Terreno Realty Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. The company is an internally managed REIT focused on industrial properties in six coastal U.S. markets. It owned 39 buildings totaling approximately 2.9 million square feet, leased 71.6% to 50 tenants. Terreno began operations on February 16, 2010, so the six-month comparison is against a shorter 2010 period and is not like-for-like.
Financial performance and condition
- Revenue: Q2 rental revenue was $3.766 million, versus $0.333 million in Q2 2010. First-half revenue was $7.136 million, versus $0.345 million from commencement of operations through June 30, 2010. Growth was primarily attributable to acquisitions.
- Profitability: Q2 net loss was $1.961 million, or $0.21 per share, compared with a $1.331 million loss, or $0.15 per share. First-half net loss was $3.267 million, or $0.36 per share, compared with a $2.088 million loss, or $0.23 per share, in the shorter 2010 period. First-half FFO was negative $1.314 million, or negative $0.14 per share. Adjusted EBITDA was $1.922 million for the first half; the company reported interest coverage of 2.3x.
- Property-level margin: Rental revenue less property operating expenses was approximately 60.5% of revenue in Q2 and 58.6% in the first half. These are derived figures before depreciation, general and administrative expense, acquisition costs, and interest.
- Cash flow and liquidity: First-half cash used in operations was $1.513 million; cash used in investing was $49.373 million, mainly for acquisitions; and cash used in financing was $2.288 million. Cash fell from $57.253 million at year-end to $4.079 million at June 30. The $80 million revolving facility had $6 million drawn, matures March 22, 2013, and is subject to borrowing-base limits and covenants. The filing does not establish that the full undrawn commitment was available.
- Debt and capitalization: Total debt, including mortgage premiums, was $38.010 million, versus $17.676 million of mortgage debt at year-end 2010. Weighted-average debt interest rate was 5.0%; debt-to-gross real estate investment was 19.0%, and debt-to-market capitalization was 19.4%. Debt maturities are concentrated in 2015, when $13.989 million of principal is scheduled. The company reported compliance with facility covenants.
- Balance sheet and shareholder returns: Total assets were $205.116 million and stockholders’ equity was $161.024 million. Dividends declared were $0.10 per share in each of Q1 and Q2; $0.929 million was paid in the first half.
Material changes versus the prior comparable period
- Q2 operating costs rose alongside the larger portfolio: property operating expenses were $1.488 million, depreciation and amortization $1.042 million, general and administrative expenses $1.480 million, and acquisition costs $1.256 million. Interest expense was $0.464 million. Management attributed most increases to acquisitions; director stock compensation also contributed to Q2 G&A growth.
- During the first half, Terreno acquired six buildings totaling approximately 535,078 square feet for an aggregate initial investment of $61.7 million, including assumed debt. Mortgage loans payable increased to $32.010 million, and the company drew $6 million on its revolver.
- The company paid the $7 million deferred IPO underwriting fee during Q2. First-half acquisition investment and this payment contributed to the substantial decline in cash.
Outlook, risks, and unusual items
- Outlook: No quantified earnings or acquisition guidance was provided. Management expects to fund near-term investments with term loans, mortgages, and the revolving facility, and longer-term needs through borrowings and periodic debt or equity issuance. Its stated long-term capital objectives include debt below 40% of enterprise value, fixed-charge coverage above 2.0x, and floating-rate debt below 20% of total debt.
- Subsequent activity: On July 20, 2011, Terreno acquired a 73,000-square-foot property for approximately $12.4 million, partly funded with an assumed $6.7 million mortgage and revolver borrowings. As of August 8, it had contracts to acquire two more buildings totaling approximately 190,500 square feet for $14.75 million; closing was not assured.
- Concentration and leasing risks: Northern New Jersey/New York accounted for 59.0% of annualized base rent. The top five tenants represented 55.3% of annualized base rent. Miami occupancy was only 9.9%; overall portfolio occupancy was 71.6%. Lease expirations include 22.4% of annualized base rent in 2013 and 16.7% in 2012.
- Other risks: Management identifies tenant default or non-renewal, rental-rate and occupancy declines, acquisition execution, interest-rate exposure, access to capital, environmental liability, natural disasters, and maintaining REIT status as risks. A 0.25% change in LIBOR would change annual interest expense by approximately $15,000 on the June 30 revolver balance. No material litigation or material environmental exposure was reported; the company noted that environmental assessments may not reveal all liabilities. No material change to previously disclosed risk factors was reported.
- Controls: Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether occupancy and leasing improve, particularly in Miami, and how the 2012–2013 lease expirations are addressed.
- Tenant and geographic concentration, including the 55.3% rent share of the top five tenants and 59.0% share from Northern New Jersey/New York.
- Cash needs and actual borrowing capacity under the revolver’s borrowing-base restrictions, especially after the July acquisition and any pending purchases.
- Debt maturities, floating-rate exposure, and compliance with facility covenants as acquisitions and financing change.
- Acquisition closings and financing for the two properties under contract, and whether growth translates into improved operating cash flow and positive FFO.
- Ability to sustain distributions while operating cash flow is negative and the company continues investing in properties.