Nontraded REIT sales at Realty Capital slip in 2014 but big drop avoided

Sales of REITs and other non-liquid alts at Schorsch-related firm decline 7.6% from 2013

Jan 6, 2015 @ 12:50 pm

By Bruce Kelly

Sales at Realty Capital Securities, the wholesaler for Nicholas Schorsch's AR Capital nontraded real estate investment trusts, slipped 7.6% in 2014, but given the accounting scandal that rocked the REIT czar's empire in the fourth quarter, it could have been a lot worse.

“I think they have held up pretty well,” said Kevin Gannon, president and managing director for Robert A. Stanger & Co. Inc., an investment bank that focuses on nontraded REITs.

Realty Capital Securities and SC Distributors, a broker dealer acquired by RCS Capital Corp., Realty Capital Securities' parent company, distributed products last year that raised $8.6 billion in equity, according to RCS Capital Corp. spokesman Andrew Backman. That compares with sales of $9.3 billion of equity in 2013 for the two, Mr. Backman said.

The largest wholesaler in the nontraded REIT industry, Realty Capital is the broker-dealer that distributes products for AR Capital. That company is owned and controlled by Mr. Schorsch, who in December resigned as chairman from two companies, a publicly traded REIT, American Realty Capital Properties, or ARCP, and RCS Capital, or RCAP.

Those resignations came after it was revealed in October that a $23 million accounting error at ARCP during the first half of last year was detected but went intentionally uncorrected. That accounting error at ARCP spurred some broker-dealers, including the largest in the country, to halt selling agreements for AR Capital products.

RCAP on Monday said in a news release that its three wholesaling broker-dealers, Realty Capital Securities, SC Distributors and The Hatteras Funds, which sells mutual funds that focus on alternative investments, in December raised $270 million in equity. In the fourth quarter 2014, RCAP raised $1.1 billion through 31 direct investment programs and mutual funds that its three broker-dealer subsidiaries distribute to retail broker-dealers.

Some broker-dealers, including LPL Financial and the AIG Advisor Group network, still have suspensions in place for Realty Capital or SC Distributors products. Others, however, have reinstated selling agreements; 123 of Realty Capital's previously suspended selling agreements with broker-dealers have been reinstated to date. It ended 2014 with 87% of its active selling agreements in place, according to a news release.

BUMPER YEAR

2015 could be a bumper year for Realty Capital Securities and the nontraded REIT industry in general, said Mr. Gannon. There is close to $8.1 billion in nontraded REITs sold through Realty Capital Securities that are closed and could have a sale or listing in the future, while the nontraded REIT industry in total has almost $49 billion of closed REITs that could have potential liquidity events, he said.

While there is no strict timeline for such events, Mr. Gannon said he believes the industry could see between $15 billion to $20 billion in liquidity events this year. That's good news for REIT sponsors and managers like AR Capital as such listing or mergers often spur sales of new REITs as investors buy new products that offer similar yields. And investment banks are particularly hungry to participate in such deals, Mr. Gannon added.

(More: Reps selling nontraded REITs could be swimming in liquidity)

“That amount wouldn't shock me,” Mr. Gannon said. “Investors are still hunting yield, and the stock market being as choppy as it's been helps this space.”

The new year has already seen one AR Capital REIT tip its hand to a potential liquidity events.

American Realty Capital Global Trust Inc., with $2 billion in total assets, on Monday said it engaged Barclays Capital Inc. and Realty Capital Securities as advisers to assist the REIT in promptly evaluating potential strategic alternatives.

Such an announcement is widely regarded as an indication that a nontraded REIT is seeking a sale or listing.

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