Terreno Realty Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; unaudited. Terreno acquires and operates industrial properties in six coastal U.S. markets and elected REIT status. At quarter-end it owned 63 buildings totaling approximately 4.77 million square feet, leased 92.6% to 97 tenants.
Financial results and position
Dollar amounts below are in millions except per-share data. Year-over-year comparisons are with 2011.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $9.07 | $4.40 | $22.53 | $10.78 |
| Net income (loss) | $0.52 | $(0.27) | $0.51 | $(3.54) |
| Net income (loss) available to common shareholders | $(0.19) | $(0.27) | $(0.20) | $(3.54) |
| Basic and diluted EPS available to common shareholders | $(0.01) | $(0.03) | $(0.02) | $(0.39) |
| NOI, a non-GAAP measure | $6.62 | $2.78 | $16.18 | $6.33 |
| FFO per common share, non-GAAP | $0.17 | $0.12 | $0.45 | $(0.03) |
- Q3 same-store NOI rose 69.8% to $2.70 million; nine-month same-store NOI rose 51.6% to $7.35 million. Same-store occupancy at Q3-end was 92.8%, versus 68.4% a year earlier. Company-wide occupancy was 92.6%.
- Revenue growth reflected acquisitions and improved same-store leasing. Q3 rental revenue included approximately $0.7 million of straight-line rent from contractual abatements; the nine-month amount was approximately $2.2 million.
- Interest expense increased 101.8% in Q3 to $1.60 million and 129.4% for the nine months to $3.73 million, mainly reflecting acquired and originated mortgages and credit-facility borrowing. Depreciation and amortization also increased with acquisitions.
- Nine-month operating cash flow was $7.1 million, compared with $0.5 million in 2011. Investing used $148.0 million, chiefly for acquisitions; financing provided $142.3 million. Cash and equivalents were $4.6 million at September 30, versus $3.2 million at year-end 2011.
- Total assets were $424.5 million; total liabilities were $170.5 million. Debt comprised $51.4 million under the revolving credit facility and $106.9 million of mortgages, or $158.3 million including mortgage premiums. Preferred stock liquidation preference was $46.0 million. The filing reports total debt-to-market capitalization of 38.0%, and debt plus preferred-to-market capitalization of 49.0%.
- Weighted average debt interest rate was 3.9%; 32.5% of debt was floating-rate. Adjusted EBITDA interest coverage was 3.6x and fixed-charge coverage 3.0x, both non-GAAP measures. The company reported compliance with facility covenants.
Material changes and business developments
- Terreno acquired 16 buildings totaling approximately 1.35 million square feet during the first nine months, for an aggregate initial investment of about $150.4 million. Nine-month revenue increased 109.1%; NOI increased 155.5%, with acquisitions a major contributor.
- A January follow-on common-stock offering raised approximately $54.7 million net. A July offering of 1.84 million shares of 7.75% Series A preferred stock raised approximately $44.3 million net, used to reduce facility borrowings. Preferred dividends of $0.713 million were recognized for the nine months.
- In June the revolving facility was increased from $80 million to $100 million; it may be increased to $150 million subject to lender approval. It matures January 19, 2015, with one conditional 12-month extension. The company repaid its $10.1 million term loan in August.
- Mortgage debt increased from $38.3 million at December 31, 2011 to $106.9 million at September 30, 2012. The mortgages carried a 4.5% weighted average fixed rate at quarter-end. Scheduled principal payments include $73.1 million in 2015, including the $51.4 million facility balance.
Outlook, risks and contingencies
- No specific earnings, revenue, occupancy or acquisition guidance was provided. Management expects near-term liquidity to come from operations, cash and facility borrowings as needed; it expects to fund future investments through debt and common or preferred equity. Its stated long-term financing aims include keeping debt and preferred stock below 40% of enterprise value, fixed-charge coverage above 2.0x and floating-rate debt below 20% of total debt; these are targets, not reported results.
- Key risks identified include tenant defaults or non-renewals, rent or occupancy declines, acquisition and growth execution, access to capital, interest-rate changes, debt service and refinancing, property-value declines, REIT qualification, and natural-disaster, environmental and operating exposures. A 0.25% LIBOR change was estimated to alter annual interest expense by approximately $128,573 at the period-end facility balance.
- Tenant and geographic exposure merits attention: the largest tenant represented 8.1% of annualized base rent; the top ten represented 48.2%. Northern New Jersey/New York City accounted for 31.7% of annualized base rent. Approximately 18.2% of rentable area, representing 13.4% of annualized base rent, was scheduled to expire in 2013.
- One Los Angeles property was classified as held for sale, with an agreed sale price of approximately $17.2 million and net book value of $11.8 million; closing remained subject to due diligence and conditions. Its results were reported as discontinued operations. No impairment charges were recorded.
- As of November 7, 2012, a Seattle property acquisition was under contract for $8.0 million, including $5.1 million assumed debt, subject to due diligence, closing conditions and lender consent. A Maryland property was acquired after quarter-end for approximately $7.0 million.
- The company reported no material litigation, no material changes to previously disclosed risk factors, effective disclosure controls, and no material changes in internal control during the quarter.
Investor verification priorities
- Confirm the composition and sustainability of reported growth: acquisitions, same-store occupancy and NOI, and straight-line rents from abatements.
- Review the 2015 facility maturity, mortgage amortization schedule, refinancing options, variable-rate exposure and covenant headroom.
- Assess cash generation against acquisition spending, dividends, capital expenditures and the company’s modest period-end cash balance.
- Track tenant concentration, lease expirations, occupancy by market and the status of the held-for-sale property and pending acquisition.
- Reconcile GAAP results with non-GAAP NOI, FFO and Adjusted EBITDA, and account for preferred dividends when assessing common-shareholder returns.