the content of disclosure where excess distributions are
consistency of disclosure about excess distributions;
timely disclosure where a reduction or termination of
distributions occurs; and
presentation of non-GAAP metrics such as adjusted funds from
REITs are issuers that own income-producing real estate assets
and generally distribute their taxable income to unitholders. With
bond yields at historic lows, REITs have become more popular as
investors seeking yield have increasingly looked to equity issuers
that pay regular dividends or distributions. The Notice focuses on
disclosure relating to cash flow and situations in which a REIT
distributes more cash than it generates from operations, referred
to as "excess distributions".
Of the 30 REITs reviewed by the OSC, 33% paid excess
distributions. The OSC believes that more prominent and transparent
disclosure about the potential risks of this practice should be
provided to investors. Such disclosure would include quantifying
the distributions funded from non-operating sources, identifying
the sources of cash used to fund excess distributions and
discussing the related risks and implications, including any impact
on the sustainability of distributions.
The Notice points out that whether a REIT pays excess
distributions may be affected by whether it has elected to classify
borrowing costs as a financing activity or an operating cash flow
item. The OSC states that if distributions do not exceed cash flow
from operations only because the REIT elected to classify interest
as a financing activity, it should in any event provide disclosure
about excess distributions as if it had classified interest as an
operating cash flow item.
The Notice highlights the importance of REITs disclosing trends
and risks that may result in a possible reduction or elimination of
distributions. Sufficient advance notice of any prospective
distribution reduction should be provided to investors as soon as
possible. The OSC notes that such a reduction or elimination may
constitute a material change.
The Notice addresses the use of adjusted funds from operations
(AFFO), the non-GAAP (generally accepted accounting principles)
metric most commonly used by REITs to measure the cash generated by
a REIT's operations that is available for distribution. The
Notice states that adjustments included in the determination of
AFFO should be consistent from year to year and that disclosure of
AFFO should include the following:
a statement that AFFO does not have a standard meaning under
International Financial Reporting Standards;
a reconciliation of AFFO to cash flow from operations (the most
comparable GAAP measure); and
no greater emphasis in presentation on AFFO than on cash flow
The OSC sent comment letters to 50% of the REITs it reviewed, of
which 67% were asked to enhance their disclosure in the future. No
REIT was asked to refile or restate any of its continuous
disclosure documents. The guidance in the Notice builds upon
similar guidance previously outlined in National Policy 41-201
– Income Trusts and Other Indirect Offerings.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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