Chapter 3 — Real Estate Operations Acquired or to Be Acquired

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 post-effective 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, under Form 8-K, Item 9.01, a registrant other than a shell company has an additional 71 calendar days (see Chapter 2 for the definition of “the grace period”) after the initial Form 8-K to file an amended Form 8-K that includes these financial statements. If the financial statements and pro forma financial information required by Item 9.01 are not filed within the grace period for a non-shell company registrant, the Form 8-K will be considered materially deficient and, therefore, not filed in a timely manner for Form S-3 eligibility. See paragraphs 2930.1 and 2930.2 of the FRM for details.

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 of 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.

Note 1 to paragraph 2930.1 of the FRM states that “[w]hile an Item 2.01 Form 8-K is not required for business acquisitions at or below 20% significance, registrants may elect to report business acquisitions at or below 20% significance pursuant to Item 8.01 of Form 8-K even if financial information is not provided.”

In addition, note 2 to paragraph 2930.1 of the FRM notes that “[t]here is also no requirement in Form 8-K to report acquisitions that are significant in the aggregate unless they are related businesses, related real estate operations or related funds.”

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 Section 3.3.2.1 and Section 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.”

As indicated in paragraph 1220.11 of the FRM, post-effective amendments that consolidate sticker supplements are not considered new filings for financial statement updating purposes if the duty to file a post-effective 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 Aggregate Significance

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 probable and consummated acquisitions that are within the scope of Rule 3-14, which is similar to the requirement under Rule 3-05. See Section 2.4.2.1.3 for additional discussion.

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 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.

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