Realty Capital Says Cetera Spinoff ‘On the Table’

November 13, 2014 at 08:57 AM
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As RCS Capital reported weak third-quarter results Thursday, the company is looking at a potential spinoff of its broker-dealer operations – along with other options.

RCS Capital (RCAP) reported a loss in its third-quarter results of $32 million, or $0.59 per share, on Thursday; on an adjusted basis, earnings were $0.40 per share.

On a conference call with analysts, executives were clear about the many options they are considering in the face of a rapidly declining stock price and issues tied to sister company American Realty Capital Properties' (ARCP) disclosure of accounting errors on Oct. 23. That disclosure has led some broker-dealers and custodians to halt sales of products distributed by RCAP under the Cole and AR Capital brands. (See Schwab, Fidelity Stop Sales of Schorsch-Led Nontraded REITs)

Asked by an equity analyst about whether they are willing to break up the company and possibly spin off Cetera Financial Group, RCAP CEO Michael Weil said, "As we've indicated, there is not one thing that we are not willing to look at, and we will look at [everything] on a long-term strategic basis involving the broker-dealer operations and will come back to the market at the appropriate time with the results of that strategic review."

Pointing to the "incredible value" in the firm's retail advice business, Weil explained, "It's a little bit early, and we don't want to say anything ahead of evaluations of the broker-dealer and other options. It, along with everything, is on the table."  

RCAP's multiple broker-dealers include 9,139 affiliated independent advisors. 

As for the lawsuit filed Wednesday against it by ARCP over RCAP's recent move to cancel a planned purchase of certain Cole Capital operations, "It would be inappropriate to discuss our legal strategies publicly, and we remain confident in our legal position," the CEO said.

(Real-estate mogul Nicholas Schorsch is executive chairman of Realty Capital Securities, which conducts the wholesaling work of RCAP. He also is chairman of ARCP.)

The RCS Capital executives on the earnings call were less cautious in their outlook for the company's sales of nontraded REITs, which carry the AR Capital and Cole brands.

"Most suspended sales of Realty Capital Security products are expected to be reinstated by year end, said RCAP CFO Brian Jones. "After…more due diligence, several broker-dealers have [already] put them back in place."

The company, however, declined to name any specific broker-dealers that have ended their sales suspensions. 

"As I reflected on my 30 years on the broker-dealer side, my thought process went to where our partners are," said Bill Dwyer, CEO of Realty Capital Securities, during the call. "They inquired, and we responded."

Dwyer, who used to run LPL Financial's (LPLA) advisor operations, says the group has 800 selling agreements in place for alternative products, "a significant multiple of that of anyone else in the space."

"They want confirmation of the independence of each company [with ties to Schorsch] and the reliability of the financial statements," he explained. "This week sales suspensions have been lifted by a number of firms. We talked with about 100 institutions. We have gotten nothing but positive feedback."

RCAP's stock traded down about 2% on Thursday to $11.35. It has declined roughly 38% over the last 30 days, during which time the S&P 500 has improved 8.6% and the Dow Jones Equity REIT ETF has risen 7.1%.

In the third quarter, total revenue grew 6% year over year to about $697 million. Sales expanded 16% in the retail-advice segment to roughly $504 million, but dropped 7% in wholesale distribution to about $211 million. 

Advisor Business

RCAP also released some news of its broker-dealer business, excluding the results of VSR Group and Girard Securities, which are being acquired by the group and have about 500 affiliated reps.

It recruited 196 financial advisors in the third quarter with $15.2 million in trailing 12-month fees and commissions (or production). This represents average yearly production per rep of about $77,550, which is 43% higher than that of advisors who left the platform, according the Larry Roth, CEO of Cetera Financial.

"Our recruiting pipeline is more robust now than in the past 12 months when we look at it in the aggregate," Roth said.

The company's third-party recruiters "have been receiving more referrals in the past month than in the prior quarter," he explained. "In the last week, we've had our best recruiting week in several."

Roth, the former head of the AIG-owned Advisor Group, adds that Cetera "doesn't see any lasting or frankly any effects at all" from recent ARCP-related news.

"We will absolutely look at all our strategic options and are very confident in what Larry and this business are doing," said Weil.

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