Terreno Realty Corporation (NYSE: TRNO), a leading industrial real estate investment trust (REIT), has reported its operating and financial results for the second quarter of 2024. The company's performance showcases its ability to navigate the evolving industrial real estate landscape, delivering robust rent growth despite facing some occupancy challenges.

Financials

For the full year 2023, Terreno Realty reported annual net income of $151,457,000 and annual revenue of $323,590,000. The company's annual operating cash flow stood at $179,677,000, while its annual free cash flow reached $126,622,000. These strong financial metrics underscore Terreno Realty's operational efficiency and its capacity to generate sustainable cash flows.

Occupancy and Leasing

In the second quarter of 2024, Terreno Realty's operating portfolio was 96.0% leased to 668 tenants as of June 30, 2024. This represents a decline from the 96.2% leased rate recorded as of March 31, 2024 and the 97.8% leased rate as of June 30, 2023. The company's same-store portfolio of 14.7 million square feet was 96.0% leased as of June 30, 2024, down from 96.2% as of March 31, 2024 and 98.1% as of June 30, 2023.

Despite the occupancy challenges, Terreno Realty was able to secure higher rents on new and renewed leases during the quarter. The cash rents on new and renewed leases increased by 45.9% compared to the previous rental rates for the same space. The company's tenant retention ratio was 56.4% for the operating portfolio and 61.2% for the improved land portfolio.

Acquisitions and Portfolio

Terreno Realty's strategic acquisition efforts continued in the second quarter of 2024. The company purchased one industrial property comprising four buildings, encompassing 357,000 square feet, and a multi-market portfolio of industrial properties consisting of 28 buildings containing 1.2 million square feet, for a total of $448.8 million. As of June 30, 2024, Terreno Realty's portfolio included 292 buildings spanning 18.1 million square feet and 45 improved land parcels encompassing 152.4 acres.

Development and Redevelopment

The company's development and redevelopment activities also progressed during the quarter. Terreno Realty commenced the development of one property with a total expected investment of $42.1 million and stabilized two buildings encompassing 692,000 square feet at Countyline Corporate Park. As of June 30, 2024, the company had nine properties under development or redevelopment, which upon completion, will comprise 10 buildings encompassing 1.1 million square feet, with an overall pre-leasing rate of 41%. The total expected investment for these projects is approximately $389.3 million. Additionally, Terreno Realty owned 35.4 acres of land entitled for the future development of three buildings aggregating 0.7 million square feet.

Geographic Distribution

Geographically, Terreno Realty's portfolio is diversified across six major coastal U.S. markets: Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami, and Washington, D.C. As of June 30, 2024, the company's annualized base rent was distributed as follows: Los Angeles (17.0%), Northern New Jersey/New York City (24.9%), San Francisco Bay Area (18.9%), Seattle (16.0%), Miami (13.7%), and Washington, D.C. (9.5%).

Revenue Breakdown

In terms of revenue breakdown, Terreno Realty's portfolio is primarily composed of warehouse/distribution properties, which accounted for approximately 76.0% of the company's total annualized base rent as of March 31, 2024. Flex properties (including light industrial and research and development) contributed 3.8%, transshipment properties contributed 7.4%, and improved land parcels contributed 12.8%.

Liquidity

Regarding the company's liquidity position, Terreno Realty had no borrowings outstanding under its $400 million revolving credit facility as of June 30, 2024. The company has a single $100 million senior unsecured note maturing in July 2024, which it plans to retire using cash on hand, and no maturities in 2025.

Management Commentary

Terreno Realty's Chief Executive Officer, W. Blake Baird, commented, "We are pleased with our ability to drive rent growth during the quarter, despite facing some occupancy headwinds. Our strategic acquisitions, development projects, and strong balance sheet position us well to capitalize on the favorable long-term trends in the industrial real estate sector."

Outlook

Looking ahead, the company remains cautiously optimistic about the industry's prospects, acknowledging the potential challenges posed by rising supply of industrial real estate, stabilizing e-commerce sales growth, persistent macroeconomic uncertainty, and a high interest rate environment. Nonetheless, Terreno Realty's solid operating platform, robust financial position, and strategic expansion initiatives position the company to navigate these market dynamics and continue delivering value to its shareholders.

Conclusion

Overall, Terreno Realty's second-quarter performance demonstrates its resilience and ability to adapt to the evolving industrial real estate landscape. The company's focus on strategic acquisitions, disciplined development activities, and prudent capital management have enabled it to maintain a strong financial profile and capitalize on growth opportunities, despite the temporary occupancy challenges. Investors will be closely monitoring Terreno Realty's ability to sustain its rent growth momentum and navigate the industry's headwinds in the quarters ahead.