Joshua Dicker - EVP, General Counsel and Corporate Secretary Christopher Constant - Chief Executive Officer Mark Olear - Chief Operating Officer Danion Fielding - Chief Financial Officer.

Mitch Germain - JMP Securities Ryan Meliker - Canaccord Genuity Daniel Donlan - Ladenburg Thalmann.

Good day, ladies and gentlemen, and welcome to the Getty Realty Corp. Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Joshua Dicker, EVP, General Counsel and Corporate Secretary. Please go ahead, sir..

Thank you, operator. I would like to thank you all for joining us for Getty Realty's Second Quarter Conference Call. Yesterday afternoon, the company released its financial results for the quarter ended June 30, 2017. 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 2017 guidance; and may also include statements made by management in their remarks and in response to questions, including regarding future company operations, future financial performance and the company's acquisition or redevelopment plans and opportunities, included expecting closing of pending transactions.

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, 2016, as well as our 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 views 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 revised definition of 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..

generating consistent organic growth from our existing net lease portfolio, the ongoing pursuit of accretive acquisitions and unlocking embedded value in our portfolio through selective opportunities for redevelopment.

We are very pleased with our progress on each of these fronts, particularly in terms of acquisitions where we've recently increased our activity.

We produced another quarter of steady results with modest growth over the prior year's quarter, which displays the continued stability of our net lease portfolio and the health of the convenience store and gas station industry.

At the same time, we made significant progress on our strategic goal of growing and enhancing our portfolio through disciplined acquisitions and redevelopment projects. Specifically, we produced growth in net earnings, FFO and AFFO for the quarter.

Our quarterly AFFO per share was $0.53, which represents a significant increase over the prior year's quarter.

After adjusting for certain nonrecurring notable items, which Danion will discuss, our normalized AFFO was $0.42 per share for the quarter ended June 30, 2017, up from $0.40 per share for the quarter ended June 30, 2016 on a comparable basis.

Moving to our portfolio, we made considerable progress towards building the company during the second quarter.

As Mark will discuss in more detail, we acquired five high-quality, well-located properties for $11.6 million during the quarter; and subsequently announced two significant portfolio acquisitions for almost $200 million, which we expect to close later this year.

The first is a 49-property acquisition leaseback transaction with Empire Petroleum, a regional fuel distributor. And the second is a 42-property acquisition leaseback transaction with Applegreen, a publicly traded C store operator headquartered in Ireland.

We continue to evaluate a robust pipeline of actionable acquisition opportunities, which includes both single-unit and portfolio transactions.

We are seeking to partner with stronger operators to acquire real estate that meets our underwriting criteria and have strong operating fundamentals located in geographic regions which either enhance our current holdings or where we are targeting new investments.

Regarding our redevelopment program, we commenced active redevelopments on two new projects in the quarter, both of which are new-to-industry convenience store and gas stations, bringing our number of active redevelopments to nine, with another six leases executed and in various stages of redevelopment.

Finally, on the balance sheet, we opportunistically used our ATM program during the quarter. And in addition, we completed a successful $105 million capital raise after quarter end. These equity offerings support the funding needed for our pending acquisitions and further enhances our capital structure.

We are excited about our accomplishments year-to-date and about our business prospects for the remainder of the year. We are focused on executing on our stated growth strategies, which we believe will drive additional shareholder value as we move through 2017 and beyond.

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

Thank you, Chris. We've been quite active in terms of acquisitions. Year-to-date, we have completed or announced the acquisition of 101 properties, for a total purchase price of $210.9 million. During the second quarter, we purchased five properties located in Arizona, Georgia and Oregon for a total purchase price of approximately $11.6 million.

These acquisitions have been the purchase of a small portfolio and two triple-net lease properties, all of which meet our underwriting standards for real estate attributes, tenant credit and operational quality.

In total, these acquisitions were purchased for a weighted average initial cash return of 7.3% and had a weighted average remaining initial lease term of 9.3 years. In addition to the transactions we closed during the quarter, we also announced two significant portfolio transactions which we expect to close prior to the end of the year.

On a portfolio basis, the properties need a disciplined approach to both underwriting real estate and credit worthiness of the future tenants. The first, Empire Petroleum, is a 49-property transaction with assets located in seven states, including Arizona, Colorado, Florida and Texas.

Empire, our future tenant, is a large regional fuel supplier with track record of both company-operating locations and supplying fuel to the industry. Empire is acquiring the business at these properties as a result of the divestiture of certain properties stemming from the Couche-Tard/CST brands merger.

The properties we are acquiring have an average lot size of 1.3 acres and a store size of approximately 2,700 square feet, both of which compare favorably to the industry as a whole. We expect to fund $123 million at closing and recognize an initial-year rent of approximately $9 million.

As previously disclosed, we expect the transaction to close before the end of the third quarter this year. The second transaction, Applegreen, includes the acquisition of 38 fee properties and four leasehold interests, which are all located in the greater Columbia, South Carolina metropolitan market.

Of the 42 properties, 34 are convenience store and gasoline station properties, many of which contain Burger King, Subway or Blimpie outlets inside the store. And 8 of these properties are stand-alone Burger Kings.

Once again, the properties compare favorably to the overall industry with an average lot size of 1.7 acres and average store size of 2,900 square feet. Applegreen, our future tenant, is a publicly traded convenience store operator with more than 240 locations in Ireland and the U.K.

This transaction marks a significant strategic expansion by Applegreen into the US market, and we are happy to be their partner in South Carolina. We expect to fund $70.1 million at closing and recognize an initial-year rent of approximately $5 million for our investment in fee properties and $0.2 million of NOI from the four leasehold properties.

As previously disclosed, we expect the transaction to close before the end of the year. I should note that, although we expect these deals to close as contemplated, as we have previously disclosed, each of these deals is subject to certain contingencies. And we cannot guarantee that they either will close on the terms of our agreements or at all.

While the acquisition market continues to be competitive in the convenience and gas sector and remain disciplined in our underwriting criteria, our pipeline of actionable opportunities continues to grow. And we are in the process of reviewing and pursuing several additional acquisition opportunities for both single asset and portfolio.

In terms of capital recycling, during the quarter, we sold two properties for $1 million in the aggregate. Moving to our redevelopment platform. We ended the quarter with 15 signed leases and LOIs, which include nine active projects and six additional projects on properties which are currently included in our net lease portfolio.

All these projects are continuing to advance through this development process. We expect substantially all these projects will be completed over the next two to three years. In total, we have invested approximately $1.2 million in these 15 redevelopment projects to date, and we expect to have rent commencement at two projects later this year.

On the capital spending side, we estimate that these 15 projects will require total investment by Getty of $11.2 million and will generate incremental returns to the company in excess of where we can invest these funds in the acquisition market today.

For a more detailed information on the redevelopment pipeline, please refer to Page 12 on our investor presentation, which we can - which it can be found on our website. We remain committed to transforming certain sites in our portfolio and look forward to updating everyone as we make progress.

Finally, we did not enter into any new leases during this quarter. As a result of our activity, we ended the quarter with 806 net lease properties, nine active redevelopment sites and 10 vacant properties. Our weighted lease term is approximately 11 years. And our overall occupancy, excluding our nine active redevelopments, remains constant at 98.8%.

With that, I turn the call over to Danion..

Thank you, Mark. Turning to our financial results, for the second quarter, our total revenues and revenues from rental properties which excludes tenant expense reimbursements and interest income were $29 million and $24.8 million, respectively, representing increases of 2.8% and 1.5% over the prior year's quarter, respectively.

These increases were driven primarily by our year-to-date completed acquisitions and leasing activities. During the second quarter of 2017, our results were positively impacted by reductions in all of our major expense categories, including property costs, environmental and G&A expenses, which declined a collective $1.1 million quarter-over-quarter.

For more information on specific expense movements, please refer to last night's earning release. Our FFO for the quarter was $19.9 million or $0.57 per share, including an $0.11 per share net benefit from notable items, which we highlight as they are not part of our core operations.

For more information on notable items, please refer to last night's earning release. After removing notable items from the comparable quarters, our normalized FFO per share for the quarter was $0.46 per share, as compared to $0.45 per share for the prior year's quarter. Our AFFO for the quarter was $18.7 million or $0.53 per share.

After removing notable items from comparable quarters, our normalized AFFO per share for the quarter was $0.42 per share, as compared to $0.40 per share for the prior year's quarter.

Turning to the balance sheet and our capital markets activity, we ended the quarter with $310 million of borrowings, which includes $85 million under our credit agreement and $225 million of long-term fixed-rate debt. Our weighted average borrowing cost is 4.9%.

And the weighted average maturity of our debt is 4.4 years, with 73% of our debt being fixed rate. Our debt-to-total capitalization currently stands at approximately 28%, and our net debt-to-EBITDA is 3.9 times. In addition, we used our ATM program during the quarter and issued $1.6 million of equity at an average price of $25.34 per share.

After quarter end, we issued 4.7 million shares through a follow-on equity offering at an offer price of $23.15 per share. The offering raised net proceeds, after underwriting fees, of approximately $105 million. We have used the proceeds to pay down all of our revolving credit facility borrowings, with the balance going to cash on hand.

We ultimately expect to use cash on hand and borrowings under our credit agreement to fund the Empire and Applegreen transactions when they close later this year. Our environmental liability ended the quarter at $64.6 million, down $9.9 million so far this year.

For the quarter, the company's net environmental remediation spending was approximately $3.6 million. Finally, we are reaffirming our 2017 AFFO per share guidance of $1.54 to $1.60 per share.

Our guidance excludes a net benefit of $0.12 per share related to notable items, as discussed in our earnings release, but includes the impact of our 4.7-million-share common stock offering in July of this year and the expected closings of the pending Empire and Applegreen transactions but does not assume any potential future acquisitions or capital markets activity.

With that, I will turn the call back to Chris..

Thank you. That concludes our prepared remarks, so let me ask the operator to open the call for questions..

Certainly. [Operator Instructions] And we'll take our first question from Mitch Germain with JMP Securities. Please go ahead..

Curious about the two portfolios that you have under contract and were they sourced off market, or were they full bidding?.

I would say that both transactions were certainly sourced through industry relationships, but I don't think either of them were completely off market..

And how would you characterize the bidder pool? Have you seen a pullback versus relative to what some of your competition are doing out in the market? Just curious in terms of what this might mean going forward as to your ability to source these types of transactions..

I think I actually would tell you the other way with that, Mitch, because I think there is a significant amount of consolidation and M&A going on in the C store industry at this point. So I think there is a lot of activity that we're seeing in the market.

And I do think all situations, especially marketed situations, will continue to see competition from other REITs and other types of investors that focus on our sector..

Got you. And then just in terms of that and in terms of moving forward and your ability to execute on these types of transactions, I'm curious what your long-term plan is for the balance sheet with regards to maybe clearing up some space in the revolver.

Do you plan to possibly term some of that debt out and create some capacity?.

Well, we did that earlier this year with a $50 million refinance. So we're certainly comfortable of doing that. And I think, as the year progresses, we'll certainly look at all of our options for freeing up capacity to make sure that we're capable of executing on what's in our pipeline right now..

Great and then in terms of the redevelopment pipeline, are there any types of customers, industries that you're shying away from in terms of signing contracts with customers?.

This is Mark. I don't think we have any specific. We're looking at multiple type usage, from quick-service restaurants, fast food, convenience stores, financial institutions; and some mixed-use opportunities, where there might be some medical or urgent care as they compatibly used with [ph] our properties.

But it's basically what's appropriate for the individual sites and the typical financial and risk and due diligences that we do on any transaction..

Great, thanks guys. Good quarter..

Thank you..

And we'll hear next from Ryan Meliker with Canaccord Genuity. Please go ahead..

Hey, good morning guys. I just had a couple of quick ones here. First of all, I'm - just I'm assuming that your reiteration of guidance at $1.54 to $1.60 is largely driven by the uncertainties surrounding the timing of the closing of the two transactions that were already funded with equity.

Obviously, it was a great quarter, so is that what's driving not raising guidance after a pretty strong quarter or is there something else?.

No, that's it. I mean there - those two transactions are subject to - our transactions are subject to the closing of separate transactions, so we're not able to control the actual closing dates there. So that uncertainty is [indiscernible] hold our guidance where it is.

And we'll revisit as there's additional clarity on when our deals are going to get done..

No, that's helpful. And then I guess, how much confidence do you have that you'll be able to close them in the time lines that you've outlined? Obviously, it sounds like it's outside of your control, so any color you have there would be helpful..

I think, based on the way the 2 transactions are progressing and the fact that we've publicly stated that we think they're going to close in no certain time frames, we feel pretty confident that they'll get done before the end of the time frames we've laid out..

Okay, great. And then another - just a quick question on redevelopment. Obviously, you guys have been ramping the redevelopment platform. It seems to be highly accretive with the yields you're talking about.

Is there any talk about accelerating that in the near term to try to generate outsized returns?.

This is Mark Olear again. So the disclosed projects are in the development process, which is largely can - the timing of which and acceleration is largely controlled by the entitlement and project design process. And we continue to dedicate resources to generating rent from redevelopment projects as soon as possible..

But how about expanding the redevelopment projects from what's on the slate today that you guys announced to originally substantially more the next couple of years?.

Yes, Ryan, we've publicly said that we think the total basket of projects is somewhere between 5% and 10% of our overall portfolio by number of properties. So the team has got the 15 projects that we've talked about in our investor slides, which are the nine, both of which are active; and the 6 that are in various stages of the process.

Behind that is the balance of what we think we can redevelop. Those are in various stages of marketing, whether we're trying to find new tenants or in various stages of negotiation for leases. So there's a significant amount of emphasis with inside of Mark's group in terms of trying to move those projects along as quickly as we can.

So it - I think the one thing I would leave you with is, yes, they have 15 projects that we talk about, but there are a host of projects behind that, that we obviously hope to bring onto that list as quickly as we can..

Great, that's helpful. Thanks, guys..

[Operator Instructions] We'll hear next from Daniel Donlan with Ladenburg Thalmann. Please go ahead..

Good morning, just had three quick ones here. As it pertains to the redevelopment pipeline, I'm just kind of curious as to how those transactions are coming about.

Is this something where you find such you think would be attractive to a certain subset of tenants and then you go out and proactively try to see if there's interest? Is it - is some of it kind of inbound from tenants that are looking for sites? Just kind of curious how these redevelopments kind of materialize..

Yes. So it - there's a few different ways, but mostly it's the traditional marketing of the sites through the appropriate type of broker assurances. So we've identified sites that have potential for redevelopment. We assess what can - what is likely and can be developed on the property.

And then we'll dedicate a marketing program around that individual property and try and generate interest and pull some offers through the redevelopment..

Okay.

And then as far as the anticipated total investment, it kind of varies widely by asset type, so should we just expect, the ones that are kind of smaller in scale, those are just simple brown leases where the first - or the future tenant is going to be doing the building themselves? Or how do we look at that?.

Yes. It is a mix of transaction structures where, as you said, there are standard, simple ground leases where the incoming tenant is doing the bulk of the investment in the property, up through build-to-suit type of delivery, vanilla box delivery to the tenant, so yes.

I think directionally, where there's larger spend, it would be a build-to-suit type of a transaction. And where there's less spend, it would be basically demolition, some site improvements and the incoming tenant doing the building construction..

Okay. And then as far as your expansion goes via acquisitions, I think historically Getty's portfolio has been more Northeast focused. Call it Boston to D.C.

Is the thought process around expanding kind of going more into the Southeast and to the Midwest, to Texas? Is that going to be kind of the bulk of where you see opportunities?.

Well, I think we're certainly looking at opportunities that both overlap with the historic focus of the company, which is Northeast, Mid-Atlantic. In 2015, we did a significant transaction which included an entrance into Colorado, Washington and Oregon. And then there's been expansion of our presence in California.

There are certain areas of the country where we're - we certainly spend a lot of time studying. The acquisition in '15 was 1 of those. And these two deals which we announced this quarter or after the quarter were - are more Southeast, in South Carolina. And then the Empire transaction is really across the entire Sunbelt.

But that doesn't mean we wouldn't look at transactions that are overlapping where we currently are. We're really focused on what the real estate attributes are, what the credit of the tenant is and what the operations are. So I think the coasts are certainly there. The South is certainly there. What I don't think you'll see us do is doing all 50 states.

I think there are certain areas where we're just not as excited to invest..

Okay, appreciate that. And then just lastly, I'm just kind of curious, your thoughts on some of the bigger-concept gas station and C stores and your sheets [indiscernible] racetrack.

Are these assets that you think you're potentially interested in? Is it just the I've seen where these things traded at with very low cap rates, but they're something that's just kind of out of your realm of possibility given your cost of capital or how do you kind of look at those on a go-forward basis?.

Well, I think what you see out there or that we see in the one-offs for the folks you mentioned are sort of in 1031 market and those are in the fours and fives, that's just not something that we're going to play in. We have racetracks in our portfolio. We have other large-scale formats in the portfolio.

The two acquisitions which we announced this quarter definitely have components of it that are that 4,000, 5,000-square-foot C store, but the average is - average out to where some of what Mark discussed earlier in the call. The large-format C store is definitely attractive to us.

It's attractive to our tenants, but the dynamics of the industry are such that the profitability inside the store drives the majority or more than the majority of site-level profitability.

So the more revenue sources that tenants can pack into the store, the better it is from a coverage standpoint and overall profitably standpoint for us and our tenant..

Okay, thank you..

This concludes today's question-and-answer session. I would like to turn the call back over to Mr. Constant for any additional or closing remarks..

Okay, thank you. I just wanted to say thank you to everyone for joining us this morning. We appreciate your interest in Getty. And we look forward to continuing our activity and speaking to everyone again when we report for the third quarter of this year..

Once again, that does conclude today's conference. Thank you for your participation. You may now disconnect..