Times have certainly changed for AR Capital LLC (ARC) since the $2.6 billion sale of ARC Healthcare REIT to Ventas Inc. (NYSE: VTR) last year.
ARC, one of the largest sponsors of non-traded real estate investment trusts (REITs), has announced it will suspend new capital fundraising by the end of the year. The company has placed the blame on uncertain regulatory changes for non-traded REITs, but is also embroiled in its own legal troubles.
A real estate investment company that creates new public, non-traded REITs, ARC said it will not accept new investments “as a result of regulatory and market uncertainty affecting capital raising.” As of Thursday afternoon, Charles Schwab and Fidelity had stopped selling interests in AR Capital products.
While it will cease to raise new equity, the company has funds earmarked and available for all properties being acquired, both with purchase agreements and letters of intent, CIO Todd Jensen told Senior Housing News.* It will also continue to be in the market acquiring properties with debt capital.
The New York firm, formerly known as American Realty Capital, has close to $19 billion worth of investment programs across its affiliate companies.
“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,” William M. Kahane, founding partner of ARC, said in a statement.
The decision to halt fundraising will likely impact four of the firm’s REITs that are currently in the offering stage. American Realty Capital Healthcare Trust III, ARC’s creation that invests in health-care related assets and seniors housing communities, is still in its offering stage, which opened August 2014 and isn’t scheduled to end until August 2016. The REIT holds 13 properties and has raised more than $156 million in gross proceeds.
The news comes as regulations are being considered for non-traded REITs after the U.S. Department of Labor proposed a fiduciary rule earlier this year that could prohibit sales of alternative investments in brokerage retirement accounts.
Kahane noted that the pending regulatory changes proposed by the DOL have pressured the firm to suspend new investments.
“Until there is greater clarity, we have decided to sit this one out,” Kahane stated. “As a result, we do not intend to register any new product offerings nor pursue any of our existing offerings after Dec. 31, 2015.”
He added that should the regulations become more clear, the company may change its position.
However, the evolving regulatory environment is not the only issue standing in the way of the firm’s fundraising, as ARC has already run into its fair share of troubles throughout this year.
Earlier this month, Apollo Global Management (NYSE: APO) terminated its pending deal to acquire a controlling interest in one of ARC’s newly-formed companies, AR Global Investments, LLC. Just days later, an administrative complaint was filed against ARC’s affiliate company, Realty Capital Securities (RCS), by the Massachusetts Securities Division, questioning the integrity of proxy votes.
“The Enforcement Section’s investigation has uncovered a pattern of RCS employees masquerading as shareholders to cast proxy votes in favor of management proposals,” the complaint reads.
The negative headlines regarding AR Capital may only add to the headwinds already facing non-traded REITs, according to analyst Michael Knott of Green Street Advisors. These headwinds go beyond the regulatory issues cited by Kahane.
“Another negative recent development for non-traded REITs focused on health care is that the large listed companies that used to acquire huge portfolios or even entire companies like [ARC Healthcare REIT] now trade at discounts to NAV [net asset value], a 180-degree change from recent years when large NAV premiums equated to a ticket to an all-you-can-eat-buffet,” Knott told Senior Housing News.
This is bad news for non-traded REITs that hoped to create an attractive portfolio and sell to a traded REIT, Knott noted. Already, those traded REITs have pulled back on acquisition activity given that they no longer have a clear cost of capital advantage.
Despite these concerns, Knott acknowledges the success of American Realty Capital Healthcare REIT, the AR-sponsored REIT that was acquired by Ventas Inc. (NYSE: VTR) in 2014.
The third of ARC’s affiliate formations, ARC Healthcare Trust II, is now known as Healthcare Trust Inc. (HTI). In March, it announced its intention to list its common stock on a national stock exchange during the third quarter of 2015. In September, board members put a hold on its scheduled listing, citing market conditions and the pending deal with Apollo.
The decision to suspend capital raising for ARC Healthcare III is not expected to have any impact on the potential listing or other liquidity event for HTI, Jensen said.
*Editor’s Note: This article has been updated from a previous version, which suggested that AR Capital might be in danger of defaulting on ongoing deals. We regret the error.