Terreno Realty Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 6, 2020. This is an annual report, not a standalone fourth-quarter filing. Amounts are in U.S. dollars unless otherwise noted.
Business context
Terreno acquires, owns and operates industrial real estate in six coastal U.S. markets: Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami and Washington, D.C. At year-end it held 220 buildings totaling approximately 13.3 million square feet, 19 improved land parcels totaling 77.6 acres, and four properties under redevelopment. Buildings were 96.8% leased and land parcels 92.0% leased. The portfolio served 493 customers; the largest represented 3.6% of annualized base rent. Warehouse/distribution generated 81.5% of annualized base rent.
Financial and operating performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $171.0 million | $151.7 million | +12.8% |
| Net income | $55.5 million | $63.3 million | -12.3% |
| Diluted EPS | $0.85 | $1.09 | Down |
| FFO per diluted share (non-GAAP) | $1.38 | $1.30 | +6.2% |
| Cash from operating activities | $94.7 million | $77.6 million | +22.0% |
| Same-store NOI (non-GAAP) | $110.5 million | $103.5 million | +6.7% |
| Cash-basis same-store NOI (non-GAAP) | $106.6 million | $97.7 million | +9.2% |
Revenue growth reflected acquisitions and higher rents on new and renewed leases. Same-store occupancy was 98.4%, compared with 99.1% a year earlier. Rent on new and renewed leases commencing in 2019 was reported approximately 17.3% above prior rents. Net income fell primarily because gains on property sales declined to $9.4 million from $28.6 million. Operating expenses rose 9.5% to $112.2 million; depreciation and amortization was $44.0 million. FFO is a supplemental non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
For Q4 2019, revenue was $45.0 million versus $39.4 million in Q4 2018. Net income was $14.8 million versus $23.0 million, while diluted FFO per share was $0.35 versus $0.33.
Capital, debt and liquidity
- Year-end cash and cash equivalents were $110.1 million, up from $31.0 million. Net debt, after deferred financing costs, was $491.6 million, versus $462.1 million.
- Debt comprised $350.0 million of senior unsecured notes, a $100.0 million term loan and $44.3 million of mortgage loans; no revolving-credit borrowings were outstanding. The reported weighted-average debt rate was 3.7%.
- Debt-to-adjusted EBITDA was 4.1x, interest coverage 7.2x and fixed-charge coverage 6.0x. Debt-to-total market capitalization was 11.9%. The company reported compliance with debt covenants.
- All $100 million of variable-rate term-loan debt was covered by interest-rate caps at year-end. The company warned that LIBOR’s expected transition could affect borrowing costs.
- Operating cash flow funded part of investment needs, but investing activities used $251.5 million and financing activities provided $235.1 million. Terreno raised $274.0 million net from issuing 6.1 million shares through its at-the-market programs.
- Common dividends declared totaled $1.02 per share for 2019, up from $0.92 in 2018. The board declared a further $0.27-per-share dividend in February 2020. Distributions remain subject to board discretion, cash availability and REIT requirements.
Material changes, transactions and outlook
- Terreno acquired 17 buildings and four improved land parcels in 2019 for a stated purchase price of $273.6 million; total initial investment including costs was approximately $289.6 million. It sold four properties for $48.9 million, recognizing $9.4 million in gains.
- Four redevelopment projects were expected to require $120.4 million in total investment, with $19.1 million remaining to spend at year-end. Estimated stabilized cap rates averaged 5.5%; these are management estimates, not guarantees.
- In December 2019, Terreno issued $100 million of ten-year senior notes at 3.14%. On January 6, 2020, it repaid a $32.7 million mortgage loan.
- Management described operating conditions in its markets as excellent, expected 2020 lease renewals and re-leasing to achieve higher rents on average, and saw acquisition opportunities. It cautioned that speculative development could moderate rent growth, and said acquisition volume would depend on opportunity pricing and the share price relative to net asset value. No quantified earnings or FFO guidance was provided.
- Leases covering 12.6% of portfolio rentable area were scheduled to expire in 2020 and 17.3% in 2021. Northern New Jersey/New York City accounted for 30.9% of annualized base rent, creating geographic concentration exposure.
Risks, contingencies and unusual items
Key risks include tenant defaults or non-renewals, leasing concessions, acquisition and redevelopment execution, financing access and refinancing, interest-rate and LIBOR transition exposure, property-tax increases, environmental liabilities, natural disasters including earthquakes and hurricanes, and changes in industrial property supply or demand. The company noted that a proposed California ballot measure could remove certain commercial-property tax protections. It reported no material litigation, no material known environmental exposures, and no property impairment charges in 2017–2019. The auditor issued unqualified opinions on the financial statements and internal controls; valuation of acquired properties was identified as a critical audit matter because it relied on significant estimates and Level 3 inputs.
Important facts for investors to verify
- Whether rent growth and high occupancy continue, particularly as 2020–2021 leases expire and new industrial supply may constrain pricing.
- Whether redevelopment projects complete on schedule and within budget, and achieve estimated leasing and stabilized returns.
- How acquisition funding, share issuance and dilution affect per-share FFO and NAV; 2019 weighted-average shares increased materially.
- Debt maturity and liquidity plans, including mortgage repayments, facility availability, floating-rate exposure and the remaining LIBOR transition.
- Whether property concentration, environmental exposures, insurance coverage and potential property-tax changes affect cash available for distributions.
- Reconcile reported GAAP results with non-GAAP FFO, NOI and adjusted EBITDA, and assess the effect of lower property-sale gains on earnings.