Terreno(TRNO) - 2022 Q4 - Annual Report

Part I Business Terreno Realty Corporation is an internally managed REIT that acquires, owns, and operates industrial real estate in six major coastal U.S. markets - As of December 31, 2022, the company's portfolio consisted of 252 buildings (approx. 15.3 million sq. ft.) and 46 improved land parcels (approx. 161.4 acres), with building and land occupancy at 98.6% and 92.5% respectively[19] - The company's investment strategy targets six major coastal U.S. markets: Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami, and Washington, D.C[21] - The company's financing strategy aims to limit total consolidated indebtedness and perpetual preferred stock to less than 35% of total enterprise value and maintain a fixed charge coverage ratio above 2.0x[37] - As of February 7, 2023, the company had 40 employees and emphasizes a commitment to diversity, inclusion, and competitive employee benefits[48][49][51] Portfolio Breakdown by Annualized Base Rent (as of Dec 31, 2022) | Property Type | % of Total Annualized Base Rent | | :--- | :--- | | Warehouse/Distribution | 76.5% | | Improved Land | 12.6% | | Transshipment | 6.8% | | Flex (Light Industrial/R&D) | 4.1% | Risk Factors The company faces significant business, financial, and industry-wide risks, including market concentration, debt obligations, and the need to maintain its REIT status Risks Related to Our Business and Our Properties - The company's investments are concentrated in the industrial real estate sector, exposing it to economic downturns in that specific area[59] - A significant portion of the company's portfolio is geographically concentrated, with the Northern New Jersey/New York City market representing approximately 24.9% of total annualized base rent as of December 31, 2022[61] - The company faces risks from tenant bankruptcies or defaults, which could delay enforcement of landlord rights and lead to substantial costs in re-leasing properties[65][66] Risks Related to Financing and Capital - As of December 31, 2022, the company had approximately $770.8 million in total debt, and significant debt service obligations could adversely affect operating results[78] - Debt agreements contain financial covenants that could limit operational flexibility, including restrictions on distributions if the company is in default[81][82] - The company's variable rate debt is transitioning from LIBOR to SOFR, which could result in higher interest costs[89] Risks Related to the Real Estate Industry - Real estate investments are not as liquid as other assets, which may limit the company's ability to adjust its portfolio in response to changing economic conditions[97] - The company faces potential liability for environmental hazards, such as hazardous substances or asbestos, on its properties, which could lead to significant remediation costs[101][102] - Future climate change and related regulations may result in increased operating costs and expose properties to physical risks like severe storms or rising sea levels[109][110] Risks Related to Our Organizational Structure - The Board of Directors can change significant corporate policies, including investment and financing strategies, without stockholder approval[115] - Certain provisions of Maryland law could inhibit a change of control, although the company has opted out of these provisions[117][118] Risks Related to Our Status as a REIT - Failure to qualify as a REIT would subject the company to federal income tax at regular corporate rates, substantially reducing funds available for distributions[121][122] - To maintain REIT status, the company must distribute at least 90% of its net taxable income annually, which could adversely affect liquidity[128] Unresolved Staff Comments The company reports no unresolved comments from the staff of the Securities and Exchange Commission - None[144] Properties The company's highly occupied portfolio is concentrated in six markets, with Amazon.com as its top customer and significant rent growth on new leases - The company's top 20 customers account for 25.2% of total annualized base rent, with Amazon.com being the largest at 4.3%[152] - Leases representing 9.2% of the total annualized base rent are scheduled to expire during the year ending December 31, 2023[152][153] - For leases commencing in 2022, cash rent changes were approximately 49.5% higher compared to the previous rental rates for the same space[153] Portfolio Summary by Market (as of Dec 31, 2022) | Market | % of Total Annualized Base Rent | | :--- | :--- | | Northern New Jersey/New York City | 24.9% | | Los Angeles | 19.1% | | Seattle | 16.7% | | San Francisco Bay Area | 16.3% | | Miami | 12.4% | | Washington, D.C. | 10.6% | Legal Proceedings The company is not currently involved in any material litigation nor is it aware of any being threatened - The company is not involved in any material litigation[155] Mine Safety Disclosures This section is not applicable to the company's business operations - Not Applicable[156] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock (NYSE: TRNO) policy is to pay regular quarterly distributions, driven by its strategy and REIT tax requirements - The company's common stock is listed on the NYSE under the trading symbol "TRNO"[159] - To maintain its REIT qualification, the company must distribute at least 90% of its REIT taxable income to stockholders annually[160] - A performance graph shows the cumulative total stockholder return on the company's common stock from December 31, 2017, to December 31, 2022[163] Reserved This item is not applicable Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, significant property transactions drove a 126.9% increase in net income, with strong revenue growth and a solid liquidity position 2022 Developments - During 2022, the company acquired 20 industrial properties for a total purchase price of approximately $414.8 million[180] - The company sold four properties in 2022 for a total sales price of approximately $168.3 million, resulting in a total gain of approximately $112.2 million[182][183] - In 2022, the company increased its revolving credit facility capacity to $400.0 million and added a new $100.0 million term loan maturing in 2028[184][185] - Under its at-the-market (ATM) program, the company issued approximately 1.3 million shares of common stock in 2022, generating net proceeds of about $77.7 million[187] Financial Condition and Results of Operations - The increase in total revenues was primarily driven by property acquisitions and a 49.5% increase in cash rents on new and renewed leases commencing during 2022[214] Comparison of Operations for Years Ended Dec 31 (in thousands) | Metric | 2022 | 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $276,212 | $221,930 | $54,282 | 24.5% | | Total Net Operating Income | $207,309 | $165,682 | $41,627 | 25.1% | | Same Store NOI | $159,157 | $148,203 | $10,954 | 7.4% | | Gain on sales of real estate | $112,166 | $16,627 | $95,539 | 574.6% | | Net Income | $198,014 | $87,254 | $110,760 | 126.9% | Liquidity and Capital Resources - As of December 31, 2022, the company had $26.4 million in cash and cash equivalents and no outstanding balance on its $400.0 million revolving credit facility[233][230] Capitalization and Debt Ratios (as of Dec 31) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Total Debt, net (in thousands) | $770,818 | $720,670 | | Total Market Capitalization (in thousands) | $5,143,049 | $7,146,786 | | Total Debt-to-Total Market Capitalization | 15.0% | 10.1% | | Total Debt-to-Adjusted EBITDA | 3.7x | 4.5x | | Fixed Charge Coverage | 7.1x | 8.0x | Non-GAAP Financial Measures - The increase in FFO was primarily due to property acquisitions in 2021 and 2022, as well as same-store NOI growth of $11.0 million for the year ended December 31, 2022[263] Funds from Operations (FFO) (in thousands, except per share) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | FFO attributable to common stockholders | $150,883 | $120,812 | 24.9% | | Diluted FFO per common share | $2.00 | $1.71 | 17.0% | Net Operating Income (NOI) (in thousands) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Operating Income | $207,309 | $165,682 | 25.1% | | Same Store NOI | $159,157 | $148,203 | 7.4% | | Cash-basis Same Store NOI | $151,755 | $137,197 | 10.6% | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is to interest rate fluctuations from its variable-rate debt - The primary market risk is interest rate risk from variable-rate debt used to fund operations and acquisitions[272] - As of December 31, 2022, the company had $200.0 million of variable-rate debt outstanding; a 0.25% fluctuation in the SOFR rate would change annual interest expense by approximately $0.5 million[273] Financial Statements and Supplementary Data This item directs readers to the consolidated financial statements and supplementary data included in the report - Refers to the detailed financial statements and schedules beginning on page F-1 of the report[275] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting or financial disclosure - None[276] Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal controls over financial reporting were effective as of year-end - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[277] - Based on the COSO framework, management assessed its internal control over financial reporting as effective as of December 31, 2022[280] - The independent registered public accounting firm provided an unqualified opinion on the effectiveness of the company's internal control over financial reporting[282] Other Information A director notified the company of his decision not to stand for re-election at the 2023 Annual Meeting - Director David M. Lee will not stand for re-election at the 2023 Annual Meeting of Stockholders[290] Part III This section incorporates information by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - The information required by Items 10 through 14 will be contained in the definitive proxy statement for the 2023 Annual Meeting of Stockholders and is incorporated herein by reference[293][294][295] Directors, Executive Officers and Corporate Governance Information is incorporated by reference from the company's 2023 Proxy Statement Executive Compensation Information is incorporated by reference from the company's 2023 Proxy Statement Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information is incorporated by reference from the company's 2023 Proxy Statement Certain Relationships and Related Transactions, and Director Independence Information is incorporated by reference from the company's 2023 Proxy Statement Principal Accountant Fees and Services Information is incorporated by reference from the company's 2023 Proxy Statement Part IV Exhibits and Financial Statement Schedules This section contains financial statements and the auditor's report, which identifies the valuation of acquired properties as a critical audit matter - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements[305] - The auditor identified the "Valuation of acquired properties" as a Critical Audit Matter due to the complexity and judgment required in 2022's real estate acquisitions[309][311] Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Investments in Properties | $3,398,774 | $2,946,826 | | Total Assets | $3,164,441 | $2,924,215 | | Total Liabilities | $934,590 | $866,252 | | Total Stockholders' Equity | $2,229,851 | $2,057,963 | Consolidated Statement of Operations Highlights (in thousands) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Revenues | $276,212 | $221,930 | $186,884 | | Net Income | $198,014 | $87,254 | $79,795 | | Diluted EPS | $2.61 | $1.23 | $1.16 | Form 10-K Summary The company has not provided a summary for its Form 10-K - None[302]