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Invest in diversified REITs

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Diversified real estate investment trusts (REITs) take a broad approach to investing in commercial real estate. Instead of focusing on a particular type of property (for example, retail, industrial, residential or office) like most REITs, these companies have a diversified portfolio that includes more than one type of property.

Below, we’ll take a closer look at why some REITs choose to diversify and the pros and cons of being a diversified REIT. We also feature some of the best diversified REITs for investors to consider.

Understanding Diversified REITs

A diversified REIT owns a diversified portfolio of commercial real estate, which may include, but is not limited to:

  • office buildings and industrial parks.

  • Warehouses and other industrial buildings.

  • Apartment building.

  • Real estate in the healthcare sector, e.g. B. medical office buildings.

  • Commercial properties, including detached commercial buildings and shopping malls.

  • hotels and spas.

  • gas stations and travel centers.

  • Self-storage facilities.

  • Mixed-use properties that include offices, retail space, and multi-family housing.

Many diversified REITs focus on owning single-tenant net lease properties. These are properties secured by long term triple net leases (NNN) with the tenant. With this rental structure, the tenant is responsible for maintenance, building insurance, and property taxes, allowing the REIT to generate stable rental income.

However, some diversified REITs own multi-tenant properties whose rental income fluctuates due to shorter lease terms or variable expenses. In addition, some diversified REITs own properties that are jointly operated with a third-party manager (for example, hotels and self-storage facilities). For these properties, returns can be even more volatile as occupancy and prices can drop rapidly during a recession.

Diversified REITs do not buy real estate indiscriminately. They develop a strategy to focus on a specific topic. For example, some diversified REITs focus on a particular type of real estate (for example, global net lease real estate or service-related real estate). Others focus on owning a diversified real estate portfolio in a particular city.

Benefits of investing in diversified REITs

Diversified REITs make it easy to invest in real estate. These REITs typically have a diversified portfolio that gives investors relatively broad exposure to different types of commercial real estate, often with balanced risk profiles. In some ways, owning a diversified REIT is similar to investing in a REIT ETF. Both offer instant diversification across multiple property types.

Risks of Investing in Diversified REITs

While diversified REITs can help reduce an investor’s risk profile, they are not without risk. Due to their diversified business operations, many diversified REITs have chosen to pay out most of their cash flow in the form of dividends and therefore have high payout ratios. While that means they are typically high-dividend REITs, it also increases the risk of a dividend cut if a segment of real estate struggles. This strategy can also limit the REIT’s growth opportunities, as it does not retain as much cash for acquisitions and therefore is forced to take out large loans and issue stock to expand.

Diversified REITs may also face risks that depend on the types of real estate they own. Commercial and office properties, for example, have experienced problems in recent years. Lower occupancy and customer traffic have affected the stock prices and cash flows of the diversified REITs that own these types of properties. This problem has led several previously diversified REITs to change their strategies and narrow their investment focus to a specific type of property.

Diversified REITs also face interest rate risk common to all REITs. As interest rates rise, it becomes more expensive for these REITs to borrow and refinance debt. Additionally, higher interest rates make lower-risk, return-oriented investments such as government and corporate bonds more attractive to income investors. As a result, REIT stock prices fall and dividend yields rise to compensate investors for their higher risk profile.

Top 3 Diversified REITs

According to the National Association of Real Estate Investment Trusts (NAREIT), there were 17 publicly traded diversified REITs as of early 2022. That number has dwindled in recent years. Several formerly diversified REITs have focused on a specific property type after years of underperforming some of the other real estate segments.

Despite the drop, there are still some interesting diversified REITs for investors. Three of them deserve a special mention:



market cap


W. P. Carey

(New York Stock Exchange: A1J5SB)

$15.2 billion

A net rent-based REIT with industrial, warehouse, office, retail and self-storage properties.

Properties JBG SMITH


$3.7 billion

A REIT that owns multi-family, mixed-use office and commercial properties in the Washington, DC area.

Trust in service properties


$1.4 billion

A REIT that owns hotels and service-oriented net lease properties.


Here’s a closer look at these diversified REITs

W. P. Carey

WP Carey is one of the largest and most diversified REITs. It focuses on owning essential commercial properties that are rented out to high-quality tenants. As of 2022, the REIT had more than 1,300 properties with approximately 156 million square feet of lettable space leased to more than 350 tenants in more than a dozen industries. Properties include industrial buildings (26% of annual base rent), warehouses (24%), office buildings (20%), commercial buildings (18%), and self-storage facilities (5%). Other types of properties (educational institutions, hotels, gyms, theaters, university residences, restaurants and lots) make up the rest of the portfolio. WP Carey owns the majority of its real estate in the US (63% of its real estate assets) and Europe (35%). Other countries (Canada, Mexico and Japan) make up the remaining 2%.

The REIT is focused on the global net rental market and has therefore been able to generate stable cash flow. This allowed WP Carey to pay an ever-increasing dividend. The REIT has increased its dividend each year since its IPO in 1998. It has a history of generating an above-average dividend yield, making it a great choice for anyone looking to generate passive income from commercial real estate. .

JBG SMITH Real Estate

JBG SMITH is focused on owning quality mixed-use properties in Washington, DC, including office, multi-family, and retail space. The REIT currently owns 17.1 million square feet of operating property and has a portfolio of 16.6 million square feet of mixed-use development opportunities.

The crown jewel of its diverse portfolio is National Landing, where it is the exclusive developer of the e-commerce giant’s new headquarters. Amazon (NASDAQ:RN:906866) is. Additionally, the Company is currently developing several multi-family units with retail space and two new outdoor developments with restaurants, parks and other amenities at National Landing. This focus on Washington, DC makes JBG SMITH an opportunity for real estate investors to participate in the capital area growth that Amazon’s expansion entails.

Trust in service properties

Service Properties Trust is a diversified REIT focused on service-related real estate. The REIT owned nearly 1,100 properties as of 2022, including about 300 hotels and nearly 800 net lease retail properties. Hotels represent 57.5% of the portfolio. Net leases included travel centers (27.8%), restaurants (4.1%), movie theaters (1.6%), health and fitness facilities (1.5%), supermarkets (1.1%), household items and leisure facilities (1%) and other objects (5.4%). This REIT also owns shares in its two largest tenants: Sonesta Holdco Corporation (34%) and America travel hubs (NASDAQ:AAPL).

The net leasing portfolio provides the REIT with a constant cash flow that balances fluctuations in the hotel portfolio. These fluctuations became apparent during the COVID-19 pandemic when hotels were affected. However, occupancy and revenue per available room recovered as travel picked up again. The recovery in travel also benefited travel centers and other service companies.

Still, headwinds have forced the REIT to take steps to improve its financial health in recent years. It also included the sale of several hotels in transactions expected to close in 2022. These transactions will put Service Properties in a better financial position and reduce its exposure to the volatile hotel industry while allowing it to participate in its recovery.

Diversified REITs can be a good option for real estate investors

Diversified REITs allow investors to own a diversified real estate portfolio with a single investment, reducing risk. However, it is important to know what is in the portfolio of a diversified REIT. Because most of these companies develop a strategy around a certain theme, which has its advantages and disadvantages. Some of these strategies have worked well over the years, while others have struggled, forcing the REIT to chart a different course.

The article Investing in Diversified REITs first appeared in The Motley Fool Germany.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. This article was written by Matthew DiLallo and was published on Fool.com on 03/21/2022. It has been translated so that our German readers can join the discussion.

The Motley Fool owns stock and recommends Amazon.

Motley Fool Germany 2022

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