Hip Hop Hurray - These Small REITs Really Pay

by: Brad Thomas

It looks like the Easter Bunny will be visiting the house and my kids are all excited of the prospects of finding some treats scattered across the backyard. Of course the key to finding the sweetest treat is to smell out the best hiding places by staying away from the herd and focusing on the lesser known opportunities. Sometimes this strategy will provide some real gems that could turn into chocolate covered jewels.

Some of the most fascinating investments are found in smaller packages. Conversely, the small-cap REITs have provided investors with some very appetizing options. As A.D. Pruitt recently wrote in the April 4, 2012 edition of The Wall Street Journal:

"In surprise, returns for some smaller REITs were higher. The three best-performing REITs in the latest quarter have market capitalizations of less than $1 billion and were among the worst-performing stocks last year."

As Pruitt explained, Pennsylvania Real Estate Investment Trust (PEI), Sabra Health Care REIT (NASDAQ:SBRA), and Weyerhaeuser Company (WY) all thrived in the first quarter market rally by posting strong double-digit performance. Pennsylvania REIT achieved the best results with a total return of 48 percent, while Sabra Health achieved a total return of 39 percent and Weyerhaeuser posted total return results of 18 percent.

Some other small cap darlings include Monmouth REIT (MNR), Excel Trust (EXL), and Retail Opportunity Investment Trust (ROIC). Due to the lesser known characteristics of these small cap REITs, an investor can often find considerable value in selecting a high-growth option that has increased capital appreciation potential. Sometimes it is possible to uncover a real gem where the REIT's dividend and growth potential are greater than average resulting in a unique opportunity to outperform.

With many of the larger cap REITs reaching hefty valuations, these smaller cap REITs appear to be cheaper and perhaps provide some unique portfolio weighting opportunities. Note that these smaller cap REITs are riskier (by nature) and the degree of risk should be assessed based on the individual investor profiles.

Consider the following small cap REITs in your portfolio weighting (allocation) model and you may find a real gem worth exploring:

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.