Buying better: Terreno Realty versus Prologis

The intense demand for industrial space in America is no big secret. New research from the commercial real estate services giant Jones Lang Lasalle indicates that the vacancy rate fell below 3.8% nationally for the first time. Nearly half a billion square feet of new space is under construction.

Competition for existing space has driven rents up – the JLL report says they’ve risen 11.3% since the end of 2020. Landlords of these spaces have made big money, including trust shareholders Real Estate Investment Trusts (REITs) that own and operate such properties.

The National Association of Real Estate Investment Trusts (NAREIT) has 13 publicly traded companies in the industrial REIT sector and claims to have posted a total return of 47.11% in 2021. This same group is down about 14% heading into this month since the start of the l year, which is now a good time to consider good business in this sector.

Let’s look at two. Prologis (PLD -0.16% ) is a global operator and among the largest of all REITs, regardless of sector. The other is much smaller and specializes in US coastal markets: Terreno Realty ( TRNO 0.07% ).

What’s the best buy now? We’ll take a look.

Image source: Getty Images.

David and Goliath share a hometown

Both Terreno and Prologis are based in San Francisco. Prologis has a portfolio of approximately 4,700 logistics properties in 19 countries on four continents. It has approximately one billion square feet of space and 5,800 customers across two broad categories: B2B fulfillment and retail/online.

Terreno has a portfolio of approximately 250 buildings and 15.1 million square feet and 36 other improved parcels of land which it leases for storage space and which could be developed. Its market is geographically limited to Los Angeles, northern New Jersey and New York, the San Francisco Bay Area, Seattle, Miami and Washington, D.C., and areas near logistics hubs such as ports and the main rail and road arteries.

Both companies are focused on growth, steadily adding to their portfolios, and both have similar stock performance.

Prologis, with a market capitalization of around $118 billion, has increased its dividend for nine consecutive years and currently yields around 1.98%. Its payout ratio is modest at 57.4% based on estimated 2022 earnings. Terreno has also increased its dividend for nine consecutive years and is now yielding approximately 1.88% with a payout ratio of 63% based on earnings. estimated profits for 2022.

REITs make good long-term investments and are generally viewed more as an income than a growth game. Both of these companies have done very well in terms of total return, far outpacing the market as a whole.

PLD Total Performance Level Table

PLD Total Return Level data by YCharts.

Terreno dipped more than Prologis, giving him the nod

Now let’s look at their stock prices. As the chart below shows, Prologis and Terreno shares have struggled so far this year, as has the broader market. Prologis has rallied lately and has less ground to make up than its smaller rival.

PLD Chart

PLD data by YCharts.

This ground to catch up encourages me to give the nod to Terreno. Both companies are deeply committed to a sector that is expected to have years to run as supply chain capacity catches up with demand. Both have already shown that they can meet this demand efficiently and profitably.

Their performance and prospects seem so similar that the share price alone can be a deciding factor, and right now Terreno looks more unnecessarily downcast to me than Prologis. This profit-taking after a strong 2021 creates a new buy-and-hold opportunity now for either of these companies, but I’ll take the little guy right away. I have already. I’ve owned shares of Terreno for about a year now and will probably add to that stake.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.