A former independent director of two nontraded real estate investment trusts controlled by Nicolas Schorsch claims “a manifest conflict of interest” in the potential merger of one of those REITs into a related company.
Last month,
InvestmentNews reported that Mr. Schorsch's AR Global was attempting to consolidate more than a half dozen REITs with almost $10.5 billion in assets. One of those REITs, American Finance Trust Inc., was reportedly interested in acquiring Realty Finance Trust Inc., along with other real estate companies managed by AR Global, formerly known as AR Capital.
Mr. Schorsch and William Kahane are the two controlling partners of AR Global.
According to proxy statements from two REITs at the end of April, Robert Froehlich was to depart the boards of Realty Finance Trust, or RFT, with $1.28 billion in assets, and Healthcare Trust Inc., with $2.27 billion in assets. However, the companies failed at the time to give any reasons why Mr. Froehlich was not running for re-election to the boards in the companies' upcoming election.
Now,
it's clear in a filing from Thursday with the Securities and Exchange Commission that Mr. Froehlich had deep misgivings about the negotiations to merge RFT into American Finance Trust.
(Related read: Federal judge approves RCAP bankruptcy plan)
On May 4, he sent an email to other members of the Realty Finance Trust board, criticizing them for not appreciating the perception of a conflict of interest in having the same executive, Nick Radesca, as chief financial officer for RFT and the other REIT, American Finance Trust, which had its name redacted in the filing. If the board failed to move on his requests, which included engaging a third party adviser to explore alternatives for the REIT, Mr. Froehlich said he would resign.
“Mr. Radesca was appointed CFO of RFT in November 2015 and, at that time, it was disclosed to us he was also CFO of [American Finance Trust]. Whereas that potential conflict provided me discomfort at the time, that discomfort became overwhelming once [American Finance Trust] expressed an interest in acquiring RFT,” according to the email. “Frankly, sound corporate governance should have compelled Mr. Radesca to resign as CFO from one firm or the other rather than straddle clearly conflicting roles.”
“I expressed my concern at our board meeting on April 28th that, given we had received a proposal from [American Finance Trust] to acquire RFT on February 16th, Mr. Radesca should have immediately reinforced his clear conflict of interest to the entire board given he was (and still is) the CFO of both the acquirer [American Finance Trust] and the target (RFT),” Mr. Froehlich wrote. “Much to my shock and surprise, the majority of the board did not concur with my assessment, which, in my mind, calls into question the level of independence of the only other independent director and the quality of corporate governance exercised by the balance of the board of directors of RFT.”
The other members of the board of RFT are Peter Budko, the chairman and one of Mr. Schorch's long-time partners, and Elizabeth Tuppeny, an independent director.
“The fact the CFO of [American Finance Trust] is also the CFO of RFT given the circumstances, is, in my clear estimation, prima facie evidence of a manifest conflict of interest,” he wrote. “I find the board's lack of pro-active (or even reactive for that matter) movement to remove this conflict deplorable.”
“As you are aware, I am highly suspect as to whether a merger of RFT into [American Finance Trust] is in the best interest of our shareholders and unless and until we fully analyze our other options, I am concerned about our legal exposure,” wrote Mr. Froehlich, adding that corporate governance at the company was, at best, “shoddy.”
Neither Mr. Budko nor Ms. Tuppeny could immediately be reached for comment Friday.
In a later email, Mr. Froehlich explained his resignation. “When it is all said and done I simply have too many disagreements with management to continue,” he wrote. “This is a very sad day for shareholders and an even sadder day for all the financial advisers who invested on behalf of their clients in our company because they knew (and they were told at all the ARC forums held around the country over the past three years) that I was there to protect their interests and fight for shareholder value as the lead independent of RFT.”
Jesse Galloway, a spokesman for AR Global, said that RFT had no comment beyond in its response in its filing with the SEC.
RFT has not finished the process of evaluating an independent adviser, according to the filing. “Therefore [RFT] is not currently prepared to accede to Froehlich's demand that the committee appoint [a third party adviser],” according to the filing. The company has also not “engaged in any substantive discussions or negotiations related to a transaction.” The board of RFT concluded that the temporary removal of Mr. Radesca as CFO was unnecessary, according to the filing.
The flurry of mergers of AR Global REITs, if successful, would put more assets under the roofs of the American Finance Trust and Global Net Lease Inc. Both REITs 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.
(More:
How Nick Schorsch lost his mojo)
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.
