Net lease real estate investment trust (REIT) VEREIT (NYSE: VER) looked ready to turn the corner in 2020 after a long, drawn-out turnaround effort. And then the global coronavirus pandemic hit and upended things. But, as 2021 gets underway, a 20% dividend hike suggests things are looking up again. Here's what you need to know.
A troubled past
Without getting too deep into the details, VEREIT, formerly known as American Realty Capital Properties, started life as a fast-growing, acquisition-driven REIT. The company's management at the time, however, bit off more than it could chew, and an accounting error was the end result in 2014.
The board acted quickly and brought in Glenn Rufrano, an industry veteran with turnaround experience. He and his team got to work, publicly laying out a plan that included strengthening the balance sheet, rebalancing the portfolio, and reinstating the REIT's dividend. Openly and methodically, Rufrano and the team he assembled worked through the plan, including putting the legal fallout from the accounting error in the rearview mirror.
It was hard work, but as 2020 got underway, VEREIT was finally in a position to shift from shoring up the foundation to building for the future. Only the pandemic got in the way and, given the portfolio had never been stress-tested by a global health crisis, VEREIT chose to be cautious and cut the dividend. To be fair, even at that time, the company highlighted that the move was made out of caution because of the uncertain macro environment, not out of necessity because of problems in the portfolio.
That was born out as the year progressed, with the adjusted funds from operations (FFO) payout ratio sitting at roughly 50% in the fourth quarter of 2020. That's a huge amount of leeway suggesting the dividend was very well-supported even during the worst portions of the year. And now that the portfolio has proven its ability to hold up in the face of adversity, noting rent collection rates were in the high 90% range in the fourth quarter, VEREIT has upped the dividend by 20%.
The next phase
The real story here, however, is that VEREIT is finally ready to make the shift back to growth. The big dividend increase was really more of a statement to investors that the REIT is financially strong. In fact, even after the hike, the payout ratio is only about 60% based on fourth-quarter adjusted FFO. That still offers a huge amount of safety in case there are further headwinds and plenty of room for dividend hikes.
But there's more here than just that. At the start of 2020, VEREIT had cash on hand of around $13 million. As 2021 gets underway, it has over $500 million. And, unlike last year, the company's revolving credit facility is fully available at the start of 2021. Rufrano and his team are confident they can acquire $1 billion worth of assets this year without the need to tap the capital markets. Its liquidity proves it.
To be fair, VERIET had the same acquisition goal in 2020, but it wasn't in the same financial position, and, well, the coronavirus got in the way. Assuming the operating environment in 2021 is better than last year, VEREIT is in a solid position to start growing its business.
And also to be fair, the growth target isn't going to light your world on fire, with adjusted FFO growth expected to be in the 4.5% range. But it's important to note VEREIT is one of the larger players in the net lease sector, with a diversified portfolio of more than 3,800 properties. Slow and steady is exactly what you would expect, and want to see, here.
That said, with such a low payout ratio, the REIT could easily afford to increase the dividend at a higher rate than it grows adjusted FFO for a little bit. That's clearly a board-level decision, but at this point, dividend growth looks pretty likely even if coronavirus issues linger longer. In other words, that 20% dividend hike is probably just a down payment on what could be a healthy string of annual increases in the future.
Now is the time to invest
With a roughly 4.8% dividend yield, VEREIT investors are getting a healthy mix of current yield and dividend growth potential. There's clearly an ugly history here that you have to come to terms with. But that's the past -- the future looks much brighter. If you can see VEREIT for what it's become and not what it's been, you might want to do a deep dive today -- before the next dividend hike proves dividend growth is the new name of the game.