Terreno Realty Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Terreno owns and operates industrial real estate across six coastal U.S. markets and elected REIT tax treatment. At quarter-end it owned 249 buildings totaling 15.1 million square feet, 42 improved land parcels, and four properties under redevelopment.
Financial and operating performance
| Metric | Q2 2022 | Prior-year comparison |
|---|---|---|
| Revenue | $65.4 million | Up 22.7% from $53.3 million |
| Net income | $97.0 million | Up from $17.4 million; includes a $76.0 million property-sale gain |
| Diluted EPS | $1.28 | Up from $0.25 |
| FFO per diluted share | $0.48 | Up 14.3% from $0.42 |
| Net operating income (NOI) | $49.6 million | Up 23.5%; same-store NOI rose 7.1% |
| Cash-basis same-store NOI | $37.9 million | Up 11.3% |
For the six months, revenue was $129.4 million, net income $116.7 million, diluted EPS $1.54, and FFO per diluted share $0.94. Revenue increased 24.4%, while FFO per share increased 14.6% year over year. The increase in GAAP earnings primarily reflects the property-sale gain; FFO excludes that gain.
Quarter-end building occupancy was 97.9% and improved-land occupancy was 97.0%. Same-store occupancy was 98.0%, compared with 97.9% a year earlier. Cash rents on new and renewed leases commencing in Q2 increased 55.4% over prior rents; the six-month increase was 42.8%. These leasing results accompanied tenant retention of 27.5% for the operating portfolio in Q2 and 38.6% for the first half.
Cash flow, debt and liquidity
- First-half operating cash flow was $63.2 million, versus $59.2 million a year earlier. Investing cash outflow was $219.1 million, including $277.0 million of acquisition payments; financing cash outflow was $38.6 million, primarily reflecting $51.3 million in dividends.
- Cash and cash equivalents were $7.2 million at June 30, down from $204.4 million at year-end 2021; cash plus restricted cash was $10.3 million. The cash decline largely reflects acquisitions and capital investment.
- Gross debt was $737.0 million ($733.1 million net of financing costs), with a 3.1% weighted-average interest rate and 5.4-year weighted-average maturity. Debt-to-market capitalization was 14.8%; debt-to-Adjusted EBITDA was 4.1x. The company reported compliance with debt covenants.
- The amended credit facility provides a $400 million revolving facility and a $100 million term loan; $12 million was drawn on the revolver at quarter-end. The facility transitioned its rate reference from LIBOR to SOFR. Fitch’s issuer rating was BBB with a stable outlook.
- The board declared a $0.34-per-share quarterly dividend during the period. After quarter-end it declared a $0.40-per-share dividend payable October 14, 2022.
Material developments, outlook and risks
- Terreno acquired 12 industrial properties in the first half for approximately $291.9 million, compared with 10 properties for $167.7 million in the first half of 2021. It sold one Northern New Jersey/New York City property, comprising 18 buildings, for approximately $110.4 million and recorded a $76.0 million gain.
- Four redevelopment projects had an expected total investment of $108.3 million; $99.1 million had been spent by June 30. Management reported 86.9% pre-leasing overall. Countyline 29, a separate redevelopment, was completed in Q2 for approximately $37.7 million.
- Management said it expected rental rates on 2022 expirations, representing 3.4% of portfolio annualized base rent, to average above current rates. This is commentary, not formal earnings guidance; no specific financial forecast is provided in the filing.
- Management noted inflationary pressure on construction, tenant-improvement and operating costs, partly mitigated by tenant expense recoveries and rent escalators. Risks include interest-rate increases on variable-rate debt, tenant defaults or non-renewals, leasing and valuation conditions, redevelopment delays and costs, and access to financing. The company had no interest-rate caps at quarter-end; a 0.25% SOFR move was estimated to change annual interest expense by about $0.3 million on then-outstanding facility borrowings.
- Other items: approximately $1.0 million of environmental remediation at the Avenue A property contributed to higher acquisition costs and other expenses. No real estate impairment charges were recorded. No material litigation or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Separate recurring operating performance from the $76.0 million sale gain; assess FFO, same-store NOI and cash-basis NOI alongside GAAP earnings.
- Track the sustainability of unusually strong rent increases, renewal/retention outcomes and the 2022–2026 lease-expiration schedule.
- Review funding needs and leverage after the $50 million note tranche due September 2022 was prepaid on August 1 using revolver borrowings, and consider variable-rate exposure and remaining debt maturities.
- Monitor redevelopment completion, remaining project spending, actual stabilization and acquisition commitments. Three signed purchase contracts totaled $51.3 million as of August 2; closings were subject to conditions.
- Confirm future cash generation, dividend coverage and liquidity given the sharp decrease in cash balances and continued acquisition and capital-spending plans.