Terreno Realty Corporation — Q2 2019 Form 10-Q
Business context and reporting period
Quarter and six months ended June 30, 2019. Terreno owns and operates industrial real estate in six coastal U.S. markets. At quarter-end it owned 209 buildings totaling approximately 13.0 million square feet, leased 97.9%, plus 17 improved land parcels and four properties under redevelopment. It operates as a REIT.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $41.7m | $37.2m | $82.6m | $74.3m |
| Net income | $10.4m | $20.1m | $25.9m | $30.2m |
| Diluted EPS | $0.16 | $0.35 | $0.41 | $0.54 |
| FFO per diluted share | $0.33 | $0.32 | $0.67 | $0.63 |
| Net operating income (NOI) | $31.0m | $26.9m | $61.2m | $54.1m |
| Same-store NOI growth | 9.8% | — | 8.3% | — |
Revenue rose 12.1% in Q2 and 11.1% for the first half, driven by acquisitions and higher rents on new and renewed leases. Same-store NOI increased 9.8% and 8.3%, respectively; cash-basis same-store NOI rose 12.7% and 11.9%. Management reported new and renewed lease rates approximately 19.9% above prior rents for 0.6 million square feet commencing in Q2, and 16.2% above prior rents for 1.6 million square feet in the first half.
Net income fell 48.5% in Q2 and 14.2% for the first half, chiefly because the comparable 2018 periods included larger property-sale gains. Q2 2018 included an $11.7m gain; first-half gains were $15.0m in 2018 versus $4.5m in 2019. First-half FFO increased 19.1% to $42.2m, or $0.67 per diluted share, reflecting property and same-store growth, partly offset by higher performance-share expense and more shares outstanding.
Six-month operating cash flow was $43.9m, versus $35.6m. Investing used $93.1m, principally for acquisitions and capital spending, offset by $12.0m of property-sale proceeds. Financing provided $134.8m, including $188.2m net common-stock proceeds; cash and restricted cash increased $85.7m to $120.2m.
Debt, liquidity and capital
At June 30, total debt was $445.1m gross and $442.7m net of financing costs; cash and cash equivalents were $117.2m. No revolving-credit borrowings were outstanding, leaving a $250m unsecured revolver available, subject to facility terms. Weighted-average debt interest rate was 3.9%. The company reported debt-to-market capitalization of 12.1%, debt-to-Adjusted EBITDA of 3.9x, interest coverage of 6.9x, and fixed-charge coverage of 5.8x. It was in compliance with debt covenants.
Debt included $150m of variable-rate term loans, $250m of senior unsecured notes and $45.1m of mortgage loans. Interest-rate caps covered $100m of variable-rate loans; unhedged floating-rate debt was 11.3% of total debt. Scheduled principal maturities include $33.1m in 2020, $61.3m in 2021 and $150m in 2022. Common shares outstanding increased from 61.0m at year-end to 65.5m at June 30, primarily reflecting equity issuance. Quarterly dividends were $0.24 per share; a subsequent $0.27 dividend was declared for October 2019.
Changes, outlook, risks and unusual items
- Acquisitions in the first half totaled four buildings and two improved land parcels, with aggregate initial investment of approximately $119.4m. The company also acquired two properties securing its 8% senior secured loan for approximately $39.1m, reducing that loan balance to $15.8m; the remaining loan matures in May 2020.
- Four redevelopment properties were expected to deliver approximately 0.6m square feet for total expected investment of $129.3m, including $51.3m of redevelopment costs. Estimated remaining spend was $28.2m; estimated weighted-average stabilized cap rate was 5.2%. One Miami property was under contract to sell for $14.0m, subject to closing conditions.
- As of July 31, the company had acquisition contracts for properties with a stated purchase price of $120.9m, plus non-binding letters of intent for approximately $19.0m. These transactions were not assured to close.
- Management stated it expects 2019 expiring space to re-lease or renew, on average, above current rents, but provided no formal earnings or operating guidance. Future leasing outcomes are not assured.
- Key risks include tenant defaults or non-renewals, vacancy or lower rents, market and property-value changes, redevelopment execution and costs, acquisition financing, interest-rate exposure, and maintaining REIT qualification. Northern New Jersey/New York City represented 25.9% of annualized base rent; no tenant exceeded 10% of first-half rental revenue. Approximately 16.5% of rentable square feet was scheduled to expire in 2020.
- There were no property impairment charges, material litigation disclosed, material off-balance-sheet arrangements, or material changes to previously reported risk factors. The company adopted lease-accounting standards in 2019 without material financial-statement impact.
Important facts for investors to verify
- Whether same-store rent growth and high occupancy persist as leases expire, particularly the 2020 expirations.
- Whether the $129.3m redevelopment program meets expected cost, timing, pre-leasing and stabilized-cap-rate assumptions.
- Whether contracted acquisitions and the $14.0m property disposition close, and how they are funded.
- How continued ATM equity issuance and share-count growth affect per-share FFO and dividend coverage.
- Exposure to floating rates, upcoming debt maturities and the borrower’s repayment of the remaining senior secured loan.