The Canadian Securities Administrators is calling on real estate investment trusts (REITs) and real estate operating companies (REOCs) to enhance their disclosure after a review found widespread weaknesses.

The CSA details the results of the review in a notice published on Thursday.

“The quality and completeness of disclosure pertaining to non-GAAP financial measures and distributions” needs to improve, the notice says.

The review looked at the disclosure of 47 REITs and REOCs, and focused on disclosure regarding the sustainability of distributions, and the use of non-GAAP financial measures.

The regulators found some issues with 72% of the firms they reviewed, including 6% that were required to restate their financials, and 62% that agreed to enhance their disclosure in the future.

“Generally, REITs and REOCs provided adequate disclosure about their distributions, except when ‘excess distributions’ were made and in those cases, many issuers did not disclose the sources of cash used to fund the excess,” the notice says..

As for their use of non-GAAP financial measures, the CSA found: “a lack of transparency about the various adjustments made in arriving at non-GAAP financial measures”;
instances where non-GAAP metrics were given greater prominence than GAAP measures; and
a lack of consistency in how non-GAAP financial measures are used and reconciled.

“We are concerned that these issues have the potential to render non-GAAP financial measures not useful, confusing or misleading,” the notice says.

The notice calls on real estate issuers to ensure that they are providing appropriate disclosure, particularly when they are distributing more cash than they are generating from their operations.

“Given strong investor interest in this sector and the inherent pressure on issuers to pay distributions, the sustainability of distributions and the accompanying disclosures are important to investors,” it says.

The CSA reminds real estate issuers to provide adequate disclosure when they use non-GAAP measures to report their operating and cash flow performance.

“We continue to closely monitor non-GAAP financial measures in the real estate sector. Investors need sufficient information to understand what these measures represent and how they are calculated. Real estate reporting issuers are expected to provide transparent disclosures regarding distributions and non-GAAP financial measures,” says Louis Morisset, chair of the CSA and president and CEO of the Autorité des marchés financiers (AMF) in a statement.

The CSA intends to continue assessing these areas in its future continuous disclosure reviews and prospectus reviews.