Real estate investment trusts (REITs) have historically performed very well. Overall, REITs have outperformed the S&P 500 in 15 of the last 25 years, generating an annualized total return of 10.9% during that period.
However, some REITs have done even better. The five best over the last decade have been Equinix (NASDAQ: EQIX), First Industrial Realty (NYSE: FR), Extra Space Storage (NYSE: EXR), SBA Communications (NYSE: SBAC), and Sun Communities (NYSE: SUI). Here's a look at the secret to their success.
Data center REIT Equinix has produced a jaw-dropping 1,008% total return during the 10-year period ending in June of this year. To put that into perspective, a $10,000 investment in the REIT a decade ago would have grown into a more than $100,000 nest egg.
Powering those strong total returns has been the explosive growth in data, driving the need for more data centers. Equinix has captured this opportunity by building and acquiring data centers and related assets. This expansion has grown its earnings from $404 million in 2009 to more than $2.8 billion this year, powering robust dividend growth.
Riding the e-commerce wave
Industrial REIT First Industrial Realty is right on Equinix's heels, generating a 1,006% total return over the last decade. Driving that growth has been the REIT's steadily expanding portfolio of logistics properties it has grown through acquisitions, development projects, and redevelopments, with most of its properties focused on supporting the steadily growing e-commerce sector's needs.
This growth has paid big dividends for investors as the REIT has expanded its AFFO at an 11.8% compound annual rate since 2015. That has given it the fuel to grow its dividend at an even more impressive 14.4% compound annual rate during that time frame while maintaining one of the lowest payout ratios in the REIT sector.
Self-storage REIT Extra Space Storage has delivered a more than 905% total return over the past decade, more than doubling the return of its closest competitor. Driving the company's outsized wealth creation has been its sector-leading FFO growth, driven in part by its ability to generate more NOI out of its existing properties.
Another big driver for the company is its industry-leading third-party management business. This platform generates several high-margin fee-based revenue streams that have enabled the REIT to grow its FFO and dividend at an outsized pace over the last several years. On top of that, it has acquired, redeveloped, and expanded sites, cashing in on the growing need for additional storage space by households and businesses.
Dialed in to a fast-growing trend
Infrastructure REIT SBA Communications has generated a roughly 810% total return over the past decade. Driving that growth is the rapid expansion of mobile communications, especially mobile data consumption. That has powered the need for more capacity, enabling SBA Communications to add more tenants per tower and build new ones.
SBA Communications has wisely allocated shareholder capital over the years. It has poured money into growth-focused investments like building and buying new cell towers while also returning cash to shareholders via dividends and share repurchases. Meanwhile, it has managed to grow its portfolio and shareholder returns while steadily improving its balance sheet by driving down its leverage ratio. This strategy has paid big dividends over the years, allowing the REIT to steadily grow its cash flow per share, contributing to its significant outperformance.
Cashing in on the growing need for affordable housing
Sun Communities produced a nearly 760% total return over the past decade. The residential REIT has done that by consolidating the highly fragmented manufactured housing and RV community segments. That has enabled it to steadily grow its portfolio, FFO, and dividend.
However, the REIT hasn't expanded for the sake of growth. It has focused on buying communities to improve by increasing occupancy and site counts, which have increased their NOI. Meanwhile, it has also developed and redeveloped communities to help boost the supply of affordable housing options. These factors have enabled Sun Communities to grow its NOI at a higher rate over the past two decades than any other REIT category.
Many paths to creating wealth in real estate
The best performing REITs over the last decade were from a variety of different subgroups. However, they all had one thing in common, which is that they've grown their cash flow at above-average rates. While their focus on expanding property sectors helped, these REIT have actively increased their existing properties' cash flow to complement their acquisition-driven growth. Given this successful formula, investors should look for REITs with similar traits, as they could be the best performers over the next decade.