Three Small Recession-Proof REITs with the Potential to Move from Small Cap to Large Cap This Decade
Discover three overlooked REITs positioned for significant growth through strategic niches, solid financials, and market-defying strategies.
As recession fears continue to wane and interest rates trend lower, the real estate investment trust (REIT) sector is capturing investor attention once again. The Schwab U.S. REIT ETF (SCHH), for example, has doubled the performance of the broader market indices over the past 30 days, buoyed by the sector’s stable dividends and resilient cash flows. Yet, not all REITs are created equal. Choosing the right sectors is essential for capitalizing on this momentum and for finding those gems that could transition from small-cap to large-cap status.
While traditional retail and office REITs are under pressure from e-commerce and remote work trends, certain niches offer more promising outlooks. Grocery store REITs provide steady cash flow in both good and bad times; medical real estate is backed by ever-growing healthcare demand; and ground lease REITs offer a unique, inflation-resistant business model.
This article profiles three small-cap REITs—Slate Grocery REIT (OTC: SRRTF, Market Cap: $585 million), Safehold (NYSE: SAFE, Market Cap: $1.8 billion), and Global Medical REIT (NYSE: GMRE, Market Cap: $616 million) — each positioned to thrive through strategic focus and niche expertise. We’ll also compare them to Digital Realty Trust (NYSE: DLR, Market Cap: $53 billion), illustrating how they could grow into large-cap REITs over the next decade.
1. Slate Grocery REIT: The Neighborhood Cornerstone
Market Cap: $425 million
Niche Focus: Essential Retail Anchors
Slate Grocery REIT (TSX: SGR.U) (TSX: SGR.UN) (OTC: SRRTF) specializes in grocery-anchored retail properties across the United States. Unlike other retail REITs, which are susceptible to fluctuations in consumer spending and the growth of e-commerce, grocery-anchored retail is a more recession-proof niche. Grocery stores remain essential, driving consistent foot traffic even during economic downturns, thereby offering a stable and reliable income stream.
Reading Between the Lines: A Strategic Expansion
Slate Grocery REIT is aggressively expanding in high-growth U.S. regions. Recently, it acquired 25 grocery-anchored properties in the Southeast, focusing on areas with robust population growth and favorable demographic trends. This approach positions Slate Grocery to benefit from a stable tenant base and consistent cash flows, with the potential for further growth by adding complementary tenants like pharmacies and specialty stores.
Financial Performance and Strategic Moves
Over the last five years, Slate Grocery REIT has maintained a steady revenue growth rate of 9.5% CAGR, while its adjusted funds from operations per share (AFFO) have grown at 2%. With over $21.5 million in cash reserves, it is well-positioned to pursue additional acquisitions. Offering a juicy yet sustainable dividend yield of 8.9%, it appeals to income-focused investors while maintaining a low payout ratio to support future growth.
Recent News and Stock Performance
The stock has appreciated by 12% year-to-date, outperforming many peers. Management’s focus on diversifying its tenant mix—by targeting complementary tenants like pharmacies and specialty food stores—is aimed at enhancing portfolio stability and boosting long-term growth prospects.
2. Safehold: Redefining Ground Leases
Market Cap: $1.8 billion
Niche Focus: Ground Leases
Safehold (NYSE: SAFE) operates in the unique niche of ground leases, a long-term investment model where Safehold owns the land under a property while another party owns the building and improvements. This model provides a highly predictable and inflation-protected cash flow, making it an attractive option during uncertain economic times.
Reading Between the Lines: Innovative Approach to Real Estate
Safehold has built a robust portfolio by focusing on ground leases in major metropolitan areas with high barriers to entry. Recently, it expanded its footprint in high-demand cities like New York and Los Angeles. This strategy reflects management’s belief in urban resilience and long-term real estate value appreciation, positioning Safehold to benefit from consistent, inflation-adjusted rent escalations.
Financial Performance and Strategic Moves
Safehold’s revenue has grown impressively at a five-year CAGR of 6.6%, but negative AFFO growth. The company has relatively high leverage with a debt-to-equity ratio above 175% and a paltry $23 million in cash reserves for future growth initiatives. Safehold offers a dividend yield of 2.8%, which is lower than many REITs but reflective of its strategy to reinvest cash flows for growth.
Recent News and Stock Performance
Safehold’s stock has gained 8.9% year-to-date, driven by investor optimism around its innovative business model and strong growth potential. The company recently announced plans to expand its ground lease portfolio by targeting additional core markets in the U.S., with an eye on securing new, long-term lease agreements.
3. Global Medical REIT: The Healthcare Havens
Market Cap: $616 million
Niche Focus: Medical Office Buildings
Global Medical REIT (NYSE: GMRE) focuses on acquiring and managing healthcare facilities, including medical office buildings and outpatient treatment centers. The aging U.S. population and the growing demand for healthcare services make this a particularly resilient niche, insulated from many of the economic fluctuations impacting other commercial real estate segments.
Reading Between the Lines: A Decentralized Future for Healthcare
GMRE is strategically targeting smaller, decentralized healthcare facilities, aligning with trends toward outpatient care and telemedicine. This focus not only captures the shift in healthcare delivery models but also positions GMRE to capitalize on the growing demand for community-based healthcare services.
Financial Performance and Strategy
Global Medical REIT has demonstrated robust growth, with revenue rising at a CAGR of 19% and AFFO growing by 4.6% over the past five years. The REIT’s concerning balance sheet, with a debt-to-equity ratio of over 107%, only $5 million in cash, and over $600 million in current liabilities leaves much to be desired and reminds one of the perils of investing in small-cap stocks. It offers a dividend yield of 9%, which is under 85% of the trailing 12 month’s free cash flow implying it is sustainable.
Recent News and Stock Performance
GMRE has expanded its portfolio by acquiring five new properties in growth markets like Texas and Florida. The stock is down -15% year-to-date, reflecting either risks and mismanagement or market inefficiency; only time will tell, but analysts online think it is the latter based on its focused strategy and resilient tenant base. Management continues to explore opportunities in high-demand healthcare sectors, positioning the company for steady growth.
Comparison: Digital Realty Trust – The Blueprint for Growth
Market Cap: $53 billion
Digital Realty Trust (NYSE: DLR) serves as a model for the potential growth of smaller REITs. As a leader in the data center space, DLR capitalizes on the explosion in demand for cloud computing, AI, and blockchain, proving that focused niche strategies can lead to massive scale.
Digital Realty’s success has been built on strategic acquisitions, disciplined capital allocation, and targeting high-growth sectors—principles that Slate Grocery, Safehold, and Global Medical REIT are also pursuing. With revenue growth of 14.3% and AFFO growth of -1.69% over the past five years, DLR provides a compelling roadmap for small-cap REITs looking to reach large-cap status.
Conclusion: The Path to Large Cap
While Digital Realty Trust offers an inspiring example of a niche REIT achieving large-cap status, Slate Grocery REIT, Safehold, and Global Medical REIT each have distinct strategies and stable foundations to pursue similar growth trajectories. For investors seeking recession-proof opportunities with significant upside potential, these three REITs offer a balanced combination of income, stability, and growth.
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Disclaimer: Wealthy VC does not hold a long or short position in any of the stocks, ETFs or cryptocurrencies mentioned in this article.
