Owning investment properties is usually a fairly boring business, but not today. The worldwide effort to contain the spread of COVID-19 has upended property markets and left real estate investment trusts (REITs) facing steep losses.
Dividend cuts have become commonplace in a sector once known for dividend consistency. But with Wall Street tossing out the best along with the worst, savvy investors have an opportunity to pick up some great REITs at reasonable prices.
Three you should look at right now are W.P. Carey (WPC +0.17%), Federal Realty Investment Trust (FRT +0.00%), and AvalonBay Communities (AVB +0.75%). Let's take a closer look at these three and see if they might be right for you.
1. W.P. Carey: Diversification is the key
W.P. Carey is a net lease real estate investment trust, which means its tenants are responsible for most of the operating costs of the properties they occupy. That's why it's generally considered a relatively low-risk niche in the REIT sector. However, many of the players in this sector are heavily focused on retail properties. Not only did the pandemic require widespread closures of retailers (with many tenants refusing or unable to pay their rent), but the necessities of social distancing have left big questions about what the future of retail will look like. There are genuinely good reasons to be worried about retail-focused REITs -- which is why it's a good thing for W.P. Carey that retail properties only provide around 17% of its revenue.
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The rest of the REIT's revenues come from industrial (24%), office (23%), warehouse (22%), self-storage (5%), and "other" (the remainder). Carey is probably one of the most diversified REITs around by property type. It's also one of the most diversified geographically, with roughly a third of its rents generated from Europe. Diversification has material benefits: Tenants in the industrial, warehouse, and self-storage segments are generally holding up well even in the face of the coronavirus. In fact, the REIT was able to collect 95% of its April rents, a higher percentage than peers like Realty Income and National Retail Properties that are considered net lease bellwethers but have materially more retail exposure.
Meanwhile, W.P. Carey has a 23-year streak of annual dividend increases backing up its hefty 6.8% yield. That includes a payout hike delivered in 2020, by the way. So if the stock-price carnage in the REIT sector has piqued your interest, W.P. Carey's diverse portfolio offers a way to get broad exposure with just one purchase.
2. Federal Realty: A retail focus, but with a twist
For investors who are actually attracted to the retail space right now -- perhaps because they think that in the aftermath of COVID-19, it won't be as bad as some fear -- a good stock to consider is Federal Realty. Dividends for the REIT's shares are currently yielding 5.3% -- a historical high. And the company has put together an incredible 52-year streak of annual dividend increases. That puts it in the rare company of Dividend Kings like Coca-Cola and Procter & Gamble. The problem, of course, is that its business is all about retail.
But it's important to understand what kind of retail properties Federal Realty owns. About two-thirds of its carefully curated portfolio is made up of shopping centers located in affluent, high-barrier-to-entry markets. Its 100 or so properties feature businesses that people visit regularly, including grocery stores, pharmacies, and hardware stores. These are essential businesses that have remained open throughout the COVID-19 shutdowns.
Obviously, not all of the business it leases to fit the "essential" description, and Federal Realty's revenues have been hit by the coronavirus: It has reported that it only collected about half of its April rents. However, based on the location of its properties and the type of tenants it has, this REIT is likely to recover reasonably well.
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And then there's the roughly one-third of the portfolio that is classified as mixed-use. These properties bring together living, working, and playing in one place. Via this segment, Federal Realty has exposure to around 2,700 apartments, broadening its diversification beyond retail. And, assuming COVID-19 results in more people looking for apartments that are within walking distance of most of their regular needs, mixed-use properties could become an increasingly attractive property type. Already a leader in the space, Federal Realty would benefit right away and be able to use its expertise to expand in this unique niche.
3. AvalonBay Communities: Someplace to live
While you're considering Federal Realty's apartment exposure, you should also give some consideration to AvalonBay Communities, one of the largest residential landlords in the United States. It owns around 300 apartment communities with a total of more than 86,000 individual units. Moreover, the REIT is focused on high-end properties in high-barrier-to-entry markets.
At its current share price, the REIT's dividend yields about 4.1%, which is at the high end of its historical range. It has boosted its payout annually for nine years, after holding it steady for a few years following the Great Recession. The key takeaway here is that even the deep 2008-09 downturn didn't compel management to cut its dividend. That's important because efforts to contain COVID-19 have pushed the United States into another downturn, one that most economists agree is already a recession. People will still need places to live, though, and AvalonBay has proven it can meet that need in a way that is resilient in the face of economic headwinds.
A key part of AvalonBay's long-term strength comes from the fact that it takes an active approach with its portfolio. That includes selling older assets when it can get good prices for them and reinvesting the proceeds into new properties. If management can find apartments to acquire at desirable prices, it will buy them, but very often it prefers to take advantage of another of its areas of expertise: construction. This is an important differentiator, since building apartments itself often results in higher returns. And it gives the REIT greater control over the quality of what it owns. Overall, AvalonBay is one of the best-managed apartment REITs and worth a close look today.
Seeing the good in the bad
There's no question that REITs in general have been hit with massive headwinds today because of the COVID-19 pandemic. But that has left some of the best names in the industry trading at notably discounted prices. For long-term investors who can step back and see that Wall Street is, perhaps, throwing the baby out with the bathwater, W.P. Carey, Federal Realty, and AvalonBay are all good choices to consider buying today -- before Wall Street fully realizes that some REITs are, indeed, better-run than others.
