So, as I’m sure you heard, American Realty Capital Properties (ARCP) just released a press statement saying that their reported AFFO for 1Q14 and 2Q14 were misstated. 2013’s numbers are currently being investigated. Observe:
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 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.
According to SeekingAlpha, “2014 Q1 AFFO of $0.26 would be cut to $0.23, and Q2 AFFO of $0.24 would be cut to $0.22″. The company’s CFO and Chief Accounting Officer have since been replaced.
I want you to take a look, a really close look at the bolded lines. The company lied on their financial statements. As a shareholder, I have no words. I’m pissed. A company I trusted, a management I trusted, betrayed its shareholders. They purposefully inflated their numbers to make it appear that they were performing better financially than they were. Yeah, they ‘cleaned house’, so they say. Are you sure? Do you trust them when they say that? I don’t. What else are they hiding? I hear the SEC is now investigating. I don’t want any part of that. The dividend will most likely be cut soon as well. Revised numbers, lower numbers, probably mean they’ll have to adjust the distribution. Combine this with very quick expansion, difficult-to-understand business structure, an odd deal with Red Lobster, planned and cancelled spinoff of the mutitenant shopping centers, share dilution, the CEO resigning recently. What is even happening at ARCP?
And if I can be honest, I no longer remember why I invested in ARCP to begin with. It doesn’t suit my portfolio, and fails quite a few criteria. If I had come across it after solidifying my purchase criteria, I wouldn’t have touched it with a ten foot pole. I made a mistake in my purchase. I’ve felt that way for a bit, and this clarifies it for me.
ARCP has no place in my portfolio. As of market open, 10/30/2014, I have sold 405.327 shares of ARCP, my whole position, at $9.74/share. A new purchase will be announced very soon. Yeah, it may be a good value; there’s still good real estate and good rents being collected. Those who hold through this time may make a lot of money. But ARCP is no longer a sleep-well-at-night stock for me. I can’t, I don’t, trust it. Good luck to those who will keep holding or buying. I’m no longer among them.
Those of you who own ARCP: are you buying, selling, or holding? If not, will you go long, or are you glad you’ve stayed away?
Disclosure: None.
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10 Comments
Hi DD, what happened here is… wow!! It’s just pissing me off. For now I still own my 200 shares… not a big stake but by selling now I would have a 600$ loss or two weeks of savings. I didn’t want to sell under emotions and not with such a loss… the stock fell by almost 40% intraday on day 1. People are emotionnal. But waiting is a dangerous game too… anytime another bad news might be published and put a lot of pressure on share price and increase my loss. One bad news usually doesn’t stay alone for long. Tons of auditors, lawyers and reporters will dissect everything they did and have said… they will probably find something else… Honestly, I don’t want to hold this stock anymore but timing an exit is even harder than timing a buy.
Warren Buffett emphasized that honest managers are of most importance when you pick a stock. While it’s hard to evaluate if managers are honest or not, we can see here what kind of damage it does when they are not. Warren had to deal with a similar situation in the past has an investor in Salomon. He had to become CEO of the company for a while to try to save it… it was a real mess.
You probably did the best move.
Yeah, I don’t really blame you for holding for a bit longer. Who knows how the investigation will go. I debated about holding off, but that one word really bothered me: “intentionally”. They knew they made a mistake and chose not to fix it. I don’t want a part of that. I took about a $1,000 loss on my position when I sold. Didn’t worry about the best timing; just did it. Well worth it to be free of the doubt. If you want my opinion, just sell. Don’t worry about the loss. It could get better, but it could get worse too, and I think it’ll be the latter.
I remembered looking at ARCP a few months ago then completely forgot about them. I guess they popped back up in the news again. The company never provided any annual reports/letter to shareholder when I looked at them so that’s why they went off my radar. It looks interesting.
From the looks of it, the stock is trading below book value! But who knows if that is even accurate. I might buy some. It’s not like the company is going to go bankrupt, there are real assets that generate cash flow.
Henry @ Living At Home recently posted…An Honest Valuation Of Tesla Motors (TSLA)
Yeah, they may present a good value now. Just depends on whether you trust management anymore. If you don’t, well … let’s just say there’s not a large enough discount to BV to make me buy. Best of luck if you do buy though!
FWIW I think you have the right attitude about this one and in the long run you’ll be well served by your rules and sticking to high quality. Probably a lot of people will say that because you’re young you can afford to take on the risk…I look at it differently – you’re young, already off to a good start saving, have a high income and savings rate – so you can achieve FI early in life while being very conservative in your investing.
It was a feat of luck on the timing, but I happened to sell out of ARCP last week to buy UL…Like you I had reached the point where I wondered how I ever bought ARCP in the first place – it never had the track record to earn the benefit of the doubt. Wouldn’t really have been a big deal either way because it was <1% position for me but I'm glad to be rid of it, and have no interest in getting back in regardless of the current price. I wouldn't be at all surprised if more bad news comes out of this one.
Congratulations on selling before the news. Definitely got lucky there. I feel exactly as you say. I’m already on a good path, with FIRE a reasonable goal. Why would I ever want to jeopardize that with companies that I don’t trust and that aren’t good quality? The same people who tell me I can and should take a large amount of risk were the same kind of people who poured everything into companies like GTAT. Look how well that went. If nothing else, that’s all the more reason to take it slow and steady. Don’t take excessive risk, and I’ll turn out fine.
Well in my short investing history this is a first. Ideally my portfolio would be made up entirely of strong, trustworthy companies and these recent events obviously violates that. I think you were smart to get out as soon you knew that company you own violates your trust. I have small position in ARCP so I might hold out to see what happens but I will definitely be thinking long and hard about what this means to me as and investor.
Yeah, it’s an interesting experience. I sold my old GM stock because I didn’t like management, but outright fraud is definitely new to me. Best of luck.
I am glad I stayed away. I almost went ahead and pulled the trigger before it crashed, but I just held tight. I am glad I did. Who knows what is going on now with ARCP, but with the FBI involved it isn’t just a mistake. Time will tell with this one. Thanks for including me in your blogroll.
Keep cranking,
Robert the DividendDreamer
You definitely got lucky there! As soon as I heard that about the FBI, I knew I made the right choice. No problem on the blogroll.