Terreno Realty Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Although the request identifies 2017 Q4, this filing reports full-year results; selected fourth-quarter figures are included below. Terreno is a REIT focused on industrial properties in six coastal U.S. markets.
Business context and portfolio
At year-end, Terreno owned 196 buildings totaling approximately 13.0 million square feet and 10 improved land parcels totaling 47.9 acres. The portfolio was 97.3% leased to 426 customers; warehouse and distribution properties represented 93.5% of building square footage. The largest customer, FedEx, represented 5.1% of annualized base rent. Weighted-average remaining building lease term was 4.8 years.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $132.5 million | $108.4 million |
| Net income | $53.1 million | $15.1 million |
| Net income available to common stockholders | $49.0 million; $0.95 per share | $11.5 million; $0.26 per share |
| Funds from operations (FFO) | $56.1 million; $1.09 per share | $38.4 million; $0.86 per share |
| Net operating income (NOI) | $96.6 million | $78.1 million |
| Cash from operating activities | $69.5 million | $49.2 million |
| Cash used in investing activities | $249.1 million | $149.6 million |
| Cash from financing activities | $203.9 million | $93.8 million |
| Total debt, net | $461.7 million | $415.3 million |
| Cash and cash equivalents | $35.7 million | $14.2 million |
Revenue rose 22.2%; same-store NOI increased 12.8% to $79.0 million, while cash-basis same-store NOI grew 16.5% to $76.2 million. NOI was approximately 72.9% of revenue in 2017. Net income included a $30.7 million gain on property sales, versus $7.1 million in 2016; accordingly, net income growth substantially reflects dispositions. Interest expense increased 28.5% to $16.8 million. The filing does not provide a directly comparable GAAP operating margin measure.
Year-end debt-to-market capitalization was 19.2%, down from 22.9%; debt-to-adjusted EBITDA was 5.3x versus 5.4x. Interest coverage was 5.1x and fixed-charge coverage 4.6x. Terreno reported compliance with debt covenants and a Fitch issuer rating of BBB- with stable outlook. The $200 million revolving facility had no year-end borrowings; $150 million of variable-rate term loans were capped against rate increases. Cash and restricted cash totaled $42.8 million.
Changes, outlook, risks, and unusual items
- Terreno acquired 35 buildings and five improved land parcels in 2017 for approximately $319.7 million including acquisition costs, and sold four properties for $77.3 million, recording a $30.7 million gain.
- Common shares outstanding increased to 55.4 million from 47.4 million. ATM equity sales produced approximately $251.6 million net proceeds. Terreno also issued $100 million of seven-year senior notes at 3.75% and redeemed all 1.84 million Series A preferred shares, generating a $1.8 million redemption charge.
- Annual common dividends increased to $0.84 per share from $0.76. The quarterly dividend rose from $0.20 to $0.22 during 2017; the board declared a further $0.22 dividend for April 2018.
- Management described operating conditions in its markets as excellent and expected average rents on 2018 renewals and new leases to exceed current rents. It cautioned that speculative development could temper rent growth. No specific earnings or FFO guidance was provided.
- Management outlined an aspirational three-to-four-year plan to grow the portfolio to approximately $3.0 billion of assets from approximately $2.4 billion in total market capitalization at year-end 2017, emphasizing per-share results and noting there is no assurance of achieving the target.
- Same-store occupancy declined to 97.5% from 98.9%. Approximately 9.4% of rentable space, representing 8.4% of annualized base rent, was scheduled to expire in 2018; management expected rents on those renewals or re-leases to average above current levels. A Belleville tenant was due approximately $0.6 million of rent abatements in 2018.
- Key risks include lease renewals and tenant defaults, acquisition pricing and execution, rising interest rates and refinancing, geographic concentration, severe weather and seismic exposure, environmental liabilities, and the ability to maintain REIT status and distributions. Hurricane Irma-related expenses were approximately $0.2 million in 2017.
- The Tax Cuts and Jobs Act was enacted in December 2017; Terreno said its effects were uncertain and still under assessment. Three property acquisitions totaling $92.6 million and two property sales totaling $39.3 million were under contract as of February 7, 2018, subject to closing conditions. A further $17.5 million acquisition closed January 31, 2018.
The company reported no material litigation, no material off-balance-sheet arrangements, and no significant or material environmental exposures known at year-end. The auditor gave unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- How much of the rise in net income and FFO reflects recurring property operations versus disposition gains, acquisition growth, and share issuance.
- Whether same-store occupancy and rent growth hold up as 2018 expirations are renewed or re-leased, including the timing and cost of tenant improvements and concessions.
- Actual acquisition and disposition closings, pricing, and returns, compared with management’s portfolio-growth ambitions and per-share performance objective.
- Debt maturities, covenant headroom, interest-rate cap expirations, and the effect of financing costs and equity issuance on future per-share results.
- The effect of the new tax law and accounting standards, and the sustainability of distributions relative to operating cash flow and capital needs.