To read the full version of this content please select one of the options below:

The capital structure determinants of REITs. Is it a peculiar industry?

Giacomo Morri (Accounting, Control, Corporate and Real Estate Finance Department, SDA Bocconi, Milan, Italy)
Christian Beretta (Bocconi University, Milan, Italy)

Journal of European Real Estate Research

ISSN: 1753-9269

Article publication date: 9 May 2008

Abstract

Purpose

Unlike previous studies on capital structure decisions, the purpose of this paper is to focus on US real estate investment trusts (REITs) in order to find out the main determinants of capital structure choice for real estate companies and in order to verify if they are related to factors similar to those affecting the decisions of public firms in other sectors.

Design/methodology/approach

Using a methodology similar to Rajan and Zingales, a sample of 119 listed REITs with different investment strategies and in different property sectors was analyzed. The analysis is carried out in order to determine the basic factors underpinning the capital structures by selecting financial items and ratios related with leverage (such as asset size, profitability ratios, tangibility of assets, growth opportunities, operating risk and geographical diversification of investments).

Findings

Results show that REITs follow a pecking order theory of financing since more profitable firms are less levered and REITs with more growth opportunities have higher leverage ratios. The tangibility of assets turns out to be positively correlated with leverage, while REITs whose operating risk is high prefer a lower financial risk and consequently a lower gearing. Finally, it is not clear how size affects leverage decisions and more diversified REITs appear to be riskier.

Originality/value

The research also addresses the issue of asymmetric information and the debt‐equity choice for REITs sampled on the basis of their size, highlighting differences with other business sectors.

Keywords

Citation

Morri, G. and Beretta, C. (2008), "The capital structure determinants of REITs. Is it a peculiar industry?", Journal of European Real Estate Research, Vol. 1 No. 1, pp. 6-57. https://doi.org/10.1108/17539260810891488

Publisher

:

Emerald Group Publishing Limited

Copyright © 2008, Emerald Group Publishing Limited