December 13, 2002
Mr. Jonathan G. Katz
Re: Conditions for Use of Non-GAAP Financial Measures (File No. S7-43-02)
Dear Mr. Katz:
Associated Estates Realty Corporation (the "Company") is pleased to have the opportunity to respond to the Securities and Exchange Commission ("Commission") regarding the proposals set forth in Release No. 33-8145 and 34-46788 ("Releases"). The Company is a self-administered and self-managed publicly traded real estate investment trust which specializes in multifamily property management, advisory, development, acquisition, disposition, operation and ownership activities.
The Company supports the Commission's efforts to reform the use of Non-GAAP financial measures by public companies. We agree with the need to improve the transparency and quality of public disclosures, including pro forma financial information. We agree with most of the Commission's proposals relating to the use of Non-GAAP financial measures. However, the Company is concerned that one aspect of the proposals could be counterproductive to the interests of investors. Associated Estates Realty Corporation opposes the Commission's proposal that would prohibit the use of Non-GAAP per share information in corporate earnings releases.
The Company supports the Commission's proposal that any Non-GAAP financial measure must be reconciled with the comparable GAAP measure. Additionally, we agree that any comparable GAAP measure must be presented with equal or greater prominence of the comparable non-GAAP measure.
However, we use a non-GAAP measure, Funds From Operations (FFO), as an important supplemental indicator of our company's operating profitability. Reporting FFO, as well as other Non-GAAP measures, on only an absolute basis, not on a per-share basis, would be inappropriate since the issuance of shares or the repurchase of shares could affect the absolute measure. Additionally, investors have advised us that these Non-GAAP per-share measures, including Funds From Operations and Net Asset Value, are important supplemental indicators of a real estate company's operating profitability and financial condition.
We recommend that the final rule allow per share reporting of non-GAAP measures and require that both the numerator (the non-GAAP measure) and the denominator (the applicable diluted number of shares) be reconciled to GAAP net income and the number of diluted shares used to calculate GAAP net income per share respectively. This position agrees with the alternative suggested in "Questions regarding amendments to Item 10 of Regulation S-K, Item 10 of Regulation S-B and Form 20-F" of the Release.
Associated Estates Realty Corporation thanks the Commission for the opportunity to comment on this proposal. Please contact Lou Fatica at (216) 261-5000 if you have any questions regarding this letter.