Bear markets are a real kick the teeth to live through. And yes, I know that we are not “technically” in a bear market because the S&P 500 and Dow have yet to fall by 20% or more.
But small caps, as measured by the Russell 2000, are well into bear market territory, down about 22% since June. And several subsectors — such as REITs, MLPs and business development companies — have gotten hit even harder.
As a case in point, the IQ US Real Estate Small Cap ETF (ROOF) is also down about 22% and at one point in January was down more than 25%.
A lot of this comes down to financing. Small caps tend to require more capital than large caps, and REITs, MLPs and business development companies tend to have even greater need for external financing than most. With the Fed raising rates for the first time in a decade and the credit markets looking as jittery as I’ve seen them since 2008, the stock of anything that needs access to credit has gotten throttled.
But this is exactly what makes investing challenging … and very rewarding. Rather than run from these sectors, this is precisely the time that we should be hunting for values. And believe me, there are plenty to be found these days.
Today, I’ll share three of my favorites.
Bargain REITs: STAG Industrial Inc (STAG)
Dividend Yield: 8.1%
I’ll start with one of my favorite REITs, STAG Industrial Inc (STAG). STAG primarily buys single-tenant logistical centers and light manufacturing properties. It’s not sexy. It’s actually pretty gritty. But it’s consistently profitable, and STAG has done a fine job of growing its business since going public in 2011.
And after the recent selloff, the shares are trading at prices first seen in 2012.
From looking at the share price, it would seem that STAG has had a rough three years, yet nothing could be further from the truth. STAG has grown its funds from operations at a 9% annual rate and boosted its dividend at a 7% annualized rate since its IPO.
So, what gives?
The selloff has little to do with STAG’s operations and a lot to do with its size. STAG’s market cap is just $1.2 billion, and small caps in general have gotten crushed over the past year. STAG’s been dragged down with the rest of them, but now yields an impressive 8.1%.
Buy this stock, collect the dividend (which is paid monthly) and wait for the market to regain its sense.
Bargain REITs: Preferred Apartment Communities Inc. (APTS)
Dividend Yield: 6.4%
Up next is Preferred Apartment Communities Inc. (APTS), a tiny apartment REIT with a market cap of just $271 million.
The rationale for apartment REITs is pretty straightforward. With home prices high and incomes not exactly keeping up, a lot of Americans are locked out of the housing market indefinitely. Add to this a massive surge in new demand from Millennials moving out of mom’s basement, and you have a very favorable macro environment for apartments.
As with politics, all real estate is local. And that is where a smaller operator like Preferred Apartments can really add value. Starting small, they can concentrate their efforts on the most promising markets.
Like STAG, Preferred Apartments went public in 2011. And also like STAG, it has been a solid dividend-growing REIT ever since, boosting its dividend by 54%.
At current prices, APTS yields an attractive 6.4%.
Bargain REITs: New Senior Investment Group Inc (SNR)
Dividend Yield: 11.4%
I’ll leave you with a small-cap REIT that’s a little more on the speculative side: New Senior Housing Investment Group Inc (SNR). New Senior went public in the fourth quarter of 2014, and the stock has pretty well done nothing but fall ever since. At a current price of $9.55, the REIT is down by over 50% from its all-time high.
So, what gives?
It was something of a perfect storm. SNR went public just before we started to see signs of overbuilding in the senior care and assisted living space. Many health- and senior-care REITs — including the big boys like Ventas, Inc. (VTR) — have seen their share prices get crushed over this period, and SNR’s situation was made worse by the fact that it is a small cap with a market cap of just $835 million.
Add to this an activist investor campaign against its management structure (SNR is managed externally by an affiliate of hedge fund Fortress), and it seems New Senior was viewed as toxic.
So, what’s the appeal?
To start, SNR sports a very nice 11.4% yield, and the REIT raised its dividend last year. And more fundamentally, healthcare REITs are all looking pretty beaten up and due for a good rally.
New Senior is speculative, so please don’t invest the money you need for your mortgage payment in it. But if you’re looking for a reasonably safe bet with a high yield, this REIT is worth a look.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing he was long APTS and STAG.