American Realty Capital Properties (ARCP) had more than just a time change this weekend.
“In the middle of the night, we received a letter from RCS Capital Corp. (RCAP) purporting to terminate the [$700 million] equity purchase agreement, dated Sept. 30, 2014, between RCS and an affiliate of ARCP [Cole Capital],” the company said in a press release early Monday.
RCAP also told American Reality that it had canceled subadvisory deals related to five Cole Capital nontraded REITs, along with wholesale agreements; both arrangements were reached on Oct. 22. (The deals which have been terminated involved Cole Capital’s private-capital management operations, not all of Cole’s nontraded REIT businesses.)
ARCP, which is led by co-founder Chairman Nicholas Schorsch, is a sister company of RCAP; Schorsch is executive chairman of RCS Capital, which includes about 9,700 affiliated independent advisors.
Last week, news broke that American Capital is being investigated by the FBI and federal prosecutors for accounting errors that it intentionally concealed, according to multiple sources. Michael Sodo replaced Brian Block as CFO, while Gavin Brandon became chief accounting officer in place of Lisa McAlister.
One equity analyst believes RCS Capital broke off the deal to protect the interests of its advisors and their clients.
“Cole Capital is a business that deals with creating investment vehicles for retail shareholders. While there’s an ongoing investigation surrounding the integrity of the disclosers, then that business will be impaired,” explained analyst Paul Adornato of BMO Capital in an interview with ThinkAdvisor on Monday.
“Advisors would be probably avoid selling these products and might even be prohibited for selling them by their firms because of legal liability issues,” Adornato added.
RCS Capital’s shares dropped 16% Monday to trade at about $13.80, while ARCP’s declined some 10% to trade near $7.96.
American Realty, of course, is not taking the news lightly.
“As we informed RCS orally and in writing over the weekend, RCS has no right and there is absolutely no basis for RCS to terminate the agreement. Therefore, RCS’s attempt to terminate the agreement constitutes a breach of the agreement,” it explained.
“In addition, we believe that RCS’s unilateral public announcement is a violation of its agreement with ARCP. The independent members of the ARCP Board of Directors and ARCP management are evaluating all alternatives under the agreement and with respect to the Cole Capital business, generally,” the firm said.
Requests for comments from RCS and ARCP as to why their differences were being played out publicly were not returned as of press time.
“As publicly traded entities, each company is compelled to report material changes to their respective shareholder bases,” Adornato explained.
For Schorsch, the latest developments call the rapid expansion of his different businesses into further question.
“Some investors have always been concerned about the involvement of Nicholas Schorsch in many different entities. This most recent situation does not allay concerns,” said the analyst.
Meanwhile, the headaches — and most likely the legal bills — are piling up.
“There’s the investigation underway by the accounting firms, outside investigations from regulatory bodies like [the Securities and Exchange Commission], and it’s conceivable there could be legal cases to resolve,” Adornato said. Plus, news of the FBI’s involvement in the matter “caught everyone off guard,” he explained. “I’ve not ever heard of this before for such a real-estate entity.”
American Realty Capital bought the entire operations of Cole Real Estate Investments in a deal worth $11.2 billion (including debt) a year ago.
“As a result, American Realty Capital Properties will become the largest net lease REIT and the new industry leader,” said Chairman & CEO Schorsch, in a press release at the time. “We benefit by uniting not only two exceptional real estate portfolios, but also by joining forces with Cole’s world-class management team.”
Also last fall, RCS Capital named Larry Roth CEO of Realty Capital Securities (its nontraded REIT broker-dealer and wholesale arm), pulling him away from the AIG-owned Advisor Group, which includes about 6,000 independent broker-dealers.
Several weeks ago, Roth became head of the independent broker-dealer operations, Cetera Financial Group. Bill Dwyer, the former president of LPL Financial’s Independent Advisor Services unit, came out of retirement to take the helm of Realty Capital Securities.
— Check out Schorsch’s ARCP Plunges After Execs Replaced Over Accounting Errors on ThinkAdvisor.