REIT Definitions: Distribution Per Unit (DPU) Accretive
For those who are learning how and where to invest money in Singapore as a beginner, it is important to know what DPU accretive means.
DPU Accretive also known as, Distribution Per Unit Accretive, is often used to talk about how much more cash a reit unitholder can get. If DPU increases by 5 cents per unit, then the unitholder will get more cash during the next distribution.
This increased distribution is often a result of the reit making acquisitons or buying a property which will help to increase the net property income. The reason DPU will increase when an acquisition increases Net property income, is because REITs are necessitated by law to pay out 90% of its distributable income.
However, not all acquisitions are DPU accretive. It is because REITs have to pay out most of their earnings so they do not have as high a level of retained earnings as a source of internal cashflow to fund acquisitions. If so, how do REITS fund acquisitions? They do it via two main ways:
- Issuing more debt
- Issuing more equity
In real life, management of Reits seldom do 100% of debt or equity. Instead they will use a mixture of both. However, to understand DPU accretion, it will be helpful to walk through the either or scenario.
More Debt
This case is pretty straight forward. The debt funded acquisition is likely to be DPU accretive as there is now more NPI income to be distributed amongst the unit holders.
More Equity
This is where things can more complex. If the management decides to raise more equity to finance the acquisition, it will increase the total amount of outstanding units. What this means is that, even as the Net Property Income Pie increase, so does the number of mouths (total units outstanding) that it has to feed. Given the Pie and hungry children analogy, if the pie grows slower than the number of mouths, you will start to see a drop in distribution per unit.
Having understood the relationship between units outstanding and net property income, it is now possible to add two new scenarios to our train of thought.
Scenario 1: If I buy more than NPI increase, does it mean I will have higher DPU?
Firstly, DPU accretion can at times be determined by the unit holders themselves. Unit holders when hearing the news of an equity raising, can choose either to subscribe to more shares or buy them off the secondary market. If they buy more than the increase in NPI, it will generally cause the DPU to increase for them. However, this is not as easy as it sounds partly because reported increases in NPI often comes at least 3-4 months after news of any property acquisition.
Hence, you got to decide for yourself if the management projection of NPI increase for the project is feasible and not just simply take management’s words at face value.
Scenario 2: What if management issues units at a discount to existing unit holders
If management issues units at a discount to entice existing shareholders to subscribe, it will have no impact on the distribution per unit as the distribution is determined by NPI and number of units and not the share price.. However, it does have a direct impact on the Real Estate Investment Trust REIT Singapore Dividend Yield. The benefit is that the new subscribers benefit from a higher dividend yield, due to the lower entry price. However, the discount provided for the new units, will have a dampening effect on where the Reit trades in the secondary market. More on this when we cover Yield Accretion!
