Real estate investment trusts (REITs) can provide large, growing dividends and excellent long-term growth potential. Welltower (NYSE: WELL), Public Storage (NYSE: PSA), and Prologis (NYSE: PLD) can give you geographic diversification as well.
In this clip from Industry Focus: Financials, analyst Michael Douglass and Fool.com contributor Matthew Frankel discuss why you should have these three REITs on your radar.
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A full transcript follows the video.
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This video was recorded on May 14, 2018.
Michael Douglass: Let's turn to Welltower. This is ticker symbol WELL. Folks who have been watching the company for a long time know that it used to be HCN, but they've changed it now to WELL, for Welltower, I assume. This is a healthcare REIT that's really strongly diversified both in the United States and outside of it.
Matt Frankel: Yeah. If you've been following them for a while, they changed their name to Welltower. Their official name was Health Care REIT. It tells the story, but that's kind of a boring name.
Douglass: [laughs] Right. Not the best headline, maybe.
Frankel: [laughs] No. If you're not familiar with them, they're, obviously, a healthcare REIT, but they invest mainly in senior-specific properties: senior housing, long-term care, assisted living, things like that. They operate primarily in the U.S., but they have a big presence in Canada and the U.K. As of this most recent quarter, they have about 150 Canadian properties and about 120 in the U.K. So, a pretty big chunk of their revenue comes from overseas. They're susceptible to currency headwinds a little bit because of it, but that's actually helped them out at points in the past. These are kind of their two big growth markets. The senior housing industry is not as evolved over there as it is here.
So, the general theme so far is, we like stocks whose foreign exposure is a really nice complement to their U.S. exposure. They can leverage their brand name over in foreign markets. It adds a new growth avenue where the market might be getting a little saturated here. Right now, for example, there's big oversupply worries in the senior housing market. Not the case in some of these foreign markets that Welltower invests in.
Douglass: Right. That's a good point. Matt and I are both ... I wouldn't call us really conservative investors, but I would say, maybe we're not quite as high on the yield curve as a lot of other people. We definitely tend toward businesses with heavy U.S. presences, even if it's maybe not their majority, just because this is a large, rich, attractive market.
Let's turn to another REIT -- actually, our next two are both REITs, as well. Perhaps that's not surprising, because there's a lot of geographic dispersion in real estate. Public Storage, ticker symbol PSA. This is a self-storage REIT. Self-storage tends to be a really attractive business model, both because the relationships tend to be sticky -- that is, once you put your stuff in a storage container, you tend to keep it there more or less indefinitely, and they're able to do very small increases in price every year or two to continue to ramp up their net operating income. And, Public Storage has about a 92% occupancy rate. Most self-storage companies can break even at 40% or less. So, it's a pretty attractive business model.
Plus, it has a lot of exposure in non-U.S. markets. Specifically, Public Storage only owns one self-storage facility outside the U.S. It's in England. They have a 49% interest in Shurgard Europe, which has 222 self-storage facilities. So, they're able to leverage that with market share there in Europe. Any other thoughts on them, Matt?
Frankel: Yeah. This is another issue, like I was mentioning with Welltower, some of the businesses aren't as evolved overseas yet. In Public Storage's case, self-storage is a small, small business over in Europe still. I want to say, I read right before this episode, there are about 2,000 self-storage facilities total across Europe. Just to put that in perspective, Public Storage has more than that in the U.S. alone. So, it's still a very small market.
And Public Storage just recently got into the development side of the game. They've generally grown through acquisitions and they're really ramping up their development program. That opens up a lot of possibilities overseas, if they start to really develop the Shurgard brand over there.
Douglass: Right. It's definitely a potentially attractive company. It's kind of the behemoth in self-storage. As a result, their growth tends to be a little bit slower compared to some of the smaller folks like Extra Space Storage. They boosted revenue 2% year over year last quarter. Funds from operations per share, or FFO per share, which is the typical REIT number, was about 1.3% growth year over year. So, you do tend to get some of that lower growth, but they could also be in a bit of a growth trough, which, once they've built some of this development into their pipeline and are lapping through that, there might be some real opportunities for them. And, again, there's a lot of optionality internationally, so that's a really good thing for them.
Finally, let's talk about Prologis, ticker symbol PLD. This one is an industrials RIET, primarily logistics centers. 70% of the net operating income is in the U.S. Only 55% of their square footage is. They have really heavy diversification across Europe, which is their next-largest market, Canada, Mexico, Brazil, and then a lot of Southeast Asia. The nice thing there is, sure, most of your investment in the company is based off these large, mature markets, but there's significant optionality in some of these other markets, which are commanding much lower rents, but long-term, as they continue to expand and demand increases and etc., there are a lot of opportunities for that company to grow.
Plus, the majority of their asset management and third-party transaction fees are from outside the U.S., 52% vs. 48%. Not a huge majority, but that means they're active in the disposition market there, and they're seeing opportunities, which, hopefully, they can then leverage that deep knowledge into building their square footage footprint in these outside-of-the-U.S. markets.
Frankel: Yeah. I always call Prologis the e-commerce play that nobody's talking about. Amazon's their biggest tenant, not surprisingly. The statistic that stands out to me the most about Prologis is that online or e-commerce sales requires three times the distribution center space of brick and mortar retailers. So, as we gradually transition to more and more e-commerce, it's a very positive catalyst for Prologis long-term. Like Michael said, most of their revenue is still domestic, but that could very easily change going forward. They're in 19 countries right now, and some of them have the potential to become very big markets for the company.
Douglass: Right. Now, it's worth noting here, Prologis is currently in the process of acquiring DCT Industrial, which would increase the percentage of their square footage that's in the United States. But, there's still plenty of optionality internationally. And frankly, you look at core business metrics, they boosted revenue 10% year over year last quarter. Their core funds from operations were up 27%. Guidance for the year is for core FFO to get to nearly $3 a share from $2.81 last year. So, a lot of reasons to like the company, despite the fact that it's already pretty darn big. That's one of the things that I like about both Prologis and Welltower. They're big, and really do have quite a bit of growth ramp potential, which means that you get the stability of a large company while also getting some of the potential benefits of a growth company. Again, you're never going to get the kind of growth that you'll get from some small-cap tech stock. But, hopefully, that optionality gives them a nice growth ramp to churn out significant growth and dividends long-term for shareholders.
Frankel: Yeah, definitely. These REITs tend to be low volatility but can surprise you with how much growth they have over the long-term. Public Storage, for example, has handily beaten the S&P over the past three decades. I think it's returned something like 5X the S&P's return over 30 years, and with much lower volatility, much more stable of a business, than some of these smaller companies that can produce comparable returns.
Douglass: Yes. Because of our episode last week about dividend yield traps, lest you think that means we don't like dividend-yielding stocks, Matt and I both love REITs, and we both love talking about REITs. Not all REITs. There are some ones that are really kind of terrible. But there are a lot of equity REITs that are really very attractive, and we both tend to invest, or at least tend to look pretty hard at REITs when we're investing.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Matthew Frankel owns shares of Public Storage. Michael Douglass owns shares of AMZN. The Motley Fool owns shares of and recommends AMZN. The Motley Fool recommends Welltower. The Motley Fool has a disclosure policy.