VEREIT's (VER +0.00%) image as a trustworthy real estate investment trust, or REIT, was burned to the ground following its accounting scandal in October 2014 -- but the company is making a comeback. Led by its new CEO Glenn Rufrano, VEREIT continued to strengthen its business and rebuild its reputation during 3Q 2015.
Enhancing the portfolio
Rufrano unveiled his business plan in the second quarter and one of the most significant tasks was sorting through the company's $18 billion portfolio of real estate.
Following the initial sorting process, Rufrano decided to sell between $1.8 billion and $2.2 billion worth of properties. In particular, part of those sales would help diversify the portfolio by reducing expose to its top tenant, Red Lobster.
As of September 2015, Red Lobster accounted for 12% of VEREIT's annual rent. This is higher than peer companies Realty Income (O +0.58%), whose top tenant represents 7% of rent, and National Retail Properties (NNN +0.87%), whose top tenant contributes 6%.
Year to date, the company has disposed of $1.2 billion of real estate. Also, following the end of the quarter, VEREIT announced that it has entered into an agreement "to sell a $204 million pool of Red Lobster restaurants," as well as an additional $400 million in 2016. This will certainly reduce exposure and is another example of VEREIT following through on its promises.
Improving the balance sheet
The asset sales also help to improve the balance sheet. Following the accounting scandal, VEREIT lost its investment grade rating, and easy access to lower cost capital along with it. This is something Realty Income and National Retail have going in their favor.
One of the important metrics for earning back an investment grade rating is net debt to EBITDA. This uses a key cash flow measure, like EBITDA, and finds how many years it would take a company to pay down debt if the situation remained constant.
| Company | Net debt to EBITDA |
| VEREIT | 7.3 |
| Realty Income | 5.6 |
| National Retail Properties | 4.7 |
Source: Company filings.
VEREIT uses a "normalized" net debt to EBITDA figure. This pulls out one-time charges like gains and losses on the sale of assets. However, even with the adjustments the company is desperately behind its peers.
The good news is that this is an improvement over the previous quarter's figure of 7.5 times. Also, if the company follows through on its $1.8 billion to $2.2 billion worth of asset sales, Rufrano said: "In that range, we are certainly in the middle of 6 to 7." If VEREIT is able to continue to hammer down its net debt to EBITDA, there is a good chance the company wins back its investment grade rating in 2016.
A sustainable dividend
Finally, Rufrano wanted to get VEREIT's dividend back on track. And, true to form, the company distributed its first dividend since December 2014 this past September.
As you can imagine, VEREIT would like to avoid cutting the dividend again. For this reason, we can expect the company to be cautious. Most REITs judge their ability to shell out dividends based on funds from operation, or FFO -- a key cash flow measure more specifically for REITs. The chart below shows how much of each company's FFO is going toward dividends.
| Company | Payout Ratio |
| VEREIT | 66% |
| Realty Income | 83% |
| National Retail Properties | 75% |
Source: Company filings.
VEREIT's payout is well below Realty Income and National Retail. This should give the company plenty of wiggle room to maintain its dividend and accomplish the mission of paying a sustainable dividend.
Time to buy?
There is still work to be done for VEREIT: Follow through on asset sales, continue to make progress on the balance sheet, and eventually switch gears into growth mode. But for more risk tolerant investors, I think now is a good time to get in.
The company is currently trading at 10 times FFO -- the REIT version of price to earnings. That is a pretty dramatic discount compared to 18 times for Realty Income and 16 times for National Retail. And at this point in the turnaround story, VEREIT has done enough to lead me to believe it will continue to follow though. I'll be adding VEREIT to my Motley Fool CAPs account and you can watch what it does here.
