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Marcato Capital's Letter of Discontent to American Realty Capital Properties

June 06, 2014 | About:
Canadian Value

Canadian Value

134 followers

SAN FRANCISCO, June 3, 2014 /PRNewswire/ -- Marcato Capital Management LP ("Marcato"), a San Francisco-based investment manager that owns approximately 2.4% of the common shares outstanding of American Realty Capital Properties, Inc. (ARCP), yesterday sent a letter to Leslie D. Michelson, Lead Independent Director of American Realty Capital Properties, Inc., outlining its concern regarding the Company's recent actions. The full text of the letter is as follows:

June 2, 2014

Dear Mr. Michelson,

As you know, investment funds managed by Marcato Capital Management LP own approximately 21.8 million shares of American Realty Capital Properties, Inc. ("ARCP" or the "Company"), making us one of the Company's largest shareholders. We believe that shares of ARCP trade at a substantial discount to their fair value. We are writing to express our disappointment over a number of the Company's recent actions – I can also assure you that, having spoken with numerous other shareholders, this disappointment is echoed by many – and to remind you and your fellow Board members of your duty to represent the interests of your existing shareholders and to urge that you exercise appropriate authority and oversight to prevent any further value destroying activity.

Recent Equity Issuance

We were extremely frustrated by the Company's recent equity issuance at $12 per share. We found it disturbing that the Company would issue equity after repeatedly stating publicly that it had no intention to do so, and at a price that it has repeatedly acknowledged undervalues the shares. Management could not have been clearer about this point on recent conference calls:

"As we've said before, we're certainly not comfortable selling equity at $14 and we haven't. We said we weren't going to sell equity at $13 and we didn't. We said we weren't going to sell equity no matter what anybody said at $12, and people were saying we're coming to the market for equity, we didn't." (Nicholas Schorsch, ARCP CEO, Q4 2013 Earnings Call, 2/27/14)

"But to be clear, we're not anxious to issue stock at $12 and whatever it is at the moment, or $13 or $13.5 a share. We think we're way undervalued, and we think our currency is not being fairly viewed." (Nicholas Schorsch, ARCP CEO, Q1 2014 Earnings Call, 5/8/2014)

In spite of these unambiguous statements, the Company not only went out to issue equity at $12 per share on May 21st, but subsequently upsized the equity offering by 20% to approximately $1.7 billion before expenses, belying yet another statement management had made less than three months prior:

"So right now, if you look at our business plan, we've got a modest equity raise plan…which has about $600 million to $700 million equity component. And that equity component could be lessened, not increased, based on what we end up doing with multi-tenant portfolio." (Nicholas Schorsch, ARCP CEO, Q4 2013 Earnings Call, 2/27/14)

After agreeing to sell its multi-tenant retail portfolio to Blackstone for approximately $2 billion, the Company definitively did not need to do an equity offering of any kind, let alone an offering 2.5x the size of what it had previously articulated. Such willingness to destroy shareholder value, by issuing shares at an acknowledged discount to fair value, illustrates a disregard for existing shareholders that we find very problematic. Furthermore, the decision to then upsize the offering by more than 20% – even after being loudly criticized by shareholders on the morning call of the offering – was an additional slap in the face.

Too Many Transactions Too Fast

ARCP's rapid acquisitions of CapLease, ARCT IV, and Cole, followed by the recent purchase of the Red Lobster portfolio, sale of the multi-tenant retail portfolio, and equity issuance, have made the Company's financials complicated and difficult to understand. So many moving pieces make the Company challenging for investors and analysts to model. Indeed, we believe the best evidence of this is that the Company itself seemingly cannot keep its own financials straight. On May 20th, in an 8-K filing in which it attempted to show its Pro Forma first quarter financial statements, the Company used an inaccurate share count; as a result, it was forced to file an amendment telling the market to disregard the previous filing, and a subsequent 8-K with new Pro Forma financials. ARCP's shares sold off on news of the inaccurate 8-K, and have yet to substantially recover. We have spent many hours going through ARCP's numbers both on our own and with the Company, and are consequently comfortable with the Company's forward guidance. However, it is our view that a large part of the reason the share price has not recovered is due to widespread confusion, concern, and doubt about the Company's numbers.

It certainly did not help that the Company then made another mistake in its filings. In the prospectus for its recent equity issuance, the Company stated the fees associated with the Red Lobster transaction were $108 million. On May 29th, the Company put out an 8-K disclosing that the fees were actually $10.8 million, and it had initially overstated the figure by a factor of 10. While we are relieved to know that the Company did not spend $108 million in fees to close a $1.5 billion portfolio acquisition, we are alarmed by what appear to be disorderly financial controls exposed by the Company's second material disclosure error in as many weeks.

We believe the existence of these errors is symptomatic of the larger problem: The Company is engaging in too many transformative transactions too quickly. ARCP should pause on large-scale transaction activity and give investors a chance to see multiple quarters of clean financial results. Build credibility by letting investors see that the Company's Pro Forma clean financials are consistent with management's guidance, and the market will be obligated to reward the strength of ARCP's asset portfolio and platform with a higher share price. Pausing today and allowing ARCP's share price to approach fair value is the best way to enable value-enhancing acquisition activity over the medium and long-term.

In our opinion, the sum of all of these recent actions has undermined management's credibility in the capital markets. We hope that, by writing this letter to share our views with the Board, other investors will feel emboldened to voice their similar frustrations with management and the Board. ARCP has a strong platform and an attractive, diverse asset portfolio with superior scale and credit quality. The Company needs to pause on large-scale transactions and rebuild its credibility the only way it can: by solidly executing its organic operations for an extended period of time. If it can do this, and give investors a chance to see what the Pro Forma entity actually looks like, we believe it is only a matter of time until the market rewards ARCP. If, however, the Board and management continue to contradict their own statements, disregard the interests of existing shareholders by issuing equity at an acknowledged unfair price, and commit multiple reporting and disclosure errors, then we will have no choice but to consider actions that are necessary to protect our investment.

Sincerely,

/s/ Richard T. McGuire

Managing Partner
Marcato Capital Management LP

For further information, contact:

Marcato Capital Management LP
Nichole Peterson
(415) 796-6354

http://finance.yahoo.com/news/marcato-sends-letter-american-realty-113000883.html

About the author:

Canadian Value
http://valueinvestorcanada.blogspot.com/

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