The real estate investment trust (REIT) sector is far from homogeneous, with names like VICI Properties (NYSE: VICI) taking a hyperfocused approach and VEREIT (NYSE: VER) at the opposite extreme. There are pros and cons to each, depending on what you want to achieve. Here's a look at five factors affecting these two net lease REITs to see which might be a better fit for your portfolio.
1. The same core
VICI Properties and VEREIT share one important common trait: They use a net lease approach. That means they own single-tenant properties for which their lessees are responsible for most of the operating costs of the assets they occupy. It's a fairly low-risk approach to owning property, in which the landlord can, to simplify things greatly, just sit back and collect the rent.
What's important to understand, however, is that net lease agreements are often born out of sale/leaseback transactions. Basically, a company with property raises cash by selling it to a REIT, but it doesn't want to lose access to the asset. So, it instantly signs a long-term lease, usually with built-in rent increases. That way, the company raises cash it can use for growth spending or to shore up its balance sheet and can still use the property over the long term. The REIT, meanwhile, gets a property with a happy, long-term tenant. It's usually a win/win transaction.
2. The high roller vs. spreading the bet
VICI, notably, is hyperfocused on the gambling sector, with a collection of 28 casinos. That sounds like a pretty small portfolio, but casinos are massive assets with gaming floors, restaurants, show venues, and hotels. So VICI's business is bigger than it sounds. That said, it's centered around gaming, which is highly sensitive to economic conditions and tourism trends.
VEREIT, meanwhile, has a fairly diversified portfolio, with more than 3,800 properties spread across the retail (45% of rents), restaurant (21%), office (17%), and industrial (17%) sectors. Underneath that broad-level diversification, the REIT estimates it has exposure to over 40 different industries.
There's no winner or loser here, but it's important to recognize these two REITs are doing vastly different things. VICI is a pure play on gaming, while VEREIT is more of a diversified play on the broader real estate sector.
3. Taking a hit
You might expect VICI was hit hard by the coronavirus pandemic, since casinos were shut down for a time and, once reopened, living under occupancy restrictions. But that wouldn't be the case: Its net lease structure protected it from the worst of the pain. In fact, it's been able to collect all of the rent it was due despite the ongoing headwinds, even during the early days of the pandemic.
VICI has provided some relief for its tenants, altering things like property investment requirements. But its tenants haven't stopped paying their rent, which speaks to the integral nature of casino properties in the gaming space.
VEREIT hasn't done quite as well, with rent collection across its portfolio dipping to 87% in the second quarter. That ticked up to 94% in the third quarter and was 97% in October, so it's managed reasonably well. However, its restaurant exposure has proven to be a trouble spot, given government-mandated business restrictions. It's not fair to say VEREIT stumbled (other REITs have fared much worse), but it clearly hasn't held up quite as well as VICI.
4. The dividend
This backdrop helps explain why VICI increased its dividend 11% in September. In fact, it's continued to make portfolio moves throughout the span, buying and selling assets to best position its portfolio for the long term. It is, in some ways, using the pandemic to strengthen its industry position. VICI's adjusted funds from operations (FFO) payout ratio was roughly 77% in the third quarter, a bit high but not outlandish given the strength of its business.
VEREIT's dividend history is a bit more complicated. The REIT basically completed a turnaround in early 2020, finally bringing to a close the legal and regulatory issues related to an accounting error made under previous management roughly five years earlier. That error resulted in a huge overhaul, including a balance sheet makeover, a rebalancing of the portfolio, and installation of a new team in the executive suite.
The REIT was supposed to start 2020 with a clean slate, but that didn't exactly happen because of COVID-19. Instead, VEREIT decided to err on the side of caution and reset its dividend lower, announcing a 45% dividend cut in the first quarter. That dramatically reduced its adjusted FFO payout ratio, which was a modest 50% in the third quarter. So while it cut its dividend, there's very little risk to the payment going forward, and the reduction could be viewed as the capstone of the REIT's turnaround effort. Business and dividend growth are the likely future from here.
5. The yield
VEREIT's yield is currently around 4%. VICI's yield is roughly 5.1%. Both are likely to see dividend growth from this point forward, but VICI definitely has the edge yield-wise and the better dividend track record.
Which is right for you?
There are some important issues here. If you're looking for a diversified REIT, VICI's gaming focus won't be attractive -- you'll be better off with VEREIT. However, if you're looking for a business that's performing quite well even during a time of stress, VICI stands out as the better option, assuming you're willing to take on the inherent concentration risk in its portfolio.
Meanwhile, VICI's stock is basically breakeven in 2020, with VEREIT off by about 18% or so despite what appears to be a solid performance and improved long-term outlook. Investors may be underestimating the REIT's prospects. That suggests those with a value bias might prefer VEREIT over VICI, which has been rewarded for its strong operating results.
All in, when you examine the key puts-and-takes, there's no standout winner in this matchup. That said, conservative times should probably err on the side of diversification and go with the now-repositioned VEREIT.