REIT Discounted Cash Flow valuation model, part four, Equity Issuance. We now need to deal with the equity issuance. Now, typically in a DCF, we are not concerned with the financing at all. Our cash flows are unlevered, and we are looking for the enterprise value, which is the value of the company to all stakeholders. However, there's something that we needed to consider with the REIT, and that is the fact that if you recall back in our operating model, we said, we established that in order for the REIT to have future growth, it needed a way to fund that growth. It can't be funded by cash flow, therefore, in order for us to forecast future growth in the REIT, we needed to make an assumption about future funding, and that funding was split between debt and equity. We carry that same theory into the DCF. We can't forecast growth and not deal with the fact that additional equity is going to have to be issued in order to fund that growth. And that additional equity is going to require additional shares, which is going to cause dilution. If we look down below, we have our fully diluted shares, which takes into consideration existing stock ownership plus potential dilution through options, stock units, et cetera. And then if we scroll down, we have shares outstanding, and this shares outstanding takes into consideration the future stock issuances, so we're going to now deal with those future stock issuances. The first thing I'm gonna do is I want to take a look at that section. The stock issuances assumptions begin in row 83. I'm going to hide C, D and E, and then I'd like to freeze my panes here so that we can see everything. Where do we get the stock issuances from? Well, if you recall, we've done this already in the operating model. If I link to my operating model, and I go into the financing section, we had this already established where we made an assumption of percentage of debt and percentage of equity for future funding, and based on the cash flow need of the REIT, we split that need between the debt and the equity. So I have a forecast amount here for the portion to be raised in equity, and I'm gonna bring that into my DCF. Now, the good news is, is I have that for the next five years. The bad news is, is that I've gone out to 10 years, so I no longer have that going forward. So we have an assumption here on how we're going to calculate that, and what this is, is stock issuances is a percentage of total capital spending. So the first thing I'm gonna do is actually just calculate this historically so I can see where I got my assumption from, and that's going to be equal to the stock issuances divided by the sum of the total capital spending. So again, my future capital spending, which is buying of buildings, redeveloping properties, et cetera, is driving the growth, and I'm going to fund that with this amount of stock issuances. That's going to be the sum of those items in my free cash flow calculation, the recurring maintenance CapEx, the acquisitions, the redevelopments and developments, and that's going to be offset by any asset dispositions. I'm showing this as a negative, because those are cash outflows, so I'm just gonna flip my sum function, copy that across, and we get an idea of where this 7% assumption comes from. I now need to take that 7% and reconfigure the formula so that I'm applying the 7% to the sum of those cash flows, and I will do that by flipping the sum so I can get positive number, and then taking the same for cash flows.

So I now have my stock issuances from years one through 10. This is now going to work a lot like the discounted cash flows work. We effectively have cash flows, and now we need to discount them back to the present value. We're not gonna use the WAC, because the WAC is a blend of debt and equity, and this is a solely an equity based calculation, so we're going to use just the cost of equity or the case of E. I have actually named that sell case of E. By simply typing that in, I get the cost of equity, and I can copy that over as an absolute reference. I also need to calculate that discount factor based on the cost of equity and the year that I'm in, so that's going to be one over one plus cost of equity raised to the year that I'm in. I can copy that over as well, and so the present value of my stock issuances are the discount factor, times the stock issuance.

Now I can go back up to my shares outstanding calculation. I'm gonna have to unhide these columns. So the present value of the stock issuances is the sum of all of those stock issuances.

Again, since I'm basically doing a mini DCF within the DCF, I can't just stop at the end of my forecast. The forecast period is arbitrary. This company will go on beyond the forecast period, there will be growth beyond the forecast period, and I need to therefore continue to issue stock to fund that growth. What I need here is a terminal value for the stock issuances. To do that, I need to have a terminal growth rate. I'm actually gonna borrow the terminal value growth from my terminal value assumptions, which I haven't gotten to yet, but they're in the model, so they're down here. And the terminal value free cash flow growth rate is 2.35%, and it's a named cell, as we can see up here. So I'm simply going to borrow that as my terminal value growth rate and use it to calculate the terminal value of the stock issuances. I also need to, within this same formula, discount those terminal value stock issuances back to today. So it's gonna be a slightly complicated formula, but it's something that most of us have seen before, so it shouldn't be too bad. It's going to be equal to my stock issuance from year 10, which is what I'm basing my terminal value off of, times one plus my terminal growth rate, divided by my cost of equity minus my terminal growth rate.

This is just the perpetuity formula. And now I have the terminal value calculated, but what I need to do is apply the discount factor from the year 10 in order to get the present value of that terminal value, so that's gonna be times P 87.

And now I have the present value of the terminal value of the stock issuances. So these are both dollar amounts, and I'm gonna change the format. Now I need to find the estimated number of future shares to be issued in actual shares, and the way I'm going to do that is I'm going to take the sum of these two and divide it by the share price, which is also a named cell. So basically, what this is saying is I need to dilute my ownership by 4,374 additional shares in order to achieve the future growth that I have forecast in this model. So my total shares outstanding is gonna be equal to that plus the fully diluted share number that I had calculated previously.