Securities America, citing risk of overconcentration, ends sales of one of REIT maven Nicholas Schorsch's biggest-selling funds.
A leading independent broker-dealer has cut ties with a top nontraded real estate investment trust, citing a risk of overconcentration. It marks the second time recently that a broker-dealer has distanced itself from a nontraded REIT.
Securities America Inc. told its registered representatives and advisers in an e-mail last Friday that it will no longer offer American Realty Capital Trust V Inc., a top-selling nontraded REIT. Indeed, ARC V, as it's known in the industry, was the top seller in June, averaging $10.8 million in daily sales, according to investment bank Robert A. Stanger & Co. Inc.
Brokers sold $406.6 million of ARC V between its launch in April through June 30.
“An important risk management tactic implemented by Securities America and other firms is maintaining certain thresholds limiting total firm investment in any one alternative product or sponsor,” according to the e-mail from senior vice president Paul Lofties. “I am writing to inform you, due to concentration thresholds and the amount of exposure Securities America has to real estate programs distributed by [broker-dealer] AR Capital, Securities America will no longer offer” ARC V, he wrote.
Securities America spokeswoman Janine Wertheim said Mr. Lofties was unavailable to comment further.
The move by Securities America to stop sales of ARC V showed prudence on the part of the broker-dealer, said Nicholas Schorsch, CEO of American Realty Capital.
“We're a victim of our own success,” said Mr. Schorsch. “Securities America has never had (a REIT sponsor) sell so much so fast.”
“Securities America doesn't want to sell more than $50 million to $100 million of any one program. In three-and-a-half months, we sold $70 million” of ARC V, he said. “This is part of what we think is best practices.”
He noted that Securities America gave brokers until July 26 to complete the paperwork for such sales, and stressed that the firm was still selling a number of American Realty Capital products.
American Realty Capital has been by far the dominant sponsor this year of nontraded REITs and other illiquid investments, dubbed “direct participation programs” in the industry.
ARC V is just the latest net-lease REIT offered by American Realty Capital. For the year-to-date through June 30, independent broker-dealers have sold almost $4.2 billion of American Realty Capital nontraded REITs and business development companies, giving the company a market share of 39.2% of all such sales, according to Stanger.
American Realty Capital's closest competitor, Franklin Square Capital Partners, which sells only nontraded BDCs, had 12.3% of market share, according to Stanger.
Securities America was burned in the past by too many sales of specific illiquid, alternative investments deals. From 2003 to 2007, the firm was the biggest seller of notes issued by Medical Capital Holdings Inc., which was later revealed to be a $2 billion Ponzi scheme. Securities America brokers sold close to $700 million of those notes, the legal fallout from which resulted in Ameriprise Financial Inc. selling Securities America in 2011 to Ladenburg Thalmann Financial Services Inc.
InvestmentNews reported yesterday that Advisor Group, owned by American International Group Inc., has cut its selling agreement with Cole Holdings Corp., another leading sponsor of net-lease nontraded REITs.
Advisor Group cited an “internalization fee” of $127 million paid to founder Chris Cole and other top management earlier this year as the reason for ending its selling relationship with Cole. Critics of nontraded REITs have long disapproved of such “internalization fees” because they may not be disclosed clearly to investors.
