The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the sections entitled "Item 1A.
Risk Factors" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our Annual Report on Form 10-K for the
year ended December 31, 2019; and "Part I, Item 1. Financial Statements" and
"Part II, Item 1A. Risk Factors" in this Quarterly Report on Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q may constitute
"forward-looking statements" within the meaning of the federal securities laws,
including Section 27A of the Securities Act of 1933, as amended (the "Securities
Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Statements preceded by, followed by, or that otherwise include
the words "believes," "expects," "seeks," "plans," "projects," "estimates,"
"anticipates," "predicts" and similar expressions or future or conditional verbs
such as "will," "should," "would," "may" and "could" are generally
forward-looking in nature and are not historical facts. (All capitalized and
undefined terms used in this section shall have the same meanings hereafter
defined in this Quarterly Report on Form 10-Q.)
Examples of forward-looking statements included in this Quarterly Report on Form
10-Q include, but are not limited to, our statements regarding our network of
convenience store and gasoline station properties; substantial compliance of our
properties with federal, state and local provisions enacted or adopted
pertaining to environmental matters; the effects of recently enacted U.S.
federal tax reform and other legislative, regulatory and administrative
developments; the impact of existing legislation and regulations on our
competitive position; our prospective future environmental liabilities,
including those resulting from preexisting unknown environmental contamination;
the impact of the COVID-19 pandemic on our business and results of operations;
our expectations regarding our growth strategy; quantifiable trends, which we
believe allow us to make reasonable estimates of fair value for the future costs
of environmental remediation resulting from the removal and replacement of USTs;
the impact of our redevelopment efforts related to certain of our properties;
the origination of certain construction loans for the construction of
income-producing properties; the amount of revenue we expect to realize from our
properties; our belief that our owned and leased properties are adequately
covered by casualty and liability insurance; AFFO as a measure that best
represents our core operating performance and its utility in comparing the
sustainability of our core operating performance with the sustainability of the
core operating performance of other REITs; the reasonableness of our estimates,
judgments, projections and assumptions used regarding our accounting policies
and methods; our critical accounting policies; our exposure and liability due to
and our accruals, estimates and assumptions regarding our environmental
liabilities and remediation costs; loan loss reserves or allowances; our belief
that our accruals for environmental and litigation matters including matters
related to our former Newark, New Jersey Terminal and the Lower Passaic River,
our MTBE multi-district litigation cases in the states of New Jersey,
Pennsylvania and Maryland, and our lawsuit with the State of New York pertaining
to a property formerly owned by us in Uniondale, New York, were appropriate
based on the information then available; our claims for reimbursement of monies
expended in the defense and settlement of certain MTBE cases under pollution
insurance policies; compliance with federal, state and local provisions enacted
or adopted pertaining to environmental matters; our beliefs about the settlement
proposals we receive and the probable outcome of litigation or regulatory
actions and their impact on us; our expected recoveries from UST funds; our
indemnification obligations and the indemnification obligations of others; our
investment strategy and its impact on our financial performance; the adequacy of
our current and anticipated cash flows from operations, borrowings under our
Restated Credit Agreement and available cash and cash equivalents; our continued
compliance with the covenants in our Restated Credit Agreement and our senior
unsecured notes; our belief that certain environmental liabilities can be
allocated to others under various agreements; our belief that our real estate
assets are not carried at amounts in excess of their estimated net realizable
fair value amounts; our beliefs regarding our properties, including their
alternative uses and our ability to sell or lease our vacant properties over
time; our expectation that future property acquisitions will benefit our
financial performance; and our ability to maintain our federal tax status as a
REIT.
These forward-looking statements are based on our current beliefs and
assumptions and information currently available to us, and are subject to known
and unknown risks, uncertainties and other factors and were derived utilizing
numerous important assumptions that may cause our actual results, performance or
achievements to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Factors
and assumptions involved in the derivation of forward-looking statements, and
the failure of such other assumptions to be realized as well as other factors
may also cause actual results to differ materially from those projected. Most of
these factors are difficult to predict accurately and are generally beyond our
control. These factors and assumptions may have an impact on the continued
accuracy of any forward-looking statements that we make.
Factors which may cause actual results to differ materially from our current
expectations include, but are not limited to, the risks described in "Item 1A.
Risk Factors" in our Annual Report on Form 10-K for the year ended December 31,
2019, as such risk factors may be updated from time to time in our public
filings, and risks associated with: complying with environmental laws and
regulations and the costs associated with complying with such laws and
regulations; substantially all of our tenants depending on the same
24
--------------------------------------------------------------------------------
industry for their revenues; the creditworthiness of our tenants; our tenants'
compliance with their lease obligations; renewal of existing leases and our
ability to either re-lease or sell properties; our dependence on external
sources of capital; counterparty risks; the uncertainty of our estimates,
judgments, projections and assumptions associated with our accounting policies
and methods; our ability to successfully manage our investment strategy;
potential future acquisitions and redevelopment opportunities; changes in
interest rates and our ability to manage or mitigate this risk effectively;
owning and leasing real estate; our business operations generating sufficient
cash for distributions or debt service; adverse developments in general
business, economic or political conditions; adverse effect of inflation; federal
tax reform; property taxes; potential exposure related to pending lawsuits and
claims; owning real estate primarily concentrated in the Northeast and
Mid-Atlantic regions of the United States; competition in our industry; the
adequacy of our insurance coverage and that of our tenants; failure to qualify
as a REIT; dilution as a result of future issuances of equity securities; our
dividend policy, ability to pay dividends and changes to our dividend policy;
changes in market conditions; provisions in our corporate charter and by-laws;
Maryland law discouraging a third-party takeover; changes in LIBOR reporting
practices or the method in which LIBOR is calculated or changes to alternative
rates if LIBOR is discontinued; the loss of a member or members of our
management team or Board of Directors; changes in accounting standards; future
impairment charges; terrorist attacks and other acts of violence and war; our
information systems; failure to maintain effective internal controls over
financial reporting; and negative impacts from the continued spread of the novel
coronavirus ("COVID-19") pandemic, including on the global economy or on our or
our tenants' businesses, financial position or results of operations.
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, ability to pay dividends or stock price. An investment in our stock
involves various risks, including those mentioned above and elsewhere in this
Quarterly Report on Form 10-Q and those that are described from time to time in
our other filings with the SEC. While we expect to continue to pursue our
overall growth strategy and to fund our business operations from our cash flows
from our properties, the rapid developments and fluidity of COVID-19 may cause
us to moderate, if not suspend, our growth strategy.
You should not place undue reliance on forward-looking statements, which reflect
our view only as of the date hereof. Except for our ongoing obligations to
disclose material information under the federal securities laws, we undertake no
obligation to release publicly any revisions to any forward-looking statements,
to report events or to report the occurrence of unanticipated events, unless
required by law. For any forward-looking statements contained in this Quarterly
Report on Form 10-Q or in any other document, we claim the protection of the
safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
General
Real Estate Investment Trust
We are a REIT specializing in the ownership, leasing and financing of
convenience store and gasoline station properties. As of September 30, 2020, we
owned 896 properties and leased 58 properties from third-party landlords. As a
REIT, we are not subject to federal corporate income tax on the taxable income
we distribute to our stockholders. In order to continue to qualify for taxation
as a REIT, we are required, among other things, to distribute at least 90% of
our ordinary taxable income to our stockholders each year.
COVID-19
In March 2020, the World Health Organization declared the outbreak of COVID-19
as a pandemic. The impact from the rapidly changing market and economic
conditions due to the COVID-19 pandemic remains uncertain. While we have not
incurred significant disruptions to our financial results thus far from the
COVID-19 pandemic, we are unable to accurately predict the impact that COVID-19
will have on our business, operations and financial result due to numerous
evolving factors, including the severity of the disease, the duration of the
pandemic, actions that may be taken by governmental authorities, the impact to
our tenants, including the ability of our tenants to make their rental payments
and any closures of tenants' facilities. Additionally, while we expect to
continue our overall growth strategy during the fourth quarter of 2020 and to
fund our business operations from cash flows from our properties and our
Revolving Facility, the rapid developments and fluidity of COVID-19 may cause us
to re-evaluate, if not suspend, our growth strategy and/or to rely more heavily
on borrowings under our Revolving Facility, proceeds from the sale of shares of
our common stock under our ATM Program, or other sources of liquidity.
We will continue to evaluate the nature and extent of the impact of this
situation to our business, consolidated results of operations, liquidity and
financial condition and whether or to what extent we need to adjust our
business, operations or investment, financing, redevelopment or growth
strategies during the fourth quarter of 2020 or thereafter.
Our Triple-Net Leases
Substantially all of our properties are leased on a triple-net basis primarily
to petroleum distributors, convenience store retailers and, to a lesser extent,
automotive service and other retail operators. Generally, our tenants supply
fuel and either operate our properties directly or sublet our properties to
operators who operate their convenience stores, gasoline stations, automotive
service or
25
--------------------------------------------------------------------------------
other retail businesses at our properties. 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.
Substantially all of our tenants' financial results depend on the sale of
refined petroleum products, convenience store sales or rental income from their
subtenants. As a result, our tenants' financial results are highly dependent on
the performance of the petroleum marketing industry, which is highly competitive
and subject to volatility. 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.
For additional information regarding our real estate business, our properties
and environmental matters, see "Item 1. Business - Company Operations" and
"Item 2. Properties" in our Annual Report on Form 10-K for the year ended
December 31, 2019, and "Environmental Matters" below.
Our Properties
Net Lease. As of September 30, 2020, we leased 939 of our properties to tenants
under triple-net leases.
Our net lease properties include 820 properties leased under 29 separate unitary
or master triple-net leases and 119 properties leased under single unit
triple-net leases. These leases generally provide for an initial term of 15 or
20 years with options for successive renewal terms of up to 20 years and
periodic rent escalations. Several of our leases provide for additional rent
based on the aggregate volume of fuel sold. In addition, certain of our leases
require the tenants to invest capital in our properties.
Redevelopment. As of September 30, 2020, we were actively redeveloping seven of
our properties either as a new convenience and gasoline use or for alternative
single-tenant net lease retail uses.
Vacancies. As of September 30, 2020, eight of our properties were vacant. We
expect that we will either sell or enter into new leases on these properties
over time.
Investment Strategy and Activity
As part of our overall growth strategy, we regularly review acquisition and
financing opportunities to invest in additional convenience store and gasoline
station, and other automotive related properties. While we expect to continue to
pursue investments that we believe will benefit our financial performance
consistent with our overall growth strategy, we are continuing to monitor the
impact of COVID-19 on our business, and the rapid developments and fluidity of
this situation may cause us to moderate, if not suspend, our acquisition
activities or reevaluate our financing activities. In addition to sale/leaseback
and other real estate acquisitions, our investment activities include purchase
money financing with respect to properties we sell, real property loans relating
to our leasehold portfolios and construction loans. Our investment strategy
seeks to generate current income and benefit from long-term appreciation in the
underlying value of our real estate. To achieve that goal, we seek to invest in
high quality individual properties and real estate portfolios that are in strong
primary markets that serve high density population centers. A key element of our
investment strategy is to invest in properties that will promote geographic and
tenant diversity in our property portfolio.
During the nine months ended September 30, 2020, we acquired fee simple
interests in 24 convenience store and gasoline station, and other automotive
related properties for an aggregate purchase price of $104.8 million. During the
nine months ended September 30, 2019, we acquired fee simple interests in 14
convenience store and gasoline station, and other automotive related properties
for an aggregate purchase price of $43.3 million.
Redevelopment Strategy and Activity
We believe that certain of our properties are located in geographic areas which,
together with other factors, may make them well-suited for a new convenience and
gasoline use or for alternative single-tenant net lease retail uses, such as
quick service restaurants, automotive parts and service stores, specialty retail
stores and bank branch locations. We believe that the redeveloped properties can
be leased or sold at higher values than their current use.
For the nine months ended September 30, 2020, rent commenced on five completed
redevelopment projects that were placed back into service in our net lease
portfolio. Since the inception of our redevelopment program in 2015, we have
completed 18 redevelopment projects. During the nine months ended September 30,
2020, we transferred $1.2 million of construction-in-progress to buildings and
improvements on our consolidated balance sheets.
As of September 30, 2020, we were actively redeveloping seven of our properties
either as a new convenience and gasoline use or for alternative single-tenant
net lease retail uses. In addition to the seven properties currently classified
as redevelopment, we are in various stages of feasibility and planning for the
recapture of select properties from our net lease portfolio that are suitable
for redevelopment to either a new convenience and gasoline use or for
alternative single-tenant net lease retail uses. As of September 30, 2020, we
have signed leases on five properties, that are currently part of our net lease
portfolio, which will be recaptured and
26
--------------------------------------------------------------------------------
transferred to redevelopment when the appropriate entitlements, permits and
approvals have been secured. While we expect to continue to pursue our
redevelopment strategy, we are continuing to monitor the impact of COVID-19 to
our business, and the rapid developments and fluidity of this situation may
cause us to moderate, if not suspend, our redevelopment activities.
Asset Impairment
We perform an impairment analysis for the carrying amounts of our properties in
accordance with GAAP when indicators of impairment exist. We reduced the
carrying amounts to fair value, and recorded impairment charges aggregating $1.3
million and $2.9 million for the three and nine months ended September 30, 2020,
respectively, and $0.9 million and $2.4 million for the three and nine months
ended September 30, 2019, where the carrying amounts of the properties exceed
the estimated undiscounted cash flows expected to be received during the assumed
holding period which includes the estimated sales value expected to be received
at disposition. The impairment charges were attributable to the effect of adding
asset retirement costs due to changes in estimates associated with our
environmental liabilities, which increased the carrying values of certain
properties in excess of their fair values, reductions in estimated undiscounted
cash flows expected to be received during the assumed holding period for certain
of our properties, and reductions in estimated sales prices from third-party
offers based on signed contracts, letters of intent or indicative bids for
certain of our properties. The evaluation and estimates of anticipated cash
flows used to conduct our impairment analysis are highly subjective and actual
results could vary significantly from our estimates.
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, to the extent feasible,
and generating cash sufficient to make required distributions to stockholders of
at least 90% of our ordinary taxable income each year. In addition to
measurements defined by GAAP, we also focus on Funds From Operations ("FFO") and
Adjusted Funds From Operations ("AFFO") to measure our performance. FFO and AFFO
are generally considered by analysts and investors to be appropriate
supplemental non-GAAP measures of the performance of REITs. FFO and AFFO are not
in accordance with, or a substitute for, measures prepared in accordance with
GAAP. In addition, FFO and AFFO are not based on any comprehensive set of
accounting rules or principles. 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. These measures should only be used to evaluate our
performance in conjunction with corresponding GAAP measures.
FFO is defined by the National Association of Real Estate Investment Trusts as
GAAP net earnings before depreciation and amortization of real estate assets,
gains or losses on dispositions of real estate, impairment charges and
cumulative effect of accounting changes. Our definition of AFFO is defined as
FFO less (i) Revenue Recognition Adjustments (net of allowances), (ii) changes
in environmental estimates, (iii) accretion expense, (iv) environmental
litigation accruals, (v) insurance reimbursements, (vi) legal settlements and
judgments, (vii) acquisition costs expensed and (viii) other unusual items that
are not reflective of our core operating performance. Other REITs may use
definitions of FFO and/or AFFO that are different from ours and, accordingly,
may not be comparable.
We believe that FFO and AFFO are helpful to analysts and 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 core operating
performance. FFO excludes various items such as depreciation and amortization of
real estate assets, gains or losses on dispositions of real estate, and
impairment charges. In our case, however, GAAP net earnings and FFO typically
include the impact of revenue recognition adjustments comprised of deferred
rental revenue (straight-line rental revenue), the net amortization of
above-market and below-market leases, adjustments recorded for recognition of
rental income recognized from direct financing leases on revenues from rental
properties and the amortization of deferred lease incentives, as offset by the
impact of related collection reserves. Deferred rental revenue results primarily
from fixed rental increases scheduled under certain leases with our tenants. In
accordance with GAAP, the aggregate minimum rent due over the current term of
these leases is recognized on a straight-line basis rather than when 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 revenues from rental properties over the remaining
lives of the in-place leases. Income from direct financing leases is recognized
over the lease terms using the effective interest method, which produces a
constant periodic rate of return on the net investments in the leased
properties. The amortization of deferred lease incentives represents our funding
commitment in certain leases, which deferred expense is recognized on a
straight-line basis as a reduction of rental revenue. GAAP net earnings and FFO
include non-cash changes in environmental estimates and environmental accretion
expense, which do not impact our recurring cash flow. GAAP net earnings and FFO
also include environmental litigation accruals, insurance reimbursements, and
legal settlements and judgments, which items are not indicative of our core
operating performance. GAAP net earnings and FFO from time to time may also
include property acquisition costs expensed and other unusual items that are not
reflective of our core operating performance. Acquisition costs are expensed,
generally in the period when properties are acquired and are not reflective of
our core operating performance.
27
--------------------------------------------------------------------------------
We pay particular attention to AFFO, as we believe it best represents our core
operating performance. In our view, AFFO provides a more accurate depiction than
FFO of our core operating performance. By providing AFFO, we believe that we are
presenting useful information that assists analysts and investors to better
assess our core operating performance. Further, we believe that AFFO is useful
in comparing the sustainability of our core operating performance with the
sustainability of the core operating performance of other real estate companies.
A reconciliation of net earnings to FFO and AFFO is as follows (in thousands,
except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net earnings $ 11,884 $ 11,890 $ 35,557 $ 36,015
Depreciation and amortization of real
estate assets 7,635 6,321 22,057 18,571
(Gain) loss on dispositions of real
estate (82 ) - (1,138 ) (376 )
Impairments 1,325 928 2,863 2,400
Funds from operations 20,762 19,139 59,339 56,610
Revenue recognition adjustments 151 (184 ) 306 (799 )
Changes in environmental estimates (861 ) (296 ) (2,089 ) (855 )
Accretion expense 454 475 1,375 1,507
Environmental litigation accruals 85 4,650 85 4,677
Insurance reimbursements - (4,490 ) (96 ) (4,760 )
Legal settlements and judgments (376 ) (1,146 ) (800 ) (2,568 )
Adjusted funds from operations $ 20,215 $ 18,148 $ 58,120 $ 53,812
Basic per share amounts:
Earnings per share $ 0.27 $ 0.28 $ 0.83 $ 0.86
Funds from operations per share 0.48 0.46 1.39 1.36
Adjusted funds from operations per share $ 0.47 $ 0.43 $ 1.37 $ 1.29
Diluted per share amounts:
Earnings per share
$ 0.27 $ 0.28 $ 0.83 $ 0.86
Funds from operations per share 0.48 0.46 1.39 1.36
Adjusted funds from operations per share $ 0.47 $ 0.43 $ 1.37 $ 1.29
Weighted average common shares
outstanding:
Basic 42,226 41,139 41,690 41,013
Diluted 42,254 41,176 41,708 41,043
Results of Operations
The following discussion describes our results of operations for the three and
nine months ended September 30, 2020. While the COVID-19 pandemic did not have a
material adverse effect on our reported results for the nine months ended
September 30, 2020, we are actively monitoring the impact of COVID-19, which may
negatively impact our business and results of operations for subsequent
quarters.
During the quarter ended September 30, 2020, we received contractual base rent
and mortgage payments from 98% of our tenants or mortgagors, as applicable. We
granted a small number of short-term rent or mortgage payment relief requests,
most of them in the form of deferral of payments. We evaluated each rent or
mortgage payment relief request on an individual basis, considering a number of
factors. Not all of the requests made to the Company resulted in agreements and,
except for short term payment deferrals or, in a limited number of cases,
abatements, we did not waive any of our contractual rights under our lease
agreements or mortgages.
As of October 22, 2020, we had received October contractual base rent and
mortgage payments from 98% of our tenants or mortgagors, as applicable. October
collections and rent or mortgage payment relief requests to date may not be
indicative of collections or requests in any future period. Accordingly, the
full impact of COVID-19 on our rental revenue or interest income for the fourth
quarter of 2020 and thereafter cannot be definitively determined at present.
Three months ended September 30, 2020, compared to the three months ended
September 30, 2019
Revenues from rental properties increased by $1.5 million to $37.2 million for
the three months ended September 30, 2020, as compared to $35.7 million for the
three months ended September 30, 2019. The increase in revenues from rental
properties was primarily due to $2.5 million of revenue from newly acquired
properties along with contractual rent increases, partially offset by a decrease
in revenue recognition adjustments of $0.3 million. Rental income contractually
due from our tenants included in revenues from rental properties was $32.0
million for the three months ended September 30, 2020, as compared to $30.1
million for the three
28
--------------------------------------------------------------------------------
months ended September 30, 2019. Tenant reimbursements, which are included in
revenues from rental properties, and which consist of real estate taxes and
other municipal charges paid by us which are reimbursable by our tenants
pursuant to the terms of triple-net lease agreements, were $5.3 million and $5.4
million for the three months ended September 30, 2020 and 2019, respectively.
Interest income on notes and mortgages receivable was $0.7 million for the three
months ended September 30, 2020 and 2019.
In accordance with GAAP, we recognize revenues from rental properties in amounts
which vary from the amount of rent contractually due during the periods
presented. As a result, revenues from rental properties include Revenue
Recognition Adjustments comprised of 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, the net amortization of above-market and
below-market leases, recognition of rental income under direct financing leases
using the effective interest rate method which produces a constant periodic rate
of return on the net investments in the leased properties and the amortization
of deferred lease incentives. Revenues from rental properties includes Revenue
Recognition Adjustments which decreased rental revenue by $0.1 million and
increased rental revenue by $0.2 million for the three months ended
September 30, 2020 and 2019, respectively.
Property costs, which are primarily comprised of rent expense, real estate and
other state and local taxes, municipal charges, professional fees, maintenance
expense and reimbursable tenant expenses, were $6.6 million for the three months
ended September 30, 2020, as compared to $7.3 million for the three months ended
September 30, 2019. The decrease in property costs for the three months ended
September 30, 2020, was principally due to a decrease in rent expense,
professional fees and maintenance expense related to property redevelopments.
Impairment charges were $1.3 million for the three months ended September 30,
2020, as compared to $0.9 million for the three months ended September 30, 2019.
Impairment charges are recorded when the carrying value of a property is reduced
to fair value. Impairment charges for the three months ended September 30, 2020
and 2019, were attributable to the effect of adding asset retirement costs due
to changes in estimates associated with our environmental liabilities, which
increased the carrying values of certain properties in excess of their fair
values, reductions in estimated sales prices from third-party offers based on
signed contracts, letters of intent or indicative bids for certain of our
properties, and reductions in estimated undiscounted cash flows expected to be
received during the assumed holding period for certain of our properties.
Environmental expenses for the three months ended September 30, 2020 were $18
thousand, as compared to $5.7 million for the three months ended September 30,
2019. The decrease in environmental expenses for the three months ended
September 30, 2020, was principally due to a $4.6 million decrease in
environmental litigation accruals, a $0.6 million decrease in net environmental
remediation costs and estimates and a $0.5 million decrease in environmental
legal and professional fees. Environmental expenses vary from period to period
and, accordingly, undue reliance should not be placed on the magnitude or the
direction of changes in reported environmental expenses for one period, as
compared to prior periods.
General and administrative expense was $4.2 million for the three months ended
September 30, 2020, as compared to $3.7 million for the three months ended
September 30, 2019. The increase in general and administrative expense for the
three months ended September 30, 2020, was principally due to a $0.2 million
increase in employee-related expenses and a $0.3 million increase in legal and
other professional fees.
Depreciation and amortization expense was $7.6 million for the three months
ended September 30, 2020, as compared to $6.3 million for the three months ended
September 30, 2019. The increase in depreciation and amortization expense for
the three months ended September 30, 2020, was primarily due to depreciation and
amortization of properties acquired, partially offset by the effect of certain
assets becoming fully depreciated and dispositions of real estate.
Other income was $0.4 million for the three months ended September 30, 2020, as
compared to $5.6 million for the three months ended September 30, 2019. For the
three months ended September 30, 2020, other income was primarily attributable
to $0.4 million received from a legal settlement. For the three months ended
September 30, 2019, other income was primarily attributable to $4.5 million
received from insurance carriers for reimbursement of environmental costs and
$1.1 million received from a legal settlement.
Interest expense was $6.7 million for the three months ended September 30, 2020,
as compared to $6.2 million for the three months ended September 30, 2019. The
increase was due to higher average borrowings outstanding partially offset by a
decrease in average interest rates on borrowing outstanding for the three months
ended September 30, 2020, as compared to the three months ended September 30,
2019.
For the three months ended September 30, 2020, FFO was $20.8 million, as
compared to $19.1 million for the three months ended September 30, 2019. For the
three months ended September 30, 2020, AFFO increased by $2.1 million to $20.2
million, as compared to $18.1 million for the three months ended September 30,
2019. FFO for the three months ended September 30, 2020, was impacted by changes
in net earnings but excludes a $0.4 million increase in impairment charges, a
$0.1 million increase in gain on dispositions of real estate and a $1.3 million
increase in depreciation and amortization expense. The increase in AFFO for the
three months ended September 30, 2020, also excludes a $0.6 million decrease in
environmental estimates and accretion expense, a $4.6
29
--------------------------------------------------------------------------------
million decrease in environmental litigation accruals, a $4.5 million decrease
in insurance reimbursements, a $0.8 million decrease in legal settlements and
judgements and a $0.3 million decrease in Revenue Recognition Adjustments.
Nine months ended September 30, 2020, compared to the nine months ended
September 30, 2019
Revenues from rental properties increased by $5.7 million to $108.2 million for
the nine months ended September 30, 2020, as compared to $102.5 million for the
nine months ended September 30, 2019. The increase in revenues from rental
properties was primarily due to $6.0 million of revenue from properties acquired
in fourth quarter of 2019 and the nine months ended September 30, 2020, along
with contractual rent increases, partially offset by a decrease in revenue
recognition adjustments of $1.1 million. Rental income contractually due from
our tenants included in revenues from rental properties was $95.2 million for
the nine months ended September 30, 2020, as compared to $88.7 million for the
nine months ended September 30, 2019. Tenant reimbursements, which consist of
real estate taxes and other municipal charges paid by us which are reimbursable
by our tenants pursuant to the terms of triple-net lease agreements, were $13.3
million and $13.0 million for the nine months ended September 30, 2020 and 2019,
respectively. Interest income on notes and mortgages receivable was $2.1 million
and $2.2 million for the nine months ended September 30, 2020 and 2019,
respectively.
In accordance with GAAP, we recognize revenues from rental properties in amounts
which vary from the amount of rent contractually due during the periods
presented. As a result, revenues from rental properties include Revenue
Recognition Adjustments comprised of 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, the net amortization of above-market and
below-market leases, recognition of rental income under direct financing leases
using the effective interest rate method which produces a constant periodic rate
of return on the net investments in the leased properties and the amortization
of deferred lease incentives. Revenues from rental properties includes Revenue
Recognition Adjustments which decreased rental revenue by $0.3 million and
increased rental revenue by $0.8 million for the nine months ended September 30,
2020 and 2019, respectively.
Property costs, which are primarily comprised of rent expense, real estate and
other state and local taxes, municipal charges, professional fees, maintenance
expense and reimbursable tenant expenses, were $18.0 million for the nine months
ended September 30, 2020, as compared to $18.4 million for the nine months ended
September 30, 2019. The decrease in property costs for the nine months ended
September 30, 2020, was principally due to a decrease in rent expense and
professional fees related to property redevelopments, partially offset by an
increase in real estate taxes and other professional fees.
Impairment charges were $2.9 million for the nine months ended September 30,
2020, as compared to $2.4 million for the nine months ended September 30, 2019.
Impairment charges are recorded when the carrying value of a property is reduced
to fair value. Impairment charges for the nine months ended September 30, 2020
and 2019, were attributable to the effect of adding asset retirement costs due
to changes in estimates associated with our environmental liabilities, which
increased the carrying values of certain properties in excess of their fair
values, reductions in estimated sales prices from third-party offers based on
signed contracts, letters of intent or indicative bids for certain of our
properties, and reductions in estimated undiscounted cash flows expected to be
received during the assumed holding period for certain of our properties.
Environmental expenses for the nine months ended September 30, 2020, decreased
by $6.3 million to $1.1 million, as compared to $7.4 million for the nine months
ended September 30, 2019. The decrease in environmental expenses for the nine
months ended September 30, 2020, was principally due to a $4.6 million decrease
in environmental litigation accruals, a $1.3 million decrease in net
environmental estimates and accretion, and a $0.4 million decrease in
environmental legal and professional fees. Environmental expenses vary from
period to period and, accordingly, undue reliance should not be placed on the
magnitude or the direction of changes in reported environmental expenses for one
period, as compared to prior periods.
General and administrative expense was $12.8 million for the nine months ended
September 30, 2020, as compared to $11.5 million for the nine months ended
September 30, 2019. The increase in general and administrative expense for the
nine months ended September 30, 2020, was principally due to a $0.8 million
increase in employee-related expenses and a $0.4 million increase in legal and
other professional fees.
Depreciation and amortization expense was $22.1 million for the nine months
ended September 30, 2020, as compared to $18.6 million for the nine months ended
September 30, 2019. The increase in depreciation and amortization expense for
the nine months ended September 30, 2020, was primarily due to depreciation and
amortization charges related to properties acquired, partially offset by the
effect of certain assets becoming fully depreciated and dispositions of real
estate.
Other income was $0.9 million for the nine months ended September 30, 2020, as
compared to $7.3 million for the nine months ended September 30, 2019. For the
nine months ended September 30, 2020, other income was primarily attributable to
$0.8 million received from legal settlements and $0.1 million received from
insurance carriers for reimbursement of environmental costs. For the nine months
ended September 30, 2019, other income was primarily attributable to $4.8
million received from insurance carriers for reimbursement of environmental
costs and $2.6 million received from legal settlements.
Interest expense was $20.1 million for the nine months ended September 30, 2020,
as compared to $18.2 million for the nine months ended September 30, 2019. The
increase was due to higher average borrowings outstanding partially offset by a
decrease in
30
--------------------------------------------------------------------------------
average interest rates on borrowings outstanding for the nine months ended
September 30, 2020, as compared to the nine months ended September 30, 2019.
For the nine months ended September 30, 2020, FFO increased by $2.7 million to
$59.3 million, as compared to $56.6 million for the prior period. For the nine
months ended September 30, 2020, AFFO increased by $4.3 million to $58.1
million, as compared to $53.8 million for the prior period. FFO for the nine
months ended September 30, 2020, was impacted by the changes in net earnings but
excludes a $0.7 million increase in gains on dispositions of real estate, a $3.5
million increase in depreciation and amortization expense and a $0.5 million
increase in impairment charges. The increase in AFFO for the nine months ended
September 30, 2020, also excludes a $1.8 million decrease in legal settlements
and judgements, a $1.1 million decrease in Revenue Recognition Adjustments, a
$1.3 million decrease in environmental estimates and accretion expense, a $4.6
million decrease in environmental litigation accruals and a $4.7 million
decrease in insurance reimbursements.
Liquidity and Capital Resources
Our principal sources of liquidity are the cash flows from our operations, funds
available under our Revolving Facility (which is scheduled to mature in March
2022), proceeds from the sale of shares of our common stock through offerings
from time to time under our ATM Program, and available cash and cash
equivalents. Our business operations and liquidity are dependent on our ability
to generate cash flow from our properties. We believe that our operating cash
needs for the next twelve months can be met by cash flows from operations,
borrowings under our Revolving Facility, proceeds from the sale of shares of our
common stock under our ATM Program and available cash and cash equivalents.
While we expect during the fourth quarter of 2020 to continue to fund our
business operations from our cash flows from our properties, and funds available
under our Revolving Facility, consistent with the quarter ended September 30,
2020, the rapid developments and fluidity of COVID-19 may cause us to rely more
heavily on borrowings under our Revolving Facility or other sources of liquidity
than in prior periods.
Our cash flow activities for the nine months ended September 30, 2020 and 2019,
are summarized as follows (in thousands):
Nine Months Ended
September 30,
2020 2019
Net cash flow provided by operating activities $ 53,604 $ 57,994
Net cash flow (used in) investing activities (98,243 ) (39,036 )
Net cash flow provided by (used in) financing activities $ 81,327 $ (30,119 )
Operating Activities
Net cash flow from operating activities decreased by $4.4 million for the nine
months ended September 30, 2020, to $53.6 million, as compared to $58.0 million
for the nine months ended September 30, 2019. Net cash provided by operating
activities represents cash received primarily from rental and interest income
less cash used for property costs, environmental expense, general and
administrative expense and interest expense. The change in net cash flow
provided by operating activities for the nine months ended September 30, 2020
and 2019, is primarily the result of changes in revenues and expenses as
discussed in "Results of Operations" above and the other changes in assets and
liabilities on our consolidated statements of cash flows.
Investing Activities
Our investing activities are primarily real estate-related transactions. Because
we generally lease our properties on a triple-net basis, we have not
historically incurred significant capital expenditures other than those related
to investments in real estate and our redevelopment activities. Net cash flow
used in investing activities increased by $59.2 million for the nine months
ended September 30, 2020, to a use of $98.2 million, as compared to a use of
$39.0 million for the nine months ended September 30, 2019. The increase in net
cash flow used in investing activities for the nine months ended September 30,
2020, was primarily due to an increase of $61.5 million for property
acquisitions and an increase of $2.4 million in issuance of notes and mortgages
receivable, partially offset by an increase of $3.4 million in collection of
notes and mortgages receivables, a $0.6 million decrease in deposits on property
acquisitions and an increase of $0.8 million in proceeds from dispositions of
real estate.
Financing Activities
Net cash flow provided by financing activities increased by $111.4 million for
the nine months ended September 30, 2020, to $81.3 million, as compared to funds
used of $30.1 million for the nine months ended September 30, 2019. The increase
in net cash flow provided by financing activities was primarily due to an
increase in net borrowings under credit agreement of $210.0 million and an
increase in net proceeds under the ATM agreement of $29.7 million, partially
offset by a decrease in proceeds from senior unsecured notes of $125.0 million
and an increase in dividends paid of $3.9 million.
31
--------------------------------------------------------------------------------
Credit Agreement
On June 2, 2015, we entered into a $225.0 million 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 $175.0 million unsecured revolving
credit facility (the "Revolving Facility") and a $50.0 million unsecured term
loan (the "Term Loan").
On March 23, 2018, we entered in to 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 $175.0 million to $250.0
million, (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 $250.0 million to $300.0 million and (b) decrease lender
commitments under the Term Loan to $0.0 million.
Subject to the terms of the Restated Credit Agreement and our continued
compliance with its provisions, we have the option to (a) extend the term of the
Revolving Facility for one additional year to March 2023 and (b) request that
the lenders approve an increase of up to $300.0 million in the amount of the
Revolving Facility to $600.0 million in the aggregate.
The Restated Credit Agreement incurs interest and fees at various rates based on
our total indebtedness to total asset value ratio at the end of each quarterly
reporting period. The Revolving Facility permits borrowings at an interest rate
equal to the sum of a base rate plus a margin of 0.50% to 1.30% or a LIBOR rate
plus a margin of 1.50% to 2.30%. The annual commitment fee on the undrawn funds
under the Revolving Facility is 0.15% to 0.25%.
Senior Unsecured Notes
On September 12, 2019, we entered into a fourth amended and restated note
purchase and guarantee agreement (the "Fourth Restated Prudential Note Purchase
Agreement") amending and restating our existing senior note purchase agreement
with Prudential and certain of its affiliates. Pursuant to the Fourth Restated
Prudential Note Purchase Agreement, we agreed that our (a) 6.0% Series A
Guaranteed Senior Notes due February 25, 2021, in the original aggregate
principal amount of $100.0 million (the "Series A Notes"), (b) 5.35% Series B
Guaranteed Senior Notes due June 2, 2023, in the original aggregate principal
amount of $75.0 million (the "Series B Notes"), (c) 4.75% Series C Guaranteed
Senior Notes due February 25, 2025, in the aggregate principal amount of $50.0
million (the "Series C Notes") and (d) 5.47% Series D Guaranteed Senior Notes
due June 21, 2028, in the aggregate principal amount of $50.0 million (the
"Series D Notes") that were outstanding under the existing senior note purchase
agreement would continue to remain outstanding under the Fourth Restated
Prudential Note Purchase Agreement and we authorized and issued our 3.52% Series
F Guaranteed Senior Notes due September 12, 2029, in the aggregate principal
amount of $50.0 million (the "Series F Notes" and, together with the Series A
Notes, Series B Notes, Series C Notes and Series D Notes, the "Notes"). The
Fourth Restated Prudential Note Purchase Agreement does not provide for
scheduled reductions in the principal balance of the Notes prior to their
respective maturities.
On June 21, 2018, we entered into a note purchase and guarantee agreement (the
"MetLife Note Purchase Agreement") with MetLife and certain of its affiliates.
Pursuant to the MetLife Note Purchase Agreement, we authorized and issued our
5.47% Series E Guaranteed Senior Notes due June 21, 2028, in the aggregate
principal amount of $50.0 million (the "Series E Notes"). The MetLife Note
Purchase Agreement does not provide for scheduled reductions in the principal
balance of the Series E Notes prior to their maturity.
On September 12, 2019, we entered into a note purchase and guarantee agreement
(the "AIG Note Purchase Agreement") with American General Life Insurance
Company. Pursuant to the AIG Note Purchase Agreement, we authorized and issued
our 3.52% Series G Guaranteed Senior Notes due September 12, 2029, in the
aggregate principal amount of $50.0 million (the "Series G Notes"). The AIG Note
Purchase Agreement does not provide for scheduled reductions in the principal
balance of the Series G Notes prior to their maturity.
On September 12, 2019, we entered into a note purchase and guarantee agreement
(the "MassMutual Note Purchase Agreement") with Massachusetts Mutual Life
Insurance Company and certain of its affiliates. Pursuant to the MassMutual Note
32
--------------------------------------------------------------------------------
Purchase Agreement, we authorized and issued our 3.52% Series H Guaranteed
Senior Notes due September 12, 2029, in the aggregate principal amount of $25.0
million (the "Series H Notes"). The MassMutual Note Purchase Agreement does not
provide for scheduled reductions in the principal balance of the Series H Notes
prior to their maturity.
ATM Program
In March 2018, we established an at-the-market equity offering program (the "ATM
Program"), pursuant to which we are able to issue and sell shares of our common
stock with an aggregate sales price of up to $125.0 million through a consortium
of banks acting as agents. Sales of the shares of common stock may be made, as
needed, from time to time in at-the-market offerings as defined in Rule 415 of
the Securities Act, including by means of ordinary brokers' transactions on the
New York Stock Exchange or otherwise at market prices prevailing at the time of
sale, at prices related to prevailing market prices or as otherwise agreed to
with the applicable agent.
During the three and nine months ended September 30, 2020, we issued a total of
922,000 and 1,326,000 shares of common stock and received net proceeds of $26.6
million and $38.5 million, respectively, under the ATM Program. During the three
and nine months ended September 30, 2019, we issued 70,000 and 283,000 shares of
common stock and received net proceeds of $2.2 million and $8.8 million,
respectively, under the ATM Program. Future sales, if any, will depend on a
variety of factors to be determined by us from time to time, including among
others, market conditions, the trading price of our common stock, determinations
by us of the appropriate sources of funding for us and potential uses of funding
available to us.
Property Acquisitions and Capital Expenditures
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.
During the nine months ended September 30, 2020, we acquired fee simple
interests in 24 convenience store and gasoline station, and other automotive
related properties for an aggregate purchase price of $104.8 million. During the
nine months ended September 30, 2019, we acquired fee simple interests in 14
convenience store and gasoline station, and other automotive related properties
for an aggregate purchase price of $43.3 million. We accounted for the
acquisitions of fee simple interests as asset acquisitions. For additional
information regarding our property acquisitions, see Note 11.
We are reviewing select opportunities for capital expenditures, redevelopment
and alternative uses for certain of our properties. We are also seeking to
recapture select properties from our net lease portfolio to redevelop such
properties either for a new convenience and gasoline use or for alternative
single-tenant net lease retail uses. For the nine months ended September 30,
2020, rent commenced on five completed redevelopment projects that were placed
back into service in our net lease portfolio. Since the inception of our
redevelopment program in 2015, we have completed 18 redevelopment projects.
Because we generally lease our properties on a triple-net basis, we have not
historically incurred significant capital expenditures other than those related
to acquisitions. However, our tenants frequently make improvements to the
properties leased from us at their expense. As of September 30, 2020, we have a
remaining commitment to fund up to $6.9 million in the aggregate in capital
improvements in certain properties previously leased to Marketing and now
subject to unitary triple-net leases with other tenants.
Dividends
We elected to be treated as a REIT under the federal income tax laws with the
year beginning January 1, 2001. To qualify for taxation as a REIT, we must,
among other requirements such as those related to the composition of our assets
and gross income, distribute annually to our stockholders at least 90% of our
taxable income, including taxable income that is accrued by us without a
corresponding receipt of cash. We cannot provide any assurance that our cash
flows will permit us to continue paying cash dividends.
It is also possible that instead of distributing 100% of our taxable income on
an annual basis, we may decide to retain a portion of our taxable income and to
pay taxes on such amounts as permitted by the Internal Revenue Service. Payment
of dividends is subject to market conditions, our financial condition, including
but not limited to, our continued compliance with the provisions of the Restated
Credit Agreement, our senior unsecured notes and other factors, and therefore is
not assured. In particular, the Restated Credit Agreement and our senior
unsecured notes prohibit the payment of dividends during certain events of
default.
Regular quarterly dividends paid to our stockholders for the nine months ended
September 30, 2020, were $47.0 million, or $1.11 per share. There can be no
assurance that we will continue to pay dividends at historical rates, if at all.
Critical Accounting Policies and Estimates
The consolidated financial statements included in this Quarterly Report on Form
10-Q have been prepared in conformity with accounting principles generally
accepted in the United States of America. The preparation of consolidated
financial statements in accordance with GAAP requires us to make estimates,
judgments and assumptions that affect the amounts reported in our consolidated
financial statements. Although we have made estimates, judgments and assumptions
regarding future uncertainties relating to the
33
--------------------------------------------------------------------------------
information included in our consolidated 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, real estate, receivables,
deferred rent receivable, direct financing leases, depreciation and
amortization, impairment of long-lived assets, 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. The information included in our consolidated 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 in "Item 8. Financial Statements
and Supplementary Data" in our Annual Report on Form 10-K for the year ended
December 31, 2019. The SEC's Financial Reporting Release ("FRR") No. 60,
Cautionary Advice Regarding Disclosure About Critical Accounting Policies ("FRR
60"), suggests that companies provide additional disclosure on those accounting
policies considered most critical. FRR 60 considers an accounting policy to be
critical if it is important to our financial condition and results of operations
and requires significant judgment and estimates on the part of management in its
application. We believe that our most critical accounting policies relate to
revenue recognition and deferred rent receivable, direct financing leases,
impairment of long-lived assets, environmental remediation obligations,
litigation, income taxes, and the allocation of the purchase price of properties
acquired to the assets acquired and liabilities assumed (collectively, our
"Critical Accounting Policies"), each of which is discussed in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Annual Report on Form 10-K for the year ended December 31,
2019.
Environmental Matters
General
We are subject to numerous 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 costs are principally attributable to
remediation costs which are incurred for, among other things, removing USTs,
excavation of contaminated soil and water, installing, operating, maintaining
and decommissioning remediation systems, monitoring contamination and
governmental agency compliance reporting required in connection with
contaminated properties.
We enter into leases and various other agreements which contractually allocate
responsibility between the parties for known and unknown environmental
liabilities at or relating to the subject properties. We are contingently liable
for these environmental obligations in the event that our tenant does not
satisfy them, and we are required to accrue for environmental liabilities that
we believe are allocable to others under our leases if we determine that it is
probable that our tenant will not meet its environmental obligations. 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 and environmental remediation liabilities. We
assess whether to accrue for environmental liabilities based upon relevant
factors including our tenants' histories of paying for such obligations, our
assessment of their financial capability, and their intent to pay for such
obligations. However, there can be no assurance that our assessments are correct
or that our tenants who have paid their obligations in the past will continue to
do so. We may ultimately be responsible to pay for environmental liabilities as
the property owner if our tenant fails to pay them.
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 accrued liability is the aggregate of
our estimate of the fair value of cost for each component of the liability, net
of estimated recoveries from state UST remediation funds considering estimated
recovery rates developed from prior experience with the funds.
For substantially all of our triple-net leases, our tenants are contractually
responsible for compliance with environmental laws and regulations, removal of
USTs at the end of their lease term (the cost of which in certain cases is
partially borne by us) and remediation of any environmental contamination that
arises during the term of their tenancy. Under the terms of our leases covering
properties previously leased to Marketing (substantially all of which commenced
in 2012), we have agreed to be responsible for environmental contamination at
the premises that was known at the time the lease commenced, and for
environmental contamination which existed prior to commencement of the lease and
is discovered (other than as a result of a voluntary site investigation) during
the first 10 years of the lease term (or a shorter period for a minority of such
leases). After expiration of such 10-year (or, in certain cases, shorter)
period, responsibility for all newly discovered contamination, even if it
relates to periods prior to commencement of the lease, is contractually
allocated to our tenant. Our tenants at properties previously leased to
Marketing are in all cases responsible for the cost of any remediation of
contamination that results from their use and occupancy of our properties. Under
substantially all of our other triple-net leases, responsibility for remediation
of all environmental contamination discovered during the term of the lease
(including known and unknown contamination that existed prior to commencement of
the lease) is the responsibility of our tenant.
34
--------------------------------------------------------------------------------
We anticipate that a majority of the USTs at properties previously leased to
Marketing will be replaced over the next several years because these USTs are
either at or near the end of their useful lives. For long-term, triple-net
leases covering sites previously leased to Marketing, our tenants are
responsible for the cost of removal and replacement of USTs and for remediation
of contamination found during such UST removal and replacement, unless such
contamination was found during the first 10 years of the lease term and also
existed prior to commencement of the lease. In those cases, we are responsible
for costs associated with the remediation of such preexisting contamination. We
have also agreed to be responsible for environmental contamination that existed
prior to the sale of certain properties assuming the contamination is discovered
(other than as a result of a voluntary site investigation) during the first five
years after the sale of the properties.
In the course of certain UST removals and replacements at properties previously
leased to Marketing where we retained continuing responsibility for preexisting
environmental obligations, previously unknown environmental contamination was
and continues to be discovered. As a result, we have developed an estimate of
fair value for the prospective future environmental liability resulting from
preexisting unknown environmental contamination and have accrued for these
estimated costs. These estimates are based primarily upon quantifiable trends
which we believe allow us to make reasonable estimates of fair value for the
future costs of environmental remediation resulting from the removal and
replacement of USTs. Our accrual of the additional liability represents our
estimate of the fair value of cost for each component of the liability, net of
estimated recoveries from state UST remediation funds considering estimated
recovery rates developed from prior experience with the funds. In arriving at
our accrual, we analyzed the ages of USTs at properties where we would be
responsible for preexisting contamination found within 10 years after
commencement of a lease (for properties subject to long-term triple-net leases)
or five years from a sale (for divested properties), and projected a cost to
closure for preexisting unknown environmental contamination.
We measure our environmental remediation liabilities at fair value based on
expected future net cash flows, adjusted for inflation (using a range of 2.0% to
2.75%), and then discount them to present value (using a range of 4.0% to 7.0%).
We adjust our environmental remediation liabilities quarterly to reflect changes
in projected expenditures, changes in present value due to the passage of time
and reductions in estimated liabilities as a result of actual expenditures
incurred during each quarter. As of September 30, 2020, we had accrued a total
of $49.0 million for our prospective environmental remediation obligations. This
accrual consisted of (a) $11.9 million, which was our estimate of reasonably
estimable environmental remediation liability, including obligations to remove
USTs for which we are responsible, net of estimated recoveries and (b) $37.1
million for future environmental liabilities related to preexisting unknown
contamination. As of December 31, 2019, we had accrued a total of $50.7 million
for our prospective environmental remediation obligations. This accrual
consisted of (a) $12.4 million, which was our estimate of reasonably estimable
environmental remediation liability, including obligations to remove USTs for
which we are responsible, net of estimated recoveries and (b) $38.3 million for
future environmental liabilities related to preexisting unknown contamination.
Environmental liabilities are accreted for the change in present value due to
the passage of time and, accordingly, $1.4 million and $1.5 million of net
accretion expense was recorded for the nine months ended September 30, 2020 and
2019, respectively, which is included in environmental expenses. In addition,
during the nine months ended September 30, 2020 and 2019, we recorded credits to
environmental expenses aggregating $2.1 million and $0.9 million, respectively,
where decreases in estimated remediation costs exceeded the depreciated carrying
value of previously capitalized asset retirement costs. Environmental expenses
also include project management fees, legal fees and environmental litigation
accruals.
During the nine months ended September 30, 2020 and 2019, we increased the
carrying values of certain of our properties by $2.3 million and $3.7 million.
respectively, due to changes in estimated environmental remediation costs. The
recognition and subsequent changes in estimates in environmental liabilities and
the increase or decrease in carrying values of the properties are non-cash
transactions which do not appear on our consolidated statements of cash flows.
Capitalized asset retirement costs are being depreciated over the estimated
remaining life of the UST, a 10-year period if the increase in carrying value is
related to environmental remediation obligations or such shorter period if
circumstances warrant, such as the remaining lease term for properties we lease
from others. Depreciation and amortization expense related to capitalized asset
retirement costs in our consolidated statements of operations for the nine
months ended September 30, 2020 and 2019, was $3.0 million and $3.1 million,
respectively. Capitalized asset retirement costs were $40.0 million (consisting
of $23.6 million of known environmental liabilities and $16.4 million of
reserves for future environmental liabilities) as of September 30, 2020, and
$39.7 million (consisting of $22.2 million of known environmental liabilities
and $17.5 million of reserves for future environmental liabilities) as of
December 31, 2019. We recorded impairment charges aggregating $2.1 million and
$2.4 million for the nine months ended September 30, 2020 and 2019,
respectively, for capitalized asset retirement costs.
Environmental exposures are difficult to assess and estimate for numerous
reasons, including the amount of data available upon initial assessment 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, changes in costs associated with environmental remediation
services and equipment, the availability of state UST remediation funds and the
possibility of existing legal claims giving rise to allocation of
responsibilities to others, as well as the time it takes to remediate
contamination and receive regulatory approval. In developing our liability for
estimated environmental remediation obligations on a property by property basis,
we consider, among other things, laws and regulations, assessments of
contamination and surrounding geology, quality of information available,
currently available
35
--------------------------------------------------------------------------------
technologies for treatment, alternative methods of remediation and prior
experience. Environmental accruals are based on estimates derived upon facts
known to us at this time, which are subject to significant change as
circumstances change, and as environmental contingencies become more clearly
defined and reasonably estimable.
Any changes to our estimates or our assumptions that form the basis of our
estimates may result in our providing an accrual, or adjustments to the amounts
recorded, for environmental remediation liabilities.
In July 2012, we purchased a 10-year pollution legal liability insurance policy
covering substantially all of our properties at that time for preexisting
unknown environmental liabilities and new environmental events. The policy has a
$50.0 million aggregate limit and is subject to various self-insured retentions
and other conditions and limitations. Our intention in purchasing this policy
was to obtain protection predominantly for significant events. In addition to
the environmental insurance policy purchased by the Company, we also took
assignment of certain environmental insurance policies, and rights to
reimbursement for claims made thereunder, from Marketing, by order of the U.S.
Bankruptcy Court during Marketing's bankruptcy proceedings. Under these assigned
policies, we have received and expect to continue to receive reimbursement of
certain remediation expenses for covered claims.
In light of the uncertainties associated with environmental expenditure
contingencies, we are unable to estimate ranges in excess of the amount accrued
with any certainty; however, we believe that it is possible that the fair value
of future actual net expenditures could be substantially higher than amounts
currently recorded by us. Adjustments to accrued liabilities for environmental
remediation obligations will be reflected in our consolidated financial
statements as they become probable and a reasonable estimate of fair value can
be made.
Environmental Litigation
We are subject to various legal proceedings and claims which arise in the
ordinary course of our business. As of September 30, 2020 and December 31, 2019,
we had accrued $17.9 million and $17.8 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 our former Newark, New Jersey Terminal and the
Lower Passaic River, our MTBE litigations in the states of New Jersey,
Pennsylvania and Maryland, and our lawsuit with the State of New York pertaining
to a property formerly owned by us in Uniondale, New York, in particular, 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 these and other pending environmental lawsuits and
claims, see "Item 3. Legal Proceedings" in our Annual Report on Form 10-K for
the year ended December 31, 2019, and "Part II, Item 1. Legal Proceedings" and
Note 4 in "Part I, Item 1. Financial Statements" in this Quarterly Report on
Form 10-Q.
© Edgar Online, source Glimpses
GETTY REALTY CORP. 
