UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K


 

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008

 

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

COMMISSION FILE NUMBER 001-13777

 

 

 

GETTY REALTY CORP.

 


 

(Exact name of registrant as specified in its charter)


 

 

 

Maryland

 

11-3412575


 


(State or other jurisdiction of incorporation or organization)

 

(I.R.S. employer identification no.)

 

 

 

125 Jericho Turnpike, Suite 103, Jericho, New York

 

11753


 


(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (516) 478-5400

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

TITLE OF EACH CLASS

 

NAME OF EACH EXCHANGE ON WHICH REGISTERED


 


Common Stock, $0.01 par value

 

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

 

 

 

 

None

 

 


 

 

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o    No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o    No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o    No x

The aggregate market value of common stock held by non-affiliates (17,354,865 shares of common stock) of the Company was $250,083,605 as of June 30, 2008.

The registrant had outstanding 24,766,166 shares of common stock as of March 2, 2009.

DOCUMENTS INCORPORATED BY REFERENCE

 

 

 

DOCUMENT

 

PART OF FORM 10-K


 


Selected Portions of Definitive Proxy Statement for the 2009 Annual Meeting of Stockholders (the “Proxy Statement”), which will be filed by the registrant on or prior to 120 days following the end of the registrant’s year ended December 31, 2008 pursuant to Regulation 14A.

 

III




TABLE OF CONTENTS

 

 

 

 

 

Item

 

Description

 

Page


 


 


 

 

 

 

 

 

 

Cautionary Note Regarding Forward-Looking Statements

 

1

 

 

 

 

 

 

 

PART I

 

 

 

 

 

 

 

1

 

Business

 

3

1A

 

Risk Factors

 

7

1B

 

Unresolved Staff Comments

 

17

2

 

Properties

 

18

3

 

Legal Proceedings

 

20

4

 

Submission of Matters to a Vote of Security Holders

 

24

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

5

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

25

6

 

Selected Financial Data

 

27

7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

28

7A

 

Quantitative and Qualitative Disclosures About Market Risk

 

44

8

 

Financial Statements and Supplementary Data

 

45

9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

65

9A

 

Controls and Procedures

 

65

9B

 

Other Information

 

65

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

10

 

Directors, Executive Officers and Corporate Governance

 

66

11

 

Executive Compensation

 

66

12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

66

13

 

Certain Relationships and Related Transactions, and Director Independence

 

67

14

 

Principal Accountant Fees and Services

 

67

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

15

 

Exhibits and Financial Statement Schedules

 

68

 

 

 

 

 

 

 

Signatures

 

84

 

 

Exhibit Index

 

85

ii


Cautionary Note Regarding Forward-Looking Statements

          Certain statements in this Annual Report on Form 10-K may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When we use the words “believes,” “expects,” “plans,” “projects,” “estimates,” “predicts” and similar expressions, we intend to identify forward-looking statements. (All capitalized and undefined terms used in this section shall have the same meanings hereafter defined below in this Annual Report on Form 10-K.) Examples of forward-looking statements include statements regarding the developments related to our primary tenant, Getty Petroleum Marketing Inc. (“Marketing”) which is a wholly owned subsidiary of OAO LUKoil (“Lukoil”), and the Marketing Leases (as defined below) included in “Item 1A. Risk Factors” and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Developments Related to Marketing and the Marketing Leases” and elsewhere in this Annual Report on Form 10-K; the impact of any modification or termination of the Marketing Leases on our business and ability to pay dividends or our stock price; our belief that Lukoil would not allow Marketing to fail to perform its rental, environmental and other obligations under the Marketing Leases; our belief that it is not probable that Marketing will not pay for substantially all of the Marketing Environmental Liabilities (as defined below); our decision to attempt to negotiate with Marketing for a modification of the Marketing Leases which removes the Subject Properties (as defined below) or the Revised Subject Properties (as defined below) from the Marketing Leases; our ability to predict if or when the Marketing Leases will be modified or terminated, the terms of any such modification or termination or what actions Marketing and Lukoil will take and what our recourse will be whether the Marketing Leases are modified or terminated or not; our belief that it is probable that we will collect the deferred rent receivable related to the Remaining Properties (as defined below); our belief that no impairment charge is necessary for the Subject Properties or the additional properties included within the list of Revised Subject Properties; the expected effect of regulations on our long-term performance; our expected ability to maintain compliance with applicable regulations; our ability to renew expired leases; the adequacy of our current and anticipated cash flows from operations, borrowings under our credit agreement and available cash and cash equivalents; our ability to re-let properties at market rents or sell properties; our belief that we do not have a material liability for offers and sales of our securities made pursuant to registration statements that did not contain the financial statements or summarized financial data of Marketing; our expectations regarding future acquisitions; our ability to maintain our federal tax status as a real estate investment trust (“REIT”); the probable outcome of litigation or regulatory actions; our expected recoveries from underground storage tank funds; our exposure to environmental remediation costs; our estimates regarding remediation costs; our expectations as to the long-term effect of environmental liabilities on our business, financial condition; results of operations, liquidity, ability to pay dividends and stock price our exposure to interest rate fluctuations and the manner in which we expect to manage this exposure; the expected reduction in interest-rate risk resulting from our interest rate swap agreement and our expectation that we will not settle the interest rate swap agreement prior to its maturity; the expectation that the Credit Agreement (as defined below) will be refinanced with variable interest-rate debt at its maturity; our expectations regarding corporate level federal income taxes; the indemnification obligations of the Company and others; our assessment of the likelihood of future competition; our assessment as to the adequacy of our insurance coverage; our belief that Marketing had vacancies and/or removed the gasoline tanks and related equipment at what may be as much as 10% or more of the properties subject to the Marketing Leases; assumptions regarding the future applicability of accounting estimates, assumptions and policies; our intention to pay future dividends and the amounts thereof; and our beliefs about the reasonableness of our accounting estimates, judgments and assumptions.

          These forward-looking statements are based on our current beliefs and assumptions and information currently available to us, and involve known and unknown risks (including the risks described below in “Item 1A. Risk Factors” and other risks that we describe from time to time in our other filings with the Securities and Exchange Commission (“SEC”)), uncertainties and other factors which may cause our actual results, performance and achievements to be materially different from any future results, performance or achievements expressed or implied by these forward- looking statements. These factors include, but are not limited to: risks associated with owning and leasing real estate generally; dependence on Marketing as a tenant and on rentals from companies engaged in the petroleum marketing and convenience store businesses; adverse developments in general business, economic or political conditions our unresolved SEC comment; competition for properties and tenants; risk of performance of our tenants of their lease obligations, tenant non-renewal and our ability to re-let or sell vacant properties; the effects of taxation and other regulations; potential litigation exposure; costs of completing environmental remediation and of compliance with environmental regulations; the exposure to counterparty risk; the risk of loss of our management

 

1


team; the impact of our electing to be treated as a REIT under the federal income tax laws, including subsequent failure to qualify as a REIT; risks associated with owning real estate primarily concentrated in the Northeast and Mid-Atlantic regions of the United States; risks associated with potential future acquisitions; losses not covered by insurance; future dependence on external sources of capital; the risk that our business operations may not generate sufficient cash for distributions or debt service; our potential inability to pay dividends; and terrorist attacks and other acts of violence and war. 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 and/or stock price. An investment in our stock involves various risks, including those mentioned above and elsewhere in this report and those that are described from time to time in our other filings with the SEC.

          You should not place undue reliance on forward-looking statements, which reflect our view only as of the date hereof. We undertake no obligation to publicly release revisions to these forward-looking statements that reflect future events or circumstances or reflect the occurrence of unanticipated events.

2


PART I

Item 1. Business

Overview

          Getty Realty Corp., a Maryland corporation, is the largest publicly-traded real estate investment trust (“REIT”) in the United States specializing in the ownership and leasing of retail motor fuel and convenience store properties and petroleum distribution terminals. As of December 31, 2008, we owned eight hundred seventy-eight properties and leased one hundred eighty-two additional properties. Our properties are located primarily in the Northeast and the Mid-Atlantic regions in the United States. The Company also owns or leases properties in Texas, North Carolina, Hawaii, California, Florida, Arkansas, Illinois, Ohio and North Dakota.

          Nearly all of our properties are leased or sublet to distributors and retailers engaged in the sale of gasoline and other motor fuel products, convenience store products and automotive repair services who are responsible for the payment of taxes, maintenance, repair, insurance and other operating expenses and for managing the actual operations conducted at these properties. As of December 31, 2008, we leased approximately 82% of our owned and leased properties on a long-term basis to Getty Petroleum Marketing Inc. (“Marketing”). Marketing is wholly-owned by a subsidiary of OAO LUKoil (“Lukoil”), one of the largest integrated Russian oil companies. Marketing operates the petroleum distribution terminals but typically does not itself directly operate the retail motor fuel and convenience store properties it leases from us. Rather, Marketing generally subleases our retail properties to distributors and retailers who are responsible for the actual operations at the locations and operate their convenience stores, automotive repair services or other businesses at our properties. (For information regarding factors that could adversely affect us relating to Marketing or our other lessees, see “Item 1A. Risk Factors”. For additional information regarding developments related to Marketing and the Marketing Leases (as defined below), see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.)

          We are self-administered and self-managed by our experienced management team, which has over ninety-eight years of combined experience in owning, leasing and managing retail motor fuel and convenience store properties. Our executive officers are engaged exclusively in the day-to-day business of the Company. We administer nearly all management functions for our properties, including leasing, legal, data processing, finance and accounting. We have invested, and will continue to invest, in real estate and real estate related investments, such as mortgage loans, when appropriate opportunities arise.

The History of Our Company

          Our founders started the business in 1955 with the ownership of one gasoline service station in New York City and combined real estate ownership, leasing and management with actual service station operation and petroleum distribution. We held our initial public offering in 1971 under the name Power Test Corp. We acquired, from Texaco in 1985, the petroleum distribution and marketing assets of Getty Oil Company in the Northeast United States along with the Getty® name and trademark in connection with our real estate and the petroleum marketing business in the United States. We became one of the largest independent owner/operators of petroleum marketing assets in the country, serving retail and wholesale customers through a distribution and marketing network of Getty® and other branded retail motor fuel and convenience store properties and petroleum distribution terminals.

          Marketing was formed to facilitate the spin-off of our petroleum marketing business to our shareholders which was completed in 1997 (the “Spin-Off”). At that time, our shareholders received a tax-free dividend of one share of common stock of Marketing for each share of our common stock. Following the Spin-Off, Marketing held the assets and liabilities of our petroleum marketing operations and a portion of our home heating oil business, and we continued to operate primarily as a real estate company specializing in the ownership and leasing of retail motor fuel and convenience store properties and petroleum distribution terminals. We acquired Power Test Investors Limited Partnership (the “Partnership”) in 1998, thereby acquiring fee title to two hundred ninety-five properties we had previously leased from the Partnership and which the Partnership had acquired from Texaco in 1985. We later sold

3


the remaining portion of our home heating oil business. As a result, we are now exclusively engaged in the ownership, leasing and management of real estate assets, principally in the petroleum marketing industry.

          Marketing was acquired by a U.S. subsidiary of Lukoil in December 2000. In connection with Lukoil’s acquisition of Marketing, we renegotiated our long-term unitary lease (the “Master Lease”) with Marketing. As of December 31, 2008, Marketing leased from us eight hundred fifty-four properties under the Master Lease and ten properties under supplemental leases (collectively with the Master Lease, the “Marketing Leases”). Eight hundred fifty-five of the properties leased to Marketing are retail motor fuel and convenience store properties and nine of the properties are petroleum distribution terminals. Seven hundred ten of the properties leased to Marketing are owned by us and one hundred fifty-four of the properties are leased by us from third parties. The Master Lease has an initial term expiring in December 2015, and generally provides Marketing with three renewal options of ten years each and a final renewal option of three years and ten months extending to 2049. Each of the renewal options may be exercised only on an “all or nothing” basis. The supplemental leases have initial terms of varying expiration dates. The Marketing Leases are “triple-net” leases, pursuant to which Marketing is responsible for the payment of taxes, maintenance, repair, insurance and other operating expenses. We have licensed the Getty® trademarks to Marketing on an exclusive basis in its marketing territory as of December 2000. We have also licensed the trademarks to Marketing on a non-exclusive basis outside that territory, subject to a gallonage-based royalty, although to date, Marketing has not used the trademark outside that territory. (For additional information regarding developments related to Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.)

          We elected to be treated as a REIT under the federal income tax laws beginning January 1, 2001. A REIT is a corporation, or a business trust that would otherwise be taxed as a corporation, which meets certain requirements of the Internal Revenue Code. The Internal Revenue Code permits a qualifying REIT to deduct dividends paid, thereby effectively eliminating corporate level federal income tax and making the REIT a pass-through vehicle for federal income tax purposes. To meet the applicable requirements of the Internal Revenue Code, a REIT must, among other things, invest substantially all of its assets in interests in real estate (including mortgages and other REITs) or cash and government securities, derive most of its income from rents from real property or interest on loans secured by mortgages on real property, and distribute to shareholders annually a substantial portion of its otherwise taxable income. As a REIT, we are required to distribute at least ninety percent of our taxable income to our shareholders each year and would be subject to corporate level federal income taxes on any taxable income that is not distributed.

Real Estate Business

          The operators of our properties are primarily distributors and retailers engaged in the sale of gasoline and other motor fuel products, convenience store products and automotive repair services. Over the past decade, these lines of business have matured into a single industry as operators increased their emphasis on co-branded locations with multiple uses. The combination of petroleum product sales with other offerings, particularly convenience store products, has helped provide one-stop shopping for consumers and we believe represented a driving force behind the industry’s historical growth. In addition, approximately twenty of our properties are directly leased by us to others for other uses such as fast food restaurants, automobile sales and other retail purposes. In those instances where we determine that the highest and best use for our properties is no longer a retail motor fuel outlet, we will seek alternative tenants or buyers for such properties as opportunities arise.

          Revenues from rental properties for the year ended December 31, 2008 were $81.2 million which is comprised of $78.6 million of lease payments received and $2.5 million of deferred rental income recognized due to the straight-line method of accounting for the leases with Marketing and certain of our other tenants and amortization of above-market and below-market rent for acquired in-place leases. In 2008, we received lease payments from Marketing aggregating approximately $60.3 million (or 77%) of the $78.6 million lease payments received. We are materially dependent upon the ability of Marketing to meet its rental, environmental and other obligations under the Marketing Leases. Marketing’s financial results depend largely on retail petroleum marketing margins and rental income from subtenants who operate our properties. As permitted under the terms of our leases with Marketing, Marketing can generally use each property for any lawful purpose, or for no purpose whatsoever. The petroleum marketing industry has been and continues to be volatile and highly competitive. Marketing has made all required

4


monthly rental payments under the Marketing Leases when due, although there is no assurance that it will continue to do so. (For additional information regarding developments related to Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.) You can find more information about our revenues, profits and assets by referring to the financial statements and supplemental financial information in “Item 8. Financial Statements and Supplementary Data”.

          As of December 31, 2008, we owned fee title to eight hundred sixty-nine retail motor fuel, convenience store and other retail properties and nine petroleum distribution terminals. We also leased one hundred eighty-two retail motor fuel, convenience store and other retail properties. Our typical property is used as a retail motor fuel and/or convenience store, and is located on between one-half and three quarters of an acre of land in a metropolitan area. Our properties are located primarily in the Northeast and the Mid-Atlantic regions in the United States. The Company also owns or leases properties in Texas, North Carolina, Hawaii, California, Florida, Arkansas, Illinois, Ohio and North Dakota. Approximately one-half of our retail motor fuel properties have repair bays (typically two or three bays per station) and nearly half have convenience stores, canopies or both. We lease four thousand square feet of office space at 125 Jericho Turnpike, Jericho, New York, which is used for our corporate headquarters.

          We believe our network of retail motor fuel and convenience store properties and terminal properties across the Northeast and the Mid-Atlantic regions of the United States is unique and that comparable networks of properties are not readily available for purchase or lease from other owners or landlords. Many of our properties are located at highly trafficked urban intersections or conveniently close to highway entrance and exit ramps. Furthermore, we believe that obtaining the permits necessary to operate a network of petroleum marketing properties such as ours would be a difficult, time consuming and costly process for any potential competitor. However, the real estate industry is highly competitive, and we compete for tenants with a large number of property owners. Our principal means of competition are rents charged in relation to the income producing potential of the location. In addition, we expect other major real estate investors with significant capital will compete with us for attractive acquisition opportunities. These competitors include petroleum manufacturing, distributing and marketing companies, other REITs, investment banking firms and private institutional investors. This competition has increased prices for commercial properties and may impair our ability to make suitable property acquisitions on favorable terms in the future.

          As part of our overall growth strategy we regularly review opportunities to acquire additional properties and we expect to continue to pursue acquisitions that we believe will benefit our financial performance. To the extent that our current sources of liquidity are not sufficient to fund such acquisitions we will require other sources of capital, which may or may not be available on favorable terms or at all.

Trademarks

          We own the Getty® name and trademark in connection with our real estate and the petroleum marketing business in the United States and have licensed the Getty® trademarks to Marketing on an exclusive basis in its marketing territory as of December 2000. We have also licensed the trademarks to Marketing on a non-exclusive basis outside that territory, subject to a gallonage-based royalty, although to date, Marketing has not used the trademark outside that territory. The trademark licenses with Marketing are coterminous with the Master Lease.

Regulation

          We are subject to numerous existing federal, state and local laws and regulations including matters related 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, underground storage tanks (“UST” or “USTs”) and other equipment. Petroleum properties are governed by numerous federal, state and local environmental laws and regulations. These laws have included: (i) requirements to report to governmental authorities discharges of petroleum products into the environment and, under certain circumstances, to remediate the soil and/or groundwater contamination pursuant to governmental order and directive, (ii) requirements to remove and replace USTs that have exceeded governmental-mandated age limitations and (iii) the requirement to

5


provide a certificate of financial responsibility with respect to claims relating to UST failures. Our tenants are directly responsible for compliance with various environmental laws and regulations as the operators of our properties.

          We believe that we are in substantial compliance with federal, state and local provisions enacted or adopted pertaining to environmental matters. Although we are unable to predict what legislation or regulations may be adopted in the future with respect to environmental protection and waste disposal, existing legislation and regulations have had no material adverse effect on our competitive position. (For additional information with respect to pending environmental lawsuits and claims see “Item 3. Legal Proceedings”.)

          Environmental expenses are principally attributable to remediation costs which include installing, operating, maintaining and decommissioning remediation systems, monitoring contamination, and governmental agency reporting incurred in connection with contaminated properties. We seek reimbursement from state UST remediation funds related to these environmental expenses where available. We enter into leases and various other agreements which allocate responsibility for known and unknown environmental liabilities by establishing the percentage and method of allocating responsibility between the parties. In accordance with leases with certain tenants, we have agreed to bring the leased properties with known environmental contamination to within applicable standards and to regulatory or contractual closure (“Closure”) in an efficient and economical manner. Generally, upon achieving Closure at an individual property, our environmental liability under the lease for that property will be satisfied and future remediation obligations will be the responsibility of our tenant. As of December 31, 2008, we have regulatory approval for remediation action plans in place for two hundred forty-nine (95%) of the two hundred sixty-two properties for which we continue to retain remediation responsibility and the remaining thirteen properties (5%) were in the assessment phase. In addition, we have nominal post-closure compliance obligations at twenty-four properties where we have received “no further action” letters.

          Our tenants are directly responsible to pay for (i) remediation of environmental contamination they cause and compliance with various environmental laws and regulations as the operators of our properties, and (ii) environmental liabilities allocated to our tenants under the terms of our leases and various other agreements between our tenants and us. Generally, the liability for the retirement and decommissioning or removal of USTs and other equipment is the responsibility of our tenants. We are contingently liable for these obligations in the event that our tenants do not satisfy their responsibilities. A liability has not been accrued for obligations that are the responsibility of our tenants based on our tenants’ past histories of paying such obligations and/or our assessment of their respective financial abilities to pay their share of such costs. 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.

          It is possible that our assumptions regarding the ultimate allocation methods and share of responsibility that we used to allocate environmental liabilities may change, which may result in adjustments to the amounts recorded for environmental litigation accruals, environmental remediation liabilities and related assets. We will be required to accrue for environmental liabilities that we believe are allocable to others under various agreements if we determine that it is probable that the counter-party will not meet its environmental obligations. We may ultimately be responsible to directly pay for environmental liabilities as the property owner if the counterparty fails to pay them. The ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.

          For additional information please refer to “Item 1A. Risk Factors” and to “General – Developments Related to Marketing and the Marketing Leases,” “Liquidity and Capital Resources,” “Environmental Matters” and “Contractual Obligations” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” which appear in Item 7. of this Annual Report on Form 10-K.

Personnel

          As of February 1, 2009, we had sixteen employees.

6


Access to our filings with the Securities and Exchange Commission and Corporate Governance Documents

          Our website address is www.gettyrealty.com. Our address, phone number and a list of our officers is available on our website. Our website contains a hyperlink to the EDGAR database of the Securities and Exchange Commission at www.sec.gov where you can access, free-of-charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to these reports as soon as reasonably practicable after such reports are filed. Our website also contains our business conduct guidelines, corporate governance guidelines and the charters of the Compensation, Nominating/Corporate Governance and Audit Committees of our Board of Directors. We also will provide copies of these reports and corporate governance documents free-of-charge upon request, addressed to Getty Realty Corp., 125 Jericho Turnpike, Suite 103, Jericho, NY 11753, Attn: Investor Relations. Information available on or accessible through our website shall not be deemed to be a part of this Annual Report on Form 10-K. You may read and copy any materials that we file with the Securities and Exchange Commission at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330.

Item 1A. Risk Factors

          We are subject to various risks, many of which are beyond our control. As a result of these and other factors, we may experience material fluctuations in our future operating results on a quarterly or annual basis, which could materially and adversely affect our business, financial condition, results of operations liquidity, ability to pay dividends and/or stock price. An investment in our stock involves various risks, including those mentioned below and elsewhere this Annual Report on Form 10-K and those that are described from time to time in our other filings with the SEC.

We are subject to risks inherent in owning and leasing real estate.

          We are subject to varying degrees of risk generally related to leasing and owning real estate many of which are beyond our control. In addition to general risks related to owning properties used in the petroleum marketing industry, our risks include, among others:

 

 

our liability as a lessee for long-term lease obligations regardless of our revenues,

 

 

deterioration in national, regional and local economic and real estate market conditions,

 

 

potential changes in supply of, or demand for, rental properties similar to ours,

 

 

competition for tenants and declining rental rates,

 

 

difficulty in re-letting properties on favorable terms or at all,

 

 

impairments in our ability to collect rent payments when due,

 

 

increases in interest rates and adverse changes in the availability, cost and terms of financing,

 

 

the potential for uninsured casualty and other losses,

 

 

the impact of present or future environmental legislation and compliance with environmental laws,

 

 

adverse changes in zoning laws and other regulations, and

 

 

acts of terrorism and war.

          Each of these factors could cause a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price. In addition, real estate investments are relatively

7


illiquid, which means that our ability to vary our portfolio of properties in response to changes in economic and other conditions may be limited.

Adverse developments in general business, economic, or political conditions could have a material adverse effect on us.

          Adverse developments in general business and economic conditions, including through recession, downturn or otherwise, either in the economy generally or in those regions in which a large portion of our business is conducted, could have a material adverse effect on us and significantly increase certain of the risks we are subject to. The general economic conditions in the United States are, and for an extended period of time may be, significantly less favorable than that of recent years. Among other effects, adverse economic conditions could depress real estate values, impact our ability to re-let or sell our properties and have and adverse effect on our tenants’ level of sales and financial performance generally. Our revenues are dependent on the economic success of our tenants and any factors that adversely impact our tenants could also have a material adverse effect on our business, financial condition and results of operations liquidity, ability to pay dividends and/or stock price.

Because our revenues are primarily dependent on the performance of Getty Petroleum Marketing Inc., our primary tenant, in the event that Marketing cannot or will not perform its rental, environmental and other obligations under the Marketing Leases, or if the Marketing Leases are modified significantly or terminated, or if it becomes probable that Marketing will not pay its environmental obligations, or if we change our assumptions for rental revenue or environmental liabilities related to the Marketing Leases, our business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends and/or stock price could be materially adversely affected. No assurance can be given that Marketing will have the ability to pay its debts or meet its rental, environmental or other obligations under the Marketing Leases.

          Marketing’s financial results depend largely upon retail petroleum marketing margins from the sale of refined petroleum products at margins in excess of its fixed and variable expenses and rental income from its subtenants who operate their convenience stores, automotive repair service or other businesses at our properties. The petroleum marketing industry has been, and continues to be, volatile and highly competitive. A large, rapid increase in wholesale petroleum prices would adversely affect Marketing’s profitability and cash flow if the increased cost of petroleum products could not be passed on to Marketing’s customers or if the consumption of gasoline for automotive use were to decline significantly. Petroleum products are commodities, the prices of which depend on numerous factors that affect supply and demand. The prices paid by Marketing and other petroleum marketers for products are affected by global, national and regional factors. We cannot accurately predict how these factors will affect petroleum product prices or supply in the future, or how in particular they will affect Marketing or our other tenants.

          A substantial portion of our revenues (75% for the year ended December 31, 2008) are derived from the Marketing Leases. Accordingly, our revenues are dependent to a large degree on the economic performance of Marketing and of the petroleum marketing industry, and any factor that adversely affects Marketing, or our relationship with Marketing, may have a material adverse effect on our business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends and/or stock price. Through March 2009, Marketing has made all required monthly rental payments under the Marketing Leases when due, although there is no assurance that it will continue to do so. Even though Marketing is wholly-owned by a subsidiary of Lukoil, and Lukoil has in prior periods provided credit enhancement and capital to Marketing, Lukoil is not a guarantor of the Marketing Leases and there can be no assurance that Lukoil is currently providing, or will provide, any credit enhancement or additional capital to Marketing.

          In accordance with accounting principles generally accepted in the United States of America (“GAAP”), the aggregate minimum rent due over the current terms of the Marketing Leases, substantially all of which are scheduled to expire in December 2015, is recognized on a straight-line basis rather than when the cash payment is due. We have recorded the cumulative difference between lease revenue recognized under this straight line accounting method and the lease revenue recognized when the payment is due under the contractual payment terms as deferred rent receivable on our consolidated balance sheet. We provide reserves for a portion of the recorded deferred rent receivable if circumstances indicate that a property may be disposed of before the end of the current lease term or if it is not reasonable to assume that a tenant will make all of its contractual lease payments when due

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during the current lease term. Our assessments and assumptions regarding the recoverability of the deferred rent receivable related to the properties subject to the Marketing Leases are reviewed on a regular basis and such assessments and assumptions are subject to change.

          We have had periodic discussions with representatives of Marketing regarding potential modifications to the Marketing Leases and in 2007, during the course of such discussions, Marketing has proposed to (i) remove approximately 40% of the properties (“the Subject Properties”) from the Marketing Leases and eliminate payment of rent to us, and eliminate or reduce payment of operating expenses, with respect to the Subject Properties, and (ii) reduce the aggregate amount of rent payable to us for the approximately 60% of the properties that would remain under the Marketing Leases (the “Remaining Properties”). Representatives of Marketing have also indicated to us that they are considering significant changes to Marketing’s business model. In light of these developments, and the continued deterioration in Marketing’s annual financial performance (as discussed below), in March 2008 we decided to attempt to negotiate with Marketing for a modification of the Marketing Leases which removes the Subject Properties from the Marketing Leases. We have held periodic discussions with Marketing since March 2008 in our attempt to negotiate a modification of the Marketing Leases to remove the Subject Properties. Although we continue to remove individual locations from the Master Lease as mutually beneficial opportunities arise, there has been no agreement between us and Marketing on any principal terms that would be the basis for a definitive Master Lease modification agreement. If Marketing ultimately determines that its business strategy is to exit all of the properties it leases from us or to divest a composition of properties different from the properties comprising the Subject Properties, such as the revised list of properties provided to us by Marketing in the second quarter of 2008 which includes approximately 45% of the properties Marketing leases from us ( the “Revised Subject Properties”), it is our intention to cooperate with Marketing in accomplishing those objectives if we determine that it is prudent for us to do so. Any modification of the Marketing Leases that removes a significant number of properties from the Marketing Leases would likely significantly reduce the amount of rent we receive from Marketing and increase our operating expenses. We cannot accurately predict if, or when, the Marketing Leases will be modified or what the terms of any agreement may be if the Marketing Leases are modified. We also cannot accurately predict what actions Marketing and Lukoil may take, and what our recourse may be, whether the Marketing Leases are modified or not.

          We intend either to re-let or sell any properties removed from the Marketing Leases and reinvest the realized sales proceeds in new properties. We intend to seek replacement tenants or buyers for properties removed from the Marketing Leases either individually, in groups of properties, or by seeking a single tenant for the entire portfolio of properties subject to the Marketing Leases. Although we are the fee or leasehold owner of the properties subject to the Marketing Leases and the owner of the Getty® brand and have prior experience with tenants who operate their gas stations, convenience stores, automotive repair services or other businesses at our properties; in the event that properties are removed from the Marketing Leases, we cannot accurately predict if, when, or on what terms, such properties could be re-let or sold.

          Due to the previously disclosed deterioration in Marketing’s annual financial performance, in conjunction with our decision to attempt to negotiate with Marketing for a modification of the Marketing Leases to remove the Subject Properties, we have decided that we cannot reasonably assume that we will collect all of the rent due to us related to the Subject Properties for the remainder of the current lease terms. In reaching this conclusion, we relied on various indicators, including, but not limited to, the following financial results of Marketing through the year ended December 31, 2007: (i) Marketing’s significant operating losses, (ii) its negative cash flow from operating activities, (iii) its asset impairment charges for underperforming assets, and (iv) its negative earnings before interest, taxes, depreciation, amortization and rent payable to the Company. We have not received Marketing’s financial results for the year ended December 31, 2008 prior to the preparation of this Annual Report on Form 10-K.

          We recorded a reserve of $10.5 million in 2007 representing the full amount of the deferred rent receivable recorded related to the Subject Properties as of December 31, 2007. Providing the $10.5 million non-cash deferred rent receivable reserve reduced our net earnings and our funds from operations for 2007 but did not impact our cash flow from operating activities or adjusted funds from operations since the impact of the straight-line method of accounting is not included in our determination of adjusted funds from operations. (For additional information regarding funds from operations and adjusted funds from operations, which are non-GAAP measures, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Supplemental Non-GAAP Measures”.) As of December 31, 2008 we had a reserve of $10.0 million for the deferred

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rent receivable due from Marketing representing the full amount of the deferred rent receivable recorded related to the Subject Properties as of that date. We have not provided a deferred rent receivable reserve related to the Remaining Properties since, based on our assessments and assumptions, we continue to believe that it is probable that we will collect the deferred rent receivable related to the Remaining Properties of $22.9 million as of December 31, 2008 and that Lukoil will not allow Marketing to fail to perform its rental, environmental and other obligations under the Marketing Leases.

          Marketing is directly responsible to pay for (i) remediation of environmental contamination it causes and compliance with various environmental laws and regulations as the operator of our properties, and (ii) known and unknown environmental liabilities allocated to Marketing under the terms of the Master Lease and various other agreements between Marketing and us relating to Marketing’s business and the properties subject to the Marketing Leases (collectively the “Marketing Environmental Liabilities”). We may ultimately be responsible to directly pay for Marketing Environmental Liabilities as the property owner if Marketing fails to pay them. Additionally, we will be required to accrue for Marketing Environmental Liabilities if we determine that it is probable that Marketing will not meet its obligations or if our assumptions regarding the ultimate allocation methods and share of responsibility that we used to allocate environmental liabilities changes as a result of the factors discussed above, or otherwise. However, we continue to believe that it is not probable that Marketing will not pay for substantially all of the Marketing Environmental Liabilities since we believe that Lukoil will not allow Marketing to fail to perform its rental, environmental and other obligations under the Marketing Leases and, accordingly, we did not accrue for the Marketing Environmental Liabilities as of December 31, 2008 or December 31, 2007. Nonetheless, we have determined that the aggregate amount of the Marketing Environmental Liabilities (as estimated by us based on our assumptions and analysis of information currently available to us) could be material to us if we were required to accrue for all of the Marketing Environmental Liabilities in the future since we believe that it is reasonably possible that as a result of such accrual, we may not be in compliance with the existing financial covenants in our Credit Agreement. Such non-compliance could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness under the Credit Agreement.

          Should our assessments, assumptions and beliefs prove to be incorrect, or if circumstances change, the conclusions we reached may change relating to (i) whether some or all of the Subject or Remaining Properties are likely to be removed from the Marketing Leases (ii) recoverability of the deferred rent receivable for some or all of the Subject or Remaining Properties, (iii) potential impairment of the Subject or Remaining Properties, and (iv) Marketing’s ability to pay the Marketing Environmental Liabilities. We intend to regularly review our assumptions that affect the accounting for deferred rent receivable; long-lived assets; environmental litigation accruals; environmental remediation liabilities; and related recoveries from state underground storage tank funds, which may result in material adjustments to the amounts recorded for these assets and liabilities, and as a result of which, we may not be in compliance with the financial covenants in our Credit Agreement. Accordingly, we may be required to (i) reserve additional amounts of the deferred rent receivable related to the Remaining Properties, (ii) record an impairment charge related to the Subject or Remaining Properties, or (iii) accrue for Marketing Environment Liabilities as a result of the potential or actual modification of the Marketing Leases or other factors.

          We cannot provide any assurance that Marketing will continue to pay its debts or meet its rental, environmental or other obligations under the Marketing Leases prior or subsequent to any potential modification to the Marketing Leases. In the event that Marketing cannot or will not perform its rental, environmental or other obligations under the Marketing Leases; if the Marketing Leases are modified significantly or terminated; if we determine that it is probable that Marketing will not meet its environmental obligations and we accrue for such liabilities; if we are unable to promptly re-let or sell the properties subject to the Marketing Leases; or if we change our assumptions that affect the accounting for rental revenue or Marketing Environmental Liabilities related to the Marketing Leases and various other agreements; our business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends and/or stock price may be materially adversely affected.

Substantially all of our tenants depend on the same industry for their revenues.

          We derive substantially all of our revenues from leasing, primarily on a triple-net basis, retail motor fuel and convenience store properties and petroleum distribution terminals to tenants in the petroleum marketing industry. Accordingly, our revenues will be dependent on the economic success of the petroleum marketing industry, and any factors that adversely affect that industry could also have a material adverse effect on our business, financial

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condition and results of operations liquidity, ability to pay dividends and/or stock price. The success of participants in that industry depends upon the sale of refined petroleum products at margins in excess of fixed and variable expenses. A large, rapid increase in wholesale petroleum prices would adversely affect the profitability and cash flows of Marketing and our other tenants if the increased cost of petroleum products could not be passed on to their customers or if automobile consumption of gasoline were to decline significantly. Petroleum products are commodities, the prices of which depend on numerous factors that affect the supply of and demand for petroleum products. The prices paid by Marketing and other petroleum marketers for products are affected by global, national and regional factors. We cannot be certain how these factors will affect petroleum product prices or supply in the future, or how in particular they will affect Marketing or our other tenants.

Our future cash flow is dependent on the performance of our tenants of their lease obligations, renewal of existing leases and either re-letting or selling our vacant properties.

          We are subject to risks that financial distress or default of our existing tenants may lead to vacancy at our properties or disruption in rent receipts as a result of partial payment or nonpayment of rent or that expiring leases may not be renewed. Under unfavorable general economic conditions, there can be no assurance that our tenants’ level of sales and financial performance generally will not be adversely affected, which in turn, could impact the reliability of our rent receipts. We are subject to risks that the terms of renewal or re-letting our properties (including the cost of required renovations, replacement of gasoline tanks and related equipment or environmental remediation) may be less favorable than current lease terms, or that the values of our properties that we sell may be adversely affected by unfavorable general economic conditions. Unfavorable general economic conditions may also negatively impact our ability to re-let or sell our properties. Numerous properties compete with our properties in attracting tenants to lease space. The number of available or competitive properties in a particular area could have a material adverse effect on our ability to lease or sell our properties and on the rents charged.

          In addition to the risk of disruption in rent receipts, we are subject to the risk of incurring real estate taxes, maintenance, environmental and other expenses at vacant properties. The financial distress or default of our tenants may also lead to protracted, more complex, expensive or burdensome processes for retaking control of our properties than would otherwise be the case, including as a possible consequence of bankruptcy, eviction or other legal proceedings related to or resulting from the tenant’s default. These risks are greater with respect to certain of our tenants who lease multiple properties from us, such as Marketing. (For additional information with respect to concentration of tenant risk, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.)

          If our tenants do not perform their lease obligations, or we were unable to renew existing leases and promptly recapture and re-let or sell vacant locations; or if lease terms upon renewal or re-letting were less favorable than current lease terms, or if the values of properties that we sell are adversely affected by market conditions; or if we incur significant costs or disruption related to or resulting from tenant financial distress, bankruptcy or default; our cash flow could be significantly adversely affected.

Property taxes on our properties may increase without notice.

          Each of the properties we own or lease is subject to real property taxes. The leases for certain of the properties that we lease from third parties obligate us to pay real property taxes with regard to those properties. The real property taxes on our properties and any other properties that we develop, acquire or lease in the future may increase as property tax rates change and as those properties are assessed or reassessed by tax authorities. To the extent that our tenants are unable or unwilling to pay such increase in accordance with their leases, our net operating expenses may increase.

We have incurred, and may continue to incur, operating costs as a result of environmental laws and regulation, which could reduce our profitability.

          The real estate business and the petroleum products industry are subject to numerous federal, state and local laws and regulations, including matters relating to the protection of the environment. Under certain environmental laws, a current or previous owner or operator of real estate may be liable for contamination resulting from the presence or discharge of hazardous or toxic substances or petroleum products at, on, or under, such property, and may be

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required to investigate and clean-up such contamination. Such laws typically impose liability and clean-up responsibility without regard to whether the owner or operator knew of or caused the presence of the contaminants, or the timing or cause of the contamination, and the liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. For example, liability may arise as a result of the historical use of a property or from the migration of contamination from adjacent or nearby properties. Any such contamination or liability may also reduce the value of the property. In addition, the owner or operator of a property may be subject to claims by third parties based on injury, damage and/or costs, including investigation and clean-up costs, resulting from environmental contamination present at or emanating from a property. The properties owned or controlled by us are leased primarily as retail motor fuel and convenience store properties, and therefore may contain, or may have contained, USTs for the storage of petroleum products and other hazardous or toxic substances, which creates a potential for the release of such products or substances. Some of our properties may be subject to regulations regarding the retirement and decommissioning or removal of long-lived assets including buildings containing hazardous materials, USTs and other equipment. Some of the properties may be adjacent to or near properties that have contained or currently contain USTs used to store petroleum products or other hazardous or toxic substances. In addition, certain of the properties are on, adjacent to, or near properties upon which others have engaged or may in the future engage in activities that may release petroleum products or other hazardous or toxic substances. There may be other environmental problems associated with our properties of which we are unaware. These problems may make it more difficult for us to re-let or sell our properties on favorable terms, or at all.

          For additional information with respect to pending environmental lawsuits and claims, environmental remediation costs and estimates, and developments related to Marketing and the Marketing Leases see “Item 3. Legal Proceedings”, “Environmental Matters” and “General – Developments Related to Marketing and the Marketing Leases” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 5 in “Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements” each of which is incorporated by reference herein.

          We enter into leases and various other agreements which allocate responsibility for known and unknown environmental liabilities by establishing the percentage and method of allocating responsibility between the parties. Our tenants are directly responsible to pay for (i) remediation of environmental contamination they cause and compliance with various environmental laws and regulations as the operators of our properties, and (ii) environmental liabilities allocated to our tenants under the terms of our leases and various other agreements between our tenants and us. Generally, the liability for the retirement and decommissioning or removal of USTs and other equipment is the responsibility of our tenants. We are contingently liable for these obligations in the event that our tenants do not satisfy their responsibilities. A liability has not been accrued for obligations that are the responsibility of our tenants based on our tenants’ past histories of paying such obligations and/or our assessment of their respective financial abilities to pay their share of such costs. However, there can be no assurance that our assessments are correct or that our tenants who have paid their obligations in the past will continue to do so.

          We have not accrued for approximately $1.0 million in costs allegedly incurred by the current property owner in connection with removal of USTs and soil remediation at a property that was leased to and operated by Marketing. We believe that Marketing is responsible for such costs under the terms of the Master Lease, and have tendered the matter for defense and indemnification from Marketing, but Marketing had denied its liability for claims and its responsibility to defend against, and indemnify us, for the claim. We have filed third party claims against Marketing for indemnification in this matter, which claim is currently being actively litigated. It is reasonably possible that our assumption that Marketing will be ultimately responsible for the claim may change, which may result in our providing an accrual for this and other matters.

          It is possible that our assumptions regarding the ultimate allocation methods and share of responsibility that we used to allocate environmental liabilities may change, which may result in adjustments to the amounts recorded for environmental litigation accruals, environmental remediation liabilities and related assets. We will be required to accrue for environmental liabilities that we believe are allocable to others under various other agreements if we determine that it is probable that the counter-party will not meet its environmental obligations. We may ultimately be responsible to directly pay for environmental liabilities as the property owner if the counterparty fails to pay them.

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          We cannot predict what environmental legislation or regulations may be enacted in the future, or if or how existing laws or regulations will be administered or interpreted with respect to products or activities to which they have not previously been applied. We cannot predict whether state UST fund programs will be administered and funded in the future in a manner that is consistent with past practices and if future environmental spending will continue to be eligible for reimbursement at historical recovery rates under these programs. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies or stricter interpretation of existing laws which may develop in the future, could have an adverse effect on our financial position, or that of our tenants, and could require substantial additional expenditures for future remediation.

          As a result of the factors discussed above, or others, compliance with environmental laws and regulations could have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.

We are defending pending lawsuits and claims and are subject to material losses.

          We are subject to various lawsuits and claims, including litigation related to environmental matters, damages resulting from leaking USTs and toxic tort claims. The ultimate resolution of certain matters cannot be predicted because considerable uncertainty exists both in terms of the probability of loss and the estimate of such loss. Our ultimate liabilities resulting from such lawsuits and claims, if any, could cause a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price. (For additional information with respect to pending lawsuits and claims see “Item 3. Legal Proceedings”.)

A significant portion of our properties are concentrated in the Northeast and Mid-Atlantic regions of the United States, and adverse conditions in those regions, in particular, could negatively impact our operations.

          A significant portion of the properties we own and lease are located in the Northeast and Mid-Atlantic regions of the United States. Because of the concentration of our properties in those regions, in the event of adverse economic conditions in those regions, we would likely experience higher risk of default on payment of rent payable to us (including under the Marketing Leases) than if our properties were more geographically diversified. Additionally, the rents on our properties may be subject to a greater risk of default than other properties in the event of adverse economic, political, or business developments or natural hazards that may affect the Northeast or Mid-Atlantic United States and the ability of our lessees to make rent payments. This lack of geographical diversification could have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.

We are in a competitive business.

          The real estate industry is highly competitive. Where we own properties, we compete for tenants with a large number of real estate property owners and other companies that sublet properties. Our principal means of competition are rents charged in relation to the income producing potential of the location. In addition, we expect other major real estate investors, some with much greater resources than us, will compete with us for attractive acquisition opportunities. These competitors include petroleum manufacturing, distributing and marketing companies, other REITs, investment banking firms and private institutional investors. This competition has increased prices for commercial properties and may impair our ability to make suitable property acquisitions on favorable terms in the future.

We are exposed to counterparty credit risk and there can be no assurances that we will manage or mitigate this risk effectively.

          We regularly interact with counterparties in various industries. The types of counterparties most common to our transactions and agreements include, but are not limited to, landlords, tenants, vendors and lenders. Our most significant counterparties include, but are not limited to, Marketing as our primary tenant, the members of the Bank Syndicate that are counterparties to our Credit Agreement as our primary source of financing and JPMorgan Chase as the counterparty to our interest rate Swap Agreement. The default, insolvency or other inability of a significant counterparty to perform its obligations under an agreement or transaction, including, without limitation, as a result of the rejection of an agreement or transaction in bankruptcy proceedings, could have a material adverse effect on

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us. (For additional information with respect to, and definitions of, the Bank Syndicate, the Credit Agreement and the Swap Agreement, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risks”.)

We may acquire or develop new properties, and this may create risks.

          We may acquire or develop properties or acquire other real estate companies when we believe that an acquisition or development matches our business strategies. We may not succeed in consummating desired acquisitions or in completing developments on time or within our budget. We also may not succeed in leasing newly developed or acquired properties at rents sufficient to cover their costs of acquisition or development and operations.

We are subject to losses that may not be covered by insurance.

          Marketing, and other tenants, as the lessees of our properties, are required to provide insurance for such properties, including casualty, liability, fire and extended coverage in amounts and on other terms as set forth in our leases. We carry insurance against certain risks and in such amounts as we believe are customary for businesses of our kind. However, as the costs and availability of insurance change, we may decide not to be covered against certain losses (such as certain environmental liabilities, earthquakes, hurricanes, floods and civil disorder) where, in the judgment of management, the insurance is not warranted due to cost or availability of coverage or the remoteness of perceived risk. There is no assurance that our insurance against loss will be sufficient. The destruction of, or significant damage to, or significant liabilities arising out of conditions at, our properties due to an uninsured cause would result in an economic loss and could result in us losing both our investment in, and anticipated profits from, such properties. When a loss is insured, the coverage may be insufficient in amount or duration, or a lessee’s customers may be lost, such that the lessee cannot resume its business after the loss at prior levels or at all, resulting in reduced rent or a default under its lease. Any such loss relating to a large number of properties could have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.

Failure to qualify as a REIT under the federal income tax laws would have adverse consequences to our shareholders.

          We elected to be treated as a REIT under the federal income tax laws beginning January 1, 2001. We cannot, however, guarantee that we will continue to qualify in the future as a REIT. We cannot give any assurance that new legislation, regulations, administrative interpretations or court decisions will not significantly change the requirements relating to our qualification. If we fail to qualify as a REIT, we will again be subject to federal income tax at regular corporate rates, we could be subject to the federal alternative minimum tax, we would be required to pay significant income taxes and we would have less money available for our operations and distributions to shareholders. This would likely have a significant adverse effect on the value of our securities. We could also be precluded from treatment as a REIT for four taxable years following the year in which we lost the qualification, and all distributions to stockholders would be taxable as regular corporate dividends to the extent of our current and accumulated earnings and profits. Loss of our REIT status would result in an event of default that, if not cured or waived, could result in the acceleration of all of our indebtedness under our Credit Agreement which could have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.

In 2004, we received a comment letter from the Securities and Exchange Commission that contains one comment that remains unresolved.

          One comment remains unresolved as part of a periodic review commenced in 2004 by the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”) of our Annual Report on Form 10-K for the year ended December 31, 2003 pertaining to the SEC’s position that we must include the financial statements and summarized financial data of Marketing in our periodic filings, which Marketing contends is prohibited by the terms of the Master Lease. In June 2005, the SEC indicated that, unless we file Marketing’s financial statements and summarized financial data with our periodic reports: (i) it will not consider our Annual Reports on Forms 10-K for the years beginning with fiscal 2000 to be compliant; (ii) it will not consider us to be current in our reporting

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requirements; (iii) it will not be in a position to declare effective any registration statements we may file for public offerings of our securities; and (iv) we should consider how the SEC’s conclusion impacts our ability to make offers and sales of our securities under existing registration statements and if we have a liability for such offers and sales made pursuant to registration statements that did not contain the financial statements of Marketing. We have had no communication with the SEC since 2005. We cannot accurately predict the consequences if we are ultimately unable to resolve this outstanding comment.

We are dependent on external sources of capital which may not be available on favorable terms, if at all.

          We are dependent on external sources of capital to maintain our status as a REIT and must distribute to our shareholders each year at least ninety percent of our net taxable income, excluding any net capital gain. Because of these distribution requirements, it is not likely that we will be able to fund all future capital needs, including acquisitions, from income from operations. Therefore, we will have to continue to rely on third-party sources of capital, which may or may not be available on favorable terms, or at all. As part of our overall growth strategy we regularly review opportunities to acquire additional properties and we expect to continue to pursue acquisitions that we believe will benefit our financial performance. To the extent that our current sources of liquidity are not sufficient to fund such acquisitions we will require other sources of capital, which may or may not be available on favorable terms or at all. We cannot accurately predict how periods of illiquidity in the credit markets, such as current market conditions, will impact our access to or cost of capital. In addition, we may be unable to pursue public equity and debt offerings until we resolve with the SEC the outstanding comment regarding disclosure of Marketing’s financial information. Moreover, additional equity offerings may result in substantial dilution of shareholders’ interests, and additional debt financing may substantially increase our leverage. Our access to third-party sources of capital depends upon a number of factors including general market conditions, the market’s perception of our growth potential, our current and potential future earnings and cash distributions, limitations on future indebtedness imposed under our Credit Agreement and the market price of our common stock.

          The United States credit markets are currently experiencing an unprecedented contraction. As a result of the tightening credit markets, we may not be able to obtain additional financing on favorable terms, or at all. If one or more of the financial institutions that supports our Credit Agreement fails, we may not be able to find a replacement, which would negatively impact our ability to borrow under our the Credit Agreement. In addition, if the current pressures on credit continue or worsen, we may not be able to refinance our outstanding debt when due in March 2011, which could have a material adverse effect on us. Subject to the terms of the Credit Agreement, we have the option to extend the term of the Credit Agreement for one additional year to March 2012.

          Our ability to meet the financial and other covenants relating to our Credit Agreement may be dependent on the performance of our tenants, including Marketing. Should our assessments, assumptions and beliefs that affect our accounting prove to be incorrect, or if circumstances change, we may have to materially adjust the amounts recorded in our financial statements for certain assets and liabilities, and as a result of which, we may not be in compliance with the financial covenants in our Credit Agreement. We have determined that the aggregate amount of the Marketing Environmental Liabilities (as estimated by us based on our assumptions and analysis of information currently available to us) could be material to us if we were required to accrue for all of the Marketing Environmental Liabilities in the future since we believe that it is reasonably possible that as a result of such accrual, we may not be in compliance with the existing financial covenants in our Credit Agreement. (For additional information with respect to The Marketing Environmental Liabilities, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.) If we are not in compliance with one or more of our covenants which, if not complied with could result in an event of default under our Credit Agreement, there can be no assurance that our lenders would waive such non-compliance. A default under our Credit Agreement, if not cured or waived, whether due to a loss of our REIT status, a material adverse effect on our business, financial condition or prospects, a failure to comply with financial and certain other covenants in the Credit Agreement or otherwise, could result in the acceleration of all of our indebtedness under our Credit Agreement. This could have a material adverse affect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.

The downturn in the credit markets has increased the cost of borrowing and has made financing difficult to obtain, which may negatively impact our business, and may have a material adverse effect on us. Lenders may require us to enter into more restrictive covenants relating to our operations

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          During 2007, the United States housing and residential lending markets began to experience accelerating default rates, declining real estate values and increasing backlog of housing supply. The residential sector issues quickly spread more broadly into the corporate, asset-backed and other credit and equity markets and the volatility and risk premiums in most credit and equity markets have increased dramatically, while liquidity has decreased. These issues have continued into 2008 and the beginning of 2009. Increasing concerns regarding the United States and world economic outlook, such as large asset write-downs at banks, volatility in oil prices, declining business and consumer confidence and increased unemployment and bankruptcy filings, are compounding these issues and risk premiums in most capital markets remain near historical all-time highs. These factors are precipitating generalized credit market dislocations and a significant contraction in available credit. As a result, it is becoming increasingly difficult to obtain cost-effective debt capital to finance new investment activity or to refinance maturing debt, and most lenders are imposing more stringent restrictions on the terms of credit. Any future credit agreements or loan documents we execute may contain additional or more restrictive covenants. The negative impact on the tightening of the credit markets and continuing credit and liquidity concerns may have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price. Additionally, there is no assurance that the increased financing costs, financing with increasingly restrictive terms or the increase in risk premiums that are demanded by investors will not have a material adverse effect on us.

Our business operations may not generate sufficient cash for distributions or debt service.

          There is no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to make distributions on our common stock, to pay our indebtedness, or to fund our other liquidity needs. We may not be able to repay or refinance existing indebtedness on favorable terms, which could force us to dispose of properties on disadvantageous terms (which may also result in losses) or accept financing on unfavorable terms.

          Borrowings under our Credit Agreement bear interest at a floating rate. Accordingly, an increase in interest rates will increase the amount of interest we must pay under our Credit Agreement and a significant increase in interest rates could also make it more difficult to find alternative financing on desirable terms. We have entered into an interest rate swap agreement with a major financial institution with respect to a portion of our variable rate debt outstanding under our Credit Agreement. Although the agreement is intended to lessen the impact of rising interest rates, it also exposes us to the risk that the other party to the agreement will not perform, the agreement will be unenforceable and the underlying transactions will fail to qualify as a highly-effective cash flow hedge for accounting purposes. Further, there can be no assurance that the use of an interest rate swap will always be to our benefit. While the use of an interest rate swap agreement is intended to lessen the adverse impact of rising interest rates, it also conversely limits the positive impact that could be realized from falling interest rates with respect to the portion of our variable rate debt covered by the interest rate swap agreement.

We may be unable to pay dividends and our equity may not appreciate.

          Under the Maryland General Corporation Law, our ability to pay dividends would be restricted if, after payment of the dividend, (1) we would not be able to pay indebtedness as it becomes due in the usual course of business or (2) our total assets would be less than the sum of our liabilities plus the amount that would be needed, if we were to be dissolved, to satisfy the rights of any shareholders with liquidation preferences. There currently are no shareholders with liquidation preferences. No assurance can be given that our financial performance in the future will permit our payment of any dividends. (For additional information regarding developments related to Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.) In particular, our Credit Agreement prohibits the payments of dividends during certain events of default. As a result of the factors described above, we may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect our business, stock price and ability to pay dividends.

16


The loss of certain members of our management team could adversely affect our business.

          We depend upon the skills and experience of our executive officers. Loss of the services of any of them could have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price. We do not have employment agreements with any of our executives.

Our accounting policies and methods are fundamental to how we record and report our financial position and results of operations, and they require management to make estimates, judgments and assumptions about matters that are inherently uncertain.

          Our accounting policies and methods are fundamental to how we record and report our financial position and results of operations. We have identified several accounting policies as being critical to the presentation of our financial position and results of operations because they require management to make particularly subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be recorded under different conditions or using different assumptions. Because of the inherent uncertainty of the estimates, judgments and assumptions associated with these critical accounting policies, we cannot provide any assurance that we will not make subsequent significant adjustments to our consolidated financial statements including those included in this Form 10-K. Estimates, judgments and assumptions underlying our consolidated financial statements include, but are not limited to, deferred rent receivable, recoveries from state UST funds, environmental remediation costs, real estate, depreciation and amortization, impairment of long-lived assets, litigation, accrued expenses, income taxes payable and the allocation of the purchase price of properties acquired to the assets acquired and liabilities assumed. For example, we have made judgments regarding the level of environmental reserves and reserves for our deferred rent receivable relating to Marketing and the Marketing Leases. These judgments and assumptions may prove to be incorrect and our business, financial condition, revenues, operating expense, results of operations, liquidity, ability to pay dividends and/or stock price may be materially adversely affected if that is the case. (For information regarding our critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies”.)

Changes in accounting standards issued by the Financial Accounting Standards Board (the “FASB”) or other standard-setting bodies may adversely affect our reported revenues, profitability or financial position.

          Our financial statements are subject to the application of GAAP, which are periodically revised and/or expanded. The application of GAAP is also subject to varying interpretations over time. Accordingly, we are required to adopt new or revised accounting standards or comply with revised interpretations that are issued from time-to-time by recognized authoritative bodies, including the FASB and the SEC. Those changes could adversely affect our reported revenues, profitability or financial position.

Terrorist attacks and other acts of violence or war may affect the market on which our common stock trades, the markets in which we operate, our operations and our results of operations.

          Terrorist attacks or armed conflicts could affect our business or the businesses of our tenants or of Marketing or its parent. The consequences of armed conflicts are unpredictable, and we may not be able to foresee events that could have a material adverse effect on us. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economy. Terrorist attacks also could be a factor resulting in, or a continuation of, an economic recession in the United States or abroad. Any of these occurrences could have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.

Item 1B. Unresolved Staff Comments

          One comment remains unresolved as part of a periodic review commenced in 2004 by the Division of Corporation Finance of the SEC of our Annual Report on Form 10-K for the year ended December 31, 2003 pertaining to the SEC’s position that we must include the financial statements and summarized financial data of Marketing in our periodic filings, which Marketing contends is prohibited under the terms of the Master Lease. In

17


June 2005, the SEC indicated that, unless we file Marketing’s financial statements and summarized financial data with our periodic reports: (i) it will not consider our Annual Reports on Forms 10-K for the years beginning with 2000 to be compliant; (ii) it will not consider us to be current in our reporting requirements; (iii) it will not be in a position to declare effective any registration statements we may file for public offerings of our securities; and (iv) we should consider how the SEC’s conclusion impacts our ability to make offers and sales of our securities under existing registration statements and if we have a liability for such offers and sales made pursuant to registration statements that did not contain the financial statements of Marketing.

          We believe that the SEC’s position is based on their interpretation of certain provisions of their internal Financial Reporting Manual (formerly known as their Accounting Disclosure Rules and Practices Training Material), Staff Accounting Bulletin No. 71 and Rule 3-13 of Regulation S-X. We do not believe that any of this guidance is clearly applicable to our particular circumstances and we believe that, even if it were, we should be entitled to certain relief from compliance with such requirements. Marketing generally subleases our properties to independent, individual service station/convenience store operators (subtenants). Consequently, we believe that we, as the owner of these properties and the Getty® brand, could re-let these properties to the existing subtenants (except for those properties that are vacant) who operate their convenience stores, automotive repair services or other businesses at our properties, or to other new or replacement tenants, at market rents although we cannot accurately predict whether, when, or on what terms, such properties would be re-let or sold. The SEC did not accept our positions regarding the inclusion of Marketing’s financial statements in our filings. We have had no communication with the SEC since 2005 regarding the unresolved comment. We cannot accurately predict the consequences if we are unable to resolve this outstanding comment.

          We do not believe that offers or sales of our securities made pursuant to existing registration statements that did not or do not contain the financial statements of Marketing constitute, by reason of such omission, a violation of the Securities Act of 1933, as amended, or the Exchange Act. Additionally, we believe that if there ultimately is a determination that such offers or sales, by reason of such omission, resulted in a violation of those securities laws, we would not have any material liability as a consequence of any such determination.

Item 2. Properties

          Nearly all of our properties are leased or sublet to distributors and retailers engaged in the sale of gasoline and other motor fuel products, convenience store products and automotive repair services who are responsible for the payment of taxes, maintenance, repair, insurance and other operating expenses and for managing the actual operations conducted at these properties. Approximately twenty of our properties are directly leased by us to others under similar lease terms primarily for other uses such as fast food restaurants, automobile sales and other retail purposes. In those instances where we determine that the highest and best use for our properties is no longer a retail motor fuel outlet, we will seek alternative tenants or buyers for such properties as opportunities arise.

          The following table summarizes the geographic distribution of our properties at December 31, 2008. The table also identifies the number and location of properties we lease from third-parties and which Marketing leases from us under the Marketing Leases. In addition, we lease four thousand square feet of office space at 125 Jericho Turnpike, Jericho, New York, which is used for our corporate headquarters, which we believe will remain suitable and adequate for such purposes for the immediate future.

18


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OWNED BY GETTY REALTY

 

LEASED BY GETTY REALTY

 

 

 

 

 

 

 

 

 

 


 


 

TOTAL

 

PERCENT

 

 

 

 

MARKETING
AS TENANT (1)

 

OTHER
TENANTS

 

MARKETING
AS TENANT

 

OTHER
TENANTS

 

 

PROPERTIES
BY STATE

 

 

OF TOTAL
PROPERTIES

 

 

 

 


 


 


 


 


 


 

 

New York

 

 

 

236

 

 

 

 

31

 

 

 

 

70

 

 

 

 

5

 

 

 

 

342

 

 

 

 

32.3

%

 

Massachusetts

 

 

 

127

 

 

 

 

1

 

 

 

 

23

 

 

 

 

 

 

 

 

151

 

 

 

 

14.2

 

 

New Jersey

 

 

 

106

 

 

 

 

9

 

 

 

 

24

 

 

 

 

5

 

 

 

 

144

 

 

 

 

13.6

 

 

Pennsylvania

 

 

 

107

 

 

 

 

5

 

 

 

 

3

 

 

 

 

4

 

 

 

 

119

 

 

 

 

11.3

 

 

Connecticut

 

 

 

59

 

 

 

 

29

 

 

 

 

16

 

 

 

 

9

 

 

 

 

113

 

 

 

 

10.7

 

 

Virginia

 

 

 

4

 

 

 

 

24

 

 

 

 

8

 

 

 

 

1

 

 

 

 

37

 

 

 

 

3.5

 

 

New Hampshire

 

 

 

25

 

 

 

 

3

 

 

 

 

3

 

 

 

 

 

 

 

 

31

 

 

 

 

2.9

 

 

Maine

 

 

 

17

 

 

 

 

1

 

 

 

 

3

 

 

 

 

1

 

 

 

 

22

 

 

 

 

2.1

 

 

Rhode Island

 

 

 

15

 

 

 

 

1

 

 

 

 

3

 

 

 

 

 

 

 

 

19

 

 

 

 

1.8

 

 

Texas

 

 

 

 

 

 

 

17

 

 

 

 

 

 

 

 

 

 

 

 

17

 

 

 

 

1.6

 

 

Delaware

 

 

 

9

 

 

 

 

1

 

 

 

 

1

 

 

 

 

 

 

 

 

11

 

 

 

 

1.0

 

 

North Carolina

 

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

11

 

 

 

 

1.0

 

 

Hawaii

 

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

 

0.9

 

 

Maryland

 

 

 

4

 

 

 

 

3

 

 

 

 

 

 

 

 

2

 

 

 

 

9

 

 

 

 

0.8

 

 

California

 

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

1

 

 

 

 

9

 

 

 

 

0.8

 

 

Florida

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

0.6

 

 

Arkansas

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

0.3

 

 

Illinois

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

0.2

 

 

Ohio

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

0.2

 

 

North Dakota

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

0.1

 

 

Vermont

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

0.1

 

 

 

 

 



 

 

 



 

 

 



 

 

 



 

 

 



 

 

 



 

 

Total

 

 

 

710

 

 

 

 

168

 

 

 

 

154

 

 

 

 

28

 

 

 

 

1,060

 

 

 

 

100.0

%

 

 

 

 



 

 

 



 

 

 



 

 

 



 

 

 



 

 

 



 

 


 

 

(1)

Includes nine terminal properties owned in New York, New Jersey, Connecticut and Rhode Island.

          The properties that we lease have a remaining lease term, including renewal option terms, averaging over ten years. The following table sets forth information regarding lease expirations, including renewal and extension option terms, for properties that we lease from third parties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CALENDAR YEAR

 

NUMBER OF
LEASES
EXPIRING

 

PERCENT
OF TOTAL
LEASED
PROPERTIES

 

PERCENT
OF TOTAL
PROPERTIES

 


 


 


 


 

2009

 

 

 

17

 

 

 

 

9.34

% 

 

 

 

1.60

% 

 

2010

 

 

 

9

 

 

 

 

4.95

 

 

 

 

0.85

 

 

2011

 

 

 

10

 

 

 

 

5.49

 

 

 

 

0.94

 

 

2012

 

 

 

13

 

 

 

 

7.14

 

 

 

 

1.23

 

 

2013

 

 

 

5

 

 

 

 

2.75

 

 

 

 

0.47

 

 

 

 

 



 

 

 



 

 

 



 

 

Subtotal

 

 

 

54

 

 

 

 

29.67

 

 

 

 

5.09

 

 

Thereafter

 

 

 

128

 

 

 

 

70.33

 

 

 

 

12.08

 

 

 

 

 



 

 

 



 

 

 



 

 

Total

 

 

 

182

 

 

 

 

100.0

%

 

 

 

17.17

%

 

 

 

 



 

 

 



 

 

 



 

 

          We have rights-of-first refusal to purchase or lease one hundred forty-four of the properties we lease. Although there can be no assurance regarding any particular property, historically we generally have been successful in renewing or entering into new leases when lease terms expire. Approximately 65% of our leased properties are subject to automatic renewal or extension options.

          In the opinion of our management, our owned and leased properties are adequately covered by casualty and liability insurance. In addition, we require our tenants to provide insurance for all properties they lease from us, including casualty, liability, fire and extended coverage in amounts and on other terms satisfactory to us. We have no plans for material improvements to any of our properties. However, our tenants frequently make improvements to the properties leased from us at their expense. We are not aware of any material liens or encumbrances on any of our properties.

          We lease eight hundred fifty-five retail motor fuel and convenience store properties and nine petroleum distribution terminals to Marketing under the Marketing Leases. The Master Lease is a unitary lease and has an initial term expiring in 2015, and generally provides Marketing with three renewal options of ten years each and a final renewal option of three years and ten months extending to 2049. Each of the renewal options may be exercised

19


only on an “all or nothing” basis. The Marketing Leases are “triple-net” leases, under which Marketing is responsible for the payment of taxes, maintenance, repair, insurance and other operating expenses. As permitted under the terms of our leases with Marketing, Marketing can generally use each property for any lawful purpose, or for no purpose whatsoever. We believe that as of December 31, 2008, Marketing had vacancies and/or removed the gasoline tanks and related equipment at what may be as much as 10% or more of the properties subject to the Marketing Leases. (For additional information regarding developments related to Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.)

          If Marketing fails to pay rent, taxes or insurance premiums when due under the Marketing Leases and the failure is not cured by Marketing within a specified time after receipt of notice, we have the right to terminate the Marketing Leases and to exercise other customary remedies against Marketing. If Marketing fails to comply with any other obligation under the Master Lease after notice and opportunity to cure, we do not have the right to terminate the Master Lease. In the event of Marketing’s default where we do not have the right to terminate the Master Lease, our available remedies under the Master Lease are to seek to obtain an injunction or other equitable relief requiring Marketing to comply with its obligations under the Master Lease and to recover damages from Marketing resulting from the failure. If any lease we have with a third-party landlord for properties that we lease to Marketing is terminated as a result of our default and the default is not caused by Marketing, we have agreed to indemnify Marketing for its losses with respect to the termination. Marketing has the right-of-first refusal to purchase any property leased to Marketing under the Marketing Leases that we decide to sell.

          We have also agreed to provide limited environmental indemnification to Marketing, capped at $4.25 million and expiring in 2010, for certain pre-existing conditions at six of the terminals we own and lease to Marketing. Under the agreement, Marketing is obligated to pay the first $1.5 million of costs and expenses incurred in connection with remediating any pre-existing terminal condition, Marketing will share equally with us the next $8.5 million of those costs and expenses and Marketing is obligated to pay all additional costs and expenses over $10.0 million. We have accrued $0.3 million as of December 31, 2008 and 2007 in connection with this indemnification agreement. Under the Master Lease, we continue to have additional ongoing environmental remediation obligations for one hundred eighty-seven scheduled sites and our agreements with Marketing provide that Marketing otherwise remains liable for all environmental matters. (For additional information regarding developments related to Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.)

Item 3. Legal Proceedings

          In 1989, we were named as a defendant in a lawsuit by multiple owners of adjacent properties seeking compensatory and punitive damages for personal injury and property damages alleging that a leak of an underground storage tank occurred in November 1985 at one of our retail motor fuel properties. The action is still pending in New York Supreme Court, Suffolk County, remains in the pleadings stage and has remained dormant for more than twelve years.

          In 1991, the State of New York brought an action in the New York State Supreme Court in Albany against our former heating oil subsidiary seeking reimbursement for cleanup costs claimed to have been incurred at a retail motor fuel property in connection with a gasoline release. The State is also seeking penalties plus interest. We answered the complaint by denying liability and also asserted cross-claims against another defendant. There had been no activity in this proceeding for approximately eight years prior to January 2002 when we received a letter from the State’s attorney indicating that the State intends to continue prosecuting the action. To date, we are not aware that the State has taken any additional actions in connection with this claim.

          In 1997, an action was commenced in the New York Supreme Court in Schenectady, naming us as defendants, and seeking to recover monetary damages for personal injuries allegedly suffered from the release of petroleum and vapors from one of our retail motor fuel properties. This action has not been pursued by the plaintiff for more than ten years.

20


          In 1997, representatives of the County of Lancaster, Pennsylvania contacted the Company regarding alleged petroleum contamination of property owned by the County adjoining a property owned by the Company. No litigation has been instituted as a result of this potential claim. Negotiations with the County have, however, have been ongoing since commencement of this action in an effort to reach an amicable resolution. In 2005, the County requested reimbursement of legal fees pursuant to an access agreement between the parties. A substantial portion of the fees remains in dispute.

          In June 1999, an action was commenced against us in the New York Supreme Court in Richmond County seeking monetary damages for property damage alleged to have resulted from a petroleum release in connection with a tank removal by our contractor. After a number of years of inactivity by the plaintiff, in 2006 the plaintiff reactivated prosecution by filing for a preliminary conference. After a number of years of inactivity by the plaintiff, in 2006 the plaintiff reactivated prosecution of its case by filing for a preliminary conference. Discovery is ongoing.

          In 2000, an action was commenced in New York Supreme Court in Nassau County against us by a prior landlord to recover damages arising out of a petroleum release and remediation thereof. The release dates back to 1979 and is listed as “closed” by the NYSDEC. The plaintiff has not pursued this case for more than seven years.

          In December 2002, the State of New York commenced an action in the New York Supreme Court in Albany County against us and Marketing to recover costs claimed to have been expended by the State to investigate and remediate a petroleum release into the Ossining River commencing approximately in 1996. This case was settled against all defendants in June, 2008 in consideration for a payment of an aggregate amount, of which the Company, for ourselves and on behalf of Marketing (whom we had agreed to indemnify), paid $53,000.

          In February 2003, an action was commenced against us, Marketing and others by the owners of an adjacent property in the Pennsylvania Court of Common Pleas in Lancaster County, asserting claims relating to a discharge of gasoline allegedly emanating from our property. In response to cross motions for summary judgment, the court denied our motion and granted plaintiff’s motion finding us liable for the petroleum contamination. Plaintiff’s counsel has also made demand for legal fees. The matter was settled by us, for ourselves and on behalf of Marketing and its subtenant, in July 2008 in consideration for a payment by the Company of $295,000.

          In April 2003, we were named in a complaint seeking class action classification, filed in the New York Supreme Court in Dutchess County, NY, arising out of alleged contamination of ground water with methyl tertiary butyl ether (a fuel derived from methanol, which we refer to as “MTBE”). We served an answer that denied liability and asserted affirmative defenses. The plaintiffs have not responded to our answer and there has been no activity in the case since it was commenced.

          In July 2005, the State of Rhode Island Department of Environmental Management (“RIDEM”) issued a Notice of Violation (“NOV”) against the Company and Marketing relating to a suspected petroleum release at a property that abuts property owned by us and leased to Marketing. The NOV was appealed by Marketing on behalf of it and the Company to RIDEM’s Administrative Adjudication Division. An evidentiary hearing on that appeal was held in May, 2008, leading to a final decision entered by RIDEM in October, 2008. The final decision dismissed the NOV entirely against Marketing but only partially against the Company, upholding certain state regulatory violations against one of our subsidiaries and ordering remediation actions and the payment of an administrative penalty. We have appealed RIDEM’s final decision to the Providence Superior Court.

          In July 2003, we received a Request for Reimbursement from the State of Maine Department of Environmental Protection (“MDEP”) seeking reimbursement of costs claimed to have been incurred by it in connection with the remediation of contamination found at a retail motor fuel property, purportedly linked to numerous gasoline spills in the late 1980’s. We have denied liability for the claim and not received any data from the State responsive to our requests, the most recent of which was made in July, 2008, for evidence linking the subject contamination to our conduct.

          In September 2003, we were notified by the New Jersey Department of Environmental Protection (the “NJDEP”) that we may be responsible for damages to natural resources (“NRDs”) by reason of a petroleum release at a retail motor fuel property formerly operated by us in Egg Harbor, NJ. We have remediated the resulting contamination at the property in accordance with a plan approved by the NJDEP and continue required sampling of monitoring wells

21


that were required to be installed. In addition, we have responded to the notice and met with the Department to determine whether, and to what extent, we may be responsible for NRDs regarding this property and our other properties formerly supplied by us with gasoline in New Jersey. Since our meeting with the NJDEP held shortly after receipt of the notification, we have had no communication with the NJDEP arising from this matter regarding NRDs.

          From October 2003 through December 2008, we were made a party to fifty-four cases in Connecticut, Florida, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Vermont, Virginia, and West Virginia, brought by local water providers or governmental agencies. These cases allege various theories of liability due to contamination of groundwater with MTBE as the basis for claims seeking compensatory and punitive damages. Each case names as defendants approximately fifty petroleum refiners, manufacturers, distributors and retailers of MTBE, or gasoline containing MTBE. The accuracy of the allegations as they relate to us, our defenses to such claims, the aggregate possible amount of damages, and the method of allocating such amounts among the remaining defendants have not been determined. We have been dismissed from certain of the cases initially filed against us. Pursuant to consolidation procedures under federal law, the various MTBE cases have been transferred to the Federal District Court for the Southern District of New York for coordinated Multi-District Litigation proceedings. We are presently named as a defendant in fifty out of the approximately one hundred cases that are consolidated in the Multi-District Litigation. The Federal District Court has set apart for initial process four focus cases from the consolidated cases being heard. Three of these four focus cases name us as a defendant. One of the focus cases to which we are a party had been set for trial in September 2008. However, all of the named defendants in this first focus case, other than us and one other non-refiner defendant, entered into settlements with certain plaintiffs, which affected approximately twenty-seven of the cases to which we are a party, including one of the other initial focus cases. As a result of the multi-party settlement which affected two of the focus cases, the Court vacated the September 2008 trial date for the first focus case, and further scheduling of trial for the first focus case and one of the other focus cases to which we are a named defendant remains open at this time. As a result of this settlement, the Federal District Court designated an additional focus case for process. We are a named defendant in this new focus case. Trials in this case and in one of the original focus cases in which we have been named a defendant are scheduled for sometime in 2009. We participate in a joint defense group with the goal of sharing expert and other costs with the other defendants, and we also have separate counsel defending our interests. We are vigorously defending these matters.

          In November 2003, we received a demand from the State of New York for reimbursement of cleanup and removal costs claimed to have been incurred by the New York Environmental Protection and Spill Compensation Fund regarding contamination it alleges emanated from one of our retail motor fuel properties in 1997. We have responded to the State’s demand and have denied responsibility for reimbursement of such costs. In September 2004, the State of New York commenced an action against us and others in New York Supreme Court in Albany County seeking recovery of such costs as well as additional costs and future costs for remediation and sampling, and interest and penalties. Discovery in this case is ongoing. We are vigorously defending this matter.

          In July 2005, we received a demand from a property owner for reimbursement of cleanup and soil removal costs, at a former retail motor fuel property located in Brooklyn, New York formerly supplied by us with gasoline that the owner expects to incur in connection with the proposed development of its property. The owner claims that the costs will be reimbursable pursuant to an indemnity agreement that we entered into with the property owner. Although we have acknowledged responsibility for the contaminated soil, and have been engaged in the remediation of the same, we have denied responsibility for the full extent of the costs estimated to be incurred.

          In October 2005, the State of New York commenced an action in the New York Supreme Court in Albany County against us and Marketing to recover costs claimed to have been funded by the State to remediate a petroleum release emanating from a property we acquired in 1999. The seller of the property to us, who is also party to the action, has agreed to defend and indemnify us (and Marketing) regarding the release and funds have been escrowed to cover the amount sought to be recovered. The parties in this action are engaged in discovery proceedings. No trial date has yet been established.

          In December 2005, an action was commenced against us in the Superior Court in Providence, Rhode Island, by the owner of a pier that is adjacent to one of our terminals that is leased to Marketing seeking monetary damages of approximately $500,000 representing alleged costs related to the ownership and maintenance of the pier for the period from January 2003 through September 2005. We have been vigorously defending against this action.

22


Additionally, we tendered the matter to Marketing for indemnification and defense pursuant to the Master Lease. Marketing declined to accept our tender and has denied liability for the claim. In May, 2008 the US District Court (to which the case had been removed from state court) granted our motion for summary judgment against the plaintiff on all claims. The plaintiff has appealed this decision to the First Circuit Court of Appeals. We intend to pursue our claim against Marketing for indemnification.

          In April 2006, we were added as a defendant in an action in the Superior Court of New Jersey, Middlesex County, filed by a property owner claiming damages against multiple defendants for remediation of contaminated soil. The basis for prosecuting the claim against us is corporate successor liability. The matter was settled in July 2008 in consideration for a payment by us of $600,000, which was made in the third quarter of 2008, plus an additional maximum contingent amount of $40,000 relating to possible future liability for certain third party claims.

          In May 2006, we were advised (but not yet served) of a third party complaint filed in an action in the Superior Court of New Jersey, Essex County, against Getty Oil, Inc. and John Doe Corporations, filed by a property owner seeking to impose upon third parties (that may include a subsidiary of the Company) responsibility for damages it may suffer in the action for claims brought against it under federal environmental laws, the State’s Spill Act, the State’s Water Pollution Act and other theories of liability.

          In November 2006, an action was commenced by the New Jersey Schools Corporation (“NJSC”) in the Superior Court of New Jersey, Union County seeking reimbursement for costs of approximately $1.0 million related to the removal of abandoned USTs and remediation of soil contamination at a retail motor fuel property that was acquired from us by eminent domain. Prior to the taking, the property was leased to and operated by Marketing. We tendered the matter to Marketing for defense and indemnification. Marketing has declined to accept the tender and has denied liability for the claim. We have filed a compulsory third party claim against Marketing seeking defense and indemnification. In July 2007, Marketing filed a claim against the Company seeking defense and indemnification. (For additional information regarding developments related to Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.)

          In May 2007, the Company’s subsidiary received a lease default notice from its sub-landlord pertaining to an alleged underpayment of rent by our subsidiary for a period of time exceeding fifteen years. In June 2007, the Company commenced an action against the sub-landlord seeking an injunction that would preclude the sub-landlord from taking any action to terminate its sublease with our subsidiary or collect the alleged underpayment of rent. The Court issued the injunction preventing termination of the sublease pending determination of the matter. Discovery is ongoing.

          In July 2007, subsidiaries of the Company were notified of the commencement of three actions by the NJDEP seeking Natural Resource Damages (“NRDs”) arising out of petroleum releases at properties owned or leased by us. Answers to the complaints and discovery requests were filed by us in each of these cases. In September, 2008, we agreed with NJDEP to a stipulation of dismissal of one of the NRD cases, and in February, 2009, we agreed with NJDEP to a stipulation of dismissal of another of the NRD cases. In each of these stipulations of dismissal, the claims raised in the New Jersey State Court action were dismissed without prejudice to the NJDEP’s right to reassert the same claims in complaints brought in the Federal District Court to be heard in the Multi-District MTBE cases currently pending against us. The third action remains pending. We are favorably disposed to entering into a stipulation with the NJDEP with respect to the final NRD case on the same terms as the other two, and have been advised by the NJDEP that it intends to do so.

          In October 2007, the Company received a demand from the State of New York to pay the costs allegedly arising from investigation and remediation of petroleum spills that occurred at a property formerly owned by us and taken by Eminent Domain by the State of New York in 1991. No formal legal action has yet been commenced by the State.

          In August, 2008, we were notified by the New York Environmental Protection and Spill Compensation Fund (“NY Spill Fund”) that we and another party had been named as allegedly responsible for certain petroleum contamination discovered in 2007. The claimant in the matter is a property developer who alleges to have incurred approximately $434,000 in petroleum-related remediation costs as a result of contamination on its property which

23


allegedly derive from two reported spills: one dating back to 1995 at an adjacent site formerly owned by us, and the other occurring in 2006, at an adjacent site owned by the other respondent named in the action. In September 2008, the same claimant also commenced a lawsuit in the New York State Supreme Court against us and the other allegedly responsible party to recover damages based upon the same set of facts. We are vigorously defending the claims against us and have asserted cross claims against the other party.

          In September 2008, we received a directive from the NJDEP calling for a remedial investigation and cleanup, by us and other named parties, of petroleum-related contamination found at a retail motor fuel and auto service property. We did not own or lease this property, but did supply gas to the operator of this property in 1985 and 1986. We have responded to the NJDEP and we have tendered the matter to Marketing for defense and indemnification under the Reorganization and Distribution Agreement between Getty Petroleum Corp. (n/k/a/ Getty Properties Corp.) and Marketing dated as of February 1, 1997. However, there can be no assurance that Marketing will accept responsibility for this matter. For additional information regarding developments related to Marketing and the Marketing Leases (as defined below), see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.)

Matters related to our Newark, New Jersey Terminal and the Lower Passaic River

          In September 2003, we received a directive (the “Directive”) issued by the NJDEP under the New Jersey Spill Compensation and Control Act. The Directive indicated that we are one of approximately sixty-six potentially responsible parties for alleged NRDs resulting from discharges of hazardous substances along the lower Passaic River (the “Lower Passaic River”). The Directive alleged, inter alia, that the recipients thereof must conduct an assessment of the natural resources that have been injured by the discharges and implement interim compensatory restoration for the injured natural resources. NJDEP alleges that our liability arises from alleged discharges originating from our Newark, New Jersey Terminal site. Chevron/Texaco was also identified in the Directive. We responded to the Directive by asserting that we were not liable. There has been no material activity and/or communications by NJDEP with respect to the Directive since early after its issuance.

          Effective June 22, 2004, the United States Environmental Protection Agency (“EPA”) entered into an Administrative Order on Consent (“AOC”) with 31 parties (some of which are also named in the Directive) who agreed to fund a portion of the costs for EPA to perform a Remedial Investigation and Feasibility Study (“RI/FS”) for the Lower Passaic River. The RI/FS is intended to address the investigation and evaluation of alternative remedial actions with respect to alleged damages to the Lower Passaic River. After being notified by the EPA that they considered us to be a potentially responsible party, we reserved our defenses to liability, became a party to an amended AOC, and joined the Cooperating Parties Group (“CPG”), which consists of the parties which had executed the initial AOC and other parties (including Chevron/Texaco). Pursuant to the amended AOC and subsequent amendments adding additional parties, the CPG has agreed to take over performance of the RI/FS from EPA. The RI/FS does not resolve liability issues for remedial work or restoration of, or compensation for, natural resource damages to the Lower Passaic River, which are not known at this time. As to such matters, separate proceedings or activities are currently ongoing.

          In a related action, in December 2005, the State of New Jersey brought suit in the Superior Court of New Jersey, Law Division, against certain companies which the State alleges are responsible for pollution of the Passaic River from a former Diamond Alkali manufacturing plant and seeking recovery of alleged damages incurred and to be incurred on account of alleged discharges of hazardous substances to the Passaic River. On February 4, 2009, certain of these defendants filed third-party complaints against approximately three hundred additional parties, including us as well as the other members of the CPG, seeking contribution for a pro-rata share of response costs, cleanup and removal costs, and other damages.

          We have made a demand upon Chevron/Texaco for indemnity under certain agreements between the Company and Chevron/Texaco that allocate environmental liabilities for the Newark Terminal Site between the parties. In response, Chevron/Texaco has asserted that the proceedings and claims are still not yet developed enough to determine the extent to which indemnities apply. Our ultimate liability, if any, in the pending and possible future proceedings pertaining to the Lower Passaic River is uncertain and subject to numerous contingencies which cannot be predicted and the outcome of which are not yet known.

Item 4. Submission of Matters to a Vote of Security Holders

          No matter was submitted to a vote of security holders during the three months ended December 31, 2008.

24


PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Capital Stock

          Our common stock is traded on the New York Stock Exchange (symbol: “GTY”). There were approximately 11,000 shareholders of our common stock as of March 2, 2009, of which approximately 1,400 were holders of record. The price range of our common stock and cash dividends declared with respect to each share of common stock during the years ended December 31, 2008 and 2007 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PRICE RANGE

 

CASH
DIVIDENDS

 

 

 


 

 

PERIOD ENDED

 

HIGH

 

LOW

 

PER SHARE

 


 



 



 



 

March 31, 2007

 

$

32.10

 

$

27.80

 

$

 

.4550

 

June 30, 2007

 

 

30.33

 

 

26.17

 

 

 

.4650

 

September 30, 2007

 

 

28.72

 

 

23.80

 

 

 

.4650

 

December 31, 2007

 

 

29.23

 

 

25.21

 

 

 

.4650

 

March 31, 2008

 

 

28.58

 

 

13.33

 

 

 

.4650

 

June 30, 2008

 

 

19.04

 

 

14.34

 

 

 

.4650

 

September 30, 2008

 

 

23.12

 

 

13.12

 

 

 

.4700

 

December 31, 2008

 

 

22.40

 

 

13.35

 

 

 

.4700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          For a discussion of potential limitations on our ability to pay future dividends see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources”.

Issuer Purchases of Equity Securities

          None

Sales of Unregistered Securities

          None

25


Stock Performance Graph

          We have chosen as our Peer Group the following companies: Commercial Net Lease Realty, Entertainment Properties Trust, Realty Income Corp. and Hospitality Properties Trust. We have chosen these companies as our Peer Group because a substantial segment of each of their businesses is owning and leasing commercial properties. We cannot assure you that our stock performance will continue in the future with the same or similar trends depicted in the graph above. We do not make or endorse any predictions as to future stock performance.

          This performance graph and related information shall not be deemed filed for the purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section and shall not be deemed to be incorporated by reference into any filing that we make under the Securities Act or the Exchange Act.

(LINE GRAPH)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006

 

2007

 

2008

 

 

 


 


 


 


 


 


 

Getty Realty Corp.

 

 

100.00

 

 

117.15

 

 

114.35

 

 

143.03

 

 

132.08

 

 

115.55

 

Standard & Poors 500

 

 

100.00

 

 

108.99

 

 

112.26

 

 

127.55

 

 

132.06

 

 

81.23

 

Peer Group

 

 

100.00

 

 

125.57

 

 

117.58

 

 

155.00

 

 

137.96

 

 

103.68

 

Assumes $100 invested at the close of trading on 12/03 in Getty Realty Corp. common stock, Standard & Poor’s 500, and Peer Group.

 

 

*

Cumulative total return assumes reinvestment of dividends.

26


Item 6. Selected Financial Data

GETTY REALTY CORP. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(in thousands, except per share amounts and number of properties)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FOR THE YEARS ENDED DECEMBER 31,

 

 

 


 

 

 

2008

 

2007 (a)

 

2006

 

2005

 

2004

 

 

 


 


 


 


 


 

OPERATING DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from rental properties

 

$

81,163

 

$

78,069

 

$

71,329

 

$

70,264

 

$

65,188

 

Earnings before income taxes and discontinued operations

 

 

39,162

 

 

28,110

(b)

 

41,228

 

 

43,211

 

 

38,525

 

Income tax benefit (c)

 

 

 

 

 

 

700

 

 

1,494

 

 

 

 

 



 



 



 



 



 

Earnings from continuing operations

 

 

39,162

 

 

28,110

 

 

41,928

 

 

44,705

 

 

38,525

 

Earnings from discontinued operations

 

 

2,648

 

 

5,784

 

 

797

 

 

743

 

 

827

 

 

 



 



 



 



 



 

Net earnings

 

 

41,810

 

 

33,894

 

 

42,725

 

 

45,448

 

 

39,352

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

 

1.58

 

 

1.13

 

 

1.69

 

 

1.81

 

 

1.56

 

Net earnings

 

 

1.69

 

 

1.37

 

 

1.73

 

 

1.84

 

 

1.59

 

Diluted weighted-average common shares outstanding

 

 

24,774

 

 

24,787

 

 

24,759

 

 

24,729

 

 

24,721

 

Cash dividends declared per share

 

 

1.87

 

 

1.85

 

 

1.82

 

 

1.76

 

 

1.70

 

FUNDS FROM OPERATIONS AND ADJUSTED FUNDS FROM OPERATION (d):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

41,810

 

 

33,894

 

 

42,725

 

 

45,448

 

 

39,352

 

 

 



 



 



 



 



 

Depreciation and amortization of real estate assets

 

 

11,875

 

 

9,794

 

 

7,883

 

 

8,113

 

 

7,490

 

Gains on dispositions of real estate

 

 

(2,787

)

 

(6,179

)

 

(1,581

)

 

(1,309

)

 

(618

)

 

 



 



 



 



 



 

Funds from operations

 

 

50,898

 

 

37,509

 

 

49,027

 

 

52,252

 

 

46,224

 

Deferred rental revenue (straight-line rent)

 

 

(1,803

)

 

(3,112

)

 

(3,010

)

 

(4,170

)

 

(4,464

)

Allowance for deferred rental revenue

 

 

 

 

10,494

 

 

 

 

 

 

 

Amortization of above-market and below-market leases

 

 

(790

)

 

(1,047

)

 

 

 

 

 

 

Income tax benefit (c)

 

 

 

 

 

 

(700

)

 

(1,494

)

 

 

 

 



 



 



 



 



 

Adjusted funds from operations

 

 

48,305

 

 

43,844

 

 

45,317

 

 

46,588

 

 

41,760

 

BALANCE SHEET DATA (AT END OF YEAR):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate before accumulated depreciation and amortization

 

$

473,567

 

$

474,254

 

$

383,558

 

$

370,495

 

$

346,590

 

Total assets

 

 

387,813

 

 

396,911

 

 

310,922

 

 

301,468

 

 

292,088

 

Debt

 

 

130,250

 

 

132,500

 

 

45,194

 

 

34,224

 

 

24,509

 

Shareholders’ equity

 

 

205,957

 

 

212,178

 

 

225,575

 

 

227,883

 

 

225,503

 

NUMBER OF PROPERTIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owned

 

 

878

 

 

880

 

 

836

 

 

814

 

 

795

 

Leased

 

 

182

 

 

203

 

 

216

 

 

241

 

 

250

 

 

 



 



 



 



 



 

Total properties

 

 

1,060

 

 

1,083

 

 

1,052

 

 

1,055

 

 

1,045

 

 

 



 



 



 



 



 


 

 

(a)

Includes (from the date of the acquisition) the effect of the $84.6 million acquisition of convenience stores and gas station properties from FF-TSY Holding Company II LLC (successor to Trustreet Properties, Inc.) which was substantially completed by the end of the first quarter of 2007.

 

 

(b)

Includes the effect of a $10.5 million non-cash reserve for the full amount of the deferred rent receivable recorded as of December 31, 2007 related to approximately 40% of the properties under leases with our primary tenant, Getty Petroleum Marketing, Inc. (For additional information regarding developments related to Marketing and the Marketing Leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Developments Related to Marketing and the Marketing Leases”.)

 

 

(c)

The years ended 2006 and 2005 include income tax benefits recognized due to the elimination of, or reduction in, amounts accrued for uncertain tax positions related to being taxed as a C-corp. prior to our election to be

27


 

 

 

taxed as a real estate investment trust (“REIT”) under the federal income tax laws in 2001. Income taxes have not had a significant impact on our earnings since we first elected to be treated as a REIT.

 

 

(d)

In addition to measurements defined by accounting principles generally accepted in the United States of America (“GAAP”), our management also focuses on funds from operations (“FFO”) and adjusted funds from operations (“AFFO”) to measure our performance. FFO is generally considered to be an appropriate supplemental non-GAAP measure of the performance of real estate investment trusts (“REITs”). FFO is defined by the National Association of Real Estate Investment Trusts as net earnings before depreciation and amortization of real estate assets, gains or losses on dispositions of real estate, (including such non-FFO items reported in discontinued operations), extraordinary items, and cumulative effect of accounting change. 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 is helpful to investors in measuring our performance because FFO excludes various items included in GAAP net earnings that do not relate to, or are not indicative of, our fundamental operating performance such as gains or losses from property dispositions and depreciation and amortization of real estate assets. In our case, however, GAAP net earnings and FFO include the significant impact of deferred rental revenue (straight-line rental revenue) and the net amortization of above-market and below-market leases on our recognition of revenue from rental properties, as offset by the impact of related collection reserves. Deferred rental revenue results primarily from fixed rental increases scheduled under certain leases with our tenants. In accordance with GAAP, the aggregate minimum rent due over the current term of these leases is recognized on a straight-line basis rather than when the payment is due. The present value of the difference between the fair market rent and the contractual rent for in-place leases at the time properties are acquired is amortized into revenue from rental properties over the remaining lives of the in-place leases. GAAP net earnings and FFO also include income tax benefits recognized due to the elimination of, or reduction in, amounts accrued for uncertain tax positions related to being taxed as a C-corp. rather than as a REIT prior to 2001 (see note (b) above). As a result, management pays particular attention to AFFO, a supplemental non-GAAP performance measure that we define as FFO less straight-line rental revenue, net amortization of above-market and below-market leases and income tax benefit. In management’s view, AFFO provides a more accurate depiction than FFO of the impact of the scheduled rent increases under these leases, rental revenue from acquired in-place leases and our election to be treated as a REIT under the federal income tax laws beginning in 2001. Neither FFO nor AFFO represent cash generated from operating activities calculated in accordance with GAAP and therefore should not be considered an alternative for GAAP net earnings or as a measure of liquidity.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

          The following discussion and analysis should be read in conjunction with the “Cautionary Note Regarding Forward-Looking Statements” on page 1; the risks and uncertainties described in “Item 1A. Risk Factors”; the selected financial data in “Item 6.Selected Financial Data”; and the consolidated financial statements and related notes in “Item 8. Financial Statements and Supplementary Data”.

GENERAL

Real Estate Investment Trust

          We are a real estate investment trust (“REIT”) specializing in the ownership and leasing of retail motor fuel and convenience store properties and petroleum distribution terminals. We elected to be treated as a REIT under the federal income tax laws beginning January 1, 2001. As a REIT, we are not subject to federal corporate income tax on the taxable income we distribute to our shareholders. In order to continue to qualify for taxation as a REIT, we are required, among other things, to distribute at least ninety percent of our taxable income to shareholders each year.

Retail Petroleum Marketing Business

          We lease or sublet our properties primarily to distributors and retailers engaged in the sale of gasoline and other motor fuel products, convenience store products and automotive repair services. These tenants are responsible for the payment of taxes, maintenance, repair, insurance and other operating expenses and for managing the actual

28


operations conducted at these properties. In addition, approximately twenty of our properties are directly leased by us to others for other uses such as fast food restaurants, automobile sales and other retail purposes. In those instances where we determine that the highest and best use for our properties is no longer a retail motor fuel outlet, we will seek alternative tenants or buyers for such properties as opportunities arise. As of December 31, 2008, we leased eight hundred sixty-four of our one thousand sixty properties on a long-term basis to Getty Petroleum Marketing Inc. (“Marketing”). Eight hundred fifty-four of the properties are leased to Marketing under a unitary master lease (the “Master Lease”) with an initial term effective through December 2015 and supplemental leases for ten properties with initial terms of varying expiration dates (collectively with the Master Lease, the “Marketing Leases”). Marketing was spun-off to our shareholders as a separate publicly held company in March 1997 and, in December 2000; Marketing was acquired by a subsidiary of OAO LUKoil (“Lukoil”), one of the largest integrated Russian oil companies.

          Marketing’s financial results depend largely on retail petroleum marketing margins from the sale of refined petroleum products at margins in excess of its fixed and variable expenses and rental income from subtenants who operate their convenience stores, automotive repair service or other businesses at our properties. As permitted under the terms of our leases with Marketing, Marketing can generally use each property for any lawful purpose, or for no purpose whatsoever. The petroleum marketing industry has been and continues to be volatile and highly competitive. (For information regarding factors that could adversely affect us relating to Marketing, or our other lessees, see “Item 1A. Risk Factors”.)

Developments Related to Marketing and the Marketing Leases

          A substantial portion of our revenues (75% for the year ended December 31, 2008) are derived from the Marketing Leases. Accordingly, our revenues are dependent to a large degree on the economic performance of Marketing and of the petroleum marketing industry, and any factor that adversely affects Marketing, or our relationship with Marketing, may have a material adverse effect on our business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends and/or stock price. Through March 2009, Marketing has made all required monthly rental payments under the Marketing Leases when due, although there is no assurance that it will continue to do so. Even though Marketing is wholly-owned by a subsidiary of Lukoil, and Lukoil has in prior periods provided credit enhancement and capital to Marketing, Lukoil is not a guarantor of the Marketing Leases and there can be no assurance that Lukoil is currently providing, or will provide, any credit enhancement or additional capital to Marketing.

          In accordance with accounting principles generally accepted in the United States of America (“GAAP”), the aggregate minimum rent due over the current terms of the Marketing Leases, substantially all of which are scheduled to expire in December 2015, is recognized on a straight-line basis rather than when payment is due. We have recorded the cumulative difference between lease revenue recognized under this straight line accounting method and the lease revenue recognized when payment is due under the contractual payment terms as deferred rent receivable on our consolidated balance sheet. We provide reserves for a portion of the recorded deferred rent receivable if circumstances indicate that a property may be disposed of before the end of the current lease term or if it is not reasonable to assume that a tenant will make all of its contractual lease payments during the current lease term. Our assessments and assumptions regarding the recoverability of the deferred rent receivable related to the properties subject to the Marketing Leases are reviewed on a regular basis and such assessments and assumptions are subject to change.

          We have had periodic discussions with representatives of Marketing regarding potential modifications to the Marketing Leases and, in 2007, during the course of such discussions, Marketing proposed to (i) remove approximately 40% of the properties (the “Subject Properties”) from the Marketing Leases and eliminate payment of rent to us, and eliminate or reduce payment of operating expenses, with respect to the Subject Properties, and (ii) reduce the aggregate amount of rent payable to us for the approximately 60% of the properties that would remain under the Marketing Leases (the “Remaining Properties”). Representatives of Marketing have also indicated to us that they are considering significant changes to Marketing’s business model. In light of these developments and the continued deterioration in Marketing’s annual financial performance (as discussed below), in March 2008, we decided to attempt to negotiate with Marketing for a modification of the Marketing Leases which removes the Subject Properties from the Marketing Leases. We have held periodic discussions with Marketing since March 2008 in our attempt to negotiate a modification of the Marketing Leases to remove the Subject Properties. Although we continue to remove individual locations from the Master Lease as mutually beneficial opportunities arise, there has

29


been no agreement between us and Marketing on any principal terms that would be the basis for a definitive Master Lease modification agreement. If Marketing ultimately determines that its business strategy is to exit all of the properties it leases from us or to divest a composition of properties different from the properties comprising the Subject Properties, such as the revised list of properties provided to us by Marketing in the second quarter of 2008 which includes approximately 45% of the properties Marketing leases from us (the “Revised Subject Properties”), it is our intention to cooperate with Marketing in accomplishing those objectives if we determine that it is prudent for us to do so. Any modification of the Marketing Leases that removes a significant number of properties from the Marketing Leases would likely significantly reduce the amount of rent we receive from Marketing and increase our operating expenses. We cannot accurately predict if, or when, the Marketing Leases will be modified or what the terms of any agreement may be if the Marketing Leases are modified. We also cannot accurately predict what actions Marketing and Lukoil may take, and what our recourse may be, whether the Marketing Leases are modified or not.

          We intend either to re-let or sell any properties removed from the Marketing Leases and reinvest the realized sales proceeds in new properties. We intend to seek replacement tenants or buyers for properties removed from the Marketing Leases either individually, in groups of properties, or by seeking a single tenant for the entire portfolio of properties subject to the Marketing Leases. Although we are the fee or leasehold owner of the properties subject to the Marketing Leases and the owner of the Getty® brand and have prior experience with tenants who operate their gas stations, convenience stores, automotive repair services or other businesses at our properties; in the event that the properties are removed from the Marketing Leases, we cannot accurately predict if, when, or on what terms, such properties could be re-let or sold.

          Due to the previously disclosed deterioration in Marketing’s annual financial performance, in conjunction with our decision to attempt to negotiate with Marketing for a modification of the Marketing Leases to remove the Subject Properties, we have decided that we cannot reasonably assume that we will collect all of the rent due to us related to the Subject Properties for the remainder of the current lease terms. In reaching this conclusion, we relied on various indicators, including, but not limited to, the following financial results of Marketing through the year ended December 31, 2007: (i) Marketing’s significant operating losses, (ii) its negative cash flow from operating activities, (iii) its asset impairment charges for underperforming assets, and (iv) its negative earnings before interest, taxes, depreciation, amortization and rent payable to the Company. We have not received Marketing’s financial results for the year ended December 31, 2008 prior to the preparation of this Annual Report on Form 10-K.

          We recorded a reserve of $10.5 million in 2007 representing the full amount of the deferred rent receivable recorded related to the Subject Properties as of December 31, 2007. Providing the $10.5 million non-cash deferred rent receivable reserve reduced our net earnings and our funds from operations for 2007 but did not impact our cash flow from operating activities or adjusted funds from operations since the impact of the straight-line method of accounting is not included in our determination of adjusted funds from operations. (For additional information regarding funds from operations and adjusted funds from operations, which are non-GAAP measures, see “— General — Supplemental Non-GAAP Measures” below.) As of December 31, 2008 we had a reserve of $10.0 million for the deferred rent receivable due from Marketing representing the full amount of the deferred rent receivable recorded related to the Subject Properties as of that date. We have not provided a deferred rent receivable reserve related to the Remaining Properties since, based on our assessments and assumptions, we continue to believe that it is probable that we will collect the deferred rent receivable related to the Remaining Properties of $20.5 million as of December 31, 2008 and that Lukoil will not allow Marketing to fail to perform its rental, environmental and other obligations under the Marketing Leases. We anticipate that the rental revenue for the Remaining Properties will continue to be recognized on a straight-line basis. As required by the straight-line method of accounting, beginning with the first quarter of 2008, the rental revenue for the Subject Properties was, and for future periods, is expected to be, effectively recognized when payment is due under the contractual payment terms. Although we have adjusted the estimated useful lives of certain long-lived assets for the Subject Properties, we believe that no impairment charge was necessary for the Subject Properties as of December 31, 2008 or 2007 pursuant to the provisions of Statement of Financial Accounting Standards No. 144. The impact to depreciation expense due to adjusting the estimated lives for certain long-lived assets beginning with the year ended December 31, 2008 was not material.

          Marketing is directly responsible to pay for (i) remediation of environmental contamination it causes and compliance with various environmental laws and regulations as the operator of our properties, and (ii) known and unknown environmental liabilities allocated to Marketing under the terms of the Master Lease and various other

30


agreements between Marketing and us relating to Marketing’s business and the properties subject to the Marketing Leases (collectively the “Marketing Environmental Liabilities”). We may ultimately be responsible to directly pay for Marketing Environmental Liabilities as the property owner if Marketing fails to pay them. Additionally, we will be required to accrue for Marketing Environmental Liabilities if we determine that it is probable that Marketing will not meet its obligations or if our assumptions regarding the ultimate allocation methods and share of responsibility that we used to allocate environmental liabilities changes as a result of the factors discussed above, or otherwise. However, we continue to believe that it is not probable that Marketing will not pay for substantially all of the Marketing Environmental Liabilities since we believe that Lukoil will not allow Marketing to fail to perform its rental, environmental and other obligations under the Marketing Leases and, accordingly, we did not accrue for the Marketing Environmental Liabilities as of December 31, 2008 or December 31, 2007. Nonetheless, we have determined that the aggregate amount of the Marketing Environmental Liabilities (as estimated by us based on our assumptions and analysis of information currently available to us) could be material to us if we were required to accrue for all of the Marketing Environmental Liabilities in the future since we believe that it is reasonably possible that as a result of such accrual, we may not be in compliance with the existing financial covenants in our Credit Agreement. Such non-compliance could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness under the Credit Agreement.

          Should our assessments, assumptions and beliefs prove to be incorrect, or if circumstances change, the conclusions we reached may change relating to (i) whether some or all of the Subject or Remaining Properties are likely to be removed from the Marketing Leases (ii) recoverability of the deferred rent receivable for some or all of the Subject or Remaining Properties, (iii) potential impairment of the Subject or Remaining Properties, and (iv) Marketing’s ability to pay the Marketing Environmental Liabilities. We intend to regularly review our assumptions that affect the accounting for deferred rent receivable; long-lived assets; environmental litigation accruals; environmental remediation liabilities; and related recoveries from state underground storage tank funds, which may result in material adjustments to the amounts recorded for these assets and liabilities, and as a result of which, we may not be in compliance with the financial covenants in our Credit Agreement. Accordingly, we may be required to (i) reserve additional amounts of the deferred rent receivable related to the Remaining Properties, (ii) record an impairment charge related to the Subject or Remaining Properties, or (iii) accrue for Marketing Environmental Liabilities as a result of the potential or actual modification of the Marketing Leases or other factors.

          We cannot provide any assurance that Marketing will continue to pay its debts or meet its rental, environmental or other obligations under the Marketing Leases prior or subsequent to any potential modification of the Marketing Leases. In the event that Marketing cannot or will not perform its rental, environmental or other obligations under the Marketing Leases; if the Marketing Leases are modified significantly or terminated; if we determine that it is probable that Marketing will not meet its environmental obligations and we accrue for such liabilities; if we are unable to promptly re-let or sell the properties subject to the Marketing Leases; or, if we change our assumptions that affect the accounting for rental revenue or Marketing Environmental Liabilities related to the Marketing Leases and various other agreements; our business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends and/or stock price may be materially adversely affected.

Unresolved Staff Comments

          One comment remains unresolved as part of a periodic review commenced in 2004 by the Division of Corporation Finance of the SEC of our Annual Report on Form 10-K for the year ended December 31, 2003 pertaining to the SEC’s position that we must include the financial statements and summarized financial data of Marketing in our periodic filings, which Marketing contends is prohibited by the terms of the Master Lease. In June 2005, the SEC indicated that, unless we file Marketing’s financial statements and summarized financial data with our periodic reports: (i) it will not consider our Annual Reports on Forms 10-K for the years beginning with 2000 to be compliant; (ii) it will not consider us to be current in our reporting requirements; (iii) it will not be in a position to declare effective any registration statements we may file for public offerings of our securities; and (iv) we should consider how the SEC’s conclusion impacts our ability to make offers and sales of our securities under existing registration statements and if we have a liability for such offers and sales made pursuant to registration statements that did not contain the financial statements of Marketing.

          We believe that the SEC’s position is based on their interpretation of certain provisions of their internal Financial Reporting Manual (formerly known as their Accounting Disclosure Rules and Practices Training Material), Staff Accounting Bulletin No. 71 and Rule 3-13 of Regulation S-X. We do not believe that any of this guidance is clearly

31


applicable to our particular circumstances and we believe that, even if it were, we should be entitled to certain relief from compliance with such requirements. Marketing generally subleases our properties to independent, individual service station/convenience store operators (subtenants). Consequently, we believe that we, as the owner of these properties and the Getty® brand, could re-let these properties to the existing subtenants (except for those properties that are vacant) who operate their convenience stores, automotive repair services or other businesses at our properties, or to other new or replacement tenants, at market rents although we cannot accurately predict if, when, or on what terms, such properties would be re-let or sold. The SEC did not accept our positions regarding the inclusion of Marketing’s financial statements in our filings. We have had no communication with the SEC since 2005 regarding the unresolved comment. We cannot accurately predict the consequences if we are ultimately unable to resolve this outstanding comment.

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 and generating cash sufficient to make required distributions to shareholders of at least ninety percent of our taxable income each year. In addition to measurements defined by accounting principles generally accepted in the United States of America (“GAAP”), our management also focuses on funds from operations available to common shareholders (“FFO”) and adjusted funds from operations available to common shareholders (“AFFO”) to measure our performance. FFO is generally considered to be an appropriate supplemental non-GAAP measure of the performance of REITs. FFO is defined by the National Association of Real Estate Investment Trusts as net earnings before depreciation and amortization of real estate assets, gains or losses on dispositions of real estate, (including such non-FFO items reported in discontinued operations), extraordinary items and cumulative effect of accounting change. 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 is helpful to investors in measuring our performance because FFO excludes various items included in GAAP net earnings that do not relate to, or are not indicative of, our fundamental operating performance such as gains or losses from property dispositions and depreciation and amortization of real estate assets. In our case, however, GAAP net earnings and FFO include the significant impact of deferred rental revenue (straight-line rental revenue) and the net amortization of above-market and below-market leases on our recognition of revenues from rental properties, as offset by the impact of related collection reserves. Deferred rental revenue results primarily from fixed rental increases scheduled under certain leases with our tenants. In accordance with GAAP, the aggregate minimum rent due over the current term of these leases are recognized on a straight-line basis rather than when payment is due. The present value of the difference between the fair market rent and the contractual rent for in-place leases at the time properties are acquired is amortized into revenue from rental properties over the remaining lives of the in-place leases. GAAP net earnings and FFO also include income tax benefits recognized due to the elimination of, or a net reduction in, amounts accrued for uncertain tax positions related to being taxed as a C-corp., rather than as a REIT, prior to 2001. As a result, management pays particular attention to AFFO, a supplemental non-GAAP performance measure that we define as FFO less straight-line rental revenue, net amortization of above-market and below-market leases and income tax benefit. In management’s view, AFFO provides a more accurate depiction than FFO of the impact of scheduled rent increases under these leases, rental revenue from acquired in-place leases and our election to be treated as a REIT under the federal income tax laws beginning in 2001. 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. For a reconciliation of FFO and AFFO, see “Item 6. Selected Financial Data”.

          Net earnings, earning from continuing operations and FFO for 2007 were reduced by all or substantially all of the non-cash $10.5 million reserve for the deferred rent receivable recorded as of December 31, 2007 for approximately 40% of the properties leased to Marketing under the Marketing Leases. (See “— General — Developments related to Marketing and the Marketing Leases” above for additional information.) If the applicable amount of the non-cash reserve were added to our 2007 net earnings, earning from continuing operations and FFO; net earnings would have been $44.4 million, or $1.79 per share, for the year ended December 31, 2007; earnings from continuing operations would have been $38.4 million for the year ended December 31, 2007; and FFO would have been $48.0 million, or $1.94 per share, for the year ended December 31, 2007. Accordingly, as compared to the respective prior year periods; net earnings for 2008 would have decreased by $2.6 million and for 2007 would have increased by $1.7 million; earnings from continuing operations for 2008 would have increased by $0.8 million and for 2007 would have decreased by $3.5 million; and FFO for 2008 would have increased by $2.9 million and for

32


2007 would have decreased by $1.0 million. We believe that these supplemental non-GAAP measures for 2007 are important to assist in the analysis of our performance for 2008 as compared to 2007 and 2007 as compared to 2006, exclusive of the impact of the non-cash reserve on our results of operations and are reconciled below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-
adjusted

 


Reserve

 


As Adjusted

 

 

 


 


 


 

Net earnings

 

$

33,894

 

$

10,494

 

$

44,388

 

Earnings from continuing operations

 

 

28,110

 

 

10,312

 

 

38,422

 

Funds from operations

 

 

37,509

 

 

10,494

 

 

48,003

 

2007 and 2008 Acquisitions

          Effective March 31, 2007, we acquired fifty-nine convenience store and retail motor fuel properties in ten states from various subsidiaries of FF-TSY Holding Company II, LLC (the successor to Trustreet Properties, Inc.) (“Trustreet”), a subsidiary of General Electric Capital Corporation, for cash with funds drawn under our credit facility. Effective April 23, 2007, we acquired five additional properties from Trustreet. The aggregate cost of the acquisitions, including transaction costs, was approximately $84.5 million. Substantially all of the properties are triple-net leased to tenants who previously leased the properties from the seller. The leases generally provide that the tenants are responsible for substantially all existing and future environmental conditions at the properties. In addition, in 2007, we exercised our fixed price purchase option for seven leased properties, purchased two properties and redeveloped one property by purchasing land adjacent to it and building a new convenience store on the existing site. In 2008 we exercised our fixed price purchase option for three leased properties and purchased six properties.

RESULTS OF OPERATIONS

Year ended December 31, 2008 compared to year ended December 31, 2007

          Revenues from rental properties increased by $3.1 million to $81.2 million for the year ended December 31, 2008, as compared to $78.1 million for 2007. We received approximately $60.4 million for 2008, and $59.7 million for 2007, from properties leased to Marketing under the Marketing Leases. We also received rent of $18.2 million for 2008 and $14.8 million for 2007 from other tenants. The increase in rent received was primarily due to rent from properties acquired in March 2007, and rent escalations, partially offset by the effect of dispositions of real estate. In addition, revenues from rental properties include deferred rental revenue of $1.7 million for 2008, as compared to $2.6 million for 2007, recorded as required by GAAP, related to fixed rent increases scheduled under certain leases with our tenants. The aggregate minimum rent due over the current term of these leases are recognized on a straight-line basis rather than when payment is due. Revenues from rental properties also include $0.8 million and $1.0 million of net amortization of above-market and below-market leases primarily related to the properties acquired in 2007. The present value of the difference between the fair market rent and the contractual rent for in-place leases at the time properties are acquired is amortized into revenue from rental properties over the remaining lives of the in-place leases.

          Rental property expenses, which are primarily comprised of rent expense and real estate and other state and local taxes, were $9.4 million for 2008, as compared to $9.3 million for 2007. Increases in real estate and other state and local taxes were partially offset by the decrease in rent expense which was principally due to the reduction in the number of leased locations compared to the prior year.

          Environmental expenses, net of estimated recoveries from state underground storage tank (“UST” or “USTs”) funds for 2008 were $7.4 million, as compared to $8.2 million for 2007. The decrease was primarily due to a $0.5 million decrease in change in net estimated environmental costs, and a $0.4 million net decrease in environmental related litigation reserves and legal fees as compared to the prior year period.

          General and administrative expenses for 2008 were $6.8 million, as compared to $6.7 million recorded for 2007. The increase in general and administrative expenses was due to $0.5 million of higher professional fees associated with previously disclosed potential modification of the Marketing Leases which was partially offset by a $0.2 million reduction in insurance loss reserves and a $0.3 million reduction in employee related expenses. The insurance loss reserves were established under our self funded insurance program that was terminated in 1997. Employee related expenses recorded in 2007 include the payment of severance in connection with the resignation of Mr. Andy Smith, the former President and Chief Legal Officer of the Company.

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          Allowance for deferred rent receivable reported in continuing operations and discontinued operations were $10.3 million and $0.2 million, respectively, for the year ended December 31, 2007. The non-cash allowance was provided in 2007 since we could no longer reasonably assume that we will collect all of the rent due to us related to approximately 40% of the properties leased to Marketing for the remainder of the current terms of the Marketing Leases. (See “— General — Developments related to Marketing and the Marketing Leases” above for additional information.)

          Depreciation and amortization expense for 2008 was $11.8 million, as compared to $9.6 million for 2007. The increase was primarily due to properties acquired in 2007 and the acceleration of depreciation expense resulting from the reduction in the estimated useful lives of certain assets which may be removed from the unitary lease with Marketing, which increases were partially offset by the effect of dispositions of real estate and lease expirations.

          As a result, total operating expenses decreased by approximately $8.7 million for 2008 as compared to 2007.

          Other income, net, substantially all of which is comprised of certain gains from dispositions of real estate and leasehold interests, decreased by $1.5 million to $0.4 million for 2008, as compared to $1.9 million for 2007. Gains on dispositions of real estate from discontinued operations were $2.4 million for 2008 as compared to $4.6 million for 2007. Gain on dispositions of real estate in 2008 decreased by an aggregate of $3.4 million to $2.8 million, as compared to $6.2 million for the prior year. For 2008, there were eleven property dispositions and four partial land takings under eminent domain. For 2007, there were thirteen property dispositions, a partial land taking under eminent domain and an increase in the awards for two takings that occurred in prior years. Property dispositions for 2008 and 2007 include seven and six properties, respectively, that were mutually agreed to be removed from the Marketing Leases prior to their scheduled lease expiration.

          Interest expense was $7.0 million for 2008, as compared to $7.8 million for 2007. The decrease was due to reduction in interest rates, partially offset by increased average borrowings outstanding used to finance the acquisition of properties in 2007.

          As a result, net earnings were $41.8 million for 2008, as compared to $33.9 million for 2007, an increase of 23.4%, or $7.9 million. Earnings from continuing operations were $39.2 million for 2008, as compared to $28.1 million for 2007, an increase of 39.3%, or $11.1 million. For the same period, FFO increased by 35.7% to $50.9 million, as compared to $37.5 million for prior year period and AFFO increased by 10.2%, or $4.5 million, to $48.3 million, as compared to $43.8 million for 2007. The increase in FFO for 2008 was primarily due to the changes in net earnings described above but excludes a $2.1 million increase in depreciation and amortization expense and a $3.4 million decrease in gains on dispositions of real estate. The increase in AFFO for 2008 also excludes a $1.3 million decrease in deferred rental revenue, a $.03 million decrease in net amortization of above-market and below-market leases and a $10.5 million allowance for deferred rent receivable recorded in 2007 (which are included in net earnings and FFO but are excluded from AFFO).

          Diluted earnings per share were $1.69 per share for 2008, an increase of $0.32 per share, as compared to $1.37 per share for 2007. Diluted FFO per share for 2008 was $2.05 per share, an increase of $0.54 per share, as compared to 2007. Diluted AFFO per share for 2008 was $1.95 per share, an increase of $0.18 per share, as compared to 2007.

Year ended December 31, 2007 compared to year ended December 31, 2006

          Revenues from rental properties increased by $6.8 million to $78.1 million for the year ended December 31, 2007, as compared to $71.3 million for 2006. We received approximately $59.7 million for 2007, and $59.5 million for 2006, from properties leased to Marketing under the Marketing Leases. We also received rent of $14.8 million for 2007 and $8.9 million for 2006 from other tenants. The increase in rent received was primarily due to rent from properties acquired in March 2007 and February 2006, and rent escalations, partially offset by the effect of dispositions of real estate. In addition, revenues from rental properties include deferred rental revenue of $2.6 million for 2007, as compared to $3.0 million for 2006, recorded as required by GAAP, related to fixed rent increases scheduled under certain leases with our tenants. The aggregate minimum rent due over the current term of these leases are recognized on a straight-line basis rather than when payment is due. Revenues from rental properties also include $1.0 million of net amortization of above-market and below-market leases related to the properties acquired in 2007. The present value of the difference between the fair market rent and the contractual rent for in-

34


place leases at the time properties are acquired is amortized into revenue from rental properties over the remaining lives of the in-place leases.

          Rental property expenses, which are primarily comprised of rent expense and real estate and other state and local taxes, were $9.3 million for 2007, as compared to $9.6 million for 2006. The decrease in rent expense was principally due to the reduction in the number of leased locations compared to the prior year.

          Environmental expenses, net of estimated recoveries from state UST funds for 2007 were $8.2 million, as compared to $5.4 million for 2006. The increase was primarily due to a $1.9 million increase in change in net estimated environmental costs, and a $0.8 million increase in environmental related litigation expenses and legal fees as compared to the prior year period. The increase in the net change in estimated environmental costs was due to the increase in project scope or duration and related cost forecasts at a limited number of properties, including one site that we have agreed to remediate as part of a legal settlement with the State of New York and regulator mandated project changes at other sites. The increase in environmental related litigation expenses was due to $0.5 million of higher legal fees and $0.3 million of higher litigation loss reserves.

          General and administrative expenses for 2007 were $6.7 million, as compared to $5.6 million recorded for 2006. The increase in general and administrative expenses was principally due to $0.5 million of higher employee related expenses, $0.2 million of higher professional fees and a charge of $0.1 million to insurance loss reserves recorded in 2007, as compared to a credit of $0.3 million recorded in 2006. The insurance loss reserves were established under our self funded insurance program that was terminated in 1997. Employee related expenses increased primarily due to the payment of severance in 2007 in connection with the resignation of Mr. Andy Smith, the former President and Chief Legal Officer of the Company.

          Allowance for deferred rent receivable reported in continuing operations and discontinued operations were $10.3 million and $0.2 million, respectively, for the quarter and year ended December 31, 2007. The non-cash allowance was provided since we can no longer reasonably assume that we will collect all of the rent due to us related to approximately 40% of the properties leased to Marketing for the remainder of the current terms of the Marketing Leases. (See “— General — Developments related to Marketing and the Marketing Leases” above for additional information.)

          Depreciation and amortization expense for 2007 was $9.6 million, as compared to $7.8 million for 2006. The increase was primarily due to properties acquired in 2007 and 2006, offset by the effect of dispositions of real estate and lease expirations.

          As a result, total operating expenses increased by approximately $15.7 million for 2007 as compared to 2006.

          Other income, net, substantially all of which is comprised of certain gains from dispositions of real estate and leasehold interests, was $1.9 million for 2007 and 2006. Gains on dispositions of real estate from discontinued operations were $4.6 million for 2007. Gain on dispositions of real estate in 2007 increased by an aggregate of $4.6 million to $6.2 million, as compared to $1.6 million for the prior year. For 2007, there were thirteen property dispositions, including six properties that were mutually agreed to be removed from the Marketing Leases prior to their scheduled lease expiration, a partial land taking under eminent domain and an increase in the awards for two takings that occurred in prior years, as compared to seven property dispositions, a total property taking and seven partial land takings recorded in the prior year period.

          Interest expense was $7.8 million for 2007, as compared to $3.5 million for 2006. The increase was primarily due to increased borrowings used to finance the acquisition of properties in 2007 and 2006.

          The income tax benefit of $0.7 million recorded in 2006 was recognized due to the elimination of the accrual for uncertain tax positions since management believes that the uncertainties regarding these exposures have been resolved or that it is no longer likely that the exposure will result in a liability upon review. However, the ultimate resolution of these matters may have a significant impact on our results of operations for any single fiscal year or interim period.

35


          As a result, net earnings were $33.9 million for 2007, as compared to $42.7 million for 2006, a decrease of 20.7%, or $8.8 million. Earnings from continuing operations were $28.1 million for 2007, as compared to $41.9 million for 2006, a decrease of 33.0%, or $13.8 million. For the same period, FFO decreased by 23.5% to $37.5 million, as compared to $49.0 million for prior year period and AFFO decreased by 3.3%, or $1.5 million, to $43.8 million, as compared to $45.3 million for 2006. The decrease in FFO for 2007 was primarily due to the changes in net earnings described above but excludes a $1.9 million increase in depreciation and amortization expense and a $4.6 million increase in gains on dispositions of real estate. The decrease in AFFO for 2007 also excludes a $0.7 million decrease in income tax benefit, a $0.1 million decrease in deferred rental revenue, a $1.0 million increase in net amortization of above-market and below-market leases and a $10.5 million allowance for deferred rent receivable recorded in 2007 (which are included in net earnings and FFO but are excluded from AFFO).

          Diluted earnings per share were $1.37 per share for 2007, a decrease of $0.36 per share, as compared to $1.73 per share for 2006. Diluted FFO per share for 2007 was $1.51 per share, a decrease of $0.47 per share, as compared to 2006. Diluted AFFO per share for 2007 was $1.77 per share, a decrease of $0.06 per share, as compared to 2006.

LIQUIDITY AND CAPITAL RESOURCES

          Our principal sources of liquidity are the cash flows from our business, funds available under a revolving credit agreement that expires in 2011 and available cash and cash equivalents. Management believes that our operating cash needs for the next twelve months can be met by cash flows from operations, borrowings under our credit agreement and available cash and cash equivalents.

          The current disruption in the credit markets and the resulting impact on the availability of funding generally may limit our access to one or more funding sources. In addition, we expect that the costs associated with any additional borrowings we may undertake may be adversely impacted, as compared to such costs prior to the disruption of the credit markets. The United States credit markets are currently experiencing an unprecedented contraction. As a result of the tightening credit markets, we may not be able to obtain additional financing on favorable terms, or at all. If one or more of the financial institutions that supports our credit agreement fails, we may not be able to find a replacement, which would negatively impact our ability to borrow under our credit agreement. In addition, if the current pressures on credit continue or worsen, we may not be able to refinance our outstanding debt when due, which could have a material adverse effect on us.

          We have a $175.0 million amended and restated senior unsecured revolving credit agreement (the “Credit Agreement”) with a group of domestic commercial banks led by JPMorgan Chase Bank, N.A. (the “Bank Syndicate”) which expires in March 2011. The Credit Agreement does not provide for scheduled reductions in the principal balance prior to its maturity. The Credit Agreement permits borrowings at an interest rate equal to the sum of a base rate plus a margin of 0.0% or 0.25% or a LIBOR rate plus a margin of 1.0%, 1.25% or 1.5%. The applicable margin is based on our leverage ratio at the end of the prior calendar quarter, as defined in the Credit Agreement, and is adjusted effective mid-quarter when our quarterly financial results are reported to the Bank Syndicate. Based on our leverage ratio as of December 31, 2008, the applicable margin is 0.0% for base rate borrowings and will increase to 1.25% in the first quarter of 2009 for our LIBOR rate borrowings.

          Subject to the terms of the Credit Agreement, we have the option to extend the term of the Credit Agreement for one additional year to March 2012 and/or, subject to approval by the Bank Syndicate, increase the amount of the credit facility available pursuant to the Credit Agreement by $125,000,000 to $300,000,000. We do not expect to exercise our option to increase the amount of the Credit Agreement at this time. In addition, based on the current lack of liquidity in the credit markets, we believe that we would need to renegotiate certain terms in the Credit Agreement in order to obtain approval from the Bank Syndicate to increase the amount of the credit facility at this time. No assurance can be given that such approval from the Bank Syndicate will be obtained on terms acceptable to us, if at all. The annual commitment fee on the unused Credit Agreement ranges from 0.10% to 0.20% based on the average amount of borrowings outstanding. The Credit Agreement contains customary terms and conditions, including customary financial covenants such as leverage and coverage ratios and other customary covenants, including limitations on our ability to incur debt and pay dividends and maintenance of tangible net worth, and events of default, including change of control and failure to maintain REIT status. A material adverse effect on our business, assets, prospects or condition, financial or otherwise, would also result in an event of default. Any event of

36


default, if not cured or waived, could result in the acceleration of all of our indebtedness under our Credit Agreement.

          We entered into a $45.0 million LIBOR based interest rate swap agreement with JPMorgan Chase Bank, N.A. as the counterparty (the “Swap Agreement”), effective through June 30, 2011. The Swap Agreement is intended to hedge our current exposure to market interest rate risk by effectively fixing, at 5.44%, the LIBOR component of the interest rate determined under our existing Credit Agreement or future exposure to variable interest rate risk due to borrowing arrangements that may be entered into prior to the expiration of the Swap Agreement. As a result of the Swap Agreement, as of December 31, 2008, $45.0 million of our LIBOR based borrowings under the Credit Agreement bear interest at an effective rate of 6.44%.

          Total borrowings outstanding under the Credit Agreement at December 31, 2008 were $130.3 million, bearing interest at a weighted-average effective rate of 3.8% per annum. The weighted-average effective rate is based on $85.3 million of LIBOR rate borrowings floating at market rates plus a margin of 1.0% and $45.0 million of LIBOR rate borrowings effectively fixed at 5.44% by the Swap Agreement plus a margin of 1.0%. We had $44.7 million available under the terms of the Credit Agreement as of December 31, 2008.

          Since we generally lease our properties on a triple-net basis, we do not incur significant capital expenditures other than those related to acquisitions. Capital expenditures, including acquisitions, for 2008, 2007 and 2006 amounted to $6.6 million, $90.6 million and $15.5 million, respectively. To the extent that our current sources of liquidity are not sufficient to fund capital expenditures and acquisitions we will require other sources of capital, which may or may not be available on favorable terms or at all. We may be unable to pursue public debt or equity offerings until we resolve with the SEC the outstanding comment regarding disclosure of Marketing’s financial information. We cannot accurately predict how periods of illiquidity in the credit markets, such as current market conditions, will impact our access to capital.

          As part of our overall growth strategy, we regularly review opportunities to acquire additional properties and we expect to continue to pursue acquisitions that we believe will benefit our financial performance. To the extent that our current sources of liquidity are not sufficient to fund such acquisitions we will require other sources of capital, which may or may not be available on favorable terms or at all. We cannot accurately predict how periods of illiquidity in the credit markets, such as current market conditions, will impact our access to capital.

          We elected to be treated as a REIT under the federal income tax laws with the year beginning January 1, 2001. As a REIT, we are required, among other things, to distribute at least ninety percent of our taxable income to shareholders each year. Payment of dividends is subject to market conditions, our financial condition and other factors, and therefore cannot be assured. In particular, our Credit Agreement prohibits the payment of dividends during certain events of default. Dividends paid to our shareholders aggregated $46.3 million, $45.7 million and $44.8 million for 2008, 2007 and 2006, respectively, and were paid on a quarterly basis during each of those years. We presently intend to pay common stock dividends of $0.47 per share each quarter ($1.88 per share, or $46.7 million, on an annual basis), and commenced doing so with the quarterly dividend declared in May 2008. Due to the developments related to Marketing and the Marketing Leases discussed above, there is no assurance that we will be able to continue to pay dividends at the rate of $0.47 per share per quarter, if at all.

CONTRACTUAL OBLIGATIONS

          Our significant contractual obligations and commitments are comprised of borrowings under the Credit Agreement, operating lease payments due to landlords and estimated environmental remediation expenditures, net of estimated recoveries from state UST funds. In addition, as a REIT we are required to pay dividends equal to at least

37


ninety percent of our taxable income in order to continue to qualify as a REIT. Our contractual obligations and commitments as of December 31, 2008 are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

LESS
THAN ONE
YEAR

 

ONE TO
THREE
YEARS

 

THREE TO
FIVE
YEARS

 

MORE
THAN
FIVE
YEARS

 

 

 


 


 


 


 


 

Operating leases

 

$

26,620

 

$

7,338

 

$

10,571

 

$

5,235

 

$

3,476

 

Borrowing under the Credit Agreement (a)

 

 

130,250

 

 

 

 

130,250

 

 

 

 

 

Estimated environmental remediation expenditures (b)

 

 

17,660

 

 

6,946

 

 

6,411

 

 

2,480

 

 

1,823

 

Estimated recoveries from state underground storage tank funds (b)

 

 

(4,223

)

 

(1,368

)

 

(1,479

)

 

(844

)

 

(532

)

 

 


 


 


 


 


 

Estimated net environmental remediation expenditures (b)

 

 

13,437

 

 

5,578

 

 

4,932

 

 

1,636

 

 

1,291

 

 

 


 


 


 


 


 

Total

 

$

170,307

 

$

12,916

 

$

145,753

 

$

6,871

 

$

4,767

 

 

 


 


 


 


 


 


 

 

(a)

Excludes related interest payments. (See “— Liquidity and Capital Resources” above and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for additional information.) Subject to the terms of the Credit Agreement, we have the option to extend the term of the Credit Agreement to March 2012.

 

 

(b)

Estimated environmental remediation expenditures and estimated recoveries from state UST funds have been adjusted for inflation and discounted to present value.

          Generally, the leases with our tenants are “triple-net” leases, with the tenant responsible for the payment of taxes, maintenance, repair, insurance, environmental remediation and other operating expenses. We estimate that Marketing makes annual real estate tax payments for properties leased under the Marketing Leases of approximately $12.3 million and makes additional payments for other operating expenses related to our properties, including environmental remediation costs other than those liabilities that were retained by us. These costs are not reflected in our consolidated financial statements. (See “— General — Developments related to Marketing and the Marketing Leases” above for additional information.)

          We have no significant contractual obligations not fully recorded on our consolidated balance sheets or fully disclosed in the notes to our consolidated financial statements. We have no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the Exchange Act.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

          The consolidated financial statements included in this Annual Report on Form 10-K include the accounts of Getty Realty Corp. and our wholly-owned subsidiaries. The preparation of financial statements in accordance with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in its financial statements. Although we have made our best estimates, judgments and assumptions regarding future uncertainties relating to the information included in our 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, deferred rent receivable, recoveries from state underground storage tank funds, environmental remediation costs, real estate, depreciation and amortization, impairment of long-lived assets, litigation, accrued expenses, income taxes, allocation of the purchase price of properties acquired to the assets acquired and liabilities assumed and exposure to paying an earnings and profits deficiency dividend. The information included in our 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 of Notes to Consolidated Financial Statements. We believe the following are our critical accounting policies:

          Revenue recognition — We earn revenue primarily from operating leases with Marketing and other tenants. We recognize income under the Master Lease with Marketing, and with other tenants, on the straight-line method, which effectively recognizes contractual lease payments evenly over the current term of the leases. The present value of the

38


difference between the fair market rent and the contractual rent for in-place leases at the time properties are acquired is amortized into revenue from rental properties over the remaining lives of the in-place leases. A critical assumption in applying the straight-line accounting method is that the tenant will make all contractual lease payments during the current lease term and that the net deferred rent receivable of $26.7 million recorded as of December 31, 2008 will be collected when the payment is due, in accordance with the annual rent escalations provided for in the leases. Historically our tenants have generally made rent payments when due. However, we may be required to reverse, or provide reserves for, or adjust our $10.0 million reserve as of December 31, 2008 for, a portion of the recorded deferred rent receivable if it becomes apparent that a property may be disposed of before the end of the current lease term or if circumstances indicate that the tenant may not make all of its contractual lease payments when due during the current term of the lease. The straight-line method requires that rental income related to those properties for which a reserve was provided is effectively recognized in subsequent periods when payment is due under the contractual payment terms. (See developments related to Marketing and the Marketing Leases in “— General — Developments related to Marketing and the Marketing Leases” above for additional information.)

          Impairment of long-lived assets — Real estate assets represent “long-lived” assets for accounting purposes. We review the recorded value of long-lived assets for impairment in value whenever any events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We may become aware of indicators of potentially impaired assets upon tenant or landlord lease renewals, upon receipt of notices of potential governmental takings and zoning issues, or upon other events that occur in the normal course of business that would cause us to review the operating results of the property. We believe our real estate assets are not carried at amounts in excess of their estimated net realizable fair value amounts.

          Income taxes — Our financial results generally do not reflect provisions for current or deferred federal income taxes since we elected to be treated as a REIT under the federal income tax laws effective January 1, 2001. Our intention is to operate in a manner that will allow us to continue to be treated as a REIT and, as a result, we do not expect to pay substantial corporate-level federal income taxes. Many of the REIT requirements, however, are highly technical and complex. If we were to fail to meet the requirements, we may be subject to federal income tax, excise taxes, penalties and interest or we may have to pay a deficiency dividend to eliminate any earnings and profits that were not distributed. Certain states do not follow the federal REIT rules and we have included provisions for these taxes in rental property expenses.

          Environmental costs and recoveries from state UST funds — We provide for the estimated fair value of future environmental remediation costs when it is probable that a liability has been incurred and a reasonable estimate of fair value can be made (see “— Environmental Matters” below for additional information). Environmental liabilities and related recoveries are measured based on their expected future cash flows which have been adjusted for inflation and discounted to present value. Since environmental exposures are difficult to assess and estimate and knowledge about these liabilities is not known upon the occurrence of a single event, but rather is gained over a continuum of events, we believe that it is appropriate that our accrual estimates are adjusted as the remediation treatment progresses, as circumstances change and as environmental contingencies become more clearly defined and reasonably estimable. A critical assumption in accruing for these liabilities is that the state environmental laws and regulations will be administered and enforced in the future in a manner that is consistent with past practices. Recoveries of environmental costs from state UST remediation funds, with respect to past and future spending, are accrued as income, net of allowance for collection risk, based on estimated recovery rates developed from our experience with the funds when such recoveries are considered probable. A critical assumption in accruing for these recoveries is that the state UST fund programs will be administered and funded in the future in a manner that is consistent with past practices and that future environmental spending will be eligible for reimbursement at historical rates under these programs. We accrue environmental liabilities based on our share of responsibility as defined in our lease contracts with our tenants and under various other agreements with others or if circumstances indicate that the counter-party may not have the financial resources to pay its share of the costs. 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 adjustments to the amounts recorded for environmental litigation accruals, environmental remediation liabilities and related assets. (See “— General — Developments related to Marketing and the Marketing Leases” above for additional information.) We may ultimately be responsible to directly pay for environmental liabilities as the property owner if Marketing or our other tenants or other counter-parties fail to pay them. In certain environmental matters the effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists both in terms of the probability of loss and the estimate of such

39


loss. The ultimate liabilities resulting from such lawsuits and claims, if any, may be material to our results of operations in the period in which they are recognized.

          Litigation — Legal fees related to litigation are expensed as legal services are performed. We provide for litigation reserves, including certain environmental litigation (see “— Environmental Matters” below for additional information), when it is probable that a liability has been incurred and a reasonable estimate of the liability can be made. If the best estimate of the liability can only be identified as a range, and no amount within the range is a better estimate than any other amount, the minimum of the range is accrued for the liability.

          New Accounting Pronouncements — In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities. SFAS 157 generally applies whenever other standards require assets or liabilities to be measured at fair value. SFAS 157 is effective in fiscal years beginning after November 15, 2007. FASB Staff Position (“FSP”) No. 152, “Effective Date of FASB Statement No. 157”, (“FSP 152”) delayed the effective date of FASB No. 157 by one year for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a non recurring basis to fiscal years beginning after November 15, 2008. The adoption of SFAS 157 in January 2008 has not had a material impact on our financial position and results of operations. We do not believe that the adoption of the provisions of SFAS 157 for nonfinancial assets and liabilities that are recognized or disclosed at fair value on a non recurring basis will have a material impact on our financial position and results of operations.

          In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements at fair value the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill acquired in a business combination. SFAS 141(R) requires that acquisition costs, which could be material to our future financial results, will be expensed rather than included as part of the basis of the acquisition. The adoption of this standard by us on January 1, 2009 will not result in a write-off of acquisition related transactions costs associated with transactions not yet consummated. SFAS 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

ENVIRONMENTAL MATTERS

General

          We are subject to numerous existing 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. Our tenants are directly responsible for compliance with various environmental laws and regulations as the operators of our properties. Environmental expenses are principally attributable to remediation costs which include installing, operating, maintaining and decommissioning remediation systems, monitoring contamination, and governmental agency reporting incurred in connection with contaminated properties. We seek reimbursement from state UST remediation funds related to these environmental expenses where available.

          We enter into leases and various other agreements which allocate responsibility for known and unknown environmental liabilities by establishing the percentage and method of allocating responsibility between the parties. In accordance with the leases with certain of our tenants, we have agreed to bring the leased properties with known environmental contamination to within applicable standards and to regulatory or contractual closure (“Closure”) in an efficient and economical manner. Generally, upon achieving Closure at an individual property, our environmental liability under the lease for that property will be satisfied and future remediation obligations will be the responsibility of our tenant. As of December 31, 2008, we have regulatory approval for remediation action plans in place for two hundred forty-nine (95%) of the two hundred sixty-two properties for which we continue to retain remediation responsibility and the remaining thirteen properties (5%) were in the assessment phase. In addition, we have nominal post-closure compliance obligations at twenty-four properties where we have received “no further action” letters.

40


          Our tenants are directly responsible to pay for (i) remediation of environmental contamination they cause and compliance with various environmental laws and regulations as the operators of our properties, and (ii) environmental liabilities allocated to our tenants under the terms of our leases and various other agreements between our tenants and us. Generally, the liability for the retirement and decommissioning or removal of USTs and other equipment is the responsibility of our tenants. We are contingently liable for these obligations in the event that our tenants do not satisfy their responsibilities. A liability has not been accrued for obligations that are the responsibility of our tenants based on our tenants’ past histories of paying such obligations and/or our assessment of their respective financial abilities to pay their share of such costs. 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.

          It is possible that our assumptions regarding the ultimate allocation methods and share of responsibility that we used to allocate environmental liabilities may change, which may result in adjustments to the amounts recorded for environmental litigation accruals, environmental remediation liabilities and related assets. We will be required to accrue for environmental liabilities that we believe are allocable to others under various other agreements if we determine that it is probable that the counter-party will not meet its environmental obligations. We may ultimately be responsible to directly pay for environmental liabilities as the property owner if the counter-party fails to pay them. The ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price. (See “— General — Developments related to Marketing and the Marketing Leases” above for additional information.)

          We have not accrued for approximately $1.0 million in costs allegedly incurred by the current property owner in connection with removal of USTs and soil remediation at a property that was leased to and operated by Marketing. We believe that Marketing is responsible for such costs under the terms of the Master Lease and have tendered the matter for defense and indemnification from Marketing, but Marketing has denied its liability for the claim and its responsibility to defend against, and indemnify us for, the claim. We have filed third party claims against Marketing for indemnification in this matter, which claims is currently being actively litigated. Trial is anticipated to be scheduled for the first quarter of 2009. It is reasonably possible that our assumption that Marketing will be ultimately responsible for the claim may change, which may result in our providing an accrual for this and other matters.

          We have also agreed to provide limited environmental indemnification to Marketing, capped at $4.25 million and expiring in 2010, for certain pre-existing conditions at six of the terminals we own and lease to Marketing. Under the indemnification agreement, Marketing is obligated to pay the first $1.5 million of costs and expenses incurred in connection with remediating any such pre-existing conditions, Marketing will share equally with us the next $8.5 million of those costs and expenses and Marketing is obligated to pay all additional costs and expenses over $10.0 million. We have accrued $0.3 million as of December 31, 2008 and 2007 in connection with this indemnification agreement. Under the Master Lease, we continue to have additional ongoing environmental remediation obligations for one hundred eighty-seven scheduled sites.

          As the operator of our properties under the Marketing Leases, Marketing is directly responsible to pay for the remediation of environmental contamination it causes and to comply with various environmental laws and regulations. In addition, the Marketing Leases and various other agreements between Marketing and us allocate responsibility for known and unknown environmental liabilities between Marketing and us relating to the properties subject to the Marketing Leases. Based on various factors, including our assessments and assumptions at this time that Lukoil would not allow Marketing to fail to perform its obligations under the Marketing Leases, we believe that Marketing will continue to pay for substantially all environmental contamination and remediation costs allocated to it under the Marketing Leases. It is possible that our assumptions regarding the ultimate allocation methods and share of responsibility that we used to allocate environmental liabilities may change as a result of the factors discussed above, or otherwise, which may result in adjustments to the amounts recorded for environmental litigation accruals, environmental remediation liabilities and related assets. We may ultimately be responsible to directly pay for environmental liabilities as the property owner if Marketing fails to pay them. We are required to accrue for environmental liabilities that we believe are allocable to Marketing under the Marketing Leases and various other agreements if we determine that it is probable that Marketing will not pay its environmental obligations.

41


          Based upon our assessment of Marketing’s financial condition and certain other factors, including but not limited to those described above, we believe at this time that it is not probable that Marketing will not pay the environmental liabilities allocable to it under the Marketing Leases and various other agreements and, therefore, have not accrued for such environmental liabilities. Our assessments and assumptions that affect the recording of environmental liabilities related to the properties subject to the Marketing Leases are reviewed on a quarterly basis and such assessments and assumptions are subject to change.

          We have determined that the aggregate amount of the environmental liabilities attributable to Marketing related to our properties (as estimated by us based on our assumptions and analysis of information currently available to us) (the “Marketing Environmental Liabilities”) could be material to us if we were required to accrue for all of the Marketing Environmental Liabilities in the future since we believe that it is reasonably possible that as a result of such accrual, we may not be in compliance with the existing financial covenants in our Credit Agreement. Such non-compliance could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness under the Credit Agreement. (See “— General — Developments related to Marketing and the Marketing Leases” above for additional information.)

          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. Environmental liabilities and related recoveries are measured based on their expected future cash flows which have been adjusted for inflation and discounted to present value. The environmental remediation liability is estimated based on the level and impact of contamination at each property and other factors described herein. The accrued liability is the aggregate of the best estimate for the fair value of cost for each component of the liability. Recoveries of environmental costs from state UST remediation funds, with respect to both past and future environmental spending, are accrued at fair value as an offset to environmental expense, net of allowance for collection risk, based on estimated recovery rates developed from our experience with the funds when such recoveries are considered probable.

          Environmental exposures are difficult to assess and estimate for numerous reasons, including the extent 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, as well as the time it takes to remediate contamination. In developing our liability for probable and reasonably estimable environmental remediation costs, on a property by property basis, we consider among other things, enacted 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. These accrual estimates are subject to significant change, and are adjusted as the remediation treatment progresses, as circumstances change and as these contingencies become more clearly defined and reasonably estimable.

          As of December 31, 2008, we had accrued $13.5 million as management’s best estimate of the net fair value of reasonably estimable environmental remediation costs which is comprised of $17.7 million of estimated environmental obligations and liabilities offset by $4.2 million of estimated recoveries from state UST remediation funds, net of allowance. Environmental expenditures, net of recoveries from UST funds, were $5.0 million, $4.7 million and $3.0 million, respectively, for 2008, 2007 and 2006. For 2008, 2007 and 2006, the net change in estimated remediation cost and accretion expense included in our consolidated statements of operations amounted to $4.7 million, $5.1 million and $3.2 million, respectively, which amounts were net of probable recoveries from state UST remediation funds.

          Environmental liabilities and related assets are currently measured at fair value based on their expected future cash flows which have been adjusted for inflation and discounted to present value. We also use probability weighted alternative cash flow forecasts to determine fair value. We assumed a 50% probability factor that the actual environmental expenses will exceed engineering estimates for an amount assumed to equal one year of net expenses aggregating $4.9 million. Accordingly, the environmental accrual as of December 31, 2008 was increased by $1.9 million, net of assumed recoveries and before inflation and present value discount adjustments. The resulting net environmental accrual as of December 31, 2008 was then further increased by $0.9 million for the assumed impact of inflation using an inflation rate of 2.75%. Assuming a credit-adjusted risk-free discount rate of 7.0%, we then reduced the net environmental accrual, as previously adjusted, by a $1.9 million discount to present value. Had we assumed an inflation rate that was 0.5% higher and a discount rate that was 0.5% lower, net environmental liabilities as of December 31, 2008 would have increased by $0.2 million and $0.1 million, respectively, for an aggregate

42


increase in the net environmental accrual of $0.3 million. However, the aggregate net change in environmental estimates expense recorded during the year ended December 31, 2008 would not have changed significantly if these changes in the assumptions were made effective December 31, 2007.

          In view of the uncertainties associated with environmental expenditures, contingencies concerning the developments related to Marketing and the Marketing Leases and contingencies related to other parties, however, we believe it is possible that the fair value of future actual net expenditures could be substantially higher than these estimates. (See “— General — Developments related to Marketing and the Marketing Leases” above for additional information.) Adjustments to accrued liabilities for environmental remediation costs will be reflected in our financial statements as they become probable and a reasonable estimate of fair value can be made. Future environmental costs could cause a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.

          We cannot predict what environmental legislation or regulations may be enacted in the future or how existing laws or regulations will be administered or interpreted with respect to products or activities to which they have not previously been applied. We cannot predict if state UST fund programs will be administered and funded in the future in a manner that is consistent with past practices and if future environmental spending will continue to be eligible for reimbursement at historical recovery rates under these programs. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies or stricter interpretation of existing laws, which may develop in the future, could have an adverse effect on our financial position, or that of our tenants, and could require substantial additional expenditures for future remediation.

Environmental litigation

          We are subject to various legal proceedings and claims which arise in the ordinary course of our business. In addition, we have retained responsibility for certain legal proceedings and claims relating to the petroleum marketing business that were identified at the time of the Spin-Off. As of December 31, 2008 and 2007, we had accrued $1.7 million and $2.6 million, respectively, for certain of these matters which we believe were appropriate based on information then currently available. It is possible that our assumptions regarding the ultimate allocation method and share of responsibility that we used to allocate environmental liabilities may change, which may result in our providing an accrual, or adjustments to the amounts recorded, for environmental litigation accruals. (For additional information with respect to pending environmental lawsuits and claims see “Item 3. Legal Proceedings”.)

          In September 2003, we were notified by the State of New Jersey Department of Environmental Protection (the “NJDEP”) that we are one of approximately sixty-six potentially responsible parties for natural resource damages resulting from discharges of hazardous substances into the Lower Passaic River. The definitive list of potentially responsible parties and their actual responsibility for the alleged damages, the aggregate cost to remediate the Lower Passaic River, the amount of natural resource damages and the method of allocating such amounts among the potentially responsible parties have not been determined. In September 2004, we received a General Notice Letter from the United States Environmental Protection Agency (the “EPA”) (the “EPA Notice”), advising us that we may be a potentially responsible party for costs of remediating certain conditions resulting from discharges of hazardous substances into the Lower Passaic River. ChevronTexaco received the same EPA Notice regarding those same conditions. In a related action, in December 2005, the State of New Jersey brought suit against certain companies which the State alleges are responsible for pollution of the Passaic River from a former Diamond Alkali manufacturing plant. In February 2009, certain of these defendants filed third-party complaints against approximately 300 additional parties, including us, seeking contribution for a pro-rata share of response costs, cleanup and removal costs, and other damages. Additionally, we believe that ChevronTexaco is contractually obligated to indemnify us, pursuant to an indemnification agreement for most of the conditions at the property identified by the NJDEP and the EPA; accordingly, our ultimate legal and financial liability, if any, cannot be estimated with any certainty at this time.

          From October 2003 through December 31, 2008, we were notified that we were made party to fifty-four cases in Connecticut, Florida, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Vermont, Virginia and West Virginia brought by local water providers or governmental agencies. These cases allege various theories of liability due to contamination of groundwater with methyl tertiary butyl ether (“MTBE”) as the basis for claims seeking compensatory and punitive damages. Each case names as defendants approximately fifty petroleum refiners,

43


manufacturers, distributors and retailers of MTBE, or gasoline containing MTBE. At this time, we have been dismissed from certain of the cases initially filed against us. A significant number of the named defendants other than us have entered into settlements with certain plaintiffs, which affected approximately twenty-seven of the cases to which we are a party. The accuracy of the allegations as they relate to us, our defenses to such claims, the aggregate amount of possible damages, and the method of allocating such amounts among the remaining defendants have not been determined. Accordingly, our ultimate legal and financial liability, if any, cannot be estimated with any certainty at this time.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

          Prior to April 2006, when we entered into the a Swap Agreement with JPMorgan Chase, N.A. (the “Swap Agreement”), we had not used derivative financial or commodity instruments for trading, speculative or any other purpose, and had not entered into any instruments to hedge our exposure to interest rate risk. We do not have any foreign operations, and are therefore not exposed to foreign currency exchange rate risks.

          We are exposed to interest rate risk, primarily as a result of our $175.0 million Credit Agreement. Our Credit Agreement, which expires in March 2011, permits borrowings at an interest rate equal to the sum of a base rate plus a margin of 0.0% or 0.25% or a LIBOR rate plus a margin of 1.0%, 1.25% or 1.5%. The applicable margin is based on our leverage ratio at the end of the prior calendar quarter, as defined in the Credit Agreement, and is adjusted effective mid-quarter when our quarterly financial results are reported to the Bank Syndicate. Based on our leverage ratio as of December 31, 2008, the applicable margin is 0.0% for base rate borrowings and will increase to 1.25% in the first quarter of 2009 for our LIBOR rate borrowings.

          Total borrowings outstanding under the Credit Agreement at December 31, 2008 were $130.3 million, bearing interest at a weighted-average rate of 3.3% per annum, or a weighted-average effective rate of 3.8% including the impact of the Swap Agreement discussed below. The weighted-average effective rate is based on $85.3 million of LIBOR rate borrowings floating at market rates plus a margin of 1.0% and $45.0 million of LIBOR rate borrowings effectively fixed at 5.44% by the Swap Agreement plus a margin of 1.0%. We use borrowings under the Credit Agreement to finance acquisitions and for general corporate purposes.

          We manage our exposure to interest rate risk by minimizing, to the extent feasible, our overall borrowing and monitoring available financing alternatives. Our interest rate risk as of December 31, 2008 has not increased significantly, as compared to December 31, 2007. We entered into a $45.0 million LIBOR based interest rate Swap Agreement, effective through June 30, 2011, to manage a portion of our interest rate risk. The Swap Agreement is intended to hedge $45.0 million of our current exposure to variable interest rate risk by effectively fixing, at 5.44%, the LIBOR component of the interest rate determined under our existing Credit Agreement or future exposure to variable interest rate risk due to borrowing arrangements that may be entered into prior to the expiration of the Swap Agreement. As a result of the Swap Agreement, as of December 31, 2008, $45.0 million of our LIBOR based borrowings under the Credit Agreement bear interest at an effective rate of 6.44%. As a result, we are, and will be, exposed to interest rate risk to the extent that our borrowings exceed the $45.0 million notional amount of the Swap Agreement. As of December 31, 2008, our borrowings exceeded the notional amount of the Swap Agreement by $85.3 million. We do not foresee any significant changes in how we manage our interest rate risk in the near future.

          We entered into the $45.0 million notional five year interest rate Swap Agreement, designated and qualifying as a cash flow hedge to reduce our exposure to the variability in future cash flows attributable to changes in the LIBOR rate. Our primary objective when undertaking hedging transactions and derivative positions is to reduce our variable interest rate risk by effectively fixing a portion of the interest rate for existing debt and anticipated refinancing transactions. This in turn, reduces the risks that the variability of cash flows imposes on variable rate debt. Our strategy protects us against future increases in interest rates. Although the Swap Agreement is intended to lessen the impact of rising interest rates, it also exposes us to the risk that the other party to the agreement will not perform, the agreement will be unenforceable and the underlying transactions will fail to qualify as a highly-effective cash flow hedge for accounting purposes.

          In the event that we were to settle the Swap Agreement prior to its maturity, if the corresponding LIBOR swap rate for the remaining term of the Swap Agreement is below the 5.44% fixed strike rate at the time we settle the

44


Swap Agreement, we would be required to make a payment to the Swap Agreement counter-party; if the corresponding LIBOR swap rate is above the fixed strike rate at the time we settle the Swap Agreement, we would receive a payment from the Swap Agreement counter-party. The amount that we would either pay or receive would equal the present value of the basis point differential between the fixed strike rate and the corresponding LIBOR swap rate at the time we settle the Swap Agreement.

          Based on our average outstanding borrowings under the Credit Agreement projected at $133.6 million for 2009, an increase in market interest rates of 0.5% for 2009 would decrease our 2009 net income and cash flows by $0.4 million. This amount was determined by calculating the effect of a hypothetical interest rate change on our Credit Agreement borrowings that is not covered by our $45.0 million interest rate Swap Agreement and assumes that the $133.6 million average outstanding borrowings during the fourth quarter of 2008 is indicative of our future average borrowings for 2009 before considering additional borrowings required for future acquisitions. The calculation also assumes that there are no other changes in our financial structure or the terms of our borrowings. Our exposure to fluctuations in interest rates will increase or decrease in the future with increases or decreases in the outstanding amount under our Credit Agreement.

          In order to minimize our exposure to credit risk associated with financial instruments, we place our temporary cash investments with high-credit-quality institutions. Temporary cash investments, if any, are held in an overnight bank time deposit with JPMorgan Chase Bank, N.A.

Item 8. Financial Statements and Supplementary Data

GETTY REALTY CORP. INDEX TO FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

 

 

 

 

 

(PAGES)

 

 


 

Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006

 

46

Consolidated Statements of Comprehensive Income for the years ended December 31, 2008, 2007 and 2006

 

46

Consolidated Balance Sheets as of December 31, 2008 and 2007

 

47

Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006

 

48

Notes to Consolidated Financial Statements (including the supplementary financial information contained in Note 9 “Quarterly Financial Data”)

 

49

Report of Independent Registered Public Accounting Firm

 

64

45


GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

YEAR ENDED DECEMBER 31,

 

 

 


 

 

 

2008

 

2007

 

2006

 

 

 


 


 


 

Revenues from rental properties

 

$

81,163

 

$

78,069

 

$

71,329

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Rental property expenses

 

 

9,390

 

 

9,301

 

 

9,619

 

Environmental expenses, net

 

 

7,374

 

 

8,190

 

 

5,418

 

General and administrative expenses

 

 

6,831

 

 

6,669

 

 

5,607

 

Allowance for deferred rent receivable

 

 

 

 

10,312

 

 

 

Depreciation and amortization expense

 

 

11,784

 

 

9,647

 

 

7,785

 

 

 



 



 



 

Total expenses

 

 

35,379

 

 

44,119

 

 

28,429

 

 

 



 



 



 

Operating income

 

 

45,784

 

 

33,950

 

 

42,900

 

Other income, net

 

 

412

 

 

1,920

 

 

1,855

 

Interest expense

 

 

(7,034

)

 

(7,760

)

 

(3,527

)

 

 



 



 



 

Earnings before income taxes and discontinued operations

 

 

39,162

 

 

28,110

 

 

41,228

 

Income tax benefit

 

 

 

 

 

 

700

 

 

 



 



 



 

Earnings from continuing operations

 

 

39,162

 

 

28,110

 

 

41,928

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

Earnings from operating activities

 

 

259

 

 

1,216

 

 

793

 

Gains on dispositions of real estate

 

 

2,389

 

 

4,568

 

 

4

 

 

 



 



 



 

Earnings from discontinued operations

 

 

2,648

 

 

5,784

 

 

797

 

 

 



 



 



 

Net earnings

 

$

41,810

 

$

33,894

 

$

42,725

 

 

 



 



 



 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

1.58

 

$

1.14

 

$

1.70

 

Earnings from discontinued operations

 

$

.11

 

$

.23

 

$

.03

 

Net earnings

 

$

1.69

 

$

1.37

 

$

1.73

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

1.58

 

$

1.13

 

$

1.69

 

Earnings from discontinued operations

 

$

.11

 

$

.23

 

$

.03

 

Net earnings

 

$

1.69

 

$

1.37

 

$

1.73

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

Basic

 

 

24,766

 

 

24,765

 

 

24,735

 

Stock options and restricted stock units

 

 

8

 

 

22

 

 

24

 

 

 



 



 



 

Diluted

 

 

24,774

 

 

24,787

 

 

24,759

 

 

 



 



 



 

Dividends declared per share

 

$

1.87

 

$

1.85

 

$

1.82

 

GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

YEAR ENDED DECEMBER 31,

 

 

 


 

 

 

2008

 

2007

 

2006

 

 

 


 


 


 

Net earnings

 

$

41,810

 

$

33,894

 

$

42,725

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

Net unrealized loss on interest rate swap

 

 

(1,997

)

 

(1,478

)

 

(821

)

 

 



 



 



 

Comprehensive Income

 

$

39,813

 

$

32,416

 

$

41,904

 

 

 



 



 



 

The accompanying notes are an integral part of these consolidated financial statements.

46


GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

DECEMBER 31,

 

 

 


 

 

 

2008

 

2007

 

 

 


 


 

ASSETS:

 

 

 

 

 

 

 

Real Estate:

 

 

 

 

 

 

 

Land

 

$

221,540

 

$

222,194

 

Buildings and improvements

 

 

252,027

 

 

252,060

 

 

 



 



 

 

 

 

473,567

 

 

474,254

 

Less — accumulated depreciation and amortization

 

 

(129,322

)

 

(122,465

)

 

 



 



 

Real estate, net

 

 

344,245

 

 

351,789

 

Deferred rent receivable (net of allowance of $10,029 at December 31, 2008 and $10,494 at December 31, 2007)

 

 

26,718

 

 

24,915

 

Cash and cash equivalents

 

 

2,178

 

 

2,071

 

Recoveries from state underground storage tank funds, net

 

 

4,223

 

 

4,652

 

Mortgages and accounts receivable, net

 

 

1,533

 

 

1,473

 

Prepaid expenses and other assets

 

 

8,916

 

 

12,011

 

 

 



 



 

Total assets

 

$

387,813

 

$

396,911

 

 

 



 



 

LIABILITIES AND SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

Debt

 

$

130,250

 

$

132,500

 

Environmental remediation costs

 

 

17,660

 

 

18,523

 

Dividends payable

 

 

11,669

 

 

11,534

 

Accounts payable and accrued expenses

 

 

22,337

 

 

22,176

 

 

 



 



 

Total liabilities

 

 

181,916

 

 

184,733

 

 

 



 



 

Commitments and contingencies (notes 2, 3, 5 and 6)

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock, par value $.01 per share; authorized 50,000,000 shares; issued 24,766,166 at December 31, 2008 and 24,765,065 at December 31, 2007

 

 

248

 

 

248

 

Paid-in capital

 

 

259,069

 

 

258,734

 

Dividends paid in excess of earnings

 

 

(49,124

)

 

(44,505

)

Accumulated other comprehensive loss

 

 

(4,296

)

 

(2,299

)

 

 



 



 

Total shareholders’ equity

 

 

205,897

 

 

212,178

 

 

 



 



 

Total liabilities and shareholders’ equity

 

$

387,813

 

$

396,911

 

 

 



 



 

The accompanying notes are an integral part of these consolidated financial statements.

47


GETTY REALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

YEAR ENDED DECEMBER 31,

 

 

 


 

 

 

2008

 

2007

 

2006

 

 

 


 


 


 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

41,810

 

$

33,894

 

$

42,725

 

Adjustments to reconcile net earnings to net cash flow provided by operating activities:

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

11,875

 

 

9,794

 

 

7,883

 

Gain on dispositions of real estate

 

 

(2,787

)

 

(6,179

)

 

(1,581

)

Deferred rental revenue

 

 

(1,803

)

 

(3,112

)

 

(3,010

)

Allowance for deferred rent receivable

 

 

 

 

10,494

 

 

 

Amortization of above-market and below-market leases

 

 

(790

)

 

(1,047

)

 

 

Accretion expense

 

 

956

 

 

974

 

 

923

 

Stock-based employee compensation expense

 

 

326

 

 

492

 

 

186

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

Recoveries from state underground storage tank funds, net

 

 

827

 

 

(379

)

 

772

 

Mortgages and accounts receivable, net

 

 

(5

)

 

44

 

 

(172

)

Prepaid expenses and other assets

 

 

423

 

 

(130

)

 

170

 

Environmental remediation costs

 

 

(2,217

)

 

(80

)

 

(1,425

)

Accounts payable and accrued expenses

 

 

(1,031

)

 

(249

)

 

545

 

Accrued income taxes

 

 

 

 

 

 

(700

)

 

 



 



 



 

Net cash flow provided by operating activities

 

 

47,584

 

 

44,516

 

 

46,316

 

 

 



 



 



 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Property acquisitions and capital expenditures

 

 

(6,579

)

 

(90,636

)

 

(15,538

)

Proceeds from dispositions of real estate

 

 

5,295

 

 

8,420

 

 

2,462

 

(Increase) decrease in cash held for property acquisitions

 

 

2,397

 

 

(2,079

)

 

(465

)

Collection (issuance) of mortgages receivable, net

 

 

(55

)

 

267

 

 

326

 

 

 



 



 



 

Net cash flow provided by (used in) investing activities

 

 

1,058

 

 

(84,028

)

 

(13,215

)

 

 



 



 



 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Borrowings (repayments) under credit agreement, net

 

 

(2,250

)

 

87,500

 

 

11,000

 

Cash dividends paid

 

 

(46,294

)

 

(45,650

)

 

(44,819

)

Credit agreement origination costs

 

 

 

 

(863

)

 

 

Cash paid in settlement of restricted stock units

 

 

 

 

(405

)

 

 

Repayment of mortgages payable, net

 

 

 

 

(194

)

 

(30

)

Proceeds from exercise of stock options

 

 

9

 

 

 

 

696

 

 

 



 



 



 

Net cash flow provided by (used in) financing activities

 

 

(48,535

)

 

40,388

 

 

(33,153

)

 

 



 



 



 

Net increase (decrease) in cash and cash equivalents

 

 

107

 

 

876

 

 

(52

)

Cash and cash equivalents at beginning of year

 

 

2,071

 

 

1,195

 

 

1,247

 

 

 



 



 



 

Cash and cash equivalents at end of year

 

$

2,178

 

$

2,071

 

$

1,195

 

 

 



 



 



 

Supplemental disclosures of cash flow information Cash paid (refunded) during the year for:

 

 

 

 

 

 

 

 

 

 

Interest

 

$

6,728

 

$

7,021

 

$

2,638

 

Income taxes, net

 

 

708

 

 

488

 

 

576

 

Recoveries from state underground storage tank funds

 

 

(1,511

)

 

(1,644

)

 

(2,128

)

Environmental remediation costs

 

 

6,542

 

 

6,314

 

 

5,132

 

The accompanying notes are an integral part of these consolidated financial statements.

48


GETTY REALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Basis of Presentation: The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of Getty Realty Corp. and its wholly-owned subsidiaries (the “Company”). The Company is a real estate investment trust (“REIT”) specializing in the ownership and leasing of retail motor fuel and convenience store properties and petroleum distribution terminals. The Company manages and evaluates its operations as a single segment. All significant inter-company accounts and transactions have been eliminated.

          Use of Estimates, Judgments and Assumptions: The financial statements have been prepared in conformity with GAAP, which requires the Company’s management to make its best estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. While all available information has been considered, actual results could differ from those estimates, judgments and assumptions. Estimates, judgments and assumptions underlying the accompanying consolidated financial statements include, but are not limited to, deferred rent receivable, recoveries from state underground storage tank (“UST” or “USTs”) funds, environmental remediation costs, real estate, depreciation and amortization, impairment of long-lived assets, litigation, accrued expenses, income taxes and the allocation of the purchase price of properties acquired to the assets acquired and liabilities assumed.

          Discontinued Operations: The operating results and gains from certain dispositions of real estate sold in 2008 and 2007 have been reclassified as discontinued operations. The results of such properties for the years ended 2007 and 2006 have been reclassified to discontinued operations to conform to the 2008 presentation. Discontinued operations for the year ended December 31, 2008 and 2007 are primarily comprised of gains from property dispositions. The revenue from rental properties and expenses related to the operations of these properties are insignificant for the each of the three years ended December 31, 2008, 2007 and 2006.

          Real Estate: Real estate assets are stated at cost less accumulated depreciation and amortization. Upon acquisition of real estate operating properties and leasehold interests, the Company estimates the fair value of acquired tangible assets (consisting of land, buildings and improvements) “as if vacant” and identified intangible assets and liabilities (consisting of leasehold interests, above-market and below-market leases, in-place leases and tenant relationships) and assumed debt. Based on these estimates, the Company allocates the purchase price to the applicable assets and liabilities. When real estate assets are sold or retired, the cost and related accumulated depreciation and amortization is eliminated from the respective accounts and any gain or loss is credited or charged to income. Expenditures for maintenance and repairs are charged to income when incurred.

          Depreciation and amortization: Depreciation of real estate is computed on the straight-line method based upon the estimated useful lives of the assets, which generally range from sixteen to twenty-five years for buildings and improvements, or the term of the lease if shorter. Leasehold interests, capitalized above-market and below-market leases, in-place leases and tenant relationships are amortized over the remaining term of the underlying lease.

          Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of: Assets are written down to fair value (determined on a nonrecurring basis using a discounted cash flow method and significant unobservable inputs) when events and circumstances indicate that the assets might be impaired and the projected undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. The Company reviews and adjusts as necessary its depreciation estimates and method when long-lived assets are tested for recoverability. Assets held for disposal are written down to fair value less disposition costs.

          Cash and Cash Equivalents: The Company considers highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

          Deferred Rent Receivable and Revenue Recognition: The Company earns rental income under operating leases with tenants. Minimum lease rentals and lease termination payments are recognized on a straight-line basis over the

49


term of the leases. The cumulative difference between lease revenue recognized under this method and the contractual lease payment terms is recorded as deferred rent receivable on the consolidated balance sheet. Lease termination fees are recognized as rental income when earned upon the termination of a tenant’s lease and relinquishment of space in which the Company has no further obligation to the tenant. The present value of the difference between the fair market rent and the contractual rent for in-place leases at the time properties are acquired is amortized into revenue from rental properties over the remaining lives of the in-place leases. The Company provides reserves for a portion of the recorded deferred rent receivable if circumstances indicate that a property may be disposed of before the end of the current lease term or if it is not reasonable to assume that the tenant will not make all of its contractual lease payments when due during the current term of the lease. The straight-line method requires that rental income related to those properties for which a reserve was provided is effectively recognized in subsequent periods when payment is due under the contractual payment terms.

          Environmental Remediation Costs and Recoveries from State UST Funds, Net: The estimated future costs for known environmental remediation requirements are accrued when it is probable that a liability has been incurred, including legal obligations associated with the retirement of tangible long-lived assets if the asset retirement obligation results from the normal operation of those assets and a reasonable estimate of fair value can be made. The environmental remediation liability is estimated based on the level and impact of contamination at each property. The accrued liability is the aggregate of the best estimate of the fair value of cost for each component of the liability. Recoveries of environmental costs from state UST remediation funds, with respect to both past and future environmental spending, are accrued at fair value as an offset to environmental expense, net of allowance for collection risk, based on estimated recovery rates developed from prior experience with the funds when such recoveries are considered probable. Environmental liabilities and related assets are currently measured based on their expected future cash flows which have been adjusted for inflation and discounted to present value. The Company will accrue for environmental liabilities that it believes are allocable to other potentially responsible parties if it becomes probable that the other parties will not pay their environmental obligations.

          Litigation: Legal fees related to litigation are expensed as legal services are performed. The Company provides for litigation reserves, including certain litigation related to environmental matters, when it is probable that a liability has been incurred and a reasonable estimate of the liability can be made. If the best estimate of the liability can only be identified as a range, and no amount within the range is a better estimate than any other amount, the minimum of the range is accrued for the liability. The Company accrues its share of environmental liabilities based on its assumptions of the ultimate allocation method and share that will be used when determining its share of responsibility.

          Income Taxes: The Company and its subsidiaries file a consolidated federal income tax return. Effective January 1, 2001, the Company elected to qualify, and believes it is operating so as to qualify, as a REIT for federal income tax purposes. Accordingly, the Company generally will not be subject to federal income tax, provided that distributions to its shareholders equal at least the amount of its REIT taxable income as defined under the Internal Revenue Code. If the Company sells any property within ten years after its REIT election that is not exchanged for a like-kind property, it will be taxed on the built-in gain realized from such sale at the highest corporate rate. This ten-year built-in gain tax period will end in 2011.

          Interest Expense and Interest Rate Swap Agreement: In April 2006 the Company entered into an interest rate swap agreement with JPMorgan Chase Bank, N.A. as the counterparty, designated and qualifying as a cash flow hedge, to reduce its variable interest rate risk by effectively fixing a portion of the interest rate for existing debt and anticipated refinancing transactions. The Company has not entered into financial instruments for trading or speculative purposes. The fair value of the derivative is reflected on the consolidated balance sheet and will be reclassified as a component of interest expense over the remaining term of the interest rate swap agreement since the Company does not expect to settle the interest rate swap prior to its maturity. The fair value of the interest rate swap obligation is based upon the estimated amounts the Company would receive or pay to terminate the contract and is determined using an interest rate market pricing model. Changes in the fair value of the agreement would be recorded in the consolidated statements of operations if the agreement was not an effective cash flow hedge for accounting purposes.

          Earnings per Common Share: Basic earnings per common share is computed by dividing net earnings by the weighted-average number of common shares outstanding during the year. Diluted earnings per common share also

50


gives effect to the potential dilution from the exercise of stock options and the issuance of common shares in settlement of restricted stock units utilizing the treasury stock method. For the year ended December 31, 2008, the assumed exercise of stock options utilizing the treasury stock method would have been anti-dilutive and therefore was not assumed for purposes of computing diluted earnings per common share.

          Stock-Based Compensation: Compensation cost for the Company’s stock-based compensation plans using the fair value method was $326,000, $492,000 and $186,000 for the years ended 2008, 2007 and 2006, respectively, and is included in general and administrative expense. The impact of the accounting for stock-based compensation is, and is expected to be, immaterial to the Company’s financial position and results of operations.

          New Accounting Pronouncements: In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities. SFAS 157 generally applies whenever other standards require assets or liabilities to be measured at fair value. SFAS 157 is effective in fiscal years beginning after November 15, 2007. Staff Position (“FSP”) No. 152, “Effective Date of FASB Statement No. 157”, (“FSP 152”) delayed the effective date of FASB No. 157 by one year for nonfinancial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis to fiscal years beginning after November 15, 2008. The adoption of SFAS 157 in January 2008 has not had a material impact on the Company’s financial position and results of operations. The Company does not believe that the adoption of the provisions of SFAS 157 for nonfinancial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis will have a material impact on the Company’s financial position and results of operations.

          In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements at fair value the identifiable assets acquired, liabilities assumed, any non-controlling interest in the acquiree and goodwill acquired in a business combination. SFAS 141(R) requires that acquisition costs, which could be material to the Company’s future financial results, will be expensed rather than included as part of the basis of the acquisition. The adoption of this standard by the Company on January 1, 2009 will not result in a write-off of acquisition related transactions costs associated with transactions not yet consummated. SFAS 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

2. LEASES

          The Company leases or sublets its properties primarily to distributors and retailers engaged in the sale of gasoline and other motor fuel products, convenience store products and automotive repair services who are responsible for the payment of taxes, maintenance, repair, insurance and other operating expenses and for managing the actual operations conducted at these properties. In addition, approximately twenty of the Company’s properties are directly leased by the Company to others for other uses such as fast food restaurants, automobile sales and other retail purposes. The Company’s properties are primarily located in the Northeast and Mid-Atlantic regions of the United States. The Company also owns or leases properties in Texas, North Carolina, Hawaii, California, Florida, Arkansas, Illinois, North Dakota and Ohio.

          As of December 31, 2008, Getty Petroleum Marketing Inc. (“Marketing”) leased from the Company, eight hundred sixty-four properties. Substantially all of the properties are leased to Marketing under a unitary master lease (the “Master Lease”) except for ten properties which are leased under supplemental leases (collectively the “Marketing Leases”). As of December 31, 2008, the Marketing Leases included eight hundred fifty-five retail motor fuel and convenience store properties and nine distribution terminals, seven hundred ten of the properties are owned by the Company and one hundred fifty-four of the properties are leased by the Company from third parties. The Master Lease has an initial term of fifteen years commencing December 9, 2000, and generally provides Marketing with options for three renewal terms of ten years each and a final renewal option of three years and ten months extending to 2049 (or such shorter initial or renewal term as the underlying lease may provide). The Marketing Leases include provisions for 2% annual rent escalations. The Master Lease is a unitary lease and, accordingly, Marketing’s exercise of renewal options must be on an “all or nothing” basis. The supplemental leases have initial terms of varying expiration dates. As permitted under the terms of the Company’s leases with Marketing, Marketing

51


can generally use each property for any lawful purpose, or for no purpose whatsoever. (See footnote 3 for contingencies related to Marketing and the Marketing Leases for additional information.)

          The Company estimates that Marketing makes annual real estate tax payments for properties leased under the Marketing Leases of approximately $12.3 million. Marketing also makes additional payments for other operating expenses related to these properties, including environmental remediation costs other than those liabilities that were retained by the Company. These costs, which have been assumed by Marketing under the terms of the Marketing Leases, are not reflected in the consolidated financial statements.

          Revenues from rental properties for the years ended December 31, 2008, 2007 and 2006 were $81,163,000, $78,069,000 and $71,329,000, respectively, of which $60,440,000, $59,669,000 and $59,482,000, respectively, were received from Marketing under the Marketing Leases. In addition, revenues from rental properties for the years ended December 31, 2008, 2007 and 2006 include $2,537,000, 3,605,000 and $2,982,000, respectively, of deferred rental revenue accrued due to recognition of rental revenue on a straight-line basis and amortization of above-market and below-market leases. In the fourth quarter and year ended December 31, 2007, the Company provided a non-cash $10.5 million reserve for a portion of the deferred rent receivable recorded as of December 31, 2007 related to the Marketing Leases. (See footnote 3 for additional information related to the Marketing Leases and the reserve.)

          Future contractual minimum annual rentals receivable from Marketing under the Marketing Leases and from other tenants, which have terms in excess of one year as of December 31, 2008, are as follows (in thousands. See footnote 3 for additional information related to the Marketing Leases and the reserve):

 

 

 

 

 

 

 

 

 

 

 

YEAR ENDING DECEMBER 31,

 

MARKETING

 

OTHER
TENANTS

 

TOTAL (a)

 


 


 


 


 

2009

 

 

60,003

 

 

18,938

 

 

78,941

 

2010

 

 

59,968

 

 

18,722

 

 

78,690

 

2011

 

 

60,086

 

 

18,769

 

 

78,855

 

2012

 

 

60,402

 

 

18,588

 

 

78,990

 

2013

 

 

60,508

 

 

18,006

 

 

78,514

 

Thereafter

 

 

118,946

 

 

121,683

 

 

240,629

 

(a) Includes $78,441,000 of future minimum annual rentals receivable under subleases.

          Rent expense, substantially all of which consists of minimum rentals on non-cancelable operating leases, amounted to $8,100,000, $8,337,000 and $8,685,000 for the years ended December 31, 2008, 2007 and 2006, respectively, and is included in rental property expenses using the straight-line method. Rent received under subleases for the years ended December 31, 2008, 2007 and 2006 was $13,986,000, $14,145,000 and $14,646,000, respectively.

          The Company has obligations to lessors under non-cancelable operating leases which have terms (excluding renewal term options) in excess of one year, principally for gasoline stations and convenience stores. Substantially all of these leases contain renewal options and rent escalation clauses. The leased properties have a remaining lease term averaging over ten years, including renewal options. Future minimum annual rentals payable under such leases, excluding renewal options, are as follows: 2009 — $7,338,000, 2010 — $5,971,000, 2011 — $4,600,000, 2012 — $3,197,000, 2013 — $2,038,000 and $3,476,000 thereafter.

3. COMMITMENTS AND CONTINGENCIES

          In order to minimize the Company’s exposure to credit risk associated with financial instruments, the Company places its temporary cash investments with high credit quality institutions. Temporary cash investments, if any, are held in an overnight bank time deposit with JPMorgan Chase Bank, N.A.

          As of December 31, the Company leased eight hundred sixty-four of its one thousand sixty properties on a long-term triple-net basis to Marketing under the Marketing Leases (see footnote 2 for additional information). A substantial portion of the Company’s revenues (75% for the year ended December 31, 2008), are derived from the Marketing Leases. Accordingly, the Company’s revenues are dependent to a large degree on the economic performance of Marketing and of the petroleum marketing industry, and any factor that adversely affects Marketing,

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or the Company’s relationship with Marketing, may have a material adverse effect on the Company’s business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends and/or stock price. Marketing operated substantially all of the Company’s petroleum marketing businesses when it was spun-off to the Company’s shareholders as a separate publicly held company in March 1997 (the “Spin-Off”). In December 2000, Marketing was acquired by a subsidiary of OAO LUKoil (“Lukoil”), one of the largest integrated Russian oil companies. Even though Marketing is a wholly-owned subsidiary of Lukoil and Lukoil has in prior periods provided credit enhancement and capital to Marketing, Lukoil is not a guarantor of the Marketing Leases and there can be no assurance that Lukoil is currently providing, or will provide, any credit enhancement or additional capital to Marketing. The Company’s financial results depend largely on rental income from Marketing, and to a lesser extent on rental income from other tenants and; therefore, are materially dependent upon the ability of Marketing to meet its rental, environmental and other obligations under the Marketing Leases. Marketing’s financial results depend largely on retail petroleum marketing margins and rental income from its sub-tenants who operate their respective convenience stores, automotive repair services or other businesses at the Company’s properties. The petroleum marketing industry has been and continues to be volatile and highly competitive. Marketing has made all required monthly rental payments under the Marketing Leases when due through March 2009, although there is no assurance that it will continue to do so.

          The Company has had periodic discussions with representatives of Marketing regarding potential modifications to the Marketing Leases and, in 2007, during the course of such discussions, Marketing proposed to (i) remove approximately 40% of the properties (the “Subject Properties”) from the Marketing Leases and eliminate payment of rent to the Company, and eliminate or reduce payment of operating expenses, with respect to the Subject Properties, and (ii) reduce the aggregate amount of rent payable to the Company for the approximately 60% of the properties that would remain under the Marketing Leases (the “Remaining Properties”). Representatives of Marketing have also indicated to the Company that they are considering significant changes to Marketing’s business model. In light of these developments and the continued deterioration in Marketing’s annual financial performance, in March 2008, the Company had decided to attempt to negotiate with Marketing for a modification of the Marketing Leases which removes the Subject Properties from the Marketing Leases. The Company has held periodic discussions with Marketing since March 2008 in its attempt to negotiate a modification of the Marketing Leases to remove the Subject Properties. Although the Company continues to remove individual locations from the Master Lease as mutually beneficial opportunities arise, there has been no agreement between the Company and Marketing on any principal terms that would be the basis for a definitive Master Lease modification agreement. If Marketing ultimately determines that its business strategy is to exit all of the properties it leases from the Company or to divest a composition of properties different from the properties comprising the Subject Properties, such as the revised list of properties provided to the Company by Marketing in the second quarter of 2008 which includes approximately 45% of the properties Marketing leases from the Company (the “Revised Subject Properties”), it is the Company’s intention to cooperate with Marketing in accomplishing those objectives if the Company determines that it is prudent for it to do so. Any modification of the Marketing Leases that removes a significant number of properties from the Marketing Leases would likely significantly reduce the amount of rent the Company receives from Marketing and increase the Company’s operating expenses. The Company cannot accurately predict if, or when, the Marketing Leases will be modified or what the terms of any agreement may be if the Marketing Leases are modified. The Company also cannot accurately predict what actions Marketing and Lukoil may take, and what the Company’s recourse may be, whether the Marketing Leases are modified or not.

          The Company intends either to re-let or sell any properties removed from the Marketing Leases and reinvest the realized sales proceeds in new properties. The Company intends to seek replacement tenants or buyers for properties removed from the Marketing Leases either individually, in groups of properties, or by seeking a single tenant for the entire portfolio of properties subject to the Marketing Leases. Although the Company is the fee or leasehold owner of the properties subject to the Marketing Leases and the owner of the Getty® brand and has prior experience with tenants who operate their convenience stores, automotive repair services or other businesses at its properties; in the event that properties are removed from the Marketing Leases, the Company cannot accurately predict if, when, or on what terms, such properties could be re-let or sold.

          Due to the previously disclosed deterioration in Marketing’s annual financial performance, in conjunction with the Company’s decision to attempt to negotiate with Marketing for a modification of the Marketing Leases to remove the Subject Properties, the Company has decided that it cannot reasonably assume that it will collect all of the rent due to the Company related to the Subject Properties for the remainder of the current lease terms. In

53


reaching this conclusion, the Company relied on various indicators, including, but not limited to, the following financial results of Marketing through the year ended December 31, 2007: (i) Marketing’s significant operating losses, (ii) its negative cash flow from operating activities, (iii) its asset impairment charges for underperforming assets, and (iv) its negative earnings before interest, taxes, depreciation, amortization and rent payable to the Company. The Company has not received Marketing’s financial results for the year ended December 31, 2008 prior to the preparation of this Annual Report on Form 10-K.

          The Company recorded a reserve of $10,494,000 in 2007 representing the full amount of the deferred rent receivable recorded related to the Subject Properties as of December 31, 2007. Providing the non-cash deferred rent receivable reserve reduced the Company’s net earnings but did not impact the Company’s cash flow from operating activities for 2007. As of December 31, 2008, the Company had a reserve of $10,029,000 for the deferred rent receivable due from Marketing representing the full amount of the deferred rent receivable recorded related to the Subject Properties as of that date. The Company has not provided a deferred rent receivable reserve related to the Remaining Properties since, based on the Company’s assessments and assumptions, the Company continues to believe that it is probable that it will collect the deferred rent receivable related to the Remaining Properties of $22,900,000 as of December 31, 2008 and that Lukoil will not allow Marketing to fail to perform its rental, environmental and other obligations under the Marketing Leases. The Company anticipates that the rental revenue for the Remaining Properties will continue to be recognized on a straight-line basis. As required by the straight-line method of accounting, beginning with the first quarter of 2008, the rental revenue for the Subject Properties was, and for future periods is expected to be, effectively recognized when payment is due under the contractual payment terms. Although the Company has adjusted the estimated useful lives of certain long-lived assets for the Subject Properties, the Company believes that no impairment charge was necessary for the Subject Properties as of December 31, 2008 or December 31, 2007 pursuant to the provisions of Statement of Financial Accounting Standards No. 144. The impact to depreciation expense due to adjusting the estimated lives for certain long-lived assets beginning with the year ended December 31, 2008 was not material.

          Marketing is directly responsible to pay for (i) remediation of environmental contamination it causes and compliance with various environmental laws and regulations as the operator of the Company’s properties, and (ii) known and unknown environmental liabilities allocated to Marketing under the terms of the Master Lease and various other agreements between Marketing and the Company relating to Marketing’s business and the properties subject to the Marketing Leases (collectively the “Marketing Environmental Liabilities”). The Company may ultimately be responsible to directly pay for Marketing Environmental Liabilities as the property owner if Marketing fails to pay them. Additionally, the Company will be required to accrue for Marketing Environmental Liabilities if the Company determines that it is probable that Marketing will not meet its obligations or if the Company’s assumptions regarding the ultimate allocation methods and share of responsibility that it used to allocate environmental liabilities changes as a result of the factors discussed above, or otherwise. However, the Company continues to believe that it is not probable that Marketing will not pay for substantially all of the Marketing Environmental Liabilities since the Company believes that Lukoil will not allow Marketing to fail to perform its rental, environmental and other obligations under the Marketing Leases and, accordingly, the Company did not accrue for the Marketing Environmental Liabilities as of December 31, 2008 or 2007. Nonetheless, the Company has determined that the aggregate amount of the Marketing Environmental Liabilities (as estimated by the Company based on its assumptions and analysis of information currently available to it) could be material to the Company if it was required to accrue for all of the Marketing Environmental Liabilities in the future since the Company believes that it is reasonably possible that as a result of such accrual, the Company may not be in compliance with the existing financial covenants in its Credit Agreement. Such non-compliance could result in an event of default which, if not cured or waived, could result in the acceleration of all of the Company’s indebtedness under the Credit Agreement.

          Should the Company’s assessments, assumptions and beliefs prove to be incorrect, or if circumstances change, the conclusions reached by the Company may change relating to (i) whether some or all of the Subject or Remaining Properties are likely to be removed from the Marketing Leases (ii) recoverability of the deferred rent receivable for some or all of the Subject or Remaining Properties, (iii) potential impairment of the Subject or Remaining Properties and, (iv) Marketing’s ability to pay the Marketing Environmental Liabilities. The Company intends to regularly review its assumptions that affect the accounting for deferred rent receivable; long-lived assets; environmental litigation accruals; environmental remediation liabilities; and related recoveries from state underground storage tank funds, which may result in material adjustments to the amounts recorded for these assets and liabilities, and as a

54


result of which, the Company may not be in compliance with the financial covenants in its Credit Agreement. Accordingly, the Company may be required to (i) reserve additional amounts of the deferred rent receivable related to the Remaining Properties, (ii) record an impairment charge related to the Subject or Remaining Properties, or (iii) accrue for Marketing Environmental Liabilities that the Company believes are allocable to Marketing under the Marketing Leases and various other agreements as a result of the potential or actual modification of the Marketing Leases or other factors.

          The Company cannot provide any assurance that Marketing will continue to pay its debts or meet its rental, environmental or other obligations under the Marketing Leases prior or subsequent to any potential modification of the Marketing Leases. In the event that Marketing cannot or will not perform its rental, environmental or other obligations under the Marketing Leases; if the Marketing Leases are modified significantly or terminated; if the Company determines that it is probable that Marketing will not meet its environmental obligations and the Company accrues for such liabilities; if the Company is unable to promptly re-let or sell the properties subject to the Marketing Leases; or, if the Company changes its assumptions that affect the accounting for rental revenue or Marketing Environmental Liabilities related to the Marketing Leases and various other agreements; the Company’s business, financial condition, revenues, operating expenses, results of operations, liquidity, ability to pay dividends and/or stock price may be materially adversely affected.

          The Company has also agreed to provide limited environmental indemnification to Marketing, capped at $4,250,000 and expiring in 2010, for certain pre-existing conditions at six of the terminals which are owned by the Company and leased to Marketing. Under the agreement, Marketing is obligated to pay the first $1,500,000 of costs and expenses incurred in connection with remediating any such pre-existing conditions, Marketing and the Company will share equally the next $8,500,000 of those costs and expenses and Marketing is obligated to pay all additional costs and expenses over $10,000,000. The Company has accrued $300,000 as of December 31, 2008 and 2007 in connection with this indemnification agreement.

          The Company is subject to various legal proceedings and claims which arise in the ordinary course of its business. In addition, the Company has retained responsibility for certain legal proceedings and claims relating to the petroleum marketing business that were identified at the time of the Spin-Off. As of December 31, 2008 and 2007, the Company had accrued $1,671,000 and $2,575,000, respectively, for certain of these matters which it believes were appropriate based on information then currently available. The Company has not accrued for approximately $950,000 in costs allegedly incurred by the current property owner in connection with removal of underground storage tanks (“USTs” or “UST”) and soil remediation at a property that had been leased to and operated by Marketing. The Company believes Marketing is responsible for such costs under the terms of the Master Lease and tendered the matter for defense and indemnification from Marketing, but Marketing has denied its liability for the claim and its responsibility to defend against and indemnify the Company for the claim. The Company has filed a third party claim against Marketing for indemnification in this matter, which claim is currently being actively litigated. Trial is anticipated to be scheduled for the first quarter of 2009. It is possible that the Company’s assumption that Marketing will be ultimately responsible for this claim may change, which may result in the Company providing an accrual for this and other matters.

          In September 2003, the Company was notified by the State of New Jersey Department of Environmental Protection (“NJDEP”) that the Company is one of approximately sixty-six potentially responsible parties for natural resource damages resulting from discharges of hazardous substances into the Lower Passaic River. The definitive list of potentially responsible parties and their actual responsibility for the alleged damages, the aggregate cost to remediate the Lower Passaic River, the amount of natural resource damages and the method of allocating such amounts among the potentially responsible parties have not been determined. In September 2004, the Company received a General Notice Letter from the United States Environmental Protection Agency (the “EPA”) (the “EPA Notice”), advising the Company that it may be a potentially responsible party for costs of remediating certain conditions resulting from discharges of hazardous substances into the Lower Passaic River. ChevronTexaco received the same EPA Notice regarding those same conditions. In a related action, in December 2005, the State of New Jersey brought suit against certain companies which the State alleges are responsible for pollution of the Passaic River from a former Diamond Alkali manufacturing plant. In February 2009, certain of these defendants filed third-party complaints against approximately 300 additional parties, including the Company, seeking contribution for a pro-rata share of response costs, cleanup and removal costs, and other damages. The Company believes that ChevronTexaco is contractually obligated to indemnify the Company, pursuant to an indemnification

55


agreement, for most if not all of the conditions at the property identified by the NJDEP and the EPA. Accordingly, the ultimate legal and financial liability of the Company, if any, cannot be estimated with any certainty at this time.

          From October 2003 through December 31, 2008, the Company was notified that the Company was made party to fifty-four cases in Connecticut, Florida, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Vermont, Virginia and West Virginia brought by local water providers or governmental agencies. These cases allege various theories of liability due to contamination of groundwater with methyl tertiary butyl ether (“MTBE”) as the basis for claims seeking compensatory and punitive damages. Each case names as defendants approximately fifty petroleum refiners, manufacturers, distributors and retailers of MTBE, or gasoline containing MTBE. At this time, the Company has been dismissed from certain of the cases initially filed against it. A significant number of the named defendants other than the Company have entered into settlements with certain plaintiffs, which affected approximately twenty-seven of the cases to which the Company is a party. The accuracy of the allegations as they relate to the Company, the Company’s defenses to such claims, the aggregate amount of possible damages and the method of allocating such amounts among the remaining defendants have not been determined. Accordingly, the ultimate legal and financial liability of the Company, if any, cannot be estimated with any certainty at this time. The ultimate resolution of these matters could cause a material adverse effect on the Company’s business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.

          Prior to the Spin-Off, the Company was self-insured for workers’ compensation, general liability and vehicle liability up to predetermined amounts above which third-party insurance applies. As of December 31, 2008 and 2007, the Company’s consolidated balance sheets included, in accounts payable and accrued expenses, $290,000 and $310,000, respectively, relating to self-insurance obligations. The Company estimates its loss reserves for claims, including claims incurred but not reported, by utilizing actuarial valuations provided annually by its insurance carriers. The Company is required to deposit funds for substantially all of these loss reserves with its insurance carriers, and may be entitled to refunds of amounts previously funded, as the claims are evaluated on an annual basis. The Company’s consolidated statements of operations for the years ended December 31, 2008, 2007 and 2006 include, in general and administrative expenses, charges (credits) of $(72,000), $81,000 and ($301,000), respectively, for self-insurance loss reserve adjustments. Since the Spin-Off, the Company has maintained insurance coverage subject to certain deductibles.

          In order to qualify as a REIT, among other items, the Company must pay out substantially all of its “earnings and profits” (as defined in the Internal Revenue Code) in cash distributions to shareholders each year. Should the Internal Revenue Service successfully assert that the Company’s earnings and profits were greater than the amounts distributed, the Company may fail to qualify as a REIT; however, the Company may avoid losing its REIT status by paying a deficiency dividend to eliminate any remaining earnings and profits. The Company may have to borrow money or sell assets to pay such a deficiency dividend.

4. CREDIT AGREEMENT

          As of December 31, 2008, borrowings under the Credit Agreement, described below, were $130,250,000, bearing interest at a weighted-average effective rate of 3.8% per annum. The weighted-average effective rate is based on $85,250,000 of LIBOR rate borrowings floating at market rates plus a margin of 1.0% and $45,000,000 of LIBOR rate borrowings effectively fixed at 5.44% by an interest rate Swap Agreement, described below, plus a margin of 1.0%. The Company has a $175,000,000 amended and restated senior unsecured revolving credit agreement (the “Credit Agreement”) with a group of domestic commercial banks led by JPMorgan Chase Bank, N.A. (the “Bank Syndicate”) which expires in March 2011. The Credit Agreement does not provide for scheduled reductions in the principal balance prior to its maturity. The Credit Agreement permits borrowings at an interest rate equal to the sum of a base rate plus a margin of 0.0% or 0.25% or a LIBOR rate plus a margin of 1.0%, 1.25% or 1.5%. The applicable margin is based on the Company’s leverage ratio at the end of the prior calendar quarter, as defined in the Credit Agreement, and is adjusted effective mid-quarter when the Company’s quarterly financial results are reported to the Bank Syndicate. Based on the Company’s leverage ratio as of December 31, 2008, the applicable margin is 0.0% for base rate borrowings and will increase to 1.25% in the first quarter of 2009 for LIBOR rate borrowings.

56


          Subject to the terms of the Credit Agreement, the Company has the option to extend the term of the credit agreement for one additional year to March 2012 and/or, subject to approval by the Bank Syndicate, increase the amount of the credit facility available pursuant to the Credit Agreement by $125,000,000 to $300,000,000. The Company does not expect to exercise its option to increase the amount of the Credit Agreement at this time. In addition, based on the current lack of liquidity in the credit markets, the Company believes that it would need to renegotiate certain terms in the Credit Agreement in order to obtain approval from the Bank Syndicate to increase the amount of the credit facility at this time. No assurance can be given that such approval from the Bank Syndicate will be obtained on terms acceptable to the Company, if at all. The annual commitment fee on the unused Credit Agreement ranges from 0.10% to 0.20% based on the amount of borrowings. The Credit Agreement contains customary terms and conditions, including customary financial covenants such as leverage and coverage ratios and other customary covenants, including limitations on the Company’s ability to incur debt, pay dividends and maintenance of tangible net worth, and events of default, including change of control and failure to maintain REIT status. A material adverse effect on the Company’s business, assets, prospects or condition, financial or otherwise, would also result in an event of default. Any event of default, if not cured or waived, could result in the acceleration of all of the Company’s indebtedness under the Credit Agreement.

          The Company entered into a $45,000,000 LIBOR based interest rate swap agreement with JPMorgan Chase Bank, N.A. as the counterparty, effective through June 30, 2011 (the “Swap Agreement”). The Swap Agreement is intended to effectively fix, at 5.44%, the LIBOR component of the interest rate determined under the Credit Agreement. As a result of the Swap Agreement, as of December 31, 2008, $45,000,000 of the Company’s LIBOR based borrowings under the Credit Agreement bear interest at an effective rate of 6.44%.

          The Company entered into the Swap Agreement with JPMorgan Chase Bank, N.A., designated and qualifying as a cash flow hedge, to reduce its exposure to the variability in future cash flows attributable to changes in the LIBOR rate. The Company’s primary objective when undertaking the hedging transaction and derivative position was to reduce its variable interest rate risk by effectively fixing a portion of the interest rate for existing debt and anticipated refinancing transactions. The Company determined, as of the Swap Agreement’s inception and as of December 31, 2008 and 2007, that the derivative used in the hedging transaction is highly effective in offsetting changes in cash flows associated with the hedged item and that no gain or loss was required to be recognized in earnings during 2008 or 2007 representing the hedge’s ineffectiveness. At December 31, 2008 and, 2007, the Company’s consolidated balance sheets include, in accounts payable and accrued expenses, an obligation for the fair value of the Swap Agreement of $4,296,000 and $2,299,000, respectively. For the years ended December 31, 2008, 2007 and 2006, the Company has recorded a loss in the fair value of the Swap Agreement related to the effective portion of the interest rate contract totaling $1,997,000, $1,478,000 and $821,000, respectively, in accumulated other comprehensive loss in the Company’s consolidated balance sheet. The accumulated comprehensive loss will be recognized as an increase in interest expense as quarterly payments are made to the counter-party over the remaining term of the Swap Agreement (of which approximately $1,862,000 is expected to be reclassified within the next twelve months) since it is expected that the Credit Agreement will be refinanced with variable interest rate debt at its maturity.

          The fair value of the Swap Agreement is $4,296,000 as of December 31, 2008 determined using (i) a discounted cash flow analysis on the expected cash flows of the Swap Agreement, which is based on market data obtained from sources independent of the Company consisting of interest rates and yield curves that are observable at commonly quoted intervals and are defined by GAAP as “Level 2” inputs in the “Fair Value Hierarchy”, and (ii) credit valuation adjustments, which are based on unobservable “Level 3” inputs. The fair value of the $133,577,000 projected borrowings outstanding under the Credit Agreement is $122,751,000 as of December 31, 2008 determined using a discounted cash flow technique that incorporates a market interest yield curve, “Level 2 inputs”, with adjustments for duration, optionality, risk profile and projected average borrowings outstanding, which are based on unobservable “Level 3 inputs”. As of December 31, 2008, accordingly, the Company classified its valuation of the Swap Agreement in its entirety within Level 2 of the Fair Value Hierarchy since the credit valuation adjustments are not significant to the overall valuation of the Swap Agreement and its valuation of the borrowings outstanding under the Credit Agreement in its entirety within Level 3 of the Fair Value Hierarchy.

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5. ENVIRONMENTAL EXPENSES

          The Company is subject to numerous existing 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 expenses are principally attributable to remediation costs which include installing, operating, maintaining and decommissioning remediation systems, monitoring contamination, and governmental agency reporting incurred in connection with contaminated properties. The Company seeks reimbursement from state UST remediation funds related to these environmental expenses where available.

          The Company enters into leases and various other agreements which allocate responsibility for known and unknown environmental liabilities by establishing the percentage and method of allocating responsibility between the parties. In accordance with the leases with certain tenants, the Company has agreed to bring the leased properties with known environmental contamination to within applicable standards and to regulatory or contractual closure (“Closure”) in an efficient and economical manner. Generally, upon achieving Closure at each individual property, the Company’s environmental liability under the lease for that property will be satisfied and future remediation obligations will be the responsibility of the Company’s tenant. Generally the liability for the retirement and decommissioning or removal of USTs and other equipment is the responsibility of the Company’s tenants. The Company is contingently liable for these obligations in the event that the tenants do not satisfy their responsibilities. A liability has not been accrued for obligations that are the responsibility of the Company’s tenants based on the tenants’ history of paying such obligations and/or the Company’s assessment of their financial ability to pay their share of such costs. However, there can be no assurance that the Company’s assessments are correct or that the Company’s tenants who have paid their obligations in the past will continue to do so.

          Of the eight hundred sixty-four properties leased to Marketing as of December 31, 2008, the Company has agreed to pay all costs relating to, and to indemnify Marketing for, certain environmental liabilities and obligations at one hundred eighty-seven retail properties that have not achieved Closure and are scheduled in the Master Lease. The Company will continue to seek reimbursement from state UST remediation funds related to these environmental expenditures where available.

          It is possible that the Company’s assumptions regarding the ultimate allocation method and share of responsibility that it used to allocate environmental liabilities may change, which may result in material adjustments to the amounts recorded for environmental litigation accruals, environmental remediation liabilities and related assets. The Company will be required to accrue for environmental liabilities that the Company believes are allocable to others under various other agreements if the Company determines that it is probable that the counter-party will not meet its environmental obligations. The ultimate resolution of these matters could cause a material adverse effect on the Company’s business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price. (See footnote 3 for contingencies related to Marketing and the Marketing Leases for additional information.)

          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 environmental remediation liability is estimated based on the level and impact of contamination at each property. The accrued liability is the aggregate of the best estimate of the fair value of cost for each component of the liability. Recoveries of environmental costs from state UST remediation funds, with respect to both past and future environmental spending, are accrued at fair value as an offset to environmental expense, net of allowance for collection risk, based on estimated recovery rates developed from prior experience with the funds when such recoveries are considered probable.

          Environmental exposures are difficult to assess and estimate for numerous reasons, including the extent 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, as well as the time it takes to remediate contamination. In developing the Company’s liability for probable and reasonably estimable environmental remediation costs, on a property by property basis, the Company considers among other things, enacted 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. These accrual estimates are subject to significant change, and are adjusted as the remediation treatment progresses, as circumstances change and as these

58


contingencies become more clearly defined and reasonably estimable. As of December 31, 2008, the Company had regulatory approval for remediation action plans in place for two hundred forty-nine (95%) of the two hundred sixty-two properties for which it continues to retain environmental responsibility and the remaining thirteen properties (5%) remain in the assessment phase. In addition, the Company has nominal post-closure compliance obligations at twenty-four properties where it has received “no further action” letters.

          Environmental remediation liabilities and related assets are measured at fair value based on their expected future cash flows which have been adjusted for inflation and discounted to present value. The net change in estimated remediation cost and accretion expense included in environmental expenses in the Company’s consolidated statements of operations aggregated $4,656,000, $5,136,000 and $3,202,000 for 2008, 2007 and 2006, respectively, which amounts were net of changes in estimated recoveries from state UST remediation funds. In addition to net change in estimated remediation costs, environmental expenses also include project management fees, legal fees and provisions for environmental litigation loss reserves.

          As of December 31, 2008, 2007, 2006 and 2005, the Company had accrued $17,660,000, $18,523,000, $17,201,000 and $17,350,000 respectively, as management’s best estimate of the fair value of reasonably estimable environmental remediation costs. As of December 31, 2008, 2007, 2006 and 2005, the Company had also recorded $4,223,000, $4,652,000, $3,845,000 and $4,264,000, respectively, as management’s best estimate for recoveries from state UST remediation funds, net of allowance, related to environmental obligations and liabilities. The net environmental liabilities of $13,871,000, $13,356,000 and $13,086,000 as of December 31, 2007, 2006 and 2005, respectively, were subsequently accreted for the change in present value due to the passage of time and, accordingly, $956,000, $974,000 and $923,000 of net accretion expense was recorded for the years ended December 31, 2008, 2007 and 2006, respectively, substantially all of which is included in environmental expenses.

          In view of the uncertainties associated with environmental expenditures, contingencies related to Marketing and the Marketing Leases and contingencies related to other parties, however, the Company believes it is possible that the fair value of future actual net expenditures could be substantially higher than amounts currently recorded by the Company. (See footnote 3 for contingencies related to Marketing and the Marketing Leases for additional information.) Adjustments to accrued liabilities for environmental remediation costs will be reflected in the Company’s financial statements as they become probable and a reasonable estimate of fair value can be made. Future environmental expenses could cause a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends and/or stock price.

6. INCOME TAXES

          Net cash paid for income taxes for the years ended December 31, 2008, 2007 and 2006 of $708,000, $488,000 and $576,000, respectively, includes amounts related to state and local income taxes for jurisdictions that do not follow the federal tax rules, which are provided for in rental property expenses in the Company’s consolidated statements of operations.

          Earnings and profits (as defined in the Internal Revenue Code) is used to determine the tax attributes of dividends paid to stockholders and will differ from income reported for financial statement purposes due to the effect of items which are reported for income tax purposes in years different from that in which they are recorded for financial statement purposes. Earnings and profits were $40,906,000, $41,147,000 and $39,486,000 for the years ended December 31, 2008, 2007 and 2006, respectively. The federal tax attributes of the common dividends for the years ended December 31, 2008, 2007 and 2006 were: ordinary income of 87.4%, 90.3% and 88.0%; capital gain distributions of 1.2%, 0.0% and 0.02% and non-taxable distributions of 11.4%, 9.7% and 11.8%, respectively.

          In order to qualify as a REIT, among other items, the Company must pay out substantially all of its earnings and profits in cash distributions to shareholders each year. Should the Internal Revenue Service successfully assert that the Company’s earnings and profits were greater than the amount distributed, the Company may fail to qualify as a REIT; however, the Company may avoid losing its REIT status by paying a deficiency dividend to eliminate any remaining earnings and profits. The Company may have to borrow money or sell assets to pay such a deficiency dividend. The Company accrues for this and certain other tax matters when appropriate based on information

59


currently available. The accrual for uncertain tax positions is adjusted as circumstances change and as the uncertainties become more clearly defined, such as when audits are settled or exposures expire. Accordingly, an income tax benefit of $700,000 was recorded in the third quarter of 2006, due to the elimination of the amount accrued for uncertain tax positions since the Company believes that the uncertainties regarding these exposures have been resolved or that it is no longer likely that the exposure will result in a liability upon review. However, the ultimate resolution of these matters may have a significant impact on the results of operations for any single fiscal year or interim period.

7. SHAREHOLDERS’ EQUITY

          A summary of the changes in shareholders’ equity for the years ended December 31, 2008, 2007 and 2006 is as follows (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMMON STOCK

 

PAID-IN
CAPITAL

 

 

DIVIDENDS
PAID
IN EXCESS
OF EARNINGS

 

 

ACCUMULATED
OTHER
COMPREHENSIVE
LOSS

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

SHARES

 

AMOUNT

 

 

 

 

 

 

TOTAL

 

 

 


 


 


 


 


 


 

BALANCE,
DECEMBER 31, 2005

 

 

24,717

 

$

247

 

$

257,766

 

$

(30,130

)

$

 

$

227,883

 

 

 



 



 



 



 



 



 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

42,725

 

 

 

 

 

42,725

 

Dividends — $1.82 per common share

 

 

 

 

 

 

 

 

 

 

 

(45,094

)

 

 

 

 

(45,094

)

Stock-based compensation

 

 

 

 

 

 

 

 

186

 

 

 

 

 

 

 

 

186

 

Net unrealized loss on interest rate swap

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(821

)

 

(821

)

Stock options exercised

 

 

48

 

 

1

 

 

695

 

 

 

 

 

 

 

 

696

 

 

 



 



 



 



 



 



 

BALANCE,
DECEMBER 31, 2006

 

 

24,765

 

 

248

 

 

258,647

 

 

(32,499

)

 

(821

)

 

225,575

 

 

 



 



 



 



 



 



 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

33,894

 

 

 

 

 

33,894

 

Dividends — $1.85 per common share

 

 

 

 

 

 

 

 

 

 

 

(45,900

)

 

 

 

 

(45,900

)

Stock-based compensation

 

 

 

 

 

 

 

 

87

 

 

 

 

 

 

 

 

87

 

Net unrealized loss on interest rate swap

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,478

)

 

(1,478

)

 

 



 



 



 



 



 



 

BALANCE,
DECEMBER 31, 2007

 

 

24,765

 

 

248

 

 

258,734

 

 

(44,505

)

 

(2,299

)

 

212,178

 

 

 



 



 



 



 



 



 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

41,810

 

 

 

 

 

41,810

 

Dividends — $1.87 per common share

 

 

 

 

 

 

 

 

 

 

 

(46,429

)

 

 

 

 

(46,429

)

Stock-based compensation

 

 

1

 

 

 

 

 

326

 

 

 

 

 

 

 

 

326

 

Stock options exercised

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

 

 

9

 

Net unrealized loss on interest rate swap

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,997

)

 

(1,997

)

 

 



 



 



 



 



 



 

BALANCE,
DECEMBER 31, 2008

 

 

24,766

 

$

248

 

$

259,069

 

$

(49,124

) (a)

$

(4,296

)

$

205,897

 

 

 



 



 



 



 



 



 


 

 

(a)

Net of $103,803 transferred from retained earnings to common stock and paid-in capital as a result of accumulated stock dividends.

          The Company is authorized to issue 20,000,000 shares of preferred stock, par value $.01 per share, for issuance in series, of which none were issued as of December 31, 2008, 2007, 2006 and 2005.

8. SEVERANCE AGREEMENT AND EMPLOYEE BENEFIT PLANS

          General and administrative expenses include a provision of $447,000 recorded in the quarter ended December 31, 2007 primarily due to the payment of severance and the accelerated vesting of 14,250 restricted stock units which were unvested and scheduled to vest five years from the date of each grant in conjunction with the resignation of Mr. Andy Smith, the former President and Chief Legal Officer of the Company.

          The Company has a retirement and profit sharing plan with deferred 401(k) savings plan provisions (the “Retirement Plan”) for employees meeting certain service requirements and a supplemental plan for executives (the “Supplemental Plan”). Under the terms of these plans, the annual discretionary contributions to the plans are determined by the Compensation Committee of the Board of Directors. Also, under the Retirement Plan, employees

60


may make voluntary contributions and the Company has elected to match an amount equal to fifty percent of such contributions but in no event more than three percent of the employee’s eligible compensation. Under the Supplemental Plan, a participating executive may receive an amount equal to ten percent of eligible compensation, reduced by the amount of any contributions allocated to such executive under the Retirement Plan. Contributions, net of forfeitures, under the retirement plans approximated $151,000, $100,000 and $139,000 for the years ended December 31, 2008, 2007 and 2006, respectively. These amounts are included in the accompanying consolidated statements of operations.

          The Getty Realty Corp. 2004 Omnibus Incentive Compensation Plan (the “2004 Plan”) provides for the grant of restricted stock, restricted stock units, performance awards, dividend equivalents, stock payments and stock awards to all employees and members of the Board of Directors. The 2004 Plan authorizes the Company to grant awards with respect to an aggregate of 1,000,000 shares of common stock through 2014. The aggregate maximum number of shares of common stock that may be subject to awards granted under the 2004 Plan during any calendar year is 80,000.

          The Company awarded to employees and directors 23,800, 17,550 and 12,550 restricted stock units (“RSUs”) and dividend equivalents in 2008, 2007 and 2006, respectively. The RSUs are settled subsequent to the termination of employment with the Company. On the settlement date each RSU will have a value equal to one share of common stock and may be settled, at the sole discretion of the Compensation Committee, in cash or by the issuance of one share of common stock. In 2008, the Company settled 1,000 RSUs by issuing 400 shares of common stock with an intrinsic value of $7,000 net of employee tax withholdings and cancelling 600 RSUs that were not vested. In 2007, the Compensation Committee elected to settle 14,250 RSUs in cash for $405,000. The RSUs do not provide voting or other shareholder rights unless and until the RSU is settled for a share of common stock. The 62,000 RSUs outstanding as of December 31, 2008 vest starting one year from the date of grant, on a cumulative basis at the annual rate of twenty percent of the total number of RSUs covered by the award. The dividend equivalents represent the value of the dividends paid per common share multiplied by the number of RSUs covered by the award.

          The fair values of the RSUs were determined based on the closing market price of the Company’s stock on the date of grant. The average fair values of the RSUs granted in 2008, 2007, and 2006 were estimated at $26.86, $28.78, and $28.80 per unit on the date of grant with an aggregate fair value estimated at $639,000, $505,000 and $361,000, respectively. The fair value of the grants is recognized as compensation expense ratably over the five year vesting period of the RSUs. As of December 31, 2008, there was $971,000 of total unrecognized compensation cost related to RSUs granted under the 2004 Plan.

          The fair value of the 7,840, 19,330 and 3,320 RSUs which vested during the years ended December 31, 2008, 2007 and 2006 was $213,000, $523,000 and $88,000, respectively. The aggregate intrinsic value of the 62,000 outstanding RSUs and the 17,400 vested RSUs as of December 31, 2008 was $1,306,000 and $366,000, respectively. For the years ended December 31, 2008, 2007 and 2006, dividend equivalents aggregating approximately $88,000, $85,000 and $65,000, respectively, were charged against retained earnings when common stock dividends were declared.

          The Company has a stock option plan (the “Stock Option Plan”). The Company’s authorization to grant options to purchase shares of the Company’s common stock under the Stock Option Plan expired in January 2008. No options were granted in 2008. Stock options vest starting one year from the date of grant, on a cumulative basis at the annual rate of twenty-five percent of the total number of options covered by the award. As of December 31, 2008, there was $10,000 of unrecognized compensation cost related to non-vested options granted in May 2007 under the Stock Option Plan with an estimated fair value of $18,000, or $3.51 per option. The total fair value of the options vested during the years ended December 31, 2008 and 2006 was $4,000 and $8,000, respectively. As of December 31, 2008, there were 1,750, 10,500 and 5,000 options outstanding which were exercisable at prices of $16.15, $18.30 and $27.68 with a remaining contractual life of three, four and nine years, respectively.

61


          The following is a schedule of stock option prices and activity relating to the Stock Option Plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

YEAR ENDED DECEMBER 31,

 

 

 


 

 

 

2008

 

 

2007

 

 

2006

 

 

 






 






 






 

 

 

 

NUMBER
OF SHARES

 

 

WEIGHTED-
AVERAGE
EXERCISE
PRICE

 

 

WEIGHTED-
AVERAGE
REMAINING
CONTRACTUAL
TERM

 

 

AGGREGATE
INTRINSIC
VALUE
(IN THOUSANDS)

 

 

NUMBER
OF SHARES

 

 

WEIGHTED-
AVERAGE
EXERCISE
PRICE

 

 

NUMBER
OF SHARES

 

 

WEIGHTED-
AVERAGE
EXERCISE
PRICE

 

 

 



 



 



 



 



 



 



 



 

Outstanding at beginning of year

 

 

17,750

 

$

20.73

 

 

 

 

 

 

 

 

12,750

 

$

18.00

 

 

84,378

 

$

19.48

 

Issued

 

 

 

 

 

 

 

 

 

 

 

 

5,000

 

 

27.68

 

 

 

 

 

Exercised (a)

 

 

(500

)

 

18.30

 

 

 

 

 

 

 

 

 

 

 

 

(71,628

)

 

19.74

 

Cancelled

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 

 

 

 

 

 

 



 



 



 



 

Outstanding at end of year

 

 

17,250

 

$

20.80

 

 

5.3

 

$

4

 

 

17,750

 

$

20.73

 

 

12,750

 

$

18.00

 

 

 



 



 



 



 



 



 



 



 

Exercisable at end of year (b)

 

 

13,500

 

$

18.89

 

 

4.8

 

$

29

 

 

12,750

 

$

18.00

 

 

12,750

 

$

18.00

 

 

 



 



 



 



 



 



 



 



 


 

 

(a)

The total intrinsic value of the options exercised during the years ended December 31, 2008 and 2006 was $5,000 and $704,000, respectively.

 

 

(b)

The options vested during the years ended December 31, 2008 and 2006 was 1,250 and 14,875, respectively. No options vested during the year ended December 31, 2007.

9. QUARTERLY FINANCIAL DATA

          The following is a summary of the quarterly results of operations for the years ended December 31, 2008 and 2007 (unaudited as to quarterly information) (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

 

 

 

 


 

YEAR ENDED
DECEMBER 31,

 

YEAR ENDED DECEMBER 31, 2008

 

MARCH 31,

 

JUNE 30,

 

SEPTEMBER 30,

 

DECEMBER 31,

 

 


 


 


 


 


 


 

Revenues from rental properties

 

$

20,242

 

$

20,187

 

$

20,328

 

$

20,406

 

$

81,163

 

Earnings from continuing operations

 

 

10,832

 

 

9,361

 

 

10,011

 

 

8,958

 

 

39,162

 

Net earnings

 

 

11,371

 

 

10,635

 

 

10,489

 

 

9,315

 

 

41,810

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

 

.44

 

 

.38

 

 

.40

 

 

.36

 

 

1.58

 

Net earnings

 

 

.46

 

 

.43

 

 

.42

 

 

.38

 

 

1.69

 

 

 

 

 

THREE MONTHS ENDED

 

 

 

 

 

 


 

YEAR ENDED
DECEMBER 31,

 

YEAR ENDED DECEMBER 31, 2007 (a)

 

MARCH 31,

 

JUNE 30,

 

SEPTEMBER 30,

 

DECEMBER 31,

 

 


 


 


 


 


 


 

Revenues from rental properties

 

$

17,713

 

$

20,248

 

$

20,000

 

$

20,108

 

$

78,069

 

Earnings (loss) from continuing operations (b)(c)

 

 

10,194

 

 

8,507

 

 

9,907

 

 

(498

)

 

28,110

 

Net earnings (b)(c)

 

 

10,437

 

 

10,024

 

 

12,846

 

 

587

 

 

33,894

 

Diluted earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) from continuing
operations (b)(c)

 

 

.41

 

 

.34

 

 

.40

 

 

(.02

)

 

1.13

 

Net earnings (b)(c)

 

 

.42

 

 

.40

 

 

.52

 

 

.02

 

 

1.37

 


 

 

(a)

Includes (from the date of the acquisition) the effect of the $84.6 million acquisition of convenience stores and gas station properties from FF-TSY Holding Company II LLC (successor to Trustreet Properties, Inc.) which was substantially completed by the end of the first quarter of 2007 (See footnote 10 for additional information).

 

 

(b)

The quarter ended December 31, 2007 includes the effect of a $10.5 million non-cash reserve for the full amount of the deferred rent receivable recorded as of December 31, 2007 related to approximately 40% of the properties under leases with Marketing, (See footnote 3 for additional information).

 

 

(c)

The quarter ended December 31, 2007 includes a net expense of $447,000 related to Mr. Andy Smith’s resignation (See footnote 8 for additional information).

62


10. PROPERTY ACQUISITIONS

          On February 28, 2006, the Company completed the acquisition of eighteen retail motor fuel and convenience store properties located in Western New York for approximately $13,389,000. Simultaneous with the closing on the acquisition, the Company entered into a triple-net lease with a single tenant for all of the properties. The lease provides for annual rentals at a competitive rate and provides for escalations thereafter. The lease has an initial term of fifteen years and provides the tenant options for three renewal terms of five years each. The lease also provides that the tenant is responsible for all existing and future environmental conditions at the properties.

          Effective March 31, 2007, the Company acquired fifty-nine convenience store and retail motor fuel properties in ten states for approximately $79,335,000 from various subsidiaries of FF-TSY Holding Company II, LLC (the successor to Trustreet Properties, Inc.) (“Trustreet”), a subsidiary of General Electric Capital Corporation, for cash with funds drawn under its Credit Agreement. Effective April 23, 2007, the Company acquired five additional properties from Trustreet for approximately $5,200,000. The aggregate cost of the acquisitions, including $1,131,000 of transaction costs, is approximately $84,535,000. Substantially all of the properties are triple-net-leased to tenants who previously leased the properties from the seller. The leases generally provide that the tenants are responsible for substantially all existing and future environmental conditions at the properties.

          The purchase price has been allocated between assets, liabilities and intangible assets based on the estimates of fair value. The Company estimated the fair value of acquired tangible assets (consisting of land, buildings and improvements) “as if vacant” and identified intangible assets and liabilities (consisting of leasehold interests, above-market and below-market leases and in-place leases). Based on these estimates, the Company allocated $89,908,000, $5,351,000 and $10,724,000 of the purchase price to acquired tangible assets; identified intangible assets; and identified intangible liabilities, respectively.

          The following unaudited pro forma condensed consolidated financial information has been prepared utilizing the historical financial statements of Getty Realty Corp. and the historical financial information of the properties acquired in 2007 which was derived from the consolidated books and records of Trustreet. The unaudited pro forma condensed consolidated financial information assumes that the acquisitions had occurred as of the beginning of each of the periods presented, after giving effect to certain adjustments including (a) rental income adjustments resulting from (i) the straight-lining of scheduled rent increases and (ii) the net amortization of the intangible assets relating to above-market leases and intangible liabilities relating to below-market leases over the remaining lease terms which average eleven years and (b) depreciation and amortization adjustments resulting from (i) the depreciation of real estate assets over their useful lives which average seventeen years and (ii) the amortization of intangible assets relating to leases in place over the remaining lease terms. The following unaudited pro forma condensed consolidated financial information also gives effect to the additional interest expense resulting from the assumed increase in borrowing outstanding drawn under the Credit Agreement to fund the acquisition.

          The unaudited pro forma condensed financial information the years ended December 31, 2007 and 2006 is not indicative of the results of operations that would have been achieved had the acquisition from Trustreet reflected herein been consummated on the dates indicated or that will be achieved in the future and is as follows (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

2007

 

2006

 

 

 


 


 

Revenues from rental properties

 

$

81,344

 

$

81,724

 

 

 



 



 

Net earnings

 

$

34,348

 

$

43,900

 

 

 



 



 

Net earnings per share

 

 

 

 

 

 

 

Basic

 

$

1.39

 

$

1.77

 

Diluted

 

$

1.39

 

$

1.77

 

          In 2007, the Company also exercised its fixed price purchase option for seven leased properties, purchased two properties and redeveloped one property by purchasing land adjacent to it and building a new convenience store on the existing site. In 2008, the Company exercised its fixed price purchase option for three leased properties and purchased six properties.

63


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Getty Realty Corp.:

          In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income and cash flows present fairly, in all material respects, the financial position of Getty Realty Corp. and its subsidiaries at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

          A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

          Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ PricewaterhouseCoopers LLP

New York, New York

March 2, 2009

64


Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

          None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

          The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or furnished pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

          As required by the Exchange Act Rule 13a-15(b), the Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2008.

Management’s Report on Internal Control Over Financial Reporting

          Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.

          The effectiveness of our internal control over financial reporting as of December 31, 2008, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in “Item 8. Financial Statements and Supplementary Data”.

          There have been no changes in the Company’s internal control over financial reporting during the latest fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

NYSE Certifications

          On June 16, 2008, in accordance with Section 303A.12 of the Listed Company Manual of the New York Stock Exchange, our Chief Executive Officer certified to the New York Stock Exchange that he was not aware of any violation by our Company of New York Stock Exchange corporate governance listing standards as of that date. Further the Company files certifications by its Chief Executive Officer and Chief Financial Officer with the SEC, in accordance with the Sarbanes-Oxley Act of 2002. These certifications are filed as exhibits to this our Annual Report on Form 10-K.

Item 9B. Other Information

          None.

65


PART III

Item 10. Directors, Executive Officers and Corporate Governance

          Information with respect to compliance with section 16(a) of the Exchange Act is incorporated herein by reference to information under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. Information with respect to directors, the audit committee and the audit committee financial expert, and procedures by which shareholders may recommend to nominees to the board of directors in response to this item is incorporated herein by reference to information under the headings “Election of Directors” and “Directors’ Meetings, Committees and Executive Officers” in the Proxy Statement. The following table lists our executive officers, their respective ages, and the offices and positions held.

 

 

 

 

NAME

AGE

POSITION

OFFICER SINCE





Leo Liebowitz

81

Chairman and Chief Executive Officer

1971

Kevin C. Shea

49

Executive Vice President

2001

Thomas J. Stirnweis

50

Vice President, Treasurer and Chief Financial Officer

2001

Joshua Dicker

48

General Counsel and Corporate Secretary

2008

          Mr. Liebowitz cofounded the Company in 1955 and has served as Chief Executive Officer since 1985. He was the President of the Company from May 1971 to May 2004. Mr. Liebowitz served as Chairman, Chief Executive Officer and a director of Marketing from October 1996 until December 2000. He is also a director of the Regional Banking Advisory Board of J.P. Morgan Chase & Co.

          Mr. Shea has been with the Company since 1984 and has served as Executive Vice President since May 2004. He was Vice President since January 2001 and Director of National Real Estate Development prior thereto.

          Mr. Stirnweis has been with the Company or Getty Petroleum Marketing Inc. since 1988 and has served as Vice President, Treasurer and Chief Financial Officer of the Company since May 2003. He joined the Company in January 2001 as Corporate Controller and Treasurer. Prior to joining the Company, Mr. Stirnweis was Manager of Financial Reporting and Analysis of Marketing.

          Mr. Dicker joined the Company in February 2008 as General Counsel and Corporate Secretary. Prior to joining Getty, he was a partner at the national law firm Arent Fox, LLP, resident in its New York City office, specializing in corporate and transactional matters.

          There are no family relationships between any of the Company’s directors or executive officers.

          The Getty Realty Corp. Business Conduct Guidelines (“Code of Ethics”), which applies to all employees, including our chief executive officer and chief financial officer, is available on our website at www.gettyrealty.com.

Item 11. Executive Compensation

          Information in response to this item is incorporated herein by reference to information under the heading “Executive Compensation” in the Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

          Information in response to this item is incorporated herein by reference to information under the heading “Beneficial Ownership of Capital Stock” and “Executive Compensation — Compensation Discussion and Analysis — Equity Compensation — Equity Compensation Plan Information” in the Proxy Statement.

66


Item 13. Certain Relationships and Related Transactions, and Director Independence

          There were no such relationships or transactions to report for the year ended December 31, 2008. Information with respect to director independence is incorporated herein by reference to information under the heading “Directors’ Meetings, Committees and Executive Officers — Independence of Directors” in the Proxy Statement.

Item 14. Principal Accountant Fees and Services

         Information in response to this item is incorporated herein by reference to information under the heading “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement.

67


PART IV

Item 15. Exhibits and Financial Statement Schedules

 

 

 

(a)(1) Financial Statements

 

 

 

Information in response to this Item is included in “Item 8. Financial Statements and Supplementary Data”.

 

 

 

(a)(2) Financial Statement Schedules

GETTY REALTY CORP.
INDEX TO FINANCIAL STATEMENT SCHEDULES
Item 15(a)(2)

 

 

 

 

 

PAGES

 

 


Report of Independent Registered Public Accounting Firm on Financial Statement Schedules

 

69

Schedule II - Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2008, 2007 and 2006

 

69

Schedule III - Real Estate and Accumulated Depreciation and Amortization as of December 31, 2008

 

70


 

 

 

(a)(3) Exhibits

 

 

 

Information in response to this Item is incorporated herein by reference to the Exhibit Index on page 86 of this Form 10-K.

68


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULES

To the Board of Directors of Getty Realty Corp.:

          Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated March 2, 2009 appearing in Item 8 of this Annual Report on Form 10-K also included an audit of the financial statement schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

New York, New York
March 2, 2009

GETTY REALTY CORP. and SUBSIDIARIES
SCHEDULE II — VALUATION and QUALIFYING ACCOUNTS and RESERVES
for the years ended December 31, 2008, 2007 and 2006
(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT
BEGINNING
OF YEAR

 

ADDITIONS

 

DEDUCTIONS

 

BALANCE
AT END
OF YEAR

 

 

 


 


 


 


 

December 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for deferred rent receivable

 

$

10,494

 

$

 

$

465

 

$

10,029

 

Allowance for mortgages and accounts receivable

 

$

100

 

$

71

 

$

71

 

$

100

 

Allowance for deposits held in escrow

 

$

 

$

377

 

$

 

$

377

 

Allowance for recoveries from state underground storage tank funds

 

$

650

 

$

 

$

 

$

650

 

December 31, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for deferred rent receivable

 

$

 

$

10,494

 

$

 

$

10,494

 

Allowance for mortgages and accounts receivable

 

$

30

 

$

70

 

$

 

$

100

 

Allowance for recoveries from state underground storage tank funds

 

$

650

 

$

 

$

 

$

650

 

December 31, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for mortgages and accounts receivable

 

$

29

 

$

44

 

$

43

 

$

30

 

Allowance for recoveries from state underground storage tank funds

 

$

750

 

$

 

$

100

 

$

650

 

69


GETTY REALTY CORP. and SUBSIDIARIES
SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION
As of December 31, 2008
(in thousands)

          The summarized changes in real estate assets and accumulated depreciation are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

2006

 

 

 


 


 


 

Investment in real estate:

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

$

474,254

 

$

383,558

 

$

370,495

 

Acquisitions

 

 

6,540

 

 

94,700

 

 

15,496

 

Capital expenditures

 

 

 

 

1,310

 

 

42

 

Sales and condemnations

 

 

(3,939

)

 

(3,464

)

 

(1,416

)

Lease terminations

 

 

(3,288

)

 

(1,850

)

 

(1,059

)

 

 



 



 



 

Balance at end of year

 

$

473,567

 

$

474,254

 

$

383,558

 

 

 



 



 



 

Accumulated depreciation and amortization:

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

$

122,465

 

$

116,089

 

$

109,800

 

Depreciation and amortization expense

 

 

11,576

 

 

9,448

 

 

7,883

 

Sales and condemnations

 

 

(1,431

)

 

(1,222

)

 

(535

)

Lease terminations

 

 

(3,288

)

 

(1,850

)

 

(1,059

)

 

 



 



 



 

Balance at end of year

 

$

129,322

 

$

122,465

 

$

116,089

 

 

 



 



 



 

          We are not aware of any material liens or encumbrances on any of our properties.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial Cost
of Leasehold
or Acquisition
Investment to
Company (1)

 

Cost
Capitalized
Subsequent
to Initial
Investment

 

Gross Amount at Which Carried
at Close of Period

 

Accumulated
Depreciation

 

Date of Initial
Leasehold or
Acquisition
Investment (1)

 

 

 

 


 

 

Description

 

 

 

Land

 

Building and
Improvements

 

Total

 

 






















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CEDAR PARK, TX

 

$

178,507

 

$

0

 

$

42,091

 

$

136,415

 

$

178,507

 

$

12,414

 

2007

ALBANY, NY

 

 

142,312

 

 

36,831

 

 

91,600

 

 

87,543

 

 

179,143

 

 

59,357

 

1985

SALISBURY, MA

 

 

119,698

 

 

59,615

 

 

80,598

 

 

98,715

 

 

179,313

 

 

89,410

 

1986

CARMEL, NY

 

 

20,419

 

 

158,943

 

 

20,750

 

 

158,612

 

 

179,362

 

 

154,391

 

1970

POTTSTOWN, PA

 

 

166,236

 

 

16,010

 

 

71,631

 

 

110,615

 

 

182,246

 

 

94,975

 

1989

LONG ISLAND CITY, NY

 

 

90,895

 

 

91,386

 

 

60,030

 

 

122,251

 

 

182,281

 

 

115,438

 

1972

BOILING SPRINGS, PA

 

 

14,792

 

 

167,641

 

 

14,792

 

 

167,641

 

 

182,433

 

 

151,310

 

1961

ARLINGTON, TX

 

 

182,460

 

 

0

 

 

30,425

 

 

152,035

 

 

182,460

 

 

17,212

 

2007

GREENVILLE, NY

 

 

77,153

 

 

105,325

 

 

77,152

 

 

105,326

 

 

182,478

 

 

99,023

 

1989

PIERMONT, NY

 

 

151,125

 

 

31,470

 

 

90,675

 

 

91,920

 

 

182,595

 

 

91,920

 

1978

SOUTH PORTLAND, ME

 

 

176,700

 

 

6,938

 

 

115,100

 

 

68,538

 

 

183,638

 

 

33,203

 

1985

AUBURN, ME

 

 

105,908

 

 

77,928

 

 

105,908

 

 

77,928

 

 

183,836

 

 

77,781

 

1986

KINGSTON, NY

 

 

68,341

 

 

115,961

 

 

44,379

 

 

139,923

 

 

184,302

 

 

136,199

 

1971

HOWELL, NJ

 

 

9,750

 

 

174,857

 

 

0

 

 

184,607

 

 

184,607

 

 

184,035

 

1978

PITTSFIELD, MA

 

 

97,153

 

 

87,874

 

 

40,000

 

 

145,027

 

 

185,027

 

 

144,983

 

1982

AGAWAM, MA

 

 

65,000

 

 

120,665

 

 

0

 

 

185,665

 

 

185,665

 

 

183,366

 

1982

IPSWICH, MA

 

 

138,918

 

 

46,831

 

 

95,718

 

 

90,031

 

 

185,749

 

 

87,034

 

1986

GETTYSBURG, PA

 

 

157,602

 

 

28,530

 

 

67,602

 

 

118,530

 

 

186,132

 

 

117,939

 

1986

ATHOL, MA

 

 

164,629

 

 

22,016

 

 

107,009

 

 

79,636

 

 

186,645

 

 

33,779

 

1991

GLEN ROCK, PA

 

 

20,442

 

 

166,633

 

 

20,442

 

 

166,633

 

 

187,075

 

 

145,128

 

1961

WHITE PLAINS, NY

 

 

120,393

 

 

67,315

 

 

0

 

 

187,708

 

 

187,708

 

 

187,708

 

1979

HADLEY, MA

 

 

119,276

 

 

68,748

 

 

36,080

 

 

151,944

 

 

188,024

 

 

147,948

 

1982

KINGSTON, NY

 

 

29,010

 

 

159,986

 

 

12,721

 

 

176,275

 

 

188,996

 

 

167,892

 

1972

TONAWANDA, NY

 

 

189,296

 

 

0

 

 

147,122

 

 

42,174

 

 

189,296

 

 

15,886

 

2000

SEAFORD, NY

 

 

32,000

 

 

157,665

 

 

0

 

 

189,665

 

 

189,665

 

 

162,443

 

1978

WISCASSET, ME

 

 

156,587

 

 

33,455

 

 

90,837

 

 

99,205

 

 

190,042

 

 

99,205

 

1986

BRISTOL, CT

 

 

108,808

 

 

81,684

 

 

44,000

 

 

146,492

 

 

190,492

 

 

142,705

 

1982

YONKERS, NY

 

 

111,300

 

 

80,000

 

 

65,000

 

 

126,300

 

 

191,300

 

 

116,522

 

1988

LANGHORNE, PA

 

 

122,202

 

 

69,328

 

 

50,000

 

 

141,530

 

 

191,530

 

 

96,391

 

1987

DELMAR, NY

 

 

150,000

 

 

42,478

 

 

70,000

 

 

122,478

 

 

192,478

 

 

118,294

 

1986

HUNTINGTON STATION, NY

 

 

140,735

 

 

52,045

 

 

84,000

 

 

108,780

 

 

192,780

 

 

108,416

 

1978

MECHANICSVILLE, VA

 

 

0

 

 

193,088

 

 

193,088

 

 

0

 

 

193,088

 

 

0

 

2005

70


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial Cost
of Leasehold
or Acquisition
Investment to
Company (1)

 

Cost
Capitalized
Subsequent
to Initial
Investment

 

Gross Amount at Which Carried
at Close of Period

 

Accumulated
Depreciation

 

Date of Initial
Leasehold or
Acquisition
Investment (1)

 

 

 

 


 

 

Description

 

 

 

Land

 

Building and
Improvements

 

Total

 

 






















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CHRISTIANA, PA

 

 

182,593

 

 

11,178

 

 

65,212

 

 

128,559

 

 

193,771

 

 

128,559

 

1989

LINWOOD, PA

 

 

171,518

 

 

22,371

 

 

102,968

 

 

90,921

 

 

193,889

 

 

89,412

 

1987

OZONE PARK, NY

 

 

0

 

 

193,968

 

 

0

 

 

193,968

 

 

193,968

 

 

193,968

 

1986

ELMONT, NY

 

 

108,348

 

 

85,793

 

 

64,290

 

 

129,851

 

 

194,141

 

 

96,559

 

1982

ROTHSVILLE, PA

 

 

169,550

 

 

25,188

 

 

52,169

 

 

142,569

 

 

194,738

 

 

142,569

 

1989

OLD BRIDGE, NJ

 

 

85,617

 

 

109,980

 

 

56,190

 

 

139,407

 

 

195,597

 

 

138,339

 

1972

BREWSTER, NY

 

 

117,603

 

 

78,076

 

 

72,403

 

 

123,276

 

 

195,679

 

 

116,856

 

1972

BLOOMFIELD, CT

 

 

141,452

 

 

54,786

 

 

90,000

 

 

106,238

 

 

196,238

 

 

102,146

 

1986

JACKSONVILLE, FL

 

 

196,764

 

 

0

 

 

114,434

 

 

82,330

 

 

196,764

 

 

31,009

 

2000

EPHRATA, PA

 

 

187,843

 

 

9,400

 

 

65,212

 

 

132,031

 

 

197,243

 

 

131,124

 

1989

BRONX, NY

 

 

95,328

 

 

102,639

 

 

73,750

 

 

124,217

 

 

197,967

 

 

118,171

 

1976

RAVENA, NY

 

 

0

 

 

199,900

 

 

0

 

 

199,900

 

 

199,900

 

 

193,108

 

1991

BROOKLYN, NY

 

 

74,808

 

 

125,120

 

 

30,694

 

 

169,234

 

 

199,928

 

 

164,543

 

1967

POUGHKEEPSIE, NY

 

 

32,885

 

 

168,354

 

 

35,904

 

 

165,335

 

 

201,239

 

 

158,649

 

1971

JACKSONVILLE, FL

 

 

201,477

 

 

0

 

 

117,907

 

 

83,570

 

 

201,477

 

 

31,479

 

2000

DOUGLASSVILLE, PA

 

 

178,488

 

 

23,321

 

 

128,738

 

 

73,071

 

 

201,809

 

 

73,071

 

1990

CATSKILL, NY

 

 

104,447

 

 

99,076

 

 

203,523

 

 

0

 

 

203,523

 

 

0

 

1989

RHINEBECK, NY

 

 

203,658

 

 

0

 

 

101,829

 

 

101,829

 

 

203,658

 

 

9,505

 

2007

QUARRYVILLE, NY

 

 

35,917

 

 

168,199

 

 

35,916

 

 

168,200

 

 

204,116

 

 

161,348

 

1988

LEXINGTON, NC

 

 

204,139

 

 

0

 

 

43,311

 

 

160,828

 

 

204,139

 

 

17,602

 

2007

EXETER, NH

 

 

160,000

 

 

44,343

 

 

105,000

 

 

99,343

 

 

204,343

 

 

83,837

 

1986

MIDDLE VILLAGE, NY

 

 

130,684

 

 

73,741

 

 

89,960

 

 

114,465

 

 

204,425

 

 

108,299

 

1972

LEWISTON, NY

 

 

205,000

 

 

0

 

 

125,000

 

 

80,000

 

 

205,000

 

 

30,133

 

2000

MIDLAND PARK, NJ

 

 

201,012

 

 

4,080

 

 

150,000

 

 

55,092

 

 

205,092

 

 

49,668

 

1989

AUBURN, MA

 

 

175,048

 

 

30,890

 

 

125,048

 

 

80,890

 

 

205,938

 

 

80,639

 

1986

LAKEWOOD, NJ

 

 

130,148

 

 

77,265

 

 

70,148

 

 

137,265

 

 

207,413

 

 

136,702

 

1978

CLINTON, MA

 

 

177,978

 

 

29,790

 

 

115,686

 

 

92,082

 

 

207,768

 

 

43,245

 

1992

TOLLAND, CT

 

 

107,902

 

 

100,178

 

 

44,000

 

 

164,080

 

 

208,080

 

 

161,058

 

1982

BALDWIN, NY

 

 

101,952

 

 

106,328

 

 

61,552

 

 

146,728

 

 

208,280

 

 

112,964

 

1978

NORTH BABYLON, NY

 

 

91,888

 

 

117,066

 

 

59,059

 

 

149,895

 

 

208,954

 

 

147,091

 

1978

NEW YORK, NY

 

 

106,363

 

 

103,035

 

 

79,275

 

 

130,123

 

 

209,398

 

 

126,852

 

1976

HANCOCK, NY

 

 

100,000

 

 

109,470

 

 

50,000

 

 

159,470

 

 

209,470

 

 

155,229

 

1986

WATERFORD, CT

 

 

76,981

 

 

133,059

 

 

0

 

 

210,040

 

 

210,040

 

 

202,481

 

1982

AMITYVILLE, NY

 

 

70,246

 

 

139,953

 

 

42,148

 

 

168,051

 

 

210,199

 

 

168,051

 

1978

OCEANSIDE, NY

 

 

40,378

 

 

169,929

 

 

40,000

 

 

170,307

 

 

210,307

 

 

137,354

 

1970

MENANDS, NY

 

 

150,580

 

 

60,563

 

 

49,999

 

 

161,144

 

 

211,143

 

 

147,689

 

1988

WILLIAMSVILLE, NY

 

 

211,972

 

 

0

 

 

176,643

 

 

35,329

 

 

211,972

 

 

13,306

 

2000

PELHAM MANOR, NY

 

 

127,304

 

 

85,087

 

 

75,800

 

 

136,591

 

 

212,391

 

 

126,720

 

1972

MILLER PLACE, NY

 

 

110,000

 

 

103,160

 

 

66,000

 

 

147,160

 

 

213,160

 

 

145,331

 

1978

BRONX, NY

 

 

93,817

 

 

120,396

 

 

67,200

 

 

147,013

 

 

214,213

 

 

124,497

 

1985

MILFORD, MA

 

 

0

 

 

214,331

 

 

0

 

 

214,331

 

 

214,331

 

 

173,037

 

1985

BLUEPOINT, NY

 

 

96,163

 

 

118,524

 

 

96,068

 

 

118,619

 

 

214,687

 

 

114,006

 

1972

MOUNTVILLE, PA

 

 

195,635

 

 

19,506

 

 

78,254

 

 

136,887

 

 

215,141

 

 

136,887

 

1989

BAY SHORE, NY

 

 

188,900

 

 

26,286

 

 

123,000

 

 

92,186

 

 

215,186

 

 

53,485

 

1985

N. WINDHAM, ME

 

 

161,365

 

 

53,923

 

 

86,365

 

 

128,923

 

 

215,288

 

 

128,884

 

1986

TEWKSBURY, MA

 

 

125,000

 

 

90,338

 

 

75,000

 

 

140,338

 

 

215,338

 

 

134,274

 

1986

STRATFORD, NJ

 

 

215,597

 

 

0

 

 

0

 

 

215,597

 

 

215,597

 

 

206,617

 

1995

PELHAM MANOR, NY

 

 

136,791

 

 

78,987

 

 

75,000

 

 

140,778

 

 

215,778

 

 

137,650

 

1985

SEABROOK, NH

 

 

199,780

 

 

19,102

 

 

124,780

 

 

94,102

 

 

218,882

 

 

93,844

 

1986

FRANKLIN, CT

 

 

50,904

 

 

168,470

 

 

20,232

 

 

199,142

 

 

219,374

 

 

198,201

 

1982

WESTFIELD, MA

 

 

123,323

 

 

96,093

 

 

50,000

 

 

169,416

 

 

219,416

 

 

166,343

 

1982

HAMPTON, NH

 

 

193,103

 

 

26,449

 

 

135,598

 

 

83,954

 

 

219,552

 

 

83,589

 

1986

MIDDLETOWN, CT

 

 

133,022

 

 

86,915

 

 

131,312

 

 

88,625

 

 

219,937

 

 

88,625

 

1987

WORCESTER, MA

 

 

186,877

 

 

33,510

 

 

121,470

 

 

98,917

 

 

220,387

 

 

47,387

 

1993

STONY BROOK, NY

 

 

175,921

 

 

44,529

 

 

105,000

 

 

115,450

 

 

220,450

 

 

114,507

 

1978

YONKERS, NY

 

 

153,184

 

 

67,266

 

 

76,592

 

 

143,858

 

 

220,450

 

 

78,260

 

1987

EMMITSBURG, MD

 

 

146,949

 

 

73,613

 

 

101,949

 

 

118,613

 

 

220,562

 

 

118,392

 

1986

MANCHESTER, CT

 

 

65,590

 

 

156,628

 

 

64,750

 

 

157,468

 

 

222,218

 

 

156,833

 

1982

STATEN ISLAND, NY

 

 

0

 

 

222,525

 

 

0

 

 

222,525

 

 

222,525

 

 

222,525

 

1981

PELHAM, NH

 

 

169,182

 

 

53,497

 

 

136,077

 

 

86,602

 

 

222,679

 

 

80,417

 

1986

AMHERST, NY

 

 

223,009

 

 

0

 

 

173,451

 

 

49,558

 

 

223,009

 

 

29,860

 

2000

NEW ROCHELLE, NY

 

 

188,932

 

 

34,649

 

 

103,932

 

 

119,649

 

 

223,581

 

 

119,017

 

1982

71


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial Cost
of Leasehold
or Acquisition
Investment to
Company (1)

 

Cost
Capitalized
Subsequent
to Initial
Investment

 

Gross Amount at Which Carried
at Close of Period

 

Accumulated
Depreciation

 

Date of Initial
Leasehold or
Acquisition
Investment (1)

 

 

 

 


 

 

Description

 

 

 

Land

 

Building and
Improvements

 

Total

 

 






















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SOMERSWORTH, NH

 

 

210,805

 

 

15,012

 

 

157,520

 

 

68,297

 

 

225,817

 

 

68,169

 

1986

RED HOOK, NY

 

 

0

 

 

226,787

 

 

0

 

 

226,787

 

 

226,787

 

 

220,274

 

1991

BRIDGEWATER, MA

 

 

190,360

 

 

36,762

 

 

140,000

 

 

87,122

 

 

227,122

 

 

81,814

 

1987

BROOKLYN, NY

 

 

135,693

 

 

91,946

 

 

100,035

 

 

127,604

 

 

227,639

 

 

107,679

 

1972

NEW YORK, NY

 

 

0

 

 

229,435

 

 

0

 

 

229,435

 

 

229,435

 

 

229,433

 

1985

HYANNIS, MA

 

 

222,472

 

 

7,282

 

 

144,607

 

 

85,147

 

 

229,754

 

 

24,909

 

1991

LAGRANGEVILLE, NY

 

 

129,133

 

 

101,140

 

 

64,626

 

 

165,647

 

 

230,273

 

 

163,995

 

1972

PINE HILL, NJ

 

 

190,568

 

 

39,918

 

 

115,568

 

 

114,918

 

 

230,486

 

 

112,628

 

1986

TREVOSE, PA

 

 

215,214

 

 

16,382

 

 

150,000

 

 

81,596

 

 

231,596

 

 

71,123

 

1987

MILFORD, NH

 

 

190,000

 

 

41,689

 

 

115,000

 

 

116,689

 

 

231,689

 

 

112,700

 

1986

W. HAVERSTRAW, NY

 

 

194,181

 

 

38,141

 

 

140,000

 

 

92,322

 

 

232,322

 

 

87,313

 

1978

MERIDEN, CT

 

 

126,188

 

 

106,805

 

 

72,344

 

 

160,649

 

 

232,993

 

 

155,320

 

1982

LANCASTER, PA

 

 

208,677

 

 

24,347

 

 

78,254

 

 

154,770

 

 

233,024

 

 

154,770

 

1989

WEST HAVEN, CT

 

 

185,138

 

 

48,619

 

 

74,000

 

 

159,757

 

 

233,757

 

 

157,837

 

1982

LEOMINSTER, MA

 

 

185,040

 

 

49,592

 

 

85,040

 

 

149,592

 

 

234,632

 

 

147,070

 

1986

PELHAM, NH

 

 

0

 

 

234,915

 

 

0

 

 

234,915

 

 

234,915

 

 

140,743

 

1996

NEW MILFORD, CT

 

 

113,947

 

 

121,174

 

 

0

 

 

235,121

 

 

235,121

 

 

231,921

 

1982

EBENEZER, PA

 

 

147,058

 

 

88,474

 

 

68,804

 

 

166,728

 

 

235,532

 

 

144,565

 

1989

STOUGHTON, MA

 

 

0

 

 

235,794

 

 

0

 

 

235,794

 

 

235,794

 

 

200,384

 

1990

QUINCY, MA

 

 

200,000

 

 

36,112

 

 

125,000

 

 

111,112

 

 

236,112

 

 

109,396

 

1986

HARWICH, MA

 

 

225,000

 

 

12,044

 

 

150,000

 

 

87,044

 

 

237,044

 

 

84,250

 

1986

NORTH KINGSTOWN, RI

 

 

211,835

 

 

25,971

 

 

89,135

 

 

148,671

 

 

237,806

 

 

147,346

 

1985

KENHORST, PA

 

 

143,466

 

 

94,592

 

 

65,212

 

 

172,846

 

 

238,058

 

 

154,465

 

1989

BOYERTOWN, PA

 

 

233,000

 

 

5,373

 

 

151,700

 

 

86,673

 

 

238,373

 

 

40,875

 

1985

ATCO, NJ

 

 

153,159

 

 

85,853

 

 

131,766

 

 

107,246

 

 

239,012

 

 

107,063

 

1987

SPRINGFIELD, MA

 

 

0

 

 

239,087

 

 

0

 

 

239,087

 

 

239,087

 

 

183,746

 

1984

COLUMBIA, PA

 

 

225,906

 

 

13,206

 

 

75,000

 

 

164,112

 

 

239,112

 

 

139,513

 

1989

PAWTUCKET, RI

 

 

237,100

 

 

2,990

 

 

154,400

 

 

85,690

 

 

240,090

 

 

39,103

 

1985

NEW HAVEN, CT

 

 

217,000

 

 

23,889

 

 

141,300

 

 

99,589

 

 

240,889

 

 

55,976

 

1985

ROTTERDAM, NY

 

 

140,600

 

 

100,399

 

 

91,600

 

 

149,399

 

 

240,999

 

 

112,696

 

1985

SACO, ME

 

 

204,006

 

 

37,173

 

 

150,694

 

 

90,485

 

 

241,179

 

 

90,385

 

1986

SOMERSWORTH, NH

 

 

180,800

 

 

60,497

 

 

117,700

 

 

123,597

 

 

241,297

 

 

72,820

 

1985

PITTSFIELD, MA

 

 

123,167

 

 

118,273

 

 

50,000

 

 

191,440

 

 

241,440

 

 

190,690

 

1982

BRONX, NY

 

 

45,044

 

 

196,956

 

 

10,044

 

 

231,956

 

 

242,000

 

 

202,976

 

1976

LEWISTON, ME

 

 

180,338

 

 

62,629

 

 

101,338

 

 

141,629

 

 

242,967

 

 

139,558

 

1986

LAKE RONKONKOMA, NY

 

 

87,097

 

 

156,576

 

 

51,000

 

 

192,673

 

 

243,673

 

 

189,671

 

1978

HANOVER, PA

 

 

231,028

 

 

13,252

 

 

70,000

 

 

174,280

 

 

244,280

 

 

155,369

 

1989

NEW WINDSOR, NY

 

 

150,000

 

 

94,791

 

 

75,000

 

 

169,791

 

 

244,791

 

 

157,978

 

1986

HILLSBOROUGH, NJ

 

 

237,122

 

 

7,729

 

 

100,000

 

 

144,851

 

 

244,851

 

 

67,608

 

1985

DEDHAM, MA

 

 

225,824

 

 

19,150

 

 

125,824

 

 

119,150

 

 

244,974

 

 

118,859

 

1987

POTTSVILLE, PA

 

 

162,402

 

 

82,769

 

 

43,471

 

 

201,700

 

 

245,171

 

 

188,055

 

1990

YONKERS, NY

 

 

202,826

 

 

42,877

 

 

144,000

 

 

101,703

 

 

245,703

 

 

86,111

 

1986

OSSINING, NY

 

 

140,992

 

 

104,761

 

 

97,527

 

 

148,226

 

 

245,753

 

 

141,908

 

1982

WELLSVILLE, NY

 

 

247,281

 

 

0

 

 

0

 

 

247,281