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Regional diversification and the cost of debt securities: U.S. REITs

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  • Islam Ibrahim
  • Heidi Falkenbach

Abstract

This study investigates the effect of corporate regional diversification on the cost of debt securities. It observes the yield spreads on debt securities issued by U.S. REITs and employs asset-level data to measure portfolio diversification levels across NCREIF regions. By utilizing a Herfindahl-Hirschman index-based measure of diversification, the results show that, on average, a one standard deviation increase in regional diversification increases the spread by nearly 8 basis points. Also, expanding to one additional NCREIF region increases the spread by nearly 4 basis points. Put differently, in our sample, being amongst the most diversified tercile could increase the spread premium by about 26 basis points, while maintaining a low level of diversification (falling in the least diversified tercile) could reduce the spread by about 12 basis points. These results are robust to controlling for credit rating and other potential confounders. The findings highlight a latent channel for the so-called corporate diversification discount.

Suggested Citation

  • Islam Ibrahim & Heidi Falkenbach, 2022. "Regional diversification and the cost of debt securities: U.S. REITs," ERES 2022_40, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:2022_40
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    File URL: https://eres.architexturez.net/doc/eres-id-eres2022-40
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    More about this item

    Keywords

    Cost of debt; Diversification; REIT; Yield spread;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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