October 24, 2003

Regulation G’s Mixed Blessing for

In its FAQ No. 7 issued in June, the SEC staff reiterated that only the measure “funds from operations” – known as “FFO” – as defined by the industry association NAREIT could be used by companies as “funds from operations per share” in earnings releases and materials that are filed/furnished with the SEC. This exception for the real estate industry was first espoused in footnote 50 of Reg G’s adopting release.

The mixed blessing is that NAREIT’s definition was not universely applied by real estate companies – thus, the SEC’s exception did not really help those companies too much. In FAQ 7, the SEC staff made clear that use of a modified measure would be subject to all of the provisions of Item 10(e) of Regulation S-K.

Lately, NAREIT has been in discussions with the SEC staff over a disagreement regarding the exclusion of impairment charges from FFO – the staff ruled it can’t be excluded. As noted in a recent alert, NAREIT believes that this staff position is inconsistent with guidance it issued in July 2000, which indicated that impairment write-downs of depreciable real estate should be excluded from FFO. As I understand it, the theory for the NAREIT approach is that impairment charges should be treated like depreciation. The SEC staff appears to disagree. [it doesn’t appear that the NAREIT alert is available on their web site – if you want a copy of the alert, shoot me an email.]

Disclosure of Potential Environmental Liabilities

Investors consistently seek more disclosure about potential environmental liabilities; companies consistently are loathe to provide too much disclosure for fear of tipping their hand in litigation. Alan Beller has stated that if the SEC puts out an interpretative release on MD&A in time for the upcoming proxy season (a window that is now measured in weeks), it will address this tension.

For subscribers, we have posted an interview with Greg Rogers on Environmental Liabilities Risks and Disclosure.