Real estate investment trusts (REITs) need to step up their disclosure to investors, particularly in cases where distributions exceed cash flows, the Ontario Securities Commission (OSC) says.

In OSC Staff Notice 51-724 Report on Staff’s Review of REIT Distributions Disclosure published Monday, the OSC reports that it recently carried out a review of the disclosures of the 30 Ontario-based REITs, which found that OSC staff sought clarification about the distributions and/or disclosure of half of the issuers it reviewed. Of those, two thirds were asked to enhance their disclosure.

“Based on the findings of the review, the quality of disclosure for some issuers requires improvement in certain areas,” the commission says.

In the notice, the OSC indicates that it is particularly concerned about REITs where distributions to investors exceed the cash generated by operations. “Given the importance of distributions to investors, a REIT’s continuous disclosure record should provide investors with transparent information to assess the source of funding for distributions paid and, in turn, the sustainability of those distributions,” it says.

The OSC provides further guidance on its disclosure expectations in the notice. Specifically, it says that it has concerns about the consistency of disclosure about excess distributions; the need for timely disclosure where distributions are reduced or terminated; and, the presentation of common real estate metrics, such as adjusted funds from operations (AFFO).

The notice also indicates that REITs are also generally subject to a variety of risk factors which may negatively impact their distributions, including: rising interest rates that may lead to a REIT’s debt being refinanced at higher rates; distributions that are financed by increasing levels of debt, which are not sustainable; and, the fact that the crop of potential investment properties that meet a REIT’s investment objectives and strategy may be limited.

“Investors are entitled to know the sources of distributions, especially when distributions exceed cash flow from operations” said Huston Loke, director of corporate finance at the OSC. “These disclosures should highlight the risks and their impact on the issuer as well as the sustainability of distributions. We encourage issuers and their advisers to refer to the guidance in this notice as they prepare their annual and interim filings.”

The OSC says that it will continue to monitor REITs’ distribution disclosure as part of its continuous disclosure and prospectus review programs. “REITs who have not complied with these disclosure expectations will be expected to take corrective action,” it warns.