Terreno Realty Corporation — Q1 2013 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2013, compared with Q1 2012. Terreno owns and operates industrial real estate in six coastal U.S. markets and elected REIT tax treatment. At quarter-end, it owned 69 buildings totaling approximately 5.2 million square feet, leased 93.3% to 115 tenants.
Financial and operating results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenues | $10.487 million | $6.237 million |
| Net income (loss) | $794,000 | ($267,000) |
| Net loss available to common stockholders | ($97,000); ($0.01) per share | ($267,000); ($0.02) per share |
| Net operating income (NOI), company-defined | $7.497 million | $4.377 million |
| Same-store NOI | $4.491 million | $4.368 million |
| Cash-basis same-store NOI | $4.270 million | $3.581 million |
| Funds from operations (FFO), company-defined | $2.588 million; $0.16 per share | $1.529 million; $0.12 per share |
| Net cash from operating activities | $1.907 million | $736,000 |
Revenue rose 68.1%, primarily because of acquisitions; same-store revenue increased approximately $0.3 million and same-store NOI increased 2.8%. Cash-basis same-store NOI grew 19.2%. Acquisition-related property operating costs and depreciation also increased. Interest expense rose 50.3% to $1.521 million. Total revenues less property operating expenses—an arithmetic NOI margin, not a GAAP margin—was approximately 71.5%, versus 70.2% in Q1 2012.
At March 31, total assets were $468.1 million, net real estate investments $441.2 million, cash and cash equivalents $15.7 million, total liabilities $124.4 million, and stockholders’ equity $343.7 million. Debt was $110.8 million, all mortgage loans, with a weighted-average fixed rate of 4.5%; no credit-facility borrowings were outstanding. Disclosed ratios included debt to total market capitalization of 22.1%, debt and preferred stock to market capitalization of 31.2%, interest coverage of 3.9x, and fixed-charge coverage of 2.5x. These are company-presented measures; EBITDA-based ratios use annualized quarterly Adjusted EBITDA.
Cash used in investing was $13.5 million, including $11.5 million for property acquisitions; financing provided $21.4 million, principally reflecting the common-stock offering and repayment of facility borrowings. Cash increased by $9.8 million during the quarter.
Material changes versus Q1 2012
- Total revenue increased $4.25 million, with most of the increase attributed to 2012–2013 acquisitions. Same-store quarter-end occupancy improved to 95.3% from 92.5%.
- GAAP net income improved from a $267,000 loss to $794,000 income, but preferred dividends of $891,000 left a small loss attributable to common stockholders.
- FFO increased 69.3% to $2.588 million. Same-store NOI rose 2.8%, while cash-basis same-store NOI rose 19.2%.
- On February 19, Terreno issued 5.75 million common shares at $16.60 per share, receiving approximately $90.8 million net. It used $65.4 million to repay its credit facility; common shares outstanding increased to 19.2 million at quarter-end.
Outlook, risks, contingencies and unusual items
- No numerical earnings or operating guidance is provided. Management reported improving industrial-space demand in most markets and expected 2013 expiring leases, on average, to renew or re-lease at rates slightly below to equal to current rates. Approximately 12.9% of rentable area was scheduled to expire during the remaining nine months of 2013.
- Tenant Banah International Group filed for Chapter 11 after an eviction judgment. It paid rent through May 31, 2013, but whether it would affirm or reject its lease and any recovery of past-due rent remained uncertain. The lease was treated as month-to-month, with revenue recognized as cash was received.
- Tenant and geographic concentration merit attention: ten tenants generated 40.6% of Q1 rental revenues; Northern New Jersey/New York City represented 31.1% of annualized base rent. The filing also states the largest tenant represented 6.6% of annualized base rent in the portfolio summary.
- As of May 8, the company had contracts to buy nine buildings totaling 686,326 square feet for $43.55 million, subject to due diligence and closing conditions, and five nonbinding letters of intent totaling approximately $56.1 million. Two acquisitions totaling $14.4 million closed after quarter-end; a South San Francisco property is to be substantially renovated.
- Debt maturities were concentrated in later years, with $65.1 million scheduled thereafter; mortgage loans mature from 2014 to 2021. The credit facility is floating-rate when drawn, and borrowing availability is subject to borrowing-base limits and covenants. Management reported covenant compliance and no quarter-end facility borrowings.
- Key risks include tenant defaults or non-renewals, vacancies and rental-rate pressure, acquisition and integration execution, financing access and interest rates, property valuations, and maintaining REIT qualification. No impairment charges were recorded in either comparison period; management reported no material litigation and no material change in previously disclosed risk factors.
Important facts for investors to verify
- Track Banah’s bankruptcy outcome, rent collections, and any lease or property-related costs.
- Assess near-term lease expirations, renewal rates, leasing incentives, and the reported market-level occupancy and rent trends.
- Confirm whether the contracted acquisitions close, their funding and pricing, and the results of the South San Francisco renovation.
- Monitor acquisition-driven growth against same-store performance, cash flow, capital expenditures, and common-share dilution.
- Review mortgage maturities, facility terms and covenants, cash needs, and the sustainability of common and preferred dividends.