American Tower (NYSE: AMT) has been an excellent investment since it converted into a real estate investment trust (REIT) nearly a decade ago. Overall, the infrastructure REIT focused on communications has delivered a more than 400% total return (18.6% annualized), outperforming the S&P 500's roughly 300% total return (16% annualized) during that time frame.
If you like those types of returns, you'll love the upside potential of Invitation Homes (NYSE: INVH) and Prologis (NYSE: PLD).
A fast-growing residential REIT
One of the keys to American Tower's outsized returns has been its ability to deliver above-average growth. The REIT has expanded its AFFO per share by a 13.7% compound annual rate over the past decade. It has also grown its dividend at a more than 20% yearly pace since becoming a REIT.
Residential REIT Invitation Homes has similar growth potential. The single-family rental (SFR) focused company has grown its same-store net operating income (NOI) by more than 30% since its IPO in 2017. That's much faster than other residential REITs. The main driver has been fast-paced rent growth, partially due to its focus on the rapidly expanding Sun Belt region. In addition to organic growth, Invitation Homes has steadily acquired additional rental homes.
Those two growth catalysts should continue to drive above-average FFO and dividend growth for Invitation Homes in the coming years. The REIT expects to acquire a record of more than $1 billion of homes this year. Meanwhile, it has plenty of financial flexibility to continue buying rental homes thanks to its investment-grade balance sheet, retained cash flow after paying its dividend, and homebuying joint venture.
Meanwhile, Invitation Homes has plenty of organic growth potential. Rental rates are rising fast across the country, driven by inventory shortages and a growing preference for the flexibility of renting over owning. Couple that with a focus on the rapidly expanding Sun Belt region, and Invitation Homes is in an excellent position to follow American Tower and produce market-beating total returns.
Another fast-growing industry leader
Industrial REIT Prologis shares many of the same characteristics as American Tower. It's one of the largest REITs (second only to American Tower), and it's growing at an above-average rate. The company has grown its core FFO and dividend at above-average rates during the last several years.
That above-average growth should continue, given the unrelenting demand for warehouse space around the world. That was evident in Prologis' most recent quarter. The REIT experienced record increases in rent and property values. CEO Hamid Moghadam stated: "Operating conditions are being shaped by the structural forces driving demand. With vacancies at unprecedented lows, space in our markets is effectively sold out."
This means rents should continue rising. Prologis noted that rents on existing leases are more than 20% below current market rates. As a result, its FFO should continue growing as these leases expire and it signs new contracts at higher market rates.
In addition to rising rental rates on existing properties, Prologis should benefit from continuing to add new ones to its portfolio. The company has an extensive development pipeline and land bank to build more warehouse capacity. On top of that, it has a top-tier balance sheet, which along with its post-dividend free cash flow, gives it lots of financial flexibility to expand its portfolio via developments and acquisitions. These factors should enable Prologis to continue growing its FFO and dividends at above-average rates, which should support attractive total returns.
Great options for REIT investors
Invitation Homes and Prologis are benefiting from several growth drivers. Because of that, they should be able to expand their portfolios, FFO, and dividends at above-average rates in the coming years. That should enable these REITs to produce market-beating total returns, making them great options for investors who like the returns they've seen from American Tower over the years.