Schorsch's empire jolted by $23M accounting mishap
Execs replaced over what firm calls intentional errors; REIT king says problems will not affect other related firms
Oct 29, 2014 @ 2:45 pm
By Bruce Kelly
(Bloomberg News)
Nicholas Schorsch downplayed the impact a $23 million accounting error will have on his REIT empire in a conference call with 300 broker-dealer executives Tuesday.
Earlier in the day, Mr. Schorsch's flagship REIT, American Realty Capital Properties, disclosed that it had replaced its chief financial officer and accounting officer after the company's senior management learned of accounting errors that reduced its adjusted funds from operations – AFFO – over the first half of this year by close to $23 million.
Michael Sodo is the new CFO of ARCP, replacing Brian Block, who resigned effective immediately. Gavin Brandon is the new chief accounting officer, replacing Lisa McAlister.
ARCP is a giant net lease REIT, with a market capitalization of $11.5 billion.
In the conference call, Mr. Schorsch said that the problems with accounting at ARCP in no way would affect the number of nontraded REITs that are created by American Realty Capital, and sold by RCS Capital Corp., the leading wholesaler of nontraded REITs. Both firms are controlled by Mr. Schorsch.
“How does it impact any [ARC] programs? It doesn't,” Mr. Schorsch said on the conference call. “It doesn't impact any programs by Cole [Capital],” another of the nontraded REIT brands controlled by Mr. Schorsch, he added.
RCS Capital and American Realty Capital “are not involved,” he said. “None of those programs are part of this transaction. If you remember, ARCP is a publicly traded company with $23 billion in assets. [They] have different boards [and] no affiliation.”
“The headline is mistakes were made, identified and the people involved were identified,” Mr. Schorsch said. “It will be fully corrected. It's not something I'm proud of or happy about. It's a very difficult situation to sever relationship with Brian Block after all these years.”
One ARCP investor was clearly disappointed.
“I suspected that there would be cracks in the foundation, but I never imagined ARCP would overstate earnings,” said Brad Thomas, a REIT investor and editor of a REIT newsletter, The Intelligent REIT Investor. “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.”
Accounting Officer Lisa McAlister (right) have both stepped down.
“As a value investor, I always pay close attention to fundamentals because they can tell us an awful lot,” he continued. “And while I was surprised with this latest news — the accounting snafu — I was buckled-up ready for the impact.” Mr. Thomas said he owned ARCP shares and was still long on the stock but was evaluating whether to sell.
“Now I must decide whether or not I can tolerate the continued volatility,” said Mr. Thomas. “More importantly, I am concerned about the sustainability of the dividend and whether ARCP can cover its all-important payout.”
ARCP's audit committee began investigating the accounting issues at the start of September, Mr. Schorsch said. Management learned of the accounting errors on Oct. 24 and worked immediately to correct the errors, he added. There was no involvement by regulators in the matter, Mr. Schorsch said.
Investors immediately punished Mr. Schorsch's publicly traded companies. In afternoon trading in New York, ARCP shares were trading at $8.80, down 28.9% for the day. Meanwhile, shares of RCAP were down 16.2% at $16.50.
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“The accounting issues are unacceptable and we are taking the personnel and other actions necessary to ensure that this does not happen again,” said ARCP's CEO, David Kay, in a statement Wednesday morning.
The accounting errors were intentional, the company said. ARCP's 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 that ended June 30, 2014.”
On the conference call, Mr. Schorsch downplayed the overall financial impact of the reduction of $23 million from adjusted funds from operations.
“There's no impact to net income” of ARCP, Mr. Schorsch said. “Also, GAAP financial statements are not impacted. The previously announced transactions with Blackstone and others are not impacted. The dividend has been reaffirmed.” ARCP said in May that it intended to sell most of its multitenant shopping-center buildings to affiliates of Blackstone Group for $1.98 billion in cash. That deal has yet to close.
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