Most of my real estate investment trust (REIT) holdings have delivered solid performances. They haven't all beaten the market, but most have generated above-average dividend income with less volatility, helping smooth out my overall returns.
However, a couple of my REIT investments have produced disappointing results: CorEnergy Infrastructure Trust (NYSE: CORR) and Seritage Growth Properties (NYSE: SRG). While they've weighed on my returns, that doesn't mean I'm giving up on these two REITs. Here's why I plan to continue holding for now.
CorEnergy Infrastructure Trust is an infrastructure REIT focused on owning energy infrastructure leased to customers under long-term contracts. It's the first REIT to focus on energy infrastructure, giving investors a real estate-focused alternative to the master limited partnership (MLP) structure commonly found in the energy industry.
While CorEnergy has a sound business model for generating stable income to support an attractive dividend, it has had several issues over the years. The biggest problem has been purchasing infrastructure via sale-leaseback transactions from financially weaker operators. That came back to bite the company during the most recent downturn in oil prices as its two largest tenants stopped paying rent. That forced the REIT to reset its dividend from $0.75 a quarter to $0.05 per quarter.
CorEnergy has since ended those relationships, selling one of the assets back to the operator while using the other as partial payment to acquire Crimson Midstream. That deal added six oil pipeline systems in California that serve a diversified and creditworthy customer base. The Crimson acquisition complemented the company's natural gas assets in Missouri while positioning it for future expansion.
The Crimson transaction should eventually allow CorEnergy to boost its dividend to an annual rate of around $0.35 to $0.40 a share as market conditions return to normal. Meanwhile, it expects future acquisitions to help further diversify and grow its revenue stream, supporting additional dividend growth. I'd like to see how this strategy plays out before giving up on the company.
A bumpy start
I bought Seritage Growth Properties knowing it was a turnaround play. Sears formed the REIT for the sole purpose of unlocking the value of its retail real estate in 2015. It started with 235 wholly-owned properties and 31 owned through joint ventures.
The company has had its share of ups and downs along the way. On a positive note, it secured the financial backing of Warren Buffett's Berkshire Hathaway, which provided the retail REIT with a $1.6 billion term loan to help it finance its redevelopment program. However, Sears declared bankruptcy in 2018 and terminated its remaining leases with the company in 2020. Meanwhile, the pandemic had a significant impact on the retail sector. Many tenants didn't pay rent for a portion of the year. Those issues forced the company to defer some development projects.
Seritage brought in a new management team in the last year to get back on track. They completed an asset-by-asset analysis and company review. This process led them to streamline its focus on an actionable business plan to unlock the value of the remaining portfolio consisting of 154 wholly-owned properties and 25 unconsolidated properties. It has six distinct business plans focused around repositioning its properties into one of the following categories:
- Grocery-anchored shopping centers
- Multi-tenant retail, like strip malls
- Triple net single-tenant properties
- Office and life science
- Multifamily residential
- Pipeline and disposition pool
The REIT intends to finance this strategy by selling additional properties and bringing on joint-venture partners.
I still believe Seritage holds valuable real estate that the company can unlock by repositioning its properties. That's why I plan to continue holding shares and allow the new management team to execute their strategy.
Real estate is a long-term investment
I initially bought shares of CorEnergy and Seritage knowing they were higher-risk/higher-reward opportunities given their unique business models in the REIT sector. While these investments haven't generated the higher returns I'd hoped, there's still time for them to pay off as they execute their turnaround strategies. That's why I plan to continue holding for a while longer to see if they can deliver on their initial promise.