Terreno Realty Corporation — Q1 2023 10-Q
Reporting period: Three months ended March 31, 2023. Terreno owns and operates industrial real estate in six coastal U.S. markets and is taxed as a REIT. The portfolio comprised 257 buildings, 46 improved land parcels and four properties under development or redevelopment.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenues | $74.7 million | $64.0 million | +16.6% |
| Net income | $23.3 million | $19.7 million | +18.7% |
| Diluted EPS | $0.29 | $0.26 | +11.5% |
| Funds from operations (FFO) attributable to common stockholders | $41.3 million | $34.5 million | +19.7% |
| Diluted FFO per share | $0.51 | $0.46 | +10.9% |
| Net cash provided by operating activities | $38.8 million | $28.0 million | +$10.8 million |
- Net operating income (NOI) increased 19.3% to $56.3 million. Same-store NOI rose 11.2% to $49.0 million; cash-basis same-store NOI increased 15.5% to $46.1 million.
- Same-store occupancy was 98.5%, compared with 97.3% a year earlier. At quarter-end, building occupancy was 98.1% and improved-land occupancy was 98.9%.
- Cash rents on new and renewed leases commencing during the quarter for approximately 0.6 million square feet and 5.6 acres were 69.3% above prior rents for the same space. Management said it expects 2023 expirations to re-lease, on average, above current rates; this is not a formal earnings forecast.
- Interest expense rose 45.1% to $7.4 million, principally due to higher average borrowing rates and the additional $100 million term loan borrowed in September 2022. Interest and other income increased to $2.0 million, primarily from higher rates earned on cash.
Balance sheet, liquidity and capital allocation
- At March 31, 2023, total assets were $3.58 billion and total liabilities were $978.5 million. Cash and cash equivalents were $11.1 million, with another $2.6 million in restricted cash.
- Debt totaled $775 million gross ($770.9 million net of unamortized costs); all debt was unsecured, with no secured debt. The weighted-average debt interest rate was 3.9% and weighted-average maturity was 5.1 years. Debt maturities include $100 million in 2024, $50 million in 2026, $150 million in 2027 and $475 million thereafter.
- The $400 million revolving credit facility had no borrowings outstanding at quarter-end. The company reported compliance with debt covenants. Debt-to-adjusted EBITDA was 3.7x, versus 4.2x in Q1 2022; floating-rate debt was 25.8% of total debt, compared with 13.8% a year earlier.
- Cash used in investing activities was $387.4 million, mainly for $364.6 million of property acquisitions. Financing activities provided $334.1 million, mainly from equity issuance, partly offset by $30.8 million of dividends. Cash and restricted cash declined $14.4 million over the quarter.
- The February public offering of 5.75 million shares generated approximately $355.9 million net proceeds. The ATM program generated a further $21.8 million net during the quarter; $120.4 million remained available at March 31. These equity proceeds funded acquisitions and increased the share count.
- The quarterly dividend was $0.40 per share. On May 2, 2023, the board declared another $0.40 dividend, payable July 14 to holders of record June 30.
Material developments, outlook and risks
- Terreno acquired three industrial properties in Q1 for a stated purchase price of approximately $382.6 million; total initial investment, including costs and other acquisition accounting items, was approximately $406.7 million. The acquisitions included 121 acres at Countyline Phase IV in Miami and properties in New York and California.
- Four development or redevelopment projects had an estimated total investment of $571.2 million, of which $248.1 million had been spent and $323.1 million remained. Estimated stabilized cap rates are management estimates, not guarantees; projects face construction-cost, supply-chain, delay and leasing risks.
- As of May 2, the company had contracts to acquire two additional properties for approximately $62.9 million, subject to due diligence and closing conditions. A North Bergen, New Jersey property with a $12.3 million net book value was sold on May 1 for approximately $25.5 million, after quarter-end.
- Management cited inflation in construction, labor and operating costs, higher interest rates, tenant defaults or non-renewals, vacancies, market and property-value changes, access to financing, and development execution as risks. Tenant expense pass-throughs and lease escalators mitigate but do not eliminate cost pressures. Approximately 94.5% of leased space has fixed or CPI-based rent increases.
- Interest-rate risk is material: $200 million of term loans bore variable rates at a 6.0% weighted-average rate at quarter-end, with no interest-rate caps. A 0.25 percentage-point change in SOFR would change annual interest expense by approximately $0.5 million on those balances.
- The filing provides no specific earnings or FFO guidance. Management expects operating cash flows, available cash and, if needed, revolving-credit borrowings to support near-term needs; future acquisitions and development may require debt, equity issuance or property dispositions. The company reported no property impairment charges in Q1, no material litigation, and effective disclosure controls.
Key facts investors should verify
- Whether leasing spreads, occupancy and same-store NOI growth persist as leases roll; 10.5% of portfolio annualized base rent was scheduled to expire during the remaining nine months of 2023.
- Execution, remaining funding needs, pre-leasing and stabilization timing for Countyline Phase IV and other development projects, including whether estimated costs and cap rates are achieved.
- Exposure to variable rates and refinancing needs, particularly the 2024 and 2027 maturities, and the effect of interest rates on borrowing costs and coverage.
- Acquisition economics and funding, including the pending $62.9 million purchase commitments and the effect of equity issuance and dilution on per-share results.
- Tenant and geographic concentration: Northern New Jersey/New York City represented 24.6% of annualized base rent; Amazon was the largest tenant at 3.7%.