Terreno Realty Corporation — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. Terreno is an internally managed REIT focused on industrial properties in six coastal U.S. markets: Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami and Washington, D.C.
Business and portfolio
At year-end, Terreno owned 252 buildings totaling approximately 15.3 million square feet and 46 improved-land parcels totaling 161.4 acres; three properties were under redevelopment. Buildings were 98.6% leased and improved land was 92.5% leased. The portfolio served 569 customers, with the largest representing 4.3% of annualized base rent. Warehouse/distribution represented 76.5% of annualized base rent. Northern New Jersey/New York City represented 24.9% of total annualized base rent.
Financial and operating performance
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenues | $276.2 million | $221.9 million |
| Net income | $198.0 million | $87.3 million |
| Net income available to common stockholders per diluted share | $2.61 | $1.23 |
| Net cash from operating activities | $143.2 million | $132.2 million |
| Funds from operations (FFO), per diluted share | $150.9 million; $2.00 | $120.8 million; $1.71 |
| Adjusted EBITDA | $187.1 million | $149.1 million |
Revenue grew 24.5%; management attributed growth to acquisitions, higher rents on new and renewed leases, and improved occupancy. Same-store NOI increased 7.4% to $159.2 million; cash-basis same-store NOI increased 10.6% to $151.8 million. The reported net income increase was substantially affected by property-sale gains: $112.2 million in 2022 versus $16.6 million in 2021. Net income therefore should not be read as an equivalent increase in recurring operating performance. Total revenue less property operating expenses, the company’s NOI measure, was $207.3 million, up 25.1%.
Cash used in investing was $337.7 million, including $407.6 million of net cash paid for acquisitions and $92.2 million of capital improvements, partly offset by $162.1 million of property-sale proceeds. Cash provided by financing was $17.7 million. Year-end cash and cash equivalents were $26.4 million, down from $204.4 million a year earlier.
Debt, liquidity and distributions
Year-end debt principal was $775 million ($770.8 million net of deferred financing costs); all was unsecured. Debt-to-market capitalization was 15.0%, debt-to-Adjusted EBITDA was 3.7x, interest coverage was 7.8x and fixed-charge coverage was 7.1x. The weighted-average debt interest rate was 3.7%, while the $200 million of floating-rate term loans carried a 5.5% weighted-average rate. Floating-rate debt was 25.8% of total debt, above the company’s stated long-term target of less than 20%. The $400 million revolving facility had no balance outstanding at year-end; management reported approximately $26.4 million cash entering 2023. Fitch rated the company BBB with a stable outlook.
Debt principal maturities include $100 million in 2024, $50 million in 2026, $150 million in 2027 and $475 million thereafter. The common dividend was increased during 2022: quarterly payments were $0.34 for the first two quarters and $0.40 for the final two, or $1.48 per share for the year. A $0.40-per-share dividend for payment in April 2023 was declared after year-end.
Material changes and notable items
- Terreno acquired 20 properties for an initial investment of approximately $422.3 million, compared with 34 acquisitions and approximately $682.0 million in 2021.
- It sold four properties for aggregate proceeds of approximately $168.3 million and recorded $112.2 million in gains. This was the main driver of the increase in GAAP net income.
- Same-store occupancy rose to 99.5% from 98.1%. Cash rents on new and renewed leases commencing in 2022 were approximately 49.5% above prior rents for the same space.
- Interest expense increased 32.1% to $23.9 million, reflecting higher average rates, revolving-credit borrowings during the year and a new $100 million term loan. The revolving borrowings were repaid by year-end.
- Capital expenditures increased to $93.1 million from $67.8 million. Three redevelopment projects remained in progress, with expected total investment of $69.3 million and estimated completion from Q3 2023 through Q3 2024.
- Acquisition costs and other included approximately $1.0 million for environmental remediation at Avenue A. In Q4, Terreno also wrote off $2.0 million of below-market lease assets related to early lease terminations. No property impairment charges were recorded in 2022.
Outlook, commentary and risks
Management described operating conditions in its markets as excellent and expected 2023 new or renewed lease rates, on average, to exceed existing rents. It cautioned that new speculative development would moderate potential rent growth. Acquisition volume will depend on asset quality, pricing and Terreno’s share price relative to estimated net asset value. Management also expects to continue selling assets and redeploying proceeds or returning capital to shareholders. The filing gives no specific quantitative earnings or FFO guidance.
As of February 7, 2023, the company had contracts to acquire four properties for $259.5 million, subject to due diligence and closing conditions. One is a 121-acre Miami project expected to require total investment of approximately $491.1 million when completed; the project is 29.8% pre-leased and expected to be completed in 2025.
Key risks include higher interest rates and unhedged variable-rate debt, refinancing and capital-market access, tenant defaults and lease renewals, property operating and construction-cost inflation, development delays, and concentration in coastal markets. Terreno noted that most leases pass through some operating costs and that approximately 93.5% of leased space has fixed or CPI-based rent increases. Environmental exposure, natural disasters and climate-related costs are additional property risks. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. No material litigation was reported.
Important facts for investors to verify
- How much of earnings growth reflects recurring rents and occupancy versus the $112.2 million of property-sale gains; also review FFO and same-store NOI reconciliations.
- Whether rent spreads near 49.5% persist as leases roll and speculative supply affects market rents; monitor the 9.2% of annualized base rent scheduled to expire in 2023.
- Exposure to floating rates: floating debt was 25.8% of total debt, no interest-rate caps were in place, and management estimated a 0.25% SOFR move would change annual interest expense by about $0.5 million on year-end variable borrowings.
- Completion costs, leasing and returns for redevelopment projects and the proposed $259.5 million acquisitions, particularly the larger Countyline project.
- Cash available after dividends, capital spending and acquisitions, and the company’s ability to maintain its dividend while meeting its stated leverage and coverage objectives.