Investor Presentaiton
Impact on EV
Balance Sheet: Optimal Leverage
Green Street Advisors
ADVISORY & CONSULTING GROUP
History shows that costs associated with financial distress begin to show up even at leverage ratios below 40%, and
that they become large at higher leverage ratios. Highly levered REITs are also in no position to play offence during
times of distress. These two factors cause a REIT's weighted average cost of capital to increase once leverage exceeds
roughly 30%.
WACC
The Effect of Leverage on Weighted Average Cost of Capital
7.0%
6.5%
Cost of Financial Distress
Cost of Missed Opportunities
6.0%
5.5%
0%
10%
20%
30%
40%
Leverage Ratio
50%
60%
70%
80%
And Corresponding Impact on Enterprise Value
0%
10%
20%
30%
40%
50%
60%
70%
80%
0%
This is not a Research report.
■Cost of Financial Distress
Cost of Missed Opportunities
Leverage Ratio
22
22
-5%
-10%
-15%
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