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Jernigan Capital, Inc.13000516 Mffl 2Ui 40 Terreno Realty Corporation 2012 Annual Report Directors Executive Officers Blake Baird Chairman Chief Executive Officer Michao 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 February 26 2013 Dear Fellow Shareholders Here is review of our strategy our 2012 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 New Jersey/New York City San Francisco Bay Area Seattle Miami and Washington D.C./Baltimore Exclusively We believe 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 88% of our investments have been warehouse/distribution 9% have been flex and 3% have been trans-shipment Our six-market strategy provides discounts to replacement of safety We acquire properties at cost We do no ground up development or raw land margin acquisition We have no complex joint ventures We acquire 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 Whore we believe it is the best execution we manage our properties directly We sell properties from time to time when we believe the prospective total return from property is particularly low relative to its market value or the market value is significantly greater than the propertys estimated replacement cost Capital from such sales is recycled into properties that are expected to provide better prospective returns or is returned to shareholders These are our 2012 results We acquired 13 properties containing 22 buildings for purchase price of approximately $181 million up over 50% from 2011 adding 1.8 million square feet to our portfolio We recycled $17 million through the sale of trans-shipment facility in LA that we purchased in 2010 generating $4.0 million gain and 21% unleveraged IRR We now own 36 properties comprising 67 buildings and 5.1 million square feet that we purchased for approximately $422 million Since our IPO we have been the leading buyer of industrial real estate among public industrial REIT peers and the 10th-largest acquirer overall based on acquisition volume in our six markets Our value-add acquisitions generally contain vacant space or space with near-term expirations On average our acquisitions have been 77% leased Notwithstanding we ended the year 93.3% leased delivering on our invest ment strategy by stabilizing 11 of our 19 value-add properties Our same store cash basis net operating income grew by 11.9% We produced EPS of $0.19 compared to loss of $0.41 in 2011 and Funds From Operations of $0.57 per share compared to $0.12 in 2011 after recognizing disappointing loss of $1.2 million in 2012 related to large tenant in our Miami market upon whom we filed an eviction proceeding in January 2013 Despite this progress and while our total shareholder return in 2012 was 5.8% our stock price underperformed our peers and the REIT universe in 2010 2011 and 2012 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 most cases are rising modestly Nevertheless with national availability ending 2012 near 13% and new speculative development beginning in some markets it will take time before most markets exhibit significant rent growth We see growing set of acquisition opportunities Subsequent to yearend we raised approximately $95 million of new common equity to pursue those opportunities increase our liquidity and maintain prudent leverage In the intermediate term we expect to grow our portfolio to optimize our oper ating efficiency increase our shareholder liquidity and position us to achieve an investment grade credit rating to broaden our access to capital We remain mindful however that it is per share rather than aggregate results that matter 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 our ability to produce superior results for our shareholders over time As evidence of this confidence our senior management team and Board of Directors purchased 90325 additional common shares as part of our recent equity offering in February 2013 and 93000 shares in our January 2012 offering As we pursue Torrenos 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 2012 OR EJ TRANSITION EXCHANGE ACT OF 1934 REPORT PURSUANT TO SECTION 13 OR 15d OF THE SECURITIES 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 101 Montgomery Street Suite 200 San Francisco CA Address of Principal Executive Offices 27-1262675 I.R.S Employer Identification Number 94104 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 7.75% Series Cumulative Redeemable Preferred Stock $0.01 par value per share Name of Exchange on Which Registered New York Stock Exchange 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 No LJ Indicate by check mark if the registrant Act Yes No is not required to file reports pursuant to Section 13 or Section 15d of the 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 Yes No shorter period that the registrant was required to file 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 S-T during the preceding 12 months or for such shorter period that the registrant was required to submit and post such files Yes No 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 Part III of this Form 10-K or any amendment to this Form 10-K proxy or information statements incorporated by reference in Indicate by check mark whether reporting company See the definitions of the Exchange Act Check one the registrant is large accelerated filer an accelerated filer non-accelerated filer or smaller of large accelerated filer accelerated filer and smaller reporting company in Rule l2b-2 Large accelerated filer Non-accelerated filer Do not check if smaller reporting company Accelerated filer Smaller reporting company Indicate by check mark whether the registrant is shell company as defined in Rule 12b-2 of the Exchange Act Yes No Aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price as reported by the New York Stock Exchange business day of the Registrants most recently completed second at which the common equity was last sold as of June 292012 the last fiscal quarter $193145298 For this computation the Registrant owned by executive and directors officers of value of all shares of its common stock reported as beneficially has excluded the market the Registrant The registrant had 13434558 shares of its common stock $0.01 par value per share outstanding as of February 15 2013 Documents incorporated by Reference on Form 10-K incorporates by reference portions of Terreno Realty Corporations Proxy Statement for Past Ill of this Annual Report its 2013 Annual Meeting of Stockholders which the registrant anticipates will be filed with the Securities no later than 120 days after the end of its 2012 fiscal year pursuant to Regulation and Exchange Commission l4A Terreno Realty Corporation Annual Report on Form 10-K for the Year Ended December 31 2012 Table of Contents Part Item Business Item IA Risk Factors Item lB Unresolved Staff Comments Item Item Item Part 11 Item Item Item Properties Legal Proceedings Mine Safety Disclosures Market for RegisErants Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Managements iiscussion and Analysis of Financial Condition and Results of Operations Item 7A Quantitative and Qualitative Disclosures About Market Risk Item Financial Statements lata and Supplementary Item Changes in and Eisagreements with Accountants on Accounting and Financial iisclosure Item 9A Controls and Procedures Item 9B Other Information Part 111 Item 10 1irectors Executive Officers and Corporate Governance Item II Executive Compensation Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13 Certain Relationships and Related Transactions and Director Independence Item 14 Principal Accounting Fees and Services Part IV Item 15 Exhibits and Financial Statement Schedules Index to Financial Statements Signatures Exhibit Index 23 23 25 25 26 29 29 46 46 46 47 49 49 49 49 49 49 50 50 FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking Reform Act of 1995 Section 27A of the Securities Exchange Act of 1934 as amended Act of 1933 the Exchange Act We caution investors statements within the meaning of the Private the Securities Act and Section as amended Securities Litigation of the Securities that forward-looking statements are based on available to management When used the words and on assumptions beliefs managements anticipate helieve estimate expect see likely position opportunity and similar expressions which do not relate solely These statements to risks uncertainties statements currently are subject identify forward-looking made by and information intend may might plan project result should will seek target to historical matters are intended to and assumptions and are not guarantees of future performance which may be affected by known control Should results may vary materially from those anticipated one or more of these risks or uncertainties and unknown risks trends uncertainties and factors that are beyond our materialize or should underlying assumptions prove incorrect actual estimated or projected We expressly disclaim any responsibility to update our forward-looking statements whether as result of new information future events or otherwise except as required by law Accordingly time they are made to investors should use caution in relying on past forward-looking statements which are based on results and trends at the 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 and Analysis of Financial Condition and Results of Operations under forth Managements Discussion the headings Risk Factors and our ability to identify and acquire industrial properties on terms favorable to us general volatility of the capital markets and the market price of our common stock adverse economic or real estate conditions or developments in the industrial real estate sector and/or in the markets in which we acquire properties our dependence on key personnel and our reliance on third parties to property manage the majority of our industrial properties our inability to comply with the laws rules and regulations applicable to companies and in particular public companies our ability to manage our growth effectively tenant bankruptcies and defaults on or non-renewal of leases by tenants decreased rental rates or increased vacancy rates increased interest rates and operating costs declining real estate valuations and impairment charges our expected leverage our failure to obtain necessary outside financing and future debt service obligations 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 PART Item Business Overview Terreno Realty Corporation Terreno and together with its subsidiaries we us our our company or the company acquires owns and operates industrial real estate in six major coastal U.S markets Los Angeles Northern New Jersey/New York City San Francisco Bay Area Seattle Miami and Washington D.C./Baltimore We invest in several types of industrial real estate including warehouse/distribution approximately light industrial and research and development 87.4% of our total portfolio as of December 31 2012 flex or RD approximately 10.3% and trans-shipment approximately square footage functional buildings in infill locations that may be shared by multiple tenants and that cater to customer including We target 2.3% demand within the various submarkets in which we operate Infill locations developed land and existing buildings As of December are geographic 31 2012 we owned locations surrounded by high concentrations of already 67 buildings aggregating approximately 5.1 million square feet which we purchased for an aggregate loans payable of approximately mortgage December 31 2012 our properties were approximately 6.8% of our total annualized rent base purchase of approximately price $55.1 million which includes mortgage 93.3% leased to 112 $421.8 million including the assumption of premiums of approximately tenants the largest of which accounted $1.5 million As of for approximately We are an internally managed Maryland Corporation We were incorporated in November 2009 and on February completed both our initial public offering of 8750000 shares of our common stock and concurrent aggregate of 350000 shares of our common stock to our executive officers at private price per share of $20.00 The net proceeds of our placement initial public offering were approximately $162.8 million after deducting the full underwriting discount of approximately $10.5 million and other offering expenses of approximately $1.7 million We received net proceeds of approximately $7.0 million from our concurrent private placement On January shares purchased 13 2012 we completed public follow-on offering of 4000000 shares of our common stock including 93000 by our senior management and directors at price per share of $14.25 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 The net proceeds of the offering after deducting the underwriting discount and estimated offering costs were approximately $54.7 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 used the remainder of the net proceeds to invest in industrial properties and for general business purposes 16 2010 we of an On July 19 2012 we completed the Series Stock Preferred Stock including 240000 shares at public offering of 1840000 shares of our 7.75% Series Cumulative Redeemable Preferred shares sold upon the exercise by the underwriters of their option to purchase additional price per share of $25.00 The net proceeds of the offering were approximately $44.3 million after deducting the underwriting discount and other offering expenses of approximately $1.7 million We used the net proceeds to reduce outstanding borrowings under our senior revolving credit facility We elected to be taxed as REIT under Sections 856 through 860 of the Internal Revenue Code of 1986 as amended or the Code commencing with our taxable year ended December 31 2010 Our Investment Strategy We invest in industrial properties in six major coastal U.S markets Los Angeles Northern New Jersey/New York City San Francisco Bay Area Seattle Miami and Washington D.C./Baltimore As described in more detail in the table below we invest warehouse/distribution flex including light industrial in several and RD and trans-shipment We target types of industrial 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 Generally less than 20% 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 activity and/or trailer storage and small truck distribution options possibly including staging for high volume of truck 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 Typically has larger amount of office space and shallower bay depths than warehouse/distribution 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 by drawing upon the experiences of our management team investing and operating in over 50 industrial markets global population changes regulatory and physical constraints that our target markets have attractive long term investment limited to the following Located in high population coastal markets located in North America Europe and Asia and in anticipation of trends in potential long term increases in carbon prices attributes We target assets with characteristics that include but are not logistics from and other factors We believe resulting patterns 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 and is source of acquisition opportunities We currently manage one 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 or portfolios of properties We may also acquire industrial properties through the acquisition as equity interests of other corporations or entities in individual properties that own industrial real estate We will opportunistically target 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 During the period from February 16 2010 to December have been stabilized In addition we have disposed of one property 31 2012 we acquired 19 unstabilized properties of which 11 We may sell properties from time to time when we believe the prospective total return from property is particularly low relative to its market value or the market value of the property is significantly greater than its estimated replacement cost Capital from such sales will be reinvested into properties that are expected to provide better prospective returns or returned to shareholders Competitive Strengths We believe we distinguish ourselves from our competitors through the following competitive advantages Focused Investment Strategy We invest exclusively in six major coastal U.S markets and focus on infill locations We selected our six target markets based 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 Highly Aligned Compensation Structure We believe that executive term stockholder value creation As result all of the incentive compensation our total shareholder return exceeding the total shareholder Equity Industrial Index compensation should be closely aligned with long- solely return of the MSCI U.S REIT Index or the FTSE NAREIT of our executive officers is based on Commitment following to Strong Corporate Governance We are committed to strong corporate governance as demonstrated by the all members of our board of directors serve annual terms we have we have adopted majority voting standard in non-contested director elections opted out of two Maryland anti-takeover provisions and in the future we may not opt back in to these provisions without 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 such plan or if adopted by our board of directors we will submit the stockholder terminate rights plan to our stockholders for ratification vote within 12 months of adoption or the plan will 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 lease term 5-7 years positioning us to re-price parts of our capital structure as our rental rates 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 additional perpetual preferred stock Prior to attaining utilize non-recourse debt secured by individual properties or pools of properties an investment grade rating we intend to primarily with targeted maximum loan-to-value of 65% at the facilities and perpetual preferred stock We may also assume debt in connection time of financing with property acquisitions which may have or recourse bank term loans credit higher loan-to-value Our Corporate Structure We are Maryland corporation formed on November 2009 and have Exchange Commission Investment or SEC reporting obligations since 2010 We are not structured Trust or UPREIT We own our properties indirectly through subsidiaries been publicly held and subject to U.S Security and Partnership Real Estate and may utilize one or more taxable REIT as an Umbrella subsidiaries as appropriate Our Tax Status We elected to be taxed as REIT under Sections 856 through 860 of the Code commencing with our taxable year ended December 31 2010 We believe that our organization and method of operation has enabled and will continue to enable us to meet the requirements for qualification number of organizational and operational and taxation as REIT for federal income tax purposes To maintain REIT status we must meet 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 to our stockholders income tax at regular corporate rates Even if we qualify for taxation as to qualify as distribute If we fail REIT in any taxable year we will be REIT we may be subject to some federal taxes on our income or property and the income of our taxable REIT subsidiaries if any will be subject to taxation at subject to federal state and local regular corporate rates We do not currently own any taxable REIT subsidiaries but may in the future 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 activities some of which have greater financial resources limited partnerships owner-users individuals and other entities engaged in real estate investment than we do In addition we believe the leasing of real estate to be highly competitive We experience to provide free rental periods incur charges competition for customers from owners and managers of competing for tenant improvements or offer other inducements impact on our results of operations properties As all of which may have result we may have an adverse 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 property property at the time it became contaminated and therefore it is possible we could incur if we did not know of or were not responsible for the contamination even These laws contaminated to clean up the also apply to persons who owned property 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 claim or to comply with environmental stockholders We generally obtain Phase environmental However these ESAs may not reveal all environmental of operations or liquidity and may not identify laws could all potential discussed above The costs to clean up be material and could adversely affect contaminated property to defend against the funds available for distribution to our site assessments or ESAs on each property prior to acquiring it costs that might have material adverse effect on our business assets results 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 industrial properties in compliance with applicable federal state and local environmental laws in their daily operation of the respective properties and to promptly notify may become regulations will not impose material environmental to material environmental subject or similar liabilities of which we are unaware We can make no assurances us of any environmental contaminations issues As result we that future laws or liabilities on us or the environmental condition of our industrial properties will not be affected by the condition of the properties in the vicinity of our industrial properties such as the presence of leaking underground storage tanks or by third parties unrelated to us We were not aware of any significant or material exposures as of December 31 2012 and 2011 Employees As of February 15 2013 we have thirteen 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 free of charge on or through our website certain reports and amendments to those reports that we file with or furnish to the SEC in accordance with the Exchange Act These include our annual reports on Form 10-K our quarterly reports on Form l0-Q our current reports on Form 8-K and exhibits and amendments to these reports and Section 16 filings Our Code of Business Conduct and Ethics is also available on our website We intend to disclose any amendments on our website We make this information or waivers to our Code of Business Conduct and Ethics that apply to any of our executive practicable after we free of charge as soon as reasonably available on our website officers electronically at the SECs website at http//www.sec.gov file the information with or furnish it to the SEC You may also obtain our reports by accessing the EDGAR database Item 1A Risk Factors The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered The risks and uncertainties described below are not the only ones that we face Additional risks and uncertainties to us or that we may currently deem immaterial business financial condition operating results and cash also may impair our business operations If any of the following flows could be adversely affected Investors should also not presently known risks occur our refer 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 advantageous terms the acquired properties may not perform as we expect and we may be unable or we may be unable to consummate acquisitions on to quickly and efficiently integrate our new acquisitions into our existing operations We intend to acquire industrial properties in our six target markets The acquisition of properties entails various risks including the risks that our investments may not perform as we expect that we may be unable to quickly and efficiently integrate our new acquisitions into our existing prove inaccurate In addition we cannot operations and that our cost estimates for bringing an acquired pmperty up to market standards may assure you of the availability of investment opportunities in our targeted markets at attractive pricing levels or at all In the event that such opportunities are not available in our targeted markets as we expect our ability to execute our business plan may be adversely affected Further we face significant from other well-capitalized real estate investors including pension competition for attractive investment opportunities 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 credit facility term loan and the use of retained cash flows long-term debt and the issuance of common and perpetual preferred stock which may not be available at all or on advantageous could adversely affect our financial price of our common stock and our preferred stock condition terms and which could adversely affect our cash results of operations cash flows and ability to pay distributions flows Any of the above on and the market risks 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 shares of our common stock or preferred stock to pay for industrial profitability properties that we acquire which may dilute our stockholders These acquisitions may also expose us to risks such as ownership interests and may reduce or eliminate our 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 environmental or asbestos liability insurance coverage and liabilities regarding acquired of which our insurance may be insufficient properties including but not limited or for which we may be unable to to secure 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 does not keep pace with these potential acquisition costs we may not be able to maintain our current or expected earnings as we absorb these additional expenses There is no assurance we would successfully overcome these risks or any other problems encountered with these acquisitions If we cannot obtain additional financing 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 upon maturity our financial conditions may or equity financing or that we will be able to obtain it on favorable terms to obtain additional make it difficult condition and results of operations would likely be adversely affected Market assure you that we will be able to obtain additional and we cannot financing debt In addition to qualify as REIT we are 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 development credit facility in excess of such amount As if any or other capital expenditures will be limited As of December Terreno and for working capital to finance acquisitions result our ability requirements wholly-owned subsidiary under the senior revolving credit facility The senior revolving credit 31 2012 we had $100.0 million senior revolving guarantees the obligations of the borrower as amended on January facility 17 to retain earnings to fund acquisitions redevelopment and 2013 matures on January 19 2016 and provides for one 12-month extension option exercisable by us subject among other things to there being an absence million of borrowings of an event of default and to our payment of an extension fee As of December outstanding on the senior revolving credit facility 31 2012 there were $65.4 The availabilily and timing of cash distributions is uncertain In 2011 and 2012 we made quarterly distributions to holders of our common stock and beginning in September 2012 to holders of our preferred stock operations and the funds and we intend to continue to pay regular quarterly distributions However we bear all expenses incurred by our generated by our operations after deducting these expenses may not be sufficient to cover desired levels of distributions to our stockholders In addition our board of directors in its discretion may retain any portion of such capital Our ability to make distributions to our stockholders also will depend on our levels of retained cash use as source of investment capital We cannot assure our stockholders that sufficient cash for working flows which we intend to funds will be available to pay distributions flows from distributable cash Our corporate strategy However we may fund our quarterly distributions is to fund the payment of quarterly distributions to our stockholders entirely 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 officer and our president and chief financial officer each of whom would be difficult to replace If any of our key personnel were to cease employment with us our operating results could suffer Our ability to retain our senior group or to attract management competitive nature of the employment market The loss of services from key members of the management loss could could adversely impact our financial condition and cash any members of the senior management flows Further replacements should suitable such group leave is dependent on the group or limitation in be negatively perceived in their availability the capital markets We have not obtained 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 managerial investment financial and operational personnel Competition large part upon our ability to hire and retain highly skilled is intense and we cannot assure our for such personnel 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 the next several years We cannot assure you as to whether or when industrial operating fundamentals will in fact improve or to what extent 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 economk downturn in that sector Our investments in real estate assets are concentrated in the industrial real estate risk of economic downturns in this sector to greater extent than if our business sectors of the real estate industry sector This concentration may expose us to the portion of other included more significant 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 and particularly of the markets in which we have significant concentrations of properties 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 December approximately 31 2012 34.3% of our buildings were located in Northern to our stockholders could be materially adversely affected As of New Jersey New York City representing approximately 32.0% of our total annualized base rent We may be unable leases expire to renew leases lease vacant space including vacant space resulting from tenant defaults or re-lease space as We cannot assure you that leases at our properties will be renewed or that such properties will be re-leased at net effective rates equal to or above the then current average net effective rental rates If the rental rates for our properties decrease our tenants rental do not renew their leases or we do not re-lease significant portion of our available space including vacant space resulting from tenant defaults and space for which leases are scheduled to expire our financial condition results of operations cash flows cash available for distribution to stockholders per share trading price of our common stock and preferred stock and our ability to satisfy our debt service obligations could be materially adversely affected In addition if we are unable to renew leases or re-lease property the resale value of that property could be diminished because the market value of particular property will depend in part upon the value of the leases of such property We face potential adverse effects from the bankruptcies or insolvencies of tenants or from tenant defaults generally We are dependent on tenants for our revenues including certain significant tenants Moreover certain of our properties are occupied by single tenant and the income produced by these properties depends on the financial stability of that tenant The or insolvency of the tenants at our properties or tenant defaults generally may adversely affect the income produced bankruptcy our properties The tenants particularly the future Under bankruptcy those that are highly leveraged could file for bankruptcy protection or become insolvent law tenant cannot be evicted solely because of its bankruptcy On the other hand by in bankrupt future rent would be tenant may reject and terminate its lease with us In such case our claim against the bankrupt tenant for unpaid and 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 may incur substantial on the property In the event of tenant default we may experience delays in enforcing our rights as landlord and 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 impairment may exist We base our review on an estimate of the future disposition We consider use and eventual the real estate investments such as adverse market conditions indicate potential cash flows excluding interest charges expected to result from factors such as future operating income trends and prospects as well as the carrying value of the effects of leasing demand competition and other factors If our evaluation indicates to the extent loss will be recorded real estate investment an impairment that we may be unable to recover that the carrying value exceeds the estimated fair value of the property These losses would have income because recording an impairment loss impact income The evaluation of anticipated cash on our net direct results in an immediate negative adjustment to net 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 and preferred 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 one of our properties directly and may directly manage more of our properties in the future To the extent we utilize third party managers our cash addition our managers or their affiliates may manage and properties may be adversely affected if our managers fail in some cases may own invest flows from our industrial in or provide credit support or operating to provide quality services In guarantees to industrial properties 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 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 that 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 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 could adversely affect our overall operating results may require us to sell industrial properties and could adversely affect our ability to make distributions to our stockholders and the market price of our shares of common stock and preferred stock Our business strategy contemplates the use of both non-recourse secured debt and unsecured debt to finance long-term growth As of December 31 2012 we had total debt outstanding of approximately $177.0 million which consisted of our senior revolving credit facility and mortgage our consolidated indebtedness loans payable While over the liquidation and preference the long-term we intend to limit the sum of the outstanding principal amount of of any outstanding shares of preferred stock to less than 40% of our total enterprise value 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 total consolidated indebtedness amount of our outstanding floating Our board of directors may modify or eliminate these limitations the principal rate debt to less than 20% of our at any time without the approval of our stockholders As result we may be able to incur substantial additional debt including secured debt in the future Incurring debt could subject us 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 substantial portion of our cash flows from operations to payments on our debt thereby reducing 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 shares of common stock and preferred stock could adversely affect our ability to make distributions to our stockholders and the market price of our 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 debt To the extent we cannot meet any future resulting in losses We may place mortgages on our properties that we own to secure revolving credit facility or other debt service obligations we will risk losing some or all of our industrial properties that may be pledged investment strategy and if violated result in default to secure our obligations to foreclosure Also covenants applicable to any future debt could impair our planned 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 Adverse economic conditions could cause our portfolio promptly the terms on which we borrow to be unfavorable in response to changes in economic or other conditions 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 indebtedness will contain covenants that could limit our operations and our ability and certain of our existing mortgage loans payable contain and we expect that our future to make distributions to our stockholders We have loan We have senior revolving credit facility which includes $100.0 million revolving credit facility and $50.0 million term agreed to guarantee the obligations of the borrower wholly-owned subsidiary under our senior revolving credit facility Our senior revolving credit facility and certain of our existing mortgage loans payable contain and we expect that our future 10 indebtedness will contain financial and operating covenants such as fixed charge coverage and debt ratios and other limitations that will limit or restrict our ability to make distributions or other payments to our stockholders and may restrict our investment activities For example our senior revolving credit facility restricts distributions if we are in default and otherwise limits our fiscal year distributions to 95% of our funds from operations The covenants in our debt agreements 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 incunence 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 loans payable or in our future agreements we could be required to repay all or on attractive portion of our indebtedness before maturity at time when we might be unable to arrange financing for such repayment terms if at all In addition any unsecured debt agreements we enter into may contain specific other indebtedness giving the unsecured lenders the right to declare default cross-default provisions with respect to if we are in default under other loans in some specified 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 of the underlying property in the near-term through property from lenders and investors if we believe we can acquire foreclosure deed-in-lieu of foreclosure or other means However if we ownership do acquire such debt borrowers may seek in acquiring the underlying property on to assert various defenses to our foreclosure or other actions and we may not be successful timely basis or at all in which event we could incur significant 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 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 future are based on our operating performance liquidity and leverage ratios overall financial and preferred stock we may issue position and other factors employed by in the the credit 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 obtaining additional financing Also downgrade in our credit ratings may trigger additional costs and may encounter payments or other negative difficulty in consequences long-term debt are downgraded to below investment credit facilities under our future our then existing debt Adverse changes in our credit and debt instruments For example if our credit ratings of any future senior unsecured grade levels we may not be able to obtain or maintain extensions on certain of our ability to manage could negatively impact our refinancing activities ratings 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 to interest rate volatility by using interest rate hedging arrangements such as cap contracts and swap agreements These agreements have costs and involve the risks that these arrangements may not be effective in reducing our exposure to 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 and local taxes on our properties The real property taxes on our properties may increase as property tax rates reassessed by taxing authorities Therefore the amount of property taxes we pay in the future may increase substantially If the change or as our properties are assessed or 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 11 Actions of our joint venture partners could negatively impact our performance We may acquire and/or persons or entities when warranted redevelop properties through by the circumstances joint ventures Such partners may share certain investments may involve risks not otherwise present with other methods of investment maintain sufficient control limited liability companies and joint ventures of our partnerships approval rights over major decisions Such in real estate We generally will seek to to permit us to achieve our business limited liability companies and partnerships with other objectives affect our financial however we may not be able to do so and the occurrence results of operations condition cash of one or more of the events described above could adversely flows and ability to pay distributions on and the market price of our common stock and our preferred 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 portion of our interest acquire all or liabilities of such partnership Additionally we may be required to take our interests partner Consequently we would be potentially in such partnership as liable for all such general partner As general partner we could be liable for all the in other investments as non-managing general liabilities without having the same rights of management or control over the operation of the partnership as the managing general partner or partners may have Therefore we may be held responsible for all of the liabilities of an entity in which we do not have full management rights or control and our liability may far 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 to policies certain provisions of Maryland law which are also designed specifically some of the potential address conflicts relating to our activities In addition our board of directors is subject to 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 sufficient operating cash flows to pay our operating expenses service our debt and maintain and make distributions to our stockholders We may be unable to attract or effectively manage our anticipated growth any of which could have material adverse effect on our business and our operating and retain qualified personnel create effective operating and financial controls and systems results Our business could be adversely impacted if 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 all errors misstatements or misrepresentations While management will continue to review the effectiveness of our disclosure controls and procedures 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 including any material weakness in our internal controls over financial reporting which may occur 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 recent years have financing or refinancing issues could materially and adversely affect us Market turmoil and tightening of credit in 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 and preferred stock 12 We may not acquire the industrial properties that we have entered into agreements to acquire We have entered into agreements with third-party sellers to acquire three industrial buildings containing an aggregate of approximately 178783 square feet as more fully 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 and various closing conditions and there is no assurance that such proposed acquisitions if completed will be completed we will have incurred expenses on the timefranie we expect without our stockholders realizing If we do not complete the acquisition of the properties under contract benefit from the acquisition of such properties any Risks Related to the Real Estate Industry Our performance and value are subject to general economic conditions and risks associated with our real estate assets 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 circumstances in real estate such as mortgage reduce the income from the property payments real estate costs that generally do not decline when Income from and the value of our properties may be adversely affected by taxes and maintenance 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 including changes in tax real estate environmental and zoning laws and our potential liability 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 conditions in costs associated with known adverse environmental conditions or retained liabilities for such 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 their existing leases For these and other reasons we cannot growth in the value of our real estate properties could be adversely affected including their assure our stockholders that we will be profitable ability to continue to honor or that we will realize Actions by our competitors may decrease or prevent increases in the occupancy and rental rates of our properties We compete with other developers owners and operators of real estate some of which own properties similar to our properties in the same markets and submarkets in which the properties we own are located If our competitors offer space at rental 13 rates below current market rates or below the rental we may be pressured to reduce our rental rates rates we will charge the tenants in order to retain tenants when such of our properties we may lose potential tenants leases expire In addition if our competitors tenants and 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 financial condition our assets at all or at favorable pricing or on favorable terms As result of these actions by our competitors our cash flows cash available for distribution trading price of our common stock and preferred 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 estate investments such as mortgage payments real estate taxes and maintenance In addition significant expenditures associated with real 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 REIT to avoid punitive taxation on the sale of assets Thus our ability at any time to sell assets or contribute assets to property funds or other entities in which we have an ownership interest may be 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 our common stock and preferred stock results of operations cash flows and our ability to pay distributions on and the market price of Uninsured or underinsured losses relating to real prop erly may adversely affect our returns We will attempt losses including losses to ensure that all of our properties are adequately insured to cover casualty losses However there are certain from floods hurricanes fires earthquakes and other natural disasters 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 such uninsured loss and we could experience significant loss of capital the value of our assets will be reduced by the amount of any and could invested and potential in these properties revenues 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 source of funding to flows and ability to pay repair or reconstruct distributions on and the market price of our common stock In addition we may have no the damaged property and we cannot assure that any such sources of funding will be available to us for such purposes in the future 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 able to obtain coverage to cover all to coverage losses with respect to such properties limitations and deductibles that we believe are commercially reasonable we may not be on economically favorable terms which could expose us to uninsured casualty losses We intend to evaluate our earthquake insurance coverage annually in light of current industry practice We own properties located in areas which are 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 losses with respect to such properties on economically favorable terms which could expose us to uninsured casualty evaluate our insurance coverage annually in light of current industry practice to cover all losses We intend to Contingent or unknown liabilities could adversely affect our financial condition We may own or acquire properties that are subject to liabilities and without any recourse or with only limited recourse with to unknown liabilities As respect properties then we might have result if liability were asserted against us based upon ownership of any of these entities or 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 14 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 haiardous not the owner or operator knew of or was responsible for the presence of such hazardous on such property Such laws often impose liability whether or Even if more than one substances substances or toxic or toxic 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 laws also may impose restrictions on the manner in which property may be used or businesses may be operated property owner who violates certain circumstances environmental laws may be subject private parties In connection with the acquisition and ownership to sanctions which may be enforced costs The cost of defending against environmental claims of compliance with environmental by governmental agencies or in of our properties we may be exposed regulatory requirements or of to such 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 may impose fines and penalties or other abatement in the event that asbestos is disturbed during building renovation or demolition These laws 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 contained contain or may have substances All of these operations create Some of our properties may be adjacent used to store petroleum products underground storage tanks for the storage of petroleum products and other hazardous or toxic potential for the release of petroleum products or other hazardous or toxic substances to or near other properties that have contained or currently contain underground storage tanks 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 in the future engage in activities that may release petroleum products or other hazardous or toxic substances obtain environmental insurance policies on commercially reasonable terms that provide coverage for potential have engaged As needed we may environmental or may liabilities subject properties with known to the policys coverage conditions and limitations From time to time we may acquire properties or interests in adverse environmental conditions where we believe that the environmental 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 the properties that we may acquire in the future may be subject site assessments environmental that on each property prior to acquiring it and we generally anticipate 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 do not include an asbestos survey that we believe would have Even if written report but do not include soil sampling or subsurface investigations and typically none of our environmental assessments adverse effect on our business financial of our properties reveal an environmental liability condition or results of operations taken as whole we cannot give any assurance that such material 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 15 Costs of complying with governmental laws and regulations with respect to our properties may adversely affect our income and the cash available for any distributions 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 and regulations may impose joint and several obligations arising under such laws and regulations Some of these laws liability on tenants owners or operators for the costs to investigate or remediate contaminated properties regardless of fault or whether the acts causing the contamination were legal Leasing our properties to tenants that engage in industrial manufacturing and commercial activities will cause us to be subject to the risk of liabilities under environmental laws and regulations In addition the presence 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 dates Compliance with new or more stringent future so as to require compliance with new or more stringent standards as of 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 parties may affect such properties In addition there are various local state and federal fire health life-safety and similar regulations with which we may be required to comply and which may subject us to liability in the form of fines or damages for noncompliance Any material expenditures will reduce our ability to make distributions governmental regulations or their interpretation and may reduce the value of our common stock by agencies or the courts could occur fines or damages we must pay in these laws and changes In addition 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 moving to regulate GHG emissions from large over contributions to climate change The United States Environmental stationary sources including electricity producers Protection Agency or EPA is and mobile sources through fuel efficiency and other requirements such as those adopted by California and to require reductions in GHG emissions Any additional regulations that EPA has proposed or may propose using its existing regional programs the Regional Greenhouse Gas Initiative of various northeastern states are being implemented the Clean Air Act Moreover authority under certain state and taxation or regulation of energy use including as result of the in the future ii state programs and regulations or iii renewed GHG legislative addition any increased an increase in the cost of the fuel efforts by future Congresses could result in increased operating costs that we may not be able to effectively pass on to our tenants In regulation of GHG emissions could impose substantial costs on our tenants These costs include for example 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 of future climate change and climate-change related risks We may be exposed to potential physical risks from possible future changes in climate Our properties may be exposed to rare catastrophic weather events such 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 could result in substantial costs Under the Americans with Disabilities Act places of public accommodation must meet certain federal requirements related to access and use by disabled persons Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants If we are required to make unanticipated expenditures to comply with the Americans with Disabilities including removing access barriers then our cash Act adversely affected If we are required to make substantial modifications rules and regulations Act or other changes in governmental Disabilities flows and the amounts available for distributions to our stockholders may be to our properties whether to comply with the Americans with our financial condition cash flows results of operations the market price of our shares of common stock and preferred stock and our ability to make distributions to our stockholders could be adversely affected We may be unable could adversely affect to sell property jf or when we decide to do so including as result of uncertain market conditions whwh the return on an investment in our common stack and our preferred stock We expect to hold the various real properties in which we invest until such time as we decide that sale or other disposition is appropriate given our investment objectives Our ability to dispose of properties on advantageous terms depends on factors beyond 16 including competition from other sellers and the our control We cannot Due to the uncertainty of market conditions which may affect stockholders that we will be able to sell the various market conditions affecting predict such at properties availability of attractive financing for potential buyers of our properties real estate investments which will exist at any particular time in the future the future disposition of our properties we cannot assure our 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 assure our stockholders that we will have property we may agree to restrictions limitation on the amount of debt funds available to correct such defects or to make such improvements In acquiring that prohibit the sale of that property for that can be placed or repaid on that property period of time or impose other restrictions such as 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 the purchaser may default which could negatively impact our cash distributions to stockholders purchasers and result stockholders in the risk that we will bear litigation and related expenses Even in the absence or their reinvestment in other assets will be delayed of purchaser default the distribution of the proceeds of sales to our 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 nay 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 In addition the board of directors may change our policies with respect to conflicts of interest provided that such changes are consistent with applicable legal and regulatory requirements including the listing standards of the NYSE our financial condition results of operations cash in these policies flows per share trading price of our common stock and preferred stock and ability an adverse effect could have change on to satisfy our debt service obligations and to pay distributions to our stockholders 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 set our board of directors shares Although has no such shares of our common stock or preferred stock and to classify or reclassify any unissued the preferences rights and other terms of such classified or unclassified intention at the present time it could establish series of preferred stock that could depending premium price on the terms of such series delay defer or prevent for our common stock or otherwise be in the best interest of our stockholders transaction or change of control that might involve 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 holders of shares of our common stock with the opportunity to acquire us or of impeding proposal change of control under circumstances that otherwise could provide the 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 shares or an affiliate or associate of ours who at any time within the two-year period prior owns 10% or more of the voting power of our to the date in question was the or an affiliate of an interested stockholder for five beneficial years after owner of 10% or more of our then outstanding voting shares 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 that provide that control shares of our company defined as shares which when aggregated 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 17 We have opted out of these provisions of the MGCL in the case of the business combination resolution of our board of directors and in the case of the control share provisions of the MGCL pursuant bylaws However in the future only upon the approval the business provisions of the MGCL and we may only upon the approval our board of directors may by resolution elect by amendment of our stockholders of our stockholders combination to to opt in to to our provisions of the MGCL by provision in our bylaws opt in to the control share provisions of the MGCL In addition the provisions of our charter on removal of directors and the advance notice provisions of our bylaws defer or prevent stock or otherwise be in their best interest provisions of the MGCL or the provisions of Title transaction change or of control of our company Likewise if our companys board of directors were to opt in to the business premium price that might involve combination Subtitle of the MGCL or if the provision in our bylaws opting out of the control share acquisition provisions of the MGCL were rescinded the MGCL could have similar anti-takeover effects by our board of directors and our stockholders these provisions of Our rights and the rights of our stockholders to take action against our directors and officers are limited could delay for holders of our common Maryland law provides that director or officer has no liability our stockholders Our charter limits the liability of our directors for liability resulting from in that capacity if he or she satisfies his or her duties to us and our stockholders for money damages and officers to us and except actual receipt of an improper benefit or profit in money property or services or final judgment based upon cause of action adjudicated finding of active and deliberate dishonesty by the director or officer that was material to the In addition our charter will authorize us to obligate our company and our bylaws will officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law As require us to indemnify our directors result we and our and stockholders may have more limited rights against our directors actions taken in good faith by any of our directors or officers and officers than might otherwise exist Accordingly in the event that impede the performance of our company your ability to recover damages from such director or officer will be limited In addition we may be obligated to advance 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 Risks Related to Our Status as REIT Failure to qualify as REIT would cause available for distributions to stockholders us to be taxed as regular corporation which would substantially reduce funds We believe that our organization and method of operation has enabled taxation as REIT However we cannot and qualification for and will continue to enable us to meet the requirements assure you that we will qualify as such This is because qualification REIT involves the application of highly technical and complex provisions of the Code as to which there are only limited judicial administrative interpretations and involves the determination of facts and circumstances not entirely within our control Future as and 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 fail 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 following the year during which we were disqualified to relief under statutory provisions we could not elect to be taxed as REIT for four taxable years In addition if we fail to qualify as RE1T we will no longer be required to pay distributions As result of all these factors our failure to qualify as our common stock REIT could impair our ability to expand our business and raise capital and it could adversely affect the value of 18 Even if we qualify as REI1 we may face other tax liabilities that reduce our cash flows Even ii 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 undistrihuted 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 REJT 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 or sell assets even if the then-prevailing market conditions are not favorable requirements we may need to borrow funds on for these borrowings or sales To qualify as REIT we generally short-term basis must distribute to our stockholders at least 90% of our net taxable income each year excluding capital gains In addition we will be subject to corporate income tax to the extent we distribute less than 100% of our net taxable income including distributions to our stockholders to comply with the requirements of the Code for REITs and to minimize or eliminate any net capital gain We intend our corporate to make 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 purposes or the effect ol non-deductible capital expenditures the creation receipt of income and the of reserves or required recognition of income for fedeml income tax debt service or amortization payments The insufficiency of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short- and long-term debt or sell equity securities in order to fund distributions required to maintain our REIT status In addition we will be suect to 4% nondeductible excise tax on the amount if any by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income 95% of our capital gain net income and 100% of our undistributed income from prior years Dividends payable by REITs generally do not quahfy for reduced tax rates For taxable years beginning after December 31 2012 the maximum tax rate for qualified dividends payable to individual U.S stockholders is 15% if such individuals modified adjusted gross income is below $400000 for single individuals $45000 for married individuals separately or ii 20% for all other U.S individuals filing jointly or surviving spouses 1-lowever to the extent such dividends are attributable $425000 for heads of households or $225000 for married individuals filing Dividends payable by REITs to certain dividends that we receive however are generally not eligible from taxable REIT subsidiary such dividends for the reduced rates 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 the value of the stock of REITs including our common stock We may in the future choose in excess of the cash dividends they receive to pay dividends in our stock instead of cash in which case stockholders may be required to pay income taxes 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 income to the extent of our current and accumulated earnings and profits for U.S federal income tax purposes As result stockholders taxes with respect to such dividends in excess of the cash dividends received If U.S stockholder sells the stock receives as dividend may be required that it to pay income in order to pay this tax the sales proceeds may be less than the amount included in income with respect to the dividend depending on the market price U.S federal of our stock at the time of the sale Furthermore with respect income tax with respect to such dividends including in respect of all or to certain non-U.S stockholders we may be required portion of such dividend that is payable in stock In to withhold addition if significant number of our stockholders determine to sell common stock in order to pay taxes owed on dividends it may put downward pressure on the trading price of our common stock Complying with REIT requirements may cause investments us to forego otherwise attractive opportunities or to liquidate otherwise attractive 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 least 75% of the value of our assets consists at of cash cash items government securities and qualified real estate assets The remainder of our investments in securities other than government curities and qualified real estate assets generally cannot include more than 10% of the total voting power of the outstanding securities 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 securities and qualified real estate assets can consist of the securities of any one issuer and no more than 25% of the value of our total assets can be represented by the securities of one or 19 more taxable REIT subsidiaries or TRSs If we fail to comply with these requirements at the end of any calendar quarter we must correct the failure within 30 days after the end of the calendar quarter or qualify for 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 distribution to our stockholders Our relationship with any TRS will be limited and 100% excise tax may result in the application of failure to comply with the limits would jeopardize our REIT qualcation and 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 interest in the future TRS may earn income that would not be qualifying income if earned directly by TRS we may own any such the parent REIT Overall domestic TRS will pay federal no more than 25% of the value of REITs assets may consist of stock or securities state and local income tax at regular corporate rates on any income that rules limit the deductibility of interest paid or accrued by IRS to its parent REIT to assure that level of corporate taxation The rules also impose 100% excise tax on certain transactions between are not conducted on an arms-length basis of one or more TRSs the TRS In addition it earns the TRS is subject to an appropriate TRS and its parent REIT that Any TRS of ours will pay federal state and local income tax on its taxable income and its after-tax net income will be available but not required to be distributed to us We anticipate that the aggregate value of any TRS stock and securities owned by us will be significantly less than 25% of the value of our total assets including value of our investments in TRSs for the purpose of ensuring compliance the TRS stock and securities Furthermore we will monitor with the rule that no more than 25% of the value of our the assets may consist all of our transactions of TRS stock and securities which is applied at the end of each calendar quarter In addition we will scrutinize with TRSs for the purpose of ensuring that they are entered into on arms-length terms in 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 the 100% excise tax of TRS stock and securities on an ongoing basis so as to maintain our REIT qualification or avoid application imposed on certain non-arms-length transactions The ability of our board of directors to revoke our REIT qualification without stockholder income tax and reduce distributions to our stockholders approval may subject us to federal Our charter provides that our board of directors may revoke or otherwise terminate our REIT election without if it determines in our best interest to continue that to be qualified as REIT If we cease to be the approval of income tax on our taxable income and would no longer be required to distribute most of adverse consequences on our total return to our stockholders and on the our stockholders REIT we would become our taxable income to our stockholders which may have market subject to federal of our common stock it is no longer price We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock and preferred stock 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 income tax law regulation or administrative existing federal income tax law regulation or administrative interpretation will be adopted promulgated interpretation or any amendment effective or become to any and any such law regulation or interpretation may take effect retroactively We and our stockholders could be adversely affected by any such change in or any new federal income tax law regulation or administrative interpretation Risks Related to Our Common Stock and Our Preferred Stock Level of cash distributions market interest rates and other factors may affect the value of our common stock and our preferred stock The market value of the equity securities of REIT is based current and potential the underlying assets Our common stock may trade at we retain operating cash cash distributions whether flows for investment future from operations sales or refinancings upon the markets perception of the REITs growth potential and upon the real estate market and its value of prices that are higher or lower than our net asset value per share To the extent purposes working capital reserves or other purposes these retained funds while increasing the value of our underlying assets may not correspondingly meet the markets expectations with regard to future earnings and cash distributions our common stock In addition increase the market price of our common stock Our failure to likely would adversely affect the market price of the price of our common stock and our preferred stock will be influenced by the dividend yield on the common stock and preferred stock relative to market interest rates and the dividend yields of other REITs An increase in market interest rates which are currently at low levels relative to historical rates could cause the market price of our common stock or our preferred stock to go down The trading price of the shares of common stock and preferred stock will also depend on many other factors which may change from time to time including the market for similar securities 20 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 our issuance of debt or preferred equity securities changes in earnings estimates by analysts and our ability to meet analysts earnings estimates general economic conditions and our financial condition performance and prospects The number of shares of our common stock available forfuture and our preferred stock and have dilutive effect to our existing stockholders sale could adversely affect the market pnce of our common stock Sales of substantial amounts of shares of our common stock and preferred 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 and preferred stock respectively The stock granted vesting of any restricted Plan the issuance of our common stock in connection common stock and preferred stock could have sales of shares of our common stock or preferred stock may be dilutive to certain directors executive an adverse effect with property officers and other employees under our 2010 Equity Incentive portfolio or business acquisitions and other issuances of our on the market price of our common stock and preferred stock Future to existing stockholders The market price and trading volume of our common stock and preferred stock may be volatile The market price of our common stock and preferred stock may be volatile In addition If the market variations to occur significant price and preferred stock may fluctuate stock declines significantly you may be unable and cause to resell your shares at or above the price you paid for such the trading volume in our common stock of our common stock or preferred shares We cannot assure price you that the market price of our common stock or preferred 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 and preferred 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 the market for similar securities issued by REITs actions by institutional stockholders 21 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 market price of our common stock or preferred stock to our common stock for purposes to our common stock and preferred stock upon liquidation and/or preferred stock of dividend distributions or upon liquidation may adversely affect the as applicable capital million We have As of December 31 2012 we had $100.0 million senior revolving credit facility to finance acquisitions and for working requirements with outstanding borrowings of $65.4 million and had total mortgage loans payable of approximately $111.6 agreed to guarantee the obligations of the borrower wholly-owned subsidiary under our senior revolving credit facility Upon liquidation holders of our debt securities and shares of preferred stock including our Series Preferred Stock and lenders with respect to other borrowings including our existing mortgage loans payable will receive distributions of our available assets prior to the holders of our common stock In addition holders of our debt securities and lenders with respect to other Preferred Stock Additional equity of our common stock or our preferred borrowings will receive distributions of our available assets prior to the holders of our Series offerings may dilute the holdings of our existing stock Holders of our common stock are not entitled stockholders and/or reduce the market price to preemptive rights or other protections against dilution Our preferred stock has 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 or preferred stock and diluting their stock holdings in us We may be unable the future to generate sufficient cashflowsfrom our operations to make distributions to our stockholders at any time in Our ability to make distributions sufficient to our stockholders may be adversely affected by the risk factors to our stockholders Our board of directors income to make distributions described in this Form 10-K has the sole discretion to the timing form and amount of any distributions to our stockholders Our board of directors will make determinations We may not generate determine 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 and preferred stock Our shares of common stock rank junior to our Series Preferred Stock Our shares of common stock rank junior to our Series Preferred Stock with respect to dividends and upon liquidation dissolution or winding up which could limit or restrict our ability to make distributions on our common stock In certain circumstances following change of control of our company holders of our Series Preferred Stock will be entitled to convert their shares of Series Preferred Stock into specified number of shares of common stock subject to our option to redeem the Series Preferred Stock for cash at $25.00 per share plus accrued and unpaid dividends Holders of our shares of common stock are not entitled to preemptive rights or other protections against dilution We may in the future attempt to increase our capital resources by making additional preferences with respect to dividends or upon dissolution that are senior to our shares of common stock offerings of equity securities including additional classes or series of preferred stock which would likely have Because our decision to issue conditions and other factors many of which are beyond our control we cannot securities in any future offering will depend on market predict or estimate the amount timing or nature of any future offerings Thus our common stockholders bear the risk of our future offerings reducing the market price of our shares of common stock and diluting their interest in us 22 The change of control conversion or discourage company party from taking over our company feature of the Series Preferred Stock may make it more difficult for party to take over our Upon the occurrence of change of control as defined in the Articles Supplementary for the Series Preferred Stock the result of which our common stock or the common securities NASDAQ holders of the Series of the acquiring or surviving entity are not listed on the NYSE NYSE Amex or Preferred Stock will have the right unless prior to the change of control conversion date we have provided Stock into shares of our common stock or equivalent value of alternative of our election to redeem the Series or provide notice Preferred Stock to convert some or all of their Series Preferred consideration Upon such conversion the holders will he limited to maximum number of shares of our common stock equal to the share cap of 3.2446 multiplied by the number of shares of Series Preferred Stock converted The change of control conversion feature of the Series Preferred Stock may have the effect of discouraging third party from making an acquisition proposal for our company or of delaying deferring or preventing certain change of control transactions of our company under circumstances that stockholders may otherwise believe are in their best interests Our ability to pay dividends is limited by the requirements of Maryland law Our ability to pay dividends on our stock is limited by the laws of the State of Maryland Under applicable Maryland law Maryland to pay its debts as corporation generally may not make the debts become due distribution if alter giving effect to the distribution the corporation would not be able in the usual course of business or the corporations total assets would be less than the sum of its total liabilities plus unless the corporations charter provides otherwise the amount that would be needed if the corporation were dissolved at the time of the distribution to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution Accordingly we generally may not make distribution on our stock if after giving effect 10 the distribution we would not be able to pay our debts as they become due in the usual course of business or our total assets would be less than the sum of our total liabilities plus unless the terms of such class or series provide otherwise the amount that would be needed to satisfy the preferential with preferences senior rights upon dissolution to those of our outstanding stock of the holders of shares of any class or series of preferred stock then outstanding if any Item lB Unresolved Staff Comments None Item Properties As of December 31 2012 we owned 67 buildings aggregating approximately 5.1 million square feet The properties are located in Los Angeles Northern New Jersey/New York City San Francisco Bay Area Seattle Miami and Washington D.C./Baltimore As of December 31 2012 our properties 6.8% of our total annualized were approximately 93.3% leased to 112 tenants the largest of which accounted for approximately base rent Our focus is on the ownership of several types of industrial real estate including warehouse/distribution and RD approximately approximately industrial 87.4% of our total portfolio square footage as of December 31 2012 flex including light 10.3% and trans-shipment approximately 2.3% See Our Investment Strategy Industrial Facility General Characteristics We target various submarkets functional buildings in infill in which we operate in this Annual Report on Form 10-K for general description of these types of industrial real estate locations that may be shared by multiple tenants and that cater to customer demand within the See our Consolidated Financial Statements Schedule Ill-Real Estate Investments and Accumulated Depreciation in this Annual Report on Form 10-K for detailed listing of our properties The following table summarizes by market our investments in real estate as of December 31 2012 Number of Rentable RiiiIdinc Square Feet of Total Occupancy December 31 2012 as of Annualized Base Rent 000s of Total Annualized Base Rent Per Occupied Square Foot Weighted Average Remaining Lease Term Years Gross Book Value 000s 12 1096422 21.6% 91.7% 6169 19.5% 6.13 2.1 $114763 23 14 1.591250 31.4% 96.3% 10.121 32.0% 6.61 3.7 122.778 675083 416.711 842592 13.3% 8.2% 16.6% 84.2% 100.0% 90.8% 6052 2199 4233 19.1% 1L65 7.0% 13.4% 5.28 5.54 5.0 4.9 7.7 84027 33423 56317 Market Los Angeles Norlhern New Jersey/New York City San Francisco Bay Area SeaUle Miami Washington D.C/Baltimore 23 Annualized base rent is calculated as monthly base rent per the leases excluding any partial or full rent abatements as of December 31 2012 multiplied by 12 Weighted average remaining lease term is calculated by summing the remaining lease 2012 weighted by the respective square footage term of each lease as of December 31 The following table summarizes our capital expenditures incurred during the three months and years ended December 31 2012 and 2011 dollars in thousands For the Three Months Ended December 2012 20 1179 190 102 1471 1947 315 2013 4275 For the Year Ended December 31 2012 2011 $7020 $5311 1.638 742 966 2847 $9400 $9124 Building improvements Tenant improvements Lcasing commissions Total capital expenditures Excludes approximately $0.8 million in write-offs default as described under the heading Recent Developments for the three months and year ended December under Managements Discussion 31 2012 related to the tenant and Analysis of Financial Condition and Results of Operations in this Annual Report Includes approximately $0.2 million and $4.7 million respectively on Form 10-K at four properties for the three months and year ended December three properties for the three months and year ended December 31 2011 related to leasing acquired vacancy and renovation projects 31 2012 and $3.1 million and $4.3 million respectively at The following table summarizes the anticipated lease expirations for leases in place at December 31 2012 without giving effect to the exercise of renewal options or termination rights if any at or prior to the scheduled expirations Year 2013 2014 2015 2016 2017 2018 Total of Total Annualized Rentable Rentable Sauare Feet Suuare 5%16 979582 86282 196.01 1546C 1944376 4.734312 Feet L8% 9.3% 7.0% 39C% 3.0% 38.3 93.3% Base Rent 000s 12 3711 6080 358 1.349 19 17551 3523 olTotal Annualized Base Rent 15% 17.3% 5.2% 3.8% 3.4% 49.8% 100.0% Includes leases that expire on or after December 31 2012 and month-to-month leases totaling 71000 square feet Annualized base as of December rent is calculated as monthly 31 2012 multiplied by 12 base rent per the leases at expiration excluding any partial or full rent abatements Our ability to re-lease of operations As of December or renew expiring space 31 2012 leases at rental rates equal representing approximately to or in excess of current impact our results 11.8% of the total rentable square footage of our portfolio to see improving demand rates will for industrial rental are scheduled to expire during the year ending December 31 2013 In general we continue space in most of our markets We currently expect on any new re-leased or for our 2013 expirations will generally be flat to slightly below the rates currently being paid for the same space Our that on average the rental rates we are likely to achieve renewed leases past performance may not be indicative will be re-leased at all or at rental of future results and we cannot assure you that leases will be renewed or that our properties rates equal to or slightly below the current average rental rates Further re-leased/renewed rental rates in particular market may not be consistent with rental rates across our portfolio as whole and re-leased/renewed rental rates for particular case due to properties within number of factors including local market may not be consistent with rental rates across our portfolio within particular market in each real estate conditions local supply and demand for industrial space the condition of the property the impact of leasing the property has been redeveloped incentives including free rent and tenant improvements and whether the property or space within Our industrial properties are typically subject to leases on iple 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 24 over certain threshold levels In addition approximately 87.5% of our leased space includes fixed rental increases or Consumer Price Index-based rental increases Lease terms typically range from three to ten years We monitor the liquidity and creditworthiness of our tenants on an on-going basis by reviewing outstanding accounts agreements review the tenants financial condition periodically receivable balances and as provided as appropriate As needed we hold discussions with the tenants the respective lease under management about their business and we conduct site visits of the tenants operations Our top ten tenants based on annualized base rent as of December 31 2012 are as follows Tenant Cphid I-ID Smith Wholesale Drug Conipany Hour Depu Precision Custoni Coatings YRC Worldwide Miami International Freight Solutions 14 Avborne Accessory Group Sohnen Enterprises Northrop Grumman Systems It Banah International Group Total Rentable Rentable Base Rent Annualized Leases Sooare Feet Sunare Feet 000s Base Rent of Total Annualized of Total 10 .080 211418 41 .092 208000 61252 192.454 37594 161.610 1032X 301.983 2.0% 4.2% 8.1% 4.1% 1.2% 3.8% 2.7% 3.2% 2.0% 6.0% 2.146 2.08 1905 1.668 1260 1.107 1008 994 941 906 6.8% 6.4k 6.0% 4.0% 354 3.2% 3.V4 3.0% 28% 12 1891683 37.3% 13943 44.1% Annualized base rent is calculated as monthly base rent per the leases excluding any partial or full rent abatements as of December Subsequent 31 2012 multiplied by 12 to December 31 2012 the Company filed an eviction proceeding under Managements Discussion the heading Recent Developments under against Banab International Group as described and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K As of December 31 2012 15 of our 36 properties with net investment book value of approximately $219.5 million were encumbered by mortgage rate of 4.55% loans payable totaling approximately $111.6 million which bear interest at weighted average fixed annual Item Legal Proceedings We are not involved in any material litigation nor to our knowledge is any material litigation threatened against us Item Mine Safety Disclosures Not Applicable 25 Item Market for Our Common Stock and Related Stockholder Matters PART II Market Information Our common stock sets forth for the indicated periods the high and is listed on the New York Stock Exchange low closing prices dividends declared Year 2012 FirstQuarter Sond Quarter Third Quarter Fourth Quarter 2011 First Quart Second Quarter ThirdQuazter Fourth Quarter the NYSE under for our common stock the symbol TRNO The following table as reported on the NYSE and the per share Hieh Low Dividend 5.25 5.11 16.10 15.79 $13.75 40 14.64 14.20 $18.60 $16.55 17.05 17.04 15.74 16.22 12.83 11.42 0.10 0.12 0.12 0.10 0.10 0.10 0.10 As of February 2013 there were approximately 2039 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 We intend to pay regular quarterly distributions when as and if authorized by our board of directors and declared by us 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 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 debt service any requirements capital expenditure requirements for our properties 26 our taxable income the annual distribution requirement under the REIT provisions of the Code the amount required to declare and pay in cash or set aside for the payment of dividends on our Series Preferred Stock for all past dividend periods that have ended 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 from operations before acquisition our funds facility has costs of 95% for each covenant limiting our maximum REIT distribution paid to percentage of fiscal year subject to distribution payments necessary to preserve our REIT status beginning in fiscal 2012 The percentage limitation was 110% for fiscal 2010 and 100% for fiscal 2011 To the extent that in respect of any to sell assets or borrow funds to make cash distributions calendar year cash available for distribution or make portion of the required distribution in the form of taxable share is less than our REIT taxable income we could be required 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 are equity ownership interests significant in indusirial properties which generate depreciation and other non-cash portion of our distributions may constitute tax-free return of capital although our current intention is portion of our investments charges against our income to limit the level of such return of capital The following table sets forth the cash dividends paid or payable during the years ended December 31 2012 and 2011 For the Three Months Ended Securjt Dividend per Share Declaration Date Record Iate late Paid March 31 2012 June 30 2012 September 30 2012 September 30 2012 December3l2012 December 31 2012 Coilunon stock $0.100XX February 21 2012 AprilS 2012 Common stock Common stock $0 120000 August $0.120000 May 2012 July 2012 2012 October 2012 2012 April July 23 2012 October 26 2012 $0.38750 Preferred stock Commonstock .12XX0 November62012 Decemt31 2012 10 2012 November(cid:244) Preferred stock 2012 December $0.484375 August 2012 September 10 2012 October January 14 2013 December 31 2012 2012 For the Three Months Ended Security li idend per Share Declaration Date Record Date late Paid March31 2011 June 30 201 September 30 2011 December 31 201 Common stock $0.100000 February Common stock $0100000 common stock $0J00000 Common stock $0 00000 May 18 2011 August ii 2011 November 201 172011 AprilS2011 Unregistered Sale of Equity Securities and Use of Proceeds July 201 October January 2011 2012 Total Number of Shares Purchased as April 192011 July 20 201 October 20 201 January 20 201 Maximum Number or Approximate Value of Shares lollar that Period October 2012- October 31 2012 November 2112 November 30 2012 December 2012 December 312012 Total Number of Shares of Common Stock Purchased Average Price Paid per Common Share 331 331 14.61 14.61 Part of Publicly Announced Plans May Yet be Under Purchased the or Programs N/A N/A N/A N/A Plan or Program N/A N/A N/A N/A Represents shares of common stock surrendered by employees to the Company to satisfy such employees tax withholding obligations in connection with the vesting of restricted stock 27 Performance Graph The following graph compares the change in the cumulative total stockholder return on our common stock during the period from February 10 2010 the first day our stock began trading on the NYSE to December the Standard Index the MSCI U.S REIT Index and Poors 500 Stock and the FTSE NAREIT Equity Industrial Index The return 31 2012 with the cumulative total return of 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 pann Aurn 34 Month urnu1ii Toa Feium Der .0 12 fl of $100 200 00 18000 16000 140 00 12000 10000 800G 6000 4000 200 00 TtnoRW Corate S4P 00n Tout Rurns FTS MMET Eqty tnus1fla $ri.x iMSC US RUT 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 28 Item Selected Financial Data The frllowing table December 31 2012 and 201 sets forth selected financial data derived from our audited consolidated financial statements as of for the years ended December 31 2012 and 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 Tot cos revenues expenses Income loss from continuing operations Income from discontinued operations Gain on sales of real estate investments Net and comprehensive income loss available to common stockho1det Earnings per Common Share Basic and Diluted Income loss from continuing operations available to common stockholders Income from discontinued operations Net income loss available to common stockholders Dividends Dividends declared per common share share declared per prefened For the Year Ended December ____________________________________ 31 2012 2011 Period from February 16 2010 Commencement of Operations to December 31 2010 31.173 267 .022 1050 4037 2437 0.20 0.39 0.19 0.46 0.87 16.005 18179 4.788 1059 3729 0.52 0.1 0.41 0.40 3589 8828 5699 309 5.390 0.63 0.04 0.59 Basic and Diluted Weighted Average Common Shares Outstanding 13.135.440 9.161805 9.1 l20X Other Data lunds from operations Basic and diluted FF0 per common share1 ash flows provided by used in Operating activities Investing activities Financing activities Balance Sheet lata Investments real estate at cost Total assets Total debt Total stockholders equity 7.435 0.57 9749 160.180 153112 445348 4453 18 177.044 255.274 1056 2149 05884 49731 264584 267.049 99315 159.01 4209 0.46 2019 16.581 175852 136363 194382 17676 165.499 See Part II Item Managements Discussion and Analysis of Financial Condition and Results of Operations Non-GAAP Financial Measures in this Annual Report common stockholders and ways in which investors discussion of why we believe FF0 is might use FF0 when assessing our financial useful supplemental measure of operating performance performance and FFOs limitations as measurement tool on Form 10-K for reconciliation to net and comprehensive income loss to 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 and the related notes thereto statements Factors Forward-Looking Statements Business and our audited consolidated financial included elsewhere on Form 10-K This discussion contains forward-looking in this Annual Report statements reflecting current expectations that involve risks and uncertainties Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to number of factors including those discussed in the section entitled Risk Factors and elsewhere in this Annual Report on Form 10-K 29 Overview We acquire own and operate industrial real estate in six major coastal U.S markets Los Angeles Northern New Jersey/New York City San Francisco estate including warehouse/distribution Bay Area Seattle Miami and Washington D.C/Baltimore We invest and RD approximately 87.4% of our total portfolio approximately 10.3% and trans-shipment approximately 2.3% We target square footage as of December 31 2012 flex in several types of industrial real functional including light industrial buildings in infill in which we operate locations that may be shared by multiple tenants and that cater 31 2012 we owned As of December 67 buildings aggregating to customer demand within the various submarkets approximately 5.1 million square feet which we purchased for an aggregate purchase price of approximately $421.8 million including the assumption of mortgage loans payable of approximately Maryland corporation and elected to be taxed as year ending December 31 2010 $55.1 million which includes mortgage premiums of approximately REIT under Sections 856 through $1.5 million We are an internally 860 of the Code commencing managed with our taxable Our Investment Strategy We invest in industrial properties in six major coastal U.S markets Los Angeles Northern New Jersey/New York City San Francisco Bay Area Seattle Miami and Washington D.C.IBaltimore We invest in several types of industrial real estate including warehouse/distribution flex including light industrial 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 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 patterns resulting from population changes regulatory and physical constraints potential long term increases in carbon prices and other factors We believe that our target markets 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 third party property managers for day-to-day property management and as source of acquisition opportunities We believe outsourcing property management is cost effective and may directly manage other properties in the future and provides us with operational if we determine flexibility such direct We currently manage one of our properties directly 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 in individual properties that own We expect that we will continue to acquire the significant majority of our investments as equity interests or portfolios industrial of properties We may also acquire industrial properties through the acquisition of other corporations or entities real estate We will opportunistically target 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 During the period from February 16 2010 to December 31 2012 we acquired 19 unstabilized properties of which II have been stabilized In addition we have disposed of one property We may sell properties from time to time when we believe the prospective total return from property is particularly low relative to its market value and/or the market value of the property is significantly greater than its estimated replacement cost Capital from such sales will be reinvested into properties that are expected to provide better prospective returns or returned to shareholders 30 2012 Developments Acquisition Activity purchase price of approximately hand facility net of assumed mortgage The following table During the year ended December 31 2012 we acquired $180.9 million The properties 22 industrial buildings containing 1781402 square feet for total were acquired from unrelated third parties using existing cash on loans payable of approximately $14.8 million and borrowings under our senior revolving credit sets forth the wholly-owned industrial properties we acquired during the year ended December 31 2012 Acquisition late l3uildins Square Feet in thousands Cap Rate Number of lurchase lriee Stabilized Propcrt Name Global Plaza Garfield Whittier Caribbean 78th Avenue Manhattan Beach arlton Court Troy 1-fill a6th Street weitzer 17600 West Valley Highway 631 Brennan South Main Total/Weighted Average Location Sterling VA Commerce CA Whittier CA Sunnyvale Doral FL March 16 2012 May 30 2012 June 122012 July 3.2012 July 23 2012 July 312012 Beach CA Redondo South San Francisco CA August Elkridge MD Miami FL Laurel MD 17 2012 August September 25 2012 October IS 2012 2012 Tukwila WA San Jose CA Carson CA December December 14 2012 19 2012 December 20 2012 68989 545299 161610 171707 74786 103200 24277 65.697 137594 84.961 110049 47233 186000 6100 52400 16100 33.718 42X 14.150 3575 6.664 12100 6.950 8000 4.176 12j50 22 1781402 180883 7.5% 5.5% 7.l 7.2% 6.0sf 5.1% 7.1% 7.4% 7.6% 6.3% 7.4 8.4% 6.6% lease We define Excludes intangible liabilities and mortgage premiums totaling approximately $4.2 million The total aggregate investment was approximately $185.3 million Stabilized stabilized cap rates to market occupancy generally 95% divided by the total at the time of acquisition are calculated as annualized cash basis net operating income for the property acquisition Cost for the property Total acquisition cost basis for the property includes the initial purchase price the effects of marking assumed debt to market buyers due diligence intangible cash basis adjustments necessary net operating income for the property as net operating income excluding straight-line estimated acquisition capital expenditures and leasing costs to achieve stabilization rents and amortization of lease These stabilized intangibles performance which may be affected including risks related to our ability to meet our estimated forecasts and unknown by known are subject cap rates to risks uncertainties and assumptions and are not guarantees of future risks trends uncertainties and factors that are beyond our control related to stabilized cap rates and those risk factors contained in this Annual Report on Form 10-K 31 Disposition Activity During the year ended December approximately $17.0 million resulting Public Follow-on Offering 31 2012 we sold one property located in San Bernardino CA for $4.0 million gain of approximately in sales price of shares of our common stock at The net proceeds shares On January 13 2012 we completed public follow-on offering of 4000000 shares of our common stock at price per share of $14.25 including 93000 shares that were sold in the offering to our executive directors No underwriting we sold an additional 61853 discount or commission was paid on the shares sold to such officers 13 2012 price per share of $14.25 upon the exercise by the underwriters of their and directors On February and senior officers and members of our board of option to purchase additional of the offering were approximately $54.7 million after deducting the underwriting discount and offering costs of approximately $3.1 million We used approximately $41.0 million of the net proceeds to repay outstanding borrowings under our senior revolving credit facility and the remaining net proceeds were used to invest in industrial properties and for general business purposes Preferred Stock Offering On July 19 2012 we completed public offering of 1840000 shares of our 7.75% Series Cumulative Redeemable Preferred Stock the Series purchase additional Preferred Stock including 240000 shares at price per share of $25.00 The net proceeds of the offering were approximately $44.3 million after shares sold upon the exercise by the underwriters of their option to deducting the underwriting discount and other offering expenses of approximately $1.7 million We used the net proceeds to reduce outstanding borrowings under our credit facility Dividends on the Series Preferred Stock are payable when as and if authorized by our board of directors quarterly in arrears on or about the last day of March June September and December of each year The Series Preferred Stock ranks with respect to dividend rights and rights upon our liquidation dissolution or winding-up senior to our common stock Generally we may not redeem the Series Preferred Stock prior to July 19 2017 except in limited circumstances relating to our ability to qualify as REIT and pursuant to special optional redemption related to specified change of control as defined in the articles supplementary for the Series Preferred Stock in whole or in part at any time or from time to time for cash at accrued and unpaid dividends whether or not authorized or declared up to but excluding the redemption date Preferred Stock On and after July 19 2017 we may at our option redeem the Series of $25.00 per share plus any redemption price 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 Facility with KeyBank National Association as the adminisirative agent and as lender and the other lenders thereunder 32 which provided for certain modifications to our $80.0 million revolving credit facility The amendment extended the maturity date to January absence 19 2015 and provided of an event of default for one 12-month under the Facility extension option exercisable by us subject to among other things there and to our payment of an extension fee The amendment provided that outstanding being an to the lesser of $80.0 million and 60% of the value of the borrowing base properties 50% prior to the were limited borrowings amendment LIBOR margin or ii the applicable base Interest on the Facility funds effective the federal applicable LIBOR margin was amended to range ratio of our outstanding consolidated indebtedness rate or thirty-day continued to generally be paid based rate which is the greater LIBOR plus the applicable of the administrative agents prime rate plus 1.00% 0.50% above at our option either upon LIBOR plus the applicable LIBOR margin for LIBOR rate loans under the Facility The from 2.50% to 3.50% 3.00% to 4.25% prior to the amendment depending on the to the value of our consolidated gross asset value On June 15 2012 we entered into Third Amendment to our Facility with KeyBank National Association as administrative agent and as $80.0 million to $100.0 million by exercising the accordion and PNC Bank National Association lender and Union Bank N.A as feature under lenders to increase our Facility from the Facility The amendment provided that outstanding limited to the lesser of $100.0 million or 60.0% of the value of the borrowing base properties The borrowings under the Facility were amount available the identification under the Facility could be increased of lenders willing to make additional unused facility fee in an amount equal to 0.25% or 0.35% depending on the unused the obligations of the borrower wholly-owned subsidiary under the Facility up to $150.0 million subject amounts available The Facility continued to the approval of the administrative agent and to require payment of an annual portion of the Facility We continued to guarantee As set forth Second Amended and Restated Senior Credit Agreement on January under Recent Developments-Term Loan and Amendment to Senior Credit Agreement 17 2013 which provides for certain below we entered into amendments to the Facility and term loan Secured Financing On January 30 2012 we entered into 2019 The mortgage matures on February $20 million non-recourse mortgage loan at fixed annual interest rate of 3.79% that loan is secured by five of our properties aggregating approximately 442000 square feet term loan the Term Loan The remaining loan proceeds portion of the loan proceeds was used to pay down our senior secured were used to invest in industrial properties and for general business purposes On June 26 2012 we entered into 2020 The mortgage on March matures $39.8 million non-recourse mortgage loan at fixed annual interest rate of 3.65% that loan is secured by three of our properties The loan proceeds were used to reduce outstanding borrowings under the Facility and for general business purposes In August 2012 we repaid our senior secured term loan which had an outstanding balance of approximately $10.1 million that was scheduled to mature on February 22 2013 with proceeds from the Facility Distribution Activity The following table sets forth the cash dividends paid or payable per share during the year ended December 31 2012 For the Three tlontlis Ended Security Dividend per Share Declaration late Record _____________________ Date Iate Paid March 31 2012 June 30 2112 September 30 2012 September 30 2012 31 2012 December December 31 2012 Recent Developments common stock $0 100000 Common stock common stock $0.120000 Preferred stock $0387500 Common stock $0.12000 February 21 2012 April $0.120000 May 2012 July 2012 2012 August August November 2012 2012 2012 October September 10 2012 October 31 2012 10 2012 2012 December 2012 December January 14 2013 December 31 2012 April 19 2012 July 23 2012 October 26 2012 2012 Preferred stock $0484375 Novernber(cid:244) Term L1an and Amendment to Senior redi.t Agreement On January 17 2013 we entered into Second Amended and Restated Senior Credit Agreement and as lender KeyBanc Capital Markets as the Amended Facility with and PNC Bank lead arranger KeyBank National Association National Association Union Bank N.A and Regions Bank $100.0 million Facility term loan and amend our existing as administrative agent as lenders collectively the Lenders to add five-year $50.0 million 33 The five-year $50.0 million term loan maturity date under the Amended Facility is January 16 2018 and we will have months to borrow the full $50.0 million The amendment extends the maturity date for the $100.0 million Facility under up to six the Amended Facility to January 2016 and provides for one 12-month extension option exercisable by the Company subject among other things to an absence of an event of default under there being Amended Facility including the term loan will continue applicable LIBOR margin or ii the applicable base 0.50% above funds effective Amended Facility The applicable LIBOR margin was reduced outstanding consolidated indebtedness rate or thirty-day the federal the Amended Facility and to our payment of an extension fee Interest on the to generally be paid based upon at our option either LIBOR plus the rate which is the greater of the administrative agents prime rate plus 1.00% for LIBOR rate loans under LIBOR plus the applicable LIBOR margin the to the value of our consolidated gross asset value The aggregate to range from 1.65% to 2.65% depending on the ratio of our amount of the Amended Facility may be increased to of lenders willing to make available additional total of up to $300.0 million subject amounts The Amended Facility continues to be guaranteed by the Company and by to the approval of the administrative agent and the identification substantially all of the borrowers current and to-be-formed subsidiaries that own borrowing base property In addition the Amended Facility continues to be secured by pledge of the borrowers equity interests in the subsidiaries that hold each of the borrowing base properties Outstanding borrowings under the Amended Facility are limited to the lesser of the sum of the $100.0 million revolving credit facility amount and the $50.0 million term loan amount or ii 60% of the value of the borrowing base properties Tenant Default On January 29 2013 we filed an eviction proceeding 2012 and January Hialeah FL for failure to pay December December 31 2012 of approximately against Banah International 2013 rent As Group our tenant at 10th Avenue located in result we incurred charges during the year ended $45000 related to the bad-debt reserve of outstanding accounts receivable approximately $1.1 million related to the write-off of deferred rent receivable and approximately $0.4 million related to the write-off of capitalized leasing commissions net of deferred lease commissions payable As of December 31 2012 Banah International Group represented approximately time We currently above the rental 2.8% of our annualized base rent Any ultimate recovery of damages including past due rent is undetermined at this expect that the rental rates we are likely to achieve on any new leases for this space will generally be equal to or rates under the lease with Banah International Group We cannot provide assurance however that the space will be re-leased at all or at rental rates equal to or above the current rental rate Contractual Commitments Currently we have three contracts with third-party sellers to acquire three 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 and various closing conditions Outlook Industrial rents have availability likely ending falling in our markets stopped 2012 near 13% and new speculative development and in most cases are rising modestly Nevertheless with national beginning in some markets it will take time before most markets exhibit significant rent growth We see growing set of acquisition opportunities In the intermediate term we expect to grow our portfolio credit rating increase our shareholder to optimize our operating efficiency to broaden our access to capital We remain mindful however matter We believe in the long-term operating prospects of our functional infill coastal liquidity and position us to achieve an investment grade that it is per share rather than aggregate that assets We believe in sound balance sheet results management We believe in the benefits of our market-leading corporate governance and exceptionally aligned executive management compensation The primary source of our operating revenues from tenants under operating leases at our and earnings is rents from tenants for certain operating costs We seek received properties including reimbursements long-term earnings growth primarily through increasing rents and operating income at existing properties and acquiring properties in our six target markets We intend to seek 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 facility and entered into three placements of secured or unsecured debt In the first two months of 2013 we have amended our credit contracts to acquire three industrial properties all as described in this Annual Report on Form 10-K Inflation Although the U.S economy has been experiencing relatively modest inflation rates recently and wide variety of industries and sectors are affected differently operation Most of our leases estate taxes and insurance by changing commodity prices inflation has not had significant impact on us in our markets of require the tenants to pay their share of operating expenses including common area maintenance real to increases in costs and operating expenses from inflation thereby reducing resulting In our exposure addition approximately 50.2% our current leases expire within five years which enables us to seek to replace existing leases with new leases at the then-existing market rate 34 Financial Condition and Results of Operations We derive substantially all of our revenues from rents received from tenants under existing leases on each of our properties These revenues include fixed base rents and recoveries of certain property operating expenses that we have incurred and that we pass through to the individual tenants Approximately 87.5% of our leased space includes fixed rental increases or Consumer Price Index- based rental increases Lease terms typically range from three to ten years Our primary cash expenses consist of our property operating expenses which include real estate taxes repairs and maintenance management professional expenses insurance fees and other administrative expenses acquisition costs which include third-party utilities general and administrative expenses which include compensation costs office expenses costs paid to brokers and consultants and interest expense primarily on mortgage loans and our Facility Our consolidated results of operations often are not comparable from period to period due to the impact of property acquisitions at various times during the course of such periods The results of operations of any acquired property are included in our financial statements as of the date of its acquisition The analysis of our results below for the years ended December 31 2012 and 2011 includes the changes attributable to same store properties The same store pool in operation as of December 31 2012 and since January for the comparison of the 2012 and 2011 fiscal years includes all properties that were owned and 2011 and excludes properties that were either disposed of or held for sale to third party As of December 31 2012 the same store pool consisted of II properties aggregating or disposed square feet As of December 31 2012 the non-same store properties which we acquired 2012 2.9 million square feet consisted of 25 properties approximately aggregating approximately 2.2 million of during the course of 2011 and Our future financial condition and results of operations including rental revenues straight-line rents and amortization of lease intangibles may be impacted by the acquisitions of additional properties and expenses may vary materially from historical results Comparison of the Year Ended December 31 2012 to the Year Ended December 31 2011 For the Year Ended Decemher 31 2012 2011 Change ________ Change ________ Dollars in thousands Rental revenues Same store 2011 and 2012 Acquisitions Total rental revenues Tenant expense reimbursements Same store 2011 and 2012 Acquisitions lotal tenant expense Tot revenues reimhursenient.s Property operating expenses Same gore 20 and 2012 Acquisitions Total ivty operating expenses Net operating income Same store 2011 and 2012 Acquisitions Ttlal net operating income Other costs and expenses Depreciation and amortization General and administrative Acquisition costs Total other costs and expenses Other Income Expense Interest and other income expense Interest expense including amortization Total other income and expenses Income from discontinued operations Net income loss 10397 14109 24506 2922 3745 6667 8901 3350 12251 2970 784 3754 1496 10759 12.255 48 296 2913 31173 16005 15168 5182 921 6103 6689 3.2 13 9902 4688 5.407 1981 12 076 2612 2614 1059 3729 @75 3358 2883 1923 10.362 $12285 4445 996 257 5.698 39 2860 2.821 4028 7794 4707 4279 8986 8.6 12 13575 2187 9133 6403 2238 7.774 37 5472 5.435 5087 4065 35 I6.8A 321.2% l00.09 .6y% 377.7% 77.6A 94.8% 9.2% 364.% 47.2% 28.7% 322.5% 124.1% 94.8% 8.4A 13.0% 47.2A n/a 109.5% 107.9A 380.4% n/a Includes straight-line rents and amortization of lease intangibles See Non-GAAP Financial Measures in this Annual Report on Form 10-K for reconciliation of net operating income and same store net operating income from net income loss and discussion of why we believe net operating income and same store net operating income are useful supplemental measures of our operating performance Revenues Total revenues Approximately $1.4 million net of approximately $1.1 million due to the write-off increased approximately $15.2 million for the year ended December 31 2012 compared to the default of this increase related to the tenant prior year is from same store revenues mainly due to increased occupancy as same store consolidated occupancy at year end increased to 93.0% as of December 31 2012 as compared to 90.3% from the same period in 2011 The remaining increase in total revenues is due to property acquisitions respectively during 2011 was recorded and 2012 For the quarter and year ended December 31 2012 approximately $0.4 million and $1.9 million in straight-line rental revenues related to contractual rent abatements given to certain tenants Property operating expenses Total property operating expenses increased approximately $2.9 million during the year ended December 31 2012 compared to the same period from the prior year The increase in total property operating expenses was due to an increase of approximately $3.4 million attributable to property acquisitions during 2011 and 2012 which was partially offset by decrease in same store property operating expenses of approximately $0.5 million The decrease in same store property operating expenses was primarily due to from the prior year period decrease in snow removal and security expenses Depreciation and amortization Depreciation and amortization increased approximately $4.4 million including approximately $0.3 million of write-offs related to the tenant default during the year ended December 31 2012 compared to the same period from the prior year due to property acquisitions during 2011 and 2012 General and administrative expenses General and administrative expenses increased approximately $1.0 million for the year ended December31 2012 compared to the prior year due primarily to an increase in compensation expense related to higher number of employees in 2012 Acquisition costs Acquisition costs increased by approximately $0.3 million for the year ended December 31 2012 from the prior year due to higher volume of property acquisitions during the year ended December 31 2012 as compared to the prior year interest expense 2012 compared to the including amortization Interest expense increased approximately $2.9 million for the year ended December 31 prior year due primarily to the assumption and origination of mortgage loans payable during 2011 and 2012 as well as borrowings under our Facility and term loan payable Comparison of the Year Ended December December 31 2010 31 2011 to the Period from February 16 2010 Commencement of Operations to The majority of the changes in our statements of operations line items for the year ended December31 2011 compared to the period 16 2010 commencement from February times during the course of 2010 and 2011 operations compared to 2010 consisting of of operations to December 31 2010 are related to property acquisitions that occurred at various In addition certain of such changes were the result of 2011 consisting of full year of Rental revenues Tenant expense reimbursements Total revenues Property operating expenses Total net operating income Other costs and expenses Depreciation and arnorti7ation General and administrative Acquisition costs Total other costs and expenses Other Income Expense Interest and other income expense Interest expense including amortization Total other income and expenses Income from discontinued operations Net income loss shorter operating period For the Year Ended Period from February 16 2010 Commencement of Operations to December 31 2011 December31 2010 2762 827 3589 1.216 2373 4122 7.612 64 524 460 309 5390 12251 3.754 16005 6.103 9902 688 5407 981 12.076 2612 2.614 L059 3729 36 Change 9489 2927 12416 4887 7529 3487 1285 308 4464 66 2088 2.154 750 1661 Change 343.6% 353.9A 345.9% 401.9% 17.3% 290.3% 31.2% 13.5% 58.6 n/a 398.5% 468.3sf 242.7% 30.8% Revenues Total revenues increased by approximately $12.4 million to $16.0 million for the year ended December 2011 from $3.6 million for the period from February primarily to property acquisitions during 2010 and 2011 16 2010 commencement of operations to December 31 2010 This increase is due 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 ended December 2011 from $1.2 million for the period from February by approximately 16 2010 commencement $4.9 million to $6.1 million for the year 31 to December of operations 2010 This increase is due primarily to property acquisitions during 2010 and 2011 tepreciation year ended December December and amortization Depreciation and amortization increased from $1.2 million for the period from February by approximately $3.5 million to $4.7 million for the 16 2010 commencement of operations to 2011 31 2010 This increase is due to property acquisitions during 2010 and 2011 General and administrative and administrative expenses increased by approximately $1.3 million to $5.4 million thr the year ended December from $4.1 million for the period from February 16 2010 commencement of expenses General 31 2011 operations December to December 31 2010 This increase was driven primarily by our having 31 2011 compared to the shorter period from February 16 2010 commencement full year of expenses of operations for the year ended to December 2010 Acquisition costs Acquisition costs decreased by approximately 2011 from $2.3 million for the period from February 16 2010 commencement $0.3 million to $2.0 million for the year ended December 31 to December 31 2010 This decrease is of operations due to lower volume of property acquisitions during the year ended December 31 2011 compared to the period from February 16 2010 commencement of operations to December 31 2010 Interest expense including amortization Interest expense increased by approximately ended December 31 2011 from $0.5 million for the period from February 16 2010 commencement $2.1 million to $2.6 million for the year to December 31 of operations 2010 This increase is due primarily to the assumption of $39.5 million in mortgage loans payable during 2010 and 2011 as well as borrowings on our Facility and term loan payable in 2011 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 lease term 5-7 years positioning us to re-price parts of our capital structure as our rental rates change with market conditions 37 We intend to preserve flexible capital structure with long-term goal to obtain an investment to issue unsecured debt and additional perpetual preferred stock Prior to attaining an investment grade rating and position grade rating we intend to primarily be in 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 with property acquisitions which may have or recourse bank term loans credit higher loan-to-value facilities and perpetual preferred stock We may also assume debt in connection We expect to meet our short-term liquidity balances adequate and if necessary to fund operating requirements short-term borrowings requirements generally through net cash provided by operations existing cash under our Facility We believe that our net cash provided by operations will be pay interest on any borrowings and fund distributions in accordance with the REIT requirements of the federal mortgages borrowings income tax laws In the near-term we intend to fund future under our Facility perpetual preferred and common stock issuance investments in properties with term loans and from time to time property sales 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 Facility periodic issuances of common stock perpetual preferred stock and long-term secured and unsecured debt and 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 shares purchased 13 2012 we completed public follow-on offering of 4000000 shares of our common stock including 93000 by our senior management and directors at price per share of $14.25 On February 13 2012 we sold an additional 61853 shares of our common stock at price The net proceeds of the offering after deducting per share of $14.25 additional shares upon the exercise by the underwriters of their option to purchase the underwriting discount and estimated offering costs were approximately $54.7 million We used approximately $41.0 million of the net proceeds to repay outstanding borrowings under our credit facility on January 13 2012 and the remaining net proceeds were used to invest in industrial properties and for general business purposes On July 19 2012 we completed public offering of 1840000 shares of our Series Preferred Stock including 240000 shares sold upon the exercise by the underwriters of their option to purchase proceeds of the offering were approximately $44.3 million after deducting approximately $1.7 million We used the net proceeds additional shares at price per share of $25.00 The net to reduce outstanding borrowings the underwriting discount and other offering expenses of under our Facility Dividends on the Series Preferred Stock are payable when as and if authorized by our board of directors June September and December of each year The Series Preferred Stock liquidation dissolution or winding-up senior to our common stock quarterly in arrears on or about ranks with respect to dividend rights the last day of March and rights upon our Generally we may not redeem the Series Preferred Stock prior to July 19 2017 except in limited circumstances relating to our ability to qualify as REIT and pursuant to special optional redemption related to specified change of control as defined in the articles supplementary for the Series Preferred Stock in whole or in part at any time or from time to time for cash and unpaid dividends whether or not authorized or declared accrued up to but excluding the redemption date Preferred Stock On and after July 19 2017 we may at our option redeem the Series price of $25.00 per share plus any redemption at We have $100.0 million Facility as of December 31 2012 The following is description of our Facility as of December 31 2012 prior to our entry into an amendment to the Facility on January 17 2013 which is discussed under the heading Recent Developments The Facility was previously amended in 2012 as discussed under the heading 2012 Developments The amount available under our Facility may be increased up to $150.0 million subject to the approval of the administrative agent and the identification 12-month of lenders willing to make available additional amount The maturity date of our Facility is January 19 2015 with one extension option exercisable by us subject to among other things there being an absence of an event of default under the Facility and to our payment of an extension fee Interest on our Facility is generally to 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 the federal funds effective rate or thirty-day LIBOR plus the applicable LIBOR margin for LIBOR rate loans under the Facility The applicable LIBOR margin ranges from 2.50% to 3.50% depending on the ratio of our outstanding consolidated indebtedness to the value of our consolidated gross asset value As of December 31 2012 the applicable LIBOR margin was 2.50% The Facility provides that outstanding borrowings are limited to the lesser of $100.0 million and 60.0% of the value of the borrowing base properties Our Facility requires payment of an annual unused facility fee in an amount equal to 0.25% or 0.35% on the unused depending years ended December 2010 Our Facility includes portion of our Facility The unused facility fee was $204000 $359000 and $197000 respectively for the 31 2012 and 2011 and for the period from February 16 2010 commencement of operations to December 31 series of financial and other covenants requiring among other things the maintenance of maximum leverage ratios and minimum fixed coverage obligations of the borrower wholly-owned subsidiary ratios that we must comply with in order to borrow under under our Facility As of December 31 2012 the Facility We guarantee the there were approximately $65.4 million of borrowings outstanding and 12 properties were in the borrowing base under our Facility As of December 31 2011 there were approximately $41.0 million of borrowings outstanding under our Facility We were in compliance with our financial covenants under the Facility at December 31 2012 and 2011 38 As set under Recent Developments-Term Loan and Amendment to Senior Credit Agreement Second Amended and Restated Senior Credit Agreement on January 17 2013 which provides for certain forth above we entered into amendments to the Facility and new term loan During the year ended December 31 2012 we repaid our senior secured term loan that was scheduled to mature on February 22 2013 with proceeds from our Facility and mortgage term loan was approximately $20.1 million loans As of December 31 2011 the outstanding balance of the senior secured As of December 31 2012 and 2011 we had outstanding mortgage loans payable of approximately $11 .6 million and $38.3 million respectively and held cash and cash equivalents totaling approximately $5.9 million and $3.2 million respectively The following table summarizes our debt maturities principal payments market capitalization capitalization for the ended December as of and ratios year and debt ratios EBITDA 2012 dollars Adjusted EB ITDA interest coverage fixed charge coverage in thousands 2013 2014 2015 2016 2017 Thereafter Subtotal tnamortiied net premiums Tot Debt Weighted Average Interest Rate Credit hIciht% 65429 _______ 65429 ____________ $65429 Mortgage Loans Pa3ahle 2852 12161 21878 6649 1916 65 063 otal Iht 2852 12.161 87307 6.649 1.916 65.063 110.519 175948 .096 1.096 $111615 $177t4 2.7/c 4.6A 394 Shares Outstandinst Market Price Muket aIue Common Stock 13434558 15.44 Preferred Stuck $25.tX per share liquidation preference Total Equity TOtal Market Capitalization Total Debt-to-Total Investments in Propeiles3 Iotal IehttoFotal Iviarket Capitalization Total Debt and Preferred Stock to-Total Market Capitalizations Floating Rate EBITDA6 eht as of Total Debt Adjusted EBITDA Interest Coverage8 Fixed Charge Coverage Total Debt-to-Adjusted EI3ITDA Total Debt and Preferred Stock-to-Adjusted EBITDA Weitxhted Average Maturity years 207430 4600 253430 430474 39.8% 41 9f 51.8% 37.0% 14737 18096 3.3 2.6 9.2 1.6 4.3 39 Includes 149125 Closing price Total debt-to-total shares of unvested restricted 31 2012 of our shares of common stock on the New York Stock Exchange in properties is calculated as stock as of December investments total debt including premiums divided by total on December 31 2012 in dollars per share in investments properties as of December 31 2012 Total debt-to-total market capitalization of December 2012 is calculated as total debt including premiums divided by total market capitalization as Total debt and preferred stock-to-total market capitalization is calculated as total debt including premiums plus preferred stock at liquidation preference Earnings before interest divided by total market taxes gains losses from sales of property depreciation and amortization EBITDA for capitalization the year as of December 31 2012 ended December 31 2012 EBITDA for such period includes acquisition costs of approximately in this Annual Report Financial Measures discussion of why we believe EBITDA is on Form 10-K for reconciliation of EBITDA from net income loss and useful supplemental measure of our operating performance Earnings before interest based compensation this Annual Report taxes gains losses from sales of property depreciation and amortization acquisition costs and stock- Adjusted EB1TDA for the year ended December 31 2012 See Non-GAAP Financial Measures in on Form 10-K for reconciliation of Adjusted EBITDA from net income loss and $2.2 million See Non-GAAP believe Adjusted EBITDA is useful supplemental measure of our operating performance Interest coverage is calculated as Adjusted EBITDA divided by interest expense including amortization Financial Measures in this Annual Report on Form 10-K for reconciliation of Adjusted EBITDA from net income loss and discussion of why we See Non-GAAP discussion of why we believe Adjusted EBITDA is useful supplemental measure of our operating performance Fixed charge coverage stock dividends is calculated as Adjusted See Non-GAAP Financial Measures EBITDA divided by interest expense including amortization plus preferred of Adjusted in this Annual Report on Form 10-K for reconciliation EBITDA from net income loss and discussion of why we believe Adjusted EB1TDA is useful supplemental measure of our operating performance Total debt-to-Adjusted EBITDA is calculated as total debt including premiums divided by annualized Non-GAAP Financial Measures in this Annual Report reconciliation Adjusted EBITDA See of Adjusted EBITDA from net income loss and discussion of why we believe Adjusted useful supplemental measure of our operating on Form 10-K for EBITDA is performance Total debt and preferred stock-to-Adjusted EBITDA is calculated as by annualized Adjusted EBITDA See Non-GAAP Financial Measures of Adjusted EBITDA from net income loss and reconciliation total debt including premiums plus preferred stock divided in this Annual Report discussion of why we believe Adjusted on Form 10-K for EBITDA is useful supplemental measure of our operating performance The following table sets forth the cash dividends paid or payable per share during the years ended December 16 2010 commencement of operations to December 31 2012 and 2011 31 2010 No dividends were paid during the period from February For the Three Months Ended Securit Dividend per Share Date __________________ Declaration Record Date Date Paid March 31 2012 June 30 2012 September 30 2012 September 30 2012 December 31 2012 December 31 2012 common stock $0.I00000 February 21 2012 April Common stock common stock $0.120000 $0120000 August May 2012 2012 July October 2012 2012 2012 April 19 2012 July 23 2012 October 26 2012 Preferred stock Common stock $0.387500 August 2012 September 10 2012 October 2012 $0.120000 November November6 2012 December 2012 December 31 2012 10 2012 14 2013 January December 31 2012 Preferred stock $0.484375 40 For the three Months Fnded March3l2011 June 30 201 September 30 2011 December 31 2011 Sources and Uses of Cash Security 1ividend per Share Commonstock $0100000 Common stock Common stock $0 100000 Common stock $0.10000 $0100000 Ieclaration Date Record Iate Iate Paid February172011 April52011 April 1920l1 May 18 2011 July 2011 July 20 2011 August 11 2011 November October 2011 October 20 2011 82011 January 62012 January 20 2012 Our principal sources of cash are cash from operations borrowings under mortgage loans payable draws on our Facility and issuances Our principal uses of cash are asset acquisitions debt service capital expenditures operating common and preferred stock cosis corporate overhead costs and common and preferred stock dividends Cash Iron Opcratms Activities Net cash provided by operating activities totaled approximately $9.7 million for the year ended Iecemher 31 201 operating activities compared to approximately $2 million for the year ended December from new leases at existing to increased revenues is attributable rental 2011 This increase in cash provided by properties and higher cash flows from the operations of properties acquired during 2012 ash Front 1nvcrin Activities Net cash used in investing activities was $160.2 million and $105.9 million respectively for the years ended lecemher 31 2012 and 2011 which consists primarily of cash paid for property acquisitions of $166.0 million and $96.9 million respectively and additions to buildings and improvements of approximately $10.2 million and $7.7 million respectively offset by proceeds from sales of real estate investments of approximately $16.3 million for the year ended December 31 2012 ash From Finarnn Activities Net cash provided by financing activities was $153.1 million for the year ended December 31 2012 which consists primarily of $98.9 million in net common and preferred stock issuance proceeds and borrowings on mortgage loans and the Facility of approximately $222.6 million less payments on the Facility and Term Loan of approximately $158.3 million Net cash provided of approximately $67 million of borrowings payments $6.0 million of payments on the by financing activities was $49.7 million for the year ended December 31 2011 which consists Facility and Term Loan less $7.0 million in deferred underwriting fee on the primarily Facility and $2.8 million in dividend payments 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 judgment.s will affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statenients 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 Properly Acquisitions Upon acquisition of property which are accounted for as business combinations we estimate the fair value of acquired tangible asset.s consisting generally of land buildings and improvements and intangible assets and liabilities consisting generally of the above and below-market leases and the origination value of all using replacement cost estimated cash flow projections and other valuation techniques in-place leases We determine and applying appropriate discount and fair values 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 Acquisition-related costs associated with business combinations are expensed as incurred The lair value of the current comparative sales assets tangible values when available or managements is determined by valuing the property as if it were vacant Land values are derived from estimates of the fair value based on market conditions and the experience of our management teani Building and improvement values are calculated as replacement cost less depreciation or managements estimates of the lair 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 he received pursuant to the acquired leases using discount rate that reflects the risks associated with the acquired leases and our estimate ol the market lease rates measured over period equal renewal options The above and below-market to the remaining term of the leases plus the term of any below-market the remaining initial are amortized to rental revenues lease values over fixed rate term plus the term of any below-market lixed rate renewal options that are considered bargain renewal options 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 41 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 Examples of such events or changes when an asset remains in circumstances may include classifying than expected vacant significantly longer an asset to be held for sale changing the intended hold period or 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 the long-term the recoverability is based on the undiscounted future cash flows If the asset carrying value is not supported on an undiscounted future cash flow basis then the asset carrying value is measured against the lower of cost or the present value of expected An impairment values of expected the expected hold period If an asset charge to earnings is recognized for the excess of the assets carrying value over flows over is intended cash cash flows over the expected hold period the lower of cost or the present to be sold impairment is 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 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 sales values may also comparative based on our understanding from our estimates The discount be used to establish fair value When market information is not readily available the inputs are of market conditions and the experience of our management team Actual results could differ significantly rates used in the fair value estimates 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 maintains an allowance for estimated losses that may result from the inability of our tenants to make required payments If tenants fail to make contractual lease payments that are greater than our allowance for doubtful accounts security deposits and letters of credit then we may have of our tenants on an on-going to recognize additional doubtful account charges in future periods We monitor the basis by reviewing their financial condition periodically as appropriate liquidity and creditworthiness Each period we review our receivable including straight-line rents for doubtful accounts and provide allowances as needed We also outstanding accounts 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 will be deferred and recognized over the term of such tenants occupancy Income Taxes We elected to be taxed as REIT under the Code and operate as such beginning with our taxable year ended December to distribute at 31 2010 To qualify as requirements least 90% of our annual REIT taxable income to our stockholders which is computed without or net capital gain and which does not necessarily equal REIT we must meet certain organizational and operational net including requirement regard to the dividends to qualify as paid deduction REIT we generally will not be subject we fail income tax rates and generally will not be permitted to qualify for treatment taxable years following the year during which qualification Such an event could materially adversely affect our net believe we are organized any taxable year we will be subject and operate in such manner as REIT in to federal to federal income tax to the extent we distribute to qualify for treatment as REIT income as calculated in accordance with GAAP As qualifying dividends to our stockholders If income tax on our taxable income at regular corporate as REIT for federal income tax purposes for the four is lost unless the IRS grants us relief under certain statutory provisions income and net cash available for distribution to stockholders However we Stock-Based Compensation-Stock Compensation and Other Long-Term Incentive Compensation We follow the provisions of ASC 718 the compensation plan which requires that for our stock-based Compensation compensation to account 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 We have 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 general and administrative as We estimate the forfeiture expense in the financial statements and measured at the fair value of the award on the date of grant 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 In addition we have awarded long-term incentive target awards to our executives that are payable in shares of our common stock after the conclusion of each pre-established performance measurement period The amount that may be earned under the long- term incentive plan is variable depending return of the MSCI U.S REIT Index and the FTSE NAREIT Equity Industrial measurement period We estimate the fair value of the long-term incentive target awards using Monte Carlo simulation model on the date of grant and at each return of our stock as compared to the total shareholder reporting period These awards the pre-established performance total shareholder on the relative Index over over the as compensation expense are recognized performance requisite period based on the fair value of the award at the balance sheet date 42 Off-Balance Sheet Arrangements We do not have any oil-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 Currently we have three outstanding contracts with third-party sellers to acquire three industrial properties There is no assurance that we will acquire the properties under contract because the proposed acquisitions are subject to the completion of satislactory due diligence and various closing conditions The following table summarizes certain information with respect to the properties we have under contract \t arkct Los Angeles Miami Northern New Jersey/New York City San Francsc Ua Area Seattle Washington ./Ualtimore Total Number of Buildings ---- Sqtia re Feet in thousands in housands Purchase Price Assumed lebt 490 6090 68.583 5122 S.40 6450 178783 19972 -- The following table suniinariies our contractual obligations due by period as of December 31 2012 dollars in thousands ontruclual Obligations Debt Debt Interest Pa\ments Operating lease comnhitments Purchase Obligations lotal Non-CAAl Financial Measures less than More than sear 1.3 Years 3-5 ears ears lotal 2125 $86718 $21577 4.694 5.649 $65528 6369 472 497 1.208 3.737 227 9.972 $175948 24.419 2404 I9972 $206l $95884 $27723 $73105 $222773 We use the following of non-GAAP financial measures funds from operations or FF0 EBITDA Adjusted EBITDA net operating income or NOl same store that we believe are useful key supplemental to investors measure as our operating performance NOl and cash-basis same store NOl FF0 EBITDA Adjusted EBETDA NOl same store NO and cash-basis same store NOl should in accordance with GAAP Further our computation of not be considered FF0 FBITIA Adjusted EBITIA NOl same store NOl in isolation substitute or as for measures of performance and cash-basis same store NOl may not be comparable to FF0 EBITDA Adjusted F13IT1A NOl same store NOl and cash-basis same store NOt reported by other companies We compute FF in accordance with standards established by the National Association of Real Estate Investment Trusts NARE IT which defines FF0 as net property and impairment write-downs income loss determined in accordance with GAAP excluding gains losses from sales of of depreciable real estate plus depreciation and amortization on real estate assets and after ventures which are calculated to reflect FF0 on the same basis We believe adjustments for unconsolidated partnerships and joint information to investors regarding our operating performance because it is measure of our non-cash items such as real estate depreciation and amortization and gain or loss on sale of that presenting FF provides useful operations without regard to specified assets We believe that FF0 is meaningful real estate assets in accordance with AAP implicitly supplemental measure of our operating performance because historical cost accounting for 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 the use of FF0 together with the required GAAP presentations we believe that cost accounting alone to be insufficient As result provide more complete understanding of our operating pertormance 43 The following table reflects the calculation of FF0 reconciled from net and comprehensive income loss for the three months ended December 31 2012 2011 16 2010 commencement and 2010 and for the years ended of operations to December December 31 2012 and 201 and 31 2010 dollars in thousands for the period from February except per share data 1or the Three Months Ended December 31 For the Three Months Ended tenmher t1 2012 2011 Change Change 2011 4037 4037 n/a 2110 598 h.tnge 404 hange 67.6% n/a Gain on sales of real estate investments Depreciation and amortization Weighted average common shares basic and diluted 13285181 9174747 9174747 91120X For the Year Ended December 31 2012 2011 Change Change the Year Ended For December 31 2011 Period from February 16 2010 Commencement of Operations 1ecember3l to 2010 Gain on sales of real estate investments 4037 4037 n/a Change Change n/a lepreciation and amortization .. erations frc Weighted average basic and diluted common shares 13135440 9161805 9161805 9112000 To be consistent with the companys policies of determining whether instruments granted in share-based transactions payment common share is adjusted for FF0 distributed are participating securities and accounting for earnings per share the FF0 per through declared dividends if any and allocated to all participating securities weighted average common shares outstanding and unvested restricted shares outstanding and 148973 under the two-class method Under this method allocations were made to 149532 134958 of weighted average unvested restricted shares outstanding for the three months ended December 31 2012 2011 and 2010 respectively and 147200 and 138440 for the years ended December 31 2012 and 2011 respectively and for the period from February 16 2010 commencement of operations to December 31 2010 Includes expensed acquisition costs of approximately $0.4 million $0.3 million and $0.4 million respectively for the three months ended December million $2.0 million and $2.3 million respectively and for the period from February 16 2010 commencement 31 2012 2011 for the years ended December 31 2012 and 2011 and 2010 and approximately $2.2 of operations to December 31 2010 Ll4 The following table reflects the calculation of NO same store NOl and cash-basis same store NO reconciled from net income loss for the three months and the years ended December 31 2012 and 2011 dollars in thousands Net income loss eprec at and tiit irti /a in fro in CO11I1I1U1flC Operations Income from discontinued operations jeneral and administiali Acquisition costs Total other income and c\penses Net operating income 55 non same store NOl Same store NOt ess straight -Ii ic rents and amorli/alion ui lease intangibles cash-basis same store NOL or the Three Months I.nded December 2012 3553 3.012 4234 .496 440 1.739 6.006 20 194 1.469 269 279 300 955 3570 4.745 1.731 1261 1.839 75 2.014 37 1876 hange n/a For the Year Ended December 31 202 20 4065 $3.729 I05.0 9.1 1474.0% 15.087 6.403 2.238 5.435 22.187 7.04 46.7% 76.54 68.2 174.14 3L4% 4.688 1059 5.407 1981 2614 9902 13.575 3.213 10.362 8612 6689 1923 harige zr hange 7794 n/a 4.445 4028 996 257 9454 380.4% 8.44 13.0% 2.821 107.94 12.285 124.1% 322.5A 28.7% hunge 3747 1543 3965 140 754 2.436 3.014 578 716 138 1935.14 1.176 7.4% 7.416 42 6M7 1.134 27804 789 11.9% Includes straichi-line rents and amorti/ation of lease intangibles for the same store pool only 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 changes that affect market sensitive instruments In pursuing our business strategies the primary market risk and other market prices which we are exposed to is interest rate risk We are exposed to interest liquidity fund capital expenditures and expand our investment porffolio changes on earnings and cash flows and to lower our overall borrowing rate changes primarily as and operations We seek costs As described result of debt used to maintain to limit the impact of interest rate below some of our outstanding debt bears interest at variable rates and we expect that some of our future outstanding debt will have variable interest rate caps to manage our interest rate risks relating to our variable rate debt We expect to replace variable with fixed rate long4errn debt to finance our assets and operations rates We may use interest regular basis rate debt on As of 2012 we had $65.4 million of borrowings outstanding under our Facility Amounts borrowed under our Facility hear interest at variable rate based December 31 2012 movement future earnings and cash Facility as of December 31 2012 If the LIBOR rate fluctuates on LIBOR plus an applicable LIBOR margin which interest would increase or decrease by 0.25% interest expense rate was 2.7 1% as of depending on rate flows by approximately $163573 annually on the total of the outstanding balances on our Item Financial Statements And Supplementary Data See Part IV Item IS -- Exhibits and Financial Statement Schedules beginning on page F-I of this Annual Report on Form 10- Item Changes In And Disagreements With Accountants On Accounting And Financial Disclosure On March 2012 Deloitte Touche LLPDeloitte was notified that the Audit Committee dismissed Deloitte as the Companys independent registered public accounting firm effective immediately leloittes reports on the Companys financial 16 2010 commencement of operations statements for the year ended December 31 2011 and for the period from to December 31 2010 did not contain an adverse opinion or disclaimer of and were not qualified or modified as to uncertainty audit scope or accounting principles February opinion luring the year ended lecemher 31 2011 the period from February 16 2010 commencement of operations to December 31 2010 and aliv of Regulation the subsequent interim period through March S-K and the related instructions principles or practices financial statement disclosure 2012 the Company did not have any disagreements as defined in Item 304 to Item 304 of Regulation S-K with Deloitte of procedure or auditing scope which disagreement on any matter of accounting if not resolved to the in connection with its satislaction of Deloitte would have caused it to make reference to the subject matter of the disagreement reports Also during these periods there were no reportable events as that term is defined in Item 304alv of Regulation S-K 45 The Company provided Deloitte with to the SEC stating whether letter addressed copy of the above disclosures and requested that Deloitte furnish the Company with it agrees with such statements and if not stating the respects in which it does not agree copy of that SEC on March letter dated March 12 2012 was filed as Exhibit 16.1 to the Companys current report on Form 8-K filed with the 12 2012 On March 2012 the Audit Committee approved the engagement of Ernst independent from February registered accounting 16 2010 commencement firm for the year ending December to December of operations 31 2012 During 31 2010 and Young LLP Ernst the year ended Young as December 31 2011 the Companys the period through the subsequent period prior to engaging Ernst Young neither the Company nor anyone acting on its behalf consulted with Ernst Young regarding any of the matters or events described in Items 304a2i and ii of Regulation S-K 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 Exchange Act and has concluded the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15e and 15d-15e under the that as of the end of the period covered by this report our disclosure controls and procedures were effective to give reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act accumulated is recorded processed and communicated to our management summarized and reported within the time periods specified in the SECs rules and including our Chief Executive Officer and Chief Financial Officer forms and is 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 matter how well designed reasonable regarding the preparation and fair presentation of published financial statements All internal control systems no have inherent limitations Therefore even those systems determined to be effective can provide only 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 31 2012 December Treadway Commission COSO in Internal Control-Integrated Corporation believes that In making this assessment as of December it used the criteria set forth by the Committee of Sponsoring Organizations of the Framework Based on its assessment management of Terreno Realty 31 2012 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 as stated in their report included in this Annual Report on Form 10-K which expresses an unqualified opinion on the effectiveness of the Companys internal control over financial reporting as of December 31 2012 46 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Terreno Realty Corporation We have audited lerreno Realty Corporations internal control over financial reporting as of December 31 2012 based on criteria established in Internal Control Treadway Commission the COSO criteria Terreno Realty Corporations Integrated Framework issued by the Committee of Sponsoring Organizations of the 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 Managements Annual 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 on the assessed risk and performing such other procedures as we considered necessary in the effectiveness of internal control We believe that our audit based circumstances provides reasonable basis for our opinion companys internal control over financial reporting is process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements 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 in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management regarding prevention or timely detection of unauthorized and directors of the company and provide reasonable assurance acquisition use or disposition of the companys assets that could have material effect on the financial statements Because of its inherent limitations internal control over financial reporting may not prevent or detect misstatements Also projections of any evaluation of effectiveness to future periods are subject to the risk that 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 as of lecember 31 2012 based on the COSO criteria Terreno Realty Corporation maintained in all material respects effective internal control over financial reporting We also have audited in accordance with the standards of the Public Company Accounting Oversight Board United States the consolidated balance sheet of Terreno Realty Corporation as of December 2012 and the related consolidated statements of operations and comprehensive income loss equity and cash flows for the year then ended and our report dated February 15 2013 expressed an unqualified opinion thereon Is Frnst Young .1 .1 San Francisco CA February IS 2013 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 2012 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting Item 913 Other Information None Item 10 Directors Executive Officers and Corporate Governance Part Hi The information required by Item 10 will be contained which we anticipate herein by reference will be filed no later than 120 days after Item 11 Executive Compensation The information required by Item 11 will be contained which we anticipate will be filed no later than 120 days after herein by reference in definitive proxy statement the end of our fiscal year ended December for our Annual Meeting of Stockholders 31 2012 and is incorporated in definitive proxy statement the end of our fiscal year ended December for our Annual Meeting of Stockholders 31 2012 and is incorporated Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by Item 12 will be contained which we anticipate herein by reference will be filed no later than 120 days after in definitive proxy statement the end of our fiscal year ended December for our Annual Meeting of Stockholders 31 2012 and is incorporated item 13 Certain Relationships and Related Transactions and Director Independence The information required by Item 13 will be contained which we anticipate herein by reference will be filed no later than 120 days after Item 14 Principal Accounting Fees and Services in definitive proxy statement the end of our fiscal year ended December for our Annual Meeting of Stockholders 31 2012 and is incorporated 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 2012 and is incorporated herein by reference 48 Item 15 Fxhihits and Financial Statement Schedules and Iinoncal 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- as follows Rents ol Iiidpendew Reeeiered 1daied lance kek as ot December Fuhlic Accounting Firms 31 2012 and 201 Consol dated Statcnieni ii perations and Comprehensive Income Loss for the years ended December 2012 and 2011 id ic pcri inn ebruary 20 coil mence merit of operations to Dece rnher 20 II nnsoldated SitcucuN of Fquit for the years ended December 31 2012 and 2011 and for the penod from February 11 2010 rnieneiicnt 3nsolIdated Stateuieui ot operations at ash Flows to December 31 2010 for the years ended December 31 2012 and 201 and for the period from lebruars ft 2010 tnuniencenicnt of operations In December 31 2010 Notes to aisalidated macal Statements Schedule Ill Real tate Investments and Accumulated Depreciation 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 Page F-i F-3 -4 F-5 F-(cid:244) F-7 S-I Exhi hits The exhibits required to be filed by Item 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 The Board of Directors and Shareholders of Terreno Realty Corporation Report of Independent Registered Public Accounting Firm We have audited the accompanying consolidated balance sheet of Terreno Realty Corporation as of December 31 2012 and the related consolidated statements of operations and comprehensive income loss equity and cash flows for the year then ended Our audit also included the financial statement schedule listed in the Index at Item 15 These financial statements and schedule aie the responsibility of the Companys management Our responsibility is to express an opinion on these financial statements and schedule 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 the financial statements are free of material misstatement An audit includes examining on test basis evidence supporting the amounts and disclosures in the financial statements An audit also includes assessing the accounting principles used and significant as well as evaluating the overall financial statement presentation We believe that our audit provides opinion estimates made by management basis reasonable for our In our opinion the financial statements referred to above present fairly in all material respects the consolidated financial position of Terreno Realty Corporation at December 31 2012 year then ended in conformity with U.S generally accepted accounting and the consolidated results of its operations and its cash flows for the principles Also in our opinion the related financial statement schedule when considered in relation to the basic financial statements taken as whole presents fairly in all material respects the information set forth therein We also Terreno Realty Corporations have audited in accordance with the standards of the Public Company Accounting reporting as of December 31 2012 financial internal control over Oversight Board United States based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 15 2013 expressed an unqualified opinion thereon Is/ Ernst Young LLP San Francisco CA February 15 2013 F-I Report of Independent Registered Public Accounting Firm To the Board of 1irectors and Stockholders of Ferreno Realty Corporation San Francisco Cahfornia We have audited the accompanying consolidated balance lecemher 31 2011 the related consolidated statements and as of sheet of Terreno Realty Corporation and subsidiaries the Company of operations equity and cash flows for the year ended 1ecemher 31 2011 and for the period from February 162010 commencement of operations to December 31 2010 Our audits also included the financial statement schedule for the year ended Iecember 31 2011 Schedule Ill Real Estate Investments and Accumulated Depreciation listed in the Index at Item 15 These financial statements and financial statement schedule are the responsibility of the Companys management statement schedule based on our audits Our responsibility is to express an opinion on the financial statements and financial We conducted our audits 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 the financial statements are free of material misstatement An audit includes examining on test basis evidence financial statements An audit also includes assessing the accounting principles used supporting the amounts and disclosures in the estimates made by management and significant 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 Terreno Realty Corporation and subsidiaries as of December 31 2011 and the results of their operations and their cash flows for the year ended 1ecember 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 inlrmation set forth therein As discussed in Note to the consolidated financial statements the accompanying 2011 and 2010 financial statements have been retrospectively adjusted for discontinued operations Is 1eloitte Touche Ii San Francisco California February 22 2012 February IS 2013 As to Note F-2 Terreno Realty Corporation Consolidated Balance Sheets in thousands except share and per share data 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 Defeffed financing costs net Other assets net Total assets LIABILITIES AND EQUITY Liabilities Creditfacility Term loan payable Mortgage loans payable Security deposits Intangible liabilities net Accounts payable and other liabilities Total liabilities Commitments and contingencies Note 11 Equity Stockholders equity Preferred stock $0.01 par value 100000000 shares authorized and 1840000 and per share issued and Outstanding respectively no shares liquidation preference of $25.00 common stock $0.01 par value 400000000 shares authorized and 13434558 and 9308670 shares issued and outstanding respectively Additional paid-in capital Accumulated dclicit Total stockholders equity Total liabilities andequity 1ecember 2012 Jecember 31 2011 218191 204137 23020 445348 15648 429700 5930 2057 1887 5744 133464 116287 14833 264584 7063 257521 3249 2139 770 3370 445318 267049 65429 111615 2356 4011 6633 190044 46000 133 214.195 5054 255274 445318 41000 20050 38265 1772 913 6038 108038 91 168.039 9119 159.011 267049 The accompanying notes are an integral part of these consolidated financial statements F-3 Terreno Realty Corporation Consolidated Statements of Operations and Comprehensive Income Loss in thousands except share and per share data REVENUES Rental revenues Tenant expense reimbursements revenues COSTS AND EXPENSES Total Propert operating expenses Deieciation and amortization General and adni in istrativ Acquisition costs Fotal costs and expenses OTHER INCOME EXPENSE Intei est and other income expense interest expense including amoitii.al.ion total other income and expenses Income loss from continuing operations iscontinued operations Income from discontinued operations Gain on sales of real estate nv estnients Income from discontinued operations Net income loss Pre1rrcd stock dividends Net and coniprehensive income loss Allocation to participating securities Net and comprehensive income loss available to common stockholders EARNINGS PER COMMON SHARE BASIC AND DILUTED .oss from continuing operations available to corunlon stockholders Income from discontinued operations Net income loss available to conimon stockholders BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OtJTSTANDING For the tear Fnded fleeenher 2012 20 Perwdfrirn 1ebruarv IfS 2010 ni nil flCeWttlt 0/ Operations to leeenber 31 2010 24.506 6667 31.173 8.986 9.133 64 2238 2676 37 5472 5435 022 1.050 4.037 5087 4.065 604 2461 24 2437 0.20 0.39 19 12.251 3754 16005 6.103 4688 5407 1981 18.179 2612 614 4788 1059 2.762 827 3.589 .2 16 1201 122 2.289 8.828 64 524 460 5699 309 _________________ _______________________ 1059 3729 3729 3729 0.52 0.11 0.41 309 5390 90 5.390 0.63 0.Q4 0.59 13135440 9161805 9112000 the accompan\ notes are an integral part of these consolidated Ii nancial statements F-4 Terreno Realty Corporation Consolidated Statements of Equity in thousands except share data Balance as of February 16 2010 commencement of operations Net loss Issuance of common stock net of issuance costs of $5135 Repurchase of common stock Issuance of restricted stock Stock-based compensation Preferred Stuck ominon Stock Additional Paid ccumulated umber or Shares mount in apital leficit Total 1000 539 5390 9.1120X 91 170014 170105 .000 150778 784 Balance as of December 31 2010 9262778 91 170798 Net loss Issuance of common stock Issuance of restricted stock Stock-based compensation Common stock dividends Balance as of December 31 201 Net income Issuance of common stock net of issuance costs of $305 Repurchase of common stock Issuance of restricted stock Issuance of preferred stock Stock-based compensation Common stock dividends Prefeffed stock dividends 46.000 -- 18272 27620 -- 300 663 3.722 9308670 91 168039 4083269 4917 47536 42 55007 79 1729 39 6.178 04 5390 3729 9119 4.065 784 165499 3729 300 663 3.722 159011 4.065 55049 79 44.271 739 6.178 604 Balance as of December 31 2012 $46000 13434558 133 $214195 5054 $255274 The accompanying notes are an integral part of these consolidated financial statements F-5 lerreno Realty Corporation Consolidated Statements ol Cash Flows in thousands CASH FLOWS FROM OPERATING ACTIVITIES Net incoilir Ii 55 Adjustments to reconcile net income loss to net cash provided by used in operating activities Straiht line rents Amortization ol lease intangibles Depiectaunu and ainorti/alion Depreciation related to discontinued operations Gain nit sales real estate nsestwcnls Deferred financing cost and mortgage prenliurn amortization Stock-based cOtfllXns.ttiitit Changes in assets and liabilities ther assets Accounts payable and other liabilities Net cash piosided used in operating activities CASh FLOWS FROM INVESTING ACTIVITIES Restricted cash Cash paid for property acquisitions Pr iceeds lii tnt sates of eat estate ins esl tents Additions to buildings and improvements Net cash used in tnsestin actis ties CASH FLOWS FROM FINANCING AUT1VFFHsS ssua nec ni ci tin ni in sloe Issuance costs on issuance of common stock Repu chase nI cot it won stock Issuance ol preferred stock Issuance ci isIs on issuance itt prelerred stock Borrowings on credit facility Pas nients on credit facilit Borrowings Pa nients on term loan payable on let ni nan pa able Borrowings Rt nients Payment Ia went on mortgage loans payable on nor gage loans pa able of deferred costs financing it deterred underss ritine tee Dividends paid to common stockholders is idends pit to preterteit stockholders Net cash pros-ided by financing activities Net increase decrease in cash and cash equts alents Cash and cash equivalents at beginning of period isli and cash equisalents at end of period SUPPLEMENTAL ash paid lot DlS2LOSURES OF CASH FLOW INFORNIATION interest Supplemental disclosures of non-cash transactions Acci iunt Reconciliation pa able related to capital mpros entents of cash paid for propeitv acquisitions \cquisition ol iOcittL5 Assumption of mortgage loans payable \lorteatie ptetn1ut Assumption of other assets and liabilities Net isli paid or properts acquisitions Fur ihe ear Lnded her ember 31 2012 201 Ierwd/run 16 2011 nrnincmeni af Oeralian.s to December 31 2010 91 f5 91 379 91 619t 2.673 399 9.133 104 4.037 462 1121 533 1718 9.749 218 166043 6293 10.212 160.180 55.0 305 79 44551 260 162700 38.271 20.050 59880 .847 1.110 5497 1.604 153.1 12 268 3249 6.931 91 4.819 fS 185.281 14832 7111 3705 66.043 11.454 506 4688 211 238 1202 690 1177 2149 .293 96.926 7.665 05.884 47.000 6.000 20.050 889 639 7.000 2791 221 288 .20 62 73 784 349 l52 2.09 193 116140 248 6.58 .999 5085 -- ISO 882 _________________ __________________________ 49731 54.004 57253 91 3.249 91 91 91 2.102 2.138 119.203 21541 111 635 91 96926 175852 57.262 ______________ 91 91 91 57.253 344 579 13634 17.181 719 2.001 111.14 he ace inpan\ inc notes are in integral pail ol these consi dated inancial statenients Ph Terreno Realty Corporation Notes to Consolidated Financial Statements Note Organization Terreno Realty Corporation Terreno and together with its subsidiaries the Company acquires owns and operates industrial real estate in six major coastal U.S markets Los Angeles Northern New Jersey/New York City San Francisco Bay Area Seattle Miami and Washington D.C./Baltimore As of December31 2012 the Company owned 67 buildings aggregating approximately 5.1 million square feet The Company commenced common stock purchased operations upon completion of an initial public offering IPO and concurrent private placement of by the Companys executive management 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 managed Maryland corporation and elected to be taxed as REIT under Sections taxable year ended December 31 2010 860 of the Internal Revenue Code of 1986 as amended 856 through real estate investment trust the Code commencing with its Note Significant Accounting Policies Basis of Presentation The accompanying consolidated financial with accounting principles generally accepted in the United States statements of the Company have been prepared of America GAAP The accompanying consolidated financial in accordance 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 make estimates and assumptions that affect the reported amounts of assets and in conformity with GAAP requires management and liabilities and disclosure of contingent assets to 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 to the carrying value of the property is made to reduce it to its estimated fair value The Company also reviews the impact of above and below-market leases in-place leases and lease origination costs for acquisitions 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 Examples of such events or changes in circumstances when an asset remains vacant significantly may include classifying longer than expected an asset to be held for sale changing the intended hold period or 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 the long-term the recoverability is based on the undiscounted future cash flows If the asset carrying value is not supported on an undiscounted future cash flow basis then the asset carrying value is measured against the lower of cost or the present value of expected An impairment values of expected the expected hold period If an asset charge to earnings is recognized for the excess of the assets carrying value over flows over is intended cash cash flows over the expected hold period the lower of cost or the present to be sold impairment is 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 The Company determines as sales prices When available current market the estimated fair values based on its assumptions regarding rental rates lease-up and holding periods as well information is used to determine capitalization and rental growth rates If available current comparative values may also on the Companys understanding sales are based be used to establish fair value When market information is not readily available the inputs 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 represent rate commensurate with the indicated holding period with the years ended December December 31 2012 and 31 2010 premium layered on for risk There were no impairment charges recorded for 2011 or for the period from February 16 2010 commencement of operations to Property Acquisitions Upon acquisition of property which are accounted for as business combinations the Company estimates the fair value of acquired tangible assets consisting generally of land buildings and improvements and intangible assets and liabilities consisting generally of the above and below-market leases and the origination value of all in-place leases The Company determines fair values using replacement cost estimated cash appropriate discount and capitalization rates based on available market flow projections and other valuation techniques information Mortgage loans assumed in connection and applying with acquisitions are recorded at their fair value using current market interest rates for similar debt at the date of acquisition Acquisition- related costs associated with business combinations are expensed as incurred F-7 comparative of the Companys managenlent sales The lair value of the tangible assets is determined by valuing the property as if it were vacant Land values are derived from current values when available or managements estimates of the fair value based on market conditions and the experience managements estimates of the fair value of these assets using discounted cash flows analyses team Building and improvement values are calculated as replacement cost less depreciation or similar methods The fair value of or 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 the Companys estimate of the market lease rates measured over period equal to the remaining term of the leases plus the term of any below-market fixed rate renewal options The above and below-market lease values are amortized to rental revenues over the remaining initial term plus the term of any below-market fixed rate renewal options that are considered bargain renewal options of the respective leases The total net impact to rental revenues due to the amortization of above and below-market leases was $3990X $50600 and $288000 respectively for the years ended December 2012 and 2011 net decrease of approximately and for the period from February 16 2010 commencement of operations to December 31 2010 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 ol lost rental 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 As of December 31 2012 the Company had attributed approximately $3.4 million $4.5 million and $19.6 million to above-market December 31 2011 had attributed the Company approximately leases below-market leases and in-place leases respectively As of $2.3 million $1.2 million and $12.5 million to above-market leases below-market accompanying consolidated balance sheets As of December leases respectively in-place leases These and amounts are included in intangible assets and liabilities in the 31 2012 the Company had recorded net accumulated amortization of approximately $8.4 million and $0.5 million respectively related to these intangible assets and liabilities As of December 31 2011 the Company had recorded and these intangible assets net accumulated amortization of approximately $4.5 million and $0.3 million respectively related to liabilities As of December 31 2012 the remaining weighted average lease term related to these intangible assets and liabilities is 4.0 years Projected net amortization of the intangible assets and liabilities for the next five years as of December 31 2012 is as follows dollars in thousands 2013 2U14 2015 2017 Thereafter Total 3044 2.054 1307 1.139 998 2.091 $10633 Depreciafion and Useful Lives Real Lstate and Intangible Assets Depreciation and amortization are computed on sOaight line basis over typically used the estimated useful to compute depreciation and amortization However such depreciable lives may be different lives of the related assets or liabilities The following table reflects the standard depreciable lives based on the estimated useful life of such assets or liabilities Iescription Land Building Building Improvements Tenant Improvements Leasing Costs In-place leases Above/Below Market Leases Standard iepreciable Life Not depreciated 40 years 5-40 years Shorter of lease term or useful life Lease term Lease term Lease term Discontinued Operations The Company separately reports as discontinued operations the historical operating results attributable to properties sold and the applicable gain or loss on the disposition of the properties Although this application may affect the presentation of the ompanys results of operations for the periods that it has already reported there will be no effect on its previously reported consolidated financial position net income loss or cash flows F-8 Cash and Cash Equivalents Cash and cash equivalents is comprised liquid short-term investments with original maturities of cash held in major banking of three months or less Cash equivalents are generally invested in U.S institution and other highly government securities government agency securities or money market accounts Restricted rash Restricted cash capital improvements leasing interest includes cash held in escrow in connection with property acquisitions and real estate tax and insurance payments as required by certain mortgage and reserves for certain 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 If tenants fail to make contractual lease payments that are greater than the Companys allowance for doubtful accounts security deposits and letters of credit then the Company may have to recognize additional doubtful account charges in future periods The Company and creditworthiness of its tenants on an on-going basis by reviewing their financial condition periodically as monitors the liquidity appropriate Each period the Company and provides allowances as needed reviews its outstanding accounts receivable including straight-line rents for doubtful accounts 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 Tenant expense reimbursement income includes payments and amounts due from tenants pursuant to their leases for real estate taxes insurance and other recoverable property operating expenses and is recognized as revenues during the same period the related expenses are incurred As of December 31 2012 and 2011 approximately receivable net of allowances included as were $4.0 million and $1.9 million respectively of straight-line rent and accounts component of other assets in the accompanying consolidated balance sheets Deferred Financing Costs Costs incurred in connection with financings are capitalized and amortized to interest expense using the effective interest method over the term of the related loan Deferred financing costs in the accompanying consolidated balance sheets are shown at cost net of accumulated amortization of approximately $1.2 million and $0.5 million as of December 31 2012 and 2011 respectively 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 related debt instrument using the effective interest method As of December 31 2012 and 2011 and were included as were approximately $1.1 million and $0.6 million respectively expense over the term of the the net unamortized mortgage premiums component of mortgage loans payable in 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 ended 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 taxable income to its stockholders which is computed without dividends paid deduction As REIT the Company stockholders or net capital gain and which does not necessarily equal net income as calculated generally will not be subject to federal income tax to the extent it distributes qualifying dividends to its 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 regard to the in accordance with GAAP 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 Such an event could materially adversely affect qualification is lost unless the IRS grants it relief under certain statutory provisions the Companys net income and net cash available for distribution 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 in the financial statements provides guidance ASC 740-10 requires for how uncertain tax positions the evaluation of tax positions should be recognized measured presented taken in the course of preparing the Companys tax and disclosed returns to determine whether the tax positions are more-likely-than-not of being sustained by the applicable tax authority Tax benefits of positions not deemed to meet the more-likely-than-not threshold are recorded as tax expense in the current year As of December 31 2012 and 2011 the Company did not have any unrecognized tax benefits and does not believe that there will be any material changes in unrecognized tax positions over the next 12 months The Companys tax returns are subject to examination by federal state and local tax jurisdictions beginning with 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 to stock-based relating payment the equity or liability instruments issued The Company stock awards performance share awards unrestricted transactions be recognized in the financial statements and that the cost be measured on the fair value of has adopted the 2010 Equity Plan which provides for the grant of restricted shares or any combination of the foregoing Stock-based compensation is recognized as general and administrative expense in the accompanying consolidated statements of operations and measured at the F-9 fair value of the award on the date of grant The Company estimates the forfeiture 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 In addition the Company has awarded long-term incentive target the conclusion payable amount in shares of the Companys common stock after that may he earned under common stock as compared to the total shareholder Index over is variable depending return of the MSCI U.S REIT Index and the FTSE NAREIT Equity Industrial the pre-estahlished performance measurement period The Company estimates the fair value of the LTIP awards using the LTIP awards on the relative total shareholder return of the Companys the LTIP awards to its executives awards of each pre-established performance measurement period The that may be Monte Carlo simulation model on the date of grant and at each reporting period The LTIP awards are recognized as compensation expense over the requisite performance period based on the fair value of the LTIP awards at the balance sheet date Fair Value of Financial Instruments ASC 820 Fair Value Measurements and Disclosures defines fair value as the price that would he received an asset or paid to transfer measurement date ASC 820 also provides guidance disclosure of the level within the fair value hierarchy in which the fair value measurements fall for using fair value to measure in an orderly transaction liability financial to sell between market participants at the assets and liabilities ASC 820 requires including measurements using quoted prices prices readily in active markets for identical assets or liabilities Level quoted prices for similar instruments in active markets or quoted for identical or siiiiilar instruments in markets that are not active Level and significant valuation assumptions that are not observable in the market Level As of lecember 2012 and 2011 the fair values of cash and cash equivalents and accounts payable approximated their carrying values because of the short-term nature of these investments or liabilities based on Level inputs As of December 31 2012 and 2011 based on borrowing rates available to the Company which are Level inputs the estimated fair values of the mortgage and term loans payable were approximately $113.0 million and $59.2 million respectively New Accounting Standards Effective January 2012 the Company adopted Accounting Standards Update No 2011-05 lresenlatwn Comprehensive Income which eliminates the option to report other comprehensive statement of changes in stockholders equity and Accounting Standards Update No 2011-04 Amendments income and its components in the to Achieve Common Fair Value Measurement and lisclosure Requirements in U.S GAAP and IFRS which generally aligns the principles for fair value measurements and the related disclosure requirements under US GAAP and International Financial Reporting Standards IFRS This standard requires new disclosures with particular focus on Level measurements including quantitative information about the significant unobservable inputs used for all Level measurements qualitative discussion about the sensitivity of recurring Level measurements to changes in the unobservable inputs disclosed including the interrelationship between inputs and description of the companys valuation processes This standard also requires disclosure of any transfers between Levels and of the fair value hierarchy information about when the current use of non-financial asset measured at fair value differs from its highest and best use and the hierarchy classification for items whose fair value is not recorded on the balance sheet but is disclosed in the notes The adoption of these standards did not have material impact on the Companys financial statements Segment Disclosure ASC 280 Segment Reporting establishes standards for reporting financial and descriptive information about an enterprises investing in real estate The Companys investments reportable segment The Company has determined in real estate are geographically diversified and the chief operating decision that it has one reportable segment with activities related to makers evaluate operating performance on an individual asset level As each of the Companys assets has similar economic characteristics the assets have been aggregated into one reportable segment Note Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents The Company may maintain deposits in federally insured financial limits However believes the Company is not exposed the Companys management institutions in excess of federally insured to significant credit risk due to the financial position of the depository institutions in which those deposits are held As of 1ecemher 2012 the Company owned six properties located in Northern New Jersey/New York City which accounted for approximately 32.Yf of its annualized base rent which is based on contractual base rent from leases in effect as of December 31 211 excluding any partial or full rent abatements Other real estate space The existence of competing properties could companies compete with the Company in its real estate markets This results have material impact on the Companys ability to lease space and on the level of in competition for tenants to occupy rent that can he achieved The Company had ten tenants that accounted for approximately 49.7% of the rental revenues for the year ended leeemher 31 2012 F- 10 During the year ended December 31 2012 the Company recorded approximately $45000 related to the write-off of outstanding accounts receivable and approximately $1.1 million related to the write-off of deferred rent receivable related to the Companys tenant at 10th Avenue as result of their failure to pay rent Note Investments in Real Estate During unaudited the year ended December The total aggregate initial 31 2012 the Company acquired 22 industrial buildings containing 178 1402 square feet investment was approximately $185.3 million of which $90.9 million was recorded to land $84.9 million to buildings and improvements $9.5 million to intangible assets and $4.2 million to intangible liabilities The following table 2012 Iroperl Name Global Plaza Garfield Whittier Caribbean 78th Avenue Manhattan Beach Carlton Court Troy Hill 26th Street Sweitzer 17600 West Valley Highway 63 Brennan South Main Total sets forth the wholly-owned industrial properties the Company acquired during the year ended December 31 Location Sterling VA Commerce CA Whittier CA Sunnyvale CA Doral Beach CA Redondo South San Francisco CA Elkridge MD Miami FL Laurel MD Tukwila WA San Jose CA Carson CA Acquisition Iate March 16 2012 May 30 2012 12 2012 June 2012 July July 23 2012 July 31 2012 2012 August August 17 2012 Seiember25 2012 October 15 2012 December 14 2012 December 19 2012 December 20 2012 Number of Buildings Unaudited Square Feet Purchase Price Unaudited in thousands 68989 545299 161.610 171.707 74786 103.200 24277 65697 137594 84961 110049 47.233 186000 .. 22 1781.402 6100 52400 16100 33718 4.200 14150 3575 6.664 12100 6.950 8.000 4176 12750 180 883 Excludes intangible liabilities and assumed mortgage premiums totaling approximately $4.2 million The total aggregate investment was approximately $185.3 million The Company recorded revenues and net income for the year ended December 31 2012 of approximately $6.4 million and $2.6 million respectively related to the above acquisitions During year ended December 31 2011 the Company acquired 14 industrial buildings containing 1058548 square feet unaudited The total aggregate to buildings and improvements initial investment was approximately $1 19.2 million of which $61.6 million was recorded to land $51.0 million $6.6 million to intangible assets and $0.4 million to intangible liabilities The following 2011 table sets forth the wholly-owned industrial properties the Company acquired during the year ended December 31 Properly Name Dorsey Belleville 630 Glasgow 8730 Bollman Dell 70th Avenue 19601 Hamilton 39th Street 620 Division 48th Avenue Clawiter Valley Corporate Total Location Jessup MD Kearny NJ Inglewood CA Savage MD Carlstadt NJ Miami FL Torrance CA Doral FL Elizabeth NJ Miami Gardens FL Hayward CA Kent WA Number of Buildings Unaudited Feet Square Unaudited Purchase Price in thousands 135000 21 1.418 27505 98.745 27410 35.000 72808 40.000 150348 57.682 33842 168.790 14 .05 8548 5800 32.600 4100 7500 7725 000 12350 4.40 10350 7.200 7625 15.025 18675 Acquisition late March 25 2011 May 20 201 2011 June June 24 201 June 28 2011 June 28 201 July 20 2011 August October 19 201 2011 December 15 201 December 15 2011 December 30 201 F-lI F.xcludes intangible liabilities and assumed mortgage premiums totaling approximately $0.5 million The total aggregate investment was approximately $1 19.2 million The Company recorded revenues and net income for the year ended December 31 2011 of approximately $4 million and $1.5 million respectively related to the above acquisitions The above assets and liabilities were recorded at fair value which uses Level inputs The properties were acquired from unrelated third parties using existing cash on hand net of assumed mortgage loans payable and borrowings on the Companys credit facility and were accounted for as business combinations Pro Forma Financial Information The lollowing supplementary pro forma financial information presents the results of operations of the Company for the years ended December 31 2012 and 2011 as if all of the Companys acquisitions during the year ended December 31 2012 occurred on January 2011 The following pro forma results for the years ended December 31 2012 and 2011 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 2011 or of future results of operations dollars in thousands except per share data Total revenues Net and comprehensi income loss ax ailable to conirnon stockholders Basic and Diluted net income loss available to common stockholders per share Note Discontinued Operations For the Year Ended Iecember 20 20/2 naudited 39011 7.629 0.58 30.420 35 0.04 The Company separately reports as discontinued operations the historical operating results attributable to properties sold and the applicable gain or loss on the disposition of the properties Although results of operations br the periods that it has already reported there will be no effect on its previously reported consolidated this application may affect the presentation of the Companys financial position net income loss or cash flows During the year ended lecember 31 2012 approximately $17.0 million resulting in the Company sold one property gain of approximately $4.0 million located in the Los Angeles market for sales price of The following summarizes the condensed results of operations of the property sold for the years ended December 31 2012 and 2011 and for the period from February 2010 commencement of operations to December 31 20l0 dollars in thousands Rental revenues Tenant expense reimbursements Property operating expenses leprecial ion and tmorIialion Income from discontinued operations For the Year I.nded December 20/2 20 1187 90 223 104 1050 1.309 227 211 1059 Ierwd from February /6 20/0 Commencement of Operations Ieeember to 20/0 385 57 71 62 309 F-I Note Debt As of December 31 2012 Third Amendment to its Amended and Restated Senior Revolving the Company has $100.0 million revolving credit Credit Agreement into Association as administrative agent and as lender and PNC Bank National Association facility On June 15 2012 the Company entered the Facility with KeyBank National and Union Bank N.A as lenders to feature under the Facility The amount increase the Facility from $80.0 million to $100.0 million by exercising the accordion available under the Facility may be increased up to $150.0 million subject identification of lenders willing to make available additional to the approval amounts The maturity date of the Facility of the administrative agent and the is January 19 2015 with one 12-month under the extension option exercisable by the Company Facility and to the payment of an extension fee The Facility provides that outstanding borrowings subject to among other things there being an absence of an event of default are limited to the lesser of $100.0 million and 60.0% of the value of the borrowing in the subsidiaries that hold each of the borrowing base properties The Facility is secured by pledge of the equity interests base properties Interest on the Facility is generally to be paid based upon at the for LIBOR rate loans under LIBOR plus the applicable LIBOR margin Companys option either administrative agents prime rate plus 1.00% 0.50% above the federal LIBOR margin on the ratio of the Companys outstanding consolidated indebtedness As of December 31 2012 the applicable LIBOR margin was 2.50% 3.00% as of December quarterly payments of an annual Facility The unused facility fee in an amount equal facility fee was approximately $204000 $359000 the Facility The applicable LIBOR margin will unused to 0.25% or 0.35% depending and $197000 respectively or ii the applicable base rate which is the greater of the funds effective LIBOR plus the applicable range from 2.50% to 3.50% depending to the value of the Companys consolidated gross asset value rate or thirty-day 31 2011 The Facility requires on the unused portion of the December 31 2012 and 2011 and for the period from February 16 2010 commencement of operations for the years ended to December 31 2010 The Company guarantees the obligations of the borrower wholly-owned subsidiary under the Facility The Facility includes series of financial and other covenants that the Company must comply with in order to borrow under the Facility As of December 31 2012 there were December $65.4 million of borrowings 31 2011 there were $41.0 million of borrowings outstanding under outstanding under the Facility and 12 properties were in the borrowing base As of the Facility The Company was in compliance with the financial covenants under the Facility at December 31 2012 and 2011 the year ended December 31 2012 During February 22 2013 the Term Loan with proceeds balance of the Term Loan was approximately $20.1 million the Company repaid its senior secured term loan that was scheduled and mortgage loans As of December from the Facility to mature on 31 2011 the outstanding During the year ended December 31 2012 the Company assumed three mortgage loans totaling approximately $14.8 million that bear interest at weighted average fixed rate of 6.01% Each of the mortgage loans payable is secured by separate property and requires monthly interest and principal payments until maturity and is generally non-recourse The mortgage loans mature in 2014 and 2016 On January 30 2012 the Company entered into The mortgage that matures on February 2019 $20.1 million non-recourse mortgage loan at fixed annual interest rate of 3.79% loan is secured by five of the Companys properties portion of the loan proceeds was used to pay down the Term Loan The remaining loan proceeds were used to invest in industrial properties and for general business purposes On June 26 2012 the Company entered into matures on March 2020 The mortgage $39.8 million non-recourse mortgage loan at fixed annual interest rate of 3.65% that used to pay down the Facility The remaining loan proceeds were loan is secured by three of the Companys properties used in industrial to invest portion of the loan proceeds was properties and for general business purposes During the year ended December 31 2011 interest at weighted average fixed rate of approximately the Company assumed two mortgage 5.5 1% loans totaling approximately $21.6 million that bear The mortgage loans payable are collateralized by certain of the properties and require monthly interest and principal payments until maturity and are generally non-recourse The mortgage loans mature between 2014 and 2021 As of December 31 2012 the Company had nine mortgage loans payable totaling approximately $111.6 million which bear interest at weighted average fixed annual rate of 4.6% As of December 31 2011 the Company had four mortgage loans payable which bore interest at weighted average fixed annual interest rate of 5.4% As of December totaling 31 2012 and 2011 approximately the total net $38.3 million investment book value of the properties securing the debt was $219.5 million and $84.2 million respectively F- 13 The scheduled principal payments of the Companys debt as of December 31 2012 were as follows dollars in thousands 2013 2014 2015 2016 2017 Thereafter Subtotal Unamortized net premiums Total Debt Weighted Average Interest Rate Note Leasing Credit Facility 65429 _______ 65429 Mortgage Loans Payable 2852 12161 21878 6649 1916 65063 110519 1096 lotal Iebt 2852 12161 87307 6649 1916 65063 175948 1096 $65429 $111615 $177044 2.7% 4.6% 3.9sf The following is schedule of minimum future cash rentals on tenant operating leases in effect as of December 31 2012 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 2013 2014 2015 2016 2017 Thereafter Total 28594 25258 20027 17686 16995 47073 $155633 Note Stockholders Equity The Companys authorized capital stock consists of 400000000 shares of common stock $0.01 par value per share and 100000000 shares ui preferred stock $0.01 par value per share On January 13 2012 the Company completed public follow-on offering of 4.000000 shares of its common stock at price per share of $14.25 including 93000 shares that were sold in the offering to the Companys executive and senior officers and members of the board of directors No underwriting discount or commission was the shares sold paid Ofl common stock at to such officers and directors On February 13 2012 the Company sold an additional 61853 shares of its 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 and olferitig costs of approximately $3 million The Company used approximately $41.0 million of the net proceeds to repay outstanding borrowings under the Facility on January 13 2012 and the remaining net proceeds were used to invest in industrial properties and for general business purposes As of December 31 2012 13434558 shares of common stock were issued and outstanding including 149125 non-vested restricted stock awards As of December 31 2011 9308670 shares of common stock were issued and outstanding including 133526 non-vested restricted stock awards In connection with the annual meeting of stockholders on May 2012 the Company granted total of 21416 shares of unrestricted common stock to its independent directors under the Companys 2010 Equity Incentive Plan with grant date fair value per share of $14.01 The grant date fair value of the unrestricted stock on the date of the grant The Company recognized lecemher 31 2012 related to this issuance common stock was determined using the closing price approximately $0.3 million in compensation costs of the Companys common for the year ended On July 19 2012 the Company completed public offering of 1840000 shares of its 7.75w Series Cumulative Redeemable Preferred Stock the Series Preferred Stock including 240000 share of $25.00 The net proceeds of the offering were approximately shares sold upon the exercise by the underwriters of their option $44.3 million atter additional shares at price per to purchase deducting Company used payable when as and the underwriting discount of approximately $1.4 million and other offering expenses of approximately the net proceeds to reduce outstanding borrowings under the Facility Dividends on the Series $0.3 million The Preferred Stock are il authorized by the Companys hoard of directors quarterly in arrears on or about the last day of March June and December of each year The Series Preferred Stock ranks with respect to dividend rights and rights UOfl the September Companys liquidation dissolution or winding-up senior to the Companys common stock F- 14 Generally the Company may not redeem the Series Preferred Stock prior to July 19 2017 except in limited circumstances relating to the Companys ability to qualify as as defined in the articles option redeem the Series supplementary REIT and pursuant to special optional redemption related to specified change of control for the Series Preferred Stock On and after July 19 2017 the Company may at its Preferred Stock in whole or in part at any time or from time to time for cash at redemption price of $25.00 per share plus any accrued and unpaid dividends whether or not authorized or declared date up to but excluding the redemption As of December 31 2012 there were 455000 shares of common stock authorized for issuance as restricted stock grants unrestricted stock awards or LTIP awards under the Companys 2010 Equity Incentive Plan of which 186810 were remaining The grant date fair value per share of restricted December 31 2012 ranged from $14.20 to $20.00 The grant date fair value of the restricted stock was determined using the initial stock awards issued during the period from February 16 2010 commencement of operations to public offering price the commencement of $20.00 for grants issued on February of operations the Company uses the closing price of the Companys common stock on the date of grant The fair 16 2010 commencement and for all grants of operations issued after value of the restricted stock that was granted during the year ended December 31 2012 was $0.7 million and the vesting period for the restricted stock is five years As of December 31 2012 the Company had approximately $2.0 million of total unrecognized compensation costs related to restricted stock issuances which is expected to be recognized over remaining weighted average period of approximately 2.9 years The Company recognized compensation million respectively for the years ended December 31 2012 and 2011 and costs of approximately for the period from February $0.7 million $0.7 million and $0.8 16 2010 commencement of operations to December 31 2010 related to the restricted stock issuances The following is summary of the total restricted shares to the Companys executive granted the years ended December 31 2012 and 2011 December 31 2010 officers and employees with the related weighted average grant date fair value share prices for and for the period from February 16 2010commencement of operations to 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 Non-vested shares outstanding as of December 31 2Q11 Granted Forfeited Vested Non-vested shares outstanding as of December 31 2012 Shares 155.778 5000 150778 28904 1.284 44.872 133526 47536 4917 27020 149125 Weighted Average Grant Date Fair Value 19.93 20.0 19.93 17.82 20.00 19.95 19.54 14.20 19.81 19.81 17.78 The following is vesting schedule of the total non-vested shares of restricted stock outstanding as of December 31 2012 Non-ested Shares besting Schedule Number or Shares 2013 2014 2015 2016 2017 Total Non-sested Shares 41443 41443 41443 15288 9508 149 25 Long-Term Incentive Plan As of December 31 2012 there are three open performance measurement periods for the LTIP awards February 16 2010 to December 31 2012 January 2011 to December 31 2013 and January 2012 to December 31 2014 The LTTP awards related to the performance measurement period from February 162010 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 F- 15 performance measurement period The Company recorded 31 2012 and for the years ended December respectively compensation costs of approximately $82000 $23900 and $0 2011 and for the period from February 16 2010 commencement of operations to December 31 2010 Dividends The following table sets forth the cash dividends paid or payable per share during the years ended Iecember 31 2012 and 2011 For the three Months Ended March 31 2012 June 30 2012 September 30 2012 September 30 2012 31 2012 December lecemher 31 2012 Securit Common stock Common stock Common stock Ii idend per Share lectaration Dale Record late $0.100000 $0 1200X May $0i200X August 32012 2112 February 212012 April 2012 July 2012 ate Paid April 192012 Jul 23 2012 October 5.2012 October 26 2012 Preferred stock $ft3875X August 2012 September 2012 October 12 Common stock $0 1200X November 2012 December 31 2012 January 14 2013 Preferred stock $0484375 Noember 2012 December 10 2012 December 31 2012 For the three Months Ended Securil Iis ulend per Share Ieclaralion Iate Record Iate Iute Paid March 31 2011 June 30 2011 September 30 2011 1ecemher 31 2011 Note Net Income Loss Per Share Common stock $0.1 00000 February 172011 April Common stock Common stock Common stock $0 1000X May 18 2011 $0.1 00000 August IL 2011 July October 50 1000X November 2111 Januar 2011 2011 2011 2012 April 19 2011 July 20 21 October 20 2011 Januar 20 201 Pursuant to ASC 260-10-45 ietermining Whether Instruments Granted in Share-Based Payment Transactions Are Par1icipatin Securities unvested share-based payment awards that contain non-forfeitable rights to dividends are participating securities and are included in the computation of earnings per share pursuant to the two-class method The two-class method of share allocates compultng earnings per declared whether paid or unpaid and participation common share are computed by dividing the sum of distributed allocated to common stockholders by the weighted rights in undistributed earnings Under the two-class method earnings per earnings to common stockholders and undistributed earnings average number of common shares outstanding for the period The Companys earnings per share for common stock and any participating securities according to dividends non-vested shares of restricted stock are considered participating securities since these share-based awards contain non-forfeitable rights to dividends irrespective outstanding br the years ended of whether the awards ultimately vest or expire The Company had no dilutive restricted stock awards December 31 2012 and 2011 or for the period from February 16 2010 commencement of operations to 1ecemher 31 2010 In accordance with the Companys policies of determining whether instruments granted in share-based payment transactions are participating securities and accounting for earnings per share the net and comprehensive income loss per common share is adjusted for earnings distributed through shares outstanding and unvested to 1472X of weighted and declared restricted dividends if any and allocated to all participating under shares outstanding the two-class method Under this method allocations were made securities weighted average common average unvested restricted shares outstanding for the years ended December 31 2012 and 2011 and for the period from February 16 2010 commencement of operations to December 31 2010 F- 16 Note 10 Quarterly Results of Operations Unaudited The following tables accordance with guidance summarize the Companys quarterly financial on accounting for discontinued operations information All fiscal quarters have been revised in Total revenues Total costs and expenses Total other income and expenses Income loss from continuing operations Income from discontinued operations Gain on sales of real estate investments Net and comprehensive income loss available to common stockholders Farnings per Common Share Income loss from continuing operations available Basic and Diluted to common stockholders Income from discontinued operations Net income loss available to common stockholders1 Basic and Diluted Weighted Average Common Shares March31 June30 September30 December 31 2012 Quarter Ended 6237 5762 1011 536 269 267 0.04 0.02 0.02 7230 6125 1114 266 255 0.00 0.02 0.02 9066 7290 1571 205 317 191 0.03 0.02 0.0 8640 7583 1739 682 198 4037 2640 0.12 0.32 0.20 Outstanding 12686573 13276892 13284894 13285181 Total revenues Total costs and expenses Total other income and expenses Income loss from continuing operations Income from discontinued operations Net and comprehensive income loss available to common stockholders Earnings per Conunon Share Income loss from continuing operations available Basic and Dilutedt to common stockholders Income from discontinued operations Net income loss available to common stockholders March 31 June30 September30 December 31 2011 Quarter Ended 2990 4198 364 1572 266 1306 0.17 0.03 .l4 3388 5144 461 2217 256 1961 0.24 003 02l 4397 4129 804 536 268 268 0.06 0.03 0.03 5230 4708 985 463 269 194 0.05 0.03 0.02 are based on the weighted average number of common shares outstanding The above quarterly during each quarter The income losses per share losses per share income calculations calculation for the years ended December 31 2012 and 2011 in the Consolidated Statements of Operations and Comprehensive Income Loss is based on the weighted average number of common shares outstanding for the years December 31 2012 ended December 31 2012 and 2011 data due and 2011 respectively The sum of the quarterly financial data may vary from the years ended to rounding Note 11 Commitments and Contingencies 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 operations of its properties Management from time to time the Company may be involved in legal actions the liabilities if any that may ultimately position results of operations or cash flows of the Company not expect relating result does that to the ownership and from such legal actions will have material effect on the consolidated financial 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 as owner of contaminated property to clean up the property even if it did not know of or was not responsible for the contamination These laws also apply to persons who owned the Company even after costs affect the value of applicable environmental property at the time it became contaminated and therefore it is possible the Company could incur these sells some of the to the costs of cleanup property and therefore an owners ability to borrow using the property as collateral agencies also it acquires In addition and government laws courts to require authority properties have that the environmental contamination can or to sell the property Under 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 F- 17 injury from the asbestos Lastly some of these environmental laws restrict the use of property or place conditions on various activities An example would he laws that require business using chemicals to manage them carefully and to notify local officials that the chemicals are being used The Company could be responsible ftr 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 in their daily operation of the respective properties and to promptly notify the Company of any environmental contaminations or similar issues As result the Company may become subject to material environmental liabilities of which it is unaware The Company can make no assurances that tuture 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 2012 and 2011 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 uninsurahie 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 he 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 material exposures as of December profits and cash 31 2012 and 2011 flows from property The Company was not aware of any significant or Contractual Comm(cid:252)ments As of February 15 2013 the Company had three outstanding contracts with third-party sellers to acquire three industrial properties consisting of 178783 square feet unaudited 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 and various closing conditions The following table summarizes certain information with respect to the properties the Company has under contract \iarhei LosAngeles Miami Northern New Jersey/New San Francisco Ba Area York City Seattle ashington ./Raltimore Total Note 12 Suhsequent Fvents Number of Buildings Lnaudiied Square Feet tinaudited Purchase Price Assumed Iehl in thousands iii thousands 49.300 60.901 68583 5.122 8.40 6.450 178783 19972 On January 17 2013 the Company entered into Second Amended and Restated Senior Credit Agreement the Amended Facility with KeyBank National Association and PNC Bank National Association Union Bank N.A and Regions Bank $50.0 million term loan and amend the existing $100.0 million Facility as administrative agent and as as lender KeyBanc Capital Markets lenders collectively the Lenders to add as lead arranger five-year The five-year $50.0 million term loan maturity date under months to borrow the full $50.0 million The amendment the Amended Facility is January 2018 and the Company will have up to six extends the maturity date for the $100.0 million Facility under the Amended Facility to January 2016 and provides for one 12-month extension option exercisable by the Company subject among other things to there being an absence of an event of default under the Amended Facility and Amended Facility including the term loan will generally be paid based applicable LII3OR margin or ii the applicable base rate which is the greater upon F- 18 to the payment of an extension fee Interest at the Companys option either LIBOR plus on the the of the administrative agents prime rate plus 1.00% the federal 0.50% above Amended Facility The applicable LIBOR margin will range from 1.65% to 2.65% depending outstanding consolidated indebtedness to the value of our consolidated rate or thirty-day funds effective value LIBOR plus the applicable LIBOR margin gross asset for LIBOR rate loans under the on the ratio of the Companys The aggregate amount of the Amended agent and the identification to total of up to $300.0 million subject to the approval of the administrative to make available additional amounts The Amended Facility continues to be guaranteed by the Company and by all of the borrowers current and to-be-formed subsidiaries that own borrowing base property In addition the Facility may be increased of lenders willing substantially Amended Facility continues to be secured by pledge of the borrowers equity interests in the subsidiaries that hold each of the borrowing base properties Outstanding borrowings under the Amended Facility are limited to the lesser of the sum of the $100.0 million revolving credit facility amount and the $50.0 million term loan amount or ii 60% of the value of the borrowing base properties F- 19 Terreno Realty Corporation Schedule III Real Estate Investments and Accumulated 31 2012 As of December Depreciation Location Encumbrances Land Improsements Initial Cost to Compan Buildings in thousands tIost Capitalized Subsequent to Acquisition Gross 1mount Carried at 12/31/12 Land Buildings Improsements Accumulated Year Total Depreciation Acquired Year Constructed Inglewood CA Torrance CA Commerce CA Redcsndo Beach CA Carson CA Whittier CA South Brunswick NJ Elizabeth NJ KeasnyNJ Carlstadt NJ Totowa NJ Bound 1415 224 6619 7409 1.855 4072 109 2245 1.964 4209 7409 4072 11481 25.785 27.539 22.694 248 27539 22.942 0.481 119 149 406 2011 2011 2012 1988 1985 2002 7874 007 7736 8686 6491 12845 6641 7231 6592 14310 5641 4.849 7902 12135 3.568 18041 771 7593 7874 10.07 7736 8686 6491 12845 6641 7.231 106 886 16 5641 13515 60 2012 1963/1970 4.849 14.921 201 7902 15638 115 2012 12241 20927 697 2010 4454 18057 10945 30902 118 734 2011 2011 771 7.412 29 2011 7.598 14.829 435 2010 1966 2004 1999 1980 2006 1972 1964 18 Brook NJ 14.397 16442 10.241 3765 16442 14006 10.448 1085 2010 1958 1976 South San Francisco CA South San Francisco CA San Jose CA Union City CA .ale Sunnl CA South San Francisco CA Haysard CA San Jose CA Fremont CA 1109 6674 2.655 525 6674 3.180 9854 190 2010 1352 1932 3484 3246 l7.4 2036 4.889 5964 2518 3664 1198 2245 2749 4493 1475 1159 2484 2782 416 1352 1614 2966 120 2010 1932 2245 4.177 267 3246 3016 6262 17.483 14.493 31.976 2036 5.964 2518 3664 609 863 1475 116 3093 3511 7.126 5.611 3.645 309 2012 2010 2011 2012 2011 2010 010 169 178 16 30 235 375 1986 1968 1975 1986 1980 1981 1981 1967 1980 1984 No of Propert Name Los Angeles 630 Glasgoo 19601 Hamilton Garfield Manhattan Beach Snuth Main Whittier Northern Ness Jerses/Ness York 130 Interstate 610 Disision BeIleville Dell Maltese Middlebrook San Francisco Bay Area 218/242 Lao rence 299 Lawrence 631 Brennan Ahern Canbbean Carlton Court Classiter Fortune/Qume Vv arm Spring andll Seattle 17600 West Valley Highway Kant 188 Valley Corporate Miami 10th Avenue 26th Street 39th Street 48th Avenue 60th Avenue 7OthAvensae 78th Avenue Washington D.CjBaltlanore 8730 Bollman Dorsey Global Plaza Sweitzer Troy Hill Tukwila WA Kent WA Kent WA Hialeah FL Miami FL Doral FL Miama Gardens FL Miami Lakes FL Miami FL Doral FL Savage MD Jessup MD Sterling VA Laurel MD Elkridge MD 5045 5305 8.753 6133 1999 3361 3251 5264 6376 4569 1420 4322 6203 1434 2445 4361 3207 1948 2541 3604 1409 5260 4719 9096 2624 6183 2717 2187 1567 2333 1755 2757 2383 3619 3835 5033 1172 117 1050 3361 3231 5264 6376 4569 1420 5260 5891 9213 3674 6183 2725 8621 9142 14477 10050 10752 4145 300 254 302 47 93 2012 2010 2011 2010 2012 2011 1986 1979 1987 1957/2005 1973 2002 25 4322 2232 6534 58 2011 1987 6085 136 167 6203 1434 2445 7652 2469 1922 13855 3903 4367 374 93 23 2010 2011 2012 4361 2757 7118 106 2011 889 3207 1948 2541 1409 __________ 3272 3619 6479 5567 3835 6376 5033 6442 163 2011 78 24 50 2012 2012 2012 1971/2011 1999 1977 1984 1917 2006 1995 2003 Subtotal Total Unamortized net premtumt IntaShle 67 67 110519 218191 186675 17462 218191 204137 422328 7288 1096 111615 $218191 186675 17462 218191 204137 _________ 23020 445348 8360 15648 Si Terreno Realty Corporation Schedule Ill Real Estate Investments and Accumulated Depreciation Continued As of December 31 2012 in thousands summary 01 activity for real estate and accumulated depreciation for the years ended December 31 2012 and 2011 is as l1lows Investment in Properties Ralance at heirini ol sear Acquisition of propertics Iispoi1ion oF propetties Improvements net of write-ofls Ralanec at end ol scar ccumuaaeo uepriauun Ralance at hcginnin ot sear Amortiation of lease intangible assets cpreciation e\pene Disposition of properties and writeoffs Ralance at end of ear 2012 2011 264.54 3i.363 185.281 119.203 12.152 7.635 9018 $445.34 $2645M4 2012 2011 7.063 $1 502 756 .09 1261 $1 5.64 760 4J0 $7063 S-2 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 15 2013 SIGNATURES Terreno Realty Corporation By Is Blake Baird Blake Baird Chairman and Chief Executive Officer Power of Attorney We the undersigned directors of Terreno Realty Corporation hereby severally constitute and appoint Blake Baird and Michael 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 Title Date IsIW Blake Baird Blake Baird Is Michael Coke Michael Coke Is LeRoy Carison LeRoy Carlson Is Peter Merlone Peter Merlone Is Douglas Pasquale Douglas Pasquale Is Dennis Polk Dennis Polk Chairman Chief Executive Officer and Director February 15 2013 principal executive officer President Chief Financial Officer and Director February 15 2013 principal financial and accounting officer Director Director Director Director February 15 2013 February 15 2013 February 15 2013 February 15 2013 3.2 3.3 4.1 10 10.2 10.6 10.7 10.8 Exhibit Number Exhibit Index Exhibit Description 3.1 Articles of Amendment and Restatement of Registrant as amended previously filed as Exhibit 3.1 to Amendment No to the Registrants Registration Statement on Form S-I on January 2010 and incorporated herein by reference Articles Redeemable Exhibit 3.1 to the Registrants Current Report on Form 8-K on July 19 2012 and thr Registrants 7.75% Series Supplementary Cumulative Preferred Stock as previously filed as incorporated herein by reference Amended and Restated Bylaws of Registrant previously filed as Exhibit 3.2 to Amendment No to the Registrants Registration Statement on Form S-I on January 2010 and incorporated herein by reference Specimen Common Stock Certificate of Registrant previously filed as Exhibit 4.1 to Amendment No to the Registrants Registration Statement on Form S-I on January 15 2010 and incorporated herein by reference Form of Severance No Form of Severance No Agreement between Registrant and Blake Baird previously filed as Exhibit 10.1 to Amendment to the Registrants Registration Statement on Form S-Il on January 62010 and incorporated herein by reference Agreement between Registrant and Michael Coke previously filed as Exhibit 10.2 to Amendment to the Registrants Registration Statement on Form S-I on January 2010 and incorporated by reference herein 10.3 2010 Equity Incentive Plan of Registrant previously filed as Exhibit 10.3 to the Registrants Annual Report on Form 10- on March 29 2010 and incorporated by reference herein 10.4 Form of Restricted No Amendment by refi.rence Stock Award Agreement for Executive Officers and Employees previously filed as Exhibit 10.410 to the Registrants Registration Statement on Form S-I on January 2010 and incorporated herein 10.5 Form of Restricted Stock Award Agreement for Non-Employee Directors previously filed as Exhibit 10.5 to Amendment No to the Registrants Registration Statement on Form S-Il on January 2010 and incorporated herein by reference Form of Indemnification Agreement Exhibit lft(cid:244) incorporated herein by reference to Amendment No.2 to the Registrants Registration Statement on Form S-I on January 62010 and between Registrant and its Directors and Executive Officers previously filed as Incentive Plan of Registrant previously filed as Exhibit 10.7 to the Companys Annual Report on Form 10-K IAng-Fernl on March 29 2010 and Form of Award Notice No incorporated by reference herein under the Long-Term Incentive Plan of Registrant previously filed as Exhibit 10.8 to Amendment to the Registrants Registration Statement on Form S-I 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 Registrants Registration Statement on Forni S-Il on January 2010 and incorporated herein by reference 10 It Amended and Restated Senior Revolving Credit Agreement dated as of December 30 2010 among Terreno Realty LLC KeyBank National Association both individually as Lender and as Administrative Agent KeyBanc Capital Markets heconie as Lead Arranger parties as additional Lenders previously and the several banks financial and other entities which may from time to time filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K institutions on January 2011 and incorporated by reference herein 10.11 10.12 Agreement of Sale dated as of May 17 2010 between ILC previously filed as Exhibit 10.1 to the Registrants Quarterly Report on Form lO-Qon August 12 2010 and Advance at Middlebrook Crossroads LLC and Terreno Realty incorporated by reference herein Agreement of Purchase and Sale dated as of September 30 2010 Ltk previously filed as Exhibit 2.1 to the Registrants Current Report between 130 Interstate Blvd LLC and Terreno Realty on Form 8-K on October 2010 and incorporated by reference herein ID Agreement of Purchase and Sale dated as of March 31 2011 between Saw Mill Park LLC and Terreno Realty LLC previousl filed as Exhibit 10.1 to the Registrants Quarterly Report on Form 0-Q on May 2011 and incorporated by reference herein 10 14 Senior Secured Term Loan Agreement dated as of August 23 2011 Association as Administrative Agent KeyBanc Capital Markets among Terreno Realty LLC KeyBank National lenders which the several and as Lead Arranger may Irom time to time become Current Report on Form 8-K on August 26 2011 and incorporated by reference herein parties as additional Lenders previously filed as Exhibit 10.1 to the Registrants 10.15 10.16 First Amendment to Senior Secured LLC as Borrower KeyBank and KeyBanc Capital Markets Term Loan Agreement dated as of December National Association as Lead Arranger previously both individually as Agent filed as Exhibit 10 to the Registrants Current Report Lender 29 2011 among Terreno Realty and as an Administrative on Form 8-K on January 2012 and incorporated by reference herein Second Amendment to Amended and Restated Senior Revolving among Terreno Realty LLC KeyBank National Association Agent PNC Bank National Association and Union Bank N.A as Lenders previously Registrants Current Report both individually as Credit Agreement on Form 8-K on January 23 2012 and incorporated herein by reference Lender dated as of January and as Administrative filed as Exhibit 10.1 to the 19 2012 10.17 Agreement of Purchase and Sale dated May previously filed as Exhibit 2.1 to the Registrants Current Report 2012 between Dune-Westcore GBP LLC and Terreno Realty LLC on Form 8-K on May 31 2012 and incorporated herein by reference 10.18 Agreement of Purchase and Sale and Joint Escrow Instructions Partnership and Terreno Realty LLC previously dated June II 2012 between Arden Realty Limited filed as Exhibit 2.1 to the Registrants Current Report on Form 8-K on July 2012 and incorporated herein by reference 10.19 Third Amendment to Amended and Restated Senior Revolving Credit Agreement dated as of June 15 2012 previously filed as Exhibit 10.3 to the Registrants Quarterly Report on Form 10-Q on August 2012 and 12.1 21 23.1 23.2 24.1 31.1 31 .2 32.l 32.2 incorporated herein by reference Statement of Computation of Ratios Subsidiaries of Registrant Consent of Independent Registered Public Accounting Consent of Independent Registered Public Accounting Firm 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 Sd- 15e as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Chief Financial Officer pursuant to Rules 3a- 15e and Sd-I 5e as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Chief Executive Officer of pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 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 l0-Q on August 82011 and incorporated by reference herein 101 The following materials from Terreno Realty Corporations 31 2012 formatted in XBRL eXtensible Business Reporting Annual Report on Form 10-K for the year ended December Language Consolidated Balance Sheets ii Consolidated Statements of Operations and Comprehensive Income Loss iiiConsolidated Statements of Equity iv Consolidated Real Estate Investments and Accumulated Depreciation Statements of Cash Flows and Notes to Consolidated Financial Statements and vi Schedule Ill- 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 Annual Meeting Stockholders of Terreno Realty Corporation are invited of Stockholders to attend the Annual Meeting to be held at 800 AM 2013 at Pacific Time on Tuesday May Terrenos headquarters Forward-Looking Statements This 2012 Annual Report contains foward 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 021 09 TI 617.570.1403 //617.523.1231 Transfer Agent Computershare Investor Services P.O Box 43078 Providence RI 02940-3078 1/ 800.662.7232 I/Inside the U.S T/ 781.575.4238 II Outside the U.S www.computershare.com/investor Overnight Delivery Computershare Investor Services 250 Royall Canton MA 02021 Street TERRENO Headquarters Terreno Realty Corporation 101 Montgomery Street Suite 200 San Francisco CA 94104 /1 4156554580 II 415.6554599 Investor Relations 1//415.655.4580 Ilinvestors@terreno.com Stock Usting New York Stock Exchange IRNO Symbol // News Releases News releases can be viewed on our website www.terrenocom
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