Please ensure Javascript is enabled for purposes of website accessibility

VEREIT's Dividend Reset Is a Big Letdown

By Reuben Gregg Brewer – Jun 12, 2020 at 5:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This was supposed to be the year things turned for the better, but COVID-19 changed that. Despite a dividend cut, VEREIT is still attractive.

There's no way to sugarcoat what happened to VEREIT's (VER) dividend -- the net-lease real estate investment trust (REIT) trimmed it by a painful 45%. That was not what investors had been expecting when the year began, but COVID-19 upended the company's plans. That said, there's still a lot to like about the REIT, even if future dividend growth is really just a matter of making up lost ground. Here's a look at what happened, and why investors might still want to give management the benefit of the doubt.

A quick history lesson

VEREIT was born from the ashes of American Realty Capital Properties. When still known as American Realty Capital, the company's leadership focused on growth at any cost, with an emphasis on acquisitions. The pace of expansion was so fast and furious, and the desire to please Wall Street's growth expectations so strong, that the finance department pushed the accounting envelope a bit too far. The ensuing scandal led to the suspension of the dividend and the ouster of the company's top leadership. Its stock plummeted. 

A man with his head on table and a graph behind him heading down

Image source: Getty Images

The board brought in respected industry veteran Glenn Rufrano to right the ship, as he'd done before at other companies. He quickly got to know his new company and laid out a plan for the future. Notably, he provided clear targets for investors to watch as he and his new team worked to get things going in the right direction again. In addition to the name change, that list included reducing debt, rationalizing the portfolio, reinstating the dividend, and putting the legal issues surrounding the accounting issue in the rearview mirror. 

The new team made relatively quick work of the plan except on the legal front, which was dependent on court schedules. However, in late 2019 the final touches were put on settlements with all involved, and VEREIT was ready to start with a clean slate in 2020. The company came into the year with high expectations, and so did investors. The goal was simple: Start to grow the portfolio and dividend again.

But then COVID-19 hit ... very close to home.

A change in plans

CEO Rufrano contracted and survived COVID-19. He built a strong team, so there weren't any leadership issues and he was back in time for VEREIT's first-quarter 2020 conference call (and sounded great). But with roughly 45% of the portfolio in retail assets and another 20% in restaurants, there was no way to avoid the hit that social distancing measures and non-essential business closures would have on the portfolio. Rent collection in those two segments of the portfolio was rough, hovering around 80% in retail and just 45% or so in restaurants. 

Luckily, VEREIT is one of the more diversified in the net-lease space, with industrial and office properties accounting for roughly 17% and 18% of the portfolio, respectively. The REIT collected nearly all of the rent it was expecting in these segments, helping to offset weakness on the retail and restaurant fronts. Total rent collections in April and May were roughly 80%. That's much better than retail-focused peers like industry bellwether National Retail Properties, which only collected about half of its April rents. Still, VEREIT's business wasn't performing anywhere near what had been expected when the year started. 

VER Chart

VER data by YCharts

As so many REITs have chosen to do, VEREIT made the call to cut its dividend in an effort to ensure it had ample cash around to weather the COVID-19 storm. In fairness, this wasn't something the company could control any better than it did by focusing on creating a financially strong and diversified REIT. But it still stung dividend investors who had been hoping that 2020 would finally be the turnaround year. Adding to the problem is that, as the company discussed on the conference call, property markets have slowed to a crawl because nobody is quite sure how to price a building in the current environment. With acquisitions basically on pause, growth is being pushed out to 2021 or later at this point. 

That said, the lowered dividend only amounts to 45% of first-quarter adjusted funds from operations (AFFO, which is like earnings for an industrial company). That should provide plenty of leeway for the company to deal with the COVID-19 headwinds. Assuming the portfolio holds up generally well and rent collection rates get back to normal as the U.S. economy reopens, VEREIT will have plenty of room for dividend increases in the future. That may be small solace to some, since it will be working its way back from the cut, but it means that dividend growth could start a new long-term uptrend. And, with the lowered payout ratio, in the near term VEREIT will have more cash to put back into the portfolio to boost its future growth prospects.

This isn't ideal, but given the situation, VEREIT has made the call to err on the side of caution, basically using this difficult period to reset the REIT to perform better over the long term. It remains one of the largest and most diversified net-lease REITs -- and thanks to the reset, it could soon become a dividend growth machine.

A tough call

If you own VEREIT, there's probably no point in selling it now. You'll likely be better off just continuing to stick it out through this rough patch and collect its well-covered dividend, which yielded 8.25% as of Thursday's close.

If you don't own it, now might actually be a good time to consider an investment despite the dividend cut. With a well-diversified portfolio in front of it and the past finally behind it, the new lowered dividend should be a much easier number to increase over time. And since Wall Street has a pretty short memory, assuming the dividend begins to move higher in 2021, few will remember the hit REIT investors took in 2020 because of COVID-19.

VEREIT has an ugly backstory, but it's actually a very well run REIT today, which should eventually shine through.

Reuben Gregg Brewer owns shares of VEREIT. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

VEREIT, Inc. Stock Quote
VEREIT, Inc.
VER
National Retail Properties, Inc. Stock Quote
National Retail Properties, Inc.
NNN
$39.09 (-5.42%) $-2.24

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
342%
 
S&P 500 Returns
107%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.