Personal Finance

3 Top Small-Cap Stocks to Buy in Real Estate

Three piles of coins, with plants growing out of them.

Looking back over the past several decades, we can see the long-term growth power of well-run real estate investment trusts, or REITs. For example, leading healthcare REIT Welltower has produced a total return of nearly 79,000% over its 47-year history, and since its IPO in 1994, top net-lease retail REIT Realty Income has averaged a remarkable 16.4% annualized rate of return. Currently, both are huge companies, with market capitalizations of $26.5 billion and $15.8 billion, respectively.

While I still love both of those REITs as long-term investments, it's only natural to think, "Wouldn't it have been nice to get in on the ground floor of those opportunities?"

Three piles of coins, with plants growing out of them.

Image Source: Getty Images.

Fortunately, there are many smaller REITs with similar growth opportunities. And while there's no way to know for sure which of the small REITs will become tomorrow's major players, here are three that look quite promising.

Company Stock Symbol Recent Stock Price Dividend Yield Market Cap
Tanger Factory Outlet Centers SKT $23.90 5.8% $2.3 billion
LTC Properties LTC $48.03 4.8% $1.9 billion
Preferred Apartment Communities APTS $18.22 5.2% $595 million

Data Source: TD Ameritrade . Stock prices, dividend yields, and market caps as of 8/29/2017.

Consumers always want or need a bargain

In a recent presentation, Tanger Factory Outlet Centers (NYSE: SKT) CEO Steven B. Tanger said, "In good times people love a bargain, and in tough times, people need a bargain." In other words, the discount-oriented nature of Tanger's business model works in all economic environments.

The proof is in the numbers. Tanger has consistently grown its same-center net operating income (NOI) over the past decade, even throughout the Great Recession. And since its 1993 IPO, the company has finished every single year with an occupancy rate of 95% or higher.

Chart of Tanger's occupancy each year since 1993.

Image Source: Tanger Outlets investor presentation.

The only pure-play outlet-center REIT, Tanger certainly has lots of potential for growth. Tanger is a market leader, with 43 outlet centers, but outlets are still a relatively small portion of the retail industry. In fact, Tanger estimates that there are less than 70 million square feet of quality outlet space in the entire United States -- less than the retail space in Chicago.

In addition, Tanger's stock price has been beaten down, along with most others that make their money from brick-and-mortar retail. However, discount-oriented retail actually is doing quite well, plus the outlet-shopping business model revolves around in-person discounts -- meaning that the company is resistant to e-commerce headwinds.

A massive opportunity in senior care

LTC Properties (NYSE: LTC) is a healthcare REIT that focuses on skilled nursing and assisted-living properties, with the company's portfolio of 201 facilities almost evenly split between the two. Most of the properties are in major metropolitan areas and are operated by some of the best senior-living companies in the nation, such as Brookdale Senior Living and Genesis Healthcare, just to name two.

Why invest in senior housing? In a nutshell, the U.S. population is projected to age rapidly, thanks to the ongoing retirement of the massive baby boomer generation.

The typical age for a senior-housing resident is between 82 and 86 years old, based on a 2014 survey. This portion of the population is expected to grow by 29% by 2025 and will continue to grow after that. In other words, the portion of the population most likely to utilize senior housing is going to grow rapidly, creating a steady stream of new demand.

LTC Properties is already growing aggressively, with more than half a billion dollars of investments over the past two years alone, a large amount for a REIT of its size. With nearly $800 million in available liquidity, there's no reason to believe the company has any intention of slowing down.

A good time to invest in rental housing

The U.S. homeownership rate is at a generational low, as the millennial generation has demonstrated more of a preference for renting than previous generations. One smaller, but rapidly growing, REIT that could be a smart way to invest in this trend is Preferred Apartment Communities (NYSE: APTS) .

In addition to its apartment communities, the company also has several subsidiary companies that invest in other property types -- Preferred Campus Communities (student housing), Preferred Office Properties (Class A office buildings), and New Market Properties (grocery-anchored shopping centers). Not only does this add diversification, but it also gives the company three more avenues for growth and the ability to concentrate its resources in whatever property type is the most attractive investment at a particular time. At the end of 2016, the company owned and managed 24 apartment communities, 31 grocery-anchored shopping centers, owned 23 real estate loan investments, three office buildings, and one student-housing community.

Preferred Apartment Communities is relatively new, having issued its IPO in 2011, but has grown aggressively since then. In 2016 alone, the company increased its core funds from operations ( FFO) by 12.9% per share, and nearly doubled its revenue and total assets.

Preferred Apartment Communities' revenue and asset growth since 2011.

Image Source: Preferred Apartment Communities' 2016 annual report.

2017 looks like it will be another impressive year of growth for the company. As of this writing (August 29, 2017), the company has announced the acquisition of six more apartment communities, four grocery-anchored shopping centers, and five real estate loan investments.

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Matthew Frankel owns shares of Realty Income. The Motley Fool recommends Tanger Factory Outlet Centers and Welltower. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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