VEREIT CEO Glenn Rufrano Rufrano says VEREIT has surpassed many of the metrics in the business plan the company mapped out in 2015.

NEW YORK CITY—As 2014 segued into 2015, the net lease REIT then known as American Realty Capital Properties was shaken by revelations of accounting irregularities that led to the resignation of its senior management team. Two years ago, the company began re-establishing its credibility in the marketplace with a new CEO (Glenn Rufrano) and new name (VEREIT).

Since then, the company has bested many of the objectives its board and management team set out in ’15. A recent milestone was its recognition with investment-grade ratings from Standard & Poor’s and Fitch Ratings—and earlier this month, Moody’s Investors Services upgraded VEREIT’s senior unsecured rating to Baa3. Moody’s cited the REIT’s “significant progress in achieving several of the goals set forth in its 2015 business plan, which among other objectives included strengthening the balance sheet, improving its credit metrics and enhancing the quality of the real estate portfolio.” S&P upgraded the REIT to BBB- last week, matching the prior rating of its debt. sat down with Rufrano at our offices in Lower Manhattan to discuss the progress Rufrano and his team have made since he joined the company in April of ’15. An edited version of that conversation follows below. It’s been about two years since you came aboard. Give us an update on the past year and also the longer-term progress you and the team have made.

Glenn Rufrano: I’ll start off with the second point, which is recreating the head of the company, because you need to do that before you can proceed. We put together a virtually new board in the first year, with very good people. We had seven directors, including myself, and of the seven, six were brand new. In the first quarter of this year, there was a change: Bruce Frank, our legacy director, who did a yeoman’s job, stepped off the board, and we named Richard Lieb and Mary Hogan Preusse. So now we have an eight-member board who can really help management navigate.

The management team was established in 2015, with some people from the inside and some from the outside. From the inside, Paul McDowell, who was the CEO of CapLease, one of the companies that was bought—is our COO, and very knowledgable in net lease. Our CIO, Tom Roberts, came from Cole Capital, where he bought $11.5 billion of assets that we have. Bill Miller, who joined around the time I did, is now in charge of Cole Capital, our investment management arm. We brought in a new general counsel, Lauren Goldberg, who was general counsel of Revlon and prior to that was part of the SEC litigation team for the Southern District of New York. Then the last person who came on was Mike Bartolotta, our CFO. Mike was the CFO of Cushman & Wakefield when I was the CEO there.

The board and management team put together a business plan in 2015, which was announced on our second-quarter call in August. We had four goals; the first was to always make sure the portfolio is well-protected from a diversification standpoint and that it has reasonable growth and income. To do that, we felt we had to cull parts of the portfolio. We identified where we wanted the portfolio to be long-term, in terms of tenant exposure, industry exposure and state exposure, and then the culling process was to get us to that spot. We projected selling between $1.8 billion and $2.2 billion of real estate in various categories by the end of 2016. We actually sold $2.6 billion, at very good prices and well within our cap rate range, so our portfolio is in very good shape.

The second important goal was related to our balance sheet. We had too much debt, from the standpoint of net debt to EBITDA, and we said we were going to take that down from between seven andeight to between six and seven. By the end of ’16, our net debt to EBITDA was 5.7; our fixed-rate coverage charge was 2.8, better than the 2.2 we had aimed for; our unencumbered assets were 66% of the portfolio, better than the 60% we had identified; and our debt maturity was four-and-a-half years. We were shooting for five years, so we were a little light there.

We got those metrics in order and exceeded on most of them, for two very important reasons. We had $1.3 billion of bonds maturing in February 2017, and we decided we didn’t want to wait too long. So we went to the bond markets in June of ’16 and raised $1 billion in bonds at favorable rates and arranged for a $300-million bank loan, and we paid off that $1.3 billion in July. The second issue was that we found a very favorable equity market in August of last year, and we issued $700 million of equity. With the combination of the bond offering pushing up our maturity, the equity paying down our debt and getting all of our metrics in order, we actually achieved, by the end of ’16, investment-grade ratings on our bonds from S&P and Fitch. We did not expect to get there that quickly.

The third goal was related to re-establishing Cole Capital, which had been tarnished by some of the issues in 2014—not that Cole had anything to do with it, but when our financials were pulled, many of the broker-dealers suspended sales. In ’15, we were not selling a lot of equity; in ’16, we raised $487 million of equity, which is a remarkable turnaround that Cole achieved. It had no market share in ’15 and 10% in ’16, and we believe we’re well on our way to re-establishing that brand.

The final goal was to establish a sustainable dividend. We had no dividend in place when I started, which is very unusual for a REIT. After a lot of thought and analysis, we established a dividend of 55 cents. We wanted to make sure that the market understood it was a long-term, sustainable dividend, and in my mind there’s no doubt about that now. So as we look at the four goals, we feel good about how we ended ’16. At the end of ’14 and in the early part of ’15, the public markets’ confidence in the company certainly was shaken. Where does that stand today?

Rufrano: When I joined, the company had started to regain credibility because the financials were restated. But our job was to maintain and increase credibility. The board was important, the management team was important, our business plan and implementing that plan were important. I believe we are now fully credible, in part because we’re new: new board, new management team, new name, new stock exchange—we went to the New York Stock Exchange from Nasdaq. So the company is not the same. The good news is that the assets are the same, and they were good assets to begin with. As the company is making new acquisitions, it stands to reason that the criteria you’re using are considerably different from those used to assemble the portfolio which has been culled.

Rufrano: In 2017, we still have a disposition program. We’ve given guidance that we’re looking to sell $450 million to $600 million—far less than we had, but it’s important to achieve diversification goals. One of those goals is to not have a tenant represent more than 5% of revenue; we have only one, Red Lobster. It was 12% of income when I got here; it’s now to 8.2%. It’s very good real estate and a very good sponsor, but we want to be very strict in our criteria of diversification. The other diversifier is that we want our portfolio to be 15% to 20% industrial, 15% to 20% office and 60% retail. Office is 21.8%.

So we’re continuing our dispositions, but for the first time, in the fourth quarter of ’16, VEREIT acquired assets. We acquired $80 million. Looking into ’17, our guidance is to acquire between $450 million and $600 million, similar to what we’re disposing. Our acquisition program won’t include office or restaurants. We will be looking to acquire industrial and off-price, necessity and service retail. Looking ahead into ’17, one word that is tossed around a lot lately is “uncertainty.” Where do you see potential headwinds, and conversely where do you see opportunities?

Rufrano: At the NYU REIT symposium last month, one word that was used a great deal was “disruptors.” I look at it as “change.” Change has always occurred; in my 40 years in the business, there has never been a period where there wasn’t some change. I categorize it in two buckets: cyclical change and secular change. A lot of the uncertainties you’re referring to in real estate come from secular change. E-commerce is clearly a secular change in retail, and there are other secular changes. In office, you have companies moving from 250 square feet per person to 150 or 125. In industrial, you have building requirements mandated by e-commerce that are very different from those of distribution centers.

The point I would make is: are you in the business to take advantage of the cyclical and secular changes, or are you in the business to protect yourself against those cyclical and secular changes? As a public REIT, we’re the latter. By our nature, our strategy is well-positioned real estate with a sizable, diversified portfolios to minimize those uncertainties and distractors.