For those of you discussing REITs, could you explain something to me that I have never understood regarding them.... How are REITs (or any investment required to pay out 90% of its income for that matter) any different than a ponzi scheme?
Here is my thought process. Take an already publicly traded REIT with 50/50 debt to equity. Their current debt was funneled into whatever investments floated their boats in the past. On these investments, 90% of all income MUST be paid out to shareholders. I think most pay over 90%. It is often over 100%, and I've seen some up to 200%. This leaves no money on the table to either pay down debt or to invest into new properties. Hence, the companies dilute their shareholders with a secondary offering in order to pay off their debt and afford their distributions. The cycle then starts over. It is an endless cycle of taking out debt, over-extending on cash flows, and diluting shareholders with secondary offerings.
The result is often a company payout ratios between 100-200%, debt levels near their entire market cap, current ratios well under 1, and poor debt to equity ratios. They are legally forced to pay out more cash than they need to run a company, resulting in dilution of shareholders year after year. I feel that eventually every one of the REITs that is run this way will collapse due to their debt and illiquidity. They are reliant upon acquiring new investors to keep their ship afloat. It seems to me that REITs have no plans of using the proceeds from new investors for any reason other than to pay off debt they raised to purchase assets. So essentially, they are taking your money directly to pay down a mounting debt. Just like in a ponzi scheme, what is stopping these companies from collapsing when the new investments stop?
I've been pondering this for a while, what is my flaw in thinking here? |
