The average real estate investment trust (REIT), using Vanguard Real Estate ETF as a proxy, was off by roughly 8% in pandemic-ravaged 2020. But that's a mix of the good and bad and doesn't actually tell you the whole story. That's why it is so interesting to see that highly focused Digital Realty Trust (DLR 0.50%) was up 16% in 2020, according to data from S&P Global Market Intelligence.
Meanwhile, more diversified REIT W.P. Carey (WPC -0.48%) and Brookfield Property Partners (BPY) were down roughly 12% and 21%, respectively. Those very different performance numbers hint at an interesting story. It's worth taking a few moments to dig in here.
When investors look back at 2020, the big story will invariably be the coronavirus pandemic. That makes total sense given the worldwide impact and the disruption it caused to everyday life. That's the backstory for the stock market gains at real estate investment trust Digital Realty: As non-essential businesses got shut down and people practiced social distancing, much of the world shifted online. And Digital Realty owns a global portfolio of roughly 280 data centers.
In fact, through the first nine months of 2020, Digital Realty's rental revenue was up 17% year over year. So it basically didn't skip a beat despite the pandemic as it continued to push forward on its growth agenda. Investors seeking out safe real estate harbors during the storm flocked to the stock based on its continued success and its digital focus. That makes pretty good sense.
At the other ends of the spectrum were names like W.P. Carey and Brookfield Property, which both own diversified portfolios. W.P. Carey's business spans across the industrial (24% of rents), warehouse (23%), office (23%), retail (17%), and self-storage (5%) sectors (a sizable "other" category makes up the rest). While the industrial and warehouse portfolios were net beneficiaries of the online shift (thanks to internet retailing), office and retail were both on the losing end of the stick in 2020. Investors reacted by selling the stock, despite the fact that its rent collection rates never dipped below 96%. For long-term investors, however, this might actually be a buying opportunity -- and note that the REIT's generous 5.9% yield is backed by over two decades of annual dividend increases (including four in 2020).
Brookfield Property is also diversified, but it's in even "worse" property segments, which helps explain why it was the biggest laggard of this trio. The master limited partnership's portfolio is spread across the office, retail, multifamily, industrial, hospitality, triple net lease, self-storage, student housing, and manufactured housing sectors. The "retail" component, meanwhile, is largely malls, one of the hardest-hit sectors. That said, the office component wasn't far behind, given that social distancing also meant working from home became a big trend. Those two segments make up roughly 85% of Brookfield Property's rent roll, so its positioning going into the coronavirus pandemic was extremely bad.
That's notable because management was questioned about the distribution's safety during Brookfield Property's third-quarter 2020 earnings conference call -- even after a roughly 10% distribution cut in the second quarter. Basically, the partnership is sticking to the current payout for now because it believes that performance will improve, even though it may mean leaning on the balance sheet to cover the payment. That's not the case at W.P. Carey -- so the sell-off at Brookfield Property may have it looking cheap right now, but it's probably more appropriate for aggressive investors.
That is even more true now that Brookfield Property's external manager, Brookfield Asset Management (BN 2.45%) has offered to buy the shares of Brookfield Property that it doesn't already own for $16.50 per share. Brookfield Asset Management tends to be fairly opportunistic when it comes to buying and selling assets. So it's likely that Brookfield Asset Management either believes Brookfield Property is trading on the cheap or it wants to sit with the current property investments until they rebound without Wall Street looking over its shoulder. Brookfield Property rose on the news, erasing a portion of the 2020 loss, but now its really more of a special situations play, which is a type of investing that requires a little more work and, at times, risk.
The divergent fortunes of Digital Realty, W.P. Carey, and Brookfield Property in 2020 provide an interesting look at both the reality that REITs faced last year and the impact of investor sentiment. Digital Realty was in the right place at the right time, and investors logically rewarded it for that. W.P. Carey has a mix of assets, but its underlying performance was quite strong. Being in a few of the out-of-favor sectors, however, led investors to dump the stock -- perhaps opening up a buying opportunity for long-term investors. Brookfield Property's business, meanwhile, is heavily weighted toward office and malls, two of the worst-performing segments of the REIT space last year. And while the stock has made news-driven gains on the first trading day of 2021, the buyout offer from parent Brookfield Asset Management has turned it into a special situation stock, which isn't a great fit for most investors.
All in all, 2020 was a rough year for REITs -- but if you look closely enough, there are still some bright spots, and perhaps even some buying opportunities as 2021 gets under way.