Terreno Realty Corporation (NYSE: TRNO) — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. The filing is an annual report, not a standalone fourth-quarter report; full-year comparisons are year over year 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 owned 259 buildings totaling approximately 16.0 million square feet, 45 improved-land parcels totaling 152.4 acres, seven properties under development or redevelopment, and 62.7 acres entitled for future development. Buildings were 98.5% leased and improved land 94.6% leased across 580 customers. The largest customer represented 3.6% of annualized base rent.
Financial and operating metrics
| Metric | 2023 | 2022 | Change/comment |
|---|---|---|---|
| Total revenue | $323.6 million | $276.2 million | Up 17.2% |
| Net income | $151.5 million | $198.0 million | Down 23.5% |
| Net income per diluted share | $1.81 | $2.61 | Down 30.7% |
| Net operating income (NOI) | $244.5 million | $207.3 million | Up 17.9%; approximately 75.6% of 2023 revenue |
| Same-store NOI | $200.9 million | $185.1 million | Up 8.6% |
| Cash-basis same-store NOI | $190.9 million | $168.5 million | Up 13.3% |
| FFO attributable to common stockholders | $185.5 million | $150.9 million | Up 22.9% |
| Diluted FFO per share | $2.22 | $2.00 | Up 11.0% |
| Net cash from operating activities | $179.7 million | $143.2 million | Up $36.5 million |
Fourth quarter: Net income was $57.6 million versus $58.9 million in Q4 2022; FFO attributable to common stockholders was $50.0 million versus $41.1 million, and diluted FFO per share was $0.58 versus $0.54.
Cash, investment and capital: Cash and cash equivalents were $165.4 million at year-end, compared with $26.4 million a year earlier. Investing activities used $570.4 million, including $466.8 million of net cash paid for acquisitions and $176.6 million of additions to capital improvements, partly offset by $73.1 million of property-sale proceeds. Financing activities provided $528.9 million, primarily from common-stock issuance; dividends paid were $135.9 million. Total capital expenditures were $185.3 million, versus $93.1 million in 2022.
Debt and liquidity: Debt principal was $775.0 million ($771.6 million net of deferred financing costs); no revolving-credit borrowings were outstanding against the $400 million facility. The weighted-average debt interest rate was 4.0%; $200 million of term loans were floating rate at 6.6%. Net debt to Adjusted EBITDA was 2.6x, interest coverage 9.1x and fixed-charge coverage 6.8x. The company reported compliance with debt covenants and a Fitch issuer rating of BBB with a positive outlook. $100 million of notes mature in 2024; the revolving facility matures in August 2025. The filing reports 25.8% of debt as floating rate.
Distributions: Quarterly dividends rose during 2023 from $0.40 to $0.45 per share; total declared dividends were $1.70 per share for the year, versus $1.48 in 2022. A $0.45-per-share dividend was declared for payment in April 2024.
Material changes versus 2022
- Revenue increased mainly from rent growth and acquisitions. Cash rents on new and renewed leases commencing in 2023 were 55.5% higher than prior rents on the same space.
- Same-store occupancy eased to 98.5% from 98.8%, while same-store NOI increased 8.6%.
- Net income fell largely because gains on property sales declined to $38.2 million from $112.2 million. The company sold four properties in 2023 for approximately $77.1 million in aggregate, recognizing $38.2 million in gains.
- FFO increased despite higher share count, interest expense and general and administrative costs. The company issued 5.75 million shares in a public offering, raising net proceeds of $355.9 million, and raised a further $310.5 million net through ATM offerings during 2023.
- Acquisitions totaled seven properties for a stated purchase price of approximately $484.0 million. Development and redevelopment spending rose materially; seven projects were in progress at year-end, with total expected investment of approximately $592.0 million, including entitled land.
Outlook, commentary and risks
Management said operating conditions had slowed over the prior year but remained good in its submarkets. It expects 2024 renewals and new leases, on average, to achieve rents above current rents, while warning that new speculative development may temper rent growth. Acquisition activity will depend on opportunity quality and pricing and the company’s share price relative to net asset value. Management emphasized per-share growth and plans to continue selling assets and redeploying proceeds or returning capital.
The company entered 2024 with no revolver balance and approximately $165.4 million in cash. The filing provides no numerical earnings or FFO guidance. It identifies risks including lease renewals and tenant defaults, interest rates and refinancing, development costs and timing, market and asset values, geographic concentration, environmental and climate exposures, and REIT qualification. DirectBuy Home Improvement, a top-20 customer, filed for Chapter 11 in October 2023; Terreno had fully reserved its receivables at year-end, and recovery was undetermined. In January 2024, Terreno began redevelopment of the property and signed a short-term lease expiring in January 2026.
Other notable items: there were no property impairment charges in 2023, 2022 or 2021, and the company reported no material litigation. Its audited financial statements and internal-control audit received unqualified opinions.
Important facts for investors to verify
- Assess the $100 million 2024 note maturity and refinancing plan, as well as floating-rate exposure above the company’s stated long-term target of less than 20% of debt.
- Track leasing and occupancy, particularly the 2024 lease expirations representing 10.2% of portfolio annualized base rent, and whether expected rent increases are realized after concessions and tenant improvements.
- Monitor delivery, pre-leasing, total costs and stabilization of the development pipeline; estimated cap rates and schedules are management estimates, not guarantees.
- Evaluate acquisition and redevelopment returns against capital raised through equity issuance and resulting dilution; outstanding shares increased substantially during 2023.
- Follow DirectBuy’s bankruptcy outcome and the re-leasing and redevelopment of its former space.
- Review cash available for dividends alongside recurring capital needs, debt service, and the REIT distribution requirement; dividend levels remain subject to board discretion.