NEW YORK CITY—Seeking to dispel the perception that hiscompany's top financial personnel had sought to inflate quarterlyearnings numbers, American Realty CapitalProperties' CEO on Wednesday afternoon said the misstatedearnings grew out of an accounting error that was then covered up.The mistake, which precipitated a plummeting of the net leaseREIT's stock prices on Wednesday and prompted anumber of analysts to issue downgrades, resulted in theresignations of CFO Brian Block and chiefaccounting officer Lisa McAlister earlier the sameday.


“The best way I can describe what happened is that we don't havebad people, we had some bad judgment there, and we have twoemployees who have resigned as a result” of the decision to notdisclose an error in calculating adjusted funds from operations forthe first quarter, CEO David S. Kay said during a webcast Wednesdayafternoon. He pointed out that none of the GAAP measurements,including NAV, NOI and property metrics, were affected by theovestatement


ARCP's audit committee determined that in order to conceal theQ1 error, which resulted from a confusion of two differentaccounting methods to determine AFFO, an accrual that ought to havebeen included as an expense in Q2's numbers was instead moved up toQ3's ledger, Kay said. As a result, Q2's AFFO figure was inflatedby about 5% to $205.3 million, None of the current ARCP executiveshave been implicated in the investigation, he added.


With Block and McAlister having been replaced by MichaelSodo and Gavin Brandon, respectively, andwith changes coming to ARCP's financial reporting controls andprocedures, Kay sought to put the incident into perspective. “Webuy and manage assets in the net lease spacebetter than anybody,” he said on Wednesday's webcast. “Our companyhas bought more assets, has a high quality portfolio, nearly 50%investment grade-rated tenants, we have exceptional length andmaturity on our leases and we are significantly de-levered from 10months ago. We have simplified the business by not only selling ourmulti-tenant division but we have also contracted to sell ColeCapital, our broker-dealer.”


In a statement issued Wednesday, ARCP's board expressedconfidence in the REIT's current management, and Kay reiteratedthat he wasn't going anywhere. “I can assure you that I'm notmoving from this seat, other than to talk to investors and run thisbusiness. I have been asked on every call, am I going to stay withthe company? One hundred percent absolutely. This is not the idealsituation, but it is not the parade of horribles that the marketmay view this as today.”

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.