Terreno Realty : Letter to Shareholders

March 1, 2024

Dear Fellow Shareholders,

Here is a review of our strategy, our 2023 results and our outlook.

This is our strategy

We acquire, own and operate industrial real estate in six major coastal U.S. markets: Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami and Washington, D.C. Exclusively. We believe that over time these six markets have the best potential for superior returns given favorable supply and demand factors. Supply of newly developed industrial product will be limited due to physical and regulatory constraints; in some of our submarkets the supply of industrial product is shrinking. Future demand will result from large and growing population densities and proximity to high volume distribution points. Further, these locations may provide the opportunity for higher and better use over time.

We invest in functional and flexible industrial real estate in infill locations within our six markets. We acquire, own and operate the product that satisfies customer demand within a submarket: warehouse/distribution, flex (including light industrial and R&D), transshipment and improved land parcels (which we lease as industrial outdoor storage, retaining the optionality of redevelopment to higher and better use). As of year-end 2023 the sources of our rent are 77% warehouse/distribution, 12% improved land, 7% transshipment and 4% flex.

We acquire properties at discounts to replacement cost, providing a margin of safety. We may renovate, develop, redevelop or expand properties, but we do no ground up greenfield development or raw unimproved land acquisition. We have no complex joint ventures. We acquire both value-add and stabilized properties; approximately 58% of our acquisitions so far have been value-add. We retain the best local third-party firms to help us efficiently manage our space.

We sell properties when we believe the prospective total return from a property is particularly low relative to its market value or the market value is significantly greater than the property's estimated replacement cost. Capital from such sales is recycled into properties that are expected to provide better prospective returns or is returned to shareholders.

These are our 2023 results

Notwithstanding geopolitical tensions, supply-chain disruptions and increasing inflation and interest rates for much of the year, our same store cash basis net operating income grew by 13.3% (13.7% excluding lease termination fees) and our cash rents on new and renewed leases commencing in 2023 grew 55.5% demonstrating what the right assets in very infill locations can produce. Our value-add acquisitions generally contain vacant space or space with near-term lease expirations, and many require physical repositioning. On average our acquisitions since our IPO have been 85.5% leased. Nonetheless, we ended the year 98.5% leased (just 10 basis points below the highest in our history) and 98.5% leased in our same store pool.

Overall market operating conditions for industrial real estate weakened during 2023. The investment sales environment slowed during the year with many market participants increasingly cautious due to increased debt financing costs and redemptions from several significant private commercial real estate investment vehicles. Nevertheless, we acquired seven properties for an aggregate purchase price of approximately $484.0 million. This included a 121-acre project in Miami, Countyline Corporate Park Phase IV, a landfill redevelopment adjacent to Florida's Turnpike and the southern terminus of I-75. Upon expected completion in 2027 Countyline Corporate Park Phase IV will contain ten LEED-certified industrial distribution buildings for a total expected investment of approximately $511.5 million.

We sold four properties for approximately $77 million. We have sold 33 properties since our IPO for a total of approximately $653 million generating a cumulative unleveraged IRR of 12.9%.

We earned EPS of $1.81 compared to $2.61 in 2022. Our 2023 Funds from Operations was the highest in our history at $2.22 per share, up 11.0% compared to $2.00 per share in 2022. Further, we operated with excess liquidity for much of the year and ended the year with an undrawn credit facility and $165.4 million of cash. We have only $100 million of debt maturities in 2024 and none in 2025.

We raised $311 million of common equity via our ATM program at an average price of $61.15 per share and completed an underwritten public offering of 5.75 million common shares at $62.50 per share for a combined total of $666 million. We did not repurchase any common shares pursuant to our share buyback program.

We raised our dividend in 2023 by 12.5%. Since paying our first dividend in 2011, we have raised our dividend every year providing a 12.5% compounded annual growth rate.

For incentive compensation we measure our performance over rolling three-year periods. Our total shareholder return over the preceding three years of 17.8% was below the total return of the MSCI US REIT index and the index of industrial REITs. As a result, we did not earn any payout under our performance-based incentive plan opportunity. We are fully aligned with our shareholders and committed to creating superior long-term value for all of us.

This is our outlook

Current operating conditions in our six markets for our business have slowed over the last year, yet remain good within our submarkets. We believe that on average, the rental rates we are likely to achieve on new or renewed leases for our 2024 expirations will be above the rates currently paid for the same space. However, new speculative development continues. This new development will slow potential rent growth from what it would be without such new development.