Terreno Realty Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are against December 31, 2015. Terreno owns and operates industrial properties across six major coastal U.S. markets. At quarter-end, it owned 149 buildings totaling approximately 11.1 million square feet, plus a redevelopment property and three improved land parcels. The portfolio was 90.7% leased.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $25.7 million | $23.1 million | Up 10.9% |
| Net income (loss) | $7.4 million | ($0.8 million) | Improved $8.3 million |
| Common-stockholder earnings per share | $0.15 | ($0.04) | — |
| Net operating income (NOI) | $17.9 million | $16.0 million | Up 11.9% |
| Same-store NOI | $14.5 million | $13.6 million | Up 6.8% |
| Cash-basis same-store NOI | $13.6 million | $12.2 million | Up 11.5% |
| Funds from operations (FFO), attributable to common stockholders | $9.4 million; $0.22 per share | $5.8 million; $0.14 per share | FFO up 61.6% |
| Adjusted EBITDA | $15.5 million | $13.8 million | Up 12.1% |
| Net cash from operating activities | $8.6 million | $5.7 million | Up $2.9 million |
NOI and FFO are non-GAAP measures. Revenue growth reflected acquisitions and improved average occupancy in the same-store portfolio. Same-store occupancy was 92.2%, versus 92.4% a year earlier. Total revenue less property operating expenses implies an NOI margin of approximately 69.8%, compared with 69.2% in Q1 2015.
Balance sheet, debt and liquidity
- Total assets were $1.15 billion; net investments in real estate were $1.12 billion. Cash and cash equivalents were $3.6 million, down from $22.5 million at year-end; restricted cash was $2.3 million.
- Debt was $383.6 million before deferred financing costs and $381.2 million net. The debt table reports a 3.1% weighted-average interest rate. Debt-to-total investments in properties was 31.6%; debt-to-market capitalization was 26.4%.
- Quarter-end borrowings included $205 million under the credit facility, $100 million of senior unsecured notes and approximately $78.1 million of mortgage loans, net. Mortgage debt carried a 4.3% weighted-average fixed rate. The company had $100 million of revolving capacity, with $5 million drawn.
- Floating-rate debt represented 53.5% of total debt; interest-rate caps covered $150 million of variable-rate term loans. Management estimated a 0.25 percentage-point LIBOR move would change annual interest expense by approximately $0.5 million on facility borrowings outstanding at quarter-end.
- Debt maturities included $11.5 million of mortgage principal during the remaining nine months of 2016, $68.8 million in 2019 and $133.1 million in 2020. The company reported compliance with credit facility and note covenants.
Material changes and notable items
- Q1 acquisitions comprised three buildings totaling 125,480 square feet and a 4.5-acre improved land parcel, for approximately $27.9 million of aggregate investment. Two property sales generated $16.4 million of proceeds and a $5.2 million gain, materially contributing to reported GAAP earnings.
- Interest expense rose 41.2% to $3.1 million, primarily because average borrowings increased. Property operating expenses rose 8.8%, while acquisition costs fell 70.2% to $1.0 million as acquisition volume declined from the prior-year quarter.
- Operating cash flow increased, but investing outflows of $16.9 million and financing outflows of $10.6 million drove an $18.9 million decline in cash. Investing activity included $26.9 million of acquisitions, $15.9 million of sale proceeds and capital spending.
- Redevelopment continued at the South Main Street property in Carson, California: a planned 210,000-square-foot distribution building and renovation of a 34,000-square-foot office building were 73.8% pre-leased. Expected redevelopment cost was approximately $16.4 million, with total expected investment of approximately $38.0 million.
- At March 31, 10.5% of portfolio rentable area was scheduled to expire by year-end 2016. Management expected, on average, renewal or re-leasing rents for 2016 expirations to be at or above current rates, but cautioned there is no assurance leases will renew or space will re-lease at comparable rents.
Outlook, risks and contingencies
The filing gives no formal earnings or FFO guidance. Management expects to fund short-term liquidity needs through operating cash flow, cash and, if needed, credit-facility borrowings; planned property investments may be funded with debt, equity, preferred stock and property-sale proceeds. Its stated long-term capital targets include debt and preferred stock below 40% of enterprise value, fixed-charge coverage above 2.0x and debt-to-adjusted EBITDA below 6.5x. Quarter-end reported fixed-charge coverage was 3.7x and debt-to-adjusted EBITDA was 6.2x.
Key risks include tenant defaults or non-renewals, vacancy and rent pressure, acquisition and redevelopment execution, interest-rate increases and hedging effectiveness, access to capital, property valuation changes, and maintaining REIT status. Four acquisitions totaling $26.6 million and one property sale for approximately $6.1 million were under contract as of May 3, 2016, subject to due diligence and closing conditions. A subsequent April acquisition cost approximately $7.4 million. The company reported no material litigation, no material change in previously disclosed risk factors, and no material off-balance-sheet arrangements.
Investor verification priorities
- Separate recurring property performance from the $5.2 million property-sale gain when assessing GAAP earnings and FFO.
- Track occupancy and leasing progress, especially 2016 expirations and the short-term leases cited as weighing on occupancy.
- Assess cash availability, planned acquisition commitments and financing needs given quarter-end cash of $3.6 million and debt maturities.
- Monitor variable-rate exposure, interest-rate-cap coverage, debt covenants and progress against management’s leverage targets.
- Confirm completion and funding of contracted transactions and redevelopment, and test whether expected re-leasing rents are achieved.