GETTY REALTY CORP /MD/ - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q

(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended MARCH 31, 2003
--------------

OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
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Commission file number 001-13777
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GETTY REALTY CORP.
------------------
(Exact name of registrant as specified in its charter)

MARYLAND 11-3412575
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

125 JERICHO TURNPIKE, SUITE 103
JERICHO, NEW YORK 11753
--------------------------------------------------------
(Address of principal executive offices)
(Zip Code)

(516) 478 - 5400
----------------
(Registrant's telephone number, including area code)

---------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]

Registrant had outstanding 21,449,921 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 May 1, 2003.

GETTY REALTY CORP.

INDEX

Part I. FINANCIAL INFORMATION Page Number
- ------- --------------------- -----------

Item 1. Financial Statements

Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002 1

Consolidated Statements of Operations for the three
months ended March 31, 2003 and 2002 2

Consolidated Statements of Cash Flows for the
three months ended March 31, 2003 and 2002 3

Notes to Consolidated Financial Statements 4 - 8

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 14

Item 3. Quantitative and Qualitative Disclosures About Market Risk 14

Item 4. Controls and Procedures 14 - 15

Part II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K 16

Signatures 16

GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)

- -------------------------------------------------------------------------------------------------------------
March 31, December 31,
- -------------------------------------------------------------------------------------------------------------
Assets: 2003 2002
- -------------------------------------------------------------------------------------------------------------

Real Estate:
Land $ 135,719 $ 135,372
Buildings and improvements 172,573 172,682
--------- ---------
308,292 308,054
Less - accumulated depreciation 95,689 93,986
--------- ---------
Real estate, net 212,603 214,068
Cash and equivalents 32,948 33,726
Deferred rent receivable 16,524 15,116
Recoveries from state underground storage tank funds, net 12,988 13,396
Mortgages and accounts receivable, net 4,678 5,193
Prepaid expenses and other assets 924 992
--------- ---------
Total assets $ 280,665 $ 282,491
========= =========

- -------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
- -------------------------------------------------------------------------------------------------------------

Mortgages payable $ 905 $ 923
Dividends payable 10,117 10,379
Accounts payable and accrued expenses 9,285 9,839
Environmental remediation costs 28,491 27,924
--------- ---------
Total liabilities 48,798 49,065
--------- ---------
Commitments and contingencies (notes 6 and 7)
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 2,865,768 at
March 31, 2003 and December 31, 2002 71,644 71,644
Common stock, par value $.01 per share; authorized
50,000,000 shares; issued 21,442,801 at March 31, 2003
and 21,442,299 at December 31, 2002 214 214
Paid-in capital 186,665 186,664
Dividends paid in excess of earnings (26,656) (25,096)
--------- ---------
Total shareholders' equity 231,867 233,426
--------- ---------
Total liabilities and shareholders' equity $ 280,665 $ 282,491
========= =========

The accompanying notes are an integral part of these financial statements.

1

GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

- -----------------------------------------------------------------------------------------
Three months ended March 31,
- -----------------------------------------------------------------------------------------
2003 2002
- -----------------------------------------------------------------------------------------

Revenues:
Revenues from rental properties $ 16,677 $ 16,877
Other income, net 354 560
-------- --------
Total revenues 17,031 17,437
-------- --------

Expenses:
Rental property expenses 2,912 3,105
Environmental expenses, net 1,547 1,649
General and administrative expenses 1,293 1,078
Depreciation expense 2,139 2,314
Interest expense 33 33
-------- --------
Total expenses 7,924 8,179
-------- --------
Net earnings before cumulative effect of accounting change 9,107 9,258
Cumulative effect of accounting change (550) --
-------- --------
Net earnings 8,557 9,258
Preferred stock dividends 1,272 1,272
-------- --------
Net earnings applicable to common shareholders $ 7,285 $ 7,986
======== ========

Net earnings per common share:
Basic $ .34 $ .37
Diluted $ .34 $ .37

Weighted average common shares outstanding:
Basic 21,442 21,425
Diluted 21,456 21,435

Dividends declared per share:
Preferred $ .44375 $ .44375
Common $ .41250 $ .41250

The accompanying notes are an integral part of these financial statements.

2

GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

- -----------------------------------------------------------------------------------------------------------
Three months ended March 31,
- -----------------------------------------------------------------------------------------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------------

Cash flows from operating activities:
Net earnings $ 8,557 $ 9,258
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation expense 2,139 2,314
Gain on dispositions of real estate (126) (346)
Deferred rental revenue (1,408) (1,689)
Accretion expense 248 --
Cumulative effect of accounting change 550 --
Changes in assets and liabilities:
Recoveries from state underground storage tank funds, net 1,620 (488)
Mortgages and accounts receivable, net 328 (147)
Prepaid expenses and other assets 68 67
Accounts payable and accrued expenses (554) (1,945)
Environmental remediation costs (1,443) 1,438
-------- --------
Net cash provided by operating activities 9,979 8,462
-------- --------

Cash flows from investing activities:
Collections of mortgages receivable, net 187 148
Capital expenditures (38) (48)
Property acquisitions (901) (352)
Proceeds from dispositions of real estate 391 498
-------- --------
Net cash provided by (used in) investing activities (361) 246
-------- --------

Cash flows from financing activities:
Repayment of mortgages payable (18) (18)
Cash dividends paid (10,379) (10,108)
Stock options, common and treasury stock, net 1 94
-------- --------
Net cash used in financing activities (10,396) (10,032)
-------- --------
Net decrease in cash and equivalents (778) (1,324)
Cash and equivalents at beginning of period 33,726 37,523
-------- --------
Cash and equivalents at end of period $ 32,948 $ 36,199
======== ========

Supplemental disclosures of cash flow information
Cash paid (refunded) during
the period for:
Interest $ 33 $ 33
Income taxes, net 396 551
Recoveries from state underground storage tank funds (454) (1,094)
Environmental remediation costs 1,217 1,499

The accompanying notes are an integral part of these financial statements.

3

GETTY REALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. General:

The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America ("GAAP"). The consolidated financial statements include the accounts of
Getty Realty Corp. and its wholly-owned subsidiaries (the "Company"). The
Company is a real estate investment trust ("REIT") specializing in the ownership
and leasing of service stations, convenience stores and petroleum marketing
terminals. The Company manages and evaluates its operations as a single segment.
All significant intercompany accounts and transactions have been eliminated.

The financial statements have been prepared in conformity with GAAP, which
requires management to make its best estimates, judgments and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the period reported. While all available
information has been considered, actual results could differ from those
estimates, judgments and assumptions. Estimates, judgments and assumptions
underlying the accompanying consolidated financial statements include, but are
not limited to, deferred rent receivable, recoveries from state underground
storage tank funds, net, 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, 2002.

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 14,000
and 10,000 shares for the three months ended March 31, 2003 and 2002,
respectively. For the three months ended March 31, 2003 and 2002, 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. Stock-Based Compensation:

In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. ("SFAS") 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of SFAS 123."
The Company voluntarily changed to the fair value basis of accounting for
stock-based employee compensation for options granted subsequent to January 1,
2003 under its stock option plan. The Company will continue to account for
options granted under its stock option plan prior to January 1, 2003 using the
intrinsic value method. Had compensation cost for the Company's stock option
plan 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

4

basis would have been as follows (in thousands, except per share amounts):

(*) There were no stock options granted during the three months ended
March 31, 2003.

4. Cumulative Effect of Accounting Change:

In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS 143 requires that obligations associated with the retirement
of tangible long-lived assets be recognized at their fair value in the period
when incurred 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.

5. Shareholders' Equity:

A summary of the changes in shareholders' equity for the three months ended
March 31, 2003 is as follows (in thousands, except per share amounts):

Dividends
Preferred Stock Common Stock Paid-in
-------------------------------------------- Paid-in Excess Of
Shares Amount Shares Amount Capital Earnings Total
------------------------------------------------------------------------------------

Balance, December 31, 2002 2,866 $71,644 21,442 $214 $186,664 $(25,096) $233,426

Net earnings 8,557 8,557
Cash dividends declared:
Common -- $.4125 per share (8,845) (8,845)
Preferred -- $.44375 per share (1,272) (1,272)
Stock options 1 1 1
------------------------------------------------------------------------------------
Balance, March 31, 2003 2,866 $71,644 21,443 $214 $186,665 $(26,656) $231,867
====================================================================================

5

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 970 of its 1,048 properties on a long-term net basis to
Getty Petroleum Marketing Inc. ("Marketing") under the 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. In December 2000, Marketing was
acquired by a subsidiary of OAO Lukoil, one of Russia's largest integrated oil
companies. The Company's financial results depend largely on rental income from
Marketing, and to a lesser extent on rental income from other tenants, and are
therefore materially dependent upon the ability of Marketing to meet its
obligations under the 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. Marketing has made all required monthly rental payments under the
Master Lease when due.

The Master Lease is a "triple-net" lease, with Marketing responsible for the
cost of all taxes, maintenance, repair, insurance and other operating expenses.
In general, Marketing remains responsible for any violations of
non-environmental laws that existed prior to the time of the amendment of the
Master Lease. The Company also has agreed to indemnify Marketing for certain
violations. The Company's indemnification responsibility for certain violations
is capped at $1.375 million and expired in December 2002, unless curing of any
violation commenced prior to such date. The Company has agreed to indemnify
Marketing for certain pre-existing environmental conditions at six terminals
which are owned by the Company. Under the agreement, Marketing will pay the
first $1.5 million of costs and expenses incurred in connection with remediating
any such pre-existing conditions, Marketing and the Company will share equally
the next $8.5 million of those costs and expenses and Marketing will pay all
additional costs and expenses over $10.0 million. The Company's indemnification
responsibility for certain pre-existing environmental conditions at the six
terminals is capped at $4.25 million and expires in December 2010. 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. Under the Master Lease, the Company also continues to have
additional ongoing environmental remediation obligations for 320 scheduled
properties as of March 31, 2003 (see note 7).

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 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 March 31, 2003 and
December 31, 2002, the Company's consolidated balance sheets included, in
accounts payable and accrued

6

expenses, $1,594,000 and $1,602,000, respectively, relating to insurance
obligations that may be deemed to have arisen prior to the spin-off of the
Marketing business. The Company's consolidated statements of operations for the
three months ended March 31, 2003 and 2002 included, in general and
administrative expenses, charges of $121,000 and $122,000, respectively, for
insurance. 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 and 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
three months ended March 31, 2003 and 2002, net environmental expenses included
in the Company's consolidated statements of operations were $1,547,000 and
$1,649,000, respectively, which amounts were net of estimated net recoveries
from state UST remediation funds.

Under the Master Lease with Marketing, and in accordance with its leases
with its 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. The Company will continue to collect recoveries
from state UST remediation funds related to these environmental liabilities
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 for 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 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 when such recoveries are considered probable. Prior to the
adoption of SFAS 143 effective January 1, 2003, if the best estimate of cost for
a component of the liability could only be identified as a range, and no amount
within the range was a better estimate than any other amount, the minimum of the
range had been accrued for that cost component rather than the estimated fair
value currently required under the recently adopted pronouncement.

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 including the potential impact of the
contamination and the surrounding geology, 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 March 31, 2003, the Company has remediation action
plans in place for 358 (88%) of the 405 properties for which it retained
environmental

7

responsibility. Forty-seven properties (12%) remain in the assessment phase,
which when completed will likely result in a change in estimate for those
properties.

As of March 31, 2003 and January 1, 2003, the Company had accrued
$28,491,000 and $29,426,000, respectively, as management's best estimate of the
fair value of reasonably estimable environmental remediation costs. As of March
31, 2003 and January 1, 2003, the Company had also recorded $12,988,000 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 liability of $15,078,000 as
of January 1, 2003 was subsequently accreted for the change in present value due
to the passage of time and, accordingly, $248,000 of accretion expense is
included in environmental expenses for the quarter ended March 31, 2003.
Environmental expenditures and recoveries from underground storage tank funds
were $1,217,000 and $454,000, respectively, for the quarter ended March 31,
2003.

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.

8. Subsequent Event:

On May 1, 2003, the Company completed the acquisition of 41 retail service
station and convenience store properties that it had been leasing for the past
twelve years. The aggregate purchase price for these properties was
approximately $13.0 million, excluding transaction costs. Forty of the locations
are subleased to Marketing under the Master Lease through at least 2015. Rental
property expenses include rent expense relating to these properties of $325,000
for the quarter ended March 31, 2003. Current 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 a $1,915,000 escrow fund established solely for that
purpose, the Company's exposure to environmental remediation expenses should not
change because of the acquisition.

8

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
970 of our 1,048 properties on a long-term net basis to Getty Petroleum
Marketing Inc. ("Marketing"), which was spun-off to our stockholders 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.

Our financial results largely depend 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 entered into in February 1, 1997 and amended and restated
effective December 9, 2000 (the "Master Lease"). Marketing has made all required
monthly rental payments under the Master lease when due.

Results of Operations - Three months ended March 31, 2003 compared with the
three months ended March 31, 2002

Net earnings before cumulative effect of accounting change for the three
months ended March 31, 2003 were $9.1 million as compared with $9.3 million for
the comparable prior year period. Net earnings for the three months ended March
31, 2003, which were $8.6 million as compared with $9.3 million for the
comparable prior year period, decreased by $0.7 million principally due to the
one-time cumulative effect of an accounting change of $0.6 million. Diluted
earnings per common share for the three months ended March 31, 2003 were $.34,
as compared with $.37 for the comparable prior year period.

Revenues from rental properties for the three months ended March 31, 2003
and 2002 were $16.7 million and $16.9 million, respectively. Approximately $14.7
million and $14.6 million of these rentals received in the three months ended
March 31, 2003 and 2002 were from properties leased to Marketing under the
Master Lease. In addition, revenues from rental properties include $1.4 million
and $1.7 million of deferred rental revenue recognized in the three months ended
March 31, 2003 and 2002, respectively, as required by generally accepted
accounting principles ("GAAP"), 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.

Other income was $0.4 million for the three months ended March 31, 2003 as
compared with $0.6 million for the three months ended March 31, 2002. The $0.2
million decrease was primarily due to reduced gains on dispositions of
properties recorded in the current period.

Rental property expenses, which are principally comprised of rent expense
and real estate and other state and local taxes, were $2.9 million for the three
months ended March 31, 2003, a decrease of $0.2 million from the three months
ended March 31, 2002. The decrease was primarily due to a reduction in the
number of properties leased.

Environmental expenses for the three months ended March 31, 2003 were $1.5
million, a decrease of $0.1 million from the three months ended March 31, 2002.
Environmental expenses for the quarter ended March 31, 2003 include $1.0 million
for the net change in estimated environmental costs, a $0.4 million decrease
from the prior period. The decrease in the change in estimated environmental
costs was partially offset by accretion expense of $0.2 million recorded in the
current quarter due to the increase in present value resulting from the passage
of time of the net environmental liability recorded as of January 1, 2003 (See
"Environmental Matters" below).

General and administrative expenses for the three months ended March 31,
2003 were $1.3 million, an increase of $0.2 million from the three months ended
March 31, 2002. The increase was primarily due to higher legal fees.

9

Depreciation and amortization for the three months ended March 31, 2003 was
$2.1 million, a decrease of $0.2 million from the three months ended March 31,
2002, as a result of certain assets becoming fully depreciated and dispositions
of properties.

The cumulative effect of accounting change recorded for the three months
ended March 31, 2003 is due to the adoption of SFAS 143 effective January 1,
2003. Accrued environmental remediation costs and the related recoveries from
state underground storage tank funds were adjusted to their estimated fair value
resulting in a one-time cumulative effect of change in accounting charge of $0.6
million (See "Environmental Matters" below).

Liquidity and Capital Resources

Our principal sources of liquidity are available 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 March 31, 2003, we had a line of credit
amounting to $25.0 million, of which $0.3 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 in August 2003 at the
discretion of the bank.

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. 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 will participate in the excess
common stock dividends declared for the calendar year on an "as converted"
basis. 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 cash common and preferred
stock dividends of $.4125 and $.44375 per share, respectively, during the three
months ended March 31, 2003 and 2002. These dividends aggregated $10.1 million
for the three months ended March 31, 2003 and 2002.

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.

Capital expenditures, principally acquisitions, were $0.9 million for the
three months ended March 31, 2003.

On May 1, 2003, we completed the acquisition of 41 retail service station
and convenience store properties that we had been leasing for the past twelve
years. The aggregate purchase price for these properties was approximately $13.0
million, excluding transaction costs. Forty of the locations are subleased to
Marketing under the Master Lease through at least 2015. Rental property expenses
include rent expense relating to these properties of $0.3 million for the
quarter ended March 31, 2003. Current annual rent expense of approximately

10

$1.3 million, and future rent escalations scheduled through 2056, will be
eliminated as a result of the acquisition. Since the seller has agreed to
indemnify us for historical environmental costs, and the seller's indemnity is
supported by a $1.9 million escrow fund established solely for that purpose, our
exposure to environmental remediation expenses should not change because of the
acquisition.

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 GAAP requires management to make
estimates, judgments and assumptions that affect amounts reported in its
financial statements. We have made our best estimates, judgments and assumptions
relating to certain amounts that are included in our financial statements,
giving due consideration to the accounting policies selected and materiality. We
do not believe that there is a great likelihood that materially different
amounts would be reported related to the application of the accounting policies
described below. Application of these accounting policies, however, involves the
exercise of judgment and use of assumptions as to future uncertainties and, as a
result, actual results could differ from these estimates, judgments and
assumptions. Our accounting policies are described in note 1 to the consolidated
financial statements which appear in our Annual Report on Form 10-K for the year
ended December 31, 2002. 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. 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 $16.5 million recorded as of March 31, 2003 will be
collected when due, in accordance with the 2% annual rent escalations provided
for in the Master Lease. Accordingly, 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 or if Marketing
fails to make its contractual lease payments.

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 will not reflect provisions
for current or deferred federal income taxes since we elected to be taxed as a
REIT effective January 1, 2001. Our intention is to operate in a manner that
will allow us to continue to be taxed as a REIT and, as a result, we do not
expect to pay substantial corporate-level federal income taxes. Many of the REIT
requirements, however, are highly technical and complex. If we were to fail to
meet the requirements, we may be subject to federal income tax. Certain states
do not follow the federal REIT rules and we have included provisions for these
taxes in rental property expenses.

Environmental costs and recoveries from state underground storage tank
funds--we provide for the estimated fair value of future environmental
remediation costs when it is probable that a liability has been incurred and a
reasonable estimate of fair value can be made (see "Environmental Matters"
below). Since environmental exposures are difficult to assess and estimate and
knowledge about these liabilities is not known

11

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
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 under these programs. Effective January 1, 2003, environmental
liabilities and related assets are measured based on their expected future cash
flows which have been adjusted for inflation and discounted to present value.

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 and 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 three months ended March 31,
2003 and March 31, 2002, net environmental expenses included in our consolidated
statements of operations amounted to $1.5 million and $1.6 million,
respectively, which amounts were net of estimated net recoveries from state UST
remediation funds.

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. We will continue to
collect recoveries from certain state UST remediation funds related to these
environmental liabilities where available.

We have also agreed to provide limited environmental indemnification to
Marketing for pre-existing environmental conditions at six 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. Our indemnification responsibility under this
agreement is capped at $4.25 million and expires in December 2010. We have not
accrued a liability for this indemnification agreement since it is uncertain
that any significant amounts will be required to be paid under the agreement.

The estimated future costs for known environmental remediation requirements
are accrued when it is probable that a liability has been incurred and a
reasonable estimate of fair value can be made. The environmental remediation
liability is estimated based on the level and impact of contamination for 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 when such recoveries are considered probable. The
accrued liability is the aggregate of the best estimate of the fair value of
cost for each component of the liability. Prior to the adoption of SFAS 143
effective January 1, 2003, if the best estimate of cost for a component of the
liability could only be identified as a range, and no amount within the range
was a better estimate than

12

any other amount, the minimum of the range was accrued for that cost component
rather than the estimated fair value currently required under the recently
adopted pronouncement.

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 including the potential impact of the contamination and the
surrounding geology, 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
March 31, 2003, we have remediation action plans in place for 358 (88%) of the
405 properties for which we retained environmental responsibility. Forty-seven
properties (12%) remain in the assessment phase, which when completed will
likely result in a change in estimate for those properties.

As of March 31, 2003 and January 1, 2003, we had accrued $28.5 million and
$29.4 million, respectively, as management's best estimate of the fair value of
reasonably estimable environmental remediation costs. As of March 31, 2003 and
January 1, 2003, we had also recorded $13.0 million and $14.3 million,
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 liability of $15.1 million as of January 1,
2003 was subsequently accreted for the change in present value due to the
passage of time and, accordingly, $0.2 million of accretion expense is included
in environmental expenses for the quarter ended March 31, 2003. Environmental
expenditures and recoveries from underground storage tank funds were $1.2
million and $0.4 million respectively, for the quarter ended March 31, 2003.
During 2003, we estimate that our net environmental remediation spending will be
approximately $4.3 million and our business plan for 2003 reflects a net change
in estimated remediation costs of approximately $5.0 million.

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. 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. 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 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

13

financial position, or that of our tenants, and could require substantial
additional expenditures for future remediation.

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 of 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, 2002 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.

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

14

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.

15

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
------------------------ ----------------------

99.1 Certification of Chief Executive Officer(*)
99.2 Certification of Chief Financial Officer(*)

(*) The certifications furnished with this Report are being furnished
solely to accompany the Report pursuant to 18 U.S.C. ss. 1350, and are
not being filed for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended, and are not to be incorporated by reference
into any filing of the Company, whether made before or after the date
hereof, regardless of any general incorporation language in such
filing.

(b) Reports filed on Form 8-K:

On May 12, 2003, the Company announced its earnings for the three
months ended March 31, 2003 which was furnished under Item 12 "Results of
Operations and Financial Condition" on Form 8-K and was presented under Item 9
in accordance with SEC Release No. 33-8216.

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: May 13, 2003 BY: /s/ THOMAS J. STIRNWEIS
-------------------------------------
(Signature)
THOMAS J. STIRNWEIS
Corporate Controller and Treasurer
(Principal Financial and Accounting
Officer)

Dated: May 13, 2003 BY: /s/ LEO LIEBOWITZ
-------------------------------------
(Signature)
LEO LIEBOWITZ
President and Chief Executive Officer

16

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: May 13, 2003

/s/ THOMAS J. STIRNWEIS
- ---------------------------------------------
Thomas J. Stirnweis Corporate
Controller and Treasurer
(Principal Financial and Accounting Officer)

17

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: May 13, 2003

/s/ LEO LIEBOWITZ
- -----------------------------------------
Leo Liebowitz
President and Chief Executive Officer

18