REIT Capital Structure Choices: Preparation Matters

Sun, Titman and Twite find that capital structure risks, namely, high leverage and a high share of short†term debt, reduced the cumulative total return of U.S. REITs in the 2007–2009 financial crisis. We find that mitigating capital structure risks ahead of the crisis by reducing leverage and extending debt maturity in 2006 was associated with a significantly higher cumulative total return 2007–2009, after controlling for the levels of those variables at the start of the financial crisis. We further identify two systematic cross†sectional differences between those REITs that reduced capital structure risks prior to the financial crisis and those that did not: the exposure to capital structure risks and the strength of corporate governance. On balance, our findings are consistent with the interpretation of risk†reducing adjustments to capital structure ahead of the crisis as a component of managerial skill and discipline with significant implications for firm value during the crisis.