Most Reits' DPU paid out of operations

A HEALTHY 91 per cent of distributions from Singapore Reits (S-Reits) on average comes from operations, contrary to the belief that distributions are increasingly artificially supported by capital and other means. This is according to findings from a study done by Religare Institutional Research.

In fact, only four Reits used capital - mostly comprising divestment proceeds - to prop up their dividend payout in FY14 and FY15. They are Cache Logistics Trust, Mapletree Logistics Trust, Keppel Reit and Suntec Reit.

There is another "artificial" factor that can boost DPU temporarily, which is when Reit managers take a portion of their base management fees in units, leaving the cash behind in the company.

This usually has the effect of increasing the distribution per unit (DPU) for that quarter, notwithstanding the dilution from the issuance of new units.

This is quite commonly practised. In fact, Religare's study showed that most DPUs are supported by the management taking their base fees in units. The only two Reits out of the 18 that it covered that do not do so are Mapletree Logistics Trust and Starhill Global Reit.

Religare's analysis also showed that hospitality Reits tend to take more management fees in units (75-100 per cent) than Reits in other sectors (47 per cent on average).

"We believe this is one of the methods adopted by hospitality Reits to conserve cash for capex required for hotel refurbishment and maintenance," analyst Pang Ti Wee said.

Rankings wise, Starhill Global Reit, Mapletree Industrial Trust, and Mapletree Logistics Trust scored the best, with the highest percentage (99-100 per cent) of their distributions coming from operations.

At the other end of the spectrum, Cache Logistics Trust, Keppel Reit, and Suntec Reit (highlighted in the table) have the lowest estimated proportion of distributions arising from operations, or around 72-85 per cent of such "clean DPU".

Religare said it is cautious on the sustainability of DPU paid by Cache and Suntec, given that their capital distribution has been rising year on year to hold up DPU, and a sizeable 75-79 per cent of management fees have been collected in units.

That said, Keppel Reit's DPU is the most supported with 28 per cent coming from capital distribution and 100 per cent of management fees paid in units in FY15.

A separate report by DBS Group Research yielded similar findings.

Analysts Derek Tan and Mervin Song said that while it is "timely" that several S-Reits have boosted DPU through capital distributions in Q4 2015 to give out stable dividends, the sustainability of the payouts will become an issue going forward, given the weak operational growth outlook.

They advised S-Reits to consider paying a higher proportion of fees in cash, instead of units, to maintain their sustainability. This is because most Reits are trading below book, and coupled with a modest DPU growth outlook, the continued issuance of new units will end up eroding net asset value per unit and diluting future DPU.

If S-Reits were to pay 100 per cent of its fees in cash, they estimate a 0.5 percentage point drop in average sector yields to 6.5 per cent, which is "not all that bad".

"While we acknowledge that headline absolute yield still remains a key focus for investors in the near term, it comes at the expense of DPU sustainability which we believe is a more important metric in assessing a Reit's long-term viability," they said.

Among Reits which already pay most of their fees in cash are Ascendas Reit, CapitaLand Mall Trust, Mapletree Industrial Trust, Starhill Global Reit, Mapletree Logistics Trust, Parkway Life Reit and Keppel DC Reit.