Getty Realty: Profitable, Solvent, and Undervalued (NYSE:GTY)

Getty Realty Corp. (NYSE: GTY), established in 1955 and headquartered in New York, NY, is a net lease REIT that primarily acquires, finances and develops single-tenant automotive retail real estate assets.

Despite some risks faced by market concentration and changes in interest rates, GTY has potential. The REIT’s portfolio is mostly located in markets with lower-than-average unemployment rates, its tenant base is well-diversified, consisting of stable businesses, and its long-term performance reflects its operating focus and leasing structure. More importantly, though, the stock is undervalued, resulting in a high dividend yield, and there isn’t much to justify it.

Portfolio and Outlook

The REIT’s portfolio consists of 1,124 properties spread across 42 states. The largest exposure is in New York (~16%), but it has a national presence.

On one On the other hand, New York’s 20-year population growth trend is not very promising:

On the other hand, even though New York’s unemployment rate is one of the highest, most of the rest of the states where it has the most exposure have below-average rates, suggesting a positive outlook for the business:

A robust portfolio is also supported by a solid tenant base. Average tenant rent coverage is 2.6x and the REIT enjoys a 100% rent collection rate (2023 and YTD). Additionally, in 2019, the REIT’s top tenants accounted for 82% of its ABR, and today they account for 68%. Another positive development was the decreased reliance on convenience stores and gas/repair stations; in 2019, 82% of ABR came from convenience stores and 15% was generated by gas stations/repair stations, but today both sources account for 63% and 9%, respectively, with the expansion of exposure to different businesses.

Another aspect of the quality of its portfolio is the way it expands it through sale-leaseback transactions, as it buys properties from prospective tenants and then leases them back to them. This provides immediate funding to businesses and allows REITs to reduce both the risk and the work involved in buying or building real estate for the first time with the intention of finding tenants to rent to, and therefore occupancy is higher for such retail. REIT (99.7% at end of last quarter). Additionally, Getty Realty underwrites net leases that result in lower maintenance CapEx and therefore higher and more predictable cash flow.

With a well-diversified portfolio and tenant base, as well as an advantageous underwriting process and favorable economic factors in its key markets, Getty Realty’s business should continue to grow at an attractive rate and deliver shareholder value. Speaking of which…

Performance

Simply judging by price performance as an indicator of expansion on a peer-to-peer basis, it’s clear that there have been plenty of retail REITs that have grown much faster over the past two decades:

However, based on total return, it’s also clear that Getty has delivered great value to shareholders over the long term, with growth accelerating over the past decade:

Last year, the company earned $172.8 million in annual base rent, up 12.1% from last year. Occupancy was 99.8% last year, the same level as last year. In addition, NOI increased by 9.13% and AFFO per share reached $2.25, an increase of 5.14% from last year. The latest results suggest significant momentum overall, as ABR increased 15% year-on-year and occupancy saw only a minor 10bps decline to 99.7%. Also, net operating income increased by 21.55% and AFFO by 3.57%.

2024 could be a slower year, however, judging by management’s guidance. Based on mid-year AFFO of $2.31 per share, the implied year-over-year growth is 2.67%.

Leverage and liquidity

Fitch Ratings’ BBB- rating of the REIT is justified given that only 44.37% of its assets are financed by long-term debt, which at the end of the last quarter consisted of senior unsecured notes, a term loan and a credit facility revolving credit. . Its debt is also 100% unsecured, which offers plenty of flexibility, and the weighted average interest rate it pays is just 4.35%.

Also with a Debt/EBITDAre rate of 5.32x and interest coverage at 4.08x, there appears to be a high level of liquidity to service the debt. In addition, its available liquidity is 34.5% of total debt, and future maturities do not represent a large refinancing risk, nor an immediate threat to the bottom line due to higher interest rates, as most of the amount of 2025 is tied to the credit facility and term loan, both of which already burden the REIT with a high interest rate.

Dividends and valuation

GTY currently pays a quarterly dividend of $0.45 per share, yielding a forward yield of 5.68%. Its payout ratio based on forward AFFO is admittedly a bit high at 77.92% to make the dividend attractive to income investors, but it still leaves plenty of margin for both safety and growth. The track record is also impressive, as the dividend has been increased by an annualized rate of 8.33% over the past decade.

Its forward AFFO yield is also 7.3%, which indicates good value despite its FFO multiple being only slightly below its peers’ average (14.39 vs. 14.84). Moreover, the default cap rate of 7.15% is slightly high compared to the average cap rate expected for retail asset transactions in 2024 (6.9%); I also believe that the Getty assets would be priced at a lower than average cap rate because they do not introduce the same risk seen in most retail assets due to the tenants they appeal to and the nature of the leases that the owners of such properties they can. subscribe.

risks

One risk that should not be overlooked is a cut in the federal funds rate, as this may put downward pressure on the GTY price. Shortly after interest rates began to rise rapidly in 2022, GTY also began to rise, likely due to its attractive tenant base and rental structure; Getty tenants enjoy relatively stable cash flows regardless of economic conditions because they cover essential needs, and the leases can make investors more confident about rent and dividend growth.

An outflow of capital driven by a less conservative market, once interest rates fall, could be offset by a general transfer of capital from the debt market to equities, but this is mere speculation and GTY shareholders should expect to short-term volatility, regardless.

In terms of more long-term risks, the reliance on New York is not insignificant, and changes in market dynamics there could noticeably affect Getty’s long-term bottom line.

Verdict

All in all, I think Getty Realty enjoys the presence of all the return drivers I look for when looking for stocks that could outperform the market; small size, high quality and a low price. For this reason, I rate the GTY a strong buy.

what do you think Do you own these stocks or favor another REIT? I would love to know! Also, please leave a comment if you found this post helpful; it means a lot. Thank you for reading.