Nicholas Schorsch's AR Global is attempting to consolidate more than a half dozen real estate investment trusts with almost $10.5 billion in assets, according to two sources with knowledge of the negotiations.
Two REITs, American Finance Trust Inc. and Global Net Lease Inc., would purchase five other real estate companies managed by AR Global, formerly known as AR Capital, according to the two sources familiar with the discussions. Mr. Schorsch and William Kahane are the controlling partners of AR Global, which in turn controls the adviser to each of the seven REITs in the potential roll ups.
Through its advisers, AR Global generates fees and income by acquiring and managing properties on behalf of the REITs, said Brad Thomas, editor of Forbes Real Estate Investor. “The investor doesn't get paid a fee every time the REIT buys a property, but the management does.”
The flurry of mergers, if successful, would put more assets under the roofs of the two REITs, which have unusual, difficult to break 20-year advisory contracts with AR Global, said industry sources, including former AR Global employees. AR Global does not have the 20-year advisory agreements with the other REITs it manages, observers said.
That means AR Global, as the manager of two larger REITS, would create a larger source of fee revenue over a long period of time, benefiting Mr. Schorsch and his partners, those sources said.
On the other hand, a long-term source of revenue could also ultimately benefit investors by making American Finance Trust and Global Net Lease more attractive takeover targets and potentially gaining the attention of other REIT managers looking to buy such a revenue stream, sources noted.
Under AR Global's plan, American Finance Trust, a nontraded REIT with $2.26 billion in assets, would buy four other AR Global-managed REITs with close to $5 billion in assets. Global Net Lease, a listed REIT with $2.55 billion in assets, would acquire a smaller global REIT, American Realty Capital Global Trust II Inc., which controls $677 million in assets.
All acquisitions need to be approved by the boards of each REIT. The acquisitions have been discussed for the past four to six weeks and would pay investors in cash and stock, sources said.
Matthew Furbish, a spokesman for AR Global, declined to comment.
“Twenty-year contracts are not normal or customary, but they could be fair. It depends on the fee terms and termination provisions,” said Kevin Gannon, managing director, Robert A. Stanger & Co. Inc., who said he did not have direct knowledge of any AR Global transactions. “Could it be done fairly with the right people? Who is the management team that is going to be in charge?
“And what is the exit strategy and how do these acquisitions dovetail with that,” Mr. Gannon asked. “Will the nonlisted REIT list immediately?
One of the problems facing the Schorsch-controlled REITs is that they have stopped raising money from investors, making growth next to impossible, according to industry sources, including former AR Global employees.
One AR Global managed REIT that could be acquired by American Finance Trust, Healthcare Trust Inc., indicated on Monday that it had started the process of examining a potential sale; the company issued a press release that stated its board has started a strategic review process to examine and consider a range of alternatives, including forming a committee to address potential conflicts of interest and hiring an investment banker.
The other three REITs targeted by American Finance Trust are: Realty Finance Trust Inc., American Realty Capital - Retail Centers of America Inc. and American Realty Capital Healthcare Trust III Inc.
It is not unusual for some of Mr. Schorsch's companies to be acquired by related companies. For example, American Realty Capital Properties Inc., now Vereit Inc., in 2013 bought American Realty Capital Trust III Inc. A year later, American Realty Capital Properties bought American Realty Capital Trust IV Inc.
Those were headier days for Mr. Schorsch, a deal maker whose estimated wealth is $1 billion, according to Forbes.
(More: How Nick Schorsch lost his mojo)
In December, the wholesaling broker-dealer of those REITs, Realty Capital Securities, closed after it had been charged by Massachusetts securities regulators with fraudulently rounding up proxy votes to support real estate deals sponsored by AR Global. Realty Capital Securities was owned by Realty Capital Securities, or RCAP, another firm founded by Mr. Schorsch currently in bankruptcy.
Mr. Schorsch and other AR Global partners have also been named in investor complaints stemming from the steep decline in the value of Vereit starting in October 2014. That's when the company revealed a $23 million accounting mistake that led to the shake-up of Mr. Schorsch's nontraded REIT empire.