Good morning, everyone and welcome to Getty Realty's Earnings Conference Call for the Second Quarter of 2019. This call is being recorded. Prior to the start of the call.

Josh, Joshua Dicker, Executive Vice President, General Counsel and Secretary of the company will read a Safe Harbor statement and provide information about our 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 second quarter conference call. Yesterday afternoon the company released its financial results for the quarter ended June 30, 2019. The Form 8-K and our 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 2019 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 2018, 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 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..

Thank you, Josh. Good morning, everyone, and welcome to our call for the second quarter of 2019. 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 second quarter 2019 performance, investment and balance sheet activities and our strategic objectives for the remainder of the year. 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 results for the quarter were steady, and once again in line with our expectations. During the quarter, our net lease portfolio displayed the ongoing strength and stability that we have consistently demonstrated from our long term triple net leases.

And we continue to selectively add properties to our portfolio, dispose of non-core sites and invest in properties in our redevelopment pipeline.

Rental income, which excludes GAAP revenue recognition adjustments and tenant reimbursements, grew by 3.5% to $29.4 million for the quarter, primarily due to income received from properties acquired last year, our contractual rent increases and the completion of several of our redevelopment projects.

For the second quarter, we reported net income of $13.2 million, FFO of $19.6 million and AFFO of $18.1 million, which grew 4% over the prior year's quarter. The growth in AFFO can be attributed to both our rental income growth as well as our efforts to maintain an efficient operating cost structure.

On a per share basis our AFFO was $0.43 per share, which was comparable to the prior year's quarter. I'm pleased to announce an active quarter in terms of our growth strategy as we executed on both our acquisition and redevelopment platforms. During the quarter, we acquired nine convenience and gas properties for approximately $30 million.

In addition after quarter end we acquired two additional properties for $8.5 million. One site was a carwash and the other is a collision [ph] center and both are newly constructed facilities subject to 15 year triple net leases.

As Mark will discuss in more detail these acquisitions mark an important milestone in Getty's evolution, as we believe there are a number of attractive opportunities to further enhance our portfolio with closely related asset types.

We believe all of our acquisition activity year-to-date supports our stated goals of acquiring high quality, well located properties in the CNG sector, as well as expanding our investment criteria to include various segments of what we call the other automotive sector.

Turning to our redevelopment program, during the second quarter, we added one signed lease to our pipeline of projects bringing our pipeline to 13 redevelopments. During the quarter we partially funded our growth with proceeds raised by -- via our aftermarket equity program.

Looking ahead capital market conditions remain favorable for our company and we will look to fund the company's growth long term with permanent capital. We plan to maintain our conservative balance sheet and are committed to having a well laddered and flexible capital structure.

While the volume of timing of acquisition activity can vary quarter-to-quarter, we continue to source and underwrite transactions in the convenience gas and other automotive-related sectors.

Overall, the volume of opportunities available for these types of assets remain strong and we continue to see competition from both our REIT peers and other institutional real estate investors.

As we have continuously demonstrated we will be disciplined when reviewing opportunities and are focused on acquiring high quality real estate in either dense and established metropolitan areas or in high growth markets as we believe a portfolio of well-located properties will drive additional long term shareholder value.

In addition, we are pursuing additional redevelopment projects and selectively disposing of properties where we have made the determination that the property is nowhere competitive as a community gas location and does not have redevelopment potential.

As we move through the second quarter of 2019 and beyond, we continue to benefit from the stability of our cash flow from our core leased portfolio and our conservative balance sheet. We remain focused on our three pronged growth platform consisting of one, stable growth supported by asset management activities in our core net lease portfolio.

Two, expanding our portfolio through acquisitions in the convenience, gas and auto-related sectors. And three, selectively redevelopment projects. We remain confident that we will be able to continue to successfully execute on our strategic objectives throughout the remainder of 2019.

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

Thank you, Chris. I'll start by reviewing our investment activities and provide additional detail on our redevelopment projects and our portfolio in general. During the quarter, we acquired nine properties for $29.7 million.

Six of these properties we acquired for $24.7 million were part of a sale leaseback transaction with a New Circle K franchisee, who is an experience owner and operator of convenience stores and car washes in the Southern California market. All the properties are located in the Los Angeles MSA and are subject to a 15 year unitary triple net lease.

We expect to recognize initial full year rent of approximately $1.8 million from this transaction. The properties are well positioned and the land and building size and design are competitive in the marketplace and have a history of sales volume and profitability that meet our underwriting criteria.

In addition, during the quarter, we acquired three properties, in individual transactions for $5 million in the aggregate. All of these properties are leased to Circle K and are located in Alabama, Georgia and North Carolina.

The lot sizes for these three properties average more than 0.7 acres and the stores at each site are in excess of 2,200 square feet. Additionally, after the quarter ended, we closed on the acquisition of two additional properties for $8.5 million.

One site which was acquired for $4 million is a newly constructed Car Wash facility in Kentucky subject to a 15 year triple net lease with District Wash [ph]. The other site, which was acquired for $4.5 million is a newly constructed collision center in the Minneapolis St. Paul MSA subject to a 15 year lease with Caliber Collision.

Turning to our redevelopment program, during the quarter, we signed a new lease, where our new tenant plans to update an existing convenience and gas site and transform it into a state-of-the-art, new-to-industry facility.

The property is currently subject to a lease, and we expect to recapture and commence work once the appropriate approvals have been received.

In total, we ended the quarter with 13 signed leases, which includes seven active projects and six projects on properties which are currently subject to triple-net leases, which will be removed when we receive various approvals required to commence construction.

Our pipeline includes a wide range of retail uses such as enhanced gas and convenience stores, specialty retail such as automotive parts and service and quick-serve and fast casual restaurants. All of our projects are continuing to advance through the redevelopment process.

We expect substantially all these projects will be completed over the next one to three years, with several additional projects moving to rent commencement in 2019.

To-date, we have invested approximately $12.7 million in both completed and in-progress redevelopment projects with $0.6 million occurring during the second quarter of 2019, and we estimate that the anticipated total investment through completion for the 13 projects currently in progress by Getty will be approximately $8.6 million.

The investment in these redevelopment projects will generate incremental returns for 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 over the next five years, possibly involving between 5% and 10% of our current portfolio, with targeting unlevered redevelopment program yields greater than 10%.

Finally, during the quarter, we disposed of six noncore locations for $1.5 million in proceeds, and we exited two properties which we previously leased from third-party landlords. As a result of our portfolio activity, we ended the quarter with 918 net lease properties, seven active redevelopment sites and eight vacant properties.

Our weighted average lease term is approximately 10 years. And our overall occupancy, not including our seven active redevelopments, increased to 99.1%. With that, I'll turn the call over to Danion..

Thank you, Mark. Turning to our financial results. For the second quarter, our total revenues were $34.3 million, and rental income, which excludes tenant reimbursements and interest on notes and mortgages receivables, grew 2.1% to $29.6 million.

Our growth in rental income continues to be driven by rent escalators in our leases, plus incremental growth from completed acquisitions and redevelopment projects. During the second quarter, the company also benefited from decreases in property costs and both environmental and general and administrative expenses.

For more information on specific expense movements, please refer to yesterday afternoon's earnings release. Our FFO for the quarter was $19.6 million or $0.47 per share as compared to $17.6 million or $0.43 per share for the prior year's quarter.

Our AFFO for the quarter was $18.1 million or $0.43 per share as compared to $17.4 million or $0.43 per share for the prior year's quarter.

Turning to the balance sheet and our capital markets activities, we ended the quarter with $440 million of borrowings, which includes $150 million under our credit agreement and $325 million of long-term fixed rate debt. Our weighted average borrowing cost is 5.1%.

The weighted average maturity of our debt is approximately 4.6 years, with 74% of our debt being fixed rate, and our earliest debt maturity remains 2021. Our debt-to-total capitalization currently stands at 27%. Our debt-to-total asset value is 36%, and our net debt-to-EBITDA is 4.3 times.

In addition, we used our ATM program during the quarter and issued $6.8 million of capital at an average price of $31.92 per share. Our environmental liability ended the quarter at $58.8 million, down $1 million so far this year. For the quarter, the company's net environmental remediation spending was approximately $2.4 million.

Finally, we reaffirmed our 2019 AFFO per share guidance at a range of $1.71 to $1.75 per share. Our guidance does not assume any acquisition or capital market activities, although it does reflect our expectation that we will continue to execute on our redevelopment, leasing and disposition activities.

Specific factors which impact our guidance this year include one, our expectation that we will forego rent when we recapture properties for redevelopment. Two, our expectation that our cost of borrowings will increase in 2019. Three, the full year impact of the dilution associated with the company's 2018 capital-raising activities.

And four, our expectation that we will remain active in pursuing acquisitions and redevelopments, which could result in additional expenses if deal is ultimately not completed. 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..

Yeah, hi, thanks. Good morning.

My first question is, can you talk about what all you have teed up for sale over the rest of the year, just order of magnitude?.

Sure. I think we sold 6 properties in the quarter for $1.5 million proceeds. I think that using that as sort of a run rate for the rest of the year probably is a good number to use. But again, all of our dispositions at this point are again properties that we really don't think are long-term holds for the company and don't have redevelopment potential.

So I really do not expect to generate significant net proceeds post-sale..

Okay. Got it.

And then two, with regards to a couple of the auto-related deals you did, it sounds like, post 2Q, are the deals you're looking at on that front mostly one-off like this look like a couple of $4 million-ish transactions? Or is that a space where you're likely to see portfolios?.

Yes. So it's Mark. I think we'll see a mix of both in our underwriting and our sourcing efforts. I wouldn't say that the first two deals were indicative that they're all one-off deals. But we consider both. So I think we're likely to -- we're hopeful to find some portfolio deals and continue to evaluate the individual acquisitions..

And can you talk about the pipeline growth for these as well as just more broadly as we look into the second half? You mentioned that you have a good pipeline, but you're also bumping up against other REITs and others as competitors.

Can you talk about just what that picture looks like?.

Yes, sure. So for the first half of the year our pipeline of opportunities in the gas convenience sector is pretty much in line with the last couple of years.

We're probably in excess of somewhere around $0.5 billion of opportunities that we've evaluated through the first half of the year, which is pretty much on pace with what we saw last year annualized. We are growing our pipeline of opportunities in other automotive.

It's not quite at the pace of the volume that we have to date in the fuel and convenience. With that, we continue to make inroads, develop relationships, and we're seeing much more -- a better pace and a better volume of opportunities presented to us and again also sourcing direct opportunities. So we're going to get some momentum in both categories..

Okay. And it seemed like the -- just the math you provided or numbers you provided; the Circle K sale leaseback was about a 7.3 yield. It seems like a good yield.

Just curious, like, in terms of having $0.5 billion pipeline in the first half, like was that just a -- just connected well for you? Or were the other deals just more aggressive? Like it just seems like at that price point, you should be able to make a lot of deals clear and hit the bid and make it accretive to your cost of capital?.

Yes. I mean I think that there's a host of factors, right? A, we referenced competitions. Obviously, there's certainly a lot of activity in the sector. We also have one opportunity that's come in.

We've put that through our underwriting criteria, and certain things don't fit either our real estate screen or maybe there's a credit issue on the tenant side. So not every transaction is going to be for us.

But we certainly think that there are a lot of opportunities out there that work for our cost of capital and that we can move forward on and add to the portfolio over the course of this year and beyond..

Okay, great, thank you..

And our next question is from -- one moment please. And our next question is from Mitch Germain from JMP Securities. Please go ahead..

Thank you.

How much of your portfolio today currently is characterized as other auto?.

Very, very small percentage, Mitch, less -- 2%, plus or minus..

And then the shift into -- kind of stretching kind of your acquisition criteria, is that due to competition and kind of more traditional assets? Maybe you can just provide some perspective there..

Yes. I wouldn't use the word -- yes, sure. Thanks. I wouldn't use the word --.

I'm struggling at the right word..

Yes. I think we still feel very comfortable about the core business, which remains convenience and gas. It's 98% of the portfolio. We've got deep relationships, and I think we've demonstrated that we can find opportunities and grow the portfolio there. As we look at the broader net lease universe, obviously, other automotive has a lot of similarities.

There is a bit of overlap, specifically with things such as carwashes, right, which is a -- has always been a piece to our portfolio. So I think we view it as additive. I think we view the real estate as very similar in terms of location and size, both sides, the lot size and the building size.

So again, we view this as an add, not a shift or not anything. There's no thought to moving away from convenience and gas on our side, but just adding to our opportunity set..

And are you still seeing a significant consolidation trend in the convenience and gas sector?.

That sector continues to consolidate. It is M&A-driven, right? So there are certain opportunities coming in. If you look at our transaction history over the last several years, it has been largely driven by M&A and has been, therefore, variable.

So yes, we continue to think that there will be more significant portfolio that will come to market over the next 18 months..

Great. And then last one. Danion, I'm sorry, I just missed it.

Was it $7 million on the ATM in the quarter?.

Correct..

Thank you..

And your next question is from John Massocca from Ladenburg Thalmann. Please go ahead. Your line is open..

Good morning..

Hey, John.

How are you?.

Not bad. So just for help with modeling, what was the timing on the Division Street deal from some of the industry reports that were out there, it seems like it was pretty late in the quarter.

Is that correct?.

Yes..

Okay.

I mean like is it like two days left in the quarter kind of or like mid-June?.

All right, call it, mid-June..

Okay. Mid-June.

And then kind of following up on that transaction, was this your first transaction with Division Street? And is there an opportunity potentially for more deals with the operator?.

Yes, it's Mark. This was our first transaction with this operator. He's an experienced operator from Southern California. He's been in the business for a while. He bought these from a larger operator and distributor in the LA market.

If he can grow his business, it was a good relationship, who knows if he's out there in the future? And it lends us more opportunities. But we certainly -- we won't listen to him. But for right now, it's just these properties that we acquired..

Okay. And then specifically with regards to kind of potential investments in kind of the pure carwash space, how do you maybe differentiate yourself from some of the other net lease investors in the sector? Just thinking, because it's been a fairly popular investment, especially when you look at the two larger kind of PE-backed players in the space.

There's been a lot of net lease REITs that have invested in their real estates.

So just -- is there something specific you're looking for in that sector? Or is it just that it's attractive based on the kind of underlying fundamentals?.

I think our goal with -- specifically with the larger operators or other operators who are seeking to grow there is to form direct relationships where we have an understanding as to what they're looking to do and also where we want to invest in terms of owning the real estate.

We think that there is certainly an opportunity, specifically with -- that's we did our first deal within the quarter to continue to find locations, which work for both parties and have high-quality real estate that fits well with our portfolio..

And then specifically with regards to maybe guidance, how much kind of assumptions are you making in terms of stuff within that kind of six property pipeline that isn't yet being worked on from the development side? Are you assuming all of that kind of works its way into the actual project side of the development list? Or is it -- when you contemplate your guidance, how much kind of rent is coming off-line in order to redevelop it?.

So specifically as it relates to those six properties, those that which we call pipeline, they are currently in net leases. We are currently collecting rent for those today. There will be downtime, right, when we take those properties back, work on the properties, and then obviously, the properties will come back into service upon completion.

That is factored into our guidance. We try to minimize that downtime. I think on average, on those particular properties, it would be somewhere between 6 to 12 months of downtime for the construction process..

But specifically in the 171 to 175, is that just based on what you guys have budgeted from what you can see? Or is that -- we're making some general assumption that -- for conservatism, let's assume all of those stop paying rent as part of a net lease in, I don't know, September..

Each project, John, has its own time line, right? So when we think about our numbers, specifically 2019 guidance, each one has a different time line and roll on. And actually, they roll off and then back on. So it's hard to comment as to -- from your standpoint how do you model that. Again, it's individual in nature..

Okay, thank you very much. That's it for me..

At this time, we have no further questions. I would like to return back to Mr. Constant for any further closure remarks..

Excellent. Thank you. Well, first of all, thank you all for your continued interest in Getty, and we look forward to getting back on the phone in October of this year when we report our third quarter..

This now concludes our conference call. You may now all disconnect..