Business Context and Reporting Period
Company: Terreno Realty Corporation (Terreno)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter ended June 30, 2010 (and period from commencement of operations on February 16, 2010)
Business Overview: Terreno is an internally managed Maryland corporation focused on acquiring, owning, and operating industrial real estate in six major coastal U.S. markets. The company commenced operations following an Initial Public Offering (IPO) on February 16, 2010, and intends to elect to be taxed as a Real Estate Investment Trust (REIT) commencing with the taxable year ending December 31, 2010.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2010 | Period from Feb 16, 2010 to June 30, 2010 |
|---|---|---|
| Total Revenues | $333,000 | $345,000 |
| Net Loss | $(1,331,000) | $(2,088,000) |
| Funds From Operations (FFO) | $(1,180,000) | $(1,931,000) |
| Cash and Cash Equivalents | $162,304,000 (as of June 30, 2010) | |
| Total Assets | $176,227,000 (as of June 30, 2010) | |
| Total Liabilities | $7,945,000 (as of June 30, 2010) | |
| Stockholders' Equity | $168,282,000 (as of June 30, 2010) | |
| Outstanding Debt | $0 (No borrowings under credit facility) |
Portfolio Status: As of June 30, 2010, the company owned two industrial properties in the San Francisco Bay Area totaling approximately 212,000 square feet with an occupancy rate of 66.9%.
Material Changes and Operational Activity
- Commencement of Operations: The company began operations on February 16, 2010, following an IPO of 8,750,000 shares and a concurrent private placement of 350,000 shares at $20.00 per share. Net proceeds totaled approximately $169.8 million.
- Property Acquisitions: During the period, Terreno acquired two properties in California for an aggregate purchase price of approximately $12.8 million:
- March 26, 2010: Fremont, CA (140,000 sq. ft., 50% leased).
- March 30, 2010: San Jose, CA (72,000 sq. ft., 100% leased).
- Financing: On March 24, 2010, the company established a $50.0 million senior revolving credit facility with KeyBank, maturing in March 2013. No amounts were outstanding under this facility as of June 30, 2010.
- Deferred Underwriting Fees: Approximately $7.0 million of underwriting commissions were deferred and are payable once the company invests an amount equal to the net IPO proceeds in assets.
Outlook, Risks, and Contingencies
Guidance and Strategy: Management intends to deploy remaining cash proceeds to acquire industrial properties in target markets. The company aims to maintain a conservative capital structure, limiting consolidated indebtedness and preferred stock to less than 40% of total enterprise value.
Pending Acquisitions:
- As of June 30, 2010, the company had contracts to acquire properties in Northern New Jersey and the San Francisco Bay Area (approx. 664,000 sq. ft.) for $36.6 million, including the assumption of $17.2 million in debt.
- Subsequent to June 30, 2010, the company entered into contracts for additional properties in Northern New Jersey and Los Angeles (approx. 329,500 sq. ft.) for $28.6 million.
Risk Factors:
- REIT Qualification: Failure to qualify as a REIT would subject the company to federal income tax, materially affecting net income.
- Market Conditions: Risks include general economic conditions, volatility in capital markets, and the ability to identify and acquire properties on favorable terms.
- Environmental and Insurance: Potential liabilities for environmental contamination and uninsured losses (e.g., earthquakes, floods, acts of war).
- Limited Operating History: The company has a short track record, making future performance difficult to predict.
Key Investor Verification Points
- Capital Deployment: Verify the timeline and success of closing the pending acquisitions totaling over $65 million in purchase price to trigger the payment of deferred underwriting fees.
- REIT Status: Confirm the company's ability to meet the 90% distribution requirement and other operational tests to maintain REIT tax status for the 2010 tax year.
- Occupancy Rates: Monitor the lease-up progress of the current portfolio (currently 66.9% occupied) and the impact of new acquisitions on overall occupancy and rental rates.
- Debt Utilization: Track the utilization of the $50 million credit facility and the assumption of debt in future acquisitions to assess leverage ratios.