Getty Realty (NYSE: GTY) has been on a nice run this year. Shares of the retail REIT, or real estate investment trust, are up more than 20% year-to-date. Fueling that surge in its stock price has been an improving economy, thanks to the vaccine rollout enabling more people to travel, benefiting Getty's auto-related tenants.
That rally likely has real estate investors wondering whether there's any fuel left in the tank. Here's a closer look at the cases for and against buying shares of Getty Realty nowadays.
The case for buying Getty Realty
Getty Realty focuses on owning free-standing properties net leased to automotive-related retailers like gas stations with convenience stores or repair shops, car washes, and other auto service and parts stores.
These tenants held up much better than others in the retail sector, despite the pandemic's impact on travel last year. That's evident in Getty's ability to collect 98% of the rent and mortgage payments owed in 2020.
Overall, Getty Realty grew its adjusted funds from operations (AFFO) per share by 7% last year. The company benefited from rent escalations on its existing contracts, the acquisition of 34 properties for $150 million, and the completion of six redevelopment projects. The company's ability to grow during one of the most challenging periods for retail is a testament to the overall strength of its operations and portfolio.
Meanwhile, Getty invested another $30.3 million to acquire nine properties in the first quarter of 2021. It also provided construction loans for three new convenience stores in the Charleston, South Carolina, market that it expects to purchase via sale-leaseback transactions upon completion.
The REIT also had six more redevelopment projects underway and another five in the pipeline. Those investments should provide Getty with the fuel to continue growing in the near term. In addition to its growth potential, Getty Realty pays an attractive dividend. At a 4.6% yield, it's well above the REIT sector's current average of around 3%.
The case against buying Getty Realty
With Getty Realty's stock rallying this year, shares aren't as cheap as they once were. The REIT currently expects to generate between $1.86 and $1.88 per share of AFFO this year. Considering its recent stock price of around $34 per share, it trades at about 18 times AFFO. While that's not expensive, it's not a screaming bargain either.
Another knock against Getty Realty is its financial profile. While the REIT has an investment-grade credit rating, it's at the bottom rung. Thus, it can't take on too much more debt to fund further expansion without risking a credit rating downgrade that would increase its borrowing costs and reduce its financial flexibility.
Meanwhile, Getty has a rather high dividend payout ratio of 83.4% of its projected 2021 AFFO, further limiting its ability to finance expansion because it's retaining less cash. That forces the retail REIT to issue new stock to fund its expansion, impacting its results on a per-share basis. For example, while its AFFO grew by 8.6% overall in Q1 2021, topping out at $20.9 million, it was only up 2.2% on a per-share basis due to dilutive stock sales.
A final concern with Getty Realty is the potential long-term impact of the energy transition. The electrification of transportation will steadily reduce gasoline demand. While electric vehicles will need access to charging stations, the current convenience store model might not be the way of the future since charging stations can be placed in garages, parking lots, and other locations for easier usage.
Getty is working to combat this headwind by selectively redeveloping gas stations into other retail hubs, such as auto parts stores and fast-food restaurants. Meanwhile, it's investing in acquiring auto-related businesses, such as car washes and auto parts and service stores, that are less likely to face disruption from the energy transition.
Finally, it's worth noting that about half of the customer visits to the company's convenience stores are non-gasoline purchases, suggesting that these essential retail locations should continue to drive sales and rental income for Getty.
Too many caution flags
On one hand, Getty Realty's business model focused on auto-related retail has delivered solid results. The REIT grew its AFFO during the pandemic, enabling it to continue paying an above-average dividend. With more growth ahead, it could continue performing well in the near term.
However, the long-term picture isn't quite as compelling. The REIT doesn't have the strongest financial profile, and its core tenants face a significant future headwind from the energy transition, potentially causing it to struggle to grow in the coming years. As a result, Getty doesn't look like an attractive buy, especially following its recent rally.