If success breeds contempt, Nicholas Schorsch can deal with the contempt.
The outspoken 52-year-old chief executive of American Realty Capital Properties Inc. is a maverick in the nontraded-REIT industry.
This month, for example, he ruffled feathers in the industry when he launched a hostile bid for Cole Credit Property Trust III after it announced plans to merge with Cole Holdings Corp. and go public. Even though Mr. Schorsch eventually withdrew his offer, the move is typical of his “shoot first and ask questions later” approach.
“He's stirring up the pot in the industry, and that's good,” said Jim Ball, principal at Ball Financial Services Co. in Westborough, Mass. “But at times, he seems to be trying to confuse people about what others in the industry are doing. I don't think that's helping the industry.”
Indeed, Mr. Schorsch has stood out not only for his performance — he has rewarded investors handsomely by bringing an unprecedented three deals involving nontraded real estate investment trusts full cycle in the last five years — but for his willingness to denounce his peers in an industry that has drawn criticism from regulators and investor advocates for being opaque, illiquid, conflicted and self-serving.
“We have to make this industry better. I'm a zealot about that,” Mr. Schorsch said in a recent interview at his Park Avenue offices in New York. “It has to be about pay for performance. I tell investors what I'm going to do and then I do it.”
He has undeniably delivered for his investors. In the space of 18 months, Mr. Schorsch has executed three transactions. He helped with the roadshow for Healthcare Trust of America (HTA), a non-traded REIT for which he served as broker-dealer and raised nearly $1 billion. He also listed American Realty Capital Trust (ARCT) for public trading and merged ARCT III with his own American Realty Capital Properties (ARCP). The three deals netted investors internal rates of return of 11%, 14% and 33%, respectively, according to company data. In the meantime, publicly traded shares of ARCP have increased 60% — to $16, from $10 — since last July.
In an industry characterized by long life cycles and broken promises, that kind of performance stands out.
“He came into the industry a blustery, opinionated newcomer,” said Kevin Gannon, president of Robert A. Stanger & Co. Inc., an investment bank focused on real estate. “I was initially cautious about him, but I became a believer a few years back. He makes a lot of noise, but he backs up what he says he's going to do.”
Not surprisingly, Mr. Schorsch has developed a committed following among financial advisers, who are a big source of capital for nontraded-REIT sponsors. Last month alone, Mr. Schorsch attracted an unheard of $1.5 billion in capital, largely for his ARCT IV REIT, which specializes in net-lease properties.
“Last month was staggering,” Mr. Gannon said. “We've never seen anybody do something like that before.” So far this year, Mr. Schorsch has raised $2.4 billion, representing 60% of the total capital raised in the industry, according to data from Stanger.
In 2012, his firm raised more than $3 billion from investors, representing 30% of total funds raised, according to Stanger.
'NOT ROCKET SCIENCE'
For advisers, Mr. Schorsch's performance speaks for itself. “It's not rocket science,” said Jeffrey Schrader, an investment adviser who has about a dozen clients in the American Realty Capital Healthcare Trust. “They do exactly what they say they're going to do, and people are starved for [REIT sponsors] who follow through on what they say.”
Norman Anderson, an adviser with United Planners Financial Services of America, has always been hesitant to invest in nontraded REITs, because they've been “heavy on the fees and light on results.” But he began investing with ARCP in 2010.
“The genius behind this is, they're keeping the deals small and manageable,” he said. “I've been in the business since 1976, and you don't run into many people who have the energy and commitment to what they're doing that [Mr. Schorsch] has.”
Mr. Schorsch definitely has the energy and he clearly enjoys playing the role of industry gadfly. He has criticized his peers relentlessly for paying themselves large fees while investors remain mired in illiquid investments.
“I'm just a guy who's found some white space in an industry that needed changing,” Mr. Schorsch said.
His latest target was Cole Holdings Corp., another big player in the net-lease sector. Mr. Schorsch launched a hostile bid for Cole Credit Property Trust III last month and only recently withdrew the offer after the Cole board rejected it. Cole plans to list the REIT this year.
“We think the better strategy is to let the market value the assets,” said Aaron Halfacre, senior vice president and head of strategic relations at Cole Real Estate Investments.
Schorsch: 'Economic magic'
VEHICLE NEEDS ALIGNMENT
The move by Mr. Schorsch might have been intended to embarrass his competitor for its recent purchase of its external investment manager Cole Holdings Corp. that resulted in a big payday for Cole managers — a common practice in the industry known as internalization.
Mr. Schorsch has railed against internalization as well as the common practice of REIT managers' paying themselves big asset management fees before investors get their capital back.
“Investors should get paid first,” said Mr. Schorsch, who pays himself in restricted stock for his firm's management services that will pay off after he lists the REIT or sells it to someone else down the road. “If we make investors money, we'll all make money. We have to align the interests of REIT sponsors and their investors.”
Whether Mr. Schorsch can continue to execute his deals as rapidly and profitably as he has remains to be seen. His focus is on the so-called triple-net-lease sector, where properties are leased long-term to high-quality corporate clients. With the properties enjoying high occupancy by investment-grade tenants and a low cost of capital, thanks to the accommodative Federal Reserve, the conservative strategy so far has been reliable.
“He has a formula, and with the Fed at his back, it's working,” Mr. Schrader said.
While Mr. Schorsch has delivered to investors since launching ARC in 2007, the biggest factor in his success is arguably good timing. He resigned from his first foray into the REIT space, American Financial Realty Trust, in 2006. That REIT focused on net leases in the financial services industry. It did not end well. Investors ultimately suffered losses of 20% on their investment after it was sold in early 2008.
With ARC, however, Mr. Schorsch started fresh. He inherited no legacy assets from before the financial crisis — something that continues to hobble many of his competitors — and essentially has ridden the real estate markets up since then.
With his current success in raising capital, the question is whether he will crash and burn as other formerly hot managers in the industry, such as Behringer Harvard and Inland Real Estate Corp., have before him. Real estate prices are up, and if interest rates rise, his formula for cycling investments quickly could falter. His challenge, according to Mr. Gannon, is to do the same thing but with a lot more money.
As for the self-promotional rhetoric, Mr. Gannon, for one, has gotten used to it. “He's probably rubbed some people the wrong way. He wants to win and he doesn't mind seeing you lose,” Mr. Gannon said.
Even those he has done battle with find it difficult to downplay the positive effect he has had on the industry.
“He's done a lot of things — some controversial — but at the end of the day, he's brought more investment to this asset class and that's a positive,” Mr. Halfacre said. “He's raised the profile of the industry, and I can't fault him for that.”