Terreno Realty Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. Fourth-quarter figures are noted where relevant. Amounts are in U.S. dollars.
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./Baltimore. At year-end, it owned 126 buildings totaling approximately 9.3 million square feet and two improved land parcels. The portfolio was 93.7% leased to 299 customers; the largest tenant represented 5.3% of annualized base rent. Warehouse/distribution facilities accounted for 88.8% of portfolio square footage. Terreno is a REIT.
Financial and operating performance
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $68.9 million | $45.5 million |
| Net income | $10.7 million | $6.6 million |
| Net income available to common stockholders, after preferred dividends | $7.1 million; $0.23 per share | $3.1 million; $0.15 per share |
| Funds from operations (FFO; non-GAAP) | $26.1 million; $0.86 per share | $12.7 million; $0.60 per share |
| Net operating income (NOI; non-GAAP) | $49.7 million | $32.8 million |
| Operating cash flow | $29.3 million | $13.5 million |
Total revenue increased 51.3%; same-store NOI rose 6.7% to $30.6 million, while same-store year-end occupancy improved to 97.1% from 96.3%. The company reported new and renewed lease rates approximately 8.0% above prior rents for the same space. NOI was approximately 72.2% of revenue, a calculated non-GAAP operating measure. Fourth-quarter revenue was $18.7 million, and net income available to common stockholders was $1.9 million, or $0.05 per share. Fourth-quarter FFO was $7.0 million, or $0.20 per share, versus $3.7 million, or $0.15 per share, in fourth-quarter 2013.
- Investment and liquidity: Total assets were $1.077 billion; cash and cash equivalents were $190.6 million, compared with $7.0 million at year-end 2013. Operating cash flow was $29.3 million; investing cash outflow was $249.9 million, including $225.8 million for acquisitions. Capital expenditures were $20.6 million.
- Debt: Total debt was $304.5 million, versus $189.3 million a year earlier; stockholders’ equity was $747.0 million. Debt was 24.7% of market capitalization and debt plus preferred stock was 28.4%. The $100 million revolving facility had no year-end borrowings; term loans outstanding were $200 million. Mortgage debt was $104.5 million, with a weighted average fixed rate of 4.5%. Total weighted average debt maturity was 4.8 years; $24.8 million of principal was scheduled for 2015.
- Funding and distributions: Two 2014 common-stock offerings raised net proceeds of approximately $319.5 million combined. Common shares outstanding increased to 42.9 million from 25.0 million. Common dividends declared totaled $0.57 per share, up from $0.51 in 2013. Series A preferred stock pays a 7.75% cumulative dividend.
Material changes versus 2013
- Revenue growth primarily reflected acquisitions completed in 2013 and 2014, along with stronger same-store occupancy and rents. Terreno acquired 29 buildings and one improved land parcel during 2014 for an aggregate initial investment of approximately $236.7 million.
- Net income and FFO increased, but the comparison is affected by portfolio growth and by 2013 gains on property sales: 2013 included a $2.8 million gain and discontinued-operations income, while 2014 reported none. Terreno adopted revised discontinued-operations guidance in 2014.
- Property operating expenses rose 50.0%, mainly due to acquired properties; same-store costs also increased, primarily because of snow removal. Depreciation and amortization rose 53.6%, and interest expense rose 6.1%.
- Cash and debt both increased substantially amid acquisitions and equity financing. The credit facility was amended and expanded, including new term loans and extended maturities.
Outlook, risks and contingencies
Management expected industrial rents in its markets to continue rising in 2015, while cautioning that increased speculative development could moderate rent growth. It sought to increase 2015 acquisitions over 2014 and, over four to five years, grow the portfolio to approximately $3.0 billion of assets. Management emphasized per-share performance and balance-sheet discipline; no specific earnings or FFO guidance was provided.
- Leases covering 17.3% of rentable area and 13.4% of annualized base rent were scheduled to expire in 2015. Re-leasing outcomes, tenant improvements, concessions and tenant defaults could affect results.
- Interest-rate exposure is material: 65.7% of debt was floating-rate. A 0.25 percentage-point LIBOR move was estimated to change annual interest expense by approximately $0.5 million at year-end debt levels. A cap covers the $50 million variable-rate seven-year term loan, with a 4.0% LIBOR strike.
- Other principal risks include acquisition competition and execution, financing access and refinancing, tenant creditworthiness, regional and industrial-sector downturns, property valuation and impairment, environmental liabilities, and natural disasters including earthquakes, hurricanes and floods. No impairment charges were recorded in 2014, 2013 or 2012.
- Banah International Group, a tenant in bankruptcy, vacated its space in January 2015 and Terreno regained possession. The company reported no material litigation and no significant or material environmental exposures known at year-end.
- At February 11, 2015, five property acquisitions were under contract for approximately $77.7 million, with a further non-binding acquisition letter of intent. One property was under contract for sale at approximately $11.2 million. These transactions remained subject to due diligence and closing conditions. Subsequent to year-end, Terreno acquired seven buildings for approximately $125.4 million.
- Management and the independent auditor reported effective internal controls; the financial statements received an unqualified audit opinion. The filing reports no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether 2015 lease expirations were renewed or re-leased, and at what effective rents after concessions and tenant-improvement costs.
- Actual occupancy, same-store NOI and cash-basis same-store NOI trends, distinguishing them from acquisition-driven growth and GAAP results.
- Acquisition completion, pricing and realized returns, and progress toward the stated portfolio-growth objective.
- Debt maturities, floating-rate exposure, covenant headroom, and whether operating cash flow supports dividends and planned capital spending.
- Tenant-default developments, including re-leasing of the former Banah space, and any changes in environmental or insurance exposures.