Real estate investment trusts (REITs) often tout their adjusted distribution per unit (DPU) as a gauge of how well they have done relative to past performances. However, investors need to be wary when using the adjusted DPU to assess a REIT. The adjustments made are usually based on management’s discretion and may sometimes result in inflated adjusted DPU numbers.
With that, here are some things that will help you to assess whether an adjusted DPU is indeed useful.
Look out for adjustments made due to dilution
REITs may use adjustments to hide the fact that distribution per unit has fallen. This could be because of a rights offering, which has increased the unit base. Investors need to do their own due diligence to see if the adjusted DPU is informative and useful for analysing the REIT’s operating performance.
Adjustments due to capital distribution
REITs may also adjust their DPU to reflect one-off distributions. In this case, the adjustments are important and the adjusted DPU will be more reflective of the REIT’s actual operating performance.
Capital distributions occur when a REIT divests an asset and distributes the capital back to unitholders. As these are one-off occurrences, capital distributions should be excluded when comparing a REIT’s performance against other financial periods.
For instance, Parkway Life REIT (SGX: C2PU) paid out an additional 1.5 Singapore cents per unit in 2015 due to one-off divestment gains of seven Japan assets. This caused its DPU to spike by 15.3%. However, investors should exclude such one-off gains when assessing the long-term operational performance of the REIT.
Adjustments when acquisitions are made
Alternatively, if an acquisition and rights offering were made mid-way through the quarter, the management may adjust DPU to reflect as if the deals were done at the start of the quarter. This gives investors a better idea of the full-quarter impact of an acquisition and rights offering and what to expect in future quarters.
Investors should use this information to gauge how a REIT will perform in future quarters when the full-quarter contribution from the acquisition and rights offering kick in.
The Foolish bottom line
Adjustments can be useful to exclude one-off distributions or to include events that will likely occur in the future. However, adjustments may also be used by management to inflate or mask poor quarterly performance.
Diligent investors will need to assess the adjustments that have been made and whether the adjusted figure is really useful and representative of the REIT’s actual operating performance.
Editor’s note: An earlier version of this article incorrectly used Manulife US REIT as an example of adjusted DPU due to dilution. This has been corrected. The Fool regrets the error.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Parkway Life REIT and Manulife US REIT. Motley Fool Singapore contributor Jeremy Chia does not own shares in any companies mentioned.