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

A recently-amended 13D filed with the U.S. Securities and Exchange Commission disclosed that Keith Meister’s Corvex Management LP holds 80.61 million shares of VEREIT Inc. (NYSE:VER), which account for 8.9% of the Real Estate Investment Trust’s outstanding common stock. The public filing also disclosed that the investment firm acquired 7.76 million shares over the past 60 days at prices ranging from $7.90 to $8.68. Moreover, Corvex Management has amassed 9.96 million shares of the REIT since the previous 13D filed with the SEC on March 9, 2015.

Corvex Management LP is an activist hedge fund established by Keith Meister back in 2010, with $1 billion in financial support from reputable investor George Soros. Meister, a former protégé of Carl Icahn, has managed to grow his investment firm quite rapidly, amassing over $8 billion in assets under management. The New York-based investment firm takes on an opportunistic and event-driven approach to investing, and also seeks for opportunities in special situations and distressed securities. According to its most recent 13F filing, Corvex Management LP oversees an equity portfolio with a market value of $9.14 billion.

Professional investors like Keith Meister spend considerable time and money conducting due diligence on each company they invest in, which makes them the perfect investors to emulate. However, we also know that the returns of hedge funds on the whole have not been good for several years, underperforming the market. We analyzed the historical stock picks of these investors and our research revealed that the small-cap picks of these funds performed far better than their large-cap picks, which is where most of their money is invested and why their performances as a whole have been poor. Why pay fees to invest in both the best and worst ideas of a particular hedge fund when you can simply mimic the best ideas of the best fund managers on your own? A portfolio consisting of the 15 most popular small-cap stock picks among the funds we track has returned more than 118% and beaten the market by more than 60 percentage points since the end of August 2012 (see more details).

Let’s now turn our full attention to VEREIT Inc. (NYSE:VER), a publicly owned REIT, which owns and manages a well-diversified portfolio of assets, including retail, restaurant, office, and industrial real estate. Prior to proceeding to a more in-depth analysis on the company’s operations, opportunities and risks, let’s take a quick look at its major shareholders. Aside from Corvex Managemen, Larry Robbins’ Glenview Capital and Matthew Halbower’s Pentwater Capital Management are two other major shareholders of VEREIT from our database. The former holds 18.63 million shares, while the latter owns a 12.40 million share-stake as of June 30.

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