Terreno Realty Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; the filing was signed February 19, 2014. Amounts below are in U.S. dollars; financial-statement figures are in millions unless stated otherwise.
Business context
Terreno acquires, owns and operates industrial properties in six coastal U.S. markets: Los Angeles, Northern New Jersey/New York City, the San Francisco Bay Area, Seattle, Miami, and Washington, D.C./Baltimore. At year-end, it owned 96 buildings totaling approximately 6.8 million square feet, leased 92.8% to 214 tenants. Warehouse/distribution comprised 86.4% of portfolio area. The company elected REIT status.
Financial and operating performance
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $45.5 | $29.3 |
| Net operating income (NOI) | $32.8 | $20.8 |
| Same-store NOI | $17.2 | $15.9 |
| Net income | $6.6 | $4.1 |
| Net income available to common stockholders, after preferred dividends | $3.1 | $2.4 |
| Basic and diluted EPS | $0.15 | $0.19 |
| FFO | $12.7; $0.60 per share | $7.4; $0.57 per share |
| Cash from operating activities | $13.5 | $9.7 |
| Cash and cash equivalents at year-end | $7.0 | $5.9 |
| Total debt at year-end | $189.3 | $177.0 |
Revenue increased 55.2%, primarily from acquisitions; same-store revenue rose about 5.0% and same-store NOI rose 8.2%. NOI was approximately 71.9% of revenue. FFO increased 70.7%, while FFO per share rose 6.7%. GAAP EPS declined despite higher net income, alongside substantial common-share issuance. Net income included $4.2 million of discontinued-operations income, including a $2.8 million property-sale gain; continuing operations generated $2.5 million of income, versus a $2.0 million loss in 2012.
Investing activities used $201.9 million, principally for acquisitions; financing activities provided $189.4 million, with operating cash providing the balance. The company acquired 30 buildings totaling approximately 1.9 million square feet for a stated aggregate investment of $212.4 million and sold one property for approximately $19.0 million. Capital expenditures were $10.0 million.
Debt, liquidity and distributions
Year-end debt comprised $31.0 million drawn on a $100 million revolving facility, a $50.0 million term loan, and $108.3 million of mortgage loans. Cash was $7.0 million, with an additional $2.6 million of restricted cash. The revolver matures in January 2016, with a conditional one-year extension option; the term loan matures in January 2018. Mortgage debt carried a weighted-average fixed rate of 4.5%; facility and term-loan borrowings were variable rate. Total debt was 27.9% of market capitalization, and debt plus preferred stock was 34.7%. Floating-rate debt was 42.8% of total debt, above management’s stated long-term goal of less than 20%; fixed-charge coverage was 2.8x, above its 2.0x goal. The filing reports covenant compliance at year-end.
Common dividends declared totaled $0.51 per share for 2013, up from $0.46 in 2012. Series A preferred dividends were $1.94 per share for 2013; the preferred stock has a 7.75% stated rate and $46.0 million aggregate liquidation preference. Distributions depend on board authorization, cash generation, debt covenants and REIT requirements.
Material changes and portfolio details
- Two 2013 common-stock offerings raised approximately $190.7 million net in total. Common shares outstanding increased from 13.4 million to 25.0 million, contributing to EPS dilution.
- The 2013 credit agreement added a $50 million term loan and extended the revolving-facility maturity to January 2016.
- Same-store occupancy improved to 96.8% at year-end from 95.0% a year earlier. Portfolio occupancy was 92.8%.
- Northern New Jersey/New York City represented 35.8% of annualized base rent. The largest tenant, FedEx, represented 7.2%; the top 20 tenants represented 49.4% of annualized base rent.
- Leases covering 14.6% of rentable area were scheduled to expire in 2014 and 25.2% in 2015. Weighted-average remaining lease term was 3.9 years.
Outlook, risks and unusual items
Management expected industrial rents to continue rising in most markets in 2014, but noted that new speculative development could restrain rent growth. It expected rents on 2014 renewals and re-leasing to be generally flat to slightly higher, and sought to increase 2014 acquisitions versus 2013. Its five-to-six-year objective was to grow the portfolio to approximately $3 billion of assets; this is an aspiration, not earnings guidance.
Banah International Group, a tenant at a Miami property, defaulted and filed for Chapter 11 after an eviction judgment. At year-end, the lease was treated as month-to-month and rent revenue recognized as cash was received; the proposed reorganization and assumption of the lease remained subject to bankruptcy proceedings. Recovery of past-due rent was undetermined. Two additional property acquisitions totaling $27.3 million were under contract, subject to due diligence and closing conditions. Subsequent to year-end, Terreno acquired a Washington-area building for approximately $6.6 million.
Key risks include tenant defaults and lease renewals, acquisition competition and execution, concentrated exposure to industrial real estate and particular markets, refinancing and variable-rate interest costs, access to capital, property valuation, and environmental, natural-disaster and insurance exposures. Management reported no known significant or material environmental exposure and no material litigation. The company reported effective disclosure controls and internal controls; the auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the Banah tenant or successor assumed the lease and continued paying rent, and whether any amounts were recovered.
- Whether the two contracted acquisitions closed, and the resulting purchase costs, financing and lease-up needs.
- Lease rollover and renewal outcomes, particularly the 2014–2015 expirations, and the sustainability of same-store NOI growth.
- How management addresses floating-rate exposure, the 2016 revolver maturity, and debt levels relative to its stated financing goals.
- Whether acquisition-led growth translates into per-share cash flow and FFO growth given the significant increase in shares outstanding.
- Actual cash-flow coverage of common and preferred distributions, including recurring capital and leasing expenditures.