Nareit Alert (July 13, 2015)

Transparency in Labeling FFO

July 13, 2015

Through informal conversations with representatives of the Securities and Exchange Commission’s Division of Corporation Finance, who are primarily responsible for reviewing real estate company filings, the SEC staff indicated that, while the great majority of REITs measure FFO in accordance with NAREIT’s definition, there are variations in the securities to which the reported FFO is applicable, e.g., all equity securities, all common shares, etc. While each of these metrics may represent FFO as defined by NAREIT, accurate labeling with respect to applicable securities is very important. Therefore, care should be taken in labeling the FFO metric, as well as the GAAP earnings metric in all FFO reporting. This is particularly so in the GAAP earnings to NAREIT-defined FFO reconciliation. The following examples illustrate transparent labeling and labeling that lacks clear transparency:

llIustration I - Transparent
GAAP Net Earnings $10,000
Add Back Real Estate Depreciation 4,000
NAREIT FFO, Applicable to the Company 14,000
Less Preferred Stock Dividends 2,000
NAREIT FFO Applicable to Common Shares $12,000
Illustration II - Transparent
GAAP Net Earnings Applicable to Common Shares $8,000
Add Back Real Estate Depreciation 4,000
NAREIT FFO Applicable to Common Shares $12,000
Illustration III - Lacks Transparency
GAAP Net Earnings *$8,000
Add Back Real Estate Depreciation 4,000
NAREIT FFO *$12,000

*not labeled "applicable to common shares"

Illustration IV - Lacks Transparency
Net Income Available to the Company **$9,000
Add Back Real Estate Depreciation 2,000
NAREIT FFO **$11,000

**no indication that "the company" and NAREIT FFO excludes non-controlling interests

In these illustrations, all FFO measures comply with the NAREIT definition of FFO.

In cases where FFO is reported, other than as defined by NAREIT, the same approach should be taken.

To ensure industry transparency in reporting FFO in the future, NAREIT intends to discuss this matter with NAREIT’s Best Financial Practices Council to explore whether a single format or a preferred template should be adopted by the industry.

Contact

For further information, please contact NAREIT Vice President of Financial Standards Christopher Drula at cdrula@nareit.com or Senior Vice President of Financial Standards George Yungmann at gyungmann@nareit.com .