e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark one)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
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o |
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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)
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MARYLAND
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11-3412575 |
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(State or other jurisdiction of incorporation or
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(I.R.S. Employer |
organization)
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Identification No.) |
125 Jericho Turnpike, Suite 103
Jericho, New York 11753
(Address of principal executive offices)
(Zip Code)
(516) 478 5400
(Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer. See the definitions of larger accelerated filer, accelerated filer and
smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer o
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Accelerated Filer þ
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Non-Accelerated Filer o
(Do not check if a smaller reporting company)
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Registrant had outstanding 33,394,175 shares of Common Stock, par value $.01 per share, as of May
10, 2011.
GETTY REALTY CORP.
INDEX
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Page Number |
Part I. FINANCIAL INFORMATION |
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Item 1. Financial Statements (unaudited) |
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Consolidated Balance Sheets as of March 31, 2011 and
December 31, 2010 |
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1 |
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Consolidated Statements of Operations for the
Three Months ended March 31, 2011 and 2010 |
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2 |
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Consolidated Statements of Comprehensive Income for the
Three Months ended March 31, 2011 and 2010 |
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3 |
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Consolidated Statements of Cash Flows for the
Three Months ended March 31, 2011 and 2010 |
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4 |
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Notes to Consolidated Financial Statements |
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5 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
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29 |
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Item 3 Quantitative and Qualitative Disclosures about Market Risk |
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49 |
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Item 4. Controls and Procedures |
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51 |
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Part II. OTHER INFORMATION |
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Item 1. Legal Proceedings |
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51 |
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Item 1a. Risk Factors |
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51 |
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Item 4. Other Information |
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57 |
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Item 5. Exhibits |
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58 |
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Signatures |
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59 |
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
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March 31, |
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December 31, |
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2011 |
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2010 |
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ASSETS: |
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Real Estate: |
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Land |
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$ |
360,929 |
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$ |
253,413 |
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Buildings and improvements |
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250,268 |
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251,174 |
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611,197 |
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504,587 |
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Less accumulated depreciation and amortization |
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(146,046 |
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(144,217 |
) |
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Real estate, net |
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465,151 |
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360,370 |
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Net investment in direct financing leases |
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77,251 |
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20,540 |
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Deferred rent receivable (net of allowance of $7,608 at
March 31, 2011 and $8,170 at December 31, 2010) |
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27,345 |
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27,385 |
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Cash and cash equivalents |
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23,422 |
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6,122 |
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Recoveries from state underground storage tank funds, net |
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3,982 |
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3,966 |
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Note, mortgages and accounts receivable, net |
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32,168 |
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1,796 |
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Prepaid expenses and other assets |
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21,233 |
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6,965 |
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Total assets |
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$ |
650,552 |
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$ |
427,144 |
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LIABILITIES AND SHAREHOLDERS EQUITY: |
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Borrowings under credit line |
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$ |
160,000 |
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$ |
41,300 |
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Term loan |
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23,395 |
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23,590 |
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Environmental remediation costs |
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14,712 |
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14,874 |
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Dividends payable |
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16,111 |
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14,432 |
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Accounts payable and accrued expenses |
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33,423 |
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18,013 |
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Total liabilities |
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247,641 |
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112,209 |
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Commitments and contingencies (notes 2, 3, 5 and 6) |
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Shareholders equity: |
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Common stock, par value $.01 per share; authorized
50,000,000 shares; issued 33,394,175 at March 31,
2011 and 29,944,155 at December 31, 2010 |
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334 |
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299 |
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Paid-in capital |
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460,190 |
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368,093 |
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Dividends paid in excess of earnings |
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(57,029 |
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(52,304 |
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Accumulated other comprehensive loss |
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(584 |
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(1,153 |
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Total shareholders equity |
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402,911 |
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314,935 |
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Total liabilities and shareholders equity |
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$ |
650,552 |
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$ |
427,144 |
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The accompanying notes are an integral part of these consolidated financial statements.
- 1 -
GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
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Three months ended March 31, |
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2011 |
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2010 |
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Revenues from rental properties |
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$ |
25,025 |
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$ |
22,449 |
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Operating expenses: |
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Rental property expenses |
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3,486 |
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3,216 |
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Impairment charges |
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994 |
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Environmental expenses, net |
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1,127 |
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1,552 |
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General and administrative expenses |
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4,885 |
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2,338 |
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Depreciation and amortization expense |
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2,325 |
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2,391 |
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Total operating expenses |
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12,817 |
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9,497 |
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Operating income |
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12,208 |
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12,952 |
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Other income, net |
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411 |
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121 |
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Interest expense |
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(1,319 |
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(1,494 |
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Earnings from continuing operations |
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11,300 |
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11,579 |
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Discontinued operations: |
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Earnings from operating activities |
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18 |
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16 |
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Gains on dispositions of real estate |
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68 |
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310 |
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Earnings from discontinued operations |
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86 |
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326 |
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Net earnings |
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$ |
11,386 |
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$ |
11,905 |
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Basic and diluted earnings per common share: |
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Earnings from continuing operations |
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$ |
0.35 |
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$ |
0.47 |
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Earnings from discontinued operations |
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$ |
0.00 |
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$ |
0.01 |
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Net earnings |
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$ |
0.35 |
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$ |
0.48 |
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Weighted-average shares outstanding: |
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Basic |
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32,502 |
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24,766 |
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Stock options and restricted stock units |
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2 |
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3 |
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Diluted |
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32,504 |
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24,769 |
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The accompanying notes are an integral part of these consolidated financial statements.
- 2 -
GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
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Three months ended March 31, |
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2011 |
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2010 |
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Net earnings |
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$ |
11,386 |
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$ |
11,905 |
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Other comprehensive income: |
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Unrealized gain on interest rate swap |
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569 |
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303 |
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Comprehensive income |
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$ |
11,955 |
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$ |
12,208 |
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The accompanying notes are an integral part of these consolidated financial statements.
- 3 -
GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Three months ended March 31, |
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2011 |
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2010 |
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Cash flows from operating activities: |
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Net earnings |
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$ |
11,386 |
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$ |
11,905 |
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Adjustments to reconcile net earnings to
net cash flow provided by operating activities: |
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Depreciation and amortization expense |
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2,325 |
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2,395 |
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Impairment charges |
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994 |
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Gains from dispositions of real estate |
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(68 |
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(310 |
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Deferred rental revenue, net of allowance |
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40 |
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(138 |
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Amortization of above-market and below-market leases |
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(135 |
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(173 |
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Amortization of investment in direct financing lease |
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89 |
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(73 |
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Accretion expense |
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136 |
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165 |
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Stock-based employee compensation expense |
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143 |
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106 |
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Changes in assets and liabilities: |
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Recoveries from state underground storage tank funds, net |
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63 |
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(242 |
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Accounts receivable |
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(60 |
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(63 |
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Prepaid expenses and other assets |
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240 |
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(353 |
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Environmental remediation costs |
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(377 |
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235 |
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Accounts payable and accrued expenses |
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156 |
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305 |
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Net cash flow provided by operating activities |
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14,932 |
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13,759 |
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Cash flows from investing activities: |
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Property acquisitions and capital expenditures |
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(165,393 |
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(1,500 |
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Proceeds from dispositions of real estate |
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116 |
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639 |
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Decrease in cash held for property acquisitions |
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60 |
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1,124 |
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(Issuance) collection of note and mortgages receivable |
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(30,312 |
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34 |
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Net cash flow provided by (used in) investing activities |
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(195,529 |
) |
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297 |
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Cash flows from financing activities: |
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Borrowings (repayments) under credit agreement, net |
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118,700 |
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(2,000 |
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(Repayments) under term loan agreement |
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(195 |
) |
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(195 |
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Cash dividends paid |
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(14,432 |
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(11,842 |
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Credit agreement origination costs |
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(175 |
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Security deposits received |
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2,010 |
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72 |
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Net proceeds from issuance of common stock |
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91,989 |
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Net cash flow provided by (used in) financing activities |
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197,897 |
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(13,965 |
) |
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Net increase in cash and cash equivalents |
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17,300 |
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91 |
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Cash and cash equivalents at beginning of period |
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6,122 |
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3,050 |
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Cash and cash equivalents at end of period |
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$ |
23,422 |
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$ |
3,141 |
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Supplemental disclosures of cash flow information |
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Cash paid (refunded) during the period for: |
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Interest |
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$ |
1,343 |
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$ |
1,441 |
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Income taxes, net |
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65 |
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74 |
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Recoveries from state underground storage tank funds |
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(133 |
) |
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(206 |
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Environmental remediation costs |
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758 |
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995 |
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The accompanying notes are an integral part of these consolidated financial statements.
- 4 -
GETTY REALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
Basis of Presentation: The consolidated financial statements include the accounts of Getty
Realty Corp. and its wholly-owned subsidiaries (the Company). The Company is a real estate
investment trust (REIT) specializing in the ownership and leasing of retail motor fuel and
convenience store properties and petroleum distribution terminals. The Company manages and
evaluates its operations as a single segment. All significant intercompany accounts and
transactions have been eliminated.
The accompanying consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America (GAAP). In 2009, the
Financial Accounting Standards Board (FASB) established the Accounting Standards Codification, as
amended (the ASC), as the sole reference source of authoritative accounting principles recognized
by the FASB to be applied by non-governmental entities in the preparation of financial statements
in conformity with GAAP. The Company adopted the codification during the quarter ended September
30, 2009 which had no impact on the Companys financial position, results of operations or cash
flows.
Use of Estimates, Judgments and Assumptions: The financial statements have been prepared in
conformity with GAAP, which requires the Companys management to make 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, net investment in direct financing lease, recoveries from state underground storage
tank (UST or USTs) funds, environmental remediation costs, real estate, depreciation and
amortization, impairment of long-lived assets, litigation, accrued expenses, income taxes and the
allocation of the purchase price of properties acquired to the assets acquired and liabilities
assumed.
Discontinued Operations: The operating results and gains from certain dispositions of real
estate sold in 2011 and 2010 are reclassified as discontinued operations. The operating results of
such properties for the three months ended March 31, 2010 have also been reclassified to
discontinued operations to conform to the 2011 presentation. Discontinued operations for the three
months ended March 31, 2011 and 2010 are primarily comprised of gains or losses from property
dispositions. The revenue from rental properties and expenses related to these properties are
insignificant for the each of the three months ended March 31, 2011 and 2010.
Unaudited, Interim Financial Statements: The consolidated financial statements are unaudited
but, in the Companys opinion, reflect all adjustments (consisting of normal recurring accruals)
necessary for a fair statement of the results for the periods presented. These statements should be
read in conjunction with the consolidated financial statements and related notes, which appear in
the Companys Annual Report on Form 10-K for the year ended December 31, 2010.
- 5 -
Earnings per Common Share: Basic earnings per common share gives effect, utilizing the
two-class method, to the potential dilution from the issuance of common shares in settlement of
restricted stock units (RSUs or RSU) which provide for non-forfeitable dividend equivalents
equal to the dividends declared per common share. Basic earnings per common share is computed by
dividing net earnings less dividend equivalents attributable to RSUs by the weighted-average number
of common shares outstanding during the year. Diluted earnings per common share, also gives effect
to the potential dilution from the exercise of stock options utilizing the treasury stock method.
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Three months ended |
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March 31, |
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(in thousands) |
|
2011 |
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2010 |
|
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Earnings from continuing operations |
|
$ |
11,300 |
|
|
$ |
11,579 |
|
Less dividend equivalents attributable to restricted stock units outstanding |
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(82 |
) |
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(56 |
) |
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Earnings from continuing operations attributable to common shareholders used for basic
earnings per share calculation |
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11,218 |
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11,523 |
|
Discontinued operations |
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|
86 |
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326 |
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Net earnings attributable to common shareholders used for basic earnings per share calculation |
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$ |
11,304 |
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$ |
11,849 |
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Weighted-average number of common shares outstanding: |
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|
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|
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Basic |
|
|
32,502 |
|
|
|
24,766 |
|
Stock options |
|
|
2 |
|
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|
3 |
|
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|
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Diluted |
|
|
32,504 |
|
|
|
24,769 |
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Restricted stock units outstanding at the end of the period |
|
|
171 |
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2. LEASES
The Company leases or sublets its properties primarily to distributors and retailers engaged
in the sale of gasoline and other motor fuel products, convenience store products and automotive
repair services who are responsible for managing the operations conducted at these properties and
for the payment of taxes, maintenance, repair, insurance and other operating expenses related to
these properties. In those instances where the Company determines that the best use for a property
is no longer as a retail motor fuel outlet, the Company will seek an alternative tenant or buyer
for the property. The Company leases or subleases approximately twenty of its properties for uses
such as fast food restaurants, automobile sales and other retail purposes. The Companys 1,172
properties are located in 20 states across the United States with concentrations in the Northeast
and Mid-Atlantic regions.
As of March 31, 2011, Getty Petroleum Marketing Inc. (Marketing) leased from the Company,
813 properties. Eight hundred four of the properties are leased to Marketing under a unitary master
lease (the Master Lease) and nine properties are leased under supplemental leases (collectively
with the Master Lease, the Marketing Leases). The Master Lease has an initial term of 15 years
commencing December 9, 2000, and provides Marketing with options for three renewal terms of ten
years each and a final renewal option of three years and ten months extending to 2049 (or such
shorter initial or renewal term as the underlying lease may provide). If Marketing elects to
exercise any renewal option, Marketing is required to notify us of such election one year in
advance of the commencement of the renewal term. The Master Lease is a unitary lease and,
therefore, Marketings exercise of any renewal option can only be for
all of the properties subject of the Master Lease. The supplemental leases have initial terms
of varying expiration dates. The Marketing Leases include provisions for 2.0% annual rent
escalations. (See
- 6 -
note 8 for additional information regarding the portion of the Companys
financial results that are attributable to Marketing. See note 3 for additional information
regarding contingencies related to Marketing and the Marketing Leases).
The Company estimates that Marketing makes annual real estate tax payments for properties
leased under the Marketing Leases of approximately $13,000,000. Marketing also makes additional
payments for other operating expenses related to these properties, including environmental
remediation costs other than those liabilities that were retained by the Company. These costs,
which have been assumed by Marketing under the terms of the Marketing Leases, are not reflected in
the Companys consolidated financial statements.
Revenues from rental properties included in continuing operations for the quarters ended March
31, 2011 and 2010 were $25,025,000 and $22,449,000, respectively, of which $15,171,000 and
$15,147,000, respectively, were received from Marketing under the Marketing Leases and $9,632,000
and $6,927,000, respectively, were received from other tenants. Rent received and rental property
expenses include $919,000 and $812,000 for the three months ended March 31, 2011 and 2010,
respectively, for real estate taxes paid by the Company which were reimbursed by Marketing and
other tenants. In accordance with GAAP, the Company recognizes rental revenue in amounts which vary
from the amount of rent contractually due or received during the periods presented. As a result,
revenues from rental properties include non-cash adjustments recorded for deferred rental revenue
due to the recognition of rental income on a straight-line (or an average) basis over the current
lease term, net amortization of above-market and below-market leases and recognition of rental
income recorded under a direct financing lease using the effective interest method which produces a
constant periodic rate of return on the net investment in the leased property (the Revenue
Recognition Adjustments). Revenue Recognition Adjustments included in continuing operations
increased rental revenue by $222,000 for the quarter ended March 31, 2011, and $375,000 for the
quarter ended March 31, 2010.
The components of the $77,251,000 net investment in direct financing lease as of March 31,
2011, are minimum lease payments receivable of $185,456,000 plus unguaranteed estimated residual
value of $10,828,000 less unearned income of $119,033,000.
3. COMMITMENTS AND CONTINGENCIES
In order to minimize the Companys exposure to credit risk associated with financial
instruments, the Company places its temporary cash investments, if any, with high credit quality
institutions. Temporary cash investments, if any, are currently held in an overnight bank time
deposit with JPMorgan Chase Bank, N.A.
As of March 31, 2011, the Company leased 813, or 69% of its 1,172 properties, on a long-term
triple-net basis to Marketing. (See note 2 for additional information). The Companys financial
results are materially dependent upon the ability of Marketing to meet its rental, environmental
and other obligations under the Marketing Leases. Marketings financial results depend on retail
petroleum marketing margins from the sale of refined petroleum products and rental income from its
subtenants. Marketings subtenants
either operate their gas stations, convenience stores, automotive repair services or other
businesses at the Companys properties or are petroleum distributors who may operate the Companys
properties directly and/or sublet the Companys properties to the operators. Since a substantial
portion of the Companys
- 7 -
revenues (59% for the three months ended March 31, 2011), are derived from
the Marketing Leases, any factor that adversely affects Marketings ability to meet its obligations
under the Marketing Leases may have a material adverse effect on the Companys business, financial
condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends
or stock price. (See note 8 for additional information regarding the portion of the Companys
financial results that are attributable to Marketing.)
On February 28, 2011, OAO LUKoil (Lukoil), one of the largest integrated Russian oil
companies, transferred its ownership interest in Marketing to Cambridge Petroleum Holding Inc.
(Cambridge). The Company is not privy to the terms and conditions pertaining to this transaction
between Lukoil and Cambridge and the Company does not know what type or amount of consideration, if
any, was paid or is payable by Lukoil or its subsidiaries to Cambridge or by Cambridge to Lukoil or
its subsidiaries in connection with the transfer. Although the Company believes that there are
certain contractual relationships between Lukoil and its subsidiaries and Marketing, the Company
has not confirmed the existence of such agreements and the Company does not know the terms and
conditions of such agreements or the scope or extent of any ongoing contractual or business
relationships between Lukoil or its subsidiaries and Cambridge or its subsidiaries, including
Marketing.
The Company did not believe that while Lukoil owned Marketing Lukoil would allow Marketing to
fail to meet its obligations under the Marketing Leases. However, there can be no assurance that
Cambridge will have the capacity to provide capital or financial support to Marketing or will
provide or arrange for the provision of additional capital investment or financial support to
Marketing in the future that Marketing may require to perform its obligations under the Marketing
Leases. The Company cannot predict what impact the transfer of Marketing may have the Companys
business. Without financial support, it is possible that Marketing may file for bankruptcy
protection and seek to reorganize or liquidate its business. It is also possible that Marketing may
take other actions in addition to seeking to modify the terms of the Marketing Leases.
From time to time when it was owned by Lukoil, the Company held discussions with
representatives of Marketing regarding potential modifications to the Marketing Leases. These
discussions did not result in a common understanding with Marketing that would form a basis for
modification of the Marketing Leases. After Lukoils transfer of its ownership of Marketing to
Cambridge, the Company commenced discussions with Marketings new owners and management. Although
Marketings new management has indicated a desire to reduce the number of properties its leases
from the Company under the Marketing Leases in an effort to improve Marketings financial results,
such discussions are currently ongoing and the Company does not yet have a definitive understanding
of what Marketings business strategy under its new ownership is or how it may change in the
future. The Company intends to continue its discussions with Marketing and diligently pursue the
removal of properties from the Marketing Leases to the extent the Company deems it prudent for it
to do so; however, there is no agreement in place providing for removal of a significant number of
properties from the Marketing Leases. Any modification of the Marketing Leases that removes a
significant number of properties from the Marketing Leases would likely significantly reduce the
amount of rent the Company receives from Marketing and increase the Companys operating expenses.
The Company cannot accurately predict if, or when, the Marketing Leases will be modified; what
composition of properties, if any, may be removed from the Marketing
Leases as part of any such modification; or what the terms of any agreement for modification
of the Marketing Leases may be. the Company also cannot accurately predict what actions Marketing
may take, and what the Companys recourse may be, whether the Marketing Leases are modified or not.
During the
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second quarter of 2011 or thereafter, the Company may be required to significantly
increase or decrease the deferred rent receivable reserve, record additional impairment charges
related to its properties, or accrue for environmental liabilities as a result of the potential or
actual modification or termination of the Marketing Leases.
As of the date of this Form 10-Q, the Company has not yet received Marketings unaudited
consolidated financial statements for the year ended December 31, 2010. For the year ended December
31, 2009, Marketing reported a significant loss, continuing a trend of reporting large losses in
recent years. Based on interim reports the Company has received through 2010, Marketings
significant losses have continued. The Company continues to believe that Marketing likely does not
have the ability to generate cash flows from its business operations sufficient to meet its
obligations as they come due in the ordinary course under the terms of the Marketing Leases unless
Marketing shows significant improvement in its financial results, reduces the number of properties
under the Marketing Leases, or receives additional capital or credit support. There can be no
assurance that Marketing will be successful in any of these efforts.
In November 2009, Marketing announced a restructuring of its business. Marketing disclosed
that the restructuring included the sale of all assets unrelated to the properties it leases from
the Company, the elimination of parent-guaranteed debt, and steps to reduce operating costs.
Although Marketings press release stated that its restructuring included the sale of all assets
unrelated to the properties it leases from the Company, the Company has concluded, based on the
press releases related to the Marketing/Bionol contract dispute described below, that Marketings
restructuring did not include the sale of all assets unrelated to the properties it leases from the
Company. Marketing sold certain assets unrelated to the properties it leases from the Company to
its affiliates, LUKOIL Pan Americas LLC and LUKOIL North America LLC. The Company believes that
Marketing retained other assets, liabilities and business matters unrelated to the properties it
leases from the Company. As part of the restructuring, Marketing paid off debt which had been
guaranteed or held by Lukoil with proceeds from the sale of assets to Lukoil affiliates.
In June 2010, Marketing and Bionol Clearfield LLC (Bionol) each issued press releases
regarding a contractual dispute between them. Bionol owns and operates an ethanol plant in
Pennsylvania. Bionol and Marketing entered into a five-year contract under which Marketing agreed
to purchase substantially all of the ethanol production from the Bionol plant, at formula-based
prices. Bionol stated that Marketing breached the contract by not paying the agreed-upon price for
the ethanol. According to Bionols press release, the cumulative gross purchase commitment under
the contract could be on the order of one billion dollars. The Company cannot predict with any
certainty how the ultimate resolution of this matter may impact Marketings long-term financial
performance and its ability to meet its obligations to the Company as they become due under the
terms of the Marketing Leases.
The Company cannot predict what impact Marketings restructuring, dispute with Bionol, other
changes in its business model or other impacts on its business will have on the Company. If
Marketing should fail to meet its rental, environmental or other obligations under the Marketing
Leases to the Company, such default could lead to a protracted and expensive process for retaking
control of the Companys properties. In addition to the risk of disruption in rent receipts, the
Company is subject to the risk of incurring real
estate taxes, maintenance, environmental and other expenses at properties subject to the
Marketing Leases.
- 9 -
The Company intends either to re-let or sell any properties removed from the Marketing Leases,
whether such removal arises consensually by negotiation or as a result of default by Marketing, and
reinvest any realized sales proceeds in new properties. The Company intends to offer any
properties removed from the Marketing Leases to replacement tenants or buyers individually, or in
groups of properties, or by seeking a single tenant for the entire portfolio of properties subject
to the Marketing Leases. Although the Company is the fee or leasehold owner of the properties
subject to the Marketing Leases and the owner of the Getty® brand and has
prior experience with tenants who operate their convenience stores, automotive repair services or
other businesses at its properties; in the event that properties are removed from the Marketing
Leases, the Company cannot accurately predict if, when, or on what terms, such properties could be
re-let or sold.
As permitted under the terms of the Marketing Leases, Marketing generally can, subject to any
contrary terms under applicable third party leases, use each property for any lawful purpose, or
for no purpose whatsoever. As of March 31, 2011, Marketing was not operating any of the nine
terminals it leases from the Company and had removed, or has scheduled removal of, underground
gasoline storage tanks and related equipment at approximately 165 of the Companys retail
properties and the Company believes that most of these properties are either vacant or provide
negative or marginal contribution to Marketings results. In those instances where the Company
determines that the best use for a property is no longer as a retail motor fuel outlet, at the
appropriate time the Company will seek an alternative tenant or buyer for such property. With
respect to properties that are vacant or have had underground gasoline storage tanks and related
equipment removed, it may be more difficult or costly to re-let or sell such properties as gas
stations because of capital costs or possible zoning or permitting rights that are required and
that may have lapsed during the period since gasoline was last sold at the property. Conversely, it
may be easier to re-let or sell properties where underground gasoline storage tanks and related
equipment have been removed if the property will not be used as a retail motor fuel outlet or if
environmental contamination has been or is being remediated.
Based in part on the Companys willingness to negotiate with Marketing for a modification of
the Marketing Leases, and its belief that the Marketing Leases will be modified prior to the
expiration of the current lease term, the Company believes that it is probable that it will not
collect all of the rent due related to properties identified from time to time as being the most
likely to be removed from the Marketing Leases. As of March 31, 2011 and December 31, 2010, the net
carrying value of the deferred rent receivable attributable to the Marketing leases was $20,868,000
and $21,221,000, respectively, which was comprised of a gross deferred rent receivable of
$28,476,000 and $29,391,000, respectively, partially offset by a valuation reserve of $7,608,000
and $8,170,000, respectively. The valuation reserves were estimated based on the deferred rent
receivable attributable to properties identified by the Company as being the most likely to be
removed from the Marketing Leases. The Company has not provided deferred rent receivable reserves
related to the remaining properties subject to the Marketing Leases since, based on its assessments
and assumptions as of March 31, 2011, the Company continued to believe that it was probable that it
will collect the deferred rent receivable related to those remaining properties. It is possible
that the deterioration of Marketings financial condition may continue, that Marketing may file
bankruptcy and seek to reorganize or liquidate its business, or that Marketing may seek a reduction
in the rental payments owed under the Marketing Leases in connection with a removal of properties
from the
Marketing Leases or otherwise. It is possible that the Company may change its estimates,
judgments, assumptions and beliefs regarding Marketing and the Marketing Leases, and accordingly,
during the second quarter of 2011 or thereafter, the Company may be required to significantly
increase or decrease
- 10 -
the deferred rent receivable reserve as a result of the potential or actual
modification or termination of the Marketing Leases.
The Company has performed an impairment analysis of the carrying amount of the properties
subject to the Marketing Leases from time to time in accordance with GAAP when indicators of
impairment exist. The impact to depreciation expense due to adjusting the estimated lives for such
long-lived assets was insignificant. During the three months ended March 31, 2011, the Company
reduced the carrying amount to fair value, and recorded non-cash impairment charges aggregating
$994,000, for certain properties leased to Marketing where the carrying amount of the property
exceeded the estimated undiscounted cash flows expected to be received during the assumed holding
period and the estimated net sales value expected to be received at disposition. The non-cash
impairment charges were attributable to reductions in real estate valuations primarily due to the
removal or scheduled removal of underground storage tanks by Marketing. The fair value of real
estate is estimated based on the price that would be received to sell the property in an orderly
transaction between marketplace participants at the measurement date, net of disposal costs. The
valuation techniques that the Company used included discounted cash flow analysis, an income
capitalization approach on prevailing or earnings multiples applied to earnings from the property,
analysis of recent comparable sales transactions, actual sale negotiations and bona fide purchase
offers received from third parties and/or consideration of the amount that currently would be
required to replace the asset, as adjusted for obsolescence. In general, the Company considers
multiple valuation techniques when measuring the fair value of a property, all of which are based
on assumptions that are classified within Level 3 of the fair value hierarchy.
Marketing is directly responsible to pay for (i) remediation of environmental contamination it
causes and compliance with various environmental laws and regulations as the operator of the
Companys properties, and (ii) known and unknown environmental liabilities allocated to Marketing
under the terms of the Marketing Leases and various other agreements with the Company relating to
Marketings business and the properties it leases from the Company (collectively the Marketing
Environmental Liabilities). However, the Company continues to have ongoing environmental
remediation obligations at 176 retail sites and for certain pre-existing conditions at six of the
terminals the Company leases to Marketing. If Marketing fails to pay the Marketing Environmental
Liabilities, the Company may ultimately be responsible to pay for Marketing Environmental
Liabilities as the property owner. The Company does not maintain pollution legal liability
insurance to protect it from potential future claims for Marketing Environmental Liabilities. The
Company will be required to accrue for Marketing Environmental Liabilities if the Company
determines that it is probable that Marketing will not meet its environmental obligations and the
Company can reasonably estimate the amount of the Marketing Environmental Liabilities for which it
will be responsible to pay, or if the Companys assumptions regarding the ultimate allocation
methods or share of responsibility that it used to allocate environmental liabilities changes.
However, as of March 31, 2011 the Company continued to believe that it was not probable that
Marketing would not pay for substantially all of the Marketing Environmental Liabilities.
Accordingly, the Company did not accrue for the Marketing Environmental Liabilities as of March 31,
2011. Nonetheless, the Company has determined that the aggregate amount of the Marketing
Environmental Liabilities (as estimated by the Company) would be material to the Company if it was
required to accrue for all of the Marketing Environmental Liabilities since as a result of such
accrual, the Company would not be in
compliance with the existing financial covenants in its Credit Agreement and its Term Loan
Agreement. Such non-compliance would result in an event of default pursuant to each agreement
which, if not waived, would prohibit the Company from drawing funds against the Credit Agreement
and could result in the
- 11 -
acceleration of the Companys indebtedness under the Companys restated
senior unsecured revolving credit agreement expiring in March 2012 (the Credit Agreement) and the
Companys $25.0 million three-year term loan agreement expiring in September 2012 (the Term Loan
Agreement or Term Loan). It is possible that the Company may change its estimates, judgments,
assumptions and beliefs regarding Marketing and the Marketing Leases, and accordingly, during the
second quarter of 2011 or thereafter, the Company may be required to accrue for the Marketing
Environmental Liabilities.
The Companys estimates, judgments, assumptions and beliefs regarding Marketing and the
Marketing Leases made effective March 31, 2011 are subject to reevaluation and possible change as
the Company develops a greater understanding of factors relating to the new ownership and
management of Marketing, and a clearer understanding of Marketings business plan and strategies
and its capital resources. It is possible that the deterioration of Marketings financial condition
may continue, that Marketing may file bankruptcy and seek to reorganize or liquidate its business
or that Marketing may continue to pursue seeking a modification of the Marketing Leases, including,
removal of either groups of or individual properties from the Marketing Leases, or a reduction in
the rental payments owed by Marketing under the Marketing Lease.
Should the Companys assessments, assumptions and beliefs made effective as of March 31, 2011
prove to be incorrect, or if circumstances change, the conclusions reached by the Company relating
to the following may change (i) whether any or what combination of the properties subject to the
Marketing Leases are likely to be removed from the Marketing Leases, (ii) recoverability of the
deferred rent receivable for some or all of the properties subject to the Marketing Leases, (iii)
potential impairment of the properties subject to the Marketing Leases and, (iv) Marketings
ability to pay the Marketing Environmental Liabilities. The Company intends to regularly review its
assumptions that affect the accounting for deferred rent receivable; long-lived assets;
environmental litigation accruals; environmental remediation liabilities; and related recoveries
from state underground storage tank funds. Accordingly, it is possible that the Company may be
required to (i) increase or decrease the deferred rent receivable reserve related to the properties
subject to the Marketing Leases, (ii) record an additional impairment charge related to the
properties subject to the Marketing Leases, or (iii) accrue for Marketing Environmental Liabilities
that the Company believes are allocable to Marketing under the Marketing Leases and various other
agreements as a result of the potential or actual filing for bankruptcy protection by Marketing or
as a result of the potential or actual modification of the Marketing Leases or other factors, which
may result in material adjustments to the amounts recorded for these assets and liabilities, and as
a result of which, the Company may not be in compliance with the financial covenants in its Credit
Agreement and its Term Loan Agreement.
The Company cannot provide any assurance that Marketing will continue to meet its rental,
environmental or other obligations under the Marketing Leases. In the event that Marketing does not
perform its rental, environmental or other obligations under the Marketing Leases; if the Marketing
Leases are modified significantly or terminated; if the Company determines that it is probable that
Marketing will not meet its rental, environmental or other obligations and the Company accrues for
certain of such liabilities; if the Company is unable to promptly re-let or sell the properties
upon recapture from the Marketing Leases; or, if the Company changes its assumptions that affect
the accounting for
rental revenue or Marketing Environmental Liabilities related to the Marketing Leases and
various other agreements; the Companys business, financial condition, revenues, operating
expenses, results of operations, liquidity, ability to pay dividends or stock price may be
materially adversely affected.
- 12 -
The Company has also agreed to provide limited environmental indemnification to Marketing,
capped at $4,250,000, for certain pre-existing conditions at six of the terminals which are owned
by the Company and leased to Marketing. Under the agreement, Marketing is required to pay (and has
paid) the first $1,500,000 of costs and expenses incurred in connection with remediating any such
pre-existing conditions, Marketing and the Company share equally the next $8,500,000 of those costs
and expenses and Marketing is obligated to pay all additional costs and expenses over $10,000,000.
The Company has accrued $300,000 as of March 31, 2011 and December 31, 2010 in connection with this
indemnification agreement.
The Company is subject to various legal proceedings and claims which arise in the ordinary
course of its business. In addition, the Company has retained responsibility for certain legal
proceedings and claims relating to the petroleum marketing business that were identified at the
time the Companys petroleum marketing business was spun-off to our shareholders in March 1997. As
of March 31, 2011 and December 31, 2010, the Company had accrued $2,893,000 and $3,273,000,
respectively, for certain of these matters which it believes were appropriate based on information
then currently available. It is possible that the Companys assumptions regarding, among other
items, the ultimate resolution of and/or the Companys ultimate share of responsibility for these
matters may change, which may result in the Company providing or adjusting its accruals for these
matters.
In September 2003, the Company received a directive (the Directive) from the State of New
Jersey Department of Environmental Protection (the NJDEP) notifying the Company that it is one of
approximately 66 potentially responsible parties for natural resource damages resulting from
discharges of hazardous substances into the Lower Passaic River. The Directive calls for an
assessment of the natural resources that have been injured by the discharges into the Lower Passaic
River and interim compensatory restoration for the injured natural resources. There has been no
material activity with respect to the NJDEP Directive since early after its issuance. The
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. Effective May 2007, the United States
Environmental Protection Agency (EPA) entered into an Administrative Settlement Agreement and
Order on Consent (AOC) with over 70 parties comprising a Cooperating Parties Group (CPG) (many
of whom also named in the Directive) who have collectively agreed to perform a Remedial
Investigation and Feasibility Study (RI/FS) for the Lower Passaic River. The Company is a party
to the AOC and is a member of the CPG. The RI/FS is intended to address the investigation and
evaluation of alternative remedial actions with respect to alleged damages to the Lower Passaic
River, and is scheduled to be completed in or about 2014. The RI/FS does not resolve liability
issues for remedial work or restoration of, or compensation for, natural resource damages to the
Lower Passaic River, which are not known at this time.
In a related action, in December 2005, the State of New Jersey through various state agencies
brought suit against certain companies which the State alleges are responsible for various
categories of past and future damages resulting from discharges of hazardous substances to the
Passaic River. In February 2009, certain of these defendants filed third-party complaints against
approximately 300 additional parties,
including the Company, seeking contribution for such parties proportionate share of response
costs, cleanup, and other damages, based on their relative contribution to pollution of the Passaic
River and adjacent bodies of water. The Company believes that ChevronTexaco is contractually
obligated to
- 13 -
indemnify the Company, pursuant to an indemnification agreement, for most if not all
of the conditions at the property identified by the NJDEP and the EPA. Accordingly, the ultimate
legal and financial liability of the Company, if any, cannot be estimated with any certainty at
this time.
During 2010, the Company was defending against 53 lawsuits brought by or on behalf of private
and public water providers and governmental agencies. These cases alleged (and, as described below
with respect to one remaining case, continue to allege) various theories of liability due to
contamination of groundwater with methyl tertiary butyl ether (a fuel derived from methanol,
commonly referred to as MTBE) as the basis for claims seeking compensatory and punitive damages,
and name as defendant approximately 50 petroleum refiners, manufacturers, distributors and
retailers of MTBE, or gasoline containing MTBE. During the quarter ended March 31, 2010, the
Company reached agreements to settle two plaintiff classes covering 52 of the 53 pending cases. A
settlement payment of $1,250,000 was made during the third quarter of 2010 covering 27 cases and a
settlement payment of $475,000 was made during the first quarter of 2011 covering 25 cases.
Presently, the Company remains a defendant in one MTBE case involving multiple locations throughout
the State of New Jersey brought by various governmental agencies of the State of New Jersey,
including the NJDEP.
As of March 31, 2011 and December 31, 2010, the Company maintained a litigation reserve
relating to the remaining MTBE case in an amount which it believes was appropriate based on
information then currently available. However, the Company is unable to estimate with certainty its
liability for the case involving the State of New Jersey as there remains uncertainty as to the
accuracy of the allegations in this case as they relate to it, the Companys defenses to the
claims, its rights to indemnification or contribution from Marketing, and the aggregate possible
amount of damages for which the Company may be held liable.
The ultimate resolution of the matters related to the Lower Passaic River for which no reserve
has been provided for and the MTBE litigation discussed above for an amount above that which has
been provided for could cause a material adverse effect on the Companys business, financial
condition, results of operations, liquidity, ability to pay dividends or stock price.
Prior to the time the Companys petroleum marketing business was spun-off to its shareholders
in March 1997 (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, 2011 and December 31, 2010, the Companys consolidated balance sheets
included, in accounts payable and accrued expenses, $278,000 relating to self-insurance
obligations. The Company estimates its loss reserves for claims, including claims incurred but not
reported, by utilizing actuarial valuations provided annually by its insurance carriers. The
Company is required to deposit funds for substantially all of these loss reserves with its
insurance carriers, and may be entitled to refunds of amounts previously funded, as the claims are
evaluated on an annual basis. The Companys consolidated statements of operations for the three
months ended March 31, 2011 include, in general and administrative expenses, a charge of $135,000
for self-insurance loss reserve adjustments. Since the Spin-Off, the Company has maintained
insurance coverage subject to certain deductibles.
In order to qualify as a REIT, among other items, the Company must distribute at least ninety
percent of its earnings and profits (as defined in the Internal Revenue Code) to shareholders
each year. Should the Internal Revenue Service successfully assert that the Companys earnings and
profits were greater than
- 14 -
the amounts 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 earnings and profits. The Company may have to borrow money or sell assets to pay such
a deficiency dividend.
4. CREDIT AGREEMENT, TERM LOAN AGREEMENT AND INTEREST RATE SWAP AGREEMENT
The Company is a party to a $175,000,000 amended and restated senior unsecured revolving
credit agreement (the Credit Agreement) with a group of domestic commercial banks led by JPMorgan
Chase Bank, N.A. (the Bank Syndicate) which was scheduled to expire in March 2011. During the
first quarter of 2011, the Company exercised its option to extend the maturity date by an
additional year to March 2012. As of March 31, 2011, borrowings under the Credit Agreement were
$160,000,000, bearing interest at a rate of 1.31% per annum. The Company had $15,000,000 available
under the terms of the Credit Agreement as of March 31, 2011. The Credit Agreement does not provide
for scheduled reductions in the principal balance prior to its maturity. The Credit Agreement
permits borrowings at an interest rate equal to the sum of a base rate plus a margin of 0.0% or
0.25% or a LIBOR rate plus a margin of 1.0%, 1.25% or 1.5%. The applicable margin is based on the
Companys leverage ratio at the end of the prior calendar quarter, as defined in the Credit
Agreement, and is adjusted effective mid-quarter when the Companys quarterly financial results are
reported to the Bank Syndicate. Based on the Companys leverage ratio as of March 31, 2011, the
applicable margin will remain at 0.0% for base rate borrowings and 1.00% for LIBOR rate borrowings.
The annual commitment fee on the unused Credit Agreement ranges from 0.10% to 0.20% based on
the amount of borrowings. The Credit Agreement contains customary terms and conditions, including
financial covenants such as those requiring the Company to maintain minimum tangible net worth,
leverage ratios and coverage ratios and other covenants which may limit the Companys ability to
incur debt or pay dividends. The Credit Agreement contains customary events of default, including
change of control, failure to maintain REIT status or a material adverse effect on the Companys
business, assets, prospects or condition. Any event of default, if not cured or waived, would
prohibit the Company from drawing funds against the Credit Agreement and could result in the
acceleration of the Companys indebtedness under the Credit Agreement and could also give rise to
an event of default and consequent acceleration of the Companys indebtedness under its Term Loan
Agreement described below.
The Company is a party to a $25,000,000 three-year Term Loan Agreement with TD Bank (the Term
Loan Agreement or Term Loan) which expires in September 2012. As of March 31, 2011, borrowings
under the Term Loan Agreement were $23,395,000 bearing interest at a rate of 3.5% per annum. The
Term Loan Agreement provides for annual reductions of $780,000 in the principal balance with a
$22,160,000 balloon payment due at maturity. The Term Loan Agreement bears interest at a rate equal
to a thirty day LIBOR rate (subject to a floor of 0.4%) plus a margin of 3.1%. The Term Loan
Agreement contains customary terms and conditions, including financial covenants such as those
requiring the Company to maintain minimum tangible net worth, leverage ratios and coverage ratios
and other covenants which may limit the Companys ability to incur debt or pay dividends. The Term
Loan Agreement contains customary events of default, including change of control, failure to
maintain REIT
status or a material adverse effect on the Companys business, assets, prospects or condition.
Any event of default, if not cured or waived, could result in the acceleration of the Companys
indebtedness under the Term Loan Agreement and could also give rise to an event of default and
would prohibit the Company
- 15 -
from drawing funds against the Credit Agreement and could result in the
acceleration of the Companys indebtedness under its Credit Agreement.
The Company is a party to a $45,000,000 LIBOR based interest rate swap, effective through June
30, 2011 (the Swap Agreement). The Swap Agreement is intended to effectively fix, at 5.44%, the
LIBOR component of the interest rate determined under the Companys LIBOR based loan agreements.
The Company entered into the Swap Agreement with JPMorgan Chase Bank, N.A., designated and
qualifying as a cash flow hedge, to reduce its exposure to the variability in future cash flows
attributable to changes in the LIBOR rate. The Companys primary objective when undertaking the
hedging transaction and derivative position was to reduce its variable interest rate risk by
effectively fixing a portion of the interest rate for existing debt and anticipated refinancing
transactions. The Company determined, as of the Swap Agreements inception and as of March 31, 2011
and December 31, 2010, that the derivative used in the hedging transaction is highly effective in
offsetting changes in cash flows associated with the hedged item and that no gain or loss was
required to be recognized in earnings during the three months ended March 31, 2011 or 2010
representing the hedges ineffectiveness. At March 31, 2011 and December 31, 2010, the Companys
consolidated balance sheets include, in accounts payable and accrued expenses, an obligation for
the fair value of the Swap Agreement of $584,000 and $1,153,000, respectively. For the three months
ended March 31, 2011 and 2010, the Company has recorded, in accumulated other comprehensive loss in
the Companys consolidated balance sheets, a gain of $569,000, and $303,000, respectively, from
the change in the fair value of the Swap Agreement obligation related to the effective portion of
the interest rate contract. The accumulated comprehensive loss of $584,000 recorded as of March 31,
2011 will be recognized as interest expense over the remaining term of the Swap Agreement which
expires at the end of the second quarter of 2011.
The fair value of the Swap Agreement obligation was $584,000, as of March 31, 2011, determined
using (i) a discounted cash flow analysis on the expected cash flows of the Swap Agreement, which
is based on market data obtained from sources independent of the Company consisting of interest
rates and yield curves that are observable at commonly quoted intervals and are defined by GAAP as
Level 2 inputs in the Fair Value Hierarchy, and (ii) credit valuation adjustments, which are
based on unobservable Level 3 inputs. The fair value of the borrowings outstanding under the
Credit Agreement was $156,300,000 as of March 31, 2011. The fair value of the borrowings
outstanding under the Term Loan Agreement was $23,300,000 as of March 31, 2011. The fair value of
the projected average borrowings outstanding under the Credit Agreement and the borrowings
outstanding under the Term Loan Agreement were determined using a discounted cash flow technique
that incorporates a market interest yield curve, Level 2 inputs, with adjustments for duration,
optionality, risk profile and projected average borrowings outstanding or borrowings outstanding,
which are based on unobservable Level 3 inputs. As of March 31, 2011, accordingly, the Company
classified its valuation of the Swap Agreement in its entirety within Level 2 of the Fair Value
Hierarchy since the credit valuation adjustments are not significant to the overall valuation of
the Swap Agreement.
5. ENVIRONMENTAL EXPENSES
The Company is subject to numerous existing federal, state and local laws and regulations,
including matters relating to the protection of the environment such as the remediation of known
contamination and the retirement and decommissioning or removal of long-lived assets including
buildings containing hazardous materials, USTs and other equipment. Environmental expenses are
principally attributable to
- 16 -
remediation costs which include installing, operating, maintaining and
decommissioning remediation systems, monitoring contamination, and governmental agency reporting
incurred in connection with contaminated properties. The Company seeks reimbursement from state UST
remediation funds related to these environmental expenses where available.
The Company enters into leases and various other agreements which allocate responsibility for
known and unknown environmental liabilities by establishing the percentage and method of allocating
responsibility between the parties. In accordance with the leases with certain tenants, the Company
has agreed to bring the leased properties with known environmental contamination to within
applicable standards, and to either regulatory or contractual closure (Closure). Generally, upon
achieving Closure at each individual property, the Companys environmental liability under the
lease for that property will be satisfied and future remediation obligations will be the
responsibility of the Companys tenant. Generally the liability for the retirement and
decommissioning or removal of USTs and other equipment is the responsibility of the Companys
tenants. The Company is contingently liable for these obligations in the event that the tenants do
not satisfy their responsibilities. A liability has not been accrued for obligations that are the
responsibility of the Companys tenants based on the tenants history of paying such obligations
and/or the Companys assessment of their financial ability to pay their share of such costs.
However, there can be no assurance that the Companys assessments are correct or that the Companys
tenants who have paid their obligations in the past will continue to do so.
Of the 813 properties leased to Marketing as of March 31, 2011, the Company has agreed to pay
all costs relating to, and to indemnify Marketing for, certain environmental liabilities and
obligations at 176 retail properties that have not achieved Closure and are scheduled in the Master
Lease. The Company will continue to seek reimbursement from state UST remediation funds related to
these environmental expenditures where available.
It is possible that the Companys assumptions regarding the ultimate allocation method and
share of responsibility that it used to allocate environmental liabilities may change, which may
result in material adjustments to the amounts recorded for environmental litigation accruals,
environmental remediation liabilities and related assets. The Company is required to accrue for
environmental liabilities that the Company believes are allocable to others under various other
agreements if the Company determines that it is probable that the counter-party will not meet its
environmental obligations. The ultimate resolution of these matters could cause a material adverse
effect on the Companys business, financial condition, results of operations, liquidity, ability to
pay dividends or stock price. (See note 3 for contingencies related to Marketing and the Marketing
Leases for additional information.)
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 an offset to
environmental expense, net of allowance for collection risk, based on estimated recovery rates
developed from prior experience with the funds when such recoveries are considered probable.
- 17 -
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 Companys 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. Environmental
accruals are based on estimates which are subject to significant change, and are adjusted as the
remediation treatment progresses, as circumstances change and as environmental contingencies become
more clearly defined and reasonably estimable. As of March 31, 2011, the Company had regulatory
approval for remediation action plans in place for 217 (92%) of the 237 properties for which it
continues to retain environmental responsibility and the remaining 20 properties (8%) remain in the
assessment phase. In addition, the Company has nominal post-closure compliance obligations at 31
properties where it has received no further action letters.
Environmental remediation liabilities and related assets are measured at fair value based on
their expected future cash flows which have been adjusted for inflation and discounted to present
value. The estimated environmental remediation cost and accretion expense included in environmental
expenses in the Companys consolidated statements of operations aggregated $447,000 and $947,000
for the three months ended March 31, 2011 and 2010, respectively, which amounts were net of changes
in estimated recoveries from state UST remediation funds. In addition to estimated environmental
remediation costs, environmental expenses also include project management fees, legal fees and
provisions for environmental litigation loss reserves.
As of March 31, 2011 and December 31, 2010 and 2009, the Company had accrued $14,712,000,
$14,874,000 and $16,527,000, respectively, as managements best estimate of the fair value of
reasonably estimable environmental remediation costs. As of March 31, 2011 and December 31, 2010
and 2009, the Company had also recorded $3,982,000, $3,966,000 and $3,882,000, respectively, as
managements best estimate for recoveries from state UST remediation funds, net of allowance,
related to environmental obligations and liabilities. The net environmental liabilities of
$10,908,000 and $12,645,000 as of December 31, 2010 and 2009, respectively, were subsequently
accreted for the change in present value due to the passage of time and, accordingly, $136,000 and
$165,000 of net accretion expense was recorded for the three months ended March 31, 2011 and 2010,
respectively, substantially all of which is included in environmental expenses.
In view of the uncertainties associated with environmental expenditures, contingencies related
to Marketing and the Marketing Leases and contingencies related to other parties, however, the
Company believes it is possible that the fair value of future actual net expenditures could be
substantially higher than amounts currently recorded by the Company. (See note 3 for contingencies
related to Marketing and the Marketing Leases for additional information.) Adjustments to accrued
liabilities for environmental remediation costs will be reflected in the Companys financial
statements as they become probable and a reasonable estimate of fair value can be made. Future
environmental expenses could cause a material
adverse effect on our business, financial condition, results of operations, liquidity, ability
to pay dividends or stock price.
- 18 -
6. SHAREHOLDERS EQUITY
A summary of the changes in shareholders equity for the three months ended March 31, 2011 is
as follows (in thousands, except share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS |
|
ACCUMULATED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAID |
|
OTHER |
|
|
|
|
COMMON STOCK |
|
PAID-IN |
|
IN EXCESS |
|
COMPREHENSIVE |
|
|
|
|
SHARES |
|
AMOUNT |
|
CAPITAL |
|
OF EARNINGS |
|
LOSS |
|
TOTAL |
|
Balance, December 31, 2010 |
|
|
29,944,155 |
|
|
$ |
299 |
|
|
$ |
368,093 |
|
|
$ |
(52,304 |
) |
|
$ |
(1,153 |
) |
|
$ |
314,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,386 |
|
|
|
|
|
|
|
11,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,111 |
) |
|
|
|
|
|
|
(16,111 |
) |
Stock-based employee compensation expense |
|
|
20 |
|
|
|
|
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
3,450,000 |
|
|
|
35 |
|
|
|
91,954 |
|
|
|
|
|
|
|
|
|
|
|
91,989 |
|
Net unrealized gain on interest rate swap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
569 |
|
|
|
569 |
|
|
|
|
Balance, March 31, 2011 |
|
|
33,394,175 |
|
|
$ |
334 |
|
|
$ |
460,190 |
|
|
$ |
(57,029 |
) |
|
$ |
(584 |
) |
|
$ |
402,911 |
|
|
|
|
The Company is authorized to issue 20,000,000 shares of preferred stock, par value $.01 per
share, of which none were issued as of March 31, 2011 or December 31, 2010.
In the first quarter of 2011, the Company completed a public stock offering of 3,450,000
shares of the Companys common stock, of which 3,000,000 shares were issued in January 2011 and
450,000 shares, representing the underwriters over-allotment, were issued in February 2011.
Substantially all of the aggregate $91,989,000 net proceeds from the issuance of common stock
(after related transaction costs of $264,000) was used to repay a portion of the outstanding
balance under the Companys Credit Agreement and the remainder was used for general corporate
purposes.
7. PROPERTY ACQUISITIONS
CPD NY SALE/LEASEBACK
On January 13, 2011, the Company acquired fee or leasehold title to 59 Mobil-branded gasoline
station and convenience store properties and also took a security interest in six other
Mobil-branded gasoline stations and convenience store properties in a sale/leaseback and loan
transaction with CPD NY Energy Corp. (CPD NY), a subsidiary of Chestnut Petroleum Dist. Inc. The
Companys total investment in the transaction was $111,300,000, which was financed entirely with
borrowings under the Companys Credit Agreement.
The properties were acquired or financed in a simultaneous transaction among ExxonMobil, CPD
NY and the Company whereby CPD NY acquired a portfolio of 65 gasoline station and convenience
stores from ExxonMobil and simultaneously completed a sale/leaseback of 59 of the acquired
properties with the Company. The lease between the Company, as lessor, and CPD NY, as lessee,
governing the properties is a unitary triple-net lease agreement (the CPD Lease), with an initial
term of 15 years, and options for up to three successive renewal terms of ten years each. The CPD
Lease requires CPD NY to pay a fixed
annual rent for the properties (the Rent), plus an amount equal to all rent due to third
party landlords pursuant to the terms of third party leases. The Rent is scheduled to increase on
the third anniversary of the date of the CPD Lease and on every third anniversary thereafter. As a
triple-net lessee, CPD NY is
- 19 -
required to pay all amounts pertaining to the properties subject to
the CPD Lease, including taxes, assessments, licenses and permit fees, charges for public utilities
and all governmental charges. Partial funding to CPD NY for the transaction was also provided by
the Company under a secured, self-amortizing loan having a 10-year term (the CPD Loan).
As of March 31, 2011, the Companys allocation of the purchase price among the assets acquired
is preliminary and subject to change. The purchase price has been allocated among the assets
acquired based on the initial estimates of fair value. These allocations are preliminary and may
not be indicative of the final allocations. The Company continues to evaluate the assumptions used
in valuing the real estate. The Company anticipates finalizing these allocations in the second
quarter of 2011. A change in the final allocation from what is presented may result in an increase
or decrease in identified assets and changes in revenue and expenses, including amortization and
other expenses. A change in the final allocation from what is presented may also result in changes
in the unaudited pro forma condensed consolidated financial information presented below.
The Company estimated the fair value of acquired tangible and assets (consisting of land,
buildings and equipment) as if vacant and intangible assets consisting of above and below market
leases. Based on these estimates, the Company allocated $60,275,000 of the purchase price to land,
which is accounted for as an operating lease, net above and below market leases with landlords of
$10,018,000 which is accounted for as a deferred asset, net above and below market leases with
tenants of $9,652,000 which is accounted for as a deferred liability and $31,390,000 allocated to
buildings and equipment, which is accounted for as a direct financing lease. The future contractual
minimum annual rent receivable from CPD NY on a calendar year basis is as follows: 2011
$8,090,000, 2012 $8,826,000 2013 $8,826,000, 2014 $9,090,000, 2015 $9,090,000, 2016
$9,090,000 and $86,820,000 thereafter.
The following unaudited pro forma condensed consolidated financial information has been
prepared utilizing the historical financial statements of Getty Realty Corp. and the effect of
additional revenue and expenses from the properties acquired assuming that the acquisitions had
occurred as of the beginning of each of the periods presented, after giving effect to certain
adjustments including (a) rental income adjustments resulting from the straight-lining of scheduled
rent increases (b) rental income adjustments resulting from the recognition of revenue under direct
financing leases over the lease term using the effective interest rate method which produces a
constant periodic rate of return on the net investment in the leased property (c) rental income
adjustments resulting from the amortization of above market leases with tenants and (d) rent
expense adjustments resulting from the amortization of below market leases with landlords. The
following information also gives effect to the additional interest expense resulting from the
assumed increase in borrowing outstanding drawn under the Credit Agreement to fund the acquisition.
The unaudited pro forma condensed financial information is not indicative of the results of
operations that would have been achieved had the acquisition from CPD NY reflected herein been
consummated on the dates indicated or that will be achieved in the future.
- 20 -
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
Revenues |
|
$ |
25,466 |
|
|
$ |
25,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
11,768 |
|
|
$ |
14,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net earnings
per common share |
|
$ |
0.36 |
|
|
$ |
0.58 |
|
NOURIA SALE/LEASEBACK
On March 31, 2011, the Company acquired 66 Shell branded gasoline station and convenience
store properties located in and around the Greater Boston and Southern New Hampshire area for
approximately $86,000,000 million, in a sale/leaseback transaction with Nouria Energy Ventures I,
LLC (Nouria), a subsidiary of Nouria Energy Group.
The 66 properties were acquired in a simultaneous transaction among Motiva Enterprises LLC
(Shell), Nouria and Getty Realty Corp. whereby Nouria acquired 66 gasoline station and
convenience stores from Shell and simultaneously completed a sale/leaseback with Getty of the 66
properties under a long-term triple-net unitary lease having an initial term of 20 years plus
renewal options.
As of March 31, 2011, the Companys allocation of the purchase price among the assets acquired
is preliminary and subject to change. The purchase price has been allocated among the assets
acquired based on the initial estimates of fair value. These allocations are preliminary and may
not be indicative of the final allocations. The Company continues to evaluate the assumptions used
in valuing the real estate. The Company anticipates finalizing these allocations in the second
quarter of 2011. A change in the final allocation from what is presented may result in an increase
or decrease in identified assets and changes in revenue and expenses, including amortization and
other expenses. A change in the final allocation from what is presented may also result in changes
in the unaudited pro forma condensed consolidated financial information presented below.
The Company estimated the fair value of acquired tangible and assets (consisting of land,
buildings and equipment) as if vacant and intangible assets consisting of above and below market
leases. Based on these estimates, the Company allocated $47,810,000 of the purchase price to land,
which is accounted for as an operating lease, net above and below market leases with landlords of
$3,781,000, which is accounted for as a deferred asset, net above and below market leases with
tenants of $3,638,000, which is accounted for as a deferred liability, $25,370,000 to buildings and
equipment, which is accounted for as a direct financing lease and $12,000,000 which is accounted
for in notes, mortgages and accounts receivable, net. The future contractual minimum annual rent
receivable from Nouria on a calendar year basis is as follows: 2011 $6,431,000, 2012
$8,675,000 2013 $8,812,000, 2014 $8,952,000, 2015 $9,095,000, 2016 $9,240,000 and
$131,043,000 thereafter.
The following unaudited pro forma condensed consolidated financial information has been
prepared utilizing the historical financial statements of Getty Realty Corp. and the effect of
additional revenue and expenses from the properties acquired assuming that the acquisitions had
occurred as of the beginning of
each of the periods presented, after giving effect to certain adjustments including (a) rental
income adjustments resulting from the straight-lining of scheduled rent increases (b) rental income
adjustments resulting from the recognition of revenue under direct financing leases over the lease
term using the effective interest rate method which produces a constant periodic rate of return on
the net investment in
- 21 -
the leased property (c) rental income adjustments resulting from the
amortization of above market leases with tenants and (d) rent expense adjustments resulting from
the amortization of below market leases with landlords. The following information also gives effect
to the additional interest expense resulting from the assumed increase in borrowing outstanding
drawn under the Credit Agreement to fund the acquisition. The unaudited pro forma condensed
financial information is not indicative of the results of operations that would have been achieved
had the acquisition from Nouria reflected herein been consummated on the dates indicated or that
will be achieved in the future.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
Revenues |
|
$ |
27,278 |
|
|
$ |
24,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
13,268 |
|
|
$ |
13,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net earnings
per common share |
|
$ |
0.41 |
|
|
$ |
0.56 |
|
The following unaudited pro forma condensed consolidated financial information has been
prepared utilizing the historical financial statements of Getty Realty Corp. and the combined
effect of additional revenue and expenses from the properties acquired from both CPD NY and Nouria
assuming that the acquisitions had occurred as of the beginning of each of the periods presented,
after giving effect to certain adjustments including (a) rental income adjustments resulting from
the straight-lining of scheduled rent increases (b) rental income adjustments resulting from the
recognition of revenue under direct financing leases over the lease term using the effective
interest rate method which produces a constant periodic rate of return on the net investment in the
leased property (c) rental income adjustments resulting from the amortization of above market
leases with tenants and (d) rent expense adjustments resulting from the amortization of below
market leases with landlords . The following information also gives effect to the additional
interest expense resulting from the assumed increase in borrowing outstanding drawn under the
Credit Agreement to fund the acquisitions. The unaudited pro forma condensed financial information
is not indicative of the results of operations that would have been achieved had the acquisition
from CPD NY and Nouria reflected herein been consummated on the dates indicated or that will be
achieved in the future.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
Revenues |
|
$ |
27,711 |
|
|
$ |
27,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
13,650 |
|
|
$ |
16,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net earnings
per common share |
|
$ |
0.42 |
|
|
$ |
0.65 |
|
- 22 -
8. SUPPLEMENTAL CONDENSED COMBINING FINANCIAL INFORMATION
Condensed combining financial information as of March 31, 2011 and December 31, 2010 and for
the three months ended March 31, 2011 and 2010 has been derived from the Companys books and
records and is provided below to illustrate, for informational purposes only, the net contribution
to the Companys financial results that are realized from the leasing operations of properties
leased to Marketing (which represents approximately 69% of the Companys properties as of March 31,
2011) and from properties leased to other tenants. The condensed combining financial information
set forth below presents the results of operations, net assets, and cash flows of the Company,
related to Marketing, the Companys other tenants and the Companys corporate functions necessary
to arrive at the information for the Company on a combined basis. The assets, liabilities, lease
agreements and other leasing operations attributable to the Marketing Leases and other tenant
leases are not segregated in legal entities. However, the Company generally maintains its books and
records in site specific detail and has classified the operating results which are clearly
applicable to each owned or leased property as attributable to Marketing or to the Companys other
tenants or to non-operating corporate functions. The condensed combining financial information has
been prepared by the Company using certain assumptions, judgments and allocations. Each of the
Companys properties were classified as attributable to Marketing, other tenants or corporate for
all periods presented based on the propertys use as of March 31, 2011 or the propertys use
immediately prior to its disposition or third party lease expiration.
Environmental remediation expenses have been attributed to Marketing or other tenants on a
site specific basis and environmental related litigation expenses and professional fees have been
attributed to Marketing or other tenants based on the pro rata share of specifically identifiable
environmental expenses for the three years and three months ended March 31, 2011. The Company
enters into leases and various other agreements which allocate responsibility for known and unknown
environmental liabilities by establishing the percentage and method of allocating responsibility
between the parties. In accordance with the leases with certain tenants, the Company has agreed to
bring the leased properties with known environmental contamination to within applicable standards,
and to either regulatory or contractual closure (Closure). Generally, upon achieving Closure at
each individual property, the Companys environmental liability under the lease for that property
will be satisfied and future remediation obligations will be the responsibility of the Companys
tenant. Of the 813 properties leased to Marketing as of March 31, 2011, the Company has agreed to
pay all costs relating to, and to indemnify Marketing for, certain environmental liabilities and
obligations at 176 retail properties that have not achieved Closure and are scheduled in the Master
Lease. (See note 5 for additional information.)
The heading Corporate in the statements below includes assets, liabilities, income and
expenses attributed to general and administrative functions, financing activities and parent or
subsidiary level income taxes, capital taxes or franchise taxes which were not incurred on behalf
of the Companys leasing operations and are not reasonably allocable to Marketing or other tenants.
With respect to general and administrative expenses, the Company has attributed those expenses
clearly applicable to Marketing and other tenants. The Company considered various methods of
allocating to Marketing and other tenants
amounts included under the heading Corporate and determined that none of the methods
resulted in a reasonable allocation of such amounts or an allocation of such amounts that more
clearly summarizes the net contribution to the Companys financial results realized from the
leasing operations of properties leased to Marketing and of properties leased to other tenants.
Moreover, the Company determined that
- 23 -
each of the allocation methods it considered resulted in a
presentation of these amounts that would make it more difficult to understand the clearly
identifiable results from its leasing operations attributable to Marketing and other tenants. The
Company believes that the segregated presentation of assets, liabilities, income and expenses
attributed to general and administrative functions, financing activities and parent or subsidiary
level income taxes, capital taxes or franchise taxes provides the most meaningful presentation of
these amounts since changes in these amounts are not fully correlated to changes in the Companys
leasing activities.
While the Company believes these assumptions, judgments and allocations are reasonable, the
condensed combining financial information is not intended to reflect what the net results would
have been had assets, liabilities, lease agreements and other operations attributable to Marketing
or its other tenants had been conducted through stand-alone entities during any of the periods
presented.
The condensed combining balance sheet of Getty Realty Corp. as of March 31, 2011 is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Getty |
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum |
|
|
Other |
|
|
|
|
|
|
|
|
|
Marketing |
|
|
Tenants |
|
|
Corporate |
|
|
Consolidated |
|
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
$ |
136,578 |
|
|
$ |
224,351 |
|
|
$ |
|
|
|
$ |
360,929 |
|
Buildings and improvements |
|
|
151,668 |
|
|
|
98,229 |
|
|
|
371 |
|
|
|
250,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
288,246 |
|
|
|
322,580 |
|
|
|
371 |
|
|
|
611,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and
amortization |
|
|
(119,392 |
) |
|
|
(26,451 |
) |
|
|
(203 |
) |
|
|
(146,046 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate, net |
|
|
168,854 |
|
|
|
296,129 |
|
|
|
168 |
|
|
|
465,151 |
|
Net investment in direct financing leases |
|
|
|
|
|
|
77,251 |
|
|
|
|
|
|
|
77,251 |
|
Deferred rent receivable, net |
|
|
20,868 |
|
|
|
6,477 |
|
|
|
|
|
|
|
27,345 |
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
23,422 |
|
|
|
23,422 |
|
Recoveries from state underground storage
tank funds, net |
|
|
3,891 |
|
|
|
91 |
|
|
|
|
|
|
|
3,982 |
|
Note, mortgages and accounts receivable, net |
|
|
17 |
|
|
|
30,965 |
|
|
|
1,186 |
|
|
|
32,168 |
|
Prepaid expenses and other assets |
|
|
|
|
|
|
18,042 |
|
|
|
3,191 |
|
|
|
21,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
193,630 |
|
|
|
428,955 |
|
|
|
27,967 |
|
|
|
650,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under credit line |
|
|
|
|
|
|
|
|
|
|
160,000 |
|
|
|
160,000 |
|
Term loan |
|
|
|
|
|
|
|
|
|
|
23,395 |
|
|
|
23,395 |
|
Environmental remediation costs |
|
|
13,624 |
|
|
|
1,088 |
|
|
|
|
|
|
|
14,712 |
|
Dividends payable |
|
|
|
|
|
|
|
|
|
|
16,111 |
|
|
|
16,111 |
|
Accounts payable and accrued expenses |
|
|
917 |
|
|
|
23,546 |
|
|
|
8,960 |
|
|
|
33,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
14,541 |
|
|
|
24,634 |
|
|
|
208,466 |
|
|
|
247,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets (liabilities) |
|
$ |
179,089 |
|
|
$ |
404,321 |
|
|
$ |
(180,499 |
) |
|
$ |
402,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 24 -
The condensed combining balance sheet of Getty Realty Corp. as of December 31, 2010 is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Getty |
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum |
|
|
Other |
|
|
|
|
|
|
|
|
|
Marketing |
|
|
Tenants |
|
|
Corporate |
|
|
Consolidated |
|
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
$ |
137,151 |
|
|
$ |
116,262 |
|
|
$ |
|
|
|
$ |
253,413 |
|
Buildings and improvements |
|
|
152,570 |
|
|
|
98,233 |
|
|
|
371 |
|
|
|
251,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289,721 |
|
|
|
214,495 |
|
|
|
371 |
|
|
|
504,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and
amortization |
|
|
(118,784 |
) |
|
|
(25,241 |
) |
|
|
(192 |
) |
|
|
(144,217 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate, net |
|
|
170,937 |
|
|
|
189,254 |
|
|
|
179 |
|
|
|
360,370 |
|
Net investment in direct financing lease |
|
|
|
|
|
|
20,540 |
|
|
|
|
|
|
|
20,540 |
|
Deferred rent receivable, net |
|
|
21,221 |
|
|
|
6,164 |
|
|
|
|
|
|
|
27,385 |
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
6,122 |
|
|
|
6,122 |
|
Recoveries from state underground
storage tank funds, net |
|
|
3,874 |
|
|
|
92 |
|
|
|
|
|
|
|
3,966 |
|
Mortgages and accounts receivable, net |
|
|
13 |
|
|
|
509 |
|
|
|
1,274 |
|
|
|
1,796 |
|
Prepaid expenses and other assets |
|
|
|
|
|
|
3,444 |
|
|
|
3,521 |
|
|
|
6,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
196,045 |
|
|
|
220,003 |
|
|
|
11,096 |
|
|
|
427,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under credit line |
|
|
|
|
|
|
|
|
|
|
41,300 |
|
|
|
41,300 |
|
Term loan |
|
|
|
|
|
|
|
|
|
|
23,590 |
|
|
|
23,590 |
|
Environmental remediation costs |
|
|
13,841 |
|
|
|
1,033 |
|
|
|
|
|
|
|
14,874 |
|
Dividends payable |
|
|
|
|
|
|
|
|
|
|
14,432 |
|
|
|
14,432 |
|
Accounts payable and accrued expenses |
|
|
962 |
|
|
|
6,953 |
|
|
|
10,098 |
|
|
|
18,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
14,803 |
|
|
|
7,986 |
|
|
|
89,420 |
|
|
|
112,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets (liabilities) |
|
$ |
181,242 |
|
|
$ |
212,017 |
|
|
$ |
(78,324 |
) |
|
$ |
314,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 25 -
The condensed combining statement of operations of Getty Realty Corp. for the three
months ended March 31, 2011 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Getty |
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum |
|
|
Other |
|
|
|
|
|
|
|
|
|
Marketing |
|
|
Tenants |
|
|
Corporate |
|
|
Consolidated |
|
Revenues from rental properties |
|
$ |
14,810 |
|
|
$ |
10,215 |
|
|
$ |
|
|
|
$ |
25,025 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental property expenses |
|
|
1,417 |
|
|
|
1,930 |
|
|
|
139 |
|
|
|
3,486 |
|
Impairment charges |
|
|
994 |
|
|
|
|
|
|
|
|
|
|
|
994 |
|
Environmental expenses, net |
|
|
1,101 |
|
|
|
26 |
|
|
|
|
|
|
|
1,127 |
|
General and administrative expenses |
|
|
31 |
|
|
|
1,664 |
|
|
|
3,190 |
|
|
|
4,885 |
|
Depreciation and amortization expense |
|
|
1,041 |
|
|
|
1,274 |
|
|
|
10 |
|
|
|
2,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
4,584 |
|
|
|
4,894 |
|
|
|
3,339 |
|
|
|
12,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
10,226 |
|
|
|
5,321 |
|
|
|
(3,339 |
) |
|
|
12,208 |
|
Other income, net |
|
|
|
|
|
|
|
|
|
|
411 |
|
|
|
411 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
(1,319 |
) |
|
|
(1,319 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
|
|
10,226 |
|
|
|
5,321 |
|
|
|
(4,247 |
) |
|
|
11,300 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operating activities |
|
|
20 |
|
|
|
(2 |
) |
|
|
|
|
|
|
18 |
|
Gains on dispositions of real estate |
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations |
|
|
88 |
|
|
|
(2 |
) |
|
|
|
|
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
10,314 |
|
|
$ |
5,319 |
|
|
$ |
(4,247 |
) |
|
$ |
11,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The condensed combining statement of operations of Getty Realty Corp. for the three
months ended March 31, 2010 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Getty |
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum |
|
|
Other |
|
|
|
|
|
|
|
|
|
Marketing |
|
|
Tenants |
|
|
Corporate |
|
|
Consolidated |
|
Revenues from rental properties |
|
$ |
14,814 |
|
|
$ |
7,635 |
|
|
$ |
|
|
|
$ |
22,449 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental property expenses |
|
|
1,907 |
|
|
|
1,076 |
|
|
|
233 |
|
|
|
3,216 |
|
Environmental expenses, net |
|
|
1,516 |
|
|
|
36 |
|
|
|
|
|
|
|
1,552 |
|
General and administrative expenses |
|
|
32 |
|
|
|
33 |
|
|
|
2,273 |
|
|
|
2,338 |
|
Depreciation and amortization expense |
|
|
1,061 |
|
|
|
1,322 |
|
|
|
8 |
|
|
|
2,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
4,516 |
|
|
|
2,467 |
|
|
|
2,514 |
|
|
|
9,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
10,298 |
|
|
|
5,168 |
|
|
|
(2,514 |
) |
|
|
12,952 |
|
Other income (expense), net |
|
|
|
|
|
|
|
|
|
|
121 |
|
|
|
121 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
(1,494 |
) |
|
|
(1,494 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
|
|
10,298 |
|
|
|
5,168 |
|
|
|
(3,887 |
) |
|
|
11,579 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operating activities |
|
|
31 |
|
|
|
(15 |
) |
|
|
|
|
|
|
16 |
|
Gains on dispositions of real estate |
|
|
284 |
|
|
|
26 |
|
|
|
|
|
|
|
310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations |
|
|
315 |
|
|
|
11 |
|
|
|
|
|
|
|
326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
10,613 |
|
|
$ |
5,179 |
|
|
$ |
(3,887 |
) |
|
$ |
11,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 26 -
The condensed combining statement of cash flows of Getty Realty Corp. for the three
months ended March 31, 2011 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Getty |
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum |
|
|
Other |
|
|
|
|
|
|
|
|
|
Marketing |
|
|
Tenants |
|
|
Corporate |
|
|
Consolidated |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
10,314 |
|
|
$ |
5,319 |
|
|
$ |
(4,247 |
) |
|
$ |
11,386 |
|
Adjustments to reconcile net earnings (loss) to net cash flow
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
1,041 |
|
|
|
1,274 |
|
|
|
10 |
|
|
|
2,325 |
|
Impairment charges |
|
|
994 |
|
|
|
|
|
|
|
|
|
|
|
994 |
|
Gain from dispositions of real estate |
|
|
(68 |
) |
|
|
|
|
|
|
|
|
|
|
(68 |
) |
Deferred rental revenue |
|
|
353 |
|
|
|
(313 |
) |
|
|
|
|
|
|
40 |
|
Amortization of above-market and below-market leases |
|
|
|
|
|
|
(135 |
) |
|
|
|
|
|
|
(135 |
) |
Amortization of investment in direct financing lease |
|
|
|
|
|
|
89 |
|
|
|
|
|
|
|
89 |
|
Accretion expense |
|
|
133 |
|
|
|
3 |
|
|
|
|
|
|
|
136 |
|
Stock-based employee compensation expense |
|
|
|
|
|
|
|
|
|
|
143 |
|
|
|
143 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries from state underground storage tank funds, net |
|
|
60 |
|
|
|
3 |
|
|
|
|
|
|
|
63 |
|
Mortgages and accounts receivable, net |
|
|
(4 |
) |
|
|
(56 |
) |
|
|
|
|
|
|
(60 |
) |
Prepaid expenses and other assets |
|
|
|
|
|
|
(205 |
) |
|
|
445 |
|
|
|
240 |
|
Environmental remediation costs |
|
|
(427 |
) |
|
|
50 |
|
|
|
|
|
|
|
(377 |
) |
Accounts payable and accrued expenses |
|
|
(45 |
) |
|
|
770 |
|
|
|
(569 |
) |
|
|
156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow provided by (used in) operating activities |
|
|
12,351 |
|
|
|
6,799 |
|
|
|
(4,218 |
) |
|
|
14,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property acquisitions and capital expenditures |
|
|
|
|
|
|
(165,393 |
) |
|
|
|
|
|
|
(165,393 |
) |
Proceeds from dispositions of real estate |
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
116 |
|
Decrease in cash held for property acquisitions |
|
|
|
|
|
|
|
|
|
|
60 |
|
|
|
60 |
|
(Issuance of) collection of notes and mortgages receivable, net |
|
|
|
|
|
|
(30,400 |
) |
|
|
88 |
|
|
|
(30,312 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow provided by (used in) investing activities |
|
|
116 |
|
|
|
(195,793 |
) |
|
|
148 |
|
|
|
(195,529 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under credit agreement, net |
|
|
|
|
|
|
|
|
|
|
118,700 |
|
|
|
118,700 |
|
Repayments under term loan agreement |
|
|
|
|
|
|
|
|
|
|
(195 |
) |
|
|
(195 |
) |
Cash dividends paid |
|
|
|
|
|
|
|
|
|
|
(14,432 |
) |
|
|
(14,432 |
) |
Credit agreement origination costs |
|
|
|
|
|
|
|
|
|
|
(175 |
) |
|
|
(175 |
) |
Net proceeds from issuance of common stock |
|
|
|
|
|
|
|
|
|
|
91,989 |
|
|
|
91,989 |
|
Security deposits received |
|
|
|
|
|
|
2,010 |
|
|
|
|
|
|
|
2,010 |
|
Cash consolidation Corporate |
|
|
(12,467 |
) |
|
|
186,984 |
|
|
|
(174,517 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow (used in) provided by financing activities |
|
|
(12,467 |
) |
|
|
188,994 |
|
|
|
21,370 |
|
|
|
197,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
17,300 |
|
|
|
17,300 |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
|
|
|
|
6,122 |
|
|
|
6,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
|
|
|
$ |
|
|
|
$ |
23,422 |
|
|
$ |
23,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 27 -
The condensed combining statement of cash flows of Getty Realty Corp. for the three
months ended March 31, 2010 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Getty |
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum |
|
|
Other |
|
|
|
|
|
|
|
|
|
Marketing |
|
|
Tenants |
|
|
Corporate |
|
|
Consolidated |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
10,613 |
|
|
$ |
5,179 |
|
|
$ |
(3,887 |
) |
|
$ |
11,905 |
|
Adjustments to reconcile net earnings (loss) to net cash flow
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
1,064 |
|
|
|
1,323 |
|
|
|
8 |
|
|
|
2,395 |
|
Impairment charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from dispositions of real estate |
|
|
(284 |
) |
|
|
(26 |
) |
|
|
|
|
|
|
(310 |
) |
Deferred rental revenue |
|
|
324 |
|
|
|
(462 |
) |
|
|
|
|
|
|
(138 |
) |
Amortization of above-market and below-market leases |
|
|
|
|
|
|
(173 |
) |
|
|
|
|
|
|
(173 |
) |
Amortization of investment in direct financing leases |
|
|
|
|
|
|
(73 |
) |
|
|
|
|
|
|
(73 |
) |
Accretion expense |
|
|
161 |
|
|
|
4 |
|
|
|
|
|
|
|
165 |
|
Stock-based employee compensation expense |
|
|
|
|
|
|
|
|
|
|
106 |
|
|
|
106 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries from state underground storage tank funds, net |
|
|
(211 |
) |
|
|
(31 |
) |
|
|
|
|
|
|
(242 |
) |
Mortgages and accounts receivable, net |
|
|
(33 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
(63 |
) |
Prepaid expenses and other assets |
|
|
|
|
|
|
(174 |
) |
|
|
(179 |
) |
|
|
(353 |
) |
Environmental remediation costs |
|
|
(645 |
) |
|
|
880 |
|
|
|
|
|
|
|
235 |
|
Accounts payable and accrued expenses |
|
|
274 |
|
|
|
(251 |
) |
|
|
282 |
|
|
|
305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow provided by (used in) operating activities |
|
|
11,263 |
|
|
|
6,166 |
|
|
|
(3,670 |
) |
|
|
13,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property acquisitions and capital expenditures |
|
|
|
|
|
|
(1,500 |
) |
|
|
|
|
|
|
(1,500 |
) |
Proceeds from dispositions of real estate |
|
|
414 |
|
|
|
225 |
|
|
|
|
|
|
|
639 |
|
Increase in cash held for property acquisitions |
|
|
|
|
|
|
|
|
|
|
1,124 |
|
|
|
1,124 |
|
Collection of mortgages receivable, net |
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow provided by (used in) investing activities |
|
|
414 |
|
|
|
(1,275 |
) |
|
|
1,158 |
|
|
|
297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments under credit agreement, net |
|
|
|
|
|
|
|
|
|
|
(2,000 |
) |
|
|
(2,000 |
) |
Repayments under term loan agreement, net |
|
|
|
|
|
|
|
|
|
|
(195 |
) |
|
|
(195 |
) |
Cash dividends paid |
|
|
|
|
|
|
|
|
|
|
(11,842 |
) |
|
|
(11,842 |
) |
Security deposits received |
|
|
|
|
|
|
72 |
|
|
|
|
|
|
|
72 |
|
Cash consolidation Corporate |
|
|
(11,677 |
) |
|
|
(4,963 |
) |
|
|
16,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow (used in) provided by financing activities |
|
|
(11,677 |
) |
|
|
(5,035 |
) |
|
|
2,603 |
|
|
|
(13,965 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
91 |
|
|
|
91 |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
|
|
|
|
3,050 |
|
|
|
3,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,141 |
|
|
$ |
3,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 28 -
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis of financial condition and results of operations should
be read in conjunction with the sections entitled Part I, Item 1A. Risk Factors and Part II,
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations,
which appear in our Annual Report on Form 10-K for the year ended December 31, 2010, and Part I,
Item 1. Financial Statements and Part II, Item 1A. Risk Factors which appear in this Quarterly
Report on Form 10-Q.
GENERAL
Real Estate Investment Trust
We are a real estate investment trust (REIT) specializing in the ownership, leasing and
financing of retail motor fuel and convenience store properties and petroleum distribution
terminals. We elected to be treated as a REIT under the federal income tax laws beginning January
1, 2001. As a REIT, we are not subject to federal corporate income tax on the taxable income we
distribute to our shareholders. In order to continue to qualify for taxation as a REIT, we are
required, among other things, to distribute at least ninety percent of our taxable income to
shareholders each year.
Retail Petroleum Marketing Business
We lease or sublet our properties primarily to distributors and retailers engaged in the sale
of gasoline and other motor fuel products, convenience store products and automotive repair
services. These tenants are responsible for managing the operations conducted at these properties
and for the payment of taxes, maintenance, repair, insurance and other operating expenses relating
to our properties. Our tenants financial results are largely dependent on the performance of the
petroleum marketing industry, which is highly competitive and subject to volatility. In those
instances where we determine that the best use for a property is no longer as a retail motor fuel
outlet, we will seek an alternative tenant or buyer for the property. We lease or sublet
approximately twenty of our properties for uses such as fast food restaurants, automobile sales and
other retail purposes. (For additional information regarding our real estate business and our
properties, see Item 1. Business Real Estate Business and Item 2. Properties which appear in
our Annual Report on Form 10-K for the year ended December 31, 2010.) (For information regarding
factors that could adversely affect us relating to our lessees, including our primary tenant, Getty
Petroleum Marketing Inc., (Marketing) see Item 1A. Risk Factors which appears in our Annual
Report on Form 10-K for the year ended December 31, 2010 and Part II, Item 1A. Risk Factors which
appears in this Quarterly Report on Form 10-Q.)
Marketing and the Marketing Leases
As of March 31, 2011, Marketing leased from us 804 properties under a unitary master lease
(the Master Lease) and nine properties under supplemental leases (collectively with the Master
Lease, the Marketing Leases). The Master Lease has an initial term expiring in December 2015, and
provides Marketing with three renewal options of ten years each and a final renewal option of three
years and ten months extending to 2049. If Marketing elects to exercise any renewal option,
Marketing is required to notify us of such election one year in advance of the commencement of the
renewal term. The Master Lease is a unitary lease and, therefore, Marketings exercise of any
renewal option can only be for all of
- 29 -
the properties subject of the Master Lease. The supplemental leases have initial terms of
varying expiration dates. The Marketing Leases are triple-net leases, pursuant to which Marketing
is responsible for the payment of taxes, maintenance, repair, insurance and other operating
expenses. As of March 31, 2011, Marketing was not operating any of the nine terminals it leases
from us. Also, as of March 31, 2011, Marketing had removed, or has scheduled removal of the
gasoline tanks and related equipment at approximately 165 of our retail properties and we believe
that most of these properties are either vacant or provide negative or marginal contribution to
Marketings results.
Our financial results are materially dependent upon the ability of Marketing to meet its
rental, environmental and other obligations under the Marketing Leases. Marketings financial
results depend on retail petroleum marketing margins from the sale of refined petroleum products
and rental income from its subtenants. Marketings subtenants either operate their gas stations,
convenience stores, automotive repair services or other businesses at our properties or are
petroleum distributors who may operate our properties directly and/or sublet our properties to the
operators. Since a substantial portion of our revenues (59% for the three months ended March 31,
2011) are derived from the Marketing Leases, any factor that adversely affects Marketings ability
to meet its rental, environmental and other obligations under the Marketing Leases may have a
material adverse effect on our business, financial condition, revenues, operating expenses, results
of operations, liquidity, ability to pay dividends or stock price. (For additional information
regarding the portion of our financial results that are attributable to Marketing, see Note 8 in
Item 1. Financial Statements Notes to Consolidated Financial Statements.) (For information
regarding factors that could adversely affect us relating to our lessees, including our primary
tenant, Getty Petroleum Marketing Inc., (Marketing) see Item 1A. Risk Factors which appears in
our Annual Report on Form 10-K for the year ended December 31, 2010 and Part II, Item 1A. Risk
Factors which appears in this Quarterly Report on Form 10-Q.)
On February 28, 2011 OAO LUKoil (Lukoil), one of the largest integrated Russian oil
companies transferred its ownership interest in Marketing to Cambridge Petroleum Holding Inc.
(Cambridge). We are not privy to the terms and conditions pertaining to this transaction between
Lukoil and Cambridge and we do not know what type or amount of consideration, if any, was paid or
is payable by Lukoil or its subsidiaries to Cambridge, or by Cambridge to Lukoil or its
subsidiaries in connection with the transfer. Although we believe that there are certain
contractual relationships between Lukoil and its subsidiaries and Marketing, we have not confirmed
the existence of such agreements and we do not know the terms and conditions of such agreements or
the scope or extent of any ongoing contractual or business relationships between Lukoil or its
subsidiaries and Cambridge or its subsidiaries, including Marketing.
We did not believe that while Lukoil owned Marketing it would allow Marketing to fail to meet
its obligations under the Marketing Leases. However, there can be no assurance that Cambridge will
have the capacity to provide capital or financial support to Marketing or will provide or arrange
for the provision of additional capital investment or financial support to Marketing in the future
that Marketing may require to perform its obligations under the Marketing Leases. We cannot predict
what impact the transfer of Marketing may have on our business. Without financial support, it is
possible that Marketing may file for bankruptcy protection and seek to reorganize or liquidate its
business. It is also possible that Marketing may take other actions in addition to seeking to
modify the terms of the Marketing Leases.
From time to time when it was owned by Lukoil, we held discussions with representatives of
Marketing regarding potential modifications to the Marketing Leases. These discussions did not
result in a common
- 30 -
understanding with Marketing that would form a basis for modification of the Marketing Leases.
After Lukoils transfer of its ownership of Marketing to Cambridge, we commenced discussions with
Marketings new owners and management. Although Marketings new management has indicated a desire
to reduce the number of properties its leases from us under the Marketing Leases in an effort to
improve Marketings financial results, such discussions are currently ongoing and we do not yet
have a definitive understanding of what Marketings business strategy under its new ownership is or
how it may change in the future. We intend to continue our discussions with Marketing and
diligently pursue the removal of properties from the Marketing Leases to the extent we deem it
prudent for us to do so; however, there is no agreement in place providing for removal of a
significant number of properties from the Marketing Leases. Any modification of the Marketing
Leases that removes a significant number of properties from the Marketing Leases would likely
significantly reduce the amount of rent we receive from Marketing and increase our operating
expenses. We cannot accurately predict if, or when, the Marketing Leases will be modified; what
composition of properties, if any, may be removed from the Marketing Leases as part of any such
modification; or what the terms of any agreement for modification of the Marketing Leases may be.
We also cannot accurately predict what actions Marketing may take, and what our recourse may be,
whether the Marketing Leases are modified or not. During the second quarter of 2011 or thereafter,
we may be required to significantly increase or decrease the deferred rent receivable reserve,
record additional impairment charges related to our properties, or accrue for environmental
liabilities as a result of the potential or actual modification or termination of the Marketing
Leases.
As of the date of this Form 10-Q, we have not yet received Marketings unaudited consolidated
financial statements for the year ended December 2010. For the year ended December 31, 2009,
Marketing reported a significant loss, continuing a trend of reporting large losses in recent
years. Based on the interim reports we have received through 2010, Marketings significant losses
have continued. We continue to believe that Marketing likely does not have the ability to generate
cash flows from its business operations sufficient to meet its rental, environmental and other
obligations under the terms of the Marketing Leases unless Marketing shows significant improvement
in its financial results, reduces the number of properties under the Marketing Leases, or receives
additional capital or credit support. There can be no assurance that Marketing will be successful
in any of these efforts. It is possible that the deterioration of Marketings financial condition
may continue or that Marketing may file bankruptcy and seek to reorganize or liquidate its
business. We cannot predict what impact Lukoils transfer of its ownership interest to Cambridge
will have on Marketings ability and willingness to perform its rental, environmental and other
obligations under the Marketing Leases or on our business.
As of March 31, 2011, the net carrying value of the deferred rent receivable attributable to
the Marketing Leases was $20.9 million and the aggregate Marketing Environmental Liabilities (as
defined below), net of expected recoveries from underground storage tank funds, for which we may
ultimately be responsible to pay but have not accrued range between $13 million and $20 million.
The actual amount of the Marketing Environmental Liabilities may be significantly higher than our
estimated range and we can provide no assurance as to the accuracy of our estimate. Although our
financial statements for the three months ended March 31, 2011 were not significantly affected by
the transfer of Lukoils ownership interest in Marketing to Cambridge, our estimates, judgments,
assumptions and beliefs regarding Marketing and the Marketing Leases made effective March 31, 2011
are subject to reevaluation and possible change as we develop a greater understanding of factors
relating to the new ownership and management of Marketing, Marketings business plan and
strategies, its capital resources and we pursue possible modifications to the Marketing Leases. It
is possible that we may be required to significantly
- 31 -
increase or decrease the deferred rent reserve, record additional impairment charges related
to the properties, or accrue for Marketing Environmental Liabilities as a result of changes in our
estimates, judgments, assumptions and beliefs regarding Marketing and the Marketing Leases that
materially affect the amounts reported in our financial statements. It is also possible that as a
result of material adjustments to the amounts recorded for certain of our assets and liabilities
that we may not be in compliance with the financial covenants in our Credit Agreement or Term Loan
Agreement.
In November 2009, Marketing announced a restructuring of its business. Marketing disclosed
that the restructuring included the sale of all assets unrelated to the properties it leases from
us, the elimination of parent-guaranteed debt, and steps to reduce operating costs. Although
Marketings press release stated that its restructuring included the sale of all assets unrelated
to the properties it leases from us, we have concluded, based on the press releases related to the
Marketing/Bionol contract dispute described below, that Marketings restructuring did not include
the sale of all assets unrelated to the properties it leases from us. Marketing sold certain assets
unrelated to the properties it leases from us to its affiliates, LUKOIL Pan Americas LLC and LUKOIL
North America LLC. We believe that Marketing retained other assets, liabilities and business
matters unrelated to the properties it leases from us. As part of the restructuring, Marketing paid
off debt which had been guaranteed or held by Lukoil with proceeds from the sale of assets to
Lukoil affiliates.
In June 2010, Marketing and Bionol each issued press releases regarding a significant
contractual dispute between them. Bionol owns and operates an ethanol plant in Pennsylvania. Bionol
and Marketing entered into a five-year contract under which Marketing agreed to purchase
substantially all of the ethanol production from the Bionol plant, at formula-based prices. Bionol
stated that Marketing breached the contract by not paying the agreed-upon price for the ethanol.
According to Bionols press release, the cumulative gross purchase commitment under the contract
could be on the order of one billion dollars. We cannot predict how the ultimate resolution of this
matter may impact Marketings long-term financial performance and its ability to meet its rental,
environmental and other obligations to us as they become due under the terms of the Marketing
Leases.
We cannot predict what impact Marketings restructuring, dispute with Bionol, other changes in
its business model or other impacts on its business will have on us. If Marketing should fail to
meet its rental, environmental or other obligations to us, such default could lead to a protracted
and expensive process for retaking control of our properties as a result of which, our business,
financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay
dividends or stock price may be materially adversely affected. In addition to the risk of
disruption in rent receipts, we are subject to the risk of incurring real estate taxes,
maintenance, environmental and other expenses at properties subject to the Marketing Leases.
We intend either to re-let or sell any properties removed from the Marketing Leases, whether
such removal arises consensually by negotiation or as a result of default by Marketing, and
reinvest any realized sales proceeds in new properties. We intend to offer properties removed from
the Marketing Leases to replacement tenants or buyers individually, or in groups of properties, or
by seeking a single tenant for the entire portfolio of properties subject to the Marketing Leases.
Although we are the fee or leasehold owner of the properties subject to the Marketing Leases and
the owner of the Getty® brand, and have prior experience with tenants who
operate their gas stations, convenience stores, automotive repair
- 32 -
services or other businesses at our properties, in the event that properties are removed from
the Marketing Leases, we cannot accurately predict if, when, or on what terms such properties could
be re-let or sold.
As permitted under the terms of the Marketing Leases, Marketing generally can, subject to any
contrary terms under applicable third party leases, use each property for any lawful purpose, or
for no purpose whatsoever. As of March 31, 2011, Marketing was not operating any of the nine
terminals it leases from us and had removed, or has scheduled removal of, underground gasoline
storage tanks and related equipment at approximately 165 of our retail properties and we believe
that most of these properties are either vacant or provide negative or marginal contribution to
Marketings results. In those instances where we determine that the best use for a property is no
longer as a retail motor fuel outlet, at the appropriate time we will seek an alternative tenant or
buyer for such property. With respect to properties that are vacant or have had underground
gasoline storage tanks and related equipment removed, it may be more difficult or costly to re-let
or sell such properties as gas stations because of capital costs or possible zoning or permitting
rights that are required and that may have lapsed during the period since gasoline was last sold at
the property. Conversely, it may be easier to re-let or sell properties where underground gasoline
storage tanks and related equipment have been removed if the property will not be used as a retail
motor fuel outlet or if environmental contamination has been or is being remediated.
In accordance with accounting principles generally accepted in the United States of America
(GAAP), the aggregate minimum rent due over the current terms of the Marketing Leases,
substantially all of which are scheduled to expire in December 2015, is recognized on a
straight-line (or an average) basis rather than when payment contractually is due. We record the
cumulative difference between lease revenue recognized under this straight line accounting method
and the lease revenue recognized when payment is due under the contractual payment terms as
deferred rent receivable on our consolidated balance sheets. We provide reserves for a portion of
the recorded deferred rent receivable if circumstances indicate that a property may be disposed of
before the end of the current lease term or if it is not reasonable to assume that a tenant will
make all of its contractual lease payments during the current lease term. Our assessments and
assumptions regarding the recoverability of the deferred rent receivable related to the properties
subject of the Marketing Leases are reviewed on a quarterly basis and such assessments and
assumptions are subject to change.
Based in part on our willingness to negotiate with Marketing for a modification of the
Marketing Leases, and our belief that the Marketing Leases will be modified prior to the expiration
of the current lease term, we believe that it is probable that we will not collect all of the rent
due related to properties we identified as being the most likely to be removed from the Marketing
Leases. As of March 31, 2011 and December 31, 2010, the net carrying value of the deferred rent
receivable attributable to the Marketing leases was $20.9 million and $21.2 million, respectively,
which was comprised of a gross deferred rent receivable of $28.5 million and $29.4 million,
respectively, partially offset by a valuation reserve of $7.6 million and $8.2 million,
respectively. The valuation reserves were estimated based on the deferred rent receivable
attributable to properties identified from time to time as being the most likely to be removed from
the Marketing Leases. We have not provided deferred rent receivable reserves related to the
remaining properties subject to the Marketing Leases since, based on our assessments and
assumptions as of March 31, 2011, we continued to believe that it was probable that we would
collect the deferred rent receivables related to those remaining properties. It is possible that
the deterioration of Marketings financial condition may continue, that Marketing may file
bankruptcy and seek to reorganize or liquidate its business, or that Marketing may seek a reduction
in the rental payments owed under the Marketing
- 33 -
Leases in connection with a removal of properties from the Marketing Leases or otherwise. Our
estimates, judgments, assumptions and beliefs regarding Marketing and the Marketing Leases made
effective March 31, 2011 are subject to reevaluation and possible change as we develop a greater
understanding of factors relating to the new ownership and management of Marketing, and a clearer
understanding of Marketings business plan and strategies and its capital resources. It is possible
that we may change our estimates, judgments, assumptions and beliefs regarding Marketing and the
Marketing Leases, and accordingly, during the second quarter of 2011 or thereafter, we may be
required to significantly increase or decrease our deferred rent receivable reserve or provide
deferred rent receivable reserves related to the remaining properties subject to the Marketing
Leases.
Marketing is directly responsible to pay for (i) remediation of environmental contamination it
causes and compliance with various environmental laws and regulations as the operator of our
properties, and (ii) known and unknown environmental liabilities allocated to Marketing under the
terms of the Marketing Leases and various other agreements with us relating to Marketings business
and the properties it leases from us (collectively the Marketing Environmental Liabilities).
However, we continue to have ongoing environmental remediation obligations at 176 retail sites and
for certain pre-existing conditions at six of the terminals we lease to Marketing. If Marketing
fails to pay the Marketing Environmental Liabilities, we may ultimately be responsible to pay for
Marketing Environmental Liabilities as the property owner. We do not maintain pollution legal
liability insurance to protect from potential future claims for Marketing Environmental
Liabilities. We will be required to accrue for Marketing Environmental Liabilities if we determine
that it is probable that Marketing will not meet its environmental obligations and we can
reasonably estimate the amount of the Marketing Environmental Liabilities for which we will be
responsible to pay, or if our assumptions regarding the ultimate allocation methods or share of
responsibility that we used to allocate environmental liabilities changes. However, as of March 31,
2011 we continued to believe that it was not probable that Marketing would not pay for
substantially all of the Marketing Environmental Liabilities. Accordingly, we did not accrue for
the Marketing Environmental Liabilities as of March 31, 2011 or December 31, 2010. Nonetheless, we
have determined that the aggregate amount of the Marketing Environmental Liabilities (as estimated
by us) would be material to us if we were required to accrue for all of the Marketing Environmental
Liabilities since as a result of such accrual, we would not be in compliance with the existing
financial covenants in our $175.0 million amended and restated senior unsecured revolving Credit
Agreement expiring in March 2012 (the Credit Agreement) and our $25.0 million three-year term
loan agreement expiring in September 2012 (the Term Loan Agreement). Such non-compliance would
result in an event of default under the Credit Agreement and the Term Loan Agreement which, if not
waived, would prohibit us from drawing funds against the Credit Agreement and could result in the
acceleration of our indebtedness under the Credit Agreement and the Term Loan Agreement. Our
estimates, judgments, assumptions and beliefs regarding Marketing and the Marketing Leases made
effective March 31, 2011 are subject to reevaluation and possible change as we develop a greater
understanding of factors relating to the new ownership and management of Marketing, Marketings
business plan and strategies and its capital resources. It is possible that we may change our
estimates, judgments, assumptions and beliefs regarding Marketing and the Marketing Leases, and
accordingly, during the second quarter of 2011 or thereafter, we may be required to accrue for the
Marketing Environmental Liabilities.
We estimate that as of March 31, 2011, the aggregate Marketing Environmental Liabilities, net
of expected recoveries from underground storage tank funds, for which we may ultimately be
responsible to pay range between $13 million and $20 million, of which between $6 million to $9
million relate to the
- 34 -
properties that we identified as the basis for our estimate of the deferred rent receivable
reserve. Although we do not have a common understanding with Marketing that would form a basis for
modification of the Marketing Leases, if the Marketing Leases are modified to remove any
composition of properties, it is not our intention to assume Marketings Environmental Liabilities
related to the properties that are so removed without adequate consideration from Marketing. Since
we generally do not have access to certain site specific information available to Marketing, which
is the party responsible for paying and managing its environmental remediation expenses at our
properties, our estimates were developed in large part by review of the limited publically
available information gathered through electronic databases and freedom of information requests and
assumptions we made based on that data and on our own experiences with environmental remediation
matters. The actual amounts of the ranges estimated above may be significantly higher than our
estimates and we can provide no assurance as to the accuracy of these estimates.
Should our assessments, assumptions and beliefs made effective as of March 31, 2011, prove to
be incorrect or if circumstances change, the conclusions reached by us may change relating to (i)
whether any or what combination of the properties subject to the Marketing Leases are likely to be
removed from the Marketing Leases; (ii) recoverability of the deferred rent receivable for some or
all of the properties subject to the Marketing Leases; (iii) potential impairment of the properties
subject to the Marketing Leases; and (iv) Marketings ability to pay the Marketing Environmental
Liabilities. We intend to regularly review our assumptions that affect the accounting for deferred
rent receivable; long-lived assets; environmental litigation accruals; environmental remediation
liabilities; and related recoveries from state underground storage tank funds. Our estimates,
judgments, assumptions and beliefs regarding Marketing and the Marketing Leases made effective
March 31, 2011 are subject to reevaluation and possible change as we develop a greater
understanding of factors relating to the new ownership and management of Marketing, Marketings
business plan and strategies and its capital resources. Accordingly, it is possible that during the
second quarter of 2011 or thereafter, we may be required to significantly increase or decrease the
deferred rent receivable reserve, record additional impairment charges related to the properties
subject of the Marketing Leases, or accrue for Marketing Environmental Liabilities as a result of
the potential or actual bankruptcy filing by Marketing or as a result of the potential or actual
modification of the Marketing Leases or other factors, which may result in material adjustments to
the amounts recorded for these assets and liabilities, and as a result of which, we may not be in
compliance with the financial covenants in our Credit Agreement and our Term Loan Agreement.
We cannot provide any assurance that Marketing will continue to meet its rental, environmental
or other obligations under the Marketing Leases. In the event that Marketing does not perform its
rental, environmental or other obligations under the Marketing Leases; if the Marketing Leases are
modified significantly or terminated; if we determine that it is probable that Marketing will not
meet its rental, environmental or other obligations and we accrue for certain of such liabilities;
if we are unable to promptly re-let or sell the properties upon recapture from the Marketing
Leases; or, if we change our assumptions that affect the accounting for rental revenue or Marketing
Environmental Liabilities related to the Marketing Leases and various other agreements; our
business, financial condition, revenues, operating expenses, results of operations, liquidity,
ability to pay dividends or stock price may be materially adversely affected.
- 35 -
Supplemental Non-GAAP Measures
We manage our business to enhance the value of our real estate portfolio and, as a REIT, place
particular emphasis on minimizing risk and generating cash sufficient to make required
distributions to shareholders of at least ninety percent of our taxable income each year. In
addition to measurements defined by accounting principles generally accepted in the United States
of America (GAAP), our management also focuses on funds from operations available to common
shareholders (FFO) and adjusted funds from operations available to common shareholders (AFFO)
to measure our performance. FFO is generally considered to be an appropriate supplemental non-GAAP
measure of the performance of REITs. FFO is defined by the National Association of Real Estate
Investment Trusts as net earnings before depreciation and amortization of real estate assets, gains
or losses on dispositions of real estate (including such non-FFO items reported in discontinued
operations), extraordinary items and cumulative effect of accounting change. Other REITs may use
definitions of FFO and/or AFFO that are different than ours and; accordingly, may not be
comparable. Beginning in the first quarter of 2011, we revised our definition of AFFO to exclude
direct expensed costs related to property acquisitions.
We believe that FFO and AFFO are helpful to investors in measuring our performance because
both FFO and AFFO exclude various items included in GAAP net earnings that do not relate to, or are
not indicative of, our fundamental operating performance. FFO excludes various items such as gains
or losses from property dispositions and depreciation and amortization of real estate assets. In
our case, however, GAAP net earnings and FFO typically include the impact of the Revenue
Recognition Adjustments comprised of deferred rental revenue (straight-line rental revenue), the
net amortization of above-market and below-market leases, and income recognized from direct
financing leases on our recognition of revenues from rental properties, as offset by the impact of
related collection reserves. GAAP net earnings and FFO from time to time may also include
impairment charges, property acquisition costs or income tax benefits. Deferred rental revenue
results primarily from fixed rental increases scheduled under certain leases with our tenants. In
accordance with GAAP, the aggregate minimum rent due over the current term of these leases are
recognized on a straight-line (or an average) basis rather than when payment is contractually due.
The present value of the difference between the fair market rent and the contractual rent for
in-place leases at the time properties are acquired is amortized into revenue from rental
properties over the remaining lives of the in-place leases. Income from direct financing leases is
recognized over the lease term using the effective interest method which produces a constant
periodic rate of return on the net investment in the leased property. Impairment of long-lived
assets represents charges taken to write-down real estate assets to fair value estimated when
events or changes in circumstances indicate that the carrying amount of the property may not be
recoverable. Property acquisition costs are expensed, generally in the period when properties are
acquired. In prior periods, income tax benefits have been recognized due to the elimination of, or
a net reduction in, amounts accrued for uncertain tax positions related to being taxed as a
C-corp., rather than as a REIT, prior to 2001.
Management pays particular attention to AFFO, a supplemental non-GAAP performance measure that
we define as FFO less Revenue Recognition Adjustments, impairment charges, property acquisition
costs and income tax benefit. In managements view, AFFO provides a more accurate depiction than
FFO of our fundamental operating performance related to: (i) the impact of scheduled rent increases
under these leases; (ii) the rental revenue earned from acquired in-place leases; (iii) the impact
of rent due from direct financing leases, (iv) our rental operating expenses (exclusive of
impairment charges); (v) our operating expenses (exclusive of direct expensed operating property
acquisition costs) and (vi) our election to be treated as a REIT under the federal income tax laws
beginning in 2001. Neither FFO nor AFFO represent
- 36 -
cash generated from operating activities calculated in accordance with GAAP and therefore
these measures should not be considered an alternative for GAAP net earnings or as a measure of
liquidity.
A reconciliation of net earnings to FFO and AFFO for the three months ended March 31, 2011 and
2010 is as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
Net earnings |
|
$ |
11,386 |
|
|
$ |
11,905 |
|
Depreciation and amortization of real estate assets |
|
|
2,325 |
|
|
|
2,395 |
|
Gains from dispositions of real estate |
|
|
(68 |
) |
|
|
(310 |
) |
|
|
|
|
|
|
|
Funds from operations |
|
|
13,643 |
|
|
|
13,990 |
|
Revenue recognition adjustments |
|
|
(230 |
) |
|
|
(384 |
) |
Impairment charges |
|
|
994 |
|
|
|
|
|
Property acquisition costs |
|
|
1,986 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted funds from operations |
|
$ |
16,393 |
|
|
$ |
13,606 |
|
|
|
|
|
|
|
|
Diluted per share amounts: |
|
|
|
|
|
|
|
|
Earnings per share |
|
$ |
0.35 |
|
|
$ |
0.48 |
|
Funds from operations per share |
|
$ |
0.42 |
|
|
$ |
0.56 |
|
Adjusted funds from operations per share |
|
$ |
0.50 |
|
|
$ |
0.55 |
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average shares outstanding |
|
|
32,504 |
|
|
|
24,769 |
|
RESULTS OF OPERATIONS
Three months ended March 31, 2011 compared to the three months ended March 31, 2010
Revenues from rental properties included in continuing operations increased by $2.6 million to
$25.0 million for the three months ended March 31, 2011, as compared to $22.4 million for the three
months ended March 31, 2010. We received approximately $15.2 million and $15.1 million for the
three months ended March 31, 2011 and March 31, 2010, respectively, from properties leased to
Marketing under the Marketing Leases. We also received rent of $9.6 million for the three months
ended March 31, 2011 and $6.9 million for the three months ended March 31, 2010 from other tenants.
The increase in rent received for the three months ended March 31, 2011 was primarily due to rental
income from 59 properties we acquired from, and leased back to, CPD NY Energy (CPD) in January
2011 and, to a lesser extent, due to rent escalations, partially offset by the effect of
dispositions of real estate and lease expirations. In accordance with GAAP, we recognize rental
revenue in amounts which vary from the amount of rent contractually due or received during the
periods presented. As a result, revenues from rental properties include Revenue Recognition
Adjustments comprised of non-cash adjustments recorded for deferred rental revenue due to the
recognition of rental income on a straight-line basis over the current lease term, net amortization
of above-market and below-market leases and recognition of rental income under a direct financing
lease using the effective interest rate method which produces a constant periodic rate of return on
the net investment in the leased property. Revenue Recognition Adjustments included in continuing
operations increased rental revenue by $0.2 million for the three months ended March 31, 2011, and
$0.4 million for the three months ended March 31, 2010.
- 37 -
Rental property expenses primarily comprised of rent expense and real estate and other state
and local taxes included in continuing operations were $3.5 million for the three months ended
March 31, 2011, as compared to $3.2 million for the three months ended March 31, 2010. The increase
in rental property expenses for the quarter ended March 31, 2011, as compared to the prior year
period, is principally due to $0.2 million of rent expense from the amortization of below-market
leases related to properties acquired in 2011.
Non-cash impairment charges of $1.0 million recorded in the quarter ended March 31, 2011
result from reductions in real estate valuations due to the removal or scheduled removal of
underground storage tanks by Marketing or a reduction in the assumed holding period used to test
for impairment at additional locations requested by Marketing in March 2011 to be removed from the
Master Lease. There were no impairment charges recorded in the quarter ended March 31, 2010.
Environmental expenses, net of estimated recoveries from underground storage tank funds
included in continuing operations for the three months ended March 31, 2011 decreased by $0.5
million to $1.1 million, as compared to $1.6 million for the three months ended March 31, 2010. The
decrease in net environmental expenses for the three months ended March 31, 2011 was primarily due
to a lower provision for estimated environmental remediation costs which decreased by $0.4 million
to $0.5 million for the three months ended March 31, 2011, as compared to $0.9 million recorded for
the three months ended March 31, 2010. Environmental expenses vary from period to period and,
accordingly, undue reliance should not be placed on the magnitude or the direction of change in
reported environmental expenses for one period as compared to prior periods.
General and administrative expenses increased by $2.6 million to $4.9 million for the three
months ended March 31, 2011 as compared to $2.3 million recorded for the three months ended March
31, 2010. The increase in general and administrative expenses was principally due to $2.0 million
of property acquisition costs and higher corporate overhead expenses recorded in the three months
ended March 31, 2011.
Depreciation and amortization expense included in continuing operations decreased by $0.1
million to $2.3 million for the three months ended March 31, 2011, as compared to $2.4 million for
the three months ended March 31, 2010. The decrease was primarily due to the effect of certain
assets becoming fully depreciated, lease terminations and property dispositions.
As a result, total operating expenses increased by $3.3 million to $12.8 million for the three
months ended March 31, 2011, as compared to $9.5 million for the three months ended March 31, 2010.
Other income, net, included in income from continuing operations was $0.4 million for the
three months ended March 31, 2011 and $0.1 million for the three months ended March 31, 2010. The
increase in other income is due to interest income related to an $18.4 million ten-year note issued
in January 2011. Gains from dispositions of real estate included in discontinued operations was
$0.1 million for the three months ended March 31, 2011 and $0.3 million for the three months ended
March 31, 2010. Other income, net varies from period to period and, accordingly, undue reliance
should not be placed on the magnitude or the direction of change in other income reported for one
period as compared to prior periods.
- 38 -
Interest expense decreased by $0.2 million to $1.3 million for the three months ended March
31, 2011, as compared to $1.5 million for the three months ended March 31, 2010. The decrease for
the three months ended March 31, 2011 was due to lower borrowings outstanding and lower weighted
average effective interest rates during the three months ended March 31, 2011, as compared to the
three months ended March 31, 2010. The lower average borrowings outstanding was principally due to
the repayment of a portion of the outstanding balance of our Credit Agreement with a portion of the
net proceeds from public stock offerings of our common stock during the second quarter of 2010 and
the first quarter of 2011. The lower weighted average effective interest rates was caused by
changes in the relative amounts of debt outstanding under our Credit Agreement and Term Loan, (each
described in Liquidity and Capital Resources below).
The operating results and gains from certain dispositions of real estate sold in 2011 and 2010
are reclassified as discontinued operations. The operating results of such properties for the three
months ended March 31, 2010 has also been reclassified to discontinued operations to conform to the
2011 presentation. The results of discontinued operations, primarily comprised of gains on
dispositions of real estate, was $0.1 million for the three months ended March 31, 2011, as
compared to $0.3 million for the three months ended March 31, 2010. The decrease was primarily due
to lower gains on dispositions of real estate. For the three months ended March 31, 2011, there was
one property disposition. For the three months ended March 31, 2010, there were two property
dispositions. Gains on disposition of real estate vary from period to period and accordingly, undue
reliance should not be placed on the magnitude or the directions of change in reported gains for
one period as compared to prior periods.
As a result, earnings from continuing operations decreased by $0.3 million to $11.3 million
for the three months ended March 31, 2011, as compared to $11.6 million for the three months ended
March 31, 2010 and net earnings decreased by $0.5 million to $11.4 million for the three months
ended March 31, 2011, as compared to $11.9 million for the three months ended March 31, 2010.
Excluding the $2.0 million of direct costs related to two portfolio acquisitions that the Company
closed during the quarter, the Companys net earnings for the quarter would have increased by $1.5
million to $13.4 million, and net earnings from continuing operations would have increased by $1.7
million to $13.3 million.
For the three months ended March 31, 2011, FFO decreased by $0.4 million to $13.6 million, as
compared to $14.0 million for the three months ended March 31, 2010, and AFFO increased by $2.8
million to $16.4 million, as compared to $13.6 million for the three months ended March 31, 2010.
The decrease in FFO for the three months ended March 31, 2011 was primarily due to the changes in
net earnings but excludes a $0.1 million decrease in depreciation and amortization expense and a
$0.2 million decrease in gains on dispositions of real estate. The increase in AFFO for the three
months ended March 31, 2011 also excludes a $0.2 million reduction in Rental Revenue Adjustments
which cause our reported revenues from rental properties to vary from the amount of rent payments
contractually due or received by us during the periods presented, $1.0 million of impairment
charges recorded in the quarter ended March 31, 2011 and $2.0 million of property acquisition
expenses recorded in the quarter ended March 31, 2011, (which are included in net earnings and FFO
but are excluded from AFFO).
The calculations of net earnings per share, FFO per share, and AFFO per share for the three
months ended March 31, 2011 were impacted by an increase in the weighted average number of shares
outstanding as a result of the issuance of shares of common stock in 2010 and 2011. The weighted
average number of shares outstanding used in our per share calculations increased by 7.7 million
shares, or 31.2%,
- 39 -
for the three months ended March 31, 2011, as compared to the prior year period. Accordingly,
the percentage or direction of the changes in net earnings, FFO and AFFO discussed above may differ
from the changes in the related per share amounts. Diluted earnings per share was $0.35 per share
for the three months ended March 31, 2011, as compared to $0.48 per share for the three months
ended March 31, 2010. Diluted FFO per share for the three months ended March 31, 2011 was $0.42 per
share, as compared to $0.56 per share for the three months ended March 31, 2010. Diluted AFFO per
share for the three months ended March 31, 2011 was $0.50 per share, as compared to $0.55 per share
for the three months ended March 31, 2010.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are the cash flows from our operations, funds available
under our revolving Credit Agreement that expires in March 2012, described below, and available
cash and cash equivalents. Management believes that our operating cash needs for the next twelve
months can be met by cash flows from operations, borrowings under our existing Credit Agreement and
available cash and cash equivalents. Net cash flow provided by operating activities reported on our
consolidated statement of cash flows for the three months ended March 31, 2011 and 2010 were $14.9
million and $13.8 million, respectively. It is possible that our business operations or liquidity
may be adversely affected by Marketing and the Marketing Leases discussed in General Marketing
and the Marketing Leases above and as a result we may be in default of our Credit Agreement or
Term Loan Agreement which if such default was not cured or waived would prohibit us from drawing
funds against the Credit Agreement. We may be required to enter into alternative loan agreements,
sell assets or issue additional equity at unfavorable terms if we do not have access to funds under
our Credit Agreement.
We cannot accurately predict how periods of illiquidity in the credit markets may impact our
access to capital and the costs associated with any additional borrowings. We may not be able to
obtain additional financing on favorable terms, or at all. If one or more of the financial
institutions that support our Credit Agreement fails, we may not be able to find a replacement,
which would negatively impact our ability to borrow under our Credit Agreement. In addition, we may
not be able to refinance our outstanding debt when due, which could have a material adverse effect
on us.
During the first quarter of 2011, we completed a public stock offering of 3.45 million shares
of our common stock. Substantially all of the $92.3 million net proceeds from the offering was used
to repay a portion of the outstanding balance under our Credit Agreement and the remainder was used
for general corporate purposes.
We are party to a $175.0 million amended and restated senior unsecured revolving credit
agreement (the Credit Agreement) with a group of domestic commercial banks led by JPMorgan Chase
Bank, N.A. (the Bank Syndicate) which expires in March 2012 (on March 10, 2010 we exercised our
option to extend the maturity date of the Credit Agreement for one year). We are considering
amending and extending the term of the existing Credit Agreement or entering into a new revolving
credit agreement. There can be no assurance that before or at the expiration of the Credit
Agreement we will be able to amend the existing Credit Agreement or enter into a new revolving
credit agreement on favorable terms, if at all.
As of March 31, 2011, borrowings under the Credit Agreement were $160.0 million bearing
interest at a rate of 1.31% per annum. We had $15.0 million available under the terms of the Credit
Agreement as of
- 40 -
March 31, 2011. The Credit Agreement does not provide for scheduled reductions in the
principal balance prior to its maturity. The Credit Agreement permits borrowings at an interest
rate equal to the sum of a base rate plus a margin of 0.0% or 0.25% or a LIBOR rate plus a margin
of 1.0%, 1.25% or 1.5%. The applicable margin is based on our leverage ratio at the end of the
prior calendar quarter, as defined in the Credit Agreement, and is adjusted effective mid-quarter
when our quarterly financial results are reported to the Bank Syndicate. Based on our leverage
ratio as of March 31, 2011, the applicable margin will remain at 0.0% for base rate borrowings and
1.0% for LIBOR rate borrowings.
The annual commitment fee on the unused Credit Agreement ranges from 0.10% to 0.20% based on
the average amount of borrowings outstanding. The Credit Agreement contains customary terms and
conditions, including financial covenants such as those requiring us to maintain minimum tangible
net worth, leverage ratios and coverage ratios which may limit our ability to incur debt or pay
dividends. The Credit Agreement contains customary events of default, including change of control,
failure to maintain REIT status and a material adverse effect on our business, assets, prospects or
condition. Any event of default, if not cured or waived, would prohibit us from drawing funds
against the Credit Agreement and could result in the acceleration of our indebtedness under our
Credit Agreement, an inability to draw additional funds from the Credit Agreement and could also
give rise to an event of default and consequent acceleration of our indebtedness under our Term
Loan Agreement. Additionally, in such an event, we may be required to enter into alternative loan
agreements, sell assets or issue additional equity at unfavorable terms if we do not have access to
funds under our Credit Agreement.
We are party to a $45.0 million LIBOR based interest rate Swap Agreement with JPMorgan Chase
Bank, N.A. as the counterparty (the Swap Agreement), effective through June 30, 2011. The Swap
Agreement is intended to hedge our current exposure to market interest rate risk by effectively
fixing, at 5.44%, the LIBOR component of the interest rate determined under our existing LIBOR
based loan agreements. We will be fully exposed to interest rate risk on our aggregate borrowings
floating at market rates upon expiration of the Swap Agreement unless we enter into another swap
agreement.
We are party to a $25.0 million three-year Term Loan Agreement with TD Bank (the Term Loan
Agreement or Term Loan) which expires in September 2012. As of March 31, 2011, borrowings under
the Term Loan Agreement were $23.4 million bearing interest at a rate of 3.5% per annum. The Term
Loan Agreement provides for annual reductions of $0.8 million in the principal balance with a $22.2
million balloon payment due at maturity. The Term Loan Agreement bears interest at a rate equal to
a thirty day LIBOR rate (subject to a floor of 0.4%) plus a margin of 3.1%. The Term Loan Agreement
contains customary terms and conditions, including financial covenants such as those requiring us
to maintain minimum tangible net worth, leverage ratios and coverage ratios and other covenants
which may limit our ability to incur debt or pay dividends. The Term Loan Agreement contains
customary events of default, including change of control, failure to maintain REIT status or a
material adverse effect on our business, assets, prospects or condition. Any event of default, if
not cured or waived, would prohibit us from drawing funds against the Credit Agreement and could
result in the acceleration of our indebtedness under the Term Loan Agreement.
Since we generally lease our properties on a triple-net basis, we do not incur significant
capital expenditures other than those related to acquisitions. As part of our overall business
strategy, we regularly review opportunities to acquire additional properties and we expect to
continue to pursue acquisitions that we believe will benefit our financial performance. Capital
expenditures, including acquisitions, for the
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three months ended March 31, 2011 and 2010 amounted to $165.4 million, and $1.5 million,
respectively. To the extent that our current sources of liquidity are not sufficient to fund
capital expenditures and acquisitions we will require other sources of capital, which may or may
not be available on favorable terms or at all. We cannot accurately predict how periods of
illiquidity in the credit markets may impact our access to capital.
We elected to be treated 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 ninety
percent of our taxable income to shareholders each year. Payment of dividends is subject to market
conditions, our financial condition and other factors, and therefore cannot be assured. In
particular, our Credit Agreement prohibits the payment of dividends during certain events of
default. Dividends paid to our shareholders aggregated $14.4 million and $11.8 million for the
three months ended March 31, 2011 and 2010, respectively. We presently intend to pay common stock
dividends of $0.48 per share each quarter ($1.92 per share, or $64.4 million, on an annual basis
including dividend equivalents paid on outstanding restricted stock units), and commenced doing so
with the quarterly dividend declared in August 2010. Due to the developments related to Marketing
and the Marketing Leases discussed in General -Marketing and the Marketing Leases above, there
can be no assurance that we will be able to continue to pay dividends at the rate of $0.48 per
share per quarter, if at all.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements included in this Quarterly Report on Form 10-Q have been
prepared in conformity with accounting principles generally accepted in the United States of
America. The preparation of financial statements in accordance with GAAP requires management to
make estimates, judgments and assumptions that affect the amounts reported in its financial
statements. Although we have made estimates, judgments and assumptions regarding future
uncertainties relating to the information included in our financial statements, giving due
consideration to the accounting policies selected and materiality, actual results could differ from
these estimates, judgments and assumptions and such differences could be material.
Estimates, judgments and assumptions underlying the accompanying consolidated financial
statements include, but are not limited to, deferred rent receivable, income under direct financing
leases, recoveries from state underground storage tank funds, environmental remediation costs, real
estate, depreciation and amortization, impairment of long-lived assets, litigation, accrued
expenses, income taxes, allocation of the purchase price of properties acquired to the assets
acquired and liabilities assumed and exposure to paying an earnings and profits deficiency
dividend. The information included in our financial statements that is based on estimates,
judgments and assumptions is subject to significant change and is adjusted as circumstances change
and as the uncertainties become more clearly defined.
Our accounting policies are described in note 1 to the consolidated financial statements that
appear in our Annual Report on Form 10-K for the year ended December 31, 2010. We believe that the
more critical of our accounting policies relate to revenue recognition and deferred rent receivable
and related reserves, impairment of long-lived assets, income taxes, environmental costs and
recoveries from state underground storage tank funds, allocation of the purchase price of
properties acquired to the assets acquired and liabilities assumed and litigation, each of which is
discussed in Item 7. Managements Discussion and
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Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K
for the year ended December 31, 2010.
As of March 31, 2010, the net carrying value of the deferred rent receivable attributable to
the Marketing Leases was $20.9 million and the aggregate Marketing Environmental Liabilities, net
of expected recoveries from underground storage tank funds, for which we may ultimately be
responsible to pay but have not accrued range between $13 million and $20 million. The actual
amount of the Marketing Environmental Liabilities may differ from our estimated range and we can
provide no assurance as to the accuracy of our estimate. Although our financial statements for the
three months ended March 31, 2011 and for the year ended December 31, 2010 were not affected by the
transfer of Lukoils ownership interest in Marketing to Cambridge, our estimates, judgments,
assumptions and beliefs regarding Marketing and the Marketing Leases made effective March 31, 2011
are subject to reevaluation and possible change as we develop a greater understanding of factors
relating to the new ownership and management of Marketing, Marketings business plan and strategies
and its capital resources. It is possible that we may be required to increase or decrease the
deferred rent reserve, record additional impairment charges related to the properties, or accrue
for Marketing Environmental Liabilities as a result of changes in our estimates, judgments,
assumptions and beliefs regarding Marketing and the Marketing Leases that affect the amounts
reported in our financial statements. It is also possible that as a result of material adjustments
to the amounts recorded for certain of our assets and liabilities that we may not be in compliance
with the financial covenants in our Credit Agreement or Term Loan Agreement. (See General
Marketing and the Marketing Leases above for additional information.)
ENVIRONMENTAL MATTERS
General
We are subject to numerous existing federal, state and local laws and regulations, including
matters relating to the protection of the environment such as the remediation of known
contamination and the retirement and decommissioning or removal of long-lived assets including
buildings containing hazardous materials, USTs and other equipment. Our tenants are directly
responsible for compliance with various environmental laws and regulations as the operators of our
properties. Environmental expenses are principally attributable to remediation costs which include
installing, operating, maintaining and decommissioning remediation systems, monitoring
contamination, and governmental agency reporting incurred in connection with contaminated
properties. We seek reimbursement from state UST remediation funds related to these environmental
expenses where available.
We enter into leases and various other agreements which allocate responsibility for known and
unknown environmental liabilities by establishing the percentage and method of allocating
responsibility between the parties. In accordance with the leases with certain of our tenants, we
have agreed to bring the leased properties with known environmental contamination to within
applicable standards, and to either regulatory or contractual closure (Closure). 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 March 31, 2011, we have regulatory approval for remediation action plans in place at
217 (92%) of the 237 properties at which we continue to retain remediation responsibility and the
remaining 20 properties (8%) were in the assessment phase. In
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addition, we have nominal post-closure compliance obligations at 31 properties where we have
received no further action letters.
Our tenants are directly responsible to pay for (i) remediation of environmental contamination
they cause and compliance with various environmental laws and regulations as the operators of our
properties, and (ii) environmental liabilities allocated to them under the terms of our leases and
various other agreements. Generally, the liability for the retirement and decommissioning or
removal of USTs and other equipment is the responsibility of our tenants. We are contingently
liable for these obligations in the event that our tenants do not satisfy their responsibilities. A
liability has not been accrued for obligations that are the responsibility of our tenants based on
our tenants past histories of paying such obligations and/or our assessment of their respective
financial abilities to pay their share of such costs. However, there can be no assurance that our
assessments are correct or that our tenants who have paid their obligations in the past will
continue to do so.
It is possible that our assumptions regarding the ultimate allocation methods or share of
responsibility that we used to allocate environmental liabilities may change, which may result in
adjustments to the amounts recorded for environmental litigation accruals, environmental
remediation liabilities and related assets. We will be required to accrue for environmental
liabilities that we believe are allocable to others under various other agreements if we determine
that it is probable that the counter-party will not meet its environmental obligations. We may
ultimately be responsible to pay for environmental liabilities as the property owner if the
counter-party fails to pay them. The ultimate resolution of these matters could have a material
adverse effect on our business, financial condition, results of operations, liquidity, ability to
pay dividends or stock price. (See General Marketing and the Marketing Leases above for
additional information.)
We have also agreed to provide limited environmental indemnification to Marketing, capped at
$4.25 million, for certain pre-existing conditions at six of the terminals we own and lease to
Marketing. Under the indemnification agreement, Marketing is required to pay (and has paid) the
first $1.5 million of costs and expenses incurred in connection with remediating any such
pre-existing conditions, Marketing shares equally with us the next $8.5 million of those costs and
expenses and Marketing is obligated to pay all additional costs and expenses over $10.0 million. We
have accrued $0.3 million as of March 31, 2011 and December 31, 2010 in connection with this
indemnification agreement. Under the Master Lease, we continue to have additional ongoing
environmental remediation obligations at 176 scheduled sites.
As the operator of our properties under the Marketing Leases, Marketing is directly
responsible to pay for the remediation of environmental contamination it causes and to comply with
various environmental laws and regulations. In addition, the Marketing Leases and various other
agreements between Marketing and us allocate responsibility for known and unknown environmental
liabilities between Marketing and us relating to the properties subject to the Marketing Leases. It
is possible that our assumptions regarding the ultimate allocation methods or share of
responsibility that we used to allocate environmental liabilities may change, which may result in
adjustments to the amounts recorded for environmental litigation accruals, environmental
remediation liabilities and related assets. If Marketing fails to pay them, we may ultimately be
responsible to pay for environmental liabilities as the property owner. We are required to accrue
for environmental liabilities that we believe are allocable to Marketing under the Marketing Leases
and various other agreements if we determine that it is probable that Marketing will not pay its
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environmental obligations and we can reasonably estimate the amount of the Marketing
Environmental Liabilities for which we will be responsible to pay.
As of March 31, 2011, we continued to believe that it was not probable that Marketing will not
pay for substantially all of the environmental liabilities allocable to it under the Marketing
Leases and various other agreements and, therefore, have not accrued for such environmental
liabilities. Our assessments and assumptions that affect the recording of environmental liabilities
related to the properties subject to the Marketing Leases are reviewed on a quarterly basis and
such assessments and assumptions are subject to change. It is possible that we may change our
estimates, judgments, assumptions and beliefs regarding Marketing and the Marketing Leases, and
accordingly, we may be required to accrue for the Marketing Environmental Liabilities.
We have determined that the aggregate amount of the environmental liabilities attributable to
Marketing related to our properties (as estimated by us, based on our assumptions and our analysis
of information currently available to us described in more detail above) (the Marketing
Environmental Liabilities) would be material to us if we were required to accrue for all of the
Marketing Environmental Liabilities since as a result of such accrual, we would not be in
compliance with the existing financial covenants in our Credit Agreement and our Term Loan
Agreement. Such non-compliance would result in an event of default under the Credit Agreement and
our Term Loan Agreement which, if not waived, would prohibit us from drawing funds against the
Credit Agreement and could result in the acceleration of our indebtedness under the Credit
Agreement and the Term Loan Agreement. (See General Marketing and the Marketing Leases above
for additional information.)
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. Environmental liabilities and related recoveries are measured based on their expected future
cash flows which have been adjusted for inflation and discounted to present value. The
environmental remediation liability is estimated based on the level and impact of contamination at
each property and other factors described herein. The accrued liability is the aggregate of the
best estimate for 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 an offset to environmental expense, net of
allowance for collection risk, based on estimated recovery rates developed from our experience with
the funds when such recoveries are considered probable.
Environmental exposures are difficult to assess and estimate for numerous reasons, including
the extent of contamination, alternative treatment methods that may be applied, location of the
property which subjects it to differing local laws and regulations and their interpretations, as
well as the time it takes to remediate contamination. In developing our liability for probable and
reasonably estimable environmental remediation costs on a property by property basis, we consider
among other things, enacted laws and regulations, assessments of contamination and surrounding
geology, quality of information available, currently available technologies for treatment,
alternative methods of remediation and prior experience. Environmental accruals are based on
estimates which are subject to significant change, and are adjusted as the remediation treatment
progresses, as circumstances change and as environmental contingencies become more clearly defined
and reasonably estimable.
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As of March 31, 2011, we had accrued $10.7 million as managements best estimate of the net
fair value of reasonably estimable environmental remediation costs which was comprised of $14.7
million of estimated environmental obligations and liabilities offset by $4.0 million of estimated
recoveries from state UST remediation funds, net of allowance. Environmental expenditures, net of
recoveries from UST funds, were $0.6 million and $0.8 million, respectively, for three months ended
March 31, 2011 and 2010. For the three months ended March 31, 2011 and 2010 estimated environmental
remediation cost and accretion expense included in environmental expenses in continuing operations
in our consolidated statements of operations amounted to $0.5 million and $0.9 million,
respectively, which amounts were net of probable recoveries from state UST remediation funds.
Environmental liabilities and related assets are currently measured at fair value based on
their expected future cash flows which have been adjusted for inflation and discounted to present
value. We also use probability weighted alternative cash flow forecasts to determine fair value. We
assumed a 50% probability factor that the actual environmental expenses will exceed engineering
estimates for an amount assumed to equal one year of gross expenses aggregating $5.1 million before
recoveries from UST funds. Accordingly, the environmental accrual as of March 31, 2011 was
increased by $2.0 million, net of assumed recoveries and before inflation and present value
discount adjustments. The resulting net environmental accrual as of March 31, 2011 was then further
increased by $0.8 million for the assumed impact of inflation using an inflation rate of 2.75%.
Assuming a credit-adjusted risk-free discount rate of 7.0%, we then reduced the net environmental
accrual, as previously adjusted, by a $1.8 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 accrued as of March 31, 2011 would have increased by an aggregate of $0.2 million.
However, the aggregate net change in environmental estimates expense recorded during the year ended
March 31, 2011 would not have changed significantly if these changes in the assumptions were made
effective December 31, 2010.
In view of the uncertainties associated with environmental expenditures, contingencies
concerning Marketing and the Marketing Leases and contingencies related to other parties, however,
we believe it is possible that the fair value of future actual net expenditures could be
substantially higher than these estimates. (See General Marketing and the Marketing Leases
above for additional information.) 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. Future environmental costs could cause a material adverse
effect on our business, financial condition, results of operations, liquidity, ability to pay
dividends or stock price.
We cannot accurately 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 accurately predict
if state UST fund programs will be administered and funded in the future in a manner that is
consistent with past practices and if future environmental spending will continue to be eligible
for reimbursement at historical recovery rates under these programs. Compliance with more stringent
laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies or
stricter interpretation of existing laws, which may develop in the future, could have an adverse
effect on our financial position, or that of our tenants, and could require substantial additional
expenditures for future remediation.
- 46 -
Environmental litigation
We are subject to various legal proceedings and claims which arise in the ordinary course of
our business. In addition, we have retained responsibility for certain legal proceedings and claims
relating to the petroleum marketing business that were identified at the time the Companys
petroleum marketing business was spun-off to our shareholders in March 1997. As of March 31, 2011
and December 31, 2010, we had accrued $2.9 million and $3.3 million, respectively, for certain of
these matters which we believe were appropriate based on information then currently available. It
is possible that our assumptions regarding the ultimate allocation method and share of
responsibility that we used to allocate environmental liabilities may change, which may result in
our providing an accrual, or adjustments to the amounts recorded, for environmental litigation
accruals. Matters related to the Lower Passaic River and certain MTBE multi-district litigation
cases, in particular, could cause a material adverse effect on our business, financial condition,
results of operations, liquidity, ability to pay dividends or stock price. See Item 3. Legal
Proceedings which appears in our Annual Report on Form 10-K for the year ended December 31, 2010
for additional information with respect to these and other pending environmental lawsuits and
claims.
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q 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, predicts and similar
expressions, we intend to identify forward-looking statements. Examples of forward-looking
statements include, but are not limited to, statements regarding: our primary tenant, Marketing,
and the Marketing Leases included in Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations Marketing and the Marketing Leases and elsewhere in this
Quarterly Report on Form 10-Q; the impact of any modification or termination of the Marketing
Leases on our business and ability to pay dividends or our stock price; the impact of Lukoils
transfer of its ownership interest in Marketing on Marketings ability or willingness to perform
its rental, environmental and other obligations under the Marketing Leases; the reasonableness of
and assumptions regarding our accounting estimates, judgments, assumptions and beliefs; our beliefs
regarding Marketing and its operations, including our belief that it is not probable that Marketing
will not pay for substantially all of the Marketing Environmental Liabilities; our ability to
predict if, or when, the Marketing Leases will be modified, what composition of properties, if any,
may be removed from the Marketing Leases as part of any such modification; what the terms of any
agreement for modification of the Marketing Leases may be or what our recourse will be if the
Marketing Leases are modified or terminated; our belief that it is not probable that we will not
collect all the rent due related to the properties we identified as being most likely to be removed
from the Marketing Leases; our exposure and liability due to and our estimates and assumptions
regarding our environmental liabilities and remediation costs; our estimates and assumptions
regarding the Marketing Environmental Liabilities and other environmental remediation costs; our
belief that our accruals for environmental and litigation matters were appropriate; compliance with
federal, state and local provisions enacted or adopted pertaining to environmental matters; the
probable outcome of litigation or regulatory actions and its impact on us; our expected recoveries
from underground storage tank funds; our expectations regarding the indemnification obligations of
the Company and others; future acquisitions and financing opportunities and their impact on our
financial performance; our ability to renew expired leases; the adequacy of our current and
anticipated cash flows from operations, borrowings under our Credit Agreement and available cash
and cash equivalents; our expectation as to our continued compliance with
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the financial covenants in our Credit Agreement and our Term Loan Agreement; our ability to
re-let properties at market rents or sell properties and our ability to maintain our federal tax
status as a real estate investment trust (REIT).
These forward-looking statements are based on our current beliefs and assumptions and
information currently available to us, and involve known and unknown risks (including the risks
described herein, those described in Marketing and the Marketing Leases herein, and other risks
that we describe from time to time in this and our other filings with the SEC), uncertainties and
other factors which may cause our actual results, performance and achievements to be materially
different from any future results, performance or achievements expressed or implied by these
forward-looking statements.
These risks include, but are not limited to risks associated with: material dependence on
Marketing as a tenant; the transfer of Lukoils ownership interest in Marketing; the possibility
that Marketing may not perform its rental, environmental or other obligations under the Marketing
Leases; the possibility that Marketing may file for bankruptcy protection and seek to reorganize or
liquidate its business; the impact of Marketings announced restructuring of its business; the
modification or termination of the Marketing Leases; our inability to provide access to financial
information about Marketing; the uncertainty of our estimates, judgments and assumptions associated
with our accounting policies and methods; costs of completing environmental remediation and of
compliance with environmental legislation and regulations; our ability to acquire or develop new
properties; potential future acquisitions; owning and leasing real estate generally; adverse
developments in general business, economic or political conditions; performance of our tenants of
their lease obligations, tenant non-renewal and our ability to re-let or sell vacant properties;
our dependence on external sources of capital; generalized credit market dislocations and
contraction of available credit; our business operations generating sufficient cash for
distributions or debt service; changes in interest rates and our ability to manage or mitigate this
risk effectively; expenses not covered by insurance; potential exposure related to pending lawsuits
and claims; owning real estate primarily concentrated in the Northeast and Mid-Atlantic regions of
the United States; substantially all of our tenants depending on the same industry for their
revenues; the impact of our electing to be treated as a REIT under the federal income tax laws,
including subsequent failure to qualify as a REIT; our potential inability to pay dividends;
changes to our dividend policy; changes in market conditions; adverse affect of inflation; the loss
of a member or members of our management team; and terrorist attacks and other acts of violence and
war.
As a result of these and other factors, we may experience material fluctuations in future
operating results on a quarterly or annual basis, which could materially and adversely affect our
business, financial condition, operating results or stock price. An investment in our stock
involves various risks, including those mentioned above and elsewhere in this report and those that
are described from time to time in our other filings with the SEC.
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.
- 48 -
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Prior to April 2006, when we entered into the swap agreement with JPMorgan Chase, N.A. (the
Swap Agreement), we had not used derivative financial or commodity instruments for trading,
speculative or any other purpose, and had not entered into any instruments to hedge our exposure to
interest rate risk. We do not have any foreign operations, and are therefore not exposed to foreign
currency exchange rate.
We are exposed to interest rate risk, primarily as a result of our $175.0 million Credit
Agreement and our $25.0 million Term Loan Agreement. We use borrowings under the Credit Agreement
to finance acquisitions and for general corporate purposes. We used borrowings under the Term Loan
Agreement to partially finance an acquisition in September 2009. Total borrowings outstanding as of
March 31, 2011 under the Credit Agreement and the Term Loan Agreement were $160.0 million and $23.4
million, respectively, bearing interest at a weighted-average rate of 1.6% per annum, or a
weighted-average effective rate of 2.8% including the impact of the Swap Agreement discussed below.
The weighted-average effective rate is based on (i) $115.0 million of LIBOR rate borrowings
outstanding under the Credit Agreement floating at market rates plus a margin of 1.00%, (ii) $23.4
million of LIBOR based borrowings outstanding under the Term Loan Agreement floating at market
rates (subject to a 30 day LIBOR floor of 0.4%) plus a margin of 3.1% and, (iii) the impact of the
Swap Agreement effectively fixing at 5.44% the LIBOR component on $45.0 million of floating rate
debt. Our Credit Agreement, which expires in March 2012, permits borrowings at an interest rate
equal to the sum of a base rate plus a margin of 0.0% or 0.25% or a LIBOR rate plus a margin of
1.0%, 1.25% or 1.5%. The applicable margin is based on our leverage ratio at the end of the prior
calendar quarter, as defined in the Credit Agreement, and is adjusted effective mid-quarter when
our quarterly financial results are reported to the Bank Syndicate. Based on our leverage ratio as
of March 31, 2011, the applicable margin will remain at 0.0% for base rate borrowings and 1.00% for
LIBOR rate borrowings. It is possible that our business operations or liquidity may be adversely
affected by Marketing and the Marketing Leases discussed in General Marketing and the Marketing
Leases above and as a result we may be in default of our Credit Agreement or Term Loan Agreement
which if such default was not cured or waived would prohibit us from drawing funds against the
Credit Agreement. An event of default if not cured or waived would increase by 2.0% the interest
rate we pay under our Credit Agreement. We may be required to enter into alternative loan
agreements, sell assets or issue additional equity at unfavorable terms if we do not have access to
funds under our Credit Agreement.
We manage our exposure to interest rate risk by minimizing, to the extent feasible, our
overall borrowing and monitoring available financing alternatives. Our interest rate risk as of
March 31, 2011 has increased significantly, as compared to December 31, 2010 primarily as a result
of $113.0 million drawn under the Credit Agreement to finance the transaction with CPD NY and $92.1
million drawn under the Credit Agreement to finance the transaction with Nouria, partially offset
by the repayment of approximately $92.3 of the borrowings then outstanding under the Credit
Agreement with funds primarily received from the proceeds of a 3.45 million share common stock
offering. Our interest rate risk may materially change in the future if we increase our borrowings
under the Credit Agreement, seek other sources of debt or equity capital or refinance our
outstanding debt.
We entered into a $45.0 million LIBOR based interest rate Swap Agreement, effective through
June 30, 2011, to manage a portion of our interest rate risk. The Swap Agreement is intended to
hedge $45.0 million of our current exposure to variable interest rate risk by effectively fixing,
at 5.44%, the LIBOR component of the interest rate determined under our existing loan agreements or
future exposure to variable interest rate risk due to borrowing arrangements that may be entered
into prior to the expiration
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of the Swap Agreement. As a result, we are, and will be, exposed to interest rate risk to the
extent that our aggregate borrowings floating at market rates exceed the $45.0 million notional
amount of the Swap Agreement. As of March 31, 2011, our aggregate borrowings floating at market
rates exceeded the notional amount of the Swap Agreement by $138.4 million. We have not determined
if we will enter into other swap agreements either before or after the expiration of the Swap
Agreement in June 2011. It is possible that we may significantly change how we manage our interest
rate risk in the near future due to, among other factors, the acquisition of properties or seeking
other sources of capital.
We entered into the $45.0 million notional five year interest rate Swap Agreement, designated
and qualifying as a cash flow hedge to reduce our exposure to the variability in future cash flows
attributable to changes in the LIBOR rate. Our primary objective when undertaking hedging
transactions and derivative positions is to reduce our variable interest rate risk by effectively
fixing a portion of the interest rate for existing debt and anticipated refinancing transactions.
This in turn, reduces the risks that the variability of cash flows imposes on variable rate debt.
Our strategy protects us against future increases in interest rates. Although the Swap Agreement is
intended to lessen the impact of rising interest rates, it also exposes us to the risk that the
other party to the agreement will not perform, the agreement will be unenforceable and the
underlying transactions will fail to qualify as a highly-effective cash flow hedge for accounting
purposes. Further, there can be no assurance that the use of an interest rate swap will always be
to our benefit. While the use of an interest rate Swap Agreement is intended to lessen the adverse
impact of rising interest rates, it also conversely limits the positive impact that could be
realized from falling interest rates with respect to the portion of our variable rate debt covered
by the interest rate Swap Agreement.
In the event that we were to settle the Swap Agreement prior to its maturity, if the
corresponding LIBOR swap rate for the remaining term of the Swap Agreement is below the 5.44% fixed
strike rate at the time we settle the Swap Agreement, we would be required to make a payment to the
Swap Agreement counter-party; if the corresponding LIBOR swap rate is above the fixed strike rate
at the time we settle the Swap Agreement, we would receive a payment from the Swap Agreement
counter-party. The amount that we would either pay or receive would equal the present value of the
basis point differential between the fixed strike rate and the corresponding LIBOR swap rate at the
time we settle the Swap Agreement.
Based on our aggregate average outstanding borrowings under the Credit Agreement and the Term
Loan Agreement projected at $183.1 million for 2011, an increase in market interest rates of 0.5%
for 2011 would decrease our 2011 net income and cash flows by $0.8 million. This amount was
determined by calculating the effect of a hypothetical interest rate change on our aggregate
borrowings floating at market rates that is not covered by our $45.0 million interest rate Swap
Agreement through the June 2011 and the full amount of such borrowings after the expiration of the
Swap Agreement, and assumes that the $160.0 million average outstanding borrowings under the Credit
Agreement during the first quarter of 2011 as adjusted to reflect $112.8 million of net incremental
borrowings under the Credit Agreement related to the acquisitions and common stock issuance
completed in the first quarter of 2011 plus the $23.1 million average scheduled outstanding
borrowings for 2011 under the Term Loan Agreement is indicative of our future average borrowings
for 2011 before considering additional borrowings required for future acquisitions or repayment of
outstanding borrowings from proceeds of future equity offerings. The calculation also assumes that
there are no other changes in our financial structure or the terms of our borrowings. Our exposure
to fluctuations in interest rates will increase or decrease in the future with increases or
decreases in the outstanding amount under our Credit Agreement, with decreases in the
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outstanding amount under our Term Loan Agreement and with increases or decreases in amounts
outstanding under borrowing agreements entered into with interest rates floating at market rates.
In order to minimize our exposure to credit risk associated with financial instruments, we
place our temporary cash investments with high-credit-quality institutions. Temporary cash
investments, if any, are currently held in an overnight bank time deposit with JPMorgan Chase Bank,
N.A.
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Item 4. |
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Controls and Procedures |
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Companys reports filed or furnished pursuant to the
Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time
periods specified in the Commissions rules and forms, and that such information is accumulated and
communicated to the Companys 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 the Exchange Act Rule 13a-15(b), the Company has carried out an evaluation,
under the supervision and with the participation of the Companys management, including the
Companys Chief Executive Officer and the Companys Chief Financial Officer, of the effectiveness
of the design and operation of the Companys disclosure controls and procedures as of the end of
the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, the Companys
Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure
controls and procedures were effective as of March 31, 2011.
There have been no changes in the Companys internal control over financial reporting during
the latest fiscal quarter that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Please refer to Item 3. Legal Proceedings of our Annual Report on Form 10-K for the year
ended December 31, 2010, and to note 3 to our accompanying unaudited consolidated financial
statements which appears in this Quarterly Report on Form 10-Q, for additional information.
Item 1A. Risk Factors
There have not been any material changes to the information previously disclosed in Part I,
Item 1A. Risk Factors which appears in our Annual Report on Form 10-K for the year ended December
31, 2010 except as follows:
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Our financial results are materially dependent on the performance of Marketing. In the event
that Marketing does not perform its rental, environmental or other obligations under the Marketing
Leases, our business, financial condition, revenues, operating expenses, results of operations,
liquidity, ability to pay dividends or stock price could be materially adversely affected. The
financial performance of Marketing has deteriorated in recent years.
Our financial results are materially dependent upon the ability of Marketing to meet its
rental, environmental and other obligations under the Marketing Leases. A substantial portion of
our revenues (59% for the three months ended March 31, 2011) are derived from the Marketing Leases.
Accordingly, any factor that adversely affects Marketings ability to meet its rental,
environmental and other obligations under the Marketing Leases may have a material adverse effect
on our business, financial condition, revenues, operating expenses, results of operations,
liquidity, ability to pay dividends or stock price. For additional information regarding the
portion of our financial results that are attributable to Marketing, see Note 8 in Item 1.
Financial Statements Notes to Consolidated Financial Statements.
As of the date of this Form 10-Q, we have not yet received Marketings unaudited consolidated
financial statements for the year ended December 2010. For the year ended December 31, 2009,
Marketing reported a significant loss, continuing a trend of reporting large losses in recent
years. Based on the interim reports we have received through 2010, Marketings significant losses
have continued. We continue to believe that Marketing likely does not have the ability to generate
cash flows from its business operations sufficient to meet its rental, environmental and other
obligations under the terms of the Marketing Leases unless Marketing shows significant improvement
in its financial results, reduces the number of properties under the Marketing Leases, or receives
additional capital or credit support. There can be no assurance that Marketing will be successful
in any of these efforts. It is also possible that the deterioration of Marketings financial
condition may continue or that Marketing may file bankruptcy and seek to reorganize or liquidate
its business. We cannot predict what impact Lukoils transfer of its ownership interest to
Cambridge will have on Marketings ability and willingness to perform its rental, environmental and
other obligations under the Marketing Leases or on our business.
As of March 31, 2011, the net carrying value of the deferred rent receivable attributable to
the Marketing Leases was $20.9 million and the aggregate Marketing Environmental Liabilities (as
defined below), net of expected recoveries from underground storage tank funds, for which we may
ultimately be responsible to pay but have not accrued range between $13 million and $20 million.
The actual amount of the Marketing Environmental Liabilities may be significantly higher than our
estimated range and we can provide no assurance as to the accuracy of our estimate. Although our
financial statements for the three months ended March 31, 2011 were not significantly affected
subsequent to the transfer of Lukoils ownership interest in Marketing to Cambridge, our estimates,
judgments, assumptions and beliefs regarding Marketing and the Marketing Leases made effective
March 31, 2011 are subject to reevaluation and possible change as we develop a greater
understanding of factors relating to the new ownership and management of Marketing, Marketings
business plan and strategies, its capital resources and we pursue possible modifications to the
Marketing Leases. It is possible that we may be required to increase or decrease the deferred rent
reserve, record additional impairment charges related to the properties, or accrue for Marketing
Environmental Liabilities as a result of changes in our estimates, judgments, assumptions and
beliefs regarding Marketing and the Marketing Leases that materially affect the amounts reported in
our financial statements. It is possible also that as a result of material adjustments to the
amounts recorded
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for certain of our assets and liabilities that we may not be in compliance with the financial
covenants in our Credit Agreement or Term Loan Agreement.
If Marketing does not meet its rental, environmental and other obligations under the Marketing
Leases, our business, financial condition, revenues, operating expenses, results of operations,
liquidity, ability to pay dividends or stock price may be materially adversely affected.
Lukoil transferred its ownership interest in Marketing. We cannot predict what impact such
transfer will have on Marketings ability or willingness to perform its rental, environmental and
other obligations under the Master Lease and on our business.
On February 28, 2011, Lukoil, one of the largest integrated Russian oil companies, transferred
its ownership interest in Marketing to Cambridge. We are not privy to the terms and conditions
pertaining to this transaction between Lukoil and Cambridge and we do not know what type or amount
of consideration, if any, was paid or is payable by Lukoil or its subsidiaries to Cambridge, or by
Cambridge to Lukoil or its subsidiaries in connection with the transfer. We do not know if there
are any ongoing contractual or business relationships between Lukoil or its subsidiaries .Although
we believe that there are certain contractual relationships between Lukoil or its subsidiaries and
Marketing, we have not confirmed the existence of such agreements and we do not know the terms and
conditions of such agreements or the scope or extent of any ongoing contractual or business
relationships between Lukoil or its subsidiaries and Cambridge or its subsidiaries, including
Marketing.
We did not believe that while Lukoil owned Marketing it would allow Marketing to fail to meet
its obligations under the Marketing Lease. However, there can be no assurance that Cambridge will
have the capacity to provide capital or financial support to Marketing or will provide or arrange
for the provision of additional capital investment or financial support to Marketing in the future
that Marketing may require to perform its obligations under the Marketing Leases. We cannot predict
what impact the transfer of Marketing may have on our business. Without financial support, it is
possible that Marketing may file for bankruptcy protection and seek to reorganized or liquidate its
business or take other actions in addition to seeking to modify the terms of the Marketing Leases.
If it becomes probable that Marketing will not pay its environmental obligations, or if we
change our assumptions for environmental liabilities related to the Marketing Leases we would be in
default of our Credit Agreement or Term Loan Agreement, our business, financial condition,
revenues, operating expenses, results of operations, liquidity, ability to pay dividends or stock
price could be materially adversely affected.
Marketing is directly responsible to pay for (i) remediation of environmental contamination it
causes and compliance with various environmental laws and regulations as the operator of our
properties, and (ii) known and unknown environmental liabilities allocated to Marketing under the
terms of the Marketing Leases and various other agreements with us relating to Marketings business
and the properties it leases from us (collectively the Marketing Environmental Liabilities).
However, we continue to have ongoing environmental remediation obligations at 176 retail sites and
for certain pre-existing conditions at six of the terminals we lease to Marketing. If Marketing
fails to pay the Marketing Environmental Liabilities, we may ultimately be responsible to pay for
Marketing Environmental Liabilities as the property owner. We
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do not maintain pollution legal liability insurance to protect from potential future claims
for Marketing Environmental Liabilities. We will be required to accrue for Marketing Environmental
Liabilities if we determine that it is probable that Marketing will not meet its environmental
obligations and we can reasonably estimate the amount of the Marketing Environmental Liabilities
for which we will be responsible to pay, or if our assumptions regarding the ultimate allocation
methods or share of responsibility that we used to allocate environmental liabilities changes.
However, as of March 31, 2011 we continue to believe that it is not probable that Marketing will
not pay for substantially all of the Marketing Environmental Liabilities. Accordingly, we have not
accrued for the Marketing Environmental Liabilities as of March 31, 2011 or December 31, 2010.
Nonetheless, we have determined that the aggregate amount of the Marketing Environmental
Liabilities (as estimated by us) would be material to us if we were required to accrue for all of
the Marketing Environmental Liabilities since as a result of such accrual, we would not be in
compliance with the existing financial covenants in our Credit Agreement and our Term Loan
Agreement. Such non-compliance would result in an event of default under the Credit Agreement and
the Term Loan Agreement which, if not waived, would prohibit us from drawing funds against the
Credit Agreement and could result in the acceleration of indebtedness under the Credit Agreement
and Term Loan Agreement. Our estimates, judgments, assumptions and beliefs regarding Marketing and
the Marketing Leases, made effective March 31, 2011 are subject to reevaluation and possible change
as we develop a greater understanding of factors relating to the new ownership and management of
Marketing, Marketings business plan and strategies and its capital resources. It is possible that
we may change our estimates, judgments, assumptions and beliefs regarding Marketing and the
Marketing Leases, and accordingly, during the second quarter of 2011 or thereafter, we may be
required to accrue for the Marketing Environmental Liabilities.
We estimate that as of March 31, 2011, the aggregate Marketing Environmental Liabilities, net
of expected recoveries from underground storage tank funds, for which we may ultimately be
responsible to pay range between $13 million and $20 million, of which between $6 million and $9
million relate to the properties that we identified as the basis for our estimate of the deferred
rent receivable reserve. Since we generally do not have access to certain site specific information
available to Marketing, which is the party responsible for paying and managing its environmental
remediation expenses at our properties, our estimates were developed in large part by review of the
limited publically available information gathered through electronic databases and freedom of
information requests and assumptions we made based on that data and on our own experiences with
environmental remediation matters. The actual amounts of the ranges estimated above may be
significantly higher than our estimates and we can provide no assurance as to the accuracy of these
estimates.
If the Marketing Leases are modified significantly or terminated, our business, financial
condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends
or stock price could be materially adversely affected.
From time to time when it was owned by Lukoil, we held discussions with representatives of
Marketing regarding potential modifications to the Marketing Leases. These discussions did not
result in a common understanding with Marketing that would form a basis for modification of the
Marketing Leases. After Lukoils transfer of its ownership of Marketing to Cambridge, we commenced
discussions with Marketings new owners and management. Although Marketings new management has
indicated a desire to reduce the number of properties its leases from us under the Marketing Leases
in an effort to improve Marketings financial results, such discussions are currently ongoing and
we do not yet have a definitive
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understanding of what Marketings business strategy under its new ownership is or how it may
change in the future. We intend to continue our discussions with Marketing and diligently pursue
the removal of properties from the Marketing Leases to the extent we deem it prudent for it to do
so; however, there is no agreement in place providing for removal of a significant number of
properties from the Marketing Leases. Any modification of the Marketing Leases that removes a
significant number of properties from the Marketing Leases would likely significantly reduce the
amount of rent we receive from Marketing and increase our operating expenses. We cannot accurately
predict if, or when, the Marketing Leases will be modified; what composition of properties, if any,
may be removed from the Marketing Leases as part of any such modification; or what the terms of any
agreement for modification of the Marketing Leases may be. We also cannot accurately predict what
actions Marketing may take, and what our recourse may be, whether the Marketing Leases are modified
or not. During the second quarter of 2011 or thereafter, we may be required to significantly
increase or decrease the deferred rent receivable reserve, record additional impairment charges
related to our properties, or accrue for environmental liabilities as a result of the potential or
actual modification or termination of the Marketing Leases.
As permitted under the terms of the Marketing Leases, Marketing generally can, subject to any
contrary terms under applicable third party leases, use each property for any lawful purpose, or
for no purpose whatsoever. As of March 31, 2011, Marketing was not operating any of the nine
terminals it leases from us and had removed, or has scheduled removal of, the underground gasoline
storage tanks and related equipment at approximately 165 of our retail properties and we believe
that most of these properties are either vacant or provide negative contribution to Marketings
results. In those instances where we determine that the best use for a property is no longer as a
retail motor fuel outlet, at the appropriate time we will seek an alternative tenant or buyer for
such property. With respect to properties that are vacant or have had underground gasoline storage
tanks and related equipment removed, it may be more difficult or costly to re-let or sell such
properties as gas stations because of capital costs or possible zoning or permitting rights that
are required and that may have lapsed during the period since gasoline was last sold at the
property. Conversely, it may be easier to re-let or sell properties where underground gasoline
storage tanks and related equipment have been removed if the property will not be used as a retail
motor fuel outlet or if environmental contamination has been or is being remediated.
We intend either to re-let or sell any properties that are removed from the Marketing Leases,
whether such removal arises consensually by negotiation or as a result of default by Marketing, and
reinvest any realized sales proceeds in new properties. We intend to offer properties removed from
the Marketing Leases to replacement tenants or buyers individually, or in groups of properties, or
by seeking a single tenant for the entire portfolio of properties subject to the Marketing Leases.
In the event that properties are removed from the Marketing Leases, we cannot accurately predict
if, when, or on what terms such properties could be re-let or sold. If the Marketing Leases are
significantly modified or terminated, our business, financial condition, revenues, operating
expenses, results of operations, liquidity, ability to pay dividends or stock price may be
materially adversely affected.
Our accounting policies and methods are fundamental to how we record and report our financial
position and results of operations, and they require management to make estimates, judgments and
assumptions about matters that are inherently uncertain.
Our accounting policies and methods are fundamental to how we record and report our financial
position and results of operations. We have identified several accounting policies as being
critical to the
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presentation of our financial position and results of operations because they require
management to make particularly subjective or complex judgments about matters that are inherently
uncertain and because of the likelihood that materially different amounts would be recorded under
different conditions or using different assumptions. Because of the inherent uncertainty of the
estimates, judgments and assumptions associated with these critical accounting policies, we cannot
provide any assurance that we will not make subsequent significant adjustments to our consolidated
financial statements. Estimates, judgments and assumptions underlying our consolidated financial
statements include, but are not limited to, deferred rent receivable, income under direct financing
leases, recoveries from state UST funds, environmental remediation costs, real estate including
impairment charges related to the reduction in market value of our real estate, depreciation and
amortization, impairment of long-lived assets, litigation, accrued expenses, income taxes and the
allocation of the purchase price of properties acquired to the assets acquired and liabilities
assumed.
For example, we have made judgments regarding the level of environmental reserves and reserves
for our deferred rent receivable relating to Marketing and the Marketing Leases and leases with our
other tenants. As of March 31, 2011, the net carrying value of the deferred rent receivable
attributable to the Marketing Leases was $20.9 million and the aggregate Marketing Environmental
Liabilities, net of expected recoveries from underground storage tank funds, for which we may
ultimately be responsible to pay but not have accrued range between $13 million and $20 million.
The actual amount of the Marketing Environmental Liabilities may be higher than our estimated range
and we can provide no assurance as to the accuracy of our estimate. Although our financial
statements for the three months ended March 31, 2011 were not materially affected by the transfer
of Lukoils ownership interest in Marketing to Cambridge, our estimates, judgments, assumptions and
beliefs regarding Marketing and the Marketing Leases made effective March 31, 2011 are subject to
reevaluation and possible change as we develop a greater understanding of factors relating to the
new ownership and management of Marketing, Marketings business plans, strategies, operating
results and its capital resources. It is possible that during the second quarter of 2011 or
thereafter, we may be required to significantly increase or decrease our deferred rent receivable
reserve, record additional impairment charges related to our properties, or accrue for Marketing
Environmental Liabilities as a result of changes in our estimates, judgments, assumptions and
beliefs regarding Marketing and the Marketing Leases that affect the amounts reported in our
financial statements. It is possible that as a result of material adjustments to the amounts
recorded for certain of our assets and liabilities that we may not be in compliance with the
financial covenants in our Credit Agreement or Term Loan Agreement.
If our judgments, assumptions and allocations prove to be incorrect, or if circumstances
change, our business, financial condition, revenues, operating expense, results of operations,
liquidity, ability to pay dividends or stock price may be materially adversely affected. (For
information regarding our critical accounting policies, see Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations Critical Accounting Policies.)
We may be unable to pay dividends.
Under the Maryland General Corporation Law, our ability to pay dividends would be restricted
if, after payment of the dividend, (1) we would not be able to pay indebtedness as it becomes due
in the usual course of business or (2) our total assets would be less than the sum of our
liabilities plus the amount that would be needed, if we were to be dissolved, to satisfy the rights
of any shareholders with liquidation
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preferences. There currently are no shareholders with liquidation preferences. Our estimates,
judgments, assumptions and beliefs regarding Marketing and the Marketing Leases made effective
March 31, 2011 are subject to reevaluation and possible change as we develop a greater
understanding of factors relating to the new ownership and management of Marketing. (For additional
information regarding Marketing and the Marketing Leases, see Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations General Marketing and the Marketing
Leases.) In addition, our Credit Agreement and our Term Loan Agreement prohibit the payments of
dividends during certain events of default. As a result of the factors described above, we may
experience material fluctuations in future operating results on a quarterly or annual basis, which
could materially and adversely affect our business, and our stock price. No assurance can be given
that our financial performance in the future will permit our payment of any dividends at the level
historically paid, if at all.
Item 4. Other Information
None.
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Item 5. Exhibits
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Exhibit No. |
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Description of Exhibit |
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10.1*
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Unitary Net Lease Agreement between GTY
NY Leasing, Inc., and CPD NY Energy Corp., dated January 13,
2011 |
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31(i).1
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Rule 13a-14(a) Certification of Chief Financial Officer |
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31(i).2
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Rule 13a-14(a) Certification of Chief Executive Officer |
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32.1
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Certification of Chief Executive
Officer pursuant to 18 U.S.C. § 1350 (a) |
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32.2
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Certifications of Chief Financial
Officer pursuant to 18 U.S.C. § 1350 (a) |
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(a) |
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These certifications are being furnished solely to accompany the Report pursuant
to 18 U.S.C. § 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. |
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* |
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Confidential treatment has
been sought for certain portions of this Exhibit pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended,
which portions have been omitted and filed separately with the
Securities and Exchange Commission. |
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SIGNATURES
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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. |
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Getty Realty Corp.
(Registrant)
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BY: /s/ Thomas J. Stirnweis
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(Signature) |
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THOMAS J. STIRNWEIS
Vice President, Treasurer and
Chief Financial Officer
May 12, 2011 |
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BY: /s/ David Driscoll
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(Signature) |
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DAVID DRISCOLL
President and Chief
Executive Officer
May 12, 2011 |
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