Terreno Realty Corporation — Q1 2017 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2017. Terreno is a REIT that owns and operates industrial real estate in six coastal U.S. markets. At quarter-end it owned 168 buildings totaling approximately 12.1 million square feet, plus five improved land parcels; its portfolio was 97.4% leased to 388 customers.
Financial and operating metrics
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Total revenue | $31.4 million | $25.7 million |
| Net income | $5.8 million | $7.4 million |
| Net income available to common stockholders | $4.9 million; $0.10 per diluted share | $6.5 million; $0.15 per diluted share |
| Funds from operations (FFO), attributable to common stockholders | $14.0 million; $0.29 per share | $9.4 million; $0.22 per share |
| Net operating income (NOI) | $22.9 million | $17.9 million |
| Same-store NOI / cash-basis same-store NOI | $20.1 million / $19.2 million | $17.2 million / $15.5 million |
| Net cash from operating activities | $16.1 million | $8.6 million |
| Cash and restricted cash | $17.1 million, including $11.1 million cash | $18.5 million at year-end 2016 |
| Total debt, gross / net carrying value | $382.4 million / $379.4 million | $417.2 million / $415.3 million at year-end 2016 |
| Total assets / stockholders’ equity | $1.292 billion / $864.4 million | $1.279 billion / $811.8 million at year-end 2016 |
Revenue less property operating expenses (NOI) was approximately 72.8% of revenue, compared with 69.8% in Q1 2016. Adjusted EBITDA was $20.3 million, up 30.9%; interest coverage was 5.4x and fixed-charge coverage 4.4x. The reported weighted-average interest rate on total debt was 3.3%. The common dividend was $0.20 per share for the quarter; the Series A preferred dividend was $0.484375 per share.
Changes versus the prior comparable period
- Revenue grew 22.5%, reflecting acquisitions and stronger same-store occupancy. Same-store occupancy at quarter-end rose to 99.0% from 90.4%; same-store NOI increased 16.6%.
- FFO per share increased 31.8%, while GAAP net income declined 22.0% and diluted EPS fell from $0.15 to $0.10. The prior-year quarter included a $5.2 million property-sale gain; Q1 2017 had no such gain. Interest expense rose $0.7 million and depreciation and amortization rose $0.9 million.
- Operating cash flow increased to $16.1 million. Investing used $21.5 million, principally for acquisitions and capital improvements. Financing provided $4.1 million, including equity proceeds and net repayment of revolving-credit borrowings.
- Terreno issued 2.05 million shares through its ATM program for approximately $55.2 million net proceeds. Revolver borrowings fell to $16.0 million from $51.5 million at year-end.
- Two buildings totaling approximately 91,000 square feet were acquired for about $14.9 million. Effective January 1, 2017, new accounting guidance generally led the company to capitalize property acquisition costs rather than expense them.
Outlook, risks and unusual items
- Management provided no formal earnings or financial guidance. It said it expects 2017 new or renewed leases, on average, to achieve rents above prior rents; rent changes on leases commenced in Q1 were approximately 15.4% higher than the previous rates for the same space. Management cautioned that past leasing results do not assure future outcomes.
- Management described operating cash flow, cash balances and the revolving facility as sources for short-term liquidity, and expects to use debt, equity, preferred stock and property dispositions to fund future investments and maturities. It stated that the company complied with debt covenants at quarter-end.
- Of $166 million borrowed under the credit facility, $150 million was subject to interest-rate caps. The filing estimates a 0.25 percentage-point LIBOR change would affect annual interest expense by approximately $0.4 million, based on quarter-end balances.
- Key risks include tenant defaults or non-renewals, vacancy or lower rents, competition, acquisition and redevelopment execution, higher rates and operating costs, access to capital, property valuations, and maintaining REIT status. Northern New Jersey/New York City and Washington, D.C./Baltimore represented 46.9% of annualized base rent combined.
- One Los Angeles property was classified as held for sale at a $15.0 million net book value; a sale agreement called for approximately $25.3 million, subject to conditions. It sold on April 28, 2017. After quarter-end, the company also acquired five industrial buildings for approximately $51.3 million.
- As of May 2, 2017, eight acquisition contracts covered properties and land with a stated purchase price of $113.7 million; completion remained subject to due diligence and closing conditions. The company also had a non-binding letter of intent for a separate $2.6 million purchase.
- No impairment charges were recorded in either comparable quarter. The filing reports no material litigation and says disclosure controls were effective.
Important facts for investors to verify
- Whether strong same-store occupancy and rent growth are sustained, and how upcoming lease expirations affect occupancy and rents.
- How much of revenue and future rent collections depend on the two largest markets and on major tenants; the largest tenant represented 5.7% of annualized base rent.
- Whether contracted and subsequent acquisitions close as expected, and the resulting funding needs and returns.
- Debt maturities, variable-rate exposure, covenant headroom and the impact of additional borrowing or equity issuance on leverage and per-share results.
- Cash available for investment and distributions after capital spending, dividends and acquisition commitments; also verify that non-GAAP FFO and NOI definitions remain comparable across periods.