This 3%-Yielding Real Estate Stock Just Raised Its Dividend Again. Is It a Buy Before Its Next Raise?
Terreno Realty (NYSE: TRNO) flies under the radar of most investors. The industrial-focused real estate investment trust (REIT) is tiny compared to industry behemoth Prologis (NYSE: PLD). It owns 292 buildings in six U.S. markets compared to over 5,500 properties worldwide for the sector leader.
Because of its smaller size, many investors might have missed that the industrial REIT just increased its dividend again. That raise pushed its dividend yield closer to 3%, more than double the S&P 500's sub-1.5% yield and around Prologis' payout level. With more dividend growth likely, it looks like a great REIT to buy for those seeking an attractive and rapidly rising income stream.
The upward trend continues
Terreno Realty recently declared its latest dividend payment. The REIT bumped up its quarterly rate to $0.49 per share, an 8.9% increase from the prior level. That has continued the brisk growth in the REIT's dividend over the years. Since initiating a dividend in 2011, Terreno has grown its payout at a 12.7% compound annual rate. That's roughly in line with the dividend growth rate of sector leader Prologis, which has grown its payment at a 13% compound annual rate over the past five years.
A big driver of Terreno's hefty dividend growth is the growing demand for industrial real estate. The continued rise in e-commerce, on-shoring trends, and changing inventory management practices are driving robust demand for warehouse space. The REIT also focuses on high-demand coastal markets with strong fundamentals and limited supply. These factors have kept occupancy levels high while driving strong rent growth. Since its initial public offering, Terreno has delivered 11.3% compound annual growth in its cash same-store net operating income.
On top of its strong organic growth drivers, Terreno has completed a steady diet of acquisitions. It tends to target value-add opportunities where it can buy properties with redevelopment potential or land suitable for expansion. This strategy drives higher investment returns.
Positioned for continued growth
Terreno Realty is in an excellent position to continue growing its earnings and dividend at high rates. Its well-positioned portfolio focused on six coastal U.S. markets should continue benefiting from strong and growing demand. That should drive above-average occupancy levels and rent growth, which should continue pushing its same-store net operating income higher.
Meanwhile, the company has a lot of embedded growth potential within its existing portfolio from current development projects and its large land position. While Terreno doesn't have a large-scale greenfield development program like Prologis, it selectively invests in high-return projects to enhance its existing properties. Terreno is investing $185.2 million across nine development and redevelopment projects, such as constructing additional buildings on existing sites. Meanwhile, the company has 45 improved land parcels for future projects.
Terreno also has the financial flexibility to make acquisitions. It typically buys single properties across its six markets. For example, in August, it bought a vacant industrial property between two of its existing properties in Washington, D.C., for $7.6 million. Because it was vacant, the REIT got a good price on a property it will have no trouble leasing. It also bought a fully leased property in Alexandria, Va., for $84.3 million in April.
The REIT will also pursue larger portfolio transactions when those unique opportunities emerge. For example, it acquired a 28-building portfolio of properties in New York City, Northern New Jersey, San Francisco, and Los Angeles for $365 million earlier this year. That acquisition aligned with its geographic focus and its value-add strategy. While the acquisition's initial cap rate is rather low at 4.3%, the REIT expects the stabilized cap rate to increase to 5.8% based on current market rents that it will capture as existing leases expire, and it signs new ones at market rates.
Acquisitions provide the REIT with incremental income to support its growing dividend. They help enhance its already strong organic growth drivers.
A great dividend growth stock
Terreno Realty has a terrific record of increasing its dividend. That trend should continue in the future, given its laser focus on high-demand coastal U.S. markets and its steady investments to enhance and expand its existing portfolio. The REIT's strategy has paid big dividends for shareholders over the years, with 10.4% average annual total returns since its IPO, and should continue creating value for them in the future. That makes it a great stock to buy ahead of what will likely be many more dividend increases.
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Matt DiLallo has positions in Prologis and Terreno Realty. The Motley Fool has positions in and recommends Prologis and Terreno Realty. The Motley Fool recommends the following options: long January 2026 $90 calls on Prologis. The Motley Fool has a disclosure policy.
This 3%-Yielding Real Estate Stock Just Raised Its Dividend Again. Is It a Buy Before Its Next Raise? was originally published by The Motley Fool