Most real estate investment trusts (REITs) have well-defined strategies that they've homed in on over the years. They tend to have a pure-play focus on a specific property type, geographic region, or lease structure. REITs concentrate because they can leverage their expertise and scale to create the most value for their shareholders.
Most REITs spend years homing their strategies, which is why it's unusual to see one abruptly change course. However, that has been the case this year, as three REITs -- Equity Commonwealth (NYSE: EQC), Preferred Apartment Communities (NYSE: APTS), and WashREIT (NYSE: WRE) -- all unveiled transformational strategy shifts. Here's a closer look at their new plans and whether they make sense.
Pivoting from offices to industrial
Equity Commonwealth was once one of the largest commercial office REITs in the country, with more than 40 million square feet of space spread across 30 states, as well as D.C., and Australia. However, a new management team led by real estate mogul Sam Zell took over a few years ago. They planned to slowly sell off office buildings to rebuild the balance sheet, putting it in a better position for future growth.
However, the team continued dismantling the portfolio even after reaching their initial asset sale target. By earlier this year, they only had four properties totaling 1.5 million square feet remaining.
Instead of rebuilding the office portfolio via acquisition, Equity Commonwealth decided to transition to industrial real estate. It's doing that by merging with industrial REIT Monmouth Real Estate Investment (NYSE: MNR) in a $3.4 billion deal. The company sees the industrial sector as having more upside potential. That's because it's benefiting from the accelerating adoption of e-commerce, driving demand for new warehouse space.
Getting back to its roots
Preferred Apartment Communities had deviated from its initial strategy over the years of investing in multifamily buildings. At one point, the residential REIT also owned student housing, office properties, and grocery-anchored shopping centers across the Sun Belt region.
However, it sold its student housing portfolio last year and recently agreed to unload most of its office properties. That's giving it the financial flexibility to pivot back to its core strategy of owning apartment communities in fast-growing Sun Belt cities. This year, it has already financed three new loans to help develop multifamily projects in Orlando, Florida; Atlanta; and Savannah, Georgia. It has the option to acquire many of the projects it's financing upon completion to expand its Sun Belt-focused multifamily portfolio.
Changing its focus from a city to a major trend
WashREIT is a diversified REIT currently focused on owning multifamily, retail, and office properties in the Washington, D.C. metro area. However, it recently agreed to sell most of its office portfolio and retail properties. That will enable it to accelerate its strategic transformation into a multifamily REIT focused on the Southeast.
In addition to continuing to grow its multifamily presence in Washington, D.C., WashREIT plans to expand into Atlanta and Charlotte and Raleigh-Durham, North Carolina. That will enable the company to diversify its geographic concentration while adding high-growth markets to its portfolio.
Trading offices for a mega trend
All three of these REITs have one thing in common: They are all selling off their office portfolios so that they can redeploy the proceeds into a faster-growing real estate sector. For Equity Commonwealth, that's industrial real estate, which benefits from the accelerating growth of e-commerce, driving demand for more warehouse space. Meanwhile, Preferred Apartments and WashREIT are selling offices and other properties to focus on the Sun Belt migration mega trend as more people move south for better weather and affordability.
These moves make a lot of sense. While there's a risk that the REITs could fail at executing this new strategy, they're pivoting from focusing on properties facing headwinds that could reduce their rental growth potential to those benefiting from strong secular tailwinds. All this means they look like smart moves that could pay big dividends for their shareholders over the long term.