REIT Capital Structure Choices: Preparation Matters

Real Estate Economics, Forthcoming

Posted: 6 Feb 2016 Last revised: 26 Aug 2016

See all articles by Andrey D. Pavlov

Andrey D. Pavlov

Simon Fraser University (SFU) - Finance Area

Eva Steiner

School of Hotel Administration, Cornell University

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ; University of Pennsylvania - Finance Department

Multiple version iconThere are 2 versions of this paper

Date Written: February 29, 2016

Abstract

Sun, Titman, and Twite (2015) find that risky capital structure characteristics, such as high leverage, high share of debt due in the near future and high share of variable-rate debt, significantly reduce the cumulative total returns of US REITs over the 2007-2009 financial crisis. In this paper we show that preparing ahead of the crisis significantly influenced the cumulative return over the crisis period even when controlling for the levels at the start of the crisis. Specifically, we document that REITs which reduced leverage and increased maturity prior to the crisis fared better during the crisis. For instance, one standard deviation reduction in leverage generated five percent higher cumulative return during the crisis. We further find that US REITs with the highest capital structure risk (high leverage and short maturities) were more likely to take precautions by reducing leverage and extending maturity. This effect is especially large for REITs with strong governance. We also document that none of our findings hold for European REITs. This suggests that since European firms did not experience or observe the levels of market excess that occurred in the US before the crisis, whether they took precautions or not had no impact on their returns during the crisis.

Keywords: Real estate investment; leverage; financial crisis

Suggested Citation

Pavlov, Andrey D. and Steiner, Eva Maria and Wachter, Susan M., REIT Capital Structure Choices: Preparation Matters (February 29, 2016). Real Estate Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2727959 or http://dx.doi.org/10.2139/ssrn.2727959

Andrey D. Pavlov (Contact Author)

Simon Fraser University (SFU) - Finance Area ( email )

Burnaby, British Columbia V5A 1S6
Canada
604 291 5835 (Phone)
604 291 4920 (Fax)

Eva Maria Steiner

School of Hotel Administration, Cornell University ( email )

465B Statler Hall
Ithaca, NY 14853
United States

HOME PAGE: http://https://sha.cornell.edu/about/directory/instructors/ems457

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104-6330
United States
215-898-6355 (Phone)

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

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