The bad news is that VEREIT (VER) cut its dividend roughly 45% in May as the global pandemic started to spread. The good news, however, is that the future should be much brighter than the past. Why? The net-lease real estate investment trust (REIT) has turned an important corner. Here's what you need to know. 

A scary time

When COVID-19 started to spread around the globe, nobody knew exactly what to expect. It was a time of great uncertainty, and people were frightened. VEREIT took actions to ensure it would have the financial strength and liquidity to survive if things got bad -- which, in addition to the dividend cut, included selling debt. When CEO Glenn Rufrano discussed the issue in the second-quarter earnings release, he specifically noted that the board's choice was driven by economic uncertainty, not company-specific issues. 

A jar of coins with the word dividends written on it.

Image source: Getty Images.

In fact, VEREIT's rent collections have held up fairly well. In April and May -- the worst of the early-year hit that resulted from the government-mandated closure of non-essential businesses -- tenants paid roughly 80% of what they owed. That's not as good as 100%, of course, but it was better than the percentages at some peers, like National Retail Properties, where roughly half of the company's tenants didn't pay what they owed in April. Meanwhile, in September, VEREIT's collection rate had risen to 95%. Things aren't back to normal, but VEREIT appears to be doing just fine. 

Meanwhile, the dividend cut, while not ideal, will help to lower the REIT's cost of capital going forward. That is notable because VEREIT has finally moved past legal issues left behind by an accounting issue under previous management. In short, the REIT is ready to shift from defense to offense as it looks to start growing again.

A solid platform

There's one more thing to understand about VEREIT that sets it apart from many of its peers: diversification. While not the most diversified net-lease REIT you can buy -- that distinction would probably go to W.P. Carey -- VEREIT breaks its portfolio down between retail (about 45% of rents), restaurant (21%), office (18%), and industrial (17%). Restaurants, meanwhile, include both quick service and casual dining. 

This diversification is notable because different areas of the portfolio have performed differently through the COVID-19 crisis. For example, in a June update, VEREIT noted that retail rent collections were in the mid-80% range. Restaurants overall were paying in the 50% area, with casual dining around 30% and quick service in the high-70% space. Office and industrial lessees, meanwhile, were in the mid-90% range. That's a lot of numbers all at once, but the big takeaway is that while times were tough, the strong areas of the portfolio offset the weaker ones. Diversification is just as good for a REIT's portfolio as it is for yours. 

Further, with multiple property types in the portfolio, VEREIT has more levers to pull as it looks to grow its portfolio. For example, the REIT recently partnered with institutional investors to buy a distribution and warehouse facility in Texas. Although VEREIT owns the asset in partnership with a Korean investment company, the REIT earns fees for overseeing it. Industrial assets are expected to perform well as more shopping shifts online. The REIT needs to do more than this to grow for the long term, but this deal shows it is taking the first steps toward growth despite the fact that the real estate market is in a state of flux. Its diversified portfolio is a key reason that it was able to make this move. 

VER Chart

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Ready for the future

To be fair, the past five years or so haven't been particularly good ones for VEREIT or its shareholders. And COVID-19 showing up just as the company was getting past the legacy problems it faced wasn't great news. But the current headwinds have proven that the REIT's diversified model works, and with the dividend cut the corporate reset that has been in the works appears complete. With a 4.7% dividend yield at Tuesday morning's prices and an adjusted funds from operations payout ratio of roughly 50% in the second quarter, even conservative dividend investors should like what they see here today.