SELF - 4 Small-Cap REITs Being Ignored By Wall Street

2023-07-31 07:00:00 ET

Summary

• Agree Realty has returned more than 410% since my article compared with 213% for the S&P 500.
• STAG has returned 593% since 2011.
• Which small-cap REIT could repeat?

In a recent Seeking Alpha article I explained that “ I was one of the first analysts on Seeking Alpha to cover Agree Realty ( ADC ) back in 2011."

During that time, Agree had a market capitalization of around $370 million compared with the company’s current market cap of $6.4 billion.

As I mentioned in the recent article, shares in Agree have returned more than 410% since my article compared with 213% for the S&P 500.

Another REIT I referenced in that article is STAG Industrial ( STAG ) and as I explained, “I was the first analyst to suggest buying STAG in 2011” . Back then STAG’s market cap was around $170 million compared with a current market cap of $6.9 billion. And since that time STAG has returned 593%.

These are two great examples of REITs that we recommended over the years that have resulted in amazing returns of roughly 35% per year.

I’ve never sold a share in either REIT and I'm still accumulating shares in these SWANs today.

So now the next question…

How can I do it again?

To answer that question, let’s take some time to look under the head of four small cap REITs to determine if they could generate the same success stories as STAG and Agree.

Before getting started, I’ll warn you.

Just like STAG and Agree Realty 12 years ago, these tiny REITs are thinly traded which means there’s very little analyst coverage. Which also means that articles like these are critical, so investors can get unbiased research, exposing the good, the bad, and the ugly…

A quick disclaimer: We consider all of these stocks speculative given their size and riskier leverage profile. Don’t just trust our research, always consult other sources and read over earnings calls and investor presentations.

Good luck and happy REIT investing!

Global Self Storage ( SELF )

Global Self Storage is an internally managed real estate investment trust (“REIT”) that acquires, owns, and operates self-storage properties in the U.S. They currently own or manage 13 self-storage properties located in Oklahoma, South Carolina, Pennsylvania, Ohio, New York, Indiana, Illinois, and Connecticut.

Their properties cover 967,137 square feet of net leasable space and contain 7,034 storage units that are leased to both residential and commercial customers.

SELF’s properties contain traditional and climate-controlled units, but many of their properties also feature covered and outside storage for automobiles, recreational vehicles, and boats. In total, 59% of their units are traditional drive-up storage, 33% are climate-controlled storage, while 8% are outside storage.

SELF has a same-store average tenant stay of approximately 3.4 years and a same-store occupancy rate of 88.7% as of the end of the first quarter.

Global Self Storage is not credit rated, but they have impressive debt metrics including a long-term debt to capital ratio of 25.68%, a total debt to equity ratio of 35.7%, an interest coverage ratio of 6.66x, and a net debt to EBITDA of just 2.12x.

They have $17.3 million in total debt and as of their first quarter earnings release, they had $24.2 million of capital resources which includes $6.5 million in cash and equivalents, $2.7 million in marketable securities, and $15 million available to them under their revolving credit facility.

Over the past five years SELF has had an average adjusted funds from operations (“AFFO”) growth rate of 10.03% and an average dividend growth rate of 1.15%. AFFO fell by -25% in 2020, but then rebounded with a 50% increase in 2021 and a 19% increase in 2022.

Analysts expect AFFO to fall by -7% in the current year and increase by 2% in 2024. SELF pays a 5.9% dividend yield that is well covered with an AFFO payout ratio of 63.95% and trades at a P/AFFO of 11.95x which is well below their normal AFFO multiple of 14.76x.

Other peers: ( CUBE ) yields 4.3%, ( NSA ) yields 6.4%, ( EXR ) yields 2.8%, and ( PSA ) yields 4.1%.

We rate Global Self Storage a Spec Buy.

Whitestone REIT ( WSR )

Whitestone REIT specializes in open-air shopping centers with an emphasis on service-oriented industries such as restaurants, grocery stores, fitness centers, financial and educational services. They own 57 properties that cover roughly 5.1 million square feet of gross leasable space which are located in Texas, Arizona, and Illinois.

Within these states, WSR’s largest concentration is in the Scottsdale / Phoenix area with 25 shopping centers, followed by Houston with 14 shopping centers. Their smallest market is in Buffalo Grove, Ill., with only one shopping center.

The majority of their properties (93%) are leased on a triple-net basis and their total portfolio has a weighted-average lease term of roughly four years and a 92.7% occupancy rate as of the end of the first quarter.

Whitestone REIT has relatively high amount of debt with a debt to pro forma EBITDAre of 7.8x , an interest coverage ratio of 2.66x, and a long-term debt to capital ratio of 58.21 %.

Additionally, their debt is 90% fixed rate and has a weighted average interest rate of 4.87%. They have a well staggered debt maturity schedule with minimal debt maturities in 2023 and have ample liquidity with $137 million available to them under their revolving credit facility.

Whitestone REIT has had a 1.21% average AFFO growth rate since 2013, but much of that growth took place prior to 2016. WSR’s AFFO declined each year between 2016 and 2021 and went from $1.08 per share to $0.74 per share over that time period.

AFFO increased by 13% in 2022 to $0.84 per share but is expected to fall by -7% in the current year. Analysts expect AFFO to increase by 10% in 2024 and by 8% in 2025 .

WSR has not had a good dividend track record over the last 10 years. In 2013 they paid a dividend of $1.04 per share whereas in 2022 they only paid a dividend of $0.47 per share. The dividend was maintained at $1.14 per share from 2014 to 2019 but was cut by -47.37% in 2020 and then cut again by -28.75% in 2021.

In total they have had an annual compound dividend growth rate of negative -9.26% over the last 10 years. WSR pays a 4.8% dividend yield that is well covered with an AFFO payout ratio of 55.99% and trades at a P/AFFO of 12.52x which compares favorably to their normal AFFO multiple of 14.24x.

Peers: ( KIM ) yields 4.4%, ( REG ) yields 4.0%, ( FRT ) yields 4.2%, ( CTO ) yields 8.6%, and ( ROIC ) yields 4.1%.

We rate WSR a Spec Buy.

Strawberry Fields REIT ( STRW )

Strawberry Fields is a young public company, having listed its shares in the over-the-counter (OTC) market in late 2022, before the stock commenced trading on the NYSE American exchange in early 2023.

STRW is a real estate investment trust (“REIT”) in the healthcare sector that specializes in skilled nursing facilities (“SNF”) and acute care centers that are leased to operators on a triple-net basis.

STRW’s portfolio consists of 79 healthcare properties (78 owned, one held under a long-term lease) with a total of 10,351 licensed beds that are located across Texas, Tennessee, Oklahoma, Ohio, Michigan, Kentucky, Indiana, and Arkansas.

Their 79 properties include 83 healthcare facilities which consist of the following: 76 skilled nursing facilities, three assisted living facilities, and two dual-purpose properties that are both used for skilled nursing and long-term acute care hospitals.

STRW’s skilled nursing facilities have an average facility size of 131 beds, with a patients per day average of 90 residents, and an SNF occupancy rate of 68.4%.

STRW’s investments are largely financed with debt. As of year-end 2022, their total liabilities equaled $497.6 million vs $49.3 million in total equity and their total debt as a percentage of capital comes to 87.6%. However, they have a solid net debt to EBITDA of 5.53x and a reasonable interest coverage ratio of 3.37x.

Since their formation in 2018, STRW has had an adjusted EBITDA compound annual growth rate of 8.55% and has delivered an AFFO compound annual growth rate of 18.90%.

Much of this growth was achieved prior to being publicly listed and growth has moderated in the last year with AFFO growth in 2023 projected to come in at 2.5%.

Since its public listing, STRW’s stock price has fallen -31.30%, putting its price per share at $6.87 and its total market capitalization at $43.67 million.

Interestingly enough, STRW’s reported full-year 2022 AFFO was $51.1 million so it appears that STRW is currently trading for a P/AFFO of under 1x.

This is a nano-cap stock with very little historical information to analyze so there is a greater level of risk when compared to a more established REIT, but currently the stock seems to be trading at a very attractive price and pays a 6.40% dividend yield.

We rate Strawberry Fields REIT a Spec Buy.

Sachem Capital ( SACH )

Sachem Capital is a Connecticut-based mortgage REIT that originates, services, and manages a portfolio of first mortgage loans. They offer a variety of loans including bridge loans, new construction loans, fix-and-flip loans, and refinance loans that are issued to real estate investors to fund the acquisition, development, or improvement of commercial or residential properties across 15 states within the U.S.

Their loans are short term, typically ranging between 12 and 36 months, with 88% of their loans having a term of under 1 year and are relatively small in size with an average loan size of $1.03 million.

Since their formation, SACH has originated more than $1.0 billion in loans with over 1,850 transactions completed and currently has a $476.5 million loan portfolio with a target loan-to-value (“LTV”) of 70%. Their portfolio consists of over 400 loans and no single loan makes up more than 10% of their portfolio.

Sachem Capital has a long-term debt total capital ratio of 48.75% and conservative debt levels when compared to many of its peers.

SACH has a total debt to equity ratio of 1.5x, which may seem high compared to the equity REITs we cover, but compared to other mortgage REITs it looks much better with Ladder Capital’s ( LADR ) debt to equity at 2.7x, Blackstone Mortgage Trust’s ( BXMT ) debt to equity at 4.5x, and Starwood Property’s ( STWD ) debt to equity at 2.8x.

SACH has averaged a blended adjusted operating earnings growth rate of 3.76% since 2020. Earnings increased by 4%, 7%, and 20% in the years 2020, 2021, and 2022 respectively.

Analysts expect earnings to fall by -23% in 2023, but then to increase by 16% the following year. They currently pay a 14.4% dividend yield with a 2022 adjusted earnings dividend payout ratio of 98.11%.

While the payout ratio is high, it has gotten better over the last several years with the payout ratio improving from 117.07% in 2020 to where it stands now at under 100%.

The stock is trading at a P/E of 7.77x which is a discount compared to their normal earnings multiple of 10.16x.

We rate Sachem Capital a Spec Buy.

Management Matters

We dig deep into our research and that includes frequent interviews with management. I have interviewed C-suite executives at SACH, STRW, and WSR, as well as STAG and ADC.

In fact, I have personally published well over 200 C-suite interviews and next week I plan to interview CEOs at VICI Properties ( VICI ) and Alexandria Real Estate ( ARE ).

Quite frankly, I think that one of our advantages is that we're able to listen to these interviews, watch facial expressions, and read transcripts. We know that “management matters."

As always, thank you for reading and commenting. Please let us know if there’s a ticker that you would like for our team to cover.

Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.

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