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American Realty Capital Crashes 19.2% on Accounting Issues

Wednesday turned out to be a nightmare for shareholders of American Realty Capital Properties Inc. (ARCP) as the stock price tumbled over 19% on the disclosure of accounting mistakes. The errors were reportedly concealed and the fiasco resulted in the immediate resignation of two top brass officials – the Chief Financial Officer and Chief Accounting Officer.

As per the Audit Committee, the accounting mistake led to overstatement of adjusted funds from operations – a popular metric to determine a REIT’s performance – and understatement of the company’s net loss for the first quarter as well as the first half of this year.

In numbers, this overstatement amounted to nearly $12 million for the first quarter and $10.9 million for the second quarter of 2014. The Audit Committee further believes that though this error was well spotted, it was initially suppressed on intention. In addition to the quarterly reports of this year, the company has further asked not to rely on its financial statement for full year 2013.

American Realty Capital named Gavin Brandon as the new Chief Accounting Officer, replacing Lisa McAlister and appointed Michael Sodo as the new Chief Financial Officer of the company, replacing Brian Block.

According to media sources, the Securities and Exchange Commission is planning a probe into this matter. Furthermore, ratings of the company have been placed under review by Standard & Poor’s for a possible downgrade.

Such news obviously erodes investors’ confidence on the stock and the reaction is well reflected in yesterday’s share price plunge. Moreover, as trustworthiness concerns crop up, the company may need to bear more cost for capital. This, in turn, can impede the growth momentum of this company, which has relied on acquisitions for a major part of its expansion.

Though management does not expect these accounting issues to affect the sale of Cole Capital to RCS Capital Corp. (RCAP), that stock too, tanked over 14% in yesterday’s trading.

American Realty Capital currently carries a Zacks Rank #3 (Hold). Investors in the retail real estate investment trust (:REIT) may have a look toward some better-ranked stocks like DDR Corp. (DDR) and The Macerich Co. (MAC). Both these stocks hold a Zacks Rank #2 (Buy).

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Read the Full Research Report on RCAP


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