Real-Estate Magnate Faces Criticism on Proposed Deal

Nicholas Schorsch, whose multibillion-dollar real-estate empire was rocked by an accounting scandal two years ago, has come under fire from an independent director who resigned from one of the companies Mr. Schorsch manages because he believed it suffered from a conflict of interest and was failing to act in the best interest of investors.

Robert Froehlich, whose background includes about three decades in the asset-management industry for firms including Deutsche Bank AG, resigned last month from the board of Realty Finance Trust Inc., a real-estate company managed by Mr. Schorsch’s company, AR Global.

Mr. Froehlich’s concerns stemmed primarily from an interest expressed by another company managed by AR Global in acquiring Realty Finance, he said in an interview with The Wall Street Journal.

Mr. Froehlich, who was chairman of Realty Finance’s audit committee, said he was upset that the board of Realty Finance hasn’t hired an adviser to independently review the expression of interest it received in February from the other company, American Finance Trust Inc.

Mr. Froehlich also criticized the proposed deal because the chief financial officer of the two companies involved is the same person, Nick Radesca.

“There’s no way in the world that you can sit as chief financial officer of two companies, one trying to buy the other,” said Mr. Froehlich. “You have to act with undivided loyalty.”

Messrs. Radesca and Schorsch didn’t respond to requests for comment.

In a filing with the Securities and Exchange Commission in May, Realty Finance said it “strongly disagreed” with Mr. Froehlich’s conflict of interest charge. The filing said Mr. Radesca was qualified and that his removal as chief financial officer “would be highly detrimental to the company and its shareholders.”

The company also disclosed that it had formed a special committee of its board “to consider exploring a potential strategic transaction with a related party” but didn’t identify that entity. The filing said that so far the special committee “hadn’t engaged in any substantive discussions” related to the terms of a transaction.

Both Realty Finance and American Finance are nontraded real-estate investment trusts, a type of investment that became popular with small investors in the years following the financial crisis because of the high dividends they offer. More recently, though, nontraded REITs have come under increasing scrutiny by regulators because of disclosure issues and high upfront fees.

Mr. Schorsch was the undisputed leader in the nontraded REIT business. He sponsored more than a dozen companies that raised more than $20 billion mostly from small investors, mostly in the years following the housing bust. His companies tend to own no flashy properties like stores that house Walgreens Co. outlets and medical buildings.

Realty Finance’s dispute with Mr. Froehlich is a sign that upheaval continues in Mr. Schorsch’s real-estate empire two years after his flagship company, American Realty Capital Properties Inc., said in an SEC filing that it had overstated financial results and that the mistakes were deliberately concealed.

The filing prompted investigations by the SEC and Justice Department and the resignations by Mr. Schorsch from the boards of American Realty and other companies he had sponsored. No charges have been filed.

American Realty, which has changed its name to Vereit, said in a March filing with the SEC that the company is continuing to cooperate with regulators in these investigations.

Mr. Schorsch and his longtime business partner, William Kahane, have retained majority ownership and control of AR Global, a management firm that is paid fees by more than 10 nontraded REITs including Realty Finance and American Finance Trust.

Mr. Froehlich said he believes that Mr. Schorsch is involved in the plan to combine the two firms although he hasn’t had any direct contact with him on the matter. “I don’t think there’s anything that goes on that he doesn’t have some role in,” Mr. Froehlich said.

Realty Finance, which invests in commercial mortgages, raised $782.8 million between 2013 and January of this year by selling shares mostly to small investors, according to Robert A. Stanger & Co., a securities firm that specializes in nontraded REITs. It currently is managed by Mr. Schorsch’s AR Global.

American Finance, the company interested in buying Realty Finance, last year cut a 20-year management deal with Mr. Schorsch’s AR Global. If American Finance acquires Realty Finance, it also would likely be subject to that same lengthy management agreement, he said.

Generally management agreements pay advisers 0.075% to 1% of how much assets are worth for such things as leasing and maintaining properties. The greater the assets, the greater the fees collected.

“If you roll it into a 20-year management agreement, as opposed to a one year management agreement, it’s fundamentally great for the adviser and not so great for the shareholder,” Mr. Froehlich said.

Realty Finance this week is scheduled to have a shareholder meeting. The agenda includes votes on changes to the company’s charter that would make it easier for Realty Finance to be acquired by American Finance, according to a report by Robert A. Stanger.

American Finance owns about $1.5 billion in property, most of it stores under long-term leases. Mr. Froehlich said that combining American Finance with Realty Finance was likely a bad idea for investors because they own different asset types: mortgages and retail properties.

The small investors who bought shares in Realty Finance “didn’t buy this product to be in a major conglomerate. They bought a sector-specific REIT,” he said.

Most nontraded REITs eventually are sold or are listed so investors can get their principal back, Mr. Froehlich said. “Ultimately these shareholders need liquidity and if you ever list this thing as a diversified conglomerate, it will not trade as well as a sector-specific REIT,” he said.

Mr. Froehlich’s term as director was scheduled to expire this month and wasn’t being renewed. But he resigned in May.

 

—WSJ