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REITs

Paper Session

Saturday, Jan. 7, 2017 3:15 PM – 5:15 PM

Sheraton Grand Chicago, Ontario
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Walter Boudry, Cornell University

Financial Flexibility and Investment: Evidence From At-the-Market (ATM) Equity Offerings

Benjamin Scheick
,
Villanova University
Shawn Howton
,
Villanova University
Shelly Howton
,
Villanova University

Abstract

This paper examines changes in firm investment around the establishment of a relatively new source of financial flexibility, at-the-market (ATM) equity programs. We document significant increases in the rate of investment in the quarters following an ATM program announcement. We also find that firms choosing to establish an ATM program generate greater long-run returns than a matched sample of their peers. This evidence is consistent with the belief that ATM programs represent a flexible financing option that allows managers to more efficiently match capital raising efforts to available investment opportunities. Conditioning on firm leverage, we also identify significant differences in investment policies following the establishment of an ATM program. In particular, we find that high leverage (i.e., more constrained) firms experience smaller changes in investment following the establishment of an ATM program. However, high leverage firms with an ATM program still generate greater long-run returns than similar firms without access to this additional source of financial flexibility. Taken together, our performance results suggest that access to an ATM program has the ability to provide shareholder value along multiple dimensions.

Homemade Equity Offerings Via Dividend Reinvestment and Stock Purchase Plans

Suyan Zheng
,
University of Cincinnati
Shaun Bond
,
University of Cincinnati

Abstract

This paper investigates equity issuances through Dividend Reinvestment and Stock Purchase Plans (DRSPPs). Using a unique sample collected from security registration filings, we show that firms can issue new shares through DRSPPs without using underwriters and consequently, save a large part of direct costs. This economical form of equity offering helps firms, especially those paying high dividends (i.e., Real Estate Investment Trusts), retain a substantial amount of cash flow from operations. The alternative source of capital is crucial for some financially constrained firms to maintain growth. The determinants of equity issuance via DRSPPs are different between REITs and industrial firms. Moreover, unlike seasoned equity offerings, equity offerings via DRSPPs can avoid negative stock market reactions around the issuance date. Overall, our findings expand upon an existing discovery of innovative strategic practices for equity financing and provide direct evidence showing that the Pecking Order still drives firms’ financing..

Corporate Diversification and the Cost of Debt: Evidence From REIT Bank Loans and Mortgages

Erkan Yonder
,
Ozyegin University
Irem Demirci
,
University of Mannheim
Piet Eichholtz
,
Maastricht University

Abstract

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.

The Determinants of Capital Structure of REITs: Evidence From Around the World

Milena Petrova
,
Syracuse University
Chinmoy Ghosh
,
University of Connecticut
Yunus Dogan
,
Amsterdam University

Abstract

We use a sample of 12 countries around to world to investigate the most important determinants of a REIT’s capital structure. We investigate firm-specific and country-specific factors, but also account for the unique legal requirements and for the different property types. The results illustrate that the legal requirements are significant determinants of the capital structure of a REIT. Specifically, the findings show that in countries where REITs have to payout most of their operating income but there are no restriction with regard to the leverage ratio exist, have the highest leverage ratio. The result also implies that REITs, prefer debt financing to equity financing. Additionally, we find that the country with no payout requirement has the lowest leverage ratio, which suggests that internal financing is preferred to external financing. Furthermore, we show that firm-specific factors may vary across countries and that no single model for all countries can be used to analyze the influence of capital structure determinants on the leverage ratio of REITs. We made a cross-country comparison of the firm-specific variables to examine whether the main legal regulations influence the impact of the firm-specific factors, like profitability and firm size. Unfortunately, we cannot conclude that the legal requirements have an indirect impact on the firm-specific variables. Lastly, our findings illustrate that in the majority of the countries, the country-specific determinants do not have a significant impact.
Discussant(s)
McKay Price
,
Lehigh University
Alan Crane
,
Rice University
Eva Steiner
,
Cornell University
Jamie Alcock
,
University of Sydney
JEL Classifications
  • G0 - General
  • G3 - Corporate Finance and Governance