Terreno Realty Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Terreno acquires and operates industrial real estate in six coastal U.S. markets. At quarter-end it owned 178 buildings totaling approximately 12.7 million square feet, leased 96.9%, plus seven improved land parcels. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and key metrics
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Total revenue | $32.8 | $25.8 | $64.2 | $51.5 |
| Net income | $15.5 | $2.8 | $21.3 | $10.2 |
| Net income available to common stockholders per share | $0.29 | $0.04 | $0.40 | $0.19 |
| Funds from operations (FFO), attributable to common stockholders | $13.5 | $9.9 | $27.4 | $19.3 |
| FFO per common share | $0.27 | $0.22 | $0.56 | $0.44 |
| Net operating income (NOI) | $24.3 | $18.7 | $47.2 | $36.6 |
| Adjusted EBITDA | $21.6 | $16.3 | $41.9 | $31.8 |
- Q2 revenue rose 27.0%; first-half revenue rose 24.8%. Management attributed growth to acquisitions, higher same-store occupancy, and new and renewed leases.
- Same-store NOI increased 17.2% in Q2 and 16.6% in the first half. Same-store occupancy at June 30 was 98.0%, versus 92.2% a year earlier. New and renewed leases commencing in the first half had rents approximately 12.0% above prior rents; Q2 lease spreads were approximately 9.4%.
- GAAP net income includes a $10.1 million gain on a Los Angeles property sale in 2017; the comparable first-half 2016 period included $5.2 million of property-sale gains. FFO excludes property-sale gains and is a non-GAAP measure.
- First-half operating cash flow was $33.6 million, compared with $21.1 million in 2016. Investing cash outflow was $125.7 million, primarily reflecting $138.3 million of property acquisitions, partly offset by $25.1 million of net sale proceeds. Financing cash inflow was $82.7 million, including equity proceeds.
- At June 30, cash and cash equivalents were $4.5 million and restricted cash was $4.6 million. Total debt was $387.0 million gross and $384.1 million net of deferred financing costs; the reported weighted-average debt rate was 3.4%. Debt-to-total investments in properties was 25.7%, and debt-to-market capitalization was 17.5%.
- Debt included $171.0 million outstanding under the credit facility, $150.0 million of senior unsecured notes, and $66.0 million of mortgage principal. $150.0 million of variable-rate term loans was protected by interest-rate caps. The company reported compliance with debt covenants.
Material changes and notable developments
- Terreno acquired 13 industrial buildings and two land parcels in the first half for an aggregate initial investment of approximately $155.9 million, compared with seven buildings and one improved land parcel for approximately $49.3 million in the first half of 2016.
- Common shares outstanding increased from 47.4 million at year-end 2016 to 52.4 million at June 30, 2017. The ATM offering program was fully utilized; first-half issuance generated approximately $143.3 million net proceeds.
- General and administrative expense rose 40.3% in Q2, principally due to performance-share expense, which increased to approximately $2.5 million from $1.1 million. First-half performance-share expense was $3.6 million versus $1.7 million.
- Interest expense increased 23.7% in Q2 and 23.2% in the first half, primarily because average borrowings were higher. Acquisition costs fell sharply following adoption of accounting guidance under which property acquisition costs are generally capitalized rather than expensed.
- Two Washington, D.C.-area properties were classified as held for sale at June 30, with a proposed aggregate sale price of approximately $40.5 million and net book value of $23.2 million; closing remained subject to conditions.
Outlook, risks, contingencies, and unusual items
- No numeric earnings or FFO guidance was provided. Management expects operating cash flow, existing cash, and, if needed, credit-facility borrowings to meet near-term liquidity needs. It expects to use debt, equity, and property dispositions to fund future investment and maturities.
- Management described a long-term objective to keep debt and preferred stock below 40% of enterprise value, fixed-charge coverage above 2.0x, and debt-to-adjusted EBITDA below 6.5x. The company reported a 4.5x fixed-charge coverage ratio and 4.4x debt-to-adjusted EBITDA ratio for the quarter-based measures shown in the filing.
- After quarter-end, Terreno issued $100 million of 3.75% senior unsecured notes due 2024 and redeemed all 1.84 million Series A preferred shares for $25 per share plus accrued dividends. It expects an approximately $1.8 million charge in Q3 to write off issuance costs.
- Subsequent to quarter-end, the board declared a common dividend of $0.22 per share, payable October 20, 2017. Four property purchase contracts totaling $69.4 million and sales contracts for three properties totaling approximately $52.0 million were outstanding as of August 2; both acquisitions and dispositions were subject to closing conditions.
- Key risks include tenant defaults or non-renewals, vacancies and rent declines, competition, higher interest rates and operating costs, access to financing, acquisition and redevelopment execution, property-value declines, environmental or natural-disaster exposures, and maintaining REIT status. Northern New Jersey/New York City and Washington, D.C. represented 24.8% and 21.6% of annualized base rent, respectively; no tenant exceeded 10% of first-half rental revenue.
- Management said disclosure controls were effective and reported no material litigation or material changes to previously disclosed risk factors. The filing notes that the impact of upcoming revenue and lease accounting standards was still being assessed.
Investor verification priorities
- Separate recurring property operating growth from the $10.1 million property-sale gain when evaluating GAAP earnings.
- Review acquisition contributions, same-store occupancy and leasing spreads, and whether rent growth can be sustained as leases expire.
- Assess dilution from the share issuance and the company’s financing capacity after fully using its ATM program.
- Confirm completion and proceeds of the held-for-sale properties and other pending purchase and sale contracts.
- Evaluate post-quarter debt issuance and preferred-share redemption effects on interest costs, distributions, leverage, and liquidity.
- Monitor floating-rate exposure, interest-rate caps, debt maturities, covenant headroom, and geographic concentration.