Getty Realty (GTY) - 2020 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION This section presents Getty Realty Corp.'s unaudited consolidated financial statements and detailed notes for periods ending September 30, 2020 Item 1. Financial Statements (Unaudited) This section provides Getty Realty Corp.'s unaudited consolidated financial statements and comprehensive notes for the specified periods Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity for specified periods Consolidated Balance Sheet Highlights (in thousands) | Metric | September 30, 2020 | December 31, 2019 | | :--------------------------------- | :------------------- | :------------------ | | Total assets | $1,323,538 | $1,211,777 | | Real estate, net | $1,025,971 | $947,759 | | Cash and cash equivalents | $58,338 | $21,781 | | Total liabilities | $705,752 | $622,338 | | Borrowings under credit agreement | $110,000 | $20,000 | | Total stockholders' equity | $617,786 | $589,439 | - Total assets increased by $111.76 million (9.2%) from December 31, 2019, to September 30, 2020, primarily driven by an increase in net real estate and cash[9] - Total liabilities increased by $83.41 million (13.4%) over the same period, largely due to a significant increase in borrowings under the credit agreement[9] Consolidated Statements of Operations This section outlines the company's financial performance, including revenues, expenses, and net earnings for the specified periods Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total revenues | $37,903 | $36,428 | $110,270 | $104,765 | | Total operating expenses | $19,772 | $23,928 | $56,722 | $58,293 | | Operating income | $18,213 | $12,500 | $54,686 | $46,848 | | Net earnings | $11,884 | $11,890 | $35,557 | $36,015 | | Basic earnings per common share | $0.27 | $0.28 | $0.83 | $0.86 | - Total revenues increased by $1.475 million (4.05%) for the three months ended September 30, 2020, and by $5.505 million (5.25%) for the nine months ended September 30, 2020, compared to the respective prior periods[12] - Operating income significantly increased by $5.713 million (45.7%) for the three months and $7.838 million (16.7%) for the nine months ended September 30, 2020, primarily due to a decrease in total operating expenses, especially environmental expenses[12] Consolidated Statements of Cash Flows This section details the company's cash flows from operating, investing, and financing activities for the specified periods Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Net cash flow provided by operating activities | $53,604 | $57,994 | | Net cash flow (used in) investing activities | $(98,243) | $(39,036) | | Net cash flow provided by (used in) financing activities | $81,327 | $(30,119) | | Cash, cash equivalents and restricted cash at end of period | $60,352 | $37,581 | - Net cash from operating activities decreased by $4.39 million (7.6%) for the nine months ended September 30, 2020, compared to the prior year[15] - Net cash used in investing activities increased significantly by $59.207 million (151.7%) due to higher property acquisitions[15] - Net cash from financing activities shifted from a use of $30.119 million in 2019 to a provision of $81.327 million in 2020, primarily driven by increased net borrowings under the credit agreement and ATM program proceeds[15] Notes to Consolidated Financial Statements This section provides detailed explanations of accounting policies, significant transactions, and financial statement line items NOTE 1. — DESCRIPTION OF BUSINESS Getty Realty Corp. is a REIT specializing in convenience store and gasoline station property ownership and leasing - Getty Realty Corp. is a REIT focused on convenience store and gasoline station properties[17] - As of September 30, 2020, the company owned 896 properties and leased 58, totaling 954 properties in 35 states and D.C[17] NOTE 2. — ACCOUNTING POLICIES This note details the accounting principles, estimates, and specific policies used in preparing the consolidated financial statements - The consolidated financial statements are prepared in conformity with GAAP and include estimates, judgments, and assumptions for various accounts[18][21] - Adopted ASU 2016-13 (Credit Losses) on January 1, 2020, recognizing a cumulative adjustment to retained earnings for credit loss reserves on direct financing leases ($578 thousand) and notes/mortgages receivable ($309 thousand)[28][31][48] - The company is evaluating the impact of ASU 2020-04 (Reference Rate Reform) on its financial statements[49] - For COVID-19 related lease concessions, the company elected to account for them as if no changes to the lease contract were made, increasing lease receivables and continuing to recognize income[37][38] NOTE 3. — LEASES This note describes the company's triple-net leasing arrangements, detailing revenue recognition, assets, liabilities, and future rentals - Substantially all properties are leased on a triple-net basis, with tenants responsible for taxes, maintenance, repairs, insurance, and environmental contamination[50][152] Revenues from Rental Properties (in thousands) | Period | 2020 | 2019 | | :-------------------------------- | :----- | :----- | | Three Months Ended September 30, | $37,194 | $35,692 | | Nine Months Ended September 30, | $108,180 | $102,539 | Lease-Related Assets and Liabilities (in thousands) | Category | September 30, 2020 | | :-------------------------- | :----------------- | | Right-of-use assets - operating | $17,215 | | Right-of-use assets - finance | $819 | | Lease liability - operating | $17,893 | | Lease liability - finance | $3,714 | - Future contractual annual rentals receivable from tenants total $1.24 billion for operating leases and $116.572 million for direct financing leases[59] Major Tenants This section identifies the company's three significant tenants by revenue contribution for the nine months ended September 30, 2020 - Global Partners LP subsidiaries accounted for 16% of total revenues for the nine months ended September 30, 2020[66] - Apro, LLC (d/b/a "United Oil") accounted for 12% of total revenues for the nine months ended September 30, 2020[66] - Chestnut Petroleum Dist., Inc. subsidiaries accounted for 10% of total revenues for the nine months ended September 30, 2020[66] NOTE 4. — COMMITMENTS AND CONTINGENCIES This note outlines credit risk management and details significant legal proceedings, primarily environmental litigations, and their financial impact - Accrued $17.86 million for legal proceedings as of September 30, 2020, compared to $17.82 million as of December 31, 2019[66] - Key legal matters include the Lower Passaic River, MTBE litigations in New Jersey, Pennsylvania, and Maryland, and a lawsuit in Uniondale, New York, which could have a material adverse effect[66] - The company has agreed to settle the New Jersey MDL Proceedings for $13.5 million, which has been fully accrued, pending court approval[78] NOTE 5. — DEBT This note details the company's debt structure, including its revolving credit facility and senior unsecured notes, outlining terms and compliance Debt Outstanding (in thousands) | Debt Instrument | Maturity Date | Interest Rate | September 30, 2020 | December 31, 2019 | | :-------------------------- | :------------ | :------------ | :----------------- | :------------------ | | Unsecured Revolving Credit Facility | March 2022 | 1.84% | $110,000 | $20,000 | | Senior Unsecured Notes (Total) | Various | Various | $450,000 | $450,000 | | Total debt | | | $560,000 | $470,000 | - The Revolving Facility borrowing capacity was increased to $300 million in September 2019, with an option to extend to March 2023 and increase to $600 million[88][89] - The company was in compliance with all material terms and financial covenants of its debt agreements as of September 30, 2020[96] NOTE 6. — ENVIRONMENTAL OBLIGATIONS This note details environmental remediation obligations, including accrual methodology, contractual responsibilities, and the impact of estimate changes - Accrued $49.024 million for prospective environmental remediation obligations as of September 30, 2020, a decrease from $50.723 million as of December 31, 2019[105] - The accrual includes $11.934 million for estimable remediation liability and $37.090 million for future liabilities related to preexisting unknown contamination[105] - Environmental liabilities are measured at fair value based on expected future net cash flows, adjusted for inflation (2.0%-2.75%) and discounted (4.0%-7.0%)[104] - The company holds a $50 million pollution legal liability insurance policy for preexisting unknown environmental liabilities and new environmental events[111] NOTE 7. — STOCKHOLDERS' EQUITY This note summarizes changes in stockholders' equity, including net earnings, dividends, share issuances, and stock-based compensation Stockholders' Equity Changes (in thousands) | Metric | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2020 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net earnings | $11,884 | $35,557 | | Dividends declared | $(16,111) | $(47,511) | | Shares issued (ATM Program, net) | $26,622 | $38,538 | | Stock-based compensation/settlements | $867 | $2,223 | | Total stockholders' equity (end of period) | $617,786 | $617,786 | - The company issued 922,000 shares for $26.622 million (3 months) and 1,326,000 shares for $38.538 million (9 months) under its ATM Program in 2020[115] - Paid regular quarterly dividends of $1.11 per share ($46.957 million) for the nine months ended September 30, 2020, up from $1.05 per share ($43.678 million) in 2019[116] NOTE 8. — EARNINGS PER COMMON SHARE This note reconciles the numerator and denominator for basic and diluted earnings per common share using the two-class method Earnings Per Common Share (in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net earnings attributable to common stockholders | $11,566 | $11,644 | $34,604 | $35,278 | | Basic EPS | $0.27 | $0.28 | $0.83 | $0.86 | | Diluted EPS | $0.27 | $0.28 | $0.83 | $0.86 | | Weighted average common shares outstanding (Basic) | 42,226 | 41,139 | 41,690 | 41,013 | NOTE 9. — FAIR VALUE MEASUREMENTS This note describes fair value measurements of financial instruments and real estate assets, categorized within the Fair Value Hierarchy - The fair value of senior unsecured notes was $479.6 million as of September 30, 2020, determined using discounted cash flow techniques with Level 3 unobservable inputs[121] Assets and Liabilities Measured at Fair Value (in thousands) | Category | Level 1 | Level 2 | Level 3 | Total | | :------------------- | :------ | :------ | :------ | :---- | | Assets: Mutual funds | $898 | $— | $— | $898 | | Liabilities: Deferred compensation | $— | $898 | $— | $898 | - Real estate assets measured at fair value on a non-recurring basis (Level 3 inputs) due to impairment charges totaled $1.664 million as of September 30, 2020[124] NOTE 10. — ASSETS HELD FOR SALE This note confirms no properties were held for sale and reports gains from property dispositions and condemnation - No properties were classified as held for sale as of September 30, 2020[125] - Sold six properties for an aggregate gain of $955 thousand and received a gain of $183 thousand from a property condemnation during the nine months ended September 30, 2020[126] NOTE 11. — PROPERTY ACQUISITIONS This note details the company's property acquisition activities, including the purchase of 24 properties for $104.8 million - Acquired 24 properties for $104.809 million during the nine months ended September 30, 2020, compared to 14 properties for $43.324 million in the same period of 2019[128][132] - Acquisitions in 2020 included 17 car wash properties for $78.604 million and 7 convenience store/gasoline station properties for $26.205 million[129][130][131] NOTE 12. — SUBSEQUENT EVENTS This note states no significant subsequent events after September 30, 2020, beyond the ongoing COVID-19 pandemic impact evaluation - No significant subsequent events occurred after September 30, 2020, other than the ongoing impact assessment of the COVID-19 pandemic[137] - The company cannot accurately predict the full impact of COVID-19 on its business, operations, and financial results, citing numerous evolving factors[138] - As of October 22, 2020, 98% of contractual base rent and mortgage payments for October were received, but this may not be indicative of future collections[139] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition and results, including forward-looking statements, COVID-19 impact, and non-GAAP measures Cautionary Note Regarding Forward-Looking Statements This section advises that the report contains forward-looking statements subject to known and unknown risks and uncertainties, including COVID-19 - Forward-looking statements are based on current beliefs and assumptions and are subject to known and unknown risks and uncertainties[143] - Factors that could cause actual results to differ include environmental laws, tenant creditworthiness, capital dependence, and the impact of the COVID-19 pandemic[144][145] - The rapid developments and fluidity of COVID-19 may cause the company to moderate or suspend its growth strategy[146] General This section provides a REIT overview, reiterates COVID-19 uncertainty, describes triple-net leases, and outlines investment strategies - Getty Realty Corp. operates as a REIT, requiring distribution of at least 90% of ordinary taxable income to stockholders[148] - The company's properties are primarily leased on a triple-net basis, making tenants responsible for most operating expenses and environmental contamination[151][152] - As of September 30, 2020, the company was actively redeveloping seven properties and had signed leases for five additional properties to be recaptured for redevelopment[156][161] - Acquired 24 properties for $104.8 million in the nine months ended September 30, 2020, compared to 14 properties for $43.3 million in the prior year, as part of its growth strategy[158] Supplemental Non-GAAP Measures This section explains the use of non-GAAP financial measures, FFO and AFFO, to assess core operating performance and provides reconciliation - FFO and AFFO are used as supplemental non-GAAP measures to evaluate core operating performance and sustainability for REITs[164][167] FFO and AFFO Reconciliation (in thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net earnings | $11,884 | $11,890 | $35,557 | $36,015 | | Funds from operations (FFO) | $20,762 | $19,139 | $59,339 | $56,610 | | Adjusted funds from operations (AFFO) | $20,215 | $18,148 | $58,120 | $53,812 | | AFFO per share | $0.47 | $0.43 | $1.37 | $1.29 | - AFFO increased by $2.067 million (11.4%) for the three months and $4.308 million (8.0%) for the nine months ended September 30, 2020, compared to the prior periods[168] Results of Operations This section analyzes financial performance for the three and nine months ended September 30, 2020, detailing changes in revenues, expenses, and income - Revenues from rental properties increased by $1.5 million (4.2%) for the three months and $5.7 million (5.6%) for the nine months ended September 30, 2020, primarily due to newly acquired properties and contractual rent increases[172][184] - Environmental expenses decreased significantly by $5.7 million for the three months and $6.3 million for the nine months ended September 30, 2020, mainly due to lower environmental litigation accruals and remediation costs[177][188] - Operating income increased by $5.7 million for the three months and $7.8 million for the nine months ended September 30, 2020, driven by revenue growth and reduced environmental expenses[12] Liquidity and Capital Resources This section discusses primary liquidity sources, including cash flows from operations, the Revolving Facility, and the ATM Program, detailing cash flow changes - Primary liquidity sources are cash flows from operations, the $300 million Revolving Facility (maturing March 2022), and proceeds from the ATM Program[195][241] - Net cash flow used in investing activities increased by $59.2 million to $98.2 million for the nine months ended September 30, 2020, mainly due to increased property acquisitions[199] - Net cash flow provided by financing activities increased by $111.4 million to $81.3 million for the nine months ended September 30, 2020, driven by higher net borrowings under the credit agreement and ATM program proceeds[200] - Issued 1,326,000 shares of common stock for $38.5 million net proceeds under the ATM Program during the nine months ended September 30, 2020[213] Critical Accounting Policies and Estimates This section highlights critical accounting policies requiring significant management judgment and estimates, including revenue recognition, impairment, and environmental obligations - Critical accounting policies involve significant judgment and estimates, including revenue recognition, direct financing leases, impairment of long-lived assets, environmental remediation obligations, litigation, income taxes, and purchase price allocation[223][224] - Actual results could differ materially from these estimates, judgments, and assumptions[222] Environmental Matters This section details environmental obligations, including remediation costs, contractual responsibilities, and the estimation and accrual of liabilities - Environmental costs are primarily for remediation, including UST removal, soil/water excavation, and system maintenance[225] - Accrued $49.0 million for prospective environmental remediation obligations as of September 30, 2020, a decrease from $50.7 million at December 31, 2019[231] - Environmental liabilities are measured at fair value based on expected future net cash flows, adjusted for inflation (2.0%-2.75%) and discounted (4.0%-7.0%)[231] - The company is contingently liable for environmental obligations if tenants fail to satisfy them, and estimates are subject to significant change[226][236] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses market risks, primarily interest rate risk from the variable-rate Revolving Facility, and the impact of COVID-19 - The company is exposed to interest rate risk from its $300 million Revolving Facility, with $110 million outstanding at variable rates as of September 30, 2020[241] - A hypothetical 1.0% increase in market interest rates would decrease 2020 net income and cash flows by $0.3 million[242] - The COVID-19 pandemic presents material uncertainty and risk to the company's performance, financial condition, and results of operations[244] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures and reports no material changes to internal control over financial reporting - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2020, at a reasonable assurance level[246] - No material changes in internal control over financial reporting occurred during the third quarter of 2020[247] PART II—OTHER INFORMATION This section provides additional information, including updates on legal proceedings, risk factors, and filed exhibits Item 1. Legal Proceedings This section refers to previously disclosed legal proceedings and notes no new material developments, except for the New Jersey MTBE Litigation settlement - No new material legal proceedings or material developments in previously disclosed legal proceedings were reported[250] - The company agreed to settle the New Jersey MTBE MDL Proceedings for $13.5 million, which has been fully accrued, pending approval by the U.S. District Court for the Southern District of New York[252] Item 1A. Risk Factors This section updates previously disclosed risk factors, emphasizing heightened risks associated with the COVID-19 pandemic and its potential impacts - The COVID-19 pandemic has created significant volatility, uncertainty, and economic disruption, with potential material adverse impacts on the company's business and financial condition[254] - Potential risks include tenants' inability to meet lease obligations, increased impairment charges, difficulties in enforcing landlord rights due to moratoriums, and tenant bankruptcies[254][255] - Many existing risk factors are heightened due to the impact of the COVID-19 pandemic[256] Item 5. Other Information This section states that there is no other information to report Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from key officers and XBRL documents - Includes certifications from the President and CEO, and Vice President, CFO, and Treasurer (Exhibits 31.1, 31.2, 32.1, 32.2)[259] - XBRL Instance Document and Taxonomy Extension files are also included[259] SIGNATURES This section contains the required signatures of the company's principal executive, financial, and accounting officers, certifying the report SIGNATURES This section contains the required signatures of the company's principal executive, financial, and accounting officers, certifying the report - The report is signed by Christopher J. Constant (President and CEO), Danion Fielding (Vice President, CFO and Treasurer), and Eugene Shnayderman (Chief Accounting Officer and Controller)[261] - The report was signed on October 22, 2020[261]