At first glance, you’d think that Getty Realty (GTY), a net lease REIT of gas station properties, would be struggling during a pandemic that has dramatically reduced car travel across the country. The reality could not be further from the truth, as GTY has experienced minimal impact from COVID-19, at least as far as rent collection is concerned. GTY was able to report 9.3% AFFO per share growth in the latest quarter, and on the backs of strong results even raised the dividend by over 5%. GTY maintains a low leverage balance sheet which helps to compensate for any potential secular headwinds facing the gas station segment. With shares yielding in excess of 6%, shares are a buy.
The Resiliency Of Gas Station Net Leases
When you look at the tenant list below, what do they all have in common?
The better question might be, what’s the difference? GTY is a pure-play on gas station net lease properties, which at first might sound like exactly what you do not want to own during a pandemic. It turns out that in spite of people staying at home, GTY has been able to produce strong results. Whereas net lease REIT peers have seen rent collection rates dip significantly in the past several quarters, GTY has not seen rent collection dip below 96%, and rent collection was 98% for the month of October. GTY has even been able to grow AFFO per share by 6.2% year to date.
Aren’t gas stations struggling? Perhaps many gas stations are reporting lower profits from fuel sales, but many of GTY’s tenants include a convenience store component:
Readers may be surprised to learn that gas stations derive the majority of profit from their convenience stores, as convenience store margins have remains steadily strong over the past decade:
The surprising result is that GTY has reported solidly strong financials throughout the year – aside from a couple basis points of uncollected rent here and there, GTY has experienced minimal negative impact. Its results were so solid that it even decided to raise its quarterly dividend by 5.4% to $0.39 per share:
Looking beyond the pandemic, GTY has minimal lease expiring over the next several years, which suggests that investors can expect the 1.6% annual lease escalators to kick-in every year like clockwork.
Balance Sheet Analysis
GTY has a solid balance sheet rated BBB- by Fitch. Net debt to EBITDA stands at a conservative 4.9 times. GTY has no debt maturing in 2020 and manageable maturities over the next couple of years:
GTY has $190 million of available cash under its revolving credit facilities. It is arguable that its current leverage profile is conservative and perhaps debt to EBITDA can rise to the 5.5 times range. GTY’s balance sheet is a source of strength and provides an important defensive margin of safety should the gas station industry face future challenges.
Valuation and Price Target
GTY trades at a 6.1% dividend yield based on its forward dividend payout of $1.52 per share. GTY’s strong performance in 2020 seems like testament to the strength of its business model. I project 3-5% annual dividend growth, made possible from the combination of 1.6% internal growth and the remainder from external growth. Speaking of external growth, GTY has acquired $105 million of properties YTD (already higher than 2019) at a 7.0% average cap rate. My 12 month fair value estimate is $36, representing a 4.2% dividend yield. Shares have over 40% total return upside to that target.
While GTY has churned in strong rent collection this year, there is no guarantee of that repeating moving forward. It’s possible that its tenants have been hanging by a thread and a wave of bankruptcies is on the horizon – though I find that unlikely. GTY’s conservative leverage ratio would prove crucial if it sees a wave of bankruptcies, as there is significant room for leverage to expand in the case of declining cash flows.
The market has seemingly begun to focus on renewable energies and electric vehicles. If predictions for a 100% electrical vehicle landscape come true, then GTY’s tenants would likely face an existential crisis. Because GTY is concentrated in gas station properties, it too would face serious financial stress. Investors should pay close attention to EV developments – while I doubt that it will happen, if there is sudden adoption of EV vehicles, then that would be a time to sell.
If interest rates were to rise, then GTY’s dividend yield would likely expand as well. Furthermore, GTY’s cost of capital may increase when its debt matures. I find the likelihood of rising interest rates to be very low, considering that Federal Reserve Chair Jerome Powell has committed to lower interest rates for longer.
While it may feel risky to own a concentrated portfolio of gas station real estate, the strategy has worked out well in 2020, in spite of the pandemic. While peers are reporting declines in cash flow, GTY has delivered robust growth and has also rewarded shareholders with a 5% dividend raise. While secular headwinds to gas stations should not be ignored, the 6% dividend yield is enticing. I rate shares a buy with 40% total return upside.
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Disclosure: I am/we are long GTY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.