School Is In Session: Small Cap REITs Rule

As investors become more familiar with a new property type and develop a better sense of risk, they may find reason to reduce their assessment of risk, and that may prompt an upward revaluation of the property (and hence a lowered cap rate).

Summary

  • We do hold a number of these larger cap REITs, however, we have done a good job of mitigating our retail exposure by investing in more tactical sectors.
  • As a REIT analyst, my job is to uncover the “crown jewels” and often that job means that I have to get into the trenches and get dirty.
  • My Small Cap REIT Portfolio has performed extremely well, shares have returned +15.25% YTD.

I just finished writing the November edition of the Forbes Real Estate Investor,and since it’s Halloween, I decided to provide my loyal followers with a REIT Treat (tasty dividend goodies). Also, I am providing a similar Halloween treat for prospective REIT Beat subscribers. You can get access to my service for just $511 per year (an $89 discount applied to a yearly subscription). SUBSCRIBE HERE.

Included in my newsletter (and on REIT Beat), I provide subscribers with six different REIT portfolios: Mom’s Wide Moat Portfolio, The Average Joe REIT Portfolio, The Monthly Dividend Portfolio, The Durable Income Portfolio, The Small Cap REIT Portfolio, and the newly-created DAVOS Portfolio.

As most know, REITs have underperformed year-to-date, the Vanguard REIT Fund (VNQ) has grown by 3.44% YTD and this popular REIT ETF includes REITs such as:

It should not surprise you that most all of the REITs in the VNQ are “big fish” names that include Simon Property Group (SPG), Equinix (EQIX), Prologis (PLD), Public Storage (PSA), Welltower (HCN), AvalonBay (AVB), Equity Residential (EQR), Ventas, Inc. (VTR), Digital Realty (DLR), and Boston Properties (BXP).

In fact, when we looked at the list of the most popular REIT ETFs, we found that Simon Property Group is the #1 or #2 holding for 10 out of 14 ETFs. CBL & Associates Properties (CBL) is also the #1 holding for the PowerShares KBW Premium (KBWY), +4.82% YTD.

Fortunately, we have done a good job with stock picking in 2017, our Durable Income Portfolio has returned over 9%, easily beating most all of the REIT ETFs (except the highly leveraged mortgage REIT ETFs).

We do hold a number of these larger cap REITs, however, we have done a good job of mitigating our retail exposure by investing in more tactical sectors such as data centers, cell towers, and logistics. Simon is a REIT we own and in my article yesterday I explained:

“It’s ok that Mr. Market does not see the value in Simon shares, I certainly do. Simon certainly has a few crown jewels that help me “sleep well at night.”

As a REIT analyst, my job is to uncover the “crown jewels” and often that job means that I have to get into the trenches and get dirty. Unlike the REIT ETFs that select REITs based on their market cap weighting, I prefer to filter out the best REITs that are often ignored by ETFs and the larger institutional holders.

Thus, I created the Small Cap REIT Portfolio…

Sizing Up Small Caps

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