Huge hurdles for nontraded REIT sponsor in weeks ahead.
Sales of nontraded real estate investment trusts at Cole Capital fell off a cliff in December, with the leading sponsor and real estate manager selling a mere $4.5 million, compared with $274.4 million a year earlier.
Fundraising for the Cole REITs declined to $20 million in November from $104 million in October, before coming to a virtual halt last month, according to investment bank Robert A. Stanger & Co. Inc.
Cole Capital is owned by American Realty Capital Properties Inc., or ARCP, the large publicly traded net lease REIT that at the end of October reported a $23 million accounting error in the first half of 2014 that was intentionally not corrected.
ARCP has yet to report its third-quarter financial statements, and leading custodians have not lifted sales bans of the products, making Cole products virtually impossible to sell by advisers affiliated with independent broker-dealers, according to one brokerage executive.
“Nobody can sell it, and the challenge is that the custodians have refused to allow the sale of more Cole product,” said Daniel Wildermuth, chief executive of Kalos Financial Inc., an IBD that focuses on alternative investment strategies. “We're not concerned about the underlying offerings, but this needs to be addressed fairly quickly.”
Cole Capital is one of the leading sponsors of nontraded REITs. ARCP acquired it last February, when it merged with Cole Real Estate Investments Inc., a net lease REIT that at the time owned Cole Capital.
“If the situation doesn't change, Cole is facing more severe issues,” Mr. Wildermuth said. Such an interruption in raising capital for a nontraded REIT sponsor is not life threatening if it lasts only 60 or 90 days. But the costs of running such a business, including paying for broker-dealer staff and keeping wholesalers in their seats, cannot be met without revenue, he said.
Cole Capital is taking the challenges in stride and is looking to the future, according to one executive.
“Cole Capital continues to be a high-quality commercial real estate asset manager that is operated by very much the same individuals that have been responsible for the company's success in previous years,” Mike Ezzell, ARCP executive vice president of private capital markets and head of the Cole Capital operations, said in a statement. “We believe our constituents, broker-dealers, RIAs and financial advisers realize this, and will welcome the opportunity to conduct business with Cole Capital again after ARCP's restated financials are released.”
An ARCP spokesman, Andy Merrill, had no comment when asked when ARCP's restated earnings would be released.
A pending merger between a closed Cole REIT, Cole Corporate Income Trust Inc., and the publicly traded Select Income REIT makes Cole Capital's current inability to sell product eve more daunting for the real estate sponsor and manager, said Kevin Gannon, president and managing director of Stanger.
Cole Capital is in danger of missing investor money rolling over from Cole Corporate Income Trust to new nontraded REITs, according to Mr. Gannon.
“That's $2 billion, give or take, of shares that will flow to IBDs,” he said. “What does Cole do if they don't have a REIT authorized to be sold at those firms?" The money likely will end up at REIT sponsors such as NorthStar Asset Management Group Inc., W.P. Carey Inc. or Griffin Capital Corp., he added.
The resignation of ARCP's top level of management, including former chairman and CEO Nicholas Schorsch, in December exacerbating the problems for Cole Capital, Mr. Gannon said. ARCP has “already lost its management team, and the top of ARCP is gone, so where is the direction at Cole?” he asked. “Who's left?”
