American Capital Realty Property (VER) has gotten into the Black Friday spirit early this year as its stock price has been slashed 35% over the last week.
On October 29, the company reported it had overstated adjusted funds from operations, or AFFO, -- an essential REIT metric that indicates cash created from operations -- by $23 million over the first six months of 2014. This works out to $0.04 per share over that time period.
The stock price continued to slide as reports came out that the FBI and SEC will be opening investigations into the company for allegedly covering up the overstatement. And just for good measure the stock took another hit as RCS Capital (NYSE: RCAP) withdrew its $700 million offer to purchase subsidiary Cole Capital from ARCP.
ARCP's stock price is certainly down for good reason, but that doesn't mean it will be down forever. In fact, for the right investor this could be a great opportunity to buy.
The good News
According to CEO David Kay, while the accounting issue is unacceptable and the company is doing everything necessary to make sure it doesn't happen again, he does "not believe that this impairs, in any meaningful way, what is important about our company."
From what has been disclosed thus far, everything indicates that this is an accounting fiasco and not an asset fiasco. The company still owns a highly diversified portfolio of over 4,400 properties under long-term leases to strong quality tenants -- and the value of those assets hasn't changed.
Moreover, management has been a net buyer of stock -- buy more than they sell -- over the last two years. In fact, Brian Block -- the now resigned CFO -- has also been a net buyer. If this were an Enron-like conspiracy I'd expect to see management dumping stock, and not buying it.
The Black Friday theory
Now that we have the current facts straight, you need to decide why you're interested in ACRP?
I stopped participating in Black Friday years ago because I found I was doing one very stupid thing. I would go to a store with one item in mind -- an item I researched and was sure I wanted -- but, I would leave the store with 10 things, nine of which I bought exclusively because the price was so low. As I eventually learned, I would make good use of the one item I originally wanted, and the rest would end up stuffed into a closet never to be seen again.
I think the premise holds up in this instance as well.
If you were interested in ARCP before the stock price fell 35%, then happy Black Friday. I believe most of what you probably liked about the business is still very much intact. However, if ARCP's stock price is the only reason you're interested then you're setting yourself up for failure.
I say that because at this point we don't have all the facts. If something new comes out and the price continues to fall, or the investigation becomes a long and drawn out process, those who bought because they like the business are more likely to be patient and allow the situation to resolve. While those focused on a quick score will find themselves squeamishly toiling over whether or not they have to cut their losses.
Why I am not buying
Well before any of recent news came out, I wrote an article comparing ARCP to industry competitor Realty Income (O 0.24%).
I noted that, in the first half of 2014 the company added $13.5 billion in assets. Because such incredible growth came through selling tons of new shares and diluting the company's stock, my question was whether "such rapid expansion was truly in the best interest of shareholders."
Although there were parts of ARCP's business I liked, I was uncomfortable with the company's strategy, management, and limited track record, and found Realty Income's disciplined investing approach to be more along my wavelength. Considering the recent accounting issues this has only further cemented my concerns.
Therefore, while I do believe there is opportunity here, ARCP is not a pitch I am interested in swinging at and I'll continue to focus on tried and true companies with historically strong track records.
