VEREIT (NYSE:VER) is still a company in turnaround mode. There's no question that the fire has been put out, but it still has a lot to do before management can say the job is done. Which is why the recent announcement of a $500 million debt sale has implications beyond the obvious.
Half a billion
The fist question you have to ask when a real estate investment trust, or REIT, goes looking for money is, "What's it going to do with the cash?" For many REITs the answer would be make acquisitions. But VEREIT isn't your typical REIT right now. To summarize a far more complex story, VEREIT was cobbled together through a quick series of large acquisitions that led to an accounting issue, dividend suspension (it's paying dividends again), and a management shake up. The shares nosedived after the accounting issue and are still relatively weak compared to similarly-sized peers.
That's fair because VEREIT is still working through the hangover left from its acquisition binge. The goals today are to strengthen the property portfolio, strengthen the balance sheet, and turn around the company's Cole Capital business, which creates non-traded REITs. So far the new management team has done a good job of selling off non-core assets and using the proceeds to pay off debt. And Cole's business has been steadily improving, too.
But this debt issue is more than just a routine move along the recovery path.
Not just a bond
On the one hand, the proceeds from the bond sale are going to be used, in conjunction with other sources of cash, to pay off debt maturing in 2017. The debt being sold matures in 2026, so it should provide a lot of breathing room for the REIT. The interest rate is likely to be higher than the 2% on the 2017 debt, but the maturity extension is the big goal. None of this is surprising or different from what any other REIT, or company, would be looking to do if it had some near term debt to roll over.
However, this is the first time that VEREIT is going to the capital markets for money since the accounting issue hit. It's worth noting that one of the big problems for Cole has been that the accounting issue, though not related to Cole at all, was a serious blow to VEREIT's reputation. Indeed, the question mark hovering over VEREIT's reputation is why a lot of key brokers have yet to agree to start reselling Cole's products. Thus this debt sale has much bigger implications.
So the first implication, obviously, is the ability to push out maturities. That should help strengthen VEREIT's balance sheet and that bodes well for its credit ratings and how investors view the company's financial health. But how well received the debt issue is will be far more telling, in my opinion. For VEREIT's owned portfolio it will be a litmus test to see if it has regained investor trust. That's important because the REIT will eventually need to begin tapping the public markets if it hopes to switch back into growth mode. That said, VEREIT isn't shifting toward growth yet, so there's still time before this becomes a notable issue.
But for Cole, a successful debt sale could help things right away. That's because it might spur brokers who dropped Cole to rethink that choice. Trust is an important part of the non-traded REIT market. Once brokers began to question Cole's parent, the sales process became that much harder. If investors show that they're beginning to believe in VEREIT again, even though the turnaround isn't complete yet, Cole's story becomes an easier sales pitch.
Let's hope for the best
So on the one hand, the debt issue is just VEREIT doing what it has to do to position itself for a brighter long-term future. And it's one more step along the path that management has laid out, proving once again that the current team follows through on its goals. But the market's reaction to the debt issue is going to be the bigger statement, with implications for VEREIT and Cole's future. It will be very interesting to see what Mr. Market thinks...
Disclosure: I am/we are long VER.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.