Vereit: Cheap For A Reason

Summary

• At first glance, VEREIT appears to be undervalued or close to it.
• Surely, the business offers opportunity to its investors, but there's a downside to it as well.
• Despite appropriate leverage, the company's track record in recent years leaves a lot to complain about and adjust for.
• Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »

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One of the larger REITs on the market today is VEREIT (VER). With a market capitalization of $9.2 billion, VEREIT is a major player that investors should not overlook. The company owns properties that are suitable for retail, restaurants, industrial firms, and more. However, the one thing that unifies them is the emphasis on making sure the real estate is geared towards single tenants only. This makes the company a truly niche prospect for investors to consider. And what is exciting, at first glance, is that shares do not look to be poorly priced. In fact, they appear to be trading at quite reasonable levels.

Leverage is also in check, and the overall fundamental condition of the company appears sound. Having said that, though, the company does have a long history of seeing annual declines in revenue, and it is evident that some of its cash flow metrics have been on the decline well before COVID-19 reared its ugly head. This creates a rather mixed picture, but when you consider everything taken together, I would make the case that shares of the company are probably more or less fairly valued.

A look at VEREIT

VEREIT has a large physical footprint. According to management, the company owns 3,831 properties. Of these, 2,071 properties are retail in nature. Major clients on the retail side include companies like Dollar Tree (DLTR) and its subsidiary, Family Dollar, as well as other companies like Walgreens Boots Alliance (WBA) and CVS Health (CVS). Collectively, these properties work out to 34.2 million square feet. This means that they account for 38.2% of the company's overall 89.5 million square feet.

*Taken from VEREIT

In addition, VEREIT owns 1,521 restaurants. Clients here include Red Lobster and Bloomin’ Brands (BLMN). As might be expected, these restaurants have a much smaller physical footprint than the company's retail space is due. Combined, they account for 7 million square feet. Next, the business owns 158 industrial properties, which are being leased out to clients like FedEx (FDX) and Goodyear Tire & Rubber (GT).

Though their number is small, they actually have the largest physical footprint out of all of the property types that VEREIT owns, coming out to 37.5 million square feet. And last but not least, the company owns 71 office properties. These work out to 10.8 million square feet, catering to organizations like the General Service Administration, Merrill Lynch, and others.

*Taken from VEREIT

Given how many properties that VEREIT owns across the 49 states it operates in, you might expect its tenants to individually account for a very small portion of the company's business. However, this is true only to an extent. As an example, its top 10 tenants account for 27% of its annualized base rent. And its top 50 account for an impressive 58.7%. Its remaining tenants, numbering 589 in all, make up the other 41.3% of the company's rent. The largest tenant that it has appears to be Red Lobster, which accounts for 4.8% of the company's rent. It is worth mentioning that the weighted-average time remaining on its leases is about 8.4 years.

In recent years, the picture for VEREIT has been mixed. As an example, consider revenue. Back in 2016, revenue totaled $1.34 billion. This declined almost every year, eventually dropping to $1.16 billion in 2020. Although the COVID-19 pandemic affected most companies in most industries, the impact on VEREIT was fairly limited. In the fourth quarter of last year, the company collected 98% of the rent that was due to it. This compares to its low point in the second quarter of 87%.

Today, rent collections are up to 99%, and the company expects to collect nearly $12 million in deferral repayments throughout this year. In all, the company boasts a 98% occupancy rate for its assets. All of this suggests that the bulk of the decline from 2019 to 2020, a decline of 6.2%, was driven more by structural problems with the business than pain caused by the pandemic.

Just as the revenue picture could be better, so too could its cash flow figures. They aren't bad, but the trend is questionable. After peaking in 2016 at nearly $798 million, the figure dropped to $699 million by 2020. Admittedly, operating cash flow was better than the -$107.6 million seen in 2019, but that year should be considered an outlier. FFO, or funds from operations, have followed a similar path. This figure peaked at $653 million in 2017, and by 2020 it dropped to $578 million. On an adjusted basis, this figure's decline has been steady and consistent, dropping from $741 million in 2016 to $678 million in 2020. The same kind of consistency can be seen when looking at EBITDA. this figure dropped from $1.09 billion in 2016 to just under $987 million in 2020.

It does appear, with 2021 underway, that management does have plans to improve the firm. Their goal for the year is to engage in acquisitions totaling between $1 billion and $1.3 billion. This will be funded, in part, by between $250 million and $350 million in asset dispositions. Also, for the year, if we take the midpoint of expectations as an appropriate forecast, management believes that FFO will recover to $737 million, while its adjusted figure will recover to $744 million.

Pricing a company like VEREIT is very difficult, because it is hard to know if its annual shrinkage has really stopped. If we assume that it will improve from here, the picture could look fairly decent, but it is an added risk. If we assume that this is the case, then the business is trading at a forward price to FFO multiple of 12.5. And its price to AFFO multiple is only marginally lower at 12.4. This compares to multiples of 16, and 13, respectively if we use 2020’s financial figures. On a price to operating cash flow basis, the company is trading at a multiple of 13.2. And on an EV to EBITDA basis, the multiple is 14.8.

To put this all in perspective, I decided to compare VEREIT to the five highest-rated REITs similar to it as rated by Seeking Alpha’s Quant platform. On a price to operating cash flow basis, the companies ranged from a low multiple of 8.2, to a high one of 23.2. Only one of the five firms was priced lower than VEREIT. I did the same thing with the EV to EBITDA multiple. This leaves 5 firms ranged from a low of 16.4 to a high of 24.5. This makes all of them more expensive than our prospect. Another bonus to consider is that leverage at this company is not outrageous. In fact, the net leverage ratio of the business today is 5.4.

Takeaway

Based on all of the data provided, shares of VEREIT appear quite reasonably priced. In most circumstances, I would make the case that the firm might even be undervalued. However, the picture needs to account for the continuous shrinking of revenue and the mixed profitability metrics of the firm over time. Even with its net leverage ratio where it is, it probably is more or less fairly valued. If management is accurate and 2021 marks a turnaround for the firm, that picture could change. However, that is a bet that some investors may not feel comfortable making.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.