Getty Realty Corp 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
(Mark
one)
| [X] |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended March
31, 2007
OR
| [
] |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
|
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
transition period from __________ to __________
Commission
file number 001-13777
GETTY
REALTY CORP.
(Exact
name of registrant as specified in its charter)
|
MARYLAND
(State
or other jurisdiction
of
incorporation or
organization)
|
11-3412575
(I.R.S.
Employer
Identification
No.)
|
125
Jericho Turnpike, Suite 103
Jericho,
New York 11753
(Address
of principal executive offices)
(Zip
Code)
(516)
478 - 5400
(Registrant's
telephone number, including area code)
_________________________________________________________________
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
[X] No
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated Filer [
]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ] No
[X]
Registrant
had outstanding 24,764,865 shares of Common Stock, par value $.01 per share,
as
of May 7, 2007.
GETTY
REALTY CORP.
INDEX
|
GETTY
REALTY CORP. AND SUBSIDIARIES
|
|
|
|
(in
thousands, except share data)
|
|
(unaudited)
|
| |
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
Assets:
|
|
|
2007
|
|
|
2006
|
|
| |
|
|
|
|
|
|
|
|
Real
Estate:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
216,904
|
|
$
|
180,409
|
|
|
Buildings
and
improvements
|
|
|
243,452
|
|
|
203,149
|
|
| |
|
|
460,356
|
|
|
383,558
|
|
|
Less
- accumulated depreciation
and amortization
|
|
|
(117,014
|
)
|
|
(116,089
|
)
|
|
Real
estate, net
|
|
|
343,342
|
|
|
267,469
|
|
|
Deferred
rent receivable
|
|
|
32,779
|
|
|
32,297
|
|
|
Cash
and cash equivalents
|
|
|
1,430
|
|
|
1,195
|
|
|
Recoveries
from state underground storage tank funds, net
|
|
|
3,929
|
|
|
3,845
|
|
|
Mortgages
and accounts receivable, net
|
|
|
2,791
|
|
|
3,440
|
|
|
Prepaid
expenses and other assets
|
|
|
8,346
|
|
|
1,037
|
|
|
Total
assets
|
|
$
|
392,617
|
|
$
|
309,283
|
|
| |
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity:
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Debt
|
|
$
|
126,686
|
|
$
|
45,194
|
|
|
Environmental
remediation costs
|
|
|
17,028
|
|
|
17,201
|
|
|
Dividends
payable
|
|
|
11,290
|
|
|
11,284
|
|
|
Accounts
payable and accrued expenses
|
|
|
13,022
|
|
|
10,029
|
|
|
Total
liabilities
|
|
|
168,026
|
|
|
83,708
|
|
|
Commitments
and contingencies
|
|
|
--
|
|
|
--
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock, par value $.01 per
share; authorized
|
|
|
|
|
|
|
|
|
50,000,000
shares; issued 24,764,815 at
March 31, 2007
and
24,764,765 at December 31, 2006
|
|
|
248
|
|
|
248
|
|
|
Paid-in
capital
|
|
|
258,701
|
|
|
258,647
|
|
|
Dividends
paid in excess of
earnings
|
|
|
(33,352
|
)
|
|
(32,499
|
)
|
|
Accumulated
other comprehensive
loss
|
|
|
(1,006
|
)
|
|
(821
|
)
|
|
Total
shareholders' equity
|
|
|
224,591
|
|
|
225,575
|
|
|
Total
liabilities and shareholders'
equity
|
|
$
|
392,617
|
|
$
|
309,283
|
|
| |
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
GETTY
REALTY CORP. AND SUBSIDIARIES
(in
thousands, except per share amounts)
(unaudited)
| |
|
|
|
|
|
Three
months ended March 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
| |
|
|
|
|
|
|
|
|
Revenues
from rental properties
|
|
$
|
17,993
|
|
$
|
18,067
|
|
| |
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Rental
property expenses
|
|
|
2,420
|
|
|
2,484
|
|
|
Environmental
expenses, net
|
|
|
969
|
|
|
1,101
|
|
|
General
and administrative expenses
|
|
|
1,453
|
|
|
1,407
|
|
|
Depreciation
and amortization expense
|
|
|
1,865
|
|
|
1,916
|
|
|
Total
operating expenses
|
|
|
6,707
|
|
|
6,908
|
|
| |
|
|
|
|
|
|
|
|
Operating
income
|
|
|
11,286
|
|
|
11,159
|
|
|
Other
income, net
|
|
|
115
|
|
|
82
|
|
|
Interest
expense
|
|
|
(964
|
)
|
|
(710
|
)
|
|
Net
earnings
|
|
$
|
10,437
|
|
$
|
10,531
|
|
| |
|
|
|
|
|
|
|
|
Net
earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.42
|
|
$
|
.43
|
|
|
Diluted
|
|
$
|
.42
|
|
$
|
.43
|
|
| |
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
24,765
|
|
|
24,717
|
|
|
Stock
options and restricted stock units
|
|
|
20
|
|
|
28
|
|
|
Diluted
|
|
|
24,785
|
|
|
24,745
|
|
| |
|
|
|
|
|
|
|
|
Dividends
declared per share
|
|
$
|
.455
|
|
$
|
.455
|
|
GETTY
REALTY CORP. AND SUBSIDIARIES
(in
thousands)
(unaudited)
| |
|
|
|
|
|
Three
months ended March 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
| |
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
10,437
|
|
$
|
10,531
|
|
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
Net
unrealized loss on interest rate swap
|
|
|
(185
|
)
|
|
—
|
|
|
Comprehensive
income
|
|
$
|
10,252
|
|
$
|
10,531
|
|
| |
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
GETTY
REALTY CORP. AND SUBSIDIARIES
|
|
|
|
(in
thousands)
|
|
(unaudited)
|
| |
|
|
|
|
|
Three
months ended March 31,
|
| |
|
|
2007
|
|
|
2006
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
10,437
|
|
$
|
10,531
|
|
|
Adjustments
to reconcile net earnings to
|
|
|
|
|
|
|
|
|
net
cash flow provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
expense
|
|
|
1,865
|
|
|
1,916
|
|
|
Deferred
rental
revenue
|
|
|
(482
|
)
|
|
(823
|
)
|
|
Gain
on dispositions of real
estate
|
|
|
(46
|
)
|
|
(34
|
)
|
|
Accretion
expense
|
|
|
167
|
|
|
167
|
|
|
Stock-based
employee compensation expense
|
|
|
54
|
|
|
38
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Recoveries
from state underground
storage tank funds, net
|
|
|
(6
|
)
|
|
9
|
|
|
Mortgages
and accounts receivable,
net
|
|
|
485
|
|
|
(423
|
)
|
|
Prepaid
expenses and other
assets
|
|
|
192
|
|
|
268
|
|
|
Environmental
remediation
costs
|
|
|
(418
|
)
|
|
(316
|
)
|
|
Accounts
payable and accrued
expenses
|
|
|
(1,195
|
)
|
|
(516
|
)
|
|
Net
cash flow provided by operating activities
|
|
|
11,053
|
|
|
10,817
|
|
| |
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Property
acquisitions and capital
expenditures
|
|
|
(80,494
|
)
|
|
(14,254
|
)
|
|
Collection
of mortgages
receivable, net
|
|
|
164
|
|
|
33
|
|
|
Proceeds
from dispositions of real
estate
|
|
|
148
|
|
|
231
|
|
|
Net
cash flow used in investing activities
|
|
|
(80,182
|
)
|
|
(13,990
|
)
|
| |
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings
under credit agreement,
net
|
|
|
81,500
|
|
|
15,000
|
|
|
Cash
dividends
paid
|
|
|
(11,284
|
)
|
|
(11,009
|
)
|
|
Credit
agreement origination costs
|
|
|
(844
|
)
|
|
-
|
|
|
Repayment
of mortgages payable,
net
|
|
|
(8
|
)
|
|
(8
|
)
|
|
Proceeds
from stock options
exercised
|
|
|
-
|
|
|
48
|
|
|
Net
cash flow provided by financing activities
|
|
|
69,364
|
|
|
4,031
|
|
| |
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
235
|
|
|
858
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,195
|
|
|
1,247
|
|
| |
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,430
|
|
$
|
2,105
|
|
| |
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash
paid (refunded) during
the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,579
|
|
$
|
565
|
|
|
Income
taxes, net
|
|
|
174
|
|
|
185
|
|
|
Recoveries
from state underground storage tank funds
|
|
|
(511
|
)
|
|
(341
|
)
|
|
Environmental
remediation costs
|
|
|
1,366
|
|
|
976
|
|
| |
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
(Unaudited)
1.
General:
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
(“GAAP”). The consolidated financial statements include the accounts of Getty
Realty Corp. and its wholly-owned subsidiaries (the "Company"). The Company
is a
real estate investment trust (“REIT”) specializing in the ownership and leasing
of retail motor fuel and convenience store properties and petroleum distribution
terminals. The Company manages and evaluates its operations as a single segment.
All significant intercompany accounts and transactions have been
eliminated.
The
financial statements have been prepared in conformity with GAAP, which requires
management to make its best estimates, judgments and assumptions that affect
the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and revenues and
expenses during the period reported. While all available information has been
considered, actual results could differ from those estimates, judgments and
assumptions. Estimates, judgments and assumptions underlying the accompanying
consolidated financial statements include, but are not limited to, deferred
rent
receivable, recoveries from state underground storage tank funds, environmental
remediation costs, real estate, depreciation and amortization, impairment of
long-lived assets, litigation, accrued expenses, and income taxes.
The
consolidated financial statements are unaudited but, in the opinion of
management, reflect all adjustments (consisting of normal recurring accruals)
necessary for a fair statement of the results for the periods presented. These
statements should be read in conjunction with the consolidated financial
statements and related notes, which appear in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2006.
2.
Commitments and Contingencies:
In
order
to minimize the Company’s exposure to credit risk associated with financial
instruments, the Company places its temporary cash investments with high credit
quality institutions. Temporary cash investments, if any, are held in an
institutional money market fund and federal agency discount notes.
As
of
March 31, 2007, the Company leased nine hundred ten of its one thousand
ninety-eight properties on a long-term net basis to Getty Petroleum Marketing
Inc. (“Marketing”) under a master lease (“Master Lease”) and supplemental leases
for four properties (collectively the “Marketing Leases”) (see note 2 to the
consolidated financial statements which appear in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2006). Marketing operated
substantially all of the Company’s petroleum marketing businesses when it was
spun-off to the Company’s shareholders as a separate publicly held company in
March 1997 (the “Spin-Off”). In December 2000, Marketing was acquired by a
subsidiary of OAO Lukoil, one of Russia’s largest integrated oil companies.
The
Company’s financial results depend largely on rental income from Marketing, and
to a lesser extent on rental income from other tenants, and are therefore
materially dependent upon the ability of Marketing to meet its obligations
under
the Marketing
Leases. A substantial portion of the deferred rental revenue, $31,348,000 of
the
$32,779,000 recorded as of March 31, 2007, is due to recognition of rental
revenue on a straight-line basis under the Marketing Leases. Marketing’s
financial results
depend largely on retail petroleum marketing margins and rental income from
its
dealers. The petroleum marketing industry has been and continues to be volatile
and highly competitive. Marketing has made all required monthly rental payments
under
the
Marketing Leases when due.
Under
the
Master Lease, the Company has also agreed to provide limited environmental
indemnification to Marketing, capped at $4,250,000 and expiring in 2010, for
certain pre-existing conditions at six of the terminals which are owned by
the
Company. Under the agreement, Marketing will pay the first $1,500,000 of costs
and expenses incurred in connection with remediating any such pre-existing
conditions, Marketing and the Company will share equally the next $8,500,000
of
those costs and expenses and Marketing will pay all additional costs and
expenses over $10,000,000. The Company has accrued $300,000 as of March 31,
2007
and December 31, 2006 in connection with this indemnification agreement.
The
Company is subject to various legal proceedings and claims which arise in the
ordinary course of its business. In addition, the Company has retained
responsibility for certain legal proceedings and claims relating to the
petroleum marketing business that were identified at the time of the spin-off.
As of March 31, 2007 and December 31, 2006 the Company had accrued $2,812,000
and $2,822,000, respectively, for certain of these matters which it believes
were appropriate based on information then currently available. The ultimate
resolution of these matters is not expected to have a material adverse effect
on
the Company’s financial condition or results of operations.
In
September 2003, the Company was notified by the State of New Jersey Department
of Environmental Protection that the Company is one of approximately sixty
potentially responsible parties for natural resource damages resulting from
discharges of hazardous substances into the Lower Passaic River. The definitive
list of potentially responsible parties and their actual responsibility for
the
alleged damages, the aggregate cost to remediate the Lower Passaic River, the
amount of natural resource damages and the method of allocating such amounts
among the potentially responsible parties have not been determined. In September
2004, the Company received a General Notice Letter from the United States
Environmental Protection Agency (the “EPA”) (the “EPA Notice”), advising the
Company that it may be a potentially responsible party for costs of remediating
certain conditions resulting from discharges of hazardous substances into the
Lower Passaic River. ChevronTexaco received the same EPA Notice regarding those
same conditions. Additionally, the Company believes that ChevronTexaco is
contractually obligated to indemnify the Company, pursuant to an indemnification
agreement, for most of the conditions at the property identified by the New
Jersey Department of Environmental Protection and the EPA. Accordingly, the
ultimate legal and financial liability of the Company, if any, cannot be
estimated with any certainty at this time.
From
October 2003 through May 2007 the Company was notified that the Company was
made
party to forty-eight cases, in Connecticut, Florida, Massachusetts, New
Hampshire, New Jersey, New York, Pennsylvania, Vermont, Virginia and West
Virginia brought by local water providers or governmental agencies. These cases
allege various theories of liability due to contamination of groundwater with
MTBE as the basis for claims seeking compensatory and punitive damages. Each
case names as defendants approximately fifty petroleum refiners, manufacturers,
distributors and retailers of MTBE, or gasoline containing MTBE. The accuracy
of
the allegations as they relate to the Company, its defenses to such claims,
the
aggregate amount of damages, the definitive list of defendants and the method
of
allocating such amounts among the defendants have not been determined.
Accordingly, the ultimate legal and financial liability of the Company, if
any,
cannot be estimated with any certainty at this time.
Prior
to
the spin-off, the Company was self-insured for workers’ compensation, general
liability and vehicle liability up to predetermined amounts above which
third-party insurance applies. As of March 31, 2007 and December 31, 2006,
the
Company’s consolidated balance sheets included, in accounts payable and accrued
expenses, $318,000 and $332,000, respectively, relating to self-insurance
obligations. The Company estimates its loss reserves for claims, including
claims incurred but not reported, by utilizing actuarial valuations provided
annually by its insurance carriers. The Company is required to deposit funds
for
substantially all of these loss reserves with its insurance carriers, and may
be
entitled to refunds of amounts previously funded, as the claims are evaluated
on
an annual basis. Although loss reserve adjustments may have a significant impact
on results of operations for any single fiscal year or interim period, the
Company currently believes that such adjustments will not have a material
adverse effect on the Company’s long-term financial position. Since the
spin-off, the Company has maintained insurance coverage subject to certain
deductibles.
In
order
to qualify as a REIT, among other items, the Company must pay out substantially
all of its “earnings and profits” (as defined in the Internal Revenue Code) in
cash distributions to shareholders each year. Should the Internal Revenue
Service successfully assert that the Company’s earnings and profits were greater
than the amounts distributed, the Company may fail to qualify as a REIT;
however, the Company may avoid losing its REIT status by paying a deficiency
dividend to eliminate any remaining accumulated earnings and profits. The
Company may have to borrow money or sell assets to pay such a deficiency
dividend. The Company accrues for this and other uncertain tax matters when
appropriate based on information currently available. The accrual for uncertain
tax positions is adjusted as circumstances change and as the uncertainties
become more clearly defined, such as when audits are settled or exposures
expire. Accordingly, an income tax benefit of $700,000 was recorded in the
third
quarter of 2006 due to the elimination of the amount accrued for uncertain
tax
positions since the Company believes that the uncertainties regarding these
exposures have been resolved or that it is no longer likely that the exposure
will result in a liability upon review. However, the ultimate resolution of
these matters may have a significant impact on the results of operations for
any
single fiscal year or interim period. In June 2006 the Financial Accounting
Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”)
“Accounting for Uncertainty in Income Taxes.” FIN 48 addresses the recognition
and measurement of tax positions taken or expected to be taken in a tax return.
The adoption of FIN 48 in January 2007 did not have any impact on the Company’s
financial position or results of operation.
3.
Environmental Expenses
The
Company is subject to numerous existing federal, state and local laws and
regulations, including matters relating to the protection of the environment
such as the remediation of known contamination and the retirement and
decommissioning or removal of long-lived assets including buildings containing
hazardous materials, USTs and other equipment. Environmental expenses are
principally attributable to remediation costs which include installing,
operating, maintaining and decommissioning remediation systems, monitoring
contamination, and governmental agency reporting incurred in connection with
contaminated properties. Environmental remediation liabilities and related
assets are measured at fair value based on their expected future cash flows
which have been adjusted for inflation and discounted to present value. For
the
three months ended March 31, 2007,
the
net
changes in estimated remediation costs included in environmental expenses in
the
Company’s consolidated statements of operations were $431,000 as compared to
$328,000 for the comparable prior year period, which amounts were net of changes
in estimated recoveries from state underground storage tank (“UST”) remediation
funds. Environmental expenses also include project management fees, legal fees
and provisions for environmental litigation loss reserves.
In
accordance with the leases with certain tenants, the Company has agreed to
bring
the leased properties with known environmental contamination to within
applicable standards and to regulatory or contractual closure (“Closure”) in an
efficient and economical manner. Generally, upon achieving Closure at each
individual property, the Company’s environmental liability under the lease for
that property will be satisfied and future remediation obligations will be
the
responsibility of the Company’s tenant. Generally the liability for the
retirement and decommissioning or removal of USTs and other equipment is the
responsibility of the Company’s tenants. The Company is contingently liable for
these obligations in the event that the tenants do not satisfy their
responsibilities. A liability has not been accrued for obligations that are
the
responsibility of the Company’s tenants.
Of
the
nine hundred ten properties leased to Marketing, the Company has agreed to
pay
all costs relating to, and to indemnify Marketing for, certain environmental
liabilities and obligations for two hundred nine properties that have not
achieved Closure as of March 31, 2007 and are scheduled in the Master Lease.
The
Company will continue to seek reimbursement from state UST remediation funds
related to these environmental expenditures where available.
The
estimated future costs for known environmental remediation requirements are
accrued when it is probable that a liability has been incurred and a reasonable
estimate of fair value can be made. The environmental remediation liability
is
estimated based on the level and impact of contamination at each property.
The
accrued liability is the aggregate of the best estimate of the fair value of
cost for each component of the liability. Recoveries of environmental costs
from
state UST remediation funds, with respect to both past and future environmental
spending, are accrued at fair value as income, net of allowance for collection
risk, based on estimated recovery rates developed from prior experience with
the
funds when such recoveries are considered probable.
Environmental
exposures are difficult to assess and estimate for numerous reasons, including
the extent of contamination, alternative treatment methods that may be applied,
location of the property which subjects it to differing local laws and
regulations and their interpretations, as well as the time it takes to remediate
contamination. In developing the Company’s liability for probable and reasonably
estimable environmental remediation costs, on a property by property basis,
the
Company considers among other things, enacted laws and regulations, assessments
of contamination and surrounding geology, quality of information available,
currently available technologies for treatment, alternative methods of
remediation and prior experience. These accrual estimates are subject to
significant change, and are adjusted as the remediation treatment progresses,
as
circumstances change and as these contingencies become more clearly defined
and
reasonably estimable. As of March 31, 2007, the Company had remediation action
plans in place for two hundred seventy-eight (92%) of the three hundred one
properties for which it retained environmental responsibility and has not
received a “no further action” letter and the remaining twenty-three properties
(8%) remain in the assessment phase.
As
of
March 31, 2007, December 31, 2006 and December 31, 2005, the Company had accrued
$17,028,000, $17,201,000 and $17,350,000, respectively, as management’s best
estimate of the fair value of reasonably estimable environmental remediation
costs. As of March 31, 2007, December 31, 2006 and December 31, 2005, the
Company had also recorded $3,929,000, $3,845,000 and $4,264,000, respectively,
as management’s best estimate for recoveries from state UST remediation funds,
net of allowance, related to environmental obligations and liabilities. Accrued
environmental remediation costs and recoveries from state UST remediation funds
have been accreted for the change in present value due to the passage of time
and, accordingly, $167,000 of net accretion expense is included in environmental
expenses for each of the three months ended March 31, 2007 and 2006.
In
view of
the uncertainties associated with environmental expenditures, however, the
Company believes it is possible that the fair value of future actual net
expenditures could be substantially higher than these estimates. Adjustments
to
accrued liabilities for environmental remediation costs will be reflected in
the
Company’s financial statements as they become probable and a reasonable estimate
of fair value can be made. Although future environmental expenses may have
a
significant impact on results of operations for any single fiscal year or
interim period, the Company currently believes that such costs will not have
a
material adverse effect on the Company’s long-term financial
position.
4.
Shareholders' Equity:
A
summary
of the changes in shareholders' equity for the three months ended March 31,
2007
is as follows (in thousands, except share amounts):
|
|
|
|
|
|
|
|
Dividends
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid
In
|
|
|
Other
|
|
|
|
|
|
|
|
Common
Stock
|
|
Paid-in
|
|
|
Excess
Of
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Total
|
|
|
Balance,
December 31, 2006
|
|
|
24,764,765
|
|
$
|
248
|
|
$
|
258,647
|
|
$
|
(32,499
|
)
|
$
|
(821
|
)
|
$
|
225,575
|
|
|
Net
earnings
|
|
|
|
|
|
|
|
|
|
|
|
10,437
|
|
|
|
|
|
10,437
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
(11,290
|
)
|
|
|
|
|
(11,290
|
)
|
|
Stock-based
employee
compensation
expense
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
54
|
|
|
Net
unrealized loss on
interest
rate swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(185
|
)
|
|
(185
|
)
|
|
Stock
issued
|
|
|
50
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
Balance,
March 31,2007
|
|
|
24,764,815
|
|
$
|
248
|
|
$
|
258,701
|
|
$
|
(33,352
|
)
|
$
|
(1,006
|
)
|
$
|
224,591
|
|
The
Company is authorized to issue 20,000,000 shares of preferred stock, par value
$.01 per share, of which none were issued as of March 31, 2007 or December
31,
2006.
5.
Debt
On
March
27, 2007, the Company entered into an amended and restated senior unsecured
revolving credit agreement (the “Credit Agreement”) with a group of domestic
commercial banks.
The
Credit
Agreement, among other items, increases the aggregate amount of the Company’s
credit facility by $75,000,000 to $175,000,000; reduces the interest rate margin
on LIBOR based borrowings by 0.25% and extends the term of the Credit Agreement
from June 2008 to March 2011. The Credit Agreement permits borrowings at an
interest rate equal to the sum of a base rate plus a margin ranging from 0.0%
to
0.25% or a LIBOR rate plus a margin ranging from 1.0% to 1.5%. The applicable
margin is based on the Company's leverage ratio, as defined in the Credit
Agreement.
Subject
to
the terms of the Credit Agreement, the Company has options to extend the term
of
the Credit Agreement for one additional year and/or increase the amount of
the
credit facility available pursuant to the Credit Agreement by $125,000,000
to
$300,000,000, subject to approval by the Company’s Board of Directors and the
Bank Syndicate. The Credit Agreement contains customary terms and conditions,
including customary financial covenants such as leverage and coverage ratios
and
other customary covenants, including limitations on the Company’s ability to
incur debt and pay dividends and maintenance of tangible net worth, and events
of default, including change of control and failure to maintain REIT status.
The
Company believes that the Credit Agreement’s terms, conditions and covenants
will not limit its current business practices.
6.
Acquisitions
On
February 28, 2006, the Company acquired eighteen retail motor fuel and
convenience store properties located in Western New York for $13,389,000.
Simultaneous with the closing on the acquisition, the Company entered into
a
triple-net lease with a single tenant for all of the properties. The lease
provides for annual rentals at a competitive rate and provides for escalations
thereafter. The lease has an initial term of fifteen years and provides the
tenant options for three renewal terms of five years each. The lease also
provides that the tenant is responsible for all existing and future
environmental conditions at the properties.
Effective
March 31, 2007 the Company acquired fifty-nine convenience store and retail
motor fuel properties in ten states for approximately $79,335,000 from Trustreet
Properties, Inc. (now known as GE Capital Solutions, Franchise Finance)
(“GE-FF”) and its various subsidiaries for cash with funds drawn under its
Credit Agreement. Effective April 23, 2007, the Company acquired five additional
properties from GE-FF for approximately $5,200,000. The aggregate cost of the
acquisitions, including transaction costs, is approximately $84,535,000.
Substantially all of the properties are triple-net-leased to tenants who
previously leased the properties from the seller. The leases generally provide
that the tenants are responsible for substantially all existing and future
environmental conditions at the properties.
The
Company's allocation of the purchase price to the assets acquired and
liabilities assumed as of March 31, 2007 is preliminary and subject to change.
The purchase price has been allocated between assets, liabilities and intangible
assets based on the initial estimates of fair value. These allocations exclude
the properties that were acquired in April 2007, are preliminary and may not
be
indicative of the final allocations. The Company continues to evaluate the
existence of pre-acquisition contingencies and the assumptions used in valuing
the real estate. The Company anticipates finalizing these allocations during
the
latter part of 2007. A change in the final allocation from what is presented
may
result in an increase or decrease in identified intangible assets and changes
in
depreciation, amortization or other expenses.
The
Company estimated the fair value of acquired tangible assets (consisting of
land, buildings and improvements) “as if vacant” and identified intangible
assets and liabilities (consisting of leasehold interests, above-market and
below-market leases, in-place leases and tenant relationships) and assumed
liabilities.
Based
on
these estimates, the Company allocated the purchase price to the applicable
assets and liabilities as follows (in thousands):
| Consideration: |
|
|
|
|
|
Purchase
price to GE-FF
|
|
$
|
78,274
|
|
|
Allocated
transaction costs
|
|
|
1,061
|
|
|
|
|
|
|
|
|
Total
consideration
|
|
$
|
79,335
|
|
| |
|
|
|
|
| Assets
Acquired: |
|
|
|
|
|
Real
estate investment properties
|
|
$ |
76,681
|
|
|
Other
assets:
|
|
|
|
|
|
Above
market leases
|
|
|
3,706
|
|
|
Leases
in place and tenant relationships
|
|
|
2,951
|
|
| |
|
|
|
|
|
Total
|
|
|
83,338
|
|
| |
|
|
|
|
| Liabilities
Assumed: |
|
|
|
|
|
Below
market leases and other liabilities
|
|
|
4,003
|
|
| |
|
|
|
|
|
Net
assets acquired
|
|
$
|
79,335
|
|
| |
|
|
|
|
The
following unaudited pro forma condensed consolidated financial information
has
been prepared utilizing the historical financial statements of Getty Realty
Corp. and the historical financial information of the properties acquired which
was derived from the consolidated books and records of GE-FF. The unaudited
pro
forma condensed consolidated statements of earnings assume that the acquisitions
had occurred as of the beginning of each of the periods presented, after giving
effect to certain adjustments including (a) rental income adjustments resulting
from the straight-lining of scheduled rent increases; (b) the amortization
of
the intangible assets relating to above market leases and liabilities relating
to below market leases over the remaining lease terms; (c) adjustments to
depreciate real estate assets over the depreciable lives and (d) the
amortization of identifiable leases in place intangibles and tenant relationship
intangibles over the remaining lease terms. The following information also
gives
effect to the additional interest expense resulting from the assumed increase
in
borrowing outstanding drawn under the Credit Agreement to fund the acquisition.
The unaudited pro forma condensed financial information is not indicative of
the
results of operations that would have been achieved had the acquisition from
GE-FF reflected herein been consummated on the dates indicated or that will
be
achieved in the future.
|
|
|
|
Three
Months
|
|
|
Three
Months
|
|
|
|
|
|
Ended
March 31,
|
|
|
Ended
March 31,
|
|
| |
|
|
2007
|
|
|
2006
|
|
| |
|
|
|
|
|
|
|
| Revenues |
|
$ |
20,215 |
|
$ |
20,339 |
|
| |
|
|
|
|
|
|
|
| Net
income |
|
$ |
10,281 |
|
$ |
10,696 |
|
| |
|
|
|
|
|
|
|
| Net
earnings per share: |
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.42 |
|
$ |
0.43 |
|
|
Diluted
|
|
$ |
0.41 |
|
$ |
0.43 |
|
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
This
discussion and analysis of financial condition and results of operations should
be read in conjunction with the sections entitled “Part I, Item 1A. Risk
Factors” and “Part II, Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” which appear in our Annual Report on Form
10-K for the year ended December 31, 2006, and the unaudited consolidated
financial statements and related notes which appear in this Quarterly Report
on
Form 10-Q.
Recent
Developments
On
March
31, 2007, we acquired fifty-nine convenience store and retail motor fuel
properties in ten states from Trustreet Properties, Inc. (now known as GE
Capital Solutions, Franchise Finance) (“GE-FF”) and its various subsidiaries for
cash with funds drawn under our credit facility. On April 23, 2007 we acquired
five additional properties from GE-FF. The aggregate cost of the acquisitions,
including transaction costs, is approximately $84.5 million. Substantially
all
of the properties are triple-net leased to tenants who previously leased the
properties from the seller. The leases generally provide that the tenants are
responsible for substantially all existing and future environmental conditions
at the properties. For more information with respect to the acquisition from
GE-FF, see note 6 to our unaudited consolidated financial statements included
in
this Quarterly Report on Form 10-Q.
General
We
are a
real estate investment trust specializing in the ownership and leasing of retail
motor fuel and convenience store properties and petroleum distribution
terminals. We elected to be taxed as a REIT under the federal income tax laws
beginning January 1, 2001. As a REIT, we are not subject to federal corporate
income tax on the taxable income we distribute to our shareholders. In order
to
continue to qualify for taxation as a REIT, we are required, among other things,
to distribute at least ninety percent of our taxable income to shareholders
each
year.
We
lease
or sublet our properties primarily to distributors and retailers engaged in
the
sale of gasoline and other motor fuel products, convenience store products
and
automotive repair services. These tenants are responsible for the payment of
taxes, maintenance, repair, insurance and other operating expenses and for
managing the actual operations conducted at these properties. As of March 31,
2007, we leased nine hundred ten of our one thousand ninety-eight properties
on
a long-term basis under a master lease (the “Master Lease”) and supplemental
leases for four properties, (collectively the “Marketing Leases”) to Getty
Petroleum Marketing Inc. (“Marketing”) which was spun-off to our shareholders as
a separate publicly held company in March 1997. In December 2000, Marketing
was
acquired by a subsidiary of OAO Lukoil (“Lukoil”), one of Russia’s largest
integrated oil companies.
A
substantial portion of our revenues (86% for the three months ended March 31,
2007), are derived from the Marketing Leases. Accordingly, our revenues are
dependent to a large degree on the economic performance of Marketing and of
the
petroleum marketing industry and any factor that adversely affects Marketing
or
our other lessees may have a material adverse effect on our financial condition
and results of operations. Marketing’s financial results depend largely on
retail petroleum marketing margins and rental income from subtenants who operate
our properties. The petroleum marketing industry has been and continues to
be
volatile and highly competitive. Factors that could adversely affect Marketing
or our other lessees include those described under “Part I, Item 1A. Risk
Factors”, in our Annual Report on Form 10-K. In the event that Marketing cannot
or will not perform its monetary obligations under the Marketing Leases with
us,
our financial condition and results of operations would be materially adversely
affected. Although Marketing is wholly owned by a subsidiary of Lukoil, Lukoil
is not a guarantor of the Marketing Leases, and no assurance can be given that
Lukoil will provide additional capital to, or otherwise cause, Marketing to
fulfill any of its monetary obligations under the Marketing Leases.
We
periodically receive and review Marketing’s financial statements and other
financial data. We receive this information from Marketing pursuant to the
terms
of the Master Lease. Certain of this information is not publicly available
and
the terms of the Master Lease prohibit us from including this financial
information in our Annual Reports on Form 10-K, our Quarterly Reports on Form
10-Q or in our Annual Reports to Shareholders. The financial performance of
Marketing may deteriorate, and Marketing may ultimately default on its monetary
obligations to us before we receive financial information from Marketing that
would indicate the deterioration.
Certain
financial and other information concerning Marketing is available from Dun
&
Bradstreet and may be accessed by their web site (www.dnb.com) upon payment
of
their fee.
Selected
balance sheet data of Marketing at December 31, 2005, 2004, 2003 and 2002 and
selected operating data of Marketing for each of the three years in the period
ending December 31, 2004, which is publicly available, has been provided in
“Part II, Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” which appears in our Annual Report on Form 10-K for
the year ended December 31, 2006. You should not rely on the selected balance
sheet data or operating data related to prior years as representative of
Marketing’s current financial condition or current results of
operations.
Based
on
our review of the recent financial statements and other financial data Marketing
has provided us to date; we have observed a significant decline in their
financial results from the prior periods presented. Marketing continues to
pay
timely its monetary obligations under the Marketing Leases, as it has since
the
inception of the Master Lease in 1997, although there is no assurance that
they
will continue to do so.
As
part of
a periodic review by the Division of Corporation Finance of the Securities
and
Exchange Commission (“SEC”) of our Annual Report on Form 10-K for the year ended
December 31, 2003, we received and responded to a number of comments. The only
comment that remains unresolved pertains to the SEC’s position that we must
include the financial statements and summarized financial data of Marketing
in
our periodic filings. The SEC subsequently indicated that, unless we file
Marketing’s financial statements and summarized financial data with our periodic
reports: (i) it will not consider our Annual Reports on Forms 10-K for the
years
beginning with 2000 to be compliant; (ii) it will not consider us to be current
in our reporting requirements; (iii) it will not be in a position to declare
effective any registration statements we may file for public offerings of our
securities; and (iv) we should consider how the SEC’s conclusion impacts our
ability to make offers and sales of our securities under existing registration
statements and if we have a liability for such offers and sales made pursuant
to
registration statements that did not contain the financial statements of
Marketing.
We
believe
that the SEC’s position is based on their interpretation of certain provisions
of their internal Accounting Disclosure Rules and Practices Training Material,
Staff Accounting Bulletin No. 71 and Rule 3-13 of Regulation S-X. We do not
believe that any of this guidance is clearly applicable to our particular
circumstances and that, even if it were, we believe that we should be entitled
to certain relief from compliance with such requirements. Marketing subleases
our properties to approximately nine hundred independent, individual service
station/convenience store operators (subtenants), most of whom were our tenants
when Marketing was spun-off to our shareholders. Consequently, we believe that
we, as the owner of these properties and the Getty brand, and our prior
experience with Marketing’s tenants, could relet these properties to the
existing subtenants or others at market rents. Because of this particular aspect
of our landlord-tenant relationship with Marketing, we do not believe that
the
inclusion of Marketing’s financial statements in our filings is necessary to
evaluate our financial condition. Our position was included in a written
response to the SEC. To date, the SEC has not accepted our position regarding
the inclusion of Marketing’s financial statements in our filings. We are
endeavoring to achieve a resolution of this issue that will be acceptable to
the
SEC. We can not accurately predict the consequences if we are ultimately
unsuccessful in achieving an acceptable resolution.
We
do not
believe that offers or sales of our securities made pursuant to existing
registration statements that did not or do not contain the financial statements
of Marketing constitute, by reason of such omission, a violation of the
Securities Act of 1933, as amended, or the Exchange Act. Additionally, we
believe that, if there ultimately is a determination that such offers or sales,
by reason of such omission, resulted in a violation of those securities laws,
we
would not have any material liability as a consequence of any such
determination.
We
manage
our business to enhance the value of our real estate portfolio and, as a REIT,
place particular emphasis on minimizing risk and generating cash sufficient
to
make required distributions to shareholders of at least ninety percent of our
taxable income each year. In addition to measurements defined by generally
accepted accounting principles (“GAAP”), our management also focuses on funds
from operations available to common shareholders (“FFO”) and adjusted funds from
operations available to common shareholders (“AFFO”) to measure our performance.
FFO is generally considered to be an appropriate supplemental non-GAAP measure
of the performance of REITs. FFO is defined by the National Association of
Real
Estate Investment Trusts as net earnings before depreciation and amortization
of
real estate assets, gains or losses on dispositions of real estate, non-FFO
items reported in discontinued operations and extraordinary items and cumulative
effect of accounting change. Other REITS may use definitions of FFO and/or
AFFO
that are different than ours and, accordingly, may not be
comparable.
We
believe
that FFO is helpful to investors in measuring our performance because FFO
excludes various items included in GAAP net earnings that do not relate to,
or
are not indicative of, our fundamental operating performance such as gains
or
losses from property dispositions and depreciation and amortization of real
estate assets. In our case, however, GAAP net earnings and FFO include the
significant impact of deferred rental revenue (straight-line rental revenue)
on
our recognition of revenues from rental properties, which results primarily
from
fixed rental increases scheduled under certain leases with our tenants. In
accordance with GAAP, the aggregate minimum rent due over the initial term
of
these leases are recognized on a straight-line basis rather than when due.
GAAP
net earnings and FFO may also include income tax benefits recognized due to
the
elimination of, or a net reduction in, amounts accrued for uncertain tax
positions related to being taxed as a C-corp., prior to 2001. Income taxes
did
not have a significant impact on our earnings for the periods presented, and
accordingly, do not appear as a separate item in our statement of operations
or
reconciliation of AFFO from net earnings. As a result, management pays
particular attention to AFFO, a supplemental non-GAAP performance measure that
we define as FFO less straight-line rental revenue and income tax benefit.
In
management’s view, AFFO provides a more accurate depiction than FFO of the
impact of scheduled rent increases under these leases and our election to be
treated as a REIT under the federal income tax laws beginning in 2001. Neither
FFO nor AFFO represent cash generated from operating activities calculated
in
accordance with generally accepted accounting principles and therefore these
measures should not be considered an alternative for GAAP net earnings or as
a
measure of liquidity.
A
reconciliation of net earnings to FFO and AFFO for the three months ended March
31, 2007 and 2006 is as follows (in thousands, except per share amounts):
| |
|
|
|
| |
|
Three
months ended
March
31,
|
|
| |
|
|
2007
|
|
|
2006
|
|
|
Net
earnings
|
|
$
|
10,437
|
|
$
|
10,531
|
|
| |
|
|
|
|
|
|
|
|
Depreciation
and amortization of real estate assets
|
|
|
1,865
|
|
|
1,916
|
|
|
Gains
on dispositions of real estate
|
|
|
(46
|
)
|
|
(34
|
)
|
|
Funds
from operations
|
|
|
12,256
|
|
|
12,413
|
|
|
Deferred
rental revenue (straight-line rent)
|
|
|
(482
|
)
|
|
(823
|
)
|
|
Adjusted
funds from operations
|
|
$
|
11,774
|
|
$
|
11,590
|
|
|
Diluted
per share amounts:
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
$
|
.42
|
|
$
|
.43
|
|
|
Funds
from operations per share
|
|
$
|
.49
|
|
$
|
.50
|
|
|
Adjusted
funds from operations per share
|
|
$
|
.48
|
|
$
|
.47
|
|
| |
|
|
|
|
|
|
|
|
Diluted
weighted average shares outstanding
|
|
|
24,785
|
|
|
24,745
|
|
| |
|
|
|
|
|
|
|
Results
of
operations
Three
months ended March 31, 2007 compared to the three months ended March 31,
2006
Revenues
from rental properties were $18.0 million for the three months ended March
31,
2007 as compared to $18.1 million for the three months ended March 31, 2006.
We
received approximately $15.1 million for both the three months ended March
31,
2007 and the three months ended March 31, 2006 from properties leased to
Marketing under the Marketing Leases. We also received rent of $2.4 million
in
the three months ended March 31, 2007 and $2.2 million in the three months
ended
March 31, 2006 from other tenants. The increase in rent received was primarily
due to rent from properties acquired in February 2006 and rent escalations,
partially offset by the effect of dispositions of real estate and lease
expirations. In addition, revenues from rental properties include deferred
rental revenues of $0.5 million for the three months ended March 31, 2007 as
compared to $0.8 million for the three months ended March 31, 2006, recorded
as
required by GAAP, related to the fixed rent increases scheduled under certain
leases with tenants. The aggregate minimum rent due over the initial term of
these leases are recognized on a straight-line basis rather than when
due.
Rental
property expenses, which are primarily comprised of rent expense and real estate
and other state and local taxes, were $2.4 million for the three months ended
March 31, 2007 as compared to $2.5 million recorded for the three months ended
March 31, 2006.
Environmental
expenses, net for the three months ended March 31, 2007 were $1.0 million as
compared to $1.1 million for the three months ended March 31, 2006. The decrease
was primarily due to a $0.2 million decrease in environmental related litigation
expenses as compared to the prior year period partially offset by a $0.1 million
increase in change in estimated environmental costs, net of estimated
recoveries.
General
and administrative expenses for the three months ended March 31, 2007 were
$1.5
million as compared to $1.4 million recorded for the three months ended March
31, 2006.
Depreciation
and amortization expense was $1.9 million for both the three months ended March
31, 2007 and the three months ended March 31, 2006.
As
a
result, total operating expenses decreased by approximately $0.2 million for
the
three months ended March 31, 2007, as compared to the three months ended March
31, 2006.
Other
income, net was $0.1 million for both the three months ended March 31, 2007
and
the three months ended March 31, 2006
Interest
expense was $1.0 million for the three months ended March 31, 2007 as compared
to $0.7 million for the three months ended March 31, 2006. The increase was
primarily due to increased borrowings used to finance the acquisition of
properties in February 2006. Interest expense also increased due to higher
interest rates which averaged 6.7% for the three months ended March 31, 2007
as
compared to 5.8% for the three months ended March 31, 2006.
As
a
result, net earnings were $10.4 million for the three months ended March 31,
2007, which was comparable to the $10.5 million for the prior year period.
For
the same period, FFO decreased to $12.3 million as compared to $12.4 million
for
prior year period and AFFO increased by $0.2 million, to $11.8 million. The
increase in AFFO for the quarter was primarily due to the changes in net
earnings described above but exclude the $0.3 million decrease in deferred
rental revenue (which is included in net earnings and FFO but is excluded from
AFFO) recorded for the three months ended March 31, 2007 as compared to the
three months ended March 31, 2006.
Diluted
earnings per share for the three months ended March 31, 2007 was $0.42 per
share, a decrease of $0.01 per share as compared to the three months ended
March
31, 2006. Diluted FFO per share for the three months ended March 31, 2007
was $0.49 per share, a
decrease of $0.01 per share, as compared to the three months ended March 31,
2006. Diluted AFFO per share for the three months ended March 31, 2007 was
$0.48
per share, an increase of $0.01 per share as compared to the three months ended
March 31, 2006.
Liquidity
and Capital Resources
Our
principal sources of liquidity are the cash flows from our business, funds
available under a revolving credit agreement that expires in 2011 and available
cash and equivalents. Management believes that dividend payments and cash
requirements for our business for the next twelve months, including
environmental remediation expenditures, capital expenditures and debt service,
can be met by cash flows from operations, borrowings under the credit agreement
and available cash and cash equivalents.
On
March
27, 2007, we entered into an amended and restated senior unsecured revolving
credit agreement (the “Credit Agreement”) with a group of domestic commercial
banks (the “Bank Syndicate”).
The
Credit
Agreement, among other items, increases the aggregate amount of our credit
facility by $75,000,000 to $175,000,000; reduces the interest rate margin on
LIBOR based borrowings by 0.25% and extends the term of the Credit Agreement
from July 2008 to March 2011. The Credit Agreement permits borrowings at an
interest rate equal to the sum of a base rate plus a margin ranging from 0.0%
to
0.25% or a LIBOR rate plus a margin ranging from 1.0% to 1.5%. The applicable
margin is based on our leverage ratio, as defined in the Credit Agreement.
Subject
to
the terms of the Credit Agreement, we have the options to extend the term of
the
Credit Agreement for one additional year and/or increase the amount of the
credit facility available pursuant to the Credit Agreement by $125,000,000
to
$300,000,000, subject to approval by our Board of Directors and the Bank
Syndicate. The Credit Agreement contains customary terms and conditions,
including customary financial covenants such as leverage and coverage ratios
and
other customary covenants, including limitations on our ability to incur debt
and pay dividends and maintenance of tangible net worth, and events of default,
including change of control and failure to maintain REIT status. We believe
that
the Credit Agreement’s terms, conditions and covenants will not limit our
current business practices.
In
April
2006 we entered into a $45.0 million LIBOR based interest rate swap, effective
May 1, 2006 through June 30, 2011. The interest rate swap is intended to hedge
$45.0 million of our current exposure to variable market interest rate risk
by
effectively fixing, at 5.44%, the LIBOR component of the interest rate
determined under our existing credit agreement or future exposure to variable
interest rate risk due to borrowing arrangements that may be entered into prior
to the expiration of the interest rate swap. As of March 31, 2007, $45.0 million
of our LIBOR based borrowings under the Credit Agreement bear interest at an
effective rate of 6.44%.
On
March
31, 2007, we acquired fifty-nine convenience store and retail motor fuel
properties in ten states for approximately $79.3 million from GE-FF for cash
with funds drawn under our Credit Agreement. Total borrowings outstanding under
the Credit Agreement at March 31, 2007 were $126.5 million, bearing interest
at
an average effective rate of 6.40% per annum. Total borrowings increased to
$132.5 million as of May 1, 2007 primarily due to additional borrowings used
to
pay $11.2 million of dividends that were accrued as of March 31, 2007 and paid
in April 2007 and $5.2 million to acquire five additional properties in April
2007, net of repayments from positive cash flows provided by rental operations.
Accordingly, we had $42.5 million available under the terms of the Credit
Agreement as of May 1, 2007 or $167.5 million available assuming our Board
of
Directors and the Bank Syndicate were to approve our request to increase the
Credit Agreement by $125.0 million. Increasing the Credit Agreement is also
contingent upon the existing members of the Bank Syndicate increasing their
commitment to the Credit Agreement, and/or additional members joining the Bank
Syndicate to increase the availability committed under the line.
We
elected
to be taxed as a REIT under the federal income tax laws with the year beginning
January 1, 2001. As a REIT, we are required, among other things, to distribute
at least ninety percent of our taxable income to shareholders each year. Payment
of dividends is subject to market conditions, our financial condition and other
factors, and therefore cannot be assured. In particular, our Credit Agreement
prohibits the payment of dividends during certain events of default. Dividends
paid to our shareholders aggregated $11.3 million for the three months ended
March 31, 2007 and $11.0 million for the prior year period. We presently intend
to pay common stock dividends of $0.455 per share each quarter ($1.82 per share
on an annual basis), and commenced doing so with the quarterly dividend declared
in February 2006.
As
part of
our overall growth strategy, we regularly review opportunities to acquire
additional properties and we expect to continue to pursue acquisitions that
we believe will benefit our financial performance. To the extent that our
current sources of liquidity are not sufficient to fund such acquisitions we
will require other sources of capital, which may or may not be available on
favorable terms or at all.
Critical
Accounting Policies
Our
accompanying unaudited interim consolidated financial statements include the
accounts of Getty Realty Corp. and our wholly-owned subsidiaries. The
preparation of financial statements in accordance with GAAP requires management
to make estimates, judgments and assumptions that affect amounts reported in
its
financial statements. Although we have made our best estimates, judgments and
assumptions regarding future uncertainties relating to the information included
in our financial statements, giving due consideration to the accounting policies
selected and materiality, actual results could differ from these estimates,
judgments and assumptions. We do not believe that there is a great likelihood
that materially different amounts would be reported related to the application
of the accounting policies described below.
Estimates,
judgments and assumptions underlying the accompanying consolidated financial
statements include, but are not limited to, deferred rent receivable, recoveries
from state underground storage tank funds, environmental remediation costs,
real
estate, depreciation and amortization, impairment of long-lived assets,
litigation, accrued expenses, income taxes and exposure to paying an earnings
and profits deficiency dividend. The information included in our financial
statements that is based on estimates, judgments and assumptions is subject
to
significant change and is adjusted as circumstances change and as the
uncertainties become more clearly defined. Our accounting policies are described
in note 1 to the consolidated financial statements that appear in our Annual
Report on Form 10-K for the year ended December 31, 2006. We believe that the
more critical of our accounting policies relate to revenue recognition,
impairment of long-lived assets, income taxes, environmental costs and
recoveries from state underground storage tank funds and litigation, each of
which is discussed in “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in our Annual Report on Form 10-K for the
year ended December 31, 2006.
Environmental
Matters
We
are
subject to numerous existing federal, state and local laws and regulations,
including matters relating to the protection of the environment such as the
remediation of known contamination and the retirement and decommissioning or
removal of long-lived assets including buildings containing hazardous materials,
USTs and other equipment. In accordance with the leases with certain of our
tenants, we have agreed to bring the leased properties with known environmental
contamination to within applicable standards and to regulatory or contractual
closure (“Closure”) in an efficient and economical manner. Generally, upon
achieving Closure at an individual property, our environmental liability under
the lease for that property will be satisfied and future remediation obligations
will be the responsibility of our tenant. We will continue to seek reimbursement
from state UST remediation funds related to these environmental liabilities
where available. Generally the liability for the retirement and decommissioning
or removal of USTs and other equipment is the responsibility of our tenants.
We
are contingently liable for these obligations in the event that our tenants
do
not satisfy their responsibilities. A liability has not been accrued for
obligations that are the responsibility of our tenants.
As
of
March 31, 2007, we had remediation action plans in place for two hundred
seventy-eight (92%) of the three hundred one properties for which we retained
environmental responsibility and the remaining twenty-three properties (8%)
remain in the assessment phase. As of March 31, 2007, we had accrued $17.0
million as management’s best estimate of the fair value of reasonably estimable
environmental remediation costs. As of March 31, 2007 we had also recorded
$3.9
million as management’s best estimate for net recoveries from state UST
remediation funds, net of allowance, related to environmental obligations and
liabilities. Environmental expenditures and recoveries from underground storage
tank funds were $1.4 million and $0.5 million, respectively, for the three
month
period ended March 31, 2007.
Environmental
liabilities and related assets are currently measured at fair value based on
their expected future cash flows which have been adjusted for inflation and
discounted to present value. We also use probability weighted alternative cash
flow forecasts to determine fair value. We assumed a 50% probability factor
that
the actual environmental expenses will exceed engineering estimates for an
amount assumed to equal one year of net expenses aggregating $6.0 million.
Accordingly, the environmental accrual as of March 31, 2007 was increased by
$2.3 million, net of assumed recoveries and before inflation and present value
discount adjustments. The resulting net environmental accrual as of March 31,
2007 was then further increased by $1.0 million for the assumed impact of
inflation using an inflation rate of 2.75%. Assuming a credit-adjusted risk-free
discount rate of 7.0%, we then reduced the net environmental accrual, as
previously adjusted, by a $2.2 million discount to present value. Had we assumed
an inflation rate that was 0.5% higher and a discount rate that was 0.5% lower,
net environmental liabilities as of March 31, 2007 would have increased by
$0.2
million and $0.1 million, respectively, for an aggregate increase in the net
environmental accrual of $0.3 million. However, the aggregate net change in
environmental estimates recorded during the three months ended March 31, 2007
would not have changed significantly if these changes in the assumptions were
made effective December 31, 2006.
In
view of
the uncertainties associated with environmental expenditures, however, we
believe it is possible that the fair value of future actual net expenditures
could be substantially higher than these estimates. Adjustments to accrued
liabilities for environmental remediation costs will be reflected in our
financial statements as they become probable and a reasonable estimate of fair
value can be made. For the three months ended March 31, 2007 and 2006, the
aggregate of the net change in estimated remediation costs included in our
consolidated statement of operations amounted to $0.4 million and $0.3 million,
respectively, which amounts were net of probable recoveries from state UST
remediation funds. Although future environmental costs may have a significant
impact on results of operations for any single fiscal year or interim period,
we
believe that such costs will not have a material adverse effect on our long-term
financial position.
We
cannot
predict what environmental legislation or regulations may be enacted in the
future or how existing laws or regulations will be administered or interpreted
with respect to products or activities to which they have not previously been
applied. We cannot predict if state underground storage tank fund programs
will
be administered and funded in the future in a manner that is consistent with
past practices and if future environmental spending will continue to be eligible
for reimbursement at historical recovery rates under these programs. Compliance
with more stringent laws or regulations, as well as more vigorous enforcement
policies of the regulatory agencies or stricter interpretation of existing
laws,
which may develop in the future, could have an adverse effect on our financial
position, or that of our tenants, and could require substantial additional
expenditures for future remediation.
Our
discussion of environmental matters should be read in conjunction with “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations” which appears in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2006 and the unaudited consolidated financial statements
and related notes (including notes 2 and 3) which appear in this Quarterly
Report on Form 10-Q.
Forward
Looking Statements
Certain
statements in this Quarterly Report may constitute “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995.
When
we use the words “believes,” “expects,” “plans,” “projects,” “estimates” and
similar expressions, we intend to identify forward-looking statements. Examples
of forward-looking statements include statements regarding our expectations
regarding future payments from Marketing; the expected effect of regulations
on
our long-term performance; our expected ability to maintain compliance with
applicable regulations; our
ability to renew expired leases; the adequacy of our current and anticipated
cash flows; our belief that we do not have a material liability for offers
and
sales of our securities made pursuant to registration statements that did not
contain the financial statements or summarized financial data of Marketing;
our
expectations regarding future acquisitions; the impact of the covenants included
in the Credit Agreement on our current business practices; our expected ability
to increase our available funding under the Credit Agreement; our ability to
maintain our REIT status; the probable outcome of litigation or regulatory
actions; our expected recoveries from underground storage tank funds; our
exposure to environmental remediation costs; our estimates regarding remediation
costs; our expectations as to the long-term effect of environmental liabilities
on our financial condition; our exposure to interest rate fluctuations and
the
manner in which we expect to manage this exposure; the expected reduction in
interest-rate risk resulting from our interest-rate swap agreement and our
expectation that we will not settle the interest-rate swap prior to its
maturity; our expectations regarding corporate level federal income taxes;
the
indemnification obligations of the Company and others; our intention to
consummate future acquisitions; our assessment of the likelihood of future
competition; assumptions regarding the future applicability of accounting
estimates, assumptions and policies; our intention to pay future dividends
and
the amounts thereof; our expectation that we will finalize the allocation of
the
purchase price for the properties acquired from GE-FF during the later portion
of 2007; and our beliefs about the reasonableness of our accounting estimates,
judgments and assumptions, including the preliminary allocation of the purchase
price for the properties acquired from GE-FF.
These
forward-looking statements are based on our current beliefs and assumptions
and
information currently available to us and involve known and unknown risks,
uncertainties and other factors, which may cause our actual results, performance
and achievements to be materially different from any future results, performance
or achievements, expressed or implied by these forward-looking statements.
Information concerning factors that could cause our actual results to materially
differ from those forward looking results can be found in “Part I, Item 1A. Risk
Factors” of our Annual Report on Form 10-K for the year ended December 31, 2006,
as well as in other filings we make with the Securities and Exchange Commission
and include, but are not limited to risks associated with owning and leasing
real estate generally; dependence on Marketing as a tenant and on rentals from
companies engaged in the petroleum marketing and convenience store businesses;
our unresolved SEC comment; competition for properties and tenants; risk of
tenant non-renewal; the effects of taxation and other regulations; potential
litigation exposure; costs of completing environmental remediation and of
compliance with environmental regulations; the risk of loss of our management
team; the impact of our electing to be taxed as a REIT, including subsequent
failure to qualify as a REIT; risks associated with owning real estate
concentrated in one region of the United States; risks associated with potential
future acquisitions; losses not covered by insurance; future dependence on
external sources of capital; the risk that our business operations may not
generate sufficient cash for distributions or debt service; our potential
inability to increase our available funding under the Credit Agreement; our
potential inability to pay dividends; the risk that our estimates of the fair
value of the properties acquired from GE-FF may be revised or that other
accounting judgments or assumptions used in the allocation of the purchase
price
thereof may prove incorrect; and terrorist attacks and other acts of violence
and war.
As
a
result of these and other factors, we may experience material fluctuations
in
future operating results on a quarterly or annual basis, which could materially
and adversely affect our business, financial condition, operating results and
stock price. An investment in our stock involves various risks, including those
mentioned above and elsewhere in this report and those that are detailed from
time to time in our other filings with the Securities and Exchange
Commission.
You
should
not place undue reliance on forward-looking statements, which reflect our view
only as of the date hereof. We undertake no obligation to publicly release
revisions to these forward-looking statements to reflect future events or
circumstances or reflect the occurrence of unanticipated events.
Item
3. Quantitative and Qualitative Disclosures About
Market Risk
We
are
exposed to interest rate risk, primarily as a result of our $175.0 million
Credit Agreement. Our Credit Agreement, which expires in June 2011,
permits borrowings at an interest rate equal to the sum of a base rate plus
a
margin ranging from 0.0% to 0.25% or a LIBOR rate plus a margin ranging from
1.0% to 1.5%. The applicable margin is based on our leverage ratio, as defined
in the Credit Agreement. At March 31, 2007, we had borrowings outstanding of
$126.5 million under our Credit Agreement bearing interest at an average rate
of
6.375% per annum (or an average effective rate of 6.4% including the impact
of
the interest rate swap discussed below). We use borrowings under the Credit
Agreement to finance acquisitions and for general corporate purposes.
We
manage our exposure to interest rate risk by minimizing, to the extent feasible,
our overall borrowing and monitoring available financing alternatives. Our
interest rate risk as of March 31, 2007 increased significantly due to increased
borrowings under the Credit Agreement as compared to December 31, 2006. In
April
2006, we entered into a $45.0 million LIBOR based interest rate swap, effective
May 1, 2006 through June 30, 2011, to manage a portion of our interest rate
risk. The interest rate swap is intended to hedge $45.0 million of our current
exposure to variable interest rate risk by effectively fixing, at 5.44%, the
LIBOR component of the interest rate determined under our existing Credit
Agreement or future exposure to variable interest rate risk due to borrowing
arrangements that may be entered into prior to the expiration of the interest
rate swap. As of March 31, 2007, $45.0 million of our LIBOR based borrowings
under the Credit Agreement bear interest at an effective rate of 6.44%. As
a
result, we will be exposed to interest rate risk to the extent that our
borrowings exceed the $45.0 million notional amount of the interest rate swap.
As of March 31, 2007, our borrowings exceeded the notional amount of the
interest rate swap by $81.5 million. As a result of the increase in the funding
available under the Credit Agreement from $100.0 million to $175.0 million,
and
the subsequent increase in our total borrowings, the interest rate swap covers
a
smaller percentage of our total borrowings that it did previously. We do not
foresee any additional significant changes in our exposure or in how we manage
this exposure in the near future.
We
entered
into the $45.0 million notional five year interest rate swap agreement
designated and qualifying as a cash flow hedge to reduce our exposure to the
variability in future cash flows attributable to changes in the LIBOR rate.
Our
primary objective when undertaking hedging transactions and derivative positions
is to reduce our variable interest rate risk by effectively fixing a portion
of
the interest rate for existing debt and anticipated refinancing transactions.
This in turn, reduces the risks that the variability of cash flows imposes
on
variable rate debt. Our strategy protects us against future increases in
interest rates. While this agreement is intended to lessen the impact
of rising interest rates, it also exposes us to the risk that the other
party to the agreement will not perform, the agreement will be
unenforceable and the underlying transactions will fail
to qualify as a highly-effective cash flow hedge for accounting
purposes.
In
the
event that we were to settle the interest rate swap prior to its maturity,
if
the corresponding LIBOR swap rate for the remaining term of the agreement is
below the 5.44% fixed strike rate at the time we settle the
swap, we would be required to make a payment to the swap counter-party; if
the corresponding LIBOR swap rate is above the fixed strike rate at the
time we settle the swap, we would receive a payment from the swap
counter-party. The amount that we would either pay or receive would
equal the present value of the basis point differential between the fixed strike
rate and the corresponding LIBOR swap rate at the time we settle the
swap.
Based
on our projected average outstanding borrowings under the Credit Agreement
for
2007, if market interest rates increase by an average of 0.5% more than the
market interest rates as of March 31, 2007, the additional annualized interest
expense caused by market interest rate increases since December 31, 2006 would
decrease 2007 net income and cash flows by approximately $407,500. This amount
is the effect of a hypothetical interest rate change on the portion of our
average outstanding borrowings of $81.5 million projected for the remainder
of
2007 under our Credit Agreement that is not covered by our $45.0 million
interest rate swap. The projected average outstanding borrowings are before
considering additional borrowings required for future acquisitions. The
calculation also assumes that there are no other changes in our financial
structure or the terms of our borrowings. Management believes that the fair
value of its debt equals its carrying value at March 31, 2007 and December
31,
2006. Our exposure to fluctuations in interest rates will increase or decrease
in the future with increases or decreases in the amount of borrowings
outstanding under our Credit Agreement.
In
order
to minimize our exposure to credit risk associated with financial instruments,
we place our temporary cash investments with high-credit-quality
institutions. Temporary cash investments, if any, are held in an
institutional money market fund and short-term federal agency discount
notes.
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company's reports filed or
furnished pursuant to the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the Commission's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures.
As
required by Rule 13a-15(b), the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and the Company's Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures as of the end of the quarter covered by this report.
Based on the foregoing, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures were effective at a reasonable assurance level as of March 31,
2007.
There
have
been no changes in the Company's internal control over financial reporting
during the latest fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
From
January 2007 through May 2007 we have been made party to thirteen
additional actions that are nearly identical to the thirty-five cases pending
as
of December 31, 2006 in Connecticut, Florida, Massachusetts, New Hampshire,
New
Jersey, New York, Pennsylvania, Vermont, Virginia, and West Virginia, brought
by
local water providers or governmental agencies. These cases allege various
theories of liability due to contamination of groundwater with MTBE as the
basis
for claims seeking compensatory and punitive damages. Each case names as
defendants approximately fifty petroleum refiners, manufacturers, distributors
and retailers of MTBE, or gasoline containing MTBE. The accuracy of the
allegations as they relate to us, our defenses to such claims, the aggregate
amount of damages, the definitive list of defendants and the method of
allocating such amounts among the defendants have not been determined.
Accordingly, our ultimate legal and financial liability, if any, cannot be
estimated with any certainty at this time.
Please
refer to “Item 3. Legal Proceedings” of our Annual Report on Form 10-K for the
year ended December 31, 2006, and note 3 to our consolidated financial
statements in such Form 10-K and to note 2 to our accompanying unaudited
consolidated financial statements which appear in this Quarterly Report on
Form
10-Q, for additional information.
See
“Part
I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended
December 31, 2006 for factors that could affect the Company’s results of
operations, financial condition and liquidity. There has been no material change
in such factors since December 31, 2006.
| |
Exhibit
No. |
Description
of Exhibit |
|
| |
|
|
|
| |
31(i).1
|
Rule
13a-14(a) Certification of Chief Financial Officer |
| |
|
|
|
| |
31(i).2
|
Rule
13a-14(a) Certification of Chief Executive Officer |
| |
|
|
|
| |
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. § 1350 (a) |
| |
|
|
|
| |
32.2
|
Certifications
of Chief Financial Officer pursuant to 18 U.S.C. § 1350 (a) |
| |
|
|
|
(a)
These
certifications are being furnished solely to accompany the Report pursuant
to 18
U.S.C. § 1350, and are not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and are not to be incorporated
by
reference into any filing of the Company, whether made before or after the
date
hereof, regardless of any general incorporation language in such
filing.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
GETTY
REALTY CORP.
(Registrant)
| Dated:
May 10, 2007 |
|
BY: /s/
Thomas J. Stirnweis |
| |
|
(Signature)
|
| |
|
THOMAS
J. STIRNWEIS
|
| |
|
Vice
President, Treasurer and
|
| |
|
Chief
Financial Officer
|
| |
|
|
| |
|
|
| Dated:
May 10, 2007 |
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BY: /s/
Leo Liebowitz |
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(Signature)
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LEO
LIEBOWITZ
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Chairman
and Chief Executive
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Officer
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