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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 SEPTEMBER 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission file number 001-13777
GETTY REALTY CORP.
------------------
(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 24,683,429 shares of Common Stock, par value $.01 per
share, as of September 30, 2004.
GETTY REALTY CORP.
INDEX
Page Number
-----------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 2004 and
December 31, 2003 1
Consolidated Statements of Operations for the Three and Nine
Months ended September 30, 2004 and 2003 2
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 2004 and 2003 3
Notes to Consolidated Financial Statements 4 - 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12 - 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Item 4. Controls and Procedures 21
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
September 30, December 31,
------------- ------------
2004 2003
------------- ------------
Assets:
Real Estate:
Land $ 144,294 $ 142,724
Buildings and improvements 176,308 175,498
------------ ------------
320,602 318,222
Less - accumulated depreciation (104,934) (100,488)
------------ ------------
Real estate, net 215,668 217,734
Deferred rent receivable 23,997 20,653
Cash and equivalents 12,858 19,905
Recoveries from state underground storage tank funds, net 5,995 7,454
Deposits on property acquisitions 4,963 -
Mortgages and accounts receivable, net 3,411 5,565
Prepaid expenses and other assets 532 692
------------ ------------
Total assets $ 267,424 $ 272,003
============ ============
Liabilities and Shareholders' Equity:
Environmental remediation costs $ 21,908 $ 23,551
Dividends payable 10,490 10,483
Accounts payable and accrued expenses 9,364 9,100
Mortgages payable 528 844
------------ ------------
Total liabilities 42,290 43,978
------------ ------------
Commitments and contingencies (Notes 6 and 7)
Shareholders' equity:
Common stock, par value $.01 per share; authorized 50,000,000
shares; issued 24,683,429 at September 30,
2004 and 24,664,384 at December 31, 2003 247 247
Paid-in capital 257,290 257,206
Dividends paid in excess of earnings (32,403) (29,428)
------------ ------------
Total shareholders' equity 225,134 228,025
------------ ------------
Total liabilities and shareholders' equity $ 267,424 $ 272,003
============ ============
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 Nine months ended
September 30, September 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenues:
Revenues from rental properties $ 16,425 $ 16,676 $ 49,379 $ 50,025
Other income, net 323 475 752 1,238
-------- -------- -------- --------
Total revenues 16,748 17,151 50,131 51,263
-------- -------- -------- --------
Expenses:
Rental property expenses 2,462 2,573 7,470 8,157
Environmental expenses, net 1,049 1,868 4,564 5,581
General and administrative expenses 1,492 1,128 4,124 3,028
Depreciation expense 1,764 2,083 5,428 6,394
Interest expense 12 32 52 98
-------- -------- -------- --------
Total expenses 6,779 7,684 21,638 23,258
-------- -------- -------- --------
Net earnings before cumulative effect of
accounting change 9,969 9,467 28,493 28,005
Cumulative effect of accounting change - - - (550)
-------- -------- -------- --------
Net earnings 9,969 9,467 28,493 27,455
Less preferred stock dividends - 13 - 2,538
-------- -------- -------- --------
Net earnings applicable to common
shareholders $ 9,969 $ 9,454 $ 28,493 $ 24,917
======== ======== ======== ========
Net earnings per common share:
Basic $ .40 $ .38 $ 1.15 $ 1.11
Diluted $ .40 $ .38 $ 1.15 $ 1.11
Weighted average common shares outstanding:
Basic 24,680 24,703 24,677 22,530
Diluted 24,701 24,726 24,694 22,546
Dividends declared per share:
Common $ .42500 $ .42500 $1.27500 $1.25000
Preferred - $ .27118 - $1.15868
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)
Nine months ended
September 30,
--------------------
2004 2003
-------- --------
Cash flows from operating activities:
Net earnings $ 28,493 $ 27,455
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation expense 5,428 6,394
Deferred rental revenue (3,344) (4,225)
Gain on dispositions of real estate (334) (625)
Accretion expense 711 743
Cumulative effect of accounting change - 550
Changes in assets and liabilities:
Recoveries from state underground storage tank funds, net 1,818 4,516
Mortgages and accounts receivable, net 591 440
Prepaid expenses and other assets 160 289
Environmental remediation costs (2,713) (4,155)
Accounts payable and accrued expenses 264 (759)
-------- --------
Net cash provided by operating activities 31,074 30,623
-------- --------
Cash flows from investing activities:
Collections of mortgages receivable, net 1,563 1,307
Property acquisitions and capital expenditures (8,632) (13,786)
Proceeds from dispositions of real estate 641 1,126
-------- --------
Net cash used in investing activities (6,428) (11,353)
-------- --------
Cash flows from financing activities:
Cash dividends paid (31,461) (30,635)
Repayment of mortgages payable (316) (58)
Proceeds from issuance of common stock 84 231
Preferred stock conversion and redemption - (1,224)
-------- --------
Net cash used in financing activities (31,693) (31,686)
-------- --------
Net decrease in cash and equivalents (7,047) (12,416)
Cash and equivalents at beginning of period 19,905 33,726
-------- --------
Cash and equivalents at end of period $ 12,858 $ 21,310
======== ========
Supplemental disclosures of cash flow information
Cash paid (refunded) during the period for:
Interest $ 49 $ 98
Income taxes, net 373 811
Recoveries from state underground storage tank funds (1,532) (1,583)
Environmental remediation costs 4,271 4,467
The accompanying notes are an integral part of these financial statements.
3
GETTY REALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General:
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America ("GAAP"). The consolidated financial statements include the accounts of
Getty Realty Corp. and its wholly-owned subsidiaries (the "Company"). The
Company is a real estate investment trust ("REIT") specializing in the ownership
and leasing of retail motor fuel and convenience store properties as well as
petroleum distribution terminals. The Company manages and evaluates its
operations as a single segment. All significant intercompany accounts and
transactions have been eliminated.
The financial statements have been prepared in conformity with GAAP, which
requires management to make its best estimates, judgments and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the period reported. While all available
information has been considered, actual results could differ from those
estimates, judgments and assumptions. Estimates, judgments and assumptions
underlying the accompanying consolidated financial statements include, but are
not limited to, deferred rent receivable, recoveries from state underground
storage tank funds, net, environmental remediation costs, depreciation, and
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, 2003.
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. The weighted average number of shares outstanding for the
three months ended September 30, 2003 gives effect to conversion of Series A
Participating Convertible Redeemable Preferred stock into 3,186,000 shares of
common stock as if the conversion had occurred at the beginning of the period
(see note 5). For the nine months ended September 30, 2003, conversion of the
Series A Participating Convertible Redeemable Preferred stock into common stock
utilizing the two class method would have been antidilutive and therefore
conversion was not assumed for purposes of computing either basic or diluted
earnings per common share. There were no preferred shares outstanding during the
three and nine months ended September 30, 2004. Diluted earnings per common
share also gives effect to the potential dilution from the exercise of stock
options and issuance of common shares in settlement of restricted stock unit
awards aggregating 21,000 and 17,000 shares for the three and nine months ended
September 30, 2004, respectively, and 23,000 and 16,000 shares for the three and
nine months ended September 30,
4
2003, respectively.
3. Stock-Based Compensation:
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standard No. ("SFAS") 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of SFAS 123." SFAS 148
provides alternative transition methods for a voluntary change to the fair value
basis of accounting for stock-based employee compensation. SFAS 148 requires
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation, a description of the
transition method utilized and the effect of the method used on reported
results. The Company adopted SFAS 148 effective December 31, 2002. The Company
voluntarily changed to the fair value basis of accounting for stock-based
employee compensation for awards granted subsequent to January 1, 2003. On June
1, 2004, the Company granted 10,800 restricted stock units under its 2004
Omnibus Incentive Compensation Plan (the "2004 Plan") following shareholder
approval of the 2004 Plan at the Annual Meeting of Shareholders on May 20, 2004
(see note 8). There were no stock options granted under the Stock Option Plan on
or subsequent to January 1, 2003. The Company will continue to account for
options granted under its stock option plan prior to January 1, 2003 using the
intrinsic value method. Historically, the exercise price of options granted by
the Company was the same as the market price at the grant date and stock-based
compensation expense was not included in reported net earnings. 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 basis would have been as follows (in
thousands, except per share amounts):
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
Net earnings, as reported $ 9,969 $ 9,467 $ 28,493 $ 27,455
Add: Stock-based employee compensation
expense included in reported net
earnings (*) 10 - 14 -
Deduct: Total stock-based employee
compensation expense using the fair
value method 33 33 83 99
-------- -------- -------- --------
Pro-forma net earnings $ 9,946 $ 9,434 $ 28,424 $ 27,356
======== ======== ======== ========
Net earnings per common share:
As reported $ .40 $ .38 $ 1.15 $ 1.11
Pro-forma $ .40 $ .38 $ 1.15 $ 1.11
(*) There were no stock-based compensation awards granted during the three and
nine months ended September 30, 2003.
4. Cumulative Effect of Accounting Change:
5
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 in the nine months ended September
30, 2003. 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 nine months ended
September 30, 2004 is as follows (in thousands):
Dividends
Common Stock Paid In
------------ Paid-in Excess Of
Shares Amount Capital Earnings Total
------ ------ --------- --------- ---------
Balance, December 31, 2003 24,664 $ 247 $ 257,206 $( 29,428) $ 228,025
Net earnings 28,493 28,493
Common dividends (31,468) (31,468)
Restricted stock unit expense 14 14
Common stock issued 19 70 70
Balance, September 30, 2004 24,683 $ 247 $ 257,290 $ (32,403) $ 225,134
In August 2003, the Company notified holders of its Series A Participating
Convertible Redeemable Preferred Stock that the preferred stock would be
redeemed on September 24, 2003 for $25.00 per share plus a mandatory redemption
dividend of $0.27118 per share. Prior to the redemption date, shareholders with
98% of the preferred stock exercised their right to convert 2,816,919 shares of
preferred stock into 3,186,355 shares of common stock at the conversion rate of
1.1312 shares of common stock for each share of preferred stock so converted,
and received cash in lieu of fractional shares of common stock. The remaining
48,849 shares of the outstanding preferred stock were redeemed for an aggregate
amount, including accrued dividends through the call date, of approximately
$1,234,000.
6. Commitments and Contingencies:
In order to qualify as a REIT, among other items, the Company paid a
special one-time "earnings and profits" (as defined in the Internal Revenue
Code) cash distribution to shareholders aggregating $64.2 million in August
2001. Determination of accumulated earnings and profits for federal income tax
purposes is extremely complex. Should the Internal Revenue Service
6
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.
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 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 directly
responsible for the cost of all taxes, maintenance, repair, insurance,
environmental remediation and other operating expenses. The Company has agreed
to reimburse Marketing for one-half of certain capital expenditures for work
required to comply with local zoning requirements up to a maximum amount
designated for each property and an aggregate maximum reimbursement of $875,000,
of which $147,000 was reimbursed to Marketing and capitalized in the nine months
ended September 30, 2004. The Company expects to reimburse Marketing and
capitalize the balance of these costs during 2004 and 2005.
The Company has also agreed to provide limited environmental
indemnification, capped at $4.25 million and expiring in 2010, to Marketing for
certain pre-existing conditions at the six terminals owned by the Company. 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 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 has not accrued a liability in
connection with this indemnification agreement since it is uncertain that any
significant amounts will be required to be paid under the agreement.
The Company is subject to various legal proceedings and claims which arise
in the ordinary course of its business. In addition, the Company has retained
responsibility for all pre-spin-off legal proceedings and claims relating to the
petroleum marketing business. The Company has provided accruals for certain of
these matters which it believes are appropriate based on information currently
available. The ultimate resolution of these matters is not expected to have a
material adverse effect on the Company's financial condition or results of
operations.
7
In September 2003, the Company was notified by the State of New Jersey
Department of Environmental Protection that the Company is one of approximately
60 potentially responsible parties for natural resource damages resulting from
discharges of hazardous substances into the Lower Passaic River. The definitive
list of potentially responsible parties and their actual responsibility for the
alleged damages, the aggregate cost to remediate the Lower Passaic River, the
amount of natural resource damages and the method of allocating such amounts
among the potentially responsible parties have not been determined. In September
2004, the Company received a General Notice Letter from the US EPA (the "EPA
Notice"), advising the Company that it may be a potentially responsible party
for costs of remediating certain conditions resulting from discharges of
hazardous substances into the Lower Passaic River. ChevronTexaco received the
same EPA Notice regarding those same conditions. Additionally, the Company
believes that ChevronTexaco is contractually obligated to indemnify the Company,
pursuant to an indemnification agreement, for most of the conditions at the
property identified by the New Jersey Department of Environmental Protection and
the EPA. Accordingly, the ultimate legal and financial liability of the Company,
if any, cannot be estimated with any certainty at this time.
From October 2003 through April 2004, the Company was notified that it had
been made party to 36 cases in Connecticut, Florida, Massachusetts, New
Hampshire, New Jersey, New York, Pennsylvania, Vermont, Virginia and West
Virginia brought by local water providers or governmental agencies. These cases
allege various theories of liability due to contamination of groundwater with
MTBE as the basis for claims seeking compensatory and punitive damages. Each
case names as defendants approximately 50 petroleum refiners, manufacturers,
distributors and retailers of MTBE, or gasoline containing MTBE. The accuracy of
the allegations as they relate to the Company, its defenses to such claims, the
aggregate amount of damages, the definitive list of defendants and the method of
allocating such amounts among the defendants have not been determined.
Accordingly, the ultimate legal and financial liability of the Company, if any,
cannot be estimated with any certainty at this time.
Prior to the spin-off of the Marketing business, 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, 2004 and December 31, 2003, the Company's consolidated balance
sheets included, in accounts payable and accrued expenses, $817,000 and
$833,000, respectively, relating to insurance obligations that may be deemed to
have arisen prior to the spin-off. 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. In recent years, environmental expenses were 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 USTs to meet federal, state and local environmental standards. For
the three and nine months ended September 30, 2004, net environmental expenses
included in the Company's consolidated statements of operations were $1,049,000
and $4,564,000, respectively, and $1,868,000 and $5,581,000, respectively, for
the comparable prior year periods, which amounts were net of estimated
8
recoveries from state UST remediation funds.
Under the Master Lease with Marketing, and in accordance with leases with
other tenants, the Company agreed to bring the leased properties with known
environmental contamination to within applicable standards and to regulatory or
contractual closure ("Closure") in an efficient and economical manner.
Generally, upon achieving Closure at each individual property, the Company's
environmental liability under the lease for that property will be satisfied and
future remediation obligations will be the responsibility of the tenant. 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 seek reimbursement from state UST remediation funds
related to these environmental expenditures where available.
The estimated future costs for known environmental remediation
requirements are accrued when it is probable that a liability has been incurred
and a reasonable estimate of fair value can be made. The environmental
remediation liability is estimated based on the level and impact of
contamination at each property. The accrued liability is the aggregate of the
best estimate of the fair value of cost for each component of the liability.
Recoveries of environmental costs from state UST remediation funds, with respect
to both past and future environmental spending, are accrued at fair value as
income, net of allowance for collection risk, based on estimated recovery rates
developed from prior experience with the funds when such recoveries are
considered probable. 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 SFAS 143
(see note 4).
Environmental exposures are difficult to assess and estimate for numerous
reasons, including the extent of contamination, alternative treatment methods
that may be applied, location of the property which subjects it to differing
local laws and regulations and their interpretations, as well as the time it
takes to remediate contamination. In developing the Company's liability for
probable and reasonably estimable environmental remediation costs, on a property
by property basis, the Company considers among other things, enacted laws and
regulations, assessments of contamination and surrounding geology, quality of
information available, currently available technologies for treatment,
alternative methods of remediation and prior experience. These accrual estimates
are subject to significant change, and are adjusted as the remediation treatment
progresses, as circumstances change and as these contingencies become more
clearly defined and reasonably estimable. As of September 30, 2004, the Company
has remediation action plans in place for 325 (92%) of the 353 properties for
which it retained environmental responsibility and the remaining 28 properties
(8%) remain in the assessment phase.
As of September 30, 2004, December 31, 2003 and January 1, 2003, the
Company had accrued $21,908,000, $23,551,000, and $29,426,000, respectively, as
management's best estimate of the fair value of reasonably estimable
environmental remediation costs. As of September 30, 2004, December 31, 2003 and
January 1, 2003, the Company had also recorded $5,995,000, $7,454,000 and
$14,348,000, respectively, as management's best estimate for recoveries from
state UST remediation funds, net of allowance, related to environmental
9
obligations and liabilities. The net environmental liabilities of $16,097,000
and $15,078,000 as of December 31, 2003 and January 1, 2003, respectively, have
been accreted for the change in present value due to the passage of time and,
accordingly, $711,000 and $743,000, of accretion expense is included in
environmental expenses for the nine months ended September 30, 2004 and 2003,
respectively. Environmental expenditures were $4,271,000 and recoveries from
underground storage tank funds were $1,532,000 for the nine months ended
September 30, 2004.
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. Employee Benefit Plans
The Getty Realty Corp. 2004 Omnibus Incentive Compensation Plan (the "2004
Plan") became effective upon its approval at the Annual Meeting of Shareholders
held May 20, 2004. The 2004 Plan provides for the grant of restricted stock,
restricted stock units, performance awards, dividend equivalents, stock payments
and stock awards to all employees and members of the Board of Directors. The
2004 Plan authorizes the Company to grant awards with respect to an aggregate of
1,000,000 shares of common stock through 2014. The aggregate maximum number of
shares of common stock that may be subject to awards granted under the 2004 Plan
during any calendar year is 80,000.
On June 1, 2004, the Company awarded 10,800 restricted stock units
("RSUs") and dividend equivalents to employees. On the settlement date each RSU
will have a value equal to one share of common stock and may be settled, in the
sole discretion of the Compensation Committee, in cash or by the issuance of one
share of common stock. The RSUs do not provide voting or other shareholder
rights unless and until the RSU is settled for a share of common stock. The RSUs
vest starting one year from the date of grant, on a cumulative basis at the
annual rate of twenty percent of the total number of RSUs covered by the award.
The dividend equivalents represent the value of the dividend paid per common
share paid multiplied by the number of RSUs vested as of the dividend payment
date assuming that the RSUs vest starting three months from the date of grant,
on a cumulative basis at the quarterly rate of five percent of the total number
of RSUs covered by the award. The fair value of the RSUs granted on June 1, 2004
was estimated at $19.91 per unit on the date of grant. The fair value of the
grant, aggregating approximately $215,000, will be recognized as compensation
expense ratably over the five year vesting period of the RSUs. Dividend
equivalents will be charged against retained earnings when common stock
dividends are declared.
9. Subsequent Events
On November 1, 2004, the Company completed the previously announced
acquisition of 36 convenience store and retail motor fuel properties located in
Connecticut and Rhode Island for approximately $25.7 million. Approximately
$10.7 million of the purchase price was paid with
10
cash on hand, of which $5.0 million was previously paid into escrow and is
included in deposits on property acquisitions on the consolidated balance sheet
as of September 30, 2004. The balance of the purchase price was financed through
the Company's line of credit.
Simultaneously with the closing on the acquisition, the Company entered
into a triple net lease with a single tenant for all of the properties. The
lease provides for annual rentals beginning at approximately $3.0 million and
escalating thereafter. The triple net lease has an initial term of 15 years and
provides the tenant options for 3 renewal terms of 5 years each. The lease also
provides that the tenant is responsible for all environmental conditions at the
properties, including those properties where remediation activities are ongoing.
The Company took title to 25 fee properties located in Connecticut and one
in Rhode Island and an assignment of the seller's leasehold interest in 10
properties in Connecticut. The Company's annual rent expense under these leases
currently approximates $0.4 million. The Company also took an assignment of an
existing environmental remediation agreement with a third party who will
continue to be responsible for the remediation costs associated with certain
known environmental conditions at approximately 15 properties in Connecticut.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
We are a real estate investment trust specializing in the ownership and
leasing of retail motor fuel and convenience store properties as well as
petroleum distribution terminals. We lease 950 of our 1,016 properties on a
long-term net basis under a master lease (the "Master Lease") to Getty Petroleum
Marketing Inc. ("Marketing") which was spun-off to our shareholders as a
separate publicly held company in March 1997. In December 2000, Marketing was
acquired by a subsidiary of OAO Lukoil ("Lukoil"), one of Russia's largest
integrated oil companies. Our financial results are materially dependent upon
the ability of Marketing to meet its obligations under the Master Lease.
Marketing has made all required monthly rental payments under the Master Lease
when due.
We manage our business to enhance the value of our real estate portfolio
and, as a REIT, place particular emphasis on minimizing risk and generating cash
sufficient to make required distributions to shareholders of at least 90% of our
taxable income each year. In addition to measurements defined by generally
accepted accounting principles ("GAAP"), our management also focuses on funds
from operations available to common shareholders ("FFO") and adjusted funds from
operations available to common shareholders ("AFFO") to measure our performance.
FFO is generally considered to be an appropriate supplemental non-GAAP measure
of performance of REITs. FFO is defined by the National Association of Real
Estate Investment Trusts as net earnings before depreciation and amortization,
gains or losses on sales of real estate, non-FFO items reported in discontinued
operations, extraordinary items and cumulative effect of accounting change.
We believe that FFO is helpful to investors in measuring Getty's
performance because FFO excludes various items included in net income that do
not relate to or are not indicative of Getty's fundamental operating performance
such as gains or losses from property sales and depreciation and amortization.
In our case, however, net earnings and FFO include the significant impact of
straight-line rent on our recognition of revenues from rental properties, which
largely results from 2% annual rental increases scheduled under the Master
Lease. In accordance with generally accepted accounting principles, 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. As a result,
management pays particular attention to AFFO, a supplemental non-GAAP
performance measure that we define as FFO less straight line rent. In
management's view, AFFO provides a more accurate depiction of the impact of the
scheduled rent increases under the Master Lease than FFO. Neither FFO nor AFFO
represent cash generated from operating activities in accordance with generally
accepted accounting principles and therefore should not be considered an
alternative for net earnings or as a measure of liquidity. FFO and AFFO are
reconciled to net earnings in the financial table on page 16.
Our discussion and analysis of financial condition and results of
operations should be read in conjunction with Management's Discussion and
Analysis which appears in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003 and the accompanying consolidated financial statements
and related notes which appears in this Form 10-Q.
12
Results of Operations - Quarter ended September 30, 2004 compared with the
quarter ended September 30, 2003
Revenues from rental properties for the three months ended September 30,
2004 and 2003 were $16.4 million and $16.7 million, respectively. Approximately
$14.7 million of these rentals received in each of the three months ended
September 30, 2004 and 2003 were from properties leased to Marketing under the
Master Lease. Revenues from rental properties include deferred rental revenue
recognized on a straight-line basis, rather than when due, of $1.1 million and
$1.4 million in the three months ended September 30, 2004 and 2003,
respectively.
Other income was $0.3 million for the three months ended September 30,
2004, a decrease of $0.2 million as compared to the three months ended September
30, 2003. The decrease was principally due to lower gains on dispositions of
properties.
As a result, total revenues declined by approximately $0.4 million in the
three months ended September 30, 2004 as compared to the three months ended
September 30, 2003.
Rental property expenses, which are principally comprised of rent expense
and real estate and other state and local taxes, were $2.5 million for the three
months ended September 30, 2004, a decrease of $0.1 million from the three
months ended September 30, 2003. The decrease was primarily due to a reduction
in rent expense as a result of lease expirations and the exercise of lease
purchase options.
Environmental expenses for the three months ended September 30, 2004 were
$1.0 million, a decrease of $0.8 million from the three months ended September
30, 2003, due to a $1.0 million decrease in net change in estimated
environmental costs partially offset by $0.2 million of higher litigation
expenses incurred in the current period.
General and administrative expenses for the three months ended September
30, 2004 were $1.5 million, an increase of $0.4 million as compared to the three
months ended September 30, 2003. The increase was primarily due to increased
legal and audit fees.
Depreciation expense for the three months ended September 30, 2004 was
$1.8 million, a decrease of $0.3 million from the three months ended September
30, 2003, as a result of certain assets becoming fully depreciated and
dispositions of properties.
As a result, total expenses declined by approximately $0.9 million in the
three months ended September 30, 2004 as compared to the three months ended
September 30, 2003.
Net earnings of $10.0 million for the three months ended September 30,
2004 increased $0.5 million, or 5.3%, over the comparable period in 2003 and FFO
increased $0.3 million, or 3.0%, to $11.5 million for the three months ended
September 30, 2004 due to the items discussed above. AFFO increased $0.6
million, or 6.5%, to $10.4 million in the three months ended September 30, 2004.
AFFO increased more than FFO on both a dollar and percentage basis due to $0.3
million in lower deferred rental revenues (which are included in FFO, but
excluded from
13
AFFO) recorded for the three months ended September 30, 2004 as compared to
September 30, 2003.
Diluted earnings per common share for the three months ended September 30,
2004 increased 5.3% to $0.40 per share, as compared to $0.38 per share for the
three months ended September 30, 2003. Diluted FFO per common share for the
three months ended September 30, 2004 increased 4.4% to $0.47 per share, as
compared to $0.45 per share for the three months ended September 30, 2003, and
diluted AFFO per common share increased 5.0% to $0.42 per share compared to
$0.40 per share in the 2003 period. The percentage increases in FFO per common
share and AFFO per common share were less than the respective percentage
increases in FFO and AFFO since the per share amounts for 2003 reflect the
impact of the September 2003 conversion of our outstanding convertible preferred
stock into common stock as if the conversion had occurred at the beginning of
the quarter. Accordingly, preferred stock dividends of $13,000 were added back
to FFO and AFFO in calculating FFO and AFFO per share amounts for the prior year
period.
Results of Operations - Nine months ended September 30, 2004 compared with the
nine months ended September 30, 2003
Revenues from rental properties for the nine months ended September 30,
2004 and 2003 were $49.4 million and $50.0 million, respectively. Approximately
$44.2 million and $44.0 million of these rentals received in the nine months
ended September 30, 2004 and 2003, respectively, were from properties leased to
Marketing under the Master Lease. Revenues from rental properties include
deferred rental revenue recognized on a straight-line basis, rather than when
due, of $3.3 million and $4.2 million in the nine months ended September 30,
2004 and 2003, respectively.
Other income was $0.8 million for the nine months ended September 30,
2004, a decrease of $0.5 million compared to the nine months ended September 30,
2003. The decrease was due to lower gains on dispositions of properties and
lower interest income.
As a result, total revenues declined by approximately $1.1 million in the
nine months ended September 30, 2004 as compared to the nine months ended
September 30, 2003.
Rental property expenses, which are principally comprised of rent expense
and real estate and other state and local taxes, were $7.5 million for the nine
months ended September 30, 2004, a decrease of $0.7 million from the nine months
ended September 30, 2003. The decrease was primarily due to a reduction in rent
expense as a result of the exercise of lease purchase options, including the
purchase of 41 properties in May 2003.
Environmental expenses for the nine months ended September 30, 2004 were
$4.6 million, a decrease of $1.0 million from the nine months ended September
30, 2003. The decrease was primarily due to a decrease in the net change in
estimated environmental costs of $1.6 million partially offset by $0.6 million
of higher litigation expenses incurred in the current period.
14
General and administrative expenses for the nine months ended September
30, 2004 were $4.1 million, an increase of $1.1 million as compared to the nine
months ended September 30, 2003. The increase was primarily caused by an
increase in legal and audit fees incurred in the current period as well as a
$0.5 million credit recorded in the nine months ended September 30, 2003 to
reduce insurance loss reserves that were established under the Company's
self-insurance program that was terminated in 1997.
Depreciation expense for the nine months ended September 30, 2004 was $5.4
million, a decrease of $1.0 million from the nine months ended September 30,
2003, as a result of certain assets becoming fully depreciated and dispositions
of properties.
As a result, total expenses declined by approximately $1.6 million in the
nine months ended September 30, 2004 as compared to the nine months ended
September 30, 2003.
The cumulative effect of accounting change recorded in the nine months
ended September 30, 2003 is due to the adoption of Statement of Financial
Accounting Standard No. ("SFAS") 143, effective January 1, 2003. Accrued
environmental remediation costs and the related recoveries from state
underground storage tank funds were adjusted to their estimated fair value
resulting in a one-time cumulative effect of change in accounting charge of $0.6
million (see "Environmental Matters").
Net earnings of $28.5 million for the nine months ended September 30, 2004
increased $1.0 million, or 3.8%, over the comparable period in 2003 due to the
items discussed above and the impact of the $0.6 million one-time accounting
charge recorded in the prior period. FFO increased $2.4 million, or 7.5%, to
$33.6 million for the nine months ended September 30, 2004, principally due to
the elimination of $2.5 million in preferred stock dividends as a result of the
conversion of 98% of our outstanding convertible preferred stock into 3.2
million common shares and the redemption of the remaining preferred shares in
September 2003. AFFO increased $3.2 million, or 12.0%, to $30.2 million in the
nine months ended September 30, 2004. AFFO increased more than FFO on both a
dollar and percentage basis due to $0.9 million in lower deferred rental
revenues (which are included in FFO, but excluded from AFFO) recorded for the
nine months ended September 30, 2004 as compared to September 30, 2003.
Diluted earnings per common share for the nine months ended September 30,
2004 increased 3.6% to $1.15 per share, as compared to $1.11 per share for the
nine months ended September 30, 2003. Diluted FFO per common share for the nine
months ended September 30, 2004 decreased 0.7% to $1.36 per share, as compared
to $1.37 per share for the nine months ended September 30, 2003, while diluted
AFFO per common share for the nine months ended September 30, 2004 increased
1.7% to $1.22 per share, as compared to $1.20 per share for the nine months
ended September 30, 2003. FFO decreased on a per share basis, and the percentage
changes in FFO per common share and AFFO per common share are different than the
respective percentage changes in FFO and AFFO, when compared to the prior year
period since the diluted per share amounts for 2004 reflect the actual September
2003 conversion and redemption of our preferred shares discussed above, while
the per share amounts for 2003 reflect the assumed conversion of our outstanding
preferred stock using the two class method. Accordingly, preferred stock
dividends of $2.5 million were added back to FFO and AFFO in calculating FFO and
AFFO per share amounts for the nine months ended September 30, 2003. The impact
of the
15
assumed conversion would have been anti-dilutive in calculating diluted earnings
per common share for the nine months ended September 30, 2003, and therefore was
not assumed.
A reconciliation of net earnings to FFO and AFFO for the three and nine
months ended September 30, 2004 and 2003 is as follows (in thousands, except per
share amounts):
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net earnings $ 9,969 $ 9,467 $ 28,493 $ 27,455
Preferred stock dividends - (13) - (2,538)
-------- -------- -------- --------
Net earnings applicable to common 9,969 9,454 28,493 24,917
shareholders
Depreciation expense 1,764 2,083 5,428 6,394
Gains on sales of real estate (188) (331) (334) (625)
Cumulative effect of accounting change - - - 550
-------- -------- -------- --------
Funds from operations available to
common shareholders 11,545 11,206 33,587 31,236
Straight-line rent (1,113) (1,409) (3,344) (4,225)
-------- -------- -------- --------
Adjusted funds from operations available to
common shareholders $ 10,432 $ 9,797 $ 30,243 $ 27,011
======== ======== ======== ========
Diluted per common share amounts (a):
Earnings per share $ .40 $ .38 $ 1.15 $ 1.11
FFO per share $ .47 $ .45 $ 1.36 $ 1.37
AFFO per share $ .42 $ .40 $ 1.22 $ 1.20
Diluted weighted average number of common share equivalents outstanding:
Used to calculate net earnings per common share 24,701 24,726 24,694 22,546
Assumed conversion of preferred shares - - - 2,162
-------- -------- -------- --------
Used to calculate FFO and AFFO per common share 24,680 24,726 24,687 24,708
======== ======== ======== ========
(a) Diluted earnings, funds from operations ("FFO") and adjusted funds from
operations ("AFFO") per common share are computed by dividing net earnings
applicable to common shareholders, FFO and AFFO, respectively, by the diluted
weighted average number of common share equivalents outstanding during the
period. Diluted earnings, FFO and AFFO per share give effect, for the quarter
ended September 30, 2003, to the conversion of the outstanding Series A
Participating Convertible Redeemable Preferred Stock into common stock as if the
conversion had occurred at the beginning of the quarter and, for the nine months
ended September 30, 2003, diluted FFO and AFFO per share give effect to the
dilution from the conversion assuming that it had occurred at the beginning of
the year. The effect of the potential dilution from the assumed conversion
utilizing the two class method in computing diluted earnings per share for the
nine months ended September 30, 2003 would have been antidilutive and was not
assumed. Accordingly, for the quarter and nine months ended September 30, 2003,
preferred stock dividends are added back to FFO and AFFO, and to earnings for
the nine month period, which sums are then divided by the diluted weighted
average number of common share equivalents outstanding for the period. There
were no preferred shares outstanding during the quarter and nine months ended
September 30, 2004.
Liquidity and Capital Resources
Our principal sources of liquidity are available cash and equivalents, the
cash flows from our business and a short-term uncommitted line of credit with a
bank. Management believes that
16
dividend payments and cash requirements for our business, including
environmental remediation expenditures, capital expenditures and debt service,
can be met with cash flows from operations, available cash and equivalents and
the credit line (see Subsequent Events below). As of September 30, 2004, we had
a $25.0 million line of credit, of which $0.2 million was utilized for
outstanding letters of credit. Borrowings under the line of credit are unsecured
and bear interest at the prime rate or, at our option, LIBOR plus 1.25%. There
were no borrowings under the line of credit during the nine months ended
September 30, 2004 or 2003. The line of credit is subject to annual renewal in
June 2005 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 $0.4250 per quarter
($1.70 per share on an annual basis), and commenced doing so with the quarterly
dividend declared in the quarter ended September 30, 2003. Payment of dividends
is subject to market conditions, our financial condition and other factors, and
therefore cannot be assured. Dividends paid to our common shareholders were
$31.5 million for the nine months ended September 30, 2004 compared to an
aggregate amount of $30.6 million paid to our common and preferred shareholders
during the prior year period.
In August 2003, we called for redemption of our outstanding preferred
stock. Prior to the September 24, 2003 redemption date, shareholders with 98% of
the preferred stock exercised their right to convert their shares of preferred
stock into approximately 3.2 million shares of common stock. The remaining
shares of outstanding preferred stock were redeemed for approximately $1.2
million.
Property acquisitions and capital expenditures for the nine months ended
September 2004 include $5.0 million paid into escrow for the pending
acquisition, $3.5 million for the acquisition of eight properties as well as
reimbursements of $147,000 to Marketing for one-half of certain capital
expenditures for work required to comply with local zoning requirements.
Subsequent Events
On November 1, 2004, we completed the previously announced acquisition of
36 convenience store and retail motor fuel properties located in Connecticut and
Rhode Island for approximately $25.7 million. Approximately $10.7 million of the
purchase price was paid with cash on hand, of which $5.0 million was previously
paid into escrow and is included in deposits on property acquisitions on the
consolidated balance sheet as of September 30, 2004. The balance of the purchase
price was financed through our line of credit.
Simultaneously with the closing on the acquisition, we entered into a
triple net lease with a single tenant for all of the properties. The lease
provides for annual rentals beginning at approximately $3.0 million and
escalating thereafter. The triple net lease has an initial term of 15 years and
provides the tenant options for 3 renewal terms of 5 years each. The lease also
provides that the tenant is responsible for all environmental conditions at the
properties, including those properties where remediation activities are ongoing.
We took title to 25 fee properties located in Connecticut and one in Rhode
Island and an
17
assignment of the seller's leasehold interest in 10 properties in Connecticut.
Our annual rent expense under these leases currently approximates $0.4 million.
We also took an assignment of an existing environmental remediation agreement
with a third party who will continue to be responsible for the remediation costs
associated with certain known environmental conditions at approximately 15
properties in Connecticut.
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, 2003. Estimates, judgments and assumptions underlying the
accompanying consolidated financial statements include, but are not limited to,
deferred rent receivable, recoveries from state underground storage tank funds,
environmental remediation costs (see Environmental Matters), depreciation,
impairment of long-lived assets, litigation, accrued expenses and income taxes.
We believe that the more critical of our accounting policies relate to revenue
recognition, impairment of long-lived assets, income taxes, environmental costs
and recoveries from state underground storage tank funds and litigation, each of
which is discussed in Management's Discussion and Analysis in our Annual Report
on Form 10-K for the year ended December 31, 2003.
Environmental Matters
We are subject to numerous existing federal, state and local laws and
regulations, including matters relating to the protection of the environment.
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 within applicable standards and to regulatory or contractual
closure ("Closure") in an efficient and economical manner. Generally, upon
achieving Closure at an individual property, our environmental liability under
the lease for that property will be satisfied and future remediation obligations
will be the responsibility of our tenant. As of September 30, 2004, we have
remediation action plans in place for 325 (92%) of the 353 properties for which
we retained environmental responsibility and the remaining 28 properties (8%)
remain in the assessment phase.
As of September 30, 2004, December 31, 2003 and January 1, 2003, we had
accrued $21.9 million, $23.6 million, and $29.4 million, respectively, as
management's best estimate of the fair value of reasonably estimable
environmental remediation costs. As of September 30, 2004,
18
December 31, 2003 and January 1, 2003, we had also recorded $6.0 million, $7.5
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 liabilities of
$16.1 million and $15.1 million as of December 31, 2003 and January 1, 2003,
respectively, have been accreted for the change in present value due to the
passage of time and, accordingly, $0.7 million of accretion expense is included
in environmental expenses for each of the nine month periods ended September 30,
2004 and 2003. Environmental expenditures were $4.2 million and $4.5 million,
respectively, and recoveries from underground storage tank funds were $1.5
million and $1.6 million, respectively, for each of the nine month periods ended
September 30, 2004 and 2003. During 2004, we currently estimate that our net
environmental remediation spending will be approximately $5.0 million. Our
business plan for 2004 currently reflects a net change in estimated remediation
costs and accretion expense of approximately $4.0 million.
Environmental liabilities and related assets are currently measured at
fair value based on their expected future cash flows which have been adjusted
for inflation and discounted to present value. We also use probability weighted
alternative cash flow forecasts to determine fair value. For locations where
remediation efforts are not assumed to be completed during the current year, we
assumed a 50% probability factor that the actual environmental expenses will
exceed engineering estimates for an amount assumed to equal one year of net
expenses aggregating $5.8 million for those sites. Accordingly, the
environmental accrual as of September 30, 2004 was increased by $2.3 million,
net of assumed recoveries and before inflation and present value discount
adjustments. The resulting net environmental accrual as of September 30, 2004
was then further increased by $1.6 million for the assumed impact of inflation
using an inflation rate of 2.75%. Assuming a credit-adjusted risk-free rate of
7.0%, we then reduced the net environmental accrual, as previously adjusted, by
a $4.1 million discount to present value. Had we assumed an inflation rate that
was 0.5% higher and a discount rate that was 0.5% lower, net environmental
liabilities as of September 30, 2004 would have increased by $0.2 million for
each of those factors for an aggregate increase in the net environmental accrual
of $0.4 million. In addition, the aggregate net change in environmental
estimates and accretion expense recorded during the nine months ended September
30, 2004 would have increased by $0.2 million due to these changes in the
assumptions.
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. Net environmental expenses included in our consolidated
statements of operations for the three and nine months ended September 30, 2004,
amounted to $1.0 million and $4.6 million, respectively, as compared to $1.9
million and $5.6 million, respectively, for the comparable prior year periods,
which amounts were net of probable recoveries from state UST remediation funds.
Although future environmental costs may have a significant impact on results of
operations for any single fiscal year or interim period, we believe that such
costs will not have a material adverse effect on our long-term financial
position.
Our discussion of environmental matters should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations which appear in the
19
Company's Annual Report on Form 10-K for the year ended December 31, 2003 and
the accompanying consolidated financial statements and related notes which
appear in this Form 10-Q (including notes 4, 6 and 7).
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, 2003 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; potential
environmental litigation exposure; 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.
20
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 Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As required by Rule 13a-15(b), the Company carries out regular quarterly
evaluations, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the quarter
covered by this report. Based on the foregoing, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures were effective at a reasonable assurance level as of
September 30, 2004.
There has been no change in the Company's internal controls over financial
reporting during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
controls over financial reporting.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In 1995, Pennsauken Solid Waste Management Authority, its
successor-in-interest, the Pollution Control Financing Authority of Camden
County and the Township of Pennsauken, New Jersey commenced an action for
unspecified amounts against certain defendants for all costs and damages claimed
to have been incurred for the remediation of the Pennsauken Sanitary Landfill.
The claims against us were settled in November 2003, in exchange for a payment
of $5,000 made in June 2004.
In 1997, the State of Rhode Island commenced an action against us to
recover damages resulting from an accident which occurred in March 1994,
regarding an oil tanker truck which tipped over and exploded in Providence, RI.
The State alleged damages to the highway area as well as the surrounding area
and nearby overpass. The case was dismissed in June 2004.
In December 1998, the New York State Department of Environmental
Conservation filed an administrative complaint against us for civil penalties
for alleged groundwater contamination and gasoline migration into a building
basement in April 1997. In January 1999, an action was commenced in United
States District Court (SDNY) by the owner of the property, seeking compensatory
and punitive damages. We are vigorously defending the private claims of
liability and that, notwithstanding extensive discovery in the matter, we do not
believe that the plaintiff has presented any evidence of damage. In September
2004, our motion for summary judgment was granted as to all claims other than
plaintiff's claim for compensatory damages resulting from an alleged diminution
in property value. To date, plaintiff has not presented any evidence of
diminution of property value.
In July 1999, the New Jersey Department of Environmental Protection
("NJDEP") issued a Directive and Notice to Insurers to several parties,
including the Company regarding environmental contamination at a retail motor
fuel property located in New Jersey. We signed an Administrative Consent Order
and settlement agreement with our insurers in December 2003 that calls for the
insurers paying the State, under a reservation of rights, for past costs and
taking over responsibility for the completion of the remediation. The settlement
agreement called for us to pay $70,000 to the State and $15,000 toward the
settlement that the insurers reached with the State regarding natural resource
damages. These payments were made in May 2004.
In August 2000, the State of New York commenced an action against us in
the New York State Supreme Court in Albany County, seeking reimbursement of
costs claimed to have been incurred to clean up a gasoline release that occurred
in 1987. The matter was settled in June 2004, in exchange for a payment of
$580,000, made in July 2004.
In September 2002, a suit was brought against us in the United States
District Court for the Eastern District of New York to recover legal fees
incurred in connection with a pending Rhode Island litigation, based on a
Guarantee and Indemnity Agreement. In January, 2002, we filed a counterclaim
against the plaintiff in that earlier suit for recovery of our legal fees
pursuant to a 1985 Settlement Agreement. Discovery has been completed, summary
judgment motions were
22
filed by both parties in the third quarter of 2004 and those motions are
scheduled to be heard on November 2, 2004.
In April 2003, we received a Request for Reimbursement from the State of
Maine Department of Environmental Protection seeking reimbursement of costs
claimed to have been incurred by them in connection with the remediation of
contamination claimed to have originated at a former retail motor fuel property
supplied by us with gasoline in 1988. We discovered evidence that indicates that
the contamination may not have originated from the property and submitted a
written response to the Request, denying liability for the claim. In September
2004, we received a response from the Office of the Attorney General for the
State of Maine rejecting our evidence and theories of liability and offering
settlement which we are evaluating.
In September 2003, we were notified by the State of New Jersey Department
of Environmental Protection (the "DEP") that we are one of approximately 60
potentially responsible parties for natural resources damages resulting from
discharges of hazardous substances into the Lower Passaic River. The definitive
list of potentially responsible parties and their actual responsibility for the
alleged damages, the aggregate cost to remediate the Lower Passaic River, the
amount of natural resource damages and the method of allocating such amounts
among the potentially responsible parties have not been determined. In September
2004, we received a General Notice Letter from the US EPA (the "EPA Notice"),
advising us that we may be a potentially responsible party for costs of
remediating certain conditions resulting from discharges of hazardous substances
into the Lower Passaic River. ChevronTexaco received the same EPA Notice
regarding those same conditions. We believe that ChevronTexaco is obligated to
indemnify the Company, pursuant to an indemnification agreement, regarding most
of the conditions at the property identified by the DEP and the EPA and that,
accordingly, our ultimate legal and financial liability, if any, cannot be
estimated with any certainty at this time.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
23
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
------------ ----------------------
31 Certifications of Chief Executive Officer and
Chief Financial Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002
32 Certifications of Chief Executive Officer and
Chief Financial Officer pursuant to 18
U.S.C. Section 1350 (*)
(*) These certifications are being furnished solely to accompany the Report
pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be
incorporated by reference into any filing of the Company, whether made before or
after the date hereof, regardless of any general incorporation language in such
filing.
(b) Reports filed on Form 8-K:
On August 2, 2004, the Company announced its earnings for the quarter and six
months ended months ended June 30, 2004, which was furnished under Item 12
"Results of Operations and Financial Condition" on Form 8-K.
On September 8, 2004, the Company announced that the United States Bankruptcy
Court in Wilmington, DE, on September 7, 2004, approved it as the winning bidder
to acquire 36 convenience store and retail motor fuel properties located in
Connecticut and Rhode Island currently operated as DB Marts for an aggregate
purchase price of approximately $25 million, which was filed under Item 8.01
"Other Events" on Form 8-K.
On November 2, 2004, the Company announced its earnings for the quarter and six
months ended months ended June 30, 2004, which was furnished under Item 12
"Results of Operations and Financial Condition" on Form 8-K.
In the Form 8-K filed on November 2, 2004, the Company also announced that the
Company entered into an agreement with GPM Investments, LLC to net lease to them
all 36 former DB Mart locations that it will be acquiring in the first week of
November 2004 and additional information regarding the acquisition of the 36
locations which was filed under Item 8.01 "Other Events".
24
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 9, 2004 BY: /s/ Thomas J.Stirnweis
-----------------------------
(Signature)
THOMAS J. STIRNWEIS
Vice President, Treasurer and
Chief Financial Officer
Dated: November 9, 2004 BY: /s/ Leo Liebowitz
--------------------------------
(Signature)
LEO LIEBOWITZ
Chairman and Chief Executive
Officer
25
EXHIBIT INDEX
Exhibit No. Description
31 Certifications of Chief Executive Officer and
Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002
32 Certifications of Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 (*)