Getty Realty Corp (GTY) Q2 2021 Earnings Call Transcript

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Getty Realty Corp (GTY -1.24%)
Q2 2021 Earnings Call
Jul 29, 2021, 11:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Getty Realty's Earnings Conference Call for the Second Quarter of 2021. This call is being recorded. After the presentation, there will be an opportunity to ask questions.

Prior to starting 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 -- Executive Vice President, General Counsel and Secretary

Thank you. I would like to thank you all for joining us for Getty Realty's second quarter earnings conference call. Yesterday afternoon, the Company released its financial results for the quarter ended June 30, 2021. The 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 2021 guidance and may also include statements made by management in their remarks and in response to questions, including regarding the Company's response to the COVID-19 pandemic, future Company operations, and financial performance and the Company's acquisition or redevelopment plans 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, 2020, our subsequent quarterly report on Form 10-Q and our other filings made with the SEC 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 operation, 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 J. Constant -- President and Chief Executive Officer

Thank you, Josh. Good morning, everyone, and welcome to our earning call for the second quarter of 2021. With Josh and me on the call today are Mark Olear, our Chief Operating Officer; and Brian Dickman, our Chief Financial Officer. I will begin today's call by providing an overview of our performance for the second quarter of 2021, and highlight the continued execution of our growth initiatives. And then, we'll pass the call to Mark and Brian to discuss our portfolio and financial results in more detail.

The net result of our stable in-place portfolio and a continued execution of our investment strategies was a 4.5% increase in total revenues, and almost 19% increase in adjusted funds from operations and 11.4% increase in AFFO per share. The Company invested $44.1 million for the quarter, and another $4.6 million just after quarter end, bringing our year-to-date total investment activity to $79 million in aggregate. The quarter was highlighted by the growing and steady pace of our investment activity in convenience and automotive retail assets. We continue to successfully execute on our multiple investment strategies, which include traditional sale leasebacks, accretive acquisitions of net leased properties and construction loans for new-to-industry assets.

We also broadened our portfolio further during the quarter by adding both new geographies as we added the State of Michigan, and new tenants as we added both Valvoline and Mavis Tire's to our roster. The Company also continues to benefit from the strong performance of target asset classes, as evidenced by our stable rent coverage of 2.6 times. Once again, Getty realized full normalized collections of our recurring rental income during the quarter, as well as the COVID-related deferments we agreed to in 2020, which were due this quarter. More broadly, industry data published this month by the National Association of Convenience Stores further demonstrates the health of the overall convenience store sector, which had another record year of profits in 2020 despite the COVID pandemic. As we enter the second half of the year, we are pleased that our year-to-date investment activity has positioned the Company to raise our AFFO guidance at quarter end.

Looking ahead, we are committed to maintaining our healthy portfolio through active asset management. In addition, our team continues to work diligently to source and underwrite new opportunities to invest in our target asset classes, including convenience stores, car washes and automotive-related retail properties, and by unlocking embedded value through selected redevelopments. We remain encouraged by the growing opportunities in our investment pipelines. We are confident with our targeted investment approach, which prioritizes acquiring real estate in strong metropolitan markets across the country. We'll continue to drive additional shareholder value as we move through 2021 and beyond.

Finally, I would like to formally welcome Evelyn Infurna to our Board of Directors. Evelyn has a long track record of advising and investing in real estate companies and REITs and I'm excited about the value she will bring to our Company. I look forward to working with her for years to come.

With that, I will turn the call over to Mark to discuss our portfolio and investment activities.

Mark J. Olear -- Executive Vice President and Chief Operating Officer

Thank you, Chris. As at the end of the quarter, our portfolio includes 994 net lease properties, six active redevelopment sites and five vacant properties. Our weighted average lease term was approximately 8.9 years and our overall occupancy, excluding active redevelopments, remain constant at 99.5%. Our portfolio remains spread over 35 states plus Washington D.C. and our annualized base rents 65% of which come from the top 15 MSAs in the US, continue to be well covered by our trailing 12-month tenant rent coverage ratio of 2.6 times.

In terms of our investment activities, we had another busy quarter in which we invested $44.1 million in 53 properties and subsequent to the quarter and we acquired one additional property for $4.6 million, bringing our year-to-date investment activity to $79 million across 60 properties. Our completed acquisitions during the second quarter included the purchase of 46 Valvoline-branded oil change centers for $31 million. The triple net leases which are guaranteed by Valvoline Inc. were acquired with 11.5 years of remaining base term and have multiple renewal options. The properties are located primarily throughout the Detroit, Grand Rapids, Lansing MSAs in Michigan, and the Toledo metropolitan area in Ohio.

Additionally, we've closed on the acquisition of three additional car wash properties for $10.4 million during the quarter. These properties were added to our existing unitary lease with WhiteWater Express car wash and have approximately 15 years remaining of the base term with multiple renewal options. These properties are located in Cincinnati, Ohio. Subsequent to the quarter end, the Company acquired a Mavis Tire center located in the Chicago, Illinois MSA for $4.6 million. In aggregate, we expect all of our completed acquisitions to generate cash yields that are in line with our historical quoted acquisition cap rate range for our targeted asset classes.

Getty also funded an additional $2.7 million of construction loans for four new-to-industry convenience stores with Refuel, a c-store operator with more than 100 locations across the Southeast United States and Texas, bringing the total amount funded by Getty to $11.1 million year-to-date. As part of this transaction, we will accrue interest on our investment during the construction phase of the project and we expect to acquire the properties via sale leaseback transaction at the end of the construction period.

We ended the quarter with a strong investment pipeline, remain highly committed to continuing to grow our portfolio with convenience and automotive retail real estate. And we expect that we will continue to pursue direct sale leaseback, acquisitions of net lease properties, and funding for new-to-industry construction.

Moving to our redevelopment platform. During the quarter, we invested approximately $200,000 in sites which are in our pipeline. At quarter end, we had 11 signed leases or letters of intent, which includes six active projects, four signed leases on properties which are currently subject to triple net leases, but which have not yet been recaptured from the current tenants and one signed letter of intent on a vacant property. At quarter end, rent commenced on a redevelopment project leased to 7-Eleven in Baltimore and Maryland MSA. We invested approximately $125,000 in the project, expect to generate a return of nearly 40% on that investment. The Company expects to rent -- expect rent to commence at a number of additional redevelopment sites during the second half of 2021. In total, we have invested approximately $2.1 million in the 11 redevelopment projects in our pipeline and estimate that these projects will require total investment by Getty of $7.8 million. We project these redevelopments will generate incremental returns to the Company in excess where we can invest these funds in the acquisition market today.

Turning to our asset management activities for the quarter, the Company did not sell any properties, but did exit four leased properties which had a de minimis impact on our financial results. As we look ahead, we will continue to selectively dispose the properties that we determined are no longer competitive in their current format and do not have compelling redevelopment potential.

With that, I will turn the call over to Brian to discuss our financial results.

Brian R. Dickman -- Executive Vice President, Chief Financial Officer and Treasurer

Thanks, Mark. Good morning, everyone. I'll start with a recap of earnings, AFFO, which we believe best reflects the Company's core operating performance was $0.49 per share for the second quarter, representing a year-over-year increase of 11.1%. NAREIT FFO was also $0.49 per share for the quarter.

Our total revenues were $38.7 million, representing a year-over-year increase of 4.5%. Rental income, which excludes tenant reimbursements and interest on notes and mortgages receivable, grew more than 8% to $34.4 million. Strong acquisition activity over the last 12 months and the current [Indecipherable] our leases were the primary drivers of the increase, additional contribution from rent commencements at nearly [Phonetic] all the projects.

On the expense side, G&A cost increased in the quarter, primarily due to employee-related expenses, including stock-based compensation and non-recurring retirement costs, as well as certain professional fees.

Property costs and environmental expenses both decreased in the quarter. The reduction in property costs was largely driven by decreases in real estate taxes and certain professional fees related to redevelopment activities, and the decline in environmental expenses was mostly attributable to lower professional fees and related expenses that flow through to AFFO. As we note each quarter, environmental expenses are subject to a number of estimates and non-cash adjustments and will continue to be highly variable.

Turning to the balance sheet, our capital markets activities, we ended the quarter with $542.5 million of total debt outstanding, including $525 million of long-term fixed-rate unsecured notes and $17.5 million drawn against our $300 million revolving credit facility. Our weighted average borrowing cost was 4.2% and the weighted average maturity of our debt was 6.8 years. In addition, our total debt to total market capitalization was 29%, our total debt to total asset value was 38% and our net debt-to-EBITDA was 5 times. Each of these leverage metrics are calculated according to the terms of our loan agreements. We have no debt maturities until June of 2023 other than our revolving credit facility which matures in March of 2022, but has a one-year extension option at our election.

We were selective with equity issuance under our ATM program during the quarter, raising $9.5 million at an average price of $32.94 per share. Year-to-date, we've raised a total of $30.3 million through the ATM program. In general, as we think about our future capital needs, we're committed to maintaining a strong credit profile, including meaningful liquidity and access to capital, low-to-moderate leverage and a well-laddered and flexible capital structure.

With respect to our environmental liability, we ended the quarter at $47.9 million, which was a decrease of $150,000 from the end of 2020. For the quarter, net environmental remediation spending was approximately $1.4 million [Phonetic].

Finally, as a result of our investment and capital markets activities in the first half of the year, we're raising our 2021 AFFO guidance to a range of $1.89 to $1.91, a $0.03 per share increase from our prior guidance. This guidance includes transaction activity completed year-to-date. It does not otherwise assume potential acquisitions or capital markets activities for the remainder of 2024. Specific factors which may impact our guidance include variability with respect to certain operating costs including environmental expenses, variability with respect to the recapturing of properties for redevelopment, which results in foregoing rent, and our expectation that we will remain active in pursuing acquisitions and redevelopments, which could result in additional expenses, including certain property demolition costs and transaction costs for deals that are not ultimately completed.

And with that, I'll turn the call back to Chris.

Christopher J. Constant -- President and Chief Executive Officer

Thanks, Brian. Operator, we will take questions at this time.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Todd Thomas with KeyBanc. Please proceed with your question.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Hi. Thanks. Good morning. First question I have is just on investment activity, which increased in the quarter, compared to the first quarter. But looks like closings have slowed up a little bit in the last one to two months since the last update. I realized there is no incremental investment activity in the guidance. But just curious if you can comment generally on the pipeline and the pace of investments going forward as we move further into the second half of the year.

Mark J. Olear -- Executive Vice President and Chief Operating Officer

So, this is Mark. Our -- as we broadened our investment strategy that we announced recently to include all other automotive asset classes, we're pretty comfortable -- in addition to CNG opportunities, we're pretty comfortable with the current state of our pipeline, the pace of opportunities, both inbound and opportunities that we've been generating through our business development. And so, I think that some of the closings are just merely a factor of timing in the pace of the deal -- in each individual deal, but I think we're pretty comfortable where the pipeline is right now.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. And you -- I think you indicated that initial yields or cap rates are in line with the market. What does that look like today? What were the cap rates for the acquisitions completed in the quarter? And can you talk about cap rate trends in terms of the future here?

Mark J. Olear -- Executive Vice President and Chief Operating Officer

Sure. So, our acquisitions to date [Phonetic] have been in the mid- to high-6% range. Some of that compression is due to kind of the overall market tightening and kind of -- as well as I just referenced our broadening of our investment targets through different automotive verticals and some of those being more mature and more competitive. But we continue to feel comfortable that we'll be able to deliver accretive acquisitions as we've done over the last few years.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. And then, just on the construction loans, can you just talk about that opportunity that you have there? Your desire to originate more construction loans. And also, can you just remind us what kind of premium spread on pricing through the sale leasebacks you're achieving relative to market pricing?

Mark J. Olear -- Executive Vice President and Chief Operating Officer

Yeah. I think on the loan program, broadly speaking, the industries that we target have been consolidating, obviously, multiples are high as you'd expect. And certain of our operators have chosen to really focus on their organic growth pipelines. And as we partner with existing relationships or new relationships, it's really a way to continue -- for our operators to grow their business and for Getty to find a path to the ownership at the end of the construction period. So, I think the opportunity will continue to grow for us and we're quite comfortable. We have the redevelopment capabilities in-house and this is a natural extension from that team. So we're pretty comfortable operating there.

In terms of premium yield, there's certainly a premium over the acquisition market. I wouldn't call it significant. And it does vary a little bit by sector, but again we like the opportunity. We think it's going to continue to grow and it's certainly, applicable to all the target asset classes that we're focused on.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

And is that an opportunity though that you -- do you have an opportunity you feel to ramp that program up or more meaningfully?

Mark J. Olear -- Executive Vice President and Chief Operating Officer

I think it's going to continue to grow over time. I don't want to put a number on it or a target range behind it, Todd. But I certainly feel like it's an avenue for Getty to continue to deploy capital accretively.

Brian R. Dickman -- Executive Vice President, Chief Financial Officer and Treasurer

It's Brian. The one thing I would add, I think we spoke about it, the objective and somewhat reiterated what Chris said, it's not to build a large loan portfolio per se. That's not the business that we're looking to get into. It's ways that we can add value to our partners, to our tenant partners and continue to work with them to help grow their platforms, which obviously helps us grow as well. And as Chris said explicitly, it gives us another path to feed simple ownership of the type of assets we want to own and that's probably the key -- those last two pieces are really key component to it.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. All right. Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from John Massocca with Ladenburg Thalmann. Please proceed with your question.

John Massocca -- Ladenburg Thalmann -- Analyst

Good morning.

Christopher J. Constant -- President and Chief Executive Officer

Good morning.

Mark J. Olear -- Executive Vice President and Chief Operating Officer

Good morning, John.

John Massocca -- Ladenburg Thalmann -- Analyst

So maybe just a little more on the kind of construction loan opportunity you said and ultimately, trying to pull those assets on to your balance sheet. I mean, are those type of transactions you're looking at primarily kind of greenfield, de novo construction? Or is that like redevelopment where you're kind of coming in and kind of funding a developers' redevelopment of an existing maybe out-of-date kind of c-store concept and they're revamping that?

Mark J. Olear -- Executive Vice President and Chief Operating Officer

It's Mark. We've done a little bit of both, both with our existing in-place tenants where they want to put material capital improvements into our lease properties, we'll partner with them to bring them up to industry standards. I would say, it's more heavily tilted toward the greenfield, as you said, the de novo buildings where it's a net new operation for our tenant partners where it is truly state-of-the-art. So, in addition to all the financial metrics that were just discussed, it's kind of a reinforcement of our partnership with operators that they want to be on the leading edge and new-to-industry delivering all the latest and greatest in meeting the consumer demands. So these are, not only state-of-the-art facilities, but obviously have a tremendously long useful life, present well, look great. And it's -- the program is repeatable with these key partners where it's ease relationship to rinse and repeat on their new program. And we've become kind of a dependable partner for them in that process.

John Massocca -- Ladenburg Thalmann -- Analyst

And, I guess, maybe big picture, I mean, how big is the opportunity set in terms of -- essentially how much kind of de novo construction is there out there in the c-store space right now? Is it -- just give any -- it does seem like some of the M&A activities going to be a little bit -- more muted, I guess, maybe in the near-term?

Christopher J. Constant -- President and Chief Executive Officer

Todd had sort of a similar question, so I don't want to put a box around it, John. But what I would tell you is, if you look across the c-store sector, the car wash sector in particular, right, there is a significant amount of growth, what we call, a chain store operators, right? So, as the traditional mom-and-pop, c-store operator or car wash may be going away, there is an opportunity for tenants in the space to grow their brand, right, with their prototype store that Mark was talking about, the state-of-the-art facility, whether that's a express car wash tunnel or whether that's a 5,000, 6,000 square foot c-store with a QSR inside of it. The opportunity is certainly there for c-stores car washes to create the brand recognition, which also has the royalty program and the absence side of it, where it becomes sort of that go-to destination that the consumer is looking for right across either a specific region or a chunk of the country. So, again, I think it's certainly repeatable, but I'm not going to put up timeframe or a dollar amount behind, but I think the opportunity is.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. And then on the balance sheet side of things, I mean, how should we think about ATM issuance going forward? I think if I heard correctly, you issued $9 million during the quarter in terms of dollar amount, which would seem on a gross invested basis maybe a little bit kind of light versus kind of in-place portfolio today. But I know that can kind of be variable quarter-to-quarter. But should we kind of still expect maybe on a net debt-to-EBITDA, this 5% range can be a good target -- I'm sorry, 5x range to be a good target going forward?

Brian R. Dickman -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. John, I think the ATM issuance itself is obviously a function of a number of different factors. Leverage metrics as you alluded to, liquidity at the time, in terms of on-balance sheet, stock price and investment pipeline and all the rest. What we're really focused on, as I said in my prepared remarks is, ensuring that we maintain strong liquidity access to capital that we keep low-to-moderate leverage. And if you just go back to the end of 2020, right, we ended the year at -- I think it was just under 5 times on leverage. The revolver was undrawn completely or it was early January when we paid off the year-end balance. And as a result of some asset sales and legal settlements, there's a lot of cash on the balance sheet.

So if you go back to again the end of the year, you'll see that back pattern and I think that back pattern lends itself to us being a little bit less active on the ATM kind of this first half of the year. And so, I think as you go forward, we'll continue as we have and we stated in a number of our peers do to utilize the ATM, it's a great tool for our business. Leverage is right down the middle. I think we typically said, 4.5 times to 5.5 times, maybe at different points in time 5 times to 6 times, but we're low-to-middle end of that range. And that's really what we're looking at as we execute on the ATM.

Operator

Thank you. Our next question comes from Joshua Dennerlein with Bank of America. Please proceed with your question.

Joshua Dennerlein -- Bank of America -- Analyst

Hey. Good morning, everyone. I guess, I was just curious on maybe a impact on inflation on your portfolio. Could you remind us maybe what percent of your portfolios has escalators linked to like the CPI or for SPIs [Phonetic]? Just trying to get a sense of what we can see an acceleration in the earnings growth as a result of more inflation?

Brian R. Dickman -- Executive Vice President, Chief Financial Officer and Treasurer

Sure. It's Brian, Josh. One fact I'll start with is, upwards of 97%, 98% of our leases do have some escalator in them. So the bulk of the portfolio does have annual escalators. Of that, roughly two-thirds is annual escalators. And then the balance is your typical -- your 10% every five years or something thereabouts.

On a CPI basis, it's de minimis. There might be one or two leases. That's not a typical structure in our leases at least to date. So the blend of all that is about 1.6% annual. And I think it's a nice way to start off each year. Obviously, growth in our earnings, in our value creation will be acquisition and redevelopment-based as it is for most in our space. But I think that going into year with that level of escalator is helpful.

And then the other thing I'll add, given that the majority of our activity is sales leaseback activity, as Mark and Chris said, we had and we'll continue to buy existing leases. But at least when you're originating your own leases, in my humble opinion, it gives us at least some opportunity [Technical Issues]. If the environment and the markets really changing from where it is and where it's been to -- at least have that conversation with tenants and prospective tenants about getting either different levels or different types or frequency of escalators in the leases. So a little bit more control over our destiny, so to speak, than if we were only acquiring existing leases.

Joshua Dennerlein -- Bank of America -- Analyst

Yeah, interesting. Have those conversations changed a lot maybe in the last like year or two? Or is it like what you would want in a lease?

Mark J. Olear -- Executive Vice President and Chief Operating Officer

I would think that -- if you're talking specifically about escalators, it's more the [Indecipherable] as Brian just mentioned. We strive for annuals, do our best to get an annual increase, if not, something, certainly, near-term, but not a material change in the dynamic of those conversations.

Joshua Dennerlein -- Bank of America -- Analyst

Okay. Awesome. Thanks, guys. I'll leave it there.

Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Mr. Christopher Constant for closing remarks.

Christopher J. Constant -- President and Chief Executive Officer

Great. Thank you, operator. Thank you, everyone, for participating in our call this morning. We look forward to getting back on. We look forward to our Q3 earnings in October. And we appreciate your interest in Getty.

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Joshua Dicker -- Executive Vice President, General Counsel and Secretary

Christopher J. Constant -- President and Chief Executive Officer

Mark J. Olear -- Executive Vice President and Chief Operating Officer

Brian R. Dickman -- Executive Vice President, Chief Financial Officer and Treasurer

Todd Thomas -- KeyBanc Capital Markets -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

Joshua Dennerlein -- Bank of America -- Analyst

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