One of the most desirable things about real estate investment trusts (REITs) is the cash they throw off via dividends. However, looking only at big-dividend yielders isn't a great investment approach. You need to dig a little deeper into the story of the REITs you're looking at. These three each offer an incredibly attractive mixture of income and diversification.
Mixing it up in the apartment space
We all need a place to rest our heads at night, something apartment REITs have long provided. Historically, the best players have focused on high barrier-to-entry markets with dense populations -- basically, coastal cities. However, in the face of the coronavirus, things have shifted around. Now apartments in less urban areas are all the rage. But, if history is any guide, cities will eventually regain their luster and draw residents back in. Instead of trying to time these shifts, investors should go with a diversified apartment owner like UDR (NYSE: UDR).
The breakdown of its over 50,000 apartment units is roughly 40% urban and 60% suburban. It has exposure to big cities on the coasts, like New York, Boston, Seattle, and Los Angeles, and it also has properties in the middle of the country, in places like Austin, Texas; Denver; and Nashville, Tennessee.
All in, it's probably one of the more diversified apartment REITs you can buy. To highlight this, occupancy in UDR's Northeast and West Coast divisions fell 5% and 2.5% year over year in the third quarter of 2020. Meanwhile, the Mid-Atlantic, Southeast, and Southwest regions were all roughly flat to slightly higher. Overall occupancy was down 1.2%, which isn't great, but broad diversification clearly benefited the company's portfolio.
With a 3.8% yield, for investors looking for an apartment REIT built to benefit from whatever population trends unfold from here, UDR is worth a close look today.
Ready for the headwind
The next REIT for investors to consider is healthcare-focused Healthpeak Properties (NYSE: PEAK). There's an interesting backstory here because the REIT stumbled a few years ago, but that misstep set it up well for the coronavirus pandemic.
In a nutshell, Healthpeak was slow in spinning off a collection of troubled nursing home assets -- a delay that ultimately resulted in a dividend cut. However, that event made management rethink its entire business, with a focus on shifting toward a more diversified investment approach.
Today, senior housing is roughly 34% of the rent roll, with medical office buildings at 29% and medical research at 32% ("other" makes up the rest). This is far more balanced than Healthpeak's closest peers, which have a heavier focus on senior housing assets. That property type has been particularly hard-hit during the coronavirus pandemic. Medical office and research assets, on the other hand, have remained in high demand.
This diversification has proven very important for Healthpeak. Its third-quarter net operating income (NOI) fell 6.3% year over year in senior housing but was up 3.3% in medical office and 5.5% in research. Overall, net operating income rose a healthy 2.8% despite the pandemic.
With a 5% yield, investors looking to own a diversified healthcare REIT should definitely be looking at Healthpeak today.
To the extreme
So far, UDR and Healthpeak have been diversified within their specific niches. The next name, W.P. Carey (NYSE: WPC), goes well beyond one property type. W.P. Carey is a net lease REIT, which means it owns single-tenant properties for which its lessees are responsible for most of the costs of the assets they occupy. It's a fairly low-risk approach in the REIT space.
That said, many of its net lease peers focus on retail assets, which has not been a good thing lately. W.P. Carey's retail exposure is a modest 17% of its rent roll. Not only has its occupancy remained in the high 90% range throughout the pandemic, but so has its rent collection rate.
A big piece of that strength boils down to diversification. In addition to retail assets, W.P. Carey also owns industrial (24% of rents), office (23%), warehouse (22%), and self-storage (5%) properties, with a generous "other" category making up the difference. Moreover, roughly 37% of its rents are generated outside the United States. It's easily one of the most diversified REITs you can buy. And the benefit of that diversification has been on clear display lately.
Meanwhile, investors will likely find W.P. Carey's 6.1% dividend yield, backed by over two decades of annual dividend increases, highly desirable.
Boring, but important
It's not particularly exciting to tell people you own a portfolio filled with well-diversified REITs. But sometimes, boring is a wonderful thing, a reality Wall Street has been reminded of thanks to the coronavirus pandemic.
If you own or are looking to build a real estate portfolio, W.P. Carey, Healthpeak, and UDR should all be on your short list today. No, they aren't exactly "sexy" stocks, but they do offer generous yields backed by solid portfolios performing pretty well despite the massive headwinds the world is facing. But that's hardly shocking, given the diversification they've built into their portfolios.