Although the stock market had an excellent year in 2017, the real estate sector did not. Thanks to a combination of rising interest rates and headwinds that affected a broad range of equity REITs, real estate gained 6%, less than one-third of the rise in the S&P 500.
Despite the so-so performance in 2017, many REITs are compelling long-term investments, with market-beating return potential. And with the sector lagging the market recently, now could be a great time to add them to your portfolio.
| Company | Recent Stock Price | Dividend Yield |
|---|---|---|
| Iron Mountain (NYSE: IRM) | $37.82 | 6.2% |
| American Campus Communities (NYSE: ACC) | $42.74 | 4.1% |
| Realty Income (NYSE: O) | $57.42 | 4.5% |
Data source: TD Ameritrade. Prices and dividend yields as of 12/15/17.
A strong brand name and lots of growth potential
Iron Mountain is widely known as the leader in document storage and security, but there's a lot more to the company. Many investors don't think of Iron Mountain as a REIT, and in fairness, it wasn't classified as a REIT until a few years ago, but the company owns and operates more than 1,400 facilities worldwide.
REITs can be great investments for income and growth. Image Source: Getty Images.
Its core document-security business, which includes records and information management, as well as its shredding service, makes up 86% of the company's revenue, and makes for a rather interesting business model. In many ways, it's similar to the self-storage business, which as I've written several times has extremely low maintenance and operating expenses. In fact, leading self-storage operator Public Storage has said it needs just 30% occupancy to break even, thanks to its favorable cost structure.
The downside to self-storage is that tenants are on month-to-month leases, which makes turnover high, especially in tough economic times. That's why Iron Mountain's business model is so interesting. Records stored in its facilities stay for a long time. Half of the records that were in Iron Mountain's facilities 15 years ago are still there. In other words, it's self-storage without the high turnover risk.
Furthermore, Iron Mountain has plenty of growth opportunities. For starters, its core document securities business has lots of room for international growth. The company has also been gradually getting into the lucrative data-center business and recently announced a major data-center acquisition that will significantly add to this part of the business.
Data-center REITs have performed tremendously well, and Iron Mountain has the opportunity to leverage its highly respected brand name and huge client list to capitalize on the ever-growing need for data storage.