A year ago, Nicholas Schorsch, the former nontraded REIT czar, was working to consolidate more than half a dozen real estate investment trusts with more than $10 billion in assets. Now, those moves have begun to bear fruit for Mr. Schorsch and his partners at AR Global, the sponsor of the REITs.
On Tuesday, two of those REITs, American Finance Trust Inc., with $2.1 billion in assets, and the $1.25 billion American Realty Capital-Retail Centers of America, announced shareholder approval for a merger that was first announced last September.
Eighty-seven percent of shareholders of American Finance Trust who cast votes were in favor of the merger, according to the company. Meanwhile, 75% of ARC – Retail Centers shareholders who voted on the deal were in favor of the merger and a related charter amendment necessary for the deal to go forward. Those voters represented slightly more than half of the owners of the REIT's outstanding shares.
One investment bank that had been critical of the deal was quick to note that the merger's announcement was on Tuesday, the 88th anniversary of the infamous 1929 St. Valentine's Day Massacre in Chicago.
Indeed, the merger was a bad deal of ARC - Retail Centers investors, according to Robert A. Stanger & Co. Inc., an investment bank with a focus on nontraded REITs.
"The 2017 St. Valentine's Day Massacre of the RCA shareholders is one for the ages in terms of assaults on the sensibilities of investors," according to the Stanger report. "The investors are now at the mercy of an apparently conflict-ridden board and an onerous management agreement with a brutal exit clause that will likely overhang the value of the merged entity."
American Finance Trust has an unusual, difficult to break 20-year advisory contract with AR Global, Stanger noted. That could work to the detriment of ARC - Retail Centers investors.
"Who should get the flowers of condolence," the Stanger note asked. "The RCA investors. Who gets the chocolates? Likely AR Global, thanks to a structure which imposes a 20-year, virtually non-cancellable, management contract on the RCA investors."
"We will not be surprised to see AR Global monetize that contract sometime in the future in a huge payday by selling it to a third-party management company — a payday bought at the expense of the RCA investors."
A spokesman for American Finance Trust, Tim Cifelli, declined to comment.
"We are pleased to have received the support of our stockholders to approve the merger of AFIN and RCA," said American Finance Trust's CEO and president, Mike Weil, in a statement. Mr. Weil is also one of the partners at AR Global.
"This is a strategically important transaction that brings together two high quality portfolios, enhancing AFIN's position as a premier diversified REIT with a retail focus," he said.
American Finance Trust was initially priced at $25 per share and had its initial public offering in 2013, when Mr. Schorsch and AR Global, which was at the time called American Realty Capital, were riding high. The company was raising billions of dollars of equity from investors and was merging its disparate REITs in a rapid-fire manner.
ARC-Retail Centers was priced at $10 per share during its IPO, which lasted from 2011 to 2014. In the autumn of that year, an accounting scandal was revealed at another of Mr. Schorsch's companies, American Realty Properties Inc., now called Vereit Inc., hurting sales of other ARC REITs. (Mr. Schorsch is no longer involved with Vereit.)
A year later, in 2015, ARC stopped sales of REITs after the Massachusetts Securities Division leveled proxy voting charges at the wholesaling broker-dealer, Realty Capital Securities, that sold the ARC REITs.
Realty Capital Securities quickly settled those charges for $3 million and agreed to close up shop.
Stanger also called into question what ARC-Retail investors will get for their shares.
According to the September press release that announced the merger, ARC-Retail Centers investors were to receive 0.385 shares of American Finance Trust common stock and $0.95 in cash for each share of stock they owned. Based on American Finance Trust's December 31, 2015 valuation of $24.17 per share, that translated into ARC-Retail Centers shareholders receiving a total consideration of close to $10.26 per share.
That valuation could be off, according to Stanger. "The proxy statement touted a transaction price of $10.26 per RCA share as the consideration paid to RCA investors in the merger," according the Stanger note. "But a further review of the disclosure suggests a value as low as the mid $8s."