ARCP reports "weakness" in financial reporting controls

Troubled REIT finally reports Q3 2014 earnings, adjusted funds from operations get revised down

Mar 2, 2015 @ 8:25 am

By Bruce Kelly

The audit committee for troubled traded real estate investment trust American Realty Capital Properties Inc. said Monday it “found certain material weaknesses in the company's internal controls over financial reporting and its disclosure controls and procedures.”

The committee also reported that “certain payments by the company to ARC Properties Advisors and certain of its affiliates were not sufficiently documented or otherwise warrant scrutiny,” according to a company statement. ARCP has recovered $8.5 million of those payments the company deemed “inappropriate.”

In its filing Monday with the Securities and Exchange Commission, the company did not identify any individual executives who received the inappropriate payments. Nicholas Schorsch was chief executive of ARC Properties Advisors, the REIT's former manager, from its formation in November 2010 until the company became self-managed in January 2014, according to the company's 2014 proxy statement.

(More: Schorsch, ARCP dodge bullet as defamation suit dropped)

That information was part of ARCP's third quarter 2014 earnings report released Monday after being delayed in the fall. In addition, the company restated its results for 2013 as well as the first six months of 2014.

ARCP said Monday its adjusted funds from operations — AFFO — in 2013 was overstated by 20 cents per share and AFFO from the first half of 2014 was overstated by 10 cents per share. AFFO is an important measure of cash flow for REITs.

ARCP also did not reinstate its dividend and will address that later in the year when it has a new management team.

In late October, the company revealed a $23 million accounting error in the first half of 2014 that was intentionally uncorrected. Two executives resigned at the time, and in December the company's chairman, Nicholas Schorsch, and its CEO, David Kay, also resigned.

The audit committee did not identify any material changes relating to ARCP's real estate ownership, rental revenue or fundamental business operations. The investigation did not find any changes to the financial statements or operations of the Cole Capital-sponsored nontraded REITs.

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