Crystallizing Value Creation & Market Overview
Investment Strategy: 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
LONG-TERM
Weighted Average Cost of Capital
•
•
Drives investment decision-
making at the property level
Considers required "growth"
component of equity returns
Long-term WACC is the hurdle rate
for acquisitions
Focus on higher long-term
IRR discourages risk-taking
REALTY INCOME
Beta vs. S&P 500 (since S&P 500 Index Inclusion on 4/6/15)
Long-term 10-year U.S. yield (Fitted Instantaneous Forward Rate)
Equity market risk premium (S&P 500 Earnings Yield vs 10Y UST)
Long-Term Cost of Equity (CAPM methodology)
0.86
3.1%
KEY ASSUMPTIONS & CALCULATION:
3.3%
5.9%
% LONG-TERM WACC
65% Weight: Long-Term Cost of Equity
7.0%
Dividend yield
4.0%
Assumed long-term dividend growth rate
4.0%
35% Weight: Cost of Debt (unsecured, 10Y, fixed)
Long-Term WACC
2.2%
5.3%
Long-Term Cost of Equity (Yield + Growth methodology)
8.0%
Long-Term Cost of Equity (Average of two methodologies)
7.0%
SHORT-TERM
"Nominal 1st-Year Weighted
Average Cost of Capital
Used to measure initial
(year one) earnings accretion
KEY ASSUMPTIONS & CALCULATION:
NOMINAL 1ST-YEAR WACC
62% Equity: AFFO Yield
5.3%
Higher stock price (lower cost)
33% Debt: unsecured, 10-year, fixed
2.2%
supports faster growth
•
Spread on short-term WACC
5% 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
4.0%
•
Unwilling to sacrifice quality to
generate wider spreads
Note: Cost of capital information uses illustrative assumptions only (as of 10/29/2021). 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.
LONG-TERM WACC
considers growth requirements
of equity and supports focus on
residual value of acquisitions
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