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Is Terreno Realty a Buy?


Dec 18, 2020 by Marc Rapport
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Real estate investment trusts (REITs) are a varied lot, and there are a lot of them and a lot of reasons to invest in them. Depending on the niche they're in, their business can be cyclical, but their very nature makes them less prone to stock market swings than, say, a pure play like an oil drilling firm or airline.

The coronavirus pandemic, of course, has produced a market disruption like no other, with the overall market's spring plunge followed by a remarkably swift recovery in a number of sectors. Among those, and one that's showing considerable promise now and going forward in the eyes of many investors, is the family of industrial REITs.

These companies acquire and operate facilities they rent to tenants for a wide variety of uses, including as distribution centers and warehouses. The rise of e-commerce in general, and then its spike during the pandemic, has driven demand for such space, and it shows in their overall performance. For instance, Nareit says the 14 REITs it includes in the industrial vertical have posted a year-to-date return of 9.81%, with a dividend yield of 2.55% as of Nov. 30.

Terreno Realty: Flexible space in a highly defined market

Each of those REITs has its own industry and geographic concentrations: some wide and diverse, some quite narrow. The latter includes Terreno Realty (NYSE: TRNO), a San Francisco-based REIT that buys, owns, and operates industrial real estate in six major coastal U.S. markets.

Terreno says it currently owns about 220 buildings encompassing 13 million square feet, occupied by 476 customers. The markets it serves are Los Angeles, northern New Jersey/New York City, the San Francisco Bay Area, Seattle, Miami, and Washington, D.C., and it serves those markets in a very direct fashion.

"No complex joint ventures," the company says in a description of its strategy included in its third-quarter investor presentation. "No greenfield development." The REIT also has a presence in submarkets where physical and regulatory constraints hinder new competition from arising.

Terreno's mix of core and value-add investments is 82.3% committed to warehouse and distribution operated as functional, flexible assets adjacent to transportation infrastructure and targeted to submarket tenant demands, including last-mile distribution, a growing imperative in today's e-commerce market.

Terreno Realty by the numbers

Terreno Realty has weathered the pandemic well. In its third-quarter report, the company said its available space was 97.3% leased at the end of the quarter. The company also grew same-store net operating income (NOI) by 16.6% from the year-ago quarter and funds from operations (FFO) by $0.02 from third quarter 2019, to $0.38.

Terreno Realty is currently trading in about the middle of its 52-week range of $42.12-$64.24, and as of the Dec. 14 market close of $55.43, it had a one-year total return of 5.32%. Its yield at a midday Dec. 15 price of $55.58 was 2.08%. Terreno raised its dividend 7.4% to $0.29 per share for the quarter ending Sept. 30, 2020 and repeated that payout for the final quarter of the calendar year, continuing a 10-year streak of steadily rising payouts.

The company also reported a cash balance of $155.3 million and zero drawn on its $250 million credit facility. No debt or liquidity problems to see here.

The Millionacres bottom line

Terreno Realty is, in fact, on a buying tear, announcing the acquisition of nine properties in 2020 alone, as well as a series of new, long-term leases and redevelopments.

And while its portfolio -- 476 customers, 13 million square feet -- is dwarfed by the likes of, say, the largest industrial REIT Prologis (NYSE: PLD) with its 4,655 buildings, 963 million square feet, and 5,500 customers in 19 countries, there's something to be said for small here.

The company's focus on flexible, functional warehouse and distribution space located at crucial spots where large populations meet high-volume distribution centers seems to position it for steady performance through good times and bad.

Terreno also has a growing record of solid payouts and steady growth and is investing heavily in itself in focused markets that may be poised to do very well in an economic recovery and a new normal: for instance, the final steps from arriving imports to last-mile distribution.

If it makes sense to you, too, Terreno Realty is definitely worth considering as a buy, especially for a long-term hold or retirement portfolio.

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Marc Rapport has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.