{"id":179744,"date":"2024-12-11T16:33:23","date_gmt":"2024-12-11T23:33:23","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=179744"},"modified":"2024-12-11T16:33:26","modified_gmt":"2024-12-11T23:33:26","slug":"top-3-reits-to-buy-in-2025","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/top-3-reits-to-buy-in-2025","title":{"rendered":"3 Top REITs to Consider Buying in 2025"},"content":{"rendered":"\n

I\u2019ve shared several articles outlining why I believe real estate investment trusts (<\/span>REITs<\/span><\/a>) are <\/span>better investments than rental properties<\/span><\/a> in most cases. <\/span>In summary,<\/span> studies consistently demonstrate that REITs deliver superior returns, are inherently safer, and require significantly less effort to manage.<\/span><\/p>\n\n\n\n

Study 1: FTSE Equity REIT Index compared to NCREIF Property Index as an annual return percentage (1977-2010)\u2014<\/span>EPRA<\/span><\/a><\/strong><\/h3>\n\n\n\n
\"\"<\/figure>\n\n\n\n

Study 2: Private equity real estate compared to listed equity REITs as net total return per year over 25 years\u2014<\/span>Cambridge Associates<\/span><\/a><\/strong><\/h3>\n\n\n\n
\"\"<\/figure>\n\n\n\n

Study 3: Performance of U.S. REITs and private real estate returns (1980-2019)\u2014<\/span>NAREIT<\/span><\/a><\/strong><\/h3>\n\n\n\n
\"\"<\/figure>\n\n\n\n

This<\/span> is particularly true today, as REITs are currently priced at historically low valuations\u2014levels not seen since the Great Financial Crisis. It\u2019s not unusual to find REITs trading at substantial discounts to the intrinsic value of their properties after accounting for debt.<\/span><\/p>\n\n\n\n

Given these conditions, investing in rental properties makes even less sense now, as it would involve paying a premium for similar exposure.<\/span><\/p>\n\n\n\n

Now,<\/span> let\u2019s transition from theory to practice: I\u2019ll highlight three of my top REIT picks for 2025.<\/span> I\u2019ve deliberately chosen higher-yielding REITs to address the common misconception among rental property investors that REIT dividend yields are too low.<\/span><\/p>\n\n\n\n

This notion <\/span>is far from<\/span> accurate.<\/span> The REITs I\u2019m about to discuss offer dividend yields of up to 10%\u2014yields that are <\/span>not only sustainable but also<\/span> growing.<\/span> Furthermore, these REITs trade at significant discounts, offering upside potential <\/span>of<\/span> up to 50% in a recovery.<\/span><\/p>\n\n\n\n

1. Armada Hoffler Properties (AHH)<\/span><\/h2>\n\n\n\n

AHH<\/a> stands out as the only REIT specializing in mixed-use properties, which blend retail, residential, office, and other uses into a single development:<\/span><\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Armada Hoffler<\/a><\/span><\/em><\/p>\n\n\n\n

These mixed-use properties are highly desirable, commanding premium rents compared to single-use properties and consistently maintaining high occupancy rates. <\/span>The combination of<\/span> different uses creates synergies that enhance convenience, livability, and walkability.<\/span><\/p>\n\n\n\n

Unfortunately, the market seems to overlook the appeal of AHH\u2019s unique \u201clive-work-play\u201d properties. Instead, investors focus on the fact that roughly one-third of AHH\u2019s cash flow comes from office space, which has negatively impacted its market sentiment and led to a deeply discounted valuation:<\/span><\/p>\n\n\n\n

<\/td>Armada Hoffler Properties<\/strong><\/td>Average REIT<\/strong><\/td><\/tr>
FFO* multiple<\/td>8.5x<\/td>15x<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

(*FFO stands for funds from operations. It is a commonly used metric in the REIT sector to estimate the cash flow. The FFO multiple is the equivalent of the P\/E multiple for regular stocks.)<\/em><\/p>\n\n\n\n

We see this as <\/span>a clear<\/span> mispricing. A valuation of 8.5x FFO suggests significant challenges, but that doesn\u2019t reflect reality.<\/span><\/p>\n\n\n\n

Residential properties typically warrant premium valuations, with peers like Camden Property Trust trading at approximately 16x FFO.<\/span><\/p>\n\n\n\n

Retail<\/span><\/a>, currently the hottest property sector due to limited new supply and strong rent growth, <\/span>also<\/span> trades at premium valuations, with peers like Federal Realty Trust (FRT) at 16x FFO.<\/span><\/p>\n\n\n\n

AHH\u2019s office portfolio, meanwhile, consists of precisely the type of properties that should perform well in the long term. Many tenants are shifting to hybrid work models, favoring high-quality office spaces in convenient mixed-use locations. AHH\u2019s office properties boast a 94.7% occupancy rate, long-term leases, and consistent rent growth even in today\u2019s market.<\/span><\/p>\n\n\n\n

While AHH employs slightly higher leverage than some of its peers, its balance sheet remains sound, with a 50% <\/span>loan-to-value (LTV) ratio<\/span><\/a> and a BBB investment-grade credit rating.<\/span><\/p>\n\n\n\n

Therefore, we expect AHH to keep doing just fine over the long run. It is a high-quality REIT that significantly outperformed the broader REIT market <\/span>up<\/span> until the pandemic.<\/span><\/p>\n\n\n\n

\"\"
YCharts<\/em><\/a><\/figcaption><\/figure>\n\n\n\n

However, concerns about office properties have suppressed its valuation, which has yet to recover. <\/span>Currently,<\/span> AHH trades at a steep discount and offers a near 8% dividend yield, safely covered by a low 75% payout ratio.<\/span> The REIT has consistently raised its dividend in recent years, and we expect this trend to continue.<\/span><\/p>\n\n\n\n

We estimate AHH\u2019s fair value at 14x FFO, which implies approximately 50% upside. In the meantime, the high yield makes it easier to remain patient.<\/span><\/p>\n\n\n\n

2. EPR Properties (EPR)<\/span><\/h2>\n\n\n\n

EPR<\/a> is in a similar position to AHH, with its assets and risk profile misunderstood by the market, resulting in an unusually high yield and low valuation.<\/span><\/p>\n\n\n\n

EPR focuses on experience-oriented net lease properties, including golf complexes, movie theaters, and water parks. The market seems concerned that these assets, reliant on discretionary spending, might struggle during a recession.<\/span><\/p>\n\n\n\n

This perception <\/span>is frequently echoed<\/span> in comments on financial blogs, where many investors express reservations about EPR due to recession fears.<\/span><\/p>\n\n\n\n

However, these concerns overlook EPR\u2019s business model as a net lease REIT. Its leases average 12 years, with rents locked in for the duration and ~2% annual escalations. Consequently, rents will continue to grow even in a recession:<\/span><\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

EPR Properties<\/a><\/span><\/em><\/p>\n\n\n\n

The primary risk would be tenant defaults. But with a historic rent coverage ratio of 2.1x, EPR\u2019s tenants are highly profitable at the property level. Even if profits <\/span>were halved<\/span>, most tenants would <\/span>still<\/span> remain profitable. <\/span>This<\/span> provides EPR with a significant margin of safety:<\/span><\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

EPR Properties<\/span><\/em><\/p>\n\n\n\n

Tenants are unlikely to forfeit long-term, profitable properties over short-term difficulties. Remember, they didn\u2019t abandon properties en masse even during the pandemic\u2014arguably the worst crisis <\/span>imaginable<\/span> for EPR\u2019s portfolio.<\/span><\/p>\n\n\n\n

In fact,<\/span> a regular recession could <\/span>actually<\/span> benefit <\/span><\/em>EPR by driving down interest rates. For some tenants, their main challenge is overleveraged balance sheets rather than operational struggles, and lower rates could alleviate this pressure while <\/span>also<\/span> improving EPR\u2019s market sentiment.<\/span><\/p>\n\n\n\n

Like AHH, EPR has an investment-grade balance sheet with a 40% LTV and a strong history of market outperformance:<\/span><\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

EPR Properties<\/span><\/em><\/p>\n\n\n\n

Despite this, EPR trades at a discounted valuation and a high yield. <\/span>Its near-8% dividend yield is well covered by a 70% payout ratio, and the dividend has been growing steadily, much like AHH\u2019s.<\/span><\/p>\n\n\n\n

We project approximately 50% upside for EPR as it demonstrates its resilience and re-rates closer to 14x FFO. For this reason, EPR is one of the <\/span>largest<\/span> positions in our high-yield landlord portfolio.<\/span><\/p>\n\n\n\n

3. NewLake Capital Partners (NLCP)<\/span><\/h2>\n\n\n\n

Lastly, we have NLCP<\/a>, the highest-yielding REIT in this lineup.<\/span><\/p>\n\n\n\n

Following a recent dip,<\/span> NLCP <\/span>is priced<\/span> near a 10% dividend yield.<\/span> Although it\u2019s just shy of this mark, a pending dividend hike <\/span>is likely to<\/span> push it above 10%.<\/span><\/p>\n\n\n\n

Why are we confident in such a high yield? NLCP has raised its dividend nearly every quarter since going public:<\/span><\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

NewLake Capital Partners<\/a><\/span><\/em><\/p>\n\n\n\n

We recently <\/span>interviewed<\/span><\/a> NLCP\u2019s CEO, who expressed strong optimism about the company\u2019s future.<\/span><\/p>\n\n\n\n

NLCP primarily owns cannabis cultivation facilities in limited-license states. These restrictions limit property supply while demand for cannabis continues to rise. Additionally, NLCP benefits from <\/span>very<\/span> long lease terms, averaging 14 years, with 2.6% annual rent escalations.<\/span><\/p>\n\n\n\n

Crucially, NLCP carries almost no debt, giving it the flexibility to expand its portfolio significantly. By earning substantial spreads over its cost of capital, NLCP could meaningfully boost cash flow and dividends.<\/span><\/p>\n\n\n\n

Currently, NLCP\u2019s payout ratio is at the lower end of its 80% to 90% target range, giving us confidence that another dividend increase is imminent. Not bad for a REIT yielding close to 10%!<\/span><\/p>\n\n\n\n

\n \n\n
\n
\n \n\n

Invest Smarter with PassivePockets<\/p>\n\n\n\n

Access education, private investor forums, and sponsor & deal directories \u2014 so you can confidently find, vet, and invest in syndications.<\/p>\n\n\n\n

\n Start your 7-Day Free Trial<\/a>\n <\/div>\n\n <\/main>\n <\/div>\n\n
\n \"passivepockets\n <\/div>\n <\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"

I\u2019ve shared several articles outlining why I believe real estate investment trusts (REITs) are better investments than rental properties in most cases. In summary, studies consistently demonstrate that REITs deliver […]<\/p>\n","protected":false},"author":613706,"featured_media":179746,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7363],"tags":[],"class_list":["post-179744","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-reits-passive-investing"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/179744","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613706"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=179744"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/179744\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/179746"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=179744"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=179744"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=179744"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}