3 Small-Cap REITs to Buy for Growth and Income

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I recently completed a scan for outperforming small-cap stocks and was surprised to see a significant number of small-cap REITs (real estate investment trusts) on the list.

These companies typically own and/or operate real estate and can give investors exposure to the sector, while (in most cases) paying a handsome dividend. But they’re generally not known for surging share prices.

Intrigued by the names on the list I dug in a little deeper to three of the small-cap REITs that jumped out to me because of their growth rates and exposure to specialized areas of the real estate market.

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These companies all have market caps under $2.5 billion, are expected to have grown revenue by over 30% in 2019 and pay a dividend.

If that’s not impressive enough consider that three of them are up over 10% year-to-date and up by more than 30% over the last six months!

Here’s a quick review of each small-cap REIT.

Small-Cap REIT #1: Hannon Armstrong (HASI)

If you’re concerned about climate change and want a somewhat diversified way to invest in companies that are trying to improve energy efficiency, Hannon Armstrong should be up your alley. The company provides capital to companies in the energy efficiency, renewable energy and other sustainable infrastructure markets. In exchange for capital to advance their businesses Hannon generates recurring revenue and predictable cash flows.

As of the end of 2019, 57% of Hannon’s portfolio was allocated to behind-the-meter investments (energy efficiency, storage, distributed generation), 36% to grid-connected investments (wind, solar, storage), and 7% to sustainable infrastructure (stormwater remediation, environmental restoration, transmission & distribution).

One example of an investment is a utility-scale solar land project in which Hannon made a $107 million investment in 107 acres of land with 60 utility-scale solar projects.

During its Q3 2019 conference call management said it invests roughly $1 billion a year and has made nearly 200 investments thus far, with the current portfolio yielding roughly 7.5%. The company has roughly $150 million in debt due in 2022 and $500 million due in 2024. Around 97% of all debt has a fixed rate.

Growth has been phenomenal. In 2018 revenue jumped 50%. Revenue was up another 47%, to $22.3 million, in Q3 2019, putting the company on pace for 33% revenue growth in 2019. Adjusted EPS was $0.38 in Q3 and analysts currently see EPS of $1.39 in 2019 (roughly flat with 2018).

Shares of Hannon are up 12% year-to-date and up 32% over the last six months. The company currently pays a dividend of $1.34, equal to a 3.7% yield, and has a market cap of $2.4 billion. It is based in Annapolis, MD.

Small-Cap REIT #2: Safehold (SAFE)

Safehold is the only public company I’m aware of that specializes in ground leases, which represent ownership of the land underlying commercial real estate projects. The land is leased to the owners/operators of the real estate built on the property under long-term leases of 30 to 99 years (with renewal options). The pitch for real estate developers is that by working with Safehold they can run a more efficient operation and unlock the value of the land beneath their buildings.

The company appears to be succeeding and has properties all over the U.S. Properties in its portfolio in New York City include 425 Park Avenue, 135 West 50th Street, and 195 Broadway, as well as the Alohilani Resort Waikiki Beach, Honolulu, HI. The portfolio is well-diversified, with 44% office and industrial buildings, 33% hotels and 23% multifamily.

Since going public in June 2017 Safehold has grown its portfolio by seven times, to an estimated $2.47 billion as of the end of Q4 2019 (results have yet to be reported). To fund the business Safehold has $774 million in total debt and a $525 million revolving credit facility.

Growth has been impressive. In 2018 revenue was up 150%, and is seen up 80% in 2019, to $90 million. Adjusted EPS is also seen surging this year, to $1.07 (up $0.67). Shares of Safehold are up 24% year-to-date and up 71% over the last six months. That performance has pushed the yield down some, to just 1.2%. The company has a market cap of $2.4 billion and is based in New York City.

Small-Cap REIT #3: Global Medical (GMRE)

Global Medical is a REIT that’s focused on acquiring state-of-the-art healthcare facilities and leasing them to leading clinical operators with dominant market share. The pitch is that this is a way for healthcare providers to monetize their facilities and for Global Medical to offer investors exposure to a reliable segment of real estate that can deliver consistent income.

Since going public in 2016 the company has grown its portfolio asset base from $93 million to $879 million, an average annual growth rate of 52%. As of the end of September 2019 the company owned 101 buildings with a total of 2.7 million square feet and had 84 tenants. Major tenants include Encompass, Memorial Health, Kindred Health and OCOM. Properties are spread across most of the U.S., except for states in the far north west and far north east.

As with the two small-cap REITs just discussed, growth is off the charts. Revenue was up 67% in 2018 and is expected to rise another 40%, to $70 million, in 2019. Adjusted EPS is expected to be flat, at $0.75, in 2019. Global Medical yields 5.3% despite shares having risen 13.5% year-to-date and by 48% over the last six months. As of the end of September the company had $407 million in total debt, and currently sports a market cap of $648 million. It is based in Bethesda, MD.

Should You Buy These Small-Cap REITs?

Assuming you’re aware of the tax implications of REITs, I’d say all three of these are attractive long-term investments but are trading a little too high to make significant investments right now. If these small-cap REITs look enticing to you, I’d suggest either putting them on a watch list for future purchase, or making a very small investment of a one-quarter size position or less, and looking for a more opportunistic entry point to buy another chunk.

As in most scenarios when attractive stocks have been running higher, it’s wise to average in to spread out your cost basis and avoid a scenario where you pick the right stock but at the wrong price and wind up underwater on what could otherwise have been a fruitful investment had you just exercised a little more patience.

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Tyler Laundon

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Tyler Laundon is chief analyst of Cabot Small-Cap Confidential. The circulation of Small-Cap Confidential is strictly limited because the undiscovered stocks with sky-high-potential that Tyler recommends are often low-priced and thinly traded. Don’t share these recommendations!

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Comments

  • Thomas M.

    Tyler. I’m a long time Cabot subscriber and former employee of a small cap REIT so I was very interested in
    your thoughts on these 3 REITS. From experience I know
    that the dividends paid by most REITS are not qualified
    dividends and therefore are going to be taxed at ordinary
    income (not capital gains) rates, yet I didn’t see any
    mention of that in your article nor do I recall seeing it
    mentioned in other Cabot articles covering REITS. Am I
    correct on this and if so, why isn’t this called out to
    readers? Keep up the good work. Tom

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