Terreno Realty Corp quarterly report, Q3 FY2016

Terreno Realty Corporation — Q3 2016 Form 10-Q

Reporting period: Three and nine months ended September 30, 2016. Terreno owns and operates industrial properties in six coastal U.S. markets. At quarter-end, it owned 159 buildings totaling approximately 11.7 million square feet and four improved land parcels; buildings were 96.4% leased to 374 customers.

Financial results and operating metrics

Metric	Q3 2016	Q3 2015	Nine months 2016	Nine months 2015
Total revenue	$27.1 million	$24.3 million	$78.6 million	$71.7 million
Net income	$3.1 million	$4.2 million	$13.3 million	$14.0 million
Net income available to common stockholders	$2.2 million; $0.05/share	$3.3 million; $0.08/share	$10.5 million; $0.24/share	$11.3 million; $0.26/share
Funds from operations attributable to common stockholders (FFO)	$9.1 million; $0.20/share	$11.3 million; $0.26/share	$28.4 million; $0.64/share	$28.8 million; $0.67/share
Net cash provided by operating activities	Not presented for quarter	Not presented for quarter	$37.2 million	$31.7 million

Revenue increased 11.4% in Q3 and 9.6% year to date, driven by acquisitions and higher same-store occupancy. Same-store occupancy at quarter-end was 97.9%, versus 92.0% a year earlier.
Same-store NOI, a non-GAAP measure, grew 2.7% in Q3 and 4.1% year to date. Cash-basis same-store NOI increased 7.6% and 7.8%, respectively. Total NOI was $19.8 million in Q3 and $56.4 million year to date.
Q3 property operating expenses rose 13.8%; depreciation and amortization rose 9.4%; G&A rose 75.3% to $5.6 million. The company attributed the G&A increase primarily to performance-share compensation, which varies with relative share-price performance. Interest expense increased 47.7% to $3.3 million, primarily reflecting higher average borrowings.
Q3 net income fell 27.1% and common EPS declined to $0.05. Year-to-date net income declined 5.4%. FFO per share fell 23.1% in Q3 and 4.5% year to date; management cited higher performance-share expense as a key Q3 factor.
Q3 included a $1.9 million gain on property sales and a $0.2 million loss on debt extinguishment. Year-to-date property-sale gains were $7.1 million. No impairment charges were recorded in either comparative period.

Financial position, cash flow and capital

Total assets were $1.229 billion at September 30, 2016, versus $1.152 billion at December 31, 2015. Stockholders’ equity was $792.8 million.
Debt was $387.5 million gross, or $384.2 million net of deferred financing costs, compared with $381.5 million net at year-end 2015. Cash and cash equivalents were $10.9 million, down from $22.5 million; restricted cash was $3.6 million.
Debt metrics reported by the company included debt to total market capitalization of 22.5%, debt to investments in properties of 29.8%, debt-to-adjusted EBITDA of 5.6x, interest coverage of 5.2x and fixed-charge coverage of 3.9x. Floating-rate debt was 43.9% of total debt; $150 million of the $170 million drawn under the credit facility was subject to interest-rate caps. The company reported compliance with debt covenants.
For the first nine months, investing cash use was $93.4 million, including $84.0 million for acquisitions and $29.8 million for capital improvements and leasing, partly offset by $21.4 million of property-sale proceeds. Financing cash provided was $44.7 million, including net common-stock proceeds and $20 million of revolver borrowings; dividends paid totaled approximately $26.6 million.
Q3 occupancy was 96.4% portfolio-wide. Northern New Jersey/New York City and Washington, D.C./Baltimore represented 23.7% and 22.9% of annualized base rent, respectively. No tenant generated more than 10% of nine-month rental revenue; FedEx was the largest tenant at 7.1% of annualized base rent.

Material changes, outlook and risks

During the first nine months, Terreno acquired 12 buildings and two improved land parcels for an aggregate initial investment of approximately $86.0 million, compared with 21 buildings acquired for approximately $198.4 million in the prior-year period. Three properties were sold in 2016 for total proceeds of approximately $22.5 million and aggregate gains of approximately $7.1 million.
The company completed a Carson, California redevelopment in September: a new approximately 210,000-square-foot distribution building and a renovated 34,000-square-foot office building. The property was 100% leased at quarter-end; redevelopment cost was approximately $17.8 million.
In July, Terreno issued $50 million of 10-year unsecured notes at a fixed 3.99% rate, using proceeds to repay a $50 million term loan. In August, it increased its unsecured revolving facility from $100 million to $200 million and extended the facility and term-loan maturities. A $20 million revolver balance was outstanding at quarter-end.
The company issued approximately 2.99 million shares through its ATM program in the first nine months, generating net proceeds of approximately $72.6 million. Its stated financing strategy relies on operating cash flow, debt, equity issuance and property dispositions.
Management said it currently expects average rental rates on new or renewed leases for 2016 and 2017 expirations to exceed current rates, but cautioned that renewals, achieved rents and future results are uncertain. No formal earnings or FFO guidance is provided in the filing.
As of November 2, eight acquisition contracts covered approximately 1.04 million square feet at a stated purchase price of approximately $101.9 million. Closing remained subject to due diligence and other conditions. Subsequent to quarter-end, Terreno acquired three buildings for approximately $20.6 million.
Key risks include tenant defaults or non-renewals, vacancy and rent changes, acquisition and redevelopment execution, property-market conditions, rising interest rates and financing access, leverage and debt service, and maintaining REIT status. The filing reports no material litigation and no material off-balance-sheet arrangements.
The board declared a $0.20-per-share common dividend for payment in January 2017 and a $0.484375-per-share preferred dividend for December 2016. It also extended the authorization to repurchase up to 2 million common shares through December 31, 2018; no shares had been repurchased under the program as of quarter-end.

Important facts for investors to verify

Whether occupancy gains and same-store NOI growth persist, and whether expiring leases are renewed at higher rents without material concessions.
Acquisition pipeline closings, purchase-price funding and returns, including the approximately $101.9 million of contracts reported after quarter-end.
Debt levels, upcoming mortgage maturities, revolver usage, covenant headroom and exposure to variable rates despite the interest-rate caps.
How performance-share compensation and further equity issuance affect reported earnings and per-share FFO.
Dividend coverage by recurring operating cash flow, given investment spending, debt service and distributions.