Certain businesses are always going to be around, and that's especially true in the real estate sector. To name just a couple, people are always going to need places to shop (even when consumer preferences change) and places to store their belongings. With that in mind, here are two real estate investment trusts that are leaders in these businesses and could produce fantastic returns in your portfolio for decades.
Retail headwinds have created some bargains
Many investors won't touch anything to do with brick-and-mortar retail, and who could blame them? High-profile retail bankruptcies and store closings have been all over the news in 2017.
However, don't be so quick to put all brick-and-mortar retail businesses into the same category. It's certainly true that department stores and apparel retail are struggling. On the other hand, discount retail, service-based retail, and non-discretionary retail are doing quite well. And the downturn in retail has affected the stocks of net-lease retail REITs that invest in these property types, creating some compelling bargains. In fact, on the same day I wrote this, it was announced that Warren Buffett's Berkshire Hathaway bought a considerable stake in a service-based retail REIT.
My favorite retail REIT is Realty Income (NYSE:O), which currently trades just above its 52-week low. Realty Income owns nearly 5,000 properties throughout the United States, and its main focus is freestanding retail real estate. The majority of the company's retail tenants are recession-resistant, e-commerce-resistant, or both.
To name a couple of examples from Realty Income's top tenants, AMC Theatres sells an experience, not a product, and has little to worry about from e-commerce competitors. Similarly, Dollar General offers bargains most online retailers can't match, and it does quite well during recessions. And finally, Realty Income's largest tenant, Walgreens Boots Alliance, sells items people need, and in a timely manner.
Further reducing the company's risk is its net-lease structure, which keeps tenants in place for long time periods and generates consistent, growing income.
A business that capitalizes on the good times and can survive downturns
Unlike the other two stocks here, Public Storage (NYSE:PSA) isn't one I would call a "defensive" REIT. Self-storage tenants are generally on month-to-month leases, which makes it rather easy to vacate or renegotiate the rental rate during tough times. In other words, when a recession hits, don't be surprised to see Public Storage's vacancy rate rise and its revenue to fall.
Having said that, Public Storage can generate fantastic returns over the long run. In fact, since 1990, Public Storage has produced roughly six times the return of the S&P 500, and that period included one of the worst recessions in history.
Public Storage owns nearly 2,600 self-storage facilities and is by far the leader in its industry. No self-storage brand is larger or more recognizable.
As I mentioned, Public Storage can capitalize on strong economies. Since 2012, the company has grown revenue by 40% and net income by 55%. However, it can also stay profitable during the bad times. Self-storage has lower maintenance, staffing, and turnover costs than other types of real estate, and while Public Storage can break even with just 30% occupancy, it's currently at around 95%. In other words, if a recession hit and Public Storage's occupancy fell to, say, 80%, the company would still be a long way from becoming unprofitable.
In addition, Public Storage has a rock-solid balance sheet, as the company has historically avoided debt. In fact, the company didn't use debt financing at all until the recent low-interest environment made borrowing simply too cheap to ignore.
The proof is in the (long-term) performance. Over the past 10 years, which includes the Great Recession, Public Storage has grown core funds from operations at a 9% annualized rate and has increased its dividend by an average of 14% per year.
To be fair, there are some headwinds in the business right now, specifically related to oversupply. As Chairman and CEO Ronald Havner said in the company's 2016 annual report, "Going into 2017, we face the most new supply in over a decade." That means greater competition, which means more marketing expense and more promotional discounts. However, Public Storage's brand and leading market share should allow it to do just fine as the market adapts to the new supply.
A final thought on "forever" stocks
To be clear, I say these are stocks you can buy and hold forever based on the current state of the companies. Even with "forever stocks," it's important to stay up to date with the companies' businesses, such as by reading their quarterly results and latest investor presentations.
I own both stocks discussed here and have absolutely no intention to sell. However, if something fundamentally changed in any of their businesses, or some other sell-worthy news came along, I wouldn't hesitate to reconsider my position. The bottom line is that "buy and hold forever" doesn't necessarily mean "buy and forget about it."
Matthew Frankel owns shares of Berkshire Hathaway (B shares), Public Storage, and Realty Income. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.