Terreno Realty Corporation — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone Q4 filing; quarterly figures below are identified where relevant. The company owns and operates industrial real estate in six coastal U.S. markets and elected REIT tax treatment.
Business context and portfolio
- At year-end, Terreno owned 148 buildings totaling approximately 11.1 million square feet, one redevelopment property planned to contain approximately 0.2 million square feet, and two improved land parcels. Portfolio occupancy was 91.5%, across 352 customers.
- Warehouse/distribution represented 92.2% of portfolio square footage. The largest tenant, FedEx, represented 4.4% of annualized base rent; no tenant contributed more than 10% of annual rental revenue.
- Approximately 86% of leased space had fixed or CPI-based rental increases. Weighted average remaining lease term was 3.9 years.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenue | $95.9 million | $68.9 million |
| Net income | $14.6 million | $10.7 million |
| Net income available to common stockholders | $11.0 million; $0.26 per share | $7.1 million; $0.23 per share |
| FFO attributable to common stockholders | $36.2 million; $0.84 per share | $26.1 million; $0.86 per share |
| Cash from operating activities | $42.1 million | $29.3 million |
| Cash and cash equivalents at year-end | $22.5 million | $190.6 million |
| Total debt, net of deferred financing costs | $381.5 million | $302.5 million |
- Revenue increased 39.2%, primarily from acquisitions, higher rents and occupancy gains in parts of the portfolio. Same-store NOI rose 3.6%; same-store occupancy declined to 94.4% from 95.4%.
- FFO increased 38.6% in total, while FFO per share decreased 2.8%, reflecting substantial growth in weighted-average common shares. Same-space new and renewed rents commenced during 2015 were approximately 9% above prior rents.
- Net income included $10.6 million of gains on property sales. Depreciation and amortization increased 87.9% to $36.0 million, partly reflecting acquisitions and approximately $4.0 million of additional depreciation associated with redevelopment.
- Net cash used in investing activities was $255.4 million, primarily for acquisitions and capital improvements. Financing activities provided $45.1 million; cash declined by $168.2 million during the year, largely as cash was deployed for growth.
- Debt included $200 million of variable-rate term loans, $100 million of senior unsecured notes and approximately $83.5 million of mortgage loans. The revolving facility had no year-end borrowings and $100 million of capacity. The weighted average interest rate on total debt was 3.1%; $150 million of variable-rate term loans was hedged with interest-rate caps.
- Reported leverage measures included debt-to-market capitalization of 27.1%, debt-to-adjusted EBITDA of 6.3x and fixed-charge coverage of 4.5x. Floating-rate debt was 52.2% of total debt, above management’s stated long-term objective of less than 20%. Fitch assigned an initial BBB- rating with a stable outlook in 2015.
- Common dividends declared were $0.66 per share for 2015, up from $0.57 in 2014; the quarterly rate increased to $0.18 in Q4. Preferred dividends were $0.484375 per share quarterly.
Material changes and notable items
- Terreno acquired 29 buildings totaling approximately 2.27 million square feet in 2015 for an aggregate investment of approximately $271.5 million. It sold two properties for approximately $24.6 million, recognizing $10.6 million in gains.
- Redevelopment began at the South Main Street property in Carson, California. The project was 73.8% pre-leased; expected redevelopment cost was approximately $16.4 million and expected total investment approximately $38.0 million.
- The company issued $100 million of fixed-rate senior unsecured notes: $50 million at 4.23% due 2022 and $50 million at 4.65% due 2027.
- Year-end common FFO per share was lower despite higher total FFO. Common shares outstanding rose from 42.9 million to 43.3 million; weighted-average shares increased more materially versus 2014.
- In Q4, GAAP net income was $0.6 million, but net income available to common stockholders was a loss of $0.3 million, or $0.01 per share, after preferred dividends and allocations. Q4 FFO per share was $0.17 versus $0.20 a year earlier.
Outlook, risks and contingencies
- Management described operating conditions in its six markets as excellent and expected 2016 new or renewed rents, on average, to be at or above current rents. It cautioned that new speculative development could moderate rent growth.
- Over the next four to five years, management targeted portfolio assets of approximately $3 billion, versus about $1.2 billion, and anticipated approximately $2 billion of equity, versus about $1 billion. These are targets, not guarantees.
- Leases covering 15.1% of rentable square feet and 13.9% of annualized base rent were scheduled to expire in 2016. Management expected renewal or re-leasing rates generally to exceed current rates, but gave no assurance.
- Key risks include acquisition competition and execution, tenant defaults or vacancies, market and property-value declines, refinancing and interest-rate exposure, concentration in specific markets, redevelopment costs, environmental liabilities, and natural-disaster and insurance exposure. Northern New Jersey/New York City and Washington, D.C./Baltimore each represented about 24% of annualized base rent.
- As of February 10, 2016, four property acquisitions were under contract for stated purchase consideration of $33.7 million, with closing conditions; two property sales were also under contract. The company reported no material litigation, no material off-balance-sheet arrangements, and no known significant environmental exposures at year-end.
- REIT status requires substantial distributions of taxable income and depends on meeting statutory tests. Debt covenants, liquidity needs and board discretion may constrain distributions; the filing does not guarantee their continuation.
Investor verification priorities
- Assess whether occupancy and same-store performance can recover, particularly given the 2016 lease expirations and the decline in same-store occupancy.
- Reconcile total FFO growth with the decline in FFO per share and review the effect of share issuance and performance-based compensation.
- Review acquisition returns, the conversion of the 2015 acquisition pipeline into operating income, and the cost and leasing progress of the South Main redevelopment.
- Evaluate debt maturities, floating-rate exposure, hedge coverage, covenant headroom and the company’s ability to fund planned growth and distributions.
- Test management’s portfolio-growth and rent-growth assumptions against new development, market-level concentration and actual lease renewals.