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Money in Woman's Wallet

These 3 REITs Are Creating New Income Streams for Tough Times

Nov 04, 2020 by Reuben Gregg Brewer
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The global coronavirus pandemic has been a huge headwind for some real estate investment trusts (REITs). However, not all REITs are willing to hunker down and focus on survival alone. Some, like VEREIT (NYSE: VER), Ventas (NYSE: VTR), and Public Storage (NYSE: PSA), are creating new income streams that can help them take advantage of industry dislocations. Here's what you need to know.

The simple story

Public Storage is perhaps the best basic example of what's going on here. This real estate investment trust owns and operates storage facilities. It's a fairly stable business, since customers are loath to schlep their stuff from storage unit to storage unit just to save a couple of bucks a month in rent.

In fact, the company has weathered COVID-19 in relative stride. During Public Storage's second-quarter earnings conference call, management noted it was seeing new customers show up, while older customers are staying longer.

But the story here isn't really about the pandemic. There's been a building spree in the storage space that's led to an increase in competition. With over 2,500 properties and 1.5 million customers, Public Storage is well-positioned to compete, but some smaller entrants may not be. So Public Storage has started to build a business where it runs properties for others. This is a small business, to be sure. And Public Storage only entered the space in 2018. But it's been growing quickly, increasing its scale by 148% year over year (or roughly 49 properties) in 2019 alone.

What's interesting here is that Public Storage is basically getting paid to operate these properties, which is what it's good at. Moreover, it saves the company the cost of buying or building a facility. It's kind of like icing on the cake. But there's another way REITs are basically doing this same thing that's a bit more intense.

Institutional investors

Healthcare REIT Ventas is dealing with material headwinds today, as senior living facilities adjust to life in the era of COVID-19. It hasn't been pretty, with adjusted funds from operations falling 21% in the second quarter and the company cutting its dividend by a painful 43%. The REIT is doing the best it can to ensure the safety of its residents, but this is a very turbulent time.

And yet that hasn't stopped Ventas from exploring new avenues of growth. Notably, it set up an institutional investment vehicle in March. The REIT will buy assets for the new entity and collect fees for running them. Ventas has a 20% stake in the business, but most of the money is coming from others. The key here is that the investors taking part in the investment vehicle have long-term time horizons, so the money is sticky, and Ventas will get paid for doing the types of things it does all the time.

Ventas just announced a billion-dollar purchase of life sciences properties in San Francisco using this vehicle. It's a win/win for Ventas, as it builds a new revenue stream without the need to lock down its own capital during a difficult period for the healthcare sector.

Another REIT doing the same things is VEREIT. This diversified net lease REIT isn't facing the same kinds of headwinds as Ventas. In fact, its business has held up fairly well relative to peers through the COVID-19 economic shutdowns. To put a number on that, rent collection rates dropped to around 80% in April, but are now back up to 95%. That, however, hasn't stopped the REIT from looking for new ways to do things.

To help further its diversification efforts and, at the same time, create new revenue streams, VEREIT has created two institutional joint ventures. One is focused on industrial properties and the other on office assets. It contributed assets to each, helping to get assets it wanted to sell anyway off its balance sheet, and is already starting to add to the portfolios. The main point is that, although a small business, the incremental revenue it generates from running these property portfolios is like free money because it's doing the same things with its own portfolio anyway.

Some risks, but still highly attractive

It wouldn't be fair to suggest there's no downside to what Public Storage, Ventas, and VEREIT, are doing. There's always a chance managing properties for others ends up being an unnecessary distraction. And with VEREIT and Ventas, you have to be concerned about conflicts of interest, since properties could go into a partnership that might have been bought by the REIT for its own portfolio. Such things are worth monitoring.

However, the ability to use other people's money to increase income is a highly desirable side business. That's especially true since it allows these REITs to make greater use of their operating systems, which increases productivity. Moreover, the long-term nature of the relationships means there's less need to worry about capital flight during downturns.

Investors looking at this trio should be pleased to see the creativity being applied by management as they look to get the most out of their respective businesses.

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Reuben Gregg Brewer owns shares of Ventas and VEREIT. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.