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Edited Transcript of VER earnings conference call or presentation 23-Feb-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 VEREIT Inc Earnings Call

New York Feb 23, 2017 (Thomson StreetEvents) -- Edited Transcript of Vereit Inc earnings conference call or presentation Thursday, February 23, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bonni Rosen

Vereit Inc - Director of IR

* Glenn Rufrano

Vereit Inc - CEO

* Mike Bartolotta

Vereit Inc - EVP and CFO

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Conference Call Participants

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* Andrew Rosivach

Goldman Sachs - Analyst

* Anthony Paolone

JPMorgan - Analyst

* Vineet Khanna

Capital One Securities - Analyst

* Michael Knott

Green Street Advisors - Analyst

* Peter Lunenburg

JMP Securities - Analyst

* Joshua Dennerlein

Bank of America - Analyst

* Haendel St. Juste

Mizuho Securities - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the Vereit 2016 fourth-quarter and year-end earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Bonni Rosen, Director of Investor Relations.

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Bonni Rosen, Vereit Inc - Director of IR [2]

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Thank you. Thank you for joining us today for the Vereit 2016 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 12 PM Eastern time today. Dial-in for the replay is 1-877-344-7529 with a conformation code of 10099562.

Before I turn the call over to Glenn I would like to remind everyone that certain statements in this earnings and business update call, which are not historical facts, will be forward looking. Various actual results may differ materially from these forward looking statements and factors that could cause these differences are detailed in our SEC fillings 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 quarterly and year-end financial results. Glenn will then discuss 2017 guidance and highlights of our diversified portfolio. We will conclude today's call by opening the line for questions.

Glenn?

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Glenn Rufrano, Vereit Inc - CEO [3]

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Thanks, Bonni. And thanks for joining our call today.

In 2016 we substantially achieved the core components of our business plan that we outlined in August 2015 and in certain areas exceeded expectations. Let me begin by highlighting a few accomplishments. AFFO per diluted share for the year was $0.78, within our guidance range of $0.75 to $0.78. We completed $1.14 billion of dispositions for a total of nearly $2.6 billion since 2015, exceeding the top end of our original guidance by $400 million. Our balance sheet is stronger reflected by a reduction in our net debt to normalized EBITDA to 5.7 times, better than the projected range of 6 to 7 and we received investment grade rating on our debt from both S&P and Fitch.

Cole Capital finished the year ranked number 4 for non listed REIT capital raised up from 13 in 2015. These achievements allowed us to go on the offense during the fourth quarter acquiring $80 million of assets on a leverage neutral basis. We're pleased with our operations for the year with occupancy ending at 98.3%. Same store rent was up 0.1% reduced from 0.8% due to the impact of the Ovation bankruptcy.

In 2016 we had 4.9 million square feet of leasing activity of which 3.6 million square feet were early renewals with tenants including T-Mobile, Abbott Labs, Del Monte, and Netflix. The remaining 1.3 million square feet were 2016 vacancies or expirations. Of the early renewals, we recaptured 96% of the prior rents which will have a short term effect on same store. For the 2016 vacancy and expirations we recaptured 99% of prior rent. Approximately 75% of this recent activity was office and industrial.

Our portfolio diversification was further enhanced as he implemented our culling process. At year end property type diversification was 62.6% retail, 15.6% industrial, and 21.8% office. We continue to focus on our goal of reducing office exposure below 20%. Additionally, our exposure to Red Lobster has declined [3.2%] and we will continue the disposition process.

Our top 10 tenants represent 30.2%, which is among the lowest concentration in the industry. $395 million of assets we sold in the fourth quarter bring the total for 2016 to $1.14 billion at an average cash cap rate of 6.9%. This surpassed the high end of our $800 billion to $1 billion guidance range for the year and is in addition to the $1.4 billion of asset sales in 2015. During the past two years we made significant progress with strategic dispositions, primarily across our targeted categories. $123 million of retail joint ventures, $681 million of flat lease properties, $674 million of Red Lobster sales, $725 million of office properties, and $325 million of non-core assets.

With our balance sheet metrics in line we have been recycling assets and creating internal capital to fortify and diversify our portfolio through retail and industrial acquisitions. Our retail focus is on the off-price sector including traditional and specialty grocers, select sporting goods, beauty aids, furniture, pet supplies, arts and crafts, home-improvement and fitness. For instance, during the quarter we acquired seven properties which included tenants in the above categories. Our industrial focus is on location, physical functionality, and appropriate tenancies represented by the Best Buy distribution center we acquired last week.

During the fourth quarter Cole Capital raised $67.5 million of new equity, an average of $22.5 million a month. For the year the Cole REITs raise $487 million, just below are $500 million guidance in a year when the industry's projected capital raise was down nearly 55%. Cole was able to increase its market share to 10.8% resulting in a number four year-end sponsor ranking according to Standard.

New equity for January was $21 million which continues to reflect the initial ramp up of CCIT III. Cole made significant progress on the broker-dealer front in 2016 and into early 2017, signing [80] new product selling agreements including 16 for CCIT III. Additionally, Cetera Financial Group, which was a top three producer in 2014, recently began selling Cole products.

Before Mike reviews our financial results let me provide a brief update on litigation. The court held its status conference in January during which it resolved a number of outstanding issues related to document production [instead of] schedule for the parties to file briefs addressing the issue of class certification. A follow-on conference is schedule with the court on May 16. Additional details regarding pending litigations can be found in our 10-K filed today.

Let me now turn the call over to Mike.

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Mike Bartolotta, Vereit Inc - EVP and CFO [4]

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Thanks Glenn. Thank you all for joining us today.

We finished the year end on plan, achieving AFFO of $0.78 per diluted share with $0.17 coming from the fourth quarter. During the quarter consolidated revenue was $351.9 million, slightly below Q3 revenue of $362.9 million as we continue to successfully implement our disposition program. Net loss for the fourth quarter was $118.2 million versus net income of $30.2 million for the third quarter, representing a difference of $148.4 million. However, included in Q4 net loss was a number of non-operational charges including $120.9 million of Cole Capital goodwill impairment charge, $10.2 million relating to the increased write-off of program development cost, and $5.2 million of compensation related charges. All of which resulted from the slower than originally anticipated capital raise for Cole this year.

In addition, as we noted in our last call in Q3 we had a net gain on the disposition of property sold for that quarter of $28.1 million, whereas in Q4 property sold resulted in a minor loss of [$0.2 million] or a negative quarter to quarter change of $28.3 million. It should be noted for the full year of 2016 the gain on dispositions of real estate sold and held for sale assets is $45.5 million.

Lastly, both Q4 tax expense and interest expense were more favorable than Q3 by $6.7 million and $5.3 million, respectively. If you were to adjust for all these items you would see a positive net income essentially the same as Q3.

While Cole has done a good job re-establishing its brand and raising capital the industry environment has been difficult to predict, leading us to reduce projections which resulted in the 2016 goodwill impairment charge.

FFO per diluted share for the fourth quarter was $0.05 as compared to $0.19 for the third quarter due to slightly lower revenue, the goodwill impairment charge, the increase in program development cost write-offs just discussed, and the dilutive effects of our recent equity offering in August. AFFO was $0.17 per diluted share as compared to $0.20 in the third quarter primarily due to slightly lower revenue, the reversal of the $9.2 million tax benefit received last quarter driven by the closing of [CCI2's] offering, the increased write-off for [program] development costs (technical difficulty) to my usual charges included in G&A, which we will discuss next, partially offset by reduced interest expense.

G&A for the quarter was $44.4 million versus $29.8 million in the third quarter representing an increase of $14.6 million, due primarily to the $15.4 million of non-operational items previously noted. Real estate G&A was $13.3 million for the quarter, up $1.2 million from the $12.1 million in the prior quarter mostly due to normal year-end activity. Cole Capital G&A was $31.1 million, up $13.4 million from $17.7 million in Q3, primarily due to the $10.1 million increased write-off for program development costs and the $5.2 million of compensation-related charges.

Recurring CapEx was $16.6 million for the year, which was lower than their anticipated range of $20 million to $25 million. In part, some of that capital spend will occur in 2017 and an additional amount will fall into the year due to the lease renewals that Glenn mentioned earlier. Given these factors, our 2007 estimate for recurring CapEx is $30 million to $35 million, which during the two year period would average approximately $20 million to $25 million.

Cost related to the matters arising from the audit committee investigation which are included in litigation, merger and other non-routine costs were approximately $10.8 million for the quarter. This brings the total legal cost related to these matters to $24.2 million for the year excluding any insurance proceeds, which was lower than our last guidance range of $30 million to $35 million. Our estimate for the 2017 gross legal cost is $45 million to $50 million, excluding any insurance proceeds.

Turning to our fourth quarter real estate activity, we sold 78 properties for $394.9 million at an average cash cap rate of 7.4% and a pre-goodwill allocation gain of $17.7 million which is reduced to a loss of approximately $0.1 million after goodwill. Subsequent to the quarter, the company disposed of 19 properties for an aggregate sales price of $62.3 million.

Additionally, during the fourth quarter the company acquired seven properties for $80.2 million and an average cash cap rate of 6.7%. During 2016 the company acquired eight properties for approximately $100.2 million at an average cash cap rate of 6.8%. Subsequent to the quarter the company acquired one property for $46 million. In addition we purchased the fee interest in three properties for $20.2 million in which we already owned the lease holds.

As of December 31, our net to debt EBITDA remained at 5.7 times, same as last quarter. Our fixed charge coverage ratio was a healthy 2.9 times and our net debt to gross real estate investment ratio was just under 40%, our un-encumbered asset ratio was 66%, and our weighted average duration of our debt was 4.4 years.

We have $420.2 million of first mortgages and other secure debt coming due in 2017, of which $125.4 million was repaid during 2016. As the remainder comes due we use available cash flow and our revolving line of credit and expect to eventually term out the new exposures with unsecured debt. As a reminder we have essentially no floating debt.

During 2016 we significantly transformed our capital structure and put ourselves in a safe and stable position going forward. We brought our net debt down from $8 billion to $6.1 billion. We decreased the net debt to EBITDA 7 times to 5.7 times. We issued $1 billion of unsecured senior notes and $702.5 million of equity to prepay the bonds that were expiring in February 2017, and partially paid down our term loan as well. We lengthened our debt duration and created a well staggered maturity schedule.

We increased our liquidity and we now have full capacity on a revolving line of credit of $2.3 billion. And we established a continuous equity program or ATM with an aggregate gross sales price of up to $250 million available through September 2019. These accomplishments along with overall implementation of the business plan resulted in investment grade ratings much sooner than originally anticipated.

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

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Glenn Rufrano, Vereit Inc - CEO [5]

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Thanks Mike. Let me turn to guidance for 2017.

AFFO per share between $0.70 and $0.73, which includes $0.02 to $0.03 for Cole Capital, dispositions and acquisitions each totaling $450 million to $600 million at cap rates ranging from 6.5% to 7.5% with dispositions more front end loaded and acquisitions backend loaded. Net debt to EBITDA in the target range of 5.7% to 6.0%, real estate operations with average occupancy approximating 98%, and same store rental growth approximating 0.5%. Cole Capital equity raised between $400 million and $500 million and $800 million to $1 billion of acquisitions on behalf of the Cole REITs.

Diversification is one of our portfolio core attributes and we will continue strengthening it through the year. At approximately 63% retail is our largest property type which includes restaurants at 24%. Excluding restaurants, retail has 6 of our top 10 tenants as well as a high occupancy at 99.7%. The largest retail component is discount at 7.8%, exposures concentrated in Family Dollar, Dollar General and also includes Walmart and T.J. Maxx. Pharmacy, comprised of 7.2%, is primarily Walgreens and CVS.

Grocery is 4.9% and our exposure includes Albertsons, Kroger, Publix and Stop & Shop. Home and garden is 4.4% with the largest tenants being Tractor Supply, Home Depot, and Lowe's. The other retail sectors are approximately 2% or less. As you can see our retail has strong credits, 47% of income from investment grade tenants.

The past year I've seen a number of retailer issues, some financial, others structural. Focusing on those, let's look at what's not in our portfolio. Traditional department stores such as Penney, Macy's, and Sears. We do have Kohl's, which is investment grade and is less than 1%.

In apparel we have no exposure to Aeropostale, the Limited, or American Eagle and we have only two Rue 21s. With regard to sporting goods our portfolio does not include Sports Authority or Eastern Mountain Sports stores, and we have only one Gander Mountain. If we look at electronics, which is less than 1%, our primary tenant is investment grade rated Best Buy. Combined HHGregg and Conn's are only 0.3%.

Casual dining comprises 15.6% of the portfolio. We have many major tenants in that roster. Red Lobster which has performed well represents 8.2%, of the remainder Applebee's is next at 1.6%. We also have brand names such as Olive Garden, Cracker Barrel, and Outback all under 1%.

Nearly 100% of our restaurant leases are triple net, more than 90% have contractual rental growth and average lease term is 14 years. We have provided an update on occupancy costs for retail and restaurant tenants in our supplemental. You will see they are well within the range of affordability.

As we've outlined today our focus on Vereit is provide a safe balance sheet with a stable diversified and growing portfolio. We believe this is an attractive proposition for a regional portion of the real estate investment market. We will continue to monitor the economic environment and make sure we are on the right course but our foundation and strategy are both solidly in place.

In closing, on behalf of the board I would like to thank Bruce Frank for his instrumental role and contributions to the company. And we are pleased to welcome Mary Hogan Preusse and Richard Lieb to the Board.

With that, I will open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

The first question comes from Andrew Rosivach with Goldman Sachs. Please go ahead.

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Andrew Rosivach, Goldman Sachs - Analyst [2]

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Good morning, guys. Glenn, thanks for your comment on retail. There's a rumor that you know a lot about the industry. I am just curious, we've always had at least this kind of bias of lower cap rates and more exposure to retails potentially being positive.

One of your own goals is to reduce the office exposure. I'm just curious given the pressures that we were having in the industry, could that potentially change? Especially what you guys are looking at doing on the buy side.

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Glenn Rufrano, Vereit Inc - CEO [3]

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That's a real good question, Andy. In many meetings, I have been asked about the three property types. I'm going to call some younger people to come in and say office out of favor and retail is in favor. My answer has generally been that may be right today, but if you are older like I am, you would realize at times office is in favor and out of favor, industrial is in favor and out of favor, and retail is in favor and out of favor.

We are moving in one of those directions as we speak. We clearly had a bit more retailer problem and rightfully so caused by the Internet. We are seeing some structural changes and also some financial changes. That's natural. It is going to happen. I am not sure any of us are smart enough to know over long periods of time which of these sectors will be in favor and out of favor. But I do know if we diversify and we have good real estate in those sectors, we have a better stronger portfolio.

To your point, on retail we did spend more time on retail because of what has been going on in the business. I have spent a lot of time, it's very important to understand our credits. As a simple answer, Andy, we think the three property types and proportions that we have make sense. We are not smart enough to know at any given time what's in favor and not in favor. If we have good fundamental real estate and good diversification, we will have a long-term stable portfolio.

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Andrew Rosivach, Goldman Sachs - Analyst [4]

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Understood. Just as a follow-up, within that lease are broader concerns about retail starting to get priced into higher retail cap rates?

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Glenn Rufrano, Vereit Inc - CEO [5]

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They may be, although I'm not sure we've seen them yet. I think the quality differences are very important in that equation. I personally still would believe in high-quality retail, whether it's a mall, shopping center, or single tenant.

If the market looked at it that way, I don't think there would be much difference. What I do believe is happening is that if you start talking at B and certainly C levels, there's a larger divergence than we've seen in the past.

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Andrew Rosivach, Goldman Sachs - Analyst [6]

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Got it. Thank you, sir.

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Operator [7]

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Our next question comes from Anthony Paolone with JPMorgan. Please go ahead.

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Anthony Paolone, JPMorgan - Analyst [8]

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Thanks, good morning. As you work to do acquisitions in 2017, where do you see the best values right now? Where do you see the most compelling buys? Whether it's investment grade, non-investment grade, property type or certain type of tenant industry?

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Glenn Rufrano, Vereit Inc - CEO [9]

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Anthony, if we break down our thoughts on acquisitions because we are lightening up an office, we will not be in the acquisition mode. Certainly, for our office now, and our restaurant exposure, certainly in casual dining, mostly because Red Lobster puts in the position where we would not for, diversification purposes, be buying restaurants.

If we eliminate those two, we are back to retail, in many of the areas that I just talked about, and industrial. If I stay with industrial, we did just purchase, we closed last week, a 1 million square foot Best Buy industrial distribution plan North of Columbus at a 7.1% cap rate.

We believe we can find some industrial, although hard, which can provide value. There we have to look to credit, but also the physical nature of the plant and location. If we can find the right fundamentals, we believe there is some value in industrial, although it is not going to be easy to find.

In the retail front, as we just talked about, we are in the off-price sector. We are in the necessity shopping sector. We do believe there is some retail that could provide value. It could be in primary or secondary markets as long as the credit and the demographics fit the merchandising of the tenant.

We are going to be as concerned about whether that tenant can merchandise probably to the demographics as we are, whether it's a primary market or a secondary market, and in those categories that I went through, starting with grocer and select sports, pets, beauty, and so forth, we do believe there is some value in there that we can take advantage of. Especially with the acquisition arms that we have and have had over the years where we believe we have very good ability to look at the market.

A big part of your question is can you access the market. We had $21.6 billion of opportunities in 2016 brought to us, we closed $760 million. With those opportunities and in the categories we see, we do believe we can find value.

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Anthony Paolone, JPMorgan - Analyst [10]

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Thanks. In guidance is there much contemplated as it relates to the balance sheet? I don't know if you have a lot to do this year, but anything that you assume there?

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Mike Bartolotta, Vereit Inc - EVP and CFO [11]

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No, the balance sheet in 2017, Anthony, it's Mike, we only have about a little less than $300 million of mortgages that are going to turn. We will put those mortgages as they turn onto our line. Eventually when we have the right size of number we will take it out in an unsecured bond. We will start to look at, we have some converts that are coming due in February 2018. We will start to look at those potentially sometime later in the year.

We also have about $500 million of our term debt that converts in 2018 but has a one-year extension. What we have right now some optionality to look at some things a little bit longer out than one year. We will be looking at them. We can act or not act depending on what the market does.

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Anthony Paolone, JPMorgan - Analyst [12]

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Thanks. Last couple questions on Cole, I need to get your capital raising goals. It's almost doubling the pace you guys saw in January. How comfortable are you with that, what gives you comfort on that front?

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Glenn Rufrano, Vereit Inc - CEO [13]

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In part, Anthony, we don't have CCIT III on a track yet, and we do expect that will come on. As I mentioned, we had 16 new selling agreements for CCIT III that just came on at the end of this last year. They should start picking us up this year.

We also are excited about having Cetera back on. Cetera has over 7,000 advisors and they were in the top three with Cole in 2014, and have been a great platform for us. They just came on. We actually sold our first product with them two days ago.

The combination of CCIT III, Cetera, and we are continuing to work with some of the larger broker-dealer platforms. It gives us some comfort that we can increase throughput through this year. Variable is the market and we do not forget about that. Singer is projecting $5.8 billion this year from the $4.5 billion last year, Blackstone has a good part of that.

There is some increase expected. Some increase in the market, some increase in our advisors coming on, and CCIT III gives us a comfort that we can reach those goals.

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Anthony Paolone, JPMorgan - Analyst [14]

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Thanks. Just last one on Cole, longer term, any change in terms of how you think about that business fitting in with the rest of the Company, especially you mentioned Blackstone, it seems like others would like to be in that space over time. Does it make you change your thoughts on where to go with the business?

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Glenn Rufrano, Vereit Inc - CEO [15]

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We continue to start with making it as valuable as possible. We are making some good headway there. I wish the market was better. When you have a better oiled machine in a better market, it's easier to make a decision on value, and whether or not it's value to the public company and its stock price is adequate.

We think we have a little more room in 2017 to improve Cole especially by bringing on some larger platforms. We may be in a position later on or at some point this year to understand how the public market is valuing it relative to us. Which will be a very important element in terms of how we see ourselves long term.

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Anthony Paolone, JPMorgan - Analyst [16]

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Great. Thanks for the time.

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Glenn Rufrano, Vereit Inc - CEO [17]

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Thank you.

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Operator [18]

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Our next question is from Vineet Khanna with Capital One Securities. Please go ahead.

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Vineet Khanna, Capital One Securities - Analyst [19]

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Hello, folks, good morning. Thanks for taking my question. Going on that line of thought for Cole, can you tell us -- Blackstone is obviously going to the wire house is that something that would be of interest to Cole as you sort of look to expand?

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Glenn Rufrano, Vereit Inc - CEO [20]

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It certainly would be. What Blackstone has done is really very good, we hope for the whole industry, of having wire houses sell their product. We would like to piggyback on that, very frankly, that would be good for us. And we continue to work with the wire houses as we do the larger broker dealers to help us sell more product over time.

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Vineet Khanna, Capital One Securities - Analyst [21]

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Last one on Cole here, have you seen any impact from the uncertainty that's come up around the fiduciary rules. Clearly you were able to bring Cetera on board. Have there been any other sort of issues with the broker dealers as a result of questions around fiduciary rule?

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Glenn Rufrano, Vereit Inc - CEO [22]

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I think we'd all would agree the fiduciary rule is a good fit. People should be fiduciaries -- the problem has been the definition of a fiduciary. What has been happening is in light of poor definition, in my view, from the DOL on that, the broker dealers themselves have been creating definitions that they believe work.

That's going to be very helpful this year. For instance if you have a Ineb product with no commission that's an easy choice. But T shares under certain circumstances now are being considered applicable to that rule.

It's working its way through the system as we speak. Larger companies have come up with their own internal proposals on how to meet that rule. As those decisions get made, it will help us move forward in 2017.

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Vineet Khanna, Capital One Securities - Analyst [23]

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Shifting to the real estate side of things, on the acquisition front in 2017, is there any build to suit contemplated. I know you have cap lease stuff that you guys acquired, is that something that's under consideration at this point?

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Glenn Rufrano, Vereit Inc - CEO [24]

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I'm sorry did you say disposition or acquisition?

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Vineet Khanna, Capital One Securities - Analyst [25]

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Acquisition as it pertains to build to suits.

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Glenn Rufrano, Vereit Inc - CEO [26]

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We have been looking at a number of build to suits, especially in the industrial area. Internally we have a construction group, it's a small construction group, so we can monitor construction over time, and we can be a pure take out from a construction loan. Or we can actually fund along the way, and with our internal group and perhaps an outside consultant, make sure we are funding adequately for the ultimate take-out.

As I speak to Paul and Tom about those -- that business, we can see that build to suit is a 50 basis points, in many cases, increase over normal cap rates. If we can minimize the risk to get there it's a very good way for us to move forward. We're looking at a number of those transactions right now.

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Vineet Khanna, Capital One Securities - Analyst [27]

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Last for me, thanks for the update on the litigation. What are the prospects for settlement before the May meeting date?

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Glenn Rufrano, Vereit Inc - CEO [28]

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We have our General Counsel in the room who can't give you an answer. I don't know. I'm sorry. It's one of those things I'd have to kill you if I knew. Realistically, I don't mean to make joke of it, it's very important. It's not something we can have a discussion on.

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Vineet Khanna, Capital One Securities - Analyst [29]

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Okay. I appreciate the consideration. Thanks for your time.

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Operator [30]

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Our next question is from Michael Knott with Green Street Advisors. Please go ahead.

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Michael Knott, Green Street Advisors - Analyst [31]

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Just a question for you on your anticipated acquisition, disposition guidance numbers for 2017, just curious if you feel like those are light, particularly on one side or the other? Maybe can you just give a little more color on your comment on the front-end loaded and back-end loaded with respect to those, and the thought process behind that?

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Glenn Rufrano, Vereit Inc - CEO [32]

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Sure. I will start with dispositions. Just as we've been focused on dispositions, Michael, as you know, the dispositions we are targeting in 2017 are office to get to the 20% below number and Red Lobster. It's a very focused approach with those two.

We will always have some that we believe putting capital into would not make sense. We will have those categories, so it's very specific. We feel pretty good about the numbers $450 million to $600 million surrounding those specific categories.

In terms of acquisitions, I think we've have this conversation. In 17 years as a CEO, I've never given acquisition guidance, but in our business, which is very acquisition oriented, that doesn't seem to make much sense. We spent a good amount of time looking at our -- you see we have some acquisitions to date. And looking at our pipeline and where we are in terms of what is of intent and so forth. We felt we should come up with a number that made sense. We think the $450 million to $600 million makes sense.

Could it be more? If we find appropriate acquisitions it could be more. We never want to be put in a box. Like we are a fund that has three years to invest and if you don't invest the money you lose it. We do not want to be that. We are not a fund that has to invest. We are a public company that invests wisely for their shareholders. We are going to continue with that psyche.

In terms of the front-end loaded issue with dispositions, we have been disposing for two years. We have dispositions that we believe will close early on in the year. Those are factual relationships. In terms of acquisitions, we just want to be cautious so that we have the appropriate time to make the right decision.

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Michael Knott, Green Street Advisors - Analyst [33]

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Okay. That's really helpful, thanks. Just curious, maybe broadly if you're seeing any changes in terms of cap rates out there? Maybe more so on the disposition side for you since that's where you been more focused. Curious what you are seeing and any specific comments you can share with respect to how the market is evaluating Red Lobster pricing today, and that opportunity?

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Glenn Rufrano, Vereit Inc - CEO [34]

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In terms of the cap rate, I've always felt equity follows debt. If I take two points in time, I think we've had some big differences here. At the end of last year right after the election, rates went up as we all know.

If we looked at the absolute rate of increase in the bond market there wasn't much. Spreads came in, in the last half of the year. Matter of fact, in the last two months of the year, there were some large deals done. Simon, Kimco did some very large bond transactions, at very good absolute rates so spreads came in.

Mortgage rates did not come in at the end of last year. The mortgage market was at the end of its one-year cycle, and spreads didn't come in at all. If you tried to get a mortgage in the last two months of last year, you got stuck with another 50 to 70 bps more. I believe -- our teams believe, because we've had this conversation, it's already changed this year.

The bond market is still good, there is capital there, but the mortgage in the market now has new allocations. The spreads in the mark to market have absolutely come in the last couple of months. Given that, we have not seen a lot of change in cap rates, currently, that would have the equity being led by the debt.

On top of that, there seems to be a pretty good flow of capital, at this time -- these are generalities, we do not see big differences in cap rate. If I tried to dissect them the way you've asked, larger deals, portfolio deals could have more of a discount a little higher cap rate than smaller deals. But across the board we are seeing general flatness.

Then in terms of Red Lobster not much change. I will tell you that a big trend here that will be important is the 1031. In fact, just talking to some brokers the other day, the 1031 players seem to be running right now to make deals. Perhaps ahead of what could be a change in the tax code next year.

We have not seen much change -- the basic deals are 5.5% to 6%. We spread about 1 point in our joint venture with Golden Gate. Our effective rates have been close to 7%.

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Michael Knott, Green Street Advisors - Analyst [35]

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Thanks a lot.

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Operator [36]

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Our next question comes from Mitch Germain with JMP Securities. Please go ahead.

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Peter Lunenburg, JMP Securities - Analyst [37]

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Hello, guys, it's Peter on for Mitch. Just curious could you guys quantify the Red Lobster exposure today and what is left in the forward sale agreements, and maybe what you guys think gets done this year versus 2018?

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Glenn Rufrano, Vereit Inc - CEO [38]

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In terms of the dispositions we closed about $246 million last year. We think we will be somewhere in the $200 million to $250 million range this year. That's how we would quantify what we think we could do. As of now, the effective cap rate to us of 7% looks realistic for the $200 million to $250 million for this year. That was the primary question? Did I miss the second question?

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Peter Lunenburg, JMP Securities - Analyst [39]

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Nope. That was it. What do you think gets done this year and what would be left for 2018?

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Glenn Rufrano, Vereit Inc - CEO [40]

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If we get to where we want to get to this year we should be in the 6%, 6.5% range, somewhere like that, which would mean we may have a little left. We like 5% as a goal, we could have some left in 2018, but we don't think a lot.

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Peter Lunenburg, JMP Securities - Analyst [41]

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Thanks so much.

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Operator [42]

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Our next question is from Joshua Dennerlein with Bank of America. Please go ahead.

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Joshua Dennerlein, Bank of America - Analyst [43]

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I'm curious on how you think about the double net leases in your portfolio? Is that something that would fall under your disposition bucket, or something you might move away from over time as you expand your acquisitions?

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Glenn Rufrano, Vereit Inc - CEO [44]

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It's always a question of risk reward. When you buy an asset that is triple net there is a risk that is different from double net Double net means in many cases roofs, parking lots, and so forth. We are fully equipped as a full-service real estate operating company to know and understand roofs and parking lots.

We do not have a concern relative to having to buy or sell something that is double net. That is not going to fall into the equation because we know how to manage it. We just want to make sure that the risk-return relationship makes sense. As you know it is far different, a double net is far different than running a shopping center or a mall or a multifamily property.

We are very comfortable with double net. We will look at both. It's a question of the risk return of whether or not we are being paid for that risk, and whether we can manage that risk, which we believe we can do.

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Joshua Dennerlein, Bank of America - Analyst [45]

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Thanks. On the CM leasehold consolidation that you did on three properties in 4Q, is there more of those in the portfolio, how do the economics of that work? Did you guys own land before it and now you own everything?

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Glenn Rufrano, Vereit Inc - CEO [46]

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These are the three properties we owned the leasehold subject to a ground lease payment. The ground lessor came to us and asked if we'd consider buying the fee. I wish we had a lot of them. We'd love that. We don't have many more.

What we did here was bought the fees on the three properties at a 5.5% cap rate. That allowed us to merge the fee and leasehold interest and in our view create value. And more importantly, two of those three properties were properties in which we renegotiated long-term leases, one with Del Monte and one with Nestle. We were able to buy the fee, negotiate a long-term lease, merge the two estates, and create significant value for those properties.

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Joshua Dennerlein, Bank of America - Analyst [47]

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Okay, thanks. One question on the same-store rent guidance of 0.5%, does that include the Ovation bankruptcy still or anything holding that back?

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Glenn Rufrano, Vereit Inc - CEO [48]

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That includes the Ovation bankruptcy.

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Joshua Dennerlein, Bank of America - Analyst [49]

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Do you have that number without the Ovation bankruptcy?

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Glenn Rufrano, Vereit Inc - CEO [50]

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It would be a bit higher, but not dramatically. It will only affect it in the first quarter.

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Joshua Dennerlein, Bank of America - Analyst [51]

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Okay. Thank you.

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Operator [52]

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Our next question is from Haendel St. Juste with Mizuho. Please go ahead.

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Haendel St. Juste, Mizuho Securities - Analyst [53]

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Glenn, first off on the balance sheet, you guys have done a remarkable job bringing down your debt to EBITDA, bringing down your leverage, you're now sitting at 5.7 net debt to EBITDA. Just curious on your inclination to incur a bit more leverage for some acquisition, given the improvement in the balance sheet, but also given with the stock price is?

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Glenn Rufrano, Vereit Inc - CEO [54]

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We've reflected a target this year of 5.7% to 6% and where we think we'd like to stay with that ratio. Mike, tell us -- I think we're BBB. What do you think?

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Mike Bartolotta, Vereit Inc - EVP and CFO [55]

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I think we are BBB. Obviously two out of the three have rated us as basically the equivalent of a BBB negative. And I think over the passage of time, hopefully a short time, we will get to BBB. But I think if we're there, we are where we need to be. I would not see us taking on significantly more debt. We will do things at a leverage-neutral basis going forward. Staying at the BBB level.

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Haendel St. Juste, Mizuho Securities - Analyst [56]

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Okay.

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Glenn Rufrano, Vereit Inc - CEO [57]

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Part of an earlier question was the matching of disposition and acquisitions. We are creating our own internal capital to match the acquisition program. Selling assets that will provide us better diversification and buying assets to strengthen the portfolio. In that process, we do not have to increase it.

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Haendel St. Juste, Mizuho Securities - Analyst [58]

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I appreciate that. Maybe a bit more discussion around the retail tenant watch list today, beyond the more obvious HH Gregg and Gander, any other tenants incrementally on that list, and maybe you could share a few names that you are perhaps concerned about?

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Glenn Rufrano, Vereit Inc - CEO [59]

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I have it in front of me, we do it each quarter. We're about, on a probability weighted basis, about 1.8% in terms of where we see rent issues, but it's really scattered. The purpose of actually reviewing many of our retailers, who I think have some of the issues that we've all been talking about earlier, is we don't have that many, we mentioned HH Gregg, we have six stores it's very small. We have Cons, we have two stores, we have one Gander Mountain. We talked about Logan's, we have seven Logan's, but we renegotiated those deals, so they are all set.

We have six Ruby Tuesday's. Ruby Tuesday's is not in bankruptcy but there is some issues with them, but they are a very small piece of us. We don't have a large concentration here. It's a bunch of smaller credits, which we care a lot about because we want to make sure we get every nickel. I can't tell you there's somebody on our list that is vacant.

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Haendel St. Juste, Mizuho Securities - Analyst [60]

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Fair enough. One last one, the last couple years, I'm curious now that you stand here today thinking about where you're taking the Company next, you have laid out some goals for reduction to certain asset types, tenants, balance sheets, just curious how do you see yourself perhaps solving the valuation gap that still exists between you and some of your peers, beyond the litigation overhang the stock has. Perhaps you could share some thoughts on strategically the next few milestones that you are thinking of. Where are you taking this Company in the next couple years that we should be thinking about?

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Glenn Rufrano, Vereit Inc - CEO [61]

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As you can see what we have been focusing on is portfolio, portfolio, portfolio, and making sure that it's a well-diversified portfolio. And balance sheet, balance sheet, balance sheet. We continue to work on those two. I would expect given the right portfolio, and we will be there soon, and the balance sheet we have that we should be in a position which is really a key position for us to start growing AFFO.

I think our guidance this year is reasonable at $0.70 to $0.73. It reflects what we had to do in the balance sheet to get to investment grade and we're I would hope and expect that the GAAP closes and will continue to close as the market sees us in a position to grow AFFO. We believe this is the year that we should stabilize ourselves.

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Haendel St. Juste, Mizuho Securities - Analyst [62]

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Got it. Thank you.

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Operator [63]

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This concludes 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 Rufrano, Vereit Inc - CEO [64]

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We thank everybody for joining us today and look forward to your thoughts and comments. Talk to you soon. Bye now.

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Operator [65]

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