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

Craig Mailman - KeyBanc Capital Markets Mitch Germain - JMP Securities Joshua Dennerlein - Bank of America Merrill Lynch John Massocca - Ladenburg Thalmann & Co Anthony Paolone - JP Morgan.

Good day and welcome to the Getty Realty Corporation third quarter 2018 earnings call. Today’s call is being recorded. At this time, I’d like to turn the conference over to Joshua Dicker, EVP, General Counsel and Corporate Secretary. Please go ahead, sir. .

Thank you, operator. I’d 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, 2018. The Form 8-K and earnings release are available on 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 2018 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.

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, 2017 as well as our periodic reports filed 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 for adjusted funds from operations, or AFFO, which was revised at the end of 2017 and our reconciliation of those non-GAAP financial measures to net earnings.

With that, let me turn the call over to Christopher Constant, our Chief Executive Officer..

Thank you, Josh. And good morning, everyone, and welcome to our call for the third quarter of 2018. With Josh and me on the call today are Mark Olear, our Chief Operating Officer, and Danion Fielding, our Chief Financial Officer.

Let me begin today's call by providing an overview of our third quarter 2018 performance, investment activities and balance sheet initiatives, and then I will pass the call to Mark to discuss our portfolio in more detail and, finally, Danion will discuss our financial results.

Our third quarter results continued to benefit from the steady performance of our core net lease portfolio as well as the ongoing execution of our acquisition and the redevelopment strategies. As a result, our revenues, net earnings, funds from operations and adjusted funds from operations all increased as compared to the prior year’s quarter.

I’m also pleased that this consistent growth resulted in an increase in our recurring dividend, which was announced yesterday, further demonstrating our commitment to creating shareholder value. For the third quarter, our revenue from rental properties increased by almost 19% to $29.6 million and our net income increased to $10.9 million.

Our AFFO increased by 14% to $17.9 million. And more importantly, we reported AFFO per share of $0.44, which is a $0.04 increase or 10% over the prior year’s quarter.

As I alluded to earlier, we continued to execute on our acquisition strategy during the quarter by adding 7 high-quality properties to our portfolio, all of which are leased to strong corporate tenants. For the year-to-date, we've added 39 properties and accretively invested $75 million in acquisitions.

In addition, we completed our third redevelopment project of the year which is a state-of-the-art, new-to-industry convenience and gas location. The completion of this project marks our sixth completed redevelopment.

We continue to grow our pipeline of projects as we believe this strategy allows us to unlock value in our existing portfolio and deliver superior returns by investing in well-located properties, while bringing new corporate tenants into our portfolio.

As we approach the end of 2018, we continue to underwrite additional transaction opportunities in the convenience gas and auto-related sectors. Overall, the volume of opportunities available for these type of assets remain strong and we continue to see competition from both our REIT peers and other institutional real estate investors.

With that said, we are staying true to our underwriting criteria. As such, we continue to be focused on acquiring high-quality real estate and partnering with tenants who share our commitment to the growth and evolution of the convenience and gas sector.

In addition, we are growing our pipeline of redevelopment projects and selectively disposing of properties, while we have made a determination that the property is no longer competitive as a convenience and gas location does not have redevelopment potential.

Turning to our dividend, as we announced yesterday, our board approved a 9% increase in our current quarterly cash dividend from $0.32 per share to $0.35 per share. We believe this annual increase is appropriate, given the company's significant growth over the last 18 months.

In addition, on behalf of the Getty Realty Board of Directors, I would like to welcome Mary Lou Malanoski to our board. Mary Lou has over 30 years of experience on Wall Street in various roles and is currently the chief financial officer of Colony S2K.

She brings a wealth of capital markets experience and will provide a unique and independent perspective to our company. We are excited by the enhanced strength and diversity that Mary Lou brings to our board and we look forward to the benefits her experience and counsel bring to our company.

Finally, we are excited about our accomplishments year-to-date and about our outlook for the remainder of the year. We continue to benefit from the health and growth of the convenience store industry, stable cash flows received from our net lease portfolio and our conservative balance sheet.

We’re focused on managing our net lease portfolio, expanding our portfolio through acquisitions and select redevelopment projects. We remain confident that we’ll be able to continue to successfully execute on our strategic objectives throughout the remainder of 2018 and beyond.

With that, I will turn the call to Mark Olear to discuss our portfolio and investment activities. Mark Olear Thank you, Chris. I will start by reviewing our investment activities and provide additional detail on our redevelopment projects and our portfolio in general. During the quarter, we acquired seven properties for $19.4 million.

Majority of this activity during the quarter is attributable to our previously announced six-property acquisition leaseback transaction with the US subsidiary of Applegreen, which is our second portfolio transaction with Applegreen in the Columbia, South Carolina market.

The properties acquired complement Applegreen’s existing portfolio in the Columbia market and average 1 acre in lot size and 3900 square feet in building size, both of which meet our recent acquisition criteria.

We see this add-on to the Applegreen portfolio as an inherent value opportunity for them and us and we expect to recognize initial full-year rent of approximately $1.25 million. In addition, during the quarter, we acquired one property in Phoenix, Arizona for $2 million.

Year-to-date, we have acquired 39 properties for approximately $75 million and we expect to generate annualized revenue from these properties of approximately $5.4 million. Turning to our redevelopment program, during the quarter, rent commenced on one project.

For the project, we funded a raise and rebuild of a convenience and gas station with Applegreen in Worcester, Mass. In this project, our total investment is approximately $1.4 million and we achieved an incremental return on our investment of 13%. Year-to-date, this is our third completed redevelopment project.

In aggregate, we have invested $4 million in six completed projects for an aggregate incremental return on investment of 16%.

Turning to our redevelopment pipeline, we ended the quarter with 13 signed leases and LOIs, which include nine active projects and four projects and properties which are currently included in our net lease portfolio, which will be removed from active leasing when we receive various approvals required to commence construction.

Our pipeline includes a wide range of retail uses such as enhanced convenience stores and gas stations, specialty retail such as automotive parts and service, and quickservice and fast casual restaurant.

To date, we have invested approximately $3 million in these 13 projects and we estimate that the total anticipated investment for completion will be $11 million. We expect that substantially all of these projects will be completed over the next 1 to 3 years, with additional projects moving to rent commencement status before we close out 2018.

As a reminder, we expect our redevelopment projects to generate incremental returns to the company in excess of what we could expect if we invested these funds in the acquisition market today. For more detailed information on Getty’s redevelopment projects, please refer to page 14 of our investor presentation which can be found on our website.

We remain committed to optimizing our portfolio and continue to anticipate redevelopment opportunities over the next five years, possibly involving 5% to 10% of our current portfolio with targeted unlevered redevelopment program yields of greater than 10%.

During the quarter, our occupancy was 99% compared to 99.5% at the end of the second quarter as we added four properties to our vacancy list. The increase in vacant properties was an anticipated consequence of planned takebacks of underperforming gas sites based on negotiations with certain of our tenants as part of a border arrangement.

We expect that we will either redevelop or dispose of these properties over time. As a result of our portfolio activities, we ended the quarter with 920 net lease properties, nine active redevelopment sites and nine vacant properties and our weighted average lease term is approximately 11 years. With that, I turn the call over to Danion..

Thank you, Mark. Turning to our financial results, for the third quarter 2018, our total revenues and revenues from rental property, which excludes tenant expense reimbursement and interest income, grew 18% to $34.7 million and 19% to $29.6 million respectively.

The primary drivers of the increase over the prior year’s quarter were the impact of rent received from our investment activity in the second half of 2017 and 2018 year-to-date.

During the third quarter of 2018, our property costs, environmental expense and general and administrative expenses were all comparable to the results of the third quarter ended 2017. For more information on specific expense movements, please refer to yesterday's earnings release.

Our FFO for the quarter was $17.9 million or $0.44 per share as compared to $16.2 million or $0.42 per share for the prior year’s quarter. Our AFFO for the quarter was $17.9 million or $0.44 per share as compared to $15.7 million or $0.40 per share for the prior year’s quarter.

Turning to the balance sheet, we ended the quarter with $425 million of borrowings, which includes $100 million under our credit agreement and $325 million of long-term fixed rate debt.

Our weighted average buying cost is 5.1% and the weighted average maturity of our debt is 5.4 years, with 76% of our debt in fixed-rate and our earliest debt maturity is not until 2021. Our debt to total capitalization currently stands at 28%, while total debt to total asset value is 36% and our net debt to EBITDA is 4.5 times.

In addition, we used our ATM program during the quarter and issued 7 million capital at an average price of $28.59 per share. Our environmental liability ended the quarter at $60.9 million, down $2.7 million so far this year. For the quarter, the company's net environmental remediation spending is approximately $2.3 million.

Finally, we’re trimming our 2018 AFFO per share guidance to $1.70 to $1.74 per share from a range of $1.68 to $1.74 per share. Our guidance range includes the impact of our year-to-date acquisition activity and our capital markets transaction.

As a reminder, our guidance does not assume any future acquisitions or capital markets activities, although it does reflect our expectation that we will continue to execute on our redevelopment leasing and disposition activity.

Specific factors which impact our guidance this year included, one, the full year impact of our earnings from second half of 2017 and 2018 year-to-date acquisitions; two, our expectation that we will forego rent when we recapture properties from our net lease portfolio for redevelopment; three, our expectation that our weighted average cost of borrowing will increase in 2018; and four, the full-year impact of the dilution associated with the company’s 2017 and 2018 capital raising 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..

Thank you. [Operator Instructions]. And we’ll take our first question from Craig Mailman with KeyBanc..

Hey, good morning, guys. Chris, you mentioned the opportunity set is still pretty strong here.

Just curious, with the volatility we’ve seen in rates, have you guys seen any movement in cap rates or maybe even on the margin, a little bit less appetite from competing buyers?.

Well, two questions there. I don't think there's been any reduced appetite from competing sources of capital, but I do think what you're starting to see is the expectation of a premium cap rate. It is sort of diminishing. So, people are kind of starting to adjust to maybe a new norm in a rising rate environment.

But all transactions take time to go from start to finish. So, I think that’s going to take time for that to filter its way into completed deals..

How much would rates need to move for you guys to kind of reevaluate return threshold need on either acquisitions or even incremental redevelopments?.

Well, our redevelopment pipeline is several hundred basis points over the acquisition market. So, I think you’d have to see significant movement there. I think we feel pretty comfortable that we’ll be able to accretively invest in the acquisition market even with a rising rate environment..

Okay. And then, just lastly, you guys had the ATM a bit. You are at 4.5 times debt to EBITDA.

Kind of how do you look at the different sources of capital today, given where the stock is trading and has performed this year versus maybe use incremental debt?.

Well, we've said before that we prefer to operate sort of in a 4.5 times to 5.5 times net debt to EBITDA range. We’re certainly at the low end of that. The company has always been a conservative company throughout its history and it’s still today.

With that said, when we look at acquisitions, we can take advantage of the fact that we are a low lever balance sheet at the current moment and use our debt capacity to fund deals. But we don't expect to live as a highly-levered entity post-acquisition..

I guess what I was getting at too is you guys have said kind of 4.5% to 5.5% is the range, but how far below that 4.5% would you bring it down if your cost of equity is attractive to lock in versus levering up a bit?.

I don't have a specific number to give you, Craig. We take all factors into account when we look at our growth plans and our balance sheet..

Great. Thanks, guys. .

And we take our next question from Mitch Germain from JMP Securities. .

Chris, you talked about, I guess, the pricing dynamic in the investment sales market.

Do you think that there is a reluctance for some of your competitors to put capital to work knowing that there could be some upward pressure of cap rates or are you still seeing a ton of money flowing into the space?.

I really don't see a reluctance. What you do see is a lot of significant M&A transactions going on and there doesn’t seem to be any lack of appetite from strategic or financial buyers. And, obviously, we can play with either one of those parties in an M&A contact.

So, the short answer, Mitch, I don't think there's any diminished appetite in the market right now..

Great, that's helpful. And you did a 30-property acquisition earlier this year. You just did a six-property sale-leaseback.

When you think of your pipeline today, looking at it, does it have a bit of both or is it maybe skewed to one versus the other?.

Well, we tend to favor portfolio acquisitions, right? Portfolio can be defined as a six-property field or it can be defined as 30 or 50 like we did last year. But with that said that, we certainly look at one-off situations where we really like the tenant or the real estate and the economics works.

So, we have a program that Mark runs that we’re able to look at all types of assets, big and small, in our sector..

Got you.

And last for me, with the dividend bomb, how much do you kind of bake into your analysis the potential environmental liability that could be realized? Is that considered when you're looking at the different factors as to where the cash flow of the company is heading?.

Absolutely. The board takes into account all of our sources and uses of capital, environmental being a use. And it factors that into their dividend decision in terms of the raise that was done yesterday..

Great. Congrats..

Thank you..

And we’ll take our next question Joshua Dennerlein of Bank of America Merrill Lynch. .

Hey, good morning, guys.

Maybe just on the Applegreen’s portfolio that you did the sale-leaseback on, maybe you could walk us through how that came about and I don't know if you can provide any color on the cap rate – initial cap rate and maybe some kind of annual rent bump that you're getting?.

Yeah. So, the Applegreen relationship started sort of at the beginning of 2017 or maybe even late 2016 when they were looking to come into the US market in a more meaningful way. Obviously, the deal that we closed in October of 2017 was – they were here in a smaller way, but it was their major entrance into the US market.

And we were a big part of that transaction. I think from their side and from our side, it made a lot of sense to work together on this add-on acquisition in Columbia. The six properties that were acquired by Applegreen, which we helped fund, were very much in line and near the remainder of their portfolio down in that market.

So, that’s kind of how the transaction came about. We defunded $17.25 million and we expect our initial first year of cash rent to be about $1.25 million, to kind of give you our range as to what we think the going-in return us. And the lease has effective annual bumps in it, in line with what we published in our presentation..

Great. Thank you, Chris. And then, maybe turning to the development pipeline, it looks like you have four projects that are going to wrap up by the end of the year.

Do you have any color on maybe timing, like is it early fourth quarter or towards the end of the year? Is that when rent will commence?.

Sitting here today, it’s from today through the end of 12/31, right? So, they're staggered. .

Staggered? Okay.

And what kind of yields are you getting on the projects in the active construction? Is it…?.

We’ve completed six projects. Our incremental yield – and our additional investments thus far has averaged or totaled 16% in aggregate. What we've said all along is that we target a program-wide 10-percent-plus return on each of – for the entire program. So, I think those numbers probably help you out there..

Awesome. Thank you, Chris.

And then, I guess, when we think like big picture, what’s kind of the latest thoughts on how many of the properties in your overall portfolio could go through the redevelopment pipeline?.

We continue to believe that approximately 5% to 10% of the portfolio over the next five-plus years are projects that we can access the property, work with and identify tenants who come up with either a new convenience and gas use or an alternative retail use. And I think that we feel pretty confident in that range of properties..

Great, thank you. I’ll yield the floor. .

And we’ll take our next question from John Massocca from Ladenburg Thalmann..

Good morning.

So, can you provide a little more color on the takebacks, the increased vacancy? Were those all with one tenant or were they with a collection of kind of underperforming assets across a couple of different [indiscernible]?.

Certain of our leases, in particular leases that came out of the Getty Petroleum Marketing bankruptcy, had some rights in the leases where our tenants can give a select number of properties back to us. And also, in many of those leases, we have the right to pull properties out, which is where a lot of our redevelopment projects are coming from.

But this was our tenants exercising those rights, giving us advance notice, so we can start to come up with a plan for each one of those properties. And as Mark mentioned, we expect to either sell or redevelop those properties. Obviously, if we can redevelop, there’s probably upside in that rental figure.

And if we dispose of the property, we expect to be able to reinvest the proceeds in either development funding or the acquisition market..

And then, in the near term, maybe how much NOI, if any, was lost from the givebacks?.

De minimis. .

Okay. One last question on that.

What percentage of the portfolio has these kind of giveback rights to it right now?.

It’s a tough question to answer. But leases that came out of the Getty Petroleum Marketing and the unitary leases, most of those leases had these giveback rights in them. We are approaching the end of the window for our tenants to give additional properties back to us.

So, I think you will see maybe a handful of these over the next 12 to 24 months, but it’s not a significant number of properties..

Okay. And then, maybe switching gears to the acquisition site, it seems like some of the recent operator M&A activity has been maybe for not necessarily rural, but smaller market – assets in smaller markets. I know your focus has been on the urban and suburban product.

But how small of an MSA would you be willing to go into as part of a transaction?.

Yeah. It’s a great question. We certainly looked at a lot of transactions, and some of which are in more rural markets. But I think when we get a package that – it is a portfolio that's maybe out of our core urban/suburban strategy, we do our best to come up with a subset of properties that would fit with our model.

And sometimes, we’re able to do that; and sometimes not.

But we generally would like to stick to markets that have a core retail center and some sort of – whether it’s university or state capital or some city or a growing hub that’s driving population growth, that's keeping income stable, that's creating miles driven which is customer visits for our tenants.

So, it’s really hard to say how small we would go, but the markets that are outside of our core strategies have to have some component of that in order for them to be interesting to us. .

Makes sense. That’s it for me. Thank you very much. .

[Operator Instructions]. And we take our next question from Anthony Paolone of JP Morgan..

Thanks. And good morning. Not much left here. Just real quick on Mitch's question earlier about free cash flow.

Do you have a dollar amount – because everybody’s definition here differs a bit – on where you think just you're running on a free cash flow basis after environmental and dividend and stuff right now?.

Not off the top of my head, Tony. I’ll have to look at the numbers and be able to kind of help tie that together for you. We can certainly think about publishing some sort of figure going forward..

And then, just on the deal flow, it sounds like you have a lot of activity. You have access to capital. The yields have been hovering around that low 7%.

What is the inhibiting factor from just having a little bit more perhaps robust quarter-to-quarter amount of activity? Is it that it’s hard to keep it at the 7.2% or it kind of goes where the properties are? What could happen?.

I think what we’re trying to do is acquire strong real estate. And that strong real estate, obviously, we want it to be an attractive convenience and gas use or other auto use and, obviously, have a strong partner on the counter side.

But, really, I think what the limiting factor is, today, it’s not necessarily return, it’s not necessarily opportunity set, it’s kind of geographic location and the quality of the underlying real estate..

Okay, got it. You may have mentioned this earlier.

Just the general split of activity between just traditional gas station, C-stores, any other automotive related categories, like what does that look like right now?.

I think the portfolio today is probably 95-percent-plus C-store gas station. We’re certainly looking at the other auto sectors. We've done a little bit with the – in terms of the higher-end battery, the Loop [ph] guys. We've looked at car washes service. Autobody. Thank you, Mark.

But, right now, to say that that’s a meaningful piece to our existing NOI would be – it’s just not there yet..

Okay, got it. Thanks..

There are no further questions at this time..

Great. Well, thank you, everyone, for attending the call this morning. We look back to getting back together with everyone when we report our year-end earnings in 2019..

And that concludes today’s presentation. We thank you for your participation. You may now disconnect..