REITs Field Journal: Don’t Overlook These 5 Small Cap REITs

While clearing the Thanksgiving table, I admired the small helpings of various leftovers, and was reminded that “small is beautiful,” not to be ignored or overlooked. It’s a lesson that should illuminate a slice of REIT investing principles, which I’ll follow with some “BIG” small cap ideas.

1. As a zealous value investor, and committed, practiced REIT investor (Real Estate Investment Trusts) and analyst, I’m always on the hunt for bargains, and those “small-fry’s” going – and growing- in the right REIT direction.

2. It’s fun to find and track those players other “Street” analysts might overlook. Investors might ignore smaller-sized REITs, leaving gem mining to the gutsier investors looking to find the next diamond in the rough. I want to help give you an edge.

3. My eyes are not just on the capture (ownership) of oft-elusive, high-value, low-costing publicly-traded securities, but also, the enjoyment of quarterly (and sometimes monthly) dividend collecting, especially as they grow over time, without much work from me, other than reinvesting it, or taking the cash.

4. Almost a commandment: time-tested guidelines and rules for successful small cap REIT investing shalt not be ignored. Including:

5. With a smaller volume of shares trading in a given ticker symbol, the price spread will typically be wider. Placing limit orders (for DIY investors, or asking your broker to), instead of market orders … can help prevent your purchase price (as “bid”) from landing on the higher side (“ask”) of the trading spread.

6. And with a smaller volume, a more thinly-traded stock may not have enough supply just when you want to buy – so, for sure, use patience.

7. And about pricing, lack of Wall Street coverage and investor interest can result in shares remaining undervalued, especially in down markets.

8. Smaller company balance sheets correlate with fewer and less diverse company asset holdings, and sometimes limited or narrower future prospects. Said another way, small caps have always been seen as riskier bets than large caps because they often lack diverse revenue streams or stable cash flows. So: restrict your small cap holdings to a smaller portion of your portfolio, to mitigate those risks.

9. For more “speculative” buys, I like to stay inside a 1% holding for any one stock.

10. Here’s a nice group of small cap’ers to consider, to help fill out your REIT portfolio:

Unique, Kansas City-based, CorEnergy Infrastructure Trust CORR was first Infrastructure REIT. Primarily focused on acquiring and financing midstream and downstream real estate assets within U.S. energy infrastructure sector and concurrently entering into long-term triple-net participating leases with energy companies. Strong growth potential for “dedicated infrastructure” assets – mostly pipelines and storage assets. Proven revenue stream reliable even in periods of distress, and came out of the energy crisis with its strategy validated. Battle-tested & better prepared to scale into a safer investment platform. Few peers. CORR can build foothold as premier partner of choice in energy infrastructure sale/leaseback transactions. Instead of competing for deals in the open market, CORR can source off-market deals and essentially be the “go to” landlord of choice. Owns mission-critical assets and lease payments are “operating” expenses, not “financing” expenses.

Operating leases have priority in payment and bankruptcy. CORR revenue stream therefore, is resilient and protected even during any bankruptcy encountered. CORR continues paying a stable dividend and maintains a comfortable level of coverage. Current dividend yield 8.35%. Analysts forecast impressive AFFO earnings growth of 9% in 2019.

On a riskier side, City Office REIT Inc. CIO offers attractive combination of current yield, long-term growth potential, and one of the lowest valuations in its industry. Focuses on secondary, fast-growing markets (medium-sized cities), seeing strong occupancy and continued annual rental increases. Holds 62 office buildings in seven cities (four in fastest-growing major metro areas). Goal is to buy new properties for cap rates (cash yield) of 7% to 8%. Currently has $170 million in purchasing power and closing on two properties for $62 million.

By end of Q1-19 expects all $170 million to work acquiring new properties. Beyond, has potential $330 million acquisition pipeline that could keep property base growing strongly for several more years. AFFO payout 122% (in part to attract investor interest), and expecting to fully cover dividend with cash flow next year and begin growing dividend in line with AFFO/share growth in 2021. Currently fastest growing office REIT in America. Collects 35% of rent from government agencies or investment grade companies (or subsidiaries). Risk-tolerant investors potentially looking at 16% to 18% long-term annualized returns over coming decade. Dividend yields 8.80%.

The only publicly-traded pure play on timber, CatchMark Timber Trust Inc. CTT has enviable position of holding a real timberland heritage while trading at a dirt-cheap valuation against its acreage. Company’s Q3-18 earnings show timber and lumber prices are not necessarily correlated. Prices in company’s markets remain healthy, even after seeing lumber pricing fall quarter to quarter. Share price was down from June highs due to an unfair association with lumber.

May lumber peaked at more than $600/ton, up 50% from beginning of the year. Trade duties on Canadian softwood imports drove tighter supplies and the saw mills that were recently brought back online, struggled to find volume, as construction activity marched higher. Lumber pricing has since come down to more realistic levels, into $350/ton range. However, CatchMark sells timber (not lumber), and does not engage in higher risk activities like lumber manufacturing or land development. Of the major publicly-traded timberlands REITs, CTT is the only one expected to grow EBITDA year-over-year into 2019.

On strict land value basis, CatchMark trades at a discount to the true value of its timberlands acreage. Investment in timber has a place in any portfolio, especially when market sentiment is weakest. The net asset value story is here, the income story is in place, with a 6.46% dividend yield, and management team has excellent experience.

QTS Realty Trust, Inc. QTS provides data center solutions from more than 6 million square feet of owned mega scale data center space throughout North America. Through a software-defined technology platform, QTS delivers secure, compliant infrastructure solutions, robust connectivity and premium customer service to more than 1,100 leading hyperscale technology companies, enterprises, and government entities. In Q3-18, FFO decreased 48.5% compared to prior year Q3, yet beat expectations for the quarter, as company shifts product offerings and focuses more on Hyperscale and Hybrid Colocation, while exiting its Cloud and Managed Services business.

Third quarter brought online approximately four megawatts of gross power and approximately 26,000 net rentable square feet at its Atlanta-Metro, Chicago and Piscataway (NJ) facilities, total cost about $31 million. In October 2018, completed acquisition of 55 acres of land in Atlanta, Georgia next to existing Atlanta-Metro mega data center, expanding area campus by 150 megawatts. By the end of 2018, QTS expects those non-core revenues and expenses to be fully removed from financial results. Dividend yields 4.17%.

Easterly Government Properties DEA focuses on acquisition, development and management of class A commercial properties leased to U.S. government agencies through the General Services Administration. Not the only government office-focused REIT, but Easterly’s the only “pure play” government-leased model with internalized management (external management costs more, and allows for management and other conflicts unfavorable to shareholders). Easterly sticks to critical missions of federal government that don’t go out of favor – agencies such as Federal Bureau of Investigation and Immigration and Customs Enforcement. No state or local government leases.

Since 2010, DEA acquired 64 properties encompassing 5.5 million square feet. Portfolio is 100% leased, weighted average age is 13.5 years. Q3-18 showed significant growth, with approximately 1.5 million square feet of new rental space, 99% leased with weighted average lease expiration in 2022. Investor risks (high payout ratio) are adequately rewarded in the form of a 5.89% dividend yield–one of the highest yields in the office sector.

Look for my entire Small-Cap Portfolio – along with 6 other specialized portfolios… part of the broad coverage of REITs – and my updated BUY/SELL recommendations – in the December Forbes Real Estate Investor newsletter. It’s also a very thoughtful holiday gift! CLICK HERE.