Terreno Realty Corporation — Q2 2015 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2015, compared with the same 2014 periods. Terreno is a REIT focused on industrial properties in six coastal U.S. markets. At quarter-end it owned 137 buildings totaling about 10.5 million square feet, leased 94.4% to 317 customers.
Financial performance and position
- Revenue: Q2 total revenue was $24.2 million, up 45.9%; first-half revenue was $47.4 million, up 46.1%. Growth primarily reflected acquisitions, with same-store occupancy improving to 96.9% from 96.2%.
- Profit: Q2 net income was $10.7 million versus $2.7 million; first-half net income was $9.8 million versus $4.5 million. Common EPS was $0.23 for Q2 versus $0.06, and $0.19 for the first half versus $0.10.
- Non-GAAP operating measures: Q2 NOI was $18.0 million, up 47.7%; same-store NOI increased 3.9% to $11.2 million. First-half same-store NOI increased 2.5% to $21.8 million. FFO per common share was $0.27 in Q2, up 17.9%, but $0.41 for the first half, down 7.4% from $0.44.
- Cash flow: First-half operating cash flow was $18.4 million, versus $12.4 million. Investing activities used $158.7 million, principally for acquisitions; financing activities used $23.7 million. Cash and cash equivalents declined to $26.7 million from $190.6 million at year-end 2014.
- Debt and liquidity: Debt totaled $293.7 million: $200.0 million in term loans and $93.7 million in mortgages; the $100 million revolving facility was undrawn. The company reported $26.7 million of cash, $100 million of available revolving capacity, and compliance with facility covenants. Debt-to-market capitalization was 24.7%; debt and preferred stock-to-market capitalization was 28.6%. Fitch assigned an initial BBB- rating with stable outlook.
- Other balance-sheet data: Total assets were $1.07 billion and total liabilities $324.0 million. Preferred stock liquidation preference was $46.0 million. The weighted-average interest rate on total debt was 2.6%; 68.1% of debt was classified as floating rate.
Material changes versus the prior comparable period
- Terreno acquired 13 industrial buildings totaling about 1.35 million square feet during the first half, for an aggregate initial investment of approximately $168.6 million. Acquisitions drove much of the revenue and expense growth.
- Same-store performance improved more modestly than consolidated results: first-half same-store NOI rose 2.5%, while cash-basis same-store NOI rose 0.6%.
- Depreciation and amortization increased 73.7% and interest expense increased 33.4% for the first half, primarily reflecting the larger portfolio and increased average borrowings.
- First-half acquisition costs rose to $3.4 million from $1.5 million. Common shares outstanding increased to 43.0 million from 42.9 million at year-end; the weighted-average share count was substantially higher than in 2014.
Outlook, commentary, risks and unusual items
- Management gave no formal earnings or operating guidance. It expected rents on average for 2015 lease expirations to be at or above current rates, while cautioning that renewals and achieved rents are not assured. Rent changes on about 1.4 million square feet of leases commencing during the first half were 6.8% above prior rents.
- Q2 and first-half net income included a $6.3 million gain from selling a San Francisco Bay Area property for about $13.4 million. A separate Washington, D.C./Baltimore property, with a $6.3 million net book value, was under contract for sale at about $11.2 million, subject to due diligence and closing conditions.
- As of August 5, three acquisitions totaling about $56.0 million were under contract and one additional property was covered by a non-binding letter of intent. These transactions were not assured of closing. A subsequent July acquisition added four buildings for about $12.3 million, including assumption of a $4.8 million mortgage.
- On August 4, the board authorized repurchases of up to 2 million common shares through December 31, 2016. It also declared quarterly dividends of $0.16 per common share and $0.484375 per preferred share.
- Interest-rate risk is significant: management estimated that a 0.25 percentage-point LIBOR change would change annual interest expense by approximately $0.5 million on facility balances outstanding at quarter-end. A $50 million variable-rate term loan was covered by an interest-rate cap.
- Key risks include acquisition execution and financing, tenant defaults or nonrenewals, vacancy and rent declines, higher interest rates and operating costs, property valuation changes, and maintaining REIT status. Management reported no material change to previously disclosed risk factors, no material litigation, and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the contracted acquisitions and property disposition closed, and their final pricing and financing.
- Lease renewals, rent spreads, occupancy and cash-basis same-store NOI, including the effect of free-rent concessions.
- Debt maturities and refinancing needs, floating-rate exposure, covenant headroom, and the impact of interest-rate movements.
- How acquisition spending and dividends affect cash balances, leverage, and the company’s stated capital-structure targets.
- Whether reported earnings growth is sustained by property operations, given the one-time sale gain and the divergence between first-half EPS and FFO per share.