Terreno Realty Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; unaudited. Terreno owns and operates industrial real estate in six coastal U.S. markets and elected REIT status. At quarter-end, it owned 241 buildings totaling approximately 14.1 million square feet, 31 improved land parcels, and four properties under redevelopment.
Financial and operating performance
- Revenue: Q3 revenue was $57.3 million, up 21.5% year over year; nine-month revenue was $161.3 million, up 16.8%.
- Profit and EPS: Q3 net income was $21.4 million, down 6.0%, and diluted EPS was $0.30 versus $0.33. Nine-month net income was $55.0 million, down 17.0%, and diluted EPS was $0.79 versus $0.97. Lower gains on property sales were a major factor in the net-income declines.
- NOI and FFO: Q3 NOI was $43.1 million, up 23.3%; same-store NOI rose 11.5% to $37.2 million. Nine-month NOI was $120.4 million, up 18.1%; same-store NOI rose 11.7% to $107.9 million. Nareit FFO per diluted share was $0.45 for Q3, up from $0.38, and $1.27 for nine months, up from $1.09. These are non-GAAP measures.
- Margins: NOI was approximately 75.2% of revenue in Q3 versus 74.0% a year earlier, and 74.6% for nine months versus 73.9%.
- Cash flow: Nine-month operating cash flow was $98.4 million versus $77.4 million. Investing activities used $359.9 million, principally for acquisitions and capital improvements; financing activities provided $227.4 million. Cash and restricted cash totaled $73.7 million at September 30, down from $107.8 million at year-end 2020.
- Leasing: Building occupancy was 98.0% and improved-land occupancy was 96.1%. Cash rents on new and renewed leases increased 34.9% for approximately 0.8 million square feet commenced in Q3 and 26.8% for approximately 1.9 million square feet commenced in the first nine months.
- Debt and liquidity: Gross debt was $600 million ($596.6 million net of financing costs); cash and cash equivalents were $68.7 million. The $250 million revolver had no balance outstanding, and the $100 million variable-rate term loan remained outstanding. Reported total debt-to-market capitalization was 11.7%, and debt-to-annualized Adjusted EBITDA was 3.8x. The company reported covenant compliance.
- Dividends and equity: Dividends declared during the first nine months were $0.29 per share for each of Q1 and Q2 and $0.34 for Q3. The company issued 2.54 million shares through its ATM programs for approximately $158.4 million net proceeds during the nine-month period.
Material changes and notable items
- Terreno acquired 20 industrial properties during the first nine months for approximately $344.5 million; 10 were acquired in Q3. Acquisition-related income was approximately $6.2 million in the nine-month period.
- Four redevelopment projects were expected to deliver approximately 0.4 million square feet, with total expected investment of $117.8 million. At quarter-end, $99.9 million had been spent; estimated stabilized cap rate was 4.9%, subject to execution and market risks.
- In July, Terreno issued $150 million of senior notes: $100 million at 2.41% due 2028 and $50 million at 2.84% due 2031. In August, it extended the revolver maturity to 2025 and term-loan maturity to 2027.
- After quarter-end, the company issued $125 million of notes at 2.38% due 2030, declared a $0.34-per-share dividend payable in January 2022, and completed several property acquisitions. It also sold a New Jersey property for approximately $32.7 million; it had been carried at approximately $18.3 million.
- Q3 included a $3.2 million property-sale gain versus $9.0 million in the prior-year quarter. For the first nine months, property-sale gains were $3.2 million versus $26.8 million.
Outlook, risks, and contingencies
- No specific earnings or operating guidance was provided. Management said it expected 2021 expiring leases, on average, to achieve rents above prior rates; this is an expectation, not a guarantee.
- Management expects operating cash flow, cash balances, and available financing to support operations and distributions, while future growth may be funded through debt, equity, property sales, and the revolver. Its stated long-term objectives include debt-to-adjusted EBITDA below 6.0x and fixed-charge coverage above 2.0x.
- Key risks include tenant defaults or non-renewals, rent and occupancy declines, property-market conditions, acquisition and redevelopment execution, financing availability and cost, interest-rate exposure, LIBOR transition, COVID-19 impacts, and maintaining REIT status. Northern New Jersey/New York City represented 29.1% of annualized base rent; no tenant exceeded 10%.
- The $100 million term loan was floating-rate and uncapped at quarter-end. Management estimated a 0.25 percentage-point LIBOR movement would change annual interest expense by approximately $0.3 million on the outstanding facility borrowings.
- As of November 2, the company had five acquisition contracts totaling $94.2 million and four non-binding letters of intent totaling approximately $175.3 million; completion of proposed purchases was not assured. No material litigation, material off-balance-sheet arrangements, or impairment charges were reported.
Important facts for investors to verify
- Whether same-store leasing gains and occupancy are sustained, and how upcoming lease expirations affect rents, retention, and cash NOI.
- Actual costs, timing, pre-leasing, and stabilized returns for the four redevelopment projects.
- Funding and returns on pending and subsequent acquisitions, including the $94.2 million contracted purchases and post-quarter transactions.
- Debt and liquidity after the post-quarter $125 million note issuance and acquisitions; monitor maturities, floating-rate exposure, and covenant headroom.
- How much reported earnings and cash-flow growth reflects recurring property operations versus acquisitions, straight-line rent, lease termination income, and property-sale gains.
- Share issuance and dividend sustainability, including the effect of ATM equity sales on per-share results.