Posted by: donmihaihai | February 26, 2017

No dilution no fun

“Despite that cautious approach, I made one particularly egregious error, acquiring Dexter Shoe for $434 million in 1993. Dexter’s value promptly went to zero. The story gets worse: I used stock for the purchase, giving the sellers 25,203 shares of Berkshire that at yearend 2016 were worth more than $6 billion.”

BH shareholders’ letter 2016.

REITs just love to do the opposite and has to issue shares for addition of property, yield accretive mostly. The logic is good, issue share at lower yield to purchase property at higher yield. Look good as long as market allow it.

Is it really so? issue of unit is forever, once issue never cancel except spending money to buy back. A single year yield is a measure for justification of investment and more? Of course not, how can it be. I know the answer before I ask. But really?

Beside the love of paying investment with units, REITs love to pay expenses with units too. Unit holders love it too. why not, I get higher dividend per unit if expenses are being paid by units.

Since listed CMT issued 80.4M units for expenses. while 80.4M units is only 2.3% of outstanding unit as at 31 Dec 2016. It is 11% of outstanding during IPO. Now both percentages doesn’t tell the whole thing, But few things are certain, it 80.4M worth 157.7M base on current share price. 80.4M will be collecting dividend yearly. The cost of expenses paid never end.

Conflict of interest
There is a huge conflict of interest when a manager is able to decide whether they are getting paid in unit or cash.

Which side are they on when share price is high, and they decided to get paid cash?

Which side are they on when share price is low, and they decided to get paid unit?

Anyway who care.
As long as dividend per share increase yearly, share price don’t drop much. No people care.

But it might change soon where dividend per share no longer able to increase yearly, and about time dilution bite back.

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