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Getty Realty Corp (Holding Company) (NYSE:GTY)
Q4 2019 Earnings Call
Feb 27, 2020, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, everyone, and welcome to Getty Realty's Earnings Conference Call for the Fourth Quarter and Year-End 2019. This call is being recorded. Prior to starting the call, Joshua Dicker, Executive Vice President, General Counsel and Secretary of the company will read the Safe Harbor statement and provide information about our non-GAAP financial measures. Please go ahead, Mr. Dicker.
Joshua Dicker -- Executive Vice President, General Counsel and Secretary
Thank you, operator. I would like to thank you all for joining us for Getty Realty's fourth quarter and year end earnings conference call. Yesterday afternoon, the company released its financial results for the quarter and year ended December 31, 2019. The Form 8-K and earnings release are available in the Investor Relations section of our website at gettyrealty.com.
Certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to trends, events and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Examples of forward-looking statements include our 2020 guidance and may also include statements made by management in their remarks and in response to questions, including, regarding future company operations, future financial performance and the company's acquisition or redevelopment plans and opportunities. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially.
I refer you to the company's Annual Report on Form 10-K for the year ended December 31, 2019, subsequent quarterly reports filed on Form 10-Q and other filings made with the SEC for a more detailed discussion of the risks and other factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. You should not place undue reliance on forward-looking statements, which reflect our view only as of the date hereof. The company undertakes no duty to update any forward-looking statements that may be made in the course of this call.
Also please refer to our earnings release for a discussion of our use of non-GAAP financial measures, including our definition of adjusted funds from operations or AFFO and the reconciliation of those measures to net earnings. With that, let me turn the call over to Christopher Constant, our Chief Executive Officer.
Christopher J. Constant -- President and Chief Executive Officer
Thank you, Josh. Good morning everyone and welcome to our call for the fourth quarter and year ended 2019. With Josh and me on the call today, are Mark Olear, our Chief Operating Officer and Danion Fielding, our Chief Financial Officer.
I will begin today's call by providing an overview of our fourth quarter and year-end 2019 performance, touch on our 2020 strategic objectives and then I'll pass the call to Mark to discuss our portfolio in more detail, and then Danion will discuss our financial results.
Getty had a very active fourth quarter, punctuated by the acquisition of 13 properties for $43.8 million and a combination of individual and portfolio transactions involving the convenience and gas and other automotive sectors. In addition, during the quarter, our core net lease portfolio continued to display the strength and stability that we expect from our long term triple net leases and we continue to make progress on our redevelopment projects.
As we close out 2019, and look ahead to 2020, our team is more focused than ever on executing on each of our growth initiatives, including realizing internal growth from our operating assets, enhancing our portfolio through accretive acquisitions and unlocking embedded value through selective redevelopments. We are confident that our targeted investment strategy, which includes focusing on the largely Internet resistant service oriented convenience and gas and other automotive sectors in metropolitan markets across the country, will continue to create value for our shareholders over the long term. Furthermore, we will do so while maintaining a conservative and flexible balance sheet position.
Turning to our results for the quarter, we grew our revenue, net earnings, FFO and AFFO, for the quarter and year as compared to the same periods for the prior year. On a per share basis, our AFFO was in line with our expectations and increased slightly year-over-year, which also reflects our successful capital raising activities during 2019.
In addition, we made the decision to incur certain expenses in our redevelopment program for our environmental litigation matters, which weighed on our profitability during the year. Finally, the timing of our acquisitions in 2019 was such that much of the financial benefit will be felt beginning in 2020 and beyond.
As I mentioned earlier, we continue to underwrite and acquire new properties. For the year, our total investment was nearly $90 million, we acquired 27 high-quality, convenience and gas and other automotive locations during the year. This activity demonstrates our proactive, yet disciplined underwriting approach to growing our portfolio. Over the past three years, we have acquired 168 properties for an investment of approximately $380 million. I'm particularly proud of the fact that we continue to grow our relationships with established convenience and gas operators. We have been in the convenience and gas business for a very long time and our success proves that maintaining and growing relationships such as these are one of the keys to our ongoing ability to source accretive growth opportunities. The convenience and gas sector continues to evolve, chain store operators are taking market share at the expense of individual sites and as the industry consolidates, we are afforded regular opportunities to review new investment opportunities. We expect to continue to partner with chain store operators who share our growth-oriented vision for the sector in the coming years.
In addition, 2019 was a year for Getty in which we established and grew relationships with several other automotive operators and made progress in expanding our investments to improve related sectors such as car washes and automotive parts and services businesses. As an example, we completed our first transactions with both Zips and GO Car Wash, during the year and continue to expand our relationship with one of the largest Jiffy Lube franchisees in the U.S. as well. These types of assets are highly complementary to our existing portfolio, as they are generally located in similar retail areas, occupies similar locations in size and have similar economic profiles.
Over the long term, our goal remains to focus on acquiring high-quality real estate to partner with tenants who share our commitment to the growth and evolution of the convenience and gas and other automotive businesses.
Turning to our redevelopment program, rent commenced on four projects during 2019. These projects included new-to-industry convenience and gas, as well as other retail users. This brings our total completed redevelopments to 13 since commencing this program. As this platform matures, we expect to have a steady stream of completed projects on an annual basis, while also maintaining a pipeline of additional opportunities, which will move through the development progress over time.
Utilizing the financial flexibility that we've worked hard to create, we were able to finance our growth in 2019 with a combination of debt and selective equity, including our September $125 million 10-year unsecured debt private placement and measured use of our ATM program. We place a premium on being conservatively leveraged and are committed to maintaining a well-laddered and flexible capital structure as we look to grow the company.
Looking ahead, we remain committed to an active approach to managing our portfolio of net leased assets, expanding our portfolio through acquisitions, as well as selective redevelopment program -- projects. We are confident that we will be able to continue to successfully execute on our strategic objectives throughout 2020. This approach and focus on these critical components should result in driving additional shareholder value as we move through this year and beyond. With that I will turn the call over to Mark Olear to discuss our portfolio and investment activities.
Mark J. Olear -- Executive Vice President and Chief Operating Officer
Thank you, Chris. In terms of our investment activities, we had a productive fourth quarter in which we were able to invest $43.8 million in 13 high-quality, convenience and gas and other auto-related assets. When combined with our acquisition activities from earlier in the year, in total, we acquired 27 properties for $87.2 million. Staying on acquisitions, during 2019, Getty's underwriting of potential transactions grew, as we added resources to focus on convenience and gas opportunities and made additional inroads in other automotive categories.
For the year, we reviewed approximately $1.5 billion of opportunities, which met our initial screening process. Convenience and gas opportunities represented 63% and other automotive represented 37% of the total. As we have mentioned in prior calls, we remain highly committed to growing our portfolio in the convenience and gas sector. With that said, we view the categories of car wash and automotive services as highly complementary to our portfolio as these property type share many similar attributes. Going forward, we anticipate growing both areas of our underwriting platform and added resources to support our expanded efforts.
To review a few highlights of our investment activities, for the fourth quarter, we acquired five convenience and gas locations in individual transactions for $15.7 million, and eight car wash properties for $28.1 million. In aggregate, the return for the sites acquired during the fourth quarter was in line with the remainder of our 2019 activity and broader historical pricing, having a weighted average initial return of 7.2%. Finally, the weighted average initial lease term for the properties acquired in this quarter was 13.6 years.
For the year, we further advanced our goal of diversifying our revenue by expanding our relationships with Circle K, Irving Oil and Kum & Go and entering into new relationships with two of the fastest growing express car wash operators in the U.S., Zips and GO Car Wash. Our transaction activity in the quarter and year further expand our geographic reach and remain centered around major metropolitan markets including the Los Angeles and Las Vegas MSAs. The net result is that we are now represented in 33 states plus Washington DC and 57% of our annualized base rent comes from the top-25 national MSAs.
Additionally, after the quarter ended, we closed on the acquisition of 11 properties for $53.4 million. All of these sites are car wash facilities and are subject to 15-year triple net leases with Zips and GO Car Wash.
Overall, our team remains busy sourcing and underwriting potential investments and we continue to feel strongly that the volume of opportunities we are underwriting will produce additional growth as we progress throughout the year.
Moving to our redevelopment platform, for the year, we invested approximately $2.4 million in, both our completed projects and sites which are in progress. In the fourth quarter, we returned one redevelopment project back into the triple net lease portfolio, bringing our total for completed rent commenced projects to four in 2019 and 13 since the inception of this initiative. Specifically, in December, rent commenced on a project where we ground leased a site to a retail developer for a retail use. In this project, we invested $0.4 million and we expect to generate a return on our investment of more than 30%. In terms of redevelopment projects, we ended the quarter with 14 signed leases or letters of intent, which include five active projects and seven signed leases on properties, which are currently subject to triple net leases but which have not yet been recaptured from the current tenants, and signed letters of intent on two vacant properties. All of these projects are continuing to advance through the redevelopment process. We expect, substantially, all of these projects will be completed over the next one to three years. In total, we have invested approximately $2.8 million in the 14 redevelopment projects in our pipeline and we expect the rent commencement at several sites during 2020.
On the capital spending side, we estimate that fourth -- that these 14 projects will require total investment by Getty of $10.3 million and will generate incremental returns to the company in excess of where we can invest these funds in the acquisition market today. For more detailed information on the redevelopment pipeline, please refer to page 14 of our investor presentation, which can be found on our website.
We remain committed to optimizing our portfolio and continue to anticipate redevelopment opportunities over the next five years, possibly involving between 5% and 10% of our current portfolio, with targeted unlevered redevelopment program yields greater than 10%.
Turning to disposition, we sold nine properties during 2019, realizing proceeds of approximately $2.7 million. The properties sold were vacant or returned to us by tenants for the terms of the lease agreements. We expect the net financial impact of these dispositions will be minimal. In addition, during the year, we exited five properties, which we previously leased from third-party landlords.
As we look ahead, we continue to selectively dispose off properties where we have made the determination that the property is no longer competitive at the CNG location and does not have redevelopment potential. As a result of all of our activity, we ended the year with 931 net lease properties, five active redevelopment sites and nine vacant properties. Our weighted average lease term is approximately 10 years and our overall occupancy, excluding active redevelopments, remains consistent at 99%. With that I'll turn the call over to Danion.
Danion Fielding -- Chief Financial Officer and Treasurer
Thank you, Mark. For the fourth quarter, our total revenues were $35.9 million, an increase of 2.4% over the prior year's quarter. And our rental income, which excludes tenant reimbursements and interest on notes and mortgage receivables grew 4.3% to $30.7 million. Our growth in rental income continues to be driven by our rent escalators and our leases plus incremental growth from completed acquisition and redevelopment projects. It should be noted that due to the timing of our acquisition activity in 2019, and weighted toward the end of the year, we expect to realize full quarterly revenue contribution to these acquisitions beginning in Q1 of 2020.
During the fourth quarter of 2019, we incurred one-time costs related to our decision to proactively terminate a redevelopment project and higher than projected legal fees related to certain of our environmental litigation, where we are nearing settlement. For more information on specific expense movements, please refer to yesterday's earnings release.
Our FFO for the quarter was $21.2 million or $0.51 per share as compared to $20.3 million or $0.49 per share for the prior year's quarter. Our AFFO for the quarter was $18 million or $0.43 per share as compared to $17.6 million or $0.43 per share for the prior year's quarter. For the year ended 2019, our total revenues and our rental income, which includes tenant reimbursement and interest on notes and mortgage receivables grew by 3.3% to $140.7 million and 3.4% to $120.3 million, respectively. Again, this growth stems from the escalators in our net leases and successful execution of both acquisitions and redevelopment.
For the year ended 2019, our operating expenses increased, the primary driver for the increases was professional fees and other redevelopment costs included in property costs and increases in our environmental expense line item, which continue to be highly variable. Our FFO for the year was $77.8 million or $1.86 per share as compared to $73.6 million or $1.80 per share for the prior year. Our AFFO, for the year was $71.8 million or $1.73 per share as compared to $69.7 million or $1.71 per share for the prior year.
Turning to the balance sheet and our capital markets activities, we ended 2019 with $470 million of borrowings, which includes $20 million under our credit agreement and $450 million of long term fixed rate debt. Our weighted average borrowing cost is 4.9%. The weighted average maturity of our debt is 5.8 years and 96% of our debt is fixed rate and our earliest debt maturity remains 2021. Our debt to total capitalization covenant stands at 27%, our debt to total asset value is 41% and our net debt to EBITDA is a conservative 4.4 times.
In addition, we utilized our at-the-market equity program during the quarter and issued $5.5 million of capital at an average price of $33.04 per share. For the year, we raised $14.5 million through our ATM program at an average price of $32.29 per share. Our environmental liability ended the quarter and year at $50.7 million, down $9.1 million for the year. For the quarter and year ended December 31, 2018, the company's net environmental remediation spending was approximately $2.3 million and $7.5 million, respectively.
Finally, we are introducing our 2020 AFFO per share guidance at a range of $1.75 to $1.80 per share. Our guidance includes all transaction activity as of this date, but does not assume any potential future acquisitions or capital markets activities for the remainder of 2020, although it does reflect our expectations that we will continue to execute on our redevelopment, leasing and disposition activity. Specific factors, which impacts our guidance this year include our expectation that we will forego rent when we recapture properties for redevelopment, our expectation that our cost of borrowings will increase in 2020, the full year impact of the dilution associated with the company's 2019 capital raising activities and our expectation that we will remain active in pursuing acquisitions and redevelopments, which could result in additional expenses for deals ultimately not completed. With that, I will turn the call back to Chris.
Christopher J. Constant -- President and Chief Executive Officer
Thank you. That concludes our prepared remarks. So let me ask the operator to open the call for questions.
Questions and Answers:
Operator
Thank you. Ladies and gentlemen we will now be conducting the question and answer session. [Operator Instructions] Our first question comes from Nikita Bely with J.P. Morgan. Please proceed with your question.
Nikita Bely -- J.P. Morgan -- Analyst
Good morning, guys. What's embedded in your 2020 guidance for environment, of course and G&A?
Christopher J. Constant -- President and Chief Executive Officer
Our overall AFFO guidance is $1.75 to $1.80. We typically don't provide any sort of additional breakdown other than, I would say, that we don't expect anything to materially change year-over-year from 2019.
Nikita Bely -- J.P. Morgan -- Analyst
And on the pipeline that you guys are looking at right now, so you mentioned in 2019, your split between the C stores and auto was kind of 60-40. Do you plan to maintain that split or it sounds like maybe you will be doing a little bit more of auto in terms of just percentage split of your total deal flow?
Christopher J. Constant -- President and Chief Executive Officer
Yeah, I think our view is we're continuing to underwrite convenience and gas opportunities as well as the other automotive opportunities and where we feel there is a right opportunity for us, we're planning on acting on that. So, we're not targeting any specific split at any given year. But really, what we think we have is, we have two areas that we're comfortable underwriting, are comfortable investing in, and growing both aspects of our portfolio. But there's really no shift or target specific number that we have either asset class.
Nikita Bely -- J.P. Morgan -- Analyst
And just curious that the acquisition volume obviously has picked up since the recent times, recent quarters and 4Q and year-to-date. Can you give us a little bit of understanding of why that is? I mean, is it because of the pricing? Is it just the timing factor or is it the type of deal that you were looking at, that came through?
Mark J. Olear -- Executive Vice President and Chief Operating Officer
This is Mark Olear. Yeah, it's more a factor of just the timing of the transactions as we progressed through 2019.
Nikita Bely -- J.P. Morgan -- Analyst
So basically, what you're saying is, we shouldn't extrapolate deal flow from your 4Q and 1Q into the future, if we were to make an assumption.
Mark J. Olear -- Executive Vice President and Chief Operating Officer
Yeah, I mean, our transaction activity historically has been lumpier. We are underwriting a significant amount every year. And we hope to be more consistent over time, but I think it's -- we're not going to make any comment on -- for recurring level on any given quarter.
Nikita Bely -- J.P. Morgan -- Analyst
Right. And last question on tenant credit watchlist. Any comments on that?
Mark J. Olear -- Executive Vice President and Chief Operating Officer
We maintain a process here to monitor our -- not only the health of our tenants, but also to review the coverages of our individual assets. We do have a property specific watchlist, which we've spoken to people about in the past and there's really nothing of note that's worthy to bring up on the call.
Nikita Bely -- J.P. Morgan -- Analyst
Okay. Thank you very much.
Operator
Thank you. Our next question comes from John Massocca with Ladenburg Thalmann. Please proceed with your question.
John Massocca -- Ladenburg Thalmann -- Analyst
Good morning.
Christopher J. Constant -- President and Chief Executive Officer
Hi, John.
John Massocca -- Ladenburg Thalmann -- Analyst
So, I was wondering, maybe you could provide a little color on how you kind of source the transactions during the quarter and subsequent quarter end, both the car wash deals and the C store transactions?
Christopher J. Constant -- President and Chief Executive Officer
Sure. Well, first off, every transaction is a little different. So, some have a velocity that moves along much faster and some takes more time and, I'll let Mark answer maybe more specifically, but within the CNG sector, because of our relationships and because of the history we routinely afford the opportunity to look at deals, we're very active in sourcing in that market and I think as we get more experience and have more of a presence in the other automotive sectors, we're starting to see that same trend accelerate. Bur I'd like Mark to comment particularly...
Mark J. Olear -- Executive Vice President and Chief Operating Officer
Just regarding sourcing, it's just a continued commitment to what we've been doing in the past. We've grown some internal resources dedicated to business development, it's direct outreach to tenants that we have researched, that are growing in the various sectors, it's following up with our existing growing relationships with our existing tenant base, widely marketed brokered deals or sponsored deals, trade shows, the standard just commitment to sourcing new opportunities that we've been doing for the last few years and just staying on top of that.
John Massocca -- Ladenburg Thalmann -- Analyst
Okay. I mean, in just 4Q and 1Q, I mean, how many transactions was kind of implied in that acquisition activity?
Christopher J. Constant -- President and Chief Executive Officer
Well, in the fourth quarter, it was one portfolio sale leaseback in non-individual transactions. And in the beginning of this year, it's one portfolio sale leaseback and one individual transaction.
John Massocca -- Ladenburg Thalmann -- Analyst
Okay, that makes sense. And then you guys mentioned on your -- in your prepared remarks that one development deal was kind of removed from the pipeline. Can you maybe provide a little more color on that?
Christopher J. Constant -- President and Chief Executive Officer
Yes. As the development program -- the entire portfolio of the development program proceeds through the development entitlement process. There are deals that will not achieve the required entitlements or permits to put into development and we make a strategic decision to terminate those efforts and focus on the rest of the pipeline. So it's -- there are deals at risk that we make decisions to just terminate the activity on.
John Massocca -- Ladenburg Thalmann -- Analyst
And when that progress is kind of terminated, I mean, does that go back to being kind of an original C store asset or do you need to kind of find an alternative solution for the property?
Christopher J. Constant -- President and Chief Executive Officer
It's different, each property, if it's in a net lease portfolios, it's like we stay there. If it's a vacant property, we continue to work on the best and highest strategic plan on the property level. So it really depends on where it currently is, where it comes from and the various buckets of our -- of the portfolio. So it's not a one -size-fits-all answer there. It's kind of the right decision for each property.
John Massocca -- Ladenburg Thalmann -- Analyst
Okay. And then on the balance sheet, I know it's still decently far out, but is there any potential to maybe prepay the $100 million private placement note that's going to be churned in 2021, particularly given, kind of, where interest rates are today?
Danion Fielding -- Chief Financial Officer and Treasurer
John, it's Danion here. On those notes, they're all make-whole provisions in that. So we have to do the analysis to look at where issuance costs are relative to that, obviously that is something that is at the top of our mind as we progress during the year. And so you'll probably hear from us, later this year, on that.
John Massocca -- Ladenburg Thalmann -- Analyst
Okay, that's it for me. Thank you very much.
Christopher J. Constant -- President and Chief Executive Officer
Sure.
Operator
Thank you. Our next question comes from Craig Mailman with KeyBanc Capital Markets. Please proceed with your question.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
Hey, guys. I know we talked a bit last year, car washes or something you guys were more interested in, but pricing was a little bit tougher. Could you just talk about what has made you guys a little bit more competitive to kind of get the deals in 4Q and 1Q here so far?
Christopher J. Constant -- President and Chief Executive Officer
Well, I think the market continues to be competitive. I think some of it is relationship-driven. I think some of it is where we're targeting in terms of various MSAs. But I don't think anything's really changed in the overall competitive dynamic. And I think all -- both of the parties we mentioned, i'm sure, have multiple relationships across institutional real estate companies and will be competing in the future.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
What was the yield that you guys got on the 2020 acquisitions?
Christopher J. Constant -- President and Chief Executive Officer
Yeah, the yields are very similar to where we've been talking about, Craig. So -- but we've always said is, the market where we're looking at is really kind of high-6s to mid-7. So, think 6.75% to 7.5%, and nothing's really deviated from that overall.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
And then, pro forma, the 1Q deals. Kind of how much capital do you guys think you can deploy and remain within your leverage targets?
Christopher J. Constant -- President and Chief Executive Officer
Well, some of that depends on our ability to issue on the ATM if we choose to use that product, but we certainly have ample capacity remaining under the line. And if you look at kind of our activity pace over the last couple of years, take, maybe an average of that, I think we feel we've got ample capacity to continue to grow at that same rate. And obviously, we got the ability to issue under the ATM and, given wherever the stock price may be, it would only add to that.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
Okay, great. Thank you.
Christopher J. Constant -- President and Chief Executive Officer
But Craig, just to be clear, I mean, there is no plan for us to materially deviate from where our leverage has been over the last several years. We maintain a historical leverage profile and there is no real plan to deviate from that.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
Right. No, I was just trying to get at, how much you could deploy before you would need to do a bigger equity raise, if a portfolio came about. Like what -- is it $100 million, $150 million that you guys feel comfortable putting out the door before you would need substantial equity?
Christopher J. Constant -- President and Chief Executive Officer
I mean, I think we've got well north of $200 million available under the revolver, and obviously we do have the ATM program which would somewhat mitigate our need to go do a larger equity deal if there were a large portfolio. So -- but again, we look at -- we've done larger equity deals, we look at all of our sources of capital as we kind of look to grow the business. So, I think there is -- in our minds, it's the right tool for each type of transaction that's out there.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
Great, thanks.
Operator
Thank you. At this time we have no further questions. So I'd like to return back to Mr. Constant for any closure or further remarks.
Christopher J. Constant -- President and Chief Executive Officer
Well, first off, thanks everybody for being on the call today. We look forward to getting back on the call with everybody at the end of the first quarter of 2020, at the end of April. Again, I appreciate your interest in Getty Realty.
Operator
[Operator Closing Remarks]
Duration: 31 minutes
Call participants:
Joshua Dicker -- Executive Vice President, General Counsel and Secretary
Christopher J. Constant -- President and Chief Executive Officer
Mark J. Olear -- Executive Vice President and Chief Operating Officer
Danion Fielding -- Chief Financial Officer and Treasurer
Nikita Bely -- J.P. Morgan -- Analyst
John Massocca -- Ladenburg Thalmann -- Analyst
Craig Mailman -- KeyBanc Capital Markets -- Analyst
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