Description

I recommend a long position in VEREIT (VER), a triple-net lease REIT.  VER was heavily followed in the past under its old name American Realty Capital Properties (ARCP/ARCPP), with write-ups by gary9, madler934, rickey824, and slim from 2013 to 2015.  Since then, however, there hasn’t been much notice, although slim’s message board has perked up a little in the past two weeks (in 2017, there was only a single message).  I suspect the reason for the uptick is simply that the price has fallen and no one cares, resulting in a fairly attractive pricing opportunity for those willing to take another look.

Since it was followed so heavily, one might wonder how it could have gotten so sleepy.  The reason is that after the first three write-ups there was an accounting restatement, CEO replacement (the infamous Nicholas Schorsch), etc., and the bottom fishers since slim’s excellent writeup have moved on after the stock recovered.  I recommend that readers start there for background.  Today, however, the stock is cheaper than it was in slim’s day ($6.85 vs. $8.37), despite a lot of work by new management to stabilize and improve the business (cheesy name notwithstanding).  The stock today offers an 8% yield ($0.55 / share) that is covered by cash flow (FFO of $0.67 and AFFO of $0.70), and is meaningfully higher than standard NNN cap rates.

The turnaround has been making progress.  The 10-K in 2017 was filed in a timely manner.  Debt is now 39% of real estate investments, and net debt to “normalized EBITDA” (sigh) is around 5.7x.  The trifecta of S&P, Moody’s, and Fitch now all rate VER investment grade.  Cole Capital, a vaguely related business left over from the Schorsch days has been sold (Feb 1, 2018), making VER a now pure play on the NNN space.  The portfolio has been repositioned by new management and at the moment has 4,091 properties.  Occupancy is 98.8% with a weighted average tenancy term of 9.5 years (a little under three percent will expire this year, which always presents a source of risk in the NNN space as vacant buildings can be worth significantly less than occupied ones).

Retail is about 40% of rent, restaurant about 23%, office about 20%, and industrial/distribution 16%.  Most of the retail is necessities, with very little exposure to riskier categories like apparel.  The top 10 tenants total 29% of rent.  The single largest tenant is Red Lobster (a little under 7% of rent and almost 30% of the restaurant category, about 10 times larger than the next restaurant tenant), which is not a terrific tenant but a big step up from a “mom & pop”.  Management sold a few Red Lobsters last year, so they are working on the concentration issue.  The next three largest tenants are all a bit over 3% of rent: Walgreens, Family Dollar, and Dollar General.  Other than the Red Lobster concentration I don’t think there’s anything that raises eyebrows.  A good source to look at relatively recent NNN lease rates is www.netleaseadvisor.com.  Here are the pages for the largest tenants:

https://www.netleaseadvisor.com/tenant/red-lobster/
https://www.netleaseadvisor.com/tenant/walgreens/
https://www.netleaseadvisor.com/tenant/family-dollar/
https://www.netleaseadvisor.com/tenant/dollar-general/

The rates are not updated continuously, so you need to be a bit careful for stale prices, but current rates are generally in the 6-7% range.  VER’s properties are mostly (87%) in the Eastern half of the country, approximately equally divided equally across the Midwest, Southwest, Southeast, Mid-Atlantic, and Northeast.  There is de minimus exposure to Canada and Puerto Rico.

The company has a repurchase program and bought back about $500k of stock last year at an average price of $7.50 per share (i.e. almost 10% higher than the current market price); the Board has approved a buyback as large as $200mm.

I do not see any obvious company-specific reason for the price decline in the last year or so.  Interest rates are rising.  But it seems like an 8% dividend should be high enough to forgo bonds at current yields.

Catalyst

Potential buybacks