Debt and Capital Decisions · REITs

Acquisitions, property sales and construction change both the asset base and the risk profile. Evaluate the financing and timing of each decision, not just the announced purchase yield.

Compare the asset with the capital committed

A purchase price is only part of an acquisition's cost. Include transaction expenses, required repairs and leasing outlays. Stabilized NOI may assume occupancy that has not been achieved. Distinguish current income from the business plan and identify the evidence supporting each assumption.

Property sales can strengthen or weaken future cash flow

Selling a low quality asset can release capital and reduce risk. Selling a productive asset to fund an uncovered dividend can leave less income later. Trace the proceeds to debt repayment, reinvestment, distributions or reserves. A gain on sale is not the same as recurring operating improvement.

Development adds a timeline

Construction requires permits, procurement, contractors, financing and customers. Delays can increase costs and postpone revenue. A preleased project may reduce leasing risk while retaining construction and counterparty risk. Review remaining commitments and expected funding sources, not only spending already completed.

Test a project with realistic costs

A project costing $80 million with expected stabilized NOI of $6 million has a 7.5% yield on cost. If total cost reaches $90 million and NOI settles at $5.4 million, the yield becomes 6%. Compare that with the alternative uses of capital and the project's risk. A simple yield ignores the time value of cash spent before completion.

Try it yourself

A property is sold for $50 million and had contributed $3 million annual NOI. If all proceeds repay debt costing 4%, what is the simplified annual income effect before other items?

Show the worked answer

Interest savings are $2 million while NOI falls $3 million, a $1 million reduction before tax, costs and other changes. The balance sheet may improve even though near term income falls.

Further reading

Educational material, not a recommendation to transact. All numerical examples are hypothetical and exclude costs unless stated. Actual terms, eligibility, tax treatment and broker procedures depend on the security and jurisdiction.

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