REITs – BT

Sticking a foot in investors’ eyes

FOOTNOTES, which have gained widespread disrepute in investment product brochures, seem to have found a new refuge in the press releases and financial statements of some real estate investment trusts (Reits).

Most Reits which carried out rights issues last year have been most generous in providing shelter to these tiny characters. These trusts have had quite a bit of explaining to do about their shrinking distributions per unit (DPUs), and the footnotes help clear the air just fine.

Or do they? Most investors wouldn’t think so.

What tends to happen is this. The Reit reports the DPUs for its latest financial quarter and for the year-ago quarter in its press release. The numbers invariably show a year-on-year growth in DPU, and there will be a paragraph or two of text reinforcing this achievement.

But look closer, and there is usually a footnote linked to the year-ago DPU. Turns out that this is not the actual DPU that the Reit raked in last year, but what the DPU would have been if the rights issue had happened then. This means that the number is smaller than it should be because of a restated larger unit base.

In other words, an unvarnished press release would have reflected a year-on-year fall in DPU. When a Reit issues new units to raise cash during the year, the unit base grows, and this dilutes the amount of distributable income each unitholder receives. But this effect has been downplayed by the footnotes.

If every company was as liberal with assumptions, reported bottom lines would never drop. Let’s take this approach further for illustration purposes. Technically, a firm could assume that the recession never happened, post higher projected profits, but add a footnote to say that the actual profit was lower because the downturn did come.

If it sounds illogical for a company to report its finances in such a way, why should it be acceptable for some Reits to publicise DPUs laden with restatements and what-ifs?

Granted, there is nothing wrong with dressing up the presentation of numbers in press releases. But this happens even in the financial statements of some Reits, where figures are supposed to be as bare as possible. The actual year-ago DPUs are usually hidden deep in an obscure section of the report, if investors care to look for them.

Yes, there is full disclosure, but this way of reporting numbers has made it hard for the implications of rights issues to surface. First, investors have to be diligent enough to read the footnotes appended to the DPUs last year. Next, they have to understand the fine print – not an easy task given that it is peppered with terms such as ‘pursuant’ and ‘proforma’.

Then, investors have to comb through the financial statements to find out what the DPU really was a year ago, before they can calculate just how much lower this year’s DPU is.

Reits which made cash calls last year should do unitholders the small favour of explaining just what happened – that the unit base expanded and DPUs had to fall. And they should let footnotes return to where they belong – in the realms of academia rather than in reams of financial statements.