FFO Clarification for REITs

REITs have started implementing new NAREIT clarifying guidance reporting for funds from operations (FFO), according to Serena Wolfe, a partner with accounting firm Ernst & Young who monitors the industry's FFO reporting.

In the last six months, NAREIT released clarification guidance related to FFO that focused on the treatment of impairment of depreciable real estate. In a video interview at REITWise 2012®: NAREIT's Law, Accounting & Finance Conference in Hollywood, Fla., Wolfe said compliance with the FFO reporting standards declined slightly in 2011 from the previous year.

She said that adjusting for impairment of depreciable real estate has always been in NAREIT's definition, but historically the Securities and Exchange Commission (SEC) has taken exception to adding back impairment write-downs of depreciative real estate to net income in arriving at FFO. However, she added that recently the SEC has taken a neutral position on this adjustment.

Wolfe said that her focus was to find out if the member companies embraced all of the clarification guidance that NAREIT had issued. "Unfortunately those compliance percentages had declined slightly, from 84 percent last year to 80 percent compliance this year," she said.

However, Wolfe said a closer look at the numbers revealed that there were only seven REITs that had decided not to add back impairment allowed under the clarified guidance. If just those companies had complied with the new standard, the compliance rate actually would have gone up, according to Wolfe. She speculated that companies that didn't use the clarified version of NAREIT's FFO definition may have been "skittish" about the SEC's position. Wolfe said her hope is that REITs will see that the SEC is on board with the new treatment of FFO and comply in the future.

Additionally, Wolfe discussed lessons learned from various acquisition deals, and said that with any business acquisition it's important to understand what the purchase encompassed.

"Did you buy single assets or did you buy a whole operating company? Because the differences in accounting are very large depending on exactly what you acquired," she said.