Getty Realty (GTY): Fill Up with Gas Station Gains

"Getty was started in 1955 with one service station. The company went public in 1971 and spun off Getty Petroleum Marketing in 1997.

"That company was bought by Lukoil, Russia's largest integrated oil company. Lukoil's service stations currently lease 78% of Getty's properties. The other 22% are leased by individual operators.

"Getty has increased its distribution in small increments for six straight years. In 2004, the dividend was $0.425 cents a quarter.

"With the latest dividend increase in September, GTY is now paying out $0.48 a quarter or $1.92 per unit a year. At current prices, the REIT yields just over 6.6% ($1.92/$29.02).

"In 2009, well over 99% of the distributions came from ordinary income, taxable at your marginal income tax rate.

"Most of the balance was distributed from capital gains. As such, the REIT is best held in a tax-advantaged account.

"For the first nine months of 2010, adjusted funds from operations (AFFO) were $1.61 per unit. Getty uses this measure to calculate its dividend payout ratio.

"Of that amount, $1.35 per unit was distributed or about 83.8% of total AFFO. The payout ratio was down from roughly 90% in the year earlier period, and appears highly sustainable going forward.

"The dividend reinvestment plan is open to any shareholder of record. That means you must hold the units in your name and cannot be a 'beneficial' shareholder or hold the REIT through your broker.

"In addition to dividend reinvestment, shareholders can also purchase additional stock. If more stock is bought, the minimum amount must be $100 and the maximum allowed is $3,000 in a quarter.

"Getty's fortunes remain closely tied to those of Getty Petroleum Marketing, which provides about 80% of revenues.

"This division ensures steady rental income to Getty under long-term leases through 2015, which also provide for annual 2% rent increases.

"The stations haven't missed a single rent payment, but profit margins at the Marketing division tend to be volatile.

"Getty's revenues have grown a steady 5% a year over the past five years, mainly driven by acquisitions. In 2009, they totaled $84.5 million, and are projected to grow to nearly $89 million in 2010.

"At the end of 2009, GTY had $62.5 million in debt, primarily in the form of a revolving line of credit, and $316 million in equity. That gave it a very manageable debt to equity ratio of 0.2 times.

"For the full year 2010, analysts project an increase in funds from operations per unit to $2.15 from $2.12 chalked up in 2009. Estimates for 2011 call for a nominal increase in FFO per unit to $2.16.

"Despite the significant run up -- the REIT has returned over 30% so far this year vs. about 9% for the S&P 500 -- the units are trading roughly on par with their five-year averages on several metrics.

"A trailing P/E of 15.4 compares with a five-year average of close to 16.6; a price to book of 2.7 times compares with the long-term average of 2.9 times, although the price to cash flow of 15.3 is slightly higher than a historical average of 12.3.

"Action to Take --> GTY has so far been minimally affected by the issue of dependence on one major customer for the majority of its revenues and this situation appears to be improving rather than worsening.

"The company has also raised its distribution for six consecutive years, making the REIT suitable for dividend reinvestment.

"For investors seeking an investment with superior yield, rising dividends and double-digit returns over the past 15 years, GTY is a strong prospect."

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