Growing International Portfolio
Investment Strategy Illustration: Returns Must Exceed Long-Term WACC
WACC viewpoint balances near-term earnings per share growth with long-term value accretion
KEY ASSUMPTIONS & CALCULATION:
LONG-TERM COST OF EQUITY
REALTY INCOME
KEY ASSUMPTIONS & CALCULATION:
LONG-TERM WACC
LONG-TERM
Weighted Average Cost of Capital
Drives investment decision-
making at the property level
.
Considers required "growth"
component of equity returns
Beta vs. S&P 500 (since S&P 500 Index Inclusion on 4/6/15)(1)
Long-term 10-year U.S. yield (Fitted Instantaneous Forward Rate)(1)
Equity market risk premium (S&P 500 Earnings Yield vs 10Y UST) (1)
Long-Term Cost of Equity (CAPM methodology)
0.79
65% Weight: Long-Term Cost of Equity
7.2%
4.1%
35% Weight: Cost of Debt (unsecured, 10Y, fixed)
Long-Term WACC
5.5%
6.6%
1.6%
KEY ASSUMPTIONS & CALCULATION
5.4%
REALIZED INVESTMENT SPREAD
Dividend yield
5.0%
•
Long-term WACC is the hurdle rate
Investment Cash Cap rate
6.9%
for acquisitions
Assumed long-term dividend growth rate
4.0%
Realized WACC(2)
5.8%
Focus on higher long-term
IRR discourages risk-taking
Long-Term Cost of Equity (Yield + Growth methodology)
Long-Term Cost of Equity (Average of two methodologies)
9.0% Realized investment spread (bps)
112
7.2%
SHORT-TERM
Nominal 1st-Year Weighted Average
Cost of Capital
Used to measure initial
(year one) earnings accretion
Higher stock price (lower cost)
supports faster growth
KEY ASSUMPTIONS & CALCULATION:
NOMINAL 1ST-YEAR WACC
60% Equity: AFFO Yield (1)
6.6%
32% Debt: unsecured, 10-year, fixed
5.5%
•
Spread on short-term WACC
8% Retained Free Cash Flow
0%
required to generate accretion
LOW NOMINAL WACC
supports ability to spread
invest in high-quality real
estate opportunities
Nominal 1st-Year WACC
5.7%
•
Unwilling to sacrifice quality to
generate wider spreads
LONG-TERM WACC
considers growth requirements
of equity and supports focus on
residual value of acquisitions
Note: Realty Income's cost of capital information uses illustrative assumptions only (as of 7/19/2023). Actual results and calculations may vary materially from these illustrative calculations. AFFO yield is based on the NTM AFFO/sh consensus. Cost of debt is based on a mix of USD-denominated,
GBP-denominated, and EUR-denominated debt.
(1) Source: Bloomberg.
(2) Derived from the weighted average cost of long-term debt and equity capital raised and settled in the period, inclusive of free cash flow after dividend payments available to fund investment activity.
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