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Presentation

Operator: Good morning, and welcome to Getty Realty’s Earnings Conference Call for the Fourth Quarter 2022. This call is being recorded. After the presentation, there will be an opportunity to ask questions. Prior to starting the call, Joshua Dicker, Executive Vice President, General Counsel and Secretary of the company, will read a Safe Harbor statement and provide information about non-GAAP financial measures. Please go ahead, Mr. Dicker.

Joshua Dicker: 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, 2022. The Form 8-K and earnings release are available in the Investor Relations section of our website at gettyrealty.com. Certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to trends, events and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

Examples of forward-looking statements include our 2023 guidance and may also include statements made by management in their remarks and in response to questions, including regarding the company’s future company operations, future financial performance and the company’s acquisition or redevelopment plans and opportunities. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. I refer you to the company’s annual report on Form 10-K for the year ended December 31, 2021, and our subsequent filings made with the SEC for a more detailed discussion of the risks and other factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

You should not place undue reliance on forward-looking statements, which reflect our view only as of the date hereof. The company undertakes no duty to update any forward-looking statements that may be made in the course of this call. Also, please refer to our earnings release for a discussion of our use of non-GAAP financial measures including our updated definition of adjusted funds from operations, or AFFO, and our reconciliation of those measures to net earnings. With that, let me turn the call over to Christopher Constant, our Chief Executive Officer.

Christopher Constant: Thank you, Josh. Good morning, everyone, and welcome to our earnings call for the fourth quarter and full year 2022. Joining us on the call today are Mark Olear, our Chief Operating Officer; and Brian Dickman, our Chief Financial Officer. I will lead off today’s call by providing commentary on our financial results and investment activities for both the fourth quarter and the full year ended December 31. I will also discuss the company’s strong position heading into 2023. And as usual, Mark will then take you through our portfolio, and Brian will further discuss our financial results and guidance. 2022 was a unique, but successful year for Getty Realty. Our financial results exceeded the high end of our guidance range and we continue to make progress towards 2 of our other key objectives, which are to grow and further diversify our portfolio.

Beyond being proud of our overall accomplishments, I am particularly pleased that the team at Getty remained disciplined throughout the year as we work through volatile capital markets and a transaction market that was slow to adapt. That patience was rewarded as we ended the year with a very active and successful fourth quarter. For the year and quarter, our base rental income grew 6% and 7.5%, respectively, and our adjusted funds from operations or AFFO per share increased 1.9% and 2.9%, respectively. For the year, we invested $157.5 million in 52 properties, including more than $83 million in the fourth quarter. Our investments in 2022 reflect our continued emphasis on diversifying our portfolio by property type, geography and tenant, as we leverage our expertise to invest in high quality real estate across convenience and automotive retail sectors.

In 2022, more than 70% of our investments were property types other than convenience stores, including express car washes, auto service centers and drive-thru quick service restaurants. We also expanded our presence in a number of attractive high growth metro areas, including Austin, Charleston, Charlotte, Las Vegas and San Antonio, and continue to expand our tenant roster through both our acquisitions and redevelopment programs. In 2022, we increased our activity with refuel a high growth C-store operator, and GO car wash and Splash car wash, 2 of the best and largest operators in the business, and we look forward to continue to expand with these brands in 2023. We also completed redevelopment projects throughout the year and added Chase Bank and Murphy USA as tenants by completing value-added projects in the Boston and Dallas-Fort Worth MSAs. As we look ahead, we are excited about our committed investment pipeline of more than $110 million.

But the acquisition development of new-to-industry convenience stores, auto centers, and car wash properties, which we expect to fund over the next approximately 12 months. Equally important, our proactive capital raising activities in 2022 will enable us to accretively fund these transactions, while maintaining our conservative leverage profile. Supported by our strong financial position, our team continues to underwrite opportunities across our target asset classes. Our discipline strategy continues to emphasize owning high quality real estate in major metro areas and partnering with growing regional and national operators across the convenience and automotive retail sectors. Our knowledge of these sectors in which we invest, our underwriting expertise and our deep-industry relationships continue to drive an increasing set of transaction opportunities for Getty.

To these points, we are confident in our ability to continue executing on our investment strategy into grow and further diversify our portfolio. Lastly, I want to thank the dedicated team at Getty for their outstanding efforts in 2022, and their enthusiasm to start 2023. I believe, we are poised for continued success through this experience team, our solid balance sheet and our differentiated investment strategy. Our focus on providing real estate financing solutions to the convenience and automotive retail sectors combined with our funded investment pipeline, and this has positioned us well for success in 2023 and beyond. With that, I’ll turn the call over to Mark to discuss our portfolio and investment activities.

Mark Olear: Thank you, Chris. As of the end of the year, our occupied portfolio included 1,034 net lease properties, and 3 active redevelopment sites. Our weighted average lease term was 8.8 years and our overall occupancy, excluding active redevelopment increased to 99.8%. Our portfolio spans 38 states plus Washington, D.C. with 65% of our annualized base rent coming from top 50 MSAs and 83% coming from top 100 MSAs. Our rents are well covered with the trailing 12-month tenant rent coverage ratio of 2.7 times. We have invested in our platform to accelerate our growth and we are starting to see returns on these investments in our people processes and systems as we experienced a significant increase in the volume and diversity of potential transactions that we underwrote in 2022.

For the year, we evaluated a record $6.4 billion of opportunities to acquire freestanding convenience and automotive retail real estate. Convenience store has represented approximately 58% of our underwriting with the remaining 42% being focused on other convenience and automotive retail property types. In terms of our investment activities, we had a very strong quarter in which we acquired were provided development funding for 36 properties totaling $83.3 million, bringing our full year totals to 52 properties and $157.5 million. I like to this quarters’ investments include the acquisition of 6 convenience stores located in Las Vegas MSA for $35.7 million; 13 auto service centers located primarily in the Charlotte MSA for $21.2 million; 3 car wash properties located in Austin, Las Vegas and San Antonio MSAs for $12.4 million; and 1 drive-thru QSR located in the Charlotte MSA for $3 million.

In addition, we’ve provided approximately $9.3 million, including accrued interest for the development of 12 new-to-industry properties, including convenience stores in Charleston and Austin MSAs, and car wash properties in Jacksonville, New Haven, Newburgh, Raleigh and Richmond MSAs. As part of these funding transactions, we will accrue interest on our investments during the construction phase of the project and will acquire the properties via sale-leaseback upon completion and final funding. For the fourth quarter, the aggregate initial cash yield on our investment activity was approximately 6.9%, and the weighted average lease term for acquired properties was 17.3 years. For the year ended 2022, we acquired 40 properties for $137 million, with the weighted average initial lease term of 16.2 years, and aggregate initial cash yield of approximately 6.8%.

In addition, we advanced $20.2 million of construction loans for new-to-industry developments, which recurring interest at 6.9%. Subsequent to year-end, we invested $5.6 million for the development and acquisition of 6 car wash properties located in various markets across the U.S. Looking ahead regarding the $110 million of commitments to fund acquisitions and developments that Chris referenced, we expect to fund these transactions throughout the next approximate 12 months on an average initial yield of between 10 and 20 basis points in excess of where we closed acquisitions in 2022. We continue to evaluate underwrite a variety of potential investment opportunities across our target asset classes. Pricing for retail properties is moving and we believe the market continues to adjust to reflect the changing economic landscape and tighter credit markets.

We are pleased that we are sourcing the vast majority of these activities or , and we believe we are well positioned to invest accretively as we move through 2023. Moving to our redevelopment platform, during the quarter we invested approximately $140,000 in projects which are in various stages in our pipeline. We completed 1 redevelopment project, where rent commenced on a new convenience store in the Dallas-Fort Worth MSA, which is leased to Murphy USA. We invested in this project and generated return on invested capital of 28%. We ended the quarter with 6 signed leases, which includes 3 active projects and 3 projects and properties that are currently subject to triple net leases and have not yet been recaptured from the current tenant.

The company expects rent to commence at these and other projects over the next couple of years, including in 2023. Turning to our asset management activities for the fourth quarter, we sold 5 properties realizing $13 million in gross proceeds and exited 1 leased property. For the year, we sold 24 properties realizing $26 million in gross proceeds and exited 5 leased properties. We will continue to pursue dispositions of non-core properties that we have determined are no longer competitive in their current format do not have compelling redevelopment potential, or which we believe have attractive valuations that may allow us to recycle capital as part of managing our balance sheet and sources of capital. With that, I turn the call over to Brian to discuss our financial results.

Brian Dickman: Thanks, Mark. Good morning, everyone. Last night, we reported AFFO per share of $0.55 for Q4 2022, representing an increase of 1.9% versus $0.54 per share we reported in Q4 2021. FFO and net income for the fourth quarter were $0.63 and $0.57 per share, respectively. For the full year 2022, AFFO per share was $2.14, representing an increase of 2.9% versus the $2.08 per share we reported in 2021. FFO and net income for 2022 were $2.44 and $1.88 per share, respectively. Our total revenues were $43.1 million for the fourth quarter and $165.6 million for the year, representing year-over-year growth of 9.6% and 6.6%, respectively. Base rental income, which excludes tenant reimbursements, GAAP revenue adjustments and any additional rent, grew 6% to $37.8 million in the fourth quarter and 7.5% to $147.8 million in 2022.

Strong acquisition activity over the last 12 months and recurring rent escalators and our leases were the primary drivers of the increase with additional contribution from rent commencements at completed redevelopment projects. On the expense side, G&A costs increased 7.5% to $5.2 million in the fourth quarter, and only 2.3% to $20.6 million for the year as we were able to manage overhead relatively well during 2022. Increased G&A has been driven primarily by employee-related expenses, including stock-based compensation. Property costs increased in the fourth quarter, primarily due to increases in reimbursable expenses for taxes and other municipal charges. Property costs decreased for the full year due to lower rent expense and non-reimbursable expenses as we continue to exit lease sites and sell or redevelop other legacy properties.

This decrease was partially offset by higher costs associated with our redevelopment program, specifically increased demolition costs for active projects, which runs through property costs on our P&L. Environmental expenses, which are highly variable due to a number of estimates and non-cash adjustments declined to a credit of $5.5 million for the quarter and a credit of $20.9 million for the year. The reduction in both periods versus 2021 was primarily due to our estimates related to unknown environmental liabilities. Specifically, during the quarter and year, we concluded that there was no material continued risk of having to satisfy obligations relating to pre-existing unknown environmental contamination at certain properties. And accordingly, we removed $6.4 million and $23.5 million, respectively, of unknown reserve liabilities which had previously been accrued for these properties.

Turning to the balance sheet and our capital markets activities, we ended the year with $695 million of total debt outstanding, consisting primarily of $625 million of senior unsecured notes with a weighted average interest rate of 4.1% and a weighted average maturity of 6.1 years. We also had $70 million borrowed under our revolving credit facility at year end. As of December 31, net debt-to-EBITDA was 5.1 times and total debt to total capitalization was 31%, while total indebtedness to total asset value calculated pursuant to our credit agreement was 38%. Taking into account unsettled forward equity of approximately $115 million, net debt-to-EBITDA was 4.2 times at the end of the year. Subsequent to quarter end, we closed on our previously announced unsecured notes offering raising $125 million at 3.65% and maturing in January 2033.

We use the proceeds to repay in full $75 million of unsecured notes maturing in June of this year, and to reduce amounts outstanding on our revolving credit facility. Pro forma for this transaction, we had $675 million of senior unsecured notes outstanding with a weighted average interest rate of 3.9% and a weighted average maturity of approximately 7.5 years. Moving to our ATM program, during the quarter, we entered into forward sale agreements to sell 3 million shares, which will generate anticipated gross proceeds of $96.1 million. For the year, we entered into forward sale agreements to sell 3.7 million shares for anticipated gross proceeds of $117.6 million. To date, no shares subject to forward sale agreements have been settled. Returning to our $110 million committed investment pipeline, just want to emphasize that these transactions are fully funded through our unsettled forward equity agreements.

And we have additional liquidity beyond that from certain assets that are under contract for sale, cash and 1031 proceeds on our balance sheet, and our revolving credit facility. Pro forma for this investment in capital activity, we expect our balance sheet to remain well positioned to support continued growth. Leverage is expected to remain in line with our target range of 4.5 to 5.5 times net debt-to-EBITDA, and we expect to maintain ample capacity under our revolver. As our investment pipeline evolves, we will continue to evaluate all capital sources to ensure that we’re funding transactions in an accretive manner, while maintaining our investment-grade profile. With respect to our environmental liability, we ended the year at $23.2 million, which was a reduction of $24.4 million from the end of 2021.

The primary driver of the improvement was the removal of $23.5 million of unknown reserve liabilities as discussed earlier. As a reminder, these reserves were related to legacy properties, where we retain the responsibility to clean-up pre-existing unknown environmental contamination that was discovered during defined look-back periods, which expired during 2022. We concluded that there was no material continued risk of having to satisfy contractual obligations at these properties and accordingly removed the unknown reserve liabilities, which had previously been accrued. Our net environmental remediation spending in the fourth quarter was approximately $1.1 million, and for the full year it was approximately $4.3 million. Lastly, we are reaffirming our 2023 AFFO guidance of $2.19 to $2.21 per share, which we introduced earlier this year.

As a reminder, our outlook includes transaction activity to date, but does not otherwise assume any potential acquisitions, dispositions, or capital markets activities for the remainder of 2023. Specific factors which continue to impact our AFFO guidance this year, include variability with respect to certain operating expenses and deal pursue costs, and approximately $400,000 of anticipated demolition costs for redevelopment projects, which costs run through our P&L. With that, I’ll ask the operator to open the call for questions.

Operator: Thank you. We will now be conducting a question-and-answer session. We have a first question from the line of Brad Heffern with RBC Capital Markets. Please go ahead.

Brad Heffern: Good morning. So the development funding pipeline, obviously, expanded significantly last year, and it seems like you’ve been able to keep that at a relatively consistent level since then. I’m curious if that’s the way that you expect the business to run from here on out. Or is it really just the environment that we’re in where construction loan availability isn’t there in the traditional way?

Christopher Constant: Yeah, I think going forward we expect to see a mix of what I’ll call traditional sale-leaseback, which is the company’s core product along with the development funding. We view it as 2 products to offer tenants or potential partners, who are looking at how they grow their businesses. So they’re looking at acquisitions, sale-leaseback works there, and looking to growth for new store development, we have a product that can help them facilitate that as well. So, really we view it as 2 lines of investment activity for Getty, and we expect that to continue.

Brad Heffern: Okay. Got it. And then, Brian, just a clarification on the guidance. I know you typically don’t include things that haven’t closed yet, but I’m curious for like the $110 million pipeline, I would assume some of that is under contract, or at least firmed up on like the development funding side, it just hasn’t been funded yet. So I’m curious like is any of that $110 million in the guidance, or is it all excluded?

Brian Dickman: Yeah. Thanks, Brad. So, just to be clear, when we talked about our investment pipeline that is all under contract. We do have other deals under LOI, pending LOI, shadow pipeline, and all the rest of the activity, so that is under contract. And really just to be consistent with how we’ve historically provided guidance, we do not include any of that in the guidance we’ve put forward. So none of the under contract activity, nor do we include any settlement of forward equity. So we’ve tried to be very consistent over time, as we’ve enhanced some of our disclosure around pipeline, but keeping the guidance to really a run rate number as a point of time.

Brad Heffern: Okay. And then, I think, probably also for you, Brian, can you talk about how you see the funding for the year playing out? And where would you peg the cost of debt, incremental cost of debt as we sit here today?

Brian Dickman: Yeah, it’s a good question. Similar to some of our peers, I guess, I’ll hit the last question first, and it does depend on the day, but our debt and equity costs are relatively on top of each other. Again, it depends where the stocks trading, and where rates are, but somewhere in that mid-6% area plus or minus, again, depending on the day. So when you look at that, I think, again, not dissimilar to some of our peers. We’re really thinking about how we utilize different funding sources, when it makes sense to take on and lock in additional permanent debt. We do have capacity from a leverage perspective. But, I think, as we sit here point in time today, we have the forward equity agreement, we have some of the other capital sources I mentioned, we have significant capacity under the line and leverage that low.

So I would really look to those as source of capital to fund the activity that we have visibility into. And, of course, we’ll look elsewhere as the investment pipeline evolves, but that’s what we’re looking at today, Brad.

Brad Heffern: Okay. Thank you.

Operator: Thank you. We’ll take the next question from the line of Josh Dennerlein with Bank of America. Please go ahead.

Unidentified Analyst: Hi, this is on for Josh Dennerlein. I quickly just wanted to point on the shares outstanding. Can you just provide some color on what’s the timing in the funding of that, I think of it was $110 million acquisitions on a contract?

Christopher Constant: Yeah, I’ll give you 2 perspectives on it. I’ll make sure understand the question is that you go hand-in-hand that $110 million is predominantly development funding today that does vary by quarter, again, depending on what we have under contract. We expect that as we stated to be deployed over roughly the next 12 months, I would think of that as a little bit more back ended, just from what we’ve seen the nature of the products, the cadence of the development. So I would lean towards a back-end awaiting, but we’ll be funding throughout that next year. And we will utilize our revolver and settling the forward equity as we manage our balance sheet sources of capital, leverage, utilization on the revolver, et cetera, over that year to fund those investments.

Unidentified Analyst: Great. Thank you.

Operator: Thank you. We’ll take the next question from the line of Mitch Germain with JMP Securities. Please go ahead.

Mitch Germain: Yeah, good morning. So, Brian, just to that point on guidance, is it the goal to just update it per quarter as the year materializes?

Brian Dickman: Yeah, Mitch, that’s what we’ve been doing for €“ as far back certainly as I know a couple years and I think before then. We’re always open to conversations with analysts such as yourself investors, if we can improve, the disclosure to ensure that we’re articulating our activity and our plans appropriately. But that’s worked well for us, I think, in the past and in certainly in the environment we’re in even though we do have some visibility. We continue to think that makes sense. So, yeah, that should be the expectation.

Mitch Germain: Great. Great. And then, I know you bought that was only one QSR. But, is €“ kind of how was that strategy materializing with you guys? Are you putting any investment behind trying to grow that part of your portfolio?

Mark Olear: Yeah, Mitch, this is Mark. Yes. The answer is yes. We’ve dedicated some resources in that asset vertical to try and create some momentum as we’ve done. If you think years back, where we’ve entered the car wash space from kind of a flat foot start to a very healthy program, we hope to get that same momentum and all our assets that we are targeting. So we’ve gotten some dedicated resources, we’re attacking that as we €“ where we do the other asset verticals with business development trade shows, business relationship management. And, we hope to see some momentum in balancing out the investments across all the asset classes.

Mitch Germain: Thank you so much.

Christopher Constant: Yeah, Mitch, this is Chris. Just to add on. I think one of the things that appeals to us, right, it’s a natural extension of our underwriting the real estate, generally, same position on the Street, same size, same sort of general investment per unit. So, I think, there’s a lot of logic to extending to our broader what we call convenience in automotive industry asset classes.

Mitch Germain: Thank you.

Operator: Thank you. We’ll take the next question from the line of with Baird. Please go ahead.

Unidentified Analyst: Hi. Quick question for me. Does your 2023 guidance assume any G&A or bad debt? And if so, can you go on?

Christopher Constant: Alex , the second part of your question, G&A and what?

Unidentified Analyst: And bad debt.

Brian Dickman: So no bad debt in the G&A number. But there’s a small amount, excuse me, of a bad debt in the guidance overall. But I would say, it’s de minimis. If you look at our collections over time, including during the pandemic and general health of tenants’ coverage ratios, et cetera, I would call that de minimis. In terms of G&A, absolutely, we do have G&A running through there. We are seeing some increases in G&A both, what I’ll call it the AFFO level, which is G&A. That excludes stock-based compensation as primarily labor inflation, whether it’s our personnel compensation benefits, as we look to retain and reward and invest in our team. But also the flow through of professional services that employ people audit tax legal.

So we are bearing the burden of some of that. And then, in addition, at the P&L level, you will see a material increase as a result of stock-based compensation, which is simply because the stock has performed very well over the last 12 months. And, I think, from when we would have priced last year’s restricted stock awards versus when we do this year, the stock is up 20%, 25%. And that’s really a direct flow through to the G&A line item, as you look at the P&L. Again, we back that out for a little bit, but you’ll see that in the headline number.

Unidentified Analyst: Thank you for that. And if I can ask one more, what do you think the cash G&A part of guidance would be of the stock?

Brian Dickman: Yeah, we’re looking at a project under $17 million, which is up just about $1 million or 7% from what that was in 2022.

Unidentified Analyst: Okay. Thank you.

Operator: Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I’d now like to turn the floor back over to Christopher Constant for closing comments. Over to you, sir.

Christopher Constant: Thank you, operator, and thanks everyone for joining us for our fourth quarter call. We appreciate your interest in Getty and look forward to getting back on with everybody when we report our first quarter of 2023 in late April.

Operator: Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.