Shares in American Realty Capital Properties Inc., the biggest U.S. owner of single-tenant properties, plunged as much as 37% after the company said it had replaced two executives following errors in its financial statements.
Brian Block left as chief financial officer and has been replaced by Michael Sodo, while Gavin Brandon was named chief accounting officer in place of Lisa McAlister, the New York- based real estate investment trust said in a statement today. The company said that some amounts related to non-controlling interests likely were incorrectly included in adjusted funds from operations, an error the audit committee believes was identified but intentionally not corrected.
“The question is who knew what and when did they know it,” Paul Adornato, an analyst with BMO Capital Markets in New York who cut his rating on the shares, said in a phone interview. “Until those questions are resolved, it will be difficult to recommend the stock.”
American Realty shares slid 30% to $8.68 at 12:30 p.m. New York time. They had lost 3.7% this year before today, compared with a 20% gain in the Bloomberg REIT index. The company was the 16th-largest U.S. REIT by market value as of yesterday, according to data compiled by Bloomberg. (Shares were down about 19% at market close. –Thinkadvisor ed.)
American Realty is the biggest owner of single-tenant properties such as pharmacies and restaurants, growing through an acquisition spree since it began trading three years ago. Founder Nicholas Schorsch, 53, stepped down as chief executive officer at the end of last month under a plan announced in June. He remains chairman.
The accounting errors resulted in an overstatement of adjusted funds from operations — a measure of REIT cash flow — and understated the company’s net loss for the first quarter and first half of the year. American Realty will reduce its adjusted FFO by $12 million for the first quarter and $10.9 million for the three months ended in June, according to the statement.
The audit committee believes other financial statement errors were intentionally made, American Realty said. The investigation has expanded to include all audited 2013 numbers since Block and McAlister had “key roles in the preparation of those financial statements,” the company said. The audit committee said nothing has come to its attention that leads it to believe there are errors in those statements.
Block had been chief financial officer of American Realty since its inception in December 2010, according to company regulatory filings.
“The accounting issues are unacceptable and we are taking the personnel and other actions necessary to ensure that this does not happen again,” CEO David S. Kay said in the statement.