UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission file number 001-13777
GETTY REALTY CORP.
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(Exact name of registrant as specified in its charter)
MARYLAND 11-3412575
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 JERICHO TURNPIKE, SUITE 103
-------------------------------
JERICHO, NEW YORK 11753
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(Address of principal executive offices)
(Zip Code)
(516) 478 - 5400
----------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Registrant had outstanding 24,714,766 shares of Common Stock, par value $.01 per
share, as of August 1, 2005.
GETTY REALTY CORP.
INDEX
Page Number
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 2005 and
December 31, 2004 1
Consolidated Statements of Operations for the Three and Six
Months ended June 30, 2005 and 2004 2
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 2005 and 2004 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 22
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits 25
Signatures 26
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
June 30, December 31,
2005 2004
-------- ------------
Assets:
Real Estate:
Land $172,096 $ 156,571
Buildings and improvements 199,529 190,019
-------- ------------
371,625 346,590
Less - accumulated depreciation and amortization (106,654) (106,463)
-------- ------------
Real estate, net 264,971 240,127
Deferred rent receivable 27,002 25,117
Cash and equivalents 651 15,700
Recoveries from state underground storage tank funds, net 4,977 5,437
Mortgages and accounts receivable, net 3,761 3,961
Prepaid expenses and other assets 1,478 386
-------- ------------
Total assets $302,840 $ 290,728
======== ============
Liabilities and Shareholders' Equity:
Debt $ 37,938 $ 24,509
Environmental remediation costs 20,317 20,626
Dividends payable 10,761 10,495
Accounts payable and accrued expenses 7,819 9,595
-------- ------------
Total liabilities 76,835 65,225
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Commitments and contingencies
Shareholders' equity:
Common stock, par value $.01 per share; authorized
50,000,000 shares; issued 24,714,766 at June 30, 2005
and 24,694,071 at December 31, 2004 247 247
Paid-in capital 257,668 257,295
Dividends paid in excess of earnings (31,910) (32,039)
-------- ------------
Total shareholders' equity 226,005 225,503
-------- ------------
Total liabilities and shareholders' equity $302,840 $ 290,728
======== ============
The accompanying notes are an integral part of these financial statements.
- 1 -
GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2005 2004 2005 2004
------- --------- ------- ---------
Revenues from rental properties $17,872 $ 16,443 $35,268 $ 32,954
Expenses:
Rental property expenses 2,560 2,487 5,184 5,008
Environmental expenses, net 1,348 1,783 1,411 3,515
General and administrative expenses 1,289 1,255 2,600 2,632
Depreciation expense 2,065 1,828 4,014 3,664
------- --------- ------- ---------
Total operating expenses 7,262 7,353 13,209 14,819
------- --------- ------- ---------
Operating income 10,610 9,090 22,059 18,135
Other income, net 55 296 191 429
Interest expense (451) (19) (600) (40)
------- --------- ------- ---------
Net earnings $10,214 $ 9,367 $21,650 $ 18,524
======= ========= ======= =========
Net earnings per common share:
Basic $ .41 $ .38 $ .88 $ .75
Diluted $ .41 $ .38 $ .88 $ .75
Weighted average shares outstanding:
Basic 24,714 24,680 24,707 24,675
Stock options and restricted stock units 14 33 14 40
------- --------- ------- ---------
Diluted 24,728 24,713 24,721 24,715
======= ========= ======= =========
Dividends declared per share: $ .435 $ .425 $ .87 $ .85
The accompanying notes are an integral part of these financial statements
- 2 -
GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six months ended June 30,
-------------------------
2005 2004
-------- --------
Cash flows from operating activities:
Net earnings $ 21,650 $ 18,524
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization expense 4,014 3,664
Deferred rental revenue (1,885) (2,231)
Gain on dispositions of real estate (72) (146)
Accretion expense 420 462
Stock-based compensation expense 64 4
Changes in assets and liabilities:
Recoveries from state underground storage tank funds, net 660 1,483
Mortgages and accounts receivable, net 58 679
Prepaid expenses and other assets (1,092) 102
Environmental remediation costs (929) (1,659)
Accounts payable and accrued expenses (1,776) (154)
-------- --------
Net cash provided by operating activities 21,112 20,728
-------- --------
Cash flows from investing activities:
Property acquisitions and capital expenditures (29,571) (3,643)
Collection of mortgages receivable, net 142 847
Proceeds from dispositions of real estate 785 390
-------- --------
Net cash used in investing activities (28,644) (2,406)
-------- --------
Cash flows from financing activities:
Cash dividends paid (21,255) (20,972)
Borrowings under credit line, net 13,700 -
(Repayment) issuance of mortgages payable, net (271) 20
Stock issued 309 58
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Net cash used in financing activities (7,517) (20,894)
-------- --------
Net decrease in cash and equivalents (15,049) (2,572)
Cash and equivalents at beginning of period 15,700 19,905
-------- --------
Cash and equivalents at end of period $ 651 $ 17,333
======== ========
Supplemental disclosures of cash flow information
Cash paid (refunded) during the period for:
Interest $ 611 $ 40
Income taxes, net 217 188
Recoveries from state underground storage tank funds (1,033) (987)
Environmental remediation costs 2,174 2,710
The accompanying notes are an integral part of these financial statements.
- 3 -
GETTY REALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General:
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America ("GAAP"). The consolidated financial statements include the accounts of
Getty Realty Corp. and its wholly-owned subsidiaries (the "Company"). The
Company is a real estate investment trust ("REIT") specializing in the ownership
and leasing of retail motor fuel and convenience store properties and petroleum
distribution terminals. The Company manages and evaluates its operations as a
single segment. All significant intercompany accounts and transactions have been
eliminated.
The financial statements have been prepared in conformity with GAAP, which
requires management to make its best estimates, judgments and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the period reported. While all available
information has been considered, actual results could differ from those
estimates, judgments and assumptions. Estimates, judgments and assumptions
underlying the accompanying consolidated financial statements include, but are
not limited to, deferred rent receivable, recoveries from state underground
storage tank funds, environmental remediation costs, depreciation and
amortization, impairment of long-lived assets, litigation, accrued expenses,
income taxes and exposure to paying an earnings and profits deficiency dividend.
The consolidated financial statements are unaudited but, in the opinion of
management, reflect all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation. These statements should be read in
conjunction with the consolidated financial statements and related notes, which
appear in the Company's Annual Report on Form 10-K for the year ended December
31, 2004.
2. Earnings Per Share:
Basic earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share also give effect to the potential dilution from the issuance
of common shares in settlement of stock option and restricted stock unit awards.
3. Stock-Based Employee Compensation:
The Company recorded stock-based employee compensation expense of $38,000
and $64,000 for the three and six months ended June 30, 2005, respectively, and
$4,000 for the three and six months ended June 30, 2004 utilizing the fair value
basis of accounting. Under the fair value method of accounting, compensation
expense equal to the fair value of the stock-based award at the date of grant is
recognized as compensation expense ratably over the vesting period of the award.
Stock-based
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employee compensation expense is related to restricted stock units granted in
June 2004 and March 2005 under the Company's Omnibus Incentive Compensation Plan
which vest over five years. For the three and six months ended June 30, 2005,
the stock-based employee compensation expense is also related to stock options
granted in September 2001 and December 2002 under the Company's Stock Option
Plan which vest over four years.
Effective December 31, 2002 the Company changed to the fair value basis of
accounting for stock-based employee compensation for awards granted subsequent
to that date. In 2004 the Company accounted for options granted under its stock
option plan prior to January 1, 2003 using the intrinsic value method.
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. Since there were no stock-based
compensation awards granted from January 1, 2003 through March 31, 2004,
stock-based employee compensation expense was not required to be recorded in the
first quarter of 2004. Effective January 1, 2005, the Company changed to the
fair value basis of accounting for all of the awards outstanding as of that date
that it had been accounting for under the intrinsic value method.
Had compensation cost for the Company's stock option plan been accounted
for in 2004 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):
Three months Six months
ended ended
June 30, 2004 June 30, 2004
------------- -------------
Net earnings, as reported $ 9,367 $ 18,524
Add: Stock-based employee
compensation expense included in
reported net earnings 4 4
Deduct: Total stock-based employee
compensation expense using the fair
value method 27 50
------------- -------------
Pro-forma net earnings $ 9,344 $ 18,478
============= =============
Net earnings per common share:
As reported $ .38 $ .75
Pro-forma $ .38 $ .75
- 5 -
4. Shareholders' Equity:
A summary of the changes in shareholders' equity for the six months ended
June 30, 2005 is as follows (in thousands, except share amounts):
Dividends
Common Stock Paid In
------------------- Paid-in Excess Of
Shares Amount Capital Earnings Total
---------- ------ --------- --------- ---------
Balance, December 31, 2004 24,694,071 $ 247 $ 257,295 $ (32,039) $ 225,503
Net earnings 21,650 21,650
Dividends (21,521) (21,521)
Stock-based employee compensation
expense 64 64
Stock issued 20,695 309 309
---------- ------ --------- --------- ---------
Balance, June 30, 2005 24,714,766 $ 247 $ 257,668 $ (31,910) $ 226,005
========== ====== ========= ========= =========
The Company is authorized to issue 20,000,000 shares of preferred stock,
par value $.01 per share, of which none were issued as of December 31, 2004 or
June 30, 2005.
5. 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. As of June 30, 2005 and
December 31, 2004 the Company had accrued $2,594,000 for this and certain other
tax matters which it believes are appropriate based on information currently
available. The reserves are adjusted as circumstances change and as the
uncertainties become more clearly defined, such as when tax audits are settled
or exposures expire. The ultimate resolution of these matters may have a
significant impact on the results of operations for any single fiscal year or
interim period.
In order to minimize the Company's exposure to credit risk associated with
financial instruments, the Company places its temporary cash investments with
high credit quality institutions. Temporary cash investments, if any, are held
in an institutional money market fund or federal agency discount notes.
As of June 30, 2005, the Company leased nine hundred forty-three of its
one thousand sixty properties on a long-term net basis to Getty Petroleum
Marketing Inc. ("Marketing") under a master lease ("Master Lease") and a
coterminous supplemental lease for one property (collectively the "Marketing
Leases") (see note 2 to the consolidated financial statements which appear in
the Company's Annual Report on Form 10-K for the year ended December 31, 2004).
Marketing operated substantially all of the Company's petroleum marketing
businesses when it was spun-off to the Company's shareholders as a separate
publicly held company in March 1997 (the "Spin-Off"). In December 2000,
Marketing was acquired by a subsidiary of OAO Lukoil, one of Russia's largest
oil
- 6 -
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 $27,002,000 recorded as of June 30, 2005 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 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 amounts will be required to be paid under the agreement.
The Company is subject to various legal proceedings and claims which arise
in the ordinary course of its business. In addition, the Company has retained
responsibility for all pre-Spin-Off legal proceedings and claims relating to the
petroleum marketing business. As of June 30, 2005 and December 31, 2004 the
Company had accrued $2,430,000 and $3,623,000, 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
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, 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 most of the conditions at the
property identified by the New Jersey Department of Environmental Protection and
the EPA. Accordingly, the ultimate legal and financial liability of the Company,
if any, cannot be estimated with any certainty at this time.
From October 2003 through November 2004, the Company was notified that it
had been made party to 37 cases in Connecticut, Florida, Massachusetts, New
Hampshire, New Jersey, New York, Pennsylvania, Vermont, Virginia and West
Virginia brought by local water providers or governmental
- 7 -
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 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.
6. 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. Environmental expenses are principally attributable to remediation
costs which include installing, operating, maintaining and decommissioning
remediation systems, monitoring contamination, and governmental agency reporting
incurred in connection with contaminated properties. Environmental remediation
liabilities and related assets are measured at fair value based on their
expected future cash flows which have been adjusted for inflation and discounted
to present value. For the three and six months ended June 30, 2005, the
aggregate of the net changes in estimated remediation costs and accretion
expense included in environmental expenses in the Company's consolidated
statements of operations were $1,025,000 and $1,292,000, respectively, and
$895,000 and $1,929,000, respectively, for the comparable prior year periods,
which amounts were net of changes in estimated recoveries from state underground
storage tank ("UST") remediation funds. Environmental expenses also include
project management fees, legal fees and provisions for environmental litigation
loss reserves.
In accordance with leases with certain tenants, the Company has agreed to
bring the leased properties with known environmental contamination to within
applicable standards and to regulatory or contractual closure ("Closure") in an
efficient and economical manner. Generally, upon achieving Closure at each
individual property, the Company's environmental liability under the lease for
that property will be satisfied and future remediation obligations will be the
responsibility of the tenant. Of the nine hundred forty-three properties leased
to Marketing as of June 30, 2005, the Company has agreed to pay all costs
relating to, and to indemnify Marketing for, certain environmental liabilities
and obligations for the remaining two hundred sixty-six properties that are
scheduled in the Master Lease and have not achieved Closure. The Company will
continue to seek reimbursement from state UST remediation funds related to these
environmental expenditures where available.
The estimated future costs for known environmental remediation
requirements are accrued when it is probable that a liability has been incurred
and a reasonable estimate of fair value can be made. The environmental
remediation liability is estimated based on the level and impact of
contamination at each property. The accrued liability is the aggregate of the
best estimate of the fair value of cost for each component of the liability.
Recoveries of environmental costs from state UST remediation funds, with respect
to both past and future environmental spending, are accrued at fair value as
income, net of allowance for collection risk, based on estimated recovery rates
developed from prior experience with the funds when such recoveries are
considered probable.
Environmental exposures are difficult to assess and estimate for numerous
reasons, including the
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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 June 30, 2005, the Company has remediation action
plans in place for 297 (91%) of the 328 properties for which it retained
environmental responsibility and has not received a no further action letter and
the remaining 31 properties (9%) remain in the assessment phase.
As of June 30, 2005, December 31, 2004 and December 31, 2003 the Company
had accrued $20,317,000, $20,626,000, and $23,551,000, respectively, as
management's best estimate of the fair value of reasonably estimable
environmental remediation costs. As of June 30, 2005, December 31, 2004 and
December 31, 2003, the Company had also recorded $4,977,000, $5,437,000 and
$7,454,000, respectively, as management's best estimate for recoveries from
state UST remediation funds, net of allowance, related to environmental
obligations and liabilities. Accrued environmental remediation costs and
recoveries from state UST remediation funds have been accreted for the change in
present value due to the passage of time and, accordingly, $420,000 and $462,000
of net accretion expense is included in environmental expenses for the six
months ended June 30, 2005 and 2004. Environmental expenditures were $2,174,000
and recoveries from UST remediation funds were $1,033,000 for the six months
ended June 30, 2005.
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.
7. Debt
As of June 30, 2005, debt consisted of $37,700,000 in borrowings under a
revolving credit agreement bearing interest at 4.35% and $238,000 of mortgages
due in varying amounts through May 1, 2015.
On June 30, 2005, the Company entered into an unsecured three-year senior
revolving $100,000,000 Credit Agreement ("Credit Agreement") with a group of six
domestic commercial banks which replaced the Company's outstanding $50,000,000
uncommitted line of credit with one bank. The Credit Agreement matures on June
30, 2008 and does not provide for scheduled reductions in the principal balance
prior to its maturity. Subject to the term of the credit agreement, the Company
has the right to increase the Credit Agreement by $25,000,000 and to extend the
term of the Credit Agreement for one additional year.
Borrowings under the Credit Agreement bear interest at a rate equal to the
sum of a base rate or a LIBOR rate plus an applicable margin based on the
Company's leverage ratio and ranging from 0.25% to 1.75%.
- 9 -
The annual commitment fee on the unused Credit Agreement will range from 0.10%
to 0.20% based on usage. The Credit Agreement includes customary terms and
conditions, including financial covenants such as leverage and coverage ratios
and other customary covenants, including limitations on the Company's ability to
incur debt and pay dividends and maintenance of tangible net worth and events of
default, including a change of control and failure to maintain REIT status. The
Company does not believe that these covenants will limit its current business
practices.
8. Acquisition
On March 25, 2005, the Company acquired 23 convenience store and retail
motor fuel properties in Virginia for approximately $29,000,000 which is
included in land and buildings and improvements in the consolidated balance
sheet as of June 30, 2005. Available cash and equivalents and revolving debt
were utilized to finance the transaction.
All of the properties are triple-net-leased to a single tenant who
previously leased 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 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.
- 10 -
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion and analysis of financial condition and results of operations
should be read in conjunction with the Section entitled "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" which
appears in our Annual Report on Form 10-K for the year ended December 31, 2004,
"Risks and Uncertainties" in Exhibit 99 to this Form 10-Q and the accompanying
consolidated financial statements and related notes which appear in this Form
10-Q.
General
We are a real estate investment trust ("REIT") 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 that 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-three of our one thousand sixty 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 the revenue from leasing retail motor fuel and convenience
store properties and petroleum distribution terminals, primarily to Marketing,
for substantially all of our revenues (89.4% for the six months ended June 30,
2005). 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.
Marketing's financial results depend largely on retail petroleum marketing
margins and rental income from subtenants who operate our properties. The
petroleum marketing industry has been and continues to be volatile and highly
competitive. 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. Certain of this information is not publicly available and
the terms of the Master Lease prohibit us from including this financial
- 11 -
information in our Annual Reports on Form 10-K, our Quarterly Reports on Form
10-Q or in our Annual Reports to Shareholders. The financial performance of
Marketing may deteriorate, and Marketing may ultimately default on its monetary
obligations to us before we receive financial information from Marketing that
would indicate the deterioration 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.
The most recent selected financial data of Marketing which is available is
provided below. Neither we nor our auditors, were involved in the preparation of
this data.
For the years ended December 31,
--------------------------------
2003 2002
------------- --------------
(unaudited, in thousands)
Operating data:
Total revenues $ 1,297,042 $ 1,029,926
Total expenses 1,290,439 1,038,385
----------- -----------
Earnings (loss) before provision (credit) for income 6,603 (8,459)
taxes
Provision (credit) for income taxes 3,157 (3,389)
----------- -----------
Net earnings (loss) $ 3,446 ($ 5,070)
=========== ===========
Balance Sheet Data (at end of period):
ASSETS:
Cash and equivalents $ 44,210 $ 18,678
Other current assets 68,971 62,448
----------- -----------
Total current assets 113,181 81,126
Property and equipment, net 134,792 139,477
Other assets 3,956 5,338
----------- -----------
Total assets $ 251,929 $ 225,941
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Total current liabilities $ 125,940 $ 107,362
Long-term liabilities 62,419 58,438
----------- -----------
Total liabilities 188,359 165,800
Total stockholder's equity 63,570 60,141
----------- -----------
Total liabilities and stockholder's equity $ 251,929 $ 225,941
=========== ===========
Audited financial data of Marketing for the year ended December 31, 2004 is not
yet available. In 2004, Marketing reported the acquisition of more than 750
Mobil stations in New Jersey and Pennsylvania from ConocoPhillips for $266
million with debt and funds provided, in part, from capital contributed from its
parent company, OAO Lukoil. Title to approximately 280 properties was acquired
with the remaining properties being supplied with gasoline under contract.
Marketing's results for 2004, take into account the acquisition. We were advised
by Marketing that their total assets, total liabilities and stockholder's equity
increased significantly at December 31, 2004, and its revenues and net income
increased significantly for the year then ended, as compared to the respective
amounts for 2003.
- 12 -
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, certain publicly available
information regarding Marketing's financial and our assessment of the financial
condition of Marketing, we believe that Marketing has the liquidity and
financial ability to continue to pay timely its monetary obligations under the
Marketing Leases, as it has since the inception of the Master Lease in 1997
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 90% of our
taxable income each year. In addition to measurements defined by generally
accepted accounting principles ("GAAP"), our management also focuses on funds
from operations ("FFO") and adjusted funds from operations ("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 and extraordinary items. 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
deferred rental revenue (straight-line rent) on our recognition of revenues from
rental properties, which results from fixed rental increases scheduled under
certain leases with our tenants. In accordance with GAAP, the aggregate minimum
rent due over the initial term of these leases 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 these leases than FFO.
Neither FFO nor AFFO represent cash generated from operating activities
calculated in accordance with GAAP and therefore should not be considered an
alternative for GAAP net earnings or as a measure of liquidity.
- 13 -
A reconciliation of net earnings to FFO and AFFO for the three and six
months ended June 30, 2005 and 2004 is as follows (in thousands, except per
share amounts):
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
2005 2004 2005 2004
-------- ------- ------- --------
Net earnings $ 10,214 $ 9,367 $21,650 $ 18,524
Depreciation and amortization expense 2,065 1,828 4,014 3,664
Gains on sales of real estate - (146) (72) (146)
-------- ------- ------- --------
Funds from operations 12,279 11,049 25,592 22,042
Deferred rental revenue (straight-line rent) (985) (1,115) (1,885) (2,231)
-------- ------- ------- --------
Adjusted funds from operations $ 11,294 $ 9,934 $23,707 $ 19,811
======== ======= ======= ========
Diluted per common share amounts:
Earnings per share $ .41 $ .38 $ 0.88 $ .75
Funds from operations per share $ .50 $ .45 $ 1.04 $ .89
Adjusted funds from operations per share $ .46 $ .40 $ 0.96 $ .80
Diluted weighted average shares outstanding 24,728 24,713 24,721 24,715
Results of operations
Quarter ended June 30, 2005 compared to the quarter ended June 30, 2004
Revenues from rental properties were $17.9 million for the three months
ended June 30, 2005 and $16.4 million for the three months ended June 30, 2004.
We received rent from properties leased to Marketing under the Marketing Leases
of approximately $14.9 million in the three months ended June 30, 2005 and $14.7
million in the three months ended June 30, 2004. We also received rent from
other tenants of $2.0 million in the three months ended June 30, 2005 and $0.6
million in the three months ended June 30, 2004. The increase in rent received
was primarily due to rental income from the properties acquired in November 2004
and March 2005 and rent escalations, and was partially offset by the effect of
lease terminations and property dispositions. In addition, revenues from rental
properties include deferred rental revenues of $1.0 million for the three months
ended June 30, 2005 and $1.1 million for the three months ended June 30, 2004,
recognized as required by GAAP, related to the fixed future rent increases
scheduled under certain leases with our tenants. The aggregate minimum rent due
over the initial term of these leases 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 $2.6 million for the three
months ended June 30, 2005, which was comparable to the $2.5 million recorded
for the three months ended June 30, 2004.
- 14 -
Environmental expenses for the three months ended June 30, 2005 were $1.3
million as compared to $1.8 million for the three months ended June 30, 2004.
The decrease was due to a reduction in legal fees and litigation related
expenses as compared to the prior year period, partially offset by a slight
increase in net changes in estimated environmental expenses and accretion
expense of $0.1 million. The net changes in estimated environmental expenses and
accretion expense aggregated $1.0 million for the three months ended June 30,
2005 compared to $0.9 million recorded in the comparable period last year.
General and administrative expenses for the three months ended June 30,
2005 were $1.3 million for the three months ended June 30, 2005, which was
comparable to the three months ended June 30, 2004.
Depreciation and amortization expense for the three months ended June 30,
2005 was $2.1 million, as compared to the $1.8 million recorded for the three
months ended June 30, 2004. The increase was primarily due to depreciation and
amortization from properties acquired in November 2004 and March 2005.
Other income for the three months ended June 30, 2005 was $0.1 million, as
compared to $0.3 million recorded for the three months ended June 30, 2004. The
$0.2 million decrease as compared to the prior year period is primarily due to
decreases in investment income and gains on dispositions of properties.
Interest expense, principally related to borrowings under lines of credit
used to acquire properties in November 2004 and March 2005, was $0.5 million for
the three months ended June 30, 2005 and was insignificant for the three months
ended June 30, 2004.
Net earnings were $10.2 million for the three months ended June 30, 2005
as compared to $9.4 million for the comparable prior year period. Net earnings
for the three months ended June 30, 2005 increased by 9%, or $0.8 million, over
the comparable period in 2004. FFO increased $1.2 million, or 11.1%, to $12.3
million and AFFO increased $1.4 million, or 13.7%, to $11.3 million in the three
months ended June 30, 2005. AFFO increased more than FFO on both a dollar and
percentage basis due to a $0.1 million decrease in deferred rental revenues
(which are included in net earnings and FFO but are excluded from AFFO) recorded
for the three months ended June 30, 2005 as compared to the three months ended
June 30, 2004.
Diluted earnings per share for the three months ended June 30, 2005
increased $0.03 per share to $0.41 per share, as compared to the three months
ended June 30, 2004. Diluted FFO per share increased $0.05 per share to $0.50
per share compared to the three months ended June 30, 2004. Diluted AFFO per
share for the three months ended June 30, 2005 increased $0.06 per share to
$0.46 per share, as compared to the three months ended June 30, 2004.
- 15 -
Results of operations
Six months ended June 30, 2005 compared to six months ended June 30, 2004
Revenues from rental properties were $35.3 million for the six months
ended June 30, 2005 and $33.0 million for the six months ended June 30, 2004. We
received rent from properties leased to Marketing under the Marketing Leases of
approximately $29.8 million in the six months ended June 30, 2005 and $29.5
million for the six months ended June 30, 2004. We also received rent from other
tenants of $3.6 million in the six months ended June 30, 2005 and $1.2 million
in six months ended June 30, 2004. The increase in rent received was primarily
due to rental income from the properties acquired in November 2004 and March
2005 and rent escalations, and was partially offset by the effect of lease
terminations and property dispositions. In addition, revenues from rental
properties include deferred rental revenues of $1.9 million for the six months
ended June 30, 2005 and $2.2 million for the six months ended June 30, 2004.
Rental property expenses were $5.2 million for the six months ended June
30, 2005, which was comparable to the $5.0 million recorded for the six months
ended June 30, 2004.
Environmental expenses for the six months ended June 30, 2005 were $1.4
million as compared to $3.5 million for the six months ended June 30, 2004. The
decrease was primarily due to a reduction in the net change in estimated
environmental costs and accretion expense of $0.6 million as well as a reduction
in litigation related expenses of $1.5 million as compared to the prior year
period. Environmental expenses for the six months ended June 30, 2005 include a
$0.5 million net credit in environmental litigation expense due to a net
reduction in litigation loss reserve estimates that were recorded in the first
quarter of 2005. The net change in estimated environmental expenses and
accretion expense aggregated $1.3 million for the six months ended June 30, 2005
compared to $1.9 million recorded in the comparable period last year.
General and administrative expenses were $2.6 million for the six months
ended June 30, 2005 and June 30, 2004.
Depreciation and amortization expense for the six months ended June 30,
2005 was $4.0 million, as compared to the $3.7 million recorded for the six
months ended June 30, 2004. The increase was primarily due to depreciation and
amortization from properties acquired in November 2004 and March 2005.
As a result, total operating expenses declined by approximately $1.6
million for the six months ended June 30, 2005 as compared to the six months
ended June 30, 2004.
Other income for the six months ended June 30, 2005 was $0.2 million, as
compared to $0.4 million recorded for the six months ended June 30, 2004. The
$0.2 million decrease as compared to the prior year period is primarily due to
decreases in investment income and gains on dispositions of properties.
- 16 -
Interest expense, principally related to borrowings under lines of credit
used to acquire properties in November 2004 and March 2005, was $0.6 million for
the six months ended June 30, 2005 and was insignificant for the six months
ended June 30, 2004.
Net earnings were $21.7 million for the six months ended June 30, 2005 as
compared to $18.5 million for the comparable prior year period. Net earnings for
the six months ended June 30, 2005 increased by 16.9%, or $3.1 million, over the
comparable period in 2004. FFO increased $3.6 million, or 16.1%, to $25.6
million and AFFO increased $3.9 million, or 19.7%, to $23.7 million in the six
months ended June 30, 2005. AFFO increased more than FFO on both a dollar and
percentage basis due to a $0.3 million decrease in deferred rental revenues
(which are included in net earnings and FFO but are excluded from AFFO) recorded
for the six months ended June 30, 2005 as compared to the six months ended June
30, 2004.
Diluted earnings per share for the six months ended June 30, 2005
increased $0.13 per share to $0.88 per share, as compared to the six months
ended June 30, 2004. Diluted FFO per share increased $0.15 per share to $1.04
per share compared to respective amounts for the six months ended June 30, 2004.
Diluted AFFO per share for the six months ended June 30, 2005 increased $0.16
per share to $0.96 per share, as compared to the six months ended June 30, 2004.
Liquidity and Capital Resources
Our principal sources of liquidity are the cash flows from our business,
funds available under a revolving credit agreement and available cash and
equivalents. Management believes that dividend payments and cash requirements
for our business for the next twelve months, including environmental remediation
expenditures, capital expenditures and debt service, can be met by cash flows
from operations, borrowing under the revolving credit agreement and available
cash and equivalents.
On June 30, 2005, we entered into an unsecured three-year senior revolving
$100.0 million credit agreement ("Credit Agreement") with a group of six
domestic commercial banks which is scheduled to expire in 2008. Subject to the
terms of the Credit Agreement, we have the right to increase the Credit
Agreement by $25.0 million and to extend the term of the Credit Agreement for
one additional year. Borrowings under the Credit Agreement bear interest at a
rate equal to the sum of a base rate or a LIBOR rate plus an applicable margin
based on our leverage ratio and ranging from 0.25% to 1.75%. The annual
commitment fee on the unused credit agreement will range from 0.10% to 0.20%
based on the amount of borrowings. The Credit Agreement includes customary terms
and conditions including financial covenants such as leverage and coverage
ratios and other customary covenants, including limitations on our ability to
incur debt and pay dividends and maintenance of tangible net worth and events of
default, including a change of control and failure to maintain REIT status. We
do not believe that these covenants will limit our current business practices.
Total borrowings outstanding under the Credit Agreement at June 30, 2005
were $37.7 million, bearing interest at a rate of 4.35% per annum. Total
borrowings increased to $39.5 million as of August 1, 2005 principally due to
additional borrowings for the dividends accrued as of June 30, 2005 of $10.8
million that were paid in July, net of repayments from positive cash flows
provided by rental operations in July and August. Accordingly, we had $60.5
million of unused availability under the terms of the Credit Agreement as of
August 1, 2005.
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 paid to
our shareholders were $21.3 million for the six months ended June 30, 2005 and
$21.0 million for the
- 17 -
prior year period. We presently intend to pay stock dividends of $0.435 per
quarter ($1.74 per share on an annual basis), and commenced doing so with the
quarterly dividend declared in the quarter ended March 31, 2005.
On March 25, 2005, we acquired 23 convenience store and retail motor fuel
properties in Virginia for approximately $29.0 million which is included in land
and buildings and improvements in the consolidated balance sheet as of June 30,
2005. We utilized available cash and equivalents and revolving debt to finance
the transaction. All of the properties are triple-net-leased to a single tenant
who previously leased 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 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.
Critical Accounting Policies
Our accompanying interim consolidated financial statements include the
financial condition and results of operations of Getty Realty Corp. and our
wholly-owned subsidiaries. The preparation of financial statements in accordance
with GAAP requires management to make estimates, judgments and assumptions that
affect amounts reported in its financial statements. Although we have made our
best estimates, judgments and assumptions regarding future uncertainties
relating to the information included in our financial statements, giving due
consideration to the accounting policies selected and materiality, actual
results could differ from these estimates, judgments and assumptions. We do not
believe that there is a great likelihood that materially different amounts would
be reported related to the application of the accounting policies described
below.
Estimates, judgments and assumptions underlying the accompanying
consolidated financial statements include, but are not limited to, deferred rent
receivable, recoveries from state underground storage tank funds, environmental
remediation costs (see "Environmental Matters" below), real estate, depreciation
and amortization, impairment of long-lived assets, litigation, accrued expenses,
income taxes and exposure to paying an earnings and profits deficiency dividend.
The information included in our financial statements that is based on estimates,
judgments and assumptions is subject to significant change and is adjusted as
circumstances change and as the uncertainties become more clearly defined. Our
accounting policies are described in note 1 to the consolidated financial
statements which appear in our Annual Report on Form 10-K for the year ended
December 31, 2004. We believe that the more critical of our accounting policies
relate to revenue recognition, impairment of long-lived assets, income taxes,
environmental costs and recoveries from state underground storage tank funds and
litigation, each of which is discussed in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our Annual Report
on Form 10-K for the year ended December 31, 2004.
- 18 -
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
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. As of June 30, 2005, we have remediation action plans in place for
297 (91%) of the 328 properties for which we retained environmental
responsibility and the remaining 31 properties (9%) remain in the assessment
phase.
As of June 30, 2005, December 31, 2004 and December 31, 2003, we had
accrued $20.3 million, $20.6 million, and $23.6 million, respectively, as
management's best estimate of the fair value of reasonably estimable
environmental remediation costs. As of June 30, 2005, December 31, 2004 and
December 31, 2003, we had also recorded $5.0 million, $5.4 million and $7.5
million, respectively, as management's best estimate for net recoveries from
state UST remediation funds, net of allowance, related to environmental
obligations and liabilities. Accrued environmental remediation costs and
recoveries from state UST remediation funds have been accreted for the change in
present value due to the passage of time and, accordingly, $0.4 million and $0.5
million of accretion expense is included in environmental expenses for the six
month periods ended June 30, 2005 and 2004, respectively. Environmental
expenditures were $2.2 million, and recoveries from underground storage tank
funds were $1.0 million for the six month period ended June 30, 2005.
We currently estimate that our net environmental remediation spending will
be approximately $5.0 million during 2005. Our business plan for 2005 currently
projects 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 the current year, we
assumed a 50% probability factor that the actual environmental expenses will
exceed engineering estimates for an amount assumed to equal one year of expenses
aggregating $6.1 million for those sites. Accordingly, the environmental accrual
as of June 30, 2005 was increased by $2.4 million, net of assumed recoveries and
before inflation and present value discount adjustments. The resulting net
environmental accrual as of June 30, 2005 was then further increased by $1.4
million for the assumed impact of inflation using an inflation rate of 2.75%.
Assuming a credit-adjusted risk-free rate of 7.0%, we then reduced the net
environmental accrual, as previously adjusted, by a $2.9 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 June 30,
2005 would have increased by $0.3 million and $0.1 million, respectively, for
those factors for an aggregate increase in the net environmental accrual of $0.4
million. However, the aggregate net change in environmental estimates and
accretion expense recorded during the six months ended June 30, 2005 would not
have changed significantly if these changes in the assumptions were made
effective December 31, 2004.
In view of the uncertainties associated with environmental expenditures,
however, we believe it is
- 19 -
possible that the fair value of future actual net expenditures could be
substantially higher than these estimates. Adjustments to accrued liabilities
for environmental remediation costs will be reflected in our financial
statements as they become probable and a reasonable estimate of fair value can
be made. For the six months ended June 30, 2005 and 2004, the aggregate of the
net change in estimated remediation costs and accretion expense included in our
consolidated statement of operations amounted to $1.3 million and $1.9 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.
Our discussion of environmental matters should be read in conjunction with
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" which appears in the Company's Annual Report on Form 10-K for the
year ended December 31, 2005 and the accompanying consolidated financial
statements and related notes which appear in this Form 10-Q (including notes 5
and 6).
Forward Looking Statements
Certain statements in this Quarterly Report may constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. When we use the words "believes," "expects,"
"plans," "projects," "estimates" and similar expressions, we intend to identify
forward-looking statements. Examples of forward-looking statements include
statements regarding our expectations regarding future payments from Marketing;
the expected effect of regulations on our long-term performance; our expected
ability to maintain compliance with applicable regulations; the adequacy of our
current and anticipated cash flows; the impact of the covenants included in the
Credit Agreement on our current business practices; the probable outcome of
litigation or regulatory actions; our expected recoveries from underground
storage tank funds; our exposure to environmental remediation expenses; our
expectations as to the long-term effect of environmental liabilities on our
financial condition; our exposure to interest rate fluctuations; our
expectations regarding corporate level federal income taxes; the indemnification
obligations of the Company and others; assumptions regarding the future
applicability of accounting estimates, assumptions and policies; our intention
to pay future dividends and our beliefs about the reasonableness of our
accounting estimates, judgments and assumptions.
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 are more fully detailed in our Annual
Report on form 10-K for the year ended December 31, 2004 and include, but are
not limited to: risks associated with owning and leasing real estate generally;
dependence on Marketing as a tenant and on rentals from companies engaged in the
petroleum marketing and convenience store businesses; 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
- 20 -
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.
- 21 -
Item 3. Quantitative and Qualitative 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 June 30, 2005 or at any time during the six months 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 $100.0
million Credit Agreement. 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 borrowings
under the Credit Agreement, as anticipated in connection with the acquisition
completed on March 25, 2005, as compared to December 31, 2004 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 Credit Agreement to
finance acquisitions and for general corporate purposes. Borrowings under our
Credit Agreement bear interest at a rate equal to the sum of a base rate or a
Libor rate plus an applicable margin based on our leverage ratio and ranging
from 0.25% to 1.75%. At June 30, 2005, we had borrowings outstanding of $37.7
million under our Credit Agreement bearing interest at a rate of 4.35% per
annum, and had not entered into any instruments to hedge our resulting exposure
to interest-rate risk.
Management believes that the fair value of the debt equals its carrying
value at June 30, 2005 and December 31, 2004. Our exposure to fluctuations in
interest rates will increase or decrease in the future with increases or
decreases in the amount of borrowings outstanding under our Credit Agreement.
In order to minimize our exposure to credit risk associated with financial
instruments, we place our temporary cash investments with high-credit-quality
institutions. Temporary cash investments, if any, are held in an institutional
money market fund and short-term federal agency discount notes.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's reports
filed under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms, and that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
As required by Rule 13a-15(b), the Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and the Company's Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the quarter
covered by this report. Based on the foregoing, the Company's Chief Executive
Officer and Chief Financial Officer have
- 22 -
concluded that the Company's disclosure controls and procedures were effective
at a reasonable assurance level as of June 30, 2005.
There have been no changes in the Company's internal controls over
financial reporting during the latest fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
controls over financial reporting.
- 23 -
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In January 2003, a claim was brought against us in New York Supreme Court
in Westchester County, alleging that we owe the Plaintiff rent in consideration
for access to his property to continue on-going remediation of contamination
allegedly due to spills at the property, formerly supplied by us with gasoline.
The matter was settled in June 2005 in exchange for our payment of $17,500,
which was expensed and paid for in June 2005.
Please refer to "Item 3. Legal Proceedings" of our Annual Report on Form
10-K for the year ended December 31, 2004 and notes 3 and 5 to our consolidated
financial statements in such Form 10-K, as well as to Part II, "Item 1. Legal
Proceedings" of our Quarterly Report on From 10-Q for the quarter ended March
31, 2005 and notes 5 and 6 to our accompanying consolidated financial statements
which appear in this Form 10-Q for a description of certain legal proceedings
presently pending.
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of stockholders on May 19, 2005. There were
24,712,891 shares of our common stock outstanding and entitled to vote at our
annual meeting, and 23,644,982 shares were represented in person or by proxy.
The following matters were voted upon at the annual meetings:
The five directors listed below were elected to serve an additional
one-year term:
Votes
Nominee Votes For Withheld
- ------------------ ---------- --------
Milton Cooper 23,591,100 53,882
Philip E. Coviello 23,211,595 433,387
Leo Liebowitz 23,589,238 55,744
Howard Safenowitz 23,598,827 46,155
Warren G. Wintrub 23,590,926 54,056
The appointment of PricewaterhouseCoopers LLP as our independent
registered public accounting firm for the fiscal year ending December 31, 2005
was ratified:
Votes For Votes Against Abstentions
- ---------- ------------- -----------
23,534,714 84,161 26,107
There were no broker non-votes at the Annual Meetings.
Item 5. Other Information
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(a) On June 30, 2005, we entered into an unsecured three-year senior
revolving $100.0 million Credit Agreement with JPMorgan Chase Bank, N.A.
("JPMorgan"), as administrative agent for itself and for Bank of America as
Syndication Agent, Citizens Bank of Rhode Island, as Documentation Agent, Israel
Discount Bank of New York, North Fork Bank and HSBC Bank USA, National
Association. The credit facility replaced our $50.0 million uncommitted line of
credit with JPMorgan that expired on June 30, 2005. The Credit Agreement
matures on June 30, 2008 and does not provide for scheduled reductions in
principal prior to its maturity. Subject to the terms of the Credit Agreement,
we have the right to increase the Credit Agreement by $25.0 million and to
extend the term of the Credit Agreement for one additional year. Borrowings
under the Credit Agreement bear interest at a rate equal to the sum of a base
rate or a LIBOR rate plus an applicable margin based on our leverage ratio and
ranging from 0.25% to 1.75%.
The Credit Agreement includes customary terms and conditions, including
financial covenants such as leverage and coverage ratios and other customary
covenants, including limitations on our ability to incur debt and pay dividends
and maintenance of tangible net worth and events of default, including a change
of control and failure to maintain REIT status. We do not believe that these
covenants will limit our current business practices. If any event of default
were to occur and if the default were not subsequently waived by the lenders,
the lenders would be entitled to declare all amounts outstanding under the
Credit Agreement immediately due and payable. We are not aware of any event of
default under the Credit Agreement that occurred prior to, or existed as of, the
date of the filing of this Quarterly Report on Form 10-Q.
The Credit Agreement is attached as Exhibit 10.21 to this Quarterly Report
on Form 10-Q.
Item 6. Exhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.21 $100,000,000 Credit Agreement dated June 30, 2005
31.1 Rule 13a-14(a) Certification of Chief Financial Officer
31.2 Rule 13a-14(a) Certification of Chief Executive Officer
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 (a)
32.2 Certifications of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 (a)
99 Risk and Uncertainties
(a) These certifications are being furnished solely to accompany the Report
pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be
incorporated by reference into any filing of the Company, whether made before or
after the date hereof, regardless of any general incorporation language in such
filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GETTY REALTY CORP.
(Registrant)
Dated: August 9, 2005 BY: /s/ Thomas J. Stirnweis
-----------------------
(Signature)
THOMAS J. STIRNWEIS
Vice President, Treasurer and
Chief Financial Officer
Dated: August 9, 2005 BY: /s/ Leo Liebowitz
-----------------
(Signature)
LEO LIEBOWITZ
Chairman and Chief Executive
Officer
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