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Why Manulife US REIT’s 33.6% Rise in DPU is Misleading

November 13, 2018

by: Tam Ging Wien

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On Monday last week (05-Nov-2018), Manulife US REIT (Manulife REIT) announced it’s Q3-FY2018 results. Not long after its results was released, the following news headlines hit the market:

Such catching headlines really caught ProButterfly and REITScreener’s attention! Certainly any REIT that can grow their DPU consistently as such a phenomenal rate is worthy of investment!

So we set out to dig deeper into the Manulife REIT’s results announcement. In this article, we share our findings and our thoughts.

Looking Into the Announcement

We started by looking into with Manulife REIT’s official press release. The first thing we noticed was that their headlines did not state that the DPU had increased 33.6%! The headline figure quoted was 3.4% increase based on “Adjusted DPU” and not “DPU”. This 33.6% figure was only quoted in their paragraph elaboration.

Therefore, it is clear to us that Manulife had not intended the 33.6% DPU figure to be a headline number; instead it intended the 3.4% Adjusted DPU to be the headline figure. It was the press that picked up on the larger number and made it into their headline figure.

Source: http://investor.manulifeusreit.sg/newsroom/20181105_072228_BTOU_WAEC44ELV2MG9C27.3.pdf

Further down in the press release, Manulife REIT provides a table comparing the year-on-year quarterly figure and the year-on-year YTD figure.

Now what makes this announcement a little difficult to understand is that both the figures are further sub-divided into DPU and Adjusted DPU. In a contrary to the figure chosen for the headlines, Manulife REIT clearly states in the table below that the “Adjusted DPU” is “for information only”. So it would seem as if the management intended investors to focus on the DPU instead of the Adjusted DPU. Yet there was no DPU figures show in the headlines and the highlights.

On the one hand, from the perspective of the DPU, the quarterly figure increased 33.6% from 1.13c to 1.51c while the YTD figure decreased 7.1% from 4.35c to 4.04c.

On the other hand, from the perspective of the Adjusted DPU, the quarterly figure increased 3.4% from 1.47c to 1.52c while the YTD figure increased 2.5% from 4.42c to 4.53c.

The press release tries to explain the difference stating in the footnotes that the Adjusted DPU is calculated based on the weighted average number of units in issue while the DPU is computed based on the enlarged unit base from the Rights Issue used to fund the acquisition. How complicated!

Arggs… we couldn’t make any sense of the announcement!

Source: http://investor.manulifeusreit.sg/newsroom/20181105_072228_BTOU_WAEC44ELV2MG9C27.3.pdf

We then decided to take a look at the presentation slides instead.

Immediately, 2 points within the Key Highlights attracted our attention:

33.6% year-on-year increase in DPU
13.5% rental reversion

A double digit rental reversion is hard to come by unless the asset is situated is high growth areas. Manulife REITs’s assets certainly was showing high growth.

The 33.6% figure was quoted again!

Unfortunately, nothing else within the presentation slides could help us comprehend what is going on.

Source: http://investor.manulifeusreit.sg/newsroom/20181105_072228_BTOU_WAEC44ELV2MG9C27.2.pdf

What Exactly Was Q3-2017’s DPU?

Since we could make little sense of the Q3-2018 results, we decided to look at the distribution history table on Manulife REIT’s investor relations website. Unfortunately, they only provide the DPU data on a half-yearly basis and was of little use in finding out what exactly was the DPU for Q3-2017.

However, we did notice that Manulife REIT ended its 2017 half year on the 28-Jun-2017 instead of the usual 30-Jun-2017. More about that in a moment.

Source: http://investor.manulifeusreit.sg/financial_results.html/year/2018

We moved on to look at the Q3-2017 announcement and presentation slides. According to both, the DPU for the period 01-Jul-2017 to 30-Sep-2017 was 1.60c.

On a year-to-date (YTD) basis, it was 4.83c.

There was no statement referencing an “Adjusted DPU” in the Q3-2017 announcement and presentation slides. We can therefore conclude that the term “Adjusted DPU” was introduced in later announcements.

Source: http://investor.manulifeusreit.sg/newsroom/20171103_072540_BTOU_Z25GD51ZPTC3XT59.2.pdf

Source: http://investor.manulifeusreit.sg/newsroom/20171103_072540_BTOU_Z25GD51ZPTC3XT59.3.pdf

The DPU figures on both announcements clearly did not tally! We summarise the figures we observed below.

Q3-2017 Announcement:

Q3-2017 DPU for the period 01-Jul-2017 to 30-Sep-2017: 1.60c

Q3-2018 Announcement:

Q3-2017 DPU for the period 01-Jul-2017 to 30-Sep-2017: 1.13c
Q3-2018 DPU for the period 01-Jul-2018 to 30-Sep-2018: 1.51c
Q3-2017 Adjusted DPU for the period 01-Jul-2017 to 30-Sep-2017: 1.47c
Q3-2018 Adjusted DPU for the period 01-Jul-2018 to 30-Sep-2018: 1.52c

It’s clear to us that the understanding of DPU is different between the Q3-2017 announcement and the Q3-2018 announcement!

Back to Fundamentals

As we were already lost in the differing and confounding terms and figures, we decided that we will instead table out all the key data with relation to Manulife REIT’s DPU since the IPO quarter by quarter.

It would be far more useful to chart out all the figures.

After tabulating the declared DPU and plotting it on a chart, we found that Manulife REIT’s DPU seems to show a flat if not declining trend. The first point was due to a much longer quarter of 20-May-2016 to 30-Sep-2016, baselining this to the same period of 01-Jul-2016 to 30-Sep-2016 would give 1.375c.

Source: REITScreener Research, ProButterfly Research, Manulife US REIT

How do you explain such flat performance in the DPU when the Revenue, Net Property Income (NPI) and Distributable Income where all chalking up phenomenal growth thanks to Manulife REIT’s aggressive acquisitions?

The Revenue, Net Property Income (NPI) and Distributable Income growth clocked an impressive 7.41%, 7.17% and 7.76% per quarter respectively.

Source: REITScreener Research, ProButterfly Research, Manulife US REIT

The answer is due to the heavy dilution due to numerous private placements, rights issues and preferential offerings. In fact, there are three major equity fund raising rounds made in Q2-2017, Q4-2017 and Q2-2018.

As a result, the units in issue has been steadily climbing. The growth rate of the units in issue was estimated to be 11.06% compounded per quarter! Outpacing the Revenue, NPI and Distributable Income growth.

It’s no surprise then that Manulife REIT’s DPU hadn’t showed any growth at all. The growth in units was much faster than the growth in distributable income. In other words, Manulife REIT’s equity fund raising is effectively DPU dilutive!

Source: REITScreener Research, ProButterfly Research, Manulife US REIT

Making Sense of this Discrepancy

We present the same data previously in a tabular format below so that we can place remarks to indicate the various quarters where an acquisition, private placement, rights issue of preferential offering had occurred.

Its clear the revenue, NPI and distributable income got a boost each time an acquisition was completed start from the Plaza and Exchange acquisitions. Later in 2018, the Penn and Phipps assets were also added to bring the quarterly revenue to almost double compared to 2016.

Source: REITScreener Research, ProButterfly Research, Manulife US REIT

However, each time these acquisitions were funded by dilutive equity fund raising resulting also in the total units in issue doubling.

Comparing each quarter side by side, we can see that each of the 3 quarters in 2018 were lower than the quarters the preceding year.

Source: REITScreener Research, ProButterfly Research, Manulife US REIT

What Exactly is the Difference between DPU and Adjusted DPU?

At first, the answer appears to be found in the footnotes of the Financial Statement documents.

Source: http://investor.manulifeusreit.sg/newsroom/20181105_072228_BTOU_WAEC44ELV2MG9C27.1.pdf

It seems that the Q3-2017 DPU was calculated based on an enlarged unit base of 1,033,722,152 units.

Beyond these, we could not comprehend from the financial statements exactly what is the difference between a DPU and Adjusted DPU. After hours of trying to understand their footnotes, we decided to give up.

In short, we can’t explain exactly what Adjusted DPU is in the context of Manulife REIT’s results.

Was Manulife REIT Justified to use the Enlarged Unit Base?

Looking back at the historical announcements, we can see that Manulife REIT make the Rights Issue announcement on the 19-Sep-2017 which is during the Q3-2017 period.’

However, the results of the rights issue and the actual issuance of the new units occurred in October 2017 which falls in the Q4-2017 period.

Source: http://investor.manulifeusreit.sg/newsroom.html/year/2017

It is clear from the announcements that the new units from the rights issue was only issued in Q4-2017 even though the intention of the rights issue was released in Q3-2017.

Therefore, we are on the view that Manulife REIT should have instead used the Units in Issue during Q3-2017 for the computation of the DPU which is 731,824,029 instead of the larger based of 1,033,722,152 units. The use of the larger base is not truly representative of the DPU for the period of Q3-2017.

We think that it was rather misleading that the management had used the larger unit base for the computation before the new units were issued. As a result, the incredible 33.6% rise in DPU is not representative of a true comparison between Q3-2018 and Q3-2017.

Our Thoughts on the Announcement

After much effort pouring through Manulife REIT’s historical financial statements, we could not ourselves come to a good understanding of how and why Manulife REIT had changed the way they calculated the DPU and how they reported their results.

If we found it difficult, we think that the general investment public is also not likely to understand.

Personally, we think that Manulife REIT should not have used an enlarged unit base for the calculations of the historical DPU unless those units had already been issued as this skews the comparison of DPU leading to rather misleading figures.

What was the intention behind Manulife REIT’s seemingly unconventional change in method of calculating and reporting their DPU and results? We lay out the facts here in this article as we have found them; we leave it to the reader to conclude the intention of the management.

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