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

45 Pages Posted: 14 Sep 2015 Last revised: 15 Aug 2016

See all articles by Emanuela Giacomini

Emanuela Giacomini

University of Florida - Warrington College of Business Administration

David C. Ling

University of Florida - Hough Graduate School of Business Administration

Andy Naranjo

University of Florida - Warrington College of Business Administration

Multiple version iconThere are 3 versions of this paper

Date Written: August 3, 2016

Abstract

This paper examines U.S. REIT leverage decisions and their effects on risk and return. We find that REITs are highly levered relative to industrial firms, with an average market leverage of 46 percent over our 1990-2012 sample period. Using partial adjustment models, we further find that the speed of adjustment at which REITs close the gap between current debt levels and target leverage levels is 17 percent annually, with over-levered REITs tending to adjust more quickly to their target leverage ratios than under-levered REITs. We also find that 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.

Keywords: REITs, Leverage, Capital structure, Returns, Investment performance, Financial constraints, Distress, Crisis

JEL Classification: G110, G120, G150, G320, G01

Suggested Citation

Giacomini, Emanuela and Ling, David C. and Naranjo, Andy, REIT Leverage and Return Performance: Keep Your Eye on the Target (August 3, 2016). Available at SSRN: https://ssrn.com/abstract=2659630 or http://dx.doi.org/10.2139/ssrn.2659630

Emanuela Giacomini (Contact Author)

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

David C. Ling

University of Florida - Hough Graduate School of Business Administration ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States
(352) 392-0153 (Phone)
(352) 392-0301 (Fax)

Andy Naranjo

University of Florida - Warrington College of Business Administration ( email )

P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-392-3781 (Phone)

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