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Better Buy: VEREIT vs. Empire State Realty Trust

Jul 20, 2020 by Matthew DiLallo

This year has been a tough one for most REITs. Many of their tenants have struggled to pay rent due to the impact COVID-19 has had on their operations. That's weighed heavily on the share prices of most REITs, including VEREIT (NYSE: VER) and Empire State Realty Trust (NYSE: ESRT), which are down more than 30% and 50%, respectively.

Those big-time selloffs likely have real estate investors wondering which of these REITs is the better buy right now. Here's a look at what each one offers investors in light of COVID-19.

The outlook for VEREIT

VEREIT's diversification has helped cushion the blow of COVID-19. During April, May, and June, the diversified REIT collected 84%, 84%, and 82% of its rent, on average. The company benefited from strong rental collection rates at its industrial and office tenants -- more than 94% on average -- which helped offset weaker rent collection rates at restaurants (around 50%) and retailers (86%). The REIT's overall collection rate was much higher than its retail-focused rivals.

Despite that solid rental collection rate given the circumstances, VEREIT reduced its dividend from $0.1375 per share each quarter to $0.077 per share for the second quarter. That implies a 4.9% yield at the current share price. However, it hasn't decided what rate it will pay in future periods. In commenting on the dividend, CEO Glenn Rufrano stated:

"The Board's decision to reduce the dividend this quarter is not based generally upon a micro review of our business but, more importantly, on a macro review of an uncertain economy. We chose this base amount on which to build the dividend while protecting against any increase in debt. As more information is available in each of the next two quarters, this decision will be under constant review."

On a positive note, the company's debt has been heading in the right direction. It has reduced its leverage ratio from a concerning 7.5 times debt-to-EBITDA at its peak to a more comfortable 5.7 times at the end of the first quarter. Because of that, one credit rating agency recently upgraded its rating, putting it two notches above the investment-grade cutoff line. That improving credit profile, bolstered by more than $600 million of cash on the balance sheet, gives VEREIT the financial flexibility to make acquisitions during this market downturn.

The outlook for Empire State Realty Trust

New York City-focused office REIT Empire State Realty Trust has also experienced some impact due to COVID-19. Overall, it collected 84% of April's rent, 81% in May, 79% in June, and 75% so far in July, with office collections trending higher than the rate of its retail tenants. In addition to rental income, another revenue driver for the company is the observatory on the iconic Empire State Building. While it has been closed for much of the year because of the pandemic, it opened on July 20.

Despite the income hit, Empire State Realty Trust has maintained its quarterly dividend, which now yields more than 6% due to the big selloff in its stock price. That payout seems safe since the REIT has a low dividend payout ratio -- which has traditionally been less than 50% of its FFO -- and a strong balance sheet. The REIT boasts a low 4.4 times debt-to-EBITDA ratio and more than $1 billion in cash and short-term investments. That gives it a lot of flexibility to make acquisitions in the current environment and repurchase its beaten-down shares.

Like its iconic building, Empire State Realty stands out

VEREIT is a solid option for investors seeking diversified real estate exposure. However, it doesn't boast the financial strength of Empire State Realty, which was evident in its decision to reduce its dividend. Because of that, Empire State Realty stands out as the better buy right now, especially in light of the deeper dive in its stock price, which has pushed its dividend yield to an enticing level.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Empire State Realty Trust. The Motley Fool has a disclosure policy.

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