Terreno Realty Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Terreno is a REIT focused on industrial properties in six coastal U.S. markets. At quarter-end it owned 85 buildings totaling approximately 6.3 million square feet; the portfolio was 88.6% leased.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $11.5m | $8.6m | $32.4m | $21.2m |
| Net income | $1.3m | $0.5m | $2.9m | $0.5m |
| Income available to common stockholders | $0.4m | $(0.2)m | $0.3m | $(0.2)m |
| Basic and diluted EPS | $0.02 | $(0.01) | $0.01 | $(0.02) |
| Net operating income (NOI) | $8.2m | $6.3m | $23.2m | $15.1m |
| Funds from operations (FFO), non-GAAP | $3.7m; $0.15/share | $2.2m; $0.17/share | $9.0m; $0.46/share | $5.9m; $0.45/share |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $9.7m | $7.1m |
- For the nine months, cash used in investing was $116.9m, primarily for $110.1m of property acquisitions; cash from financing was $163.3m. Cash and cash equivalents were $62.0m at September 30, versus $5.9m at year-end 2012.
- Total debt was $159.2m: $50.0m on the term loan and $109.2m of mortgage loans; the revolving facility had no borrowings. Debt was 28.2% of property investments and 24.5% of market capitalization. The weighted average debt interest rate was 3.7%; 31.4% of debt was floating-rate. The company reported covenant compliance.
- Adjusted EBITDA was $19.9m for the nine months; interest coverage was 4.3x and fixed-charge coverage 2.7x. These are non-GAAP measures.
Changes versus comparable periods
- Q3 revenue rose 33.8% and nine-month revenue rose 52.9%, primarily because of acquisitions. Nine-month NOI increased 53.6%.
- Same-store NOI declined 7.3% in Q3 and 0.8% for the nine months. Management attributed the quarterly same-store revenue decline partly to lower occupancy: same-store occupancy was 90.2% at quarter-end versus 94.8% a year earlier. Cash-basis same-store NOI, a non-GAAP measure, increased 7.5% for Q3 and 17.2% for the nine months.
- Net income increased, but nine-month interest expense also rose 23.5%, reflecting debt assumed or originated and borrowings under the credit facility and term loan. FFO per share was $0.15 in Q3 versus $0.17 a year earlier, despite higher total FFO, alongside substantial share issuance.
- Two 2013 follow-on offerings issued 11.5 million common shares and generated approximately $190.7m net proceeds. Common shares outstanding increased to 24.99 million from 13.43 million at year-end 2012. The company acquired 18 buildings during the nine months for approximately $112.0m.
Outlook, risks and unusual items
- No quantified earnings or operating guidance was provided. Management said industrial-space demand was improving in most markets and expected 2013 lease renewals or re-leasing, on average, at or above current rents; it cautioned that actual results and rents could differ.
- Management’s long-term financing objectives include keeping debt plus preferred stock below 40% of enterprise value, fixed-charge coverage above 2.0x, and floating-rate debt below 20% of total debt. At quarter-end, floating-rate debt was 31.4%, above that stated objective.
- A tenant, Banah International Group, filed for Chapter 11 after an eviction judgment. It had paid rent through November 30, 2013, but may affirm or reject its lease; past-due rent and any recovery remained uncertain. The lease was treated as month-to-month, with revenue recognized when cash was received.
- One Northern New Jersey/New York City property was classified as held for sale, with an approximately $19.0m proposed sale price and approximately $15.0m net book value, subject to due diligence and closing conditions. The filing reports no impairment charges.
- Interest-rate exposure is material: a 0.25% change in LIBOR would change annual interest expense by approximately $125,000 on the $50.0m facility and term-loan balance at quarter-end. Other risks cited include tenant defaults, vacancies or lower rents, acquisition execution, access to capital, property values, operating costs, and maintaining REIT status.
- Subsequent to quarter-end, Terreno acquired two New Jersey buildings for approximately $9.9m and declared common and preferred dividends. Five outstanding acquisition contracts covered six buildings totaling 351,851 square feet and $31.2m in stated purchase prices; completion was not assured.
Important facts for investors to verify
- Track same-store occupancy and leasing results, especially whether the reported occupancy decline and same-store NOI weakness persist.
- Monitor Banah’s bankruptcy and lease status, including cash rent collections and any recovery of past-due amounts.
- Assess the impact of equity dilution on per-share results and dividend coverage; FFO per share declined year over year in Q3.
- Review debt maturities, floating-rate exposure, facility borrowing-base availability, and progress against management’s leverage and coverage objectives.
- Confirm whether the proposed property sale and contracted acquisitions close; the filing’s contract descriptions contain a count discrepancy, referring to five properties in one place and six buildings in another.
- Consider geographic and tenant concentration: Northern New Jersey/New York City represented 32.5% of annualized base rent, and the ten largest tenants represented 34.1% of nine-month revenue.