Is Terreno Realty Corporation (NYSE:TRNO) A Healthy REIT?

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Terreno Realty Corporation is a US$2.9b mid-cap, real estate investment trust (REIT) based in San Francisco, United States. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of TRNO is unique and it has to adhere to different requirements compared to other non-REIT stocks. In this commentary, I’ll take you through some of the things I look at when assessing TRNO.

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A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT’s main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much TRNO actually makes from its day-to-day operations, compared to net income, which can be affected by 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.

NYSE:TRNO Historical Debt, May 28th 2019
NYSE:TRNO Historical Debt, May 28th 2019

In order to understand whether TRNO has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take TRNO to pay off its debt using its income from its main business activities, and gives us an insight into TRNO’s ability to service its borrowings. 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.

I also look at TRNO’s interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it’s better to use FFO divided by net interest. With an interest coverage ratio of 4.26x, it’s safe to say TRNO is generating an appropriate amount of cash from its borrowings.

I also use FFO to look at TRNO’s valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. TRNO’s price-to-FFO is 36.78x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

Next Steps:

In this article, I’ve taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. Terreno Realty can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:

  1. 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.
  2. 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.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.