FORM 10-K
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
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 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 þ
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
The aggregate market value of common stock held by non-affiliates (17,324,093 shares of common stock) of the Company was $326,905,635 as of June 30, 2009.
The registrant had outstanding 24,766,426 shares of common stock as of March 16, 2010.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT
PART OF FORM10-K
Selected Portions of Definitive Proxy Statement for the 2010 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, 2009 pursuant to Regulation 14A.
III
ii
TABLE OF CONTENTS
Item
Description
Page
Cautionary Note Regarding Forward-Looking Statements
2
PART I
1
Business
4
1A
Risk Factors
8
1B
Unresolved Staff Comments
20
Properties
3
Legal Proceedings
23
PART II
5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
27
6
Selected Financial Data
29
7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
31
7A
Quantitative and Qualitative Disclosures About Market Risk
48
Financial Statements and Supplementary Data
50
9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
81
9A
Controls and Procedures
9B
Other Information
PART III
10
Directors, Executive Officers and Corporate Governance
82
11
Executive Compensation
83
12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
13
Certain Relationships and Related Transactions, and Director Independence
14
Principal Accountant Fees and Services
PART IV
15
Exhibits and Financial Statement Schedules
84
Signatures
94
Exhibit Index
95
iii
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, but are not limited to, statements regarding: our primary tenant, Marketing, and the Marketing Leases included in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Marketing and the Marketing Leases” and elsewhere in this Annual Report on Form 10-K; our belief that our network of retail motor fuel and convenience store properties and terminal properties are unique and not readily available for purchase or lease from other owners or landlords; our belief regarding the difficulty of obtaining the permits necessary to operate a network of petroleum marketing properties such as ours; future acquisitions and their impact on our financial performance; compliance with federal, state and local provisions enacted or adopted pertaining to environmental matters; our estimates and assumptions regarding the Marketing Environmental Liabilities; the impact of any modification or termination of the Marketing Leases on our business and ability to pay dividends or our stock price; our ability to predict if Marketing will continue to be dependent on financial support from Lukoil to meet its obligations as they become due through the terms of the Marketing Leases, that it is probable that Lukoil will continue to provide financial support to Marketing in the future and that Lukoil will 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; our belief that Marketing is exiting the direct-supplied retail gasoline business by entering into subleases with petroleum distributors; our belief that Marketing is seeking subtenants for other significant portions of the portfolio of properties it leases from us; our decision to attempt to negotiate with Marketing for a modification of the Marketing Leases which removes certain properties 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 not probable that we will not collect the deferred rent receivable related to the properties subject to the Marketing Leases other than the deferred rent receivable related to the three hundred fifty properties we identified as being the most likely to be removed from the Marketing Leases; 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 ability to maintain our federal tax status as a real estate investment trust (“REIT”); the probable outcome of litigation or regulatory actions and its impact on us; our belief that Marketing or other counterparties are responsible for certain environmental remediation costs; our expected recoveries from underground storage tank funds; our exposure and liability due to environmental remediation costs; our estimates and assumptions regarding remediation costs; our belief that our accruals for environmental litigation matters were appropriate based on information then currently available; 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; our expectation as to our continued compliance with the financial covenants in our Credit Agreement and our Term Loan Agreement and that the Credit Agreement 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 beliefs regarding our insurance coverage; our belief that Marketing had removed, or has scheduled removal of the gasoline tanks and related equipment at approximately one hundred fifty, or 18%, of our properties and our beliefs that most of these properties are either vacant or provide negative or marginal contribution to Marketing’s results; assumptions regarding the future applicability of our 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 including the estimated net sales value we expect to receive on the properties where we reduced the carrying amount of the properties during 2009.
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 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 risks include, but are not limited to risks associated with: owning and leasing real estate generally; adverse developments in general business, economic or political conditions; material dependence on Marketing as a tenant; the impact of Marketing’s announced restructuring of its business; our inability to provide access to financial information about Marketing; the modification or termination of the Marketing Leases; Marketing paying its environmental obligations or changes in our assumptions for environmental liabilities related to the Marketing Leases; competition for properties and tenants; 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 change to other applicable standards or regulations; potential exposure related to pending lawsuits and claims; costs of completing environmental remediation and of compliance with environmental legislation and regulations; our exposure to counterparty risk and our ability to effective manage or mitigate this risk; owning real estate primarily concentrated in the Northeast and Mid-Atlantic regions of the United States; substantially all of our tenants depending on the same industry for their revenues; potential future acquisitions; losses not covered by insurance; 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; our dependence on external sources of capital; generalized credit market dislocations and contraction of available credit; our business operations generating sufficient cash for distributions or debt service; changes in interest rates and our ability to manage or mitigate this risk effectively; our potential inability to pay dividends; changes to our dividend policy; changes in market conditions; adverse affect of inflation; the loss of a member or members of our management team; the uncertainty of our estimates, judgments and assumptions associated with our accounting policies and methods; 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 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, 2009, we owned nine hundred ten properties and leased one hundred sixty-one 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. These tenants are responsible for managing the operations conducted at these properties and for the payment of taxes, maintenance, repair, insurance and other operating expenses related to our properties. Our tenants’ financial results are largely dependent on the performance of the petroleum marketing industry, which is highly competitive and subject to volatility. As of December 31, 2009, we leased approximately 78% of our one thousand seventy-one owned and leased properties on a long-term triple-net 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 subtenants that either operate their gas stations, convenience stores, automotive repair services or other businesses at our properties or are petroleum distributors who may operate our properties directly and/or sublet our properties to the operators. (For information regarding factors that could adversely affect us relating to our lessees, including our primary tenant, Marketing, see “Item 1A. Risk Factors”. For additional information regarding the portion of our financial results that are attributable to Marketing, see Note 11 in “Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements.” For additional information regarding Marketing and the Marketing Leases (as defined below), see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Marketing and the Marketing Leases”.)
We are self-administered and self-managed by our experienced management team, which has over one hundred-two 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 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 triple-net lease (the “Master Lease”) with Marketing. As of December 31, 2009, Marketing leased from us eight hundred thirty properties under the Master Lease and ten properties under supplemental leases (collectively with the Master Lease, the “Marketing Leases”). Eight hundred thirty-one 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 eight of the properties leased to Marketing are owned by us and one hundred thirty-two 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. The Master Lease is a unitary lease and, therefore, Marketing’s exercise of any renewal option can only be 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 Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — 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 those instances where we determine that the best use for a property is no longer as a retail motor fuel outlet, we will seek an alternative tenant or buyer for the property. We lease or sublet approximately twenty of our properties for such uses as fast food restaurants, automobile sales and other retail purposes.
Revenues from rental properties included in continuing operations for the year ended December 31, 2009 were $84.5 million which is comprised of $82.5 million of lease payments received and $2.0 million of “Rental Revenue Adjustments” consisting of deferred rental income recognized due to the straight-line method of accounting for the leases with Marketing and certain of our other tenants, amortization of above-market and below-market rent for acquired in-place leases and income recognized for direct financing leases. In 2009, we received lease payments from Marketing aggregating approximately $60.0 million (or 72.7%) of the $82.5 million lease payments received included in continuing operations. Our financial results are materially dependent upon the ability of Marketing to meet its rental and environmental obligations under the Marketing Leases. Marketing’s financial results depend on retail petroleum marketing margins from the sale of refined petroleum products and rental income from its subtenants. Marketing’s subtenants either operate their gas stations, convenience stores, automotive repair services or other businesses at our properties or are petroleum distributors who may operate our properties directly and/or sublet our properties to the operators. Since a substantial portion of our revenues are derived from the Marketing Leases, any factor that adversely affects Marketing’s ability to meet its obligations under the Marketing Leases
may have a material adverse effect on our business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends or stock price. Marketing has made all required monthly rental payments under the Marketing Leases when due through March 2010, although there can be no assurance that it will continue to do so. (For additional information regarding the portion of our financial results that are attributable to Marketing, see Note 11 in “Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements.” For additional information regarding Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — 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, 2009, we owned fee title to nine hundred one retail motor fuel, convenience store and other retail properties and nine petroleum distribution terminals. We also leased one hundred sixty-one retail motor fuel, convenience store and other retail properties. Our typical property is used as a retail motor fuel outlet 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 either regulatory or contractual closure (“Closure”) in an efficient and economical manner. Generally, upon achieving Closure at each 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, 2009, we have regulatory approval for remediation action plans in place for two hundred forty-five (95%) of the two hundred fifty-eight 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-two 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 or stock price.
For additional information please refer to “Item 1A. Risk Factors” and to “General – 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 March 16, 2010, 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 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 selling or 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 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 prior years. Among other effects, adverse economic conditions could depress real estate values, impact our ability to re-let or sell our properties and have an 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 or stock price.
Because our financial results are materially dependent on the performance of Marketing, in the event that Marketing does not perform its rental or environmental obligations under the Marketing Leases, our business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends or stock price could be materially adversely affected. The financial performance of Marketing had been deteriorating over the three years ending December 31, 2008. No assurance can be given that Marketing will have the ability to meet its obligations under the Marketing Leases.
Our financial results are materially dependent upon the ability of Marketing to meet its rental and environmental obligations under the Marketing Leases. A substantial portion of our revenues (71% for the year ended December 31, 2009) are derived from the Marketing Leases. Accordingly, any factor that adversely affects Marketing’s ability to meet its obligations under the Marketing Leases may have a material adverse effect on our business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends or stock price. For additional information regarding the portion of our financial results that are attributable to Marketing, see Note 11 in “Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements.” Marketing has made all required monthly rental payments under the Marketing Leases when due through March 2010, although there can be no assurance that it will continue to do so.
For the year ended December 31, 2008, Marketing reported a significant loss, continuing a trend of reporting large losses in recent years. We have not received Marketing’s operating results for the year ended December 31, 2009. As a result of Marketing’s significant losses for each of the three years ended December 31, 2008, 2007 and 2006 and the cumulative impact of those losses on Marketing’s financial position as of December 31, 2008, we previously concluded that Marketing likely does not have the ability to generate cash flows from its business sufficient to meet its obligations as they come due in the ordinary course through the terms of the Marketing Leases unless it shows significant improvement in its financial results, generates sufficient liquidity through the sale of assets or otherwise, or receives financial support from OAO LUKoil, (“Lukoil”), its parent company. As discussed in more detail below, Marketing has recently undergone a restructuring of its business. We do not know whether Marketing will continue to be dependent on financial support from Lukoil to meet its obligations as they become due through the terms of the Marketing Leases. Lukoil is not, however, a guarantor of the Marketing Leases. Even though Marketing is a wholly-owned subsidiary of Lukoil, and Lukoil has provided capital to Marketing in the past, there can be no assurance that Lukoil will provide financial support or additional capital to Marketing in the future. If Marketing does not meet its obligations under the Marketing Leases, our business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends or stock price may be materially adversely affected.
In the fourth quarter of 2009, Marketing announced a restructuring of its business. We cannot predict with certainty what impact Marketing’s restructuring and other changes in its business model will have on us.
In the fourth quarter of 2009, Marketing announced a restructuring of its business. Marketing disclosed that the restructuring included the sale of all assets unrelated to the properties it leases from us, the elimination of parent-guaranteed debt, and steps to reduce operating costs. Marketing sold all assets unrelated to the properties it leases from us to its affiliates, LUKOIL Pan Americas L.L.C. and LUKOIL North America LLC. Marketing paid off debt which had been guaranteed by Lukoil with proceeds from the sale of assets to Lukoil affiliates and with financial support from Lukoil. Marketing also announced additional steps to reduce its costs including closing two marketing regions, eliminating jobs and exiting the direct-supplied retail gasoline business.
We believe that Marketing is exiting the direct-supplied retail gasoline business by entering into subleases with petroleum distributors who supply their own petroleum products to our properties. Approximately two hundred fifty retail properties, comprising substantially all of the properties in New England that we lease to Marketing, have been subleased by Marketing to a single distributor. These properties are in the process of being rebranded BP stations and are being supplied petroleum products under a supply contract with BP. In addition, we believe that Marketing recently entered into a sublease with a single distributor in New Jersey covering approximately eighty-five of our properties. We believe that Marketing is seeking subtenants for other significant portions of the portfolio of properties it leases from us.
In connection with its restructuring, Marketing eliminated debt which had been guaranteed by Lukoil with proceeds from the sale of assets to Lukoil affiliates and with financial support from Lukoil. We cannot predict whether the restructuring announced by Marketing will stem Marketing’s recent history of significant annual operating losses, and whether Marketing will continue to be dependent on financial support from Lukoil to meet its obligations as they become due through the terms of the Marketing Leases. Lukoil is not, however, a guarantor of the Marketing Leases. Even though Marketing is a wholly-owned subsidiary of Lukoil, and Lukoil has provided capital to Marketing in the past, there can be no assurance that Lukoil will provide financial support or additional capital to Marketing in the future. We cannot predict with certainty what impact Marketing’s restructuring and other changes in its business model will have on us. If Marketing does not meet its obligations under the Marketing Leases, our business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends or stock price may be materially adversely affected.
Although we periodically receive and review the unaudited financial statements and other financial information from Marketing, this information is not publicly available to investors. You will not have access to financial information about Marketing provided to us by Marketing to allow you to independently assess Marketing’s financial condition or its ability to satisfy its obligations under the Marketing Leases.
We periodically receive and review Marketing’s unaudited financial statements and other financial information. We receive the financial statements and other financial information from Marketing pursuant to the terms of the Marketing Leases. However, the financial statements and other financial information are not publicly available to investors and Marketing contends that the terms of the Marketing Leases prohibit us from including the financial statements and other financial information in our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q or in our Annual Reports to Shareholders. The Marketing Leases provide that Marketing’s financial information which is not publicly available shall be delivered to us within one hundred fifty days after the end of each fiscal year. We have not received Marketing’s operating results for the year ended December 31, 2009. The financial statements and other financial information that we receive from Marketing is unaudited and neither we, nor our auditors, have been involved with its preparation and as a result have no assurance as to its correctness or completeness. You will not have access to financial statements and other financial information about Marketing provided to us by Marketing to allow you to independently assess Marketing’s financial condition or its ability to satisfy its obligations under the Marketing Leases, which may put your investment in us at greater risk of loss.
If the Marketing Leases are modified significantly or terminated, our business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends or stock price could be materially adversely affected.
From time to time we have held discussions with representatives of Marketing regarding potential modifications to the Marketing Leases. These efforts have been unsuccessful to date as we have not yet reached a common understanding with Marketing that would form a basis for modification of the Marketing Leases. From time to time, however, we have been able to agree with Marketing on terms to allow for removal of individual properties from the Marketing Leases as mutually beneficial opportunities arise. We intend to continue to pursue the removal of individual properties from the Marketing Leases, and we remain open to removal of groups of properties; however, there is no fixed agreement in place providing for removal of properties from the Marketing Leases. Accordingly, the removal of properties from the Marketing Leases is subject to negotiation on a case-by-case basis. If Marketing ultimately determines that its business strategy is to exit all or a portion of the properties it leases from us, 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; what composition of properties, if any, may be removed from the Marketing Leases as part of any such modification; or what the terms of any agreement for modification of the Marketing Leases may be. 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 may
be required to reserve additional amounts of the deferred rent receivable, record additional impairment charges related to our properties, or accrue for environmental liabilities as a result of the potential or actual modification or termination of the Marketing Leases or leases with our other tenants, which may result in material adjustments to the amounts recorded for these assets and liabilities.
As permitted under the terms of the Marketing Leases, Marketing generally can, subject to any contrary terms under applicable third party leases, use each property for any lawful purpose, or for no purpose whatsoever. We believe that as of December 31, 2009, Marketing had removed, or has scheduled removal of, the underground gasoline storage tanks and related equipment at approximately one hundred fifty, or 18%, of our properties and we also believe that most of these properties are either vacant or provide negative contribution to Marketing’s results. Marketing recently agreed to permit us to list with brokers and to show to prospective purchasers and lessees seventy-five of the properties where Marketing has removed, or has scheduled to remove, underground gasoline storage tanks and related equipment, and we are marketing such properties for sale or leasing. As previously discussed, however, there is no agreement between us and Marketing on terms for removal of properties from the Marketing Leases. In those instances where we determine that the best use for a property is no longer as a retail motor fuel outlet, we will seek an alternative tenant or buyer for such property. With respect to properties that are vacant or have had underground gasoline storage tanks and related equipment removed, it may be more difficult or costly to re-let or sell such properties as gas stations because of capital costs or possible zoning or permitting rights that are required and that may have lapsed during the period since gasoline was last sold at the property.
We intend either to re-let or sell any properties that are removed from the Marketing Leases, whether such removal arises consensually by negotiation or as a result of default by Marketing, and reinvest any realized sales proceeds in new properties. We intend to offer properties removed from the Marketing Leases to replacement tenants or buyers individually, or in groups of properties, or by seeking a single tenant for the entire portfolio of properties subject to the Marketing Leases. 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. If the Marketing Leases are significantly modified or terminated, our business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends or stock price may be materially adversely affected.
If it becomes probable that Marketing will not pay its environmental obligations, or if we change our assumptions for environmental liabilities related to the Marketing Leases our business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends stock price could be materially adversely affected.
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 Marketing Leases and various other agreements with us relating to Marketing’s business and the properties it leases from us (collectively the “Marketing Environmental Liabilities”). However, we continue to have ongoing environmental remediation obligations at one hundred eighty-seven retail sites and for certain pre-existing conditions at six of the terminals we lease to Marketing. If Marketing fails to pay the Marketing Environmental Liabilities, we may ultimately be responsible to pay directly for Marketing Environmental Liabilities as the property owner. We do not maintain pollution legal liability insurance to protect us from potential future claims for Marketing Environmental Liabilities. If we incur material environmental liabilities our business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends or stock price may be materially adversely affected. We will be required to accrue for Marketing Environmental Liabilities if we determine that it is probable that Marketing will not meet its obligations and we can reasonably estimate the amount of the Marketing Environmental Liabilities for which we will be directly responsible to pay, or if our assumptions regarding the ultimate allocation methods or share of responsibility that we used to allocate environmental liabilities changes. 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. Accordingly, we did not accrue for the Marketing Environmental Liabilities as of December 31, 2009 or December 31, 2008. Nonetheless, we have determined that the aggregate amount of the Marketing Environmental Liabilities (as estimated by 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 as a result of any such accrual, it is reasonably possible that we may not be in compliance with the existing financial covenants in our Credit Agreement and our Term Loan Agreement. Such non-compliance could result in an event of default under the Credit Agreement and the Term Loan Agreement which, if not cured or waived, could result in the acceleration of all of our indebtedness under the Credit Agreement and our Term Loan Agreement. If we determine that it is probable that Marketing will not meet the Marketing Environmental Liabilities and we accrue for such liabilities, our business, financial condition,
revenues, operating expenses, results of operations, liquidity, ability to pay dividends or stock price may be materially adversely affected.
We estimate that as of December 31, 2009, the aggregate Marketing Environmental Liabilities for which we may ultimately be responsible to pay range between $13 million and $20 million, net of expected recoveries from underground storage tank funds, of which between $6 million and $9 million relate to the three hundred fifty properties that we identified as the basis for our estimate of the deferred rent receivable reserve. Since we generally do not have access to certain site specific information available to Marketing, which is the party responsible for paying and managing its environmental remediation expenses at our properties, our estimates were developed in large part by review of the limited publically available information gathered through electronic databases and freedom of information requests and assumptions we made based on that data and on our own experiences with environmental remediation matters. The actual aggregate Marketing Environmental Liabilities and the actual Marketing Environmental Liabilities related to the three hundred fifty properties that we identified as the basis for our estimate of the deferred rent receivable reserve may differ materially from our estimates and we can provide no assurance as to the accuracy of these estimates.
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 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. The petroleum marketing industry is highly competitive and volatile. Petroleum products are commodities, the prices of which depend on numerous factors that affect supply and demand. The prices paid by our tenants and other petroleum marketers for products are affected by global, national and regional factors. 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 or selling our vacant properties.
We are subject to risks that financial distress, default or bankruptcy 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, default or bankruptcy of our tenants may also lead to a protracted and expensive processes for retaking control of our properties than would otherwise be the case, including, 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 regarding the portion of our financial results that are attributable to Marketing, see Note 11 in “Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements.” 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 — Marketing and the Marketing
Leases”.) If a tenant files for bankruptcy protection it is possible that we would recover substantially less than the full value of our claims against the tenant.
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, default or bankruptcy; 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 incur significantly higher operating costs as a result of environmental laws and regulations, which could reduce our profitability.
We 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 Marketing and the Marketing Leases see “Item 3. Legal Proceedings”, “Environmental Matters” and “General – 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.
As of December 31, 2009, we had accrued $12.6 million as management’s best estimate of the net fair value of reasonably estimable environmental remediation costs which is comprised of $16.5 million of estimated environmental obligations and liabilities offset by $3.9 million of estimated recoveries from state UST remediation funds, net of allowance. 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. Environmental accruals are based on estimates which are subject to significant change, and are adjusted as the remediation treatment progresses, as circumstances change and as environmental contingencies become more clearly defined and reasonably estimable. 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.
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. The property owner’s claim for reimbursement of costs incurred and our claim for indemnification by Marketing were actively litigated, leading to a trial held before a judge. The trial court issued its decision in August 2009 under which the Company and Marketing were held jointly and severally responsible to the current property owner for the costs incurred by the owner to remove USTs and remediate contamination at the site, but, as between the Company and Marketing, Marketing was accountable for such costs under the indemnification provisions of the Master Lease. The order on the trial court’s decision was entered in February 2010, making such decision final for purposes of initiating the limited period of time following which appeal may be taken. We believe that Marketing will appeal the decision; however, we believe the probability that Marketing will not be ultimately responsible for the claim for clean-up costs incurred by the current property owner is remote. 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 matter.
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 or stock price.
We are defending pending lawsuits and claims and are subject to material losses.
We are subject to various lawsuits and claims, including litigation related to environmental matters, such as those arising from leaking USTs and releases of motor fuel into the environment, 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 or stock price. For additional information with respect to pending environmental lawsuits and claims and environmental remediation costs and estimates see “Item 3. Legal Proceedings” and “Environmental Matters” 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.
A significant portion of our properties are concentrated in the Northeast and Mid-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 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 financial resources or more experienced personnel than we have, 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 properties we seek to acquire 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. These properties may have characteristics or deficiencies currently unknown to us that affect their value or revenue potential. It is possible that the operating performance of these properties may decline after we acquire them, they may not perform as expected and, if financed using debt or new equity issuances, may result in shareholder dilution. Our acquisitions of new properties will also expose us to the liabilities of those properties, some of which we may not be aware of at the time of acquisition. We face competition in pursuing these acquisitions and we may not succeed in leasing newly developed or acquired properties at rents sufficient to cover their costs of acquisition or development and operations. Newly acquired properties may require significant management attention that would otherwise be devoted to our ongoing business. We may not succeed in consummating desired acquisitions or in completing developments on time or within our budget. Consequences arising from or in connection with any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends or stock price.
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 do not maintain pollution legal liability insurance to protect the Company from potential future claims for environmental contamination, including the environmental liabilities that are the responsibility of our tenants. 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 or stock price.
Failure to qualify as a REIT under the federal income tax laws would have adverse 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 would not be allowed a deduction for distributions to shareholders in computing our taxable income and 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 shareholders 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 and Term Loan Agreement which could have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends or stock price.
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, 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, covenants and limitations imposed under our Credit Agreement and our Term Loan Agreement and the market price of our common stock.
The United States credit markets experienced an unprecedented contraction beginning in 2007. As a result of the tightened 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. If the current pressures on credit continue or worsen, we may not be able to refinance our outstanding debt when due in March 2011, (or in March 2012 if we exercise our option to extend the term of the Credit Agreement for one additional year), which could have a material adverse effect on us. We may be precluded from exercising our option to extend the term of the Credit Agreement for one additional year if we are in default of the Credit Agreement.
Our ability to meet the financial and other covenants relating to our Credit Agreement and our Term Loan 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 and our Term Loan Agreement. We have determined that the aggregate
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amount of the Marketing Environmental Liabilities (as estimated by us, based on our assumptions and analysis of information currently available to us described in more detail above) 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 and our Term Loan 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 — 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 or our Term Loan Agreement, there can be no assurance that our lenders would waive such non-compliance. A default under our Credit Agreement or our Term Loan 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 our Term Loan Agreement or otherwise, could result in the acceleration of all of our indebtedness under our Credit Agreement and our Term Loan Agreement. This could have a material adverse affect on our business, financial condition, results of operations, liquidity, ability to pay dividends or stock price.
The downturn in the credit markets has increased the cost of borrowing and 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 the beginning of 2010. 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 could have negative effects on our business such as (i) we could have difficulty in acquiring or developing properties, which would adversely affect our business strategy, (ii) our liquidity could be adversely affected, (iii) we may be unable to repay or refinance our indebtedness or (iv) we may need to make higher interest and principal payments or sell some of our assets on unfavorable terms to fund our liquidity needs. These negative effects may cause other material adverse effects on our business, financial condition, results of operations, ability to pay dividends 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 or debt 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.
We are exposed to interest rate risk and there can be no assurances that we will manage or mitigate this risk effectively.
We are exposed to interest rate risk, primarily as a result of our $175.0 million Credit Agreement and our $25.0 million Term Loan Agreement. Borrowings under our Credit Agreement and our Term Loan 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 our Term Loan Agreement. 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. We are, and will be, exposed to interest rate risk to the extent that our aggregate borrowings floating at market rates exceed the $45.0 million notional amount of the Swap Agreement. Although the Swap Agreement is intended to lessen the impact of rising interest rates, it also exposes us to
17
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. (For additional information with respect to interest rate risk, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risks”.)
We may be unable to pay dividends.
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 Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Marketing and the Marketing Leases”.) In particular, our Credit Agreement and our Term Loan Agreement prohibit 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.
We may change the dividend policy of our common stock in the future.
The decision to declare and pay dividends on our common stock in the future, as well as the timing, amount and composition of any such future dividends, will be at the sole discretion of our Board of Directors and will depend on such factors as the Board of Directors deems relevant and the dividend paid may vary from expected amounts. Any change in our dividend policy could adversely affect our business and the market price of our common stock. A recent Internal Revenue Service (“IRS”) revenue procedure allows us to satisfy the REIT income distribution requirement by distributing up to 90% of our dividends on our common stock in shares of our common stock in lieu of paying dividends entirely in cash. Although we reserve the right to utilize this procedure in the future, we currently have no intent to do so. In the event that we pay a portion of a dividend in shares of our common stock, taxable U.S. shareholders would be required to pay tax on the entire amount of the dividend, including the portion paid in shares of common stock, in which case such shareholders might have to pay the tax using cash from other sources. If a U.S. shareholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to non-U.S. shareholders, we may be required to withhold U.S. tax with respect to such dividend, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our shareholders sell shares of our common stock in order to pay taxes owed on dividends, such sales would put downward pressure on the market price of our common stock.
18
Changes in market conditions could adversely affect the market price of our publicly traded common stock.
As with other publicly traded securities, the market price of our publicly traded common stock depends on various market conditions, which may change from time-to-time. Among the market conditions that may affect the market price of our publicly traded common stock are the following:
the reputation of REITs generally and the reputation of REITs with portfolios similar to us;
the attractiveness of the securities of REITs in comparison to securities issued by other entities (including securities issued by other real estate companies);
an increase in market interest rates, which may lead prospective investors to demand a higher distribution rate in relation to the price paid for publicly traded securities;
our financial condition and performance and that of our significant tenants;
the market’s perception of our growth potential and potential future earnings;
the extent of institutional investor interest in us; and
general economic and financial market conditions.
Inflation may adversely affect our financial condition and results of operations.
Although inflation has not materially impacted our results of operations in the recent past, increased inflation could have a more pronounced negative impact on any variable rate debt we incur in the future and on our results of operations. During times when inflation is greater than increases in rent, as provided for in our leases, rent increases may not keep up with the rate of inflation. Likewise, even though our triple net leases reduce our exposure to rising property expenses due to inflation, substantial inflationary pressures and increased costs may have an adverse impact on our tenants if increases in their operating expenses exceed increases in revenue, which may adversely affect the tenants’ ability to pay rent.
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 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 Annual Report on Form 10-K. Estimates, judgments and assumptions underlying our consolidated financial statements include, but are not limited to, deferred rent receivable, income under direct financing leases, recoveries from state UST funds, environmental remediation costs, real estate including impairment charges related to the reduction in market value of our 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. 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 and leases with our other tenants. We may be required to reserve additional amounts of the deferred rent receivable, record additional impairment charges related to our properties, or accrue for environmental liabilities as a result of the potential or actual modification or termination of the Marketing Leases or leases with our other tenants, which may result in material adjustments to the amounts recorded for these assets and liabilities. These judgments, assumptions and allocations may prove to be incorrect and our business, financial condition, revenues, operating expense,
19
results of operations, liquidity, ability to pay dividends 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”.)
Amendments to the Accounting Standards Codification made by the Financial Accounting Standards Board (the “FASB”) or changes in accounting standards issued by other standard-setting bodies may adversely affect our reported revenues, profitability or financial position.
Our financial statements are subject to the application of GAAP in accordance with the Accounting Standards Codification, which is periodically amended by the FASB. The application of GAAP is also subject to varying interpretations over time. Accordingly, we are required to adopt amendments to the Accounting Standards Codification 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 other acts of violence or war 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 or stock price.
Item 1B. Unresolved Staff Comments
As of December 31, 2009, one comment remained 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 filed Marketing’s financial statements and summarized financial data with our periodic reports: (i) it would not consider our Annual Reports on Forms 10-K for the years beginning with fiscal 2000 to be compliant; (ii) it would not consider us to be current in our reporting requirements; (iii) it would 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 whether we would have a liability for such offers and sales made pursuant to registration statements that did not contain the financial statements of Marketing.
Subsequent to December 31, 2009, we have had communications with the SEC regarding the unresolved comment and as a result thereof we have included additional disclosures regarding Marketing, including supplemental condensed combining financial information in our financial statement footnotes. The financial information disclosure presents our results of operations, net assets and cash flows, allocated between Marketing, our other tenants and our general corporate functions. See “Footnote 11 – Supplemental Condensed Combining Financial Information in Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements.” The comment has been resolved.
Item 2. Properties
Nearly all of our properties are leased or sublet to petroleum 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 managing the operations conducted at these properties and for the payment of taxes, maintenance, repair, insurance and other operating expenses relating to our properties. In those instances where we determine that the best use for a property is no longer as a retail motor fuel outlet, we will seek an alternative tenant or buyer for the property. We lease or sublet approximately twenty
of our properties under similar lease terms primarily for uses such as fast food restaurants, automobile sales and other retail purposes.
The following table summarizes the geographic distribution of our properties at December 31, 2009. 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 GETTYREALTY
TOTALPROPERTIESBY STATE
PERCENTOF TOTALPROPERTIES
MARKETINGAS TENANT (1)
OTHERTENANTS
MARKETINGAS TENANT
New York
236
64
336
31.3
%
Massachusetts
127
21
—
149
13.9
New Jersey
106
140
13.1
Pennsylvania
104
114
10.6
Connecticut
60
28
111
10.4
39
45
4.2
Virginia
24
32
3.0
New Hampshire
25
2.9
Maine
2.0
Rhode Island
1.7
Texas
1.6
North Carolina
1.0
Delaware
0.9
Hawaii
California
0.8
Florida
0.6
Ohio
0.4
Arkansas
0.3
Illinois
0.2
North Dakota
0.1
Vermont
Total
708
202
132
1,071
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 eleven years. The following table sets forth information regarding lease expirations, including renewal and extension option terms, for properties that we lease from third parties:
CALENDARYEAR
NUMBER OFLEASESEXPIRING
PERCENTOF TOTALLEASEDPROPERTIES
2010
6.21
0.93
2011
5.59
0.84
2012
8.08
1.22
2013
2.48
0.37
2014
1.86
0.28
Subtotal
24.22
3.64
Thereafter
122
75.78
11.39
161
100.00
15.03
We have rights-of-first refusal to purchase or lease one hundred twenty-nine 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 68% of our leased properties are subject to automatic renewal or extension options.
For the year ended December 31, 2009 we received $82.8 million of lease payments with respect to 1,061 average rental properties held during the year resulting in an average annual rent received of $78,000 per rental property. For the year ended December 31, 2008 we received $81.0 million of lease payments with respect to 1,078 average rental properties held during the year resulting in an average annual rent received of $75,100 per rental property.
Rental unit expirations and the current annualized contracted rent as of December 31, 2009, are as follows (in thousands, except for the number of rental units data):
CURRENT ANNUALIZED CONTRACTUAL RENT (a)
NUMBER OFRENTALUNITSEXPIRING(b)
MARKETING
TOTAL
PERCENTAGEOF TOTALANNUALIZEDRENT
49
$
1,360
467
1,827
2.15
824
167
991
1.17
1,269
582
1,851
2.18
22
625
842
1,467
1.73
697
1,464
2,161
2.55
2015
781
55,070
91
55,161
65.03
2016
332
0.39
2017
445
0.53
2018
1,108
1.31
2019
70
5,134
6.05
130
42
14,304
14,346
16.91
1,175
59,887
24,936
84,823
(a)
Represents the monthly contractual rent due from tenants under existing leases as of December 31, 2009 multiplied by twelve. This amount excludes real estate tax reimbursements which are billed to the tenant when paid.
(b)
Rental units include properties subdivided into multiple premises with separate tenants. Rental units also include individual properties comprising a single “premises” as such term is defined under a unitary master lease related to such properties. With respect to a unitary master lease that includes properties subject to third party leases, the expiration dates for rental units refers to the dates that the underlying third party leases expire, not the expiration date of the unitary master lease itself.
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 thirty-one 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. The Master Lease is a unitary lease and, therefore, Marketing’s exercise of any renewal option can only be exercised 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, 2009, Marketing had removed, or has scheduled removal of the gasoline tanks and related equipment at approximately one hundred fifty, or 18%, of our properties and we also believe that most of these properties are either vacant or provide negative or marginal contribution to Marketing’s results. (For additional information regarding the portion of our financial results that are attributable to Marketing, see Note 11 in “Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements.” For additional information regarding
Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — 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, 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, 2009 and 2008 in connection with this indemnification agreement. Under the Master Lease, we continue to have additional ongoing environmental remediation obligations at 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 Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Marketing and the Marketing Leases”.)
Item 3. Legal Proceedings
The Company is engaged in a number of legal proceedings, many of which we consider to be routine and incidental to our business. The following is a description of material legal proceedings, including those involving private parties and governmental authorities under federal, state and local laws regulating the discharge of materials into the environment. We are vigorously defending all of the legal proceedings involving the Company, including each of the legal proceedings matters listed below.
In April 2003, our subsidiary, Leemilt’s Petroleum Inc., was named as a defendant, along with Amoco Oil Co., BP Corporation North America, CITGO Petroleum Corporation, Exxon Mobil Corp., Sunoco, Inc., Tosco Corporation, Valero Energy Inc., and others, in a complaint seeking class action classification, filed by three individuals, on behalf of themselves and others similarly situated, 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, commonly referred to as “MTBE”). We served an answer to the complaint in which we 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 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 that were required to be installed. In addition, we responded to the notice and, in late 2003, we met with the NJDEP to determine whether, and to what extent, we may be responsible for NRDs regarding this property and other properties formerly supplied by us with gasoline in New Jersey. Since our meeting with the NJDEP we have had no communication with the NJDEP arising from this matter regarding NRDs.
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 responded to the State’s demand and denied responsibility for reimbursement of such costs. In September 2004, the State of New York commenced an action against us and Costa Gas Station, Inc., The Ingraham Bedell Corporation, Exxon Mobil Corporation, Shell Oil Company,
Shell Oil Products Company, Motiva Enterprises, LLC, and related parties, in New York Supreme Court in Albany County seeking recovery of such costs as well as additional costs and future costs for remediation, and interest and penalties. Discovery in this case is ongoing.
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 September 2008, we received a directive and notice of violation from the NJDEP calling for a remedial investigation and cleanup, to be conducted by us and Gary and Barbara Galliker, individually and trading Millstone Auto Service, Auto Tech, and other named parties, of petroleum-related contamination found at a retail motor fuel 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, denying liability, and we have also 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 (the “Spin-Off Agreement”). Marketing has denied responsibility for this matter. In November, 2009, the NJDEP issued an Administrative Order and Notice of Civil Administrative Penalty Assessment (the “Order and Assessment”) to the Company, Marketing and Gary and Barbara Galliker, individually and trading as Millstone Auto Service. Both Marketing and the Company have filed requests for a hearing to contest the allegations of the Order and Assessment. The hearing request is still pending. For additional information regarding Marketing and the Marketing Leases (as defined below), see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Marketing and the Marketing Leases”.)
In November 2009, an action was commenced by the State of New York in the Supreme Court, Albany County, seeking the recovery of costs incurred in remediating alleged petroleum contamination down gradient of a gasoline station formerly owned by us, and gasoline stations that were allegedly owned or operated by other named defendants, including M&A Realty, Inc., Gas Land Petroleum, Inc., and Mid-Valley Oil Company. The Company has tendered the matter to M&A Realty Inc. for defense and indemnification as relates to discharges of petroleum that occurred on or after July of 1994 at the site which is the subject of allegations against the Company. This site was leased by the Company to M & A Realty Inc. in 1994 and sold to M & A Realty Inc. in 2002. M&A Realty Inc. has demanded that the Company defend and indemnify M&A Realty Inc. for contamination at this site as of 1994. The Company has answered the complaint denying liability and asserting affirmative defenses and cross claims against co-defendants. Discovery is ongoing.
MTBE Litigation
From October 2003 through September 2009, we were named as a defendant in lawsuits brought on behalf of private and public water providers and governmental agencies in Connecticut, Florida, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Vermont, Virginia, and West Virginia. These cases allege various theories of liability due to contamination of groundwater with MTBE as the basis for claims seeking compensatory and punitive damages. We have settled one case and have been dismissed from five of the cases initially filed against us. Presently, fifty-three of these MTBE cases remain pending against us. Each of these cases name as defendants approximately fifty petroleum refiners, manufacturers, distributors and retailers of MTBE, or gasoline containing MTBE, including Irving Oil Corporation, Mobil Oil Corporation, Sunoco, Inc., Texaco, Inc., Tosco Corporation, Unocal Corporation, Valero Energy Corporation, Marathon Oil Company, Shell Oil Company, Giant Yorktown, Inc., BP Amoco Chemical Company, Inc., Atlantic Richfield Company, Coastal Oil New England, Inc., Chevron Texaco Corporation, Amerada Hess Corp., Chevron U.S.A., Inc., CITGO Petroleum Corporation, ConocoPhillips Company, Exxon Mobil Corporation, Getty Petroleum Marketing, Inc., and Gulf Oil Limited Partnership.
Pursuant to consolidation procedures under federal law, most of the MTBE cases originally filed in various state and federal courts were transferred to the United States District Court for the Southern District of New York for coordinated Multi-District Litigation proceedings. We are presently named as a defendant in thirty-nine out of more than one hundred cases that have been consolidated in this Multi-District Litigation. We are also named as a defendant in fourteen related MTBE cases pending in the Supreme Court of New York, Nassau County.
The Federal District Court initially designated three individual cases as “focus” cases for discovery and trial purposes. We were a named as a defendant in two of these three initial focus cases. The two focus cases in which we were a named defendant, brought on behalf of the Suffolk County Water Authority and United Water of New York, had been set for trial in
September 2008. Prior to the scheduled trial date, a majority of the primary defendants entered into global settlement agreements which settled one hundred two cases brought by the same law firm on behalf of various plaintiffs. Although we were not a party to these global settlements, the two focus cases in which we were a named defendant were included in these settlements. As a result of these multi-party settlements, the Court vacated the September 2008 trial date for the two initial focus cases in which we were a named defendant. A new trial date for these two focus cases has not yet been rescheduled. We remain a defendant in a total of twenty-seven out of the one hundred two individual cases brought by the same firm and previously settled by other named defendants. Should these two focus cases or any of the other twenty-five cases represented by this firm proceed to trial, the Court has indicated that trials would be scheduled stating in June 2010.
The Court has designated two additional cases as focus cases for discovery and trial purposes. These cases were brought on behalf of water authorities of the Village of Hempstead and the Village of West Hempstead. These cases are presently scheduled for trial in June 2010. We believe that several defendants have settled these two focus cases as part of a multi-case settlement comprising a total of twenty-five cases brought by the same law firm (a different law firm from that indicated above) on behalf of various plaintiffs. We remain a defendant in the Village of Hempstead and the Village of West Hempstead focus cases, which are among twenty-five total cases brought by this other law firm.
In addition to the above described cases, there is one other MTBE case in the consolidated Multi-District Litigation that is pending against us. This case is brought by various governmental agencies of the State of New Jersey, including the NJDEP, and names many refiners, manufacturers, distributors and retailers as defendants. In December 2008, the Court designated this case as a focus case. This case remains in its preliminary stages.
We have tendered defense and indemnification to Marketing and its insurers under the Spin-Off Agreement and the Master Lease. In 2009, we provided litigation reserves of $2.3 million relating to a majority of the MTBE cases pending against us. However, we are still unable to estimate our liability for a minority of the cases pending against us. Further, notwithstanding that we have provided a litigation reserve as to certain of these cases, there remains uncertainty as to the accuracy of the allegations in the MTBE cases as they relate to us, our defenses to the claims, our rights to indemnification or contribution from Marketing, and the aggregate possible amount of damages for which we may be held liable.
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 the discharges of hazardous substances along the lower Passaic River (the “Lower Passaic River”). Other named recipients of the Directive are 360 North Pastoria Environmental Corporation, Amerada Hess Corporation, American Modern Metals Corporation, Apollo Development and Land Corporation, Ashland Inc., AT&T Corporation, Atlantic Richfield Assessment Company, Bayer Corporation, Benjamin Moore & Company, Bristol Myers-Squibb, Chemical Land Holdings, Inc., Chevron Texaco Corporation, Diamond Alkali Company, Diamond Shamrock Chemicals Company, Diamond Shamrock Corporation, Dilorenzo Properties Company, Dilorenzo Properties, L.P., Drum Service of Newark, Inc., E.I. Dupont De Nemours and Company, Eastman Kodak Company, Elf Sanofi, S.A., Fine Organics Corporation, Franklin-Burlington Plastics, Inc., Franklin Plastics Corporation, Freedom Chemical Company, H.D. Acquisition Corporation, Hexcel Corporation, Hilton Davis Chemical Company, Kearny Industrial Associates, L.P., Lucent Technologies, Inc., Marshall Clark Manufacturing Corporation, Maxus Energy Corporation, Monsanto Company, Motor Carrier Services Corporation, Nappwood Land Corporation, Noveon Hilton Davis Inc., Occidental Chemical Corporation, Occidental Electro-Chemicals Corporation, Occidental Petroleum Corporation, Oxy-Diamond Alkali Corporation, Pitt-Consol Chemical Company, Plastics Manufacturing Corporation, PMC Global Inc., Propane Power Corporation, Public Service Electric & Gas Company, Public Service Enterprise Group, Inc., Purdue Pharma Technologies, Inc., RTC Properties, Inc., S&A Realty Corporation, Safety-Kleen Envirosystems Company, Sanofi S.A., SDI Divestiture Corporation, Sherwin Williams Company, SmithKline Beecham Corporation, Spartech Corporation, Stanley Works Corporation, Sterling Winthrop, Inc., STWB Inc., Texaco Inc., Texaco Refining and Marketing Inc., Thomasset Colors, Inc., Tierra Solution, Incorporated, Tierra Solutions, Inc., and Wilson Five Corporation.
The Directive provided, among other things, that the recipients thereof must conduct an assessment of the natural resources that have been injured by the discharges into the Lower Passaic River and must 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. 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 in June 2004, the United States Environmental Protection Agency (“EPA”) entered into an Administrative Order on Consent (“AOC”) with thirty-one 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 parties to the Directive, Occidental Chemical Corporation, Tierra Solutions, Inc., Maxus Energy Corporation and related entities 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. In February 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. The Company has answered the complaint, denying responsibility for any discharges of hazardous substances released into the Lower Passaic River. On December 9, 2009, the court entered an order under which a Special Master is tasked with facilitating discussions for the purpose of designing an alternative dispute resolution process for achieving a global resolution of the Action. The Special Master and certain party representatives are in the process of developing a potential framework for such an alternative dispute resolution process.
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. The Company and Chevron/Texaco are engaged in discussions regarding the Company’s demands for indemnification, and, to facilitate said discussions, in October, 2009 entered into a Tolling/Standstill Agreement which tolls all claims by and among the Company and Chevron/Texaco that relate to the various Lower Passaic River matters from May 8, 2007, until either party terminates such Tolling/Standstill Agreement.
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.
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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 13,000 shareholders of our common stock as of March 16, 2010, of which approximately 1,300 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, 2009 and 2008 was as follows:
PRICE RANGE
CASHDIVIDENDSPER SHARE
QUARTER ENDED
HIGH
LOW
March 31, 2008
28.58
13.33
.4650
June 30, 2008
19.04
14.34
September 30, 2008
23.12
13.12
.4700
December 31, 2008
22.40
13.35
March 31, 2009
21.87
13.25
June 30, 2009
20.99
16.36
September 30, 2009
26.32
18.61
.4750
December 31, 2009
25.63
21.50
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: National Retail Properties, 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.
12/31/2004
12/31/2005
12/31/2006
12/31/2007
12/31/2008
12/31/2009
Getty Realty Corp.
97.61
122.09
112.75
98.63
120.99
Standard & Poors 500
103.00
117.03
121.16
74.53
92.01
Peer Group
93.63
123.44
109.86
82.57
110.65
Assumes $100 invested at the close of trading 12/04 in Getty Realty Corp. common stock, Standard & Poors 500, and Peer Group.
*Cumulative total return assumes reinvestment of dividends.
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,
2009 (a)
2008
2007 (b)
2006
2005
OPERATING DATA:
Revenues from rental properties
84,539
82,802
79,207
72,491
71,282
Earnings before income taxes and discontinued operations
41,424
38,767
27,842
(c)
40,927
42,846
Income tax benefit (d)
700
1,494
Earnings from continuing operations
41,627
44,340
Earnings from discontinued operations
5,625
3,043
6,052
1,098
Net earnings
47,049
41,810
33,894
42,725
45,448
Diluted earnings per common share:
1.67
1.57
1.12
1.68
1.79
1.90
1.69
1.37
1.84
Diluted weighted-average common shares outstanding
24,767
24,769
24,752
24,736
Cash dividends declared per share
1.89
1.87
1.85
1.82
1.76
FUNDS FROM OPERATIONS AND ADJUSTED FUNDS FROM OPERATION (e):
Depreciation and amortization of real estate assets
11,027
11,875
9,794
7,883
8,113
Gains on dispositions of real estate
(5,467
)
(2,787
(6,179
(1,581
(1,309
Funds from operations
52,609
50,898
37,509
49,027
52,252
Revenue Recognition Adjustments
(2,065
(2,593
(4,159
(3,010
(4,170
Allowance for deferred rental revenue
10,494
Impairment charges
1,135
(700
(1,494
Adjusted funds from operations
51,679
48,305
43,844
45,317
46,588
BALANCE SHEET DATA (AT END OF YEAR):
Real estate before accumulated depreciation and amortization
503,874
473,567
474,254
383,558
370,495
Total assets
432,872
387,813
396,911
310,922
301,468
Debt
175,570
130,250
132,500
45,194
34,224
Shareholders’ equity
207,669
205,897
212,178
225,575
227,883
NUMBER OF PROPERTIES:
Owned
910
878
880
836
814
Leased
182
203
216
241
Total properties
1,060
1,083
1,052
1,055
Includes (from the date of the acquisition) the effect of the $49.0 million acquisition of the real estate assets and improvements of thirty-six convenience store properties from White Oak Petroleum LLC which were acquired on September 25, 2009.
Includes (from the date of the acquisition) the effect of the $84.5 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 deferred rent receivable reserve, $10.2 million of which is included in earnings from continuing operations and $0.3 million of which is included in earnings from discontinued operations, based on the deferred rent receivable recorded as of December 31, 2007 related to approximately 40% of the properties then under leases with our primary tenant, Getty Petroleum Marketing, Inc. (For additional information regarding Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Marketing and the Marketing Leases”.)
(d)
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.
(e)
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 and AFFO are helpful to investors in measuring our performance because both FFO and AFFO exclude various items included in GAAP net earnings that do not relate to, or are not indicative of, our fundamental operating performance. FFO excludes various items 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 typically include the impact of deferred rental revenue (straight-line rental revenue), the net amortization of above-market and below-market leases and income recognized from direct financing leases on its recognition of revenue from rental properties (collectively the “Revenue Recognition Adjustments”), as offset by the impact of related collection reserves. GAAP net earnings and FFO from time to time may also include impairment charges and/or income tax benefits. 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 (or an average) basis rather than when the payment is contractually 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. Income from direct financing leases is recognized over the lease term using the effective interest method which produces a constant periodic rate of return on the net investment in the leased property. Impairment of long-lived assets represents charges taken to write-down real estate assets to fair value estimated when events or changes in circumstances indicate that the carrying amount of the property may not be recoverable. In prior periods, income tax benefits have been recognized due to the elimination of, or a net reduction in, amounts accrued for uncertain tax positions related be being taxed as a C-corp., rather than as a REIT, prior to 2001 (see note (d) above).
Management pays particular attention to AFFO, a supplemental non-GAAP performance measure that we define as FFO less Revenue Recognition Adjustments, impairment charges and income tax benefit. In management’s view, AFFO provides a more accurate depiction than FFO of our fundamental operating performance related to: (i) the impact of scheduled rent increases from operating leases; (ii) the rental revenue from acquired in-place leases; (iii) the impact of rent due from direct financing leases, (iv) our rental operating expenses (exclusive of impairment charges); and (v) 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.
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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 2; 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 managing the operations conducted at these properties and for the payment of taxes, maintenance, repair, insurance and other operating expenses relating to our properties. Our tenants’ financial results are largely dependent on the performance of the petroleum marketing industry, which is highly competitive and subject to volatility. In those instances where we determine that the best use for a property is no longer as a retail motor fuel outlet, we will seek an alternative tenant or buyer for the property. We lease or sublet approximately twenty of our properties for uses such as fast food restaurants, automobile sales and other retail purposes. (See “Item 1. Business — Real Estate Business” and “Item 2. Properties” for additional information regarding our real estate business and our properties.) (For information regarding factors that could adversely affect us relating to our lessees, including our primary tenant, Getty Petroleum Marketing Inc., see “Item 1A. Risk Factors”.)
Marketing and the Marketing Leases
As of December 31, 2009, we leased eight hundred forty properties, or 78% of our one thousand seventy-one properties, on a long-term triple-net basis to Getty Petroleum Marketing Inc. (“Marketing”), a wholly-owned subsidiary of OAO LUKoil (“Lukoil”), one of the largest integrated Russian oil companies. Eight hundred thirty of the properties we lease to Marketing are leased under a unitary master lease (the “Master Lease”) with an initial term effective through December 2015. The Master Lease is a unitary lease and, therefore, Marketing’s exercise of any renewal option can only be on an “all or nothing” basis. Ten of the properties we lease to Marketing are leased under supplemental leases with initial terms of varying expiration dates (collectively with the Master Lease, the “Marketing Leases”).
Our financial results are materially dependent upon the ability of Marketing to meet its rental and environmental obligations under the Marketing Leases. Marketing’s financial results depend on retail petroleum marketing margins from the sale of refined petroleum products and rental income from its subtenants. Marketing’s subtenants either operate their gas stations, convenience stores, automotive repair services or other businesses at our properties or are petroleum distributors who may operate our properties directly and/or sublet our properties to the operators. Since a substantial portion of our revenues (71% for the year ended December 31, 2009) are derived from the Marketing Leases, any factor that adversely affects Marketing’s ability to meet its obligations under the Marketing Leases may have a material adverse effect on our business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends or stock price. (For additional information regarding the portion of our financial results that are attributable to Marketing, see Note 11 in “Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements.”) Marketing has made all required monthly rental payments under the Marketing Leases when due through March 2010, although there can be no assurance that it will continue to do so.
For the year ended December 31, 2008, Marketing reported a significant loss, continuing a trend of reporting large losses in recent years. We have not received Marketing’s operating results for the year ended December 31, 2009. As a result of Marketing’s significant losses for each of the three years ended December 31, 2008, 2007 and 2006 and the cumulative impact of those losses on Marketing’s financial position as of December 31, 2008, we previously concluded that Marketing likely does not have the ability to generate cash flows from its business sufficient to meet its obligations as they come due in
the ordinary course through the terms of the Marketing Leases unless it shows significant improvement in its financial results, generates sufficient liquidity through the sale of assets or otherwise, or receives financial support from Lukoil, its parent company.
In the fourth quarter of 2009, Marketing announced a restructuring of its business. Marketing disclosed that the restructuring included the sale of all assets unrelated to the properties it leases from us, the elimination of parent-guaranteed debt, and steps to reduce operating costs. Marketing sold all assets unrelated to the properties it leases from us to its affiliates, LUKOIL Pan Americas L.L.C. and LUKOIL North America LLC. Marketing paid off debt which had been guaranteed by Lukoil with proceeds from the sale of assets to Lukoil affiliates and with financial support from Lukoil. Marketing also announced additional steps to reduce its costs including closing two marketing regions, eliminating jobs and exiting the direct-supplied retail gasoline business. Marketing’s announcement also indicated that LUKOIL North America LLC is the vehicle through which Lukoil expects to concentrate its future growth in the United States.
We believe that Marketing is exiting the direct-supplied retail gasoline business by entering into subleases with petroleum distributors who supply their own petroleum products to the properties leased from us by Marketing. Approximately two hundred fifty retail properties, comprising substantially all of the properties in New England that we lease to Marketing, have been subleased by Marketing to a single distributor. These properties are in the process of being rebranded BP stations and are being supplied petroleum products under a supply contract with BP. In addition, we believe that Marketing recently entered into a sublease with a single distributor in New Jersey covering approximately eighty-five of our properties. We believe that Marketing is seeking subtenants for other significant portions of the portfolio of properties it leases from us.
In connection with its restructuring, Marketing eliminated debt which had been guaranteed by Lukoil with proceeds from the sale of assets to Lukoil affiliates and with financial support from Lukoil, which we believe increased Marketing’s liquidity and improved its balance sheet. However, we cannot predict whether the restructuring announced by Marketing will stem Marketing’s recent history of significant annual operating losses, and whether Marketing will continue to be dependent on financial support from Lukoil to meet its obligations as they become due through the terms of the Marketing Leases. We continue to believe that to the extent Marketing requires continued financial support from Lukoil, it is probable that Lukoil will continue to provide such support. Lukoil is not, however, a guarantor of the Marketing Leases. Even though Marketing is a wholly-owned subsidiary of Lukoil, and Lukoil has provided capital to Marketing in the past, there can be no assurance that Lukoil will provide financial support or additional capital to Marketing in the future. It is reasonably possible that our beliefs regarding the likelihood of Lukoil providing continuing financial support to Marketing will prove to be incorrect or will change as circumstances change. If Marketing should fail to meet its financial obligations to us, including payment of rent, such default could lead to a protracted and expensive process for retaking control of our properties. 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 properties subject to the Marketing Leases.
From time to time we have held discussions with representatives of Marketing regarding potential modifications to the Marketing Leases. These efforts have been unsuccessful to date as we have not yet reached a common understanding with Marketing that would form a basis for modification of the Marketing Leases. From time to time, however, we have been able to agree with Marketing on terms to allow for removal of individual properties from the Marketing Leases as mutually beneficial opportunities arise. We intend to continue to pursue the removal of individual properties from the Marketing Leases, and we remain open to removal of groups of properties; however, there is no fixed agreement in place providing for removal of properties from the Marketing Leases. Accordingly, the removal of properties from the Marketing Leases is subject to negotiation on a case-by-case basis. If Marketing ultimately determines that its business strategy is to exit all or a portion of the properties it leases from us, 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; what composition of properties, if any, may be removed from the Marketing Leases as part of any such modification; or what the terms of any agreement for modification of the Marketing Leases may be. We also cannot accurately predict what actions Marketing or 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 that are removed from the Marketing Leases, whether such removal arises consensually by negotiation or as a result of default by Marketing, and reinvest any realized sales proceeds in new properties. We intend to offer properties removed from the Marketing Leases to replacement tenants or buyers individually, or 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.
As permitted under the terms of the Marketing Leases, Marketing generally can, subject to any contrary terms under applicable third party leases, use each property for any lawful purpose, or for no purpose whatsoever. We believe that as of December 31, 2009, Marketing had removed, or has scheduled removal of, underground gasoline storage tanks and related equipment at approximately one hundred fifty, or 18%, of our properties and we also believe that most of these properties are either vacant or provide negative or marginal contribution to Marketing’s results. Marketing recently agreed to permit us to list with brokers and to show to prospective purchasers and lessees seventy-five of the properties where Marketing has removed, or has scheduled to remove, underground gasoline storage tanks and related equipment, and we are marketing such properties for sale or leasing. As previously discussed, however, there is no agreement between us and Marketing on terms for removal of properties from the Marketing Leases. In those instances where we determine that the best use for a property is no longer as a retail motor fuel outlet, we will seek an alternative tenant or buyer for such property. With respect to properties that are vacant or have had underground gasoline storage tanks and related equipment removed, it may be more difficult or costly to re-let or sell such properties as gas stations because of capital costs or possible zoning or permitting rights that are required and that may have lapsed during the period since gasoline was last sold at the property. Conversely, it may be easier to re-let or sell properties where underground gasoline storage tanks and related equipment have been removed if the property will not be used as a retail motor fuel outlet or if environmental contamination has been remediated.
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 (or an average) basis rather than when payment contractually is due. We record 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 sheets. 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 quarterly basis and such assessments and assumptions are subject to change.
Based on our prior decision to attempt to negotiate with Marketing for a modification of the Marketing Leases to remove approximately 40% of the properties from the Marketing Leases, we previously concluded in March 2008 that we could not reasonably assume that we will collect all of the rent due to us related to those properties for the remainder of the current term of each lease comprising the Marketing Leases. Accordingly, we recorded a $10.5 million non-cash deferred rent receivable reserve as of December 31, 2007 based on the deferred rent receivable recorded related to those properties because we then believed those properties were most likely to be removed from the Marketing Leases as a result of a modification of the Marketing Leases. Providing this $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.) The deferred rent receivable and the related $10.5 million deferred rent receivable reserve have declined since December 31, 2007 as a result of regular monthly lease payments being made by Marketing and the removal of individual properties from the Marketing Leases.
We continue to believe that it is likely that the Marketing Leases will be modified and therefore we cannot reasonably assume that we will collect all of the rent due to us for the entire portfolio of properties we lease to Marketing for the remainder of the current term of each lease comprising the Marketing Leases. However, as a result of Marketing’s restructuring announced in the fourth quarter of 2009 and the potential effect on our properties caused by changes in Marketing’s business model, we reevaluated the entire portfolio of properties we lease to Marketing, and reconstituted the list of properties that we used to estimate the deferred rent receivable reserve as of December 31, 2009. We reviewed the properties that had previously been designated to us by Marketing for removal and which were the subject of our prior decision to attempt to negotiate with Marketing for a modification of the Marketing Leases and from that group of properties, we excluded properties that we no longer considered to be the most likely to be removed from the Marketing Leases, such as those which are subject to significant subleases between Marketing and various distributors (as described above) and third
33
party leased properties. Then, to the group of properties remaining, we added properties most likely to be removed from the Marketing Leases, properties previously designated by Marketing for removal from time to time and properties that we believe are currently negative or marginal contributors to Marketing’s results, such as those that are vacant or have had tanks removed. Based on our reevaluation of the entire portfolio of properties we lease to Marketing, we identified three hundred fifty properties as being the most likely to be removed from the Marketing Leases. Our estimate of the deferred rent receivable reserve as of December 31, 2009 of $9.4 million is based on the deferred rent receivable attributable to these three hundred fifty properties. We have not provided a deferred rent receivable reserve related to the remaining properties subject to the Marketing Leases 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 those remaining properties and that Lukoil will not allow Marketing to fail to perform its rental, environmental and other obligations under the Marketing Leases.
We perform an impairment analysis of the carrying amount of the properties subject to the Marketing Leases from time to time in accordance with GAAP when indicators of impairment exist. During the year ended December 31, 2008, we adjusted the estimated useful lives of certain long-lived assets for properties subject to the Marketing Leases resulting in accelerating the depreciation expense recorded for those assets. 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. During the year ended December 31, 2009, we reduced the carrying amount to fair value (generally estimated as sales value net of disposal costs), and recorded impairment charges aggregating $1.1 million, for certain properties leased to Marketing where the carrying amount of the property exceeded the estimated undiscounted cash flows expected to be received during the assumed holding period and the estimated net sales value expected to be received at disposition. The impairment charges were attributable to general reductions in real estate valuations and, in certain cases, by the removal or scheduled removal of underground storage tanks by Marketing.
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 Marketing Leases and various other agreements with us relating to Marketing’s business and the properties it leases from us (collectively the “Marketing Environmental Liabilities”). However, we continue to have ongoing environmental remediation obligations at one hundred eighty-seven retail sites and for certain pre-existing conditions at six of the terminals we lease to Marketing. If Marketing fails to pay the Marketing Environmental Liabilities, we may ultimately be responsible to pay directly for Marketing Environmental Liabilities as the property owner. We do not maintain pollution legal liability insurance to protect the Company from potential future claims for Marketing Environmental Liabilities. We will be required to accrue for Marketing Environmental Liabilities if we determine that it is probable that Marketing will not meet its obligations and we can reasonably estimate the amount of the Marketing Environmental Liabilities for which we will be directly responsible to pay, or if our assumptions regarding the ultimate allocation methods or share of responsibility that we used to allocate environmental liabilities changes. 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. Accordingly, we did not accrue for the Marketing Environmental Liabilities as of December 31, 2009 or December 31, 2008. Nonetheless, we have determined that the aggregate amount of the Marketing Environmental Liabilities (as estimated by 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 as a result of any such accrual, it is reasonably possible that we may not be in compliance with the existing financial covenants in our Credit Agreement and our Term Loan Agreement. Such non-compliance could result in an event of default under the Credit Agreement and the Term Loan Agreement which, if not cured or waived, could result in the acceleration of our indebtedness under the Credit Agreement and the Term Loan Agreement.
We estimate that as of December 31, 2009, the aggregate Marketing Environmental Liabilities for which we may ultimately be responsible to pay range between $13 million and $20 million, net of expected recoveries from underground storage tank funds of which between $6 million to $9 million relate to the three hundred fifty properties that we identified as the basis for our estimate of the deferred rent receivable reserve. Although we do not have a common understanding with Marketing that would form a basis for modification of the Marketing Leases, if the Marketing Leases are modified to remove any composition of properties, it is not our intention to assume Marketing’s Environmental Liabilities related to the properties that are so removed without adequate consideration from Marketing. Since we generally do not have access to certain site specific information available to Marketing, which is the party responsible for paying and managing its environmental remediation expenses at our properties, our estimates were developed in large part by review of the limited publically available information gathered through electronic databases and freedom of information requests and assumptions we made based on that data and on our own experiences with environmental remediation matters. The actual aggregate
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Marketing Environmental Liabilities and the actual Marketing Environmental Liabilities related to the three hundred fifty properties that we identified as the basis for our estimate of the deferred rent receivable reserve may differ materially from our estimates and we can provide no assurance as to the accuracy of these estimates.
Our belief that to the extent Marketing requires continued financial support from Lukoil, it is probable that Lukoil will continue to provide such support, and that Lukoil will not allow Marketing to fail to perform its obligations under the Marketing Leases are critical assumptions regarding future uncertainties affecting the accounting for matters related to Marketing and the Marketing Leases. Our beliefs are based on various factors, including, among other things, Marketing’s timely payment history despite its trend of reporting large losses, capital contributions made and credit support provided in the past by Lukoil, and the potential damage to Lukoil’s brand and reputation which we do not believe Lukoil would be willing to suffer as a result of default or bankruptcy of one of its wholly owned subsidiaries. Prior to Marketing’s restructuring discussed above, we also based our beliefs on Lukoil’s guarantees of substantially all of Marketing’s outstanding debt which was repaid in the fourth quarter of 2009. We cannot predict whether the restructuring announced by Marketing will stem Marketing’s recent history of significant annual operating losses, and whether Marketing will continue to be dependent on financial support from Lukoil to meet its obligations as they become due through the terms of the Marketing Leases. We cannot predict what actions Marketing or Lukoil will take if, subsequent to the restructuring, Marketing continues to be dependent on financial support from Lukoil to meet its obligations as they become due through the terms of the Marketing Leases.
Should our assessments, assumptions and beliefs prove to be incorrect, including, in particular, our belief that Lukoil will continue to provide financial support to Marketing, or if circumstances change, the conclusions we reached may change relating to (i) whether any or what combination of the properties subject to the Marketing Leases are likely to be removed from the Marketing Leases; (ii) recoverability of the deferred rent receivable for some or all of the properties subject to the Marketing Leases; (iii) potential impairment of the properties subject to the Marketing Leases; 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. Accordingly, we may be required to reserve additional amounts of the deferred rent receivable, record additional impairment charges related to the properties subject to the Marketing Leases, or accrue for Marketing Environmental Liabilities as a result of the potential or actual modification of the Marketing Leases or other factors, 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 and our Term Loan Agreement.
We cannot provide any assurance that Marketing will continue to meet its rental, environmental or other obligations under the Marketing Leases. In the event that Marketing does 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 rental, environmental or other obligations and we accrue for certain of such liabilities; if we are unable to promptly re-let or sell the properties upon recapture from 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 or stock price may be materially adversely affected.
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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 and AFFO are helpful to investors in measuring our performance because both FFO and AFFO exclude various items included in GAAP net earnings that do not relate to, or are not indicative of, our fundamental operating performance. FFO excludes various items 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 typically include the impact of deferred rental revenue (straight-line rental revenue), the net amortization of above-market and below-market leases and income recognized from direct financing leases on our recognition of revenues from rental properties (collectively, the “Revenue Recognition Adjustments”), as offset by the impact of related collection reserves. GAAP net earnings and FFO from time to time may also include impairment charges and/or income tax benefits. Deferred rental revenue results primarily from fixed rental increases scheduled under certain operating 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 (or an average) basis rather than when payment is contractually 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. Income from direct financing leases is recognized over the lease term using the effective interest method which produces a constant periodic rate of return on the net investment in the leased property. Impairment of long-lived assets represents charges taken to write-down real estate assets to fair value estimated when events or changes in circumstances indicate that the carrying amount of the property may not be recoverable. In prior periods, income tax benefits have been 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.
Management pays particular attention to AFFO, a supplemental non-GAAP performance measure that we define as FFO less Revenue Recognition Adjustments, impairment charges and income tax benefit. In management’s view, AFFO provides a more accurate depiction than FFO of our fundamental operating performance related to: (i) the impact of scheduled rent increases under certain operating leases; (ii) rental revenue from acquired in-place leases; (iii) the impact of rent due from direct financing leases, (iv) our rental operating expenses (exclusive of impairment charges); and (v) 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 $10.5 million non-cash deferred rent receivable reserve recorded as of December 31, 2007 for approximately 40% of the properties leased to Marketing under the Marketing Leases. (See “— General — Marketing and the Marketing Leases” above for additional information.) If the applicable amount of the non-cash deferred rent receivable 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 $38.0 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 $3.6 million; and FFO for 2008 would have increased by $2.9 million and for 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
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of the impact of the non-cash deferred rent receivable reserve on our results of operations and are reconciled below (in thousands):
Non-adjusted
Reserve
AsAdjusted
44,388
10,206
38,048
48,003
2009 and 2008 Acquisitions
On September 25, 2009 we acquired the real estate assets and improvements of thirty-six gasoline stations and convenience store properties located primarily in Prince George’s County Maryland, for $49.0 million from White Oak Petroleum LLC (“White Oak”) for cash with $24.5 million draw under our existing Credit Agreement and $24.5 provided by the three-year Term Loan Agreement entered into on that date.
The real estate assets were acquired in a simultaneous transaction among ExxonMobil, White Oak and us, whereby White Oak acquired the real estate assets and the related businesses from ExxonMobil and simultaneously completed a sale/leaseback of the real estate assets of all thirty-six properties with us. We entered into a unitary triple-net lease for the real estate assets with White Oak which has an initial term of twenty years and provides White Oak with options for three renewal terms of ten years each extending to 2059. The unitary triple-net lease provides for annual rent escalations of 2½% per year. White Oak is responsible to pay for all existing and future environmental liabilities related to the properties.
In 2009 we also exercised our fixed price purchase option for one leased property and purchased three properties. In 2008 we exercised our fixed price purchase options for three leased properties and purchased six properties.
RESULTS OF OPERATIONS
Year ended December 31, 2009 compared to year ended December 31, 2008
Revenues from rental properties included in continuing operations increased by $1.7 million to $84.5 million for the year ended December 31, 2009, as compared to $82.8 million for 2008. We received approximately $60.0 million for 2009 and 2008, from properties leased to Marketing under the Marketing Leases. We also received rent of $22.5 million for 2009 and $20.3 million for 2008 from other tenants. The increase in rent received was primarily due to rent escalations, and rental income from properties acquired, partially offset by the effect of lease expirations. In accordance with GAAP, we recognize rental revenue in amounts which vary from the amount of rent contractually due or received during the periods presented. As a result, revenues from rental properties include non-cash adjustments recorded for deferred rental revenue due to the recognition of rental income on a straight-line (or an average) basis over the current lease term, net amortization of above-market and below-market leases and recognition of rental income recorded under a direct financing lease using the effective interest method which produces a constant periodic rate of return on the net investment in the leased property (the “Revenue Recognition Adjustments”). Rental revenue included in continuing operations includes Revenue Recognition Adjustments of $2.0 million for the year ended December 31, 2009, which decreased by $0.5 million for the year as compared to $2.5 million in 2008.
Rental property expenses, which are primarily comprised of rent expense and real estate and other state and local taxes, included in continuing operations were $10.9 million for 2009, as compared to $11.5 million for 2008. The decrease in rental property expenses is due to a reduction in rent expense incurred as a result of third party lease expirations as compared to the prior year.
Environmental expenses, net of estimated recoveries from state underground storage tank (“UST” or “USTs”) funds included in continuing operations for 2009 were $8.8 million, as compared to $7.4 million for 2008. The increase was due to a $2.4 million net increase in environmental related litigation reserves, which was partially offset by a reduction in legal fees of $0.2 million and a reduction in estimated environmental remediation costs of $0.7 million, respectively. The increase in environmental litigation reserves was principally attributed to settlement of twenty-seven MTBE cases in which we were named a defendant. See Environmental Matters – Environmental Litigation below for additional information related to our
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defense of MTBE cases. Environmental expenses vary from period to period and, accordingly, undue reliance should not be placed on the magnitude or the direction of change in reported environmental expenses for one period as compared to prior periods.
General and administrative expenses for 2009 were $6.8 million, which was comparable to 2008.
Depreciation and amortization expense included in continuing operations for 2009 was $11.0 million, as compared to $11.7 million for 2008. The decrease was primarily due to the effect of assets becoming fully depreciated, dispositions of real estate and lease expirations.
The $1.1 million of impairment charges recorded in the year ended December 31, 2009 was attributable to general reductions in real estate valuations and, in certain cases, the removal or scheduled removal of underground storage tanks by Marketing.
As a result, total operating expenses increased by approximately $1.2 million for 2009 as compared to 2008.
Other income, net, included in income from continuing operations increased by $0.2 million to $0.6 million for 2009, as compared to $0.4 million for 2008. Gains on dispositions of real estate included in discontinued operations were $5.3 million for 2009 as compared to $2.4 million for 2008. Gains on dispositions of real estate in 2009 increased by an aggregate of $2.7 million to $5.5 million, as compared to $2.8 million for the prior year. For 2009, there were eight property dispositions and two partial land takings under eminent domain. For 2008, there were eleven property dispositions, four partial land takings under eminent domain. Property dispositions for 2009 and 2008 include four and seven properties, respectively, that were mutually agreed to be removed from the Marketing Leases prior to their scheduled lease expiration. Other income, net and gains on disposition of real estate vary from period to period and, accordingly, undue reliance should not be placed on the magnitude or the direction of change in reported gains for one period as compared to prior periods.
Interest expense was $5.1 million for 2009, as compared to $7.0 million for 2008. The decrease was due to lower average interest rates in 2009 on our floating rate borrowings, partially offset by increased average borrowings outstanding relating to the acquisition of properties in the third quarter of 2009.
As a result, net earnings were $47.0 million for 2009, as compared to $41.8 million for 2008, an increase of 12.4%, or $5.2 million. Earnings from continuing operations were $41.4 million for 2009, as compared to $38.8 million for 2008, an increase of 6.7%, or $2.6 million. For the same period, FFO increased by 3.3% to $52.6 million, as compared to $50.9 million for prior year period and AFFO increased by 7.0%, or $3.4 million, to $51.7 million, as compared to $48.3 million for 2008. The increase in FFO for 2009 was primarily due to the changes in net earnings described above but excludes a $0.9 million decrease in depreciation and amortization expense and a $2.7 million increase in gains on dispositions of real estate. The increase in AFFO for 2009 also excludes a $0.5 million reduction in Rental Revenue Adjustments which cause our reported revenues from rental properties to vary from the amount of rent payments contractually due or received by us during the periods presented, and a $1.1 million impairment charge recorded in 2009 (which are included in net earnings and FFO but are excluded from AFFO).
Diluted earnings per share were $1.90 per share for 2009, an increase of $0.21 per share, as compared to $1.69 per share for 2008. Diluted FFO per share for 2009 was $2.12 per share, an increase of $0.06 per share, as compared to 2008. Diluted AFFO per share for 2009 was $2.09 per share, an increase of $0.14 per share, as compared to 2008.
Year ended December 31, 2008 compared to year ended December 31, 2007
Revenues from rental properties included in continuing operations increased by $3.6 million to $82.8 million for the year ended December 31, 2008, as compared to $79.2 million for 2007. We received approximately $60.0 million for 2008, and $59.3 million for 2007, from properties leased to Marketing under the Marketing Leases. We also received rent of $20.3 million for 2008 and $16.3 million for 2007 from other tenants. The increase in rent received was primarily due to rent escalations, and rental income from properties acquired, partially offset by the effect of lease expirations. In accordance with GAAP, we recognize rental revenue in amounts which vary from the amount of rent contractually due or received during the periods presented As a result revenues from rental properties for 2008 and 2007 include non-cash Revenue Recognition Adjustments recorded due to the recognition of rental income on a straight-line (or an average) basis over the current lease term and net amortization of above-market and below-market leases. Rental revenue included in continuing operations
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includes Revenue Recognition Adjustments of $2.5 million for the year ended December 31, 2008, which decreased by $1.1 million for the year as compared to $3.6 million in 2007.
Rental property expenses, which are primarily comprised of rent expense and real estate and other state and local taxes, included in continuing operations were $11.5 million for 2008, as compared to $10.9 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 UST funds included in continuing operations 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 estimated environmental remediation costs, and a $0.4 million net decrease in environmental related litigation reserves and legal fees as compared to the prior year period. Environmental expenses vary from period to period and, accordingly, undue reliance should not be placed on the magnitude or the direction of change in reported environmental expenses for one period as compared to prior periods.
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.
Allowance for deferred rent receivable reported in continuing operations and discontinued operations were $10.2 million and $0.3 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 — Marketing and the Marketing Leases” above for additional information.)
Depreciation and amortization expense included in continuing operations for 2008 was $11.7 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 $8.1 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. Gains on disposition of real estate vary from period to period and, accordingly, undue reliance should not be placed on the magnitude or the direction of change in reported gains for one period as compared to prior periods.
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 $38.8 million for 2008, as compared to $27.8 million for 2007, an increase of 39.6%, or $11.0 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 $1.6 million reduction in Revenue Recognition Adjustments which cause our reported revenues from rental properties to vary from the amount of rent payments contractually due or received by us during the periods presented and a $10.5 million deferred rent receivable reserve 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 $2.06 per share, an increase of $0.55 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.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are the cash flows from our operations, funds available under a revolving credit agreement that expires in March 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. There can be no assurance, however, that our business operations or liquidity will not be adversely affected by Marketing and the Marketing Leases discussed in “General - Marketing and the Marketing Leases” above or the other risk factors described in our filings with the SEC.
Disruptions 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. As a result of the current 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 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.
As of December 31, 2009, borrowings under the Credit Agreement, described below, were $151.2 million, bearing interest at a weighted-average effective rate of 3.0% per annum. The weighted-average effective rate is based on $106.2 million of LIBOR rate borrowings floating at market rates plus a margin of 1.25% and $45.0 million of LIBOR rate borrowings effectively fixed at 5.44% by an interest rate Swap Agreement, described below, plus a margin of 1.25%. We are party to 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. We had $23.8 million available under the terms of the Credit Agreement as of December 31, 2009. 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, 2009, the applicable margin will remain at 0.0% for base rate borrowings and 1.25% for LIBOR rate borrowings.
Subject to the terms of the Credit Agreement and continued compliance with the covenants therein, 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 $125.0 million to $300.0 million. 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 financial covenants such as those requiring us to maintain minimum tangible net worth, leverage ratios and coverage ratios which may limit our ability to incur debt or pay dividends The Credit Agreement contains customary events of default, including change of control, failure to maintain REIT status and a material adverse effect on our business, assets, prospects or condition. Any event of default, if not cured or waived, could result in the acceleration of our indebtedness under our Credit Agreement and
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could also give rise to an event of default and consequent acceleration of our indebtedness under our Term Loan Agreement described below.
We are party to 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, 2009, $45.0 million of our LIBOR based borrowings under the Credit Agreement bear interest at an effective rate of 6.69%.
In order to partially finance the acquisition of thirty-six properties in September 2009, we entered into a $25.0 million three-year Term Loan Agreement with TD Bank (the “Term Loan Agreement”) which expires in September 2012. The Term Loan Agreement bears interest at a rate equal to a thirty day LIBOR rate (subject to a floor of 0.4%) plus a margin of 3.1%. As of December 31, 2009, borrowings under the Term Loan Agreement were $24.4 million bearing interest at a rate of 3.5% per annum. The Term Loan Agreement provides for annual reductions of $0.8 million in the principal balance with a $22.2 million balloon payment due at maturity. The Term Loan Agreement contains customary terms and conditions, including financial covenants such as those requiring us to maintain minimum tangible net worth, leverage ratios and coverage ratios which may limit our ability to incur debt or pay dividends. The Term Loan Agreement contains customary events of default, including change of control, failure to maintain REIT status and a material adverse effect on our business, assets, prospects or condition. Any event of default, if not cured or waived, could result in the acceleration of our indebtedness under the Term Loan Agreement and could also give rise to an event of default and consequent acceleration of our indebtedness under our Credit Agreement.
Since we generally lease our properties on a triple-net basis, we do not incur significant capital expenditures other than those related to acquisitions. As part of our overall business 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. Capital expenditures, including acquisitions, for 2009, 2008 and 2007 amounted to $55.3 million, $6.6 million and $90.6 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 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 and our Term Loan Agreement prohibit the payment of dividends during certain events of default. Dividends paid to our shareholders aggregated $46.8 million, $46.3 million and $45.7 million for 2009, 2008 and 2007, respectively, and were paid on a quarterly basis during each of those years. We presently intend to pay common stock dividends of $0.475 per share each quarter ($1.90 per share, or $47.2 million, on an annual basis including dividend equivalents paid on outstanding restricted stock units), and commenced doing so with the quarterly dividend declared in August 2009. Due to contingencies related to Marketing and the Marketing Leases discussed in “General - Marketing and the Marketing Leases” above, there can be no assurance that we will be able to continue to pay dividends at the rate of $0.475 per share per quarter, if at all.
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CONTRACTUAL OBLIGATIONS
Our significant contractual obligations and commitments are comprised of borrowings under the Credit Agreement and the Term Loan 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, 2009 are summarized below (in thousands):
LESSTHAN-ONE YEAR
ONE-TOTHREEYEARS
THREETOFIVEYEARS
MORETHANFIVEYEARS
Operating leases
23,782
6,673
9,473
4,678
2,958
Borrowing under the Credit Agreement (a)(b)
151,200
Borrowings under the Term Loan Agreement (a)
24,370
780
23,590
Estimated environmental remediation expenditures (c)
16,527
5,951
2,388
2,237
Estimated recoveries from state underground storage tank funds (c)
(3,882
(1,298
(1,491
(690
(403
Estimated net environmental remediation expenditures (c)
12,645
4,653
4,460
1,698
1,834
211,997
12,106
188,723
6,376
4,792
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 and continued compliance with the covenants therein, 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 managing the operations conducted at these properties and 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 $13.0 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 — 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 accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. 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 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, income under direct financing leases, 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 in “Item 8. Financial Statements and Supplementary Data - 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 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 $27.5 million recorded as of December 31, 2009 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 $9.4 million reserve as of December 31, 2009 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 specifically provided is effectively recognized in subsequent periods when payment is due under the contractual payment terms. (See Marketing and the Marketing Leases in “— General — Marketing and the Marketing Leases” above for additional information.)
Direct Financing Lease — Income under direct financing leases is included in revenues from rental properties and is recognized over the lease term using the effective interest rate method which produces a constant periodic rate of return on the net investment in the leased property. Net investment in direct financing lease represents the investment in leased assets accounted for as a direct financing lease. The investment is reduced by the receipt of lease payments, net of interest income earned and amortized over the life of the lease.
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
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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 material adjustments to the amounts recorded for environmental litigation accruals, environmental remediation liabilities and related assets. (See “— General — 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 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 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.
Recent Accounting Developments and Amendments to the Accounting Standards Codification — In September 2006, the FASB amended the accounting standards related to fair value measurements of assets and liabilities (the “Fair Value Measurements Amendment”). The Fair Value Measurements Amendment generally applies whenever other standards require assets or liabilities to be measured at fair value. The Fair Value Measurements Amendment was effective in fiscal years beginning after November 15, 2007. The FASB subsequently delayed the effective date of the Fair Value Measurements Amendment by one year for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis to fiscal years beginning after November 15, 2008. The adoption of the Fair Value Measurements Amendment in January 2008 and the adoption of the provisions of the Fair Value Measurements Amendment for nonfinancial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis in January 2009 did not have a material impact on our financial position and results of operations.
In December 2007, the FASB amended the accounting standards related to business combinations (the Business Combinations Amendment”), affecting 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. The Business Combinations Amendment 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 did not result in a write-off of acquisition related transactions costs associated with transactions not yet consummated.
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
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within applicable standards, and to either regulatory or contractual closure (“Closure”). 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, 2009, we have regulatory approval for remediation action plans in place for two hundred forty-five (95%) of the two hundred fifty-eight 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-two properties where we have received “no further action” letters.
It is possible that our assumptions regarding the ultimate allocation methods or 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 or stock price. (See “— General — 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 tendered the matter for defense and indemnification from Marketing. Marketing denied its liability for the claim and its responsibility to defend against, and indemnify us for, the claim. We filed third party claims against Marketing for indemnification in this matter. The property owner’s claim for reimbursement of costs incurred and our claim for indemnification by Marketing were actively litigated, leading to a trial held before a judge. The trial court issued its decision in August 2009 under which the Company and Marketing were held jointly and severally responsible to the current property owner for the costs incurred by the owner to remove USTs and remediate contamination at the site, but, as between the Company and Marketing, Marketing was accountable for such costs under the indemnification provisions of the Master Lease. The order on the trial court’s decision was entered in February 2010, making such decision final for purposes of initiating the limited period of time following which appeal may be taken. We believe that Marketing will appeal the decision; however, we believe the probability that Marketing will not be ultimately responsible for the claim for clean-up costs incurred by the current property owner is remote. 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 matter.
We have also agreed to provide limited environmental indemnification to Marketing, capped at $4.25 million, for certain pre-existing conditions at six of the terminals we own and lease to Marketing. Under the indemnification agreement, Marketing is required to pay (and has paid) the first $1.5 million of costs and expenses incurred in connection with remediating any such pre-existing conditions, Marketing shares 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, 2009 and December 31, 2008 in connection with this indemnification agreement. Under the Master Lease, we continue to have additional ongoing environmental remediation obligations at 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 or 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. If Marketing fails to pay them, we may ultimately be responsible to directly pay for environmental liabilities as the property owner. 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 and we can reasonably estimate the amount of the Marketing Environmental Liabilities for which we will be directly responsible to pay.
Based on our assessment of Marketing’s financial condition and our assumption that Lukoil would not allow Marketing to fail to perform its obligations under the Marketing Leases 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 our analysis of information currently available to us described in more detail above) (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 and our Term Loan Agreement. Such non-compliance could result in an event of default under the Credit Agreement and our Term Loan Agreement which, if not cured or waived, could result in the acceleration of our indebtedness under the Credit Agreement and the Term Loan Agreement. (See “— General — 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. Environmental accruals are based on estimates which are subject to significant change, and are adjusted as the remediation treatment progresses, as circumstances change and as environmental contingencies become more clearly defined and reasonably estimable.
As of December 31, 2009, we had accrued $12.6 million as management’s best estimate of the net fair value of reasonably estimable environmental remediation costs which is comprised of $16.5 million of estimated environmental obligations and liabilities offset by $3.9 million of estimated recoveries from state UST remediation funds, net of allowance. Environmental expenditures, net of recoveries from UST funds, were $4.7 million $5.0 million and $4.7 million, respectively, for 2009, 2008, and 2007. For 2009, 2008 and 2007 estimated environmental remediation cost and accretion expense included in environmental expenses in continuing operations in our consolidated statements of operations amounted to $3.9 million, $4.6 million and $5.1 million, respectively, which amounts were net of probable recoveries from state UST remediation funds.
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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 $4.5 million. Accordingly, the environmental accrual as of December 31, 2009 was increased by $1.8 million, net of assumed recoveries and before inflation and present value discount adjustments. The resulting net environmental accrual as of December 31, 2009 was then further increased by $1.0 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 $2.1 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, 2009 would have increased by $0.2 million and $0.1 million, respectively, for an aggregate increase in the net environmental accrual of $0.3 million. However, the aggregate net change in estimated environmental estimates expense recorded during the year ended December 31, 2009 would not have changed significantly if these changes in the assumptions were made effective December 31, 2008.
In view of the uncertainties associated with environmental expenditures, contingencies concerning 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 — 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 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, 2009 and December 31, 2008, we had accrued $3.8 million and $1.7 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. Matters related to the Lower Passaic River and certain MTBE multi-district litigation cases, in particular, for which accruals have been provided in part, could cause a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price. See “Item 3. Legal Proceedings” for additional information with respect these and other pending environmental lawsuits and claims.
The Lower Passaic River
In September 2003, we received a directive (the “Directive”) from 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 Directive calls for an assessment of the natural resources that have been injured by the discharges into the Lower Passaic River and 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. There has been no material activity with respect to the NJDEP Directive since early after its issuance. The 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. We are a member of a Cooperating Parties Group which has agreed to take
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over from the United States Environmental Protection Agency (“EPA”) performance of a remedial investigation and feasibility study intended to evaluate alternative remedial actions with respect to alleged damages to the Lower Passaic River. The remedial investigation and feasibility study 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.
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 Lower Passaic River. In February 2009, certain of these defendants filed third-party complaints against approximately three hundred additional parties, including us, seeking contribution for a pro-rata share of response costs, cleanup, and other damages. A Special Master has been appointed by the court to try and design an alternative dispute resolution process for achieving a global resolution of this litigation.
We believe that ChevronTexaco is contractually obligated to indemnify us, pursuant to an indemnification agreement for most, if not all of the conditions at the property identified by the NJDEP and the EPA. 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.
As of December 31, 2009, we are defending against fifty-three lawsuits brought by or on behalf of private and public water providers and governmental agencies in Connecticut, Florida, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Vermont, Virginia, and West Virginia. These cases allege various theories of liability due to contamination of groundwater with MTBE as the basis for claims seeking compensatory and punitive damages, and name as defendant approximately fifty petroleum refiners, manufacturers, distributors and retailers of MTBE, or gasoline containing MTBE. Pursuant to consolidation procedures under federal law, most of the MTBE cases originally filed were transferred to the United States District Court for the Southern District of New York for coordinated Multi-District Litigation proceedings. We are presently named as a defendant in thirty-nine out of more than one hundred cases that have been consolidated in this Multi-District Litigation, and we are also named as a defendant in fourteen related MTBE cases pending in the Supreme Court of New York, Nassau County. A majority of the primary defendants entered into global settlement agreements which settled one hundred two individual cases brought by the same law firm on behalf of various plaintiffs. We remain a defendant in twenty-seven of these one hundred two cases. We are also a defendant in twenty-five other individual MTBE cases brought by another firm, and we are also a defendant in a final MTBE case in the consolidated Multi-District Litigation brought by the State of New Jersey.
In 2009, we provided litigation reserves of $2.3 million relating to a majority of the MTBE cases pending against us. However, we are still unable to estimate our liability for a minority of the cases pending against us. Further, notwithstanding that we have provided a litigation reserve as to certain of the MTBE cases, there remains uncertainty as to the accuracy of the allegations in these cases as they relate to us, our defenses to the claims, our rights to indemnification or contribution from Marketing, and the aggregate possible amount of damages for which we may be held liable.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Prior to April 2006, when we entered into the 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.
We are exposed to interest rate risk, primarily as a result of our $175.0 million Credit Agreement and our $25.0 million Term Loan Agreement. We use borrowings under the Credit Agreement to finance acquisitions and for general corporate purposes. We used borrowings under the Term Loan Agreement to partially finance an acquisition in September 2009. Total borrowings outstanding as of December 31, 2009 under the Credit Agreement and the Term Loan Agreement were $151.2 million and $24.4 million, respectively, bearing interest at a weighted-average rate of 1.8% per annum, or a weighted-average effective rate of 3.1% including the impact of the Swap Agreement discussed below. The weighted-average effective rate is based on (i) $106.2 million of LIBOR rate borrowings outstanding under the Credit Agreement floating at market rates plus a margin of 1.25%, (ii) $45.0 million of LIBOR rate borrowings outstanding under the Credit Agreement effectively fixed at 5.44% by the Swap Agreement plus a margin of 1.25% and (iii) $24.4 million of LIBOR based borrowings outstanding under
the Term Loan Agreement floating at market rates (subject to a 30 day LIBOR floor of 0.4%) plus a margin of 3.1%. 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, 2009, the applicable margin will remain at 0.0% for base rate borrowings and 1.25% for LIBOR rate borrowings.
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, 2009 has increased significantly, as compared to December 31, 2008 primarily as a result of the $24.5 million drawn under the Credit Agreement to partially finance an acquisition in September 2009 and the $24.5 million borrowings outstanding under the $25.0 million three-year Term Loan Agreement entered into in September 2009. 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, 2009, $45.0 million of our LIBOR based borrowings outstanding under the Credit Agreement bear interest at an effective rate of 6.69%. As a result, we are, and will be, exposed to interest rate risk to the extent that our aggregate borrowings floating at market rates exceed the $45.0 million notional amount of the Swap Agreement. As of December 31, 2009, our aggregate borrowings floating at market rates exceeded the notional amount of the Swap Agreement by $130.6 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. 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.
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 aggregate average outstanding borrowings under the Credit Agreement and the Term Loan Agreement projected at $178.8 million for 2010, an increase in market interest rates of 0.5% for 2010 would decrease our 2010 net income and cash flows by $0.7 million. This amount was determined by calculating the effect of a hypothetical interest rate change on our aggregate borrowings floating at market rates that is not covered by our $45.0 million interest rate Swap Agreement and assumes that the $154.9 million average outstanding borrowings under the Credit Agreement during the fourth quarter of 2009 plus the $23.9 million average scheduled outstanding borrowings for 2010 under the Term Loan Agreement is indicative of our future average borrowings for 2010 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 and decreases in the outstanding amount under our Term Loan 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 currently 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, 2009, 2008 and 2007
51
Consolidated Statements of Comprehensive Income for the years ended December 31, 2009, 2008 and 2007
Consolidated Balance Sheets as of December 31, 2009 and 2008
52
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
53
Notes to Consolidated Financial Statements (including the supplementary financial information contained in Note 9 “Quarterly Financial Data”)
54
Report of Independent Registered Public Accounting Firm
80
GETTY REALTY CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
2009
2007
Operating expenses:
Rental property expenses
10,851
11,482
10,864
Environmental expenses, net
8,799
7,365
8,189
General and administrative expenses
6,849
6,831
6,669
Allowance for deferred rent receivable
Depreciation and amortization expense
10,975
11,726
9,600
Total operating expenses
38,609
37,404
45,528
Operating income
45,930
45,398
33,679
Other income, net
585
403
1,923
Interest expense
(5,091
(7,034
(7,760
Discontinued operations:
Earnings from operating activities
299
645
1,487
5,326
2,398
4,565
Basic and diluted earnings per common share:
.23
.12
.24
Weighted average shares outstanding:
Basic
24,766
24,765
Stock options
Diluted
The accompanying notes are an integral part of these consolidated financial statements.
GETTY REALTY CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands)
Other comprehensive loss:
Net unrealized gain (loss) on interest rate swap
1,303
(1,997
(1,478
Comprehensive Income
48,352
39,813
32,416
GETTY REALTY CORP. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except share data)
DECEMBER 31,
ASSETS:
Real Estate:
Land
252,083
221,540
Buildings and improvements
251,791
252,027
Less — accumulated depreciation and amortization
(136,669
(129,322
Real estate, net
367,205
344,245
Net investment in direct financing lease
19,156
Deferred rent receivable (net of allowance of $9,389 at December 31, 2009 and $10,029 at December 31, 2008)
27,481
26,718
Cash and cash equivalents
3,050
2,178
Recoveries from state underground storage tank funds, net
3,882
4,223
Mortgages and accounts receivable, net
2,402
1,533
Prepaid expenses and other assets
9,696
8,916
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Borrowings under credit line
Term loan
Environmental remediation costs
17,660
Dividends payable
11,805
11,669
Accounts payable and accrued expenses
21,301
22,337
Total liabilities
225,203
181,916
Commitments and contingencies (notes 2, 3, 5 and 6)
Shareholders’ equity:
Common stock, par value $.01 per share; authorized 50,000,000 shares; issued 24,766,376 at December 31, 2009 and 24,766,166 at December 31, 2008
248
Paid-in capital
259,459
259,069
Dividends paid in excess of earnings
(49,045
(49,124
Accumulated other comprehensive loss
(2,993
(4,296
Total shareholders’ equity
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 from dispositions of real estate
Deferred rental revenue, net of allowance
(763
(1,803
(3,112
Amortization of above-market and below-market leases
(1,217
(790
(1,047
Amortization of investment in direct financing lease
(85
Accretion expense
884
956
974
Stock-based employee compensation expense
390
326
492
Changes in assets and liabilities:
724
827
(379
(724
(5
339
423
(130
(2,400
(2,217
(80
1,640
(1,031
(249
Net cash flow provided by operating activities
52,532
47,584
44,516
CASH FLOWS FROM INVESTING ACTIVITIES:
Property acquisitions and capital expenditures
(55,317
(6,579
(90,636
Proceeds from dispositions of real estate
6,939
5,295
8,420
(Increase) decrease in cash held for property acquisitions
(1,623
2,397
(2,079
Collection (issuance) of mortgages receivable, net
(145
(55
267
Net cash flow provided by (used in) investing activities
(50,146
1,058
(84,028
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under credit agreement, net
20,950
(2,250
87,500
Borrowings under term loan agreement, net
Cash dividends paid
(46,834
(46,294
(45,650
Credit agreement origination costs
(863
Cash paid in settlement of restricted stock units
(405
Repayment of mortgages payable, net
(194
Proceeds from stock options exercised
Net cash flow provided by (used in) financing activities
(1,514
(48,535
40,388
Net increase in cash and cash equivalents
872
107
876
Cash and cash equivalents at beginning of period
2,071
1,195
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information
Cash paid (refunded) during the year for:
Interest
5,046
6,728
7,021
Income taxes, net
488
Recoveries from state underground storage tank funds
(1,411
(1,511
(1,644
6,154
6,542
6,314
GETTY REALTY CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: 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 intercompany accounts and transactions have been eliminated.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). In 2009, the Financial Accounting Standards Board (“FASB”) established the Accounting Standards Codification, as amended (the “ASC”), as the sole reference source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP. The Company adopted the codification during the quarter ended September 30, 2009 which had no impact on the Company’s financial position, results of operations or cash flows.
Use of Estimates, Judgments and Assumptions: The financial statements have been prepared in conformity with GAAP, which requires the Company’s management to make 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, net investment in direct financing lease, 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 2009, 2008 and 2007 are reclassified as discontinued operations. The operating results for the years ended 2008 and 2007 of such properties sold in 2009 have also been reclassified to discontinued operations to conform to the 2009 presentation. Discontinued operations for the year ended December 31, 2009, 2008 and 2007 are primarily comprised of gains or losses from property dispositions. The revenue from rental properties and expenses related to these properties are insignificant for the each of the three years ended December 31, 2009, 2008 and 2007.
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 and direct financing leases with tenants. Minimum lease rentals and lease termination payments from operating leases 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. 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. 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.
Direct Financing Lease: Income under a direct financing lease is included in revenues from rental properties and is recognized over the lease term using the effective interest rate method which produces a constant periodic rate of return on the net investment in the leased property. Net investment in direct financing lease represents the investment in leased assets accounted for as a direct financing lease. The investment in direct financing lease is increased for interest income earned and amortized over the life of the lease and reduced by the receipt of lease payments.
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 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 on January 1, 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
55
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 are included in the consolidated statements of comprehensive income and 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 gives effect, utilizing the two-class method, to the potential dilution from the issuance of common shares in settlement of restricted stock units (“RSUs” or “RSU”) which provide for non-forfeitable dividend equivalents equal to the dividends declared per common share. Basic earnings per common share is computed by dividing net earnings less dividend equivalents attributable to RSUs by the weighted-average number of common shares outstanding during the year. Diluted earnings per common share also gives effect to the potential dilution from the exercise of stock options utilizing the treasury stock method. (in thousands)
Year ended December 31,
Less dividend equivalents attributable to restricted stock units outstanding
(162
(117
Earnings from continuing operations attributable to common shareholders used for basic earnings per share calculation
41,262
38,650
27,757
Discontinued operations
Net earnings attributable to common shareholders used for basic earnings per share calculation
46,887
41,693
33,809
Weighted-average number of common shares outstanding:
Restricted stock units outstanding at the end of the period
86
62
Stock-Based Compensation: Compensation cost for the Company’s stock-based compensation plans using the fair value method was $390,000, $326,000 and $492,000 for the years ended 2009, 2008 and 2007, 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.
Recent Accounting Developments and Amendments to the Accounting Standards Codification: In September 2006, the FASB amended the accounting standards related to fair value measurements of assets and liabilities (the “Fair Value Measurements Amendment”). The Fair Value Measurements Amendment generally applies whenever other standards require assets or liabilities to be measured at fair value. The Fair Value Measurements Amendment was effective in fiscal years beginning after November 15, 2007. Subsequently, the FASB delayed the effective date of the Fair Value Measurements Amendment 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 the Fair Value Measurements Amendment in January 2008 and the adoption of the provisions of the Fair Value Measurements Amendment for nonfinancial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis in January 2009 did not have a material impact on the Company’s financial position and results of operations.
In December 2007, the FASB amended the accounting standards related to business combinations (the “Business Combinations Amendment”) affecting 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. The Business Combinations Amendment 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 the Business Combinations Amendment by the Company in January 2009 did not result in a write-off of acquisition related transactions costs associated with transactions not yet consummated.
56
The FASB amended the accounting standards related to determining earnings per share (the “Earnings Per Share Amendment”). Due to the adoption of the “Earnings Per Share Amendment” effective as of January 1, 2009 and retrospectively applied to the years ended 2008 and 2007, basic earnings per common share gives effect, utilizing the two-class method, to the potential dilution from the issuance of common shares in settlement of restricted stock units (“RSUs” or “RSU”) which provide for non-forfeitable dividend equivalents equal to the dividends declared per common share. The adoption of the “Earnings Per Share Amendment” did not have a material impact in the determination of earnings per common share for the years ended December 31, 2009, 2008 and 2007.
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 managing the operations conducted at these properties and for the payment of taxes, maintenance, repair, insurance and other operating expenses related to these properties. In those instances where the Company determines that the best use for a property is no longer as a retail motor fuel outlet, the Company will seek an alternative tenant or buyer for the property. The Company leases or subleases approximately twenty of its properties for 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, Ohio, Arkansas, Illinois, and North Dakota.
As of December 31, 2009, Getty Petroleum Marketing Inc. (“Marketing”) leased from the Company, eight hundred forty properties. Eight hundred thirty of the properties are leased to Marketing under a unitary master lease (the “Master Lease”) and ten properties are leased under supplemental leases (collectively with the Master Lease, the “Marketing Leases”). 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, therefore, Marketing’s exercise of any renewal option can only be on an “all or nothing” basis. The supplemental leases have initial terms of varying expiration dates. (See note 11 for additional information regarding the portion of the Company’s financial results that are attributable to Marketing. See note 3 for additional information regarding contingencies related to Marketing and the Marketing Leases).
The Company estimates that Marketing makes annual real estate tax payments for properties leased under the Marketing Leases of approximately $13,000,000. 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 Company’s consolidated financial statements.
Revenues from rental properties included in continuing operations for the years ended December 31, 2009, 2008 and 2007 were $84,539,000, $82,802,000 and $79,207,000, respectively, of which $59,956,000, $60,047,000 and $59,259,000, respectively, were received from Marketing under the Marketing Leases and $2,236,000, $2,113,000 and $1,580,000, respectively, were received from other tenants for reimbursement of real estate taxes. In accordance with GAAP, the Company recognizes rental revenue in amounts which vary from the amount of rent contractually due or received during the periods presented. As a result, revenues from rental properties include non-cash adjustments recorded for deferred rental revenue due to the recognition of rental income on a straight-line (or an average) basis over the current lease term, net amortization of above-market and below-market leases and recognition of rental income recorded under a direct financing lease using the effective interest method which produces a constant periodic rate of return on the net investment in the leased property (the “Revenue Recognition Adjustments”). Revenues from rental properties included in continuing operations for the years ended December 31, 2009, 2008 and 2007 include Revenue Recognition Adjustments of $2,026,000, 2,537,000 and $3,605,000, respectively. In the year ended December 31, 2007, the Company provided a non-cash $10,494,000 reserve for a portion of the deferred rent receivable recorded as of December 31, 2007 related to the Marketing Leases, $10,206,000 of which is included in earnings from continuing operations and $288,000 of which is included in earnings from discontinued operations. (See footnote 3 for additional information related to the Marketing Leases and the reserve.)
57
The components of the $19,156,000 net investment in direct financing lease as of December 31, 2009, are minimum lease payments receivable of $78,187,000 plus unguaranteed estimated residual value of $1,907,000 less unearned income of $60,938,000.
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, 2009, are as follows (in thousands)(See footnote 3 for additional information related to the Marketing Leases and the reserve):
OPERATING LEASES
DIRECTFINANCINGLEASE
YEAR ENDINGDECEMBER 31,
SUBTOTAL
TOTAL (a)
59,400
22,140
81,540
3,110
84,650
59,377
22,462
81,839
3,188
85,027
59,679
22,378
82,057
3,268
85,325
59,770
21,924
81,694
3,349
85,043
60,409
21,195
81,604
3,433
85,037
57,082
163,211
220,293
61,839
282,132
Includes $64,196,000 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 $7,323,000, $8,100,000 and $8,337,000 for the years ended December 31, 2009, 2008 and 2007, respectively, and is included in rental property expenses using the straight-line method. Rent received under subleases for the years ended December 31, 2009, 2008 and 2007 was $12,760,000, $13,986,000 and $14,145,000, 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. The leased properties have a remaining lease term averaging over eleven years, including renewal options. Future minimum annual rentals payable under such leases, excluding renewal options, are as follows: 2010 — $6,673,000, 2011 — $5,487,000, 2012 — $3,986,000, 2013 — $2,810,000, 2014 — $1,868,000 and $2,958,000 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, if any, with high credit quality institutions. Temporary cash investments, if any, are currently held in an overnight bank time deposit with JPMorgan Chase Bank, N.A.
As of December 31, 2009, the Company leased eight hundred forty properties, or 78% of its one thousand seventy-one properties, on a long-term triple-net basis to Marketing, a wholly-owned subsidiary of OAO LUKoil (“Lukoil”), one of the largest integrated Russian oil companies (see note 2 for additional information).
The Company’s financial results are materially dependent upon the ability of Marketing to meet its rental and environmental obligations under the Marketing Leases. Marketing’s financial results depend on retail petroleum marketing margins from the sale of refined petroleum products and rental income from its subtenants. Marketing’s subtenants either operate their gas stations, convenience stores, automotive repair services or other businesses at the Company’s properties or are petroleum distributors who may operate the Company’s properties directly and/or sublet the Company’s properties to the operators. Since a substantial portion of the Company’s revenues (71% for the year December 31, 2009), are derived from the Marketing Leases, any factor that adversely affects Marketing’s ability to meet its obligations under the Marketing Leases may have a material adverse effect on the Company’s business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends or stock price. (See note 11 for additional information regarding the portion of the Company’s financial results that are attributable to Marketing.) 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, performance of the petroleum marketing industry 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
58
rental payments under the Marketing Leases when due through March 2010, although there can be no assurance that it will continue to do so.
For the year ended December 31, 2008, Marketing reported a significant loss, continuing a trend of reporting large losses in recent years. The Company has not received Marketing’s operating results for the year ended December 31, 2009. As a result of Marketing’s significant losses for each of the three years ended December 31, 2008, 2007 and 2006 and the cumulative impact of those losses on Marketing’s financial position as of December 31, 2008, the Company previously concluded that Marketing likely does not have the ability to generate cash flows from its business sufficient to meet its obligations as they come due in the ordinary course through the term of the Marketing Leases unless Marketing shows significant improvement in its financial results, generates sufficient liquidity through the sale of assets or otherwise, or receives financial support from Lukoil, its parent company.
In the fourth quarter of 2009, Marketing announced a restructuring of its business. Marketing disclosed that the restructuring included the sale of all assets unrelated to the properties it leases from the Company, the elimination of parent-guaranteed debt, and steps to reduce operating costs. Marketing sold all assets unrelated to the properties it leases from the Company to its affiliates, LUKOIL Pan Americas L.L.C. and LUKOIL North America LLC. Marketing paid off debt which had been guaranteed by Lukoil with proceeds from the sale of assets to Lukoil affiliates and with financial support from Lukoil. Marketing also announced additional steps to reduce its costs including closing two marketing regions, eliminating jobs and exiting the direct-supplied retail gasoline business. Marketing’s announcement also indicated that LUKOIL North America LLC is the vehicle through which Lukoil expects to concentrate its future growth in the United States.
The Company believes that Marketing is exiting the direct-supplied retail gasoline business by entering into subleases with petroleum distributors who supply their own petroleum products to the Company’s properties. Approximately two hundred fifty retail properties, comprising substantially all of the properties in New England that the Company leases to Marketing, have been subleased by Marketing to a single distributor. These properties are in the process of being rebranded BP stations and are being supplied petroleum products under a supply contract with BP. In addition, the Company believes that Marketing recently entered into a sublease with a single distributor in New Jersey covering approximately eighty-five of our properties. The Company believes that Marketing is seeking subtenants for other significant portions of the portfolio of properties it leases from it.
In connection with its restructuring, Marketing eliminated debt which had been guaranteed by Lukoil with proceeds from the sale of assets to Lukoil affiliates and with financial support from Lukoil, which the Company believes increased Marketing’s liquidity and improved its balance sheet. However, the Company cannot predict whether the restructuring announced by Marketing will stem Marketing’s recent history of significant annual operating losses, and whether Marketing will continue to be dependent on financial support from Lukoil to meet its obligations as they become due and through the terms of the Marketing Leases. The Company continues to believe that to the extent Marketing requires continued financial support from Lukoil, that it is probable that Lukoil will continue to provide such financial support. Lukoil is not, however, a guarantor of the Marketing Leases. Even though Marketing is a wholly-owned subsidiary of Lukoil, and Lukoil has provided capital to Marketing in the past, there can be no assurance that Lukoil will provide financial support or additional capital to Marketing in the future. It is reasonably possible that the Company’s belief regarding the likelihood of Lukoil providing continuing financial support to Marketing will prove to be incorrect or will change as circumstances change.
From time to time the Company has held discussions with representatives of Marketing regarding potential modifications to the Marketing Leases. These efforts have been unsuccessful to date as the Company has not yet reached a common understanding with Marketing that would form a basis for modification of the Marketing Leases. From time to time, however, the Company has been able to agree with Marketing on terms to allow for removal of individual properties from the Marketing Leases as mutually beneficial opportunities arise. The Company intends to continue to pursue the removal of individual properties from the Marketing Leases, and it remains open to removal of groups of properties; however, there is no fixed agreement in place providing for removal of properties from the Marketing Leases. Accordingly, the removal of properties from the Marketing Leases is subject to negotiation on a case-by-case basis. If Marketing ultimately determines that its business strategy is to exit all or a portion of the properties it leases from the Company, 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; what composition of properties, if any, may be removed from the Marketing Leases as part of any such modification; or what the terms of any
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agreement for modification of the Marketing Leases may be. 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 that are removed from the Marketing Leases, whether such removal arises consensually by negotiation or as a result of default by Marketing, and reinvest any realized sales proceeds in new properties. The Company intends to offer properties removed from the Marketing Leases to replacement tenants or buyers individually, or 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.
As permitted under the terms of the Marketing Leases, Marketing generally can, subject to any contrary terms under applicable third party leases, use each property for any lawful purpose, or for no purpose whatsoever. The Company believes that as of December 31, 2009, Marketing had removed, or has scheduled removal of, underground gasoline storage tanks and related equipment at approximately one hundred fifty, or 18%, of the Company’s properties and the Company also believes that most of these properties are either vacant or provide negative or marginal contribution to Marketing’s results. Marketing recently agreed to permit the Company to list with brokers and to show to prospective purchasers and lessees seventy-five of the properties where Marketing has removed, or has scheduled to remove, underground gasoline storage tanks and related equipment, and the Company is marketing such properties for sale or leasing. As previously discussed, however, there is no agreement between the Company and Marketing on terms for removal of properties from the Marketing Leases. In those instances where the Company determines that the best use for a property is no longer as a retail motor fuel outlet, the Company will seek an alternative tenant or buyer for such property. With respect to properties that are vacant or have had underground gasoline storage tanks and related equipment removed, it may be more difficult or costly to re-let or sell such properties as gas stations because of capital costs or possible zoning or permitting rights that are required and that may have lapsed during the period since gasoline was last sold at the property. Conversely, it may be easier to re-let or sell properties where underground gasoline storage tanks and related equipment have been removed if the property will not be used as a retail motor fuel outlet or if environmental contamination has been remediated.
Based on the Company’s prior decision to attempt to negotiate with Marketing for a modification of the Marketing Leases to remove approximately 40% of the properties from the Marketing Leases, the Company concluded that it cannot reasonably assume that it will collect all of the rent due to the Company related to those properties for the remainder of the current term of each lease comprising the Marketing Leases. Accordingly, the Company recorded a $10,494,000 non-cash deferred rent receivable reserve as of December 31, 2007 based on the deferred rent receivable recorded related to the those properties because the Company then believed those properties were most likely to be removed from the Marketing Leases as a result of a modification of the Marketing Leases. Providing this 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. The deferred rent receivable and the related $10,494,000 deferred rent receivable reserve have declined since December 31, 2007 as a result of regular monthly lease payments being made by Marketing and the removal of individual properties from the Marketing Leases.
The Company continues to believe that it is likely that the Marketing Leases will be modified and therefore it cannot reasonably assume that it will collect all of the rent due to the Company for the entire portfolio of properties it leases to Marketing for the remainder of the current term of each lease comprising the Marketing Leases. However, as a result of Marketing’s restructuring announced in the fourth quarter of 2009 and the potential effect on the Company’s properties caused by changes in Marketing’s business model, the Company reevaluated the entire portfolio of properties it leases to Marketing, and reconstituted the list of properties that the Company used to estimate the deferred rent receivable reserve as of December 31, 2009. The Company reviewed the properties that had previously been designated to the Company by Marketing for removal and which were the subject of its prior decision to attempt to negotiate with Marketing for a modification of the Marketing Leases and from that group of properties, the Company excluded properties that it no longer considered to be the most likely to be removed from the Marketing Leases, such as those which are subject to significant subleases between Marketing and various distributors (as described above) and third party leased properties. Then, to the group of properties remaining, the Company added properties previously designated by Marketing for removal from time to time and properties that the Company believe are currently negative or marginal contributors to Marketing’s results, such as those that are vacant or have had tanks removed. Based on its reevaluation of the entire portfolio of properties we lease to Marketing, the Company identified three hundred fifty properties
as being the most likely to be removed from the Marketing Leases. The Company’s estimate of the deferred rent receivable reserve as of December 31, 2009 of $9.4 million is based on the deferred rent receivable attributable to these three hundred fifty properties. The Company has not provided a deferred rent receivable reserve related to the remaining properties subject to the Marketing Leases since, based on its assessments and assumptions, the Company continues to believe that it is probable that it will collect the deferred rent receivable related to those remaining properties and that Lukoil will not allow Marketing to fail to perform its rental, environmental and other obligations under the Marketing Leases.
The Company has performed an impairment analysis of the carrying amount of the properties subject to the Marketing Leases from time to time in accordance with GAAP when indicators of impairment exist. During the year ended December 31, 2008, the Company reduced the estimated useful lives of certain long-lived assets for properties subject to the Marketing Leases resulting in accelerating the depreciation expense recorded for those assets. 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. During the year ended December 31, 2009, the Company reduced the carrying amount to fair value, and recorded impairment charges aggregating $1,135,000, for certain properties leased to Marketing where the carrying amount of the property exceeded the estimated undiscounted cash flows expected to be received during the assumed holding period and the estimated net sales value expected to be received at disposition. The impairment charges were attributable to general reductions in real estate valuations and, in certain cases, by the removal or scheduled removal of underground storage tanks by Marketing. The fair value of real estate is estimated based on the price that would be received to sell the property in an orderly transaction between marketplace participants at the measurement date, net of disposal costs. The valuation techniques that the Company used included discounted cash flow analysis, an income capitalization approach on prevailing or earnings multiples applied to earnings from the property, analysis of recent comparable sales transactions, actual sale negotiations and bona fide purchase offers received from third parties and/or consideration of the amount that currently would be required to replace the asset, as adjusted for obsolescence. In general, the Company considers multiple valuation techniques when measuring the fair value of a property, all of which are based on assumptions that are classified within Level 3 of the fair value hierarchy.
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 Marketing Leases and various other agreements with the Company relating to Marketing’s business and the properties it leases from the Company (collectively the “Marketing Environmental Liabilities”). However, the Company continues to have ongoing environmental remediation obligations at one hundred eighty-seven retail sites and for certain pre-existing conditions at six of the terminals the Company leases to Marketing. If Marketing fails to pay the Marketing Environmental Liabilities, the Company may ultimately be responsible to pay directly for Marketing Environmental Liabilities as the property owner. The Company does not maintain pollution legal liability insurance to protect it from potential future claims for Marketing Environmental Liabilities. 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 and the Company can reasonably estimate the amount of the Marketing Environmental Liabilities for which it will be directly responsible to pay, or if the Company’s assumptions regarding the ultimate allocation methods or share of responsibility that it used to allocate environmental liabilities changes. 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. Accordingly, the Company did not accrue for the Marketing Environmental Liabilities as of December 31, 2009 or 2008. Nonetheless, the Company has determined that the aggregate amount of the Marketing Environmental Liabilities (as estimated by the Company) 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 and its Term Loan Agreement. Such non-compliance could result in an event of default pursuant to each agreement which, if not cured or waived, could result in the acceleration of the Company’s indebtedness under the Credit Agreement and the Term Loan Agreement.
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Should the Company’s assessments, assumptions and beliefs prove to be incorrect, including, in particular, the Company’s belief that Lukoil will continue to provide financial support to Marketing, or if circumstances change, the conclusions reached by the Company may change relating to (i) whether any or what combination of the properties subject to the Marketing Leases are likely to be removed from the Marketing Leases, (ii) recoverability of the deferred rent receivable for some or all of the properties subject to the Marketing Leases, (iii) potential impairment of the properties subject to the Marketing Leases 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. Accordingly, the Company may be required to (i) reserve additional amounts of the deferred rent receivable related to the properties subject to the Marketing Leases, (ii) record an additional impairment charge related to the properties subject to the Marketing Leases, 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, 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 and its Term Loan Agreement.
Although Marketing has made all required monthly rental payments under the Marketing Leases when due through March 2010, the Company cannot provide any assurance that Marketing will continue to meet its rental, environmental or other obligations under the Marketing Leases. In the event that Marketing does 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 rental, environmental or other obligations and the Company accrues for certain of such liabilities; if the Company is unable to promptly re-let or sell the properties upon recapture from 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 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, 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 required to pay (and has paid) the first $1,500,000 of costs and expenses incurred in connection with remediating any such pre-existing conditions, Marketing and the Company 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, 2009 and 2008 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, 2009 and December 31, 2008, the Company had accrued $3,790,000 and $1,671,000, 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 USTs 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 denied its liability for the claim and its responsibility to defend against and indemnify the Company for the claim. The Company filed a third party claim against Marketing for indemnification in this matter. The property owner’s claim for reimbursement of costs incurred and our claim for indemnification by Marketing were actively litigated, leading to a trial held before a judge. The trial court issued its decision in August 2009 under which the Company and Marketing were held jointly and severally responsible to the current property owner for the costs incurred by the owner to remove USTs and remediate contamination at the site, but, as between the Company and Marketing, Marketing was accountable for such costs under the indemnification provisions of the Master Lease. The order on the trial court’s decision was entered in February 2010, making such decision final for purposes of initiating the limited period of time following which appeal may be taken. The Company believes that Marketing will appeal the decision; however, the Company believes the probability that Marketing will not be ultimately responsible for the claim for clean-up costs incurred by the current property owner is remote. It is possible that the Company’s assumptions regarding, among other items, the ultimate resolution of and/or the Company’s ultimate share of
responsibility for these matters may change, which may result in the Company providing or adjusting its accruals for these matters.
In September 2003, the Company received a directive (the “Directive”) from the State of New Jersey Department of Environmental Protection (the “NJDEP”) notifying the Company that it 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 Directive calls for an assessment of the natural resources that have been injured by the discharges into the Lower Passaic River and interim compensatory restoration for the injured natural resources. There has been no material activity with respect to the NJDEP Directive since early after its issuance. The 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. The Company is a member of a Cooperating Parties Group which has agreed to take over from the United States Environmental Protection Agency (“EPA”) performance of a remedial investigation and feasibility study intended to evaluate alternative remedial actions with respect to alleged damages to the Lower Passaic River. The remedial investigation and feasibility study 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.
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. In February 2009, certain of these defendants filed third-party complaints against approximately three hundred additional parties, including the Company, seeking contribution for a pro-rata share of response costs, cleanup, and other damages. A Special Master has been appointed by the court to try and design an alternative dispute resolution process for achieving a global resolution of this litigation. The Company believes that ChevronTexaco is contractually obligated to indemnify the Company, pursuant to an indemnification 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.
As of December 31, 2009, the Company is defending against fifty-three lawsuits brought by or on behalf of private and public water providers and governmental agencies in Connecticut, Florida, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Vermont, Virginia, and West Virginia. These cases allege various theories of liability due to contamination of groundwater with methyl tertiary butyl ether (a fuel derived from methanol, commonly referred to as “MTBE”) as the basis for claims seeking compensatory and punitive damages, and name as defendant approximately fifty petroleum refiners, manufacturers, distributors and retailers of MTBE, or gasoline containing MTBE. Pursuant to consolidation procedures under federal law, most of the MTBE cases originally filed were transferred to the United States District Court for the Southern District of New York for coordinated Multi-District Litigation proceedings. The Company is presently named as a defendant in thirty-nine out of more than one hundred cases that have been consolidated in this Multi-District Litigation, and the Company is also named as a defendant in fourteen related MTBE cases pending in the Supreme Court of New York, Nassau County. A majority of the primary defendants entered into global settlement agreements which settled one hundred two individual cases brought by the same law firm on behalf of various plaintiffs. The Company remains a defendant in twenty-seven of these one hundred two cases. The Company is also a defendant in twenty-five other individual MTBE cases brought by another firm, and it is also a defendant in a final MTBE case in the consolidated Multi-District Litigation brought by the State of New Jersey.
In 2009, the Company provided litigation reserves of $2,300,000 relating to a majority of the MTBE cases pending against it. However, the Company is still unable to estimate its liability for a minority of the cases pending against it. Further, notwithstanding that the Company has provided a litigation reserve as to certain of the MTBE cases, there remains uncertainty as to the accuracy of the allegations in these cases as they relate to it, the Company’s defenses to the claims, its rights to indemnification or contribution from Marketing, and the aggregate possible amount of damages for which the Company may be held liable.
The ultimate resolution of the matters related to the Lower Passaic River and the MTBE multi-district litigation discussed above could cause a material adverse effect on the Company’s business, financial condition, results of operations, liquidity, ability to pay dividends 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, 2009 and December 31, 2008, the Company’s consolidated balance sheets included, in accounts payable and accrued expenses, $292,000 and $290,000,
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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, 2009, 2008 and 2007 include, in general and administrative expenses, a charge of $25,000, a credit of $72,000 and a charge of $81,000, 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 distribute at least ninety percent of its “earnings and profits” (as defined in the Internal Revenue Code) 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, TERM LOAN AGREEMENT AND INTEREST RATE SWAP AGREEMENT
As of December 31, 2009, borrowings under the Credit Agreement, described below, were $151,200,000, bearing interest at a weighted-average effective rate of 3.0% per annum. The weighted-average effective rate is based on $106,200,000 of LIBOR rate borrowings floating at market rates plus a margin of 1.25% 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 1.25%. The Company is a party to 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 Company had $23,800,000 available under the terms of the Credit Agreement as of December 31, 2009. 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, 2009, the applicable margin will remain at 0.0% for base rate borrowings and 1.25% for LIBOR rate borrowings.
Subject to the terms of the Credit Agreement and continued compliance with the covenants therein, 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 financial covenants such as those requiring the Company to maintain minimum tangible net worth, leverage ratios and coverage ratios and other covenants which may limit the Company’s ability to incur debt or pay dividends. The Credit Agreement contains customary events of default, including change of control, failure to maintain REIT status or a material adverse effect on the Company’s business, assets, prospects or condition. Any event of default, if not cured or waived, could result in the acceleration of the Company’s indebtedness under the Credit Agreement and could also give rise to an event of default and consequent acceleration of the Company’s indebtedness under its Term Loan Agreement described below.
On September 25, 2009, the Company entered into a $25,000,000 three-year Term Loan Agreement with TD Bank (the “Term Loan Agreement”) which expires in September 2012. As of December 31, 2009, borrowings under the Term Loan Agreement were $24,370,000 bearing interest at a rate of 3.5% per annum. The Term Loan Agreement provides for annual reductions of $780,000 in the principal balance with a $22,160,000 balloon payment due at maturity. The Term Loan Agreement bears interest at a rate equal to a thirty day Libor rate (subject to a floor of 0.4%) plus a margin of 3.1%. The Term Loan Agreement contains customary terms and conditions, including financial covenants such as those requiring the Company to maintain minimum tangible net worth, leverage ratios and coverage ratios and other covenants which may limit the Company’s ability to incur debt or pay dividends. The Term Loan Agreement contains customary events of default,
including change of control, failure to maintain REIT status or a material adverse effect on the Company’s business, assets, prospects or condition. Any event of default, if not cured or waived, could result in the acceleration of the Company’s indebtedness under the Term Loan Agreement and could also give rise to an event of default and consequent acceleration of the Company’s indebtedness under its Credit Agreement.
The aggregate maturities of the Company’s outstanding debt is as follows: 2010 — $780,000, 2011 — $151,980,000, and 2012 — $22,810,000.
The Company is a party to a $45,000,000 LIBOR based interest rate swap, 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, 2009, $45,000,000 of the Company’s LIBOR based borrowings under the Credit Agreement bear interest at an effective rate of 6.69%.
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 of each year thereafter, 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 2009, 2008 or 2007 representing the hedge’s ineffectiveness. At December 31, 2009 and 2008, the Company’s consolidated balance sheets include, in accounts payable and accrued expenses, an obligation for the fair value of the Swap Agreement of $2,993,000 and $4,296,000, respectively. For the year ended December 31, 2009, 2008 and 2007, the Company has recorded, in accumulated other comprehensive loss in the Company’s consolidated balance sheets, a gain of $1,303,000, a loss of $1,997,000, and a loss of $1,478,000, respectively, from the change in the fair value of the Swap Agreement related to the effective portion of the interest rate contract. The accumulated comprehensive loss of $2,993,000 recorded as of December 31, 2009 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 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 was $2,993,000 as of December 31, 2009, 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 borrowings outstanding under the Credit Agreement was $144,700,000 as of December 31, 2009. The fair value of the borrowings outstanding under the Term Loan Agreement was $24,400,000 as of December 31, 2009. The fair value of the projected average borrowings outstanding under the Credit Agreement and the borrowings outstanding under the Term Loan Agreement were 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 or borrowings outstanding, which are based on unobservable “Level 3 inputs”. As of December 31, 2009, 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.
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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 either regulatory or contractual closure (“Closure”). 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 forty properties leased to Marketing as of December 31, 2009, 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 is 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 or stock price. (See note 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. Environmental accruals are based on estimates which are subject to significant change, and are adjusted as the remediation treatment progresses, as circumstances change and as environmental contingencies become more clearly defined and reasonably estimable. As of December 31, 2009, the Company had regulatory approval for remediation action plans in place for two hundred forty-five (95%) of the two hundred fifty-eight properties for which it continues to retain
66
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-two 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 estimated environmental remediation cost and accretion expense included in environmental expenses in the Company’s consolidated statements of operations aggregated $3,910,000, $4,649,000 and $5,135,000 for 2009, 2008 and 2007, respectively, which amounts were net of changes in estimated recoveries from state UST remediation funds. In addition to estimated environmental remediation costs, environmental expenses also include project management fees, legal fees and provisions for environmental litigation loss reserves.
As of December 31, 2009, 2008, 2007 and 2006, the Company had accrued $16,527,000, $17,660,000, $18,523,000 and $17,201,000, respectively, as management’s best estimate of the fair value of reasonably estimable environmental remediation costs. As of December 31, 2009, 2008, 2007 and 2006, the Company had also recorded $3,882,000, $4,223,000 $4,652,000, and $3,845,000, 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 $13,437,000, $13,871,000 and $13,356,000 as of December 31, 2008, 2007 and 2006, respectively, were subsequently accreted for the change in present value due to the passage of time and, accordingly, $884,000, $956,000 and $974,000 of net accretion expense was recorded for the year ended December 31, 2009, 2008 and 2007, 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 note 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 or stock price.
6. INCOME TAXES
Net cash paid for income taxes for the years ended December 31, 2009, 2008 and 2007 of $467,000, $708,000 and $488,000, 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 $47,349,000, $40,906,000 and $41,147,000 for the years ended December 31, 2009, 2008 and 2007, respectively. The federal tax attributes of the common dividends for the years ended December 31, 2009, 2008 and 2007 were: ordinary income of 100.0%, 87.4% and 90.3%; capital gain distributions of 0.0%, 1.2% and 0.0% and non-taxable distributions of 0.0%, 11.4% and 9.7%, 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. Tax returns filed for the years 2006, 2007 and 2008, and tax returns which will be filed for the year ended 2009, remain open to examination by federal and state tax jurisdictions under the respective statute of limitations. In 2006 the Company eliminated the amount it had accrued for uncertain tax positions since the Company believes that the uncertainties
67
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, 2009, 2008 and 2007 is as follows (in thousands, except per share amounts):
PAID-INCAPITAL
DIVIDENDPAIDIN EXCESSOF EARNINGS
ACCUMULATEDOTHERCOMPREHENSIVELOSS
COMMON STOCK
SHARES
AMOUNT
BALANCE, DECEMBER 31, 2006
258,647
(32,499
(821
Dividends - $1.85 per share
(45,900
Stock-based compensation
87
Net unrealized loss on interest rate swap
BALANCE, DECEMBER 31, 2007
258,734
(44,505
(2,299
Dividends - $1.87 per share
(46,429
Stock options exercised
BALANCE, DECEMBER 31, 2008
Dividends - $1.89 per share
(46,970
Net unrealized gain on interest rate swap
BALANCE, DECEMBER 31, 2009
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, 2009, 2008, 2007 and 2006.
8. SEVERANCE AGREEMENT AND EMPLOYEE BENEFIT PLANS
General and administrative expenses include a provision of $447,000 recorded in 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 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 $159,000, $151,000 and
68
$100,000 for the years ended December 31, 2009, 2008 and 2007, 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 23,600, 23,800 and 17,550 restricted stock units (“RSUs”) and dividend equivalents in 2009, 2008 and 2007, 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 85,600 RSUs outstanding as of December 31, 2009 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 2009, 2008, and 2007 were estimated at $16.64, $26.86, and $28.78 per unit on the date of grant with an aggregate fair value estimated at $393,000, $639,000 and $505,000, 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, 2009, there was $981,000 of total unrecognized compensation cost related to RSUs granted under the 2004 Plan.
The fair value of the 12,400, 7,840 and 19,330 RSUs which vested during the years ended December 31, 2009, 2008 and 2007 was $335,000, $213,000 and $523,000, respectively. The aggregate intrinsic value of the 85,600 outstanding RSUs and the 29,800 vested RSUs as of December 31, 2009 was $2,014,000 and $701,000, respectively. For the years ended December 31, 2009, 2008 and 2007, dividend equivalents aggregating approximately $162,000, $117,000 and $85,000, 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, 2009, there was $6,000 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, 2009 and 2008 was $4,000 in each year. As of December 31, 2009, 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 two, three and eight years, respectively.
The following is a schedule of stock option prices and activity relating to the Stock Option Plan:
NIMBEROFSHARES
WEIGHTEDAVERAGEEXERCISEPRICE
WEIGHTEDAVERAGEREMAININGCONTRACTUALTERM
AGGREGATEINTRINSICVALUE(INTHOUSANDS)
NUMBEROFSHARES
WEIGHTEDAVERAGEEXERXCISEPRICE
Outstanding at beginning of year
17,250
20.80
17,750
20.73
12,750
18.00
Issued
5,000
27.68
Exercised (a)
(500
18.30
Outstanding at end of year
4.3
Exercisable at end of Year (b)
14,750
19.63
4.5
13,500
18.89
The total intrinsic value of the options exercised during the year ended December 31, 2008 was $5,000.
The options vested during the years ended December 31, 2009 and 2008 was 1,250 in each year. No options vested during the year ended December 31, 2007.
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9. QUARTERLY FINANCIAL DATA
The following is a summary of the quarterly results of operations for the years ended December 31, 2009 and 2008 (unaudited as to quarterly information) (in thousands, except per share amounts):
THREE MONTHS ENDED
YEAR ENDEDDECEMBER 31,
YEAR ENDED DECEMBER 31, 2009 (a)
MARCH 31,
JUNE 30,
SEPTEMBER 30,
20,652
20,561
20,784
22,542
9,571
10,477
10,638
10,738
9,928
13,605
12,185
11,331
.39
.42
.43
.40
.55
.49
.46
YEAR ENDED DECEMBER 31, 2008
21,014
20,419
20,741
20,628
10,773
9,263
9,919
8,812
11,371
10,635
10,489
9,315
.37
.36
.38
(a) Includes the effect of the $49.0 million acquisition of gasoline stations and convenience store properties from White Oak Petroleum LLC which was completed on September 25, 2009.
10. PROPERTY ACQUISITIONS
In addition to the acquisition of sixty-four properties from Trustreet described in more detail below, 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. In addition to the acquisition of thirty-six properties from White Oak described in more detail below, in 2009 the Company also exercised its fixed purchase price option for one property and purchased three properties.
Acquisition of sixty-four properties from Trustreet
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 2007, 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 is not indicative of the results of operations that would have been achieved had the acquisition from Trustreet reflected herein been consummated at the beginning of 2007 or that will be achieved in the future and is as follows (in thousands, except per share amounts):
Revenue from rental properties
82,089
34,348
Basic and diluted net earnings per common share
1.39
Acquisition of thirty-six properties from White Oak
On September 25, 2009 the Company acquired the real estate assets and improvements of thirty-six gasoline station and convenience store properties located primarily in Prince George’s County, Maryland, for $49,000,000 in a sale/leaseback transaction with White Oak Petroleum LLC (“White Oak”). The Company financed this transaction with $24,500,000 of borrowings under the Company’s existing Credit Agreement and $24,500,000 of indebtedness under the Term Loan Agreement entered into on that date.
The real estate assets were acquired in a simultaneous transaction among ExxonMobil, White Oak, and the Company, whereby White Oak acquired the real estate assets properties and related businesses from ExxonMobil and simultaneously completed a sale/leaseback of the real estate assets of all thirty-six properties with the Company. The Company entered into a unitary triple-net lease for the real estate assets with White Oak which has an initial term of twenty years and provides White Oak with options for three renewal terms of ten years each extending to 2059. The unitary triple-net lease provides for annual rent escalations of 2½% per year. White Oak is responsible to pay for all existing and future environmental liabilities related to the properties.
The purchase price has been allocated among the assets acquired based on the estimates of fair value. The Company estimated the fair value of acquired tangible assets (consisting of land, buildings and equipment) “as if vacant.” Based on these estimates, the Company allocated $29,929,000 of the purchase price to land, which is accounted for as an operating lease, and $19,071,000 to buildings and equipment, which is accounted for as a direct financing lease.
The following unaudited pro forma condensed consolidated financial information has been prepared utilizing the historical financial statements of Getty Realty Corp. and the effect of additional revenue and expenses from the properties acquired assuming that the acquisitions had occurred as of the beginning of each of the years presented, after giving effect to certain adjustments including (a) rental income adjustments resulting from the straight-lining of scheduled rent increases and
71
(b) rental income adjustments resulting from the recognition of revenue under direct financing leases over the lease term using the effective interest rate method which produces a constant periodic rate of return on the net investment in the leased property. The following information also gives effect to the additional interest expense resulting from the assumed increase in borrowing outstanding drawn under the Credit Agreement and borrowings outstanding provided by the Term Loan Agreement to fund the acquisition. The unaudited pro forma condensed financial information is not indicative of the results of operations that would have been achieved had the acquisition from White Oak reflected herein been consummated on the dates indicated or that will be achieved in the future. (in thousands)
Year Ended December 31,
89,372
89,370
50,930
45,885
2.06
The selected financial data of White Oak, LLC as of December 31, 2009 and from its inception on September 26, 2009 through December 31, 2009, which has been prepared by White Oak’s management, is provided below.
(in thousands)
Operating Data (from September 26, 2009 to December 31, 2009:
Gross sales
43,171
Gross profit
1,082
Net (loss)
(1,372
Balance Sheet Data (at December 31, 2009):
Current assets
1,613
Noncurrent assets
56,666
Current liabilities
5,795
Noncurrent liabilities
53,605
11. SUPPLEMENTAL CONDENSED COMBINING FINANCIAL INFORMATION
Condensed combining financial information as of December 31, 2009 and 2008 and for the three year period ended December 31, 2009 has been derived from the Company’s books and records and is provided below to illustrate, for informational purposes only, the net contribution to the Company’s financial results that are realized from the leasing operations of properties leased to Marketing (which represents approximately 78% of the Company’s properties as of December 31, 2009) and from properties leased to other tenants. The condensed combining financial information set forth below presents the results of operations, net assets, and cash flows of the Company, related to Marketing, the Company’s other tenants and the Company’s corporate functions necessary to arrive at the information for the Company on a combined basis. The assets, liabilities, lease agreements and other leasing operations attributable to the Marketing Leases and other tenant leases are not segregated in legal entities. However, the Company generally maintains its books and records in site specific detail and has classified the operating results which are clearly applicable to each owned or leased property as attributable to Marketing or to the Company’s other tenants or to non-operating corporate functions. The condensed combining financial information has been prepared by the Company using certain assumptions, judgments and allocations. Each of the Company’s properties were classified as attributable to Marketing, other tenants or corporate for all periods presented based on the property’s use as of December 31, 2009 or the property’s use immediately prior to its disposition or third party lease expiration.
72
Environmental remediation expenses have been attributed to Marketing or other tenants on a site specific basis and environmental related litigation expenses and professional fees have been attributed to Marketing or other tenants based on the pro rata share of specifically identifiable environmental expenses for the three year period ended December 31, 2009. 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 either regulatory or contractual closure (“Closure”). 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. Of the eight hundred forty properties leased to Marketing as of December 31, 2009, 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. (See note 5 for additional information.)
The heading “Corporate” in the statements below includes assets, liabilities, income and expenses attributed to general and administrative functions, financing activities and parent or subsidiary level income taxes, capital taxes or franchise taxes which were not incurred on behalf of the Company’s leasing operations and are not reasonably allocable to Marketing or other tenants. With respect to general and administrative expenses, the Company has attributed those expenses clearly applicable to Marketing and other tenants. The Company considered various methods of allocating to Marketing and other tenants amounts included under the heading “Corporate” and determined that none of the methods resulted in a reasonable allocation of such amounts or an allocation of such amounts that more clearly summarizes the net contribution to the Company’s financial results realized from the leasing operations of properties leased to Marketing and of properties leased to other tenants. Moreover, the Company determined that each of the allocation methods it considered resulted in a presentation of these amounts that would make it more difficult to understand the clearly identifiable results from its leasing operations attributable to Marketing and other tenants. The Company believes that the segregated presentation of assets, liabilities, income and expenses attributed to general and administrative functions, financing activities and parent or subsidiary level income taxes, capital taxes or franchise taxes provides the most meaningful presentation of these amounts since changes in these amounts are not fully correlated to changes in the Company’s leasing activities.
While the Company believes these assumptions, judgments and allocations are reasonable, the condensed combining financial information is not intended to reflect what the net results would have been had assets, liabilities, lease agreements and other operations attributable to Marketing or its other tenants had been conducted through stand-alone entities during any of the periods presented.
The condensed combining statement of operations of Getty Realty Corp. for the year ended December 31, 2009 is as follows (in thousands):
GettyPetroleumMarketing
OtherTenants
Corporate
Consolidated
59,818
24,721
(6,297
(3,994
(560
(10,851
(1,135
(8,599
(200
(8,799
(280
(231
(6,338
(6,849
(5,565
(5,339
(71
(10,975
(21,876
(9,764
(6,969
(38,609
37,942
14,957
154
(13
444
38,096
14,944
(11,616
209
90
4,590
736
4,799
826
42,895
15,770
73
The condensed combining statement of operations of Getty Realty Corp. for the year ended December 31, 2008 is as follows (in thousands):
60,526
22,276
(6,937
(3,944
(601
(11,482
(7,152
(213
(7,365
(686
(193
(5,952
(6,831
(6,743
(4,944
(39
(11,726
(21,518
(9,294
(6,592
(37,404
39,008
12,982
(6,952
384
39,392
12,987
(13,612
546
99
912
1,486
1,458
1,585
40,850
14,572
The condensed combining statement of operations of Getty Realty Corp. for the year ended December 31, 2007 is as follows (in thousands):
60,464
18,743
(7,209
(3,145
(510
(10,864
(7,943
(246
(8,189
(267
(171
(6,231
(6,669
(10,206
(5,287
(4,273
(40
(9,600
(30,912
(7,835
(6,781
(45,528
29,552
10,908
1,569
309
31,121
10,953
(14,232
1,149
338
1,479
3,086
2,628
3,424
33,749
14,377
74
The condensed combining balance sheet of Getty Realty Corp. as of December 31, 2009 is as follows (in thousands):
137,887
114,196
154,344
97,172
275
292,231
211,368
(116,128
(20,386
(155
176,103
190,982
120
Deferred rent receivable, net
22,801
4,680
3,784
98
970
1,432
4,052
5,644
202,688
219,938
10,246
LIABILITIES:
16,114
413
920
8,643
11,738
17,034
9,056
199,113
Net assets (liabilities)
185,654
210,882
(188,867
75
The condensed combining balance sheet of Getty Realty Corp. as of December 31, 2008 is as follows (in thousands):
138,886
82,654
157,554
94,060
296,440
176,714
(113,122
(15,929
(271
183,318
160,785
142
22,900
3,818
4,060
163
239
1,287
4,509
4,407
210,285
169,514
8,014
17,264
396
1,152
9,711
11,474
18,416
10,107
153,393
191,869
159,407
(145,379
76
The condensed combining statement of cash flows of Getty Realty Corp. for the year ended December 31, 2009 is as follows (in thousands):
5,607
5,349
(4,744
(723
Deferred rental revenue
(862
864
650
(731
(47
386
(2,388
(12
(232
305
1,567
Net cash flow provided by (used in) operating activities
43,893
17,841
(9,202
(483
(54,785
(49
5,701
1,238
5,218
(53,547
(1,817
Cash consolidation - Corporate
(49,111
35,706
13,405
11,891
77
The condensed combining statement of cash flows of Getty Realty Corp. for the year ended December 31, 2008 is as follows (in thousands):
6,839
4,997
(1,296
(539
(1,264
934
691
136
411
(1,948
(269
(222
382
(1,191
16,294
(14,027
(1,233
(5,346
2,027
2,035
(3,319
2,342
Cash consolidation – Corporate
(47,352
(12,975
60,327
11,792
78
The condensed combining statement of cash flows of Getty Realty Corp. for the year ended December 31, 2007 is as follows (in thousands):
5,406
4,348
(3,048
(3,131
(1,776
(1,336
952
(386
(4
1,669
(1,799
(62
(18
(59
220
(410
45,266
15,159
(15,909
(1,576
(89,006
(54
3,855
2,279
(84,441
(1,866
(47,545
69,282
(21,737
18,651
79
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, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 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, 2009, 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 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 YorkMarch 16, 2010
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, of 1934, as amended, 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 as of December 31, 2009.
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, 2009.
The effectiveness of our internal control over financial reporting as of December 31, 2009, 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.
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
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
Vice President, General Counsel and 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. As part of the Company’s management succession process, Mr. Liebowitz will relinquish his position as Chief Executive Officer of the Company at the Company’s 2010 annual stockholder’s meeting, (the “2010 Annual Meeting”) currently scheduled for May 20, 2010. Mr. Liebowitz will continue to serve as Chairman of the Company’s Board of Directors and will retain an active role in the Company through May 2013 at which time he intends to retire.
Mr. David B. Driscoll will be appointed to the position of President of the Company, effective on April 1, 2010. In addition, Mr. Driscoll will be appointed as the Company’s Chief Executive Officer, effective on the date of the 2010 Annual Meeting. Mr. Driscoll currently serves as, and will remain, a Director of the Company. Mr. Driscoll is a Managing Director at Morgan Joseph and Co. Inc. where he was a founding shareholder. Prior to his work at Morgan Joseph, Mr. Driscoll was a Managing Director for ING Barings, where he was Global Coordinator of the real estate practice and prior to ING Barings, Mr. Driscoll was the founder of the real estate group at Smith Barney, which he ran for more than a decade.
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 has served as Vice President, General Counsel and Secretary since February 2009. He was General Counsel and Secretary since joining the Company in February 2008. Prior to joining Getty, he was a partner at the 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, 2009.
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
85
Schedule II - Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2009, 2008 and 2007
Schedule III - Real Estate and Accumulated Depreciation and Amortization as of December 31, 2009
(a)(3) Exhibits
Information in response to this Item is incorporated herein by reference to the Exhibit Index on page 90 of this Annual Report on 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 16, 2010 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.
/s/ PricewaterhouseCoopers LLP
New York, New YorkMarch 16, 2010
GETTY REALTY CORP. and SUBSIDIARIESSCHEDULE II — VALUATION and QUALIFYING ACCOUNTS and RESERVESfor the years ended December 31, 2009, 2008 and 2007(in thousands)
BALANCE ATBEGINNINGOF YEAR
ADDITIONS
DEDUCTIONS
BALANCEAT ENDOF YEAR
December 31, 2009:
10,029
640
9,389
Allowance for mortgages and accounts receivable
100
135
Allowance for deposits held in escrow
377
Allowance for recoveries from state underground storage tank funds
December 31, 2008:
465
December 31, 2007:
GETTY REALTY CORP. and SUBSIDIARIESSCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATIONAs of December 31, 2009(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
36,246
6,540
94,700
Capital expenditures
1,310
Impairment
Sales and condemnations
(3,298
(3,939
(3,464
Lease expirations
(1,506
(3,288
(1,850
Balance at end of year
Accumulated depreciation and amortization:
129,322
122,465
116,089
10,679
11,576
9,448
(1,826
(1,431
(1,222
136,669
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 atWhich Carried atClose of PeriodBuilding andImprovements
AccumulatedDepreciation
Date ofInitialLeasehold orAcquisitionInvestment (1)
BROOKLYN, NY
282,104
301,052
176,292
406,864
583,156
372,670
1967
JAMAICA, NY
12,000
295,750
307,750
220,893
1970
REGO PARK, NY
33,745
281,380
23,000
292,125
315,125
249,086
1974
74,808
125,120
30,694
169,234
199,928
165,328
BRONX, NY
60,000
353,955
60,800
353,155
413,955
291,186
1965
CORONA, NY
114,247
300,172
112,800
301,619
414,419
230,641
OCEANSIDE, NY
40,378
169,929
40,000
170,307
210,307
141,447
BLUEPOINT, NY
96,163
118,524
96,068
118,619
214,687
116,418
1972
BRENTWOOD, NY
253,058
84,485
125,000
212,543
337,543
210,879
1968
BAY SHORE, NY
47,685
289,972
0
337,657
337,232
1969
WHITE PLAINS, NY
527,925
302,607
225,318
127,439
PELHAM MANOR, NY
127,304
85,087
75,800
136,591
212,391
130,613
309,235
176,558
132,677
86,961
293,507
365,767
364,264
POUGHKEEPSIE, NY
32,885
168,354
35,904
165,335
201,239
160,754
WAPPINGERS FALLS, NY
114,185
159,162
111,785
161,562
273,347
157,257
STONY POINT, NY
59,329
203,448
55,800
206,977
262,777
206,942
KINGSTON, NY
29,010
159,986
12,721
176,275
188,996
174,808
LAGRANGEVILLE, NY
129,133
101,140
64,626
165,647
230,273
164,522
128,419
221,197
100,681
248,935
349,616
209,457
STATEN ISLAND, NY
40,598
256,262
26,050
270,810
296,860
213,823
1973
141,322
141,909
86,800
196,431
283,231
189,474
NEW YORK, NY
125,923
168,772
78,125
216,570
294,695
214,696
MIDDLE VILLAGE, NY
130,684
73,741
89,960
114,465
204,425
110,305
100,000
254,503
66,890
287,613
354,503
251,641
135,693
91,946
100,035
127,604
227,639
110,972
147,795
228,379
103,815
272,359
376,174
241,697
101,033
371,591
75,650
396,974
472,624
304,088
25,000
325,918
350,918
543,833
693,438
473,695
763,576
1,237,271
758,424
90,176
183,197
40,176
233,197
273,373
207,493
1976
45,044
196,956
10,044
231,956
242,000
209,573
128,049
315,917
83,849
360,117
443,966
280,785
130,396
184,222
90,396
224,222
314,618
214,621
118,025
290,298
73,025
335,298
408,323
294,627
70,132
322,265
30,132
362,265
392,397
287,812
78,168
450,267
65,680
462,755
528,435
378,580
69,150
300,279
34,150
335,279
369,429
273,112
YONKERS, NY
291,348
170,478
216,348
245,478
461,826
231,088
SLEEPY HOLLOW, NY
280,825
102,486
129,744
253,567
383,311
247,803
OLD BRIDGE, NJ
85,617
109,980
56,190
139,407
195,597
139,137
BREWSTER, NY
117,603
78,076
72,403
123,276
195,679
118,832
FLUSHING, NY
118,309
280,435
78,309
320,435
398,744
248,372
278,517
243,120
173,667
133,198
113,369
193,496
306,865
183,514
BRIARCLIFF MANOR, NY
652,213
103,753
501,687
254,279
755,966
244,336
95,328
102,639
73,750
124,217
197,967
120,677
88,865
193,679
63,315
219,229
282,544
218,236
106,363
103,035
79,275
130,123
209,398
128,015
146,159
407,286
43,461
509,984
553,445
410,723
GLENDALE, NY
124,438
287,907
86,160
326,185
412,345
281,583
OZONE PARK, NY
57,289
331,799
44,715
344,373
389,088
299,924
LONG ISLAND CITY, NY
106,592
151,819
73,260
185,151
258,411
169,016
RIDGE, NY
276,942
73,821
200,000
150,763
350,763
132,752
1977
NEW CITY, NY
180,979
100,597
109,025
172,551
281,576
172,312
1978
W. HAVERSTRAW, NY
194,181
38,141
140,000
92,322
232,322
89,998
271,332
271,334
74,928
250,382
44,957
280,353
325,310
222,546
RONKONKOMA, NY
76,478
208,121
46,057
238,542
284,599
234,859
STONY BROOK, NY
175,921
44,529
105,000
115,450
220,450
114,868
MILLER PLACE, NY
110,000
103,160
66,000
147,160
213,160
146,205
LAKE RONKONKOMA, NY
87,097
156,576
51,000
192,673
243,673
191,078
E. PATCHOGUE, NY
57,049
210,390
34,213
233,226
267,439
232,540
AMITYVILLE, NY
70,246
139,953
42,148
168,051
210,199
BETHPAGE, NY
210,990
38,356
126,000
123,346
249,346
122,985
HUNTINGTON STATION, NY
140,735
52,045
84,000
108,780
192,780
108,702
BALDWIN, NY
101,952
106,328
61,552
146,728
208,280
125,641
ELMONT, NY
388,848
114,933
231,000
272,781
503,781
242,996
NORTH BABYLON, NY
91,888
117,066
59,059
149,895
208,954
148,060
CENTRAL ISLIP, NY
103,183
151,449
61,435
193,197
254,632
120,393
67,315
187,708
1979
222,525
1981
116,328
232,254
75,000
273,582
348,582
268,060
1980
191,420
390,783
116,554
465,649
582,203
352,385
156,382
123,032
85,854
193,560
279,414
191,476
BRISTOL, CT
108,808
81,684
44,000
146,492
190,492
144,412
1982
CROMWELL, CT
70,017
183,119
24,000
229,136
253,136
EAST HARTFORD, CT
208,004
60,493
184,497
268,497
184,440
FRANKLIN, CT
50,904
168,470
20,232
199,142
219,374
198,684
MANCHESTER, CT
65,590
156,628
64,750
157,468
222,218
157,082
MERIDEN, CT
207,873
39,829
163,702
247,702
163,335
NEW MILFORD, CT
113,947
121,174
235,121
233,506
NORWALK, CT
257,308
128,940
104,000
282,248
386,248
281,771
SOUTHINGTON, CT
115,750
158,561
70,750
203,561
274,311
203,086
TERRYVILLE, CT
182,308
98,911
74,000
207,219
281,219
207,115
TOLLAND, CT
107,902
100,178
164,080
208,080
162,050
WATERFORD, CT
76,981
133,059
210,040
205,914
WEST HAVEN, CT
185,138
48,619
159,757
233,757
158,374
AGAWAM, MA
65,000
120,665
185,665
184,608
GRANBY, MA
58,804
232,477
267,281
291,281
217,247
HADLEY, MA
119,276
68,748
36,080
151,944
188,024
148,960
PITTSFIELD, MA
97,153
87,874
145,027
185,027
123,167
118,273
50,000
191,440
241,440
190,902
SOUTH HADLEY, MA
232,445
54,351
90,000
196,796
286,796
193,084
SPRINGFIELD, MA
139,373
239,713
329,086
379,086
260,748
1983
239,087
194,090
1984
WESTFIELD, MA
123,323
96,093
169,416
219,416
167,009
OSSINING, NY
140,992
104,761
97,527
148,226
245,753
143,576
FREEHOLD, NJ
494,275
68,507
402,834
159,948
562,782
94,590
HOWELL, NJ
9,750
174,857
184,607
184,257
LAKEWOOD, NJ
130,148
77,265
70,148
137,265
207,413
136,858
NORTH PLAINFIELD, NJ
227,190
239,709
175,000
291,899
466,899
285,546
SOUTH AMBOY, NJ
299,678
94,088
178,950
214,816
393,766
213,777
GLEN HEAD, NY
234,395
192,295
102,645
324,045
426,690
NEW ROCHELLE, NY
188,932
34,649
103,932
119,649
223,581
119,320
108,348
85,793
64,290
129,851
194,141
100,390
126,188
106,805
72,344
160,649
232,993
159,095
PLAINVILLE, CT
80,000
290,433
370,433
338,333
FRANKLIN SQUARE, NY
152,572
121,756
137,315
137,013
274,328
98,722
SEAFORD, NY
32,000
157,665
189,665
172,250
276,831
376,706
168,423
485,114
653,537
377,249
NEW HAVEN, CT
1,412,860
56,420
898,470
570,810
1,469,280
302,425
1985
359,906
185,954
2004
1,594,129
1,036,184
557,945
115,310
253,639
149,553
104,086
21,509
365,028
237,268
127,760
26,402
COBALT, CT
395,683
204,435
DURHAM, CT
993,909
513,520
ELLINGTON, CT
1,294,889
841,678
453,211
93,661
ENFIELD, CT
259,881
157,966
FARMINGTON, CT
466,271
303,076
163,195
33,728
HARTFORD, CT
664,966
432,228
232,738
48,102
570,898
371,084
199,814
41,297
1,531,772
989,165
542,607
115,232
MIDDLETOWN, CT
1,038,592
675,085
363,507
75,123
NEW BRITAIN, CT
390,497
253,823
136,674
28,246
NEWINGTON, CT
953,512
619,783
333,729
68,970
NORTH HAVEN, CT
405,389
251,985
153,404
40,249
544,503
353,927
190,576
39,386
PLYMOUTH, CT
930,885
605,075
325,810
67,332
SOUTH WINDHAM, CT
644,141
1,397,938
598,394
1,443,685
2,042,079
144,051
SOUTH WINDSOR, CT
544,857
336,737
208,120
64,274
SUFFIELD, CT
237,401
602,635
200,878
639,158
840,036
232,644
VERNON, CT
1,434,223
741,014
WALLINGFORD, CT
550,553
334,901
215,652
55,516
WATERBURY, CT
804,040
516,387
287,653
65,095
515,172
334,862
180,310
37,262
468,469
304,505
163,964
33,888
WATERTOWN, CT
924,586
566,986
357,600
115,395
WETHERSFIELD, CT
446,610
230,749
1,214,831
789,640
425,191
87,875
WESTBROOK, CT
344,881
178,188
WILLIMANTIC, CT
716,782
465,908
250,874
51,848
WINDSOR, CT
1,042,081
669,804
372,277
192,345
WINDSOR LOCKS, CT
1,433,330
740,554
360,664
74,540
BLOOMFIELD, CT
141,452
54,786
106,238
196,238
103,807
1986
SIMSBURY, CT
317,704
144,637
206,700
255,641
462,341
195,906
RIDGEFIELD, CT
535,140
33,590
347,900
220,830
568,730
122,288
BRIDGEPORT, CT
349,500
56,209
227,600
178,109
405,709
113,357
510,760
209,820
332,200
388,380
720,580
258,459
313,400
20,303
204,100
129,603
333,703
71,986
STAMFORD, CT
506,860
15,635
329,700
192,795
522,495
99,846
245,100
159,600
106,152
265,752
60,930
24,314
133,614
337,714
75,832
377,600
83,549
245,900
215,249
461,149
146,327
526,775
63,505
342,700
247,580
590,280
151,300
338,415
27,786
219,800
146,401
366,201
82,955
538,400
176,230
350,600
364,030
714,630
265,749
DARIEN, CT
667,180
26,061
434,300
258,941
693,241
136,480
WESTPORT, CT
603,260
23,070
392,500
233,830
626,330
120,149
112,305
323,065
715,565
210,644
506,580
40,429
217,309
547,009
123,159
STRATFORD, CT
301,300
70,735
196,200
175,835
372,035
120,250
285,200
14,728
185,700
114,228
299,928
61,763
CHESHIRE, CT
490,200
19,050
319,200
190,050
509,250
100,561
MILFORD, CT
293,512
43,846
191,000
146,358
337,358
90,711
FAIRFIELD, CT
430,000
13,631
280,000
163,631
443,631
83,910
619,018
401,996
217,022
36,230
1988
233,000
32,563
151,700
113,863
265,563
70,402
217,000
23,889
141,300
99,589
240,889
59,274
401,630
47,610
166,861
282,379
449,240
277,774
346,442
16,990
230,000
133,432
363,432
132,159
WILTON, CT
518,881
71,425
337,500
252,806
590,306
154,446
133,022
86,915
131,312
88,625
219,937
1987
555,826
13,797
301,322
268,301
569,623
92,648
1991
351,771
58,812
204,027
206,556
410,583
117,379
1992
AVON, CT
730,886
402,949
327,937
111,494
2002
WILMINGTON, DE
309,300
67,834
201,400
175,734
377,134
118,194
ST. GEORGES, DE
442,014
218,906
324,725
336,195
660,920
301,427
103,748
213,048
417,148
146,061
381,700
156,704
248,600
289,804
538,404
196,254
CLAYMONT, DE
237,200
30,878
116,378
268,078
73,402
NEWARK, DE
405,800
35,844
264,300
177,344
441,644
102,647
369,600
38,077
240,700
166,977
407,677
98,578
446,000
33,323
290,400
188,923
479,323
107,146
21,971
139,671
359,471
77,613
LEWISTON, ME
341,900
89,500
222,400
209,000
431,400
146,361
PORTLAND, ME
325,400
42,652
211,900
156,152
368,052
96,727
BIDDEFORD, ME
618,100
8,009
235,000
391,109
626,109
SACO, ME
204,006
37,173
150,694
90,485
241,179
SANFORD, ME
265,523
9,178
201,316
73,385
274,701
WESTBROOK, ME
93,345
193,654
50,431
236,568
286,999
202,561
WISCASSET, ME
156,587
33,455
90,837
99,205
190,042
SOUTH PORTLAND, ME
180,689
84,980
110,689
154,980
265,669
180,338
62,629
101,338
141,629
242,967
140,005
N. WINDHAM, ME
161,365
53,923
86,365
128,923
215,288
AUGUSTA, ME
482,859
68,242
276,678
274,423
551,101
72,123
BELTSVILLE, MD
1,130,024
730,521
525,062
1,050,123
BLADENSBURG, MD
570,719
BOWIE, MD
1,084,367
CAPITOL HEIGHTS, MD
627,791
CLINTON, MD
650,620
COLLEGE PARK, MD
536,476
445,161
DISTRICT HEIGHTS, MD
479,404
388,089
FORESTVILLE, MD
1,038,709
FORT WASHINGTON, MD
422,332
GREENBELT, MD
1,152,853
HYATTSVILLE, MD
490,819
593,548
LANDOVER, MD
753,349
662,034
LANDOVER HILLS, MD
1,358,312
456,575
LANHAM, MD
821,836
LAUREL, MD
2,522,579
1,415,384
1,529,528
88
1,266,997
1,209,925
696,278
OXON HILL, MD
1,255,582
RIVERDALE, MD
787,593
582,134
SEAT PLEASANT, MD
467,990
SUITLAND, MD
376,675
673,449
TEMPLE HILLS, MD
331,017
UPPER MARLBORO, MD
844,665
BALTIMORE, MD
429,100
139,393
308,700
259,793
568,493
218,237
RANDALLSTOWN, MD
590,600
33,594
384,600
239,594
624,194
131,788
EMMITSBURG, MD
146,949
73,613
101,949
118,613
220,562
118,455
MILFORD, MA
214,331
192,464
209,555
63,621
136,000
137,176
273,176
98,617
289,580
38,615
188,400
139,795
328,195
86,661
WEST ROXBURY, MA
23,134
194,134
513,334
101,899
MAYNARD, MA
735,200
12,714
478,800
269,114
747,914
133,559
GARDNER, MA
1,008,400
73,740
656,700
425,440
1,082,140
234,338
STOUGHTON, MA
775,300
34,554
504,900
304,954
809,854
160,575
ARLINGTON, MA
518,300
27,906
208,706
546,206
113,941
METHUEN, MA
379,664
64,941
198,705
444,605
129,287
BELMONT, MA
27,938
133,038
329,238
76,538
RANDOLPH, MA
743,200
25,069
484,000
284,269
768,269
147,273
ROCKLAND, MA
534,300
23,616
210,016
557,916
111,897
WATERTOWN, MA
357,500
296,588
321,030
333,058
654,088
229,910
WEYMOUTH, MA
643,297
36,516
418,600
261,213
679,813
139,635
DEDHAM, MA
225,824
19,150
125,824
119,150
244,974
118,904
HINGHAM, MA
352,606
22,484
242,520
132,570
375,090
131,650
1989
ASHLAND, MA
606,700
17,424
395,100
229,024
624,124
115,358
WOBURN, MA
507,600
294,303
801,903
151,857
389,700
28,871
253,800
164,771
418,571
93,523
HYDE PARK, MA
499,175
29,673
321,800
207,048
528,848
116,035
EVERETT, MA
269,500
190,931
460,431
115,415
281,200
51,100
183,100
149,200
332,300
NORTH ATTLEBORO, MA
662,900
16,549
431,700
247,749
679,449
126,177
WORCESTER, MA
497,642
67,806
243,648
565,448
153,054
NEW BEDFORD, MA
522,300
18,274
340,100
200,474
540,574
104,595
FALL RIVER, MA
859,800
24,423
559,900
324,323
884,223
166,109
385,600
21,339
251,100
155,839
406,939
84,587
WEBSTER, MA
1,012,400
67,645
659,300
420,745
1,080,045
233,100
CLINTON, MA
586,600
52,725
382,000
257,325
639,325
147,896
FOXBOROUGH, MA
426,593
34,403
325,000
135,996
460,996
131,559
1990
95,698
230,198
481,298
157,549
HYANNIS, MA
650,800
42,552
423,800
269,552
693,352
150,756
HOLYOKE, MA
329,500
38,345
214,600
153,245
367,845
NEWTON, MA
691,000
42,832
450,000
283,832
733,832
152,729
FALMOUTH, MA
519,382
43,841
458,461
104,762
563,223
104,235
16,282
187,282
506,482
97,793
578,600
185,285
376,800
387,085
763,885
252,606
FAIRHAVEN, MA
725,500
46,752
470,900
301,352
772,252
169,368
BELLINGHAM, MA
734,189
132,725
476,200
390,714
866,914
254,390
482,275
95,553
293,000
284,828
577,828
198,387
SEEKONK, MA
1,072,700
29,112
698,500
403,312
1,101,812
203,696
WALPOLE, MA
449,900
20,586
177,486
470,486
92,786
NORTH ANDOVER, MA
393,700
220,132
256,400
357,432
613,832
240,597
LOWELL, MA
360,949
83,674
200,949
243,674
444,623
243,481
AUBURN, MA
175,048
30,890
125,048
80,890
205,938
80,795
147,330
188,059
50,731
284,658
335,389
249,953
IPSWICH, MA
138,918
46,831
95,718
90,031
185,749
88,864
BEVERLY, MA
275,000
150,741
250,741
425,741
222,188
BILLERICA, MA
400,000
135,809
250,000
285,809
535,809
276,095
HAVERHILL, MA
17,182
225,000
192,182
417,182
192,094
CHATHAM, MA
197,302
297,302
472,302
250,106
HARWICH, MA
12,044
150,000
87,044
237,044
84,749
19,161
144,161
294,161
142,766
LEOMINSTER, MA
185,040
49,592
85,040
149,592
234,632
147,540
375,000
175,969
300,969
550,969
254,684
300,000
50,861
200,861
350,861
199,667
ORLEANS, MA
260,000
37,637
185,000
112,637
297,637
109,463
PEABODY, MA
200,363
325,363
600,363
293,518
QUINCY, MA
36,112
111,112
236,112
109,724
REVERE, MA
193,854
293,854
443,854
263,076
SALEM, MA
25,393
125,393
300,393
124,521
TEWKSBURY, MA
90,338
140,338
215,338
138,159
322,942
397,942
472,942
331,983
WEST YARMOUTH, MA
33,165
133,165
258,165
132,472
WESTFORD, MA
196,493
296,493
471,493
251,058
350,000
45,681
195,681
395,681
194,547
YARMOUTHPORT, MA
26,940
176,940
326,940
BRIDGEWATER, MA
190,360
36,762
87,122
227,122
83,296
235,794
232,800
476,102
174,233
309,466
340,869
650,335
369,306
27,792
240,049
157,049
397,098
60,090
BARRE, MA
535,614
163,028
348,149
350,493
698,642
178,134
275,866
11,674
179,313
108,227
287,540
37,421
BROCKTON, MA
194,619
291,172
470,485
219,607
177,978
29,790
115,686
92,082
207,768
46,403
167,745
275,852
443,597
171,597
DUDLEY, MA
302,563
141,993
196,666
247,890
444,556
124,599
FITCHBURG, MA
247,330
16,384
202,675
61,039
263,714
45,484
FRANKLIN, MA
253,619
18,437
164,852
107,204
272,056
41,534
342,608
11,101
222,695
131,014
353,709
42,314
222,472
7,282
144,607
85,147
229,754
28,044
195,776
177,454
127,254
245,976
373,230
162,472
231,372
157,356
150,392
238,336
388,728
150,160
NORTHBOROUGH, MA
404,900
18,353
263,185
160,068
423,253
54,711
1993
WEST BOYLSTON, MA
311,808
28,937
138,070
340,745
57,909
186,877
33,510
121,470
98,917
220,387
50,895
SOUTH YARMOUTH, MA
49,961
146,514
325,827
71,099
STERLING, MA
165,998
332,634
642,100
173,974
SUTTON, MA
714,159
187,355
464,203
437,311
901,514
220,738
150,472
247,025
426,338
147,677
FRAMINGHAM, MA
297,568
203,147
193,419
307,296
500,715
193,930
UPTON, MA
428,498
24,611
278,524
174,585
453,109
64,071
WESTBOROUGH, MA
205,994
315,127
517,802
197,599
HARWICHPORT, MA
382,653
173,989
248,724
307,918
556,642
173,738
547,283
205,733
355,734
397,282
753,016
215,367
978,880
191,413
636,272
534,021
1,170,293
242,758
390,276
216,589
253,679
353,186
606,865
205,805
146,832
140,589
95,441
191,980
287,421
125,915
LEICESTER, MA
266,968
197,898
173,529
291,337
464,866
175,087
NORTH GRAFTON, MA
244,720
35,136
159,068
120,788
279,856
56,356
SOUTHBRIDGE, MA
249,169
62,205
161,960
149,414
311,374
84,110
OXFORD, MA
293,664
9,098
190,882
111,880
302,762
36,505
89
284,765
45,285
185,097
144,953
330,050
71,865
ATHOL, MA
164,629
22,016
107,009
79,636
186,645
36,657
142,383
194,291
92,549
244,125
336,674
157,865
271,417
183,331
176,421
278,327
454,748
171,821
ORANGE, MA
301,102
4,015
230,117
305,117
400,449
22,280
260,294
162,435
422,729
59,478
262,436
216,584
JONESBORO, AR
2,985,267
330,322
2,654,945
302,998
BELLFLOWER, CA
1,369,511
910,252
459,259
67,741
BENICIA, CA
2,223,362
1,057,519
1,165,843
179,594
COACHELLA, CA
2,234,957
1,216,646
1,018,312
146,272
EL CAJON, CA
1,292,114
779,828
512,286
66,742
FILLMORE, CA
1,354,113
950,061
404,052
59,378
HESPERIA, CA
1,643,449
849,352
794,097
107,894
LA PALMA, CA
1,971,592
1,389,383
582,210
84,221
POWAY, CA
1,439,021
179,877
SAN DIMAS, CA
1,941,008
749,066
1,191,942
148,569
HALEIWA, HI
1,521,648
1,058,124
463,524
84,262
HONOLULU, HI
1,538,997
1,219,217
319,780
45,501
1,768,878
1,192,216
576,662
75,551
1,070,141
980,680
89,460
19,847
9,210,707
8,193,984
1,016,724
137,758
KANEOHE, HI
1,977,671
1,473,275
504,396
74,249
1,363,901
821,691
542,210
82,742
WAIANAE, HI
1,996,811
870,775
1,126,036
148,316
1,520,144
648,273
871,871
114,252
WAIPAHU, HI
2,458,592
945,327
1,513,264
190,279
COTTAGE HILLS, IL
249,419
26,199
223,220
37,762
FAIRVIEW HEIGHTS, IL
516,564
78,440
438,124
63,912
2,258,897
721,876
1,537,022
197,323
802,414
110,333
ELLICOTT CITY, MD
895,049
129,547
KERNERSVILLE, NC
296,770
72,777
223,994
31,523
638,633
338,386
300,247
49,401
608,441
250,505
357,936
56,196
LEXINGTON, NC
204,139
43,311
160,828
27,660
MADISON, NC
420,878
45,705
375,174
NEW BERN, NC
349,946
190,389
159,557
30,627
TAYLORSVILLE, NC
422,809
134,188
288,621
222,808
WALKERTOWN, NC
844,749
488,239
356,509
62,169
WALNUT COVE, NC
1,140,945
513,565
627,380
108,922
WINSTON SALEM, NC
696,397
251,987
444,410
76,494
BELFIELD, ND
1,232,010
381,909
850,101
203,453
ALLENSTOWN, NH
1,787,116
466,994
1,320,122
188,198
BEDFORD, NH
2,301,297
1,271,171
1,030,126
161,736
HOOKSETT, NH
1,561,628
823,915
737,712
182,135
AUSTIN, TX
2,368,425
738,210
1,630,215
205,486
462,233
274,300
187,933
33,472
3,510,062
1,594,536
1,915,526
244,250
BEDFORD, TX
353,047
112,953
240,094
FT WORTH, TX
2,114,924
866,062
1,248,863
177,260
HARKER HEIGHTS, TX
2,051,704
588,320
1,463,384
302,995
HOUSTON, TX
1,688,904
223,664
1,465,240
175,159
KELLER, TX
2,506,573
996,029
1,510,544
202,293
LEWISVILLE, TX
493,734
109,925
383,809
42,644
MIDLOTHIAN, TX
429,142
71,970
357,172
58,301
N RICHLAND HILLS, TX
314,246
125,745
188,501
27,981
SAN MARCOS, TX
1,953,653
250,739
1,702,914
209,753
TEMPLE, TX
2,405,953
1,215,488
1,190,465
163,100
THE COLONY, TX
4,395,696
337,083
4,058,613
471,646
WACO, TX
3,884,407
894,356
2,990,051
411,823
BROOKLAND, AR
1,467,809
149,218
1,318,591
112,884
868,501
173,096
695,405
62,568
MANCHESTER, NH
261,100
36,404
170,000
127,504
297,504
79,252
DERRY, NH
417,988
16,295
157,988
276,295
434,283
276,083
PLAISTOW, NH
300,406
110,031
244,694
165,743
410,437
SOMERSWORTH, NH
180,800
60,497
117,700
123,597
241,297
78,667
SALEM, NH
279,047
763,047
141,775
LONDONDERRY, NH
703,100
31,092
457,900
276,292
734,192
146,480
ROCHESTER, NH
939,100
12,337
600,000
351,437
951,437
173,976
HAMPTON, NH
193,103
26,449
135,598
83,954
219,552
83,871
MERRIMACK, NH
151,993
205,823
100,598
257,218
357,816
209,001
NASHUA, NH
197,142
219,639
155,837
260,944
416,781
210,590
PELHAM, NH
169,182
53,497
136,077
86,602
222,679
82,095
PEMBROKE, NH
138,492
174,777
100,837
212,432
313,269
166,808
175,188
208,103
95,471
287,820
383,291
244,378
210,805
15,012
157,520
68,297
225,817
68,251
EXETER, NH
113,285
149,265
197,550
262,550
192,556
CANDIA, NH
130,000
184,004
234,004
314,004
231,035
EPPING, NH
131,403
120,000
181,403
301,403
168,376
EPSOM, NH
220,000
96,022
155,000
161,022
316,022
148,994
MILFORD, NH
190,000
41,689
115,000
116,689
231,689
114,021
PORTSMOUTH, NH
20,257
105,257
255,257
105,200
228,704
328,704
453,704
278,025
47,484
147,484
497,484
143,711
SEABROOK, NH
199,780
19,102
124,780
94,102
218,882
93,917
MCAFEE, NJ
670,900
15,711
436,900
249,711
686,611
126,157
HAMBURG, NJ
598,600
22,121
389,800
230,921
620,721
121,247
WEST MILFORD, NJ
502,200
31,918
327,000
207,118
534,118
115,376
LIVINGSTON, NJ
871,800
30,003
567,700
334,103
901,803
174,067
TRENTON, NJ
373,600
9,572
243,300
139,872
383,172
71,409
WILLINGBORO, NJ
425,800
29,928
277,300
178,428
455,728
100,714
BAYONNE, NJ
341,500
18,947
138,047
360,447
75,719
CRANFORD, NJ
342,666
29,222
149,488
371,888
86,426
NUTLEY, NJ
512,504
329,248
183,256
47,504
466,100
13,987
303,500
176,587
480,087
91,065
WALL TOWNSHIP, NJ
336,441
55,709
121,441
270,709
392,150
268,546
UNION, NJ
41,361
212,361
531,561
120,230
CRANBURY, NJ
31,467
243,067
638,167
132,331
HILLSIDE, NJ
31,552
106,552
256,552
105,855
SPOTSWOOD, NJ
466,675
69,036
232,211
535,711
146,805
LONG BRANCH, NJ
514,300
22,951
334,900
202,351
537,251
108,466
ELIZABETH, NJ
18,881
160,381
424,681
85,530
BELLEVILLE, NJ
397,700
39,410
259,000
178,110
437,110
105,204
NEPTUNE CITY, NJ
269,600
175,600
94,000
44,808
BASKING RIDGE, NJ
362,172
32,960
195,132
395,132
140,493
DEPTFORD, NJ
24,745
122,845
305,945
70,586
CHERRY HILL, NJ
13,879
138,579
371,379
72,874
SEWELL, NJ
551,912
48,485
355,712
244,685
600,397
140,704
FLEMINGTON, NJ
546,742
17,494
346,342
217,894
564,236
112,160
BLACKWOOD, NJ
401,700
36,736
261,600
176,836
438,436
103,518
684,650
33,275
444,800
273,125
717,925
147,862
LODI, NJ
1,037,440
587,823
449,617
171,979
EAST ORANGE, NJ
421,508
37,977
272,100
187,385
459,485
110,471
BELMAR, NJ
566,375
24,371
410,800
179,946
590,746
127,114
MOORESTOWN, NJ
470,100
27,064
306,100
191,064
497,164
105,199
SPRING LAKE, NJ
345,500
42,194
162,694
387,694
97,100
HILLTOP, NJ
16,758
131,658
346,258
70,806
CLIFTON, NJ
301,518
6,413
157,931
307,931
113,298
FRANKLIN TWP., NJ
683,000
30,257
268,457
713,257
143,570
708,160
33,072
460,500
280,732
741,232
148,630
CLEMENTON, NJ
562,500
27,581
366,300
223,781
590,081
120,759
ASBURY PARK, NJ
418,966
18,038
164,904
437,004
88,655
MIDLAND PARK, NJ
201,012
4,080
55,092
205,092
52,999
PATERSON, NJ
619,548
16,765
402,900
233,413
636,313
120,103
OCEAN CITY, NJ
843,700
113,162
549,400
407,462
956,862
253,286
WHITING, NJ
447,199
3,519
167,090
283,628
450,718
283,061
HILLSBOROUGH, NJ
237,122
7,729
144,851
244,851
73,093
PRINCETON, NJ
40,615
285,815
743,715
157,211
NEPTUNE, NJ
455,726
39,090
201,816
494,816
116,219
NEWARK, NJ
3,086,592
164,432
2,005,800
1,245,224
3,251,024
681,531
OAKHURST, NJ
225,608
46,405
100,608
171,405
272,013
170,936
215,468
38,163
149,237
104,394
253,631
103,501
PINE HILL, NJ
190,568
39,918
115,568
114,918
230,486
113,625
TUCKERTON, NJ
224,387
132,864
131,018
226,233
357,251
223,797
WEST DEPTFORD, NJ
245,450
50,295
151,053
144,692
295,745
143,527
ATCO, NJ
153,159
85,853
131,766
107,246
239,012
SOMERVILLE, NJ
252,717
254,230
200,500
306,447
506,947
217,483
CINNAMINSON, NJ
326,501
24,931
176,501
174,931
351,432
173,817
RIDGEFIELD PARK, NJ
273,549
123,549
95,881
1997
BRICK, NJ
1,507,684
1,000,000
507,684
274,351
2000
LAKE HOPATCONG, NJ
1,305,034
800,000
505,034
327,094
BERGENFIELD, NJ
381,590
36,271
117,861
417,861
116,222
ORANGE, NJ
24,573
122,673
305,773
71,167
BLOOMFIELD, NJ
695,000
21,021
371,400
344,621
716,021
287,800
SCOTCH PLAINS, NJ
331,063
14,455
130,918
345,518
70,788
433,800
48,677
282,500
199,977
482,477
120,394
PLAINFIELD, NJ
29,975
193,975
500,075
107,064
MOUNTAINSIDE, NJ
664,100
31,620
264,020
695,720
140,933
WATCHUNG, NJ
20,339
177,239
470,239
94,344
GREEN VILLAGE, NJ
277,900
44,471
127,900
194,471
322,371
192,586
IRVINGTON, NJ
409,700
54,841
266,800
197,741
464,541
122,878
JERSEY CITY, NJ
438,000
51,856
204,656
489,856
123,893
441,900
32,951
187,051
474,851
106,117
DOVER, NJ
30,153
241,753
636,853
130,149
PARLIN, NJ
418,046
29,075
263,946
183,175
447,121
102,345
UNION CITY, NJ
799,500
3,440
520,600
282,340
802,940
136,383
COLONIA, NJ
253,100
3,395
164,800
91,695
256,495
45,486
NORTH BERGEN, NJ
629,527
81,006
409,527
301,006
710,533
184,442
WAYNE, NJ
21,766
192,766
511,966
103,277
HASBROUCK HEIGHTS, NJ
639,648
19,648
416,000
243,296
659,296
125,636
952,200
74,451
620,100
406,551
1,026,651
231,266
319,521
24,445
204,621
139,345
343,966
78,953
RIDGEWOOD, NJ
36,959
282,159
740,059
151,110
HAWTHORNE, NJ
10,967
96,467
256,067
51,723
474,100
42,926
208,326
517,026
121,563
WASHINGTON TOWNSHIP, NJ
912,000
21,261
593,900
339,361
933,261
172,441
PARAMUS, NJ
42,394
175,494
424,094
105,839
43,808
183,908
445,508
110,590
FORT LEE, NJ
1,245,500
39,408
811,100
473,808
1,284,908
245,685
AUDUBON, NJ
421,800
12,949
274,700
160,049
434,749
82,963
69,461
187,161
406,961
125,353
MAGNOLIA, NJ
26,488
141,388
355,988
81,258
BEVERLY, NJ
24,003
188,003
494,103
101,231
PISCATAWAY, NJ
269,200
28,232
175,300
122,132
297,432
72,669
WEST ORANGE, NJ
34,733
313,633
834,233
167,676
ROCKVILLE CENTRE, NY
350,325
315,779
464,704
666,104
367,737
368,625
159,763
235,500
292,888
528,388
194,487
BELLAIRE, NY
73,358
188,258
402,858
118,915
BAYSIDE, NY
202,833
288,333
447,933
199,525
153,184
67,266
76,592
143,858
82,504
DOBBS FERRY, NY
670,575
33,706
269,981
704,281
145,463
NORTH MERRICK, NY
510,350
141,506
319,656
651,856
195,313
GREAT NECK, NY
500,000
24,468
74,468
524,468
74,455
462,468
45,355
300,900
206,923
507,823
122,157
GARDEN CITY, NY
361,600
33,774
159,874
395,374
92,693
HEWLETT, NY
85,618
256,618
575,818
136,646
EAST HILLS, NY
241,613
21,070
262,683
20,501
111,300
126,300
191,300
125,714
LEVITTOWN, NY
502,757
42,113
217,870
544,870
124,889
546,400
113,057
355,800
303,657
659,457
182,469
ST. ALBANS, NY
87,250
202,150
416,750
135,207
RIDGEWOOD, NY
278,372
38,578
66,950
316,950
30,334
626,700
282,677
408,100
501,277
909,377
339,892
476,816
272,765
443,481
749,581
307,713
83,257
196,757
408,657
107,452
246,576
410,576
716,676
267,004
188,900
26,286
123,000
92,186
215,186
56,733
360,056
90,633
224,156
226,533
450,689
125,300
258,600
60,120
153,920
318,720
100,798
SCARSDALE, NY
257,100
102,632
167,400
192,332
359,732
132,271
EASTCHESTER, NY
614,700
34,500
400,300
248,900
649,200
135,997
51,741
169,441
389,241
102,451
270,436
417,536
692,236
284,431
COMMACK, NY
321,400
25,659
209,300
137,759
347,059
78,952
SAG HARBOR, NY
703,600
36,012
458,200
281,412
739,612
152,932
EAST HAMPTON, NY
659,127
39,313
427,827
270,613
698,440
147,997
MASTIC, NY
110,180
219,480
423,580
162,281
390,200
329,357
468,457
719,557
321,137
1,020,400
61,875
664,500
417,775
1,082,275
228,216
GLENVILLE, NY
343,723
98,299
222,222
442,022
151,393
202,826
42,877
144,000
101,703
245,703
91,641
MINEOLA, NY
34,411
153,511
375,911
90,255
ALBANY, NY
404,888
104,378
247,666
509,266
170,973
1,646,307
259,443
1,071,500
834,250
1,905,750
532,030
RENSSELAER, NY
1,653,500
514,444
1,076,800
1,091,144
2,167,944
789,339
683,781
286,504
397,277
108,728
PORT JEFFERSON, NY
387,478
63,743
205,468
451,221
131,214
SALT POINT, NY
554,243
301,775
252,468
103,331
ROTTERDAM, NY
140,600
100,399
91,600
149,399
240,999
116,342
231,100
44,049
125,949
275,149
80,070
ELLENVILLE, NY
53,690
134,990
286,690
89,625
CHATHAM, NY
349,133
131,805
255,938
480,938
182,302
HYDE PARK, NY
12,015
139,100
126,015
265,115
SHRUB OAK, NY
1,060,700
81,807
690,700
451,807
1,142,507
255,357
229,435
237,100
125,067
154,400
207,767
362,167
135,688
288,603
393,703
589,903
283,923
357,904
39,588
230,300
167,192
397,492
101,240
176,590
298,490
526,090
201,804
93,817
120,396
67,200
147,013
214,213
130,646
104,130
360,410
374,540
464,540
326,249
136,791
78,987
140,778
215,778
138,712
EAST MEADOW, NY
425,000
86,005
186,005
511,005
154,006
88,922
224,822
478,622
152,059
MERRICK, NY
477,498
77,925
240,764
314,659
555,423
157,414
MASSAPEQUA, NY
333,400
53,696
217,100
169,996
387,096
109,017
TROY, NY
60,569
146,500
139,069
285,569
97,618
290,923
5,007
151,280
144,650
295,930
86,176
541,637
477,319
MIDDLETOWN, NY
751,200
166,411
489,200
428,411
917,611
244,445
88,863
198,163
402,263
110,920
WANTAGH, NY
261,814
85,758
172,572
347,572
139,271
NORTHPORT, NY
241,100
33,036
157,000
117,136
274,136
73,013
BALLSTON, NY
160,000
134,021
184,021
294,021
181,404
BALLSTON SPA, NY
210,000
105,073
215,073
315,073
211,564
COLONIE, NY
245,150
28,322
120,150
153,322
273,472
150,416
DELMAR, NY
42,478
70,000
122,478
192,478
119,169
FORT EDWARD, NY
65,739
140,739
290,739
140,132
QUEENSBURY, NY
105,592
165,000
165,592
330,592
164,944
HALFMOON, NY
415,000
205,598
228,100
392,498
620,598
386,836
HANCOCK, NY
109,470
159,470
209,470
156,719
59,198
184,198
359,198
183,391
LATHAM, NY
68,160
193,160
343,160
188,752
MALTA, NY
91,726
216,726
281,726
211,271
MILLERTON, NY
123,063
198,063
298,063
196,919
NEW WINDSOR, NY
94,791
169,791
244,791
161,327
NISKAYUNA, NY
35,421
185,421
460,421
184,584
PLEASANT VALLEY, NY
398,497
115,129
240,000
273,626
513,626
222,558
215,255
65,245
140,255
140,245
280,500
135,714
132,287
166,077
298,364
258,942
1995
SCHENECTADY, NY
298,103
373,103
523,103
369,352
S. GLENS FALLS, NY
58,892
188,700
195,192
383,892
206,620
87,949
81,620
212,949
294,569
211,779
NEWBURGH, NY
430,766
25,850
306,616
456,616
299,080
JERICHO, NY
274,779
155,023
1998
RHINEBECK, NY
203,658
101,829
16,634
PORT EWEN, NY
657,147
176,924
480,223
83,743
CATSKILL, NY
404,988
354,365
50,623
6,075
321,446
196,446
54,588
104,447
99,076
203,523
HUDSON, NY
303,741
126,379
151,871
278,249
430,120
140,534
SAUGERTIES, NY
328,668
63,983
392,651
63,845
QUARRYVILLE, NY
35,917
168,199
35,916
168,200
204,116
163,096
MENANDS, NY
150,580
60,563
49,999
161,144
211,143
149,918
302,564
44,393
142,564
204,393
346,957
201,278
VALATIE, NY
165,590
394,981
90,829
469,742
560,571
439,439
CAIRO, NY
191,928
142,895
46,650
288,173
334,823
280,668
RED HOOK, NY
226,787
222,389
WEST TAGHKANIC, NY
202,750
117,540
121,650
198,640
320,290
138,989
RAVENA, NY
199,900
195,574
SAYVILLE, NY
528,225
228,225
104,223
640,680
370,200
270,480
123,516
572,244
214,744
97,957
516,110
320,125
195,985
89,328
NORTH LINDENHURST, NY
294,866
192,000
102,866
68,199
WYANDANCH, NY
415,414
279,500
135,914
79,142
415,180
251,875
163,305
74,244
FLORAL PARK, NY
616,700
356,400
260,300
118,740
RIVERHEAD, NY
723,346
291,646
133,040
AMHERST, NY
223,009
173,451
49,558
32,208
BUFFALO, NY
312,426
150,888
161,538
80,252
GRAND ISLAND, NY
350,849
247,348
60,442
HAMBURG, NY
294,031
163,906
130,125
54,218
LACKAWANNA, NY
250,030
129,870
120,160
61,720
LEWISTON, NY
205,000
33,333
TONAWANDA, NY
189,296
147,122
42,174
17,573
263,596
11,493
211,337
63,752
275,089
43,718
WEST SENECA, NY
257,142
184,385
72,757
30,322
WILLIAMSVILLE, NY
211,972
176,643
35,329
14,719
ALFRED STATION, NY
714,108
414,108
46,000
AVOCA, NY
935,543
634,543
301,000
BATAVIA, NY
684,279
364,279
320,000
49,067
BYRON, NY
969,117
669,117
CASTILE, NY
307,196
132,196
26,833
CHURCHVILLE, NY
1,011,381
601,381
410,000
62,867
EAST PEMBROKE, NY
787,465
537,465
38,333
FRIENDSHIP, NY
392,517
42,517
53,667
NAPLES, NY
1,257,487
827,487
65,933
ROCHESTER, NY
559,049
159,049
61,333
PERRY, NY
1,443,847
1,043,847
PRATTSBURG, NY
553,136
303,136
SAVONA, NY
1,314,135
964,136
349,999
WARSAW, NY
990,259
690,259
WELLSVILLE, NY
247,281
37,916
823,031
273,031
550,000
84,757
LAKEVILLE, NY
1,027,783
202,857
824,926
91,323
GREIGSVILLE, NY
1,017,739
202,873
814,866
89,426
595,237
305,237
290,000
22,893
PHILADELPHIA, PA
687,000
25,017
447,400
264,617
712,017
137,446
205,495
288,195
442,595
196,645
ALLENTOWN, PA
76,385
201,085
433,885
119,084
NORRISTOWN, PA
241,300
78,419
157,100
162,619
319,719
97,709
BRYN MAWR, PA
221,000
59,832
143,900
136,932
280,832
93,668
CONSHOHOCKEN, PA
77,885
168,985
338,985
116,737
34,285
132,385
315,485
79,638
HUNTINGDON VALLEY, PA
36,439
183,539
458,239
105,807
FEASTERVILLE, PA
510,200
160,144
338,144
670,344
226,939
65,498
164,998
350,698
112,381
289,300
50,010
150,910
339,310
96,859
221,269
362,769
627,069
255,105
417,800
210,406
356,106
628,206
227,069
276,720
405,620
646,320
292,790
HATBORO, PA
61,979
161,479
347,179
108,598
HAVERTOWN, PA
402,000
22,660
170,860
424,660
99,740
MEDIA, PA
326,195
24,082
159,277
350,277
105,741
28,006
417,706
92,695
224,647
343,747
566,147
228,179
ALDAN, PA
45,539
143,639
326,739
88,918
BRISTOL, PA
430,500
82,981
233,481
513,481
154,868
TREVOSE, PA
215,214
16,382
81,596
231,596
76,096
265,200
24,500
172,700
117,000
289,700
66,918
ABINGTON, PA
43,696
151,596
352,996
94,716
61,371
162,271
350,671
108,669
CLIFTON HGTS., PA
428,201
63,403
235,204
491,604
161,928
21,152
172,452
454,952
92,653
SHARON HILL, PA
411,057
39,574
183,831
450,631
108,981
92
5,055
170,455
479,155
83,897
ROSLYN, PA
173,661
295,561
523,161
227,969
CLIFTON HGTS, PA
213,000
46,824
138,700
121,124
259,824
81,437
273,642
402,542
643,242
306,174
MORRISVILLE, PA
33,522
165,222
411,122
95,906
302,999
220,313
181,497
341,815
523,312
293,393
PHOENIXVILLE, PA
413,800
17,561
161,861
431,361
86,345
LANGHORNE, PA
122,202
69,328
141,530
191,530
99,333
POTTSTOWN, PA
48,854
198,854
478,854
120,210
BOYERTOWN, PA
5,373
86,673
238,373
44,127
QUAKERTOWN, PA
379,111
89,812
225,623
468,923
157,434
SOUDERTON, PA
172,170
305,270
553,870
206,609
LANSDALE, PA
243,844
200,458
444,302
124,383
FURLONG, PA
151,150
326,450
101,322
DOYLESTOWN, PA
32,659
174,159
438,459
99,328
120,786
296,086
70,702
TRAPPE, PA
44,509
176,209
422,109
107,287
GETTYSBURG, PA
157,602
28,530
67,602
118,530
186,132
118,167
PARADISE, PA
132,295
151,188
102,295
181,188
283,483
LINWOOD, PA
171,518
22,371
102,968
90,921
193,889
90,076
READING, PA
750,000
49,125
799,125
792,720
ELKINS PARK, PA
275,171
17,524
292,695
91,588
NEW OXFORD, PA
1,044,707
18,687
1,039,520
1,058,207
844,811
1996
GLEN ROCK, PA
20,442
166,633
187,075
149,023
1961
1,251,534
813,997
437,537
3,222
NORTH KINGSTOWN, RI
211,835
25,971
89,135
148,671
237,806
148,205
MIDDLETOWN, RI
306,710
16,364
176,710
146,364
323,074
145,626
WARWICK, RI
376,563
39,933
205,889
210,607
416,496
209,088
PROVIDENCE, RI
191,647
272,627
423,019
154,654
EAST PROVIDENCE, RI
2,297,435
568,241
1,495,700
1,369,976
2,865,676
741,895
ASHAWAY, RI
618,609
402,096
216,513
44,749
309,950
49,546
202,050
157,446
359,496
99,250
PAWTUCKET, RI
212,775
161,188
118,860
255,103
373,963
240,898
434,752
24,730
192,682
459,482
117,853
CRANSTON, RI
12,576
175,176
478,676
89,783
207,100
2,990
55,690
210,090
42,411
BARRINGTON, RI
213,866
384,866
704,066
284,432
34,400
122,700
287,500
74,839
N. PROVIDENCE, RI
542,400
61,717
353,200
250,917
604,117
151,534
486,675
13,947
316,600
184,022
500,622
94,998
WAKEFIELD, RI
39,616
183,916
453,416
102,217
EPHRATA, PA
183,477
96,937
136,809
143,605
280,414
143,596
DOUGLASSVILLE, PA
178,488
23,321
128,738
73,071
201,809
POTTSVILLE, PA
162,402
82,769
43,471
201,700
245,171
192,417
451,360
19,361
147,740
322,981
470,721
317,280
LANCASTER, PA
208,677
24,347
78,254
154,770
233,024
BETHLEHEM, PA
42,927
130,423
121,181
251,604
642,000
17,993
359,993
659,993
HAMBURG, PA
219,280
75,745
164,602
295,025
182,592
82,812
104,338
161,066
265,404
147,623
MOUNTVILLE, PA
195,635
19,506
136,887
215,141
EBENEZER, PA
147,058
88,474
68,804
166,728
235,532
148,286
INTERCOURSE, PA
311,503
81,287
157,801
234,989
392,790
115,614
REINHOLDS, PA
176,520
83,686
82,017
178,189
260,206
165,976
COLUMBIA, PA
225,906
13,206
164,112
239,112
144,883
OXFORD, PA
191,449
118,321
65,212
244,558
309,770
223,504
208,604
52,826
30,000
231,430
261,430
179,819
ROBESONIA, PA
225,913
102,802
258,715
328,715
243,959
KENHORST, PA
143,466
94,592
172,846
238,058
NEFFSVILLE, PA
234,761
45,637
91,296
189,102
280,398
186,954
LEOLA, PA
262,890
102,007
131,189
233,708
364,897
131,417
187,843
9,400
132,031
197,243
131,262
RED LION, PA
221,719
29,788
52,169
199,338
251,507
129,284
137,863
65,352
201,795
267,147
174,658
ROTHSVILLE, PA
169,550
25,188
142,569
194,738
HANOVER, PA
231,028
13,252
174,280
244,280
159,496
HARRISBURG, PA
399,016
347,590
198,740
547,866
746,606
360,151
ADAMSTOWN, PA
213,424
108,844
222,268
322,268
178,442
308,964
83,443
288,069
392,407
274,570
NEW HOLLAND, PA
313,015
106,839
143,465
276,389
419,854
256,032
CHRISTIANA, PA
182,593
11,178
128,559
193,771
WYOMISSING HILLS, PA
319,320
113,176
76,074
356,422
432,496
LAURELDALE, PA
262,079
15,550
86,941
190,688
277,629
189,150
REIFFTON, PA
338,250
43,470
300,075
343,545
W.READING, PA
790,432
68,726
387,641
471,517
859,158
470,893
ARENDTSVILLE, PA
173,759
101,020
32,603
242,176
222,873
MOHNTON, PA
317,228
56,374
66,425
307,177
373,602
294,203
MCCONNELLSBURG, PA
155,367
145,616
69,915
231,068
300,983
141,305
CRESTLINE, OH
1,201,523
284,761
916,762
56,833
MANSFIELD, OH
921,108
331,599
589,509
34,311
1,950,000
700,000
1,250,000
54,083
MONROEVILLE, OH
2,580,000
485,000
2,095,000
42,772
ROANOKE, VA
91,281
150,495
241,776
241,778
RICHMOND, VA
120,818
167,895
288,713
CHESAPEAKE, VA
1,184,759
32,132
604,983
611,908
1,216,891
161,615
PORTSMOUTH, VA
562,255
17,106
221,610
357,751
579,361
354,410
NORFOLK, VA
534,910
6,050
310,630
230,330
540,960
ASHLAND, VA
839,997
FARMVILLE, VA
1,226,505
621,505
605,000
114,950
FREDERICKSBURG, VA
1,279,280
469,280
810,000
153,900
1,715,914
995,914
720,000
136,800
1,289,425
798,444
490,981
112,657
3,623,228
2,828,228
795,000
151,050
GLEN ALLEN, VA
1,036,585
411,585
625,000
118,750
1,077,402
322,402
755,000
143,450
KING GEORGE, VA
293,638
KING WILLIAM, VA
1,687,540
1,067,540
620,000
117,800
MECHANICSVILLE, VA
1,124,769
504,769
902,892
272,892
630,000
119,700
1,476,043
876,043
114,000
957,418
324,158
633,260
159,410
193,088
1,677,065
1,157,065
520,000
98,800
1,042,870
222,870
820,000
155,800
MONTPELIER, VA
2,480,686
1,725,686
PETERSBURG, VA
1,441,374
816,374
1,131,878
546,878
585,000
111,150
RUTHER GLEN, VA
466,341
31,341
435,000
82,650
SANDSTON, VA
721,651
101,651
SPOTSYLVANIA, VA
1,290,239
490,239
152,000
1,026,115
7,149
407,026
626,238
1,033,264
624,922
BENNINGTON, VT
154,480
262,380
463,780
163,522
JACKSONVILLE, FL
559,514
296,434
263,080
109,614
485,514
388,434
97,080
40,447
196,764
114,434
82,330
34,302
201,477
117,907
83,570
34,822
545,314
256,434
288,880
120,364
ORLANDO, FL
867,515
401,435
466,080
194,197
Miscellaneous Investments
12,200,724
12,924,015
7,436,922
17,687,817
25,124,739
16,426,126
425,827,135
78,046,667
252,082,801
251,791,001
503,873,802
136,669,475
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 $481,189,000 at December 31, 2009.
93
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
March 16, 2010
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)
Vice President, Treasurer and Chief Financial 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, 2009
EXHIBIT NO.
DESCRIPTION
2.1
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/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.
Filed as Exhibit 3.2 to Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13777) and incorporated herein by reference.
3.3
By-Laws of Getty Realty Corp.
Filed as Exhibit 3.3 to Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13777) and incorporated herein by reference.
3.4
Articles of Amendment of Holdings, changing its name to Getty Realty Corp., filed January 30, 1998.
Filed as Exhibit 3.4 to Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13777) and incorporated herein by reference.
3.5
Amendment to Articles of Incorporation of Holdings, filed August 1, 2001.
Filed as Exhibit 3.5 to Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13777) and incorporated herein by reference.
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.
Filed as Exhibit 10.1 to Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13777) and incorporated herein by reference.
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.
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.
Filed as Exhibit 10.5 to Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13777) and incorporated herein by reference.
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).
Filed as Exhibit 10.6 to Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13777) and incorporated herein by reference.
10.7*
Letter Agreement dated June 12, 2001 by and between Getty Realty Corp. and Thomas J. Stirnweis regarding compensation upon change in control.
Filed as Exhibit 10.7 to Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13777) and incorporated herein by reference.
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.
Filed as Exhibit 10.8 to Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13777) and incorporated herein by reference.
10.9
Form of Tax Sharing Agreement between Getty Petroleum Corp (now known as Getty. Properties Corp.) and Getty Petroleum Marketing Inc.
Filed as Exhibit 10.9 to Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13777) and incorporated herein by reference.
10.10
Consolidated, Amended and Restated Master Lease Agreement dated November 2, 2000 between Getty Properties Corp. and Getty Petroleum Marketing Inc.
Filed as Exhibit 10.10 to Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13777) and incorporated herein by reference.
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.
96
10.15*
Form of restricted stock unit grant award under the 2004 Getty Realty Corp. Omnibus Incentive Compensation Plan, as amended.
Filed as Exhibit 10.15 to Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13777) and incorporated herein by reference.
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.
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.
Filed as Exhibit 10.19 to Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13777) and incorporated herein by reference.
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).
Filed as Exhibit 10.20 to Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13777) and incorporated herein by reference.
10.21
Unitary Net Lease Agreement between GTY MD Leasing, Inc. and White Oak Petroleum LLC, dated as of September 25, 2009.
Filed as Exhibit 10.1 to Company’s Current Report on Form 8-K filed September 25, 2009 (File No. 001-13777) and incorporated herein by reference.
10.22
Loan Agreement among GTY MD Leasing, Inc., Getty Properties Corp., Getty Realty Corp., and TD Bank, dated as of September 25, 2009.
Filed as Exhibit 10.2 to Company’s Current Report on Form 8-K filed September 25, 2009 (File No. 001-13777) and incorporated herein by reference.
The Getty Realty Corp. Business Conduct Guidelines (Code of Ethics).
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.
97
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.