Real estate investment trusts (REITs) generally specialize in a certain type of commercial property, but that doesn't mean they only invest in their core property type. For example, many office REITs also have some retail space in their portfolio. Some indoor mall REITs also have some shopping center assets.
Companies that invest exclusively in a certain type of asset are referred to as pure plays. For example, a pure-play shopping center REIT would only own shopping centers and no other kinds of assets.
Pure-play vs. 'focused' REIT examples
As mentioned, many REITs focus on a specific property type. For example, Ryman Hospitality Properties (NYSE: RHP) primarily owns group-focused hotels, Realty Income's (NYSE: O) focus is on freestanding retail properties, and Empire State Realty Trust (NYSE: ESRT) largely owns urban office space.
But none of these are pure plays. In addition to its hotels, Ryman gets a small portion of its revenue from entertainment venues like the Grand Ole Opry. About 15% of Realty Income's portfolio is made up of office, industrial, and agricultural properties. And like many urban office REITs, Empire State Realty Trust has significant exposure to retail real estate, plus it owns and operates the observatory on top of the Empire State Building.
On the other hand, Apple Hospitality REIT (NYSE: APLE) is a pure play on midlevel hotel real estate. And National Retail Properties (NYSE: NNN) is a pure play on single-tenant retail.
Advantages and disadvantages to pure-play REITs
The main reason to consider a pure-play REIT over one with multiple property types is for a narrow focus. If a company is very good at evaluating, operating, developing, and managing a certain type of property, it can be a net benefit to investors for management to stick to their core competence rather than trying to branch out and create multiple income streams. For example, if National Retail Properties were to announce it was going to start buying medical office buildings, it would negatively affect my opinion of it, since the REIT has such an excellent track record in its core property type.
On the other hand, the downside to a pure-play REIT is the same thing as its key advantage: a laser focus on a single type of commercial real estate. This can be a disadvantage in tough times. For example, during the COVID-19 pandemic, Realty Income's industrial and office properties helped offset the effects of retail closures.
The Millionacres bottom line
There's no perfect answer to the "pure-play or diversified" debate, and it depends on the REIT. In my own portfolio, I own some pure plays and some with two or more property types in their portfolio. The bottom line is that a pure play REIT can be an excellent way to invest if the management team is very good at generating superior returns from a single type of property and you're prepared to ride out any cyclicality that comes with such a narrow investment focus. But it's important to evaluate REITs on a case-by-case basis -- a solid, well-run operation is far more important as a long-term investor than a narrow or diversified business focus.