Terreno Realty Corporation — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a stand-alone fourth-quarter filing; quarterly figures are identified where relevant. Amounts are in U.S. dollars.
Business context and portfolio
Terreno acquires, owns and operates industrial real estate in six coastal U.S. markets: Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami and Washington, D.C./Baltimore. It elected REIT status beginning with tax year 2010.
- At year-end, the portfolio comprised 67 buildings and approximately 5.1 million square feet, 93.3% leased to 112 tenants. Warehouse/distribution represented 87.4% of portfolio square footage.
- Annualized base rent was $31.6 million; weighted average remaining lease term was 4.4 years. The largest tenant represented 6.8% of annualized base rent.
- During 2012, Terreno acquired 22 buildings totaling 1.78 million square feet for an aggregate investment of approximately $185.3 million, and sold one property.
Financial results and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $31.2 million | $16.0 million |
| Net operating income (NOI) | $22.2 million | $9.9 million |
| Income (loss) from continuing operations | $(1.0) million | $(4.8) million |
| Net income (loss) available to common stockholders | $2.4 million | $(3.7) million |
| FFO | $7.4 million; $0.57 per share | $1.1 million; $0.12 per share |
| Cash provided by operating activities | $9.7 million | $2.1 million |
| Capital expenditures | $9.4 million | $9.1 million |
- Revenue increased 94.8%, primarily from acquisitions; same-store year-end occupancy rose to 93.0% from 90.3%. Same-store NOI increased 28.7% for the year, though fourth-quarter same-store NOI fell 31.4% year over year, partly reflecting the tenant default described below.
- Reported common-stockholder income included $5.1 million of discontinued-operations income, including a $4.0 million gain on the sale of a property for approximately $17.0 million. Continuing operations remained loss-making. FFO is a non-GAAP supplemental measure and should not be treated as GAAP earnings or cash available for distribution.
- Year-end cash and cash equivalents were $5.9 million. Total debt was $177.0 million: $65.4 million outstanding under the revolving credit facility and $111.6 million of mortgage debt. Total stockholders’ equity was $255.3 million.
- Mortgage debt was fixed-rate, averaging 4.6%; the revolving facility was floating-rate, with a 2.71% rate at year-end. Floating-rate debt was 37.0% of total debt. Reported fixed-charge coverage was 2.6x and debt-to-adjusted EBITDA was 9.2x.
- The $100 million revolving facility had $65.4 million drawn at year-end, subject to borrowing-base limits. The company reported covenant compliance. In January 2013, it amended the facility, extended its maturity to January 2016 and added a $50 million five-year term loan, drawable over six months.
- Cash flows from investing activities were $(160.2) million, principally reflecting acquisitions; financing activities provided $153.1 million. 2012 financing included approximately $54.7 million net proceeds from common shares and $44.3 million net proceeds from preferred shares.
Material changes versus the prior period
- Revenue nearly doubled and NOI rose 124.1%, primarily because the portfolio expanded. Interest expense increased 109.5% to $5.5 million, reflecting higher borrowings and assumed mortgage debt; depreciation and amortization rose 94.8% to $9.1 million.
- Common shares outstanding increased from 9.31 million to 13.43 million following the 2012 follow-on offering. Terreno also issued 1.84 million shares of 7.75% Series A cumulative redeemable preferred stock, with a $46 million liquidation preference and priority over common stock for dividends and liquidation.
- Common dividends declared increased to $0.46 per share for 2012 from $0.40 in 2011. Preferred dividends began in 2012.
Outlook, commentary and risks
- Management said industrial rents had stopped falling and were rising modestly in most markets, but expected significant rent growth to take time. It anticipated 2013 lease renewals and re-leasing would generally achieve rates flat to slightly below current rents.
- Management saw acquisition opportunities and intended to grow the portfolio, while emphasizing per-share results, balance-sheet discipline and a long-term goal of achieving an investment-grade credit rating. Three additional properties totaling about 178,783 square feet and priced at approximately $20.0 million were under contract as of the filing; completion was not assured.
- In January 2013, Terreno filed eviction proceedings against Banah International Group after missed rent payments. Banah represented 2.8% of year-end annualized base rent. 2012 charges included approximately $45,000 of receivable write-offs, $1.1 million of deferred-rent write-off and $0.4 million of leasing-commission write-off. Recovery and re-leasing outcomes were uncertain.
- Key risks include lease expirations and tenant defaults, acquisition competition and integration, geographic and tenant concentration, refinancing and interest-rate exposure, distributions dependent on operating cash flow and board discretion, and environmental, natural-disaster and insurance exposures. Approximately 11.8% of rentable area was scheduled to expire in 2013; Northern New Jersey/New York City generated 32.0% of annualized base rent.
- REIT status requires distributions of at least 90% of taxable income, subject to applicable rules; the company cautioned that distributions are not assured. The Series A preferred stock carries a 7.75% stated rate and ranks senior to common stock.
- The company reported no material litigation and no significant or material environmental exposures known at year-end. The financial statement and internal-control audit opinions were unqualified; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether Banah’s eviction, rent recovery and re-leasing proceed as expected, and whether the reported write-offs fully capture the economic impact.
- Actual renewal and re-leasing rents, occupancy trends and 2013 expirations compared with management’s flat-to-slightly-below-rent expectation.
- Debt availability under borrowing-base and covenant limits, the terms and use of the new term loan, and refinancing exposure—particularly the $65.4 million facility balance scheduled to mature in 2015 before the subsequent amendment.
- Recurring operating performance and per-share FFO excluding the one-time property-sale gain, alongside recurring capital needs, preferred dividends and common distributions.
- Completion, cost and funding of the three contracted acquisitions, and the effects of further equity issuance on existing holders.