Some real estate investment trusts (REITs) focus on owning trophy properties. Others prefer fixer-uppers that could have some value if only the properties were given a little love. That's the big story behind Seritage Growth Properties (NYSE: SRG) and Acadia Realty Trust (NYSE: AKR) today. Only there's a big difference in how they're positioned right now, and that could change which one you would be most inclined to buy.
Things got much tougher
Seritage Growth Properties was spun off from Sears Holdings (OTCMKTS: SHLDQ) in mid-2015. It was a way for the troubled retailer to raise some much-needed cash. From day one, Seritage's goal was to get out from under its former parent's shadow by upgrading properties and finding tenants to replace the Sears and Kmart stores that filled its portfolio. In other words, this REIT started life as a turnaround play.
It hasn't been easy, though the company has managed to shift in a new direction. By the end of March 2021, Seritage will no longer have any Sears or Kmart stores in its mix. That said, at the end of 2020, 28% of its portfolio was listed as "signed not yet opened." That's company-specific jargon that means the REIT has a lease in place, but it still needs to fix up the property before the tenant can open for business. In other words, while Seritage has gotten Sears and Kmart out of the mix, it still hasn't turned the portfolio around just yet.
The coronavirus pandemic has only complicated things. But there were troubles before that, with the REIT eliminating its dividend in 2019 to put more cash toward its makeover effort. It even had to take a loan from Berkshire Hathaway (NYSE: BRK.B), which has been working with the company through the pandemic to give it more financial breathing room. While it's good to see Berkshire Hathaway has been willing to provide Seritage some financial leeway, the fact the REIT needed the help at all isn't inspiring. Until Seritage is at a point where it can reinstate its dividend, it's probably best left to investors willing to take on riskier fare.
The dividend is back
Acadia Realty Trust suspended its dividend in early 2020 as the pandemic impacted its retail-focused portfolio. Although the REIT isn't the same kind of turnaround play as Seritage, it's a mixture of a core portfolio, spread across street-level city (40% of segment rents), urban (20%), and suburban assets (40%), as well as turnaround plays via an investment platform. In the turnaround segment, the company partners with outside investors to reduce its risk.
Notably, the company's core portfolio is the main driver of performance. The turnaround business, in which the partnerships it oversees buy out-of-favor assets and redevelop them, is a relatively modest contributor to the top line. In fact the dividend cut was largely driven by the core portfolio, where rent collections plunged to around 50% during the early days of the pandemic. With rent collections back to around 90% of pre-coronavirus levels, the REIT has reinstated the dividend. That said, the dividend is only around half of what it was before. So this isn't exactly a return to normal, but it is a clear sign that things are getting better.
And that, in turn, means Acadia appears to be in a stronger position than Seritage right now. In this matchup, Acadia is probably the better option for most investors. That said, Acadia's 3.1% dividend yield isn't particularly huge when compared to other REITs, some of which have much better long-term track records of rewarding investors with regular, and generous, dividends. In fact, if you're looking for an income stock, there are better options in the REIT space that don't involve the redevelopment risks Acadia takes on.
An acquired taste
When you step back from this comparison, Acadia looks like it's a better option than Seritage right now, but that doesn't mean it's the best option for most investors. Really, the redevelopment angle inherent in both of these stocks is something investors should think carefully about before adding the stocks to their portfolios. The average REIT investor would probably be better off with something a little more plain vanilla.