3 Small Cap REITs Poised To Profit


Traders work on the floor after the ringing of the opening bell to celebrate New York Stock Exchange’s 225th Anniversary, at the NYSE in New York on May 17, 2017. / AFP PHOTO / Jewel SAMAD (Photo credit should read JEWEL SAMAD/AFP/Getty Images)

It should be no surprise that small-cap REITs have performed well year-to-date Many of the dominant index-driven large-cap REITs absorbed most of the decline in value, while the small-cap REITs have managed to fly under the radar.


My top performing Small Cap REITs (in the Forbes Real Estate Investor) year-to-date were Hannon Armstrong +30.8%, Global Healthcare +19.1%, and Community Healthcare +16.8%.

The trade-off for investing in large-cap stocks can be easily traced back to the institutional buyers – led by exchange-traded funds and mut ual funds — that have a higher degree of analyst coverage and much lower risk tolerances.

Conversely, the small-cap REITs lack the same Wall Street coverage and investor interest can result in shares remaining undervalued — especially in down markets — for extended periods of time. These under-analyzed Small-cap REITs flying under the radar can offer better potential for growth over the long term.


Due to decreased institutional support, there’s a better chance that small-cap REITs will have lower valuations that result in an underestimation of a company’s operational health and prospects for growth.

Keep in mind, small-cap REITs have always been higher risk bets than large-caps, and although they don’t have the diverse revenue streams or stable cash flows as the big guns, they are an important driver for overall performance in my Durable Income Portfolio.

Small-cap REITs create a buoy effect as they are more susceptible to wide swings (by Mr . Market) in price due to lower trading volumes — a key attribute since greater volatility deters action and often invites selling. Let’s take a look at these 3 Small Cap REITs that are “poised to profit”.


3 Small Cap REITs Poised To Profit  

Jernigan Capital (JCAP) is a commercial real estate mortgage REIT that lends to private developers, owners and operators of self-storage facilities. The company went public in 2015 to originate a diversified portfolio of development, acquisition and refinance loans secured by self-storage facilities primarily in the top 50 United States metropolitan statistical areas.

JCAP has a simple business model: it provides innovative loan financing solutions for the self-storage industry. The company’s primary focus is on programmatic self-storage development in top-tier markets. Prototypical loan terms include 90% LTC (loan-to-cost), 6-year terms and equity participation.


At the end of Q1-17, JCAP announced net income attributable to common shareholders of $0.14 per share and adjusted earnings of $0.21 per share, the latter of which was $0.04 above the high end of the guidance.

JCAP issued second-quarter guidance with a GAAP earnings per share range of $0.25-0.36 and an adjusted earnings per share range of $0.31-0.42. The company also reaffirmed its full-year guidance for 2017 of GAAP earnings per share of $1.62-2.02 and adjusted earnings per share of $1.80-2.30.

Mortgage REITs are riskier than Equity REITs, but JCAP is somewhat of a hybrid. It gives me comfort to know that the management team is led by veteran operators, a key risk mitigator when it comes to investing in this sector (insider’s own ~9% of the company).


Source: FAST Graphs

City Office (CIO) was formed on November 26, 2013, to acquire, own, and operate high-quality office properties located within its specified markets in the United States. Based in Vancouver, Canada, CIO listed on the NYSE on April 11, 2014 (over three years ago), by raising ~$82 million at a price of $12.50 per share. 

The REIT has grown from 14 properties (3.3 million square feet) to 19 (includes 38 buildings). The properties are located in Seattle, Portland, Boise, Phoenix, Salt Lake City, Denver, Dallas, San Antonio, Austin, Houston, Tampa, and Orlando. The company invests in high-quality office properties in mid-sized metropolitan areas with strong economic fundamentals, primarily in the Southern and Western United States.


City Office invests in “secondary markets” with less competition from larger institutional investors. Local real estate operators lack the capital to compete and the outsized population and employment growth are strong catalysts. 

Thes e secondary markets are supply-constrained and this means City Office benefits from high credit tenancy, below market in-place rents and acquisition prices below replacement cost. The company leverages local property manager relationships to source acquisition opportunities and efficiently operate.

City Office seems to simply lack the Wall Street coverage, as evidenced by the company’s modest P/FFO multiple (of 12.1x) and high dividend yield (0f 7.4%).


Source: FAST Graphs

In late 2013, Ashford Hospitality Prime, Inc. (AHP) announced the completion of its spin-off from Ashford Hospitality Trust, Inc. (AHT). The spin-off REIT began trading as an independent public company on the New York Stock Exchange starting November 20, 2013.

Ashford Prime formed with a strong foundation of eight hotels that has now grown to 12 hotels with 3,657 net rooms. AHP is focused on investing in luxury hotels and resorts that exhibits greater long-term RevPAR growth trend than the other chain scale segments. The Upper Upscale segment represents the second greatest long-term RevPAR growth trend.


AHP acquired the Ritz-Carlton St. Thomas, Bardessono Hotel & Spa, Sofitel Chicago Magnificent Mile, Pier House Resort, Park Hyatt Beaver Creek and Hotel Yountville since spin-off, and the company has increased portfolio RevPAR since spin-off by 55% to $217 as of TTM March 2017.

AHP’s external advisory agreement differentiates it from other external advisory agreements in the REIT industry. The agreement’s unique structure is designed to reduce the G&A expense burden by avoiding duplication, and provides for management incentives only in the event of outperformance versus a defined peer group, enabling investors to benefit from the management team’s extensive experience and tenure together.

During Q1 2017, AHP had strong performance as the company reported AFFO per share of $0.46, 18% above the prior year and adjusted EBITDA of $23.7 million. AHP’s RevPAR growth for all hotels of 2.5%, exceeded the industry-wide results for the luxury segment by 40 basis points.

AHP recently declared a first quarter 2017 cash dividend of $0.16 per share or $0.64 per diluted share on an annualized basis, equates to an annual yield of approximately 6.1%.

Source: FAST Graphs

For more information on my Small Cap REIT Portfolio, subscribe to the Forbes Real Estate Investor.

I own shares in HASI, CHCT, GMRE, JCAP, and AHP.