Merkado Barkada
September 3, 2024 | 8:10am
The short answer is “no”, but I think that a longer answer is more helpful to understand why dilution isn’t as big of an issue for REITs as this question implies.
> What is dilution? Let’s quickly talk about dilution so that we are all on the same page. Dilution is when a shareholder’s percentage ownership of a company is reduced when new shares are issued by the company. In the REIT context, this most often happens as part of a property-for-shares swap when a REIT issues a huge block of new (primary) shares to its parent company in exchange for assets like commercial towers and malls.
> So swaps ARE dilutive? Technically, yes! It is true that a swap will dilute the voting and economic interests of minority shareholders, but I honestly don’t care that my proportional voting interest might drop from 0.0001% to 0.0007%. Voting interest “matters” in the game of thrones that is boardroom control, but not at the minority shareholder level. What about the economic interest? So long as the acquisitions are dividend-accretive, meaning that my post-transaction dividend is larger than my pre-transaction dividend, then (in my opinion) the dilution is “in name only.”
> Is swap dilution always harmless? Not necessarily. It’s not automatic that share swaps will be dividend-accretive, and in the case where they are not, the resulting dilution would then not be a net positive for the minority shareholders. There are layers and layers of conflicts of interest at play any time a REIT does a transaction with its parent company. There are a good number of safeguards written into the REIT Law legislation, but those safeguards only try to limit the frequency and severity of bad outcomes, not protect us perfectly from them.
MB bottom-line: Most REITs have done one of these swaps (or plan to), which makes sense as this approach to growth seems to be how the drafters of the REIT Law imagined REITs would acquire their assets. AREIT [AREIT 38.45, down 0.1%; 61% avgVol] is one of the most prolific users of this swap injection method, and their dividend has grown 65% since 2020 despite all those rounds of dilution. DDMP [DDMPR 1.00, up 1.0%; 45% avgVol] is one of the REITs that has never diluted shareholders with a property-for-share swap, and despite the lack of dilution, their dividend has decayed 15% since 2021. Dilution in the REIT context is not inherently negative, and it is actually an acceptable side-effect of the kind of strategic growth that long-term investors covet. So long as the transactions are dividend-accretive and the conflicts are effectively managed, this is the cleanest and most direct way for REITs to dramatically increase shareholder value.
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