Critical Growth And Diversification In Retail REITs Fuels Optimistic Financial Outlook

Key Takeaways

• Active portfolio expansion and diversification through significant investments and a strategic focus on sectors like convenience stores and car washes signal strong growth prospects.
  
• Disciplined underwriting and strong industry relationships emphasize a commitment to quality assets and selective growth opportunities, aiming to enhance portfolio performance and financial outcomes.
  
• Market volatility, reliance on specific tenant sectors, and uncertainty in transaction markets pose risks to Getty Realty's investment affordability, portfolio growth, and earnings.

Catalysts

A publicly traded, net lease REIT specializing in the acquisition, financing and development of convenience, automotive and other single tenant retail real estate.

• The 15% year-over-year increase in annualized base rent and a 3.6% increase year-over-year in AFFO per share indicate strong financial growth, suggesting the potential for continued revenue and earnings growth.
  
• Over $100 million of year-to-date investments and the presence of a $53 million investment pipeline at blended cap rates approaching mid-8% area suggest active portfolio expansion and diversification, which could lead to future growth in rental income and net earnings.
  
• The diverse investment strategy across four asset classes (convenience stores, express tunnel car washes, auto service centers, and quick service restaurants) and direct transactions imply a strategic approach towards growth and portfolio diversification, positively impacting revenue and profit margins.
  
• The company's disciplined underwriting criteria and strong industry relationships hint at selective growth opportunities with a focus on high-quality assets, which could improve the overall portfolio's performance and contribute to higher net margins and AFFO per share.
  
• Getty Realty's focus on sectors like convenience stores and car washes, with reports indicating the stability and growth within these sectors, including a significant increase in convenience store inside sales and the resilience of the express tunnel car wash business, suggests a strong foundation for income stability and growth, positively impacting future revenue and earnings.

Assumptions

• Analysts are assuming Getty Realty's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 32.2% today to 35.1% in 3 years time.
• Analysts expect earnings to reach $78.8 million (and earnings per share of $1.29) by about September 2027, up from $63.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 42.5x on those 2027 earnings, up from 29.1x today. This future PE is greater than the current PE for the US Retail REITs industry at 34.0x.
• Analysts expect the number of shares outstanding to grow by 14.23% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.42%, as per the Simply Wall St company report.

Risks

• There is emphasis on the expectation of continued challenges in transaction and capital markets for the remainder of 2024, including uncertainty regarding interest rates, which could impact Getty Realty's ability to finance investments affordably, affecting earnings.
  
• The market sentiment has not changed significantly, with high inventory and persistent seller expectations for lower cap rates, reducing transaction volumes which could hinder the company's growth and portfolio expansion efforts, influencing revenue growth adversely.
  
• Despite an increase in investment pipeline, the material bid-ask spreads between buyers and sellers due to market volatility could lead to missed investment opportunities or overpayment for assets, impacting net margins and earnings negatively.
  
• A significant reliance on the convenience store and car wash tenants, while currently resilient, poses a risk should there be a downturn in these sectors, affecting the company’s rental income stability and thereby, its revenue stream.
  
• The geopolitical environment and its unpredictability were mentioned as a daily surprise, indicating external risks that could lead to increased costs or impacts on the company’s operation not yet foreseen, potentially affecting net earnings.

Valuation

• The analysts have a consensus price target of $31.8 for Getty Realty based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $224.5 million, earnings will come to $78.8 million, and it would be trading on a PE ratio of 42.5x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $32.1, the analyst's price target of $31.8 is 0.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.