Terreno Realty Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Terreno owns and operates industrial properties in six coastal U.S. markets and is taxed as a REIT. At quarter-end, it owned 141 buildings totaling approximately 10.5 million square feet, plus two improved land parcels; the portfolio was 90.2% leased to 344 customers.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $24.3 million | $17.7 million | $71.7 million | $50.1 million |
| Net income | $4.2 million | $3.4 million | $14.0 million | $7.9 million |
| Net income available to common stockholders | $3.3 million | $2.5 million | $11.3 million | $5.2 million |
| Diluted earnings per common share | $0.08 | $0.08 | $0.26 | $0.18 |
| Funds from operations (FFO), attributable to common stockholders | $11.3 million | $7.4 million | $28.8 million | $19.1 million |
| FFO per common share | $0.26 | $0.22 | $0.67 | $0.67 |
| Net operating income (NOI) | $17.9 million | $12.9 million | $52.0 million | $36.1 million |
- Q3 same-store NOI increased 3.4% to $11.2 million; nine-month same-store NOI increased 2.8% to $32.5 million. Cash-basis same-store NOI grew 4.5% in Q3 and 1.9% year to date.
- Nine-month Adjusted EBITDA was $45.4 million, up 47.6% from $30.8 million. These are non-GAAP measures defined by the company.
- Net cash provided by operations was $31.7 million for the nine months, versus $23.1 million. Investing used $189.5 million, primarily for acquisitions; financing provided $16.8 million. Cash and cash equivalents ended at $49.7 million, down from $190.6 million at year-end 2014.
- At September 30, total debt was $347.7 million, versus $304.5 million at December 31, 2014. Total assets were $1.12 billion and stockholders’ equity was $740.9 million. No revolving-credit borrowings were outstanding; $200 million was outstanding on term loans.
- Debt metrics included 27.9% debt to market capitalization, 5.6x debt to Adjusted EBITDA, 6.9x interest coverage and 4.9x fixed-charge coverage. Weighted-average debt maturity was 4.5 years. The company reported compliance with debt covenants.
Changes and operating developments
- Revenue rose 37.3% in Q3 and 43.0% for the first nine months, mainly due to property acquisitions and higher same-store occupancy. Same-store occupancy was 93.3%, compared with 93.5% a year earlier.
- During the first nine months, Terreno acquired 21 buildings totaling approximately 1.64 million square feet for an aggregate initial investment of $198.4 million. Acquisition-related revenue and net income were $8.3 million and $0.7 million, respectively, for the period.
- Higher depreciation and amortization, interest expense and acquisition costs partly offset operating growth. Nine-month interest expense increased 38.6% to $6.5 million; acquisition costs increased to $3.7 million from $1.8 million.
- A property sale generated $13.0 million in proceeds and a $6.3 million gain during the first nine months. Another property, with a $6.3 million net book value, was under contract to sell for approximately $11.2 million, subject to due diligence and closing conditions.
Capital, outlook and risks
- Terreno issued $50 million of seven-year senior unsecured notes in September at 4.23%. After quarter-end, it issued a further $50 million of 12-year notes at 4.65%, maturing in October 2027.
- Three interest-rate caps covered $150 million of variable-rate term debt. Management reported a 1.76% weighted-average rate on facility borrowings; a 0.25 percentage-point LIBOR change would affect annual interest expense by approximately $0.5 million at quarter-end balances.
- Management said operating cash, cash balances and, if needed, credit-facility borrowings should meet short-term needs, including operating costs, interest and REIT distributions. It expects to fund longer-term acquisitions and maturities with debt, equity, preferred stock and property-sale proceeds. No formal earnings or operating guidance was provided.
- Management reported an initial Fitch issuer rating of BBB- with a stable outlook during the period, while cautioning that ratings may change. The stated long-term capital objectives include debt below 40% of enterprise value, fixed-charge coverage above 2.0x, debt/Adjusted EBITDA below 6.5x and floating-rate debt below 20% of total debt.
- At November 4, the company had contracts to acquire three properties for approximately $49.8 million, plus non-binding letters of intent for two properties totaling approximately $27.9 million. Transactions remain subject to conditions and may not close.
- The South Main Street redevelopment in Carson, California was 73.8% pre-leased; the project is expected to involve approximately $16.4 million of redevelopment costs and a total investment of about $38.0 million, excluding specified intangible liabilities.
- Risks include tenant defaults or non-renewals, vacancy or lower rents, acquisitions and redevelopment execution, rising rates and operating costs, financing access, property-value declines, and REIT qualification. The filing reported no impairment charges in the periods presented, no material litigation and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective.
Key facts for investors to verify
- Whether acquisition-driven growth translates into sustained same-store occupancy, rent increases and NOI growth; 1.6 million square feet of new and renewed leases commenced in the nine-month period at rates reportedly 6.6% above prior rents.
- Leasing and rollover exposure: 15.5% of portfolio square footage was scheduled to expire through December 31, 2016; Northern New Jersey/New York City occupancy was 80.9%.
- Liquidity after the substantial decline in cash, and the funding plan for contracted acquisitions, redevelopment, dividends and upcoming debt maturities. Scheduled principal payments included $13.6 million for the final three months of 2015 and $16.9 million in 2016.
- Interest-rate exposure: 57.5% of total debt was classified as floating rate, although $150 million was covered by caps; confirm the effectiveness and continuing cost of the hedges.
- Execution and closing of pending acquisitions, the Washington, D.C./Baltimore property sale, and the 73.8%-pre-leased Carson redevelopment.
- Dividend sustainability and per-share performance: the board declared a common dividend of $0.18 per share after quarter-end, up from $0.16 during the reported quarters; share count and financing activity also affect per-share results.