Top Investor Can’t Stop Buying Shares of This REIT; Should You Follow Him?

VEREIT Inc. (NYSE:VER) has entered and will surely continue to involve in sale-leaseback transactions, which is a key part of its business. Simply put, the company purchases properties and then leases them back to the seller, which seems like a win-win situation for both parties. On one hand, the seller eases up some capital, while VEREIT acquires a property with a guaranteed tenant that is ready to put the signature on the sale-leaseback contract. However, sale-leasebacks might be quite risky for VEREIT in the event of bankruptcy of a tenant. The company acknowledged in one its public filings with the SEC that a sale-leaseback might be re-characterized as either a financing or a joint venture if a tenant goes bankrupt. Therefore, if the sale-leaseback is considered as a financing venture, VEREIT may not be seen as the owner of the property. On the other hand, if the sale-leaseback is seen as a joint venture instead, VEREIT could be considered as a co-venturer and held liable for the debts of the tenant. Of course, each type of businesses has its risk and challenges, but VEREIT’s business model appears relatively strong, allowing it to keep a very high occupancy rate, which in turn leads to stable cash flow streams.

We will now take a brief look at the company’s financial results for the second quarter in order to get a general picture on the profitability and cash flow potential of its operations. VEREIT reported revenue of $392.7 million for the quarter, compared to $382.2 million posted a year earlier. At the same time, the REIT’s net loss widened year-over-year to $108.7 million from $56.6 million. It is also worth mentioning that the company used $884.0 million of its cash to reduce its outstanding debt. As of June 30, the company’s aggregate indebtedness adds up to $9.3 billion, which seems to be quite high. Reportedly, VEREIT intends to sell roughly $1 billion in assets next year so as to cut down on the high amount of debt, which could eventually lead to a higher credit rating.

Even though VEREIT’s activities and operations are accompanied by numerous risks, including the termination its lease contracts or default of some tenants, a potential capital spending in this REIT might represent a stable investment with steady cash dividend streams. Given that the freshly-amended 13D filed by Keith Meister’s Corvex Management outlines that VEREIT continues to be an attractive investment opportunity, some risk-averse investors might actually consider investing in this stock.

Disclosure: None