Terreno Realty Corporation is a US$3.3b mid-cap, real estate investment trust (REIT) based in San Francisco, United States. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. I’ll take you through some of the key metrics you should use in order to properly assess TRNO.
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Funds from Operations (FFO) is a higher quality measure of TRNO’s earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For TRNO, its FFO of US$78m makes up 69% of its gross profit, which means the majority of its earnings are high-quality and recurring.
TRNO’s financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky TRNO is, broadly speaking, to have debt on its books. The metric I’ll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 17%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take TRNO 5.95 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.
Next, interest coverage ratio shows how many times TRNO’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 4.26x, it’s safe to say TRNO is generating an appropriate amount of cash from its borrowings.
In terms of valuing TRNO, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. TRNO’s price-to-FFO is 42.84x, compared to the long-term industry average of 16.5x, meaning that it is highly overvalued.
Next Steps:
Terreno Realty can bring diversification into your portfolio due to its unique REIT characteristics. Before you make a decision on the stock today, keep in mind I’ve only covered one metric in this article, the FFO, which is by no means comprehensive. I’d strongly recommend continuing your research on the following areas I believe are key fundamentals for TRNO:
- Future Outlook: What are well-informed industry analysts predicting for TRNO’s future growth? Take a look at our free research report of analyst consensus for TRNO’s outlook.
- Valuation: What is TRNO worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether TRNO is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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