Terreno Realty Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Financial statements are unaudited. Terreno is a REIT focused on industrial properties in six coastal U.S. markets. At quarter-end it owned 109 buildings totaling approximately 7.7 million square feet, with 93.8% occupancy and 233 tenants.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $17.7 million | $11.5 million | $50.1 million | $32.4 million |
| Net income | $3.4 million | $1.3 million | $7.9 million | $2.9 million |
| Net income available to common stockholders, after preferred dividends | $2.5 million | $0.4 million | $5.2 million | $0.3 million |
| Basic and diluted EPS | $0.08 | $0.02 | $0.18 | $0.01 |
| FFO per share, basic and diluted | $0.22 | $0.15 | $0.67 | $0.46 |
| Net cash from operating activities | Not separately stated for the quarter | $23.1 million | $9.7 million |
Revenue rose 53.8% in Q3 and 54.9% year to date, primarily reflecting acquisitions and improved same-store occupancy. Same-store occupancy increased to 95.1% from 91.3%; same-store NOI rose 10.6% in Q3 and 8.7% year to date. Management reported that rents on new and renewed leases commenced during the first nine months were approximately 7.3% above prior rents for the same space. Total NOI, a non-GAAP measure, was $12.9 million in Q3 and $36.1 million year to date; NOI as a share of revenue was approximately 73% and 72%, respectively.
Cash from operations increased year over year, while investing activities used $110.8 million, mainly for acquisitions and property improvements. Financing activities provided $101.8 million, including net common-stock proceeds. Cash and cash equivalents were $21.1 million at September 30, versus $7.0 million at year-end 2013. Total assets were $766.8 million and stockholders’ equity was $568.9 million.
Debt, liquidity and capital
- Total debt was $172.3 million, compared with $189.3 million at December 31, 2013. The balance comprised $15.0 million drawn on the revolving credit facility, $58.0 million in term loans and $99.3 million in mortgage loans. Weighted-average stated interest rate was 3.3% overall; mortgage debt averaged 4.4% and facility/term debt was variable rate.
- The amended credit agreement added a $50 million seven-year term loan, extended the revolving facility maturity to May 2018 and the existing term loan to May 2019, and made the facility unsecured. The new term loan matures May 2021. The company was in covenant compliance at quarter-end.
- Management reported debt-to-market-capitalization of 20.5%, debt plus preferred stock-to-market-capitalization of 25.9%, and interest coverage of 6.5x. These are company-presented measures; Adjusted EBITDA and related ratios are non-GAAP.
- A May follow-on offering of 8.05 million common shares raised approximately $136.5 million net. About $100 million repaid facility borrowings; remaining proceeds supported acquisitions and general purposes. Common shares outstanding increased to 33.1 million from 25.0 million at year-end. The $100 million ATM program had no sales through September 30.
- Quarterly common dividends were $0.14 per share; Series A preferred dividends were $0.484375 per share. The preferred stock carries a 7.75% rate and $25 per-share liquidation preference.
Material changes and outlook
- Terreno acquired 13 buildings totaling 877,240 square feet during the first nine months for aggregate initial investment of approximately $101.6 million, compared with 18 buildings and approximately $112.0 million in the prior-year period. The acquired properties contributed $3.5 million of revenue and $1.4 million of net income in 2014 through September.
- Q3 revenue growth included $4.3 million of additional rental revenue from 2013 and 2014 acquisitions; same-store rental revenue increased 6.4%. The company also reported increased depreciation, general and administrative expense, and stock-based compensation, partly reflecting portfolio growth and performance awards.
- Management expected average rents on 2014 and 2015 lease renewals or re-leasing to be generally at or above current rates, while cautioning that outcomes depend on local market conditions and are not assured. Approximately 26.6% of rentable area was scheduled to expire through December 2015.
- As of November 3, six acquisition contracts covered properties with a stated purchase price of $94.4 million; three non-binding acquisition letters of intent totaled approximately $83.5 million. These transactions were subject to diligence and other conditions. A further $3.6 million of unfunded commitments related to an expansion project.
- Three post-quarter acquisitions totaled approximately $26.4 million. The company also disclosed a non-binding letter of intent to sell one property for approximately $11.2 million.
Risks, contingencies and unusual items
- Banah International Group, a tenant in bankruptcy, was on a month-to-month lease at September 30; rent was recognized as cash was received. Following conversion of its bankruptcy case to Chapter 7, Terreno expected to regain possession during Q4 2014. The tenant represented approximately 1.7% of annualized base rent in the tenant table.
- Northern New Jersey/New York City represented 31.1% of annualized base rent. The largest tenant, FedEx, represented 6.3%; no tenant exceeded 10% of nine-month revenue.
- Approximately 42.4% of debt was floating rate. Management estimated that a 0.25 percentage-point LIBOR change would affect annual interest expense by approximately $182,500, based on quarter-end facility borrowings.
- Key risks include tenant defaults and non-renewals, vacancy or lower rents, acquisition execution and financing access, interest-rate changes, property-market conditions, and maintaining REIT status. No impairment charges were recorded in the periods shown; the company reported no material litigation and no material changes to previously disclosed risk factors.
- The filing provides no formal earnings or FFO guidance. Management’s stated long-term financing objectives include limiting debt plus preferred stock to less than 40% of enterprise value and maintaining fixed-charge coverage above 2.0x.
Important facts for investors to verify
- Whether same-store occupancy and leasing spreads remain strong as the 2014–2015 lease expirations roll through.
- Whether the Banah tenant vacated as expected and the space was re-leased, including the effect on rent and occupancy.
- Completion, financing and returns of contracted and proposed acquisitions, and the associated capital and leasing requirements.
- Debt maturity and refinancing exposure, floating-rate sensitivity, facility covenant headroom, and the effect of further borrowing on leverage.
- Per-share performance in light of the substantial increase in common shares outstanding, preferred dividends, and the sustainability of cash available for distributions.