UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D. C.  20549
  FORM
10-Q
 (Mark
one)
 [X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 
 For the
quarterly period ended June 30,
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
              (I.R.S.
      Employerof incorporation
      or
              Identification
      No.)organization)
 
 125
Jericho Turnpike, Suite 103
 Jericho,
New York 11753
 (Address
of principal executive offices)
 (Zip
Code)
 
 (516)
478 - 5400
 (Registrant's
telephone number, including area code)
 _________________________________________________________________
 (Former
name, former address and former fiscal year, if changed since last
report)
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes
[X]  No [   ]
  Indicate
by check mark whether the registrant 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 24,765,685 shares of Common Stock, par value $.01 per share, as
of August 7, 2008.




GETTY
REALTY CORP.





INDEX





Part I.  FINANCIAL INFORMATION
            Page NumberItem
      1. Financial Statements (unaudited)Consolidated Balance Sheets as of June 30,
      2008 andDecember 31, 2007
            
            1Consolidated Statements of Operations for
      theThree and Six Months ended June 30, 2008 and
      2007
            
            2Consolidated Statements of Comprehensive Income
      for theThree and Six Months ended June 30, 2008 and
      2007
            
            3Consolidated Statements of Cash Flows for
      theSix Months ended June 30, 2008 and
      2007
            
            4Notes to Consolidated Financial
      Statements
            
            5Item
      2. Management's Discussion and Analysis of Financial
    Conditionand
      Results of Operations
            
            17Item
      3. Quantitative and Qualitative Disclosures about Market
Risk
            
            35Item
      4. Controls and Procedures
            
            36Part II. OTHER
      INFORMATIONItem 1. Legal Proceedings
            
            38Item 1A.  Risk Factors
            
            39Item 4.  Submission of Matters to a Vote of
      Security Holders
            
            43Item 6. Exhibits
            
            44Signatures
            
            45









Part I.  FINANCIAL INFORMATION





Item 1.Financial Statements


GETTY REALTY CORP. AND
      SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETS(in
      thousands, except share data)(unaudited)June
      30,
            
            
            December
      31,Assets:
            
            
            2008
            
            
            2007Real
      Estate:Land
            
            $
            221,501
            
            $
            222,194Buildings
      and improvements
            
            
            254,274
            
            
            252,060475,775
            
            
            474,254Less
      – accumulated depreciation and amortization
            
            
            (126,807)
            
            
            (122,465)Real
      estate, net
            
            
            348,968
            
            
            351,789Deferred
      rent receivable (net of allowance of $10,308 as of June 30, 2008 and
      $10,494 as of December 31, 2007)
            
            
            25,715
            
            
            24,915Cash
      and cash equivalents
            
            
            2,479
            
            
            2,071Recoveries
      from state underground storage tank funds, net
            
            
            4,497
            
            
            4,652Mortgages
      and accounts receivable, net
            
            
            1,363
            
            
            1,473Prepaid
      expenses and other assets
            
            
            10,324
            
            
            12,011Total
      assets
            
            $
            393,346
            
            $
            396,911Liabilities
      and Shareholders' Equity:Debt
            
            $
            131,250
            
            $
            132,500Environmental
      remediation costs
            
            
            18,004
            
            
            18,523Dividends
      payable
            
            
            11,545
            
            
            11,534Accounts
      payable and accrued expenses
            
            
            21,078
            
            
            22,176Total
      liabilities
            
            
            181,877
            
            
            184,733Commitments
      and contingencies
            
            
            -
            
            
            -Shareholders'
      equity:Common
      stock, par value $.01 per share; authorized50,000,000
      shares; issued 24,765,685 at June 30, 2008
              and
      24,765,065 at December 31, 2007
            
            
            248
            
            
            248Paid-in
      capital
            
            
            258,897
            
            
            258,734Dividends
      paid in excess of earnings
            
            
            (45,588)
            
            
            (44,505)Accumulated
      other comprehensive loss
            
            
            (2,088)
            
            
            (2,299)Total
      shareholders' equity
            
            
            211,469
            
            
            212,178Total
      liabilities and shareholders' equity
            
            $
            393,346
            
            $
            396,911The accompanying notes are an
      integral part of these consolidated financial
  statements.




- 1
-




GETTY REALTY CORP. AND
    SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONS(in
      thousands, except per share amounts)(unaudited)Three
      months ended June 30,
            
            
            
            Six
      months ended June 30,2008
            
            
            
            2007
            
            
            
            2008
            
            
            
            2007Revenues
      from rental properties
            
            $
            20,249
            
            
            $
            20,342
            
            
            $
            40,578
            
            
            $
            38,144Operating
      expenses:Rental
      property expenses
            
            
            2,353
            
            
            
            2,368
            
            
            
            4,773
            
            
            
            4,786Environmental
      expenses, net
            
            
            1,973
            
            
            
            3,056
            
            
            
            2,760
            
            
            
            4,015General
      and administrative expenses
            
            
            2,111
            
            
            
            1,780
            
            
            
            3,752
            
            
            
            3,233Depreciation
      and amortization expense
            
            
            2,942
            
            
            
            2,701
            
            
            
            5,747
            
            
            
            4,538Total
      expenses
            
            
            9,379
            
            
            
            9,905
            
            
            
            17,032
            
            
            
            16,572Operating
      income
            
            
            10,870
            
            
            
            10,437
            
            
            
            23,546
            
            
            
            21,572Other
      income, net
            
            
            182
            
            
            
            276
            
            
            
            429
            
            
            
            391Interest
      expense
            
            
            (1,657
            )
            
            
            (2,224
            )
            
            
            (3,646
            )
            
            
            (3,188Net
      earnings from continuing operations
            
            
            9,395
            
            
            
            8,489
            
            
            
            20,329
            
            
            
            18,775Discontinued
      operations:Earnings
      from operating activities
            
            
            24
            
            
            
            363
            
            
            
            48
            
            
            
            514Gains
      on dispositions of real estate
            
            
            1,217
            
            
            
            1,172
            
            
            
            1,630
            
            
            
            1,172Earnings
      from discontinued operations
            
            
            1,241
            
            
            
            1,535
            
            
            
            1,678
            
            
            
            1,686Net
      earnings
            
            $
            10,636
            
            
            $
            10,024
            
            
            $
            22,007
            
            
            $
            20,461Basic
      earnings per common share:Earnings
      from continuing operations
            
            $
            .38
            
            
            $
            .34
            
            
            $
            .82
            
            
            $
            .76Earnings
      from discontinued operations
            
            
            .05
            
            
            
            .06
            
            
            
            .07
            
            
            
            .07Net
      earnings
            
            $
            .43
            
            
            $
            .40
            
            
            $
            .89
            
            
            $
            .83Diluted
      earnings per common share:Earnings
      from continuing operations
            
            $
            .38
            
            
            $
            .34
            
            
            $
            .82
            
            
            $
            .76Earnings
      from discontinued operations
            
            
            .05
            
            
            
            .06
            
            
            
            .07
            
            
            
            .07Net
      earnings
            
            $
            .43
            
            
            $
            .40
            
            
            $
            .89
            
            
            $
            .83Weighted-average
      shares outstanding:Basic
            
            
            24,766
            
            
            
            24,765
            
            
            
            24,766
            
            
            
            24,765Stock
      options and restricted stock units
            
            
            -
            
            
            
            22
            
            
            
            9
            
            
            
            21Diluted
            
            
            24,766
            
            
            
            24,787
            
            
            
            24,775
            
            
            
            24,786Dividends
      declared per share
            
            $
            .465
            
            
            $
            .465
            
            
            $
            .930
            
            
            $
            .920The accompanying notes are an
      integral part of these consolidated financial
      statements.




- 2
-





GETTY REALTY CORP. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME


(in
thousands)


(unaudited)


Three
      months ended June 30,
            
            
            Six
      months ended June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      earnings
            
            $
            10,636
            
            
            $
            10,024
            
            
            $
            22,007
            
            
            $
            20,461Other
      comprehensive gain:Net
      unrealized gain on interest rate swap
            
            
            1,662
            
            
            
            815
            
            
            
            211
            
            
            
            630Comprehensive
      income
            
            $
            12,298
            
            
            $
            10,839
            
            
            $
            22,218
            
            
            $
            21,091The accompanying notes are an
      integral part of these consolidated financial
      statements.





- 3
-




GETTY REALTY CORP. AND
      SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS(in
      thousands)(unaudited)Six
      months ended June 30,2008
            
            
            2007Cash
      flows from operating activities:Net
      earnings
            
            $
            22,007
            
            
            $
            20,461Adjustments
      to reconcile net earnings tonet cash flow provided by operating activities:Depreciation and amortization
      expense
            
            
            5,763
            
            
            
            4,572Deferred rental
      revenue
            
            
            (800
            )
            
            
            (1,351
            )Gains on dispositions of real
      estate
            
            
            (1,905
            )
            
            
            (1,438
            )Amortization
      of above-market and below-market leases
            
            
            (402
            )
            
            
            (554
            )Accretion
expense
            
            
            356
            
            
            
            384Stock-based
      employee compensation expense
            
            
            154
            
            
            
            120Changes
      in assets and liabilities:Recoveries from state
      underground storage tank funds, net
            
            
            335
            
            
            
            (134
            )Mortgages and accounts
      receivable, net
            
            
            (44
            )
            
            
            113Prepaid expenses and other
      assets
            
            
            183
            
            
            
            244Environmental remediation
      costs
            
            
            (1,055
            )
            
            
            639Accounts payable and accrued
      expenses
            
            
            (547
            )
            
            
            86Net
      cash flow provided by operating activities
            
            
            24,045
            
            
            
            23,142Cash
      flows from investing activities:Property acquisitions and
      capital expenditures
            
            
            (3,743
            )
            
            
            (86,201
            )Proceeds
      from dispositions of real estate
            
            
            2,903
            
            
            
            1,649Collection of mortgages
      receivable, net
            
            
            154
            
            
            
            198(Increase) decrease in cash held
      for property acquisitions
            
            
            1,369
            
            
            
            (1,188
            )Net
      cash flow provided by (used in) investing activities
            
            
            683
            
            
            
            (85,542
            )Cash
      flows from financing activities:Borrowings under credit
      agreement, net
            
            
            (1,250
            )
            
            
            86,500Cash dividends
    paid
            
            
            (23,079
            )
            
            
            (22,574
            )Credit
      agreement origination costs
            
            
            -
            
            
            
            (863
            )Repayment of mortgages
      payable, net
            
            
            -
            
            
            
            (16
            )Proceeds from stock options
      exercised
            
            
            9
            
            
            
            2Net
      cash flow provided by (used in) financing activities
            
            
            (24,320
            )
            
            
            63,049Net
      increase in cash and cash equivalents
            
            
            408
            
            
            
            649Cash
      and cash equivalents at beginning of period
            
            
            2,071
            
            
            
            1,195Cash
      and cash equivalents at end of period
            
            $
            2,479
            
            
            $
            1,844Supplemental
      disclosures of cash flow informationCash paid (refunded) during the
      period for:Interest
            
            $
            3,725
            
            
            $
            1,747Income
      taxes, net
            
            
            347
            
            
            
            329Recoveries
      from state underground storage tank funds
            
            
            (389
            )
            
            
            (871
            )Environmental
      remediation costs
            
            
            2,117
            
            
            
            2,434The
      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 and 2007 have
been reclassified as discontinued operations. The results of such properties for
the three and six months ended June 30, 2007 have also been reclassified to
discontinued operations to conform to the 2008 presentation. Discontinued
operations for the quarter and six months ended June 30, 2008 are primarily
comprised of gains from property dispositions, respectively. The revenue from
rental properties and expenses related to these properties are insignificant for
the three and six months ended June 30, 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.
 
 Earnings per Common Share:Basic earnings per
common share is computed by dividing net earnings by the weighted-average number
of common shares outstanding during the period. Diluted earnings per common
share also gives effect to the potential dilution from the exercise of stock
options and the issuance of common shares in settlement of restricted stock
units utilizing the treasury stock method. For the quarter ended June 30, 2008,
the assumed exercise of stock options and the issuance of common shares in
settlement of restricted stock units utilizing the treasury stock method would
have been anti-dilutive and therefore was not assumed for purposes of computing
diluted earnings per common share.
 
 - 5 -
  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.
 
 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 June
30, 2008, Getty Petroleum Marketing Inc. (“Marketing”) leased from the Company,
eight hundred and seventy-five properties under a unitary master lease (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.
 
 - 6
-
  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.
 
 As of June
30, 2008, the Company leased eight hundred eighty-five of its one thousand
seventy-nine properties on a long-term triple-net basis to Marketing under the
Marketing Leases (see footnote 2). A substantial portion of the Company’s
revenues (75% for the six months ended June 30, 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’s
business, financial condition, revenues, operating expenses, results of
operations, liquidity, ability to pay dividends and stock price. 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 and
Lukoil has provided credit enhancement and capital to Marketing, Lukoil is not a
guarantor of the Marketing Leases and there can be no assurance that Lukoil is
currently providing, or will provide, any credit enhancement or additional
capital to Marketing. The Company’s financial results depend largely on rental
income from Marketing, and to a lesser extent on rental income from other
tenants and; therefore, are materially dependent upon the ability of Marketing
to meet its rental, environmental and other obligations under the Marketing
Leases. Marketing’s financial results depend largely on retail petroleum
marketing margins and rental income from its sub-tenants who operate their
respective convenience stores, automotive repair services or other businesses at
the Company’s properties. The petroleum marketing industry has been and
continues to be volatile and highly competitive. Marketing has made all required
monthly rental payments under the Marketing Leases when due through August 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 2007, during the course of such
discussions, Marketing proposed to (i) remove approximately 40% of the
properties (the “Subject Properties”) from the Marketing Leases and eliminate
payment of rent to the Company, and eliminate or reduce payment of operating
expenses, with respect to the Subject Properties, and (ii) reduce the aggregate
amount of rent payable to the Company for the approximately 60% of the
properties that would remain under the Marketing Leases (the “Remaining
Properties”). Representatives of Marketing have also indicated to the Company
that they are considering significant changes to Marketing’s business model. In
light of these developments and the continued deterioration in Marketing’s
annual financial performance, in March 2008, the Company decided to attempt to
negotiate with Marketing for a modification of the Marketing Leases which
removes the Subject Properties from the Marketing Leases. In the second quarter
of 2008, Marketing revised the list of properties that it proposed be removed
from the Marketing Leases to include approximately 45% of the properties it
leases from the Company (the “Revised Subject Properties”). Following the
completion of the Company’s market analysis of the additional properties
included within the list of Revised Subject Properties, the Company will review
its assumptions related to the additional properties and make a determination
whether it intends to attempt to negotiate with Marketing for a modification of
the Marketing Leases which removes some or all of the Revised Subject Properties
from the Marketing Leases.
 
 - 7
-
  The
Company decided 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 the Company or to divest a composition of properties
different from the properties comprising the Subject Properties (which may
include some or all of the Revised Subject Properties), it is the Company’s
intention to cooperate with Marketing in accomplishing those objectives if the
Company determines that it is prudent for it to do so. Any modification of the
Marketing Leases that removes the Subject Properties or the Revised Subject
Properties from the Marketing Leases would likely significantly reduce the
amount of rent the Company receives from Marketing and increase the Company’s
operating expenses. The Company cannot accurately predict if, or when, the
Marketing Leases will be modified or what the terms of any agreement may be if
the Marketing Leases are modified. The Company also cannot accurately predict
what actions Marketing and Lukoil may take, and what the Company's recourse may
be, whether the Marketing Leases are modified or not.
 
 Following
any modification of the Marketing Leases, the Company intends either to relet or
sell the properties removed from the Marketing Leases and reinvest the realized
sales proceeds in new properties. The Company intends to seek 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.
 
 Due to the
previously disclosed deterioration in Marketing’s annual financial performance,
in conjunction with the Company’s decision to attempt to negotiate with
Marketing for a modification of the Marketing Leases to remove the Subject
Properties, the Company cannot reasonably assume that it will collect all of the
rent due to the Company related to the Subject Properties for the remainder of
the current 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.
 
 The
Company has reserved $10,308,000 and $10,494,000 as of June 30, 2008 and
December 31, 2007, respectively, of the deferred rent receivable due from
Marketing. The reserve 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 has not provided a
deferred rent receivable reserve related to the Remaining Properties since,
based on the Company’s assessments and assumptions, the Company continues to
believe that it is probable that it will collect the deferred rent receivable
related to the Remaining
  - 8
-
 
  Properties
of $22,564,000 as of June 30, 2008 and that Lukoil will 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 June 30, 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 will be 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
June 30, 2008 or December 31, 2007.
 
 Should the
Company’s assessments, assumptions and beliefs prove to be incorrect, or if
circumstances change, the conclusions reached by the Company may change relating
to (i) whether the Revised Subject Properties are likely to be removed from the
Marketing Leases (ii) recoverability of the deferred rent receivable for the
Remaining Properties, (iii) potential impairment of the Subject Properties or
the Revised Subject Properties and, (iv) Marketing’s ability to pay the
Marketing Environmental Liabilities. The Company intends to regularly review its
assumptions that affect the accounting for deferred rent receivable; long-lived
assets; environmental litigation accruals; environmental remediation
liabilities; and related recoveries from state underground storage tank funds,
which may result in 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 related to the Remaining Properties,
(ii) record an impairment charge related to the Subject Properties or the
Revised 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.
 
 - 9
-
  The
Company cannot provide any assurance that Marketing will continue to pay its
debts or meet its rental, environmental or other obligations under the Marketing
Leases prior or subsequent to any potential modification of the Marketing
Leases. In the event that Marketing cannot or will not perform its rental,
environmental or other obligations under the Marketing Leases; if the Marketing
Leases are modified significantly or terminated; if the Company determines that
it is probable that Marketing will not meet its 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 June 30, 2008 and December 31, 2007 in connection with this
indemnification agreement.
 
 The
Company is subject to various legal proceedings and claims which arise in the
ordinary course of its business. In addition, the Company has retained
responsibility for certain legal proceedings and claims relating to the
petroleum marketing business that were identified at the time of the Spin-Off.
As of June 30, 2008 and December 31, 2007, the Company had accrued $2,660,000
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 underground storage tanks
("USTs" or "UST") and soil remediation at a property that had been leased to and
operated by Marketing. We believe 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 two other legal proceedings. The
Company has filed third party claims against Marketing in two of these
proceedings and has filed motion papers seeking a ruling as to each party's
respective rights in the third proceeding. It is possible that the Company’s
assumption that Marketing will be ultimately responsible for these claims 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
  - 10 -
 
  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 January 2008 (when the latest of such notices was
received), 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. A significant number of the
named defendants have agreed to settle a large number of the cases as pertain to
them, but a number of named defendants, including the Company, remain involved
in these 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.
 
 Prior to
the Spin-Off, the Company was self-insured for workers’ compensation, general
liability and vehicle liability up to predetermined amounts above which
third-party insurance applies. As of June 30, 2008 and December 31, 2007, the
Company’s consolidated balance sheets included, in accounts payable and accrued
expenses, $291,000 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 six
months ended June 30, 2008 and 2007 include, in general and administrative
expenses,  a credit of $72,000 and a charge of $81,000, respectively,
for self-insurance loss reserve adjustments. Since the Spin-Off, the Company has
maintained insurance coverage subject to certain deductibles.
 
 In order
to qualify as a REIT, among other items, the Company must 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.
 
 - 11
-
  4.
Credit and Interest Rate Swap Agreements
 As of June
30, 2008, borrowings under the Credit Agreement, described below, were
$131,250,000, bearing interest at a weighted-average effective interest rate of
4.5% per annum. The weighted-average effective rate is based on $86,250,000 of
LIBOR rate borrowings floating at market rates plus a margin of 1.0% and
$45,000,000 of LIBOR rate borrowings effectively fixed at 5.44% by an interest
rate swap agreement plus a margin of 1.0%. As further described below, due to an
increase in the Company’s leverage ratio as of June 30, 2008, as compared to
March 31, 2008, the margin on the Company’s LIBOR rate borrowings will increase
from 1.0% to 1.25% during the third quarter.
 
 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 (the "Bank Syndicate") which expires in March 2011. The Credit Agreement
does not provide for scheduled reductions in the principal balance prior to its
maturity. The Credit Agreement permits borrowings at an interest rate equal to
the sum of a base rate plus a margin of 0.0% or 0.25% or a LIBOR rate plus a
margin of 1.0%, 1.25% or 1.5%. The applicable margin is based on the Company’s
leverage ratio at the end of prior calendar quarter, as defined in the Credit
Agreement and is adjusted effective mid-quarter when the Company’s quarterly
financial results are reported to the Bank Syndicate. Based on the Company’s
leverage ratio as of June 30, 2008, the applicable margin is 0.0% for base rate
borrowings and will increase from 1.0% as of June 30, 2008 to 1.25% for LIBOR
rate borrowings due to an increase in the Company’s leverage ratio as of June
30, 2008 as compared to March 31, 2008.
 
 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.
 
 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 a result of the swap agreement, as of June 30, 2008,
$45,000,000 of the Company’s LIBOR based borrowings under the Credit Agreement
bear interest at an effective rate of 6.44%.
 
 - 12
-
  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 June 30, 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 six months ended June 30, 2008 or 2007
representing the hedge’s ineffectiveness. At June 30, 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
$2,088,000 and $2,299,000, respectively. For the six months ended June 30, 2008
and 2007, the Company has recorded the gain in fair value of the Swap Agreement
related to the effective portion of the interest rate contract totaling $211,000
and $630,000, 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 June 30, 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.
 
 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.
 
 - 13
-
  Of the
eight hundred eighty-five properties leased to Marketing as of June 30, 2008,
the Company has agreed to pay all costs relating to, and to indemnify Marketing
for, certain environmental liabilities and obligations at two hundred 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 will be 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.
 
 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 June 30, 2008, the Company had regulatory approval
for remediation action plans in place for two hundred fifty-eight (94%) of the
two hundred seventy-four properties for which it continues to retain
environmental responsibility and the remaining sixteen properties (6%) remain in
the assessment phase. In addition, the Company has nominal post-closure
compliance obligations at twenty-seven properties where it has received “no
further action” letters.
 
 - 14
-
  Environmental
remediation liabilities and related assets are measured at fair value based on
their expected future cash flows which have been adjusted for inflation and
discounted to present value. The net change in estimated remediation cost and
accretion expense included in environmental expenses in the Company’s
consolidated statements of operations aggregated $1,363,000 and $2,444,000 for
the six months ended June 30, 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 June
30, 2008 and December 31, 2007 and 2006, the Company had accrued $18,004,000,
$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 June
30, 2008 and December 31, 2007 and 2006, the Company had also recorded
$4,497,000, $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, $356,000 and $384,000 of net accretion
expense, substantially all of which is included in environmental expenses for
the six months ended June 30, 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.
 
 - 15
-
  6.  Shareholders’
Equity
 A summary
of the changes in shareholders' equity for the six months ended June 30, 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
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              22,007
              
              
              
              
              
              
              
              22,007Dividends
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (23,090
              )
              
              
              
              
              
              
              (23,090
              )Stock-based
      employee
                compensation
      expense
              
              
              120
              
              
              
              
              
              
              
              154
              
              
              
              
              
              
              
              
              
              
              
              154Net
      unrealized gain on
                interest
      rate swap
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              211
              
              
              
              211Stock
      issued
              
              
              500
              
              
              
              -
              
              
              
              9
              
              
              
              
              
              
              
              
              
              
              
              9Balance,
      June 30, 2008
              
              
              24,765,685
              
              
              $
              248
              
              
              $
              258,897
              
              
              $
              (45,588
              )
              
              $
              (2,088
              )
              
              $
              211,469
 The
Company is authorized to issue 20,000,000 shares of preferred stock, par value
$.01 per share, of which none were issued as of June 30, 2008 or December 31,
2007.
 
 - 16
-
  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 and “Part II, Item 1A. Risk Factors,” which appear in this Quarterly
Report on Form 10-Q.”
 
 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 June 30,
2008, we leased eight hundred eighty-five of our one thousand seventy-nine
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 from the
sale of refined petroleum products at margins in excess of its fixed and
variable expenses 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 and “Part II, Item
1A. Risk Factors,” which appears in this Quarterly Report on Form
10-Q.
 
 Developments
Related to Marketing and the Marketing Leases
 A
substantial portion of our revenues (75% for the six months ended June 30, 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 our business,
financial condition, revenues, operating expenses, results of operations,
liquidity, ability to pay dividends and stock price. Through August 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, and Lukoil has
provided credit enhancement and capital to Marketing, Lukoil is not a guarantor
of the Marketing Leases and there can be no assurance that Lukoil is currently
providing, or will provide, any credit enhancement or additional capital to
Marketing.
 
 - 17
-
  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 regular 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 2007, during the course of such
discussions, Marketing proposed to (i) remove approximately 40% of the
properties (the “Subject Properties”) from the Marketing Leases and eliminate
payment of rent to us, and eliminate or reduce payment of operating expenses,
with respect to the Subject Properties, and (ii) reduce the aggregate amount of
rent payable to us for the approximately 60% of the properties that would remain
under the Marketing Leases (the “Remaining Properties”). Representatives of
Marketing have also indicated to us that they are considering significant
changes to Marketing’s business model. In light of these developments and the
continued deterioration in Marketing’s annual financial performance (as
discussed below), in March 2008, we decided to attempt to negotiate with
Marketing for a modification of the Marketing Leases which removes the Subject
Properties from the Marketing Leases. In the second quarter of 2008, Marketing
revised the list of properties that it proposed be removed from the Marketing
Leases to include approximately 45% of the properties it leases from us (the
“Revised Subject Properties”). Following the completion of our market analysis
of the additional properties included within the list of Revised Subject
Properties, we will review our assumptions related to the additional properties
and make a determination whether we intend to attempt to negotiate with
Marketing for a modification of the Marketing Leases which removes some or all
of the Revised Subject Properties from the Marketing Leases.
 
 We have
decided 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 (which may include some or
all of the Revised Subject Properties), it is our intention to cooperate with
Marketing in accomplishing those objectives if we determine that it is prudent
for us to do so. Any modification of the Marketing Leases that removes the
Subject Properties or the Revised Subject Properties from the Marketing Leases
would likely significantly reduce the amount of rent we receive from Marketing
and increase our operating expenses. We cannot accurately predict if, or when,
the Marketing Leases will be modified or what the terms of any agreement 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.
 
 - 18
-
 As a
result of any modification of the Marketing Leases, we intend either to relet or
sell the properties removed from the Marketing Leases and reinvest the realized
sales proceeds in new properties. We intend to seek 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.
 
 Due to the
previously disclosed deterioration in Marketing’s annual financial performance,
in conjunction with our decision to attempt to negotiate with Marketing for a
modification of the Marketing Leases to remove the Subject Properties, we cannot
reasonably assume that we will collect all of the rent due to us related to the
Subject Properties for the remainder of the current 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.
 
 We have
reserved $10.3 million and $10.5 million as of June 30, 2008 and December 31,
2007, respectively, of the deferred rent receivable due from Marketing. The
reserve 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 have not provided a
deferred rent receivable reserve related to the Remaining Properties since,
based on our assessments and assumptions, we continue to believe that it is
probable that we will collect the deferred rent receivable related to the
Remaining Properties of $22.6 million as of June 30, 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 June 30, 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.
 
 - 19
-
  Marketing
is directly responsible to pay for (i) remediation of environmental
contamination it causes and compliance with various environmental laws and
regulations as the operator of our properties, and (ii) known and unknown
environmental liabilities allocated to Marketing under the terms of the Master
Lease and various other agreements between Marketing and us relating to
Marketing’s business and the properties subject to the Marketing Leases
(collectively the “Marketing Environmental Liabilities”). We may ultimately be
responsible to directly pay for Marketing Environmental Liabilities as the
property owner if Marketing fails to pay them. Additionally, we will be required
to accrue for Marketing Environmental Liabilities if we determine that it is
probable that Marketing will not meet its obligations or if our assumptions
regarding the ultimate allocation methods and share of responsibility that we
used to allocate environmental liabilities changes as a result of the factors
discussed above, or otherwise. However, we continue to believe that it is not
probable that Marketing will not pay for substantially all of the Marketing
Environmental Liabilities since we believe that Lukoil will not allow Marketing
to fail to perform its rental, environmental and other obligations under the
Marketing Leases and, accordingly, we did not accrue for the Marketing
Environmental Liabilities as of June 30, 2008 or December 31, 2007.
 
 Should our
assessments, assumptions and beliefs prove to be incorrect, or if circumstances
change, the conclusions we reached may change relating to (i) whether the
Revised Subject Properties are likely to be removed from the Marketing Leases
(ii) recoverability of the deferred rent receivable for the Remaining
Properties, (iii) potential impairment of the Subject Properties or the Revised
Subject Properties, and (iv) Marketing’s ability to pay the Marketing
Environmental Liabilities. We intend to regularly review our assumptions that
affect the accounting for deferred rent receivable; long-lived assets;
environmental litigation accruals; environmental remediation liabilities; and
related recoveries from state underground storage tank funds, which may result
in 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 related to the Remaining Properties, (ii) record an
impairment charge related to the Subject Properties or the Revised 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.
 
 - 20
-
  We cannot
provide any assurance that Marketing will continue to pay its debts or meet its
rental, environmental or other obligations under the Marketing Leases prior or
subsequent to any potential modification of the Marketing Leases 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.
 
 Unresolved
SEC 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. 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.
 
 - 21
-
  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.
 
 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.
 
 - 22
-
  A
reconciliation of net earnings to FFO and AFFO for the three and six months
ended June 30, 2008 and 2007 is as follows (in thousands, except per share
amounts):
 
 Three
      months ended
                June
      30,
              
              
              Six
      months ended
                June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      earnings
              
              $
              10,636
              
              
              $
              10,024
              
              
              $
              22,007
              
              
              
              20,461Depreciation
      and amortization of real estate assets
              
              
              2,950
              
              
              
              2,707
              
              
              
              5,763
              
              
              
              4,572Gains
      on dispositions of real estate
              
              
              (1,358
              )
              
              
              (1,392
              )
              
              
              (1,905
              )
              
              
              (1,438
              )Funds
      from operations
              
              
              12,228
              
              
              
              11,339
              
              
              
              25,865
              
              
              
              23,595Deferred
      rental revenue (straight-line rent)
              
              
              (361
              )
              
              
              (869
              )
              
              
              (800
              )
              
              
              (1,351
              )Net
      amortization of above-market and below-market leases
              
              
              (201
              )
              
              
              (554
              )
              
              
              (402
              )
              
              
              (554
              )Adjusted
      funds from operations
              
              
              11,666
              
              
              $
              9,916
              
              
              $
              24,663
              
              
              $
              21,690Diluted
      per share amounts:Earnings
      per share
              
              $
              0.43
              
              
              $
              0.40
              
              
              $
              0.89
              
              
              $
              0.83Funds
      from operations per share
              
              $
              0.49
              
              
              $
              0.46
              
              
              $
              1.04
              
              
              $
              0.95Adjusted
      funds from operations per share
              
              $
              0.47
              
              
              $
              0.40
              
              
              $
              1.00
              
              
              $
              0.88Diluted
      weighted-average shares outstanding
              
              
              24,766
              
              
              
              24,787
              
              
              
              24,775
              
              
              
              24,786
  Results
of operations
 Three
months ended June 30, 2008 compared to the three months ended June 30,
2007
 
 Revenues
from rental properties were $20.2 million for the three months ended June 30,
2008 as compared to $20.3 million for the three months ended June 30, 2007. We
received approximately $15.2 million in the three months ended June 30, 2008 and
$15.0 million in the three months ended June 30, 2007 from properties leased to
Marketing under the Marketing Leases. We also received rent of $4.5 million in
the three months ended June 30, 2008 and $4.1 million in the three months ended
June 30, 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 $0.3 million for the three months ended June 30, 2008, as
compared to $0.7 million for the three months ended June 30, 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 also includes net amortization of
above-market and below-market leases, related to the properties acquired at the
end of the first quarter in 2007 of $0.2 million  for the three months
ended June 30, 2008, as compared to $0.6 million for the three months ended June
30, 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.
 
 - 23
-
  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 month
periods ended June 30, 2008 and June 30, 2007.
 
 Environmental
expenses, net for the three months ended June 30, 2008 were $2.0 million as
compared to $3.1 million recorded for the three months ended June 30, 2007.
Change in estimated environmental costs, net of estimated recoveries from state
underground storage tank funds, was $1.2 million for the three months ended June
30, 2008, as compared to $1.9 million recorded in the prior year period. The
decrease in environmental expenses was also due to lower environmental related
litigation reserves, which decreased by $0.4 million as compared to the prior
year period.
 
 General
and administrative expenses for the three months ended June 30, 2008 were $2.1
million as compared to $1.8 million recorded for the three months ended June 30,
2007. The increase in general and administrative expenses was primarily due to
higher professional fees associated with the previously disclosed potential
modification of the Marketing Leases and related matters.
 
 Depreciation
and amortization expense was $2.9 million for the three months ended June 30,
2008, as compared to $2.7 million recorded for the three months ended June 30,
2007. The increase was due to property acquisitions and the acceleration of
depreciation expense resulting from the reduction in the estimated useful lives
of certain assets which may be removed from the unitary lease with Marketing,
which increases were partially offset by the effect of dispositions of real
estate and lease expirations.
 
 As a
result, total operating expenses decreased by approximately $0.5 million for the
three months ended June 30, 2008, as compared to the three months ended June 30,
2007.
 
 Interest
expense was $1.7 million for the three months ended June 30, 2008, as compared
to $2.2 million for the three months ended June 30, 2007. The decrease was
primarily due to a reduction in interest rates.
 
 The
aggregate gain on dispositions of real estate, included in both other income and
discontinued operations, were $1.4 million for each of the three month periods
ended June 30, 2008 and 2007
 
 As a
result, net earnings increased by $0.6 million to $10.6 million for the three
months ended June 30, 2008, as compared to the $10.0 million for the three
months ended June 30, 2007. Earnings from continuing operations increased by
$0.9 million to $9.4 million for the three months ended June 30, 2008, as
compared to $8.5 million for the three months ended June 30, 2007. Earnings from
continuing operations exclude the operating results and gains from the
disposition of four properties sold in 2008 and eleven properties sold in 2007,
which results applicable to the three months ended June 30, 2008 and 2007 have
been reclassified and are included in earnings from discontinued
operations.
 
 - 24
-
  For the
three months ended June 30, 2008, FFO increased by $0.9 million to $12.2
million, as compared to $11.3 million for prior year period, and AFFO increased
by $1.8 million to $11.7 million. Certain items, which are included in the
changes in net earnings, are excluded from the changes in FFO and AFFO. The
increase in FFO for the three months ended June 30, 2008 was primarily due to
the changes in net earnings but excludes the $0.2 million increase in
depreciation and amortization expense. The increase in AFFO for the three months
ended June 30, 2008 also excludes a $0.5 million decrease in deferred rental
revenue and a $0.4 million decrease in net amortization of above-market and
below-market leases (which are included in net earnings and FFO but are excluded
from AFFO).
 
 Diluted
earnings per share increased by $0.03 per share to $0.43 per share for the three
months ended June 30, 2008, as compared to $0.40 per share for the three months
ended June 30, 2007. Diluted FFO per share increased by $0.03 per share for the
three months ended June 30, 2008 to $0.49 per share, as compared to the three
months ended June 30, 2007. Diluted AFFO per share increased by $0.07 per share
for the three months ended June 30, 2008 to $0.47 per share, as compared to the
three months ended June 30, 2007.
 
 Results
of operations
 Six
months ended June 30, 2008 compared to the six months ended June 30,
2007
 
 Revenues
from rental properties were $40.6 million for the six months ended June 30,
2008, as compared to $38.1 million for the six months ended June 30, 2007. We
received approximately $30.4 million in rent for the six months ended June 30,
2008 and $30.0 million in rent for the six months ended June 30, 2007 from
properties leased to Marketing under the Marketing Leases. We also received rent
of $9.0 million in the six months ended June 30, 2008 and $6.4 million in the
six months ended June 30, 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 $0.8 million for the six months ended June 30, 2008, as
compared to $1.1 million for the six months ended June 30, 2007. Revenues from
rental properties also includes net amortization of above-market and
below-market leases, related to the properties acquired at the end of the first
quarter in 2007, of $0.4 million for the six months ended June 30, 2008, as
compared to $0.6 million for the prior year period.
 
 Rental
property expenses, which are primarily comprised of rent expense and real estate
and other state and local taxes, were $4.8 million for each of the six month
periods ended June 30, 2008 and 2007.
 
 Environmental
expenses, net for the six months ended June 30, 2008 were $2.8 million as
compared to $4.0 million recorded for the six months ended June 30, 2007. Change
in estimated environmental costs, net of estimated recoveries from state
underground storage tank funds, was $1.4 million for the six months ended June
30, 2008, as compared to $2.4 million recorded in the prior year period. The
decrease in environmental expenses was also due to lower environmental related
litigation reserves, which decreased by $0.2 million as compared to the prior
year period.
 
 - 25
-
  General
and administrative expenses for the six months ended June 30, 2008 were $3.8
million as compared to $3.2 million recorded for the six months ended June 30,
2007. The increase in general and administrative expense was due to higher
professional fees associated with the previously disclosed potential
modification of the Marketing Leases and related matters.
 
 Depreciation
and amortization expense was $5.8 million for the six months ended June 30,
2008, as compared to $4.5 million recorded for the six months ended June 30,
2007. The increase was primarily due to properties acquired in 2007 and the
acceleration of depreciation expense resulting from the reduction in the
estimated useful lives of certain assets which may be removed from the unitary
lease with Marketing, which increases were partially offset by the effect of
dispositions of real estate and lease expirations.
 
 Interest
expense was $3.6 million for the six months ended June 30, 2008, as compared to
$3.2 million for the six months ended June 30, 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.
 
 The
aggregate gain on dispositions of real estate, included both in other income and
discontinued operations, increased by an aggregate of $0.5 million for the six
months ended June 30, 2008, as compared to the six months ended June 30,
2007.
 
 As a
result, net earnings increased by $1.5 million to $22.0 million for the six
months ended June 30, 2008, as compared to the $20.5 million for the six months
ended June 30, 2007. Earnings from continuing operations increased by $1.5
million to $20.3 million for the six months ended June 30, 2008, as compared to
$18.8 million for the six months ended June 30, 2007. Earnings from continuing
operations exclude the operating results and gains from the disposition of four
properties sold in 2008 and eleven properties sold in 2007, which results
applicable to the six months ended June 30, 2008 and 2007 have been reclassified
and are included in earnings from discontinued operations.
 
 For the
six months ended June 30, 2008, FFO increased by $2.3 million to $25.9 million,
as compared to $23.6 million for prior year period, and AFFO increased by $3.0
million to $24.7 million. Certain items, which are included in the changes in
net earnings, are excluded from the changes in FFO and AFFO. The increase in FFO
for the six months ended June 30, 2008 was primarily due to the changes in net
earnings but excludes the $1.2 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 six months ended June 30, 2008 also excludes a $0.6
million decrease in deferred rental revenue and a $0.2 million decrease in net
amortization of above-market and below-market leases (which are included in net
earnings and FFO but are excluded from AFFO).
 
 Diluted
earnings per share increased by $0.06 per share to $0.89 per share for the six
months ended June 30, 2008, as compared to $0.83 per share for the six months
ended June 30, 2007. Diluted FFO per share increased by $0.09 per share for the
six months ended June 30, 2008 to $1.04 per share, as compared to the six months
ended June 30, 2007. Diluted AFFO per share increased by $0.12 per share for the
six months ended June 30, 2008 to $1.00 per share, as compared to the six months
ended June 30, 2007.
 
 - 26
-
  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 at the end
of prior calendar quarter, as defined in the Credit Agreement and is adjusted
effective mid-quarter when our quarterly financial results are reported to the
Bank Syndicate. Based on our leverage ratio as of June 30, 2008, the applicable
margin is 0.0% for base rate borrowings and will increase from 1.0% as of June
30, 2008 to 1.25% for our LIBOR rate borrowings due to an increase in our
leverage ratio as of June 30, 2008 as compared to March 31, 2008.
 
 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 a
result of the swap agreement, as of June 30, 2008, $45.0 million of our LIBOR
based borrowings under the Credit Agreement bear interest at an effective rate
of 6.44%.
 
 - 27
-
  Total
borrowings outstanding under the Credit Agreement at June 30, 2008 were $131.3
million, bearing interest at a weighted-average effective rate of 4.5% per
annum. The weighted-average effective rate is based on $86.3 million of LIBOR
rate borrowings floating at market rates plus a margin of 1.0% and $45.0 million
of LIBOR rate borrowings effectively fixed at 5.44% by an interest rate swap
agreement plus a margin of 1.0%. Due to an increase in our leverage ratio as of
June 30, 2008, as compared to March 31, 2008, the margin on our LIBOR rate
borrowings will increase from 1.0% to 1.25% during the third quarter. We
had $43.7 million available under the terms of the Credit Agreement as of June
30, 2008, or $168.7 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 2007 relate 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 six months ended June 30,
2008 and 2007 amounted to $3.7 million and $86.2 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 $23.1 million and $22.6
million for the six months ended June 30, 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.
 
 - 28
-
  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
 
 We are
subject to numerous existing federal, state and local laws and regulations,
including matters relating to the protection of the environment such as the
remediation of known contamination and the retirement and decommissioning or
removal of long-lived assets including buildings containing hazardous materials,
underground storage tanks ("USTs" or "UST") 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.
 
 - 29
-
  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 will be required to accrue for environmental liabilities that
we believe are allocable to others under various other agreements if we
determine that it is probable that the counter-party will not meet its
environmental obligations. We may ultimately be responsible to directly pay for
environmental liabilities as the property owner if 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. We believe
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 two
other legal proceedings. We have filed third party claims against Marketing
in two of these proceedings and have filed motion papers seeking a ruling as to
each party's respective rights in the third proceeding. It is possible that our
assumption that Marketing will be ultimately responsible for these 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
  - 30
-
 
  all
additional costs and expenses over $10.0 million. We have accrued $0.3 million
as of June 30, 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
scheduled retail properties.
 
 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
June 30, 2008, we have regulatory approval for remediation action plans in place
for two hundred-fifty-eight (94%) of the two hundred seventy-four for which we
continue to retain remediation responsibility and the remaining sixteen
properties (6%) were in the assessment phase. In addition, we have nominal
post-closure compliance obligations at twenty-seven properties where we have
received “no further action” letters.
 
 As of June
30, 2008, we had accrued $13.5 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 $4.5 million of estimated recoveries from state UST
remediation funds, net of allowance. Environmental expenditures, net of
recoveries from UST funds, were $1.7 million and $1.6 million, respectively, for
the six months ended June 30, 2008 and 2007. For the six months ended June 30,
2008 and 2007, the net change in estimated remediation cost and accretion
expense included in our consolidated statements of operations amounted to $1.4
million and $2.4 million, respectively, which amounts were net of probable
recoveries from state UST remediation funds.
 
 - 31
-
  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 $6.5 million.
Accordingly, the environmental accrual as of June 30, 2008 was increased by $2.4
million, net of assumed recoveries and before inflation and present value
discount adjustments. The resulting net environmental accrual as of June 30,
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 $1.8 million discount to present value. Had we assumed
an inflation rate that was 0.5% higher and a discount rate that was 0.5% lower,
net environmental liabilities as of June 30, 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 six months ended June 30,
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.
 
 - 32
-
  From
October 2003 through January 2008 (when the latest of such notices was
received), 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. A significant number of the
named defendants have agreed to settle a large number of 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 will not allow Marketing to fail to perform
its rental, environmental and other obligations under the Marketing Leases; our
belief that it is not probable that Marketing will not pay for substantially all
of the Marketing Environmental Liabilities; our decision to attempt to negotiate
with Marketing for a modification of the Marketing Leases which removes the
Subject Properties or the Revised 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 or the additional properties included within the list of
Revised Subject Properties; the expected effect of regulations on our long-term
performance; our expected ability to maintain
  - 33
-
 
  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.
  These
forward-looking statements are based on our current beliefs and assumptions and
information currently available to us and involve known and unknown risks
(including the risks described herein, those described in “Developments Related
to Marketing and the Marketing Leases" herein, and other risks that we describe
from time to time in our filings with the SEC), uncertainties and other factors
which may cause our actual results, performance and achievements to be
materially different from any future results, performance or achievements,
expressed or implied by these forward-looking statements. These factors include,
but are not limited to: risks associated with owning and leasing real estate
generally; dependence on Marketing as a tenant and on rentals from companies
engaged in the petroleum marketing and convenience store businesses; 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.
 
 - 34
-
  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.
 
 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 at the end of prior calendar
quarter, as defined in the Credit Agreement and is adjusted effective
mid-quarter when our quarterly financial results are reported to the Bank
Syndicate. Based on our leverage ratio as of June 30, 2008, the applicable
margin is 0.0% for base rate borrowings and will increase from 1.0% as of June
30, 2008 to 1.25% for our LIBOR rate borrowings due to an increase in our
leverage ratio as of June 30, 2008 as compared to March 31, 2008.
 
 At June
30, 2008, we had borrowings outstanding of $131.3 million under our Credit
Agreement bearing interest at a weighted-average rate of 3.6% per annum, or a
weighted-average effective rate of 4.5% including the impact of the Swap
Agreement discussed below. The weighted-average effective rate is based on $86.3
million of LIBOR rate borrowings floating at market rates plus a margin of 1.0%
and $45.0 million of LIBOR rate borrowings effectively fixed at 5.44% by an
interest rate swap agreement plus a margin of 1.0%. 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 June 30, 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 a result of the swap agreement, as of June 30, 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 June 30, 2008, our borrowings exceeded the
notional amount of the Swap Agreement by $86.3 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.
 
 - 35
-
  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.
 
 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
$133.2 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 $0.2
million. This amount was determined by calculating the effect of a hypothetical
interest rate change on our Credit Agreement borrowings that is not covered by
our $45.0 million interest rate swap and assumes that the $133.2 million average
outstanding borrowings during the second quarter of 2008 is indicative of our
future average borrowings for the remainder of 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 and does not include the impact of the increase in interest
rates due to the higher margin on LIBOR based borrowings effective in the third
quarter discussed above. 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.
  - 36
-
  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 June 30,
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.
  - 37
-
  PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 
 In
February 2003, an action was commenced against us, Marketing and its subtenant
that operated the property by the owners of an adjacent property in the
Pennsylvania Court of Common Pleas in Lancaster County, asserting claims
relating to a discharge of gasoline allegedly emanating from our property. The
complaint states that the plaintiffs first became aware of a problem upon
detecting gasoline vapors in their basement in 1996. In response to cross
motions for summary judgment, the court denied our motion and granted
plaintiff’s motion finding us liable for the petroleum contamination.
Plaintiff’s counsel had also made demand for statutory legal fees. The matter
was settled by us, for ourselves and on behalf of Marketing and its subtenant,
in July 2008 in consideration for a payment by the Company of
$295,000.
 
 From
October 2003 through January 2008 (when the latest of such notices was
received), 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. A significant number of the named defendants have agreed to
settle a majority of 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 out 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 focus cases to which we are a party has been set for trial
in September 2008; however, it is likely that the trial will be postponed since
the Company is the only remaining named defendant which has not settled. We have
been successful during pretrial motion practice in being dismissed from alleged
liability with respect to all but one of the allegedly contaminated water
sources which are the subject of this initial focus case and we believe we have
strong defenses as to the remaining water source in this case. 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.
 
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  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 appears in  this Quarterly Report on Form
10-Q for additional information.
 
 Item 1A.Risk Factors
 
 This Item
1A should be read in conjunction with “Part I, Item 1A. Risk Factors” of our
Annual Report on Form 10-K for the year ended December 31, 2007 for factors that
could affect the Company’s results of operations, financial condition and
liquidity. Other than with respect to the risk factors below, there have been no
material changes in the risk factors disclosed in Part I, Item 1A. Risk Factors”
of our Annual Report on Form 10-K for the year ended December 31,
2007.
 
 Because
our revenues are primarily dependent on the performance of Getty Petroleum
Marketing Inc., our primary tenant, in the event that Marketing cannot or will
not perform its rental, environmental and other obligations under the Marketing
Leases, or if the Marketing Leases are modified significantly or terminated, or
if it becomes probable that Marketing will not pay its environmental
obligations, or if we change our assumptions for rental revenue or environmental
liabilities related to the Marketing Leases, our business, financial condition,
revenues, operating expenses, results of operations, liquidity, ability to pay
dividends and stock price could be materially adversely affected. No assurance
can be given that Marketing will have the ability to pay its debts or meet its
rental, environmental or other obligations under the Marketing
Leases.
 
 Marketing’s
financial results depend largely upon retail petroleum marketing margins from
the sale of refined petroleum products at margins in excess of its fixed and
variable expenses and rental income from its 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. A large, rapid increase in wholesale petroleum
prices would adversely affect Marketing’s profitability and cash flow if the
increased cost of petroleum products could not be passed on to Marketing’s
customers or if the consumption of gasoline for automotive use were to decline
significantly. Petroleum products are commodities, the prices of which depend on
numerous factors that affect supply and demand. The prices paid by Marketing and
other petroleum marketers for products are affected by global, national and
regional factors. We cannot accurately predict how these factors will affect
petroleum product prices or supply in the future, or how in particular they will
affect Marketing or our other tenants.
 
 A
substantial portion of our revenues (75% for the six months ended June 30, 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 our business,
financial condition, revenues, operating expenses, results of operations,
liquidity, ability to pay dividends and stock price. Through August 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, and Lukoil has
provided credit enhancement and capital to Marketing, Lukoil is not a guarantor
of the Marketing Leases and there can be no assurance that Lukoil is currently
providing, or will provide, any credit enhancement or additional capital to
Marketing.
 
 - 39
-
  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 regular 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 2007, during the course of such
discussions, Marketing proposed to (i) remove approximately 40% of the
properties (the “Subject Properties”) from the Marketing Leases and eliminate
payment of rent to us, and eliminate or reduce payment of operating expenses,
with respect to the Subject Properties, and (ii) reduce the aggregate amount of
rent payable to us for the approximately 60% of the properties that would remain
under the Marketing Leases (the “Remaining Properties”). Representatives of
Marketing have also indicated to us that they are considering significant
changes to Marketing’s business model. In light of these developments and the
continued deterioration in Marketing’s annual financial performance (as
discussed below), in March 2008, we decided to attempt to negotiate with
Marketing for a modification of the Marketing Leases which removes the Subject
Properties from the Marketing Leases. In the second quarter of 2008, Marketing
revised the list of properties that it proposed be removed from the Marketing
Leases to include approximately 45% of the properties it leases from us (the
“Revised Subject Properties”).  Following the completion of our market
analysis of the additional properties included within the list of Revised
Subject Properties, we will review our assumptions related to the additional
properties and make a determination whether we intend to attempt to negotiate
with Marketing for a modification of the Marketing Leases which removes some or
all of the Revised Subject Properties from the Marketing Leases.
 
 We have
decided 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 (which may include some or
all of the Revised Subject Properties), it is our intention to cooperate with
Marketing in accomplishing those objectives if we determine that it is prudent
for us to do so. Any modification of the Marketing Leases that removes the
Subject Properties or the Revised Subject Properties from the Marketing Leases
would likely significantly reduce the amount of rent we receive from Marketing
and increase our operating expenses. We cannot accurately predict if, or when,
the Marketing Leases will be modified or what the terms of any agreement 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.
 
 - 40
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  As a
result of any modification of the Marketing Leases, we intend either to relet or
sell the properties removed from the Marketing Leases and reinvest the realized
sales proceeds in new properties. We intend to seek 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.
 
 Due to the
previously disclosed deterioration in Marketing’s annual financial performance,
in conjunction with our decision to attempt to negotiate with Marketing for a
modification of the Marketing Leases to remove the Subject Properties, we cannot
reasonably assume that we will collect all of the rent due to us related to the
Subject Properties for the remainder of the current 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.
 
 We have
reserved $10.3 million and $10.5 million as of June 30, 2008 and December 31,
2007, respectively, of the deferred rent receivable due from Marketing. The
reserve 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” which appears in this Quarterly
Report on Form 10-Q. We have not provided a deferred rent receivable reserve
related to the Remaining Properties since, based on our assessments and
assumptions, we continue to believe that it is probable that we will collect the
deferred rent receivable related to the Remaining Properties of $22.6 million as
of June 30, 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 June 30, 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.
 
 - 41
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  Marketing
is directly responsible to pay for (i) remediation of environmental
contamination it causes and compliance with various environmental laws and
regulations as the operator of our properties, and (ii) known and unknown
environmental liabilities allocated to Marketing under the terms of the Master
Lease and various other agreements between Marketing and us relating to
Marketing’s business and the properties subject to the Marketing Leases
(collectively the “Marketing Environmental Liabilities”). We may ultimately be
responsible to directly pay for Marketing Environmental Liabilities as the
property owner if Marketing fails to pay them. Additionally, we will be required
to accrue for Marketing Environmental Liabilities if we determine that it is
probable that Marketing will not meet its obligations or if our assumptions
regarding the ultimate allocation methods and share of responsibility that we
used to allocate environmental liabilities changes as a result of the factors
discussed above, or otherwise. However, we continue to believe that it is not
probable that Marketing will not pay for substantially all of the Marketing
Environmental Liabilities since we believe that Lukoil will not allow Marketing
to fail to perform its rental, environmental and other obligations under the
Marketing Leases and, accordingly, we did not accrue for the Marketing
Environmental Liabilities as of June 30, 2008 or December 31, 2007.
 
 Should our
assessments, assumptions and beliefs prove to be incorrect, or if circumstances
change, the conclusions we reached may change relating to (i) whether the
Revised Subject Properties are likely to be removed from the Marketing Leases
(ii) recoverability of the deferred rent receivable for the Remaining
Properties, (iii) potential impairment of the Subject Properties or the Revised
Subject Properties, and (iv) Marketing’s ability to pay the Marketing
Environmental Liabilities. We intend to regularly review our assumptions that
affect the accounting for deferred rent receivable; long-lived assets;
environmental litigation accruals; environmental remediation liabilities; and
related recoveries from state underground storage tank funds, which may result
in 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 related to the Remaining Properties, (ii) record an
impairment charge related to the Subject Properties or the Revised Subject
Properties, or (iii) accrue for Marketing Environmental Liabilities as a result
of the proposed modification of the Marketing Leases or other
factors.
 
 We cannot
provide any assurance that Marketing will continue to pay its debts or meet its
rental, environmental or other obligations under the Marketing Leases prior or
subsequent to any potential modification of the Marketing Leases. In the
event that Marketing cannot or will not perform its rental, environmental or
other obligations under the Marketing Leases; if the Marketing Leases are
modified significantly or terminated; if we determine that it is probable that
Marketing will not meet its 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.
 
 - 42
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  Our
future cash flow is dependent on renewal of leases and either reletting or
selling our properties.
 
 We are
subject to risks that financial distress of our tenants may lead to disruption
in rent receipts or vacancies at our properties, that leases may not be renewed,
that locations may not be relet or that the terms of renewal or reletting
(including the cost of required renovations) may be less favorable than current
lease terms. As described in our Annual Report on Form 10-K for the year ended
December 31, 2007 and Part I, Item 2. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Developments Related to
Marketing and the Marketing Leases” which appears in this Quarterly Report on
Form 10-Q, we decided to attempt to negotiate a modification of the Marketing
Leases with Marketing to remove a significant number of properties from the
Marketing Leases. Any modification of the Marketing Leases that removes the
Subject Properties or the Revised Subject Properties from the Marketing Leases
would likely significantly reduce the amount of rent we receive from Marketing
and increase our operating expenses. We cannot accurately predict if, or when,
the Marketing Leases will be modified or what the terms of any modification 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. In addition, numerous properties compete
with our properties in attracting tenants to lease space. The number of
competitive properties in a particular area could have a material adverse effect
on our ability to lease or sell our properties or newly acquired properties and
on the rents charged. If we were unable to promptly relet or renew the leases
for all or a substantial portion of these locations, or if the rental rates upon
such renewal or reletting were lower than current lease terms, our cash flow
could be significantly adversely affected and the resale values or our
properties could decline significantly.
 
 Item 4. Submission of Matters to a Vote of
Security Holders
 
 We held
our annual meeting of stockholders on May 15, 2008. There were 24,765,615 shares
of our common stock outstanding and entitled to vote at our annual meeting, and
22,956,675 shares were represented in person or by proxy. The following matters
were voted upon at the annual meeting:
 
 The five
directors listed below were elected to serve an additional one-year
term:
 
 Nominee
              Votes
      For
              Votes
      WithheldMilton
      Cooper
              22,666,793
              289,882Philip
      E. Coviello
              22,709,688
              246,987David
      B. Driscoll
              22,705,969
              250,706Leo
      Liebowitz
              22,712,288
              244,387Howard
      Safenowitz
              22,704,513
              252,162
 
 The
appointment of PricewaterhouseCoopers LLP as our independent registered public
accounting firm for the fiscal year ending December 31, 2008 was
ratified:
 
 Votes
      For
              Votes
      Against
              Abstentions22,743,929
              137,094
              75,652
  - 43
-
  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.
  - 44
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  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: August 7,
      2008
              
              BY:
              /s/
      Thomas J. Stirnweis(Signature)THOMAS J.
      STIRNWEISVice President,
      Treasurer andChief Financial
      OfficerDated: August 7,
      2008
              
              BY:
              /s/
      Leo Liebowitz(Signature)LEO
    LIEBOWITZChairman and Chief
      ExecutiveOfficer
  - 45
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