After Glenn Rufrano joined VEREIT Inc. as CEO in April 2015, he and his team went about crafting a four-point plan to reshape the business. In the three years since Rufrano’s arrival, the publicly traded net lease REIT has been able to check off all four of those boxes.
Three of those checked-off accomplishments were selling Cole Capital, manager of a group of public non-traded REITs, for up to $200 million; returning VEREIT’s balance sheet to investment-grade status; and once again declaring dividends.
The fourth accomplishment—culling the REIT’s portfolio to make it more attractive and achieve long-term diversification—has borne plenty of fruit, but remains a work in progress.
In 2017, Phoenix-based VEREIT bought 91 properties for $745.6 million, and sold 137 properties and a parcel of land for $574.9 million. This year, VEREIT is projecting $500 million to $800 million in acquisitions and $300 million to $500 million in dispositions.
At the end of last year, VEREIT had nearly 4,100 properties in its portfolio, with a book value of $14.7 billion.
Thanks to his execution of the four-point plan, one publication last year dubbed Rufrano a “turnaround titan.” The “titan” came aboard after a $23 million accounting scandal tripped up what was then known as American Realty Capital Partners Inc. As part of its fresh start, the REIT rebranded as VEREIT in July 2015.
While Rufrano has righted the ship, so to speak, he’s got to keep carefully navigating the vessel to ensure smooth sailing ahead. Last year, he signed up to head the REIT through 2021.
In a Q&A with NREI, Rufrano explained VEREIT’s acquisition and disposition strategy, including its reduction of office and restaurant assets and its addition of retail and industrial assets.
This Q&A has been edited for length, style and clarity.
NREI: How difficult is it these days to find properties that are worthy of acquiring?
Glenn Rufrano: If you’ve listened to any of my conference calls, I always have these conversations with the analysts who talk about acquisitions. I always say to them, “I really dislike acquisition guidance.” The reason for that is not that we may or may not find appropriate acquisitions; it’s that you don’t want to be put in a box by the public market where you have to acquire. You only acquire if it makes sense to acquire.
I was amazed when I got here and looked at the amount of trading that goes on in single-tenant assets. We have retail, restaurants, industrial and office. If you look at the four property types that we acquire, we had $22 billion worth of acquisitions offered to us in 2017, which is an extraordinarily large amount.
When you look at the size of much of what we acquire, we buy assets from $10 million to $40 million, because that’s what single-tenant properties are about. If you were to classify those $22 billion worth of acquisitions, they would be a combination of pure leases that trade on the market, sale-leasebacks and forward commitments. Those three forms of investments for office, retail, industrial and restaurants comprised $22 billion last year, so it’s quite a big market.
We’re not worried about having acquisition volume this year. We believe there’ll be a big trading market. The question is pricing and whether it’s the property type that fits the portfolio construct that we’re creating. Those are the two primary conditions that have to be met before we acquire.
NREI: What types of property are more on your radar this year than they have been in the past?
Glenn Rufrano: With restaurants, we’re at about 20 percent of our income and we like where we are. We’re not increasing our restaurant portfolio. Our office portfolio was 25 percent of our income in 2015. We wanted it to be 20 percent or less. Because office exceeded our defined diversification metrics, we’ve been reducing office. In the last quarter, we were down to 19.6 percent; we finally broke 20 percent for the first time. We’ll continue to cull office a bit. Because we’re not buying office and restaurant, that leaves retail and industrial as the two primary forms of acquisition that we will be looking for in 2018.
NREI: What is it about the office sector that is making you decide to further trim that portfolio?
Glenn Rufrano: When we presented our business plan in 2015, we created what we expected the portfolio to look like over time from a diversification standpoint—40 percent retail, 20 percent restaurants, 15 to 20 percent office, 15 to 20 percent industrial, no tenant more than 5 percent, no industry more than 10 percent, no geography more than 10 percent. We laid out a whole series of metrics that people should look toward in our portfolio over the long term. Those are the diversifiers that have become sacrosanct to us.
Office was at 25 percent, so we’ve been bringing it down. It was purely a diversifying element so that, over time, we wouldn’t have any one property type that would directly affect the proportions in our portfolio.
We have rent increases built into our property types. We’ve run five-year projections just like everybody else in our business would have. We took into consideration rates of increase as we constructed the portfolio that helped us come up with the ratio of 15 to 20 percent for office. There’s nothing wrong with office. We just don’t want too much of it in our portfolio, just like we don’t want too much too much retail, just like we don’t want too much restaurant, just like we don’t want too much industrial.
NREI: Forty-three percent of your acquisitions last year were industrial. Do you see that pace continuing this year? What is your outlook for industrial?
Glenn Rufrano: Why people like industrial is because, in some cases, it’s the new retail when you look at online distribution, so there’s some demand, and I think that demand is here for a while. There are these legs that, over time, you believe will create demand for industrial.
On the flip side of that, some people are concerned that industrial is very easy to build. When you think about an industrial facility, it’s a bunch of tilt-up walls at 30- to 35-foot heights. If you can find land and the right transportation nodes, you can build it quickly. Will supply come on too quickly and exceed demand? I don’t know if anybody really knows the answer to that. But there will be some markets that will be overbuilt and some markets that will not.
From our standpoint, we see it as an attractive property type in our portfolio. We don’t buy multi-tenant industrial. What we buy is single-tenant industrial, usually with leases that range from 10 to 20 years. Sometimes it’s investment-grade tenants, sometimes it’s not.
For us, industrial fits our triple-net, single-tenant concept very well. It fits our business model, it complements our portfolio of retail, restaurant and office, and, long term, we like the locations and tenancy. We’ll continue, with the appropriate ratio of 15 to 20 percent, to look for industrial. Right now, we’re in the high 16 percent area, so we’re in the lower end of our range, which would cause us to think we could add some more industrial to the portfolio.
NREI: Fifty-seven percent of your acquisitions last year were in retail. Amid the “sky is falling” chatter about retail, what is your strategy in that sector?
Glenn Rufrano: I have historically been involved in owning and developing malls and owning and developing shopping centers. As I sit here today, we own simple single-tenant properties on corners. I really like where I am today. Simple is better, less capital is better, discount retail (like TJ Maxx, HomeGoods and dollar stores) is better. Discount retail may have less online requirements than other forms of retail and, therefore, less cost to get into online. So, we’re looking for tenants who embrace online to whatever extent is necessary and can pay for it.