The Drama Shaking The REIT World Just Won't Stop
On December 16, the Wall Street Journal reported that American Realty Capital Properties Inc (NASDAQ: ARCP) had been cut by Moody's to "junk" (Ba1) with a negative outlook. The rating agency cited concerns over the recent accounting irregularities, cover-up, executive shake-up and ongoing investigations.
Can it get worse? Potentially.
Just ask shareholders of RCS Capital Corp (NYSE: RCAP), whose shares were crushed Thursday, December 18, following a news report that reflected negatively on current Executive Chairman Nicholas Schorsch.
The Latest Lawsuit Targets The C-Suite
On December 18, the Wall Street Journal broke the news that former ARCP Chief Accounting Officer (CAO) Lisa McAllister had filed a lawsuit alleging defamation against ARCP, former CEO and Chairman Nick Schorsch and former CEO David Kay.
According to the WSJ report, "Lisa P. McAlister, alleges Mr. Schorsch instructed her and former Chief Financial Officer Brian Block to shift numbers in the company's second-quarter results to cover up errors from the first quarter.
"Ms. McAlister repeatedly expressed concern about the directive to fellow executives and others, including an email to Grant Thornton LLP, the real-estate-investment trust's audit firm, but her concerns were ignored, according to the complaint," the report added.
Recent Upgrades
Worth noting, RCS Capital management has been meeting with investment bank analysts, and explaining why the company is well positioned to be successful in 2015 and beyond.
On December 16, Citigroup upgraded RCAP from Neutral to Buy, raising its price target from $13 to $19 -- an 80-plus percent premium to current trading prices.
On December 18, the same day as the McAllister lawsuit news broke, Barclay's reinstated RCS Capital at Overweight with a PT of $20.
This represented a 70 percent upside.
Bottom Line
The ARCP-related crisis of confidence is dragging down RCAP shares despite the favorable views from Wall Street sell-side analysts.
As for whether or not the controversy has reached a tipping point, only time will tell.
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