2 Stocks to Watch in Energy REITs

When you think about real estate investment trusts, or REITs, you probably think about apartments, offices, and warehouses. Most people don't think about power lines or oil and gas pipelines. But InfraREIT and Corenergy Infrastructure Trust are testing the waters of taking the energy industry into the REIT realm. And that makes this duo worth watching.

Spinning the power lineInfrREIT began life as a part of private Hunt Consolidated. Hunt's Sharyland Utilities subsidiary, which operates in Texas, spun off its transmission and distribution assets into InfraREIT. These are the wires that take energy from where it's generated to where it's consumed. But it wasn't a simple process. The first step was getting a private-letter ruling from the Internal Revenue Service in 2007 that transmission assets could be owned in a REIT. Then the Public Utility Commission of Texas had to approve the corporate restructuring, which didn't take place until 2010.

Source: ReubenGBrewer, via Wikimedia Commons.

This is a first-of-its-kind company in the REIT space. True, ITC Holdings Corp. is another pure play on transmission assets, but it isn't structured as a REIT. For income investors, it's reasonable to expect InfraREIT to provide a larger income stream over time because REITs avoid corporate-level taxes. Being a REIT may also give InfraREIT a leg up on acquisitions for the same reason.

There are other things to consider here, though. For example, InfraREIT is externally managed, a setup some REIT investors don't like. And in addition to a management fee, InfraREIT is required to pay incentive fees based around distribution growth -- sort of like the model used with limited partnerships. That situation could eventually make expenses an issue. Hunt is also a major shareholder, which brings into question which comes first -- Hunt or smaller InfraREIT shareholders.

On the plus side, Hunt is planning on using the REIT to grow its power distribution footprint. Moreover, there's a constructive outlook for electric infrastructure in Texas. So it's reasonable to expect growth from InfraREIT. Still, there's a lot to get your head around with InfraREIT, but that's exactly why this is a REIT experiment worth watching -- and one that others could replicate down the line.

Pipelines, too?Another REIT experiment to keep an eye on is Corenergy. This REIT essentially owns oil and natural gas pipelines, though it's a fairly small player in the space. These assets are normally housed within the limited-partnership structure, so income investors have other options for investing in pipelines. But REITs are easier to own in retirement accounts and less complicated in terms of taxes, which could make the REIT model a better option for some.

Corenergy started life as Tortoise Capital Resources Corporation, a business development company, in the mid 2000s. It didn't turn into Corenergy until 2012, with REIT status beginning in 2013. So while the company has been around for a while, it's existed in its current form for a much shorter period.

A pipeline being built. Source: Vachon, John, via Wikimedia Commons.

Corenergy differs from limited partners in a key way: It charges rent. LPs generally get paid for the amount of use their pipelines get. That may not sound like a big deal, but it is. While falling volumes through a pipeline would crimp an LP's revenues, Corenergy would still get its full rent roll on the same "property." So while investors might paint Corenergy with a similar brush as an LP during a downturn, that may create a buying opportunity.

Owning pipelines in a REIT is really thinking about the space in a very different way. Will it work out as well? Will others follow suit? Only time will tell, which is why you'll want to keep an eye on Corenergy. That said, it's still early days, and Corenergy only owns a handful of assets, making it heavily reliant on just a few tenants.

Risks worth taking?Neither Corenergy nor InfraREIT owns things that are odd. They simply own them in a structure that hasn't historically been associated with such assets. Depending on your investing needs, that could be a good thing, which would make both stocks worth considering. Or it could be a novel approach that simply doesn't interest you. But what is clear is that both could be the harbingers of industry change, as a new corporate structure gets applied to the energy industry. That's why these two are two stocks worth watching in the energy REIT space.

The article 2 Stocks to Watch in Energy REITs originally appeared on Fool.com.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends ITC. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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