In a recent news updateVEREIT (NYSE:VER) was flagged as having been downgraded by a Bank of America Merrill Lynch analyst along with Realty Income (NYSE:O), National Retail Properties (NYSE:NNN), and Spirit Realty (NYSE:SRC). The logic being that there’s limited upside because of the long-term lease nature of the triple net lease business. I won’t argue that, but there’s something important to note about VEREIT compared to this trio–diversification.
The retail group
As a shareholder of VEREIT, what caught my eye about this particular news release was that it lumped the real estate investment trust, or REIT, in with the retail sector. Retail accounts for essentially all of National Retail’s portfolio, nearly 90% of Spirit Realty’s portfolio, and roughly 80% of Realty Income’s portfolio. Spirit and Realty Income both have some exposure to office and industrial, but retail is the clear driving force at each of these REITs.
VEREIT’s portfolio, on the other hand, is far more diversified. Retail makes up around 60% of the portfolio, split largely between retail stores (35%) and restaurants (24%), with office at 23% and industrial at 16%. A near term goal is to reduce the exposure to restaurants, but even without that it’s pretty clear that retail is important to VEREIT, but it has materially more sector diversification than the other three REITs with which it was lumped.
The diversification doesn’t stop there. That’s because the numbers above are for the company’s owned portfolio. VEREIT also has an asset management business that sells and manages non-traded REITs. It’s Cole division has been struggling of late, but largely because of its association with the VEREIT… or more specifically American Realty Capital Properties, what VEREIT was known as before a name change and strategic repositioning. The problem is that the repositioning came along with an accounting scandal that resulted in Cole losing key brokerage relationships even though Cole wasn’t implicated in the troubles in any way.
Although Cole isn’t much of a contributor to the bottom line today, at one point it was a more notable business. And if VEREIT can continue the improving trends at Cole, it has the potential to regain at least some of its former glory. Either way, the Cole business is yet another diversification away from retail since Cole, and thus VEREIT, earns money for managing the portfolios of Cole’s products–regardless of what’s inside.
A different beast
Clearly, VEREIT is not simply a retail triple net lease REIT. It’s much more than that and this is an important distinction that investors should be aware of. Moreover, looked at as a whole, there’s really only one REIT to which you can compare VEREIT… and that’s WP Carey (NYSE:WPC).
That said, Carey is slightly different from VEREIT because it invests internationally and VEREIT is focused on North America. So they are the closest comparisons, but if you really want diversification in the triple net lease space Carey, with roughly 37% of its portfolio outside the United States, is probably your best option. It’s also less exposed to retail. Carey’s portfolio breakdown is industrial 28%, office 25%, warehouse 18%, retail 16%, and self storage 5% (“other” rounds that to 100%). Carey’s asset management arm, meanwhile, makes up about 8% of its adjusted funds from operations. Carey is truly a different animal in the triple net lease space.
I’m not suggesting that VEREIT or Carey are better or worse than Realty Income, National Retail, or Spirit. Nor am I suggesting that any of them are more or less prepared for a rising interest rate environment. What I am trying to stress is that neither VEREIT nor Carey are your run of the mill retail focused triple net lease REIT. They are broadly diversified by property type and both have an asset management arm. That materially changes how you have to look at them, with the international exposure at Carey adding even more differentiation to the mix.
Essentially, this goes back to a key investment priority: Make sure you understand what you own.