Terreno Realty Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are to Q1 2017 unless otherwise noted. Terreno owns and operates industrial real estate in six coastal U.S. markets and elected REIT tax treatment.
Business context and portfolio
- At quarter-end, Terreno owned 195 buildings totaling approximately 12.9 million square feet, ten improved land parcels totaling 47.9 acres, and three buildings under redevelopment expected to total about 0.4 million square feet when complete.
- The portfolio was 97.0% leased to 423 customers. The largest customer represented 4.3% of annualized base rent; no tenant accounted for more than 10% of quarterly rental revenue.
- Annualized base rent was $106.4 million, or $8.53 per occupied square foot; weighted-average remaining lease term was 4.7 years. Northern New Jersey/New York City represented 25.6% of annualized base rent and Los Angeles 19.2%.
Financial results and key metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $37.1 million | $31.4 million | +18.0% |
| Net income | $10.1 million | $5.8 million | +73.4% |
| Net income available to common shareholders per diluted share | $0.18 | $0.10 | — |
| FFO attributable to common shareholders (non-GAAP) | $17.4 million; $0.32/share | $14.0 million; $0.29/share | +24.4% total; +10.3% per share |
| Net operating income (non-GAAP) | $27.2 million | $22.9 million | +18.9% |
| Same-store NOI (non-GAAP) | $23.4 million | $21.4 million | +9.7% |
| Cash-basis same-store NOI (non-GAAP) | $22.5 million | $20.0 million | +12.5% |
| Operating cash flow | $14.7 million | $16.1 million | Down $1.4 million |
Revenue growth reflected acquisitions, higher rental income on new and renewed leases, and approximately $0.5 million of lease termination income. Same-store occupancy was 97.5%, compared with 97.2% a year earlier. Same-store NOI grew 9.7%; cash-basis same-store NOI growth also included lease termination income and properties acquired vacant or with near-term expirations. Terreno reported a 12.5% increase in rental rates on approximately 0.6 million square feet of leases commencing during the quarter.
Property operating expenses increased 15.7%, primarily due to acquisitions. Depreciation and amortization rose 16.9%, and general and administrative expense rose 21.5%, including higher performance-share award expense. Interest expense increased 24.4% to $4.7 million, primarily reflecting higher average borrowings. Q1 2018 net income included a $3.3 million gain on a property sale; Q1 2017 had no such gain. No impairment charges were recorded in either period.
Cash, debt and liquidity
- At March 31, total assets were $1.60 billion and stockholders’ equity was $1.03 billion. Cash and cash equivalents were $7.5 million, down from $35.7 million at year-end; restricted cash was $4.0 million. Cash and restricted cash combined were $11.5 million.
- Gross debt was $504.9 million ($501.8 million net of deferred financing costs), versus approximately $464.9 million gross at December 31, 2017. This included $40.4 million drawn on the revolving facility, $150.0 million in term loans, $250.0 million in senior unsecured notes and $64.6 million in mortgage debt.
- Weighted-average debt interest rate was 3.6%. Debt-to-total market capitalization was 20.7%; debt-to-Adjusted EBITDA was 5.2x, compared with 4.7x a year earlier. Interest coverage was 5.2x and fixed-charge coverage was 5.0x.
- $150.0 million of variable-rate term loans was covered by interest-rate caps; 8.0% of total debt was unhedged floating-rate debt. Management estimated a 0.25 percentage-point LIBOR change would affect annual interest expense by approximately $0.5 million on facility borrowings outstanding at quarter-end.
- Operating activities generated $14.7 million. Investing activities used $71.8 million, including $85.4 million for acquisitions, partly offset by $19.8 million of net property-sale proceeds. Financing activities provided $25.9 million, including $40.4 million of revolving-facility borrowings; common dividends paid were $12.2 million.
- Management stated that operating cash flow, cash balances and, if needed, the credit facility were expected to meet short-term requirements. The company reported compliance with debt covenants. The revolving facility matures in August 2020; scheduled debt principal payments total $19.1 million within one year, excluding interest.
Changes, outlook and notable items
- Terreno acquired three buildings totaling approximately 418,000 square feet for a purchase price of $84.7 million; total initial investment including costs was about $87.9 million. Two acquired buildings were under redevelopment. The company began three redevelopment projects with combined expected investment of approximately $106.3 million, including approximately $30.0 million of redevelopment costs. Estimated completion dates range from Q4 2018 to Q3 2020; estimated stabilized cap rates are forecasts, not guarantees.
- One Washington, D.C.-area property was sold for approximately $20.3 million, producing the $3.3 million gain. After quarter-end, Terreno acquired an approximately 11,000-square-foot building for $2.6 million.
- Management expected, on average, rents on 2018 lease expirations to exceed existing rents, while cautioning that renewals, re-leasing rates and occupancy are uncertain. Approximately 7.5% of portfolio square footage was scheduled to expire through year-end 2018.
- As of May 2, the company had contracts to acquire three properties and an improved land parcel for a combined $49.8 million, a commitment to fund a senior secured loan of about $55.0 million, and a contract to sell a Miami property for approximately $24.3 million. Each remained subject to due diligence and closing conditions.
- The board declared a $0.22-per-share common dividend payable July 20, 2018. The filing gives no formal earnings or FFO guidance. Management identified risks including tenant defaults and lease expirations, rental-rate and occupancy declines, acquisition and redevelopment execution, higher interest rates and operating costs, financing access, real estate valuations, and maintaining REIT status.
- Terreno adopted revenue-recognition and related accounting updates effective January 1, 2018 with no material impact. It was assessing the lease-accounting standard expected to take effect in Q1 2019. Management reported effective disclosure controls, no material change in internal control, and no material litigation.
Important facts for investors to verify
- Whether acquisition and redevelopment spending achieves the stated completion schedules, leasing targets and estimated stabilized returns.
- Lease renewal and re-leasing performance, including the sustainability of reported same-store growth and the 12.5% rent increase on new and renewed leases.
- Liquidity after the substantial Q1 cash decline, future acquisition commitments, debt maturities and the extent of available revolving capacity under facility terms.
- Interest-rate exposure, including the effect of LIBOR changes and the coverage and expiration dates of the rate caps.
- How much reported earnings growth depended on the one-time property-sale gain, and how FFO, Adjusted EBITDA and NOI reconcile to GAAP results.
- Completion of the pending property transactions and senior secured loan commitment, which were not assured as of the filing date.