TRNO

Business Context and Reporting Period

Company: Terreno Realty Corporation (Terreno)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2011
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. As of March 31, 2011, the Company owned 34 buildings aggregating approximately 2.5 million square feet with an occupancy rate of 67.5%. The Company intends to be taxed as a Real Estate Investment Trust (REIT).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by approximately $3.4 million, driven primarily by property acquisitions completed in 2010. Rental revenues rose from $12,000 to $3.37 million.
• Expense Increases: Property operating expenses increased by $1.5 million, and depreciation and amortization increased by $944,000, both attributable to the expanded property portfolio. General and administrative expenses rose by $988,000 due to a full quarter of operations compared to a partial quarter in the prior period.
• Net Loss Expansion: Net loss increased by $549,000 to $1.3 million. This was primarily due to higher operating expenses, depreciation, and interest expense ($368,000 vs. $3,000) resulting from assumed mortgage debt and facility financing costs.
• Cash Flow: Net cash used in operating activities was $475,000. Net cash used in investing activities was $8.7 million, primarily for property acquisitions ($5.8 million) and deposits ($2.0 million).

Outlook, Risks, and Management Commentary

• Acquisitions: During Q1 2011, the Company acquired one industrial building (135,000 sq. ft.) in Jessup, MD, for approximately $5.8 million using cash on hand. As of May 5, 2011, the Company had two outstanding contracts to acquire additional properties totaling 239,000 sq. ft. for $36.7 million.
• Liquidity and Capital Resources: The Company maintains an $80.0 million senior revolving credit facility (mature March 2013) with no outstanding borrowings as of March 31, 2011. Management intends to fund future investments through retained cash flows, the credit facility, and potential equity/debt issuances.
• Dividends: The Board declared a cash dividend of $0.10 per share, payable April 19, 2011.
• Risk Factors: Key risks include the Company's limited operating history, dependence on key personnel, tenant bankruptcies, environmental liabilities, and the ability to maintain REIT qualification. The Company faces potential uninsured losses from natural disasters (earthquake/flood) and acts of war.
• Deferred Underwriting Fees: Approximately $7.0 million of underwriting commissions from the IPO remain deferred and payable upon the investment of net proceeds in assets.

Investor Verification Checklist

• Occupancy Rates: Verify the 67.5% occupancy rate and the specific lease-up timeline for the Miami Area (3.5% occupancy) and Washington, D.C./Baltimore (44.4% occupancy) markets.
• Debt Covenants: Confirm continued compliance with financial covenants on the $80 million credit facility and mortgage loans.
• Acquisition Pipeline: Monitor the status of the two pending property acquisitions totaling $36.7 million and the associated assumed debt of $14.8 million.
• REIT Status: Verify the Company's ability to meet the 90% distribution requirement to maintain REIT tax status.
• Deferred Fees: Track the timing of the $7.0 million deferred underwriting fee payment, which is triggered by asset acquisition thresholds.