EXHIBIT 13
GETTY REALTY CORP. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(in thousands, except per share amounts and number of properties)
<Table>
<Caption>
FOR THE YEARS ENDED FOR THE ELEVEN
DECEMBER 31, MONTHS ENDED
--------------------------------------------------------- DECEMBER 31,
2004 2003 2002 2001 2000(a)
--------- --------- --------- --------- --------------
OPERATING DATA:
Revenues from rental properties $ 66,331 $ 66,601 $ 67,157 $ 68,322 $ 53,916
Earnings before income taxes 39,352 36,887 36,163 32,083 18,950
(Benefit) provision for income taxes -- -- -- (36,648)(b) 7,875
--------- --------- --------- --------- ---------
Net earnings 39,352 36,887 36,163 68,731 11,075
Diluted earnings per common share 1.59 1.49(c) 1.44 3.18 .47
Diluted weighted average common
shares outstanding 24,721 23,082 21,446 16,244 12,818
Cash dividends declared per share:
Preferred -- 1.159 1.866 5.975 (d) 1.775
Common 1.700 1.675 1.650 5.275 (d) .60
FUNDS FROM OPERATIONS (e):
Earnings before income taxes 39,352 36,887 36,163 32,083 18,950
Preferred stock dividends -- (2,538) (5,350) (5,088)(f) (5,098)
--------- --------- --------- --------- ---------
Earnings before income taxes
applicable to common shareholders 39,352 34,349 30,813 26,995 13,852
Depreciation and amortization 7,490 8,411 9,016 9,281 9,196
Gains on sales of real estate (618) (928) (1,153) (990) (1,106)
Cumulative effect of accounting change -- 550 -- -- --
--------- --------- --------- --------- ---------
Funds from operations available to
common shareholders 46,224 42,382 38,676 35,286 21,942
Straight-line rent (4,464) (5,537) (6,728) (8,388) --
--------- --------- --------- --------- ---------
Adjusted funds from
operations available to
common shareholders 41,760 36,845 31,948 26,898 21,942
BALANCE SHEET DATA
(AT END OF PERIOD):
Real estate before accumulated
depreciation and amortization 346,590 318,222 308,054 311,352 313,037
Total assets 290,728 272,003 282,491 288,188 255,725
Total debt 24,509 844 923 997 49,969
Shareholders' equity 225,503 228,025 233,426 237,773 128,099
========= ========= ========= ========= =========
NUMBER OF PROPERTIES:
Owned 795 772 739 744 753
Leased 250 256 310 335 344
--------- --------- --------- --------- ---------
Total properties 1,045 1,028 1,049 1,079 1,097
--------- --------- --------- --------- ---------
</Table>
- ----------
(a) The Company's fiscal year end changed to December 31 from January 31,
effective December 31, 2000.
(b) Represents a tax benefit due to the reversal of previously accrued
income taxes that the Company would no longer be required to pay as a
REIT.
(c) Diluted earnings per common share of $1.51 before the impact of the
cumulative effect of accounting change.
(d) Includes $4.20 and $4.15 per share "earnings and profits" cash
distribution paid on August 2, 2001 to preferred and common
shareholders, respectively.
(e) 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 real estate
investment trusts ("REITs"). FFO is defined by the National
Association of Real Estate Investment Trusts as net earnings before
depreciation and amortization, gains or losses on sales of real
estate, non-FFO items reported in discontinued operations,
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 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 sales and depreciation and amortization.
In our case, however, GAAP net earnings and FFO include the
significant impact of straight-line rent on our recognition of revenue
from rental properties, which largely results from 2% annual rental
increases scheduled under a master lease. In accordance with GAAP, the
aggregate minimum rent due over the initial fifteen year term of the
master lease is recognized on a straight-line basis rather than when
due. As a result, management pays particular attention to AFFO, a
supplemental non-GAAP performance measure that we define as FFO less
straight-line rent. In management's view, AFFO provides a more
accurate depiction of the impact of the scheduled rent increases under
the maser lease than FFO. Neither FFO nor AFFO represent cash
generated from operating activities calculated in accordance with
generally accepted accounting principles and therefore should not be
considered an alternative for GAAP net earnings or as a measure of
liquidity. The provision (benefit) for income taxes has been excluded
in calculating FFO and AFFO in 2001 and 2000 in order make the
comparison to these earlier periods more meaningful.
(f) Excludes $4.20 per share "earnings and profits" cash distribution paid
on August 2, 2001 to preferred shareholders.
-7-
GETTY REALTY CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
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 90% 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. Nearly all of our properties are leased
or sublet to third-party operators who are responsible for the payment of taxes,
maintenance, repair, insurance and other operating expenses and for managing the
actual operations conducted at these properties. Nine hundred forty-nine of our
one thousand forty-five properties are leased on a long-term basis under a
master lease (the "Master Lease") and a coterminous supplemental lease for one
property, (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.
We rely upon revenues from leasing retail motor fuel and convenience store
properties and petroleum distribution terminals, primarily to Marketing, for
substantially all of our revenues (95.5% for the year ended December 31, 2004).
Accordingly, our revenues will be 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. 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, no assurance can be given that Lukoil will 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. This information is not publicly available and the
terms of the Master Lease prohibit us from including this financial information
in our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q or in our
Annual Report to Shareholders. As a result, 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 or before we would have the opportunity to
advise our shareholders of any increased risk of default.
Certain financial and other information concerning Marketing is available
from Dun & Bradstreet and may be accessed by their web site (www.dnbsearch.com)
upon payment of their fee.
If Marketing does not fulfill its monetary obligations to us under the
Marketing Leases, our financial condition and results of operations will be
materially adversely affected. Based on our review of the financial statements
and other financial data Marketing has provided to us to date, we believe that
Marketing has the ability to make its rent payments to us under the Marketing
Leases timely when due.
In August 2003, we called for redemption of all our outstanding preferred
stock. Prior to the September 24, 2003 redemption date, shareholders with 98% of
the preferred stock exercised their right to convert their shares of preferred
stock into 3.2 million shares of common stock. The remaining shares of
outstanding preferred stock were redeemed for an aggregate amount, including
accrued dividends through the call date, of $1.2 million.
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
-8-
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 performance of REITs. FFO is defined by the National Association of Real
Estate Investment Trusts as net earnings before depreciation and amortization,
gains or losses on sales of real estate, non-FFO items reported in discontinued
operations, 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 sales and depreciation and amortization. In our
case, however, GAAP net earnings and FFO include the significant impact of
straight-line rent on our recognition of revenues from rental properties, which
largely results from 2% annual rental increases scheduled under the Master
Lease. In accordance with GAAP, the aggregate minimum rent due over the initial
fifteen-year term of the Master Lease is recognized on a straight-line basis
rather than when due. As a result, management pays particular attention to AFFO,
a supplemental non-GAAP performance measure that we define as FFO less
straight-line rent. In management's view, AFFO provides a more accurate
depiction of the impact of scheduled rent increases under the Master Lease, than
FFO. Neither FFO nor AFFO represent cash generated from operating activities
calculated in accordance with generally accepted accounting principles and
therefore should not be considered an alternative for GAAP net earnings or as a
measure of liquidity. FFO and AFFO are reconciled to net earnings in Selected
Financial Data on page 7.
RESULTS OF OPERATIONS
Year ended December 31, 2004 compared to year ended December 31, 2003
Revenues from rental properties for the year ended December 31, 2004 were $66.3
million compared to $66.6 million for 2003. We received approximately $58.9
million in 2004 and $58.7 million in 2003 of rent from properties leased to
Marketing under the Marketing Leases. We also received $2.9 million in 2004 and
$2.3 million in 2003 from other tenants. The increase in rent received was
primarily due to $0.5 million of rent from properties acquired in November 2004
and rent escalations and was partially offset by the effect of lease
terminations and property dispositions. In addition, revenues from rental
properties include $4.5 million in 2004 and $5.5 million in 2003 of deferred
rental revenue recognized, as required by GAAP, primarily related to the 2%
future annual rent increases due from Marketing under the terms of the Master
Lease. The aggregate minimum rent due over the initial fifteen-year term of the
Master Lease is recognized on a straight-line basis rather than when due.
Rental property expenses, which are principally comprised of rent expense
and real estate and other state and local taxes, were $9.8 million for 2004, a
decrease of $0.8 million from 2003. The decrease was primarily due to a
reduction in rent expense of $0.8 million as a result of the full year impact of
43 lease purchase options exercised in 2003 and an additional 8 lease purchase
options exercised in 2004, partially offset by $0.1 million of rent expense from
leasehold interests acquired in November 2004.
-9-
Environmental expenses for 2004 were $6.0 million, a decrease of $1.6
million from 2003. Environmental expenses for 2004 include a net change in
estimated remediation costs and accretion expense aggregating $3.3 million, a
$2.1 million decrease from the prior year. The decrease in the net change in
estimated environmental costs was principally due to increases in expected
recoveries from underground storage tank funds related to both past and future
environmental spending partially offset by increases in changes in estimated
remediation costs. The decrease in the net change in estimated remediation costs
was partially offset by an increase in the amount accrued for environmental
litigation of $0.5 million.
General and administrative expenses for 2004 were $5.0 million compared to
$4.1 million for 2003. The increase was primarily caused by approximately $0.4
million of higher legal and audit expenses, including internal controls review
costs, incurred in 2004, primarily due to compliance with various requirements
the Sarbanes-Oxley Act of 2002. The increase was also due to a smaller credit to
insurance loss reserves recorded in 2004 as compared to 2003 and higher
insurance premiums. A credit of $0.5 million was recorded in 2003 and a smaller
credit of $0.3 million was recorded in 2004. The insurance loss reserves were
established under our self funded insurance program that was terminated in 1997.
Depreciation and amortization expense for 2004 was $7.5 million, a decrease
of $0.9 million from 2003, as a result of certain assets becoming fully
depreciated and dispositions of properties, partially offset by $0.2 million of
depreciation and amortization expense on properties and leasehold interests
acquired in November 2004.
Other income was $1.5 million for 2004 as compared with $1.7 million for
2003. The $0.2 million decrease was due to lower gains on dispositions of
properties, investment income and other items, partially offset by $0.4 million
of income recorded in the fourth quarter of 2004 due to the elimination of
reserves for late paying mortgage note receivable accounts and late fees
recognized related to mortgage notes that were renegotiated in 2004 and are now
current.
The cumulative effect of accounting change recorded for 2003 is due to the
adoption of Statement of Financial Accounting Standards No. ("SFAS") 143
effective January 1, 2003. Accrued environmental remediation costs and the
related recoveries from state underground storage tank funds were adjusted to
their estimated fair value resulting in a one-time cumulative effect of change
in accounting charge of $0.6 million in 2003 (see "Environmental Matters"
below).
As a result, our net earnings of $39.4 million in 2004 increased $2.5
million, or 6.7%, over 2003 due to the items discussed above. FFO increased $3.8
million, or 9.1%, to $46.2 million in 2004, principally due to the elimination
of $2.5 million in preferred stock dividends partially offset by the impact of
lower depreciation expense recorded in 2004 and the one-time accounting charge
recorded in 2003. The preferred stock dividends were eliminated as a result of
the conversion of 98% of our outstanding convertible preferred stock into 3.2
million common shares and the redemption of the remaining preferred shares in
September 2003. AFFO increased $4.9 million, or 13.3%, to $41.8 million in 2004.
AFFO increased more than FFO on both a dollar and percentage basis due to $1.1
million in lower deferred rental revenues (which are included in FFO, but
excluded from AFFO) recorded in 2004 as compared to 2003.
Diluted earnings per common share in 2004 increased 6.7% to $1.59 per
share, as compared to $1.49 per share in 2003. Diluted FFO per common share
increased 2.8% to $1.87 per share in 2004, as compared to $1.82 per share in
2003 and diluted AFFO per common share increased 6.3% to $1.69 per share in
2004, as compared to $1.59 per share in 2003. The percentage changes in FFO per
common share and AFFO per common share are different than the respective
percentage changes in FFO and AFFO, when compared to the prior year period,
since the diluted per share amounts for 2004 reflect the actual September 2003
conversion and redemption of our preferred shares discussed above, while the per
share amounts for 2003 reflect the assumed conversion of our outstanding
preferred stock as if the conversion had occurred at the beginning of the year.
Accordingly, preferred stock dividends of $2.5 million were added back to FFO
and AFFO in calculating FFO and AFFO per share amounts in 2003. The effect of
the potential dilution from the assumed conversion utilizing the two class
method in computing earnings per share would have been anti-dilutive and was not
assumed. There were no preferred shares outstanding during the year ended 2004.
-10-
Year ended December 31, 2003 compared to year ended December 31, 2002
Revenues from rental properties for the year ended December 31, 2003 were $66.6
million compared to $67.2 million for 2002. We received approximately $58.7
million in 2003 and $58.1 million in 2002 of rent from properties leased to
Marketing under the Master Lease. We also received $2.3 million in 2003 and 2002
from other tenants. The increase in rent received was primarily due to rent
escalations and was partially offset by the effect of lease terminations and
property dispositions. In addition, revenues from rental properties include $5.5
million in 2003 and $6.7 million in 2002 of deferred rental revenue.
Rental property expenses, were $10.7 million for 2003, a decrease of $1.3
million from 2002. The decrease was primarily due to a reduction in rent expense
of $1.1 million as a result of the exercise of 43 lease purchase options,
including the acquisition of 41 leased properties in May 2003 for an aggregate
purchase price of approximately $13.0 million.
Environmental expenses for 2003 were $7.6 million, a decrease of $1.1
million from 2002. Environmental expenses for 2003 include $4.2 million for the
net change in estimated environmental costs, as compared to $6.7 million for the
prior period. The decrease in the net change in estimated environmental costs
from 2002 to 2003 of $2.5 million was due to a required change in the method
used to account for estimated environmental costs and estimated recoveries from
underground storage tank funds beginning in 2003, partially offset by related
accretion expense of $1.3 million recorded in the current period. Effective
January 1, 2003, environmental liabilities and related recoveries are measured
based on their expected future cash flows which have been adjusted for inflation
and discounted to present value (see "Environmental Matters" below). The net
change in estimated environmental costs for 2003 of $4.2 million is primarily
due to reductions in recovery rates used to estimate recoveries from underground
storage tank remediation funds based on recent experience with the funds,
partially offset by reductions in estimated environmental expenses.
General and administrative expenses for 2003 were $4.1 million compared to
$3.7 million for 2002. The increase was also due to a smaller credit to
insurance loss reserves recorded in 2003 as compared to 2002. A credit of $0.9
million was recorded in 2002 and a smaller credit of $0.5 million was recorded
in 2003. The insurance loss reserves were established under our self funded
insurance program that was terminated in 1997.
Depreciation and amortization for 2003 was $8.4 million, a decrease of $0.6
million from 2002, as a result of certain assets becoming fully depreciated and
dispositions of properties.
Other income was $1.7 million for 2003 as compared with $2.5 million for
2002. The $0.8 million decrease was due to lower gains on dispositions of
properties, investment income and other items.
The cumulative effect of accounting change recorded for 2003 is due to the
adoption of SFAS 143 effective January 1, 2003. Accrued environmental
remediation costs and the related recoveries from state underground storage tank
funds were adjusted to their estimated fair value resulting in a one-time
cumulative effect of change in accounting charge of $0.6 million (see
"Environmental Matters" below).
As a result, our net earnings were $36.9 million in 2003, an increase of
2.0% over 2002, while FFO increased 9.6% to $42.4 million in 2003 and AFFO
(defined as FFO minus straight-line rent) increased 15.3% to $36.8 million
during the period. AFFO increased more than FFO on both a dollar and percentage
basis due to the $1.2 million reduction in deferred rental revenues recorded in
2003 compared to 2002, which are included in FFO but excluded from AFFO. The
increases in FFO and AFFO were partially due to the reduction in preferred stock
dividends as a result of the conversion and redemption of our outstanding
preferred stock in the quarter ended September 30, 2003. Diluted earnings per
common share in 2003 increased 3.5% to $1.49 compared to $1.44 in 2002, while
FFO per common share and AFFO per common share increased 2.2% and 5.3% to $1.82
and $1.59, respectively. The increases in net earnings, FFO and AFFO per common
share were partly offset by an increase in the weighted number of common shares
outstanding in calculating per share amounts, principally due to the conversion
of preferred shares into 3.2 million common shares.
-11-
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are available cash and equivalents, the cash
flows from our business and a short-term uncommitted line of credit with
JPMorgan Chase Bank ("JPMorgan"). 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, available cash and equivalents and the
credit line. However, we intend to borrow funds to complete the pending
acquisition. See "Subsequent Events" below. As of December 31, 2003, we had a
line of credit amounting to $25.0 million. Total borrowings outstanding under
the uncommitted line of credit at December 31, 2004 were $24.0 million and an
additional $0.2 million was utilized for outstanding letters of credit.
Borrowings under the line of credit are unsecured and bear interest at the prime
rate or, at our option, LIBOR plus 1.25%. The line of credit is subject to
annual renewal in June 2005 at the discretion of the bank. In March 2005 we
entered into a non-binding Commitment Letter with JPMorgan for an unsecured
three-year senior revolving credit facility ("Credit Facility") in the aggregate
amount of $100.0 million which we anticipate will replace the outstanding $25.0
million uncommitted line of credit. We intend to use the Credit Facility to
repay borrowings outstanding under the uncommitted line of credit and to provide
funds for the pending acquisition. We expect that the remaining unused
availability will approximate $55.0 million and will be available for general
corporate purposes including acquisitions. See "Subsequent Events" below.
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 90% 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. Dividends declared for our
common and preferred shareholders aggregated $42.0 million, $41.2 million and
$40.7 million for 2004, 2003 and 2002, respectively.
We declared common stock dividends of $0.425 per share for the four
quarters of 2004 and the last two quarters of 2003. Common stock dividends were
$0.4125 per share for the first two quarters of 2003 and for the four quarters
of 2002. The Board of Directors declared a common stock dividend of $0.435 per
share in February 2005, which is an increase of $0.01 per share over the prior
quarter. We presently intend to pay common stock dividends of $0.435 per quarter
($1.74 per share on an annual basis).
In August 2003, we notified holders of Series A Participating Convertible
Redeemable Preferred Stock that the preferred stock would be redeemed on
September 24, 2003 for $25.00 per share plus a mandatory redemption dividend of
$0.271 per share. Prior to the redemption date, shareholders with 98% of the
preferred stock exercised their right to convert 2,816,919 shares of preferred
stock into 3,186,355 shares of common stock at the conversion rate of 1.1312
shares of common stock for each share of preferred stock so converted, and
received cash in lieu of fractional shares of common stock. The remaining 48,849
shares of the outstanding preferred stock were redeemed for $1.2 million which
included accrued dividends through the call date. The preferred stock ceased
accruing dividends and trading on the NYSE in September 2003. In addition to the
mandatory redemption dividend, we declared quarterly cash preferred stock
dividends of $0.44375 per share for the first two quarters of 2003, and for the
first three quarters of 2002. The preferred stock dividend for the fourth
quarter of 2002 was $0.53523 per share.
In order to initially qualify for REIT status, we were required to make a
distribution to shareholders in an amount at least equal to our accumulated
earnings and profits from the years we operated as a taxable corporation. A
special one-time earnings and profits distribution was paid in August 2001 to
holders of Getty common stock and preferred stock. Determination of accumulated
earnings and profits for federal income tax purposes is extremely complex.
Should the Internal Revenue Service successfully assert that our accumulated
earnings and profits were greater than the amount distributed in 2001, we may
fail to qualify as a REIT; however, we may avoid losing our REIT status by
paying a deficiency dividend to eliminate any remaining accumulated earnings and
profits. We may have to borrow money or sell assets to pay such a deficiency
dividend.
-12-
Since we generally lease our properties on a triple-net basis and we do not
capitalize environmental remediation equipment, we do not incur significant
capital expenditures other than those related to acquisitions. Capital
expenditures, including acquisitions, for 2004, 2003 and 2002 amounted to $30.6
million, $14.3 million and $2.8 million, respectively.
On November 1, 2004, we completed the acquisition of 36 convenience store
and retail motor fuel properties located in Connecticut and Rhode Island for
approximately $25.7 million. Simultaneously with the closing on the acquisition,
we entered into a triple-net lease with a single tenant for all of the
properties. The lease provides for annual rentals at a competitive lease
capitalization rate and provides escalations thereafter. The triple-net 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 environmental conditions at the properties, including those
properties where remediation activities are ongoing.
On May 1, 2003, we completed the acquisition of forty-one retail motor fuel
and convenience store properties that we had been leasing for the past twelve
years. The aggregate purchase price for these properties was approximately $13.0
million, excluding transaction costs. Forty of the locations are subleased to
Marketing under the Master Lease through at least 2015. Annual rent expense of
approximately $1.3 million, and future rent escalations scheduled through 2056,
will be eliminated as a result of the acquisition. Since the seller has agreed
to indemnify us for historical environmental costs, and the seller's indemnity
is supported by an escrow fund established solely for that purpose, our exposure
to environmental remediation expenses should not change because of the
acquisition.
SUBSEQUENT EVENTS
On February 23, 2005, we entered into a definitive real estate purchase
agreement to acquire 23 convenience store and retail motor fuel properties in
Virginia for approximately $29.0 million. The closing is expected to be
completed by the end of the first quarter 2005. We also entered into a
triple-net lease with a single tenant for all of the properties. The tenant
currently leases the properties from the seller and operates these locations
under its proprietary convenience store brand in its network of over 200
locations. The lease provides for annual rentals at a competitive lease
capitalization 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. An
affiliate of the tenant currently leases other properties from us.
In March 2005 we entered into a Commitment Letter with JPMorgan for an
unsecured three-year senior revolving credit facility in the aggregate amount of
$100.0 million which we anticipate will replace the outstanding $25.0 million
uncommitted line of credit. Under the terms of the proposed Credit Facility, we
expect to have the option to increase the Credit Facility by $25.0 million and
extend the Credit Facility for one additional year. While the Commitment Letter
is non-binding, is subject to JPMorgan's successful syndication of a substantial
portion of the Credit Facility, and execution of definitive agreements
containing customary terms and conditions, we believe that the Credit Facility
will be committed and available in the second quarter of 2005.
We anticipate that borrowings under the proposed Credit Facility will bear
interest at a rate equal to the sum of a base rate or a LIBOR rate plus an
applicable margin ranging from 1.25% to 1.75%, which is based on our leverage
ratio, as defined by the Credit Facility. The annual commitment fee on the
unused proposed Credit Facility Fee will range from 0.10% to 0.20%, and will be
based on usage. We expect that the Credit Facility will include financial
covenants such as leverage and coverage ratios and other customary covenants,
including limitations on our ability to incur debt and pay dividends,
maintenance of tangible net worth and events of default, including a change of
control and maintenance of REIT status. We believe that these covenants will not
limit our current business practices.
-13-
In addition, JPMorgan has agreed to increase the funds available under the
existing $25.0 million uncommitted line of credit, which expires on June 30,
2005, if required to enable us to complete the acquisition discussed above prior
to funds becoming available under the proposed Credit Facility.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our significant contractual obligations and commitments and our other commercial
commitments are comprised of borrowings under credit lines, long-term debt,
operating lease payments due to landlords and projected environmental
remediation expenditures, net of projected recoveries from state underground
storage tank funds. In addition, as a REIT we are required to pay dividends
equal to at least ninety percent of our taxable income in order to continue to
qualify as a REIT. Our contractual obligations and estimated commercial
commitments are summarized below (in thousands):
<Table>
<Caption>
TOTAL 2005 2006 2007 2008 2009 2010 THEREAFTER
-------- -------- -------- -------- ------- ------- ------- ----------
Operating leases $ 38,668 $ 8,950 $ 7,692 $ 6,176 $ 4,977 $ 3,254 $ 1,793 $ 5,826
Borrowings under credit lines 24,000 24,000
Long-term debt 509 285 30 31 33 27 21 82
-------- -------- -------- -------- ------- ------- ------- -------
Total contractual obligations $ 63,177 $ 33,235 $ 7,722 $ 6,207 $ 5,010 $ 3,281 $ 1,824 $ 5,908
======== ======== ======== ======== ======= ======= ======= =======
Environmental remediation
expenditures (a) $ 20,626 $ 6,516 $ 4,504 $ 2,942 $ 1,815 $ 1,113 812 $ 2,924
Recoveries from state underground
storage tank funds (a) (5,437) (1,542) (1,144) (845) (574) (401) (287) (644)
-------- -------- -------- -------- ------- ------- ------- -------
Net environmental remediation
expenditures (a) $ 15,189 $ 4,974 $ 3,360 $ 2,097 $ 1,241 $ 712 525 $ 2,280
======== ======== ======== ======== ======= ======= ======= =======
</Table>
(a) Projected environmental remediation expenditures and projected recoveries
from state underground storage tank funds have been adjusted for inflation
and discounted to present value.
Generally the leases with our tenants are "triple-net" leases, with the
tenant responsible for the payment of taxes, maintenance, repair, insurance,
environmental remediation and other operating expenses. We estimate that
Marketing makes annual real estate tax payments for properties leased under the
Marketing Leases of approximately $11.6 million and makes additional payments
for other operating expenses related to our properties, including environmental
remediation costs other than those liabilities that were retained by us. These
costs are not reflected in our consolidated financial statements. We have agreed
to reimburse Marketing for one-half of certain capital expenditures for work
required to comply with local zoning requirements up to a maximum amount
designated for each property and an aggregate maximum reimbursement of $875,000.
We have reimbursed Marketing for $265,000 of these costs during 2004 and expect
to reimburse Marketing for the remaining balance in 2005.
We have no significant contractual obligations not fully recorded on our
Consolidated Balance Sheets or fully disclosed in the Notes to our Consolidated
Financial Statements. We have no off-balance sheet arrangements as defined in
Item 303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934,
as amended.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements included in this report 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. We have made our best estimates, judgments and assumptions
relating to certain amounts that are included in our financial statements,
giving due consideration to the accounting policies selected and materiality. 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.
-14-
Application of these accounting policies, however, involves the exercise of
judgment and use of assumptions as to future uncertainties and, as a result,
actual results could differ from these estimates, judgments and assumptions. Our
accounting policies are described in note 1 to the consolidated financial
statements. 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, (see "Environmental Maters" below) real estate, depreciation
and amortization, impairment of long-lived assets, litigation, accrued expenses
and income taxes. We believe the following are our critical accounting policies:
Revenue recognition--We earn revenue primarily from operating leases with
Marketing and other tenants. We recognize income under the Master Lease with
Marketing, and with other tenants, on the straight-line method, which
effectively recognizes contractual lease payments evenly over the initial term
of the leases. A critical assumption in applying this accounting method is that
the tenant will make all contractual lease payments during the initial lease
term and that the deferred rent receivable of $25.1 million recorded as of
December 31, 2004 will be collected when due, in accordance with the annual rent
escalations provided for in the leases. Historically our tenants have generally
made rent payments when due. However, we may be required to reverse, or provide
reserves for, a portion of the recorded deferred rent receivable if it becomes
apparent that a property may be disposed of before the end of the initial lease
term or if the tenant fails to make its contractual lease payments when due.
Impairment of long-lived assets--Real estate assets represent "long-lived"
assets for accounting purposes. We review the recorded value of long-lived
assets for impairment in value whenever any events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. We may
become aware of indicators of potentially impaired assets upon tenant or
landlord lease renewals, upon receipt of notices of potential governmental
takings and zoning issues, or upon other events that occur in the normal course
of business that would cause us to review the operating results of the property.
We believe our real estate assets are not carried at amounts in excess of their
estimated net realizable fair value amounts.
Income taxes--Our future financial results generally will not reflect
provisions for current or deferred federal income taxes since we elected to be
taxed as a REIT effective January 1, 2001. Our intention is to operate in a
manner that will allow us to continue to be taxed as a REIT and, as a result, we
do not expect to pay substantial corporate-level federal income taxes. Many of
the REIT requirements, however, are highly technical and complex. If we were to
fail to meet the requirements, we may be subject to federal income tax. Certain
states do not follow the federal REIT rules and we have included provisions for
these taxes in rental property expenses.
Environmental costs and recoveries from state underground storage tank
funds--We provide for the estimated fair value of future environmental
remediation costs when it is probable that a liability has been incurred and a
reasonable estimate of fair value can be made (see "Environmental Matters"
below). Since environmental exposures are difficult to assess and estimate and
knowledge about these liabilities is not known upon the occurrence of a single
event, but rather is gained over a continuum of events, we believe that it is
appropriate that our accrual estimates are adjusted as the remediation treatment
progresses, as circumstances change and as environmental contingencies become
more clearly defined and reasonably estimable. Recoveries of environmental costs
from state underground storage tank remediation funds, with respect to past and
future spending, are accrued as income, net of allowance for collection risk,
based on estimated recovery rates developed from our experience with the funds
when such recoveries are considered probable. A critical assumption in accruing
for these recoveries is that the state underground storage tank fund programs
will be administered and funded in the future in a manner that is consistent
with past practices and that future environmental spending will be eligible for
reimbursement at historical rates under these programs. Effective January 1,
2003, environmental liabilities and related recoveries are measured based on
their expected future cash flows which have been adjusted for inflation and
discounted to present value.
-15-
Litigation--Legal fees related to litigation are expensed as legal services
are performed. We provide for litigation reserves, including certain
environmental litigation (see "Environmental Matters" below), when it is
probable that a liability has been incurred and a reasonable estimate of the
liability can be made. If the best estimate of the liability can only be
identified as a range, and no amount within the range is a better estimate than
any other amount, the minimum of the range is accrued for the liability. In
certain environmental matters, the effect on future financial results is not
subject to reasonable estimation because considerable uncertainty exists both in
terms of the probability of loss and the estimate of such loss. The ultimate
liabilities resulting from such lawsuits and claims, if any, may be material to
our results of operations in the period in which they are recognized.
ENVIRONMENTAL MATTERS
We are subject to numerous existing federal, state and local laws and
regulations, including matters relating to the protection of the environment. In
recent years, environmental expenses were principally attributable to
remediation, monitoring and governmental agency reporting incurred in connection
with contaminated properties. In prior periods, a larger portion of the expenses
also included soil disposal and the replacement or upgrading of underground
storage tank systems ("USTs") to meet federal, state and local environmental
standards.
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.
We have also agreed to provide limited environmental indemnification,
capped at $4.25 million and expiring in 2010, to Marketing for certain
pre-existing conditions at six of the terminals owned by us. Under the
indemnification agreement, Marketing will pay the first $1.5 million of costs
and expenses incurred in connection with remediating any such pre-existing
conditions, Marketing will share equally with us the next $8.5 million of those
costs and expenses and Marketing will pay all additional costs and expenses over
$10.0 million. We have not accrued a liability in connection with this
indemnification agreement since it is uncertain that any significant amounts
will be required to be paid under the agreement.
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. Recoveries of environmental costs from state underground storage tank
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 our experience with the funds when
such recoveries are considered probable. The accrued liability is the aggregate
of the best estimate for the fair value of cost for each component of the
liability.
In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS 143 requires that obligations associated with the retirement
of tangible long-lived assets be recognized at their fair value if the asset
retirement obligation results from the normal operation of those assets and a
reasonable estimate of fair value can be made. Due to the adoption of SFAS 143
effective January 1, 2003, accrued environmental remediation costs and
recoveries from state underground storage tank funds were adjusted to their
estimated fair value resulting in a one-time cumulative effect of change in
accounting charge of $550,000. Environmental liabilities and related assets are
currently measured based on their expected future cash flows which have been
adjusted for inflation and discounted to present value. Prior to the adoption of
SFAS 143 generally accepted accounting principles required that if the best
estimate of cost for a component of the liability could only be identified as a
range, and no amount within the range was a better estimate than any other
amount, the minimum of the range was accrued for that cost component.
Historically, such accruals were not adjusted for inflation or discounted to
present value.
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.
-16-
In developing our liability for probable and reasonably estimable environmental
remediation costs, on a property by property basis, we consider 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
December 31, 2004, we have remediation action plans in place for 316 (92%) of
the 345 properties for which we retained environmental responsibility and have
not received a no further action letter and the remaining 29 properties (8%)
remain in the assessment phase.
As of December 31, 2004, December 31, 2003 and January 1, 2003, we had
accrued $20.6 million, $23.6 million and $29.4 million, respectively, as
management's best estimate of the fair value of reasonably estimable
environmental remediation costs. As of December 31, 2004, December 31, 2003 and
January 1, 2003, we had also recorded $5.4 million, $7.5 million and $14.3
million, respectively, as management's best estimate for net recoveries from
state UST remediation funds, net of allowance, related to environmental
obligations and liabilities. The net environmental liabilities of $16.1 million
as of December 31, 2003 and $15.1 million as of January 1, 2003 were
subsequently accreted for the change in present value due to the passage of
time, and accordingly, $1.1 million and $1.3 million of accretion expense is
included in environmental expenses for 2004 and 2003, respectively.
Environmental expenditures and recoveries from underground storage tank funds
were $6.8 million and $2.4 million, respectively, for 2004. The decrease in
accrued environmental costs and net recoveries during 2004 were primarily due to
payments made and cash received during the period, respectively, partially
offset by changes in estimated expenditures and recoveries, respectively. During
2005, we estimate that our net environmental remediation spending will be
approximately $5.0 million. Our business plan for 2005 reflects a net change in
estimated remediation costs and accretion expense of approximately $3.6 million.
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. For locations where
remediation efforts are not assumed to be completed during 2005, 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 $5.4 million for those sites. Accordingly, the environmental accrual
as of December 31, 2004 was increased by $2.2 million, net of assumed recoveries
and before inflation and present value discount adjustments. The resulting net
environmental accrual as of December 31, 2004 was then further increased by $1.5
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 $4.2 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 December
31, 2004 would have increased by $0.2 million for each of those factors for an
aggregate increase in the net environmental accrual of $0.4 million. In
addition, the aggregate net change in environmental estimates and accretion
expense recorded during the year ended December 31, 2004 would have increased by
$0.2 million due to these changes in the assumptions.
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 2004, 2003 and 2002, the aggregate of the net change in
estimated remediation costs and accretion expense included in our consolidated
statements of operations amounted to $3.3 million, $5.5 million and $6.6
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
-17-
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.
In September 2003, we were notified by the State of New Jersey Department
of Environmental Protection that we are one of approximately 60 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, we
received a General Notice Letter from the US EPA (the "EPA Notice"), advising us
that we 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. We believe that ChevronTexaco is obligated to indemnify us, pursuant
to an indemnification agreement regarding the conditions at the property
identified by the DEP and EPA and accordingly, our ultimate legal and financial
liability, if any, cannot be estimated with any certainty at this time.
From October 2003 through February 2004 we were notified that we were made
party to 36 cases, and one additional case in the fourth quarter of 2004, in
Connecticut, Florida, Massachusetts, New Hampshire, New Jersey, New York,
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
50 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.
DISCLOSURES ABOUT MARKET RISK
We do not use derivative financial or commodity instruments for trading,
speculative or any other purpose. We had no outstanding derivative instruments
as of December 31, 2004 or December 31, 2003 or at any time during the years
then ended. We do not have any foreign operations, and are therefore not exposed
to foreign currency exchange rate risks.
We are exposed to interest rate risks, primarily as a result of our line
of credit with JPMorgan Chase Bank. We manage our exposure to this risk by
minimizing, to the extent feasible, our overall borrowing and monitoring
available financing alternatives. Our interest rate risk has changed due to
increased average outstanding borrowings under the line as compared to December
31, 2003, but we do not foresee any significant changes in our exposure or in
how we manage this exposure in the near future. We use borrowings under the line
of credit, which expires in June 2005, to finance acquisitions and for general
corporate purposes. We had no borrowings against the line of credit prior to
November 2004. Our line of credit bears interest at the prime rate or, at our
option, LIBOR plus 1.25%. At December 31, 2004 we had total borrowings of $24.0
million under our line of credit, and had not entered into any instruments to
hedge our resulting exposure to interest-rate risk.
Based on our average outstanding borrowings under the line of credit of
$11.5 million, and assuming $30.0 million of additional borrowings required to
finance a pending acquisition on March 31, 2005 (see "Subsequent Events" in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"), if market interest rates for 2005 increase by an average of 0.5%
more than the average interest rate for the last two months of 2004, the
additional annualized interest expense would decrease 2005 net income and cash
flows by $0.8 million attributable to increased borrowings and an additional
$0.2 million attributable to higher interest rates. These amounts were
determined by calculating the effect of a hypothetical interest rate on our line
of credit borrowings and assumes that the average outstanding borrowings during
the three month period from November 2004 through January 2005 is indicative of
our future average borrowings for 2005 before considering additional borrowings
required for 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 the debt equals its carrying value at December
31, 2004 and 2003. Our exposure to fluctuations in interest rates will increase
or decrease in the future with increases or decreases in the outstanding amount
under our line of credit.
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 are held in an institutional money
market fund and short-term federal agency discount notes.
-18-
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual 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, including $59.7
million in lease rental payments in 2005; 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 ability to maintain our REIT status; our
ability to obtain additional financing from JPMorgan on the terms described in
this Annual Report or at all; the probable outcome of litigation or regulatory
actions; our expected recoveries from underground storage tank funds; our
exposure to environmental remediation expenses; our expectations regarding
corporate level federal income taxes; the indemnification obligations of the
Company and others; our intention to consummate future acquisitions; assumptions
regarding the future applicability of accounting estimates, assumptions and
policies and our intention to pay future dividends.
These forward-looking statements are based on our current beliefs and
assumptions and information currently available to us and involve known and
unknown risks (including the risks described herein and other risks that we
describe from time to time in our filings with the Securities and Exchange
Commission), 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. These factors 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; competition for properties and
tenants; risk of tenant non-renewal; the effects of taxation and other
regulations; potential litigation exposure; our expectations as to the cost of
completing environmental remediation; 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 located in the
same region of the United States; risks associated with potential future
acquisitions; losses not covered by insurance; future dependence on external
sources of capital; our potential inability to pay dividends 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 that reflect
future events or circumstances or reflect the occurrence of unanticipated
events.
-19-
GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------
2004 2003 2002
-------- -------- --------
Revenues from rental properties $ 66,331 $ 66,601 $ 67,157
Expenses:
Rental property expenses 9,814 10,662 11,975
Environmental expenses, net 6,027 7,594 8,668
General and administrative expenses 5,006 4,074 3,691
Depreciation and amortization expense 7,490 8,411 9,016
-------- -------- --------
Total expenses 28,337 30,741 33,350
-------- -------- --------
Operating income 37,994 35,860 33,807
Other income, net 1,485 1,705 2,488
Interest expense (127) (128) (132)
-------- -------- --------
Earnings before cumulative effect of accounting change 39,352 37,437 36,163
Cumulative effect of accounting change -- (550) --
-------- -------- --------
Net earnings 39,352 36,887 36,163
Preferred stock dividends -- 2,538 5,350
-------- -------- --------
Net earnings applicable to common shareholders $ 39,352 $ 34,349 $ 30,813
======== ======== ========
Net earnings per common share:
Basic $ 1.59 $ 1.49 $ 1.44
Diluted $ 1.59 $ 1.49 $ 1.44
Weighted average common shares outstanding:
Basic 24,679 23,063 21,436
Diluted 24,721 23,082 21,446
Dividends declared per share:
Common $ 1.700 $ 1.675 $ 1.650
Preferred -- $ 1.159 $ 1.866
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
-21-
GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<Table>
<Caption>
DECEMBER 31,
------------------------
2004 2003
--------- ---------
ASSETS:
Real Estate:
Land $ 156,571 $ 142,724
Buildings and improvements 190,019 175,498
--------- ---------
346,590 318,222
Less--accumulated depreciation and amortization (106,463) (100,488)
--------- ---------
Real estate, net 240,127 217,734
Deferred rent receivable 25,117 20,653
Cash and equivalents 15,700 19,905
Recoveries from state underground storage tank funds, net 5,437 7,454
Mortgages and accounts receivable, net 3,961 5,565
Prepaid expenses and other assets 386 692
--------- ---------
Total assets $ 290,728 $ 272,003
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Environmental remediation costs $ 20,626 $ 23,551
Borrowings under credit line 24,000 --
Dividends payable 10,495 10,483
Accounts payable and accrued expenses 9,595 9,100
Mortgages payable 509 844
--------- ---------
Total liabilities 65,225 43,978
--------- ---------
Commitments and contingencies (notes 2, 3 and 5)
Shareholders' equity:
Common stock, par value $.01 per share; authorized 50,000,000 shares;
issued 24,694,071 at December 31, 2004 and 24,664,384 at December 31, 2003 247 247
Paid-in capital 257,295 257,206
Dividends paid in excess of earnings (32,039) (29,428)
--------- ---------
Total shareholders' equity 225,503 228,025
--------- ---------
Total liabilities and shareholders' equity $ 290,728 $ 272,003
========= =========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
-22-
GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------
2004 2003 2002
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 39,352 $ 36,887 $ 36,163
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization expense 7,490 8,411 9,016
Deferred rental revenue (4,464) (5,537) (6,728)
Gain on dispositions of real estate (618) (928) (1,153)
Accretion expense 1,054 1,284 --
Cumulative effect of accounting change -- 550 --
Stock-based employee compensation expense 25 -- --
Changes in assets and liabilities:
Recoveries from state underground storage tank funds, net 2,512 7,559 880
Mortgages and accounts receivable, net 238 (1,528) (663)
Prepaid expenses and other assets 306 300 80
Environmental remediation costs (4,474) (7,824) 632
Accounts payable and accrued expenses 495 (739) (2,179)
-------- -------- --------
Net cash provided by operating activities 41,916 38,435 36,048
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property acquisitions and capital expenditures (30,568) (14,266) (2,821)
Collection of mortgages receivable, net 1,366 1,156 289
Proceeds from dispositions of real estate 1,303 3,117 3,000
-------- -------- --------
Net cash provided by (used in) investing activities (27,899) (9,993) 468
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (41,951) (41,115) (40,451)
Borrowings under credit line, net 24,000 -- --
Repayment of mortgages payable, net (335) (79) (74)
Preferred stock redemption and conversion -- (1,224) --
Stock options and treasury stock, net 64 155 212
-------- -------- --------
Net cash used in financing activities (18,222) (42,263) (40,313)
-------- -------- --------
Net decrease in cash and equivalents (4,205) (13,821) (3,797)
Cash and equivalents at beginning of period 19,905 33,726 37,523
-------- -------- --------
Cash and equivalents at end of period $ 15,700 $ 19,905 $ 33,726
======== ======== ========
Supplemental disclosures of cash flow information
Cash paid (refunded) during the period for:
Interest $ 114 $ 127 $ 132
Income taxes, net 571 949 662
Recoveries from state underground storage tank funds (2,362) (2,135) (3,431)
Environmental remediation costs 6,776 6,642 8,545
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
-23-
GETTY REALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: 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 inter-company
accounts and transactions have been eliminated. Certain reclassifications have
been made in the financial statements for 2003 and 2002 to conform to the
presentation for 2004.
Use of Estimates, Judgments and Assumptions: 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.
Real Estate: Real estate assets are stated at cost less accumulated
depreciation and amortization. Upon acquisition of real estate operating
properties and leasehold interests, the Company estimates 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 and below-market leases, in-place leases and tenant
relationships) and assumed debt in accordance with Statement of Financial
Accounting Standards No. ("SFAS") 141, Business Combinations. Based on these
estimates, the Company allocates the purchase price to the applicable assets and
liabilities. When real estate assets are sold or retired, the cost and related
accumulated depreciation and amortization is eliminated from the respective
accounts and any gain or loss is credited or charged to income. Expenditures for
maintenance and repairs are charged to income when incurred.
Depreciation and amortization: Depreciation of real estate is computed on
the straight-line method based upon the estimated useful lives of the assets,
which generally range from sixteen to twenty-five years for buildings and
improvements, or the term of the lease if shorter. Leasehold interests,
capitalized above and below-market leases, in-place leases and tenant
relationships are amortized over the remaining term of the underlying lease.
Cash and Equivalents: The Company considers highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Deferred Rent Receivable and Revenue Recognition: The Company earns rental
income under operating leases with tenants. Minimum lease rentals are recognized
on a straight-line basis over the initial term of the leases. The cumulative
difference between lease revenue recognized under this method and the
contractual lease payment terms is recorded as deferred rent receivable on the
consolidated balance sheet.
Environmental Remediation Costs and Recoveries from State Underground
Storage Tank Funds, Net: 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 underground storage tank ("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 liabilities and related
assets are currently measured based on their expected future cash flows which
have been adjusted for inflation and discounted to present value. In June 2001,
the Financial Accounting Standards Board ("FASB") issued SFAS 143, "Accounting
for Asset Retirement Obligations." SFAS 143 requires that obligations associated
with the retirement of tangible long-lived assets be recognized at their fair
value if the asset retirement obligation results from the normal operation of
those assets and a
-24-
reasonable estimate of fair value can be made. Due to the adoption of SFAS 143
effective January 1, 2003, accrued environmental remediation costs and
recoveries from state underground storage tank funds were adjusted to their
estimated fair value resulting in a one-time cumulative effect of change in
accounting charge of $550,000, or $0.02 per diluted common share, in the year
ended December 31, 2003. Prior to the adoption of SFAS 143, GAAP required that
if the best estimate of cost for a component of the liability could only be
identified as a range, and no amount within the range was a better estimate than
any other amount, the minimum of the range was accrued for that cost component.
Historically, such accruals were not adjusted for inflation or discounted to
present value.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of:
Assets are written down to fair value when events and circumstances indicate
that the assets might be impaired and the projected undiscounted cash flows
estimated to be generated by those assets are less than the carrying amount of
those assets. Assets held for disposal are written down to fair value less
disposition costs.
Litigation: Legal fees related to litigation are expensed as legal services
are performed. The Company provides for litigation reserves, including certain
litigation related to environmental matters, when it is probable that a
liability has been incurred and a reasonable estimate of the liability can be
made. If the best estimate of the liability can only be identified as a range,
and no amount within the range is a better estimate than any other amount, the
minimum of the range is accrued for the liability.
Income Taxes: The Company and its subsidiaries file a consolidated federal
income tax return. Effective January 1, 2001, the Company elected to qualify,
and believes it is operating so as to qualify, as a REIT for federal income tax
purposes. Accordingly, the Company generally will not be subject to federal
income tax, provided that distributions to its shareholders equal at least the
amount of its REIT taxable income as defined under the Internal Revenue Code. If
the Company sells any property within ten years after its REIT election that is
not exchanged for a like-kind property, it will be taxed on the built-in gain
realized from such sale at the highest corporate rate. This ten-year built-in
gain tax period will end in 2011.
Earnings per Common Share: Basic earnings per common share is computed by
dividing net earnings less preferred dividends by the weighted average number of
common shares outstanding during the year. The weighted average number of shares
outstanding for the year ended December 31, 2003 gives effect to the conversion
of Series A Participating Convertible Redeemable Preferred Stock into 3,186,000
shares of common stock as if the conversion had occurred at the beginning of the
period (see note 7). For the year ended December 31, 2002, conversion of the
preferred shares utilizing the two class method would have been antidilutive and
therefore conversion was not assumed for purposes of computing either basic or
diluted earnings per common share. There were no preferred shares outstanding
during 2004. Diluted earnings per common share also gives effect to the
potential dilution from the exercise of stock options and the issuance of common
shares in settlement of restricted stock units aggregating 42,000 shares, 19,000
shares and 10,000 shares for the years ended December 31, 2004, 2003 and 2002,
respectively. Diluted earnings before cumulative effect of accounting change per
common share were $1.51 for the year ended December 31, 2003.
Stock-Based Compensation: In December 2002, the FASB issued SFAS 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure--an
amendment of SFAS 123." SFAS 148 provides alternative transition methods for a
voluntary change to the fair value basis of accounting for stock-based employee
compensation. SFAS 148 requires disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation,
a description of the transition method utilized and the effect of the method
used on reported results. The Company adopted SFAS 148 effective December 31,
2002. The Company voluntarily changed to the fair value basis of accounting for
stock-based employee compensation for awards granted subsequent to January 1,
2003.
The Company continued to account for options granted under its stock option
plan prior to January 1, 2003 using the intrinsic value method in 2004.
Effective January 1, 2005, the Company will adopt the fair value basis of
accounting for the unvested portion of the outstanding stock options granted
prior to January 1, 2003 and will recognize additional stock-based compensation
expense of $32,000 and $8,000 in 2005 and 2006, respectively (see note 8).
Historically, the exercise price of options granted by the Company was the same
as the market price at the grant date and stock-based compensation expense was
not included in reported net earnings. There were no stock options granted under
the stock option plan subsequent to January 1, 2003.
-25-
On June 1, 2004, the Company granted 10,800 restricted stock units under
its 2004 Omnibus Incentive Compensation Plan (the "2004 Plan") following
shareholder approval of the 2004 Plan at the Annual Meeting of Shareholders on
May 20, 2004 (see note 8). Accordingly, $25,000 of stock-based employee
compensation expense is included in general and administrative expense for the
year ended December 31, 2004.
Had compensation cost for the Company's stock-based compensation plans been
accounted for using the fair value method for all grants, the Company's total
stock-based employee compensation expense using the fair value method, pro-forma
net earnings and pro-forma net earnings per share on a basic and diluted basis
would have been as follows (in thousands, except per share amounts):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------
2004 2003 2002
------- ------- -------
Net earnings, as reported $39,352 $36,887 $36,163
Add: Stock-based employee compensation expense included in reported net earnings 25 -- --
Deduct: Total stock-based employee compensation expense using the fair value method 118 133 124
------- ------- -------
Pro-forma net earnings $39,259 $36,754 $36,039
======= ======= =======
Net earnings per common share:
As reported $ 1.59 $ 1.49 $ 1.44
Pro-forma $ 1.59 $ 1.48 $ 1.43
</Table>
The fair value of the options granted during the year ended December 31,
2002 was estimated as $0.56 per share on the date of grant using the
Black-Scholes option-pricing model assuming an expected dividend yield of 9.0%,
an expected volatility of 18.0%, a risk-free interest rate of 3.6% and an
expected option life of seven years.
2. LEASES
The Company leases or sublets its properties primarily to distributors and
retailers engaged in the sale of gasoline and other motor fuel products,
convenience store products and automotive repair services who are responsible
for the payment of taxes, maintenance, repair, insurance and other operating
expenses and for managing the actual operations conducted at these properties.
The Company's properties are primarily located in the Northeast and Mid-Atlantic
regions of the United States.
The Company and Getty Petroleum Marketing Inc. ("Marketing"), are parties
to an amended and restated Master Lease Agreement (the "Master Lease"), which
became effective on December 9, 2000, and a coterminous supplemental lease for a
single property (collectively the "Marketing Leases"). As of December 31, 2004,
the Marketing Leases included nine hundred thirty-nine retail motor fuel and
convenience store properties and ten distribution terminals, two hundred thirty
of which are leased by the Company from third parties. The Master Lease has an
initial term of fifteen years commencing December 9, 2000, and generally
provides Marketing with options for three renewal terms of ten years each and a
final renewal option of three years and ten months extending to 2049 (or such
shorter initial or renewal term as the underlying lease may provide). The
Marketing Leases include provisions for 2% annual rent escalations. The Master
Lease is a unitary lease and, accordingly, Marketing's exercise of renewal
options must be on an "all or nothing" basis.
The Company estimates that Marketing makes annual real estate tax payments
for properties leased under the Marketing Leases of approximately $11.6 million
and makes additional payments for other operating expenses related to these
properties, including environmental remediation costs other than those
liabilities that were retained by the Company. These costs, which have been
assumed by Marketing under the terms of the Marketing Leases, are not reflected
in the consolidated financial statements.
-26-
Revenues from rental properties for the years ended December 31, 2004, 2003
and 2002 were $66,331,000, $66,601,000 and $67,157,000, respectively, of which
$58,938,000, $58,723,000 and $58,104,000, respectively, were received from
Marketing under the Marketing Leases. In addition, revenues from rental
properties for the years ended December 31, 2004, 2003 and 2002 includes
$4,464,000, $5,537,000 and $6,728,000, respectively, of deferred rental revenue
accrued due to recognition of rental revenue on a straight-line basis.
Future minimum annual rentals receivable from Marketing under the Marketing
Leases and from other tenants, which have terms in excess of one year as of
December 31, 2004, are as follows (in thousands):
<Table>
<Caption>
OTHER
YEAR ENDING DECEMBER 31, MARKETING TENANTS TOTAL (a)
- ------------------------ --------- ------- ---------
2005 $ 59,501 $ 5,403 $ 64,904
2006 60,028 5,263 65,291
2007 59,846 4,893 64,739
2008 60,437 4,762 65,199
2009 60,734 4,510 65,244
Thereafter 364,468 45,653 410,121
</Table>
(a) Includes $135,142 of future minimum annual rentals receivable under
subleases.
Rent expense, substantially all of which consists of minimum rentals on
non-cancelable operating leases, amounted to $8,928,000, $9,704,000 and
$10,805,000 for the years ended December 31, 2004, 2003 and 2002, respectively,
and is included in rental property expenses when contractually due, which
approximates the straight-line method. Rent received under subleases for the
years ended December 31, 2004, 2003 and 2002 was $14,943,000, $17,305,000 and
$17,373,000, respectively.
The Company has obligations to lessors under non-cancelable operating leases
which have terms (excluding renewal term options) in excess of one year,
principally for gasoline stations and convenience stores. Substantially all of
these leases contain renewal options and rent escalation clauses. The leased
properties have a remaining lease term averaging over twelve years, including
renewal options. Future minimum annual rentals payable under such leases,
excluding renewal options, are as follows (in thousands):
<Table>
<Caption>
YEAR ENDING DECEMBER 31,
- ------------------------
2005 $8,950
2006 7,692
2007 6,176
2008 4,977
2009 3,254
Thereafter 7,619
</Table>
3. COMMITMENTS AND CONTINGENCIES
In order to qualify as a REIT, among other items, the Company paid a $64,162,000
special one-time "earnings and profits" (as defined in the Internal Revenue
Code) cash distribution to shareholders in August 2001. Determination of
accumulated earnings and profits for federal income tax purposes is extremely
complex. Should the Internal Revenue Service successfully assert that the
Company's accumulated earnings and profits were greater than the amount
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.
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 are held in an
institutional money market fund and federal agency discount notes.
-27-
The Company leases nine hundred forty-nine of its one thousand forty-five
properties on a long-term net basis to Marketing under the Marketing Leases (see
note 2). 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. 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. Substantially all of the deferred rental
revenue of $25,117,000 recorded as of December 31, 2004 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, capped at $4,250,000 and expiring in 2010, to
Marketing 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 not accrued a
liability in connection with this indemnification agreement since it is
uncertain that any significant amounts will be required to be paid under the
agreements.
The Company has agreed to reimburse Marketing for one-half of certain
capital expenditures for work required to comply with local zoning requirements
up to a maximum amount designated for each property and an aggregate maximum
reimbursement of $875,000. The Company reimbursed Marketing $265,000 in 2004 and
expects to reimburse Marketing for the balance of these costs during 2005.
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 all pre-spin-off legal proceedings and claims relating to the
petroleum marketing business. As of December 31, 2004 and 2003 the Company had
accrued $3,623,000 and $3,415,000, respectively, for certain of these matters
which it believes are appropriate based on information 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 US 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 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 February 2004 the Company was notified that the
Company was made party to thirty-six cases, and one additional case in the
fourth quarter of 2004, in Connecticut, Florida, Massachusetts, New Hampshire,
New Jersey, New York, 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.
-28-
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 December 31, 2004 and
2003, the Company's consolidated balance sheets included, in accounts payable
and accrued expenses, $500,000 and $833,000, respectively, relating to insurance
obligations that may be deemed to have arisen prior to the spin-off of the
Marketing business. The Company's consolidated statements of operations for the
years ended December 31, 2004, 2003 and 2002 included, in general and
administrative expenses, credits of $312,000, $500,000 and $873,000,
respectively, for self-insurance. Since the spin-off, the Company has maintained
insurance coverage subject to certain deductibles.
4. DEBT
Mortgages payable consists of $509,000 of real estate mortgages, bearing
interest at a weighted average interest rate of 5.7% per annum, due in varying
amounts through May 1, 2015. Aggregate principal payments in subsequent years
for real estate mortgages are as follows: 2005--$285,000; 2006--$30,000;
2007--$31,000; 2008--$33,000; 2009--$27,000 and $103,000 thereafter. These
mortgages payable are collateralized by real estate having an aggregate net book
value of approximately $1,886,000 as of December 31, 2004.
As of December 31, 2004, the Company had an uncommitted line of credit with
a JPMorgan Chase Bank ("JPMorgan") in the amount of $25,000,000. Total
borrowings outstanding under the uncommitted line of credit at December 31, 2004
were $24,000,000. In addition, $157,000 was utilized in the form of outstanding
letters of credit relating to insurance obligations. Borrowing under the line of
credit is unsecured and bears interest at the bank's prime rate or, at the
Company's option, LIBOR plus 1.25% (aggregating 3.56% at December 31, 2004). The
line of credit is subject to annual renewal in June 2005 at the discretion of
the bank (see note 11).
5. ENVIRONMENTAL REMEDIATION COSTS
The Company is subject to numerous existing federal, state and local laws and
regulations, including matters relating to the protection of the environment. In
recent years, environmental expenses were principally attributable to
remediation, monitoring, and governmental agency reporting incurred in
connection with contaminated properties. In prior periods a larger portion of
the expenses also included soil disposal and the replacement or upgrading of
USTs to meet federal, state and local environmental standards. For the years
ended December 31, 2004, 2003 and 2002, the aggregate of the net changes in
estimated remediation costs and accretion expenses included in the Company's
consolidated statements of operations were $3,346,000, $5,450,000 and
$6,626,000, respectively, which amounts were net of estimated recoveries from
state UST remediation funds.
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 our tenants. The Company has agreed to pay all costs relating
to, and to indemnify Marketing for, certain environmental liabilities and
obligations for two hundred sixty-four properties that 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.
-29-
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.
Prior to the adoption of SFAS 143, effective January 1, 2003, if the best
estimate of cost for a component of the liability could only be identified as a
range, and no amount within the range was a better estimate than any other
amount, the minimum of the range had been accrued for that cost component rather
than the estimated fair value currently required under SFAS 143.
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 December 31, 2004, the Company
has remediation action plans in place for 316 (92%) of the 345 properties for
which it retained environmental responsibility and has not received a no further
action letter and the remaining 29 properties (8%) remain in the assessment
phase.
As of December 31, 2004, 2003 and January 1, 2003, the Company had accrued
$20,626,000, $23,551,000 and $29,426,000 respectively, as management's best
estimate of the fair value of reasonably estimable environmental remediation
costs. As of December 31, 2004, 2003 and January 1, 2003, the Company had also
recorded $5,437,000, $7,454,000 and $14,348,000, respectively, as management's
best estimate for recoveries from state UST remediation funds, net of allowance,
related to environmental obligations and liabilities. The net environmental
liabilities of $16,097,000 and 15,078,000 as of December 31, 2003 and January 1,
2003, respectively, were subsequently accreted for the change in present value
due to the passage of time and, accordingly, $1,054,000 and $1,284,000 of
accretion expense is included in environmental expenses for the years ended
December 31, 2004 and 2003, respectively. Environmental expenditures were
$6,776,000 and recoveries from underground storage tank funds were $2,362,000
for the year ended December 31, 2004.
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.
6. INCOME TAXES
Net cash paid for income taxes for the years ended December 31, 2004, 2003 and
2002 of $571,000, $949,000 and $662,000, respectively, includes amounts related
to state and local income taxes for jurisdictions that do not follow the federal
tax rules, which are provided for in rental property expenses in the Company's
consolidated statements of operations. Net cash paid for income taxes also
includes audit settlements which were provided for in the periods prior to 2001
when the Company was taxed as a C-corp.
-30-
7. SHAREHOLDERS' EQUITY
A summary of the changes in shareholders' equity for the years ended December
31, 2004, 2003, and 2002 is as follows (in thousands, except per share amounts):
<Table>
<Caption>
PREFERRED STOCK COMMON STOCK DIVIDENDS PAID
------------------ ------------------ PAID-IN IN EXCESS
SHARES AMOUNT SHARES AMOUNT CAPITAL OF EARNINGS
------ ------ ------ ------ ------- -----------
BALANCE, DECEMBER 31, 2001 2,889 72,220 22,441 224 198,575 (20,537)
Net earnings 36,163
Cash dividends:
Common--$1.65 per share (35,372)
Preferred--$1.867 per share (5,350)
Issuance of treasury stock 1
Cancellation of treasury stock (23) (576) (1,019) (10) (12,120)
Stock options 20 208
----- --------- ------ ------ ----------- ----------
BALANCE, DECEMBER 31, 2002 2,866 71,644 21,442 214 186,664 (25,096)
----- --------- ------ ------ ----------- ----------
Net earnings 36,887
Cash dividends:
Common--$1.675 per share (38,681)
Preferred--$1.159 per share (2,538)
Preferred stock redemption
and conversion (2,866) (71,644) 3,186 32 70,388
Stock options 36 1 154
----- --------- ------ ------ ----------- ----------
BALANCE, DECEMBER 31, 2003 -- -- 24,664 247 257,206 (29,428)
===== ========= ------ ------ ----------- ----------
Net earnings 39,352
Cash dividends:
Common--$1.70 per share (41,963)
Restricted stock unit 25
expense
Stock options 30 -- 64
----- --------- ------ ------ ----------- ----------
BALANCE, DECEMBER 31, 2004 -- $ -- 24,694 $247 $ 257,295 $ (32,039)(a)
===== ========= ====== ====== =========== ==========
</Table>
<Table>
<Caption>
PREFERRED STOCK COMMON STOCK
HELD IN TREASURY, HELD IN TREASURY,
AT COST AT COST
----------------- -------------------
SHARE AMOUNT SHARES AMOUNT TOTAL
------ ------ ------ -------- --------
BALANCE, DECEMBER 31, 2001 (23) $ (430) (1,019) $(12,279) $237,773
Net earnings 36,163
Cash dividends:
Common--$1.65 per share (35,372)
Preferred--$1.867 per share (5,350)
Issuance of treasury stock 3 4
Cancellation of treasury stock 23 430 1,019 12,276 --
Stock options 208
------ ------ ------ -------- --------
BALANCE, DECEMBER 31, 2002 -- -- -- -- 233,426
------ ------ ------ -------- --------
Net earnings 36,887
Cash dividends:
Common--$1.675 per share (38,681)
Preferred--$1.159 per share (2,538)
Preferred stock redemption
and conversion (1,224)
Stock options 155
------ ------ ------ -------- --------
BALANCE, DECEMBER 31, 2003 -- -- -- -- 228,025
------ ------ ------ -------- --------
Net earnings 39,352
Cash dividends:
Common--$1.70 per share (41,963)
Restricted stock unit expense 25
Stock options -- -- 64
------ ------ ------ -------- --------
BALANCE, DECEMBER 31, 2004 -- $ -- -- $ -- $225,503
====== ====== ====== ======== ========
</Table>
(a) Net of $103,803 transferred from retained earnings to common stock and
paid-in capital as a result of accumulated stock dividends.
-31-
In August 2003, the Company notified holders of Series A Participating
Convertible Redeemable Preferred Stock that the preferred stock would be
redeemed on September 24, 2003 for $25.00 per share plus a mandatory redemption
dividend of $0.271 per share. Prior to the redemption date, shareholders with
98% of the preferred stock exercised their right to convert 2,816,919 shares of
preferred stock into 3,186,355 shares of common stock at the conversion rate of
1.1312 shares of common stock for each share of preferred stock so converted,
and received cash in lieu of fractional shares of common stock. The remaining
48,849 shares of the outstanding preferred stock were redeemed for an aggregate
amount, including accrued dividends through the call date, of approximately
$1,234,000. Each share of preferred stock was convertible into 1.1312 shares of
common stock of the Company and paid stated cumulative dividends of $1.775 per
annum, or if greater on an "as converted basis," the cash dividends declared per
share of common stock for the calendar year.
The Company has authorized 20,000,000 shares of preferred stock, par value
$.01 per share, for issuance in series, of which none were issued as of December
31, 2004 and 2003.
-31-
8. EMPLOYEE BENEFIT PLANS
The Company has a retirement and profit sharing plan with deferred 401(k)
savings plan provisions (the "Retirement Plan") for employees meeting certain
service requirements and a supplemental plan for executives (the "Supplemental
Plan"). Under the terms of these plans, the annual discretionary contributions
to the plans are determined by the Board of Directors. Also, under the
Retirement Plan, employees may make voluntary contributions and the Company has
elected to match an amount equal to fifty percent of such contributions but in
no event more than three percent of the employee's eligible compensation. Under
the Supplemental Plan, a participating executive may receive an amount equal to
ten percent of eligible compensation, reduced by the amount of any contributions
allocated to such executive under the Retirement Plan. Contributions, net of
forfeitures, under the plans approximated $139,000, $125,000 and $118,000 for
the years ended December 31, 2004, 2003 and 2002, respectively. These amounts
are included in the accompanying consolidated statements of operations.
The Getty Realty Corp. 2004 Omnibus Incentive Compensation Plan (the "2004
Plan") became effective upon its approval at the Annual Meeting of Shareholders
held May 20, 2004. The 2004 Plan provides for the grant of restricted stock,
restricted stock units, performance awards, dividend equivalents, stock payments
and stock awards to all employees and members of the Board of Directors. The
2004 Plan authorizes the Company to grant awards with respect to an aggregate of
1,000,000 shares of common stock through 2014. The aggregate maximum number of
shares of common stock that may be subject to awards granted under the 2004 Plan
during any calendar year is 80,000.
On June 1, 2004, the Company awarded 10,800 restricted stock units ("RSUs")
and dividend equivalents to employees. On the settlement date each RSU will have
a value equal to one share of common stock and may be settled, in the sole
discretion of the Compensation Committee, in cash or by the issuance of one
share of common stock. The RSUs do not provide voting or other shareholder
rights unless and until the RSU is settled for a share of common stock. The RSUs
vest starting one year from the date of grant, on a cumulative basis at the
annual rate of twenty percent of the total number of RSUs covered by the award.
The dividend equivalents represent the value of the dividend paid per common
share paid multiplied by the number of RSUs vested as of the dividend payment
date assuming that the RSUs vest starting three months from the date of grant,
on a cumulative basis at the quarterly rate of five percent of the total number
of RSUs covered by the award. The fair value of the RSUs granted on June 1, 2004
was estimated at $19.91 per unit on the date of grant. The fair value of the
grant, aggregating approximately $215,000, will be recognized as compensation
expense ratably over the five year vesting period of the RSUs. Dividend
equivalents will be charged against retained earnings when common stock
dividends are declared.
The Company has a stock option plan (the "Stock Option Plan") which
authorizes the Company to grant options to purchase shares of the Company's
common stock (see note 1). The aggregate number of shares of the Company's
common stock which may be made the subject of options under the Stock Option
Plan may not exceed 1,100,000 shares, subject to further adjustment for stock
dividends and stock splits. The Stock Option Plan provides that options are
exercisable starting one year from the date of grant, on a cumulative basis at
the annual rate of twenty-five percent of the total number of shares covered by
the option.
-32-
The following is a schedule of stock option prices and activity relating to
the Stock Option Plan:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2004 2003 2002
---------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- -------- --------- --------
Outstanding at beginning of year 173,085 $ 18.19 358,773 $ 19.12 352,324 $ 19.51
Granted -- -- -- -- 69,500 18.30
Exercised (60,344) 16.40 (153,412) 19.10 (46,055) 15.78
Cancelled (2,192) 24.06 (32,276) 24.06 (16,996) 23.36
--------- -------- --------- -------- --------- --------
Outstanding at end of year 110,549 $ 18.64 173,085 $ 18.19 358,773 $ 19.12
--------- -------- --------- -------- --------- --------
Exercisable at end of year 66,299 $ 18.63 91,023 $ 18.63 214,711 $ 20.72
========= ======== ========= ======== ========= ========
Available for grant at end of year 663,073 660,881 628,605
========= ========= =========
</Table>
The following table summarizes information concerning options outstanding and
exercisable at December 31, 2004:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -------------------------------
WEIGHTED AVERAGE
REMAINING
RANGE OF NUMBER CONTRACTUAL WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ------------ -------------- ----------- --------------
$11.125-$14.50 16,563 6 $ 13.48 16,563 $ 13.48
16.15 - 18.30 64,000 7 17.43 19,750 17.08
24.06 29,986 2 24.06 29,986 24.06
------- ------
110,549 66,299
======= ======
</Table>
9. QUARTERLY FINANCIAL DATA
The following is a summary of the quarterly results of operations for the years
ended December 31, 2004 and 2003 (unaudited as to quarterly information) (in
thousands, except per share amounts):
<Table>
<Caption>
THREE MONTHS ENDED
---------------------------------------------------- YEAR ENDED
YEAR ENDED DECEMBER 31, 2004 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
---------------------------- --------- -------- ------------- ------------ ------------
Revenues from rental properties $ 16,511 $ 16,443 $ 16,425 $ 16,952 $ 66,331
Net earnings 9,157 9,367 9,969 10,859(a) 39,352
Diluted earnings per common share .37 .38 .40 .44 1.59
</Table>
<Table>
<Caption>
THREE MONTHS ENDED
---------------------------------------------------- YEAR ENDED
YEAR ENDED DECEMBER 31, 2003 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
---------------------------- --------- -------- ------------- ------------ ------------
Revenues from rental properties $ 16,677 $ 16,672 $ 16,676 $ 16,576 $ 66,601
Earnings before cumulative effect of accounting change 9,107 9,431 9,467 9,432 37,437
Net earnings 8,557 9,431 9,467 9,432 36,887
Diluted earnings per common share (b) .34 .38 .38 .38 1.49
</Table>
(a) Includes credits aggregating $686 for reductions in insurance and mortgage
receivable reserves.
(b) After giving effect to quarterly preferred stock dividends aggregating
$2,538 for the year ended December 31, 2003 and a reduction of $0.02 per
share for the cumulative effect of accounting change recorded in the first
quarter.
-33-
10. PROPERTY ACQUISITIONS
On November 1, 2004, the Company acquired thirty-six convenience store and
retail motor fuel properties located in Connecticut and Rhode Island for
approximately $25.7 million. Simultaneously 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 lease
capitalization rate and provides for escalations thereafter. The triple-net
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 environmental conditions at the properties, including those
properties where remediation activities are ongoing.
On May 1, 2003, the Company completed the acquisition of forty-one retail
motor fuel and convenience store properties that it had been leasing for the
past twelve years. The aggregate purchase price for these properties was
approximately $13.0 million, excluding transaction costs. Forty of the locations
are subleased to Marketing under the Master Lease through at least 2015. Annual
rent expense of approximately $1.3 million, and future rent escalations
scheduled through 2056, will be eliminated as a result of the acquisition. Since
the seller has agreed to indemnify the Company for historical environmental
costs, and the seller's indemnity is supported by an escrow fund established
solely for that purpose, the Company's exposure to environmental remediation
expenses should not change because of the acquisition.
11. SUBSEQUENT EVENTS
On February 23, 2005, the Company entered into a definitive real estate
asset purchase agreement to acquire 23 convenience store and retail motor fuel
properties in Virginia for approximately $29,000,000. The closing is expected to
be completed by the end of the first quarter 2005. The Company entered into a
triple-net lease with a single tenant for all of the properties. The tenant
currently leases the properties from the seller and operates the locations under
its proprietary convenience store brand in its network of over 200 locations.
The lease provides for annual rentals at a competitive lease capitalization 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. An affiliate of
the tenant currently leases other properties from the Company.
In March 2005 the Company entered into a Commitment Letter with JPMorgan
for an unsecured three-year senior revolving credit facility ("Credit Facility")
in the aggregate amount of $100,000,000 which the Company anticipates will
replace the outstanding $25,000,000 uncommitted line of credit. Under the terms
of the proposed Credit Facility, the Company will have the options to increase
the Credit Facility by $25,000,000 and extend the Credit Facility for one
additional year. While the Commitment Letter is non-binding and is subject to
JPMorgan's successful syndication of a substantial portion of the Credit
Facility, and execution of definitive agreements containing customary terms and
conditions, the Company believes that the Credit Facility will be committed and
available in the second quarter of 2005.
The Company anticipates that borrowings under the proposed Credit Facility
will bear interest at a rate equal to the sum of a base rate or a LIBOR rate
plus an applicable margin ranging from 1.25% to 1.75%, which is based on the
Company's leverage ratio, as defined by the Credit Facility. The annual
commitment fee on the unused proposed Credit Facility Fee will range from 0.10%
to 0.20%, which will be based on usage. The Company expects that the Credit
Facility will include 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, maintenance of tangible net worth and events of
default, including a change of control and maintenance of REIT status. The
Company does not believe that these covenants will limit its current business
practices.
In addition, JPMorgan has agreed to increase the funds available under the
existing $25,000,000 uncommitted line of credit, which expires on June 30, 2005,
if required to enable the Company to complete the acquisition discussed above
prior to funds becoming available under the proposed Credit Facility.
-34-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Getty Realty Corp.:
We have completed an integrated audit of Getty Realty Corp.'s 2004 consolidated
financial statements and of its internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002 consolidated financial
statements in accordance with standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our audits, are
presented below:
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and cash flows present fairly, in all
material respects, the financial position of Getty Realty Corp. and its
subsidiaries at December 31, 2004 and 2003, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2004 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that the
Company maintained effective internal control over financial reporting as of
December 31, 2004 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 11, 2005
-35-
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on our assessment under the framework in Internal Control - Integrated
Framework, our management concluded that our internal control over financial
reporting was effective as of December 31, 2004.
PricewaterhouseCoopers LLP, our independent registered public accounting
firm which audited the financial statements included in this Annual Report, has
issued an attestation report on management's assessment of our internal control
over financial reporting which is included herein.
CAPITAL STOCK
Our common stock is traded on the New York Stock Exchange (symbol: "GTY"). At
December 31, 2004, there were approximately 1,500 holders of record and 11,000
beneficial holders of our common stock. The price range of our common stock and
cash dividends declared with respect to each share of common stock during the
years ended December 31, 2004 and 2003 was as follows:
<Table>
<Caption>
PRICE RANGE CASH
--------------------- DIVIDENDS
PERIOD ENDING HIGH LOW PER SHARE
------------- -------- -------- ---------
December 31, 2004 $ 30.10 $ 26.04 $ .4250
September 30, 2004 26.22 22.75 .4250
June 30, 2004 25.52 21.35 .4250
March 31, 2004 27.47 25.27 .4250
December 31, 2003 $ 27.35 $ 23.95 $ .4250
September 30, 2003 25.25 22.41 .4250
June 30, 2003 23.42 18.78 .4125
March 31, 2003 19.49 17.90 .4125
</Table>
-36-