Plaintiff Carolyn St. Clair-Hibbard and other shareholders have initiated a second complaint against American Finance Trust Inc (Nasdaq: AFIN), American Finance Advisors, LLC., AR Global Investments, LLC., and its majority owners, William M. Kahane, co-founder of AR Capital (now AR Global) and Nicholas S. Schorsch, chief executive officer and controlling owner of AR Global.
AFIN was a non-traded REIT, previously known as American Realty Capital Trust V, Inc. It was formed on January 22, 2013 to acquire and operate “primarily freestanding, single tenant retail properties net leased to investment grade and other creditworthy tenants.”
Yet, the legal complaint alleges the abandonment of these investment objectives and that, in lieu of Schorsch and Kahane’s fiduciary duties, the two systematically usurped shareholders’ rights to make informed decisions by providing inaccurate and misleading proxy statements.
As a result, the suit seeks to recover damages and rescind the merger between AFIN and Retail Centers of America (RCA) as well as a second amended advisory agreement, and a third non-cancellable advisory agreement, which the plaintiffs allege has erased stockholders’ share value and liquidity.
Proxy statements suggested the merger “would create a fee structure with a lower base management fee as a percentage of combined assets and cost efficiencies, which would contribute to stronger dividend, enhanced liquidity and operating flexibility.” In actuality, per the lawsuit, it created a vehicle to roll up all of its affiliated non-traded public REITS into AFIN and another AR Global affiliate in order to garner unfair and above-market fees through 20-year non-cancellable advisory agreements.
Though AFIN initially suggested investors would be presented a path to liquidity by its sixth year, this was amended by the third advisory agreement. Further reducing shareholder value and liquidity, while undermining a potential public listing, this advisory agreement discouraged any potential takeover with a $125-million internalization fee that would accompany any buyout.
Though AFIN introduced its IPO on July 19, 2018 on the NASDAQ, shareholders grew frustrated by proxy materials that made repeated references to the liquidity that would be created through a public listing on the New York Stock Exchange between 2015-2017.
As another carrot to solicit shareholder votes, AFIN proxy statements on February 9, 2017, disclosed the company, “intends to list the stock upon the closing of the merger.”
Schorsch and Kahane omitted AFIN’s rationale for not listing its stock on either the NYSE or NASDAQ despite securing listing approvals by both. It omitted that its cashflow declined by more than $16 million between 2015-2016. It omitted the eminent termination of its share repurchase program, thereby leaving no liquidity option for shareholders. It omitted that its stockholders’ equity dropped 15 percent in 2016.
According to the lawsuit, Schorsch and his fellow defendants also failed to disclose the sale of Merrill Lynch properties for a price of $148 million, on January 31, 2017, at a loss of nearly $17.5 million. They failed to disclose that they wrote down the value of its SunTrust properties by $24.7 million for “impairment changes.”
And they failed to disclose adverse information regarding a drastic decline in AFIN’s NAV, asset impairments and dramatic declines in the flow of funds from operations. All critical to AFIN’s current level of dividends and stock redemptions at the time.
The complaint was submitted by attorney, Olimpio Lee Squitieri of Squitieri & Fearon, LLP and seeks a class action lawsuit on behalf of the plaintiff, Carolyn St. Clair-Hibbard, and potentially hundreds of other individual and entity shareholders. As of October 2017, there were approximately 104.8 million shares of AFIN common stock outstanding.