Terreno Realty Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; unaudited. Terreno is an internally managed REIT focused on industrial properties in six coastal U.S. markets. At quarter-end it owned 183 buildings totaling approximately 12.5 million square feet, leased 96.7%, plus eight improved land parcels totaling 41.6 acres.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $33.6 million | $27.1 million | $97.9 million | $78.6 million |
| Net income | $20.9 million | $3.1 million | $42.3 million | $13.3 million |
| Net income available to common stockholders | $18.9 million | $2.2 million | $38.3 million | $10.5 million |
| Basic and diluted EPS | $0.36 | $0.05 | $0.76 | $0.24 |
| FFO attributable to common stockholders | $13.0 million | $9.1 million | $40.5 million | $28.4 million |
| FFO per share | $0.25 | $0.20 | $0.80 | $0.64 |
| Net operating income (NOI) | $24.6 million | $19.8 million | $71.8 million | $56.4 million |
Revenue increased 24.1% in Q3 and 24.5% for the nine-month period, driven by acquisitions, higher occupancy and new or renewed leases. Same-store NOI rose 12.5% in Q3 and 15.3% year to date; same-store occupancy was 97.5%, versus 96.1% a year earlier. Management reported that rents on leases commencing in the first nine months were approximately 12.5% above prior rents (14.7% for Q3 commencements).
Net income growth substantially reflects property-sale gains: $15.4 million in Q3 and $25.5 million for the first nine months, compared with $1.9 million and $7.1 million, respectively, in 2016. Excluding these gains through the company’s FFO measure, FFO per share increased 25% in both comparison periods. Q3 interest expense rose $1.2 million year over year, primarily due to higher average borrowings; nine-month interest expense rose $2.7 million.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $53.7 million, up from $37.2 million. Investing cash use was $144.9 million, including $190.1 million for acquisitions, partly offset by $64.2 million of property-sale proceeds. Financing cash flow provided $186.1 million.
- Cash and cash equivalents were $109.1 million at September 30, 2017; restricted cash was $4.3 million. Net cash increased $94.8 million during the nine months.
- Debt carrying value, net of financing costs, was $462.0 million, versus $415.3 million at December 31, 2016. Gross scheduled debt was $465.5 million. Reported debt-to-market capitalization was 19.0%, debt-to-investments in properties 30.3%, and debt-to-adjusted EBITDA 5.2x. Interest coverage was 5.3x and fixed-charge coverage 4.6x.
- The company had $150 million of variable-rate term loans, all covered by interest-rate caps, and $65.3 million of fixed-rate mortgage debt. It reported no revolving-credit borrowings and compliance with debt covenants at quarter-end. Debt’s weighted-average interest rate was 3.6%.
- Terreno issued $100 million of seven-year senior notes at 3.75% in July. Proceeds funded the redemption of all $46 million of Series A preferred stock, repayment of revolving-credit borrowings and acquisitions. The company also issued 7.0 million common shares through ATM programs during the nine months, producing $221.2 million net proceeds. A $200 million ATM program had $120.9 million remaining at quarter-end.
Material changes, outlook and risks
- Terreno acquired 21 buildings and three land parcels during the first nine months, for an aggregate initial investment of approximately $209.8 million. It sold three properties for $65.8 million in total, recognizing $25.5 million of gains. One Washington, D.C. property, with a $6.1 million net book value, was held for sale under an approximately $11.5 million agreement subject to due diligence and closing conditions.
- On October 19, 23 and 30, the company acquired three additional properties for approximately $19.9 million total. As of November 1, it also had seller contracts for acquisitions totaling $104.2 million and non-binding letters of intent totaling $47.3 million; completion is not assured.
- Management expects rents on 2017 and 2018 expirations, on average, to exceed current rents, but cautioned that renewals and re-leasing at equal or higher rates are not assured. Approximately 12.4% of portfolio square footage was scheduled to expire through 2018.
- No formal earnings or operating guidance is provided. Management said operating cash flow, cash balances and available financing are expected to meet near-term requirements; future investment funding may use debt, equity and property-sale proceeds. The board declared a $0.22-per-share common dividend payable January 12, 2018.
- Key risks include tenant defaults or non-renewals, vacancy and rental-rate changes, competition and local market conditions, acquisition execution, interest-rate exposure, access to capital, leverage and debt service, property values, redevelopment, natural disasters and maintaining REIT status. Northern New Jersey/New York City represented 26.2% of annualized base rent and Washington, D.C. 19.2%; no tenant exceeded 10%, and the largest accounted for 5.4%.
- Hurricane Irma-related property expenses were approximately $0.1 million in Q3. No impairment charges were recorded. The company was evaluating new revenue and lease accounting standards; it expected no material impact from revenue-standard adoption but had not quantified effects, including possible changes to the timing of real-estate-sale gains. No material litigation or material changes to previously reported risk factors were disclosed.
Important facts for investors to verify
- How much of earnings growth is recurring property performance versus gains from asset sales; compare GAAP net income with FFO and same-store NOI.
- Whether acquisition growth and rent increases persist, and the leasing outcome for the 2017–2018 expirations, especially in markets with lower occupancy.
- Effects of common-share issuance and the remaining ATM capacity on per-share results, alongside the preferred-stock redemption and its financing cost.
- Debt maturity and refinancing exposure, floating-rate debt and cap protection, covenant headroom, and the company’s ability to fund planned acquisitions and distributions.
- Whether the pending property sale and contracted acquisitions close, and the eventual accounting effects of the new revenue and lease standards.