The struggling real estate investment trust formerly known as American Realty Capital Properties wants to sell up to $2.2 billion worth of properties and pay off debts in an attempt to turn its fortunes around, CEO Glenn Rufrano told investors in an earnings call Thursday.
“We now have the opportunity for a fresh start,” Rufrano said, a week after changing the REIT’s name to VEREIT in an apparent attempt to break with the past. Rufrano took the reins at the retail-focused REIT, which had been plagued by an accounting scandal, in April, but hadn’t revealed his strategy until the much-anticipated earnings call.
Analysts had long identified the company’s high debt-to-earnings ratio as a major stumbling block, and Rufrano said he hopes to address the issue by selling assets and reducing leverage.
By the end of 2016, the firm plans to sell $1.8 billion to $2.2 billion worth of properties in non-core markets, non-controlling stakes in joint ventures, restaurants and properties with fixed-rate leases. According to Rufrano, it has already sold or “firmly identified” for sale $960 million in assets. Rufrano hopes to use some of that cash to reduce the debt burden from a comparatively high 7.5 times gross earnings to a ratio between six and seven.
He also announced corporate governance changes, including the appointment of a new board of directors by simple majority. He added that William Stanley, the former interim CEO who is believed to have close ties to former chairman Nicholas Schorsch, will not stand for re-election.
American Realty Capital Properties, which owns retail properties across the United States and was founded by Schorsch in 2011, began its sudden and dramatic fall from grace last October, when the company’s management revealed that its chief financial officer had intentionally overstated its cash flow to mask prior accounting errors. Subsequently, Schorsch and CEO David Kay stepped down, making way for the new leadership under Rufrano.
The fallout from the accounting scandal spooked investors, and VEREIT’s share price has tumbled since last year. Rufrano acknowledged that the firm will spend an estimated $50 million to $55 million on litigation related to the scandal this year.
In June, the company replaced its accounting firm, Grant Thornton, with Deloitte and then brought on a new general counsel: Lauren Goldberg, a former Assistant United States Attorney and chief compliance officer for cosmetics firm Revlon.
Mitchell Germain, an analyst at JMP Securities who tracks VEREIT, said there were no major surprises in Rufrano’s strategy. “He didn’t really take many risks with this plan, but I think the positives outweigh the negatives,” he told The Real Deal.
Germain added that changes to corporate governance and the board will likely be well received by investors, as will be the decision to raise cash through asset sales rather than through issuing new stocks. He added, however, that he would have liked the firm to get rid of its struggling subsidiary, the non-traded REIT manager Cole Capital, and be more aggressive in its asset sales. “This is a seller’s market,” he said. “Why not take advantage of these capital flows?”