RCAP sales slow down in wake of ARCP accounting fiasco

Schorsch firm optimistic activity will return as B-Ds resume selling its nontraded real estate investment trusts

Nov 13, 2014 @ 8:29 am

By Bruce Kelly

RCS Capital Corp. sales of nontraded REITs and other alternative investments have slowed in the two weeks after accounting problems surfaced at another company controlled by its executive chairman, Nicholas Schorsch, but officials are optimistic that the problems at American Realty Capital Properties Inc. will not have a significant, long-term impact on RCS Capital.

Despite facing the suspension of sales of its various nontraded real estate investment trusts at leading broker-dealers and clearing firms, RCAP, through its broker-dealer wholesaling arm Realty Capital Securities, is currently raising $12 million to $15 million per day of equity, according to RCS Capital's chief executive Mike Weil.

That translates roughly into $216 million to $270 million for November, which has only 18 business days in it due to the Thanksgiving weekend. According to investment bank Robert A. Stanger & Co. Inc., Realty Capital Securities posted $486.6 million in sales in October and $655.1 million in September.

“We continue, even in this period, running at $12 to $15 million a day in equity raised,” Mr. Weil said Thursday morning in a conference call to discuss RCAP's third quarter earnings with analysts and investors. The company is “very confident that number goes up from here as” broker-dealers lift suspensions, Mr. Weil said.

RCAP has performed a “break even” analysis for the company, Mr. Weil said later on Thursday at a Merrill Lynch financial services conference. At the company’s existing size, which is three to four times larger than any other nontraded REIT wholesaler, RCAP’s “break-even is $3.1 billion of equity raised in 2015,” Mr. Weil said. “If the bottom is $12 million to $15 million a day, we’re in great shape.”

Analysts peppered Mr. Weil with questions about a potential spin-off of parts of the company in order to boost its value, which has sagged of late. RCAP's stock price has plummeted almost 50% since American Realty Capital Properties, or ARCP, reported a $23 million accounting error late last month. In early afternoon trading Thursday, RCAP shares were down 13%. Earlier in the morning they were down 17%.

Mr. Weil said the company is looking at all ways to maximize its value, but did not give any details. “There is not one thing we are not willing to look at,” he said. “Everything is on the table.”

RCAP reported $697.1 million in pro-forma revenue for the three months ended Sept. 30, a 6% increase compared with the same period a year ago. Adjusted net income per share for the third quarter was 40 cents, compared with 7 cents in the same quarter of 2013, an increase of 51%.

Mr. Schorsch's real estate and brokerage empire is a vast web of businesses. As executive chairman of RCAP, he presides over a company that includes 9,100 registered reps and advisers affiliated under the Cetera Financial Group brand. He also is chairman and CEO of American Realty Capital, the largest nontraded REIT sponsor in the industry.

He is also the former CEO and current chairman of ARCP. The accounting error at the firm was intentionally uncorrected over the first half of the year. It resulted in the resignation of the REIT's chief financial officer, Brian Block, who was also a former CFO of RCAP and a partner in ARC.

Broker-dealers, clearing firms and registered investment adviser custodians over the past two weeks have placed a temporary halt on RCAP distributed REITs and products, along with REITs with the Cole brand, since the revelation of ARCP's accounting problems. (Cole is a REIT sponsor owned by ARCP.)

Bill Dwyer, who became CEO of Realty Capital Securities in September, said the company expected a short term decrease of equity raised for REITs and other products on the RCAP platform, but was optimistic that the majority of the selling agreements recently suspended by broker-dealers will be reinstated by the end of the year or in the first quarter of 2015.

During the conference call, Mr. Weil said that several firms have already lifted their suspension of sales but did not name those firms.

In a statement Thursday morning before the conference call, Mr. Weil said that RCAP's audit committee on Oct. 31 hired independent counsel to conduct a review that was deemed appropriate but did not include a review of email. Outside counsel was assisted by a forensic accounting firm.

Following counsel's review, RCAP's “audit committee, board of directors and management team remain confident in the company's reported historical financials, accounting, and internal controls for each of the three quarters in the nine-month period ending Sept. 30, 2013.”

There are no adjustments or restatements to RCAP's audited financials, Mr. Weil said. “The board and audit committee have full confidence in (RCAP's) reported financials,” Mr. Weil said. “We consider question of RCAP's accounting as closed.”

Mr. Weil also said that it would be inappropriate to comment on RCAP's recent termination of its $700 million deal to buy the Cole assets from ARCP. The latter filed suit against RCAP this week over the deal termination.

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