Small real estate investment trusts are risky investments but they may have the potential for better growth than larger rivals, says Brad Thomas, chief analyst at iREIT Investor.
With large institutional investors more focused on major REITs like Simon Property Group or Ventas Inc., smaller REITs often get ignored and may create opportunities to find better value, he says in a Seeking Alpha blog post
“Let me make no mistake, a small-cap company is riskier and that's why you won't see me attaching a SWAN (sleep well at night) label to these less visible securities,” Thomas says. “However, for the investor willing to stomach the volatility risks, owning a portfolio of small-cap REITs could be rewarding.”
The value of real estate investment trusts — companies that own income-producing properties like office buildings — typically rises with U.S. property values. Building prices in big cities have risen 30 percent from the last market peak in 2007, according to Moody’s Investors Service and Real Capital Analytics Inc.
The S&P U.S. REIT Index
has fallen 8.6 percent this year, matching the decline in the S&P 500 index of the biggest U.S. companies. REITs have come under pressure with investors expecting the Federal Reserve to raise interest rates this year, putting a drag on property values.
Thomas says he developed a small-cap portfolio of REITs with diverse revenue streams and a market value of at least $150 million.
"I take pride in analyzing the underlying stocks at an almost microscopic level — especially since many of the institutions aren't covering them," he says. "I suggest selecting sound securities as an intelligent means to protect against market fluctuations."
Three Small Cap REITs Poised To Profit
- Ladder Capital (ticker :LADR): “What I like most about this $1.5 billion (market cap) REIT is its very healthy payout ratio of under 60%.”
- STAG Commercial (ticker: STAG): “I like STAG for its undervalued pricing (price-to-funds from operations is 12.2 times) that provides sound price appreciation catalysts.”
- Chatham Lodging Trust (ticker: CLDT: “Like most of my small-cap picks, CLDT is trading at a discount (price-to-funds from operations is 9 times) with an attractive dividend yield of 5.7 percent.”
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