Terreno Realty Corporation — Q1 2015 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2015, compared with Q1 2014. Terreno is a REIT focused on industrial properties in six coastal U.S. markets. At quarter-end it owned 137 buildings totaling approximately 10.4 million square feet; portfolio occupancy was 92.0%, across 315 customers.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 / prior period |
|---|---|---|
| Total revenues | $23.1 million | $15.8 million; up 46.4% |
| Net income (loss) | $(0.8) million; $(0.04) per common share | $1.8 million; $0.04 per share |
| Funds from operations (FFO) | $5.8 million; $0.14 per share | $5.2 million; $0.21 per share |
| Adjusted EBITDA | $13.8 million | $9.1 million; up 51.0% |
| Net operating income (NOI) | $16.0 million; 69.2% of revenue | $11.0 million; 69.5% of revenue |
| Same-store NOI / cash-basis same-store NOI | $10.6 million / $9.4 million | $10.5 million / $9.8 million |
| Operating cash flow | $5.7 million | $5.8 million |
| Cash and cash equivalents | $35.2 million | $190.6 million at Dec. 31, 2014 |
| Total debt | $303.6 million | $304.5 million at Dec. 31, 2014 |
Debt comprised $200.0 million of term loans and $103.6 million of mortgage loans; there were no revolver borrowings. Weighted-average debt interest rate was 2.7%. Debt-to-total market capitalization was 22.9%; debt and preferred stock-to-market capitalization was 26.3%. The company reported 6.4x interest coverage and 4.5x fixed-charge coverage. Its $50 million variable-rate term loan had an interest-rate cap; a 0.25 percentage-point LIBOR change was estimated to affect annual interest expense by approximately $0.5 million on outstanding facility borrowings.
Material changes and operating performance
- Revenue growth chiefly reflected acquisitions in 2014 and 2015. Terreno acquired 11 buildings totaling about 1.2 million square feet for approximately $151.6 million during the quarter; the acquisitions contributed approximately $1.8 million of revenue.
- Same-store occupancy improved to 94.1% from 93.0%. Same-store revenue rose 2.5% and same-store NOI rose 0.7%; new and renewed leases commencing in the quarter had rents approximately 11.5% above prior rents for the same space.
- Cash-basis same-store NOI fell 4.1%, reflecting vacancies at properties in Los Angeles and Northern New Jersey/New York, plus a Miami property that was vacant until a new lease began in March.
- Despite higher revenue and NOI, GAAP results shifted to a loss. Acquisition costs increased to $3.2 million from $0.9 million, depreciation and amortization rose to $7.6 million from $4.4 million, G&A increased to $3.8 million from $2.4 million, and interest expense rose to $2.2 million from $1.6 million. FFO increased in total but fell per share, alongside a substantial increase in weighted-average common shares.
- Investing cash outflow was $152.1 million, primarily for acquisitions. Cash declined by $155.4 million during the quarter. Financing cash outflow was $9.0 million, including common and preferred dividends.
Outlook, risks and unusual items
- No specific earnings or FFO guidance was provided. Management said it currently expects rents on 2015 lease renewals and re-leases, on average, to be at or above current rates, while cautioning that actual outcomes depend on market and property conditions.
- As of May 6, 2015, three acquisition contracts covered properties totaling 438,774 square feet for $58.9 million, and a non-binding letter of intent covered another property for approximately $6.8 million. These transactions remained subject to due diligence and other conditions. Two property-sale contracts totaled approximately $24.6 million, against a $13.0 million net book value, and also remained conditional.
- After quarter-end, Terreno acquired two Washington-area industrial buildings for a combined $14.4 million and declared common and preferred dividends of $0.16 and $0.484375 per share, respectively.
- Key disclosed risks include tenant defaults or non-renewals, vacancy and rent pressure, acquisition execution and financing access, interest-rate exposure, property valuation and impairment, operating cost increases, and maintaining REIT status. Northern New Jersey/New York City and Washington, D.C./Baltimore together generated 48.9% of annualized base rent. No tenant contributed more than 10% of quarterly revenue.
- Management reported no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls. No impairment charges were recorded in Q1 2015 or Q1 2014.
Important facts for investors to verify
- Whether occupancy gains and reported rent increases translate into durable cash rent growth, given the decline in cash-basis same-store NOI and identified vacancies.
- Acquisition economics and execution, including the stabilized cap rates disclosed for completed acquisitions and the status of pending purchases and sales.
- Liquidity after the substantial acquisition-related cash reduction, and the company’s intended funding mix for additional investments and debt maturities.
- Exposure to floating rates: 65.9% of total debt was classified as floating-rate debt, with only $50 million covered by the disclosed interest-rate cap.
- Differences between GAAP earnings, FFO and Adjusted EBITDA, including acquisition costs, stock-based compensation and the increase in weighted-average shares.