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, 2021; 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 stores, car washes, automotive service centers, automotive parts
retailers, and certain other freestanding retailers; 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 novel coronavirus ("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 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; our workplace demographics,
recruiting efforts, and employee compensation program; FFO and AFFO as measures
that represent our core operating performance and its utility in comparing our
core operating performance between periods; 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 Pennsylvania and
Maryland, 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 Second Restated Credit Agreement and available
cash and cash equivalents; our continued compliance with the covenants in our
Second 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; 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.
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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,
2021, 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 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 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 acquisition, financing and development of
convenience, automotive and other single tenant retail real estate. As of
June 30, 2022, our portfolio included 1,024 properties of which we owned 979
properties and leased 45 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 future 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 our tenants' facilities. Additionally, while we
expect to continue our overall growth strategy during 2022 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. See "Part I.
Item. 1A. Risk Factors" in our Annual Report on Form 10-K for additional
information.
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Our Triple-Net Leases
Substantially all of our properties are leased on a triple-net basis to
convenience store operators, petroleum distributors, car wash operators and
other automotive-related and retail tenants. Our tenants either operate their
businesses at our properties directly or, in the case of certain convenience
stores and gasoline and repair stations, sublet our properties and supply fuel
to third parties who operate the businesses. Our triple-net lease tenants are
responsible for the payment of all taxes, maintenance, repairs, insurance and
other operating expenses relating to our properties, and are also responsible
for environmental contamination occurring during the terms of their leases and
in certain cases also for environmental contamination that existed before their
leases commenced.
A significant portion of our tenants' financial results depend on convenience
store sales, the sale of refined petroleum products and/or the sale of
automotive services and parts. As a result, our tenants' financial results can
be dependent on the performance of the convenience retail, petroleum marketing,
and automobile maintenance industries, each of which are highly competitive and
can be subject to variability. 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, 2021, and "Environmental Matters"
below.
Our Properties
Net Lease. As of June 30, 2022, we leased 1,013 of our properties to tenants
under triple-net leases.
Our net lease properties include 846 properties leased under 36 separate unitary
or master triple-net leases and 167 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 June 30, 2022, we were actively redeveloping five of our
properties either for new convenience and gasoline use or for alternative
single-tenant net lease retail uses.
Vacancies. As of June 30, 2022, six 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 strategy to grow and diversify our portfolio, we regularly review
acquisition and financing opportunities to invest in additional convenience,
automotive and other single tenant retail real estate. We primarily pursue sale
leaseback transactions with existing and prospective tenants and will pursue
other transactions, including forward commitments to acquire new-to-industry
construction and the acquisition of assets with in-place leases, that result in
us owning fee simple interests in our properties. Our investment activities may
also include purchase money financing with respect to properties we sell, real
property loans relating to our leasehold properties 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 well-located, freestanding properties that support
automobility and provide convenience and service to consumers in major markets
across the country. A key element of our investment strategy is to invest in
properties that will enhance our property type, tenant, and geographic
diversification.
During the six months ended June 30, 2022, we acquired fee simple interests in
14 properties for an aggregate purchase price of $54.2 million. During the six
months ended June 30, 2021, we acquired fee simple interests in 55 properties
for an aggregate purchase price of $63.3 million.
We also originate construction loans for the construction of income-producing
properties which we expect to purchase via sale leaseback transactions at the
end of the construction period. During the six months ended June 30, 2022, we
funded $5.1 million, including accrued interest, and, as of June 30, 2022, had
outstanding $10.8 million of such construction loans, including accrued
interest. At the end of the construction period, the construction loans will be
repaid with the proceeds from the sale of the properties.
Redevelopment Strategy and Activity
We believe that certain of our properties, primarily those currently occupied by
gas and repair businesses, are well-suited to be redeveloped as new convenience
stores or other single tenant retail uses, such as automotive parts, quick
service restaurants, bank branches and specialty retail. We believe that the
redeveloped properties can be leased or sold at higher values than their current
use. During the six months ended June 30, 2022, there were no rent
commencements. Since the inception of our redevelopment program in 2015, we have
completed 24 redevelopment projects.
As of June 30, 2022, we had five properties under active redevelopment and
others in various stages of feasibility planning for potential recapture from
our net lease portfolio, including two properties for which we have signed new
leases or letters of intent and which will be transferred to redevelopment when
the appropriate entitlements, permits and approvals have been secured.
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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 $0.4
million and $1.4 million for the three and six months ended June 30, 2022, and
$0.8 million and $1.5 million for the three and six months ended June 30, 2021,
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 (i) the effect of adding asset
retirement costs to certain properties due to changes in estimates associated
with our environmental liabilities, which increased the carrying values of these
properties in excess of their fair values, (ii) reductions in estimated
undiscounted cash flows expected to be received during the assumed holding
period for certain of our properties, and (iii) 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 accounting principles generally accepted in the United
States of America ("GAAP"), we also focus on Funds From Operations ("FFO") and
Adjusted Funds From Operations ("AFFO") to measure our performance. As
previously disclosed, beginning with its results for the quarter and year ended
December 31, 2021, we updated our definition of AFFO to include adjustments for
stock-based compensation and amortization of debt issuance costs. We believe
that conforming to this market practice for calculating AFFO improves the
comparability of this measure of performance to other net lease REITs
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
("NAREIT") as GAAP net earnings before (i) depreciation and amortization of real
estate assets, (ii) gains or losses on dispositions of real estate assets, (iii)
impairment charges, and (iv) the cumulative effect of accounting changes.
We define AFFO as FFO excluding (i) certain revenue recognition adjustments
(defined below), (ii) certain environmental adjustments (defined below), (iii)
stock-based compensation, (iv) amortization of debt issuance costs and (v) other
non-cash and/or unusual items that are not reflective of our core operating
performance.
Other REITs may use definitions of FFO and/or AFFO that are different than 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, the core operating
performance of our portfolio. Specifically, FFO excludes items such as
depreciation and amortization of real estate assets, gains or losses on
dispositions of real estate assets, and impairment charges. With respect to
AFFO, we further exclude the impact of (i) deferred rental revenue
(straight-line rent), the net amortization of above-market and below-market
leases, adjustments recorded for the recognition of rental income from direct
financing leases, and the amortization of deferred lease incentives
(collectively, "Revenue Recognition Adjustments"), (ii) environmental accretion
expenses, environmental litigation accruals, insurance reimbursements, legal
settlements and judgments, and changes in environmental remediation estimates
(collectively, "Environmental Adjustments"), (iii) stock-based compensation
expense, (iv) amortization of debt issuance costs and (v) other items, which may
include allowances for credit losses on notes and mortgages receivable and
direct financing leases, losses on extinguishment of debt, retirement and
severance costs, and other items that do not impact our recurring cash flow and
which are not indicative of our core operating performance.
We pay particular attention to AFFO which it believes provides the most useful
depiction of the core operating performance of our portfolio. By providing AFFO,
we believe we are presenting information that assists analysts and investors in
their assessment of our core operating performance, as well as the
sustainability of our core operating performance with the sustainability of the
core operating performance of other real estate companies.
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A reconciliation of net earnings to FFO and AFFO is as follows (in thousands,
except per share amounts):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2022 2021 2022 2021
Net earnings (1) $ 30,680 $ 12,890 $ 49,429 $ 30,817
Depreciation and amortization of real
estate assets 9,924 8,648 19,552 17,085
Gain on dispositions of real estate (1,149 ) (259 ) (7,302 ) (7,478 )
Impairments 391 756 1,429 1,532
Funds from operations (FFO) (1) 39,846 22,035 63,108 41,956
Revenue recognition adjustments 449 383 1,025 726
Changes in environmental estimates (16,713 ) (731 ) (17,534 ) (1,039 )
Accretion expense 377 402 822 863
Insurance reimbursements (44 ) (9 ) (44 ) (38 )
Legal settlements and judgments - (57 ) - (57 )
Retirement and severance costs - 119 77 662
Stock-based compensation expense 1,231 1,032 2,316 1,937
Amortization of debt issuance costs 239 259 468 518
Adjusted funds from operations (AFFO) $ 25,385 $ 23,433 $ 50,238 $ 45,528
Basic per share amounts:
Net earnings (1) $ 0.64 $ 0.28 $ 1.03 $ 0.68
FFO (1)(2) 0.83 0.49 1.32 0.93
AFFO (2) 0.53 0.52 1.05 1.01
Diluted per share amounts:
Net earnings (1) $ 0.64 $ 0.28 $ 1.03 $ 0.68
FFO (1)(2) 0.83 0.49 1.32 0.93
AFFO (2) 0.53 0.52 1.05 1.01
Weighted average common shares
outstanding:
Basic 46,733 44,437 46,727 44,156
Diluted 46,756 44,470 46,746 44,176
(1) Net earnings and FFO for the three and six months ended June 30, 2022
included a $16.3 million credit related to removal of environmental
remediation obligations at certain properties. For additional information
regarding environmental obligations, see Note 6 - Environmental
Obligations.
(2) Dividends paid and undistributed earnings allocated, if any, to unvested
restricted stockholders are deducted from FFO and AFFO for the computation
of the per share amounts. The following amounts were deducted:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2022 2021 2022 2021
FFO $ 930 $ 448 $ 1,474 $ 857
AFFO 593 476 1,173 930
Results of Operations
The following discussion describes our results of operations for the three and
six months ended June 30, 2022. While the COVID-19 pandemic did not have a
material adverse effect on our reported results for the three and six months
ended June 30, 2022, we are actively monitoring the impact of COVID-19, which
may negatively impact our business and results of operations for subsequent
quarters.
Three months ended June 30, 2022, compared to the three months ended June 30,
2021
Revenues from rental properties increased by $2.5 million to $40.8 million for
the three months ended June 30, 2022, as compared to $38.3 million for the three
months ended June 30, 2021. The increase in revenues from rental properties was
primarily due to revenue from newly acquired properties and contractual rent
increases, partially offset by property dispositions. Rental income
contractually due from our tenants included in revenues from rental properties
was $37.1 million for the three months ended June 30, 2022, as compared to $34.4
million for the three months ended June 30, 2021. 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 $4.1
million and $4.3 million for the three months ended June 30, 2022 and 2021,
respectively. Interest income on notes and mortgages receivable was $0.4 million
for the three months ended June 30, 2022 and 2021.
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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 (i) non-cash adjustments recorded for
deferred rental revenue due to the recognition of rental income on a
straight-line basis over the current lease term, (ii) the net amortization of
above-market and below-market leases, (iii) 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 (iv) the amortization of deferred lease incentives. Revenues from
rental properties include Revenue Recognition Adjustments which decreased rental
revenue by $0.4 million for the three months ended June 30, 2022 and 2021.
Property costs, which are comprised of property operating expenses and leasing
and redevelopment expenses, were $5.3 million for the three months ended
June 30, 2022, as compared to $5.6 million for the three months ended June 30,
2021. The decrease in property costs for the three months ended June 30, 2022
was principally due to reductions in property operating expenses, including
lower rent expense and real estate taxes, partially offset by increased leasing
and redevelopment expenses, primarily demolition costs for active redevelopment
projects.
Impairment charges were $0.4 million for the three months ended June 30, 2022,
as compared to $0.8 million for the three months ended June 30, 2021. Impairment
charges are recorded when the carrying value of a property is reduced to fair
value. Impairment charges for the three months ended June 30, 2022 and 2021 were
attributable to (i) the effect of adding asset retirement costs to certain
properties due to changes in estimates associated with our environmental
liabilities, which increased the carrying values of these properties in excess
of their fair values, and (ii) reductions in estimated sales prices from
third-party offers based on signed contracts, letters of intent or indicative
bids for certain of our properties.
Environmental expenses for the three months ended June 30, 2022 was a credit of
$15.9 million, as compared to an expense of $0.1 million for the three months
ended June 30, 2021. The decrease in environmental expenses for the three months
ended June 30, 2022 was principally due to a reduction in estimates related to
unknown environmental liabilities. Specifically, during the three months ended
June 30, 2022, we concluded that there is no material continued risk of having
to satisfy contractual obligations relating to preexisting unknown environmental
contamination at certain properties. Accordingly, we removed $16.8 million of
unknown reserve liabilities which had previously been accrued for these
properties. This resulted in a net credit of $16.3 million being recorded to
environmental expense for the three months ended June 30, 2022. 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 $5.3 million for the three months ended
June 30, 2022, as compared to $5.1 million for the three months ended June 30,
2021. The increase in general and administrative expense for the three months
ended June 30, 2022 was principally due to increased personnel costs.
Depreciation and amortization expense was $9.9 million for the three months
ended June 30, 2022, as compared to $8.6 million for the three months ended
June 30, 2021. The increase in depreciation and amortization expense for the
three months ended June 30, 2022 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.
Gains on dispositions of real estate were $1.1 million for the three months
ended June 30, 2022, as compared to $0.3 million for the three months ended
June 30, 2021. The gains were the result of the disposition of one property
during the three months ended June 30, 2022 and one partial condemnation during
the three months ended June 30, 2021, respectively.
Interest expense was $6.9 million for the three months ended June 30, 2022, as
compared to $6.2 million for the three months ended June 30, 2021. The increase
was due to higher average borrowings outstanding partially offset by a decrease
in average interest rates on borrowings outstanding for the three months ended
June 30, 2022, as compared to the three months ended June 30, 2021.
Six Months Ended June 30, 2022, compared to the six months ended June 30, 2020
Revenues from rental properties increased by $4.6 million to $79.8 million for
the six months ended June 30, 2022, as compared to $75.2 million for the six
months ended June 30, 2021. The increase in revenues from rental properties was
primarily due to revenue from newly acquired properties and contractual rent
increases, partially offset by property dispositions. Rental income
contractually due from our tenants included in revenues from rental properties
was $73.6 million for the six months ended June 30, 2022, as compared to $67.9
million for the six months ended June 30, 2021. 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 $7.2 million and $8.0 million for the six months ended June 30,
2022 and 2021, respectively. Interest income on notes and mortgages receivable
was $0.7 million for the six months ended June 30, 2022 and 2021.
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 (i) non-cash adjustments recorded for
deferred rental revenue due to the recognition of rental income on a
straight-line basis over the current lease term, (ii) the net amortization of
above-market and below-market leases, (iii) recognition of rental income
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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 (iv) the amortization of deferred lease incentives. Revenues from
rental properties includes Revenue Recognition Adjustments which decreased
rental revenue by $1.0 million and $0.7 million for the six months ended
June 30, 2022 and 2021, respectively.
Property costs, which are comprised of property operating expenses and leasing
and redevelopment expenses, were $10.0 million for the six months ended June 30,
2022, as compared to $10.8 million for the six months ended June 30, 2021. The
decrease in property costs for the three months ended June 30, 2022 was
principally due to reductions in property operating expenses, including lower
rent expense and real estate taxes, partially offset by increased leasing and
redevelopment expenses, primarily demolition costs for active redevelopment
projects.
Impairment charges were $1.4 million and $1.5 million for the six months ended
June 30, 2022 and 2021, respectively. Impairment charges are recorded when the
carrying value of a property is reduced to fair value. Impairment charges for
the six months ended June 30, 2022 and 2021 were attributable to (i) the effect
of adding asset retirement costs to certain properties due to changes in
estimates associated with our environmental liabilities, which increased the
carrying values of these properties in excess of their fair values, and (ii)
reductions in estimated sales prices from third-party offers based on signed
contracts, letters of intent or indicative bids for certain of our properties.
Environmental expenses for the six months ended June 30, 2022 was a credit of
$16.1 million, as compared to an expense of $0.6 million for the six months
ended June 30, 2021. The decrease in environmental expenses for the six months
ended June 30, 2022 was principally due to a reduction in estimates related to
unknown environmental liabilities. Specifically, during the six months ended
June 30, 2022, we concluded that there is no material continued risk of having
to satisfy contractual obligations relating to preexisting unknown environmental
contamination at certain properties. Accordingly, we removed $16.8 million of
unknown reserve liabilities which had previously been accrued for these
properties. This resulted in a net credit of $16.3 million being recorded to
environmental expense for the six months ended June 30, 2022. 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 $10.4 million for the six months ended
June 30, 2022, as compared to $10.6 million for the six months ended June 30,
2021. The decrease in general and administrative expense for the six months
ended June 30, 2022 was principally due to $0.6 million of non-recurring
severance and retirement costs incurred during the six months ended June 30,
2021, partially offset by increased personnel costs.
Depreciation and amortization expense was $19.6 million for the six months ended
June 30, 2022, as compared to $17.1 million for the six months ended June 30,
2021. The increase in depreciation and amortization expense for the six months
ended June 30, 2022 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.
Gains on dispositions of real estate were $7.3 million for the six months ended
June 30, 2022, as compared to $7.5 million for the six months ended June 30,
2021. The gains were primarily the result of the dispositions of 16 properties
during the six months ended June 30, 2022 and five properties during the six
months ended June 30, 2021, respectively.
Interest expense was $13.4 million for the six months ended June 30, 2022, as
compared to $12.3 million for the six months ended June 30, 2021. The increase
was due to higher average borrowings outstanding and a decrease in average
interest rates on borrowings outstanding for the six months ended June 30, 2022,
as compared to the six months ended June 30, 2021.
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 October
2025), 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. Our principal uses for liquidity
include normal operating activities, payments of interest on outstanding debt,
redevelopment projects and real estate acquisitions. We believe that our
operating cash needs for the next twelve months and our long-term liquidity
requirements, 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.
Our cash flow activities for the six months ended June 30, 2022 and 2021, are
summarized as follows (in thousands):
For the Six Months
Ended June 30,
2022 2021
Net cash flow provided by operating activities $ 43,409 $ 40,004
Net cash flow used in investing activities (47,637 ) (62,094 )
Net cash flow used in financing activities $ (499 ) $ (14,148 )
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Operating Activities
Net cash flow from operating activities increased by $3.4 million for the six
months ended June 30, 2022, to $43.4 million, as compared to $40.0 million for
the six months ended June 30, 2021. 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 six months ended June 30, 2022 and 2021 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 decreased by $14.5 million for the six months ended
June 30, 2022, to $47.6 million, as compared to $62.1 million for the six months
ended June 30, 2021. The decrease in net cash flow used in investing activities
was primarily due to a decrease of $9.1 million for property acquisitions, a
decrease of $6.3 million in issuance of notes and mortgages receivable and an
increase of $1.9 million in proceeds from dispositions of real estate, partially
offset by a decrease of $3.0 million in deposits on property acquisitions for
the six months ended June 30, 2022.
Financing Activities
Net cash flow used in financing activities decreased by $13.6 million for the
six months ended June 30, 2022, to $0.5 million, as compared to $14.1 million
for the six months ended June 30, 2021. The decrease in net cash flow used in by
financing activities was primarily due to an increase in net borrowings under
senior unsecured notes of $100.0 million, partially offset by a decrease in net
proceeds under the ATM agreement of $29.5 million, an increase in net repayments
under the credit agreement of $52.5 million and an increase in dividends paid of
$4.1 million.
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 modified 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.
On October 27, 2021, we entered into a second amended and restated credit
agreement (as amended, the "Second Restated Credit Agreement") amending and
restating our Restated Credit Agreement. Pursuant to the Second Restated Credit
Agreement, we (i) extended the maturity date of the Revolving Facility from
March 2022 to October 2025, (ii) reduced the interest rate for borrowings under
the Revolving Facility and (iii) amended certain financial covenants and other
provisions.
The Second Restated Credit Agreement provides for the Revolving Facility in an
aggregate principal amount of $300.0 million and includes an accordion feature
to increase the revolving commitments or add one or more tranches of term loans
up to an additional aggregate amount not to exceed $300.0 million, subject to
certain conditions, including one or more new or existing lenders agreeing to
provide commitments for such increased amount and that no default or event of
default shall have occurred and be continuing under the terms of the Revolving
Facility.
The Revolving Facility matures October 27, 2025, subject to two six-month
extensions (for a total of 12 months) exercisable at our option. Our exercise of
an extension option is subject to the absence of any default under the Second
Restated Credit Agreement
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and our compliance with certain conditions, including the payment of extension
fees to the Lenders under the Revolving Facility and that no default or event of
default shall have occurred and be continuing under the terms of the Revolving
Facility.
The Second Restated Credit Agreement reflects reductions in the interest rates
for borrowings under the Revolving Facility and permits borrowings at an
interest rate equal to the sum of a base rate plus a margin of 0.30% to 0.90% or
a LIBOR rate plus a margin of 1.30% to 1.90% based on our consolidated total
indebtedness to total asset value ratio at the end of each quarterly reporting
period. The Revolving Facility includes customary LIBOR transition language that
addresses the succession of LIBOR at a future date.
The per annum rate of the unused line fee on the undrawn funds under the
Revolving Facility is 0.15% to 0.25% based on our daily unused portion of the
available Revolving Facility.
The Second Restated Credit Agreement contains customary financial covenants,
including covenants with respect to total leverage, secured leverage and
unsecured leverage ratios, fixed charge and interest coverage ratios, and
minimum tangible net worth, as well as limitations on restricted payments, which
may limit our ability to incur additional debt or pay dividends. The Second
Restated Credit Agreement contains customary events of default, including cross
default provisions with respect to our existing senior unsecured notes. Any
event of default, if not cured or waived in a timely manner, could result in the
acceleration of our indebtedness under the Second Restated Credit Agreement and
could also give rise to an event of default and the acceleration of our existing
senior unsecured notes.
Senior Unsecured Notes
On February 22, 2022, we entered into a sixth amended and restated note purchase
and guarantee agreement (the "Sixth Amended and Restated Prudential Agreement")
with Prudential and certain of its affiliates amending and restating our
existing fifth amended and restated note purchase and guarantee agreement with
Prudential (the "Fifth Amended and Restated Prudential Agreement"). Pursuant to
the Sixth Amended and Restated Prudential Agreement, we will issue $80.0 million
of 3.65% Series Q Guaranteed Senior Notes due January 20, 2033 (the "Series Q
Notes") to Prudential on January 20, 2023 and use a portion of the proceeds to
repay in full the $75.0 million of 5.35% Series B Guaranteed Senior Notes due
June 2, 2023 (the "Series B Notes") outstanding under the Fifth Amended and
Restated Prudential Agreement. The other senior unsecured notes outstanding
under the Fifth Amended and Restated Prudential Agreement, including (i) $50.0
million of 4.75% Series C Guaranteed Senior Notes due February 25, 2025 (the
"Series C Notes"), (ii) $50.0 million of 5.47% Series D Guaranteed Senior Notes
due June 21, 2028 (the "Series D Notes"), (iii) $50.0 million of 3.52% Series F
Guaranteed Senior Notes due September 12, 2029 (the "Series F Notes") and (iv)
$100.0 million of 3.43% Series I Guaranteed Senior Notes due November 25, 2030
(the "Series I Notes"), remain outstanding under the Sixth Amended and Restated
Prudential Agreement.
On February 22, 2022, we entered into a second amended and restated note
purchase and guarantee agreement (the "Second Amended and Restated AIG
Agreement") with American General Life Insurance Company ("AIG") and certain of
its affiliates amending and restating our existing first amended and restated
note purchase and guarantee agreement with AIG (the "First Amended and Restated
AIG Agreement"). Pursuant to the Second Amended and Restated AIG Agreement, we
issued $55.0 million of 3.45% Series L Guaranteed Senior Notes due February 22,
2032 (the "Series L Notes") to AIG. The other senior unsecured notes outstanding
under the First Amended and Restated AIG Agreement, including (i) $50.0 million
of 3.52% Series G Guaranteed Senior Notes due September 12, 2029 (the "Series G
Notes") and (ii) $50.0 million of 3.43% Series J Guaranteed Senior Notes due
November 25, 2030 (the "Series J Notes"), remain outstanding under the Second
Amended and Restated AIG Agreement.
On February 22, 2022, we entered into a second amended and restated note
purchase and guarantee agreement (the "Second Amended and Restated MassMutual
Agreement") with Massachusetts Mutual Life Insurance Company ("MassMutual") and
certain of its affiliates amending and restating our existing first amended and
restated note purchase and guarantee agreement with MassMutual (the "First
Amended and Restated MassMutual Agreement"). Pursuant to the Second Amended and
Restated MassMutual Agreement, we issued $20.0 million of 3.45% Series M
Guaranteed Senior Notes due February 22, 2032 (the "Series M Notes") to
MassMutual and will issue $20.0 million of 3.65% Series O Guaranteed Senior
Notes due January 20, 2033 (the "Series O Notes") to MassMutual on January 20,
2023. The other senior unsecured notes outstanding under the First Amended and
Restated MassMutual Agreement, including (i) $25.0 million of 3.52% Series H
Guaranteed Senior Notes due September 12, 2029 (the "Series H Notes") and (ii)
$25.0 million of 3.43% Series K Guaranteed Senior Notes due November 25, 2030
(the "Series K Notes"), remain outstanding under the Second Amended and Restated
MassMutual Agreement.
On February 22, 2022, we entered into a note purchase and guarantee agreement
(the "New York Life Agreement") with New York Life Insurance Company ("New York
Life") and certain of its affiliates. Pursuant to the New York Life Agreement,
we issued $25.0 million of 3.45% Series N Guaranteed Senior Notes due
February 22, 2032 (the "Series N Notes") to New York Life and will issue $25.0
million of 3.65% Series P Guaranteed Senior Notes due January 20, 2033 (the
"Series P Notes") to New York Life on January 20, 2023.
On June 21, 2018, we entered into a note purchase and guarantee agreement (the
"MetLife Agreement") with MetLife and certain of its affiliates. Pursuant to the
MetLife Agreement, we issued $50.0 million of 5.47% Series E Guaranteed Senior
Notes due June 21, 2028 (the "Series E Notes").
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The funded and outstanding Series B Notes, Series C Notes, Series D Notes,
Series E Notes, Series F Note, Series G Notes, Series H Notes, Series I Notes,
Series J Notes, Series K Notes, Series L Notes, Series M Notes and Series N
Notes are collectively referred to as the "senior unsecured notes.
ATM Program
In March 2018, we established an at-the-market equity offering program (the
"2018 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. The 2018 ATM Program was terminated in
January 2021.
In February 2021, we established a new 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 $250.0 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 six months ended June 30, 2022, no shares of common stock
were issued under the ATM Program. During the three and six months ended
June 30, 2021, we issued a total of 289,000 and 1,032,000 shares of common
stock, respectively, and received net proceeds of $9.3 million and $29.6
million, respectively, under the 2018 ATM Program and 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 acquisition and
financing opportunities to invest in additional convenience, automotive and
other single tenant retail real estate, and we expect to continue to pursue
acquisitions that we believe will benefit our financial performance.
During the six months ended June 30, 2022, we acquired fee simple interests in
14 properties for an aggregate purchase price of $54.2 million. During the six
months ended June 30, 2021, we acquired fee simple interests in 55 properties
for an aggregate purchase price of $63.3 million. We accounted for the
acquisitions of fee simple interests as asset acquisitions. For additional
information regarding our property acquisitions, see Note 11.
We also seek opportunities to recapture select properties from our net lease
portfolio and redevelop such properties as new convenience stores or other
single tenant retail uses. Since the inception of our redevelopment program in
2015, we have completed 24 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 or redevelopments. However, our tenants frequently make
improvements to the properties leased from us at their expense. As of June 30,
2022, we have a remaining commitment to fund up to $6.6 million in the aggregate
of capital improvements at 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 six months ended
June 30, 2022 were $39.1 million, or $0.82 per share. There can be no assurance
that we will continue to pay dividends at historical rates, if at all.
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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 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, 2021. 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,
2021.
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. As the property owner, we may ultimately be responsible for the payment
of environmental liabilities 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 is mainly the
responsibility of our tenant but in certain cases partially paid for by us) and
remediation of any environmental contamination that arises during the term of
their tenancy. In addition, for substantially all of our triple-net leases, our
tenants are contractually responsible for known environmental contamination that
existed at the commencement of the lease and for preexisting unknown
environmental contamination that is discovered during the term of the lease.
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For the subset of our triple-net leases which cover properties previously leased
to Marketing (substantially all of which commenced in 2012), the allocation of
responsibility differs from our other triple-net leases as it relates to
preexisting known and unknown contamination. Under the terms of our leases
covering properties previously leased to Marketing, we agreed to be responsible
for environmental contamination that was known at the time the lease commenced,
and for unknown environmental contamination which existed prior to commencement
of the lease and which 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) (a "Lookback Period"). Similarly, for certain
properties previously leased to Marketing which we have sold, we have agreed to
be responsible for environmental contamination that was known at the time of the
sale and for unknown environmental contamination which existed prior to the sale
and which is discovered (other than as a result of a voluntary site
investigation) within 5 years of the closing (also, a "Lookback Period"). After
expiration of the applicable Lookback Period, responsibility for all newly
discovered contamination at these properties, even if it relates to periods
prior to commencement of the lease or sale, is contractual responsibility of our
tenant or buyer as the case may be.
In the course of UST removals and replacements at certain properties previously
leased to Marketing where we retained responsibility for preexisting unknown
environmental contamination until expiration of the applicable Lookback Period,
environmental contamination has been and continues to be discovered. As a
result, we developed an estimate of fair value for the prospective future
environmental liability resulting from preexisting unknown environmental
contamination and 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 anticipated removal and replacement of USTs. Our accrual of
this liability represents our estimate of the fair value of the cost for each
component of the liability, net of estimated recoveries from state UST
remediation funds considering estimated recovery rates developed from prior
experience. In arriving at our accrual, we analyzed the ages and expected useful
lives of USTs at properties where we would be responsible for preexisting
unknown environmental contamination and we projected a cost to closure for
remediation of such contamination.
During the quarter ended June 30, 2022, the Lookback Periods for many properties
we previously leased to Marketing expired. Based on the expiration of the
Lookback Periods, together with other factors which have significantly mitigated
our potential liability for preexisting environmental obligations, including the
absence of any contractual obligations relating to properties which have been
sold, quantifiable trends associated with types and ages of USTs at issue,
expectations regarding future UST replacements, and historical trends and
expectations regarding discovery of preexisting unknown environmental
contamination and/or attempted pursuit of Getty therefor, we concluded that
there is no material continued risk of having to satisfy contractual obligations
relating to preexisting unknown environmental contamination at certain
properties. Accordingly, we removed $16.8 million of unknown reserve liabilities
which had previously been accrued for these properties. This resulted in a net
credit of $16.3 million being recorded to environmental expense for the three
months ended June 30, 2022.
We continue to anticipate that our tenants under leases where the Lookback
Periods have expired will replace USTs in the years ahead as these USTs near the
end of their expected useful lives. At many of these properties the USTs in use
are fabricated with older generation materials and technologies and we believe
it is prudent to expect that upon their removal preexisting unknown
environmental contamination will be identified. Although contractually these
tenants are now responsible for preexisting unknown environmental contamination
that is discovered during UST replacements, because the applicable Lookback
Periods have expired before the end of the initial term of these leases,
together with other relevant factors, we believe there remains continued risk
that we will be responsible for remediation of preexisting environmental
contamination associated with future UST removals at certain properties.
Accordingly, we believe it is appropriate at this time to maintain $7.4 million
of unknown reserve liabilities for certain properties with respect to which the
Lookback Periods have expired as of June 30, 2022.
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 June 30, 2022, we had accrued a total of
$29.5 million for our prospective environmental remediation obligations. This
accrual consisted of (a) $10.6 million of known reserve liabilities 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) $18.9 million of unknown reserve liabilities, which
was our estimate of future environmental liabilities related to preexisting
unknown contamination. As of December 31, 2021, we had accrued a total of $47.6
million for our prospective environmental remediation obligations. This accrual
consisted of (a) $11.4 million of known reserve liabilities and (b) $36.2
million of unknown reserve liabilities, which was our estimate of 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, $0.8 million and $0.9 million of net
accretion expense was recorded for the six months ended June 30, 2022 and 2021,
respectively, which is included in environmental expenses. In addition, during
the six months ended June 30, 2022 and 2021, we recorded credits to
environmental expenses aggregating $17.5 million and $1.0 million, respectively,
where decreases in estimated remediation costs
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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 six months ended June 30, 2022 and 2021, we increased the carrying
values of certain of our properties by $1.2 million for both periods, 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 was $1.9 million
and $2.0 million for the six months ended June 30, 2022 and 2021. Capitalized
asset retirement costs were $37.6 million (consisting of $24.7 million of known
environmental liabilities and $12.9 million of reserves for future environmental
liabilities related to preexisting unknown contamination) as of June 30, 2022,
and $39.7 million (consisting of $24.1 million of known environmental
liabilities and $15.6 million of reserves for future environmental liabilities
related to preexisting unknown contamination) as of December 31, 2021. We
recorded impairment charges aggregating $0.7 million and $1.5 million for the
six months ended June 30, 2022 and 2021, 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 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. [Placeholder for
update on potential new pollution legal liability insurance policy.]
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 involved in various legal proceedings and claims which arise in the
ordinary course of our business. As of June 30, 2022 and December 31, 2021, we
had accrued $1.9 million 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, and our MTBE
litigations in the states of Pennsylvania and Maryland, in particular, could
cause a material adverse effect on our business, financial condition, results of
operations, liquidity, ability to pay dividends or stock price. 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, 2021, 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.
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