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3 Top Small Cap Real Estate Stocks to Buy

[Updated: Oct 03, 2019] Aug 29, 2019 by Matt Frankel, CFP
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The most well-known real estate investment trusts , or REITs, are the largest players in the sector. This isn’t surprising; larger companies have longer track records and can even be household names. For example, leading self-storage REIT Public Storage (NYSE: PSA) is almost synonymous with the business it operates in.

But when you’re looking for the best long-term growth opportunities, it's smart to focus on smaller companies. Here are three excellent examples to help get your search started.

Why invest in small-cap real estate stocks?

Small-cap stocks have far more growth potential than their large-cap counterparts. Think about it -- if a $20 billion REIT has a $40 billion addressable market, it still has growth potential, but it’s rather limited. On the other hand, a $250 million REIT with a $40 billion addressable market has tons of room to grow.

Small-cap stocks have far more growth potential than their large-cap counterparts.

Small-cap REITs also have the advantage of being able to focus on smaller and niche deals that larger players tend to ignore. In other words, a $5 million property might not be a needle-moving acquisition for a massive REIT. But for a $200 million REIT, it could be a serious boost to profitability.

3 top small cap real estate stocks

With that in mind, here are three examples of small cap REITs, followed by a bit about each one:

Company (Symbol) Subsector Market Capitalization Dividend Yield
Physicians Realty Trust (NYSE: DOC) Healthcare $3.5 billion 4.9%
Seritage Growth Properties (NYSE: SRG) Retail $1.7 billion 2.2%
Xenia Hotels and Resorts (NYSE: XHR) Hotels $2.5 billion 5.0%

Data source: CNBC. Market capitalization and dividend yield data as of 5/22/19[1] .

Update before post

Physicians Realty Trust is a healthcare REIT that focuses on medical office properties located on major health campuses or affiliated with health systems. The company owns about 250 properties and has grown rapidly since its 2013 IPO. With a growing senior citizen population expected to cause a steady rise in healthcare demand in the coming decades, there's plenty of growth runway ahead.

Seritage Growth Properties is an interesting retail REIT. It was spun off from Sears Holdings in 2015 to repurpose vacant Sears and Kmart stores and fill them with higher-paying tenants. So far, the company has had tremendous success despite the rapid Sears closures over the past year or so. The company isn’t currently profitable, but it has several high-dollar projects in the pipeline. That should translate to strong returns for patient investors. Seritage received a big vote of confidence from Warren Buffett's Berkshire Hathaway (NYSE: BRK-B) in 2018. The conglomerate entered a $2 billion loan agreement to help Seritage fund its operations.

Finally, Xenia Hotels and Resorts is a hotel REIT that owns 40 high-end luxury hotel properties. The company focuses on hotels with respected brand names in top leisure destination markets in the United States. Xenia creates value by renovating its properties, but also acquires and improves existing ones. With a rather conservative balance sheet, Xenia has lots of financial flexibility to pursue future growth opportunities.

More risk, more rewards

It’s important to remember that small cap stocks are usually more volatile than their large cap counterparts; larger REITs tend to be more mature companies, have more financial flexibility, and run more stable operations. This is especially true for smaller, rapidly-growing REITs, as there’s a lot of execution risk in ambitious growth plans.

Having said all that, if you’re looking for tremendous growth over time, you’re more likely to find it in small cap REITs than large caps. Just know that you’re taking on a bit more risk in exchange for a higher reward potential.

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Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Physicians Realty Trust. The Motley Fool has a disclosure policy.