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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarter ended SEPTEMBER 30, 2002 Commission file number 001-13777
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GETTY REALTY CORP.
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(Exact name of registrant as specified in its charter)
MARYLAND 11-3412575
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 JERICHO TURNPIKE, SUITE 103, JERICHO, NEW YORK 11753
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(Address of principal executive offices) (Zip Code)
(516) 478 - 5400
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Registrant had outstanding 21,442,109 shares of Common Stock, par value $.01 per
share, and 2,865,768 shares of Series A Participating Convertible Redeemable
Preferred Stock, par value $.01 per share, as of October 31, 2002.
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GETTY REALTY CORP.
INDEX
Part I. FINANCIAL INFORMATION Page Number
- ------------------------------ -----------
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002 and
December 31, 2001 1
Consolidated Statements of Operations for the three
and nine months ended September 30, 2002 and 2001 2
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2002 and 2001 3
Notes to Consolidated Financial Statements 4 - 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16 - 17
Part II. OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
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September 30, December 31,
- -----------------------------------------------------------------------------------------------------------
2002 2001
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Assets:
- -----------------------------------------------------------------------------------------------------------
Real Estate:
Land $ 134,785 $ 134,717
Buildings and improvements 172,700 176,635
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307,485 311,352
Less - accumulated depreciation (92,096) (89,242)
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Real estate, net 215,389 222,110
Cash and equivalents 35,556 37,523
Mortgages and accounts receivable, net 5,777 4,819
Deferred rent receivable 13,441 8,388
Recoveries from state underground storage tank funds 15,531 14,276
Prepaid expenses and other assets 1,393 1,072
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Total assets $ 287,087 $ 288,188
========= =========
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Liabilities and Shareholders' Equity:
- -----------------------------------------------------------------------------------------------------------
Mortgages payable $ 943 $ 997
Dividends payable 10,117 10,108
Accounts payable and accrued expenses 10,589 12,018
Environmental remediation costs 30,261 27,292
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Total liabilities 51,910 50,415
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Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.01 per share; authorized
20,000,000 shares for issuance in series of which
3,000,000 shares are classified as Series A Participating
Convertible Redeemable Preferred; issued 2,888,798 at
September 30, 2002 and December 31, 2001 72,220 72,220
Common stock, par value $.01 per share; authorized
50,000,000 shares; issued 22,460,877 at September 30, 2002
and 22,441,168 at December 31, 2001 225 224
Paid-in capital 198,783 198,575
Dividends paid in excess of earnings (23,343) (20,537)
Preferred stock held in treasury, at cost; 23,030 shares at
September 30, 2002 and December 31, 2001 (430) (430)
Common stock held in treasury, at cost; 1,018,768 shares at
September 30, 2002 and 1,018,848 at December 31, 2001 (12,278) (12,279)
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Total shareholders' equity 235,177 237,773
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Total liabilities and shareholders' equity $ 287,087 $ 288,188
========= =========
See accompanying notes.
1
GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
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Three months ended September 30, Nine months ended September 30,
- ---------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Revenues:
Revenues from rental properties $ 16,746 $ 16,971 $ 50,425 $ 51,209
Other income, net 637 623 1,989 1,530
-------- -------- -------- --------
17,383 17,594 52,414 52,739
-------- -------- -------- --------
Expenses:
Rental property expenses 2,885 2,881 9,051 8,578
Environmental expenses, net 2,351 1,953 5,657 5,966
General and administrative expenses 965 1,660 3,254 3,896
Depreciation expense 2,174 2,264 6,815 6,997
Interest expense 35 243 100 1,885
-------- -------- -------- --------
8,410 9,001 24,877 27,322
-------- -------- -------- --------
Earnings before income taxes 8,973 8,593 27,537 25,417
Income tax benefit -- (43,679) -- (36,648)
-------- -------- -------- --------
Net earnings 8,973 52,272 27,537 62,065
Preferred stock dividends 1,272 13,308 3,816 15,852
-------- -------- -------- --------
Net earnings applicable to common shareholders $ 7,701 $ 38,964 $ 23,721 $ 46,213
======== ======== ======== ========
Net earnings per common share:
Basic $ .36 $ 2.11 $ 1.11 $ 3.19
Diluted $ .36 $ 2.11 $ 1.11 $ 3.18
Weighted average common shares outstanding:
Basic 21,441 18,430 21,433 14,509
Diluted 21,450 18,437 21,443 14,517
See accompanying notes.
2
GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Nine months ended September 30,
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2002 2001
- -----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 27,537 $ 62,065
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 6,815 6,997
Deferred income taxes -- (36,479)
Gain on dispositions of real estate (1,178) (710)
Deferred rent (5,053) (6,291)
Changes in assets and liabilities:
Mortgages and accounts receivable (958) 742
Recoveries from state underground storage tank funds (1,255) 462
Prepaid expenses and other assets (321) 287
Accounts payable and accrued expenses (1,429) (1,038)
Environmental remediation costs 2,969 (428)
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Net cash provided by operating activities 27,127 25,607
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Cash flows from investing activities:
Capital expenditures (86) (460)
Property acquisitions (1,770) --
Proceeds from dispositions of real estate 2,940 1,784
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Net cash provided by investing activities 1,084 1,324
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Cash flows from financing activities:
Repayments under credit lines, net -- (27,000)
Repayment of mortgages payable (54) (21,140)
Cash dividends paid (30,334) (73,649)
Issuance of common stock -- 131,531
Stock options and treasury stock, net 210 81
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Net cash provided by (used in) financing activities (30,178) 9,823
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Net increase (decrease) in cash and equivalents (1,967) 36,754
Cash and equivalents at beginning of period 37,523 723
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Cash and equivalents at end of period $ 35,556 $ 37,477
========= =========
Supplemental disclosures of cash flow information
Cash paid (refunded) during the period for:
Interest $ 100 $ 2,054
Income taxes, net 1,200 333
Recoveries from state underground storage tank funds (2,618) (4,511)
Environmental remediation costs 5,551 9,409
See accompanying notes.
3
GETTY REALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General:
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America ("GAAP"). The consolidated financial statements include the accounts of
Getty Realty Corp. and its wholly-owned subsidiaries (the "Company"). The
Company is a real estate investment trust ("REIT") specializing in the ownership
and leasing of service stations, convenience stores and petroleum marketing
terminals. All significant intercompany accounts and transactions have been
eliminated. Certain prior period amounts have been reclassified to conform to
the current period presentation.
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. Estimates underlying the accompanying consolidated financial
statements include, but are not limited to, deferred rent receivable, recoveries
from state underground storage tank funds, environmental remediation costs,
depreciation, impairment of long-lived assets, litigation, accrued expenses and
income taxes.
The consolidated financial statements are unaudited but, in the opinion of
management, reflect all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation. These statements should be read in
conjunction with the consolidated financial statements and related notes, which
appear in the Company's Annual Report on Form 10-K for the year ended December
31, 2001.
2. 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 period. Diluted earnings per common share also gives effect to the
potential dilution from the exercise of stock options in the amount of 9,000 and
10,000 shares, respectively, for the three and nine months ended September 30,
2002 and 7,000 and 8,000 shares, respectively, for the prior year periods.
For the three and nine months ended September 30, 2002 and 2001, conversion
of the Series A Participating Convertible Redeemable Preferred stock into common
stock utilizing the if-converted method would have been antidilutive and
therefore conversion was not assumed for purposes of computing either basic or
diluted earnings per common share.
3. Income taxes:
The Company and its subsidiaries file a consolidated federal income tax
return. In the third quarter of 2001, and effective retroactive to January 1,
2001, the Company elected to qualify, and believes it is operating so as to
continue to qualify, as a REIT for federal income tax purposes. Accordingly, the
Company generally will not be subject to federal corporate income tax, provided
that distributions to its shareholders equal at least 100% of its REIT taxable
income as defined under the Internal Revenue Code. The Company is subject to
income taxes in certain states that do not conform to the federal REIT
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provisions and to other state taxes that are not based on income. The Company
recorded a non-recurring tax benefit of approximately $43.7 million for the
quarter ended September 30, 2001 to reverse accrued income tax liabilities that
it would no longer be required to pay as a REIT, including certain taxes that
were provided for during the first two quarters of 2001. If the Company sells
any property within ten years after its REIT election for which a gain is not
deferred in a like-kind property exchange, it will be taxed on the built-in gain
that existed as of January 1, 2001 and is realized from such sale at the highest
corporate tax rate. This ten-year built-in gain tax period will end on January
1, 2011.
4. New accounting pronouncements:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations" and Statement of Financial Accounting Standards No. 142 ("SFAS
No.142"), "Goodwill and Other Intangible Assets." SFAS No. 141 requires the
purchase method of accounting to be used for all business combinations initiated
after June 30, 2001. SFAS No. 141 also addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in business
combinations and requires intangible assets to be recognized apart from goodwill
if certain tests are met. The adoption of SFAS No. 141 has not had a significant
effect on the Company's financial position or results of operations. SFAS No.
142 requires that goodwill not be amortized but instead be measured for
impairment at least annually, or when events indicate that there may be an
impairment. The Company adopted SFAS No. 142 effective January 1, 2002. The
adoption of SFAS No. 142 has not had a significant effect on the Company's
financial position or results of operations.
In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 provides new guidance on the recognition of
impairment losses on long-lived assets to be held and used or to be disposed of
and also broadens the definition of what constitutes a discontinued operation
and how the results of a discontinued operation are to be measured and
presented. The Company adopted SFAS No. 144 effective January 1, 2002. The
adoption of SFAS No. 144 has not had a significant effect on the Company's
financial position or results of operations.
On April 30, 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No.
145 eliminates the requirement that gains and losses from the extinguishment of
debt be aggregated and, if material, classified as an extraordinary item, net of
the related income tax effect. Further, SFAS No. 145 eliminates an inconsistency
between the accounting for sale-leaseback transactions and certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also makes several other technical corrections to
existing pronouncements that may change accounting practice. The Company adopted
the provisions of this statement beginning with the second quarter of 2002. The
adoption of SFAS No. 145 has not had a significant impact on the Company's
financial position or results of operations.
5
5. Shareholders' equity:
A summary of the changes in shareholders' equity for the nine months ended
September 30, 2002 is as follows (in thousands, except per share amounts):
Dividends Preferred Stock Common Stock
Paid In Held in Treasury, Held in Treasury,
Preferred Stock Common Stock Paid-in Excess Of At Cost at Cost
------------------------------ ------------------------------------
Shares Amount Shares Amount Capital Earnings Shares Amount Shares Amount Total
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BALANCE, DECEMBER 31, 2001 2,889 $72,220 22,441 $224 $198,575 $(20,537) 23 $(430) 1,019 $(12,279) $237,773
Net earnings 27,537 27,537
Cash dividends:
Common -- $.825 per share (26,527) (26,527)
Preferred -- $.8875 per share (3,816) (3,816)
Stock options 20 1 208 209
Issuance of Treasury Stock - 1 1
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BALANCE, SEPTEMBER 30, 2,003 2889 $72,220 22,461 $225 $198,783 $(23,343) 23 $(430) 1,019 $(12,278) $235,177
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6. Commitments and Contingencies
In order to qualify as a REIT, among other items, the Company paid a
$64,162,000 special one-time "earnings and profits" (as defined in the Internal
Revenue Code) cash distribution to shareholders in August 2001. Determination of
accumulated earnings and profits for federal income tax purposes is extremely
complex. Should the Internal Revenue Service successfully assert that the
Company's accumulated earnings and profits were greater than the amount
distributed, the Company may fail to qualify as a REIT, however, the Company may
avoid losing its REIT status by paying a deficiency dividend to eliminate any
remaining accumulated earnings and profits. The Company may have to borrow money
or sell assets to pay such a deficiency dividend.
In order to minimize the Company's exposure to credit risk associated with
financial instruments, the Company places its temporary cash investments with
high credit quality institutions. Temporary cash investments are held in an
institutional money market fund and federal agency discount notes.
The Company leases substantially all of its properties on a long-term net
basis to Getty Petroleum Marketing Inc. ("Marketing") under a master lease
entered into on February 1, 1997 and amended and restated effective December 9,
2000 (the "Master Lease"). 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. Marketing was
subsequently acquired by a subsidiary of OAO Lukoil, Russia's largest vertically
integrated oil company, in December 2000. The Company's financial results depend
largely on rental income from Marketing, and to a lesser extent on rental income
from other tenants, and are therefore materially dependent upon the ability of
Marketing to meet its obligations under the Master Lease. 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. However, based on the information currently
available to the Company, the Company does not anticipate that Marketing will
have difficulty in making required rental payments under the Master Lease for
the foreseeable future.
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. These matters are not expected to have a
6
material adverse effect on the Company's financial condition or results of
operations.
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 September 30, 2002 and
December 31, 2001, the Company's consolidated balance sheets included, in
accounts payable and accrued expenses, $2,616,000 and $2,179,000, respectively,
relating to insurance obligations arising prior to the spin-off of the marketing
business. Insurance charges related to the period prior to the spin-off for the
quarter and nine months ended September 30, 2002 and 2001 are immaterial, and
are included in general and administrative expenses in the Company's
consolidated statements of operations. Since the spin-off, the Company has
maintained insurance coverage subject to certain deductibles.
7. Environmental Remediation Costs
The Company is subject to numerous existing federal, state and local laws
and regulations, including matters relating to the protection of the
environment. Currently, environmental expenses are principally attributable to
remediation, monitoring, and governmental agency reporting incurred in
connection with contaminated properties. In prior periods a larger portion of
the expenses also included soil disposal, the replacement or upgrading of
underground storage tanks ("USTs") to meet federal, state and local
environmental standards, as well as routine monitoring and tank testing. For the
quarter and nine months ended September 30, 2002, net environmental expenses
included in the Company's consolidated statements of operations were $2,351,000
and $5,657,000, respectively and $1,953,000 and $5,966,000, respectively, for
the prior year periods, which amounts were net of probable recoveries from state
UST remediation funds.
Under the Master Lease with Marketing, and in accordance with our leases
with our other tenants, the Company agreed to bring the leased properties with
known environmental contamination to regulatory or contractual closure
("Closure") in an economical manner, and thereafter, transfer all future
environmental risks to its tenants. Generally, upon achieving Closure at each
individual property, the Company's environmental liability under its lease for
that property will be satisfied and future remediation obligations will be the
tenant's responsibility. The Company has agreed to pay all costs relating to,
and to indemnify Marketing for, environmental liabilities and obligations
scheduled in the Master Lease, as amended. The Company will continue to collect
recoveries from state UST remediation funds related to these environmental
liabilities.
The Company has also agreed to provide limited environmental indemnification
to Marketing with respect to six leased terminals and limited indemnification
relating to compliance of properties with local laws. The Company's aggregate
indemnification liability for these additional items is capped at a maximum of
$5.6 million. The Company has not accrued a liability for these indemnification
agreements since it is uncertain that any significant amounts will be required
to be paid under the agreements.
The environmental remediation liability is estimated based on the level and
impact of contamination for each property. The accrued liability is the
aggregate of the best estimates of cost for each component of the liability. If
the best estimate of costs for a component 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 that cost component.
Environmental exposures are difficult to assess and estimate
7
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 liability for
probable and reasonably estimable environmental remediation costs, the Company
considers among other things, enacted laws and regulations, assessments of
contamination and the 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 September 30, 2002 and December 31, 2001, the Company had accrued
$30,261,000 and $27,292,000, respectively, as management's best estimate for
probable and reasonably estimable environmental remediation and related
administrative costs. As September 30, 2002 and December 31, 2001, the Company
had also recorded $15,531,000 and $14,276,000, respectively, as management's
best estimate for recoveries from state UST remediation funds related to
environmental obligations and liabilities.
It is possible that estimated aggregate cash expenditures for environmental
remediation through 2010 could approximate $30.3 million or approximately $14.2
million on a net basis after estimated recoveries from state UST remediation
funds of approximately $16.1 million. Neither the aggregate cash expenditure
estimate nor the accrued environmental remediation costs, nor their related
recoveries, have been adjusted for inflation or discounted to present value. It
is possible that net cash expenditures during this period could exceed the net
amount accrued as of September 30, 2002. The Company estimates that
approximately 100 properties will not have Closure at the end of this period and
that spending will continue after 2010, although at aggregate levels
significantly reduced from historical amounts.
In view of the uncertainties associated with environmental expenditures,
however, the Company believes it is possible that 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 reasonably estimable
as defined by GAAP. 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.
8
Item 2. Management's discussion and analysis of financial condition and results
of operations
General
We are a real estate company specializing in the ownership and leasing of
service stations, convenience stores and petroleum marketing terminals. We lease
most of our properties on a long-term net basis to Getty Petroleum Marketing
Inc. ("Marketing"), which was spun-off to our shareholders on March 21, 1997. In
December 2000, Marketing was acquired by a subsidiary of OAO Lukoil ("Lukoil"),
Russia's largest vertically integrated oil company.
Our financial results largely depend on rental income from Marketing and
other tenants and are materially dependent upon the ability of Marketing to meet
its obligations under the Master Lease entered into on February 1, 1997 and
amended and restated effective December 9, 2000 (the "Master Lease"). Based on
the information currently available to us, we do not anticipate that Marketing
will have difficulty in making required rental payments under the Master Lease
in the foreseeable future.
On August 1, 2001, we closed a public offering of 8,855,000 shares of our
common stock. A portion of the $131.5 million net proceeds of the offering was
used to pay a $64.1 million special one-time "earnings and profits" (as defined
in the Internal Revenue Code) cash distribution to preferred and common
shareholders and $37.4 million was used to repay substantially all of our
mortgage debt and outstanding lines of credit.
In addition, on August 1, 2001, our shareholders approved a charter
amendment to include ownership limitations typical for a real estate investment
trust ("REIT") and accordingly, we elected to be taxed as a REIT under the
federal income tax laws with the year beginning January 1, 2001. As a result,
during the third quarter of 2001, we recorded a non-recurring tax benefit to
reverse previously accrued income tax liabilities that we would no longer be
required to pay as a REIT, including certain taxes that were provided during the
first two quarters of 2001. 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. Moreover, as a REIT, we will not be
subject to federal corporate income tax if we distribute at least 100% of our
taxable income to our shareholders.
Results of Operations - Quarter ended September 30, 2002 compared with the
quarter ended September 30, 2001
Revenues from rental properties for the quarter ended September 30, 2002
were $16.7 million, compared to $17.0 million for the quarter ended September
30, 2001. Approximately $16.2 million and $16.4 million of these rentals for the
quarters ended September 30, 2002 and 2001, respectively, were from properties
leased to Marketing under the Master Lease. Revenues from rental properties
include $1.7 million and $2.1 million of deferred rent recognized in the current
and prior periods, respectively, related to the 2% future annual rent increases
due from Marketing under the terms of the Master Lease. The aggregate minimum
rent due over the initial 15-year term of the Master Lease is recognized on a
straight-line basis rather than when due. The $.4 million decrease in deferred
rent was partially offset by $.2 million of additional rental income received
during the current quarter due to the 2% annual rent increase under the Master
Lease effective in December 2001, net of a reduction in the number of properties
leased compared to the prior period.
9
Other income was $.6 million for the quarter ended September 30, 2002, which
was comparable to the prior year period.
Rental property expenses, which are principally comprised of rent expense
and real estate and other taxes, were $2.9 million for the quarter ended
September 30, 2002, which was comparable to the prior year period.
Environmental expenses, net for the quarter ended September 30, 2002 were
$2.4 million, compared to $2.0 for the quarter ended September 30, 2001. The
current period environmental expenses include a net change in estimated
remediation costs of $1.8 million, a $.3 million increase over the net change
recorded in the comparable prior year period.
General and administrative expenses for the quarter ended September 30, 2002
were $1.0 million, compared to $1.7 million for the quarter ended September 30,
2001. The decrease of $.7 million is primarily due to non-recurring expenses
relating to the Company's REIT election and debt repayment incurred in the prior
year period as well as a decrease in legal fees.
Depreciation expense was $2.2 million and $2.3 million, respectively, for
the quarters ended September 30, 2002 and 2001. The decrease was primarily the
result of certain assets becoming fully depreciated and real estate
dispositions.
Interest expense for the quarter ended September 30, 2002 decreased to
$35,000 from $243,000 in the quarter ended September 30, 2001. The decrease was
due to the repayment of substantially all of our mortgage debt and outstanding
lines of credit in August 2001.
Results of Operations - Nine months ended September 30, 2002 compared with
the nine months ended September 30, 2001
Revenues from rental properties for the nine months ended September 30, 2002
were $50.4 million, compared to $51.2 million for the nine months ended
September 30, 2001. Approximately $48.7 million and $49.3 million of these
rentals for the nine months ended September 30, 2002 and 2001, respectively,
were from properties leased to Marketing under the Master Lease. Revenues from
rental properties include $5.1 million and $6.3 million of deferred rent
recognized in the current and prior periods, respectively. The $1.2 million
decrease in deferred rent was partially offset by $.4 million of additional
rental income received during the nine months ended September 30, 2002, due to
the 2% annual rent increase under the Master Lease effective in December 2001,
net of a reduction in the number of properties leased compared to the prior
period.
Other income was $2.0 million and $1.5 million for the nine months ended
September 30, 2002 and 2001, respectively. The increase from the prior period
was due to $.5 million of additional gains on dispositions of properties.
Rental property expenses were $9.1 million for the nine months ended
September 30, 2002, compared to $8.6 million for the nine months ended September
30, 2001. The $.5 million increase was primarily due to taxes provided during
the nine months ended September 30, 2002 for states that do not conform to the
federal REIT provisions and real estate tax refunds received in the prior
period.
10
Environmental expenses, net for the nine months ended September 30, 2002
were $5.7 million, a decrease of $.3 million over the comparable prior year
period. The current period environmental expenses include a net change in
estimated remediation costs of $4.6 million compared to $4.9 million recorded in
the comparable prior year period.
General and administrative expenses for the nine months ended September 30,
2002 were $3.3 million, compared to $3.9 million for the nine months ended
September 30, 2001. The decrease of $.6 million is primarily due to
non-recurring expenses relating to the Company's REIT election and debt
repayment incurred in the prior period as well as a decrease in legal fees and
service agreement fees to Marketing, offset by increased employee related
expenses.
Depreciation expense was $6.8 million and $7.0 million, respectively, for
the nine months ended September 30, 2002 and 2001. The decrease was primarily
the result of certain assets becoming fully depreciated and real estate
dispositions.
Interest expense for the nine months ended September 30, 2002 decreased to
$100,000 from $1,885,000 in the nine months ended September 30, 2001. The
decrease was due to the repayment of substantially all of our mortgage debt and
outstanding lines of credit in August 2001.
Liquidity and Capital Resources
Our principal sources of liquidity are cash and equivalents, the cash flows
from our business and our short-term uncommitted line of credit with a bank.
Management believes that dividend payments and cash requirements for our
business, including environmental remediation expenditures, capital expenditures
and debt service, can be met by cash flows from operations, available cash and
equivalents and the credit line. As of September 30, 2002, we had a line of
credit amounting to $25.0 million, of which $3.3 million was utilized in
connection with outstanding letters of credit. Borrowings under the lines of
credit are unsecured and bear interest at the prime rate or, at our option,
LIBOR plus 1.25%. The line of credit is subject to annual renewal at the
discretion of the bank.
At a special meeting of shareholders held on August 1, 2001, our
shareholders approved a charter amendment containing ownership limitations
typical for a REIT. 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. We presently intend to pay common stock dividends of
$0.4125 per quarter ($1.65 per share on an annual basis), and commenced doing so
with the quarterly dividend declared in September 2001. We presently intend to
pay quarterly dividends of $0.44375 per share of preferred stock ($1.775 per
share on an annual basis) until dividends declared per share of common stock in
any calendar year exceed $1.5691, at which time preferred shareholders
participate in the excess common stock dividends declared for the calendar year
on an "as converted" basis. Based on the current conversion rate and our current
annual common stock dividend rate of $1.65 per share, preferred shareholders
would receive annual dividends aggregating approximately $1.8665 per preferred
share. Payment of dividends is subject to market conditions, our financial
condition, the distribution preferences of our preferred stock and other
factors, and therefore cannot be assured. We declared quarterly common stock
dividends aggregating $1.2375 and $.7125 per share for the nine months ended
September 30, 2002 and 2001, respectively. We also declared quarterly preferred
stock dividends aggregating $1.33125 per share during each of these periods. In
addition, a special distribution was paid on August 2, 2001 to
11
holders of Getty common stock and Series A Preferred stock. Common shareholders
received $4.15 per share and Series A Preferred shareholders received $4.20 per
share. Cash dividends paid aggregated $30.3 million and $73.6 million for the
nine months ended September 30, 2002 and 2001, respectively. On November 12,
2002, we declared a common stock dividend of $0.4125 per share and a preferred
stock dividend of $0.53523 per share consisting of a stated quarterly dividend
of $0.44375 and $0.09148 based on the participation feature discussed above.
In order to initially qualify for REIT status, we were required to make a
distribution to shareholders in an amount at least equal to our accumulated
earnings and profits from the years we operated as a taxable corporation.
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 in 2001, 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.
Acquisitions of 6 leased properties, principally from the exercise of lease
purchase options, and capital expenditures for the nine months ended September
30, 2002 aggregated $1.9 million.
Critical Accounting Policies
Our accompanying consolidated financial statements include the accounts of
Getty Realty Corp. and our wholly-owned subsidiaries. The preparation of
financial statements in accordance with generally accepted accounting principles
("GAAP") requires management to make estimates and assumptions that affect
amounts reported in its financial statements. We have made our best estimates
and judgments relating to certain amounts which are included in our financial
statements, giving due consideration to the accounting policies selected and
materiality. We do not believe that there is a great likelihood that materially
different amounts would be reported related to the application of the accounting
policies described below. Application of these accounting policies however,
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates. Our accounting policies are described in Note 1 to the consolidated
financial statements which appear in our Annual Report on Form 10-K for the year
ended December 31, 2001. We believe the more critical of our accounting policies
are as follows:
Revenue Recognition - We earn revenue primarily from operating leases with
Marketing and other tenants. According to GAAP, we recognize income under the
Master Lease with Marketing on the straight-line method, which effectively
recognizes contractual lease payments evenly over the initial fifteen year term
of the lease. 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 $13.4 million recorded as of
September 30, 2002 will ultimately be collected. In addition, we may be required
to reverse a portion of the recorded deferred rent receivable if it becomes
apparent that a property will be disposed of before the end of the initial lease
term.
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
believe that our real estate assets are not carried at amounts in excess of
their
12
estimated net realizable fair value.
Income taxes - Our future financial results generally will not reflect
provisions for current or deferred income taxes since we elected to be taxed as
a REIT effective as of 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 these
REIT requirements, however, are highly technical and complex. If we were to fail
to meet these requirements, we may be subject to federal income tax.
Environmental Costs - We provide for estimated future costs for known
environmental remediation requirements when it is probable that a liability has
been incurred and the amount of remediation costs can be reasonably estimated
(see Environmental Matters). Frequently the best estimate of costs for a
component of the liability can only be identified as a range, and no amount
within the range is a better estimate of the liability than any other amount. In
that circumstance, GAAP requires that the minimum of the range be accrued for
that cost component. 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.
Environmental Matters
We are subject to numerous existing federal, state and local laws and
regulations, including matters relating to the protection of the environment.
Currently, environmental expenses are principally attributable to remediation,
monitoring and governmental agency reporting incurred in connection with
contaminated properties. In prior periods, a larger portion of the expenses also
included soil disposal, the replacement or upgrading of underground storage
tanks ("USTs") to meet federal, state and local environmental standards, as well
as routine monitoring and tank testing.
Under the Master Lease with Marketing, and in accordance with leases with
other tenants, we agreed to bring the leased properties with known environmental
contamination to regulatory or contractual closure ("Closure") in an economical
manner and, thereafter, transfer all future environmental risks to our tenants.
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 have agreed
to pay all costs relating to, and to indemnify Marketing for, environmental
liabilities and obligations scheduled in the Master Lease, as amended. We will
continue to collect recoveries from certain state UST remediation funds related
to these environmental liabilities.
We have also agreed to provide limited environmental indemnification to
Marketing with respect to six leased terminals and limited indemnification
relating to compliance of properties with local laws. Our aggregate
indemnification liability for these items is capped at a maximum of $5.6
million. We have not accrued a liability for these indemnification agreements
since it is uncertain that any significant amounts will be required to be paid
under the agreements.
The estimated future costs for known environmental remediation requirements
are accrued when it is probable that a liability has been incurred and the
amount of remediation costs can be
13
reasonably estimated in accordance with GAAP. The environmental remediation
liability is estimated based on the level and impact of contamination for each
property. The accrued liability is the aggregate of the best estimates of cost
for each component of the liability. If the best estimate of costs for a
component 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 that cost component. Recoveries of environmental costs,
principally from state underground storage tank remediation funds, are accrued
as a reduction in environmental expenses, net 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 our liability for probable and
reasonably estimable environmental remediation costs, on a property by property
basis, we consider among other things, enacted laws and regulations, assessments
of contamination and the 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
September 30, 2002, we had remediation action plans in place for 354 (84%) of
the 419 properties for which we retain environmental responsibility and have not
achieved Closure. Sixty- five properties (15%) remain in the assessment phase,
which when completed will likely result in a change in estimate for those
properties. In addition, 15 sites that have achieved Closure as of September 30,
2002 require post Closure compliance activities with remaining estimated costs
of approximately $70,000 in the aggregate.
As of September 30, 2002 and December 31, 2001, we had accrued $30.3 million
and $27.3 million, respectively, as management's best estimate for probable and
reasonably estimable environmental remediation and related administrative costs.
As of September 30, 2002 and December 31, 2001, we had also recorded $15.5
million and $14.3 million, respectively, as management's best estimate for
recoveries from state UST remediation funds related to environmental obligations
and liabilities. It is possible that future estimated aggregate cash
expenditures for environmental remediation through 2010 could approximate $30.3
million, or approximately $14.2 million on a net basis after estimated
recoveries from state UST remediation funds of approximately $16.1 million.
Neither the aggregate future cash expenditure nor the accrued environmental
remediation costs, nor their related recoveries, have been adjusted for
inflation or discounted to present value. It is possible that estimated net cash
expenditures through 2010 could exceed the net amount accrued as of September
30, 2002. We estimate that approximately 100 properties will not have Closure by
2010 and that spending will continue afterwards, although at aggregate levels
significantly reduced from historical amounts. Early in 2002, we estimated that
our net environmental remediation spending would be approximately $7.4 million
and stated that our business plan for 2002 reflects a net change in estimated
remediation costs of approximately $6.0 million. During the first nine months of
2002, our net environmental remediation spending was $2.9 million and we
recorded a net increase in estimated remediation costs of $4.6 million. While we
believe that our net spending for 2002 will be lower than previously projected,
we expect that a significant amount of the reduction will be expended in 2003.
14
In view of the uncertainties associated with environmental expenditures,
however, we believe it is possible that 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 reasonably estimable as defined by GAAP.
Although 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. 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.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations" and Statement of Financial Accounting Standards No. 142 ("SFAS
No.142"), "Goodwill and Other Intangible Assets." SFAS No. 141 requires the
purchase method of accounting to be used for all business combinations initiated
after June 30, 2001. SFAS No. 141 also addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in business
combinations and requires intangible assets to be recognized apart from goodwill
if certain tests are met. The adoption of SFAS No. 141 has not had a significant
effect on our financial position or results of operations. SFAS No. 142 requires
that goodwill not be amortized but instead be measured for impairment at least
annually, or when events indicate that there may be an impairment. We adopted
SFAS No. 142 effective January 1, 2002. The adoption of SFAS No. 142 has not had
a significant effect on our financial position or results of operations.
In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 provides new guidance on the recognition of
impairment losses on long-lived assets to be held and used or to be disposed of
and also broadens the definition of what constitutes a discontinued operation
and how the results of a discontinued operation are to be measured and
presented. We adopted SFAS No. 142 effective January 1, 2002. The adoption of
SFAS No. 144 has not had a significant effect on our financial position or
results of operations.
On April 30, 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No.
145 eliminates the requirement that gains and losses from the extinguishment of
debt be aggregated and, if material, classified as an extraordinary item, net of
the related income tax effect. Further, SFAS No. 145 eliminates an inconsistency
between the accounting for sale-leaseback transactions and certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also makes several other technical corrections to
existing pronouncements that may change accounting practice. We adopted the
provisions of this statement beginning with the second quarter of 2002. The
adoption of SFAS No. 145 has not had a significant effect on our financial
position
15
or results of operations.
Forward Looking Statements
Certain statements in this Quarterly Report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. When we use the words "believes", "expects", "plans", "projects",
"estimates" and similar expressions, we intend to identify forward-looking
statements. These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
and achievements to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements. These
factors are more fully detailed in our Annual Report on Form 10-K for the year
ended December 31, 2001 and include, but are not limited to: risks associated
with owning and leasing real estate generally; dependence on Marketing as a
tenant and on rentals from companies engaged in the petroleum marketing and
convenience store businesses; competition for properties and tenants; risk of
tenant non-renewal; the effects of regulation; our expectations as to the cost
of completing environmental remediation; and the impact of our electing to be
taxed as a REIT, including subsequent failure to qualify as a REIT and future
dependence on external sources of capital.
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
which 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.
Item 3. Quantitative and qualitative disclosures about market risk
Information in response to this item is incorporated by reference from Note
6 of the Notes to Consolidated Financial Statements in this Form 10-Q.
Item 4. Controls and procedures
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the Commission's rules and forms, and that such information
is accumulated and communicated to the Company's management, including its Chief
Executive Officer and Corporate Controller and Treasurer, as appropriate, to
allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
16
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Corporate Controller and Treasurer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on the
foregoing, the Company's Chief Executive Officer and Corporate Controller and
Treasurer concluded that the Company's disclosure controls and procedures were
effective.
There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation.
17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Designation of Exhibit
in this Quarterly Report
on Form 10-Q Description of Exhibit
None.
(b) Reports filed on Form 8-K:
On August 13, 2002, the Company filed a Current Report
on Form 8-K under Item 9 containing certifications under
Section 906 of the Sarbanes Oxley Act of 2002 with
respect to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GETTY REALTY CORP.
------------------
(Registrant)
Dated: November 13, 2002 BY: /s/ THOMAS J. STIRNWEIS
-----------------------------
(Signature)
THOMAS J. STIRNWEIS
Corporate Controller and
Treasurer
(Principal Financial and
Accounting Officer)
Dated: November 13, 2002 BY: /s/ LEO LIEBOWITZ
-----------------------------
(Signature)
LEO LIEBOWITZ
President and Chief Executive
Officer
18
CERTIFICATIONS:
I, Thomas J. Stirnweis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Getty Realty Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ THOMAS J. STIRNWEIS
----------------------------------------
Thomas J. Stirnweis
Corporate Controller and Treasurer
(Principal Financial and Accounting Officer)
19
I, Leo Liebowitz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Getty Realty Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report; 4.
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ LEO LIEBOWITZ
---------------------------------
Leo Liebowitz
President and Chief Executive Officer
20