Apartment real estate investment trust (REIT) UDR (UDR 0.21%) has a broadly diversified portfolio, unlike more focused peers such as Essex Property Trust (ESS -0.21%). Diversification is a good thing, but it also tends to mute performance. That's often seen as a negative in good times, but it's a huge benefit in bad periods because the downside isn't as bad. Here's a quick look at UDR's performance during the pandemic and its surprising strong performance coming out of it. And why, for more conservative types, it could be one of the best investment options in the apartment market.
Where are the eggs?
Investors are frequently told to diversify their portfolios. It's good advice, since it is difficult, if not impossible, to always pick winning stocks. Even legends like Warren Buffett make mistakes! That said, a REIT's portfolio is similar in many ways to that of an individual investor, only the investments are physical assets. Putting all of a property portfolio's eggs in one basket can work out great if things are going well, but it can also expose shareholders to heightened risk when things aren't.
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In fact, since the start of 2020, Essex Property Trust, which is focused almost exclusively on the West Coast, has seen its stock rise around 18%. UDR, which is much more diversified, is up just over 23%. And while both apartment REITs fell sharply during the worst of the pandemic, UDR's stock didn't drop quite as far. Sure, Essex's business is bouncing back along with the rebound in the markets it serves. But UDR's portfolio is bouncing back, too, and it didn't fall quite as hard to begin with, leading to a better overall outcome during this rough patch.
The differences here are notable. The West Coast makes up basically all of Essex's portfolio. At UDR the West is roughly 36% of total revenue. The other roughly two-thirds of its portfolio is spread across the Mid-Atlantic (22% of revenue), Northeast (17%), Southeast (12%), Southwest (7%), and a sizable "other" (around 5%) category.
Some interesting numbers
What's notable about this breakdown is that UDR's overall revenue fell 2.8% on a cash basis in 2020. However, that was largely driven by just two regions. The REIT's West region witnessed a revenue decline of 4.6%, while the Northeast was off by 8.9%. Together these two areas represent around half of the portfolio, so they are very important. But, because of the diversification in the portfolio, the overall drop was much less than the decline in either of these areas. In fact, the company's assets in the Southeast and Southwest both reported revenue gains in the low-single digits in 2020, helping to offset the hit.
In 2021, meanwhile, UDR's cash revenue growth was 1.5%. To be fair, for the full year, the company's West region saw revenue decline 0.4%. However, every other region, including the Northeast, experienced revenue growth.
Even more impressive, though, was the fourth quarter of 2021. Cash revenue growth in the final stanza of the year was a huge 9% compared with the fourth quarter of 2020. And every single region was up, with double-digit gains in the company's West and Northeast markets. Occupancy remains strong as well, at 97.1%, up from 96.1% in the fourth quarter of 2020.
The ability to push through large rent increases has been a vital piece of the recovery story here. But it's also important to remember that portfolio diversification blunted the hit from the pandemic to some degree. Now that UDR's business is picking up again, and every region it serves is thriving, the REIT is really firing on all cylinders. Make sure to keep an eye on first-quarter earnings results, expected on April 26, to see if the positive trends hold.
Don't get overly excited
Shareholders should be pleased with UDR's underlying performance because it validates the benefits of diversification. It shows why conservative investors might want to favor this apartment landlord over a more focused REIT like Essex, which is reliant on just one region. But don't forget that, despite the current strength throughout UDR's portfolio, the upside probably won't be quite as robust as less diversified names. However, that's likely a worthwhile trade-off for most investors and particularly so for conservative ones.
