Most retirees highly favor stocks that can generate steady income. Because of that, real estate investment trusts (REITs) can be a good fit since these companies tend to pay consistent dividends. However, not all REITs deliver on that aim, so retirees need to do their homework before adding a new one to their portfolios. Here's a look at whether industrial REIT Terreno Realty Corporation (NYSE: TRNO) has the right traits to make it a good fit for a retirement portfolio.
What makes a good retirement stock?
A model retirement investment pays a bankable income stream, ideally one that grows over time. To deliver on that objective, a company needs to generate a steadily growing cash flow stream. Three factors help support that goal:
- An investment-grade balance sheet: By having a strong credit rating, a company has more funding flexibility, especially during more challenging market conditions.
- A conservative dividend payout ratio: By retaining more free cash, companies have the additional financial flexibility to expand their operations.
- Operating in a growing market: Companies can't grow their dividends if they're unable to expand their operations.
Terreno Realty vs. the ideal retirement stock
Terreno Realty has been an excellent dividend-paying stock over the years. The industrial REIT has grown its payout each year since it initiated one in 2011, expanding it at an impressive 11.9% compound annual rate. It currently yields right around 2%, which, while above average compared to stocks in the S&P 500 (the average yield is 1.7%) is about half the rate of the average REIT (which yields 3.7% on average).
The company's strong financial profile plays a direct role in its ability to consistently grow its dividend. The REIT has an investment-grade balance sheet backed by a conservative leverage ratio of 3.7 times debt-to-EBITDA and $148.3 million of cash at the end of the second quarter. It also has a reasonable dividend payout ratio of less than 85% of its FFO. These factors provide it with the financial flexibility to expand its operations so it can grow its FFO and dividend.
Terreno Realty has a unique approach to growth compared to its industrial REIT peers. It focuses on owning a highly concentrated portfolio of industrial real estate in six major coastal markets. It expands by acquiring existing properties in those six markets that it either holds or redevelops. Unlike some peers, it doesn't engage in greenfield development (i.e., ground-up construction) or complex joint ventures.
Redevelopment projects have been a significant source of growth for the company over the years. Since its IPO in 2010, two-thirds of its acquisitions have been on properties where it subsequently made value-add investments. One recent example was the 2018 purchase of a property in Seattle for $12.6 million. The company invested $15.9 million to redevelop the property, which enabled it to secure a seven-year lease with a new tenant at an attractive 5.1% cap rate on the total investment.
The industrial REIT believes it will have no shortage of opportunities to continue with that growth strategy thanks to the fast-paced expansion in e-commerce. Further, the supply of industrial buildings in most of its core markets has been shrinking because older products are getting demolished and replaced with other property types. With the demand for industrial space high and supply low, Terreno's redevelopment strategy should continue paying dividends.
Terreno Realty has all the traits retirees desire
Terreno Realty has been an excellent stock for retirement-focused investors since its IPO about a decade ago because it has steadily increased its dividend. That trend seems poised to continue because the industrial REIT has the financial and growth profiles needed to keep growing its FFO, which would support additional dividend increases. About the only drawback to the stock is that it trades at a lower yield compared to other REITs. However, it still has all the characteristics a retiree would want in a retirement stock, making it an ideal fit for that type of portfolio.