Fitch Ratings has assigned a 'BBB-' rating to Getty Realty Corp.'s (NYSE: GTY) new senior unsecured notes, series O, P and Q. Fitch expects the transaction to be leverage neutral and the proceeds to be used for general corporate purposes, including the refinancing of outstanding debt.
Key Rating Drivers
C-Store Exposure: Getty Realty primarily invests in convenience stores (C-Stores), a combination of fueling station and C-Store, and sometimes quick service restaurant. However, GTY has been increasing its portfolio diversity in the past four years. The C-Store segment accounted for 72.6% of annualized base rent (ABR) at 3Q22, down from 100% in 2017. Getty Realty also invests in other automotive-related properties such as car washes and repair shops. C-Store businesses are necessity-based and performed well throughout the pandemic.
Conservative Credit Profile: Fitch expects GTY to maintain leverage in the mid- to high-4x range through the forecast period, as portfolio occupancy stays in the 99% range. Fitch expects acquisitions to be funded on a leverage neutral basis with a mix of unsecured bond offerings, disposition proceeds, and equity issuances that will result in leverage maintaining at or below 5.0x. Fitch anticipates GTY's leverage and FCC to be approximately 5.0x and 4.0x for 2022, respectively, metrics which are strong for the rating.
Getty has adequate financial flexibility from its unencumbered pool as of 3Q22 which is sufficiently sized at 2.4x of net unsecured debt using a stressed 10.5% cap rate. A UA/UD ratio of 2.0x is typical for the 'BBB' category REITs. GTY benefits from a fully unencumbered asset base. While sufficiently sized, Fitch notes the assets are relatively less financeable than more traditional commercial real estate property types.
Getty Realty's portfolio generates predictable cash flow, absent tenant bankruptcies and lease rejections, with annual rent bumps of 1%-2% over a 15- to 20-year initial lease term at the onset and consistent occupancy of greater than 99%. While these increases will likely trail inflation for the foreseeable future, this should not be a credit concern given substantially all of Getty Realty's leases are on a triple-net basis thereby shielding it from increases in property operating expenses. Getty Realty's weighted average remaining lease term of approximately nine years is comparable to the net lease peer average; Getty Realty has only 6% of its leases expiring through YE 2025.
Portfolio/Tenant Concentrations: The New York MSA, Getty Realty's largest market, represents 18% of ABR, down from about 27% in 2019. It is followed by Washington, D.C., at 8% of ABR and Boston at 6% of ABR. The company targets high-density metropolitan areas, which Fitch views positively for C-Store assets, but exposure to one location exceeding 10% presents outsized portfolio risk. Getty Realty also has elevated, although decreasing tenant concentration risk, with the top three tenants (ARKO, at 14% of ABR; Global Partners at 14%; and United Oil at 11%) accounting for 39% of revenue (down from 42% in 2020) and top 10 tenants accounting for 76% of ABR (down from 81% in 2020) as of Sept. 30, 2022.
Limited Contingent Liquidity: GTY's ratings are constrained by its C-Stores portfolio focus, which has less contingent liquidity than other real estate property types given the still nascent mortgage market. Relative to core real estate sectors, the mortgage market for C-Stores is less robust, making these assets relatively more difficult to borrow against, or divest of, in a stressed market. The credit constrains posed by the relatively more limited contingent liquidity is mitigated in part by the cash flow stability of C-Stores, as demonstrated during the pandemic, and GTY's increased portfolio diversification towards more financeable asset classes such as car washes (approx. 12.4% of ABR), auto service (2.3%) and auto parts (0.4%).
Minimal Impact from Electric Vehicles to Date: Fitch expects the increased popularity of electric vehicles (EV) to have a minimal impact on Getty Realty's performance over the one- to two-year rating horizon. Fitch assumes EV sales penetration in the U.S. will continue to lag internal combustion engine penetration for most of the 2020s, meaning that they will make up a relatively small percentage of vehicles in operation for well over a decade.
EV penetration could be accelerated by technological advancements or rich government incentives, as well as a higher pace of EV charging infrastructure installations, but based on current production plans, the shift to EVs will be much slower in the U.S. than in Europe or China.
Derivation Summary
Getty Realty's closest peers include Four Corners Property Trust, Inc. (FCPT; BBB/Stable) and EPR Properties (EPR; BBB-/Stable). Getty Realty is rated a notch lower than FCPT and the same as EPR despite having a slightly tighter financial policy (4.5x-5.5x for GTY, low-to-mid 5x for EPR and mid- to-high 5x for FCPT) because of the weaker contingent liquidity and financeability of C-Stores relative to restaurants and experiential retail, and less demonstrated capital market access.
Getty Realty has significant although decreasing exposure to individual tenants and is improving portfolio diversification by investing in auto-related subsectors. FCPT has sector and tenant concentrations similar to Getty Realty. FCPT's tenant base is focused predominately on the restaurant industry, with a large majority of lease income from Darden Restaurants, Inc. (BBB/Stable) brands, primarily Olive Garden and LongHorn Steakhouse. However, FCPT's portfolio has tenant EBITDAR/rent coverage above 4.0x and a large investment-grade tenant.
EPR is similar to Getty Realty as the company has significant tenant concentration, tenants with non-investment grade or no credit ratings, and EPR owns properties with weaker contingent liquidity and financeability relative to other property sectors, including most other net lease peers. Getty Realty's rent collections were notably stronger than EPR's in 2020-2021, highlighting the necessity-based nature of their tenancy versus EPR's emphasis on experiential tenants. Unlike Getty Realty, EPR demonstrated access to debt financing through the public capital markets and has greater property sector diversity.
Key Assumptions
Same-store NOI growth of 1.4% annually during the forecast period;
Net acquisitions and development spending totals $100 million-$220 million per year;
Equity issuance of approximately $50 million-$120 million per year to fund acquisitions;
Bond issuances of $400 million during the forecast period.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch's expectation of leverage (net debt to recurring operating EBITDA) sustaining below 4.3x;
Reduction in the company's top 10 tenant exposure to less than 50% of annual revenue while improving or sustaining tenant credit quality;
An expanded mortgage market for C-Store assets.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch's expectation of leverage sustaining above 5.3x;
Fitch's expectation of FCC sustaining below 2.5x;
Fitch's expectation of a UA/UD ratio meaningfully below 2.5x (at a 10.25% stressed cap rate);
Greater than expected settlement and/or costs from environmental litigation that could pressure liquidity and/or leverage.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Fitch estimates Getty Realty's base case liquidity coverage through YE 2023 by more than 4.0x, which is strong for the rating. The strength of GTY's liquidity profile is driven by a well-staggered debt maturity profile. GTY maintains full availability under its $300 million revolving credit facility at 3Q22. The company is expected to execute small scale redevelopment at or below a cost of $10 million annually.
Fitch defines liquidity coverage as sources of liquidity divided by uses of liquidity. Sources include unrestricted cash, availability under unsecured revolving credit facilities and retained cash flow from operating activities after dividends. Uses include pro rata debt maturities, expected recurring capex and forecast (re)development costs.
Issuer Profile
Getty Realty Corp. (GTY) is a publicly traded, net lease REIT specializing in the acquisition, financing and development of convenience, automotive and other single tenant retail real estate. . As of Sept. 30, 2022, GTY owned 1,021 properties including 43 leased properties from third-party landlords, across 38 states and Washington, D.C. Substantially all of GTY's properties are leased on a triple-net basis to C-Store retailers, petroleum distributors, car wash operators and other automotive-related and retail tenants.
Date of Relevant Committee
11 July 2022
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Getty Realty Corp. has an ESG Relevance Score of '4' for Waste & Hazardous Materials Management; Ecological Impacts due to Environmental Remediation Liabilities, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
GETTY REALTY CORP. 
