Although the stock market had an excellent year in 2017, the real estate sector did not. Thanks to a combination of rising interest rates and headwinds that affected a broad range of equity REITs, real estate gained 6%, less than one-third of the rise in the S&P 500.

Despite the so-so performance in 2017, many REITs are compelling long-term investments, with market-beating return potential. And with the sector lagging the market recently, now could be a great time to add them to your portfolio.


Recent Stock Price

Dividend Yield

Iron Mountain (NYSE:IRM)



American Campus Communities (NYSE:ACC)



Realty Income (NYSE:O)



Data source: TD Ameritrade. Prices and dividend yields as of 12/15/17.

A strong brand name and lots of growth potential

Iron Mountain is widely known as the leader in document storage and security, but there's a lot more to the company. Many investors don't think of Iron Mountain as a REIT, and in fairness, it wasn't classified as a REIT until a few years ago, but the company owns and operates more than 1,400 facilities worldwide.

Jar of coins labeled dividends.

REITs can be great investments for income and growth. Image Source: Getty Images.

Its core document-security business, which includes records and information management, as well as its shredding service, makes up 86% of the company's revenue, and makes for a rather interesting business model. In many ways, it's similar to the self-storage business, which as I've written several times has extremely low maintenance and operating expenses. In fact, leading self-storage operator Public Storage has said it needs just 30% occupancy to break even, thanks to its favorable cost structure.

The downside to self-storage is that tenants are on month-to-month leases, which makes turnover high, especially in tough economic times. That's why Iron Mountain's business model is so interesting. Records stored in its facilities stay for a long time. Half of the records that were in Iron Mountain's facilities 15 years ago are still there. In other words, it's self-storage without the high turnover risk.

Furthermore, Iron Mountain has plenty of growth opportunities. For starters, its core document securities business has lots of room for international growth. The company has also been gradually getting into the lucrative data-center business and recently announced a major data-center acquisition that will significantly add to this part of the business.

Data-center REITs have performed tremendously well, and Iron Mountain has the opportunity to leverage its highly respected brand name and huge client list to capitalize on the ever-growing need for data storage.

Because living in the dorms is so 20th century

College students don't want to live in dorms anymore. That's especially true in American Campus Communities' target markets, where the on-campus student housing options primarily consist of residence halls whose median age exceeds 50 years old.

Furthermore, most of the current alternatives consist of standard apartment complexes and single-family rental homes.

American Campus Communities intends to capitalize on the underserved need for "purpose-built" student housing solutions. The company's communities are modern, with student-focused amenities and enhanced privacy.

The company's approach has been successful so far, with 12 consecutive years of net operating income growth and an occupancy rate of more than 95%. Annual funds from operations per share have grown at a 5.5% compound rate, significantly outpacing traditional apartment REIT peers. With a strong development and acquisition pipeline set for 2018 and beyond, there's still lots of room for growth.

Not all retail is struggling

I mentioned headwinds that affected certain types of REITs. One major example is the current retail environment. It's no secret that dozens of brick-and-mortar retail businesses have gone bankrupt in recent years, and this situation has put pressure on REITs that invest in retail properties.

However, it's important to point out that not all types of retail are struggling. For example, many discount-oriented retail business types are doing quite well, such as dollar stores and warehouse clubs. Service-oriented retailers like megaplex movie theaters are also doing quite well, as the younger generations prefer to pay for experiences, rather than simply buying things. Finally, non-discretionary retail, such as drugstores and gas stations, tend to do well no matter what, as they sell products that people need.

These three categories of retail make up the majority of Realty Income's retail properties. In addition, tenants sign triple-net leases, meaning they commit to long tenancy (a decade or more) and cover the variable costs of ownership, such as taxes, insurance, and maintenance. This situation results in minimal turnover, and an extraordinarily consistent revenue stream.

It's tougher to find a more reliable dividend stock than Realty Income. The company's January dividend payment will represent the 570th consecutive monthly dividend, and the 94th increase since the company's 1994 NYSE listing.

Matthew Frankel owns shares of Iron Mountain, Public Storage, and Realty Income. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.