UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D. C.  20549
 
 FORM
10-Q
 (Mark
one)
 [X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the
quarterly period ended June 30,
2009
 
 OR
 [   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the
transition period from __________ to __________
 
 Commission
file number 001-13777
 
 GETTY
REALTY CORP.
 (Exact
name of registrant as specified in its charter)
   MARYLAND
              11-3412575(State or other
      jurisdiction
              (I.R.S.
      Employerof incorporation
      or
              Identification
      No.)organization)
  125 Jericho Turnpike, Suite
103
 Jericho, New York
11753
 (Address
of principal executive offices)
 (Zip
Code)
 
 (516) 478 -
5400
 (Registrant's
telephone number, including area code)
  _________________________________________________________________
 (Former
name, former address and former fiscal year, if changed since last
report)
 
 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 [   ]
 
 Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
 Yes
[   ]  No [   ]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See the definitions of “larger
accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
 Large
      Accelerated Filer [   ]
                  Accelerated
      Filer [X]
                  Non-Accelerated
      Filer [   ]
                  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
[   ]  No [X]
 
 Registrant
had outstanding 24,766,216 shares of Common Stock, par value $.01 per share, as
of August 10, 2009.
 
 
  GETTY
REALTY CORP.





INDEX





Part I.  FINANCIAL
      INFORMATION
                          
                          Page
      NumberItem 1. Financial Statements (unaudited)Consolidated Balance Sheets as of June 30, 2009
      andDecember 31, 2008
                          
                          
                          1Consolidated Statements of Operations for
      theThree and Six Months ended June 30, 2009 and
      2008
                          
                          
                          2Consolidated Statements of Comprehensive Income for
      theThree and Six Months ended June 30, 2009 and
      2008
                          
                          
                          3Consolidated Statements of Cash Flows for
      theSix Months ended June 30, 2009 and
    2008
                          
                          
                          4Notes to Consolidated Financial
    Statements
                          
                          
                          5Item 2. Management's Discussion and Analysis of Financial
      Condition and Results of Operations
                          
                          
                          17Item 3. Quantitative and Qualitative Disclosures about
      Market Risk
                          
                          
                          35Item 4. Controls and Procedures
                          
                          
                          37Part II. OTHER
INFORMATIONItem 1. Legal Proceedings
                          
                          
                          38Item 1A. Risk Factors
                          
                          
                          38Item 4. Submission of Matters to a Vote of Security
      Holders
                          
                          
                          38Item 5. Other Information
                          
                          
                          38Item 6. Exhibits
                          
                          
                          38Signatures
                          
                          
                          40











Part I.  FINANCIAL INFORMATION





Item 1. Financial Statements




GETTY
      REALTY CORP. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in
      thousands, except share data)(unaudited)




June
      30,
                            
                            
                            December
      31,2009
                            
                            
                            2008Assets:Real
      Estate:Land
                            
                            $
                            221,055
                            
                            
                            $
                            221,540Buildings
      and improvements
                            
                            
                            250,573
                            
                            
                            
                            252,027471,628
                            
                            
                            
                            473,567Less
      – accumulated depreciation and amortization
                            
                            
                            (132,622
                            )
                            
                            
                            (129,322
                            )Real
      estate, net
                            
                            
                            339,006
                            
                            
                            
                            344,245Deferred
      rent receivable (net of allowance of $9,638 as of June 30, 2009 and
                              $10,029
      as of December 31, 2008)
                            
                            
                            26,887
                            
                            
                            
                            26,718Cash
      and cash equivalents
                            
                            
                            2,595
                            
                            
                            
                            2,178Recoveries
      from state underground storage tank funds, net
                            
                            
                            4,344
                            
                            
                            
                            4,223Mortgages
      and accounts receivable, net
                            
                            
                            2,672
                            
                            
                            
                            1,533Prepaid
      expenses and other assets
                            
                            
                            11,850
                            
                            
                            
                            8,916Total
      assets
                            
                            $
                            387,354
                            
                            
                            $
                            387,813Liabilities
      and Shareholders' Equity:Debt
                            
                            $
                            129,500
                            
                            
                            $
                            130,250Environmental
      remediation costs
                            
                            
                            17,978
                            
                            
                            
                            17,660Dividends
      payable
                            
                            
                            11,680
                            
                            
                            
                            11,669Accounts
      payable and accrued expenses
                            
                            
                            21,094
                            
                            
                            
                            22,337Total
      liabilities
                            
                            
                            180,252
                            
                            
                            
                            181,916Commitments
      and contingencies
                            
                            
                            --
                            
                            
                            
                            --Shareholders'
      equity:Common
      stock, par value $.01 per share; authorized50,000,000
      shares; issued 24,766,216 at June 30, 2009
                              and
      24,766,166 at December 31, 2008
                            
                            
                            248
                            
                            
                            
                            248Paid-in
      capital
                            
                            
                            259,266
                            
                            
                            
                            259,069Dividends
      paid in excess of earnings
                            
                            
                            (48,951
                            )
                            
                            
                            (49,124
                            )Accumulated
      other comprehensive loss
                            
                            
                            (3,461
                            )
                            
                            
                            (4,296
                            )Total
      shareholders' equity
                            
                            
                            207,102
                            
                            
                            
                            205,897Total
      liabilities and shareholders' equity
                            
                            $
                            387,354
                            
                            
                            $
                            387,813
 
 The
accompanying notes are an integral part of these consolidated financial
statements.





1




GETTY
      REALTY CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in
      thousands, except per share amounts)(unaudited)Three
      months ended June 30,
                                        
                                        
                                        Six
      months ended June 30,2009
                                        
                                        
                                        2008
                                        
                                        
                                        2009
                                        
                                        
                                        2008Revenues
      from rental properties
                                        
                                        $
                                        20,254
                                        
                                        
                                        $
                                        20,106
                                        
                                        
                                        $
                                        40,081
                                        
                                        
                                        $
                                        40,265Operating
      expenses:Rental
      property expenses
                                        
                                        
                                        2,178
                                        
                                        
                                        
                                        2,353
                                        
                                        
                                        
                                        4,368
                                        
                                        
                                        
                                        4,768Impairment
      charges
                                        
                                        
                                        1,069
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,069
                                        
                                        
                                        
                                        -Environmental
      expenses, net
                                        
                                        
                                        1,100
                                        
                                        
                                        
                                        1,974
                                        
                                        
                                        
                                        3,637
                                        
                                        
                                        
                                        2,762General
      and administrative expenses
                                        
                                        
                                        1,516
                                        
                                        
                                        
                                        2,111
                                        
                                        
                                        
                                        3,354
                                        
                                        
                                        
                                        3,752Depreciation
      and amortization expense
                                        
                                        
                                        2,756
                                        
                                        
                                        
                                        2,906
                                        
                                        
                                        
                                        5,349
                                        
                                        
                                        
                                        5,678Total
      operating expenses
                                        
                                        
                                        8,619
                                        
                                        
                                        
                                        9,344
                                        
                                        
                                        
                                        17,777
                                        
                                        
                                        
                                        16,960Operating
      income
                                        
                                        
                                        11,635
                                        
                                        
                                        
                                        10,762
                                        
                                        
                                        
                                        22,304
                                        
                                        
                                        
                                        23,305Other
      income, net
                                        
                                        
                                        116
                                        
                                        
                                        
                                        181
                                        
                                        
                                        
                                        249
                                        
                                        
                                        
                                        428Interest
      expense
                                        
                                        
                                        (1,242
                                        )
                                        
                                        
                                        (1,657
                                        )
                                        
                                        
                                        (2,437
                                        )
                                        
                                        
                                        (3,646
                                        )Earnings
      from continuing operations
                                        
                                        
                                        10,509
                                        
                                        
                                        
                                        9,286
                                        
                                        
                                        
                                        20,116
                                        
                                        
                                        
                                        20,087Discontinued
      operations:Earnings
      from operating activities
                                        
                                        
                                        33
                                        
                                        
                                        
                                        132
                                        
                                        
                                        
                                        122
                                        
                                        
                                        
                                        289Gains
      on dispositions of real estate
                                        
                                        
                                        3,063
                                        
                                        
                                        
                                        1,218
                                        
                                        
                                        
                                        3,295
                                        
                                        
                                        
                                        1,631Earnings
      from discontinued operations
                                        
                                        
                                        3,096
                                        
                                        
                                        
                                        1,350
                                        
                                        
                                        
                                        3,417
                                        
                                        
                                        
                                        1,920Net
      earnings
                                        
                                        $
                                        13,605
                                        
                                        
                                        $
                                        10,636
                                        
                                        
                                        $
                                        23,533
                                        
                                        
                                        $
                                        22,007Basic
      earnings per common share:Earnings
      from continuing operations
                                        
                                        $
                                        0.42
                                        
                                        
                                        $
                                        0.37
                                        
                                        
                                        $
                                        0.81
                                        
                                        
                                        $
                                        0.81Earnings
      from discontinued operations
                                        
                                        $
                                        0.13
                                        
                                        
                                        $
                                        0.05
                                        
                                        
                                        $
                                        0.14
                                        
                                        
                                        $
                                        0.08Net
      earnings
                                        
                                        $
                                        0.55
                                        
                                        
                                        $
                                        0.43
                                        
                                        
                                        $
                                        0.95
                                        
                                        
                                        $
                                        0.89Diluted
      earnings per common share:Earnings
      from continuing operations
                                        
                                        $
                                        0.42
                                        
                                        
                                        $
                                        0.37
                                        
                                        
                                        $
                                        0.81
                                        
                                        
                                        $
                                        0.81Earnings
      from discontinued operations
                                        
                                        $
                                        0.13
                                        
                                        
                                        $
                                        0.05
                                        
                                        
                                        $
                                        0.14
                                        
                                        
                                        $
                                        0.08Net
      earnings
                                        
                                        $
                                        0.55
                                        
                                        
                                        $
                                        0.43
                                        
                                        
                                        $
                                        0.95
                                        
                                        
                                        $
                                        0.89Weighted-average
      shares outstanding:Basic
                                        
                                        
                                        24,766
                                        
                                        
                                        
                                        24,766
                                        
                                        
                                        
                                        24,766
                                        
                                        
                                        
                                        24,766Stock
      options and restricted stock units
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1Diluted
                                        
                                        
                                        24,766
                                        
                                        
                                        
                                        24,766
                                        
                                        
                                        
                                        24,766
                                        
                                        
                                        
                                        24,767Dividends
      declared per share
                                        
                                        $
                                        .470
                                        
                                        
                                        $
                                        .465
                                        
                                        
                                        $
                                        0.940
                                        
                                        
                                        $
                                        .930






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




2





GETTY
REALTY CORP. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(in
thousands)


(unaudited)




Three
      months ended June 30,
                                          
                                          
                                          Six
      months ended June 30,2009
                                          
                                          
                                          2008
                                          
                                          
                                          2009
                                          
                                          
                                          2008Net
      earnings
                                          
                                          $
                                          13,605
                                          
                                          
                                          $
                                          10,636
                                          
                                          
                                          $
                                          23,533
                                          
                                          
                                          $
                                          22,007Other
      comprehensive gain:Net
      unrealized gain on interest rate swap
                                          
                                          
                                          548
                                          
                                          
                                          
                                          1,662
                                          
                                          
                                          
                                          835
                                          
                                          
                                          
                                          211Comprehensive
      income
                                          
                                          $
                                          14,153
                                          
                                          
                                          $
                                          12,298
                                          
                                          
                                          $
                                          24,368
                                          
                                          
                                          $
                                          22,218








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





3




GETTY
      REALTY CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in
      thousands)(unaudited)Six
      months ended June 30,2009
                                                  
                                                  
                                                  2008Cash
      flows from operating activities:Net
      earnings
                                                  
                                                  $
                                                  23,533
                                                  
                                                  
                                                  $
                                                  22,007Adjustments
      to reconcile net earnings tonet cash flow provided by operating activities:Depreciation and amortization
      expense
                                                  
                                                  
                                                  5,353
                                                  
                                                  
                                                  
                                                  5,763Impairment
    charges
                                                  
                                                  
                                                  1,069
                                                  
                                                  
                                                  
                                                  -Gains from dispositions of
      real estate
                                                  
                                                  
                                                  (3,348
                                                  )
                                                  
                                                  
                                                  (1,905
                                                  )Deferred rental revenue, net of
      allowance
                                                  
                                                  
                                                  (169
                                                  )
                                                  
                                                  
                                                  (800
                                                  )Amortization
      of above-market and below-market leases
                                                  
                                                  
                                                  (380
                                                  )
                                                  
                                                  
                                                  (402
                                                  )Accretion
expense
                                                  
                                                  
                                                  365
                                                  
                                                  
                                                  
                                                  356Stock-based
      employee compensation expense
                                                  
                                                  
                                                  197
                                                  
                                                  
                                                  
                                                  154Changes
      in assets and liabilities:Recoveries from state
      underground storage tank funds, net
                                                  
                                                  
                                                  55
                                                  
                                                  
                                                  
                                                  335Mortgages and accounts
      receivable, net
                                                  
                                                  
                                                  (1,230
                                                  )
                                                  
                                                  
                                                  (44
                                                  )Prepaid expenses and other
      assets
                                                  
                                                  
                                                  (21
                                                  )
                                                  
                                                  
                                                  183Environmental remediation
      costs
                                                  
                                                  
                                                  (223
                                                  )
                                                  
                                                  
                                                  (1,055
                                                  )Accounts payable and accrued
      expenses
                                                  
                                                  
                                                  50
                                                  
                                                  
                                                  
                                                  (547
                                                  )Net
      cash flow provided by operating activities
                                                  
                                                  
                                                  25,251
                                                  
                                                  
                                                  
                                                  24,045Cash
      flows from investing activities:Property acquisitions and
      capital expenditures
                                                  
                                                  
                                                  (1,971
                                                  )
                                                  
                                                  
                                                  (3,743
                                                  )Proceeds
      from dispositions of real estate
                                                  
                                                  
                                                  4,281
                                                  
                                                  
                                                  
                                                  2,903(Increase) decrease in cash held
      for property acquisitions
                                                  
                                                  
                                                  (3,136
                                                  )
                                                  
                                                  
                                                  1,369Collection of mortgages
      receivable
                                                  
                                                  
                                                  91
                                                  
                                                  
                                                  
                                                  154Net
      cash flow provided by (used in) investing activities
                                                  
                                                  
                                                  (735
                                                  )
                                                  
                                                  
                                                  683Cash
      flows from financing activities:Borrowings (repayments) under
      credit agreement, net
                                                  
                                                  
                                                  (750
                                                  )
                                                  
                                                  
                                                  (1,250
                                                  )Cash
      dividends paid
                                                  
                                                  
                                                  (23,349
                                                  )
                                                  
                                                  
                                                  (23,079
                                                  )Proceeds from stock options
      exercised
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  9Net
      cash flow used in financing activities
                                                  
                                                  
                                                  (24,099
                                                  )
                                                  
                                                  
                                                  (24,320
                                                  )Net
      increase  in cash and cash equivalents
                                                  
                                                  
                                                  417
                                                  
                                                  
                                                  
                                                  408Cash
      and cash equivalents at beginning of period
                                                  
                                                  
                                                  2,178
                                                  
                                                  
                                                  
                                                  2,071Cash
      and cash equivalents at end of period
                                                  
                                                  $
                                                  2,595
                                                  
                                                  
                                                  $
                                                  2,479Supplemental
      disclosures of cash flow informationCash paid (refunded) during the
      period for:Interest
                                                  
                                                  $
                                                  2,621
                                                  
                                                  
                                                  $
                                                  3,725Income
      taxes, net
                                                  
                                                  
                                                  247
                                                  
                                                  
                                                  
                                                  347Recoveries
      from state underground storage tank funds
                                                  
                                                  
                                                  (591
                                                  )
                                                  
                                                  
                                                  (389
                                                  )Environmental
      remediation costs
                                                  
                                                  
                                                  2,184
                                                  
                                                  
                                                  
                                                  2,117The
      accompanying notes are an integral part of these consolidated financial
      statements.





4




GETTY
REALTY CORP. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 1.  GENERAL
 
 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 intercompany
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 2009 and 2008 are reclassified as discontinued operations. The
operating results of such properties for the three and six months ended June 30,
2008 has also been reclassified to discontinued operations to conform to the
2009 presentation. Discontinued operations for the quarters and six months ended
June 30, 2009 and 2008 are primarily comprised of gains or losses from property
dispositions, respectively. The revenue from rental properties and expenses
related to these properties are insignificant for the three and six months ended
June 30, 2009 and 2008.
 
 Unaudited,
Interim Financial Statements: The consolidated financial statements are
unaudited but, in the Company’s opinion, reflect all adjustments (consisting of
normal recurring accruals) necessary for a fair statement of the results for the
periods presented. These statements should be read in conjunction with the
consolidated financial statements and related notes, which appear in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2008.
 
 Subsequent
events: Management of the Company evaluated subsequent events through August 10,
2009, the date the financial statements were issued.
 
 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 was 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 and 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 in January 2009
did not have a material impact on the Company’s financial position and results
of operations.
 
 5
 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 in
January 2009 did not result in a write-off of acquisition related transactions
costs associated with transactions not yet consummated.
 
 Earnings
per Common Share: Due to the adoption of FSP EITF03-6-1 “Determining Whether
Instruments Granted Payment Transactions Are Participating Securities” effective
as of January 1, 2009 and retrospectively applied to the three and six months
ended June 30, 2008, basic earnings per common share gives effect, utilizing the
two-class method, to the potential dilution from the issuance of common shares
in settlement of restricted stock units (“RSUs” or “RSU”) which provide for
non-forfeitable dividend equivalents equal to the dividends declared per common
share. Basic earnings per common share is computed by dividing earnings less
dividend equivalents attributable to RSUs outstanding at the end of each
quarterly period by the weighted-average number of common shares outstanding
during the period. The adoption of FSP EITF03-6-1 did not have a material impact
in the determination of earnings per common share for the three and six months
ended June 30, 2009 and 2008. Diluted earnings per common share also give
effect, utilizing the treasury stock method, to the potential dilution from the
exercise of stock options. For the three and six months ended June 30, 2009, 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.
 
 Three
      months ended
                                            June
      30,
                                          
                                          
                                          Six
      months ended
                                            June
      30,2009
                                          
                                          
                                          2008
                                          
                                          
                                          2009
                                          
                                          
                                          2008Earnings
      from continuing operations
                                          
                                          $
                                          10,509
                                          
                                          
                                          $
                                          9,286
                                          
                                          
                                          $
                                          20,116
                                          
                                          
                                          $
                                          20,087Less dividend equivalents
      attributable to restricted stock units outstanding
                                          
                                          
                                          40
                                          
                                          
                                          
                                          30
                                          
                                          
                                          
                                          80
                                          
                                          
                                          
                                          59Earnings
      from continuing operations attributable to common shareholders used for
      basic earnings per share calculation
                                          
                                          
                                          10,469
                                          
                                          
                                          
                                          9,256
                                          
                                          
                                          
                                          20,036
                                          
                                          
                                          
                                          20,028Discontinued
      operations
                                          
                                          
                                          3,096
                                          
                                          
                                          
                                          1,350
                                          
                                          
                                          
                                          3,417
                                          
                                          
                                          
                                          1,920Net
      earnings attributable to common shareholders used for basic earnings per
      share calculation
                                          
                                          $
                                          13,565
                                          
                                          
                                          $
                                          10,606
                                          
                                          
                                          $
                                          23,453
                                          
                                          
                                          $
                                          21,948Weighted-average
      number of common shares outstanding:Basic
                                          
                                          
                                          24,766
                                          
                                          
                                          
                                          24,766
                                          
                                          
                                          
                                          24,766
                                          
                                          
                                          
                                          24,766Stock options
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1Diluted
                                          
                                          
                                          24,766
                                          
                                          
                                          
                                          24,766
                                          
                                          
                                          
                                          24,766
                                          
                                          
                                          
                                          24,767Restricted
      stock units outstanding at the end of the period
                                          
                                          
                                          86
                                          
                                          
                                          
                                          63
                                          
                                          
                                          
                                          86
                                          
                                          
                                          
                                          63
  6
 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 use 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 June
30, 2009, Getty Petroleum Marketing Inc. (“Marketing”) leased from the Company,
eight hundred fifty-five properties. Eight hundred forty-five of the properties
are leased to Marketing under a unitary master lease (the “Master Lease”) and
ten properties are leased under supplemental leases (collectively with the
Master Lease, the “Marketing Leases”). 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 Marketing Leases, Marketing
generally, subject to any contrary terms under applicable third party leases,
can use each property for any lawful purpose, or for no purpose whatsoever. (See
note 3 for contingencies related to Marketing and the Marketing Leases for
additional information).
 
 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, if any, with
high credit quality institutions. Temporary cash investments, if any, are
currently held in an overnight bank time deposit with JPMorgan Chase Bank,
N.A.
 
 As of June
30, 2009, the Company leased eight hundred fifty-five of its one thousand
fifty-one properties on a long-term triple-net basis to Marketing under the
Marketing Leases (see note 2 for additional information). 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.
 
 A
substantial portion of the Company’s revenues (75% for the six months ended June
30, 2009), are derived from the Marketing Leases. Accordingly, any factor that
adversely affects Marketing, 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.  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 from the sale of refined petroleum products at
margins in excess of its fixed and variable expenses, performance of the
petroleum marketing industry 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
August 2009, although there is no assurance that it will continue to do
so.
 
 7
 For the
year ended December 31, 2008, Marketing reported a significant loss,
accelerating a trend of reporting progressively larger losses in recent years.
Based on Marketing’s significant losses for each of the three years ended
December 2008, 2007 and 2006 and the cumulative impact of those losses on
Marketing’s financial position as of December 31, 2008, Marketing may not have
the ability to generate cash flows from its business sufficient to meet its debt
maturities and other obligations as they come due in the ordinary course through
the term of the Marketing Leases unless Marketing shows significant improvement
in its financial results and/or generates sufficient liquidity through the sale
of assets or otherwise, or unless financial support continues to be provided by
Lukoil, its parent company. The Company believes that Lukoil is providing credit
support to Marketing and that it is probable that Lukoil will continue to
provide financial support to Marketing enabling it to meet its obligations as
they come due. Lukoil is not, however, a guarantor of the Marketing Leases and
even though Marketing is a wholly-owned subsidiary of Lukoil and Lukoil has
provided capital to Marketing in the past, there can be no assurance that Lukoil
will provide any financial support or additional capital to Marketing in the
future. It is reasonably possible that the Company’s belief regarding the
likelihood of Lukoil providing continuing financial support to Marketing will
prove to be incorrect or will change as circumstances change.
 
 From time
to time the Company has had 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 through December 31, 2007, the Company previously
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 discussions with Marketing from time to time 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
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, it is the Company’s intention to cooperate
with Marketing in accomplishing those objectives to the extent that 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 for modification of the Marketing Leases may be. 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.
 
 8
 The
Company intends either to re-let or sell any properties removed from the
Marketing Leases and reinvest any 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. As permitted under the terms of the Marketing Leases,
Marketing generally, subject to any contrary terms under applicable third party
leases, can use each property for any lawful purpose, or for no purpose
whatsoever. In those instances where the Company determines that the highest and
best use for a property is no longer as a retail motor fuel outlet, the Company
intends to seek an alternative tenant or buyer for such property as
opportunities arise. 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.
 
 Based on
the Company’s prior decision to attempt to negotiate with Marketing for a
modification of the Marketing Leases to remove the Subject Properties, made in
part upon consideration of the continued deterioration in Marketing’s annual
financial performance through December 31, 2007, the Company previously decided,
and continues to believe, 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 term of each Marketing Lease. Accordingly, in 2007, the
Company recorded a non-cash reserve representing the full amount of the deferred
rent receivable recorded related to the Subject Properties as of December 31,
2007.
 
 As of June
30, 2009, the Company had a reserve of $9,638,000 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 not probable that it will not
collect the deferred rent receivable related to the Remaining Properties of
$22,792,000 as of June 30, 2009 and that Lukoil will not allow Marketing to fail
to perform its rental, environmental and other obligations under the Marketing
Leases. 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.
 
 The
Company has reduced the estimated useful lives of certain long-lived assets for
the Subject Properties resulting in accelerating the depreciation expense
recorded for those assets. In addition, during the three months ended June 30,
2009, the Company reduced the carrying amount to fair value, and recorded
impairment charges aggregating $1,069,000, for certain properties leased to
Marketing where the carrying amount of the property exceeded the estimated
undiscounted cash flows expected to be received during the assumed holding
period and the estimated net sales value expected to be received at disposition.
The impairment charges were attributable to general reductions in real estate
valuations and, in certain cases, by the removal or scheduled removal of
underground storage tanks by Marketing. The fair value of real estate is
estimated based on the price that would be received to sell the property in an
orderly transaction between marketplace participants at the measurement date.
The valuation techniques that the Company used included discounted cash flow
analysis, an income capitalization approach on prevailing or earnings multiples
applied to earnings from the property, analysis of recent comparable sales
transactions, actual sale negotiations and bona fide purchase offers received
from third parties and/or consideration of the amount that currently would be
required to replace the asset, as adjusted for obsolescence. In general, the
Company considers multiple valuation techniques when measuring the fair value of
a property, all of which are based on assumptions that are classified
within Level 3 of the fair value hierarchy.
 9
 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 and the Company can reasonably estimate the amount of the Marketing
Environmental Liabilities for which it will be directly responsible to pay, 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
June 30, 2009 or December 31, 2008. Nonetheless, the Company has determined that
the aggregate amount of the Marketing Environmental Liabilities (as estimated by
the Company based on its assumptions and its 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, including,
in particular, the Company’s belief that Lukoil is providing credit support to
Marketing and that it is probable that Lukoil will continue to provide financial
support to Marketing, 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 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 additional 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 rental, environmental or other
obligations and the Company accrues for certain of such liabilities; if the
Company is unable to promptly re-let or sell the properties upon recapture from
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.
 
 10
 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 has paid 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 June 30,
2009 and December 31, 2008 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 June 30, 2009 and December 31, 2008, the Company had accrued $2,111,000
and $1,671,000, 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 USTs 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 denied its liability for the claim and its responsibility to
defend against and indemnify the Company for the claim. The Company filed a
third party claim against Marketing for indemnification in this matter, which
claim was actively litigated, leading to a trial held before a judge during the
first quarter of 2009. A decision has not yet been rendered by the court. It is
possible that the Company’s assumption that Marketing will ultimately be
responsible for this claim may change, which may result in the Company providing
an accrual for this and possibly 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 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.
 
 11
 From
October 2003 through June 30, 2009, the Company was notified that the Company
was made party to fifty-eight 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. The Company
has been dismissed from five of the cases initially filed against it and
fifty-three remain outstanding. 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. 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 the matters related to the Lower Passaic River and the
MTBE multi-district litigation discussed above 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 June 30, 2009 and December 31, 2008, the
Company’s Consolidated Balance Sheets included, in accounts payable and accrued
expenses, $290,000 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 six months ended June 30, 2009 and
2008 include, in general and administrative expenses, a charge of $25,000 and a
credit of $72,000, 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 distribute at least
ninety percent of its “earnings and profits” (as defined in the Internal Revenue
Code) 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
AND INTEREST RATE SWAP AGREEMENTS
 
 As of June
30, 2009, borrowings under the Credit Agreement, described below, were
$129,500,000, bearing interest at a weighted-average effective rate of 3.4% per
annum. The weighted-average effective rate is based on $84,500,000 of LIBOR rate
borrowings floating at market rates plus a margin of 1.25% 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 1.25%. The Company is a party to 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 June 30, 2009, the applicable margin
will remain at 0.0% for base rate borrowings and will be adjusted downward from
1.25% to 1.0% for LIBOR rate borrowings effective in August 2009.
 
 12
 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 is a party to a $45,000,000 LIBOR based interest rate swap, 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 June 30,
2009, $45,000,000 of the Company’s LIBOR based borrowings under the Credit
Agreement bear interest at an effective rate of 6.69%.
 
 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 June 30, 2009 and December 31, 2008, 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 the six months ended June 30, 2009 or 2008
representing the hedge’s ineffectiveness. At June 30, 2009 and December 31,
2008, the Company’s Consolidated Balance Sheets include, in accounts payable and
accrued expenses, an obligation for the fair value of the Swap Agreement of
$3,461,000 and $4,296,000, respectively. For the six months ended June 30, 2009
and 2008, the Company has recorded, in accumulated other comprehensive loss in
the Company’s Consolidated Balance Sheets, a gain of $835,000 and $211,000,
respectively, from the change in the fair value of the Swap Agreement related to
the effective portion of the interest rate contract. The accumulated
comprehensive loss of $3,461,000 recorded as of June 30, 2009 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 since it is expected
that the Credit Agreement will be refinanced with variable interest rate debt at
its maturity.
 
 13
 The fair
value of the Swap Agreement was $3,461,000 as of June 30, 2009, 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 $129,500,000
borrowings outstanding under the Credit Agreement is $120,700,000 as of June 30,
2009 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 June 30, 2009, 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
Agreementand its
valuation of the borrowings outstanding under the Credit Agreement in its
entirety within Level 3 of the Fair Value Hierarchy.
 
 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.
 
 14
 Of the
eight hundred fifty-five properties leased to Marketing as of June 30, 2009, the
Company has agreed to pay all costs relating to, and to indemnify Marketing for,
certain environmental liabilities and obligations at one hundred seventy-eight
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 is 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 note 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. Environmental accruals are based on estimates
which are subject to significant change, and are adjusted as the remediation
treatment progresses, as circumstances change and as environmental contingencies
become more clearly defined and reasonably estimable. As of June 30, 2009, the
Company had regulatory approval for remediation action plans in place for two
hundred forty-six (94%) of the two hundred sixty-two properties for which it
continues to retain environmental responsibility and the remaining sixteen
properties (6%) remain in the assessment phase. In addition, the Company has
nominal post-closure compliance obligations at twenty-two 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 $1,774,000 and $1,367,000 for
the six months ended June 30, 2009 and 2008, 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.
 
 15
 As of June
30, 2009 and December 31, 2008, and 2007, the Company had accrued $17,978,000,
$17,660,000 and $18,523,000, respectively, as management’s best estimate of the
fair value of reasonably estimable environmental remediation costs. As of June
30, 2009 and December 31, 2008 and 2007, the Company had also recorded
$4,344,000, $4,223,000 and $4,652,000, 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 $13,437,000, and $13,871,000 as of December 31, 2008, and 2007,
respectively, were subsequently accreted for the change in present value due to
the passage of time and, accordingly, $365,000, and $356,000 of net accretion
expense was recorded for the six months ended June 30, 2009 and 2008,
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 note 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.  SHAREHOLDERS’
EQUITY
 
 A summary
of the changes in shareholders' equity for the six months ended June 30, 2009 is
as follows (in thousands, except share amounts):
 
 DIVIDENDS
                                    
                                    
                                    ACCUMULATEDPAID
                                    
                                    
                                    OTHERCOMMON
      STOCK
                                    
                                    
                                    PAID-IN
                                    
                                    
                                    IN
      EXCESS
                                    
                                    
                                    COMPREHENSIVESHARES
                                    
                                    
                                    AMOUNT
                                    
                                    
                                    CAPITAL
                                    
                                    
                                    OF
      EARNINGS
                                    
                                    
                                    LOSS
                                    
                                    
                                    TOTALBalance,
      December 31, 2008
                                    
                                    
                                    24,766,166
                                    
                                    
                                    $
                                    248
                                    
                                    
                                    $
                                    259,069
                                    
                                    
                                    $
                                    (49,124
                                    )
                                    
                                    $
                                    (4,296
                                    )
                                    
                                    $
                                    205,897Net
      earnings
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    23,533
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    23,533Dividends
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (23,360
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (23,360
                                    )Stock-based
      employee
                                      compensation
      expense
                                    
                                    
                                    50
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    197
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    197Net
      unrealized gain on
                                      interest
      rate swap
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    835
                                    
                                    
                                    
                                    835Balance,
      June 30, 2009
                                    
                                    
                                    24,766,216
                                    
                                    
                                    $
                                    248
                                    
                                    
                                    $
                                    259,266
                                    
                                    
                                    $
                                    (48,951
                                    )
                                    
                                    $
                                    (3,461
                                    )
                                    
                                    $
                                    207,102
 
 The
Company is authorized to issue 20,000,000 shares of preferred stock, par value
$.01 per share, of which none were issued as of June 30, 2009 or December 31,
2008.
 
 16
 Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
 
 The
following discussion and analysis of financial condition and results of
operations should be read in conjunction with the sections entitled “Part I,
Item 1A. Risk Factors” and “Part II, Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” which appear in our
Annual Report on Form 10-K for the year ended December 31, 2008, and “Part I,
Item 1. Financial Statements” and “Part II, Item 1A. Risk Factors,” which appear
in our Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2009.
 
 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 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 a property is no longer as a retail motor fuel outlet, we will seek an
alternative tenant or buyer for such property as opportunities arise. Our
properties are primarily located in the Northeast and Mid-Atlantic regions of
the United States. We also own or lease properties in Texas, North Carolina,
Hawaii, California, Florida, Arkansas, Illinois, North Dakota and
Ohio.
 
 As of June
30, 2009, we leased eight hundred fifty-five of our one thousand fifty-one
properties on a long-term basis to Getty Petroleum Marketing Inc.
(“Marketing”).  Eight hundred and forty-five of the properties are
leased to Marketing under a unitary master lease (the “Master Lease”) with an
initial term effective through December 2015 and ten of the properties are
leased to Marketing under supplemental leases with initial terms of varying
expiration dates (collectively with the Master Lease, the “Marketing Leases”).
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. As permitted under the
terms of the Marketing Leases, Marketing generally, subject to any contrary
terms under applicable third party leases, can use each property for any lawful
purpose, or for no purpose whatsoever.
 
 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, performance of the petroleum marketing industry and rental
income from sub-tenants who operate their respective 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.
(For information regarding factors that could adversely affect us relating to
Marketing, or our other lessees, see “Item 1A. Risk Factors” which appears in
our Annual Report on Form 10-K for the year ended December 31, 2008 and “Part
II, Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q.”)
 
 17
 Developments
Related to Marketing and the Marketing Leases
 
 Marketing
operated substantially all of our petroleum marketing businesses when it was
spun-off to our 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.
 
 A
substantial portion of our revenues (75% for the six months ended June 30, 2009)
are derived from the Marketing Leases. Accordingly, 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. Our 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 has made all required monthly rental payments under the Marketing
Leases when due through August 2009, although there is no assurance that it will
continue to do so.
 
 For the
year ended December 31, 2008, Marketing reported a significant loss,
accelerating a trend of reporting progressively larger losses in recent years.
Based on Marketing’s significant losses for each of the three years ended
December 2008, 2007 and 2006 and the cumulative impact of those losses on
Marketing’s financial position as of December 31, 2008, Marketing may not have
the ability to generate cash flows from its business sufficient to meet its debt
maturities and other obligations as they come due in the ordinary course through
the term of the Marketing Leases unless it shows significant improvement in its
financial results and/or generates sufficient liquidity through the sale of
assets or otherwise, or unless financial support continues to be provided by
Lukoil, its parent company. We believe that Lukoil is providing credit support
to Marketing and that it is probable that Lukoil will continue to provide
financial support to Marketing enabling it to meet its obligations as they come
due. Our belief regarding the likelihood of Lukoil providing continuing
financial support to Marketing is based on a number of factors, including our
understanding that Lukoil currently guarantees substantially all of Marketing’s
borrowing facilities. We believe that Marketing would not be able to maintain,
renew, extend or expand any such borrowing facilities absent Lukoil guarantees.
Lukoil is not, however, a guarantor of the Marketing Leases and even though
Marketing is a wholly-owned subsidiary of Lukoil and Lukoil has provided capital
to Marketing in the past, there can be no assurance that Lukoil will provide any
financial support or additional capital to Marketing in the future. It is
reasonably possible that our beliefs regarding the likelihood of Lukoil
providing continuing financial support to Marketing will prove to be incorrect
or will change as circumstances change.
 
 From time
to time we have had 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 through
December 31, 2007, we previously 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 discussions with Marketing from time to
time 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
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, it is our intention to cooperate with Marketing in accomplishing
those objectives to the extent that 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 for modification of the Marketing Leases may be.
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.
 
 18
 We intend
either to re-let or sell any properties removed from the Marketing Leases and
reinvest any 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. As permitted
under the terms of the Marketing Leases, Marketing generally, subject to any
contrary terms under applicable third party leases, can use each property for
any lawful purpose, or for no purpose whatsoever. We believe that as of June 30,
2009, Marketing had removed, or has scheduled to remove, the gasoline tanks and
related equipment at approximately 19% of the properties subject to the
Marketing Leases. In those instances where we determine that the highest and
best use for a property is no longer as a retail motor fuel outlet, we intend to
seek an alternative tenant or buyer for such property as opportunities arise.
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.
 
 Based on
our prior decision to attempt to negotiate with Marketing for a modification of
the Marketing Leases to remove the Subject Properties, made in part upon
consideration of the continued deterioration in Marketing’s annual financial
performance through December 31, 2007, we previously decided, and we continue to
believe, 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
term of each Marketing Lease. Accordingly, in 2007, we recorded a non-cash
reserve representing the full amount of the deferred rent receivable recorded
related to the Subject Properties as of December 31, 2007.
 
 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 (or an average) basis rather than when
payment contractually is due. We record 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 Sheets. 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 quarterly basis and
such assessments and assumptions are subject to change.
 
 19
 As of June
30, 2009, we had a reserve of $9.6 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 not
probable that we will not collect the deferred rent receivable related to the
Remaining Properties of $22.8 million as of June 30, 2009 and that Lukoil will
not allow Marketing to fail to perform its rental, environmental and other
obligations under the Marketing Leases. 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.
 
 We have
reduced the estimated useful lives of certain long-lived assets for the Subject
Properties resulting is accelerating the depreciation expense recorded for those
assets. In addition, during the three months ended June 30, 2009, we reduced the
carrying amount to fair value (generally estimated as sales value net of
disposal costs), and recorded impairment charges aggregating $1.1 million, for
certain properties leased to Marketing where the carrying amount of the property
exceeded the estimated undiscounted cash flows expected to be received during
the assumed holding period and the estimated net sales value expected to be
received at disposition. The impairment charges were attributable to general
reductions in real estate valuations and, in certain cases, by the removal or
scheduled removal of underground storage tanks by Marketing.
 
 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 and we can reasonably
estimate the amount of the Marketing Environmental Liabilities for which we will
be directly responsible to pay, 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 June 30, 2009 or December 31, 2008. Nonetheless, we have
determined that the aggregate amount of the Marketing Environmental Liabilities
(as estimated by us based on our assumptions and our 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.
 
 20
 Should our
assessments, assumptions and beliefs prove to be incorrect, including, in
particular, our belief that Lukoil is providing credit support to Marketing and
that it is probable that Lukoil will continue to provide financial support to
Marketing, 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 additional
impairment charges 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 rental, environmental or other obligations and we accrue for
certain of such liabilities; if we are unable to promptly re-let or sell the
properties upon recapture from 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 Comment
 
 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 its interpretation of certain provisions of
its internal Financial Reporting Manual (formerly known as its 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, except for those properties that
are vacant, to the existing subtenants 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.
 
 21
 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 and AFFO are helpful to investors in measuring our performance because
both FFO and AFFO exclude various items included in GAAP net earnings that do
not relate to, or are not indicative of, our fundamental operating performance.
FFO excludes various items 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 typically include the 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.  GAAP net
earnings and FFO from time to time may also include impairment charges and/or
income tax benefits. 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 (or an average) basis rather than when payment is
contractually 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. Impairment of long-lived assets represents charges
taken to write down real estate assets to fair value estimated when events or
changes in circumstances indicate that the carrying amount of the property may
not be recoverable. In prior periods, income tax benefits have been 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, impairment charges and
income tax benefit. In management’s view, AFFO provides a more accurate
depiction than FFO of our fundamental operating performance related to: (i) the
impact of scheduled rent increases under these leases; (ii) the rental revenue
earned from acquired in-place leases; (iii) our rental operating expenses
(exclusive of impairment charges); and (iv) 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.
 
 22
 A
reconciliation of net earnings to FFO and AFFO for the three and six months
ended June 30, 2009 and 2008 is as follows (in thousands, except per share
amounts):
 
 Three
      months ended
                                  June
      30,
                                
                                
                                Six
      months ended
                                  June
      30,2009
                                
                                
                                2008
                                
                                
                                2009
                                
                                
                                2008Net
      earnings
                                
                                $
                                13,605
                                
                                
                                $
                                10,636
                                
                                
                                $
                                23,533
                                
                                
                                $
                                22,007Depreciation
      and amortization of real estate assets
                                
                                
                                2,760
                                
                                
                                
                                2,950
                                
                                
                                
                                5,353
                                
                                
                                
                                5,763Gains
      from dispositions of real estate
                                
                                
                                (3,079
                                )
                                
                                
                                (1,358
                                )
                                
                                
                                (3,348
                                )
                                
                                
                                (1,905
                                )Funds
      from operations
                                
                                
                                13,286
                                
                                
                                
                                12,228
                                
                                
                                
                                25,538
                                
                                
                                
                                25,865Deferred
      rental revenue (straight-line rent)
                                
                                
                                (357
                                )
                                
                                
                                (361
                                )
                                
                                
                                (169
                                )
                                
                                
                                (800
                                )Net
      amortization of above-market and below-market leases
                                
                                
                                (190
                                )
                                
                                
                                (201
                                )
                                
                                
                                (380
                                )
                                
                                
                                (402
                                )Impairment
      charges
                                
                                
                                1,069
                                
                                
                                
                                -
                                
                                
                                
                                1,069
                                
                                
                                
                                -Adjusted
      funds from operations
                                
                                $
                                13,808
                                
                                
                                $
                                11,666
                                
                                
                                $
                                26,058
                                
                                
                                $
                                24,663Diluted
      per share amounts:Earnings
      per share
                                
                                $
                                0.55
                                
                                
                                $
                                0.43
                                
                                
                                $
                                0.95
                                
                                
                                $
                                0.89Funds
      from operations per share
                                
                                $
                                0.54
                                
                                
                                $
                                0.49
                                
                                
                                $
                                1.03
                                
                                
                                $
                                1.04Adjusted
      funds from operations per share
                                
                                $
                                0.56
                                
                                
                                $
                                0.47
                                
                                
                                $
                                1.05
                                
                                
                                $
                                1.00Diluted
      weighted-average shares outstanding
                                
                                
                                24,766
                                
                                
                                
                                24,766
                                
                                
                                
                                24,766
                                
                                
                                
                                24,767
 
 RESULTS
OF OPERATIONS
 
 Three
months ended June 30, 2009 compared to the three months ended June 30,
2008
 
 Revenues
from rental properties included in continuing operations were $20.3 million for
the three months ended June 30, 2009, as compared to $20.1 million for the three
months ended June 30, 2008. We received approximately $15.1 million for each of
the three month periods ended June 30, 2009 and 2008 from properties leased
to Marketing under the Marketing Leases. We also received rent of $4.7 million
for the three months ended June 30, 2009 and $4.5 million for the three months
ended June 30, 2008 from other tenants. The increase in rent received for the
three months ended June 30, 2009 was primarily due to rent escalations offset by
the effect of lease expirations. In addition to rent received, revenues from
rental properties include adjustments recorded for deferred rental revenue due
to the recognition of rental income on a straight-line basis and net
amortization of above-market and below-market leases. Adjustments for deferred
rental revenue result in effectively recognizing the aggregate minimum rent due
over the current lease term on a straight-line (or an average) basis, rather
than when payment is contractually due, under leases with our tenants which
provide for scheduled fixed rent increases. Revenues from rental properties for
each of the three months ended June 30, 2009 and 2008 include $0.3 million of
rental income recognized utilizing the straight-line method of accounting in
excess of rent received for the respective period. Revenues from rental
properties for each of the three months ended June 30, 2009 and 2008 include
$0.2 million of rental income recognized due to net amortization of above-market
and below-market leases. 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.
 
 23
 Rental
property expenses included in continuing operations, which are primarily
comprised of rent expense and real estate and other state and local taxes, were
$2.2 million for the three months ended June 30, 2009, as compared to $2.4
million for the three months ended June 30, 2008. The reduction in rental
property expenses was principally due to lower rent expense incurred as a result
of lease terminations when compared to the prior year period.
 
 Environmental
expenses, net of estimated recoveries from state underground storage tank (“UST”
or “USTs”) funds included in continuing operations decreased by $0.9 million for
the three months ended June 30, 2009 to $1.1 million, as compared to $2.0
million recorded for the three months ended June 30, 2008 due to decreases in
the net change in estimated remediation costs and litigation loss reserves of
$0.8 million and $0.1 million, respectively. Change in net estimated
environmental costs were $0.4 million for the three months ended June 30, 2009,
which decreased by $0.8 million as compared to $1.2 million recorded in the
prior year period. Environmental accruals are based on estimates which are
subject to significant change, and are adjusted as the remediation treatment
progresses, as circumstances change and as environmental contingencies become
more clearly defined and reasonably estimable.
Environmental expenses vary from period to period and, accordingly, undue
reliance should not be placed on the magnitude or the direction of change in
reported environmental expenses for one period as compared to prior
periods.
 
 General
and administrative expenses were $1.5 million for the three months ended June
30, 2009 as compared to $2.1 million recorded for the three months ended June
30, 2008. The decrease in general and administrative expenses was principally
due to higher professional fees incurred in the three months ended June 30, 2008
associated with the previously disclosed potential modification of the Master
Lease with Marketing and related matters.
 
 Depreciation
and amortization expense included in continuing operations was $2.8 million for
the three months ended June 30, 2009, as compared to $2.9 million for the three
months ended June 30, 2008. The decrease in depreciation and amortization
expense was principally due to the effect of certain assets becoming fully
depreciated, lease terminations and property dispositions.
 
 The $1.1
million of impairment charges recorded in the three months ended June 30, 2009
was attributable to general reductions in real estate valuations and, in certain
cases, by the removal or scheduled removal of underground storage tanks by
Marketing.
 
 As a
result, total operating expenses decreased by approximately $0.7 million for the
three months ended June 30, 2009, as compared to the three months ended June 30,
2008.
 
 Interest
expense was $1.2 million for the three months ended June 30, 2009, as compared
to $1.7 million for the three months ended June 30, 2008. The decrease was
principally due to reduction in interest rates on our floating rate
borrowings.
 
 Gains on
dispositions of real estate, partially included in other income and discontinued
operations, increased by an aggregate of $1.7 million for the three months ended
June 30, 2009, as compared to the three months ended June 30, 2008. Gains on
disposition of real estate vary from period to period and, accordingly, undue
reliance should not be placed on the magnitude or the direction of change in
reported gains for one period as compared to prior periods.
 
 As a
result, net earnings increased by $3.0 million to $13.6 million for the three
months ended June 30, 2009, as compared to the $10.6 million for the three
months ended June 30, 2008. Earnings from continuing operations increased by
$1.2 million to $10.5 million for the three months ended June 30, 2009, as
compared to $9.3 million for the three months ended June 30, 2008. Earnings from
continuing operations excludes the operating results and $3.1 million of net
gain from the disposition of four properties sold in 2009, which applicable
results have been included in earnings from discontinued operations for the
three months ended June 30, 2009 and 2008.
 
 24
 For the
three months ended June 30, 2009, FFO increased by $1.1 million to $13.3
million, as compared to $12.2 million for prior year period, and AFFO increased
by $2.1 million to $13.8 million, as compared to $11.7 million for prior year
period. The increase in FFO for the three months ended June 30, 2009 was
primarily due to the changes in net earnings but excludes the $0.2 million
decrease in depreciation and amortization expense and the $1.7 million increase
in gains on dispositions of real estate. The increase in AFFO for the three
months ended June 30, 2009 also excludes a marginal decrease in deferred rental
revenue, a marginal decrease in net amortization of above-market and
below-market leases and the $1.1 million increase in impairment charges (which
are included in net earnings and FFO but are excluded from AFFO).
 
 Diluted
earnings per share increased by $0.12 per share to $0.55 per share for the three
months ended June 30, 2009, as compared to $0.43 per share for the three months
ended June 30, 2008. Diluted FFO per share increased by $0.05 per share for the
three months ended June 30, 2009 to $0.54 per share, as compared to $0.49 per
share for the three months ended June 30, 2008. Diluted AFFO per share increased
by $0.09 per share for the three months ended June 30, 2009 to $0.56 per share,
as compared to $0.47 per share for the three months ended June 30,
2008.
 
 Six
months ended June 30, 2009 compared to the six months ended June 30,
2008
 
 Revenues
from rental properties included in continuing operations were $40.1 million for
the six months ended June 30, 2009, as compared to $40.3 million for the six
months ended June 30, 2008. We received approximately $30.2 million in rents for
the six months period ended June 30, 2009 and $30.1 million in rent for the six
months ended June 30, 2008 from properties leased to Marketing under the
Marketing Leases. We also received rent of $9.4 million for the six months ended
June 30, 2009 and $9.0 million for the six months ended June 30, 2008 from other
tenants. The increase in rent received for the six months ended June 30, 2009
was primarily due to rent escalations offset by the effect of lease expirations.
Revenues from rental properties for the six months ended June 30, 2009 and 2008
include $0.1 million and $0.8 million, respectively, of rental income recognized
utilizing the straight-line method of accounting in excess of rent received for
the respective period. Revenues from rental properties for each of the six
months ended June 30, 2009 and 2008 include $0.4 million of rental income
recognized due to net amortization of above-market and below-market
leases.
 
 Rental
property expenses included in continuing operations, which are primarily
comprised of rent expense and real estate and other state and local taxes, were
$4.4 million for the six months ended June 30, 2009, as compared to $4.8 million
for the six months ended June 30, 2008. The reduction in rental property
expenses was principally due to lower rent expense incurred as a result of lease
terminations when compared to the prior year period.
 
 Environmental
expenses, net of estimated recoveries from UST funds included in continuing
operations increased by $0.8 million for the six months ended June 30, 2009 to
$3.6 million, as compared to $2.8 million recorded for the six months ended June
30, 2008 due to increases in the net change in estimated remediation costs,
legal fees and litigation loss reserves of $0.4 million, $0.3 million and $0.2
million, respectively. In addition to net change in estimated remediation costs
of $1.8 million (which includes $0.4 million of accretion expense),
environmental expenses for the six months ended June 30, 2009 also include legal
fees of $1.0 million, principally for trial related costs incurred for several
active litigation matters; adjustments to provisions for environmental
litigation loss reserves of $0.4 million, principally related to a tentative
settlement agreement for one litigation matter; and project management fees of
$0.4 million. Change in net estimated environmental costs were $1.8 million for
the six months ended June 30, 2009, or an increase of $0.4 million as compared
to $1.4 million recorded in the prior year period as a result of more stringent
interpretations of existing standards by New York State regulators for certain
properties currently being remediated. Environmental accruals are based on
estimates which are subject to significant change, and are adjusted as the
remediation treatment progresses, as circumstances change and as environmental
contingencies become more clearly defined and reasonably estimable.
Environmental expenses vary from period to period and, accordingly, undue
reliance should not be placed on the magnitude or the direction of change in
reported environmental expenses for one period as compared to prior
periods.
 
 25
 General
and administrative expenses were $3.4 million for the six months ended June 30,
2009 as compared to $3.8 million recorded for the six months ended June 30,
2008. The decrease in general and administrative expenses was principally due to
higher professional fees incurred in the three months ended June 30, 2008
associated with the previously disclosed potential modification of the Master
Lease with Marketing and related matters.
 
 Depreciation
and amortization expense included in continuing operations was $5.3 million for
the six months ended June 30, 2009, as compared to $5.7 million for the six
months ended June 30, 2008. The decrease in depreciation and amortization
expense was principally due to the effect of assets becoming fully depreciated,
lease terminations and property dispositions.
 
 The $1.1
million of impairment charges recorded in the six months ended June 30, 2009 was
attributable to general reductions in real estate valuations and, in certain
cases, by the removal or scheduled removal of underground storage tanks by
Marketing.
 
 As a
result, total operating expenses increased by approximately $0.8 million for the
six months ended June 30, 2009, as compared to the six months ended June 30,
2008.
 
 Interest
expense was $2.4 million for the six months ended June 30, 2009, as compared to
$3.6 million for the six months ended June 30, 2008. The decrease was
principally due to reduction in interest rates on our floating rate
borrowings.
 
 Gains on
dispositions of real estate, partially included in other income and discontinued
operations, increased by an aggregate of $1.4 million for the six months ended
June 30, 2009, as compared to the six months ended June 30, 2008. Gains on
disposition of real estate vary from period to period and, accordingly, undue
reliance should not be placed on the magnitude or the direction of change in
reported gains for one period as compared to prior periods.
 
 As a
result, net earnings increased by $1.5 million to $23.5 million for the six
months ended June 30, 2009, as compared to the $22.0 million for the six months
ended June 30, 2008. Earnings from continuing operations was $20.1 million for
each of the six month periods ended June 30, 2009 and 2008. Earnings from
continuing operations excludes the operating results and $3.3 million of net
gain from the disposition of four properties sold in 2009, which applicable
results have been included in earnings from discontinued operations for the six
months ended June 30, 2009 and 2008.
 
 For the
six months ended June 30, 2009, FFO decreased by $0.4 million to $25.5 million,
as compared to $25.9 million for prior year period, and AFFO increased by $1.4
million to $26.1 million, as compared to $24.7 million for prior year period.
The increase in FFO for the six months ended June 30, 2009 was primarily due to
the changes in net earnings but excludes a $0.4 million decrease in depreciation
and amortization expense and the $1.4 million increase in gains on dispositions
of real estate. The increase in AFFO for the six months ended June 30, 2009 also
excludes a $0.6 million decrease in deferred rental revenue, a marginal decrease
in net amortization of above-market and below-market leases and the $1.1 million
increase in impairment charges (which are included in net earnings and FFO but
are excluded from AFFO).
 
 26
 Diluted
earnings per share increased by $0.06 per share to $0.95 per share for the six
months ended June 30, 2009, as compared to $0.89 per share for the six months
ended June 30, 2008. Diluted FFO per share decreased by $0.01 per share for the
six months ended June 30, 2009 to $1.03 per share, as compared to $1.04 per
share for the six months ended June 30, 2008. Diluted AFFO per share increased
by $0.05 per share for the six months ended June 30, 2009 to $1.05 per share, as
compared to $1.00 per share for the six months ended June 30, 2008.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 Our
principal sources of liquidity are the cash flows from our operations, 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. There is no
assurance, however, that our liquidity will not be adversely affected by
developments related to Marketing and the Marketing Leases discussed in “General
- Developments Related to Marketing and the Marketing Leases” above or the other
risk factors described in our filings with the SEC.
 
 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.
 
 As of June
30, 2009, borrowings under the Credit Agreement, described below, were $129.5
million, bearing interest at a weighted-average effective rate of 3.4% per
annum. The weighted-average effective rate is based on $84.5 million of LIBOR
rate borrowings floating at market rates plus a margin of 1.25% and $45.0
million of LIBOR rate borrowings effectively fixed at 5.44% by an interest rate
Swap Agreement, described below, plus a margin of 1.25%. We had
$45.5 million available under the terms of the Credit Agreement as of June 30,
2009.We are party to 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 June 30, 2009, the
applicable margin will remain at 0.0% for base rate borrowings and will be
adjusted downward from 1.25% to 1.0% for LIBOR rate borrowings in August
2009.
 
 27
 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 default, if
not cured or waived, could result in the acceleration of all of our indebtedness
under our Credit Agreement.
 
 We are
party to 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 June 30, 2009, $45.0 million of our LIBOR based
borrowings under the Credit Agreement bear interest at an effective rate of
6.69%.
  Since we
generally lease our properties on a triple-net basis, we do not incur
significant capital expenditures other than those related to acquisitions. As
part of our overall business 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. Capital expenditures,
including acquisitions, for the six months ended June 30, 2009 and 2008 amounted
to $2.0 million, and $3.8 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.
 
 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 $23.3 million and $23.1
million for the six months ended June 30 2009 and 2008, 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 including dividend equivalents paid on
outstanding restricted stock units), and commenced doing so with the quarterly
dividend declared in May 2008. Due to the developments related to Marketing and
the Marketing Leases discussed in “General - Developments Related to Marketing
and the Marketing Leases” 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.
 
 28
 CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
 
 Our
accompanying unaudited interim consolidated financial statements 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 to the consolidated financial statements that
appear in our Annual Report on Form 10-K for the year ended December 31, 2008.
We believe that the more critical of our accounting policies relate to revenue
recognition and deferred rent receivable and related reserves, impairment of
long-lived assets, income taxes, environmental costs and recoveries from state
underground storage tank funds and litigation, each of which is discussed in
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations” in our Annual Report on Form 10-K for the year ended December 31,
2008.
 
 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 nonrecurring basis to
fiscal years beginning after November 15, 2008. The adoption of SFAS 157 in
January 2008 and 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 in January 2009 did not have 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 nonrecurring basis will have
a material impact on our financial position and results of
operations.
 
 29
 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 did not
result in a write-off of acquisition related transactions costs associated with
transactions not yet consummated.
 
 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
June 30, 2009, we have regulatory approval for remediation action plans in place
for two hundred forty-six (94%) of the two hundred sixty-two properties for
which we continue to retain remediation responsibility and the remaining sixteen
properties (6%) were in the assessment phase. In addition, we have nominal
post-closure compliance obligations at twenty-two 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.
 
 30
 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
tendered the matter for defense and indemnification from Marketing, but
Marketing denied its liability for the claim and its responsibility to defend
against, and indemnify us for, the claim. We filed third party claims against
Marketing for indemnification in this matter, which claim was actively
litigated, leading to a trial held before a judge during the first quarter of
2009. A decision has not yet been rendered by the court. 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
possibly 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 has paid 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 June 30, 2009
and December 31, 2008 in connection with this indemnification agreement. Under
the Master Lease, we continue to have additional ongoing environmental
remediation obligations for one hundred seventy-eight 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 and we can reasonably estimate the amount of the
Marketing Environmental Liabilities for which we will be directly responsible to
pay.
 
 31
 Based on
our assessment of Marketing’s financial condition and our assumption that Lukoil
would not allow Marketing to fail to perform its obligations under the Marketing
Leases 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 our 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. Environmental accruals are based on estimates which are subject to
significant change, and are adjusted as the remediation treatment progresses, as
circumstances change and as these environmental contingencies become more
clearly defined and reasonably estimable.
 
 As of June
30, 2009, we had accrued $13.7 million as management’s best estimate of the net
fair value of reasonably estimable environmental remediation costs which is
comprised of $18.0 million of estimated environmental obligations and
liabilities offset by $4.3 million of estimated recoveries from state UST
remediation funds, net of allowance. Environmental expenditures, net of
recoveries from UST funds, were $1.6 million and $1.7 million, respectively, for
the six months ended June 30, 2009 and 2008. For the six months ended June 30,
2009 and 2008, the net change in estimated remediation cost and accretion
expense included in environmental expenses in our consolidated statements of
operations amounted to $1.8 million and $1.4 million, respectively, which
amounts were net of probable recoveries from state UST remediation
funds.
 
 32
 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 $5.6 million.
Accordingly, the environmental accrual as of June 30, 2009 was increased by $2.2
million, net of assumed recoveries and before inflation and present value
discount adjustments. The resulting net environmental accrual as of June 30,
2009 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 June 30, 2009 would have increased by $0.2
million and $0.1 million, respectively, for an aggregate increase in the net
environmental accrual of $0.3 million. However, the aggregate net change in
environmental estimates expense recorded during the six months ended June 30,
2009 would not have changed significantly if these changes in the assumptions
were made effective December 31, 2008.
 
 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 June 30, 2009 and December
31, 2008, we had accrued $2.1 million and $1.7 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. Matters related to the Lower Passaic River and the MTBE multi-district
litigation, in particular, for which accruals have not been provided 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 environmental lawsuits and
claims, including those matters specifically referenced above, see “Item 3.
Legal Proceedings” which appears in our Annual Report on Form 10-K for the year
ended December 31, 2008 and “Part II, Item 1. Legal Proceedings” which appears
in this Form 10-Q.)
 
 33
 Forward-Looking
Statements
 
 Certain
statements in this Quarterly Report on Form 10-Q 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. Examples of forward-looking statements include
statements regarding the developments related to Marketing and the Marketing
Leases included in “Developments Related to Marketing and the Marketing Leases”
and elsewhere in this Form 10-Q; 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 is providing credit support and will
continue to provide financial support to Marketing in the future and Lukoil will
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; our prior decision to attempt to negotiate with Marketing for a
modification of the Marketing Leases which removes the Subject Properties or
other properties 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 not probable that we will not collect
the deferred rent receivable related to the Remaining Properties; 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 relet
properties at market rents (either as motor fuel
outlets or for other commercial uses)or sell properties; our expectations
regarding future acquisitions; our ability to maintain our REIT status; the
probable outcome of litigation or regulatory actions; our expected recoveries
from UST 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 Swap
Agreement and our expectation that we will not settle the Swap Agreement prior
to its maturity; the expectation that the Credit Agreement 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;
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 herein, those described in “Developments Related
to Marketing and the Marketing Leases” herein, and other risks that we describe
from time to time in our filings with the 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 relet 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;
exposure to counterparty risk; the risk of loss of our management 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.
 
 34
 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
stock price. An investment in our stock involves various risks, including those
mentioned above and elsewhere in this report and those that are detailed 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.
 
 Item 3. Quantitative and Qualitative Disclosures About Market
Risk
 
 Prior to
April 2006, when we entered into the 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.
 
 We are
exposed to interest rate risk, primarily as a result of our $175.0 million
Credit Agreement. We use borrowings under the Credit Agreement to finance
acquisitions and for general corporate purposes. Total borrowings outstanding
under the Credit Agreement at June 30, 2009 were $129.5 million, bearing
interest at a weighted-average rate of 1.9% per annum, or a weighted-average
effective rate of 3.4% including the impact of the Swap Agreement discussed
below. The weighted-average effective rate is based on $84.5 million of LIBOR
rate borrowings floating at market rates plus a margin of 1.25% and $45.0
million of LIBOR rate borrowings effectively fixed at 5.44% by the Swap
Agreement plus a margin of 1.25%. 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 June 30, 2009, the applicable
margin will remain at 0.0% for base rate borrowings and will be adjusted
downward from 1.25% to 1.0% for LIBOR rate borrowings in August
2009.
 
 35
 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 June 30, 2009 has not increased significantly, as compared to
December 31, 2008. 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 June 30, 2009, $45.0 million
of our LIBOR based borrowings under the Credit Agreement bear interest at an
effective rate of 6.69%. 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 June 30, 2009, our borrowings exceeded the
notional amount of the Swap Agreement by $84.5 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. 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.
 
 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 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
$133.4 million for 2009, an increase in market interest rates of 0.5% for 2009
for the remainder of 2009 would decrease our 2009 net income and cash flows by
$0.2 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
$133.4 million average outstanding borrowings during the second quarter of 2009
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 currently held in an overnight bank time
deposit with JPMorgan Chase Bank, N.A.
 
 36
 Item 4. 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, of 1934, as amended, 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 quarter covered by this
report. 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 June 30,
2009.
 
 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.
  37
 PART II.  OTHER INFORMATION
 
 Item 1.  Legal Proceedings
 
 Please
refer to “Item 3. Legal Proceedings” of our Annual Report on Form 10-K for the
year ended December 31, 2008, and note 3 to our consolidated financial
statements in such Form 10-K, “Part II, Item 1. Legal Proceedings” in our
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009 and
to note 3 to our accompanying unaudited consolidated financial statements which
appear in  this Quarterly Report on Form 10-Q, for additional
information.
 
 Item 1A. Risk Factors
 
 There have
not been any material changes to the information previously disclosed in “Part
I, Item 1A. Risk Factors” which appears in our Annual Report on Form 10-K for
the year ended December 31, 2008, and “Part II, Item 1A. Risk Factors” which
appears in our Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2009.
 
 Item 4.  Submission of Matters to a Vote of Security
Holders
 
 We held
our annual meeting of stockholders on May 14, 2009 (the “Annual Meeting”). There
were 24,766,216 shares of our common stock outstanding and entitled to vote at
our annual meeting, and 23,142,280 shares were represented in person or by
proxy. The following matters were voted upon at the Annual Meeting:
 
 The five
directors listed below were elected to serve an additional one-year
term:
 
 Nominee
                    Votes For
                    Votes WithheldMilton
      Cooper
                    22,956,459
                    185,821Philip
      E. Coviello
                    22,876,281
                    265,999David
      B. Driscoll
                    22,956,686
                    185,594Leo
      Liebowitz
                    22,892,294
                    249,986Howard
      Safenowitz
                    22,894,507
                    247,773
 
 The
appointment of PricewaterhouseCoopers LLP as our independent registered public
accounting firm for the fiscal year ending December 31, 2009 was
ratified:
 
 Votes For
                    Votes Against
                    Abstentions22,909,719
                    150,577
                    81,984
 
 Item 5.  Other Information
 
 None.
 
 Item 6.  Exhibits
 
 Exhibit
      No.
                      Description of Exhibit31(i).1
                      Rule
      13a-14(a) Certification of Chief Financial Officer31(i).2
                      Rule
      13a-14(a) Certification of Chief Executive Officer32.1
                      Certification
      of Chief Executive Officer pursuant to 18 U.S.C. § 1350
  (a)32.2
                      Certifications
      of Chief Financial Officer pursuant to 18 U.S.C. § 1350
  (a)
 
 38
  (a) These
certifications are being furnished solely to accompany the Report pursuant to 18
U.S.C. § 1350, and are not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and are not to be incorporated by
reference into any filing of the Company, whether made before or after the date
hereof, regardless of any general incorporation language in such
filing.
  39
 SIGNATURES
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
  Getty
      Realty Corp.(Registrant)BY:
                                /s/ Thomas
      J. Stirnweis(Signature)THOMAS
      J. STIRNWEISVice
      President, Treasurer andChief
      Financial OfficerAugust
      10, 2009
  BY:
                                  /s/ Leo
      Liebowitz(Signature)LEO
      LIEBOWITZChairman
      and ChiefExecutive
      OfficerAugust
      10, 2009
   40