Lesson 5 of 8
Metrics a company invented
Brixmor's printed definition of its own measure said one thing and its calculation did another. Recomputing it, not reading it, is the check.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- A non-GAAP measure has no standard behind it, so its definition is written by the company that reports it.
- In a settled order dated 1 August 2019, the Commission found that Brixmor's calculation of its own growth measure did not match the definition it printed in its filings.
- The check is arithmetic, not reading: recompute the measure from the GAAP lines in the reconciliation and see whether you get the published figure.
Every company reports at least one figure no accounting standard governs. Adjusted earnings, same-store growth, organic revenue, annual recurring revenue. The standards say only that such a figure must be reconciled to the nearest measure that is governed, and may not be given greater prominence than it.
What the order says about one non-GAAP measure
- Q3 2013 to Q3 2015The relevant periodThe Commission found the company misstated its same property net operating income growth rate in all but one quarterly report, in both annual reports, and in the related current reports of the period.
- Q3 2014One entry, namedThe order describes 425,000 dollars of a 1.3 million dollar lease termination payment reclassified as other income so it could be included in the measure and the quarter's target reached.
- 8 February 2016The disclosureA current report stated that the board had concluded income items were smoothed between quarters. Revised growth rates for each quarter of the period were published and four senior finance and executive roles changed.
The measure, and why it exists
Same property net operating income compares only the properties a landlord owned throughout both the current period and the same period a year earlier. Excluding everything bought or sold in between is the point: it is meant to show what the existing estate did, not what acquisitions added.
Lease termination income is a lump sum a tenant pays to leave a lease early. Under the standards it is income in the quarter the lease ends and the payment arrives. Many landlords exclude it from the same-property measure because a one-off payment would distort a growth comparison, and the company's filings said that it did.
What the order found instead
Two things, both inside a figure whose definition the company controlled. Termination income was spread over the remaining term of the ended lease and fed into the measure quarter by quarter, so the comparison looked as though rent were still arriving from a tenant who had gone. And on occasions when more income was needed to reach the quarter's target, portions of a termination payment were reclassified as other income and recognised at once.
The order gives one instance with a number attached: in the third quarter of 2014, 425,000 dollars of a 1.3 million dollar payment. The company consented to the order without admitting or denying the findings.
The lesson a reader can act on
The printed definition was not wrong. It said termination income was excluded, and that is the industry practice. What differed was the calculation, and no amount of careful reading of the definition would have revealed that.
What would have revealed it is arithmetic. A non-GAAP measure must be reconciled to the nearest governed measure, and the reconciliation is a list of additions and subtractions. Recompute the measure from that list. If the published figure does not come out, the difference is the thing to ask about.
Three questions for any invented measure
Has the definition changed since last year, and is the prior year restated on the new definition. Does the same adjustment appear every year, in which case it is describing the business rather than excluding an oddity. And does the reconciliation actually reconcile, computed by hand.
Check yourself
What did the Brixmor order find about the relationship between the printed definition and the calculation?
- The definition was misleading in its wording
- The definition stated termination income was excluded, and the calculation incorporated it in two ways
- No definition was published
Show the answer
Answer: B.
The order describes filings stating that lease termination income was excluded from the measure, and a calculation that amortised it into the measure and at times reclassified portions of it as other income.Which check would have shown the gap?
- Reading the definition more carefully
- Recomputing the measure from the required reconciliation to the nearest governed measure
- Comparing the measure with a competitor's version of it
Show the answer
Answer: B.
The definition was accurate as written. Only arithmetic on the reconciliation separates the published figure from the one the definition implies.An adjustment described as unusual appears in the reconciliation every year for eight years. What does that suggest?
- That the company is manipulating the measure
- That the item is part of how the business operates, so excluding it describes something other than the business
- That the standards require its exclusion
Show the answer
Answer: B.
A charge that recurs annually is recurring by definition. That is a question about what the adjusted figure represents, not an allegation about anyone.Sources
- SEC, In the Matter of Brixmor Property Group Inc., Exchange Act Release No. 86538, Accounting and Auditing Enforcement Release No. 4061, 1 August 2019. Settled without admitting or denying the findings.
- Regulation G and Item 10(e) of Regulation S-K: a non-GAAP measure presented to the public must be reconciled to the most directly comparable GAAP measure and may not be given greater prominence than it.
What this leaves out
- The matter was settled and the respondent consented without admitting or denying the findings, which are not binding on any other person or entity. Everything stated about the company comes from that order.
- Reporting a non-GAAP measure is ordinary, lawful and near universal. Nothing here suggests that a company reporting one is doing anything improper.
- The worked example uses invented round numbers and is labelled illustrative.
- Nothing here is advice about any security.