After reviewing the continuous disclosure records of 30 Ontario-based real estate investment trusts (REITs), the Ontario Securities Commission (OSC) staff, in OSC Staff Notice 51-724 Report on Staff’s Review of REIT Distributions Disclosure issued January 26, 2015, has provided additional guidance on its expectations for disclosure by REITs regarding the source of distributions paid to equityholders, and the sustainability of those distributions. This report reiterates and further explains guidance provided in National Policy 41-201 Income Trusts and Other Indirect Offerings (NP 41-201), which sets out certain requirements applicable to REITs’ continuous disclosure and offering documents.

In its report, the OSC staff noted the expectation of investors that REITs, as an investment vehicle, provide a predictable cash flow stream, and therefore that it is critical that REITs provide transparent disclosure that enables investors to evaluate the source of funding for the distributions paid by the REIT and their sustainability. Although the OSC characterized the majority of the disclosure they reviewed as fulsome, they did identify the following four areas of concern where disclosure should be improved:

  • the content of disclosure where distributions in excess of cash flows generated from operations are paid,
  • consistency of disclosure about excess distributions,
  • timely disclosure where a reduction or termination of distributions occurs, and
  • presentation of metrics common to the real estate industry such as adjusted funds from operations (AFFO).

All four concerns were heightened where the distributions paid by REITs exceeded the cash flows generated by the REIT’s underlying real estate portfolios.

The report provides examples of disclosure the OSC staff regards as inadequate, as well as examples of how that disclosure could be improved.

The report also notes that the OSC staff will continue to assess these disclosure items in their continuous disclosure and prospectus review programs and that REITs who have not complied with disclosure expectations will be expected to take corrective action. We recommend, therefore, that REITs review their continuous disclosure filings for compliance with the items highlighted in the report, particularly in advance of any proposed prospectus offerings.