BUY (TRNO, $20.12)
Lowest Risk Operator with Best Asset Base - Initiating With a BUY Rating and $23.50 Price Target
July 28, 2015
John R. Benda
Investment Conclusion. We are initiating coverage of Terreno Realty Corporation with a Buy rating and $23.50 price target. In real estate you make money when you buy right, and to say that TRNO timed the market favorably in terms of acquisition date and price paid for its assets is an understatement at the very least. In the industrial REIT space of 8 operators, TRNO has arguably one of the best portfolios in the business from a vintage standpoint, as 53.5% of its portfolio was acquired between 1/1/10 and 12/31/12, the bottom pricing of the industrial real estate market according to the Moody’s / Real Capital Analytics Commercial Property Price Index (“CPPI”). Further, TRNO has the most conservatively leveraged balance sheet in the industrial REIT universe, meaning that there is only upside to be had for equity returns should management choose to attach additional leverage to its real estate portfolio. When TRNO completed its initial public offering in February 2010, it was an opportunistic investment vehicle for investors, an IPO of a firm with $0 assets at the time aimed solely to take advantage of the crash in industrial real estate, which according to some indices, happened a single month earlier. TRNO has the right portfolio, acquired at the right time, with the right growth opportunities. Our $23.50 price target implies an annual total return, including the current 3.18% dividend yield, of 20.3% at TRNO’s 7/24/15 closing stock price of $20.12.
Source: Capital IQ, Company reports, National Securities Corporation Estimates
Portfolio Entirely Composed of RE Purchased >2010 with $0.00 Legacy Assets. They say timing is everything in life, and to say that TRNO’s management timed the industrial real estate market nearly perfectly is an understatement. Impairments are the bane of any company’s financials, a negative revision of the carrying value of an asset reflecting a current market value being below carrying, which usually occurs in an environment of falling prices. The Moody’s / Real Capital Analytics Industrial Property Price Index reached its post-2008 recession low of 110.92 in January 2010, down 33.49% from a peak of 166.78 in October 2007, nearly a month to the day before TRNO’s priced its initial public offering. While some investors purchased various real estate assets the entire way down, TRNO’s timing was a cut above. As such, TRNO’s...
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