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Industrial real estate investment trust (REIT) Terreno Realty (NYSE: TRNO) knows exactly what it wants to do. That focus gives it the opportunity to dig in and create value for customers and investors. Although the yield is a tiny 2% or so, this relatively young REIT is growing fast and could help dividend growth investors build a million-dollar nest egg. Here are the important takeaways.
1. Young and finally tested
Terreno Realty's initial public offering was in 2010, after the deep 2007 to 2009 recession. That means the industrial-focused REIT doesn't have the experience of some of its larger peers that have been around longer. Notably, it hadn't been tested by severe adversity until 2020. But it flew through the year without skipping a beat.
Quarterly occupancy never fell below 96%, even during the worst of the coronavirus pandemic. It only offered rent deferrals to 2.8% of its rent base, and of that total, only 0.4% have defaulted. And, in a sign of strength, the REIT increased its dividend in the third quarter of 2020.
2. Focus, focus, focus
Terreno's success is at least partly driven by a strict focus on six markets: Seattle, San Francisco Bay, Los Angeles, New York/New Jersey, Washington D.C., and Miami. These are population-dense areas with high barriers to entry and, often, little new industrial development. In fact, in some of these locals, industrial assets are being torn down to build other types of buildings, increasing the value of the industrial assets that remain.
The REIT's core portfolio is warehouse properties. It looks to buy assets at below-replacement cost and adds value by upgrading buildings to more modern specifications. It's also an active investor, willing to sell assets so it can use that cash to invest in new opportunities in its core markets.
3. Not a yield play
This so-far successful approach has resulted in a dividend increase every year since 2011, when the REIT paid its first dividend. Assuming no dividend cuts, 2021 will give the company a 10-year long streak of annual hikes. The average annualized increase since 2011, meanwhile, is a hefty 11%. For comparison, industry giant Prologis (NYSE: PLD) has increased its dividend at a roughly 7.5% annualized rate over the past decade and only has a seven-year increase streak going at this point.
Terreno's dividend streak and swift rate of increase are the two most compelling factors for long-term, dividend-growth investors. It's what will drive investor return. But investors recognize the growth rate and have bid the stock up accordingly, with Terreno's yield sitting near 2%, not much more than you'd get from an S&P 500 Index fund. So this is a dividend growth play, not an income play.
4. Some caveats
Dividend growth investors looking to build wealth will probably like Terreno's story at this point. But it's important to recognize some negatives here. For example, at a roughly $4 billion market cap, the REIT is small. For comparison, Prologis' market cap is $76 billion. That means that it has been expanding off a very small base, which is much easier to achieve because relatively small acquisitions will have a greater impact on the portfolio. It can also focus on opportunities larger competitors simply wouldn't bother with, so its competition isn't as fierce as it could be. Right now, these factors are net benefits, but as Terreno grows, it will take more to drive growth than it has in the past.
Meanwhile, that low yield is partly driven by Terreno operating in a hot sector. Industrial assets have been benefiting from the shift toward online shopping and even got a boost from the pandemic, as consumers were forced to shop from home. Although the long-term trend of increasing digital commerce isn't over, at some point the sector may not be quite as favored. It doesn't mean the REIT's growth will suddenly slow, but valuations may change. Right now, however, it's still full steam ahead.
Not for everyone, but still attractive
Investors looking to maximize current income won't be interested in Terreno and its miserly 2% yield. However, those looking to maximize dividend growth should do a deep dive. It's a niche name in the industrial space with a very focused approach, but so far, that's been a profitable opportunity, given the company's well-executed gameplan.
Although long-term success could slow the company's growth, there's no reason to think that Terreno's positive trajectory is going to change drastically at this point in time. And that means it could help you create the million-dollar portfolio you dream of owning.
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