Wharton Professor Says REITs Learned from Financial Crisis

Susan Wachter

Susan Wachter, finance professor at the University of Pennsylvania’s Wharton School, joined REIT.com for a video interview during REITWeek 2015: NAREIT’s Investor Forum, held in New York.

Wachter presented a paper at the NAREIT/AREUEA Real Estate Research Conference on June 8 detailing research into REIT capital structures. Wachter and her co-authors found that investors rewarded management teams that took prudent action prior to and during that financial crisis of the 2000s. REITs that reduced leverage prior to the credit crunch and manage their debt maturities were rewarded by shareholders in the period from 2007 to 2009, according to Wachter.

“It’s as though the shareholders are rewarding the very fact that someone is at the helm of the ship and is watching over all conditions and is preparing for the crisis to come,” Wachter said. “We see it pretty clearly in the data.”

Conversely, investors punished riskier capital structures after the financial market meltdown, Wachter said. She noted that, on the whole, REITs had prepared well for the crisis. Now, REITs are employing “quite conservative capital structures,” according to Wachter.

“I think it’s fair to say that no one understood the depth of the crisis that we were going into,” she said. REITs “were deleveraging, and we see the reward for that. I believe that they now have learned from this extreme period of volatility.”

Wachter also commented on the implications of her study on how REIT management teams can add shareholder value.

“REITs are infinitely long-lived corporations with exposure to real estate over all the cycles,” she observed. “We are at a point where interest rates are low. It does appear that the entities holding real estate assets for the long run have taken steps to prepare [for interest rate hikes].”