Real estate investment trusts (REITs) aren't typically thought of as stocks that set you up for life. But buying shares in the right REITs at the right time can build tremendous wealth over the long haul thanks to a REIT's ability to have a rising share price and reliably increase dividends.
The key is identifying stocks that are set to soar but remain somewhat under the radar today, making their current share price a value bargain based on their long-term potential. Two REITs that have major money-making potential today are Independence Realty Trust(NYSE: IRT) and Plymouth Industrial REIT(NYSE: PLYM). Here's a closer look at each company and why they could pay off big 20 or 30 years from now.
Independence Realty Trust
Independence Realty Trust is a multifamily REIT that specializes in owning and leasing older or non-luxury Class B apartments in secondary and suburban submarkets. Last year was an important one for the company: It more than doubled its portfolio after the acquisition of Steadfast Apartments, giving it notable exposure to the Sun Belt region. It now has 120 apartment communities in 15 states with about 70% of its net operating income (NOI) coming from the Sun Belt properties.
This region, particularly in smaller secondary markets and suburbs, is among the fastest-growing markets in the country for rent growth and demand. The REIT's occupancy is just over 95%, while the growth rate for new and renewing leases in the first quarter and second quarter of 2022 to date is between 11% and 12% year over year.
This unique business model gives the company a competitive advantage compared to its multifamily peers because it largely serves middle-income earners with stable demand for housing. It also benefits from lower costs to acquire property and less competition, giving it more favorable returns. It also has a lot of room to grow. It owns 50 fewer communities than its Sun Belt focused peer, Camden Property Trust.
The company's share price skyrocketed just before its acquisition of Steadfast in 2021. Although the shares have declined about 20% this year, they still are up about 15% during the past 12 months. The shares are priced favorably at about 11 times funds from operations (FFO), a key measure of REIT performance. By comparison, the two other Sun Belt-focused multifamily REITs, Mid-America Apartment Communities and Camden Property Trust, are trading at about 16 times FFO, making Independence Realty Trust's current share price a bargain.
The company recently raised its dividend by 17% and now offers a 2.7% yield. However, this number is likely to grow as the REIT's performance improves over the long haul. Share prices are trading for a little more than $20 right now. Considering its peers trade above $120, the potential for price appreciation in the long term is tremendous.
Plymouth Industrial REIT
Plymouth Industrial REIT owns and leases warehouses, light manufacturing buildings, and small to medium industrial bays in primary and secondary submarkets across the U.S. Short-term concerns over the impact from reduced customer spending in light of higher inflation have pushed share prices down 43% this year. But the long-term outlook for the industrial market remains as strong as ever.
E-commerce and the desire for more omnichannel manufacturing solutions are feeding industrial demand, a trend that should only grow over the next 10 to 20 years. E-commerce sales made up just under 12% of all retail sales in 2021, leaving enormous potential for further market penetration. Industrial operators directly serve this need in an industry that generally speaking has a high barrier of entry due to the expensive cost of land and development.
The company isn't profitable yet, but its metrics are consistently improving quarter over quarter. Its rental rates on a cash basis are up 19.5% year to date. The company is using this accelerated leasing momentum to create a stronger portfolio. It bought out its joint venture partnership in the Memphis, Tennessee, area and is expanding its presence in its best-performing markets while reaching into new ones as well. It's priced well, trading at about 10 times its FFO with a favorable dividend return of 4.6%.
Today's bear market puts these stocks on sale, making right now a favorable time to pick them up. It could take a few decades to really see these companies soar, so investors should be patient, knowing they have a stake in growing industries and markets backed by long-term demand with positive fundamentals.
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Liz Brumer-Smith has positions in Independence Realty Trust, Inc., Mid-America Apartment, and Plymouth Industrial REIT, Inc. The Motley Fool has positions in and recommends Camden Property Trust, Independence Realty Trust, Inc., Mid-America Apartment, and Plymouth Industrial REIT, Inc. The Motley Fool has a disclosure policy.
