NAREIT Response to the SEC's Segment Disclosure Letter on Funds From Operations

January 20, 1998


Mr. Jack Albert
Associate Chief Accountant
Office of the Chief Accountant
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549

Dear Mr. Albert:

The National Association of Real Estate Investment Trusts ("NAREIT") has reviewed the newly issued Statement of Financial Accounting Standards No. 131, which became effective for fiscal years beginning after December 15, 1997. We would like to know whether you object to our understanding of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," as applied to REITs and other real estate companies that use funds from operations (FFO) as a segment performance measure.

SFAS No. 131 requires preparers to disclose a measure for profit or loss and total assets for each reportable segment. The standard applies a subjective "management approach" to measuring segment information-that is, the measure that is reported to the chief operating decision-maker for purposes of making decisions about allocating resources to the segment and assessing its performance.

REITs and other commercial real estate companies typically report funds from operations (FFO) to the chief operating decision-maker as the standard measure of operating performance. NAREIT's definition of FFO is "net income under generally accepted accounting principles, excluding gains/losses from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures". While the calculation of FFO begins with net income under GAAP, FFO is not a concept that is found in GAAP literature.

SFAS No. 131 is silent on measurement criteria and whether disclosures must conform to GAAP. Because the standard does not require accounting disclosures in conformance with GAAP, and because SFAS No.131 requires disclosures of information reviewed by the chief operating decision-maker, we believe that the standard would allow real estate companies to disclose segment FFO as the performance measure.

As a practical matter, real estate companies and public companies that own and operate income producing real estate have used FFO to provide readers of financial statements a more relevant performance indicator. Real estate analysts look to FFO disclosures as an alternative measure to net income under GAAP. Since NAREIT adopted FFO as the industry's uniform performance measure seven years ago, FFO has become the accepted industry benchmark for gauging operating performance of real estate companies. For example, First Call estimates of real estate companies' earnings are based on FFO rather than net income. Multiples are applied to FFO per share to develop market pricing for the shares of real estate companies.

For companies that examine FFO by segment and are subject to disclosing FFO under SFAS No. 131, we believe that the standard would allow real estate companies to label the disclosure "FFO". In accordance with paragraph 31 of the standard, the footnotes would also need to state that FFO is consistent with the definition developed in the 1995 NAREIT White Paper and include the definition that is stated earlier in this letter.

In accordance with paragraph 32 of SFAS 131, footnote disclosures would also need to provide a reconciliation of FFO and its components to net income.

We also understand that when financial statement disclosures in accordance with SFAS No.131 are mentioned in the Management's Discussion and Analysis, president's letters and press releases, these disclosures must be consistent with the disclosures presented in the financial statements.

NAREIT believes that SFAS No.131 footnote disclosures revealing FFO by segment will go a long way to improve financial statement relevance for the real estate industry. We also believe that the descriptions that are required under SFAS No. 131 would make clear to readers that FFO is an accepted industry benchmark. The required reconciliation of FFO to net income will especially enhance financial statement readers understanding of the composition of FFO vis-a vis net income under GAAP.

Please let us know in writing your opinion of our understanding of SFAS No. 131 disclosures when FFO is used as a segment performance measure. If you have any questions, please feel free to contact me at (716) 866-6000, or contact Marti Tirinnanzi at (202) 965-6300. Thank you.



Stephen Richter
NAREIT Accounting Committee Co-Chair
And Senior Vice President
Weingarten Realty Investors