Small Cap REITs: Uncovering the Hidden Gems of Real Estate Investing
Real Estate Investment Trusts (REITs) have long been a popular choice for investors seeking stable income and long-term capital appreciation. While large-cap REITs often dominate the spotlight, there is a hidden world of small-cap REITs that offer unique opportunities for those willing to take on a bit more risk. These small-cap REITs may lack the name recognition of their larger counterparts, but they can provide outsized returns and exciting growth potential.
In this article, we will explore the world of small-cap REITs and uncover some of the hidden gems that have the potential to deliver impressive returns. We will examine six hand-picked small-cap REITs, each with its own unique investment thesis and growth prospects. From lodging and multifamily properties to cannabis real estate and net lease assets, these small-cap REITs offer a diverse range of opportunities for investors.
Small Cap Pick #1: Chatham Lodging
Chatham Lodging (CLDT) is a small-cap lodging REIT with a market capitalization of $683 million. The company owns a portfolio of upscale extended-stay and premium-branded select-service hotels in markets with strong long-term growth. Chatham focuses on acquiring properties in markets that have strong demand generators and where it expects demand growth to outpace new supply.
With a portfolio that includes well-known brands such as Residence Inn by Marriott and Homewood Suites by Hilton, Chatham has generated the highest operating margins among all lodging REITs. This is a testament to the company’s asset quality and its operating expertise, managed by Island Hospitality.
Chatham’s balance sheet is solid, with a reduced net debt balance and ample liquidity. The company is strategically disposing of older hotels that are on the bottom end of absolute Revenue per Available Room (RevPAR), allowing it to avoid high capital expenditures in the near term. Chatham’s strong performance positions it well for the return of business travel and higher hotel demand in 2022.
Small Cap Pick #2: Clipper Realty
Clipper Realty (CLPR) is a small-cap REIT with a market capitalization of just $146 million and a unique focus on the New York City market. Headquartered in Brooklyn, Clipper owns and operates a portfolio of properties in both Brooklyn and Manhattan. Its properties include multifamily buildings, retail spaces, and office spaces.
Despite the challenges faced by the New York City real estate market during the COVID-19 pandemic, Clipper Realty remains bullish due to its focus on multifamily properties, particularly in Brooklyn. The company’s portfolio includes properties such as Flatbush Gardens, a low-cost option with rent-stabilized apartments that provide stable revenue. Clipper also owns Tribeca House, a multifamily and retail portfolio with strong upside potential.
With a well-positioned debt profile and a dividend that was covered in 2020, Clipper Realty offers an attractive investment opportunity. The company’s focus on value-add projects and its strategic location in high-growth markets make it an intriguing small-cap REIT to consider.
Small Cap Pick #3: Power REIT
Power REIT (PW) is a small-cap REIT that has recently pivoted to cannabis real estate, specifically investing in cannabis greenhouses. With a market capitalization of $160 million, Power REIT is focused on expanding its real estate portfolio of Controlled Environment Agriculture (CEA) properties for food and cannabis cultivation.
Power REIT’s diversified portfolio also includes investments in solar farmland and transportation infrastructure. The company has a significant acquisition pipeline and potential expansion opportunities for its existing CEA assets. With a CEO who has over 35 years of real estate experience and insider ownership of more than 20%, Power REIT is well-positioned for growth.
Despite a recent pullback in its share price, Power REIT offers an attractive valuation with a low Price/FFO ratio and substantial growth potential. As the cannabis industry continues to thrive, Power REIT’s focus on cannabis greenhouses makes it an intriguing small-cap REIT for investors seeking exposure to this high-growth sector.
Small Cap Pick #4: NewLake Capital Partners
NewLake Capital Partners (NLCP) is a cannabis REIT that owns a portfolio of properties in 11 states. While traded over the counter, the company is actively seeking a listing on either the NYSE or NASDAQ. NewLake’s portfolio consists of properties leased to cannabis operators, making it an attractive option for investors looking to capitalize on the growing cannabis industry.
NewLake has a strong financial track record, with increasing rental income and solid AFFO (Adjusted Funds From Operations) figures. The company has never had a deferral or missed payment of any kind, and it has positioned itself as the second-largest player in the cannabis-related REIT industry.
Despite its strong fundamentals, NewLake’s shares have dropped year-to-date, presenting a potential buying opportunity. With a low P/AFFO ratio and a dividend yield higher than its peers, NewLake offers an enticing investment proposition for investors looking to gain exposure to the cannabis real estate market.
Small Cap Pick #5: CTO Realty
CTO Realty (CTO) is a small-cap shopping center REIT that owns a portfolio of properties in markets projected to have outsized jobs and population growth. With a focus on states with favorable business climates, such as Texas, Florida, and Arizona, CTO Realty is well-positioned to benefit from economic expansion and strong leasing demand.
CTO Realty’s portfolio consists of 22 properties, primarily shopping centers, totaling 2.7 million square feet. The company boasts a solid financial profile, with ample liquidity, unsecured debt, and no near-term maturities. CTO has also raised its dividend recently, reflecting its confidence in future cash flows.
The company’s strategic focus on high-growth markets and multi-tenanted retail centers, coupled with its strong financial position, make CTO Realty an attractive small-cap REIT for investors seeking exposure to the retail sector.
Small Cap Pick #6: Netstreit
Netstreit (NTST) is a small-cap net lease REIT that went public in 2020. The company has quickly built a portfolio of over 300 properties, with a focus on investment-grade tenants. Netstreit’s portfolio is highly diversified, with over 85% of its properties leased to investment-grade or investment-grade profile tenants.
Despite its short time as a public company, Netstreit has shown impressive growth, expanding its portfolio by an average of $101 million per quarter. The company maintains a conservative approach to financing, with strict financial discipline and a well-positioned balance sheet.
Netstreit’s strong financial performance, growing AFFO figures, and attractive valuation make it an interesting small-cap REIT to consider. With a dividend yield and the potential for substantial dividend growth, Netstreit offers investors an enticing combination of income and growth potential.
While small-cap REITs may come with added risk and volatility, they also offer the potential for significant returns and exciting growth prospects. The six small-cap REITs discussed in this article represent a diverse range of investment opportunities, from lodging and multifamily properties to cannabis real estate and net lease assets.
Investors looking to uncover the hidden gems of the real estate market should consider the small-cap REIT space. By carefully researching and analyzing potential investments, investors can identify opportunities that have the potential to deliver impressive returns over the long term.
As always, it is important to maintain adequate diversification and consider your risk tolerance before investing in small-cap REITs. While they may offer attractive growth prospects, they also come with added risk. With careful consideration and a strategic approach, small-cap REITs can be a valuable addition to a well-rounded real estate investment portfolio.