NEW YORK (TheStreet) -- American Realty Capital Properties (ARCP) shares are down 6.7% to $9.33 in early market trading on Thursday following a report that the SEC will open an inquiry into real estate investment trust accounting practices following yesterday's revelation of alleged accounting errors that were covered up by executives at the company, according to the Wall Street Journal.
American Realty Capital released a statement yesterday reading in part "The Audit Committee believes that this error was identified but intentionally not corrected, and other AFFO and financial statement errors were intentionally made, resulting in an overstatement of AFFO and an understatement of the company's net loss for the three and six months ended June 30, 2014."
The company announced in a securities filing the proforma resignations of its CFO and CAO in light of the scandal due to their failure to correct the faulty information.
"We don't have bad people, we had some bad judgment there. We had two employees which have resigned as the result of the effects of that calculation and the non-disclosure of the error in the first quarter," said CEO David Kay.
TheStreet Ratings team rates AMERICAN RLTY CAP PPTY INC as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:
"We rate AMERICAN RLTY CAP PPTY INC (ARCP) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, increase in net income and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including poor profit margins and a generally disappointing performance in the stock itself."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- ARCP's very impressive revenue growth greatly exceeded the industry average of 12.2%. Since the same quarter one year prior, revenues leaped by 595.2%. Growth in the company's revenue appears to have helped boost the earnings per share.
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Real Estate Investment Trusts (REITs) industry. The net income increased by 44.0% when compared to the same quarter one year prior, rising from -$71.96 million to -$40.33 million.
- AMERICAN RLTY CAP PPTY INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, AMERICAN RLTY CAP PPTY INC reported poor results of -$2.34 versus -$0.47 in the prior year. This year, the market expects an improvement in earnings (-$0.59 versus -$2.34).
- ARCP has underperformed the S&P 500 Index, declining 5.89% from its price level of one year ago. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time.
- The gross profit margin for AMERICAN RLTY CAP PPTY INC is currently extremely low, coming in at 6.89%. Despite the low profit margin, it has increased significantly from the same period last year. Despite the mixed results of the gross profit margin, ARCP's net profit margin of -10.55% significantly underperformed when compared to the industry average.
- You can view the full analysis from the report here: ARCP Ratings Report