Understanding REIT Distribution Components and DPU from Operations

Last January, I wrote about REIT Distribution Demystified and Manipulatable Components, explaining how a REIT can inflate or deflate the DPU. Since then, I have provided these breakdowns through the S-REITs Dashboard & S-REITs Data. For progressive updates, refer to the following posts:

1) SREITs Dashboard, Data & Result Date Updates - Added DPU Breakdown, Updated DPU Trend & Others

2) SREITs Data Updates - Added Distribution Breakdown Tab

3) S-REITs Dashboard & S-REITs Data Updates - Added DPU component %, Re-designed SREITs Data and Others

Photo by Leeloo The First

Since March last year, I have separated fee payables in units and income support from the distributable Income from operations. However, I haven't updated my previous post to explain this. Now, let's revisit and fine-tune that content. For simplicity, all non-cash items like net changes in fair value for properties/financial derivatives, unrealized foreign exchange, depreciation, amortization, and straight-line rental have been omitted.

Income Statement (Statement of Total Return/Profit & Loss)

1) REITs earn a large part of their revenue from properties and a small portion from finance income (e.g., interest and coupon income like Keppel DC REIT). Some REITs receive income support, which can be part of gross revenue or recorded separately. Divestment gains or losses occur when properties are sold during the period, and the REIT can distribute the proceeds as a capital return to unitholders, whether the divestment is a gain or a loss.

2) Net Property Income (NPI) is calculated by deducting property operating expenses from gross revenue.

3) Operating profit is determined by deducting remaining expenses (management fees, trustee fees, finance expenses, and taxes) from NPI and adding finance income.

Gross revenue and NPI only account for directly managed assets. While the income statement includes "share of results of joint ventures/associates/funds", this amount contains non-cash items like valuation gains/losses. Therefore, it is more accurate to use distributions from joint ventures, associates and funds, which could be found in the distribution statement or cash flow statement.

Distribution Statement

4) Next, the distributions from joint ventures, associates, and funds capture the distribution from non-directly managed assets. Fees payable in units, such as property management and manager management fees, are also added as these are non-cash items.

5) Distributable income from operations, also known as operating distributable income, is derived by combining distributable income from directly and non-directly managed assets. Management could also release previously retained distributions or amounts from capital/cash.

6) Management can retain up to 10% of taxable income for working capital. The remainder is then distributed to unitholders. Here, management can decide to retain a smaller amount (or no retention) compared to the previous period to achieve an increase in DPU.

Simplified Distribution Derivation Flow

This should now provide a clearer picture of the components of distribution. The operating distributable income value is used in the Key Financial Metrics section in the S-REITs Dashboard & S-REITs Data. One of the key metrics, operating distribution proportion, measures the percentage of operating distributable income distributed to unitholders. The formula is operating distributable income divided by distribution to unitholders, capped at 100%. If a REIT has a high proportion of manipulatable components, then the percentage would be low. At this moment, the median operating distribution proportion (TTM) is at 95.9%.

Focus on DPU from Operations

The DPU from operations is derived from dividing distribution from operations by the outstanding shares. The focus of REIT distributions should always be the DPU from operations, not the distributed DPU, as these can be manipulated to a certain extent. Income support and divestment can boost DPU only in the short term. However, there are exceptional cases like CapitaLand Ascendas REIT, Keppel REIT, Mapletree Logistics Trust, OUE REIT & Suntec REIT, which have consistently included income support/divestment proceeds in their distributions. See the charts below:

Paying management fees in units is another common way to boost DPU, but it is dilutive in the long run. The distribution amount must keep up with the increase in outstanding shares to maintain the same DPU. Over the past five years, only Parkway Life REIT and Sabana Industrial REIT did not issue units in place of fees. Cromwell European REIT and Frasers Hospitality Trust have also stopped paying fees in units for the past 4.5 years and 3.5 years, respectively.

Some argue that taking fees in units shows management alignment with unitholders, which is true IF the percentage of managers' unitholding increases over time. Unfortunately, some REITs sell these shares after receiving them. Currently, the median proportion of management fees paid in units against distribution to unitholders (TTM) stands at 4.9%. Let's take a look at the top 5 REITs with the highest proportion, extracted from the recent SREITs Fundamental Review @ 30 June 2024 post.

S-REITs with Stable DPU from Operations

Given the current high interest rate environment, a decline in DPU from operations seems inevitable. However, some REITs maintain a stable DPU from operations. I have filtered out the following based on two criteria:

i) DPU from operations has remained stable or grown over the past 10 years (or since IPO).

ii) The past year's DPU from operations dropped less than 15% from the recent peak, both inclusive of distributing retention.

Here are the S-REITs meeting these criteria:

1) CapitaLand Ascendas REIT

2) Frasers Centrepoint Trust

3) Keppel DC REIT

4) Mapletree Industrial Trust

5) Mapletree Logistics Trust

6) Mapletree Pan Asia Commercial Trust

7) Paragon REIT

8) Parkway Life REIT

9) Sasseur REIT

Only Keppel DC REIT & Sasseur REIT are listed less than 10 years from the above. If we further tighten the criterion of the past year's DPU from operations decline to less than 10% from the recent peak, it would still leave CapitaLand Ascendas REIT, Mapletree Industrial Trust, Mapletree Logistics Trust, Mapletree Pan Asia Commercial Trust and Parkway Life REIT. You can visit REITs Review for my latest review on these REITs.

Takeaway

This post has taken longer than I anticipated, so here’s a summary:

• Manipulatable Components in Distribution:  These include fees payable in units, income support, divestment proceeds, the release of retention/capital, and the amount of distribution retention.
• Inflated Distributed DPU: Distributed DPU can be inflated by these manipulatable components, with fees payable in units being particularly dilutive. The distribution amount must keep up with the increase in outstanding shares to maintain the same DPU amount.
• Focus on DPU from Operations: The focus should always be on DPU from operations rather than distributed DPU, as the latter can be manipulated through various means.

Lastly, here is a table showing the TTM Dividend Yield of DPU from Operations:

If you notice, the difference in dividend yield correlates with the inverse of the operating distribution proportion. The operating distribution proportion figures are in the Key Financial Metrics section in the S-REITs Dashboard & S-REITs Data.

That’s it for today’s sharing. I hope you find it useful. Feel free to contact me or comment if you have any questions.

For more information, check out:

SREITs Dashboard - Detailed information on individual Singapore REIT

SREITs Data - Overview and details of Singapore REIT

REIT Review - List of previous REIT review posts

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*Disclaimer: The information presented on this blog is for educational and informational purposes only. The materials, including research and opinions, are based solely on my findings and should not be considered professional financial advice or a definitive statement of fact. I cannot guarantee the accuracy, completeness, or reliability of the information provided. I shall not be held liable for any errors, omissions, or losses that may occur as a result of using the information presented on this blog. It should be noted that the information presented on this blog does not constitute a buy, sell, or hold recommendation for any security. It is crucial to conduct your own thorough research and due diligence before making any investment decisions.