1. Mentor: Thomas Herndon
Finding the Optimum Point of Leverage in Real Estate Investment Trusts (REITs)
By Alex Stamas
Mentor: Thomas Herndon

2. What is an REIT? REITs Equity REITs Mortgage REITs
Funds traded on stock exchanges that buy, sell and develop real estate for profit paid to stockholders in dividends.
REITs
Equity REITs
Mortgage REITs

3. Market Cap (in millions)
Why do we care?
Market Cap (in millions)
NAREIT 2016

4. Leverage Use in REITs For Comparison:
JP Morgan & Chase has an almost 98% gearing ratio.
Bloomberg 2014

5. Finding the Optimum Point of Leverage
Market Conditions
Variables:
Market Leveraging
Preferred Stock
For example:
4% unemployment
FED int. rate: 3%
Output below potential
Investment Structure
Variables:
Variable Rate Debt/Total Debt
Property Type (i.e. Hotels, Office)
For example:
60% Core
30% Value Add
10% Investment
By adapting Sun, Titman, and Twite’s methodology I will work to discern the optimum point of leverage for any number of market conditions or investment structures.
Optimal Leveraging Ratio

6. Research Questions
What is the degree of leverage that is exogenous from market conditions (what I refer to as pure leverage)?
How do varying degrees of pure leverage affect fund returns under different market conditions and firm investment structures?
What is the optimum point of leverage for any firm under any market conditions or investment structure?

7. References
Brown, David T. "Liquidity and Liquidation: Evidence from Real Estate Investment Trusts." The Journal of Finance 55, no. 1 (2000): doi: /
Sun, Libo, Sheridan D. Titman, and Garry J. Twite. "REIT and Commercial Real Estate Returns: A Postmortem of the Financial Crisis." Real Estate Economics 43, no. 1 (2014): doi: /
Alcock, Jamie, Andrew Baum, Nicholas Colley, and Eva Steiner. "The Role of Financial Leverage in the Performance of Private Equity Real Estate Funds." The Journal of Private Equity 17, no. 1 (2013): doi: /jpe