Real estate investment trusts, or REITs, are known for income more than growth, but it's a mistake for investors to overlook the tremendous growth opportunities within the real estate sector. To be sure, there are many REITs that are designed to produce modest but steady returns over time, but there are some that have the potential to grow dramatically -- and to produce market-beating returns for investors along the way.
With that in mind, here are two real estate investment trusts (REITs) in particular that have lots of growth potential and produce steady income for investors right now.
The need for data security isn't going anywhere
The real estate sector has generally performed well recently, but Digital Realty Trust (NYSE: DLR) has been an exception, with shares falling by about 12% in September despite no company-specific news to justify the decline.
To put it mildly, data center demand isn't going anywhere. The gradual rollout of 5G technology around the world as well as the surge in augmented reality devices, autonomous vehicles, artificial intelligence, and the number of connected devices in general are major catalysts for the growing need for secure and reliable places to house servers and networking equipment. And as one of the largest real estate owners in the entire world, Digital Realty is in an excellent position to take advantage.
As an example of a particularly exciting recent development, Digital Realty recently formed a joint venture with Brookfield Infrastructure to bring its data center expertise to India. Not only is India the most populated market in the world with about 1.4 billion people, but data consumption is growing rapidly, which should give the 50/50 venture lots of room to grow.
People want experiences, and this REIT could be a big winner
EPR Properties (NYSE: EPR) is a rather unique REIT in the sense that it is the only major REIT that is laser-focused on experiential real estate. Obviously, this wasn't a great thing in 2020, as the pandemic essentially prevented people from going to movies, water parks, ski resorts, and other properties EPR owns, but the business has rebounded sharply. The company recently reinstated its monthly dividend, is yielding about 6%, and just received an investment-grade credit rating from S&P.
As far as growth goes, EPR is currently a small-cap REIT, with a market cap of less than $4 billion. But the company doesn't plan to stay that way. In fact, EPR has over $1.1 billion in liquidity and sees a $100 billion addressable market of properties it could potentially acquire.
Plus, EPR is eager to diversify away from movie theater properties, which made up 46% of its rental income prior to the pandemic and, as you can probably imagine, was a major source of headaches over the past year and a half. EPR has specifically mentioned gaming properties, amusement parks, live entertainment venues, and cultural attractions like museums and zoos as potential growth pathways, and I'm excited to see what the company does with its financial flexibility.
Invest for the long run
To be perfectly clear, I'm suggesting both of these REITs because of their long-term growth potential. I have absolutely no idea what short-term headwinds these businesses could face or what could happen to their stock prices in the coming weeks or months. However, they are both well-run businesses with lots of room to grow over the long term, and while I have no idea what will happen in the near future, I'm quite confident investors who add these companies to their portfolios will be happy they did in a decade.