2023-04-06 04:04:47 ET
Summary
- Getty Realty has shown consistent top line growth for the last 10 years.
- As it is a triple net lease company, margins are much higher than many peers.
- Getty has consistently raised its dividend over a 10-year period, but it has a very high payout ratio, making the long-term sustainability a concern.
- Getty's valuation is very high compared to peers, making it potentially overvalued.
- Constant share float dilution is a concern.
Getty Realty Corporation (GTY) is a triple net lease REIT corporation. In this type of lease agreement, the tenant is responsible for paying the property’s operating expense, taxes, maintenance, and insurance costs, shielding the REIT from day-to-day operating costs. Getty primarily deals with single-tenant retail real estate deals, such as convenience stores and auto service centers. Notable tenants include 7Eleven, Valvoline, and Jiffy Lube. Today, the company has 1,039 properties in the United States.
Revenue
Getty Realty Corporation has shown steady revenue growth over the last 9 years. While there are 2 outlier years where revenue grew double digits, growth has stabilized in the mid-single digit range. Annual Revenue has grown from $100mm in 2014 to over $165mm by the end of 2022, showing steady momentum. Analyst estimates suggest continued revenue growth in the 5% range, bringing estimated revenue to $180mm in 2024.
This is exactly what we want to see in a good company - that solid 45-degree angle for the revenue curve. This is a sign of a company with proper positioning in its segment, and good leadership at the helm.
Valuation
The EV/Sales multiple currently sits at 14.3x for GTY stock. This is significantly higher than some of its’ closest peers. Whitestone REIT for example, currently trades at 7.68x EV/Sales, although they are much more geographically focused. Another good comp for GTY is Retail Opportunity Investments Corp (ROIC), which trades at 10.2x sales. Looking at their entire peer group, GTY is quite expensive on a sales multiple basis.
As it is a triple net lease company, margins are much higher than many peers, which could contribute to the steeper multiple. Gross margin is currently 87%, but we still do not feel that fully justifies the sales multiple over 14x, especially when considering the 14x number is at the very top of GTY's historical valuation.
Of further interest is GTY's Price/FFO multiple. It's important to note that this is very instructive when researching REITs, and GTY's P/FFO is currently sitting well below it's all time high - indicating that investors can get a better return on their dollar at the moment than previously in the company's history. Comparatively speaking though, we still think its valuation is a bit high for entry.
Debt
Total Debt at Getty is just under $700mm and has steadily grown as they expand their portfolio. In the near term, Getty’s interest coverage should not be an issue. When examining their peer group, many REITs have interest coverage just under 2x, while Getty currently sits comfortably over 3.5x.
It is important to note however that GTY has been showing negative cash flow in several recent quarters; however, that is related to large property purchases. At this time, they have their debt well in hand, and are able to service it.
Dividend Yield
The current dividend yield is 4.95% and the per-share dollar value has been raised virtually every year since 2012. That's a big green flag for any company, and especially a REIT. We always want to see that dividend per share increasing.
Their payout ratio is currently about 70%; however, it has moved over the 100% mark consistently. Consistent moves over the 100% mark mean that the REIT has to be getting money from somewhere to pay those dividends. Somewhere other than income. That's a big red flag for us.
Shares Outstanding
On February 28 th , 2023, Getty priced a common stock offering of 300,000,000 shares to raise $100mm with the option for underwriters to purchase another 450,000 shares. After this offering, shares outstanding jumped from 46,700,000 to 49,000,000. Looking back to 2015, the share count has consistently risen.
This is a problem because it dilutes the share float for the holders, thereby devaluing their holdings. We typically want to see share buybacks from companies to recommend them, or at least see them holding the float stable. Granted REITs need capital to expand, but when this is compared to the very high dividend payout ratios it seems the constant selling of shares may be being used to fund those dividends.
Risks in the REIT Space
In general, concerns have been raised in the REIT space as office occupancy dwindles. Getty and its peer group are somewhat insulated from these concerns as their tenants are essential to their communities and often commercial or industrial.
Rising interest rates have also created a cloud over the REIT space as refinancing and debt offerings become more expensive. This is probably GTY's most pressing concern to immediate continued expansion and will force them to lean harder on share offerings - this was probably the reason for the February 28th offering.
In its press release regarding the offering it stated: "The Company intends to use the net proceeds from the offering and the net proceeds, if any, received upon the settlement of the forward sale agreements to fund property acquisitions, to repay indebtedness outstanding under its revolving credit facility, for working capital and other general corporate purposes, or a combination of the foregoing."
The statement was quite vague, and essentially they wanted a blank check without any real accountability for what they're going to do with it.
Leadership
Getty is led by Christopher Constant, who has been with the company since 2010 and was eventually promoted to CEO in 2016. Although reviews on Glassdoor are limited, they are 100% approving of current leadership. It is clear that employees are appreciative of management and feel wanted at the company, which is a positive sign about the culture.
Conclusion
REITs can be a nice way to create a steady dividend stream. Getty has proven that since 2012, they have been able to manage and increase their dividend consistently. We consider Getty to be a Hold, but given the current environment, would not suggest adding to, or opening a new position.
In the current macro environment, things may get tougher for REITs as they look to raise and refinance debt for expansion. Getty is nicely insulated from many headwinds as most of their current tenants are convenience stores and auto service centers, but rising interest rates make it hard to justify starting a position. We fully acknowledge that GTY has extremely high margins as a triple net operator, but do not feel that supports the current valuation.
Overall, this is a solid REIT with decent management and that is reason enough to keep it on a watchlist for when the credit environment starts to loosen in 2024. But at this time, it's just a hold if you already own it, or avoid if you don't.
For further details see:
Getty Realty: A Consistent Performer, But Some Red Flags Make This A Hold