Business context and reporting period
Terreno Realty Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The internally managed REIT owns and operates industrial properties across six coastal U.S. markets. At quarter-end, it owned 195 buildings totaling approximately 12.5 million square feet, leased 98.2% to 430 customers, plus 11 improved land parcels and four buildings under redevelopment. Its largest customer represented 4.2% of annualized base rent.
Financial and operating performance
- Second-quarter revenue: $37.2 million, up 13.6% from $32.8 million. Rental revenue rose 12.4% to $28.9 million; tenant reimbursements increased 17.9% to $8.3 million.
- Second-quarter earnings: Net income was $20.1 million versus $15.5 million, up 29.7%. Diluted EPS was $0.35 versus $0.29. Results included an $11.7 million property-sale gain; net income before preferred dividends should not be viewed as solely recurring operating performance.
- Six-month results: Revenue was $74.3 million, up 15.8%; net income was $30.2 million, up 41.6%; and diluted EPS was $0.54 versus $0.40. Property-sale gains totaled $15.0 million, compared with $10.1 million in the prior-year period.
- Property operations: Second-quarter NOI increased 10.7% to $26.9 million, while same-store NOI rose 2.2% to $22.6 million. For the first half, NOI increased 14.7% to $54.1 million and same-store NOI rose 5.9% to $45.6 million. Cash-basis same-store NOI grew 2.8% in Q2 and 7.6% for the six months.
- Funds from operations: FFO attributable to common stockholders was $18.1 million, or $0.32 per share, in Q2, versus $13.5 million, or $0.27 per share. First-half FFO was $35.4 million, or $0.63 per share, up 29.1% and 12.5% per share, respectively.
- Cash flow: First-half operating cash flow was $35.6 million versus $33.6 million. Investing used $127.8 million, including $100.9 million for acquisitions and $55.0 million funded for a secured loan, partly offset by $43.0 million of property-sale proceeds. Financing provided $82.5 million, including $106.4 million of net common-stock proceeds; cash and restricted cash ended at $33.2 million.
- Balance sheet and debt: Total assets were $1.69 billion and stockholders’ equity $1.14 billion. Debt was $469.5 million gross, or $466.5 million net of financing costs, with a weighted-average rate of 3.8%. Cash and cash equivalents were $27.7 million, with another $5.5 million restricted. Debt-to-market capitalization was 17.5%; debt-to-adjusted EBITDA was 4.7x. The company reported compliance with debt covenants.
- Capital returns: Common dividends were $0.22 per share for each of the first two 2018 quarters. On August 1, the board declared a $0.24-per-share dividend payable October 19, 2018.
Material changes, outlook and risks
- Revenue growth reflected acquisitions and higher rents on new and renewed leases; same-store occupancy increased to 98.3% from 97.8% a year earlier. New and renewed leases commencing in Q2 had rents 33.9% above prior rents for the same space; the first-half increase was 18.7%. Management expected rents on 2018 expirations, covering 2.0% of portfolio space, to average above current rents, but cautioned that future leasing outcomes are uncertain.
- Operating expenses rose 22.0% in Q2, mainly due to acquired properties. Interest expense increased 21.5% as average borrowings rose. Lower performance-share compensation partly offset these increases in general and administrative expense.
- The company acquired five buildings and one improved land parcel in the first half for an aggregate initial investment of $103.7 million. Four redevelopment projects are expected to total $119.2 million, with an estimated weighted-average stabilized cap rate of 5.3%; approximately $30.9 million remained to spend at June 30. Timing, costs, leasing and projected returns are uncertain.
- A $55.0 million senior secured loan originated in May at a fixed 8.0% rate, maturing in May 2020, and secured by nine improved land parcels. Certain collateral parcels may be put to or called by the company as partial or full repayment.
- As of August 1, the company had contracts to acquire properties totaling approximately $107.6 million, subject to due diligence and closing conditions, and non-binding letters of intent for properties totaling approximately $22.7 million. These purchases are not assured.
- Management expects to fund liquidity needs through operating cash flow, existing cash, debt, equity issuance and dispositions. No specific earnings or FFO guidance is provided. The company highlighted risks including tenant defaults or non-renewals, vacancies and lower rents, acquisition and redevelopment execution, interest-rate changes, financing access, property valuations, and maintaining REIT status. A 0.25% LIBOR move was estimated to change annual interest expense by approximately $0.4 million on facility borrowings outstanding at quarter-end; $150.0 million of variable-rate term loans was covered by interest-rate caps.
- The company adopted revenue-related accounting guidance in 2018 without material financial-statement impact and planned to adopt the new lease standard on January 1, 2019; its impact was still under assessment. Disclosure controls were reported effective, and the filing reported no material litigation or material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of earnings growth came from recurring leasing and property operations versus property-sale gains, and how FFO trends relative to per-share dilution from equity issuance.
- Whether same-store rent growth and high occupancy can be sustained as leases expire, including the concentration of 2019–2021 expirations and market-level performance.
- Execution, remaining funding needs and leasing progress for redevelopment projects, and whether estimated stabilized yields are achieved.
- Closing and funding status of the $107.6 million contracted acquisitions, and any subsequent changes to the non-binding acquisition pipeline.
- Loan repayment and collateral outcomes for the $55.0 million secured loan, as well as debt maturities, interest-rate exposure and covenant headroom.
- Cash available for dividends and investment after capital spending, debt service and ongoing ATM equity issuance.