REIT capital structure strategy in the aftermath of hurricanes

Abstract

This paper studies the causal impacts of hurricanes on capital structure. The sample covers 181 US public equity Real Estate Investment Trusts (REITs) throughout 2011–2018, during which 8 catastrophic hurricanes made landfalls in the contiguous US. This study finds that a basis point (0.01%) increment in REIT sudden exposure to hurricanes leads to a negative liquidity shock of 15.3% in corporate cash. Such shock is immediately followed by a 26.4% increase in leverage, measured as total debt over total assets. The effects are temporary, lasting only one quarter during the shock. REIT reactions to hurricanes are consistent with the pecking order theory of capital structure. Overall, hurricane ramifications to REIT capital structure strategy can be as impactful as any distress event that alters corporate liquidity and ability to maintain its daily operation.