AMB Property Corporation, Financial Reporting in the REIT Industry

AMB Property Corporation set out to be a leader in corporate governance and financial reporting. The company, a publicly traded real estate investment trust (REIT) that acquires, develops, and owns industrial properties, believed that its governance and reporting practices were among the best in the industry. The implementation of good disclosure practices in the REIT industry was not a simple undertaking. Historically, the real estate industry was dominated by private partnerships and institutional investors who used tax and partnership accounting rather than generally accepted accounting principles (GAAP). As a result, there was a need for new financial terms that were meant to bridge the differences between GAAP and private partnership accounting, notably funds from operations. However, because such industry-specific metrics were not consistently calculated, it was difficult for users of REIT financial statements to compare operating results across companies. Public REITs that used non-GAAP metrics were required to reconcile these metrics to GAAP standards, a process which added significantly to the length of REIT financial reports. In addition, companies were required to apply GAAP accounting standards that were mostly designed for industries other than real estate and had the unintended consequence of making it difficult to evaluate the operating performance of REITs and compare those results across periods. This case explores the issue of financial reporting in the REIT industry, including important FASB standards that potentially distort REIT financial results, the use of Funds From Operations as a metric of financial performance, and different approaches for valuing REITs.