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I’ve 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 superior returns, are inherently safer, and require significantly less effort to manage.
Study 1: FTSE Equity REIT Index compared to NCREIF Property Index as an annual return percentage (1977-2010)—EPRA
Study 2: Private equity real estate compared to listed equity REITs as net total return per year over 25 years—Cambridge Associates
Study 3: Performance of U.S. REITs and private real estate returns (1980-2019)—NAREIT
This is particularly true today, as REITs are currently priced at historically low valuations—levels not seen since the Great Financial Crisis. It’s not unusual to find REITs trading at substantial discounts to the intrinsic value of their properties after accounting for debt.
Given these conditions, investing in rental properties makes even less sense now, as it would involve paying a premium for similar exposure.
Now, let’s transition from theory to practice: I’ll highlight three of my top REIT picks for 2025. I’ve deliberately chosen higher-yielding REITs to address the common misconception among rental property investors that REIT dividend yields are too low.
This notion is far from accurate.The REITs I’m about to discuss offer dividend yields of up to 10%—yields that are not only sustainable but also growing. Furthermore, these REITs trade at significant discounts, offering upside potential of up to 50% in a recovery.
1. Armada Hoffler Properties (AHH)
AHH stands out as the only REIT specializing in mixed-use properties, which blend retail, residential, office, and other uses into a single development:
Armada Hoffler
These mixed-use properties are highly desirable, commanding premium rents compared to single-use properties and consistently maintaining high occupancy rates. The combination of different uses creates synergies that enhance convenience, livability, and walkability.
Unfortunately, the market seems to overlook the appeal of AHH’s unique “live-work-play” properties. Instead, investors focus on the fact that roughly one-third of AHH’s cash flow comes from office space, which has negatively impacted its market sentiment and led to a deeply discounted valuation:
Armada Hoffler Properties
Average REIT
FFO* multiple
8.5x
15x
(*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.)
We see this as a clear mispricing. A valuation of 8.5x FFO suggests significant challenges, but that doesn’t reflect reality.
Residential properties typically warrant premium valuations, with peers like Camden Property Trust trading at approximately 16x FFO.
Retail, currently the hottest property sector due to limited new supply and strong rent growth, also trades at premium valuations, with peers like Federal Realty Trust (FRT) at 16x FFO.
AHH’s 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’s office properties boast a 94.7% occupancy rate, long-term leases, and consistent rent growth even in today’s market.
While AHH employs slightly higher leverage than some of its peers, its balance sheet remains sound, with a 50% loan-to-value (LTV) ratio and a BBB investment-grade credit rating.
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 up until the pandemic.
YCharts
However, concerns about office properties have suppressed its valuation, which has yet to recover. Currently, AHH trades at a steep discount and offers a near 8% dividend yield, safely covered by a low 75% payout ratio. The REIT has consistently raised its dividend in recent years, and we expect this trend to continue.
We estimate AHH’s fair value at 14x FFO, which implies approximately 50% upside. In the meantime, the high yield makes it easier to remain patient.
2. EPR Properties (EPR)
EPR 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.
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.
This perception is frequently echoed in comments on financial blogs, where many investors express reservations about EPR due to recession fears.
However, these concerns overlook EPR’s 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:
EPR Properties
The primary risk would be tenant defaults. But with a historic rent coverage ratio of 2.1x, EPR’s tenants are highly profitable at the property level. Even if profits were halved, most tenants would still remain profitable. This provides EPR with a significant margin of safety:
EPR Properties
Tenants are unlikely to forfeit long-term, profitable properties over short-term difficulties. Remember, they didn’t abandon properties en masse even during the pandemic—arguably the worst crisis imaginable for EPR’s portfolio.
In fact, a regular recession could actuallybenefit 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 also improving EPR’s market sentiment.
Like AHH, EPR has an investment-grade balance sheet with a 40% LTV and a strong history of market outperformance:
EPR Properties
Despite this, EPR trades at a discounted valuation and a high yield. Its near-8% dividend yield is well covered by a 70% payout ratio, and the dividend has been growing steadily, much like AHH’s.
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 largest positions in our high-yield landlord portfolio.
3. NewLake Capital Partners (NLCP)
Lastly, we have NLCP, the highest-yielding REIT in this lineup.
Following a recent dip, NLCP is priced near a 10% dividend yield. Although it’s just shy of this mark, a pending dividend hike is likely to push it above 10%.
Why are we confident in such a high yield? NLCP has raised its dividend nearly every quarter since going public:
NewLake Capital Partners
We recently interviewed NLCP’s CEO, who expressed strong optimism about the company’s future.
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 very long lease terms, averaging 14 years, with 2.6% annual rent escalations.
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.
Currently, NLCP’s 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%!
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
