Following American Realty Capital Properties' (NYSE:VER) accounting debacle and the resignation of CEO Kay and Chairman Schorsch, the company has been without permanent figures at the top since December 2014.
That changed last Tuesday when ARCP announced Glenn Rufrano would be taking over as CEO, and with more than 30 years of industry expertise, this is a giant leap in the right direction.
However, despite hiring a CEO and owning one of the strongest and most diverse portfolios of real estate in the REIT stratosphere, there are still a few issues that need to be addressed before I would recommend diving in.
1. Develop a clear vision for the future
In the company's press release announcing his appointment, Rufrano suggested, "ARCP is a young company, grown rapidly, which now requires a sound business path."
As a long-term investor, I am betting on management's ability to follow through on a vision, so before I considering buying I need more detail on what Refrano's "sound business plan" includes. ARCP is expecting to release full-year 2014 results on March 31st, and I am assuming this is where investors will get their first glimpse into Rufrano's strategy.
There are ongoing government investigations into ARCP, as well as lawsuits that are in progress, and I am going to be gauging how the company is managing this, and if it can put a timetable on how long it expects it to last. Depending on whether this process takes months or over a year will dramatically change when investors can start expecting a reliable return.
Also, with Rufrano being in his mid-60s and ARCP's comments referencing his "ability to lead companies through complex situations," suggests Rufrano was hired strictly to help turnaround the business, and not as a long-term CEO. If so, I will be looking for the strategy to be simple, long-term focused, and adaptable for the next CEO.
2. Fix the balance sheet
The second half of Rufrano's comment touched on another of my chief concerns: "I look forward to meeting the management team [...] and reviewing the details of the balance sheet."
As you can see in the chart below, more than 55% of the company's debt is maturing over the next four years. This is compared to just 40% for competitor Realty Income.
If ARCP cannot refinance its debt, it would leave the company with a massive cash obligation -- $4.6 billion due between 2017 and 2018. Moreover, if interest rate rise over the next few years, even if ARCP is able to refinance, it will likely be at less favorable rates, and this would increase its borrowing costs.
The other issue is liquidity, and whether you think of it as ammunition to buy new properties, or a financing cushion to thwart off unexpected expenses, liquidity is the lifeblood of any company. ARCP currently has $616 million of available funds, which covers 6% of future debt obligations, and this is compared to $1.3 billion, or 20% of obligations, for Realty Income.
These issues are manageable -- selling assets and paying down debt is one possible solution -- but before I buy, I would like to see ARCP's balance sheet gravitate toward Realty Income's. That means less shorter-term debt as a percentage of total debt, and available liquidity over $1 billion.
3. Keep this from happening again
My final concern is the most important, and that is: How will the company make sure this does not happen again?
To ARCP's credit, I think the company has done a nice job handling what is, and will continue to be, a difficult situation. Here's a brief recap:
- Parted ways with former management
- Restated earnings dating back to 2011
- Retained advisory firm to improve internal controls
- Implementing new processes for equity-based compensation
- Hired a new CEO
As Warren Buffett has said, "It take 20 years to build a reputation and five minutes to ruin it." So, while addressing these issues is important, restoring investor trust is going to take time.
When will it be time to buy?
Over the next few months, if ARCP develops and clearly explains a strategy that is long-term focused and make some meaningful adjustments to its balance sheet, I would consider building a small position at that point, which I would slowly increase over time as my faith in the company grows.
ARCP's stock price will unquestionably be higher by the time I would feel comfortable buying, but I think you need to be long-term greedy and not short-term greedy, and personally, I am more than happy to pay a premium for more clarity and a better positioned business.