Canada: REITs Cautioned On Disclosure Practices

OSC Publishes Results of Review on REIT Distribution Disclosure; Excess Distributions, Non-IFRS Metrics Among Key OSC Concerns

On January 26, 2015, the Ontario Securities Commission published OSC Staff Notice 51-724 – Report on Staff's Review of REIT Distributions Disclosure. The Report presented the findings of the OSC's recent review of the disclosure practices of 30 publicly-listed REITs, primarily in the area of distribution sustainability and accounting disclosure. As investors expect REITs to provide predictable and regular distributions, the OSC is concerned that REITs may not always be providing their investors with a complete picture of the stability and sustainability of distributions. Though Staff's review found the disclosure of the subject REITs to be generally satisfactory with respect to distributions, Staff did note that many REITs are falling short of the OSC's expectations for disclosure set out in National Policy 41-201 – Income Trusts and Other Indirect Offerings. In particular, Staff found that certain REITs were deficient in their disclosure of distributions paid in excess of cash generated by operating activities, and in their disclosure relating to the use of certain non-IFRS measures.

Common Disclosure Deficiencies Relating to Distributions

The Report outlined several key concerns surrounding the payment of distributions by REITs in excess of their operating cash flow, a practice that Staff noted is relatively common, particularly among REITs in the process of adjusting to the impact of a recent financing, major acquisition, or contractual and/or seasonal fluctuations in operating income. Of the REITs surveyed, 33 percent had paid distributions in excess of cash flow from operations during the review period, and in turn, 70 percent of these had paid distributions equal to or in excess of 10 percent of available operational cash flow. Of the REITs surveyed, 13 percent had paid non-cash distributions (such as distributions paid pursuant to a distribution re-investment plan or DRIP) that, if paid in cash, would have been in excess of operational cash flow.

Additionally, the Report noted that, while the intent of NP 41-201 is to require REITs to report interest paid on long-term debt—typically a crucial REIT expenditure—as an operational expense, IFRS gives REITs the accounting choice to report this expense as a financing expense not required to be deducted from operational cash flow. For approximately 10 percent of the REITs surveyed, distributions would have exceeded cash flow from operations had these REITs elected to treat interest as an operating expense. Staff stressed that REITs whose cash distributions would exceed operating cash flow but for the accounting election should, nonetheless, provide the prescribed excess distribution disclosure pursuant to NP 41-201.

Return on Capital vs. Return of Capital

Staff also stressed that the impact of a REIT's decision to fund distributions from sources of cash other than operating activities, such as debt or other new financing, cash reserves or non-cash distributions, is not being adequately communicated to investors in many cases. Staff expressed a particular concern that paying distributions to unitholders in such circumstances, commonly referred to as a return of capital as opposed to a return on capital, can significantly alter a REIT's risk profile and should be appropriately disclosed.

Several suggestions were provided by Staff for improving the disclosure in the case of a return of capital distribution, including describing the material terms of any borrowing required to finance such distributions, the expected impact on the REIT's operating performance of additional interest expense or the issuance of additional units pursuant to a DRIP (upon which distributions must subsequently be paid) and generally increasing transparency surrounding management's distribution payment strategy, all as contemplated by NP 41-201.

Changes to Distributions that Trigger Timely Disclosure

Staff's concerns were heightened during the course of its review in the case of one REIT that suspended payment of distributions to unitholders as the shortfall from operational cash flow had made continued distributions unsustainable. The Report confirmed Staff's view that any suspension or elimination of a distribution by a REIT constitutes a material change under securities law, which should be immediately disclosed under National Instrument 51-102 – Continuous Disclosure Requirements. The Report notes that "sufficient advance notice of any prospective distribution reduction, either to conserve capital for use in future projects or because current distribution levels have become unsustainable, should be provided to investors as soon as practicable. It is critical that investors receive information required in order to understand and assess any risks related to the sustainability of distributions on a timely basis."

Non-IFRS Metrics

The Report also highlighted a concern of Staff relating to the practice by REITs of disclosing performance metrics typical to the real estate industry (and REITs in particular) but which do not have standardized meanings under IFRS or US GAAP. Most common among these are net operating income, distributable cash, funds from operations (FFO) and, of most concern to Staff, adjusted funds from operations (AFFO). The Report found that AFFO is not always presented as a cash flow measure with appropriate adjustments, which is necessary for it to be an adequate metric of a REIT's cash available for distribution to unitholders. The Report also found that REITs often fail to present the nearest IFRS or US GAAP metric more prominently and include proximate disclosure about the non-standard nature of the metrics used, all as required by NP 41-201.


Although the Report found that the disclosure by REITs surveyed was generally adequate, common disclosure deficiencies identified in the Report underscore Staff's broad concern with investors' ability to assess the risk profile of distribution-paying securities. For roughly half the REITs surveyed, the OSC felt the disclosure deficiencies warranted a comment letter, though ultimately no REIT was required to refile or restate any of its continuous disclosure documents. REITs should take particular note of the highlighted deficiencies and prospectively address Staff's concerns in future disclosure.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Christopher J. Doucet
Similar Articles
Relevancy Powered by MondaqAI
Borden Ladner Gervais LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Borden Ladner Gervais LLP
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions