Residential real estate investment trusts (REITs) like UDR (NYSE: UDR) and Apartment Investment and Management (NYSE: AIV) (Aimco) can be a great way for investors to enjoy the passive income-generating benefits of being a landlord without all the hassles. Both currently offer above-average dividends (4.46% for UDR and 4.92% for Aimco), making them appealing for income-seeking investors.
Here's a look at which of these REITs is the better buy right now.
The case for UDR
UDR currently has an ownership interest in 51,320 apartment homes, including 819 under development, in 21 coastal and Sunbelt markets.
In addition to that geographic diversification, the company also owns a blend of Class A and Class B properties, 57% and 43%, respectively, housed in urban (42%) and suburban (58%) markets.
This diversification by market and property quality has several benefits, including:
- Being a differentiating factor compared to its more concentrated peers.
- Allowing it to appeal to a broader renter and investor base.
- Providing it with more investment opportunities.
- Reducing the volatility in long-term, same-store growth.
The company's strategy has paid dividends for investors over the years. It has grown its combined same-store NOI at a peer-leading pace over the past two decades, which enabled it to outperform its rivals during the last 3-, 5-, 10-, and 20-year periods. Further, it has allowed the REIT to pay a dividend for an impressive 192 consecutive quarters, increasing it every year for the past decade.
UDR's dividend and total returns should keep trending higher in the coming years. One factor driving that view is its solid financial profile, which includes a sub-70% dividend payout ratio and investment-grade credit rating. That gives it the flexibility to keep expanding its portfolio.
Meanwhile, UDR has a long track record of investing in various high-return growth opportunities, including acquisitions, development projects, redevelopments, and renovations. That ability to invest in opportunities that grow its portfolio and cash flow should enable it to continue generating solid total returns for investors.
The case for Aimco
Aimco currently owns 125 apartment communities in 17 states and the District of Columbia. About half of its properties are Class A while the rest are a mix of B and C properties.
However, the Aimco of today will look quite different in the coming quarters because the company plans to split into two distinct, publicly traded companies: Apartment Income REIT (AIR) and Aimco. AIR will own 93.5% of a portfolio of 98 stabilized properties with 26,599 apartment homes. These communities will be primarily A/B quality, located in several large U.S. markets.
The company also intends to have a lower leverage ratio and a higher dividend payout ratio than the current Aimco. As such, it will be a more income-focused REIT, making it an ideal option for risk-averse investors like retirees.
Meanwhile, the new Aimco will retain 11 stabilized multifamily properties and a separate portfolio of 16 other multifamily properties. The company will also own an option to invest in the Parkmerced Apartments in San Francisco and two waterfront properties in Miami, as well as other assets. Aimco's focus will be on development and redevelopment opportunities that could yield higher returns.
Given this upcoming change, investors who buy shares in Aimco are, in essence, getting two REITs for the price of one. AIR will be a stabilizer entity geared toward income-focused investors. Meanwhile, the new Aimco will be a development-focused company with a higher risk profile -- but offering greater reward potential.
UDR already is where Aimco wants to be
On the one hand, Aimco's split will create a company in AIR that's similar to what UDR currently offers investors: a stable, income-producing apartment REIT. However, since the company isn't there yet and has more risk in terms of its balance sheet and the development bend of the new Aimco, it might not be the best choice for REIT investors who desire a low-risk income stream.
Because of that, UDR looks like the better option versus Aimco right now since it's already the company AIR will strive to become.