Terreno Realty Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Terreno is an internally managed REIT focused on industrial real estate in six coastal U.S. markets. At quarter-end it owned 257 buildings totaling approximately 15.8 million square feet and 46 improved land parcels; building occupancy was 98.3% and improved-land occupancy was 96.3%.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $82.9 million | $70.8 million | $237.1 million | $200.2 million |
| Net income | $30.3 million | $22.4 million | $93.9 million | $139.1 million |
| Net income per diluted share | $0.36 | $0.30 | $1.13 | $1.84 |
| FFO per diluted share | $0.57 | $0.52 | $1.64 | $1.46 |
| Net operating income (NOI) | $62.5 million | $53.7 million | $179.7 million | $150.4 million |
For Q3, revenue increased 17.1%, net income 35.1%, and FFO per diluted share 9.6% year over year. Nine-month net income declined 32.5%, primarily reflecting a much smaller gain on property sales: $12.3 million versus $76.0 million in 2022. Excluding that comparison, operating measures improved: nine-month FFO attributable to common stockholders rose 23.4%, and same-store NOI rose 10.3%. Cash-basis same-store NOI increased 13.1% in Q3 and 14.4% for the nine months.
Q3 cash rents on new and renewed leases increased 38.9% against prior rents; the increase was 48.6% excluding one fixed-rate Oakland renewal. For the nine-month period, the increase was 57.1%. Management attributed growth to new and renewed leases, acquisitions, contractual rent increases, and higher same-store occupancy.
- Cash and cash flow: Cash and cash equivalents were $96.2 million at September 30, up from $26.4 million at year-end 2022; including restricted cash, the balance was $100.2 million. Nine-month operating cash flow was $140.6 million, investing cash outflow was $479.6 million, and financing cash inflow was $411.2 million.
- Debt and liquidity: Gross unsecured debt was $775 million, with no secured debt and no revolver borrowings against a $400 million revolving facility. Net debt was $771.4 million; reported weighted-average debt interest rate was 4.0%. The $200 million term loans were floating-rate debt at 6.6%. Debt-to-adjusted EBITDA was 3.3x, interest coverage 8.7x, and fixed-charge coverage 6.7x. The company reported covenant compliance.
- Capital and distributions: Nine-month common-stock issuance generated approximately $510 million net, including a February public offering that raised $355.9 million and ATM proceeds of $154.4 million. Dividends paid were $97.4 million. The quarterly dividend rose to $0.45 per share; the board declared another $0.45 dividend payable January 5, 2024.
Material changes and operating activity
- Q3 same-store NOI increased 8.6%; nine-month same-store NOI increased 10.3%. Same-store occupancy was 98.5%, compared with 98.1% a year earlier.
- Terreno acquired five industrial properties for approximately $437.0 million during the first nine months of 2023, compared with 16 properties for $360.8 million in the prior-year period. Capital expenditures were $122.9 million versus $81.6 million, including increased development and redevelopment spending.
- Eight properties were under development or redevelopment, with expected investment of $336.1 million; a further $295.7 million was expected for entitled land development. Combined expected investment was approximately $631.8 million. Projects had a weighted-average estimated stabilized cap rate of 5.3% for properties under development or redevelopment; these are estimates, not realized returns.
- One property sold for $25.5 million during the nine months, generating a $12.3 million gain. A Washington, D.C.-market property sold after quarter-end for $18.0 million. Two additional properties were acquired in October for a combined $73.2 million.
Outlook, risks, and unusual items
The filing provides no formal earnings or FFO guidance. Management said it currently expects average rents on 2023 and 2024 expirations to exceed existing rents. Leases representing approximately 12.1% of portfolio annualized base rent were scheduled to expire through December 31, 2024. The next-year debt maturity is $100 million in 2024.
Key risks include interest-rate exposure, refinancing and capital-market access, tenant defaults or non-renewals, industrial-market conditions, rising insurance, taxes and construction costs, and execution risks in development and redevelopment. A 0.25% change in SOFR would change annual interest expense by approximately $0.5 million on the reported outstanding facility balance. Approximately 24.3% of annualized base rent came from the Northern New Jersey/New York City market; no tenant exceeded 10% of rent, and Amazon.com was the largest at 3.6%.
DirectBuy Home Improvement, representing 1.4% of annualized base rent, filed for Chapter 11 bankruptcy on October 16, 2023. Terreno had reserved for its receivables at quarter-end; ultimate rent recovery was undetermined. Q3 included approximately $0.4 million of related bad-debt expense. No property impairment charges were recorded in the periods presented. Management identified no material litigation and reported effective disclosure controls.
Most important facts for investors to verify
- Whether rent spreads, occupancy, and tenant retention remain strong as leases expire, and whether reported leasing gains translate into cash flows.
- Actual costs, completion dates, pre-leasing, and stabilized returns for the development and redevelopment pipeline.
- Funding and dilution implications of continued acquisitions, equity issuance, capital spending, and dividends.
- Refinancing plans for the $100 million 2024 maturity and sensitivity to floating rates and credit-market conditions.
- DirectBuy’s lease status, receivable recovery, and any effect on occupancy or future rental income.