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Financial Distress in U.S. REITs

Pind Schmidt, Christian LU (2025) NEKN02 20251
Department of Economics
Abstract
This study examines how the use of leverage conditions both market-based and operational outcomes in U.S. equity Real Estate Investment Trusts (REITs), with particular focus on the period surrounding the 2022-2023 monetary tightening cycle. Despite REITs' prominence as capital-intensive, payout-constrained institutions, little empirical research has explored how their capital structure choices translate into financial distress costs. Drawing on the frameworks of Opler and Titman (1994) and Sun et al. (2013), this study tests four hypotheses using panel data from 117 publicly listed REITs over the period 2010-2024. Results provide robust support for the view that leverage acts as a conditional amplifier of equity returns, i.e. enhancing... (More)
This study examines how the use of leverage conditions both market-based and operational outcomes in U.S. equity Real Estate Investment Trusts (REITs), with particular focus on the period surrounding the 2022-2023 monetary tightening cycle. Despite REITs' prominence as capital-intensive, payout-constrained institutions, little empirical research has explored how their capital structure choices translate into financial distress costs. Drawing on the frameworks of Opler and Titman (1994) and Sun et al. (2013), this study tests four hypotheses using panel data from 117 publicly listed REITs over the period 2010-2024. Results provide robust support for the view that leverage acts as a conditional amplifier of equity returns, i.e. enhancing performance in stable conditions while deepening losses in economic downturns. However, leverage does not appear to significantly impair short-term revenue performance, suggesting a decoupling between equity market penalties of highly levered REITs and their operating cash flows in the short term. High leverage is found to be consistently associated with reduced investment intensity, even outside crisis periods, indicating a structural constraint on capital deployment. No systematic increase in equity issuance is observed among highly levered REITs, consistent with debt overhang theory and dilution aversion. Collectively, the findings suggest that financial distress in U.S. REITs may manifest more through curtailed strategic flexibility and return asymmetries than through immediate deterioration in operating performance. Implications of the findings are drawn for investors, managers, and policymakers seeking to understand the more indirect but consequential costs of financial distress in REITs (Less)
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author
Pind Schmidt, Christian LU
supervisor
organization
course
NEKN02 20251
year
type
H1 - Master's Degree (One Year)
subject
keywords
REITs, Financial Distress, Capital Structure
language
English
id
9204477
date added to LUP
2025-09-12 10:43:58
date last changed
2025-09-12 10:43:58
@misc{9204477,
  abstract     = {{This study examines how the use of leverage conditions both market-based and operational outcomes in U.S. equity Real Estate Investment Trusts (REITs), with particular focus on the period surrounding the 2022-2023 monetary tightening cycle. Despite REITs' prominence as capital-intensive, payout-constrained institutions, little empirical research has explored how their capital structure choices translate into financial distress costs. Drawing on the frameworks of Opler and Titman (1994) and Sun et al. (2013), this study tests four hypotheses using panel data from 117 publicly listed REITs over the period 2010-2024. Results provide robust support for the view that leverage acts as a conditional amplifier of equity returns, i.e. enhancing performance in stable conditions while deepening losses in economic downturns. However, leverage does not appear to significantly impair short-term revenue performance, suggesting a decoupling between equity market penalties of highly levered REITs and their operating cash flows in the short term. High leverage is found to be consistently associated with reduced investment intensity, even outside crisis periods, indicating a structural constraint on capital deployment. No systematic increase in equity issuance is observed among highly levered REITs, consistent with debt overhang theory and dilution aversion. Collectively, the findings suggest that financial distress in U.S. REITs may manifest more through curtailed strategic flexibility and return asymmetries than through immediate deterioration in operating performance. Implications of the findings are drawn for investors, managers, and policymakers seeking to understand the more indirect but consequential costs of financial distress in REITs}},
  author       = {{Pind Schmidt, Christian}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Financial Distress in U.S. REITs}},
  year         = {{2025}},
}