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.
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EXHIBIT 13
GETTY REALTY CORP. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(in thousands, except per share amounts and number of properties)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------- -------------- ------------- ------------- ----------
OPERATING DATA:
Revenues from rental properties $ 71,377 $ 66,331 $ 66,601 $ 67,157 $ 68,322
Earnings before income taxes 43,954 39,352 36,887 36,163 32,083
Income tax benefit 1,494 (a) -- -- -- 36,648 (a)
------------- ------------- ------------- ------------- -----------
Net earnings 45,448 39,352 36,887 36,163 68,731
Diluted earnings per common share 1.84 1.59 1.49 (b) 1.44 3.18
Diluted weighted average common 24,729 24,721 23,082 21,446 16,244
shares outstanding
Cash dividends declared per share:
Common 1.760 1.700 1.675 1.650 5.275 (c)
Preferred -- -- 1.159 1.866 5.975 (c)
FUNDS FROM OPERATIONS (d):
Net earnings 45,448 39,352 36,887 36,163 68,731
Preferred stock dividends -- -- (2,538) (5,350) (5,088) (e)
------------- ------------- ------------- ------------- -----------
Net earnings applicable to
common shareholders 45,448 39,352 34,349 30,813 63,643
Depreciation and amortization of real
estate assets (f) 8,113 7,490 8,411 9,016 9,281
Gains on sales of real estate (1,309) (618) (928) (1,153) (990)
Cumulative effect of accounting
change -- -- 550 -- --
------------- ------------- ------------- ------------- -----------
Funds from operations available to
common shareholders 52,252 46,224 42,382 38,676 71,934
Deferred rental revenue (straight-line
rent) (4,170) (4,464) (5,537) (6,728) (8,388)
Income tax benefit (1,494) (a) -- -- -- (36,648) (a)
------------- ------------- ------------- ------------- -----------
Adjusted funds from operations
available to common shareholders 46,588 41,760 36,845 31,948 26,898
BALANCE SHEET DATA
(AT END OF YEAR):
Real estate before accumulated
depreciation and amortization 370,495 346,590 318,222 308,054 311,352
Total assets 299,981 290,728 272,003 282,491 288,188
Debt 34,224 24,509 844 923 997
Shareholders' equity 227,883 225,503 228,025 233,426 237,773
============= ============= ============= ============= ===========
NUMBER OF PROPERTIES:
Owned 814 795 772 739 744
Leased 241 250 256 310 335
------------- ------------- ------------- ------------- -----------
Total properties 1,055 1,045 1,028 1,049 1,079
------------- ------------- ------------- ------------- -----------
- ---------------------
(a)Represents a tax benefit recognized in 2005 due to a net reduction in amounts
accrued for uncertain tax positions and, in 2001, due to the reversal of
previously accrued income taxes that that we would no longer be required to
pay as a real estate investment trust ("REIT"). These accruals related to the
Company being taxed as a C-corp. prior to its election to be taxed as a REIT
in 2001.
(b)Diluted earnings per common share of $1.51 before the impact of the
cumulative effect of accounting change.
(c)Includes $4.20 and $4.15 per share "earnings and profits" cash distribution
paid on August 2, 2001 to preferred and common shareholders, respectively.
(d)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 of real estate assets, 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 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
of real estate assets. In our case, however, GAAP net earnings and FFO
include the significant impact of deferred rental revenue (straight-line
rental revenue) on our recognition of revenue from rental properties, which
results primarily from fixed rental increases scheduled under certain leases
with our tenants. In accordance with GAAP, the aggregate minimum rent due
over the initial term of these leases is recognized on a straight-line basis
rather than when due. GAAP net earnings and FFO also include income tax
benefits recognized due to a net reduction in amounts accrued for uncertain
tax positions related to the Company being taxed as a C-corp. prior to 2001
(see note (a) above). As a result, management pays particular attention to
AFFO, a supplemental non-GAAP performance measure that we define as FFO less
straight-line rental revenue and income tax benefit. Income taxes have not
had a significant impact on our earnings since 2001 when we first elected to
be taxed as a REIT, and accordingly, has not recently appeared as a separate
item in our statements of operations or reconciliation of AFFO from net
earnings. In management's view, AFFO provides a more accurate depiction than
FFO of the impact of the scheduled rent increases under these leases and our
election to be taxed as a REIT beginning in 2001. 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.
(e)Excludes $4.20 per share "earnings and profits" cash distribution paid on
August 2, 2001 to preferred shareholders.
(f)Depreciation and amortization expense as reflected in our Consolidated
Statements of Operations also includes depreciation on non-real estate
assets.
- 7 -
GETTY REALTY CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
RECENT DEVELOPMENTS
On February 28, 2006, we completed the acquisition of eighteen retail motor fuel
and convenience store properties located in Western New York for approximately
$13.5 million. Simultaneous 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 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.
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. These tenants are responsible for the
payment of taxes, maintenance, repair, insurance and other operating expenses
and for managing the actual operations conducted at these properties. As of
December 31, 2005, we leased nine hundred thirty-eight of our one thousand
fifty-five properties 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.
Substantially all of our revenues (89% for the year ended December 31,
2005), are derived from the Marketing Leases. Accordingly, our revenues are
dependent to a large degree on the economic performance of Marketing and of the
petroleum marketing industry and any factor that adversely affects Marketing or
our other lessees may have a material adverse effect on our financial condition
and results of operations. Marketing's financial results depend largely on
retail petroleum marketing margins and rental income from subtenants who operate
our properties. The petroleum marketing industry has been and continues to be
volatile and highly competitive. Factors that could adversely affect Marketing
or our other lessees include those described under Part I, Item 1A, "Risk
Factors", in our Annual Report on Form 10-K. In the event that Marketing cannot
or will not perform its monetary obligations under the Marketing Leases with us,
our financial condition and results of operations would be materially adversely
affected. Although Marketing is wholly owned by a subsidiary of Lukoil, 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
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.dnb.com) upon
payment of their fee.
- 8 -
The most recent selected financial data of Marketing which is publicly
available is provided below. Neither we, nor our auditors, were involved in the
preparation of this data and as a result can provide no assurance thereon.
Additionally, our auditors have not been engaged to review or audit this data.
Getty Petroleum Marketing Inc.
Selected Financial Data
For the years ended December 31,
---------------------------------------
2004 2003 2002
----------- ----------- -----------
(unaudited, in thousands)
OPERATING DATA:
Total revenues $ 2,696,102 $ 1,297,042 $1,029,926
Total expenses 2,670,282 1,290,439 1,038,385
----------- ----------- -----------
Earnings (loss) before provision (credit) for income taxes 25,820 6,603 (8,459)
Provision (credit) for income taxes 10,784 3,157 (3,389)
----------- ----------- -----------
Net earnings (loss) $ 15,036 $ 3,446 ($ 5,070)
=========== =========== ===========
BALANCE SHEET DATA (AT END OF YEAR):
ASSETS:
Cash and equivalents $ 76,485 $ 44,210 $ 18,678
Other current assets 161,901 68,971 62,448
----------- ----------- -----------
Total current assets 238,386 113,181 81,126
Property and equipment, net 367,453 134,792 139,477
Other assets 54,292 3,956 5,338
----------- ----------- -----------
Total assets $ 660,131 $ 251,929 $ 225,941
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Total current liabilities $ 214,171 $ 125,940 $ 107,362
Long-term liabilities 318,091 62,419 58,438
----------- ----------- -----------
Total liabilities 532,262 188,359 165,800
Total stockholder's equity 127,869 63,570 60,141
----------- ----------- -----------
Total liabilities and stockholder's equity $ 660,131 $ 251,929 $ 225,941
=========== =========== ===========
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 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.
As part of a periodic review by the Division of Corporation Finance of the
Securities and Exchange Commission ("SEC") of our Annual Report on Form 10-K for
the year ended December 31, 2003, we received and responded to a number of
comments. The only comment that remains unresolved pertains to the SEC's
position that we must include the financial statements and summarized financial
data of Marketing in our periodic filings. The SEC subsequently indicated that,
unless we file Marketing's financial statements and summarized financial data
with our periodic reports: (i) it will not consider our Annual Reports on Forms
10-K for the years beginning with 2000 to be compliant; (ii) it will not
consider us to be current in our reporting requirements; (iii) it will not be in
a
- 9 -
position to declare effective any registration statements we may file for public
offerings of our securities; and (iv) we should consider how the SEC's
conclusion impacts our ability to make offers and sales of our securities under
existing registration statements and if we have a liability for such offers and
sales made pursuant to registration statements that did not contain the
financial statements of Marketing.
We believe that the SEC's position is based on their interpretation of
certain provisions of their internal Accounting Disclosure Rules and Practices
Training Material, Staff Accounting Bulletin No. 71 and Rule 3-13 of Regulation
S-X. We do not believe that any of this guidance is clearly applicable to our
particular circumstances and that, even if it were, we believe that we should be
entitled to certain relief from compliance with such requirements. Marketing
subleases our properties to approximately nine hundred independent, individual
service station/convenience store operators (subtenants), most of whom were our
tenants when Marketing was spun-off to our shareholders. Consequently, we
believe that we, as the owner of these properties and the Getty brand, and our
prior experience with Marketing's tenants, could relet these properties to the
existing subtenants or others at market rents. Because of this particular aspect
of our landlord-tenant relationship with Marketing, we do not believe that the
inclusion of Marketing's financial statements in our filings is necessary to
evaluate our financial condition. Our position was included in a written
response to the SEC. To date, the SEC has not accepted our position regarding
the inclusion of Marketing's financial statements in our filings. We are
endeavoring to achieve a resolution of this issue that will be acceptable to the
SEC. We can not accurately predict the consequences if we are ultimately
unsuccessful in achieving an acceptable resolution.
We do not believe that offers or sales of our securities made pursuant to
existing registration statements that did not or do not contain the financial
statements of Marketing constitute, by reason of such omission, a violation of
the Securities Act of 1933, as amended or the Exchange Act. Additionally, we
believe that, if there ultimately is a determination that such offers or sales,
by reason of such omission, resulted in a violation of those securities laws, we
would not have any material liability as a consequence of any such
determination.
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, 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 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 of real estate assets, 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 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 of real
estate assets. In our case, however, GAAP net earnings and FFO include the
significant impact of deferred rental revenue (straight-line rental revenue) on
our recognition of revenues from rental properties, which results primarily from
fixed rental increases scheduled under certain leases with our tenants. In
accordance with GAAP, the aggregate minimum rent due over the initial term of
these leases are recognized on a straight-line basis rather than when due. GAAP
net earnings and FFO also include the income tax benefit recognized due to a net
reduction in amounts accrued for uncertain tax positions related to being taxed
as a C-Corp. prior to 2001. As a result, management pays particular attention to
AFFO, a supplemental non-GAAP performance measure that we define as FFO less
straight-line rental revenue and income tax benefit. Income taxes have not had a
significant impact on our earnings since the year ended December 31, 2001, when
we first elected to be taxed as a REIT, and accordingly have not recently
appeared as a separate item in our statement of operations or reconciliation of
AFFO from net earnings. In management's view, AFFO provides a more accurate
depiction than FFO of the impact of scheduled rent increases under these leases
and our election to be taxed as a REIT beginning in 2001. 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, 2005 compared to year ended December 31, 2004
Revenues from rental properties were $71.4 million for the year ended December
31, 2005 compared to $66.3 million for 2004. We received approximately $59.6
million in 2005 and $58.9 million in 2004 from properties leased to Marketing
under the Marketing Leases. We also received rent of $7.6 million in 2005 and
$2.9 million in 2004 from other tenants. The increase in rent received was
primarily due to rent from properties acquired in November 2004 and March 2005,
and rent escalations, partially offset by the effect of lease terminations and
property dispositions. In addition, revenues from rental properties include
deferred rental revenue of $4.2 million in 2005 and $4.5 million in 2004,
recorded as required by GAAP, related to fixed rent increases scheduled under
certain leases with tenants and includes $0.6 million due to lease terminations
recorded in the fourth quarter of 2005. 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.
- 10 -
Rental property expenses, which are principally comprised of rent expense
and real estate and other state and local taxes, were $11.8 million for 2005, as
compared to $9.8 million for 2004. Rental property expenses include an
adjustment of $1.5 million recorded in the fourth quarter of 2005 for a change
in accounting for rent expense from a contractual to a straight-line basis. The
increase in rental property expenses was also due to rent expense on properties
acquired in November 2004 of $0.4 million partially offset by property
dispositions.
Environmental expenses, net for 2005 were $2.4 million, a decrease of $3.6
million from 2004. The decrease was due to a $1.6 million reduction in
litigation related expenses as well as a $1.9 million reduction in the change in
estimated environmental costs, net of estimated recoveries, and accretion
expense as compared to the prior year period. Environmental expenses for 2005
include a $0.6 million net credit for environmental litigation expense due to
net reductions in litigation loss reserve estimates. The net change in estimated
environmental expenses and accretion expense aggregated $1.4 million for 2005
compared to $3.3 million recorded in 2004.
General and administrative expenses were $4.9 million for 2005, which was
comparable to the $5.0 million recorded for 2004.
Depreciation and amortization expense for 2005 was $8.3 million, as
compared to the $7.5 million recorded for 2004. The increase was primarily due
to depreciation and amortization of properties acquired in November 2004 and
March 2005 partially offset by property dispositions.
Other income, net was $1.6 million for 2005, as compared with $1.5 million
for 2004. Other income, net for 2005 includes $1.3 million of gains on
dispositions of properties, which includes $1.1 million recorded in the fourth
quarter resulting from properties taken by eminent domain related to road
improvement projects, as compared to $0.6 million of gains for 2004. The $0.7
million increase in gains on dispositions of properties was offset by a $0.3
million reduction in interest income from mortgages notes receivable and
short-term investments and a $0.3 million reduction in other items. Other items
for 2004 include $0.4 million of income 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.
Interest expense, principally related to borrowings used to finance the
acquisition of properties in November 2004 and March 2005, was $1.6 million
during 2005 and was insignificant for 2004.
The tax benefit of $1.5 million recorded in 2005 was recognized due a net
reduction in the amount accrued for uncertain tax positions to the extent that
the uncertainties regarding these exposures have been resolved.
During the fourth quarter of 2005, we recorded a reduction in net earnings
of $0.7 million as a result of adjustments which should have been recorded in
prior years or earlier quarterly periods of 2005 and are included in the results
of operations for 2005 discussed above. The adjustments consisted of: (a) $0.1
million of rental income for lease terminations that related to prior years and
$0.2 million related to earlier quarters of 2005; (b) $1.5 million of rent
expense for a change in accounting for rent expense from a contractual to a
straight-line basis, which is related to prior years, and; (c) $0.5 million of
gains on dispositions of real estate resulting from a property taken by eminent
domain that should have been recorded in the second quarter of 2005. We believe
that these adjustments are not material to any previously issued financial
statements and that the impacts of recording these adjustments are not material,
individually or in the aggregate, to the quarter or year ended December 31,
2005.
As a result, net earnings were $45.4 million for 2005 as compared to $39.4
million for 2004. Net earnings for 2005 increased by 15.2%, or $6.0 million,
over 2004 due to the items discussed above. FFO increased $6.0 million, or
13.0%, to $52.3 million or slightly less than the increase in net earnings since
the increase in gains on sales of real estate of $0.7 million were almost
entirely offset by the increase in depreciation and amortization of real estate
assets of $0.6 million (both of which are included in net earnings but are
excluded from FFO and AFFO). AFFO
- 11 -
increased $4.8 million, or 11.6%, to $46.6 million in 2005. FFO increased more
than AFFO on both a dollar and percentage basis due to the $1.5 million income
tax benefit recorded in 2005 which was partially offset by a $0.3 million
decrease in deferred rental revenue (both of which are included in net earnings
and FFO but are excluded from AFFO) recorded for 2005 as compared to 2004.
Diluted earnings per share for 2005 increased $0.25 per share or 15.7% to
$1.84 per share, as compared to 2004. Diluted FFO per share increased $0.24 per
share, or 12.8%, to $2.11 per share, as compared to 2004 and diluted AFFO per
share for 2005 increased $0.19 per share, or 11.2%, to $1.88 per share, as
compared to 2004.
Year ended December 31, 2004 compared to year ended December 31, 2003
Revenues from rental properties were $66.3 million for the year ended December
31, 2004, as compared to $66.6 million for 2003. We received rent of
approximately $58.9 million in 2004 and $58.7 million in 2003 from properties
leased to Marketing under the Marketing Leases. We also received rent of $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 deferred rental revenue of $4.5 million in 2004 and $5.5
million in 2003.
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.
Environmental expenses, net were $6.0 million for 2004, 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 change in estimate recorded during 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 were $5.0 million for 2004, as
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 of 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 was $7.5 million for 2004, 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, net 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.
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).
- 12 -
As a result, 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 revenue (which is 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.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are the cash flows from our business, funds
available under a revolving credit agreement that matures in 2008 and available
cash and equivalents. Management believes that dividend payments and cash
requirements for our business for the next twelve months, including
environmental remediation expenditures, capital expenditures and debt service,
can be met by cash flows from operations, borrowings under the credit agreement
and available cash and 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. 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 December 31,
2005 were $34.0 million, bearing interest at a rate of 5.6% per annum. Total
borrowings increased to $47.5 million as of March 1, 2006 principally due to
additional borrowings used to pay $11.0 million of dividends that were accrued
as of December 31, 2005 and paid in January 2006 and $13.5 used for the
properties acquired on February 28, 2005, net of repayments from positive cash
flows provided by rental operations. Accordingly, we had $52.5 million available
under the terms of the Credit Agreement as of March 1, 2006 or available $77.5
million available assuming we had exercised our right to increase the credit
agreement by $25.0 million.
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 $43.5 million, $42.0
million and $41.2 million for 2005, 2004 and 2003, respectively. We presently
intend to pay common stock dividends of $0.455 per share each quarter ($1.82 per
share on an annual basis), and commenced doing so with the quarterly dividend
declared on February 16, 2006.
- 13 -
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 2005, 2004 and 2003 amounted to $29.6
million, $30.6 million and $14.3 million, respectively.
As part of our overall growth strategy, we regularly review opportunities
to acquire additional properties and we expect to continue to pursue
acquisitions that we believe will benefit our financial performance. To the
extent that our current sources of liquidity are not sufficient to fund such
acquisitions we will require other sources of capital, which may or may not be
available on favorable terms or at all.
CONTRACTUAL OBLIGATIONS
Our significant contractual obligations and commitments are comprised of
borrowings under the Credit Agreement, long-term debt, operating lease payments
due to landlords and estimated environmental remediation expenditures, net of
estimated 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 commitments as of December 31, 2005 are summarized below (in
thousands):
TOTAL 2006 2007 2008
----------- ---------- ---------- -----------
Operating leases $ 35,488 $ 8,640 $ 7,220 $ 6,054
Borrowing under the Credit Agreement (a) 34,000 34,000
Long-term debt (a) 224 30 31 33
Estimated environmental remediation
expenditures (b) 17,350 6,348 3,807 2,251
Estimated recoveries from state underground
storage tank funds (b) (4,264) (1,120) (1,144) (546)
----------- ---------- ---------- ----------
Estimated net environmental remediation
expenditures (b) 13,086 5,228 2,663 1,705
----------- ---------- ---------- ----------
Total $ 82,798 $ 13,898 $ 9,914 $ 41,792
=========== ========== ========== ==========
2009 2010 2011 THEREAFTER
--------- --------- ---------- ----------
Operating leases $ 4,408 $ 2,769 $ 1,654 $ 4,743
Borrowing under the Credit Agreement (a)
Long-term debt (a) 27 21 22 60
Estimated environmental remediation
expenditures (b) 1,314 808 555 2,267
Estimated recoveries from state underground
storage tank funds (b) (397) (299) (200) (558)
--------- --------- --------- ----------
Estimated net environmental remediation
expenditures (b) 917 509 355 1,709
--------- --------- --------- ----------
Total $ 5,352 $ 3,299 $ 2,031 $ 6,512
========= ========= ========= ==========
(a) Excludes related interest payments. See "Liquidity and Capital Resources"
above and "Disclosures About Market Risk" below.
(b) Estimated environmental remediation expenditures and estimated 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 $11.8 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 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 Annual 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. 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.
- 14 -
Estimates, judgments and assumptions underlying the accompanying
consolidated financial statements include, but are not limited to, deferred rent
receivable, recoveries from state underground storage tank funds, environmental
remediation costs , real estate, depreciation and amortization, impairment of
long-lived assets, litigation, accrued expenses, income taxes and exposure to
paying an earnings and profits deficiency dividend. The information included in
our financial statements that is based on estimates, judgments and assumptions
is subject to significant change and is adjusted as circumstances change and as
the uncertainties become more clearly defined. Our accounting policies are
described in note 1 to the consolidated financial statements. 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 $29.3 million recorded as of
December 31, 2005 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 financial results generally do 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, excise taxes,
penalties and interest or we may have to pay a deficiency dividend to eliminate
any remaining accumulated earnings and profits that were not distributed in
2001. 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.
Litigation -- Legal fees related to litigation is 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
- 15 -
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
such as the remediation of known contamination and the retirement and
decommissioning or removal of long-lived assets including buildings containing
hazardous materials, USTs and other equipment. In accordance with the leases
with certain of our tenants, we have agreed to bring the leased properties with
known environmental contamination to within applicable standards and to
regulatory or contractual closure ("Closure") in an efficient and economical
manner. Generally, upon achieving Closure at an individual property, our
environmental liability under the lease for that property will be satisfied and
future remediation obligations will be the responsibility of our tenant. We will
continue to seek reimbursement from state UST remediation funds related to these
environmental liabilities where available. Generally the liability for the
retirement and decommissioning or removal of USTs and other equipment is the
responsibility of our tenant. We are contingently liable for these obligations
in the event that our tenants do not satisfy their responsibilities. A liability
has not been recognized for obligations that are the responsibility of our
tenants.
We have also agreed to provide limited environmental indemnification to
Marketing, capped at $4.25 million and expiring in 2010, 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 accrued $0.3 million as of December 31, 2005 in
connection with this indemnification 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 legal 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. In developing our liability for probable and
reasonably estimable environmental remediation costs, on a property by
- 16 -
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, 2005, we have remediation action plans
in place for three hundred two (95%) of the three hundred eighteen properties
for which we retain remediation responsibility and have not received a no
further action letter and the remaining sixteen properties (5%) were in the
assessment phase.
As of December 31, 2005, 2004 and 2003 and January 1, 2002, we had accrued
$17.4 million, $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, 2005, 2004 and 2003 and
January 1, 2003, we had also recorded $4.3 million, $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
$15.2 million as of December 31, 2004, $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, $0.9 million, $1.1
million and $1.3 million of accretion expense is included in environmental
expenses for 2005, 2004 and 2003, respectively. Environmental expenditures and
recoveries from underground storage tank funds were $6.8 million and $2.4
million, respectively, for 2005. The decrease in accrued environmental costs and
net recoveries during 2005 were primarily due to payments made and cash received
during the year, respectively, partially offset by changes in estimated
expenditures and recoveries, respectively.
Environmental liabilities and related assets are currently measured at
fair value based on their expected future cash flows which have been adjusted
for inflation and discounted to present value. We also use probability weighted
alternative cash flow forecasts to determine fair value. We assumed a 50%
probability factor that the actual environmental expenses will exceed
engineering estimates for an amount assumed to equal one year of net expenses
aggregating $5.3 million. Accordingly, the environmental accrual as of December
31, 2005 was increased by $2.1 million, net of assumed recoveries and before
inflation and present value discount adjustments. The resulting net
environmental accrual as of December 31, 2005 was then further increased by $1.2
million for the assumed impact of inflation using an inflation rate of 2.75%.
Assuming a credit-adjusted risk-free discount rate of 7.0%, we then reduced the
net environmental accrual, as previously adjusted, by a $2.5 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, 2005 would have increased by $0.2 million and $0.1 million, respectively,
for an aggregate increase in the net environmental accrual of $0.3 million.
However, the aggregate net change in environmental estimates and accretion
expense recorded during the year ended December 31, 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 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 2005, 2004 and 2003, the aggregate of the net change in
estimated remediation costs and accretion expense included in our consolidated
statements of operations amounted to $1.4 million, $3.3 million and $5.5
million, respectively, which amounts were net of probable recoveries from state
UST remediation funds. Although future environmental costs may have a
significant impact on results of operations for any single fiscal year or
interim period, we believe that such costs will not have a material adverse
effect on our long-term financial position.
We cannot predict what environmental legislation or regulations may be
enacted in the future or how existing laws or regulations will be administered
or interpreted with respect to products or activities to which they have not
previously been applied. We cannot predict if state underground storage tank
fund programs will be administered and funded in the future in a manner that is
consistent with past practices and if future environmental spending will
continue to be eligible for reimbursement at historical recovery rates under
these programs. Compliance with more stringent laws or regulations, as well as
more vigorous enforcement policies of the regulatory agencies or stricter
interpretation of existing laws, which may develop in the future, could have an
adverse effect on our financial position, or that of our tenants, and could
require substantial additional expenditures for future remediation.
- 17 -
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 United States Environmental Protection
Agency (the "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 September 2005 we were notified that we were
made party to 38 cases in Connecticut, Florida, Massachusetts, New Hampshire,
New Jersey, New York, Pennsylvania, Vermont, Virginia and West Virginia brought
by local water providers or governmental agencies. These cases allege various
theories of liability due to contamination of groundwater with MTBE as the basis
for claims seeking compensatory and punitive damages. Each case names as
defendants approximately 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, 2005 or December 31, 2004 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 $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 increased due to increased average
outstanding borrowings under the Credit Agreement as compared to December 31,
2004. 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, which expires in June 2008, to finance acquisitions and for general
corporate purposes. Our Credit Agreement bears 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 December 31, 2005 we had
total borrowings of $34.0 million under our Credit Agreement bearing interest at
a rate of 5.6% per annum, and had not entered into any instruments to hedge our
resulting exposure to interest-rate risk.
Based on our average outstanding borrowings under the Credit Agreement
projected for 2006, if market interest rates for 2006 increase by an average of
0.5% more than the weighted average interest rate of 5.6% as of December 31,
2005, the additional annualized interest expense would decrease 2006 net income
and cash flows by $0.3 million. This amount was determined by calculating the
effect of a hypothetical interest rate change on our Credit Agreement borrowings
and assumes that the $36.6 million average outstanding borrowings during the
fourth quarter of 2005 plus $13.5 million for the acquisition completed in
February 2006 is indicative of our future average borrowings for 2006 before
considering additional borrowings required for future acquisitions. The
calculation also assumes that there are no other changes in our financial
structure or the terms of our borrowings. Management believes that the fair
value of the debt equals its carrying value at December 31, 2005 and 2004. Our
exposure to fluctuations in interest rates will increase or decrease in the
future with increases or decreases in the outstanding amount under our Credit
Agreement.
- 18 -
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.
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 $60.3
million in lease rental payments in 2006; the expected effect of regulations on
our long-term performance; our expected ability to maintain compliance with
applicable regulations; our ability to renew expired leases; the adequacy of our
current and anticipated cash flows; our belief that we do not have a material
liability for offers and sales of our securities made pursuant to registration
statements that did not contain the financial statements or summarized financial
data of Marketing; our expectations regarding future acquisitions; the impact of
the covenants included in the Credit Agreement on our current business
practices; our ability to maintain our REIT status; the probable outcome of
litigation or regulatory actions; our expected recoveries from underground
storage tank funds; our exposure to environmental remediation expenses; our
estimates regarding remediation costs and accretion expense; 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; our intention to consummate future acquisitions; our assessment of the
likelihood of future competition; the anticipated impact of changes in
accounting for stock-based compensation; 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 include, but are not limited to: risks associated with
owning and leasing real estate generally; dependence on Marketing as a tenant
and on rentals from companies engaged in the petroleum marketing and convenience
store businesses; our unresolved SEC comment; competition for properties and
tenants; risk of tenant non-renewal; the effects of taxation and other
regulations; potential litigation exposure; 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 concentrated in
one region of the United States; risks associated with potential future
acquisitions; losses not covered by insurance; future dependence on external
sources of capital; 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 -
- 20 -
GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2005 2004 2003
--------------- --------------- ---------------
Revenues from rental properties $ 71,377 $ 66,331 $ 66,601
Expenses:
Rental property expenses 11,770 9,814 10,662
Environmental expenses, net 2,428 6,027 7,594
General and administrative expenses 4,925 5,006 4,074
Depreciation and amortization expense 8,255 7,490 8,411
--------------- --------------- ---------------
Total expenses 27,378 28,337 30,741
--------------- --------------- ---------------
Operating income 43,999 37,994 35,860
Other income, net 1,578 1,485 1,705
Interest expense (1,623) (127) (128)
--------------- --------------- ---------------
Earnings before income tax benefit and cumulative effect
of accounting change 43,954 39,352 37,437
Income tax benefit 1,494 -- --
--------------- --------------- ---------------
Earnings before cumulative effect of accounting change 45,448 39,352 37,437
Cumulative effect of accounting change -- -- (550)
--------------- --------------- ---------------
Net earnings 45,448 39,352 36,887
Preferred stock dividends -- -- 2,538
--------------- --------------- ---------------
Net earnings applicable to common shareholders $ 45,448 $ 39,352 $ 34,349
=============== =============== ===============
Net earnings per common share:
Basic $ 1.84 $ 1.59 $ 1.49
Diluted $ 1.84 $ 1.59 $ 1.49
Weighted average common shares outstanding:
Basic 24,711 24,679 23,063
Stock options and restricted stock units 18 42 19
--------------- --------------- ---------------
Diluted 24,729 24,721 23,082
=============== =============== ===============
Dividends declared per share:
Common $ 1.76 $ 1.700 $ 1.675
Preferred $ -- $ -- $ 1.159
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)
DECEMBER 31,
-----------------------------------
2005 2004
---------------- ----------------
ASSETS:
Real Estate:
Land $ 171,839 $ 156,571
Buildings and improvements 198,656 190,019
---------------- ----------------
370,495 346,590
Less -- accumulated depreciation and amortization (109,800) (106,463)
---------------- ----------------
Real estate, net 260,695 240,127
Deferred rent receivable 29,287 25,117
Cash and equivalents 1,247 15,700
Recoveries from state underground storage tank funds, net 4,264 5,437
Mortgages and accounts receivable, net 3,129 3,961
Prepaid expenses and other assets 1,359 386
---------------- ----------------
Total assets $ 299,981 $ 290,728
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Debt $ 34,224 $ 24,509
Environmental remediation costs 17,350 20,626
Dividends payable 11,009 10,495
Accounts payable and accrued expenses 9,515 9,595
---------------- ----------------
Total liabilities 72,098 65,225
---------------- ----------------
Commitments and contingencies (notes 2, 3, 5 and 6)
Shareholders' equity:
Common stock, par value $.01 per share; authorized 50,000,000 shares;
issued 24,716,614 at December 31, 2005 and 24,694,071 at December 31, 2004 247 247
Paid-in capital 257,766 257,295
Dividends paid in excess of earnings (30,130) (32,039)
---------------- ----------------
Total shareholders' equity 227,883 225,503
---------------- ----------------
Total liabilities and shareholders' equity $ 299,981 $ 290,728
================ ================
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)
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2005 2004 2003
--------------- ---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 45,448 $ 39,352 $ 36,887
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization expense 8,255 7,490 8,411
Deferred rental revenue (4,170) (4,464) (5,537)
Gain on dispositions of real estate (1,309) (618) (928)
Accretion expense 925 1,054 1,284
Cumulative effect of accounting change -- -- 550
Stock-based employee compensation expense 134 25 --
Changes in assets and liabilities:
Recoveries from state underground storage tank funds, net 1,557 2,512 7,559
Mortgages and accounts receivable, net 497 238 (1,528)
Prepaid expenses and other assets (1,115) 306 300
Environmental remediation costs (4,585) (4,474) (7,824)
Accounts payable and accrued expenses 1,414 495 (739)
Accrued income taxes (1,494) -- --
--------------- --------------- ---------------
Net cash provided by operating activities 45,557 41,916 38,435
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property acquisitions and capital expenditures (29,573) (30,568) (14,266)
Collection of mortgages receivable, net 335 1,366 1,156
Proceeds from dispositions of real estate 2,201 1,303 3,117
--------------- --------------- ---------------
Net cash used in investing activities (27,037) (27,899) (9,993)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (43,025) (41,951) (41,115)
Borrowings under credit lines, net 10,000 24,000 --
Repayment of mortgages payable, net (285) (335) (79)
Preferred stock redemption and conversion -- -- (1,224)
Proceeds from stock issued 337 64 155
--------------- --------------- ---------------
Net cash used in financing activities (32,973) (18,222) (42,263)
--------------- --------------- ---------------
Net decrease in cash and equivalents (14,453) (4,205) (13,821)
Cash and equivalents at beginning of year 15,700 19,905 33,726
--------------- --------------- ---------------
Cash and equivalents at end of year $ 1,247 $ 15,700 $ 19,905
=============== =============== ===============
Supplemental disclosures of cash flow information
Cash paid (refunded) during the year for:
Interest $ 1,464 $ 114 $ 127
Income taxes, net 582 571 949
Recoveries from state underground storage tank funds (2,304) (2,362) (2,135)
Environmental remediation costs 5,822 6,776 6,642
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.
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, income taxes and exposure to paying an earnings
and profits deficiency dividend.
Out of Period Adjustments: During the fourth quarter of 2005, the Company
recorded a reduction in net earnings of $693,000 as a result of adjustments
which should have been recorded in prior years or earlier quarterly periods of
2005. The adjustments consisted of: (a) $115,000 of rental income for lease
terminations that related to prior years and $185,000 related to earlier
quarters of 2005; (b) $1,534,000 of rent expense for a change in accounting for
rent expense from a contractual to a straight-line basis, which is related to
prior years, and; (c) $541,000 of gains on sale of real estate resulting from a
property taken by eminent domain that should have been recorded in the second
quarter of 2005. Management believes that these adjustments are not material to
any previously issued financial statements and that the impacts of recording
these adjustments are not material, individually or in the aggregate, to the
quarter or year ended December 31, 2005.
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. 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 and lease
termination payments are recognized on a straight-line basis over the 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. Lease termination fees are
recognized as rental income when earned upon the termination of a tenant's lease
and relinquishment of space in which the Company has no further obligation to
the tenant.
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
- 24 -
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 legal 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, 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. In January 2005 the FASB issued FIN 47 "Accounting
for Conditional Asset Retirement Obligations" to clarify the use of that term in
SFAS 143. The adoption of FIN 47 effective December 31, 2005 did not have a
significant effect on the Company's financial position or results of operations.
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
year (see note 7). There were no preferred shares outstanding during 2005 or
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. 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"). In December 2004, the FASB amended and
reissued SFAS 123, "Share-Based Payment" ("SFAS 123R"). The Company adopted SFAS
148 effective December 31, 2002 and SFAS 123R effective January 1, 2005. The
effects of applying these accounting standards for recognizing compensation cost
and providing pro forma disclosures during their initial phase-in periods may
not be representative of the effects on reported net income for future years.
However, the impact of the accounting for stock-based compensation is, and is
expected to be, immaterial to the Company's financial position and results of
operations.
- 25 -
Effective January 1, 2003, the Company voluntarily changed to the fair
value basis of accounting for all 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 until January 1, 2005 when it adopted SFAS 123R and the
fair value basis of accounting for the unvested portion of the outstanding stock
options granted prior to January 1, 2003 (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-based employee compensation awards granted in 2003. On
March 1, 2005 and June 1, 2004, the Company granted 12,550 and 10,800 restricted
stock units, respectively, under its 2004 Omnibus Incentive Compensation Plan
(the "2004 Plan") which was approved at the Annual Meeting of Shareholders on
May 20, 2004, (see note 8). Accordingly, $134,000 and $25,000 of stock-based
employee compensation expense is included in general and administrative expense
for the years ended December 31, 2005 and 2004, respectively. The expense for
2005 includes $32,000 related to options granted under the Company's stock
option plan prior to January 1, 2003.
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):
YEAR ENDED DECEMBER 31,
---------------------------
2004 2003
------------ ------------
Net earnings, as reported $ 39,352 $ 36,887
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
------------ ------------
Pro-forma net earnings $ 39,259 $ 36,754
============ ============
Net earnings per common share:
As reported $ 1.59 $ 1.49
Pro-forma $ 1.59 $ 1.48
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, 2005,
the Marketing Leases included nine hundred twenty-eight retail motor fuel and
convenience store properties and ten distribution terminals, two hundred
twenty-one 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 $11.8 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, 2005,
2004 and 2003 were $71,377,000, $66,331,000 and $66,601,000, respectively, of
which $59,590,000, $58,938,000 and $58,723,000, respectively, were received from
Marketing under the Marketing Leases. In addition, revenues from rental
properties for the years ended December 31, 2005, 2004 and 2003 includes
$4,170,000, $4,464,000 and $5,537,000, 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, 2005, are as follows (in thousands):
OTHER
YEAR ENDING DECEMBER 31, MARKETING TENANTS TOTAL (a)
- ------------------------ --------- --------- -----------
2006 $ 60,270 $ 8,037 $ 68,307
2007 60,162 7,836 67,998
2008 60,763 7,784 68,547
2009 61,071 7,492 68,563
2010 61,107 7,317 68,424
Thereafter 304,296 71,679 375,975
(a) Includes $121,693 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 $10,765,000, $8,928,000 and
$9,704,000 for the years ended December 31, 2005, 2004 and 2003, respectively,
and is included in rental property expenses using the straight-line method for
2005 and when contractually due for 2004 and 2003, which approximated the
straight-line method. Rent expense of $10,765,000 for the year ended December
31, 2005 includes an adjustment of $1,534,000 recorded in the fourth quarter of
2005 for a change in accounting for rent expense to a straight-line basis (see
footnote 1). Rent received under subleases for the years ended December 31,
2005, 2004 and 2003 was $15,240,000, $14,943,000 and $17,305,000, 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):
YEAR ENDING DECEMBER 31,
- -----------------------
2006 $ 8,640
2007 7,220
2008 6,054
2009 4,408
2010 2,769
Thereafter 6,397
3. COMMITMENTS AND CONTINGENCIES
In order to minimize the Company's exposure to credit risk associated with
financial instruments, the Company places its temporary cash investments with
high credit quality institutions. Temporary cash investments, if any, are held
in an institutional money market fund and federal agency discount notes.
As of December 31, 2005, the Company leased nine hundred thirty-eight of
its one thousand fifty-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
- 27 -
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 $29,287,000 recorded as of
December 31, 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 also agreed to provide limited
environmental indemnification to Marketing, capped at $4,250,000 and expiring in
2010, for certain pre-existing conditions at six of the terminals which are
owned by the Company. Under the agreement, Marketing will pay the first
$1,500,000 of costs and expenses incurred in connection with remediating any
such pre-existing conditions, Marketing and the Company will share equally the
next $8,500,000 of those costs and expenses and Marketing will pay all
additional costs and expenses over $10,000,000. The Company has accrued $300,000
as of December 31, 2005 in connection with this indemnification agreement.
The Company is subject to various legal proceedings and claims which arise
in the ordinary course of its business. In addition, the Company has retained
responsibility for all pre-spin-off legal proceedings and claims relating to the
petroleum marketing business. As of December 31, 2005 and 2004 the Company had
accrued $2,667,000 and $3,623,000, respectively, for certain of these matters
which it believes are appropriated 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 United States Environmental Protection Agency (the "EPA") (the "EPA
Notice"), advising the Company that it may be a potentially responsible party
for costs of remediating certain conditions resulting from discharges of
hazardous substances into the Lower Passaic River. ChevronTexaco received the
same EPA Notice regarding those same conditions. Additionally, the Company
believes that ChevronTexaco is contractually obligated to indemnify the Company,
pursuant to an indemnification agreement, for 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 September 2005 the Company was notified that the
Company was made party to thirty-eight cases, in Connecticut, Florida,
Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Vermont,
Virginia and West Virginia brought by local water providers or governmental
agencies. These cases allege various theories of liability due to contamination
of groundwater with MTBE as the basis for claims seeking compensatory and
punitive damages. Each case names as defendants approximately fifty petroleum
refiners, manufacturers, distributors and retailers of MTBE, or gasoline
containing MTBE. The accuracy of the allegations as they relate to the Company,
its defenses to such claims, the aggregate amount of damages, the definitive
list of defendants and the method of allocating such amounts among the
defendants have not been determined. Accordingly, the ultimate legal and
financial liability of the Company, if any, cannot be estimated with any
certainty at this time.
Prior to the spin-off, the Company was self-insured for workers'
compensation, general liability and vehicle liability up to predetermined
amounts above which third-party insurance applies. As of December 31, 2005 and
2004, the Company's consolidated balance sheets included, in accounts payable
and accrued expenses, $291,000 and $500,000, respectively, relating to insurance
obligations. The Company estimates its loss reserves for claims, including
claims incurred but not reported, by utilizing actuarial valuations provided
annually by its insurance carriers. The Company is required to deposit funds for
these loss reserves with its insurance carriers, and may be entitled to refunds
of amounts previously funded, as the claims are evaluated on an annual basis.
Although future loss reserve adjustments may have a significant impact on
- 28 -
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. The Company's consolidated
statements of operations for the years ended December 31, 2005, 2004 and 2003
included, in general and administrative expenses, credits of $150,000, $312,000
and $500,000, respectively, for self-insurance. Since the spin-off, the Company
has maintained insurance coverage subject to certain deductibles.
4. DEBT
As of December 31, 2005, debt consists of $34,000,000 in borrowings under the
Credit Agreement, described below, bearing interest at 5.6% and $224,000 of real
estate mortgages, bearing interest at a weighted average interest rate of 4.4%
per annum, due in varying amounts through May 1, 2015. Aggregate principal
payments in subsequent years for real estate mortgages are as follows: 2006 --
$30,000; 2007 -- $31,000; 2008 -- $33,000; 2009 -- $27,000; 2010 -- $21,000 and
$82,000 thereafter. These mortgages payable are collateralized by real estate
having an aggregate net book value of approximately $1,312,000 as of December
31, 2005.
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 terms 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%. 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.
5. ENVIRONMENTAL EXPENSES
The Company is subject to numerous existing federal, state and local laws and
regulations, including matters relating to the protection of the environment
such as the remediation of known contamination and the retirement and
decommissioning or removal of long-lived assets including buildings containing
hazardous materials, USTs and other equipment. Environmental expenses are
principally attributable to remediation costs which include installing,
operating, maintaining and decommissioning remediation systems, monitoring
contamination, and governmental agency reporting incurred in connection with
contaminated properties. Environmental remediation liabilities and related
assets are measured at fair value based on their expected future cash flows
which have been adjusted for inflation and discounted to present value. 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 $1,415,000, $3,346,000 and $5,450,000 for 2005,
2004 and 2003, respectively, which amounts were net of changes in estimated
recoveries from state underground storage tank ("UST") remediation funds.
Environmental expenses also include project management fees, legal fees and
provisions for environmental litigation loss reserves.
In accordance with the leases with certain tenants, the Company has agreed
to bring the leased properties with known environmental contamination to within
applicable standards and to regulatory or contractual closure ("Closure") in an
efficient and economical manner. Generally, upon achieving Closure at each
individual property, the Company's environmental liability under the lease for
that property will be satisfied and future remediation obligations will be the
responsibility of our tenants. Generally the liability for the retirement and
decommissioning or removal of USTs and other equipment is the responsibility of
our tenants. The Company is contingently liable for these obligations in the
event that the tenants do not satisfy their responsibilities. A liability has
not been recognized for obligations that are the responsibility of the tenants.
- 29 -
The Company has agreed to pay all costs relating to, and to indemnify
Marketing for, certain environmental liabilities and obligations for two hundred
forty-two 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.
The estimated future costs for known environmental remediation
requirements are accrued when it is probable that a liability has been incurred
and a reasonable estimate of fair value can be made. The environmental
remediation liability is estimated based on the level and impact of
contamination at each property. The accrued liability is the aggregate of the
best estimate of the fair value of cost for each component of the liability.
Recoveries of environmental costs from state UST remediation funds, with respect
to both past and future environmental spending, are accrued at fair value as
income, net of allowance for collection risk, based on estimated recovery rates
developed from prior experience with the funds when such recoveries are
considered probable.
Environmental exposures are difficult to assess and estimate for numerous
reasons, including the extent of contamination, alternative treatment methods
that may be applied, location of the property which subjects it to differing
local laws and regulations and their interpretations, as well as the time it
takes to remediate contamination. In developing the Company's liability for
probable and reasonably estimable environmental remediation costs, on a property
by property basis, the Company considers among other things, enacted laws and
regulations, assessments of contamination and surrounding geology, quality of
information available, currently available technologies for treatment,
alternative methods of remediation and prior experience. These accrual estimates
are subject to significant change, and are adjusted as the remediation treatment
progresses, as circumstances change and as these contingencies become more
clearly defined and reasonably estimable. As of December 31, 2005, the Company
has remediation action plans in place for 302 (95%) of the 318 properties for
which it retained environmental responsibility and has not received a no further
action letter and the remaining 16 properties (5%) remain in the assessment
phase.
As of December 31, 2005, 2004, 2003 and January 1, 2003, the Company had
accrued $17,350,000, $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, 2005, 2004, 2003 and January
1, 2003, the Company had also recorded $4,264,000, $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 $15,189,000,
$16,097,000 and 15,078,000 as of December 31, 2004, 2003 and January 1, 2003,
respectively, were subsequently accreted for the change in present value due to
the passage of time and, accordingly, $925,000, $1,054,000 and $1,284,000 of
accretion expense is included in environmental expenses for the years ended
December 31, 2005, 2004 and 2003, respectively.
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, 2005, 2004 and
2003 of $582,000, $571,000 and $949,000, 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.
Earnings and profits (as defined in the Internal Revenue Code) is used to
determine the tax attributes of dividends paid to stockholders and will differ
from income reported for financial statement purposes due to the effect of items
which are reported for income tax purposes in years different from that in which
they are recorded for financial statement purposes. Earnings and profits were
- 30 -
$38,200,000, $31,900,000 and $30,400,000 for the years ended December 31, 2005,
2004 and 2003, respectively. The federal tax attributes of the common dividends
for the years ended December 31, 2005, 2004 and 2003 were: ordinary income of
88.8%, 75.3% and 70.4%; capital gains distributions of 0.04%, 0.8% and 0.6%; and
non-taxable distributions of 11.2%, 23.9% and 29.0%, respectively.
In order to qualify as a REIT, among other items, the Company paid a
$64,162,000 special one-time earnings and profits 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 December 31, 2005 and 2004 the Company had accrued
$1,100,000 and $2,594,000, respectively, for this and certain other tax matters
which it believes were appropriate based on information then currently
available. The accrual for uncertain tax positions is adjusted as circumstances
change and as the uncertainties become more clearly defined, such as when audits
are settled or exposures expire. Accordingly, an income tax benefit of
$1,494,000 was recorded in 2005 due to the net reduction in the amount accrued
for uncertain tax positions to the extent that the uncertainties regarding these
exposures have been resolved. The ultimate resolution of these matters may have
a significant impact on the results of operations for any single fiscal year or
interim period.
7. SHAREHOLDERS' EQUITY
A summary of the changes in shareholders' equity for the years ended December
31, 2005, 2004, and 2003 is as follows (in thousands, except per share amounts):
PREFERRED STOCK COMMON STOCK DIVIDENDS PAID
------------------ --------------- PAID-IN IN EXCESS
SHARES AMOUNT SHARES AMOUNT CAPITAL OF EARNINGS TOTAL
------ --------- ------ ------ ----------- -------------- ----------
BALANCE, DECEMBER 31, 2002 2,866 $ 71,644 21,442 $ 214 $ 186,664 $ (25,096) $ 233,426
Net earnings 36,887 36,887
Cash dividends:
Common -- $1.675 per share (38,681) (38,681)
Preferred -- $1.159 per share (2,538) (2,538)
Preferred stock redemption
and conversion (2,866) (71,644) 3,186 32 70,388 (1,224)
Stock options 36 1 154 155
----- --------- ------ ------ ----------- ---------- ----------
BALANCE, DECEMBER 31, 2003 -- -- 24,664 247 257,206 (29,428) 228,025
----- -------- ------ ------ ----------- ---------- ----------
Net earnings 39,352 39,352
Cash dividends:
Common -- $1.70 per share (41,963) (41,963)
Stock-based compensation 25 25
Stock options 30 - 64 64
----- -------- ------ ------ ----------- ---------- ----------
BALANCE, DECEMBER 31, 2004 -- -- 24,694 247 257,295 (32,039) 225,503
----- -------- ------ ------ ----------- ---------- ----------
Net earnings 45,448 45,448
Cash dividends:
Common -- $1.76 per share (43,539) (43,539)
Stock-based compensation 134 134
Stock options 23 - 337 337
------ --------- ------ ------ ----------- ---------- ----------
BALANCE, DECEMBER 31, 2005 -- $ -- 24,717 $ 247 $ 257,766 $ (30,130)(a) $ 227,883
====== ========= ====== ====== =========== ========== ==========
(a) Net of $103,803 transferred from retained earnings to common stock and
paid-in capital as a result of accumulated stock dividends.
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
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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 is authorized to issue
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, 2005, 2004 and 2003.
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 Compensation Committee of 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 retirement plans
approximated $141,000, $139,000 and $125,000 for the years ended December 31,
2005, 2004 and 2003, 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 March 1, 2005 and June 1, 2004, the Company awarded 12,550 and 10,800
restricted stock units ("RSUs") and dividend equivalents to employees,
respectively. All of the 23,350 RSUs awarded were outstanding as of December 31,
2005. 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 are settled subsequent to the
termination of employment with the Company. Presently, 16,600 of 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, and
6,750 of the RSUs vest on the fifth anniversary of their grant. The dividend
equivalents represent the value of the dividend paid per common share paid
multiplied by the number of RSUs covered by the award. The dividend equivalents
awarded in 2004 originally vested over a five year period but were modified to
be fully vested in March 2005.
The fair values of the RSUs were determined based on the closing market
price of the Company's stock on the date of grant. The fair value of the 2004
award included a reduction for the discounted value of the dividends that would
not have been paid during the vesting period of the dividend equivalents. The
fair values of the RSUs granted on March 1, 2005 and June 1, 2004 were estimated
at $26.95 and $19.91 per unit on the date of grant with an aggregate fair value
estimated at $338,000 and $215,000, respectively. The modification to the 2004
award increased its fair value by $3.02 per unit or $33,000. The fair value of
the grants will be recognized as compensation expense ratably over the five year
vesting period of the RSUs and the remaining four year vesting period for the
modification to the 2004 award. As of December 31, 2005, there was $455,000 of
total unrecognized compensation cost related to RSUs granted under the 2004
Plan.
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The fair value of the 1,560 RSUs which vested during the year ended
December 31, 2005 was $36,000 and their intrinsic value as of December 31, 2005
was $41,000. For the years ended December 31, 2005 and 2004, dividend
equivalents aggregating approximately $41,000 and $1,000, respectively, were
charged against retained earnings when common stock dividends were 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 within ten years of the grant date (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.
The following is a schedule of stock option prices and activity relating
to the Stock Option Plan:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------
WEIGHTED-
WEIGHTED- AVERAGE AGGREGATE WEIGHTED- WEIGHTED-
AVERAGE REMAINING INTRINSIC AVERAGE AVERAGE
NUMBER EXERCISE CONTRACTUAL VALUE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE TERM (IN THOUSANDS) OF SHARES PRICE OF SHARES PRICE
--------- --------- ----------- -------------- --------- --------- --------- ---------
Outstanding at beginning of year 110,549 $ 18.64 173,085 $ 18.19 358,773 $ 19.12
Exercised (a) (23,374) 15.50 (60,344) 16.40 (153,412) 19.10
Cancelled (2,797) 19.94 (2,192) 24.06 (32,276) 24.06
------- --------- ------- --------- -------- ---------
Outstanding at end of year 84,378 $ 19.48 4.9 $ 2,196 110,549 $ 18.64 173,085 $ 18.19
======= ========= === ======= ======= ========= ======== =========
Exercisable at end of year (b) 69,503 $ 19.73 4.4 $ 1,808 66,299 $ 18.63 91,023 $ 18.63
======= ========= === ======= ======= ========= ======== =========
Available for grant at end of year 665,870 663,073 660,881
======= ======= ========
(a) The total intrinsic value of the options exercised during the years ended
December 31, 2005, 2004 and 2003 was $276,000, $676,000 and $666,000,
respectively.
(b) Of the 44,250 non-vested options outstanding as of December 31, 2004, 29,375
vested in 2005 and the remaining 14,875 outstanding as of December 31, 2005
are scheduled to vest in 2006.
As of December 31, 2005, there was $8,000 of total unrecognized compensation
cost related to non-vested options granted under the Option Plan, which expense
will be recognized in 2006. The total fair value of the options vested during
the years ended December 31, 2005, 2004 and 2003 was $35,000, $91,000 and
$128,000, respectively.
The following table summarizes information concerning options outstanding and
exercisable at December 31, 2005:
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
- --------------- --------------- ------------------- ---------------- ------------- ----------------
$14.50 5,938 5 $ 14.50 5,938 $ 14.50
16.15 - 18.30 50,500 7 17.52 35,625 17.20
24.06 27,940 1 24.06 27,940 24.06
------ ------
84,378 4.9 69,503
====== === ======
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9. QUARTERLY FINANCIAL DATA
The following is a summary of the quarterly results of operations for the years
ended December 31, 2005 and 2004 (unaudited as to quarterly information) (in
thousands, except per share amounts):
THREE MONTHS ENDED
-------------------------------------------------------------- YEAR ENDED
YEAR ENDED DECEMBER 31, 2005 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
- ------------------------------------------- ----------- -------------- ------------- ------------- -------------
Revenues from rental properties $ 17,396 $ 17,872 $ 17,768 $ 18,341 $ 71,377
Net earnings before income tax benefit 11,436 10,214 (a) 11,272 11,032 (a) 43,954
Net earnings 11,436 10,214 (a) 12,766 11,032 (a) 45,448
Diluted earnings per common share .46 .41 .52 .45 1.84
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 (b) 39,352
Diluted earnings per common share .37 .38 .40 .44 1.59
(a) The quarter ended December 31, 2005 includes adjustments (see footnote 1)
which reduced net earnings by $693 comprised of: (a) a charge of $1,534
for rent expense related to prior years (see footnote 2); offset by income
aggregating $300 for: (b) lease terminations of $115 related to prior
years and $185 related to earlier quarters in 2005, and; (c) $541 of gains
on sales of real estate resulting from a property taken by eminent domain
related to the quarter ended June 30, 2005.
(b) Includes credits which increased earnings by $686 for reductions in
insurance and mortgage receivable reserves.
10. PROPERTY ACQUISITIONS
On March 25, 2005, the Company acquired twenty-three convenience store and
retail motor fuel properties in Virginia for approximately $29,000,000. 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.
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 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, 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
prior 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 28, 2006, the Company completed the acquisition of eighteen retail
motor fuel and convenience store properties located in Western New York for
approximately $13,500,000. Simultaneous with the closing on the acquisition, the
Company entered into a triple-net lease with a single tenant for all of the
properties. The lease provides for annual rentals at a competitive rate and
provides for escalations thereafter. The lease has an initial term of fifteen
years and provides the tenant options for three renewal terms of five years
each. The lease also provides that the tenant is responsible for all existing
and future environmental conditions at the properties.
- 34 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Getty Realty Corp.:
We have completed integrated audits of Getty Realty Corp.'s December 31, 2005
and 2004 consolidated financial statements and of its internal control over
financial reporting as of December 31, 2005, and an audit of its December 31,
2003 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, 2005 and 2004, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2005 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, 2005 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,
2005, 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 9, 2006
- 35 -
MANAGEMENT'S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING, CAPITAL STOCK
AND CERTIFICATIONS
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 have
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, 2005.
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"). There
were approximately 12,500 shareholders of our common stock as of December 31,
2005, of which 1,400 were holders of record. 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, 2005 and 2004 was as follows:
PRICE RANGE CASH
----------------- DIVIDENDS
PERIOD ENDING HIGH LOW PER SHARE
- ----------------------------- ------- ------- ---------
December 31, 2005 $ 28.94 $ 25.25 $ .4450
September 30, 2005 30.70 27.01 .4450
June 30, 2005 29.35 24.81 .4350
March 31, 2005 28.78 24.75 .4350
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
Please refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" for a discussion of
potential limitations on our ability to pay future dividends.
CERTIFICATIONS
Compliance with NYSE Corporate Governance Listing Standards
On June 10, 2005, in accordance with Section 303A.12 of the Listed Company
Manual of the New York Stock Exchange, our Chief Executive Officer certified to
the New York Stock Exchange that he was not aware of any violation by our
Company of New York Stock Exchange corporate governance listing standards as of
that date.
Rule 13a-14(a) Certifications of Chief Executive Officer and Chief Financial
Officer
On March 9, 2006, our Chief Executive Officer and Chief Financial Officer each
filed the certification required by Section 302 of the Sarbanes-Oxley Act of
2002 as an exhibit to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2005.
- 36 -