The real estate sector has been one of the worst-performing parts of the stock market for several years, with rising interest rates creating a major headwind. However, this has created an excellent opportunity for long-term investors to buy shares of excellent high-dividend stocks for relatively cheap valuations.
Some real estate investment trusts, or REITs, are especially cheap right now due to a combination of interest rate pressures and business-specific risk factors. But in this group, some look incredibly attractive from a risk-reward perspective. Here are two in particular with yields much higher than the benchmark S&P 500 that might be worth a closer look for patient investors right now.
Invest in experiences
EPR Properties (EPR -0.22%) had a dividend yield of 6.9% at Friday’s prices and is one of the few REITs that makes monthly payments. EPR specializes in experiential properties — that is, it owns the real estate of businesses that sell experiences, not physical products. It owns eat-and-play businesses (TopGolf is one of its largest tenants), waterparks, ski resorts, and more.
One of EPR’s biggest risk factors is its exposure to the movie theater industry. While the bankruptcy of Regal Entertainment’s parent company was resolved in a favorable manner for EPR, the future of the theater industry is far from certain, and EPR still gets 36% of its rental income from movie theaters. To be sure, box office revenue has been quite strong recently, and 2025 is widely expected to be an even stronger year. But this is certainly worth keeping an eye on.
EPR hasn’t grown too much recently, as the cost of capital (borrowing money or issuing new shares) hasn’t been favorable. But that could change as interest rates gradually come down, and EPR sees an addressable market opportunity of more than $100 billion in real estate it could pursue. In the meantime, this is a highly profitable business that is generating more than enough funds from operations (FFO) to cover its dividend.
Uncertainty has pressured this unique business
Easterly Government Properties (DEA 0.94%) is trading around 52-week lows and has fallen by roughly 50% over the past three years. It had a dividend yield of 9.9% at Friday’s prices, making it the highest-paying REIT in this discussion.
As the name suggests, this is a REIT that owns properties that are leased to the U.S. government. It owns 100 properties with about 9.8 million rentable square feet, and nearly all are leased to various government agencies, such as the FBI, Drug Enforcement Administration, Department of Veterans Affairs, and more.
In addition to the interest rate headwinds that are impacting the entire real estate sector, Easterly Government Properties is being hit by the uncertainty surrounding government offices. Reports suggest that up to three-fourths of government office space in the D.C. area is sitting unused, and the Trump administration’s efficiency efforts could put federal office leases on the chopping block.
However, Easterly’s properties are generally for mission-critical agencies that use their office space, and much of the portfolio is located far from the D.C. area. Plus, Easterly CEO Darrell Crate recently made the case that the company and the government could mutually benefit from the efficiency push, and Easterly could potentially acquire many properties that are currently owned by the federal government, creating a more capital-efficient structure for the government and facilitating growth for the company.
Buy for the long term
As a final thought, it would be wise to expect somewhat of a rollercoaster ride in the near term with both of these stocks. EPR’s movie theater exposure could create a volatile situation if its major tenants run into trouble, and Easterly could be under pressure until we get more clarity on the administration’s intentions with federal office space. Plus, interest rates remain rather high, and create somewhat of a roadblock to growth with high borrowing costs.
Having said that, both companies are well-run businesses that will likely be just fine over the long term. The younger generations clearly value experiences more than their parents did, and this should create a steady stream of opportunities for EPR, and its focus on mission-critical government offices should allow Easterly to make it through the efficiency efforts relatively unscathed.
Matt Frankel has positions in EPR Properties. The Motley Fool recommends EPR Properties, Easterly Government Properties, and Topgolf Callaway Brands. The Motley Fool has a disclosure policy.
