Terreno Realty Corporation (TRNO) is an industrial REIT and has carved a niche for itself in this segment thanks to its focus on identifying and acquiring underrated properties. The REIT is mainly operational in six states with high rent growth potential and restricted supply side. It features broad product opportunity and has different property types in its portfolio. Terreno Realty further ensures that its properties are flexible in nature and thus able to cater to different types of customers. The REIT also has strong sub market focused approach where it concentrates on supply side characteristics of the market.
Terreno Realty characterizes itself with its “Six Market Strategy” implying that it focuses on six coastal markets in the United States. These markets are Northern New Jersey/New York City, Washington DC, Miami, San Francisco Bay Area, Los Angeles and Seattle. NJ/New York City region has the highest share in the portfolio with a 30.9 percent share, while San Francisco and Los Angeles are second and third with 16.9 percent and 16.5 percent, respectively. Overall, Terreno Realty has 220 buildings occupying 13.3 million square feet of area.
Coming to its strategy of submarket focus, it is easy to see how the REIT makes use of its insights. 30 percent of Terreno Realty’s portfolio consists of submarkets with shrinking supply. This type of submarket provides plenty of opportunities to upcycle existing buildings. 56 percent of the REIT’s portfolio is in No Net New Supply submarkets. These are the markets which mainly consist of older existing industrial buildings which can now be converted for modern use. Remaining portfolio of Terreno Realty is in New Supply submarkets where there is supply of undeveloped land for greenfield projects.
Source: Company Website
Apart from careful positioning of its portfolio, Terreno Realty also focuses on proper utilization of its capital by carrying out constant recycling. Its main value creation strategy is in regard to redevelopment and leasing of properties while it also focuses on real estate with below market rate rents. With its ability to convert undervalued assets into stabilized real estate, the REIT is in a position to generate higher value for its investments.
Source: Company Website
The REIT also ensures that it has a proactive investment approach where it quickly gets out of unprofitable assets, deploying capital into more lucrative channels. During the fourth quarter, the REIT acquired three industrial properties comprising of two buildings. While these buildings are spread across 91,000 square feet, it also acquired one improved land parcel of 0.9 acres. The REIT spent $21.6 million on these acquisitions. For the entire year of 2019, the REIT acquired 13 industrial properties consisting of 17 buildings and four improved land parcels spread on 22.6 acres. The company’s tab for these acquisitions stood at $273.6 million.
Terreno Realty’s expertise lies in identifying under-utilized and under-valued properties and then converting them into high yielding real estate by carrying out extensive value addition. The REIT also focuses on recognizing the causes of undervaluation. In most of the cases, the undervaluation is caused by either outdated design and facilities or by short-term leases. Terreno Realty takes appropriate measures to remove such impediments and derive higher valuation.
The company recently reported its full-year operational results. The REIT announced its annual revenue at $171.022 million, up from $151.657 million it had reported for the previous year. Its net income available to common shareholders stood at $56.165 million, down from $62.888 million for the last year. On per share basis, the net income dipped from $1.09 to $0.85. However, when it comes to assessing REITs, the most appropriate criterion for determining the investment potential is to check its Core Funds from Operations. Terreno Realty’s core FFO for 2019 stood at $1.39, surpassing previous year’s figure of $1.30 per share.
Terreno Realty also has a strong balance sheet with investment grade credit rating. This is an important feature as it allows the REITs to obtain credit on more favorable terms. Such credit is vital for funding growth and acquisitions. Through such value propositions, the REIT has been able to provide 13.7 percent compounded annual total return to shareholders since its IPO in 2010.
Coming to key financial ratios for the REIT, let’s have a look at the company’s important metrics such as fixed charge coverage and interest coverage. For the year ending on December 31, 2019, the REIT had interest coverage ratio of 7.2x, a vast improvement over the 5.7x coverage it had reported for the previous year. Interest coverage ratio denotes the company’s ability to service its interest liabilities pertaining to its debts.
Terreno Realty improved its fixed charge coverage ratio from 5.0x a year earlier to 6.0x now. Terreno Realty also showed slight improvement in its Total Debt to Adjusted EBITDA ratio. For the FY 2019, the ratio stood at 4.1x which is in line with industry average and is a slight improvement over the 4.2x ratio it had reported a year earlier.
REIT investments are generally picked for their income generating potential in the form of dividend payments. Terreno Realty declared its latest quarterly dividend at $0.27 per share. Apart from making regular dividend payments, the REIT offers steady growth as well.
Source: Company Website
The REIT currently offers a dividend yield of 1.74 percent, which is on the lower side as compared to the yields offered by its peers. However, the company has steady dividend growth and payment record which makes up for the low yield. Further, the company’s dividend payout ratio of 73.91 percent is also encouraging as it shows that Terreno Realty has plenty of room to grow its dividend further.
Terreno Realty’s stock has shown strong performance in the market. It has registered over 50 percent growth in the past 12 months. With its ongoing robust operational performance, the stock is expected to retain its positive trajectory. However, as it is currently trading close to its 52-week high, investors may have to wait for some meaningful pullback for creating a medium- to long-term position.
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