Terreno Realty Corp quarterly report, Q2 FY2012

Terreno Realty Corporation — Q2 2012 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2012. Terreno acquires and operates industrial properties in six major U.S. coastal markets. At quarter-end, it owned 54 buildings totaling approximately 4.2 million square feet and was 91.3% leased.

Financial performance and condition

Metric	Q2 2012	Q2 2011	Six months 2012	Six months 2011
Total revenue	$7.6 million	$3.8 million	$14.2 million	$7.1 million
Net income (loss)	$257,000	($2.0 million)	($10,000)	($3.3 million)
FFO	$2.1 million	($944,000)	$3.6 million	($1.3 million)
FFO per common share	$0.16	($0.10)	$0.28	($0.14)
NOI	$5.5 million	$2.3 million	$10.2 million	$4.2 million
Operating cash flow	Not stated by quarter	$3.3 million	($1.5 million)

Q2 NOI was approximately 72% of total revenue; six-month NOI was approximately 72% of revenue. These are calculated ratios, not separately reported margins.
Same-store NOI increased 45.1% in Q2 and 37.9% for the six months. Same-store occupancy at quarter-end rose to 92.7% from 69.1% a year earlier.
At June 30, total assets were $351.4 million, total liabilities $140.1 million, and stockholders’ equity $211.4 million. Cash and cash equivalents were $4.7 million; restricted cash was $4.3 million.
Debt totaled $129.4 million, including $22.0 million under the revolver, $10.1 million under the term loan, and $97.4 million of mortgages. Weighted-average debt interest rate was 4.0%; 24.8% of debt was floating-rate. Debt was 37.5% of property investment book value and 38.9% of total market capitalization.
Six-month interest coverage was 3.6x, using Adjusted EBITDA divided by interest expense; total debt to annualized Adjusted EBITDA was 7.7x. The company reported compliance with debt covenants.
Common dividends declared were $0.12 per share for Q2 and $0.22 per share for the first six months, versus $0.10 and $0.20, respectively, in 2011.

Changes versus the prior comparable period

Q2 revenue more than doubled, up 101.8%; six-month revenue rose 99.1%. Growth reflected acquisitions and higher same-store occupancy.
Q2 net results improved from a $2.0 million loss to $257,000 income; the six-month loss narrowed to $10,000 from $3.3 million.
Interest expense rose 140.5% in Q2 and 155.8% for the six months, primarily due to mortgage debt and borrowings associated with acquisitions. Depreciation and amortization also increased substantially as the portfolio expanded.
Terreno acquired seven buildings totaling approximately 775,898 square feet for an aggregate initial investment of $74.8 million in the first half. Property operating expenses increased, but same-store operating expenses declined.

Outlook, financing, risks, and unusual items

No specific earnings, revenue, occupancy, or acquisition guidance was provided. Management expects to fund near-term liquidity needs through operating cash flow, existing cash, and, if needed, revolver borrowings; future growth may use mortgages, loans, equity and property dispositions.
Management’s long-term financing objectives include debt plus preferred-stock liquidation preference below 40% of enterprise value, fixed-charge coverage above 2.0x, and floating-rate debt below 20% of total debt. Floating-rate debt was 24.8% at quarter-end.
The revolver was increased from $80 million to $100 million in June, with potential expansion to $150 million subject to lender approval and availability. Its maturity is January 2015, with a conditional one-year extension. The $10.1 million term loan matures in February 2013, subject to a conditional six-month extension.
Two new fixed-rate, non-recourse mortgages were entered into during 2012: $20.1 million at 3.79% and $39.8 million at 3.65%. Total mortgage debt was $97.4 million, at a 4.3% weighted-average fixed rate.
After quarter-end, the company issued 1.84 million shares of 7.75% Series A preferred stock, netting approximately $44.3 million, and used the proceeds to reduce revolver borrowings. It also acquired six buildings for approximately $55.7 million. These transactions were subsequent events and are not included in June 30 balances.
Q2 included approximately $0.8 million of straight-line rental revenue associated with contractual rent abatements; the comparable six-month amount was approximately $1.5 million. No impairment charges were recorded in the periods presented.
As of August 7, the company had acquisition contracts for properties with a stated purchase price of $19.0 million and assumed debt of $9.7 million, subject to due diligence, closing conditions and lender consent. It also had a conditional agreement to sell a Los Angeles property for approximately $17.2 million.
Key disclosed risks include tenant default or non-renewal, vacancy and rent pressure, concentration in markets and tenants, acquisition and financing access, interest-rate increases, property valuation and impairment, and maintaining REIT status. Ten tenants accounted for 56.1% of six-month rental revenue; Northern New Jersey/New York City represented 38.7% of annualized base rent.
Management reported effective disclosure controls, no material litigation known, and no material changes to previously disclosed risk factors.

Important facts for investors to verify

Whether acquisitions and rising occupancy translate into sustainable cash rent and same-store cash NOI; reported same-store NOI included straight-line rent and lease-intangible amortization.
Revolver availability under borrowing-base limits and covenants, and the company’s plan for the 2013 term-loan maturity and 2015 revolver maturity.
Tenant and geographic concentration, lease expirations, and the ability to renew or replace tenants without lower rents or extended vacancy.
Completion and financing of the contracted purchases and sale, and the effects of the subsequent preferred offering and acquisitions on leverage, distributions and per-share results.
The filing reports $129.4 million of balance-sheet debt, while its contractual-obligations table lists $106.9 million of debt; investors should reconcile the differing presentation and scope.