Real estate can be an excellent investment if you have the right time horizon. Over the long term, real estate has historically produced attractive returns with less volatility than other asset classes.
Anyone can benefit from the long-term riches of real estate investing through real estate investment trusts (REITs). Three REITs that have delivered excellent returns for patient investors are Extra Space Storage (EXR 0.63%), Sun Communities (SUI -0.04%), and Terreno Realty (TRNO).
Extra Space Storage delivered a 770% total return over the last 10 years, which is about 24.1% annualized. That's the best performance in the REIT sector and has easily beat the S&P 500's 13.8% annualized return during that period.
Several factors have helped drive the self-storage REIT's strong performance. One notable catalyst is the company's third-party property-management program, which it launched in 2008. It's currently the largest self-storage management company in the country. That particular business creates additional income streams, improves operational efficiency, and provides the company with a built-in acquisition pipeline.
Extra Space Storage has also grown its operating portfolio to the second largest in the country by steadily acquiring additional properties. These two businesses have combined to deliver sector-leading core funds from operations (FFO) growth per share over the past decade, driven by steadily rising demand for self-storage space. That's given the REIT the funds to increase its dividend by 650% over the last 10 years as it has steadily rewarded patient investors with more income.
Going off the beaten path has paid big dividends
Sun Communities has been an excellent long-term investment. It's delivered a more than 460% total return over the past 10 years, or about 18.8% annualized.
One of the keys to the residential REIT's success is its focus on consolidating property classes that fly below the radar of most real estate investors. It started by focusing on manufactured home communities and RV parks before expanding into marinas and U.K. holiday parks in recent years. Historically, these have been highly fragmented property classes, enabling Sun Communities to gobble up market share while facing limited competition.
That has allowed the REIT to get attractive pricing on underrated real estate assets. For example, manufactured home communities have grown their same-store net operating income (SSNOI) at a 4.8% compound annual rate since 2000. That's the same growth rate as self-storage properties, and more than double the rate of traditional commercial real estate like industrial, multifamily, office, and retail.
Its growing rental income from existing properties and a steady stream of new additions have helped the REIT enrich its investors over the long term, allowing it to grow its dividend by almost 40% over the last 10 years.
Creating value for long-term investors
Terreno has also produced strong returns for long-term investors. The industrial REIT has delivered an average annualized return of 18.4% over the past decade.
A big driver of its returns has been its focused strategy. Terreno concentrates on acquiring, owning, and operating industrial properties across six major coastal markets where demand is growing but supply is limited. Because of that, it has benefited from stronger rental growth rates. SSNOI has expanded at an average of 11% across its portfolio since its initial public offering in 2010.
Terreno has complemented that strong SSNOI growth rate by steadily adding new properties to the portfolio. The company will acquire operating assets and value-add opportunities, including vacant properties and those ripe for redevelopment.
Terreno has an excellent history of creating value through leasing and redevelopment, with 60% of its acquisitions being value-add investments. This strategy has paid big dividends for long-term investors. The REIT has grown its payout at an 11.8% compound annual rate since initiating it in 2011.
Patience pays off
Extra Space Storage, Sun Communities, and Terreno Realty have all been richly rewarding long-term investments. That's due to the steady rental growth rates of their growing real estate portfolios, which has enabled all three to steadily increase their dividends. This trio shows that REITs can be well worth the return for investors with longtime horizons.