Canadian regulators want better disclosure from real estate investment companies
Canadian securities regulators are demanding better disclosures about accounting and distributions in real estate investments after a review found the sector, which includes REITs and real estate operating companies, “needs improvement.”
“Given strong investor interest in this sector and the inherent pressure on issuers to pay distributions, the sustainability of distributions and the accompanying disclosures are important to investors,” the Canadian Securities Administrators, an umbrella organization for Canada’s provincial securities watchdogs, said Thursday.
The CSA review, which included 47 REITs and real estate operating companies, identified “a lack of transparency” when various adjustments are made to financials using non-GAAP (generally accepted accounting principles) measures.
The regulators also found that the non-GAAP measures tend to be presented with “greater prominence” than comparable measures specified under generally accepted accounting principles.
Of the issuers reviewed, six per cent were required to restate the management discussion and analysis (MD&A) section of their financial disclosure, while 62 per cent agreed to “enhance” their disclosure going forward.
“Investors need sufficient information to understand what these measures represent and how they are calculated,” said Louis Morisset, chair of the CSA and chief executive of Quebec’s market watchdog, the Autorité des marchés financiers. “Real estate reporting issuers are expected to provide transparent disclosures regarding distributions and non-GAAP financial measures.”
At the conclusion of the review, the regulators issued “additional guidance” to ensure real estate issuers provide better disclosure when distributions from the investments exceed operating cash flows.
“Generally, REITs and REOCs provided adequate disclosure about their distributions, except when ‘excess distributions’ were made and in those cases, many issuers did not disclose the sources of cash used to fund the excess,” the CSA said.
Around two-thirds of the issues in the review did not disclose a description of the sources of cash used to fund the excess distributions, or their description was “boiler plate,” the CSA said.
“The risk profile of an 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,” the CSA said. “We expect the disclosure about distributions to address these risks.”
Going forward, real estate investment issuers are expected to quantify excess distributions funded by sources other than operating activities, identify specific sources including debt or recent equity raise, and acknowledge if and why distributions are being provided that partly represent a return of capital.