September hasn’t been too kind to Getty Realty (NYSE:GTY), as the shares have declined by 11% since the start of the month. Undoubtedly, fears of another surge in COVID-19 have weighed on the share price. However, I believe the decline is largely unwarranted. In this article, I show why the shares are an attractive investment at the current valuation; so let’s get started.

(Source: Company website)

A Look Into Getty Realty

Getty Realty is a leading net lease REIT that specializes in the ownership of Gas Stations/Convenience Stores, and other automotive properties. It currently owns 946 properties that are spread across 35 states. As seen below, the properties well diversified, with exposure to much of the United States.

(Source: Company Earnings Presentation)

What I like about Getty Realty is the need-based products and services that its properties provide. Its properties are generally located in densely-populated, high-traffic areas. Currently, 55% of Getty’s ABR (average base rent) comes from the top 25 MSAs (metropolitan statistical area). This is further supported by the fact that 71% of its properties are at corner locations, which helps them to garner the most traffic. As seen below, New York City, Washington D.C., and Boston represents 37% of Getty’s ABR on a combined basis.

(Source: Company Earnings Presentation)

Despite headwinds from COVID-19, the portfolio occupancy remains very strong at 99% (unchanged from the same time last year), with a weighted average 10-year lease term. What I also find encouraging is that the unit level rent coverage actually improved on a YoY basis, to 2.3x in the latest quarter, which is up from 2.2x in the prior year quarter.

Rent collection appears to be manageable, as the company received 96% of its rents in the last quarter, with just 2.3% of its rents being deferred on a short-term basis. In addition, the company continues to grow its AFFO/share, with a 2.3% YoY increase to $0.44 per share in the latest quarter.

Looking forward, I expect to see continued growth, as Getty has already acquired 15 properties on a YTD basis, and completed two more redevelopment projects during the latest quarter. In addition, I expect convenience stores to play a big role in driving future growth. As seen below, C-store gross profit has grown at a solid pace over the past decade.

(Source: National Association of Convenience Stores)

As a leading REIT in this sector, I see Getty as being in a prime position to consolidate this fragmented sector, in which REIT ownership represents just ~5% of all chain stores. This is supported by Getty’s strong balance sheet, with a BBB- credit rating from Fitch. As seen below, its net debt to EBITDA ratio sits at 5.3x, which is below the 6.0x that I consider as generally safe, with a healthy fixed charge coverage ratio of 3.0x.

I find the current 5.7% dividend yield to be attractive, as it is far superior to that of the S&P 500 (SPY). In addition, the dividend had a 5-year CAGR of 12%. While I expect the dividend growth rate to slow down in the future, it still remains safe at an 81% payout ratio, especially considering the durable nature of its net leases.

(Source: Company Earnings Presentation)

Risks To Consider

In the near term, COVID-19 remains a risk factor, as a resurgence of infection rates could harm consumer mobility, and put stress on its tenants. I believe this risk is partially mitigated, however, by the reduction in air travel, as people increasingly rely on their cars. Another risk factor is the recent resignation of the CFO, which was noted by the company as being for personal reasons. While this may not be too much of a concern, especially if taken at face value, executive transition is always something worth noting.

Valuation

Getty Realty appears to be attractively valued at the current price of $26.01 and a blended P/AFFO of 14.5, which sits below its normal P/AFFO of 16. This implies a 10% upside. Analyst estimates are more bullish, with an average $34.40 price target, thereby implying a 32% upside from the current price.

(Source: F.A.S.T. Graphs)

Investor Takeaway

Getty Realty is a leading net lease REIT with a focus on owning convenience/gas station properties in densely-populated areas, with high barriers to entry. While COVID-19 is a risk factor in the near term, Getty’s tenants have so far proven to be resilient, as demonstrated by the strong rent collection and occupancy rates.

It also maintains a strong balance sheet and has a strong runway for growth in a fragmented sector. I also find the dividend to be attractive, which, at 5.7%, sits far above the S&P 500 dividend rate. Lastly, I find the valuation to be appealing and see upside potential for the stock.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.

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