Real estate investment trust VEREIT, Inc. (NYSE:VER) continues to have a difficult standing with investors after an accounting scandal, a management shake-up, and a dividend suspension/reinstatement rocked the company in the last one-and-a-half years. The company has made solid progress under new Chief Executive Officer, Glenn Rufrano, though, selling Red Lobster restaurant properties back to Golden Gate Capital, reducing portfolio risk and improving its balance sheet in the process.
VEREIT's common stock has done quite 'OK' this year, too, advancing ~13 percent year-to-date. Based on a $0.1375/share quarterly dividend, or $0.55/share annually, an investment in the real estate investment trust yields ~6.13 percent. That is surely more than an investment in Realty Income (NYSE:O) yields (3.79 percent), or in National Retail Properties (NYSE:NNN) (3.75 percent), but the higher yield reflects the higher risk that comes with an investment in VEREIT.
That being said, though, there is an even better investment than VEREIT's common stock: VEREIT's 6.70 percent Series F Cumulative Redeemable Preferred Stock, ticker symbol VER.PRF, whose yield is approaching ~7 percent. That's right, the preferred shares, which rank higher than the common stock in the capital structure, and are therefore a safer bet for income investors, yield more than VEREIT's common shares.
VEREIT's Series F preferred stock throws off a monthly dividend of $0.1396/share. Since the preferred shares sell for ~$25.30 at the time of writing, investors can lock in a 6.62 percent. VEREIT's preferred shares also hand investors a yield advantage of 49 basis points compared to the common stock. The same is true by the way for Realty Income and National Retail Properties, whose preferred shares are also more lucrative than their common shares. From a return AND a risk perspective, VEREIT's preferred shares make a superior value proposition.
The relative safety that comes with an investment in the preferred stock layer of VEREIT's capital structure and the better yield have a price tag, though. VEREIT's preferred stock dividends are fixed, meaning VEREIT is not going to increase its monthly dividend distribution, whereas management has discretion as to whether it wants to grow its common stock dividend payout in the future (probable). VEREIT has reinstated its dividend in 2015, and so far the dividend has remained stable at $0.1375/share, but management has a strong incentive to grow common stock dividends moving forward. All the other commercial REITs are growing their dividends, and VEREIT can't afford to fall behind.
It makes a lot of sense to pay attention to the preferred shares of real estate investment trusts, especially because some common REIT shares have become rather expensive. Though this is not the case for VEREIT, the common stock is still quite cheap at ~11.6x 2016e AFFO, VEREIT's preferred shares are worth of consideration. Buying the preferred stock gives investors an immediate yield advantage of 49 basis points over the common stock, and the preferreds are superior to the common shares, too. As an added bonus, VEREIT's preferred stock pays a monthly dividend. Buy for income.
Disclosure: I am/we are long O.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.