TRNO

Terreno Realty Corp. 10-K Summary (Fiscal Year Ended Dec 31, 2010)

Business Context and Reporting Period

Terreno Realty Corporation (Terreno) is an internally managed Maryland corporation and Real Estate Investment Trust (REIT) focused on acquiring, owning, and operating industrial real estate in six major coastal U.S. markets. The reporting period covers the fiscal year ended December 31, 2010, which represents the company's first full year of operations following its initial public offering (IPO) and commencement of operations on February 16, 2010.

As of December 31, 2010, the company owned 33 buildings aggregating approximately 2.4 million square feet, primarily consisting of warehouse/distribution (82.1%), flex (12.7%), and trans-shipment (5.2%) properties.

Key Financial Metrics

Debt Profile: Total debt consists of mortgage loans payable with a weighted average interest rate of 5.19% and a weighted average maturity of 5.1 years. The company also maintains an $80.0 million senior revolving credit facility with no outstanding borrowings as of year-end.

Material Changes and Operational Highlights

• Portfolio Expansion: The company deployed approximately $136.0 million of its IPO proceeds to acquire 33 industrial buildings between March and December 2010. This represents a significant increase from zero assets at the commencement of operations.
• Occupancy: As of December 31, 2010, the portfolio was 70.6% leased to 44 tenants. The largest tenant, Home Depot, accounted for 17.4% of total annualized base rent.
• Revenue Growth: Revenue was generated entirely from the newly acquired portfolio, with rental revenues totaling $4.0 million for the partial year of operations.
• Expense Structure: Significant general and administrative expenses ($4.1 million) and acquisition costs ($2.3 million) were incurred during the setup and acquisition phase, contributing to the net loss.

Outlook, Risks, and Management Commentary

Outlook and Strategy: Management intends to continue growing the portfolio by utilizing cash on hand, borrowings under the credit facility, and potential equity or debt issuances. The company targets assets in supply-constrained submarkets with barriers to new development. A quarterly cash dividend of $0.100 per share was declared in February 2011.

Risks and Contingencies:

• Limited Operating History: As a newly formed company, Terreno faces risks associated with executing its business plan and integrating new acquisitions.
• Financing and Liquidity: Future growth depends on access to capital markets. The company relies on its $80 million credit facility and retained cash flows.
• Tenant Concentration: The top five tenants represent 54.3% of total annualized base rent, creating concentration risk.
• REIT Compliance: The company must distribute at least 90% of its taxable income to maintain REIT status. Failure to qualify would result in corporate taxation.
• Market Conditions: Risks include declining real estate valuations, tenant bankruptcies, and the inability to renew leases at favorable rates.

Key Facts for Investor Verification

• Capital Deployment: Verify the pace of remaining cash deployment from the $169.8 million IPO proceeds into the target industrial markets.
• Lease Expirations: Review the lease expiration schedule, noting that 24.0% of annualized base rent expires in 2012 and 24.7% in 2013.
• Deferred Underwriting Fee: Confirm the status of the $7.0 million deferred underwriting fee payable, which is contingent on the company purchasing assets equal to net IPO proceeds.
• Occupancy Trends: Monitor the trajectory of the 70.6% occupancy rate as the company transitions from acquisition to stabilization.
• Dividend Sustainability: Assess whether future distributable cash flows will be sufficient to support the declared dividend policy without relying on additional capital raises.