Operator: Good morning, and welcome to Getty Realty's Earnings Conference Call for the Third Quarter 2023. This call is being recorded. After the presentation, there will be an opportunity to ask questions. Prior to the starting of the call, Joshua Dicker, Executive Vice President, General Counsel and Secretary of the company, will read a safe harbor statement and provide information about non-GAAP financial measures. Please go ahead, Mr. Dicker.
Joshua Dicker: Thank you, Operator. I would like to thank you all for joining us for Getty Realty's Third Quarter Earnings Conference Call. Yesterday afternoon, the company released its financial and operating results for the quarter ended September 30, 2023. Form 8-K and earnings release are available in the Investor Relations section of our website at gettyrealty.com. Certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to trends, events and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.
Aerial view of a standard residential neighborhood with multiple rows of relatively new houses representing the company's real estate investments.
Examples of forward-looking statements include our 2023 guidance and may also include statements made by management including those regarding the company's future operations, future financial performance or investment plan and opportunities. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. I refer you to the company's annual report on Form 10-K for the year ended December 31, 2022, and our subsequent filings made with the SEC, for a more detailed discussion of the risks and other factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. You should not place undue reliance on forward-looking statements, which reflect our view only as of today here up.
The company undertakes no duty to update any forward-looking statements that may be made in the course of this call. Also, please refer to our earnings release for a discussion of our use of non-GAAP financial measures including our definition of adjusted funds from operations, or AFFO, and our reconciliation of those measures to net earnings. With that, let me turn the call over to Christopher Constant, our Chief Executive Officer.
Christopher Constant: Thank you, Josh. Good morning, everyone, and welcome to our earnings call for the third quarter of 2023. Joining us on the call today are Mark Olear, our Chief Operating Officer, and Brian Dickman, our Chief Financial Officer. I will lead off today's call by providing commentary on our financial results and investment activities, along with some perspective on our outlook in light of the ongoing economic uncertainty. As usual, Mark will then take you through our portfolio, and Brian will further discuss our financial results and guidance. In the third quarter, we produced strong AFFO per share growth of 5.6%, and for the nine months ended September 30th, our AFFO per share grew a healthy 5.7%. This growth continues to be driven by our robust investment activity and thoughtful capital markets execution.
Year-to-date, we have surpassed the company's previous record for annual investments by deploying $269 million, including $155 million in the third quarter. We also continue to maintain an attractive investment pipeline with more than $95 million under contract for the acquisition and development funding of convenience stores, auto service centers, and express tunnel car washes, all of which we expect to fund over the next six to nine months. When combined with our investments to date, our pipeline provides visibility into our earnings for the fourth quarter and our growth prospects for the next year. The ongoing success of our investment platform and steady growth in our cash flow and earnings can be attributed in part to our successful capital markets activity.
Since January of 2022, we have raised more than $600 million of attractively priced capital, much of it with a forward or delayed draw execution, including our recently announced $150 million unsecured term loan, $225 million of long-term unsecured notes, and more than $230 million of common equity. Our strategic approach to raising capital has enhanced our ability to lock in accretive investment spreads, support a committed investment pipeline that is fully funded, and maintain a balance sheet with moderate leverage and ample capacity for future transactions. We believe that Getty's business model of focusing on convenience and automotive retail assets provides us with a competitive advantage in the market, given our sector expertise, tenant relationships, and track record of execution.
Many of our completed transactions this year have come from repeat business, meaning we already have a decent place with our counterparty and are capitalizing on our relationships and transaction experience to bring new properties into the company's portfolio with tenants that are well known to us who have a proven record of performance through economic cycles. We have also successfully increased our initial yields with these tenants to reflect current market pricing while not sacrificing our rigorous underwriting standards. The net result is that we continue to buy the same quality properties in sectors where we have a significant knowledge of industry trends and with tenants we know well, but at prices that reflect the rapid rise in financial costs.
As we look beyond our pipeline and deal activity, the real estate market has changed significantly since the end of the second quarter. Rapid changes in the availability and cost of capital have outpaced sellers' expectations for the value of their properties. For Getty specifically, we believe prospective tenants who are often making long-term financing decisions related to M&A or development, are in the process of re-evaluating their capital structures to reflect less access to capital and lower values attributable to real estate financing. While we continue to identify opportunities to acquire assets that meet our rigorous underwrite standards, we expect to be disciplined in our capital deployment while the market continues to fully digest the reality of higher cap rates for the foreseeable future.
Given our performance year-to-date, committed and funded investment pipeline and earnings growth expectations, our board approved an increase of 4.7% in our recurring quarterly dividend to $0.45 per share. This represents the 10th and straight year we have grown the dividend alongside our earnings growth. Our board believes this annual increase is appropriate as it maintains a stable payout ratio and continues to increase Getty's retained cash flow to have more investable capital to meet our growth objectives. Additionally, as a result of our year-to-date investment in capital activities, we are raising our 2023 AFFO guidance by a $1.00 to $2.24 to $2.25 per share. Getty is well positioned for the current environment, given the essential nature of our assets, the operating strength of our institutional tenant base, and our well positioned balance sheet, including low to moderate leverage and ample equity.
In a challenging market, we believe that we benefit from the targeted nature of our investment strategy, due to our sector expertise and strong relationships with operators in our space. Our disciplined approach, which emphasizes owning high quality real estate in major metro areas and partnering with growing regional and national operators, will continue to afford us with attractive acquisition and development funding opportunities to underwrite. As a result, we remain confident in our ability to create shareholder value through earnings growth and portfolio diversification. With that, I'll turn the call over to Mark to discuss our portfolio and investment activities.
Mark Olear: Thank you, Chris. At the end of the quarter, our lease portfolio included 1,074 net lease properties and three active redevelopment sites. Excluding the active redevelopments, occupancy was 99.7% and our weighted average lease term was nine years. Our portfolio spans 40 states plus Washington, DC, with 61% of our annualized base rent coming from top 50 MSAs and 79% coming from top 100 MSAs. Our rents are well-covered with trailing 12-month tenant rent coverage ratios of 2.7x. Turning to our investment activities, we had a record quarter, so Getty invests $155 million net of amounts previously funded across 50 properties in a number of different property types and attractive MSAs. Highlights of this quarter's investments include the acquisition of nine convenience stores located in Las Vegas and various markets across Texas and the Southeast for $55.1 million, nine car wash properties which are located through the US for $48.5 million, two drive-thru quick service restaurants and an auto service center for a total of $3.5 million, and nine under construction car wash properties for $31.5 million.
As part of this acquisition, we provide additional funding during the construction period to complete these projects. We also advance incremental development funding in the amount of $16.6 million, including accrued interest for the construction of 20 new-to-industry car washes, giving stores and auto service centers. These assets are either already owned by the company and are under construction or will be acquired via sale leaseback transactions at the end of the project's respective construction periods. For the third quarter, the aggregate initial cash yield on our investment activity was approximately 7.2% and the weighted average lease term for required properties was 17.2 years. Subsequent to quarter end, we invested an additional $3.3 million towards the development of an Express Tunnel car wash property.
Cumulative result of our year-to-date investment activity is $269 million deployed at initial cash yield of approximately 7.2% across all of our targeted asset types. Looking ahead regarding the $95 million of commitments to fund acquisition to developments, we expect to fund these transactions for the next six to nine months at an average initial yield of approximately 20 basis points in excess of our investment activity year-to-date. From a market perspective, in many cases, we are now submitting offers that are approaching 150 basis points more than where we transacted in 2021 and 2022. The amount of cap rate expansion combined with the short duration in which these moves and asset pricing have occurred has caused many sellers to pause. We believe the market will adjust to the changed economic landscape and will stabilize as sellers evolve and modify their expectations.
The direct nature of our investment strategy affords us the opportunity to discuss these changes directly with decision makers and we believe that we can continue to identify accretive investments as we move through the remainder of 2023 and into 2024. Moving to our redevelopment platform, during the quarter, we invested approximately $460,000 in projects which are in various stages in our pipeline. We completed one redevelopment project where rent commenced on an automotive part store in Pennsylvania which leads to AutoZone. We invested a total of approximately $200,000 in the project, generated incremental return and invested capital of approximately 21%. We also completed the renovation of a convenience store property in Connecticut, which was already subject to a long-term triple net lease.
In this project, we invested $450,000 in our incremental return on the invested capital with 7.5%. We ended the quarter with three properties under active redevelopment, and other in various states with feasibility planning for potential recapture from our net lease portfolio and expect to continuously complete projects over the next few years. Turning to our asset management activities for the third quarter, we exited one lease property and sold two properties for aggregate gross proceeds of $1.9 million. With that, I turn the call over to Brian for our financial results.
Brian Dickman: Thanks, Mark. Good morning, everyone. Last night, we reported AFFO per share of $0.57 for Q3 2023, representing a 5.6% increase or the $0.54 per share we reported in the prior year. FFO and net income for the third quarter were $0.53 and $0.31 per share respectively. Total revenues were $50.5 million for the third quarter, representing a 25.3% increase over the prior year. Base rental income, which excludes tenant reimbursement and GAAP revenue adjustments, grew 10.5% to $40.9 million. This growth continues to be driven by our acquisition activity and recurring rent escalators in our leases, with additional contribution from rent commencements and completed redevelopment projects. On the expense side, G&A cost were $5.7 million in the quarter, as compared to $5 million in the third quarter of 2022.
Change in G&A was primarily due to increase personnel cost including noncash stock-based compensation. Total property cost was $8.7 million for the quarter as compared to $5.7 million for the third quarter of 2022. This quarter included the increase in property operating expenses that was primarily due to timing and free universal real estate tax payments partially offset by lower rent expense and also included an increase in leasing and redevelopment expenses due to additional professional fees and demolition costs for development projects. Environmental expenses which are highly variable due to a number of estimates and noncash adjustments were $313,000 in the quarter as compared to $632,000 for the third quarter of 2022. Turning to the balance sheet and our capital markets activities, we ended the quarter with $750 million in total debt outstanding.
This consisted of $675 million of senior unsecured notes with a weighted average interest rate of 3.9% and a weighted average maturity of 6.7 years, as well as $75 million drawn on our $300 million revolving credit facility. As of September 30th, net debt to EBITDA was 5x, and total debt to total capitalization was 35%, while total indebtedness to total asset value, as calculated pursuant to our credit agreement, was 37%. Taking into account unsettled forward equity of $48.4 million, net debt to EBITDA would be approximately 4.7x. Subsequent to quarter end, as Chris mentioned, we closed on a new $150 million senior unsecured term loan. The term loan matures in October 2025 with a 1 to 12-month extension option. The term loan includes an initial draw of $75 million that was funded at close and used to repay amount outstanding under our revolving credit facility, and an additional $75 million that can be funded at our option any time over the next six months.
In connection with the closing of the term loan, we entered in the interest rate swaps to fix SOFR for the full principal loan, including the impact of these swaps, the effective interest rate on the term loan is 6.13%, based on our leverage ratio as of September 30th. It’s a little bit more color on the term loan. We are obviously pleased to secure this financing in the current environment. I think it demonstrates continued access to capital and the support of our banking relationships, while providing us with a flexible loan that we can refinance in two to three years as the capital market stabilized. And importantly, as we continue to scale our platform and position our balance sheet for additional credit ratings and possible public law issuance.
While the shorter term prevented us from taking greater advantage of the inverted yield curve upon fixing the rate, we were still able to lock in material accretion relative to returns on our invested capital while keeping our investment pipeline funded and retaining the flexibility I mentioned. Moving to our equity capital markets activities, during the quarter we settled 2.2 million shares of common stock, are subject to outstanding forward sale agreements, which generated $71.6 million in net proceeds. We currently have approximately 1.5 million shares of common stock still subject to outstanding forward equity agreements, which upon settlement are anticipated to raise gross proceeds of approximately $48.4 million. Returning to the $95 million committed investment pipeline, as Chris mentioned, these transactions are fully funded through a combination of proceeds from outstanding forward equity agreements and the new term loan.
Pro forma for these investments and capital activity, we expect our balance sheets to remain well positioned to support companies growth. Leverage is expected to remain in line with our target range of 4.5x to 5.5 net debt to EBITDA, and we expect to maintain ample capacity under our revolving credit facility. As our investment pipeline evolves, we will continue to evaluate all capital sources to ensure that we are funding transactions in an accretive manner while also maintaining our investment credit profile. Respect to our environmental liability, we ended the quarter at $22.7 million, which was a reduction of $438,000 since the end of 2022. Our net environmental remediation spending in the third quarter was approximately $1.6 million. Finally, with respect to our 2023 earnings outlook, as a result of our year-to-date investment activity and capital markets transactions, we are raising our 2023 AFFO per share guidance to a range of $2.24 to $2.25 from our previous range of $2.23 to $2.24.
As a reminder, our outlook includes transaction and capital markets activities to date, but does not otherwise assume any potential acquisitions, dispositions or capital markets activities for the remainder of the year. Specific factors which continue to impact our guidance include variability with respect to certain operating expenses and deal pursuit costs, as well as $300,000 of anticipated demolition costs for redevelopment projects that run through property costs on our P&L. With that, I'll ask the operator to open the call for questions.
