Moody’s Downgrades ARCP Stock to Junk Due to ‘Continued Uncertainty’ at REIT

One day after American Realty Capital Properties Executive Chairman Nick Schorsch and the company’s other two top executives resigned in the wake of an accounting scandal, the REIT giant suffered another blow as Moody’s Investors Service downgraded its credit ratings to junk status because of the “continued uncertainty” from the management shakeup and ongoing investigations and lawsuits.
Nicholas Schorsch, ARCP chairman & CEO

Nick Schorsch

One day after American Realty Capital Properties Executive Chairman Nick Schorsch and the company’s other two top executives resigned in the wake of an accounting scandal, the REIT giant suffered another blow as Moody’s Investors Service downgraded its credit ratings to junk status because of the “continued uncertainty” from the management shakeup and ongoing investigations and lawsuits.

Moody’s had started the review Oct. 30, one day after the New York-based net-lease REIT revealed there were errors in its financial statements that had been identified but not corrected and “should no longer be relied upon.” CFO Brian Block and Chief Accounting Officer Lisa McAllister resigned then and CEO David Kay announced replacements. Kay also stated emphatically during an Oct. 29 conference call with analysts and investors that he was staying with the company. He repeated his intention to stay during another call on Nov. 14, saying he was in it “for the long haul.”

On Monday, Kay was gone along with President and COO Lisa Beeson. The news about their resignations came in a press release soon after ARCP had announced that Schorsch had stepped down as executive chairman and from the ARCP Board of Directors and Boards of Directors of the non-traded REITs managed by Cole Capital, a sponsor owned by ARCP.

William Stanley, the lead independent director who took over as interim CEO & chairman, said ARCP was “unwinding all of its relationships with entities in which Mr. Schorsch maintains an executive chairman or director-level role or is a significant stockholder. These steps will not only enhance the company’s corporate governance structure but will also lead to further simplification of its business relationships.”

Other entities Schorsch resigned from included Business Development Corporation of America, Business Development Corporation of America II, American Realty Capital, Retail Centers of America, Inc., and New York REIT Inc.

Stanley did not provide any details as to why Kay, who had only been CEO since October, and Beeson had left. He thanked both of them for their service and noted that a search for CEO and a new board chairman were under way.

“The actions taken today will stabilize the company and are necessary to strengthen future leadership and strategy, improve governance, and complete a separation from Nick Schorsch and his affiliates,” Stanley stated in the second release. “These actions build on ARCP’s significant real estate assets and asset management capabilities, and will further restore investor confidence in ARCP.”

As of June 30, ARCP owned 3,966 properties in 49 states and Puerto Rico and Washington, D.C., totaling 106.8 million square feet and had total book assets of $21.3 billion and total equity of $10.6 billion.

While most analysts and investors had expected Schorsch, who had built ARCP into the world’s largest single-tenant net-lease firm in about three years, to step away from ARCP, the news about Kay and Beeson was surprising to some.

“I think Nick was not a surprise, but Kay was,” Brad Thomas, editor of The Intelligent REIT Investor, said. “It’s hard to interpret or speculate what the actual reasons are. To me it’s a magnification of risk for investors.”

“This company is very high risk. I would describe it as toxic,” added Thomas, who said he sold his ARCP shares in early November.

Kevin Gannon, president and managing director at Robert A. Stanger & Co., a Shrewsbury, N.J.-based investment bank, called the departures of Kay and Beeson “an unprecedented move” in an interview with Bloomberg, adding that the company now had a “complete vacuum in the executive suite.”

“They need experienced leadership,” Gannon told Commercial Property Executive. “I expect the stock to be volatile until all the information is out, the financials are released and new leadership is on site and in control.”

ARCP said in November it was delaying its third-quarter earnings and expected to report them by Jan. 5.

In addition to reviews by Moody’s and Standard & Poor’s, which has not yet announced a decision on whether it will downgrade ARCP’s credit rating, lawsuits have been filed alleging securities fraud and there are reports of investigations by the U.S. Securities and Exchange Commission and FBI.

The Rosen Law Firm in New York City is one of several firms around the United States that filed class action lawsuits on behalf of investors soon after the news of the accounting errors surfaced and the stock tumbled more than 30 percent. The stock was down 8.5 percent on Monday after the news broke about the executives and was down about 6.4 percent Tuesday, closing at $7.70 per share after bouncing between $8.17 and $7.66 throughout the day.

“Certainly recent developments have caused the stock to drop. The news hasn’t been good, so to speak,” Phillip Kim, an attorney with the Rosen Law Firm, told CPE. “It shows the problems were more serious than we had believed for things of this nature to happen. We know there’s a regulatory investigation, there’s civil lawsuits we filed, people are resigning left and right. These are big problems.”

ARCP said its Audit Committee was continuing to work with its advisors to complete the investigation into financial statements and other financial information in the company’s annual report for the 2013 fiscal year and the quarterly reports for the first and second quarters of this year.  Bruce Frank has joined the Audit Committee and assumed the role of committee chairman.

The independent members of the ARCP board of directors also continue to work with Morgan Stanley & Co., L.L.C., which was hired to provide advice around capital structure, business strategy and capital allocation.

Meanwhile, William Kahane, a founding partner of AR Capital, said Scorsch will “focus his attention on the strategy, growth and management of AR Capital.”

Schorsch and Kahane founded AR Capital, a full-service investment management firm providing advisory services to retail and institutional investors, in 2006. AR Capital is a sponsor and manager of public and private real estate investments and other investment products.

Kahane, who made his comments in a press release from AR Capital, stated stepping down from ARCP and several related companies “has not been an easy decision for Nick, but he believes it is the correct one.”

Kahane also noted that to date there has “not been any conclusion of unlawful conduct by Mr. Schorsch.”