How you interpret the status of distributions depends on your beliefs about depreciation of buildings. The tax status of a distribution does not necessarily reflect the economic status of it.
Start by comparing the year's distribution to the estimated reported NetIncomePerShare. To the extent that you accept accountant's use of depreciation, the extra distribution is a 'return OF capital'. You should NOT consider ROC as any kind of 'income'.
All distributions shrink the value of a business by the same amount as the distribution. The payment simply moves value from the company into your pocket. To the extent that the company earns a profit to replace the distribution, its value stays stable. If the distribution is larger than the profits earned, the company gradually shrinks.
Income Trusts and REITs have got away with this by replacing the cash distributions with borrowed money, or by issuing new shares (which imparts a benefit to existing shareholders because the shares are priced far above book value).
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There are two adjustments you should consider to the reported NetIncome. The increase in market value of ppty and depreciation. Start with market values. The Income Statement will not recognize any increase in the resale value of a ppty until it is actually sold. You know that values have doubled in the past 5 years, but to the extent the ppty was never bought/sold that value is not reflected on the Balance Sheet, or the gain included in the Income Statement.
It can be argued that excess distributions are on account of this capital gain that has not been realized yet. IMO I completely disregard this because what I want to pay for the shares depends on the net rent revenues it generates. Rents have NOT kept up, at all, with ppty values.
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About a decade ago the rules for depreciation changed. Instead of charging off 2% of the value of buildings each year, they now have to charge off 4%. Personally I think the 2% rate is a more accurate economic measure, so I 'restate' the reported Net Income with my own calculation --- then proceed from there.
A lot of people dismiss depreciation completely by arguing that the value of real-estate in total (land plus building) goes up in value and does not depreciate. IMO land increases in value but buildings do not. When you compare the price of a bare lot in Vancouver, to that with a house, you see little difference.
