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 The errors overstated the firm's operating revenue in the first
quarter and understated its net loss in the first half of the year,
the company said in a filing with U.S. regulators.
The REIT's audit committee, which conducted the investigation, also
said its 2013 annual report "should no longer be relied upon."
Shares of American Realty Capital, fell as much as 37 percent after
the announcement, wiping out about $4 billion of value. The company
markets itself as "the largest publicly traded net lease REIT,"
which means tenants in properties it own pay operating expenses
directly.
Shares recovered some ground after American Realty Capital Chief
Executive Officer David Kay said on a conference call on Wednesday
afternoon that the errors - which executives learned about last
Friday night from audit committee investigators - were not meant to
mislead and that the firm might sell assets to repurchase shares if
they remain depressed.
The financial executives who made a mistake in the first quarter and
covered it up in the second "are not bad people," Kay added. The
events will not affect the company's bank agreements, but American
Realty Capital is in discussions with rating agencies, he said.
At the end of the trading day, the company's shares were down $2.38,
or 19.2 percent, at $12.38.
The U.S. Securities and Exchange Commission, which routinely
investigates companies that restate financial statements, will look
into its accounting, the Wall Street Journal reported Wednesday
afternoon. An SEC spokesman declined comment.
American Realty Capital's troubles also affected shares of RCS
Capital Corp, an investment firm that in the past two years has
purchased Cetera Financial and a handful of other independent
brokerage firms that sell REITs and other investments to "mass
affluent" retail investors.
Nicholas Schorsch, American Realty Capital's chairman and former
chief executive, is also executive chairman of the board of RCS.
Shares of RCS Capital closed down 14.0 percent to $16.99.
A spokesman for RCS Capital said it and American Realty Capital are
"unrelated entities" with different audit committees, management and
boards.
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Schorsch also owns AR Capital, which sponsors and advises private
real estate investment trusts, lease programs and other
nontraditional investments sold through independent brokerage firms.
Michael Weil, RCS Capital's cofounder and president, previously
served as president of American Realty Capital Properties, according
to RCS's website. Peter Budko, another RCS Capital founding partner,
was once chief investment officer of the REIT.
American Realty Capital said in its regulatory filing that Chief
Financial Officer Brian Block and Chief Accounting Officer Lisa
McAlister resigned on Tuesday and were replaced respectively by
Michael Sodo and Gavin Brandon.
Brandon, 38, joined earlier this year from Cole Real Estate
Investments, a money manager that RCS Capital is buying from
American Realty Capital for at least $700 million.
American Realty Capital said it did not expect the accounting errors
from this year's first two quarters to impact any previously
announced transactions. It also said adjustments of the errors will
reduce its funds from operations for the six months ended June 30 by
4 cents to 45 cents per share.
Within hours of the filing, several law firms that specialize in
class-action suits solicited investors in American Realty Capital to
contact them.
Several brokerage firms also cut their ratings and price targets on
the company's stock.
(Reporting by Sagarika Jaisinghani in Bangalore and Jed Horowitz in
New York; Additional reporting by Sarah Lynch; Editing by Maju
Samuel and Cynthia Osterman)
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