Eyal Zimbelman's  Instablog

Eyal Zimbelman
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I am a CFO responsible for a global bank presence in my country I started to spend time in analyzing investments that will increase my cash flow over time in order to build my portfolio for my retirement (hopefully many years from now...). I view the REIT world as a very attractive for... More
  • Why Equity REIT Dividend Are Not A Mirage 0 comments
    Mar 7, 2013 3:59 PM | about stocks: MPW, SNH, OHI, O

    After reading interesting articles stating that REIT dividend may be a mirage as on the one hand they distribute dividends and on the other hand raise capital that may be above the dividends distributed.

    In order to demonstrate it I will take a numeric example that is based on one of my (very) few successes in investments - Medical Properties Trust (NYSE:MPW), Omega Healthcate Investors Inc (NYSE:OHI) and Senior Housing Properties Trust (NYSE:SNH):

    Lets assume a CAP rate (Yield over assets) of ~ 10%; Assets generating revenue of 1,000 USD Million and a $100M income base, and assume no expenses. Lets also assume that debt to equity ratio is 1, so equity is $500 (50 shares of 10$) and debt of $500M at an average cost of 6%

    The result is as follows:

    Income 100

    Interest expense (30)

    Depreciation (20)

    Net Income 50 (all income is distributed as revenue

    Return on Equity 10% (or FFO/equity is 14%)

    Lets also assume that investors expect a 5% dividend yield. This means that the share price should be 20$ (Net income of 50$ to a capital base of 50 stocks makes 5% yield).

    In case the company raises additional capital of $500M in order to invest at properties that yield a 10% CAP rate and they manage to issue the shares around current market price the results will be as follows:

    Capital raised $500 (25 shares of 20$); Assets increased by 1,000, and debt increased by 500$.

    P&L report will be:

    Income 200

    Interest expense (60)

    Depreciation (40)

    Net Income 100

    Return on Equity 10% (FFO/Equity is 14%)

    What happens to the stock price?

    Dividend per share will be 100/75 = 1.33$

    Dividend yield will grow to 6.67%

    In case investors still expect a 5% yield, then the stock price should grow to 26.6$, or in other words will increase by 33%.


    In today's environment where funding costs are historically low, many opportunities that exist, make the companies that raise capital a potential buying opportunity

    Disclosure: I am long MPW, SNH, OHI.

    Stocks: MPW, SNH, OHI, O
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