JMP Securities Reinstates Coverage On ARCP, Revises Estimates

On Tuesday, JMP Securities reinstated coverage of beleaguered American Realty Capital Properties Inc (NASDAQ: ARCP) at Market Perform, noting "the risk-reward is balanced at current levels."

Shares of ARCP had closed at $10.08 per share on the day the JMP note was released, corresponding to a market cap of just under $9 billion.

ARCP is a net-lease REIT with over 4,600 properties, leased to approximately 800 corporate tenants, located in 49 states; Washington, D.C.; Puerto Rico and Canada.

Tale Of The Tape

During the past 12 months, the broad MSCI REIT Index saw gains of approximately 17.5 percent, while ARCP shares have lost about 32 percent of their value.

JMP Securities – Market Perform

JMP stated that the "2014 restated AFFO estimate is now $0.92 (prior $1.08), while [JMP's] 2015 estimate declines to $0.91 from $1.13, including $0.07 associated with Cole Capital's operations."

Forensic audit and legal review "uncovered a number of additional concerns," including:

1. Improper accounting and documentation associated with related party transactions
2. Alterations to equity compensation programs inconsistent with original parameters agreed to by the board
3. Internal control weaknesses with respect to financial reporting

JMP noted, "Earnings misstatements came in considerably higher than we had anticipated."

JMP – ARCP Risk Factors

JMP noted that the following issues still unfolding at ARCP:

• Leadership: "Long-term leadership is lacking as parties accountable for these accounting misstatements have been terminated."
• Legal Issues: "The outcomes of SEC and DOJ investigations, in addition to existing shareholder lawsuits, are indeterminable."
• Dividend Concerns: "Reinstatement of the dividend will likely be tied to a considerable leverage reduction plan."
• Cole Capital: Growth prospects have been impaired, "with few investors subscribing any value to the platform [...] the earnings contribution of this segment is limited on a forward basis until sales agreements are restored."

JMP – Positive Catalysts

• Operations: ARCP "has durable cash flows backed by credited tenants"
• Net Asset Value: "Asset sale pricing could prove [JMP's] NAV estimate to be too conservative"
• Financial Statements: FY 2014 and "4Q financials are expected by month-end
• Activist Stake: "A renowned investor with a prominent stake could potentially use its influence to provoke positive change across the board and governance team"