(Bloomberg) American Realty Capital Properties Inc. fell for a second day Thursday after reporting accounting errors that led to the resignations of two top executives, sparking concern about the company’s ability to raise money for growth.
The stock sank 5.8 percent to $9.42, a record low, following a 19 percent plunge Wednesday. Moody’s Investors Service joined Standard & Poor’s on Thursday in saying it may cut the company’s credit rating to junk status.
The disclosure that a mistake in the landlord’s financial statements was intentionally concealed has erased more than $2.7 billion in market value at a company that has built itself into the largest owner of U.S. single tenant buildings in less than four years. The New York-based real estate investment trust said its reports for the first half of 2014 and all of last year should no longer be relied upon.
“There are definitely still unanswered questions,” said Paul Adornato, an analyst with BMO Capital Markets in New York. “We still don’t have clean financials.”
American Realty Chief Executive Officer David Kay said Wednesday that the accounting missteps came after a mistake in first-quarter results that wasn’t intended to inflate adjusted funds from operations, a measure of REIT cash flow. The company changed its accounting methods in the second quarter and a number was included that was used to hide the mistake from the prior period, he said.
Bad Judgment
The errors reflected “bad judgment,” Kay said on a conference call Wednesday. Brian Block, chief financial officer of the REIT since its inception in December 2010, and Chief Accounting Officer Lisa McAlister resigned.
American Realty was founded by Nicholas Schorsch, 53, who has built a real estate empire through his company AR Capital LLC, the biggest manager and operator of nontraded REITs. Block is listed on AR Capital’s website as a founding partner of that company.
American Realty Capital Properties was sponsored by AR Capital and went public in September 2011 at $12.50 a share. Schorsch, who had been CEO of the REIT before stepping down at the end of last month, went on an acquisition spree to make the company the largest owner of single-tenant buildings such as pharmacies and restaurants. The company completed at least 20 purchases since its shares began trading through June, according to data compiled by Bloomberg.
Borrowing Costs
The stock decline makes issuing shares to finance acquisitions unattractive, while a ratings downgrade would increase the debt costs, said Adornato. More expensive financing narrows the spread to make money on new investments.
“The bigger-picture question is: What does the higher cost of capital mean for their own acquisition program?” he said in a telephone interview. “That is the question that could be impacting the stock today.”
REITs are dependent on the capital markets to finance acquisitions and development because they can’t keep large amounts of cash on hand. They also are required to pay out most of their taxable earnings to shareholders.
Moody’s said in a report yesterday that the company’s access to debt and equity capital markets is curtailed until the review is resolved. In addition, “this purposeful hiding of the accounting error engenders questions about the company’s credibility and maintenance of investor trust,” the firm said.
—With assistance from Brian Louis in Chicago.
