Getty Realty: Fuel Your Income With This Sweet 7% Yield (NYSE:GTY)

No journey is complete without hitting a couple of speed bumps along the way, and the same holds true for dividend investors. While many REITs have fallen out of favor with the market in recent months, it’s important to keep in mind that it’s during these times that long-term bargains are found.

Such I find the case to be with Getty Realty (NYSE:GTY) which I last covered here back in June, highlighting its capacity for growth through accretive capital raises and solid portfolio fundamentals. In this article, I provide an update on GTY’s Q3 results and discuss why value seekers ought to consider GTY for its high yield and discounted valuation, so let’s get started!

Why GTY?

Getty Realty is the largest pure-play net lease REIT that’s focused on properties that cater to the automotive segment, with 1,080 properties that are diversified across 40 U.S. states and Washington D.C. As shown below, GTY’s biggest markets are in the Northeast, Mid-Atlantic, South, and Western regions of the U.S., and particularly in cities with high population densities.

Those familiar with GTY stock know that it’s seen a material downturn in price over the past 12 months, with most of it occurring since the end of July. As shown below, GTY stock has declined by 16% over the past 12 months, pushing the dividend yield up to 6.8%.

While the market as a whole may have a multitude of reasons for selling, the top reason is likely due to higher interest rates, which raise borrowing costs for REITs, and provide competition from the likes of Treasury bonds and high yield savings as alternatives to dividend stocks.

Nonetheless, I believe GTY got painted by a broad brush, as underlying asset quality remains high. This is reflected by its 99.7% occupancy ratio, with the average tenant being healthy at 2.7x rent coverage. Furthermore, GTY’s locations are well-positioned with 69% of properties being in corner locations and 61% in the Top MSAs in the U.S.

Scale matters in the net lease space, as this enables GTY to spread its management overhead costs over a wider asset base. This has enabled GTY to increase its AFFO margin by 16.1 points from 46% in 2015 to 62% in 2022. Also, GTY benefits from being a big fish in a highly fragment space with low competition from institutional buyers. Its accretive acquisitions combined with rent growth have enabled a healthy 5.2% CAGR in AFFO/share since 2015.

Meanwhile, GTY has demonstrated resilience amidst a challenging macroeconomic backdrop, with AFFO/share growing by $0.03 YoY to $0.57, equating to 5.7% growth during the third quarter. This was driven by both internal and external growth (acquisitions) as base rental income grew by 10.5% YoY during Q3, and 8.4% YoY for the first nine months of this year.

GTY also appears to find no shortage of investment opportunities, as it deployed a record $269 million towards property acquisitions so far this year, including $155 million in the third quarter alone. At present, it maintains an attractive pipeline of $95 million, including those properties under contract and development funding of convenience stores, auto service centers, and express tunnel car washes.

Risks to GTY include a higher than expected inflation rate. While 99% of its leases are subject to annual escalations, its 1.7% annualized rent escalation rate may fall below the pace of inflation should it remain above the 2% long-term target set by the Federal Reserve. In addition, a common refrain for the car industry is that automakers are going all-in on electric, and that spells uncertainties for gas stations.

However, recent trends in EVs indicate that growth is stalling, as the early adopters have already been saturated and the remaining unconverted buyers will take a lot more convincing with respect to EVs’ higher prices, longer charge times compared to gasoline fill-up, and lack of charging infrastructure despite progress made in recent years. EVs made up just 7.9% of total car industry sales in the U.S, up from 6.1% from a year ago, and automakers have noted heightened demand for hybrid and plug-in hybrid vehicles.

As such, I believe the future of the type of vehicles on the road is going to be more nuanced than a simple ‘either or’ scenario between EVs and non-EVs. Plus, 85% of GTY’s portfolio has either a convenience store or car wash component, and as shown below, C-Store inside sales are of the most recession resilient subsegments of the economy, demonstrating growth even during the pandemic years, as shown below.

GTY is further protected by long-lease schedules with a weighted average remaining lease term of 9 years. Moreover, higher fuel margins in recent years should ensure that GTY’s tenants remain solidly profitable, and as shown below, car culture is very much alive and well, with a record setting number of vehicles on the road and growth in average vehicle age over the past 11 years.

Importantly, GTY carries a strong balance sheet in face of higher interest rates, with a net debt to EBITDA ratio of 5.0x, sitting comfortably below the 6.0x level considered safe by ratings agencies for REITs, and it has a BBB- investment grade credit rating. It also has plenty of liquidity with $48 million of unsettled forward equity, which could be used to fuel (pun intended) top and bottom line growth through property acquisitions.

Meanwhile, GTY currently yields an attractive 6.8% and the dividend is covered by a 79% payout ratio, based on Q3 AFFO/share of $0.57. It also come with 9 years of consecutive growth and a 5-year dividend CAGR of 6.1%. While I believe dividend growth could slow in the near term, it could pick back up in a couple of years should interest rates stabilize or potentially fall with a recession and as rents continue to grow.

Lastly, GTY trades solidly in value territory at the current price of $26.62 with a forward P/FFO of 12.6. Considering GTY’s long runway for growth and stability of its underlying revenue stream, I would expect for the stock to trade at a long-term P/FFO of 14-16, giving GTY upside potential from the current price. While I fully expect for income stocks like GTY to remain volatile, catalysts for near-term price appreciation may arise from a clearer picture of where interest rates are headed should inflation start to ease.

Investor Takeaway

In conclusion, GTY is a well-managed net lease REIT with an attractive portfolio of properties and a strong balance sheet. It has demonstrated respectable growth during the third quarter and has a healthy acquisition pipeline. While higher interest rates introduce near-term uncertainties, long-term investors should take stock of GTY’s exposure to the essential sectors of convenience store and car washes, which provide stability in uncertain economic times. With an attractive dividend yield near 7% and a discounted valuation, value and income investors may find GTY appealing at the current price.