income taxes and interest are deducted. AFFO/ NFFO are equal to FFO after adjustments for certain non-comparable items. Depending on the adjustments, the AFFO/NFFO calculation varies from company to company, which can make a comparability analysis difficult. CAD/FAD is used to measure a REIT’s ability to generate cash and to distribute dividends, and is generally equal to FFO minus recurring capital expenditures. EBITDAre was introduced by Nareit in its September 2017 white paper to provide a more widely known and understood measure of performance for real estate operating companies. Additionally, mortgage REITs may use other non-GAAP financial measures, such as “core earnings” (or other similarly titled measures). Core earnings is typically defined as net income (loss) excluding realized and change in unrealized gains (losses), gains (losses) on financial derivatives, and any other nonrecurring items of income (loss). Core earnings and similar metrics are typically useful for mortgage REIT investors because they assess a mortgage portfolio’s performance by evaluating its effective net yield. Internal Control Over Financial Reporting Public companies are required to establish and maintain a system of internal controls over financial reporting that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. However, an issuer will not be required to include either a management’s report on its internal control over financial reporting or an auditor’s report on such internal control until the second annual report following its IPO. In addition, as long as the company is an EGC under the JOBS Act, it will be exempt from providing an auditor’s report on the effectiveness of such internal controls. SEC TREATMENT OF NON-GAAP FINANCIAL MEASURES Regulation G requires issuers to include a reconciliation and general disclosure with respect to any non-GAAP financial measures that are publicly disclosed. The reconciliation requirement provides that whenever an issuer publicly discloses (whether in an SEC-filed report or in an earnings call or investor presentation) material information that includes a non-GAAP financial measure, it must accompany that non-GAAP financial measure with (i) a presentation of the most directly comparable financial measure calculated and presented in accordance with GAAP and (ii) a quantitative reconciliation of the differences between the non-GAAP financial measure and the most directly comparable GAAP financial measure. In addition, the GAAP measure must be presented with equal or greater prominence, which generally means that the most directly comparable GAAP measure should be presented before the Non-GAAP measure. Regulation G and Item 10(e) of Regulation S-K permit a public REIT to disclose FFO as defined by Nareit as a non-GAAP financial measure. As described in further detail below, the disclosure of FFO must be quantitatively reconciled with the most directly comparable GAAP financial measure (generally, net income) used by the REIT. The SEC Staff has issued, and periodically updates, Compliance and Disclosure Interpretations (“CD&Is”) on the use of non-GAAP financial measures. The updated C&DIs included certain updates to the use of the FFO and AFFO performance metrics. The SEC staff continues to accept Nareit’s definition of FFO, as a performance measure and does not object to such presentation on a per share basis. The C&DIs also state that a REIT may present FFO on a basis other than as defined by Nareit (such as AFFO), provided that any adjustments made to FFO must comply with the requirements of Item 10(e) of Regulation S-K for a performance measure or a liquidity measure. If AFFO is intended to be a liquidity measure, it may not exclude charges or liabilities that are required or will require cash settlement and may not be presented on a per share basis. For more information, please see our publication “Frequently Asked Questions about Non-GAAP Financial Measures for REITs.” 2024 Guide to REIT IPOs and Listing Transactions | 10
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