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 March 31,
2008





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 of incorporation or organization)
            
            (I.R.S.
      EmployerIdentification
      No.)






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 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 24,765,615 shares of Common Stock, par value $.01 per share, as
of May 1, 2008.









GETTY
REALTY CORP.
 
 INDEX
 
  Part
      I.  FINANCIAL INFORMATION
                Page
      NumberItem 1.
      Financial Statements (unaudited)Consolidated
      Balance Sheets as of March 31, 2008 and December 31,
    2007
                1Consolidated
      Statements of Operations for the Three months ended March 31, 2008 and
      2007
                2Consolidated
      Statements of Comprehensive Income for the Three months ended March 31,
      2008 and 2007
                3Consolidated
      Statements of Cash Flows for the Three months ended March 31, 2008
      and 2007
                4Notes to
      Consolidated Financial Statements
                5Item 2.
      Management's Discussion and Analysis of Financial Condition and Results of
      Operations
                16Item 3.
      Quantitative and Qualitative Disclosures about Market
    Risk
                31Item 4.
      Controls and Procedures
                33Part II.
      OTHER INFORMATIONItem 1. Legal
      Proceedings
                34Item
      5.  Other Information
                34Item 6.
      Exhibits
                35Signatures
                36









Part I.  FINANCIAL INFORMATION
  Item 1. Financial Statements
 GETTY
      REALTY CORP. AND SUBSIDIARIESCONSOLIDATEDBALANCE
      SHEETS(in
      thousands, except share data)(unaudited)March
      31,
                  
                  
                  December
      31,Assets:
                  
                  2008
                  
                  
                  2007Real
      Estate:Land
                  
                  $
                  221,581
                  
                  
                  $
                  222,194Buildings
      and improvements
                  
                  
                  254,388
                  
                  
                  
                  252,060475,969
                  
                  
                  
                  474,254Less
      – accumulated depreciation and amortization
                  
                  
                  (124,697
                  )
                  
                  
                  (122,465
                  )Real
      estate, net
                  
                  
                  351,272
                  
                  
                  
                  351,789Deferred
      rent receivable (net of allowance of $10,438 as of March 31, 2008 and
      $10,494 as of December 31, 2007)
                  
                  
                  25,354
                  
                  
                  
                  24,915Cash
      and cash equivalents
                  
                  
                  271
                  
                  
                  
                  2,071Recoveries
      from state underground storage tank funds, net
                  
                  
                  4,639
                  
                  
                  
                  4,652Mortgages
      and accounts receivable, net
                  
                  
                  1,451
                  
                  
                  
                  1,473Prepaid
      expenses and other assets
                  
                  
                  10,587
                  
                  
                  
                  12,011Total
      assets
                  
                  $
                  393,574
                  
                  
                  $
                  396,911Liabilities
      and Shareholders' Equity:Debt
                  
                  $
                  129,750
                  
                  
                  $
                  132,500Environmental
      remediation costs
                  
                  
                  18,001
                  
                  
                  
                  18,523Dividends
      payable
                  
                  
                  11,545
                  
                  
                  
                  11,534Accounts
      payable and accrued expenses
                  
                  
                  23,650
                  
                  
                  
                  22,176Total
      liabilities
                  
                  
                  182,946
                  
                  
                  
                  184,733Commitments
      and contingencies
                  
                  
                  --
                  
                  
                  
                  --Shareholders'
      equity:Common
      stock, par value $.01 per share; authorized50,000,000
      shares; issued 24,765,615 at March 31, 2008
                    and
      24,765,065 at December 31, 2007
                  
                  
                  248
                  
                  
                  
                  248Paid-in
      capital
                  
                  
                  258,809
                  
                  
                  
                  258,734Dividends
      paid in excess of earnings
                  
                  
                  (44,679
                  )
                  
                  
                  (44,505
                  )Accumulated
      other comprehensive loss
                  
                  
                  (3,750
                  )
                  
                  
                  (2,299
                  )Total
      shareholders' equity
                  
                  
                  210,628
                  
                  
                  
                  212,178Total
      liabilities and shareholders' equity
                  
                  $
                  393,574
                  
                  
                  $
                  396,911
  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 March 31,2008
              
              
              2007Revenues
      from rental properties
              
              $
              20,330
              
              
              $
              17,813Operating
      expenses:Rental
      property expenses
              
              
              2,420
              
              
              
              2,418Environmental
      expenses, net
              
              
              787
              
              
              
              959General
      and administrative expenses
              
              
              1,641
              
              
              
              1,453Depreciation
      and amortization expense
              
              
              2,805
              
              
              
              1,852Total
      expenses
              
              
              7,653
              
              
              
              6,682Operating
      income
              
              
              12,677
              
              
              
              11,131Other
      income, net
              
              
              247
              
              
              
              115Interest
      expense
              
              
              (1,989
              )
              
              
              (964
              )Net
      earnings from continuing operations
              
              
              10,935
              
              
              
              10,282Discontinued
      operations:Earnings
      from operating activities
              
              
              23
              
              
              
              155Gains
      on dispositions of real estate
              
              
              413
              
              
              
              -Earnings
      from discontinued operations
              
              
              436
              
              
              
              155Net
      earnings
              
              $
              11,371
              
              
              $
              10,437Basic
      earnings per common share:Earnings
      from continuing operations
              
              $
              .44
              
              
              $
              .42Earnings
      from discontinued operations
              
              $
              .02
              
              
              $
              .01Net
      earnings
              
              $
              .46
              
              
              $
              .42Diluted
      earnings per common share:Earnings
      from continuing operations
              
              $
              .44
              
              
              $
              .41Earnings
      from discontinued operations
              
              $
              .02
              
              
              $
              .01Net
      earnings
              
              $
              .46
              
              
              $
              .42Weighted-
      average shares outstanding:Basic
              
              
              24,765
              
              
              
              24,765Stock
      options and restricted stock units
              
              
              19
              
              
              
              20Diluted
              
              
              24,784
              
              
              
              24,785Dividends
      declared per share
              
              $
              .465
              
              
              $
              .455






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 March 31,2008
                
                
                2007Net
      earnings
                
                $
                11,371
                
                
                $
                10,437Other
      comprehensive loss:Net
      unrealized loss on interest rate swap
                
                
                (1,451
                )
                
                
                (185
                )Comprehensive
      income
                
                $
                9,920
                
                
                $
                10,252




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)Three
      months ended March 31,2008
              
              
              2007Cash
      flows from operating activities:Net
      earnings
              
              $
              11,371
              
              
              $
              10,437Adjustments
      to reconcile net earnings tonet cash flow provided by operating activities:Depreciation and amortization
      expense
              
              
              2,813
              
              
              
              1,865Deferred rental
      revenue
              
              
              (439
              )
              
              
              (482
              )Gain on dispositions of real
      estate
              
              
              (547
              )
              
              
              (46
              )Amortization
      of above-market and below-market leases
              
              
              (201
              )
              
              
              -Accretion
expense
              
              
              166
              
              
              
              167Stock-based
      employee compensation expense
              
              
              66
              
              
              
              54Changes
      in assets and liabilities:Recoveries from state
      underground storage tank funds, net
              
              
              101
              
              
              
              (6
              )Mortgages and accounts
      receivable, net
              
              
              (12
              )
              
              
              189Prepaid expenses and other
      assets
              
              
              (55
              )
              
              
              192Environmental remediation
      costs
              
              
              (776
              )
              
              
              (418
              )Accounts payable and accrued
      expenses
              
              
              123
              
              
              
              (1,195
              )Net
      cash flow provided by operating activities
              
              
              12,610
              
              
              
              10,757Cash
      flows from investing activities:Property acquisitions and
      capital expenditures
              
              
              (3,118
              )
              
              
              (80,494
              )Proceeds
      from dispositions of real estate
              
              
              1,491
              
              
              
              148Collection of mortgages
      receivable, net
              
              
              34
              
              
              
              164Decrease in cash held for
      property acquisitions
              
              
              1,459
              
              
              
              296Net
      cash flow used in investing activities
              
              
              (134
              )
              
              
              (79,886
              )Cash
      flows from financing activities:Borrowings under credit
      agreement, net
              
              
              (2,750
              )
              
              
              81,500Cash dividends
    paid
              
              
              (11,534
              )
              
              
              (11,284
              )Credit
      agreement origination costs
              
              
              -
              
              
              
              (844
              )Repayment of mortgages
      payable, net
              
              
              -
              
              
              
              (8
              )Proceeds from stock options
      exercised
              
              
              9
              
              
              
              -Net
      cash flow provided by (used in) financing activities
              
              
              (14,275
              )
              
              
              69,364Net
      increase (decrease) in cash and cash equivalents
              
              
              (1,799
              )
              
              
              235Cash
      and cash equivalents at beginning of period
              
              
              2,071
              
              
              
              1,195Cash
      and cash equivalents at end of period
              
              $
              272
              
              
              $
              1,430Supplemental
      disclosures of cash flow informationCash paid (refunded) during the
      period for:Interest
              
              $
              2,072
              
              
              $
              1,579Income
      taxes, net
              
              
              199
              
              
              
              174Recoveries
      from state underground storage tank funds
              
              
              (180
              )
              
              
              (511
              )Environmental
      remediation costs
              
              
              867
              
              
              
              1,366




The
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 funds, environmental remediation costs, real estate,
depreciation and amortization, impairment of long-lived assets, litigation,
accrued expenses, and income taxes.
 
 Discontinued Operations: The
operating results and gains from certain dispositions of real estate sold in
2008 are reclassified as discontinued operations. The operating results of such
properties for the three months ended March 31, 2007 have been reclassified to
discontinued operations to conform to the 2008 presentation. Discontinued
operations for the quarter ended March 31, 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 months ended March 31, 2008 and 2007.
 
 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, 2007.
 
 New Accounting
Pronouncements: In September 2006, the Financial Accounting Standards
Board (“FASB”) issued Statement 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, except that the effective date for
non-financial assets and non-financial liabilities that are not recognized or
disclosed at fair value on a recurring basis may be deferred to fiscal years
beginning after November 15, 2008. The adoption of SFAS 157 in January 2008 did
not have a material impact on the Company’s financial position and results of
operations.
  5




In
December 2007, the FASB issued Statement 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 the
identifiable assets acquired, liabilities assumed, any noncontrolling interest
in the acquiree and goodwill acquired in a business combination. SFAS 141(R) is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company is currently assessing the potential impact that
the adoption of SFAS 141(R) will have on its financial position and results of
operations.
  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. 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 and North
Dakota.
 
 As of
March 31, 2008, Getty Petroleum Marketing Inc. (“Marketing”) leased from the
Company, eight hundred and eighty properties under an amended and restated
Master Lease Agreement (the “Master Lease”) and ten properties 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. See
footnote 3 for contingencies related to Marketing and the Marketing
Leases.
  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 with high credit
quality institutions. Temporary cash investments, if any, are held in an
institutional money market fund and federal agency discount notes.
  6




As of
March 31, 2008, the Company leased eight hundred ninety of its one thousand
eighty-four properties on a long-term net basis to Marketing under the Marketing
Leases (see footnote 2). A substantial portion of the Company’s revenues (76%
for the three months ended March 31, 2008), are derived from the Marketing
Leases. Accordingly, the Company’s revenues are dependent to a large degree on
the economic performance of Marketing and of the petroleum marketing industry,
and any factor that adversely affects Marketing, or the Company’s relationship
with Marketing, may have a material adverse effect on the Company. 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. Even though Marketing is a wholly-owned subsidiary of Lukoil,
Lukoil is not a guarantor of the Marketing Leases and there can be no assurance
that Lukoil will continue to provide credit enhancement or additional capital to
Marketing in the future. The Company’s financial results depend largely on
rental income from Marketing, and to a lesser extent on rental income from other
tenants, and are therefore 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 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 May 2008, although
there is no assurance that it will continue to do so.




The
Company has periodically discussed with representatives of Marketing potential
modifications to the Marketing Leases and in the course of such discussions
Marketing has 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”). In light of these
developments, and the continued deterioration in Marketing’s annual financial
performance,  the Company intends to negotiate with Marketing for a
modification of the Marketing Leases which removes the Subject Properties from
the Marketing Leases. Following any such modification, the Company intends
either to relet or sell those locations and reinvest the proceeds in new
properties. Any such modification 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 may be if the
Marketing Leases are modified. The Company also cannot accurately predict what
actions Marketing and Lukoil may take, and what its recourse may be, whether the
Marketing Leases are modified or not.
 
 Representatives
of Marketing have also indicated to the Company that they are considering
significant changes to Marketing’s business model. The Company intends to
negotiate with Marketing for a modification of the Marketing Leases to remove
the Subject Properties; however, 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, it is the Company’s intention to cooperate with
Marketing in accomplishing those objectives to the extent that it is prudent for
the Company to do so by seeking replacement tenants or buyers for the properties
subject to 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. 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.
  7




Due to the
previously disclosed deterioration in Marketing’s annual financial performance,
in conjunction with the Company’s intention to attempt to negotiate with
Marketing for a modification of the Marketing Leases to remove the Subject
Properties, the Company can not 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 lease terms. In reaching this conclusion, the Company relied on
various indicators, including, but not limited to, the following: (i)
Marketing’s significant operating losses, (ii) its negative cash flow from
operating activities, (iii) its asset impairment charges for underperforming
assets, and (iv) its negative earnings before interest, taxes, depreciation,
amortization and rent payable to the Company.
 
 Accordingly,
the Company has reserved $10,438,000 and $10,494,000 as of March 31, 2008 and
December 31, 2007, respectively, of the deferred rent receivable due from
Marketing (which represents the full amount of the deferred rent receivable
recorded related to the Subject Properties as of those respective dates).
Providing the non-cash deferred rent receivable reserve in the fourth quarter of
2007 reduced the Company’s net earnings but did not impact the Company’s cash
flow from operating activities. The Company did not provide 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 probable that it will collect the deferred rent receivable related to the
Remaining Properties of $22,515,000 as of March 31, 2008 and that Lukoil would
not allow Marketing to fail to perform its rental, environmental and other
obligations under the Marketing Leases. The Company anticipates that the rental
revenue for the Remaining Properties will continue to be recognized on a
straight-line basis and 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. Although the Company adjusted the estimated useful lives of certain
long-lived assets for the Subject Properties, the Company believes that no
impairment charge was necessary for the Subject Properties as of March 31, 2008
or December 31, 2007 pursuant to the provisions of Statement of Financial
Accounting Standards No. 144. The impact to depreciation expense due to
adjusting the estimated lives for certain long-lived assets beginning with the
quarter ended March 31, 2008 was not significant.
 
 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 is required to accrue for Marketing
Environmental Liabilities if the Company determines that it is probable that
Marketing will not meet its obligations 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 March 31, 2008 or
December 31, 2007.
  8




Should the
Company’s assessments, assumptions and beliefs prove to be incorrect, or as
circumstances change, the conclusions reached by the Company relating to (i)
recoverability of the deferred rent receivable for the Remaining Properties,
(ii) potential impairment of the Subject Properties and, (iii) Marketing’s
ability to pay the Marketing Environmental Liabilities may change. 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 adjustments to the amounts
recorded for these assets and liabilities. Accordingly, the Company may be
required to (i) reserve additional amounts of the deferred rent receivable at a
later time, (ii) record an impairment charge related to the Subject 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 proposed 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 to the Marketing Leases
discussed above. 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 environmental
obligations and the Company accrues for such liabilities; if the Company is
unable to relet or sell the properties subject to 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 stock price may be materially adversely affected.
 
 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 is obligated to pay 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 March 31, 2008 and December 31, 2007 in connection with this
indemnification agreement.
  9




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 March 31, 2008 and December 31, 2007, the Company had accrued $2,482,000
and $2,575,000, 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. Marketing is
responsible for such costs under the terms of the Master Lease but Marketing has
denied its liability for the claim and its responsibility to defend against and
indemnify the Company for the claim. In addition, Marketing has denied liability
and refused the Company’s tender for defense and indemnification for another
legal proceeding. The Company has filed third party claims against Marketing in
both proceedings. It is  possible that the Company’s assumption that
Marketing will be ultimately responsible for the claim may change, which may
result in the Company providing an accrual for these matters.
 
 In
September 2003, the Company was notified by the State of New Jersey Department
of Environmental Protection that the Company is one of approximately sixty
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. Additionally, 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 New Jersey Department of Environmental Protection and the EPA. Accordingly,
the ultimate legal and financial liability of the Company, if any, cannot be
estimated with any certainty at this time.
 
 From
October 2003 through March 2008, the Company was notified that the Company was
made party to fifty 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. These cases
allege various theories of liability due to contamination of groundwater with
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. Certain of the
named defendants have preliminary agreed to settle the cases as pertains to
them, but a number of named defendants, including the Company, remain involved
in the cases. 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 these matters could cause a material adverse effect on
the Company’s business, financial condition, results of operations, liquidity,
ability to pay dividends and stock price.
  10




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 March 31, 2008 and December 31, 2007, the
Company’s consolidated balance sheets included, in accounts payable and accrued
expenses, $219,000 and $310,000, respectively, 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
three months ended March 31, 2008 include, in general and administrative
expenses, credits of $72,000 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 pay out substantially
all of its “earnings and profits” (as defined in the Internal Revenue Code) in
cash distributions 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
March 31, 2008, borrowings under the Credit Agreement, described below, were
$129,750,000, bearing interest at a weighted-average effective interest rate of
4.9% per annum.
 
 The
Company has a $175,000,000 amended and restated senior unsecured revolving
credit agreement (the “Credit Agreement”) with a group of domestic commercial
banks 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, as defined
in the Credit Agreement. Based on the Company’s leverage ratio as of March 31,
2008, the applicable margin is 0.0% for base rate borrowings and 1.0% for LIBOR
rate borrowings.
 
 Subject to
the terms of the Credit Agreement, the Company has the option to increase the
amount of the credit facility available pursuant to the Credit Agreement by
$125,000,000 to $300,000,000, subject to approval by the Bank Syndicate, and/or
extend the term of the Credit Agreement for one additional year. 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.
  11




The
Company has 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 of March 31, 2008, $45,000,000 of the Company’s LIBOR based
borrowings under the Credit Agreement bear interest at an effective rate of
6.44%.
 
 The
Company entered into the Swap Agreement with a major financial institution,
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 March 31, 2008 and December 31, 2007, 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 three months ended March
31, 2008 or 2007 representing the hedge’s ineffectiveness. At March 31 2008 and
December 31, 2007, the Company’s consolidated balance sheets include, in
accounts payable and accrued expenses, an obligation for the fair value of the
Swap Agreement of $3,750,000 and $2,299,000, respectively. For the three months
ended March 31, 2008 and 2007, the Company has recorded the loss in fair value
of the Swap Agreement related to the effective portion of the interest rate
contract totaling $1,451,000 and $185,000, respectively, in accumulated other
comprehensive loss in the Company’s consolidated balance sheet. The accumulated
comprehensive loss 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.
 
 The
valuation of the Swap Agreement is 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. As of March 31, 2008, 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 Agreement.
 
 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.
   12




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 their financial ability to pay their share of such
costs.
 
 Of the
eight hundred ninety properties leased to Marketing as of March 31, 2008, the
Company has agreed to pay all costs relating to, and to indemnify Marketing for,
certain environmental liabilities and obligations at two hundred two 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 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 stock
price. See footnote 3 for contingencies related to Marketing and the Marketing
Leases.
 
 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 income, net of allowance for collection
risk, based on estimated recovery rates developed from prior experience with the
funds when such recoveries are considered probable.
  13




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. These accrual estimates are subject to
significant change, and are adjusted as the remediation treatment progresses, as
circumstances change and as these contingencies become more clearly defined and
reasonably estimable. As of March 31, 2008, the Company had regulatory approval
for remediation action plans in place for two hundred sixty-one (93%) of the two
hundred eighty properties for which it continues to retain environmental
responsibility and the remaining nineteen properties (7%) remain in the
assessment phase. In addition, the Company has nominal post-closure compliance
obligations at thirty 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 $178,000 and $598,000 for the
three months ended March 31 2008 and 2007, 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.
 
 As of
March 31, 2008 and December 31, 2007 and 2006, the Company had accrued
$18,001,000, $18,523,000 and $17,201,000, respectively, as management’s best
estimate of the fair value of reasonably estimable environmental remediation
costs. As of March 31, 2008 and December 31, 2007 and 2006, the Company had also
recorded $4,639,000, $4,652,000 and $3,845,000, 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 $13,871,000 and $13,356,000 as of December 31, 2007 and 2006,
respectively, were subsequently accreted for the change in present value due to
the passage of time and, accordingly, $166,000 and $167,000 of net accretion
expense, substantially all of which is included in environmental expenses for
the three months ended March 31, 2008 and 2007, respectively.
 
 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 footnote 3 for contingencies related to
Marketing and the Marketing Leases. 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 stock price.
  14




6.  Shareholders’
Equity
  A summary
of the changes in shareholders' equity for the three months ended March 31, 2008
is as follows (in thousands, except share amounts):




Dividends
              
              
              AccumulatedPaid
      In
              
              
              OtherCommon
      Stock
              
              
              Paid-in
              
              
              Excess
      Of
              
              
              ComprehensiveShares
              
              
              Amount
              
              
              Capital
              
              
              Earnings
              
              
              Loss
              
              
              TotalBalance,
      December 31, 2007
              
              
              24,765,065
              
              
              $
              248
              
              
              $
              258,734
              
              
              $
              (44,505
              )
              
              $
              (2,299
              )
              
              $
              212,178Net
      earnings
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              11,371
              
              
              
              
              
              
              
              11,371Dividends
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (11,545
              )
              
              
              
              
              
              
              (11,545
              )Stock-based
      employeecompensation
      expense
              
              
              50
              
              
              
              
              
              
              
              66
              
              
              
              
              
              
              
              
              
              
              
              66Net
      unrealized loss oninterest
      rate swap
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,451
              )
              
              
              (1,451
              )Stock
      issued
              
              
              500
              
              
              
              -
              
              
              
              9
              
              
              
              
              
              
              
              
              
              
              
              9Balance,
      March 31,2008
              
              
              24,765,615
              
              
              $
              248
              
              
              $
              258,809
              
              
              $
              (44,679
              )
              
              $
              (3,750
              )
              
              $
              210,628




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 March 31, 2008 or December 31,
2007.
 
 7.  Acquisitions
  Effective
March 31, 2007 the Company acquired fifty-nine convenience store and retail
motor fuel properties in ten states for approximately $79,335,000 from various
subsidiaries of FF-TSY Holding Company II, LLC (the successor to Trustreet
Properties, Inc.) (“Trustreet”), a subsidiary of General Electric Capital
Corporation, for cash with funds drawn under its Credit Agreement. Effective
April 23, 2007, the Company acquired five additional properties from Trustreet
for approximately $5,200,000. The aggregate cost of the acquisitions, including
transaction costs, is approximately $84,535,000. Substantially all of the
properties are triple-net-leased to tenants who previously leased the properties
from the seller. The leases generally provide that the tenants are responsible
for substantially all existing and future environmental conditions at the
properties.
 
 The
following unaudited pro forma condensed consolidated financial information for
the three months ended March 31, 2007 has been prepared utilizing the historical
financial statements of Getty Realty Corp. and the historical financial
information of the properties acquired which was derived from the consolidated
books and records of Trustreet. The unaudited pro forma condensed consolidated
financial information assumes that the acquisitions had occurred as of the
beginning of the period presented, after giving effect to certain adjustments
including (a) rental income adjustments resulting from (i) the straight-lining
of scheduled rent increases; and (ii) the net amortization of the intangible
assets relating to above-market leases and intangible liabilities relating to
below-market leases over the remaining lease terms which average eleven years
and (b) depreciation and amortization adjustments resulting from (i) the
depreciation of real estate assets over their useful lives which average
seventeen years and (ii) the amortization of intangible assets relating to
leases in place over the remaining lease terms. The following unaudited pro
forma condensed consolidated financial information also gives effect to the
additional interest expense resulting from the assumed increase in borrowing
outstanding drawn under the Credit Agreement to fund the
acquisition.
 
 The
unaudited pro forma condensed financial information for the three months ended
March 31, 2007 is not indicative of the results of operations that would have
been achieved had the acquisition from Trustreet reflected herein been
consummated on the dates indicated or that will be achieved in the future and is
as follows (in thousands, except share amounts):
  Revenues
                
                $
                20,695Net
      earnings
                
                $
                10,891Net
      earnings per shareBasic
                
                $
                0.44Diluted
                
                $
                0.44
  15




Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
 
 This
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, 2007, and “Part I, Item 1. Financial
Statements.”
 
 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. As of March 31,
2008, we leased eight hundred ninety of our one thousand eighty-four properties
on a long-term basis under a unitary master lease (the “Master Lease”) with an
initial term effective through December 2015 and supplemental leases for ten
properties with initial terms of varying expiration dates (collectively with the
Master Lease, the “Marketing Leases”) to our primary tenant, Getty Petroleum
Marketing Inc. (“Marketing”), which was spun-off to our shareholders as a
separate publicly held company in March 1997. In December 2000, Marketing was
acquired by a subsidiary of OAO LUKoil (“Lukoil”), one of the largest integrated
Russian oil companies.
 
 Marketing’s
financial results depend largely on retail petroleum marketing margins and
rental income from subtenants who operate their 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 “Part I, Item 1A. Risk Factors” in our 2007
Annual Report on Form 10-K.
 
 Developments
Related to Marketing and the Marketing Leases
  A
substantial portion of our revenues (76% for the three months ended March 31,
2008) are derived from the Marketing Leases. Accordingly, our revenues are
dependent to a large degree on the economic performance of Marketing and of the
petroleum marketing industry, and any factor that adversely affects Marketing,
or our relationship with Marketing, may have a material adverse effect on us.
Through May 2008, Marketing has made all required monthly rental payments under
the Marketing Leases when due, although there is no assurance that it will
continue to do so. Even though Marketing is wholly-owned by a subsidiary of
Lukoil, Lukoil is not a guarantor of the Marketing Leases and there can be no
assurance that Lukoil will continue to provide credit enhancement or additional
capital to Marketing in the future.
  16




In
accordance with generally accepted accounting principles (“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 basis rather than when payment is due. We have recorded 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 sheet. 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.
 
 We have
had periodic discussions with representatives of Marketing regarding potential
modifications to the Marketing Leases and in the course of such discussions
Marketing has 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”). In light of these developments
and the continued deterioration in Marketing’s annual financial performance (as
discussed below), we intend to attempt to negotiate with Marketing for a
modification of the Marketing Leases which removes the Subject Properties from
the Marketing Leases. Following any such modification, we intend either to relet
the Subject Properties or to sell the Subject Properties and reinvest the
proceeds in new properties. Any such modification 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 may be if the Marketing Leases are
modified. 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.
 
 Representatives
of Marketing have also indicated to us that they are considering significant
changes to Marketing’s business model. We intend to attempt to negotiate with
Marketing for a modification of the Marketing Leases to remove the Subject
Properties; however, 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, it is our intention to cooperate with Marketing in accomplishing
those objectives to the extent that it is prudent for us to do so by seeking
replacement tenants or buyers for the properties subject to 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.
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
Subject Properties or other 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.
  17




Due to the
previously disclosed deterioration in Marketing’s annual financial performance,
in conjunction with our intention to attempt to negotiate with Marketing for a
modification of the Marketing Leases to remove the Subject Properties, we can
not reasonably assume that we will collect all of the rent due to us related to
the Subject Properties for the remainder of the current lease terms. In reaching
this conclusion, we relied on various indicators, including, but not limited to,
the following: (i) Marketing’s significant operating losses, (ii) its negative
cash flow from operating activities, (iii) its asset impairment charges for
underperforming assets, and (iv) its negative earnings before interest, taxes,
depreciation, amortization and rent payable to the Company.
 
 Accordingly,
we have reserved $10.4 million and $10.5 million as of March 31, 2008 and
December 31, 2007, respectively, of the deferred rent receivable due from
Marketing (which represents the full amount of the deferred rent receivable
recorded related to the Subject Properties as of those respective dates).
Providing the non-cash deferred rent receivable reserve in the fourth quarter of
2007 reduced our net earnings and our funds from operations but did not impact
our cash flow from operating activities or adjusted funds from operations since
the impact of the straight-line method of accounting is not included in our
determination of adjusted funds from operations. For additional information
regarding funds from operations and adjusted funds from operations, which are
non-GAAP measures, see “General — Supplemental Non-GAAP Measures” below. We did
not provide a deferred rent receivable reserve related to the Remaining
Properties since, based on our assessments and assumptions, we continue to
believe that it is probable that we will collect the deferred rent receivable
related to the Remaining Properties of $22.5 million as of March 31, 2008 and
that Lukoil will not allow Marketing to fail to perform its rental,
environmental and other obligations under the Marketing Leases. We anticipate
that the rental revenue for the Remaining Properties will continue to be
recognized on a straight-line basis and 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. Although we adjusted the estimated useful lives of
certain long-lived assets for the Subject Properties, we believe that no
impairment charge was necessary for the Subject Properties as of March 31, 2008
or December 31, 2007 pursuant to the provisions of Statement of Financial
Accounting Standards No. 144. The impact to depreciation expense due to
adjusting the estimated lives for certain long-lived assets beginning with the
quarter ended March 31, 2008 was not significant.
 
 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 are required to
accrue for Marketing Environmental Liabilities if we determine that it is
probable that Marketing will not meet its obligations 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 March 31, 2008 or December 31,
2007.
  18




Should our
assessments, assumptions and beliefs prove to be incorrect, or as circumstances
change, the conclusions we reached relating to (i) recoverability of the
deferred rent receivable for the Remaining Properties, (ii) potential impairment
of the Subject Properties, and (iii) Marketing’s ability to pay the Marketing
Environmental Liabilities may change. 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 adjustments to the amounts recorded for these assets and
liabilities. Accordingly, we may be required to (i) reserve additional amounts
of the deferred rent receivable at a later time, (ii) record an impairment
charge related to the Subject Properties, or (iii) accrue for Marketing
Environmental Liabilities as a result of the proposed modification of the
Marketing Leases or other factors.
 
 We
periodically receive and review Marketing’s financial statements and other
financial data. We receive this information from Marketing pursuant to the terms
of Master Lease. Certain of this information is not publicly available and
Marketing contends that the terms of the Master Lease prohibit us from including
this financial information in our Annual Reports on Form 10-K, our Quarterly
Reports on Form 10-Q or in our Annual Reports to Shareholders. As we had
previously disclosed in our filings with the Securities and Exchange Commission
(“SEC”), the financial performance of Marketing has been significantly
deteriorating as compared to Marketing’s financial performance for prior annual
periods that were previously presented in our filings with the SEC. Marketing’s
current financial data is not publicly available. Any financial data of
Marketing that we were able to provide in our periodic reports was publicly
available and was derived from the financial data provided by Marketing, and
neither we nor our auditors were involved with the preparation of such data, and
as a result, we cannot provide any assurance thereon. Additionally, our auditors
were not engaged to review or audit such data. You should not rely on the
selected balance sheet data or operating data related to prior years that was
previously presented in our filings as representative of Marketing’s current
financial condition or current results of operations.
 
 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 to the Marketing Leases discussed
above. 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 environmental obligations and we
accrue for such liabilities; if we are unable to relet or sell the properties
subject to 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 stock price may be materially adversely
affected.
  19




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 their interpretation of certain provisions
of their internal 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 subleases our
properties to approximately eight hundred independent, individual service
station/convenience store operators (subtenants). Consequently, we believe that
we, as the owner of these properties and the Getty® brand, could relet these
properties to the existing subtenants who operate their convenience stores,
automotive repair services or other businesses at our properties, or to others,
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
unable to resolve this outstanding comment.
 
 We do not
believe that offers or sales of our securities made pursuant to existing
registration statements that did not or do not contain the financial statements
of Marketing constitute, by reason of such omission, a violation of the
Securities Act of 1933, as amended, or the Exchange Act. Additionally, we
believe that if there ultimately is a determination that such offers or sales,
by reason of such omission, resulted in a violation of those securities laws, we
would not have any material liability as a consequence of any such
determination.
 
 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 generally
accepted accounting principles (“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.
  20




We believe
that FFO is helpful to investors in measuring our performance because FFO
excludes various items included in GAAP net earnings that do not relate to, or
are not indicative of, our fundamental operating performance 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 include the
significant 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. 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 basis rather than when payment is 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.
GAAP net earnings and FFO may also include income tax benefits 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 and income tax
benefit. In management’s view, AFFO provides a more accurate depiction than FFO
of the impact of scheduled rent increases under these leases, rental revenue
from acquired in-place leases and 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 generally
accepted accounting principles and therefore these measures should not be
considered an alternative for GAAP net earnings or as a measure of liquidity.
FFO and AFFO are reconciled to net earnings in Selected Financial
Data.
   21




A
reconciliation of net earnings to FFO and AFFO for the three months ended March
31, 2008 and 2007 is as follows (in thousands, except per share
amounts):




Three
      months ended
                March
      31,2008
              
              
              2007Net
      earnings
              
              $
              11,371
              
              
              $
              10,437Depreciation
      and amortization of real estate assets
              
              
              2,813
              
              
              
              1,865Gains
      on dispositions of real estate
              
              
              (547
              )
              
              
              (46
              )Funds
      from operations
              
              
              13,637
              
              
              
              12,256Deferred
      rental revenue (straight-line rent)
              
              
              (439
              )
              
              
              (482
              )Net
      amortization of above-market and below-market leases
              
              
              (201
              )
              
              
              -Adjusted
      funds from operations
              
              $
              12,997
              
              
              $
              11,774Diluted
      per share amounts:Earnings
      per share
              
              $
              0.46
              
              
              $
              0.42Funds
      from operations per share
              
              $
              0.55
              
              
              $
              0.49Adjusted
      funds from operations per share
              
              $
              0.52
              
              
              $
              0.48Diluted
      weighted average shares outstanding
              
              
              24,784
              
              
              
              24,785




Results
of operations
  Three
months ended March 31, 2008 compared to the three months ended March 31,
2007
 
 Revenues
from rental properties were $20.3 million for the three months ended March 31,
2008 as compared to $17.8 million for the three months ended March 31, 2007. We
received approximately $15.2 million in the three months ended March 31, 2008
and $15.0 million in the three months ended March 31, 2007 from properties
leased to Marketing under the Marketing Leases. We also received rent of $4.5
million in the three months ended March 31, 2008 and $2.3 million in the three
months ended March 31, 2007 from other tenants. The increase in rent received
was primarily due to rent from properties acquired in 2007 and rent escalations,
which was partially offset by the effect of dispositions of real estate and
lease expirations. In addition, revenues from rental properties include deferred
rental revenues of $0.4 million for the three months ended March 31, 2008, as
compared to $0.5 million for the three months ended March 31, 2007, recorded as
required by GAAP, related to the fixed rent increases scheduled under certain
leases with tenants. The aggregate minimum rent due over the current term of
these leases are recognized on a straight-line basis rather than when payment is
due. Revenues from rental properties for the three months ended March 31, 2008
also include $0.2 million of net amortization of above-market and below-market
leases due to the properties acquired at the end of the first quarter in 2007.
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.
 
 Rental
property expenses, which are primarily comprised of rent expense and real estate
and other state and local taxes, were $2.4 million for each of the three months
ended March 31, 2008 and 2007.
   22




Environmental
expenses, net for the three months ended March 31, 2008 were $0.8 million as
compared to $1.0 million recorded for the three months ended March 31, 2007.
Change in estimated
environmental costs, net of estimated recoveries from state underground storage
tank funds, was $0.2 million for the three months ended March 31, 2008, as
compared to $0.6 million recorded in the prior year period.The $0.4 million decrease in change
in estimated net environmental costs was partially offset by a $0.2 million increase
in environmental related litigation expenses, primarily higher legal
fees, as compared to the prior year period.
 
 General
and administrative expenses for the three months ended March 31, 2008 were $1.6
million as compared to $1.5 million recorded for the three months ended March
31, 2007. The increase in general and administrative expense was due to higher
legal and accounting fees.
 
 Depreciation
and amortization expense was $2.8 million for the three months ended March 31,
2008, as compared to $1.9 million recorded for the three months ended March 31,
2007. The increase was primarily due to properties acquired in 2007, which was
partially offset by the effect of dispositions in real estate and lease
expirations.
 
 As a
result, total operating expenses increased by approximately $1.0 million for the
three months ended March 31, 2008, as compared to the three months ended March
31, 2007.
 
 Interest
expense was $2.0 million for the three months ended March 31, 2008, as compared
to $1.0 million for the three months ended March 31, 2007. The increase was
primarily due to increased borrowings used to finance the acquisition of
properties in 2007, partially offset by a reduction in interest
rates.
 
 Gains on
dispositions of real estate, included in other income and discontinued
operations, increased by an aggregate of $0.5 million for the three months ended
March 31, 2008, as compared to the three months ended March 31,
2007.
 
 As a
result, net earnings increased by $1.0 million to $11.4 million for the three
months ended March 31, 2008, as compared to the $10.4 million for the three
months ended March 31, 2007. Earnings from continuing operations increased by
$0.6 million to $10.9 million for the three months ended March 31, 2008, as
compared to $10.3 million for the three months ended March 31, 2007. Earnings
from continuing operations excludes the operating results and $0.4 million of
net gains from the disposition of three properties sold in 2008 which results
have been included in earnings from discontinued operations for the three months
ended March 31, 2008 and 2007.
 
 For the
three months ended March 31, 2008, FFO increased by $1.3 million to $13.6
million, as compared to $12.3 million for prior year period, and AFFO increased
by $1.2 million to $13.0 million. The increase in FFO for the three months ended
March 31, 2008 was primarily due to the changes in net earnings but excludes the
$1.0 million increase in depreciation and amortization expense and the $0.5
million increase in gains on dispositions of real estate. The increase in AFFO
for the three months ended March 31, 2008 also excludes a marginal decrease in
deferred rental revenue and a $0.2 million increase in net amortization of
above-market and below-market leases (which are included in net earnings and FFO
but are excluded from AFFO).
  23




Diluted
earnings per share increased by $0.04 per share to $0.46 per share for the three
months ended March 31, 2008, as compared to $0.42 per share for the three months
ended March 31, 2007. Diluted FFO per share increased by $0.06 per share for the
three months ended March 31, 2008 to $0.55 per share, as compared to the three
months ended March 31, 2007. Diluted AFFO per share increased by $0.04 per share
for the three months ended March 31, 2008 to $0.52 per share, as compared to the
three months ended March 31, 2007.
 
 Liquidity
and Capital Resources
 
 Our
principal sources of liquidity are the cash flows from our business, 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. The recent
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.
 
 We have a
$175.0 million amended and restated senior unsecured revolving credit agreement
(the “Credit Agreement”) with a group of domestic commercial banks (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, as defined
in the Credit Agreement. Based on our leverage ratio as of March 31, 2008, the
applicable margin is 0.0% for base rate borrowings and 1.0% for LIBOR rate
borrowings.
 
 Subject to
the terms of the Credit Agreement, we have the option to increase the amount of
the credit facility available pursuant to the Credit Agreement by $125,000,000
to $300,000,000, subject to approval by the Bank Syndicate, and/or extend the
term of the Credit Agreement for one additional year. 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 have a
$45.0 million LIBOR based interest rate swap (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 of
March 31, 2008, $45.0 million of our LIBOR based borrowings under the Credit
Agreement bear interest at an effective rate of 6.44%.
  24




Total
borrowings outstanding under the Credit Agreement at March 31, 2008 were $129.8
million, bearing interest at an average effective rate of 4.9% per annum.
Accordingly, we had $45.2 million available under the terms of the Credit
Agreement as of March 31, 2008, or $170.2 million available assuming the
exercise of our right to increase the credit agreement by $125.0 million. The
increase in our borrowings under the Credit Agreement during 2007relate
primarily to borrowings used to fund acquisitions.
 
 Since we
generally lease our properties on a triple-net basis, we do not incur
significant capital expenditures other than those related to acquisitions.
Capital expenditures, including acquisitions, for the three months ended March
31, 2008 and 2007 amounted to $3.1million and $80.5 million,
respectively.
 
 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. To the extent that our current
sources of liquidity are not sufficient to fund such 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 $11.5 million and $11.3
million for the three months ended March 31 2008 and 2007, respectively, and
were paid on a quarterly basis during each of those years. We presently intend
to pay common stock dividends of $0.465 per share each quarter ($1.86 per share,
or $46.1 million, on an annual basis), and commenced doing so with the quarterly
dividend declared in May 2007. 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 $0.465 per share per quarter, if at
all.
 
 Critical
Accounting Policies
 
 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 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. We do not believe that there is a great likelihood
that materially different amounts would be reported related to the application
of the accounting policies described below.
  25




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, 2007.
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,
2007.
 
 In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement 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, except that the effective date for non-financial assets and
non-financial liabilities that are not recognized or disclosed at fair value on
a recurring basis may be deferred to fiscal years beginning after November 15,
2008. The adoption of SFAS 157 in January 2008 did not have a material impact on
our financial position and results of operations.
 
 In
December 2007, the FASB issued Statement 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 the
identifiable assets acquired, liabilities assumed, any noncontrolling interest
in the acquiree and goodwill acquired in a business combination. SFAS 141(R) is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. We are currently assessing the potential impact that the
adoption of SFAS 141(R) will have on our financial position and results of
operations.
 
 Environmental
Matters
 
 Weare 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. We seek reimbursement from
state UST remediation funds related to these environmental expenses where
available.
  26




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.
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’ history of
paying such obligations and/or their financial ability to pay their share of
such costs.
 
 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 are 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 our tenants fail 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 stock price. (See developments related to Marketing and the
Marketing Leases in “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 had been leased to and operated by Marketing. Marketing is
responsible for such costs under the terms of the Master Lease but Marketing has
denied its liability for the claim and its responsibility to defend against and
indemnify us for the claim. In addition, Marketing has denied liability and
refused our tender for defense and indemnification for another legal proceeding.
We have filed third party claims against Marketing in both proceedings. It is
possible that our assumption that Marketing will be ultimately responsible for
the claims may change, which may result in our providing an accrual for these
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 is obligated to pay 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 March 31, 2008 and December 31, 2007 in connection with this
indemnification agreement. Under the Master Lease, we continue to have
additional ongoing environmental remediation obligations for two hundred two
scheduled retail properties.
  27




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 income, 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. These accrual estimates are subject to significant change, and are
adjusted as the remediation treatment progresses, as circumstances change and as
these contingencies become more clearly defined and reasonably estimable. As of
March 31, 2008, we have regulatory approval for remediation action plans in
place for two hundred-sixty-one (93%) of the two hundred eighty properties for
which we continue to retain remediation responsibility and the remaining
nineteen properties (7%) were in the assessment phase. In addition, we have
nominal post-closure compliance obligations at thirty properties where we have
received “no further action” letters.
 
 As of
March 31, 2008, we had accrued $13.4 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 $4.6 million of estimated recoveries from state UST
remediation funds, net of allowance. Environmental expenditures, net of
recoveries from UST funds, were $0.7 million and $0.9 million, respectively, for
the three months ended March 31, 2008 and 2007. For the three months ended March
31, 2008 and 2007, the net change in estimated remediation cost and accretion
expense included in our consolidated statements of operations amounted to $0.2
million and $0.6 million, respectively, which amounts were net of probable
recoveries from state UST remediation funds.
  28




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 $6.0 million.
Accordingly, the environmental accrual as of March 31, 2008 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 March 31,
2008 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 March 31, 2008 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 year ended March 31, 2008
would not have changed significantly if these changes in the assumptions were
made effective December 31, 2007.
 
 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 developments related to Marketing and the Marketing
Leases in “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 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.
 
 In
September 2003, we were notified by the State of New Jersey Department of
Environmental Protection (the “NJDEP”) that we are one of approximately sixty
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, we received a General Notice Letter from the United States Environmental
Protection Agency (the “EPA”) (the “EPA Notice”), advising us that we 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.
Additionally, we believe that ChevronTexaco is contractually obligated to
indemnify us, pursuant to an indemnification agreement for most in not all of
the conditions at the property identified by the NJDEP and the EPA. Accordingly,
our ultimate legal and financial liability, if any, cannot be estimated with any
certainty at this time.
  29




From
October 2003 through March 2008, we were notified that we were made party to
fifty 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. These cases allege various theories of
liability due to contamination of groundwater with 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. Certain of the named defendants
have preliminary agreed to settle the cases as pertains to them, but a number of
named defendants, including the Company, remain involved in the cases. The
accuracy of the allegations as they relate to us, our 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,
our ultimate legal and financial liability, if any, cannot be estimated with any
certainty at this time.
 
 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 would not allow Marketing to fail to perform
its rental, environmental and other obligations under the Marketing Leases; our
belief that Marketing will continue to pay for substantially all of the
Marketing Environmental Liabilities; our intention to attempt to negotiate with
Marketing for a modification of the Marketing Leases which removes the Subject
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 probable that we will collect the
deferred rent receivable related to the Remaining Properties; our belief that no
impairment charge is necessary for the Subject Properties; the expected effect
of regulations on our long-term performance; our expected ability to maintain
compliance with applicable regulations; our ability to renew expired leases; the
adequacy of our current and anticipated cash flows; our ability to relet
properties at market rents; our belief that we do not have a material liability
for offers and sales of our securities made pursuant to registration statements
that did not contain the financial statements or summarized financial data of
Marketing; our expectations regarding future acquisitions; our expected ability
to increase our available funding under the Credit Agreement; 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 intention to
consummate future acquisitions; 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.
  30




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 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; our unresolved SEC
comment; competition for properties and tenants; risk of tenant non-renewal; the
effects of taxation and other regulations; potential litigation exposure; costs
of completing environmental remediation and of compliance with environmental
regulations; 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.
 
 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, 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 risks.
  31




We are
exposed to interest rate risk, primarily as a result of our $175.0 million
Credit Agreement. Our Credit Agreement, which expires in June 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, as defined in the Credit
Agreement. Based on our leverage ratio as of March 31, 2008, the applicable
margin is 0.0% for base rate borrowings and 1.0% for LIBOR rate borrowings. At
March 31, 2008, we had borrowings outstanding of $129.8 million under our Credit
Agreement bearing interest at an average rate of 4.7% per annum (or an average
effective rate of 4.9% including the impact of the Swap Agreement discussed
below). We use borrowings under the Credit Agreement to finance acquisitions and
for general corporate purposes.
 
 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 March 31, 2008 has not increased significantly, as compared to
December 31, 2007. We entered into a $45.0 million LIBOR based interest rate
swap, 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 of March 31, 2008, $45.0 million of our LIBOR based borrowings
under the Credit Agreement bear interest at an effective rate of 6.44%. 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 March 31, 2008, our borrowings exceeded the notional amount of the Swap
Agreement by $84.8 million. As a result of the increase in the funding available
under the Credit Agreement from $100.0 million to $175.0 million, and the
subsequent increase in our total borrowings, the Swap Agreement covers a smaller
percentage of our total borrowings than it did previously. 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 with a
major financial institution 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.
  32




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 2008, an increase in market interest rates of 0.5% for the
remainder of 2008 would decrease our 2008 net income and cash flows by $0.3
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 and assumes that the $133.4 million average
outstanding borrowings during the first quarter of 2008 is indicative of our
future average borrowings for 2008 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 held in overnight bank time deposits and
an institutional money market fund.
 
 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 Securities 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 Rule 13a-15(b), the Company 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 end of the quarter covered by this report.
Based on the foregoing, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures were effective at a reasonable assurance level as of March 31,
2008.
  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.
  33




PART II.  OTHER INFORMATION
 
 Item 1.  Legal Proceedings
 
 From
October 2003 through March 2008, we were made a party to fifty 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. These cases allege various theories of
liability due to contamination of groundwater with 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. Certain of the named defendants
have preliminary agreed to settle the cases as pertains to them, but a number of
named defendants, including the Company, remain involved in the cases. The
accuracy of the allegations as they relate to us, our defenses to such claims,
the aggregate possible amount of damages and the method of allocating such
amounts among the remaining defendants have not been determined. At this time,
four focus cases have been broken our from a consolidated Multi-District
Litigation being heard in the Southern District of New York. Three of these
cases name the Company as a defendant. One of the cases to which we are a party
has been set for trial in September 2008. Trials in the other two focus cases in
which the Company has been named are anticipated to be scheduled for sometime in
2009. The Company participates in a joint defense group with the goal of sharing
expert and other costs with the other defendants, and also has separate counsel
defending its interests. We are vigorously defending these matters. In June
2006, we were served with a Toxic Substance Control Act (“TSCA”) Notice Letter
(“Notice Letter”), advising us that “prospective plaintiffs” listed on a
schedule to the Notice Letter intend to file a TSCA citizens’ civil action
against the entities listed on a schedule to the Notice Letter, including the
Company’s subsidiaries, based upon alleged failure by such entities to provide
information to the United States Environmental Protection Agency regarding MTBE
as may be required by the TSCA and declaring that such action will be filed
unless such information is delivered. We do not believe that we have any such
information. Our ultimate legal and financial liability, if any, in connection
with the existing litigation or any future civil litigation pursuant to the
Notice Letter cannot be estimated with any certainty at this time.
 
 Please
refer to “Item 3. Legal Proceedings” of our Annual Report on Form 10-K for the
year ended December 31, 2007, and note 3 to our consolidated financial
statements in such Form 10-K  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 5.  Other Information
 
 Deadlines
for submitting stockholder proposals for the 2009 annual meeting
 
 Stockholder
proposals to be considered for inclusion in next year’s proxy statement pursuant
to Rule 14a-8 under the Securities Exchange Act of 1934, as amended, must be
received by December 17, 2008. Any stockholder proposal or director nomination
to be presented at our 2009 Annual Meeting of Stockholders that is not intended
to be included in our proxy statement will be considered “untimely” if we
receive it before February 15, 2009 or after March 17, 2009. Such proposals and
nominations also must be made in accordance with our Bylaws. An untimely
proposal may be excluded from consideration at our 2009 Annual Meeting of
Stockholders.
  34




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)
    (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.
   35




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)Dated:
      May 12, 2007
                BY:
                /s/ Thomas J.
      Stirnweis(Signature)THOMAS
      J. STIRNWEISVice
      President, Treasurer and Chief
      Financial Officer






Dated:
      May 12, 2007
              BY:
              /s/ Leo
      Liebowitz(Signature)LEO
      LIEBOWITZChairman
      and Chief Executive Officer








36