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, 2008





OR


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





For the
transition period from __________ to __________





Commission
file number 001-13777





GETTY
REALTY CORP.


(Exact
name of registrant as specified in its charter)




MARYLAND
              11-3412575(State
      or other jurisdiction
              (I.R.S.
      Employerof
      incorporation or
              Identification
      No.)organization)


125 Jericho Turnpike, Suite
103


Jericho, New York
11753


(Address
of principal executive offices)


(Zip
Code)





(516) 478 -
5400


(Registrant's
telephone number, including area code)


_________________________________________________________________


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







Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes
[X]  No [   ]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See the definitions of “larger
accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
 Large
Accelerated Filer [   ]    Accelerated Filer
[X]    Non-Accelerated Filer
[   ]    Smaller Reporting Company
[   ]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes
[   ]  No [X]
 
 Registrant
had outstanding 24,765,685 shares of Common Stock, par value $.01 per share, as
of November 5, 2008










GETTY
REALTY CORP.





INDEX




Part I.  FINANCIAL INFORMATION
              Page
      NumberItem 1. Financial Statements (unaudited)Consolidated Balance Sheets as of September 30, 2008 and
      December 31, 2007
              1Consolidated Statements of Operations for
      theThree and Nine Months ended September 30, 2008 and
      2007
              2Consolidated Statements of Comprehensive Income for
      theThree and Nine Months ended September 30, 2008 and
      2007
              3Consolidated Statements of Cash Flows for the
                Nine Months ended September 30, 2008 and
      2007
              4Notes to Consolidated Financial
    Statements
              5Item 2. Management's Discussion and Analysis of Financial
      Condition and Results of Operations
              17Item 3. Quantitative and Qualitative Disclosures about
      Market Risk
              36Item 4. Controls and Procedures
              37Part II. OTHER INFORMATIONItem 1. Legal Proceedings
              39Item 1A.  Risk Factors
              42Item 6. Exhibits
              48Signatures
              49













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,Assets:
            
            2008
            
            
            2007Real
      Estate:Land
            
            $
            221,377
            
            
            $
            222,194Buildings
      and improvements
            
            
            253,500
            
            
            
            252,060474,877
            
            
            
            474,254Less
      – accumulated depreciation and amortization
            
            
            (127,465
            )
            
            
            (122,465
            )Real
      estate, net
            
            
            347,412
            
            
            
            351,789Deferred
      rent receivable (net of allowance of $10,109 as of September 30, 2008 and
      $10,494 as of December 31, 2007)
            
            
            26,200
            
            
            
            24,915Cash
      and cash equivalents
            
            
            6,968
            
            
            
            2,071Recoveries
      from state underground storage tank funds, net
            
            
            4,570
            
            
            
            4,652Mortgages
      and accounts receivable, net
            
            
            1,526
            
            
            
            1,473Prepaid
      expenses and other assets
            
            
            8,528
            
            
            
            12,011Total
      assets
            
            $
            395,204
            
            
            $
            396,911Liabilities
      and Shareholders' Equity:Debt
            
            $
            134,750
            
            
            $
            132,500Environmental
      remediation costs
            
            
            17,827
            
            
            
            18,523Dividends
      payable
            
            
            11,669
            
            
            
            11,534Accounts
      payable and accrued expenses
            
            
            20,659
            
            
            
            22,176Total
      liabilities
            
            
            184,905
            
            
            
            184,733Commitments
      and contingencies
            
            
            --
            
            
            
            --Shareholders'
      equity:Common
      stock, par value $.01 per share; authorized50,000,000
      shares; issued 24,765,685 at September 30, 2008
              and
      24,765,065 at December 31, 2007
            
            
            248
            
            
            
            248Paid-in
      capital
            
            
            258,984
            
            
            
            258,734Dividends
      paid in excess of earnings
            
            
            (46,769
            )
            
            
            (44,505
            )Accumulated
      other comprehensive loss
            
            
            (2,164
            )
            
            
            (2,299
            )Total
      shareholders' equity
            
            
            210,299
            
            
            
            212,178Total
      liabilities and shareholders' equity
            
            $
            395,204
            
            
            $
            396,911










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




- 1-





GETTY REALTY CORP. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTSOF
      OPERATIONS(in
      thousands, except per share amounts)(unaudited)Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenues
      from rental properties
            
            $
            20,354
            
            
            $
            20,035
            
            
            $
            60,832
            
            
            $
            58,082Operating
      expenses:Rental
      property expenses
            
            
            2,256
            
            
            
            2,272
            
            
            
            7,025
            
            
            
            7,059Environmental
      expenses, net
            
            
            2,270
            
            
            
            2,844
            
            
            
            5,039
            
            
            
            6,860General
      and administrative expenses
            
            
            1,483
            
            
            
            1,525
            
            
            
            5,235
            
            
            
            4,758Depreciation
      and amortization expense
            
            
            2,841
            
            
            
            2,588
            
            
            
            8,583
            
            
            
            7,109Total
      expenses
            
            
            8,850
            
            
            
            9,229
            
            
            
            25,882
            
            
            
            25,786Operating
      income
            
            
            11,504
            
            
            
            10,806
            
            
            
            34,950
            
            
            
            32,296Other
      income, net
            
            
            224
            
            
            
            1,417
            
            
            
            652
            
            
            
            1,808Interest
      expense
            
            
            (1,703
            )
            
            
            (2,314
            )
            
            
            (5,349
            )
            
            
            (5,502
            )Earnings
      from continuing operations
            
            
            10,025
            
            
            
            9,909
            
            
            
            30,253
            
            
            
            28,602Discontinued
      operations:Earnings
      from operating activities
            
            
            2
            
            
            
            337
            
            
            
            149
            
            
            
            933Gains
      on dispositions of real estate
            
            
            462
            
            
            
            2,600
            
            
            
            2,093
            
            
            
            3,772Earnings
      from discontinued operations
            
            
            464
            
            
            
            2,937
            
            
            
            2,242
            
            
            
            4,705Net
      earnings
            
            $
            10,489
            
            
            $
            12,846
            
            
            $
            32,495
            
            
            $
            33,307Basic
      earnings per common share:Earnings
      from continuing operations
            
            $
            .40
            
            
            $
            .40
            
            
            $
            1.22
            
            
            $
            1.15Earnings
      from discontinued operations
            
            
            .02
            
            
            
            .12
            
            
            
            .09
            
            
            
            .19Net
      earnings
            
            $
            .42
            
            
            $
            .52
            
            
            $
            1.31
            
            
            $
            1.34Diluted
      earnings per common share:Earnings
      from continuing operations
            
            $
            .40
            
            
            $
            .40
            
            
            $
            1.22
            
            
            $
            1.15Earnings
      from discontinued operations
            
            
            .02
            
            
            
            .12
            
            
            
            .09
            
            
            
            .19Net
      earnings
            
            $
            .42
            
            
            $
            .52
            
            
            $
            1.31
            
            
            $
            1.34Weighted-average
      shares outstanding:Basic
            
            
            24,766
            
            
            
            24,765
            
            
            
            24,766
            
            
            
            24,765Stock
      options and restricted stock units
            
            
            7
            
            
            
            27
            
            
            
            8
            
            
            
            23Diluted
            
            
            24,773
            
            
            
            24,792
            
            
            
            24,774
            
            
            
            24,788Dividends
      declared per share
            
            $
            .470
            
            
            $
            .465
            
            
            $
            1.400
            
            
            $
            1.385










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




- 2-




GETTY REALTY CORP. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OFCOMPREHENSIVE
INCOME


(in
thousands)


(unaudited)


Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      earnings
            
            $
            10,489
            
            
            $
            12,846
            
            
            $
            32,495
            
            
            $
            33,307Other
      comprehensive gain:Net
      unrealized gain (loss) on interest rate swap
            
            
            (76
            )
            
            
            (1,033
            )
            
            
            135
            
            
            
            (403
            )Comprehensive
      income
            
            $
            10,413
            
            
            $
            11,813
            
            
            $
            32,630
            
            
            $
            32,904











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 September 30,2008
            
            
            2007Cash
      flows from operating activities:Net
      earnings
            
            $
            32,495
            
            
            $
            33,307Adjustments
      to reconcile net earnings tonet cash flow provided by operating activities:Depreciation and amortization
      expense
            
            
            8,638
            
            
            
            7,186Gains on dispositions of real
      estate
            
            
            (2,395
            )
            
            
            (5,386
            )Deferred rental
      revenue
            
            
            (1,285
            )
            
            
            (1,922
            )Amortization
      of above-market and below-market leases
            
            
            (600
            )
            
            
            (942
            )Accretion
expense
            
            
            601
            
            
            
            648Stock-based
      employee compensation expense
            
            
            241
            
            
            
            188Changes
      in assets and liabilities:Recoveries from state
      underground storage tank funds, net
            
            
            372
            
            
            
            (287
            )Mortgages and accounts
      receivable, net
            
            
            32
            
            
            
            26Prepaid expenses and other
      assets
            
            
            338
            
            
            
            323Environmental remediation
      costs
            
            
            (1,587
            )
            
            
            1,455Accounts payable and accrued
      expenses
            
            
            (806
            )
            
            
            474Net
      cash flow provided by operating activities
            
            
            36,044
            
            
            
            35,070Cash
      flows from investing activities:Property acquisitions and
      capital expenditures
            
            
            (5,950
            )
            
            
            (89,354
            )Proceeds
      from dispositions of real estate
            
            
            4,272
            
            
            
            7,138(Increase) decrease in cash held
      for property acquisitions
            
            
            2,981
            
            
            
            (1,428
            )Collection of mortgages
      receivable, net
            
            
            (85
            )
            
            
            230Net
      cash flow provided by (used in) investing activities
            
            
            1,218
            
            
            
            (83,414
            )Cash
      flows from financing activities:Borrowings under credit
      agreement, net
            
            
            2,250
            
            
            
            83,650Cash dividends
    paid
            
            
            (34,624
            )
            
            
            (34,112
            )Credit
      agreement origination costs
            
            
            -
            
            
            
            (863
            )Repayment of mortgages
      payable, net
            
            
            -
            
            
            
            (24
            )Proceeds from stock options
      exercised
            
            
            9
            
            
            
            2Net
      cash flow provided by (used in) financing activities
            
            
            (32,365
            )
            
            
            48,653Net
      increase in cash and cash equivalents
            
            
            4,897
            
            
            
            309Cash
      and cash equivalents at beginning of period
            
            
            2,071
            
            
            
            1,195Cash
      and cash equivalents at end of period
            
            $
            6,968
            
            
            $
            1,504Supplemental
      disclosures of cash flow informationCash paid (refunded) during the
      period for:Interest
            
            $
            5,305
            
            
            $
            3,961Income
      taxes, net
            
            
            532
            
            
            
            490Recoveries
      from state underground storage tank funds
            
            
            (1,012
            )
            
            
            (1,244
            )Environmental
      remediation costs
            
            
            4,419
            
            
            
            3,779The
      accompanying notes are an integral part of these consolidated financial
      statements.







- 4-






GETTY REALTY CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





1.  General:


Basis of Presentation: The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
(“GAAP”). The consolidated financial statements include the accounts of Getty
Realty Corp. and its wholly-owned subsidiaries (the "Company"). The Company is a
real estate investment trust (“REIT”) specializing in the ownership and leasing
of retail motor fuel and convenience store properties and petroleum distribution
terminals. The Company manages and evaluates its operations as a single segment.
All significant intercompany accounts and transactions have been
eliminated.





Use of Estimates, Judgments and
Assumptions: The financial statements have been prepared in conformity
with GAAP, which requires the Company’s management to make its best estimates,
judgments and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the period reported.
While all available information has been considered, actual results could differ
from those estimates, judgments and assumptions. Estimates, judgments and
assumptions underlying the accompanying consolidated financial statements
include, but are not limited to, deferred rent receivable, recoveries from state
underground storage tank funds, environmental remediation costs, real estate,
depreciation and amortization, impairment of long-lived assets, litigation,
accrued expenses, and income taxes.





Discontinued Operations: The
operating results and gains from certain dispositions of real estate sold in
2008 and 2007 have been reclassified as discontinued operations. The results of
such properties for the three and nine months ended September 30, 2007 have also
been reclassified to discontinued operations to conform to the 2008
presentation. Discontinued operations for the quarter and nine months ended
September 30, 2008 are primarily comprised of gains from property dispositions.
The revenue from rental properties and expenses related to the operations of
these properties are insignificant for the three and nine months ended September
30, 2008 and 2007.





Unaudited, Interim Financial
Statements: The consolidated financial statements are unaudited but, in
the Company’s opinion, reflect all adjustments (consisting of normal recurring
accruals) necessary for a fair statement of the results for the periods
presented. These statements should be read in conjunction with the consolidated
financial statements and related notes, which appear in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2007.





Earnings per Common Share:
Basic earnings per common share is computed by dividing net earnings by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per common share also gives effect to the potential dilution from the
exercise of stock options and the issuance of common shares in settlement of
restricted stock units utilizing the treasury stock method. For the quarter
ended September 30, 2008, 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.





- 5-




New Accounting
Pronouncements: In September 2006, the Financial Accounting Standards
Board (“FASB”) issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”).
SFAS 157 provides guidance for using fair value to measure assets and
liabilities. SFAS 157 generally applies whenever other standards require assets
or liabilities to be measured at fair value. SFAS 157 is effective in fiscal
years beginning after November 15, 2007, except that the effective date for
non-financial assets and non-financial liabilities that are not recognized or
disclosed at fair value on a recurring basis may be deferred to fiscal years
beginning after November 15, 2008. The adoption of SFAS 157 in January 2008 did
not have a material impact on the Company’s financial position and results of
operations.





In
December 2007, the FASB issued Statement No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”), which establishes principles and requirements for
how the acquirer shall recognize and measure in its financial statements the
identifiable assets acquired, liabilities assumed, any noncontrolling interest
in the acquiree and goodwill acquired in a business combination. SFAS 141(R) is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company is currently assessing the potential impact that
the adoption of SFAS 141(R) will have on its financial position and results of
operations.




2. 
Leases:


The
Company leases or sublets its properties primarily to distributors and retailers
engaged in the sale of gasoline and other motor fuel products, convenience store
products and automotive repair services who are responsible for the payment of
taxes, maintenance, repair, insurance and other operating expenses and for
managing the actual operations conducted at these properties. The Company’s
properties are primarily located in the Northeast and Mid-Atlantic regions of
the United States. The Company also owns or leases properties in Texas, North
Carolina, Hawaii, California, Florida, Arkansas, Illinois, North Dakota and
Ohio.





As of
September 30, 2008, Getty Petroleum Marketing Inc. (“Marketing”) leased from the
Company eight hundred and seventy-three properties. Substantially all of the
properties are leased to Marketing under a unitary master lease (the “Master
Lease”) except for ten properties which 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. See footnote 3 for contingencies
related to Marketing and the Marketing Leases.





3.
Commitments and Contingencies:


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




- 6-





As of
September 30, 2008, the Company leased eight hundred seventy-three of its one
thousand sixty-nine properties on a long-term triple-net basis to Marketing
under the Marketing Leases (see footnote 2). A substantial portion of the
Company’s revenues (75% for the three months ended September 30, 2008), are
derived from the Marketing Leases. Accordingly, the Company’s revenues are
dependent to a large degree on the economic performance of Marketing and of the
petroleum marketing industry, and any factor that adversely affects Marketing,
or the Company’s relationship with Marketing, may have a material adverse effect
on the Company’s business, financial condition, revenues, operating expenses,
results of operations, liquidity, ability to pay dividends and stock price.
Marketing operated substantially all of the Company’s petroleum marketing
businesses when it was spun-off to the Company’s shareholders as a separate
publicly held company in March 1997 (the “Spin-Off”). In December 2000,
Marketing was acquired by a subsidiary of OAO LUKoil (“Lukoil”), one of the
largest integrated Russian oil companies. Even though Marketing is a
wholly-owned subsidiary of Lukoil and Lukoil has provided credit enhancement and
capital to Marketing, Lukoil is not a guarantor of the Marketing Leases and
there can be no assurance that Lukoil is currently providing, or will provide,
any credit enhancement or additional capital to Marketing. The Company’s
financial results depend largely on rental income from Marketing, and to a
lesser extent on rental income from other tenants and; therefore, are materially
dependent upon the ability of Marketing to meet its rental, environmental and
other obligations under the Marketing Leases. Marketing’s financial results
depend largely on retail petroleum marketing margins and rental income from its
sub-tenants who operate their respective convenience stores, automotive repair
services or other businesses at the Company’s properties. The petroleum
marketing industry has been and continues to be volatile and highly competitive.
Marketing has made all required monthly rental payments under the Marketing
Leases when due through November 2008, although there is no assurance that it
will continue to do so.





The
Company has had periodic discussions with representatives of Marketing regarding
potential modifications to the Marketing Leases and, in 2007, during the course
of such discussions, Marketing proposed to (i) remove approximately 40% of the
properties (the “Subject Properties”) from the Marketing Leases and eliminate
payment of rent to the Company, and eliminate or reduce payment of operating
expenses, with respect to the Subject Properties, and (ii) reduce the aggregate
amount of rent payable to the Company for the approximately 60% of the
properties that would remain under the Marketing Leases (the “Remaining
Properties”). Representatives of Marketing have also indicated to the Company
that they are considering significant changes to Marketing’s business model. In
light of these developments and the continued deterioration in Marketing’s
annual financial performance, in March 2008, the Company had decided to attempt
to negotiate with Marketing for a modification of the Marketing Leases which
removes the Subject Properties from the Marketing Leases. In the second quarter
of 2008, Marketing revised the list of properties that it proposed be removed
from the Marketing Leases to include approximately 45% of the properties it
leases from the Company (the “Revised Subject Properties”). The Company
continues its internal review of a number of possible lease modification
proposals to determine, among other things, whether it would be willing to
remove some or all of the Revised Subject Properties from the Marketing
Leases.




- 7-





The
Company has decided to attempt to negotiate with Marketing for a modification of
the Marketing Leases to remove the Subject Properties; however, if Marketing
ultimately determines that its business strategy is to exit all of the
properties it leases from the Company or to divest a composition of properties
different from the properties comprising the Subject Properties (which may
include some or all of the Revised Subject Properties), it is the Company’s
intention to cooperate with Marketing in accomplishing those objectives if the
Company determines that it is prudent for it to do so. Any modification of the
Marketing Leases that removes the Subject Properties or the Revised Subject
Properties from the Marketing Leases would likely significantly reduce the
amount of rent the Company receives from Marketing and increase the Company’s
operating expenses. The Company cannot accurately predict if, or when, the
Marketing Leases will be modified or what the terms of any agreement may be if
the Marketing Leases are modified. The Company also cannot accurately predict
what actions Marketing and Lukoil may take, and what the Company’s recourse may
be, whether the Marketing Leases are modified or not.





Following
any modification of the Marketing Leases, the Company intends either to relet or
sell the properties removed from the Marketing Leases and reinvest the realized
sales proceeds in new properties. The Company intends to seek replacement
tenants or buyers for the properties subject to the Marketing Leases either
individually, in groups of properties, or by seeking a single tenant for the
entire portfolio of properties subject to the Marketing Leases. Although the
Company is the fee or leasehold owner of the properties subject to the Marketing
Leases and the owner of the Getty® brand and has prior experience with tenants
who operate their convenience stores, automotive repair services or other
businesses at its properties; in the event that properties are removed from the
Marketing Leases, the Company cannot accurately predict if, when, or on what
terms, such properties could be re-let or sold.





Due to the
previously disclosed deterioration in Marketing’s annual financial performance,
in conjunction with the Company’s decision to attempt to negotiate with
Marketing for a modification of the Marketing Leases to remove the Subject
Properties, the Company has decided 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 lease terms. In reaching this
conclusion, the Company relied on various indicators, including, but not limited
to, the following financial results of Marketing through the year ending 2007:
(i) Marketing’s significant operating losses, (ii) its negative cash flow from
operating activities, (iii) its asset impairment charges for underperforming
assets, and (iv) its negative earnings before interest, taxes, depreciation,
amortization and rent payable to the Company.





The
Company has reserved $10,109,000 and $10,494,000 as of September 30, 2008 and
December 31, 2007, respectively, of the deferred rent receivable due from
Marketing. The reserve represents the full amount of the deferred rent
receivable recorded related to the Subject Properties as of those respective
dates. Providing the non-cash deferred rent receivable reserve in the fourth
quarter of 2007 reduced the Company’s net earnings but did not impact the
Company’s cash flow from operating activities. The Company has not provided a
deferred rent receivable reserve related to the Remaining Properties since,
based on the Company’s assessments and assumptions, the Company continues to
believe that it is probable that it will collect the deferred rent receivable
related to the Remaining Properties of $22,726,000 as of September 30, 2008 and
that Lukoil will not allow Marketing to fail to perform its rental,
environmental and other obligations under the Marketing Leases. The Company
anticipates that the rental revenue for the Remaining Properties will continue
to be recognized on a straight-line basis. Beginning with the first quarter of
2008, the rental revenue for the Subject Properties was, and for future periods
is expected to be, effectively recognized when payment is due under the
contractual payment terms. Although the Company  has adjusted the
estimated useful lives of certain long-lived assets for the Subject Properties,
the Company believes that no impairment charge was necessary for the Subject
Properties as of September 30, 2008 or December 31, 2007 pursuant to the
provisions of Statement of Financial Accounting Standards No. 144. The impact to
depreciation expense due to adjusting the estimated lives for certain long-lived
assets beginning with the quarter ended March 31, 2008 was not
material.





- 8-


Marketing
is directly responsible to pay for (i) remediation of environmental
contamination it causes and compliance with various environmental laws and
regulations as the operator of the Company’s properties, and (ii) known and
unknown environmental liabilities allocated to Marketing under the terms of the
Master Lease and various other agreements between Marketing and the Company
relating to Marketing’s business and the properties subject to the Marketing
Leases (collectively the “Marketing Environmental Liabilities”). The Company may
ultimately be responsible to directly pay for Marketing Environmental
Liabilities as the property owner if Marketing fails to pay them. Additionally,
the Company will be required to accrue for Marketing Environmental Liabilities
if the Company determines that it is probable that Marketing will not meet its
obligations or if the Company’s assumptions regarding the ultimate allocation
methods and share of responsibility that it used to allocate environmental
liabilities changes as a result of the factors discussed above, or otherwise.
However, the Company continues to believe that it is not probable that Marketing
will not pay for substantially all of the Marketing Environmental Liabilities
since the Company believes that Lukoil will not allow Marketing to fail to
perform its rental, environmental and other obligations under the Marketing
Leases and, accordingly, the Company did not accrue for the Marketing
Environmental Liabilities as of September 30, 2008 or December 31, 2007.
Nonetheless, the Company has determined that the aggregate amount of the
Marketing Environmental Liabilities (as estimated by the Company based on its
assumptions and analysis of information currently available to it) could be
material to the Company if it was required to accrue for all of the Marketing
Environmental Liabilities in the future since the Company believes that it is
reasonably possible that as a result of such accrual, the Company may not be in
compliance with the existing financial covenants in its Credit Agreement. Such
non-compliance could result in an event of default which, if not cured or
waived, could result in the acceleration of all of the Company’s indebtedness
under the Credit Agreement.





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





- 9-




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





The
Company has also agreed to provide limited environmental indemnification to
Marketing, capped at $4,250,000 and expiring in 2010, for certain pre-existing
conditions at six of the terminals which are owned by the Company and leased to
Marketing. Under the agreement, Marketing is obligated to pay the first
$1,500,000 of costs and expenses incurred in connection with remediating any
such pre-existing conditions, Marketing and the Company will share equally the
next $8,500,000 of those costs and expenses and Marketing is obligated to pay
all additional costs and expenses over $10,000,000. The Company has accrued
$300,000 as of September 30, 2008 and December 31, 2007 in connection with this
indemnification agreement.





The
Company is subject to various legal proceedings and claims which arise in the
ordinary course of its business. In addition, the Company has retained
responsibility for certain legal proceedings and claims relating to the
petroleum marketing business that were identified at the time of the Spin-Off.
As of September 30, 2008 and December 31, 2007, the Company had accrued
$1,671,000 and $2,575,000, respectively, for certain of these matters which it
believes were appropriate based on information then currently available. The
Company has not accrued for approximately $950,000 in costs allegedly incurred
by the current property owner in connection with removal of underground storage
tanks (“USTs” or “UST”) and soil remediation at a property that had been leased
to and operated by Marketing. 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 has denied its
liability for the claim and its responsibility to defend against and indemnify
the Company for the claim. The Company has filed a third party claim against
Marketing for indemnification in this matter, which claim is currently being
actively litigated. Trial is anticipated to be scheduled for the first quarter
of 2009. It is possible that the Company’s assumption that Marketing will be
ultimately responsible for this claim may change, which may result in the
Company providing an accrual for this and other matters.





- 10-




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 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. 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 2008, the Company was notified that the Company
was made party to fifty-two cases in Connecticut, Florida, Massachusetts, New
Hampshire, New Jersey, New York, Pennsylvania, Vermont, Virginia and West
Virginia brought by local water providers or governmental agencies. These cases
allege various theories of liability due to contamination of groundwater with
MTBE as the basis for claims seeking compensatory and punitive damages. Each
case names as defendants approximately fifty petroleum refiners, manufacturers,
distributors and retailers of MTBE, or gasoline containing MTBE. At this time,
the Company has been dismissed from eight of the cases initially filed against
it. 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
these matters could cause a material adverse effect on the Company’s business,
financial condition, results of operations, liquidity, ability to pay dividends
and stock price.





Prior to
the Spin-Off, the Company was self-insured for workers’ compensation, general
liability and vehicle liability up to predetermined amounts above which
third-party insurance applies. As of September 30, 2008 and December 31, 2007,
the Company’s consolidated balance sheets included, in accounts payable and
accrued expenses, $290,000 and $310,000, respectively, relating to
self-insurance obligations. The Company estimates its loss reserves for claims,
including claims incurred but not reported, by utilizing actuarial valuations
provided annually by its insurance carriers. The Company is required to deposit
funds for substantially all of these loss reserves with its insurance carriers,
and may be entitled to refunds of amounts previously funded, as the claims are
evaluated on an annual basis. The Company’s consolidated statements of
operations for the nine months ended September 30, 2008 and 2007 include, in
general and administrative expenses, a credit of $72,000 and a charge of
$81,000, respectively, for self-insurance loss reserve adjustments. Since the
Spin-Off, the Company has maintained insurance coverage subject to certain
deductibles.





- 11-




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





4.
Credit and Interest Rate Swap Agreements


As of
September 30, 2008, borrowings under the Credit Agreement, described below, were
$134,750,000, bearing interest at a weighted-average effective rate of 4.7% per
annum. The weighted-average effective rate is based on $89,750,000 of LIBOR rate
borrowings floating at market rates plus a margin of 1.25% and $45,000,000 of
LIBOR rate borrowings effectively fixed at 5.44% by an interest rate Swap
Agreement, described below, plus a margin of 1.25%.





The
Company has 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, 2008, the applicable margin is 0.0% for base rate borrowings and
will decrease to 1.0% in the fourth quarter for LIBOR rate
borrowings.





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 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 annual
commitment fee on the unused Credit Agreement ranges from 0.10% to 0.20% based
on the amount of borrowings. The Credit Agreement contains customary terms and
conditions, including customary financial covenants such as leverage and
coverage ratios and other customary covenants, including limitations on the
Company’s ability to incur debt, pay dividends and maintenance of tangible net
worth, and events of default, including change of control and failure to
maintain REIT status. A material adverse effect on the Company’s business,
assets, prospects or condition, financial or otherwise, would also result in an
event of default. Any event of default, if not cured or waived, could result in
the acceleration of all of the Company’s indebtedness under the Credit
Agreement.





The
Company entered into a $45,000,000 LIBOR based interest rate swap agreement with
JPMorgan Chase Bank, N.A. as the counterparty, 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, 2008,
$45,000,000 of the Company’s LIBOR based borrowings under the Credit Agreement
bear interest at an effective rate of 6.69%.





- 12-




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, 2008 and December 31, 2007, that the
derivative used in the hedging transaction is highly effective in offsetting
changes in cash flows associated with the hedged item and that no gain or loss
was required to be recognized in earnings during the nine months ended September
30, 2008 or 2007 representing the hedge’s ineffectiveness. At September 30, 2008
and December 31, 2007, the Company’s consolidated balance sheets include, in
accounts payable and accrued expenses, an obligation for the fair value of the
Swap Agreement of $2,164,000 and $2,299,000, respectively. For the nine months
ended September 30, 2008 and 2007, the Company has recorded a gain (loss) in the
fair value of the Swap Agreement related to the effective portion of the
interest rate contract totaling $135,000 and $(403,000), respectively, in
accumulated other comprehensive loss in the Company’s consolidated balance
sheet. The accumulated comprehensive loss will be recognized as an increase in
interest expense as quarterly payments are made to the counter-party over the
remaining term of the Swap Agreement since it is expected that the Credit
Agreement will be refinanced with variable interest rate debt at its
maturity.





The
valuation of the Swap Agreement is determined using (i) a discounted cash flow
analysis on the expected cash flows of the Swap Agreement, which is based on
market data obtained from sources independent of the Company consisting of
interest rates and yield curves that are observable at commonly quoted intervals
and are defined by GAAP as “Level 2” inputs in the “Fair Value Hierarchy”, and
(ii) credit valuation adjustments, which are based on unobservable “Level 3”
inputs. As of September 30, 2008, accordingly, the Company classified its
valuation of the Swap Agreement in its entirety within Level 2 of the Fair Value
Hierarchy since the credit valuation adjustments are not significant to the
overall valuation of the Swap Agreement.





5.  Environmental
Expenses


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





The
Company enters into leases and various other agreements which allocate
responsibility for known and unknown environmental liabilities by establishing
the percentage and method of allocating responsibility between the parties. In
accordance with the leases with certain tenants, the Company has agreed to bring
the leased properties with known environmental contamination to within
applicable standards and to regulatory or contractual closure (“Closure”) in an
efficient and economical manner. Generally, upon achieving Closure at each
individual property, the Company’s environmental liability under the lease for
that property will be satisfied and future remediation obligations will be the
responsibility of the Company’s tenant. Generally the liability for the
retirement and decommissioning or removal of USTs and other equipment is the
responsibility of the Company’s tenants. The Company is contingently liable for
these obligations in the event that the tenants do not satisfy their
responsibilities. A liability has not been accrued for obligations that are the
responsibility of the Company’s tenants based on the tenants’ history of paying
such obligations and/or their financial ability to pay their share of such
costs.





- 13-




Of the
eight hundred seventy-three properties leased to Marketing as of September 30,
2008, the Company has agreed to pay all costs relating to, and to indemnify
Marketing for, certain environmental liabilities and obligations at one hundred
ninety-six 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 will be required to accrue for environmental
liabilities that the Company believes are allocable to others under various
other agreements if the Company determines that it is probable that the
counter-party will not meet its environmental obligations. The ultimate
resolution of these matters could cause a material adverse effect on the
Company’s business, financial condition, results of operations, liquidity,
ability to pay dividends and stock price. See footnote 3 for contingencies
related to Marketing and the Marketing Leases.





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





Environmental
exposures are difficult to assess and estimate for numerous reasons, including
the extent of contamination, alternative treatment methods that may be applied,
location of the property which subjects it to differing local laws and
regulations and their interpretations, as well as the time it takes to remediate
contamination. In developing the Company’s liability for probable and reasonably
estimable environmental remediation costs, on a property by property basis, the
Company considers among other things, enacted laws and regulations, assessments
of contamination and surrounding geology, quality of information available,
currently available technologies for treatment, alternative methods of
remediation and prior experience. These accrual estimates are subject to
significant change, and are adjusted as the remediation treatment progresses, as
circumstances change and as these contingencies become more clearly defined and
reasonably estimable. As of September 30, 2008, the Company had regulatory
approval for remediation action plans in place for two hundred fifty-five (94%)
of the two hundred seventy-one properties for which it continues to retain
environmental responsibility and the remaining sixteen properties (6%) remain in
the assessment phase. In addition, the Company has nominal post-closure
compliance obligations at twenty-two properties where it has received “no
further action” letters.





- 14-




Environmental
remediation liabilities and related assets are measured at fair value based on
their expected future cash flows which have been adjusted for inflation and
discounted to present value. The net change in estimated remediation cost and
accretion expense included in environmental expenses in the Company’s
consolidated statements of operations aggregated $2,801,000 and $4,350,000 for
the nine months ended September 30, 2008 and 2007, respectively, which amounts
were net of changes in estimated recoveries from state UST remediation funds. In
addition to net change in estimated remediation costs, environmental expenses
also include project management fees, legal fees and provisions for
environmental litigation loss reserves.





As of
September 30, 2008 and December 31, 2007 and 2006, the Company had accrued
$17,827,000, $18,523,000 and $17,201,000, respectively, as management’s best
estimate of the fair value of reasonably estimable environmental remediation
costs. As of September 30, 2008 and December 31, 2007 and 2006, the Company had
also recorded $4,570,000, $4,652,000 and $3,845,000, respectively, as
management’s best estimate for recoveries from state UST remediation funds, net
of allowance, related to environmental obligations and liabilities. The net
environmental liabilities of $13,871,000 and $13,356,000 as of December 31, 2007
and 2006, respectively, were subsequently accreted for the change in present
value due to the passage of time and, accordingly, $601,000 and $648,000 of net
accretion expense has been recorded during the nine months ended September 30,
2008 and 2007, 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 footnote 3 for contingencies related to
Marketing and the Marketing Leases. Adjustments to accrued liabilities for
environmental remediation costs will be reflected in the Company’s financial
statements as they become probable and a reasonable estimate of fair value can
be made. Future environmental expenses could cause a material adverse effect on
our business, financial condition, results of operations, liquidity, ability to
pay dividends and stock price.





- 15-





6.  Shareholders’
Equity


A summary
of the changes in shareholders' equity for the nine months ended September 30,
2008 is as follows (in thousands, except share amounts)





Dividends
            
            
            AccumulatedPaid
      In
            
            
            OtherCommon
      Stock
            
            
            Paid-in
            
            
            Excess
      Of
            
            
            ComprehensiveShares
            
            
            Amount
            
            
            Capital
            
            
            Earnings
            
            
            Loss
            
            
            TotalBalance,
      December 31, 2007
            
            
            24,765,065
            
            
            $
            248
            
            
            $
            258,734
            
            
            $
            (44,505
            )
            
            $
            (2,299
            )
            
            $
            212,178Net
      earnings
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            32,495
            
            
            
            
            
            
            
            32,495Dividends
      declared
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (34,759
            )
            
            
            
            
            
            
            (34,759
            )Stock-based
      employee
              compensation
      expense
            
            
            
            
            
            
            
            
            
            
            239
            
            
            
            
            
            
            
            
            
            
            
            239Net
      unrealized gain on
              interest
      rate swap
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            135
            
            
            
            135Stock
      issued
            
            
            620
            
            
            
            -
            
            
            
            11
            
            
            
            
            
            
            
            
            
            
            
            11Balance,
      September 30, 2008
            
            
            24,765,685
            
            
            $
            248
            
            
            $
            258,984
            
            
            $
            (46,769
            )
            
            $
            (2,164
            )
            
            $
            210,299


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, 2008 or December
31, 2007.




- 16-




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





This
discussion and analysis of financial condition and results of operations should
be read in conjunction with the sections entitled “Part I, Item 1A. Risk
Factors” and “Part II, Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” which appear in our Annual Report on Form
10-K for the year ended December 31, 2007, and “Part I, Item 1. Financial
Statements and “Part II, Item 1A. Risk Factors,” which appear in this Quarterly
Report on Form 10-Q.”





General





Real
Estate Investment Trust


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





Retail
Petroleum Marketing Business


We lease
or sublet our properties primarily to distributors and retailers engaged in the
sale of gasoline and other motor fuel products, convenience store products and
automotive repair services. These tenants are responsible for the payment of
taxes, maintenance, repair, insurance and other operating expenses and for
managing the actual operations conducted at these properties. As of September
30, 2008, we leased eight hundred seventy-three of our one thousand sixty-nine
properties on a long-term basis principally under a unitary master lease (the
“Master Lease”) with an initial term effective through December 2015 and
supplemental leases for ten properties with initial terms of varying expiration
dates (collectively with the Master Lease, the “Marketing Leases”) to our
primary tenant, Getty Petroleum Marketing Inc. (“Marketing”) Marketing was
spun-off to our shareholders as a separate publicly held company in March 1997
and, in December 2000, Marketing was acquired by a subsidiary of OAO LUKoil
(“Lukoil”), one of the largest integrated Russian oil companies.





Marketing’s
financial results depend largely on retail petroleum marketing margins from the
sale of refined petroleum products at margins in excess of its fixed and
variable expenses and rental income from subtenants who operate their
convenience stores, automotive repair service or other businesses at our
properties. The petroleum marketing industry has been and continues to be
volatile and highly competitive. For information regarding factors that could
adversely affect us relating to Marketing, or our other lessees, see “Part I,
Item 1A. Risk Factors” in our 2007 Annual Report on Form 10-K and “Part II, Item
1A. Risk Factors,” which appears in this Quarterly Report on Form
10-Q.





Developments
Related to Marketing and the Marketing Leases


A
substantial portion of our revenues (75% for the three months ended September
30, 2008) are derived from the Marketing Leases. Accordingly, our revenues are
dependent to a large degree on the economic performance of Marketing and of the
petroleum marketing industry, and any factor that adversely affects Marketing,
or our relationship with Marketing, may have a material adverse effect on our
business, financial condition, revenues, operating expenses, results of
operations, liquidity, ability to pay dividends and stock price. Through
November 2008, Marketing has made all required monthly rental payments under the
Marketing Leases when due, although there is no assurance that it will continue
to do so. Even though Marketing is wholly-owned by a subsidiary of Lukoil, and
Lukoil has provided credit enhancement and capital to Marketing, Lukoil is not a
guarantor of the Marketing Leases and there can be no assurance that Lukoil is
currently providing, or will provide, any credit enhancement or additional
capital to Marketing.




- 17-





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





We have
had periodic discussions with representatives of Marketing regarding potential
modifications to the Marketing Leases and, in 2007, during the course of such
discussions, Marketing proposed to (i) remove approximately 40% of the
properties (the “Subject Properties”) from the Marketing Leases and eliminate
payment of rent to us, and eliminate or reduce payment of operating expenses,
with respect to the Subject Properties, and (ii) reduce the aggregate amount of
rent payable to us for the approximately 60% of the properties that would remain
under the Marketing Leases (the “Remaining Properties”). Representatives of
Marketing have also indicated to us that they are considering significant
changes to Marketing’s business model. In light of these developments and the
continued deterioration in Marketing’s annual financial performance (as
discussed below), in March 2008, we decided to attempt to negotiate with
Marketing for a modification of the Marketing Leases which removes the Subject
Properties from the Marketing Leases. In the second quarter of 2008, Marketing
revised the list of properties that it proposed be removed from the Marketing
Leases to include approximately 45% of the properties it leases from us (the
“Revised Subject Properties”). We continue our internal review of a number of
possible lease modification proposals to determine, among other things, whether
we would be willing to remove some or all of the Revised Subject Properties from
the Marketing Leases.





We have
decided to attempt to negotiate with Marketing for a modification of the
Marketing Leases to remove the Subject Properties; however, if Marketing
ultimately determines that its business strategy is to exit all of the
properties it leases from us or to divest a composition of properties different
from the properties comprising the Subject Properties (which may include some or
all of the Revised Subject Properties), it is our intention to cooperate with
Marketing in accomplishing those objectives if we determine that it is prudent
for us to do so. Any modification of the Marketing Leases that removes the
Subject Properties or the Revised Subject Properties from the Marketing Leases
would likely significantly reduce the amount of rent we receive from Marketing
and increase our operating expenses. We cannot accurately predict if, or when,
the Marketing Leases will be modified or what the terms of any agreement may be
if the Marketing Leases are modified. We also cannot accurately predict what
actions Marketing and Lukoil may take, and what our recourse may be, whether the
Marketing Leases are modified or not.





- 18-




As a
result of any modification of the Marketing Leases, we intend either to relet or
sell the properties removed from the Marketing Leases and reinvest the realized
sales proceeds in new properties. We intend to seek replacement tenants or
buyers for the properties subject to the Marketing Leases either individually,
in groups of properties, or by seeking a single tenant for the entire portfolio
of properties subject to the Marketing Leases. Although we are the fee or
leasehold owner of the properties subject to the Marketing Leases and the owner
of the Getty® brand and have prior experience with tenants who operate their gas
stations, convenience stores, automotive repair services or other businesses at
our properties; in the event that the Subject Properties or other properties are
removed from the Marketing Leases, we cannot accurately predict if, when, or on
what terms, such properties could be re-let or sold.





Due to the
previously disclosed deterioration in Marketing’s annual financial performance,
in conjunction with our decision to attempt to negotiate with Marketing for a
modification of the Marketing Leases to remove the Subject Properties, we have
decided 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
lease terms. In reaching this conclusion, we relied on various indicators,
including, but not limited to, the following financial results of Marketing
through the year ending 2007: (i) Marketing’s significant operating losses, (ii)
its negative cash flow from operating activities, (iii) its asset impairment
charges for underperforming assets, and (iv) its negative earnings before
interest, taxes, depreciation, amortization and rent payable to the
Company.





We have
reserved $10.1 million and $10.5 million as of September 30, 2008 and December
31, 2007, respectively, of the deferred rent receivable due from Marketing. The
reserve represents the full amount of the deferred rent receivable recorded
related to the Subject Properties as of those respective dates. Providing the
non-cash deferred rent receivable reserve in the fourth quarter of 2007 reduced
our net earnings and our funds from operations but did not impact our cash flow
from operating activities or adjusted funds from operations since the impact of
the straight-line method of accounting is not included in our determination of
adjusted funds from operations. For additional information regarding funds from
operations and adjusted funds from operations, which are non-GAAP measures, see
“General — Supplemental Non-GAAP Measures” below. We have not provided a
deferred rent receivable reserve related to the Remaining Properties since,
based on our assessments and assumptions, we continue to believe that it is
probable that we will collect the deferred rent receivable related to the
Remaining Properties of $22.7 million as of September 30, 2008 and that Lukoil
will not allow Marketing to fail to perform its rental, environmental and other
obligations under the Marketing Leases. We anticipate that the rental revenue
for the Remaining Properties will continue to be recognized on a straight-line
basis. Beginning with the first quarter of 2008, the rental revenue for the
Subject Properties was, and for future periods is expected to be, effectively
recognized when payment is due under the contractual payment terms. Although we
have adjusted the estimated useful lives of certain long-lived assets for the
Subject Properties, we believe that no impairment charge was necessary for the
Subject Properties as of September 30, 2008 or December 31, 2007 pursuant to the
provisions of Statement of Financial Accounting Standards No. 144. The impact to
depreciation expense due to adjusting the estimated lives for certain long-lived
assets beginning with the quarter ended March 31, 2008 was not
material.





- 19-




Marketing
is directly responsible to pay for (i) remediation of environmental
contamination it causes and compliance with various environmental laws and
regulations as the operator of our properties, and (ii) known and unknown
environmental liabilities allocated to Marketing under the terms of the Master
Lease and various other agreements between Marketing and us relating to
Marketing’s business and the properties subject to the Marketing Leases
(collectively the “Marketing Environmental Liabilities”). We may ultimately be
responsible to directly pay for Marketing Environmental Liabilities as the
property owner if Marketing fails to pay them. Additionally, we will be required
to accrue for Marketing Environmental Liabilities if we determine that it is
probable that Marketing will not meet its obligations or if our assumptions
regarding the ultimate allocation methods and share of responsibility that we
used to allocate environmental liabilities changes as a result of the factors
discussed above, or otherwise. However, we continue to believe that it is not
probable that Marketing will not pay for substantially all of the Marketing
Environmental Liabilities since we believe that Lukoil will not allow Marketing
to fail to perform its rental, environmental and other obligations under the
Marketing Leases and, accordingly, we did not accrue for the Marketing
Environmental Liabilities as of September 30, 2008 or December 31, 2007.
Nonetheless, we have determined that the aggregate amount of the Marketing
Environmental Liabilities (as estimated by us based on our assumptions and
analysis of information currently available to us) could be material to us if we
were required to accrue for all of the Marketing Environmental Liabilities in
the future since we believe that it is reasonably possible that as a result of
such accrual, we may not be in compliance with the existing financial covenants
in our Credit Agreement. Such non-compliance could result in an event of default
which, if not cured or waived, could result in the acceleration of all of our
indebtedness under the Credit Agreement.





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





We
periodically receive and review Marketing’s financial statements and other
financial data. We receive this information from Marketing pursuant to the terms
of Master Lease. Certain of this information is not publicly available and
Marketing contends that the terms of the Master Lease prohibit us from including
this financial information in our Annual Reports on Form 10-K, our Quarterly
Reports on Form 10-Q or in our Annual Reports to Shareholders. As we had
previously disclosed in our filings with the Securities and Exchange Commission
(“SEC”), the financial performance of Marketing has been significantly
deteriorating as compared to Marketing’s financial performance for prior annual
periods that were previously presented in our filings with the SEC. Marketing’s
current financial data is not publicly available. Any financial data of
Marketing that we were able to provide in our periodic reports was publicly
available and was derived from the financial data provided by Marketing, and
neither we nor our auditors were involved with the preparation of such data, and
as a result, we cannot provide any assurance thereon. Additionally, our auditors
were not engaged to review or audit such data. You should not rely on the
selected balance sheet data or operating data related to prior years that was
previously presented in our filings as representative of Marketing’s current
financial condition or current results of operations.





- 20-




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





Unresolved
SEC Comment


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





We believe
that the SEC’s position is based on their interpretation of certain provisions
of their internal Accounting Disclosure Rules and Practices Training Material,
Staff Accounting Bulletin No. 71 and Rule 3-13 of Regulation S-X. We do not
believe that any of this guidance is clearly applicable to our particular
circumstances and we believe that, even if it were, we should be entitled to
certain relief from compliance with such requirements. Marketing subleases our
properties to approximately eight hundred independent, individual service
station/convenience store operators (subtenants). Consequently, we believe that
we, as the owner of these properties and the Getty® brand, could relet these
properties to the existing subtenants who operate their convenience stores,
automotive repair services or other businesses at our properties, or to others,
at market rents; although we cannot accurately predict if, when, or on what
terms, such properties would be re-let. The SEC did not accept our positions
regarding the inclusion of Marketing’s financial statements in our filings. We
have had no communication with the SEC since 2005 regarding the unresolved
comment. We cannot accurately predict the consequences if we are unable to
resolve this outstanding comment.





- 21-




We do not
believe that offers or sales of our securities made pursuant to existing
registration statements that did not or do not contain the financial statements
of Marketing constitute, by reason of such omission, a violation of the
Securities Act of 1933, as amended, or the Exchange Act. Additionally, we
believe that if there ultimately is a determination that such offers or sales,
by reason of such omission, resulted in a violation of those securities laws, we
would not have any material liability as a consequence of any such
determination.





Supplemental
Non-GAAP Measures


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





We believe
that FFO is helpful to investors in measuring our performance because FFO
excludes various items included in GAAP net earnings that do not relate to, or
are not indicative of, our fundamental operating performance such as gains or
losses from property dispositions and depreciation and amortization of real
estate assets. In our case, however, GAAP net earnings and FFO include the
significant impact of deferred rental revenue (straight-line rental revenue) and
the net amortization of above-market and below-market leases on our recognition
of revenues from rental properties, as offset by the impact of related
collection reserves. Deferred rental revenue results primarily from fixed rental
increases scheduled under certain leases with our tenants. In accordance with
GAAP, the aggregate minimum rent due over the current term of these leases are
recognized on a straight-line basis rather than when payment is due. The present
value of the difference between the fair market rent and the contractual rent
for in-place leases at the time properties are acquired is amortized into
revenue from rental properties over the remaining lives of the in-place leases.
GAAP net earnings and FFO may also include income tax benefits recognized due to
the elimination of, or a net reduction in, amounts accrued for uncertain tax
positions related to being taxed as a C-corp., rather than as a REIT, prior to
2001. As a result, management pays particular attention to AFFO, a supplemental
non-GAAP performance measure that we define as FFO less straight-line rental
revenue, net amortization of above-market and below-market leases and income tax
benefit. In management’s view, AFFO provides a more accurate depiction than FFO
of the impact of scheduled rent increases under these leases, rental revenue
from acquired in-place leases and our election to be treated as a REIT under the
federal income tax laws beginning in 2001. Neither FFO nor AFFO represent cash
generated from operating activities calculated in accordance with generally
accepted accounting principles and therefore these measures should not be
considered an alternative for GAAP net earnings or as a measure of
liquidity.





- 22-




A
reconciliation of net earnings to FFO and AFFO for the three and nine months
ended September 30, 2008 and 2007 is as follows (in thousands, except per share
amounts):




Three
      months ended
              September
      30,
            
            
            Nine
      months ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      earnings
            
            $
            10,489
            
            
            $
            12,846
            
            
            $
            32,495
            
            
            
            33,307Depreciation
      and amortization of real estate assets
            
            
            2,875
            
            
            
            2,614
            
            
            
            8,638
            
            
            
            7,186Gains
      on dispositions of real estate
            
            
            (490
            )
            
            
            (3,948
            )
            
            
            (2,395
            )
            
            
            (5,386
            )Funds
      from operations
            
            
            12,874
            
            
            
            11,512
            
            
            
            38,738
            
            
            
            35,107Deferred
      rental revenue (straight-line rent)
            
            
            (485
            )
            
            
            (571
            )
            
            
            (1,285
            )
            
            
            (1,922
            )Net
      amortization of above-market and below-market leases
            
            
            (198
            )
            
            
            (388
            )
            
            
            (600
            )
            
            
            (942
            )Adjusted
      funds from operations
            
            
            12,191
            
            
            $
            10,553
            
            
            $
            36,853
            
            
            $
            32,243Diluted
      per share amounts:Earnings
      per share
            
            $
            0.42
            
            
            $
            0.52
            
            
            $
            1.31
            
            
            $
            1.34Funds
      from operations per share
            
            $
            0.52
            
            
            $
            0.46
            
            
            $
            1.56
            
            
            $
            1.42Adjusted
      funds from operations per share
            
            $
            0.49
            
            
            $
            0.43
            
            
            $
            1.49
            
            
            $
            1.30Diluted
      weighted-average shares outstanding
            
            
            24,773
            
            
            
            24,792
            
            
            
            24,774
            
            
            
            24,788








Results
of operations


Three
months ended September 30, 2008 compared to the three months ended September 30,
2007





Revenues
from rental properties were $20.4 million for the three months ended September
30, 2008 as compared to $20.0 million for the three months ended September 30,
2007. We received approximately $15.1 million in the three months ended
September 30, 2008 and $14.8 million in the three months ended September 30,
2007 from properties leased to Marketing under the Marketing Leases. We also
received rent of $4.6 million in the three months ended September 30, 2008 and
$4.2 million in the three months ended September 30, 2007 from other tenants.
The increase in rent received was primarily due to rent from properties acquired
in 2007 and rent escalations, which was partially offset by the effect of
dispositions of real estate and lease expirations. In addition, revenues from
rental properties include deferred rental revenues of $0.5 million for the three
months ended September 30, 2008, as compared to $0.6 million for the three
months ended September 30, 2007, recorded as required by GAAP, related to the
fixed rent increases scheduled under certain leases with tenants. The aggregate
minimum rent due over the current term of these leases are recognized on a
straight-line basis rather than when payment is due. Revenues from rental
properties also includes net amortization of above-market and below-market
leases, related to the properties acquired at the end of the first quarter in
2007 of $0.2 million for the three months ended September 30, 2008, as compared
to $0.4 million for the three months ended September 30, 2007. The present value
of the difference between the fair market rent and the contractual rent for
in-place leases at the time properties are acquired is amortized into revenue
from rental properties over the remaining lives of the in-place
leases.





- 23-




Rental
property expenses, which are primarily comprised of rent expense and real estate
and other state and local taxes, were $2.3 million for each of the three month
periods ended September 30, 2008 and September 30, 2007.





Environmental
expenses, net for the three months ended September 30, 2008 were $2.3 million as
compared to $2.8 million recorded for the three months ended September 30, 2007.
Change in estimated environmental costs, net of estimated recoveries from state
underground storage tank funds, was $1.4 million for the three months ended
September 30, 2008, as compared to $1.9 million recorded in the prior year
period. The decrease in environmental expenses was also due to lower loss
provisions recorded for environmental related litigation reserves, which
decreased by $0.4 million for the three months ended September 30, 2008, as
compared to the three months ended September 30, 2007.





General
and administrative expenses were $1.5 million for each of the three month
periods ended September 30, 2008 and September 30, 2007.





Depreciation
and amortization expense was $2.8 million for the three months ended September
30, 2008, as compared to $2.6 million recorded for the three months ended
September 30, 2007. The increase was primarily due to the acceleration of
depreciation expense resulting from the reduction in the estimated useful lives
of certain assets which may be removed from the unitary lease with Marketing and
property acquisitions, which increases were partially offset by the effect of
dispositions of real estate and lease expirations.





As a
result, total operating expenses decreased by approximately $0.4 million for the
three months ended September 30, 2008, as compared to the three months ended
September 30, 2007.





Interest
expense was $1.7 million for the three months ended September 30, 2008, as
compared to $2.3 million for the three months ended September 30, 2007. The
decrease was primarily due to a reduction in interest rates.





Other
income, net was $0.2 million for the three months ended September 30, 2008, as
compared to $1.4 million for the three months ended September 30, 2007. The
decrease in other income, net was primarily due to a $1.3 million reduction in
gains on dispositions of real estate.





Earnings
from discontinued operations for the three months ended September 30, 2008 and
2007 include the operating results and gains from the disposition of eight
properties sold in 2008 and eleven properties sold in 2007, which results
applicable to the three months ended September 30, 2008 and 2007 have been
reclassified from earnings from continuing operations. Earnings from
discontinued operations, primarily comprised of gains on dispositions of real
estate, were $0.5 million for the three months ended September 30, 2008, as
compared to $2.9 million for the three months ended September 30, 2007. The
decrease in earnings from discontinued operations was primarily due to a $2.1
million reduction in gains on dispositions of real estate.





- 24-




The
aggregate gain on dispositions of real estate, included in both other income and
discontinued operations, was $0.5 million for the three months ended September
30, 2008, as compared to $3.9 million for the three months ended September 30,
2007. Gains on disposition of real estate decreased by an aggregate of $3.4
million for the three months ended September 30, 2008, as compared to the three
months ended September 30, 2007.





As a
result, net earnings decreased by $2.3 million to $10.5 million for the three
months ended September 30, 2008, as compared to $12.8 million for the three
months ended September 30, 2007. Earnings from continuing operations increased
by $0.1 million to $10.0 million for the three months ended September 30, 2008,
as compared to $9.9 million for the three months ended September 30,
2007.





For the
three months ended September 30, 2008, FFO increased by $1.4 million to $12.9
million, as compared to $11.5 million for the three months ended September 30,
2007, and AFFO increased by $1.6 million to $12.2 million. Certain items, which
are included in the changes in net earnings, are excluded from the changes in
FFO and AFFO. The increase in FFO for the three months ended September 30, 2008
was primarily due to the changes in net earnings but excludes the $0.3 million
increase in depreciation and amortization expense and the $3.4 million decrease
in gains on disposition of real estate. The increase in AFFO for the three
months ended September 30, 2008 also excludes a $0.1 million decrease in
deferred rental revenue and a $0.2 million decrease in net amortization of
above-market and below-market leases (which are included in net earnings and FFO
but are excluded from AFFO).





Diluted
earnings per share decreased by $0.10 per share to $0.42 per share for the three
months ended September 30, 2008, as compared to $0.52 per share for the three
months ended September 30, 2007. Diluted FFO per share increased by $0.06 per
share for the three months ended September 30, 2008 to $0.52 per share, as
compared to the three months ended September 30, 2007. Diluted AFFO per share
increased by $0.06 per share for the three months ended September 30, 2008 to
$0.49 per share, as compared to the three months ended September 30,
2007.





Nine
months ended September 30, 2008 compared to the nine months ended September 30,
2007





Revenues
from rental properties were $60.8 million for the nine months ended September
30, 2008, as compared to $58.1 million for the nine months ended September 30,
2007. We received approximately $45.4 million in rent for the nine months ended
September 30, 2008 and $44.7 million in rent for the nine months ended September
30, 2007 from properties leased to Marketing under the Marketing Leases. We also
received rent of $13.6 million in the nine months ended September 30, 2008 and
$10.8 million in the nine months ended September 30, 2007 from other tenants.
The increase in rent received was primarily due to rent from properties acquired
in 2007 and rent escalations, which was partially offset by the effect of
dispositions of real estate and lease expirations. In addition, revenues from
rental properties include deferred rental revenues of $1.2 million for the nine
months ended September 30, 2008, as compared to $1.7 million for the nine months
ended September 30, 2007. Revenues from rental properties also includes net
amortization of above-market and below-market leases, related to the properties
acquired at the end of the first quarter in 2007, of $0.6 million for the nine
months ended September 30, 2008, as compared to $0.9 million for the prior year
period.





- 25-




Rental
property expenses, which are primarily comprised of rent expense and real estate
and other state and local taxes, were $7.0 million for the nine months ended
September 30, 2008 which was comparable to $7.1 million recorded for the nine
months ended September 2007.





Environmental
expenses, net for the nine months ended September 30, 2008 were $5.0 million as
compared to $6.9 million recorded for the nine months ended September 30, 2007.
Change in estimated environmental costs, net of estimated recoveries from state
underground storage tank funds, was $2.8 million for the nine months ended
September 30, 2008, as compared to $4.3 million recorded in the prior year
period. The decrease in environmental expenses was also due to lower loss
provisions recorded for environmental related litigation reserves, which
decreased by $0.7 million for the nine months ended September 30, 2008, as
compared to the nine months ended September 30, 2007.





General
and administrative expenses for the nine months ended September 30, 2008 were
$5.2 million as compared to $4.8 million recorded for the nine months ended
September 30, 2007. The increase in general and administrative expense was due
to higher professional fees associated with the previously disclosed potential
modification of the Marketing Leases and related matters.





Depreciation
and amortization expense was $8.6 million for the nine months ended September
30, 2008, as compared to $7.1 million recorded for the nine months ended
September 30, 2007. The increase was primarily due to properties acquired in
2007 and the acceleration of depreciation expense resulting from the reduction
in the estimated useful lives of certain assets which may be removed from the
unitary lease with Marketing, which increases were partially offset by the
effect of dispositions of real estate and lease expirations.





Interest
expense was $5.3 million for the nine months ended September 30, 2008, as
compared to $5.5 million for the nine months ended September 30, 2007. The
decrease was primarily due to a reduction in interest rates, partially offset by
increased borrowings used to finance the acquisition of properties in
2007.





Other
income, net was $0.7 million for the nine months ended September 30, 2008, as
compared to $1.8 million for the nine months ended September 30, 2007. The
decrease in other income, net was primarily due to a $1.3 million reduction in
gains on dispositions of real estate.





Earnings
from discontinued operations for the nine months ended September 30, 2008 and
2007 include the operating results and gains from the disposition of eight
properties sold in 2008 and eleven properties sold in 2007, which results
applicable to the nine months ended September 30, 2008 and 2007 have been
reclassified from earnings from continuing operations. Earnings from
discontinued operations, primarily comprised of gains on dispositions of real
estate, were $2.2 million for the nine months ended September 30, 2008, as
compared to $4.7 million for the nine months ended September 30, 2007. The
decrease in earnings from discontinued operations was primarily due to a $1.7
million reduction in gains on dispositions of real estate.





- 26-




The
aggregate gain on dispositions of real estate, included both in other income and
discontinued operations was $2.4 million for the nine months ended September 30,
2008, as compared to $5.4 million for the nine months ended September 30, 2007.
Gains on disposition of real estate decreased by an aggregate of $3.0 million
for the nine months ended September 30, 2008, as compared to the nine months
ended September 30, 2007.





As a
result, net earnings decreased by $0.8 million to $32.5 million for the nine
months ended September 30, 2008, as compared to $33.3 million for the nine
months ended September 30, 2007. Earnings from continuing operations increased
by $1.7 million to $30.3 million for the nine months ended September 30, 2008,
as compared to $28.6 million for the nine months ended September 30,
2007.





For the
nine months ended September 30, 2008, FFO increased by $3.6 million to $38.7
million, as compared to $35.1 million for the nine months ended September 30,
2007, and AFFO increased by $4.7 million to $36.9 million. Certain items, which
are included in the changes in net earnings, are excluded from the changes in
FFO and AFFO. The increase in FFO for the nine months ended September 30, 2008
was primarily due to the changes in net earnings but excludes the $1.5 million
increase in depreciation and amortization expense and the $3.0 million decrease
in gains on dispositions of real estate. The increase in AFFO for the nine
months ended September 30, 2008 also excludes a $0.5 million decrease in
deferred rental revenue and a $0.3 million decrease in net amortization of
above-market and below-market leases (which are included in net earnings and FFO
but are excluded from AFFO).





Diluted
earnings per share decreased by $0.03 per share to $1.31 per share for the nine
months ended September 30, 2008, as compared to $1.34 per share for the nine
months ended September 30, 2007. Diluted FFO per share increased by $0.14 per
share for the nine months ended September 30, 2008 to $1.56 per share, as
compared to the nine months ended September 30, 2007. Diluted AFFO per share
increased by $0.19 per share for the nine months ended September 30, 2008 to
$1.49 per share, as compared to the nine months ended September 30,
2007.





Liquidity
and Capital Resources





Our
principal sources of liquidity are the cash flows from our business, funds
available under a revolving credit agreement that expires in 2011 and available
cash and cash equivalents. Management believes that our operating cash needs for
the next twelve months can be met by cash flows from operations, borrowings
under our credit agreement and available cash and cash equivalents.





The recent
disruption in the credit markets and the resulting impact on the availability of
funding generally may limit our access to one or more funding sources. In
addition, we expect that the costs associated with any additional borrowings we
may undertake may be adversely impacted, as compared to such costs prior to the
disruption of the credit markets. The United States credit markets are currently
experiencing an unprecedented contraction. As a result of the tightening credit
markets, we may not be able to obtain additional financing on favorable terms,
or at all. If one or more of the financial institutions that supports our credit
agreement fails, we may not be able to find a replacement, which would
negatively impact our ability to borrow under our credit agreement. In addition,
if the current pressures on credit continue or worsen, we may not be able to
refinance our outstanding debt when due, which could have a material adverse
effect on us.





- 27-









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





We entered
into 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, 2008, $45.0 million of our LIBOR based
borrowings under the Credit Agreement bear interest at an effective rate of
6.69%.





- 28-




Total
borrowings outstanding under the Credit Agreement at September 30, 2008 were
$134.8 million, bearing interest at a weighted-average effective rate of 4.7%
per annum. The weighted-average effective rate is based on $89.8 million of
LIBOR rate borrowings floating at market rates plus a margin of 1.25% and $45.0
million of LIBOR rate borrowings effectively fixed at 5.44% by the Swap
Agreement plus a margin of 1.25%. We had $40.2 million available under the terms
of the Credit Agreement as of September 30, 2008. The increase in our borrowings
under the Credit Agreement during 2007 relate primarily to borrowings used to
fund acquisitions.





Since we
generally lease our properties on a triple-net basis, we do not incur
significant capital expenditures other than those related to acquisitions.
Capital expenditures, including acquisitions, for the nine months ended
September 30, 2008 and 2007 amounted to $6.0 million and $89.4 million,
respectively. To the extent that our current sources of liquidity are not
sufficient to fund capital expenditures and acquisitions we will require other
sources of capital, which may or may not be available on favorable terms or at
all. We may be unable to pursue public debt or equity offerings until we resolve
with the SEC the outstanding comment regarding disclosure of Marketing’s
financial information. We cannot accurately predict how periods of illiquidity
in the credit markets, such as current market conditions, will impact our access
to capital.





We elected
to be treated as a REIT under the federal income tax laws with the year
beginning January 1, 2001. As a REIT, we are required, among other things, to
distribute at least ninety percent of our taxable income to shareholders each
year. Payment of dividends is subject to market conditions, our financial
condition and other factors, and therefore cannot be assured. In particular, our
Credit Agreement prohibits the payment of dividends during certain events of
default. Dividends paid to our shareholders aggregated $34.6 million and $34.1
million for the nine months ended September 30, 2008 and 2007, respectively, and
were paid on a quarterly basis during each of those years. We presently intend
to pay common stock dividends of $0.47 per share each quarter ($1.88) per share,
or $46.7 million, on an annual basis), and commenced doing so with the quarterly
dividend declared in August 2008. Due to the developments related to Marketing
and the Marketing Leases discussed in “General - Developments Related to
Marketing and the Marketing Leases” above, there is no assurance that we will be
able to continue to pay dividends at the rate of $0.47 per share per quarter, if
at all.





Critical
Accounting Policies





Our
accompanying unaudited interim consolidated financial statements include the
accounts of Getty Realty Corp. and our wholly-owned subsidiaries. The
preparation of financial statements in accordance with GAAP requires management
to make estimates, judgments and assumptions that affect amounts reported in its
financial statements. Although we have made our best estimates, judgments and
assumptions regarding future uncertainties relating to the information included
in our financial statements, giving due consideration to the accounting policies
selected and materiality, actual results could differ from these estimates,
judgments and assumptions and such differences could be material.





Estimates,
judgments and assumptions underlying the accompanying consolidated financial
statements include, but are not limited to, deferred rent receivable, recoveries
from state underground storage tank funds, environmental remediation costs, real
estate, depreciation and amortization, impairment of long-lived assets,
litigation, accrued expenses, income taxes, allocation of the purchase price of
properties acquired to the assets acquired and liabilities assumed and exposure
to paying an earnings and profits deficiency dividend. The information included
in our financial statements that is based on estimates, judgments and
assumptions is subject to significant change and is adjusted as circumstances
change and as the uncertainties become more clearly defined. Our accounting
policies are described in note 1 to the consolidated financial statements that
appear in our Annual Report on Form 10-K for the year ended December 31, 2007.
We believe that the more critical of our accounting policies relate to revenue
recognition and deferred rent receivable and related reserves, impairment of
long-lived assets, income taxes, environmental costs and recoveries from state
underground storage tank funds and litigation, each of which is discussed in
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations” in our Annual Report on Form 10-K for the year ended December 31,
2007.





- 29-




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides
guidance for using fair value to measure assets and liabilities. SFAS 157
generally applies whenever other standards require assets or liabilities to be
measured at fair value. SFAS 157 is effective in fiscal years beginning after
November 15, 2007, except that the effective date for non-financial assets and
non-financial liabilities that are not recognized or disclosed at fair value on
a recurring basis may be deferred to fiscal years beginning after November 15,
2008. The adoption of SFAS 157 in January 2008 did not have a material impact on
our financial position and results of operations.





In
December 2007, the FASB issued Statement No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”), which establishes principles and requirements for
how the acquirer shall recognize and measure in its financial statements the
identifiable assets acquired, liabilities assumed, any noncontrolling interest
in the acquiree and goodwill acquired in a business combination. SFAS 141(R) is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. We are currently assessing the potential impact that the
adoption of SFAS 141(R) will have on our financial position and results of
operations.





Environmental
Matters





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





We enter
into leases and various other agreements which allocate responsibility for known
and unknown environmental liabilities by establishing the percentage and method
of allocating responsibility between the parties. In accordance with the leases
with certain of our tenants, we have agreed to bring the leased properties with
known environmental contamination to within applicable standards and to
regulatory or contractual closure (“Closure”) in an efficient and economical
manner. Generally, upon achieving Closure at an individual property, our
environmental liability under the lease for that property will be satisfied and
future remediation obligations will be the responsibility of our tenant.
Generally, the liability for the retirement and decommissioning or removal of
USTs and other equipment is the responsibility of our tenants. We are
contingently liable for these obligations in the event that our tenants do not
satisfy their responsibilities. A liability has not been accrued for obligations
that are the responsibility of our tenants based on our tenants’ history of
paying such obligations and/or their financial ability to pay their share of
such costs.





- 30-




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





We have
not accrued for approximately $1.0 million in costs allegedly incurred by the
current property owner in connection with removal of USTs and soil remediation
at a property that had been leased to and operated by Marketing. We believe
Marketing is responsible for such costs under the terms of the Master Lease and
tendered the matter for defense and indemnification from Marketing, but
Marketing has denied its liability for the claim and its responsibility to
defend against and indemnify us for the claim. We have filed a third party claim
against Marketing for indemnification in this matter, which claim is currently
being actively litigated. Trial is anticipated to be scheduled for the first
quarter of 2009. It is possible that our assumption that Marketing will be
ultimately responsible for this claim may change, which may result in our
providing an accrual for this and other matters.





We have
also agreed to provide limited environmental indemnification to Marketing,
capped at $4.25 million and expiring in 2010, for certain pre-existing
conditions at six of the terminals we own and lease to Marketing. Under the
indemnification agreement, Marketing is obligated to pay the first $1.5 million
of costs and expenses incurred in connection with remediating any such
pre-existing conditions, Marketing will share equally with us the next $8.5
million of those costs and expenses and Marketing is obligated to pay all
additional costs and expenses over $10.0 million. We have accrued $0.3 million
as of September 30, 2008 and December 31, 2007 in connection with this
indemnification agreement. Under the Master Lease, we continue to have
additional ongoing environmental remediation obligations for one hundred
ninety-six scheduled retail properties.





- 31-




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





Environmental
exposures are difficult to assess and estimate for numerous reasons, including
the extent of contamination, alternative treatment methods that may be applied,
location of the property which subjects it to differing local laws and
regulations and their interpretations, as well as the time it takes to remediate
contamination. In developing our liability for probable and reasonably estimable
environmental remediation costs, on a property by property basis, we consider
among other things, enacted laws and regulations, assessments of contamination
and surrounding geology, quality of information available, currently available
technologies for treatment, alternative methods of remediation and prior
experience. These accrual estimates are subject to significant change, and are
adjusted as the remediation treatment progresses, as circumstances change and as
these contingencies become more clearly defined and reasonably estimable. As of
September 30, 2008, we have regulatory approval for remediation action plans in
place for two hundred fifty-five (94%) of the two hundred seventy-one for which
we continue to retain remediation responsibility and the remaining sixteen
properties (6%) were in the assessment phase. In addition, we have nominal
post-closure compliance obligations at twenty-two properties where we have
received “no further action” letters.





As of
September 30, 2008, we had accrued $13.2 million as management’s best estimate
of the net fair value of reasonably estimable environmental remediation costs
which is comprised of $17.8 million of estimated environmental obligations and
liabilities offset by $4.6 million of estimated recoveries from state UST
remediation funds, net of allowance. Environmental expenditures, net of
recoveries from UST funds, were $3.4 million and $2.5 million, respectively, for
the nine months ended September 30, 2008 and 2007. For the nine months ended
September 30, 2008 and 2007, the net change in estimated remediation cost and
accretion expense included in our consolidated statements of operations amounted
to $2.8 million and $4.3 million, respectively, which amounts were net of
probable recoveries from state UST remediation funds.





Environmental
liabilities and related assets are currently measured at fair value based on
their expected future cash flows which have been adjusted for inflation and
discounted to present value. We also use probability weighted alternative cash
flow forecasts to determine fair value. We assumed a 50% probability factor that
the actual environmental expenses will exceed engineering estimates for an
amount assumed to equal one year of net expenses aggregating $6.8 million.
Accordingly, the environmental accrual as of September 30, 2008 was increased by
$2.6 million, net of assumed recoveries and before inflation and present value
discount adjustments. The resulting net environmental accrual as of September
30, 2008 was then further increased by $0.8 million for the assumed impact of
inflation using an inflation rate of 2.75%. Assuming a credit-adjusted risk-free
discount rate of 7.0%, we then reduced the net environmental accrual, as
previously adjusted, by a $1.7 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, 2008 would have increased by
$0.2 million and $0.1 million, respectively, for an aggregate increase in the
net environmental accrual of $0.3 million. However, the aggregate net change in
environmental estimates expense recorded during the nine months ended September
30, 2008 would not have changed significantly if these changes in the
assumptions were made effective December 31, 2007.





- 32-




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





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





In
September 2003, we were notified by the State of New Jersey Department of
Environmental Protection (the “NJDEP”) that we are one of approximately sixty
potentially responsible parties for natural resource damages resulting from
discharges of hazardous substances into the Lower Passaic River. The definitive
list of potentially responsible parties and their actual responsibility for the
alleged damages, the aggregate cost to remediate the Lower Passaic River, the
amount of natural resource damages and the method of allocating such amounts
among the potentially responsible parties have not been determined. In September
2004, we received a General Notice Letter from the United States Environmental
Protection Agency (the “EPA”) (the “EPA Notice”), advising us that we may be a
potentially responsible party for costs of remediating certain conditions
resulting from discharges of hazardous substances into the Lower Passaic River.
ChevronTexaco received the same EPA Notice regarding those same conditions. We
believe that ChevronTexaco is contractually obligated to indemnify us, pursuant
to an indemnification agreement for most, if not all, of the conditions at the
property identified by the NJDEP and the EPA. Accordingly, our ultimate legal
and financial liability, if any, cannot be estimated with any certainty at this
time.





- 33-




From
October 2003 through September 2008, we were notified that we were made party to
fifty-two cases in Connecticut, Florida, Massachusetts, New Hampshire, New
Jersey, New York, Pennsylvania, Vermont, Virginia and West Virginia brought by
local water providers or governmental agencies. These cases allege various
theories of liability due to contamination of groundwater with MTBE as the basis
for claims seeking compensatory and punitive damages. Each case names as
defendants approximately fifty petroleum refiners, manufacturers, distributors
and retailers of MTBE, or gasoline containing MTBE. At this time, we have been
dismissed from eight of the cases initially filed against it. A significant
number of the named defendants other than us have entered into settlements with
certain plaintiffs, which affected approximately twenty-seven of the cases to
which we are a party. The accuracy of the allegations as they relate to us, our
defenses to such claims, the aggregate amount of possible damages and the method
of allocating such amounts among the remaining defendants have not been
determined. Accordingly, our ultimate legal and financial liability, if any,
cannot be estimated with any certainty at this time.





Forward
Looking Statements





Certain
statements in this Quarterly Report on Form 10-Q may constitute “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995. When we use the words “believes,” “expects,” “plans,” “projects,”
“estimates,” “predicts” and similar expressions, we intend to identify
forward-looking statements. Examples of forward-looking statements include
statements regarding the developments related to Marketing and the Marketing
Leases included in “Developments Related to Marketing and the Marketing Leases”
and elsewhere in this Form 10-Q; the impact of any modification or termination
of the Marketing Leases on our business and ability to pay dividends or our
stock price; our belief that Lukoil will not allow Marketing to fail to perform
its rental, environmental and other obligations under the Marketing Leases; our
belief that it is not probable that Marketing will not pay for substantially all
of the Marketing Environmental Liabilities; our decision to attempt to negotiate
with Marketing for a modification of the Marketing Leases which removes the
Subject Properties or the Revised Subject Properties from the Marketing leases;
our ability to predict if, or when, the Marketing Leases will be modified or
terminated, the terms of any such modification or termination or what actions
Marketing and Lukoil will take and what our recourse will be whether the
Marketing Leases are modified or terminated or not; our belief that it is
probable that we will collect the deferred rent receivable related to the
Remaining Properties; our belief that no impairment charge is necessary for the
Subject Properties or the additional properties included within the list of
Revised Subject Properties; the expected effect of regulations on our long-term
performance; our expected ability to maintain compliance with applicable
regulations; our ability to renew expired leases; 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 or sell properties; our belief that we do not have a
material liability for offers and sales of our securities made pursuant to
registration statements that did not contain the financial statements or
summarized financial data of Marketing; our expectations regarding future
acquisitions; our ability to maintain our REIT status; the probable outcome of
litigation or regulatory actions; our expected recoveries from UST funds; our
exposure to environmental remediation costs; our estimates regarding remediation
costs; our expectations as to the long-term effect of environmental liabilities
on our business, financial condition, results of operations, liquidity, ability
to pay dividends and stock price; our exposure to interest rate fluctuations and
the manner in which we expect to manage this exposure; the expected reduction in
interest-rate risk resulting from our Swap Agreement and our expectation that we
will not settle the Swap Agreement prior to its maturity; the expectation that
the Credit Agreement will be refinanced with variable interest-rate debt at its
maturity; our expectations regarding corporate level federal income taxes; the
indemnification obligations of the Company and others; our assessment of the
likelihood of future competition; assumptions regarding the future applicability
of accounting estimates, assumptions and policies; our intention to pay future
dividends and the amounts thereof; and our beliefs about the reasonableness of
our accounting estimates, judgments and assumptions.





- 34-




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.





- 35-




Item 3.
Quantitative and Qualitative Disclosures About Market
Risk





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





We are
exposed to interest rate risk, primarily as a result of our $175.0 million
Credit Agreement. Our Credit Agreement, which expires in June 2011, permits
borrowings at an interest rate equal to the sum of a base rate plus a margin of
0.0% or 0.25% or a LIBOR rate plus a margin of 1.0%, 1.25% or 1.5%. The
applicable margin is based on our leverage ratio at the end of 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, 2008, the applicable
margin is 0.0% for base rate borrowings and will decrease to 1.0% in the fourth
quarter for our LIBOR rate borrowings.





Total
borrowings outstanding under the Credit Agreement at September 30, 2008 were
$134.8 million, bearing interest at a weighted-average rate of 3.9% per annum,
or a weighted-average effective rate of 4.7% including the impact of the Swap
Agreement discussed below. The weighted-average effective rate is based on $89.8
million of LIBOR rate borrowings floating at market rates plus a margin of 1.25%
and $45.0 million of LIBOR rate borrowings effectively fixed at 5.44% by the
Swap Agreement plus a margin of 1.25%. We use borrowings under the Credit
Agreement to finance acquisitions and for general corporate purposes. In October
2008, due to an increase in LIBOR rates and a decrease in the base rate, we
converted the then $84.9 million of outstanding LIBOR rate borrowings floating
at market rates from LIBOR at 3.75% plus a margin of 1.25% to the base rate of
4.5% plus a margin of 0.0%.





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, 2008 has not increased significantly, as compared
to December 31, 2007. 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, 2008, $45.0
million of our LIBOR based borrowings under the Credit Agreement bear interest
at an effective rate of 6.69%. As a result, we are, and will be, exposed to
interest rate risk to the extent that our borrowings exceed the $45.0 million
notional amount of the Swap Agreement. As of September 30, 2008, our borrowings
exceeded the notional amount of the Swap Agreement by $89.8 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 with
JPMorgan Chase Bank, N.A., 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.





- 36-




In the
event that we were to settle the Swap Agreement prior to its maturity, if the
corresponding LIBOR swap rate for the remaining term of the Swap Agreement is
below the 5.44% fixed strike rate at the time we settle the Swap Agreement, we
would be required to make a payment to the Swap Agreement counter-party; if the
corresponding LIBOR swap rate is above the fixed strike rate at the time we
settle the Swap Agreement, we would receive a payment from the Swap Agreement
counter-party. The amount that we would either pay or receive would equal the
present value of the basis point differential between the fixed strike rate and
the corresponding LIBOR swap rate at the time we settle the Swap
Agreement.





Based on
our average outstanding borrowings under the Credit Agreement projected at
$137.0 million for 2008, an increase in market interest rates of 0.5% for the
remainder of 2008 would decrease our 2008 net income and cash flows by $0.1
million. This amount was determined by calculating the effect of a hypothetical
interest rate change on our Credit Agreement borrowings that is not covered by
our $45.0 million interest rate Swap Agreement and assumes that the $137.0
million average outstanding borrowings during the third quarter of 2008 is
indicative of our future average borrowings for the remainder of 2008 before
considering additional borrowings required for future acquisitions. The
calculation also assumes that there are no other changes in our financial
structure or the terms of our borrowings. Our exposure to fluctuations in
interest rates will increase or decrease in the future with increases or
decreases in the outstanding amount under our Credit Agreement.





In order
to minimize our exposure to credit risk associated with financial instruments,
we place our temporary cash investments with high-credit-quality institutions.
Temporary cash investments, if any, are held in 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 Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the Commission's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures.




- 37-




As
required by Rule 13a-15(b), the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and the Company's Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures as of the end of the quarter covered by this report.
Based on the foregoing, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures were effective at a reasonable assurance level as of September 30,
2008.





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














- 38-




PART II.  OTHER INFORMATION





Item
1.  LegalProceedings





In June
1991, an action was commenced against us in the Court of Common Pleas of Berks
County, PA seeking reimbursement for cleanup costs claimed to have been incurred
as a result of a petroleum release. Sun Company, Inc., Exxon Company, U.S.A. and
Atlantic Richfield Company were joined as defendants. The case has been
preliminarily settled by all defendants on the proposed basis of an aggregate
cash payment to the plaintiff and full releases and dismissal of claims against
each of the defendants. Our contribution to the aggregate payment is for an
amount that is not material to us. Settlement documentation has been circulated
and is expected to be executed and delivered in the ordinary
course.





From
October 2003 through September 2008, we were made a party to fifty-two cases in
Connecticut, Florida, Massachusetts, New Hampshire, New Jersey, New York,
Pennsylvania, Vermont, Virginia, and West Virginia, brought by local water
providers or governmental agencies. These cases allege various theories of
liability due to contamination of groundwater with MTBE as the basis for claims
seeking compensatory and punitive damages. Each case names as defendants
approximately fifty petroleum refiners, manufacturers, distributors and
retailers of MTBE, or gasoline containing MTBE. The accuracy of the allegations
as they relate to us, our defenses to such claims, the aggregate possible amount
of damages and the method of allocating such amounts among the remaining
defendants have not been determined. At this time, we have been dismissed from
eight of the cases initially filed against us. The Federal District Court has
broken out for initial process four focus cases from the consolidated
Multi-District Litigation being heard in the Southern District of New York.
Three of these four focus cases name us as a defendant. One of the focus cases
to which we are a party was set for trial in September 2008. However, all of the
named defendants in this first focus case, other than us and one other
non-refiner defendant, entered into settlements with certain plaintiffs, which
affected approximately twenty-seven of the cases to which we are a party,
including one of the other initial focus cases. As a result of the multi-party
settlement which affected two of the focus cases, the Court vacated the
September 2008 trial date for the first focus case, and further scheduling of
trial for the first focus case and one of the other focus cases to which we
are  a named defendant remains open at this time. In addition to other
considerations, given that these two focus cases now involve only us and one
other non-refiner as defendants, it is not possible at this time to assess
whether and to what extent we will have liability in connection with these
two focus cases. Trial in the third focus case in which we have been named a
defendant is anticipated to be scheduled for sometime in 2009. We participate in
a joint defense group with the goal of sharing expert and other costs with the
other defendants, and we also have separate counsel defending our interests. We
are vigorously defending these matters.  Our ultimate legal and
financial liability, if any, in connection with the existing litigation cannot
be estimated with any certainty at this time.





In
December 2005, an action was commenced against us in the Superior Court in
Providence, Rhode Island, by the owner of a pier that is adjacent to one of our
terminals that is leased to Marketing seeking monetary damages of approximately
$500,000 representing alleged costs related to the ownership and maintenance of
the pier for the period from January 2003 through September 2005. We do not
believe that we have any legal, contractual or other responsibility for such
costs, and we are vigorously defending against this action. Additionally, we
believe that, under the terms of the Master Lease, Marketing is responsible for
such costs, and we tendered the matter to it for defense and indemnification.
Marketing has denied liability for the claim. After Marketing declined to accept
our tender for the claim, we filed a third-party claim against Marketing for
defense and indemnity. In May, 2008, the US District Court (to which the case
had been removed from state court) granted our motion for summary judgment
against the plaintiff on all claims. The plaintiff has appealed this decision to
the Court of Appeals. We intend to pursue our claim against Marketing for
indemnification, which had been tolled pending resolution of the litigation at
the trial level.





- 39-




In April
2006, we were added as a defendant in an action in the Superior Court of New
Jersey, Middlesex County, filed by a property owner claiming damages against
multiple defendants for remediation of contaminated soil. The basis for
prosecuting the claim against us is corporate successor liability. The matter
was settled in July 2008 in consideration for a payment by us of $600,000, which
was made in the third quarter of 2008, plus an additional maximum contingent
amount of $40,000 relating to possible future liability for certain third party
claims.





In July
2007, subsidiaries of the Company were notified of the commencement of three
actions by the New Jersey Department of Environmental Protection (“NJDEP’)
seeking Natural Resource Damages (“NRDs”) arising out of petroleum releases
which occurred years ago at properties owned or leased by us. Answers to the
complaints and discovery requests were filed by us in each of these cases. The
accuracy of the allegations as they relate to us, the legal right of the NJDEP
to claim NRDs in these actions, the viability of our defenses to such claims,
the legal basis for determining the amount of the NRDs, and the method of
allocating damages, if any, between defendants have not yet been determined. In
September, 2008, we agreed with NJDEP to a stipulation of dismissal of one of
the NRD cases, under which the claims raised in the New Jersey State Court
action would be dismissed but without prejudice to the NJDEP’s right to reassert
the same claims in complaints brought in the Federal District Court to be heard
in the Multi-District MTBE cases currently pending against us. It is expected
that stipulations will be entered into with respect to the other two NRD cases
brought by the NJDEP, and such other cases will be similarly dismissed without
prejudice. We anticipate that the NJDEP will reassert in the Multi-District MTBE
litigation its claims it has stipulated (or is expected to stipulate) to
dismissal in state court.




In August,
2008, we were notified by the New York Environmental Protection and Spill
Compensation Fund (“NY Spill Fund”) that we and another party had been named as
allegedly responsible for certain petroleum contamination discovered in 2007 in
Rockaway Beach, New York. The claimant in the matter is a property developer who
alleges to have incurred approximately $434,000 in petroleum-related remediation
costs as a result of contamination on its property which allegedly derive from
two reported spills: one dating back to 1995 at an adjacent site formerly owned
by us, and the other occurring in 2006, at an adjacent site owned by the other
respondent named in the action. In September 2008, the same claimant also
commenced a lawsuit in the New York State Supreme Court against us and the other
allegedly responsible party to recover damages based upon the same set of facts.
We deny responsibility for any contamination that is the subject of the
complaint and also contest the amount of the claim. We are vigorously defending
the claims against us and has asserted cross claims against the other
party.





- 40-




In
September 2008, we received a directive from the NJDEP calling for a remedial
investigation and cleanup, by us and other named parties, of petroleum-related
contamination found at a retail motor fuel and auto service property. We did not
own or lease this property, but did supply gas to the operator of this property
in 1985 and 1986. We believe that we do not share responsibility for the alleged
liability. We have received an extension of time from the NJDEP to respond to
the directive while we undertake to investigate the relevant facts and history.
We are also reviewing our basis for a claim for defense and indemnity against
Marketing as the successor to the gasoline distribution business from which this
action derives. At this time, we cannot estimate our legal and financial
liability in this matter.





Please
refer to “Item 3. Legal Proceedings” of our Annual Report on Form 10-K for the
year ended December 31, 2007 and note 3 to our consolidated financial statements
in such Form 10-K, and to note 3 to our accompanying unaudited consolidated
financial statements which appears in  this Quarterly Report on Form
10-Q for additional information.













- 41-






Item1A.  Risk Factors





This Item
should be read in conjunction with “Part I, Item 1A. Risk Factors” of our Annual
Report on Form 10-K for the year ended December 31, 2007 for factors that could
affect the Company’s results of operations, financial condition and liquidity.
Other than with respect to the risk factors below, there have been no material
changes in the risk factors disclosed in “Part I, Item 1A. Risk Factors” of our
Annual Report on Form 10-K for the year ended December 31, 2007. The risk
factors disclosed below and in “Part I, Item 1A. Risk Factors” of our Annual
Report on Form 10-K for the year ended December 31, 2007 should be read in
conjunction with this Quarterly Report on Form 10-Q.





Adverse
developments in general business, economic, or political conditions could have a
material adverse effect on us.





Our
revenues are dependent on the economic success of our tenants and any factors
that adversely impact our tenants could also have a material adverse effect on
our business, financial condition and results of operations liquidity, ability
to pay dividends and stock price. Adverse developments in general business and
economic conditions, including through recession, downturn or otherwise, either
in the economy generally or in those regions in which a large portion of our
business is conducted, could have a material adverse effect on us.





We
are dependent on external sources of capital which may not be available on
favorable terms, if at all.





We are
dependent on external sources of capital to maintain our status as a REIT and
must distribute to our shareholders each year at least ninety percent of our net
taxable income, excluding any net capital gain. Because of these distribution
requirements, it is not likely that we will be able to fund all future capital
needs, including acquisitions, from income from operations. Therefore, we will
have to continue to rely on third-party sources of capital, which may or may not
be available on favorable terms, or at all. We cannot accurately predict how
periods of illiquidity in the credit markets, such as current market conditions,
will impact our access to or cost of capital. In addition, we may be unable to
pursue equity offerings until we resolve with the SEC the outstanding comment
regarding disclosure of Marketing’s financial information. Moreover, additional
equity offerings may result in substantial dilution of shareholders’ interests,
and additional debt financing may substantially increase our leverage. Our
ability to access to third-party sources of capital depends upon a number of
factors including general market conditions, the market’s perception of our
growth potential, our current and potential future earnings and cash
distributions, limitations on future indebtedness imposed under our Credit
Agreement and the market price of our common stock.





The United
States credit markets are currently experiencing an unprecedented contraction.
As a result of the tightening credit markets, we may not be able to obtain
additional financing on favorable terms, or at all. If one or more of the
financial institutions that supports our Credit Agreement fails, we may not be
able to find a replacement, which would negatively impact our ability to borrow
under our the Credit Agreement. In addition, if the current pressures on credit
continue or worsen, we may not be able to refinance our outstanding debt when
due in 2011, which could have a material adverse effect on us.





- 42-




Our
ability to meet the financial and other covenants relating to our Credit
Agreement may be dependent on the performance of our tenants, including
Marketing. Should our assessments, assumptions and beliefs that affect our
accounting prove to be incorrect, or if circumstances change, we may have to
materially adjust the amounts recorded in our financial statements for certain
assets and liabilities, and as a result of which, we may not be in compliance
with the financial covenants in our Credit Agreement. We have determined
that the aggregate amount of the Marketing Environmental Liabilities (as
estimated by us based on our assumptions and 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. For
additional information with respect to The Marketing Environmental Liabilities,
see “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Developments Related to Marketing and the Marketing Leases”, in
this Quarterly Report on Form 10-Q. If we are not in compliance with one or more
of our covenants which, if not complied with could result in an event of default
under our Credit Agreement, there can be no assurance that our lenders would
waive such non-compliance. A default under our Credit Agreement, if not cured or
waived, whether due to a loss of our REIT status, a material adverse effect on
our business, financial condition or prospects, a failure to comply with
financial and certain other covenants in the Credit Agreement or otherwise,
could result in the acceleration of all of our indebtedness under our Credit
Agreement. This could have a material adverse affect on our business, financial
condition, results of operations, liquidity, ability to pay dividends and stock
price.





We
are exposed to counterparty credit risk and there can be no assurances that we
will manage or mitigate this risk effectively.





We
regularly interact with counterparties in various industries. The types of
counterparties most common to our transactions and agreements include, but are
not limited to, landlords, tenants, vendors and lenders. Our most significant
counterparties include, but are not limited to, Marketing as our primary tenant,
and the members of the Bank Syndicate that are counterparties to our Credit
Agreement as our primary source of financing. The default, insolvency or other
inability of a significant counterparty to perform its obligations under an
agreement or transaction, including, without limitation, as a result of the
rejection of an agreement or transaction in bankruptcy proceedings, could have a
material adverse effect on us.





Our
future cash flow is dependent on the performance of our tenants of their lease
obligations, renewal of existing leases and either reletting or selling our
vacant properties.





We are
subject to risks that financial distress or default of our existing tenants may
lead to vacancy at our properties or disruption in rent receipts as a result of
partial payment or nonpayment of rent or that expiring leases may not be
renewed. We are subject to risks that the terms of renewal or reletting our
properties (including the cost of required renovations or environmental
remediation) may be less favorable than current lease terms, or that the values
of our properties that we sell may be adversely affected by market conditions.
In addition to the risk of disruption in rent receipts, we are subject to the
risk of incurring real estate taxes, maintenance, environmental and other
expenses at vacant properties. The financial distress or default of our tenants
may also lead to protracted, more complex, expensive or burdensome processes for
retaking control of our properties than would otherwise be the case, including
as a possible consequence of bankruptcy, eviction or other legal proceedings
related to or resulting from the tenant’s default. These risks are greater with
respect to certain of our tenants who lease multiple properties from us, such as
Marketing. For additional information with respect to concentration of tenant
risk, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Developments Related to Marketing and the Marketing
Leases”, in this Quarterly Report on Form 10-Q.





- 43-




In
addition, numerous properties compete with our properties in attracting tenants
to lease space. The number of available or competitive properties in a
particular area could have a material adverse effect on our ability to lease or
sell our properties and on the rents charged. The United States economy is
currently undergoing a period of slowdown, which some economists view as a
recession, and the future economic environment may continue to be less favorable
than that of recent years. Under unfavorable market conditions, there can be no
assurance that our tenants’ level of sales and financial performance generally
will not be adversely affected, which in turn, could impact the reliability of
our rent receipts. Unfavorable market conditions may also negatively impact our
ability to relet or sell our properties.





If our
tenants do not perform their lease obligations, or we were unable to renew
existing leases and promptly recapture and relet or sell vacant locations; or if
lease terms upon renewal or reletting were less favorable than current lease
terms, or if the values of properties that we sell are adversely affected by
market conditions; or if we incur significant costs or disruption related to or
resulting from tenant financial distress, bankruptcy or default; our cash flow
could be significantly adversely affected.





Because
our revenues are primarily dependent on the performance of Getty Petroleum
Marketing Inc., our primary tenant, in the event that Marketing cannot or will
not perform its rental, environmental and other obligations under the Marketing
Leases, or if the Marketing Leases are modified significantly or terminated, or
if it becomes probable that Marketing will not pay its environmental
obligations, or if we change our assumptions for rental revenue or environmental
liabilities related to the Marketing Leases, our business, financial condition,
revenues, operating expenses, results of operations, liquidity, ability to pay
dividends and stock price could be materially adversely affected. No assurance
can be given that Marketing will have the ability to pay its debts or meet its
rental, environmental or other obligations under the Marketing
Leases.





Marketing’s
financial results depend largely upon retail petroleum marketing margins from
the sale of refined petroleum products at margins in excess of its fixed and
variable expenses and rental income from its subtenants who operate their
convenience stores, automotive repair service or other businesses at our
properties. The petroleum marketing industry has been, and continues to be,
volatile and highly competitive. A large, rapid increase in wholesale petroleum
prices would adversely affect Marketing’s profitability and cash flow if the
increased cost of petroleum products could not be passed on to Marketing’s
customers or if the consumption of gasoline for automotive use were to decline
significantly. Petroleum products are commodities, the prices of which depend on
numerous factors that affect supply and demand. The prices paid by Marketing and
other petroleum marketers for products are affected by global, national and
regional factors. We cannot accurately predict how these factors will affect
petroleum product prices or supply in the future, or how in particular they will
affect Marketing or our other tenants.





- 44-




A
substantial portion of our revenues (75% for the three months ended September
30, 2008) are derived from the Marketing Leases. Accordingly, our revenues are
dependent to a large degree on the economic performance of Marketing and of the
petroleum marketing industry, and any factor that adversely affects Marketing,
or our relationship with Marketing, may have a material adverse effect on our
business, financial condition, revenues, operating expenses, results of
operations, liquidity, ability to pay dividends and stock price. Through
November 2008, Marketing has made all required monthly rental payments under the
Marketing Leases when due, although there is no assurance that it will continue
to do so. Even though Marketing is wholly-owned by a subsidiary of Lukoil, and
Lukoil has provided credit enhancement and capital to Marketing, Lukoil is not a
guarantor of the Marketing Leases and there can be no assurance that Lukoil is
currently providing, or will provide, any credit enhancement or additional
capital to Marketing.
 
 In
accordance with generally accepted accounting principles (“GAAP”), the aggregate
minimum rent due over the current terms of the Marketing Leases, substantially
all of which are scheduled to expire in December 2015, is recognized on a
straight-line basis rather than when payment is due. We have recorded the
cumulative difference between lease revenue recognized under this straight line
accounting method and the lease revenue recognized when payment is due under the
contractual payment terms as deferred rent receivable on our consolidated
balance sheet. We provide reserves for a portion of the recorded deferred rent
receivable if circumstances indicate that a property may be disposed of before
the end of the current lease term or if it is not reasonable to assume that a
tenant will make all of its contractual lease payments during the current lease
term. Our assessments and assumptions regarding the recoverability of the
deferred rent receivable related to the properties subject to the Marketing
Leases are reviewed on a regular basis and such assessments and assumptions are
subject to change.
 
 We have
had periodic discussions with representatives of Marketing regarding potential
modifications to the Marketing Leases and, in 2007, during the course of such
discussions, Marketing proposed to (i) remove approximately 40% of the
properties (the “Subject Properties”) from the Marketing Leases and eliminate
payment of rent to us, and eliminate or reduce payment of operating expenses,
with respect to the Subject Properties, and (ii) reduce the aggregate amount of
rent payable to us for the approximately 60% of the properties that would remain
under the Marketing Leases (the “Remaining Properties”). Representatives of
Marketing have also indicated to us that they are considering significant
changes to Marketing’s business model. In light of these developments and the
continued deterioration in Marketing’s annual financial performance (as
discussed below), in March 2008, we decided to attempt to negotiate with
Marketing for a modification of the Marketing Leases which removes the Subject
Properties from the Marketing Leases. In the second quarter of 2008, Marketing
revised the list of properties that it proposed be removed from the Marketing
Leases to include approximately 45% of the properties it leases from us (the
“Revised Subject Properties”). We continue our internal review of a number of
possible lease modification proposals to determine, among other things, whether
we would be willing to remove some or all of the Revised Subject Properties from
the Marketing Leases.
 
 - 45-
  We have
decided to attempt to negotiate with Marketing for a modification of the
Marketing Leases to remove the Subject Properties; however, if Marketing
ultimately determines that its business strategy is to exit all of the
properties it leases from us or to divest a composition of properties different
from the properties comprising the Subject Properties (which may include some or
all of the Revised Subject Properties), it is our intention to cooperate with
Marketing in accomplishing those objectives if we determine that it is prudent
for us to do so. Any modification of the Marketing Leases that removes the
Subject Properties or the Revised Subject Properties from the Marketing Leases
would likely significantly reduce the amount of rent we receive from Marketing
and increase our operating expenses. We cannot accurately predict if, or when,
the Marketing Leases will be modified or what the terms of any agreement may be
if the Marketing Leases are modified. We also cannot accurately predict what
actions Marketing and Lukoil may take, and what our recourse may be, whether the
Marketing Leases are modified or not.
 
 As a
result of any modification of the Marketing Leases, we intend either to relet or
sell the properties removed from the Marketing Leases and reinvest the realized
sales proceeds in new properties. We intend to seek replacement tenants or
buyers for the properties subject to the Marketing Leases either individually,
in groups of properties, or by seeking a single tenant for the entire portfolio
of properties subject to the Marketing Leases. Although we are the fee or
leasehold owner of the properties subject to the Marketing Leases and the owner
of the Getty® brand and have prior experience with tenants who operate their gas
stations, convenience stores, automotive repair services or other businesses at
our properties; in the event that the Subject Properties or other properties are
removed from the Marketing Leases, we cannot accurately predict if, when, or on
what terms, such properties could be re-let or sold.
 
 Due to the
previously disclosed deterioration in Marketing’s annual financial performance,
in conjunction with our decision to attempt to negotiate with Marketing for a
modification of the Marketing Leases to remove the Subject Properties, we have
decided 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
lease terms. In reaching this conclusion, we relied on various indicators,
including, but not limited to, the following financial results of Marketing
through the year ending 2007: (i) Marketing’s significant operating losses, (ii)
its negative cash flow from operating activities, (iii) its asset impairment
charges for underperforming assets, and (iv) its negative earnings before
interest, taxes, depreciation, amortization and rent payable to the
Company.
 
 We have
reserved $10.1 million and $10.5 million as of September 30, 2008 and December
31, 2007, respectively, of the deferred rent receivable due from Marketing. The
reserve represents the full amount of the deferred rent receivable recorded
related to the Subject Properties as of those respective dates. Providing the
non-cash deferred rent receivable reserve in the fourth quarter of 2007 reduced
our net earnings and our funds from operations but did not impact our cash flow
from operating activities or adjusted funds from operations since the impact of
the straight-line method of accounting is not included in our determination of
adjusted funds from operations. For additional information regarding funds from
operations and adjusted funds from operations, which are non-GAAP measures, see
“General — Supplemental Non-GAAP Measures” which appears in this Quarterly
Report on Form 10-Q. We have not provided a deferred rent receivable reserve
related to the Remaining Properties since, based on our assessments and
assumptions, we continue to believe that it is probable that we will collect the
deferred rent receivable related to the Remaining Properties of $22.7 million as
of September 30, 2008 and that Lukoil will not allow Marketing to fail to
perform its rental, environmental and other obligations under the Marketing
Leases. We anticipate that the rental revenue for the Remaining Properties will
continue to be recognized on a straight-line basis. Beginning with the first
quarter of 2008, the rental revenue for the Subject Properties was, and for
future periods is expected to be, effectively recognized when payment is due
under the contractual payment terms. Although we have adjusted the estimated
useful lives of certain long-lived assets for the Subject Properties, we believe
that no impairment charge was necessary for the Subject Properties as of
September 30, 2008 or December 31, 2007 pursuant to the provisions of Statement
of Financial Accounting Standards No. 144. The impact to depreciation expense
due to adjusting the estimated lives for certain long-lived assets beginning
with the quarter ended March 31, 2008 was not material.
 
 - 46-
  Marketing
is directly responsible to pay for (i) remediation of environmental
contamination it causes and compliance with various environmental laws and
regulations as the operator of our properties, and (ii) known and unknown
environmental liabilities allocated to Marketing under the terms of the Master
Lease and various other agreements between Marketing and us relating to
Marketing’s business and the properties subject to the Marketing Leases
(collectively the “Marketing Environmental Liabilities”). We may ultimately be
responsible to directly pay for Marketing Environmental Liabilities as the
property owner if Marketing fails to pay them. Additionally, we will be required
to accrue for Marketing Environmental Liabilities if we determine that it is
probable that Marketing will not meet its obligations or if our assumptions
regarding the ultimate allocation methods and share of responsibility that we
used to allocate environmental liabilities changes as a result of the factors
discussed above, or otherwise. However, we continue to believe that it is not
probable that Marketing will not pay for substantially all of the Marketing
Environmental Liabilities since we believe that Lukoil will not allow Marketing
to fail to perform its rental, environmental and other obligations under the
Marketing Leases and, accordingly, we did not accrue for the Marketing
Environmental Liabilities as of September 30, 2008 or December 31, 2007.
Nonetheless, we have determined that the aggregate amount of the Marketing
Environmental Liabilities (as estimated by us based on our assumptions and
analysis of information currently available to us) could be material to us if we
were required to accrue for all of the Marketing Environmental Liabilities in
the future since we believe that it is reasonably possible that as a result of
such accrual, we may not be in compliance with the existing financial covenants
in our Credit Agreement. Such non-compliance could result in an event of default
which, if not cured or waived, could result in the acceleration of all of our
indebtedness under the Credit Agreement.
 
 Should our
assessments, assumptions and beliefs prove to be incorrect, or if circumstances
change, the conclusions we reached may change relating to (i) whether the
Revised Subject Properties are likely to be removed from the Marketing Leases
(ii) recoverability of the deferred rent receivable for the Remaining
Properties, (iii) potential impairment of the Subject Properties or the Revised
Subject Properties, and (iv) Marketing’s ability to pay the Marketing
Environmental Liabilities. We intend to regularly review our assumptions that
affect the accounting for deferred rent receivable; long-lived assets;
environmental litigation accruals; environmental remediation liabilities; and
related recoveries from state underground storage tank funds, which may result
in material adjustments to the amounts recorded for these assets and
liabilities, and as a result of which, we may not be in compliance with the
financial covenants in our Credit Agreement. Accordingly, we may be required to
(i) reserve additional amounts of the deferred rent receivable related to the
Remaining Properties, (ii) record an impairment charge related to the Subject
Properties or the Revised Subject Properties, or (iii) accrue for Marketing
Environmental Liabilities as a result of the proposed modification of the
Marketing Leases or other factors.
 
 - 47-
  We cannot
provide any assurance that Marketing will continue to pay its debts or meet its
rental, environmental or other obligations under the Marketing Leases prior or
subsequent to any potential modification of the Marketing Leases. In the event
that Marketing cannot or will not perform its rental, environmental or other
obligations under the Marketing Leases; if the Marketing Leases are modified
significantly or terminated; if we determine that it is probable that Marketing
will not meet its environmental obligations and we accrue for such liabilities;
if we are unable to relet or sell the properties subject to the Marketing
Leases; or, if we change our assumptions that affect the accounting for rental
revenue or Marketing Environmental Liabilities related to the Marketing Leases
and various other agreements; our business, financial condition, revenues,
operating expenses, results of operations, liquidity, ability to pay dividends
and stock price may be materially adversely affected.
 
 
 Item
6.  Exhibits
 
 Exhibit
      No.
                Description
      of Exhibit31(i).1
                Rule
      13a-14(a) Certification of Chief Financial Officer31(i).2
                Rule
      13a-14(a) Certification of Chief Executive Officer32.1
                Certification
      of Chief Executive Officer pursuant to 18 U.S.C. § 1350
  (a)32.2
                Certifications
      of Chief Financial Officer pursuant to 18 U.S.C. § 1350
  (a)
  (a) These
certifications are being furnished solely to accompany the Report pursuant to 18
U.S.C. § 1350, and are not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and are not to be incorporated by
reference into any filing of the Company, whether made before or after the date
hereof, regardless of any general incorporation language in such
filing.
 - 48-
  SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 GETTY
REALTY CORP.
 (Registrant)
 
 Dated:
      November 5, 2008
                BY:
                /s/ Thomas J.
      Stirnweis(Signature)THOMAS
      J. STIRNWEISVice
      President, Treasurer andChief
      Financial OfficerDated:
      November 5, 2008
                BY:
                /s/ Leo
      Liebowitz(Signature)LEO
      LIEBOWITZChairman
      and Chief ExecutiveOfficer