Good morning, and welcome to Getty Realty's First Quarter 2024 Earnings Call. This call is being recorded. Prior to starting the call, Joshua Dicker, Executive Vice President, General Counsel and Secretary for the company, will read the safe harbor statement and provide information about non-GAAP financial measures. Please go ahead, Mr. Dicker.

Thank you. I would like to thank you all for joining us for Getty Realty's first quarter earnings conference call. Yesterday afternoon, the company released its financial and operating results for the quarter ended March 31, 2024. The Form 8-K and earnings release are available in the Investor Relations section of our website at gettyrealty.com. Certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to trends, events and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Examples of forward-looking statements include our 2024 guidance and may also include statements made by management, including those regarding the company's future operations, future financial performance or investment plans and opportunities. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. I refer you to the company's annual report on Form 10-K for the year ended December 31, 2023, for a more detailed discussion of the risks and other factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. You should not place undue reliance on forward-looking statements, which reflect our view only as of the date hereof. The company undertakes no duty to update any forward-looking statements that may be made in the course of this call. Also, please refer to our earnings release for a discussion of our use of non-GAAP financial measures, including our definition of adjusted funds from operations, or AFFO, and our reconciliation of those measures to net earnings. With that, let me turn the call over to Christopher Constant, our Chief Executive Officer.

Thank you, Josh. Good morning, everyone, and welcome to our earnings call for the first quarter of 2024. Joining us on the call today are Mark Olear, our Chief Operating Officer; and Brian Dickman, our Chief Financial Officer. I will lead off today's call by summarizing our financial results and investment activities, and we'll provide commentary on how we continue to execute on our overall strategy in a thoughtful and disciplined manner despite the headwinds impacting all net lease companies. We had a productive start to 2024, building on our momentum from last year. The combination of the investments made in 2023 and our year-to-date activity plus the successful capital markets activity that pre-funded these investments positions us to deliver continued earnings growth in 2024, even as we remain patient in a still uncertain interest rate environment. In the first quarter, we invested approximately $41 million across 35 properties. We also continue to diversify our business by investing across our four primary convenience and automotive retail asset classes, including convenience stores, express car washes, auto service centers and drive-through quick-service restaurants. In addition, the team at Getty continued to actively manage our in-place portfolio by extending two material unitary leases with near-term maturities, which resulted in an uptick in our weighted average lease term at quarter end. The net result of our excellent performance from last year and our strong start to this year was a quarterly base rental income increase of 13.1% and a 1.8% growth in our quarterly AFFO per share. Looking ahead, Getty continues to be well-positioned to create value for shareholders in the current environment, both through the strength of our in-place portfolio, and our ability to source and close investment opportunities, which will further advance our growth and portfolio diversification efforts. To that end, we currently have a committed investment pipeline of more than $44 million under contract at a blended cap rate in the high 7% area, which is fully funded from our prior capital markets transactions. In addition, thanks to the efforts of our investments team, we are evaluating a steady flow of potential acquisition and redevelopment opportunities. Our target retail sectors and institutional tenant base continue to perform well and maintain healthy profit margins and rent coverage ratios. Specific to the C-store sector, the National Association of Convenience Stores recently published a summary of their annual state of the industry report showing that 2023 was another record year of sales for the industry. We also continue to benefit from our focused strategy and direct relationships. Despite many operators in our target sectors prioritizing operations and/or being more selective when it comes to growth, we've been steadily sourcing new opportunities to underwrite. Pricing these transactions remains a challenge as bid-ask spreads persist, but we're pleased with the deal flow and trust that we'll be able to execute as the transaction market continues to adjust. Overall, we expect 2024 to be a challenging year for acquisitions of net lease properties in our sectors. However, we believe we have a clear path to generate earnings growth from the rent escalators in our in-place portfolio, additional income from investments made in 2023 and those already completed in the first quarter as well as closings from our committed pipeline, which are expected to occur throughout 2024. With that, I'll turn the call over to Mark to discuss our portfolio and investment activities.

Thank you, Chris. As of the end of the quarter, our lease portfolio included 1,103 net lease properties and 2 active redevelopment sites. Excluding the active redevelopments, occupancy was at 99.7%, and our weighted average lease term increased to 9.2 years due to both our new investments and the early renewal of selected leases. Our portfolio spans 42 states plus Washington, D.C. with 60% of our annualized base rent coming from the top 50 MSAs and 77% coming from the top 100 MSAs. Our rents are well covered with a trailing 12-month tenant rent coverage ratio of 2.6x, which has generally been consistent over the last 4 years, demonstrating the resiliency of our tenants' businesses despite macroeconomic uncertainty. Turning to our investment activities, we had a productive start to the year as we invested approximately $41 million in the first quarter. Highlights of this quarter's investment included the acquisition of one new-to-industry community store located in Florida for $7.6 million, two drive-through QSRs for $3 million, and seven auto service center properties located throughout the Southeastern U.S. for $13.7 million, of which $12.6 million was funded in the first quarter, as well as twelve express tunnel car washes located in various markets with concentrations in Virginia and North Carolina for $61 million, of which $9.9 million was funded in the first quarter. We also advanced incremental development funding in the amount of $7.8 million for the construction of thirteen new-to-industry convenience stores, express tunnel car washes and auto service centers. These assets are either already owned by the company and are under construction or will be acquired via sale-leaseback transactions at the end of the project's respective construction periods. For the quarter, the aggregate initial cash yield on our investment activity was 7.7% and the weighted average lease term for acquired properties was more than 16 years. Subsequent to the quarter end, we invested $7.2 million for the development and/or acquisition of one convenience store and two express tunnel car washes. We currently have more than $44 million of commitments to fund acquisitions and developments, the majority of which we expect to deploy over the next six months at average initial yields that are consistent with our first quarter performance. Pipeline yields continue to reflect some older vintage transactions as well as current pricing for our new originations, which is generally north of 8%. Moving to our redevelopment platform, during the quarter, we invested approximately $500,000 in projects, which are in various stages in our pipeline. We ended the quarter with three signed leases for redevelopment and are seeing renewed interest from retailers whose expansion plans overlap with the footprint of our portfolio. We expect to continuously complete projects over the next few years. Turning to asset management activities, we sold one property in the first quarter for $1.2 million. As we look ahead, overall transaction market conditions are largely unchanged from the prior quarter as sellers are electing to hold assets with the hope that pricing improves later this year. However, we believe our focused strategy will afford us the opportunity to work on transaction opportunities with both our existing tenant partners as well as several new relationships as we move throughout the year.

Thanks, Mark. Good morning, everyone. Last night, we reported AFFO per share of $0.57 for Q1 2024, representing an increase of 1.8% versus the $0.56 per share we reported in Q1 2023. FFO and net income for the quarter were $0.53 and $0.30 per share, respectively. Our total revenues for the quarter were $49 million, representing year-over-year growth of 14% versus the first quarter of 2023. Base rental income, which excludes tenant reimbursements, GAAP revenue adjustments and any additional rent, increased by 13.1% to $43.9 million. This growth was driven primarily by our recent acquisition activity as well as recurring rent escalators in our leases and rent commencements at completed redevelopment projects. On the expense side, total G&A was $6.7 million in the first quarter compared to $6.3 million in the prior year period. Excluding non-cash stock-based compensation, G&A was $5.3 million compared to $5 million in Q1 2023. The increase in G&A was primarily due to employee-related expenses, professional legal fees and information technology expenses. We continue to anticipate that G&A increases will moderate and G&A as a percentage of our revenue and asset base will decrease as we continue to scale the company. Property costs were $3.7 million for the quarter compared to $4.7 million in the prior year period due primarily to lower reimbursable expenses, rent expense and demolition costs for redevelopment projects. Environmental expenses, which are highly variable due to a number of estimates and noncash adjustments were a credit of $17,000 in the quarter as compared to an expense of $321,000 in the first quarter of 2023. Our balance sheet continues to be well-positioned, and we ended the quarter with $800 million of total debt outstanding. This consisted primarily of $675 million of senior unsecured notes with a weighted average interest rate of 3.9% and a weighted average maturity of 6.2 years. We also had a $75 million unsecured term loan outstanding at a 6.1% interest rate and $50 million drawn on our $300 million unsecured revolving credit facility. As of March 31, net debt-to-EBITDA was 5.1x, and total debt to total capitalization was 37% while total indebtedness to total asset value as calculated pursuant to our credit agreement was 36%. Taking into account unsettled forward equity, net debt-to-EBITDA would be approximately 4.9x. Subsequent to quarter end, we drew down the remaining $75 million available under our delayed draw term loan and used the proceeds to repay all amounts outstanding on the revolving credit facility. The balance will be used for general corporate purposes, including to partially fund our investment pipeline. There was no new equity capital markets activity in the first quarter, and we currently have approximately 1 million shares of common stock subject to outstanding forward sales agreements. Upon settlement, these shares are anticipated to raise gross proceeds of approximately $32 million. Returning to our committed investment pipeline. As Chris mentioned, these transactions are fully funded through a combination of cash on the balance sheet, proceeds from the recent term loan draw and proceeds from our outstanding forward equity agreements. Pro forma for these investments and capital activity, we expect our balance sheet to remain well-positioned to support continued growth and to maintain leverage near the midpoint of our target range of 4.5 to 5.5x net debt to EBITDA. As our investment pipeline evolves, we will continue to evaluate all capital sources to ensure that we're funding transactions in an accretive manner while continuing to maintain our investment-grade credit profile. With respect to our environmental liability, we ended the quarter at approximately $21.7 million, which was a reduction of approximately $700,000 since the end of 2023. Our net environmental remediation spending for the first quarter was approximately $1.1 million. Finally, we are reaffirming our 2024 AFFO guidance of $2.29 to $2.31 per share. As a reminder, our outlook includes transaction and capital markets activity to date, including the recent $75 million term loan draw, which does not otherwise assume any potential acquisitions, dispositions or capital markets activities for the remainder of the year. Primary factors impacting our AFFO guidance include variability with respect to certain operating expenses, deal pursuit costs and the timing of anticipated demolition costs for redevelopment projects, which run through property costs on our P&L. With that, I'll ask the operator to open the call for questions.

Our first question is from Joshua Dennerlein with Bank of America.

This is Farrell Granath on behalf of Josh. I want to ask if you could make a few comments on the sale leaseback markets about what you're seeing in opportunity.

Yes, this is Mark. So the opportunity coming in the first part of the year remains active. We're seeing a lot of product maybe at a more moderate pace than we had coming out of last year. That activity is around continuing to work the relationships with our existing long-term partners to try and match their underwriting expectations and pricing on growth and also a mix of new relationships and new opportunities that might not have previously considered sale leasebacks as a source of capital. So there is activity in the pipeline. We're pretty encouraged by what we're seeing, and it's just a matter of buyer and seller expectations coming into line.

Great. And when thinking about investment pacing for the rest of the year, do you think that it may be even more back half weighted as people start figuring out the macro?

Yes. I mean, we've said for a while when there's some better certainty or clarity around where the economy is headed, we do think the transaction market will open back up. So I think you can certainly make an argument that towards the back half of this year, we do expect to see more opportunities.

Our next question is from Todd Thomas with KeyBanc Capital Markets.

Mark, maybe Brian can weigh in, too. You talked about the yield on investments being 7.7% in the quarter, but indicated that the yield on deals in the pipeline is, I think, 8%, you said. Does 8% get you a little bit more active again on capital deployment? Or do you see investment yields increasing or do you need to see investment yields increasing further relative to your current cost of capital? And then do you see potential upside to those yields just based on current conversations that you're having with sellers and tenants regarding sale-leasebacks, just given where interest rates are and expectations for rate cuts being priced out of the market a little bit more recently?

Yes, I can discuss the high 7%. There is some impact from last year's vintage deals where the development funding has a longer time frame. As this year progresses, we will work through those. The pipeline includes both opportunities priced closer to the 8% range, and in our most recent vintage deals, we are generally seeing rates around or above 8% in our discussions. Although the total volume might be more moderate than before, we anticipate being able to transact on new opportunities by aligning the valuation with our tenant partners, both from existing and new relationships.

Todd, it's Brian. With respect to spreads, I think no different than a lot of the sector. We'd love to be closer to that 150 basis point area. Candidly in the current market and for the probably last year and change, it's really been trying to get spreads closer to 100 basis points and north of that. And I think if you look at current cost of capital and where we're putting up paper today, I think that's something we can achieve. The deals that are under contract, the deals that Mark has been quoting are really matched to get some capital we have in hand, right, that's at a lower cost. So we think we're achieving that spread when you match that funding against those deals. And as we look at putting out new paper and we're looking at spot cost of capital, we want to be north of 8% certainly on a blended basis, maybe into the low, if not mid-8% to really achieve that spread. But we also try not to put any bright red lines that will inhibit us from doing otherwise quality deals that make sense for the portfolio as long as they're accretive directionally. So hopefully, that helps provide a little bit of color. But yes, to achieve the spreads we're looking for, which is generally around that 100 basis points area in this market, we're going to want to be north of 8%.

Okay. Yes, that's helpful. And then I think you mentioned that there are some new tenants that you're talking to that had not previously considered sale leasebacks. Is that sort of a new category or just new tenants, new credits within the C-store and automotive services segment?

It's not new categories. I'd say it's tenants that previously had either been financing on their balance sheet or just hadn't really entertained sale-leaseback conversations in the past. So folks that we've known for a long time who are certainly looking at how they can continue to manage their balance sheet and finance their growth, and we're certainly thrilled to have those conversations and would love to bring those types of tenants into the portfolio.

Okay. And then just lastly, Chris, you touched on the extension of two unitary leases, which bumped out the portfolio's wall. It looked like those leases might have been in '25 and '27 that you extended. But can you provide a little bit more detail there, whether there were any sort of changes to economic or non-economic terms pertaining to the lease, annual escalators, for example. And then looking out, I know it's a little early, but expirations do bump up quite a bit to 8% and 12% in '26 and '27, which is rather meaningful. Any early thoughts on those expirations?

We had two leases where one initially matured in 2025. The tenant wanted to invest in those properties and opted for a longer lease term, extending it by ten years with some additional rent increases. We are pleased with that lease. The other lease was expiring in 2027, and we renewed it early with standard rent increases, extending the term by another ten years. We have leases maturing primarily in 2027, many of which come from the old Getty petroleum marketing assets. We are actively engaging with those tenants as we approach their renewal dates and expect them to renew, allowing us to keep those properties in our portfolio long term.

Our next question is from Anthony Paolone with JPMorgan.

Just going back to cap rates and these numbers at the margins seem to be in the 8s. Is it like-for-like quality with what you were doing historically? Or do you have to go up or down the quality spectrum to kind of get into that zip code? I'm just trying to understand how to think about 8% today versus what that had been, say, 2, 3 years ago?

I'm glad you asked that question. We are purchasing the same types of assets we've been acquiring throughout my entire tenure with this company, such as convenience stores, car washes, and auto service, all with consistent quality tenants and appealing locations. The real estate valuations for our properties have shifted, but we are not increasing rents. We are maintaining our underwriting standards. These tenants have the capacity to expand their businesses and require financing for that growth, and we are here to provide that support.

Okay. So basically, this implies about 100 basis points of cap rate backup in terms of what you've seen at this point in the market?

Yes, you could argue from the trough, it's actually probably a little more than that, but probably 100 to 125 basis points.

Okay. And then just on the credit side, the 2.6 coverage you talked about. But can you dig in a bit further there? Are there any pockets where you feel like it warrants some concern or anything on your watch list? And then also along the same lines, can you maybe talk to how areas like car washes are doing, particularly the new builds versus kind of what you underwrote?

Go ahead. These are coverage ones.

Tony, it's Brian. So specific to the coverage ratio and watch list, the short answer is no. There's no real tenants on the watch list. I mean, in general, just given macro environment, consumer environment, we're engaged with our tenants, making sure that we're understanding how they're operating their business. We are definitely hearing a lot of our tenants focus on operational excellence, cost savings, margin expansion, things like that, just as growth broadly speaking, as we've been talking about as well, has slowed down a little bit. So no particular tenants, though beyond just that regular way kind of diligence, I would say. You may have noticed in the distribution of rent coverage in our deck, we did have two leases with not an immaterial amount of ABR move from one strata to the other, but that was really right around the 2x coverage moving from one side of that to the other. And as you see from the total, did that have a material impact on the 2.6. So that explains that. And then just within the different sectors, obviously, we have a lot more data and a lot more history with the C-stores and the tenants there and their performance. Car washes are a little bit new. I'd say if there are any trends. And this may be moderating again, given some of the economic backdrop. But I'd say the car washes are probably, on average, have ramped up a little faster than our initial underwriting. And so we're seeing some good profitability there in the years one and two time frame versus typically our tenants look to year three for stabilization. Again, whether that's a trend that continues or not, we'll see. But I'd say net-net, that's a positive.

Okay. And if I could just sneak one more in, just following up, I think, on Todd's question, your answer around the '27 lease expirations. Any sense as to whether those sit above or below market as of today?

From a rent perspective, they have contractual renewal options. Therefore, the comparison of rents to the market is not particularly relevant to the decision to renew. What we are truly focused on is the profitability of the portfolios, as these are unitary leases. Based on our assessment today and considering their contribution to the tenant's overall profitability, we expect that they will renew at rents in accordance with the existing leases.

Our next question is from Alex Fagan with Baird.

First one is, are you seeing any more opportunities for developer takeouts? And if so, in which categories?

So we have gotten some opportunities come our way. If you're asking about tenants that had previously used development services. That has been a difficult business. So if you were a tenant growing through like a merchant developer program, the total pro forma for that type of business has been really difficult to continue to deliver on. So we have tenants that had previously used other types of services to grow, have come to us to explore our development funding and our sale-leaseback product. If the question is about from developers who had previously been in the midst of their entitlement and development process. We've had some conversations where they've come to us looking to us as a partner, our source of capital. Again, within our targeted asset classes if they had intended to develop for a tenant, we'd eventually like to have in our portfolio. We do have some of those conversations going on too. I hope that answers the question.

Yes, it does. And I guess the second one for me is in Getty's diversification effort, what kind of upper bound, if any, of the portfolio would car washes get to? Kind of noticed, I think, at 18.9% now?

Yes. I think our ultimate goal with the diversification strategy has just become a more balanced portfolio. So given the history of the business, where at one point, C-stores and gas stations made up 100% of rents or 99% of rents. Certainly, we're looking to balance that out more. I think what you saw with our activity in 2023 and in the first quarter '24, we're investing across all of the asset classes. And to Brian's earlier point, what we're seeing now is operators specifically in car washes maybe more focused on operations and ramping up some of the store developments that we funded. So we expect to see what I'll call more balanced underwriting and balanced closings across opportunities as we move through 2024.

Our next question is from Mitch Germain with Citizens JMP.

I'm just curious, I know with a lot of emphasis on leasing this call. Has the lease structure changed at all in terms of maybe financial reporting requirements or rent bumps in kind of are you pushing those at all in terms of some of the new leases that you're signing?

Generally, the lease terms have remained consistent over the past several months. When we began to observe changes in cap rates and inflation about 15 or 18 months ago, one of the initial adjustments was in rent increases. Currently, our rent increases are set at over 2%, compared to the lowest point of around 1.5%. However, other lease terms have not experienced significant changes.

Great. Given your current cost of equity, are you considering asset sales? I know you still have several legacy assets that may be performing well but might not align with the types of assets you would acquire today. Are you thinking about pursuing any additional sales in the future?

We certainly entertain that type of thought all the time. Several quarters ago, we sold the portfolio in Upstate New York and reinvested that into assets in Austin, Texas. And should that align, that type of transaction aligned in the future, we would consider it. We're fortunate today that being 99.7% occupied and having leases with healthy rent coverages and tenants that are performing well, right? We're not forced to look at asset sales. So it would be really maybe more of an opportunistic transaction where we could maybe divest the best of portfolio and reinvest in a new set of assets. But when we look at the portfolio all the time, it's for value. And certainly, we expect to continue to do so. And if that works, if the numbers work, we would transact on that.

Our next question is from Michael Gorman with BTIG.

Chris, I was wondering if you could talk a little bit about some of the new tenants or new relationships that you're looking at from a sale-leaseback perspective. And just the expectation side, if they're new to the market, are you finding that these are deals that take a longer time to get through to close? Are there expectations further off? Or kind of what the negotiation process is like there versus the existing market and what their alternatives look like in the current financing environment?

Yes. With some of the newer conversations, our process and preference for transacting through a portfolio unitary master lease rather than individual transactions is important. The first challenge is always discussing pricing and comparing what people might secure on a one-off basis in the 1031 market to where we believe the value lies for a portfolio. In the first quarter, our number was 7.7%. Mark mentioned that we are currently offering deals at 8% or higher. There are still one-off transactions occurring, likely starting in the 6% range for those willing to deal with single assets. It's essential to educate potential buyers on what a portfolio sale-leaseback entails compared to a retail transaction. This educational process takes time, especially for those who haven't experienced a sale leaseback before. However, our strong track record has enabled us to build trust and provide commitment, whether it's through a sale-leaseback or development funding. Our goal is to highlight the benefits of transacting in a portfolio rather than the risks and duration associated with single transactions. While it takes time, we've successfully been educating tenants who are unfamiliar with the sale leaseback process and establishing new relationships to bring them into our portfolio.

That's helpful, Chris. And Brian, just quickly on the coverage side of things, you mentioned the two leases. Can you just give us a little bit more color in that kind of 1 to 2 bucket, what the breakdown of the properties and the property types in that bucket are? And then just generally, when you think about the portfolio where do you look for the coverages based on product type as you're kind of thinking about the portfolio or thinking about underwriting?

Yes, happy to. I'll work backwards there, Mike. We've been really consistent over the years with underwriting C-stores to a 2x coverage, car washes, we will push 2.5, maybe upwards of 3x, depending on if it's a new build, and we're looking off pro formas or whether there's an operating history to look at. So that's where the underwriting comes in. In terms of the actual performance, I'd say in that 1 to 2x a bucket, it would be a mix of some ramping car washes, which I think we referenced on the call last time. So as things are coming into our dataset, which we bring in after 12 months. And I mentioned earlier that typically, the car wash target for stabilization is more like 36 months. So that is some of the 1 to 2. And then there's a couple C-store portfolios that are definitely performing. They've been in the portfolio for a long time. As I mentioned, they were north of 2 on our last dataset, and they happen to drop just south of 2 for this dataset, but not in such a material way that had changed the overall average. So think of it as a mix of ramping car washes, and some older but very much performing C-store portfolios that have been in our broader portfolio for a long period of time.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Chris for closing remarks.

Thank you, operator. Thank you everyone for being on the call this morning. We look forward to getting back on in July when we report our second quarter of 2024 results.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.