The Truth Will Set You Free
As my readers know, I research a growing number of Net Lease REITs and in the upcoming edition of the Forbes Real Estate Investor (monthly newsletter) I plan to launch a “Nothing But Net Lease REITs Portfolio”.
- The Truth Will Set You Free Movie Quote
- The Truth Will Set You Free Book
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Keep in mind, the advantages for owning net leased real estate is based on predictability and durability. Because of the long-term lease contracts, net lease properties generate much less consistent rental income and more reliable dividend growth.
For many fixed-income investors, owning Net Lease REITs provide a valuable source of stability and predictability. By owning a diversified portfolio of Net ease REITs, an investor should be able to generate stability through various economic cycles.
It’s important to research every REIT, regardless of how safe the appearance. While Realty Income (O) and National Retail Properties (NNN) serve as the “gold standard” in the Net Lease REIT universe, an intelligent investor should always peel back the onion to determine if the dividend is growing.
Those whom I love I rebuke and chasten, so be zealous and repent - Revelation 3:19. Knowing the Truth will set one at liberty—free from sin, free from condemnation, and free from death (Romans 6:22; 8:1–2). Jesus came to proclaim liberty to the captives (Luke 4:18). “Live as people who are free, not using your freedom as a cover-up for evil, but living as servants of God” (1 Peter 2:16, ESV). The meaning of the truth will set you free is that only reality and what's factual actually exist. Lies, falsehood, cheating, and deception are all not real. Lies, falsehood, cheating, and deception are all not real.
Today, I am going to take a closer look at VEREIT Inc. (VER), a Net Lease REIT that has risen from the ashes of the phoenix. In Greek mythology, a phoenix is a long-lived bird that is re-born and makes a miraculous comeback.
VERITAS + REIT
VERITAS is Latin and means “truth”…
Source: Website
As many know, I was the very first analyst on Seeking Alpha to write on VER, or actually the predecessor company, American Realty Capital Properties (formerly ARCP). In that first article I wrote,
“The biggest issue that I have with the IPO is that the assets are highly concentrated with just two tenants, and one of the two tenants is a troubled bank with minimum lease term remaining.”
When ARCP commenced in 2011, the management team began to consolidate other REITs, and the previous CEO was fixated on owning Cole Real Estate Investments, and in early 2014, VER (formerly ARCP) completed the acquisition of Cole for $11.2 billion, in a move that created the “largest net-lease REIT in the U.S.”
The ARCP management team had been pursuing Cole for quite some time, and the marriage was summed up by Forbes writer Maggie McGrath as something like the 'Boston Red Sox and New York Yankees joined forces.'
VEREIT's, formerly ARCP, chairman Nicholas Schorsch called the deal an 'epic transaction' and a 'win-win' for all parties. In the game of 'size matters,' ARCP’s CEO boasted that its dividend growth was 'stable and secure.'
It was apparent during the negotiations (to buy Cole) that ARCP’s CEO wanted to create a dominating REIT that could squash any competitor. Accordingly, ARCP was attempting to build the widest of net lease moats by engineering the company in a manner in which “David becomes Goliath” in record time.
When ARCP acquired Cole (back in February 2014), it purchased a portfolio of assets and also an advisory business that generates substantial fee-based income. ARCP's private capital business, Cole Capital™, was an alternative broker-dealer with fully integrated teams across external and internal sales, marketing, sales analytics, events, national accounts, due diligence, compliance and shareholder services.
According to Robert Stanger & Co. industry reports, Cole Capital™ was the only non-traded REIT sponsor to rank in the top 3 for the past five years, and at that time, Cole generated around $140 million after tax (annualized) that translated into a market value of over $2 billion. ARCP booked the Cole Capital deal at $800 million.
Then, of course, an accounting “snafu” sparked a selloff, just days after I published an article titled “Is American Realty Capital Properties A 'Sucker Yield' Bet?. My only regret in publishing that article was that I did not downgrade ARCP to a SELL, instead I was less cautious and downgraded shares from a BUY to a HOLD.
More recently VER sold Cole Capital to an affiliate of CIM Group. At the time, Cole had more than $7.6 billion in assets under management and managed five public non-listed real estate investment trusts: Cole Credit Property Trust IV, Inc., Cole Credit Property Trust V, Inc., Cole Real Estate Income Strategy (Daily NAV), Inc., Cole Office & Industrial REIT (CCIT II), Inc., and Cole Office & Industrial REIT (CCIT III), Inc.
In connection with the transaction, VER received $200 million, comprised of $120 million cash paid at closing under the purchase agreement and up to $80 million in fees to be paid under a six-year services agreement based on Cole's future revenues. The services agreement will, among other things, require VER to provide operational real estate support to Cole for approximately one year.
As noted, Cole received $120 million in cash and an earn-out, a far cry from the $800 million the previous management team paid for Cole. Where did the $600 million go?
There is no doubt that conflicts of interest were par for the course for ARCP management team, and in hindsight it seems that “ego” was the driving catalyst that was driving ARCP’s share price. By selling Cole, VER has simplified its core business model and focus on its large, diversified single-tenant real estate portfolio. But the $120 million in cash (and earnout) may serve another purpose…
It was the accounting scandal that eventually rocked the boat for ARCP in which it was disclosed that the previous management team had “cooked the books.” Ultimately lawsuits followed and here’s what Beyond Saving wrote an excellent update on VER’s lawsuit,
While the Cole overhang has vanished, it’s clear that the lingering lawsuit (and legal costs) has weighed on investors, and the fear of the unknown makes it hard to forecast the outcome. This chart sums up the history of VEREIT shares:
Source Yahoo Finance (Shares returned -41% over 5 years)
Breaking It All Down
Glenn Rufrano assumed the CEO role at VER on April 1, 2015, and under his leadership he has done an excellent job of navigating the company through adversity. Over the last few years, Rufrano has (1) appointed a new accounting firm, (2) improved credit ratings, (3) sold Cole, (4) settled pending litigation with Vanguard form $90 million, and (5) completed over $3 billion of dispositions.
Today VER owns free-standing buildings (~4,000 properties and $15.5 Billion) leased to a variety of retail, restaurant, office, and industrial tenants. VER is an internally-managed full-service net-lease REIT with a long-term net-lease structure that provides stable and predictable rent stream payments. The diverse portfolio is across sectors, geographies and tenants.
VER has successfully implemented its business plan, enhanced its portfolio, de-levered its balance sheet and achieved investment-grade ratings. As illustrated below, VER has a diversified portfolio that includes retail (41.7%), restaurants (22.0%), industrial (16.9%), and office (19.4%).
Focusing on VER’s retail mix, the exposure is dominated by off price and necessity shopping of which 50% is investment grade. In many of these core categories, VER sees “reasonable expansion plans in 2018 and beyond.”
Discount is comprised of 7.9%, pharmacy 7.2%, grocer 5.1%, home and garden 4.5% and convenience 2.5%. Approximately 67% of the retail revenue is derived from tenants that are public companies providing increased transparency into their operations and finances.
VER’s restaurant portfolio consists of single-tenant quick service, casual and family dining properties. Creditworthy tenants, including franchisors, operating strong national and regional brands. It’s important to note that VER owned 507 Red Lobster leased sites in June 2014, representing 12.2% of average base rent, and that exposure is now 6.3% overall.
VER’sindustrial property types include single-tenant distribution and warehouse facilities with creditworthy tenants. Most are mission-critical and strategic locations with close proximity to ports, railways, major freeways and/or interstate highways.
VER’s office property types include primarily single-tenant corporate headquarters and business operations with creditworthy tenants with strategic location for corporate operations.
It’s important to note that VER has 16.9% dedicated to the Industrial sector and this is important because VER’s valuation today does not reflect the value of the Industrial portfolio. Many of the Industrial property types include single-tenant distribution and warehouse facilities with creditworthy tenants with essential and strategic locations with 87% dedicated to distribution or warehousing.
Now, here is a snapshot of VER’s top 15 tenants, and as noted, the Red Lobster exposure has decreased from 12.2% (in June 2014) to 6.3% (as of Q2-18).
The Balance Sheet
During Q2-18 VER had net draws of $75 million on its revolving line of credit, including the $90 million (referenced above) settlement payment. VER had drawn $195 million on its revolving line of credit, leaving $1.8 billion of capacity.
Also in Q2-18 VER reduced secured debt by $45.9 million and entered into a new $2.9 billion credit facility, replacing the $2.3 billion facility. The new facility is comprised of a $2 billion unsecured revolving line of credit and $900 million unsecured delayed-draw term, enhancing liquidity and financial flexibility with upcoming debt maturities.
Subsequent to Q2-18, VER repaid $597.5 million of principal outstanding related to the 2018 convertible notes that came due August 1 from the revolver. The company is evaluating options for permanent financing, including borrowing on the delayed-draw term loan or the issuance of senior note offering.
VER’s net debt to normalized EBITDA increased slightly to 5.8x from 5.7x. The company’s fixed charge coverage ratio remains healthy at 3x and the net debt to gross real estate investment ratio was 39%. VER’s unencumbered asset ratio was 74% and the weighted average duration of debt is four years (and 96% fixed).
The Latest Earnings Results
In Q2-18 VER achieved $0.18 AFFO per diluted share, while revenue was up slightly compared to last quarter. The company’s $103.7 million decrease in net income was mostly due to the $90 million settlement along with $5.6 million in higher impairments.
FFO per diluted share decreased $0.09 from $0.17 to $0.08, mostly due to the Vanguard (lawsuit) settlement along with $6.2 million in lower other income, partially offset by the $5.2 million gain on the extinguishment of debt and $4.5 million lower litigation costs.
Also in Q2-18 VER purchased seven properties for $41 million at a weighted average cash cap rate of 7.2%. Subsequent to the quarter, the company purchased 14 properties for $74.2 million at an average cash cap rate of 7.1%.
During the quarter, VER disposed of 37 properties for $56.4 million: $28.4 million were used in the total weighted average cash cap rate calculation of 7.4%, including $25.9 million in net sales of Red Lobster restaurants.
The gain on second quarter sales was approximately $6 million and subsequent to the quarter, the company disposed of 10 properties for an aggregate sales price of $39.3 million at an average cash cap rate of 6.8%.
VER also repurchased 5.6 million of its common stock under the $200 million stock repurchase plan at a weighted average price of $6.95.
Lawsuit Lingers
VER’s share price multiples are still influenced by its last legacy issue litigation. As VER’s CEO explained,
“…the DOJ has indicated it will not bring criminal charges against the company. We are in discussions with the SEC. And we have settled with one of our opt out lawsuits. We will manage the remaining litigation and do so with our stakeholders' welfare in the forefront.”
VER sold $58 million of Red Lobsters through Q2-18 and expects to sell between $100 million to $150 million this year. As VER’s CEO explains, “So we will be in the fives, we expect by early next year and down than five by the end of next year. So we are in pretty good shape.”
When you think about VER’s valuation, it seems that the only thing holding back the company is the lawsuit. On the recent earnings call, VER’s CEO said
“On June 11, we announced that we entered into a settlement agreement with Vanguard for $90 million. Vanguard's holdings accounted for approximately 13% of VEREIT's outstanding shares of common stock held at the end of the period covered by the various pending shareholder actions.
Depositions have been taking place since January. At the June 11 Status Conference, the judge ordered fast deposition to be completed by year-end and also set a trial date for September 9, 2019. The next Status Conference with the court is scheduled for November 29, 2018.”
As you can see, VER’s dividend yield is 7.4%, suggesting again that the lawsuit is the remaining overhang for the company. How safe is the dividend?
VER is in excellent shape today, and I credit the management team for focusing on disciplined execution. It’s unfortunate that investors have been caught up with the agonizing pain of a lawsuit, but ultimately, VER will begin to trade in-line with its closest peers, that include Realty Income (O), National Retail Properties (NNN), and Store Capital (STOR).
As you can see, VER is expected to generate between $.70 and $.72 per share in AFFO in 2018. Here’s how the growth estimates compare with the peers:
We believe VER should trade in-line with STOR (15.7x P/AFFO and 4.7% dividend yield). Yet, the lingering lawsuit – and uncertainty – has spooked investors and this is the ONLY reason for the wide discount.
Who likes lawsuits anyway?
But one way to insure against the “uncertainty” is to buy shares today, with such a wide margin of safety. There is some clarity – Vanguard has settled – and VER has substantial liquidity that can be used to reduce debt and settle the lawsuits.
In fact, I would not rule out M&A, VER has excelled on delivering on its “trusted” promise and as Aunt Esther said,
Yes, VEREIT has risen from the ashes, and it appears that the company is well-positioned to become acquired. Obviously, the lawsuits must first be settled, but the clarity is much better. Does this mean that it won’t happen until September 2019 (the proposed court date)?
I’m not a lawyer…but rest assured, there is not as much hair on VEREIT today, although Mr. Market has priced the shares accordingly. There’s at least 25% upside, so I am nudging VEREIT from a BUY to a STRONG BUY…. The clocks ticking…and I am happy waiting…
Note:Brad Thomas is a Wall Street writer, and that means he is not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos, and be assured that he will do his best to correct any errors, if they are overlooked.
Finally, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking. If you have not followed him, please take five seconds and click his name above (top of the page).
Sources: FAST Graphs, VER Website, and VER Investor Presentation.
Other REITs mentioned: (LXP), (SRC), (WPC), (GTY), (O), (NNN), (FCPT), (EPR), (STOR), (ADC), (AFIN), and (GNL).
Brad Thomas is one of the most read authors on Seeking Alpha (based on page-views), and over the years, he has developed a trusted brand in the REIT sector. His articles generate significant traffic (around 500,000 views monthly) and he has thousands of satisfied customers who rely on his expertise.
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Disclosure:I am/we are long ACC, AVB, BHR, BPY, BRX, BXMT, CCI, CIO, CLDT, CONE, CORR, CTRE, CXP, CUBE, DEA, DLR, DOC, EPR, EQIX, ESS, EXR, FRT, GDS, GEO, GMRE, GPT, HASI, HT, HTA, INN, IRET, IRM, JCAP, KIM, KREF, KRG, LADR, LAND, LMRK, LTC, MNR, MPW, NNN, NXRT, O, OFC, OHI, OUT, PEB, PEI, PK, PSB, PTTTS, QTS, REG, RHP, RLJ, ROIC, SBRA, SKT, SPG, SRC, STAG, STOR, TCO, TRTX, UBA, UMH, UNIT, VER, VICI, VNO, VNQ, VTR, WPC.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.
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Preview — The Truth Will Set You Free by Alice Miller
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The Ultimate Psychopathy, Sociopathy, Narcissistic Personality Disorder, Narcissistic Abuse and Relationship Trauma Book ListMore lists with this book...
Miller applies micro psychological theories to macro historical events, and vise versa, which is hard for many to swallow.
I see where she's going and must say I'm inclined to agree on m...more
An example generalisation: 'today there are over 100 million women [who have had FGM] and most of them actively endorse this practice' (p.78). No sources cited by Miller, though she does often cite her other works.
While...more
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Dec 13, 2016Travel Writing rated it really liked itMission accomplished Dr. Miller.
'...our bodies store information about what we have experienced in our lives, it is frequently at a loss to decipher those experiences.'
'Of course I needed someone to say they understood me because I couldn't understand myself.'
'I spent years tormenting my own body, destroying my zest for life, spoiling every...more
Absolutely LOVED this book!
Hmmm.......as I was reading my first two Alice Miller books, I was looking forward to perusing others' reviews. I thought I'd find many who blasted her away. Maybe they're all on Amazon, or maybe there are more reviews re: Drama of the Gifted Child, her more famous book.
In any case, she certainly made me think. I'm not sure I totally buy into all of her theories, but then, I don't subscribe to anything in life 100%. I can't h...more
I'll give you a few quote here, so you can see some of the things I got out of this book and how the book can validate and release things for psychiatry survivors.
Adherence to the system, so 'to avoid confronting repressed early suffering'. This is the reason why some children who've suffered psychiatric abuse,...more
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Psychologist and world renowned author, who is noted for her books on child abuse, translated in several languages. In her books she departed from psychoanalysis charging it with being similar to the poisonous pedagogies, which she described in For Your Own Good.
Miller was born in Poland and as young woman lived...more