Terreno Realty Corporation (NYSE:TRNO) has shown strong performance in 2024, outperforming the Vanguard Real Estate Index Fund ETF Shares (VNQ) with a total return of approximately 12%, compared to the benchmark ETF’s 10% gain. This strong performance is driven by the company’s elevated valuation in terms of FFO multiple (~27.6x) and market-implied cap rate (~3.64%), as well as the potential for above-average net operating income (NOI) growth in the coming years.
Terreno Realty is an industrial real estate investment trust (REIT) focused on warehouse/distribution properties, which account for 77.5% of its annualized base rent (ABR). The company operates in six real estate markets, with Northern New Jersey/New York City and the San Francisco Bay Area being its largest exposures. In the second quarter of 2024, Terreno Realty reported an FFO of $0.61 per share, up 11% year-over-year, driven by increases in same-store NOI and a larger portfolio.
Despite a slight decrease in occupancy to 96.2% year-over-year, Terreno Realty reported exceptional leasing spreads with 45.9% higher rents on new and renewed leases. The company’s operating performance metrics closely mirror those of its largest peer, Prologis, Inc., with both companies experiencing strong FFO growth powered by rent growth.
Terreno Realty ended the second quarter of 2024 with a net debt of $590 million, accounting for just 8% of its $7.3 billion enterprise value. The company’s low gearing in its capital structure could limit the impact of potential Fed rate cuts compared to other more leveraged REITs. The market-implied cap rate for Terreno Realty’s portfolio stood at around 3.64%, indicating an efficient operating structure.
The company’s quarterly FFO run rate suggests an annual FFO of approximately $2.50 per share, resulting in a high FFO multiple of 27.6x. Despite the strong NOI growth pipeline, with cash NOI increasing at 9% year-over-year, this growth rate is expected to decrease over time. The company’s above-average NOI growth since 2012 may not be indicative of future growth potential as the portfolio size increases.
While Terreno Realty has performed well in terms of FFO and NOI growth, the company’s high valuation and conservative capital structure may limit its ability to outperform peers in the medium term. The company would require significant market changes to outperform other real estate peers that utilize higher leverage to enhance shareholder returns.
In conclusion, despite the strong performance of Terreno Realty in 2024, the company’s high valuation and conservative capital structure suggest a hold rating for the shares. The company’s ability to maintain strong NOI growth in the long term remains uncertain, and investors should closely monitor occupancy levels and lease renewals to assess future performance.
