Terreno Realty Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Terreno owns and operates industrial real estate in six coastal U.S. markets and reported a portfolio of 219 buildings, 22 improved land parcels and one property under redevelopment. The company is a REIT.
Financial and operating results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $47.1 million | $43.4 million | $138.0 million | $126.0 million |
| Net income | $22.7 million | $14.8 million | $66.3 million | $40.7 million |
| Diluted EPS | $0.33 | $0.22 | $0.97 | $0.63 |
| FFO per diluted share | $0.38 | $0.36 | $1.09 | $1.03 |
| Net cash from operations | Not separately provided for the quarter | Not separately provided for the quarter | $77.4 million | $68.5 million |
Revenue rose 8.6% in Q3 and 9.5% year to date. Net income increased 53.7% and 62.9%, respectively, but included real estate sale gains of $9.0 million in Q3 and $26.8 million year to date, versus $1.8 million and $6.2 million in the prior-year periods. Q3 net income margin was approximately 48% versus 34% a year earlier; the increase was materially affected by the higher sale gain. FFO, which excludes property sale gains, grew 7.4% in Q3 and 11.5% year to date.
Net operating income (NOI, a non-GAAP measure) increased 7.8% in Q3 and 8.9% year to date. Same-store NOI increased 2.7% and 1.8%, respectively. Cash-basis same-store NOI excluding termination fees increased 4.3% in Q3 and 4.6% year to date. The reported cash-basis measure benefited from a $3.3 million lease termination fee in July; Terreno also wrote off approximately $3.4 million of deferred rent receivable in connection with the lease termination.
At September 30, cash and cash equivalents were $155.3 million, up from $110.1 million at year-end 2019. Total debt was $461.4 million gross, or $459.1 million net of deferred financing costs; the reported debt-to-market-capitalization ratio was 10.9%, and debt-to-annualized Adjusted EBITDA was 3.6x. The $250 million revolving facility had no borrowings outstanding. Operating cash flow for the first nine months was $77.4 million. Cash and restricted cash totaled $156.0 million at period end.
Buildings were 97.3% leased and improved land parcels 98.5% leased. Same-store occupancy was 98.5%, compared with 98.1% a year earlier. New and renewed lease cash rents were 20.3% higher for approximately 0.9 million square feet commencing in Q3 and 25.2% higher for approximately 2.0 million square feet year to date, compared with prior rents on the same space.
Material changes and notable transactions
- Terreno acquired three buildings and two improved land parcels in the first nine months for approximately $47.6 million, compared with 15 buildings and three parcels for approximately $267.7 million in the same 2019 period.
- It sold four properties in 2020 for aggregate proceeds of approximately $73.5 million, recognizing $26.8 million in gains; 2019 sales of two properties generated $26.4 million in proceeds and $6.2 million in gains.
- Mortgage debt declined from $44.3 million at December 31, 2019 to $11.4 million at September 30, 2020, following repayment of a $32.7 million mortgage. The $15.9 million senior secured loan was fully repaid in May 2020.
- Net proceeds from common stock issuance were $55.2 million in the first nine months of 2020, versus $260.5 million in 2019. Shares outstanding were 68.2 million at quarter end, compared with 67.3 million at year-end 2019.
- Q3 dividend was $0.29 per share, up from $0.27 in each of the first two 2020 quarters. The board subsequently declared another $0.29 per share dividend payable January 5, 2021.
Outlook, risks and unusual items
Management provided no specific earnings or revenue guidance. It said it expects rents on 2020 and 2021 lease renewals or re-leasing, on average, to exceed current rents, while cautioning that COVID-19 has slowed leasing and could reduce revenue versus a normal environment. Management described the balance sheet as well positioned for opportunistic acquisitions, citing cash on hand and no revolving-credit borrowings.
Through November 3, 2020, Terreno had granted rent deferrals to 59 tenants representing 2.6% of annualized base rent. Of these, 12 tenants representing 0.3% of annualized base rent had defaulted on repayment; 34 tenants representing 2.2% were fulfilling deferral terms, and 13 had repaid in full. The filing also reports $0.7 million of rent abatements for a tenant at the Caribbean property during the first nine months. COVID-19-related risks include further tenant distress or nonpayment, weaker leasing and investment activity, construction delays, and reduced access to capital.
One property remained under redevelopment, with expected total investment of $63.3 million, estimated stabilization in Q1 2022, and 14% pre-leasing. The Kent 192 redevelopment was completed during Q3 at a total investment of approximately $33.9 million. No real estate impairment charges were recorded in the periods presented. Debt covenant compliance was reported at September 30. The $11.4 million mortgage matures in April 2021; the $100 million variable-rate term loan matures in January 2022, and the revolving facility in October 2022. Management also identified potential LIBOR replacement-rate uncertainty.
As of November 3, 2020, the company had five acquisition contracts totaling approximately $42.5 million, subject to due diligence and closing conditions, plus non-binding letters of intent for approximately $25.6 million of potential acquisitions. A $10.0 million land parcel acquisition in Los Angeles closed October 26. The share repurchase program was extended through December 31, 2022; no shares had been repurchased under the program as of September 30.
Investor verification priorities
- Assess underlying earnings and cash rent growth apart from property-sale gains and the $3.3 million lease termination fee; reconcile GAAP results with FFO, NOI and cash-basis NOI.
- Track rent-deferral repayment performance, tenant credit quality and collection trends, including the 12 reported deferral-repayment defaults and the increased receivables allowance.
- Monitor occupancy, lease rollover and re-leasing spreads as COVID-19 affects leasing conditions; 15.2% of portfolio annualized base rent was scheduled to expire through 2021.
- Review near-term debt maturities, variable-rate exposure and refinancing or repayment plans, as well as covenant headroom and liquidity after planned acquisitions and dividends.
- Confirm whether contracted or proposed acquisitions close and whether the redevelopment meets its budget, pre-leasing and stabilization assumptions.