NEW YORK, Oct. 29, 2014 /PRNewswire/ -- 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 accounting issues are unacceptable and we are taking the
personnel and other actions necessary to ensure that this does not
happen again. As disappointed as I am, I do not believe that
this impairs, in any meaningful way, what is important about our
Company – the high quality and diversification of our real estate
assets, the depth and strength of our management team, the strong
and predictable cash flows from our leases, the strength of our
balance sheet and the size of our market opportunity," said
David S. Kay, Chief Executive
Officer of ARCP.
Although the Board is disappointed in these developments, the
Board has full confidence in the management team and staff.
The Audit Committee, Board and management team are fully committed
to resolving this matter in an expedited and thorough manner.
The Board continues to support management's efforts surrounding the
simplification of the business, enhancements in transparency, and
improvements to the predictability of our earnings, all with the
goal of enhancing long-term value.
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.
Based on the preliminary findings of the investigation, the
Company has identified the potential adjustments shown on the
attached financial table to the Company's reported net loss in
accordance with U.S. GAAP for the three and six months ended
June 30, 2014 and to reported AFFO
for the three months ended March 31,
2014 and the three and six months ended June 30, 2014. The Company notes that, in
calculating AFFO for the first quarter of 2014, the Company
reported non-controlling interests on a net basis, while in the
second quarter of 2014, as permitted, the Company reported
non-controlling interests on a gross basis (which it will continue
to do in calculating AFFO in future periods). The weighted
average number of shares used in calculating AFFO differs depending
on whether the net or gross method is used (but does not change for
purposes of calculating net loss per share in accordance with U.S.
GAAP). The investigation is ongoing and there can be no
assurance that the potential adjustments set forth in the attached
financial table will not change based upon the final results of the
investigation, and any such change could be material.
The Audit Committee has indicated that nothing has come to its
attention that leads it to believe that there are any errors in the
Company's previously issued audited consolidated financial
statements for the fiscal year ended December 31, 2013 contained in the Company's 2013
Form 10-K. However, the Audit Committee has expanded its
investigation to encompass the Company's audited financial
statements for this period in light of the fact that the Company's
former Chief Financial Officer and former Chief Accounting Officer
had key roles in the preparation of those financial statements.
Management does not expect this matter to impact any previously
announced transactions, including the sale of Cole Capital to RCS
Capital Corp. (NYSE: RCAP), which the Company expects to be
completed next week and the sub-advisory agreement with ARC Global
II. The identified potential adjustments would not affect the
Company's compliance with the financial ratios in its debt
covenants.
The Company also announced that effective immediately,
Michael Sodo has been named Chief
Financial Officer of the Company, replacing Brian Block. Mr. Sodo will report directly
to David Kay and the Audit
Committee. Mr. Sodo previously served as Senior Vice
President, Director of Financial Reporting and Treasury. Mr.
Sodo joined ARCP from Capital Automotive where he served in a
number of roles of increasing seniority, most recently as SVP,
Director of Financial Reporting and Treasurer.
Gavin Brandon will serve as Chief
Accounting Officer, replacing Lisa
McAlister and reporting to Mr. Sodo. Mr. Brandon
previously served as a Senior Vice President of Accounting where he
oversaw acquisition accounting and property on-boarding, lease
accounting, accounts payable, accounts receivable and process
treasury services. Mr. Block and Ms. McAlister have resigned
effective immediately.
In light of the preliminary findings of the Audit Committee's
investigation, the Company is re-evaluating its financial reporting
controls and procedures. The Company intends to make the
necessary changes to its controls and procedures to remediate any
control deficiencies that are identified through the Audit
Committee's investigation.
The Company will work with the Audit Committee and the Audit
Committee's independent advisors to determine the adjustments
required to be made to the Company's previously issued financial
statements, including the calculation of AFFO, as expeditiously as
possible. Upon completion of this process, which could
identify further required adjustments in addition to those
discussed above, the Company will restate prior financial
statements and amend its prior periodic filings to the extent
required and update its earnings guidance at that time.
The Company will file its Quarterly Report on Form 10-Q for the
period ended September 30, 2014 after
the amended filings have been made.
|
Potential
Adjustments
|
|
Amounts in
Thousands
|
(except per share
amounts)
|
|
|
|
|
|
|
|
AFFO (Presented on
a Net Basis):
|
|
Three Months
Ended
March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
AFFO - Originally
Reported
|
|
$
147,389
|
|
|
|
|
Preliminary
Adjustments
|
|
(17,638)
|
|
|
|
|
AFFO -
Adjusted
|
|
$
129,751
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
Shares, Fully Diluted - Originally Reported
|
|
573,728
|
|
|
|
|
|
|
|
|
|
|
|
AFFO Per Share -
Originally Reported
|
|
$
0.26
|
|
|
|
|
Results of
Preliminary Adjustments to AFFO
|
|
$
(0.03)
|
|
|
|
|
AFFO per Share -
Adjusted
|
|
$
0.23
|
|
|
|
|
|
|
|
|
|
|
|
AFFO (Presented on
a Gross Basis):
|
|
Three Months
Ended
March 31, 2014
|
|
Three Months
Ended
June 30, 2014
|
|
Six Months
Ended
June 30, 2014
|
|
|
|
|
|
|
|
AFFO - Originally
Reported
|
|
$
147,780
|
(1)
|
$
205,278
|
|
$ 353,058
|
Preliminary U.S. GAAP
Adjustments
|
|
-
|
|
(9,242)
|
|
(9,242)
|
Preliminary
Adjustments - AFFO Only
|
|
(11,974)
|
|
(1,627)
|
|
(13,601)
|
AFFO -
Adjusted
|
|
$
135,806
|
|
$ 194,409
|
|
$ 330,215
|
|
|
|
|
|
|
|
Weighted Average
Shares, Fully Diluted - Originally Reported
|
|
573,728
|
|
869,094
|
|
722,118
|
Adjusted for Gross
Basis
|
|
22,044
|
|
-
|
|
11,022
|
Weighted Average
Shares, Fully Diluted - Adjusted
|
|
595,772
|
|
869,094
|
|
733,140
|
|
|
|
|
|
|
|
AFFO Per Share -
Originally Reported
|
|
$
0.26
|
|
$
0.24
|
|
$
0.49
|
Results of
Preliminary Adjustments to AFFO
|
|
$
(0.03)
|
|
$
(0.01)
|
|
$
(0.04)
|
AFFO per Share -
Adjusted
|
|
$
0.23
|
|
$
0.22
|
|
$
0.45
|
|
|
|
|
|
|
|
(1) Represents
AFFO as reported for the six months ended June 30, 2014 less AFFO
as reported for the three months ended June 30, 2014
|
|
|
|
|
|
|
|
U.S. GAAP EPS
Calculation
|
|
Three Months
Ended
March 31, 2014
|
|
Three Months
Ended
June 30, 2014
|
|
Six Months
Ended
June 30, 2014
|
|
|
|
|
|
|
|
Net Loss Attributable
to Common Stockholders - Originally Reported
|
$ (332,313)
|
|
$ (63,419)
|
|
$ (395,732)
|
Preliminary U.S. GAAP
Adjustments
|
|
-
|
|
(9,242)
|
|
(9,242)
|
Adjusted Net Loss
Attributable to Common Stockholders
|
|
$ (332,313)
|
|
$ (72,661)
|
|
$ (404,974)
|
|
|
|
|
|
|
|
Basic and Diluted
Weighted Average Shares - Originally Reported
|
|
547,782
|
|
815,741
|
|
682,502
|
U.S. GAAP EPS -
Originally Reported
|
|
$
(0.61)
|
|
$ (0.08)
|
|
$
(0.58)
|
Results of
Preliminary Adjustments to U.S. GAAP
|
|
$
-
|
|
$ (0.01)
|
|
$
(0.01)
|
U.S. GAAP EPS -
Adjusted
|
|
$
(0.61)
|
|
$ (0.09)
|
|
$
(0.59)
|
About ARCP
ARCP is a leading, self-managed commercial real estate
investment trust ("REIT") focused on investing in single tenant
freestanding commercial properties subject to net leases with high
credit quality tenants. ARCP owns approximately 4,400 properties
totaling 99.1 million square feet of leasable space. Additionally,
ARCP acquires and manages assets on behalf of the Cole Capital®
non-traded REITs, managing nearly $30
billion of high-quality real estate located in 49 states, as
well as Washington D.C.,
Puerto Rico and Canada. ARCP is a publicly traded Maryland corporation listed on The NASDAQ
Global Select Market. Additional information about ARCP can be
found on its website at www.arcpreit.com. ARCP may disseminate
important information regarding it and its operations, including
financial information, through social media platforms such as
Twitter, Facebook and LinkedIn.
Cautionary Statements
The forward-looking information set forth herein is subject
to various assumptions, risks, uncertainties and other factors that
could cause actual results to differ materially from those
expressed or implied in the forward-looking information, including:
the timing and definitive findings of the Audit Committee's
investigation and whether any additional accounting errors or other
issues are identified; the timing and impact on ARCP's previously
reported net loss and AFFO of the restatement of ARCP's financial
statements; negative reactions from ARCP's creditors, shareholders
or business partners to the findings of the Audit Committee's
investigation or the restatement of its financial statements; the
results of the re-evaluation of ARCP's internal controls over
financial reporting and disclosure controls and procedures and the
timing and expense of any necessary remediation of control
deficiencies; and the impact and result of any litigation or
regulatory inquiries or investigations related to the findings of
the Audit Committee's investigation or ARCP's restatement of its
financial statements. All of the forward-looking statements made in
this report are qualified by the above cautionary statements and
those made in the "Risk Factors" section of ARCP's Annual Report on
Form 10-K for the year ended December 31,
2013 and ARCP's other filings with the U.S. Securities and
Exchange Commission. ARCP disclaims any intention or obligation to
update or revise any forward-looking statements to reflect
subsequent events and circumstances, except to the extent required
by applicable law.
Description of Funds From Operations and Adjusted Funds From
Operations
Due to certain unique operating characteristics of real estate
companies, as discussed below, the National Association of Real
Estate Investment Trusts, Inc. ("NAREIT"), an industry trade group,
has promulgated a measure known as funds from operations ("FFO"),
which we believe to be an appropriate supplemental measure to
reflect the operating performance of a REIT. The use of FFO is
recommended by the REIT industry as a supplemental performance
measure. FFO is not equivalent to our net income or loss as
determined under generally accepted accounting principles in
the United States ("U.S.
GAAP").
We define FFO, a non-GAAP measure, consistent with the standards
established by the White Paper on FFO approved by the Board of
Governors of NAREIT, as revised in February
2004 (the "White Paper"). The White Paper defines FFO as net
income or loss computed in accordance with U.S. GAAP, excluding
gains or losses from sales of property but including asset
impairment write downs, plus depreciation and amortization, after
adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures are
calculated to reflect FFO. Our FFO calculation complies with
NAREIT's policy described above.
The historical accounting convention used for real estate assets
requires straight-line depreciation of buildings and improvements,
which implies that the value of real estate assets diminishes
predictably over time, especially if such assets are not adequately
maintained or repaired and renovated as required by relevant
circumstances and/or is requested or required by lessees for
operational purposes in order to maintain the value disclosed. We
believe that, since real estate values historically rise and fall
with market conditions, including inflation, interest rates, the
business cycle, unemployment and consumer spending, presentations
of operating results for a REIT using historical accounting for
depreciation may be less informative. Historical accounting for
real estate involves the use of U.S. GAAP. Any other method of
accounting for real estate such as the fair value method cannot be
construed to be any more accurate or relevant than the comparable
methodologies of real estate valuation found in U.S. GAAP.
Nevertheless, we believe that the use of FFO, which excludes the
impact of real estate related depreciation and amortization,
provides a more complete understanding of our performance to
investors and to management, and when compared year over year,
reflects the impact on our operations from trends in occupancy
rates, rental rates, operating costs, general and administrative
expenses, and interest costs, which may not be immediately apparent
from net income. However, FFO and AFFO, as described below, should
not be construed to be more relevant or accurate than the current
U.S. GAAP methodology in calculating net income or in its
applicability in evaluating our operating performance. The method
utilized to evaluate the value and performance of real estate under
U.S. GAAP should be construed as a more relevant measure of
operational performance and considered more prominently than the
non-GAAP FFO and AFFO measures and the adjustments to U.S. GAAP in
calculating FFO and AFFO.
We consider FFO and AFFO useful indicators of the performance of
a REIT. Because FFO calculations exclude such factors as
depreciation and amortization of real estate assets and gains or
losses from sales of operating real estate assets (which can vary
among owners of identical assets in similar conditions based on
historical cost accounting and useful-life estimates), they
facilitate comparisons of operating performance between periods and
between other REITs in our peer group. Accounting for real estate
assets in accordance with U.S. GAAP implicitly assumes that the
value of real estate assets diminishes predictably over time. Since
real estate values have historically risen or fallen with market
conditions, many industry investors and analysts have considered
the presentation of operating results for real estate companies
that use historical cost accounting to be insufficient by
themselves.
Changes in the accounting and reporting promulgations under GAAP
(for acquisition fees and expenses from a
capitalization/depreciation model to an expensed-as-incurred model)
that were put into effect in 2009 and other changes to GAAP
accounting for real estate subsequent to the establishment of
NAREIT's definition of FFO have prompted an increase in
cash-settled expenses, specifically acquisition fees and expenses
for all industries as items that are expensed under GAAP, that are
typically accounted for as operating expenses. Management believes
these fees and expenses do not affect our overall long-term
operating performance. While certain companies may experience
significant acquisition activity, other companies may not have
significant acquisition activity and management believes that
excluding costs such as merger and transaction costs and
acquisition related costs from property operating results provides
useful information to investors and provides information that
improves the comparability of operating results with other
companies who do not have significant merger or acquisition
activities. AFFO is not equivalent to our net income or loss as
determined under GAAP, and AFFO may not be a useful measure of the
impact of long-term operating performance if we continue to have
such activities in the future.
We exclude certain income or expense items from AFFO, that we
consider more reflective of investing activities, other non-cash
income and expense items and the income and expense effects of
other activities that are not a fundamental attribute of our
business plan. These items include unrealized gains and losses,
which may not ultimately be realized, such as gains or losses on
derivative instruments, gains or losses on contingent valuation
rights, gains and losses on investments and early extinguishment of
debt. In addition, by excluding non-cash income and expense items
such as amortization of above and below market leases, amortization
of deferred financing costs, straight-line rent and non-cash equity
compensation from AFFO we believe we provide useful information
regarding income and expense items which have no cash impact and do
not provide liquidity to the company or require capital resources
of the company. By providing AFFO, we believe we are presenting
useful information that assists investors and analysts to better
assess the sustainability of our ongoing operating performance
without the impacts of transactions that are not related to the
ongoing profitability of our portfolio of properties. We also
believe that AFFO is a recognized measure of sustainable operating
performance by the REIT industry. Further, we believe AFFO is
useful in comparing the sustainability of our operating performance
with the sustainability of the operating performance of other real
estate companies that are not as involved activities which are
excluded from our calculation. Investors are cautioned that AFFO
should only be used to assess the sustainability of our operating
performance excluding these activities, as it excludes certain
costs that have a negative effect on our operating performance
during the periods in which these costs are incurred.
In addition, we exclude certain interest expenses related to
securities that are convertible to common stock as the shares are
assumed to have converted to common stock in our calculation of
weighted average common shares-fully diluted. As the Company's
convertible notes have a cash or stock settlement option and the
Company has the ability and intent to settle its convertible notes
in cash, the interest expense related to our convertible notes have
not been excluded from AFFO, and accordingly, the shares are not
assumed to have converted to common stock in our calculation of
weighted average common shares-fully diluted.
In calculating AFFO, we exclude expenses, which under GAAP are
characterized as operating expenses in determining operating net
income. These expenses are paid in cash by us, and therefore such
funds will not be available to distribute to investors. All paid
and accrued merger and acquisition fees and certain other expenses
negatively impact our operating performance during the period in
which expenses are incurred or properties are acquired and will
have negative effects on returns to investors, the potential for
future distributions, and cash flows generated by us, unless
earnings from operations or net sales proceeds from the disposition
of other properties are generated to cover the purchase price of
the property and certain other expenses. Therefore, AFFO may not be
an accurate indicator of our operating performance, especially
during periods in which mergers are being consummated or properties
are being acquired or certain other expense are being incurred.
AFFO that excludes such costs and expenses would only be comparable
to companies that did not have such activities. Further, under
GAAP, certain contemplated non-cash fair value and other non-cash
adjustments are considered operating non-cash adjustments to net
income in determining cash flow from operating activities. In
addition, we view fair value adjustments as items which are
unrealized and may not ultimately be realized. We view both gains
and losses from fair value adjustments as items which are not
reflective of ongoing operations and are therefore typically
adjusted for when assessing operating performance. Excluding income
and expense items detailed above from our calculation of AFFO
provides information consistent with management's analysis of the
operating performance of the properties. Additionally, fair value
adjustments, which are based on the impact of current market
fluctuations and underlying assessments of general market
conditions, but can also result from operational factors such as
rental and occupancy rates, may not be directly related or
attributable to our current operating performance. By excluding
such changes that may reflect anticipated and unrealized gains or
losses, we believe AFFO provides useful supplemental
information.
As a result, we believe that the use of FFO and AFFO, together
with the required U.S. GAAP presentations, provide a more complete
understanding of our performance relative to our peers and a more
informed and appropriate basis on which to make decisions involving
operating, financing and investing activities. FFO and AFFO are
non-GAAP financial measures and do not represent net income as
defined by U.S. GAAP. FFO and AFFO do not represent cash flows from
operations as defined by U.S. GAAP, are not indicative of cash
available to fund all cash flow needs and liquidity, including our
ability to pay distributions, and should not be considered as
alternatives to net income, as determined in accordance with U.S.
GAAP, for purposes of evaluating our operating performance. Other
REITs may not define FFO in accordance with the current NAREIT
definition (as we do) or may interpret the current NAREIT
definition differently than we do and/or calculate AFFO differently
than we do. Consequently, our presentation of FFO and AFFO may not
be comparable to other similarly titled measures presented by other
REITs.
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SOURCE American Realty Capital Properties, Inc.