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Small-cap REITs forecast to have high FFO growth potential, despite underperformance

Small-capREITs — defined in this analysis as U.S. equity REITs with less than $1 billionimplied market cap — have underperformed their larger counterparts across variousmetrics, including price-to-FFO, total return and price-to-NAV over the last year,but could be poised for strong FFO growth in 2016, according to Cap IQ estimates.

At year-end2015, small-cap REITs reported a median price-to-FFO of 11.9x, while large-cap REITs— those with implied market cap exceeding $5 billion — reported a median price-to-FFOof 19.0x. The median discount to NAV, as of April 11, 2016, for small-cap REITswas 19.2%, while large-cap REITs posted a median discount to NAV of 0.69%.

Comparingone-year total return also shows vast underperformance for a weighted small-capREIT index, which posted a negative 10.86% return, more than 20 percentage pointsbelow a weighted large-cap REIT index.

Lookingat a balance sheet metric for leverage, calculated as debt-to-total-capitalization,at year-end 2015 small-cap REITs reported a median 49.5%, compared to 29.1% forthe large-cap REITs.

However,forward-looking median Cap IQ FFO-per-share growth figures paint a different picture,with small-cap REITs forecast to increase FFO by 15.6% — nearly 3x the 5.24% expectedgrowth for large-cap REITs.

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