You don't have to choose between income and growth when deciding which stocks to buy -- some excellent businesses offer a lot of both. Two in particular that are worth a closer look right now are real estate investment trusts, or REITs, that operate in two of the hottest subsectors of commercial properties. And you might be surprised at just how fast these businesses are growing.
Industrial demand is still very strong
There have been some major fears among investors worried that demand for industrial properties, like fulfillment centers and warehouses, would cool off. Not only was a ton of growth pulled forward due to the COVID-19 pandemic and its accompanying e-commerce surge, but if consumer spending falls, it could also lead to declining demand for logistical properties.
However, if you look at EastGroup Properties' (EGP -0.14%) latest earnings report, you won't see much evidence of this happening. Funds from operations -- or FFO, the real estate equivalent of "earnings" -- grew more than 12% year over year (YOY) in the fourth quarter. And same-property income increased by 8.7% YOY, a very strong growth rate for a real estate business that relies on long-term leases. Occupancy was 98.4% in the property portfolio at the end of the year, up from 97.3% at the end of 2021. And perhaps the most staggering statistic, EastGroup's rental rates increased by an average of 49.2% YOY on both new and renewal leases.
There is little sign that things are cooling off. The company recently completed eight development and value-add projects, all 100% leased. And not only is growth strong, but management has also recently done a great job of reducing leverage. While a 3% yield isn't exactly the highest in the market, it's an above-average payout with plenty of room to grow in the years to come.
The hottest type of commercial real estate
If I were to ask what the hottest commercial real estate subsector is, you might guess it was something exciting and tech-focused like data centers, or maybe you would think it's industrial after reading about EastGroup.
It might surprise you to learn that the best-performing type of REIT over the past couple of years has been self-storage, which many investors consider incredibly boring. And 4%-yielding Life Storage (LSI) could be an excellent way to play it.
For one thing, Life Storage's business has been on fire. Same-store revenue increased by nearly 15% YOY in the latest quarter, and FFO grew by 26%. One big reason for the incredible earnings growth is that in addition to same-store growth, Life Storage has been growing its portfolio rather aggressively.
In the third quarter of 2022 alone, Life Storage acquired 11 storage facilities on its own, another 15 as part of a joint venture, and added 25 to its third-party management business. The combination of rental income growth and aggressive expansion has resulted in profit growth that is almost unheard of for a REIT.
In addition, Life Storage recently received an unsolicited takeover offer from industry leader Public Storage. The company privately rejected the offer a couple of months ago, but there's a strong chance that making it public could prompt management to the negotiating table. So there's the added possibility of a higher buyout offer -- but even if one doesn't come, you're investing in a great business.
Could these businesses cool off?
To be perfectly clear, I don't think either of these companies will grow FFO at 20%+ rates in perpetuity. That's just not sustainable for large-scale commercial real estate owners. It's entirely possible both industrial and self-storage real estate could cool off after a couple of fantastic years, especially if a recession hits. But these are two well-run businesses more than capable of market-beating returns for patient long-term investors.
