RCAP Reports Q3 Earnings, Discusses Accounting Review

Despite a tidal wave of setbacks flowing through Nicholas Schorsch’s empire, business must go on and that includes earnings updates and looking to the future.

RCS Capital Corporation (NYSE: RCAP) (RCAP) announced this morning operating results for the third quarter. RCAP is the holding company that owns RC Securities the wholesale distributor of AR Capital’s non-traded investments and other managers, plus Cetera Financial Group the broker-dealer network amassed by Schorsch over the past year and a half which now boasts over 9,000 advisors.

The third quarter was largely unscathed from the recent issues haunting RCAP as a result of announced and hidden accounting irregularities at American Realty Capital Properties (ARCP), an unaffiliated entity that shares common roots and ownership, namely, Schorsch.

“We continued to deliver solid results in the most recent quarter,” said Michael Weil, Chief Executive Officer of RCS Capital. “Our retail advice division continues to grow top-line at double digit rates with Adjusted EBTDA growth significantly outpacing revenue growth as we continue to see margin expansion resulting from increased scale and the natural operating leverage of our business. Our retail advice business remains unaffected by the recent events involving American Realty Capital Properties, and we expect to continue to retain and recruit industry-leading advisors while exhibiting both strong revenue and EBITDA growth in the fourth quarter of 2014 and in 2015.”

Many broker-dealers have suspended sales of AR Capital products, which are distributed through RCAP and contribute significantly to its bottom line, driven by fear that the issues with ARCP could turn up in other Schorsch entities. RCAP has been quick to demonstrate it’s a separate company with no overlap amongst accounting departments.

Weil added, “Given the events of the past couple of weeks triggered by disclosures made by [ARCP] on October 29, 2014 regarding their historical financial statements and internal controls, on October, 31, 2014, our audit committee retained independent external counsel to conduct a review in accordance with specified procedures that were determined prudent and appropriate by our audit committee, but that did not include email review. Counsel was assisted by an outside forensic accounting firm. Following counsel’s review as assisted by the outside forensic accounting firm, RCS Capital’s audit committee, board of directors and management team remain confident in the company’s reported historical financials, accounting, and internal controls for each of the three quarters in the nine-month period ending September 30, 2013.”

During the third quarter, RC Securities raised $2.3 billion in equity across its investment offerings, putting it at $8.2 billion raised year-to-date.

The Wall Street Journal reports that Citigroup analyst William Katz does not expect to see any growth for the next two years for the wholesale distributor. Katz forecasts that RC Securities will likely only raise $8 billion in 2015 and 2016, significantly less than the $14 billion it raised in 2013 due to the suspensions of sales by many independent broker-dealers and other macro factors.

Just yesterday, ARCP announced it had filed litigation against RCAP for its breach of purchase agreement as it relates to the Cole Capital transaction.