Business Description
Getty Realty Corp. (GTY), a net-lease Real Estate Investment Trust (REIT) specializing in convenience & gas, and automotive retail real estate properties.
While most of its properties are in gas stations with convenience stores, its new acquisitions are mostly in car wash stations.
Gas stations and their attached convenience stores are essential businesses which are recession and e-commerce resistant, so do other properties related to auto retailers. Getty also keeps a very conservative balance at around 5x net debt / EBITDA, 4x fixed charge coverage and 37% consolidated debt to asset ratio.
Besides acquisitions, the company also possesses in-house expertise for redevelopment projects, unlocking additional value from underutilized properties.
SWOT analysis
Strengths
The tenants are in essential businesses which are e-commerce and recession resistant. They were proven by the past recessions, dot-com busts, covid-19 pandemic, etc. They have very high 2.7X average EBITDA coverage of rent as well.
The company is benefited economically by the benefits of strong tenants with high rent coverage and high annual rent escalation of 1.7% compared to other triple-net leases.
The real estate are mostly freestanding properties on corner locations in high density metro areas. They are in high traffic areas which have lots of potential for alternative uses.
While gas stations will be obsolete one day when electric vehicles take over, existing gas stations are still very valuable because gas stations and their attached convenience stores are still very profitable and it is extremely hard to get the permits to build new gas stations in high traffic areas.
Weaknesses
Almost none short-term. The only deficit is a lack of insider purchases even though share prices were low in 2013-2015. That's a bit puzzling.
Opportunities
A lack of alternative funding sources in the wake of reduced support for gasoline-based businesses could drive gas stations and convenience stores towards Getty for their capital needs.
Rents for gas & convenience stores usually go up with inflation. With average inflation higher than 1.7% (Getty's weighted average annual lease escalation), leases are likely well below market rates which suggests they are more likely to roll up than roll down upon expiry.
Car washes and auto repair shops are still fragmented, which provide some opportunities for Getty to keep growing. There is no significant opportunity ahead for Getty, though.
Threats
Electric vehicles may take over gasoline cars faster than expected, which will cause stress to gas station tenants.
Capex to redevelop single-purpose properties like gas stations maybe too high to be profitable.
References
2023/12/18: Getty's Supreme Locations Warrant A Higher Multiple by Portfolio Income Solutions (Dane Bowler)
Getty Realty Corp. Announces Third Quarter 2023 Results
Q3 2023 Earnings Call Presentation
Updates
2023/12/24 Valuation
GTY is trading at around $30 currently. With the expected AFFO of $2.25 this year, minus 5% for stock-based compensation expense, the P/AFFO = $30/(2.25*0.95) = 14x, not expensive.
The dividend was just raised to $0.45 a quarter, so $1.8 a year. That is a dividend yield of 6%. Historically, the company can grow its dividend about 5% a year. It is consistent with the 1.7% rent escalator to translate to about 2.5% annual AFFO growth, then about 2% more growth from retained earnings used for new acquisitions. The remaining 0.5% can be explained by a rent bump from releasing expiring leases due to inflation averaging higher than 1.7%, and high return on capital on redevelopment.
Getty belongs to the category of stocks with average return on equity (10-12%), so I use a discount rate of 11%. That gives a buy below price of exactly $1.8 / (11% - 5%) = $30.
Another way to look at this is through cap rates. The annualized EBITDA is $147.4 million. NOI is calculated as EBITDA + G&A. G&A in 2023 Q3 was $5,745 thousands, annualized to $23 million, thus NOI is about $170.4 million. GTY has $750 million debt outstanding and about 57.2 million shares outstanding. It has a few millions of cash but let's skip that in our calculation.
Using EBITDA, the cap rate is: 147.4/(750+57.2*30) = 5.98%.
Using NOI, the cap rate is: 170.4/(750+57.2*30) = 6.9%.
The initial cash yield for acquisitions in 2023 Q3 was 7.2%. By comparison, it was 6.7% In 2022 Q3. So if we believe the cash yield for acquisition has pretty much peaked at around 7.2%, $30 a share is a pretty fair value to pay.
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