The real estate sector performed quite poorly over the latter half of 2016 as interest rates began to rise, creating some attractive buying opportunities for long-term investors. Here are two REITs with strong dividends, both of which have fallen considerably from their 2016 highs, that income-seeking investors may want to take a look at.

Sale sign in store's window.

Image source: Getty Images.

Single-family rental homes

Most residential REITs invest in apartment communities, but the Great Recession created some attractive opportunities in the single-family rental market, and a few REITs were formed to take advantage.

One of these, Silver Bay Realty Trust (NYSE: SBY) was formed in 2012 to capitalize on the abundance of attractive single-family properties. The REIT acquires properties, renovates them, leases them to tenants, and manages them internally. Silver Bay has built a portfolio of about 8,900 properties, most of which are in Georgia, Florida, or Arizona -- three markets that were particularly hard-hit by the recession.

The rental housing market is attractive in the U.S. right now, and single-family rentals in particular could perform well in the coming years. Homeownership rates remain at generational lows, and the number of households is growing faster than homes are being built.

Over the next five years, about 6.6 million new households are expected to be formed thanks to the millennial generation entering the housing market, and single-family rentals are expected to capture 1.5 million of these. Apartment properties simply don't have enough space to accommodate newly started families -- only 9% of apartments have three or more bedrooms, as compared with 97% of Silver Bay's properties. Also, single-family homes are typically more affordable. Silver Bay's average home rents for $0.69 per square foot, a 33% discount to the average apartment.

Chart of apartments versus single family bedrooms.

Image source: Silver Bay Realty Trust.

The results so far have been impressive. Silver Bay's properties are almost 97% occupied, and same-home net operating income has grown by 8% over the past year alone. The company's strategy is to continuously try to recycle its capital into higher-yielding assets in order to maximize returns, and it has done a great job of that. For example, it recently exited the highly valued Southern California market at a nice profit and used the proceeds to acquire more attractively valued properties. With only 1.3% of all single-family rentals owned by REITs, there should be no shortage of opportunities to grow for Silver Bay.

A different kind of shopping center

Shopping center REIT DDR Corp (NYSE:SITC) is another cheap dividend stock I think is attractive right now, after a big decline in the second half of 2016.

First, it's important to note that DDR invests in a specific type of shopping center, which it calls "power centers." These are shopping centers located in large markets, where the tenants are high-quality national companies, and where the anchor stores are value- and convenience-oriented.

For example, some of DDR's top tenants include value retailers TJX, Ross Stores, and Burlington Stores. Value retailers are gaining retail market share, as opposed to more traditional department stores such as JCPenney, Macy's, and others, which are collectively losing market share at an annual rate of more than 2.5%. DDR also focuses on non-traditional grocers such as Whole Foods, Trader Joe's, and Wal-Mart, another category consistently gaining market share.

In addition to the anchor tenants, power centers have these characteristics:

  • Over 75% of rent comes from national tenants.
  • Area population of 350,000 or higher.
  • Business types that are gaining market share.
  • Tenants with strong relationships that are all important to the health of the shopping center.

Not only is demand for this type of shopping center growing, but the supply per capita has also begun to decline in recent years. This translates to lots of room for growth going forward in terms of high-value acquisitions, profitable asset sales, and redevelopment of existing properties.

Graph of power center supply over time.

Image source: DDR Corp.

DDR owns 327 shopping center properties consisting of 107 million rentable square feet. The company's strategy involves acquiring new properties and disposing of existing ones to maximize value, and redeveloping properties to create instant value for investors.

Furthermore, although DDR's 5.1% dividend yield may sound high, the current payout represents just 60% of the company's expected 2016 FFO -- lower than peers and low for the REIT sector in general. DDR prides itself on being a shareholder-friendly company, tying its compensation structure to long-term shareholder value creation, and preferring to compensate its executives with equity, therefore incentivizing strong performance for investors.

Cheap from a long-term perspective

Both of these stocks have fallen considerably from their highs, mainly thanks to rising interest rates. And it's important to point out that over the short term, they could easily continue to fall. Over any given week, month, or year, investors in both stocks should expect considerable volatility.

However, the point is, over the long run, both REITs have solid business models that should allow them to deliver strong returns over time. So, approach these with a reasonably long investment time horizon (say, five years or more), and you should do fine.