Terreno Realty Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed February 8, 2017. Quarterly figures below refer to the three months ended December 31, 2016. Terreno owns and operates industrial properties in six coastal U.S. markets and is taxed as a REIT.
Business and portfolio
- At year-end, owned 166 buildings totaling approximately 12.0 million square feet and five improved land parcels totaling 22.8 acres. The portfolio was 97.4% leased to 376 customers; warehouse/distribution represented 92.7% of building area.
- Largest tenant, FedEx, represented 5.7% of annualized base rent. Northern New Jersey/New York City and Washington, D.C./Baltimore each generated 23.9% of annualized base rent.
- Weighted-average remaining lease term was 4.2 years. Approximately 89.9% of leased space had fixed or CPI-based rent increases.
Key financial results
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $108.4 million | $95.9 million |
| Net income | $15.1 million | $14.6 million |
| Net income available to common stockholders | $11.5 million; $0.26 per share | $11.0 million; $0.26 per share |
| Funds from operations (FFO), a non-GAAP measure | $38.4 million; $0.86 per share | $36.2 million; $0.84 per share |
| Net operating income (NOI), a non-GAAP measure | $78.1 million | $69.2 million |
| Cash from operating activities | $49.2 million | $42.1 million |
| Cash used in investing activities | $151.2 million | $255.4 million |
| Cash from financing activities | $93.8 million | $45.1 million |
Fourth quarter: Revenue was $29.8 million, net income was $1.8 million, and net income available to common stockholders was $0.9 million ($0.02 per share). FFO was $10.0 million ($0.22 per share), versus $7.4 million ($0.17 per share) in Q4 2015.
Debt and liquidity: Year-end debt, net of deferred financing costs, was $415.3 million, up from $381.5 million; cash and cash equivalents were $14.2 million, down from $22.5 million. A $200 million revolving facility had $51.5 million drawn. Debt-to-adjusted EBITDA was 5.4x, fixed-charge coverage was 4.0x, and floating-rate debt was 48.2% of total debt. Interest-rate caps covered $150 million of variable-rate term loans. Fitch rated the company BBB- with a stable outlook; Terreno reported compliance with debt covenants.
Common dividends declared rose to $0.76 per share from $0.66 in 2015; preferred dividends were $1.94 per share in both years. Operating cash flow exceeded 2016 common and preferred cash dividends paid, which totaled approximately $36.7 million.
Changes versus 2015 and notable items
- Revenue rose 13.1%; NOI rose 12.8%; net income rose 3.5%; and FFO per share rose 2.4%. Same-store NOI increased 4.9%, while same-store occupancy at year-end improved to 99.0% from 92.6%.
- Management attributed revenue growth to acquisitions and stronger same-store occupancy. Interest expense increased 35.4% to $13.1 million, and general and administrative expense increased 30.1% to $19.3 million, including higher performance-share award expense. Lower gains on property sales partly offset operating growth: gains were $7.1 million versus $10.6 million.
- Acquired 19 buildings and two land parcels for an aggregate initial investment of approximately $130.9 million; sold three properties for $22.5 million, recording $7.1 million in gains. Completed the South Main redevelopment in California; the property was 100% leased.
- Issued $50 million of 3.99% ten-year unsecured notes and amended the credit facility, increasing the revolver to $200 million and extending maturities. Issued approximately 4.0 million common shares through ATM programs for net proceeds of approximately $99.9 million. A new ATM program authorized up to $150 million; $145.5 million remained available at year-end.
- Capital expenditures were $45.3 million, up from $23.3 million, including increased stabilization and redevelopment spending. No impairment charges were recorded in 2014–2016; no material litigation or material environmental exposure was reported. The company reported no material off-balance-sheet arrangements.
Outlook, risks, and contingencies
- Management described operating conditions in its six markets as excellent and expected 2017 new or renewed rents, on average, to be at or above existing rents. It expected to acquire more in 2017 than in 2016, subject to opportunity quality, pricing, and its share price relative to net asset value. Management cautioned that new speculative development could moderate rent growth.
- Over four to five years, management targeted portfolio growth to approximately $3 billion of assets from approximately $1.8 billion, with equity increasing to approximately $2 billion from approximately $1.3 billion. These are targets, not guarantees.
- Leases covering 9.3% of rentable area and 10.0% of annualized base rent were scheduled to expire in 2017. The company expected rents on these renewals or relettings to exceed current rates, but provided no assurance.
- Key risks include acquisition availability and pricing, tenant defaults and lease renewals, development competition, market concentration, refinancing and interest-rate exposure, dividend constraints, and environmental, natural-disaster, and insurance risks. Management’s long-term financing goals include floating-rate debt below 20% of total debt; the reported 2016 ratio was 48.2%, despite interest-rate caps on $150 million of variable-rate loans.
- As of February 8, 2017, three property acquisitions were under contract for $68.6 million, and a separate $3.9 million property was covered only by a non-binding letter of intent. Completion was not assured. Two additional buildings had been acquired after year-end for approximately $14.9 million.
Important facts for investors to verify
- Reconcile GAAP earnings with FFO and NOI, and assess whether same-store growth and occupancy gains persist without acquisition-driven growth.
- Review debt maturities, revolver availability, covenant headroom, floating-rate exposure, and the company’s progress toward its stated leverage and fixed-charge goals.
- Assess 2017 lease expirations, actual renewal spreads, tenant improvements, and leasing costs against management’s rent expectations.
- Track share issuance under the ATM program and its effect on per-share results, alongside the pace, funding, and returns of acquisitions.
- Confirm the status and final terms of pending acquisitions and evaluate whether the multiyear asset and equity growth targets are achieved without weakening per-share value or credit quality.