Last year was a lackluster one for the real estate investment trust (REIT) sector. The average REIT gained only about 5% last year, significantly underperforming the S&P 500's (^GSPC 1.33%) 23% rally. The main culprit was interest rates, which remained stubbornly high even as the Federal Reserve began cutting them late last year.
Some REITs performed even worse. EPR Properties (EPR 0.12%) and W.P. Carey (WPC +0.06%) declined by about 9% and 16%, respectively, pushing their dividend yields even higher (6.4% for W.P. Carey and 7.7% for EPR Properties). Here's why I think these REITs will bounce back this year, which would set investors up to potentially earn strong total returns.
A potential reacceleration is ahead
NYSE: EPR
Key Data Points
Higher interest rates have acted as a headwind for EPR Properties in recent years. They've made it more expensive for the REIT, which owns experiential properties like movie theaters and attractions, to borrow money to fund new acquisitions. They've also weighed on the value of its real estate, causing its stock price to sag.
As a result, EPR's cost of capital is too high to finance acquisitions by issuing new stock and debt. That has forced it to limit new investments to those it can fund with post-dividend free cash flow, asset sales, and its credit facility.
The company spent $214.6 million on new investments through the third quarter of last year, putting it on track to invest $225 million to $275 million for the full year. That investment level can support a modest growth rate. It was on track to grow its funds from operations (FFO) by 3.2% per share at the midpoint of its guidance range last year, after adjusting for some one-time items from 2023. That enabled EPR Properties to increase its monthly dividend by 3.6% earlier in the year.
EPR Properties can continue growing in that 3% to 4% annual range using internal funding sources. Add in the income from its high-yielding dividend, and its total return could be more than 10% annually from here without any improvement in its valuation.
However, with interest rates expected to continue declining, EPR Properties' valuation should improve. That higher stock price (and reduced borrowing rates) could allow the REIT to ramp up its acquisition volume and growth rate. This catalyst could enable it to deliver enhanced total returns in 2025 and beyond.
Back on a growth trajectory
NYSE: WPC
Key Data Points
Last year was a transitional one for W. P. Carey. The diversified REIT made the strategic decision to exit the office sector toward the end of 2023 by selling or spinning off its office portfolio. It also sold off some other noncore properties, including a self-storage portfolio. Those sales acted as a growth headwind last year, weighing on its valuation.
W. P. Carey expected to close between $1.3 billion and $1.4 billion of asset sales last year (it closed $1.2 billion by the end of October). The company was working to recycle that capital into new properties with better long-term growth prospects, like industrial real estate. It had closed $971.4 million of deals by the end of October, putting it on track to complete $1.25 billion to $1.75 billion of new investments last year.
The company expects to continue making accretive acquisitions this year, which it can fund with post-dividend free cash flow, additional asset sales, and its strong balance sheet. Add in its strong rent growth (2.8% annualized in the third quarter), and the REIT expects to return to growth this year.
Like EPR Properties, W. P. Carey also currently has a higher cost of capital than it would like, which is why it doesn't currently plan to issue any new equity this year to fund additional investments. However, with rates expected to continue falling, the value of W. P. Carey's properties (and, therefore, its stock price) should rise this year, potentially making equity sales an option for funding additional investments. The potential acceleration of its growth rate could add to its total return in the future.
A solid base with upside potential
EPR Properties and W. P. Carey could deliver solid total returns this year based on their high-yielding dividends and internal growth drivers. On top of that, they have additional upside potential from falling interest rates, which could boost their valuations and growth prospects. That makes them enticing investments for those seeking income and upside potential in 2025.
