REIT-TIREMENT - REIT Investing and Personal Finance

A blog about REIT investment and personal finance

Monday, March 02, 2020

Case Studies for SREITs with Income Support

Income support for SREITs is well known way to boost its DPU and is getting more and more common. I have recently shared SREITs that have income supports in SREITs Basic Fundamental Review - 2020 1Q post. For this post, I would only focus on those which have more than 5% income support in their distribution. I would try to estimate the distribution downfall when income support lapse.


Investors should be cautious when investing in REITs with income support
i) BHG Retail REIT
BHG Retail REIT income support
Despite their acquisition of Hefei Changjiangxilu Mall, distribution show no improvement, where FY2019 DPU is 3.87 cents. Let assume the following for calculation:
i) Distribution amount of S$ 16.754 mils remain consistent from 2020 to 2021.
ii) Outstanding increased by 0.9% per year.

2019 2020 (Est.) 2021 (Est.)
Distribution, S$ mil 16.754 16.754 16.754
Average Outstanding Shares, mil 506.484 511.042 515.642
Shares Entitled for Distribution, mil 432.575 486.406 515.642
DPU, S$ cent 3.87 3.44 3.25

DPU might drop by 11% in 2020, and further 5.5% in 2021. It doesn't look good unless management find ways to increase revenue/reduce expenses through accretive acquisitions, AEI and positive rental reversion.

ii) Dasin Retail Trust
Dasin Retail Trust income support
Dasin Retail Trust is business trust instead of REIT, but it operates in similar way as REIT. It has just acquired Doumen Metro Mall in Sep 2019 and announced another acquisition for Shunde Metro Mall and Tanbei Metro Mall on Nov 2019. However, there is no further news after EGM approval, not sure whether is this delay caused by Coronovirus outbreak.
Extracted from Acquisition Circular
The circular is quite misleading as it illustrate the case in FY2018 situation, where units not entitled to distribution was higher and results in higher DPU shown. Let's assume the following:
i) Acquisition will be completed by 31 March and contribution started from 2Q
ii) Distribution amount remain consistent from 2Q 2020 to 2021
iii) Outstanding increased by 1% per year

2019 2020 1Q (Est.) 2020 2Q-4Q (Est.) 2020 FY
 (Est.)
2021 (Est.)
Distribution, S$ mil 23.27 6.880 27.451 34.331 36.601
Average Outstanding Shares, mil 602.449 603.955 766.610 725.946 774.276
Shares Entitled for Distribution, mil 355.126 411.593 574.278 579.997 691.835
DPU, S$ cent 6.82 1.67 4.78 6.45 5.29

Despite management efforts to acquire properties aggressively, the DPU might drop by 5.4% in 2020 and further drop by 18% in 2021. By 2022 when income support end, DPU might drop to 4.68 cents, which is another 11.5%. Its situation is worse than BHG Retail REIT, management would have to work a lot harder to close up the income support gap.

iii) OUE Commercial Trust
As OUE Commercial Trust was just recently merged with OUE Hospitality Trust, so there won't be any full year result for this merged REITs. I would take 4Q 2019 result and annualize it for calculation.
Extracted from OUE Commercial Trust annual report
Income support for OUE Bayfront ended on 2019 January; whereas OUE Downtown income support would end latest by November 2023, or when the S$ 60 mils is fully drawn. Let's assume:
i) Distribution & income support to be annualized from 4Q 2019, ignore income volatility from Hospitality sector.
ii) Distribution remained constant from for 2020 to 2023, adjusted when income support end.
iii) Outstanding increased by 0.6% per year.
iv) OUE Downtown Office income support drawn in 2018 to be S$ 2.619 mils, 2/3 of 1Q 2019.

2019 (Annualized from 4Q)2020 (Est.)2021 (Est.)2022 (Est.)2023 (Est.)
Distribution, S$ mil180.516180.516180.516175.049164.804
Income support, S$ mil15.71215.71215.71210.2450
Average Outstanding Shares, mil5385.3985417.7105450.2175482.9185515.815
DPU, S$ cent3.363.333.313.192.99

The outcome is not as bad as compared to BHG Retail REIT and Dasin Retail Trust. Based on current drawn down rate, the income support would be fully drawn in 2021, where the DPU might drop by 3.6%. In 2023, DPU might further drop by 6.2%. Based on management history, they may just acquire properties with income support arrangement before current income support amount run out.

Conclusion:
The above case studies are based on assumptions; in actual situation distribution amounts would fluctuate depends on market situation and managements capabilities. The main message I want to send is that income support could greatly affect DPU after its end. If income support % is big, its DPU is bound to drop after income support end, and then share price would follow. You may want to wait out for SREITs with income support more than 5% of distribution.

Besides income support, SREITs could also use capital distribution from disposal or payment of fees in shares to boost its DPU. This is a topic which less people talk about, I would share more about it in the future.

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