The interrelationships between REIT capital structure and investment

We explore the interdependence of investment and financing choices in US listed Real Estate Investment Trusts (REITs) in the period 1973-2011. We find that the investment and financing choices of REITs are interdependent, but they are not made simultaneously. Our results suggest that investment determines leverage, but leverage has no apparent effect on investment decisions. The fundamental role of investments for the financial success of the firm in the REIT business model leads managers to prioritise the investment decision over the leverage decision. Conversely, the debt-overhang conflict between shareholders and debt holders that theoretically drives the reverse influence of leverage on the optimal investment policy does not appear to filter through to the actual investment choices of REITs. Our findings suggest that REIT managers utilise the maturity dimension of capital structure to mitigate potential investment distortions and ensure that investment remains on its value-maximising path. We also present novel evidence on the role of investments in driving a wedge between REIT target leverage and actual leverage levels, and on the interplay of investments and leverage adjustments towards the target ratio in explaining REIT capital structure dynamics. WORK IN PROGRESS DO NOT CITE OR QUOTE WITHOUT PERMISSION