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Terreno Realty Corporation

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16 Maiden Lane, Fifth Floor
San Francisco, California 94108
(415) 655-4580

 

March 11, 2011

 

Dear Stockholder:

 

You are cordially invited to attend the 2011 Annual Meeting of Stockholders of Terreno Realty Corporation. This meeting will be held on Wednesday, May 18, 2011, at 8:00 a.m., local time, at our corporate headquarters, 16 Maiden Lane, Fifth Floor, San Francisco, California 94108.

 

The attached proxy statement, accompanied by the notice of meeting, describes the matters expected to be acted upon at the meeting. We urge you to review these materials carefully and to use this opportunity to take part in the affairs of Terreno Realty Corporation by voting on the matters described in this proxy statement. We hope that you will be able to attend the meeting. Following the formal portion of the meeting, our directors and management team will be available to answer appropriate questions.

 

Your vote is important. Whether or not you plan to attend the meeting, please complete the enclosed proxy card and return it as promptly as possible or authorize a proxy to vote your shares by calling the toll-free telephone number or via the Internet. The enclosed proxy card contains instructions regarding all three methods of voting. If you attend the meeting, you may continue to have your shares voted as you have previously instructed or you may withdraw your proxy at the meeting and vote your shares in person

 

We have also enclosed a copy of our 2010 Annual Report. Thank you for your interest in Terreno Realty Corporation.

 

Sincerely,

 

TERRENO REALTY CORPORATION
16 Maiden Lane, Fifth Floor
San Francisco, California 94108

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be Held on May 18, 2011

 

To Our Stockholders:

 

Notice is hereby given that the 2011 annual meeting of the stockholders of Terreno Realty Corporation, a Maryland corporation, will be held on Wednesday, May 18, 2011 at 8:00 a.m., local time, at 16 Maiden Lane, Fifth Floor, San Francisco, California 94108. At the meeting, stockholders will consider and vote on the following matters:

 

1. The election of six directors, each to serve until the next annual meeting of stockholders and until his successor has been duly elected and qualifies;

 

2. A resolution to approve, on a non-binding, advisory basis, the compensation of certain executives, as more fully described in the accompanying proxy statement;

 

3. The determination, on a non-binding, advisory basis, of the frequency of future non-binding, advisory votes on executive compensation;

 

4. The ratification of the appointment of Deloitte & Touche LLP as our independent registered certified public accounting firm for the 2011 fiscal year; and

 

5. Such other business as may properly come before the annual meeting, including any adjournments or postponements of the meeting.

 

If you were a stockholder of record as of the close of business on February 28, 2011, you can vote in person or by proxy at the meeting. If you do not plan to attend the meeting and vote in person, please authorize a proxy to vote your shares in one of the following ways:

 

 

Stockholders who authorize a proxy over the Internet, who authorize a proxy by telephone or who return proxy cards by mail prior to the meeting may nonetheless attend the meeting, revoke their proxies and vote their shares in person.

 

By Order of our Board of Directors

 

Chairman and Chief Executive Officer and

Secretary

 

San Francisco, California

March 11, 2011

 

TABLE OF CONTENTS

 

TERRENO REALTY CORPORATION

16 Maiden Lane, Fifth Floor
San Francisco, California 94108
(415) 655-4580

 

 

 

 

PROXY STATEMENT
2011 ANNUAL MEETING OF STOCKHOLDERS

 

 

 

 

 

 

 

The following table sets forth the voting requirements with respect to each of the proposals:

 

For each of the proposals, abstentions and broker non-votes are not counted as votes cast and will have no effect on the result of the vote. Instructions to “withhold” authority to vote for any nominee will have the effect of a vote against the election of that nominee.

 

 

The date by which we must receive stockholder proposals for inclusion in the proxy materials relating to the 2012 annual meeting of stockholders, or for presentation at such meeting, is November 12, 2011. Stockholder proposals to be included in our proxy materials relating to the 2012 annual meeting of stockholders must comply with all of the applicable requirements set forth in the rules and regulations of the Securities and Exchange Commission, or SEC, including Rule 14a-8. Our board of directors will review any stockholder proposals that are timely submitted and will determine whether such proposals meet the criteria for inclusion in the proxy solicitation materials or for consideration at the 2012 annual meeting.

 

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDER MEETING TO BE HELD ON MAY 18, 2011:

 

Our proxy statement and 2010 annual report, including our annual report on Form 10-K for the fiscal year ended December 31, 2010, are available at www.edocumentview.com/TRNO.

 

Our business is managed under the direction of our board of directors. Our board of directors establishes our overall corporate policies, reviews the performance of our senior management in executing our business strategy and managing our day-to-day operations and acts as an advisor to our senior management. Our board’s mission is to further the long-term interests of our stockholders. Members of our board of directors are kept informed of our business through discussions with our management, primarily at meetings of our board of directors and its committees, and through reports and analyses presented to them. Significant communications between our directors and senior management occur apart from such meetings. Our board of directors and each of its committees — audit, compensation and nominating and corporate governance — also have the authority to retain, at our expense, outside counsel, consultants or other advisors in the performance of their duties.

 

Charters for the audit, compensation and nominating and corporate governance committees, our corporate governance guidelines and our code of business conduct and ethics may be viewed on our website at http://www.terreno.com under the “Investors & Media” tab under the subheading “Corporate Information” and under the heading entitled “Governance Documents”. These documents are also available without charge to

stockholders who request them by contacting Terreno Realty Corporation — Investor Relations, at 16 Maiden Lane, Fifth Floor, San Francisco, California 94108.

 

Under the corporate governance standards of the NYSE, at least a majority of our directors and all of the members of the audit committee, compensation committee and nominating and corporate governance committee must meet the test of “independence” as defined by the NYSE. The NYSE standards provide that to qualify as an “independent” director, in addition to satisfying certain bright-line criteria, our board of directors must affirmatively determine that a director has no material relationship with us (either directly or as a partner, shareholder or officer of an organization that has a relationship with us). In addition, our corporate governance guidelines provide that at least annually, our board of directors will evaluate all relationships between the Company and each director in light of relevant facts and circumstances for the purposes of determining whether a material relationship exists that might signal a potential conflict of interest or that might cause the director to cease to meet the applicable independence requirements or interfere with such director’s ability to satisfy his or her duties as a director. Our board of directors has determined that each of Messrs. Carlson, Merlone, Pasquale and Polk is an “independent” director under the corporate governance standards of the NYSE and the SEC. Therefore, following the election of the director nominees at the annual meeting, we believe that 67% of our board members will be independent under those rules.

 

Our non-management directors meet regularly in separate executive sessions without management participation. The executive sessions typically occur after each regularly scheduled meeting of our entire board of directors and at such other times that our non-management directors deem appropriate. The executive sessions are chaired by Mr. Pasquale, our Lead Director.

 

The nominating and corporate governance committee will consider nominees for director suggested by stockholders in written submissions to our corporate secretary. Our bylaws currently provide that in order for a stockholder to nominate a candidate for election as a director at an annual meeting of stockholders or propose business for consideration at such meeting, written notice containing the information and materials required by our bylaws generally must be delivered to our corporate secretary not later than the close of business on the 120th day, and not earlier than the 150th day, prior to the first anniversary of the date of the notice for the preceding year’s annual meeting.

 

In evaluating nominees for director, the nominating and corporate governance committee does not differentiate between nominees recommended by stockholders and others. The nominating and corporate governance committee develops and recommends to our board of directors for its consideration and approval such criteria for identifying and recommending prospective nominees for election as directors as the nominating and corporate governance committee deems necessary or advisable in the context of the current make-up of our board of directors. The criteria include such factors as diversity, age, qualities (such as character, professional integrity, independence, judgment and business acumen), skills and experience, industry knowledge and experience, requirements of the NYSE to maintain a minimum number of independent directors, requirements of the SEC to have persons with financial expertise on the Company’s audit committee, the ability of a candidate to devote sufficient time to the affairs of the Company, any actual or potential conflicts of interest, and the extent to which the candidate generally would be a desirable addition to our board of directors and any committees of our board of directors.

 

We do not have a formal diversity policy. However, the criteria above include a broad range of factors such as relevant experience, independence, commitment, compatibility with our board of directors and its committees and diversity.

 

Our board of directors has implemented a process by which our stockholders may communicate with our board of directors as a whole or with individual members of our board of directors. Communications directed at our board

of directors as a whole should be addressed to Terreno Realty Corporation, 16 Maiden Lane, Fifth Floor, San Francisco, California 94108, Attn: Chief Financial Officer, and communications directed at individual directors, including our Lead Director, should be addressed to the attention of the individual director at the same address. Such communications may be made on an anonymous or confidential basis. Our board of directors has instructed our corporate secretary to promptly forward all such communications to the specified addressees thereof.

 

Our corporate governance guidelines provide that our board of directors will periodically appoint a chairman of the board, who may either be independent or a management director, including our chief executive officer. The positions of chairman and chief executive officer are currently occupied by one individual, Mr. Baird. Our board of directors believes that this leadership structure serves us well, as Mr. Baird’s deep industrial real estate expertise across markets and cycles, as well as extensive public REIT operating experience, uniquely qualify him to serve as both chairman and chief executive officer. Combining the chairman and chief executive officer roles fosters clear accountability, effective decision-making and aligns corporate strategy with the Company’s day-to-day operations. Combining the roles also promotes unified leadership and direction for our board of directors and management.

 

In his combined role, Mr. Baird sets the agenda for board meetings and presides over all meetings of the full board. Since the chairman and chief executive officer positions are currently occupied by Mr. Baird, our board of directors appointed Mr. Pasquale, an independent director, as our Lead Director to ensure strong independent oversight. As Lead Director, Mr. Pasquale chairs the executive sessions of the non-employee directors, facilitates communications and resolves conflicts, if any, between our non-employee directors, other directors and our management and consults with and provides counsel to our chief executive officer as needed or requested. In performing these duties, our Lead Director consults with the chairpersons of the appropriate committees of our board of directors and solicits their participation in order to avoid diluting the authority or responsibility of the board committees and their chairpersons.

 

Our board of directors provides oversight of the Company’s risk exposure by receiving periodic reports from senior management regarding matters relating to financial, operational, legal and strategic risks and mitigation strategies for such risks. In addition, as reflected in the audit committee charter, our board of directors has delegated to the audit committee responsibility to discuss and evaluate our policies and guidelines with respect to risk assessment and risk management. During these discussions, the audit committee may discuss or consider our major financial risk exposures and the steps that our management has taken to monitor and control such exposures.

 

Our board of directors has adopted a code of business conduct and ethics that applies to all of our directors, officers and employees. Day-to-day responsibility for administering and interpreting our code of business conduct and ethics has been delegated by our board of directors to our chief financial officer. Our code of business conduct and ethics contains compliance procedures, allows for the anonymous reporting of a suspected violation of our code of business conduct and ethics and specifically forbids retaliation against any officer or employee who reports suspected misconduct in good faith. The provisions of our code of business conduct and ethics may only amended, or waived for the benefit of our directors and executive officers, by our board of directors or, if permitted, a committee of our board of directors. Such waivers or amendments must be promptly disclosed to our stockholders in accordance with applicable laws and rules and regulations of the NYSE. We intend to disclose any amendments or waivers to our code of business conduct and ethics that apply to any of our executive officers on our website at http://www.terreno.com. The full text of our code of business conduct and ethics is available on our website at http://www.terreno.com, under the heading “Investors & Media”, under the subheading “Corporate Information” and under the heading entitled “Governance Documents.”

 

Our board of directors has adopted Corporate Governance Guidelines, a copy of which is available on our website at http://www.terreno.com under the heading “Investors & Media”, under the subheading “Corporate Information” and under the heading entitled “Governance Documents.”

 

During the fiscal period from February 16, 2010 (commencement of operations) to December 31, 2010, our board of directors held a total of four meetings. Each of our directors attended 100% of the aggregate of (i) the number of the meetings of our board of directors which were held during the period that such person served on our board of directors and (ii) the number of meetings of committees of our board of directors held during the period that such person served on such committee. Members of our board of directors are encouraged to attend the annual meeting, but we currently do not have a formal policy with regard to Board members’ attendance at the annual meeting.

 

Our board of directors has established three standing committees of our board of directors: the audit committee; the compensation committee; and the nominating and corporate governance committee, and has adopted written charters for each committee.

 

The current members of our board committees are as follows:

 

 

 

 

Audit Committee.  The audit committee is composed of Messrs. Carlson, Merlone, Pasquale and Polk, each of whom is an independent director and “financially literate” under the rules of the NYSE and the SEC. Mr. Carlson chairs the audit committee and has been determined by our board of directors to be an audit committee financial expert within the meaning of the rules of the SEC. The audit committee met four times during the period from February 16, 2010 (commencement of operations) to December 31, 2010.

 

The purposes of the audit committee are to:

 

 

The audit committee is also responsible for engaging our independent registered certified public accounting firm, reviewing with the independent registered certified public accounting firm the plans and results of the audit engagement, approving professional services provided by the independent registered certified public accounting firm, reviewing the independence of the independent registered certified public accounting firm, considering the range of audit and non-audit fees and reviewing the adequacy of our internal accounting controls.

 

Compensation Committee.  The compensation committee is composed of Messrs. Carlson, Merlone, Pasquale and Polk, each of whom is an independent director under the rules of the NYSE and the SEC. Mr. Merlone

chairs the compensation committee. The compensation committee met two times during the period from February 16, 2010 (commencement of operations) to December 31, 2010.

 

The purposes of the compensation committee are to:

 

 

Nominating and Corporate Governance Committee.  The nominating and corporate governance committee is composed of Messrs. Carlson, Merlone, Pasquale and Polk, each of whom is an independent director under the rules of the NYSE and the SEC. Mr. Polk chairs the nominating and corporate governance committee. The nominating and corporate governance committee met once during the period from February 16, 2010 (commencement of operations) to December 31, 2010.

 

The purposes of the nominating and corporate governance committee are to:

 

 

Our board of directors may from time to time establish special or standing committees to facilitate the management of the Company or to discharge specific duties delegated to the committee by our full board of directors. Our board of directors has established the following committee:

 

Investment Committee.  Our investment committee is currently composed of Mr. Baird and Mr. Coke. Our board of directors has delegated to our investment committee the authority to approve any investment under $100 million. Our board of directors must approve any investments of $100 million or more. Approval by our investment committee requires a unanimous vote and may be given with conditions.

 

Our board of directors proposes that the nominees described below each be elected to serve until the 2012 annual meeting of stockholders and until their successors are duly elected and qualify. All of the nominees are currently serving as our directors. The biographical descriptions for the nominees include the specific experience, qualifications, attributes and skills that led to the conclusion by our board of directors in the last sentence of each biography that such person should serve as a director.

 

 

RECOMMENDATION — Our board of directors unanimously recommends a vote “FOR” each named nominee. Unless otherwise instructed, properly authorized proxies solicited by our board of directors will be voted FOR each named nominee.

 

Vote Required — Majority Vote Standard for Election of Directors

 

Our bylaws provide that the vote standard for election of directors is a “majority vote of the votes cast” standard in uncontested elections of directors. This means that in an uncontested election, a nominee is elected as a director if he or she receives more “for” votes than the total number of “against” votes and votes affirmatively “withheld”. In an election where the number of nominees is greater than the number of directors to be elected at the meeting, the nominees will be elected by a plurality of the votes cast in the election of directors.

 

Under our corporate governance guidelines, any director who fails to be elected by a majority vote is required to tender his or her resignation to our board of directors, subject to acceptance. The nominating and corporate governance committee will make a recommendation to our board of directors on whether to accept or reject the resignation, or whether other action should be taken. Our board of directors will then act on the nominating and corporate governance committee’s recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date of the certification of election results. If the resignation is not accepted, the director will continue to serve until the next annual meeting and until the director’s successor is duly elected and qualifies. The director who tenders his or her resignation will not participate in our board’s decision.

 

As of the date of this proxy statement, our executive officers are as follows:

 

 

Mr. Baird and Mr. Coke also serve as directors. Their biographical information can be found in the section entitled “Proposal 1 — Election of Directors” on page 9.

 

General

 

As required by Section 14A of the Securities Exchange Act of 1934, as amended, or the Exchange Act, our board of directors is submitting for stockholder action a resolution to approve, on a non-binding, advisory basis, the compensation paid to our named executive officers as disclosed in this proxy statement. This is commonly known as, and is referred to in this proxy statement as, a “say-on-pay” proposal or resolution.

 

This say-on-pay proposal gives our stockholders the opportunity to express their views on the compensation of our named executive officers. We are asking our stockholders to indicate their support for the compensation of our named executive officers as described in this proxy statement This vote is not limited to any specific item of compensation, but rather addresses the overall compensation of our named executive officers and our philosophy, policies and practices relating to their compensation as described in this proxy statement.

 

As described in detail under the heading “Compensation Discussion and Analysis” in this proxy statement, our executive compensation programs are designed to attract, retain and motivate our named executive officers, who are critical to our success. Our compensation program is designed to create incentives for our named executive officers to maximize long-term stockholder value. Under these programs, our named executive officers are rewarded for the achievement of our annual, long-term and strategic objectives, and the realization of increased stockholder value. Please refer to the “Compensation Discussion and Analysis” in this proxy statement for additional details about our executive compensation programs, including information about the fiscal year 2010 compensation of our named executive officers.

 

Text of Resolution

 

“RESOLVED, that the stockholders of the Company approve, on a non-binding, advisory basis, the compensation of the Company’s named executive officers, as disclosed in this proxy statement pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion.”

 

RECOMMENDATION — Our board of directors unanimously recommends a vote FOR adoption of this resolution. Unless otherwise instructed, properly authorized proxies solicited by our board of directors will be voted FOR adoption of this resolution.

 

Vote Required; Effect of Vote

 

The affirmative vote of a majority of the votes cast on this proposal will be required for adoption of this resolution. Abstentions and broker non-votes will not be treated as votes cast and, accordingly, will have no effect on the outcome of the vote on this proposal.

 

The say-on-pay resolution is advisory, and therefore will not have any binding legal effect on the Company, our board of directors or the compensation committee and may not be construed as overruling a decision by the Company, our board of directors or the compensation committee or to create or imply any change to the fiduciary duties of our board of directors. Furthermore, because this non-binding advisory resolution primarily relates to

compensation of the named executive officers that has already been paid or contractually committed, there is generally no opportunity for us to revisit those decisions.

 

However, the compensation committee does value the opinions of our stockholders and intends to take the results of the vote on this proposal into account in its future decisions regarding the compensation of our named executive officers.

 

General

 

As required by Section 14A of the Exchange Act, our board of directors is also submitting for stockholder consideration a proposal to determine, on a non-binding, advisory basis, how frequently the Company will submit say-on-pay proposals to our stockholders in the future. Stockholders will be able to specify one of three alternative frequencies for the proposal on the proxy card: every year, every two years or every three years, or stockholders may mark “abstain”.

 

Our board of directors believes that, of the three alternative frequencies, submitting a non-binding, advisory say-on-pay resolution to stockholders every year is preferable. Annual votes will provide the Company with clearer feedback regarding the compensation of our named executive officers. The primary focus of the disclosure of the compensation of our named executive officers required to be included in the Company’s proxy statements is compensation granted in or for the prior fiscal year. Additionally, the compensation committee re-evaluates the compensation of our named executive officers each year. An annual say-on-pay resolution will match the annual focus of this proxy statement disclosure and provide the Company with the clearest and most timely feedback of the three options. This feedback may then be considered by the compensation committee in its next annual decision-making process. Additionally, the administrative process of submitting a non-binding, advisory say-on-pay resolution to stockholders on an annual basis is not expected to impose any substantial additional costs on the Company.

 

Please mark on the proxy card your preferred frequency by choosing the option of every year, two years or three years or mark “abstain”.

 

RECOMMENDATION — Our board of directors unanimously recommends a vote to hold a say-on-pay vote every year. However, stockholders are not voting to approve or disapprove the recommendation of our board of directors. Unless otherwise instructed, properly authorized proxies solicited by our board of directors will be voted in favor of including a say-on-pay vote every year.

 

Vote Required; Effect of Vote

 

In order for any of the three alternative frequencies to be approved, it must receive a majority of the votes cast on this proposal. Because there are four choices (one year, two years, three years or abstain), it is possible that none of the choices will receive a majority of the votes cast. However, stockholders will still be able to communicate their preference with respect to the frequency of say-on-pay proposals by choosing from among these three alternatives. Abstentions and broker non-votes will not be treated as votes cast and, accordingly, will have no effect on the outcome of the vote on this proposal.

 

This proposal is a non-binding, advisory determination, and therefore will not have any binding legal effect on the Company or our board of directors and may not be construed as overruling a decision by the Company or our board of directors or to create or imply any change to the fiduciary duties of our board of directors. However, our board of directors does intend to take the results of the vote on this proposal into account in its decision regarding the frequency with which the Company submits say-on-pay proposals in the future.

 

The audit committee has selected and appointed the firm of Deloitte & Touche LLP to act as our independent registered certified public accounting firm for 2011. Deloitte & Touche LLP has served as our independent registered certified public accounting firm since our incorporation on November 6, 2009. Ratification of the appointment of our registered certified public accounting firm requires a majority of the votes cast on this proposal. Any votes not cast, whether by abstention, broker non-vote, or otherwise, will have no impact on the vote.

 

RECOMMENDATION: Our board of directors unanimously recommends that the stockholders vote FOR ratification of the appointment of Deloitte & Touche LLP.

 

Although stockholder ratification of the appointment of our independent registered certified public accounting firm is not required by our bylaws or otherwise, we are submitting the selection of Deloitte & Touche LLP to our stockholders for ratification as a matter of good corporate governance practice. Even if the selection is ratified, the audit committee in its discretion may select a different independent registered certified public accounting firm at any time if it determines that such a change would be in our best interest and the best interests of our stockholders. If our stockholders do not ratify the audit committee’s selection, the audit committee will take that fact into consideration, together with such other factors it deems relevant, in determining its next selection of independent registered certified public accounting firm.

 

In choosing our independent registered certified public accounting firm, the audit committee conducts a comprehensive review of the qualifications of those individuals who will lead and serve on the engagement team, the quality control procedures the firm has established and any material issue raised by the most recent quality control review of the firm. The review also includes matters required to be considered under the SEC rules on auditor independence, including the nature and extent of non-audit services to ensure that they will not impair the independence of any such firm.

 

Representatives of Deloitte & Touche LLP are expected to be present at the annual meeting. These representatives will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

 

Deloitte & Touche LLP served as our independent registered certified public accounting firm for the period from our incorporation on November 6, 2009 through December 31, 2009 and during the 2010 fiscal year, including from February 16, 2010 (commencement of operations) through December 31, 2010. Aggregate fees for professional services rendered by Deloitte & Touche LLP during such periods were as follows:

 

 

Audit fees for 2010 were incurred for professional services in connection with the audit of our consolidated financial statements and internal control over financial reporting for the period from February 16, 2010 (commencement of operations) to December 31, 2010, reviews of our interim consolidated financial statements, which were included in each of our quarterly reports on Form 10-Q during the period from February 16, 2010 (commencement of operations) to December 31, 2010 and professional services related to property acquisition due diligence. In 2009, audit fees included fees for professional services rendered for the audit of our financial statements as of November 9, 2009 in connection with our initial public offering and as of December 31, 2009.

 

The tax fees set forth in the table above for 2010 related to tax compliance, tax advice and tax planning services rendered by Deloitte & Touche LLP. The tax fees set forth in the table above for 2009 related to tax compliance, tax advice and tax planning services rendered by Deloitte & Touche LLP in connection with our initial public offering.

 

There were no fees billed for 2009 or 2010 for products and services that are not disclosed above.

 

The Audit Committee pre-approves all audit and permissible non-audit services provided by the independent registered certified public accounting firm unless an exception to such pre-approval exists under the Exchange Act or the rules of the SEC. These services may include audit services, audit-related services, tax services and other services.

 

The following report of the audit committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any of our other filings under the Securities Act of 1933 or the Securities Exchange Act of 1934.

 

In accordance with its written charter adopted by the board of directors, the audit committee’s role is to assist the board of directors in the oversight of the integrity of the Company’s financial statements, the Company’s compliance with legal and regulatory requirements, the qualifications, independence and performance of the Company’s independent auditors and the Company’s internal audit function. The audit committee currently consists of four members, each of whom is “independent” as that term is defined by the governance standards of the NYSE and the rules and regulations of the SEC.

 

Management is responsible for the Company’s financial reporting process including its system of internal controls, and for the preparation of the Company’s consolidated financial statements in accordance with generally accepted accounting principles. The Company’s independent auditors are responsible for auditing those financial statements. It is the audit committee’s responsibility to monitor and review these processes. It is not the audit committee’s duty or responsibility to conduct auditing or accounting reviews or procedures. The audit committee does not consist of the Company’s employees and it may not be, and may not represent itself to be or to serve as, accountants or accountants by profession or experts in the fields of accounting or auditing. Therefore, the audit committee has relied on management’s representation that the financial statements have been prepared with integrity and objectivity and in conformity with accounting principles generally accepted in the United States and on the representations of the Company’s independent auditors included in their report on our financial statements. The audit committee’s oversight does not provide it with an independent basis to determine that management has maintained appropriate accounting and financial reporting principles or policies, or appropriate internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Furthermore, the audit committee’s considerations and discussions with management and with our independent auditors do not assure that our financial statements are presented in accordance with generally accepted accounting principles, that the audit of our financial statements has been carried out in accordance with generally accepted auditing standards or that the Company’s independent auditors are in fact “independent.”

 

In fulfilling its oversight responsibilities, the audit committee reviewed the audited financial statements for the fiscal period from February 16, 2010 (commencement of operations) to December 31, 2010 with management, including a discussion of the quality of the accounting principles, the reasonableness of significant judgments, the clarity of disclosures in the financial statements and the effectiveness of our disclosure controls and procedures and internal controls over financial reporting. The audit committee reviewed the financial statements for the fiscal period from February 16, 2010 (commencement of operations) to December 31, 2010 with our independent auditors and discussed with them all of the matters required to be discussed by Statement of Auditing Standards No. 61 (Communications with Audit Committees), as amended and as adopted by the Public Company Accounting

Oversight Board, including their judgments as to the quality, not just the acceptability, of our accounting principles. In addition, the audit committee has received the written disclosures and the letter from our independent auditors required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent auditors’ communications with the audit committee concerning independence and has discussed with our independent auditors their independence from our management and from us. Upon its review, the audit committee has satisfied itself as to our independent auditors’ independence.

 

Based on the review and discussions with management and the independent auditors, and subject to the limitations on its role and responsibilities described above, the audit committee recommended to the board of directors, and the board of directors has approved, that the audited financial statements be included in the Company’s annual report on Form 10-K for the period from February 16, 2010 (commencement of operations) to December 31, 2010, as filed with the SEC on February 24, 2011. The undersigned members of the audit committee have submitted this report to the Company.

 

Members of the Audit Committee

LeRoy A Carlson, Chair
Peter J. Merlone
Douglas M. Pasquale
Dennis Polk

 

The undersigned members of the compensation committee of the board of directors of Terreno Realty Corporation submit this report in connection with our review of the Compensation Discussion and Analysis section of this proxy statement for the fiscal year ended December 31, 2010.

 

The compensation committee notes that we have oversight responsibilities only. We rely without independent verification on the information provided to us and on the representations made by management. Accordingly, our oversight does not provide an independent basis to determine whether the Compensation Discussion and Analysis section of this proxy statement is accurate and complete. We also note that management has the primary responsibility for the preparation of the Compensation Discussion and Analysis section of this proxy statement.

 

We, however, have reviewed the Compensation Discussion and Analysis and have discussed it with management; and in reliance on the reviews and discussions referred to above, we recommended to the board of directors that the Compensation Discussion and Analysis section of this proxy statement be included in this proxy statement.

 

Members of the Compensation Committee

Peter J. Merlone, Chair
LeRoy E. Carlson
Douglas M. Pasquale
Dennis Polk

 

We have reviewed our compensation structures and policies as they pertain to risk and have determined that our compensation programs do not create or encourage the taking of risks that are reasonably likely to have a material adverse effect on the Company.

 

No member of the compensation committee during 2010 was an officer, employee or former officer of ours or any of our subsidiaries or had any relationship that would be considered a compensation committee interlock and would require disclosure in this proxy statement pursuant to SEC regulations. None of our executive officers served as a member of a compensation committee or a director of another entity under the circumstances requiring disclosure in this proxy statement pursuant to SEC regulations.

 

The following discussion is intended to supplement the more detailed information concerning executive compensation that appears in the tables and the accompanying narrative that follows. It is also intended to provide both a review of our compensation policies for 2010 and describe our compensation policies with respect to our executive officers. Our goal is to provide a better understanding of our compensation practices and the decisions made concerning the compensation payable to our executive officers, consisting of the chairman and chief executive officer and the president and chief financial officer in the “Summary Compensation Table” below. These officers are referred to herein as the “named executive officers.”

 

The compensation committee of our board of directors, referred to in this section as the “committee,” designs and administers our executive compensation program. All principal elements of compensation paid to our executive officers are subject to approval by the compensation committee. The Compensation Committee Report appears on page 16 of this proxy statement.

 

The principal objectives of our executive compensation program are to:

 

 

The compensation committee evaluates the performance of our chairman and chief executive officer, Mr. Baird, and president and chief financial officer, Mr. Coke, and determines their compensation based on this evaluation. Mr. Baird and Mr. Coke make recommendations to the compensation committee for equity awards to other employees throughout the Company. The compensation committee can accept, reject or modify Mr. Baird and Mr. Coke’s recommendations as it sees fit. Under its charter, the compensation committee has the authority to engage independent compensation consultants or other advisors. To date, we have not retained a compensation consultant.

 

We have designed our executive compensation program to include two principal elements — base salary and long-term equity incentives, such as stock awards. Both base salary and long-term equity incentives are integrated into our compensation program and are intended to achieve different objectives. For example, we believe that a competitive base salary is a necessary element of any compensation program that is designed to attract and retain talented and experienced executives. We also believe that attractive base salaries can motivate and reward

executives. We believe that long-term equity incentives align the interests of our executives and stockholders by motivating executives to increase stockholder value and rewarding executives when stockholder value increases and encourage executives to achieve meaningful levels of ownership of our stock.

 

Base Salaries.  In order to attract and retain the most talented executives in our industry, we must set the base salaries of executive officers at levels that are competitive with other companies engaged in the industrial real estate industry and of comparable size and scope that compete with us for executive talent. Although base salaries are established in part based on the individual experience, skills and expected contributions during the coming year of our executive and our executive’s performance during the prior year, we do not view base salaries as primarily serving our objective of paying for performance.

 

Increases in base salary are left to the discretion of the compensation committee. The annual base salary of each of Mr. Baird and Mr. Coke, which was established prior to the time of our initial public offering and subsequently ratified by the compensation committee following our initial public offering, is $400,000. For 2011, the compensation committee did not adjust Mr. Baird and Mr. Coke’s annual base salaries.

 

Annual Cash Incentive Bonus.  We do not have, nor are we currently planning to adopt, an annual cash incentive bonus plan for our executives, although we reserve our right to do so in the future.

 

Long Term Incentive Plan.  In order to directly align the long-term incentive compensation of our executives with the achievement of enhanced value for our stockholders and to provide executives with the potential to earn equity awards subject to the long-term performance of our common stock, in 2010, the compensation committee adopted the Company’s Long-Term Incentive Plan (the “Long-Term Incentive Plan”). Under our Long-Term Incentive Plan, our executives are granted a target award (generally measured as a percentage of the executive’s base salary) measured in dollars, that may be payable in shares of our common stock after the conclusion of each pre-established performance measurement period. Generally, performance measurement periods under the Long-Term Incentive Plan will run for three calendar years and begin on January 1, 2011 and each anniversary thereof, however, the first performance measurement period began on the closing of our initial public offering and will end on December 31, 2011 and the second performance measurement period began on the closing of our initial public offering and will end on December 31, 2012.

 

The amount that will be earned under our Long-Term Incentive Plan for any performance measurement period will be determined by our success in attaining or exceeding performance goals linked to each of two metrics during the performance measurement period:

 

 

The two main performance goals were established to focus our named executive officers on generating significant total stockholder returns over time. Our management believes that achievement of the “target” level of performance of the two main performance goals, i.e., exceeding the applicable indices, will require significant effort and substantial progress toward the goals of our strategic plan. At the target level for each performance goal, each participating executive will receive an award equal to 50% of his target award. Accordingly, if we achieve the target level for both performance goals, each participating executive will receive an award equal to 100% of his target award for the performance period. If our performance is below the target level for either of the performance goals, then no payouts will be made with respect to such goal. To the extent that our performance exceeds the applicable index by at least 100 basis points per year, each participating executive will receive an award equal to 150% of his target award. Accordingly, if our performance exceeds both indices by at least 100 basis points per year, each participating executive will receive an award equal to 300% of his target award. In the event that our total stockholder return is negative for any performance period, even if we have outperformed the applicable indices, any incentive compensation earned for that performance period will be reduced by 50%. Once we have determined the dollar value of the award earned for any performance period, such amount will be converted to shares of our

common stock based on the average closing price of our common stock for the last ten business days immediately preceding the day the shares are issued.

 

On February 16, 2010, in connection with the completion of our initial public offering, our board of directors granted the following target awards to our executives under the Long-Term Incentive Plan, which were ratified by the compensation committee following our initial public offering:

 

 

On February 17, 2011, the compensation committee granted a target award of $400,000 to each of Mr. Baird and Mr. Coke under the Long-Term Incentive Plan for the three-year performance period commencing on January 1, 2011 and ending on December 31, 2013.

 

2010 Equity Incentive Plan.  We believe that providing our executives with equity incentives will create longer-term alignment with stockholders and further meet the Company’s objectives of building equity ownership and meaningful value for the Company’s executives. As such, our executives are eligible to receive grants of restricted stock under our 2010 Equity Incentive Plan. At the completion of our initial public offering, each of Mr. Baird and Mr. Coke received a grant of 50,000 shares of restricted stock with an approximate value of $1,000,000, based on the initial public offering price of $20.00 per share. These grants vest ratably in annual installments over a five-year period commencing on the completion of our initial public offering, with the first vesting having occurred on February 16, 2011, the first anniversary of our initial public offering.

 

Retirement Benefits.  Effective January 1, 2011, we maintain a 401(k) retirement plan in which all employees can participate on the same terms. Under the 401(k) retirement plan, we contribute 3% of the participant’s annual compensation. Our contributions are 100% vested when made. Our matching contributions are subject to applicable IRS limits and regulations.

 

Severance Agreements.  We have severance agreements with Mr. Baird and Mr. Coke. A summary of these severance agreements appears in the section of this proxy statement entitled “Payments Upon Termination of Employment and Change of Control.” These agreements provide for various payments and benefits to the executives if their employment with us is terminated for certain reasons or if there is a termination for certain reasons upon a change of control. The circumstances in which payments may be made and the potential amounts of those payments are described in more detail below. These agreements are intended to ensure the ongoing commitment and continued attention and dedication of these executive officers to their assigned duties and to the best interest of our stockholders in the event of a change of control or other potential termination events.

 

Equity Award Grant Practices.  The compensation committee expects to make annual equity awards at its quarterly meeting in February or March each year. In 2011, the awards were made to our non-executive employees at the compensation committee’s regularly scheduled meeting on February 17, 2011. The grant date of those awards is the date of the meeting, which date is determined without regard to current or anticipated stock price levels or the release of material non-public information and is set during the prior calendar year.

 

The compensation committee may also make special grants during the course of the year, primarily for new hires, promotions to retain valued employees, to award exceptional performance or otherwise. Generally, these special grants are subject to performance or time vesting, and are issued on the date of grant approval or upon a date certain following the grant approval date, such as the date on which a new hire commences his or her employment with the Company.

 

Section 162(m).  The SEC requires that we comment upon our policy with respect to Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), which limits the deductibility on our tax return of

compensation over $1 million to any of the named executive officers unless, in general, the compensation is paid pursuant to a plan which is performance-related, non-discretionary and has been approved by our stockholders. We believe that, because we intend to qualify as a REIT under the Code and pay distributions sufficient to minimize federal income taxes, the payment of compensation that does not satisfy the requirements of Section 162(m) will generally not affect our net income. To the extent that compensation does not qualify for a deduction under Section 162(m), a larger portion of stockholder distributions may be subject to federal income taxation as dividend income rather than return of capital. We do not believe that Section 162(m) will materially affect the taxability of stockholder distributions, although no assurance can be given in this regard due to the variety of factors that affect the tax position of each stockholder. For these reasons, the compensation committee’s compensation policy and practices are not directly guided by considerations relating to Section 162(m).

 

The table below summarizes the total compensation paid or awarded to each of our named executive officers for 2010. For a more thorough discussion of our executive compensation program, see “Compensation Discussion and Analysis” which begins on page 17 of this proxy statement.

 

 

 

 

 

 

 

 

 

 

 

 

Severance agreements that we entered into upon the completion of our initial public offering with our chairman and chief executive officer and our president and chief financial officer require us to make certain payments and provide certain benefits to them in the event of a termination of their employment following a change of control of our company. This section provides a discussion of those payments and benefits, along with certain other terms of those agreements that are in effect as of the date of this proxy statement.

 

Severance Agreements.  We entered into severance agreements with Mr. Baird and Mr. Coke effective on February 16, 2010. Under these agreements, each of these executives will be entitled to receive benefits under the agreements if (1) we terminate the executive’s employment without cause, or (2) the executive resigns with good reason. Under these scenarios, each of the executives is entitled to receive, subject to the executive’s execution of a general release of claims, a severance payment equal to one times the executive’s current salary plus the dollar value of his most recent target award under the Long-Term Incentive Plan. In addition, all time-based restricted stock will fully vest while all long-term incentive awards will be forfeited. The executive will also receive health insurance coverage for a period of 18 months. If such termination of employment occurs after a change of control, the severance payment, subject to the executive’s execution of a general release of claims, will be two times the sum of the executive’s current salary plus the dollar value of the most recent target award under the Long-Term Incentive Plan. No payments will be made to compensate the executive for additional taxes, if any, imposed under Section 4999 of the Code for receipt of excess parachute payments.

In the event an executive’s employment is terminated on account of death or disability, all his time-based restricted stock will fully vest. Additionally, to compensate the executive for the loss of opportunity to earn his long-term incentive awards, we will also provide him (or his estate in the case of death) with a cash payment equal to his target award under the Long-Term Incentive Plan, subject to the executive’s execution of a general release of claims in the case of disability.

 

The severance agreements provide that during the term of each executive’s employment and for 12 months after the termination of their employment for any reason, each executive has agreed not to solicit our employees to leave their employment with us or to solicit any customer or supplier to terminate or otherwise modify adversely its business relationship with us.

 

The following chart sets forth the cost that we would have incurred if one of the executives were terminated as of December 31, 2010 under the terms of the severance agreements assuming a stock price of $17.93, the closing market price of our common stock on the NYSE on December 31, 2010.

 

Cost of Termination Under Severance Agreements

 

 

 

 

 

Our board of directors has approved a compensation program for our independent directors in the form of cash and equity awards.

 

Although we do not intend to pay our independent directors an annual retainer fee, we pay the following fees, payable quarterly in cash:

 

 

We pay independent directors cash fees of $1,500 for each board meeting attended, $1,000 for each committee meeting attended, and $500 for each telephonic meeting attended. In addition, we reimburse our directors for reasonable out-of-pocket expenses incurred in connection with performance of their duties as directors, including, without limitation, travel expenses in connection with their attendance at board and committee meetings. We also reimburse our directors for approved director education programs. Furthermore, directors do not receive any perquisites or above-market nonqualified deferred compensation plan earnings.

Upon completion of our initial public offering, each of our independent directors received $100,000 payable in the form of restricted common stock. The shares of restricted common stock became fully vested on February 16, 2011, the first anniversary of the completion of our initial public offering.

 

In connection with each annual meeting of stockholders commencing in 2011, each of our independent directors will receive $75,000 payable in the form of unrestricted common stock.

 

Dividends on unvested shares of restricted stock generally will be paid in cash.

 

The following table summarizes the compensation of our non-employee directors in 2010:

 

 

The following table sets forth the aggregate number of shares of restricted stock held by each non-employee director as of December 31, 2010:

 

 

 

 

The aggregate ASC 718, Compensation — Stock Compensation grant date fair value of each of the restricted stock awards granted in 2010 was as follows:

 

 

The following table provides information as of December 31, 2010 regarding our 2010 Equity Incentive Plan.

 

 

 

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and persons who own more than ten percent of our outstanding common stock to file with the SEC, initial reports of ownership and reports of changes in ownership of common stock. Such persons are required by SEC regulations to furnish us with copies of all such reports they file.

 

To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports are required, all Section 16(a) filing requirements applicable to our executive officers, directors and greater than ten percent beneficial owners have been complied with during the fiscal year ended December 31, 2010.

 

Related Person Transaction Approval Policy

 

All related person transactions must be reviewed and approved by our board of directors in advance of our or any of our subsidiaries entering into the transaction. If we or any of our subsidiaries enters into a transaction without recognizing that the transaction constitutes a related person transaction, this approval requirement will be satisfied if the transaction is ratified by our board of directors after we recognize that the transaction constituted a related person transaction. The term “related person transaction” refers to a transaction required to be disclosed by the Company pursuant to Item 404 of Regulation S-K (or any successor provision) promulgated by the SEC. The transactions set forth below were approved by our board of directors.

 

In addition to any applicable requirements under the Maryland General Corporation Law, the affirmative vote of a majority of disinterested directors, even if the disinterested directors constitute less than a quorum, is required to authorize, approve or ratify any transaction, agreement or relationship of the Company in which any director, officer or employee of the Company has an interest.

Contribution of Fixed Assets

 

Concurrently with the completion of our initial public offering, Terreno Capital Partners LLC, of which our executive officers Mr. Baird and Mr. Coke were managing partners and co-founders, contributed its fixed assets to us at their net book value of approximately $240,000. In exchange for the contribution of these fixed assets, we issued to Terreno Capital Partners LLC 12,000 shares of our common stock. These shares were subsequently distributed to each of Mr. Baird and Mr. Coke.

 

Other Benefits to Related Parties and Related Party Transactions

 

We used approximately $272,000 of the net proceeds of our initial public offering and the concurrent private placement to reimburse Terreno Capital Partners LLC for out-of-pocket expenses it incurred in connection with the formation of our company and our initial public offering. We also used $1,000 of the net proceeds of our initial public offering and the concurrent private placement to repurchase the shares of our common stock that Mr. Baird and Mr. Coke acquired in connection with the formation and initial capitalization of our company.

 

Private Placements

 

Concurrently with the completion of our initial public offering, Mr. Baird acquired 250,000 shares of our common stock for an aggregate purchase price of $5.0 million and Mr. Coke acquired 100,000 shares of our common stock or an aggregate purchase price of $2.0 million in a private placement at the same price per share of $20.00 as in our initial public offering but without payment of any underwriting discount.

 

The table below sets forth, as of February 28, 2011, the number of shares of our common stock which were owned beneficially by:

 

 

Unless otherwise indicated, the address of each of the individuals listed in the table is c/o Terreno Realty Corporation, 16 Maiden Lane, Fifth Floor, San Francisco, CA 94108.

The number of shares beneficially owned by each individual or group is based upon information in documents filed by such person with the SEC. Percentage ownership in the following table is based on 9,292,169 shares of common stock outstanding as of the close of business on February 28, 2011. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or dispositive power with respect to the securities.

 

 

 

 

 

Our bylaws currently provide that in order for a stockholder to nominate a candidate for election as a director at an annual meeting of stockholders or propose business for consideration at such meeting, written notice accompanied by the information and other materials specified in our bylaws generally must be delivered to our corporate secretary not later than the close of business on the 120th day, and not earlier than the 150th day, prior to the first anniversary of the date of the notice for the preceding year’s annual meeting. Accordingly, a stockholder nomination or proposal intended to be considered at the 2012 annual meeting of stockholders, but not included in our proxy statement, generally must be received by our corporate secretary after October 12, 2011, and prior to 5:00 p.m., Eastern Time, on November 12, 2011. If the 2012 annual meeting of stockholders is scheduled to take place before April 18, 2012 or after June 17, 2012, then notice must be delivered no earlier than the 150th day prior to the 2012 annual meeting of stockholders and not later than the close of business on the later of the 120th day prior to the 2012 annual meeting of stockholders or the tenth day following the day on which public announcement of the date of the 2012 annual meeting of stockholders is first made by the Company. If the number of directors to be elected at the 2012 annual meeting of stockholders is increased, and there is no public announcement of such increase before November 2, 2011, then notice of nominees for any new positions created by such increase must be delivered not later than 5:00 p.m., Eastern Time, on the later of November 12, 2011 and the tenth day after the day on which public announcement of such increase is first made by the Company.

 

The date by which we must receive stockholder proposals for inclusion in the proxy materials relating to the 2012 annual meeting of stockholders, or for presentation at such meeting, is November 12, 2011. Stockholder proposals must comply with all of the applicable requirements set forth in the rules and regulations of the SEC, including Rule 14a-8.

 

Stockholder proposals should be mailed to the attention of our corporate secretary, and copies of the advance notification requirements may be obtained from, our corporate secretary at 16 Maiden Lane, Fifth Floor, San Francisco, CA 94108. A copy of our bylaws may be obtained from our corporate secretary by written request to the same address.

 

Copies of our 2010 Annual Report, financial statements and Form 10-K for the period from February 16, 2010 (commencement of operations) to December 31, 2010, as filed with the SEC, may be obtained without charge by contacting Terreno Realty Corporation — Investor Relations, 16 Maiden Lane, Fifth Floor, San Francisco, CA 94108.

 

Our board of directors knows of no other matters that may properly be presented for stockholder action at the 2011 annual meeting of stockholders, other than procedural matters relating to the proposals disclosed in this proxy statement. If any other matters are properly presented at the meeting for action, the persons named in the proxies will vote upon such matters in accordance with their discretion.