Terreno Realty Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. Terreno is a REIT focused on industrial real estate in six coastal U.S. markets. At quarter-end, it owned 207 buildings totaling 12.9 million square feet, leased 98.1%, plus 18 improved land parcels and four buildings under redevelopment.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Revenue | $40.9 million | $37.1 million; up 10.2% |
| Net income | $15.5 million; $0.25 diluted EPS | $10.1 million; $0.18 diluted EPS |
| Funds from operations (FFO) | $21.3 million; $0.35 per diluted share | $17.4 million; $0.32 per diluted share |
| Net operating income (NOI) | $30.2 million | $27.2 million; up 10.9% |
| Same-store NOI | $27.6 million; up 6.7% | $25.8 million |
| Cash-basis same-store NOI | $26.7 million; up 11.1% | $24.0 million |
| Operating cash flow | $19.8 million | $14.7 million |
| Cash and restricted cash | $62.4 million | $34.5 million at December 31, 2018 |
| Total debt, net | $442.9 million | $462.1 million at December 31, 2018 |
Net income includes a $4.5 million gain on a property sale. Q1 2018 included a $3.3 million property-sale gain. Revenue growth reflected acquisitions and higher rents on new and renewed leases. Same-store occupancy was 99.0%, compared with 96.7% a year earlier. The filing reports no impairment charges in either quarter.
Q1 investing cash outflow was $27.7 million, including $25.8 million of cash paid for acquisitions, partly offset by $12.0 million of property-sale proceeds. Financing cash inflow was $35.8 million, including approximately $73.8 million of net common-stock issuance proceeds, offset in part by dividends and net credit-facility repayments. The common dividend was $0.24 per share, versus $0.22 in Q1 2018.
Debt comprised $150 million of variable-rate term loans, $250 million of senior unsecured notes, and approximately $45.5 million of mortgage loans. The revolving facility had no borrowings at quarter-end and provides $250 million of capacity. Weighted-average debt interest rate was 4.0%; all $150 million of floating-rate term debt was subject to interest-rate caps. Debt-to-market capitalization was 14.3%, debt-to-adjusted EBITDA was 3.9x, and interest and fixed-charge coverage were 6.6x and 5.6x, respectively. The company reported compliance with debt covenants and a BBB issuer rating with stable outlook from Fitch.
Material changes versus the prior comparable period
- Revenue increased 10.2%; same-store NOI rose 6.7%, with cash-basis same-store NOI up 11.1%.
- Net income rose 54.4%, reflecting stronger property operations, increased interest and other income, and a larger property-sale gain. FFO per diluted share increased 9.4% to $0.35.
- Operating cash flow increased by $5.1 million. Acquisition cash spending was lower than in Q1 2018 ($25.8 million versus $85.4 million).
- Terreno issued 1,988,801 shares under its ATM program at a weighted-average $41.39, generating approximately $81.1 million net proceeds. The offering program had $47.6 million remaining at quarter-end.
- Two properties securing the senior secured loan were acquired for approximately $39.1 million, reducing the loan balance from $54.5 million to $15.8 million. This transaction was a non-cash loan repayment.
Outlook, commentary, and risks
- No formal full-year earnings or FFO guidance is provided. Management said it expects average rental rates on 2019 lease expirations to exceed current rates; rent changes on approximately 1.0 million square feet of leases commencing in Q1 were 14.5% above prior rents.
- Four redevelopment projects are expected to deliver approximately 612,000 square feet, with total expected investment of $126.1 million and estimated remaining spend of $34.6 million at March 31. Estimated stabilized cap rates range from 5.0% to 5.6%; these estimates are not guarantees. A Miami redevelopment was completed and leased under a five-year lease.
- As of May 1, the company had contracts to acquire properties for a total of $52.1 million, subject to due diligence and closing conditions, and non-binding letters of intent for additional prospective acquisitions with an anticipated price of $83.4 million.
- Key stated risks include tenant defaults or non-renewals, vacancy or lower rents, competition, interest-rate increases, access to financing, leverage and debt service, redevelopment execution, property valuations, environmental or natural-disaster exposure, and maintaining REIT status. Northern New Jersey/New York City represented 26.8% of annualized base rent; no tenant exceeded 10% of quarterly rental revenue.
- Terreno adopted the new lease-accounting standard in January 2019 with no material financial-statement impact; it recognized a corporate-office lease liability of approximately $0.8 million at quarter-end. Management reported effective disclosure controls and no material litigation or material change in internal control.
Important facts for investors to verify
- Whether same-store rent growth, occupancy, and reported leasing spreads persist as leases expire and renew.
- Whether redevelopment projects meet estimated costs, completion dates, leasing assumptions, and stabilized returns.
- How the substantial Q1 ATM issuance affects per-share results, and whether additional equity issuance is needed to fund growth.
- Debt maturity and refinancing exposure, particularly the scheduled $33.1 million of mortgage principal in 2020 and $150 million of debt in 2022; also monitor variable-rate exposure despite the caps.
- Collection and repayment of the remaining $15.8 million senior secured loan, due May 2020, and completion of acquisitions under contract or letter of intent.
- Underlying operating performance apart from property-sale gains and other nonrecurring or non-cash items; FFO and NOI are non-GAAP measures and should be reviewed alongside GAAP results.