Nicholas Schorsch strides into the Grand Ballroom of New York's Waldorf Astoria, clad in a dark suit, a red lanyard dangling from his neck. Despite the bags under his eyes–he's been up most of the night–he has the swagger of an industry titan. Schorsch is chairman or chief executive of over a dozen different companies, including a $19 billion enterprise-value publicly traded REIT, American Realty Capital Properties American Realty Capital Properties (ARCP). It's REITWeek, the most important annual gathering in the $1 trillion commercial real estate investment trust industry. According to his p.r. person Schorsch isn't scheduled to present today, but he can't help but grab center stage, delivering the first half of ARCP's talk to investors and analysts.
Road shows are Nick Schorsch's forte. Since 2008 he has raised more than $17 billion for his companies: 17 nontraded REITs, a business development corporation and an energy fund. In the last 15 months alone companies he controls have engaged in 12 transactions amounting to more than $35 billion worth of mergers and acquisitions.
To legions of financial advisors and their clients, Schorsch is the messiah of high yield. Virtually all of his specially structured real estate trusts aren't listed on any public exchange or followed by analysts, yet they are adored by mom-and-pop investors because they generate income at an average of 7%.
Schorsch's first, American Realty Capital Trust, merged with publicly traded Realty Income in January 2013, clinching a 49% total return over four years. Two of his other nontraded REITs, ARCT III and ARCT IV, merged into ARCP (the public company he runs), gaining 40% and 33%, respectively.
"It's more important to help the little guys than help big institutions or hedge funds," says Schorsch, 53, whose eye is riveted toward what he calls the mass affluent–investors with from $100,000 to $1 million in investable assets.
But Schorsch isn't waiting for the mass affluent to discover him. Through a blizzard of acquisitions, he has built the second-largest independent financial advisory operation in the nation, with 9,200 brokers. His now fully integrated operation manufactures nontraded, high-yielding REITs, provides research and advisory services to them, and controls a vast network of financial advisors who peddle them.
Alternative investments are all the rage, and income products are in hot demand. By FORBES' estimate Schorsch's ample fee income–including as much as 1% annually on the $35 billion in his nontraded REITs–plus ownership stakes in the companies he controls gives him a net worth of $1.5 billion.
Schorsch has long been driven to succeed. At high school in Philadelphia, his senior project was revamping a division of his father's metals fabrication business with his older brother Peter, then 21. Schorsch ran the plants; Peter was the front man in charge of marketing and business development. Schorsch dropped out of college but continued to read voraciously about business. By 23 he was on to another company, Thermal Reduction. It made 16 kinds of protective anodes when Schorsch started out. When he sold it a decade later in 1994 for just over $10 million, Thermal Reduction made 1,200 different anodes.
Having made a few million dollars by 34, Schorsch tried to retire. He bought a horse and a Porsche Porsche. He joined a few boards. But he wasn't happy. "I started bossing the dog around," he says. So he and his wife, Shelley, decided to create an M&A practice.
They started out buying what he describes as "durable" small businesses: a cemetery, a funeral home, glue factories, printers, a company that makes the shrink-wrap that seals plastic bottles and caps on Tylenol. Then, in 1998, he got a tip from his banker that First Union Bank had just purchased CoreStates Financial and was going to close 105 branches. Schorsch offered to buy them all. He was able to close the $22.3 million deal in 37 days and within a year had leased out all the branches–to other banks.
His big-league break came in 2002, when he met Lew Ranieri, the former Salomon Bros. trader made famous in Michael Lewis' Liar's Poker for inventing the mortgage-backed securities business. The men agreed to turn Schorsch's bank-branch real estate into a REIT and take it public. With Ranieri's connections, they raised about $400 million from private investors in 2002 and another $804 million from the REIT's IPO on the New York Stock Exchange in June 2003. American Financial Realty Trust (ticker: AFR) was soon a prominent, $2 billion market cap specialty REIT and the only one focused exclusively on real estate for financial institutions.
Schorsch went on an acquisition binge, buying assets in bulk at a discount–not just banks but office buildings and data and call centers–intending to sell off less desirable sites. But the sales didn't come as fast as he had planned, and investors questioned his get-big-fast strategy. With some properties struggling to fill leases, liquidity issues began to plague AFR. In August 2006 Schorsch was forced out.
"It was my baby," he recalls. "I had built the company."
After Schorsch's departure AFR continued to spiral, and ultimately in the fall of 2007 Gramercy Capital Corp. (a subsidiary of SL Green) acquired it for $1.1 billion. Shareholders who had paid $12.50 in Schorsch's IPO received about $8.43 in cash and stock. Over the same period Morgan Stanley's Morgan Stanley's REIT index climbed 94%.
But Schorsch was on to his next gig, with former AFR board member Bill Kahane as a partner. They hatched a new way to get rich fast, the "nontraded" REIT: opaque and illiquid real estate holding companies that throw off ample dividends. Like public REITs these securities must pay out at least 90% of their income to shareholders, so the yields would be high. The difference, however, comes in the fees and commissions they charge. The fine print on nontraded REITs reveals commissions to advisors of 7% to 10%, versus 1% to 3% or less on traded REITs or real estate ETFs. Another 3% or so goes to REIT wholesalers (controlled by Schorsch). All told nontraded REITs carry extraordinary fees of 10% to 15%.
Another problem is liquidity; often there's no easy way out of these REITs. A 2012 analysis by Green Street Advisors showed that only 40% of nontraded REITs could be freely redeemed. (Schorsch has won over financial advisors by diminishing fees and inventing scheduled liquidity events in which holders have the opportunity to sell shares back to the company.)
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