Getty Realty Corp. (NYSE:GTY) Q4 2023 Earnings Call Transcript
Getty Realty Corp. (NYSE:GTY) Q4 2023 Earnings Call Transcript February 15, 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).
Antara Nag-Chaudhuri: Mitch Germain - Citizens JMP Securities Farrell Granath - Bank of America Akhil Guntupalli - JPMorgan Chase Alex Saigon - Baird
Operator: Good morning, and welcome to Getty Realty's Earnings Conference Call for the Fourth Quarter 2023. 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, and 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 fourth quarter and year-end earnings conference call. Yesterday afternoon, the company released its financial and operating results for the quarter and year ended December 31, 2023. 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, 2022, and our subsequent 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 today here up.
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 fourth quarter and year-end 2023. 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 will provide commentary on how we are effectively executing on our growth objectives in a thoughtful and disciplined manner. As usual, Mark will then take you through our portfolio and Brian will further discuss our financial results and guidance. 2023 proved to be another strong year for Getty and set us up for continued growth in 2024. We invested a record $326 million raised $295 million of attractively priced capital and continued to advance our portfolio diversification objectives.
We entered new markets and expanded our presence in top MSAs around the U.S. We spread our investments across all of our target sectors and carefully structured transactions to provide certainty of funding for our growing tenants and to minimize our risk. Our successful investment activities combined with our healthy in place portfolio produced strong revenue and AFFO per share growth and a sector leading dividend increase. This excellent performance was the direct result of the hard work the Getty team, who embrace the challenge to accelerate our growth despite precarious and at times unpredictable market conditions. The net result of our record investment activity was an annual total revenue increase of 12.2% and when you factor in our effective capital market executions, AFFO per share grew 5.1% for the year ended 2023 meeting the high end of our revised guidance range.
We think these would be strong results in any given year, but I'd argue they were exceptional in light of all that transpired in 2023. Our performance was driven by our focused strategy and the competitive advantages we believe we've developed over many years in our space. With the backdrop of volatile transaction markets, we remained disciplined and relied on our core principles including prioritizing relationships and being experts in our transaction markets. Our tenants are often making long-term financing decisions and rely on us effectively structure and close transactions on a timely basis irrespective of where we are in the economic cycle. To that end, we strengthened relationships with existing tenants and aggressively pursued new business with both mature and emerging retailers.
We also lean heavily on our knowledge of the underlying sectors we invest in and our database of thousands of previously underwritten properties to make us smarter investors. Notably, we continue to add newly built stores which we refer to as new to industry or NTI locations to our portfolio. And in 2023 approximately 80% of our investments were for these NTI sites. From an operations standpoint, we believe it benefits our portfolio to acquire state-of-the-art new builds that reflect the latest tenant prototypes including increased store sizes, prominent branding, the latest technology and in certain cases drive thru lanes. And from an investment perspective, we leveraged our expertise to carefully underwrite each opportunity, set appropriate rents, limit our gross capital outlay and ultimately acquire these assets either at or below their construction cost.
Another core principle at Getty is the concept of continuous improvement with respect to our operations. We took two important steps on this front in 2023. First, we realigned some of our team for an increased focus on our investment program in order to better align with our growth plans. We now have more than one-third of the company focused on sourcing, underwriting, negotiating and closing acquisition opportunities. We also launched a multiyear technology initiative to ensure that we have the systems in place to support a larger platform and to make us more efficient and better investors. The initial phases of implementation will go live in early 2024. As we enter this year, Getty is well-positioned for the current environment given the essential nature of our assets, the operating strength of our institutional tenant base, our distinctive sourcing and underwriting capabilities and our strong balance sheet.
We expect our 2024 earnings growth be driven by the escalators from our in place portfolio, additional income from investments acquired or partially funded in 2023 and by our investment pipeline, which currently includes more than $67 million of assets under contract, the majority of which are projected to close in the first half of this year. Our target retail sectors continue to be healthy as evidenced by the resilience of the U.S. consumer and operators in the convenience and automotive retail space are pursuing a variety of growth strategies to meet consumer demand. Although our investment volume in 2024 will ultimately, depend on market conditions including sellers' expectations regarding rates and their willingness to transact. We think our relationships, underwriting expertise and liquidity will serve us well as we source and diligently underwrite opportunities to acquire new convenience and automotive retail assets.
We remain confident in the strength of Getty's in place portfolio and our ability to create value through earnings growth and portfolio diversification. And with that, I will turn it over to Mark to discuss our portfolio and investment activities.
Mark Olear: Thank you, Chris. As of the end of the year, our lease portfolio included 1,089 net leased properties and two active redevelopment sites. Excluding the active redevelopments, occupancy was 99.8% and our weighted average lease term was 8.9 years. Our portfolio spans 40 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 2.6x. Turning to our investment activities for the year, we underwrote a record $6.8 billion of potential investments. Continuing with the themes of portfolio growth and diversification, convenience stores represented approximately 45% of our underwriting with the remaining 55% being focused on other convenience and automotive retail property types, including express tunnel car washes, auto service centers, primarily tire stores and oil change locations and drive-thru quick service restaurants.
We had a strong quarter in which we invested $61.8 million through sale leasebacks or development funding transactions, bringing our full year investments to a record $326.3 million. Highlights of this quarter's investments, some of which include amounts funded in prior periods include the acquisition of two convenience stores located in the Charleston MSA for $12.9 million, 12 auto service center properties located throughout the Southeastern U.S. for $27.8 million, two express tunnel car washes located in the Cleveland and Jacksonville MSAs for $10.6 million and two under construction car wash properties for $6.2 million as part of these acquisitions, we will provide additional funding during the construction period to complete these projects.
We also advanced incremental development funding in the amount of $24.5 million for the construction of 20 new to industry car washes and auto service centers. These assets are either already owned by the company or are under construction or will be acquired via sale leaseback transactions at the end of the project's respective construction periods. For the fourth quarter, the aggregate initial cash yield on our investment activity was nearly 8% and the weighted average lease term for the acquired properties was 15 years. For the year ended 2023, our $326.3 million of investments included the acquisition of 40 express tunnel car washes, 13 auto service centers, 12 convenience stores and three drive-thru quick service restaurants. The weighted average initial yield, the lease term for these acquisitions was 17.2 years and the average initial cash yield for all investments was approximately 7.3%.
Subsequent to the year-end, we invested $18.6 million for the development and/or acquisition of nine express tunnel car washes, eight auto service centers and one convenience store. We currently have more than $67 million of commitments to fund acquisitions and developments, which we expect to spend over the next 6 to 9 months at an average initial yield in the mid-7% range, which is reflective of the mix of more recent originations similar to the yields we achieved in the fourth quarter and lower yields on some of our older originations. The market for our property types continues to adjust to the changed rate environment and remains challenged. While we were able to deploy capital in 2023 at materially higher yields than the prior year and are currently offering on transactions in the 8% range, it is clear that these pricing levels have many sellers reevaluating their needs to transact in the near-term.
With the expectation that there will be rate cuts in the second half of 2024, whereas been a decline in overall transaction activity in our retail sectors thus far this year. Despite this temporary market dislocation, Getty's position in the market remains unchanged. We believe the market will adjust to the changing economic landscape and will stabilize as our tenants look to continue growing their businesses. We remain disciplined in our underwriting and focused on our investment strategy, which prioritizes direct transactions with both growing and established operators. We believe this strategy will afford us the opportunity to work with our tenant partners as the market evolves. Ultimately, we expect that we will be able to identify accretive investments as we move throughout the year.
Moving to our redevelopment platform. During the quarter, we invested approximately $300,000 in projects for our various stages in our pipeline. We completed one redevelopment project, where rent commenced at an automotive parts store in Brooklyn, New York, which is leased to AutoZone. We invested a total of approximately $1.2 million in the project and generated incremental return on invested capital of 9.3%. We also completed the renovation of a convenience store property in Connecticut. We invested $450,000 in this project in return for increased rent and extended lease term. We ended the quarter with three signed leases for redevelopment projects and are seeing renewed interest from retailers to expansions plans overlap with the footprint in our portfolio.
We expect to continuously complete projects over the next few years. Turning to asset management activities, for the fourth quarter, we sold four properties realizing $7.2 million in gross proceeds and exited one leased property. For the year, we sold nine properties realizing $11.9 million in gross proceeds and exited five leased properties. With that, I turn the call over to Brian to discuss our financial results.
Brian Dickman: Thanks Mark. Good morning everyone. Last night we reported AFFO per share of $0.57 for Q4 2023, representing an increase of 3.6% versus the $0.55 per share we reported in Q4 2022. FFO and net income for the quarter were $0.51 and $0.30 per share respectively. For the full year 2023, AFFO per share was $2.25 representing an increase of 5.1% over the $2.14 per share we reported in 2022. FFO and net income for 2023 were $2.06 and $1.15 per share respectively. I'll mostly focus on our full year 2023 results from here, but happy to answer any questions on the quarter during Q&A. Our total revenues for the year were $187.1 million representing year-over-year growth of 12.2% versus 2022. Base rental income, which excludes tenant reimbursements, GAAP revenue adjustments and any additional rent increased by 9.5% to $161.8 million.
Away from the income statement, I'd highlight that our annualized base rent of $172.8 million as of December 31, was up 12.1% from the $154.1 million we reported at the end of 2022. This is one of the largest year-over-year increases we've achieved in ABR and we think reflects the efforts we've made to scale the platform. This growth was driven primarily by our strong acquisition activity as well as recurring rent escalators in our leases and rent commencements and completed redevelopment projects. On the expense side, total G&A costs increased 15% to $23.7 million in 2023. Excluding stock-based compensation, G&A increased by 8.9% to $17.2 million. The increase in G&A was primarily due to personnel costs including some non-recurring retirement expenses as well as higher professional fees including audit tax and legal expenses.
We also made certain platform investments in 2023 including in our people and technology systems, which we expect to benefit from starting as early as this year. We anticipate that G&A increases will moderate and G&A as a percentage of our revenue and asset base will decrease that these investments mature and we continue to scale the company. Property costs increased 10.4% to $23.8 million in 2023, primarily due to higher reimbursable real estate taxes, excluding reimbursable expenses, property costs decreased by 11.4% to $4.3 million as we continue to reduce rent expense by exiting leased properties. Environmental expenses, which are highly variable due to a number of estimates and non-cash adjustments, were $1.3 million in 2023. Recall that 2022 included the removal of reserves for unknown environmental liabilities, which is the primary driver of the significant change in environmental expenses versus 2022.
Turning to the balance sheet and our capital markets activities, we ended the year with $760 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 6.5 years. We also have a $75 million unsecured term loan outstanding at a 6.1% interest rate and $10 million drawn on our $300 million unsecured revolving credit facility. As of December 31, net debt to EBITDA was 4.9x and total debt to total capitalization was 34%, while total indebtedness to total asset value as calculated pursuant to our credit agreement was 35%. Taking into account unsettled forward equity, net debt to EBITDA would be approximately 4.7x. Moving to our equity capital markets activities.
During the fourth quarter, we settled 1.25 million shares of common stock that was subject to outstanding forward sale agreements in connection with our February follow on. This generated approximately $40.6 million in net proceeds. In addition, during the fourth quarter, we entered into new forward sale agreements under our ATM program to sell approximately 800,000 shares, which will generate anticipated gross proceeds of $24.6 million. At year-end, we had a total of approximately 1.1 million shares of common stock subject to outstanding forward sale agreements, which upon settlement are anticipated to raise gross proceeds of approximately $32.2 million. Returning to our $67 million committed investment pipeline, as Chris mentioned, these transactions are fully funded through a combination of proceeds from our outstanding forward equity agreements and the remaining $75 million available to us under our delayed draw term loan.
Pro forma for these investments in capital activity, we expect our balance sheet to remain well-positioned to support continued growth. I'd note that since 2016, we've acquired more than $1.2 billion of new assets, while effectively managing our balance sheet and maintaining leverage near the midpoint of our target range 4.5x to 5.5x 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 these leverage levels in our investment grade profile. With respect to our environmental liability, we ended the year at $22.4 million which was a reduction of approximately $800,000 since the end of 2022. Our net environmental remediation spending in 2023 was approximately $5.7 million.
And finally we're reaffirming our 2024 AFFO per share guidance range of $2.29 to $2.31, which we introduced earlier this year. As a reminder, our outlook includes transaction and capital markets activities to date, but does not otherwise assume any potential acquisitions, dispositions or capital markets activities the remainder of 2024. 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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