Centerspace (NYSE: CSR) changed its name in late 2020 (it was formerly known as IRET). The name change was something of a culminating move in a multiyear transition for this landlord. With a portfolio now focused around apartments, is this repositioned real estate investment trust (REIT) worth adding to your portfolio?
Shifting things around
In the late 1990s, Centerspace's revenues were largely derived from apartment communities, with the rest coming from "other" property types. Then, as the 2000s progressed, the "other" category started to gain in prominence to the point where apartments were the smaller component.
The trend reversed around 2010, when the REIT started to increase its exposure to apartments again. By the end of 2020, almost all the landlord's rent roll was tied to apartments.
Shifting toward apartments isn't all that unusual; other REITs have done something similar. One example is WashREIT. The problem with Centerspace’s pivot is that, in some ways, the move seems opportunistic. That's not a bad thing, but following market trends by effectively going all in on a single property type is not a risk-free decision.
To be fair, apartments have been and continue to be a solid sector, but investors should at least consider the risk that management is simply following the money into a hot sector that could cool off at some point. Then what happens? It is entirely possible that management shifts gears again and moves away from apartments. It's something long-term investors should monitor.
On this front, it is worth noting that these changes were accompanied by a dividend cut in 2011 and another one in 2017. In other words, there can be very real implications for income-focused investors when a company makes changes to its business model. The dividend was stuck in neutral from that second cut until mid-2021, when it was increased 2.8%. That's not a particularly huge hike, but at least the dividend is starting to go up again.
Also, Centerspace isn't just buying apartments to buy apartments. It has been actively upgrading its portfolio along the way. For example, the average rent per apartment in 2018 was around $1,000. Today, that figure is up to roughly $1,300. That's a big improvement that has been driven by selling weaker communities and buying stronger ones. Investors should be pleased to see that kind of upgrading going on.
Centerspace is also working to augment its most important regional concentrations, most of which are in the Midwest. This will help on the cost side of the equation, given that it increases the REIT's scale in the expanded markets.
Is it a buy?
Assuming you're comfortable with Centerspace's efforts to reposition and upgrade its properties in the apartment space, the next thing to consider is whether it is worth adding to your portfolio. For those seeking dividend growth, the answer is most likely no.
The 2.8% dividend hike just announced is a good start, but it doesn't even keep up with the historical rate of inflation (around 3%), let alone with the current spike in inflation taking shape today. The REIT simply has a lot more to prove on the dividend front.
That said, the apartment arena, specifically beyond major coastal cities, has been pretty hot of late. Centerspace's stock is near a 10-year high, with a more than 30% gain seen over the past three months alone. Investors are clearly pricing in a material amount of good news here. The 2.8% dividend yield is, literally, near the lowest level ever in the company's history. That suggests that investors with a value bias might want to stay on the sidelines here, too.
The big draw, then, is for investors who want to own an apartment landlord with a Midwest focus. The upgrading going on is nice, but it’s probably a less material issue than the location of the REIT's properties.
However, consider that buying Centerspace for this reason is simply following a market trend that may not last. Notably, history suggests that big coastal cities will rebound and be the dominant markets again. That doesn't mean that Midwestern apartments will be abandoned, just that they may not be as desirable to investors in the future as they are right now.
Look around a little
It's worth noting that industry giant AvalonBay (NYSE: AVB), with a big-city focus, has seen its stock rise just about as much as Centerspace's stock so far this year. But AvalonBay is larger and more diversified; it offers a similar dividend yield and has a better dividend track record. That's not to suggest that Centerspace is a bad REIT, but that, for most investors looking at the apartment space, there are probably better long-term options available.