Financial Reporting and Accounting An IPO registration statement must include audited financial statements for the last three fiscal years (two years for EGCs) and financial statements for the most recent fiscal interim period, compared with interim financial information for the corresponding prior fiscal period. The SEC also requires special income statement and balance sheet captions for REITs. A REIT may not be able to provide full financial statements with respect to significant real estate assets or businesses that were recently acquired or that are probable candidates for acquisition. For most equity REITs, the SEC will require audited statements of revenue and certain expenses (i.e., financial statements required pursuant to Rule 3 14 of Regulation S-X) with respect to significant real estate assets to be acquired; however, some REITs must prepare audited financial statements in accordance with Rule 3-05 of Regulation S-X, which is required when an issuer acquires a significant business. For instance, lodging REITs must prepare audited Rule 3-05 financial statements with respect to acquisitions of hotels that are “significant” in accordance with Rule 3-05 of Regulation S X. In 2021, the SEC amended the thresholds for “significance” under Rules 3-14 and 3-05 to generally mean that a transaction exceeds 20% under one of three tests: the income test, the investment test, or the asset test. Companies will need to provide the required financial statements in their IPO registration statements for all acquisitions or dispositions (or groups of related acquisitions or dispositions) that are deemed “significant” under the applicable rules and that have occurred or are considered “probable.” These assessments can be complicated and time consuming and often involve discussions with the company’s independent auditors, as well as the staff of the SEC. Early on, the issuer should identify any problems associated with providing the required financial statements (including any complex predecessor analysis or similar issues in a “roll-up” IPO) in order to seek necessary accommodations from the SEC. These statements must be prepared in accordance with GAAP, as they will be the source of information for the MD&A disclosures. Pre-Filing Correspondence with the SEC REIT formation transactions can be complex, often resulting in significant accounting and financial reporting issues. The SEC is available to discuss these accounting and financial reporting issues even in advance of a confidential submission or public filing of a registration statement, and it is advisable to approach the SEC early in the process to avoid costly delays. If an issuer is unable to prepare the necessary financial statements or is uncertain with respect to its identification of the REIT’s “predecessor” or “accounting acquirer,” the issuer should seek relief or guidance from the SEC staff in the form of a “preclearance” letter, which may result in the SEC allowing the issuer to include more limited financial information than would otherwise be required under the SEC’s rules. The identification of a “predecessor” or “accounting acquirer” can require complicated analyses that often take time, and the process of obtaining a “pre clearance” letter can further delay the IPO timeline. Measuring Performance ■ Funds from Operations (“FFO”) The real estate industry discloses a unique operating metric that the SEC has traditionally allowed. FFO is the most common financial metric used to measure a REIT’s operating performance. Nareit defines FFO as net income (computed in accordance with GAAP) excluding gains or losses from sales of most property and depreciation of real estate. REIT professionals believe that FFO provides a more accurate picture of the REIT’s performance than earnings calculated in accordance with GAAP, which includes non-cash items. FFO is not the same as Cash from Operations, which includes interest expenses. FFO was originally defined by Nareit in its White Paper in 1991 and subsequently revised from time to time, including most recently in December 2018. Most REITs disclose a modified or adjusted FFO, although the SEC requires them to present the standard Nareit definition as well. For more information, please read “Nareit Funds From Operations White Paper – 2018 Restatement.” ■ Other Performance Measures Most REITs also disclose a variety of other non-GAAP financial measures, such as net operating income (“NOI”), adjusted FFO (“AFFO”), normalized FFO (“NFFO”), cash/funds available for distribution (“CAD/FAD”), earnings before interest, taxes, depreciation and amortization (“EBITDA”), adjusted EBITDA, and EBITDA for real estate (“EBITDAre”). NOI is the operating income after operating expenses but before 9 | 2024 Guide to REIT IPOs and Listing Transactions
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