If I were to suggest an investment in storage facilities, warehouses, and senior housing communities, you might justifiably respond that it's difficult to think of three more boring businesses -- especially considering the popularity of fast-growing tech stocks like Netflix and Facebook.
However, it's the predictability of these businesses that can make them such excellent investments. With strong fundamentals, leading market positions, and long-tailed growth catalysts, here are three real estate investment trusts, or REITs, that invest in these "boring" businesses, and why they can be quite exciting additions to your portfolio.
Image source: Getty Images.
|
Company (Symbol) |
Industry |
Recent Share Price |
Dividend Yield |
|---|---|---|---|
|
Public Storage (PSA 0.59%) |
self-storage |
$208.08 |
3.9% |
|
Prologis (PLD +0.56%) |
warehouses/ distribution centers |
$65.33 |
2.9% |
|
Welltower (WELL +0.33%) |
healthcare (senior housing) |
$55.41 |
6.2% |
Data source: TD Ameritrade. Prices and dividend yield as of 5/4/18.
The self-storage leader
Few companies are quite as dominant in their industries as Public Storage. The self-storage giant is larger than its three closest competitors combined, with over 2,700 properties.
One of my favorite things about self-storage is its extremely low operating costs when compared to other types of real estate. Public Storage has previously said that it can break even with just about 30% of its properties occupied, and with occupancy currently near 94%, it's fair to say that this is a pretty big margin of safety. This is even more true considering that Public Storage carries an extremely light debt load for a REIT.
While there are currently some oversupply headwinds in the self-storage industry, there are two reasons investors shouldn't worry too much. For one thing, the largest and financially strongest players in any industry (like Public Storage) have big advantages when it comes to pricing power and financial flexibility, and often come out of difficult environments in even better shape than they went in. And second, these headwinds, combined with the negative pressure caused by rising rates, have caused the stock to retreat by about 25% from its highs, creating a nice buying opportunity for investors with a long-term focus.
A less-obvious way to play e-commerce
E-commerce has grown tremendously over the past several years, but still represents just 8.9% of total U.S. retail sales, according to U.S. Census Bureau data. This is up dramatically from just over 4% in 2010 but is still a small portion of the roughly $5.1 trillion U.S. retail market, so there's lots of room for growth. And e-commerce fulfillment requires three times the floor space at distribution centers and warehouses than brick-and-mortar retail.
That's exactly why Prologis could be such a smart investment to hold over the next few decades.
Prologis invests in "logistics real estate," which essentially means properties like distribution centers and warehouses. It shouldn't come as much of a surprise that Amazon is a top Prologis tenant, but the company has relationships with a long list of major retailers and logistics companies.
Prologis is one of the largest REITs of any kind and has nearly 3,300 properties with about 683 million square feet located in 19 countries. This may sound like a massive portfolio, and it is, but considering that worldwide e-commerce is still growing rapidly, there should be no shortage of room to grow. And with about $3 billion in available funding, Prologis has the advantage of financial flexibility to pursue attractive opportunities as they come up.
A long-term growth opportunity with a 6.2% yield
I've written before that healthcare REITs could be one of the best long-term growth opportunities in the market, especially those that invest in senior-specific properties like Welltower.
To make a long story short, the U.S. population is getting older fast. People are living longer lives than ever before, and over the next couple of decades, the massive baby boomer generation will be reaching retirement age. The 65-and-up population is expected to double by 2050, and the 85-and-older population is expected to double in just 20 years.
Welltower is not only the largest healthcare REIT, but it also has a particularly high concentration in senior housing and other senior-specific property types. Seventy-one percent of the portfolio is senior housing, and another 12% is long-term care facilities, and both of these markets should be full of growth opportunities going forward. In fact, senior housing demand is expected to accelerate over the next decade or so, and by 2025, senior housing demand is projected to increase at a rate of 92,000 units per year.
The bottom line is that this is a fantastic growth opportunity, and thanks to rising interest rates and temporary senior housing oversupply concerns, this industry leading company trades for less than 14 times 2018's expected funds from operations, or FFO.
How's this for boring?
While these businesses may seem boring, especially compared with some of today's tech companies, their long-term compounding power is anything but. Just to give you an idea, consider that Public Storage and Welltower are two of the oldest REITs, and if you had invested $10,000 in each of them 30 years ago, your investments would be worth $789,000 and $325,000, respectively, today -- a total of more than $1.1 million.
Of course, there's no guarantee of this level of performance going forward, but the point is that these boring stocks are certainly capable of some not-so-boring returns.
