Impact of financial ratios on real estate investment trusts' capital structure

Real Estate Investment Trusts (REITs) is a trust unit that creates fund flow from investors and unit holders to real estates. In Malaysia, REITs is a low-risk investment tool. It can provide at least 90 percent of net profit to the investors and unit holder in terms of dividend. The aim of this study is to examine the impact of financial ratios on Real Estate Investment Trusts’ capital structure. Capital structure refers to the way a corporation finance its assets through some combination of equity, debt or hybrid securities. By using trade-off theory and pecking order theory as theoretical background, thirteen REITs companies were used as a sample based on its five years audited annual reports (2010-2014). Leverage was used as dependent variable and four market variables were used as independent variables for this research; profitability, firm’s size,
tangibility and liquidity. The results of this study are consistent with the pecking order theory in explaining the Malaysian REITs debt financing decision but are less supportive of the trade-off
theory on tax benefits. This finding suggests that Malaysian REITs use debt to support the growth needs rather than tax motives and the high dividend pay-out requirement act as a
“disciplinary tool,” not through the use of debt.