Debt and Capital Decisions · REITs

Fixed and floating rate debt respond differently to interest rates. Coverage ratios and hedge details help explain how a rate move reaches shareholder cash flow.

Identify what actually resets

A floating loan typically references a benchmark plus a spread and may include a floor. A fixed loan keeps its coupon stable during the agreed term but eventually needs repayment or refinancing. Report the portion that can reset now, the portion hedged and the dates on which protection expires.

Read the hedge beside the debt

A swap or cap may reduce exposure, but the notional amount, maturity, benchmark and contractual terms matter. A hedge can expire before the debt or cover only part of it. It may also create collateral or termination obligations. Do not assume that a statement of hedged debt eliminates every financing risk.

Use a consistent coverage measure

Interest coverage compares an earnings or cash measure with interest expense. Definitions differ, especially in adjusted metrics. An EBITDA based ratio does not subtract all maintenance spending. A ratio that looks comfortable can coexist with limited cash after capital needs. Reconcile the numerator and include the appropriate interest obligations.

Measure a rate shock

Suppose $200 million of unhedged floating debt resets upward by two percentage points. Annual interest increases by $4 million if principal is unchanged. If the chosen earnings measure is $40 million and starting interest $10 million, coverage falls from 4 times to about 2.86 times. This isolates the rate effect before changes in rents, costs or debt balances.

Try it yourself

A REIT has $150 million of floating debt, with $100 million effectively fixed by a matching hedge. What is the annual interest effect of a one percentage point increase on the unhedged portion?

Show the worked answer

The remaining $50 million produces approximately $500,000 of extra annual interest. Check floors, hedge expiry and whether the reference rates actually match.

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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