Terreno Realty Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Terreno acquires, owns and operates industrial properties in six coastal U.S. markets. At quarter-end it owned 80 buildings totaling approximately 6.1 million square feet; the portfolio was 89.1% leased.
Financial performance and position
| Metric | Q2 2013 | Six months 2013 |
|---|---|---|
| Total revenue | $10.8 million, up 59.7% year over year | $20.8 million, up 66.0% |
| Net income (loss) | $0.8 million, versus $0.3 million | $1.6 million, versus a $10,000 loss |
| Net income (loss) available to common stockholders | $(69,000); $0.00 per share | $(167,000); $(0.01) per share |
| Net operating income (NOI), non-GAAP | $7.8 million, up 61.8% | $15.0 million, up 69.5% |
| Same-store NOI, non-GAAP | $4.4 million, up 1.6% | $8.6 million, up 2.8% |
| Operating cash flow | $5.3 million for the six months, versus $3.3 million in 2012 |
Revenue growth primarily reflected property acquisitions; same-store rental revenue declined 2.3% in Q2 and 1.0% for the half year. Six-month tenant reimbursements in the same-store portfolio increased 17.0%, with management citing improved occupancy. Cash-basis same-store NOI increased 23.0% for the half year, compared with reported same-store NOI growth of 2.8%; this supplemental measure excludes straight-line rent and lease-intangible amortization.
At June 30, total assets were $520.8 million, cash and cash equivalents $4.6 million, and restricted cash $2.5 million. Total debt was $163.5 million, including $3.5 million drawn on the revolver, a $50.0 million term loan, and $110.0 million of mortgage loans. Mortgage debt had a 4.5% weighted-average fixed rate; facility and term-loan borrowings were variable rate, with a stated rate of 1.84% at quarter-end. Debt-to-total market capitalization was 28.9%; debt plus preferred stock was 37.0%. The company reported covenant compliance. These ratios and NOI/FFO/EBITDA measures are company-defined or non-GAAP measures.
Material changes and financing
- Terreno acquired 13 industrial buildings totaling approximately 986,650 square feet in the first half for an aggregate initial investment of about $74.1 million. Eleven buildings were acquired in Q2.
- A February follow-on offering raised approximately $90.8 million net. Proceeds included repayment of $65.4 million of revolver borrowings. Common shares outstanding increased from 13.4 million at year-end to 19.2 million at June 30.
- The amended credit agreement added a fully funded $50.0 million five-year term loan due January 2018 and extended the $100.0 million revolver to January 2016, with a conditional one-year extension option.
- For the six months, net cash used in investing was $77.5 million, chiefly acquisitions and property improvements; financing provided $71.0 million. Cash declined $1.3 million from year-end.
Outlook, risks and unusual items
- Management reported improving demand for industrial space in most markets. For leases expiring in 2013, it expected average new or renewal rents to be slightly below to equal to current rates. No numerical earnings or revenue guidance is provided.
- Banah International Group, a Miami-market tenant representing 2.5% of annualized base rent, filed for Chapter 11 after an eviction action. It had paid rent through August 31, 2013, but could affirm or reject its lease; recovery of past-due rent and damages remained undetermined. The tenant’s lease was treated as month-to-month, with revenue recognized as cash was received.
- A property with a net book value of approximately $15.0 million was under agreement for sale at approximately $19.0 million, subject to due diligence and closing conditions. The filing recorded $450,000 of discontinued-operations income in Q2 and $660,000 for the half year.
- As of August 7, the company had contracts to acquire four buildings for a total stated purchase price of $26.65 million, subject to conditions. It also reported a subsequent July equity offering generating approximately $99.9 million net, two subsequent acquisitions totaling $17.8 million, and declared common and preferred dividends.
- Risks include tenant defaults and lease renewals, vacancy and rental-rate changes, concentration in Northern New Jersey/New York City (29.1% of annualized base rent), acquisition and financing availability, variable-rate exposure, and REIT qualification. A 0.25 percentage-point change in LIBOR was estimated to affect annual interest expense by approximately $133,750 on quarter-end facility and term-loan balances. No impairment charges were recorded in the periods presented.
Important facts for investors to verify
- Whether Banah affirmed its lease, continued paying rent, and whether any past-due amounts were recovered.
- Completion and proceeds of the contemplated $19.0 million property sale and the contracted acquisitions.
- Post-quarter use of the $99.9 million net offering proceeds, subsequent property purchases, and resulting debt and share count.
- Leasing outcomes and rents for upcoming expirations, particularly given 19.5% of rentable area scheduled to expire in 2014 and 17.2% in 2015.
- Occupancy, same-store operating trends, tenant concentration, debt covenants, and exposure to floating interest rates.