Terreno Realty Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context
Terreno owns and operates industrial real estate in six coastal U.S. markets. At quarter-end, it owned 203 buildings totaling approximately 12.9 million square feet, leased at 98.5% to 452 customers, plus 13 improved land parcels and four buildings under redevelopment. The company is a REIT.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $37.9 | $33.6 | $112.2 | $97.9 |
| Net income | $10.1 | $20.9 | $40.3 | $42.3 |
| Net income per common share | $0.17 | $0.36 | $0.71 | $0.76 |
| Net operating income (NOI) | $28.4 | $24.6 | $82.6 | $71.8 |
| Funds from operations (FFO), attributable to common stockholders | $20.0 | $13.0 | $55.5 | $40.5 |
| FFO per share | $0.34 | $0.25 | $0.98 | $0.80 |
Revenue increased 12.7% in Q3 and 14.7% year to date, reflecting acquisitions and improved leasing. Same-store NOI rose 7.9% in Q3 and 6.6% year to date; same-store occupancy was 98.9%, compared with 97.4% a year earlier. Cash-basis same-store NOI increased 9.7% in Q3 and 8.4% year to date.
GAAP net income fell 51.6% in Q3, principally because Q3 2017 included $15.4 million of property-sale gains, whereas there were no property sales in Q3 2018. Year-to-date net income declined 4.6%, with property-sale gains of $15.0 million versus $25.5 million in 2017. FFO increased in both periods, reflecting acquisitions and same-store growth, partly offset by growth in weighted-average shares.
Q3 property operating expenses were $9.5 million, depreciation and amortization $10.1 million, and interest expense $4.4 million. Nine-month interest expense was $13.7 million, up 13.5% year over year, largely due to higher average borrowings. The filing reports no property or senior secured loan impairment charges.
Cash flow, capital and liquidity
- Nine-month operating cash flow was $57.0 million, versus $53.7 million. Investing cash use was $204.9 million, including $169.1 million for acquisitions and $55.0 million funded to the senior secured loan, partly offset by $43.0 million of property-sale proceeds. Financing provided $113.2 million.
- Cash and cash equivalents were $3.6 million at September 30, with $4.5 million of restricted cash. Cash plus restricted cash totaled $8.1 million, down from $42.8 million at year-end 2017.
- Gross debt was $485.5 million ($482.7 million net of deferred financing costs); weighted-average interest rate was 3.8%. Debt-to-market capitalization was 17.8%, debt-to-Adjusted EBITDA 4.6x, interest coverage 5.5x, and fixed-charge coverage 4.9x. The company reported compliance with debt covenants.
- Debt included $21.9 million drawn on the revolving facility, $150.0 million of term loans, $250.0 million of senior unsecured notes and $63.6 million of mortgage principal. $150.0 million of variable-rate term loans was protected by interest-rate caps.
- During the nine months, Terreno raised $133.9 million net through at-the-market common-stock issuance. Common dividends were $0.22 per share for the first two quarters and $0.24 for Q3; the board subsequently declared another $0.24 per share for payment in January 2019.
Investments, outlook and risks
- Terreno acquired 13 buildings and three improved land parcels during the first nine months for approximately $174.1 million, and sold two properties for $44.6 million total, recognizing $15.0 million in gains. Four redevelopment projects were underway, with expected investment of $119.0 million and estimated stabilized cap rates averaging 5.5%; completion dates ranged from Q4 2018 to Q3 2020.
- Management said it expects rents on 2018–2019 expirations, on average, to exceed current rents; rent changes on leases commencing in the first nine months were approximately 17.5% above prior rents. These are expectations, not guarantees. Approximately 12.8% of portfolio square footage was scheduled to expire through year-end 2019.
- No numerical earnings or FFO guidance was provided. Management described operating cash flow, existing cash and revolving borrowings as expected sources for near-term needs, with debt and equity issuance and property dispositions also intended to fund longer-term investments and maturities.
- On October 19, 2018, after quarter-end, Terreno increased its unsecured revolver from $200 million to $250 million, extended maturity from August 2020 to October 2022, and reduced applicable borrowing margins. The quarter-end debt figures do not reflect this amended facility.
- The $55 million senior secured loan earns 8% and matures in May 2020. The borrower offered deeds in lieu on two option properties; Terreno later entered non-binding letters of intent to acquire them for approximately $39.1 million. Completion is uncertain.
- Key disclosed risks include tenant defaults or non-renewals, vacancies and rent declines, acquisition and redevelopment execution, rising interest rates and operating costs, access to financing, real estate-market conditions, and maintaining REIT status. The company reported no material litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether acquisition-driven revenue and same-store leasing gains continue to translate into sustainable cash flow and FFO per share amid share issuance.
- Progress, remaining cost, leasing and achieved returns for the $119 million redevelopment program and subsequent projects.
- Cash needs, debt maturities and borrowing capacity under the amended revolver, including the effect of future investment spending and distributions.
- Outcome of the senior-loan deed-in-lieu proposal and pending acquisition/disposition contracts, all subject to conditions or non-binding terms.
- Lease rollover exposure and whether management’s above-market re-leasing expectations are realized; assess market concentration, including 25.4% of annualized base rent in Northern New Jersey/New York City and 18.7% in Los Angeles.