PKF urges fuller gearing disclosure for A-REITs

It has become difficult to gauge the true extent of gearing for many REITs, which has called for greater transparency in reporting, PKF chartered accountants has stated.

The PKF REIT Monitor report has highlighted increased gearing and debt levels, stating that although Australian REITs are fully compliant in their basic gearing disclosure under International Financial Reporting Standards (IFRS), there is a need for greater transparency towards ‘look through’ gearing levels.

Author of the inaugural report, PKF Corporate Advisory Partner Ed Psaltis, said it has become difficult to gauge the true extent of gearing for many REITs because joint ventures and associate investments are now a far more dominant feature than five years ago.

“Thirty of the 55 Australian and New Zealand REITs have such investments on their balance sheet but under IFRS (as interpreted by the relevant REITs), they did not have to fully disclose details of debt within those investments such as their ‘look though’ gearing level, which includes all equity accounted assets and interest bearing liabilities,” said Psaltis.

PKF found that only 20 of the 48 Australian REITs actually disclosed their ‘look through’ gearing position — and where it was disclosed, the level of gearing invariably increased.

Psaltis said the lack of consistent ‘look through’ gearing disclosure across the REITs sector may conceal higher (and increasing) gearing levels than is thought.

“While the reported average basic gearing for Australia at the end of June 2009 was an already high 47 per cent, when taking into consideration the ‘look through’, the reality would have been even higher. Ideally, all REITs should disclose in their financial reporting the true level of ‘look through’ gearing — even if that figure is the same as basic balance sheet gearing,” he said.

The PKF REIT Monitor report stated that despite the reported $11 billion in equity raisings in Australian REITs over the 2008-2009 financial year (which was used almost entirely to reduce debt) gearing levels rose from 42 per cent to 47 per cent. Over the same period, properties within all REITs were written down by about $20 billion.