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

Mitch Germain - JMP Securities Anthony Paolone - JP Morgan.

Good morning, everyone. And welcome to the Getty Realty's Earnings Conference Call for the third quarter of 2017. This call is being recorded. Prior to starting the call, Joshua Dicker, Executive Vice President, General Counsel and Secretary of the company will read a Safe Harbor statement to provide information about the non-GAAP financial measures.

Please go ahead, Mr. Dicker..

Thank you, operator. I would like to thank you all for joining us for Getty Realty's third quarter conference call. Yesterday afternoon, the company released its financial results for the quarter ended September 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 they 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.

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 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 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..

Thank you, Josh. Good morning, everyone. And welcome to our call for the third quarter of 2017. With Josh and me on the call today are Mark Olear, our Chief Operating Officer, and Danion Fielding, our Chief Financial Officer.

I will begin today's call by providing an overview of our third quarter 2017 performance and strategic progress, and then we'll pass the call to Mark to discuss our portfolio in more detail, and then Danion will discuss our financial results.

Our third quarter performance continued to demonstrate the health of our core net lease portfolio, along with the progress we are making in executing on our growth strategy in terms of both acquisitions and redevelopments.

Our execution is allowing us to increase our guidance for the year and was a major factor on our board's decision this week to raise our recurring quarterly cash dividend.

Getty's investment thesis is threefold, consisting of a combination of stable growth, supported by our healthy core net lease portfolio, expanding our portfolio through acquisitions in the convenience, gas and auto-related sectors and selected redevelopment projects.

Our performance during the third quarter demonstrated each aspect of our strategy, taking into account the transactions closed during the quarter. And subsequent to the third quarter, we added 93 properties to our portfolio, for a total investment of $196 million.

The closing of the Empire transaction during the quarter was an excellent acquisition for our company. As we discussed on our prior earnings call, we are pleased to have Empire as a new tenant and to expand our geographic reach with 49 additional community store and gas station properties, all of which are high-quality assets.

We are also delighted that our transaction with Applegreen closed just after quarter-end. This acquisition further expands our geographic presence and allows us to add 38 excellent properties in the Metropolitan market of Columbia, South Carolina. Year-to-date, we have now acquired 103 properties for more than $213 million.

These acquisitions were funded with funds available under our revolving credit facility and a combination of capital raised through our follow-on offering in July and through the targeted use of our ATM program.

Pro forma for both the Empire and Applegreen transactions, we expect our net debt to EBITDA ratio to be approximately 4.5 times, which positions us with available debt capacity should additional growth opportunities present themselves.

Turning to our results for the quarter, we again produced growth in net earnings, FFO and AFFO for the quarter as compared to the same period for the prior year. On a per share basis, which takes into account our July common stock offering, our quarterly AFFO per share was $0.42.

After adjusting for certain non-recurring and notable items, which Danion will discuss, our normalized AFFO was $0.41 per share for the quarter ended September 30, 2017.

The strength of our operating results along with the completion of our significant acquisitions were the primary drivers of our decision to raise our annual AFFO per share guidance for the full year 2017.

Finally, as we announced earlier this week, our board approved a 14% increase in our recurring quarterly cash dividend from $0.28 per share to $0.32 per share. This annual increase marks the third consecutive year that we have been able to raise our recurring quarterly cash dividend by more than 10%.

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

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

Thank you, Chris. I will start with the discussion of our acquisition activities. Year-to-date, as Chris mentioned, we have completed the acquisition of 103 properties, 64 of which were acquired during the first nine months of the year and 39 have been acquired so far in the fourth quarter.

The collective total purchase price is more than $213 million and our year-to-date initial return on our investment is more than 7.3%. The highlight of the third quarter was the Empire transaction, which closed on September 6. In this transaction, we acquired 49 properties for $123 million.

At closing, we entered into a 15-year unitary triple-net lease with Empire and expect to generate initial annual cash rental income of approximately $9 million. The properties acquired are located in Arizona, Colorado, Florida, Georgia, Louisiana, New Mexico and Texas.

The properties have an average lot size of 1.3 acres and a store size of approximately 2,700 square feet, both of which compare favorable to the industry as a whole. In addition, during the third quarter, we purchased five properties, which we had previously leased for a total purchase price of $3 million in the aggregate.

These sites were purchased for a weighted average initial cash return of more than 9% and had a weighted average remaining initial lease term of 13.4 years. After the quarter ended, we closed on the Applegreen transaction, in which we acquired 38 fee properties for $68.3 million in the Greater Columbia, South Carolina metropolitan market.

At closing, we entered into a 15-year lease with Applegreen, under which we will receive initial annual cash rental income of approximately $5 million.

Of the 38 properties acquired, 33 are convenience and gasoline station properties, many of which contain Burger King, Subway or Blimpie outlets inside the store; and five properties are stand-alone Burger Kings.

Once again, the properties compare favorably to the overall industry and our existing portfolio, with an average lot size of 1.7 acres and an average store size of 2,900 square feet. While the acquisition market continues to be competitive in the convenience and gas sector, we remain disciplined in our underwriting criteria.

Our pipeline of actionable opportunities remain strong and we are in the process of reviewing and pursuing several additional acquisition opportunities for both single assets and portfolios. In terms of capital recycling, during the quarter, we sold one property for $400,000.

Moving to our redevelopment platform, we completed our second redevelopment project during the quarter. In July, rent commenced for a GreenDrop at a previously vacant location in Westchester County, New York. We invested approximately $400,000 into the site and expect to generate a return of 15% on our investment.

In terms of redevelopment projects, we ended the quarter with 14 signed leases and LOIs, which include ten active projects and four additional projects on properties, which are currently included in our net lease portfolio. All these projects are continuing to advance through the redevelopment process.

We expect substantially all of these projects will be completed over the next two to three years. In total, we have invested approximately $1 million in the 14 redevelopment projects in our pipeline and we expect to have rent commencement of further projects before the year-end.

On the capital spend side, we estimate that these 14 projects will require a total investment by Getty of $10.8 million and will generate incremental returns to the company in excess of where we could invest these funds in the acquisition market today.

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

As a result of all of our activity, we ended the quarter with 855 net lease properties, 10 active redevelopment sites and 8 vacant properties. Our weighted average lease term is approximately 11 years. And our overall occupancy, including our 10 active redevelopments, improved by 30 basis points to 99.1%. With that, we'll turn the call over to Danion..

Thank you, Mark. Turning to our financial results. For the third quarter, our total revenues and revenues from rental properties, which excludes tenant expense reimbursements and interest income, were $29.5 million and $24.9 million respectively., representing increases of 3.5% and 3.8% over the prior year's quarter respectively.

Growth was driven primarily by our year-to-date completed acquisitions and leasing activities. During the third quarter of 2017, our cash operating expenses, which consist primarily of property costs and G&A expenses, increased slightly by $0.2 million quarter-over-quarter.

For more information on specific expense movement, please refer to last night's earnings release. Our FFO for the quarter was $16.2 million or $0.42 per share, including a $0.01 per share net benefit from notable items, which we highlight as they are not part of our core operation.

For more information on notable items, please refer to last night's earnings release. After removing notable items from comparable quarters, our normalized FFO for the quarter was $15.7 million as compared to $15.4 million for the prior year's quarter. Our AFFO for the quarter was $16.3 million or $0.42 per share.

After removing notable items, our normalized AFFO per share for the quarter was $0.41. On a comparable basis, our normalized AFFO for the quarter was $15.8 million as compared to $14.6 million for the prior year's quarter.

Turning to the balance sheet and our capital markets activity, we ended the quarter with $320 million of borrowings, which includes $95 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 4.1 years, with 70% of our debt being fixed. Our debt to total capitalization currently stands at approximately 22% and our net debt to EBITDA is 3.7 times.

During the quarter, 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 $104.3 million.

We used the net proceeds to repay amount outstanding under our revolving credit facility and subsequently drew on our revolving facility to fund both the Empire and Applegreen transactions. In addition, we used our ATM program during the quarter and issued $2.7 million of capital at an average price of $28.39 per share.

Our environmental liability ended the quarter at $64.9 million, down $9.6 million so far this year. For the quarter, the company's net environmental mediation spending was approximately $2.1 million. Finally, we are raising our 2017 AFFO per share guidance by $0.05 at the midpoint to a range of $1.60 to $1.64 per share.

The company's guidance excludes the effect of notable items as discussed in our 8-K earnings release that are not representative of our core business or are not likely to recur on a regular basis. Through the nine-month period ending September 30, 2017, such notable items resulted in net benefit to AFFO of $0.12 per share.

The company's guidance includes the impact of the company's common stock offering in July, 2017, and the closing of the Empire and Applegreen transactions, but does not assume any potential future acquisitions or capital markets activities. 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..

[Operator Instructions] And we will hear first from Mitch Germain with JMP Securities..

Good morning, guys..

Good morning..

How should we think about – first, how should we think about funding the Applegreen transaction?.

Well, we raised $104 million in equity plus the ATM. And then had that funds available for both the Empire and Applegreen transaction on our balance sheet. And the balance responded with the funds available under the revolver..

And so, let me ask you differently.

Are you thinking about maybe just cleaning up the revolver balance with maybe a notes offering?.

Our credit facility comes due in next year. So, we're looking at all of our options and we'll take every piece that's available to us. And that could involve more fixed-rate debt. it could involve every capital line so we're looking at all the different funds available to us..

Okay, great. A couple of – just a small number of assets, I guess, were not included in the final acquisition on the Applegreen side.

Is there anything associated with those?.

Yes. If you recall the initial announcement from the Applegreen transaction, we were also going to take four leasehold interests as part of the transaction. At the end of the day, those leasehold interests fell out of the deal. So, our funding amount was adjusted and the number of properties we acquired were adjusted.

So, said differently, we acquired a 100% fee simple interest and not leasehold interest..

A little cleaner deal.

Are you seeing a lot of competition from the other REITs or – I'm just curious, are they as active as they used to be?.

I think there's still a lot of competition from the REIT community and from strategics in our sector. Every transaction we look at, much as we'd like to be only one looking at it, there's certainly other bidders and other REITs that are out there that really like the convenience and gas sector. So, I think yes is the short answer to your question..

Okay. And last one from me. Looks like guidance was increased, you've got a $1.62 midpoint, $1.36 year-to-date. So, it seems a fairly big tail off in the fourth quarter implied by the numbers, but, I guess, you've got the equity and you've got already almost for the full quarter – third quarter.

so, just trying to understand the kind of the ins and outs there..

Yes. The $1.36 includes $0.12 of what we call notable items. And when we're looking at our guidance, we can't forecast those items. We kind of back that out, right? So, you're looking really at $1.24 of, what we call, sort of normalized AFFO through the first nine months of the year. So, maybe that helps explain sort of what the....

And this past quarter, it's $0.41 normalized, right?.

Right, yeah..

So, assuming no major problem in the fourth quarter, like, again, you already have the equity, seems like there shouldn't be that much of a tail off into the fourth quarter, correct?.

I don't – I think if you look at the number excluding the $0.12, I don't think you see that sort of tail off..

Great. Thank you, guys. Good quarter..

Thank you..

[Operator Instructions]. We'll now move to Anthony Paolone with JP Morgan..

Thank you and good morning.

Can you spend a minute and talk about the credit metrics or underwriting in the last couple of large deals we've done, such as EBITDAR coverage and just maybe volatility of the profits of those stores and how that all worked?.

Sure. So, what we've said on our deck, that typical underwriting coverage for us is 1.5 to 2 times EBITDAR. I think both of these acquisitions were sort of towards the higher end of that underwriting range.

I think, in particular the Applegreen deal, but both deals, the presence and the size of the store and the growth of the different revenue streams and the stability of the margins inside the store really take a lot of the volatility out of the margin profile. But with all that being said, they still are convenience stores.

And gas stations, they still sell retail motor fuels. And as we all know, the price of oil moves around, the retail price of gasoline moves around.

So, there is variation year to year to year, but when looking at the last several years and underwriting the transactions, you can see, again, the large component of the gross margin profile that comes from inside the four walls is relatively stable.

And you don't see a tremendous amount of movement on a total margin profile over the last several years in either transaction..

Okay, got it. And in terms of the pipeline, these last couple of deals were around that 7.3% range.

What are cap rates like in terms of your pipeline?.

Yeah. I continue to think that cap rates in the sector range from sort of at very high 6s to sort of the mid to high 7s. That's sort of a total range throughout deals we're looking at.

Depending on who the tenant is and where the properties are, depending on the margin profile, I think we're seeing transactions that definitely run that full 100 basis point range..

Okay.

And what are – any contractual bumps typical or CPI or what are you seeing typically out there?.

They're typical sort of 1.5% to 2% annual bumps..

And then just last question on the capital structure.

Do you have a net debt to EBITDA target as you kind of think about further deals?.

We do. I think we've said before that we were happy to live in the 4.5% to 5.5% range. I think, as I said in my remarks, that at the end of the year we could be a lot closer to the 4.5% after you take into account the funding the Applegreen transaction.

With that said, given the range that I just mentioned, we still have room to grow from a leverage standpoint, but the company has always been fairly conservative from a leverage profile. And I don't expect that to change..

Okay, thank you..

Thank you..

[Operator Instructions]. And at this time, there is no further questions. I'd like to turn the call back over to Mr. Constant for any closing remarks..

Thank you, everyone, for joining us for our call this morning. We appreciate your interest in the company. And we look forward to speaking to everyone in the new year when we report our fourth quarter and full year results for 2017..

And this now concludes our call. You may now disconnect..