So I'm listening to the VICI Properties ($VICI) earnings call last week and an analyst asks about buybacks. The stock's been crushed, sitting near its 52-week low. So why not buy some of it back? The CFO basically said no thanks. And the reason he gave is something I don't think most people know, so let me try to explain it, because I've seen social media posts ripping REITs for "diluting shareholders" and there might be some confusion. A REIT (Real Estate Investment Trust) is just a publicly traded landlord you can buy a piece of that owns property and collects rent. The catch is the tax deal — to skip corporate taxes, a REIT has to hand over at least 90% of its taxable income to shareholders as dividends. That's because a normal company earns a profit, pays corporate tax and can sit on it, reinvest it, do whatever. A REIT can't. It's like being legally required to spend 90% of every paycheck the day it clears. So how does a REIT ever grow? It goes and gets money from somewhere else by selling new shares and borrowing money. Then it buys, builds or develops land or buildings that earn more than the money cost to get. That's the super simple explanation. But a buyback shrinks the company and for a REIT that's sort of going in reverse. There's not a big pile of retained cash sitting around, so every dollar spent buying back stock is a dollar not spent buying a building. And VICI's CFO mentioned the math on the call, which I loved. They just made a loan earning SOFR plus 8.25%. SOFR is just the base interest rate the big lenders build loans on top of — it's around 3.65% right now, so that loan is throwing off about 12%. Their whole loan book is close to 9.5%. And with the stock at around $27 against roughly $2.46 of AFFO per share is about 9%. Even though VICI's main game is owning physical buildings, they sometimes provide high-interest development funding to partners. The CFO is telling us that right now, lending money out at 9.5% to expand their future pipeline is a much smarter, more profitable use of cash than buying back their own stock. Which brings us to dilution. VICI's share count went from about 370 million in 2018 to 1.07 billion today. Almost triple. Sounds like a disaster if that's the only number you look at. But over that same stretch AFFO per share went from $1.43 to $2.43, up about 70%. Real quick on AFFO — it stands for adjusted funds from operations and it's basically free cash flow for a REIT. Regular earnings are useless for these guys because accounting rules make them depreciate buildings that are actually going up in value. AFFO cleans that up. That's the whole test and it's simpler than people make it: dilution only hurts you if the money they raised earns less than it cost them. AFFO per share going up means the new shares are pulling their weight. Bit if AFFO per share is flat or falling while the share count balloons? That's a red flag. One thing though — don't just use revenue growth as your proof. A REIT can grow revenue fine while the per-share value quietly shrinks. I go straight to AFFO per share for that warm and fuzzy feeling. I also used to think that a REIT buying back stock is a red flag, like they've admitted they can't find anything better to do with the money. And sometimes that's exactly what it is. But it can also be the smartest thing they do all year — if the stock is trading way below what the buildings would actually fetch in a sale, buying shares is buying real estate at a discount. So it's not a red flag, it's a flag that needs context. The question I'd ask is just: is the stock cheaper than the buildings? If yes, fine. If no, why are we doing this. And if they're borrowing to fund it, that's a whole separate conversation. Anyway. REITs don't buy back stock because the tax code forces them to pay out their cash and go raise more. Issuing shares isn't a bug, it's a feature of successful REITs. Judge them on AFFO per share and you'll be ahead of most people posting about REIT dilution online.
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6 Comments
Kyle Garrett@kgcottawa · 20d
With increasing AFFO, a REIT diluting to fund growth is fine by me ✅
Ian Lopuch@ppcian · 19d
I love this post, @rustyram78! Fabulous insights. Thanks for sharing!!! (Disc: I may end up buying $VICI at some point. Not investment advice.)
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