Terreno Realty Corp
Annual Report 2011

Plain-text annual report

12025777 RecevcdSEC1 MAR ti 2012 Ito Terreno Realty Corporation 2011 Annual Report Directors Executive Officers Blake Baird Chairman Chief Executive Officer Michael Coke President Chief Financial Officer Independent Directors LeRoy Carlson Audit Chair Principal NNC Apartment Ventures LLC Peter Merlone Compensation Chair Founder Co-Managing Partner Merlone Geier Partners Douglas Pasquale Lead Director Founder Capstone Enterprises Corporation Dennis Polk Nominating and Corporate Governance Chair Chief Operating Corporation NYSESNX Officer Director SYNNEX March 19 2012 Dear Fellow Shareholders In 2011 Terreno Realty Corporation completed its first full year of operations as publicly traded company Here is review of our strategy our 2011 results and our outlook This is our strategy We acquire own and operate industrial real estate in six major coastal U.S markets Los Angeles Northern Area Seattle Miami and Washington D.CiBaltimore Exclusively We believe New Jersey/New York City San Francisco Bay that over time these six markets have the best potential for superior returns given favorable supply and demand factors Supply of newly developed industrial product will be limited due to physical and regulatory constraints Demand will result from large and growing population densities and proximity to high volume distribution points Further these locations may provide the opportunity for higher and better use over time We invest in functional and flexible industrial real estate in infill locations within our six markets We acquire own and operate the product that satisfies customer demand within submarket warehouse/distribution flex including light industrial and RD and trans-shipment primarily truck terminals Thus far 75% of our investments have been warehouse/distribution 17% have been trans-shipment and 8% have been flex Our six-market investment strategy provides margin of safety We acquire properties at discounts to replacement cost We do no ground up development or raw land acquisition We have no complex joint ventures We a(cid:224)quire both value-add and stabilized properties about half of each so far We retain the best local third party firms to help us broadly market and efficiently manage our space Where we believe it properties directlyabout 20% of the portfolio today is the best execution we manage our These are our 2011 results We acquired 12 properties containing 14 buildings for purchase price of approximately $118.7 million adding 1.1 million square feet to our portfolio completing the deployment of our February 2(cid:212)1 P0 proceeds We how own 24 properties comprising 47 buildings and 3.4 million square feet that we purchased for approximately $253 million We s(cid:244)urcØd over half of these in transactions that were not broadly marketed The location and functionality of our properties fit our strategy well Our value-add acquisitions generally contain vacant space or space with near term expirations As such we began 2011 at 70.6% occupancy We ended the year at 92.5% delivering on our investment strategy by stabilizing nine of our twelve value-add properties Despite this progress our stock price underperformed our peers and the REIT universe in 2010 and 2011 In keeping with our commitment to fellow shareholders we did not receive any incentive compensation in those years While not happy with this result we are fully aligned with our public shareholders and committed to creating superior long-term value for all of us This is our outlook We believe that industrial rents have stopped falling in our markets and in some cases are rising modestly Nevertheless with national availability ending 2011 at above 13% it will take time before the broader markets exhibit significant rent growth We see growing set of acquisition opportunities Subsequent to year-end we raised approximately $54 million of new common equity to pursue those opportunities increase our liquidity and maintain prudent leverage Terreno owned $250 million in property assets at year-end Assuming investment opportunities remain attractive we intend to grow our assets to between $700 million and $1 billion in the intermediate term That will optimize our operating efficiency increase our shareholder liquidity and position us to achieve an investment grade credit rating to broaden our debt financing options We believe in the long-term operating prospects of our functional infill coastal assets We believe in sound balance sheet management We believe in the benefits of our market-leading corporate governance and exceptionally aligned executive management compensation As result we are enthusiastic about the future and ourability to produce superior results for our shareholders over time As evidence of this confiden(cid:244)e our senior management team and Board of Directors purchased 93000 additional common shares as part of our most recent equity offering As we pursue Terrenos goals we thank our Board of Directors for their advice and counsel and our fellow shareholders for their support Sincerely Blake Baird Michael Coke Chairman Chief Executive Officer President Chief Financial Officer UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15d OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31 2011 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15d OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 001-34603 Terreno Realty Corporation Exact Name of Registrant as Specified in Its Charter Maryland State or Other Jurisdiction of Incorporation or Organization 16 Maiden Lane Fifth Floor San Francisco CA Address of Principal Executive Offices 27-t LR.S Identification Numb 94108 Zip Code Registrants telephone number including area code 415 655-4580 Securities registered pursuant to Section 12b of the Act Title of Each Class Common Stock $0.01 par value per share Name of Exchange on Which Registered New York Stock Exchange Securities registered pursuant to Section 12g of the Act None Indicate by check mark if the registrant is well-known seasoned issuer as defined in Rule 405 Of the Securities Act Yes LII No II Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15d of the Act Yes LI No II Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15d of the Securities Exchange Act of 1934 during the preceding such reports and has been subject to such 12 months or for such filing requirements for the past 90 days shorter period that Yes EJ the registrant was required to file No LI Indicate by check mark whether the registrant has submitted electronically Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation and posted on its corporate Web site if any every 12 months S-T during the preceding or for such shorter period that the registrant was required to submit and post such files Yes EI No LI Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained to the best of registrants knowledge in definitive proxy or information statements incorporated by reference in Part Ill of this Form 10-K or any amendment to this Form 10-K Indicate by check mark whether the registrant is large accelerated filer an accelerated filer non-accelerated filer or smaller reporting company Rule 12b-2 of the Exchange Act Check one See the definitions of large accelerated filer accelerated filer and smaller reporting company in Large accelerated filer Non-accelerated filer LI Do not check if smaller reporting company Accelerated filer Smaller reporting company LI Indicate by check mark whether the registrant is shell company as defined in Rule 12b-2 of the Exchange Act Yes LI No Ei Aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold or the average bid and asked business day of the Registrants most recently completed second The registrant had 13366610 shares of its common stock price of such common equity as of June 30 2011 the last fiscal quarter $148674204 $0.01 par value per share outstanding as of February 17 2012 Part III of this Annual Report on Form 10-K incorporates by reference portions of Terreno Realty Corporations which the registrant will be filed with the Securities of Stockholders for its 2012 Annual Meeting anticipates Proxy Statement and Exchange Conmiission no later than 120 days after the end of its 2011 fiscal year pursuant to Regulation 14A Documents Incorporated by Reference Terreno Realty Corporation Annual Report on Form 10-K for the Year Ended December 31 2011 Table of Contents Part Item Business Item 1A Risk Factors Item lB Unresolved Staff Comments Item Item Item Part Properties Legal Proceedings Mine Safety Disclosures Item Market for Registrants Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities Item Selected Fmancial Data Item Item 7A Quantitative and Qualitative Disclosures About Market Risk Managements Discussion and Analysis of Financial Condition and Results of Operations Item Item Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A Controls and Procedures Item 9B Other Information Part ifi Item 10 Directors Executive Officers and Corporate Governance Item 11 Executive Compensation Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions and Director Independence Principal Accounting Fees and Services Item 13 Item 14 Part IV Item 15 Exhibits and Financial Statement Schedules Index to Financial Statements Signatures Exhibit Index 27 27 28 28 29 32 32 46 46 46 46 48 48 48 48 48 48 49 49 FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 Section Act and Section 21E of the Securities Exchange Act of 1934 27A of the Securities Act of 1933 as amended the Securities as amended the Exchange Act We caution investors that information forward-looking are based on managements beliefs currently available to management When used the words anticipate believe estimate statements and on assumptions made by and 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 assumptions and are not guarantees statements of future performance which may be affected by known and unknown risks are subject to risks uncertainties These statements and 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 statements whether as Accordingly investors should or projected We expressly disclaim any responsibility to update our forward-looking as required by law which are based result of new information future events or otherwise use caution in relying on past forward-looking statements except 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 in this Annual Report on Form 10-K including those set forth under the headings Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations 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 our industrial properties our dependence upon tenants and our reliance on third parties to property manage the majority of our ability 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 our failure to successfully operate acquired properties our failure to qualify or maintain our status as real estate investment trust 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 Item Business Overview PART Terreno Realty Corporation Terreno and together with its subsidiaries we us our our company the company acquires owns and operates U.S markets Los Angeles Northern Washington D.CiBaltimore We invest in several distribution flex including light industrial New Jersey/New York City San Francisco Bay Area Seattle Miami and industrial real estate located in six major coastal types of industrial real estate including warehouse and RD 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 December 31 2011 we owned total of 47 buildings aggregating approximately 3.4 million square feet which we purchased for an aggregate purchase price of $253.0 million including approximately million which includes mortgage premiums of approximately YRC Worldwide the assumption accounted for approximately of mortgage loans payable of approximately $39.5 $0.8 million As of December 31 2011 our tenant 11.8% of our total annualized base rent We are an internally managed Maryland Corporation We were incorporated in November 2009 and on February 16 2010 we completed both our initial public offering of 8750000 shares of our common stock and concurrent private placement of an aggregate price per share of $20.00 We estimate that of 350000 shares of our common stock to our executive officers at the net proceeds of our initial public offering were approximately $162.8 million after deducting the full underwriting discount of approximately $10.5 million and other estimated offering expenses of approximately $1.7 million We received net proceeds of approximately $7.0 million from our concurrent private placement On January 13 2012 we completed price per share of $14.25 On February price per share of $14.25 upon the exercise by the underwriters estimate that the net proceeds costs were approximately of the offering after deducting $54.7 million We used approximately the underwriting discount and estimated offering $41.0 million of the net proceeds to repay public follow-on offering of 4000000 shares of our common stock at 13 201 we sold an additional 61853 shares of our common stock at shares We of their option to purchase additional outstanding borrowings under our senior revolving credit facility on January 13 2012 and intend to use the remainder of the net proceeds to invest in industrial properties and for general business purposes We elected to be taxed as REIT under Sections 856 through 860 of the Internal Revenue Code of 1986 as amended the Code commencing with our taxable year that ended on December 31 2010 Our Investment Strategy We invest in industrial Jersey/New York City San Francisco properties located in six major coastal U.S markets Los Angeles Northern New Bay Area Seattle Miami and Washington D.C.Baltimore As described in more detail in the table below we invest warehouse/distribution flex including light industrial in several types of industrial and RD and trans-shipment We target real estate including 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 Industrial Facility General Characteristics Warehouse distribution Single and multiple tenant facilities that typically serve tenants greater than 30000 square feet of space Less than 10% office space Typical clear height from 18 feet to 36 feet May include production/manufacturing areas Adequate interior access via dock high and/or grade level doors Adequate truck court for large and small truck distribution options possibly including staging for high volume of truck activity and/or trailer storage Flex including light industrial and RD Single and multiple tenant facilities that typically serve tenants less than 30000 square feet of space Facilities generally accommodate both office and warehouse/manufacturing activities has larger amount of office space and shallower bay depths than warehouse/distribution Typically facilities Adequate parking consistent with increased office use Adequate interior access via grade level and/or dock high doors Staging for moderate truck activity Sometimes has showroom service center or assembly/light manufacturing component Enhanced landscaping Trans-shipment Includes truck terminals and airport on-tarmac facilities which serve both single and multiple tenants Typically has high number of dock high doors shallow bay depth and lower clear height Staging for high volume of truck activity and trailer storage We selected our target markets operating in over 50 global industrial markets by drawing upon the experiences of our management located in North America Europe and Asia and in anticipation of team investing and trends in logistics term increases in carbon prices and other factors We believe that our target markets patterns resulting from population changes regulatory and physical constraints potential long have attractive long term investment attributes We target assets with characteristics that include but are not limited to the following Located in high population coastal markets Close proximity to transportation infrastructure such as sea ports airports highways and railways Situated in supply-constrained submarkets with barriers to new industrial development as result of physical and/or regulatory constraints Functional and flexible layout that can be modified to accommodate single and multiple tenants Acquisition price at discount to the replacement cost of the property Potential for enhanced return through re-tenanting or operational or physical improvements and Opportunity for higher and better use of the property over time In general we prefer to utilize local third party property managers for day-to-day property management We believe outsourcing property management is cost effective and provides us with operational flexibility We currently manage four of our properties directly and may directly manage other properties in the future if we determine such direct property management is in our best interest We have no current intention to acquire undeveloped industrial land or to pursue ground up development However we may pursue redevelopment opportunities of properties that we own We expect that we will continue to acquire the significant majority of our investments as equity interests in individual properties or portfolios of properties We may also acquire industrial acquisition of other corporations that own industrial or entities real estate We will opportunistically target properties through the investments in debt secured by industrial real estate intention of ultimately acquiring the underlying that would otherwise meet our investment real estate We currently do not intend to target criteria with the specific percentages of holdings of particular types of industrial properties This expectation is based upon prevailing market conditions and may change over time in response to different prevailing market conditions The properties we acquire may be stabilized fully leased or unstabilized have near term lease expirations or be partially or fully vacant Competitive Strengths We believe we distinguish ourselves from our competitors through the following competitive advantages Focused Investment Strategy We invest exclusively infill locations We selected our six target markets based in six major coastal U.S markets and focus on upon the experiences of our management teams investing and operating in over 50 global industrial markets located in North America Europe and Asia and also in anticipation of trends in logistics patterns resulting from population changes regulatory and physical constraints potential long term increases in carbon prices and other factors We have no current intention to acquire undeveloped land or pursue ground up development Conservative Targeted Leverage with Growth Oriented Capital Structure We expect to maintain financial flexibility and conservative capital structure using retained cash flows long-term debt and the issuance of common and perpetual preferred stock to finance our growth Over the long-term we intend to limit the sum of the outstanding principal amount of our consolidated indebtedness and the liquidation preference of any outstanding preferred stock to less than 40% of our total enterprise value and to maintain fixed charge coverage ratio in excess of 2.Ox Highly Aligned Compensation Structure We believe that executive compensation should be closely aligned with long term stockholder value creation As result all of the incentive compensation of our executive officers is based solely on our total shareholder return exceeding the total shareholder return of the MSCI U.S REIT Index or the FTSE NAREIT Equity Industrial Index Commitment to Strong Corporate Governance We are committed to strong corporate governance as demonstrated by the following all members of our board of directors will serve annual terms we have adopted majority voting standard in non-contested director elections we have opted out of two Maryland back in to these provisions without anti-takeover provisions and in the future we may not opt stockholder approval we designed our ownership limits solely to protect our status as REIT and not for the purpose of serving as an anti-takeover device and we have no stockholder rights plan In the future we will not adopt stockholder rights plan unless our stockholders approve in advance the adoption of plan or if adopted by our board of directors we will submit the stockholder rights plan to our stockholders for ratification vote within 12 months of adoption or the plan will terminate Our Financing Strategy The primary objective of our financing strategy is to maintain financial flexibility with conservative capital structure using retained cash flows long-term debt and the issuance of common and perpetual preferred stock to finance our growth Over the long term we intend to limit the sum of the outstanding principal amount of our consolidated indebtedness and the liquidation preference of any outstanding perpetual preferred stock to less than 40% of our total enterprise value maintain fixed charge coverage ratio in excess of 2.Ox limit the principal amount of our outstanding floating rate debt to less than 20% of our total consolidated indebtedness and have staggered debt maturities that are aligned to our expected average positioning us to re-price parts of our capital structure as our rental rates lease term 5-7 years change with market conditions We intend to preserve flexible capital structure with long-term goal to obtain an investment grade rating and be in position to issue unsecured debt and perpetual preferred stock Prior to attaining an investment grade rating we intend to primarily utilize non-recourse debt secured by individual properties or pools of properties with targeted maximum loan-to-value of 65% at the time of financing or recourse bank term loans and credit facilities We may also assume debt in connection with property acquisitions which may have higher loan-to-value Our Corporate Structure We were organized as Maryland corporation on November Partnership Real Estate Investment may utilize one or more taxable REIT subsidiaries as appropriate Trust or UPREIT We own our properties indirectly 2009 We are not structured as an Umbrella subsidiaries and through Our Tax Status We elected to be taxed as REIT under Sections 856 through 860 of the Code commencing with our taxable year that ended on December 31 2010 We believe that our organization and method of operation has enabled and will continue income tax purposes To maintain REIT status we must meet to enable us to meet the requirements for qualification and taxation as RE1T for federal number of organizational and operational requirements including requirement that we annually distribute at least 90% of our net taxable income to our stockholders excluding net capital gains As REIT we generally will not be subject to federal income tax on REIT taxable income we currently distribute to our stockholders If we fail to qualify as REIT in any taxable to federal year we will be subject REIT we may be subject taxable REIT subsidiaries any taxable REIT subsidiaries but may in the future if any will be subject to some federal state income tax at regular corporate rates Even if we qualify for taxation as and local taxes on our income or property and the income of our to taxation at regular corporate rates We do not currently own Competition We believe the current market for industrial real estate acquisitions to be competitive We compete for real property investments with pension funds and their advisors bank and insurance company investment accounts other public and private real estate investment companies real estate limited partnerships owner-users individuals and other entities engaged in real estate investment activities some of which have greater financial resources than we do In addition we believe the leasing of real estate to be highly competitive We experience competition for customers from owners and managers of competing properties As result we may have to provide free rental periods incur charges for tenant improvements or offer other inducements all of which may have an adverse impact on our results of operations Environmental Matters The industrial properties that we own and will acquire are subject to various federal state and local environmental laws Under these laws courts and government agencies have the authority to require us as owner of contaminated property to clean up the property even if we did not know of or were not responsible for the contamination These laws also apply to persons who owned property at the time it became contaminated and therefore it is possible we could incur these costs even after we sell some of our properties In addition to the costs of cleanup environmental contamination can affect the value of property and therefore an owners ability to borrow using the property as collateral or to sell the property Under applicable environmental laws courts and government agencies also have the authority to require that person who sent waste to waste disposal facility such as landfill or an incinerator pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment Furthermore various court decisions have established that third parties may recover damages for injury caused by property contamination For instance person exposed to asbestos at one of our properties may seek to recover damages if he or she suffers injury from the asbestos Lastly some of these environmental laws restrict the use of property or place conditions on various activities An example would be laws that require business using chemicals to manage them carefully and to notify local officials that the chemicals are being used We could be responsible for any of the costs discussed above The costs to clean up contaminated property to defend against claim or to comply with environmental laws could be material and could adversely affect the funds available for distribution to our stockholders We generally obtain Phase environmental site assessments or ESAs on each property prior to acquiring it However these ESAs may not reveal all environmental costs that might have material adverse effect on our business assets results of operations or liquidity and may not identify all potential environmental liabilities In general we utilize local third party property managers for day-to-day property management and will rely on these third parties to operate our industhal properties in compliance with applicable federal state and local environmental laws in their daily operation of the respective properties and to promptly notify us of any environmental contaminations or similar issues As result we may become subject to material environmental liabilities of which we are unaware We can make no assurances that future laws or regulations will not impose material environmental liabilities on us or the environmental condition of our industrial properties will not be affected by the condition of the properties of our industrial in the vicinity parties uurelated to us We were not aware of any significant 2010 properties such as the presence of leaking underground storage tanks or by third or material exposures as of December 31 2011 and Employees We currently have ten employees None of our employees is member of any union Available Information We maintain an internet website at the following address http//terreno.com The information on our website is neither part of nor incorporated by reference in this Annual Report on Form 10-K We make available on or through our website certain reports and amendments to those reports that we file with or furnish to the Securities and Exchange Commission reports on Form 10-K our quarterly reports on Form 10-Q our current and Section amendments to these reports on our website We intend to disclose any that apply to any of our executive or SEC in accordance officers amendments on our website We make this information or waivers with the Exchange Act These include our annual reports on Form 8-K and exhibits and to our Code of Business Conduct and Ethics available on our website 16 filings Our Code of Business Conduct and Ethics is also available free of charge as soon the SEC as reasonably practicable after we electronically file the information with or furnish it to Item 1A Risk Factors The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered risks and uncertainties not presently known to us or that we may currently deem immaterial The risks and uncertainties below are not the only ones described that we face Additional also may impair our business operations If any of the following risks occur our business cash flows could be adversely affected Investors should also refer financial condition operating results and to our quarterly reports on Form 10-Q and current reports on Form 8-K for updates to these risk factors Risks Related to Our Business and Our Properties Our long-term growth will depend upon future acquisitions of properties and we may be unable to consummate acquisitions may be unable to quickly and efficiently on advantageous terms the acquired properties may not perform as we expect or we integrate our new acquisitions into our existing operations We intend to acquire high quality industrial properties in six coastal markets in the United States The acquisition of properties entails various risks including expect that we may be unable operations and that our cost estimates for bringing an acquired and efficiently to quickly the risks that our investments integrate our new acquisitions may not perform as we into our existing property up to market standards may prove inaccurate In addition we cannot assure you of the availability of investment opportunities in our targeted markets at attractive pricing levels In the event that such opportunities are not available in our targeted markets as we expect our ability to execute investment for attractive competition our business plan may be adversely affected Further we face significant opportunities from other well-capitalized real estate investors including pension funds and their advisors bank and insurance company investment accounts other public and private real estate investment companies and REITs real estate limited partnerships owner-users individuals and other entities engaged in real estate investment activities some of which have history of operations greater financial resources than we do and greater ability to borrow funds to acquire properties This competition increases as investments in real estate become increasingly attractive relative to other forms of investment As result of competition we may be unable to acquire properties as we desire or the purchase price may be significantly elevated In addition we expect to finance future acquisitions through combination of borrowings under our senior revolving perpetual preferred stock which may not be available at all or on advantageous facility and the use of retained cash credit flows long-term debt and the issuance of common and terms and which could adversely affect our cash flows Any of the above risks could adversely affect our financial condition results of operations cash flows and ability to pay distributions on and the market price of our common stock We may make acquisitions which pose integration and other risks that could harm our business We may be required to incur debt and expenditures and issue additional for industrial or prevent properties that we acquire which may dilute our stockholders These acquisitions may also expose us to risks our profitability shares of our common stock to pay and may delay ownership interests such as the possibility that we may not be able to successfully integrate acquired properties into our operations the possibility that additional capital expenditures may be required the possibility that senior management may be required to spend considerable time negotiating agreements and integrating acquired properties the possible loss or reduction in value of acquired properties the possibility of pre-existing undisclosed liabilities regarding acquired properties including but not limited to environmental or asbestos liability of which our insurance may be insufficient or for which we may be unable to secure insurance coverage and the possibility that concentration of our industrial properties in Los Angeles the San Francisco Bay Area and Seattle may increase our exposure to seismic activity especially if these industrial properties are located on or near fault zones We expect acquisition costs including capital expenditures required to render industrial properties operational to increase in the future If our revenue may not be able to maintain our current or expected assurance we would successfully overcome these risks or any other problems encountered does not keep pace earnings as we absorb these additional expenses with these with these potential acquisition costs we There is no acquisitions If we cannot obtain additionalfinancing our growth will be limited If adverse conditions in the credit markets in particular with respect to real estate materially deteriorate our business could be materially and adversely affected Our long-term ability to grow through investments in industrial properties will be limited if we cannot obtain additional financing on favorable terms In the future we will rely on debt financing including borrowings under our senior revolving credit facility issuances of unsecured debt securities and debt secured by individual properties to finance our acquisition activities and for working capital If we are unable to obtain debt financing from these or other sources or to refinance existing indebtedness adversely affected Market conditions may make it difficult you that we will be able to obtain additional upon maturity our financial condition and results of operations would likely be to obtain additional financing and we cannot assure debt or equity financing or that we will be able to obtain it on favorable terms In addition to qualify as REIT we will be required to distribute at least 90% of our taxable income determined before the deduction for dividends paid and excluding any net capital gains each year to our stockholders and we generally expect to make distributions in excess of such amount As result our ability to retain earnings to fund acquisitions redevelopment and development if any or other capital expenditures will be limited As of December 31 2011 we had an $80.0 million senior revolving credit facility to finance acquisitions and for working capital requirements Terreno guarantees the obligations of the borrower wholly-owned subsidiary under the senior revolving credit facility The senior revolving credit facility as amended on January 19 2012 matures on January 19 2015 and provides for one 12-month extension option exercisable by us subject among other extension fee As of December things to there being an absence of an event of default and to our payment of an 31 2011 there were $41.0 million of borrowings outstanding on the senior revolving credit facility The availability and timing of cash distributions is uncertain In 2011 we made quarterly distributions to holders of our common stock and we intend to continue to pay regular quarterly distributions However we bear all expenses incurred by our operations and the funds generated by our operations after deducting distributions to our stockholders In addition these expenses may not be sufficient our board of directors in its discretion may retain any portion of to cover desired levels of such cash for working capital Our ability to make distributions to our stockholders also will depend on our levels of retained cash flows which we intend to use as source of investment capital We cannot assure our stockholders that sufficient funds will be available to pay distributions Our corporate strategy is to fund the payment of quarterly distributions to our stockholders entirely from distributable cash flows However we may fund our quarterly distributions to our stockholders from combination of available cash flows net of recurring capital expenditures and proceeds from borrowings In the event we are unable to consistently fund future quarterly distributions to our stockholders entirely from distributable cash flows the value of our shares may be negatively impacted We depend on key personneL Our success depends to significant degree upon the contributions of certain key personnel including but not limited to our chairman and chief executive whom would be difficult to replace If any of our key personnel were to cease employment with us our operating officer and our president and chief financial officer each of results could suffer Our ability to retain our senior management group or to attract suitable replacements should any members market The loss of services from key members of the senior management could adversely impact in the capital markets We have not obtained group leave is dependent on the competitive nature of the employment of the management group or limitation in their availability our financial condition and cash flows Further such loss could be negatively perceived and do not expect to obtain key man life insurance on any of our key personnel We also believe that as we expand our future success depends in large part upon our ability to hire and retain highly skilled managerial investment financial and operational personnel Competition for such personnel is intense and we cannot assure our stockholders that we will be successful in attracting and retaining such skilled personnel Failure of the projected improvement in industrial operating fundamentals may adversely affect our ability to execute our business plan substantial part of our business plan is based on our belief that industrial operating fundamentals are expected to improve over fundamentals will in fact the next several years We cannot improve or to what extent assure you as to whether or when industrial operating they improve In the event conditions in the industry do not improve when and as we expect or deteriorate our ability to execute our business plan may be adversely affected Our investments are concentrated in the industrial real estate sector and our business would be adversely affected by an economic downturn in that sector Our investments in real estate assets are concentrated in the industrial real estate sector This concentration may expose us to the risk of economic downturns included more significant portion of other sectors of the real estate industry in this sector to greater extent than if our business activities Events or occurrences that affect areas in which our properties are located may impact financial results In addition to general regional national and international economic conditions our operating performance will be impacted by the economic conditions of the specific markets in which we operate If the downturn in the economy in the real estate market or any of our markets persists and we fail to accurately predict the timing of economic improvement in these markets our operations and our revenue and cash available for distribution including cash available to pay distributions to our stockholders could be materially adversely affected As of December 31 2011 approximately 48.9% of our buildings were located in the Northern New Jersey New York representing approximately 45.5% of our total annualized base rent We may be unable to renew leases lease vacant space or re-lease space as leases expire We cannot assure you that leases at our properties will be renewed or that such properties will be re-leased at net effective rental rates equal to or above the then current average net effective rental rates If the rental rates our tenants do not renew their leases or we do not re-lease significant portion of our for our properties decrease available space and space cash flows cash available for distribution satisfy our debt service obligations could for which leases are scheduled to expire our financial results of operations to you per share trading price of our common stock and our ability to to renew be materially adversely affected In addition if we are unable condition leases or re-lease property the resale value of that property could be diminished because the market value of particular property will depend principally upon the value of the leases of such property We face potential adverse effects from the bankruptcies or insolvencies of tenants We are dependent on tenants for our revenues The bankruptcy or insolvency of the tenants at our properties may adversely affect the income produced by our properties The tenants particularly those that are highly leveraged could file for bankruptcy protection or become insolvent in the future Under bankruptcy law tenant cannot be evicted solely because of its bankruptcy On the other hand bankrupt tenant may reject and terminate its lease with us In such case our claim against the bankrupt tenant for unpaid and future rent would be subject to statutory cap that might be substantially less than the remaining rent actually owed under the lease and even so our claim for unpaid rent would likely not be paid in full This shortfall could adversely affect our cash flows and results of operations and could cause us to reduce the amount of distributions to stockholders default by tenant on its lease payments could force us to find an alternative source of revenues to pay any mortgage loan or operating expenses on the property In the event of tenant default we may experience delays in enforcing our rights as landlord and may incur substantial costs including litigation and related expenses in protecting our investment and re-leasing our property Declining real estate valuations and impairment charges could adversely affect our earnings and financial condition We review the carrying value of our properties when circumstances such as adverse market conditions indicate potential impairment may exist We base our review on an estimate of the future cash interest charges expected to result from the real estate investments use and eventual flows excluding disposition We consider factors such as future operating income trends and prospects as well as the effects of leasing demand competition and other factors If our evaluation indicates that we may be unable to recover the carrying value of real estate investment an impainnent loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property These losses would have direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net income The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy rental rates and capital requirements that could differ materially from actual results in future periods worsening real estate market may cause us to reevaluate the assumptions used in our impairment analysis Impairment charges could adversely affect our financial condition results of operations cash available for distribution including cash available for us to pay distributions to our stockholders and per share trading price of our common stock We utilize local third party managers for day-to-day property management for the majority of our properties In general we prefer to utilize local third party managers for day-to-day property management although we currently manage the extent we utilize third party managers our cash four of our properties directly affected if our managers fail and in some cases may own invest to provide quality services In addition flows from our industrial properties may be adversely our managers or their affiliates may manage in or provide credit support or operating guarantees to industrial properties and may directly manage more of our properties in the future To that compete with our industrial properties which may result in conflicts of interest and decisions regarding the operation of our industrial properties that are not in our best interests 10 Our real estate redevelopment strategies may not be successful In connection with our business strategy we may pursue redevelopment opportunities or construct improvements of industrial properties that we own We will be subject to risks associated with our redevelopment and renovation activities cash flows and ability to pay distributions that could adversely affect our financial condition on and the market price of our common stock results of operations We may not havefundingforfuture tenant improvements When tenant at one of our properties does not renew its lease or otherwise vacates its space in one of our buildings in the future it is likely that in order to attract one or more new tenants we will be required to expend funds to construct new tenant improvements in the vacated space Although we intend to manage our cash position or financing availability to pay for any improvements required for re-leasing we cannot assure our stockholders that we will have adequate sources of funding available to us for such purposes in the future Debt service obligations properties and could adversely affect our ability to make distributions to our stockholders and the market price of our shares of common stock could adversely affect our overall operating results may require us to sell industrid Our business strategy contemplates the use of both non-recourse secured and unsecured debt to finance long-term growth As of December which consisted of our senior revolving 31 2011 we had total debt outstanding of approximately $99.3 million credit facility and mortgage and term loans payable While over the long- term we intend to limit liquidation preference the sum of the outstanding principal amount of our consolidated of any outstanding shares of preferred stock to less than 40% of our total enterprise value indebtedness and the our governing documents contain no limitations on the amount of debt that we may incur and our board of directors may change our financing policy at any time without stockholder approval Over the long-term we also intend to maintain fixed charge coverage ratio in excess of 2.Ox and limit the principal amount of our outstanding floating rate debt modify or eliminate these limitations at any time without be able to incur substantial additional debt the approval of our stockholders As result we may including secured debt in the future Incurring debt could subject us to less than 20% of our total consolidated indebtedness Our board of directors may to many risks including the risks that our cash flows from operations will be insufficient to make required payments of principal and interest our debt may increase our vulnerability to adverse economic and industry conditions we may be required to dedicate our debt thereby reducing substantial portion of our cash flows from operations to payments on cash available for distribution to our stockholders funds available for operations and capital expenditures future business opportunities or other purposes the terms of any refinancing will not be as favorable as the terms of the debt being refinanced and the use of leverage could adversely affect our ability to make distributions to our stockholders and the market price of our shares of common stock If we incur additional debt in the future including debt under our senior revolving credit facility and do not have sufficient funds to repay such debt at maturity it may be necessary to refinance the debt through additional debt or additional equity financings If at the time of any refinancing prevailing interest rates or other factors result in higher interest rates on refinancings increases in interest expense would adversely affect our cash flows and consequently cash available for distribution to our stockholders If we are unable to refinance our debt on acceptable terms we may be forced to dispose of industrial properties on disadvantageous terms potentially resulting in losses We may place mortgages on our properties that we own to secure we will other debt To the extent we cannot meet any future debt service obligations revolving credit facility or risk losing some or all of our industrial properties that may be pledged to secure our obligations to foreclosure Also covenants applicable to any future debt could impair our planned investment strategy and if violated result in default 11 Higher interest rates could increase debt service requirements on any floating rate debt that we incur and could reduce the amounts available for distribution to our stockholders as well as reduce funds available for our operations future business opportunities or other purposes In addition an increase in interest rates could decrease the amount third parties are willing to pay for our assets thereby limiting our ability to change our portfolio promptly in response to changes in economic or other conditions Adverse economic conditions could cause the terms on which we borrow to be unfavorable We could be required to liquidate one or more of our industrial properties in order to meet our debt service obligations at times which may not permit us to receive an attractive return on our investments Our senior revolving credit facility and certain of our existing mortgage and term loans payable contain and we expect that our future indebtedness will contain covenants that could limit our operations and our ability to make distributions to our stockholders We have an $80.0 million senior revolving 2012 amendment In addition we have January credit facility that matures on January 19 2015 pursuant to $20.1 million term loan that matures on February 22 2013 We have agreed to guarantee the obligations of the borrower wholly-owned subsidiary under the senior revolving credit facility and our term loan Our senior revolving credit facility and certain of our existing mortgage and term loans payable contain and we expect that our future indebtedness will contain financial and operating covenants such as fixed charge coverage and debt ratios and other limitations that will restrict our ability to make distributions or other payments to our stockholders and may restrict our investment activities These covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our stockholders Failure to meet our financial covenants could result from among other things changes in our results of operations the incurrence of debt or changes in general economic conditions In addition the failure of at least one of our chief executive officer and our president and chief financial officer or any successors approved by the administrative agent to continue to be active in our day-to-day management constitutes an event of default under our senior revolving credit facility We have 120 days under our senior revolving credit facility to hire successor executive reasonably satisfactory to the administrative agent in the event that both our chief executive officer and our president and chief financial officer or any successors cease to be active in our management If we violate covenants or if there is an event of default under our senior revolving credit facility our existing mortgage and term loans payable or in our future agreements we could be required to repay all or portion of our indebtedness before maturity at time when we might be unable to arrange financing for such repayment on attractive terms if at all In addition any unsecured debt agreements we enter into may contain specific cross-default provisions with respect to specified other indebtedness giving the unsecured lenders the right to declare default if we are in default under other loans in some circumstances Defaults under our debt agreements could materially and adversely affect our financial condition and results of operations We may acquire outstanding debt secured by an industrial property which may expose us to risks We may acquire outstanding debt secured by an industrial property from lenders and investors if we believe we can acquire ownership of the underlying property in the near-term through foreclosure deed-in-lieu of foreclosure or other means However if we do acquire such debt borrowers may seek to assert various defenses to our foreclosure or other actions and we may not be successful basis or at all in which event we could incur significant in acquiring the underlying property on timely costs and experience significant delays in acquiring such properties all of which could adversely affect our financial performance and reduce our expected returns from such investments In addition we may not earn current return on such investments particularly if the loan that we acquire is in default 12 Adverse changes in our credit ratings could negatively affect our financing activity The credit ratings of the senior unsecured long-term debt that we may incur in the future and preferred stock we may issue in the future are based position and other factors employed by the credit on our operating performance liquidity and leverage ratios overall financial rating agencies in their rating analyses of us Our credit ratings can affect the amount of capital we can access as well as the terms and pricing of any debt we may incur There can be no assurance that we will be able to obtain or maintain our credit ratings and in the event our credit ratings are downgraded we would likely incur higher borrowing costs and may encounter difficulty in obtaining additional financing Also downgrade in our credit ratings may trigger additional payments or other negative consequences under our future credit facilities and debt instruments For example if our credit ratings of any future senior unsecured long-term debt are downgraded to below investment grade levels we may not be able to obtain or maintain extensions on certain of our then existing debt Adverse changes in our credit ratings could negatively impact our refinancing activities our ability to manage our debt maturities our future growth our financial condition the market price of our stock and our acquisition activities Failure to hedge effectively against interest rate changes may adversely affect results of operations We may seek to manage our exposure such as cap contracts and swap agreements to interest rate volatility by using interest rate hedging arrangements These agreements have costs and involve the risks that these arrangements may not be effective in reducing our exposure to exchange or interest rate changes and that court could rule that such agreements are not legally enforceable Hedging may reduce overall returns on our investments Failure to hedge effectively against interest rate changes may materially adversely affect our results of operations Our property taxes could increase due to property tax rate changes or reassessment which would impact our cash flows Even if we qualify as REIT for federal income tax purposes we will be required to pay some state The real property taxes on our properties may increase as property tax rates and change local taxes on our properties or as our properties are assessed or reassessed by taxing authorities Therefore the amount of property taxes we pay in the future may increase substantially If the property taxes we pay increase our cash flows will be impacted and our ability to pay expected distributions to our stockholders could be adversely affected Actions of our joint venture partn ers could negatively impact our performance We may acquire and/or properties through partnerships with other persons or entities when warranted redevelop joint ventures limited liability companies and by the circumstances Such partners may share certain approval rights over major decisions Such investments may involve risks not otherwise present with other methods of investment in real estate We generally will seek to maintain sufficient control of our partnerships limited liability companies and joint ventures to permit us to achieve our business not be able to do so and the occurrence of one or more of the events described objectives however we may above could adversely affect our financial condition results of operations cash flows and ability to pay distributions on and the market price of our common stock If we invest in limited partnership as general partner we could be responsible for all liabilities of such partnership In some joint ventures or other investments we may make if the entity in which we invest is limited partnership we may acquire all or partner we could be liable for all the liabilities of such partnership Additionally we may be required to take our portion of our interest in such partnership as general general partner As interests in other investments as non-managing general partner Consequently we would be potentially liable for all such liabilities without having the same rights of management or control over the operation of the 13 partnership as of the liabilities of an entity the managing general partner or partners may have Therefore we may be held responsible for all and our liability may far in which we do not have full management rights or control exceed the amount or value of the investment we initially made or then had in the partnership The conflict of interest policies we have adopted may not adequately address all of the conflicts of interest that may arise with respect to our activities In order to avoid any actual or perceived conflicts of interest with our directors officers or employees we have adopted certain policies to specifically address some of the potential conflicts relating to our activities In addition our board of directors is subject to certain provisions of Maryland law which are also designed to eliminate or minimize conflicts Although under these policies the approval of majority of our disinterested directors is required to approve any transaction agreement or relationship in which any of our directors officers or employees has an interest there is no assurance that these policies will be adequate to address all of the conflicts that may arise or will address such conflicts in manner that is favorable to us We may not be able to successfully operate our business We were organized in November 2009 and commenced operations on February 16 2010 We may not be able to successfully operate our business or implement our operating policies and investment strategy Furthermore we may not be able to generate service our debt and maintain and make distributions sufficient operating cash flows to pay our operating expenses to our stockholders We may be unable to attract and retain qualified personnel anticipated growth any of which could create effective operating and financial controls and systems or effectively manage our have material adverse effect on our business and our operating results Our business could be adversely impacted we have deficiencies in our disclosure controls and procedures or internal controls over financial reporting The design and effectiveness of our disclosure controls and procedures and internal controls over financial reporting may not prevent review the effectiveness of our disclosure controls and procedures all errors misstatements or misrepresentations While management will continue to and internal controls over financial reporting there can be no guarantee that our internal controls over financial reporting will be effective in accomplishing all control objectives all of the time Deficiencies reporting which may occur financial including any material weakness in our internal controls over in the future could result in misstatements of our results of operations restatements of our financial statements decline in our stock price or otherwise materially adversely affect our business reputation results of operations financial condition or liquidity Volatility in the capital and credit markets could materially and adversely impact us The capital and credit markets have experienced extreme volatility and disruption in recent years which has made it more difficult to borrow money or raise equity capital Market volatility and disruption could hinder our ability to obtain new debt financing or refinance our maturing debt on favorable terms or at all In addition our future access to the equity markets could be limited Any such financing or refinancing issues could materially and adversely affect us Market turmoil and tightening of credit in recent years have also led to an increased lack of consumer confidence and widespread reduction of business activity generally which also could materially and adversely impact us including our ability to acquire and dispose of assets on favorable terms or at all The volatility in capital and credit markets may also have material adverse effect on the market price of our common stock We may not acquire the industrial properties that we have entered into agreements to acqufre We have entered into agreements with third-party sellers to acquire two industrial buildings containing an aggregate of approximately 135000 Obligations in this Annual Report square feet as more fully described on Form 10-K There is no assurance under the heading Contractual that we will acquire the properties under 14 contract because the proposed acquisitions are subject to the completion of satisfactory due diligence various closing conditions and the consent of the mortgage lender and there is no assurance that such proposed acquisitions the properties under contract we will have incurred expenses without our stockholders if completed will be completed on timeframe we expect If we do not complete the acquisition of realizing any benefit from the acquisition of such properties Risks Related to the Real Estate Industry Our performance estate assets and value are subject to general economic conditions and risks associated with our real The investment returns available from equity investments in real estate depend on the amount of income earned and capital appreciation generated by the properties as well as the expenses incurred in connection with the properties If our properties do not generate income sufficient to meet operating expenses including debt service and capital expenditures then our ability to pay distributions to our stockholders could be adversely affected In addition there are significant expenditures associated with an investment in real estate such as mortgage payments real estate taxes and maintenance costs that generally do not decline when circumstances reduce the income from the property Income from and the value of our properties may be adversely affected by downturns in national regional and local economic conditions particularly increases in unemployment the attractiveness of our properties to potential tenants and competition from other industrial properties changes in supply of or demand for similar or competing properties in an area bankruptcies financial difficulties or lease defaults by the tenants of our properties changes in interest rates availability and terms of debt financing changes in operating costs and expenses and our ability to control rents changes in or increased costs of compliance with governmental rules regulations and fiscal policies changes in tax real estate environmental and zoning laws and our potential liability including thereunder our ability to provide adequate maintenance and insurance changes in the cost or availability of insurance including coverage for mold or asbestos unanticipated changes in costs associated with known adverse environmental conditions or retained liabilities for such conditions periods of high interest rates tenant turnover general overbuilding or excess supply in the market area and disruptions in the global supply chain caused by political regulatory or other factors including terrorism In addition periods of economic slowdown or recession rising interest rates or declining demand for real estate or public perception that any of these events may occur would result in general decrease in rents or an increased occurrence of defaults under existing leases which would adversely affect our financial condition and results of operations Future terrorist attacks may result in declining economic activity which could reduce the demand for and the value of our properties To the extent that future attacks impact the tenants of our properties their businesses similarly could leases For these and other reasons we cannot be adversely affected including their assure our stockholders to continue ability that we will be profitable or that we will their existing to honor realize growth in the value of our real estate properties 15 Actions by our competitors may decrease or prevent increases in the occupancy and rental rates of our properties We compete with other developers similar to our properties in the same markets owners and operators of real estate some of which own properties and submarkets in which the properties we own are located If our competitors offer space at rental rates below current market rates or below the rental rates we will charge the tenants of our properties we may lose potential tenants and we may be pressured to reduce our rental rates in order to retain tenants when such tenants leases expire In addition if our competitors sell assets similar to assets we intend to divest in the same markets and/or at valuations below our valuations for comparable assets we may be unable to divest our assets at all or at favorable pricing or on favorable terms As result of these actions by our competitors our financial condition cash flows cash available for distribution trading price of our common stock and ability to satisfy our debt service obligations could be materially adversely affected Real estate investments are not as liquid as other types of assets which may reduce economic returns to investors Real estate investments are not as liquid as other types of investments and this lack of liquidity may limit our ability to react promptly to changes in economic financial investment or other conditions In addition significant expenditures associated with real estate investments such as mortgage payments real estate taxes and maintenance costs are generally not reduced when circumstances cause reduction in income from the investments In addition we intend to comply with the safe harbor rules relating to the number of properties that can be disposed of in year the tax bases and the costs of improvements made to these properties and meet other tests which enable sell assets or contribute assets REIT to avoid punitive taxation on the sale of assets Thus our ability at any time to in which we have an ownership interest may be to property funds or other entities restricted This lack of liquidity may limit our ability to vary our portfolio promptly in response to changes in economic financial investment or other conditions and as result could adversely affect our financial condition results of operations cash flows and our ability to pay distributions on and the market price of our common stock Uninsured or underinsured losses relating to real property may adversely affect our returns We will attempt However there are certain to ensure that all of our properties are adequately insured to cover casualty losses losses including losses from floods fires earthquakes acts of war acts of terrorism or riots that are not generally insured against or that are not generally fully insured against because it is not deemed economically feasible or prudent to do so In addition changes in the cost or availability of insurance could expose us to uninsured casualty losses In the event that any of our properties incurs casualty loss that is not fully covered by insurance the value of our assets will be reduced by the amount of any such uninsured loss and we could experience significant loss of capital invested and potential revenues in these properties and could potentially remain obligated under any recourse debt associated with the property Inflation changes in building codes and ordinances environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate property after it has been damaged or destroyed Under those circumstances the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property Any such losses could adversely affect our financial condition results of operations cash flows and ability to pay distributions on and the market price of our common stock no source of funding to repair or reconstruct the damaged property and we cannot of funding will be available to us for such purposes in the future In addition we may have sources assure that any such We own properties in Los Angeles the San Francisco Bay Area and Seattle which are located in areas that are known to be subject to earthquake activity Although we carry replacement-cost earthquake insurance on all of our properties located in areas historically subject to seismic activity subject to coverage limitations and deductibles that we believe are commercially reasonable we may not be able to obtain coverage to such properties on economically favorable terms which could expose us to uninsured to cover all losses with respect casualty losses We intend to evaluate our earthquake insurance coverage annually in light of current industry practice 16 We own properties in Seattle which is known to be subject to flood risk and in Miami which is known to be subject to hurricane and/or flood risk Although we carry replacement-cost hurricane and/or flood hazard insurance on all of our properties located in areas historically subject to such activity subject to coverage limitations and deductibles that we believe are commercially reasonable we may not be able to obtain coverage to cover all losses with respect to such properties on economically favorable terms which could expose us to uninsured casualty losses We intend to evaluate our insurance coverage annually in light of current industry practice Contingent or unknown liabilities could adversely affect our financial condition We may own or acquire properties that are subject to unknown liabilities As with respect limited recourse to liabilities and without any recourse or with only result if liability were asserted against us based upon ownership of any of these entities or properties then we might have to pay substantial sums to settle it which could adversely affect our cash flows Unknown liabilities with respect to entities or properties acquired might include liabilities for clean-up or remediation of adverse environmental conditions accrued but unpaid liabilities incurred in the ordinary course of business tax liabilities and claims for indemnification by the general partners officers and directors and others indemnified by the former owners of the properties Environmentally hazardous conditions may adversely affect our operating results Under various federal state and local environmental laws current or previous owner or operator of real property may be liable for the cost of removing or remediating Such laws often impose liability whether or not the owner or operator knew of or was responsible for the or toxic substances on such property hazardous presence of such hazardous or toxic substances Even if more than one person may have been responsible for the contamination each person covered by applicable environmental laws may be held responsible for all of the clean-up costs incurred In addition third parties may sue the owner or operator of site for damages based on personal injury natural resource or property damage or other costs including investigation and clean-up costs resulting from the environmental contamination The presence of hazardous or toxic substances on one of our properties or the failure to properly remediate contaminated property could give rise to lien in favor of the government for costs it may incur to address the contamination or otherwise adversely affect our ability to sell or lease the property or borrow using the property as collateral Environmental the manner in which property may be used or businesses may be operated laws also may impose restrictions property owner who violates on environmental laws may be subject to sanctions which may be enforced by governmental agencies or in certain circumstances private parties In connection with the acquisition and ownership of our properties we may be exposed to such costs The cost of defending against environmental claims of compliance with environmental regulatory requirements or of remediating any contaminated property could materially adversely affect our business assets or results of operations and consequently amounts available for distribution to our stockholders Environmental laws in the U.S also require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos adequately inform or train those who may come into contact with asbestos and undertake special precautions including removal or other abatement in the event that asbestos is disturbed during building renovation or demolition These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos Some of our properties may contain asbestos-containing building materials We invest in properties historically used for industrial manufacturing and commercial purposes Some of these properties contain or may have contained underground storage tanks for the storage of petroleum products 17 and other hazardous or toxic substances All of these operations create potential for the release of petroleum products or other hazardous or toxic substances Some of our properties may be adjacent to or near other properties that have contained or currently contain underground storage tanks used to store petroleum products or other hazardous or toxic substances In addition certain of our properties may be on or are adjacent to or near other properties upon which others including former owners or tenants of such properties have engaged or may in the future engage in activities that may release petroleum products or other hazardous or toxic substances As needed we may obtain environmental insurance policies on commercially reasonable terms that provide coverage for potential environmental liabilities subject to the policys co.verage conditions and limitations From time to time we may acquire properties where we believe that the environmental or interests in properties with known adverse environmental conditions liabilities associated with these conditions are quantifiable and that the acquisition will yield superior risk-adjusted return In such an instance we underwrite the costs of environmental investigation clean-up and monitoring into the cost Further in connection with property dispositions we may agree to remain responsible for and to bear the cost of remediating or monitoring certain environmental conditions on the properties We generally obtain Phase environmental site assessments on each property prior to acquiring it and we generally anticipate that the properties that we may acquire in the future may be subject to Phase or similar environmental assessment by independent environmental consultants at the time of acquisition Phase assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties Phase assessments generally include historical review public records review an investigation of the surveyed site and surrounding properties and preparation and issuance of written report but do not include soil sampling or subsurface investigations and typically do not include an asbestos survey Even if none of our environmental liability that we believe would have material adverse assessments of our properties reveal an environmental effect on our business financial condition or results of operations taken as whole we cannot give any assurance that such conditions do not exist or may not arise in the future Material environmental conditions liabilities or compliance concerns may arise after the environmental assessment has been completed Moreover there can be no assurance that future laws ordinances or regulations will not impose any material environmental liability or ii the environmental condition of our properties will not be affected by tenants by the condition of land or operations in the vicinity of such properties such as releases from underground storage tanks or by third parties unrelated to us Costs of complying with governmental our income and the cash available for any distributions laws and regulations with respect to our properties may adversely affect All real property and the operations conducted on real property are subject to federal state and local laws and regulations relating to environmental protection and human health and safety Tenants ability to operate and to generate income to pay their lease obligations may be affected by permitting and compliance obligations Some of these laws and regulations may impose joint and several arising under such laws and regulations liability on tenants owners or operators for the costs to investigate or remediate contaminated properties regardless of fault or whether the acts causing that engage in industrial manufacturing and commercial activities will cause the presence liabilities under laws and regullations In addition the contamination environmental were legal Leasing our properties to tenants us to be subject to the risk of of hazardous or toxic substances or the failure to properly remediate these substances may adversely affect our ability to sell rent or pledge such property as collateral for future borrowings Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures Future laws ordinances or regulations may impose material environmental liability Additionally the operations of the tenants of our properties the existing condition of the land operations in the vicinity of such properties such as the presence of underground storage tanks or activities of unrelated third are various local state and federal fire health life-safety 18 parties may affect and similar regulations with which we may be required such properties In addition there to comply and which may subject us to liability in the form of fines or damages for noncompliance Any material expenditures fines or damages we must pay will reduce our ability to make distributions and may reduce the value of our common stock In addition changes in these laws and govermnental regulations or their interpretation by agencies or the courts could occur The impacts of climate-related initiatives at the U.S federal and state levels remain uncertain at this time but could result in increased operating costs Government authorities and various interest groups are promoting laws and regulations that could limit greenhouse gas or GHG emissions due to concerns over contributions to climate change The United States Environmental Protection Agency or EPA is moving to regulate UHO emissions from large stationary including electricity producers and mobile sources existing authority under the Clean Air Act Moreover by California and the Regional Greenhouse Gas Initiative to require reductions in GHG emissions Any additional taxation or regulation of energy use including of various northeastern states are being and other requirements and regional programs fuel efficiency certain state through such as those adopted implemented as result sources using its of the regulations that EPA has proposed or may propose in the future ii state programs and regulations or iii renewed GHG legislative not be able to effectively pass on to our tenants In addition by future Congresses efforts could result in increased operating costs that we may any increased regulation of GHG emissions could impose substantial costs on our tenants These costs include for example an increase in the cost of the fuel and other energy purchased by our tenants and capital costs associated with updating or replacing their trucks earlier than planned Any such increased costs could impact the financial condition of our tenants and their ability to meet their lease obligations and to lease or re-lease our properties We are exposed to the potential impacts offuture climate change and climate-change related risks We may be exposed to potential physical be exposed to rare catastrophic weather events such risks from possible future changes in climate Our properties may as severe storms or floods If the frequency of extreme weather events increases due to climate change our exposure to these events could increase Compliance or failure to comply with the Americans with Disabilities Act and other similar regulations result in substantial costs could Under the Americans with Disabilities Act places of public accommodation must meet certain federal requirements fines by the federal government or the award of damages to private litigants If we are required to make related to access and use by disabled persons Noncompliance could result in the imposition of unanticipated expenditures to comply with the Americans with Disabilities Act including removing access barriers then our cash affected If we are required to make substantial modifications flows and the amounts available for distributions to our stockholders may be adversely to our properties whether to comply with the Americans with Disabilities cash flows results of operations Act or other changes in governmental rules and regulations the market price of our shares of common stock and our ability to make our financial condition distributions to our stockholders could be adversely affected We may be unable to sell property if or when we decide to do so including as result of uncertain market conditions which could adversely affect the return on an investment in our common stock We expect other disposition to hold the various real properties in which we invest until objectives Our ability is appropriate given our investment such time as we decide that sale or to dispose of properties on advantageous terms depends on factors beyond our control including competition from other sellers and the availability of attractive financing for potential buyers of our properties We cannot predict the various market conditions affecting real estate investments which will exist at any particular time in the future Due to the uncertainty of market conditions which may affect the future disposition of our properties we cannot assure our 19 stockholders that we will be able to sell such properties at profit in the future Accordingly the extent to which our stockholders will receive cash distributions and realize potential appreciation on our real estate investments will be dependent upon fluctuating market conditions Furthermore we may be required to expend funds to correct defects or to make improvements before property can be sold We cannot or to make such improvements assure our stockholders that we will have funds available to correct such defects In acquiring property we may agree to restrictions that prohibit the sale of that property for period of time or impose other restrictions such as limitation on the amount of debt that can be placed or repaid on that property These provisions would restrict our ability to sell property If we sell properties and provide financing to purchasers defaults by the purchasers would adversely affect our cash flows If we decide to sell any of our properties we presently intend to sell them for cash However if we provide financing to purchasers we will bear the risk that the purchaser may default which could negatively impact our cash distributions to stockholders and result in litigation and related expenses Even in the absence of purchaser default the distribution of the proceeds of sales to our stockholders or their reinvestment in other assets will be delayed until the promissory notes or other property we may accept upon sale are actually paid sold refinanced or otherwise disposed of Risks Related to Our Organizational Structure Our board of directors may change significant corporate policies without stockholder approval Our investment financing borrowing and distribution policies and our policies with respect to all other activities including growth debt capitalization and operations will be determined by our board of directors These policies may be amended or revised at any time and from time to time at the discretion of the board of directors without vote of our stockholders respect to conflicts of interest provided that requirements including the listing standards In addition the board of directors may change our policies with such changes are consistent with applicable legal and regulatory of the NYSE have an adverse in these policies could change effect on our financial condition results of operations and ability to satisfy our debt service obligations cash flows per and to pay distributions share trading price of our common stock to you We could increase the number of authorized shares of stock and issue stock without stockholder approval Subject to applicable legal and regulatory requirements our charter authorizes our board of directors without stockholder approval to increase the aggregate number of authorized shares of stock or the number of authorized shares of stock of any class or series to issue authorized but unissued shares of our common stock or preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock and to set the preferences rights and other terms of such classified or unclassified shares Although our board of directors has no such intention at the present time it could establish series of preferred stock that could depending on the terms of such series delay defer or prevent transaction or change of control that might involve premium price for our common stock or otherwise be in the best interest of our stockholders Certain provisions of Maryland law could inhibit changes in control Certain provisions of the Maryland General Corporation Law or MGCL may have the effect of inhibiting or deterring third party from making proposal to acquire us or of impeding change of control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize premium over the then-prevailing market price of such shares including Business Combination provisions that subject to limitations prohibit certain business combinations between us and an interested stockholder defined generally as any person who beneficially owns 20 10% or more of the voting power of our shares or an affiliate or associate of ours who at any time within the two-year period prior to the date in question was the beneficial owner of 10% or more of our then outstanding voting shares or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder becomes an interested stockholder and thereafter may impose special appraisal rights and special stockholder voting requirements on these combinations and Control Share provisions which when aggregated that provide that control shares of our company defined as shares with other shares controlled by the stockholder entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors acquired in control share acquisition defined as the direct or indirect acquisition of ownership or control of control shares have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter excluding all interested shares We have opted out of these provisions of the MGCL in the case of the business combination the MGCL by resolution of our board of directors and in the case of the control share provisions provisions of the MGCL of pursuant to provision in our bylaws However in the future only upon the approval board of directors may by resolution elect to opt in to the business combination of our stockholders provisions of the MGCL and we our may only upon the approval provisions of the MGCL of our stockholders by amendment to our bylaws opt in to the control share In addition the provisions of our charter on removal of directors and the advance notice provisions of our bylaws could delay defer or prevent transaction or change of control of our company that might involve premium price for holders of our common stock or otherwise be in their best interest Likewise if our companys board of directors were to opt in to the business combination provisions of the MGCL or the provisions of Title Subtitle of the MGCL or if the provision in our bylaws opting out of the control share acquisition provisions of the MGCL were rescinded MGCL could have similar anti-takeover by our board of directors and our stockholders these provisions of the effects Our rights and the rights of our stockholders to take action against our directors and officers are limited Maryland law provides that director or officer has no liability in that capacity if he or she satisfies his or her duties to us and our stockholders Our charter limits the liability of our directors and officers to us and our stockholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money property or services or final judgment based upon finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated In addition indemnify our directors permitted by Maryland law As our charter will authorize us to obligate our company and our bylaws will require us to for actions taken by them in those capacities to the maximum extent result we and our stockholders may have more limited rights against our and officers directors and officers than might otherwise exist Accordingly in the event that actions taken in good faith by any of our directors or officers such director or officer will be limited In addition we may be obligated to advance impede the performance of our company your ability to recover damages from the defense costs incurred by our directors and executive officers and may in the discretion of our board of directors advance the defense costs incurred by our employees and other agents in connection with legal proceedings 21 Risks Related to Our Status as REIT Failure to qualify as REIT would cause us to be taxed reduce funds available for distributions to stockholders as regular corporation which would substantkdly We believe that our organization and method of operation has enabled and will continue to enable us to meet the requirements for qualification and taxation as REIT However we cannot assure you that we will qualify as such This is because qualification as REIT involves the application of highly technical and complex provisions of the Code as to which there are only limited judicial and administrative interpretations and involves the determination of facts and circumstances not entirely within our control Future legislation new regulations administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as REIT for federal income tax purposes or the federal income tax consequences of such qualification If we fall to qualify as REIT in any taxable year we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because we would not be allowed deduction for distributions paid to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates we could be subject to the federal alternative minimum tax and possibly increased state and local taxes and unless we are entitled to relief under statutory provisions we could not elect to be taxed as REIT for four taxable years following the year during which we were disqualified In addition if we fail to qualify as REIT we will no longer be required to pay distributions As result of all these factors our failure to qualify as REIT could impair our ability to expand our business and raise capital and it could adversely affect the value of our common stock Even if we qualfy as REIT we may face other tax liabilities that reduce our cash flows Even if we qualify for taxation as REIT we may be subject to certain federal state and local taxes on our income and assets including taxes on any undistributed income tax on income from some activities conducted as result of foreclosure and state or local income property and transfer taxes Any of these taxes would decrease cash available for distributions to stockholders REIT distribution requirements could adversely affect our liquidity and may force us to borrow funds or sell assets during unfavorable market conditions In order to maintain our REIT status and to meet the REIT distribution requirements we may need to borrow funds on short-term basis or sell assets even if the then-prevailing market conditions are not favorable for these borrowings of our net taxable income each year excluding capital gains In addition we will be subject tax to the extent we distribute less than 100% of our net taxable income including or sales To qualify as REIT we generally must distribute to corporate income any net capital gain We intend to our stockholders at least 90% to make distributions to our stockholders to comply with the requirements of the Code for REITs and to minimize or eliminate our corporate income tax obligation to the extent consistent with our business objectives Our cash flows from operations may be insufficient to fund required distributions as result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes or the effect of non-deductible capital expenditures the creation of reserves or required debt service or amortization payments The insufficiency of our cash flows to cover our distribution requirements could have an adverse and long-term debt or sell equity securities in order to fund distributions on our ability to raise short- impact required to maintain our REIT status In addition we will be subject amount if any by which distributions income 95% of our capital paid by us in any calendar ordinary to 4% nondeductible excise tax on the year are less than the sum of 85% of our gain net income and 100% of our undistributed income from prior years 22 Dividends payable by REITs generally do not qualify for reduced tax rates The maximum tax rate for qualified dividends payable to individual U.S stockholders is currently 15% through December 31 2012 Dividends payable by REITs however are generally not eligible for the reduced rates However to the extent such dividends are attributable to certain dividends that we receive from taxable REIT subsidiary such dividends generally will be eligible for the reduced rates that apply to qualified dividend income The more favorable rates applicable to regular corporate dividends could cause investors who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends which could adversely affect including our common stock the value of the stock of REITs We may in the future required to pay income taxes in excess of the cash dividends choose to pay dividends in our stock they receive instead of cash in which case stockholders may be Although we have no current intention to do so we may in the future distribute taxable dividends that are payable in cash and common stock at the election of each stockholder or distribute other forms of taxable stock dividends Taxable stockholders receiving such dividends or other forms of taxable stock dividends will be required to include the full amount of the dividend as ordinary accumulated earnings and profits for U.S federal income tax purposes As income to the extent of our current and result stockholders may be required If U.S stockholder to pay income taxes with respect it receives as sells the stock that to such dividends dividend in order in excess of the cash dividends to pay this tax the sales proceeds may be less than the received amount included in income with respect to the dividend depending on the market price of our stock at the time of the sale Furthermore with respect to certain non-U.S stockholders we may be required to withhold U.S federal income tax with respect to such dividends including in respect of all or portion of such dividend that is payable in stock in order to pay taxes owed on dividends stock In addition if significant number of our stockholders determine to sell common stock it may put downward pressure on the trading price of our common Complying with REIT requirements may cause us to forego otherwise attractive opportunities or to liquidate otherwise attractive investments To qualify as REIT for federal income tax purposes we must continually satisfy tests concerning among other things the sources of our income the nature and diversification of our assets the amounts we distribute to our stockholders and the ownership of our capital stock In order to meet these tests we may be required to forego investments we might otherwise make Thus compliance with the REIT requirements may hinder our performance In particular we must ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash cash items government securities and qualified real estate assets The remainder of our investments in securities other than government securities and qualified real estate include more than 10% of the total voting power of the outstanding securities assets generally cannot of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer In addition in general no more than 5% of the value of our assets other than government of any one issuer and no more than 25% of the value of our total assets one or more taxable REIT subsidiaries or TRSs If we fail securities and qualified real estate assets can consist of the securities can be represented by the securities of to comply with these requirements at the end of any quarter or qualify for calendar quarter we must correct the failure within 30 days after the end of the calendar certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences As result we may be required to liquidate otherwise attractive investments These actions could have the effect of reducing our income and amounts available for disthbution to our stockholders 23 Our relationship with any TRS will be limited and failure to comply with the limits would jeopardize REIT qualification and may result in the application of 100% excise tax our REIT may own up to 100% of the stock of one or more TRSs While we have no current intention to own any interest in TRS we may own any such qualifying income if earned directly interest TRS may earn income that would not be by the parent REIT Overall no more than 25% of the value of REITs in the future assets may consist of stock or securities income tax at regular corporate rates on any income that of one or more TRSs domestic TRS will pay federal state and local it earns In addition the TRS rules limit the deductibility of interest paid or accrued by TRS to its parent REIT to assure that the TRS is subject corporate taxation REIT that are not conducted on an arms-length basis The rules also impose 100% excise tax on certain transactions between to an appropriate level of TRS and its parent Any TRS of ours will pay federal income will be available but not required state and local income tax on its taxable income and its after-tax net to be distributed to us We anticipate that the aggregate value of any TRS stock and securities owned by us will be significantly the TRS stock and securities Furthermore we will monitor including the purpose of ensuring compliance with the rule that no more than 25% of the value of our assets may consist of TRS stock and securities which is applied at the end of each calendar quarter In addition we will scrutinize all of our transactions with TRSs for the into on arms-length terms in of ensuring that they are entered purpose the value of our investments in TRSs for less than 25% of the value of our total assets order to avoid incurring the 100% excise tax described above No assurance however can be given that we will be able to comply with the 25% limitation on ownership of TRS stock and securities maintain our REIT qualification or avoid application of the 100% excise tax imposed on certain non-anns- on an ongoing basis so as to length transactions The ability of our board of directors to revoke our REIT qualification without stockholder approval may subject us to federal income tax and reduce distributions to our stockholders Our charter provides that our board of directors may revoke or otherwise terminate our REIT election without the approval of our stockholders if it determines that it is no longer in our best interest to continue to be qualified as REIT If we cease income and would no longer be required to distribute most of our taxable income to our stockholders which may have adverse and on the market price of our common stock consequences on our total return to our stockholders to be REIT we would become income tax on our taxable to federal subject We may be subject common stock to adverse legislative or regulatory tax changes that could reduce the market price of our At any time the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended We cannot predict when or if any new federal interpretation or any amendment interpretation will be adopted promulgated or become retroactively We and our stockholders to any existing federal could income tax law regulation or administrative income tax law regulation or administrative effective and any such law regulation or interpretation be adversely affected by any such change in or any may take effect new federal income tax law regulation or administrative interpretation Risks Related to Our Common Stock Level of cash distributions market interest rates and other factors may affect the value of our common stock The market value of the equity securities of REIT is based growth potential and its current and potential future cash distributions whether upon the markets perception of the REITs from operations sales or refinancings common stock may trade at prices that are higher or lower and is based upon the real estate market value of the underlying than our net asset value per share To the extent we assets For that reason our retain operating cash flows for investment purposes working capital reserves or other purposes these retained funds while increasing the value of our underlying assets may not correspondingly increase the market price of 24 our common stock Our failure to meet the markets expectations with regard to future earnings and cash distributions likely would adversely affect the market price of our common stock In addition the price of our common stock will be influenced by the dividend yield on the common stock the dividend yields of other REITs An increase in market interest relative to market interest rates and rates which are currently at low levels relative to historical rates could cause the market price of our common stock to go down The trading price of the shares of common stock will also depend on many other factors which may change from time to time including the market for similar securities the attractiveness of REIT securities in comparison to the securities of other companies taking into account among other things the higher tax rates imposed on dividends paid by REITs government action or regulation general economic conditions and our financial condition performance and prospects The number of shares of our common stock available for future our common stock and have dilutive effect to our existing stockholders sale could adversely affect the market price of Sales of substantial amounts of shares of our common stock in the public market or the perception that such sales might occur could adversely affect the market price of the shares of our common stock The vesting of any restricted stock granted to certain directors executive officers and other employees under our 2010 Equity Incentive Plan the issuance of our common stock in connection with property portfolio or business acquisitions and other issuances of our common stock could have an adverse effect on the market price of our common stock Future sales of shares of our common stock may be dilutive to existing stockholders The market price and trading volume of our common stock may be volatile The market price of our common stock may be volatile In addition the trading volume in our common stock may fluctuate and cause declines significantly you may be unable significant price variations to occur If the market price of our common stock to resell your shares at or above the price you paid for such shares We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include our financial condition performance liquidity and prospects actual or anticipated variations in our quarterly operating results or distributions changes in our funds from operations as defined by NAREIT and discussed in Managements Discussion and Analysis of Financial Condition and Results of Operations elsewhere in this Annual Report on Form 10-K or earnings publication of research reports about us or the real estate industry changes in earnings estimates by analysts our ability to meet analysts earnings estimates increases in market interest rates that lead purchasers of our shares to demand higher yield changes in market valuations of similar companies adverse market reaction to any additional debt we incur in the future additions or departures of key management personnel 25 the market for similar securities issued by REITs actions by institutional stockholders speculation in the press or investment community our compliance with generally accepted accounting principles our compliance with applicable laws and regulations and the listing requirements of the New York Stock Exchange the realization of any of the other risk factors presented in this Annual Report on Form 10-K and general market including capital market and real estate market and economic conditions Future offerings of debt which would be senior which may be senior to our common stock for purposes of dividend distributions or upon liquidation may to our common stock upon liquidation and/or preferred stock adversely affect the market price of our common stock As of December 31 2011 we had an $80.0 million senior revolving credit facility to finance acquisitions and for working capital requirements with outstanding borrowings of $41.0 million and had total mortgage and term loans payable of approximately $58.3 million We have agreed to guarantee the obligations of the borrower wholly-owned subsidiary under our senior revolving credit facility and our term loan Upon liquidation holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings including our existing mortgage and term loans payable will receive distributions of our available assets prior to the holders of our common stock Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock or both Holders of our common stock are not entitled to preemptive rights or other protections against dilution Our preferred stock if issued could have preference on liquidating distributions and preference on dividend payments that could limit our ability to pay dividend or make another distribution to the holders of our common stock Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control we cannot predict or estimate the amount timing or nature of our future offerings Thus our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting their stock holdings in us We may be unable to generate stockholders at any time in the future sufficient cash flows from our operations to make distributions to our Our ability to make disthbutions in this Form 10-K We may not generate to our stockholders may be adversely affected by the risk factors described sufficient income to make distributions to our stockholders Our board of directors has the sole discretion to determine the timing form and amount of any distributions to our stockholders Our board of directors will make determinations regarding distributions based upon among other factors our financial performance any debt service obligations any debt covenants and capital expenditure requirements Among the factors that could impair our ability to make distributions to our stockholders are our inability to realize attractive risk-adjusted returns on our investments unanticipated expenses or reduced revenues that reduce our cash flow or non-cash earnings and decreases in the value of our industrial properties that we own As result no assurance can be given that we will be able to make distributions to our stockholders at any time in the future or that the level of any distributions we do make to our stockholders will increase or even be maintained over time any of which could materially and adversely affect the market price of our shares of common stock 26 Item lB Unresolved Staff Comments None Item Properties As of December 31 2011 we owned 47 buildings aggregating approximately 3.4 million square feet The properties are located in Los Angeles Northern New Jersey/New York City San Francisco Miami and Washington D.C./Baltimore As of December 31 2011 the properties were 92.5% leased to 72 Bay Area Seattle tenants the largest of which accounted for 11.8% of our total annualized base rent Our focus is on the ownership of several types of industrial real estate including warehouse/distribution 84.2% of our total portfolio square footage flex including light industrial Strategy Industrial Facility General Characteristics and RD 8.7% and trans-shipment 7.1% See Our Investment in this Annual Report on Form 10-K for general description of these types of industrial shared by multiple tenants and that cater to customer demand within the various submarkets See our Consolidated Financial Statements Schedule 111-Real Estate Investments functional buildings real estate We target in infill locations that may be in which we operate and Accumulated Depreciation in this Annual Report on Form 10-K for detailed listing of our properties The following table summarizes our investments in real estate as of December 31 2011 Market Los Angeles Northern New Jersey/New York San Francisco Bay Area Seattle Miami Washington D.C./Baltimore Number of Buildings Rentable Rentable Percentage Square Feet Square Feet December as of 312011 Base Rent Annualized Base Rent 000s of Total Occupancy Annualized of Total Weighted Average Remaining Lease Term Years 221864 6.5% 100.0% 2337 11.1% 6.2 23 1591250 46.6% 431866 306662 630212 233745 12.6% 9.0% 18.5% 6.8% 91.7% 80.5% 91.6% 98.0% 100.0% 9537 3148 1457 3275 1206 45.5% 15.0% 7.0% 15.6% 5.8% 4.4 4.2 7.5 8.9 4.8 Total/Weighted Average 47 3415599 100.0% 92.5% $20960 100.0% 5.7 Annualized base rent is calculated as monthly base rent per the leases excluding any partial or full rent abatements Weighted average remaining lease term is calculated by summing the remaining lease term by lease as of as of December 31 2011 multiplied by 12 December 31 2011 weighted by the respective square footage The following table summarizes the anticipated lease expirations for leases in place at December 31 2011 without giving effect to the exercise of renewal options or termination rights if any at or prior to the scheduled expirations Year 2012 2013 2014 2015 2016 2017 of Total Annualized Rentable Rentable Square Feet Square Feet Base Rent 000s2 of Total Annualized Base Rent 72491 786976 357000 196319 128423 1619753 2.1% 23.0% 10.5% 5.7% 3.8% 47.4% 908 4384 2683 1759 986 12017 4.0% 19.3% 11.8% 7.7% 4.3% 52.9% Total 3160962 92.5% $22737 100.0% 27 Includes leases that expire on or after December 31 2011 Annualized base rent is calculated as monthly base rent per the leases at expiration excluding any partial or full rent abatements as of December 31 2011 multiplied by 12 Our industrial properties are typically subject to leases on triple net basis in which tenants pay their proportionate share of real estate taxes insurance and operating costs or are subject to leases on modified gross basis in which tenants pay expenses fixed rental increases or Consumer Price Index-based over certain threshold levels In addition most of our leases include rental increases Lease terms typically range from three to ten years As of December 31 2011 our ten largest tenants by annualized base rent are set forth in the table below Tenant YRC Worldwide H.D Smith Wholesale Drug Company Home Depot Precision Custom Coatings Miami International Freight Solutions Banah International Group FedEx Corporation International Paper Company Maines Paper Food Service 10 Duro Bag Manufacturing Company Rentable Rentable Leases Square Feet Square Feet Base Rent 000s Annualized Base Rent of Total Annualized of Total 182803 211418 413092 208000 166220 301983 72808 137872 98745 120948 5.4% 6.2% 12.1% 6.1% 4.9% 8.8% 2.1% 4.0% 2.9% 3.5% 2463 1949 1889 1637 956 906 852 680 636 615 11.8% 9.3% 9.0% 7.8% 4.6% 4.3% 4.1% 3.2% 3.0% 2.9% Total 12 1913889 56.0% $12583 60.0% Annualized base rent is calculated as monthly base rent per the leases excluding any partial or full rent abatements as of December 31 2011 multiplied by 12 As of December 31 2011 four of our 24 properties were encumbered by mortgage loans payable totaling approximately $38.3 million which bear interest at weighted average fixed annual rate of 5.36% Item Legal Proceedings We are not against us involved in any material litigation nor to our knowledge is any material litigation threatened Item Mine Safety Disclosures Not Applicable 28 PART II Item Market for Our Common Stock and Related Stockholder Matters Market Information Our shares of common stock commenced trading on the New York Stock Exchange the NYSE under the symbol TRNO on February closing prices for our common stock reported on the NYSE as 10 2010 The following table sets forth for the indicated periods the high and low FirstQuarter20ll Second Quarter 2011 Third Quarter 2011 FourthQuarter20ll First Quarter 2010 February 10 2010 through March 31 2010 Second Quarter 2010 Third Quarter 2010 Fourth Quarter 2010 High Low Dividend $18.60 $16.55 $0.10 17.05 16.22 17.04 12.83 0.10 0.10 15.74 11.42 0.10 High Low Dividend $19.73 $18.52 19.90 17.34 18.24 17.33 18.50 17.75 As of February 17 2012 there were approximately 3300 holders of record of shares of our common stock This number does not include stockholders for which shares are held in nominee or street name Distribution Policy In 2011 we made quarterly distributions to holders of shares of our common stock and we intend to continue to pay regular quarterly distributions when as and if authorized by our board of directors and declared by us Our ability to make distributions which we intend to use as to our stockholders also will depend on our levels of retained cash flows source of investment capital In order to qualify for taxation as REIT we must distribute to our stockholders an amount at least equal to 90% of our REIT taxable income determined before the deduction for dividends paid and excluding any net capital gain plus ii 90% of the excess of our after-tax net income if any from foreclosure property over the tax imposed on such income by the Code less iii the sum of certain items of non-cash income Generally we expect to distribute 100% of our REIT taxable income so as to avoid the income and excise tax on undistributed REIT taxable income However we cannot assure you as to our ability to sustain those distributions The timing and frequency of distributions will be authorized by our board of directors and declared by us based upon variety of factors including actual results of operations our level of retained cash flows any debt service requirements capital expenditure requirements for our properties 29 our taxable income the annual distribution requirement under the REIT provisions of the Code our operating expenses restrictions on the availability of funds under Maryland law and other factors that our board of directors may deem relevant In addition our senior revolving credit facility and our term loan have covenant limiting our maximum REIT distribution paid to percentage of our funds from operations before acquisition costs of 110% in fiscal 2010 100% in fiscal 2011 and 95% in fiscal years thereafter subject to distribution payments necessary to our REIT status To the extent preserve less than our REIT taxable income we could that in respect of any calendar year cash available for distribution is be required to sell assets or borrow funds to make cash distributions or make portion of the required distribution in the form of taxable share distribution or distribution of debt securities Income as computed for purposes of the tax rules described above will not necessarily correspond to our income as determined for financial reporting purposes Distributions to our stockholders generally are taxable to our stockholders as ordinary income however because significant portion of our investments are equity ownership interests in industrial properties which generate depreciation and other non-cash charges against our income portion of our distributions may constitute tax-free return of capital although our current intention is to limit the level of such return of capital The following table sets forth the cash dividends paid or payable during the year ended December 31 2011 For the Three Months Ended March31 2011 June 30 2011 September 30 2011 December 31 2011 Dividend per Share $0.10 $0.10 $0.10 $0.10 Declaration Date Record Date Date Paid February 17 2011 April 52011 April 19 2011 May 18 2011 July 2011 July 20 2011 August 11 2011 November 2011 October 2011 October 20 2011 January 62012 January 20 2012 30 Performance Graph The following graph compares the change in the cumulative total stockholder return on our common stock during the period from February 2011 with the cumulative 10 2010 the first day our stock began trading on the NYSE to December 500 Stock Index the MSCI U.S REIT Index and Poors total return of the Standard 31 and the FTSE NAREIT Equity Industhal Index The return shown on the graph is not necessarily indicative of future performance The comparison assumes that $100 was invested on February 10 2010 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends if any 4Terrenx Realty Corporatixn SP 500 Index Total Returns 5FTSE NAREIT Equity Industrial Index MSCI US REIT Index $4 The performance graph and related information shall not be deemed soliciting material or be deemed to be filed with the SEC nor shall such information be incorporated by reference into any future filing except to the extent that the Company specifically incorporates it by reference into such filing 31 Item Selected Financial Data The following table sets forth selected financial data derived from our audited consolidated financial statements as of December 31 2011 and 2010 and for the year ended December 31 2011 and for the period from February 16 2010 commencement of operations to December 31 2010 and should be read in conjunction with the consolidated financial statements and notes thereto included in this Annual Report on Form 10-K beginning on page F-i dollars in thousands except share and per share amounts Operating Data Total revenues Net loss available to common stockholders Basic and Diluted net loss available to common stockholders share per Dividends declared per common share For the Year Ended 31 2011 December Period from February 16 2010 Commencement of Operations to December 31 2010 17502 3729 0.41 0.40 4031 5390 0.59 Basic and Diluted Weighted Average Common Shares Outstanding 9161805 9112000 Other Data Funds from operations Basic and diluted FF0 per common share1 Cash flows provided by used in Operating activities Investing activities Financing activities Balance Sheet Data Investments in real estate at cost Total assets Total debt Total stockholders equity 1056 0.12 2149 105884 49731 264584 267049 99315 159011 4209 0.46 2019 116581 175852 136363 194382 17676 165499 See Part II Item Managements Discussion and Analysis of Financial Condition and Results of Operations net loss and performance ways Non-GAAP Financial Measures in this Annual Report discussion of why we believe FF0 is measure of operating in which investors might use FF0 when assessing our financial performance useful supplemental on Form 10-K for reconciliation to and FF0 limitations as measurement tool Item Managements Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion in conjunction with the sections of this Annual Report on Form 10-K entitled Risk Factors Forward-Looking Statements Business and our audited consolidated financial on Form 10-K This discussion and the related notes thereto included elsewhere in this Annual Report statements contains forward-looking statements reflecting current expectations that involve risks and uncertainties Actual results due to and the timing of events may differ materially from those contained including those discussed number of factors in the section entitled Risk Factors and elsewhere in this in these forward-looking statements Annual Report on Form 10-K Overview We acquire own and operate industrial real estate located in six major coastal U.S markets Los Angeles New Jersey/New York City San Francisco Bay Area Seattle Miami and Washington D.C Northern Baltimore We invest light industrial in several types of industrial and RD and trans-shipment We target real estate including warehouse/distribution flex including functional buildings in infill locations that may be 32 shared by multiple tenants and that cater to customer demand within the various submarkets As of December total of 47 buildings approximately aggregating 31 2011 we owned in which we operate 3.4 million square feet which we purchased for an aggregate purchase price of approximately $253.0 million including the assumption of mortgage loans payable $0.8 million We are an internally of approximately $39.5 million which includes mortgage premiums of approximately and elected to be taxed as REIT under managed Maryland corporation Sections 856 through 860 of the Code commencing with our taxable year ending December 31 2010 Our Investment Strategy We invest in industrial properties located in six major coastal U.S markets Los Angeles Northern Jersey/New York City San Francisco Bay Area Seattle Miami and Washington several types of industrial and trans-shipment We target that cater to customer demand within the various submarkets functional buildings real estate including warehouse/distribution in which we operate in infill locations that may be shared by multiple tenants and New D.C./Baltimore We invest in and RD flex including light industrial We selected our target markets by drawing upon the experiences of our management team investing and operating in over 50 global industrial markets located in North America Europe and Asia and in anticipation of trends in logistics term increases in carbon prices and other factors We believe that our target markets patterns resulting from population changes regulatory and physical constraints potential long have attractive long term investment attributes We target assets with characteristics that include but are not limited to the following Located in high population coastal markets Close proximity to transportation infrastructure such as sea ports airports highways and railways Situated in supply-constrained submarkets with barriers to new industrial development as result of physical and/or regulatory constraints Functional and flexible layout that can be modified to accommodate single and multiple tenants Acquisition price at discount to the replacement cost of the property Potential for enhanced return through re-tenanting or operational and physical improvements and Opportunity for higher and better use of the property over time In general we prefer to utilize local believe outsourcing property management currently manage four of our properties directly third party property managers for day-to-day property management We is cost effective and provides us with operational flexibility We and may directly manage other properties in the future if we determine such direct property management is in our best interest We have no current intention to acquire undeveloped industrial land or to pursue ground up development However we may pursue redevelopment opportunities of properties that we own We expect that we will continue to acquire the significant majority of our investments as equity interests in individual properties or portfolios of properties We may also acquire industrial acquisition of other corporations that own industrial or entities real estate We will opportunistically target properties through the investments in debt secured by industrial real estate that would otherwise meet our investment criteria with the intention of ultimately acquiring the underlying real estate We currently do not intend to target specific percentages of holdings of particular types of industrial properties This expectation is based upon prevailing market conditions and may change over time in response to different prevailing market conditions The properties we acquire may be stabilized fully leased or unstabilized have near term lease expirations or be partially or fully vacant 33 2011 Developments Acquisition Activity During the year ended December 31 2011 we acquired 14 industrial buildings containing approximately 1.1 million square feet for total purchase price of approximately $118.7 million The properties were acquired from unrelated third parties using existing cash on hand net of assumed mortgage loans payable of approximately $21.6 million which includes mortgage premiums of approximately $0.1 million and borrowings on our term loan and credit facility The following table sets forth the wholly-owned industrial properties we acquired during the year ended December 31 2011 Property Name Dorsey Belleville 630 Glasgow 8730 Bollman Dell 70th Avenue 19601 Hamilton 39th Street 620 Division 48th Avenue Clawiter Valley Corporate Total Location Acquisition Date Buildings Square Feet in thousands Number of Purchase Price Jessup MD KearnyNJ Inglewood CA Savage MD Carlstadt NJ Miami FL Torrance CA Doral FL Elizabeth NJ March 25 2011 May 20 2011 June 2011 June 24 2011 June 28 2011 June 28 2011 July 20 2011 August 19 2011 October 2011 Miami Gardens FL Hayward CA Kent WA December 15 2011 December 15 2011 December 30 2011 135000 211418 27505 98745 27410 35000 72808 40000 150348 57682 33842 168790 5800 32600 4100 7500 7725 4000 12350 4400 10350 7200 7625 15025 14 1058548 $118675 Excludes intangible liabilities and assumed mortgage premiums totaling approximately $0.5 million The total aggregate investment was approximately $119.2 million Term Loan On August 23 2011 we entered into $10.1 million senior secured term loan agreement that matures on February 22 2013 the Term Loan On December 29 2011 we entered into an amendment to the Term Loan to increase the borrowings on the Term Loan to $20.1 million as described under the heading Liquidity and Capital Resources in this Annual Report on Form 10-K Mortgage Loans During the year ended December 31 2011 we assumed two mortgage loans payable totaling approximately $21.6 million including mortgage premiums of approximately $0.1 million These mortgage loans bear interest at weighted average fixed annual interest rate of approximately 5.51% and mature in 2015 and 2021 respectively Distribution Activity The following table sets forth the cash dividends paid or payable per share during the year ended December 31 2011 For the Three Months Ended March31 2011 June 30 2011 September 30 2011 December 31 2011 Dividend per Share $0.10 $0.10 $0.10 $0.10 Declaration Date Record Date Date Paid February 17 2011 April 2011 April 19 2011 May 18 2011 July 2011 July 20 2011 August 11 2011 October 2011 October 20 2011 November 2011 January 2012 January 20 2012 34 Leasing Activity On December 2011 we entered into lease renewal of approximately 138000 square feet at one of our industrial buildings located in Kent Washington which was 100% leased as of December 31 2011 On December 20 2011 we entered into lease of approximately 166000 square feet at our industrial building located in Miami Lakes Florida which was approximately 94% leased as of December 31 2011 The lease includes an expansion On December 30 2011 we entered located in Hialeah Florida which was 100% leased into lease of approximately 302000 square feet at our industhal building as of December 31 2011 On December 30 2011 we entered option exercisable within 13 months for an additional approximately 24000 square feet into lease of approximately was 100% leased as of December 75000 square 31 2011 feet at our industrial building located in Jessup Maryland which We executed new or renewal leases for total of approximately 761000 square feet during the fourth quarter of 2011 which represented Collectively our properties were approximately approximately 22% of our total rentable square feet as of December 31 2011 92.5% leased to 72 tenants as of December 31 2011 which is an 31 2010 The number of square feet under increase from our occupancy of approximately 70.6% as of December leases that we anticipate will expire in 2012 was reduced to total representing approximately 2% of our total rentable square feet as of December 31 2011 Recent Developments Public Follow-on Offering On January 13 2012 we completed public follow-on offering of 4000000 shares of our common stock at price per share of $14.25 93000 shares were sold in the offering to our executive and senior officers and our board of directors No underwriting discount or commission was paid on such shares On February 13 2012 we sold an additional 61853 shares of our common stock at price per share of $14.25 upon the exercise by the underwriters of their option to purchase additional shares We estimate that the net proceeds of the offering were approximately $54.7 million after deducting the underwriting discount of approximately $2.8 million and other estimated offering expenses of approximately $0.4 million We used approximately $41.0 million of the net proceeds to repay outstanding borrowings under our senior revolving credit facility on January 13 2012 and intend to use the remainder of the net proceeds to invest in industrial properties and for general business purposes Amendments to Our Senior Revolving Credit Facility On January 19 2012 we entered into Second Amendment to Amended and Restated Senior Revolving Credit Agreement the Amended Facility with KeyBank National Association as administrative agent and as lender and the other lenders thereunder which provides for certain modifications to our $80.0 million revolving credit facility The Amended Facility extends the maturity date to January 19 2015 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 Amended Facility outstanding borrowings properties 50% prior to the amendment and to our payment of an extension fee The amendment are limited to the lesser of $80.0 million and 60% of the value of the borrowing base to generally be paid on the Amended Facility provides that will continue Interest LIBOR plus the applicable LIBOR margin or ii the applicable base agents prime rate plus 1.00% 0.50% above the federal based upon at our option either which is the greater of the administrative rate or thirty-day LIBOR plus the applicable LIBOR margin for LIBOR rate loans under The applicable LIBOR margin will depending on the ratio of our outstanding consolidated value The Amended Facility requires payment of an annual unused facility from 2.50% to 3.50% 3.00% to 4.25% prior to the amendment fee in an amount equal indebtedness range to the value of our consolidated gross asset the Amended Facility to 0.25% or funds effective rate 0.35% depending on the unused portion of the credit borrower wholly-owned subsidiary under the Amended Facility facility We will continue to guarantee the obligations of the 35 Secured Financing On January 30 2012 we entered into $20.0 million non-recourse mortgage loan at fixed annual interest rate of 3.79% that matures on February 2019 The mortgage loan is secured by five of our properties aggregating approximately 442000 square feet portion of these proceeds were used to pay down the Term Loan Contractual Commitments Subsequent to December 31 2011 we entered into two contracts with third-party sellers to acquire two industrial properties as described under the heading Contractual Obligations in this Annual Report on Form 10-K 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 various closing conditions and the consent of the mortgage lender Distribution Activity On February 21 2012 our board of directors authorized us to declare cash dividend in the amount of $0.10 per share of our common stock payable on April 19 2012 to the stockholders of record as of the close of business on April 2012 Outlook We believe that industrial rents have generally stopped falling in our markets and in some cases are rising modestly With national availability broader markets exhibit significant likely ending rent growth We see 2011 at above 13% we believe it will take time before the growing set of acquisition opportunities In the intermediate term we expect to seek to grow our assets to levels that will allow us to optimize our operating efficiency increase our shareholder liquidity and position us to achieve an investment grade credit rating to broaden our debt financing options We believe the long-term operating results from our functional infill coastal assets combined with sound balance sheet management and our strong corporate governance and exceptionally aligned executive management compensation will benefit our shareholders over time The primary source of our operating revenues and earnings is rents including reimbursements from tenants for certain operating costs We seek received from tenants under operating long-term leases at our properties earnings growth primarily through properties in our six target markets We intend to seek increasing rents and operating income at existing properties and acquiring to grow our portfolio by utilizing one or more of cash on hand future borrowings under our credit facility future sales of common or preferred equity and future placements of secured or unsecured debt In the first two months of 2012 we have completed public follow-on offering of our common stock amended our credit facility entered into secured financing and entered into two contracts to acquire two industrial properties all as described in this Annual Report on Form 10-K Inflation Although the U.S economy has been experiencing relatively flat inflation rates recently and wide variety of industries and sectors are affected differently by changing commodity prices inflation has not had significant impact on us in our markets of operation Most of our leases require the tenants to pay their share of operating expenses including common area maintenance real estate taxes and insurance thereby reducing our exposure to increases in costs and operating expenses resulting from inflation In addition approximately 45.1% our outstanding leases expire within five years which enables us to seek to replace existing leases with new leases at the then-existing market rate 36 Financial Condition and Results of Operations We commenced operations upon the completion of our initial public offering and concurrent private placement on February 16 2010 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 expenses that we have incurred and that we pass through to the individual tenants 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 payroll 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 term loans and our revolving 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 Comparison of the Year Ended December 31 2011 to the Period from February 162010 Commencement of Operations to December 31 2010 The majority of the changes in our statements of operations line items for the year ended December 31 2011 compared to the period from February related to property acquisitions that occurred of operations 16 2010 commencement at various times during the course of 2010 and 2011 In addition to December 31 2010 are certain of such changes were the result of 2011 consisting of full year of operations compared to 2010 consisting of shorter operating period Revenues Total revenues increased by approximately $13.5 million to $17.5 million for the year ended December December 31 2011 from $4.0 million for the period from February 31 2010 This increase is due primarily to property acquisitions 16 2010 commencement of operations to during 2010 and 2011 In addition for the quarter and year ended December 31 2011 approximately $0.1 million and $0.9 million respectively was recorded in straight-line rental revenues related to contractual rent abatements given to certain tenants Property operating expenses Property operating expenses increased by approximately $5.0 million to $6.3 million for the year ended December 31 2011 from $1.3 million for the period from February 16 2010 commencement during 2010 and 2011 of operations to December 31 2010 This increase is due primarily to property acquisitions Depreciation and amortization Depreciation and amortization increased by approximately $3.6 million to $4.9 million for the year ended December 31 2011 from $1.3 million for the period from February 16 2010 commencement and 2011 of operations to December 31 2010 This increase is due to property acquisitions during 2010 General and administrative expenses General million to $5.4 million for the year ended December 2010 commencement of operations to December and administrative by approximately 31 2011 from $4.1 million for the period from February 31 2010 This increase was driven primarily by our having expenses increased $1.3 16 full year of expenses for the year ended December 2010 commencement of operations to December 31 2011 compared to the shorter period from February 31 2010 16 Acquisition costs Acquisition costs decreased by approximately $0.3 million to $2.0 million for the year ended December 31 2011 from $2.3 million for the period from February 16 2010 commencement of operations to December 31 2010 This decrease is due to lower volume of property acquisitions during the year ended December to December 31 2010 31 2011 compared to the period from February 16 2010 commencement of operations 37 Interest expense including amortization Interest expense increased by approximately $2.1 million to $2.6 million for the year ended December 31 2011 from $0.5 million for the period from February 16 2010 commencement of operations to December 31 2010 This increase is due primarily to the assumption of $39.5 million in mortgage loans payable Loan in 2011 during 2010 and 2011 as well as borrowings on the credit facility and Term As result of the above net loss decreased by approximately $1.7 million to $3.7 million for the year ended December 31 2011 compared to net loss of $5.4 million for the period from February 16 2010 commencement of operations to December 31 2010 Liquidity and Capital Resources The primary objective of our financing strategy is to maintain financial flexibility with conservative capital structure using retained cash flows long-term debt and the issuance of common and perpetual preferred stock to finance our growth Over the long-term we intend to limit the sum of the outstanding principal amount of our consolidated indebtedness and the liquidation preference of any outstanding perpetual preferred stock to less than 40% of our total enterprise value maintain fixed charge coverage ratio in excess of 2.Ox limit the principal amount of our outstanding floating rate debt to less than 20% of our total consolidated indebtedness and have staggered debt maturities that are aligned to our expected average positioning us to re-price parts of our capital structure as our rental rates lease term 5-7 years change with market conditions We intend to preserve flexible capital structure with long-term goal to obtain an investment grade rating and be in position to issue unsecured debt and perpetual preferred stock Prior to attaining an investment grade rating we intend to primarily utilize non-recourse debt secured by individual properties or pools of properties with targeted maximum loan-to-value of 65% at the time of financing or recourse bank term loans and credit facilities We may also assume debt in connection with property acquisitions which may have higher loan-to-value We expect to meet our short-term liquidity requirements generally through existing cash balances and if necessary short-term borrowings under our credit net cash provided by operations facility We believe that our net cash provided by operations will be adequate to fund operating requirements pay interest on any borrowings and fund distributions in accordance with the REIT requirements of the federal income tax laws In the near-term we intend to fund future investments in properties with term loans mortgages and borrowings under our credit facility We expect to meet our long-term liquidity requirements including with respect to other investments in industrial properties property acquisitions and scheduled debt maturities through borrowings under our credit facility periodic issuances of common stock perpetual preferred stock and long-term secured and unsecured debt and in the future with proceeds from the disposition of properties The success of our acquisition strategy may depend in part on our ability to obtain and borrow under our credit facility and to access additional capital through issuances of equity and debt securities On January 13 2012 we completed public follow-on offering of 4000000 shares of our common stock at price per share of $14.25 On February price per share of $14.25 upon the exercise by the underwriters 13 2012 we sold an additional 61853 shares of our common stock at shares We of their option to purchase additional estimate that the net proceeds costs were approximately of the offering after deducting $54.7 million We used approximately the underwriting discount and estimated offering $41.0 million of the net proceeds to repay outstanding borrowings under our senior revolving credit facility on January 13 2012 and intend to use the remainder of the net proceeds to invest in industrial properties and for general business purposes 38 As of December 31 2011 our market equity capitalization was as follows Market Equity Capitalization as of December 31 2011 Security Common Stock Shares Outstanding1 9308670 Market Price Market Value 15.14 $140933264 Includes Closing price of our shares of common stock on the New York Stock Exchange shares of unvested 133526 restricted stock on December 31 2011 in dollars per share We have an $80.0 million credit facility The amount available under our credit facility may be increased up to $150.0 million subject to the approval of the administrative agent and the identification of lenders willing to make available additional amounts Interest on our credit facility will generally be paid based upon at our option either LIBOR plus the applicable LIBOR margin or ii the applicable base rate which is the greater of the administrative agents prime rate plus 1.00% 0.50% above plus the applicable LIBOR margin for LIBOR rate loans under our credit amendment the federal 19 2012 the credit on January to our credit facility facility funds effective rate or thirty-day LIBOR facility Prior to our entering into an provided that the applicable margin ranged from 3.00% to 4.25% 3.00% as of December 31 2011 depending on the ratio of our outstanding consolidated indebtedness to the value of our consolidated gross asset value ii outstanding borrowings under our credit facility were limited to the lesser of $80.0 million or 50% of the value of the borrowing base properties and iii we pay an annual unused facility fee in an amount equal to 0.35% or 0.50% depending on the unused portion of the credit facility On January 19 2012 we entered into the Amended Facility which extends the maturity date of our credit facility to January 19 2015 and provides for one 12-month extension option exercisable by us subject among other things Amended Facility and to our payment of an extension fee ii modifies to there being an absence of an event of default under the the applicable LIBOR margin to range from 2.50% to 3.50% depending on the ratio of our outstanding consolidated indebtedness to the value of our consolidated gross asset value iii provides that outstanding borrowings under our Amended Facility are limited to the lesser of $80.0 million or 60% of the value of the borrowing base properties and iv provides that we pay an annual unused facility fee in an amount equal to 0.25% or 0.35% depending on the unused portion of the Amended Facility Our unused facility fee was $359000 and $197000 respectively for the year ended December 31 2011 and for the period from February 16 2010 commencement of operations to December 31 2010 Our credit facility includes series of financial and other covenants requiring among other things the maintenance of maximum leverage ratios and minimum fixed coverage ratios that we must comply with in order to borrow under the credit facility We have agreed to guarantee the obligations of the borrower wholly-owned under our credit facility As of December subsidiary outstanding and ten properties were in the borrowing base under our credit 31 2011 there were $41.0 million of borrowings facility We were in compliance with our financial covenants under the credit facility at December 31 2011 and December 31 2010 In addition we have $20.1 million Term Loan that matures on February 22 2013 Interest on the Term Loan will generally be based upon at our option either which is the greater of the administrative rate or thirty-day LIBOR plus 3.50% for LIBOR rate loans under series of financial and other covenants that are similar to the covenants guarantee the obligations of the borrower wholly-owned subsidiary compliance with its financial covenants at December 31 2011 LIBOR plus 3.50% or ii the applicable base rate agents prime rate plus 1.00% 0.50% above the federal the Term Loan The Term Loan funds effective includes in the credit under the Term Loan We were in facility We have agreed to As of December 31 2011 and 2010 we had outstanding mortgage loans payable of approximately $38.3 million and $17.7 million respectively and held cash and cash equivalents totaling approximately $3.2 million and $57.3 million respectively 39 The following table summarizes our debt maturities principal payments capitalization ratios EBITDA Adjusted EBITDA interest coverage and debt ratios as of and for the year ended December 31 2011 dollars in thousands 2012 2013 2014 2015 2016 Thereafter Subtotal Unamortized net premiums Total Credit Facility Term Loan Mortgage Loans Payable Payable Total Debt 41000 20050 1128 1195 1265 20346 682 1128 62245 1265 20346 682 13038 13038 41000 20050 37654 98704 ______ ______ $41000 ______ $20050 ______ 611 611 $38265 $99315 Weighted Average Interest Rate 3.3% 3.8% 5.4% Total Debt-to-Total Investments in Properties1 Total Debt-to-Total Market Capitalization2 Floating Rate Debt as of Total Debt EBITDA3 Adjusted EBITDA4 Interest Coverage5 Total Debt-to-Adjusted EBITDA6 Weighted Average Maturity years 4.2% 37.5% 41.3% 61.5% 3782 6965 2.7 8.8x 3.0 Total debt-to-total investments in properties is calculated as total debt including premiums divided by total investments in properties as of December 31 2011 Total debt-to-total market capitalization is calculated as total debt including premiums divided by market equity capitalization plus total debt including premiums as of December 31 2011 before interest taxes depreciation Earnings 2011 EBITDA for such period includes acquisition Financial Measures in this Annual Report and amortization EBITDA for the year ended December 31 costs of approximately $2.0 million See Non-GAAP on Form 10-K for reconciliation of EBITDA from net loss available to common stockholders and discussion of why we believe EBITDA is useful supplemental measure of our operating performance before interest taxes depreciation Earnings compensation Adjusted EBITDA for the Measures in this Annual Report on Form 10-K for and amortization acquisition costs and stock-based year ended December 31 2011 See Non-GAAP Financial reconciliation of Adjusted EBITDA from net loss available to common stockholders and discussion of why we believe Adjusted EBITDA is useful supplemental measure of our operating performance Interest coverage is calculated as Adjusted EBITDA divided by interest expense including amortization See Non-GAAP Financial Measures in this Annual Report EBITDA from net loss available to common stockholders EBITDA is useful supplemental measure of our operating performance on Form 10-K for reconciliation of Adjusted discussion of why we believe Adjusted and EBITDA is calculated as total debt including Total debt-to-Adjusted premiums Adjusted EBITDA See Non-GAAP Financial Measures in this Annual Report reconciliation of Adjusted EBITDA from net loss available to common stockholders why we believe Adjusted EBITDA is useful supplemental divided by annualized on Form 10-K for and discussion of measure of our operating performance 40 The following table sets forth the cash dividends paid or payable per share during the year ended December 31 2011 No dividends were paid during the period from February 16 2010 commencement of operations to December 31 2010 For the Three Months Ended March 31 2011 June 30 2011 September 30 2011 December 31 2011 Dividend per Share $0.10 $0.10 $0.10 $0.10 Declaration Date Record Date Date Paid February 17 2011 April 2011 April 19 2011 May 18 2011 August 112011 November 2011 July 2011 July20 2011 October 2011 October 20 2011 January 2012 January 20 2012 Sources and Uses of Cash Our principal sources of cash are cash from operations borrowings under mortgage and tenn loans payable and draws on our credit facility Our principal uses of cash are asset acquisitions debt service capital expenditures operating costs and corporate overhead costs Cash From Operating Activities Net cash provided by used in operating activities totaled approximately $2.1 million for the year ended December 31 2011 compared to approximately $2.0 million for the period from February 16 2010 commencement of operations to December 31 2010 This increase in cash provided by operating activities is attributable to higher cash flows from property acquisitions during 2010 and 2011 and full year of operations during the year ended December 31 2011 offset by increased payments for prepaid insurance costs Cash From Investing Activities Net cash used in investing activities was $105.9 million and $116.6 million respectively for the year ended December 31 2011 and for the period from February 16 2010 commencement of operations to December 31 2010 which consists primarily of property acquisitions of $96.9 million and $116.1 million respectively net of assumed mortgage loans payable Cash From Financing Activities Net cash provided by financing activities was $49.7 million and $175.9 million respectively for the year ended December 31 2011 and for the period from February 16 2010 commencement of operations to December primarily of borrowings payment of the $7.0 million deferred underwriting initial public offering and dividend payments of $2.8 million and for the period from February the underwriters fee that facility on the credit agreed to defer at the time of our 16 2010 31 2010 which consists for the and Term Loan offset by scheduled year ended December 31 2011 debt principal payments the commencement costs paid of $5.1 million from our initial public offering of our common stock and the concurrent 31 2010 primarily of $176.9 million in proceeds net of issuance of operations to December private placement and financing costs Critical Accounting Policies Below is discussion of the accounting policies that we believe are critical We consider these policies critical because they require estimates about matters that are inherently uncertain involve various assumptions and require significant management judgment and because they are important for understanding and evaluating our reported financial results These judgments will affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods Applying different estimates or assumptions may result in materially different amounts reported in our financial statements Property Acquisitions Upon acquisition of property we estimate the fair value of acquired tangible assets consisting of land buildings and improvements and intangible assets and liabilities consisting of the above and below market leases and the origination value of all in-place leases We determine fair values using replacement 41 cost estimated cash flow projections and other valuation techniques and applying appropriate discount and capitalization rates based on available market information Mortgage loans assumed in connection with acquisitions are recorded at their fair value using current market interest rates for similar debt at the date of acquisition The fair value of the tangible assets is based on the value of the property as if it were vacant Land values are derived from current comparative sales values when available or managements estimates of the fair value based on market conditions and the experience of our management team Building values are calculated as replacement cost less depreciation or managements estimates of the fair value of these assets using discounted cash flows analyses or similar methods The fair value of the above and below market leases is based on the present value of the difference between the contractual amounts to be received pursuant to the acquired leases using discount rate that reflects the risks associated with the acquired leases and our estimate of the current market lease rates measured over period equal to the remaining term of the leases when there is not bargain renewal option The capitalized values of above market leases and below market leases are amortized to rental revenue over the remaining term of the respective leases The origination value of in-place leases is based on costs to execute similar leases including commissions and other related costs The origination value of in-place leases also includes real estate taxes insurance and an estimate of lost rent revenue at market rates during the estimated time required to lease up the property from vacant to the occupancy level at the date of acquisition Impairment Carrying values for financial reporting purposes are reviewed for impairment on property-by-property basis whenever events or changes in circumstances indicate that the carrying value of property may not be fully recoverable The intended use of an asset either held for sale or held for use can significantly impact how impairment is measured If an asset is intended to be held for use the impairment analysis is based on two-step test The first test measures estimated expected future cash flows over the holding period including residual value undiscounted and without interest charges against the carrying value of the property If the asset fails the test then the asset carrying value is measured against the lower of cost or the present value of expected cash flows over the expected hold period An impairment charge to earnings is recognized for the excess of the assets carrying value over the lower of cost or the present values of expected cash flows over the expected hold period If an asset is intended to be sold impairment will be determined using the estimated fair value less costs to sell The estimation of expected future net cash flows is inherently uncertain and relies on assumptions among other things regarding current and future economic and market conditions and the availability of capital We determine the estimated fair values based on our assumptions regarding rental rates lease-up and holding periods as well as sales prices When available current market information is used to determine capitalization and rental growth rates If available current comparative sales values may also be used to establish fair value When market information is not readily available the inputs are based on our understanding of market conditions and the experience of the management team Actual results could differ significantly from our estimates The discount rates used in the fair value estimates will represent rate commensurate with the indicated holding period with premium layered on for risk Revenue Recognition We record rental revenue from operating leases on straight-line basis over the term of the leases and maintain an allowance from the inability of our tenants to make required payments for doubtful accounts security deposits and letters of credit in future periods We monitor the liquidity If tenants fail charges account lease payments that are greater than our allowance then we may have to recognize additional doubtful and creditworthiness of our tenants on an on-going for estimated losses that may result to make contractual basis by reviewing their financial condition periodically as appropriate accounts receivable including straight-line rents for doubtful accounts Each period we review our outstanding as needed We and provide allowances also record lease termination fees when tenant has executed definitive termination agreement with us and the payment of the termination fee is not subject to any conditions that must be met or waived before the fee is due to us If tenant remains in the leased space following the execution of definitive termination agreement the applicable termination fees are deferred and recognized over the term of such tenants occupancy 42 Income Taxes We elected to be taxed taxable year that ended on December as the Code and operate 31 2010 To qualify as REIT we must meet certain organizational as such beginning REIT under with our and operational requirements including requirement to distribute at least 90% of our annual REIT taxable income to our stockholders which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance principles orGAAP As REIT we generally will not be subject with U.S generally accepted accounting to federal income tax to the extent we distribute qualifying dividends to our stockholders If we fail to qualify as REIT in any taxable year we will be to federal income tax on our taxable income at regular corporate income tax rates and generally will not subject be permitted to qualify for treatment as REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost unless the IRS grants us relief under certain statutory Such an event could materially adversely affect our net income and net cash available for distribution and operate in such manner as to qualify for treatment provisions to stockholders However we believe we are organized as aREIT Stock-Based Compensation We follow the provisions of ASC 718 Compensation-Stock Compensation to account for our stock-based compensation plan which requires that the compensation cost relating to stock-based transactions be recognized payment the equity or liability instruments issued We have adopted in the financial statements and that the cost be measured on the fair value of the 2010 Equity Plan which provides for the grant of restricted stock awards performance share awards unrestricted shares or any combination of the foregoing Stock-based compensation is recognized as general and administrative expense in the financial statements and measured at the fair value of the award on the date of grant We estimate the forfeiture behavior The amount of the expense may be subject as well as expected experience rate based on historical to adjustment in future periods depending on the specific characteristics of the stock-based award In addition we have awarded long-term incentive target awards to our executives that are payable in shares of each pre-established performance measurement period The amount the conclusion of our common stock after that may be earned under the long-term incentive plan is variable depending on the relative return of our stock as compared to the total shareholder NAREIT Equity Industrial value of the long-term incentive target awards using awards are recognized return of the MSCI U.S REIT Index the pre-established as compensation the requisite expense over Index over performance measurement period We estimate the fair Monte Carlo simulation model on the date of grant These period based on the fair value of the award at total shareholder and the FTSE the balance sheet date Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have current or future effect on our financial condition changes in financial condition revenues or expenses results of operations liquidity capital expenditures or capital resources that are material to investors Contractual Obligations Subsequent to December 31 2011 we entered into two contracts with third-party sellers to acquire two industrial properties consisting of two buildings located in the Washington D.C.JBaltimore market The properties aggregate approximately 135000 square feet for purchase price of approximately $12.8 million 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 various closing conditions and the consent of the mortgage lender 43 The following table sunmmrizes our contractual obligations due by period as of December 31 2011 dollars in Less than Year 1-3 Years 3-5 Years More than Years Total 1128 1988 12760 $63510 $21028 $13038 98704 3774 2404 2877 11043 12760 $15876 $67284 $23432 $15915 $122507 thousands Contractual Obligations Debt Debt Interest Payments Purchase Obligations Total Non-GAAP Financial Measures We use the following non-GAAP measure of our operating performance and Adjusted EBITDA should not be considered with GAAP Further and Adjusted EBITDA reported by other companies our computation funds financial measures that we believe are useful to investors as or FF0 EBITDA and Adjusted EBITDA FF0 EBITDA key supplemental from operations in isolation or as substitute for measures of performance in accordance of FF0 EBITDA and Adjusted EBITDA may not be comparable to FF0 EBITDA We compute FF0 in accordance with standards established by the National Association of Real Estate Investment Trusts NAREIT which defines FF0 as net income loss determined in accordance with GAAP excluding gains losses from sales of property and impairment write-downs of depreciable real estate plus depreciation and amortization assets on real estate reflect FF0 on the same basis We believe that presenting FF0 provides useful operating performance because it is measure of our operations without and after adjustments for unconsolidated partnerships and joint ventures which are calculated to information to investors regarding our regard to specified non-cash items such as real estate depreciation and amortization and gain or loss on sale of assets We believe that FF0 is meaningful supplemental measure of our operating performance because historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time Since real estate values have historically risen or fallen with market conditions many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient As result we believe that the use of FF0 together with the required GAAP presentations provide more complete understanding of our operating performance The following table reflects the calculation of FF0 reconciled from net loss available to common stockholders for the three months ended December 31 2011 and 2010 and for the year ended December 31 2011 and for the period from February 16 2010 commencement of operations to December 31 2010 dollars in thousands except per share data Net loss available to common stockholders Depreciation and amortization Total depreciation and amortization Non-real estate depreciation Allocation to participating securities Funds from operations Basic and diluted FF0 per common share Weighted average basic and diluted common shares For the Year Ended Period from February 16 2010 Commencement of Operations to For the Three Months Ended December 31 December 31 2011 December 31 2010 2011 2010 194 1521 26 16 1285 0.14 598 836 25 209 0.02 3729 5390 4899 98 16 1056 0.12 1263 82 4209 0.46 9174747 9112000 9161805 9112000 44 Includes expensed acquisition To be consistent with the companys policies of determining whether costs instruments granted in share-based transactions are participating securities payment common share is adjusted for FF0 distributed through and accounting for earnings per share the FF0 per declared dividends if any and allocated to all participating securities weighted average common shares outstanding and unvested restricted shares outstanding under the two-class method Under this method allocations were made to 134958 and 148973 of weighted average unvested restricted shares outstanding for the three months ended December 31 2011 and 2010 respectively the year ended December and 138440 of weighted average 31 2011 and the period from February and unvested restricted shares outstanding for 16 2010 commencement of operations to December 31 2010 respectively We compute EBITDA as earnings before interest taxes and depreciation and amortization We compute Adjusted EBITDA as earnings before interest taxes depreciation and amortization acquisition costs and stock- based compensation We believe that presenting EBITDA and Adjusted EBITDA provides useful information to investors regarding our operating performance because they are measures of our operations on an unleveraged basis before the effects of tax non-cash depreciation and amortization expense and acquisition costs and stock- based compensation with regard to Adjusted EBITDA By excluding interest expense EBITDA and Adjusted EBITDA allow investors to measure our operating performance independent of our capital structure and indebtedness and therefore allow for more meaningful comparison of our operating performance between quarters as well as annual periods and for the comparison of our operating performance to that of other companies both in the real estate industry and in other industries As we are currently in growth phase acquisition costs are excluded from Adjusted EBITDA to allow for the comparison of our operating performance to that of stabilized companies The following table reflects the calculation available to common stockholders for the three months ended December of EBITDA and Adjusted EBITDA reconciled from net loss 31 2011 and 2010 and for the year ended December 31 2011 and for the period from February 16 2010 commencement of operations to December 31 2010 dollars in thousands For the Three Months Ended December 31 2011 2010 For the Year Ended 31 2011 December Period from February 16 2010 Commencement of Operations to December 31 2010 194 1521 985 $2312 206 300 598 836 287 525 228 383 $2818 $1136 $3729 4899 2612 3782 1202 1981 6965 $5390 1263 524 $3603 784 2289 530 Net loss available to common stockholders Depreciation and amortization Interest expense including amortization EBITDA Stock-based compensation Acquisition costs Adjusted EBITDA Includes expensed acquisition costs 45 Item 7A Quantitative And Qualitative Disclosures About Market Risk Market risk includes risks that arise from changes in interest rates foreign currency exchange rates commodity prices equity prices and other market changes that affect market sensitive instruments In pursuing our business strategies the primary market risk which we are exposed to is interest rate risk We are exposed to interest rate changes result of debt used primarily as and operations We seek borrowing costs As described below some of our outstanding debt bears interest to maintain liquidity fund capital expenditures the impact rate changes of interest to limit on earnings and cash flows and to lower our overall at variable rates and we expect that and expand our investment portfolio some of our future outstanding debt will have variable interest to our variable rate debt We expect rate risks relating interest rates We may use interest to replace variable rate debt on rate caps to manage our regular basis with fixed rate long-term debt to finance our assets and operations As of December 31 2011 we had $41.0 million outstanding under our credit facility and $20.1 million under our Term Loan Amounts borrowed under our credit facility and Term Loan bear interest at variable rates based on LIBOR plus an applicable LIBOR margin which interest rate is 3.00% and 3.50% as of December 31 2011 respectively for the credit facility and Term Loan If the LIBOR rate fluctuates by 0.25% interest expense would increase or decrease depending on rate movement balances on our credit facility future earnings and and Term Loan as of December flows by approximately 31 2011 cash $153000 annually on the outstanding Item Financial Statements And Supplementary Data See Part IV Item 15 Exhibits and Financial Statement Schedules beginning on page F-i of this Annual Report on Form 10-K Item Changes In And Disagreements With Accountants On Accounting And Financial Disclosure None Item 9A Controls And Procedures Evaluation of Disclosure Controls and Procedures Our management has evaluated under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15e and 15d-15e under the Exchange Act and has concluded disclosure controls and procedures were effective to give reasonable that as of the end of the period covered by this report our assurance that information required to be disclosed by us in the reports that we file or submit under reported within the time periods specified in the SEC rules and forms and is accumulated and communicated the Exchange Act is recorded processed summarized and to our management including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosures Managements Annual Report on Internal Control Over Financial Reporting Terreno Realty Corporations management is responsible for establishing and maintaining adequate internal control over financial reporting This internal control system was designed to provide reasonable assurance to the companys management and board of directors regarding the preparation and fair presentation of published financial statements All internal control systems no matter how well designed have inherent limitations Therefore even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation Terreno Realty Corporations management assessed the effectiveness of its internal control over financial reporting as of December 31 2011 In making this assessment it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission COSO in Internal Control-Integrated Framework Based on its assessment management of Terreno Realty Corporation believes that as of December 31 2011 the companys internal control over financial reporting is effective based on those criteria Terreno Realty Corporations independent auditors have issued an audit report on the effectiveness of the Companys internal control over financial reporting 46 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Terreno Realty Corporation San Francisco California We have audited the internal control over financial reporting of Terreno Realty Corporation and subsidiaries the Company as of December Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission The 31 2011 based on criteria established in Internal Control Integrated Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control Over Financial Reporting Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board United States Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects Our audit included obtaining an understanding of internal control over financial reporting assessing the risk that material weakness exists testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we considered necessary in the circumstances We believe that our audit provides reasonable basis for our opinion companys internal control over financial reporting is process designed by or under the supervision of the companys principal executive effected by the companys board of directors management and other personnel regarding the reliability of financial reporting and the preparation of financial statements financial officers or persons and principal performing similar functions and to provide reasonable assurance for external purposes in accordance with generally accepted accounting principles companys internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements with generally accepted accounting principles and that receipts and expenditures of the company in accordance are being made only in accordance with authorizations of management and directors of the company and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition use or disposition of the companys assets that could have material effect on the financial statements Because of the inherent limitations of internal control over financial reporting including the possibility of collusion or improper management override of controls material misstatements due to error or fraud may not be prevented or detected on timely basis Also projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate In our opinion the Company maintained in all material respects effective internal control over financial reporting as of December 31 2011 based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission We have also audited in accordance with the standards of the Public Company Accounting Oversight Board United States the consolidated financial statements and financial statement schedule as of December 31 2011 and for the year ended December unqualified opinion on those financial statements 31 2011 of the Company and our report dated February and financial statement schedule 22 2012 expressed an Is Deloitte Touche LLP San Francisco CA February 22 2012 47 Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting during the quarter ended December 31 2011 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting Item 9B Other Information None Part III Item 10 Directors Executive Officers and Corporate Governance The information required by Item 10 will be contained in definitive proxy statement for our Annual Meeting of Stockholders which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31 2011 and is incorporated herein by reference Item 11 Executive Compensation The information required by Item 11 will be contained in definitive proxy statement for our Annual Meeting of Stockholders which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31 2011 and is incorporated herein by reference Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by Item 12 will be contained in definitive proxy statement for our Annual Meeting of Stockholders which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31 2011 and is incorporated herein by reference Item 13 Certain Relationships and Related Transactions and Director Independence The information required by Item 13 will be contained in definitive proxy statement for our Annual Meeting of Stockholders which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31 2011 and is incorporated herein by reference Item 14 Principal Accounting Fees and Services The information required by Item 14 will be contained in definitive proxy statement for our Annual Meeting of Stockholders which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31 2011 and is incorporated herein by reference 48 Item 15 Exhibits and Financial Statement Schedules and Financial Statements and Schedules Part IV The following consolidated financial information is included as separate section of this Annual Report on Form 10-K beginning on page F-i as follows Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31 2011 and 2010 Consolidated Statements of Operations for the year ended December 31 2011 and for the period from February 16 2010 commencement of operations to December 31 2010 Consolidated Statements of Equity for the year ended December 31 2011 and for the period from February 16 2010 commencement of operations to December 31 2010 Consolidated Statements of Cash Flows for the year ended December 31 2011 and for the period from February 16 2010 commencement of operations to December 31 2010 Notes to Consolidated Financial Statements Schedule III Real Estate Investments and Accumulated Depreciation Page F-i F-2 F-3 F-4 F-5 F-6 S-i All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted or the required information is included in the consolidated financial statements and notes thereto Exhibits The exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index at the end of this Annual Report on Form 10-K which is incorporated by reference herein 49 PAGE INTENTIONALLY LEFT BLANK REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Terreno Realty Corporation San Francisco California We have audited the accompanying subsidiaries the Company as of December and cash equity operations consolidated balance sheets of Terreno Realty Corporation and 31 2011 and 2010 and the related consolidated statements of flows for the year ended December 31 2011 and for the period from February 16 2010 commencement of operations to December 31 2010 Our audits also included the financial statement schedule listed in the Index at Item 15 These financial statements and financial statement schedule are the responsibility of the Companys management Our responsibility is to express schedule based on our audits and financial statement statements an opinion on the financial We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board United States Those standards about whether the financial statements require that we plan and perform the audit are free of material misstatement An audit basis evidence supporting the amounts and disclosures in the financial statements to obtain reasonable assurance includes examining on test An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation We believe that our audits provide reasonable basis for our opinion In our opinion such consolidated financial statements present fairly in all material respects the financial position of Teneno Realty Corporation and subsidiaries as of December 31 2011 and 2010 and the results of their operations and their cash flows for the year ended December 31 2011 and for the period from February 16 2010 commencement of operations to December 31 2010 in conformity with accounting principles generally accepted in the United States of America Also in our opinion such financial statement schedule when considered in relation to the basic consolidated financial statements taken as whole presents fairly in all material respects the information set forth therein We have also audited in accordance with the standards of the Public Company Accounting Oversight Board United States the Companys internal criteria established in Internal ControlIntegrated Framework control over financial reporting as of December 31 2011 based on the issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22 2012 expressed an unqualified opinion on the Companys internal control over financial reporting Is Deloitte Touche LLP San Francisco CA February 22 2012 F-i Terreno Realty Corporation Consolidated Balance Sheets in thousands except share and per share data December 31 2011 December 31 2010 ASSETS Investments in real estate Land Buildings and improvements Intangible assets Total investments in properties Accumulated depreciation and amortization Net investments in properties Cash and cash equivalents Restricted cash Deferred financing costs net Other assets net Total assets LIABILITIES AND EQUITY Liabilities Credit facility Term loan payable Mortgage loans payable Security deposits Intangible liabilities net Deferred underwriting fee payable Accounts payable and other liabilities Total liabilities Commitments and contingencies Note 10 Equity Stockholders equity $133464 116287 14833 264584 7063 257521 3249 2139 770 3370 71861 56222 8280 136363 1502 134861 57253 593 796 879 $267049 $194382 41000 20050 38265 1772 913 6038 108038 17676 899 883 7000 2425 28883 Preferred stock $0.01 par value 100000000 shares authorized Common stock and no shares issued and outstanding $0.01 par value 400000000 shares authorized and 9308670 and 9262778 shares issued and outstanding respectively Additional paid-in capital Accumulated deficit Total stockholders equity Total liabilities and equity 91 91 168039 9119 159011 170798 5390 165499 $267049 $194382 The accompanying notes are an integral part of these consolidated financial statements F-2 Terreno Realty Corporation Consolidated Statements of Operations in thousands except share and per share data REVENUES Rental revenues Tenant expense reimbursements Total revenues COSTS AND EXPENSES Property operating expenses Depreciation and amortization General and administrative Acquisition costs Total costs and expenses OTHER INCOME EXPENSE Interest and other expense income Interest expense including amortization Total other income and expenses Net loss available to common stockholders Basic and Diluted net loss available to common stockholders per share For the Year Ended 31 2011 December Period from February 16 2010 Commencement of Operations to December 31 2010 13560 3942 17502 6330 4899 5407 1981 18617 2612 2614 3729 0.41 3147 884 4031 1287 1263 4122 2289 8961 64 524 460 5390 0.59 Basic and Diluted Weighted Average Common Shares Outstanding 9161805 9112000 Dividends Declared per Common Share 0.40 The accompanying notes are an integral part of these consolidated financial statements F-3 Terreno Realty Corporation Consolidated Statements of Equity in thousands except share data Common Stock Additional Accwnulated Number of Shares Amount Paid-in Capital Deficit Total Balance as of February 16 2010 commencement of operations Net loss 1000 Issuance of common stock 9112000 91 Equity issuance costs Repurchase of common stock Issuance of restricted stock net Stock-based compensation amortization 1000 150778 182149 12135 784 Balance as of December 31 2010 9262778 91 170798 Net loss Issuance of common stock Issuance of restricted stock net Stock-based compensation amortization Dividends 18272 27620 300 663 3722 5390 5390 3729 5390 182240 12135 784 165499 3729 300 663 3722 Balance as of December 31 2011 9308670 $91 $168039 $91 19 $159011 The accompanying notes are an integral part of these consolidated financial statements F-4 Terreno Realty Corporation Consolidated Statements of Cash Flows in thousands For the Year Ended 31 2011 December Period from February 16 2010 Commencement of Operations to December 31 2010 CASH FLOWS FROM OPERATING ACTIVITIES Net loss Adjustments to net loss Straight-line rents Amortization of lease intangibles Depreciation and amortization Deferred financing cost and mortgage premium amortization Stock-based compensation and amortization Changes in assets and liabilities Other assets Accounts payable and other liabilities Net cash provided by used in operating activities CASH FLOWS FROM INVESTING ACTIVITIES Restricted cash Cash paid for property acquisitions Additions to buildings and improvements Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock net of issuance costs of $0 and $5085 respectively on credit facility facility on term loan payable Borrowings Payments on credit Borrowings Payments on mortgage Payment of deferred financing costs Payment of deferred underwriting fee loans payable Dividends paid to common stockholders Net cash provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest Supplemental disclosures of non-cash transactions Deferred underwriting fee payable Offering costs payable Contribution of fixed assets by Terreno Capital Partners LLC Accounts payable related to capital improvements Reconciliation of cash paid for property acquisitions Acquisition of properties Assumption of mortgage Assumption of mortgage premiums Assumption of other assets loans payable and liabilities Net cash paid for property acquisitions 3729 1454 506 4899 238 1202 690 1177 2149 1293 96926 7665 105884 47000 6000 20050 889 639 7000 2791 49731 54004 57253 3249 2102 50 2038 119203 21541 101 635 96926 5390 220 288 1263 73 784 349 1532 2019 193 116140 248 116581 176914 180 882 175852 57252 57253 344 7000 50 240 579 136040 17181 719 2000 116140 The accompanying notes are an integral part of these consolidated financial statements F-S Terreno Realty Corporation Notes to Consolidated Financial Statements Note Organization Terreno Realty Corporation Terreno and together with its subsidiaries the Company acquires owns industrial and operates New York City San Francisco 2011 the Company owned real estate located in six major coastal U.S markets Los Angeles Northern New Jersey Bay Area Seattle Miami and Washington D.C.fBaltimore As of December 31 total of 47 buildings aggregating approximately 3.4 million square feet The Company commenced operations upon completion of an initial public offering IPO of 8750000 shares of its common stock at price of $20.00 per share and concurrent private placement of 350000 shares of conmion stock at price of $20.00 per share on February 16 2010 The net proceeds of the IPO and the concurrent private placement were approximately $169.8 million Prior to the completion of its IPO the Company had no assets other than cash The Company is an internally elected to be taxed as investment real estate trust REIT under Sections managed Maryland corporation and 856 through 860 of the Internal Revenue Code of 1986 as amended the Code commencing with its taxable year ending December 31 2010 Note Significant Accounting Policies Basis of Presentation The accompanying prepared in accordance with accounting principles generally accepted consolidated financial statements of the Company have been in the United States of America GAAP The accompanying consolidated financial statements include all of the Companys accounts and its subsidiaries and all intercompany balances and transactions have been eliminated in consolidation Use of Estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements Actual results could differ from those estimates Investments in Real Estate Investments in real estate including tenant improvements leasehold improvements and leasing costs are stated at cost less accumulated depreciation unless circumstances indicate that the cost cannot be recovered in which case an adjustment reduce it to its estimated fair value The Company also reviews in-place leases and lease origination costs for acquisitions to the carrying value of the property is made to the impact of above and below market leases and records an intangible asset or liability accordingly Impairment Carrying values for financial reporting purposes are reviewed for impairment on property-by-property basis whenever events or changes in circumstances indicate that the carrying value of property may not be fully recoverable The intended significantly impact how impairment is measured If an asset use of an asset either held for sale or held for use can to be held for use the impairment is intended analysis is based on two-step test The first test measures estimated expected future cash flows over the holding period including residual value undiscounted and without interest charges against the carrying value of the property If the asset fails the test then the asset carrying value is measured against the lower of cost or the present value of expected cash flows over the expected hold period An impairment charge to earnings is recognized for the excess of the assets carrying value over the lower of cost or the present values of expected cash flows over the expected hold period If an asset is intended to be sold impairment is determined using the estimated fair value less costs to sell The estimation of expected flows is inherently uncertain and relies on assumptions among other things regarding current and future economic and market conditions and the future net cash availability of capital The Company determines the estimated fair values based on its assumptions regarding rental rates lease-up and holding periods as well as sales prices When available current market information is used to determine capitalization and rental growth rates If available current comparative sales values may also be used to establish fair value When market information is not readily available the inputs are based on the F-6 Terreno Realty Corporation Notes to Consolidated Financial Statements Companys understanding of market conditions and the experience of the Companys management team Actual results could differ significantly from the Companys estimates The discount rates used in the fair value estimates will represent rate commensurate with the indicated holding period with premium layered on for risk There were no impainnents for the year ended December 31 2011 or for the period from February 16 2010 commencement of operations to December 31 2010 Property Acquisitions Upon acquisition of property the Company estimates the fair value of acquired tangible assets consisting of land buildings and improvements and intangible assets and liabilities consisting of above and below market leases and origination value of all in-place leases The Company determines fair values using replacement appropriate discount and capitalization rates based on available market information cost estimated cash flow projections Mortgage loans assumed in and other valuation techniques and applying connection with acquisitions the date of acquisition are recorded at their fair value using current market interest rates for similar debt at The fair value of the tangible assets is determined by valuing the property as if it were vacant Land values are derived from current comparative sales values when available or managements estimates of the fair value based on market conditions and the experience of the Companys management team Building values are calculated as replacement cost less depreciation or managements estimates of the fair value of these assets using discounted on the present value of the difference between the contractual amounts to be received or similar methods The fair value of the above flows analyses cash and below market leases is based pursuant to the acquired leases using estimate of the current market lease rates measured over rate that reflects discount there is not bargain renewal option the risks associated with the acquired leases and the Companys to the remaining term of the leases when The capitalized values of the above market leases and below market leases the remaining term of the respective leases The origination value of in-place period equal are amortized to rental leases is based on costs to execute similar leases including commissions revenue over value of in-place leases also includes real estate rates during the estimated time required to lease up the property from vacant taxes insurance As of December acquisition amounts of $2.3 million $1.2 million and $12.5 million for the value market leases and in-place leases respectively As of December 31 2011 the Company has recorded and other related costs The origination and an estimate of lost rent revenue at market to the occupancy level at the date of gross intangible assets and liabilities in the attributable to above market leases below 31 2010 the Company had recorded gross intangible assets and liabilities in the amounts of $2.2 million $0.9 million and $6.1 million for the value attributable to above market leases below market leases and in-place leases respectively These amounts are included in intangible assets and liabilities in the accompanying consolidated balance sheets As of December 31 2011 the Company has recorded net accumulated amortization of approximately $4.5 million and $0.3 million respectively related to these intangible assets and liabilities As of December 31 2010 the Company has net accumulated amortization recorded intangible assets and liabilities As of December of approximately $1.1 million and $33000 respectively related to these 31 2011 the remaining weighted average lease term related to these intangible assets and liabilities is 5.1 years In connection with property acquisitions the Company may acquire leases with rental rates above or below the market rental rates Such differences are recorded below market leases pursuant to Accounting as an intangible lease asset above market leases or liability Standards Codification ASC 805 Business Combinations and amortized to rental revenues over the remaining life of the related leases The total net impact to rental revenues due to the amortization of above and below market leases was decrease of approximately $506000 and $288000 respectively for the year ended December 31 2011 and for the period from February 16 2010 commencement of operations to December 31 2010 F-7 Terreno Realty Corporation Notes to Consolidated Financial Statements Projected net amortization of the intangible assets and liabilities for the next five years as of December 31 2011 is as follows dollars in thousands 2012 2013 2014 2015 2016 Thereafter Total $3019 1969 1347 877 630 1619 9461 Depreciation and Useful Lives of Real Estate and Intangible Assets Depreciation and amortization are computed on straight-line basis over the estimated useful lives of the related assets or liabilities The following table reflects the standard depreciable lives typically used to compute depreciation and amortization However such depreciable lives may be different based on the estimated useful life of such assets or liabilities Description Land Building Building Improvements Tenant Improvements Leasing Costs In-place leases Above/Below Market Leases Standard Depreciable Life Not depreciated 40 years 5-40 years Shorter of lease term or useful life Lease term Lease term Lease term Cash and Cash Equivalents Cash and cash equivalents is comprised of cash held in major banking institution and other highly liquid short-term investments with original maturities of three months or less Cash equivalents are generally invested in U.S government securities government agency securities or money market accounts Restricted Cash Restricted cash includes cash held in escrow in connection with property acquisitions and reserves for certain capital improvements interest and real estate tax and insurance payments as required by certain mortgage and term loan obligations Revenue Recognition The Company records rental revenue from operating leases on straight-line basis over the term of the leases and maintains an allowance for estimated losses that may result from the inability of its tenants to make required payments Companys allowance for doubtful accounts If tenants fail to make contractual lease payments that are greater than the security deposits and letters of credit then the Company may have to recognize additional doubtful account charges in future periods The Company monitors the liquidity and creditworthiness of its tenants on an on-going basis by reviewing their financial condition periodically as appropriate Each period the Company reviews its outstanding accounts receivable including straight-line rents for doubtful accounts and provides specific allowances as needed The Company also records lease termination fees when tenant has executed definitive termination agreement with the Company and the payment of the termination fee is not subject to any conditions that must be met or waived before the fee is due to the Company If tenant remains in the leased space following the execution of definitive termination agreement the applicable termination will be deferred and recognized over the term of such tenants occupancy F-8 Terreno Realty Corporation Notes to Consolidated Financial Statements Tenant expense reimbursement income includes payments and amounts due from tenants pursuant and is recognized for real estate property operating expenses and other recoverable taxes insurance to their leases as rental revenues during the same period the related expenses are incurred Deferred Financing Costs Costs incurred in connection with financings are capitalized and amortized to interest expense using the effective interest method over 2011 and 2010 deferred financing costs were $0.8 million net of accumulated amortization the term of the related loan As of both December 31 Mortgage Premiums Mortgage premiums represent the excess of the fair value of debt assumed over the principal value of debt assumed in connection with property acquisitions The mortgage premiums are being amortized to interest expense over the term of the related debt instrument using the effective interest method As of December 31 2011 and 2010 the net unamortized mortgage premiums were $0.6 million and $0.7 million respectively and were included as component of mortgage and term loans payable on the accompanying consolidated balance sheets Income Taxes The Company elected to be taxed as REIT under the Code and operates as such beginning with its taxable year that ended on December 31 2010 To qualify as REIT the Company must meet certain organizational and operational requirements including requirement to distribute at least 90% of its annual REIT regard to the dividends paid deduction taxable income to its stockholders which is computed without gain and which does not necessarily equal net income as calculated in accordance with JAAP As Company generally will not be subject income tax to the extent it distributes to federal or net capital REIT the qualifying dividends to its stockholders If it fails to qualify as REIT in any taxable year it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost unless the IRS grants it relief under Companys net income and net cash available for distribution statutory certain provisions Such an event could materially adversely affect the to stockholders However the Company believes it is organized and operates in such manner as to qualify for treatment as REIT ASC 740-10 Income Taxes provides guidance for how uncertain tax positions should be recognized measured and disclosed in the financial statements presented the course of preparing the Companys tax returns to determine whether not of being sustained by the applicable tax authority Tax benefits of positions not deemed the tax positions are more-likely-than to meet the more- ASC 740-10 requires the evaluation of tax positions taken in likely-than-not threshold are recorded as tax expense in the current year On February 16 2010 commencement of operations the Company adopted the provisions of ASC 740-10 with no material effect on either the financial condition or results of operations As of December 31 2011 the Company did not have any unrecognized positions over tax benefits and does not believe that there will be any material changes in unrecognized tax the next 12 months The Companys tax returns are subject to examination by federal state and local tax jurisdictions for the 2010 calendar year Stock-Based Compensation and Other Long-Term Incentive Compensation The Company follows the provisions of ASC 718 Compensation-Stock Compensation to account for its stock-based compensation plan which requires that the compensation cost relating to stock-based payment transactions be recognized in the financial statements and that the cost be measured on the fair value of the equity or liability instruments issued The Company has adopted the 2010 Equity Plan which provides for the grant of restricted stock awards performance share awards unrestricted shares or any combination of the foregoing Stock-based compensation is recognized and measured at the fair value of the award on the date of grant The Company estimates the forfeiture as general and administrative expense in the accompanying consolidated statements of operations rate based on historical experience as well as expected behavior The amount of the expense may be subject to adjustment in future periods depending on the specific characteristics of the stock-based award F-9 Teirreno Realty Corporation Notes to Consolidated Financial Statements In addition the Company has awarded long-term incentive target awards the LTIP awards to its executives that are payable in shares of the Companys common stock after the conclusion of each pre.-established performance measurement period The amount that may be earned under the LTIP awards is variable depending on the relative total shareholder return of the Companys stock as compared to the total shareholder return of the MSCI U.S REIT Index and the FTSE NAREIT Equity Industrial Index over the pre-established performance measurement period The Company estimates the fair value of the LTIP awards using Monte Carlo simulation model on the date of grant The LTIP awards are recognized as compensation over the requisite performance period based on the fair value of the LTIP awards at the balance sheet expense date Fair Value of Financial Instruments ASC 820 Fair Value Measurements and Disclosures defines fair value as the price that would be received between market participants to sell an asset or paid to transfer at the measurement date ASC 820 also provides guidance liability in an orderly transaction for using fair value to measure financial assets and liabilities ASC 820 requires disclosure of the level within the fair value hierarchy in which the fair value measurements fall including measurements using quoted prices in active markets for identical assets or liabilities Level quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active Level and significant valuation assumptions that are not readily observable in the market Level As of December 31 2011 and 2010 the fair values of cash and cash equivalents accounts payable and deferred underwriting fee payable approximated their carrying values because of the short-term nature of these investments or liabilities Cash equivalents of $0 and approximately $53.9 million were invested in short-term investments as of December 31 2011 and 2010 respectively which would qualify as Level classification under the fair value hierarchy Based on borrowing rates available to the Company at December 31 2011 and 2010 the estimated fair values of the mortgage and term loans payable were approximately $59.2 million and $17.1 million respectively Segment Disclosure ASC 280 Segment Reporting establishes standards for reporting financial and descriptive information about an enterprises reportable segment The Company has determined that it has one reportable segment with activities related to investing in real estate Our investments in real estate are geographically diversified and our chief operating decision makers evaluate operating performance on an individual asset level As each of our assets has similar economic characteristics our assets have been aggregated into one reportable segment Note Concentration of Credit Risk Financial significant concentration of credit risk consist primarily of cash maintain deposits in federally insured financial institutions instruments that potentially subject the Company to The Company may in excess of federally insured limits However and cash equivalents the Companys management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held As of December which accounted 31 2011 the Company owned six properties located in Northern New Jersey/New York City for 45.5% of its annualized from leases in rent which is based on contractual rent base base effect as of December 31 2011 excluding any partial or full rent abatements F- 10 Terreno Realty Corporation Notes to Consolidated Financial Statements Other real estate tenants to occupy space The existence of competing properties could companies compete with the Company in its real estate markets This results impact have material in competition for on the Companys ability to lease space and on the level of rent that can be achieved The Companys top ten tenants as of December 31 2011 are as follows Tenant YRC Worldwide H.D Smith Wholesale Drug Company Home Depot Precision Custom Coatings Miami International Freight Solutions Banah International Group FedEx Corporation International Paper Company Maines Paper Food Service 10 Duro Bag Manufacturing Company Rentable Rentable Leases Square Feet Square Feet Base Rent 000s1 of Total Annualized 182803 211418 413092 208000 166220 301983 72808 137872 98745 120948 5.4% 6.2% 12.1% 6.1% 4.9% 8.8% 2.1% 4.0% 2.9% 3.5% 2463 1949 1889 1637 956 906 852 680 636 615 of Total Annualized Base Rent 11.8% 9.3% 9.0% 7.8% 4.6% 4.3% 4.1% 3.2% 3.0% 2.9% Total 12 1913889 56.0% $12583 60.0% Annualized base rent is calculated as monthly base rent per the leases excluding any partial or full rent abatements as of December 31 2011 multiplied by 12 Note Investments in Real Estate During year ended December 31 2011 the Company acquired 14 industrial buildings containing approximately 1.1 million square feet The total aggregate initial investment was approximately $119.2 million which was allocated $61.6 million to land $51.0 million to buildings and $0.4 million to intangible liabilities The properties were acquired cash on hand net of assumed mortgage loans payable and improvements $6.6 million to intangible assets from unrelated third parties using existing and borrowings on the term loan and credit facility and were accounted for as asset acquisitions The following table sets forth the wholly-owned industrial properties the Company acquired during the year ended December 31 2011 Property Name Dorsey Belleville 630 Glasgow 8730 Boilman Dell 70th Avenue 19601 Hamilton 39th Street 620 Division 48th Avenue Clawiter Valley Corporate Total Location Acquisition Date Buildings Square Feet Number of Purchase Price in thousands Jessup MD Kearny NJ Inglewood CA Savage MD Carlstadt NJ Miami FL Torrance CA Dora FL Elizabeth NJ Miami Gardens FL Hayward CA Kent WA March 25 2011 May 20 2011 June 2011 June 24 2011 June 28 2011 June 28 2011 July 20 2011 August 19 2011 October 2011 December 15 2011 December 15 2011 December 30 2011 F-il 135000 211418 27505 98745 27410 35000 72808 40000 150348 57682 33842 168790 5800 32600 4100 7500 7725 4000 12350 4400 10350 7200 7625 15025 14 1058548 $118675 Terreno Realty Corporation Notes to Consolidated Financial Statements Excludes intangible liabilities and assumed mortgage premiums totaling approximately $0.5 million The total aggregate investment was approximately $119.2 million The Company recorded million and $1.5 million respectively revenues related to the above acquisitions and net income for the year ended December 31 2011 of approximately $4.1 On May 20 2011 the Company acquired Belleville for which was allocated $12.9 million to land $18.0 million to buildings total purchase intangible assets The property was acquired assumed mortgage loan payable of approximately and improvements from an unrelated third party existing cash $14.8 million The Company recorded and $1.7 million to on hand net of an revenues and net price of approximately $32.6 million income for the year ended December 31 2011 of approximately $1.7 million and $0.5 million respectively related to this acquisition On December 30 2011 the Company acquired Valley Corporate for total purchase price of approximately $15.0 million which was allocated $5.2 million to land $9.1 million to buildings and improvements $0.9 million to intangible assets and $0.2 million ito intangible liabilities The property was acquired from an unrelated third party existing cash on hand net of borrowings on the term loan The Company recorded revenues and net loss for the year ended December 31 2011 of approximately $5000 and $5000 respectively related to this acquisition During the period from February 16 2010 commencement of operations to December 31 2010 the Company acquired investment 33 industrial buildings containing approximately 2.4 million square feet The total aggregate initial was approximately $136.0 million which was allocated $71.8 million to land $55.9 million to buildings and improvements $8.3 million to intangible assets and $0.9 million to intangible liabilities The properties were acquired from unrelated third parties using existing cash on hand net of assumed mortgage loans payable and were accounted for as asset acquisitions Property Name Location Acquisition Date Number of Buildings Square Feet Purchase Price in thousands Fortune/Qume Warm Springs 238/242 Lawrence and II Rialto Maltese Middlebrook 130 Interstate 299 Lawrence Kent 188 Ahern 10th Avenue 60th Avenue Total March 30 2010 San Jose CA Fremont CA March 26 2010 South San Francisco CA August 13 2010 San Bernardino CA Totowa NJ September 15 2010 September 21 2010 Bound Brook NJ September 24 2010 September 29 2010 NJ South Brunswick South San Francisco CA November Kent WA Union City CA Hialeah FL December December December 2010 14 2010 15 2010 20 2010 Miami Lakes FL December 20 2010 18 71516 140466 80524 121551 208000 580982 413092 19247 137872 86271 301983 195547 5550 7264 9620 12152 16500 27000 22450 2550 8275 6255 9000 7750 33 2357051 $134366 Excludes intangible liabilities and assumed mortgage premiums totaling approximately $1.6 million The total aggregate investment was approximately $136.0 million F- 12 Terreno Realty Corporation Notes to Consolidated Financial Statements The following supplementary forma financial pro 31 2011 and 2010 as information presents if all acquisitions during 2011 occurred the results of operations of the Company 2010 on January for the years ended December Since the Company commenced operations on February 16 2010 upon completion of its IPO pro forma adjustments have been included for corporate general and administrative December 31 2010 The pro forma results for the years ended December for the year ended expenses 31 2011 and 2010 have been presented for comparative purposes only and are not necessarily indicative of the results of operations that would have actually occurred had all transactions taken place on January 2010 or of future results of operations dollars in thousands except per share data Pro Forma Financial Information Total revenues Net income loss available to common stockholders Basic and Diluted net income loss available to common stockholders per share Note Debt For the Years Ended December 31 2011 2010 Unaudited $23552 $14121 1061 0.12 3183 0.35 As of December 31 2011 and 2010 the Company had an $80.0 million senior revolving on March 22 2013 the Facility see Note 11 The amount available under credit facility that the Facility may be matures increased up to $150.0 million subject to certain conditions and the identification of lenders willing to make available additional amounts Interest on the Facility will generally be paid based upon at the Companys option either LIBOR plus the applicable LIBOR margin or ii the applicable base administrative plus the applicable LIBOR margin for LIBOR rate loans under agents prime rate plus 1.00% 0.50% above the federal rate which is the greater funds effective rate or thirty-day LIBOR the Facility The applicable LIBOR margin will of the range from 3.00% to 4.25% 3.00% as of December 31 2011 depending on the ratio of the Companys outstanding consolidated indebtedness to the value of the Companys consolidated gross asset value The Facility requires payment of an annual unused facility fee in an amount equal to 0.35% or 0.50% depending on the unused portion of the Facility The unused facility fee was $359000 and $197000 respectively for the year ended December 31 2011 and for the period from February 16 2010 commencement of operations to December 31 2010 The Facility includes series of financial and other covenants that the Company must comply with in order to borrow under borrower wholly-owned subsidiary the Facility The Company has agreed under the Facility As of December to guarantee the obligations of the 31 2011 there were $41.0 million of borrowings outstanding under the Facility and ten properties were in the borrowing base The Company was in compliance with its financial covenants at December 31 2011 and 2010 On August 23 2011 the Company entered into $10.1 million senior secured term loan agreement that matures on February 22 2013 the Term Loan subject to one six-month extension exercisable by the Company subject to the satisfaction of certain conditions On December 29 2011 the Company increased the borrowings on the Term Loan to $20.1 million Interest LIBOR plus the applicable LIBOR margin or ii the applicable base on the Term Loan will generally be based upon at the Companys option rate which is the greater of the either administrative agents 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 applicable LIBOR margin is 3.50% The Term Loan includes the Term Loan As of December 31 2011 the series of financial and other covenants that are similar to the covenants in the Facility The Company has agreed to guarantee the obligations of the borrower wholly-owned subsidiary December 31 2011 under the Term Loan The Company was in compliance with its financial covenants at F-13 Terreno Realty Corporation Notes to Consolidated Financial Statements During the year ended December 31 2011 the Company assumed two mortgage loans totaling approximately $21.6 million that bear interest at weighted average fixed rate of approximately payable are collateralized by certain of the properties and require monthly interest 5.51% The mortgage loans and principal payments until maturity and are generally non-recourse The mortgage loans mature between 2015 and 2021 As of December 31 2010 the Company had two mortgage loans payable totaling approximately $17.7 million which bore interest at weighted average fixed annual interest rate of 5.19% principal payments of the Companys debt as of December 31 2011 were as follows dollars in The scheduled thousands 2012 2013 2014 2015 2016 Thereafter Subtotal Unamortized net premiums Total Credit Term Loan Mortgage Loans Facility Payable Payable Total Debt 41000 20050 1128 1195 1265 1128 62245 1265 20346 20346 682 682 13038 13038 41000 20050 37654 98704 611 611 $41000 $20050 $38265 $99315 Weighted Average Interest Rate 3.3% 3.8% 5.4% 4.2% Note Leasing The following is schedule of minimum future cash rentals on tenant operating leases in effect as of December 31 2011 The schedule does not reflect future rental revenues from the renewal or replacement of existing leases and excludes property operating expense reimbursements dollars in thousands 2012 2013 2014 2015 2016 Thereafter Total 18758 18146 15806 13784 12765 50062 $129321 Note Stockholders Equity The Companys authorized capital stock consists of 400000000 shares of common stock $0.01 par value per share and 100000000 shares of preferred stock $0.01 par value per share As of December 31 2011 9308670 shares of common stock were issued and outstanding no shares of preferred stock were issued and outstanding including 133526 non-vested restricted stock awards and In connection with the annual meeting of stockholders shares of unrestricted common stock to its independent on May 18 2011 the Company granted directors under the Companys 2010 Equity Incentive total of 18272 F- 14 Terreno Realty Corporation Notes to Consolidated Financial Statements Plan with grant date fair value per share of $16.42 The grant date fair value of the unrestricted common stock was determined using the closing price of the Companys stock on the date of the grant The Company recognized approximately $0.3 million in compensation costs for the year ended December 31 2011 related to this issuance In connection the IPO on February common stock to Terreno Capital Partners LLC an entity with the completion of 16 2010 the Company issued 12000 owned by the Companys executive shares of officers in exchange for the contribution of fixed assets to the Company with net book value of $240000 These shares were subsequently distributed to such executive officers As of December grants unrestricted stock awards or performance 31 2011 there were 455000 shares of common stock authorized for issuance shares under the Companys 2010 Equity Incentive Plan of as restricted stock which 255762 were remaining The grant date fair value per share of restricted stock awards issued during the period from February 16 2010 commencement of operations to December 31 2011 ranged from $17.82 to $20.00 The grant date fair value of the restricted stock was determined using the initial public offering price of $20.00 for grants issued on February 16 2010 commencement of operations and for all grants issued after the commencement of operations the Company uses the closing price of the Companys stock on the date of grant The fair value of the restricted stock that was granted during the year ended December 31 2011 was $0.5 million and the vesting period for the restricted stock is five years As of December 31 2011 the Company had approximately $2.1 million of total unrecognized compensation costs related to restricted stock issuances which is expected to be recognized over remaining weighted average period of approximately 3.4 years The Company recognized compensation costs of approximately $0.7 million and $0.8 million for the year ended December 31 2011 and for the period from February 16 2010 commencement of operations to December 31 2010 respectively officers employees and directors with the related weighted average grant date fair value share prices for the year ended December 31 2011 and for the period from February 16 2010 commencement summary of the total to the Companys executive The following shares granted of operations restricted to is December 31 2010 Restricted Stock Activity Non-vested shares outstanding at beginning of period Granted Forfeited Vested Non-vested shares outstanding as of December 31 2010 Granted Forfeited Vested Weighted Average Grant Date Fair Value 19.93 20.00 19.93 17.82 20.00 19.95 Shares 155778 5000 150778 28904 1284 44872 Non-vested shares outstanding at end of period 133526 $19.54 F- 15 Terreno Realty Corporation Notes to Consolidated Financial Statements The following is vesting schedule of the total non-vested shares of restricted stock outstanding as of December 31 2011 Non-vested Shares Vesting Schedule Number of Shares 2012 2013 2014 2015 2016 Total Non-vested Shares 31936 31936 31936 31936 5782 133526 Long-Term Incentive Plan As of December 2010 to December 31 2011 there are two performance measurement periods for the LTIP awards February 31 2013 The LTIP awards related to the 12011 to December 31 2012 and January 16 performance measurement period from February 16 2010 to December 31 2011 resulted in no compensation expense as the compensation committee determined that the Companys total shareholder return did not exceed the applicable metrics during the performance measurement period The Company recorded compensation costs of approximately $0.2 million for the year ended December 31 2011 The Monte Carlo fair value assumptions for the LTIP awards for the performance measurement periods in the table below are as follows Performance Period Risk free interest rate Volatility Fair value of LTIP awards Dividends February 162010 to December 312012 January December 2011 to 312013 2.9 years 0.1% 26.6% years 0.3% 21.8% 93012 $534580 table The following 2011 No dividends were paid during the period from February December forth the cash dividends paid or payable sets 31 2010 per share during the year ended December 31 16 2010 commencement of operations to For the Three Months Ended per Share Declaration Date Record Date Date Paid Dividend March 31 2011 June 30 2011 September 30 2011 December 31 2011 Note Net Loss Per Share $0.10 $0.10 $0.10 $0.10 February 172011 May 18 2011 August 11 2011 November 2011 April52011 July 2011 October 2011 April 19 2011 July20 2011 October 20 2011 January 2012 January 20 2012 Pursuant to ASC 260-10-45 Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities unvested share-based payment awards that contain non-forfeitable rights to dividends are participating securities two-class method The two-class method of computing common stock and any participating securities according earnings per share allocates earnings per share for to dividends declared whether paid or unpaid and and are included in the computation of earnings per share pursuant to the F- 16 Terreno Realty Corporation Notes to Consolidated Financial Statements in undistributed earnings Under the two-class method earnings per common share are participation rights computed by dividing the sum of distributed earnings to common stockholders allocated to common stockholders by the weighted average number of common shares outstanding for the period and undistributed earnings Our nonvested restricted stock is considered participating securities since these share-based awards contain non-forfeitable rights to dividends irrespective of whether the awards ultimately vest or expire The Company had no dilutive restricted stock awards outstanding for the year ended December 31 2011 or for the period from February 16 2010 commencement of operations to December 31 2010 Note Quarterly Results of Operations Unaudited Total revenues Total costs and expenses Total other income and expenses Net loss available to common stockholders 2011 Quarter Ended March31 June30 September30 December31 3370 4312 364 1306 3766 5266 461 1961 4777 4241 804 268 5589 4798 985 194 Basic and Diluted net loss available to common stockholders per share 0.14 0.21 0.03 0.02 Basic and Diluted Weighted Average Common Shares Outstanding 9132766 9164741 9174274 9174747 Total revenues Total costs and expenses Total other income and expenses Net loss available to common stockholders 2010 Quarter Ended March31 June30 September30 December31 12 771 757 333 1580 84 1331 642 3241 105 2704 3044 3369 273 598 Basic and Diluted net loss available to common stockholders per share 0.08 0.15 0.30 0.07 Basic and Diluted Weighted Average Common Shares Outstanding 9112000 9112000 9112000 9112000 The above quarterly losses per share calculations are based on the weighted average number of common shares outstanding during each quarter for the period from February The losses per share calculation for the year ended December of operations 16 2010 commencement to December 31 2010 in the 31 2011 and Consolidated Statements of Operations is based on the weighted average number of common shares outstanding for the year ended December 31 2011 and for the period from February 16 2010 commencement of operations year December to December 31 2010 respectively The sum of the quarterly financial data may vary from the 31 2011 and the period from February 16 2010 commencement of operations to December 31 2010 data due to rounding Represents the period from February 16 commencement of operations to March 31 2010 F-17 Terreno Realty Corporation Notes to Consolidated Financial Statements Note 10 Commitments and Contingencies Deferred Underwriting Commissions Underwriting commissions incurred in connection with the Companys IPO are reflected as reduction of additional paid in capital in the amount of $10.5 million At the time of the Companys IPO the underwriters deferred approximately $7.0 million of their underwriting commissions until such time as the Company purchased assets in accordance with its investment strategy described in the Companys Annual Report on Form 10-K for the period ended December 31 2010 with an aggregate price including the amount of any outstanding indebtedness assumed or incurred by the Company at least equal December to the net proceeds 31 2011 The deferred underwriting from the IPO The deferred underwriting fee was paid during the year ended commissions as of December 31 2010 are reflected in deferred underwriting fee payable As of December 31 2011 the Company had paid approximately $10.5 million in underwriting conmiissions which represents the full amount of the underwriting commissions that the Company was obligated to pay in connection with the IPO Litigation The Company is not involved in any material litigation nor to its knowledge is any material litigation threatened against it In the normal course of business from time to time the Company may be involved in legal actions relating to the ownership and operations of its properties Management does not expect that the liabilities if any that may ultimately result from such legal actions will have material effect on the consolidated financial position results of operations or cash flows of the Company Environmental Matters The industrial properties that the Company owns and will acquire are subject to various federal state and local environmental laws Under these laws courts and government agencies have the authority to require the Company not know of or was not responsible for the contamination as owner of contaminated property to clean up the These laws also apply to persons who owned property even if it did property at the time it became contaminated and therefore it is possible the Company could even after the Company sells some of the properties it acquires incur these costs contamination can affect the value of property and therefore collateral or to sell the property Under applicable environmental In addition to the costs of cleanup environmental an owners ability to borrow using the property as also have laws courts and government agencies the authority to require that person who sent waste to waste disposal facility such as landfill or an incinerator pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment Furthermore various court decisions have established that third parties may recover damages for injury caused by property contamination For instance person exposed to asbestos at one of our properties may seek to recover damages if he or she suffers injury from the asbestos the use of property or place conditions on various activities some of these environmental Lastly An example would be laws that require business laws restrict using chemicals to manage them carefully and to notify local officials that the chemicals are being used The Company could be responsible for any of the costs discussed above The costs to clean up contaminated property to defend against claim or to comply with environmental laws could be material and could adversely affect the funds available for distribution to our stockholders The Company generally obtains Phase environmental site assessments or ESAs on each property prior to acquiring it However these ESAs may not reveal all environmental costs that might have material adverse effect on the Companys business assets results of operations or liquidity and may not identify all potential environmental liabilities The Company utilizes local third party property managers for day-to-day property management and will rely on these third parties to operate its industrial properties in compliance with applicable federal state and local environmental laws any environmental in their daily operation of the respective properties and to promptly notify the Company of contaminations or similar issues F- 18 Terreno Realty Corporation Notes to Consolidated Financial Statements As result the Company may become subject to material environmental liabilities of which it is unaware The Company can make no assurances that future laws or regulations will not impose material environmental liabilities on it or the environmental condition of the Companys industrial properties will not be affected by the condition of the properties in the vicinity of its industrial properties such as the presence of leaking underground storage tanks or by third parties unrelated to the Company The Company was not aware of any significant or material exposures as of December 31 2011 and 2010 General Uninsured Losses The Company carries property and rental loss liability and terrorism insurance The Company believes that the policy terms conditions limits and deductibles are adequate and appropriate under the circumstances given the relative risk of loss the cost of such coverage and current industry practice In addition the Companys properties are located or may in the future be located in areas that are subject to earthquake and flood activity As result the Company has obtained as applicable limited earthquake and flood insurance on those properties There are however certain types of extraordinary losses such as those due to acts of war that may be either uninsurable or not economically insurable Although the Company has obtained coverage for certain acts of terrorism with policy specifications and insured limits that it believes are commercially reasonable there can be no assurance that the Company will be able to collect under such policies Should an uninsured loss occur the Company could lose its investment in and anticipated profits and cash flows from property and 2010 The Company was not aware of any significant or material exposures as of December 31 2011 Contractual Commitments Subsequent to December 31 2011 the Company entered into two contracts with third-party sellers to acquire two industrial properties consisting of approximately 135000 square feet There is no assurance that the Company will acquire the properties under contract because the proposed acquisitions are subject to the completion of satisfactory due diligence various closing conditions and the consent of the mortgage lender The following properties the Company has under contract table summarizes certain information with respect to the Market Los Angeles Miami Northern New Jersey/New York San Francisco Bay Area Seattle Washington D.C.JBaltimore Total Note 11 Subsequent Events Number of Purchase Price Assumed Debt Buildings Square Feet in thousands in thousands 135000 135000 12760 $12760 3600 $3600 On January stock at 13 2012 the Company completed price per share of $14.25 On February public follow-on offering of 4000000 shares of its common 13 2012 we sold an additional 61853 shares of our common stock at price per share of $14.25 upon the exercise by the underwriters of their option to purchase additional shares The net proceeds of the primary follow-on offering were approximately $54.7 million after deducting the full underwriting discount of approximately $2.8 million and other estimated offering expenses of approximately $0.4 million The Company used approximately $41.0 million of the net proceeds to repay outstanding borrowings under the Facility on January 13 2012 and intends to use the remainder of the net proceeds to invest in industrial properties and for general business purposes F- 19 Terreno Realty Corporation Notes to Consolidated Financial Statements On January 19 2012 the Company entered into Second Amendment to Amended and Restated Senior Revolving Credit Agreement the Amended Facility with KeyBank National Association as administrative agent and as lender and the other lenders thereunder which provides for certain amendments to its $80.0 million revolving provides for one 12-month extension option exercisable by the Company The Amended Facility extends facility credit the maturity date to January 19 2015 and The amendment provides that outstanding borrowings properties Interest are limited to the lesser of $80.0 million and 60% of the value of the borrowing base to generally be paid based upon at the Companys on the Amended Facility will continue option either LIBOR plus the applicable LIBOR margin or ii the applicable base rate which is the greater of the administrative agents 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 LIBOR margin will range from 2.50% to 3.50% depending on the ratio of the Companys outstanding the Amended Facility The applicable consolidated indebtedness to the value of the Companys consolidated gross asset value The Amended Facility requires payment of an annual unused facility fee in an amount equal to 0.25% or 0.35% depending on the unused portion of the credit facility The Company will continue to guarantee the obligations of the borrower wholly-owned subsidiary under the Amended Facility On January 3.79% that matures 30 2012 we entered into $20.0 million non-recourse mortgage loan at fixed annual interest rate of on February 2019 The mortgage loan is secured by five of our properties portion of these proceeds were used to pay down the Term Loan On February 21 2012 our board of directors authorized us to declare cash dividend in the amount of $0.10 per share of our conmon stock payable on April 19 2012 to the stockholders of record as of the close of business on April 2012 F-20 Middlebrook 18 Bound Brook NJ San Francisco Bay Area 238/242 Lawrence South Terreno Realty Corporation Schedule III Real Estate Investments and Accumulated Depreciation As of December 31 2011 in thousands Initial Cost to Company Costs Capitalized Gross Amount Carried at 12/31111 No of Bldgs Location Encumbrances Land Improvements Acquisition Land hnprovements Total Depreciation Acquired Constructed Buildings to Buildings Accumulated Year Year Inglewood CA Torrance CA San Bernardino CA South Brunswick NJ Elizabeth NJ Kearny NJ Carlstadt NJ Totowa NJ San Francisco CA San Francisco CA South Union City CA Hayward CA San Jose CA Fremont CA Kent WA Kent WA Hialeah FL DoralFL Miami Gardens Miami Lakes FL FL MiamiFL Savage MD Jessup MD 6725 14604 14884 1441 2245 7409 6218 8686 6491 12845 6641 7231 16442 6674 1352 3246 5964 2518 1855 4072 5148 12135 3568 18041 771 7598 10241 2655 1198 2749 1159 2484 3664 2782 3251 5264 6376 1420 4322 6203 1434 4361 3207 4719 9108 2624 2717 2187 1567 2333 2757 2383 98 20 89 14 2662 357 382 70 589 507 363 1100 2511 670 2245 7409 6218 8686 6491 12845 6641 7231 16442 6674 1352 3246 5964 2518 1953 4072 5148 12155 3657 18055 771 7598 12903 3012 1580 2819 1159 3073 4198 11481 11366 20841 10148 30900 7412 14829 29345 9686 2932 6065 7123 5591 3664 3289 6953 3251 5264 6376 1420 4322 6203 1434 4361 3207 5082 9108 3724 2719 2187 4078 2335 2757 3053 8333 14372 10100 4139 6509 10281 3769 7118 6260 25 47 166 392 19 282 10 245 438 94 43 73 115 135 123 79 25 65 32 37 52 2011 2011 2010 2010 2011 2011 2011 2010 2010 2010 2010 2010 2011 2010 2010 2010 2011 2010 2011 2011 2010 2011 2011 2011 1988 1985 2002 1999 1980 2006 1972 1964 1958-1976 1986 1968 1986 1967 1980 1984 1979 1987 1957/2005 2002 1987 1971 1999 1984 1977 47 47 37654 133464 106851 9436 133464 116287 249751 2509 611 $38265 $133464 $106851 $9436 $133464 $116287 $264584 $7063 14833 4554 Property ____________ Name Los Angeles 630 Glasgow 19601 Hamilton Rialto Northern New Jersey/ New York 130 Interstate 620 Division Belleville Dell Maltese 299 Lawrence Ahern Clawiter Fortune/Qume Warm Springs and II Seattle Kent 188 Valley Corporate Miami 10th Avenue 39th Street 48th Avenue 60th Avenue 70th Avenue Washington D.C./ Baltimore 8730 Boilman Dorsey Subtotal Unamortized net premiums Intangible assets Total Terreno Realty Corporation Schedule III Real Estate Investments and Accumulated Depreciation Continued As of December 312011 in thousands summary of activity for real estate and accumulated depreciation for the year ended December 31 2011 and for the period from February 16 2010 commencement of operations to December 31 2010 is as follows Investment in Properties Balance at beginning of period Acquisition of properties Improvements Balance at end of period Accumulated Depreciation Balance at beginning of period Amortization of lease intangible assets Depreciation expense Balance at end of period 2011 2010 $136363 119203 9018 136040 323 $264584 $136363 2011 2010 1502 760 4801 7063 321 1181 1502 S-2 SIGNATURES Pursuant to the requirements of Section 13 or 15d of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized in the City of San Francisco State of California on February 22 2012 Terreno Realty Corporation By Is Blake Baird Blake Baird Chairman and Chief Executive Officer Power of Attorney We the undersigned Blake Baird and Michael directors of Terreno Realty Corporation hereby severally constitute and appoint Coke and each of them singly our true and lawful attorneys with full power to them and each of them singly to sign for us in our names in the capacities indicated below all amendments to this report and generally to do all things in our names and on our behalf in such capacities to enable Terreno Realty Corporation to comply with the provisions of the Securities Exchange Act of 1934 as amended and all requirements of the Securities and Exchange Commission Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated Signature Thle Date /sIW Blake Baird Blake Baird Is Michael Coke Michael Coke Is LeRoy Carison LeRoy Carison Chairman Chief Executive Officer and Director February 22 2012 principal executive officer President Chief Financial Officer and Director February 22 2012 principal financial and accounting officer Director February 22 2012 Is Peter Merlone Director February 22 2012 Peter Merlone Is Douglas Pasquale Director February 22 2012 Douglas Pasquale Is Dennis Polk Dennis Polk Director February 22 2012 Exhibit Number 3.1 Exhibit Index Exhibit Description Articles of Amendment and Restatement No to the Companys Registration Statement of Registrant previously filed as Exhibit 3.1 to Amendment on Form S-il on January 2010 and incorporated herein by reference 3.2 Amended and Restated Bylaws of Registrant previously filed as Exhibit 3.2 to Amendment No to the Companys Registration Statement on Form S-li on January 2010 and incorporated herein by reference 4.1 Specimen Common Stock Certificate No to the Companys Registration Statement of Registrant previously filed as Exhibit 4.1 to Amendment on Form S-li on January 15 2010 and incorporated herein by reference 10.1 Form of Severance Agreement between Registrant and Blake Baird previously filed as Exhibit 10.1 to Amendment No to the Companys Registration Statement on Form S-il on January 2010 and incorporated herein by reference 10.2 Form of Severance 10.2 to Amendment No Agreement between Registrant and Michael Coke previously filed as Exhibit to the Companys Registration Statement on Form S-il on January 2010 and incorporated by reference herein 10.3 2010 Equity Incentive Plan of Registrant previously filed as Exhibit 10.3 to the Companys Annual Report on Form 10-K on March 29 2010 and incorporated by reference herein 10.4 10.5 Form of Restricted Stock Award Agreement as Exhibit 10.4 to Amendment No for Executive Officers and Employees previously filed to the Companys Registration Statement on Form S- 11 on January 2010 and incorporated herein by reference Form of Restricted Stock Award Agreement 10.5 to Amendment No to the Companys Registration Statement on Form S-li on January for Non-Employee Directors previously filed as Exhibit 2010 and incorporated herein by reference 10.6 Form of Indemnification Agreement between Registrant and its Directors and Executive Officers filed as Exhibit 10.6 to Amendment No to the Companys Registration Statement on previously Form S-li on January 2010 and incorporated herein by reference 10.7 10.8 Long-Term Incentive Plan of Registrant previously filed as Exhibit 10.7 to the Companys Annual Report on Form 10-K on March 29 2010 and incorporated by reference herein Form of Award Notice 10.8 to Amendment No under the Long-Term Incentive Plan of Registrant previously filed as Exhibit to the Companys Registration Statement on Form S-li on January 2010 and incorporated herein by reference 10.9 Form of Subscription Agreement previously filed as Exhibit 10.9 to Amendment No to the Companys Registration Statement on Form S-li on January 2010 and incorporated herein by reference 10.10 10.11 Amended and Restated Senior Revolving Credit Agreement Terreno Realty LLC KeyBank National Association Administrative Agent KeyBanc dated as of December 30 2010 among both individually as Lender and as Capital Markets as Lead Arranger and the several banks financial institutions Lenders previously and other entities which may from time to time become filed as Exhibit 10.1 to the Companys Current Report parties as additional on Form 8-K on January 2011 and incorporated by reference herein Agreement of Sale dated as of May 17 2010 between Advance and Terreno Realty LLC previously filed as Exhibit 10.1 at Middlebrook Crossroads LLC to the Companys Quarterly Report on Form i0-Q on August 12 2010 and incorporated by reference herein Exhibit Number 10.12 10.13 Exhibit Description Agreement of Purchase and Terreno Realty LLC previously Form 8-K on October and Sale dated as of September 30 2010 between 130 Interstate Blvd LLC filed as Exhibit 2.1 to the Companys Current Report on 2010 and incorporated by reference herein Agreement of Purchase Terreno Realty LLC previously and Sale dated as of March 31 2011 between Saw Mill Park LLC and filed as Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q on May 2011 and incorporated by reference herein 10.14 Senior Secured Term Loan Agreement dated as of August 23 2011 among Terreno Realty LLC KeyBank National Association as Administrative Agent KeyBanc Capital Markets as Lead Arranger and the several lenders which may from time to time become parties as additional Lenders previously filed as Exhibit 10.1 to the Companys Current Report on Form 8-K on August 26 2011 and incorporated by reference herein 10.15 First Amendment to Senior Secured Terreno Realty LLC as Borrower KeyBank National Association and as an Administrative Agent and KeyBanc Capital Markets as Lead Arranger previously filed as Exhibit 10.1 to the Companys Current Report on Form 8-K on January both individually as dated as of December Term Loan Agreement 29 2011 among Lender 2012 and incorporated by reference herein 21 Subsidiaries of Registrant 23.1 24.1 31.1 Consent of Independent Registered Public Accounting Firm Power of Attorney included on the signature page to this Annual Report on Form 10-K Certification of Chief Executive Officer pursuant to Rules 3a- 15e and 15d- 15e as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Rules 3a- 15e and 5d- 15e as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 32.2 Certification of Chief Executive Officer of pursuant Act of 2002 906 of the Sarbanes-Oxley to Section to 18 U.S.C Section 1350 as adopted pursuant Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.1 First Amendment to Amended and Restated Senior Revolving Credit Agreement dated June 30 2011 previously filed as Exhibit 99.1 to the Companys Quarterly Report on Form 10-Q on August 2011 and incorporated by reference herein 101 The following materials from Terreno Realty Corporations Annual Report on Form 10-K for the year ended December 31 2011 formatted in XBRL eXtensible Business Reporting Language Consolidated Balance Sheets ii Consolidated Statements of Operations iii Consolidated Statements Financial Statements of Equity iv Consolidated and vi Schedule Statements of Cash Flows Notes to Consolidated Ill-Real Estate Investments and Accumulated Depreciation Filed herewith Furnished herewith Pursuant to Rule 406T of Regulation S-T these interactive data files are deemed not filed or part of registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections Exhibit is management contract or compensatory plan or arrangement PAGE INTENTIONALLY LEFF BLANK Annual Meeting Stockholders of Terreno Realty Corporation are invited of Stockholders to attend the Annual Meeting to be held at 800 A.M Pacific Time on Friday May 2012 at Terrenos headquarters Forward-Looking Statements This 2011 Annual Report contains toward- looking statements within the meaning of the federal securities laws Please see the discussion titled Forward-Looking State ments in our Annual Report on Form 10-K for discussion regarding risks to which these statements are subject Auditors Ernst Young LLP 560 Mission Street San Francisco CA 94105 Counsel Goodwin Procter LLP Place Exchange Boston MA 02109 TI 617.570.1403 Fl 617.523.1231 Transfer Agent Computershare Investor Services P.O Box 43078 Providence RI 02940-3078 800.662.7232 I/Inside 781.575.4238 II Outside the U.S the U.S www.computershare.com/investor Overnight Delivery Computershare Investor Services 250 Royall Street Canton MA 02021 TERRENO Headquarters Terreno Realty Corporation 16 Maiden Lane Fifth Floor CA 94108 San Francisco TI 415.6554580 1/415.655.4599 Investor Relations T/ 415.655.4580 El investors@terreno.com Stock Listing New York Stock Exchange /ITRNO Symbol News Releases News releases can be viewed on our websfte www.terreno.com 

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