Getty Realty Corp. (NYSE:GTY) Q1 2024 Earnings Call Transcript April 26, 2024
Getty Realty Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to Getty Realty’s First Quarter 2024 Earnings Call. This call is being recorded. After the presentation, there will be an opportunity to ask questions. Prior to the starting of the call, Joshua Dicker, Executive Vice President, General Counsel, and Secretary of the company, will read a Safe Harbor Statement and provide information about non-GAAP financial measures. Please go ahead, Mr. Dicker.
Joshua Dicker: Thank you. I would like to thank you all for joining us for Getty Realty’s First Quarter Earnings Conference Call. Yesterday afternoon, the company released its financial and operating results for the quarter ended March 31, 2024. Form 8-K and earnings release are available in 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, events and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Examples of forward-looking statements include our 2024 guidance and may also include statements made by management including those regarding the company’s future company operations, future financial performance or investment plan and opportunities.
We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. I refer you to the company’s annual report on Form 10-K for the year ended December 31, 2023, for a more detailed discussion of the risks and other 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. Also, please refer to our earnings release for a discussion of our use of non-GAAP financial measures including our definition of adjusted funds from operations, or AFFO, and our reconciliation of those measures to net earnings.
With that, let me turn the call over to Christopher Constant, our Chief Executive Officer.
Christopher Constant: Thank you, Josh. Good morning, everyone, and welcome to our Earnings Call for the First Quarter of 2024. Joining us on the call today are Mark Olear, our Chief Operating Officer; and Brian Dickman, our Chief Financial Officer. I will lead off today’s call by summarizing our financial results and investment activities, and we’ll provide commentary on how we continue to execute on our overall strategy in a thoughtful and disciplined manner despite the headwinds impacting all net lease companies. Mark will then take you through our portfolio and Brian will further discuss our financial results and guidance. We had a productive start to 2024 building on our momentum from last year. The combination of the investments made in 2023 and our year-to-date activity, plus the successful capital markets activity that pre-funded these investments, positions us to deliver continued earnings growth in 2024, even as we remain patient in a still uncertain interest rate environment.
In the first quarter, we invested approximately $41 million across 35 properties. We also continue to diversify our business by investing across our four primary convenience and automotive retail asset classes, including convenience stores, express tunnel car washes, auto service centers, and drive-thru quick-serve restaurants. In addition, the team at Getty continued to actively manage our in-place portfolio by extending two material unitary leases with near-term maturities, which resulted in an uptick in our weighted average lease term at quarter end. The net result of our excellent performance from the last year and our strong start to this year was a quarterly base rental income increase of 13.1% and a 1.8% growth in our quarterly AFFO per share.
Looking ahead, Getty continues to be well-positioned to create value for shareholders in the current environment, both through the strength of our in-place portfolio and our ability to source and close investment opportunities, which will further advance our growth and portfolio diversification efforts. To that end, we currently have a committed investment pipeline of more than $44 million under contract at a blended cap rate in the high 7% area, which is fully funded from our prior capital markets transactions. In addition, thanks to the efforts of our investments team, we are evaluating a steady flow of potential acquisition and redevelopment opportunities. Our target retail sectors and institutional tenant base continue to perform well and maintain healthy profit margins and rent coverage ratios.
Specific to the C-Store sector, the National Association of Convenience Stores recently published a summary of their Annual State of the Industry report showing that 2023 was another record year of sales for the industry. We also continue to benefit from our focused strategy and direct relationships. Despite many operators in our target sectors prioritizing operations and or being more selective when it comes to growth, we’ve been steadily sourcing new opportunities to underwrite. Pricing these transactions remains a challenge as bid-ask spreads persist, but we’re pleased with the deal flow and trust that we’ll be able to execute as the transaction market continues to adjust. Overall, we expect 2024 to be a challenging year for acquisitions of net leased properties in our sectors.
However, we believe, we have a clear path to generate earnings growth from the rent escalators in our in-place portfolio, additional income from investments made in 2023 and those already completed in the first quarter, as well as closings from our committed pipeline which are expected to occur throughout 2024. With that, I will turn the call over to Mark to discuss our portfolio and investment activities.
Mark Olear: Thank you, Chris. As of the end of the quarter, our lease portfolio included 1,103 net lease properties and two active redevelopment sites. Excluding the active redevelopments, occupancy was at 99.7% and our weighted average lease term increased to 9.2 years due to both our new investments and the early renewal of selected leases. Our portfolio spans 42 states plus Washington DC, with 60% of our annualized base rent coming from the top 50 MSAs and 77% coming from the top 100 MSAs. Our rents are well covered with a trailing 12-month tenant rent coverage ratio of 2.6 times, which has generally been consistent over the last four years, demonstrating the resiliency of our tenant’s businesses despite macroeconomic uncertainty.
Turning to our investment activities. We had a productive start to the year as we invested approximately $41 million in the first quarter. Highlights of this quarter’s investment include the acquisition of one new to industry convenience store located in Florida for $7.6 million, two drive-thru QSRs for $3 million, seven auto service center properties located throughout the Southeastern US for $13.7 million, of which $12.6 million was funded in the first quarter, 12 express tunnel car washes located in various market with concentrations in Virginia and North Carolina for $61 million, of which $9.9 million was funded in the first quarter. We also advanced incremental development funding in the amount of $7.8 million for the construction of 13 new to industry convenience stores, express tunnel car washes and auto service centers.
These assets are either already owned by the company and are under construction or will be acquired via sale-leaseback transactions at the end of the project’s respective construction periods. For the quarter, the aggregate initial cash yield on our investment activity was 7.7% and the weighted average lease term for acquired properties was more than 16 years. Subsequent to the quarter end, we invested $7.2 million for the development and/or acquisition of one convenience store and two express tunnel car washes. We currently have more than $44 million of commitments to fund acquisitions and developments. The majority of which we expect to deploy over the next six months at average initial yields that are consistent with our first quarter performance.
Pipeline yields continue to reflect some older vintage transactions as well as current pricing for our new originations, which is generally north of 8%. Moving to our redevelopment platform. During the quarter, we invested approximately $500,000 in projects which is – which are in various stages in our pipeline. We ended the quarter with three signed leases for redevelopment and are seeing renewed interest from retailers whose expansion plans overlap with the footprint of our portfolio. We expect to continuously complete projects over the next few years. Turning to asset management activities. We sold one property in the first quarter for $1.2 million. As we look ahead, overall transaction market conditions are largely unchanged from the prior quarter as sellers are electing to hold assets with the hope that pricing improves later this year.
However, we believe our focused strategy will afford us the opportunity to work on transaction opportunities with both our existing tenant partners as well as several new relationships as we move throughout the year. With that, I’ll turn the call over to Brian.
Brian Dickman: Thanks, Mark. Morning everyone. Last night, we reported AFFO per share of $0.57 for Q1 2024, representing an increase of 1.8% versus the $0.56 per share we reported in Q1 2023. FFO and net income for the quarter were $0.53 and $0.30 per share, respectively. Our total revenues for the quarter were $49 million, representing year-over-year growth of 14% versus the first quarter of 2023. Base rental income, which excludes tenant reimbursements, GAAP revenue adjustments, and any additional rent, increased by 13.1% to $43.9 million. This growth was driven primarily by our recent acquisition activity as well as recurring rent escalators in our leases and rent commencements at completed redevelopment projects. On the expense side, total G&A was $6.7 million in the first quarter compared to $6.3 million in the prior year period.
Excluding noncash stock-based compensation, G&A was $5.3 million compared to $5 million in Q1 2023. The increase in G&A was primarily due to employee-related expenses, professional legal fees, and information technology expenses. We continue to anticipate that G&A increases will moderate and G&A as a percentage of our revenue and asset base will decrease as we continue to scale the company. Property costs were $3.7 million for the quarter, compared to $4.7 million in the prior year period, due primarily to lower reimbursable expenses, rent expense, and demolition costs for redevelopment projects. Environmental expenses, which are highly variable due to a number of estimates and noncash adjustments, were a credit of $17,000 in the quarter as compared to an expense of $321,000 in the first quarter of 2023.
Our balance sheet continues to be well positioned and we ended the quarter with $800 million of total debt outstanding. This consisted primarily of $675 million of senior unsecured notes with a weighted average interest rate of 3.9% and a weighted average maturity of 6.2 years. We also had a $75 million unsecured term loan outstanding at a 6.1% interest rate and $50 million drawn on our $300 million unsecured revolving credit facility. As of March 31st, net debt to EBITDA was 5.1 times and total debt to total capitalization was 37%, while total indebtedness to total asset value as calculated pursuant to our credit agreement was 36%. Taking into account unsettled forward equity, net debt to EBITDA would be approximately 4.9 times. Subsequent to quarter end, we drew down the remaining $75 million available under our delayed draw term loan and used the proceeds to repay all amounts outstanding on the revolving credit facility.
The balance will be used for general corporate purposes, including to partially fund our investment pipeline. There was no new equity capital markets activity in the first quarter and we currently have approximately 1 million shares of common stock subject to outstanding forward sales agreements. Upon settlement, these shares are anticipated to raise gross proceeds of approximately $32 million. Returning to our committed investment pipeline. As Chris mentioned, these transactions are fully funded through a combination of cash on the balance sheet, proceeds from the recent term loan draw, and proceeds from our outstanding forward equity agreements. Pro forma for these investments and capital activity, we expect our balance sheet to remain well-positioned to support continued growth and to maintain leverage near the midpoint of our target range of 4.5 times to 5.5 times net debt to EBITDA.
As our investment pipeline evolves, we will continue to evaluate all capital sources to ensure that we’re funding transactions in an accretive manner while continuing to maintain our investment-grade credit profile. With respect to our environmental liability, we ended the quarter at approximately $21.7 million, which was a reduction of approximately $700,000 since the end of 2023. Our net environmental remediation spending for the first quarter was approximately $1.1 million. Finally, we are reaffirming our 2024 AFFO guidance of $2.29 to $2.31 per share. As a reminder, our outlook includes transaction and capital markets activity to date, including the recent $75 million term loan draw, but does not otherwise assume any potential acquisitions, dispositions or capital markets activities for the remainder of the year.
Primary factors impacting our AFFO guidance include variability with respect to certain operating expenses, deal pursuit costs, and the timing of anticipated demolition costs for redevelopment projects, which run through property costs on our P&L. With that, I’ll ask the operator to open the call for questions.
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