REIT Leverage and Return Performance: Keep Your Eye on the Target

Abstract

This article examines U.S. REIT leverage decisions and their effects on risk and return. We find that the speed at which REITs close the gap between current debt levels and target leverage levels is 17% annually. REITs that are highly levered relative to the average REIT tend to underperform REITs with less debt in their capital structure. However, REITs that are highly levered relative to their target leverage tend to perform better on a risk-adjusted basis than under-levered REITs. Taken together, our results show that REIT leverage has significant return performance effects conditional on deviations from target leverage

Financial Flexibility and Manager–Shareholder Conflict: Evidence from REITs

“…MB ratios are, in contrast, consistently measured, independently verified, and easily obtained. Research on the relationship between equity returns and leverage suggests an inverse relationship, with more highly levered firms producing lower stock returns (Giacomini, Ling and Naranjo , ).…”

How Do Firms Finance Nonprimary Market Investments? Evidence from REITs

“…Possible explanations of REIT capital structure include market timing (Boudry, Kallberg and Liu ; Ooi, Ong and Li ; Harrison, Panasian and Seiler ; Ghosh, Roark and Sirmans ), information asymmetry (Ghosh, Roark and Sirmans ) and trade‐off theory (Boudry, Kallberg and Liu ; Harrison, Panasian and Seiler ; Giacomini, Ling and Naranjo ). Harrison, Panasian and Seiler () find no evidence of financing pecking order.…”

Debt Conservatism and Debt-Equity Choices: Evidence from REITs’ Unused Debt Capacity

“…Our measure of debt buffer was higher than the estimated buffers of 16.2% and 17.2% reported by, respectively, de Jong, Verbeek and Verwijmeren (2012) and Hess and Immenkotter (2012) using credit rating regression models. The mean debt ratio of 30.1% was substantially lower than 52% documented by Giacomini et al (2017) for US REITs for the period 1990-2012. The average optimal debt ratio of 29.6% indicated firstly, REITs were operating near their optimal debt limit and secondly, optimal limit was the first debt boundary for REITs before the regulatory limit which was the maximum boundary.…”