ARCP Releases Six Quarters of Restated Financials

By Scott Baltic, Contributing Editor

William Stanley, ARCP

In a low-key, by-the-book (no pun intended) presentation this morning, American Realty Capital Properties Inc. released its restated financial results for 2013 and the first two quarters of 2014. Those revisions followed revelations last fall of accounting irregularities, which in turn resulted in several key resignations, most prominently of chairman/CEO Nicholas Schorsch.

In late October, ARCP disclosed $23 million in accounting errors in its financials for the first half of 2014, errors that turned out to have been intentionally covered up. Both the company’s CFO, Brian Block, and its chief accounting officer, Lisa McAlister, quickly departed. (McAlister later sued ARCP, alleging that Schorsch had directed her and Block to hide previous accounting errors, and that she was fired for having been a whistleblower.)

And in mid-December, Schorsch himself left, as did David Kay, a short-lived ARCP CEO, and Lisa Beeson, the REIT’s president, while independent director William Stanley took the helm as interim chairman & CEO of ARCP. Moody’s promptly downgraded ARCP stock to junk status.

This morning’s conference call emphasized that ARCP’s investigation of the accounting concerns, which was assisted by Weil, Gotshal & Manges L.L.P. and Ernst & Young L.L.P., did not identify “any material changes relating to ARCP’s real estate ownership, rental revenue or fundamental business operations.”

Further, the presentation added, “The investigation did not identify any changes to the financial statements or operations of the Cole Capital sponsored non-traded REITs.”

Importantly, the restatement is now complete, noted Stanley, who added that all relationships with ARCP’s ousted management have been severed and that the REIT’s new headquarters, in Phoenix, symbolizes its separation from its recent past.

Key points from the presentation included:

•  ACRP’s net loss was understated for 2013 and the first quarter of 2014, though overstated for II/2014. AFFO was found to have been overstated for 2011, 2012, 2013 and the first two quarters of 2014. Specifically, 2013 reported net loss attributable to stockholders and net loss per share will be increased, by approximately $16.8 million and $0.08 per share, while AFFO (net method) and AFFO per share will be decreased by approximately $43.9 million and $0.20 per share.

• The ARCP Audit Committee found that certain payments made by ARCP to ARC Properties Advisors LLC and certain of its affiliates “were not sufficiently documented or otherwise warrant scrutiny.” ARCP has recovered about $8.5 million of that consideration.

•   ARCP’s investigation reportedly found that equity awards made to two former executives in connection with the REIT’s transition to self-management “contained provisions that, as drafted, were more favorable to such executives” than the board’s Compensation Committee had approved. In response, one former executive has relinquished all of his equity awards, according to ARCP, and the other has relinquished all of his equity awards other than 1 million restricted shares, which were accelerated, but are subject to potential clawback.
• Finally, third-quarter 2014 results include consolidated revenue of $457.1 million, an increase of $361.9 million over prior year period, and a net loss of $280.4 million, versus a net loss of $80.2 million in the prior year period. AFFO was $0.26 per diluted share, compared to $0.28 per diluted share in the prior year period.
• ARCP, with assistance from Korn Ferry, reportedly is well under way with the search for a new CEO and an independent, non-executive chairman. Stanley said that the REIT’s board is “in advanced discussions” with several candidates for those positions.
• The presentation acknowledged investigations by the Securities and Exchange Commission, the Department of Justice and the Commonwealth of Massachusetts and a total of eight securities and derivative actions currently pending in federal court and in state courts in New York and Maryland.

•  During the conference call, CFO/treasurer Mike Sodo noted that as of EoY about $3.2 billion is outstanding under ARCP’s $3.6 billion credit facility. And although Stanley added that regaining investment grade with the rating agencies is important, he emphasized that ARCP has multiple options for accessing capital.
• Finally, ARCP expects to reinstate common stock dividends by year’s end and further expects that dividends will subsequently be paid quarterly.

In a clear sign of its go-go level of activity preceding the current debacle, ARCP topped, by a wide margin, Commercial Property Executive’s recent lists of both the 20 most active REITS overall and the 15 most active retail REITs.