2 ARCP Execs Resign in Midst of Accounting Errors, Stock Plummets

By Gail Kalinoski, Contributing Editor

Brian Block

Lisa McAllister

The CFO and top accounting executive at American Realty Capital Properties Inc., the largest single-tenant net-lease firm in the world, resigned Wednesday after ARCP admitted there were errors in its financial statements as recently as this year’s second quarter that “should no longer be relied upon.”

The news sent the stock plunging more than 30 percent throughout the day although it did seem to be recovering slightly later in the afternoon, ranging between a 22 and 23 percent decrease.

ARCP moved quickly to replace CFO Brian Block with Michael Sodo and Lisa McAllister, who was the Chief Accounting Officer, with Gavin Brandon. Sodo will report directly to ARCP CEO David Kay and the Audit Committee. He previously served as senior vice president, director of financial reporting and treasury. Sodo came to ARCP from Capital Automotive, where he had been senior vice president, director of financial reporting and treasurer. Brandon previously served as senior vice president of accounting.

The Audit Committee began investigating the financial statements Sept. 7 after concerns were raised, according to a release from New York-based ARCP. The committee, along with independent counsel and forensic experts, notified senior management Oct. 24 of its preliminary findings. ARCP said some amounts relating to its non-controlling interests were incorrectly calculated in the adjusted funds from operations, AFFO, for the three months ending March 31, 2014, and as a result overstated AFFO for that period.

“The Audit Committee believes that this error was identified but intentionally not corrected, and other AFFO and financial statement errors were intentionally made, resulting in an overstatement of AFFO and an understatement of the Company’s net loss for the three and six months ended June 30, 2014,” according to the statement.

The release notes that while the Audit Committee does not believe there were errors in financial statements for the fiscal year ending Dec. 31, 2013, it is still investigating the time period for any problems.

“The accounting issues are unacceptable and we are taking the personnel and other actions necessary to ensure that this does not happen again,” Kay stated in the release. “As disappointed as I am, I do not believe that this impairs, in any meaningful way, what is important about our company – the high quality of diversification of our real estate assets, the depth and strength of our management team, the strong and predicable cash flows from our leases, the strength of our balance sheet and the size of our market opportunity.”

ARCP said it does not expect the matter to impact any previously announced transactions, including the sale of Cole Capital to RCS Capital Corp. for $700 million, which was announced earlier this month and is expected to close next week. Cole Capital had been acquired as part of the $11.2 billion merger between ARCP and its former rival Cole Real Estate Investments, Inc., announced a year ago.

The merger was just one of many acquisitions totaling about $15 billion that ARCP Chairman Nicholas Schorsch has undertaken in the last three years as he has grown the REIT into the biggest owner of single-tenant properties in the United States. One of its bigger transactions announced this year was the $1.5 billion sale-leaseback deal for 500 Red Lobster restaurants. The REIT agreed to sell most of its multi-tenant shopping center portfolio to a Blackstone fund for $1.98 billion in cash to pay for the Red Lobster deal.

More recently, Schorsch has been growing AR Capital, its financial advisory business, with numerous acquisitions.

Schorsch had stepped down as CEO of ARCP in late September, part of a plan the company announced in June, but remains as chairman.

The news rattled investors and several law firms across the U.S. quickly announced they were investigating securities claims against ARCP and possibly beginning class action lawsuits to recover losses for investors.

“I suspected there would be cracks in the foundation, but I never imagined ARCP would overstate earnings,” Brad Thomas, editor of “Intelligent REIT Investor,” told Commercial Property Executive. “It’s obvious that a company that grows from $100 million to $20 billion in three years will have growing pains and specifically, integration risk.”