After fee fight, latest Schorsch REIT merger OK'd

After a dispute about fees between a leading corporate governance watchdog and REIT management, the merger of two real estate investment trusts controlled by Nicholas Schorsch's AR Global appears to have been approved Friday, resulting in a $375 million "internalization" fee to AR Global.

The two AR Global REITs that are merging are Global Net Lease Inc. and Necessity Retail REIT Inc. The former said on Friday that preliminary results from a special meeting of stockholders indicated that two proposals key to the merger had passed.

AR Global is a privately held real estate company that manages 1,489 properties representing 69 million square feet of real estate. The former nontraded REIT czar Schorsch is the majority owner of AR Global, which a decade ago was the leading seller of nontraded REITs through dozens of independent broker-dealers. At the time, such REITs were criticized for high fees and commission and opaque management structures.

In REIT parlance, an internalization fee is commonly applied once a nontraded REIT takes over its own management and begins trading on an exchange.

The merger of Global Net Lease (GNL) and Necessity Retail REIT (RTL) was announced in May. Last Friday, Institutional Shareholder Services issued a report saying shareholders should vote against the merger as it was against the interest of Global Net Lease investors because the fee going to the manager, AR Global, was too high.

"Some shareholders may accept the transaction's high price tag as a convenient means of owning a larger company with an internalized manager and improved governance," according to ISS. "However, the deal structure as currently constituted appears to disproportionately favor all other parties involved, at the expense of GNL shareholders."

"It is conceivable that terms could be reached to effect this related-party transaction and related-party internalization in a way that more adequately compensates GNL shareholders," according to ISS. "Under the current terms, a vote against the transaction is warranted."

After the Labor Day weekend, GNL shot back, saying that ISS had the math wrong in its calculation of the internalization fee. Benefits of the merger included reduced leverage, increased scale and better corporate governance, according to GNL.

"Because ISS continues to err in its analysis by comparing the aggregate internalization consideration from both the GNL and RTL transactions against the consideration to be paid by GNL only, the company strongly disagrees with ISS's analysis and recommendation," said the statement GNL issued Tuesday.

ISS wasn't buying that argument. "Though shareholders should consider the company’s view of the internalization merger consideration, we maintain our view that this represents an overly generous payment to the manager, which, along with other factors, suggests that GNL shareholders are not
receiving adequate compensation in this transaction," ISS wrote in a revised report.

A spokesperson for AR Global did not return a call to comment Friday.

Under the terms of the agreement, Necessity Retail REIT shareholders will receive 0.67 GNL shares per RTL share, which was valued at $7.08 per share, or approximately $1.4 billion in aggregate, at announcement, according to ISS. GNL shareholders are expected to own 45% of the combined company, and RTL shareholders are expected to own 39%.

AR Global, formerly American Realty Capital, has a history of merging its REITs and various other companies. In 2016, the two REITs that won shareholder approval to merge Friday, GNL and RTL, formerly American Finance Trust Inc., were involved in a flurry of mergers with other companies managed by AR Global. Now, those two REITs are merging and a $375 million payment is being criticized.

From 2010 to 2015, Schorsch was one of the most visible faces of the retail securities industry, with his partnership, American Realty Capital, raising close to $20 billion from retail investors who bought shares in a variety of ARC-branded nontraded real estate investment trusts and alternative investments.

In 2019, Schorsch reached a $7 million personal settlement with the Securities and Exchange Commission stemming from charges that AR Capital, Schorsch and a partner wrongfully obtained millions of dollars in connection with REIT mergers that were managed by ARC, also known as AR Capital.