After large shareholder criticizes ARCP, Schorsch says REIT will slow down activity

Responding to a letter from an activist investor, Nicholas Schorsch says he will keep building the company but his acquisition pace will slow.

By Bruce Kelly

Jun 3, 2014 @ 10:59 am (Updated 3:36 pm) EST

american realty capital, nicholas schorsch, reit, nontraded reit, marcato capital management

American Realty Capital Properties Inc. CEO Nicholas Schorsch today said the company was going to take a more conservative approach to its balance sheet after an activist investor criticized the real estate investment trust's recent breakneck growth and recent stock issuance.

“Expect more stability,” Mr. Schorsch said before and after in New York at an investor presentation at the annual National Association of Real Estate Investment Trusts “REIT Week” meeting in New York.

“I'm clearly telling you we will continue to grow the company, but there will be a little less activity,” he said. The firm, known by its ticker symbol ARCP, has a market capitalization of $9.6 billion. Mr. Schorsch, the chairman and chief executive of ARCP, said he expects a 10% annual growth rate from organic growth and acquisitions. “We won't stop buying properties,” he said. “Our balance sheet is in very good shape right now.”

(Don't miss: ARCP shareholders reject Schorsch's executive compensation plan)

Compensation for the hard-charging Mr. Schorsch and his team has also recently been called into question. Last week, the Wall Street Journal reported that an outside analysis showed an incentive-related $222.1 million pool of compensation for Mr. Schorsch and ARCP executives. Mr. Schorsch' share of the compensation plan alone could have been $92.7 million, targeted to performance over a five year period.

Mr. Schorsch said he “disagreed with those numbers” and that there was a “pretty high hurdle” to reaching that level of compensation because it is tied to performance standards that will be difficult to reach.

ARCP shareholders rejected the compensation plan in a non-binding resolution.

ARCP is the giant, traded net lease real estate investment trust run by Mr. Schorsch, who wears a number of hats in the real estate and brokerage business. He is chief executive of nontraded REIT sponsor American Realty Capital and executive chairman of RCS Capital Corp., a wholesaling and retailing broker-dealer.

Activist investor Marcato Capital Management asked ARCP to curb its acquisition spree and complained that a recent stock sale hurt existing shareholders.

“The company is engaging in too many transformative transactions too quickly,” Mick McGuire, managing partner at Marcato, wrote in a letter to Leslie Michelson, American Realty's lead independent director, that was included in a statement Tuesday. “ARCP should pause on large-scale transaction activity and give investors a chance to see multiple quarters of clean financial results.”

(Related: Schorsch buys Red Lobster properties in $1.5 billion deal)

At the investor meeting, Mr. Schorsch said he had no specific response to the criticism from Marcato.

Marcato, based in San Francisco, owns 21.8 million shares of ARCP, according to the statement. ARCP has expanded through acquisitions since it first sold shares to the public in September 2011. The company is now the largest owner of U.S. single-tenant buildings, which are leased to businesses such as drugstores and fast-food restaurants.

ARCP raised its acquisition target for the year to $4.5 billion from its initial plan of $3 billion, according to an investor presentation filed with regulators Tuesday.

“Our board of directors and management team regularly review the company's strategic priorities and opportunities, including deleveraging, capital allocation, and assess a variety of strategic options,” American Realty said in a response to Marcato's letter. “We are committed to driving value for all ARCP stockholders and will continue to take actions to achieve this important objective.”

The REIT didn't need to offer shares to raise money because it agreed to sell most of its multi-tenant shopping centers to Blackstone Group for about $2 billion, Marcato said in the letter. American Realty on May 28 closed on a sale of 138 million shares at $12 each.

“Such willingness to destroy shareholder value, by issuing shares at an acknowledged discount to fair value, illustrates a disregard for existing shareholders that we find very problematic,” Marcato said.

ARCP rose 1.05% to $12.50 at 2:000 in New York. The shares are down 19.8% in the 12 months through Monday.

Bloomberg News contributed to this story.