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3 Small-Cap REITs to Buy for Growth and Income

Small-cap REITs (Real Estate Investment Trusts) are among the best performing small-cap stocks these days. Here are three that really stand out.

City Skyline Black Sky Looking Up

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.

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 Q3 2022 roughly half of Hannon’s portfolio was allocated to behind-the-meter investments (energy efficiency, storage, distributed generation) while the other half was allocated to grid-connected investments (wind, solar, storage). A very small slice was allocated to sustainable infrastructure (stormwater remediation, environmental restoration, transmission & distribution).

The biggest portfolio allocations in terms of specific projects are 24% to onshore wind, 32% to residential solar and 17% to land solar. The portfolio yields 7.4%.

Growth has been phenomenal, despite a hiccup in 2019 (revenue growth of just 2%). In 2020 revenue was up 32% to $186.9 million while distributable EPS rose 13% to $1.58. In the most recently reported third quarter of 2022, distributable EPS grew 20% over the prior year and the total portfolio value increased 22% over the same timeframe.

Big picture, Hannon continues to grow its portfolio while taking advantage of low rates to reduce its cost of capital. There are some project delays due to supply chain issues, but so far nothing too serious.

Looking forward, analysts see Hannon growing distributable EPS by 10% to 13% a year for the next two years while growing its dividend at about half that pace as management will opt to self-fund some projects. With a current yield of 4.8% (annual dividend of $1.50) this isn’t the biggest yield you can find out there. But if you’re looking for growth and income with an ESG angle you’re in the right spot.

Shares of HASI peaked at 64 in November then slid for several months, finally bottoming out near 30 in mid-July. The stock had a strong bounce in the late summer before giving back those gains and reaching 52-week lows last month. It’s up nearly 40% since then.

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 45% office and industrial buildings, 12% hotels and 35% multifamily.

Since going public in June 2017 Safehold has grown its portfolio by 18 times, to an estimated $6.1 billion as of the end of Q3 2022. The portfolio has expanded by $2.1 billion over just the last twelve months. To fund the business, Safehold has $3.8 billion in total debt.

Growth has been impressive. YTD revenue was up 46%, while adjusted EPS is also seen surging this year, to $1.87. Shares of Safehold have been dragged down 62% since January, but may have recently put in a bottom. Still, the shares have returned about 58% since the IPO. With such a strong share price the yield is relatively low, just 2.3% ($0.71 annual dividend). However, over the years investors have done extremely well from capital gains as SAFE has posted enviable performance.

Safehold has a market cap of $1.9 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 $1.5 billion, an average annual growth rate of 56%. As of November 2022 the company owned 189 buildings with a total of 4.9 million square feet and had 269 tenants. Major tenants include Encompass, Memorial Health, Kindred Health and OCOM. Properties are spread across most of the U.S., with the exception of states in the far Northwest and far Northeast.

Growth is impressive. The company has grown at a 25% rate for the last five years, and while growth is expected to slow in 2022, analysts see double-digit growth resuming next year. Shares of GMRE yield 8.9%.

As of the most recently reported quarter, the company had $703 million in total debt, and currently sports a market cap of $618 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.

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Do you own any REITs in your portfolio? Tell us what’s worked and what hasn’t in the comments below.


*This post has been updated from an original version, published in 2020.

Tyler Laundon is chief analyst of the limited-subscription advisory, Cabot Small-Cap Confidential and grand slam advisory Cabot Early Opportunities. He has spent his entire career managing, consulting and analyzing start-up and small-cap companies. His hands-on experience has taught Tyler that the development of a superior business model is the biggest factor in determining a company’s long-term success. Accordingly, his research focuses on assessing the viability of management’s growth strategies, trends in addressable markets and achievement of major developmental milestones.