ARCP's CFO Out After Earnings Overstated

NEW YORK CITY—American Realty Capital Properties has replaced its CFO and chief accounting officer after an audit committee determined that the net lease REIT's adjusted funds from operations had been overstated for the first and second quarters, while net losses were understated. The audit committee, ARCP said, determined that the accounting errors were “identified but intentionally not corrected” and that previously issued financial information from those quarters should no longer be relied upon.

Brian Block has resigned as CFO and has been replaced by Michael Sodo, who most recently was SVP, director of financial reporting and treasurer. Gavin Brandon has been promoted to chief accounting officer, replacing Lisa McAlister.

“The accounting issues are unacceptable and we are taking the personnel and other actions necessary to ensure that this does not happen again,” says CEO David S. Kay.  “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.”

ARCP has estimated that AFFO for Q1 will be reduced by just under $12 million from the $147.4 million originally reported for the quarter, while Q2 AFFO will be cut by $10.9 million, from the originally reported $205.3 million. Shares of ARCP, the largest publicly traded REIT in the net lease sector, were down by as much as 37% Wednesday morning, but subsequently began ticking upward. Analysts with Capital One Financial Corp., BMO Capital Markets and J.P. Morgan Chase & Co. downgraded their ratings on the REIT, Analyst Ratings Network reported Wednesday.

In an emailing to investors Wednesday, REIT analyst Brad Thomas wrote that although he'd suspected that there would be cracks in the foundation, “I never imagined ARCP would overstate earnings. 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. You are just kidding yourself if you don't recognize the enormous risk of aggregating buildings while simultaneously integrating management and de-leveraging the balance sheet.”