Building a portfolio of real estate investment trusts (REITs) isn't as simple as just buying one stock. There are too many nuances for one REIT to cover all the bases. This is why you'll need to consider a collection of different names. Here are three you should be looking at adding to your real estate portfolio right now.
The first name you should look at if you're building a REIT portfolio is W.P. Carey (NYSE: WPC). It's a net lease REIT, which means it owns single-tenant properties for which the lessees are responsible for most of the operating costs of the assets they occupy. It's generally considered a low-risk sector.
That said, W.P. Carey takes risk management to another level by adding diversification to the mix. Its portfolio is spread across the industrial (24% of rents), office (23%), warehouse (23%), retail (17%), and self-storage (5%) sectors. A fairly large "other" category (8% of rents) makes up the balance of the portfolio. But that's not all. It also generates around 37% of its rents from outside the United States, largely from Europe. It's easily one of the most diversified REITs you can buy.
The value of operating a diversified portfolio using a generally conservative net lease approach has paid off in the face of COVID-19. While some REITs, including net lease peers, have faced material issues collecting the rent they're owed, W.P. Carey's collection rate never dipped below 96%. The REIT is basically collecting all of the rent it's due at this point despite the still-raging global pandemic.
No wonder it's been able to increase its dividend, by token amounts, each quarter so far in 2020. With a generous 6.41% yield backed by more than two decades of annual dividend increases, W.P. Carey can provide a solid core to a REIT portfolio.
Although it's hard to complain about W.P. Carey's yield, you'll likely want to consider other names with even larger yields. The risk is that you get stuck in a yield trap, where the dividend isn't likely to be sustainable over time. Broadmark Realty Capital (NYSE: BRMK) and its 7.3% yield should provide a good balance.
Technically a mortgage REIT, this hard money lender doesn't do things the same way as the REITs it's lumped in with. While most mortgage REITs buy collateralized mortgage obligations using leverage (a practice that can cause material problems during market dislocations), Broadmark provides short-term loans directly to builders and has no debt.
While relatively new as a public company, it has a roughly 10-year history behind it. Avoiding debt is a key factor in its conservative business approach. Another is that it only lends around 65% or so of the expected value of a completed property. This means the builder can end up selling for materially less than projected and Broadmark will still come out fine. In fact, the worst-case scenario is that Broadmark takes over a project and completes it itself, effectively preserving the value of its investment.
Since most loans are only a couple of years long, there's also limited duration risk here. The goal is to reliably supply builders with the loans they need as they start new projects. So long as there's construction going on, Broadmark's business should hum along. And it will be able to keep paying out a steady monthly dividend.
To be fair, the REIT trimmed its dividend 25% as the pandemic started to spread. However, the root cause was delayed construction projects (thanks to the economic shutdowns used to slow the spread of COVID-19), not a breakdown in the company's business model. So if you're looking for a high yield that looks sustainable over time, Broadmark is a name to put on your short list.
The big trend
This last category is a bit of a punt, because you should consider picking up one of the three largest diversified healthcare landlords: Healthpeak (NYSE: PEAK), Ventas (NYSE: VTR), or Welltower (NYSE: WELL). The big story is the same across this trio: The elderly population in the United States is set to increase at a rapid clip, and healthcare properties, from senior housing to hospitals, will be needed to serve this demographic. Buying a large, diversified healthcare REIT will position you to take advantage of this massive demographic wave still washing over the country, regardless of what happens with the pandemic.
Of the three names above, however, Healthpeak is probably the best-positioned right now. Its rent roll is broken down between medical office (29%), medical research (32%), and various forms of senior housing (largely the rest). Senior housing is facing material headwinds from COVID-19 because the elderly face more material risks from the illness. Ventas and Welltower have more exposure to senior housing and, thus, face more headwinds.
On the other side of the equation, medical office and research assets are doing relatively well right now. Since Healthpeak has more exposure to these healthcare property niches than its closest peers, it has been holding up pretty well given the impact of COVID-19 on the healthcare REIT niche. While FFO was a bit lower year over year in the third quarter, the company's same-store net operating income (NOI) was up 2.8%. If you want a balanced healthcare option, Healthpeak and its 5.27% yield is probably the name to go with.
Ventas and Welltower, meanwhile, are probably more appropriate for investors with strong constitutions -- and a strong belief that the world will figure out how to deal with COVID-19 sometime soon. Still, the point here is to make sure you include a diversified healthcare name in your portfolio to touch on the still-massive aging trend.
The bottom line: Mix it up
When you build a portfolio, make sure you keep diversification in mind. W.P. Carey, Broadmark, and Healthpeak cover a lot of bases on that front. And they all have generally conservative business plans, which should help dividend investors sleep at night. If you're looking to create a real estate portfolio, you'll probably want to add one or more of these REITs to your wish list.