Disclosure Expectations Outlined for Real Estate Reporting Issuers

Canada's securities regulators have published a staff notice discussing the quality of disclosure by real estate reporting issuers, focusing on distribution disclosure and non-GAAP financial measures.

What You Need To Know

  • Staff reviewed the disclosure of 47 real estate reporting issuers. The staff notice provides guidance on how these issuers can make their disclosure more useful and transparent to investors.
  • Staff's view is that the quality and completeness of disclosure of distributions and non-GAAP financial measures needs improvement. Disclosure in these areas will continue to be assessed during continuous disclosure and prospectus reviews.
  • We encourage all real estate reporting issuers to take a fresh look at their continuous disclosure and investor presentations in order to avoid adverse regulatory implications (which may include the requirement to re-file non-compliant periodic disclosure documents).


The Canadian securities regulators published CSA Staff Notice 52-329 Distribution Disclosures and Non-GAAP Financial Measures in the Real Estate Industry1 (Staff Notice). CSA staff reviewed distribution disclosures relative to National Policy 41-201 Income Trusts and Other Indirect Offerings2 (NP 41-201) and non-GAAP financial disclosures relative to CSA Staff Notice 52-306 (Revised) Non-GAAP Financial Measures (CSA SN 52-306) of 47 real estate reporting issuers. Staff reviewed disclosures included in interim and annual filings, news releases and investor presentations.

Distribution Disclosure

In respect of distributions, staff sought to assess the quality and sufficiency of disclosures provided by real estate reporting issuers relating to the sustainability of their distributions. Generally, staff found that real estate reporting issuers provided adequate disclosure about their distributions, except when "excess distributions"3 were made and, in those cases, many issuers did not disclose the sources of cash used to fund the excess. The Staff Notice indicates that:

  • real estate reporting issuers should clearly quantify the amount of "excess distributions" relative to cash flows from operating activities in each reporting period and include a description of the sources of cash used to fund the "excess distributions." It is not sufficient to simply state that the issuer believes distributions are sustainable; and
  • staff believe the risk profile of an issuer that relies on sources other than operating cash flows to fund distributions is inherently different than that of an issuer that funds distributions solely through operating cash flows and, therefore, staff expect that disclosure about distributions to address these risks.

Non-GAAP Financial Measure Disclosure

In respect of non-GAAP financial measures, staff reviewed (i) adjustments made in arriving at non-GAAP financial measures, (ii) the prominence of non-GAAP financial measures, and (iii) the use and reconciliation of non-GAAP financial measures.

Staff identified a significant number of disclosures pertaining to non-GAAP financial measures that did not conform to the guidance in CSA SN 52-306 or NP 41-201. These include (i) a lack of transparency and lack of disclosure about the adjustments made in arriving at non-GAAP financial measures such as AFFO and ACFO, particularly relating to maintenance capital expenditures and working capital, (ii) a lack of clarity in how management uses each individual non-GAAP financial measure, (iii) a failure to clearly identify the most directly comparable GAAP measure, and (iv) non-GAAP financial information being presented more prominently than the GAAP information. The Staff Notice indicates that:

  • to ensure a non-GAAP financial measure is not confusing or misleading, it is important all adjustments are sufficiently explained, including why and how the adjustment was determined. Where an adjustment is an estimate, issuers should provide additional disclosure about how the estimate was determined;
  • for issuers using a maintenance capital expenditure reserve, issuers should provide additional disclosure in the MD&A including (i) the method by which management determined the reserve, (ii) why that method was chosen in determining the reserve and why that method is appropriate, (iii) how the reserve amount compares to actual maintenance capital expenditures in the period and historically (with any material differences discussed, including the potential impact on distributions), and (iv) an explanation of why management's estimate is more relevant than the actual amount;4 and
  • any working capital adjustment should be supported by a detailed discussion of the nature of the adjustment, a description of the underlying assumptions used in preparing each element, including how those assumptions are supported, and a discussion of the specific risks and uncertainties that may affect the assumption. In staff's view, in the absence of clarifying disclosure, it would be unusual that the entire change in non-cash working capital from a prior period be adjusted as, in staff's view, not all non-cash working capital is necessarily inconsistent with sustainable cash flows.

Staff also noted that where joint ventures are accounted for using the equity method of accounting in accordance with IAS 28 Investment in Associates, the presentation of a full set of non-GAAP financial statements in the form of a columnar reconciliation5 within the MD&A that shows separately an issuer's pro rata share of the interest in joint ventures effectively creates a non-GAAP financial measure for each financial statement line item.

Staff noted that several real estate reporting issuers gave more prominence to non-GAAP financial measures in news releases than the directly comparable GAAP measures and reminded issuers that CSA SN 52-306 applies to disclosure made on issuers' websites, investor presentations or other social media.

The Staff Notice also noted that the purpose and the use of AFFO (and any other non-GAAP financial measure) is an important factor in considering whether it should be reconciled to net income or cash flows from operating activities, or other GAAP measures. Issuers should clearly explain why management calculates and uses AFFO, and the reconciliation provided should be consistent with this intended use. Staff noted that, for example, where AFFO (or another non-GAAP financial measure) is discussed primarily as a performance measure used to explain the cash generated by the issuer, its distribution paying capacity or the sustainability of distributions, the most directly comparable GAAP measure would be cash flow from operating activities.


The Staff Notice indicates that the quality and completeness of disclosure pertaining to non-GAAP financial measures and the sustainability of distributions in the real estate industry need improvement. Staff indicated they will continue to assess these areas during their continuous disclosure and prospectus reviews. Even prior to the publication of the Staff Notice, we saw comments from the securities commissions in their prospectus comment letters relating to these issues.

Interestingly, staff noted that they were aware of industry publications relating to FFO, AFFO and ACFO,6 but the Staff Notice was focussed only on compliance with securities laws. Consequently, an issuer's adherence to REALPAC publications will not necessarily mean such issuer's disclosure will conform with securities laws.


1 See http://www.osc.gov.on.ca/documents/en/Securities-Category5/csa_20180412_52-329_distribution-disclosures.pdf.

2 The Staff Notice specifically confirms that NP 41-201 applies to any non-GAAP measure that a real estate reporting issuer may use to describe the amount of net cash generated which is available for distribution, including adjusted funds from operations (AFFO) and adjusted cash flow from operations (ACFO).

3 Excess distributions occur when distributions declared (including non-cash distributions in connection with a distribution reinvestment plan) during a period exceed cash flows from operating activities (net of interest paid, even if the interest paid is classified as a financing activity in the statement of cash flows), creating a shortfall.

4 Staff were also concerned that some issuers might understate the cost to sustain and maintain their properties and thereby understate payout ratios. Staff also expect issuers to disaggregate maintenance capital expenditures from other amounts estimated by management.

5 For example, a columnar reconciliation of this type may show the issuer's statement of income as presented in the financial statements, an additional column with amounts related to equity accounted investees for each financial statement line item, and then a total column for each financial statement line item, which is often labelled "proportionate share" or "at issuer's interest."

6 Namely, the REALPAC white papers on Funds from Operations & Adjusted Funds From Operations for IFRS (February 2018) and on Adjusted Cash Flow from Operations for IFRS (February 2018).

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

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