5 Small-Cap REITs for Growth in This Market

NEW YORK (TheStreet) -- Sometimes small-cap REITs are not always as visible as the big blue chip brands like Realty Income (O), Kimco Realty (KIM) or Simon Property Group (SPG). And, as we all know, the blue chips have been on a tear this year, and many of them have rallied to record highs, especially the larger dominating index fund REIT stocks.

Of course, it is not surprising that the rally is led by the institutional buyers that have a much higher degree of analyst coverage and much lower risk tolerances.

Conversely, small-cap REITs have always been seen as more risky bets than large caps. They often do not have the diverse revenue streams or stable cash flows that allow them to weather difficult economic environments (like their larger-cap counterparts).

Small-cap stocks are also more susceptible to wide swings in price due to lower trading volumes. This greater volatility deters action and often invites selling.

Often I found that the lack of Wall Street coverage and investor interest can also result in shares remaining undervalued -- especially in down markets -- for extended periods of time.

Accordingly, the stocks that "fly under the radar" are offer better positioned for growth over the long term. Due to the decreased institutional support, there's a better chance that the operational health and prospects of these small caps will be underestimated.

The Power of Repeatability

For those investors seeking yield, the difficulty is in predicting the exact dividend policies companies will adopt in the coming years. And as more investors enter retirement and need to replace substantial proportions of their working-years' income by using their investment portfolios, a reliable dividend-yield strategy is a must.

Because REITs distribute at least 90% of their taxable income to shareholders annually in the form of dividends, investors are becoming increasingly attracted to the notion of balancing a portfolio with steady and reliable dividend income.

REITs provide investors with a powerfully unique income strategy in which the differentiated alternative is also the essence of the repeatable value proposition. Unlike most other fixed-income alternatives, REITs perform a valuable task by turning the sources of rental income into powerfully consistent and reliable dividends.

This attraction to dividends is one of the strongest sources of differentiation for REIT investors. But there is also considerable potential for explosive gains -- especially the small-cap REITs.

Winning List

Since I spend my days (and nights) researching and writing on the beloved big, medium, and small-cap REITs, I will let you in on a few un-mined gold mines. Sometimes, I have found, investors can find value in the smaller risk-aligned REITs that provide a value proposition with more room to run.

Take for example Excel Realty Trust ( EXL). This San Diego-based shopping center REIT completed its initial common stock offering on April 28, 2010 and today the company has a market cap of around $539 million. The current shares trade at $12.05 and the dividend yield is 5.39%.

Retail Opportunity Investment ( ROIC), also based in San Diego, owns shopping centers along the west coast. Led by veteran shopping center guru, Stuart Tanz, Excel has a market cap of $658 million and sports a dividend yield of 4.51%.

One high yielding gem is Whitestone REIT ( WSR). This Houston based REIT also specializes in shopping centers; however, the targeted value add approach has worked well for investors these days. The $229 million (market cap) REIT trades for $13.61 per share and the monthly dividend is 8.38%.

I really like this little Boston-based pick called STAG Industrial ( STAG). Led by veteran real estate wizard Ben Buthcher, STAG invests in industrial assets in secondary and even tertiary markets. The $639 million REIT has a healthy retention record and the $18.35 a share company pays a 5.89% dividend.

Finally, as my regular readers know, I love talking net. That is "nothing but net lease." American Realty Capital Properties ( ARCP), not be confused with American Realty Capital Trust ( ARCT), owns free-standing assets leased to chains like Dollar General ( DG), Family Dollar ( FDO) and Home Depot ( HD) ( HD). The $144 million (market cap) REIT trades for around $12.86 per share and the dividend is a slam dunk: 6.92%.

Warren Buffet once wrote:
We show below our common stock investments. With two exceptions, those that had a market value of more than $700 million at the end of 2006 are itemized. We don't itemize the two securities referred to, which have a market value of $1.9 billion, because we continue to buy them. I could, of course, tell you their names. But then I would have to kill you.

Don't worry. I won't shoot you. Just keep reading my intelligent REIT articles on TheStreet and you will begin to sleep well at night.

At the time of publication, the author had no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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