Real estate investment trusts (REITs) have historically been excellent investments. The sector has a long track record of steadily rising dividends and delivering attractive capital gains. That makes them great for building wealth over time.
Some REITs have done a fantastic job enriching their investors over the years. Two that have flown under the radar of most investors are Extra Space Storage (EXR -0.58%) and Medical Properties Trust (MPW 3.39%). Here's why investors won't want to continue overlooking these REITs.
Emerging from the shadows
Self-storage REIT Extra Space Storage has largely remained in the shadows of industry leader Public Storage. That company has long dominated the sector, ending last year an industry-leading portfolio of nearly 2,800 self-storage facilities with 198-million square feet of net rentable square feet in 39 states. For comparison, Extra Space's portfolio consisted of nearly 2,100 self-storage facilities with 160.9-million square feet in 41 states.
However, one thing the upstart Extra Space has on its larger rival is its uncanny ability to enrich its investors. Over the past decade, Extra Space Storage has produced a total return of more than 1,200%. That has outperformed all publicly traded REITs and is light years ahead of Public Storage's total return of more than 290% during that timeframe.
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Extra Space's ability to deliver sector-leading growth in its core funds from operations (FFO) per share has been driving those returns. One big driving factor is its industry-leading management business. The company runs self-storage facilities owned by third parties, enabling it to generate lucrative management income. This business also provides a steady stream of acquisition opportunities. Extra Space can buy properties it knows well whenever the current owner decides to sell.
Extra Space should continue generating value for its investors in the coming years. It still has an enormous growth opportunity ahead. While it's now the second-largest self-storage REIT, it only has about an 8% share of the highly fragmented U.S. self-storage market. It estimates that 43% of the market consists of institutional-quality properties not currently controlled by REITs. That leaves it with an enormous opportunity to continue expanding its owned and managed portfolio.
Dominating its niche
Medical Properties Trust has taken a unique approach in the healthcare REIT sector. Most of its larger rivals have focused on buying senior-housing properties or medical-office buildings. Medical Properties has steered clear of those highly competitive markets, focusing instead on primarily acquiring hospitals.
This strategy has paid big dividends for its investors over the years. The healthcare REIT has produced a more than 525% total return since its initial public offering in 2005, outperforming the S&P 500's roughly 410% total return. Driving the company's steady growth has been its ability to continue expanding its hospital portfolio. It made $3.9 billion of investments last year, helping to boost its adjusted FFO by double digits.
Medical Properties Trust has an enormous market opportunity to drive continued expansion. While it's already the second-largest nongovernment owner of hospitals globally with more than $20 billion of assets, there's an estimated $500 billion to $750 billion of operator-owned hospital real estate in the U.S. that it could acquire. On top of that, there are hundreds of billions of dollars worth of hospital real estate worldwide in places like the U.K., Germany, Switzerland, and Australia, where it already owns assets. Meanwhile, the company expanded into the behavioral healthcare market last year, opening a $260 billion market opportunity in the U.S. to go along with a sizable international market.
With such a large total addressable market, Medical Properties Trust should be able to find plenty of attractive investment opportunities. That should enable the healthcare REIT to continue increasing value for its investors.
Great wealth-building REITs
Extra Space Storage and Medical Properties Trust have done excellent jobs enriching their investors over the years. A key to their success is their unique strategies, which gives them an edge over their competition. Both still have lots of growth ahead, which is why investors will want to take a closer look at these wealth-creating REITs.
