Glenn Rufrano has a long to-do list. Rufrano, who was tapped to take over the scandal-plagued American Realty Capital Partners in April, is now in the thick of trying to turn the real estate investment trust around.
The industry is waiting with bated breath to find out exactly what his game plan is. The CEO — who announced that he would be changing the company’s name when it moves its stock to the New York Stock Exchange from Nasdaq early this month — is expected to reveal his strategy in an earnings call on August 6.
While Rufrano, the former CEO of Cushman & Wakefield, declined to comment in advance of that big reveal, industry observers say he has several key issues to tackle immediately.
His task is to turn what many consider a $20 billion disaster into a successful company. Regaining investors’ confidence is, not surprisingly, at the top of the list.
“People are going to say ‘I know that you hit one iceberg, how do I know that you’re not going to hit another,’” said Richard Morris, an attorney at Herrick Feinstein and a former regulatory auditor.
But Mitch Germain, an analyst with Manhattan-based investment bank JMP Securities who tracks ARCP, called Rufrano the “perfect individual for this job.”
“He has a long-standing track record with the REIT investing community, has done an absolutely fantastic job over the years building confidence, and has a really good understanding of the pulse of the investors,” said Germain.
Whether Rufrano can live up to that assessment remains to be seen.
Liquidation mode
As just about everyone in the real estate industry knows, American Realty Capital Partners began its sudden and stunning fall from grace last October.
That’s when the company’s management revealed that its chief financial officer had intentionally overstated its cash flow to mask prior accounting errors.
Not surprisingly, its stock price tanked (by 36 percent) in the immediate aftermath of the announcement. Late last month the share price stood at $8.62 — not even a dollar higher than its post-announcement low and far lower than its May 2013 high of $17.82.
Founded in December 2010, the company was one of several non-traded REITs launched by Nicholas Schorsch and managed by his umbrella firm, American Realty Capital. The New York-based ARCP has a national retail focus and actually doesn’t own any properties in New York City. American Realty Capital’s New York REIT — which has been aggressively buying up Manhattan office buildings — is a separate entity.
In September 2011, Schorsch and ARCP raised $70 million in an initial public offering, according to Bloomberg Business, and embarked on a massive buying spree that eventually made it the largest owner of single-tenant retail assets in the U.S.
Its biggest acquisition was Cole Real Estate Investments, a manager of non-traded REITs, for $9.85 billion.
JMP’s Mitch Germain said ARCP “didn’t effectively manage its balance sheet” during that rapid expansion.
Others weren’t as diplomatic. “It was a Ponzi scheme,” said an executive at a rival investor, who spoke on the condition of anonymity.
ARCP funded its growth with too much short-term debt, which dragged down revenue. Germain said the REIT’s debt stood at around 7.4 times gross earnings, while the industry average is between 5.5 and 6.5.
It will now be up to Rufrano to reduce ARCP’s debt level in order to turn a profit. To do that, sources say, he will have to make selling assets a big part of his soon-to-be revealed strategy.
“It will have to get into some form of liquidation mode,” Germain said.
Rufrano has already indicated he may sell parts of the portfolio.
“My guess is there’s stuff we should cull,” he told Crain’s in June. “So we’re going through the culling process.”
Cleaning house
Rufrano laid ARCP’s situation somewhat bare at a recent REIT Week conference in Manhattan.
“We have a lot of lawyers running around this company right now,” he told the audience in June, citing $10 million in legal fees for the firm in the first quarter.
But even as he acknowledged that there was “not much of a foundation to the company,” he struck a note of confidence.
“Once the market understands our corporate governance and business plan, we can start to get healthy,” Rufrano said. “We believe we can get there in a reasonable period of time.”
Rufrano may be basing that on the findings of an internal review that concluded before he stepped in. The company tapped the high-profile law firm Weil, Gotshal & Manges and the auditing firm Ernst & Young to comb through its books. Their review determined that the inflated stats weren’t a reflection of the overall financial health of the company’s portfolio. In other words, while cash flow was inflated, the value of the assets wasn’t.
But observers say Rufrano will have to show the business world that it’s investing in auditing and compliance to prevent these types of errors from happening again.
He’s already started to do that. In June, the company replaced its accounting firm, Grant Thornton, with Deloitte and then brought on a new general counsel: Lauren Goldberg, a former Assistant United States Attorney and chief compliance officer for cosmetics firm Revlon.
Those moves are in line with what other major firms have done in the wake of accounting scandals.
For example, British supermarket chain Tesco dropped its auditor of 20 years, PricewaterhouseCoopers, in January for Ernst & Young in the wake of accounting irregularities that prompted a fraud investigation.
But getting the accounting in order will likely be the easy part. Observers say ARCP has been way too aggressive in buying properties for above market rate and expanding too rapidly.
“They started to show value where everyone else was scratching their heads,” Germain said.
Meanwhile, in June 2014, ARCP investor Richard McGuire of investment firm Marcato Capital wrote a letter to the management, complaining about the company’s investment strategy (see related story on page 52).
“The company is engaging in too many transformative actions too quickly,” McGuire wrote.
Cutting ties
If industry speculators are correct, Rufrano will be taking action to further cut ties to Schorsch and anyone who was part of the leadership team during his reign.
While ARCP technically spun off from Schorsch’s American Realty Capital when it went public in 2011 and Schorsch formally stepped down as ARCP’s chairman last year, some investors have complained about some remaining links.
Keith Meister, head of hedge fund Corvex Management — which is an investor in ARCP — sent a letter to the REIT’s management in February urging it to replace its board with “truly independent directors” and to “purge any remaining ties with past affiliated entities and leadership.” While Schorsch no longer had formal ties to the company at the time of the letter, Meister was clearly implying that people close to him were still on the board.
Two board members — Leslie Michelson and former Pennsylvania Governor Edward Rendell — have since stepped down, but a new board won’t be named until the annual meeting in late September. Investors will undoubtedly be paying close attention to who is appointed.
And, the company name change, which is coupled with the company’s shift to the New York Stock Exchange from Nasdaq, is just one of many steps in the cleaning-house process.
Robert Rostan, CFO of financial education company Training The Street and a former accountant at Deloitte, said for firms like ARCP getting back on track is “largely a function of time and keeping their house in order.”
“Most of the time these things blow over,” he said.
