RCAP buying Cole Advisor for $700 million

RCS Capital Corp., known by its ticker symbol RCAP, is doubling down on the business of selling and managing nontraded real estate investment trusts.
RCAP Wednesday said it was acquiring Cole Capital Partners and Cole Capital Advisors from a related, traded REIT, American Realty Capital Properties Inc. — ARCP — for up to $400 million in cash and stock. It will also inherit $300 million of ARCP debt.
Nontraded REIT czar Nicholas Schorsch, who was recused from the deal making process, is the executive behind both RCAP and ARCP.
He is the chairman of ARCP, which has a market capitalization of close to $11 billion and a focus on acquiring net lease real estate. He is also executive chairman of RCAP, which has two primary lines of business: retail brokerage and wealth management and the creation and wholesale distribution of nontraded REITs.
RCAP has been on a buying binge of independent broker-dealers over the past 15 months, and will have close to 10,000 registered reps and advisers under its roof in more than a half dozen IBDs it owns.
But RCAP’s move to buy Cole’s nontraded REIT wholesaling and investment management business will tilt RCAP’s cash flow toward nontraded REITs.
According to a March filing with the Securities and Exchange Commission, RCAP has a solid cash flow. On a pro-forma basis and taking into account its host of pending acquisitions at the time, RCAP posted earnings before interest, taxes, depreciation and amortization of $201.7 million., almost split evenly between the wholesale distribution of nontraded REITs and retail brokerage.
The acquisition of Cole Capital is expected to increase the EBITDA contribution by $109.1 million, with $35.4 million from wholesaling fees and $73.7 million from asset management fees, according to an RCAP news release.
When asked about any potential conflicts arising from two related companies engaging in such a transaction, RCAP CEO Michael Weil said that the boards of both companies received third party fairness opinions.
“My management team and I worked hard with RCAP’s board and ARCP’s CEO, David Kay, and his team worked with their board,” Mr. Weil said. “We approached this as a trade with both companies interested in achieving a goal, with a process that was followed rigorously.”
RCAP will now be well established in three separate pieces of the financial services business, Mr. Weil said: retail brokerage, wholesale product distribution and investment management.
After it completes the Cole acquisitions, RCAP will control more than half the sales of nontraded REITs. Such REITs are sold almost exclusively through independent broker-dealers and saw year-over-year sales double to $20 billion in 2013.
RCAP’s REIT wholesaling broker-dealer, Realty Capital Securities, earlier this year acquired another substantial REIT wholesaler, SC Distributors. According to investment bank Robert A. Stanger & Co. Inc., the three wholesaling broker-dealers — Realty Capital Securities, Cole Capital Corp. and SC Distributors — accounted for $8.1 billion in sales of nontraded REITs and other illiquid alternative investment products through August. That was good for almost 54% of the total market, which is estimated to sell about $20 billion of such products this year.
RCAP is looking to “build out a suite of products for advisers to use to meet their clients’ needs,” said William Dwyer, recently crowned CEO of Realty Capital Securities.
In the past, the illiquid alternative investment industry has typically seen sponsors and their broker-dealers sell one or two deals at a time. Financial advisers will now be able to speak with RCAP’s network of product wholesalers with close to 20 different investment programs, including nontraded REITs, Mr. Dwyer noted.
The acquisition for Cole Capital is the second largest ever by RCAP. Earlier this year, it bought the retail brokerage network Cetera Financial Group for close to $1.1 billion.
Cole has been long known for packaging and selling net lease REITs. Net lease is a sector in real estate in which the tenant pays most of the costs associated with maintaining the property it leases, such as taxes, insurance, repair and upkeep. In July 2013, Mr. Schorsch said that the nontraded REIT sponsor that he controls, American Realty Capital, was planning to end the sales of net lease REITs for one to three years.
In connection with the sale, RCAP has engaged ARCP to act as the sub-adviser to certain nontraded REITs currently advised by Cole Capital. ARCP has “the biggest and best net lease underwriting and acquisition team in the world,” Mr. Weil said. “We’ve reentered the net lease space with the sub advisory relationship with ARCP, and that’s a real positive for” RCAP, he said.
RCAP’s stock price increased to $23.93 per share in early afternoon Wednesday, an increase of almost 6.3% for the day. ARCP shares were down 1% and trading at $11.94 Wednesday afternoon.