Case Studies for SREITs with Capital Distribution from Disposal

In the previous post, I did calculations for DPU downfall for SREITs with more than 5% income support in their distribution. For this post, we will look at another aspect in which SREITs use their capital distribution to boost their DPU. I will only focus on SREITs with more than 5% capital distribution from disposal in their distribution.

Before we start, we will need to set the definition right. There are quite a numbers of SREITs that used the phrase "capital distribution" in their Distribution Statement and this misled a lot of people to think that such dividend is from their cash holding. In fact, most "capital distribution" refers to distributable income from oversea properties. From a tax perspective, income from oversea properties is considered "capital distribution". Of course, distribution from the disposal of properties is considered as "capital distribution" too, as it distributes cash (capital).

Now, what are those SREITs with more than 5% capital distribution from disposal for the past 1 year? After some research, there are 5 SREITs, which are Ascott Residence Trust, CDL Hospitality Trusts, ESR-REIT, Keppel REIT, Suntec REIT. Let's work out the detail below:

i) Ascott Residence Trust

From 4Q 2019 Financial Statement

From 4Q 2018 Financial Statement

The divestment is approx. S$353.3 mils and Ascott distributed S$17.5 mils from this divestment. The capital distribution from disposal is around 9.3% of the amount distributable to unitholders in 2019. Since the remaining fund is huge, management can CHOOSE to distribute this to support its DPU during a downturn, especially during this Coronavirus outbreak, provided they have enough cash.

ii) CDL Hospitality Trusts

From 4Q 2019 Financial Statement

From 2017 Annual Report

CDL Hospitality Trusts divested Brisbane properties at A$77 mil, around S$80 mil at that point in time. They have distributed S$15.9 mils from 2018 to 2019. Capital distribution from disposal is 8.2% in 2019 and 6.2% in 2018. Same as Ascott, management can CHOOSE to distribute this fund to support its DPU during a downturn.

iii) ESR-REIT

From 4Q 2019 Financial Statement

From 2018 Annual Report

From 2Q 2019 Presentation

This required some calculations:
a) Ex-Gratia from SLA - $6.3 mils (finished)
b) 9 Bukit Batok St 22 - $23.9 mils (left 8.06 mils)
c) 31 Kian Teck Way - $5.7 mils
The total up would be $35.9 mils, in which ESR-REIT distributed S$22.139 mil. In 2019, it distributed $16.1 mils capital which is 12.1% of the distribution to unitholders. At this rate, the remaining amount would be finished by 2020.  Let's assume the following for calculation:
i) Distribution amount to be annualized from 4Q: S$ 34,703 mils with S$ 5,625 mils capital distribution (to account for the effect of acquisition) and consistent throughout 2020 to 2021, adjusted when capital from disposal ends.
ii) Outstanding increased by 0.5% per year based on outstanding shares after the preferential offer.
iii) Assume ESR-REIT distributes 100% of the disposal amount.

	2019	2020 (Est.)	2021 (Est.)
Distribution, S$ mil	132.566	130.073	116.312
Capital Distribution from Disposal, mil	16.100	13.761	0.000
Average Outstanding Shares, mil	3,355.048	3,433.757	3,450.926
DPU, S$ cent	4.011	3.788	3.370

DPU might drop by 5.5% in 2020 and further drop by 11% in 2021. Although ESR-REIT has no income support, its capital distribution from capital is quite high %. With current gearing of 41.5%, it would be quite impossible for management to raise DPU without equity fundraising.

iv) Keppel REIT

From 4Q 2019 Financial Statement

From 2018 4Q Presentation

The capital distribution from the disposal of S$12 mil is around 6.3% of FY2019 distribution. Without taking the disposal of Bugis Junction Tower into consideration, the capital gain remaining amount is still high. Moreover, it acquired T Tower in 2019 and the 311 Spencer Street development is expected to be completed by 2Q 2020. If management chooses to continue to distribute this fund, then its DPU would likely be maintained.

v) Suntec REIT

From 4Q 2019 Financial Statement

From 4Q 2015 Financial Statement

From 2018 Annual Report

Suntec REIT started this capital distribution from Park Mall disposal since 1Q 2016. To date, it has distributed S$118 mils. The capital distribution from the disposal of S$26 mils is 9.9% of FY2019 distribution. 9 Penang Road received its temporary occupation permit at end of October 2019 and targets to start occupation in 2Q 2020. Same as Keppel REIT, if management chooses to continue to distribute this fund, then its DPU would likely be maintained.

Besides the above, Frasers Commercial Trust and Mapletree Logistics Trust also do the same. Since Frasers Commercial Trust merger with Frasers Logistics and Industrial Trust is confirmed, I would just omit its case study. Whereas Mapletree Logistics Trust has continuously distributed capital from disposal from 4Q 2015, but only accounts for 3.8% of its FY2019 distribution.

Conclusion:
From these exercises, we can clearly see that SREITs could distribute more than the disposal gain amount to boost its DPU, but I have rarely seen others talk about this topic. In my opinion, Ascott, CDLHT, Keppel REIT managements are doing a good job for capital recycling. However, I feel that it would be better for them to use these amounts for acquisition, AEI or paying down debt.

This is the longest post I have written to date, although screenshots took a big portion of it. The second longest post is How to Start Investing in REITs which I posted a year ago.