NEW YORK (Reuters) - RCS Capital Corp RCAP.N, which has amassed an army of almost 10,000 independent brokers in just over a year, said on Wednesday it is buying a firm that manages private real estate investment trusts (REITs) for retail investors.
RCS, whose executive chairman is Nicholas Schorsch, will pay at least $700 million in cash or stock and debt to buy Cole Capital from American Realty Capital Properties Inc ARCP.O, a company in which Schorsch also is a major shareholder. RCS could pay up to an additional $130 million if Cole hits certain profit goals. The deal is expected to close by yearend.
Cole’s asset management revenue, sales force and specialty REITs are tied to lease payments from businesses such as fast-food franchisees in single-occupancy buildings. The acquisition will diversify RCS’s revenue sources and add more than $73 million to earnings before interest, taxes, depreciation and amortization in 2015, Chief Executive Michael Weil said.
“What I‘m most excited about,” he told investors in a conference call, “[is] creating what is a significant recurring revenue stream based on asset management.”
The retail brokerage business is by far the largest of RCS’s six businesses, accounting for 43.5 percent of its earnings last quarter.
RCS also sells REITs and other investments through its “wholesale” network of more than 300 outside firms.
Since June 2013, Schorsch has engineered the purchase of eight independent broker-dealers with about 9,700 representatives. Two of the deals, for VSR Financial Services and Girard Securities, are pending.
Independent firms offer products, marketing and compliance services to brokers who are not employees. In return, brokers pay for much of their overhead but get to keep up to 90 percent of the fees and revenue they generate. That compares with the 20 percent to 50 percent retained by brokers who are employed by conventional firms.
By selling Cole-managed products to clients of its own brokerage firms, RCS can win twice - through commissions on the sales and fees for managing Cole’s $19 billion of REIT products. Schorsch, who was not available to comment for this story, has previously denied that he is creating a captive sales network for the REITs, investments with which he made his fortune.
Like all REITs, those sponsored by Schorsch’s companies return most of their profits in the form of dividends to investors. But most of those managed by Cole are not listed on exchanges, making them difficult to sell in troubled markets.
Shares of RCS Capital closed up 5.7 percent on Wednesday at $23.81 a share, the same price RCS will use to calculate the stock payment it wall make to American Realty Capital. ARC shares closed down 0.2 percent at $12.04.
REITs have proliferated at U.S. brokerage firms as alternative investments for affluent individuals who are frustrated with rock-bottom bond market returns for the last five years. RCS defines its target audience as “mass affluent” people with $250,000 to $2.5 million to invest.
Reporting By Jed Horowitz; Editing by Linda Stern and Steve Orlofsky