Rising interest rates have depressed the prices of income-oriented investments like real estate investment trusts (REITs). That has created an opportunity to trade up to the industry's bellwether names. But that's not the only opportunity that's been created, as the stocks of less well known REITs have also fallen on hard times. If you're willing to dig a little deeper, now is a good time to consider UDR(NYSE: UDR), Stag Industrial(NYSE: STAG), and Agree Realty(NYSE: ADC).
UDR is a diversified apartment landlord
The bellwether name in the apartment REIT niche is Avalonbay(NYSE: AVB). If you're looking at it because of the broader REIT decline, you might want to consider UDR instead. While Avalonbay focuses on large metropolitan areas of the country, UDR takes a more diversified approach. Roughly 30% of its portfolio is located in urban markets, with the rest in suburban areas. Around 39% of rents come from the East Coast, 35% from the West Coast, and 26% from the U.S. Sunbelt. And roughly 45% of rents are from class A apartments (an industy qualification system that typically means a newer building in prime locations with lots of ammenities), with the rest from class B assets (fewer ammenities, older) that can be redeveloped into higher-quality properties. It's probably one of the most diversified apartment REITs you can own.
One of the larger apartment REITs, with roughly 60,000 units, it also has a fairly impressive dividend record, with 14 consecutive years of annual dividend increases. UDR has been fairly up front about the issues it face today, recently warning investors that the next year or so will be difficult because new apartment construction will depress pricing strength. That's really just a normal industry cycle. With a yield of 4.8%, compared to AvalonBay's 3.7%, more aggressive investors should probably do a deep dive.
STAG is a growing industrial landlord
When industrial REITs come up, the largest name by far is Prologis(NYSE: PLD). Hidden in that giant's shadow is Stag Industrial. While Prologis focuses on warehouses, Stag's portfolio of around 560 properties also includes manufacturing assets. And, perhaps more important, the REIT is focused on smaller properties in smaller markets. That means it's playing in areas where there's less pressure from new construction and less competition from industry giants like Prologis.
The big attraction of Stag, however, is its dividend. The distribution has been increased annually for 11 years. The dividend yield is 4%, versus around 2.9% for Prologis. Meanwhile, Stag was able to raise rents on expiring leases by a healthy 54% in the third quarter. In other words, the good news in the industrial REIT space is benefiting Stag just as it has been its larger peers. If you're considering Prologis, you might want to examine Stag, too.
Agree Realty has relatively attractive growth prospects
The giant in the net lease sector is Realty Income(NYSE: O), with over 13,000 properties. That makes Agree Realty's portfolio of 2,000 or so properties look downright tiny. That, however, means that growth will be easier to achieve for this largely retail-focused net lease REIT. Simply put, Realty Income needs to invest huge sums of money to move the needle while Agree can achieve growth with much less effort.
Agree's yield is 4.9%, which is actually lower than Realty Income's 5.6%. That's the reverse of the two aforementioned REITs, but it's related to the relative growth prospects between Agree and Realty Income. Notably, Agree's annual dividend has grown by 70% over the past decade, while Realty Income's dividend payment has increased by 35%. If you're the type of income investor attracted to dividend growth, Agree might be the better option for you.
Looking past the giants
As we enter December, it's important to note that there's absolutely nothing wrong with using the REIT downdraft to buy industry bellwethers like AvalonBay, Prologis, and Realty Income. But they aren't the only options, with smaller alternatives like UDR, Stag Industrial, and Agree Realty each offering attractive backstories as well. Now could be a good time to consider these lesser-known REITs even as you look at the top-tier names in the sector.
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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Prologis, Realty Income, and Stag Industrial. The Motley Fool recommends AvalonBay Communities. The Motley Fool has a disclosure policy.
