2023-08-28 13:45:10 ET
Summary
- Getty Realty Corp. is a specialized REIT that focuses on gas stations, convenience stores, and car wash stations.
- The company's business is stable and highly occupied, with an occupancy of 99.7% and rent collection rate close to 100%.
- Getty has a history of dividend growth and currently offers a dividend yield of 5.7%.
- Valuation looks fair but might get cheaper if this REIT bear market continues on.
Getty Realty Corp ( GTY ) is a specialized REIT that focuses on developing, owning or financing single-tenant properties operating in 39 states in addition to DC. Almost 90% of the company's roughly a thousand properties are gas stations, convenience stores and car wash stations (in many cases all three in one location). It also has a small number of auto service locations, but it's not building more of those. If you have driven across any of the major highways in the US, chances are high that you stopped in one of Getty's locations to fill up your tank and gets some snacks on your way. I believe the company's current valuation might offer a good entry point for many investors who are into specialty REITs.
While I wouldn't call gas stations and car wash places as recession-proof the same way grocery stores and pharmacies are, I would call them recession-resistant types of businesses. People still buy fuel, service and wash their cars during a recession, although they might do it less as compared to when the economy is doing better. Gas stations and convenience stores tend to have low margins per transaction, but they tend to make money in volume instead because many of these places tend to be very busy especially if they are nearby busy highways or busy intersections. These businesses tend to be stable and rarely change ownership. Many of the lease contracts can be decade long or more. This provides stability for Getty, but this can also have a downside in terms of rent increases which rarely go above the rate of inflation.
Getty reports that their occupancy rate is 99.7% and rent collection rate close to 100% which supports the notion that the company's business is highly stable. Over the years, the company provided investors with slow and steady growth of revenues. As a matter of fact, in the last 10 years the company's revenue growth matched the rate of GDP growth in the US. Moving forward we can also expect this trend to continue where the company continues growing its revenues in line with the GDP growth.
In the last decade, the company's FFO (funds from operations) grew by 225% but its FFO per share only grew by 127% which means there was some significantly dilution of the shares. As a matter of fact, the number of diluted shares rose by almost 50% during this period as the company spent close to $1 billion since 2016 to acquire 363 new properties to fuel its growth. This isn't something to be alarmed about right now but investors should probably keep an eye on the situation in the long term to make sure that dilution isn't going out of control in the long run.
One thing I definitely like about this stock is its dividend growth history especially in the last decade or so. In the last 8 years the company has been raising its dividends at an annual compounded growth rate of 5.5% which is higher than the rate of average inflation during this time. Sure, we had one year where the inflation rate was as high as 9%, but we also had many years where it was below 2%. Also, the stock currently has a dividend yield of 5.63% which is closer to the higher end of its 10-year range of 3% to 6%. Keep in mind that this stock's dividend history hasn't always been this smooth. If you go back to late 1990s or early 2000s, GTY's dividend was very volatile from year to year, but that was a long time ago and things seem to be looking better now.
In the last 10 years the stock has resulted in total returns of 167%, but a great majority of these returns came from dividends and dividend reinvestments rather than share price appreciation. The share price still appreciated by about 59% but this barely kept up with the GDP growth of the US. Part of this could be because of the share dilution I've talked about above. Also keep in mind that we've seen REIT stocks get punished heavily in the last year and half due to recession fears in light of rapidly rising interest rates and this stock also suffered from that.
The company generally has low debt and relatively low leverage levels. Its current EBITDA can cover its net debt in only 4.9 years while the company's debt to total asset value is about 35%. Getty has no debt maturing until 2025 when it will have $50 million due. Besides that, there are no debt maturities until at least 2028. Also, a great majority of the company's debt is fixed-rate, so its interest rate can't rise until maturity and there is little risk from rising rates in the current environment. Having said that, the company's current credit rating is BBB- which isn't very high. Since the company issued the majority of its debt before rates started climbing, its current average debt cost is only 3.9%, but it could be a lot higher if the company decided to issue new debt today. Then again the company can just issue more shares instead of taking on more debt like it did in the past.
Analysts expect this company to generate FFO of $2.10 per share this year, $2.18 next year and $2.24 in 2025. This gives us a forward P/FFO of 14 for this year, 13.8 for next year and 13.5 for the following year. Considering everything I wouldn't call it compellingly cheap, but I wouldn't call it expensive either. Since this is a high yielding REIT, as much as valuation goes, it all comes down to the dividend yield and dividend growth. If you think a well-covered 5.65% dividend yield that grows about 5% per year represents a good valuation, this might be worth buying or holding. If you believe you need a higher yield for better margin of safety, you might want to wait for the price to dip a bit more from here.
In January 2022, we entered a bear market, and it looks like the bear market ended for most stocks (especially technology stocks) around October-November of 2022, but there are certain assets and sectors that are still in a bear market after nearly 20 months. Bonds and REITs are two classes of assets that never came out of last year's bear market. Usually people say that the best time to buy an asset class or particular sector is when it is in a bear market because that's when those assets are oversold due to panic. If this is true, it might be a good time to start nibbling on stocks like GTY in small amounts. I am not saying you should go all in and put all your wealth into REITs, but you might as well start building a small position and be ready to buy any further dips that might come along.
If you are ready to buy the dip in REITs in general and feel that they are close to bottoming, GTY might be a good option for you to start adding in small amounts and start collecting those nice dividends. If you feel that REITs have further to drop from here, it is likely that GTY will also drop with the rest of them, so you might want to wait for lower prices (which may or may not come). I will personally most likely initiate a small position in my dividend portfolio in the next couple of months or so.
For further details see:
Getty Realty: Generating 5.7% Yield From Car Wash And Gas Stations