3.4 Real Estate Acquiree Financial Statements Required in SEC Filings
When real estate operations are significant, a registrant (acquirer)
may be required to include the statements of revenues and expenses of acquired real
estate operations in a Form 8-K, a registration statement, or proxy materials. In
addition, if the acquisition of real estate operations is deemed probable, the
registrant may need to include statements of revenues and expenses in a registration
statement or proxy materials.
Under Rule 3-14, statements of
revenues and expenses for significant acquirees are not required in annual or
quarterly reports on Form 10-K or 10-Q but must be included in all transactional
filings (i.e., proxy statements requiring financial information; Exchange Act
registration statements; Securities Act registration statements other than
registration statements filed under Securities Act Rule 462(b) or Rule 424
prospectuses; and posteffective amendments filed to reflect a fundamental
change).
3.4.1 Form 8-K
3.4.1.1 Requirements for Entities Other Than Blind Pools
Form 8-K, Item 2.01, requires a registrant to report the
acquisition or disposition of a significant amount of assets outside of the
ordinary course of business or the acquisition or disposition of a
significant amount of assets that constitute a real estate operation as
defined in Rule 3-14(a)(2). A registrant must file an
initial Form 8-K within four business days of consummating the acquisition
of a real estate operation (or group of related real estate operations) as
defined in Rule 3-14(a)(2) that exceeds the 20 percent significance level.
If the historical statements of revenues and expenses and related pro forma
financial information are available, a registrant may file them along with
the initial Form 8-K. Otherwise, a registrant other than a shell company
has an additional 71 calendar days after the initial Form 8-K was required
to be filed to file an amended Form 8-K that includes these financial
statements. Even if the acquisition is not within the scope of Rule 3-14,
the registrant should consider whether the Form 8-K filing requirements for
asset acquisitions under Item 2.01 apply.
While a registrant is not required to report probable acquisitions of real estate operations in
a Form 8-K, it must present historical statements or revenues and expenses
for probable acquisitions of real estate operations (or groups of related
real estate operations) that exceed the 50 percent significance level in
transactional filings, as defined earlier.
3.4.1.2 Requirements for Blind Pools Subject to Industry Guide 5
During the distribution period of a blind-pool offering and
after the distribution period of a blind-pool offering but before a
registrant files its first annual report after the distribution period ends,
the registrant is required to file a current report on Form 8-K. The report
must include Rule 3-14 financial statements and the related pro forma
information for each property acquired during such periods if the
acquisition is significant on the basis of the modified significance tests
for blind pools (see Section 3.3.2.1).
3.4.2 Registration Statements and Proxy Materials
3.4.2.1 Requirements for Entities Other Than Blind Pools
A registrant is required to include abbreviated income
statements for both consummated and probable acquisitions that exceed the 20
percent and 50 percent significance level, respectively, in registration
statements and certain proxy materials. Such abbreviated income statements
may be included in the registration statement or incorporated from a
previously filed Form 8-K.
In addition, under Rules 3-05 and 3-14, a registrant
may exclude from a registration statement financial statements of certain
business and real estate operation acquisitions consummated less than 75
days before the registration statement is filed or declared effective unless
the registrant has previously filed these financial statements. See
Section
2.4.2.1.1 for further discussion. However, a registrant that
omits such financial statements from its registration statement must file
those financial statements and any pro forma information on Form 8-K no
later than 75 days after consummation of the acquisition.
A registrant must provide Rule 3-14 financial statements if
either of the following conditions exist:
- During the most recent fiscal year or subsequent interim period, an acquisition of a significant real estate operation has occurred.
- After the date of the most recent balance sheet, consummation of an acquisition of a significant real estate operation has occurred or is probable.
Rule 3-14 requires a registrant to file financial statements
for real estate properties for only one year and (as applicable) the current
year-to-date interim period. However, financial statements of a real estate
acquiree in registration and proxy statements are no longer required once
the real estate acquiree has been reflected in the registrant’s audited
financial statements for nine months (see Rule 3-14(b)(3)(iii)).
Example 3-7
Registrant A acquired real estate
operations on May 5, 20X4 (Property B); September
21, 20X3 (Property C); and December 1, 20X2
(Property D). Each acquisition was individually
significant at the 20 percent level or higher. All
entities have December 31 fiscal year-ends.
Registrant A plans to file an initial registration
statement on April 1, 20X5.
Because B has not been reflected in
A’s audited financial statements for nine months, A
must provide Rule 3-14 abbreviated financial
statements for B. However, A is not required to
provide Rule 3-14 financial statements for C or D
because they have been reflected in A’s audited
financial statements for nine months.
3.4.2.2 Requirements for Blind Pools Subject to Industry Guide 5
In addition to the requirements mentioned above in Sections 3.3.2.1 and
3.4.1.2, a
registrant must file a posteffective amendment to its registration statement
at least every three months during the distribution period. The
posteffective amendment must include or incorporate by reference audited
Rule 3-14 financial statements for all significant property
acquisitions that have been consummated (except as discussed in the next
paragraph). Pro forma financial information is also required for any real
estate operations for which abbreviated financial information must be
provided. This filing process is commonly referred to as “consolidating
sticker supplements.”
The SEC staff’s view is that posteffective amendments that
consolidate sticker supplements are not considered new filings for financial
statement updating purposes if the duty to file a posteffective amendment is
triggered solely by undertakings under Item 20.D of
Industry Guide 5 (i.e., the requirement to consolidate
sticker supplements every three months). Accordingly, a posteffective
amendment filed to consolidate sticker supplements or to update the
financial statements does not need to include financial statements for
significant property acquisitions during the 71-day extension period allowed
by Form 8-K, Item 9.01, unless it reflects a fundamental change.
3.4.2.3 Individually Insignificant Acquisitions
Under Rule 3-14, a registrant is not required to provide the
financial statements of acquirees that do not exceed the 20 percent
significance level. However, when filing a registration statement, the
registrant must evaluate the aggregate significance of (1) probable
acquisitions that do not exceed 50 percent, (2) consummated acquisitions
that exceed 20 percent but do not exceed 50 percent and whose financial
statements do not yet have to be filed (i.e., within the grace period), and
(3) any acquisitions consummated since the end of the registrant’s most
recently completed fiscal year presented that do not exceed 20 percent. The
acquirees in all three categories are commonly referred to as individually
insignificant acquirees, and if their aggregate significance exceeds 50
percent, the registration statement must include:
- The audited preacquisition financial statements for the most recent fiscal year and interim period for any acquirees in categories (1) and (2) above that exceed 20 percent significance and have not yet been filed.
- Pro forma financial information to reflect the aggregate effects of all individually insignificant acquisitions.
If the registrant has an AWMV, it must calculate the
significance of each acquisition separately on the basis of the amount of
such market value that applies to the acquisition and then sum the
significance results for each one. In addition, a registrant that has both
real estate acquirees and business acquirees (i.e., Rule 3-05 applies) would
need to include the aggregate impact of its business acquirees and its real
estate acquirees to evaluate significance under the investment test.
See Section 2.9 for more details and examples of individually
insignificant acquisitions.
3.4.3 REIT Spin and REIT Conversion Transactions
At the February 2015 “SEC Speaks” Conference hosted by the
Practising Law Institute, the SEC staff discussed REIT transactions in which an
operating company (1) spins off its real estate assets and leases them back (a “REIT
spin”) or (2) is converted entirely into a REIT (a “REIT conversion”). The SEC
reporting considerations for a REIT spin or REIT conversion can be complex.
For a REIT spin, the SEC staff indicated that registrants should consider providing
the following financial statements in their initial registration statement:
- An audited opening balance sheet (i.e., a “seed money” balance sheet) for the registrant.
- Carve-out financial statements when a rental history exists; alternatively, a schedule of investments may be appropriate if there is no rental history.
- Significant tenant financial statements when the operating company leases back the real estate assets. The staff noted that if the operating company (which is the significant tenant) is an SEC reporting entity, it would be sufficient to explicitly refer to its periodic reports. See Section 2340 of the FRM and Section 3.2.1.2 of this Roadmap for additional information.
- Pro forma financial statements prepared in accordance with Regulation S-X, Article 11, or a forecasted income statement.
- Nonregistrant financial statements (or other entities’ financial statements) in accordance with the guidance in Regulation S-X, Rule 3-05 or Rule 3-14, on acquisitions of businesses or real estate operations, respectively. Such financial statements may need to be provided, for example, if some of the spun-off assets were acquired recently. The staff reminded registrants that in these circumstances, the measurement basis for the significance test under Rule 3-05 or Rule 3-14 would be the carve-out financial statements and not the prior entity.
The SEC staff also discussed the filing requirements of Schedule III under which
registrants must present detailed supplemental information about real estate
investments and accumulated depreciation. The staff observed that many registrants
have had difficulties in obtaining some of the required information. In these cases,
the SEC has considered waiver requests to (1) disclose certain cost information
prospectively or (2) provide levels of aggregated information when a significant
number of assets would otherwise need to be disclosed separately.
The staff also has observed a higher frequency of REIT transactions in industries
other than real estate (e.g., involving assets such as cell towers, data centers,
and billboards). Further, for REIT conversions that do not involve traditional real
estate companies, the staff noted that the disclosure requirements for real estate
assets have not been appropriately considered. The staff suggested that such
registrants should strive to comply with the spirit of the disclosure requirements
when considering their unique assets (e.g., portfolio occupancy, effective rents,
material tenant concentrations, category and physical location of the assets,
significant lease types, and lease expiration dates).
Because REIT transactions (including REIT spin and REIT conversion
transactions) can be complex, the SEC staff has encouraged registrants that are
contemplating such transactions to consult with the CF-OCA.