SAN FRANCISCO—Terreno Realty Corp. beat financial-analysis firm MLV & Co.‘s first-quarter expectations this year with a core FFO per share of $0.24 (excluding $0.03 per share of acquisitions costs) compared to its estimate of $0.23 and consensus of $0.22, MLV reports. Additionally, Terreno’s AFFO per share of $0.20 was well ahead of its estimate of $0.13 and consensus of $0.16.
Strong fundamentals were responsible for the strong quarter, according to MLV. Occupancy increased 70 bps sequentially, and same-store NOI increased by 11% year-over-year. Following the solid quarter, Terreno increased its quarterly dividend payout by a penny to $0.14 per share.
“We continue to believe there are significant near-term growth opportunities for Terreno through its acquisition strategy, which focuses on smaller, one-off warehouses, which large institutions don’t compete for,” MLV analysts Jonathan Petersen and Michael B. Kodesch said in an earnings review. “We also believe Terreno’s focus on the key port markets, which tend to outperform over the long term, means that its FFO growth should continue to exceed its peers when acquisitions become less attractive. We maintain our ‘buy’ rating and $22 price target.”
In the report, Petersen and Kodesch say, “As one of the smallest companies in our coverage by market cap, Terreno has the opportunity to grow more rapidly through acquisitions than its peers.”
Petersen tells GlobeSt.com that Terreno differentiates itself from similar warehouse REITs by “focusing on key port markets, namely Seattle, San Francisco, Los Angeles, Miami, DC/Baltimore and New Jersey/New York. They focus on those market markets because they outperform typical national industrial averages.”
Petersen adds that Terreno also focuses on smaller purchases, which makes its cost of capital lower than come of the smaller investors with which it competes. Also, its president and chairman/CEO—Michael A. Coke and W. Blake Baird, respectively—who are former executives with AMB Property Corp., are experienced enough to know which properties in which markets are smart buys. “They’re not afraid to go after a property with some hair on it,” says Petersen. “It may need a little bit of light redevelopment or have a slight or fair amount of vacancy. They’ve been doing this for a long time and know which markets will be easy to lease up and which will be difficult.”
During the first quarter, Terreno acquired three industrial properties totaling 318,222 square feet for $33.8 million. The stabilized cap rate on these properties is expected to be 6.8% once leased up to 95%, according to MLV. The properties were 83% leased on average upon acquisition closing.
Acquisition volume during the quarter was below the $42-million per-quarter average over the last three years. However, the company has closed on one property for $3.5 million since the end of the quarter, is under contract to acquire another five properties for $53.2 million and has letters of intent on another $27.8 million, MLV reports.
Also, total portfolio occupancy increased 70 bps to 93.5% at the end of Q1, from 92.8% in Q4 2013. Same-store occupancy was 95.9% at quarter’s end, compared to 92.8% a year ago. Same-store cash NOI increased by 11% in the quarter, compared to 20.6% in Q4 2013 and 18.1% for the full year of 2013. The 310-bps increase in occupancy over the past year was the primary driver behind the strong same-store growth, and the same-store pool makes up approximately 71% of total NOI, reports MLV.
“We like Terreno’s strategy of acquiring smaller assets that require some capex: these properties are often overlooked by larger industrial players, allowing Terreno to acquire them at attractive cap rates,” say Petersen and Kodesch. “The management team’s extensive experience (former AMB executives) gives us confidence that the company is making smart acquisitions, as evidenced by double-digit same-store NOI growth in recent quarters.”