While perusing the news on my watch list last week, I came across an interesting press release from AmREIT (AMEX:AMY) regarding a secondary offering that the company is making in order to expand its business.
As a general rule I'm wary of secondary offerings. I prefer to see companies raise money for expansion through operating cash flow and reasonably financed debt. There are a couple of exceptions to my thinking, though. For a company with a sky-high stock price I definitely see the logic in pursuing a secondary offering, but that's not AmREIT. The other exception is real estate investment trusts, which as you may have guessed from its name, is exactly what AmREIT is.
Real estate investment trusts are a different animal altogether, because acquiring real estate requires capital --gobs of capital -- and because REITs are required to pay out the majority of their earnings as dividends building up a cash hoard isn't a realistic possibility. Real estate investment trusts don't become large entities like Simon Group (NYSE:SPG) or VornadoRealty Trust (NYSE:VNO) overnight. It takes years of methodical planning to grow large in this industry. For this reason, secondary offerings -- and thirds and fourths for that matter -- are not uncommon for real estate investment trusts that need funds for expansion but are not interested in adding more debt to the balance sheet.
The specifics of AmREIT's offering involve selling 2.4 million class A shares at a price of $8.10 per share. This is a large offering for AmREIT, as it increases the class A share count by approximately 69% and it appears that nearly all of the capital raised will be used to purchase another property that over time will hopefully fund the growth in funds from operations that shareholders have come to enjoy from AmREIT in the brief time that it has been public.
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Nathan Parmelee owns shares in American Financial Realty Trust but has no financial interest in any of the other companies mentioned.
