If you are looking for bargain dividend-paying stocks, you don't have a whole lot of options today. However, that doesn't mean you can't find some interesting stories to dig into. VEREIT (NYSE: VER) and Iron Mountain (NYSE: IRM) are two that deserve your attention, as both have yields well above the norm for the real estate investment trust (REIT) space. Here's a primer on what you need to know about this pair of high-yield dividend stocks that look like they are on sale today.
1. The legal mess is nearing an end
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VEREIT offers a yield of 6.6%. The payout ratio is projected to be a solid 80% in 2019, assuming management can hit its financial targets for the year. Occupancy, meanwhile, was a robust 98.9% in the first quarter. And its yield is roughly 60% higher (nearly 2.8 percentage points) than net lease industry bellwether Realty Income, one of its closest peers based on the size of VEREIT's nearly 4,000-property portfolio.
Why is VEREIT trading at a discounted price? The biggest reason is the lingering legal issue surrounding an accounting error made under previous management. Leadership has completely changed since then, and along the way, the company has worked to simplify its business, so it is really just a boring net lease REIT at this point.
That said, VEREIT is more diversified than Realty Income, with roughly 40% of its portfolio in retail assets, 20% in restaurants, 20% in industrial, and 20% in office. Some see this as a negative, but this difference is changing, as Realty Income has increasingly diversified its portfolio in recent years. Essentially, Realty Income (roughly 80% retail, 10% industrial, 5% office) is working to look more like VEREIT, while VEREIT has been trying to simplify its business to look more like steady dividend payer Realty Income.
That really leaves the legal issue as the big overhang, and it is a legitimate concern. But there's been a lot of progress made on this front, as VEREIT has settled with roughly a third of shareholders for around $250 million. Using back-of-the-envelope math, this suggests the entire issue could cost as much as $1 billion. That said, the REIT had roughly $1.8 billion worth of liquidity on its revolving credit facility at the end of the second quarter. VEREIT looks like it can handle the hit. There's still more work to be done on the legal front, but it appears like the outlook here is getting better defined. If you can handle the legal uncertainty, VEREIT's high yield looks like a relative bargain today.
2. Still stashing the boxes away
Iron Mountain is an odd REIT that really doesn't have any peers. Its primary business is the long-term storage of physical items for businesses. Although this includes stuff like art, the main things it tackles are boxes filled with paper documents (around 65% of revenue). The storage of these documents, often legal and financial paperwork, is mandated by regulators. It's easily the biggest player in the space; with operations in 50 countries, it claims to have 95% of the Fortune 1000 as customers. The rest of the company's revenue comes from services around storage (like document shredding) and a recent push into new areas, notably data centers.
There are two problems with Iron Mountain: a relatively heavy debt load and slowly declining demand in mature markets in which records are going digital. On the debt front, management is aware of the issue and working to trim leverage. Although the dollar amount of debt has continued to rise, debt to EBITDA has actually fallen in recent years. And the company reports that it has no major maturity until 2023. So this doesn't appear to be a huge issue, but it is one that investors should continue to monitor.
As for demand, the issue is complicated. While long-term demand in developed markets is likely to fall, anything put in storage tends to stay there for a very long time. For example, half of the boxes Iron Mountain gets are still in its possession after 15 years. So slow attrition is likely to be the norm. But demand is growing in markets around the world that aren't as developed as the United States. That's an area in which Iron Mountain is expanding its presence to offset domestic declines. It's also pushing into the digital age (data centers) to ensure its long-term future. As an already trusted partner, it hopes to make solid inroads in new digital areas that require the type of security for which Iron Mountain is known.
To own Iron Mountain, you need to get comfortable with its debt and believe it will be able to offset the slow decline of its document storage business in developed markets. So far, it looks like it's doing a decent job on both fronts. The reward for taking on the uncertainties here, meanwhile, is a hefty 7.5% yield backed by nine consecutive years' worth of dividend hikes. That yield is much higher than the roughly 4% average for the REIT sector, as measured by the Vanguard Real Estate ETF.
Taking some risks
There's no question that VEREIT and Iron Mountain come with some risk. However, the extra yield and, thus, discounted price (yield and price move in opposite directions) could be worth it if you are trying to maximize your income today. You can't put these two REITs away and forget you own them, but they look cheap, and if you are willing to keep a close eye on your portfolio, they are definitely worth a deep dive today.
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