It really only takes a few superior stocks to grow a sizable investment portfolio. The key is finding the right companies, in the right industries, with the right growth opportunities and long-term demand. Duke Realty Corp (DRE), Extra Space Storage (EXR 0.41%), and Independence Realty Trust (IRT -1.01%) are three real estate investment trusts (REITs) that check all of those boxes and could help carry your portfolio for years to come. Here's a closer look at why.
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Duke Realty Corp
Industrial real estate has experienced tremendous growth during the past decade. The rise of e-commerce, which accelerated during the pandemic combined with supply chain bottlenecks, drove demand even further in 2021. This helped industrial REITs like Duke Realty have a monumental year in terms of performance.
Duke saw net effective rents grow 40.8% in the fourth quarter of 2021 from a year earlier and increase 18.7% for the full year 2021. Net operating income (NOI) grew 180% year over year (YOY), core funds from operation (FFO) jumped nearly 14%, while leasing volume reached the highest level for the company in history. Duke not only outperformed the S&P 500 over the past year, providing a 42% return for investors, but it has outpaced the S&P 500 for the past 10 years.
Results like this aren't exclusive to Duke. Most other industrial REITs are seeing similar results; however, its peers are much more richly valued, with price-to-FFO ratios in the 38 to 40 range. While Duke is still costly, with a price-to-FFO of 33 times, it's one of the more affordable options for investors to access the growing industrial real estate sector with a company that has a proven track record of sustainable growth. Given that long-term demand for industrial space is nowhere near wavering, I think Duke will continue to deliver strong results in the coming years.
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Extra Space Storage
The self-storage industry has historically been one of the top-performing subsectors among REITs. For decades, this industry has provided double-digit returns. Just before the pandemic, self-storage had hit a slump thanks to development outpacing demand. However, the pandemic changed all of that and helped self-storage REITs return with a vengeance.
Extra Space Storage is the second-largest self-storage REIT, having interest and ownership in 1,227 facilities across the U.S. and providing third-party management solutions to 827 facilities, making it the largest management company for self-storage in the country.
Full-year earnings for 2021 will be released on Feb. 23, but based on the first three quarters of 2021 the company was well on the way to an incredible year. Management fees increased 23% in the nine-month period, while it added 53 new facilities to its portfolio through acquisitions and joint ventures. Rent growth as of Q3 2021 was 16.2% YOY, an incredible jump when just two years ago rental growth for the entire year was 3.2%.
Self-storage is an industry I think every investor should have exposure to, and while Extra Space Storage is hardly the only option, I do think its growth prospects and its price to FFO of 30 times makes it an appealing buy for long-term portfolio growth.
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Independence Realty Trust
Independence Realty Trust is one of the newest and smaller residential REITs to hit the market. Really until 2021, most investors likely hadn't even heard of IRT. But the company made some major moves over the last year to help set it up for notable growth. The first was the merger with Steadfast Apartment REIT, which helped Independence Realty Trust double its portfolio and gain exposure to the booming Sun Belt region of the U.S. The company today now has ownership or interests in 78 communities, with around 70% of its net operating income being earned from the Sun Belt.
IRT doesn't invest in upscale apartments like many of its peers; instead, it focuses on Class B apartments in secondary suburban markets, many of which are experiencing double-digit rental growth right now. Its full-year earnings will help shine more light on its operations post-merger; however, blended lease rates for preliminary Q4 2021 were as high as 15.3% for IRT's portfolio and 14.2% for Steadfast Apartment REIT. Demand for rental properties doesn't appear to be slowing, and with IRT's plan to renovate as many as 20,000 properties in the future, there's a lot of room to grow.
While they're certainly not immune to market risks, these three REITs have notable strengths and growth opportunities that make them great picks for carrying a portfolio. Long-term demand and diversification within the real estate industry mean these companies should see strong years ahead.
