Sales of nontraded real estate investment trusts that are part of the Nicholas Schorsch empire declined in November in the wake of an accounting scandal at one of his firms.
Sales of American Realty Capital nontraded REITs plunged 58% in November compared with October, and sales of Cole Capital nontraded REITs dropped 81% month over month.
ARC had $154.3 million in nontraded REIT fundraising last month, compared with $380.7 million in October, according to investment bank Robert A. Stanger.
ARC, however, remains by far the leading sponsor of nontraded REITs, and through the end of November has raised $5.9 billion in equity this year, or 42% of the market total, according to Stanger.
A drop in November sales at ARC was widely anticipated after a related company, American Realty Capital Properties Inc., or ARCP, at the end of October reported a $23 million accounting error in the first half of the year that was intentionally left uncorrected.
That sent shock waves through the nontraded REIT and brokerage empire created and overseen by Mr. Schorsch, who holds top positions at a number of REIT-related companies. Some broker-dealers and clearing firms
put a temporary halt on sales of ARC-branded products, as well as nontraded REITs with the Cole brand. ARCP owns the Cole-branded REITs.
Mr. Schorsch is chief executive and chairman of ARC as well as chairman of ARCP.
The sales figures for ARC in November were not as bad as some feared, according to Kevin Gannon, president and managing director at Stanger. “I thought it could have been worse,” Mr. Gannon said. “ARC showed to be resilient. The hope of the space is that (the accounting problem at ARCP) is an isolated situation.”
What's more, RCS Capital Corp., the broker-dealer holding company and parent of Realty Capital Securities, the wholesaling broker-dealer for ARC-branded products and other alternative investments, said in a press release Monday that it raised over $260 million in November, with sales increasing steadily throughout the month. ARC products account for the biggest bulk of those sales, but Realty Capital also distributes products by other brands such as Strategic Capital and the Hatteras Funds.
RCS Capital, or RCAP, also said that over 70 selling agreements with broker-dealers had been reinstated. That represents close to 25% of the agreements that had been suspended since the end of October, according to the press release.
“Investors, we believe, remain confident in the direct investment and mutual fund products we distribute as evidenced by the steady increase in sales volume throughout November,” said Bill Dwyer, CEO of Realty Capital Securities, in the press release.
Clearing and custody firms also are reevaluating their suspension of sales of ARC and related products.
National Financial Services, the clearing arm of Fidelity Investments, told its broker-dealer correspondents that it was
once again facilitating new purchases for 12 nontraded REITs and business development companies under the ARC brand, along with other brands distributed by Realty Capital Securities. National Financial had halted those sales in November.
Meanwhile, the Charles Schwab Corp., the largest custodian for registered investment advisers, said Tuesday it had lifted the suspension on Hatteras Funds and the Phillips Edison-ARC Grocery Center REIT II Inc. but was still reviewing Cole-branded products and other ARC strategies, according to spokeswoman Alison Wertheim.
The drop in sales for Cole Capital nontraded REITs was more severe than ARC products, according to Stanger. Cole Capital raised $19.7 million in equity in November, compared with $104 million October.
Cole-branded products are not distributed by Realty Capital Securities but by a different broker-dealer, and are therefore a separate business from RCAP or Realty Capital Securities.
“Cole's selling group members shut them off,” Mr. Gannon said. “They have to earn their way back. The headline risk is big.”
Andy Merrill, a spokesman for ARCP, did not return a call to comment.
