Good morning, and welcome to Getty Realty's Earnings Conference Call for the Third Quarter 2022. This call is being recorded. After the presentation, there will be an opportunity to ask questions.

Prior to the starting of the call Joshua Dicker, Executive Vice President, General Counsel and Secretary of the company, will read a Safe Harbor statement and 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 earnings conference call. Yesterday afternoon, the company released its financial results for the quarter ended September 30, 2022. 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 2022 guidance and may also include statements made by management in their remarks and in response to questions, including regarding the company's 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, 2021, and our other filings made with the SEC, for a more detailed discussion of the risks and other factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

You should not place undue reliance on forward-looking statements, which reflect our view only as of 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 updated 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 Joshua. Good morning, everyone, and welcome to our earnings call for the third quarter of 2022. Joining us on the call today are Mark Olear, our Chief Operating Officer; and Brian Dickman, our Chief Financial Officer.

I will lead off today's call by providing commentary on the quarter's financial results, and investment activities, and offer some observations and perspectives on the company's strong position despite unsettled market conditions, which are impacting companies and consumers across the country.

As usual, Mark will then take you through our portfolio and Brian will discuss our financial results in more detail. We are pleased with the performance of our retail net lease platform in the third quarter.

Our in-place portfolio continues to perform well, generating stable cash flows and rent coverage, and we continue to execute on our growth strategy, with a positive earnings trajectory and an increased investment pipeline. For the quarter, our base rental income grew 7.7%.

Our adjusted funds from operations or AFFO increased 6.7% and our AFFO per share grew to $0.54.

Year-to-date, the company has invested more than $80 million, including approximately $21 million in the third quarter and subsequent to quarter end, and high-quality CNG and car wash properties located in attractive growth markets such as Austin, Charleston and San Antonio.

The dedicated efforts of our team have led to a net increase in our committed investment pipeline to more than $150 million from the acquisition and development of new-to-industry convenience stores, auto service centers and car wash properties, which we expect to fund over the next year or so.

Equally important, our strong liquidity position and select capital raising activities will allow us to lock in attractive investment spreads and accretively fund these transactions.

Brian will elaborate further in his remarks, but we have already raised or identified funding for approximately 75% of this transaction activity at costs meaningfully inside of prevailing market rates. And we've done so, while maintaining low leverage and an undrawn revolver to provide capacity to fund the balance of this activity and further growth.

Our team continues to underwrite opportunities across all of our target asset classes, and we remain disciplined in our approach as we navigate an evolving marketplace. Our strategy continues to emphasize owning high-quality real estate and partnering with growing regional and national operators across the convenience and automotive retail sectors.

With our relationships, underwriting expertise, and an expanding opportunity set we are confident in our ability to continue executing on our investment strategy and further diversifying our portfolio, while remaining disciplined in an environment where asset pricing is currently undergoing a significant change.

Given our performance year-to-date and expected future growth, our board approved an increase of 4.9% in our recurring quarterly dividend to $0.43 per share. This represents the ninth straight year we have grown the dividend alongside our earnings growth.

Our Board believes this annual increase is appropriate as it maintains a stable payout ratio and reflects the company's growth prospects for 2023. Additionally as a result of our year-to-date investment in capital activities, we are raising our 2022 AFFO guidance to a range of $2.12 to $2.13 per share.

I want to reiterate, despite the challenging macro environment we are open for business. Our teams continue to work diligently to source and underwrite accretive investment opportunities and to raise long-term permanent capital to finance that growth.

We believe Getty is very well-positioned for the current environment given the essential nature of our assets, the operating strength of our institutional tenant base and our well-positioned balance sheet including low leverage and ample liquidity.

We remain confident in our ability to create shareholder value through earnings growth and portfolio diversification as we move through the end of 2022 and into 2023. With that, I will turn the call over to Mark to discuss our portfolio and investment activities..

Thank you, Chris. As of the end of the third quarter, our portfolio includes 1,013 net lease properties, four active redevelopment sites and four vacant properties. Our weighted average lease term was 8.6 years and our overall occupancy excluding active redevelopments increased to 99.6%.

Our portfolio spans 38 states across the country plus Washington D.C. and our annualized base rents 65% of which come from the top 50 MSAs in the US and 84% coming from the top 100 MSAs, are well covered by our trailing 12-month tenant rent coverage ratio of 2.7 times.

And in terms of our investment activities in the third quarter we invested $14.9 million across eight properties and after quarter end added an additional $6.4 million on two additional properties bringing our total year-to-date investment to $80.5 million.

Adding, this quarter's investments include closing on the acquisition and leaseback of two Go Car Wash properties for a total of $9.1 million, one located in Austin Texas and another in the San Antonio MSA providing approximately $5.8 million of construction funding for the development of six new industry properties, two convenience stores in the Charleston South China MSA, one convenience store in the Austin Texas MSA and three carwash properties into Jacksonville, Fairhaven, Connecticut and Newberg New York MSAs.

As part of these funding transactions we will accrue interest on our investments during the construction phase of the projects and acquire the properties via sale-leaseback upon completion and final funding.

For the third quarter, the aggregate initial cash yield of our investment activity was approximately 6.7% and the weighted average lease term for the acquired properties was 14.9 years.

Year-to-date the aggregate initial cash yield on our investment activity is approximately 6.6% and the weighted average lease term for acquired properties is 14.9 years.

Year-to-date 100% of our investment activity has been directly sourced by our acquisition team and includes a mixture of repeat business with existing tenants and new convenience and automotive retail tenants.

84% of the investments were derived from new sale-leaseback transactions, which are subject to a long-term triple-net lease and 16% were derived from development funding renew industry assets that we expect to acquire via sale leaseback upon completion of the project.

Looking ahead regarding the $150 million of commitments to fund acquisitions and developments that Chris referenced while we have fully executed agreements for each transaction the timing and amount of each investment is ultimately dependent on our counterparties and the schedules under which they are able to complete development projects and close certain business acquisitions.

We expect to fund these transactions throughout the next 12 months or so with the average initial yields of approximately 20 basis points in access where we have closed acquisitions year-to-date.

We continue to underwrite a variety of potential investment opportunities during the quarter with convenience stores representing 58% of the underwritten volume and other convenience and automotive retail sectors representing the balance.

As discussed on our last call, we are seeing continued asset movement in asset pricing across all of our target asset classes, as the retail net lease market adjusts to the changed economic landscape and tighter credit markets.

While the speed and magnitude of this movement has not yet caught up to the increase in capital cost across the market, we believe we are well positioned to invest accretively as we move through the end of 2022 and into 2023. Moving to our redevelopment platform.

During the quarter, we invested approximately $300,000 in projects which are in various stages in our pipeline. We completed one redevelopment project where rent commenced on a new drive-through Chase Bank location in Boston MSA. We invested $700,000 in the project and generated a return on invested capital of 8.4%.

We ended the quarter with six signed leases or letters of intent, which includes four active projects, one project at a property, which is currently subject to a triple net lease and have not yet been recaptured from the current tenant and one signed LOI on a vacant property.

The company expects rent to commence at these and other projects over the next set years including later in 2022. Turning to our asset management activities for the third quarter. We sold three properties realizing $1 million in gross proceeds and exited one leased property. We'll continue to pursue dispositions of properties.

We have determined either no longer are competitive in their current format and do not have compelling redevelopment potential, which we believe have compelling valuations that may allow us to recycle capital as part of managing our balance sheet and sources of capital. With that I turn the call over to Brian..

Thanks, Mark. Good morning, everyone. Last night we reported FFO per share of $0.54 for the third quarter, representing a year-over-year increase of 1.9% versus the $0.53 per share we reported in the third quarter of 2021. For the quarter, FFO and net income were $0.50 and $0.27 per share, respectively.

Total revenues were up 4.7% to $42 million for the quarter and base rental income, which excludes tenant reimbursements, GAAP revenue adjustments and any additional rent grew 7.4% to $37 million.

Our acquisition activity over the last 12 months and recurring rent escalators in our leases were the primary drivers of the increase, with additional contribution from completed redevelopment projects.

On the expense side, G&A costs were $5 million for the quarter, a slight increase of $300,000, compared to the third quarter of 2021 as a result of increased personnel costs.

Property costs declined $5.7 million – declined to $5.7 million due to lower property operating expenses including a permanent reduction in rent expense, as we have exited 10 leased properties over the past 12 months.

These reductions were partially offset by increases in leasing and development costs, primarily increased professional fees associated with potential redevelopment projects.

Environmental expenses, which are highly variable due to a number of estimates and non-cash adjustments, declined to $632,000 for the quarter versus $757,000 in 2021, primarily due to a reduction in estimates related to unknown environmental liabilities. Turning to the balance sheet and our capital markets activities.

We ended the quarter with $625 million of total debt outstanding, consisting entirely of senior unsecured notes with a weighted average interest rate of 4.1% and a weighted average maturity of 6.4 years. We have no floating rate debt exposure other than our $300 million unsecured revolving credit facility, which was undrawn at quarter end.

And having addressed our 2023 notes maturity with our February private placement, we have no debt maturities until 2025. As of September 30, net debt to EBITDA was 4.9 times and total debt to total capitalization was 32%, while total indebtedness to total asset value as defined in our credit agreement was 36%.

During the quarter, we entered into forward sale agreements to sell 714,000 common shares through our ATM program at $30.22 per share, which will generate gross proceeds of $21.6 million. To date, no shares subject to formal sale agreements have been settled. Returning to our $150 million committed investment pipeline and associated financing.

We have $125 million of 3.65% unsecured notes funding in January of 2023, of which $50 million is available to fund investment activity after refinancing our 5.35% notes, coming due in June of 2023.

Combining this $50 million of net debt proceeds, with $21 million of forward ATM proceeds $11 million of cash on our balance sheet, proceeds from select property dispositions and retained cash flow over the next 12 months, and we've raised or identified over 75% of the capital required to fund our pipeline.

Cost of this capital is meaningfully inside of our current spot rates, and we continue to remain low leverage and an undrawn revolver to provide flexibility and capacity to fund the balance of the pipeline and additional growth.

Pro forma for this investment in capital activity, we expect our balance sheet to remain strong including ample liquidity and leverage in line, with our previously stated ranges.

As our investment pipeline continues to evolve, we will evaluate all capital sources including common equity, disposition proceeds and incremental debt to ensure that we're funding transactions in an accretive manner, while our investment-grade credit profile.

With respect to our environmental liability, we ended the quarter at $29.2 million, which was a reduction of $18.4 million from the end of 2021. The primary driver of the improvement was the removal of $17.1 million of unknown reserve liabilities.

As a reminder, these reserves were related to legacy properties where we retained the responsibility to clean up pre-existing, unknown environmental contamination that was discovered during defined look-back periods, which have expired during 2022.

We concluded that there was no material continued risk of having to satisfy contractual obligations at these properties, and accordingly remove the unknown reserve liabilities, which had previously been accrued.

Our net environmental remediation spending in the quarter was approximately $825,000 and finally with respect to our 2022 earnings as a result of our year-to-date investment in capital markets activities, we are raising our AFFO per share guidance, to a range of $2.12 to $2.13 from our previous range of $2.10 to $2.12.

As a reminder, our outlook includes transaction activity to date, but does not otherwise assume any potential acquisitions, dispositions or capital markets activities for the remainder of the year.

Specific factors which continue to impact our AFFO guidance include variability, with respect to certain operating and deal pursuit costs and approximately $400,000 of demolition costs, related to redevelopment projects which run through property costs on our P&L. With that I will ask the operator to open the call for questions..

Thank you. Ladies and gentlemen we will now be conducting a question-and-answer session [Operator Instructions] The first question comes from Todd Thomas of KeyBanc Capital Markets.

Hi, thanks, good morning.

First question, just in terms of asset pricing and the expected yields that you're anticipating on investments it sounded like you're seeing some upward pressure on cap rates, but I think you noted the stabilized yield expectation on the $150 million committed pipelines, about 20 basis points above the initial yields on the year-to-date investments which as you mentioned with 6.6.

I think that's consistent with last quarter.

How are cap rates trending? Can you provide a little bit more color around, what you're seeing in terms of that upward pressure and what your expectation is over the next few quarters for cap rates?.

Yes, it's Mark. Thanks for the question. So I'll just restate that the forward commitments are the 20 points basis points higher than the year-to-date activity. It's been slow, but there is certainly some expansion of cap rates that we're looking at in the kind of activity, in the further outlook pipeline.

So again, a little bit slower, but there is some upward movement, and I'm sure we'll capture that..

Okay. Can you sort of characterize, I guess, behind this $150 million pipeline today? I guess can you characterize maybe the shadow pipeline? I suppose last quarter the pipeline was $125 million. It increased by $25 million this quarter.

What's behind this? And what's your appetite like for adding additional investments to the pipeline here?.

So, we continue to see good activity across all the verticals. What we've highlighted here is the focus on staying diverse within all the retail automotive experience verticals. We're gaining momentum across all those asset classes.

And the deal team continues to bring opportunities, opportunities for us to underwrite that we'll hopefully continue to grow that forward committed pipeline..

Todd, this is Brian. I would just add and maybe it's a little bit repetitive. But again, if you look at where the balance sheet is, our ability to raise some amount of capital along the way to effectively match fund the pipeline.

We really feel that we're positioned very well on a go forward, whether it's drawing on the revolver, whether it's tapping in we use the forward on the ATM for the first time. I know others have used that tool. But that's a good tool for our business and we've used that.

We talked a little bit about accelerating some of the disposition activity on a select basis. So, as Mark said, the team is finding investment opportunities and it's incumbent upon us to continue to find the financing to fund that activity. And we feel that we're in a good position.

And I think Chris summed it up in his remarks, we're open for business..

Yes, that's helpful. I guess, Brian, yes, you discussed the funding sources for the current pipeline, which was helpful. It gives you a runway for what you've committed to here, and your cost of capital has held up relatively well.

How should we think about additional forward equity issuance sort of lock in your cost of capital as you move forward, and also, what about the volume of potential dispositions as we move into 2023?.

Yes. On the equity, look, I think selective is the best way to describe it, right at the price we raised or we sold on the forward basis in the third quarter, that obviously works for the business and the investments that we have under contract but we're cognizant of the valuation and how that fits into the overall model. So I would say, selective.

Again, we do have the undrawn revolver. We do have low leverage. So we feel as if we have a lot of flexibility there. And on the dispositions, I think we talked about this probably, maybe as far back as February, certainly in April and July, I know we did.

Just looking a little bit more strategically at the portfolio to identify, I think Mark touched on this in his remarks. Assets where maybe we can capture a little bit of value today in the market and pull in some proceeds at greater better costs than the equity markets but also it's important achieving portfolio objectives.

So whether that's something that's a shorter lease term or something that's a one-off lease away from our primary unitary leases, but that are otherwise income-producing properties looking at some of those select opportunities to transact from a disposition perspective..

Okay, great. That's helpful. Thank you..

The next question comes from John Massocca of Ladenburg Thalmann..

Good morning..

Good morning..

Good morning, John..

Just wondering, I'm sorry this is really on the call, any kind of color on the cadence of the closing for the $150 million that's in the pipeline. I mean I know you talked about it on the last call that it was kind of a 12-month window for the $125 million you had at Q2.

But just thinking should we expect this to be kind of weighted towards the end of this year leak-out and do maybe as far as June of next year? Just kind of any color there would be helpful..

Yes, sure. John, this is Brian. I'll give you this composition that hopefully will be helpful. About half of that pipeline just under 55% is development funding. Those transactions will fund over time and are probably back-end weighted as tenants make their final draws and we convert those into sale-leaseback transactions.

The balance 45-plus percent is more regular waste sale-leaseback activity. That's likely more on the front-end of that time range kind of three to six months. So when you blend it all out, we continue to think that this 12-month time horizon is the right way to look at it from a modeling perspective, you probably straight-line it over that period.

But there's going to be transactions closing throughout and fundings throughout that may deviate from a straight line across the board. But I think that's the best assumption is to look at it over 12 months on a relatively equal weighted basis..

Okay. And then in terms of kind of additional investment activity how should we think about the competitive environment to do transactions in the sale leaseback market, I know some of the top tenants in your existing portfolio have been pretty active on the M&A front.

I'm just wondering if there's, opportunities there because those are larger operators now maybe pricing is still relatively tight for those type of deals?.

I think with all of our tenants, whether they're in the portfolio or some tenants that we continue to talk to our prospective tenants we continue to try to bring into the portfolio. The M&A markets are still active.

Obviously, I think pricing is changing both in M&A multiples and in the sale-leaseback market, right? But I wouldn't say that there's not an opportunity for getting to do business with one of our existing tenants large or small.

I think the fact that we're out here constantly underwriting activity doing a good job managing our balance sheet allows us to be active in today's market, whereas maybe previously our tenants maybe had the opportunity to get it more heavily into the bank market or heavily into some other form of financing that may not be as readily available today..

And I guess maybe just in terms of sale leaseback competition or even kind of granular net lease investment competition, how has that competitive environment changed even since the Q2 call? Are there people back at the table that weren't there kind of competing for deals, or is it, have more people kind of left, because of the cost of capital and volatility?.

I would say, it's just as competitive as it's ever been..

Okay. That's it for me. Thank you very much..

Thank you. [Operator Instructions] Ladies and gentlemen, there are no further questions in the queue. I will now hand over to Chris Constant, for closing remarks..

End of Q&A:.

Great. Thank you operator, and thank you everyone for joining us this morning for our call. We appreciate your interest in the company. And we look forward to getting back on the phone with you, when we report our fourth quarter and year-end results in late February..

Thank you, sir. This concludes today's conference. Thank you for your participation. And you may now disconnect your lines..