Nicholas Schorsch and others who built American Realty Capital Properties (ARCP) — along with investors and employees — are, needless to say, having a pretty challenging holiday season.
But that doesn’t mean the nontraded REIT industry deserves coal in its stocking, says Kevin Gannon, president and managing director of Robert A. Stanger, which specializes in real estate investment banking.
“This is a challenging time for ARCP, and we have followed them closely for years,” Gannon said in an interview with ThinkAdvisor.
ARCP reported that it had accounting errors of $23 million in late October. Several executives then left the firm, and now one is accusing former-Chairman Schorsch of knowing about the errors that were pinned on her and ex-CFO Brian Block in a lawsuit filed on Dec. 18 in New York.
“This seems to be isolated to one entity,” said Gannon. “Many companies [in this business] have pretty good reputations.” What nontraded REITs do is fairly “basic,” he explains. “They collect rent and pay expenses.”
While the accounting can get complicated at times, “There are accountants and regulators everywhere,” added Gannon. “Maybe the company was just growing too quickly and got ahead of its skis.”
In ARCP’s case, the fallout — in terms of sales and lawsuits — is likely to be extensive, experts say. In November, for instance, equity raised from investors at ARCP’s Cole Capital unit fell to $19.7 million, a drop of 81% from October, according to Robert A. Stanger; and American Realty Capital-branded real estate products raised $154.3 million, a 58% decline from October.
Members of the Investment Program Association, which represents nontraded REITs, “believe the complexity of the ARCP situation is really unique to that entity,” CEO Kevin Hogan said in an interview. “We do not see it as systemic to the rest of the industry … it’s a company-specific issue.”
Other nontraded REIT-industry watchers, however, see the situation more negatively.
“Whether the allegations are true or not, investors should appreciate the meaning and value of diversification,” said Brad Thomas, editor of “The Intelligent REIT Investor,” in an interview.