Wednesday, October 29, 2014

What's Going on? American Realty Capital Properties Inc (ARCP)

American Realty Capital Properties Inc (ARCP) traded down around 25% at the start of trade. So what is going on?


In short ARCP stated that: "You could/can no longer rely on our previously issued financial statements and we have made some changes to our accounting personnel."

From CNBC.com:

"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."

CNBC.COM

This is rely troubling news since I own 200 shares of ARCP.



10/29/2014 07:03 ARCP press release: American Realty Capital Properties Announces Non-Reliance on Previously Issued Financial Statements and Changes in Accounting Personnel Related reductions in adjusted funds from operations (AFFO) estimated to be $11,974,000 for the three months ended March 31, 2014 and $10,869,000 for the three months ended June 30, 2014, reporting non-controlling interests on a gross basis Michael Sodo named Chief Financial Officer and Gavin Brandon named Chief Accounting Officer No impact on first quarter Net Income First and second quarter NAV, Revenues, Net Operating Income and real estate property metrics are unaffected for relevant periods Previously announced annual dividend rate is not affected by the estimated reductions in AFFO No impact on the Company's balance sheet or the assets managed for Cole Capital® non-traded REITs Previously announced transactions are unaffected, including the sale of Cole Capital to RCS and the sub-advisory agreement with ARC Global II
Company Release - 10/29/2014 07:03


NEW YORK, Oct. 29, 2014 /PRNewswire/ -- American Realty Capital Properties, Inc. ("ARCP") (NASDAQ: ARCP) announced today the conclusion of its Audit Committee that the previously issued financial statements and other financial information contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and Quarterly Reports on Form 10-Q for the fiscal periods ended March 31, 2014 and June 30, 2014, and the Company's earnings releases and other financial communications for these periods, should no longer be relied upon. The Audit Committee based its conclusions on the preliminary findings of its investigation into concerns that were first reported to it on September 7, 2014. The Audit Committee promptly initiated an investigation, which is being conducted with the assistance of independent counsel and forensic experts. Senior management was informed of the preliminary findings of the investigation on October 24, 2014.

"The accounting issues are unacceptable and we are taking the personnel and other actions necessary to ensure that this does not happen again. 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 and diversification of our real estate assets, the depth and strength of our management team, the strong and predictable cash flows from our leases, the strength of our balance sheet and the size of our market opportunity," said David S. Kay, Chief Executive Officer of ARCP.

Although the Board is disappointed in these developments, the Board has full confidence in the management team and staff. The Audit Committee, Board and management team are fully committed to resolving this matter in an expedited and thorough manner. The Board continues to support management's efforts surrounding the simplification of the business, enhancements in transparency, and improvements to the predictability of our earnings, all with the goal of enhancing long-term value.

The Audit Committee's investigation conducted to date has not uncovered any errors in the consolidated financial statements (prepared in accordance with U.S. GAAP) for the three months ended March 31, 2014. However, based on the preliminary findings of the investigation, the Audit Committee believes that the Company incorrectly included certain amounts related to its non-controlling interests in the calculation of adjusted funds from operations ("AFFO"), a non-U.S. GAAP financial measure, for the three months ended March 31, 2014 and, as a result, overstated AFFO for this 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.

Based on the preliminary findings of the investigation, the Company has identified the potential adjustments shown on the attached financial table to the Company's reported net loss in accordance with U.S. GAAP for the three and six months ended June 30, 2014 and to reported AFFO for the three months ended March 31, 2014 and the three and six months ended June 30, 2014. The Company notes that, in calculating AFFO for the first quarter of 2014, the Company reported non-controlling interests on a net basis, while in the second quarter of 2014, as permitted, the Company reported non-controlling interests on a gross basis (which it will continue to do in calculating AFFO in future periods). The weighted average number of shares used in calculating AFFO differs depending on whether the net or gross method is used (but does not change for purposes of calculating net loss per share in accordance with U.S. GAAP). The investigation is ongoing and there can be no assurance that the potential adjustments set forth in the attached financial table will not change based upon the final results of the investigation, and any such change could be material.

The Audit Committee has indicated that nothing has come to its attention that leads it to believe that there are any errors in the Company's previously issued audited consolidated financial statements for the fiscal year ended December 31, 2013 contained in the Company's 2013 Form 10-K. However, the Audit Committee has expanded its investigation to encompass the Company's audited financial statements for this period in light of the fact that the Company's former Chief Financial Officer and former Chief Accounting Officer had key roles in the preparation of those financial statements.

Management does not expect this matter to impact any previously announced transactions, including the sale of Cole Capital to RCS Capital Corp. (NYSE: RCAP), which the Company expects to be completed next week and the sub-advisory agreement with ARC Global II. The identified potential adjustments would not affect the Company's compliance with the financial ratios in its debt covenants.

The Company also announced that effective immediately, Michael Sodo has been named Chief Financial Officer of the Company, replacing Brian Block. Mr. Sodo will report directly to David Kay and the Audit Committee. Mr. Sodo previously served as Senior Vice President, Director of Financial Reporting and Treasury. Mr. Sodo joined ARCP from Capital Automotive where he served in a number of roles of increasing seniority, most recently as SVP, Director of Financial Reporting and Treasurer. Gavin Brandon will serve as Chief Accounting Officer, replacing Lisa McAlister and reporting to Mr. Sodo. Mr. Brandon previously served as a Senior Vice President of Accounting where he oversaw acquisition accounting and property on-boarding, lease accounting, accounts payable, accounts receivable and process treasury services. Mr. Block and Ms. McAlister have resigned effective immediately.

In light of the preliminary findings of the Audit Committee's investigation, the Company is re-evaluating its financial reporting controls and procedures. The Company intends to make the necessary changes to its controls and procedures to remediate any control deficiencies that are identified through the Audit Committee's investigation.

The Company will work with the Audit Committee and the Audit Committee's independent advisors to determine the adjustments required to be made to the Company's previously issued financial statements, including the calculation of AFFO, as expeditiously as possible. Upon completion of this process, which could identify further required adjustments in addition to those discussed above, the Company will restate prior financial statements and amend its prior periodic filings to the extent required and update its earnings guidance at that time.

The Company will file its Quarterly Report on Form 10-Q for the period ended September 30, 2014 after the amended filings have been made.

Source and Potential Adjustments: http://ir.americanrealtycapitalproperties.com/file.aspx?IID=4280143&FID=25831896

CNBC.com  Faber Report: ARCP accounting errors: http://video.cnbc.com/gallery/?play=1&video=3000325564


It is hard to make any conclusions about this matter, since you cannot be sure how much it will affect the company's future financials, is all the bad news here or will there be more to come? 

Let's look at the positive things now or things that can be considered positive after that news.

- The bad accounting personnel has gone.
- The company says on the press release: No impact on first quarter Net Income First and second quarter NAV, Revenues, Net Operating Income and real estate property metrics are unaffected for relevant periods
- Dividend: Previously announced annual dividend rate is not affected by the estimated reductions in AFFO
- No impact on the Company's balance sheet or the assets managed for Cole Capital® non-traded REITs


Also Regarding these issues, ARCP's new CEO, David Kay noted that:


"The accounting issues are unacceptable and we are taking the personnel and other actions necessary to ensure that this does not happen again. 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 and diversification of our real estate assets, the depth and strength of our management team, the strong and predictable cash flows from our leases, the strength of our balance sheet and the size of our market opportunity,"


Obviously this will affect trust between ARCP and investors and there is a lot of fear on this stock right now, but for my point of view it is too late to sell, and I rather sit on this one and wait for what's coming next. If they are able to keep the current dividend ongoing then I have no doubts that this company is able to move forward. So I'll just sit back and wait for new news and hope for the best.

cheers!

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