RCS’s Withdrawal from Cole Purchase: Latest Fallout from ARCP’s Accounting Woes

The brevity of yesterday’s press release by RCS Capital, announcing it was canceling its planned acquisition of Cole Capital Partners and Cole Capital Advisors from RCS’ sibling company ARCP, was in stark contrast to the announcement’s impact.
Nicholas Schorsch, ARCP's chairman & CEO

Nicholas Schorsch, ARCP

The brevity of yesterday’s press release by RCS Capital Corp., announcing that it was canceling its planned acquisition of Cole Capital Partners L.L.C. and Cole Capital Advisors Inc. from RCS’ sibling company American Realty Capital Properties Inc. (the release was just two paragraphs), was in stark contrast to the announcement’s impact.

The cancellation of what was to have been a $700 million transaction, and that would have been the latest in a string of headline-making transactions for the high-flying REIT, was also just the latest shock to ARCP, which has been jolted by bad news multiple times in the past week. Since Oct. 29, ARCP has seen an accounting scandal burst and the specter of federal investigations as well as ratings downgrades.

Later yesterday, nonetheless, ARCP fired back, stating that “RCS has no right and there is absolutely no basis for RCS to terminate the agreement. Therefore, RCS’s attempt to terminate the agreement constitutes a breach of the agreement.”

As of press time, RCS Capital (RCAP) had not responded to Commercial Property Executive’s request for further information.

Here’s a quick recap of the recent developments:

• Barely a month ago, it was announced that RCA Capital would buy Cole Capital from ARCP, which had acquired the private capital management company as part of the $11.2 billion deal in which ARCP merged with former competitor Cole Real Estate Investments Inc.

New ARCP president David Kay touted the Cole Capital sale as greatly simplifying ARCP’s business model, and in a conference call, RCAP CEO Michael Weil called the deal a “win for both companies.”

At the center of all this, in spirit at least, was Nicholas Schorsch, former CEO and current chairman of ARCP and also executive chairman of RCAP, who had led ARCP through a $15 billion, three-year string of acquisitions to become the world’s largest net-lease REIT.

•  But last Wednesday, Oct. 29, ARCP’s chief financial and chief accounting officers, Brian Block and Lisa McAllister, resigned after ARCP admitted that errors in financial statements as recently as the second quarter “should no longer be relied upon.” At issue, reportedly, were certain AFFO (adjusted funds from operations) figures that had been overstated and intentionally not corrected.

Fiscal 2013 financial statements were still under investigation by ARCP’s audit committee, and of course ARCP’s stock price took a major hit. In addition, S&P stated that it would examine the ARCP situation more closely.

The next day, as the stock continued to fall, Moody’s too put ARCP’s rating under review, amid media reports that the SEC would begin an investigation.

Among the latest developments, last Friday evening, Reuters exclusively reported that ARCP faces a criminal investigation over the accounting lapse, by the FBI in conjunction with the U.S. Attorney’s Office in New York.

Yesterday, Ladenburg Thalman suspended research coverage on ARCP, citing the federal investigations and concluding that the various risks involved are “unquantifiable.”

In its Monday TreppWire report, Trepp L.L.C. summarized its unofficial assessment of CMBS exposure to loans made to ARCP and to Cole Capital. It reportedly found that “The biggest intersection between CMBS and ARCP is the early 2014 deal known as DBCCR 2014-ARCP. The $620 million, 10-year fixed rate loan is collateralized by 82 ARCP properties across the U.S. and Puerto Rico.”

“The greatest exposure to ARCP,” TreppWire continued, “appears to be from properties it acquired as part of its purchase of Cole Capital earlier in the year … The totals are sizable”: more than 120 loans totaling at least $1.9 billion, about two-thirds from CMBS deals since 2010.

TreppWire noted that “Any problems with ARCP will not necessarily translate to problems for the CMBS loans. The notes themselves are backed primarily by leases that serve as the support for the loans.” In addition, a Trepp representative emphasized to CPE that the firm’s research so far is not definitive.