Corporate Diversification and the Cost of Debt: Evidence from REIT Bank Loans and Mortgages

Irem Demirci, Piet Eichholtz, Erkan Yonder*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

3 Citations (Web of Science)

Abstract

This paper investigates whether corporate diversification by property type and by geography reduces the costs of debt capital. It employs asset-level information on the portfolios of U.S. REITs to measure diversification and looks at two of their main sources of debt capital: 1,173 commercial mortgages and 952 bank loans. The paper finds that diversification across different property types does indeed dependably reduce the cost of these different types of debt. The effect is about 7 basis points for bank loans if a firm's property Herfindahl Index is lowered by one standard deviation and this effect gets stronger for REITs with worse financial health - as measured by the interest coverage ratio. The corresponding effect for commercial mortgages is around 22 basis points for collateral diversification by property type. After the crisis, the salience of the collateral asset increases. For diversification across regions, we do not find a consistent relationship between real asset diversification and loan pricing.
Original languageEnglish
Pages (from-to)316-368
Number of pages53
JournalJournal of Real Estate Finance and Economics
Volume61
Issue number3
DOIs
Publication statusPublished - Oct 2020
EventReal Estate Finance and Investment Symposium - Singapore, Singapore
Duration: 1 Jan 20171 Jan 2017

JEL classifications

  • g31 - "Capital Budgeting; Fixed Investment and Inventory Studies; Capacity"
  • l25 - Firm Performance: Size, Diversification, and Scope
  • r33 - Nonagricultural and Nonresidential Real Estate Markets

Keywords

  • REIT
  • Diversification
  • Cost of debt
  • INTERNAL CAPITAL-MARKETS
  • INVESTMENT
  • INVESTORS
  • DISCOUNT

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