The global pandemic has upended the real estate investment trust (REIT) sector, with even great landlords struggling to get tenants to pay their rent on time. But things are starting to improve, and the best-positioned REITs are starting to show just how well-positioned they are. This is why VEREIT (NYSE: VER) should be on your watch list today, as it has proven, after a difficult stretch, it can keep pace with an industry bellwether like Realty Income (NYSE: O).
Better than the best
Dividend Aristocrat Realty Income is generally considered to be one of the best-run net lease REITs. A long history of annual dividend increases is part of that assessment, but so, too, is its conservative nature and investor-friendly practices (like paying dividends monthly). In October, Realty Income collected 92.9% of the rent it was owed. That's actually pretty good, given that it was collecting closer to 80% in the early days of the coronavirus pandemic.
Here's the interesting thing: VEREIT's rent collection in October was 97%. This net lease REIT, which isn't even on the radar of most investors, is beating Realty Income in what has become a key indicator of success during COVID-19. And it's a sizable competitor, with around 3,800 single-tenant properties in its portfolio, making it one of the largest net lease REITs in the industry. Realty Income, for reference, owns about 6,500 properties.
Getting back on track
The problem with VEREIT is that it has something of a sordid history. A few years back, the company was using acquisitions to grow at what ended up being too-rapid a pace. An accounting error resulted in a management shakeup, a portfolio rebalancing, a dividend cut, and protracted legal issues. It has taken a while, but the new leadership has gotten VEREIT back on a solid path. Notably, the legal issues were cleared up just before the coronavirus pandemic upended things again.
Out of caution, the REIT cut its dividend in early 2020, which investors normally view negatively. However, if you step back and look at it from a longer-term perspective, that cut could be seen as the final step of the turnaround process. In fact, in the third quarter, VEREIT's adjusted funds from operations (FFO) payout ratio was a very conservative 50%. Realty Income's third-quarter AFFO payout ratio was around 85%. That's about the norm, but clearly VEREIT has more room to grow its dividend in the future.
The big takeaway here: After a long renovation period, VEREIT is now positioned for growth. Notably, it has more avenues to support that growth than Realty Income. Realty Income's portfolio is centered around retail assets, which make up around 85% of its rent roll. The rest is in industrial (10% of rents), office (3%), and "other" assets (the rest), none of which are particularly huge allocations.
VEREIT's portfolio is a bit more diverse, with retail at 66% of rents ( broken down to 45% retail and 21% restaurant), industrial 17%, and office 17%. Although the two REITs are in similar sectors, VEREIT has more diversification and scale from which to build as it looks to start expanding its portfolio.
Not better, but still worth considering
It would be a stretch to suggest VEREIT is a better REIT than Realty Income. Realty Income is a bellwether net lease REIT for a reason. However, the strength of VEREIT's portfolio and the success of its makeover are showing it can stand toe-to-toe with Realty Income in important ways as it finally positions itself to start growing again.
With similar yields in the low- to mid-4% range, VEREIT deserves consideration right alongside Realty Income for income-focused long-term investors. In fact, there's even a chance that, because of its low AFFO payout ratio, VEREIT could end up providing more dividend growth than Realty Income over the next few years. Add it all up, and VEREIT looks like a pretty enticing package.