Terreno Realty Corporation — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018. The filing also reports fourth-quarter results. Terreno acquires, owns and operates industrial real estate in six coastal U.S. markets and is taxed as a REIT.
Business context and portfolio
- At year-end, owned 205 buildings totaling approximately 12.8 million square feet and 16 improved land parcels totaling 55.2 acres; five properties were under redevelopment, expected to add approximately 0.7 million square feet.
- Portfolio occupancy was 98.4%, across 454 customers. The largest tenant represented 3.9% of annualized base rent. Warehouse/distribution properties comprised 92.5% of portfolio square footage.
- Weighted-average remaining lease term was 4.7 years. Approximately 91.6% of leased space had fixed or CPI-based rent increases.
Financial and operating performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Total revenue | $151.7 million | $132.5 million | +14.5% |
| Net income | $63.3 million | $53.1 million | +19.2% |
| Net income available to common stockholders | $62.9 million | $49.0 million | +28.3% |
| Diluted EPS | $1.09 | $0.95 | +14.7% |
| FFO attributable to common stockholders | $74.9 million | $56.1 million | +33.6% |
| Diluted FFO per share | $1.30 | $1.09 | +19.3% |
| Net operating income (NOI) | $111.7 million | $96.6 million | +15.6% |
| Same-store NOI | $90.9 million | $85.0 million | +6.9% |
| Cash-basis same-store NOI | $88.2 million | $80.9 million | +9.1% |
- Same-store occupancy rose to 99.1% from 98.1%. Same-store rental revenue and expense reimbursements increased, while same-store operating expenses were nearly flat.
- GAAP net margin was approximately 41.7%, compared with 40.1% in 2017; NOI as a share of revenue was approximately 73.6%, versus 72.9%. Net income included $28.6 million of property-sale gains, so GAAP profit growth also reflects dispositions.
- Net cash from operations was $77.6 million, versus $69.5 million. Investing activities used $235.0 million; financing activities provided $149.0 million.
- Year-end cash and cash equivalents were $31.0 million, with $3.5 million of restricted cash. Total debt, net of deferred financing costs, was $462.1 million; debt to total market capitalization was 17.7%, and debt to Adjusted EBITDA was 4.2x. Interest coverage was 5.7x and fixed-charge coverage 5.0x.
- The company paid or declared $0.92 per common share in 2018, up from $0.84 in 2017. Quarterly dividends increased to $0.24 during the second half of 2018.
Material changes and notable activity
- Acquired 17 buildings and five improved land parcels for a stated purchase price of approximately $219.5 million; total investment including acquisition costs was approximately $227.1 million. Acquisitions were fewer and lower in purchase price than in 2017.
- Sold four properties for approximately $82.1 million, recognizing gains of $28.6 million, compared with $30.7 million of gains in 2017.
- Redevelopment spending continued: five projects had an expected total investment of $136.3 million, with $94.7 million spent and approximately $41.6 million remaining at year-end. A completed Queens redevelopment was leased under a ten-year agreement.
- Issued 5.49 million common shares through at-the-market programs, generating approximately $205.9 million net proceeds. The 2018 weighted-average sale price was $38.04 per share. The new revolving credit facility was expanded from $200 million to $250 million and extended to October 2022; $19 million was drawn at year-end.
- Made a $55 million senior secured loan at a fixed 8.0% rate, maturing in May 2020; $54.5 million net of deferred fees remained outstanding at year-end. The loan is secured by nine improved land parcels.
- Same-store NOI growth was positive, but total results also reflect acquisitions, redevelopment and property-sale gains. FFO and NOI are non-GAAP measures and should be considered alongside GAAP results.
Outlook, risks and contingencies
- Management described operating conditions in its six markets as excellent and expected 2019 new and renewed leases, on average, to achieve rents above current rates. It cautioned that speculative development could moderate rent growth and that macroeconomic conditions appeared less favorable than the prior year.
- Management stated an intermediate-term ambition to grow the portfolio over the next three to four years; this is not a firm earnings or FFO forecast. The filing provides no specific 2019 earnings or FFO guidance.
- Key risks include tenant defaults and lease rollover, acquisition competition and pricing, interest-rate and refinancing exposure, redevelopment execution, geographic concentration, property-value impairment, environmental liabilities, and earthquake, hurricane and flood losses. Approximately 9.1% of rentable area was scheduled to expire in 2019; management reported about 1.1 million square feet of 2019 expirations had already been renewed in 2018.
- Floating-rate debt exposure was partly hedged with interest-rate caps; management estimated a 0.25% LIBOR change would affect annual interest expense by approximately $0.4 million on year-end facility borrowings. The company was in compliance with debt covenants and reported no material litigation, property impairment charges, or significant environmental exposure at year-end.
- The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring rents and same-store performance versus $28.6 million of property-sale gains?
- Whether rent spreads and occupancy remain strong as leases expire and new industrial supply enters Terreno’s markets.
- Progress, final costs, leasing and stabilized returns for the five redevelopment projects.
- Performance and repayment or property-transfer outcomes for the $55 million secured loan, including the proposed acquisitions tied to its collateral.
- Future share issuance, leverage and dividend coverage, especially given the continued use of ATM equity offerings and the REIT’s distribution requirements.