Prerequisites and a dated base case
Complete the debt-maturity, interest-coverage, dilution, and AFFO guides first. Every amount in this workshop is fictional, in millions except per-share figures. Assume annual recurring AFFO of 120 before refinancing, 30 million shares, and a 400 debt balance carrying 3% interest. The 120 already includes 12 of annual interest on that debt. Refinancing closes exactly July 1 at 6%. Other income, costs, taxes, and working capital stay unchanged. Use a half-year convention, no overlapping borrowings, and no early repayment penalty. These explicit simplifications make timing and ownership effects visible.
Debt-only refinancing: distinguish this year from next
Refinancing the entire 400 creates annual interest of 24 instead of 12. The incremental annual cost is 12, but only half affects the transaction year: 6. Transaction-year recurring AFFO is therefore 114, or $3.80 per share. The next full year's run rate is 108, or $3.60. Subtracting the entire new 24 from the original 120 would double count the old interest already embedded in the baseline. Subtracting the full incremental 12 in the transaction year would ignore the July closing. Maintain a monthly debt schedule when actual dates are more complicated.
Equity-funded repayment: higher totals can hide dilution
Alternatively, issue 2.5 million shares on July 1 at $20 each. Gross proceeds are 50; a 2% issuance cost is 1, leaving 49 to repay debt. Refinance only 351 at 6%, producing annual interest of 21.06. Relative to the original annual 12, incremental cost is 9.06, or 4.53 for half a year. Transaction-year recurring AFFO becomes 115.47. Weighted-average shares are 30 + (2.5 × 0.5) = 31.25, so AFFO per share is $3.69504. Next year's full run rate is 110.94 / 32.5 = approximately $3.41354, below the debt-only case despite higher aggregate AFFO.
Keep financing fees in a separate cash bridge
Assume either route also pays an illustrative fixed financing fee of 4 from existing cash for a five-year loan. Our recurring AFFO scenario excludes fee amortization; it is not a claim about any issuer's definition. A simplified straight-line accounting illustration would recognize 0.8 annually and 0.4 in the transaction year, while actual accounting may use an effective-interest method. Cash still leaves immediately: 4. Do not deduct both the upfront fee and its amortization in the same cash budget. Equity issuance costs already reduced the repayment proceeds from 50 to 49; charging that 1 again would also duplicate a cost.
Compare liquidity protection with per-share economics
The debt-only route preserves ownership but leaves 400 outstanding. The equity route reduces principal to 351, potentially improving refinancing resilience, while distributing earnings across more shares. An income-focused owner may prefer the higher debt-only per-share result; a lender-focused analysis may value lower principal exposure. Neither interpretation wins automatically. At a $2.40 annual dividend, the equity route pays 72 to original shares plus 3 to the new half-year shares: 75. Its simplified transaction-year residual after dividends and the financing fee is 115.47 − 75 − 4 = 36.47. Debt-only leaves 114 − 72 − 4 = 38.
Read the documents and challenge the model
Use the debt footnote for principal and coupons, the financing announcement for closing dates, the equity filing for net proceeds, and the diluted-share reconciliation for timing. Realty Income's filed debt and equity disclosures are a primary example of where these inputs live; none of its figures is being modeled here. Verify hedge settlements, premiums, covenant effects, capitalization of interest, and temporary cash interest. Our simplified residual is not unrestricted liquidity: beginning cash, other investment, working capital, and principal movements still require a full cash-flow bridge. Lower debt does not guarantee a particular credit outcome.
Control checks for the hypothetical model
Both routes begin with $4.00 AFFO per share. Debt-only ends the transaction year at $3.80 and the next year at $3.60. Equity-assisted refinancing ends at $3.69504 and approximately $3.41354. The equity route saves 49 × 6% = 2.94 of full-year interest relative to debt-only, exactly explaining 110.94 − 108. In the transaction year it saves 1.47, explaining 115.47 − 114. Those savings are smaller than the proportional increase in shares, so lower debt and lower per-share earnings coexist.
Test your reasoning
If debt-only refinancing instead closes October 1, what is transaction-year recurring AFFO and AFFO per share under the same assumptions?
Reveal the worked answer
Only one quarter of the 12 annual interest increase applies: 3. Recurring AFFO is 120 − 3 = 117, or 117 / 30 = $3.90 per share. The following full-year run rate remains $3.60.
A common mistake
Mixing a full-year interest change with a half-year share count, or subtracting costs already included in the baseline, produces misleading accretion.
What to check in the disclosures
- Date each borrowing, repayment, and issuance.
- Adjust only the interest change from the embedded baseline.
- Use net equity proceeds and weighted-average shares.
- Separate recurring performance, accounting fees, and upfront cash.
- Show the transaction year and the next full year.
Sources & scope
This guide focuses on US REITs. Examples are hypothetical unless explicitly attributed. Definitions and issuer disclosures can change; use the current source and the issuer's own reconciliation.
Educational material, not a recommendation or personalized investment advice. How these guides are prepared · Report a correction