Clarion CRA Securities, L.P.
VIA E-MAIL AND FEDERAL EXPRESS
December 12, 2002
Mr. Jonathan G. Katz
Re: File No. S7-43-02
Dear Mr. Katz:
Clarion CRA Securities, L.P., is pleased to respond to the Securities and Exchange Commission ("Commission") regarding the proposals set forth in Release No. 33-8145, "Proposed Rule: Conditions for Use of Non-GAAP Financial Measures." Including predecessors, Clarion CRA is an investment adviser registered with the Commission since 1969 and currently acts as investment manager for approximately $1.8 billion of assets from public and corporate pension plans, foundations, endowments and other investors. We are a manager specializing in publicly traded real estate securities, principally real estate investment trusts (REITs). Among its three-dozen principal clients, Clarion CRA serves as sub-adviser to two mutual funds registered with the Commission, namely ING Real Estate Shares and ING Global Real Estate Fund.
Clarion CRA supports the Commission's efforts to bring more discipline to the use of Non-GAAP financial measures by public companies. We have long supported the need to improve the transparency and quality of public disclosures, including pro forma financial information, and agree with most of the Commission's proposals relating to the use of Non-GAAP financial measures.
However, we are concerned that one aspect of the proposals could be counter-productive to the interests of sophisticated institutional investors who make up the bulk of our clients. Clarion CRA opposes the Commission's proposal that would prohibit the use of Non-GAAP per share information (emphasis added) in corporate earnings releases, investor conference calls and web site information, as set forth below.
As an investor, we use Non-GAAP per-share measures, including Funds From Operations ("FFO") per share and Net Asset Value ("NAV") per share, as important supplemental indicators of a real estate company's operating profitability and financial condition. Reporting these measures on an absolute basis only, without considering the impact of a company's issuing or repurchasing shares would be less meaningful to our analysis and to the investment community at large. We support the requirement in the proposed rule that both the numerator and denominator used in the calculation of these per share amounts be reconciled to comparable GAAP measures. Being able to examine alternative measures of performance, like FFO per share, benefits investors such as ourselves and the clients for whom we manage money.
Beginning in the 1970s, principals of Clarion CRA have been active in various efforts by the real estate industry to develop non-mechanical and non-straight line depreciation methods that would better reflect any changes in the values of the properties held by publicly registered real estate companies, as contrasted with computing values derived by applying straight-line or other mechanical depreciation methods. The Commission's 1973 Accounting Series Release No. 142 attempted to deal with this issue by stating that "it is not clear that simple omission of depreciation or other non-cash charges...provides an appropriate alternative measure of performance..." The Release had the unfortunate effect of chilling efforts by the real estate industry and accounting profession to research and implement a suitable alternative performance standard for real estate. In the intervening three decades the Commission has taken no further action to research whether any industry can develop appropriate alternative performance standards. Accordingly the National Association of Real Estate Investment Trusts, in 1991, developed an industry-wide standard for reporting the supplemental performance measure of Funds from Operations (FFO). Public companies who follow the NAREIT FFO guidelines provide information to investors that has much higher consistency, quality and information content than information provided by companies who independently decide what the best measure of their performance should be.
Clarion CRA 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.
We suggest and recommend strongly that the final rule should allow per-share reporting of Non-GAAP measures in earnings releases and other public communications, so long as the company reconciles the financial measure (the numerator) with the comparable GAAP measure and the number of shares used in the calculation (the denominator) to the number of shares used to calculate GAAP net income per share. Section 401(b) of the Sarbanes-Oxley Act does not prohibit introduction of pro-forma data in public company communications with investors but seeks to provide that such pro forma data is reconciled with GAAP and is presented "in a way that is not misleading and does not contain untrue statements [emphasis added]." We would also recommend that the Commission study further the issue of whether rigorously defined alternative industry standards of performance (all tied back to GAAP) cannot significantly enhance the quality of data reaching the investing public. Specialized industry groups that develop industry-wide supplemental performance standards, and the public companies who then voluntarily follow these accounting and disclosure practices, are providing data of a much higher credibility standard than disclosures determined by individual companies without reference to any standard.
Clarion CRA thanks the Commission for this opportunity to comment on this proposal. We will be pleased to respond to any questions you may have regarding this letter.
CLARION CRA SECURITIES L.P.