Debt and Capital Decisions · REITs

New shares can finance growth while reducing each existing share's percentage ownership. The key question is what happens to value and earnings per share after the capital is used.

Distinguish ownership dilution from economic dilution

Issuing shares increases the number of claims on the business. Existing holders own a smaller percentage unless they participate. Economic value per share can still rise if the proceeds are invested well or issued above a credible asset value. It can fall if shares are sold cheaply or capital is deployed poorly.

Work through an issuance below NAV

Assume equity NAV of $100 million across five million shares, or $20 each. Issuing one million new shares at $16 adds $16 million before costs. NAV becomes $116 million across six million shares, or about $19.33 each. The cash is real, but the lower issue price dilutes estimated NAV per share under these assumptions.

Look beyond immediate earnings accretion

An acquisition may increase FFO per share while adding leverage, maintenance obligations or tenant risk. Compare the investment yield with the full cost of capital, including equity expectations and transaction costs. An accretive accounting result is not sufficient evidence of value creation.

Buybacks compete with other uses of cash

Repurchasing shares below credible NAV can increase NAV per remaining share in a simple model. Yet cash used for buybacks cannot also repay debt or fund essential repairs. A discount may reflect genuine future losses. Test liquidity and the reliability of the valuation before treating buybacks as automatically favorable.

Try it yourself

NAV is $120 million across six million shares. The company buys back one million shares for $15 million with no other changes. What is the new NAV per share?

Show the worked answer

Remaining NAV is $105 million across five million shares, or $21. The simplified increase from $20 does not address liquidity, costs or whether the original NAV estimate was sound.

Further reading

Educational material, not a recommendation to transact. All numerical examples are hypothetical and exclude costs unless stated. Actual terms, eligibility, tax treatment and broker procedures depend on the security and jurisdiction.

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