Access to capital, including the ability to issue additional shares of common stock to investors, is critical to our business. Since we went public in October 1994, we have completed 20 common stock offerings that generated $2.1 billion, which was used to permanently finance property acquisitions.
The question that commonly arises, regarding our regular issuance of common stock, is whether or not the increase in outstanding shares results in shareholder dilution.
What is Dilution?
The typical paradigm around issuing new shares of common stock is that the resulting increase in outstanding common shares means that earnings must be distributed across a larger number of shareholders (i.e. "dilution of earnings"). This is often true when companies issue new shares, and the capital is not immediately deployed in revenue-generating and earnings-enhancing activities. However, new capital immediately invested in properties that generate increased revenue and earnings, translates into earnings growth that benefits all shareholders (i.e. earnings go up for new and existing shares). Thus, the outcome of new share issuance is an increase in earnings, which is accretive rather than dilutive, when the share issuance proceeds are immediately used to acquire revenue-generating properties.
Outside the Paradigm
In our case, the primary means to continue to increase our revenue and income (also dividends) is through real estate acquisitions, thus access to new capital to fund these acquisitions is fundamental to our operating strategy. Therefore, the perception of shareholder dilution, for Realty Income’s capital-raising activities, may be attributable to a misunderstanding about our basic business model. When we elected to be taxed as a real estate investment trust (REIT), upon going public in 1994, the REIT tax structure required that we distribute at least 90% of our taxable income as dividends to our shareholders. As a result, we are passing along the majority of our income to shareholders as dividends. This means that funds, or capital to drive growth, generally must come from external capital-raising activities.
In general, the types of capital available to us include; common stock, preferred stock, and long-term bonds. A wide variety of factors impact the decision as to which type of capital to deploy at any given point in time, but our focus is on accessing capital at the lowest possible cost while maintaining a healthy balance sheet. Historically, we have tended to issue common stock more often than preferred stock or long-term bonds, and this strategy has proven to be essential to our ability to continue to grow and prosper during challenging economic conditions.
Contrary to the perception of share issuance dilution, accessing common stock capital to permanently fund our real estate acquisitions has been the primary driver of earnings and dividend growth since 1994. Without these offerings, we would not have been able to grow the size of our real estate portfolio, which, in turn, has led to increases in the revenue supporting the dividend as well as increases in the amount of the dividend, over time. Our shareholders have benefited from this business approach, realizing a 102% increase in the amount of dividends paid from $0.90 per share, in 1994 when we went public, to $1.81725 per share today.