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Edited Transcript of VER earnings conference call or presentation 26-Feb-20 6:30pm GMT

Q4 2019 VEREIT Inc Earnings Call

New York Mar 20, 2020 (Thomson StreetEvents) -- Edited Transcript of VEREIT Inc earnings conference call or presentation Wednesday, February 26, 2020 at 6:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bonni Rosen

VEREIT, Inc. - SVP of IR

* Glenn J. Rufrano

VEREIT, Inc. - CEO & Director

* Michael J. Bartolotta

VEREIT, Inc. - Executive VP & CFO

* Paul H. McDowell

ARC Advisory Services, LLC - President of Office & Industrial Group

* Thomas W. Roberts

VEREIT, Inc. - Executive VP & CIO

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Conference Call Participants

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* Anthony Paolone

JP Morgan Chase & Co, Research Division - Senior Analyst

* Robert Jeremy Metz

BMO Capital Markets Equity Research - Director & Analyst

* Sheila Kathleen McGrath

Evercore ISI Institutional Equities, Research Division - Senior MD

* Spenser Bowes Allaway

Green Street Advisors, LLC, Research Division - Analyst of Retail

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Presentation

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Operator [1]

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Good day, and welcome to the VEREIT fourth quarter and annual earnings conference call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Ms. Bonni Rosen, Head of Investor Relations. Please go ahead.

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Bonni Rosen, VEREIT, Inc. - SVP of IR [2]

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Thank you for joining us today for the VEREIT 2019 Fourth Quarter and Year-end Earnings Call. Joining me today are Glenn Rufrano, our Chief Executive Officer; and Mike Bartolotta, our Chief Financial Officer.

Today's call is being webcast on our website at vereit.com in the Investor Relations section. There will be a replay of the call beginning at approximately 2:30 p.m. Eastern Time today. Dial-in for the replay is 1 (877) 344-7529 with the confirmation code of 10138882.

Before I turn the call over to Glenn, I would like to remind everyone that certain statements in this earnings call, which are not historical facts, will be forward looking. VEREIT's actual results may differ materially from these forward-looking statements and factors that could cause these differences are detailed in our SEC filings, including the annual report filed today. In addition, as stated more fully in our SEC reports, VEREIT disclaims any intent or obligation to update these forward-looking statements except as expressly required by law.

Let me quickly review the format of today's call. First, Glenn will begin by providing a business and operational update, followed by Mike presenting our financial results. Glenn will then wrap up with closing remarks. We will conclude today's call by opening the line for questions, where we will be joined by our Chief Investment Officer, Tom Roberts; and our Chief Operating Officer, Paul McDowell.

Glenn, let me turn the call over to you.

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Glenn J. Rufrano, VEREIT, Inc. - CEO & Director [3]

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Thanks, Bonni, and thanks for joining our call. Over the last 5 years, we've resolved the legacy issues found in front of us, always focusing on growth in share price through reporting transparency, company stability and transformation to a net acquirer. Major components of the transformation include, settling all outstanding litigation, which includes an agreement with the SEC, building a quality portfolio, enhancing the strength of our balance sheet and maintaining continuity in an experienced management team.

In 2019, we improved tenant diversification, and office exposure continues to decrease. We reduced net debt to normalized EBITDA, below our original guidance due to net dispositions, along with our ATM usage. The result was achieving a BBB flat rating from Fitch with an upgraded outlook to positive for Moody's. As you'll see, we met our guidance while settling the litigation.

Moving on to our specific financial and operational performance. AFFO per diluted share for 2019 was $0.69. Acquisitions totaled $426 million and dispositions $1.1 billion, including $326 million from our industrial partnership. The global litigation settlement at a cost to the company of $765.5 million was financed with an equity offering of $887 million. We issued 129 million under the company's ATM program and 600 million 10-year senior notes at 3.1%.

Net debt to normalized EBITDA was reduced from 5.9x to 5.7x and we redeemed 300 million of preferred stock. We have access to capital markets not only for debt reduction, but to extend our maturities. With the exception of our remaining 2020 converts, we have no unsecured bond maturities until 2024. Leasing for the year was very active with 3.7 million square feet leased and occupancy ending at a healthy 99.1%. For renewal leases, we recaptured approximately 97% of prior rents and same-store rent was up 1.2%. Our 3.7 million square feet of leasing activity represented 289 leases with 3 million square feet renewed, of which 978,000 square feet were early renewals. Leasing included 1.7 million square feet of retail, 727,000 square feet of industrial, 687,000 square feet of office and 558,000 square feet of restaurants.

Diversification is one of the most important ways to protect and provide income stability. Not only did we reduce Red Lobster from 5.5% to 4.7%, but our top 10 tenants -- our top 10 tenant concentration continued to improve. We were able to also take down exposure to Walgreens from over fourth to #2 of our -- on our tenant list and Citizens Bank from 1.3% to 0.8% of income. 47 tenants individually represent 0.5% or greater of ARI, comprising 56% of the total portfolio, while the remaining 572 tenants comprised 44%. We are introducing a new performance index for our retail and restaurant portfolio. For Q4, EBITDA coverage was 2.63x, which can be found on Page 36 of our supplemental.

Turning to capital markets. Commercial real estate sales volume, excluding M&A, increased in 2019. We once again took advantage of this activity in pruning the portfolio. 2019 portfolio dispositions totaled $740 million and were centered around portfolio diversifiers. We sold $191 million of flat leases, $175 million of office, $136 million of Red Lobster and $228 million of noncore, which included $66 million of bank branches. Acquisitions totaled $426 million, comprised of approximately 90% retail and 10% industrial. Retail included our preferred merchandise categories, convenience, entertainment, fitness, specialty grocer and discount. We are also very focused on adding leasing as evidenced by the WALT on acquisitions of 16 years and dispositions, 9 years.

Before Mike reviews our financial results, let me provide my last summary on litigation. On September 9, we announced our global settlement for both the class action and derivative lawsuits, which the court gave final approval on January 21 of this year.

In addition, on November 18, 2019, we announced an agreement with the SEC, which is subject to documentation and approval to settle the SEC investigation for $8 million as a civil penalty.

Let me now turn over the call to Mike.

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Michael J. Bartolotta, VEREIT, Inc. - Executive VP & CFO [4]

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Thanks, Glenn, and thank you all for joining us today. We had a very active year. And as Glenn mentioned, we resolved our final legacy issue litigation. And nevertheless, we're still able to achieve the midpoint of our FFO guidance range of $0.69.

In the fourth quarter, rental revenue increased $2.4 million or 1% to $305.4 million, primarily due to higher reimbursement income. Net income increased by $812.7 million from a net loss of $741 million to a net income of $71.2 million, primarily due to lower litigation of nonroutine costs of $723.4 million due to the impact of recording of the litigation settlement in Q3 and lower legal expense in Q4.

FFO per diluted share increased $0.80 from a negative of $0.66 to a positive of $0.14, mostly due to the lower litigation and nonroutine costs discussed above, partially offset by a greater Q4 loss on the extinguishment of debt and the dilutive impact of the late Q3 equity issuance, net of surrendered OP units on the Q4 weighted average shares outstanding.

AFFO per share decreased approximately $0.02, from $0.18 to $0.16, mostly due to the increase in the Q4 weighted average shares outstanding that I just mentioned, combined with slightly higher G&A and property operating expenses.

G&A increased $2.5 million quarter-over-quarter to $17 million, primarily due to normal Q4 year-end compensation and payroll tax accrual adjustments. G&A for the year ended at $62.7 million, below our guidance range of $66 million to $69 million in the year, in part due to slightly lower-than-anticipated cost for most operating expenses and the continuation of the Cole-CIM transition services agreement that was still in effect in Q1.

Our guidance for 2020 G&A is estimated to be $64 million to $66 million. Capital expenditures for the year came in at approximately $36 million, net of insurance proceeds, compared with our guidance of approximately $30 million, primarily due to the earlier than anticipated leasing commissions.

For 2020, we expect CapEx to be in the range of $30 million to $40 million. Litigation-related expenses for the quarter was $659,000, bringing the year-to-date spend to $70.2 million, in line with our guidance. Note, the litigation and other nonroutine cost line items on the income statement also included $8 million of the accrual for the settlement of the pending SEC investigation. Thankfully, this will be the last time we speak of this line item, as we do not expect meaningful amounts going forward.

On September 9, we announced that we had entered into agreements to settle the remaining civil litigation at a cost to the company of approximately $765.5 million. Pursuant to the class action settlement, certain dependents agreed to pay a total of $1,025,000,000, made up of $225 million from the company's former external manager and its principals, $12.5 million from the company's former CFO, $49 million from the company's former auditor and the balance of $738.5 million from the company.

In addition, we settled the remaining 2 opt-outs of $27 million, which brings our total to $765 million. In October, we funded $966.3 million for the class, which included the cash value of the OP units and dividends surrendered by the former manager and former CFO.

VEREIT now owns 99.9%, up from 97.6%, of the operating partnership, which reflects all OP units surrendered back to us by the former manager and former CFO.

Turning to our fourth quarter real estate activity. The company purchased 26 properties for $142 million at a weighted average cash cap rate of 7.3%. Subsequent to the quarter, the company purchased 23 properties for $128 million. During the quarter, we also disposed of 94 properties for $226 million. Of this amount, $210 million was used in the total weighted average cash cap rate calculation of 6.5%. The gain on the fourth quarter sales was approximately $42 million, bringing the total for the year to $294 million. And subsequent to the quarter, the company disposed of 11 properties for $30.3 million.

In addition, we formed an office partnership with Arch Street Capital Advisors, which will include 3 VEREIT office assets totaling $137.5 million at a capitalization rate of 7.8%. Partnership has a traditional 80/20 equity structure and was formed with Arch Street's institutional client, Gatehouse Capital.

Two of the 3 properties contributed at the time of the closing totaling $87.7 million, with the last property expected to be added to the partnership in the first half of 2020 for $49.8 million. Also, the office partnership closed on an external acquisition of a headquarters facility, which was leased to an investment-grade tenant under a 12-year lease for $33 million.

As Glenn discussed, we had another very active year in the capital markets with over $4 billion of debt and equity transactions. In February 2019, we repaid $750 million principal outstanding related to the 2019 senior notes that came due, utilizing our $900 million unsecured term loan as planned.

During the first half of 2019, we also were able to issue 5 million shares of our ATM for gross proceeds of $42.5 million at a weighted average gross price of $8.42. And in July 2019, we redeemed 100 million of our 6.7% Series F preferred stock, using proceeds from the industrial partnership.

Upon settlement of our remaining shareholder litigation, we found a good market reception, and we're able to permanently finance the liability with $887 million equity offering. Subsequently, the rating agencies viewed this as a positive development with Fitch upgrading us from BBB- to BBB, and Moody's moving us -- the outlook from stable to positive. This resulted in savings in our credit facility of 25 bps on the term loan, 20 bps on the revolver and 5 bps reduction on the facility fee.

Then in November 2019, we were able to take advantage of the current market conditions and price $600 million aggregate principal amount of 3.1% senior notes due in 2029. Proceeds from these senior notes along with borrowings from the credit -- revolving credit facility and cash on hand were used to fund the redemption of all of the $400 million -- 4.125% senior notes due in 2021, repurchased $80.7 million of the 3.75% convertible senior notes due in 2020, an additional redemption of $200 million of VEREIT's 6.7% preferred stock and the prepayment of $185.6 million of mortgage debt. In addition, we issued 9 million shares under our ATM for gross proceeds of $86.7 million at a weighted average growth price of $9.60.

With all of this activity, we were able to extend our duration, further ladder our maturity schedule, lower our debt cost and prudently manage our net debt to normalized EBITDA ratio below our original guidance.

Our balance sheet remains in a very healthy spot with plenty of liquidity. Our net debt to normalized EBITDA ended at 5.7x. For 2020, we expect a range of 5.5x to 6x, which gives us flexibility and optionality to achieve our net acquisition target. However, we'll always be cognizant of moving to the lower end of the range by over-equitizing our acquisition program. Our fixed charge coverage ratio remained healthy at 3x, and our net debt to gross real estate investment ratio was 39%.

Our unencumbered asset ratio was 79% and the weighted average duration of our debt was 4.8 years, and we are currently 97.2% fixed.

And with that, I'll turn the call back to Glenn.

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Glenn J. Rufrano, VEREIT, Inc. - CEO & Director [5]

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Thanks, Mike. I'll now turn to the guidance for 2020. AFFO per diluted share of $0.64 to $0.66, net debt to normalized EBITDA of 5.5x to 6x, real estate operations with average occupancy above 98% and same-store rental growth ranging from 0.3% to 0.8%. Acquisitions totaling $1 billion to $1.3 billion at an average cap rate of 6.5% to 7.5%. Dispositions totaling $250 million to $350 million at an average cap rate of 6.5% to 7.5%, targeting our diversification categories, office, restaurants and noncore.

Additionally, our program will continue to reduce flat leases, which have been providing an efficient form of internal equity. For instance, we sold $55.4 million of flat Walmart Sam's properties at 5.6% in the fourth quarter. Dispositions of $110 million contributed to the office partnership, the company's pro rata share. And we expect acquisitions for the industrial partnership of $400 million to $600 million and acquisitions of the office partnership of $100 million to $200 million.

We'll continue to focus on reducing our office concentration to at least the bottom of our 15% to 20% range as well as reducing casual dining. We have given thought to increasing our sourcing opportunities by property types other than in our existing portfolio or geographies outside the U.S. At this point in our life cycle, we believe using our current business model is the best way to secure appropriate investments. These avenues include discount retail, quick service restaurants and noninvestment-grade industrial for the balance sheet. We have expanded off balance sheet with our partnerships to fit our core competencies for investment-grade single-tenant industrial and long-term single-tenant office.

We have positioned ourselves for off-balance-sheet investments always with 3 criteria in mind: Full transparency in reporting; assets we would not buy on the balance sheet; nonexclusivity, thereby not encumbering the enterprise. With the options open to us, net acquisitions will not only provide growth, but quality product.

We expect our deal pipeline of approximately $25 billion a year offered to us to expand at least by 20%. As you can see, we have a great start to the year with $128 million acquired on-balance sheet and $280 million closed and under contract in the partnerships.

I'll now open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Jeremy Metz with BMO Capital Markets.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [2]

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I just wanted to talk about the partnership angle a little bit for the industrial partnerships. Are these existing from what you did last year? Are they new? How much equity will you be contributing out of the $400 million to $600 million? And then can you talk about the potential fee opportunities within these?

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Glenn J. Rufrano, VEREIT, Inc. - CEO & Director [3]

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Yes. I'll start, and then, as Bonni mentioned, both Tom and Paul are here, so I'll kick this over to Tom. But Jeremy, to start with the fees, we have confidentiality in the partnerships, but I can give you a good sense of about how the fees will work for both partnerships, both the industrial and the office. The asset management fee is approximately 0.5 point on equity, the acquisition fee on new assets would be 0.5 point on gross asset, the property management fee approximates 1% of revenues. And then we have disproportionate sharing of equity, of promote, but that's down the road. And that's a little different for each one. But those 3 fees would approximate what we'd be getting from the partnerships. In terms of the industrial partnership and what we've been looking at, it's both existing and to be built, and I'll let Tom weigh in on that.

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Thomas W. Roberts, VEREIT, Inc. - Executive VP & CIO [4]

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Yes. A lot of the assets are going to be newer, state-of-the-art distribution facilities. And as you know, it's an investment-grade appetite for industrial. And generally, these are build-to-suit assets that are in some cases, a forward commitment that allow us to get a little higher yield by committing to those and funding those 6 to 9 months out. So as you know, we did contribute 6 assets off to a balance sheet, about $407 million, about 4.8 million square feet, and that was slightly under a fixed cap. So the one thing we have noticed is our pipeline of sourced assets has increased. That's obviously an area we couldn't compete in the past on the balance sheet because of pricing. So with this new form of equity, we're seeing tremendous activity in that industrial investment grade, like I said, state-of-the-art distribution warehouse-type facility. So we're very excited about the activity. Glenn mentioned, we have $280 million -- or $248 million on the industrial front that's under contract scheduled to close year late first, early second quarter.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [5]

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And sorry, the $400 million to $600 million, is that your share? Or is that the gross value, and you'll have a percentage of that?

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Glenn J. Rufrano, VEREIT, Inc. - CEO & Director [6]

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That's the gross value, Jeremy, and it's an 80-20 deal. So that we have 20% of the equity and our partner, KIS, would have 80%. And we're expecting somewhere about 60% to 65% financing.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [7]

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Got you. Okay. And then in terms of the office partnership acquisitions. Just Glenn, how do you weigh your desire, you guys talked about longer-term goal of getting office down to the lower end at 15%. So is this just part of what it took to get that office transaction to happen and therefore, buying a few additional deals was something you had to agree to, even at 20% or whatever the equity is, I forget, is that just part of it? Or is it contributions from you into that partnership is how this acquisition, this $100 million to $200 million, how we should be thinking about it? Any color there?

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Glenn J. Rufrano, VEREIT, Inc. - CEO & Director [8]

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Sure. No, no, it's a good question. First, in terms of the office, I'd start up by saying we're selling the 3 offices -- 3 office properties in there, $137 million. 80% gets sold in. So we reduced office concentration that you'll see in the first and second quarter of this year as the assets go in there, which is an important part of this. The second is it's a much smaller acquisition vehicle. As you can see, it's -- we're projecting $100 million to $200 million versus $400 million to $600 million in the industrial. And it's -- again, it's an 80-20 transaction with approximately 60% to 65% leverage. So the amount of capital we put in is very small relative to our balance sheet. So we don't intend to increase our office concentration by this partnership to any great extent. It will also have in there the long-term corporate campus type property. So it's a different form of office than some of what we have today at shorter-term leases. So it's intended to be long term, not that large compared to the industrial and not add a lot to our percentage. We are still committed to taking the office concentration down to at least the 15%, as we mentioned.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [9]

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Got it. And just the last question for us here. Just given where you've raised equity, where the stock is, how should we think about further taking down the preferreds or even maybe more broadly, just talk about your desire to delever further from here, just in terms of the guidance, it just doesn't look like there's much in there necessarily at the outset for further deleveraging here, but I assume that's part of the plan going forward.

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Glenn J. Rufrano, VEREIT, Inc. - CEO & Director [10]

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Yes, I'll start with the big question, then I'll hand it over to Mike on the prefs. We've given a range of 5% to 6% and obviously, we're at 5.7% and deleveraging would mean taking it below 5.7%. So we put a bottom number on there that we could try to achieve if we can create some over-equitization for some of our transactions but want to make sure we have enough room in the leverage to commit and complete our program for acquisitions. In terms of the prefs, Mike?

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Michael J. Bartolotta, VEREIT, Inc. - Executive VP & CFO [11]

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I think in terms of the prefs, I can just tell you, Jeremy, we'll continue to look at them as we have all along, and we'll look at everything. We'll look at whether or not if there's any logic to a 10-year, a 30-year, whether it makes any sense to put new pref out. We are working with our banks all the time to make sure we understand what the market is on all of these items, and we'll be opportunistic about doing it. We've been opportunistic on the 2 that we've done so far, the $100 million out of the institutional partnership and then well, we had some capital available with the good refinancing that we did in the fourth quarter, another $200 million. As the agency say, we're nibbling away at them. So I think we'll continue to do that as opportunities allow.

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Glenn J. Rufrano, VEREIT, Inc. - CEO & Director [12]

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And Jeremy, in your part of your question -- I just -- to conclude with it is, the arms and legs we're using here to provide growth. And a big part of our business model now is to not have to focus on any one property type, but to use our infrastructure across the property types that we know and understand well and take on the balance sheet where we feel there's an adequate cost of capital relative to -- adequate return relative to our cost of capital and take assets like the industrial partnership that we cannot buy because right now we're -- Tom would be talking about, in the low 5s for a bunch of the assets we're looking at. We like those assets. We don't mind having a small piece of those assets and being able to get fees because of the infrastructure. And the office is there because we can provide some fee income on long-term leases. So we are -- the big issue that we think we have in trying to meet all our requirements here is looking for opportunities so we don't get caught in any one property type at any given time.

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Operator [13]

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Our next question will come from Sheila McGrath with Evercore.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [14]

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Glenn, the shares -- your shares are still trading at a big discount to some of the larger cap net lease peers, and it could be in part because of that office exposure. So just wondering how you're approaching the asset management and disposition strategy for those assets? And would you consider sale of those assets more quickly?

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Glenn J. Rufrano, VEREIT, Inc. - CEO & Director [15]

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We agree with you. Our multiple is lower than we think our competition is. And when -- I just would break it up and office could be a component. Just as Jeremy asked about leverage, we have people who ask about our leverage. I don't think our leverage is high, but in terms of loading the gun, so you can buy more assets, people would say our leverage could be a little high. Maybe our payout ratio is a little high because of the litigation settlement. So we think there are a few reasons that we are very focused on why our multiple may be a bit lower than others and need to be corrected over time. In terms of the office, we started out about 23%, 24%, if you remember at office, and we set a guideline of 15% to 20% to bring it down to. We've never bought an office building on balance sheet nor will we. We have sold $130 million of office -- $1 billion of office and have tried to make sure we do that at reasonable pricing. We have 12 million square feet and 79 properties in office left on the balance sheet, and we will -- what we expect to show you is proper asset management with our office portfolio. If we can have a larger transaction that has an NAV number that we can agree with, we're not immune to that, but this is not a giveaway. We're not going to give our assets away. We know how to asset manage them. And so we will -- I'll use your words, we will use proper asset management to move towards that lower number. But if we could do something below that number that makes sense, we're certainly open to it.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [16]

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Okay, great. And then on the tenant watch list, I just wondered if you could update us on the typical tenants we're hearing about these days, Art Van, et cetera? And just how your tenant watch list looks in historic context?

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Glenn J. Rufrano, VEREIT, Inc. - CEO & Director [17]

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I think with Paul here, I'm going to throw that over to him. Paul?

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Paul H. McDowell, ARC Advisory Services, LLC - President of Office & Industrial Group [18]

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Okay. Sheila, our watch list has remained reasonably stable over the past few years. So we haven't seen a large impact to our watch list over the past few years. And in fact, it's remained pretty stable over the past few quarters on a weighted lease-adjusted basis of around 2% to 2.5%. So the stuff that you're seeing in the marketplace today, it's not that unusual in the first quarter to see tenants throwing in the towel, and we've seen that a little bit, and there's some high-profile tenants in the market now that people are talking about like Art Van and Krystal. We are lucky that we're very diversified and we have very limited exposure to either one. Our Art Van exposure is 8 properties at 0.6% of rents and Krystal is 37 properties at 0.4% of rents. So we don't have a lot of exposure to the names you're hearing from today.

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Operator [19]

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Our next question will come from Anthony Paolone with JPMorgan.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [20]

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On the -- on that point, I guess, the watch list and credit, your same-store NOI growth is expected to decelerate in 2020. Can you talk about what's behind that?

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Glenn J. Rufrano, VEREIT, Inc. - CEO & Director [21]

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Sure. I'll cover that, Tony. If you go through our same-store, you'll notice that we break it down by each of the 4 components. The major component this year was office. Actually, of the 1.2%, it was almost half of it. And the reason for that was that we had an office tenant in 2018 we did a blend and extend, and we actually gave them free rent for a period of time in '18. And so our '18 same-store suffered because of that. And this year, they came back. They were always in the pool, they had 0 last year or pretty close. This year, they started paying rent after the free rent period was over. So we had a higher number at 1.2%. We believe it will be more stabilized next year, but we're always aware that these blend and extends at any given time can reduce same store. It doesn't mean we're not going to do them because we do them to get more term and we get more NAV. So we're not going to hurt NAV for the sake of same store. We'll just explain it as it comes through.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [22]

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Got it. Understand. So then, is there anything in the 2020 guidance or same-store stats that you're accounting for at this point around, say, in Art Van or Krystal or anything else on the watch list?

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Glenn J. Rufrano, VEREIT, Inc. - CEO & Director [23]

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We would hope everything is in there. We've taken that into consideration.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [24]

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All right. And then on the office exposure, if I look over the next 3 years, it looks like 6% of revenue expires in office. Are those assets with -- coming up on the expiration, are those things that could be sold to help with your weighted average lease term? Or as you reduce office exposure, you have to go for the longer duration stuff? And like -- and are there any large known move-outs in that mix?

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Glenn J. Rufrano, VEREIT, Inc. - CEO & Director [25]

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No, I'll start with a big picture answer, and then I'm going to hand it over to Paul. I mean the office has a weighted average lease term of 4.6 years. And so selling shorter-term office is difficult in terms of maintaining value. We have been working through the assets on an asset management basis to see if we could blend and extend it. It could cost us some rent, it could cost us some TIs. But we think, as of now, that had been the better way to minimize our exposure. When we can sell an asset, for instance, we sold an asset last year in Northrop Grumman, which was -- which actually was an asset to be vacant pretty quickly, but it was in a very good location and at $138 million, we got a very good price. So we're going to take advantage of any situation we can in office, but we do recognize with that lower WALT, it is more difficult. Paul, is there anything?

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Paul H. McDowell, ARC Advisory Services, LLC - President of Office & Industrial Group [26]

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No, I think that covers it pretty well. I'd say, over the next few years, we see our expirations are about 1/3 office, 1/3 retail and 1/3 restaurant and industrial put together. And obviously, we focus very carefully on that. And as Glenn said, we look to extend tenants in place. And when we extend the tenant in place, that hopefully gives us ability to sell that asset into the open market. And we also, as Glenn mentioned, we have some good office buildings that are very valuable without a tenant in place. He mentioned the one in California, we have another one outside Seattle, which we're getting ready to -- which we hope to dispose of during the course of this year. So it's just a sort of a classic blocking and tacking -- blocking and tackling asset management.

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Glenn J. Rufrano, VEREIT, Inc. - CEO & Director [27]

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And another one towards that, Tony, is that it's similar to Sheila's question, if we could find a method for a larger transaction that we felt maintained value, we're certainly open to it.

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Operator [28]

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(Operator Instructions) Our next question will come from Spenser Allaway with Green Street Advisors.

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Spenser Bowes Allaway, Green Street Advisors, LLC, Research Division - Analyst of Retail [29]

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So 2019 was obviously a very robust year just in terms of dispositions. But as you look at the portfolio today, what portion of the remaining portfolio would you say is kind of subject to strategic divestment? Or maybe said differently, how much more pruning would you ideally like to do?

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Michael J. Bartolotta, VEREIT, Inc. - Executive VP & CFO [30]

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In the $250 million to $350 million, that's the portfolio disposition. Outside of that, would be the disposition, Spenser, for the office partnership. So that's outside of it, that $110 million. So that would automatically take down some of our office. So then we have $250 million to $350 million. And in that $250 million to $350 million, it would be primarily office and casual dining and noncore. Those are the 3 categories that are the -- are strategic -- on how we'd like to strategically position the portfolio.

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Spenser Bowes Allaway, Green Street Advisors, LLC, Research Division - Analyst of Retail [31]

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Okay. So 2020 guidance kind of captures everything that you guys would kind of bucket into that strategic divestment, nothing beyond that?

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Michael J. Bartolotta, VEREIT, Inc. - Executive VP & CFO [32]

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No, not at this point. We -- to be fair, we've had strategic investments so far and it's been $5 billion for the last 5 years. So it's been a very big program, and you can see last year was $1.1 billion. So we hope we're minimizing the strategic requirements here. And part of it, as you can see, this year, we sold over $60 million of bank branches. So when we say noncore, within noncore, there may be small strategies that we're looking at.

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Spenser Bowes Allaway, Green Street Advisors, LLC, Research Division - Analyst of Retail [33]

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Okay. And then just in regards to the expected CapEx spend, I think you mentioned somewhere between $30 million and $40 million for the year. Just curious how this fares relative to spend in recent years? And then also, realizing you can't provide commentary probably on each line item, but can you just provide a little color on how you would expect that to be broken out between TIs or maintenance CapEx?

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Glenn J. Rufrano, VEREIT, Inc. - CEO & Director [34]

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The -- I'll hand it over to Paul, but on the big picture, we were $36 million this year. A bit above the $30 million we expected and the range of $30 million to $40 million is our projection for next year. So Paul, just give...

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Paul H. McDowell, ARC Advisory Services, LLC - President of Office & Industrial Group [35]

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Yes, I think it's important to recognize that we've been under-guidance over the past several years. In 2019, we had a variety of positive events that drove CapEx up, primarily in the form of leasing commissions from backfilling some vacant space like the Toys"R"Us box, a shift in tenancy from one of our office buildings from a low investment-grade tenant to an investment-grade tenant at higher rents, all these things we did, as Glenn mentioned before, increased net asset value. So we're willing to spend CapEx if we think that we can increase NAV. The '20 guidance is driven off of trends we saw in '19 with an eye towards our expiration schedule over the next several years, a significant portion of which is office. And I would say, to your question, as maintenance -- as compared to maintenance CapEx for new leasing activity, tenant improvements or LCs, the majority of what we would see -- expect for CapEx in 2020 would be for TIs and LCs associated with new leasing activities at our properties.

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Operator [36]

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This will conclude our question-and-answer session. I would like to turn the conference back over to Glenn Rufrano for any closing remarks.

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Glenn J. Rufrano, VEREIT, Inc. - CEO & Director [37]

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Thanks, everybody, for joining us. We like this format. We're going to keep following them around to help us as we talk through the year, and we look forward to seeing many of you at Citibank next week. Thank you.

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Operator [38]

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The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.