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.

Which is Performing Better, First Industrial or Terreno Realty? (Part 2/2)

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Click here if you haven’t read Part 1.

First Industrial and Terreno Realty have been two of the few stocks in the industrial sector that performed in a positive manner year to date. For example, STAG Industrial has decreased by 22 percent this year, Terreno has returned a positive 6.4 percent and First Industrial has returned a positive 3.2 percent. Terreno’s total return is at 11 percent while First Industrial is at 7.1 percent, both strong figures.

Both companies have a strong debt profile. Although First Industrial’s total debt to total capitalization is greater than Terreno Realty’s (38 vs. 28 percent), they are within the sector range. Three credit agencies have rated First’s senior unsecured notes as investment grade.

This is what Standard & Poor’s said about First Industrial’s recent upgrade in September,

“We are raising our corporate credit rating on First Industrial to ‘BBB-‘ from ‘BB+’, driven by strong recent operating performance and improving credit metrics, which we believe are sustainable based on favorable industrial real estate demand.”

Also in September, Terreno closed a large private placement of $100 million in senior unsecured notes at average interest rates lower than First Industrial’s.

Investors have been underwhelmed by First Industrial’s lower dividend yield of 2.4 percent. This is not much greater than a ten-year yield, and is far below the sector median’s 3.7 percent.

On the other hand, First Industrial does have one of the most conservative dividend payouts in the segment. This translates into the fact that the company could easily position itself on par with their peers. First Industrial has kept their dividend payout to Adjusted FFO under 50 percent all along.

chart06In addition, First Industrial has shown generosity by increasing growth rates since it reinstated dividends in 2013. The Q3 dividend is 24 percent higher than the same quarter last year. Still, investors wonder whether management has failed to be generous enough. The company did not make any dividend distribution from 2009 to 2013.

In the end, we have yet to detect a clear winner, although our scorecard has shifted towards Terreno. If you are willing to take a larger risk for the potential reward of a higher yield, then Terreno may be the way to go.

Source: First Industrial Realty Trust (NYSE:FR), Terreno Realty Corporation (NYSE:TRNO), STAG Industrial (NYSE:STAG), Standard & Poor’s

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.

Which is Performing Better, First Industrial or Terreno Realty? (Part 1/2)

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Two industrial companies have surpassed expectations in our Q2 US equity REIT ranking. Without further ado, they are First Industrial and Terreno Realty. Please note that Prologis, the largest pure play REIT in the industrial sector, deserves attention from investors based on the company’s strength, tenant diversity, and robustness of their results.

chart02That being said we typically tend to explore additional options by highlighting companies that are outperforming their peers, regardless of size. That is why we featured Terreno Realty’s robust Q3 results last week. Today we will compare their results with First Industrial to answer the question of which company has performed better in Q3.

chart03Terreno Realty is certainly on the lower end of the small capitalization spectrum with a market cap of approximately $1.0 billion. In comparison, First Industrial enjoys a market cap of $2.4 billion, and has a larger footprint with 629 properties containing 64 million square feet in gross leasable area. Terreno owns 141 properties with a total of 11 million square feet.

Regarding location, First Industrial’s top three markets, as calculated by rental income, are Southern California, Pennsylvania, and Chicago representing about 30 percent total. On the other hand, Terreno has a far more concentrated portfolio because they focus on six major coastal markets only. All of the company’s properties have been distributed within those markets, with Northern New Jersey/New York City and Washington, D.C./Baltimore accounting for almost half. Both REITs tend to invest in warehouses.

chart04Both companies have been performing well in different areas due to their size and life stage. For example, Terreno’s year over year growth in revenues has been at an extraordinary level, showing 46 percent in Q2, and 37 percent in Q3 respectively. The company also has a strong FFO per share growth, which is one of the metrics that is closely related to dividend distribution potential. Terreno has been on an acquisition spree recently that is comparable to STAG Industrial’s. They plan to become as large as First Industrial in the mid term.

First Industrial has enjoyed a more tamed approach to their revenue growth rate that falls between 7 and 8 percent in Q2 and Q3 (year over year), but a stronger FFO per share growth rate and increased dividends. The company mainly invests in development along with a few selected acquisitions. Terreno does not engage in ground up development.

To be continued…

Source: First Industrial Realty Trust (NYSE:FR), Terreno Realty Corporation (NYSE:TRNO)

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.