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 September
30, 2009





OR


[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934


For
the transition period from __________ to __________





Commission
file number 001-13777





GETTY
REALTY CORP.


(Exact
name of registrant as specified in its charter)





MARYLAND


(State or
other jurisdiction of incorporation or organization)




11-3412575


(I.R.S.
Employer


Identification
No.)





125 Jericho Turnpike, Suite
103


Jericho, New York
11753


(Address
of principal executive offices)


(Zip
Code)





(516) 478 -
5400


(Registrant's
telephone number, including area code)







(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes
[X]  No [   ]





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes
[   ]  No [   ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See the definitions of “larger
accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.


Large
Accelerated Filer [   ]    Accelerated Filer
[X]    Non-Accelerated Filer
[   ]    Smaller Reporting Company
[   ]





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes
[   ]  No [X]





Registrant
had outstanding 24,766,216 shares of Common Stock, par value $.01 per share, as
of November 9, 2009.










GETTY
REALTY CORP.





INDEX




Part I.  FINANCIAL
      INFORMATION
              
              Page NumberItem
      1. Financial
      Statements (unaudited)
              1Consolidated Balance Sheets as of September 30,
      2009 and December
      31, 2008
              1Consolidated Statements of Operations for the
      Three
      and Nine Months ended September 30, 2009 and 2008
              2Consolidated Statements of Comprehensive Income
      for the Three
      and Nine Months ended September 30, 2009 and 2008
              3Consolidated Statements of Cash Flows for the Nine
      Months ended September 30, 2009 and 2008
              4Notes to Consolidated Financial
Statements
              5Item
      2.Management's
      Discussion and Analysis of Financial Condition
      and Results of Operations
              19Item
      3.Quantitative
      and Qualitative Disclosures about Market RiskItem
      4. Controls
      and Procedures
              42Part II. OTHER INFORMATIONItem 1.  Legal
    Proceedings
              43Item 1A.  Risk Factors
              43Item 4.  Other
    Information
              46Item
      5. Exhibits
              46Signatures
              47











Part I.  FINANCIAL INFORMATION




Item 1. Financial Statements





GETTY
      REALTY CORP. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in
      thousands, except share data)(unaudited)September
      30,
            
            
            December
      31,2009
            
            
            2008Assets:Real
      Estate:Land
            
            $
            253,310
            
            
            $
            221,540Buildings
      and improvements
            
            
            252,305
            
            
            
            252,027505,615
            
            
            
            473,567Less
      – accumulated depreciation and amortization
            
            
            (134,709
            )
            
            
            (129,322
            )Real
      estate, net
            
            
            370,906
            
            
            
            344,245Net
      investment in direct financing lease
            
            
            17,454
            
            
            
            --Deferred
      rent receivable (net of allowance of $9,495 as of September 30, 2009 and
      $10,029 as of December 31, 2008)
            
            
            27,158
            
            
            
            26,718Cash
      and cash equivalents
            
            
            5,934
            
            
            
            2,178Recoveries
      from state underground storage tank funds, net
            
            
            4,089
            
            
            
            4,223Mortgages
      and accounts receivable, net
            
            
            2,351
            
            
            
            1,533Prepaid
      expenses and other assets
            
            
            10,302
            
            
            
            8,916Total
      assets
            
            $
            438,194
            
            
            $
            387,813Liabilities
      and Shareholders' Equity:Borrowings
      under credit line
            
            $
            154,800
            
            
            $
            130,250Term
      loan
            
            
            24,500
            
            
            
            --Environmental
      remediation costs
            
            
            18,664
            
            
            
            17,660Dividends
      payable
            
            
            11,805
            
            
            
            11,669Accounts
      payable and accrued expenses
            
            
            20,811
            
            
            
            22,337Total
      liabilities
            
            
            230,580
            
            
            
            181,916Commitments
      and contingencies
            
            
            --
            
            
            
            --Shareholders'
      equity:Common
      stock, par value $.01 per share; authorized50,000,000
      shares; issued 24,766,216 at September 30, 2009
              and
      24,766,166 at December 31, 2008
            
            
            248
            
            
            
            248Paid-in
      capital
            
            
            259,362
            
            
            
            259,069Dividends
      paid in excess of earnings
            
            
            (48,571
            )
            
            
            (49,124
            )Accumulated
      other comprehensive loss
            
            
            (3,425
            )
            
            
            (4,296
            )Total
      shareholders' equity
            
            
            207,614
            
            
            
            205,897Total
      liabilities and shareholders' equity
            
            $
            438,194
            
            
            $
            387,813




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




1






GETTY
      REALTY CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF
    OPERATIONS(in
      thousands, except per share amounts)(unaudited)Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Revenues
      from rental properties
            
            $
            20,210
            
            
            $
            20,236
            
            
            $
            60,272
            
            
            $
            60,482Operating
      expenses:Rental
      property expenses
            
            
            2,070
            
            
            
            2,239
            
            
            
            6,439
            
            
            
            7,007Impairment
      charges
            
            
            -
            
            
            
            -
            
            
            
            1,069
            
            
            
            -Environmental
      expenses, net
            
            
            2,042
            
            
            
            2,270
            
            
            
            5,677
            
            
            
            5,032General
      and administrative expenses
            
            
            1,748
            
            
            
            1,483
            
            
            
            5,102
            
            
            
            5,235Depreciation
      and amortization expense
            
            
            2,665
            
            
            
            2,828
            
            
            
            8,014
            
            
            
            8,498Total
      operating expenses
            
            
            8,525
            
            
            
            8,820
            
            
            
            26,301
            
            
            
            25,772Operating
      income
            
            
            11,685
            
            
            
            11,416
            
            
            
            33,971
            
            
            
            34,710Other
      income, net
            
            
            171
            
            
            
            224
            
            
            
            419
            
            
            
            652Interest
      expense
            
            
            (1,195
            )
            
            
            (1,703
            )
            
            
            (3,632
            )
            
            
            (5,349
            )Earnings
      from continuing operations
            
            
            10,661
            
            
            
            9,937
            
            
            
            30,758
            
            
            
            30,013Discontinued
      operations:Earnings
      from operating activities
            
            
            10
            
            
            
            90
            
            
            
            150
            
            
            
            389Gains
      on dispositions of real estate
            
            
            1,514
            
            
            
            462
            
            
            
            4,810
            
            
            
            2,093Earnings
      from discontinued operations
            
            
            1,524
            
            
            
            552
            
            
            
            4,960
            
            
            
            2,482Net
      earnings
            
            $
            12,185
            
            
            $
            10,489
            
            
            $
            35,718
            
            
            $
            32,495Basic
      and diluted earnings per common share:Earnings
      from continuing operations
            
            $
            0.43
            
            
            $
            0.40
            
            
            $
            1.24
            
            
            $
            1.21Earnings
      from discontinued operations
            
            $
            0.06
            
            
            $
            0.02
            
            
            $
            0.20
            
            
            $
            0.10Net
      earnings
            
            $
            0.49
            
            
            $
            0.42
            
            
            $
            1.44
            
            
            $
            1.31Weighted-average
      shares outstanding:Basic
            
            
            24,766
            
            
            
            24,766
            
            
            
            24,766
            
            
            
            24,766Stock
      options and restricted stock units
            
            
            1
            
            
            
            -
            
            
            
            -
            
            
            
            1Diluted
            
            
            24,767
            
            
            
            24,766
            
            
            
            24,766
            
            
            
            24,767Dividends
      declared per share
            
            $
            .475
            
            
            $
            .470
            
            
            $
            1.415
            
            
            $
            1.40





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


2





GETTY
REALTY CORP. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME


(in
thousands)


(unaudited)




Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Net
      earnings
            
            $
            12,185
            
            
            $
            10,489
            
            
            $
            35,718
            
            
            $
            32,495Other
      comprehensive gain:Net
      unrealized gain (loss) on interest rate swap
            
            
            36
            
            
            
            (76
            )
            
            
            871
            
            
            
            135Comprehensive
      income
            
            $
            12,221
            
            
            $
            10,413
            
            
            $
            36,589
            
            
            $
            32,630




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


3





GETTY
      REALTY CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH
    FLOWS(in
      thousands)(unaudited)Nine
      months ended September30,2009
            
            
            2008Cash
      flows from operating activities:Net
      earnings
            
            $
            35,718
            
            
            $
            32,495Adjustments
      to reconcile net earnings tonet
      cash flow provided by operating activities:Depreciation and amortization
      expense
            
            
            8,049
            
            
            
            8,638Impairment
    charges
            
            
            1,069
            
            
            
            -Gains from dispositions of real
      estate
            
            
            (4,863
            )
            
            
            (2,395
            )Deferred rental revenue, net of
      allowance
            
            
            (440
            )
            
            
            (1,285
            )Amortization
      of above-market and below-market leases
            
            
            (570
            )
            
            
            (600
            )Accretion
expense
            
            
            631
            
            
            
            601Stock-based
      employee compensation expense
            
            
            293
            
            
            
            241Changes
      in assets and liabilities:Recoveries from state
      underground storage tank funds, net
            
            
            398
            
            
            
            372Mortgages and accounts
      receivable, net
            
            
            (938
            )
            
            
            32Prepaid expenses and other
      assets
            
            
            45
            
            
            
            338Environmental remediation
      costs
            
            
            109
            
            
            
            (1,587
            )Accounts payable and accrued
      expenses
            
            
            32
            
            
            
            (806
            )Net
      cash flow provided by operating activities
            
            
            39,533
            
            
            
            36,044Cash
      flows from investing activities:Property acquisitions and
      capital expenditures
            
            
            (54,034
            )
            
            
            (5,950
            )Proceeds
      from dispositions of real estate
            
            
            5,881
            
            
            
            4,272(Increase) decrease in cash held
      for property acquisitions
            
            
            (1,765
            )
            
            
            2,981Collection (issuance) of
      mortgages receivable net
            
            
            120
            
            
            
            (85
            )Net
      cash flow provided by (used in) investing activities
            
            
            (49,798
            )
            
            
            1,218Cash
      flows from financing activities:Borrowings (repayments) under
      credit agreement, net
            
            
            24,550
            
            
            
            2,250Borrowings under term loan
      agreement, net
            
            
            24,500
            
            
            
            -Cash
      dividends paid
            
            
            (35,029
            )
            
            
            (34,624
            )Proceeds from stock options
      exercised
            
            
            -
            
            
            
            9Net
      cash flow provided by (used in) financing activities
            
            
            14,021
            
            
            
            (32,365
            )Net
      increase  in cash and cash equivalents
            
            
            3,756
            
            
            
            4,897Cash
      and cash equivalents at beginning of period
            
            
            2,178
            
            
            
            2,071Cash
      and cash equivalents at end of period
            
            $
            5,934
            
            
            $
            6,968Supplemental
      disclosures of cash flow informationCash paid (refunded) during the
      period for:Interest
            
            $
            3,748
            
            
            $
            5,305Income
      taxes, net
            
            
            457
            
            
            
            532Recoveries
      from state underground storage tank funds
            
            
            (1,127
            )
            
            
            (1,012
            )Environmental
      remediation costs
            
            
            3,410
            
            
            
            4,419The
      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”). In 2009 Financial Accounting Standards Board
(“FASB”) established the Accounting Standards Codification, as amended (the
“ASC”), as the sole reference source of authoritative accounting principles
recognized by the FASB to be applied by non-governmental entities in the
preparation of financial statements in conformity with GAAP. The Company adopted
the codification during the quarter ended September 30, 2009 which had no impact
on the Company’s financial position, results of operations or cash flows. 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.





Direct
Financing Lease: Income under direct financing leases is included in revenues
from rental properties and is recognized over the lease term using the effective
interest rate method which produces a constant periodic rate of return on the
net investment in the leased property. Net investment in direct financing lease
represents the investment in leased assets accounted for as a direct financing
lease. The investment is reduced by the receipt of lease payments, net of
interest income earned and amortized over the life of the lease.





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,
net investment in direct financing lease, recoveries from state underground
storage tank (“UST” or ‘USTs”) funds, environmental remediation costs, real
estate, depreciation and amortization, impairment of long-lived assets,
litigation, accrued expenses, income taxes and the allocation of the purchase
price of properties acquired to the assets acquired and liabilities
assumed.





Discontinued
Operations: The operating results and gains from certain dispositions of real
estate sold in 2009 and 2008 are reclassified as discontinued operations. The
operating results of such properties for the threeand nine months ended
September 30, 2008 has also been reclassified to discontinued operations to
conform to the 2009 presentation. Discontinued operations for the quarters and
nine months ended September 30, 2009 and 2008 are primarily comprised of gains
or losses from property dispositions, respectively. The revenue from rental
properties and expenses related to these properties are insignificant for the
three and nine months ended September 30, 2009 and 2008.




5





Unaudited,
Interim Financial Statements: The consolidated financial statements are
unaudited but, in the Company’s opinion, reflect all adjustments (consisting of
normal recurring accruals) necessary for a fair statement of the results for the
periods presented. These statements should be read in conjunction with the
consolidated financial statements and related notes, which appear in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2008.





Subsequent
events: Management of the Company evaluated subsequent events that occurred
after September 30, 2009 and through November 9, 2009, the date the financial
statements were issued.





Recent
Accounting Developments and Amendments to the Accounting Standards Codification:
In September 2006, the FASB amended the accounting standards related to fair
value measurements of assets and liabilities (the “Fair Value Measurements
Amendment”). The Fair Value Measurements Amendment generally applies whenever
other standards require assets or liabilities to be measured at fair value. The
Fair Value Measurements Amendment was effective in fiscal years beginning after
November 15, 2007. Subsequently, the FASB delayed the effective date of the Fair
Value Measurements Amendment by one year for nonfinancial assets and liabilities
that are recognized or disclosed at fair value on a nonrecurring basis to fiscal
years beginning after November 15, 2008. The adoption of the Fair Value
Measurements Amendment in January 2008 and the adoption of the provisions of the
Fair Value Measurements Amendment for nonfinancial assets and liabilities that
are recognized or disclosed at fair value on a nonrecurring basis in January
2009 did not have a material impact on the Company’s financial position and
results of operations.





In
December 2007, the FASB amended the accounting standards related to business
combinations (the “Business Combinations Amendment”) affecting how the acquirer
shall recognize and measure in its financial statements at fair value the
identifiable assets acquired, liabilities assumed, any non-controlling interest
in the acquiree and goodwill acquired in a business combination. The Business
Combinations Amendment requires that acquisition costs, which could be material
to the Company’s future financial results, will be expensed rather than included
as part of the basis of the acquisition. The adoption of the Business
Combinations Amendment by the Company in January 2009 did not result in a
write-off of acquisition related transactions costs associated with transactions
not yet consummated.





Earnings
per Common Share: The FASB amended the accounting standards related to
determining earnings per share (the “Earnings Per Share Amendment”). Due to the
adoption of the “Earnings Per Share Amendment” effective as of January 1, 2009
and retrospectively applied to the three and nine months ended September 30,
2008, basic earnings per common share gives effect, utilizing the two-class
method, to the potential dilution from the issuance of common shares in
settlement of restricted stock units (“RSUs” or “RSU”) which provide for
non-forfeitable dividend equivalents equal to the dividends declared per common
share. Basic earnings per common share is computed by dividing earnings less
dividend equivalents attributable to RSUs outstanding at the end of each
quarterly period by the weighted-average number of common shares outstanding
during the period. The adoption of the “Earnings Per Share Amendment” did not
have a material impact in the determination of earnings per common share for the
three and nine months ended September 30, 2009 and 2008. Diluted earnings per
common share also give effect, utilizing the treasury stock method, to the
potential dilution from the exercise of stock options. For the three months
ended September 30, 2008 and the nine months ended September 30, 2009, the
assumed exercise of stock options utilizing the treasury stock method would have
been anti-dilutive and therefore was not assumed for purposes of computing
diluted earnings per common share.




6





Three
      months ended
              September
      30,
            
            
            Nine
      months ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Earnings
      from continuing operations
            
            $
            10,661
            
            
            $
            9,937
            
            
            $
            30,758
            
            
            $
            30,013Less dividend equivalents
      attributable to restricted stock units outstanding
            
            
            (42
            )
            
            
            (30
            )
            
            
            (129
            )
            
            
            (88
            )Earnings
      from continuing operations attributable to common shareholders used for
      basic earnings per share calculation
            
            
            10,619
            
            
            
            9,907
            
            
            
            30,629
            
            
            
            29,925Discontinued
      operations
            
            
            1,524
            
            
            
            552
            
            
            
            4,960
            
            
            
            2,482Net
      earnings attributable to common shareholders used for basic earnings per
      share calculation
            
            $
            12,143
            
            
            $
            10,459
            
            
            $
            35,589
            
            
            $
            32,407Weighted-average
      number of common shares outstanding:Basic
            
            
            24,766
            
            
            
            24,766
            
            
            
            24,766
            
            
            
            24,766Stock options
            
            
            1
            
            
            
            -
            
            
            
            -
            
            
            
            1Diluted
            
            
            24,767
            
            
            
            24,766
            
            
            
            24,766
            
            
            
            24,767Restricted
      stock units outstanding at the end of the period
            
            
            86
            
            
            
            63
            
            
            
            86
            
            
            
            63




2. 
LEASES





The
Company leases or sublets its properties primarily to distributors and retailers
engaged in the sale of gasoline and other motor fuel products, convenience store
products and automotive repair services who are responsible for the payment of
taxes, maintenance, repair, insurance and other operating expenses and for
managing the actual operations conducted at these properties. In addition,
approximately twenty of the Company’s properties are directly leased by the
Company to tenants for other use such as fast food restaurants, automobile sales
and other retail purposes. The Company’s properties are primarily located in the
Northeast and Mid-Atlantic regions of the United States. The Company also owns
or leases properties in Texas, North Carolina, Hawaii, California, Florida,
Arkansas, Illinois, North Dakota and Ohio.





As of
September 30, 2009, Getty Petroleum Marketing Inc. (“Marketing”) leased from the
Company, eight hundred forty-six properties. Eight hundred thirty-six of the
properties are leased to Marketing under a unitary master lease (the “Master
Lease”) and ten properties are leased under supplemental leases (collectively
with the Master Lease, the “Marketing Leases”). The Master Lease has an initial
term of fifteen years commencing December 9, 2000, and generally provides
Marketing with options for three renewal terms of ten years each and a final
renewal option of three years and ten months extending to 2049 (or such shorter
initial or renewal term as the underlying lease may provide). The Marketing
Leases include provisions for 2% annual rent escalations. The Master Lease is a
unitary lease and, accordingly, Marketing’s exercise of renewal options must be
on an “all or nothing” basis. The supplemental leases have initial terms of
varying expiration dates. As permitted under the terms of the Marketing Leases,
Marketing generally, subject to any contrary terms under applicable third party
leases, can use each property for any lawful purpose, or for no purpose
whatsoever. (See note 3 for contingencies related to Marketing and the Marketing
Leases for additional information).




7





The
components of the $17,454,000 net investment in direct financing lease as of
September 30, 2009 are minimum lease payments receivable of $75,449,000 plus
unguaranteed estimated residual value of $4,363,000 less unearned income of
$62,358,000.




3.COMMITMENTS AND
CONTINGENCIES


In order
to minimize the Company’s exposure to credit risk associated with financial
instruments, the Company places its temporary cash investments, if any, with
high credit quality institutions. Temporary cash investments, if any, are
currently held in an overnight bank time deposit with JPMorgan Chase Bank,
N.A.





As of
September 30, 2009, the Company leased eight hundred forty-six of its one
thousand seventy-eight properties on a long-term triple-net basis to Marketing
under the Marketing Leases (see note 2 for additional information). Marketing
operated substantially all of the Company’s petroleum marketing businesses when
it was spun-off to the Company’s shareholders as a separate publicly held
company in March 1997 (the “Spin-Off”). In December 2000, Marketing was acquired
by a subsidiary of OAO LUKoil (“Lukoil”), one of the largest integrated Russian
oil companies.




The
Company’s financial results are materially dependent upon the ability of
Marketing to meet its rental and environmental obligations under the Marketing
Leases. A substantial portion of the Company’s revenues (74% for the three
months ended September 30, 2009), are derived from the Marketing Leases.
Accordingly, any factor that adversely affects Marketing’s ability to meet its
obligations under the Marketing Leases may have a material adverse effect on the
Company’s business, financial condition, revenues, operating expenses, results
of operations, liquidity, ability to pay dividends and/or stock
price.  Marketing’s financial results depend largely on retail
petroleum marketing margins from the sale of refined petroleum products at
margins in excess of its fixed and variable expenses, performance of the
petroleum marketing industry and rental income from its sub-tenants who operate
their respective convenience stores, automotive repair services or other
businesses at the Company’s properties. The petroleum marketing industry has
been and continues to be volatile and highly competitive. Marketing has made all
required monthly rental payments under the Marketing Leases when due through
November 2009, although there can be no assurance that it will continue to do
so.





For the
year ended December 31, 2008, Marketing reported a significant loss,
accelerating a trend of reporting progressively larger losses in recent years.
As a result of Marketing’s significant losses for each of the three years ended
December 2008, 2007 and 2006 and the cumulative impact of those losses on
Marketing’s financial position as of December 31, 2008, Marketing likely does
not have the ability to generate cash flows from its business sufficient to meet
its obligations as they come due in the ordinary course through the term of the
Marketing Leases unless Marketing shows significant improvement in its financial
results and/or generates sufficient liquidity through the sale of assets or
otherwise, or unless financial support continues to be provided by Lukoil, its
parent company. The Company believes Marketing is dependent on financial support
from Lukoil to meet its obligations as they become due and that it is probable
that Lukoil will continue to provide financial support to Marketing. Lukoil is
not, however, a guarantor of the Marketing Leases. Even though Marketing is a
wholly-owned subsidiary of Lukoil and Lukoil has provided capital to Marketing
in the past, there can be no assurance that Lukoil will provide financial
support or additional capital to Marketing in the future. It is reasonably
possible that the Company’s belief regarding the likelihood of Lukoil providing
continuing financial support to Marketing will prove to be incorrect or will
change as circumstances change.




8





From time
to time the Company has had discussions with representatives of Marketing
regarding potential modifications to the Marketing Leases. Representatives of
Marketing have also indicated to the Company that they are considering
significant changes to Marketing’s business model. Although the Company
continues to remove individual locations from the Master Lease as mutually
beneficial opportunities arise, there has been no agreement between the Company
and Marketing on any terms that would be the basis for a definitive Master Lease
modification agreement. If Marketing ultimately determines that its business
strategy is to exit all or a portion of the properties it leases from the
Company, it is the Company’s intention to cooperate with Marketing in
accomplishing those objectives to the extent that the Company determines that it
is prudent for it to do so. Any modification of the Marketing Leases that
removes a significant number of properties from the Marketing Leases would
likely significantly reduce the amount of rent the Company receives from
Marketing and increase the Company’s operating expenses. The Company cannot
accurately predict if, or when, the Marketing Leases will be modified; what
composition of properties, if any, may be considered for removal from the Master
Lease as part of any such modification; or what the terms of any agreement for
modification of the Marketing Leases may be. The Company also cannot accurately
predict what actions Marketing and Lukoil may take, and what the Company’s
recourse may be, whether the Marketing Leases are modified or not.





The
Company intends either to re-let or sell any properties removed from the
Marketing Leases and reinvest any realized sales proceeds in new
properties. Marketing
recently agreed to permit the Company to list with brokers and to show to
prospective purchasers or lessees, seventy-five of the properties where
Marketing has removed, or has scheduled to remove, the underground gasoline
storage tanks and related equipment.The Company intends to seek
replacement tenants or buyers for properties removed from the Marketing Leases
either individually, in groups of properties, or by seeking a single tenant for
the entire portfolio of properties subject to the Marketing Leases. As permitted
under the terms of the Marketing Leases, Marketing generally can, subject to any
contrary terms under applicable third party leases, use each property for any
lawful purpose, or for no purpose whatsoever. In those instances where the
Company determines that the highest and best use for a property is no longer as
a retail motor fuel outlet, the Company intends to seek an alternative tenant or
buyer for such property as opportunities arise. Although the Company is the fee
or leasehold owner of the properties subject to the Marketing Leases and the
owner of the Getty® brand and has prior experience with tenants who operate
their convenience stores, automotive repair services or other businesses at its
properties; in the event that properties are removed from the Marketing Leases,
the Company cannot accurately predict if, when, or on what terms, such
properties could be re-let or sold.




9




Based on
the Company’s prior decision to attempt to negotiate with Marketing for a
modification of the Marketing Leases to remove approximately 40% of the
properties (the “Subject Properties”) from the Marketing Leases, the Company
concluded that it cannot reasonably assume that it will collect all of the rent
due to the Company related to the Subject Properties for the remainder of the
current term of each Marketing Lease. Accordingly, the Company recorded a
non-cash reserve representing the full amount of the deferred rent receivable
recorded related to the Subject Properties as of December 31, 2007. As of
September 30, 2009, the Company had a reserve of $9,495,000 for the deferred
rent receivable due from Marketing representing the full amount of the deferred
rent receivable recorded related to the Subject Properties as of that date.
Although, based on a number of factors, we believe it is possible that Marketing
is currently considering a strategy that may involve removal from the Master
Lease of a composition of properties different from the properties comprising
the Subject Properties, we continue to believe that our best estimate of the
loss contingency attributable to the deferred rent receivable due from Marketing
is to be based on the properties comprising the Subject Properties. The Company
has not provided a deferred rent receivable reserve related to the remaining
properties subject to the Marketing Leases (the “Remaining Properties”) since,
based on the Company’s assessments and assumptions, the Company continues to
believe that it is not probable that it will not collect the deferred rent
receivable related to the Remaining Properties of $22,849,000 as of September
30, 2009 and that Lukoil will not allow Marketing to fail to perform its rental,
environmental and other obligations under the Marketing Leases. Beginning with
the first quarter of 2008, the rental revenue for the Subject Properties was,
and for future periods is expected to be, effectively recognized when payment is
due under the contractual payment terms.





The
Company has reduced the estimated useful lives of certain long-lived assets for
the Subject Properties resulting in accelerating the depreciation expense
recorded for those assets. In addition, during the three months ended June 30,
2009, the Company reduced the carrying amount to fair value, and recorded
impairment charges aggregating $1,069,000, for certain properties leased to
Marketing where the carrying amount of the property exceeded the estimated
undiscounted cash flows expected to be received during the assumed holding
period and the estimated net sales value expected to be received at disposition.
The impairment charges were attributable to general reductions in real estate
valuations and, in certain cases, by the removal or scheduled removal of
underground storage tanks by Marketing. The fair value of real estate is
estimated based on the price that would be received to sell the property in an
orderly transaction between marketplace participants at the measurement date,
net of disposal costs. The valuation techniques that the Company used included
discounted cash flow analysis, an income capitalization approach on prevailing
or earnings multiples applied to earnings from the property, analysis of recent
comparable sales transactions, actual sale negotiations and bona fide purchase
offers received from third parties and/or consideration of the amount that
currently would be required to replace the asset, as adjusted for obsolescence.
In general, the Company considers multiple valuation techniques when measuring
the fair value of a property, all of which are based on assumptions that are
classified within Level 3 of the fair value hierarchy.





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
Marketing Leases 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 pay directly for Marketing Environmental
Liabilities as the property owner if Marketing fails to pay them. The Company
does not maintain pollution legal liability insurance to protect it from
potential future claims for Marketing Environmental Liabilities. The Company
will be required to accrue for Marketing Environmental Liabilities if the
Company determines that it is probable that Marketing will not meet its
obligations and the Company can reasonably estimate the amount of the Marketing
Environmental Liabilities for which it will be directly responsible to pay, or
if the Company’s assumptions regarding the ultimate allocation methods or share
of responsibility that it used to allocate environmental liabilities changes.
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 September 30, 2009 or December 31, 2008.
Nonetheless, the Company has determined that the aggregate amount of the
Marketing Environmental Liabilities (as estimated by the Company based on its
assumptions and its analysis of information currently available to it) could be
material to the Company if it was required to accrue for all of the Marketing
Environmental Liabilities in the future since the Company believes that it is
reasonably possible that as a result of such accrual, the Company may not be in
compliance with the existing financial covenants in its Credit Agreement and its
Term Loan Agreement. Such non-compliance could result in an event of default
pursuant to each agreement which, if not cured or waived, could result in the
acceleration of the Company’s indebtedness under the Credit Agreement and the
Term Loan Agreement.




10





Should the
Company’s assessments, assumptions and beliefs prove to be incorrect, including,
in particular, the Company’s belief that Lukoil will continue to provide
financial support to Marketing, or if circumstances change, the conclusions
reached by the Company may change relating to (i) whether any or what
combination of the properties subject of the Marketing Leases are likely to be
removed from the Marketing Leases, (ii) recoverability of the deferred rent
receivable for some or all of the properties subject of the Marketing Leases,
(iii) potential impairment of the properties subject of the Marketing Leases
and, (iv) Marketing’s ability to pay the Marketing Environmental Liabilities.
The Company intends to regularly review its assumptions that affect the
accounting for deferred rent receivable; long-lived assets; environmental
litigation accruals; environmental remediation liabilities; and related
recoveries from state underground storage tank funds, which may result in
material adjustments to the amounts recorded for these assets and liabilities,
and as a result of which, the Company may not be in compliance with the
financial covenants in its Credit Agreement and its Term Loan Agreement.
Accordingly, the Company may be required to (i) reserve additional amounts of
the deferred rent receivable related to the properties subject of the Marketing
Leases, (ii) record an additional impairment charge related to the properties
subject of the Marketing Leases, or (iii) accrue for Marketing Environmental
Liabilities that the Company believes are allocable to Marketing under the
Marketing Leases and various other agreements as a result of the potential or
actual modification of the Marketing Leases or other factors.





The
Company cannot provide any assurance that Marketing will continue to 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 does not perform its rental, environmental or other
obligations under the Marketing Leases; if the Marketing Leases are modified
significantly or terminated; if the Company determines that it is probable that
Marketing will not meet its rental, environmental or other obligations and the
Company accrues for certain of such liabilities; if the Company is unable to
promptly re-let or sell the properties upon recapture from the Marketing Leases;
or, if the Company changes its assumptions that affect the accounting for rental
revenue or Marketing Environmental Liabilities related to the Marketing Leases
and various other agreements; the Company’s business, financial condition,
revenues, operating expenses, results of operations, liquidity, ability to pay
dividends and/or stock price may be materially adversely affected.




11





The
Company has also agreed to provide limited environmental indemnification to
Marketing, capped at $4,250,000, 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 required to pay (and has paid) the first $1,500,000 of
costs and expenses incurred in connection with remediating any such pre-existing
conditions, Marketing and the Company 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 September 30,
2009 and December 31, 2008 in connection with this indemnification
agreement.





The
Company is subject to various legal proceedings and claims which arise in the
ordinary course of its business. In addition, the Company has retained
responsibility for certain legal proceedings and claims relating to the
petroleum marketing business that were identified at the time of the Spin-Off.
As of September 30, 2009 and December 31, 2008, the Company had accrued
$1,736,000 and $1,671,000, respectively, for certain of these matters which it
believes were appropriate based on information then currently available. The
Company has not accrued for approximately $950,000 in costs allegedly incurred
by the current property owner in connection with removal of USTs and soil
remediation at a property that had been leased to and operated by Marketing. The
Company believes Marketing is responsible for such costs under the terms of the
Master Lease and tendered the matter for defense and indemnification from
Marketing, but Marketing denied its liability for the claim and its
responsibility to defend against and indemnify the Company for the claim. The
Company filed a third party claim against Marketing for indemnification in this
matter. The property owner’s claim for reimbursement of costs incurred and our
claim for indemnification by Marketing were actively litigated, leading to a
trial held before a judge. The trial court issued its decision in August 2009
under which the Company and Marketing were held jointly and severally
responsible to the current property owner for the costs incurred by the owner to
remove USTs and remediate contamination at the site, but, as between the Company
and Marketing, Marketing was accountable for such costs under the
indemnification provisions of the Master Lease. The Company believes that
Marketing will appeal the decision; however, the Company believes the
probability that Marketing will not be ultimately responsible for the claim for
clean-up costs incurred by the current property owner is remote. It is possible
that the Company’s assumptions regarding, among other items, the ultimate
resolution of and/or the Company’s ultimate share of responsibility for these
matters may change, which may result in the Company providing or adjusting its
accruals for these matters.




12





In
September 2003, the Company was notified by the State of New Jersey Department
of Environmental Protection (“NJDEP”) that the Company is one of approximately
sixty-six potentially responsible parties for natural resource damages resulting
from discharges of hazardous substances into the Lower Passaic River. The
definitive list of potentially responsible parties and their actual
responsibility for the alleged damages, the aggregate cost to remediate the
Lower Passaic River, the amount of natural resource damages and the method of
allocating such amounts among the potentially responsible parties have not been
determined. In September 2004, the Company received a General Notice Letter from
the United States Environmental Protection Agency (the “EPA”) (the “EPA
Notice”), advising the Company that it may be a potentially responsible party
for costs of remediating certain conditions resulting from discharges of
hazardous substances into the Lower Passaic River. ChevronTexaco received the
same EPA Notice regarding those same conditions. In a related action, in
December 2005, the State of New Jersey brought suit against certain companies
which the State alleges are responsible for pollution of the Passaic River from
a former Diamond Alkali manufacturing plant. In February 2009, certain of these
defendants filed third-party complaints against approximately 300 additional
parties, including the Company, seeking contribution for a pro-rata share of
response costs, cleanup and removal costs, and other damages. The Company
believes that ChevronTexaco is contractually obligated to indemnify the Company,
pursuant to an indemnification agreement, for most if not all of the conditions
at the property identified by the NJDEP and the EPA. Accordingly, the ultimate
legal and financial liability of the Company, if any, cannot be estimated with
any certainty at this time.





From
October 2003 through September 30, 2009, the Company was notified that the
Company was made party to fifty-nine cases in Connecticut, Florida,
Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Vermont,
Virginia and West Virginia brought by local water providers or governmental
agencies. The Company has settled one case, has been dismissed from five of the
cases initially filed against it, and fifty-three cases remain outstanding.
These cases allege various theories of liability due to contamination of
groundwater with methyl tertiary butyl ether (“MTBE”) as the basis for claims
seeking compensatory and punitive damages. Each case names as defendants
approximately fifty petroleum refiners, manufacturers, distributors and
retailers of MTBE, or gasoline containing MTBE. A significant number of the
named defendants other than the Company have entered into settlements with
certain plaintiffs, which affected approximately twenty-seven of the cases to
which the Company is a party. The accuracy of the allegations as they relate to
the Company, the Company’s defenses to such claims, the aggregate amount of
possible damages and the method of allocating such amounts among the remaining
defendants have not been determined. Accordingly, the ultimate legal and
financial liability of the Company, if any, cannot be estimated with any
certainty at this time.





The
ultimate resolution of the matters related to the Lower Passaic River and the
MTBE multi-district litigation discussed above could cause a material adverse
effect on the Company’s business, financial condition, results of operations,
liquidity, ability to pay dividends and/or stock price.





Prior to
the Spin-Off, the Company was self-insured for workers’ compensation, general
liability and vehicle liability up to predetermined amounts above which
third-party insurance applies. As of September 30, 2009 and December 31, 2008,
the Company’s Consolidated Balance Sheets included, in accounts payable and
accrued expenses, $293,000 and $290,000, 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 nine months  ended September 30, 2009 and 2008
include, in general and administrative expenses, a charge of $25,000 and a
credit of $72,000, respectively, for self-insurance loss reserve adjustments.
Since the Spin-Off, the Company has maintained insurance coverage subject to
certain deductibles.




13





In order
to qualify as a REIT, among other items, the Company must distribute at least
ninety percent of its “earnings and profits” (as defined in the Internal Revenue
Code) to shareholders each year. Should the Internal Revenue Service
successfully assert that the Company’s earnings and profits were greater than
the amounts distributed, the Company may fail to qualify as a REIT; however, the
Company may avoid losing its REIT status by paying a deficiency dividend to
eliminate any remaining earnings and profits. The Company may have to borrow
money or sell assets to pay such a deficiency dividend.




4. 
CREDIT, TERM LOAN AND INTEREST RATE SWAP AGREEMENTS





As of
September 30, 2009, borrowings under the Credit Agreement, described below, were
$154,800,000, bearing interest at a weighted-average effective rate of 2.8% per
annum. The weighted-average effective rate is based on $109,800,000 of LIBOR
rate borrowings floating at market rates plus a margin of 1.00% and $45,000,000
of LIBOR rate borrowings effectively fixed at 5.44% by an interest rate Swap
Agreement, described below, plus a margin of 1.00%. The Company is a party to a
$175,000,000 amended and restated senior unsecured revolving credit agreement
(the “Credit Agreement”) with a group of domestic commercial banks led by
JPMorgan Chase Bank, N.A. (the “Bank Syndicate”) which expires in March 2011.
The Credit Agreement does not provide for scheduled reductions in the principal
balance prior to its maturity. The Credit Agreement permits borrowings at an
interest rate equal to the sum of a base rate plus a margin of 0.0% or 0.25% or
a LIBOR rate plus a margin of 1.0%, 1.25% or 1.5%. The applicable margin is
based on the Company’s leverage ratio at the end of the prior calendar quarter,
as defined in the Credit Agreement, and is adjusted effective mid-quarter when
the Company’s quarterly financial results are reported to the Bank Syndicate.
Based on the Company’s leverage ratio as of September 30, 2009, the applicable
margin will remain at 0.0% for base rate borrowings and will be adjusted upward
from 1.00% to 1.25% for LIBOR rate borrowings effective in November
2009.





Subject to
the terms of the Credit Agreement, the Company has the option to extend the term
of the credit agreement for one additional year to March 2012 and/or, subject to
approval by the Bank Syndicate, increase the amount of the credit facility
available pursuant to the Credit Agreement by $125,000,000 to $300,000,000. The
Company does not expect to exercise its option to increase the amount of the
Credit Agreement at this time. In addition, based on the current lack of
liquidity in the credit markets, the Company believes that it would need to
renegotiate certain terms in the Credit Agreement in order to obtain approval
from the Bank Syndicate to increase the amount of the credit facility at this
time. No assurance can be given that such approval from the Bank Syndicate will
be obtained on terms acceptable to the Company, if at all. The annual commitment
fee on the unused Credit Agreement ranges from 0.10% to 0.20% based on the
amount of borrowings. The Credit Agreement contains customary terms and
conditions, including financial covenants such as those requiring the Company to
maintain minimum tangible net worth, leverage ratios and coverage ratios and
other covenants which may limit the Company’s ability to incur debt or pay
dividends. The Credit Agreement contains customary events of default, including
change of control, failure to maintain REIT status or a material adverse effect
on the Company’s business, assets, prospects or condition. Any event of default,
if not cured or waived, could result in the acceleration of the Company’s
indebtedness under the Credit Agreement.




14





On
September 25, 2009, the Company entered into a $25,000,000 three-year Term Loan
Agreement with TD Bank (the “Term Loan Agreement”) which expires in September
2012.  As of September 30, 2009, borrowings under the Term Loan
Agreement were $24,500,000 bearing interest at a rate of 3.5% per annum. The
Term Loan Agreement provides for annual reductions of $780,000 in the principal
balance with a $22,160,000 balloon payment due at maturity. The Term Loan
Agreement bears interest at a rate equal to a thirty day Libor rate (subject to
a floor of 0.4%) plus a margin of 3.1%. The Term Loan Agreement contains
customary terms and conditions, including financial covenants such as those
requiring the Company to maintain minimum tangible net worth, leverage ratios
and coverage ratios and other covenants which may limit the Company’s ability to
incur debt or pay dividends. The Term Loan Agreement contains customary events
of default, including change of control, failure to maintain REIT status or a
material adverse effect on the Company’s business, assets, prospects or
condition. Any event of default, if not cured or waived, could result in the
acceleration of the Company’s indebtedness under the Term Loan
Agreement.





The
Company is a party to a $45,000,000 LIBOR based interest rate swap, effective
through June 30, 2011 (the “Swap Agreement”). The Swap Agreement is intended to
effectively fix, at 5.44%, the LIBOR component of the interest rate determined
under the Credit Agreement. As a result of the Swap Agreement, as of September
30, 2009, $45,000,000 of the Company’s LIBOR based borrowings under the Credit
Agreement bear interest at an effective rate of 6.44%.





The
Company entered into the Swap Agreement with JPMorgan Chase Bank, N.A.,
designated and qualifying as a cash flow hedge, to reduce its exposure to the
variability in future cash flows attributable to changes in the LIBOR rate. The
Company’s primary objective when undertaking the hedging transaction and
derivative position was to reduce its variable interest rate risk by effectively
fixing a portion of the interest rate for existing debt and anticipated
refinancing transactions. The Company determined, as of the Swap Agreement’s
inception and as of September 30, 2009 and December 31, 2008, that the
derivative used in the hedging transaction is highly effective in offsetting
changes in cash flows associated with the hedged item and that no gain or loss
was required to be recognized in earnings during the nine months ended September
30, 2009 or 2008 representing the hedge’s ineffectiveness. At September 30, 2009
and December 31, 2008, the Company’s Consolidated Balance Sheets include, in
accounts payable and accrued expenses, an obligation for the fair value of the
Swap Agreement of $3,425,000 and $4,296,000, respectively. For the nine months
ended September 30, 2009 and 2008, the Company has recorded, in accumulated
other comprehensive loss in the Company’s Consolidated Balance Sheets, a gain of
$871,000 and $135,000, respectively, from the change in the fair value of the
Swap Agreement related to the effective portion of the interest rate contract.
The accumulated comprehensive loss of $3,425,000 recorded as of September 30,
2009 will be recognized as an increase in interest expense as quarterly payments
are made to the counter-party over the remaining term of the Swap Agreement
since it is expected that the Credit Agreement will be refinanced with variable
interest rate debt at its maturity.




15





The fair
value of the Swap Agreement was $3,425,000 as of September 30, 2009, determined
using (i) a discounted cash flow analysis on the expected cash flows of the Swap
Agreement, which is based on market data obtained from sources independent of
the Company consisting of interest rates and yield curves that are observable at
commonly quoted intervals and are defined by GAAP as “Level 2” inputs in the
“Fair Value Hierarchy”, and (ii) credit valuation adjustments, which are based
on unobservable “Level 3” inputs.  The fair value of the $157,000,000
projected average borrowings outstanding under the Credit Agreement is
$149,500,000 as of September 30, 2009. The fair value of the borrowings
outstanding under the Term Loan Agreement is $24,500,000 as of September 30,
2009. The fair value of the projected average borrowings outstanding under the
Credit Agreement and the borrowings outstanding under the Term Loan Agreement
were determined using a discounted cash flow technique that incorporates a
market interest yield curve, “Level 2 inputs”, with adjustments for duration,
optionality, risk profile and projected average borrowings outstanding or
borrowings outstanding, which are based on unobservable “Level 3 inputs”. As of
September 30, 2009, accordingly, the Company classified its valuation of the
Swap Agreement in its entirety within Level 2 of the Fair Value Hierarchy since
the credit valuation adjustments are not significant to the overall valuation of
the Swap Agreementand
its valuation of the borrowings outstanding under the Credit Agreement and the
Term Loan Agreement entirety within Level 3 of the Fair Value
Hierarchy.





5. ENVIRONMENTAL
EXPENSES





The
Company is subject to numerous existing federal, state and local laws and
regulations, including matters relating to the protection of the environment
such as the remediation of known contamination and the retirement and
decommissioning or removal of long-lived assets including buildings containing
hazardous materials, USTs and other equipment. Environmental expenses are
principally attributable to remediation costs which include installing,
operating, maintaining and decommissioning remediation systems, monitoring
contamination, and governmental agency reporting incurred in connection with
contaminated properties. The Company seeks reimbursement from state UST
remediation funds related to these environmental expenses where
available.





The
Company enters into leases and various other agreements which allocate
responsibility for known and unknown environmental liabilities by establishing
the percentage and method of allocating responsibility between the parties. In
accordance with the leases with certain tenants, the Company has agreed to bring
the leased properties with known environmental contamination to within
applicable standards and to regulatory or contractual closure (“Closure”).
Generally, upon achieving Closure at each individual property, the Company’s
environmental liability under the lease for that property will be satisfied and
future remediation obligations will be the responsibility of the Company’s
tenant. Generally the liability for the retirement and decommissioning or
removal of USTs and other equipment is the responsibility of the Company’s
tenants. The Company is contingently liable for these obligations in the event
that the tenants do not satisfy their responsibilities. A liability has not been
accrued for obligations that are the responsibility of the Company’s tenants
based on the tenants’ history of paying such obligations and/or the Company’s
assessment of their financial ability to pay their share of such costs. However,
there can be no assurance that the Company’s assessments are correct or that the
Company’s tenants who have paid their obligations in the past will continue to
do so.




16





Of the
eight hundred forty-six properties leased to Marketing as of September 30, 2009,
the Company has agreed to pay all costs relating to, and to indemnify Marketing
for, certain environmental liabilities and obligations at one hundred ninety-two
retail properties that have not achieved Closure and are scheduled in the Master
Lease. The Company will continue to seek reimbursement from state UST
remediation funds related to these environmental expenditures where
available.





It is
possible that the Company’s assumptions regarding the ultimate allocation method
and share of responsibility that it used to allocate environmental liabilities
may change, which may result in material adjustments to the amounts recorded for
environmental litigation accruals, environmental remediation liabilities and
related assets. The Company is required to accrue for environmental liabilities
that the Company believes are allocable to others under various other agreements
if the Company determines that it is probable that the counter-party will not
meet its environmental obligations. The ultimate resolution of these matters
could cause a material adverse effect on the Company’s business, financial
condition, results of operations, liquidity, ability to pay dividends and/or
stock price. (See note 3 for contingencies related to Marketing and the
Marketing Leases for additional information.)





The
estimated future costs for known environmental remediation requirements are
accrued when it is probable that a liability has been incurred and a reasonable
estimate of fair value can be made. The environmental remediation liability is
estimated based on the level and impact of contamination at each property. The
accrued liability is the aggregate of the best estimate of the fair value of
cost for each component of the liability. Recoveries of environmental costs from
state UST remediation funds, with respect to both past and future environmental
spending, are accrued at fair value as an offset to environmental expense, net
of allowance for collection risk, based on estimated recovery rates developed
from prior experience with the funds when such recoveries are considered
probable.





Environmental
exposures are difficult to assess and estimate for numerous reasons, including
the extent of contamination, alternative treatment methods that may be applied,
location of the property which subjects it to differing local laws and
regulations and their interpretations, as well as the time it takes to remediate
contamination. In developing the Company’s liability for probable and reasonably
estimable environmental remediation costs on a property by property basis, the
Company considers among other things, enacted laws and regulations, assessments
of contamination and surrounding geology, quality of information available,
currently available technologies for treatment, alternative methods of
remediation and prior experience. Environmental accruals are based on estimates
which are subject to significant change, and are adjusted as the remediation
treatment progresses, as circumstances change and as environmental contingencies
become more clearly defined and reasonably estimable. As of September 30, 2009,
the Company had regulatory approval for remediation action plans in place for
two hundred forty-five (95%) of the two hundred fifty-eight properties for which
it continues to retain environmental responsibility and the remaining thirteen
properties (5%) remain in the assessment phase. In addition, the Company has
nominal post-closure compliance obligations at twenty-two properties where it
has received “no further action” letters.




17





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 $3,401,000 and $2,796,000 for
the nine months ended September 30, 2009 and 2008, respectively, which amounts
were net of changes in estimated recoveries from state UST remediation funds. In
addition to net change in estimated remediation costs, environmental expenses
also include project management fees, legal fees and provisions for
environmental litigation loss reserves.





As of
September 30, 2009 and December 31, 2008, and 2007, the Company had accrued
$18,664,000, $17,660,000 and $18,523,000, respectively, as management’s best
estimate of the fair value of reasonably estimable environmental remediation
costs. As of September 30, 2009 and December 31, 2008 and 2007, the Company had
also recorded $4,089,000, $4,223,000 and $4,652,000, respectively, as
management’s best estimate for recoveries from state UST remediation funds, net
of allowance, related to environmental obligations and liabilities. The net
environmental liabilities of $13,437,000, and $13,871,000 as of December 31,
2008, and 2007, respectively, were subsequently accreted for the change in
present value due to the passage of time and, accordingly, $631,000, and
$601,000 of net accretion expense was recorded for the nine months ended
September 30, 2009 and 2008, respectively, substantially all of which is
included in environmental expenses.





In view of
the uncertainties associated with environmental expenditures, contingencies
related to Marketing and the Marketing Leases and contingencies related to other
parties, however, the Company believes it is possible that the fair value of
future actual net expenditures could be substantially higher than amounts
currently recorded by the Company. (See note 3 for contingencies related to
Marketing and the Marketing Leases for additional information.) Adjustments to
accrued liabilities for environmental remediation costs will be reflected in the
Company’s financial statements as they become probable and a reasonable estimate
of fair value can be made. Future environmental expenses could cause a material
adverse effect on our business, financial condition, results of operations,
liquidity, ability to pay dividends and/or stock price.





18




6. 
SHAREHOLDERS’ EQUITY





A summary
of the changes in shareholders' equity for the nine months ended September 30,
2009 is as follows (in thousands, except share amounts):


DIVIDENDS
            
            
            ACCUMULATEDPAID
            
            
            OTHERCOMMON
      STOCK
            
            
            PAID-IN
            
            
            IN
      EXCESS
            
            
            COMPREHENSIVESHARES
            
            
            AMOUNT
            
            
            CAPITAL
            
            
            OF
      EARNINGS
            
            
            LOSS
            
            
            TOTALBalance,
      December 31, 2008
            
            
            24,766,166
            
            
            $
            248
            
            
            $
            259,069
            
            
            $
            (49,124
            )
            
            $
            (4,296
            )
            
            $
            205,897Net
      earnings
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            35,718
            
            
            
            
            
            
            
            35,718Dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (35,165
            )
            
            
            
            
            
            
            (35,165
            )Stock-based
      employee
              compensation
      expense
            
            
            50
            
            
            
            
            
            
            
            293
            
            
            
            
            
            
            
            
            
            
            
            293Net
      unrealized gain on
              interest
      rate swap
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            871
            
            
            
            871Balance,
      September 30, 2009
            
            
            24,766,216
            
            
            $
            248
            
            
            $
            259,362
            
            
            $
            (48,571
            )
            
            $
            (3,425
            )
            
            $
            207,614





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 September 30, 2009 or December
31, 2008.





7.  
ACQUISITION





On
September 25, 2009 the Company acquired the real estate assets of thirty-six
gasoline station and convenience store properties located primarily in Prince
George’s County, Maryland, for $49,000,000 in a sale/leaseback transaction with
White Oak Petroleum LLC (“White Oak”). The Company financed this transaction
with $24,500,000 of borrowings under the Company’s existing Credit Agreement and
$24,500,000 of indebtedness under the Term Loan Agreement entered into on that
date.





The real
estate assets were acquired in a simultaneous transaction among ExxonMobil,
White Oak, and the Company, whereby White Oak acquired the properties and
related businesses from ExxonMobil and simultaneously completed a sale/leaseback
of the real estate of all thirty-six properties with the Company. The unitary
triple-net lease for the properties between White Oak and the Company has an
initial term of twenty years and provides White Oak with options for three
renewal terms of ten years each extending to 2059. The unitary
triple-net lease includes a provision for 2 1/2% annual rent escalations.
White Oak is responsible for all existing and future environmental conditions at
the properties. White Oak is an affiliate of DAG Enterprises, Inc.





As of
September 30, 2009, the Company's allocation of the purchase price among the
assets acquired is preliminary and subject to change. The purchase price has
been allocated among the assets acquired based on the initial estimates of fair
value. These allocations are preliminary and may not be indicative of the final
allocations. The Company continues to evaluate the assumptions used in valuing
the real estate. The Company anticipates finalizing these allocations in the
fourth quarter of 2009. A change in the final allocation from what is presented
may result in an increase or decrease in identified assets and changes in
revenue and expenses, including depreciation, amortization and other
expenses.





The
Company estimated the fair value of acquired tangible assets (consisting of
land, buildings and equipment) “as if vacant.” Based on these estimates, the
Company allocated $31,546,000 of the purchase price to land, which is accounted
for as an operating lease, and $17,454,000 to buildings and equipment, which is
accounted for as a direct financing lease. The future contractual minimum annual
rent receivable from White Oak on a calendar year basis is as follows: 2009 —
$1,409,000, 2010 — $5,670,000, 2011 — $5,812,000, 2012 — $5,957,000, 2013 —
$6,106,000, 2014 — $6,259,000 and $112,731,000 thereafter, of which 47.6% of the
rent is allocated to an operating lease and 52.4% of the rent is allocated to a
direct financing lease.





The
following unaudited pro forma condensed consolidated financial information has
been prepared utilizing the historical financial statements of Getty Realty
Corp. and the effect of additional revenue and expenses from the properties
acquired assuming that the acquisitions had occurred as of the beginning of each
of the years presented, after giving effect to certain adjustments including (a)
rental income adjustments resulting from the straight-lining of scheduled rent
increases and (b) rental income adjustments resulting from the recognition of
revenue under direct financing leases over the lease term using the effective
interest rate method which produces a constant periodic rate of return on the
net investment in the leased property. The following information also gives
effect to the additional interest expense resulting from the assumed increase in
borrowing outstanding drawn under the Credit Agreement and borrowings
outstanding provided by the Term Loan Agreement to fund the acquisition. The
unaudited pro forma condensed financial information is not indicative of the
results of operations that would have been achieved had the acquisition from
White Oak reflected herein been consummated on the dates indicated or that will
be achieved in the future.





Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            
            2008
            
            
            
            2009
            
            
            
            2008Revenues
            
            $21,795
            
            
            $21,915
            
            
            $65,203
            
            
            $65,507Net
      income
            
            $13,470
            
            
            $11,582
            
            
            $39,697
            
            
            $35,607Basic
      and diluted net earnings per common share
            
            $
            0.54
            
            
            $
            0.47
            
            
            $
            1.60
            
            
            $
            1.44





Item 2.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations





The
following discussion and analysis of financial condition and results of
operations should be read in conjunction with the sections entitled “Part I,
Item 1A. Risk Factors” and “Part II, Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” which appear in our
Annual Report on Form 10-K for the year ended December 31, 2008, and “Part I,
Item 1. Financial Statements” and “Part II, Item 1A. Risk Factors,” which
appears in this Quarterly Report on Form 10-Q.




19





RECENT
DEVELOPMENTS





On
September 25, 2009 we acquired the real estate assets of thirty-six gasoline
station and convenience store properties located primarily in Prince George’s
County, Maryland, for $49,000,000 from White Oak Petroleum LLC (“White Oak”) for
cash with $24,500,000 drawn under our existing Credit Agreement and $24,500,000
provided by the three-year Term Loan Agreement entered into on that
date.





The real
estate assets were acquired in a simultaneous transaction among ExxonMobil,
White Oak, and us, whereby White Oak acquired the properties and related
businesses from ExxonMobil and simultaneously completed a sale/leaseback of the
real estate of all thirty-six properties with us. The unitary triple-net lease
for the properties between White Oak and us has an initial term of twenty years
and provides White Oak with options for three renewal terms of ten years each
extending to 2059. White Oak is responsible for all existing and future
environmental conditions at the properties. White Oak is an affiliate of DAG
Enterprises, Inc.





GENERAL





Real
Estate Investment Trust





We are a
real estate investment trust (“REIT”) specializing in the ownership and leasing
of retail motor fuel and convenience store properties and petroleum distribution
terminals. We elected to be treated as a REIT under the federal income tax laws
beginning January 1, 2001. As a REIT, we are not subject to federal corporate
income tax on the taxable income we distribute to our shareholders. In order to
continue to qualify for taxation as a REIT, we are required, among other things,
to distribute at least ninety percent of our taxable income to shareholders each
year.





Retail
Petroleum Marketing Business





We lease
or sublet our properties primarily to distributors and retailers engaged in the
sale of gasoline and other motor fuel products, convenience store products and
automotive repair services. These tenants are responsible for the payment of
taxes, maintenance, repair, insurance and other operating expenses and for
managing the actual operations conducted at these properties. In addition,
approximately twenty of our properties are directly leased by us to tenants for
other uses such as fast food restaurants, automobile sales and other retail
purposes. In those instances where we determine that the highest and best use
for a property is no longer as a retail motor fuel outlet, we will seek an
alternative tenant or buyer for such property as opportunities arise. Our
properties are primarily located in the Northeast and Mid-Atlantic regions of
the United States. We also own or lease properties in Texas, North Carolina,
Hawaii, California, Florida, Arkansas, Illinois, North Dakota and
Ohio.





As of
September 30, 2009, we leased eight hundred forty-six of our one thousand
seventy-eight properties on a long-term basis to Getty Petroleum Marketing Inc.
(“Marketing”).  Eight hundred and thirty-six of the properties are
leased to Marketing under a unitary master lease (the “Master Lease”) with an
initial term effective through December 2015 and ten of the properties are
leased to Marketing under supplemental leases with initial terms of varying
expiration dates (collectively with the Master Lease, the “Marketing Leases”).
The Marketing Leases include provisions for 2% annual rent escalations. The
Master Lease is a unitary lease and, accordingly, Marketing’s exercise of
renewal options must be on an “all or nothing” basis. As permitted under the
terms of the Marketing Leases, Marketing generally, subject to any contrary
terms under applicable third party leases, can use each property for any lawful
purpose, or for no purpose whatsoever.




20





Marketing’s
financial results depend largely on retail petroleum marketing margins from the
sale of refined petroleum products at margins in excess of its fixed and
variable expenses, performance of the petroleum marketing industry and rental
income from sub-tenants who operate their respective convenience stores,
automotive repair service or other businesses at our properties. The petroleum
marketing industry has been and continues to be volatile and highly competitive.
(For information regarding factors that could adversely affect us relating to
Marketing, or our other lessees, see “Item 1A. Risk Factors” which appears in
our Annual Report on Form 10-K for the year ended December 31, 2008 and “Part
II, Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2009.”)





Developments
Related to Marketing and the Marketing Leases





Marketing
operated substantially all of our petroleum marketing businesses when it was
spun-off to our shareholders as a separate publicly held company in March 1997
(the “Spin-Off”). In December 2000, Marketing was acquired by a subsidiary of
OAO LUKoil (“Lukoil”), one of the largest integrated Russian oil
companies.





Our
financial results are materially dependent upon the ability of Marketing to meet
its rental and environmental obligations under the Marketing Leases. A
substantial portion of our revenues (74% for the three months ended September
30, 2009) are derived from the Marketing Leases. Accordingly, any factor that
adversely affects Marketing’s ability to meet its obligations under the
Marketing Leases may have a material adverse effect on our business, financial
condition, revenues, operating expenses, results of operations, liquidity,
ability to pay dividends and/or stock price.  Marketing has made all
required monthly rental payments under the Marketing Leases when due through
November 2009, although there can be no assurance that it will continue to do
so.





For the
year ended December 31, 2008, Marketing reported a significant loss,
accelerating a trend of reporting progressively larger losses in recent years.
As a result of Marketing’s significant losses for each of the three years ended
December 2008, 2007 and 2006 and the cumulative impact of those losses on
Marketing’s financial position as of December 31, 2008, Marketing likely does
not have the ability to generate cash flows from its business sufficient to meet
its obligations as they come due in the ordinary course through the term of the
Marketing Leases unless it shows significant improvement in its financial
results and/or generates sufficient liquidity through the sale of assets or
otherwise, or unless financial support continues to be provided by Lukoil, its
parent company. We believe that Marketing is dependent on financial support from
Lukoil to meet its obligations as they become due and that it is probable that
Lukoil will continue to provide financial support to Marketing. Lukoil is not,
however, a guarantor of the Marketing Leases. Even though Marketing is a
wholly-owned subsidiary of Lukoil and Lukoil has provided capital to Marketing
in the past, there can be no assurance that Lukoil will provide financial
support or additional capital to Marketing in the future. It is reasonably
possible that our beliefs regarding the likelihood of Lukoil providing
continuing financial support to Marketing will prove to be incorrect or will
change as circumstances change.




21





From time
to time we have had discussions with representatives of Marketing regarding
potential modifications to the Marketing Leases. Representatives of Marketing
have also indicated to us that they are considering significant changes to
Marketing’s business model. Although we continue to remove individual locations
from the Master Lease as mutually beneficial opportunities arise, there has been
no agreement between us and Marketing on any terms that would be the basis for a
definitive Master Lease modification agreement. If Marketing ultimately
determines that its business strategy is to exit all or a portion of the
properties it leases from us, it is our intention to cooperate with Marketing in
accomplishing those objectives to the extent that we determine that it is
prudent for us to do so. Any modification of the Marketing Leases that removes a
significant number of properties from the Marketing Leases would likely
significantly reduce the amount of rent we receive from Marketing and increase
our operating expenses. We cannot accurately predict if, or when, the Marketing
Leases will be modified; what composition of properties, if any, may be
considered for removal from the Master Lease as part of any such modification;
or what the terms of any agreement for modification of the Marketing Leases may
be. We also cannot accurately predict what actions Marketing and Lukoil may
take, and what our recourse may be, whether the Marketing Leases are modified or
not.





We intend
either to re-let or sell any properties removed from the Marketing Leases,
whether consensually by negotiation or as a result of default, and reinvest
any realized sales proceeds in new properties. Marketing
recently agreed to permit us to list with brokers and to show to prospective
purchasers or lessees, seventy-five of the properties where Marketing has
removed, or has scheduled to remove, the underground gasoline storage tanks and
related equipment.We intend to seek replacement tenants or buyers for
properties removed from the Marketing Leases either individually, in groups of
properties, or by seeking a single tenant for the entire portfolio of properties
subject to the Marketing Leases. As permitted under the terms of the Marketing
Leases, Marketing generally can, subject to any contrary terms under applicable
third party leases, use each property for any lawful purpose, or for no purpose
whatsoever. We believe that as of September 30, 2009, Marketing had removed, or
has scheduled removal of, the underground gasoline storage tanks and related
equipment at approximately 19% of the properties subject to the Marketing
Leases. In those instances where we determine that the highest and best use for
a property is no longer as a retail motor fuel outlet, we intend to seek an
alternative tenant or buyer for such property as opportunities arise. Although
we are the fee or leasehold owner of the properties subject to the Marketing
Leases and the owner of the Getty® brand, and have prior experience with tenants
who operate their gas stations, convenience stores, automotive repair services
or other businesses at our properties, in the event that the properties are
removed from the Marketing Leases, we cannot accurately predict if, when, or on
what terms such properties could be re-let or sold. Additionally, with respect
to properties that are vacant or have had underground gasoline storage tanks and
related equipment removed, it may be more difficult or costly to re-let or sell
such properties as gas stations or convenience stores because of capital costs
or possible zoning or permitting rights that are required and may have lapsed
during the period since gasoline was last sold at the property.





Based on
our prior decision to attempt to negotiate with Marketing for a modification of
the Marketing Leases to remove approximately 40% of the properties from the
Marketing Leases (the “Subject Properties”), we concluded that we cannot
reasonably assume that we will collect all of the rent due to us related to the
Subject Properties for the remainder of the current term of each Marketing
Lease. Accordingly, we recorded a non-cash reserve representing the full amount
of the deferred rent receivable recorded related to the Subject Properties as of
December 31, 2007.




22





In
accordance with accounting principles generally accepted in the United States of
America (“GAAP”), the aggregate minimum rent due over the current terms of the
Marketing Leases, substantially all of which are scheduled to expire in December
2015, is recognized on a straight-line (or an average) basis rather than when
payment contractually is due. We record the cumulative difference between lease
revenue recognized under this straight line accounting method and the lease
revenue recognized when payment is due under the contractual payment terms as
deferred rent receivable on our Consolidated Balance Sheets. We provide reserves
for a portion of the recorded deferred rent receivable if circumstances indicate
that a property may be disposed of before the end of the current lease term or
if it is not reasonable to assume that a tenant will make all of its contractual
lease payments during the current lease term. Our assessments and assumptions
regarding the recoverability of the deferred rent receivable related to the
properties subject to the Marketing Leases are reviewed on a quarterly basis and
such assessments and assumptions are subject to change.





As of
September 30, 2009, we had a reserve of $9.5 million for the deferred rent
receivable due from Marketing representing the full amount of the deferred rent
receivable recorded related to the Subject Properties as of that date. Although,
based on a number of factors, we believe it is possible that Marketing is
currently considering a strategy that may involve removal from the Master Lease
of a composition of properties different from the properties comprising the
Subject Properties, we continue to believe that our best estimate of the loss
contingency attributable to the deferred rent receivable due from Marketing is
to be based on the properties comprising the Subject Properties. We have not
provided a deferred rent receivable reserve related to the remaining properties
subject to the Marketing Leases (the “Remaining Properties”) since, based on our
assessments and assumptions, we continue to believe that it is not probable that
we will not collect the deferred rent receivable related to the Remaining
Properties of $22.8 million as of September 30, 2009 and that Lukoil will not
allow Marketing to fail to perform its rental, environmental and other
obligations under the Marketing Leases. Beginning with the first quarter of
2008, the rental revenue for the Subject Properties was, and for future periods
is expected to be, effectively recognized when payment is due under the
contractual payment terms.





We have
reduced the estimated useful lives of certain long-lived assets for the Subject
Properties resulting is accelerating the depreciation expense recorded for those
assets. In addition, during the three months ended June 30, 2009, we reduced the
carrying amount to fair value (generally estimated as sales value net of
disposal costs), and recorded impairment charges aggregating $1.1 million, for
certain properties leased to Marketing where the carrying amount of the property
exceeded the estimated undiscounted cash flows expected to be received during
the assumed holding period and the estimated net sales value expected to be
received at disposition. The impairment charges were attributable to general
reductions in real estate valuations and, in certain cases, by the removal or
scheduled removal of underground storage tanks by Marketing.




23





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
Marketing Leases 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 pay directly for Marketing Environmental Liabilities as the
property owner if Marketing fails to pay them. The Company does not maintain
pollution legal liability insurance to protect it from potential future claims
for Marketing Environmental Liabilities. We will be required to accrue for
Marketing Environmental Liabilities if we determine that it is probable that
Marketing will not meet its obligations and we can reasonably estimate the
amount of the Marketing Environmental Liabilities for which we will be directly
responsible to pay, or if our assumptions regarding the ultimate allocation
methods or share of responsibility that we used to allocate environmental
liabilities changes. 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 September 30, 2009 or December 31, 2008. Nonetheless, we have
determined that the aggregate amount of the Marketing Environmental Liabilities
(as estimated by us based on our assumptions and our analysis of information
currently available to us) could be material to us if we were required to accrue
for all of the Marketing Environmental Liabilities in the future since we
believe that it is reasonably possible that as a result of such accrual, we may
not be in compliance with the existing financial covenants in our Credit
Agreement and our Term Loan Agreement. Such non-compliance could result in an
event of default  under the Credit Agreement and the Term Loan
Agreement which, if not cured or waived, could result in the acceleration of our
indebtedness under the Credit Agreement and the Term Loan
Agreement.





Should our
assessments, assumptions and beliefs prove to be incorrect, including, in
particular, our belief that Lukoil will continue to provide financial support to
Marketing, or if circumstances change, the conclusions we reached may change
relating to (i) whether any or what combination of the properties subject of the
Marketing Leases are likely to be removed from the Marketing Leases, (ii)
recoverability of the deferred rent receivable for some or all of the properties
subject of the Marketing Leases, (iii) potential impairment of the properties
subject of the Marketing Leases, and (iv) Marketing’s ability to pay the
Marketing Environmental Liabilities. We intend to regularly review our
assumptions that affect the accounting for deferred rent receivable; long-lived
assets; environmental litigation accruals; environmental remediation
liabilities; and related recoveries from state underground storage tank funds,
which may result in material adjustments to the amounts recorded for these
assets and liabilities, and as a result of which, we may not be in compliance
with the financial covenants in our Credit Agreement and our Term Loan
Agreement. Accordingly, we may be required to (i) reserve additional amounts of
the deferred rent receivable related to the Remaining Properties, (ii) record
additional impairment charges related to the properties subject of the Marketing
Leases, or (iii) accrue for Marketing Environmental Liabilities as a result of
the potential or actual modification of the Marketing Leases or other
factors.





We cannot
provide any assurance that Marketing will continue to 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 does not perform its rental, environmental or other obligations
under the Marketing Leases; if the Marketing Leases are modified significantly
or terminated; if we determine that it is probable that Marketing will not meet
its rental, environmental or other obligations and we accrue for certain of such
liabilities; if we are unable to promptly re-let or sell the properties upon
recapture from the Marketing Leases; or, if we change our assumptions that
affect the accounting for rental revenue or Marketing Environmental Liabilities
related to the Marketing Leases and various other agreements; our business,
financial condition, revenues, operating expenses, results of operations,
liquidity, ability to pay dividends and/or stock price may be materially
adversely affected.




24





Unresolved
Staff Comment





One
comment remains unresolved as part of a periodic review commenced in 2004 by the
Division of Corporation Finance of the SEC of our Annual Report on Form 10-K for
the year ended December 31, 2003 pertaining to the SEC’s position that we must
include the financial statements and summarized financial data of Marketing in
our periodic filings, which Marketing contends is prohibited by the terms of the
Master Lease. In June 2005, the SEC indicated that, unless we file Marketing’s
financial statements and summarized financial data with our periodic reports (i)
it will not consider our Annual Reports on Forms 10-K for the years beginning
with 2000 to be compliant, (ii) it will not consider us to be current in our
reporting requirements, (iii) it will not be in a position to declare effective
any registration statements we may file for public offerings of our securities,
and (iv) we should consider how the SEC’s conclusion impacts our ability to make
offers and sales of our securities under existing registration statements and if
we have a liability for such offers and sales made pursuant to registration
statements that did not contain the financial statements of
Marketing.





We believe
that the SEC’s position is based on its interpretation of certain provisions of
its internal Financial Reporting Manual (formerly known as its Accounting
Disclosure Rules and Practices Training Material), Staff Accounting Bulletin No.
71 and Rule 3-13 of Regulation S-X. We do not believe that any of this guidance
is clearly applicable to our particular circumstances regarding the Master Lease
and we believe that, even if it were, we should be entitled to certain relief
from compliance with such requirements. The SEC has not accepted our positions
regarding the exclusion of Marketing’s financial statements and summarized
financial datafrom our filings. We cannot accurately predict the consequences if
we are ultimately unable to resolve this outstanding comment.




25




Supplemental
Non-GAAP Measures





We manage
our business to enhance the value of our real estate portfolio and, as a REIT,
place particular emphasis on minimizing risk and generating cash sufficient to
make required distributions to shareholders of at least ninety percent of our
taxable income each year. In addition to measurements defined by accounting
principles generally accepted in the United States of America (“GAAP”), our
management also focuses on funds from operations available to common
shareholders (“FFO”) and adjusted funds from operations available to common
shareholders (“AFFO”) to measure our performance. FFO is generally considered to
be an appropriate supplemental non-GAAP measure of the performance of REITs. FFO
is defined by the National Association of Real Estate Investment Trusts as net
earnings before depreciation and amortization of real estate assets, gains or
losses on dispositions of real estate, (including such non-FFO items reported in
discontinued operations), extraordinary items and cumulative effect of
accounting change. Other REITs may use definitions of FFO and/or AFFO that are
different than ours and; accordingly, may not be comparable.





We believe
that FFO and AFFO are helpful to investors in measuring our performance because
both FFO and AFFO exclude various items included in GAAP net earnings that do
not relate to, or are not indicative of, our fundamental operating performance.
FFO excludes various items such as gains or losses from property dispositions
and depreciation and amortization of real estate assets. In our case, however,
GAAP net earnings and FFO typically include the impact of deferred rental
revenue (straight-line rental revenue) and the net amortization of above-market
and below-market leases on our recognition of revenues from rental properties,
as offset by the impact of related collection reserves. GAAP net earnings and
FFO from time to time may also include impairment charges and/or income tax
benefits. Deferred rental revenue results primarily from fixed rental increases
scheduled under certain leases with our tenants. In accordance with GAAP, the
aggregate minimum rent due over the current term of these leases are recognized
on a straight-line (or an average) basis rather than when payment is
contractually due. The present value of the difference between the fair market
rent and the contractual rent for in-place leases at the time properties are
acquired is amortized into revenue from rental properties over the remaining
lives of the in-place leases. Impairment of long-lived assets represents charges
taken to write-down real estate assets to fair value estimated when events or
changes in circumstances indicate that the carrying amount of the property may
not be recoverable. In prior periods, income tax benefits have been recognized
due to the elimination of, or a net reduction in, amounts accrued for uncertain
tax positions related to being taxed as a C-corp., rather than as a REIT, prior
to 2001.





As a
result, management pays particular attention to AFFO, a supplemental non-GAAP
performance measure that we define as FFO less straight-line rental revenue, net
amortization of above-market and below-market leases, impairment charges and
income tax benefit. In management’s view, AFFO provides a more accurate
depiction than FFO of our fundamental operating performance related to: (i) the
impact of scheduled rent increases under these leases; (ii) the rental revenue
earned from acquired in-place leases; (iii) our rental operating expenses
(exclusive of impairment charges); and (iv) our election to be treated as a REIT
under the federal income tax laws beginning in 2001. Neither FFO nor AFFO
represent cash generated from operating activities calculated in accordance with
GAAP and therefore these measures should not be considered an alternative for
GAAP net earnings or as a measure of liquidity.





A
reconciliation of net earnings to FFO and AFFO for the three and nine months
ended September 30, 2009 and 2008 is as follows (in thousands, except per share
amounts):


Three
      months ended
              September
      30,
            
            
            Nine
      months ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Net
      earnings
            
            $
            12,185
            
            
            $
            10,489
            
            
            $
            35,718
            
            
            $
            32,495Depreciation
      and amortization of real estate assets
            
            
            2,696
            
            
            
            2,875
            
            
            
            8,049
            
            
            
            8,638Gains
      from dispositions of real estate
            
            
            (1,515
            )
            
            
            (490
            )
            
            
            (4,863
            )
            
            
            (2,395
            )Funds
      from operations
            
            
            13,366
            
            
            
            12,874
            
            
            
            38,904
            
            
            
            38,738Deferred
      rental revenue (straight-line rent)
            
            
            (271
            )
            
            
            (485
            )
            
            
            (440
            )
            
            
            (1,285
            )Net
      amortization of above-market and below-market leases
            
            
            (190
            )
            
            
            (198
            )
            
            
            (570
            )
            
            
            (600
            )Impairment
      charges
            
            
            -
            
            
            
            -
            
            
            
            1,069
            
            
            
            -Adjusted
      funds from operations
            
            $
            12,905
            
            
            $
            12,191
            
            
            $
            38,963
            
            
            $
            36,853Diluted
      per share amounts:Earnings
      per share
            
            $
            0.49
            
            
            $
            0.42
            
            
            $
            1.44
            
            
            $
            1.31Funds
      from operations per share
            
            $
            0.54
            
            
            $
            0.52
            
            
            $
            1.57
            
            
            $
            1.56Adjusted
      funds from operations per share
            
            $
            0.52
            
            
            $
            0.49
            
            
            $
            1.57
            
            
            $
            1.49Diluted
      weighted-average shares outstanding
            
            
            24,767
            
            
            
            24,766
            
            
            
            24,766
            
            
            
            24,767








RESULTS
OF OPERATIONS





Three
months ended September 30, 2009 compared to the three months ended September 30,
2008





Revenues
from rental properties included in continuing operations were $20.2 million for
each of the three months ended September 30, 2009 and 2008. We received
approximately $14.9 million for the three months ended September 30, 2009 and
$15.0 million for the three months ended September 30, 2008 from properties
leased to Marketing under the Marketing Leases. We also received rent of $4.9
million for the three months ended September 30, 2009 and $4.6 million for the
three months ended September 30, 2008 from other tenants. The increase in rent
received for the three months ended September 30, 2009 was primarily due to rent
escalations and rental income from properties acquired, partially offset by the
effect of dispositions of real estate and lease expirations. In addition to rent
received, revenues from rental properties include adjustments recorded for
deferred rental revenue due to the recognition of rental income on a
straight-line basis and net amortization of above-market and below-market
leases. Adjustments for deferred rental revenue result in effectively
recognizing the aggregate minimum rent due over the current lease term on a
straight-line (or an average) basis, rather than when payment is contractually
due, under leases with our tenants which provide for scheduled fixed rent
increases. Revenues from rental properties for the three months ended September
30, 2009 and 2008 include $0.3 million and $0.5 million, respectively, of rental
income recognized utilizing the straight-line method of accounting in excess of
rent received. Revenues from rental properties for each of the three months
ended September 30, 2009 and 2008 include $0.2 million of rental income
recognized due to net amortization of above-market and below-market leases. The
present value of the difference between the fair market rent and the contractual
rent for in-place leases at the time properties are acquired is amortized into
revenue from rental properties over the remaining lives of the in-place
leases.




26





Rental
property expenses included in continuing operations, which are primarily
comprised of rent expense and real estate and other state and local taxes, were
$2.1 million for the three months ended September 30, 2009, as compared to $2.2
million for the three months ended September 30, 2008. The reduction in rental
property expenses was principally due to lower rent expense incurred as a result
of third party lease terminations when compared to the prior year
period.





Environmental
expenses, net of estimated recoveries from state underground storage tank (“UST”
or “USTs”) funds included in continuing operations decreased by $0.3 million for
the three months ended September 30, 2009 to $2.0 million, as compared to $2.3
million recorded for the three months ended September 30, 2008 due to a decrease
in legal fees of $0.4 million partially offset by an increase in net change in
estimated environmental costs of $0.2 million. Change in net estimated
environmental costs were $1.6 million for the three months ended September 30,
2009, which increased by $0.2 million as compared to $1.4 million recorded in
the prior year period. Environmental accruals are based on estimates which are
subject to significant change, and are adjusted as the remediation treatment
progresses, as circumstances change and as environmental contingencies become
more clearly defined and reasonably estimable.
Environmental expenses vary from period to period and, accordingly, undue
reliance should not be placed on the magnitude or the direction of change in
reported environmental expenses for one period as compared to prior
periods.





General
and administrative expenses were $1.7 million for the three months ended
September 30, 2009 as compared to $1.5 million recorded for the three months
ended September 30, 2008. The increase in general and administrative expenses
was principally due to higher professional fees incurred in the three months
ended September 30, 2009 associated with acquisition related costs for
transactions that were not consummated.





Depreciation
and amortization expense included in continuing operations was $2.7 million for
the three months ended September 30, 2009, as compared to $2.8 million for the
three months ended September 30, 2008. The decrease in depreciation and
amortization expense was principally due to the effect of certain assets
becoming fully depreciated, lease terminations and property
dispositions.





As a
result, total operating expenses decreased by approximately $0.3 million for the
three months ended September 30, 2009, as compared to the three months ended
September 30, 2008.





Interest
expense was $1.2 million for the three months ended September 30, 2009, as
compared to $1.7 million for the three months ended September 30, 2008. The
decrease was principally due to a reduction in interest rates on our floating
rate borrowings.




27





Gains on
dispositions of real estate, partially included in both other income and
discontinued operations, increased by an aggregate of $1.0 million for the three
months ended September 30, 2009, as compared to the three months ended September
30, 2008. Gains on disposition of real estate vary from period to period and,
accordingly, undue reliance should not be placed on the magnitude or the
direction of change in reported gains for one period as compared to prior
periods.





As a
result, net earnings increased by $1.7 million to $12.2 million for the three
months ended September 30, 2009, as compared to the $10.5 million for the three
months ended September 30, 2008. Earnings from continuing operations increased
by $0.8 million to $10.7 million for the three months ended September 30, 2009,
as compared to $9.9 million for the three months ended September 30, 2008.
Earnings from continuing operations for the three months ended September 30,
2009 excludes the operating results and $1.5 million of net gain from the
disposition of six properties sold in 2009, which applicable results have been
included in earnings from discontinued operations for the three months ended
September 30, 2009 and 2008.





For the
three months ended September 30, 2009, FFO increased by $0.5 million to $13.4
million, as compared to $12.9 million for the three months ended September 30,
2008, and AFFO increased by $0.7 million to $12.9 million, as compared to $12.2
million for the three months ended September 30, 2008. The increase in FFO for
the three months ended September 30, 2009 was primarily due to the changes in
net earnings but excludes the $0.2 million decrease in depreciation and
amortization expense and the $1.0 million increase in gains on dispositions of
real estate. The increase in AFFO for the three months ended September 30, 2009
also excludes a $0.2 million decrease in deferred rental revenue and a marginal
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 $0.07 per share to $0.49 per share for the three
months ended September 30, 2009, as compared to $0.42 per share for the three
months ended September 30, 2008. Diluted FFO per share increased by $0.02 per
share for the three months ended September 30, 2009 to $0.54 per share, as
compared to $0.52 per share for the three months ended September 30, 2008.
Diluted AFFO per share increased by $0.03 per share for the three months ended
September 30, 2009 to $0.52 per share, as compared to $0.49 per share for the
three months ended September 30, 2008.





Nine
months ended September 30, 2009 compared to the nine months ended September 30,
2008





Revenues
from rental properties included in continuing operations were $60.3 million for
the nine months ended September 30, 2009, as compared to $60.5 million for the
nine months ended September 30, 2008. We received approximately $45.0 million in
rents for the nine months ended September 30, 2009 and $45.1 million in rent for
the nine months ended September 30, 2008 from properties leased to Marketing
under the Marketing Leases. We also received rent of $14.3 million for the nine
months ended September 30, 2009 and $13.5 million for the nine months ended
September 30, 2008 from other tenants. The increase in rent received for the
nine months ended September 30, 2009 was primarily due to rent escalations and
rental income from properties acquired, partially offset by the effect of
dispositions of real estate and lease expirations. Revenues from rental
properties for the nine months ended September 30, 2009 and 2008 include $0.4
million and $1.2 million, respectively, of rental income recognized utilizing
the straight-line method of accounting in excess of rent received for the
respective period. Revenues from rental properties for each of the nine months
ended September 30, 2009 and 2008 include $0.6 million of rental income
recognized due to net amortization of above-market and below-market
leases.




28





Rental
property expenses included in continuing operations, which are primarily
comprised of rent expense and real estate and other state and local taxes, were
$6.4 million for the nine months  ended September 30, 2009, as
compared to $7.0 million for the nine months ended September 30, 2008. The
decrease in rental property expenses was principally due to lower rent expense
incurred as a result of third party lease terminations when compared to the
prior year period.





Environmental
expenses, net of estimated recoveries from UST funds included in continuing
operations increased by $0.7 million for the nine months ended September 30,
2009 to $5.7 million, as compared to $5.0 million recorded for the nine months
ended September 30, 2008 due to increases in the net change in estimated
remediation costs and litigation loss reserves of $0.6 million, and $0.2
million, respectively partially offset by a reduction in legal fees of $0.1
million. In addition to net change in estimated remediation costs of $3.4
million (which includes $0.6 million of accretion expense), environmental
expenses for the nine months ended September 30, 2009 also include legal fees of
$1.3 million, principally for trial related costs incurred for several active
litigation matters; adjustments to provisions for environmental litigation loss
reserves of $0.4 million, principally related to the settlement of one
litigation matter; and project management fees of $0.6 million. Change in net
estimated environmental costs were $3.4 million for the nine months ended
September 30, 2009, or an increase of $0.6 million as compared to $2.8 million
recorded in the prior year period as a result of more stringent interpretations
of existing standards by New York State regulators for certain properties
currently being remediated. Environmental accruals are based on estimates which
are subject to significant change, and are adjusted as the remediation treatment
progresses, as circumstances change and as environmental contingencies become
more clearly defined and reasonably estimable. Environmental expenses vary from
period to period and, accordingly, undue reliance should not be placed on the
magnitude or the direction of change in reported environmental expenses for one
period as compared to prior periods.





General
and administrative expenses were $5.1 million for the nine months ended
September 30, 2009 as compared to $5.2 million recorded for the nine months
ended September 30, 2008. The decrease in general and administrative expenses
was principally due to higher professional fees incurred in the nine months
ended September 30, 2008 associated with the previously disclosed potential
modification of the Master Lease with Marketing and related matters partially
offset by higher professional fees incurred in the nine months ended September
30, 2009 associated with acquisition related costs for transactions that were
not consummated.





Depreciation
and amortization expense included in continuing operations was $8.0 million for
the nine months ended September 30, 2009, as compared to $8.5 million for the
nine months ended September 30, 2008. The $0.5 million decrease in depreciation
and amortization expense was principally due to the effect of certain assets
becoming fully depreciated, lease terminations and property
dispositions.




29





The $1.1
million of impairment charges recorded in the nine months ended September 30,
2009 was attributable to general reductions in real estate valuations and, in
certain cases, the removal or scheduled removal of underground storage tanks by
Marketing.





As a
result, total operating expenses increased by approximately $0.5 million for the
nine months ended September 30, 2009, as compared to the nine months ended
September 30, 2008.





Interest
expense was $3.6 million for the nine months ended September 30, 2009, as
compared to $5.3 million for the nine months ended September 30, 2008. The
decrease was principally due to reduction in interest rates on our floating rate
borrowings.





Gains on
dispositions of real estate, partially included in other income and discontinued
operations, increased by an aggregate of $2.5 million for the nine months ended
September 30, 2009, as compared to the nine months ended September 30, 2008.
Gains on disposition of real estate vary from period to period and, accordingly,
undue reliance should not be placed on the magnitude or the direction of change
in reported gains for one period as compared to prior periods.





As a
result, net earnings increased by $3.2 million to $35.7 million for the nine
months ended September 30, 2009, as compared to the $32.5 million for the nine
months ended September 30, 2008. Earnings from continuing operations was $30.8
million for the nine month period ended September 30, 2009, as compared to $30.0
million for the nine months ended September 30, 2008. Earnings from continuing
operations excludes the operating results and $4.8 million of net gain from the
disposition of six properties sold in 2009, which applicable results have been
included in earnings from discontinued operations for the nine months ended
September 30, 2009 and 2008.





For the
nine months  ended September 30, 2009, FFO increased by $0.2 million
to $38.9 million, as compared to $38.7 million for prior year period, and AFFO
increased by $2.1 million to $39.0 million, as compared to $36.9 million for
prior year period. The increase in FFO for the nine months ended September 30,
2009 was primarily due to the changes in net earnings but excludes a $0.6
million decrease in depreciation and amortization expense and the $2.5 million
increase in gains on dispositions of real estate. The increase in AFFO for the
nine months ended September 30, 2009 also excludes a $0.8 million decrease in
deferred rental revenue, a marginal decrease in net amortization of above-market
and below-market leases and the $1.1 million increase in impairment charges
(which are included in net earnings and FFO but are excluded from
AFFO).





Diluted
earnings per share increased by $0.13 per share to $1.44 per share for the nine
months ended September 30, 2009, as compared to $1.31 per share for the nine
months ended September 30, 2008. Diluted FFO per share increased by $0.01 per
share for the nine months ended September 30, 2009 to $1.57 per share, as
compared to $1.56 per share for the nine months ended September 30, 2008.
Diluted AFFO per share increased by $0.08 per share for the nine months ended
September 30, 2009 to $1.57 per share, as compared to $1.49 per share for the
nine months ended September 30, 2008.




30





LIQUIDITY
AND CAPITAL RESOURCES





Our
principal sources of liquidity are the cash flows from our operations, funds
available under a revolving credit agreement that expires in 2011 and available
cash and cash equivalents. Management believes that our operating cash needs for
the next twelve months can be met by cash flows from operations, borrowings
under our credit agreement and available cash and cash equivalents. There can be
no assurance, however, that our liquidity will not be adversely affected by
developments related to Marketing and the Marketing Leases discussed in “General
- Developments Related to Marketing and the Marketing Leases” above or the other
risk factors described in our filings with the SEC.


Disruptions
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.. As a result of the tightening credit markets, we may not be
able to obtain additional financing on favorable terms, or at all. If one or
more of the financial institutions that supports our credit agreement fails, we
may not be able to find a replacement, which would negatively impact our ability
to borrow under our credit agreement. In addition, if the pressures on credit
continue or worsen, we may not be able to refinance our outstanding debt when
due, which could have a material adverse effect on us.





As of
September 30, 2009, borrowings under the Credit Agreement, described below, were
$154.8 million, bearing interest at a weighted-average effective rate of 2.8%
per annum. The weighted-average effective rate is based on $109.8 million of
LIBOR rate borrowings floating at market rates plus a margin of 1.00% and $45.0
million of LIBOR rate borrowings effectively fixed at 5.44% by an interest rate
Swap Agreement, described below, plus a margin of 1.00%. We are party to a
$175.0 million amended and restated senior unsecured revolving credit agreement
(the “Credit Agreement”) with a group of domestic commercial banks led by
JPMorgan Chase Bank, N.A. (the “Bank Syndicate”) which expires in March 2011.
The Credit Agreement does not provide for scheduled reductions in the principal
balance prior to its maturity. The Credit Agreement permits borrowings at an
interest rate equal to the sum of a base rate plus a margin of 0.0% or 0.25% or
a LIBOR rate plus a margin of 1.0%, 1.25% or 1.5%. The applicable margin is
based on our leverage ratio at the end of the prior calendar quarter, as defined
in the Credit Agreement, and is adjusted effective mid-quarter when our
quarterly financial results are reported to the Bank Syndicate. Based on our
leverage ratio as of September 30, 2009, the applicable margin will remain at
0.0% for base rate borrowings and will be adjusted upward from 1.00% to 1.25%
for LIBOR rate borrowings in November 2009.





Subject to
the terms of the Credit Agreement, we have the option to extend the term of the
Credit Agreement for one additional year to March 2012 and/or, subject to
approval by the Bank Syndicate, increase the amount of the credit facility
available pursuant to the Credit Agreement by $125,000,000 to $300,000,000. We
do not expect to exercise our option to increase the amount of the Credit
Agreement at this time. In addition, based on the current lack of liquidity in
the credit markets, we believe that we would need to renegotiate certain terms
in the Credit Agreement in order to obtain approval from the Bank Syndicate to
increase the amount of the credit facility at this time. No assurance can be
given that such approval from the Bank Syndicate will be obtained on terms
acceptable to us, if at all. The annual commitment fee on the unused Credit
Agreement ranges from 0.10% to 0.20% based on the average amount of borrowings
outstanding. The Credit Agreement contains customary terms and conditions,
including financial covenants such as those requiring us to maintain minimum
tangible net worth, leverage ratios and coverage ratios which may limit our
ability to incur debt or pay dividends The Credit Agreement contains customary
events of default, including change of control, failure to maintain REIT status
and a material adverse effect on our business, assets, prospects or condition.
Any event of default, if not cured or waived, could result in the acceleration
of our indebtedness under our Credit Agreement.




31





We are
party to a $45.0 million LIBOR based interest rate swap agreement with JPMorgan
Chase Bank, N.A. as the counterparty (the “Swap Agreement”), effective through
June 30, 2011. The Swap Agreement is intended to hedge our current exposure to
market interest rate risk by effectively fixing, at 5.44%, the LIBOR component
of the interest rate determined under our existing Credit Agreement or future
exposure to variable interest rate risk due to borrowing arrangements that may
be entered into prior to the expiration of the Swap Agreement. As a result of
the Swap Agreement, as of September 30, 2009, $45.0 million of our LIBOR based
borrowings under the Credit Agreement bear interest at an effective rate of
6.44%.





In order
to partially finance the acquisition of thirty-six properties in September 2009,
we entered into a $25,000,000 three-year Term Loan Agreement with TD Bank (the
“Term Loan Agreement”) which expires in September 2012. The Term Loan Agreement
bears interest at a rate equal to a thirty day Libor rate (subject to a floor of
0.4%) plus a margin of 3.1%. As of September 30, 2009, borrowings under the Term
Loan Agreement were $24,500,000 bearing interest at a rate of 3.5% per annum.
The Term Loan Agreement provides for annual reductions of $780,000 in the
principal balance with a $22,160,000 balloon payment due at maturity. The Term
Loan Agreement contains customary terms and conditions, including financial
covenants such as those requiring us to maintain minimum tangible net worth,
leverage ratios and coverage ratios which may limit our ability to incur debt or
pay dividends. The Term Loan Agreement contains customary events of default,
including change of control, failure to maintain REIT status and a material
adverse effect on our business, assets, prospects or condition. Any event of
default, if not cured or waived, could result in the acceleration of our
indebtedness under the Term Loan Agreement.





Since we
generally lease our properties on a triple-net basis, we do not incur
significant capital expenditures other than those related to acquisitions. As
part of our overall business strategy, we regularly review opportunities to
acquire additional properties and we expect to continue to pursue acquisitions
that we believe will benefit our financial performance. Capital expenditures,
including acquisitions, for the nine months ended September 30, 2009 and 2008
amounted to $54.0 million, and $6.0 million, respectively. To the extent that
our current sources of liquidity are not sufficient to fund capital expenditures
and acquisitions we will require other sources of capital, which may or may not
be available on favorable terms or at all. We may be unable to pursue public
debt or equity offerings until we resolve with the SEC the outstanding comment
regarding disclosure of Marketing’s financial statements and other 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.




32





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 $35.0 million and $34.6
million for the nine months ended September 30, 2009 and 2008, respectively, and
were paid on a quarterly basis during each of those years. We presently intend
to pay common stock dividends of $0.475 per share each quarter ($1.90 per share,
or $47.2 million, on an annual basis including dividend equivalents paid on
outstanding restricted stock units), and commenced doing so with the quarterly
dividend declared in August 2009. Due to the developments related to Marketing
and the Marketing Leases discussed in “General - Developments Related to
Marketing and the Marketing Leases” above, there can be no assurance that we
will be able to continue to pay dividends at the rate of $0.475 per share per
quarter, if at all.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





Our
accompanying unaudited interim consolidated financial statements include the
accounts of Getty Realty Corp. and our wholly-owned subsidiaries. The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
In 2009 Financial Accounting Standards Board (“FASB”) established the Accounting
Standards Codification, as amended (the “ASC”), as the reference source of
authoritative accounting principles recognized by the FASB to be applied by
non-governmental entities in the preparation of financial statements in
conformity with GAAP. The preparation of financial statements in accordance with
GAAP requires management to make estimates, judgments and assumptions that
affect the amounts reported in its financial statements. Although we have made
our best estimates, judgments and assumptions regarding future uncertainties
relating to the information included in our financial statements, giving due
consideration to the accounting policies selected and materiality, actual
results could differ from these estimates, judgments and assumptions and such
differences could be material.





Estimates,
judgments and assumptions underlying the accompanying consolidated financial
statements include, but are not limited to, deferred rent receivable, income
under direct financing leases, recoveries from state underground storage tank
funds, environmental remediation costs, real estate, depreciation and
amortization, impairment of long-lived assets, litigation, accrued expenses,
income taxes, allocation of the purchase price of properties acquired to the
assets acquired and liabilities assumed and exposure to paying an earnings and
profits deficiency dividend. The information included in our financial
statements that is based on estimates, judgments and assumptions is subject to
significant change and is adjusted as circumstances change and as the
uncertainties become more clearly defined. Our accounting policies are described
in note 1 to the consolidated financial statements that appear in our Annual
Report on Form 10-K for the year ended December 31, 2008. We believe that the
more critical of our accounting policies relate to revenue recognition and
deferred rent receivable and related reserves, impairment of long-lived assets,
income taxes, environmental costs and recoveries from state underground storage
tank funds and litigation, each of which is discussed in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in our
Annual Report on Form 10-K for the year ended December 31, 2008.




33





Recent
Accounting Developments and Amendments to the Accounting Standards Codification
— In September 2006, the FASB amended the accounting standards related to fair
value measurements of assets and liabilities (the “Fair Value Measurements
Amendment”). The Fair Value Measurements Amendment generally applies whenever
other standards require assets or liabilities to be measured at fair value. The
Fair Value Measurements Amendment was effective in fiscal years beginning after
November 15, 2007. The FASB subsequently delayed the effective date of the Fair
Value Measurements Amendment by one year for nonfinancial assets and liabilities
that are recognized or disclosed at fair value in the financial statements on a
nonrecurring basis to fiscal years beginning after November 15, 2008. The
adoption of the Fair Value Measurements Amendment in January 2008 and the
adoption of the provisions of the Fair Value Measurements Amendment for
nonfinancial assets and liabilities that are recognized or disclosed at fair
value on a nonrecurring basis in January 2009 did not have a material impact on
our financial position and results of operations. We do not believe that the
adoption of the provisions of the Fair Value Measurements Amendment for
nonfinancial assets and liabilities that are recognized or disclosed at fair
value on a nonrecurring basis will have a material impact on our financial
position and results of operations.





In
December 2007, the FASB amended the accounting standards related to business
combinations (the Business Combinations Amendment”), affecting how the acquirer
shall recognize and measure in its financial statements at fair value the
identifiable assets acquired, liabilities assumed, any noncontrolling interest
in the acquiree and goodwill acquired in a business combination. The Business
Combinations Amendment requires that acquisition costs, which could be material
to our future financial results, will be expensed rather than included as part
of the basis of the acquisition. The adoption of this standard by us on January
1, 2009 did not result in a write-off of acquisition related transactions costs
associated with transactions not yet consummated.





ENVIRONMENTAL
MATTERS





General





We are
subject to numerous existing federal, state and local laws and regulations,
including matters relating to the protection of the environment such as the
remediation of known contamination and the retirement and decommissioning or
removal of long-lived assets including buildings containing hazardous materials,
USTs and other equipment. Our tenants are directly responsible for compliance
with various environmental laws and regulations as the operators of our
properties. Environmental expenses are principally attributable to remediation
costs which include installing, operating, maintaining and decommissioning
remediation systems, monitoring contamination, and governmental agency reporting
incurred in connection with contaminated properties. We seek reimbursement from
state UST remediation funds related to these environmental expenses where
available.





We enter
into leases and various other agreements which allocate responsibility for known
and unknown environmental liabilities by establishing the percentage and method
of allocating responsibility between the parties. In accordance with the leases
with certain of our tenants, we have agreed to bring the leased properties with
known environmental contamination to within applicable standards and to
regulatory or contractual closure (“Closure”). Generally, upon achieving Closure
at an individual property, our environmental liability under the lease for that
property will be satisfied and future remediation obligations will be the
responsibility of our tenant. As of September 30, 2009, we have regulatory
approval for remediation action plans in place for two hundred forty-five (95%)
of the two hundred fifty-eight properties for which we continue to retain
remediation responsibility and the remaining thirteen properties (5%) were in
the assessment phase. In addition, we have nominal post-closure compliance
obligations at twenty-two properties where we have received “no further action”
letters.




34





Our
tenants are directly responsible to pay for (i) remediation of environmental
contamination they cause and compliance with various environmental laws and
regulations as the operators of our properties, and (ii) environmental
liabilities allocated to our tenants under the terms of our leases and various
other agreements between our tenants and us. Generally, the liability for the
retirement and decommissioning or removal of USTs and other equipment is the
responsibility of our tenants. We are contingently liable for these obligations
in the event that our tenants do not satisfy their responsibilities. A liability
has not been accrued for obligations that are the responsibility of our tenants
based on our tenants’ past histories of paying such obligations and/or our
assessment of their respective financial abilities to pay their share of such
costs. However, there can be no assurance that our assessments are correct or
that our tenants who have paid their obligations in the past will continue to do
so.





It is
possible that our assumptions regarding the ultimate allocation methods or share
of responsibility that we used to allocate environmental liabilities may change,
which may result in adjustments to the amounts recorded for environmental
litigation accruals, environmental remediation liabilities and related assets.
We will be required to accrue for environmental liabilities that we believe are
allocable to others under various other agreements if we determine that it is
probable that the counter-party will not meet its environmental obligations. We
may ultimately be responsible to directly pay for environmental liabilities as
the property owner if the counter-party fails to pay them. The ultimate
resolution of these matters could have a material adverse effect on our
business, financial condition, results of operations, liquidity, ability to pay
dividends and/or stock price. (See “— General — Developments related to
Marketing and the Marketing Leases” above for additional
information.)





We have
not accrued for approximately $1.0 million in costs allegedly incurred by the
current property owner in connection with removal of USTs and soil remediation
at a property that was leased to and operated by Marketing. We believe that
Marketing is responsible for such costs under the terms of the Master Lease and
tendered the matter for defense and indemnification from Marketing. Marketing
denied its liability for the claim and its responsibility to defend against, and
indemnify us for, the claim. We filed third party claims against Marketing for
indemnification in this matter.  The property owner’s claim for
reimbursement of costs incurred and our claim for indemnification by Marketing
were actively litigated, leading to a trial held before a judge The trial court
issued its decision in August 2009 under which the Company and Marketing were
held jointly and severally responsible to the current property owner for the
costs incurred by the owner to remove USTs and remediate contamination at the
site, but, as between the Company and Marketing, Marketing was accountable for
such costs under the indemnification provisions of the Master Lease. We believe
that Marketing will appeal the decision; however, we believe the probability
that Marketing will not be ultimately responsible for the claim for clean-up
costs incurred by the current property owner is remote. It is reasonably
possible that our assumption that Marketing will be ultimately responsible for
the claim may change, which may result in our providing an accrual for this and
possibly other matters.




35





We have
also agreed to provide limited environmental indemnification to Marketing,
capped at $4.25 million, for certain pre-existing conditions at six of the
terminals we own and lease to Marketing. Under the indemnification agreement,
Marketing is required to pay (and has paid) the first $1.5 million of costs and
expenses incurred in connection with remediating any such pre-existing
conditions, Marketing shares equally with us the next $8.5 million of those
costs and expenses and Marketing is obligated to pay all additional costs and
expenses over $10.0 million. We have accrued $0.3 million as of September 30,
2009 and December 31, 2008 in connection with this indemnification agreement.
Under the Master Lease, we continue to have additional ongoing environmental
remediation obligations for one hundred ninety-two scheduled sites.





As the
operator of our properties under the Marketing Leases, Marketing is directly
responsible to pay for the remediation of environmental contamination it causes
and to comply with various environmental laws and regulations. In addition, the
Marketing Leases and various other agreements between Marketing and us allocate
responsibility for known and unknown environmental liabilities between Marketing
and us relating to the properties subject to the Marketing Leases. Based on
various factors, including our assessments and assumptions at this time that
Lukoil would not allow Marketing to fail to perform its obligations under the
Marketing Leases, we believe that Marketing will continue to pay for
substantially all environmental contamination and remediation costs allocated to
it under the Marketing Leases. It is possible that our assumptions regarding the
ultimate allocation methods or 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 may ultimately be responsible to
directly pay for environmental liabilities as the property owner if Marketing
fails to pay them. We are required to accrue for environmental liabilities that
we believe are allocable to Marketing under the Marketing Leases and various
other agreements if we determine that it is probable that Marketing will not pay
its environmental obligations and we can reasonably estimate the amount of the
Marketing Environmental Liabilities for which we will be directly responsible to
pay.





Based on
our assessment of Marketing’s financial condition and our assumption that Lukoil
would not allow Marketing to fail to perform its obligations under the Marketing
Leases and certain other factors, including but not limited to those described
above, we believe at this time that it is not probable that Marketing will not
pay the environmental liabilities allocable to it under the Marketing Leases and
various other agreements and, therefore, have not accrued for such environmental
liabilities. Our assessments and assumptions that affect the recording of
environmental liabilities related to the properties subject to the Marketing
Leases are reviewed on a quarterly basis and such assessments and assumptions
are subject to change.




36





We have
determined that the aggregate amount of the environmental liabilities
attributable to Marketing related to our properties (as estimated by us based on
our assumptions and our analysis of information currently available to us) (the
“Marketing Environmental Liabilities”) could be material to us if we were
required to accrue for all of the Marketing Environmental Liabilities in the
future since we believe that it is reasonably possible that as a result of such
accrual, we may not be in compliance with the existing financial covenants in
our Credit Agreement and our Term Loan Agreement. Such non-compliance could
result in an event of default under the Credit Agreement and our Term Loan
Agreement which, if not cured or waived, could result in the acceleration of our
indebtedness under the Credit Agreement and the Term Loan Agreement. (See “—
General — Developments related to Marketing and the Marketing Leases” above for
additional information.)





The
estimated future costs for known environmental remediation requirements are
accrued when it is probable that a liability has been incurred and a reasonable
estimate of fair value can be made. Environmental liabilities and related
recoveries are measured based on their expected future cash flows which have
been adjusted for inflation and discounted to present value. The environmental
remediation liability is estimated based on the level and impact of
contamination at each property and other factors described herein. The accrued
liability is the aggregate of the best estimate for the fair value of cost for
each component of the liability. Recoveries of environmental costs from state
UST remediation funds, with respect to both past and future environmental
spending, are accrued at fair value as an offset to environmental expense, net
of allowance for collection risk, based on estimated recovery rates developed
from our experience with the funds when such recoveries are considered
probable.





Environmental
exposures are difficult to assess and estimate for numerous reasons, including
the extent of contamination, alternative treatment methods that may be applied,
location of the property which subjects it to differing local laws and
regulations and their interpretations, as well as the time it takes to remediate
contamination. In developing our liability for probable and reasonably estimable
environmental remediation costs on a property by property basis, we consider
among other things, enacted laws and regulations, assessments of contamination
and surrounding geology, quality of information available, currently available
technologies for treatment, alternative methods of remediation and prior
experience. Environmental accruals are based on estimates which are subject to
significant change, and are adjusted as the remediation treatment progresses, as
circumstances change and as environmental contingencies become more clearly
defined and reasonably estimable.





As of
September 30, 2009, we had accrued $14.6 million as management’s best estimate
of the net fair value of reasonably estimable environmental remediation costs
which is comprised of $18.7 million of estimated environmental obligations and
liabilities offset by $4.1 million of estimated recoveries from state UST
remediation funds, net of allowance. Environmental expenditures, net of
recoveries from UST funds, were $2.3 million and $3.4 million, respectively, for
the nine months ended September 30, 2009 and 2008. For the nine months ended
September 30, 2009 and 2008, the net change in estimated remediation cost and
accretion expense included in environmental expenses in continuing operations in
our consolidated statements of operations amounted to $3.4 million and $2.8
million, respectively, which amounts were net of probable recoveries from state
UST remediation funds.




37





Environmental
liabilities and related assets are currently measured at fair value based on
their expected future cash flows which have been adjusted for inflation and
discounted to present value. We also use probability weighted alternative cash
flow forecasts to determine fair value. We assumed a 50% probability factor that
the actual environmental expenses will exceed engineering estimates for an
amount assumed to equal one year of net expenses aggregating $5.9 million.
Accordingly, the environmental accrual as of September 30, 2009 was increased by
$2.3 million, net of assumed recoveries and before inflation and present value
discount adjustments. The resulting net environmental accrual as of September
30, 2009 was then further increased by $1.0 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 $2.1 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 September 30, 2009 would have increased by
$0.2 million and $0.1 million, respectively, for an aggregate increase in the
net environmental accrual of $0.3 million. However, the aggregate net change in
environmental estimates expense recorded during the nine months  ended
September 30, 2009 would not have changed significantly if these changes in the
assumptions were made effective December 31, 2008.





In view of
the uncertainties associated with environmental expenditures, contingencies
concerning the developments related to Marketing and the Marketing Leases and
contingencies related to other parties, however, we believe it is possible that
the fair value of future actual net expenditures could be substantially higher
than these estimates. (See “— General — Developments related to Marketing and
the Marketing Leases” above for additional information.) Adjustments to accrued
liabilities for environmental remediation costs will be reflected in our
financial statements as they become probable and a reasonable estimate of fair
value can be made. Future environmental costs could cause a material adverse
effect on our business, financial condition, results of operations, liquidity,
ability to pay dividends and/or stock price.





We cannot
predict what environmental legislation or regulations may be enacted in the
future or how existing laws or regulations will be administered or interpreted
with respect to products or activities to which they have not previously been
applied. We cannot predict if state UST fund programs will be administered and
funded in the future in a manner that is consistent with past practices and if
future environmental spending will continue to be eligible for reimbursement at
historical recovery rates under these programs. Compliance with more stringent
laws or regulations, as well as more vigorous enforcement policies of the
regulatory agencies or stricter interpretation of existing laws, which may
develop in the future, could have an adverse effect on our financial position,
or that of our tenants, and could require substantial additional expenditures
for future remediation.





Environmental
litigation





We are
subject to various legal proceedings and claims which arise in the ordinary
course of our business. In addition, we have retained responsibility for certain
legal proceedings and claims relating to the petroleum marketing business that
were identified at the time of the Spin-Off. As of September 30, 2009 and
December 31, 2008, we had accrued $1.7 million for certain of these matters
which we believe were appropriate based on information then currently available.
It is possible that our assumptions regarding the ultimate allocation method and
share of responsibility that we used to allocate environmental liabilities may
change, which may result in our providing an accrual, or adjustments to the
amounts recorded, for environmental litigation accruals. Matters related to the
Lower Passaic River and the MTBE multi-district litigation, in particular, for
which accruals have not been provided could cause a material adverse effect on
our business, financial condition, results of operations, liquidity, ability to
pay dividends and/or stock price. (For additional information with respect to
pending environmental lawsuits and claims, including those matters specifically
referenced above, see “Item 3. Legal Proceedings” which appears in our Annual
Report on Form 10-K for the year ended December 31, 2008 and “Part II, Item 1.
Legal Proceedings” which appears in this Form 10-Q.)




38





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 Marketing
is dependent on Lukoil to meet its obligations as they become due and that it is
probable that Lukoil will continue to provide financial support to
Marketing in the future and 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 prior decision
to attempt to negotiate with Marketing for a modification of the Marketing
Leases which removes the Subject Properties or other properties from the
Marketing Leases; our ability to predict if, or when, the Marketing Leases will
be modified or terminated, the terms of any such modification or termination or
what actions Marketing and Lukoil will take and what our recourse will be
whether the Marketing Leases are modified or terminated or not; our belief that
it is not probable that we will not collect the deferred rent receivable related
to the Remaining Properties; the adequacy of our current and anticipated cash
flows from operations, borrowings under our credit agreement and available cash
and cash equivalents; our ability to relet properties at market rents (either as motor fuel outlets or for other commercial
uses)or sell properties; our
expectations regarding future acquisitions; our ability to maintain our REIT
status; the probable outcome of litigation or regulatory actions, including our
belief that Marketing is responsible for certain environmental remediation
costs; our expected recoveries from UST funds; our exposure to environmental
remediation costs; our estimates regarding remediation costs; our expectations
as to the long-term effect of environmental liabilities on our business,
financial condition, results of operations, liquidity, ability to pay dividends
and stock price; our exposure to interest rate fluctuations and the manner in
which we expect to manage this exposure; the expected reduction in interest-rate
risk resulting from our Swap Agreement and our expectation that we will not
settle the Swap Agreement prior to its maturity; the expectation that the Credit
Agreement will be refinanced with variable interest-rate debt at its maturity;
our expectations regarding corporate level federal income taxes; the
indemnification obligations of the Company and others; our assessment of the
likelihood of future competition; assumptions regarding the future applicability
of accounting estimates, assumptions and policies; our intention to pay future
dividends and the amounts thereof; and our beliefs about the reasonableness of
our accounting estimates, judgments and assumptions including the estimated net
sales value we expect to receive on the properties where we reduced the carrying
amount of the properties in the second quarter of 2009.




39





These
forward-looking statements are based on our current beliefs and assumptions and
information currently available to us and involve known and unknown risks
(including the risks described herein, those described in “Developments Related
to Marketing and the Marketing Leases” herein, and other risks that we describe
from time to time in our filings with the SEC), uncertainties and other factors
which may cause our actual results, performance and achievements to be
materially different from any future results, performance or achievements,
expressed or implied by these forward-looking statements. These factors include,
but are not limited to: risks associated with owning and leasing real estate
generally; dependence on Marketing as a tenant and on rentals from companies
engaged in the petroleum marketing and convenience store businesses; adverse
developments in general business, economic or political conditions; our
unresolved SEC comment; competition for properties and tenants; risk of
performance of our tenants of their lease obligations, tenant non-renewal and
our ability to relet or sell vacant properties; the effects of taxation and
other regulations; potential litigation exposure; costs of completing
environmental remediation and of compliance with environmental regulations;
exposure to counterparty risk; the risk of loss of our management team; the
impact of our electing to be treated as a REIT under the federal income tax
laws, including subsequent failure to qualify as a REIT; risks associated with
owning real estate primarily concentrated in the Northeast and Mid-Atlantic
regions of the United States; risks associated with potential future
acquisitions; losses not covered by insurance; future dependence on external
sources of capital; the risk that our business operations may not generate
sufficient cash for distributions or debt service; our potential inability to
pay dividends; and terrorist attacks and other acts of violence and
war.





As a
result of these and other factors, we may experience material fluctuations in
future operating results on a quarterly or annual basis, which could materially
and adversely affect our business, financial condition, operating results and
stock price. An investment in our stock involves various risks, including those
mentioned above and elsewhere in this report and those that are detailed from
time to time in our other filings with the SEC.





You should
not place undue reliance on forward-looking statements, which reflect our view
only as of the date hereof. We undertake no obligation to publicly release
revisions to these forward-looking statements that reflect future events or
circumstances or reflect the occurrence of unanticipated events.





Item 3. Quantitative and Qualitative Disclosures About Market
Risk





Prior to
April 2006, when we entered into the Swap Agreement with JPMorgan Chase, N.A.
(the “Swap Agreement”), we had not used derivative financial or commodity
instruments for trading, speculative or any other purpose, and had not entered
into any instruments to hedge our exposure to interest rate risk. We do not have
any foreign operations, and are therefore not exposed to foreign currency
exchange rate.




40





We are
exposed to interest rate risk, primarily as a result of our $175.0 million
Credit Agreement and our $25.0 million Term Loan Agreement. We use borrowings
under the Credit Agreement to finance acquisitions and for general corporate
purposes. We used borrowings under the Term Loan Agreement to partially finance
an acquisition in September 2009. Total borrowings outstanding as of September
30, 2009 under the Credit Agreement and the Term Loan Agreement were $154.8
million and $24.5 million, respectively, bearing interest at a weighted-average
rate of 1.7% per annum, or a weighted-average effective rate of 2.9% including
the impact of the Swap Agreement discussed below. The weighted-average effective
rate is based on (i) $109.8 million of LIBOR rate borrowings outstanding under
the Credit Agreement floating at market rates plus a margin of 1.00%, (ii) $45.0
million of LIBOR rate borrowings outstanding under the Credit Agreement
effectively fixed at 5.44% by the Swap Agreement plus a margin of 1.00% and
(iii) $24.5 million of LIBOR based borrowings outstanding under the Term Loan
Agreement floating at market rates (subject to a 30 day LIBOR floor of 0.4%)
plus a margin of 3.1%. Our Credit Agreement, which expires in March 2011,
permits borrowings at an interest rate equal to the sum of a base rate plus a
margin of 0.0% or 0.25% or a LIBOR rate plus a margin of 1.0%, 1.25% or 1.5%.
The applicable margin is based on our leverage ratio at the end of the prior
calendar quarter, as defined in the Credit Agreement, and is adjusted effective
mid-quarter when our quarterly financial results are reported to the Bank
Syndicate. Based on our leverage ratio as of September 30, 2009, the applicable
margin will remain at 0.0% for base rate borrowings and will be adjusted upward
from 1.00% to 1.25% for LIBOR rate borrowings in November 2009.





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 September 30, 2009 has increased significantly, as compared to
December 31, 2008 primarily as a result of the $24.5 million drawn under the
Credit Agreement to partially finance an acquisition in September 2009 and the
$24.5 million borrowings outstanding under the $25.0 million three-year Term
Loan Agreement entered into in September 2009. We entered into a $45.0 million
LIBOR based interest rate Swap Agreement, effective through June 30, 2011, to
manage a portion of our interest rate risk. The Swap Agreement is intended to
hedge $45.0 million of our current exposure to variable interest rate risk by
effectively fixing, at 5.44%, the LIBOR component of the interest rate
determined under our existing Credit Agreement or future exposure to variable
interest rate risk due to borrowing arrangements that may be entered into prior
to the expiration of the Swap Agreement. As a result of the Swap Agreement, as
of September 30, 2009, $45.0 million of our LIBOR based borrowings outstanding
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 aggregate borrowings floating at market rates exceed the $45.0 million
notional amount of the Swap Agreement. As of September 30, 2009, our aggregate
borrowings floating at market rates exceeded the notional amount of the Swap
Agreement by $134.3 million. We do not foresee any significant changes in how we
manage our interest rate risk in the near future.





We entered
into the $45.0 million notional five year interest rate Swap Agreement,
designated and qualifying as a cash flow hedge to reduce our exposure to the
variability in future cash flows attributable to changes in the LIBOR rate. Our
primary objective when undertaking hedging transactions and derivative positions
is to reduce our variable interest rate risk by effectively fixing a portion of
the interest rate for existing debt and anticipated refinancing transactions.
This in turn, reduces the risks that the variability of cash flows imposes on
variable rate debt. Our strategy protects us against future increases in
interest rates. Although the Swap Agreement is intended to lessen the impact of
rising interest rates, it also exposes us to the risk that the other party to
the agreement will not perform, the agreement will be unenforceable and the
underlying transactions will fail to qualify as a highly-effective cash flow
hedge for accounting purposes. Further, there can be no assurance that the use
of an interest rate swap will always be to our benefit. While the use of an
interest rate swap agreement is intended to lessen the adverse impact of rising
interest rates, it also conversely limits the positive impact that could be
realized from falling interest rates with respect to the portion of our variable
rate debt covered by the interest rate swap agreement.




41





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 aggregate average outstanding borrowings under the Credit Agreement and the
Term Loan Agreement projected at $181.2 million for 2009, an increase in market
interest rates of 0.5% for the remainder of 2009 would decrease our 2009 net
income and cash flows by $0.2 million. This amount was determined by calculating
the effect of a hypothetical interest rate change on our aggregate borrowings
floating at market rates that is not covered by our $45.0 million interest rate
Swap Agreement and assumes that the $156.8 million average outstanding
borrowings under the Credit Agreement during the third quarter of 2009 (as
adjusted for the $24.5 million drawn under the Credit Agreement to partially
finance an acquisition in September 2009) plus the $24.4 million average
scheduled outstanding borrowings for the fourth quarter of 2009 under the Term
Loan Agreement is indicative of our future average borrowings for 2009 before
considering additional borrowings required for future acquisitions. The
calculation also assumes that there are no other changes in our financial
structure or the terms of our borrowings. Our exposure to fluctuations in
interest rates will increase or decrease in the future with increases or
decreases in the outstanding amount under our Credit Agreement and decreases in
the outstanding amount under our Term Loan Agreement.





In order
to minimize our exposure to credit risk associated with financial instruments,
we place our temporary cash investments with high-credit-quality institutions.
Temporary cash investments, if any, are currently held in an overnight bank time
deposit with JPMorgan Chase Bank, N.A.





Item 4. Controls and Procedures





The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company’s reports filed or
furnished pursuant to the Exchange Act, of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
Commission’s rules and forms, and that such information is accumulated and
communicated to the Company’s management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.




As
required by the Exchange Act Rule 13a-15(b), the Company has carried out an
evaluation, under the supervision and with the participation of the Company’s
management, including the Company’s Chief Executive Officer and the Company’s
Chief Financial Officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures as of the quarter covered by this
report. Based on the foregoing, the Company’s Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures were effective at the reasonable assurance level as of September 30,
2009.





There have
been no changes in the Company's internal control over financial reporting
during the latest fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.




42




PART II.  OTHER INFORMATION





Item 1.  Legal Proceedings





Please
refer to “Item 3. Legal Proceedings” of our Annual Report on Form 10-K for the
year ended December 31, 2008, and note 3 to our consolidated financial
statements in such Form 10-K, “Part II, Item 1. Legal Proceedings” in our
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009 and
to note 3 to our accompanying unaudited consolidated financial statements which
appear in this Quarterly Report on Form 10-Q, for additional
information.





In
November 2006, an action was commenced by the New Jersey Schools Corporation
(“NJSC”) in the Superior Court of New Jersey, Union County seeking reimbursement
for costs of approximately $1.0 million related to the removal of abandoned USTs
and remediation of soil contamination at a retail motor fuel property that was
acquired from us by eminent domain. Prior to the taking, the property was leased
to and operated by Marketing. We tendered the matter to Marketing for defense
and indemnification. Marketing has declined to accept the tender and has denied
liability for the claim. We have filed a compulsory third party claim against
Marketing seeking defense and indemnification. In July 2007, Marketing filed a
claim against the Company seeking defense and indemnification. The property
owner’s claim for reimbursement of costs incurred and our claim for
indemnification by Marketing were actively litigated, leading to a trial held
before a judge during the first quarter of 2009. The trial court issued its
decision in August 2009 under which the Company and Marketing were held jointly
and severally responsible to the current property owner for the costs incurred
by the owner to remove USTs and remediate contamination at the site, but, as
between the Company and Marketing, Marketing was accountable for such costs
under the indemnification provisions of the Master Lease. Appeals of the
decision can be taken once judgment on the decision is entered, which is
expected in the ordinary course.




Item 1A. Risk Factors





There have
not been any material changes to the information previously disclosed in “Part
I, Item 1A. Risk Factors” which appears in our Annual Report on Form 10-K for
the year ended December 31, 2008 except as follows:





Because our
financial results are materially dependent on the performance of Marketing, in
the event that Marketing does not perform
its rental or environmental obligations under the
Marketing Leases, our business, financial condition, revenues, operating
expenses, results of operations,
liquidity, ability to pay dividends or stock price could be materially
adversely affected. The financial performance of Marketing has been
progressively deteriorating over the past three years, and may deteriorate
further. No assurance can be given that Marketing will have the ability to meet
its obligations under the Marketing Leases.





Our
financial results are materially dependent upon the ability of Marketing to meet
its rental and environmental obligations under the Marketing Leases.  A
substantial portion of our revenues (74% for the three months ended September
30, 2009) are derived from the Marketing Leases. Accordingly, any factor that
adversely affects Marketing’s ability to meet its obligations under the
Marketing Leases may have a material adverse effect on our business, financial
condition, revenues, operating expenses, results of operations, liquidity,
ability to pay dividends or stock price. Marketing has made all required monthly
rental payments under the Marketing Leases when due through November 2009,
although there can be no assurance that it will continue to do so.




43





For the
year ended December 31, 2008, Marketing reported a significant loss,
accelerating a trend of reporting progressively larger losses in recent years.
As a result of Marketing’s significant losses for each of the three years ended
December 2008, 2007 and 2006 and the cumulative impact of those losses on
Marketing’s financial position as of December 31, 2008, Marketing likely
does not have the ability to generate cash flows from its business sufficient to
meet its obligations as they come due in the ordinary course through the term of
the Marketing Leases unless it shows significant improvement in its financial
results or generates sufficient liquidity through the sale of assets or
otherwise, or unless financial support continues to be provided by OAO LUKoil
("Lukoil"), its parent company. We believe that Marketing is dependent on
financial support from Lukoil to meet its obligations as they become due. Lukoil
is not, however, a guarantor of the Marketing Leases.  Even though
Marketing is a wholly-owned subsidiary of Lukoil, and Lukoil has provided
capital to Marketing in the past, there can be no assurance that Lukoil will
provide financial support or additional capital to Marketing in the
future.  If Marketing does not meet its obligations under the
Marketing Leases, our business, financial condition, revenues, operating
expenses, results of operations, liquidity, ability to pay dividends or stock
price may be materially adversely affected.





Although we
periodically receive and review the unaudited financial statements and other
financial information from Marketing, this information is not publicly available
to investors.You will not have
access to financial information about Marketing provided to the Company by
Marketing to allow you to independently assess Marketing’s financial condition
or its ability to satisfy its obligations under the Marketing
Leases.





We
periodically receive and review Marketing’s unaudited financial statements and
other financial information. We receive the financial statements and other
financial information from Marketing pursuant to the terms of the Marketing
Leases. However, the financial statements and other financial information are
not publicly available to investors and the terms of the Marketing Leases
prohibit us from including the financial statements and other financial
information in our Annual Reports on Form 10-K, our Quarterly Reports on Form
10-Q or in our Annual Reports to Shareholders.  The financial
statements and other financial information that we receive from Marketing is
unaudited and neither we, nor our auditors, have been involved with its
preparation and as a result have no assurance as to its correctness or
completeness. You will not have access to financial statements and other
financial information about Marketing provided to us by Marketing to allow you
to independently assess Marketing’s financial condition or its ability to
satisfy its obligations under the Marketing Leases, which may put your
investment in the Company at greater risk of loss.




44





If the Marketing
Leases are modified significantly or
terminated, our business,
financial condition, revenues, operating expenses, results of operations,
liquidity, ability to pay dividends and/or stock price could be materially
adversely affected.





From time
to time we have had discussions with representatives of Marketing regarding
potential modifications to the Marketing Leases. Representatives of Marketing
have also indicated to us that they are considering significant changes to
Marketing’s business model. If Marketing ultimately determines that its business
strategy is to exit all or a portion of the properties it leases from us, it is
our intention to cooperate with Marketing in accomplishing those objectives to
the extent that we determine that it is prudent for us to do so. Any
modification of the Marketing Leases that removes a significant number of
properties from the Marketing Leases would likely significantly reduce the
amount of rent we receive from Marketing and increase our operating expenses. We
cannot accurately predict if, or when, the Marketing Leases will be modified;
what composition of properties, if any, may be considered for removal from the
Master Lease as part of any such modification; or what the terms of any
agreement for modification of the Marketing Leases may be. We also cannot
accurately predict what actions Marketing and Lukoil may take, and what our
recourse may be, whether the Marketing Leases are modified or not.





We intend
either to re-let or sell any properties removed from the Marketing Leases and
reinvest any realized sales proceeds in new properties. We intend to seek
replacement tenants or buyers for properties removed from the Marketing Leases
either individually, in groups of properties, or by seeking a single tenant for
the entire portfolio of properties subject to the Marketing Leases. As permitted
under the terms of the Marketing Leases, Marketing generally can, subject to any
contrary terms under applicable third party leases, use each property for any
lawful purpose, or for no purpose whatsoever. We believe that as of September
30, 2009, Marketing had removed, or has scheduled removal of, the underground
gasoline storage tanks and related equipment at approximately 19% of the
properties subject to the Marketing Leases. In the event that the properties are
removed from the Marketing Leases, we cannot accurately predict if, when, or on
what terms such properties could be re-let or sold. Additionally, with respect
to properties that are vacant or have had underground gasoline storage tanks and
related equipment removed, it may be more difficult or costly to re-let or sell
such properties as gas stations or convenience stores because of capital costs
or possible zoning or permitting rights that are required and may have lapsed
during the period since gasoline was last sold at the property. If the Marketing
Leases are significantly modified or terminated, our business, financial
condition, revenues, operating expenses, results of operations, liquidity,
ability to pay dividends or stock price may be materially adversely
affected.





If it becomes
probable that Marketing will not pay its
environmental obligations, or if we change our assumptions for environmental
liabilities related to the Marketing Leases our business,
financial condition, revenues, operating expenses, results of operations,
liquidity, ability to pay dividends and/or stock price could be materially
adversely affected.




45





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
Marketing Leases 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 pay directly for Marketing Environmental Liabilities as the
property owner if Marketing fails to pay them. We do not maintain pollution
legal liability insurance to protect us from potential future claims for
Marketing Environmental Liabilities. If we incur material environmental
liabilities our business, financial condition, revenues, operating expenses,
results of operations, liquidity, ability to pay dividends or stock price may be
materially adversely affected. We will be required to accrue for Marketing
Environmental Liabilities if we determine that it is probable that Marketing
will not meet its obligations and we can reasonably estimate the amount of the
Marketing Environmental Liabilities for which we will be directly responsible to
pay, or if our assumptions regarding the ultimate allocation methods or share of
responsibility that we used to allocate environmental liabilities changes.
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 September
30, 2009 or December 31, 2008. Nonetheless, we have determined that the
aggregate amount of the Marketing Environmental Liabilities (as estimated by us
based on our assumptions and our analysis of information currently available to
us) could be material to us if we were required to accrue for all of the
Marketing Environmental Liabilities in the future since we believe that it is
reasonably possible that as a result of such accrual, we may not be in
compliance with the existing financial covenants in our Credit Agreement and our
Term Loan Agreement. Such non-compliance could result in an event of default
which, if not cured or waived, could result in the acceleration of all of our
indebtedness under the Credit Agreement and our Term Loan Agreement. If we
determine that it is probable that Marketing will not meet the Marketing
Environmental Liabilities and we accrue for such liabilities, our business,
financial condition, revenues, operating expenses, results of operations,
liquidity, ability to pay dividends or stock price may be materially adversely
affected.




In
2004, we received a comment letter from the Securities and Exchange Commission
that contains one comment that remains unresolved.
  One comment remains
unresolved as part of a periodic review commenced in 2004 by the Division of
Corporation Finance of the Securities and Exchange Commission (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 fiscal 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 cannot accurately predict the
consequences if we are ultimately unable to resolve this outstanding
comment.


Item 4.  Other Information





None.





Item 5.  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.




46





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.BY:
              /s/ Thomas J. Stirnweis(Signature)THOMAS
      J. STIRNWEISVice
      President, Treasurer andChief
      Financial OfficerNovember
      9, 2009


BY:
              /s/ Leo Liebowitz(Signature)LEO
      LIEBOWITZChairman
      and ChiefExecutive
      OfficerNovember
      9, 2009
















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