Legal Alert

Financial Disclosures in the COVID-19 Era for REITs and other Public Companies Relating to Real Estate Assets and Liabilities

April 8, 2020

The stock markets’ volatility in the era of the COVID-19 pandemic is one of the virus’ largest impacts. With that in mind, the SEC recently made clear that timely disclosure of significant financial and non-financial issues in publicly traded companies is essential, notwithstanding this time of crisis. The rule remains: investors are entitled to all material information necessary to make current and past statements of any publicly traded entity accurate.

Though it is early, it appears that the effects of the pandemic are going to be extensive, including in the real estate market. Accordingly, these general disclosure issues are critical to publicly traded REITS and any publicly traded company that owns real estate, rents real estate, or has some other substantial involvement in real estate.

  • In particular, the SEC has directed companies to consider these issues in the context of their disclosures: How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook? Has your cost of or access to capital and funding sources, such as revolving credit facilities or other sources changed, or is it reasonably likely to change? Have your sources or uses of cash otherwise been materially impacted? Is there a material uncertainty about your ongoing ability to meet the covenants of your credit agreements? If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take to remedy the deficiency? Consider the requirement to disclose known trends and uncertainties as it relates to your ability to service your debt or other financial obligations, access the debt markets, including commercial paper or other short-term financing arrangements, maturity mismatches between borrowing sources and the assets funded by those sources, changes in terms requested by counterparties, changes in the valuation of collateral, and counterparty or customer risk. Do you expect to disclose or incur any material COVID-19-related contingencies?

  • How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets? For example, will there be significant changes in judgments in determining the fair-value of assets measured in accordance with U.S GAAP or IFRS?

  • Do you anticipate any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets, investment securities), increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on your financial statements?

Indeed, on April 3, 2020, the SEC’s top accountant acknowledged that accounting firms will face increasing challenges in crafting judgments and estimates amid the coronavirus pandemic, while stressing the importance of required disclosures, and citing a long list of accounting issues that may require special attention such as fair value and impairment considerations; leases; debt modifications or restructurings; hedging; revenue recognition; going concern; and subsequent events. He “urge[d] all participants in the financial reporting system to continue to work together to provide investors with the high-quality financial information they need to make decisions amidst uncertainty.”

Even a casual look at these requirements demonstrates that they are particularly applicable to those public companies with real estate related holdings or obligations. For owners, questions of payments, liquidity, and bad debt reserve will become ever more critical as tenant defaults become more regular and alternative payment arrangements are sought and granted. The stated worth of long term assets may be impaired as may goodwill. Failure to disclose such issues in a timely fashion will greatly increase the risk of actions by the SEC and private plaintiffs.

Publicly traded tenants and mortgagors face the mirror image problem if they have difficulty making rental or mortgage payments. Disclosure of foreclosure proceedings, breach of debt covenants, waiver of breaches and impairment of assets and goodwill must be made on a timely basis. Additionally, companies must revisit previous guidance to account for changed circumstances created by the virus.

Publicly traded financing institutions and servicers stand in the same place. Their liquidity, payment streams, asset streams, and value of assets are all impacted by the availability of payment, the granting of covenant waivers, predictions of defaults, bad debt reserve, and asset impairment. Once again, guidance must be corrected and updated.

For each of these types of firms, internal memoranda concerning results and forecasts will become crucial (and damning) evidence if the firms do not match the disclosures of the facts known by management at the time. And in that same vein, companies must closely watch for insider trading to ensure that company insiders are not taking advantage of insufficient disclosures.

In all these instances, the COVID-19 pandemic will not provide a safe harbor for publicly traded real estate involved companies’ failure to make disclosure of material facts to the investment public.  The emergency will not serve as a defense to SEC enforcement or private litigation. We recommend constant and active evaluation of the categories identified by the SEC with special attention to liquidity, bad debt reserve impairment of assets, impairment of goodwill, and changes in the value of collateral. These areas will be the focus of SEC investigations and private actions in the aftermath of the virus. Timely compliance now will forestall many future issues.

Copyright © 2020 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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