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IntermediateBrazilian REITs · Lesson I4.8 · Module I4

Leverage: when the fund owes money

Module I4: Analysis indicators

12 slides~5 minquiz at the end

In this lesson

  • Where a fund's debt comes from
  • LTV and liabilities ÷ equity
  • How debt amplifies a fall
See the slides
Building under construction with a crane

Brazilian REITs · Lesson I4.8

When the fund buys with borrowed money

Debt boosts gains on the way up — and the fall on the way down.

Gaf.arq · Wikimedia Commons · CC BY-SA 3.0

Where the debt comes from

Three common ways a fund borrows

  • Buying in installmentsThe fund pays the seller over time.
  • CRI backed by rentBrings future rent forward and repays with it.
  • Property as collateralOnly for the fund's own debt.

CVM Resolution 175, Annex III, art. 32, V (CVM Resolution 200/2024).

Measuring debt

Two yardsticks, one fund

R$ 300Mdebt÷R$ 1Bassets=30%LTV
R$ 300Mdebt÷R$ 700Mequity=43%liabilities ÷ equity

Assets = debt + shareholders' equity. Always compare funds with the same yardstick.

Properties fall 20%

The debt doesn't fall with them

Before

Equity R$ 700M

  • Assets R$ 1B
  • Debt R$ 300M

After

Equity R$ 500M

  • Assets R$ 800M (−20%)
  • Debt R$ 300M: unchanged

The amplifier

Properties fell 20%. Shareholders fell more.

−28.6%

in shareholders' equity: from R$ 700M to R$ 500M

The whole drop in property value lands on shareholders. The lender gets paid the same.

Properties −20% in every case

More debt, bigger fall

  1. no debt−20%
  2. LTV 30%−28.6%
  3. LTV 50%−40%
  4. LTV 70%−66.7%

Drop in shareholders' equity. From the left: no debt, then LTV of 30%, 50% and 70%.

Not all debt is bad

Cost and maturity are the problem

Debt that helps

Cheap

  • Costs less than the property yields
  • Long term, payments the rent can cover

Debt that hurts

Expensive

  • CDI + spread: rises when the Selic rises
  • Comes due before the income arrives

How this site measures it

From most to least reliable

  1. Balance sheetthe transcribed debt
  2. Manager's LTVwhat the report states
  3. CVM filingliabilities ÷ equity: overstates, on purpose
  4. Not measuredsaid on screen, no guessing

Liabilities include more than debt. Overstating is the right side to err on.

Remember this

Three takeaways

  1. LTV = debt ÷ assetsLiabilities ÷ equity is another yardstick for the same fund.
  2. Debt amplifiesThe whole drop in property value hits shareholders' equity.
  3. Cost and maturity decideCheap, long debt helps; expensive, short debt hurts.

Quick quiz · 1 of 2

A fund with a 50% LTV sees its properties fall 10%. How much does shareholders' equity fall?

See answer

20%. Assets 100 → 90; debt stays at 50; equity goes from 50 to 40.

Quick quiz · 2 of 2

Assets of R$ 500M and debt of R$ 100M. What is the LTV?

See answer

R$ 100M ÷ R$ 500M = 20%. The 25% is liabilities ÷ equity (R$ 100M ÷ R$ 400M).

Lesson complete

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Educational content, written for learners. Not investment advice.