Terreno Realty Corporation — Q2 2014 Form 10-Q
Business context and period. This unaudited filing covers the quarter and six months ended June 30, 2014. Terreno owns and operates industrial properties in six coastal U.S. markets and reported 106 buildings totaling 7.5 million square feet, 96.4% leased. Its portfolio generated $53.5 million of annualized base rent; Northern New Jersey/New York City represented 32.5% of that rent.
Financial performance and condition
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $16.6 million | $10.8 million | $32.4 million | $20.8 million |
| Net income | $2.7 million | $0.8 million | $4.5 million | $1.6 million |
| Income available to common shareholders, after preferred dividends | $1.8 million | $(0.1) million | $2.7 million | $(0.2) million |
| Basic and diluted EPS | $0.06 | $0.00 | $0.10 | $(0.01) |
| FFO per share (non-GAAP) | $0.23 | $0.15 | $0.44 | $0.31 |
| Net operating income (NOI, non-GAAP) | $12.2 million | $7.8 million | $23.2 million | $15.0 million |
- Q2 revenue rose 53.6% year over year; six-month revenue rose 55.5%. Growth primarily reflected property acquisitions, with higher occupancy also lifting same-store revenue.
- Same-store NOI increased 6.1% in Q2 and 7.8% for the six-month period. Same-store occupancy was 97.9%, versus 93.7% a year earlier. Cash-basis same-store NOI rose 17.8% in Q2 and 14.8% for six months.
- Six-month operating cash flow was $12.4 million, compared with $5.3 million. Investing activities used $83.0 million, principally for acquisitions and property improvements; financing activities provided $93.3 million. Cash and equivalents ended at $29.6 million, versus $7.0 million at year-end 2013.
- Total debt was $158.1 million, including $58.0 million in term loans and $100.1 million in mortgages; no revolving-facility balance was outstanding. Debt was $139.3 million at December 31, 2013. The weighted average debt interest rate was 3.4%; mortgage debt was fixed-rate at a 4.4% weighted average rate.
- Reported leverage measures included debt to total property investments of 21.4%, debt to market capitalization of 18.7%, interest coverage of 6.1x and fixed-charge coverage of 3.8x. These are company-reported, non-GAAP or supplemental measures.
- Total assets were $751.5 million and total liabilities $180.8 million at June 30. Stockholders’ equity was $570.7 million.
Material changes versus prior period
- Terreno acquired 10 buildings totaling 719,704 square feet in the first half for an aggregate initial investment of approximately $80.7 million, compared with 13 buildings and approximately $74.1 million in the first half of 2013. Acquisition-driven revenue growth was accompanied by higher property operating costs and depreciation.
- Same-store occupancy improved, and same-store NOI rose. For the six months, higher snow-removal expense partly offset the same-store revenue increase.
- A May follow-on offering issued 8.05 million common shares at $17.75 per share, generating approximately $136.5 million net. The company used about $100 million to repay credit-facility borrowings and intended to use the balance for acquisitions and general purposes. Shares outstanding increased from 25.0 million at year-end to 33.1 million at June 30.
- The May credit agreement amendment added a seven-year term-loan commitment of up to $50 million, extended the existing term loan to May 2019 and the revolver to May 2018, and reduced the applicable margin ranges. $8 million was drawn on the new term loan at quarter-end.
- Terreno adopted updated discontinued-operations accounting prospectively in 2014. This changed presentation of prior-period property results but did not affect previously reported net income, financial position or cash flows.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said it generally expected rents on 2014 lease renewals and re-leasing to be at or above current rates, while cautioning that outcomes depend on market and property conditions and are not assured.
- Management reported compliance with credit-facility covenants and expected operating cash flow, cash balances and available borrowing capacity to cover near-term needs. Its long-term financing plans include debt and equity issuance and property dispositions; these plans depend partly on capital-market access.
- The company reported 2014 leases scheduled to expire covering 9.4% of portfolio rentable area. Lease expirations, tenant defaults, vacancy, rent levels, operating costs, interest rates, acquisitions and real-estate valuations are key risks. Variable-rate debt totaled $58 million; management estimated a 0.25% LIBOR change would alter annual interest expense by about $145,000.
- One tenant, Banah International Group, was in Chapter 11 proceedings. At June 30 its lease was treated as month-to-month and revenue recognized as cash was received. A confirmed reorganization plan was not yet effective; the proposed successor lease included payment of approximately $0.1 million of past-due rent and a one-time option to purchase the property for $20 million.
- As of August 11, three properties totaling 288,777 square feet, with a stated purchase price of $26.8 million and $5.7 million assumed debt, were under contract subject to due diligence and closing conditions. The company also disclosed $6.3 million of unfunded expansion commitments. Two additional acquisitions completed after quarter-end totaled approximately $11.3 million.
- The board declared a common dividend of $0.14 per share for October 2014 and a Series A preferred dividend of $0.484375 per share for September 2014. The preferred stock carries a 7.75% stated dividend rate.
- Other disclosed risks include geographic concentration, competition, tenant credit and renewal risk, REIT qualification, and the possibility of higher rates or adverse real-estate conditions. The filing reported no material litigation, no material change to previously disclosed risk factors, and no impairment charges for the periods presented.
Important facts for investors to verify
- Whether acquisition-led growth translates into durable same-store rent and NOI gains, and whether acquired or redevelopment properties reach expected occupancy and returns.
- Lease rollover exposure, renewal spreads, tenant credit—particularly the Banah situation—and the concentration of base rent in Northern New Jersey/New York City.
- Debt maturities, variable-rate exposure, facility covenants and borrowing capacity, including the company’s ability to finance planned acquisitions without undue dilution or leverage.
- Use of remaining follow-on proceeds, future issuance under the $100 million ATM program, and per-share performance following the substantial increase in common shares outstanding.
- Completion and funding of the contracted acquisitions and expansion commitments, and the sustainability of cash flow relative to common and preferred dividends.