Inflation just keeps accelerating, and the stock market is taking a beating as major bellwethers report earnings disappointments and recession fears mount.
One of the major barometers is the S&P 500, which is now down about 18% so far this year, leaving investors wondering where they might turn for some relief. One place to look is the real estate investment trust (REIT) sector.
REITs own portfolios of income-producing properties and are required to pay at least 90% of their taxable income annually to shareholders. That makes them both passive income stocks and real estate investments, two characteristics that can prove resistant to general market downturns.
But not always. REITs as a whole are taking a beating right now. For instance, the Vanguard Real Estate ETF -- which currently holds a weighted mix of 163 publicly traded REITs -- is off nearly 18% so far this year, trailing the S&P 500's dismal drop of about 15% at the same time.
But, of course, there are exceptions. Here are two that have outperformed the S&P 500 in total return in the past year. I chose that period of time since it captures the peak for much of the market as well as the sudden downturn that really got going earlier this year and continues. And I chose these stocks to look at because not only have they outperformed but they also appear to have reasonably good prospects going forward.
1. Life Storage
Life Storage (LSI) operates more than 1,100 self-storage facilities in 36 states and currently serves about 625,000 commercial and residential customers, most of them on month-to-month leases. This industry has been a notable beneficiary of a mobile and downsizing society, and those short-term leases mean it also can take advantage of growing demand while more easily raising the rent than, say, industrial REITs that tend to work with long-term leases.
Funds from operations (FFO) is a key metric for measuring the operating performance of a REIT's cash flow. Life Storage just reported a 33% jump in FFO year over year in the first quarter. It also bought 18 stores and added another 25 to its third-party management platform, pointing toward more income and payouts ahead.
The company's stock is currently yielding about 3.5% -- compared with about 1.4% for the S&P 500 -- and a payout ratio of about 60% based on 2022 estimated earnings makes that look sustainable and even growable as more revenue pours in from its current and growing customer base. The stock has also been pummeled lately, making it look to me like an even more attractive buy -- I plan to soon.
2. W.P. Carey
W.P. Carey (WPC 0.27%) is a diversified REIT with a portfolio of 1,336 net-lease properties spread across the United States and northern and western Europe. About two-thirds of its revenue is from U.S. properties, and the overall portfolio is a fairly even mix of warehouse, offices, and retail, with a bit of self-storage mixed in, spreading the risk.
The company has inflation escalators built into more than half its leases and is reaping the rewards of a portfolio that's nearly 99% occupied with average leases of nearly 11 years.
Those 350 or so tenants also paid nearly 100% of their rent in the first quarter, and the company responded by slightly raising the dividend in the first quarter of 2022, marking 26 straight years of payout increases that give it a current yield of about 5.1%. It's also investing another $400 million this year, which should help grow its income further.
Good companies in a bad market make for a buy and hold
W.P. Carey and Life Storage are both good candidates for buying now and holding for a long time to come. They're investing in growing their portfolios while continuing to prove they know how to make money with what they have, and they're fairly generous in sharing that success with their shareholders. That's a good elixir for today's troubled market and for what's ahead -- good or bad or something in between.
