Dividends Premium REITs: February 2025

REIT's conservative guidance will be easy to beat as sector opportunities abound.

Welcome to Dividends Premium REITs for February.

The First Rate REITs table highlights all of my top recommendations.

This month’s edition once again features the abbreviated version of the coverage universe table featuring advice updates and key numbers. This month’s version includes a “Dream Buy” price and a “Take Profits” price for every stock I cover. I also now show ex-dividend dates, when you’ll have to own each stock to collect its next dividend. I hope you find the changes useful.

The regular table with earnings comments will appear with the March issue. By that time we should have calendar Q4 earnings and guidance updates for the entire coverage universe. I’ve updated payout ratios and debt/capital ratios in the coverage universe table for all REITs who have reported Q4 numbers and updated 2025 guidance.—RC

REITs: Conservative 2025 Guidance Will Be Easy to Beat

The Real Estate SPDR ETF (XLRE) is up about 4 percent so far in 2025. That’s about twice the gain when I posted last month’s Dividends Premium REITs.

The REIT ETF is running roughly even with the iShares Select Dividend ETF (DVY), often used as a benchmark for dividend focused stock portfolios. It’s also in line with the S&P 500.

The year to date return for our First Rate REITs list is also roughly 4 percent. And our picks also yield considerably more on average than any of these ETFs at around 5 percent.

I continue to advise following a four-part investment strategy:

· Own only REITs with strong underlying businesses and be ready to move on if there’s real weakness.

· Never pay more than the highest recommended entry points for individual REITs. And if possible, take positions in increments rather than all at once. For example, make one-third of your intended position immediately. Plan to take an additional one-third in six weeks and the final third a month after that. Buy at Dream Buy prices if possible.

· Be willing to take profits occasionally. A good benchmark is a share price 25 to 30 percent above the REIT’s highest recommended entry point. I now provide both Dream Buy and profit taking prices for every REIT in our coverage universe.

· Never load up on any one REIT. Always balance and diversify your positions.

The strategy has a heavy focus on business quality of individual REITs. I always want to be certain each company’s underlying business is solid—not necessarily growing gangbusters, but able to stick to the investment plan, maintain a strong balance sheet and to sustain dividend policy.

When a REIT fails to match up to that standard, I want to move onto a property company that does. And I’ve done so several times in this service.

The approach also takes a cautious approach toward building positions in our favorite companies. That means spreading out purchases rather than making them all at once, broadly diversifying between both companies and property types, and being willing to take at least partial profits occasionally on the best performing REITs.

Why REITs are Staying Conservative so far in 2025

Owning only truly First Rate REITs—and steering clear of weaker companies as well as those bid up on buying momentum—is likely to be even more critical in 2025 than it’s been the past several years. That’s true for several reasons.

First, interest rates/borrowing costs look like they’re going to be a headwind for the real estate business for a while longer.

Towards the end of 2024—especially in Q4—it appeared deal making was at last unfreezing. WP Carey (NYSE: WPC), for example, essentially achieved more than half its full-year investment goal in the last three months of the year. But towards the end of December, activity tightened up again in the face of volatile interest rates.

That’s slowed investment activity once again. Carey, for example, has set a guidance range for 2025 investment that at the mid-point is more than 20 percent less than what it achieved in 2024.

The elevated cost of debt capital has induced REITs like Carey to plan on funding new development and acquisitions internally. That means with a combination of operating cash flow and proceeds from asset sales, rather selling new debt or equity.

It’s a safe way to go at a time when interest rates are volatile and the cost of funding growth with outside capital can mushroom quickly. And it should keep a lid on interest expense as well going forward. That will keep balance sheets secure, credit ratings intact and dividends well protected by cash flow. But there’s a cost to this conservatism: Mainly, less available funding and therefore less investment and slower growth.

Best in class REITs are still increasing dividends. But dividend growth rates slowed in 2024. And based on most increases we’re seen so far, they’re likely to remain restrained in 2025 as well.

There are a handful of exceptions like Equity LifeStyle Properties (NYSE: ELS), which raised its payout by 8 percent starting in April. And Prologis Inc (NYSE: PLD) appears likely to deliver at least an upper single digit percentage boost by early March.

But most financially strong REITs appear likely to hold dividend increases to a low to mid-single digit percentage this year, as they hold in cash to fund modest investment plans. Simon Properties (NYSE: SPG), for example, is likely to boost its payout around 5 percent in 2025, after rapidly ratcheting up its dividend to the pre-pandemic rate of $2.10 per share the past couple years.

Higher for longer interest rates also continue to push up debt interest expense for most REITs, as they roll over existing bonds issued at much lower coupon yields. That’s also an incentive for companies to hold in more cash, to reduce what they need to refinance.

Several property types also continue to face supply overhang in 2025, the result of a wave of new builds launched before rates started to rise in early 2022. Apartment REITs, for example, have seen supply soaked up much faster than expected, as higher mortgage rates have widened the cost advantage in favor of renting. And with new builds plunging since 2022, many regions are shaping up for more acute shortages by later this year.

Nonetheless, supply is likely to keep pressure on apartment occupancy and rents for most of 2025, especially in the Southeast and Southwest. And that in turn will keep a lid on growth rates for REITs focused there. Mid-America Apartment Communities (NYSE: MAA), for example, raised its dividend for this year by a little over 3 percent, a little more than half the growth rate of recent years.

The Trump Administration has ordered federal employees back to the office five days a week. In response, BXP Inc (NYSE: BXP) had some bullish comments regardings its D.C. properties during the Q4 earnings call, as more traffic into the District would also benefit its buildings.

But it remains to be seen to what extent corporate America will follow with a return to the office, reversing what’s been a multi-year downtrend in occupancy and rents. And even REITs specializing in US government office buildings and other facilities like Easterly Government Properties (NYSE: DEA) may face a rocky road, as the Trump Administration looks for ways to cut real estate costs.

Industrial and logistics properties are ideally placed to prosper from data center expansion and re-shoring of manufacturing to the US. But even this business is roiled with uncertainty from concerns about global economic growth, the impact of tariffs and counter tariffs and extreme weather events such as southern California’s recent fires.

As for retail REITs, occupancy rates are the strongest in years. But the big gains of recent years appear to have leveled off. Payout ratios at data center REITs tightened once again in Q4, as cash flow has not matched revenue and orders from expansion so far. Digital Realty’s (NYSE: DLR) Q4 EBITDA actually dropped by -1 percent from Q3.

Bottom line: It looks like it’s going to be more difficult for most REITs at least to grow revenue in 2025 than it was in 2024. That makes a year when cost controls and balance sheet strengthening take precedence over returning capital to shareholders. The test will be if REITs can continue to position their businesses for a stronger market, potentially starting later this year.

In stark contrast to the near term outlook, the 3 to 5 year outlook for most property types is extremely positive. And while not every REIT is positioned to prosper—or even survive the current environment—the best in class are likely to emerge stronger than ever. And that means they’re in line for powerful investor returns: Many are currently selling at prices that reflect expectations of slow to no growth, including the majority of our First Rate REITs.

The key for REITs to emerge as big winners the next few years is for management to continue executing on investment plans, maintaining strong balance sheets and boosting dividends sustainably.

For us investors, buying top quality REITs now will lock in high yields, as well as accelerating cash flow and dividend growth in the not too distant future. We’re likely to going have to be patient, especially if inflation remains volatile and interest rates higher for longer. But it will be worth the wait and then some.

Q4 Results and Guidance: Strong Businesses Weathering Headwinds

End-year financial filings are more complex and detailed than ever. Having access to that information is invaluable for investors. But there’s a tradeoff: It takes longer than ever to get it.

The good news is our First Rate REITs are still measuring up as strong underlying businesses. And as a result, I’m staying with all of them.