Apartment Real Estate Investment Trusts (REITs) UDR (UDR 0.65%) has a broadly diversified portfolio, unlike more focused peers such as Essex Land Trust (ESS 0.17%). Diversification is a good thing, but it also tends to reduce performance. It’s often seen as a downside in good times, but it’s a huge upside in bad times because the downsides aren’t as severe. Here’s a quick look at how the UDR performed during the pandemic and its surprising performance as a result. And why, for more conservative types, this might be one of the best investment options in the apartment market.
Where are the eggs?
Investors are often asked to diversify their portfolios. This is good advice, because 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 investments are physical assets. Putting all the eggs in a real estate portfolio in one basket can work very well if things are going well, but it can also put shareholders at greater risk when things are not going well.
In fact, since the start of 2020, Essex Property Trust, which focuses almost exclusively on the West Coast, has seen its stock rise by around 18%. The much more diversified UDR is up just over 23%. And while both apartment REITs fell sharply during the worst of the pandemic, UDR shares didn’t fall that far. Of course, Essex’s business is bouncing back with the rebound in the markets it serves. But UDR’s portfolio is also bouncing back, and it didn’t drop as badly initially, leading to a better overall result during this tough time.
The differences here are notable. The West Coast makes up virtually all of Essex’s portfolio. In the UDR, the West accounts for about 36% of total income. The other two-thirds or so of its portfolio is split between Mid-Atlantic (22% of revenue), Northeast (17%), Southeast (12%), Southwest ( 7%), and an important “other” (about 5%) Category.
Some interesting figures
What’s notable about this breakdown is that UDR’s overall revenue fell 2.8% on a cash basis in 2020. However, this was largely driven by just two regions. The West region of the REIT saw a revenue decline of 4.6%, while the Northeast region was down 8.9%. Together, these two areas represent about half of the portfolio, so they are very important. But, due to the diversification of the portfolio, the overall decline was much less than the decline in either of these areas. In fact, the company’s assets in the Southeast and Southwest both saw single-digit revenue gains in the low single digits in 2020, helping to offset the hit.
Meanwhile, in 2021, 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, all other regions, including the Northeast, saw revenue growth.
Even more impressive, however, was the fourth quarter of 2021. Cash revenue growth in the last slice of the year was 9% compared to the fourth quarter of 2020. And every region was up, with double-digit gains in the company’s West and Northeast markets. The occupancy rate also remains high, at 97.1%, compared to 96.1% in the fourth quarter of 2020.
The ability to push through large rent increases has been a critical part of the recovery story here. But it’s also important to remember that portfolio diversification has softened the blow of the pandemic to some extent. Now that UDR’s business is picking up and every region it serves is thriving, the REIT is truly running at full speed. Be sure to keep an eye on the first quarter results, due April 26, to see if the positive trends continue.
Don’t get too excited
Shareholders should be pleased with UDR’s underlying performance, as it validates the benefits of diversification. It shows why conservative investors might want to favor this apartment owner over a more focused REIT like Essex, which relies on a single region. But keep in mind that despite the current strength of UDR’s overall portfolio, the upside is unlikely to be as robust as that of less diversified stocks. However, it is probably a valid compromise for most investors and especially for conservatives.