Is there a leverage target for REITs?

The literature on capital structure shows no concensus on whether firms target a debt ratio and, if such a leverage target exists, at what speed firms close the gap between their actual and targeted debt ratio. This paper investigates whether there is a target debt ratio for Real Estate Investment Trusts (REITs) and to what extent such a target influences the financing decisions of REITs. Using different estimation methods and target specifications, we show that REITs do appear to adjust toward a target debt ratio. Our dynamic model specifications account for unobserved firm heterogeneity at the property type level and for the persistence of firms' debt ratios over time. We identify relatively high adjustment rates of 50-60% per year, which indicate that a target debt ratio is of central importance for the corporate capital structure policies of REITs. The unique features of REITs, such as the minimum earnings payout ratio and the tangibility of their assets, likely contribute to a more active target debt behavior than that observed for other firms.