American Realty Capital Properties (NYSE:VER) stock jumped as much as 9% today following the announcement that the company has completed its filing restatements, released third-quarter 2014 earning results, and reported that it will release full-year 2014 results on March 31.
Despite the strong performance of the stock, however, the results of the audit committee's investigation were anything but favorable for ARCP. The investigation found that ARCP overstated AFFO -- a highly relied-upon cash flow metric for REITs -- not only in the first and second quarters of 2014, but in every year since the company went public in 2011. During the conference call following the announcement, the company's interim CEO, Bill Stanley, suggested that the investigation concluded that earning were, as initially suspected, intentionally overstated.
Here are the numbers: AFFO was overstated by $44 million ($0.20 per share) in 2013 and by $52 million ($0.08 per share) in the first two quarters of 2014.
According to the press release, the investigation also found that former executives had received "inappropriate" compensation -- which is unsurprising, given what we know now. The company suggested that it has recovered $8.5 million of these payments, but Stanley believes there's a silver lining:
The restatement of our financial statements is an important milestone for ARCP and enables the Company to put this matter behind us. ... The Board moved swiftly to put in place new senior management. ... Importantly, the investigation did not identify any material changes relating to our real estate ownership, the validity of our leases or our fundamental business operations.
Stanley went on to suggest that ARCP's board is currently searching for a permanent CEO, as well as a new chairman of the board.
As for the third quarter of 2014, the company reported AFFO of $0.26 per share. This exceeded Zack Investment Research's consensus estimates by $0.01 per share.
ARCP completed a sale of its "multi-tenant portfolio for approximately $1.9 billion to a Blackstone-DDR joint venture" on Oct. 17, 2014, and sold five additional properties. The transactions combined for net proceeds of $1.2 billion, which the company suggested was used to pay down debt.
Further, after the company announced that it had overstated earnings, its agreement to sell its subsidiary Cole Capital to RCS Capital fell through. This was resolved in December, with ARCP receiving a $60 million termination fee from RCS Capital.
Is it time to buy?
To this point, ARCP has done all the right things. It quickly separated itself from the former management team and sold off assets to reduce debt levels. And while there is still work to be done, it's well on its way to resolving what has been a somewhat unbelievable situation.
It's also important to note that based on what we know today, there are no material changes to ARCP's real estate portfolio, which is well diversified by tenant, property type, and geography.
With that said, although it seems ARCP is trading at a significant discount, management is what will shape the company's culture and strategy, so without a CEO in place, I will not be investing in ARCP. I think there is certainly opportunity here, but I would much rather pay a premium for a company with a CEO I know and trust than buy into a company based solely on valuation.