Ontario Securities Commissions’ Review Of REIT Distributions Disclosure

The Ontario Securities Commission (OSC) has done Canadian REIT investors a favour in its recent review of the disclosure of distributions by Ontario-head-office based REITs. The review (http://www.osc.gov.on.ca/ en/SecuritiesLaw_sn_20150126_51-724_rpt-reit. html) identified four areas where disclosure should be improved. These are: the content of disclosure where excess distributions are paid; the consistency of disclosure about excess distributions; the timeliness of disclosure where a reduction or termination of distributions occurs; and, the presentation of commonly used metrics such as adjusted funds from operations (AFFO).

The well-known risks of REITs include the distribution of more cash than is generated by operations, which is sourced by taking on new debt (such as return of capital) including issuing more shares. It is often hard for investors to understand that this is happening, since REITs may use non-GAAP and inconsistent accounting measures to describethe cash available for distribution.

The review found that most REITs provided adequate disclosure. However, about one-third of REITs distributed more cash than they generated without sufficiently highlighting this. This is summarized in the figure taken from the Review.

Of these poorly disclosing REITs, 70% distributed more than 10% in excess of annualized operating cash flows. The review provides suggested “boilerplate” wording for these non-sustainable REITs to use in their disclosure documents, as well as ways to demonstrate the effect of accounting policies on disclosure of excess distributions. The review also required that the currently inconsistent ways of determining AFFO should be adjusted to meet the disclosure expectations of a national policy document. The OSC expects non-sustainable REITs to comply with the new disclosure expectations and will monitor such compliance.

Investors who depend on distributions from REITs to provide a steady income stream owe the OSC a debt of thanks for this review.

John Prescott, Guelph, ON finds investing fascinating.