The Ontario Securities Commission (OSC) has released new
guidance on public disclosure expectations for real estate
investment trusts (REITs), particularly those whose distributions
exceed cash flow from operations.
Staff Notice 51-724 - Report on Staff 's Review of REIT
Distributions Disclosure (the
"Notice"), published on January 26,
2015, follows a recent review by OSC Staff of the quality and
sufficiency of disclosure by REITs relating to the sustainability
of their distributions. OSC Staff reviewed the public disclosure of
30 REITs with head offices in Ontario. As part of the review, the
OSC sent comment letters to 50% of the REITs that were reviewed and
of this group, the OSC requested that 67% enhance their disclosure
on a prospective basis. None of the reviews identified the need to
refile or restate continuous disclosure filings.
OSC Staff found that REITs were generally fulsome in their
disclosures but identified four areas where disclosure should be
improved, particularly in circumstances where distributions paid
exceed the cash flows generated by the REIT's underlying
properties, as outlined below.
1. The content of disclosure where excess distributions are
According to the Notice, 33% of the REITs reviewed paid
distributions which exceeded cash flow from operations and did not
provide the level of disclosure expected by OSC Staff.
The Notice states that REITs declaring distributions in excess
of cash flow from operations should disclose and discuss this fact
in their MD&A and Annual Information Form in accordance with
the requirements for such documents. Boilerplate language regarding
excess distributions should be avoided.
OSC Staff go on to suggest that where a REIT pays non-cash
distributions (including distributions paid in connection with a
distribution reinvestment plan) it should disclose this and explain
the effect such noncash distributions may have on the
sustainability of cash distributions over time.
2. Consistency of disclosure about excess Distributions
For 10% of the REIT's reviewed, distributions did not exceed
cash flow from operations solely because interest paid by the REIT
was recorded on the REIT's statement of cash flows as a
financing activity, rather than as an operating activity, as
permitted under International Financial Reporting Standards
OSC Staff recognise that a REIT may choose to classify interest
paid as a financing activity in accordance with IFRS, but the REIT
must consider whether distributions would exceed cash flow from
operations if interest paid were reclassified as an operating cash
flow item. If so, the REIT must present the required "excess
3. Timely disclosure where a reduction or termination of
The Notice points out that a reduction or elimination of
distributions may constitute a material change in the business of
the REIT. Accordingly, sufficient advance notice of any prospective
distribution reduction should be provided to investors as soon as
practicable. OSC Staff state that REITs should discuss in their
MD&A any trends and risks which may result in a possible
reduction or elimination of future distributions.
4. Presentation of metrics common to the real estate industry,
such as adjusted funds from operations (AFFO)
OSC Staff also discuss the use of cash flow measures such as
AFFO by REITs. The Notice provides that where AFFO is used to
represent a measure of the net cash available for distribution to
securityholders disclosure should be consistent with the
expectations for non-GAAP measures outlined in item 2.5 of NP 41-
201. This requires, among other things, that:
(i) the nearest GAAP measure be presented with equal or greater
prominence to the non-GAAP measure;
(ii) AFFO be reconciled to cash flow from operations;
(iii) the disclosure includes a statement indicating that AFFO
does not have a standard meaning under IFRS and may not be
comparable to AFFO as quantified by other entities; and
(iv) the disclosure includes an explanation of how AFFO provides
useful information to investors and how management uses it as a
The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
sought about your specific circumstances.
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