Is Terreno Realty a Buy?
Terreno Realty (TRNO -3.56%) stock has been beaten down this year — and it’s still kind of expensive. Yet this small-warehouse specialist is still a buy. Especially for me.
The reason I say “especially for me” is that I first bought this real estate investment trust (REIT) last year while it was near the crest of a wave of share price acceleration fueled by intense demand for warehouse space that was driving vacancies to new lows and rents to new highs.
Then 2022 happened. Now, the group of 13 publicly traded industrial REITs tracked by trade group Nareit has posted a year-to-date total decline of 23% or so. This after a 2021 during which the same group soared by 62%. Terreno specifically is down about 28% year to date.
Even after that dip, Terreno stock is still trading at a price-to-funds-from-operations (P/FFO) ratio of about 33. That’s a much richer valuation than, say, Prologis (PLD -4.04%) — the largest of all industrial REITs, which now trades at a P/FFO of about 17.
Terreno stock is now trading at about $61 a share and at that share price yields about 2.2% after 10 straight years of annual dividend increases that helped its total return sharply outpace S&P 500 in total return since the company went public in 2010.
TRNO Total Return Level data by YCharts
The fundamentals are in place for a potential rally
The fundamentals of the business could support the resumption of that kind of strong performance , so this seems like a good time to consider buying this growth-and-income play. In my case, I’m looking to add to my stake so I can benefit from dollar-cost averaging , in which you minimize risk by buying shares at different prices over time, in this case as Terreno’s share price rises.
I believe that will occur. Terreno has a solid position in its niche, owning a collection of 256 small warehouses and 37 leasable improved land parcels tucked away in areas of growing demand and limited supply: infill areas located near ports, rail access, and key highway intersections in the Los Angeles, northern New Jersey and New York City, San Francisco Bay area, Seattle, Miami, and Washington, D.C., markets.
Those logistics properties serve as primarily last-mile logistics sites, but are also used as light industrial and research and development spaces for about 560 customers, among them FedEx, Northrop Grumman, and the federal government.
Image source: Getty Images.
Notice one name that’s not on that list: Amazon. Recent revelations that the e-commerce powerhouse has excess distribution space, some of which it now may be subleasing, added some headwinds to the industrial space market, but ultimately, those should not affect Terreno. That kind of warehouse is not in its wheelhouse.
Terreno also is on an impressive acquisition spree. It announced seven purchases in the past two months, and is being led by a team of senior managers with long experience in building portfolios of industrial properties. For instance, before they co-founded Terreno in 2007, Chairman and CEO Blake Baird and President Mike Coke had top jobs at the REIT that later became Prologis.
Management’s interests are aligned with those of shareholders
They’re not alone. Its two executive vice presidents have been with Terreno since it went public. Also, its senior management and directors now own about $120 million worth of its common stock, giving them a fair amount of skin in the game.
“Terreno’s executive management team and Board of Directors are highly aligned with our shareholders,” the company says on its website. “Our incentive compensation is based on total return to shareholders and paid with stock.”
Total return, of course, is a function of both share price and dividend payout, and Terreno’s record of growing its FFO — and its payout ratio of about 73% based on that cash flow — point to its ability to sustainably raise the second half of that equation, making it even more attractive as an income stock.
TRNO Funds from Operations (TTM) data by YCharts
In sum, while the level at which I first bought Terreno stock may look now like a moment of what a former Fed chair might call “irrational exuberance,” I do think that this REIT — with its growing portfolio of in-demand, hard-to-replicate, right-sized logistics properties, and a management team focused on growth and returns — is a buy, especially for long-term investors.
