Real estate investment trusts, or REITs, are well-known for their higher-than-average dividend yields. However, many investors don't realize the incredible long-term growth potential these companies are capable of. With that in mind, here are five large equity REITs that have tripled investors' money -- or more -- over the past decade.
Company | Symbol | Property Type | 10-Year Total Return | Annualized Return |
|---|---|---|---|---|
Digital Realty Trust | DLR | Data centers | 366.7% | 16.7% |
Public Storage | PSA | Self-storage facilities | 261.5% | 13.7% |
Realty Income | O | Retail (freestanding) | 253.9% | 13.5% |
American Tower | AMT | Communications towers | 244.4% | 13.2% |
Ventas | VTR | Healthcare | 225.2% | 12.5% |
S&P 500 Index | 97.8% | 7.1% |
Data source: Ycharts. Figures are as of 5/26/17.
Image source: Getty Images.
1. Digital Realty Trust
Digital Realty Trust (DLR -1.34%) owns and operates data-center properties, and has done an excellent job of taking advantage of the growing need for data storage. The company has grown its funds from operations at an annualized 14% rate since 2005, and has increased its dividend every year.
Demand for data centers is still growing rapidly, and demand continues to outpace supply in several of Digital Realty's key markets. Cisco believes that cloud-data traffic is expected to grow at an annual rate of more than 30% per year through 2020, so there should be plenty of new opportunities to capitalize on.
2. Public Storage
Self-storage REIT Public Storage (PSA 2.46%) is, by far, the largest and most well-known company in its industry. Most consumers are familiar with the company and its 2,354 U.S. storage facilities, and there are another 200 in Europe.
The self-storage business is quite attractive, primarily because of its low operational expenses. Specifically, it costs far less to maintain, manage, and turn over self-storage space than most other types of real estate. The company has previously said that it can break even with just 30% occupancy, and while its properties are currently well over 90% full, self-storage can take a hit in tough economic times, but the cost advantages should allow Public Storage to earn a nice profit no matter what the economy does.
3. Realty Income
Many investors are hesitant to invest in anything to do with the retail industry, and who could blame them? However, Realty Income (O 1.28%) is a different kind of retail investment.
The company primarily invests in freestanding retail properties, which it leases to tenants that are immune to e-commerce competition, are recession-resistant, or both. Just to name a couple of examples, dollar stores are a big part of Realty Income's portfolio, and these businesses actually tend to do better when the economy is bad and consumers become bargain hunters. And drug stores --Walgreen's is Realty Income's largest tenant -- sell products that people need, even if the economy turns sour.
In addition, Realty Income's long-term net lease structure locks its tenants in for 15 years or more in most cases, with gradual rent increases built in. The tenants are responsible for the variable expenses of property ownership, such as taxes, insurance, and maintenance -- all Realty Income does is find a tenant and enjoy years of predictable income.
4. American Tower
One of the largest REITs in the market, American Tower (AMT 1.26%) owns, operates, and develops wireless and broadcast communications real estate in the U.S. and 14 other countries around the world. The company's portfolio has over 147,000 sites and continues to grow, especially internationally. In the past couple of years alone, American Tower has ventured into the Argentina and France markets, and so far has seen promising results. In fact, American Tower is generating so much cash flow that management expects the dividend to grow at a rate of at least 20% this year, to complement its generous buyback program.
5. Ventas
Ventas (VTR 2.02%) is one of the largest REITs focused on healthcare properties. The company owns approximately 1,300 properties, more than half of which (by income) are senior housing, with smaller concentrations in medical offices, life science buildings, hospitals, and skilled nursing facilities.
Healthcare is perhaps the most interesting type of real estate investment from a long-term perspective right now because of the attractive demographic trends that should fuel a period of tremendous growth. In a nutshell, the U.S. population is aging -- fast. The 65-and-older population is expected to roughly double by 2050, and the older (75+ and 85+) age groups are growing even faster. This should create growing healthcare demand, especially for senior housing, and large, financially flexible companies such as Ventas are in a good position to capitalize.
Will these five REITs have another great decade?
To be perfectly clear, a stock's past performance is no guarantee of its future results. Just because these REITs outperformed the market over the past decade doesn't mean they'll continue to do so.
Having said that, there's no reason to believe the strong performance of these five companies won't continue. They have winning business models, are financially solid, and are among the biggest companies in their respective specializations. In fact, in some cases, the past decade has been uncharacteristically weak for these companies. For example, Public Storage and Realty Income have 20-year average total returns of 15% and 14.6%, respectively.
The bottom line is that I'm confident that the strong performance of these REITs will continue throughout next decade (and beyond).
Matthew Frankel owns shares of Digital Realty Trust, Public Storage, and Realty Income. The Motley Fool owns shares of and recommends American Tower. The Motley Fool has the following options: short October 2017 $120 calls on American Tower and long January 2019 $80 calls on American Tower. The Motley Fool has a disclosure policy.
