eREITs' Growth Funding by Debt vs. Equity

Article of the week

Unnamed Staff (REIT Institute): REIT Leverage Metrics

Core Ideas

1) Significance: Efficient usage of debt allows eREITs’ to fund growth with a healthy risk-reward ratio. High debt levels increase the cost of borrowing (interest rate). Excessive debt creates the risk of insolvency (bankruptcy). Debt under-utilization results in sub-optimal growth and lower shareholder returns.

2) Borrowing: The debt of eREITs is backed by tangible assets (real estate properties). This endows them with higher debt capacity than other businesses and provides them with attractive long-term fixed-rate cash sources.

3) Dilution: Additional share issuance by eREITs creates dilution and only generates shareholder value if executed with sufficiently high capitalization rates (low purchase price).