Terreno Realty Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Terreno owns and operates industrial real estate across six coastal U.S. markets. At quarter-end it had 257 buildings totaling 15.8 million square feet, 46 improved land parcels, seven properties under development or redevelopment, and 62.7 acres entitled for future development. Building occupancy was 97.8%; improved-land occupancy was 96.3%.
Financial results and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $79.5 million | $65.4 million | $154.2 million | $129.4 million |
| Net income | $40.3 million | $97.0 million | $63.6 million | $116.7 million |
| Diluted EPS | $0.48 | $1.28 | $0.77 | $1.54 |
| FFO attributable to common stockholders | $46.0 million | $36.1 million | $87.3 million | $70.6 million |
| Diluted FFO per share | $0.55 | $0.48 | $1.07 | $0.94 |
| Net cash from operations | Not presented quarterly | $87.4 million | $63.2 million |
Revenue rose 21.7% in Q2 and 19.2% in the first half. Net operating income (NOI) increased 23.0% in Q2 and 21.2% in the first half; NOI was approximately 76.6% and 76.0% of revenue, respectively. Same-store NOI grew 11.1% in both comparisons. Cash-basis same-store NOI grew 14.5% in Q2 and 15.0% in the first half.
GAAP net income declined because the comparable 2022 periods included a $76.0 million property-sale gain, versus $12.3 million in 2023. FFO, which excludes property-sale gains, increased, reflecting acquisitions and same-store growth, partly offset by higher interest expense, G&A costs and share count.
At June 30, cash and cash equivalents were $58.9 million. Gross debt was $775 million, all unsecured; debt net of issuance costs was $771.1 million. The $400 million revolving facility was undrawn, and Terreno reported covenant compliance. Weighted-average debt interest rate was 4.0%; $200 million of term loans were floating rate. Floating-rate debt was 25.8% of total debt. Debt-to-adjusted EBITDA was 3.4x; interest coverage was 8.1x and fixed-charge coverage was 6.7x.
Cash used in investing was $406.5 million, primarily for $378.1 million of property acquisitions and capital improvements, partly offset by $24.6 million of disposition proceeds. Financing provided $351.1 million, principally from common-stock issuance, partly offset by $63.9 million of dividends paid. Cash and restricted cash ended the period at $60.0 million.
Material changes and operating developments
- Same-store occupancy increased to 98.4% from 97.1% a year earlier. New and renewed leases commencing in Q2 had cash rents 59.2% above prior rents; the first-half increase was 64.3%. Tenant retention was 51.7% in Q2 and 52.9% for the first half.
- Acquired four properties in the first half for approximately $420.5 million, compared with 12 properties for approximately $291.9 million in the first half of 2022. Sold one property for $25.5 million, recognizing a $12.3 million gain; 2022 first-half dispositions generated a $76.0 million gain.
- Raised substantial equity: a February public offering generated approximately $355.9 million net, and the ATM program generated approximately $60.0 million net in the first half. Shares issued and outstanding increased to 83.2 million from 76.5 million at year-end 2022. The ATM program had $81.7 million remaining.
- Development and redevelopment projects had expected investment of $295.4 million, with $151.6 million spent; estimated stabilized cap rates were 5.3% weighted average. A further $277.9 million was expected for entitled land development. Estimates and stabilization dates are subject to execution and market risks.
Outlook, risks and other notable items
No formal earnings or FFO guidance was provided. Management said it currently expects rents on 2023 lease expirations to average above existing rents. Approximately 3.0% of portfolio annualized base rent was scheduled to expire in 2023. Approximately 96.1% of leased space has fixed or CPI-based rent increases, and most leases pass through some operating costs to tenants.
The board declared a $0.45-per-share dividend on August 1, payable October 13, 2023, up from $0.40 per share for each of the first two 2023 quarters. The company had three acquisition contracts totaling $67.4 million as of August 1, subject to due diligence and closing conditions, plus a non-binding $27.5 million letter of intent.
Key risks include higher interest rates and construction costs, tenant defaults or non-renewals, vacancy or lower rents, access to capital, development delays, real estate valuation declines, natural disasters and environmental matters. A 0.25% change in SOFR would change annual interest expense by approximately $0.5 million on the June 30 term-loan balance. No property impairment charges or material litigation were reported; disclosure controls were deemed effective.
Investor verification priorities
- Track leasing spreads, tenant retention, occupancy and the ability to sustain same-store growth as leases expire.
- Review development spending, pre-leasing, completion timelines and realized returns against management’s estimated cap rates.
- Assess floating-rate exposure, refinancing needs—including $100 million of notes due in 2024—and access to capital markets.
- Evaluate acquisition commitments and the effects of continued equity issuance and share-count growth on per-share results.
- Confirm the $0.45 dividend’s coverage by recurring cash flow and the durability of operating cash generation.