Securities Regulators Find Gaps in Non-GAAP and Distribution Disclosures by REITs and REOCs

Blake, Cassels & Graydon LLP

The Canadian Securities Administrators (CSA) recently issued Staff Notice 52-329 Distribution Disclosures and Non-GAAP Financial Measures in the Real Estate Industry (Staff Notice), providing guidance on disclosure expectations relating to non-GAAP financial measures and distributions for real estate investment trusts and real estate operating companies (collectively, Real Estate Reporting Issuers).


The CSA is concerned when Real Estate Reporting Issuers present non-GAAP financial measures in a manner that is confusing or potentially misleading, such as when they are inadequately defined or when they obscure GAAP financial measures.

For the Staff Notice, the CSA reviewed non-GAAP financial disclosures relative to the commentary provided in CSA Staff Notice 52-306 (Revised) Non-GAAP Financial Measures (CSA SN 52-306). For more information about CSA SN 52-306, see our February 2016 Blakes Bulletin: CSA re: Non-GAAP, TSX NCIB FAQs and Other Acronyms. Generally, non-GAAP financial measures are disclosed in Real Estate Reporting Issuers’ management discussion and analysis and news releases, as well as on their websites (e.g., in investor presentations) and through social media. See our March 2017 Blakes Bulletin: New Medium, Same Expectations: CSA Cautions Canadian Public Issuers on Use of Social Media for a discussion of CSA’s guidance on disclosures through social media and issuers’ websites.

The Staff Notice identifies a lack of transparency and disclosure about adjustments made in arriving at non-GAAP financial measures and states that in situations where an adjustment is an estimate, issuers should provide additional disclosures about how the estimate was determined.

In particular, for Real Estate Reporting Issuers making adjustments related to maintenance capital expenditure reserves, the CSA expects additional disclosure of (i) the method by which management determined the reserve, (ii) why that method was chosen in determining the reserve and why that method is appropriate, (iii) how the reserve amount compares to actual maintenance capital expenditures in the period historically, and (iv) an explanation of why management’s estimate is more relevant than the actual. Underlying such disclosures are the CSA’s concerns that some issuers might understate the cost to sustain and maintain their properties and that any deterioration of a property resulting from not incurring sufficient maintenance capital expenditures can impact on a property’s ability to maintain revenues, ultimately impacting on the issuer’s ability to pay distributions.

For Real Estate Reporting Issuers making working capital adjustments in determining non-GAAP financial measures, the CSA expects additional disclosure regarding (i) the nature of the adjustment, (ii) the underlying assumptions used in preparing each element, including how those assumptions are supported, and (iii) the specific risks and uncertainties that may affect the assumption. The CSA is also concerned by situations where a working capital adjustment is the same dollar amount as the change in non-cash working capital reported in the statement of cash flows, since in the absence of clarifying disclosure, the CSA questions how the entire change in working capital from a prior period could be considered to be inconsistent with sustainable cash flows.

The Staff Notice further provides that Real Estate Reporting Issuers’ disclosures should clearly explain why management calculates and uses adjusted funds from operations (AFFO), and the requisite reconciliation to the most comparable GAAP measure should be consistent with this intended use. For example, where AFFO (or another non-GAAP financial measure) is discussed primarily as a performance measure used to explain the cash generated by the issuer, its distribution-paying capacity, or the sustainability of distributions, the most directly comparable GAAP measure would be cash flow from operating activities.

Other matters covered by the Staff Notice include:

  • Non-GAAP financial information being inappropriately presented more prominently than the comparable GAAP information in new releases (e.g., performance measures like net operating income, funds from operations and AFFO)
  • Non-GAAP financial presentations of an issuer’s pro rata share of interests in joint ventures (i.e., inclusion of an additional reconciling column with amounts related to equity accounted investees for each financial statement line item, and then a total column) not being accompanied with enough discussion of the comparable GAAP metrics and not being labelled appropriately
  • AFFO being a misleading label if the measure excludes normal, recurring operating expenses necessary to operate the issuer’s business because “from operations” is included in the acronym “AFFO”
  • Guidance that Real Estate Reporting Issuers should carefully consider the number of non-GAAP financial measures used in a disclosure document and avoid using multiple measures for seemingly the same purpose.


The CSA is concerned that the risk profile of a Real Estate Reporting Issuer that relies on sources other than operating cash flows to fund distributions, such as capital raising, debt financing or sale of properties, is inherently different than an issuer that funds distributions solely through operating cash flows.

For the Staff Notice, the CSA reviewed distribution disclosures of Real Estate Reporting Issuers relative to the commentary provided in National Policy 41-201 Income Trusts and Other Indirect Offerings (NP 41-201). See also our February 2015 Blakes Bulletin: OSC Expects REIT Distributions Disclosure to Yield More Information.

The Staff Notice provides guidance on disclosure when “excess distributions” are made. “Excess distributions” occur when distributions declared (including distributions in connection with a distribution reinvestment plan) during a period exceed cash flows from operating activities (net of interest paid, even if the interest paid is classified as a financing activity in the statement of cash flows), creating a shortfall.

The CSA expects issuers to: (i) clearly quantify and provided entity-specific explanations for the amount of “excess distributions” relative to cash flows from operating activities in each reporting period (in addition to, and with equal or greater prominence than, any analysis in the context of a non-GAAP financial measure like adjusted cash from operations); (ii) describe the sources of cash used to fund any “excess distributions” without being vague (e.g., will be funded from other sources such as credit facilities) or using boilerplate; (iii) go beyond simply stating that they believe current distributions are sustainable; and (iv) otherwise provide disclosure addressing the risks of “excess distributions”.


The CSA has demonstrated increased focus on disclosures by Real Estate Reporting Issuers, given strong investor interest in the sector. In particular, the Staff Notice provides that “the inherent pressure on issuers to pay distributions, the sustainability of distributions and the accompanying disclosures are important to investors”, while staff at the Ontario Securities Commission has publicly discussed its plan to, in combination with the other members of the CSA, publish formal, binding rules on how companies (including Real Estate Reporting Issuers) use non-GAAP financial measures.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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