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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

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.)

292 Madison Avenue, 9th Floor

New York, New York 10017-6318

(Address of Principal Executive Offices) (Zip Code)

(646) 349-6000

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

GTY

 

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      No  

The registrant had outstanding 46,732,973 shares of common stock as of April 28, 2022.

 

 

 


 

 

GETTY REALTY CORP.

FORM 10-Q

INDEX

 

 

 

 

  Page  

PART I—FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements (Unaudited)

 

1

 

Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021

 

1

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021

 

2

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021

 

3

 

Notes to Consolidated Financial Statements

 

4

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

35

Item 4.

Controls and Procedures

 

35

 

 

 

PART II—OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

36

Item 1A.

Risk Factors

 

36

Item 5.

Other Information

 

36

Item 6.

Exhibits

 

36

Signatures

 

 

38

 

 

 

 


 

 

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GETTY REALTY CORP.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except per share amounts)

 

 

 

March 31,

2022

 

 

December 31,

2021

 

ASSETS

 

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

Land

 

$

775,656

 

 

$

772,088

 

Buildings and improvements

 

 

632,129

 

 

 

632,074

 

Investment in direct financing leases, net

 

 

70,376

 

 

 

71,647

 

Construction in progress

 

 

706

 

 

 

693

 

Real estate held for use

 

 

1,478,867

 

 

 

1,476,502

 

Less accumulated depreciation and amortization

 

 

(215,457

)

 

 

(209,040

)

Real estate held for use, net

 

 

1,263,410

 

 

 

1,267,462

 

Real estate held for sale, net

 

 

176

 

 

 

3,621

 

Real estate, net

 

 

1,263,586

 

 

 

1,271,083

 

Notes and mortgages receivable

 

 

15,873

 

 

 

14,699

 

Cash and cash equivalents

 

 

56,983

 

 

 

24,738

 

Restricted cash

 

 

1,708

 

 

 

1,723

 

Deferred rent receivable

 

 

47,636

 

 

 

46,933

 

Accounts receivable

 

 

2,797

 

 

 

3,538

 

Right-of-use assets - operating

 

 

20,431

 

 

 

21,092

 

Right-of-use assets - finance

 

 

353

 

 

 

379

 

Prepaid expenses and other assets, net

 

 

91,867

 

 

 

82,763

 

Total assets

 

$

1,501,234

 

 

$

1,466,948

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Borrowings under credit agreement

 

$

 

 

$

60,000

 

Senior unsecured notes, net

 

 

623,313

 

 

 

523,850

 

Environmental remediation obligations

 

 

46,957

 

 

 

47,597

 

Dividends payable

 

 

19,618

 

 

 

19,467

 

Lease liability - operating

 

 

22,313

 

 

 

22,980

 

Lease liability - finance

 

 

1,893

 

 

 

2,005

 

Accounts payable and accrued liabilities

 

 

42,323

 

 

 

45,941

 

Total liabilities

 

 

756,417

 

 

 

721,840

 

Commitments and contingencies

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 20,000,000 shares authorized; unissued

 

 

 

 

 

 

Common stock, $0.01 par value; 100,000,000 shares authorized; 46,732,381 and

46,715,734 shares issued and outstanding, respectively

 

 

467

 

 

 

467

 

Additional paid-in capital

 

 

818,787

 

 

 

818,209

 

Dividends paid in excess of earnings

 

 

(74,437

)

 

 

(73,568

)

Total stockholders’ equity

 

 

744,817

 

 

 

745,108

 

Total liabilities and stockholders’ equity

 

$

1,501,234

 

 

$

1,466,948

 

 

The accompanying notes are an integral part of these consolidated financial statements.

1


 

GETTY REALTY CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share amounts)

 

 

 

Three Months Ended March 31,

 

 

 

 

2022

 

 

2021

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Revenues from rental properties

 

$

38,984

 

 

$

36,951

 

 

Interest on notes and mortgages receivable

 

 

337

 

 

 

329

 

 

Total revenues

 

 

39,321

 

 

 

37,280

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Property costs

 

 

4,626

 

 

 

5,272

 

 

Impairments

 

 

1,038

 

 

 

776

 

 

Environmental

 

 

(141

)

 

 

513

 

 

General and administrative

 

 

5,128

 

 

 

5,509

 

 

Depreciation and amortization

 

 

9,628

 

 

 

8,437

 

 

Total operating expenses

 

 

20,279

 

 

 

20,507

 

 

 

 

 

 

 

 

 

 

 

 

Gain on dispositions of real estate

 

 

6,153

 

 

 

7,219

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

25,195

 

 

 

23,992

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

 

91

 

 

 

64

 

 

Interest expense

 

 

(6,537

)

 

 

(6,129

)

 

Net earnings

 

$

18,749

 

 

$

17,927

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Net earnings

 

$

0.39

 

 

$

0.40

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Net earnings

 

$

0.39

 

 

$

0.40

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

 

46,721

 

 

 

43,872

 

 

Diluted

 

 

46,742

 

 

 

43,875

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

2


 

GETTY REALTY CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net earnings

 

$

18,749

 

 

$

17,927

 

Adjustments to reconcile net earnings to net cash flow provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

9,628

 

 

 

8,437

 

Impairment charges

 

 

1,038

 

 

 

776

 

Gain on dispositions of real estate

 

 

(6,153

)

 

 

(7,219

)

Deferred rent receivable

 

 

(704

)

 

 

(736

)

Amortization of above-market and below-market leases

 

 

9

 

 

 

(57

)

Amortization of investment in direct financing leases

 

 

1,271

 

 

 

1,145

 

Amortization of debt issuance costs

 

 

229

 

 

 

259

 

Accretion expense

 

 

444

 

 

 

461

 

Stock-based compensation

 

 

1,084

 

 

 

905

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

720

 

 

 

1,215

 

Prepaid expenses and other assets

 

 

(595

)

 

 

(477

)

Environmental remediation obligations

 

 

(1,790

)

 

 

(921

)

Accounts payable and accrued liabilities

 

 

(3,100

)

 

 

(2,308

)

Net cash flow provided by operating activities

 

 

20,830

 

 

 

19,407

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Property acquisitions

 

 

(7,037

)

 

 

(21,852

)

Capital expenditures

 

 

 

 

 

(176

)

Addition to construction in progress

 

 

(13

)

 

 

(127

)

Proceeds from dispositions of real estate

 

 

10,369

 

 

 

8,497

 

Deposits for property acquisitions

 

 

(10,170

)

 

 

1,733

 

Issuance of notes and mortgages receivable

 

 

(1,673

)

 

 

(8,395

)

Collection of notes and mortgages receivable

 

 

608

 

 

 

535

 

Net cash flow used in investing activities

 

 

(7,916

)

 

 

(19,785

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Borrowings under credit agreement

 

 

15,000

 

 

 

 

Repayments under credit agreement

 

 

(75,000

)

 

 

(25,000

)

Proceeds from senior unsecured notes

 

 

100,000

 

 

 

 

Payment of debt issuance costs

 

 

(588

)

 

 

 

Payment of finance lease obligations

 

 

(112

)

 

 

(174

)

Security deposits refunded

 

 

(11

)

 

 

(160

)

Payments of cash dividends

 

 

(19,451

)

 

 

(17,314

)

Payments in settlement of restricted stock units

 

 

(496

)

 

 

(484

)

Proceeds from issuance of common stock, net - ATM

 

 

(26

)

 

 

20,266

 

Net cash flow provided by (used in) financing activities

 

 

19,316

 

 

 

(22,866

)

Change in cash, cash equivalents and restricted cash

 

 

32,230

 

 

 

(23,244

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

26,461

 

 

 

57,054

 

Cash, cash equivalents and restricted cash at end of period

 

$

58,691

 

 

$

33,810

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

6,074

 

 

$

5,814

 

Income taxes

 

 

 

 

 

284

 

Environmental remediation obligations

 

 

969

 

 

 

613

 

Non-cash transactions:

 

 

 

 

 

 

 

 

Dividends declared but not yet paid

 

 

19,618

 

 

 

17,690

 

Issuance of notes and mortgages receivable related to property dispositions

 

$

 

 

$

 

 

The accompanying notes are an integral part of these consolidated financial statements.

3


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. — DESCRIPTION OF BUSINESS

Getty Realty Corp. (together with its subsidiaries, unless otherwise indicated or except where the context otherwise requires, “we,” “us” or “our”) is a publicly traded, net lease real estate investment trust (“REIT”) specializing in the acquisition, financing and development of convenience, automotive and other single tenant retail real estate. Our predecessor was originally founded in 1955 and our common stock was listed on the NYSE in 1997.

As of March 31, 2022, our portfolio included 1,014 properties located in 38 states and Washington, D.C., and our tenants operated under a variety of national and regional retail brands. Our company is headquartered in New York, New York and is internally managed by our management team, which has extensive experience acquiring, owning and managing convenience, automotive and other single tenant retail real estate.

NOTE 2. — ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of Getty Realty Corp. and its wholly owned subsidiaries. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). We do not distinguish our principal business or our operations on a geographical basis for purposes of measuring performance. We manage and evaluate our operations as a single segment. All significant intercompany accounts and transactions have been eliminated.

Unaudited, Interim Consolidated Financial Statements

The consolidated financial statements are unaudited but, in our opinion, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair statement of the results for the periods presented. These statements should be read in conjunction with the consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2021.

Use of Estimates, Judgments and Assumptions

The consolidated financial statements have been prepared in conformity with GAAP, which requires 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 consolidated financial statements and revenues and expenses during the period reported. Estimates, judgments and assumptions underlying the accompanying consolidated financial statements include, but are not limited to, real estate, receivables, deferred rent receivable, direct financing leases, depreciation and amortization, impairment of long-lived assets, environmental remediation costs, environmental remediation obligations, litigation, accrued liabilities, income taxes and the allocation of the purchase price of properties acquired to the assets acquired and liabilities assumed. Application of these estimates and assumptions requires exercise of judgment as to future uncertainties and, as a result, actual results could differ materially from these estimates.

Real Estate

Real estate assets are stated at cost less accumulated depreciation and amortization. For acquisitions of real estate, we estimate 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, we allocate the estimated fair value to the applicable assets and liabilities. Fair value is determined based on an exit price approach, which contemplates the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assumptions used are property and geographic specific and may include, among other things, capitalization rates, market rental rates and EBITDA to rent coverage ratios.

We expense transaction costs associated with business combinations in the period incurred. Acquisitions of real estate which do not meet the definition of a business are accounted for as asset acquisitions. The accounting model for asset acquisitions is similar to the accounting model for business combinations except that the acquisition costs are capitalized and allocated to the individual assets acquired and liabilities assumed on a relative fair value basis. For additional information regarding property acquisitions, see Note 11 – Property Acquisitions.

4


 

We capitalize direct costs, including costs such as construction costs and professional services, and indirect costs associated with the development and construction of real estate assets while substantive activities are ongoing to prepare the assets for their intended use. The capitalization period begins when development activities are underway and ends when it is determined that the asset is substantially complete and ready for its intended use.

We evaluate the held for sale classification of our real estate as of the end of each quarter. Assets that are classified as held for sale are recorded at the lower of their carrying amount or fair value less costs to sell.

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. We evaluate real estate sale transactions where we provide seller financing to determine sale and gain recognition in accordance with GAAP. Expenditures for maintenance and repairs are charged to income when incurred.

Direct Financing Leases

Income under direct financing leases is included in revenues from rental properties and is recognized over the lease terms using the effective interest rate method which produces a constant periodic rate of return on the net investments in the leased properties. The investments in direct financing leases are increased for interest income earned and amortized over the life of the leases and reduced by the receipt of lease payments. We consider direct financing leases to be past-due or delinquent when a contractually required payment is not remitted in accordance with the provisions of the underlying agreement.

On June 16, 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurements of Credit Losses on Financial Instruments (“ASU 2016-13”). The accounting standard became effective for us and was adopted on January 1, 2020. In these direct financing leases, the payment obligations of the lessees are collateralized by real estate properties. Historically, we have had no collection issues related to these direct financing leases; therefore, we assessed the probability of default on these leases based on the lessee’s financial condition, business prospects, remaining term of the lease, expected value of the underlying collateral upon its repossession, and our historical loss experience related to other leases in which we are the lessor. As of December 31, 2021, we had recorded an allowance for credit losses of $826,000 on our net investments in direct financing leases.

We review our direct financing leases each reporting period to determine whether there were any indicators that the value of our net investments in direct financing leases may be impaired and adjust the allowance for any estimated changes in the credit loss with the resulting change recorded through our consolidated statement of operations. When determining a possible impairment, we take into consideration the collectability of direct financing lease receivables for which a reserve would be required. In addition, we determine whether there has been a permanent decline in the current estimate of the residual value of the property. There were no indicators for impairments of any of our direct financing leases during the three months ended March 31, 2022 and 2021. For the three months ended March 31, 2022, we did not record any additional allowance for credit losses.

When we enter into a contract to sell properties that are recorded as direct financing leases, we evaluate whether we believe that it is probable that the disposition will occur. If we determine that the disposition is probable and therefore the property’s holding period is reduced, we may adjust an allowance for credit losses to reflect the change in the estimate of the undiscounted future rents. Accordingly, the net investment balance is written down to fair value.

Notes and Mortgages Receivable

Notes and mortgages receivable consists of loans originated by us in conjunction with property dispositions and funding provided to tenants in conjunction with property acquisitions and capital improvements. Notes and mortgages receivable are recorded at stated principal amounts. The ASU 2016-13 became effective for us and was adopted on January 1, 2020. We estimated our credit loss reserve for our notes and mortgages receivable using the weighted average remaining maturity (“WARM”) method, which has been identified as an acceptable loss-rate method for estimating credit loss reserves in the FASB Staff Q&A Topic 326, No. 1. The WARM method requires us to reference historic loan loss data across a comparable data set and apply such loss rate to our notes and mortgages portfolio over its expected remaining term, taking into consideration expected economic conditions over the relevant timeframe. We applied the WARM method for our notes and mortgages portfolio, which share similar risk characteristics. Application of the WARM method to estimate a credit loss reserve requires significant judgment, including (i) the historical loan loss reference data, (ii) the expected timing and amount of loan repayments, and (iii) the current credit quality of our portfolio and our expectations of performance and market conditions over the relevant time period. To estimate the historic loan losses relevant to our portfolio, we used our historical loan performance since the launch of our loan origination business in 2013. As of December 31, 2021, we had recorded an allowance for credit losses of $297,000 on these notes and mortgages receivable. There were no indicators for impairments related to our notes and mortgages receivable during the three months ended March 31, 2022 and 2021. For the three months ended March 31, 2022, we did not record any additional allowance for credit losses.

From time to time, we may originate construction loans for the construction of income-producing properties, which we expect to purchase via sale-leaseback transactions at the end of the construction period. During the three months ended March 31, 2022, we funded $1,782,000, including accrued interest, and, as of March 31, 2022, had outstanding $7,487,000 of such construction loans, including accrued interest. Our construction loans generally provide for funding only during the construction period, which is typically up to nine months, although our policy is to consider construction periods as long as 24 months. Funds are disbursed based on inspections in accordance with a schedule reflecting the completion of portions of the projects. We also review and inspect each property before disbursement of funds during the term of the construction loan. At the end of the construction period, the construction loans will be repaid with the proceeds from the sale of the properties.

5


 

Revenue Recognition and Deferred Rent Receivable

Lease 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 our consolidated balance sheets. We review our accounts receivable, including its deferred rent receivable, related to base rents, straight-line rents, tenant reimbursements and other revenues for collectability. Our evaluation of collectability primarily consists of reviewing past due account balances and considers such factors as the credit quality of our tenant, historical trends of the tenant, changes in tenant payment terms, current economic trends, including the novel coronavirus (“COVID-19”) pandemic, and other facts and circumstances related to the applicable tenants. In addition, with respect to tenants in bankruptcy, we estimate the probable recovery through bankruptcy claims. If a tenant’s accounts receivable balance is considered uncollectable, we will write off the related receivable balances and cease to recognize lease income, including straight-line rent unless cash is received. If the collectability assessment subsequently changes to probable, any difference between the lease income that would have been recognized if collectability had always been assessed as probable and the lease income recognized to date, is recognized as a current-period adjustment to revenues from rental properties. Our reported net earnings are directly affected by our estimate of the collectability of our accounts receivable.

In April 2020, the FASB issued interpretive guidance relating to the accounting for lease concessions provided as a result of COVID-19. In this guidance, entities can elect not to apply lease modification accounting with respect to such lease concessions and instead, treat the concession as if it was a part of the existing contract. This guidance is only applicable to COVID-19 related lease concessions that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. Some concessions will provide a deferral of payments with no substantive changes to the consideration in the original contract. A deferral affects the timing of cash receipts, but the amount of the consideration is substantially the same as that required by the original contract. The FASB staff provides two ways to account for those deferrals:

 

(1)

Account for the concessions as if no changes to the lease contract were made. Under that accounting, a lessor would increase its lease receivable. In its income statement, a lessor would continue to recognize income during the deferral period.

 

(2)

Account for the deferred payments as variable lease payments.

We elected to treat lease concessions with option (1) above. There were no outstanding balances for lease concessions provided as a result of COVID-19 as of March 31, 2022.

The present value of the difference between the fair market rent and the contractual rent for above-market and below-market leases at the time properties are acquired is amortized into revenues from rental properties over the remaining terms of the in-place leases. Lease termination fees are recognized as other income when earned upon the termination of a tenant’s lease and relinquishment of space in which we have no further obligation to the tenant.

The sales of nonfinancial assets, such as real estate, are to be recognized when control of the asset transfers to the buyer, which will occur when the buyer has the ability to direct the use of or obtain substantially all of the remaining benefits from the asset. This generally occurs when the transaction closes and consideration is exchanged for control of the property.

Impairment of Long-Lived Assets

Assets are written down to fair value 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. Assets held for disposal are written down to fair value less estimated disposition costs.

We recorded impairment charges aggregating $1,038,000 for the three months ended March 31, 2022 and $776,000 for the three months ended March 31, 2021. Our estimated fair values, as they relate to property carrying values, were primarily based upon (i) estimated sales prices from third-party offers based on signed contracts, letters of intent or indicative bids, for which we do not have access to the unobservable inputs used to determine these estimated fair values, and/or consideration of the amount that currently would be required to replace the asset, as adjusted for obsolescence (this method was used to determine $694,000 of impairments recognized during the three months ended March 31, 2022) and (ii) discounted cash flow models (this method was used to determine $0 of impairments recognized during the three months ended March 31, 2022). The remaining $344,000 of impairments recognized during the three months ended March 31, 2022, was due to the accumulation of asset retirement costs at certain properties as a result of changes in estimates associated with our estimated environmental liabilities, which increased the carrying values of these properties

6


 

in excess of their fair values. For the three months ended March 31, 2022 and 2021, impairment charges aggregating $62,000 and $335,000, respectively, were related to properties that were previously disposed of by us.

The estimated fair value of real estate is based on the price that would be received from the sale of the property in an orderly transaction between market participants at the measurement date. In general, we consider multiple internal valuation techniques when measuring the fair value of a property, all of which are based on unobservable inputs and assumptions that are classified within Level 3 of the Fair Value Hierarchy. These unobservable inputs include assumed holding periods ranging up to 15 years, assumed average rent increases of 2.0% annually, income capitalized at a rate of 8.0% and cash flows discounted at a rate of 7.0%. These assessments have a direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future rental rates and operating expenses that could differ materially from actual results in future periods. Where properties held for use have been identified as having a potential for sale, additional judgments are required related to the determination as to the appropriate period over which the projected undiscounted cash flows should include the operating cash flows and the amount included as the estimated residual value. This requires significant judgment. In some cases, the results of whether impairment is indicated are sensitive to changes in assumptions input into the estimates, including the holding period until expected sale.

Fair Value of Financial Instruments

All of our financial instruments are reflected in the accompanying consolidated balance sheets at amounts which, in our estimation based upon an interpretation of available market information and valuation methodologies, reasonably approximate their fair values, except those separately disclosed in the notes below.

The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates of fair value that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the period reported using a hierarchy (the “Fair Value Hierarchy”) that prioritizes the inputs to valuation techniques used to measure the fair value. The Fair Value Hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The levels of the Fair Value Hierarchy are as follows: “Level 1” – inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date; “Level 2” – inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active; and “Level 3” – inputs that are unobservable. Certain types of assets and liabilities are recorded at fair value either on a recurring or non-recurring basis. Assets required or elected to be marked-to-market and reported at fair value every reporting period are valued on a recurring basis. Other assets not required to be recorded at fair value every period may be recorded at fair value if a specific provision or other impairment is recorded within the period to mark the carrying value of the asset to market as of the reporting date. Such assets are valued on a non-recurring basis.

Environmental Remediation Obligations

We record the fair value of a liability for an environmental remediation obligation as an asset and liability when there is a legal obligation associated with the retirement of a tangible long-lived asset and the liability can be reasonably estimated. Environmental remediation obligations are estimated based on the level and impact of contamination at each property. The accrued liability is the aggregate of our estimate of the fair value of cost for each component of the liability. The accrued liability is net of estimated recoveries from state underground storage tank (“UST”) remediation funds considering estimated recovery rates developed from prior experience with the funds. Net environmental liabilities are currently measured based on their expected future cash flows which have been adjusted for inflation and discounted to present value. We accrue for environmental liabilities that we believe are allocable to other potentially responsible parties if it becomes probable that the other parties will not pay their environmental remediation obligations.

Income Taxes

We file a federal income tax return on which we consolidate our tax items and the tax items of our subsidiaries that are pass-through entities. Effective January 1, 2001, we elected to qualify, and believe that we are operating so as to qualify, as a REIT for federal income tax purposes. Accordingly, we generally will not be subject to federal income tax on qualifying REIT income, provided that distributions to our stockholders equal at least the amount of our taxable income as defined under the Internal Revenue Code. We accrue for uncertain tax matters when appropriate. 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 for the years 2018, 2019 and 2020, and tax returns which will be filed for the year ended 2021, remain open to examination by federal and state tax jurisdictions under the respective statutes of limitations.

7


 

New Accounting Pronouncements

On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives, and other contracts. The guidance in ASU 2020-04 provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. In January 2021, the FASB issued ASU 2021-01, which adds implementation guidance to above ASU to clarify certain optional expedients in Topic 848. We are currently evaluating the impact the adoption of ASU 2020-04 will have on our consolidated financial statements.

NOTE 3. — LEASES

As Lessor

As of March 31, 2022, our portfolio included 1,014 properties of which we owned 968 properties and leased 46 properties from third-party landlords. These 1,014 properties are located in 38 states across the United States and Washington, D.C. Substantially all of our properties are leased on a triple-net basis to convenience store retailers, petroleum distributors, car wash operators and other automotive-related and retail tenants. Our tenants either operate their businesses at our properties directly or, in the case of certain convenience stores and gasoline and repair stations, sublet our properties and supply fuel to third parties who operate the businesses. Our triple-net lease tenants are responsible for the payment of all taxes, maintenance, repairs, insurance and other operating expenses relating to our properties, and are also responsible for environmental contamination occurring during the terms of their leases and in certain cases also for environmental contamination that existed before their leases commenced. For additional information regarding environmental obligations, see Note 6 – Environmental Obligations.

A significant portion of our tenants’ financial results depend on convenience store sales, the sale of refined petroleum products and/or the sale of automotive services and parts. As a result, our tenants’ financial results can be dependent on the performance of the convenience retail, petroleum marketing, and automobile maintenance industries, each of which are highly competitive and can be subject to variability. During the terms of our leases, we monitor the credit quality of our triple-net lease tenants by reviewing their published credit rating, if available, reviewing publicly available financial statements, or reviewing financial or other operating statements which are delivered to us pursuant to applicable lease agreements, monitoring news reports regarding our tenants and their respective businesses, and monitoring the timeliness of lease payments and the performance of other financial covenants under their leases.

Pursuant to ASU 2016-02, for leases in which we are the lessor, we (i) retained the classification of our historical leases as we were not required to reassess classification upon adoption of the new standard, (ii) expense indirect leasing costs in connection with new or extended tenant leases, the recognition of which would have been deferred under prior accounting guidance and (iii) aggregate revenue from our lease components and non-lease components (comprised of tenant reimbursements) into revenue from rental properties.

Revenues from rental properties were $38,984,000 and $36,951,000 for the three months ended March 31, 2022 and 2021, respectively. Rental income contractually due from our tenants included in revenues from rental properties was $36,425,000 and $33,539,000 for the three months ended March 31, 2022 and 2021, respectively.

In accordance with GAAP, we recognize rental revenue in amounts which vary from the amount of rent contractually due during the periods presented. As a result, revenues from rental properties include (i) non-cash adjustments recorded for deferred rental revenue due to the recognition of rental income on a straight-line basis over the current lease term, (ii) the net amortization of above-market and below-market leases, (iii) rental income recorded under direct financing leases using the effective interest method which produces a constant periodic rate of return on the net investments in the leased properties and (iv) the amortization of deferred lease incentives (collectively, “Revenue Recognition Adjustments”). Revenue Recognition Adjustments included in revenues from rental properties resulted in a reduction in revenue of $576,000 and $343,000 for the three months ended March 31, 2022 and 2021, respectively.

Tenant reimbursements, which are included in revenues from rental properties and which consist of real estate taxes and other municipal charges paid by us and reimbursable by our tenants pursuant to the terms of triple-net lease agreements, were $3,135,000 and $3,756,000 for the three months ended March 31, 2022 and 2021, respectively.

8


 

The components of the $70,376,000 investment in direct financing leases as of March 31, 2022, are lease payments receivable of $95,262,000 plus unguaranteed estimated residual value of $13,928,000 less unearned income of $37,988,000 and allowance for credit losses of $826,000. The components of the $71,647,000 investment in direct financing leases as of December 31, 2021, are lease payments receivable of $98,539,000 plus unguaranteed estimated residual value of $13,928,000 less unearned income of $39,994,000 and allowance for credit losses of $826,000.

As of March 31, 2022, future contractual annual rentals receivable from our tenants, which have terms in excess of one year are as follows (in thousands):

 

 

 

Operating

Leases

 

 

Direct

Financing Leases

 

2022

 

$

98,934

 

 

$

9,926

 

2023

 

 

131,533

 

 

 

13,237

 

2024

 

 

129,894

 

 

 

13,380

 

2025

 

 

129,534

 

 

 

13,412

 

2026

 

 

117,712

 

 

 

10,386

 

Thereafter

 

 

657,646

 

 

 

34,921

 

Total

 

$

1,265,253

 

 

$

95,262

 

 

As Lessee

For leases in which we are the lessee, ASU 2016-02 requires leases with durations greater than twelve months to be recognized on our consolidated balance sheets. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carryforward our historical assessments of (i) whether contracts are or contain leases, (ii) lease classification and (iii) initial direct costs.

As of January 1, 2019, we recognized operating lease right-of-use assets of $25,561,000 (net of deferred rent expense) and operating lease liabilities of $26,087,000, which were presented on our consolidated financial statements. The right-of-use assets and lease liabilities are carried at the present value of the remaining expected future lease payments. When available, we use the rate implicit in the lease to discount lease payments to present value; however, our current leases did not provide a readily determinable implicit rate. Therefore, we estimated our incremental borrowing rate to discount the lease payments based on information available and considered factors such as interest rates available to us on a fully collateralized basis and terms of the leases. ASU 2016-02 did not have a material impact on our consolidated balance sheets or on our consolidated statements of operations. The most significant impact was the recognition of right-of-use assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged.

The following presents the lease-related assets and liabilities (in thousands):

 

 

 

March 31,

2022

 

Assets

 

 

 

 

Right-of-use assets - operating

 

$

20,431

 

Right-of-use assets - finance

 

 

353

 

Total lease assets

 

$

20,784

 

Liabilities

 

 

 

 

Lease liability - operating

 

$

22,313

 

Lease liability - finance

 

 

1,893

 

Total lease liabilities

 

$

24,206

 

 

The following presents the weighted average lease terms and discount rates of our leases:

 

Weighted-average remaining lease term (years)

 

 

 

 

Operating leases

 

8.6

 

Finance leases

 

6.4

 

Weighted-average discount rate

 

 

 

 

Operating leases (a)

 

 

4.74

%

Finance leases

 

 

16.80

%

 

(a)

Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019.

9


 

 

The following presents our total lease costs (in thousands):

 

 

 

Three Months Ended March 31, 2022

 

 

Operating lease cost

 

$

931

 

 

Finance lease cost

 

 

 

 

 

Amortization of leased assets

 

 

112

 

 

Interest on lease liabilities

 

 

97

 

 

Short-term lease cost

 

 

-

 

 

Total lease cost

 

$

1,140

 

 

 

The following presents supplemental cash flow information related to our leases (in thousands):

 

 

 

Three Months Ended March 31, 2022

 

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

Operating cash flows for operating leases

 

$

936

 

 

Operating cash flows for finance leases

 

 

97

 

 

Financing cash flows for finance leases

 

$

112

 

 

 

As of March 31, 2022, scheduled lease liabilities mature as follows (in thousands):

 

 

 

Operating

Leases

 

 

Direct

Financing Leases

 

2022

 

$

2,858

 

 

$

783

 

2023

 

 

3,695

 

 

 

561

 

2024

 

 

3,549

 

 

 

502

 

2025

 

 

3,173

 

 

 

331

 

2026

 

 

2,963

 

 

 

322

 

Thereafter

 

 

11,213

 

 

 

382

 

Total lease payments

 

 

27,451

 

 

 

2,881

 

Less: amount representing interest

 

 

(5,138

)

 

 

(988

)

Present value of lease payments

 

$

22,313

 

 

$

1,893

 

 

Major Tenants

As of March 31, 2022, we had three significant tenants by revenue:

 

We leased 150 properties in three separate unitary leases and two stand-alone leases to subsidiaries of Global Partners LP (NYSE: GLP) (“Global”). In the aggregate, our leases with subsidiaries of Global represented 15% of our total revenues for each of the three months ended March 31, 2022 and 2021. All of our unitary leases with subsidiaries of Global are guaranteed by the parent company.

 

We leased 128 properties in four separate unitary leases to subsidiaries of ARKO Corp. (NASDAQ: ARKO) (“Arko”). In the aggregate, our leases with subsidiaries of Arko represented 15% of our total revenues for each of the three months ended March 31, 2022 and 2021. All of our unitary leases with subsidiaries of Arko are guaranteed by the parent company.

 

We leased 78 properties pursuant to three separate unitary leases and one stand-alone lease to Apro, LLC (d/b/a “United Oil”). In the aggregate, our leases with United Oil represented 12% of our total revenues for the three months ended March 31, 2022 and 2021.

 

10


 

 

Getty Petroleum Marketing Inc.

Getty Petroleum Marketing Inc. (“Marketing”) was our largest tenant from 1997 until 2012 under a unitary triple-net master lease that was terminated in April 2012 as a consequence of Marketing’s bankruptcy, at which time we either sold or re-leased these properties. As of March 31, 2022, 333 of the properties we own or lease were previously leased to Marketing, of which 303 properties are subject to long-term triple-net leases with petroleum distributors across 15 separate portfolios and 23 properties are leased as single unit triple-net leases (an additional three properties are under redevelopment and four are vacant). The portfolio leases covering properties previously leased to Marketing are unitary triple-net lease agreements generally with an initial term of 15 years and options for successive renewal terms of up to 20 years. Rent is scheduled to increase at varying intervals during both the initial and renewal terms of these leases. Several of the leases provide for additional rent based on the aggregate volume of fuel sold. In addition, the majority of the portfolio leases require the tenants to invest capital in our properties, substantially all of which is related to the replacement of USTs that are owned by our tenants. As of March 31, 2022, we have a remaining commitment to fund up to $6,595,000 in the aggregate with our tenants for our portion of such capital improvements. Our commitment provides us with the option to either reimburse our tenants or to offset rent when these capital expenditures are made. This deferred expense is recognized on a straight-line basis as a reduction of rental revenue in our consolidated statements of operations over the life of the various leases.

As part of the triple-net leases for properties previously leased to Marketing, we transferred title of the USTs to our tenants, and the obligation to pay for the retirement and decommissioning or removal of USTs at the end of their useful lives, or earlier if circumstances warranted, was fully or partially transferred to our new tenants. We remain contingently liable for this obligation in the event that our tenants do not satisfy their responsibilities. Accordingly, through March 31, 2022, we removed $13,813,000 of asset retirement obligations and $10,808,000 of net asset retirement costs related to USTs from our balance sheet. The cumulative change of $1,051,000 (net of accumulated amortization of $1,954,000) is recorded as deferred rental revenue and will be recognized on a straight-line basis as additional revenues from rental properties over the terms of the various leases.

NOTE 4. — COMMITMENTS AND CONTINGENCIES

Credit Risk

In order to minimize our exposure to credit risk associated with financial instruments, we place our 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. and these balances, at times, may exceed federally insurable limits.

Legal Proceedings

We are involved in various legal proceedings and claims which arise in the ordinary course of our business. As of March 31, 2022 and December 31, 2021, we had accrued $1,925,000 for certain of these matters which we believe were appropriate based on information then currently available. We are unable to estimate ranges in excess of the amount accrued with any certainty for these matters. 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 our former Newark, New Jersey Terminal and the Lower Passaic River, and our methyl tertiary butyl ether (a fuel derived from methanol, commonly referred to as “MTBE”) litigations in the states of Pennsylvania and Maryland, in particular, could cause a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends or stock price.

Matters related to our former Newark, New Jersey Terminal and the Lower Passaic River

In 2004, the United States Environmental Protection Agency (“EPA”) issued General Notice Letters (“GNL”) to over 100 entities, including us, alleging that they are PRPs at the Diamond Alkali Superfund Site (“Superfund Site”), which includes the former Diamond Shamrock Corporation manufacturing facility located at 80-120 Lister Ave. in Newark, New Jersey and a 17-mile stretch of the Passaic River from Dundee Dam to the Newark Bay and its tributaries (the Lower Passaic River Study Area or “LPRSA”). In May 2007, over 70 GNL recipients, including us, entered into an Administrative Settlement Agreement and Order on Consent (“AOC”) with the EPA to perform a Remedial Investigation and Feasibility Study (“RI/FS”) for the LPRSA, which is intended to address the investigation and evaluation of alternative remedial actions with respect to alleged damages to the LPRSA. Many of the parties to the AOC, including us, are also members of a Cooperating Parties Group (“CPG”). The CPG agreed to an interim allocation formula for purposes of allocating the costs to complete the RI/FS among its members, with the understanding that this interim allocation formula is not binding on the parties in terms of any potential liability for the costs to remediate the LPRSA. The CPG submitted to the EPA its draft RI/FS in 2015, which sets forth various alternatives for remediating the entire 17 miles of the LPRSA. In October 2018, the EPA issued a letter directing the CPG to prepare a streamlined feasibility study for just the upper 9-miles of the LPRSA based on an iterative approach using adaptive management strategies. On December 4, 2020, The CPG submitted a Final Draft Interim Remedy Feasibility Study (“IR/FS”) to the EPA which identifies various targeted dredge and cap alternatives for the upper 9-miles of the LPRSA. On December 11, 2020, the EPA conditionally approved the CPG’s IR/FS for the upper 9-miles of the LPRSA, which

11


 

recognizes that interim actions and adaptive management may be appropriate before deciding a final remedy. The EPA published the Proposed Plan for the upper 9-mile IR/FS for public comment and subsequently issued a Record of Decision (“ROD”) for the upper 9-mile IR/FS (“Upper 9-mile IR ROD”). There is currently no mechanism in place requiring any parties to implement the Upper 9-mile IR ROD.

In addition to the RI/FS activities, other actions relating to the investigation and/or remediation of the LPRSA have proceeded as follows. First, in June 2012, certain members of the CPG entered into an Administrative Settlement Agreement and Order on Consent (“10.9 AOC”) with the EPA to perform certain remediation activities, including removal and capping of sediments at the river mile 10.9 area and certain testing. The EPA also issued a Unilateral Order to Occidental Chemical Corporation (“Occidental”), the former owner/operator of the Diamond Shamrock Corporation facility responsible for the discharge of 2,3,8,8-TCDD (“dioxin”) and other hazardous substances from the Lister facility. The Order directed Occidental to participate and contribute to the cost of the river mile 10.9 work. Concurrent with the CPG’s work on the RI/FS, on April 11, 2014, the EPA issued a draft Focused Feasibility Study (“FFS”) with proposed remedial alternatives to remediate the lower 8-miles of the LPRSA. The FFS was subject to public comments and objections and, on March 4, 2016, the EPA issued a ROD for the lower 8-miles (“Lower 8-mile ROD”) selecting a remedy that involves bank-to-bank dredging and installing an engineered cap with an estimated cost of $1,380,000,000. On March 31, 2016, we and more than 100 other PRPs received from the EPA a “Notice of Potential Liability and Commencement of Negotiations for Remedial Design” (“Notice”), which informed the recipients that the EPA intends to seek an Administrative Order on Consent and Settlement Agreement with Occidental (who the EPA considers the primary contributor of dioxin and other pesticides generated from the production of Agent Orange at its Diamond Shamrock Corporation facility and a discharger of other contaminants of concern (“COCs”)) to the Superfund Site for remedial design of the remedy selected in the Lower 8-mile ROD, after which the EPA plans to begin negotiations with “major” PRPs for implementation and/or payment of the selected remedy. The Notice also stated that the EPA believes that some of the PRPs and other parties not yet identified will be eligible for a cash out settlement with the EPA. On September 30, 2016, Occidental entered into an agreement with the EPA to perform the remedial design for the Lower 8-mile ROD. In December 2019, Occidental submitted a report to the EPA on the progress of the remedial design work, which is still ongoing.

Occidental has asserted that it is entitled to indemnification by Maxus Energy Corporation (“Maxus”) and Tierra Solutions, Inc. (“Tierra”) for its liability in connection with the Site. Occidental has also asserted that Maxus and Tierra’s parent company, YPF, S.A. (“YPF”) and certain of its affiliates must indemnify Occidental. On June 16, 2016, Maxus and Tierra filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In July 2017, an amended Chapter 11 plan of liquidation became effective and, in connection therewith, Maxus and Tierra entered into a mutual contribution release agreement with certain parties, including us, pertaining to certain past costs, but not future remedy costs.

By letter dated March 30, 2017, the EPA advised the recipients of the Notice that it would be entering into cash out settlements with 20 PRPs to resolve their alleged liability for the remedial actions addressed in the Lower 8-mile ROD, who the EPA stated did not discharge any of the eight hazardous substances identified as a COC in the ROD. The letter also stated that other parties who did not discharge dioxins, furans or polychlorinated biphenyls (which are considered the COCs posing the greatest risk to the river) may also be eligible for cash out settlements, and that the EPA would begin a process for identifying other PRPs for negotiation of future cash out settlements. We were not included in the initial group of 20 parties identified by the EPA for cash out settlements, but we believe we meet the EPA’s criteria for a cash out settlement and should be considered for same in any future discussions. In January 2018, the EPA published a notice of its intent to enter into a final settlement agreement with 15 of the initial group of parties to resolve their respective alleged liability for the Lower 8-mile ROD work, each for a payment to the EPA in the amount of $280,600. In August 2017, the EPA appointed an independent third-party allocation expert to conduct allocation proceedings with most of the remaining recipients of the Notice, which process has concluded leading to an agreement in principle between the EPA and certain of the allocation proceeding participants, including us, concerning a cash-out settlement for the entire 17-mile stretch of the Lower Passaic River and its tributaries, which is subject to negotiation and court approval and entry of a consent decree.

 

On June 30, 2018, Occidental filed a complaint in the United States District Court for the District of New Jersey seeking cost recovery and contribution under the Comprehensive Environmental Response, Compensation, and Liability Act for its alleged expenses with respect to the investigation, design, and anticipated implementation of the remedy for the Lower 8-mile ROD work the (“Occidental lawsuit”). The complaint lists over 120 defendants, including us, many of whom were also named in the EPA’s 2016 Notice. Factual discovery is ongoing, and we are defending the claims consistent with our defenses in the related proceedings.

Based on currently known facts and circumstances, including, among other factors, the agreement in principle with the EPA noted above, anticipated allocations, our belief that there was not any use or discharge of dioxins, furans or polychlorinated biphenyls in connection with our former petroleum storage operations at our former Newark, New Jersey Terminal, and because there are numerous other parties who will likely bear the costs of remediation and/or damages, we do not believe that resolution of this matter as relates us is reasonably likely to have a material impact on our results of operations. Nevertheless, in the event the agreement in principle is not approved by the Court, and/or there are one or more adverse determinations related to this matter, performance of the EPA’s selected remedies for the LPRSA may be subject to future negotiation, potential enforcement proceedings and/or possible litigation; hence our ultimate liability in the pending and possible future proceedings pertaining to the LPRSA remains uncertain and subject to numerous contingencies which cannot be predicted and the outcome of which are not yet known. For these reasons, we are

12


 

unable to estimate a possible loss or range of loss in excess of the amount we have accrued for the Lower Passaic River proceedings as of the date of this Quarterly Report on Form 10-Q, and it is therefore possible that losses related to the Lower Passaic River proceedings could exceed the amounts accrued as of the date hereof, which could cause a material adverse effect on our results of operations.

MTBE Litigation – State of Pennsylvania

On July 7, 2014, our subsidiary, Getty Properties Corp., was served with a complaint filed by the Commonwealth of Pennsylvania (the “State”) in the Court of Common Pleas, Philadelphia County relating to alleged statewide MTBE contamination in Pennsylvania. The named plaintiff is the State, by and through (then) Pennsylvania Attorney General Kathleen G. Kane (as Trustee of the waters of the State), the Pennsylvania Insurance Department (which governs and administers the Underground Storage Tank Indemnification Fund), the Pennsylvania Department of Environmental Protection (vested with the authority to protect the environment) and the Pennsylvania Underground Storage Tank Indemnification Fund. The complaint names us and more than 50 other petroleum refiners, manufacturers, distributors and retailers of MTBE or gasoline containing MTBE who are alleged to have distributed, stored and sold MTBE gasoline in Pennsylvania. The complaint seeks compensation for natural resource damages and for injuries sustained as a result of “defendants’ unfair and deceptive trade practices and act in the marketing of MTBE and gasoline containing MTBE.” The plaintiffs also seek to recover costs paid or incurred by the State to detect, treat and remediate MTBE from public and private water wells and groundwater. The plaintiffs assert causes of action against all defendants based on multiple theories, including strict liability – defective design; strict liability – failure to warn; public nuisance; negligence; trespass; and violation of consumer protection law.

The case was filed in the Court of Common Pleas, Philadelphia County, but was removed by defendants to the United States District Court for the Eastern District of Pennsylvania and then transferred to the United States District Court for the Southern District of New York so that it may be managed as part of the ongoing MTBE MDL proceedings. In November 2015, plaintiffs filed a Second Amended Complaint naming additional defendants and adding factual allegations against the defendants. We joined with other defendants in the filing of a motion to dismiss the claims against us, which was granted in part and denied in part. We are vigorously defending the claims made against us. Our ultimate liability in this proceeding is uncertain and subject to numerous contingencies which cannot be predicted and the outcome of which are not yet known.

MTBE Litigation – State of Maryland

On December 17, 2017, the State of Maryland, by and through the Attorney General on behalf of the Maryland Department of Environment and the Maryland Department of Health (the “State of Maryland”), filed a complaint in the Circuit Court for Baltimore City related to alleged statewide MTBE contamination in Maryland. The complaint was served upon us on January 19, 2018. The complaint names us and more than 60 other defendants. The complaint seeks compensation for natural resource damages and for injuries sustained as a result of the defendants’ unfair and deceptive trade practices in the marketing of MTBE and gasoline containing MTBE. The plaintiffs also seek to recover costs paid or incurred by the State of Maryland to detect, investigate, treat and remediate MTBE from public and private water wells and groundwater, punitive damages and the award of attorneys’ fees and litigation costs. The plaintiffs assert causes of action against all defendants based on multiple theories, including strict liability – defective design; strict liability – failure to warn; strict liability for abnormally dangerous activity; public nuisance; negligence; trespass; and violations of Titles 4, 7 and 9 of the Maryland Environmental Code.

On February 14, 2018, defendants removed the case to the United States District Court for the District of Maryland. We are vigorously defending the claims made against us. Our ultimate liability, if any, in this proceeding is uncertain and subject to numerous contingencies which cannot be predicted and the outcome of which are not yet known.

13


 

 

NOTE 5. — DEBT

The amounts outstanding under our Restated Credit Agreement and our senior unsecured notes are as follows (in thousands):

 

 

 

Maturity

Date

 

Interest Rate

 

 

March 31,

2022

 

 

December 31,

2021

 

Unsecured Revolving Credit Facility

 

October 2025

 

 

 

 

$

 

 

$

60,000

 

Series B Notes

 

June 2023

 

 

5.35

%

 

 

75,000

 

 

 

75,000

 

Series C Notes

 

February 2025

 

 

4.75

%

 

 

50,000

 

 

 

50,000

 

Series D-E Notes

 

June 2028

 

 

5.47

%

 

 

100,000

 

 

 

100,000

 

Series F-H Notes

 

September 2029

 

 

3.52

%

 

 

125,000

 

 

 

125,000

 

Series I-K Notes

 

November 2030

 

 

3.43

%

 

 

175,000

 

 

 

175,000

 

Series L-N Notes

 

February 2032

 

 

3.45

%

 

 

100,000

 

 

 

 

Total debt

 

 

 

 

 

 

 

 

625,000

 

 

 

585,000

 

Unamortized debt issuance costs, net (a)

 

 

 

 

 

 

 

 

(4,238

)

 

 

(3,880

)

Total debt, net

 

 

 

 

 

 

 

$

620,762

 

 

$

581,120

 

(a)

Unamortized debt issuance costs, related to the Revolving Facility, at March 31, 2022 and December 31, 2021, of $2,551 and $2,730, respectively, are included in prepaid expenses and other assets on our consolidated balance sheets.

Credit Agreement

On June 2, 2015, we entered into a $225,000,000 senior unsecured credit agreement (the “Credit Agreement”) with a group of banks led by Bank of America, N.A. The Credit Agreement consisted of a $175,000,000 unsecured revolving credit facility (the “Revolving Facility”) and a $50,000,000 unsecured term loan (the “Term Loan”).

On March 23, 2018, we entered into an amended and restated credit agreement (as amended, the “Restated Credit Agreement”) amending and restating our Credit Agreement. Pursuant to the Restated Credit Agreement, we (a) increased the borrowing capacity under the Revolving Facility from $175,000,000 to $250,000,000, (b) extended the maturity date of the Revolving Facility from June 2018 to March 2022, (c) extended the maturity date of the Term Loan from June 2020 to March 2023 and (d) amended certain financial covenants and provisions.

On September 19, 2018, we entered into an amendment (the “First Amendment”) of our Restated Credit Agreement. The First Amendment modifies the Restated Credit Agreement to, among other things: (i) reflect that we had previously entered into (a) an amended and restated note purchase and guarantee agreement with The Prudential Insurance Company of America (“Prudential”) and certain of its affiliates and (b) a note purchase and guarantee agreement with the Metropolitan Life Insurance Company (“MetLife”) and certain of its affiliates; and (ii) permit borrowings under each of the Revolving Facility and the Term Loan at three different interest rates, including a rate based on the LIBOR Daily Floating Rate (as defined in the First Amendment) plus the Applicable Rate (as defined in the First Amendment) for such facility.

On September 12, 2019, in connection with prepayment of the Term Loan, we entered into a consent and amendment (the “Second Amendment”) of our Restated Credit Agreement. The Second Amendment modifies the Restated Credit Agreement to, among other things, (a) increase our borrowing capacity under the Revolving Facility from $250,000,000 to $300,000,000 and (b) decrease lender commitments under the Term Loan to $0.

On October 27, 2021, we entered into second amended and restated credit agreement (as amended, the “Second Restated Credit Agreement”) amending and restating our Restated Credit Agreement. Pursuant to the Second Restated Credit Agreement, we (i) extended the maturity date of the Revolving Facility from March 2022 to October 2025, (ii) reduced the interest rate for borrowings under the Revolving Facility and (iii) amended certain financial covenants and other provisions.

The Second Restated Credit Agreement provides for the Revolving Facility in an aggregate principal amount of $300,000,000 and includes an accordion feature to increase the revolving commitments or add one or more tranches of term loans up to an additional aggregate amount not to exceed $300,000,000, subject to certain conditions, including one or more new or existing lenders agreeing to provide commitments for such increased amount and that no default or event of default shall have occurred and be continuing under the terms of the Revolving Facility.

The Revolving Facility matures October 27, 2025, subject to two six-month extensions (for a total of 12 months) exercisable at our option. Our exercise of an extension option is subject to the absence of any default under the Second Restated Credit Agreement and our compliance with certain conditions, including the payment of extension fees to the Lenders under the Revolving Facility and that no default or event of default shall have occurred and be continuing under the terms of the Revolving Facility.

The Second Restated Credit Agreement reflects reductions in the interest rates for borrowings under the Revolving Facility and permits borrowings at an interest rate equal to the sum of a base rate plus a margin of 0.30% to 0.90% or a LIBOR rate plus a margin

14


 

of 1.30% to 1.90% based on our consolidated total indebtedness to total asset value ratio at the end of each quarterly reporting period. The Revolving Facility includes customary LIBOR transition language that addresses the succession of LIBOR at a future date.

The per annum rate of the unused line fee on the undrawn funds under the Revolving Facility is 0.15% to 0.25% based on our daily unused portion of the available Revolving Facility.

The Second Restated Credit Agreement contains customary financial covenants, including covenants with respect to total leverage, secured leverage and unsecured leverage ratios, fixed charge and interest coverage ratios, and minimum tangible net worth, as well as limitations on restricted payments, which may limit our ability to incur additional debt or pay dividends. The Second Restated Credit Agreement contains customary events of default, including cross default provisions with respect to our existing senior unsecured notes. Any event of default, if not cured or waived in a timely manner, could result in the acceleration of our indebtedness under the Second Restated Credit Agreement and could also give rise to an event of default and the acceleration of our existing senior unsecured notes.

Senior Unsecured Notes

On February 22, 2022, we entered into a sixth amended and restated note purchase and guarantee agreement (the “Sixth Amended and Restated Prudential Agreement”) with Prudential and certain of its affiliates amending and restating our existing fifth amended and restated note purchase and guarantee agreement with Prudential (the “Fifth Amended and Restated Prudential Agreement”). Pursuant to the Sixth Amended and Restated Prudential Agreement, we will issue $80,000,000 of 3.65% Series Q Guaranteed Senior Notes due January 20, 2033 (the “Series Q Notes”) to Prudential on January 20, 2023 and use a portion of the proceeds to repay in full the $75,000,000 of 5.35% Series B Guaranteed Senior Notes due June 2, 2023 (the “Series B Notes”) outstanding under the Fifth Amended and Restated Prudential Agreement. The other senior unsecured notes outstanding under the Fifth Amended and Restated Prudential Agreement, including (i) $50,000,000 of 4.75% Series C Guaranteed Senior Notes due February 25, 2025 (the “Series C Notes”), (ii) $50,000,000 of 5.47% Series D Guaranteed Senior Notes due June 21, 2028 (the “Series D Notes”), (iii) $50,000,000 of 3.52% Series F Guaranteed Senior Notes due September 12, 2029 (the “Series F Notes”) and (iv) $100,000,000 of 3.43% Series I Guaranteed Senior Notes due November 25, 2030 (the “Series I Notes”), remain outstanding under the Sixth Amended and Restated Prudential Agreement.

On February 22, 2022, we entered into a second amended and restated note purchase and guarantee agreement (the “Second Amended and Restated AIG Agreement”) with American General Life Insurance Company (“AIG”) and certain of its affiliates amending and restating our existing first amended and restated note purchase and guarantee agreement with AIG (the “First Amended and Restated AIG Agreement”). Pursuant to the Second Amended and Restated AIG Agreement, we issued $55,000,000 of 3.45% Series L Guaranteed Senior Notes due February 22, 2032 (the “Series L Notes”) to AIG. The other senior unsecured notes outstanding under the First Amended and Restated AIG Agreement, including (i) $50,000,000 of 3.52% Series G Guaranteed Senior Notes due September 12, 2029 (the “Series G Notes”) and (ii) $50,000,000 of 3.43% Series J Guaranteed Senior Notes due November 25, 2030 (the “Series J Notes”), remain outstanding under the Second Amended and Restated AIG Agreement.

On February 22, 2022, we entered into a second amended and restated note purchase and guarantee agreement (the “Second Amended and Restated MassMutual Agreement”) with