Read distribution per unit (DPU) and explain why it matters more than total distributions.
When a REIT reports its results, the first slide often shows total distributable income. That figure can go up in a year when the money reaching each unitholder goes down. The figure that tracks your own cash is distribution per unit. It is in the same report, and you need several years of it before it tells you much.
Distribution per unit (DPU) is the total distributable income for a period divided by the number of units in issue. It is the amount each unit receives. To find your own payout, multiply the number of units you hold by DPU. Someone holding 10,000 units (an example holding) gets 10,000 x DPU.
Results presentations show both numbers, usually on the same slide. Total distributable income describes the REIT as a business: the income the whole trust has available to pay out. DPU describes the part that reaches your account. If the two move in opposite directions, your payout moves with DPU.
Darren holds units in a REIT. The REIT's latest results presentation put a large green number on its first slide: distributable income up 20% on the year. Darren was pleased. Later, when they looked at the distributions they had actually received, the amount had dropped. Neither figure was wrong. The REIT had become bigger, and Darren had received less.
S-REITs keep back very little of their income, as Lesson 4.2, "The payout rule and tax transparency", set out. To buy more property they borrow and issue new units. Funding growth this way is what allows total income and DPU to move apart. A new property adds income. It also adds units that share that income, and the new loans add interest costs.
Darren's REIT bought a property (all figures here invented). Before the purchase it had distributable income of S$200 million and 2,500 million units, so DPU was S$200 million / 2,500 million = S$0.08. It paid for the purchase partly by borrowing and partly by issuing 700 million new units. After the purchase, distributable income was S$240 million, up 20%, and there were 3,200 million units (2,500 million + 700 million). DPU became S$240 million / 3,200 million = S$0.075. A move from S$0.08 to S$0.075 is a fall of about 6% (6.25% exactly). The extra income was too small to cover both the additional units and the interest on the new debt, so the acquisition was non-accretive.
The same test applies to every acquisition. When the new income does not cover the added units and the interest, DPU drops, and unitholders own part of a larger REIT that pays them less for each unit. When the new income more than covers them, DPU rises, and the deal is described as DPU-accretive.
A manager whose pay depends on the size of the REIT can have reasons to go ahead with deals that are not accretive. Lesson 4.3 dealt with this. Module 7 comes back to manager incentives and shows you how to test a claim that a deal will be DPU-accretive before it goes ahead.
One year's DPU on its own tells you very little. With five years or more, you can see whether the manager's choices increased what unitholders were paid or only increased the size of the REIT.
Get the DPU for each financial year from the annual reports. Most annual reports have a five-year summary near the front, which is the easiest place to start. Confirm each number in that year's own annual report, then list the figures from earliest to latest. Check which pattern you have: rising, flat, falling, or a fall followed by a recovery.
Two kinds of year explain a lot of the movement in a DPU series, so flag them as you go. The first is a year with a capital distribution. Lesson 3.3, "One-offs, specials and payouts that will not repeat", describes this as a one-off payment from selling a property. Write the capital part down separately, because a DPU that includes it makes recurring income look higher than it is. The second is a year in which the REIT issued a large number of units through a rights issue, a preferential offering or a placement. The results announcement for that year will say so.
After a rights issue offered to existing holders at a discount, a REIT sometimes restates its earlier DPU so the older numbers line up with the new unit count. If two annual reports give different DPU figures for the same year, check the notes for a restatement.
Distribution yield is the REIT version of dividend yield, and you calculate it from DPU. The formula is trailing DPU / current unit price. Trailing DPU is the total DPU paid over the last twelve months. Count recurring DPU only and leave capital distributions out.
First add up the recurring DPU from the past twelve months, then divide by today's unit price. With trailing twelve-month DPU of S$0.08 and a unit price of S$1.10, the distribution yield is about 7.3%.
The dividend yield lessons in module 3 apply here too. Base your plans on a yield worked out from recurring DPU, with capital distributions taken out. If a website gives you a yield, check whether it uses trailing or forward DPU. A high distribution yield often means the unit price has already fallen because investors expect a cut.
Reading DPU is the first part of the check. A REIT can hold DPU level for some time in three ways that the DPU numbers alone will not show you:
paying out income it held back in earlier periods paying out capital to unitholders borrowing more against a property valuation that has gone up
The rest of this module covers the figures that show whether DPU can be sustained: debt in Lesson 5.2, leases and occupancy in Lesson 5.3, and asset values in Lesson 5.4.
In the activity, you will record five years of DPU for one S-REIT and mark its capital distribution years and its large unit issues. That record will tell you whether the REIT's growth has reached its unitholders.
Pick one S-REIT and write down its DPU for the last five years from the annual reports. Mark any year with a capital distribution or a large issue of new units.
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