Does Debt Management Matter for REIT Returns?

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Journal of Real Estate Finance and Economics


Asset and debt management are two essential managerial tasks in any firm. The traditional view holds that asset management is the primary driver of real estate investment trust (REIT) returns for the following reasons: (1) interest tax shields are not a source of incremental value for REITs and (2) the plain tangibility of real estate assets helps to diminish the financial distress costs of REITs. This paper examines empirically whether debt management also matters for the operating returns (i.e., ROA, ROE, ΔROA or ΔROE) of a portfolio of REITs. Both applying a novel dynamic decomposition method to ΔROA or ΔROE and also defining ROA and ROE under the net income and the funds from operations metrics guide the empirical approach of this paper. Our findings show that the effects of debt management on REITs’ operating profitability cannot be ruled out. However, the direction of these effects appears to be opposite to that of asset management. These results call for renewed and further investigations into the optimal capital structure questions for REITs.


Asset and debt management; Dynamic decomposition; FFO and NI; REIT; ROA and ROE


Property Law and Real Estate | Real Estate

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