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Executives

Joshua Dicker – Vice President, General Counsel and Corporate Secretary

David B. Driscoll – President and Chief Executive Officer

Leo Liebowitz – Co-Founder and Chairman

Thomas J. Stirnweis – Chief Financial Officer

Kevin C. Shea – Executive Vice President

Chris Constant – Treasurer

Analysts

Anthony Paolone – JPMorgan Securities LLC

Matthew Feldman – Davidson Kempner

Brett Reiss – Janney Montgomery Scott

John Deysher – Pinnacle Value Fund

Roger Liddell – Clear Harbor Asset Management

Getty Realty Corp. (GTY) Q3 2012 Earnings Call November 9, 2012 9:00 AM ET

Operator

Please standby, we’re about to begin. Good day and welcome to the Getty Realty Third Quarter 2012 Earnings Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Mr. Joshua Dicker, Vice President, General Counsel and Corporate Secretary. You may begin.

Joshua Dicker

Thank you, operator. I would like to thank you all for joining us for Getty Realty’s quarterly earnings conference call. Yesterday evening, the company released its financial results for the quarter ended September 30, 2012. The 8-K is available on the Investor Relations section of our website at gettyrealty.com.

Certain statements made in the course of this call are not based on historical information, and may constitute forward-looking statements. These statements are based on management’s current expectations and beliefs, and are subject to trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

I refer you to the company’s annual report on Form 10-K for the fiscal year ended December 31, 2011, as well as our quarterly and other filings with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. You should not place undue reliance on forward-looking statements which reflect our view only as of the date hereof. The company undertakes no duty to update any forward-looking statements that may be made in the course of this call.

With that statement, let me turn the call over to David Driscoll, our Chief Executive Officer.

David B. Driscoll

Thank you, Josh. Prior to starting my formal remarks, I want to introduce the other officers of the company who are on the call with me today. Mr. Leo Liebowitz, our Co-Founder and Chairman; our Chief Financial Officer, Tom Stirnweis; Kevin Shea, our Executive Vice President; and Chris Constant, our Treasurer.

Good morning, everyone. Welcome to our call for the third quarter of 2012. Let me start by acknowledging those impacted by the super-storm Sandy and the subsequent nor’easter that impacted the East Coast this week. And I am going to stray a moment from my prepared remarks to point out that certainly this office has been significantly impacted by that. We have had power over the last two weeks in our office building for only a couple of days. Many I would say, the majority of our staff have not had power for more than a couple of days, many of them are still without power. And it has been a very stressful time for us. But our thoughts and prayers are with our friends, our business colleagues, everyone on our staff, and really everyone in the community who has suffered losses and damage from this storm.

However, as of today, from our perspective, our offices are up and running. We are conducting business as usual, including assessing any damage caused by the storm, and its follow-on effects from the tight fuel supplies, which, again, those of us who live around here are intimately familiar with. So, now let me turn to the results of our third quarter, which we announced yesterday and this morning.

All the details are available in our 8-K, which was filed with the SEC this morning, and our 10-Q, which will be filed today, and are available on our website, the SEC’s EDGAR website, and various financial media and other websites. The bottom line from those numbers is that we generated $5.4 million or 16% per share of AFFO on revenues of $22.5 million for the quarter. The quarter marked steady progress that we are making in the repositioning of the marketing portfolio. The repositioning events this quarter consists mainly our efforts to release properties to tenants on a triple-net basis, and dispose of individual locations of properties that we do not think have good long-term prospects for Getty.

We began the fourth quarter in early October by entering into a long-term triple-net lease with an affiliate of Capital Petroleum Group, an existing tenant in our portfolio otherwise, on 24 properties located in New York City in the boroughs of Brooklyn and Staten Island. We expect this lease to generate approximately $2.3 million of annual GAAP revenue for us.

When combined with the six triple-net leases we signed in May of 2012, this leads brings the total number of re-let locations to-date to 306. In addition, we are working on several additional net leases with tenants, high-quality tenants I might add, comprising an additional approximately 150 properties, and we anticipate some or all of these leases could close during the fourth quarter. That will leave us with approximately 300 properties previously leased to Marketing, which includes 125 properties that have had their underground storage tanks removed, nine terminals and approximately 165 properties operating tanks.

As we previously have communicated, we are currently selling the 125 de-tanked properties, and we have made steady progress through the quarter with those sales. During the quarter, we sold 14 locations generating approximately $3 million of sale proceed. We anticipate the pace of these sales will accelerate in the fourth quarter and during the first quarter of 2013 evidenced by an additional four sales already in Q4. I would add that four sales in Q4 essentially in October for various reasons associated with the storm, we have not been able to organize scheduled sales that were supposed to occur over the past two weeks. We have also made good progress repositioning our terminals, and hope we will be in a position to give you specific news on this by our fourth quarter call.

Finally we have approximately 165 operating locations with tanks, many of which we anticipate may not move into long-term triple-net leases. Virtually all of these locations are currently occupied by dealers under license agreements with us, and aligned with our interim fuel supply arrangement with global partners, thus they are generating revenues for us. During 2013, we will be committing more resources to focus on these properties in order to determine their ultimate destination, whether it is a triple-net lease to a smaller distributor, one or more individual leases for outright sale.

Let me now turn to our environmental remediation effort. This is an area of focus and growing costs for us, particularly in light of our repositioning of the marketing portfolio. As I have previously stated, GAAP accounting for environmental costs has become very complex. Accrued non-cash environmental charges show up in our impairments, depreciation and amortization line. As we move forward with our remediation work, we are going to do our best to develop transparent supplemental measures to help you follow our progress, including disclosure of our actual cash spending on environmental costs.

This quarter that spend number was approximately $1.6 million, which is significantly below the run-rate costs we expect to incur in the next several years. There are multiple reasons for the slow ramp up of those costs, including contractor scheduling issues and increased assessment work from the new liabilities we assume from marketing. But the bottom line, again, is we anticipate this cost to increase substantially next year and beyond.

Our operating costs for the quarter remained elevated due to $1.1 million of costs related to the marketing bankruptcy. In addition, we are incurring operating costs required incurring operating costs required to administrator the marketing portfolio during this period of transition. We are mindful of controlling our costs, and are working on reducing them as we re-let and dispose of properties previously leased to marketing, and we expect those costs to come down.

Finally, we are mindful of our March 2013 debt maturities, and are working quite actively to re-capitalize our balance sheet in order to provide us with additional financial flexibility, strength, and longer-term maturities. Before I open the call for questions, I want to pause to reflect on the enormous transformation our company has gone through in the past few years, and the considerable progress we have made to resolve the many challenges we have encountered along the way.

There is still more to do, and while our entire team always wants to have things happen at a faster rate, I am pleased with our accomplishments and the pace of our progress. We intend to deliver even greater clarity in our fourth quarter, and we believe we will enter 2013 well-positioned to start to positively impact our year-over-year results and to pursue additional growth opportunities.

With that insight, let me ask the operator to open the call for questions. I hope there are plenty of them.

Questions-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll go first to Anthony Paolone with JPMorgan.

Anthony Paolone – JPMorgan Securities LLC

Thanks, and good morning, everyone.

David B. Driscoll

Good morning, Tony.

Anthony Paolone – JPMorgan Securities LLC

Can maybe start with NOI. If we look at the 22 million of revenue in the quarter, and $8 million of expenses and kind of think of that is your NOI, it’s seems like some of those expenses you’re bearing because the leases are not yet set, but you’re also getting income from those properties. I guess can you help us to break that down in terms of where does that $8 million go, once all these leases are kind of done? And also where you think that revenue number goes?

David B. Driscoll

I can give you the places that they go. I mean I think the $8 million is going to taxes and maintenance. The maintenance number will go away. The tax number will stay there. But again it will show up as a growth up on the revenue line in the triple-net leases.

So a lot of those expenses essentially will become, I won’t say go away, but will be abided. Some of that is rental expense, the properties that we lease in and then lease out again. Not that will stay. But I think with respect to what exactly those numbers are going to be, I don’t want to provide that kind of number and frankly right now this moment, I don’t have it at my fingertips.

Anthony Paolone – JPMorgan Securities LLC

Okay. But those taxes in maintenance items that under a triple-net lease would become the responsibility of the tenant, presumably right now, as you outlined there are a lot of rent paying tenant. Would that just increase their occupancy costs or would they get a commensurate decrease in the rent they are paying now, so that they would have room to absorb the taxes and maintenance?

David B. Driscoll

We have to be careful about the layer. I think when you refer to tenants that you’re talking about. So right now the operating tenant, the dealer in place, his rent won’t change at all. It’s the distributor who comes in and goes between us and the operating tenant that he will basically absorb those operating expenses, Tony.

But also if he will receive the rent from the operating tenant and he will receive the profit from the fuel supply in the location. What he is doing is, he is collecting essentially he is offsetting those costs with the benefit of the fuel supply and the revenues of the rent that he is getting.

Anthony Paolone – JPMorgan Securities LLC

Okay. So where is that extra profit I guess going now? Like is the operator just making excess profits because you guys are paying these bills or…?

David B. Driscoll

First, the operator is not making those profits. It’s a fuel supplier. Right now in the interim fuel supply transaction, Global is getting a lot of that fuel profit. And we’re getting a little, because we participate a little bit at that profit line, but most of that’s going to Global at the present time.

Anthony Paolone – JPMorgan Securities LLC

Okay. And with regard to the 24 stations that you just leased, can you give us a sense of those economics?

David B. Driscoll

Again, I don’t have those numbers at my finger tip. I know they exist, but it’s somewhere between a 1.75 and a 2 times rent coverage number. Based on the historical numbers I think is the question that you are asking.

Anthony Paolone – JPMorgan Securities LLC

Yeah, I mean, is it a $2 million of annual rent or what’s the…

David B. Driscoll

I’m sorry, I gave you that number. Wait a minute. It’s $2.3 million of triple-net GAAP rent. But I noted in your note last night that you are looking for that in the 8-K, and we had it in the remarks but we had to put it in the 8-K.

Anthony Paolone – JPMorgan Securities LLC

Okay, guys. The $2.3 million…

David B. Driscoll

And that’s a triple-net number.

Anthony Paolone – JPMorgan Securities LLC

Got it, okay. Moving over to Marketing and the situation and the loan that you are going to make to them, can you just walk through that case? I mean, obviously, you guys and your lawyers feel that you have a claim there, but it was my understanding that Lukoil never really had any legal responsibility to backstop Marketing. So I’m just trying to understand how they are really involved in this.

David B. Driscoll

I think, Tony, the best way I can answer that is that, this is a very active litigation at the present time, and I really don’t want to comment on it publicly beyond what we’ve said in our disclosure.

Anthony Paolone – JPMorgan Securities LLC

Okay, is there any more money though in Marketing, like you got $700,000, I think it was, if you didn’t make this loan or go after Lukoil or be part of that?

David B. Driscoll

There are various residual deposits, wind downs collections from environmental reimbursements from the state that might amount to $2 million over the next nine months or so. There are insurance payments, Tony, that where we were co- insured or an additional insured with Marketing. And a great example of that because it is quite timely is the last natural disaster around here, which was Hurricane Irene a year ago, completely destroyed a dock at one of our facilities in Upstate New York and there was a $0.5 million worth of damages.

And in fact, the check for that arrived this morning. Literally, I walked in this morning, opened up an envelope and there was a $535,000 Swiss Re, so that sort of money is drifting in.

Anthony Paolone – JPMorgan Securities LLC

Okay. So is that someone thinking about extending $6 million to them, what do you think you would realistically be out of pocket and how do you think about funding that with giving cash on hand and so forth?

David B. Driscoll

Again I don’t want to talk about an active litigation. I will tell you that from cash on hand liquidity standpoint, if we got nothing from Marketing and funded the entire amount that it would not have any kind of material effect on our ability to fund our requirements or anything else. We have plenty of cash on hand. We have plenty of liquidity. It’s not a significant issue.

Thomas J. Stirnweis

I will say this though obviously, we would not be funding this if we did not think there was merit in the economics.

Anthony Paolone – JPMorgan Securities LLC

Okay. And then in Sandy, can you just walkthrough very basically what’s been happening at your various stations, maybe just the number that you think are affected? And what happens to these operators in this situation and can you just layout some basic parameters of what’s going on there in the portfolio?

David B. Driscoll

Sure. Let me a step back Tony, for the people that are not in this region and don’t see this right away. Sandy really has two impacts on us. One is what I call the casualty, which is there was damage to some of our locations. We have a property in the Rockaways that they tell me is under 40 to stands right now. That in the overall scheme of things, I don’t want to diminish it, but it’s not material, it’s not going to harm us in any material way.

The larger issue for those of you that are not in this part of country, particularly acute in New York and Long Island and to some degree in New Jersey, is that we have a gas shortage here. In fact the whole region has gone to odd, even days for gas, depending on your license plate.

And the reason for the gas shortage has to do with terminal shutdown. There is plenty of supply. The problem is there is not enough gas in the terminals and the result of that is that not all the gas stations, generally, not just ours, everybody’s dry or getting enough gas. Lines are forming. A load of gas gets dropped in a gas station. The gas station and it sells out in two hours and then everybody waits for the next load, which comes in later.

Our gas stations are still getting gas. Obviously, when they get it, like most of the other gas stations in the region, there is a line outside and they’re pumping it right out. At this point it is unknown. I think even the governmental authorities will tell you how long it will take for the situation to ease. But it has caused a disruption in the revenues of our primary tenants, the dealer tenants, and that is something that we are mindful of, and we certainly put disclosure in our 8-K, but we don’t think that there is any catastrophic thing going on. I just note that there is a disruption, and we are looking at it and dealing with it in an appropriate fashion.

Anthony Paolone – JPMorgan Securities LLC

What happens with your dealers like, do you feel that your dealers have enough credit and wherewithal to withstand this? Or if you end up in a situation where one to two months goes by, and they are in a negative coverage point of view, they are just going to come back and look for different terms to the lease?

David B. Driscoll

Well, first of all we are talking about the license agreements at the dealer level. Certainly we believe we are comfortable that with the leases, the triple-net leases that are in place, we are not concerned about coverages or issues with respect to those. When you get up to the distributor level, this is not necessarily a negative profit event when you put gas in the tanks of a gas station and it sells out in two hours. It’s the individual dealers where I think the focus of the pressure is. And I would point out that the individual dealer license fees that we received are only about 20% of our monthly revenues, actually a little under that.

Anthony Paolone – JPMorgan Securities LLC

Is that from, if my numbers are right? The 1.65….

David B. Driscoll

That is correct. Actually a little bit more than that. So 165 plus the 150.

Anthony Paolone – JPMorgan Securities LLC

Right, 150, that should go to net leases.

David B. Driscoll

Right.

Anthony Paolone – JPMorgan Securities LLC

Okay, I will yield the floor. I might have some more down a bit.

David B. Driscoll

Okay.

Operator

We’ll go next to Matthew Feldman with Davidson Kempner.

Matthew Feldman – Davidson Kempner

Good morning. Anthony covered one of the questions I had with regards to the loans being made to Marketing. My only question is with regards to, is that being funded as a credit for past owed rent, as well?

David B. Driscoll

No, it has nothing to do with rent. Marketing has an action against GPMI for fraudulent conveyance, and we are lending money to the debtor’s estate very much in the form of a dip loan, if you will. We have the most senior priority in the estate in order to fund the costs associated with that litigation.

Matthew Feldman – Davidson Kempner

Okay. And the second question I have is I guess some of the rent loss from Marketing is being moved to a G&A expense to top line rent production? Given the fair estimate for run rate G&A going forward?

David B. Driscoll

There’s two questions in there. The first is I’m not sure I agree with the premise. But I’m not sure I understand the premise of the rent reduction part. And with respect to the G&A line, I would prefer to wait from next quarter to directly answer that question. Only to point out you though, that it will be significantly lower than the numbers that you’re seeing now.

Matthew Feldman – Davidson Kempner

Okay. Thank you.

Operator

We’ll go next to Brett Reiss with Janney Montgomery Scott.

Brett Reiss – Janney Montgomery Scott

Good morning David. The triple-net leases that you hope to enter into on the 150 properties in the New York City, New Jersey area in this coming quarter? Do you think that the rents flow from that is going to be greater, the same or less than what you’re presently getting from the temporary arrangements you have on those property?

David B. Driscoll

Brett, first it’s nice to hear from you. And second if I could answer the question by rephrasing it a little bit more?

Brett Reiss – Janney Montgomery Scott

Okay.

David B. Driscoll

Okay. So do we think that the triple-net receipts that we receive from the new leases that we are hopeful to enter into will be greater not than the revenues that we received. But that the net revenues after we pay expenses, maintenance and taxes for example on those property. And the answer is, yes.

Brett Reiss – Janney Montgomery Scott

Okay, that’s helpful. The average price you realize on the non-gas tank property this quarter was $221,000, which is down from the average price when you computed the arithmetic on nine months. Is that because the lower hanging fruit, the more valuable properties have been sold earlier and is that going to compete a trend down, how can I look at that going forward?

David B. Driscoll

Well, I think you’re pretty much on cost, but I wouldn’t say that all of the higher value properties are sold, but I think if you go back four conferences, you’ll find that we made the observation that one would expect the better properties to move faster. And the properties that will going to have less value to be occurring light in this timeframe.

And I think you’ll see the average continue to decline modestly or start to flat now at this point. We’re clearly reaching the point. We’re pushing these properties out. However, I know what the current pipeline looks like is and there is still some very nice values on a per property basis yet to be harvested.

Brett Reiss – Janney Montgomery Scott

Okay.

David B. Driscoll

Significantly above the average number that you said.

Brett Reiss – Janney Montgomery Scott

Okay. I appreciate that you don’t want to comment specifically on the fraudulent conveyance suit, but this is a generic question. What do you have to show the court to prove a fraudulent conveyance?

David B. Driscoll

Well, maybe you could call me off-line, and we could talk about that, because you say it’s generic and we don’t have to get everybody into that particular thing and we wouldn’t cross any FD lines talking about generic.

Brett Reiss – Janney Montgomery Scott

Okay, fair enough. Thank you for taking my questions.

David B. Driscoll

You’re welcome.

Operator

We’ll go next to John Deysher with Pinnacle

John Deysher – Pinnacle Value Fund

Hi, good morning.

David B. Driscoll

Good morning.

John Deysher – Pinnacle Value Fund

I just want to make sure I have the numbers straight in terms of the, I think you said there were 306 relocations to-date. Does that include the 24 that were put out on triple-net lease during October?

David B. Driscoll

Yes.

John Deysher – Pinnacle Value Fund

Okay. Does it include the 29 that were sold?

David B. Driscoll

No.

John Deysher – Pinnacle Value Fund

Okay so it excludes the 29.

David B. Driscoll

The 306 are properties that are on long-term triple-net leases to distributor tenants.

John Deysher – Pinnacle Value Fund

Okay. So it includes the 24, but not the 29 that have been sold.

David B. Driscoll

Right. You wouldn’t count a sold property in a net lease.

John Deysher – Pinnacle Value Fund

Okay. Second question on the balance sheet, in other assets, that number almost tripled to $30 million from a $11 million I believe, a $11.9 million. What exactly is in other assets as of the end of September?

David B. Driscoll

Substantial, since September.

John Deysher – Pinnacle Value Fund

Excuse me.

David B. Driscoll

Yeah, I am just driven my thoughts. The last year from September…

John Deysher – Pinnacle Value Fund

Take a look at the balance sheet on the press release. At the end of December, it was $11.9 million and as of the end of September, it was $30.3 million, and I am just wondering why the increase and what exactly is in other assets?

David B. Driscoll

Okay. Most of it is prepaid real estate taxes as we have disclosed, we are paying the real estate taxes directly some others gets paid prior to it being an expensed, that’s a big portion of it. Another portion is deferred lease costs from these new arrangements that we’ve entered into some of the assets which were classified in PP&E, for example, has now been classified as deferred lease assets, which again will be expensed over the life of these leases that we’ve entered into in May and the other new triple-net leases. Those are the two big changes will make up the difference.

John Deysher – Pinnacle Value Fund

And how does the $30 million breakdown between those two approximately?

Thomas J. Stirnweis

Approximately $4 million of prepaid, I’m sorry that one other item is the insurance policy that we entered into about $3 million for environmental coverage, that has also in prepaid. So you have $3 million for prepaid insurance, about $3 million for prepaid real estate taxes and about $7 million for deferred leasing costs.

John Deysher – Pinnacle Value Fund

So $3 million plus, $4 million plus, $7 million as up to $14 million, where is the other $16 million?

David B. Driscoll

Okay, one second. It might be better to take this off-line, because obviously it’s not something that we all had focused. My sense of it is that is the straight line rents in a collection of a number of other things.

Thomas J. Stirnweis

Yeah, another piece is going to be money that will put into 10/31 exchanges from a sale lease properties prior to reinvesting the money. I think that’s another $4 million of the differential from the proceed.

David B. Driscoll

I think if you call…

John Deysher – Pinnacle Value Fund

Let me follow-up with you off-line.

David B. Driscoll

Yeah, that’s fine.

John Deysher – Pinnacle Value Fund

Thanks.

Operator

We’ll go next to Roger Liddell with Clear Harbor Asset Management.

Roger Liddell – Clear Harbor Asset Management

Yes, good morning.

David B. Driscoll

Good morning.

Roger Liddell – Clear Harbor Asset Management

I wanted to return to the topic of the properties or sale. When I looked at the list are properties that you post on the website week or so ago, there were 26 shown as sold, which correlates quite nicely with the numbers that were herein. But also there were 49 shown as under contract and 15 more on contract pending. And so that 64 locations and so that the pace appears to be not just picking up, but moving rather swiftly, can you give me any insight into the speed with which the 64 might show up as actually sold and reported in the quarter financials?

David B. Driscoll

I think it’s fair to point, I mean because essentially it is public information. But we conducted a closed bid, sealed bid auction that reached its fruition in mid October. The results of that auction were bid that required closings within 60 to 90 days at the time that the bps were submitted. And a great deal of the number of the pickup of properties that you see under contract or moving rapidly to contract, were properties that we’re in that option. And therefore they are in 60-day to 90-day contracts with hard money out. So that you may have heard picked up in my remarks, and maybe I said it too subtly, that we expect the pace of closings to accelerate during the fourth quarter of this year and the first quarter of next year. And that’s the reason why.

Roger Liddell – Clear Harbor Asset Management

And can one draw any conclusions about the transaction prices from what is shown on the website? For instance, if a property is marked as sold on the website is the figure next to that, the asking price or is that the transaction price?

David B. Driscoll

If it is sold, it’s the transaction price. Otherwise, it is the asking price. My general comment with respect to values is the response to the prior question from Brett Reiss. As we move these down the pipe, values are becoming depressed from what the asking prices were. I mean, you have to be realistic. And remember that these are not operating properties. These are properties whose tanks have been pulled and are essentially vacant pieces of land or minimally occupied. Our EVP of real estate refers to them as future bait shops. So they are not the most valuable parcels in the world.

Roger Liddell – Clear Harbor Asset Management

Okay. Thank you.

Operator

(Operator Instructions) We’ll go next to Anthony Paolone with JPMorgan.

Anthony Paolone – JPMorgan Securities LLC

Thanks. Dave, you mentioned committing more resources in 2013 to those 165 stations. By that how much did you mean is folk’s time internally there versus actual capital that you might need to spend on those?

David B. Driscoll

Tony, So let me take the words out of it and be quite direct about it. The effort that went into those 165 properties during 2012 was what I would call stabilization effort, which was entering into and then managing and living with the Global in terms of supply arrangement. Very little effort during 2012 was put into the ultimate disposition of those properties into sale or longer-term net lease. That is quite simply, because we really didn’t look at them as 165 and 150. We looked at them as 315 properties, which were put out to the marketplace to see what kind of quality tenants wanted them on long-term triple-net lease. Based on where we are now in our discussions, that it looks like that there is 155 left over, and we will now start to move rather rapidly to re-letting those where we think we have some significant interest from some smaller regional player or then finally ultimately closing of the one where there is not that interest. Is that help?

Anthony Paolone – JPMorgan Securities LLC

Okay. So it sounds like just were the focal point is not so much a capital requirements?

David B. Driscoll

That’s absolutely correct. Capital feeds into it to the extent that in part of the economic evaluation of whether you sell or reinvest and put a property onto a long-term triple-net lease based on its capital requirements and what you think it can do after it gets capital requirements if you followed with that.

Anthony Paolone – JPMorgan Securities LLC

Understand. So what’s in the extent that on that front to-date like I guess we’ll see this in the Q, but how much capital did you spent say in the third quarter even here on the fourth quarter as you think about this 150 that we expect to get done. Is there much capital that you are out of pocket to get to that point?

David B. Driscoll

That’s frankly very little. For 2012, the capital expenditure number is quite low. For 2013 and 2014 you’re going to start to see considerable ramp up. One of the things I think that you’ll start to see in the Q and certainly you’ll start see in our 10-K is the level of contribution from tenant and us. I’m not in a position, I don’t want to put number outright now, but I think it’s fair to say that this is our new tenants were signing triple-net leases are putting multiple of the amount of money that we’re putting in, in terms of capital of the property. The portfolio itself is going to see a substantial capital improvement over the next two to three years.

Anthony Paolone – JPMorgan Securities LLC

Okay, got it. And then maybe this question for Tom. The interest expense, which is hit your debt out standing in the rate, you get the quarterly interest expense that’s just lower than what you report? Can you just walk us through the bridge there again, and how much of that to almost $3 million expenses is maybe non-cash or is it all cash?

Thomas J. Stirnweis

It probably made a both capital leases that we have included. We have got a liability on our balance sheet for capitalized lease assets, and there is also amortization of loan initiation cost with that line item is interest expense.

Joshua Dicker

David, this is my count that TWC maybe on the line. GAAP is making it less transparent to understand what our number is. So the interest expense line is not actually what the interest expense that we are writing checks for is. It has got all of these net numbers in it that are various accruals that make some accountant in an ivory tower happy.

Anthony Paolone – JPMorgan Securities LLC

Do have a sense as to how much in that number in the quarter, which was I guess...

David B. Driscoll

Yes. So, for example, for the nine-month period, Tony, $2.3 million is made up of deferred loan a cost that’s being amortized. Our refinancing that we did earlier in the year was expense of putting security interest on properties. And obviously, it’s a one-year term, so that amortization is a very brief period, so that’s a substantial hit to that line for this year.

Anthony Paolone – JPMorgan Securities LLC

Okay. So just to make sure I have got this right, of the $7.1 million of interest expense for the nine months, you said $2.3 million

David B. Driscoll

$2.3 of that is amortization of loan origination costs.

Anthony Paolone – JPMorgan Securities LLC

Okay, so that’s non-cash. And then the rest of its cash.

David B. Driscoll

Yes.

Anthony Paolone – JPMorgan Securities LLC

Okay.

David B. Driscoll

I would be careful about calling it non-cash, because it was a one year loan. And you are amortizing it over one year. I think it has the cash element to it, let me put it that way.

Anthony Paolone – JPMorgan Securities LLC

I think you paid the fees, but you paid the fees, but you did it already.

David B. Driscoll

That’s right. And by the way the cost associated with that are now security interest and properties that is conceivable we will benefit from for additional years. But we are writing them off over this period of time.

Anthony Paolone – JPMorgan Securities LLC

Okay, great. Thank you.

Operator

We’ll take our last question from Josh Peterman with (inaudible).

Unidentified Analyst

Hi, just looking for a little bit of color on something. The 150 properties that you said you are going direct to the operators right now that you are expecting to enter into triple-net distributors. I think you had mentioned on a net basis, you expect the rents to increase? Can you walk me through how that works if you are already going direct and then you effectively have to put in a middleman, how do you increase your net rent?

David B. Driscoll

The piece that you are not getting is the fuel profit in the middle that is being taken by the distributor of fuel to the properties.

Unidentified Analyst

So they are going to take less profit when they sign a ten-year lease?

David B. Driscoll

No, but they are going to be able to operate the whole portfolio more efficiently and be able to ultimately, frankly, drive more profit through it after the CapEx.

Unidentified Analyst

How does that work? What’s the efficiency that I am missing that they get generate when they signed the lease?

David B. Driscoll

I am sorry, could you say it again, you broke up for a second?

Unidentified Analyst

What’s the efficiency that they generate when they signed the lease? How does that work?

David B. Driscoll

It gets into the nitty-gritty of the operating of the business. But the portfolio itself, the dealer rents itself that we are collecting are largely carryovers from the old GPMI day. And as the new operator comes in and he is able to put a new program in place, new credit cards in place, new dispensers in place. There is all sorts of cost efficiencies if he can brought to the business, which drives additional volume to the business at the dealer, which will enable and change not only his volumes and his profit and his margin, but it also enable him to renegotiate that now monthly license fee with those dealer.

Unidentified Analyst

And is there any fixed cost associated with that, like when you guys are going to turn this over, how much is it going to costs them are you guys to do that?

David B. Driscoll

That’s all part of the negotiation that is going on right now in some leases, but generally speaking what we’ve learned from the leases that we’ve signed is that there is an agreement that we will put CapEx in and the new dealer will put CapEx in, generally speaking, over the first two to three, two to four years of the lease.

Unidentified Analyst

Okay. Thank you.

Operator

And at this time, I would like to turn the conference back over to Driscoll for any additional or closing remarks.

David B. Driscoll

I don’t have additional closing remarks. I want to thank everybody for joining us in the call. I want to wish everybody particularly those of you who are shivering in your dark homes in this region well. And I am told by our gasoline supply people, who are, I think closer to this than all of the other authorities that unfortunately, this is probably has got another seven to 10 day to go. If anybody wants anymore in cycle information, you welcome to call and I’ll turn you over to our people who are closer to that than I am. Thank you for joining.

Operator

That does conclude today’s conference. We thank you for your participation.

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