Two High-Dividend-Yield Stocks Experiencing Dips of 9% and 16% in 2024, Potentially Exhibiting Significant Recovery in 2025
Last year saw a subpar year for the real estate investment trust (REIT) sector, with an average REIT gaining only around 5%. This underperformance was notable against the S&P 500's impressive 23% rally. The primary culprit was stubbornly high interest rates, even as the Federal Reserve began cutting them towards the end of the year.
Two REITs, EPR Properties and W.P. Carey, had even worse performances, with declines of about 9% and 16%, respectively. These setbacks led to higher dividend yields of 6.4% for W.P. Carey and 7.7% for EPR Properties. Yet, I believe there's a strong chance these REITs will bounce back this year, offering investors potential high total returns.
A Positive Outlook Ahead
EPR Properties, which owns experiential properties like movie theaters and attractions, has been impacted by high interest rates. These rates have made it more expensive for the company to borrow money for new acquisitions and negatively affected its real estate value. As a result, EPR's cost of capital is too high to finance acquisitions through issuing new stock and debt.
However, the company has continued to invest modestly, with $214.6 million spent on new investments through the third quarter of last year. This level of investment supports a moderate growth rate, and EPR was on track to grow its funds from operations (FFO) by 3.2% per share at the midpoint of its guidance range last year. This growth enabled EPR Properties to increase its monthly dividend by 3.6% early in the year.
EPR Properties can continue to grow at a rate of 3% to 4% annually with internal funding sources. Combined with its dividend income, total returns could exceed 10% annually without an improvement in its valuation. As interest rates are expected to continue declining, EPR Properties' valuation should improve, lowering borrowing rates and enabling the REIT to ramp up its acquisition volume and growth rate. This could ultimately result in enhanced total returns in 2025 and beyond.
Back on Growth Track
W.P. Carey had a transitional year in 2023, with the strategic decision to exit the office sector and sell off noncore properties. These sales were a growth headwind, affecting its valuation. W.P. Carey expected to close between $1.3 billion and $1.4 billion of asset sales last year, and had completed $1.2 billion by the end of October.
By the end of this year, the company plans to complete $1.25 billion to $1.75 billion of new investments. W.P. Carey anticipates continued accretive acquisitions this year, which it can fund using post-dividend free cash flow, additional asset sales, and a strong balance sheet. Add to that its strong rent growth, and the REIT expects to return to growth this year.
Like EPR Properties, W.P. Carey has a higher cost of capital than it would prefer. However, as interest rates continue to fall, the value of its properties and its stock price should rise, potentially making equity sales an option for funding additional investments. The potential acceleration of its growth rate could contribute to its total return.
Strong Base with Upside Potential
EPR Properties and W.P. Carey offer solid total return potential this year due to their high-yielding dividends and internal growth drivers. Their upside potential stems from falling interest rates, which could boost their valuations and growth prospects. This makes them appealing investments for those seeking income and upside potential in 2025.
Enrichment Data (15% of content):
EPR Properties has strong growth potential due to strategic leadership, portfolio diversification, and a solid recovery from the pandemic's effects. The appointment of Mr. Suarez, a highly experienced real estate professional, is anticipated to enhance the company's strategic direction in the experiential real estate market. EPR Properties' diversified holdings, including educational facilities, also provide a stable cash flow base.
W.P. Carey, with its diversified portfolio and a focus on industrial, warehouse, retail, and self-storage properties, has maintained financial resilience despite challenges like tenant credit risks and elevated interest rates. The company has employed proactive refinancing strategies to strengthen its financial position and expectations for AFFO growth in 2025 indicate a slight improvement over 2024. W.P. Carey's recent record investments and property disposals aim to optimize its portfolio and position the company for future growth.
- Despite the challenges caused by high interest rates, EPR Properties continued to invest moderately in new acquisitions, spending $214.6 million through the third quarter of last year.
- The Federal Reserve's reduction of interest rates towards the end of 2023 could improve EPR Properties' valuation, lowering its borrowing rates and enabling the REIT to ramp up its acquisition volume and growth rate.
- W.P. Carey's strategic decision to exit the office sector and sell off noncore properties in 2023 was a growth headwind, affecting its valuation. However, the company expects to return to growth this year with continued accretive acquisitions and strong rent growth.
- The potential decline in interest rates could boost the value of EPR Properties' and W.P. Carey's properties and stocks, making equity sales an option for funding additional investments and contributing to their total return potential in 2025.
