This is a REIT that Reached Multiple Above 30

chart01Terreno Realty is one of our favorite industrial REITs, which has hit greater and higher high after June’s REIT rally. The stocks that are a part of the industrial sector have advanced an average of 7% in July while also appreciating by more than 33% year to date. This is seen especially in Terreno, which has reached a multiple 37 times AFFO. This is one the highest, if not the highest multiple among the industrial REITs.

Despite Terreno’s minimalistic management reporting of results, we are able to pull up their 10-Q and July presentation. From this, we are able to see that both the REIT and the sector are still performing very well. In the Q2, the same store NOI grew by 3% on a GAAP basis and up to 5% on a cash basis. However, its funds from operations, which are equivalent to earnings for REITs, has decreased on absolute terms and on a share basis.

An increase in G&A expenses that are associated with long-term incentive plans explains a significant portion of the FFO drop. This company advocates for share award incentive for its executives. Over a pre-established performance measurement period, the total shareholder returns of the Company’s common stock are taken and compared to the total shareholder return of key indices. Which means that the June rally helped to boost their incentive compensation.

In summation, the new highs have had it almost impossible to consider this stock as a buying opportunity. But if you have some its shares already, it is a good idea to hold onto them, for a potential sell opportunity. You might consider cash in (like the management just did) if you think the Fed will negatively influence REITs this year. With the high institutional ownership of the stock, it is very unlikely that an investor will be able to make any sharp gains from any sharp dips. The most sensible action to take for this stock is to just sit back and monitor it.

Source: Terreno Realty Corp.(NYSE:TRNO), Fast Graphs

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author is long FCH, XHR, CLDT, PEB.

Will STAG Industrial Lose Steam Again?

chart01Excitement and disappointment can certainly help explain the ups and downs of STAG Industrial, a small cap industrial REIT. Since reaching its 52-week low on 11 February, STAG Industrial has rallied by 26%, exciting investors again and making them wonder if the company will eventually realize its full net asset value. This is not STAG’s first boom in recent months. Will it lose steam again like it did last December?

Despite releasing solid Q4 results this February, STAG did not demonstrate something significant enough to justify this rally. Core FFO increased by 8% and occupancy advanced by 70 basis points reaching 95.6%. Some good metrics remained, such as total debt to total enterprise value around 40% and AFFO dividend payout below ratio 90%. Rent change and retention percentages decreased, although it held up well throughout 2015.

chart02The truth most definitely hurts – STAG is not in the same class as Terreno Realty or Rexford Industrial. STAG’s AFFO multiple has been averaging 12x, while Terreno has enjoyed a 27x, and Rexford is at 18x. In comparison, STAG is relatively cheap. That being said, I would be completely surprised if STAG ever reaches that high level of AFFO multiple.

What bothers me the most is that many investors tend to paint a stock into something that it is not. As a matter of fact, whenever STAG is mentioned, the very first thing that I think about is the word “risk.”

Although it may sound good when the company states that they invest in unexplored secondary and tertiary markets, they simply are not as robust as the primary markets. Also, some investors argue that STAG has a diversified portfolio; however, their properties are still contained within those same secondary and tertiary markets. They are certainly riskier, and do not have the same level of liquidity.

chart03As a potential investor, you need to ask yourself why STAG mostly invests in one hundred percent occupied assets. The management knows that their investment strategy is risky. Their attempt to reduce that risk is to invest in one hundred percent vetted properties, especially single-tenant properties (that can be either 0% or 100% occupied). STAG is paying the extra money to invest in fully occupied units as a measure to ensure the attractiveness of the properties. In addition, this investment strategy explains why the company does not develop properties from scratch.

From my point of view, STAG’s investment strategy is the exact opposite of a famous real estate adage that states “buy the worst homes in the best neighborhoods.” Technically speaking, there is nothing wrong with buying the best properties in underdeveloped markets, it is simply a method to flee away from overcrowded markets and avoid fighting other investors over a few good deals. However, this means that they need to take additional precautions, which have certainly been visible in their strategy.

Although the company has a good dividend yield, they don’t have enough history of similar or increasing dividends to rate it as a consistent dividend stock (for us, at least five-year history). After periods of boom and bust and a slowdown in the company’s growth, I placed it as speculative.

Source: STAG Industrial, Inc.(NYSE:STAG), Terreno Realty Corp.(NYSE:TRNO), Rexford Industrial Realty, Inc(NYSE:REXR)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Does Terreno Mean ‘Premium’ Territory?

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From a dividend generation standpoint, Terreno Realty Corporation (NYSE:TRNO) was our best performing industrial Real Estate Investment Trust (REIT) in Q2. The company continues to show positive figures into Q3, especially the metrics associated with cash flow generation and profitability continuing to line up with the previous quarter’s numbers. Few metrics, such as occupancy, have decreased. Please review our Q3 versus Q2 comparison as listed above.

Terreno’s revenue, FFO per share, and dividend per share have shown two-digit growth, although their portfolio occupancy decreased from 94.4 to 90.2 percent (Q2 vs.Q3). The same thing occurred to the company’s same store occupancy due to 271,000 square feet of vacancy at the Interstate properties in the New Jersey/New York market. This is one of the six markets that company operates in. In addition, there are 85,000 square feet of unoccupied space at property that is being held for sale.

Terreno’s stock ($TRNO) has performed particularly well with a return of 6.4 percent year to date. The median sector return is a paltry negative 3.6 percent. The company’s dividend yield reports in at 3.3 percent for a 3.7 percent sector median. When all is said and done, a total return of 8.7 percent is fairly good when compared to the major indices.

Terreno Realty Corporation maintains an aggressive acquisition spree, although it has decreased a bit from previous years. This year they have added 1.8 million square feet which contributed to a 13 percent net increase in overall size. Last year Terreno grew more than one third in size. Management reaffirmed their intermediate goal to triple their US$1 billion assets in a letter to shareholders earlier this year. They plan to fund this with two thirds equity and one-third debt.

We were approached by several readers regarding the high valuation of the company. Terreno has definitely entered into premium territory with a price-to-FFO of 24x in a category where the sector median is at 18x. In addition, the company’s dividend yield of 3.3 percent is slightly below the median. Due to Terreno’s recent performance and aggressive growth goals, we believe that the company will remain in this territory for the long run.

Stay tuned! Our US equity REIT ranking is finally close to release.

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.