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TRNO > SEC Filings for TRNO > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for TERRENO REALTY CORP

Form 10-Q for TERRENO REALTY CORP


7-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We caution investors that forward-looking statements are based on management's beliefs and on assumptions made by, and information currently available to, management. When used, the words "anticipate", "believe", "estimate", "expect", "intend", "may", "might", "plan", "project", "result", "should", "will", "seek", "target", "see", "likely", "position", "opportunity" and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

Some of the risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

the factors included under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission on February 22, 2012 and in our other public filings;

our ability to identify and acquire industrial properties on terms favorable to us;

general volatility of the capital markets and the market price of our common stock;

adverse economic or real estate conditions or developments in the industrial real estate sector and/or in the markets in which we acquire properties;

our dependence on key personnel and our reliance on third parties to property manage the majority of our industrial properties;

our dependence upon tenants;

our inability to comply with the laws, rules and regulations applicable to companies, and in particular, public companies;

our ability to manage our growth effectively;

tenant bankruptcies and defaults on or non-renewal of leases by tenants;

decreased rental rates or increased vacancy rates;

increased interest rates and operating costs;

declining real estate valuations and impairment charges;

our expected leverage, our failure to obtain necessary outside financing, and future debt service obligations;

our ability to make distributions to our stockholders;

our failure to successfully hedge against interest rate increases;


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our failure to successfully operate acquired properties;

our failure to qualify or maintain our status as a real estate investment trust, or REIT, and possible adverse changes to tax laws;

uninsured or underinsured losses relating to our properties;

environmental uncertainties and risks related to natural disasters;

financial market fluctuations; and

changes in real estate and zoning laws and increases in real property tax rates.

Overview

Terreno Realty Corporation ("Terreno", and together with its subsidiaries, "we", "us", "our", "our Company", or "the Company") acquires, owns and operates industrial real estate located 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./Baltimore. We invest in several types of industrial real estate, including warehouse/distribution, flex (including light industrial and research and development, or R&D) and trans-shipment. We target functional buildings in infill locations that may be shared by multiple tenants and that cater to customer demand within the various submarkets in which we operate. Infill locations are geographic locations surrounded by high concentrations of already developed land and existing buildings. As of September 30, 2012, we owned a total of 63 buildings aggregating approximately 4.8 million square feet, which we purchased for an aggregate purchase price of approximately $402.0 million, including the assumption of mortgage loans payable of approximately $49.3 million, which includes mortgage premiums of approximately $1.1 million. As of September 30, 2012, our properties were approximately 92.6% leased to 97 tenants, the largest of which accounted for approximately 8.1% of our total annualized based rent. We are an internally managed Maryland corporation and elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, or the Code, commencing with our taxable year ending December 31, 2010.

The following table summarizes by market our investments in real estate, including properties held for sale, as of September 30, 2012:

                                                                                                                                                    Annualized         Weighted
                                                                                                                                                     Base Rent         Average
                                                                                                 Occupancy            Annualized                        Per           Remaining       Gross Book
                                               Number of        Rentable        % of         Percentage as of         Base Rent        % of          Occupied         Lease Term         Value
Market                                         Buildings      Square Feet       Total       September 30, 2012        (000's) 1        Total        Square Foot       (Years) 2         (000's)
Los Angeles                                            11        1,031,973        21.6 %                   89.1 %    $      7,093        22.6 %    $        7.71              3.0     $  111,927  3
Northern New Jersey/New York City                      23        1,591,250        33.4 %                   94.1 %           9,942        31.7 %             6.64              3.6         121,862
San Francisco Bay Area                                 13          627,850        13.2 %                   91.6 %           6,295        20.1 %            10.94              4.6          79,511
Seattle                                                 3          306,662         6.4 %                  100.0 %           1,620         5.2 %             5.28              6.6          24,800
Miami                                                   9          842,592        17.7 %                   89.4 %           4,170        13.3 %             5.53              8.0          56,728
Washington, D.C./Baltimore                              4          368,431         7.7 %                   98.2 %           2,244         7.1 %             6.20              6.5          27,037

Total/Weighted Average                                 63        4,768,758       100.0 %                   92.6 %    $     31,364       100.0 %    $        7.10              4.7     $   421,865

1 Annualized base rent is calculated as monthly base rent per the leases, excluding any partial or full rent abatements, as of September 30, 2012, multiplied by 12.

2 Weighted average remaining lease term is calculated by summing the remaining lease term of each lease as of September 30, 2012, weighted by the respective square footage.

3 Includes properties held for sale with a gross book value of approximately $12.2 million and accumulated depreciation and amortization of approximately $0.4 million as of September 30, 2012.

The following table summarizes our capital expenditures incurred during the three and nine months ended September 30, 2012 (dollars in thousands):

                                         For the Three           For the Nine
                                         Months Ended            Months Ended
                                      September 30, 2012      September 30, 2012
     Building improvements            $             1,413     $             6,033
     Tenant improvements                              406                   1,437
     Leasing commissions                                5                     548

     Total capital expenditures (1)   $             1,824     $             8,018

1 Includes approximately $0.9 million and $4.7 million, respectively, related to leasing acquired vacancy and renovation projects at four properties.


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Our top ten tenants based on annualized base rent as of September 30, 2012 are as follows:

                                                                           % of Total         Annualized      % of Total
                                                           Rentable         Rentable          Base Rent       Annualized
                    Tenant                   Leases      Square Feet       Square Feet        (000's) 1        Base Rent
1    YRC Worldwide                                 3          182,803               3.8 %    $      2,548             8.1 %
2    Cepheid                                       2          101,080               2.1 %           2,137             6.8 %
3    H.D. Smith Wholesale Drug Company             1          211,418               4.4 %           2,008             6.4 %
4    Home Depot                                    1          413,092               8.7 %           1,905             6.1 %
5    Precision Custom Coatings                     1          208,000               4.4 %           1,637             5.2 %
6    Miami International Freight Solutions         1          181,340               3.8 %           1,043             3.3 %
7    Avborne Accessory Group                       1          137,594               2.9 %           1,008             3.2 %
8    Sohnen Enterprises                            1          161,610               3.4 %             994             3.2 %
9    Northrop Grumman Systems                      1          103,200               2.2 %             941             3.0 %
10   Banah International Group                     1          301,983               6.3 %             906             2.9 %

     Total                                        13        2,002,120              42.0 %    $     15,127            48.2 %

1 Annualized base rent is calculated as monthly base rent per the leases, excluding any partial or full rent abatements, as of September 30 2012, multiplied by 12.

The following table summarizes the anticipated lease expirations for leases in place at September 30, 2012, without giving effect to the exercise of renewal options or termination rights, if any, at or prior to the scheduled expirations:

                                         % of Total          Annualized        % of Total
                       Rentable           Rentable           Base Rent         Annualized
 Year               Square Feet  1       Square Feet        (000's) 1, 2       Base Rent 1
 2012 (3 months)            118,232               2.5 %    $        1,056               3.0 %
 2013                       866,594              18.2 %             4,747              13.4 %
 2014                       535,281              11.2 %             4,080              11.5 %
 2015                       560,276              11.7 %             4,425              12.5 %
 2016                       193,124               4.1 %             1,329               3.8 %
 2017+                    2,140,883              44.9 %            19,802              55.8 %

 Total                    4,414,390              92.6 %    $       35,439             100.0 %

1 Includes leases that expire on or after September 30, 2012 and month-to-month leases totaling 60,000 square feet.

2 Annualized base rent is calculated as monthly base rent per the leases at expiration, excluding any partial or full rent abatements, as of September 30, 2012, multiplied by 12.


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Recent Developments

Acquisition Activity

During the three months ended September 30, 2012, we acquired nine industrial buildings containing 577,261 square feet for a total purchase price of approximately $74.4 million. The properties were acquired from unrelated third parties using existing cash on hand, net of assumed mortgage loans payable of approximately $9.8 million and borrowings under our credit facility. The following table sets forth the wholly-owned industrial properties we acquired during the three months ended September 30, 2012:

                                                          Number of                        Purchase Price
Property Name         Location       Acquisition Date     Buildings       Square Feet      (in thousands)
Caribbean          Sunnyvale, CA       July 3, 2012                3           171,707     $        33,718
78th Avenue        Doral, FL          July 23, 2012                1            74,786               4,200
Manhattan Beach    Redondo Beach,
                   CA                 July 31, 2012                1           103,200              14,150
Carlton Court      South San
                   Francisco, CA      August 2, 2012               1            24,277               3,575
Troy Hill          Elkridge, MD      August 17, 2012               1            65,697               6,664
26th Street        Miami, FL        September 25, 2012             2           137,594              12,100

Total                                                              9           577,261     $        74,407

Subsequent to September 30, 2012, we acquired one industrial building containing 84,961 square feet for a total purchase price of approximately $7.0 million. The property was acquired from an unrelated third party using existing cash on hand and borrowings under our credit facility. The following table sets forth the wholly-owned industrial property we acquired subsequent to September 30, 2012:

                                                         Number of                           Purchase Price
Property Name        Location       Acquisition Date     Buildings        Square Feet        (in thousands)
Sweitzer           Laurel, MD       October 15, 2012              1             84,961      $          6,950

Preferred Stock Offering

On July 19, 2012, we completed a public offering of 1,840,000 shares of our 7.75% Series A Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock"), including 240,000 shares sold upon the exercise by the underwriters of their option to purchase additional shares, at a price per share of $25.00. The net proceeds of the offering were approximately $44.3 million after deducting the underwriting discount and other offering expenses of approximately $1.7 million. We used the net proceeds to reduce outstanding borrowings under our credit facility. Dividends on the Series A Preferred Stock are payable when, as and if authorized by our board of directors quarterly in arrears on or about the last day of March, June, September and December of each year. The Series A Preferred Stock ranks, with respect to dividend rights and rights upon our liquidation, dissolution or winding-up, senior to our common stock

Generally, we may not redeem the Series A Preferred Stock prior to July 19, 2017, except in limited circumstances relating to our ability to qualify as a REIT, and pursuant to a special optional redemption related to a specified change of control (as defined in the articles supplementary for the Series A Preferred Stock). On and after July 19, 2017, we may, at our option, redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus any accrued and unpaid dividends (whether or not authorized or declared) up to but excluding the redemption date.

Distribution Activity

On November 6, 2012, our board of directors declared a cash dividend in the amount of $0.12 per share of our common stock payable on January 14, 2013 to the stockholders of record as of the close of business on December 31, 2012.

On November 6, 2012, our board of directors declared a dividend in the amount of $0.484375 per share of our Series A Preferred Stock payable on December 31, 2012 to the preferred stockholders of record as of the close of business on December 10, 2012.

Contractual Commitments

As of November 7, 2012, we had one outstanding contract with a third-party seller to acquire one industrial property and one outstanding contract with a third-party purchaser to sell one property as described under the heading "Contractual Obligations" in this Quarterly Report on Form 10-Q. There is no assurance that we will acquire or sell the properties under contract because the proposed acquisition and disposition are subject to the completion of satisfactory due diligence, various closing conditions and, with respect to the acquisition, the consent of the mortgage lender.

Financial Condition and Results of Operations

We derive substantially all of our revenues from rents received from tenants under existing leases on each of our properties. These revenues include fixed base rents and recoveries of certain property operating expenses that we have incurred and that we pass through to the individual tenants.


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Our primary cash expenses consist of our property operating expenses, which include: real estate taxes, repairs and maintenance, management expenses, insurance, utilities, general and administrative expenses, which include compensation costs, office expenses, professional fees and other administrative expenses, acquisition costs, which include third-party costs paid to brokers and consultants, and interest expense, primarily on mortgage loans and our credit facility.

Our consolidated results of operations often are not comparable from period to period due to the impact of property acquisitions at various times during the course of such periods. The results of operations of any acquired property are included in our financial statements as of the date of its acquisition.

The analysis of our results below includes the changes attributable to same store properties. The same store pool includes all properties that were owned and in operations as of September 30, 2012 and since January 1, 2011 and excludes properties that were either disposed of or held for sale to a third party. As of September 30, 2012, the same store pool consisted of 11 properties aggregating approximately 2.2 million square feet. As of September 30, 2012, the non-same store properties, which we acquired or disposed of during the course of 2011 and 2012, consisted of 22 properties aggregating approximately 2.6 million square feet.

Our future financial condition and results of operations, including rental revenues, straight-line rents and amortization of lease intangibles, may be impacted by the acquisitions of additional properties, and expenses may vary materially from historical results.

Comparison of the Three Months Ended September 30, 2012 to the Three Months
Ended September 30, 2011:



                                                For the Three Months
                                                 Ended September 30,
                                                2012              2011           $ Change          % Change
                                                                 (Dollars in thousands)
Rental revenues
Same store                                   $     3,009         $ 2,178        $      831              38.2 %
2011 and 2012 Acquisitions                         4,186           1,199             2,987             249.1 %

Total rental revenues                              7,195           3,377             3,818             113.1 %
Tenant expense reimbursements
Same store                                           775             692                83              12.0 %
2011 and 2012 Acquisitions                         1,096             328               768             234.1 %

Total tenant expense reimbursements                1,871           1,020               851              83.4 %

Total revenues                                     9,066           4,397             4,669             106.2 %

Property operating expenses
Same store                                         1,087           1,282              (195 )           (15.2 )%
2011 and 2012 Acquisitions                         1,355             339             1,016             299.7 %

Total property operating expenses                  2,442           1,621               821              50.6 %

Net operating income (1)
Same store                                         2,697           1,588             1,109              69.8 %
2011 and 2012 Acquisitions                         3,927           1,188             2,739             230.6 %

Total net operating income                   $     6,624         $ 2,776        $    3,848             138.6 %

Other costs and expenses
Depreciation and amortization                      2,482           1,325             1,157              87.3 %
General and administrative                         1,606           1,040               566              54.4 %
Acquisition costs                                    760             143               617             431.5 %

Total other costs and expenses                     4,848           2,508             2,340              93.3 %

Other Income (Expense)
Interest and other income (expense)                   33              (9 )              42               n/a
Interest expense, including amortization          (1,604 )          (795 )            (809 )           101.8 %

Total other income and expenses                   (1,571 )          (804 )            (767 )            95.4 %

Income from discontinued operations                  317             268                49              18.3 %

Net income (loss)                            $       522         $  (268 )      $      790               n/a

1 Includes straight-line rents and amortization of lease intangibles. See "Non-GAAP Financial Measures" in this Quarterly Report on Form 10-Q for a reconciliation of net operating income and same store net operating income from net income (loss) and a discussion of why we believe net operating income and same store net operating income are useful supplemental measures of our operating performance.


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Revenues. Total revenues increased approximately $4.7 million for the three months ended September 30, 2012 compared to the same period from the prior year. Approximately $0.9 million of this increase is from same store revenues mainly due to increased occupancy, as same store consolidated occupancy at quarter end increased to 92.8% in the third quarter of 2012 as compared to 68.4% from the same period in 2011. The remaining increase in total revenues is due to property acquisitions during 2011 and 2012. For the quarter ended September 30, 2012, approximately $0.7 million was recorded in straight-line rental revenues related to contractual rent abatements given to certain tenants.

Property operating expenses. Total property operating expenses increased approximately $0.8 million during the three months ended September 30, 2012 compared to the same period from the prior year. The increase in total property operating expenses was due to an increase of approximately $1.0 million attributable to property acquisitions during 2011 and 2012, which was partially offset by a decrease in same store property operating expenses of approximately $0.2 million.

Depreciation and amortization. Depreciation and amortization increased approximately $1.2 million during the three months ended September 30, 2012 compared to the same period from the prior year due to property acquisitions during 2011 and 2012.

General and administrative expenses. General and administrative expenses increased approximately $0.6 million for the three months ended September 30, 2012 compared to the same period from the prior year due primarily to an increase in compensation expense related to the LTIP awards.

Acquisition costs. Acquisition costs increased by approximately $0.6 million for the three months ended September 30, 2012 from the prior year period due to a higher number of property acquisitions during the three months ended September 30, 2012 as compared to the same period in the prior year.

Interest expense, including amortization. Interest expense increased approximately $0.8 million for the three months ended September 30, 2012 compared to the same period from the prior year due primarily to the assumption and origination of mortgage loans payable during 2011 and 2012, as well as borrowings under our credit facility.

Comparison of the Nine Months Ended September 30, 2012 to the Nine Months Ended
September 30, 2011:



                                                For the Nine Months
                                                Ended September 30,
                                                2012            2011         $ Change         % Change
                                                               (Dollars in thousands)
Rental revenues
Same store                                   $    8,708       $  6,652       $   2,056             30.9 %
2011 and 2012 Acquisitions                        9,190          1,575           7,615            483.5 %

Total rental revenues                            17,898          8,227           9,671            117.6 %
Tenant expense reimbursements
Same store                                        2,224          2,155              69              3.2 %
2011 and 2012 Acquisitions                        2,411            393           2,018            513.5 %

Total tenant expense reimbursements               4,635          2,548           2,087             81.9 %

Total revenues                                   22,533         10,775          11,758            109.1 %

Property operating expenses
Same store                                        3,581          3,957            (376 )           (9.5 )%
2011 and 2012 Acquisitions                        2,771            486           2,285            470.2 %

Total property operating expenses                 6,352          4,443           1,909             43.0 %
. . .
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