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TRNO > SEC Filings for TRNO > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for TERRENO REALTY CORP


8-May-2013

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, 2012, which was filed with the Securities and Exchange Commission on February 15, 2013 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 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;


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our ability to make distributions to our stockholders;

our failure to successfully hedge against interest rate increases;

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 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 March 31, 2013, we owned a total of 69 buildings aggregating approximately 5.2 million square feet, which we purchased for an aggregate purchase price of approximately $433.3 million, including the assumption of mortgage loans payable of approximately $55.1 million, which includes mortgage premiums of approximately $1.5 million. As of March 31, 2013, our properties were approximately 93.3% leased to 115 tenants, the largest of which accounted for approximately 6.6% 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 ended December 31, 2010.

The following table summarizes by market our investments in real estate as of March 31, 2013:

                                                                                                                                                                                 Weighted
                                                                                                                                                           Annualized            Average
                                                                                            Occupancy %                                                   Base Rent Per         Remaining            Gross
                                      Number of          Rentable          % of           as of March 31,          Annualized Base         % of             Occupied            Lease Term         Book Value
Market                                Buildings        Square Feet         Total               2013                Rent (000's) 1          Total           Square Foot          (Years) 2           (000's)
Los Angeles                                   12          1,096,422          21.1 %                   90.9 %      $           6,064          18.6 %      $          6.08                2.3       $    114,901
Northern New Jersey/New York City             23          1,591,324          30.6 %                   96.3 %                 10,121          31.1 %                 6.61                3.5            123,165
San Francisco Bay Area                        14            675,083          13.0 %                   84.2 %                  6,071          18.7 %                10.68                4.8             84,153
Seattle                                        5            492,794           9.5 %                  100.0 %                  2,659           8.2 %                 5.40                4.6             40,356
Miami                                         10            891,876          17.1 %                   91.3 %                  4,768          14.7 %                 5.86                3.5             62,460
Washington, D.C./Baltimore                     5            453,392           8.7 %                   98.5 %                  2,852           8.7 %                 6.38                7.6             34,688

Total/Weighted Average                        69          5,200,891         100.0 %                   93.3 %      $          32,535         100.0 %      $          6.71                4.2       $    459,723

1 Annualized base rent is calculated as monthly base rent per the leases, excluding any partial or full rent abatements, as of March 31, 2013, multiplied by 12.

2 Weighted average remaining lease term is calculated by summing the remaining lease term of each lease as of March 31, 2013, weighted by the respective square footage.


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The following table summarizes our capital expenditures incurred during the three months ended March 31, 2013 and 2012 (dollars in thousands):

                                         For the Three Months Ended March 31,
                                            2013                      2012
     Building improvements            $           1,653         $           2,196
     Tenant improvements                            185                       474
     Leasing commissions                            626                       327

     Total capital expenditures (1)   $           2,464         $           2,997

1 Includes approximately $1.5 million and $2.4 million for the three months ended March 31, 2013 and 2012, respectively, related to leasing acquired vacancy and renovation projects (stabilization capital) at four properties for the three months ended March 31, 2013 and three properties for the three months ended March 31, 2012.

Our industrial properties are typically subject to leases on a "triple net basis," in which tenants pay their proportionate share of real estate taxes, insurance and operating costs, or are subject to leases on a "modified gross basis," in which tenants pay expenses over certain threshold levels. In addition, approximately 80.1% of our leased space includes fixed rental increases or Consumer Price Index-based rental increases. Lease terms typically range from three to ten years. We monitor the liquidity and creditworthiness of our tenants on an on-going basis by reviewing outstanding accounts receivable balances, and as provided under the respective lease agreements, review the tenant's financial condition periodically as appropriate. As needed, we hold discussions with the tenant's management about their business and we conduct site visits of the tenant's operations.

Our top 20 tenants based on annualized base rent as of March 31, 2013 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   Cepheid (2)                                   2          101,080               2.0 %    $      2,146             6.6 %
 2   H.D. Smith Wholesale Drug Company             1          211,418               4.1 %           2,008             6.2 %
 3   Home Depot                                    1          413,092               7.9 %           1,905             5.9 %
 4   Precision Custom Coatings                     1          208,000               4.0 %           1,668             5.1 %
 5   YRC Worldwide                                 2           61,252               1.2 %           1,288             4.0 %
 6   Miami International Freight Solutions         1          192,454               3.7 %           1,107             3.4 %
 7   Avborne Accessory Group                       1          137,594               2.6 %           1,028             3.2 %
 8   Northrop Grumman Systems                      1          103,200               2.0 %             998             3.0 %
 9   Sohnen Enterprises                            1          161,610               3.1 %             994             3.0 %
10   Banah International Group (3)                 1          301,983               5.8 %             906             2.8 %
11   FedEx Corporation                             1           72,808               1.4 %             852             2.6 %
12   Duro Bag Manufacturing Company                1          120,948               2.3 %             707             2.2 %
13   JAM'N Logistics                               1          110,336               2.1 %             671             2.0 %
14   International Paper Company                   1          137,872               2.7 %             653             2.0 %
15   Maines Paper & Food Service                   1           98,745               1.9 %             649             2.0 %
16   Abbott Laboratories                           1           70,627               1.4 %             585             1.8 %
17   Con-way Freight                               1           57,682               1.1 %             585             1.8 %
18   Creative Touch Interiors                      1           84,961               1.6 %             580             1.8 %
19   Ace World Class                               1          115,954               2.2 %             554             1.7 %
20   Bakeco                                        1           68,989               1.3 %             552             1.7 %

     Total                                        22        2,830,605              54.4 %    $     20,436            62.8 %

1 Annualized base rent is calculated as monthly base rent per the leases, excluding any partial or full rent abatements, as of March 31, 2013, multiplied by 12.

2 Commencing April 1, 2013, as part of their expansion, this tenant will receive six months of rent abatement under terms negotiated with the previous owner.

3 Represents a month-to-month lease related to the tenant default as described under the heading "Recent Developments - Tenant Default."


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The following table summarizes the anticipated lease expirations for leases in place at March 31, 2013, without giving effect to the exercise of renewal options or termination rights, if any, at or prior to the scheduled expirations:

                                                        % of Total                                          % of Total
                             Rentable Square         Rentable Square            Annualized Base           Annualized Base
Year                             Feet 1                    Feet                Rent (000's) 1, 2              Rent 1
2013 (9 months)                       668,868                    12.9 %       $             3,111                      8.8 %
2014                                  949,903                    18.3 %                     5,754                     16.2 %
2015                                  912,108                    17.5 %                     5,873                     16.6 %
2016                                  192,493                     3.7 %                     1,434                      4.0 %
2017                                  128,718                     2.5 %                       973                      2.7 %
2018+                               1,998,713                    38.4 %                    18,368                     51.7 %

Total                               4,850,803                    93.3 %       $            35,513                    100.0 %

1 Includes leases that expire on or after March 31, 2013 and month-to-month leases totaling 312,983 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 March 31, 2013, multiplied by 12.

Our ability to re-lease or renew expiring space at rental rates equal to or in excess of current rental rates will impact our results of operations. As of March 31, 2013, leases representing approximately 12.9% of the total rentable square footage of our portfolio are scheduled to expire during the year ending December 31, 2013. In general, we continue to see improving demand for industrial space in most of our markets. We currently expect that on average, the rental rates we are likely to achieve on any new (re-leased) or renewed leases for our 2013 expirations will generally be slightly below to equal to the rates currently being paid for the same space. Our past performance may not be indicative of future results, and we cannot assure you that leases will be renewed or that our properties will be re-leased at all or at rental rates equal to or slightly below the current average rental rates. Further, re-leased/renewed rental rates in a particular market may not be consistent with rental rates across our portfolio as a whole and re-leased/renewed rental rates for particular properties within a market may not be consistent with rental rates across our portfolio within a particular market, in each case due to a number of factors, including local real estate conditions, local supply and demand for industrial space, the condition of the property, the impact of leasing incentives, including free rent and tenant improvements and whether the property, or space within the property, has been redeveloped.

Recent Developments

Acquisition Activity

During the three months ended March 31, 2013, we acquired two industrial buildings containing 117,867 square feet for a total purchase price of approximately $11.5 million. The properties were acquired from unrelated third parties using existing cash on hand. The following table sets forth the wholly-owned industrial properties we acquired during the three months ended March 31, 2013:

                                                                       Number of                           Purchase Price         Stabilized
Property Name                        Location     Acquisition Date     Buildings        Square Feet        (in  thousands)        Cap Rate  1
107th Avenue                        Medley, FL       March 6, 2013              1             49,284      $           5,095                6.3 %
SeaTac 8th Ave                      Burien, WA      March 21, 2013              1             68,583                  6,450                5.6 %

Total/Weighted Average                                                          2            117,867      $          11,545                5.9 %

1 Stabilized cap rates are calculated, at the time of acquisition, as annualized cash basis net operating income for the property stabilized to market occupancy (generally 95%) divided by the total acquisition cost for the property. Total acquisition cost basis for the property includes the initial purchase price, the effects of marking assumed debt to market, buyer's due diligence, lease intangible adjustments, estimated acquisition capital expenditures and leasing costs necessary to achieve stabilization. We define cash basis net operating income for the property as net operating income excluding straight-line rents and amortization of lease intangibles. These stabilized cap rates are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known


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and unknown risks, trends, uncertainties, and factors that are beyond our control, including risks related to our ability to meet our estimated forecasts related to stabilized cap rates and those risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2012.

Subsequent to March 31, 2013, we acquired two industrial buildings for a total purchase price of approximately $14.4 million. We intend to substantially renovate the property located in South San Francisco, CA, creating a 67,800 square foot facility. The properties were acquired from unrelated third parties using existing cash on hand. The following table sets forth the wholly-owned industrial properties we acquired subsequent to March 31, 2013:

                                                                                        Number of                           Purchase Price
Property Name                                  Location            Acquisition Date     Buildings        Square Feet        (in  thousands)
240 Littlefield                         South San Francisco, CA    April 3, 2013                 1             67,800      $           8,400
101st Road                              Medley, FL                 April 26, 2013                1             52,536                  6,000

Total                                                                                            2            120,336      $          14,400

Public Follow-on Offering

On February 19, 2013, we completed a public follow-on offering of 5,750,000 shares of our common stock at a price per share of $16.60, including 90,325 shares that were sold in the offering to our executive and senior officers and members of our board of directors. No underwriting discount or commission was paid on the shares sold to such officers and directors. The net proceeds of the offering were approximately $90.8 million after deducting the underwriting discount and offering costs of approximately $4.6 million. We used approximately $65.4 million of the net proceeds to repay outstanding borrowings under our senior revolving credit facility and intend to use the remaining net proceeds to invest in industrial properties and for general business purposes.

Term Loan and Amendment to Senior Credit Agreement

On January 17, 2013, we entered into a Second Amended and Restated Senior Credit Agreement (the "Facility") with KeyBank National Association, as administrative agent and as a lender, KeyBanc Capital Markets, as a lead arranger, and PNC Bank, National Association, Union Bank, N.A. and Regions Bank as lenders to add a five-year $50.0 million term loan and amend our existing $100.0 million Facility.

The $50.0 million term loan maturity date under the Facility is January16, 2018 and we have up to six months to borrow the full $50.0 million. The amendment extends the maturity date for the $100.0 million Facility to January 2016 and provides for one 12-month extension option exercisable by us, subject, among other things, to there being an absence of an event of default under the Facility and to our payment of an extension fee. Interest on the Facility, including the term loan, will continue to generally be paid based upon, at our option, either (i) LIBOR plus the applicable LIBOR margin or (ii) the applicable base rate which is the greater of the administrative agent's prime rate plus 1.00%, 0.50% above the federal funds effective rate, or thirty-day LIBOR plus the applicable LIBOR margin for LIBOR rate loans under the Facility. The applicable LIBOR margin was reduced to a range from 1.65% to 2.65% depending on the ratio of our outstanding consolidated indebtedness to the value of our consolidated gross asset value. The aggregate amount of the Facility may be increased to a total of up to $300.0 million, subject to the approval of the administrative agent and the identification of lenders willing to make available additional amounts. The Facility continues to be guaranteed by the Company and by substantially all of the borrower's current and to-be-formed subsidiaries that own a "borrowing base property." In addition, the Facility continues to be secured by a pledge of the equity interests of the borrower (a wholly-owned subsidiary of the Company) in the subsidiaries that hold each of the borrowing base properties. Outstanding borrowings under the Facility are limited to the lesser of (i) the sum of the $100.0 million revolving credit facility amount and the $50.0 million term loan amount or (ii) 60% of the value of the borrowing base properties. As of March 31, 2013, there were no outstanding borrowings under the Facility.

Tenant Default

On January 29, 2013, we filed a one count eviction action against Banah International Group ("Banah"), our tenant at 10th Avenue located in Hialeah, FL for failure to pay December 2012 and January 2013 rent. On February 21, 2013, the State Court entered a default judgment for possession against Banah. Later that same day, Banah filed a Chapter 11 bankruptcy petition. Subsequently, Banah paid rent for the period from February 21, 2013 through May 31, 2013. It cannot be determined currently if Banah will affirm or reject the lease, or continue to pay rent, in bankruptcy. Therefore, at March 31, 2013, the lease is recorded as a month-to-month lease and revenue is recognized as cash is received. Any ultimate recovery of damages, including past due rent, is undetermined at this time.


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Dividend and Distribution Activity

On May 7, 2013, our board of directors declared a cash dividend in the amount of $0.13 per share of our common stock payable on July 19, 2013 to the stockholders of record as of the close of business on July 5, 2013.

On May 7, 2013, our board of directors declared a cash dividend in the amount of $0.484375 per share of our Series A Preferred Stock payable on July 1, 2013 to the preferred stockholders of record as of the close of business on June 11, 2013.

Contractual Commitments

As of May 8, 2013, we had three outstanding contracts with third-party sellers to acquire nine industrial buildings as described under the heading "Contractual Obligations" in this Quarterly Report on Form 10-Q. There is no assurance that we will acquire the properties under contract because the proposed acquisitions are subject to the completion of satisfactory due diligence and various closing.

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. Approximately 80.1% of our leased space includes fixed rental increases or Consumer Price Index-based rental increases. Lease terms typically range from three to ten years.

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 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 for the three months ended March 31, 2013 and 2012 includes the changes attributable to same store properties. The same store pool for the comparison of the three months ended March 31, 2013 and 2012 includes all properties that were owned and in operation as of March 31, 2013 and since January 1, 2012 and excludes properties that were either disposed of or held for sale to a third party. As of March 31, 2013, the same store pool consisted of 45 buildings aggregating approximately 3.3 million square feet. As of March 31, 2013, the non-same store properties, which we acquired or disposed . . .

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