3 Top REITs to Consider Buying in 2025

I’ve shared a number of articles outlining why I imagine actual property funding trusts (REITs) are higher investments than rental properties most often. In abstract, research constantly show that REITs ship superior returns, are inherently safer, and require considerably much less effort to handle.

Research 1: FTSE Fairness REIT Index in comparison with NCREIF Property Index as an annual return share (1977-2010)—EPRA

Research 2: Personal fairness actual property in comparison with listed fairness REITs as web complete return per yr over 25 years—Cambridge Associates

Research 3: Efficiency of U.S. REITs and personal actual property returns (1980-2019)—NAREIT

This is especially true at present, as REITs are presently priced at traditionally low valuations—ranges not seen for the reason that Nice Monetary Disaster. It’s commonplace to seek out REITs buying and selling at substantial reductions to the intrinsic worth of their properties after accounting for debt.

Given these circumstances, investing in rental properties makes even much less sense now, as it will contain paying a premium for comparable publicity.

Now, let’s transition from concept to apply: I’ll spotlight three of my high REIT picks for 2025. I’ve intentionally chosen higher-yielding REITs to deal with the widespread false impression amongst rental property buyers that REIT dividend yields are too low.

This notion is way from correct. The REITs I’m about to debate supply dividend yields of as much as 10%—yields which are not solely sustainable but in addition rising. Moreover, these REITs commerce at vital reductions, providing upside potential of as much as 50% in a restoration.

1. Armada Hoffler Properties (AHH)

AHH stands out as the one REIT specializing in mixed-use properties, which mix retail, residential, workplace, and different makes use of right into a single growth:

Armada Hoffler

These mixed-use properties are extremely fascinating, commanding premium rents in comparison with single-use properties and constantly sustaining excessive occupancy charges. The mix of totally different makes use of creates synergies that improve comfort, livability, and walkability.

Sadly, the market appears to miss the attraction of AHH’s distinctive “live-work-play” properties. As a substitute, buyers concentrate on the truth that roughly one-third of AHH’s money stream comes from workplace area, which has negatively impacted its market sentiment and led to a deeply discounted valuation:

(*FFO stands for funds from operations. It’s a generally used metric within the REIT sector to estimate the money stream. The FFO a number of is the equal of the P/E a number of for normal shares.)

We see this as a transparent mispricing. A valuation of 8.5x FFO suggests vital challenges, however that doesn’t mirror actuality.

Residential properties sometimes warrant premium valuations, with friends like Camden Property Belief buying and selling at roughly 16x FFO.

Retail, presently the most popular property sector because of restricted new provide and powerful hire progress, additionally trades at premium valuations, with friends like Federal Realty Belief (FRT) at 16x FFO.

AHH’s workplace portfolio, in the meantime, consists of exactly the kind of properties that ought to carry out nicely in the long run. Many tenants are shifting to hybrid work fashions, favoring high-quality workplace areas in handy mixed-use areas. AHH’s workplace properties boast a 94.7% occupancy price, long-term leases, and constant hire progress even in at present’s market.

Whereas AHH employs barely greater leverage than a few of its friends, its steadiness sheet stays sound, with a 50% loan-to-value (LTV) ratio and a BBB investment-grade credit standing.

Due to this fact, we count on AHH to maintain doing simply fantastic over the long term. It’s a high-quality REIT that considerably outperformed the broader REIT market up till the pandemic.

Nonetheless, considerations about workplace properties have suppressed its valuation, which has but to recuperate. At the moment, AHH trades at a steep low cost and presents a close to 8% dividend yield, safely coated by a low 75% payout ratio. The REIT has constantly raised its dividend in recent times, and we count on this development to proceed.

We estimate AHH’s honest worth at 14x FFO, which means roughly 50% upside. Within the meantime, the excessive yield makes it simpler to stay affected person.

2. EPR Properties (EPR)

EPR is in an identical place to AHH, with its property and danger profile misunderstood by the market, leading to an unusually excessive yield and low valuation.

EPR focuses on experience-oriented web lease properties, together with golf complexes, film theaters, and water parks. The market appears involved that these property, reliant on discretionary spending, would possibly battle throughout a recession.

This notion is incessantly echoed in feedback on monetary blogs, the place many buyers categorical reservations about EPR because of recession fears.

Nonetheless, these considerations overlook EPR’s enterprise mannequin as a web lease REIT. Its leases common 12 years, with rents locked in for the length and ~2% annual escalations. Consequently, rents will proceed to develop even in a recession:

EPR Properties

The first danger could be tenant defaults. However with a historic hire protection ratio of two.1x, EPR’s tenants are extremely worthwhile on the property degree. Even when earnings have been halved, most tenants would nonetheless stay worthwhile. This offers EPR with a big margin of security:

EPR Properties

Tenants are unlikely to forfeit long-term, worthwhile properties over short-term difficulties. Keep in mind, they didn’t abandon properties en masse even in the course of the pandemic—arguably the worst disaster conceivable for EPR’s portfolio.

In reality, a daily recession may really profit EPR by driving down rates of interest. For some tenants, their major problem is overleveraged steadiness sheets moderately than operational struggles, and decrease charges may alleviate this stress whereas additionally enhancing EPR’s market sentiment.

Like AHH, EPR has an investment-grade steadiness sheet with a 40% LTV and a robust historical past of market outperformance:

EPR Properties

Regardless of this, EPR trades at a reduced valuation and a excessive yield. Its near-8% dividend yield is nicely coated by a 70% payout ratio, and the dividend has been rising steadily, very similar to AHH’s.

We venture roughly 50% upside for EPR because it demonstrates its resilience and re-rates nearer to 14x FFO. For that reason, EPR is among the largest positions in our high-yield landlord portfolio.

3. NewLake Capital Companions (NLCP)

Lastly, we now have NLCP, the highest-yielding REIT on this lineup.

Following a latest dip, NLCP is priced close to a ten% dividend yield. Though it’s simply shy of this mark, a pending dividend hike is more likely to push it above 10%.

Why are we assured in such a excessive yield? NLCP has raised its dividend practically each quarter since going public:

NewLake Capital Companions

We lately interviewed NLCP’s CEO, who expressed robust optimism concerning the firm’s future.

NLCP primarily owns hashish cultivation amenities in limited-license states. These restrictions restrict property provide whereas demand for hashish continues to rise. Moreover, NLCP advantages from very lengthy lease phrases, averaging 14 years, with 2.6% annual hire escalations.

Crucially, NLCP carries nearly no debt, giving it the flexibleness to broaden its portfolio considerably. By incomes substantial spreads over its price of capital, NLCP may meaningfully increase money stream and dividends.

At the moment, NLCP’s payout ratio is on the decrease finish of its 80% to 90% goal vary, giving us confidence that one other dividend enhance is imminent. Not unhealthy for a REIT yielding near 10%!

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Notice By BiggerPockets: These are opinions written by the writer and don’t essentially characterize the opinions of BiggerPockets.