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Boenning & Scattergood eyes small-cap REITs with analyst hire

Boenning & Scattergood Inc.'s increased research coverage of small-cap real estate investment trusts could lead to new investment banking opportunities in the space.

The firm, based in West Conshohocken, Pa., hired Merrill Ross, a veteran analyst previously at Wunderlich Securities Inc., to cover REITs alongside Floris van Dijkum, who joined in late 2015. Van Dijkum's coverage list includes large names in the retail and hospitality property sectors, including Simon Property Group Inc., GGP Inc. and Host Hotels & Resorts Inc. By contrast, Ross, who has not yet initiated coverage, will focus on smaller REITs, said Boenning's director of research, Matthew Schultheis.

Shares of larger companies in the REIT space tend to be heavily owned by institutional investors, whereas smaller REITs typically have a greater proportion of retail investors among their shareholder bases, in part because they are too small to be included in the major REIT indexes against which large investors benchmark their performance. Schultheis said in an interview that the firm's retail clients, as well as institutional clients pursuing a generalist small-cap strategy, will be interested in research coverage of smaller REITs.

The firm has research coverage of small-to-midcap banks, insurance companies and water infrastructure companies, and was seeking to create a link between that coverage and its coverage of large-cap REITs, Schultheis said.

"We just figured we should double down into a space where we've had some traction and success, and see if we could leverage that into what we're already doing in the small-cap space," he said.

While regulations mandate a clear separation between research and investment banking, Boenning could also benefit on the investment banking side from closer relationships with small-cap REITs. Companies sometimes give underwriting assignments to investment banks who have equity research analysts covering them.

One way Boenning can help smaller REITs raise capital is by offering their shares to retail investors through the company's brokerage business. Chris Chapman, a director at the firm who leads Boenning's real estate investment banking efforts, said capital raising among REITs has been challenged in recent months, with many companies trading at steep discounts to their net asset values, and with rising interest rates dampening the market for debt offerings.

Still, he said smaller REITs "tend not to have the scale to build a fortress kind of balance sheet," and as a result may need to access "just-in-time capital," even during otherwise quiet fund-raising periods, to complete a given transaction, such as a property purchase.

"Our view is that we still have a decent amount of capacity within our investment banking unit to take on the incremental opportunity" of working with small-cap REITs, Chapman said.

Chapman said the firm is taking a "wait-and-see approach" to the new hiring of investment bankers in support of the REIT initiative. While the core of Boenning's investment banking business is focused on community banks, the firm has ventured into other areas based on team members' background and experience. Chapman, who joined the firm in 2013, advised financial institutions and real estate companies while working at Stifel Nicolaus and Ryan Beck. Earlier in his career, he worked in sell-side REIT research at KeyBanc Capital Markets.

While the firm sees promise in its relationships with small-cap REITs, he said, "We tend to wade carefully into anything new."

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