The End Of Nick Schorsch's Non-Traded REIT Empire

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Includes: NYRT, RCAP, VER
by: Albert Alfonso

Summary

RCS Capital and New York REIT say goodbye to Nick Schorsch.

Furthermore, Nick Schorsch has stepped down from the board of 11 non-traded REITs and direct investment programs sponsored by AR Capital.

These events follow his recent surprise resignation from ARCP and the worrying allegations brought forward in a lawsuit.

What a whirlwind of news surrounding Nick Schorsch and his various non-traded REIT entities. According to various reports, Mr. Schorsch has stepped down as Director and Executive Chairman of the Board of RCS Capital Corporation (NYSE:RCAP). In addition, Mr. Schorsch has stepped down from his position as Chairman of the Board and Chief Executive Officer of New York REIT, Inc. (NYSE:NYRT).

If this were all not enough, Mr. Schorsch also announced that he was stepping down from the Board of 11 non-traded REITs sponsored by AR Capital, a company which he co-founded:

As part of these initiatives, and in order to reduce complexity, AR Capital Co-Founder, Nicholas S. Schorsch, has notified the boards of directors of RCS Capital Corporation ("RCS Capital"), New York REIT, Inc. ("NYRT") and 11 non-traded REITs and direct investment programs sponsored by AR Capital of his decision to step down from his board positions at these companies, effective immediately. Mr. Schorsch has made this decision in order to focus his attention on strategic initiatives and potential liquidity events of closed programs sponsored by AR Capital, and new strategies for the future suite of AR Capital investment programs.

These actions should greatly minimize distractions and immediately eliminate any perceived or potential conflicts created as a result of Mr. Schorsch's involvement on the boards of AR Capital-sponsored programs or on the board of RCS Capital whose subsidiary, Realty Capital Securities, is the wholesale broker dealer that distributes those programs.

These are all quite stunning developments. However, if one were reading the tea leaves, signs of trouble for Mr. Schorsch were everywhere.

Soon after the accounting errors at ARCP were disclosed, sales of Schorsch-linked non-traded REITs, those sponsored by Cole Capital and AR Capital, pretty much collapsed. Numerous registered reps and investment advisers stopped selling the products.

Indeed, things have gotten so bad that RCS Capital walked away from an agreement to purchase Cole Capital from ARCP, requiring RCS Capital to reach settlement for $60M. According to InvestmentNews:

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.

Only two weeks ago, Mr. Schorsch "resigned" as Executive Chairman of American Realty Capital Properties (ARCP). However, ARCP made it pretty clear that this resignation was not fully voluntary, noting that:

In connection with Mr. Schorsch's departure as Executive Chairman, ARCP will be unwinding all of its relationships with entities in which Mr. Schorsch maintains an executive or director-level role or is a significant stockholder. These steps will not only enhance the Company's corporate governance structure but will also lead to further simplification of its business relationships.

So basically, ARCP forced Mr. Schorsch out and cut all ties. In addition, Bloomberg estimated that he was walking away from a compensation package of worth about $100 million.

While this point is somewhat speculative, this resignation, and those of other senior ARCP executives, may have been influenced by the lawsuit filed by Lisa P. McAlister, former chief accounting officer of ARCP, in which it was alleged that Mr. Schorsch had ordered subordinates to manipulate financial results at the company. You can read more about this in my earlier article, the WSJ article, and the related PDF of the full complaint.

Conclusion

Mr. Schorsch's non-traded REIT empire is pretty much in ruins. While RCS Capital, AR Capital, and Cole Capital will try to pick up the pieces and move on, the damage done is likely permanent.

Furthermore, investors are wising up to the risks and high fees associated with non-traded REITs, which were often portrayed as as alternatives to bonds and other fixed-income investments.There is now a severe stigma associated with these products, which will not be helped given the disgraceful downfall of the biggest name in the industry.

Disclosure: The author is long ARCP.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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