UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13777
GETTY REALTY CORP.
(Exact name of registrant as specified in its charter)
Maryland
11-3412575
(State or other jurisdiction of incorporation or organization)
(I.R.S. employer identification no.)
125 Jericho Turnpike, Suite 103, Jericho, New York
11753
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (516) 478-5400
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS
NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $0.01 par value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x
The aggregate market value of common stock held by non-affiliates (17,354,865 shares of common stock) of the Company was $250,083,605 as of June 30, 2008.
The registrant had outstanding 24,766,166 shares of common stock as of March 2, 2009.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT
PART OF FORM 10-K
Selected Portions of Definitive Proxy Statement for the 2009 Annual Meeting of Stockholders (the “Proxy Statement”), which will be filed by the registrant on or prior to 120 days following the end of the registrant’s year ended December 31, 2008 pursuant to Regulation 14A.
III
TABLE OF CONTENTS
Item
Description
Page
Cautionary Note Regarding Forward-Looking Statements
1
PART I
Business
3
1A
Risk Factors
7
1B
Unresolved Staff Comments
17
2
Properties
18
Legal Proceedings
20
4
Submission of Matters to a Vote of Security Holders
24
PART II
5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
25
6
Selected Financial Data
27
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
7A
Quantitative and Qualitative Disclosures About Market Risk
44
8
Financial Statements and Supplementary Data
45
9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
65
9A
Controls and Procedures
9B
Other Information
PART III
10
Directors, Executive Officers and Corporate Governance
66
11
Executive Compensation
12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
13
Certain Relationships and Related Transactions, and Director Independence
67
14
Principal Accountant Fees and Services
PART IV
15
Exhibits and Financial Statement Schedules
68
Signatures
84
Exhibit Index
85
ii
Certain statements in this Annual Report on Form 10-K may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When we use the words “believes,” “expects,” “plans,” “projects,” “estimates,” “predicts” and similar expressions, we intend to identify forward-looking statements. (All capitalized and undefined terms used in this section shall have the same meanings hereafter defined below in this Annual Report on Form 10-K.) Examples of forward-looking statements include statements regarding the developments related to our primary tenant, Getty Petroleum Marketing Inc. (“Marketing”) which is a wholly owned subsidiary of OAO LUKoil (“Lukoil”), and the Marketing Leases (as defined below) included in “Item 1A. Risk Factors” and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Developments Related to Marketing and the Marketing Leases” and elsewhere in this Annual Report on Form 10-K; the impact of any modification or termination of the Marketing Leases on our business and ability to pay dividends or our stock price; our belief that Lukoil would not allow Marketing to fail to perform its rental, environmental and other obligations under the Marketing Leases; our belief that it is not probable that Marketing will not pay for substantially all of the Marketing Environmental Liabilities (as defined below); our decision to attempt to negotiate with Marketing for a modification of the Marketing Leases which removes the Subject Properties (as defined below) or the Revised Subject Properties (as defined below) from the Marketing Leases; our ability to predict if or when the Marketing Leases will be modified or terminated, the terms of any such modification or termination or what actions Marketing and Lukoil will take and what our recourse will be whether the Marketing Leases are modified or terminated or not; our belief that it is probable that we will collect the deferred rent receivable related to the Remaining Properties (as defined below); our belief that no impairment charge is necessary for the Subject Properties or the additional properties included within the list of Revised Subject Properties; the expected effect of regulations on our long-term performance; our expected ability to maintain compliance with applicable regulations; our ability to renew expired leases; the adequacy of our current and anticipated cash flows from operations, borrowings under our credit agreement and available cash and cash equivalents; our ability to re-let properties at market rents or sell properties; our belief that we do not have a material liability for offers and sales of our securities made pursuant to registration statements that did not contain the financial statements or summarized financial data of Marketing; our expectations regarding future acquisitions; our ability to maintain our federal tax status as a real estate investment trust (“REIT”); the probable outcome of litigation or regulatory actions; our expected recoveries from underground storage tank funds; our exposure to environmental remediation costs; our estimates regarding remediation costs; our expectations as to the long-term effect of environmental liabilities on our business, financial condition; results of operations, liquidity, ability to pay dividends and stock price our exposure to interest rate fluctuations and the manner in which we expect to manage this exposure; the expected reduction in interest-rate risk resulting from our interest rate swap agreement and our expectation that we will not settle the interest rate swap agreement prior to its maturity; the expectation that the Credit Agreement (as defined below) will be refinanced with variable interest-rate debt at its maturity; our expectations regarding corporate level federal income taxes; the indemnification obligations of the Company and others; our assessment of the likelihood of future competition; our assessment as to the adequacy of our insurance coverage; our belief that Marketing had vacancies and/or removed the gasoline tanks and related equipment at what may be as much as 10% or more of the properties subject to the Marketing Leases; assumptions regarding the future applicability of accounting estimates, assumptions and policies; our intention to pay future dividends and the amounts thereof; and our beliefs about the reasonableness of our accounting estimates, judgments and assumptions.
These forward-looking statements are based on our current beliefs and assumptions and information currently available to us, and involve known and unknown risks (including the risks described below in “Item 1A. Risk Factors” and other risks that we describe from time to time in our other filings with the Securities and Exchange Commission (“SEC”)), uncertainties and other factors which may cause our actual results, performance and achievements to be materially different from any future results, performance or achievements expressed or implied by these forward- looking statements. These factors include, but are not limited to: risks associated with owning and leasing real estate generally; dependence on Marketing as a tenant and on rentals from companies engaged in the petroleum marketing and convenience store businesses; adverse developments in general business, economic or political conditions our unresolved SEC comment; competition for properties and tenants; risk of performance of our tenants of their lease obligations, tenant non-renewal and our ability to re-let or sell vacant properties; the effects of taxation and other regulations; potential litigation exposure; costs of completing environmental remediation and of compliance with environmental regulations; the exposure to counterparty risk; the risk of loss of our management
team; the impact of our electing to be treated as a REIT under the federal income tax laws, including subsequent failure to qualify as a REIT; risks associated with owning real estate primarily concentrated in the Northeast and Mid-Atlantic regions of the United States; risks associated with potential future acquisitions; losses not covered by insurance; future dependence on external sources of capital; the risk that our business operations may not generate sufficient cash for distributions or debt service; our potential inability to pay dividends; and terrorist attacks and other acts of violence and war. As a result of these and other factors, we may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect our business, financial condition, operating results and/or stock price. An investment in our stock involves various risks, including those mentioned above and elsewhere in this report and those that are described from time to time in our other filings with the SEC.
You should not place undue reliance on forward-looking statements, which reflect our view only as of the date hereof. We undertake no obligation to publicly release revisions to these forward-looking statements that reflect future events or circumstances or reflect the occurrence of unanticipated events.
Item 1. Business
Overview
Getty Realty Corp., a Maryland corporation, is the largest publicly-traded real estate investment trust (“REIT”) in the United States specializing in the ownership and leasing of retail motor fuel and convenience store properties and petroleum distribution terminals. As of December 31, 2008, we owned eight hundred seventy-eight properties and leased one hundred eighty-two additional properties. Our properties are located primarily in the Northeast and the Mid-Atlantic regions in the United States. The Company also owns or leases properties in Texas, North Carolina, Hawaii, California, Florida, Arkansas, Illinois, Ohio and North Dakota.
Nearly all of our properties are leased or sublet to distributors and retailers engaged in the sale of gasoline and other motor fuel products, convenience store products and automotive repair services who are responsible for the payment of taxes, maintenance, repair, insurance and other operating expenses and for managing the actual operations conducted at these properties. As of December 31, 2008, we leased approximately 82% of our owned and leased properties on a long-term basis to Getty Petroleum Marketing Inc. (“Marketing”). Marketing is wholly-owned by a subsidiary of OAO LUKoil (“Lukoil”), one of the largest integrated Russian oil companies. Marketing operates the petroleum distribution terminals but typically does not itself directly operate the retail motor fuel and convenience store properties it leases from us. Rather, Marketing generally subleases our retail properties to distributors and retailers who are responsible for the actual operations at the locations and operate their convenience stores, automotive repair services or other businesses at our properties. (For information regarding factors that could adversely affect us relating to Marketing or our other lessees, see “Item 1A. Risk Factors”. For additional information regarding developments related to Marketing and the Marketing Leases (as defined below), see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.)
We are self-administered and self-managed by our experienced management team, which has over ninety-eight years of combined experience in owning, leasing and managing retail motor fuel and convenience store properties. Our executive officers are engaged exclusively in the day-to-day business of the Company. We administer nearly all management functions for our properties, including leasing, legal, data processing, finance and accounting. We have invested, and will continue to invest, in real estate and real estate related investments, such as mortgage loans, when appropriate opportunities arise.
The History of Our Company
Our founders started the business in 1955 with the ownership of one gasoline service station in New York City and combined real estate ownership, leasing and management with actual service station operation and petroleum distribution. We held our initial public offering in 1971 under the name Power Test Corp. We acquired, from Texaco in 1985, the petroleum distribution and marketing assets of Getty Oil Company in the Northeast United States along with the Getty® name and trademark in connection with our real estate and the petroleum marketing business in the United States. We became one of the largest independent owner/operators of petroleum marketing assets in the country, serving retail and wholesale customers through a distribution and marketing network of Getty® and other branded retail motor fuel and convenience store properties and petroleum distribution terminals.
Marketing was formed to facilitate the spin-off of our petroleum marketing business to our shareholders which was completed in 1997 (the “Spin-Off”). At that time, our shareholders received a tax-free dividend of one share of common stock of Marketing for each share of our common stock. Following the Spin-Off, Marketing held the assets and liabilities of our petroleum marketing operations and a portion of our home heating oil business, and we continued to operate primarily as a real estate company specializing in the ownership and leasing of retail motor fuel and convenience store properties and petroleum distribution terminals. We acquired Power Test Investors Limited Partnership (the “Partnership”) in 1998, thereby acquiring fee title to two hundred ninety-five properties we had previously leased from the Partnership and which the Partnership had acquired from Texaco in 1985. We later sold
the remaining portion of our home heating oil business. As a result, we are now exclusively engaged in the ownership, leasing and management of real estate assets, principally in the petroleum marketing industry.
Marketing was acquired by a U.S. subsidiary of Lukoil in December 2000. In connection with Lukoil’s acquisition of Marketing, we renegotiated our long-term unitary lease (the “Master Lease”) with Marketing. As of December 31, 2008, Marketing leased from us eight hundred fifty-four properties under the Master Lease and ten properties under supplemental leases (collectively with the Master Lease, the “Marketing Leases”). Eight hundred fifty-five of the properties leased to Marketing are retail motor fuel and convenience store properties and nine of the properties are petroleum distribution terminals. Seven hundred ten of the properties leased to Marketing are owned by us and one hundred fifty-four of the properties are leased by us from third parties. The Master Lease has an initial term expiring in December 2015, and generally provides Marketing with three renewal options of ten years each and a final renewal option of three years and ten months extending to 2049. Each of the renewal options may be exercised only on an “all or nothing” basis. The supplemental leases have initial terms of varying expiration dates. The Marketing Leases are “triple-net” leases, pursuant to which Marketing is responsible for the payment of taxes, maintenance, repair, insurance and other operating expenses. We have licensed the Getty® trademarks to Marketing on an exclusive basis in its marketing territory as of December 2000. We have also licensed the trademarks to Marketing on a non-exclusive basis outside that territory, subject to a gallonage-based royalty, although to date, Marketing has not used the trademark outside that territory. (For additional information regarding developments related to Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.)
We elected to be treated as a REIT under the federal income tax laws beginning January 1, 2001. A REIT is a corporation, or a business trust that would otherwise be taxed as a corporation, which meets certain requirements of the Internal Revenue Code. The Internal Revenue Code permits a qualifying REIT to deduct dividends paid, thereby effectively eliminating corporate level federal income tax and making the REIT a pass-through vehicle for federal income tax purposes. To meet the applicable requirements of the Internal Revenue Code, a REIT must, among other things, invest substantially all of its assets in interests in real estate (including mortgages and other REITs) or cash and government securities, derive most of its income from rents from real property or interest on loans secured by mortgages on real property, and distribute to shareholders annually a substantial portion of its otherwise taxable income. As a REIT, we are required to distribute at least ninety percent of our taxable income to our shareholders each year and would be subject to corporate level federal income taxes on any taxable income that is not distributed.
Real Estate Business
The operators of our properties are primarily distributors and retailers engaged in the sale of gasoline and other motor fuel products, convenience store products and automotive repair services. Over the past decade, these lines of business have matured into a single industry as operators increased their emphasis on co-branded locations with multiple uses. The combination of petroleum product sales with other offerings, particularly convenience store products, has helped provide one-stop shopping for consumers and we believe represented a driving force behind the industry’s historical growth. In addition, approximately twenty of our properties are directly leased by us to others for other uses such as fast food restaurants, automobile sales and other retail purposes. In those instances where we determine that the highest and best use for our properties is no longer a retail motor fuel outlet, we will seek alternative tenants or buyers for such properties as opportunities arise.
Revenues from rental properties for the year ended December 31, 2008 were $81.2 million which is comprised of $78.6 million of lease payments received and $2.5 million of deferred rental income recognized due to the straight-line method of accounting for the leases with Marketing and certain of our other tenants and amortization of above-market and below-market rent for acquired in-place leases. In 2008, we received lease payments from Marketing aggregating approximately $60.3 million (or 77%) of the $78.6 million lease payments received. We are materially dependent upon the ability of Marketing to meet its rental, environmental and other obligations under the Marketing Leases. Marketing’s financial results depend largely on retail petroleum marketing margins and rental income from subtenants who operate our properties. As permitted under the terms of our leases with Marketing, Marketing can generally use each property for any lawful purpose, or for no purpose whatsoever. The petroleum marketing industry has been and continues to be volatile and highly competitive. Marketing has made all required
monthly rental payments under the Marketing Leases when due, although there is no assurance that it will continue to do so. (For additional information regarding developments related to Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.) You can find more information about our revenues, profits and assets by referring to the financial statements and supplemental financial information in “Item 8. Financial Statements and Supplementary Data”.
As of December 31, 2008, we owned fee title to eight hundred sixty-nine retail motor fuel, convenience store and other retail properties and nine petroleum distribution terminals. We also leased one hundred eighty-two retail motor fuel, convenience store and other retail properties. Our typical property is used as a retail motor fuel and/or convenience store, and is located on between one-half and three quarters of an acre of land in a metropolitan area. Our properties are located primarily in the Northeast and the Mid-Atlantic regions in the United States. The Company also owns or leases properties in Texas, North Carolina, Hawaii, California, Florida, Arkansas, Illinois, Ohio and North Dakota. Approximately one-half of our retail motor fuel properties have repair bays (typically two or three bays per station) and nearly half have convenience stores, canopies or both. We lease four thousand square feet of office space at 125 Jericho Turnpike, Jericho, New York, which is used for our corporate headquarters.
We believe our network of retail motor fuel and convenience store properties and terminal properties across the Northeast and the Mid-Atlantic regions of the United States is unique and that comparable networks of properties are not readily available for purchase or lease from other owners or landlords. Many of our properties are located at highly trafficked urban intersections or conveniently close to highway entrance and exit ramps. Furthermore, we believe that obtaining the permits necessary to operate a network of petroleum marketing properties such as ours would be a difficult, time consuming and costly process for any potential competitor. However, the real estate industry is highly competitive, and we compete for tenants with a large number of property owners. Our principal means of competition are rents charged in relation to the income producing potential of the location. In addition, we expect other major real estate investors with significant capital will compete with us for attractive acquisition opportunities. These competitors include petroleum manufacturing, distributing and marketing companies, other REITs, investment banking firms and private institutional investors. This competition has increased prices for commercial properties and may impair our ability to make suitable property acquisitions on favorable terms in the future.
As part of our overall growth strategy we regularly review opportunities to acquire additional properties and we expect to continue to pursue acquisitions that we believe will benefit our financial performance. To the extent that our current sources of liquidity are not sufficient to fund such acquisitions we will require other sources of capital, which may or may not be available on favorable terms or at all.
Trademarks
We own the Getty® name and trademark in connection with our real estate and the petroleum marketing business in the United States and have licensed the Getty® trademarks to Marketing on an exclusive basis in its marketing territory as of December 2000. We have also licensed the trademarks to Marketing on a non-exclusive basis outside that territory, subject to a gallonage-based royalty, although to date, Marketing has not used the trademark outside that territory. The trademark licenses with Marketing are coterminous with the Master Lease.
Regulation
We are subject to numerous existing federal, state and local laws and regulations including matters related to the protection of the environment such as the remediation of known contamination and the retirement and decommissioning or removal of long-lived assets including buildings containing hazardous materials, underground storage tanks (“UST” or “USTs”) and other equipment. Petroleum properties are governed by numerous federal, state and local environmental laws and regulations. These laws have included: (i) requirements to report to governmental authorities discharges of petroleum products into the environment and, under certain circumstances, to remediate the soil and/or groundwater contamination pursuant to governmental order and directive, (ii) requirements to remove and replace USTs that have exceeded governmental-mandated age limitations and (iii) the requirement to
provide a certificate of financial responsibility with respect to claims relating to UST failures. Our tenants are directly responsible for compliance with various environmental laws and regulations as the operators of our properties.
We believe that we are in substantial compliance with federal, state and local provisions enacted or adopted pertaining to environmental matters. Although we are unable to predict what legislation or regulations may be adopted in the future with respect to environmental protection and waste disposal, existing legislation and regulations have had no material adverse effect on our competitive position. (For additional information with respect to pending environmental lawsuits and claims see “Item 3. Legal Proceedings”.)
Environmental expenses are principally attributable to remediation costs which include installing, operating, maintaining and decommissioning remediation systems, monitoring contamination, and governmental agency reporting incurred in connection with contaminated properties. We seek reimbursement from state UST remediation funds related to these environmental expenses where available. We enter into leases and various other agreements which allocate responsibility for known and unknown environmental liabilities by establishing the percentage and method of allocating responsibility between the parties. In accordance with leases with certain tenants, we have agreed to bring the leased properties with known environmental contamination to within applicable standards and to regulatory or contractual closure (“Closure”) in an efficient and economical manner. Generally, upon achieving Closure at an individual property, our environmental liability under the lease for that property will be satisfied and future remediation obligations will be the responsibility of our tenant. As of December 31, 2008, we have regulatory approval for remediation action plans in place for two hundred forty-nine (95%) of the two hundred sixty-two properties for which we continue to retain remediation responsibility and the remaining thirteen properties (5%) were in the assessment phase. In addition, we have nominal post-closure compliance obligations at twenty-four properties where we have received “no further action” letters.
Our tenants are directly responsible to pay for (i) remediation of environmental contamination they cause and compliance with various environmental laws and regulations as the operators of our properties, and (ii) environmental liabilities allocated to our tenants under the terms of our leases and various other agreements between our tenants and us. Generally, the liability for the retirement and decommissioning or removal of USTs and other equipment is the responsibility of our tenants. We are contingently liable for these obligations in the event that our tenants do not satisfy their responsibilities. A liability has not been accrued for obligations that are the responsibility of our tenants based on our tenants’ past histories of paying such obligations and/or our assessment of their respective financial abilities to pay their share of such costs. However, there can be no assurance that our assessments are correct or that our tenants who have paid their obligations in the past will continue to do so.
It is possible that our assumptions regarding the ultimate allocation methods and share of responsibility that we used to allocate environmental liabilities may change, which may result in adjustments to the amounts recorded for environmental litigation accruals, environmental remediation liabilities and related assets. We will be required to accrue for environmental liabilities that we believe are allocable to others under various agreements if we determine that it is probable that the counter-party will not meet its environmental obligations. We may ultimately be responsible to directly pay for environmental liabilities as the property owner if the counterparty fails to pay them. The ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.
For additional information please refer to “Item 1A. Risk Factors” and to “General – Developments Related to Marketing and the Marketing Leases,” “Liquidity and Capital Resources,” “Environmental Matters” and “Contractual Obligations” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” which appear in Item 7. of this Annual Report on Form 10-K.
Personnel
As of February 1, 2009, we had sixteen employees.
Access to our filings with the Securities and Exchange Commission and Corporate Governance Documents
Our website address is www.gettyrealty.com. Our address, phone number and a list of our officers is available on our website. Our website contains a hyperlink to the EDGAR database of the Securities and Exchange Commission at www.sec.gov where you can access, free-of-charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to these reports as soon as reasonably practicable after such reports are filed. Our website also contains our business conduct guidelines, corporate governance guidelines and the charters of the Compensation, Nominating/Corporate Governance and Audit Committees of our Board of Directors. We also will provide copies of these reports and corporate governance documents free-of-charge upon request, addressed to Getty Realty Corp., 125 Jericho Turnpike, Suite 103, Jericho, NY 11753, Attn: Investor Relations. Information available on or accessible through our website shall not be deemed to be a part of this Annual Report on Form 10-K. You may read and copy any materials that we file with the Securities and Exchange Commission at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330.
Item 1A. Risk Factors
We are subject to various risks, many of which are beyond our control. As a result of these and other factors, we may experience material fluctuations in our future operating results on a quarterly or annual basis, which could materially and adversely affect our business, financial condition, results of operations liquidity, ability to pay dividends and/or stock price. An investment in our stock involves various risks, including those mentioned below and elsewhere this Annual Report on Form 10-K and those that are described from time to time in our other filings with the SEC.
We are subject to risks inherent in owning and leasing real estate.
We are subject to varying degrees of risk generally related to leasing and owning real estate many of which are beyond our control. In addition to general risks related to owning properties used in the petroleum marketing industry, our risks include, among others:
•
our liability as a lessee for long-term lease obligations regardless of our revenues,
deterioration in national, regional and local economic and real estate market conditions,
potential changes in supply of, or demand for, rental properties similar to ours,
competition for tenants and declining rental rates,
difficulty in re-letting properties on favorable terms or at all,
impairments in our ability to collect rent payments when due,
increases in interest rates and adverse changes in the availability, cost and terms of financing,
the potential for uninsured casualty and other losses,
the impact of present or future environmental legislation and compliance with environmental laws,
adverse changes in zoning laws and other regulations, and
acts of terrorism and war.
Each of these factors could cause a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price. In addition, real estate investments are relatively
illiquid, which means that our ability to vary our portfolio of properties in response to changes in economic and other conditions may be limited.
Adverse developments in general business, economic, or political conditions could have a material adverse effect on us.
Adverse developments in general business and economic conditions, including through recession, downturn or otherwise, either in the economy generally or in those regions in which a large portion of our business is conducted, could have a material adverse effect on us and significantly increase certain of the risks we are subject to. The general economic conditions in the United States are, and for an extended period of time may be, significantly less favorable than that of recent years. Among other effects, adverse economic conditions could depress real estate values, impact our ability to re-let or sell our properties and have and adverse effect on our tenants’ level of sales and financial performance generally. Our revenues are dependent on the economic success of our tenants and any factors that adversely impact our tenants could also have a material adverse effect on our business, financial condition and results of operations liquidity, ability to pay dividends and/or stock price.
Because our revenues are primarily dependent on the performance of GettyPetroleum Marketing Inc., our primary tenant, in the event that Marketing cannot or will not perform its rental, environmental and other obligations under the Marketing Leases, or if the Marketing Leases are modified significantly or terminated, or if it becomes probable that Marketing will not pay its environmental obligations, or if we change our assumptions for rental revenue or environmental liabilities related to the Marketing Leases, ourbusiness, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends and/or stock price could be materially adversely affected. No assurance can be given that Marketing will have the ability to pay its debts or meet its rental, environmental or other obligations under the Marketing Leases.
Marketing’s financial results depend largely upon retail petroleum marketing margins from the sale of refined petroleum products at margins in excess of its fixed and variable expenses and rental income from its subtenants who operate their convenience stores, automotive repair service or other businesses at our properties. The petroleum marketing industry has been, and continues to be, volatile and highly competitive. A large, rapid increase in wholesale petroleum prices would adversely affect Marketing’s profitability and cash flow if the increased cost of petroleum products could not be passed on to Marketing’s customers or if the consumption of gasoline for automotive use were to decline significantly. Petroleum products are commodities, the prices of which depend on numerous factors that affect supply and demand. The prices paid by Marketing and other petroleum marketers for products are affected by global, national and regional factors. We cannot accurately predict how these factors will affect petroleum product prices or supply in the future, or how in particular they will affect Marketing or our other tenants.
A substantial portion of our revenues (75% for the year ended December 31, 2008) are derived from the Marketing Leases. Accordingly, our revenues are dependent to a large degree on the economic performance of Marketing and of the petroleum marketing industry, and any factor that adversely affects Marketing, or our relationship with Marketing, may have a material adverse effect on our business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends and/or stock price. Through March 2009, Marketing has made all required monthly rental payments under the Marketing Leases when due, although there is no assurance that it will continue to do so. Even though Marketing is wholly-owned by a subsidiary of Lukoil, and Lukoil has in prior periods provided credit enhancement and capital to Marketing, Lukoil is not a guarantor of the Marketing Leases and there can be no assurance that Lukoil is currently providing, or will provide, any credit enhancement or additional capital to Marketing.
In accordance with accounting principles generally accepted in the United States of America (“GAAP”), the aggregate minimum rent due over the current terms of the Marketing Leases, substantially all of which are scheduled to expire in December 2015, is recognized on a straight-line basis rather than when the cash payment is due. We have recorded the cumulative difference between lease revenue recognized under this straight line accounting method and the lease revenue recognized when the payment is due under the contractual payment terms as deferred rent receivable on our consolidated balance sheet. We provide reserves for a portion of the recorded deferred rent receivable if circumstances indicate that a property may be disposed of before the end of the current lease term or if it is not reasonable to assume that a tenant will make all of its contractual lease payments when due
during the current lease term. Our assessments and assumptions regarding the recoverability of the deferred rent receivable related to the properties subject to the Marketing Leases are reviewed on a regular basis and such assessments and assumptions are subject to change.
We have had periodic discussions with representatives of Marketing regarding potential modifications to the Marketing Leases and in 2007, during the course of such discussions, Marketing has proposed to (i) remove approximately 40% of the properties (“the Subject Properties”) from the Marketing Leases and eliminate payment of rent to us, and eliminate or reduce payment of operating expenses, with respect to the Subject Properties, and (ii) reduce the aggregate amount of rent payable to us for the approximately 60% of the properties that would remain under the Marketing Leases (the “Remaining Properties”). Representatives of Marketing have also indicated to us that they are considering significant changes to Marketing’s business model. In light of these developments, and the continued deterioration in Marketing’s annual financial performance (as discussed below), in March 2008 we decided to attempt to negotiate with Marketing for a modification of the Marketing Leases which removes the Subject Properties from the Marketing Leases. We have held periodic discussions with Marketing since March 2008 in our attempt to negotiate a modification of the Marketing Leases to remove the Subject Properties. Although we continue to remove individual locations from the Master Lease as mutually beneficial opportunities arise, there has been no agreement between us and Marketing on any principal terms that would be the basis for a definitive Master Lease modification agreement. If Marketing ultimately determines that its business strategy is to exit all of the properties it leases from us or to divest a composition of properties different from the properties comprising the Subject Properties, such as the revised list of properties provided to us by Marketing in the second quarter of 2008 which includes approximately 45% of the properties Marketing leases from us ( the “Revised Subject Properties”), it is our intention to cooperate with Marketing in accomplishing those objectives if we determine that it is prudent for us to do so. Any modification of the Marketing Leases that removes a significant number of properties from the Marketing Leases would likely significantly reduce the amount of rent we receive from Marketing and increase our operating expenses. We cannot accurately predict if, or when, the Marketing Leases will be modified or what the terms of any agreement may be if the Marketing Leases are modified. We also cannot accurately predict what actions Marketing and Lukoil may take, and what our recourse may be, whether the Marketing Leases are modified or not.
We intend either to re-let or sell any properties removed from the Marketing Leases and reinvest the realized sales proceeds in new properties. We intend to seek replacement tenants or buyers for properties removed from the Marketing Leases either individually, in groups of properties, or by seeking a single tenant for the entire portfolio of properties subject to the Marketing Leases. Although we are the fee or leasehold owner of the properties subject to the Marketing Leases and the owner of the Getty® brand and have prior experience with tenants who operate their gas stations, convenience stores, automotive repair services or other businesses at our properties; in the event that properties are removed from the Marketing Leases, we cannot accurately predict if, when, or on what terms, such properties could be re-let or sold.
Due to the previously disclosed deterioration in Marketing’s annual financial performance, in conjunction with our decision to attempt to negotiate with Marketing for a modification of the Marketing Leases to remove the Subject Properties, we have decided that we cannot reasonably assume that we will collect all of the rent due to us related to the Subject Properties for the remainder of the current lease terms. In reaching this conclusion, we relied on various indicators, including, but not limited to, the following financial results of Marketing through the year ended December 31, 2007: (i) Marketing’s significant operating losses, (ii) its negative cash flow from operating activities, (iii) its asset impairment charges for underperforming assets, and (iv) its negative earnings before interest, taxes, depreciation, amortization and rent payable to the Company. We have not received Marketing’s financial results for the year ended December 31, 2008 prior to the preparation of this Annual Report on Form 10-K.
We recorded a reserve of $10.5 million in 2007 representing the full amount of the deferred rent receivable recorded related to the Subject Properties as of December 31, 2007. Providing the $10.5 million non-cash deferred rent receivable reserve reduced our net earnings and our funds from operations for 2007 but did not impact our cash flow from operating activities or adjusted funds from operations since the impact of the straight-line method of accounting is not included in our determination of adjusted funds from operations. (For additional information regarding funds from operations and adjusted funds from operations, which are non-GAAP measures, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Supplemental Non-GAAP Measures”.) As of December 31, 2008 we had a reserve of $10.0 million for the deferred
rent receivable due from Marketing representing the full amount of the deferred rent receivable recorded related to the Subject Properties as of that date. We have not provided a deferred rent receivable reserve related to the Remaining Properties since, based on our assessments and assumptions, we continue to believe that it is probable that we will collect the deferred rent receivable related to the Remaining Properties of $22.9 million as of December 31, 2008 and that Lukoil will not allow Marketing to fail to perform its rental, environmental and other obligations under the Marketing Leases.
Marketing is directly responsible to pay for (i) remediation of environmental contamination it causes and compliance with various environmental laws and regulations as the operator of our properties, and (ii) known and unknown environmental liabilities allocated to Marketing under the terms of the Master Lease and various other agreements between Marketing and us relating to Marketing’s business and the properties subject to the Marketing Leases (collectively the “Marketing Environmental Liabilities”). We may ultimately be responsible to directly pay for Marketing Environmental Liabilities as the property owner if Marketing fails to pay them. Additionally, we will be required to accrue for Marketing Environmental Liabilities if we determine that it is probable that Marketing will not meet its obligations or if our assumptions regarding the ultimate allocation methods and share of responsibility that we used to allocate environmental liabilities changes as a result of the factors discussed above, or otherwise. However, we continue to believe that it is not probable that Marketing will not pay for substantially all of the Marketing Environmental Liabilities since we believe that Lukoil will not allow Marketing to fail to perform its rental, environmental and other obligations under the Marketing Leases and, accordingly, we did not accrue for the Marketing Environmental Liabilities as of December 31, 2008 or December 31, 2007. Nonetheless, we have determined that the aggregate amount of the Marketing Environmental Liabilities (as estimated by us based on our assumptions and analysis of information currently available to us) could be material to us if we were required to accrue for all of the Marketing Environmental Liabilities in the future since we believe that it is reasonably possible that as a result of such accrual, we may not be in compliance with the existing financial covenants in our Credit Agreement. Such non-compliance could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness under the Credit Agreement.
Should our assessments, assumptions and beliefs prove to be incorrect, or if circumstances change, the conclusions we reached may change relating to (i) whether some or all of the Subject or Remaining Properties are likely to be removed from the Marketing Leases (ii) recoverability of the deferred rent receivable for some or all of the Subject or Remaining Properties, (iii) potential impairment of the Subject or Remaining Properties, and (iv) Marketing’s ability to pay the Marketing Environmental Liabilities. We intend to regularly review our assumptions that affect the accounting for deferred rent receivable; long-lived assets; environmental litigation accruals; environmental remediation liabilities; and related recoveries from state underground storage tank funds, which may result in material adjustments to the amounts recorded for these assets and liabilities, and as a result of which, we may not be in compliance with the financial covenants in our Credit Agreement. Accordingly, we may be required to (i) reserve additional amounts of the deferred rent receivable related to the Remaining Properties, (ii) record an impairment charge related to the Subject or Remaining Properties, or (iii) accrue for Marketing Environment Liabilities as a result of the potential or actual modification of the Marketing Leases or other factors.
We cannot provide any assurance that Marketing will continue to pay its debts or meet its rental, environmental or other obligations under the Marketing Leases prior or subsequent to any potential modification to the Marketing Leases. In the event that Marketing cannot or will not perform its rental, environmental or other obligations under the Marketing Leases; if the Marketing Leases are modified significantly or terminated; if we determine that it is probable that Marketing will not meet its environmental obligations and we accrue for such liabilities; if we are unable to promptly re-let or sell the properties subject to the Marketing Leases; or if we change our assumptions that affect the accounting for rental revenue or Marketing Environmental Liabilities related to the Marketing Leases and various other agreements; our business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends and/or stock price may be materially adversely affected.
Substantially all of our tenants depend on the same industry for their revenues.
We derive substantially all of our revenues from leasing, primarily on a triple-net basis, retail motor fuel and convenience store properties and petroleum distribution terminals to tenants in the petroleum marketing industry. Accordingly, our revenues will be dependent on the economic success of the petroleum marketing industry, and any factors that adversely affect that industry could also have a material adverse effect on our business, financial
condition and results of operations liquidity, ability to pay dividends and/or stock price. The success of participants in that industry depends upon the sale of refined petroleum products at margins in excess of fixed and variable expenses. A large, rapid increase in wholesale petroleum prices would adversely affect the profitability and cash flows of Marketing and our other tenants if the increased cost of petroleum products could not be passed on to their customers or if automobile consumption of gasoline were to decline significantly. Petroleum products are commodities, the prices of which depend on numerous factors that affect the supply of and demand for petroleum products. The prices paid by Marketing and other petroleum marketers for products are affected by global, national and regional factors. We cannot be certain how these factors will affect petroleum product prices or supply in the future, or how in particular they will affect Marketing or our other tenants.
Our future cash flow is dependent on the performance of our tenants of their lease obligations, renewal of existing leases and either re-letting orselling our vacant properties.
We are subject to risks that financial distress or default of our existing tenants may lead to vacancy at our properties or disruption in rent receipts as a result of partial payment or nonpayment of rent or that expiring leases may not be renewed. Under unfavorable general economic conditions, there can be no assurance that our tenants’ level of sales and financial performance generally will not be adversely affected, which in turn, could impact the reliability of our rent receipts. We are subject to risks that the terms of renewal or re-letting our properties (including the cost of required renovations, replacement of gasoline tanks and related equipment or environmental remediation) may be less favorable than current lease terms, or that the values of our properties that we sell may be adversely affected by unfavorable general economic conditions. Unfavorable general economic conditions may also negatively impact our ability to re-let or sell our properties. Numerous properties compete with our properties in attracting tenants to lease space. The number of available or competitive properties in a particular area could have a material adverse effect on our ability to lease or sell our properties and on the rents charged.
In addition to the risk of disruption in rent receipts, we are subject to the risk of incurring real estate taxes, maintenance, environmental and other expenses at vacant properties. The financial distress or default of our tenants may also lead to protracted, more complex, expensive or burdensome processes for retaking control of our properties than would otherwise be the case, including as a possible consequence of bankruptcy, eviction or other legal proceedings related to or resulting from the tenant’s default. These risks are greater with respect to certain of our tenants who lease multiple properties from us, such as Marketing. (For additional information with respect to concentration of tenant risk, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.)
If our tenants do not perform their lease obligations, or we were unable to renew existing leases and promptly recapture and re-let or sell vacant locations; or if lease terms upon renewal or re-letting were less favorable than current lease terms, or if the values of properties that we sell are adversely affected by market conditions; or if we incur significant costs or disruption related to or resulting from tenant financial distress, bankruptcy or default; our cash flow could be significantly adversely affected.
Property taxes on our properties may increase without notice.
Each of the properties we own or lease is subject to real property taxes. The leases for certain of the properties that we lease from third parties obligate us to pay real property taxes with regard to those properties. The real property taxes on our properties and any other properties that we develop, acquire or lease in the future may increase as property tax rates change and as those properties are assessed or reassessed by tax authorities. To the extent that our tenants are unable or unwilling to pay such increase in accordance with their leases, our net operating expenses may increase.
We have incurred, and may continue to incur, operating costs as a result ofenvironmental laws and regulation, which could reduce our profitability.
The real estate business and the petroleum products industry are subject to numerous federal, state and local laws and regulations, including matters relating to the protection of the environment. Under certain environmental laws, a current or previous owner or operator of real estate may be liable for contamination resulting from the presence or discharge of hazardous or toxic substances or petroleum products at, on, or under, such property, and may be
required to investigate and clean-up such contamination. Such laws typically impose liability and clean-up responsibility without regard to whether the owner or operator knew of or caused the presence of the contaminants, or the timing or cause of the contamination, and the liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. For example, liability may arise as a result of the historical use of a property or from the migration of contamination from adjacent or nearby properties. Any such contamination or liability may also reduce the value of the property. In addition, the owner or operator of a property may be subject to claims by third parties based on injury, damage and/or costs, including investigation and clean-up costs, resulting from environmental contamination present at or emanating from a property. The properties owned or controlled by us are leased primarily as retail motor fuel and convenience store properties, and therefore may contain, or may have contained, USTs for the storage of petroleum products and other hazardous or toxic substances, which creates a potential for the release of such products or substances. Some of our properties may be subject to regulations regarding the retirement and decommissioning or removal of long-lived assets including buildings containing hazardous materials, USTs and other equipment. Some of the properties may be adjacent to or near properties that have contained or currently contain USTs used to store petroleum products or other hazardous or toxic substances. In addition, certain of the properties are on, adjacent to, or near properties upon which others have engaged or may in the future engage in activities that may release petroleum products or other hazardous or toxic substances. There may be other environmental problems associated with our properties of which we are unaware. These problems may make it more difficult for us to re-let or sell our properties on favorable terms, or at all.
For additional information with respect to pending environmental lawsuits and claims, environmental remediation costs and estimates, and developments related to Marketing and the Marketing Leases see “Item 3. Legal Proceedings”, “Environmental Matters” and “General – Developments Related to Marketing and the Marketing Leases” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 5 in “Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements” each of which is incorporated by reference herein.
We enter into leases and various other agreements which allocate responsibility for known and unknown environmental liabilities by establishing the percentage and method of allocating responsibility between the parties. Our tenants are directly responsible to pay for (i) remediation of environmental contamination they cause and compliance with various environmental laws and regulations as the operators of our properties, and (ii) environmental liabilities allocated to our tenants under the terms of our leases and various other agreements between our tenants and us. Generally, the liability for the retirement and decommissioning or removal of USTs and other equipment is the responsibility of our tenants. We are contingently liable for these obligations in the event that our tenants do not satisfy their responsibilities. A liability has not been accrued for obligations that are the responsibility of our tenants based on our tenants’ past histories of paying such obligations and/or our assessment of their respective financial abilities to pay their share of such costs. However, there can be no assurance that our assessments are correct or that our tenants who have paid their obligations in the past will continue to do so.
We have not accrued for approximately $1.0 million in costs allegedly incurred by the current property owner in connection with removal of USTs and soil remediation at a property that was leased to and operated by Marketing. We believe that Marketing is responsible for such costs under the terms of the Master Lease, and have tendered the matter for defense and indemnification from Marketing, but Marketing had denied its liability for claims and its responsibility to defend against, and indemnify us, for the claim. We have filed third party claims against Marketing for indemnification in this matter, which claim is currently being actively litigated. It is reasonably possible that our assumption that Marketing will be ultimately responsible for the claim may change, which may result in our providing an accrual for this and other matters.
It is possible that our assumptions regarding the ultimate allocation methods and share of responsibility that we used to allocate environmental liabilities may change, which may result in adjustments to the amounts recorded for environmental litigation accruals, environmental remediation liabilities and related assets. We will be required to accrue for environmental liabilities that we believe are allocable to others under various other agreements if we determine that it is probable that the counter-party will not meet its environmental obligations. We may ultimately be responsible to directly pay for environmental liabilities as the property owner if the counterparty fails to pay them.
We cannot predict what environmental legislation or regulations may be enacted in the future, or if or how existing laws or regulations will be administered or interpreted with respect to products or activities to which they have not previously been applied. We cannot predict whether state UST fund programs will be administered and funded in the future in a manner that is consistent with past practices and if future environmental spending will continue to be eligible for reimbursement at historical recovery rates under these programs. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies or stricter interpretation of existing laws which may develop in the future, could have an adverse effect on our financial position, or that of our tenants, and could require substantial additional expenditures for future remediation.
As a result of the factors discussed above, or others, compliance with environmental laws and regulations could have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.
We are defending pending lawsuits and claims and are subject to materiallosses.
We are subject to various lawsuits and claims, including litigation related to environmental matters, damages resulting from leaking USTs and toxic tort claims. The ultimate resolution of certain matters cannot be predicted because considerable uncertainty exists both in terms of the probability of loss and the estimate of such loss. Our ultimate liabilities resulting from such lawsuits and claims, if any, could cause a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price. (For additional information with respect to pending lawsuits and claims see “Item 3. Legal Proceedings”.)
A significant portion of our properties are concentrated in the Northeast andMid-Atlantic regions of the United States, and adverse conditions in those regions, in particular, could negatively impact our operations.
A significant portion of the properties we own and lease are located in the Northeast and Mid-Atlantic regions of the United States. Because of the concentration of our properties in those regions, in the event of adverse economic conditions in those regions, we would likely experience higher risk of default on payment of rent payable to us (including under the Marketing Leases) than if our properties were more geographically diversified. Additionally, the rents on our properties may be subject to a greater risk of default than other properties in the event of adverse economic, political, or business developments or natural hazards that may affect the Northeast or Mid-Atlantic United States and the ability of our lessees to make rent payments. This lack of geographical diversification could have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.
We are in a competitive business.
The real estate industry is highly competitive. Where we own properties, we compete for tenants with a large number of real estate property owners and other companies that sublet properties. Our principal means of competition are rents charged in relation to the income producing potential of the location. In addition, we expect other major real estate investors, some with much greater resources than us, will compete with us for attractive acquisition opportunities. These competitors include petroleum manufacturing, distributing and marketing companies, other REITs, investment banking firms and private institutional investors. This competition has increased prices for commercial properties and may impair our ability to make suitable property acquisitions on favorable terms in the future.
We are exposed to counterparty credit risk and there can be no assurances that we will manage or mitigate this risk effectively.
We regularly interact with counterparties in various industries. The types of counterparties most common to our transactions and agreements include, but are not limited to, landlords, tenants, vendors and lenders. Our most significant counterparties include, but are not limited to, Marketing as our primary tenant, the members of the Bank Syndicate that are counterparties to our Credit Agreement as our primary source of financing and JPMorgan Chase as the counterparty to our interest rate Swap Agreement. The default, insolvency or other inability of a significant counterparty to perform its obligations under an agreement or transaction, including, without limitation, as a result of the rejection of an agreement or transaction in bankruptcy proceedings, could have a material adverse effect on
us. (For additional information with respect to, and definitions of, the Bank Syndicate, the Credit Agreement and the Swap Agreement, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risks”.)
We may acquire or develop new properties, and this may create risks.
We may acquire or develop properties or acquire other real estate companies when we believe that an acquisition or development matches our business strategies. We may not succeed in consummating desired acquisitions or in completing developments on time or within our budget. We also may not succeed in leasing newly developed or acquired properties at rents sufficient to cover their costs of acquisition or development and operations.
We are subject to losses that may not be covered by insurance.
Marketing, and other tenants, as the lessees of our properties, are required to provide insurance for such properties, including casualty, liability, fire and extended coverage in amounts and on other terms as set forth in our leases. We carry insurance against certain risks and in such amounts as we believe are customary for businesses of our kind. However, as the costs and availability of insurance change, we may decide not to be covered against certain losses (such as certain environmental liabilities, earthquakes, hurricanes, floods and civil disorder) where, in the judgment of management, the insurance is not warranted due to cost or availability of coverage or the remoteness of perceived risk. There is no assurance that our insurance against loss will be sufficient. The destruction of, or significant damage to, or significant liabilities arising out of conditions at, our properties due to an uninsured cause would result in an economic loss and could result in us losing both our investment in, and anticipated profits from, such properties. When a loss is insured, the coverage may be insufficient in amount or duration, or a lessee’s customers may be lost, such that the lessee cannot resume its business after the loss at prior levels or at all, resulting in reduced rent or a default under its lease. Any such loss relating to a large number of properties could have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.
Failure to qualify as a REIT under the federal income tax laws would haveadverse consequences to our shareholders.
We elected to be treated as a REIT under the federal income tax laws beginning January 1, 2001. We cannot, however, guarantee that we will continue to qualify in the future as a REIT. We cannot give any assurance that new legislation, regulations, administrative interpretations or court decisions will not significantly change the requirements relating to our qualification. If we fail to qualify as a REIT, we will again be subject to federal income tax at regular corporate rates, we could be subject to the federal alternative minimum tax, we would be required to pay significant income taxes and we would have less money available for our operations and distributions to shareholders. This would likely have a significant adverse effect on the value of our securities. We could also be precluded from treatment as a REIT for four taxable years following the year in which we lost the qualification, and all distributions to stockholders would be taxable as regular corporate dividends to the extent of our current and accumulated earnings and profits. Loss of our REIT status would result in an event of default that, if not cured or waived, could result in the acceleration of all of our indebtedness under our Credit Agreement which could have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.
In 2004, we received a comment letter from the Securities and Exchange Commission that contains one comment that remains unresolved.
One comment remains unresolved as part of a periodic review commenced in 2004 by the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”) of our Annual Report on Form 10-K for the year ended December 31, 2003 pertaining to the SEC’s position that we must include the financial statements and summarized financial data of Marketing in our periodic filings, which Marketing contends is prohibited by the terms of the Master Lease. In June 2005, the SEC indicated that, unless we file Marketing’s financial statements and summarized financial data with our periodic reports: (i) it will not consider our Annual Reports on Forms 10-K for the years beginning with fiscal 2000 to be compliant; (ii) it will not consider us to be current in our reporting
requirements; (iii) it will not be in a position to declare effective any registration statements we may file for public offerings of our securities; and (iv) we should consider how the SEC’s conclusion impacts our ability to make offers and sales of our securities under existing registration statements and if we have a liability for such offers and sales made pursuant to registration statements that did not contain the financial statements of Marketing. We have had no communication with the SEC since 2005. We cannot accurately predict the consequences if we are ultimately unable to resolve this outstanding comment.
We are dependent on external sources of capital which may not be available on favorable terms, if at all.
We are dependent on external sources of capital to maintain our status as a REIT and must distribute to our shareholders each year at least ninety percent of our net taxable income, excluding any net capital gain. Because of these distribution requirements, it is not likely that we will be able to fund all future capital needs, including acquisitions, from income from operations. Therefore, we will have to continue to rely on third-party sources of capital, which may or may not be available on favorable terms, or at all. As part of our overall growth strategy we regularly review opportunities to acquire additional properties and we expect to continue to pursue acquisitions that we believe will benefit our financial performance. To the extent that our current sources of liquidity are not sufficient to fund such acquisitions we will require other sources of capital, which may or may not be available on favorable terms or at all. We cannot accurately predict how periods of illiquidity in the credit markets, such as current market conditions, will impact our access to or cost of capital. In addition, we may be unable to pursue public equity and debt offerings until we resolve with the SEC the outstanding comment regarding disclosure of Marketing’s financial information. Moreover, additional equity offerings may result in substantial dilution of shareholders’ interests, and additional debt financing may substantially increase our leverage. Our access to third-party sources of capital depends upon a number of factors including general market conditions, the market’s perception of our growth potential, our current and potential future earnings and cash distributions, limitations on future indebtedness imposed under our Credit Agreement and the market price of our common stock.
The United States credit markets are currently experiencing an unprecedented contraction. As a result of the tightening credit markets, we may not be able to obtain additional financing on favorable terms, or at all. If one or more of the financial institutions that supports our Credit Agreement fails, we may not be able to find a replacement, which would negatively impact our ability to borrow under our the Credit Agreement. In addition, if the current pressures on credit continue or worsen, we may not be able to refinance our outstanding debt when due in March 2011, which could have a material adverse effect on us. Subject to the terms of the Credit Agreement, we have the option to extend the term of the Credit Agreement for one additional year to March 2012.
Our ability to meet the financial and other covenants relating to our Credit Agreement may be dependent on the performance of our tenants, including Marketing. Should our assessments, assumptions and beliefs that affect our accounting prove to be incorrect, or if circumstances change, we may have to materially adjust the amounts recorded in our financial statements for certain assets and liabilities, and as a result of which, we may not be in compliance with the financial covenants in our Credit Agreement. We have determined that the aggregate amount of the Marketing Environmental Liabilities (as estimated by us based on our assumptions and analysis of information currently available to us) could be material to us if we were required to accrue for all of the Marketing Environmental Liabilities in the future since we believe that it is reasonably possible that as a result of such accrual, we may not be in compliance with the existing financial covenants in our Credit Agreement. (For additional information with respect to The Marketing Environmental Liabilities, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.) If we are not in compliance with one or more of our covenants which, if not complied with could result in an event of default under our Credit Agreement, there can be no assurance that our lenders would waive such non-compliance. A default under our Credit Agreement, if not cured or waived, whether due to a loss of our REIT status, a material adverse effect on our business, financial condition or prospects, a failure to comply with financial and certain other covenants in the Credit Agreement or otherwise, could result in the acceleration of all of our indebtedness under our Credit Agreement. This could have a material adverse affect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.
The downturn in the credit markets has increased the cost of borrowingand has made financing difficult to obtain, which may negatively impact our business, and may have a material adverse effect on us. Lenders may require us to enter into more restrictive covenants relating to our operations
During 2007, the United States housing and residential lending markets began to experience accelerating default rates, declining real estate values and increasing backlog of housing supply. The residential sector issues quickly spread more broadly into the corporate, asset-backed and other credit and equity markets and the volatility and risk premiums in most credit and equity markets have increased dramatically, while liquidity has decreased. These issues have continued into 2008 and the beginning of 2009. Increasing concerns regarding the United States and world economic outlook, such as large asset write-downs at banks, volatility in oil prices, declining business and consumer confidence and increased unemployment and bankruptcy filings, are compounding these issues and risk premiums in most capital markets remain near historical all-time highs. These factors are precipitating generalized credit market dislocations and a significant contraction in available credit. As a result, it is becoming increasingly difficult to obtain cost-effective debt capital to finance new investment activity or to refinance maturing debt, and most lenders are imposing more stringent restrictions on the terms of credit. Any future credit agreements or loan documents we execute may contain additional or more restrictive covenants. The negative impact on the tightening of the credit markets and continuing credit and liquidity concerns may have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price. Additionally, there is no assurance that the increased financing costs, financing with increasingly restrictive terms or the increase in risk premiums that are demanded by investors will not have a material adverse effect on us.
Our business operations may not generate sufficient cash for distributions ordebt service.
There is no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to make distributions on our common stock, to pay our indebtedness, or to fund our other liquidity needs. We may not be able to repay or refinance existing indebtedness on favorable terms, which could force us to dispose of properties on disadvantageous terms (which may also result in losses) or accept financing on unfavorable terms.
Borrowings under our Credit Agreement bear interest at a floating rate. Accordingly, an increase in interest rates will increase the amount of interest we must pay under our Credit Agreement and a significant increase in interest rates could also make it more difficult to find alternative financing on desirable terms. We have entered into an interest rate swap agreement with a major financial institution with respect to a portion of our variable rate debt outstanding under our Credit Agreement. Although the agreement is intended to lessen the impact of rising interest rates, it also exposes us to the risk that the other party to the agreement will not perform, the agreement will be unenforceable and the underlying transactions will fail to qualify as a highly-effective cash flow hedge for accounting purposes. Further, there can be no assurance that the use of an interest rate swap will always be to our benefit. While the use of an interest rate swap agreement is intended to lessen the adverse impact of rising interest rates, it also conversely limits the positive impact that could be realized from falling interest rates with respect to the portion of our variable rate debt covered by the interest rate swap agreement.
We may be unable to pay dividends and our equity may not appreciate.
Under the Maryland General Corporation Law, our ability to pay dividends would be restricted if, after payment of the dividend, (1) we would not be able to pay indebtedness as it becomes due in the usual course of business or (2) our total assets would be less than the sum of our liabilities plus the amount that would be needed, if we were to be dissolved, to satisfy the rights of any shareholders with liquidation preferences. There currently are no shareholders with liquidation preferences. No assurance can be given that our financial performance in the future will permit our payment of any dividends. (For additional information regarding developments related to Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.) In particular, our Credit Agreement prohibits the payments of dividends during certain events of default. As a result of the factors described above, we may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect our business, stock price and ability to pay dividends.
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The loss of certain members of our management team could adversely affect our business.
We depend upon the skills and experience of our executive officers. Loss of the services of any of them could have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price. We do not have employment agreements with any of our executives.
Our accounting policies and methods are fundamental to how we record and report our financial position and results of operations, and they require management to make estimates, judgments and assumptions about matters that are inherently uncertain.
Our accounting policies and methods are fundamental to how we record and report our financial position and results of operations. We have identified several accounting policies as being critical to the presentation of our financial position and results of operations because they require management to make particularly subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be recorded under different conditions or using different assumptions. Because of the inherent uncertainty of the estimates, judgments and assumptions associated with these critical accounting policies, we cannot provide any assurance that we will not make subsequent significant adjustments to our consolidated financial statements including those included in this Form 10-K. Estimates, judgments and assumptions underlying our consolidated financial statements include, but are not limited to, deferred rent receivable, recoveries from state UST funds, environmental remediation costs, real estate, depreciation and amortization, impairment of long-lived assets, litigation, accrued expenses, income taxes payable and the allocation of the purchase price of properties acquired to the assets acquired and liabilities assumed. For example, we have made judgments regarding the level of environmental reserves and reserves for our deferred rent receivable relating to Marketing and the Marketing Leases. These judgments and assumptions may prove to be incorrect and our business, financial condition, revenues, operating expense, results of operations, liquidity, ability to pay dividends and/or stock price may be materially adversely affected if that is the case. (For information regarding our critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies”.)
Changes in accounting standards issued by the Financial Accounting Standards Board (the “FASB”) or other standard-setting bodies may adversely affect our reported revenues, profitability or financial position.
Our financial statements are subject to the application of GAAP, which are periodically revised and/or expanded. The application of GAAP is also subject to varying interpretations over time. Accordingly, we are required to adopt new or revised accounting standards or comply with revised interpretations that are issued from time-to-time by recognized authoritative bodies, including the FASB and the SEC. Those changes could adversely affect our reported revenues, profitability or financial position.
Terrorist attacks and other acts of violence or war may affect the market on which our common stock trades, the markets in which we operate, our operations and our results of operations.
Terrorist attacks or armed conflicts could affect our business or the businesses of our tenants or of Marketing or its parent. The consequences of armed conflicts are unpredictable, and we may not be able to foresee events that could have a material adverse effect on us. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economy. Terrorist attacks also could be a factor resulting in, or a continuation of, an economic recession in the United States or abroad. Any of these occurrences could have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.
Item 1B. Unresolved Staff Comments
One comment remains unresolved as part of a periodic review commenced in 2004 by the Division of Corporation Finance of the SEC of our Annual Report on Form 10-K for the year ended December 31, 2003 pertaining to the SEC’s position that we must include the financial statements and summarized financial data of Marketing in our periodic filings, which Marketing contends is prohibited under the terms of the Master Lease. In
June 2005, the SEC indicated that, unless we file Marketing’s financial statements and summarized financial data with our periodic reports: (i) it will not consider our Annual Reports on Forms 10-K for the years beginning with 2000 to be compliant; (ii) it will not consider us to be current in our reporting requirements; (iii) it will not be in a position to declare effective any registration statements we may file for public offerings of our securities; and (iv) we should consider how the SEC’s conclusion impacts our ability to make offers and sales of our securities under existing registration statements and if we have a liability for such offers and sales made pursuant to registration statements that did not contain the financial statements of Marketing.
We believe that the SEC’s position is based on their interpretation of certain provisions of their internal Financial Reporting Manual (formerly known as their Accounting Disclosure Rules and Practices Training Material), Staff Accounting Bulletin No. 71 and Rule 3-13 of Regulation S-X. We do not believe that any of this guidance is clearly applicable to our particular circumstances and we believe that, even if it were, we should be entitled to certain relief from compliance with such requirements. Marketing generally subleases our properties to independent, individual service station/convenience store operators (subtenants). Consequently, we believe that we, as the owner of these properties and the Getty® brand, could re-let these properties to the existing subtenants (except for those properties that are vacant) who operate their convenience stores, automotive repair services or other businesses at our properties, or to other new or replacement tenants, at market rents although we cannot accurately predict whether, when, or on what terms, such properties would be re-let or sold. The SEC did not accept our positions regarding the inclusion of Marketing’s financial statements in our filings. We have had no communication with the SEC since 2005 regarding the unresolved comment. We cannot accurately predict the consequences if we are unable to resolve this outstanding comment.
We do not believe that offers or sales of our securities made pursuant to existing registration statements that did not or do not contain the financial statements of Marketing constitute, by reason of such omission, a violation of the Securities Act of 1933, as amended, or the Exchange Act. Additionally, we believe that if there ultimately is a determination that such offers or sales, by reason of such omission, resulted in a violation of those securities laws, we would not have any material liability as a consequence of any such determination.
Item 2. Properties
Nearly all of our properties are leased or sublet to distributors and retailers engaged in the sale of gasoline and other motor fuel products, convenience store products and automotive repair services who are responsible for the payment of taxes, maintenance, repair, insurance and other operating expenses and for managing the actual operations conducted at these properties. Approximately twenty of our properties are directly leased by us to others under similar lease terms primarily for other uses such as fast food restaurants, automobile sales and other retail purposes. In those instances where we determine that the highest and best use for our properties is no longer a retail motor fuel outlet, we will seek alternative tenants or buyers for such properties as opportunities arise.
The following table summarizes the geographic distribution of our properties at December 31, 2008. The table also identifies the number and location of properties we lease from third-parties and which Marketing leases from us under the Marketing Leases. In addition, we lease four thousand square feet of office space at 125 Jericho Turnpike, Jericho, New York, which is used for our corporate headquarters, which we believe will remain suitable and adequate for such purposes for the immediate future.
OWNED BY GETTY REALTY
LEASED BY GETTY REALTY
TOTAL
PERCENT
MARKETINGAS TENANT (1)
OTHERTENANTS
MARKETINGAS TENANT
PROPERTIESBY STATE
OF TOTALPROPERTIES
New York
236
31
70
342
32.3
%
Massachusetts
127
23
—
151
14.2
New Jersey
106
144
13.6
Pennsylvania
107
119
11.3
Connecticut
59
29
113
10.7
Virginia
37
3.5
New Hampshire
2.9
Maine
22
2.1
Rhode Island
19
1.8
Texas
1.6
Delaware
1.0
North Carolina
Hawaii
0.9
0.8
California
Florida
0.6
Arkansas
0.3
Illinois
0.2
Ohio
North Dakota
0.1
Vermont
Total
710
168
154
1,060
100.0
(1)
Includes nine terminal properties owned in New York, New Jersey, Connecticut and Rhode Island.
The properties that we lease have a remaining lease term, including renewal option terms, averaging over ten years. The following table sets forth information regarding lease expirations, including renewal and extension option terms, for properties that we lease from third parties:
CALENDAR YEAR
NUMBER OFLEASESEXPIRING
PERCENTOF TOTALLEASEDPROPERTIES
PERCENTOF TOTALPROPERTIES
2009
9.34
1.60
2010
4.95
0.85
2011
5.49
0.94
2012
7.14
1.23
2013
2.75
0.47
Subtotal
54
29.67
5.09
Thereafter
128
70.33
12.08
182
17.17
We have rights-of-first refusal to purchase or lease one hundred forty-four of the properties we lease. Although there can be no assurance regarding any particular property, historically we generally have been successful in renewing or entering into new leases when lease terms expire. Approximately 65% of our leased properties are subject to automatic renewal or extension options.
In the opinion of our management, our owned and leased properties are adequately covered by casualty and liability insurance. In addition, we require our tenants to provide insurance for all properties they lease from us, including casualty, liability, fire and extended coverage in amounts and on other terms satisfactory to us. We have no plans for material improvements to any of our properties. However, our tenants frequently make improvements to the properties leased from us at their expense. We are not aware of any material liens or encumbrances on any of our properties.
We lease eight hundred fifty-five retail motor fuel and convenience store properties and nine petroleum distribution terminals to Marketing under the Marketing Leases. The Master Lease is a unitary lease and has an initial term expiring in 2015, and generally provides Marketing with three renewal options of ten years each and a final renewal option of three years and ten months extending to 2049. Each of the renewal options may be exercised
only on an “all or nothing” basis. The Marketing Leases are “triple-net” leases, under which Marketing is responsible for the payment of taxes, maintenance, repair, insurance and other operating expenses. As permitted under the terms of our leases with Marketing, Marketing can generally use each property for any lawful purpose, or for no purpose whatsoever. We believe that as of December 31, 2008, Marketing had vacancies and/or removed the gasoline tanks and related equipment at what may be as much as 10% or more of the properties subject to the Marketing Leases. (For additional information regarding developments related to Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.)
If Marketing fails to pay rent, taxes or insurance premiums when due under the Marketing Leases and the failure is not cured by Marketing within a specified time after receipt of notice, we have the right to terminate the Marketing Leases and to exercise other customary remedies against Marketing. If Marketing fails to comply with any other obligation under the Master Lease after notice and opportunity to cure, we do not have the right to terminate the Master Lease. In the event of Marketing’s default where we do not have the right to terminate the Master Lease, our available remedies under the Master Lease are to seek to obtain an injunction or other equitable relief requiring Marketing to comply with its obligations under the Master Lease and to recover damages from Marketing resulting from the failure. If any lease we have with a third-party landlord for properties that we lease to Marketing is terminated as a result of our default and the default is not caused by Marketing, we have agreed to indemnify Marketing for its losses with respect to the termination. Marketing has the right-of-first refusal to purchase any property leased to Marketing under the Marketing Leases that we decide to sell.
We have also agreed to provide limited environmental indemnification to Marketing, capped at $4.25 million and expiring in 2010, for certain pre-existing conditions at six of the terminals we own and lease to Marketing. Under the agreement, Marketing is obligated to pay the first $1.5 million of costs and expenses incurred in connection with remediating any pre-existing terminal condition, Marketing will share equally with us the next $8.5 million of those costs and expenses and Marketing is obligated to pay all additional costs and expenses over $10.0 million. We have accrued $0.3 million as of December 31, 2008 and 2007 in connection with this indemnification agreement. Under the Master Lease, we continue to have additional ongoing environmental remediation obligations for one hundred eighty-seven scheduled sites and our agreements with Marketing provide that Marketing otherwise remains liable for all environmental matters. (For additional information regarding developments related to Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.)
Item 3. Legal Proceedings
In 1989, we were named as a defendant in a lawsuit by multiple owners of adjacent properties seeking compensatory and punitive damages for personal injury and property damages alleging that a leak of an underground storage tank occurred in November 1985 at one of our retail motor fuel properties. The action is still pending in New York Supreme Court, Suffolk County, remains in the pleadings stage and has remained dormant for more than twelve years.
In 1991, the State of New York brought an action in the New York State Supreme Court in Albany against our former heating oil subsidiary seeking reimbursement for cleanup costs claimed to have been incurred at a retail motor fuel property in connection with a gasoline release. The State is also seeking penalties plus interest. We answered the complaint by denying liability and also asserted cross-claims against another defendant. There had been no activity in this proceeding for approximately eight years prior to January 2002 when we received a letter from the State’s attorney indicating that the State intends to continue prosecuting the action. To date, we are not aware that the State has taken any additional actions in connection with this claim.
In 1997, an action was commenced in the New York Supreme Court in Schenectady, naming us as defendants, and seeking to recover monetary damages for personal injuries allegedly suffered from the release of petroleum and vapors from one of our retail motor fuel properties. This action has not been pursued by the plaintiff for more than ten years.
In 1997, representatives of the County of Lancaster, Pennsylvania contacted the Company regarding alleged petroleum contamination of property owned by the County adjoining a property owned by the Company. No litigation has been instituted as a result of this potential claim. Negotiations with the County have, however, have been ongoing since commencement of this action in an effort to reach an amicable resolution. In 2005, the County requested reimbursement of legal fees pursuant to an access agreement between the parties. A substantial portion of the fees remains in dispute.
In June 1999, an action was commenced against us in the New York Supreme Court in Richmond County seeking monetary damages for property damage alleged to have resulted from a petroleum release in connection with a tank removal by our contractor. After a number of years of inactivity by the plaintiff, in 2006 the plaintiff reactivated prosecution by filing for a preliminary conference. After a number of years of inactivity by the plaintiff, in 2006 the plaintiff reactivated prosecution of its case by filing for a preliminary conference. Discovery is ongoing.
In 2000, an action was commenced in New York Supreme Court in Nassau County against us by a prior landlord to recover damages arising out of a petroleum release and remediation thereof. The release dates back to 1979 and is listed as “closed” by the NYSDEC. The plaintiff has not pursued this case for more than seven years.
In December 2002, the State of New York commenced an action in the New York Supreme Court in Albany County against us and Marketing to recover costs claimed to have been expended by the State to investigate and remediate a petroleum release into the Ossining River commencing approximately in 1996. This case was settled against all defendants in June, 2008 in consideration for a payment of an aggregate amount, of which the Company, for ourselves and on behalf of Marketing (whom we had agreed to indemnify), paid $53,000.
In February 2003, an action was commenced against us, Marketing and others by the owners of an adjacent property in the Pennsylvania Court of Common Pleas in Lancaster County, asserting claims relating to a discharge of gasoline allegedly emanating from our property. In response to cross motions for summary judgment, the court denied our motion and granted plaintiff’s motion finding us liable for the petroleum contamination. Plaintiff’s counsel has also made demand for legal fees. The matter was settled by us, for ourselves and on behalf of Marketing and its subtenant, in July 2008 in consideration for a payment by the Company of $295,000.
In April 2003, we were named in a complaint seeking class action classification, filed in the New York Supreme Court in Dutchess County, NY, arising out of alleged contamination of ground water with methyl tertiary butyl ether (a fuel derived from methanol, which we refer to as “MTBE”). We served an answer that denied liability and asserted affirmative defenses. The plaintiffs have not responded to our answer and there has been no activity in the case since it was commenced.
In July 2005, the State of Rhode Island Department of Environmental Management (“RIDEM”) issued a Notice of Violation (“NOV”) against the Company and Marketing relating to a suspected petroleum release at a property that abuts property owned by us and leased to Marketing. The NOV was appealed by Marketing on behalf of it and the Company to RIDEM’s Administrative Adjudication Division. An evidentiary hearing on that appeal was held in May, 2008, leading to a final decision entered by RIDEM in October, 2008. The final decision dismissed the NOV entirely against Marketing but only partially against the Company, upholding certain state regulatory violations against one of our subsidiaries and ordering remediation actions and the payment of an administrative penalty. We have appealed RIDEM’s final decision to the Providence Superior Court.
In July 2003, we received a Request for Reimbursement from the State of Maine Department of Environmental Protection (“MDEP”) seeking reimbursement of costs claimed to have been incurred by it in connection with the remediation of contamination found at a retail motor fuel property, purportedly linked to numerous gasoline spills in the late 1980’s. We have denied liability for the claim and not received any data from the State responsive to our requests, the most recent of which was made in July, 2008, for evidence linking the subject contamination to our conduct.
In September 2003, we were notified by the New Jersey Department of Environmental Protection (the “NJDEP”) that we may be responsible for damages to natural resources (“NRDs”) by reason of a petroleum release at a retail motor fuel property formerly operated by us in Egg Harbor, NJ. We have remediated the resulting contamination at the property in accordance with a plan approved by the NJDEP and continue required sampling of monitoring wells
21
that were required to be installed. In addition, we have responded to the notice and met with the Department to determine whether, and to what extent, we may be responsible for NRDs regarding this property and our other properties formerly supplied by us with gasoline in New Jersey. Since our meeting with the NJDEP held shortly after receipt of the notification, we have had no communication with the NJDEP arising from this matter regarding NRDs.
From October 2003 through December 2008, we were made a party to fifty-four cases in Connecticut, Florida, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Vermont, Virginia, and West Virginia, brought by local water providers or governmental agencies. These cases allege various theories of liability due to contamination of groundwater with MTBE as the basis for claims seeking compensatory and punitive damages. Each case names as defendants approximately fifty petroleum refiners, manufacturers, distributors and retailers of MTBE, or gasoline containing MTBE. The accuracy of the allegations as they relate to us, our defenses to such claims, the aggregate possible amount of damages, and the method of allocating such amounts among the remaining defendants have not been determined. We have been dismissed from certain of the cases initially filed against us. Pursuant to consolidation procedures under federal law, the various MTBE cases have been transferred to the Federal District Court for the Southern District of New York for coordinated Multi-District Litigation proceedings. We are presently named as a defendant in fifty out of the approximately one hundred cases that are consolidated in the Multi-District Litigation. The Federal District Court has set apart for initial process four focus cases from the consolidated cases being heard. Three of these four focus cases name us as a defendant. One of the focus cases to which we are a party had been set for trial in September 2008. However, all of the named defendants in this first focus case, other than us and one other non-refiner defendant, entered into settlements with certain plaintiffs, which affected approximately twenty-seven of the cases to which we are a party, including one of the other initial focus cases. As a result of the multi-party settlement which affected two of the focus cases, the Court vacated the September 2008 trial date for the first focus case, and further scheduling of trial for the first focus case and one of the other focus cases to which we are a named defendant remains open at this time. As a result of this settlement, the Federal District Court designated an additional focus case for process. We are a named defendant in this new focus case. Trials in this case and in one of the original focus cases in which we have been named a defendant are scheduled for sometime in 2009. We participate in a joint defense group with the goal of sharing expert and other costs with the other defendants, and we also have separate counsel defending our interests. We are vigorously defending these matters.
In November 2003, we received a demand from the State of New York for reimbursement of cleanup and removal costs claimed to have been incurred by the New York Environmental Protection and Spill Compensation Fund regarding contamination it alleges emanated from one of our retail motor fuel properties in 1997. We have responded to the State’s demand and have denied responsibility for reimbursement of such costs. In September 2004, the State of New York commenced an action against us and others in New York Supreme Court in Albany County seeking recovery of such costs as well as additional costs and future costs for remediation and sampling, and interest and penalties. Discovery in this case is ongoing. We are vigorously defending this matter.
In July 2005, we received a demand from a property owner for reimbursement of cleanup and soil removal costs, at a former retail motor fuel property located in Brooklyn, New York formerly supplied by us with gasoline that the owner expects to incur in connection with the proposed development of its property. The owner claims that the costs will be reimbursable pursuant to an indemnity agreement that we entered into with the property owner. Although we have acknowledged responsibility for the contaminated soil, and have been engaged in the remediation of the same, we have denied responsibility for the full extent of the costs estimated to be incurred.
In October 2005, the State of New York commenced an action in the New York Supreme Court in Albany County against us and Marketing to recover costs claimed to have been funded by the State to remediate a petroleum release emanating from a property we acquired in 1999. The seller of the property to us, who is also party to the action, has agreed to defend and indemnify us (and Marketing) regarding the release and funds have been escrowed to cover the amount sought to be recovered. The parties in this action are engaged in discovery proceedings. No trial date has yet been established.
In December 2005, an action was commenced against us in the Superior Court in Providence, Rhode Island, by the owner of a pier that is adjacent to one of our terminals that is leased to Marketing seeking monetary damages of approximately $500,000 representing alleged costs related to the ownership and maintenance of the pier for the period from January 2003 through September 2005. We have been vigorously defending against this action.
Additionally, we tendered the matter to Marketing for indemnification and defense pursuant to the Master Lease. Marketing declined to accept our tender and has denied liability for the claim. In May, 2008 the US District Court (to which the case had been removed from state court) granted our motion for summary judgment against the plaintiff on all claims. The plaintiff has appealed this decision to the First Circuit Court of Appeals. We intend to pursue our claim against Marketing for indemnification.
In April 2006, we were added as a defendant in an action in the Superior Court of New Jersey, Middlesex County, filed by a property owner claiming damages against multiple defendants for remediation of contaminated soil. The basis for prosecuting the claim against us is corporate successor liability. The matter was settled in July 2008 in consideration for a payment by us of $600,000, which was made in the third quarter of 2008, plus an additional maximum contingent amount of $40,000 relating to possible future liability for certain third party claims.
In May 2006, we were advised (but not yet served) of a third party complaint filed in an action in the Superior Court of New Jersey, Essex County, against Getty Oil, Inc. and John Doe Corporations, filed by a property owner seeking to impose upon third parties (that may include a subsidiary of the Company) responsibility for damages it may suffer in the action for claims brought against it under federal environmental laws, the State’s Spill Act, the State’s Water Pollution Act and other theories of liability.
In November 2006, an action was commenced by the New Jersey Schools Corporation (“NJSC”) in the Superior Court of New Jersey, Union County seeking reimbursement for costs of approximately $1.0 million related to the removal of abandoned USTs and remediation of soil contamination at a retail motor fuel property that was acquired from us by eminent domain. Prior to the taking, the property was leased to and operated by Marketing. We tendered the matter to Marketing for defense and indemnification. Marketing has declined to accept the tender and has denied liability for the claim. We have filed a compulsory third party claim against Marketing seeking defense and indemnification. In July 2007, Marketing filed a claim against the Company seeking defense and indemnification. (For additional information regarding developments related to Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.)
In May 2007, the Company’s subsidiary received a lease default notice from its sub-landlord pertaining to an alleged underpayment of rent by our subsidiary for a period of time exceeding fifteen years. In June 2007, the Company commenced an action against the sub-landlord seeking an injunction that would preclude the sub-landlord from taking any action to terminate its sublease with our subsidiary or collect the alleged underpayment of rent. The Court issued the injunction preventing termination of the sublease pending determination of the matter. Discovery is ongoing.
In July 2007, subsidiaries of the Company were notified of the commencement of three actions by the NJDEP seeking Natural Resource Damages (“NRDs”) arising out of petroleum releases at properties owned or leased by us. Answers to the complaints and discovery requests were filed by us in each of these cases. In September, 2008, we agreed with NJDEP to a stipulation of dismissal of one of the NRD cases, and in February, 2009, we agreed with NJDEP to a stipulation of dismissal of another of the NRD cases. In each of these stipulations of dismissal, the claims raised in the New Jersey State Court action were dismissed without prejudice to the NJDEP’s right to reassert the same claims in complaints brought in the Federal District Court to be heard in the Multi-District MTBE cases currently pending against us. The third action remains pending. We are favorably disposed to entering into a stipulation with the NJDEP with respect to the final NRD case on the same terms as the other two, and have been advised by the NJDEP that it intends to do so.
In October 2007, the Company received a demand from the State of New York to pay the costs allegedly arising from investigation and remediation of petroleum spills that occurred at a property formerly owned by us and taken by Eminent Domain by the State of New York in 1991. No formal legal action has yet been commenced by the State.
In August, 2008, we were notified by the New York Environmental Protection and Spill Compensation Fund (“NY Spill Fund”) that we and another party had been named as allegedly responsible for certain petroleum contamination discovered in 2007. The claimant in the matter is a property developer who alleges to have incurred approximately $434,000 in petroleum-related remediation costs as a result of contamination on its property which
allegedly derive from two reported spills: one dating back to 1995 at an adjacent site formerly owned by us, and the other occurring in 2006, at an adjacent site owned by the other respondent named in the action. In September 2008, the same claimant also commenced a lawsuit in the New York State Supreme Court against us and the other allegedly responsible party to recover damages based upon the same set of facts. We are vigorously defending the claims against us and have asserted cross claims against the other party.
In September 2008, we received a directive from the NJDEP calling for a remedial investigation and cleanup, by us and other named parties, of petroleum-related contamination found at a retail motor fuel and auto service property. We did not own or lease this property, but did supply gas to the operator of this property in 1985 and 1986. We have responded to the NJDEP and we have tendered the matter to Marketing for defense and indemnification under the Reorganization and Distribution Agreement between Getty Petroleum Corp. (n/k/a/ Getty Properties Corp.) and Marketing dated as of February 1, 1997. However, there can be no assurance that Marketing will accept responsibility for this matter. For additional information regarding developments related to Marketing and the Marketing Leases (as defined below), see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.)
Matters related to our Newark, New Jersey Terminal and the Lower Passaic River
In September 2003, we received a directive (the “Directive”) issued by the NJDEP under the New Jersey Spill Compensation and Control Act. The Directive indicated that we are one of approximately sixty-six potentially responsible parties for alleged NRDs resulting from discharges of hazardous substances along the lower Passaic River (the “Lower Passaic River”). The Directive alleged, inter alia, that the recipients thereof must conduct an assessment of the natural resources that have been injured by the discharges and implement interim compensatory restoration for the injured natural resources. NJDEP alleges that our liability arises from alleged discharges originating from our Newark, New Jersey Terminal site. Chevron/Texaco was also identified in the Directive. We responded to the Directive by asserting that we were not liable. There has been no material activity and/or communications by NJDEP with respect to the Directive since early after its issuance.
Effective June 22, 2004, the United States Environmental Protection Agency (“EPA”) entered into an Administrative Order on Consent (“AOC”) with 31 parties (some of which are also named in the Directive) who agreed to fund a portion of the costs for EPA to perform a Remedial Investigation and Feasibility Study (“RI/FS”) for the Lower Passaic River. The RI/FS is intended to address the investigation and evaluation of alternative remedial actions with respect to alleged damages to the Lower Passaic River. After being notified by the EPA that they considered us to be a potentially responsible party, we reserved our defenses to liability, became a party to an amended AOC, and joined the Cooperating Parties Group (“CPG”), which consists of the parties which had executed the initial AOC and other parties (including Chevron/Texaco). Pursuant to the amended AOC and subsequent amendments adding additional parties, the CPG has agreed to take over performance of the RI/FS from EPA. The RI/FS does not resolve liability issues for remedial work or restoration of, or compensation for, natural resource damages to the Lower Passaic River, which are not known at this time. As to such matters, separate proceedings or activities are currently ongoing.
In a related action, in December 2005, the State of New Jersey brought suit in the Superior Court of New Jersey, Law Division, against certain companies which the State alleges are responsible for pollution of the Passaic River from a former Diamond Alkali manufacturing plant and seeking recovery of alleged damages incurred and to be incurred on account of alleged discharges of hazardous substances to the Passaic River. On February 4, 2009, certain of these defendants filed third-party complaints against approximately three hundred additional parties, including us as well as the other members of the CPG, seeking contribution for a pro-rata share of response costs, cleanup and removal costs, and other damages.
We have made a demand upon Chevron/Texaco for indemnity under certain agreements between the Company and Chevron/Texaco that allocate environmental liabilities for the Newark Terminal Site between the parties. In response, Chevron/Texaco has asserted that the proceedings and claims are still not yet developed enough to determine the extent to which indemnities apply. Our ultimate liability, if any, in the pending and possible future proceedings pertaining to the Lower Passaic River is uncertain and subject to numerous contingencies which cannot be predicted and the outcome of which are not yet known.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the three months ended December 31, 2008.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Capital Stock
Our common stock is traded on the New York Stock Exchange (symbol: “GTY”). There were approximately 11,000 shareholders of our common stock as of March 2, 2009, of which approximately 1,400 were holders of record. The price range of our common stock and cash dividends declared with respect to each share of common stock during the years ended December 31, 2008 and 2007 was as follows:
PRICE RANGE
CASHDIVIDENDS
PERIOD ENDED
HIGH
LOW
PER SHARE
March 31, 2007
$
32.10
27.80
.4550
June 30, 2007
30.33
26.17
.4650
September 30, 2007
28.72
23.80
December 31, 2007
29.23
25.21
March 31, 2008
28.58
13.33
June 30, 2008
19.04
14.34
September 30, 2008
23.12
13.12
.4700
December 31, 2008
22.40
13.35
For a discussion of potential limitations on our ability to pay future dividends see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources”.
Issuer Purchases of Equity Securities
Sales of Unregistered Securities
Stock Performance Graph
We have chosen as our Peer Group the following companies: Commercial Net Lease Realty, Entertainment Properties Trust, Realty Income Corp. and Hospitality Properties Trust. We have chosen these companies as our Peer Group because a substantial segment of each of their businesses is owning and leasing commercial properties. We cannot assure you that our stock performance will continue in the future with the same or similar trends depicted in the graph above. We do not make or endorse any predictions as to future stock performance.
This performance graph and related information shall not be deemed filed for the purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section and shall not be deemed to be incorporated by reference into any filing that we make under the Securities Act or the Exchange Act.
2003
2004
2005
2006
2007
2008
Getty Realty Corp.
100.00
117.15
114.35
143.03
132.08
115.55
Standard & Poors 500
108.99
112.26
127.55
132.06
81.23
Peer Group
125.57
117.58
155.00
137.96
103.68
Assumes $100 invested at the close of trading on 12/03 in Getty Realty Corp. common stock, Standard & Poor’s 500, and Peer Group.
*
Cumulative total return assumes reinvestment of dividends.
26
Item 6. Selected Financial Data
GETTY REALTY CORP. AND SUBSIDIARIESSELECTED FINANCIAL DATA(in thousands, except per share amounts and number of properties)
FOR THE YEARS ENDED DECEMBER 31,
2007 (a)
OPERATING DATA:
Revenues from rental properties
81,163
78,069
71,329
70,264
65,188
Earnings before income taxes and discontinued operations
39,162
28,110
(b)
41,228
43,211
38,525
Income tax benefit (c)
700
1,494
Earnings from continuing operations
41,928
44,705
Earnings from discontinued operations
2,648
5,784
797
743
827
Net earnings
41,810
33,894
42,725
45,448
39,352
Diluted earnings per common share:
1.58
1.13
1.69
1.81
1.56
1.37
1.73
1.84
1.59
Diluted weighted-average common shares outstanding
24,774
24,787
24,759
24,729
24,721
Cash dividends declared per share
1.87
1.85
1.82
1.76
1.70
FUNDS FROM OPERATIONS AND ADJUSTED FUNDS FROM OPERATION (d):
Depreciation and amortization of real estate assets
11,875
9,794
7,883
8,113
7,490
Gains on dispositions of real estate
(2,787
)
(6,179
(1,581
(1,309
(618
Funds from operations
50,898
37,509
49,027
52,252
46,224
Deferred rental revenue (straight-line rent)
(1,803
(3,112
(3,010
(4,170
(4,464
Allowance for deferred rental revenue
10,494
Amortization of above-market and below-market leases
(790
(1,047
(700
(1,494
Adjusted funds from operations
48,305
43,844
45,317
46,588
41,760
BALANCE SHEET DATA (AT END OF YEAR):
Real estate before accumulated depreciation and amortization
473,567
474,254
383,558
370,495
346,590
Total assets
387,813
396,911
310,922
301,468
292,088
Debt
130,250
132,500
45,194
34,224
24,509
Shareholders’ equity
205,957
212,178
225,575
227,883
225,503
NUMBER OF PROPERTIES:
Owned
878
880
836
814
795
Leased
203
216
241
250
Total properties
1,083
1,052
1,055
1,045
(a)
Includes (from the date of the acquisition) the effect of the $84.6 million acquisition of convenience stores and gas station properties from FF-TSY Holding Company II LLC (successor to Trustreet Properties, Inc.) which was substantially completed by the end of the first quarter of 2007.
Includes the effect of a $10.5 million non-cash reserve for the full amount of the deferred rent receivable recorded as of December 31, 2007 related to approximately 40% of the properties under leases with our primary tenant, Getty Petroleum Marketing, Inc. (For additional information regarding developments related to Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.)
(c)
The years ended 2006 and 2005 include income tax benefits recognized due to the elimination of, or reduction in, amounts accrued for uncertain tax positions related to being taxed as a C-corp. prior to our election to be
taxed as a real estate investment trust (“REIT”) under the federal income tax laws in 2001. Income taxes have not had a significant impact on our earnings since we first elected to be treated as a REIT.
(d)
In addition to measurements defined by accounting principles generally accepted in the United States of America (“GAAP”), our management also focuses on funds from operations (“FFO”) and adjusted funds from operations (“AFFO”) to measure our performance. FFO is generally considered to be an appropriate supplemental non-GAAP measure of the performance of real estate investment trusts (“REITs”). FFO is defined by the National Association of Real Estate Investment Trusts as net earnings before depreciation and amortization of real estate assets, gains or losses on dispositions of real estate, (including such non-FFO items reported in discontinued operations), extraordinary items, and cumulative effect of accounting change. Other REITs may use definitions of FFO and/or AFFO that are different than ours and; accordingly, may not be comparable.
We believe that FFO is helpful to investors in measuring our performance because FFO excludes various items included in GAAP net earnings that do not relate to, or are not indicative of, our fundamental operating performance such as gains or losses from property dispositions and depreciation and amortization of real estate assets. In our case, however, GAAP net earnings and FFO include the significant impact of deferred rental revenue (straight-line rental revenue) and the net amortization of above-market and below-market leases on our recognition of revenue from rental properties, as offset by the impact of related collection reserves. Deferred rental revenue results primarily from fixed rental increases scheduled under certain leases with our tenants. In accordance with GAAP, the aggregate minimum rent due over the current term of these leases is recognized on a straight-line basis rather than when the payment is due. The present value of the difference between the fair market rent and the contractual rent for in-place leases at the time properties are acquired is amortized into revenue from rental properties over the remaining lives of the in-place leases. GAAP net earnings and FFO also include income tax benefits recognized due to the elimination of, or reduction in, amounts accrued for uncertain tax positions related to being taxed as a C-corp. rather than as a REIT prior to 2001 (see note (b) above). As a result, management pays particular attention to AFFO, a supplemental non-GAAP performance measure that we define as FFO less straight-line rental revenue, net amortization of above-market and below-market leases and income tax benefit. In management’s view, AFFO provides a more accurate depiction than FFO of the impact of the scheduled rent increases under these leases, rental revenue from acquired in-place leases and our election to be treated as a REIT under the federal income tax laws beginning in 2001. Neither FFO nor AFFO represent cash generated from operating activities calculated in accordance with GAAP and therefore should not be considered an alternative for GAAP net earnings or as a measure of liquidity.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the “Cautionary Note Regarding Forward-Looking Statements” on page 1; the risks and uncertainties described in “Item 1A. Risk Factors”; the selected financial data in “Item 6.Selected Financial Data”; and the consolidated financial statements and related notes in “Item 8. Financial Statements and Supplementary Data”.
GENERAL
Real Estate Investment Trust
We are a real estate investment trust (“REIT”) specializing in the ownership and leasing of retail motor fuel and convenience store properties and petroleum distribution terminals. We elected to be treated as a REIT under the federal income tax laws beginning January 1, 2001. As a REIT, we are not subject to federal corporate income tax on the taxable income we distribute to our shareholders. In order to continue to qualify for taxation as a REIT, we are required, among other things, to distribute at least ninety percent of our taxable income to shareholders each year.
Retail Petroleum Marketing Business
We lease or sublet our properties primarily to distributors and retailers engaged in the sale of gasoline and other motor fuel products, convenience store products and automotive repair services. These tenants are responsible for the payment of taxes, maintenance, repair, insurance and other operating expenses and for managing the actual
operations conducted at these properties. In addition, approximately twenty of our properties are directly leased by us to others for other uses such as fast food restaurants, automobile sales and other retail purposes. In those instances where we determine that the highest and best use for our properties is no longer a retail motor fuel outlet, we will seek alternative tenants or buyers for such properties as opportunities arise. As of December 31, 2008, we leased eight hundred sixty-four of our one thousand sixty properties on a long-term basis to Getty Petroleum Marketing Inc. (“Marketing”). Eight hundred fifty-four of the properties are leased to Marketing under a unitary master lease (the “Master Lease”) with an initial term effective through December 2015 and supplemental leases for ten properties with initial terms of varying expiration dates (collectively with the Master Lease, the “Marketing Leases”). Marketing was spun-off to our shareholders as a separate publicly held company in March 1997 and, in December 2000; Marketing was acquired by a subsidiary of OAO LUKoil (“Lukoil”), one of the largest integrated Russian oil companies.
Marketing’s financial results depend largely on retail petroleum marketing margins from the sale of refined petroleum products at margins in excess of its fixed and variable expenses and rental income from subtenants who operate their convenience stores, automotive repair service or other businesses at our properties. As permitted under the terms of our leases with Marketing, Marketing can generally use each property for any lawful purpose, or for no purpose whatsoever. The petroleum marketing industry has been and continues to be volatile and highly competitive. (For information regarding factors that could adversely affect us relating to Marketing, or our other lessees, see “Item 1A. Risk Factors”.)
Developments Related to Marketing and the Marketing Leases
In accordance with accounting principles generally accepted in the United States of America (“GAAP”), the aggregate minimum rent due over the current terms of the Marketing Leases, substantially all of which are scheduled to expire in December 2015, is recognized on a straight-line basis rather than when payment is due. We have recorded the cumulative difference between lease revenue recognized under this straight line accounting method and the lease revenue recognized when payment is due under the contractual payment terms as deferred rent receivable on our consolidated balance sheet. We provide reserves for a portion of the recorded deferred rent receivable if circumstances indicate that a property may be disposed of before the end of the current lease term or if it is not reasonable to assume that a tenant will make all of its contractual lease payments during the current lease term. Our assessments and assumptions regarding the recoverability of the deferred rent receivable related to the properties subject to the Marketing Leases are reviewed on a regular basis and such assessments and assumptions are subject to change.
We have had periodic discussions with representatives of Marketing regarding potential modifications to the Marketing Leases and, in 2007, during the course of such discussions, Marketing proposed to (i) remove approximately 40% of the properties (the “Subject Properties”) from the Marketing Leases and eliminate payment of rent to us, and eliminate or reduce payment of operating expenses, with respect to the Subject Properties, and (ii) reduce the aggregate amount of rent payable to us for the approximately 60% of the properties that would remain under the Marketing Leases (the “Remaining Properties”). Representatives of Marketing have also indicated to us that they are considering significant changes to Marketing’s business model. In light of these developments and the continued deterioration in Marketing’s annual financial performance (as discussed below), in March 2008, we decided to attempt to negotiate with Marketing for a modification of the Marketing Leases which removes the Subject Properties from the Marketing Leases. We have held periodic discussions with Marketing since March 2008 in our attempt to negotiate a modification of the Marketing Leases to remove the Subject Properties. Although we continue to remove individual locations from the Master Lease as mutually beneficial opportunities arise, there has
been no agreement between us and Marketing on any principal terms that would be the basis for a definitive Master Lease modification agreement. If Marketing ultimately determines that its business strategy is to exit all of the properties it leases from us or to divest a composition of properties different from the properties comprising the Subject Properties, such as the revised list of properties provided to us by Marketing in the second quarter of 2008 which includes approximately 45% of the properties Marketing leases from us (the “Revised Subject Properties”), it is our intention to cooperate with Marketing in accomplishing those objectives if we determine that it is prudent for us to do so. Any modification of the Marketing Leases that removes a significant number of properties from the Marketing Leases would likely significantly reduce the amount of rent we receive from Marketing and increase our operating expenses. We cannot accurately predict if, or when, the Marketing Leases will be modified or what the terms of any agreement may be if the Marketing Leases are modified. We also cannot accurately predict what actions Marketing and Lukoil may take, and what our recourse may be, whether the Marketing Leases are modified or not.
We intend either to re-let or sell any properties removed from the Marketing Leases and reinvest the realized sales proceeds in new properties. We intend to seek replacement tenants or buyers for properties removed from the Marketing Leases either individually, in groups of properties, or by seeking a single tenant for the entire portfolio of properties subject to the Marketing Leases. Although we are the fee or leasehold owner of the properties subject to the Marketing Leases and the owner of the Getty® brand and have prior experience with tenants who operate their gas stations, convenience stores, automotive repair services or other businesses at our properties; in the event that the properties are removed from the Marketing Leases, we cannot accurately predict if, when, or on what terms, such properties could be re-let or sold.
We recorded a reserve of $10.5 million in 2007 representing the full amount of the deferred rent receivable recorded related to the Subject Properties as of December 31, 2007. Providing the $10.5 million non-cash deferred rent receivable reserve reduced our net earnings and our funds from operations for 2007 but did not impact our cash flow from operating activities or adjusted funds from operations since the impact of the straight-line method of accounting is not included in our determination of adjusted funds from operations. (For additional information regarding funds from operations and adjusted funds from operations, which are non-GAAP measures, see “— General — Supplemental Non-GAAP Measures” below.) As of December 31, 2008 we had a reserve of $10.0 million for the deferred rent receivable due from Marketing representing the full amount of the deferred rent receivable recorded related to the Subject Properties as of that date. We have not provided a deferred rent receivable reserve related to the Remaining Properties since, based on our assessments and assumptions, we continue to believe that it is probable that we will collect the deferred rent receivable related to the Remaining Properties of $20.5 million as of December 31, 2008 and that Lukoil will not allow Marketing to fail to perform its rental, environmental and other obligations under the Marketing Leases. We anticipate that the rental revenue for the Remaining Properties will continue to be recognized on a straight-line basis. As required by the straight-line method of accounting, beginning with the first quarter of 2008, the rental revenue for the Subject Properties was, and for future periods, is expected to be, effectively recognized when payment is due under the contractual payment terms. Although we have adjusted the estimated useful lives of certain long-lived assets for the Subject Properties, we believe that no impairment charge was necessary for the Subject Properties as of December 31, 2008 or 2007 pursuant to the provisions of Statement of Financial Accounting Standards No. 144. The impact to depreciation expense due to adjusting the estimated lives for certain long-lived assets beginning with the year ended December 31, 2008 was not material.
Marketing is directly responsible to pay for (i) remediation of environmental contamination it causes and compliance with various environmental laws and regulations as the operator of our properties, and (ii) known and unknown environmental liabilities allocated to Marketing under the terms of the Master Lease and various other
30
agreements between Marketing and us relating to Marketing’s business and the properties subject to the Marketing Leases (collectively the “Marketing Environmental Liabilities”). We may ultimately be responsible to directly pay for Marketing Environmental Liabilities as the property owner if Marketing fails to pay them. Additionally, we will be required to accrue for Marketing Environmental Liabilities if we determine that it is probable that Marketing will not meet its obligations or if our assumptions regarding the ultimate allocation methods and share of responsibility that we used to allocate environmental liabilities changes as a result of the factors discussed above, or otherwise. However, we continue to believe that it is not probable that Marketing will not pay for substantially all of the Marketing Environmental Liabilities since we believe that Lukoil will not allow Marketing to fail to perform its rental, environmental and other obligations under the Marketing Leases and, accordingly, we did not accrue for the Marketing Environmental Liabilities as of December 31, 2008 or December 31, 2007. Nonetheless, we have determined that the aggregate amount of the Marketing Environmental Liabilities (as estimated by us based on our assumptions and analysis of information currently available to us) could be material to us if we were required to accrue for all of the Marketing Environmental Liabilities in the future since we believe that it is reasonably possible that as a result of such accrual, we may not be in compliance with the existing financial covenants in our Credit Agreement. Such non-compliance could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness under the Credit Agreement.
Should our assessments, assumptions and beliefs prove to be incorrect, or if circumstances change, the conclusions we reached may change relating to (i) whether some or all of the Subject or Remaining Properties are likely to be removed from the Marketing Leases (ii) recoverability of the deferred rent receivable for some or all of the Subject or Remaining Properties, (iii) potential impairment of the Subject or Remaining Properties, and (iv) Marketing’s ability to pay the Marketing Environmental Liabilities. We intend to regularly review our assumptions that affect the accounting for deferred rent receivable; long-lived assets; environmental litigation accruals; environmental remediation liabilities; and related recoveries from state underground storage tank funds, which may result in material adjustments to the amounts recorded for these assets and liabilities, and as a result of which, we may not be in compliance with the financial covenants in our Credit Agreement. Accordingly, we may be required to (i) reserve additional amounts of the deferred rent receivable related to the Remaining Properties, (ii) record an impairment charge related to the Subject or Remaining Properties, or (iii) accrue for Marketing Environmental Liabilities as a result of the potential or actual modification of the Marketing Leases or other factors.
We cannot provide any assurance that Marketing will continue to pay its debts or meet its rental, environmental or other obligations under the Marketing Leases prior or subsequent to any potential modification of the Marketing Leases. In the event that Marketing cannot or will not perform its rental, environmental or other obligations under the Marketing Leases; if the Marketing Leases are modified significantly or terminated; if we determine that it is probable that Marketing will not meet its environmental obligations and we accrue for such liabilities; if we are unable to promptly re-let or sell the properties subject to the Marketing Leases; or, if we change our assumptions that affect the accounting for rental revenue or Marketing Environmental Liabilities related to the Marketing Leases and various other agreements; our business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends and/or stock price may be materially adversely affected.
One comment remains unresolved as part of a periodic review commenced in 2004 by the Division of Corporation Finance of the SEC of our Annual Report on Form 10-K for the year ended December 31, 2003 pertaining to the SEC’s position that we must include the financial statements and summarized financial data of Marketing in our periodic filings, which Marketing contends is prohibited by the terms of the Master Lease. In June 2005, the SEC indicated that, unless we file Marketing’s financial statements and summarized financial data with our periodic reports: (i) it will not consider our Annual Reports on Forms 10-K for the years beginning with 2000 to be compliant; (ii) it will not consider us to be current in our reporting requirements; (iii) it will not be in a position to declare effective any registration statements we may file for public offerings of our securities; and (iv) we should consider how the SEC’s conclusion impacts our ability to make offers and sales of our securities under existing registration statements and if we have a liability for such offers and sales made pursuant to registration statements that did not contain the financial statements of Marketing.
We believe that the SEC’s position is based on their interpretation of certain provisions of their internal Financial Reporting Manual (formerly known as their Accounting Disclosure Rules and Practices Training Material), Staff Accounting Bulletin No. 71 and Rule 3-13 of Regulation S-X. We do not believe that any of this guidance is clearly
applicable to our particular circumstances and we believe that, even if it were, we should be entitled to certain relief from compliance with such requirements. Marketing generally subleases our properties to independent, individual service station/convenience store operators (subtenants). Consequently, we believe that we, as the owner of these properties and the Getty® brand, could re-let these properties to the existing subtenants (except for those properties that are vacant) who operate their convenience stores, automotive repair services or other businesses at our properties, or to other new or replacement tenants, at market rents although we cannot accurately predict if, when, or on what terms, such properties would be re-let or sold. The SEC did not accept our positions regarding the inclusion of Marketing’s financial statements in our filings. We have had no communication with the SEC since 2005 regarding the unresolved comment. We cannot accurately predict the consequences if we are ultimately unable to resolve this outstanding comment.
Supplemental Non-GAAP Measures
We manage our business to enhance the value of our real estate portfolio and, as a REIT, place particular emphasis on minimizing risk and generating cash sufficient to make required distributions to shareholders of at least ninety percent of our taxable income each year. In addition to measurements defined by accounting principles generally accepted in the United States of America (“GAAP”), our management also focuses on funds from operations available to common shareholders (“FFO”) and adjusted funds from operations available to common shareholders (“AFFO”) to measure our performance. FFO is generally considered to be an appropriate supplemental non-GAAP measure of the performance of REITs. FFO is defined by the National Association of Real Estate Investment Trusts as net earnings before depreciation and amortization of real estate assets, gains or losses on dispositions of real estate, (including such non-FFO items reported in discontinued operations), extraordinary items and cumulative effect of accounting change. Other REITs may use definitions of FFO and/or AFFO that are different than ours and; accordingly, may not be comparable.
We believe that FFO is helpful to investors in measuring our performance because FFO excludes various items included in GAAP net earnings that do not relate to, or are not indicative of, our fundamental operating performance such as gains or losses from property dispositions and depreciation and amortization of real estate assets. In our case, however, GAAP net earnings and FFO include the significant impact of deferred rental revenue (straight-line rental revenue) and the net amortization of above-market and below-market leases on our recognition of revenues from rental properties, as offset by the impact of related collection reserves. Deferred rental revenue results primarily from fixed rental increases scheduled under certain leases with our tenants. In accordance with GAAP, the aggregate minimum rent due over the current term of these leases are recognized on a straight-line basis rather than when payment is due. The present value of the difference between the fair market rent and the contractual rent for in-place leases at the time properties are acquired is amortized into revenue from rental properties over the remaining lives of the in-place leases. GAAP net earnings and FFO also include income tax benefits recognized due to the elimination of, or a net reduction in, amounts accrued for uncertain tax positions related to being taxed as a C-corp., rather than as a REIT, prior to 2001. As a result, management pays particular attention to AFFO, a supplemental non-GAAP performance measure that we define as FFO less straight-line rental revenue, net amortization of above-market and below-market leases and income tax benefit. In management’s view, AFFO provides a more accurate depiction than FFO of the impact of scheduled rent increases under these leases, rental revenue from acquired in-place leases and our election to be treated as a REIT under the federal income tax laws beginning in 2001. Neither FFO nor AFFO represent cash generated from operating activities calculated in accordance with GAAP and therefore these measures should not be considered an alternative for GAAP net earnings or as a measure of liquidity. For a reconciliation of FFO and AFFO, see “Item 6. Selected Financial Data”.
Net earnings, earning from continuing operations and FFO for 2007 were reduced by all or substantially all of the non-cash $10.5 million reserve for the deferred rent receivable recorded as of December 31, 2007 for approximately 40% of the properties leased to Marketing under the Marketing Leases. (See “— General — Developments related to Marketing and the Marketing Leases” above for additional information.) If the applicable amount of the non-cash reserve were added to our 2007 net earnings, earning from continuing operations and FFO; net earnings would have been $44.4 million, or $1.79 per share, for the year ended December 31, 2007; earnings from continuing operations would have been $38.4 million for the year ended December 31, 2007; and FFO would have been $48.0 million, or $1.94 per share, for the year ended December 31, 2007. Accordingly, as compared to the respective prior year periods; net earnings for 2008 would have decreased by $2.6 million and for 2007 would have increased by $1.7 million; earnings from continuing operations for 2008 would have increased by $0.8 million and for 2007 would have decreased by $3.5 million; and FFO for 2008 would have increased by $2.9 million and for
32
2007 would have decreased by $1.0 million. We believe that these supplemental non-GAAP measures for 2007 are important to assist in the analysis of our performance for 2008 as compared to 2007 and 2007 as compared to 2006, exclusive of the impact of the non-cash reserve on our results of operations and are reconciled below (in thousands):
Non-adjusted
Reserve
As Adjusted
44,388
10,312
38,422
48,003
2007 and 2008 Acquisitions
Effective March 31, 2007, we acquired fifty-nine convenience store and retail motor fuel properties in ten states from various subsidiaries of FF-TSY Holding Company II, LLC (the successor to Trustreet Properties, Inc.) (“Trustreet”), a subsidiary of General Electric Capital Corporation, for cash with funds drawn under our credit facility. Effective April 23, 2007, we acquired five additional properties from Trustreet. The aggregate cost of the acquisitions, including transaction costs, was approximately $84.5 million. Substantially all of the properties are triple-net leased to tenants who previously leased the properties from the seller. The leases generally provide that the tenants are responsible for substantially all existing and future environmental conditions at the properties. In addition, in 2007, we exercised our fixed price purchase option for seven leased properties, purchased two properties and redeveloped one property by purchasing land adjacent to it and building a new convenience store on the existing site. In 2008 we exercised our fixed price purchase option for three leased properties and purchased six properties.
RESULTS OF OPERATIONS
Year ended December 31, 2008 compared to year ended December 31, 2007
Revenues from rental properties increased by $3.1 million to $81.2 million for the year ended December 31, 2008, as compared to $78.1 million for 2007. We received approximately $60.4 million for 2008, and $59.7 million for 2007, from properties leased to Marketing under the Marketing Leases. We also received rent of $18.2 million for 2008 and $14.8 million for 2007 from other tenants. The increase in rent received was primarily due to rent from properties acquired in March 2007, and rent escalations, partially offset by the effect of dispositions of real estate. In addition, revenues from rental properties include deferred rental revenue of $1.7 million for 2008, as compared to $2.6 million for 2007, recorded as required by GAAP, related to fixed rent increases scheduled under certain leases with our tenants. The aggregate minimum rent due over the current term of these leases are recognized on a straight-line basis rather than when payment is due. Revenues from rental properties also include $0.8 million and $1.0 million of net amortization of above-market and below-market leases primarily related to the properties acquired in 2007. The present value of the difference between the fair market rent and the contractual rent for in-place leases at the time properties are acquired is amortized into revenue from rental properties over the remaining lives of the in-place leases.
Rental property expenses, which are primarily comprised of rent expense and real estate and other state and local taxes, were $9.4 million for 2008, as compared to $9.3 million for 2007. Increases in real estate and other state and local taxes were partially offset by the decrease in rent expense which was principally due to the reduction in the number of leased locations compared to the prior year.
Environmental expenses, net of estimated recoveries from state underground storage tank (“UST” or “USTs”) funds for 2008 were $7.4 million, as compared to $8.2 million for 2007. The decrease was primarily due to a $0.5 million decrease in change in net estimated environmental costs, and a $0.4 million net decrease in environmental related litigation reserves and legal fees as compared to the prior year period.
General and administrative expenses for 2008 were $6.8 million, as compared to $6.7 million recorded for 2007. The increase in general and administrative expenses was due to $0.5 million of higher professional fees associated with previously disclosed potential modification of the Marketing Leases which was partially offset by a $0.2 million reduction in insurance loss reserves and a $0.3 million reduction in employee related expenses. The insurance loss reserves were established under our self funded insurance program that was terminated in 1997. Employee related expenses recorded in 2007 include the payment of severance in connection with the resignation of Mr. Andy Smith, the former President and Chief Legal Officer of the Company.
33
Allowance for deferred rent receivable reported in continuing operations and discontinued operations were $10.3 million and $0.2 million, respectively, for the year ended December 31, 2007. The non-cash allowance was provided in 2007 since we could no longer reasonably assume that we will collect all of the rent due to us related to approximately 40% of the properties leased to Marketing for the remainder of the current terms of the Marketing Leases. (See “— General — Developments related to Marketing and the Marketing Leases” above for additional information.)
Depreciation and amortization expense for 2008 was $11.8 million, as compared to $9.6 million for 2007. The increase was primarily due to properties acquired in 2007 and the acceleration of depreciation expense resulting from the reduction in the estimated useful lives of certain assets which may be removed from the unitary lease with Marketing, which increases were partially offset by the effect of dispositions of real estate and lease expirations.
As a result, total operating expenses decreased by approximately $8.7 million for 2008 as compared to 2007.
Other income, net, substantially all of which is comprised of certain gains from dispositions of real estate and leasehold interests, decreased by $1.5 million to $0.4 million for 2008, as compared to $1.9 million for 2007. Gains on dispositions of real estate from discontinued operations were $2.4 million for 2008 as compared to $4.6 million for 2007. Gain on dispositions of real estate in 2008 decreased by an aggregate of $3.4 million to $2.8 million, as compared to $6.2 million for the prior year. For 2008, there were eleven property dispositions and four partial land takings under eminent domain. For 2007, there were thirteen property dispositions, a partial land taking under eminent domain and an increase in the awards for two takings that occurred in prior years. Property dispositions for 2008 and 2007 include seven and six properties, respectively, that were mutually agreed to be removed from the Marketing Leases prior to their scheduled lease expiration.
Interest expense was $7.0 million for 2008, as compared to $7.8 million for 2007. The decrease was due to reduction in interest rates, partially offset by increased average borrowings outstanding used to finance the acquisition of properties in 2007.
As a result, net earnings were $41.8 million for 2008, as compared to $33.9 million for 2007, an increase of 23.4%, or $7.9 million. Earnings from continuing operations were $39.2 million for 2008, as compared to $28.1 million for 2007, an increase of 39.3%, or $11.1 million. For the same period, FFO increased by 35.7% to $50.9 million, as compared to $37.5 million for prior year period and AFFO increased by 10.2%, or $4.5 million, to $48.3 million, as compared to $43.8 million for 2007. The increase in FFO for 2008 was primarily due to the changes in net earnings described above but excludes a $2.1 million increase in depreciation and amortization expense and a $3.4 million decrease in gains on dispositions of real estate. The increase in AFFO for 2008 also excludes a $1.3 million decrease in deferred rental revenue, a $.03 million decrease in net amortization of above-market and below-market leases and a $10.5 million allowance for deferred rent receivable recorded in 2007 (which are included in net earnings and FFO but are excluded from AFFO).
Diluted earnings per share were $1.69 per share for 2008, an increase of $0.32 per share, as compared to $1.37 per share for 2007. Diluted FFO per share for 2008 was $2.05 per share, an increase of $0.54 per share, as compared to 2007. Diluted AFFO per share for 2008 was $1.95 per share, an increase of $0.18 per share, as compared to 2007.
Year ended December 31, 2007 compared to year ended December 31, 2006
Revenues from rental properties increased by $6.8 million to $78.1 million for the year ended December 31, 2007, as compared to $71.3 million for 2006. We received approximately $59.7 million for 2007, and $59.5 million for 2006, from properties leased to Marketing under the Marketing Leases. We also received rent of $14.8 million for 2007 and $8.9 million for 2006 from other tenants. The increase in rent received was primarily due to rent from properties acquired in March 2007 and February 2006, and rent escalations, partially offset by the effect of dispositions of real estate. In addition, revenues from rental properties include deferred rental revenue of $2.6 million for 2007, as compared to $3.0 million for 2006, recorded as required by GAAP, related to fixed rent increases scheduled under certain leases with our tenants. The aggregate minimum rent due over the current term of these leases are recognized on a straight-line basis rather than when payment is due. Revenues from rental properties also include $1.0 million of net amortization of above-market and below-market leases related to the properties acquired in 2007. The present value of the difference between the fair market rent and the contractual rent for in-
34
place leases at the time properties are acquired is amortized into revenue from rental properties over the remaining lives of the in-place leases.
Rental property expenses, which are primarily comprised of rent expense and real estate and other state and local taxes, were $9.3 million for 2007, as compared to $9.6 million for 2006. The decrease in rent expense was principally due to the reduction in the number of leased locations compared to the prior year.
Environmental expenses, net of estimated recoveries from state UST funds for 2007 were $8.2 million, as compared to $5.4 million for 2006. The increase was primarily due to a $1.9 million increase in change in net estimated environmental costs, and a $0.8 million increase in environmental related litigation expenses and legal fees as compared to the prior year period. The increase in the net change in estimated environmental costs was due to the increase in project scope or duration and related cost forecasts at a limited number of properties, including one site that we have agreed to remediate as part of a legal settlement with the State of New York and regulator mandated project changes at other sites. The increase in environmental related litigation expenses was due to $0.5 million of higher legal fees and $0.3 million of higher litigation loss reserves.
General and administrative expenses for 2007 were $6.7 million, as compared to $5.6 million recorded for 2006. The increase in general and administrative expenses was principally due to $0.5 million of higher employee related expenses, $0.2 million of higher professional fees and a charge of $0.1 million to insurance loss reserves recorded in 2007, as compared to a credit of $0.3 million recorded in 2006. The insurance loss reserves were established under our self funded insurance program that was terminated in 1997. Employee related expenses increased primarily due to the payment of severance in 2007 in connection with the resignation of Mr. Andy Smith, the former President and Chief Legal Officer of the Company.
Allowance for deferred rent receivable reported in continuing operations and discontinued operations were $10.3 million and $0.2 million, respectively, for the quarter and year ended December 31, 2007. The non-cash allowance was provided since we can no longer reasonably assume that we will collect all of the rent due to us related to approximately 40% of the properties leased to Marketing for the remainder of the current terms of the Marketing Leases. (See “— General — Developments related to Marketing and the Marketing Leases” above for additional information.)
Depreciation and amortization expense for 2007 was $9.6 million, as compared to $7.8 million for 2006. The increase was primarily due to properties acquired in 2007 and 2006, offset by the effect of dispositions of real estate and lease expirations.
As a result, total operating expenses increased by approximately $15.7 million for 2007 as compared to 2006.
Other income, net, substantially all of which is comprised of certain gains from dispositions of real estate and leasehold interests, was $1.9 million for 2007 and 2006. Gains on dispositions of real estate from discontinued operations were $4.6 million for 2007. Gain on dispositions of real estate in 2007 increased by an aggregate of $4.6 million to $6.2 million, as compared to $1.6 million for the prior year. For 2007, there were thirteen property dispositions, including six properties that were mutually agreed to be removed from the Marketing Leases prior to their scheduled lease expiration, a partial land taking under eminent domain and an increase in the awards for two takings that occurred in prior years, as compared to seven property dispositions, a total property taking and seven partial land takings recorded in the prior year period.
Interest expense was $7.8 million for 2007, as compared to $3.5 million for 2006. The increase was primarily due to increased borrowings used to finance the acquisition of properties in 2007 and 2006.
The income tax benefit of $0.7 million recorded in 2006 was recognized due to the elimination of the accrual for uncertain tax positions since management believes that the uncertainties regarding these exposures have been resolved or that it is no longer likely that the exposure will result in a liability upon review. However, the ultimate resolution of these matters may have a significant impact on our results of operations for any single fiscal year or interim period.
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As a result, net earnings were $33.9 million for 2007, as compared to $42.7 million for 2006, a decrease of 20.7%, or $8.8 million. Earnings from continuing operations were $28.1 million for 2007, as compared to $41.9 million for 2006, a decrease of 33.0%, or $13.8 million. For the same period, FFO decreased by 23.5% to $37.5 million, as compared to $49.0 million for prior year period and AFFO decreased by 3.3%, or $1.5 million, to $43.8 million, as compared to $45.3 million for 2006. The decrease in FFO for 2007 was primarily due to the changes in net earnings described above but excludes a $1.9 million increase in depreciation and amortization expense and a $4.6 million increase in gains on dispositions of real estate. The decrease in AFFO for 2007 also excludes a $0.7 million decrease in income tax benefit, a $0.1 million decrease in deferred rental revenue, a $1.0 million increase in net amortization of above-market and below-market leases and a $10.5 million allowance for deferred rent receivable recorded in 2007 (which are included in net earnings and FFO but are excluded from AFFO).
Diluted earnings per share were $1.37 per share for 2007, a decrease of $0.36 per share, as compared to $1.73 per share for 2006. Diluted FFO per share for 2007 was $1.51 per share, a decrease of $0.47 per share, as compared to 2006. Diluted AFFO per share for 2007 was $1.77 per share, a decrease of $0.06 per share, as compared to 2006.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are the cash flows from our business, funds available under a revolving credit agreement that expires in 2011 and available cash and cash equivalents. Management believes that our operating cash needs for the next twelve months can be met by cash flows from operations, borrowings under our credit agreement and available cash and cash equivalents.
The current disruption in the credit markets and the resulting impact on the availability of funding generally may limit our access to one or more funding sources. In addition, we expect that the costs associated with any additional borrowings we may undertake may be adversely impacted, as compared to such costs prior to the disruption of the credit markets. The United States credit markets are currently experiencing an unprecedented contraction. As a result of the tightening credit markets, we may not be able to obtain additional financing on favorable terms, or at all. If one or more of the financial institutions that supports our credit agreement fails, we may not be able to find a replacement, which would negatively impact our ability to borrow under our credit agreement. In addition, if the current pressures on credit continue or worsen, we may not be able to refinance our outstanding debt when due, which could have a material adverse effect on us.
We have a $175.0 million amended and restated senior unsecured revolving credit agreement (the “Credit Agreement”) with a group of domestic commercial banks led by JPMorgan Chase Bank, N.A. (the “Bank Syndicate”) which expires in March 2011. The Credit Agreement does not provide for scheduled reductions in the principal balance prior to its maturity. The Credit Agreement permits borrowings at an interest rate equal to the sum of a base rate plus a margin of 0.0% or 0.25% or a LIBOR rate plus a margin of 1.0%, 1.25% or 1.5%. The applicable margin is based on our leverage ratio at the end of the prior calendar quarter, as defined in the Credit Agreement, and is adjusted effective mid-quarter when our quarterly financial results are reported to the Bank Syndicate. Based on our leverage ratio as of December 31, 2008, the applicable margin is 0.0% for base rate borrowings and will increase to 1.25% in the first quarter of 2009 for our LIBOR rate borrowings.
Subject to the terms of the Credit Agreement, we have the option to extend the term of the Credit Agreement for one additional year to March 2012 and/or, subject to approval by the Bank Syndicate, increase the amount of the credit facility available pursuant to the Credit Agreement by $125,000,000 to $300,000,000. We do not expect to exercise our option to increase the amount of the Credit Agreement at this time. In addition, based on the current lack of liquidity in the credit markets, we believe that we would need to renegotiate certain terms in the Credit Agreement in order to obtain approval from the Bank Syndicate to increase the amount of the credit facility at this time. No assurance can be given that such approval from the Bank Syndicate will be obtained on terms acceptable to us, if at all. The annual commitment fee on the unused Credit Agreement ranges from 0.10% to 0.20% based on the average amount of borrowings outstanding. The Credit Agreement contains customary terms and conditions, including customary financial covenants such as leverage and coverage ratios and other customary covenants, including limitations on our ability to incur debt and pay dividends and maintenance of tangible net worth, and events of default, including change of control and failure to maintain REIT status. A material adverse effect on our business, assets, prospects or condition, financial or otherwise, would also result in an event of default. Any event of
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default, if not cured or waived, could result in the acceleration of all of our indebtedness under our Credit Agreement.
We entered into a $45.0 million LIBOR based interest rate swap agreement with JPMorgan Chase Bank, N.A. as the counterparty (the “Swap Agreement”), effective through June 30, 2011. The Swap Agreement is intended to hedge our current exposure to market interest rate risk by effectively fixing, at 5.44%, the LIBOR component of the interest rate determined under our existing Credit Agreement or future exposure to variable interest rate risk due to borrowing arrangements that may be entered into prior to the expiration of the Swap Agreement. As a result of the Swap Agreement, as of December 31, 2008, $45.0 million of our LIBOR based borrowings under the Credit Agreement bear interest at an effective rate of 6.44%.
Total borrowings outstanding under the Credit Agreement at December 31, 2008 were $130.3 million, bearing interest at a weighted-average effective rate of 3.8% per annum. The weighted-average effective rate is based on $85.3 million of LIBOR rate borrowings floating at market rates plus a margin of 1.0% and $45.0 million of LIBOR rate borrowings effectively fixed at 5.44% by the Swap Agreement plus a margin of 1.0%. We had $44.7 million available under the terms of the Credit Agreement as of December 31, 2008.
Since we generally lease our properties on a triple-net basis, we do not incur significant capital expenditures other than those related to acquisitions. Capital expenditures, including acquisitions, for 2008, 2007 and 2006 amounted to $6.6 million, $90.6 million and $15.5 million, respectively. To the extent that our current sources of liquidity are not sufficient to fund capital expenditures and acquisitions we will require other sources of capital, which may or may not be available on favorable terms or at all. We may be unable to pursue public debt or equity offerings until we resolve with the SEC the outstanding comment regarding disclosure of Marketing’s financial information. We cannot accurately predict how periods of illiquidity in the credit markets, such as current market conditions, will impact our access to capital.
As part of our overall growth strategy, we regularly review opportunities to acquire additional properties and we expect to continue to pursue acquisitions that we believe will benefit our financial performance. To the extent that our current sources of liquidity are not sufficient to fund such acquisitions we will require other sources of capital, which may or may not be available on favorable terms or at all. We cannot accurately predict how periods of illiquidity in the credit markets, such as current market conditions, will impact our access to capital.
We elected to be treated as a REIT under the federal income tax laws with the year beginning January 1, 2001. As a REIT, we are required, among other things, to distribute at least ninety percent of our taxable income to shareholders each year. Payment of dividends is subject to market conditions, our financial condition and other factors, and therefore cannot be assured. In particular, our Credit Agreement prohibits the payment of dividends during certain events of default. Dividends paid to our shareholders aggregated $46.3 million, $45.7 million and $44.8 million for 2008, 2007 and 2006, respectively, and were paid on a quarterly basis during each of those years. We presently intend to pay common stock dividends of $0.47 per share each quarter ($1.88 per share, or $46.7 million, on an annual basis), and commenced doing so with the quarterly dividend declared in May 2008. Due to the developments related to Marketing and the Marketing Leases discussed above, there is no assurance that we will be able to continue to pay dividends at the rate of $0.47 per share per quarter, if at all.
CONTRACTUAL OBLIGATIONS
Our significant contractual obligations and commitments are comprised of borrowings under the Credit Agreement, operating lease payments due to landlords and estimated environmental remediation expenditures, net of estimated recoveries from state UST funds. In addition, as a REIT we are required to pay dividends equal to at least
ninety percent of our taxable income in order to continue to qualify as a REIT. Our contractual obligations and commitments as of December 31, 2008 are summarized below (in thousands):
LESSTHAN ONEYEAR
ONE TOTHREEYEARS
THREE TOFIVEYEARS
MORETHANFIVEYEARS
Operating leases
26,620
7,338
10,571
5,235
3,476
Borrowing under the Credit Agreement (a)
Estimated environmental remediation expenditures (b)
17,660
6,946
6,411
2,480
1,823
Estimated recoveries from state underground storage tank funds (b)
(4,223
(1,368
(1,479
(844
(532
Estimated net environmental remediation expenditures (b)
13,437
5,578
4,932
1,636
1,291
170,307
12,916
145,753
6,871
4,767
Excludes related interest payments. (See “— Liquidity and Capital Resources” above and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for additional information.) Subject to the terms of the Credit Agreement, we have the option to extend the term of the Credit Agreement to March 2012.
Estimated environmental remediation expenditures and estimated recoveries from state UST funds have been adjusted for inflation and discounted to present value.
Generally, the leases with our tenants are “triple-net” leases, with the tenant responsible for the payment of taxes, maintenance, repair, insurance, environmental remediation and other operating expenses. We estimate that Marketing makes annual real estate tax payments for properties leased under the Marketing Leases of approximately $12.3 million and makes additional payments for other operating expenses related to our properties, including environmental remediation costs other than those liabilities that were retained by us. These costs are not reflected in our consolidated financial statements. (See “— General — Developments related to Marketing and the Marketing Leases” above for additional information.)
We have no significant contractual obligations not fully recorded on our consolidated balance sheets or fully disclosed in the notes to our consolidated financial statements. We have no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the Exchange Act.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements included in this Annual Report on Form 10-K include the accounts of Getty Realty Corp. and our wholly-owned subsidiaries. The preparation of financial statements in accordance with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in its financial statements. Although we have made our best estimates, judgments and assumptions regarding future uncertainties relating to the information included in our financial statements, giving due consideration to the accounting policies selected and materiality, actual results could differ from these estimates, judgments and assumptions and such differences could be material.
Estimates, judgments and assumptions underlying the accompanying consolidated financial statements include, but are not limited to, deferred rent receivable, recoveries from state underground storage tank funds, environmental remediation costs, real estate, depreciation and amortization, impairment of long-lived assets, litigation, accrued expenses, income taxes, allocation of the purchase price of properties acquired to the assets acquired and liabilities assumed and exposure to paying an earnings and profits deficiency dividend. The information included in our financial statements that is based on estimates, judgments and assumptions is subject to significant change and is adjusted as circumstances change and as the uncertainties become more clearly defined. Our accounting policies are described in Note 1 of Notes to Consolidated Financial Statements. We believe the following are our critical accounting policies:
Revenue recognition — We earn revenue primarily from operating leases with Marketing and other tenants. We recognize income under the Master Lease with Marketing, and with other tenants, on the straight-line method, which effectively recognizes contractual lease payments evenly over the current term of the leases. The present value of the
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difference between the fair market rent and the contractual rent for in-place leases at the time properties are acquired is amortized into revenue from rental properties over the remaining lives of the in-place leases. A critical assumption in applying the straight-line accounting method is that the tenant will make all contractual lease payments during the current lease term and that the net deferred rent receivable of $26.7 million recorded as of December 31, 2008 will be collected when the payment is due, in accordance with the annual rent escalations provided for in the leases. Historically our tenants have generally made rent payments when due. However, we may be required to reverse, or provide reserves for, or adjust our $10.0 million reserve as of December 31, 2008 for, a portion of the recorded deferred rent receivable if it becomes apparent that a property may be disposed of before the end of the current lease term or if circumstances indicate that the tenant may not make all of its contractual lease payments when due during the current term of the lease. The straight-line method requires that rental income related to those properties for which a reserve was provided is effectively recognized in subsequent periods when payment is due under the contractual payment terms. (See developments related to Marketing and the Marketing Leases in “— General — Developments related to Marketing and the Marketing Leases” above for additional information.)
Impairment of long-lived assets — Real estate assets represent “long-lived” assets for accounting purposes. We review the recorded value of long-lived assets for impairment in value whenever any events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We may become aware of indicators of potentially impaired assets upon tenant or landlord lease renewals, upon receipt of notices of potential governmental takings and zoning issues, or upon other events that occur in the normal course of business that would cause us to review the operating results of the property. We believe our real estate assets are not carried at amounts in excess of their estimated net realizable fair value amounts.
Income taxes — Our financial results generally do not reflect provisions for current or deferred federal income taxes since we elected to be treated as a REIT under the federal income tax laws effective January 1, 2001. Our intention is to operate in a manner that will allow us to continue to be treated as a REIT and, as a result, we do not expect to pay substantial corporate-level federal income taxes. Many of the REIT requirements, however, are highly technical and complex. If we were to fail to meet the requirements, we may be subject to federal income tax, excise taxes, penalties and interest or we may have to pay a deficiency dividend to eliminate any earnings and profits that were not distributed. Certain states do not follow the federal REIT rules and we have included provisions for these taxes in rental property expenses.
Environmental costs and recoveries from state UST funds — We provide for the estimated fair value of future environmental remediation costs when it is probable that a liability has been incurred and a reasonable estimate of fair value can be made (see “— Environmental Matters” below for additional information). Environmental liabilities and related recoveries are measured based on their expected future cash flows which have been adjusted for inflation and discounted to present value. Since environmental exposures are difficult to assess and estimate and knowledge about these liabilities is not known upon the occurrence of a single event, but rather is gained over a continuum of events, we believe that it is appropriate that our accrual estimates are adjusted as the remediation treatment progresses, as circumstances change and as environmental contingencies become more clearly defined and reasonably estimable. A critical assumption in accruing for these liabilities is that the state environmental laws and regulations will be administered and enforced in the future in a manner that is consistent with past practices. Recoveries of environmental costs from state UST remediation funds, with respect to past and future spending, are accrued as income, net of allowance for collection risk, based on estimated recovery rates developed from our experience with the funds when such recoveries are considered probable. A critical assumption in accruing for these recoveries is that the state UST fund programs will be administered and funded in the future in a manner that is consistent with past practices and that future environmental spending will be eligible for reimbursement at historical rates under these programs. We accrue environmental liabilities based on our share of responsibility as defined in our lease contracts with our tenants and under various other agreements with others or if circumstances indicate that the counter-party may not have the financial resources to pay its share of the costs. It is possible that our assumptions regarding the ultimate allocation method and share of responsibility that we used to allocate environmental liabilities may change, which may result in adjustments to the amounts recorded for environmental litigation accruals, environmental remediation liabilities and related assets. (See “— General — Developments related to Marketing and the Marketing Leases” above for additional information.) We may ultimately be responsible to directly pay for environmental liabilities as the property owner if Marketing or our other tenants or other counter-parties fail to pay them. In certain environmental matters the effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists both in terms of the probability of loss and the estimate of such
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loss. The ultimate liabilities resulting from such lawsuits and claims, if any, may be material to our results of operations in the period in which they are recognized.
Litigation — Legal fees related to litigation are expensed as legal services are performed. We provide for litigation reserves, including certain environmental litigation (see “— Environmental Matters” below for additional information), when it is probable that a liability has been incurred and a reasonable estimate of the liability can be made. If the best estimate of the liability can only be identified as a range, and no amount within the range is a better estimate than any other amount, the minimum of the range is accrued for the liability.
New Accounting Pronouncements — In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities. SFAS 157 generally applies whenever other standards require assets or liabilities to be measured at fair value. SFAS 157 is effective in fiscal years beginning after November 15, 2007. FASB Staff Position (“FSP”) No. 152, “Effective Date of FASB Statement No. 157”, (“FSP 152”) delayed the effective date of FASB No. 157 by one year for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a non recurring basis to fiscal years beginning after November 15, 2008. The adoption of SFAS 157 in January 2008 has not had a material impact on our financial position and results of operations. We do not believe that the adoption of the provisions of SFAS 157 for nonfinancial assets and liabilities that are recognized or disclosed at fair value on a non recurring basis will have a material impact on our financial position and results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements at fair value the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill acquired in a business combination. SFAS 141(R) requires that acquisition costs, which could be material to our future financial results, will be expensed rather than included as part of the basis of the acquisition. The adoption of this standard by us on January 1, 2009 will not result in a write-off of acquisition related transactions costs associated with transactions not yet consummated. SFAS 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.
ENVIRONMENTAL MATTERS
General
We are subject to numerous existing federal, state and local laws and regulations, including matters relating to the protection of the environment such as the remediation of known contamination and the retirement and decommissioning or removal of long-lived assets including buildings containing hazardous materials, USTs and other equipment. Our tenants are directly responsible for compliance with various environmental laws and regulations as the operators of our properties. Environmental expenses are principally attributable to remediation costs which include installing, operating, maintaining and decommissioning remediation systems, monitoring contamination, and governmental agency reporting incurred in connection with contaminated properties. We seek reimbursement from state UST remediation funds related to these environmental expenses where available.
We enter into leases and various other agreements which allocate responsibility for known and unknown environmental liabilities by establishing the percentage and method of allocating responsibility between the parties. In accordance with the leases with certain of our tenants, we have agreed to bring the leased properties with known environmental contamination to within applicable standards and to regulatory or contractual closure (“Closure”) in an efficient and economical manner. Generally, upon achieving Closure at an individual property, our environmental liability under the lease for that property will be satisfied and future remediation obligations will be the responsibility of our tenant. As of December 31, 2008, we have regulatory approval for remediation action plans in place for two hundred forty-nine (95%) of the two hundred sixty-two properties for which we continue to retain remediation responsibility and the remaining thirteen properties (5%) were in the assessment phase. In addition, we have nominal post-closure compliance obligations at twenty-four properties where we have received “no further action” letters.
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It is possible that our assumptions regarding the ultimate allocation methods and share of responsibility that we used to allocate environmental liabilities may change, which may result in adjustments to the amounts recorded for environmental litigation accruals, environmental remediation liabilities and related assets. We will be required to accrue for environmental liabilities that we believe are allocable to others under various other agreements if we determine that it is probable that the counter-party will not meet its environmental obligations. We may ultimately be responsible to directly pay for environmental liabilities as the property owner if the counter-party fails to pay them. The ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price. (See “— General — Developments related to Marketing and the Marketing Leases” above for additional information.)
We have not accrued for approximately $1.0 million in costs allegedly incurred by the current property owner in connection with removal of USTs and soil remediation at a property that was leased to and operated by Marketing. We believe that Marketing is responsible for such costs under the terms of the Master Lease and have tendered the matter for defense and indemnification from Marketing, but Marketing has denied its liability for the claim and its responsibility to defend against, and indemnify us for, the claim. We have filed third party claims against Marketing for indemnification in this matter, which claims is currently being actively litigated. Trial is anticipated to be scheduled for the first quarter of 2009. It is reasonably possible that our assumption that Marketing will be ultimately responsible for the claim may change, which may result in our providing an accrual for this and other matters.
We have also agreed to provide limited environmental indemnification to Marketing, capped at $4.25 million and expiring in 2010, for certain pre-existing conditions at six of the terminals we own and lease to Marketing. Under the indemnification agreement, Marketing is obligated to pay the first $1.5 million of costs and expenses incurred in connection with remediating any such pre-existing conditions, Marketing will share equally with us the next $8.5 million of those costs and expenses and Marketing is obligated to pay all additional costs and expenses over $10.0 million. We have accrued $0.3 million as of December 31, 2008 and 2007 in connection with this indemnification agreement. Under the Master Lease, we continue to have additional ongoing environmental remediation obligations for one hundred eighty-seven scheduled sites.
As the operator of our properties under the Marketing Leases, Marketing is directly responsible to pay for the remediation of environmental contamination it causes and to comply with various environmental laws and regulations. In addition, the Marketing Leases and various other agreements between Marketing and us allocate responsibility for known and unknown environmental liabilities between Marketing and us relating to the properties subject to the Marketing Leases. Based on various factors, including our assessments and assumptions at this time that Lukoil would not allow Marketing to fail to perform its obligations under the Marketing Leases, we believe that Marketing will continue to pay for substantially all environmental contamination and remediation costs allocated to it under the Marketing Leases. It is possible that our assumptions regarding the ultimate allocation methods and share of responsibility that we used to allocate environmental liabilities may change as a result of the factors discussed above, or otherwise, which may result in adjustments to the amounts recorded for environmental litigation accruals, environmental remediation liabilities and related assets. We may ultimately be responsible to directly pay for environmental liabilities as the property owner if Marketing fails to pay them. We are required to accrue for environmental liabilities that we believe are allocable to Marketing under the Marketing Leases and various other agreements if we determine that it is probable that Marketing will not pay its environmental obligations.
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Based upon our assessment of Marketing’s financial condition and certain other factors, including but not limited to those described above, we believe at this time that it is not probable that Marketing will not pay the environmental liabilities allocable to it under the Marketing Leases and various other agreements and, therefore, have not accrued for such environmental liabilities. Our assessments and assumptions that affect the recording of environmental liabilities related to the properties subject to the Marketing Leases are reviewed on a quarterly basis and such assessments and assumptions are subject to change.
We have determined that the aggregate amount of the environmental liabilities attributable to Marketing related to our properties (as estimated by us based on our assumptions and analysis of information currently available to us) (the “Marketing Environmental Liabilities”) could be material to us if we were required to accrue for all of the Marketing Environmental Liabilities in the future since we believe that it is reasonably possible that as a result of such accrual, we may not be in compliance with the existing financial covenants in our Credit Agreement. Such non-compliance could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness under the Credit Agreement. (See “— General — Developments related to Marketing and the Marketing Leases” above for additional information.)
The estimated future costs for known environmental remediation requirements are accrued when it is probable that a liability has been incurred and a reasonable estimate of fair value can be made. Environmental liabilities and related recoveries are measured based on their expected future cash flows which have been adjusted for inflation and discounted to present value. The environmental remediation liability is estimated based on the level and impact of contamination at each property and other factors described herein. The accrued liability is the aggregate of the best estimate for the fair value of cost for each component of the liability. Recoveries of environmental costs from state UST remediation funds, with respect to both past and future environmental spending, are accrued at fair value as an offset to environmental expense, net of allowance for collection risk, based on estimated recovery rates developed from our experience with the funds when such recoveries are considered probable.
Environmental exposures are difficult to assess and estimate for numerous reasons, including the extent of contamination, alternative treatment methods that may be applied, location of the property which subjects it to differing local laws and regulations and their interpretations, as well as the time it takes to remediate contamination. In developing our liability for probable and reasonably estimable environmental remediation costs, on a property by property basis, we consider among other things, enacted laws and regulations, assessments of contamination and surrounding geology, quality of information available, currently available technologies for treatment, alternative methods of remediation and prior experience. These accrual estimates are subject to significant change, and are adjusted as the remediation treatment progresses, as circumstances change and as these contingencies become more clearly defined and reasonably estimable.
As of December 31, 2008, we had accrued $13.5 million as management’s best estimate of the net fair value of reasonably estimable environmental remediation costs which is comprised of $17.7 million of estimated environmental obligations and liabilities offset by $4.2 million of estimated recoveries from state UST remediation funds, net of allowance. Environmental expenditures, net of recoveries from UST funds, were $5.0 million, $4.7 million and $3.0 million, respectively, for 2008, 2007 and 2006. For 2008, 2007 and 2006, the net change in estimated remediation cost and accretion expense included in our consolidated statements of operations amounted to $4.7 million, $5.1 million and $3.2 million, respectively, which amounts were net of probable recoveries from state UST remediation funds.
Environmental liabilities and related assets are currently measured at fair value based on their expected future cash flows which have been adjusted for inflation and discounted to present value. We also use probability weighted alternative cash flow forecasts to determine fair value. We assumed a 50% probability factor that the actual environmental expenses will exceed engineering estimates for an amount assumed to equal one year of net expenses aggregating $4.9 million. Accordingly, the environmental accrual as of December 31, 2008 was increased by $1.9 million, net of assumed recoveries and before inflation and present value discount adjustments. The resulting net environmental accrual as of December 31, 2008 was then further increased by $0.9 million for the assumed impact of inflation using an inflation rate of 2.75%. Assuming a credit-adjusted risk-free discount rate of 7.0%, we then reduced the net environmental accrual, as previously adjusted, by a $1.9 million discount to present value. Had we assumed an inflation rate that was 0.5% higher and a discount rate that was 0.5% lower, net environmental liabilities as of December 31, 2008 would have increased by $0.2 million and $0.1 million, respectively, for an aggregate
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increase in the net environmental accrual of $0.3 million. However, the aggregate net change in environmental estimates expense recorded during the year ended December 31, 2008 would not have changed significantly if these changes in the assumptions were made effective December 31, 2007.
In view of the uncertainties associated with environmental expenditures, contingencies concerning the developments related to Marketing and the Marketing Leases and contingencies related to other parties, however, we believe it is possible that the fair value of future actual net expenditures could be substantially higher than these estimates. (See “— General — Developments related to Marketing and the Marketing Leases” above for additional information.) Adjustments to accrued liabilities for environmental remediation costs will be reflected in our financial statements as they become probable and a reasonable estimate of fair value can be made. Future environmental costs could cause a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.
We cannot predict what environmental legislation or regulations may be enacted in the future or how existing laws or regulations will be administered or interpreted with respect to products or activities to which they have not previously been applied. We cannot predict if state UST fund programs will be administered and funded in the future in a manner that is consistent with past practices and if future environmental spending will continue to be eligible for reimbursement at historical recovery rates under these programs. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies or stricter interpretation of existing laws, which may develop in the future, could have an adverse effect on our financial position, or that of our tenants, and could require substantial additional expenditures for future remediation.
Environmental litigation
We are subject to various legal proceedings and claims which arise in the ordinary course of our business. In addition, we have retained responsibility for certain legal proceedings and claims relating to the petroleum marketing business that were identified at the time of the Spin-Off. As of December 31, 2008 and 2007, we had accrued $1.7 million and $2.6 million, respectively, for certain of these matters which we believe were appropriate based on information then currently available. It is possible that our assumptions regarding the ultimate allocation method and share of responsibility that we used to allocate environmental liabilities may change, which may result in our providing an accrual, or adjustments to the amounts recorded, for environmental litigation accruals. (For additional information with respect to pending environmental lawsuits and claims see “Item 3. Legal Proceedings”.)
In September 2003, we were notified by the State of New Jersey Department of Environmental Protection (the “NJDEP”) that we are one of approximately sixty-six potentially responsible parties for natural resource damages resulting from discharges of hazardous substances into the Lower Passaic River. The definitive list of potentially responsible parties and their actual responsibility for the alleged damages, the aggregate cost to remediate the Lower Passaic River, the amount of natural resource damages and the method of allocating such amounts among the potentially responsible parties have not been determined. In September 2004, we received a General Notice Letter from the United States Environmental Protection Agency (the “EPA”) (the “EPA Notice”), advising us that we may be a potentially responsible party for costs of remediating certain conditions resulting from discharges of hazardous substances into the Lower Passaic River. ChevronTexaco received the same EPA Notice regarding those same conditions. In a related action, in December 2005, the State of New Jersey brought suit against certain companies which the State alleges are responsible for pollution of the Passaic River from a former Diamond Alkali manufacturing plant. In February 2009, certain of these defendants filed third-party complaints against approximately 300 additional parties, including us, seeking contribution for a pro-rata share of response costs, cleanup and removal costs, and other damages. Additionally, we believe that ChevronTexaco is contractually obligated to indemnify us, pursuant to an indemnification agreement for most of the conditions at the property identified by the NJDEP and the EPA; accordingly, our ultimate legal and financial liability, if any, cannot be estimated with any certainty at this time.
From October 2003 through December 31, 2008, we were notified that we were made party to fifty-four cases in Connecticut, Florida, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Vermont, Virginia and West Virginia brought by local water providers or governmental agencies. These cases allege various theories of liability due to contamination of groundwater with methyl tertiary butyl ether (“MTBE”) as the basis for claims seeking compensatory and punitive damages. Each case names as defendants approximately fifty petroleum refiners,
43
manufacturers, distributors and retailers of MTBE, or gasoline containing MTBE. At this time, we have been dismissed from certain of the cases initially filed against us. A significant number of the named defendants other than us have entered into settlements with certain plaintiffs, which affected approximately twenty-seven of the cases to which we are a party. The accuracy of the allegations as they relate to us, our defenses to such claims, the aggregate amount of possible damages, and the method of allocating such amounts among the remaining defendants have not been determined. Accordingly, our ultimate legal and financial liability, if any, cannot be estimated with any certainty at this time.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Prior to April 2006, when we entered into the a Swap Agreement with JPMorgan Chase, N.A. (the “Swap Agreement”), we had not used derivative financial or commodity instruments for trading, speculative or any other purpose, and had not entered into any instruments to hedge our exposure to interest rate risk. We do not have any foreign operations, and are therefore not exposed to foreign currency exchange rate risks.
We are exposed to interest rate risk, primarily as a result of our $175.0 million Credit Agreement. Our Credit Agreement, which expires in March 2011, permits borrowings at an interest rate equal to the sum of a base rate plus a margin of 0.0% or 0.25% or a LIBOR rate plus a margin of 1.0%, 1.25% or 1.5%. The applicable margin is based on our leverage ratio at the end of the prior calendar quarter, as defined in the Credit Agreement, and is adjusted effective mid-quarter when our quarterly financial results are reported to the Bank Syndicate. Based on our leverage ratio as of December 31, 2008, the applicable margin is 0.0% for base rate borrowings and will increase to 1.25% in the first quarter of 2009 for our LIBOR rate borrowings.
Total borrowings outstanding under the Credit Agreement at December 31, 2008 were $130.3 million, bearing interest at a weighted-average rate of 3.3% per annum, or a weighted-average effective rate of 3.8% including the impact of the Swap Agreement discussed below. The weighted-average effective rate is based on $85.3 million of LIBOR rate borrowings floating at market rates plus a margin of 1.0% and $45.0 million of LIBOR rate borrowings effectively fixed at 5.44% by the Swap Agreement plus a margin of 1.0%. We use borrowings under the Credit Agreement to finance acquisitions and for general corporate purposes.
We manage our exposure to interest rate risk by minimizing, to the extent feasible, our overall borrowing and monitoring available financing alternatives. Our interest rate risk as of December 31, 2008 has not increased significantly, as compared to December 31, 2007. We entered into a $45.0 million LIBOR based interest rate Swap Agreement, effective through June 30, 2011, to manage a portion of our interest rate risk. The Swap Agreement is intended to hedge $45.0 million of our current exposure to variable interest rate risk by effectively fixing, at 5.44%, the LIBOR component of the interest rate determined under our existing Credit Agreement or future exposure to variable interest rate risk due to borrowing arrangements that may be entered into prior to the expiration of the Swap Agreement. As a result of the Swap Agreement, as of December 31, 2008, $45.0 million of our LIBOR based borrowings under the Credit Agreement bear interest at an effective rate of 6.44%. As a result, we are, and will be, exposed to interest rate risk to the extent that our borrowings exceed the $45.0 million notional amount of the Swap Agreement. As of December 31, 2008, our borrowings exceeded the notional amount of the Swap Agreement by $85.3 million. We do not foresee any significant changes in how we manage our interest rate risk in the near future.
We entered into the $45.0 million notional five year interest rate Swap Agreement, designated and qualifying as a cash flow hedge to reduce our exposure to the variability in future cash flows attributable to changes in the LIBOR rate. Our primary objective when undertaking hedging transactions and derivative positions is to reduce our variable interest rate risk by effectively fixing a portion of the interest rate for existing debt and anticipated refinancing transactions. This in turn, reduces the risks that the variability of cash flows imposes on variable rate debt. Our strategy protects us against future increases in interest rates. Although the Swap Agreement is intended to lessen the impact of rising interest rates, it also exposes us to the risk that the other party to the agreement will not perform, the agreement will be unenforceable and the underlying transactions will fail to qualify as a highly-effective cash flow hedge for accounting purposes.
In the event that we were to settle the Swap Agreement prior to its maturity, if the corresponding LIBOR swap rate for the remaining term of the Swap Agreement is below the 5.44% fixed strike rate at the time we settle the
Swap Agreement, we would be required to make a payment to the Swap Agreement counter-party; if the corresponding LIBOR swap rate is above the fixed strike rate at the time we settle the Swap Agreement, we would receive a payment from the Swap Agreement counter-party. The amount that we would either pay or receive would equal the present value of the basis point differential between the fixed strike rate and the corresponding LIBOR swap rate at the time we settle the Swap Agreement.
Based on our average outstanding borrowings under the Credit Agreement projected at $133.6 million for 2009, an increase in market interest rates of 0.5% for 2009 would decrease our 2009 net income and cash flows by $0.4 million. This amount was determined by calculating the effect of a hypothetical interest rate change on our Credit Agreement borrowings that is not covered by our $45.0 million interest rate Swap Agreement and assumes that the $133.6 million average outstanding borrowings during the fourth quarter of 2008 is indicative of our future average borrowings for 2009 before considering additional borrowings required for future acquisitions. The calculation also assumes that there are no other changes in our financial structure or the terms of our borrowings. Our exposure to fluctuations in interest rates will increase or decrease in the future with increases or decreases in the outstanding amount under our Credit Agreement.
In order to minimize our exposure to credit risk associated with financial instruments, we place our temporary cash investments with high-credit-quality institutions. Temporary cash investments, if any, are held in an overnight bank time deposit with JPMorgan Chase Bank, N.A.
Item 8. Financial Statements and Supplementary Data
GETTY REALTY CORP. INDEX TO FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA
(PAGES)
Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006
46
Consolidated Statements of Comprehensive Income for the years ended December 31, 2008, 2007 and 2006
Consolidated Balance Sheets as of December 31, 2008 and 2007
47
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006
48
Notes to Consolidated Financial Statements (including the supplementary financial information contained in Note 9 “Quarterly Financial Data”)
49
Report of Independent Registered Public Accounting Firm
64
GETTY REALTY CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
Operating expenses:
Rental property expenses
9,390
9,301
9,619
Environmental expenses, net
7,374
8,190
5,418
General and administrative expenses
6,831
6,669
5,607
Allowance for deferred rent receivable
Depreciation and amortization expense
11,784
9,647
7,785
Total expenses
35,379
44,119
28,429
Operating income
45,784
33,950
42,900
Other income, net
412
1,920
1,855
Interest expense
(7,034
(7,760
(3,527
Income tax benefit
Discontinued operations:
Earnings from operating activities
259
1,216
793
2,389
4,568
Basic earnings per common share:
1.14
.11
.23
.03
Weighted average shares outstanding:
Basic
24,766
24,765
24,735
Stock options and restricted stock units
Diluted
Dividends declared per share
GETTY REALTY CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands)
Other comprehensive loss:
Net unrealized loss on interest rate swap
(1,997
(1,478
(821
Comprehensive Income
39,813
32,416
41,904
The accompanying notes are an integral part of these consolidated financial statements.
GETTY REALTY CORP. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except share data)
DECEMBER 31,
ASSETS:
Real Estate:
Land
221,540
222,194
Buildings and improvements
252,027
252,060
Less — accumulated depreciation and amortization
(129,322
(122,465
Real estate, net
344,245
351,789
Deferred rent receivable (net of allowance of $10,029 at December 31, 2008 and $10,494 at December 31, 2007)
26,718
24,915
Cash and cash equivalents
2,178
2,071
Recoveries from state underground storage tank funds, net
4,223
4,652
Mortgages and accounts receivable, net
1,533
1,473
Prepaid expenses and other assets
8,916
12,011
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Environmental remediation costs
18,523
Dividends payable
11,669
11,534
Accounts payable and accrued expenses
22,337
22,176
Total liabilities
181,916
184,733
Commitments and contingencies (notes 2, 3, 5 and 6)
Shareholders’ equity:
Common stock, par value $.01 per share; authorized 50,000,000 shares; issued 24,766,166 at December 31, 2008 and 24,765,065 at December 31, 2007
248
Paid-in capital
259,069
258,734
Dividends paid in excess of earnings
(49,124
(44,505
Accumulated other comprehensive loss
(4,296
(2,299
Total shareholders’ equity
205,897
Total liabilities and shareholders’ equity
GETTY REALTY CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net earnings to net cash flow provided by operating activities:
Gain on dispositions of real estate
Deferred rental revenue
Accretion expense
956
974
923
Stock-based employee compensation expense
326
492
186
Changes in assets and liabilities:
(379
772
(5
(172
423
(130
170
(2,217
(80
(1,425
(1,031
(249
545
Accrued income taxes
Net cash flow provided by operating activities
47,584
44,516
46,316
CASH FLOWS FROM INVESTING ACTIVITIES:
Property acquisitions and capital expenditures
(6,579
(90,636
(15,538
Proceeds from dispositions of real estate
5,295
8,420
2,462
(Increase) decrease in cash held for property acquisitions
2,397
(2,079
(465
Collection (issuance) of mortgages receivable, net
(55
267
Net cash flow provided by (used in) investing activities
1,058
(84,028
(13,215
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under credit agreement, net
(2,250
87,500
11,000
Cash dividends paid
(46,294
(45,650
(44,819
Credit agreement origination costs
(863
Cash paid in settlement of restricted stock units
(405
Repayment of mortgages payable, net
(194
(30
Proceeds from exercise of stock options
696
Net cash flow provided by (used in) financing activities
(48,535
40,388
(33,153
Net increase (decrease) in cash and cash equivalents
876
(52
Cash and cash equivalents at beginning of year
1,195
1,247
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information Cash paid (refunded) during the year for:
Interest
6,728
7,021
2,638
Income taxes, net
708
488
576
Recoveries from state underground storage tank funds
(1,511
(1,644
(2,128
6,542
6,314
5,132
GETTY REALTY CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of Getty Realty Corp. and its wholly-owned subsidiaries (the “Company”). The Company is a real estate investment trust (“REIT”) specializing in the ownership and leasing of retail motor fuel and convenience store properties and petroleum distribution terminals. The Company manages and evaluates its operations as a single segment. All significant inter-company accounts and transactions have been eliminated.
Use of Estimates, Judgments and Assumptions: The financial statements have been prepared in conformity with GAAP, which requires the Company’s management to make its best estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. While all available information has been considered, actual results could differ from those estimates, judgments and assumptions. Estimates, judgments and assumptions underlying the accompanying consolidated financial statements include, but are not limited to, deferred rent receivable, recoveries from state underground storage tank (“UST” or “USTs”) funds, environmental remediation costs, real estate, depreciation and amortization, impairment of long-lived assets, litigation, accrued expenses, income taxes and the allocation of the purchase price of properties acquired to the assets acquired and liabilities assumed.
Discontinued Operations: The operating results and gains from certain dispositions of real estate sold in 2008 and 2007 have been reclassified as discontinued operations. The results of such properties for the years ended 2007 and 2006 have been reclassified to discontinued operations to conform to the 2008 presentation. Discontinued operations for the year ended December 31, 2008 and 2007 are primarily comprised of gains from property dispositions. The revenue from rental properties and expenses related to the operations of these properties are insignificant for the each of the three years ended December 31, 2008, 2007 and 2006.
Real Estate: Real estate assets are stated at cost less accumulated depreciation and amortization. Upon acquisition of real estate operating properties and leasehold interests, the Company estimates the fair value of acquired tangible assets (consisting of land, buildings and improvements) “as if vacant” and identified intangible assets and liabilities (consisting of leasehold interests, above-market and below-market leases, in-place leases and tenant relationships) and assumed debt. Based on these estimates, the Company allocates the purchase price to the applicable assets and liabilities. When real estate assets are sold or retired, the cost and related accumulated depreciation and amortization is eliminated from the respective accounts and any gain or loss is credited or charged to income. Expenditures for maintenance and repairs are charged to income when incurred.
Depreciation and amortization: Depreciation of real estate is computed on the straight-line method based upon the estimated useful lives of the assets, which generally range from sixteen to twenty-five years for buildings and improvements, or the term of the lease if shorter. Leasehold interests, capitalized above-market and below-market leases, in-place leases and tenant relationships are amortized over the remaining term of the underlying lease.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of: Assets are written down to fair value (determined on a nonrecurring basis using a discounted cash flow method and significant unobservable inputs) when events and circumstances indicate that the assets might be impaired and the projected undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. The Company reviews and adjusts as necessary its depreciation estimates and method when long-lived assets are tested for recoverability. Assets held for disposal are written down to fair value less disposition costs.
Cash and Cash Equivalents: The Company considers highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Deferred Rent Receivable and Revenue Recognition: The Company earns rental income under operating leases with tenants. Minimum lease rentals and lease termination payments are recognized on a straight-line basis over the
term of the leases. The cumulative difference between lease revenue recognized under this method and the contractual lease payment terms is recorded as deferred rent receivable on the consolidated balance sheet. Lease termination fees are recognized as rental income when earned upon the termination of a tenant’s lease and relinquishment of space in which the Company has no further obligation to the tenant. The present value of the difference between the fair market rent and the contractual rent for in-place leases at the time properties are acquired is amortized into revenue from rental properties over the remaining lives of the in-place leases. The Company provides reserves for a portion of the recorded deferred rent receivable if circumstances indicate that a property may be disposed of before the end of the current lease term or if it is not reasonable to assume that the tenant will not make all of its contractual lease payments when due during the current term of the lease. The straight-line method requires that rental income related to those properties for which a reserve was provided is effectively recognized in subsequent periods when payment is due under the contractual payment terms.
Environmental Remediation Costs and Recoveries from State UST Funds, Net: The estimated future costs for known environmental remediation requirements are accrued when it is probable that a liability has been incurred, including legal obligations associated with the retirement of tangible long-lived assets if the asset retirement obligation results from the normal operation of those assets and a reasonable estimate of fair value can be made. The environmental remediation liability is estimated based on the level and impact of contamination at each property. The accrued liability is the aggregate of the best estimate of the fair value of cost for each component of the liability. Recoveries of environmental costs from state UST remediation funds, with respect to both past and future environmental spending, are accrued at fair value as an offset to environmental expense, net of allowance for collection risk, based on estimated recovery rates developed from prior experience with the funds when such recoveries are considered probable. Environmental liabilities and related assets are currently measured based on their expected future cash flows which have been adjusted for inflation and discounted to present value. The Company will accrue for environmental liabilities that it believes are allocable to other potentially responsible parties if it becomes probable that the other parties will not pay their environmental obligations.
Litigation: Legal fees related to litigation are expensed as legal services are performed. The Company provides for litigation reserves, including certain litigation related to environmental matters, when it is probable that a liability has been incurred and a reasonable estimate of the liability can be made. If the best estimate of the liability can only be identified as a range, and no amount within the range is a better estimate than any other amount, the minimum of the range is accrued for the liability. The Company accrues its share of environmental liabilities based on its assumptions of the ultimate allocation method and share that will be used when determining its share of responsibility.
Income Taxes: The Company and its subsidiaries file a consolidated federal income tax return. Effective January 1, 2001, the Company elected to qualify, and believes it is operating so as to qualify, as a REIT for federal income tax purposes. Accordingly, the Company generally will not be subject to federal income tax, provided that distributions to its shareholders equal at least the amount of its REIT taxable income as defined under the Internal Revenue Code. If the Company sells any property within ten years after its REIT election that is not exchanged for a like-kind property, it will be taxed on the built-in gain realized from such sale at the highest corporate rate. This ten-year built-in gain tax period will end in 2011.
Interest Expense and Interest Rate Swap Agreement: In April 2006 the Company entered into an interest rate swap agreement with JPMorgan Chase Bank, N.A. as the counterparty, designated and qualifying as a cash flow hedge, to reduce its variable interest rate risk by effectively fixing a portion of the interest rate for existing debt and anticipated refinancing transactions. The Company has not entered into financial instruments for trading or speculative purposes. The fair value of the derivative is reflected on the consolidated balance sheet and will be reclassified as a component of interest expense over the remaining term of the interest rate swap agreement since the Company does not expect to settle the interest rate swap prior to its maturity. The fair value of the interest rate swap obligation is based upon the estimated amounts the Company would receive or pay to terminate the contract and is determined using an interest rate market pricing model. Changes in the fair value of the agreement would be recorded in the consolidated statements of operations if the agreement was not an effective cash flow hedge for accounting purposes.
Earnings per Common Share: Basic earnings per common share is computed by dividing net earnings by the weighted-average number of common shares outstanding during the year. Diluted earnings per common share also
50
gives effect to the potential dilution from the exercise of stock options and the issuance of common shares in settlement of restricted stock units utilizing the treasury stock method. For the year ended December 31, 2008, the assumed exercise of stock options utilizing the treasury stock method would have been anti-dilutive and therefore was not assumed for purposes of computing diluted earnings per common share.
Stock-Based Compensation: Compensation cost for the Company’s stock-based compensation plans using the fair value method was $326,000, $492,000 and $186,000 for the years ended 2008, 2007 and 2006, respectively, and is included in general and administrative expense. The impact of the accounting for stock-based compensation is, and is expected to be, immaterial to the Company’s financial position and results of operations.
New Accounting Pronouncements: In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities. SFAS 157 generally applies whenever other standards require assets or liabilities to be measured at fair value. SFAS 157 is effective in fiscal years beginning after November 15, 2007. Staff Position (“FSP”) No. 152, “Effective Date of FASB Statement No. 157”, (“FSP 152”) delayed the effective date of FASB No. 157 by one year for nonfinancial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis to fiscal years beginning after November 15, 2008. The adoption of SFAS 157 in January 2008 has not had a material impact on the Company’s financial position and results of operations. The Company does not believe that the adoption of the provisions of SFAS 157 for nonfinancial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis will have a material impact on the Company’s financial position and results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements at fair value the identifiable assets acquired, liabilities assumed, any non-controlling interest in the acquiree and goodwill acquired in a business combination. SFAS 141(R) requires that acquisition costs, which could be material to the Company’s future financial results, will be expensed rather than included as part of the basis of the acquisition. The adoption of this standard by the Company on January 1, 2009 will not result in a write-off of acquisition related transactions costs associated with transactions not yet consummated. SFAS 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.
2. LEASES
The Company leases or sublets its properties primarily to distributors and retailers engaged in the sale of gasoline and other motor fuel products, convenience store products and automotive repair services who are responsible for the payment of taxes, maintenance, repair, insurance and other operating expenses and for managing the actual operations conducted at these properties. In addition, approximately twenty of the Company’s properties are directly leased by the Company to others for other uses such as fast food restaurants, automobile sales and other retail purposes. The Company’s properties are primarily located in the Northeast and Mid-Atlantic regions of the United States. The Company also owns or leases properties in Texas, North Carolina, Hawaii, California, Florida, Arkansas, Illinois, North Dakota and Ohio.
As of December 31, 2008, Getty Petroleum Marketing Inc. (“Marketing”) leased from the Company, eight hundred sixty-four properties. Substantially all of the properties are leased to Marketing under a unitary master lease (the “Master Lease”) except for ten properties which are leased under supplemental leases (collectively the “Marketing Leases”). As of December 31, 2008, the Marketing Leases included eight hundred fifty-five retail motor fuel and convenience store properties and nine distribution terminals, seven hundred ten of the properties are owned by the Company and one hundred fifty-four of the properties are leased by the Company from third parties. The Master Lease has an initial term of fifteen years commencing December 9, 2000, and generally provides Marketing with options for three renewal terms of ten years each and a final renewal option of three years and ten months extending to 2049 (or such shorter initial or renewal term as the underlying lease may provide). The Marketing Leases include provisions for 2% annual rent escalations. The Master Lease is a unitary lease and, accordingly, Marketing’s exercise of renewal options must be on an “all or nothing” basis. The supplemental leases have initial terms of varying expiration dates. As permitted under the terms of the Company’s leases with Marketing, Marketing
51
can generally use each property for any lawful purpose, or for no purpose whatsoever. (See footnote 3 for contingencies related to Marketing and the Marketing Leases for additional information.)
The Company estimates that Marketing makes annual real estate tax payments for properties leased under the Marketing Leases of approximately $12.3 million. Marketing also makes additional payments for other operating expenses related to these properties, including environmental remediation costs other than those liabilities that were retained by the Company. These costs, which have been assumed by Marketing under the terms of the Marketing Leases, are not reflected in the consolidated financial statements.
Revenues from rental properties for the years ended December 31, 2008, 2007 and 2006 were $81,163,000, $78,069,000 and $71,329,000, respectively, of which $60,440,000, $59,669,000 and $59,482,000, respectively, were received from Marketing under the Marketing Leases. In addition, revenues from rental properties for the years ended December 31, 2008, 2007 and 2006 include $2,537,000, 3,605,000 and $2,982,000, respectively, of deferred rental revenue accrued due to recognition of rental revenue on a straight-line basis and amortization of above-market and below-market leases. In the fourth quarter and year ended December 31, 2007, the Company provided a non-cash $10.5 million reserve for a portion of the deferred rent receivable recorded as of December 31, 2007 related to the Marketing Leases. (See footnote 3 for additional information related to the Marketing Leases and the reserve.)
Future contractual minimum annual rentals receivable from Marketing under the Marketing Leases and from other tenants, which have terms in excess of one year as of December 31, 2008, are as follows (in thousands. See footnote 3 for additional information related to the Marketing Leases and the reserve):
YEAR ENDING DECEMBER 31,
MARKETING
TOTAL (a)
60,003
18,938
78,941
59,968
18,722
78,690
60,086
18,769
78,855
60,402
18,588
78,990
60,508
18,006
78,514
118,946
121,683
240,629
(a) Includes $78,441,000 of future minimum annual rentals receivable under subleases.
Rent expense, substantially all of which consists of minimum rentals on non-cancelable operating leases, amounted to $8,100,000, $8,337,000 and $8,685,000 for the years ended December 31, 2008, 2007 and 2006, respectively, and is included in rental property expenses using the straight-line method. Rent received under subleases for the years ended December 31, 2008, 2007 and 2006 was $13,986,000, $14,145,000 and $14,646,000, respectively.
The Company has obligations to lessors under non-cancelable operating leases which have terms (excluding renewal term options) in excess of one year, principally for gasoline stations and convenience stores. Substantially all of these leases contain renewal options and rent escalation clauses. The leased properties have a remaining lease term averaging over ten years, including renewal options. Future minimum annual rentals payable under such leases, excluding renewal options, are as follows: 2009 — $7,338,000, 2010 — $5,971,000, 2011 — $4,600,000, 2012 — $3,197,000, 2013 — $2,038,000 and $3,476,000 thereafter.
3. COMMITMENTS AND CONTINGENCIES
In order to minimize the Company’s exposure to credit risk associated with financial instruments, the Company places its temporary cash investments with high credit quality institutions. Temporary cash investments, if any, are held in an overnight bank time deposit with JPMorgan Chase Bank, N.A.
As of December 31, the Company leased eight hundred sixty-four of its one thousand sixty properties on a long-term triple-net basis to Marketing under the Marketing Leases (see footnote 2 for additional information). A substantial portion of the Company’s revenues (75% for the year ended December 31, 2008), are derived from the Marketing Leases. Accordingly, the Company’s revenues are dependent to a large degree on the economic performance of Marketing and of the petroleum marketing industry, and any factor that adversely affects Marketing,
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or the Company’s relationship with Marketing, may have a material adverse effect on the Company’s business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends and/or stock price. Marketing operated substantially all of the Company’s petroleum marketing businesses when it was spun-off to the Company’s shareholders as a separate publicly held company in March 1997 (the “Spin-Off”). In December 2000, Marketing was acquired by a subsidiary of OAO LUKoil (“Lukoil”), one of the largest integrated Russian oil companies. Even though Marketing is a wholly-owned subsidiary of Lukoil and Lukoil has in prior periods provided credit enhancement and capital to Marketing, Lukoil is not a guarantor of the Marketing Leases and there can be no assurance that Lukoil is currently providing, or will provide, any credit enhancement or additional capital to Marketing. The Company’s financial results depend largely on rental income from Marketing, and to a lesser extent on rental income from other tenants and; therefore, are materially dependent upon the ability of Marketing to meet its rental, environmental and other obligations under the Marketing Leases. Marketing’s financial results depend largely on retail petroleum marketing margins and rental income from its sub-tenants who operate their respective convenience stores, automotive repair services or other businesses at the Company’s properties. The petroleum marketing industry has been and continues to be volatile and highly competitive. Marketing has made all required monthly rental payments under the Marketing Leases when due through March 2009, although there is no assurance that it will continue to do so.
The Company has had periodic discussions with representatives of Marketing regarding potential modifications to the Marketing Leases and, in 2007, during the course of such discussions, Marketing proposed to (i) remove approximately 40% of the properties (the “Subject Properties”) from the Marketing Leases and eliminate payment of rent to the Company, and eliminate or reduce payment of operating expenses, with respect to the Subject Properties, and (ii) reduce the aggregate amount of rent payable to the Company for the approximately 60% of the properties that would remain under the Marketing Leases (the “Remaining Properties”). Representatives of Marketing have also indicated to the Company that they are considering significant changes to Marketing’s business model. In light of these developments and the continued deterioration in Marketing’s annual financial performance, in March 2008, the Company had decided to attempt to negotiate with Marketing for a modification of the Marketing Leases which removes the Subject Properties from the Marketing Leases. The Company has held periodic discussions with Marketing since March 2008 in its attempt to negotiate a modification of the Marketing Leases to remove the Subject Properties. Although the Company continues to remove individual locations from the Master Lease as mutually beneficial opportunities arise, there has been no agreement between the Company and Marketing on any principal terms that would be the basis for a definitive Master Lease modification agreement. If Marketing ultimately determines that its business strategy is to exit all of the properties it leases from the Company or to divest a composition of properties different from the properties comprising the Subject Properties, such as the revised list of properties provided to the Company by Marketing in the second quarter of 2008 which includes approximately 45% of the properties Marketing leases from the Company (the “Revised Subject Properties”), it is the Company’s intention to cooperate with Marketing in accomplishing those objectives if the Company determines that it is prudent for it to do so. Any modification of the Marketing Leases that removes a significant number of properties from the Marketing Leases would likely significantly reduce the amount of rent the Company receives from Marketing and increase the Company’s operating expenses. The Company cannot accurately predict if, or when, the Marketing Leases will be modified or what the terms of any agreement may be if the Marketing Leases are modified. The Company also cannot accurately predict what actions Marketing and Lukoil may take, and what the Company’s recourse may be, whether the Marketing Leases are modified or not.
The Company intends either to re-let or sell any properties removed from the Marketing Leases and reinvest the realized sales proceeds in new properties. The Company intends to seek replacement tenants or buyers for properties removed from the Marketing Leases either individually, in groups of properties, or by seeking a single tenant for the entire portfolio of properties subject to the Marketing Leases. Although the Company is the fee or leasehold owner of the properties subject to the Marketing Leases and the owner of the Getty® brand and has prior experience with tenants who operate their convenience stores, automotive repair services or other businesses at its properties; in the event that properties are removed from the Marketing Leases, the Company cannot accurately predict if, when, or on what terms, such properties could be re-let or sold.
Due to the previously disclosed deterioration in Marketing’s annual financial performance, in conjunction with the Company’s decision to attempt to negotiate with Marketing for a modification of the Marketing Leases to remove the Subject Properties, the Company has decided that it cannot reasonably assume that it will collect all of the rent due to the Company related to the Subject Properties for the remainder of the current lease terms. In
53
reaching this conclusion, the Company relied on various indicators, including, but not limited to, the following financial results of Marketing through the year ended December 31, 2007: (i) Marketing’s significant operating losses, (ii) its negative cash flow from operating activities, (iii) its asset impairment charges for underperforming assets, and (iv) its negative earnings before interest, taxes, depreciation, amortization and rent payable to the Company. The Company has not received Marketing’s financial results for the year ended December 31, 2008 prior to the preparation of this Annual Report on Form 10-K.
The Company recorded a reserve of $10,494,000 in 2007 representing the full amount of the deferred rent receivable recorded related to the Subject Properties as of December 31, 2007. Providing the non-cash deferred rent receivable reserve reduced the Company’s net earnings but did not impact the Company’s cash flow from operating activities for 2007. As of December 31, 2008, the Company had a reserve of $10,029,000 for the deferred rent receivable due from Marketing representing the full amount of the deferred rent receivable recorded related to the Subject Properties as of that date. The Company has not provided a deferred rent receivable reserve related to the Remaining Properties since, based on the Company’s assessments and assumptions, the Company continues to believe that it is probable that it will collect the deferred rent receivable related to the Remaining Properties of $22,900,000 as of December 31, 2008 and that Lukoil will not allow Marketing to fail to perform its rental, environmental and other obligations under the Marketing Leases. The Company anticipates that the rental revenue for the Remaining Properties will continue to be recognized on a straight-line basis. As required by the straight-line method of accounting, beginning with the first quarter of 2008, the rental revenue for the Subject Properties was, and for future periods is expected to be, effectively recognized when payment is due under the contractual payment terms. Although the Company has adjusted the estimated useful lives of certain long-lived assets for the Subject Properties, the Company believes that no impairment charge was necessary for the Subject Properties as of December 31, 2008 or December 31, 2007 pursuant to the provisions of Statement of Financial Accounting Standards No. 144. The impact to depreciation expense due to adjusting the estimated lives for certain long-lived assets beginning with the year ended December 31, 2008 was not material.
Marketing is directly responsible to pay for (i) remediation of environmental contamination it causes and compliance with various environmental laws and regulations as the operator of the Company’s properties, and (ii) known and unknown environmental liabilities allocated to Marketing under the terms of the Master Lease and various other agreements between Marketing and the Company relating to Marketing’s business and the properties subject to the Marketing Leases (collectively the “Marketing Environmental Liabilities”). The Company may ultimately be responsible to directly pay for Marketing Environmental Liabilities as the property owner if Marketing fails to pay them. Additionally, the Company will be required to accrue for Marketing Environmental Liabilities if the Company determines that it is probable that Marketing will not meet its obligations or if the Company’s assumptions regarding the ultimate allocation methods and share of responsibility that it used to allocate environmental liabilities changes as a result of the factors discussed above, or otherwise. However, the Company continues to believe that it is not probable that Marketing will not pay for substantially all of the Marketing Environmental Liabilities since the Company believes that Lukoil will not allow Marketing to fail to perform its rental, environmental and other obligations under the Marketing Leases and, accordingly, the Company did not accrue for the Marketing Environmental Liabilities as of December 31, 2008 or 2007. Nonetheless, the Company has determined that the aggregate amount of the Marketing Environmental Liabilities (as estimated by the Company based on its assumptions and analysis of information currently available to it) could be material to the Company if it was required to accrue for all of the Marketing Environmental Liabilities in the future since the Company believes that it is reasonably possible that as a result of such accrual, the Company may not be in compliance with the existing financial covenants in its Credit Agreement. Such non-compliance could result in an event of default which, if not cured or waived, could result in the acceleration of all of the Company’s indebtedness under the Credit Agreement.
Should the Company’s assessments, assumptions and beliefs prove to be incorrect, or if circumstances change, the conclusions reached by the Company may change relating to (i) whether some or all of the Subject or Remaining Properties are likely to be removed from the Marketing Leases (ii) recoverability of the deferred rent receivable for some or all of the Subject or Remaining Properties, (iii) potential impairment of the Subject or Remaining Properties and, (iv) Marketing’s ability to pay the Marketing Environmental Liabilities. The Company intends to regularly review its assumptions that affect the accounting for deferred rent receivable; long-lived assets; environmental litigation accruals; environmental remediation liabilities; and related recoveries from state underground storage tank funds, which may result in material adjustments to the amounts recorded for these assets and liabilities, and as a
result of which, the Company may not be in compliance with the financial covenants in its Credit Agreement. Accordingly, the Company may be required to (i) reserve additional amounts of the deferred rent receivable related to the Remaining Properties, (ii) record an impairment charge related to the Subject or Remaining Properties, or (iii) accrue for Marketing Environmental Liabilities that the Company believes are allocable to Marketing under the Marketing Leases and various other agreements as a result of the potential or actual modification of the Marketing Leases or other factors.
The Company cannot provide any assurance that Marketing will continue to pay its debts or meet its rental, environmental or other obligations under the Marketing Leases prior or subsequent to any potential modification of the Marketing Leases. In the event that Marketing cannot or will not perform its rental, environmental or other obligations under the Marketing Leases; if the Marketing Leases are modified significantly or terminated; if the Company determines that it is probable that Marketing will not meet its environmental obligations and the Company accrues for such liabilities; if the Company is unable to promptly re-let or sell the properties subject to the Marketing Leases; or, if the Company changes its assumptions that affect the accounting for rental revenue or Marketing Environmental Liabilities related to the Marketing Leases and various other agreements; the Company’s business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends and/or stock price may be materially adversely affected.
The Company has also agreed to provide limited environmental indemnification to Marketing, capped at $4,250,000 and expiring in 2010, for certain pre-existing conditions at six of the terminals which are owned by the Company and leased to Marketing. Under the agreement, Marketing is obligated to pay the first $1,500,000 of costs and expenses incurred in connection with remediating any such pre-existing conditions, Marketing and the Company will share equally the next $8,500,000 of those costs and expenses and Marketing is obligated to pay all additional costs and expenses over $10,000,000. The Company has accrued $300,000 as of December 31, 2008 and 2007 in connection with this indemnification agreement.
The Company is subject to various legal proceedings and claims which arise in the ordinary course of its business. In addition, the Company has retained responsibility for certain legal proceedings and claims relating to the petroleum marketing business that were identified at the time of the Spin-Off. As of December 31, 2008 and 2007, the Company had accrued $1,671,000 and $2,575,000, respectively, for certain of these matters which it believes were appropriate based on information then currently available. The Company has not accrued for approximately $950,000 in costs allegedly incurred by the current property owner in connection with removal of underground storage tanks (“USTs” or “UST”) and soil remediation at a property that had been leased to and operated by Marketing. The Company believes Marketing is responsible for such costs under the terms of the Master Lease and tendered the matter for defense and indemnification from Marketing, but Marketing has denied its liability for the claim and its responsibility to defend against and indemnify the Company for the claim. The Company has filed a third party claim against Marketing for indemnification in this matter, which claim is currently being actively litigated. Trial is anticipated to be scheduled for the first quarter of 2009. It is possible that the Company’s assumption that Marketing will be ultimately responsible for this claim may change, which may result in the Company providing an accrual for this and other matters.
In September 2003, the Company was notified by the State of New Jersey Department of Environmental Protection (“NJDEP”) that the Company is one of approximately sixty-six potentially responsible parties for natural resource damages resulting from discharges of hazardous substances into the Lower Passaic River. The definitive list of potentially responsible parties and their actual responsibility for the alleged damages, the aggregate cost to remediate the Lower Passaic River, the amount of natural resource damages and the method of allocating such amounts among the potentially responsible parties have not been determined. In September 2004, the Company received a General Notice Letter from the United States Environmental Protection Agency (the “EPA”) (the “EPA Notice”), advising the Company that it may be a potentially responsible party for costs of remediating certain conditions resulting from discharges of hazardous substances into the Lower Passaic River. ChevronTexaco received the same EPA Notice regarding those same conditions. In a related action, in December 2005, the State of New Jersey brought suit against certain companies which the State alleges are responsible for pollution of the Passaic River from a former Diamond Alkali manufacturing plant. In February 2009, certain of these defendants filed third-party complaints against approximately 300 additional parties, including the Company, seeking contribution for a pro-rata share of response costs, cleanup and removal costs, and other damages. The Company believes that ChevronTexaco is contractually obligated to indemnify the Company, pursuant to an indemnification
55
agreement, for most if not all of the conditions at the property identified by the NJDEP and the EPA. Accordingly, the ultimate legal and financial liability of the Company, if any, cannot be estimated with any certainty at this time.
From October 2003 through December 31, 2008, the Company was notified that the Company was made party to fifty-four cases in Connecticut, Florida, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Vermont, Virginia and West Virginia brought by local water providers or governmental agencies. These cases allege various theories of liability due to contamination of groundwater with methyl tertiary butyl ether (“MTBE”) as the basis for claims seeking compensatory and punitive damages. Each case names as defendants approximately fifty petroleum refiners, manufacturers, distributors and retailers of MTBE, or gasoline containing MTBE. At this time, the Company has been dismissed from certain of the cases initially filed against it. A significant number of the named defendants other than the Company have entered into settlements with certain plaintiffs, which affected approximately twenty-seven of the cases to which the Company is a party. The accuracy of the allegations as they relate to the Company, the Company’s defenses to such claims, the aggregate amount of possible damages and the method of allocating such amounts among the remaining defendants have not been determined. Accordingly, the ultimate legal and financial liability of the Company, if any, cannot be estimated with any certainty at this time. The ultimate resolution of these matters could cause a material adverse effect on the Company’s business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.
Prior to the Spin-Off, the Company was self-insured for workers’ compensation, general liability and vehicle liability up to predetermined amounts above which third-party insurance applies. As of December 31, 2008 and 2007, the Company’s consolidated balance sheets included, in accounts payable and accrued expenses, $290,000 and $310,000, respectively, relating to self-insurance obligations. The Company estimates its loss reserves for claims, including claims incurred but not reported, by utilizing actuarial valuations provided annually by its insurance carriers. The Company is required to deposit funds for substantially all of these loss reserves with its insurance carriers, and may be entitled to refunds of amounts previously funded, as the claims are evaluated on an annual basis. The Company’s consolidated statements of operations for the years ended December 31, 2008, 2007 and 2006 include, in general and administrative expenses, charges (credits) of $(72,000), $81,000 and ($301,000), respectively, for self-insurance loss reserve adjustments. Since the Spin-Off, the Company has maintained insurance coverage subject to certain deductibles.
In order to qualify as a REIT, among other items, the Company must pay out substantially all of its “earnings and profits” (as defined in the Internal Revenue Code) in cash distributions to shareholders each year. Should the Internal Revenue Service successfully assert that the Company’s earnings and profits were greater than the amounts distributed, the Company may fail to qualify as a REIT; however, the Company may avoid losing its REIT status by paying a deficiency dividend to eliminate any remaining earnings and profits. The Company may have to borrow money or sell assets to pay such a deficiency dividend.
4. CREDIT AGREEMENT
As of December 31, 2008, borrowings under the Credit Agreement, described below, were $130,250,000, bearing interest at a weighted-average effective rate of 3.8% per annum. The weighted-average effective rate is based on $85,250,000 of LIBOR rate borrowings floating at market rates plus a margin of 1.0% and $45,000,000 of LIBOR rate borrowings effectively fixed at 5.44% by an interest rate Swap Agreement, described below, plus a margin of 1.0%. The Company has a $175,000,000 amended and restated senior unsecured revolving credit agreement (the “Credit Agreement”) with a group of domestic commercial banks led by JPMorgan Chase Bank, N.A. (the “Bank Syndicate”) which expires in March 2011. The Credit Agreement does not provide for scheduled reductions in the principal balance prior to its maturity. The Credit Agreement permits borrowings at an interest rate equal to the sum of a base rate plus a margin of 0.0% or 0.25% or a LIBOR rate plus a margin of 1.0%, 1.25% or 1.5%. The applicable margin is based on the Company’s leverage ratio at the end of the prior calendar quarter, as defined in the Credit Agreement, and is adjusted effective mid-quarter when the Company’s quarterly financial results are reported to the Bank Syndicate. Based on the Company’s leverage ratio as of December 31, 2008, the applicable margin is 0.0% for base rate borrowings and will increase to 1.25% in the first quarter of 2009 for LIBOR rate borrowings.
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Subject to the terms of the Credit Agreement, the Company has the option to extend the term of the credit agreement for one additional year to March 2012 and/or, subject to approval by the Bank Syndicate, increase the amount of the credit facility available pursuant to the Credit Agreement by $125,000,000 to $300,000,000. The Company does not expect to exercise its option to increase the amount of the Credit Agreement at this time. In addition, based on the current lack of liquidity in the credit markets, the Company believes that it would need to renegotiate certain terms in the Credit Agreement in order to obtain approval from the Bank Syndicate to increase the amount of the credit facility at this time. No assurance can be given that such approval from the Bank Syndicate will be obtained on terms acceptable to the Company, if at all. The annual commitment fee on the unused Credit Agreement ranges from 0.10% to 0.20% based on the amount of borrowings. The Credit Agreement contains customary terms and conditions, including customary financial covenants such as leverage and coverage ratios and other customary covenants, including limitations on the Company’s ability to incur debt, pay dividends and maintenance of tangible net worth, and events of default, including change of control and failure to maintain REIT status. A material adverse effect on the Company’s business, assets, prospects or condition, financial or otherwise, would also result in an event of default. Any event of default, if not cured or waived, could result in the acceleration of all of the Company’s indebtedness under the Credit Agreement.
The Company entered into a $45,000,000 LIBOR based interest rate swap agreement with JPMorgan Chase Bank, N.A. as the counterparty, effective through June 30, 2011 (the “Swap Agreement”). The Swap Agreement is intended to effectively fix, at 5.44%, the LIBOR component of the interest rate determined under the Credit Agreement. As a result of the Swap Agreement, as of December 31, 2008, $45,000,000 of the Company’s LIBOR based borrowings under the Credit Agreement bear interest at an effective rate of 6.44%.
The Company entered into the Swap Agreement with JPMorgan Chase Bank, N.A., designated and qualifying as a cash flow hedge, to reduce its exposure to the variability in future cash flows attributable to changes in the LIBOR rate. The Company’s primary objective when undertaking the hedging transaction and derivative position was to reduce its variable interest rate risk by effectively fixing a portion of the interest rate for existing debt and anticipated refinancing transactions. The Company determined, as of the Swap Agreement’s inception and as of December 31, 2008 and 2007, that the derivative used in the hedging transaction is highly effective in offsetting changes in cash flows associated with the hedged item and that no gain or loss was required to be recognized in earnings during 2008 or 2007 representing the hedge’s ineffectiveness. At December 31, 2008 and, 2007, the Company’s consolidated balance sheets include, in accounts payable and accrued expenses, an obligation for the fair value of the Swap Agreement of $4,296,000 and $2,299,000, respectively. For the years ended December 31, 2008, 2007 and 2006, the Company has recorded a loss in the fair value of the Swap Agreement related to the effective portion of the interest rate contract totaling $1,997,000, $1,478,000 and $821,000, respectively, in accumulated other comprehensive loss in the Company’s consolidated balance sheet. The accumulated comprehensive loss will be recognized as an increase in interest expense as quarterly payments are made to the counter-party over the remaining term of the Swap Agreement (of which approximately $1,862,000 is expected to be reclassified within the next twelve months) since it is expected that the Credit Agreement will be refinanced with variable interest rate debt at its maturity.
The fair value of the Swap Agreement is $4,296,000 as of December 31, 2008 determined using (i) a discounted cash flow analysis on the expected cash flows of the Swap Agreement, which is based on market data obtained from sources independent of the Company consisting of interest rates and yield curves that are observable at commonly quoted intervals and are defined by GAAP as “Level 2” inputs in the “Fair Value Hierarchy”, and (ii) credit valuation adjustments, which are based on unobservable “Level 3” inputs. The fair value of the $133,577,000 projected borrowings outstanding under the Credit Agreement is $122,751,000 as of December 31, 2008 determined using a discounted cash flow technique that incorporates a market interest yield curve, “Level 2 inputs”, with adjustments for duration, optionality, risk profile and projected average borrowings outstanding, which are based on unobservable “Level 3 inputs”. As of December 31, 2008, accordingly, the Company classified its valuation of the Swap Agreement in its entirety within Level 2 of the Fair Value Hierarchy since the credit valuation adjustments are not significant to the overall valuation of the Swap Agreement and its valuation of the borrowings outstanding under the Credit Agreement in its entirety within Level 3 of the Fair Value Hierarchy.
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5. ENVIRONMENTAL EXPENSES
The Company is subject to numerous existing federal, state and local laws and regulations, including matters relating to the protection of the environment such as the remediation of known contamination and the retirement and decommissioning or removal of long-lived assets including buildings containing hazardous materials, USTs and other equipment. Environmental expenses are principally attributable to remediation costs which include installing, operating, maintaining and decommissioning remediation systems, monitoring contamination, and governmental agency reporting incurred in connection with contaminated properties. The Company seeks reimbursement from state UST remediation funds related to these environmental expenses where available.
The Company enters into leases and various other agreements which allocate responsibility for known and unknown environmental liabilities by establishing the percentage and method of allocating responsibility between the parties. In accordance with the leases with certain tenants, the Company has agreed to bring the leased properties with known environmental contamination to within applicable standards and to regulatory or contractual closure (“Closure”) in an efficient and economical manner. Generally, upon achieving Closure at each individual property, the Company’s environmental liability under the lease for that property will be satisfied and future remediation obligations will be the responsibility of the Company’s tenant. Generally the liability for the retirement and decommissioning or removal of USTs and other equipment is the responsibility of the Company’s tenants. The Company is contingently liable for these obligations in the event that the tenants do not satisfy their responsibilities. A liability has not been accrued for obligations that are the responsibility of the Company’s tenants based on the tenants’ history of paying such obligations and/or the Company’s assessment of their financial ability to pay their share of such costs. However, there can be no assurance that the Company’s assessments are correct or that the Company’s tenants who have paid their obligations in the past will continue to do so.
Of the eight hundred sixty-four properties leased to Marketing as of December 31, 2008, the Company has agreed to pay all costs relating to, and to indemnify Marketing for, certain environmental liabilities and obligations at one hundred eighty-seven retail properties that have not achieved Closure and are scheduled in the Master Lease. The Company will continue to seek reimbursement from state UST remediation funds related to these environmental expenditures where available.
It is possible that the Company’s assumptions regarding the ultimate allocation method and share of responsibility that it used to allocate environmental liabilities may change, which may result in material adjustments to the amounts recorded for environmental litigation accruals, environmental remediation liabilities and related assets. The Company will be required to accrue for environmental liabilities that the Company believes are allocable to others under various other agreements if the Company determines that it is probable that the counter-party will not meet its environmental obligations. The ultimate resolution of these matters could cause a material adverse effect on the Company’s business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price. (See footnote 3 for contingencies related to Marketing and the Marketing Leases for additional information.)
The estimated future costs for known environmental remediation requirements are accrued when it is probable that a liability has been incurred and a reasonable estimate of fair value can be made. The environmental remediation liability is estimated based on the level and impact of contamination at each property. The accrued liability is the aggregate of the best estimate of the fair value of cost for each component of the liability. Recoveries of environmental costs from state UST remediation funds, with respect to both past and future environmental spending, are accrued at fair value as an offset to environmental expense, net of allowance for collection risk, based on estimated recovery rates developed from prior experience with the funds when such recoveries are considered probable.
Environmental exposures are difficult to assess and estimate for numerous reasons, including the extent of contamination, alternative treatment methods that may be applied, location of the property which subjects it to differing local laws and regulations and their interpretations, as well as the time it takes to remediate contamination. In developing the Company’s liability for probable and reasonably estimable environmental remediation costs, on a property by property basis, the Company considers among other things, enacted laws and regulations, assessments of contamination and surrounding geology, quality of information available, currently available technologies for treatment, alternative methods of remediation and prior experience. These accrual estimates are subject to significant change, and are adjusted as the remediation treatment progresses, as circumstances change and as these
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contingencies become more clearly defined and reasonably estimable. As of December 31, 2008, the Company had regulatory approval for remediation action plans in place for two hundred forty-nine (95%) of the two hundred sixty-two properties for which it continues to retain environmental responsibility and the remaining thirteen properties (5%) remain in the assessment phase. In addition, the Company has nominal post-closure compliance obligations at twenty-four properties where it has received “no further action” letters.
Environmental remediation liabilities and related assets are measured at fair value based on their expected future cash flows which have been adjusted for inflation and discounted to present value. The net change in estimated remediation cost and accretion expense included in environmental expenses in the Company’s consolidated statements of operations aggregated $4,656,000, $5,136,000 and $3,202,000 for 2008, 2007 and 2006, respectively, which amounts were net of changes in estimated recoveries from state UST remediation funds. In addition to net change in estimated remediation costs, environmental expenses also include project management fees, legal fees and provisions for environmental litigation loss reserves.
As of December 31, 2008, 2007, 2006 and 2005, the Company had accrued $17,660,000, $18,523,000, $17,201,000 and $17,350,000 respectively, as management’s best estimate of the fair value of reasonably estimable environmental remediation costs. As of December 31, 2008, 2007, 2006 and 2005, the Company had also recorded $4,223,000, $4,652,000, $3,845,000 and $4,264,000, respectively, as management’s best estimate for recoveries from state UST remediation funds, net of allowance, related to environmental obligations and liabilities. The net environmental liabilities of $13,871,000, $13,356,000 and $13,086,000 as of December 31, 2007, 2006 and 2005, respectively, were subsequently accreted for the change in present value due to the passage of time and, accordingly, $956,000, $974,000 and $923,000 of net accretion expense was recorded for the years ended December 31, 2008, 2007 and 2006, respectively, substantially all of which is included in environmental expenses.
In view of the uncertainties associated with environmental expenditures, contingencies related to Marketing and the Marketing Leases and contingencies related to other parties, however, the Company believes it is possible that the fair value of future actual net expenditures could be substantially higher than amounts currently recorded by the Company. (See footnote 3 for contingencies related to Marketing and the Marketing Leases for additional information.) Adjustments to accrued liabilities for environmental remediation costs will be reflected in the Company’s financial statements as they become probable and a reasonable estimate of fair value can be made. Future environmental expenses could cause a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.
6. INCOME TAXES
Net cash paid for income taxes for the years ended December 31, 2008, 2007 and 2006 of $708,000, $488,000 and $576,000, respectively, includes amounts related to state and local income taxes for jurisdictions that do not follow the federal tax rules, which are provided for in rental property expenses in the Company’s consolidated statements of operations.
Earnings and profits (as defined in the Internal Revenue Code) is used to determine the tax attributes of dividends paid to stockholders and will differ from income reported for financial statement purposes due to the effect of items which are reported for income tax purposes in years different from that in which they are recorded for financial statement purposes. Earnings and profits were $40,906,000, $41,147,000 and $39,486,000 for the years ended December 31, 2008, 2007 and 2006, respectively. The federal tax attributes of the common dividends for the years ended December 31, 2008, 2007 and 2006 were: ordinary income of 87.4%, 90.3% and 88.0%; capital gain distributions of 1.2%, 0.0% and 0.02% and non-taxable distributions of 11.4%, 9.7% and 11.8%, respectively.
In order to qualify as a REIT, among other items, the Company must pay out substantially all of its earnings and profits in cash distributions to shareholders each year. Should the Internal Revenue Service successfully assert that the Company’s earnings and profits were greater than the amount distributed, the Company may fail to qualify as a REIT; however, the Company may avoid losing its REIT status by paying a deficiency dividend to eliminate any remaining earnings and profits. The Company may have to borrow money or sell assets to pay such a deficiency dividend. The Company accrues for this and certain other tax matters when appropriate based on information
currently available. The accrual for uncertain tax positions is adjusted as circumstances change and as the uncertainties become more clearly defined, such as when audits are settled or exposures expire. Accordingly, an income tax benefit of $700,000 was recorded in the third quarter of 2006, due to the elimination of the amount accrued for uncertain tax positions since the Company believes that the uncertainties regarding these exposures have been resolved or that it is no longer likely that the exposure will result in a liability upon review. However, the ultimate resolution of these matters may have a significant impact on the results of operations for any single fiscal year or interim period.
7. SHAREHOLDERS’ EQUITY
A summary of the changes in shareholders’ equity for the years ended December 31, 2008, 2007 and 2006 is as follows (in thousands, except per share amounts):
COMMON STOCK
PAID-INCAPITAL
DIVIDENDSPAIDIN EXCESSOF EARNINGS
ACCUMULATEDOTHERCOMPREHENSIVELOSS
SHARES
AMOUNT
BALANCE,DECEMBER 31, 2005
24,717
247
257,766
(30,130
Dividends — $1.82 per common share
(45,094
Stock-based compensation
Stock options exercised
695
BALANCE,DECEMBER 31, 2006
258,647
(32,499
Dividends — $1.85 per common share
(45,900
87
BALANCE,DECEMBER 31, 2007
Dividends — $1.87 per common share
(46,429
BALANCE,DECEMBER 31, 2008
) (a)
Net of $103,803 transferred from retained earnings to common stock and paid-in capital as a result of accumulated stock dividends.
The Company is authorized to issue 20,000,000 shares of preferred stock, par value $.01 per share, for issuance in series, of which none were issued as of December 31, 2008, 2007, 2006 and 2005.
8. SEVERANCE AGREEMENT AND EMPLOYEE BENEFIT PLANS
General and administrative expenses include a provision of $447,000 recorded in the quarter ended December 31, 2007 primarily due to the payment of severance and the accelerated vesting of 14,250 restricted stock units which were unvested and scheduled to vest five years from the date of each grant in conjunction with the resignation of Mr. Andy Smith, the former President and Chief Legal Officer of the Company.
The Company has a retirement and profit sharing plan with deferred 401(k) savings plan provisions (the “Retirement Plan”) for employees meeting certain service requirements and a supplemental plan for executives (the “Supplemental Plan”). Under the terms of these plans, the annual discretionary contributions to the plans are determined by the Compensation Committee of the Board of Directors. Also, under the Retirement Plan, employees
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may make voluntary contributions and the Company has elected to match an amount equal to fifty percent of such contributions but in no event more than three percent of the employee’s eligible compensation. Under the Supplemental Plan, a participating executive may receive an amount equal to ten percent of eligible compensation, reduced by the amount of any contributions allocated to such executive under the Retirement Plan. Contributions, net of forfeitures, under the retirement plans approximated $151,000, $100,000 and $139,000 for the years ended December 31, 2008, 2007 and 2006, respectively. These amounts are included in the accompanying consolidated statements of operations.
The Getty Realty Corp. 2004 Omnibus Incentive Compensation Plan (the “2004 Plan”) provides for the grant of restricted stock, restricted stock units, performance awards, dividend equivalents, stock payments and stock awards to all employees and members of the Board of Directors. The 2004 Plan authorizes the Company to grant awards with respect to an aggregate of 1,000,000 shares of common stock through 2014. The aggregate maximum number of shares of common stock that may be subject to awards granted under the 2004 Plan during any calendar year is 80,000.
The Company awarded to employees and directors 23,800, 17,550 and 12,550 restricted stock units (“RSUs”) and dividend equivalents in 2008, 2007 and 2006, respectively. The RSUs are settled subsequent to the termination of employment with the Company. On the settlement date each RSU will have a value equal to one share of common stock and may be settled, at the sole discretion of the Compensation Committee, in cash or by the issuance of one share of common stock. In 2008, the Company settled 1,000 RSUs by issuing 400 shares of common stock with an intrinsic value of $7,000 net of employee tax withholdings and cancelling 600 RSUs that were not vested. In 2007, the Compensation Committee elected to settle 14,250 RSUs in cash for $405,000. The RSUs do not provide voting or other shareholder rights unless and until the RSU is settled for a share of common stock. The 62,000 RSUs outstanding as of December 31, 2008 vest starting one year from the date of grant, on a cumulative basis at the annual rate of twenty percent of the total number of RSUs covered by the award. The dividend equivalents represent the value of the dividends paid per common share multiplied by the number of RSUs covered by the award.
The fair values of the RSUs were determined based on the closing market price of the Company’s stock on the date of grant. The average fair values of the RSUs granted in 2008, 2007, and 2006 were estimated at $26.86, $28.78, and $28.80 per unit on the date of grant with an aggregate fair value estimated at $639,000, $505,000 and $361,000, respectively. The fair value of the grants is recognized as compensation expense ratably over the five year vesting period of the RSUs. As of December 31, 2008, there was $971,000 of total unrecognized compensation cost related to RSUs granted under the 2004 Plan.
The fair value of the 7,840, 19,330 and 3,320 RSUs which vested during the years ended December 31, 2008, 2007 and 2006 was $213,000, $523,000 and $88,000, respectively. The aggregate intrinsic value of the 62,000 outstanding RSUs and the 17,400 vested RSUs as of December 31, 2008 was $1,306,000 and $366,000, respectively. For the years ended December 31, 2008, 2007 and 2006, dividend equivalents aggregating approximately $88,000, $85,000 and $65,000, respectively, were charged against retained earnings when common stock dividends were declared.
The Company has a stock option plan (the “Stock Option Plan”). The Company’s authorization to grant options to purchase shares of the Company’s common stock under the Stock Option Plan expired in January 2008. No options were granted in 2008. Stock options vest starting one year from the date of grant, on a cumulative basis at the annual rate of twenty-five percent of the total number of options covered by the award. As of December 31, 2008, there was $10,000 of unrecognized compensation cost related to non-vested options granted in May 2007 under the Stock Option Plan with an estimated fair value of $18,000, or $3.51 per option. The total fair value of the options vested during the years ended December 31, 2008 and 2006 was $4,000 and $8,000, respectively. As of December 31, 2008, there were 1,750, 10,500 and 5,000 options outstanding which were exercisable at prices of $16.15, $18.30 and $27.68 with a remaining contractual life of three, four and nine years, respectively.
61
The following is a schedule of stock option prices and activity relating to the Stock Option Plan:
NUMBEROF SHARES
WEIGHTED-AVERAGEEXERCISEPRICE
WEIGHTED-AVERAGEREMAININGCONTRACTUALTERM
AGGREGATEINTRINSICVALUE(IN THOUSANDS)
Outstanding at beginning of year
17,750
20.73
12,750
18.00
84,378
19.48
Issued
5,000
27.68
Exercised (a)
(500
18.30
(71,628
19.74
Cancelled
Outstanding at end of year
17,250
20.80
5.3
Exercisable at end of year (b)
13,500
18.89
4.8
The total intrinsic value of the options exercised during the years ended December 31, 2008 and 2006 was $5,000 and $704,000, respectively.
The options vested during the years ended December 31, 2008 and 2006 was 1,250 and 14,875, respectively. No options vested during the year ended December 31, 2007.
9. QUARTERLY FINANCIAL DATA
The following is a summary of the quarterly results of operations for the years ended December 31, 2008 and 2007 (unaudited as to quarterly information) (in thousands, except per share amounts):
THREE MONTHS ENDED
YEAR ENDEDDECEMBER 31,
YEAR ENDED DECEMBER 31, 2008
MARCH 31,
JUNE 30,
SEPTEMBER 30,
20,242
20,187
20,328
20,406
10,832
9,361
10,011
8,958
11,371
10,635
10,489
9,315
.44
.38
.40
.36
.46
.43
.42
YEAR ENDED DECEMBER 31, 2007 (a)
17,713
20,248
20,000
20,108
Earnings (loss) from continuing operations (b)(c)
10,194
8,507
9,907
(498
Net earnings (b)(c)
10,437
10,024
12,846
587
Diluted earnings (loss) per common share:
Earnings (loss) from continuingoperations (b)(c)
.41
.34
(.02
.52
.02
Includes (from the date of the acquisition) the effect of the $84.6 million acquisition of convenience stores and gas station properties from FF-TSY Holding Company II LLC (successor to Trustreet Properties, Inc.) which was substantially completed by the end of the first quarter of 2007 (See footnote 10 for additional information).
The quarter ended December 31, 2007 includes the effect of a $10.5 million non-cash reserve for the full amount of the deferred rent receivable recorded as of December 31, 2007 related to approximately 40% of the properties under leases with Marketing, (See footnote 3 for additional information).
The quarter ended December 31, 2007 includes a net expense of $447,000 related to Mr. Andy Smith’s resignation (See footnote 8 for additional information).
62
10. PROPERTY ACQUISITIONS
On February 28, 2006, the Company completed the acquisition of eighteen retail motor fuel and convenience store properties located in Western New York for approximately $13,389,000. Simultaneous with the closing on the acquisition, the Company entered into a triple-net lease with a single tenant for all of the properties. The lease provides for annual rentals at a competitive rate and provides for escalations thereafter. The lease has an initial term of fifteen years and provides the tenant options for three renewal terms of five years each. The lease also provides that the tenant is responsible for all existing and future environmental conditions at the properties.
Effective March 31, 2007, the Company acquired fifty-nine convenience store and retail motor fuel properties in ten states for approximately $79,335,000 from various subsidiaries of FF-TSY Holding Company II, LLC (the successor to Trustreet Properties, Inc.) (“Trustreet”), a subsidiary of General Electric Capital Corporation, for cash with funds drawn under its Credit Agreement. Effective April 23, 2007, the Company acquired five additional properties from Trustreet for approximately $5,200,000. The aggregate cost of the acquisitions, including $1,131,000 of transaction costs, is approximately $84,535,000. Substantially all of the properties are triple-net-leased to tenants who previously leased the properties from the seller. The leases generally provide that the tenants are responsible for substantially all existing and future environmental conditions at the properties.
The purchase price has been allocated between assets, liabilities and intangible assets based on the estimates of fair value. The Company estimated the fair value of acquired tangible assets (consisting of land, buildings and improvements) “as if vacant” and identified intangible assets and liabilities (consisting of leasehold interests, above-market and below-market leases and in-place leases). Based on these estimates, the Company allocated $89,908,000, $5,351,000 and $10,724,000 of the purchase price to acquired tangible assets; identified intangible assets; and identified intangible liabilities, respectively.
The following unaudited pro forma condensed consolidated financial information has been prepared utilizing the historical financial statements of Getty Realty Corp. and the historical financial information of the properties acquired in 2007 which was derived from the consolidated books and records of Trustreet. The unaudited pro forma condensed consolidated financial information assumes that the acquisitions had occurred as of the beginning of each of the periods presented, after giving effect to certain adjustments including (a) rental income adjustments resulting from (i) the straight-lining of scheduled rent increases and (ii) the net amortization of the intangible assets relating to above-market leases and intangible liabilities relating to below-market leases over the remaining lease terms which average eleven years and (b) depreciation and amortization adjustments resulting from (i) the depreciation of real estate assets over their useful lives which average seventeen years and (ii) the amortization of intangible assets relating to leases in place over the remaining lease terms. The following unaudited pro forma condensed consolidated financial information also gives effect to the additional interest expense resulting from the assumed increase in borrowing outstanding drawn under the Credit Agreement to fund the acquisition.
The unaudited pro forma condensed financial information the years ended December 31, 2007 and 2006 is not indicative of the results of operations that would have been achieved had the acquisition from Trustreet reflected herein been consummated on the dates indicated or that will be achieved in the future and is as follows (in thousands, except per share amounts):
81,344
81,724
34,348
43,900
Net earnings per share
1.39
1.77
In 2007, the Company also exercised its fixed price purchase option for seven leased properties, purchased two properties and redeveloped one property by purchasing land adjacent to it and building a new convenience store on the existing site. In 2008, the Company exercised its fixed price purchase option for three leased properties and purchased six properties.
63
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Getty Realty Corp.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income and cash flows present fairly, in all material respects, the financial position of Getty Realty Corp. and its subsidiaries at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 2, 2009
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or furnished pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by the Exchange Act Rule 13a-15(b), the Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2008.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.
The effectiveness of our internal control over financial reporting as of December 31, 2008, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in “Item 8. Financial Statements and Supplementary Data”.
There have been no changes in the Company’s internal control over financial reporting during the latest fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
NYSE Certifications
On June 16, 2008, in accordance with Section 303A.12 of the Listed Company Manual of the New York Stock Exchange, our Chief Executive Officer certified to the New York Stock Exchange that he was not aware of any violation by our Company of New York Stock Exchange corporate governance listing standards as of that date. Further the Company files certifications by its Chief Executive Officer and Chief Financial Officer with the SEC, in accordance with the Sarbanes-Oxley Act of 2002. These certifications are filed as exhibits to this our Annual Report on Form 10-K.
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Information with respect to compliance with section 16(a) of the Exchange Act is incorporated herein by reference to information under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. Information with respect to directors, the audit committee and the audit committee financial expert, and procedures by which shareholders may recommend to nominees to the board of directors in response to this item is incorporated herein by reference to information under the headings “Election of Directors” and “Directors’ Meetings, Committees and Executive Officers” in the Proxy Statement. The following table lists our executive officers, their respective ages, and the offices and positions held.
NAME
AGE
POSITION
OFFICER SINCE
Leo Liebowitz
81
Chairman and Chief Executive Officer
1971
Kevin C. Shea
Executive Vice President
2001
Thomas J. Stirnweis
Vice President, Treasurer and Chief Financial Officer
Joshua Dicker
General Counsel and Corporate Secretary
Mr. Liebowitz cofounded the Company in 1955 and has served as Chief Executive Officer since 1985. He was the President of the Company from May 1971 to May 2004. Mr. Liebowitz served as Chairman, Chief Executive Officer and a director of Marketing from October 1996 until December 2000. He is also a director of the Regional Banking Advisory Board of J.P. Morgan Chase & Co.
Mr. Shea has been with the Company since 1984 and has served as Executive Vice President since May 2004. He was Vice President since January 2001 and Director of National Real Estate Development prior thereto.
Mr. Stirnweis has been with the Company or Getty Petroleum Marketing Inc. since 1988 and has served as Vice President, Treasurer and Chief Financial Officer of the Company since May 2003. He joined the Company in January 2001 as Corporate Controller and Treasurer. Prior to joining the Company, Mr. Stirnweis was Manager of Financial Reporting and Analysis of Marketing.
Mr. Dicker joined the Company in February 2008 as General Counsel and Corporate Secretary. Prior to joining Getty, he was a partner at the national law firm Arent Fox, LLP, resident in its New York City office, specializing in corporate and transactional matters.
There are no family relationships between any of the Company’s directors or executive officers.
The Getty Realty Corp. Business Conduct Guidelines (“Code of Ethics”), which applies to all employees, including our chief executive officer and chief financial officer, is available on our website at www.gettyrealty.com.
Item 11. Executive Compensation
Information in response to this item is incorporated herein by reference to information under the heading “Executive Compensation” in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information in response to this item is incorporated herein by reference to information under the heading “Beneficial Ownership of Capital Stock” and “Executive Compensation — Compensation Discussion and Analysis — Equity Compensation — Equity Compensation Plan Information” in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
There were no such relationships or transactions to report for the year ended December 31, 2008. Information with respect to director independence is incorporated herein by reference to information under the heading “Directors’ Meetings, Committees and Executive Officers — Independence of Directors” in the Proxy Statement.
Item 14. Principal Accountant Fees and Services
Information in response to this item is incorporated herein by reference to information under the heading “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement.
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
Information in response to this Item is included in “Item 8. Financial Statements and Supplementary Data”.
(a)(2) Financial Statement Schedules
GETTY REALTY CORP. INDEX TO FINANCIAL STATEMENT SCHEDULESItem 15(a)(2)
PAGES
Report of Independent Registered Public Accounting Firm on Financial Statement Schedules
69
Schedule II - Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2008, 2007 and 2006
Schedule III - Real Estate and Accumulated Depreciation and Amortization as of December 31, 2008
(a)(3) Exhibits
Information in response to this Item is incorporated herein by reference to the Exhibit Index on page 86 of this Form 10-K.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of Getty Realty Corp.:
Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated March 2, 2009 appearing in Item 8 of this Annual Report on Form 10-K also included an audit of the financial statement schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
New York, New YorkMarch 2, 2009
GETTY REALTY CORP. and SUBSIDIARIESSCHEDULE II — VALUATION and QUALIFYING ACCOUNTS and RESERVESfor the years ended December 31, 2008, 2007 and 2006(in thousands)
BALANCE ATBEGINNINGOF YEAR
ADDITIONS
DEDUCTIONS
BALANCEAT ENDOF YEAR
December 31, 2008:
465
10,029
Allowance for mortgages and accounts receivable
100
71
Allowance for deposits held in escrow
377
Allowance for recoveries from state underground storage tank funds
650
December 31, 2007:
December 31, 2006:
750
GETTY REALTY CORP. and SUBSIDIARIESSCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATIONAs of December 31, 2008(in thousands)
The summarized changes in real estate assets and accumulated depreciation are as follows:
Investment in real estate:
Balance at beginning of year
Acquisitions
6,540
94,700
15,496
Capital expenditures
1,310
Sales and condemnations
(3,939
(3,464
(1,416
Lease terminations
(3,288
(1,850
(1,059
Balance at end of year
Accumulated depreciation and amortization:
122,465
116,089
109,800
11,576
9,448
(1,431
(1,222
(535
129,322
We are not aware of any material liens or encumbrances on any of our properties.
Initial Costof Leaseholdor AcquisitionInvestment toCompany (1)
CostCapitalizedSubsequentto InitialInvestment
Gross Amount at Which Carriedat Close of Period
AccumulatedDepreciation
Date of InitialLeasehold orAcquisitionInvestment (1)
Building andImprovements
CEDAR PARK, TX
178,507
0
42,091
136,415
12,414
ALBANY, NY
142,312
36,831
91,600
87,543
179,143
59,357
1985
SALISBURY, MA
119,698
59,615
80,598
98,715
179,313
89,410
1986
CARMEL, NY
20,419
158,943
20,750
158,612
179,362
154,391
1970
POTTSTOWN, PA
166,236
16,010
71,631
110,615
182,246
94,975
1989
LONG ISLAND CITY, NY
90,895
91,386
60,030
122,251
182,281
115,438
1972
BOILING SPRINGS, PA
14,792
167,641
182,433
151,310
1961
ARLINGTON, TX
182,460
30,425
152,035
17,212
GREENVILLE, NY
77,153
105,325
77,152
105,326
182,478
99,023
PIERMONT, NY
151,125
31,470
90,675
91,920
182,595
1978
SOUTH PORTLAND, ME
176,700
6,938
115,100
68,538
183,638
33,203
AUBURN, ME
105,908
77,928
183,836
77,781
KINGSTON, NY
68,341
115,961
44,379
139,923
184,302
136,199
HOWELL, NJ
9,750
174,857
184,607
184,035
PITTSFIELD, MA
97,153
87,874
40,000
145,027
185,027
144,983
1982
AGAWAM, MA
65,000
120,665
185,665
183,366
IPSWICH, MA
138,918
46,831
95,718
90,031
185,749
87,034
GETTYSBURG, PA
157,602
28,530
67,602
118,530
186,132
117,939
ATHOL, MA
164,629
22,016
107,009
79,636
186,645
33,779
1991
GLEN ROCK, PA
20,442
166,633
187,075
145,128
WHITE PLAINS, NY
120,393
67,315
187,708
1979
HADLEY, MA
119,276
68,748
36,080
151,944
188,024
147,948
29,010
159,986
12,721
176,275
188,996
167,892
TONAWANDA, NY
189,296
147,122
42,174
15,886
2000
SEAFORD, NY
32,000
157,665
189,665
162,443
WISCASSET, ME
156,587
33,455
90,837
99,205
190,042
BRISTOL, CT
108,808
81,684
44,000
146,492
190,492
142,705
YONKERS, NY
111,300
80,000
126,300
191,300
116,522
1988
LANGHORNE, PA
122,202
69,328
50,000
141,530
191,530
96,391
1987
DELMAR, NY
150,000
42,478
70,000
122,478
192,478
118,294
HUNTINGTON STATION, NY
140,735
52,045
84,000
108,780
192,780
108,416
MECHANICSVILLE, VA
193,088
CHRISTIANA, PA
182,593
11,178
65,212
128,559
193,771
LINWOOD, PA
171,518
22,371
102,968
90,921
193,889
89,412
OZONE PARK, NY
193,968
ELMONT, NY
108,348
85,793
64,290
129,851
194,141
96,559
ROTHSVILLE, PA
169,550
25,188
52,169
142,569
194,738
OLD BRIDGE, NJ
85,617
109,980
56,190
139,407
195,597
138,339
BREWSTER, NY
117,603
78,076
72,403
123,276
195,679
116,856
BLOOMFIELD, CT
141,452
54,786
90,000
106,238
196,238
102,146
JACKSONVILLE, FL
196,764
114,434
82,330
31,009
EPHRATA, PA
187,843
9,400
132,031
197,243
131,124
BRONX, NY
95,328
102,639
73,750
124,217
197,967
118,171
1976
RAVENA, NY
199,900
193,108
BROOKLYN, NY
74,808
125,120
30,694
169,234
199,928
164,543
1967
POUGHKEEPSIE, NY
32,885
168,354
35,904
165,335
201,239
158,649
201,477
117,907
83,570
31,479
DOUGLASSVILLE, PA
178,488
23,321
128,738
73,071
201,809
1990
CATSKILL, NY
104,447
99,076
203,523
RHINEBECK, NY
203,658
101,829
9,505
QUARRYVILLE, NY
35,917
168,199
35,916
168,200
204,116
161,348
LEXINGTON, NC
204,139
43,311
160,828
17,602
EXETER, NH
160,000
44,343
105,000
99,343
204,343
83,837
MIDDLE VILLAGE, NY
130,684
73,741
89,960
114,465
204,425
108,299
LEWISTON, NY
205,000
125,000
30,133
MIDLAND PARK, NJ
201,012
4,080
55,092
205,092
49,668
AUBURN, MA
175,048
30,890
125,048
80,890
205,938
80,639
LAKEWOOD, NJ
130,148
77,265
70,148
137,265
207,413
136,702
CLINTON, MA
177,978
29,790
115,686
92,082
207,768
43,245
1992
TOLLAND, CT
107,902
100,178
164,080
208,080
161,058
BALDWIN, NY
101,952
106,328
61,552
146,728
208,280
112,964
NORTH BABYLON, NY
91,888
117,066
59,059
149,895
208,954
147,091
NEW YORK, NY
106,363
103,035
79,275
130,123
209,398
126,852
HANCOCK, NY
100,000
109,470
159,470
209,470
155,229
WATERFORD, CT
76,981
133,059
210,040
202,481
AMITYVILLE, NY
70,246
139,953
42,148
168,051
210,199
OCEANSIDE, NY
40,378
169,929
210,307
137,354
MENANDS, NY
150,580
60,563
49,999
161,144
211,143
147,689
WILLIAMSVILLE, NY
211,972
176,643
35,329
13,306
PELHAM MANOR, NY
127,304
85,087
75,800
136,591
212,391
126,720
MILLER PLACE, NY
110,000
103,160
66,000
147,160
213,160
145,331
93,817
120,396
67,200
147,013
214,213
124,497
MILFORD, MA
214,331
173,037
BLUEPOINT, NY
96,163
118,524
96,068
118,619
214,687
114,006
MOUNTVILLE, PA
195,635
19,506
78,254
136,887
215,141
BAY SHORE, NY
188,900
26,286
123,000
92,186
215,186
53,485
N. WINDHAM, ME
161,365
53,923
86,365
128,923
215,288
128,884
TEWKSBURY, MA
90,338
75,000
140,338
215,338
134,274
STRATFORD, NJ
215,597
206,617
1995
136,791
78,987
140,778
215,778
137,650
SEABROOK, NH
199,780
19,102
124,780
94,102
218,882
93,844
FRANKLIN, CT
50,904
168,470
20,232
199,142
219,374
198,201
WESTFIELD, MA
123,323
96,093
169,416
219,416
166,343
HAMPTON, NH
193,103
26,449
135,598
83,954
219,552
83,589
MIDDLETOWN, CT
133,022
86,915
131,312
88,625
219,937
WORCESTER, MA
186,877
33,510
121,470
98,917
220,387
47,387
1993
STONY BROOK, NY
175,921
44,529
115,450
220,450
114,507
153,184
67,266
76,592
143,858
78,260
EMMITSBURG, MD
146,949
73,613
101,949
118,613
220,562
118,392
MANCHESTER, CT
65,590
156,628
64,750
157,468
222,218
156,833
STATEN ISLAND, NY
222,525
1981
PELHAM, NH
169,182
53,497
136,077
86,602
222,679
80,417
AMHERST, NY
223,009
173,451
49,558
29,860
NEW ROCHELLE, NY
188,932
34,649
103,932
119,649
223,581
119,017
SOMERSWORTH, NH
210,805
15,012
157,520
68,297
225,817
68,169
RED HOOK, NY
226,787
220,274
BRIDGEWATER, MA
190,360
36,762
140,000
87,122
227,122
81,814
135,693
91,946
100,035
127,604
227,639
107,679
229,435
229,433
HYANNIS, MA
222,472
7,282
144,607
85,147
229,754
24,909
LAGRANGEVILLE, NY
129,133
101,140
64,626
165,647
230,273
163,995
PINE HILL, NJ
190,568
39,918
115,568
114,918
230,486
112,628
TREVOSE, PA
215,214
16,382
81,596
231,596
71,123
MILFORD, NH
190,000
41,689
115,000
116,689
231,689
112,700
W. HAVERSTRAW, NY
194,181
38,141
92,322
232,322
87,313
MERIDEN, CT
126,188
106,805
72,344
160,649
232,993
155,320
LANCASTER, PA
208,677
24,347
154,770
233,024
WEST HAVEN, CT
185,138
48,619
74,000
159,757
233,757
157,837
LEOMINSTER, MA
185,040
49,592
85,040
149,592
234,632
147,070
234,915
140,743
1996
NEW MILFORD, CT
113,947
121,174
235,121
231,921
EBENEZER, PA
147,058
88,474
68,804
166,728
235,532
144,565
STOUGHTON, MA
235,794
200,384
QUINCY, MA
200,000
36,112
111,112
236,112
109,396
HARWICH, MA
225,000
12,044
87,044
237,044
84,250
NORTH KINGSTOWN, RI
211,835
25,971
89,135
148,671
237,806
147,346
KENHORST, PA
143,466
94,592
172,846
238,058
154,465
BOYERTOWN, PA
233,000
5,373
151,700
86,673
238,373
40,875
ATCO, NJ
153,159
85,853
131,766
107,246
239,012
107,063
SPRINGFIELD, MA
239,087
183,746
1984
COLUMBIA, PA
225,906
13,206
164,112
239,112
139,513
PAWTUCKET, RI
237,100
2,990
154,400
85,690
240,090
39,103
NEW HAVEN, CT
217,000
23,889
141,300
99,589
240,889
55,976
ROTTERDAM, NY
140,600
100,399
149,399
240,999
112,696
SACO, ME
204,006
37,173
150,694
90,485
241,179
90,385
180,800
60,497
117,700
123,597
241,297
72,820
123,167
118,273
191,440
241,440
190,690
45,044
196,956
10,044
231,956
242,000
202,976
LEWISTON, ME
180,338
62,629
101,338
141,629
242,967
139,558
LAKE RONKONKOMA, NY
87,097
156,576
51,000
192,673
243,673
189,671
HANOVER, PA
231,028
13,252
174,280
244,280
155,369
NEW WINDSOR, NY
94,791
169,791
244,791
157,978
HILLSBOROUGH, NJ
237,122
7,729
144,851
244,851
67,608
DEDHAM, MA
225,824
19,150
125,824
119,150
244,974
118,859
POTTSVILLE, PA
162,402
82,769
43,471
201,700
245,171
188,055
202,826
42,877
144,000
101,703
245,703
86,111
OSSINING, NY
140,992
104,761
97,527
148,226
245,753
141,908
WELLSVILLE, NY
247,281
28,025
207,873
39,829
163,702
247,702
162,841
BETHPAGE, NY
210,990
38,356
126,000
123,346
249,346
122,757
COTTAGE HILLS, IL
249,419
26,199
223,220
24,030
LACKAWANNA, NY
250,030
129,870
120,160
56,548
RED LION, PA
221,719
29,788
199,338
251,507
197,653
BETHLEHEM, PA
42,927
130,423
121,181
251,604
118,994
CROMWELL, CT
70,017
183,119
24,000
229,136
253,136
BELLEVILLE, NJ
215,468
38,163
149,237
104,394
253,631
103,157
253,639
149,553
104,086
17,346
CENTRAL ISLIP, NY
103,183
151,449
61,435
193,197
254,632
PORTSMOUTH, NH
235,000
20,257
105,257
255,257
104,984
HAWTHORNE, NJ
245,100
10,967
159,600
96,467
256,067
48,303
COLONIA, NJ
253,100
3,395
164,800
91,695
256,495
41,954
HILLSIDE, NJ
31,552
106,552
256,552
105,238
S. WEYMOUTH, MA
211,891
44,893
256,784
WEST SENECA, NY
257,142
184,385
72,757
27,411
WEST YARMOUTH, MA
33,165
133,165
258,165
132,212
72
106,592
151,819
73,260
185,151
258,411
156,275
CLIFTON HGTS, PA
213,000
46,824
138,700
121,124
259,824
77,026
ENFIELD, CT
259,881
127,392
SHREWSBURY, PA
132,993
126,898
52,832
207,059
259,891
176,046
REINHOLDS, PA
176,520
83,686
82,017
178,189
260,206
153,485
208,604
52,826
30,000
231,430
261,430
173,272
262,436
192,695
113,285
149,265
197,550
262,550
188,505
EAST HILLS, NY
241,613
21,070
262,683
STONY POINT, NY
59,329
203,448
55,800
206,977
262,777
199,852
HYDE PARK, NY
12,015
139,100
126,015
265,115
109,042
READING, PA
182,592
82,812
104,338
161,066
265,404
144,701
HARTFORD, CT
32,563
113,863
265,563
65,422
180,689
84,980
110,689
154,980
265,669
BRIDGEPORT, CT
20,652
106,152
265,752
56,447
129,284
137,863
65,352
201,795
267,147
167,329
E. PATCHOGUE, NY
57,049
210,390
34,213
233,226
267,439
231,219
CLAYMONT, DE
237,200
30,878
116,378
268,078
69,812
EAST HARTFORD, CT
208,004
60,493
184,497
268,497
184,155
NEPTUNE CITY, NJ
269,600
175,600
94,000
41,048
OAKHURST, NJ
225,608
46,405
100,608
171,405
272,013
169,702
FRANKLIN, MA
253,619
18,437
164,852
107,204
272,056
37,758
209,555
63,621
136,000
137,176
273,176
93,909
WAPPINGERS FALLS, NY
114,185
159,162
111,785
161,562
273,347
154,655
90,176
183,197
40,176
233,197
273,373
201,037
COLONIE, NY
245,150
28,322
120,150
153,322
273,472
149,666
RIDGEFIELD PARK, NJ
273,549
123,549
88,159
1997
NORTHPORT, NY
241,100
33,036
157,000
117,136
274,136
69,360
SOUTHINGTON, CT
115,750
158,561
70,750
203,561
274,311
202,983
FRANKLIN SQUARE, NY
152,572
121,756
137,315
137,013
274,328
94,541
SANFORD, ME
265,523
9,178
201,316
73,385
274,701
ARENDTSVILLE, PA
173,759
101,020
32,603
242,176
274,779
219,328
231,100
44,049
149,200
125,949
275,149
75,785
WILMINGTON, DE
242,800
32,615
158,100
117,315
275,415
69,602
LAURELDALE, PA
262,079
15,550
86,941
190,688
277,629
188,178
278,517
224,698
156,382
123,032
85,854
193,560
279,414
189,628
NORTH GRAFTON, MA
244,720
35,136
159,068
120,788
279,856
51,708
NEFFSVILLE, PA
234,761
45,637
91,296
189,102
280,398
185,596
183,477
96,937
136,809
143,605
280,414
121,045
QUEENSBURY, NY
215,255
65,245
140,255
140,245
280,500
134,653
BRYN MAWR, PA
221,000
59,832
143,900
136,932
280,832
89,510
TERRYVILLE, CT
182,308
98,911
207,219
281,219
207,051
NEW CITY, NY
180,979
100,597
109,025
172,551
281,576
171,798
MALTA, NY
91,726
216,726
281,726
209,422
88,865
193,679
63,315
219,229
282,544
217,432
141,322
141,909
86,800
196,431
283,231
186,116
PARADISE, PA
132,295
151,188
102,295
181,188
283,483
140,177
RONKONKOMA, NY
76,478
208,121
46,057
238,542
284,599
233,393
TROY, NY
60,569
146,500
139,069
285,569
85,229
ELLENVILLE, NY
53,690
134,990
286,690
85,391
SOUTH HADLEY, MA
232,445
54,351
196,796
286,796
191,723
WESTBROOK, ME
93,345
193,654
50,431
236,568
286,999
192,936
146,832
140,589
95,441
191,980
287,421
115,861
WARWICK, RI
34,400
122,700
287,500
70,531
275,866
11,674
108,227
287,540
33,559
UNION, NJ
287,800
RICHMOND, VA
120,818
167,895
288,713
264,641
HAVERTOWN, PA
265,200
24,500
172,700
117,000
289,700
62,451
FORT EDWARD, NY
65,739
140,739
290,739
137,351
GRANBY, MA
58,804
232,477
267,281
291,281
204,923
73
ELKINS PARK, PA
275,171
17,524
92,695
292,695
91,156
293,507
KING GEORGE, VA
293,638
BALLSTON, NY
134,021
184,021
294,021
180,833
HAMBURG, NY
294,031
163,906
130,125
49,013
275,000
19,161
144,161
294,161
142,410
206,620
87,949
81,620
212,949
294,569
206,450
125,923
168,772
78,125
216,570
294,695
213,843
HAMBURG, PA
219,280
75,745
164,602
295,025
154,329
WEST DEPTFORD, NJ
245,450
50,295
151,053
144,692
295,745
142,590
290,923
5,007
151,280
144,650
295,930
62,219
NORRISTOWN, PA
175,300
120,786
296,086
66,625
KERNERSVILLE, NC
296,770
72,777
223,994
20,060
40,598
256,262
26,050
270,810
296,860
201,194
1973
PISCATAWAY, NJ
269,200
28,232
122,132
297,432
68,358
ROANOKE, VA
91,281
206,221
297,502
229,390
MANCHESTER, NH
261,100
36,404
170,000
127,504
297,504
68,448
ORLEANS, MA
260,000
37,637
185,000
112,637
297,637
108,503
MILLERTON, NY
175,000
123,063
198,063
298,063
185,327
132,287
166,077
298,364
246,286
STRATFORD, CT
285,200
14,728
185,700
114,228
299,928
57,536
SALEM, MA
25,393
125,393
300,393
123,970
MCCONNELLSBURG, PA
155,367
145,616
69,915
231,068
300,983
132,501
EPPING, NH
131,403
120,000
181,403
301,403
162,869
301,713
233,997
OXFORD, MA
293,664
9,098
190,882
111,880
302,762
32,247
ORANGE, NJ
281,200
24,573
183,100
122,673
305,773
66,891
DEPTFORD, NJ
24,745
122,845
305,945
66,308
173,667
133,198
113,369
193,496
306,865
179,987
CASTILE, NY
307,196
132,196
19,833
JAMAICA, NY
12,000
295,750
307,750
205,240
CLIFTON, NJ
301,518
6,413
157,931
307,931
105,862
309,235
176,558
132,677
71,647
OXFORD, PA
191,449
118,321
244,558
309,770
217,909
SOUTHBRIDGE, MA
249,169
62,205
161,960
149,414
311,374
80,091
BUFFALO, NY
312,426
150,888
161,538
73,384
PEMBROKE, NH
138,492
174,777
100,837
212,432
313,269
156,678
CANDIA, NH
130,000
184,004
234,004
314,004
229,159
N RICHLAND HILLS, TX
314,246
125,745
188,501
17,806
130,396
184,222
90,396
224,222
314,618
207,544
BALLSTON SPA, NY
210,000
105,073
215,073
315,073
210,459
REGO PARK, NY
33,745
281,380
23,000
292,125
315,125
236,798
1974
PHILADELPHIA, PA
34,285
132,385
315,485
75,319
EPSOM, NH
220,000
96,022
155,000
161,022
316,022
145,638
304,762
11,493
211,337
104,918
316,255
39,521
RIDGEWOOD, NY
278,372
38,578
250,000
66,950
316,950
25,068
258,600
60,120
153,920
318,720
94,842
241,300
78,419
157,100
162,619
319,719
90,430
WEST TAGHKANIC, NY
202,750
117,540
121,650
198,640
320,290
135,096
321,446
196,446
45,230
ADAMSTOWN, PA
213,424
108,844
222,268
322,268
168,733
GREEN VILLAGE, NJ
277,900
44,471
127,900
194,471
322,371
191,202
MIDDLETOWN, RI
306,710
16,364
176,710
146,364
323,074
145,343
74,928
250,382
44,957
280,353
325,310
209,144
SOUTH YARMOUTH, MA
49,961
146,514
325,827
65,103
FURLONG, PA
151,150
326,450
97,131
ALDAN, PA
45,539
143,639
326,739
84,049
YARMOUTHPORT, MA
300,000
26,940
176,940
326,940
FITCHBURG, MA
311,808
16,384
202,675
125,517
328,192
40,798
289,580
38,615
188,400
139,795
328,195
82,366
ROBESONIA, PA
225,913
102,802
258,715
328,715
224,809
74
BELMONT, MA
301,300
27,938
196,200
133,038
329,238
71,941
284,765
45,285
185,097
144,953
330,050
67,168
105,592
165,000
165,592
330,592
160,273
51,100
332,300
121,888
313,400
20,303
204,100
129,603
333,703
67,230
CAIRO, NY
191,928
142,895
46,650
288,173
334,823
279,210
METHUEN, MA
147,330
188,059
50,731
284,658
335,389
239,946
142,383
194,291
92,549
244,125
336,674
144,755
MILFORD, CT
293,512
43,846
191,000
146,358
337,358
85,956
BRENTWOOD, NY
253,058
84,485
212,543
337,543
205,657
1968
47,685
289,972
337,657
336,713
1969
24,314
133,614
337,714
70,985
CONSHOHOCKEN, PA
77,885
168,985
338,985
110,753
289,300
50,010
150,910
339,310
92,167
WEST BOYLSTON, MA
28,937
138,070
340,745
52,841
NORTH LINDENHURST, NY
341,530
192,000
149,530
62,218
1998
LATHAM, NY
68,160
193,160
343,160
187,787
REIFFTON, PA
338,250
43,470
300,075
343,545
319,521
24,445
204,621
139,345
343,966
74,086
WESTBROOK, CT
344,881
143,700
SCOTCH PLAINS, NJ
331,063
14,455
214,600
130,918
345,518
65,909
HILLTOP, NJ
329,500
16,758
131,658
346,258
65,932
302,564
44,393
142,564
204,393
346,957
200,406
COMMACK, NY
321,400
25,659
209,300
137,759
347,059
74,227
HATBORO, PA
61,979
161,479
347,179
104,001
WANTAGH, NY
261,814
85,758
172,572
347,572
124,605
116,328
232,254
273,582
348,582
197,062
1980
128,419
221,197
100,681
248,935
349,616
200,262
NEW BERN, NC
349,946
190,389
159,557
19,490
IRVINGTON, NJ
271,200
79,011
176,600
173,611
350,211
116,726
MEDIA, PA
326,195
24,082
159,277
350,277
101,463
61,371
162,271
350,671
103,093
65,498
164,998
350,698
105,438
RIDGE, NY
276,942
73,821
150,763
350,763
125,987
1977
GRAND ISLAND, NY
350,849
247,348
103,501
55,756
50,861
200,861
350,861
199,115
CINNAMINSON, NJ
326,501
24,931
176,501
174,931
351,432
172,960
ABINGTON, PA
309,300
43,696
201,400
151,596
352,996
88,995
BEDFORD, TX
353,047
112,953
240,094
29,199
342,608
11,101
222,695
131,014
353,709
37,328
254,503
66,890
287,613
354,503
240,968
MAGNOLIA, NJ
26,488
141,388
355,988
76,662
TUCKERTON, NJ
224,387
132,864
131,018
226,233
357,251
222,358
MERRIMACK, NH
151,993
205,823
100,598
257,218
357,816
198,323
59,198
184,198
359,198
180,659
337,500
21,971
219,800
139,671
359,471
72,609
EAST PROVIDENCE, RI
309,950
49,546
202,050
157,446
359,496
93,763
SCARSDALE, NY
257,100
102,632
167,400
192,332
359,732
125,659
359,906
149,963
BAYONNE, NJ
341,500
18,947
222,400
138,047
360,447
70,535
WINDSOR LOCKS, CT
360,664
60,113
125,067
207,767
362,167
125,486
346,442
16,990
230,000
133,432
363,432
131,730
LEOLA, PA
262,890
102,007
131,189
233,708
364,897
105,602
365,028
237,268
127,760
21,292
365,767
337,789
338,415
27,786
146,401
366,201
77,714
HOLYOKE, MA
38,345
153,245
367,845
145,091
PORTLAND, ME
325,400
42,652
211,900
156,152
368,052
82,597
69,150
300,279
34,150
335,279
369,429
256,816
75
PLAINVILLE, CT
290,433
370,433
322,526
1983
CHERRY HILL, NJ
357,500
13,879
232,800
138,579
371,379
67,609
CRANFORD, NJ
342,666
29,222
149,488
371,888
81,200
70,735
175,835
372,035
112,470
195,776
177,454
127,254
245,976
373,230
149,460
MOHNTON, PA
317,228
56,374
66,425
307,177
373,602
291,371
212,775
161,188
118,860
255,103
373,963
226,580
HINGHAM, MA
352,606
22,484
242,520
132,570
375,090
130,995
MINEOLA, NY
34,411
153,511
375,911
85,135
147,795
228,379
103,815
272,359
376,174
233,292
25,000
351,829
376,829
302,382
67,834
175,734
377,134
106,915
139,373
239,713
329,086
379,086
TRENTON, NJ
373,600
9,572
243,300
139,872
383,172
65,722
SLEEPY HOLLOW, NY
280,825
102,486
129,744
253,567
383,311
245,574
S. GLENS FALLS, NY
325,000
58,892
188,700
195,192
383,892
NORWALK, CT
257,308
128,940
104,000
282,248
386,248
281,503
MASSAPEQUA, NY
333,400
53,696
217,100
169,996
387,096
103,834
SPRING LAKE, NJ
345,500
42,194
162,694
387,694
90,468
ROCHESTER, NH
179,717
208,103
287,820
387,820
233,623
231,372
157,356
150,392
238,336
388,728
138,067
57,289
331,799
44,715
344,373
389,088
289,034
51,741
169,441
389,241
96,058
NEW BRITAIN, CT
390,497
253,823
136,674
22,779
WALL TOWNSHIP, NJ
336,441
55,709
121,441
270,709
392,150
266,566
70,132
322,265
30,132
362,265
392,397
272,357
308,964
83,443
288,069
392,407
271,636
FRIENDSHIP, NY
392,517
42,517
350,000
39,667
SAUGERTIES, NY
328,668
63,983
392,651
60,624
INTERCOURSE, PA
311,503
81,287
157,801
234,989
392,790
100,787
SOUTH AMBOY, NJ
299,678
94,088
178,950
214,816
393,766
213,268
BASKING RIDGE, NJ
362,172
32,960
195,132
395,132
131,994
GARDEN CITY, NY
361,600
33,774
235,500
159,874
395,374
87,489
WOBURN, MA
45,681
195,681
395,681
193,825
COBALT, CT
395,683
164,867
369,306
27,792
240,049
157,049
397,098
54,077
357,904
39,588
230,300
167,192
397,492
95,569
FLUSHING, NY
118,309
280,435
78,309
320,435
398,744
232,913
88,863
198,163
402,263
102,139
BELLAIRE, NY
73,358
188,258
402,858
111,531
404,988
354,365
50,623
4,050
NORTH HAVEN, CT
405,389
251,985
153,404
32,459
349,500
56,209
227,600
178,109
405,709
107,742
385,600
21,339
251,100
155,839
406,939
79,050
69,461
187,161
406,961
120,564
369,600
38,077
240,700
166,977
407,677
93,054
118,025
290,298
73,025
335,298
408,323
282,534
83,257
196,757
408,657
99,029
WATERTOWN, CT
351,771
58,812
204,027
206,556
410,583
109,570
MORRISVILLE, PA
377,600
33,522
245,900
165,222
411,122
90,191
GLENDALE, NY
124,438
287,907
86,160
326,185
412,345
270,940
JERICHO, NY
412,536
270,549
60,000
353,955
60,800
353,155
413,955
277,239
1965
CORONA, NY
114,247
300,172
112,800
301,619
414,419
215,843
415,180
251,875
163,305
67,712
376,563
39,933
205,889
210,607
416,496
208,671
ST. ALBANS, NY
87,250
202,150
416,750
128,829
NASHUA, NH
197,142
219,639
155,837
260,944
416,781
198,380
103,748
213,048
417,148
138,441
HAVERHILL, MA
400,000
17,182
192,182
417,182
191,937
389,700
28,006
253,800
417,706
87,019
76
BERGENFIELD, NJ
381,590
36,271
117,861
417,861
114,909
PLAISTOW, NH
300,406
117,924
244,694
173,636
418,330
163,605
28,871
164,771
418,571
87,317
NEW HOLLAND, PA
313,015
106,839
143,465
276,389
419,854
251,559
MADISON, NC
420,878
45,705
375,174
34,864
TRAPPE, PA
44,509
176,209
422,109
101,796
FRAMINGHAM, MA
400,449
22,280
260,294
162,435
422,729
53,269
TAYLORSVILLE, NC
422,809
134,188
288,621
28,316
PROVIDENCE, RI
191,647
272,627
423,019
140,229
NORTHBOROUGH, MA
404,900
18,353
263,185
160,068
423,253
48,522
MASTIC, NY
110,180
219,480
423,580
157,909
PARAMUS, NJ
381,700
42,394
248,600
175,494
424,094
100,322
402,000
22,660
170,860
424,660
94,304
ELIZABETH, NJ
405,800
18,881
264,300
160,381
424,681
79,555
BEVERLY, MA
150,741
250,741
425,741
213,799
150,472
247,025
426,338
135,122
GLEN HEAD, NY
234,395
192,295
102,645
324,045
426,690
MIDLOTHIAN, TX
429,142
71,970
357,172
37,101
HUDSON, NY
303,741
126,379
151,871
278,249
430,120
133,493
PHOENIXVILLE, PA
413,800
17,561
269,500
161,861
431,361
80,398
341,900
89,500
209,000
431,400
141,051
WYOMISSING HILLS, PA
319,320
113,176
76,074
356,422
432,496
334,171
ALLENTOWN, PA
76,385
201,085
433,885
110,532
DERRY, NH
417,988
16,295
157,988
276,295
434,283
275,733
AUDUBON, NJ
421,800
12,949
274,700
160,049
434,749
76,937
ASBURY PARK, NJ
418,966
18,038
272,100
164,904
437,004
82,827
397,700
39,410
259,000
178,110
437,110
98,955
BLACKWOOD, NJ
401,700
36,736
261,600
176,836
438,436
97,885
DOYLESTOWN, PA
32,659
174,159
438,459
93,290
NEWARK, DE
35,844
177,344
441,644
96,555
GLENVILLE, NY
343,723
98,299
222,222
442,022
144,438
205,495
288,195
442,595
182,411
167,745
275,852
443,597
156,796
FAIRFIELD, CT
430,000
13,631
280,000
163,631
443,631
77,554
WEST CHESTER, PA
21,935
169,035
443,735
85,817
REVERE, MA
193,854
293,854
443,854
249,800
128,049
315,917
83,849
360,117
443,966
263,315
LANSDALE, PA
243,844
200,458
444,302
117,725
DUDLEY, MA
302,563
141,993
196,666
247,890
444,556
111,855
379,664
64,941
198,705
444,605
122,989
LOWELL, MA
360,949
83,674
200,949
243,674
444,623
243,406
JERSEY CITY, NJ
43,808
183,908
445,508
104,788
WETHERSFIELD, CT
446,610
186,088
BAYSIDE, NY
202,833
288,333
447,933
186,278
RIDGEFIELD, CT
401,630
47,610
166,861
282,379
449,240
276,351
SHARON HILL, PA
411,057
39,574
266,800
183,831
450,631
102,910
360,056
90,633
224,156
226,533
450,689
115,598
WHITING, NJ
447,199
3,519
167,090
283,628
450,718
282,841
PORT JEFFERSON, NY
387,478
63,743
205,468
451,221
124,739
UPTON, MA
428,498
24,611
278,524
174,585
453,109
57,819
WYANDANCH, NY
453,131
279,500
173,631
72,197
WAKEFIELD, RI
39,616
183,916
453,416
94,885
228,704
328,704
453,704
264,433
271,417
183,331
176,421
278,327
454,748
157,381
433,800
21,152
282,500
172,452
454,952
86,068
WILLINGBORO, NJ
425,800
29,928
277,300
178,428
455,728
94,774
NEWBURGH, NY
430,766
25,850
306,616
456,616
297,464
HUNTINGDON VALLEY, PA
36,439
183,539
458,239
99,269
434,752
24,730
192,682
459,482
112,033
EAST ORANGE, NJ
421,508
37,977
187,385
459,485
104,384
NISKAYUNA, NY
425,000
35,421
185,421
460,421
180,531
77
EVERETT, MA
190,931
460,431
109,593
FOXBOROUGH, MA
426,593
34,403
135,996
460,996
129,994
83,549
215,249
461,149
141,059
291,348
170,478
216,348
245,478
461,826
225,565
AUSTIN, TX
462,233
274,300
187,933
21,300
SIMSBURY, CT
317,704
144,637
206,700
255,641
462,341
186,794
BENNINGTON, VT
154,480
262,380
463,780
150,558
104,130
360,410
374,540
464,540
308,097
409,700
54,841
197,741
464,541
117,015
LEICESTER, MA
266,968
197,898
173,529
291,337
464,866
159,423
FARMINGTON, CT
466,271
303,076
163,195
27,200
RUTHER GLEN, VA
466,341
31,341
435,000
65,250
NORTH PLAINFIELD, NJ
227,190
239,709
291,899
466,899
283,378
WATERBURY, CT
468,469
304,505
163,964
27,329
QUAKERTOWN, PA
379,111
89,812
225,623
468,923
146,056
WATCHUNG, NJ
449,900
20,339
293,000
177,239
470,239
87,508
BROCKTON, MA
194,619
291,172
470,485
167,439
WALPOLE, MA
20,586
177,486
470,486
85,658
451,360
19,361
147,740
322,981
470,721
316,077
PARLIN, NJ
441,900
29,075
183,175
470,975
95,855
WESTFORD, MA
196,493
296,493
471,493
240,656
CHATHAM, MA
197,302
297,302
472,302
239,173
101,033
371,591
75,650
396,974
472,624
283,688
FALMOUTH, MA
322,942
397,942
472,942
314,094
BLOOMFIELD, NJ
32,951
187,051
474,851
99,723
88,922
224,822
478,622
145,297
CRANSTON, RI
466,100
12,576
303,500
175,176
478,676
83,092
48,854
198,854
478,854
113,801
474,100
5,055
308,700
170,455
479,155
77,281
446,000
33,323
290,400
188,923
479,323
13,987
176,587
480,087
84,289
ORANGE, MA
476,102
4,015
230,117
480,117
213,118
CHATHAM, NY
349,133
131,805
255,938
480,938
175,146
95,698
230,198
481,298
151,538
NUTLEY, NJ
48,677
199,977
482,477
113,522
485,514
388,434
97,080
36,564
438,000
51,856
204,656
489,856
116,246
CLIFTON HGTS., PA
428,201
63,403
256,400
235,204
491,604
155,624
LEWISVILLE, TX
493,734
109,925
383,809
19,703
BEVERLY, NJ
470,100
24,003
306,100
188,003
494,103
93,921
NEPTUNE, NJ
455,726
39,090
201,816
494,816
108,946
MOORESTOWN, NJ
27,064
191,064
497,164
98,571
SALEM, NH
450,000
47,484
147,484
497,484
141,589
PLAINFIELD, NJ
29,975
193,975
500,075
99,062
486,675
13,947
316,600
184,022
500,622
87,766
297,568
203,147
193,419
307,296
500,715
178,557
388,848
114,933
231,000
272,781
503,781
239,255
490,200
16,282
319,200
187,282
506,482
90,885
SOMERVILLE, NJ
252,717
254,230
200,500
306,447
506,947
199,530
462,468
45,355
300,900
206,923
507,823
115,455
CHESHIRE, CT
19,050
190,050
509,250
93,563
404,888
104,378
247,666
509,266
164,570
EAST MEADOW, NY
86,005
186,005
511,005
149,325
WAYNE, NJ
21,766
192,766
511,966
512,504
329,248
183,256
20,321
WEST ROXBURY, MA
23,134
194,134
513,334
94,193
BRISTOL, PA
430,500
82,981
233,481
513,481
144,493
PLEASANT VALLEY, NY
398,497
115,129
240,000
273,626
513,626
216,045
515,172
334,862
180,310
30,050
516,110
320,125
195,985
81,489
FAIRVIEW HEIGHTS, IL
516,564
78,440
438,124
40,671
78
42,926
208,326
517,026
114,819
WESTBOROUGH, MA
205,994
315,127
517,802
181,224
STAMFORD, CT
506,860
15,635
329,700
192,795
522,495
92,202
SCHENECTADY, NY
298,103
373,103
523,103
368,360
ROSLYN, PA
173,661
295,561
523,161
219,133
302,999
220,313
181,497
341,815
523,312
283,719
GREAT NECK, NY
500,000
24,468
74,468
524,468
74,391
176,590
298,490
526,090
188,027
108,435
417,763
526,198
411,692
1958
527,925
302,607
225,318
119,172
SAYVILLE, NY
528,225
228,225
95,094
368,625
159,763
292,888
528,388
180,701
78,168
450,267
65,680
462,755
528,435
354,837
HYDE PARK, MA
499,175
29,673
321,800
207,048
528,848
108,740
41,361
212,361
531,561
112,345
WEST MILFORD, NJ
502,200
31,918
327,000
207,118
534,118
108,346
SPOTSWOOD, NJ
466,675
69,036
232,211
535,711
139,777
BILLERICA, MA
135,809
285,809
535,809
271,481
LONG BRANCH, NJ
514,300
22,951
334,900
202,351
537,251
101,290
156,704
289,804
538,404
178,103
NEW BEDFORD, MA
522,300
18,274
340,100
200,474
540,574
96,436
NORFOLK, VA
534,910
6,050
310,630
230,330
540,960
544,503
353,927
190,576
31,763
SOUTH WINDSOR, CT
544,857
336,737
208,120
55,038
LEVITTOWN, NY
502,757
42,113
217,870
544,870
117,361
545,314
256,434
288,880
108,809
ARLINGTON, MA
518,300
27,906
208,706
546,206
106,607
506,580
40,429
217,309
547,009
115,058
WALLINGFORD, CT
550,553
334,901
215,652
44,771
375,000
175,969
300,969
550,969
244,168
PRATTSBURG, NY
553,136
303,136
28,333
146,159
407,286
43,461
509,984
553,445
389,146
SOUDERTON, PA
172,170
305,270
553,870
194,906
SALT POINT, NY
554,243
301,775
252,468
93,244
MERRICK, NY
477,498
77,925
240,764
314,659
555,423
143,579
HARWICHPORT, MA
382,653
173,989
248,724
307,918
556,642
158,168
ROCKLAND, MA
534,300
23,616
347,900
210,016
557,916
104,115
ROCHESTER, NY
559,049
159,049
45,333
559,514
296,434
263,080
99,091
VALATIE, NY
165,590
394,981
90,829
469,742
560,571
410,011
FREEHOLD, NJ
494,275
68,507
402,834
159,948
562,782
90,408
519,382
43,841
458,461
104,762
563,223
103,923
FLEMINGTON, NJ
546,742
17,494
346,342
217,894
564,236
103,347
497,642
67,806
243,648
565,448
145,995
224,647
343,747
566,147
213,105
535,140
33,590
220,830
568,730
114,126
555,826
13,797
301,322
268,301
569,623
79,332
570,898
371,084
199,814
33,304
572,244
214,744
89,367
HEWLETT, NY
85,618
256,618
575,818
125,647
482,275
95,553
284,828
577,828
190,436
PORTSMOUTH, VA
562,255
17,106
221,610
357,751
579,361
353,473
191,420
390,783
116,554
465,649
582,203
330,427
282,104
301,052
176,292
406,864
583,156
363,404
288,603
393,703
589,903
265,024
CLEMENTON, NJ
562,500
27,581
366,300
223,781
590,081
112,687
526,775
63,505
342,700
247,580
590,280
142,201
WILTON, CT
518,881
71,425
252,806
590,306
145,308
595,237
305,237
290,000
9,157
PEABODY, MA
200,363
325,363
600,363
283,709
SEWELL, NJ
551,912
48,485
355,712
244,685
600,397
130,610
79
N. PROVIDENCE, RI
542,400
61,717
353,200
250,917
604,117
143,693
605,891
443,005
390,276
216,589
253,679
353,186
606,865
187,140
608,441
250,505
357,936
35,761
NORTH ANDOVER, MA
393,700
220,132
357,432
613,832
223,589
FLORAL PARK, NY
616,700
356,400
260,300
108,328
ASHAWAY, RI
618,609
402,096
216,513
36,088
619,018
401,996
217,022
24,661
HALFMOON, NY
415,000
205,598
228,100
392,498
620,598
383,236
HAMBURG, NJ
598,600
22,121
389,800
230,921
620,721
112,487
ASHLAND, MA
606,700
17,424
395,100
229,024
624,124
106,153
RANDALLSTOWN, MD
590,600
33,594
384,600
239,594
624,194
123,548
WESTPORT, CT
603,260
23,070
392,500
233,830
626,330
111,073
221,269
362,769
627,069
243,263
417,800
210,406
356,106
628,206
209,874
PATERSON, NJ
619,548
16,765
402,900
233,413
636,313
111,062
DOVER, NJ
30,153
241,753
636,853
120,840
CRANBURY, NJ
31,467
243,067
638,167
122,575
638,633
338,386
300,247
31,437
586,600
52,725
382,000
257,325
639,325
640,680
370,200
270,480
112,697
STERLING, MA
165,998
309,466
332,634
642,100
157,235
273,642
402,542
643,242
291,682
276,720
405,620
646,320
275,273
EASTCHESTER, NY
614,700
34,500
400,300
248,900
649,200
126,891
BALTIMORE, MD
176,067
341,467
650,167
201,170
174,233
340,869
650,335
332,336
NORTH MERRICK, NY
510,350
141,506
332,200
319,656
651,856
183,150
BELMAR, NJ
630,800
410,800
242,371
653,171
117,831
276,831
376,706
168,423
485,114
653,537
357,052
WATERTOWN, MA
296,588
321,030
333,058
654,088
213,660
PORT EWEN, NY
657,147
176,924
480,223
47,853
HASBROUCK HEIGHTS, NJ
639,648
19,648
416,000
243,296
659,296
115,788
546,400
113,057
355,800
303,657
659,457
162,557
642,000
17,993
359,993
659,993
664,966
432,228
232,738
38,792
ROCKVILLE CENTRE, NY
350,325
315,779
464,704
666,104
352,076
FEASTERVILLE, PA
510,200
160,144
338,144
670,344
215,694
NORTH ATTLEBORO, MA
662,900
16,549
431,700
247,749
679,449
116,320
WEYMOUTH, MA
643,297
36,516
418,600
261,213
679,813
129,700
RENSSELAER, NY
683,781
286,504
397,277
87,339
BATAVIA, NY
684,279
364,279
320,000
36,267
MCAFEE, NJ
670,900
15,711
436,900
249,711
686,611
116,230
270,436
417,536
692,236
266,711
DARIEN, CT
667,180
26,061
434,300
258,941
693,241
126,796
650,800
42,552
423,800
269,552
693,352
141,554
MOUNTAINSIDE, NJ
664,100
31,620
264,020
695,720
130,274
WINSTON SALEM, NC
696,397
251,987
444,410
48,678
EAST HAMPTON, NY
659,127
39,313
427,827
270,613
698,440
137,463
BARRE, MA
535,614
163,028
348,149
350,493
698,642
160,830
BARRINGTON, RI
213,866
384,866
704,066
266,871
DOBBS FERRY, NY
670,575
33,706
269,981
704,281
135,250
NORTH BERGEN, NJ
629,527
81,006
409,527
301,006
710,533
173,873
687,000
25,017
447,400
264,617
712,017
127,431
FRANKLIN TWP., NJ
683,000
30,257
444,800
268,457
713,257
133,770
ALFRED STATION, NY
714,108
414,108
34,000
538,400
176,230
350,600
364,030
714,630
258,057
112,305
323,065
715,565
201,191
695,000
21,021
371,400
344,621
716,021
230,898
246,576
410,576
716,676
248,075
WILLIMANTIC, CT
716,782
465,908
250,874
41,813
80
684,650
33,275
273,125
717,925
137,961
390,200
329,357
468,457
719,557
296,590
510,760
209,820
388,380
720,580
239,435
ST. GEORGES, DE
498,200
222,596
324,725
396,071
720,796
293,151
SANDSTON, VA
721,651
101,651
620,000
93,000
RIVERHEAD, NY
723,346
291,646
121,374
AVON, CT
730,886
402,949
327,937
96,628
2002
BIDDEFORD, ME
723,100
8,009
340,000
391,109
731,109
325,049
NEWTON, MA
691,000
42,832
283,832
733,832
141,538
LONDONDERRY, NH
703,100
31,092
457,900
276,292
734,192
136,026
SAG HARBOR, NY
703,600
36,012
458,200
281,412
739,612
143,094
RIDGEWOOD, NJ
36,959
282,159
740,059
140,211
708,160
33,072
460,500
280,732
741,232
137,084
PRINCETON, NJ
40,615
285,815
743,715
146,858
HARRISBURG, PA
399,016
347,590
198,740
547,866
746,606
344,802
MAYNARD, MA
735,200
12,714
478,800
269,114
747,914
122,939
476,816
272,765
443,481
749,581
281,823
547,283
205,733
355,734
397,282
753,016
195,499
BRIARCLIFF MANOR, NY
652,213
103,753
501,687
254,279
755,966
231,839
743,200
19,847
484,000
279,047
763,047
130,478
578,600
185,285
376,800
387,085
763,885
234,817
RANDOLPH, MA
25,069
284,269
768,269
136,189
FAIRHAVEN, MA
725,500
48,828
470,900
303,428
774,328
158,477
EAST PEMBROKE, NY
787,465
537,465
750,000
49,125
799,125
789,901
507,600
294,303
801,903
140,533
802,414
70,212
UNION CITY, NJ
799,500
3,440
520,600
282,340
802,940
125,227
804,040
516,387
287,653
52,496
775,300
34,554
504,900
304,954
809,854
148,890
823,031
273,031
550,000
63,358
WEST ORANGE, NJ
34,733
313,633
834,233
156,456
ASHLAND, VA
839,997
SUFFIELD, CT
237,401
602,635
200,878
639,158
840,036
187,636
WALKERTOWN, NC
844,749
488,239
356,509
39,562
W.READING, PA
790,432
68,726
387,641
471,517
859,158
465,075
BELLINGHAM, MA
734,189
132,725
476,200
390,714
866,914
239,279
ORLANDO, FL
867,515
401,435
466,080
175,554
JONESBORO, AR
868,501
173,096
695,405
31,284
FALL RIVER, MA
859,800
24,423
559,900
324,323
884,223
153,018
ELLICOTT CITY, MD
895,049
(0
82,439
SUTTON, MA
714,159
187,355
464,203
437,311
901,514
200,066
LIVINGSTON, NJ
871,800
30,003
567,700
334,103
901,803
902,892
272,892
630,000
94,500
626,700
282,677
408,100
501,277
909,377
320,294
CHESAPEAKE, VA
883,685
26,247
325,508
584,424
909,932
579,208
MIDDLETOWN, NY
751,200
166,411
489,200
428,411
917,611
225,350
MANSFIELD, OH
921,108
331,599
589,509
6,862
924,586
566,986
357,600
94,466
PLYMOUTH, CT
930,885
605,075
325,810
54,300
WASHINGTON TOWNSHIP, NJ
912,000
21,261
593,900
339,361
933,261
159,158
AVOCA, NY
935,543
634,543
301,000
NEWINGTON, CT
953,512
619,783
333,729
55,621
OCEAN CITY, NJ
843,700
113,162
549,400
407,462
956,862
240,926
957,418
324,158
633,260
134,666
BYRON, NY
969,117
669,117
972,200
12,775
633,100
351,875
984,975
159,658
WARSAW, NY
990,259
690,259
DURHAM, CT
993,909
414,129
CHURCHVILLE, NY
1,011,381
601,381
410,000
46,467
GREIGSVILLE, NY
1,017,739
202,873
814,866
38,307
952,200
74,451
620,100
406,551
1,026,651
216,295
LAKEVILLE, NY
1,027,783
202,857
824,926
39,197
1,026,115
7,149
407,026
626,238
1,033,264
624,636
GLEN ALLEN, VA
1,036,585
411,585
625,000
93,750
LODI, NJ
1,037,440
587,823
449,617
1,038,592
675,085
363,507
60,583
WINDSOR, CT
1,042,081
669,804
372,277
155,117
1,042,870
222,870
820,000
NEW OXFORD, PA
1,044,707
18,687
1,039,520
1,058,207
791,323
HONOLULU, HI
1,070,141
980,680
89,460
12,630
1,077,402
322,402
755,000
113,250
WEBSTER, MA
1,012,400
67,645
659,300
420,745
1,080,045
218,323
GARDNER, MA
1,008,400
73,740
656,700
425,440
1,082,140
217,211
1,020,400
61,875
664,500
417,775
1,082,275
212,485
SEEKONK, MA
1,072,700
29,112
698,500
403,312
1,101,812
187,535
1,124,769
504,769
1,131,878
546,878
585,000
87,750
WALNUT COVE, NC
1,140,945
513,565
627,380
69,314
SHRUB OAK, NY
1,060,700
81,807
690,700
451,807
1,142,507
238,435
978,880
191,413
636,272
534,021
1,170,293
217,313
CRESTLINE, OH
1,201,523
284,761
916,762
11,367
1,214,831
789,640
425,191
70,867
1,184,759
32,132
604,983
611,908
1,216,891
132,131
FARMVILLE, VA
1,226,505
621,505
605,000
90,750
BELFIELD, ND
1,232,010
381,909
850,101
129,470
543,833
693,438
473,695
763,576
1,237,271
752,658
NAPLES, NY
1,257,487
827,487
48,733
FREDERICKSBURG, VA
1,279,280
469,280
810,000
121,500
FORT LEE, NJ
1,245,500
39,408
811,100
473,808
1,284,908
227,313
1,289,425
798,444
490,981
94,004
SPOTSYLVANIA, VA
1,290,239
490,239
800,000
EL CAJON, CA
1,292,114
779,828
512,286
42,472
ELLINGTON, CT
1,294,889
841,678
453,211
75,533
LAKE HOPATCONG, NJ
1,305,034
505,034
303,226
SAVONA, NY
1,314,135
964,136
349,999
FILLMORE, CA
1,354,113
950,061
404,052
37,786
KANEOHE, HI
1,363,901
821,691
542,210
52,654
BELLFLOWER, CA
1,369,511
910,252
459,259
43,108
1,433,330
597,221
VERNON, CT
1,434,223
597,592
POWAY, CA
1,439,021
114,467
PETERSBURG, VA
1,441,374
816,374
PERRY, NY
1,443,847
1,043,847
BROOKLAND, AR
1,467,809
149,218
1,318,591
56,442
1,412,860
56,420
898,470
570,810
1,469,280
281,917
1,476,043
876,043
600,000
BRICK, NJ
1,507,684
1,000,000
507,684
247,725
WAIANAE, HI
1,520,144
648,273
871,871
72,706
HALEIWA, HI
1,521,648
1,058,124
463,524
53,621
1,531,772
989,165
542,607
92,929
1,538,997
1,219,217
319,780
28,955
HOOKSETT, NH
1,561,628
823,915
737,712
115,904
1,594,129
1,036,184
557,945
92,992
HESPERIA, CA
1,643,449
849,352
794,097
68,660
1,677,065
1,157,065
520,000
78,000
KING WILLIAM, VA
1,687,540
1,067,540
HOUSTON, TX
1,688,904
223,664
1,465,240
111,373
1,715,914
995,914
720,000
108,000
1,768,878
1,192,216
576,662
48,078
ALLENSTOWN, NH
1,787,116
466,994
1,320,122
119,762
1,646,307
259,443
1,071,500
834,250
1,905,750
507,752
82
SAN DIMAS, CA
1,941,008
749,066
1,191,942
94,544
SAN MARCOS, TX
1,953,653
250,739
1,702,914
133,479
LA PALMA, CA
1,971,592
1,389,383
582,210
53,595
1,977,671
1,473,275
504,396
47,249
1,996,811
870,775
1,126,036
94,383
SOUTH WINDHAM, CT
644,141
1,397,938
598,394
1,443,685
2,042,079
86,304
HARKER HEIGHTS, TX
2,051,704
588,320
1,463,384
192,815
FT WORTH, TX
2,114,924
866,062
1,248,863
112,417
1,653,500
514,444
1,076,800
1,091,144
2,167,944
766,271
BENICIA, CA
2,223,362
1,057,519
1,165,843
114,287
COACHELLA, CA
2,234,957
1,216,646
1,018,312
93,082
2,258,897
721,876
1,537,022
125,569
BEDFORD, NH
2,301,297
1,271,171
1,030,126
102,923
2,368,425
738,210
1,630,215
130,764
TEMPLE, TX
2,405,953
1,215,488
1,190,465
103,791
WAIPAHU, HI
2,458,592
945,327
1,513,264
121,087
MONTPELIER, VA
2,480,686
1,725,686
KELLER, TX
2,506,573
996,029
1,510,544
128,732
2,297,435
568,241
1,495,700
1,369,976
2,865,676
666,885
2,985,267
330,322
2,654,945
192,817
NEWARK, NJ
3,086,592
164,432
2,005,800
1,245,224
3,251,024
637,621
3,510,062
1,594,536
1,915,526
155,432
3,623,228
2,828,228
795,000
119,250
WACO, TX
3,884,407
894,356
2,990,051
262,069
THE COLONY, TX
4,395,696
337,083
4,058,613
300,138
9,210,707
8,193,984
1,016,724
87,664
MISCELLANEOUS INVESTMENTS
10,879,528
12,876,458
6,453,867
17,302,118
23,755,986
15,868,528
364,207,264
109,360,132
221,540,125
252,027,271
473,567,396
129,322,033
Initial cost of leasehold or acquisition investment to company represents the aggregate of the cost incurred during the year in which the company purchased the property for owned properties or purchased a leasehold interest in leased properties. Cost capitalized subsequent to initial investment also includes investments made in previously leased properties prior to their acquisition.
(2)
Depreciation of real estate is computed on the straight-line method based upon the estimated useful lives of the assets, which generally range from sixteen to twenty-five years for buildings and improvements, or the term of the lease if shorter. Leasehold interests are amortized over the remaining term of the underlying lease.
(3)
The aggregate cost for federal income tax purposes was approximately $372,183,000 at December 31, 2008.
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant)
By:
/s/ Thomas J. Stirnweis
Thomas J. Stirnweis,
Vice President, Treasurer and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Leo Liebowitz
Chairman, Chief Executive Officer and Director
(Principal Executive Officer)
(Principal Financial and Accounting Officer)
/s/ Milton Cooper
/s/ Philip E. Coviello
Milton Cooper
Philip E. Coviello
Director
/s/ David Driscoll
/s/ Howard Safenowitz
David Driscoll
Howard Safenowitz
EXHIBIT INDEX
GETTY REALTY CORP.Annual Report on Form 10-Kfor the year ended December 31, 2008
EXHIBIT NO.
DESCRIPTION
Agreement and Plan of Reorganization and Merger, dated as of December 16, 1997 (the “Merger Agreement”) by and among Getty Realty Corp., Power Test Investors Limited Partnership and CLS General Partnership Corp.
Filed as Exhibit 2.1 to Company’s Registration Statement on Form S-4, filed on January 12, 1998 (File No. 333-44065), included as Appendix A To the Joint Proxy Statement/Prospectus that is a part thereof, and incorporated herein by reference.
3.1
Articles of Incorporation of Getty Realty Holding Corp. (“Holdings”), now known as Getty Realty Corp., filed December 23, 1997.
Filed as Exhibit 3.1 to Company’s Registration Statement on Form S-4, filed on January 12, 1998 (File No. 333-44065), included as Appendix D to the Joint Proxy Statement/Prospectus that is a part thereof, and incorporated herein by reference.
3.2
Articles Supplementary to Articles of Incorporation of Holdings, filed January 21, 1998.
3.3
By-Laws of Getty Realty Corp.
3.4
Articles of Amendment of Holdings, changing its name to Getty Realty Corp., filed January 30, 1998.
Amendment to Articles of Incorporation of Holdings, filed August 1, 2001.
4.1
Dividend Reinvestment/Stock Purchase Plan.
Filed under the heading “Description of Plan” on pages 4 through 17 to Company’s Registration Statement on Form S-3D, filed on April 22, 2004 (File No.333-114730) and incorporated herein by reference.
10.1*
Retirement and Profit Sharing Plan (amended and restated as of January 1, 2002), adopted by the Company on September 3, 2002.
10.2*
1998 Stock Option Plan, effective as of January 30, 1998.
Filed as Exhibit 10.1 to Company’s Registration Statement on Form S-4, filed on January 12, 1998 (File No. 333-44065), included as Appendix H to the Joint Proxy Statement/Prospectus that is a part thereof, and incorporated herein by reference.
10.3**
Asset Purchase Agreement among Power Test Corp. (now known as Getty Properties Corp.), Texaco Inc., Getty Oil Company and Getty Refining and Marketing Company, dated as of December 21, 1984.
10.4
Assignment of Trademark Registrations
Filed as Exhibit 10.4 to Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2007 (File No. 001-13777) and incorporated herein by reference.
10.5*
Form of Indemnification Agreement between the Company and its directors.
10.6*
Amended and Restated Supplemental Retirement Plan for Executives of the Getty Realty Corp. and Participating Subsidiaries (adopted by the Company on December 16, 1997 and amended and restated effective January 1, 2009).
10.7*
Letter Agreement dated June 12, 2001 by and between Getty Realty Corp. and Thomas J. Stirnweis regarding compensation upon change in control.
10.8
Form of Reorganization and Distribution Agreement between Getty Petroleum Corp. (now known as Getty Properties Corp.) and Getty Petroleum Marketing Inc. dated as of February 1, 1997.
10.9
Form of Tax Sharing Agreement between Getty Petroleum Corp (now known as Getty. Properties Corp.) and Getty Petroleum Marketing Inc.
10.10
Consolidated, Amended and Restated Master Lease Agreement dated November 2, 2000 between Getty Properties Corp. and Getty Petroleum Marketing Inc.
10.11
Environmental Indemnity Agreement dated November 2, 2000 between Getty Properties Corp. and Getty Petroleum Marketing Inc.
10.12
Amended and Restated Trademark License Agreement, dated November 2, 2000, between Getty Properties Corp. and Getty Petroleum Marketing Inc.
10.13
Trademark License Agreement, dated November 2, 2000, between Getty™ Corp. and Getty Petroleum Marketing Inc.
10.14*
2004 Getty Realty Corp. Omnibus Incentive Compensation Plan.
Filed as Appendix B to the Definitive Proxy Statement of Getty Realty Corp., filed April 9, 2004 (File No. 001-13777) and incorporated herein by reference.
10.15*
Form of restricted stock unit grant award under the 2004 Getty Realty Corp. Omnibus Incentive Compensation Plan, as amended.
10.16**
Contract for Sale and Purchase between Getty Properties Corp. and various subsidiaries of Trustreet Properties, Inc. dated as of February 6, 2007.
Filed as Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 001-13777) and incorporated herein by reference.
86
10.17
Senior Unsecured Credit Agreement dated as of March 27, 2007 with J. P. Morgan Securities Inc., as sole bookrunner and sole lead arranger, the lenders referred to therein, and JPMorgan Chase Bank, N.A., as administrative agent for the lenders.
Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 2, 2007 (File No. 001-13777) and incorporated herein by reference.
10.18*
Severance Agreement and General Release by and between Getty Realty Corp. and Andrew M. Smith effective October 31, 2007 and dated November 13, 2007.
Filed as Exhibit 10.22 to the Company’s Current Report on Form 8-K filed November 14, 2007 (File No. 001-13777) and incorporated herein by reference.
10.19*
Amendment to the 2004 Getty Realty Corp. Omnibus Incentive Compensation Plan dated December 31, 2008.
10.20*
Amendment dated December 31, 2008 to Letter Agreement dated June 12, 2001 by and between Getty Realty Corp. and Thomas J. Stirnweis regarding compensation upon change of control. (See Exhibit 10.7).
The Getty Realty Corp. Business Conduct Guidelines (Code of Ethics).
Filed as Exhibit 14 to Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-13777) and incorporated herein by reference.
Subsidiaries of the Company.
Consent of Independent Registered Public Accounting Firm.
31(i).1
Rule 13a-14(a) Certification of Chief Financial Officer.
31(i).2
Rule 13a-14(a) Certification of Chief Executive Officer.
32.1
Section 1350 Certification of Chief Executive Officer.
32.2
Section 1350 Certification of Chief Financial Officer.
Filed herewith
Furnished herewith. These certifications are being furnished solely to accompany the Report pursuant to 18 U.S.C. Section. 1350, and are not being filed for purposes of Section 18 of the Exchange Act, and are not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Management contract or compensatory plan or arrangement.
**
Confidential treatment has been granted for certain portions of this Exhibit pursuant to Rule 24b-2 under the Exchange Act, which portions are omitted and filed separately with the SEC.