Investment Thesis
Each investor has limited capital, and so does mine, so I prefer to allocate capital to industry leading companies with clear growth prospects, strong business metrics, strong balance sheets and unique value drivers.
Getty Realty Corporation (New York Stock Exchange:GTY) boasts some impressive business metrics (occupancy, rent growth, WALT), but falls short of my expectations with regards to rent roll safety (due to high tenant concentration) and financing structure (due to significant debt maturities in 2025/2026). Additionally, there are REITs operating in a similar real estate sector (retail/service oriented) that outperform GTY on an AFFO per share basis.
That said, I remain bearish on GTY and have suggested some better alternatives later in this article.
introduction
GTY is a triple net lease REIT focused on retail/service oriented properties, specifically the convenience gas and automotive sectors. Investors love this sector because of e-commerce. They are recession-proof and durable. We typically target corner lots within densely populated urban areas. As of March 2024GTY owns 1,108 properties across 42 states and Washington, DC, with 68% of the properties located on corner lots.
To further facilitate the discussion, we have set up a reference group consisting of some of the most popular triple net lease REITs operating in the retail/service-oriented real estate sector. The companies are relatively small and have a sufficient number of comparable entities, so we have chosen Realty Income (oh) from the reference group.
You selected:
Table 1: Reference groups
Real thing | Reference basis |
---|---|
NTST | A triple net lease REIT targeting retail and service properties. The number of investment properties is 628. |
EPRT | A triple net lease REIT targeting retail and service properties. Owns 1,937 properties. |
Advanced | A triple net lease REIT targeting commercial and service properties. It owns 2,161 properties. |
NNNN-san | A triple net lease REIT targeting retail and service properties. It owns 3,546 properties. |
Now, let’s review the good and bad points of the GTY!
Good stuff
#1 Lease Structure
GTY generally uses triple net leases A triple net lease is a very advantageous contract for the lessor. In a triple net lease, the lessee is responsible for paying a large amount of the maintenance costs of the property (taxes, repairs, insurance, etc.).
Additionally, these deals usually include annual rent increases, which are generally in the 1% to 2% range. However, GTY’s weighted average annual rent increase is 1.7% (the same as EPRT’s), so it tends to stay on the higher end of this range. For reference, this is pretty impressive. NNN’s annual rent increase rate is about 1.5%.
While these numbers may seem low to some, they are important growth drivers for REITs as they are entirely inherent in the agreements. Additionally, rent increases can have a significant impact on revenue, especially when combined with triple net lease agreements.
#2 High operating rate and solid WALT
The ability to maintain high quality business metrics reflects the quality of a REIT’s overall portfolio. The ability to secure long lease terms within contracts and maintain high occupancy rates ensures predictability and stability of cash flows.
GTY’s weighted average lease term (WALT) of 9.2 is within the benchmark range and can be considered robust given its high single-digit levels. Additionally, GTY’s recent investment activity has enabled it to secure transactions with significantly higher lease terms, which has led to continued improvement in its WALT. 2023 Q4 Financial Results Announcement:
The Company’s total initial cash yield from investment activities during the fourth quarter was approximately 8% and the weighted average lease term of the properties acquired was 15 years.
and, 2024 Q1 Financial Results Announcement:
The total initial cash yield from investing activities during the quarter was 7.7%, and the weighted average lease term of acquired properties was over 16 years.
For reference, WALT looks like this:
- NTST 9.2
- EPRT 14.1
- ADC 8.2
- NNN 10.0
In terms of utilization rate, O’s investor presentationthe median occupancy rate for S&P 500 REITs over the period December 31, 2000 to March 31, 2024 was 94.8%. However, not all REITs are created equal, and some are able to maintain significantly higher occupancy rates. GTY falls into this group, with an occupancy rate of 99.7%, well within the range of the reference group.
- 100% for NTST
- 99.9% for EPRT
- 99.6% for ADC
- In the case of NNN, it is 99.4%.
bad person
#1 Balance Sheet, Upcoming Debt Maturities, and Dividend Payout Ratios
GTY’s BBB-rated balance sheet, 3.9x coverage ratio and weighted average debt maturity of 5.8 years may seem like solid metrics compared to EPRT, but GTY’s debt maturity schedule is not reassuring. The company faces significant debt maturities totaling $175 million in 2025 ($50 million revolving credit facility, $75 million term loan and $50 million senior unsecured notes), roughly 22% of total outstanding debt. While the revolving credit facility and term loan have renewal options for up to one year (until October 2026), EPRT’s 4.7 level looks much safer with no debt maturities until February 2027. ADC and NNN have also done a good job of laddering their debt maturities, limiting their exposure to a high interest rate environment. Given the above, GTY is exposed to relatively high risks due to the current interest rate environment, which could force it to refinance at higher costs, negatively impacting its financial performance and negatively impacting its already high AFFO dividend payout ratio. 78.3%.
#2 High concentration of tenants
GTY has a relatively high tenant concentration, and the top 10 tenants’ share of ABR is significantly higher than this indicator level of ADC, EPRT, and even NTST. As of March 2024, approximately 68.6% of GTY’s ABR comes from the top 10 tenants. For reference, the above indicators were as follows:
- EPRT 19.1%
- ADC 37%
- NTST 52.3%
High tenant concentration increases the significance of potential tenant-related liquidity issues, which of course will be problematic for landlords, especially given the importance of each tenant. As such, this should be considered a weakness and a material risk factor for GTY.
Neutral Position – Growth and Dividends
GTY is set to grow AFFO per share at a healthy clip from 2019 to 2023 (based on a base year of 2018), registering a CAGR of 5.6%. However, some REITs operating within the comparable real estate sector (retail/service-oriented) have posted higher AFFO per share CAGRs.
- ADC – 6.9%
- EPRT – 9.7% for the period 2020-2023 (based on 2019)
Additionally, GTY’s interim 2024 guidance assumes fairly modest growth of 2.2% on an AFFO per share basis, while ADC, EPRT, and NTST assume growth of 4.2%, 5.2%, and 3.7%, respectively, at their midpoints. See the table below for more details.
Table 2: AFFO per share for selected companies
GTY currently offers an attractive dividend yield. Approximately 6.6%Additionally, from 2019 to 2023, the company delivered a good DPS CAGR equivalent to 5.8%. However, the aforementioned upcoming debt maturities could negatively impact its financial position and its ability to grow dividends at a similar pace. Check out GTY’s dividends per share in the chart below:
evaluation
As an M&A advisor, I typically: Main Tools Identifying the business justification for a particular market multiple is important to allow for accessible, market-driven benchmarking during the deal process. A 12x multiple may be high for one company, while 15x may be considered low for another company due to differences in business and value drivers.
That said, the forward-looking P/FFO multiple looks like this:
- 12.6 times For GTY
- 14.2 times For NTST
- 14.7 times For EPRT
- 15.1 times For ADC
- 12.8 times For NNN
In the interest of transparency, I have recently covered each of the companies listed above (except GTY) and given all of them a “Buy” rating except for NTST, which I have given a “Hold” rating.
- Net Street: There are more attractive opportunities given valuations
- Essential Properties Realty Trust It’s still worth buying – here’s why
- Agri Real Estate Co., Ltd.: Elite-level business metrics with room for improvement
- NNNN-san: The best choice for investors looking for stability
We believe GTY is significantly riskier than each of the companies listed above due to its upcoming debt maturities and high AFFO payout ratio. Sure, the dividend yield may attract some income-oriented investors, but we don’t believe the risk/return ratio is attractive in terms of long-term total return potential. Admittedly, GTY has performed reasonably well in terms of AFFO per share growth over the past few years, but ADC and EPRT have posted even higher growth rates. Furthermore, GTY has a rather modest growth rate compared to ADC and EPRT.
That said, I don’t see much room for the stock to rise by multiples and, barring any major changes in the economic environment or tenant issues (which would have a disproportionate impact on GTY due to its high concentration), it will likely remain in the 12.0x to 13.0x range. I believe ADC, EPRT and NNN offer much safer yet attractive investment opportunities with higher risk/reward ratios, and I have explained why in the analysis linked above.
Risk factor
The most significant risk factors associated with GTY’s business have been discussed above and include:
- High tenant concentration, magnifying the impact of potential tenant issues on GTY’s financial performance.
- Notable debt maturities come in 2025 (or 2026, assuming renewal options are utilized), and assuming a prolonged high interest rate environment, GTY may be forced to refinance at a higher cost.
Additionally, GTY operates in the service-oriented real estate sector, and attempting to expand before reaching the right size and financial position could lead to greater price volatility, further reinforcing my bearish view.
Conclusion
Each investor has limited capital, and so does mine. Therefore, I prefer to allocate funds to industry leaders with clear growth prospects and secure financing structures. Don’t get me wrong, I’m not predicting GTY’s bankruptcy. However, given the following points:
- Notable debt maturities approaching
- Tenant concentration is high, far beyond what I would like.
- REITs operating in similar real estate sectors have outperformed GTY on an AFFO per share basis.
To name a few retail/service oriented REITs, I believe there are more attractive investment opportunities with much better risk to return ratios, such as ADC, EPRT and NNN.