When Glenn Rufrano was tapped to lead VEREIT, Inc.’s (NYSE: VER) forerunner, American Realty Capital Properties, Inc. (ARCP), in March 2015, the veteran real estate executive brought with him a range of expertise in dealing with companies facing complex situations.
He was going to need all of that experience as he set out to put the net lease REIT on a new course following the disclosure of accounting irregularities at ARCP in the fourth quarter of 2014. Those developments led to a complete management shake-up at ARCP and the eventual appointment of Rufrano.
As he took up the helm at VEREIT, Rufrano saw parallels to what he had faced when leading New Plan Excel Realty Trust, Inc., Centro Global Property Group, and Cushman & Wakefield, Inc. All three companies had undergone major structural adjustments that included shedding assets, repositioning and changing senior management.
REIT magazine spoke with Rufrano about the tasks he faces in implementing a new business platform and changing the organizational culture of the net lease REIT.
REIT: How have your past leadership positions prepared you for your current role?
GLENN RUFRANO: To answer that I’ll have to go back to 2000, when I joined as CEO of New Plan Excel Realty Trust Inc., a company that had gone through a merger in 1998. It turned out not to be a very good merger for a series of reasons. I started that position with a large decline in the stock from $26 to as low as $11 and some real uncertainty regarding the operating business and senior management.
We reshaped ourselves, sold well over a third of our assets, focused on retail and built what I think was one of the better shopping center companies. In 2007, we sold to Centro Properties Group, an Australian company.
Centro wanted to merge their U.S. operations with those of New Plan, and I agreed to stay on for a year to help them do that. By the end of 2007, however, Centro found itself with debt issues, and they asked me to be CEO of the parent company, headquartered in Melbourne. Over a two-year period we created a three-year stabilization plan that allowed the company to continue to operate. So, again, a bit of a freefall that the company was in, but we were able to stabilize the situation.
Then, in 2010, I became global CEO of Cushman & Wakefield Inc., the world’s largest privately held commercial real estate services company. It was a great brand name, but needed to organize itself more efficiently.
These three positions had characteristics that were similar to VEREIT: companies coming together that needed to be rationalized, senior management teams that needed new leadership and business plans that had to be implemented with discipline.
REIT: What have been your immediate priorities since taking the helm at VEREIT?
RUFRANO: The initial priorities were set in the first week of April. We had to create a credible corporate governance program and a business plan, so that the direction of the company was understood.
In terms of corporate governance, in September, we put in place a virtually new board. That same week, we announced changes in senior management. We earlier presented our business plan, Foundation for Growth, with its four basic pillars:
- Culling our portfolio;
- Bringing our investment management arm, Cole Capital, back to its brand value;
- Moving our balance sheet metrics toward investment-grade; and
- Beginning a sustainable dividend.
Changing the name of the company was also high on my list of priorities. VEREIT was chosen because it combines veritas, the Latin word meaning “truth,” and REIT, the industry in which we strive to be a respected leader.
Family: Wife, Mary; daughter, Lori, a doctor; son, Gary, a director at Clarion Partners.
Education: BA, Rutgers; MS – Management and Real Estate, Florida International University.
Community/Professional Activities:Board of New Alternatives for Children, a not-for-profit health and social services agency whose exclusive mission is to serve children with medical disabilities and/or chronic illnesses and their families. Trustee of ICSC and ULI, and a member of PREA. Board of Directors of Ventas. Advisory boards of NYU (Schack) Real Estate Institute and Baruch College.
Hobbies: Fishing, scuba diving.
Currently Reading: “Doomed to Succeed” by Dennis Ross.
Favorite Vacation Spot: Walker’s Cay, Bahamas.
REIT: How about your longer-term objectives?
RUFRANO: They very much have to do with the first three elements of the business plan.
Longer term, we want to enhance our portfolio. We believe Cole Capital has the ability to increase its revenue generation for the company. In terms of the balance sheet, moving toward an investment-grade rating is our longer-term strategic initiative, and the way we’ll do that is by culling assets and reducing debt.
REIT: Can you talk more about the culling strategy?
RUFRANO: The portfolio culling is intended to enhance the portfolio by providing a better risk-adjusted return for our capital and to provide diversification. Those are the two guiding lights. In terms of achieving that, we have four segments that we will cull from: non-controlled joint ventures, flat leases that have shown no growth for many years, restaurants and non-core assets.
We have a high concentration of restaurants, and a good part of that is because of the Red Lobster portfolio. It has represented 12 percent of our income stream, but we just reduced that by 1 percent with the recent transaction (in which VEREIT sold a $204 million pool of Red Lobster properties to Golden Gate Capital.)
We have said we plan to cull $1.8 billion to $2.2 billion through the end of 2016. Once we do that, we absolutely believe we will enhance the portfolio going forward. In terms of progress, as of early November 2015, we have sold off $1.2 billion in assets.
REIT: How do you plan to enhance VEREIT’s existing portfolio?
RUFRANO: We have almost 4,600 properties and 100 million square feet on the balance sheet and we manage all that ourselves. We have property management and leasing teams who run those properties, and then we have asset management folks who are continuously analyzing those properties to determine what else we can do to increase rents and occupancy and increase and maintain value.
But we also want to be looking ahead, not only at occupancy and rents, but at the credit quality of our tenants. Credit is a very important part of what we do. Just to give you an example, earlier this year, we identified an office building in Phoenix where our asset management team thought the tenant was losing credit and we were potentially at risk. We sold that property, and about a month later, there was a credit reduction for the tenant. That’s the type of enhancement we want.
REIT: Do you have an ideal mix in mind for the portfolio?
RUFRANO: We like the diversification that the three property types of office, retail and industrial present, and we also like the fact that when we start buying assets on the balance sheet, we have optionality and sourcing. We’d like the retail component to be between 60 percent and 70 percent and 15 percent to 20 percent each for office and industrial.
REIT: How would you describe market fundamentals at this time?
RUFRANO: Fundamentals in the market are pretty good for real estate owners. Even with GDP growth of 2 percent to 2.5 percent, there’s been generally good demand for office and industrial. As importantly, we also have tempered supply.
There are always analogies to baseball, and in my last earnings call I said fundamentals are in the sixth or seventh inning. We’re in reasonable shape and we have some pricing power as a landlord.
In terms of cap-rate compression, we’re probably in the eighth inning, maybe approaching the ninth. There’s still a lot of capital looking to acquire U.S. assets. We believe cap rates for assets in the $3 million to $10 million range are continuing to go lower, although cap rate compression for larger assets seems to have stopped.
REIT: What role will Cole Capital play within VEREIT? How will you go about restoring investor trust?
RUFRANO: The investors who have invested in Cole Capital funds certainly do have trust in Cole Capital, as they have performed very well over the last 10 years. The investor trust we are talking about concerns the VEREIT investors who are looking at Cole Capital as their asset and want to know and understand the value of that asset and its income reliability.
It had very good income reliability until the accounting irregularity last year, and the parent company had its financials pulled. Many of the broker-dealers had to suspend selling Cole products. It had nothing to do with their financials, but rather the parent’s financials, so that’s where the restoration of investor confidence comes from.
The financials are back in place, and we are out with Cole meeting broker dealers and getting more and more of them to sell Cole products on their platforms. We’ve made very good progress and we raised $100 million of equity in the last quarter, and that was 14 percent higher than the quarter before.
REIT: Is there a particular size you would like VEREIT to achieve?
RUFRANO: If we complete our culling program, we’ll have about $18 billion in assets by the end of 2016. I think that’s a reasonable size because what we are, in addition to being a net lease REIT, is a finance company. We want to be able to acquire assets at accretive prices and to do that we need a competitive cost of capital.
If we have a relatively large base, it gives us the ability to spread our acquisition capability among large and small assets across the country. Size allows us to provide diversification across the portfolio, and the more sourcing optionality we have, the better off we will be and can grow.
We’ll see if there’s a larger size that makes sense, but we’d be comfortable in the $17 billion to $18 billion size right now.
REIT: Are there any misperceptions about VEREIT that you find yourself having to explain?
RUFRANO: Many investors who just look at the basic statistics would see that VEREIT in its old name, ARCP, had $2 billion of assets in the summer of 2013, then $20 billion by the following summer. They say, “Holy mackerel, how can you grow that fast and really have control of your assets?”
This dramatic change was not as stressful it sounds. During that period there were three major portfolios bought. Cole accounted for $11 billion of the $20 billion and had a very good real estate infrastructure and team that came along with it. Another portfolio was Cap Lease, which about $3 billion, as well as a $2 billion portfolio of restaurants from General Electric.
When you look at the $18 billion portfolio increase, $16 billion came from those three companies that brought really good people and infrastructure. It was easier to assimilate that size than it looks on the surface.
There’s also this question mark in people’s minds: How can you possibly run a company that grew so quickly without the senior people? Well, we do have senior people embedded. Our chief operating officer comes from Cap Lease, and our chief investment officer comes from Cole. Once people see and feel that, they realize that the size of the portfolio really isn’t as difficult to understand as it looks on the surface.
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