Terreno Realty Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Terreno is an internally managed REIT focused on industrial real estate in six coastal U.S. markets. At quarter-end it owned 252 buildings totaling approximately 15.4 million square feet and 46 improved-land parcels totaling 159.9 acres; two additional properties were under redevelopment.
Financial performance and operating metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $70.8 million | $57.3 million | $200.2 million | $161.3 million |
| Net income | $22.4 million | $21.4 million | $139.1 million | $55.0 million |
| Diluted EPS | $0.30 | $0.30 | $1.84 | $0.79 |
| FFO per diluted share | $0.52 | $0.45 | $1.46 | $1.27 |
| Net operating income (NOI) | $53.7 million | $43.1 million | $150.4 million | $120.4 million |
| Same-store NOI | $41.2 million | $38.4 million | $119.0 million | $110.5 million |
| Cash-basis same-store NOI | $38.9 million | $35.6 million | $112.9 million | $102.0 million |
Q3 revenue rose 23.6%; same-store NOI increased 7.2% and cash-basis same-store NOI increased 9.2%. Buildings were 98.4% leased and improved land 91.6% leased. Cash rents on new and renewed leases were approximately 65.9% above prior rents for leases commencing in Q3 and 50.3% higher for those commencing in the first nine months. These are company-reported operating measures; FFO and NOI are non-GAAP measures.
Q3 net income increased 5.1%, while diluted EPS was unchanged. For the nine-month period, net income included a $76.0 million gain on a property sale, compared with a $3.2 million gain in 2021. Excluding the sale gain through its FFO calculation, nine-month FFO attributable to common stockholders increased 24.1% to $109.8 million.
Cash flow, debt and liquidity
- Cash flow: Nine-month operating cash flow was $109.0 million, versus $98.4 million. Investing activities used $313.8 million, including property acquisitions and capital improvements, partly offset by $106.8 million of net sale proceeds. Financing activities provided $11.0 million. Cash and restricted cash totaled $11.0 million at September 30, down from $204.8 million at year-end 2021.
- Debt: Principal debt was $785.0 million ($780.6 million net of unamortized financing costs); all debt was unsecured. Weighted-average debt interest rate was 3.4%. Debt maturities include $100 million in 2024, $10 million in 2025, $50 million in 2026 and $625 million thereafter.
- Variable-rate exposure: $210 million was outstanding under the SOFR-based credit facility and term loans, with no interest-rate caps. Management estimated that a 0.25 percentage-point rate change would alter annual interest expense by approximately $0.5 million, based on quarter-end borrowings.
- Credit capacity and leverage: The revolving facility has $400 million of capacity and matures in August 2025; $10 million was drawn at quarter-end. The company reported 4.0x total debt to annualized Adjusted EBITDA, 8.3x interest coverage and 7.3x fixed-charge coverage for the nine months. It was in covenant compliance and reported a BBB issuer rating with stable outlook.
- Distributions and equity: Dividends paid during the first nine months totaled $77.0 million. The quarterly dividend was raised to $0.40 per share from $0.34 earlier in 2022; a $0.40 dividend payable in January 2023 was declared after quarter-end. The ATM program had $190.5 million remaining at September 30.
Material changes, outlook and risks
- Revenue growth reflected acquisitions, higher occupancy and rent increases. Q3 same-store occupancy was 98.9%, compared with 98.6% a year earlier.
- During the first nine months, Terreno acquired 16 properties for an initial investment of approximately $360.8 million. It sold a property comprising 18 buildings for $110.4 million, recognizing a $76.0 million gain. No properties were sold in Q3.
- Interest expense rose 33.7% in Q3 and 27.6% for the first nine months, primarily due to additional notes and term-loan borrowings. The company prepaid $50 million of notes in August and drew a new $100 million term loan in September.
- Two redevelopment projects had total expected investment of $51.3 million, with $6.9 million remaining to spend and estimated completion in Q1 and Q2 2023. Neither was pre-leased at quarter-end. The estimated stabilized cap rate was 4.7% combined; these estimates are not guarantees.
- Management cited inflation-related construction and operating-cost increases, including higher insurance, taxes and utilities. Many leases pass through operating expenses, and approximately 93.8% of leased space has fixed or CPI-based rent increases. Management expects 2022 expirations to re-lease or renew, on average, above current rents, but cautions that future rents and retention are uncertain.
- Risks include higher interest rates, tenant defaults or non-renewals, vacancies and rent changes, property valuations, acquisition and redevelopment execution, construction delays and supply-chain disruption, capital-market access, and maintaining REIT status. Northern New Jersey/New York City represented 24.2% of annualized base rent; no tenant exceeded 10% and the largest represented 4.5%.
- Two properties were classified as held for sale at quarter-end, with expected sales prices of approximately $26.5 million and $8.7 million, subject to closing conditions. The Seattle property sold for $8.7 million on October 13. After quarter-end, the company also acquired properties in Miami and Los Angeles for $4.7 million and $17.0 million, respectively.
- No property impairment charges were recorded in the reported periods. The filing reports approximately $1.0 million of environmental remediation expense at the Avenue A property during the first nine months. Management reported no material litigation, no material change to previously disclosed risk factors, and effective disclosure controls. No formal earnings or FFO guidance is provided in the supplied filing text.
Most important facts for investors to verify
- Reconcile reported net-income growth with the $76.0 million property-sale gain; assess recurring performance using FFO, NOI and cash-basis same-store NOI, which are non-GAAP measures.
- Review the sharp decline in cash balances alongside acquisitions, capital spending, dividends and debt funding needs.
- Monitor SOFR exposure, future borrowing costs, debt maturities and covenant headroom; the reported 4.0x leverage measure uses annualized Adjusted EBITDA.
- Track lease renewals, rent increases, retention, occupancy and the 11.9% of portfolio annualized base rent scheduled to expire through 2023.
- Verify that redevelopment estimates, held-for-sale transactions and announced post-quarter acquisitions close or complete as expected; the filing notes relevant conditions and forecast uncertainty.