Business Context and Reporting Period
Company: Terreno Realty Corporation (Terreno)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 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 on February 16, 2010, following an Initial Public Offering (IPO) and a concurrent private placement. As of September 30, 2010, the Company owned 27 buildings aggregating approximately 1.6 million square feet with an occupancy rate of 86.9%. The Company 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 Sep 30, 2010 | Period from Feb 16, 2010 to Sep 30, 2010 |
|---|---|---|
| Total Revenues | $642,000 | $987,000 |
| Net Loss | $(2,704,000) | $(4,792,000) |
| Funds from Operations (FFO) | $(2,491,000) | $(4,422,000) |
| Net Cash Used in Operating Activities | N/A (Period data only) | $(2,495,000) |
| Net Cash Used in Investing Activities | N/A (Period data only) | $(82,481,000) |
| Net Cash Provided by Financing Activities | N/A (Period data only) | $176,450,000 |
| Cash and Cash Equivalents (Ending) | $91,475,000 | |
| Total Assets | $194,435,000 | |
| Total Liabilities | $28,631,000 | |
| Total Stockholders' Equity | $165,804,000 | |
| Debt (Mortgage Loans Payable) | $17,879,000 | |
| Weighted Average Interest Rate | 5.19% |
Material Changes and Operational Highlights
- Commencement of Operations: The reporting period covers the Company's inception from February 16, 2010, to September 30, 2010. Consequently, there is no prior comparable period for year-over-year financial analysis.
- Property Acquisitions: The Company acquired 27 industrial buildings totaling approximately 1.6 million square feet for an aggregate investment of approximately $102.1 million. This included assuming mortgage loans of approximately $17.9 million.
- Capital Structure: The Company raised approximately $169.8 million in net proceeds from its IPO and private placement. As of September 30, 2010, it held $91.5 million in cash and cash equivalents.
- Debt Profile: The Company has a $50.0 million senior revolving credit facility (mature March 2013) with no borrowings outstanding as of the reporting date. Total debt-to-gross investments in real estate was 17.5%.
- Tenant Concentration: The top five tenants accounted for 61.1% of total annualized base rent, with Home Depot being the largest tenant at 19.7%.
Outlook, Risks, and Contingencies
- Deferred Underwriting Fees: Approximately $7.0 million of underwriting commissions are deferred and payable once the Company purchases assets equal to the net proceeds from the IPO. As of September 30, 2010, this threshold was met, and the liability is recorded.
- Future Acquisitions: Subsequent to September 30, 2010, the Company entered into contracts to acquire three additional properties. One closed for $2.6 million; two others totaling $14.55 million remain under contract subject to closing conditions.
- REIT Status: The Company intends to qualify as a REIT for the 2010 tax year. Failure to qualify would subject the Company to federal income tax, materially affecting net income and distributions.
- Risk Factors: Key risks include the Company's limited operating history, dependence on key personnel, general economic conditions affecting the industrial real estate sector, tenant defaults, and environmental liabilities associated with industrial properties.
- Liquidity Strategy: The Company plans to fund future investments through retained cash flows, the existing credit facility, and potential issuances of equity or debt. It aims to maintain a conservative capital structure with total indebtedness less than 40% of total enterprise value.
Investor Verification Checklist
- REIT Qualification: Verify the Company's ability to meet the 90% distribution requirement and other operational tests to maintain REIT status for the 2010 tax year.
- Occupancy Trends: Monitor the 86.9% occupancy rate, particularly in the Northern New Jersey/New York market (88.3%) and San Francisco Bay Area (76.0%), to assess lease-up velocity.
- Deferred Fee Payment: Confirm the timing and impact of the $7.0 million deferred underwriting fee payment on cash flows.
- Acquisition Pipeline: Track the closing status of the two remaining properties under contract ($14.55 million) and their impact on future debt levels.
- Tenant Concentration: Assess the risk associated with the top five tenants comprising over 60% of rental income, specifically the stability of Home Depot and Precision Custom Coating.