The document provides a strategic analysis and recommendations for VEREIT (VER) to restore trust and return to investment grade status. It analyzes VER's portfolio, finances, and goals. It recommends that VER raise $4.12 billion in capital through debt repayment and asset sales to reduce leverage, diversify its retail portfolio, and spin off or divest non-core industrial and office assets. The first step is accounting for $830 million in recent property sales and selling $400 million of Red Lobster properties through a partnership.
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Restoring Trust in VEREit
1. Restoring
Trust
in
VEREIT
Strategic
Opinion
of
Daniel
Timianko
MSc
in
Real
Estate
Finance
and
Investment
New
York
University
2. Table
of
Contents
• Summary
of
VEREIT
and
Cole
Capital
• PorFolio
Analysis
• VEREIT
Short
and
Long
Term
Goals
• VEREIT’s
Financials
• Return
to
Creditability
• Capital
Raising
Plan
• How
to
Strengthen
Balance
Sheet
• Long-‐Term
Strategic
Vision
3. VEREIT
• VEREIT
is
the
second
largest
net
lease
REIT
• Financials
• NAV
of
$18bn
• Trades
at
about
NAV
• ProperRes
• 4,572
properRes
• 63%
Retail,
22%
Office,
15%
Industrial
• 98.4%
occupancy
rate
• Majority
of
holdings
in
secondary
and
terRary
markets
• Casual
Dining
and
Quick
Service
Restaurants
are
28%
of
PorFolio
4. Cole
Capital
(Wholly
Owned
Subsidiary)
• Cole
Capital
manages
$6bn
of
assets
as
a
non-‐traded
REIT.
• It
is
a
sponsor
and
asset
manager.
• Roughly
3%
of
VER’s
NAV.
• Inherent
value
lies
in
capital
raising
acRviRes
and
the
high
fees
it
collects
in
the
non-‐
traded
REIT
market.
• The
plaForm
has
become
a
liability
in
the
short
term.
Perhaps
it
can
regain
market
share
by
repairing
brand.
• Cole
Capital
largely
has
upside
for
VER
investors.
5. PosiRons
on
PorFolio
• Retail
(63%
of
por0olio)
• Bullish
• Very
straighForward,
well
run
business
(87%
operaRng
profit
margin).
• Main
risk
is
lack
of
diversificaRon.
• Office
(22%
of
por0olio)
• Bearish
• Largely
in
low
barrier
suburban
markets.
• VER
faces
a
lot
of
downside
in
suburban
markets
due
to
the
difficulty
of
retaining
tenants
and
the
high
cost
to
improve
assets.
• Industrial
(15%
of
por0olio)
• Bearish
• Only
2%
of
VER’s
industrial
holdings
are
in
high
barrier
markets.
• Easily
replaceable,
low
tenant
loyalty.
6. VEREIT
Short
and
Long
Term
Goals
1. Return
VEREIT
to
investment
grade
(BBB/Baa).
2. Diversify
retail
porFolio.
3. Reduce
office
and
industrial
porFolio
to
core
assets.
4. Restore
confidence
to
shareholders
and
credit
markets.
5. Simplify
business
strategy.
7. VEREIT’s
LiabiliRes
• Currently
VER
is
non-‐investment
rated.
Recent
accounRng
errors,
mismanagement,
and
rapid
growth
has
changed
the
character
of
the
company.
• Company
has
an
opaque
porFolio.
Asset
mix
needs
to
be
simplified.
• Key
financial
raRos
are
not
healthy.
• Presence
in
low-‐barrier
markets
leaves
porFolio
exposed
to
relocaRon
risk
of
office
and
industrial
tenants.
• Clear
strategy
needed
to
restore
trust.
• Net
lease
REIT?
Diversified
REIT?
Geographic
concentraRon?
• Where
is
VEREIT
in
1,
5,
10
years?
• Non-‐traded
REIT
sponsor
separate
from
listed
REIT?
8. Return
to
BBB
(Investment
Grade)
• Total
capital
required
for
BBB
raRng.
• $4.12bn.
• Next
slide
indicates
capital
required
in
a
sequenDal
manner.
• Much
of
the
non-‐investment
grade
raRng
is
due
to
high
leverage
and
low
cash
reserves.
• Debt
maturiRes
in
2017
and
2018
total
$4.6bn.
Paying
the
principal
on
corporate
bonds,
converRble
notes,
and
the
revolver
reduces
total
debt
enough
to
be
investment-‐grade.
• The
upgrade
can
happen
sooner
by
paying
revolver
earlier.
•
VER’s
operaRons
are
very
well
run,
but
a
majority
of
the
net
leases
do
not
have
upside
to
increase
earnings.
• Realty
Income
EBITDA/Revenue
is
90%
vs.
VER
87%.
9. Financial
Coverage
RaRos
(SequenRally
Adjusted)
Credit
RaDo
Current
RaDo
Target
RaDo
Capital
Required
for
BBB
RaDng
Credit
Line
Availability
36%
50%
$450mm
Secured
Debt/
Total
Debt
37%
<
50%
$0
Secured
Debt/
Total
Assets
18%
<
20%
$0
Total
Debt
+
Preferred/
Total
Assets
48%
<
50%
$0
Total
Debt/
EBITDA
6.96X
6.00X
$1.21bn
(Total
Debt
–
Cash)/
EBITDA
5.33X
3.50X
$2.31bn
EBITDA/
Revenue
87%
>55%
$0
Interest
Coverage:
EBITDA/
(Int
+
Div)
1.58X
2.00X
$150mm
10. Capital
Raising
Plan
• Three
Step
Process
• Step
1:
Divest
from
JVs
and
account
for
recent
sales
• Step
2:
Diversify
retail
holdings,
specifically
casual
and
fast
restaurants
• Step
3:
Divest
or
spin-‐off
industrial
and
office
holdings
11. Step
1:
First
Round
of
Sales
and
JV
Divestment
• As
of
November
22nd,
VER
has
either
sold
or
entered
into
contract
to
sell
$830
million
of
property.
• This
includes
a
strategic
partnership
with
Golden
Gate
Capital
to
sell
$400mm
worth
of
VER’s
Red
Lobster
pool.
• Golden
Gate
Capital
also
purchased
other
Red
Lobster
locaRons
for
$200mm.
• Other
disposiRons:
$200mm
• Liquidate
Joint-‐Venture
Agreements.
• Expected
sale
price
of
JVs
=
$137mm.
• Total
Capital
Raised:
$967mm.
12. Step
2:
Diversify
Retail
Holdings
• Currently,
casual
and
fast
dining
restaurants
account
for
24%
of
total
revenue.
• VER
is
overexposed
to
fast
and
casual
dining.
• To
reduce
exposure
to
this
type
of
tenant,
VER
should
sell
a
porRon
of
its
fast
and
casual
restaurant
holdings
to
reduce
revenue
to
15%
of
porFolio.
• Current
Holdings:
• Aqer
DiversificaRon:
13. Step
2:
Capital
Raised
• The
diversificaRon
program
raises
$1.75bn
• Step
1
+
Step
2
Capital
Raised
=
$2.71bn
• Capital
Remaining:
$1.41bn
• How
can
VER
raise
an
addiDonal
$1.41bn?
14. Step
3A:
Spin-‐Off
Industrial
and
Office
PorFolio
• Why
Spin-‐off?
• Spinning
off
the
porFolio
is
faster
than
selling
each
property
individually.
• $6.3bn
in
asset
value
is
sRll
a
large
REIT.
$1.5-‐2.5bn
in
equity
can
be
raised.
• Simplifies
VEREIT
business
strategy
by
exiRng
non-‐core
businesses.
• Lots
of
management
talent
acquired
from
prior
acquisiRons.
• Will
be
able
to
run
new
company.
• Precedence
• Simon
ProperRes
spun
off
non-‐core
regional
malls
by
creaRng
Washington
Prime
Group,
which
later
merged
into
WP
Glimcher.
• Splirng
the
non-‐core
assets
from
Simon
created
a
$2bn
market
cap
REIT
• Vornado
spun
off
Urban
Edge,
porFolio
of
non-‐urban
retail
centers
• VEREIT’s
industrial
spin-‐off
could
be
top
5
industrial
REIT.
• VEREIT
will
sRll
be
the
second
largest
net
lease
REIT
and
can
focus
on
expanding
core
business.
• Will
significantly
lower
S,G&A
and
operaRng
profit
will
increase.
• VEREIT
can
become
retail
specialists
and
be
able
to
more
effecRvely
diversify
tenants
and
build
strong
relaRonships
with
retailers.
• NegaRves
• Many
REITs
are
trading
at
a
discount
to
their
net
asset
value
(11%
on
average).
Selling
individual
assets
is
more
atracRve
than
a
spinoff.
A
spinoff
offers
a
quick
exit
while
asset
sales
take
longer
to
raise
cash.
15. Step
3B:
Office
and
Industrial
PorFolio
DisposiRon
Program
• VER
can
also
divest
office
and
industrial
properRes
in
order
to
raise
the
necessary
capital
to
return
to
investment
grade
• The
office
and
industrial
porFolio
of
VER
is
in
low
barrier
to
entry
markets
and
vulnerable
to
new
construcRon.
• Divestment:
• Asset
Value:
$6.3bn
(7.5
cap)
• %
to
sell:
22.4%
• Proceeds:
$1.41bn
16. Summary
of
Capital
Raising
AcRviRes
Step
Capital
Raised
Amount
Remaining
($4.12bn)
1)
JV
and
3Q
Sales
$967mm
$2.59bn
2)
Retail
DiversificaRon
Program
$1.75bn
$1.41bn
3A)
Spin-‐off
Office
and
Industrial
PorFolio
$1.5-‐2.5bn
$0
3B)
Office
and
Industrial
PorFolio
DisposiRon
Program
$1.41bn
$0
17. How
to
Balance
the
Books
• Aqer
raising
the
capital
VER
can
adjust
its
balance
sheet
by:
• Credit
Facility:
$450mm
to
reach
50%
drawn.
• Corporate
Bond:
$1.7bn
in
principal
paid.
• ConverRble
Notes:
$600m.
• Cash:
$2.1bn
held
for
conservaRve
balance
sheet.
• Strategy
must
lower
VER’s
cost
of
capital.
By
2019
VER
will
no
longer
have
favorable
rate
corporate
bonds
nor
an
unsecured
credit
facility.
• Having
a
strong
balance
sheet
ensures
cheaper
cost
of
capital
as
an
investment
grade
corporaRon.
• A
lower
cost
of
capital
will
increase
the
spreads
and
profits
of
investments.
18. Aqer
Reaching
Investment
Grade:
Long
Term
Strategy
• VER
will
have
over
$2bn
in
cash
and
favorable
access
to
unsecured
debt
which
will
allow
it
to
invest
in
new
projects.
• Net
lease
properRes
are
oqen
considered
comparable
to
bonds
due
to
their
steady
stream
of
income.
• The
10-‐year
Treasury’s
yield
has
increased
by
13%
in
approximately
one
month.
That
movement
will
make
debt
more
expensive
and
net
lease
properRes
less
atracRve.
• Solidifying
a
low
cost
of
capital
as
soon
as
possible
will
increase
the
spread
between
debt
yield
and
a
net
lease’s
yield.
• Unsecured
5
Year
Credit
Facility
for
BBB-‐
=
LIBOR
+
120BPS
• Comp:
CBL
&
Associates
in
October
2015
credit
facility.
• Unsecured
7
Year
Bonds
for
BBB+
=
7
Year
US
Note
+
140BPS
• Comp:
Kimco
7-‐Year
Bond
issued
in
October
2015.
• Net
Lease
Property
Yield
(6.4
Cap)
=
10
Year
Treasury
+
416BPS
• Source:
InternaRonal
Council
of
Shopping
Centers.
• Average
Spread
between
Debt
and
Property
Yield
=
409BPS
19. Further
Upside
• A
rise
in
interest
rates
increases
both
the
cost
of
capital
and
net
lease
property
yields.
• VER
can
create
a
wider
spread
by
accessing
capital
markets
at
investment
grade
before
debt
costs
and
cap
rates
increase.
• VER
can
experience
greater
than
average
asset
appreciaRon
in
Rmes
of
market
volaRlity
by
using
its
large
cash
reserve
to
fund
acquisiRons
in
a
depressed
market.
• VER
will
become
a
credit-‐worthy
company
with
strong
property
fundamentals
if
it
follows
the
aforemenRoned
recommendaRons.
• Growth
opportuniRes
in
expansion
of
new
naRonwide
brands.
VEREIT
can
expand
build-‐to-‐fit
program
for
free
standing
restaurants
or
other
retail.
• Examples
of
growing
brands:
• Twin
Peaks,
Peet’s
Coffee/Coffee
Bean,
Trader
Joe’s,
PETCO,
Juice/
Smoothies,
discount
chains
20. In
Conclusion
• VEREIT
is
in
need
of
a
strategic
change.
Over-‐leveraging
to
achieve
rapid
growth
has
inhibited
its
credit
raRng
and
ability
to
grow.
• In
order
to
achieve
the
best
risk-‐adjusted
returns,
VEREIT
needs
to
strengthen
its
balance
sheet
to
increase
the
spread
between
its
cost
of
capital
and
investment
yield.
• VER’s
balance
sheet
requires
$4.12bn
to
be
raised
to
reduce
total
debt
and
increase
cash
holdings
to
reach
a
BBB
raRng.
• VER
can
raise
$4.12bn
by:
• Diversifying
its
retail
porFolio
by
selling
a
porRon
of
its
fast
and
casual
restaurant
holdings.
• Divest
from
joint
venture
partnerships.
• Reduce
office
and
industrial
porFolio.
• Spin-‐off
office
and
industrial
porFolio
into
separate
REIT.
• VER
will
then
have
access
to
cheaper
debt
by
strengthening
its
balance
sheet.