Terreno Realty Corporation — Q2 2016 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2016; financial statements are unaudited. Terreno owns and operates industrial real estate in six coastal U.S. markets and is a REIT. At quarter-end, its portfolio included 153 buildings totaling approximately 11.2 million square feet, one redevelopment property and three improved land parcels. Buildings were 92.7% leased to 358 customers; the largest tenant represented approximately 5.5% of annualized base rent.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $25.8 million | $24.2 million | $51.5 million | $47.4 million |
| Net income | $2.8 million | $10.7 million | $10.2 million | $9.8 million |
| Net income available to common shareholders | $1.9 million; $0.04/share | $9.8 million; $0.23/share | $8.4 million; $0.19/share | $8.0 million; $0.19/share |
| Net operating income (NOI, non-GAAP) | $18.7 million | $18.0 million | $36.6 million | $34.0 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $21.1 million | $18.4 million |
Q2 NOI was approximately 72.5% of revenue; six-month NOI was approximately 71.1% of revenue. These are calculated ratios using the filing’s non-GAAP NOI and reported revenue, not company-reported margins. Six-month FFO attributable to common shareholders was $19.3 million, or $0.44 per share, up 10.5% and 7.3%, respectively. Q2 FFO was $9.9 million, or $0.22 per share, down 15.2% and 18.5% year over year.
At June 30, cash and cash equivalents were $22.2 million; restricted cash was $2.2 million. Debt was $375.5 million net of financing costs (approximately $377.9 million before those costs). No revolving-credit borrowings were outstanding; $200 million was outstanding on term loans. Mortgage debt was $77.5 million, with a 4.3% weighted-average fixed rate. The company reported total debt-to-market capitalization of 23.3%, debt-to-adjusted EBITDA of 5.7x, and fixed-charge coverage of 3.8x. It was in compliance with debt covenants.
Material changes versus prior comparable period
- Q2 revenue rose 6.5%; same-store NOI increased 2.8%, while cash-basis same-store NOI increased 4.5%. For the first half, revenue rose 8.7%, same-store NOI 4.8%, and cash-basis same-store NOI 7.8%.
- Q2 net income fell 73.9%, primarily because the prior-year quarter included a $6.3 million gain on property sales; there was no such gain in Q2 2016. Higher interest expense and general and administrative costs also weighed on results. First-half net income increased 4.0%, including $5.2 million of property-sale gains in 2016.
- Interest expense rose 42.5% in Q2 and 41.8% in the first half, which management attributed primarily to higher average borrowings. General and administrative expense rose 39.1% in Q2, primarily due to increased performance-share award expense.
- First-half acquisitions were seven industrial buildings totaling approximately 287,500 square feet and an improved 4.5-acre parcel, for aggregate initial investment of approximately $49.3 million, compared with approximately $168.6 million invested in 13 buildings in the first half of 2015.
- The company issued 2.63 million shares under its at-the-market program in the first half, generating approximately $62.8 million net proceeds. Common shares outstanding increased to 46.1 million from 43.3 million at year-end 2015.
Outlook, commentary, risks and unusual items
- No formal earnings or FFO guidance is provided. Management said it currently expects average rents on 2016 lease renewals or re-leasing to be at or above existing rates, while cautioning that renewals and achieved rents are not assured.
- Approximately 5.6% of portfolio rentable area was scheduled to expire through year-end 2016. A 221,000-square-foot vacancy at the Interstate property reduced occupancy; a five-year lease for that space was signed to commence September 1, 2016.
- South Main Street redevelopment in Carson, California, was 73.8% pre-leased at quarter-end. Completion of the distribution and office buildings was expected in September 2016; expected total investment was approximately $38.9 million, including redevelopment costs.
- After quarter-end, Terreno issued $50 million of ten-year unsecured notes at a fixed 3.99% rate, maturing in July 2026; acquired a 13.4-acre improved land parcel for approximately $8.2 million; and declared a common dividend of $0.20 per share for October 2016.
- As of July 27, the company had contracts to acquire five properties totaling 441,385 square feet for approximately $47.5 million, subject to due diligence and closing conditions, plus a non-binding letter of intent for a property priced at approximately $24.9 million. One Miami property was under contract to sell for approximately $6.1 million, also subject to conditions.
- Key risks include tenant defaults or non-renewals, vacancy and rent pressure, acquisition and redevelopment execution, property-market conditions, interest-rate exposure, access to financing, refinancing obligations, and maintaining REIT status. Approximately 53% of debt was floating-rate; $150 million of variable-rate term loans was covered by interest-rate caps. Management estimated a 0.25% LIBOR change would affect annual interest expense by approximately $0.5 million at quarter-end balances.
- Two properties sold in the first half generated a combined $5.2 million gain. No impairment charges were recorded in the periods presented. The filing reports no material litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the Interstate lease commences as scheduled and the effect of the previously vacant 221,000 square feet on occupancy and rent.
- Completion costs, timing, and lease-up of the South Main Street redevelopment.
- Closing and funding of the contracted acquisitions and sale, and whether the letter-of-intent transaction proceeds.
- Cash-flow and per-share effects of the substantial ATM share issuance, alongside growth in NOI and FFO.
- Debt maturities, floating-rate exposure, interest-rate-cap coverage, and compliance with financial covenants.
- Lease expirations and tenant concentration by market; Northern New Jersey/New York City and Washington, D.C./Baltimore represented 23.7% and 22.8% of annualized base rent, respectively.