So far, 2022 has certainly caused its fair share of heart palpitations as market volatility continues. With the S&P 500 down more than 6% at the time of this writing, it may not seem like a great time to jump into the stock market, but a market dip is actually a great time to buy.
I have been waiting for the market to cool before buying several buy-and-hold winners I see in the world of real estate investment trusts (REITs) today, including Invitation Homes (INVH -0.24%) and Extra Space Storage (EXR -1.20%). These two REITs have major long-term growth drivers backing them and are precisely why I think they can pay off handsomely for long-term investors during the next 10 years.
Invitation Homes is a residential REIT specializing in the acquisition, development, and management of single-family rental homes. Originally a subsidiary of Blackstone Group (BX 0.87%), the world's largest alternative investment management firm, Invitation Homes' single-family-rental empire was made possible after the Great Recession when foreclosures were rampant. The company did an initial public offering (IPO) in 2017, after separating from Blackstone, and it now sits with an impressive portfolio of more 80,000 rental homes.
Over the past five years, the share price has risen 107% while investors have received an 18% annualized return -- an impressive record by any measure. But what really makes this stock stand out as a great long-term buy-and-hold is its business model. The majority of its portfolio is located in the Sun Belt. This area is red-hot right now as people search for warmer winters, new job opportunities, and lower costs of living.
I also like that Invitation Homes focuses solely on renting single-family homes as it offers more liquidity than an apartment could because the pool of buyers is greater. If the housing market were to turn and the company needed cash, it could sell off a small portion of its assets to recapitalize much easier than a multifamily REIT could. Housing is also an essential service. While rents can fluctuate based on demand, generally speaking, housing prices and rental rates trend upward because long-term demand supports it. That's a pattern that probably will hold during the next 10 years.
Extra Space Storage
Extra Space Storage is the second-largest self-storage REIT by market capitalization, having ownership or interests in more than 2,000 facilities across the U.S. Historically, self-storage has been the highest-performing REIT by sector, as tracked by the National Association of Real Estate Investment Trusts (Nareit) since 1994.
During the past 10 years, the company's share price increased 627% while providing a 26% annualized return for investors, nearly double the S&P 500 during that same period. An increase of 627% is a huge jump and means share prices today are rather rich. However, if you had invested $1,000 in Extra Space Storage at the peak of pre-Great Recession prices in 2007, your investment would still be worth $9,710 today despite the coronavirus market crash of 2020. Price matters, but the business model matters more. And Extra Space Storage has a solid business model positioned for further growth.
Self-storage is one of the few industries that really shines during challenging personal or economic times, something that very well could be in the cards in coming years. However, its business model isn't reliant on hardship in order to thrive. Self-storage's low-cost business model, which requires very little overhead or upkeep, gives it an upper hand when it comes to keeping operating expenses and development costs low.
Additionally, Extra Space Storage offers a third-party management service that can easily be scaled. Today, the company is the largest third-party management company in the industry. This two-pronged approach to dominating the storage industry means it should be able to withstand the ups and downs that are sure to come, with plenty of room to grow during the next 10 years.
A lot can happen in 10 years
A lot can happen in 10 years, bull markets and bear markets included. It takes a lot of patience and grit to buy and hold stocks for the long term. But if you take this approach, investing in the right companies almost always pays off regardless of how high or low the price when you bought. While there is a lot of market volatility today, what hasn't wavered is the business model and long-term demand for both of these companies' services.