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AR Capital Suspends Capital Raising, Putting $2.3 Billion of Properties in Limbo

November 20, 2015

Fundraising To Be Cut Off for Trio of Non-Traded REITs With About $550 Million in Pending Acquisitions

By Mark Heschmeyer | CoStar

November 18, 2015

Alternative asset manager AR Capital LLC, one of the largest sponsors of non-traded REITs that has raised nearly $19 billion through more than a dozen such investment entities, announced this week it was suspending capital raising at the end of this year on a handful of offerings.

The company said its ability to raise investor money had been negatively affected by “regulatory and market uncertainty affecting capital raising for both new and existing offerings in the direct investment industry.”

The decision follows a particularly tough week for AR Capital. On Nov. 9, Apollo Global Management called off an agreement to acquire a controlling interest in a newly formed company that would have owned a majority of the AR Capital’s asset management business. And then on Nov. 12, the Enforcement Section of the Massachusetts Securities Division filed an administrative complaint against Realty Capital Securities LLC (RCS), an entity controlled by AR Capital, alleging that RCS had fabricated shareholder proxy votes related to the Apollo deal.

The decision to stop creating new investment products and close existing ones to new investors will cut off fundraising for four ARC REITs currently in the offering stage and one business development fund. Three of the REITs hold billions in property and debt and have more acquisitions pending. The suspension of fundraising puts the investment programs and owned properties in limbo and could put the REITs in default on pending deals.

The three REITs expected to be primarily affected by the decision to stop fundraising are: American Realty Capital Hospitality Trust with $1.9 billion in properties; American Realty Capital Global Trust II with $330 million in properties; and American Realty Capital Healthcare Trust III with $74 million in properties.

Also expected to be impacted by the decision are American Realty Capital New York City REIT II and Business Development Corporation of America II, although neither has yet to raise enough funds to break escrow and begin their investment programs.

In regulatory filings, each of the entities involved said there is no assurance as to when, or if, their offerings would be resumed or that they would be able to obtain the additional capital they require from other sources.

In addition, they said, the failure to raise adequate capital and suspending their offerings could adversely impact the value of investments in their common stock.

American Realty Capital Hospitality Trust

One the ARC REITs affected is ARC Hospitality Trust, which commenced its initial public offering of up to 80 million shares in January 2014. It has raised more than $645 million under its offering scheduled to end Jan. 7, 2016.

The REIT has several potential acquisitions pending that are now thrown into doubt. In June 2015, it agreed to acquire 44 hotels from three different sellers for $739.8 million.

In the last few weeks, it completed the first two closings from those agreements totaling $198.7 million. It is scheduled to complete the remaining acquisitions in six separate closings during the fourth quarter of 2015 and the first quarter of 2016.

Through Nov. 15, 2015, it had made $61.9 million in deposits with respect to the closings that have not yet occurred funded with proceeds from its offering. It also had entered into a term loan agreement for up to $450 million secured by mortgages on the hotels to be acquired.

“Our failure to obtain the funds required to complete the pending acquisitions, through proceeds from this offering, advances under the term loan agreement or from another source, could cause us to default under the related agreements and, as a result, forfeit all or a part of the $61.9 million in aggregate deposits,” the REIT disclosed in a regulatory filing.

ARC Hospitality Trust previously acquired some other sizeable hotel portfolios. In March 2014, it acquired the Barceló Portfolio for $110.1 million. The portfolio consists of the Baltimore Courtyard Inner Harbor Hotel, the Courtyard Providence Downtown Hotel and the Homewood Suites by Hilton Stratford, as well as one leased asset, the Georgia Tech Hotel & Conference Center and equity interests in two joint ventures that separately own the Westin Virginia Beach and the Hilton Garden Inn Blacksburg, VA.

In February 2015, it acquired the Grace Portfolio for $1.81 billion. The 116-hotel portfolio was acquired from subsidiaries of Goldman Sachs’ Whitehall Real Estate Funds.

American Realty Capital Global Trust II

ARC Global Trust II commenced its initial public offering in August 2014, raising nearly $247 million through September 2015. It too has pending acquisitions that could cause it to be in default if the deals do not go through.

The REIT acquired its largest property for $152 million last month, an office building in Reading, U.K. Known as The Foster Wheeler Energy Office Property, the 365,832-square-foot building is 100% master-leased to Foster Wheeler Energy Limited. The lease expires in August 2024.

American Realty Capital Healthcare Trust III

ARC Healthcare Trust III commenced its initial public offering in August 2014. As of Nov. 3, it had raised more than $156 million in gross proceeds. The offering wasn’t scheduled to end until August 2016.

Formed to acquire a diversified portfolio of healthcare-related assets including medical office buildings, seniors housing communities and other healthcare-related facilities, ARC Healthcare Trust III currently owns 13 properties.

Its most recent acquisition was also its largest and closed on Sept. 11, 2015, when it acquired a medical office building in Woodbury, MN, for $14.9 million. The Woodlake Office Center contains 36,375 rentable square feet and was 100% leased to Summit Orthopedics Ltd.

Reasons for the Suspension

AR Capital cited “regulatory and market uncertainty affecting capital raising for both new and existing offerings in the direct investment industry” as the reason for suspending all fundraising activity.

However, the move also follows two blows the company received last week.

On Nov. 9, Apollo Global Management LLC terminated its agreement to acquire a controlling interest in a newly formed company that would have owned a majority of the AR Capital’s asset management business.

Then on Nov. 12, the Enforcement Section of the Massachusetts Securities Division filed an administrative complaint against Realty Capital Securities LLC (RCS), an entity controlled by AR Capital and sponsor of the REITs impacted by the suspension. The administrative complaint alleges that employees of RCS fabricated numerous shareholder proxy votes across multiple entities sponsored by AR Capital but did not specifically refer to any actions taken in connection with any of the REIT’s proxy solicitations.

Following the complaint, AR Capital directed Realty Capital Securities to discontinue all proxy activities on behalf of all AR Capital-sponsored companies.

Although it has suspended all fundraising for the time being, AR Capital said it will continue to manage its $19 billion of investment programs.

“As the largest, well capitalized sponsor of non-traded REITs and BDCs in the direct investment industry, we will focus our efforts for the time being exclusively on managing our investment programs for the benefit of our shareholders, standing firmly by our “investor first” philosophy, and focusing on generating strong, risk-adjusted returns for our investors,” said William M. Kahane, the founding partner of AR Capital.

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Thomas E. Burns, III
July 29, 2015
February 22, 2016

I subscribe to Blue Vault to keep up with the sponsors and their wholesalers! The analysis keeps me up to date with the various portfolios and the way they are managed, including the differences between them.