Corporate Diversification and the Cost of Capital: The Case of REIT Mortgages and Bank Loans
- Forthcoming in Journal of Real Estate Finance and Economics (2018)
This paper investigates whether corporate diversification by property type and by geography reduces the costs of debt capital. It employs asset-level information on the portfolios of US REITs to measure diversification, and looks at two of their main sources of debt capital: 3,289 commercial mortgages and 957 bank loans. The paper finds that diversification across different property types does indeed dependably reduce the cost of these different types of debt. The effect is 6.9 to 8.7 basis points for bank loans if a firm’s property Herfindahl Index is lowered by one standard deviation. The corresponding effect for commercial mortgages is around 23 basis points. For mortgages, collateral diversification rather than corporate diversification is priced. Additionally, after the crisis, the salience of the collateral asset increases. For diversification across regions, we do not find a consistent relationship with capital costs.