3 REITs You Need in Your Real Estate Portfolio

One of the most desirable things about real estate investment trusts (REITs) is the money they make in dividends. However, just looking at dividend yields is not a good investment approach. You need to dig a little deeper into the history of the REITs you are looking at. These three each offer an incredibly attractive mix of income and diversification.

Mix it up in the apartment space

We all need a place to rest at night, something REITs have been offering for a long time. Historically, the best players have focused on markets with high barriers to entry and populations – basically coastal cities. However, in the face of the coronavirus, things have changed. Now apartments in less urban areas are all the rage. However, if history is a guide, at some point the cities will regain their luster and residents will retreat. Rather than trying to time these shifts, investors should choose a diversified homeowner like UDR (NYSE: UDR).

The distribution of over 50,000 residential units is around 40% urban and 60% suburban residential units. It has contact with major coastal cities like New York, Boston, Seattle, and Los Angeles and it also has real estate in the middle of the country, in places like Austin, Texas; Denver; and Nashville, Tennessee.

All in all, it’s probably one of the more diverse apartment REITs that you can buy. To highlight this, the load factor in the UDR Northeast and West Coast divisions decreased by 5% and 2.5% respectively in the third quarter of 2020 compared to the previous year. Meanwhile, the Central Atlantic, Southeast, and Southwest regions were roughly flat to slightly higher. Overall occupancy was down 1.2%, which isn’t particularly good, but broad diversification clearly benefited the company’s portfolio.

With a return of 3.8% today, UDR is well worth a close look for investors looking for a REIT for housing built to take advantage of the population trends that are developing from here.

Ready for the headwind

The next REIT for investors to consider is Healthpeak Properties (NYSE: PEAK), which specializes in healthcare. There’s an interesting backstory here because the REIT stumbled a few years ago, but that misstep prepared it well for the coronavirus pandemic.

In short, Healthpeak has been slow to spin off a collection of troubled nursing home goods – a delay that ultimately resulted in a dividend cut. That event, however, caused management to rethink its entire business, with an emphasis on a more diversified investment approach.

Today, senior housing accounts for around 34% of rent, with medical office buildings accounting for 29% and medical research accounting for 32% (“others” account for the rest). This is far more balanced than its closest colleagues at Healthpeak, who are more focused on senior housing. This type of property was particularly hard hit during the coronavirus pandemic. The demand for medical practices and research goods remains high.

This diversification has proven very important to Healthpeak. Third quarter net operating income (NOI) declined 6.3% year-over-year in the retirement home, but decreased 3.3% in the doctor’s office and 5.5% in research. Overall, the operating result rose by a healthy 2.8% despite the pandemic.

With a return of 5%, investors looking to own a diversified healthcare REIT should definitely bet on Healthpeak today.

To the limit

So far, UDR and Healthpeak have been diversified within their specific niches. The next name, WP Carey (NYSE: WPC), goes way beyond a property type. WP Carey is a net rental REIT, which means it owns single-tenant properties for which lessees bear most of the cost of the assets they use. It’s a relatively low-risk approach in the REIT space.

Even so, many of his Netto-Leasing peers focus on retail real estate, which hasn’t been a good thing lately. WP Carey’s exposure to retail accounts for a modest 17% of its rental income. During the pandemic, not only did occupancy remain in the high range of 90%, but also the rent collection rate.

Much of that strength comes down to diversification. In addition to retail properties, WP Carey also owns industrial (24% of rents), office (23%), warehouse (22%) and self-storage properties (5%), with a generous “Other” category making the difference. In addition, around 37% of rents are obtained outside of the US. It’s easily one of the most diversified REITs you can buy. The benefits of this diversification have recently become apparent.

Meanwhile, investors should find WP Carey’s 6.1% dividend yield, backed by more than two decades of annual dividend increases, highly desirable.

Boring but important

It’s not particularly exciting to tell people that you have a portfolio of well-diversified REITs. But sometimes boredom is a wonderful thing, a reality Wall Street has been reminded of thanks to the coronavirus pandemic.

If you own or want to build a real estate portfolio, WP Carey, Healthpeak, and UDR should be on your shortlist today. No, they aren’t exactly “sexy” stocks, but they offer generous returns that are backed by solid portfolios that do pretty well despite the massive headwinds the world is facing. But that’s hardly shocking given the diversification they’ve built into their portfolios.