Business context and reporting period
Terreno Realty Corporation (NYSE: TRNO) filed this unaudited Form 10-Q for the quarter ended September 30, 2019. The internally managed REIT owns and operates industrial real estate across six coastal U.S. markets. At quarter-end it owned 220 buildings totaling approximately 13.4 million square feet, with 97.2% occupancy, 18 improved land parcels and four properties under redevelopment.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $43.4 million | $37.9 million | $126.0 million | $112.2 million |
| Net income | $14.8 million | $10.1 million | $40.7 million | $40.3 million |
| Diluted EPS | $0.22 | $0.17 | $0.63 | $0.71 |
| FFO per diluted share | $0.36 | $0.34 | $1.03 | $0.98 |
| Same-store NOI | $28.3 million | $26.7 million | $83.6 million | $77.8 million |
| Cash-basis same-store NOI | $27.4 million | $25.3 million | $80.4 million | $72.6 million |
For the nine months, operating cash flow was $68.5 million, compared with $57.0 million in 2018. Investing activities used $236.7 million, principally for acquisitions and capital improvements; financing activities provided $191.1 million. Cash and cash equivalents were $54.6 million at September 30, with an additional $2.9 million restricted cash.
Gross debt was $444.7 million ($442.5 million net of deferred financing costs), versus $462.1 million net at December 31, 2018. Debt included $150.0 million of term loans, $250.0 million of senior unsecured notes and $44.7 million of mortgage loans; the $250 million revolving facility had no borrowings outstanding. Weighted-average debt interest rate was 3.9%. Reported debt-to-market-capitalization was 11.4%, and debt-to-Adjusted EBITDA was 3.7x. The company reported compliance with debt covenants.
Total assets were $2.05 billion and total liabilities $539.4 million at quarter-end. The quarterly common dividend increased to $0.27 per share from $0.24 earlier in 2019; a further $0.27 dividend was declared for payment in January 2020.
Material changes versus the prior comparable period
- Q3 revenue rose 14.5%; management attributed growth primarily to 2018–2019 acquisitions and higher rents on new and renewed leases. Q3 same-store NOI increased 5.9% and cash-basis same-store NOI increased 8.6%.
- Nine-month revenue rose 12.3% and same-store NOI rose 7.5%. Cash rents on leases commencing during the period were approximately 17.9% above prior rents for the same space; the comparable Q3 increase was approximately 30.2%.
- Nine-month net income was nearly flat despite revenue growth. Gains on property sales fell to $6.2 million from $15.0 million, while general and administrative expense rose 18.0%, including higher performance-share expense. Diluted EPS declined to $0.63 from $0.71, while weighted-average diluted shares increased to 64.0 million from 56.7 million.
- Nine-month FFO attributable to common stockholders increased 19.2% to $66.1 million. FFO per diluted share rose 5.1% to $1.03.
- The company issued 5.82 million shares through its ATM programs during the nine months, generating approximately $260.5 million in net proceeds. Cash rose from $31.0 million at year-end 2018, and revolving-facility borrowings fell from $19.0 million to zero.
Outlook, commentary, risks and unusual items
- No formal earnings or FFO guidance was provided. Management said it currently expects rents on 2019 and 2020 expirations, on average, to exceed current rents, but cautioned that re-leasing results are uncertain and depend on market and property conditions.
- Four redevelopment projects were expected to deliver approximately 505,000 square feet, with total expected investment of $120.3 million, $23.4 million remaining to spend, an estimated weighted-average stabilized cap rate of 5.5%, and estimated completion dates from Q2 2020 through Q2 2021. These are estimates, not guarantees.
- The company acquired 15 buildings and three improved land parcels for an aggregate initial investment of approximately $267.7 million during the first nine months. It sold two properties for $26.4 million in aggregate, recognizing $6.2 million in gains. One additional property, with a $6.0 million net book value, was held for sale under a conditional $7.5 million agreement.
- In September, the company agreed to issue $100 million of ten-year senior unsecured notes at 3.14%, expected on or about December 2, 2019. This was a subsequent financing, not quarter-end debt.
- Interest-rate exposure remains relevant: $150 million of debt was indexed to LIBOR, of which $100 million was covered by interest-rate caps. Management estimated a 0.25% LIBOR movement would change annual interest expense by approximately $0.4 million on then-outstanding facility balances. LIBOR’s expected transition after 2021 could result in a replacement rate that is higher or more volatile.
- Other disclosed risks include tenant defaults or nonrenewals, vacancy and rent declines, acquisition and redevelopment execution, access to capital, interest rates, real estate market conditions, REIT qualification, and property-level environmental or natural-disaster risks. The company reported no material litigation, no property or loan impairment charges, and no material off-balance-sheet arrangements.
- Adoption of the new lease accounting standard had no material financial-statement impact; it resulted in recognition of an approximately $0.9 million office lease liability and $0.8 million right-of-use asset at adoption.
Important facts for investors to verify
- Whether strong occupancy and leasing spreads persist as 17.6% of portfolio square footage was scheduled to expire through year-end 2020, and whether stated rent-growth expectations are realized.
- Actual completion costs, leasing, timing and stabilized returns for the four redevelopment projects.
- The closing of the pending property sale and acquisitions under contract, all of which were subject to conditions.
- The final issuance and terms of the planned $100 million notes, and the company’s future use of ATM equity proceeds and resulting share dilution.
- Debt maturity and refinancing exposure, the transition from LIBOR, hedge coverage and compliance with debt covenants.
- How much reported earnings and FFO growth reflects recurring property operations versus acquisitions, dispositions, lease-accounting effects and performance-share compensation.