When I read American Realty Capital Trust Inc.'s SEC filings, they clearly state the following:
"In accordance with the asset management agreement, $6.3 million and $4.4 million was prepaid to the Advisor as of March 31, 2011 and December 31, 2010, respectively".
Those filings also state that the external advisor, American Realty Capital Advisors, subsequently waived a portion of these prepaid fees. However, the filings do not clearly state where that $10.7 million is now, or whether the waived fees were actually refunded to the REIT. In a nutshell, assuming all this is true, it should go something like this: (1) Fees Prepaid. (2) Fees Waived. (3) Waived Fees Refunded to REIT. You know, it's the good old "cash in, cash out" concept.
Only the filings that I read don't clearly reflect step number 3, and there is some question about where the cash is. Now, somebody from FactRight LLC has suddenly appeared on the scene, and they are dressed up like Leslie Neilsen:
Of course, I don't know anyone at FactRight, and I'm sure they're all perfectly great people, but FactRight's email to broker/dealers and reps this week seemed to indicate some reluctance to get to the bottom of things. Sadly, just as Moody's and S&P were paid well by bankers to rate the banks' own subprime mortgage deals in 2007, firms like FactRight are also paid well by sponsors to "rate" the sponsors' own REIT deals now:
FactRight LLC wrote:Over the past few weeks, FactRight received numerous calls from broker dealers and registered representatives who received a copy of a letter questioning certain practices adopted by American Realty Capital Trust, Inc. and its advisor. The issues raised in the letter have since become the subject of a blog posting on REITWrecks. Unsubstantiated negative press impacts everyone by raising doubts as to the integrity of our industry. I find it counterproductive to growth, building investor confidence and avoiding unnecessary regulatory oversight, not to mention the time and energy spent by many to run these rumors down."
So, when I read FactRight's ARCT memo this afternoon, the dismissive tone of their email caused a certain degree of open-minded skepticism on my part. Unfortunately, after a thorough read, I found the memo to be singularly successful in raising more questions than it answered, and more notable for what it didn't say then what it did say. And naturally, it wasn't long before I stubbed my toe on this strangely worded bit barely three pages in:
FactRight LLC wrote:If ARCT recorded the waived fees as expenses, it would not conform to GAAP. Since it does not, ARCT is following the proper accounting rules."
This statement is pretty ridiculous, particularly given the mini-firestorm that these questions appear to have ignited, and it simply ignores the heart of the controversy: Since ARCT is obviously not reporting the waived fees as expenses, which would not conform to GAAP, then how is ARCT reporting the waived fees??
My strong suspicion is that ARCT is accounting for the "waived" fees using an asset account on the balance sheet, which WOULD conform to GAAP, but WOULD NOT reflect the true finality of the commercial arrangements being reported to shareholders. If FactRight can't be bothered to ask obvious questions like this, it's sort of hard to take the memo seriously, never mind place any value in its utility (I like to surf too, but they even managed to misspell the word "waived".)
Once again, if that ARCT fee waiver is indeed permanent, then the cash associated with the fee waiver needs to be more than just "available to pay distributions to our stockholders," which FactRight obediently regurgitated in its memo (straight from page 43 of ARCT’s first quarter 10-Q). Maybe it's just me, but this looks like a fairly crafty use of the word "available," especially when combined with the lack of specificity on the accounting that is being employed to reflect the waived fees, and the fact that nobody has yet said anything about where the actual cash is.
In a nutshell, once again, it goes like this: (1) Fees Prepaid. (2) Fees Waived. (3) Waived Fees Refunded to REIT.
Now move along folks, there's nothing to see here. Please disperse!....
American Realty Capital, FFOol Me once...
I Run A Non-Traded REIT, And I Am a Rock Star