This Real Estate Stock Posted Growth in Every Region | Ezine Daddy

Residential Real Estate Investment Trust (REIT) UDR (UDR 0.66% ) has a broadly diversified portfolio, in contrast to more focused competitors such as Essex Property Trust (ESS 0.94% ). Diversification is a good thing, but it also tends to dampen performance. This is often seen as a negative when times are good, but is a huge benefit when times are bad because the downside isn’t that bad. Here’s a quick look at how UDR performed during the pandemic and the resulting surprisingly strong performance. And why, for more conservative types, it could be one of the best investment choices in the housing market.

Where are the eggs?

Investors are often advised to diversify their portfolios. It’s good advice because it’s difficult, if not impossible, to always pick winning stocks. Even legends like Warren Buffett make mistakes! However, a REIT’s portfolio is similar in many ways to that of an individual investor, except that the investments are physical assets. Putting all the eggs of a real estate portfolio in one basket can work great when things are going well, but it can also put shareholders at increased risk when things aren’t going well.

Image source: Getty Images.

In fact, Essex Property Trust, which focuses almost entirely on the west coast, has seen its stock soar around 18% since the start of 2020. UDR, which is much more diversified, is up just over 23%. And while both residential REITs fell sharply during the worst of the pandemic, UDR’s stock didn’t fall quite as much. Sure, Essex’s business is recovering along with the recovery in the markets it serves. But UDR’s portfolio is also recovering and initially did not fall quite as much, which led to a better overall result in this difficult phase.

The differences here are striking. The West Coast basically makes up Essex’s entire portfolio. At UDR, the West accounts for about 36% of total sales. The other roughly two-thirds of the portfolio is spread across the Mid-Atlantic (22% of sales), the Northeast (17%), the Southeast (12%), the Southwest (7%) and a sizable “Other” (about 5% ) category.

Some interesting numbers

What’s notable about this breakdown is that UDR’s total revenue for 2020 declined 2.8% on a cash basis. However, this was largely due to just two regions. The West region of the REIT saw revenue decline 4.6%, while the Northeast declined 8.9%. Together these two areas represent about half of the portfolio and are therefore very important. However, due to portfolio diversification, the overall decline was much smaller than the decline in each of these areas. In fact, the company’s assets in the Southeast and Southwest posted low-single-digit sales increases in 2020, which helped offset the slump.

In 2021, UDR Cash Earnings Growth was 1.5%. To be fair, the company’s western region saw sales decline 0.4% for the full year. However, all other regions, including the Northeast, saw sales growth.

Even more impressive, however, was the fourth quarter of 2021. Cash revenue growth for the final stanza of the year was a whopping 9% compared to the fourth quarter of 2020. And every single region grew, with double-digit gains for the year in the company’s western and northeastern markets . Occupancy also remains strong at 97.1%, up from 96.1% in the fourth quarter of 2020.

The ability to push through large rent increases was a key part of the recovery story here. But it’s also important to remember that portfolio diversification has to some extent mitigated the impact of the pandemic. Now that UDR’s business is picking up again and every region it serves is thriving, the REIT is really firing on all cylinders. Be sure to keep an eye on the first quarter results expected on April 26 to see if the positive trends continue.

Don’t get overly excited

Shareholders should be pleased with UDR’s underlying performance as it confirms the benefits of diversification. It shows why conservative investors should choose this rental company over a more focused REIT like Essex, which relies on only one region. But keep in mind that despite the current strength of the overall UDR portfolio, the upside potential is unlikely to be quite as robust as for less diversified stocks. However, this is likely a worthwhile trade-off for most investors, and particularly conservative ones.

This article represents the opinion of the author, who may disagree with the “official” endorsement position of a Motley Fool premium advisory service. We are colourful! Challenging an investment thesis — including one of our own — helps us all think critically about investing and make decisions that help us be smarter, happier, and wealthier.

Leave a Comment