A reexamination of corporate sell-offs of real estate assets

We examine major sales of real property by public U.S. Real Estate Investment Trusts (REITs) 1992-2002. We find that abnormal shareholder returns are significantly positive, a result that is consistent with findings for conventional firms that sell off real estate. Because REITs do not pay taxes, this finding supports the view that abnormal returns in real estate sell-offs by all types of firms are derived largely from asset allocation efficiencies and do not result exclusively from tax benefits. Shareholder returns are lower in sell-offs motivated by a desire to reduce long-term debt, as is consistent with financial theory regarding the information content of leverage decisions. Returns are inversely related to the firm's operating performance prior to the sell-off announcement, further supporting the case that improved asset efficiencies create value in real estate sell-offs.We study a sample of real estate property sell-offs 1992-2002, in which the seller is an Equity Real Estate Investment Trust (EREIT). We define a property sell-off as a transaction in which a Real Estate Investment Trust (REIT) sells one or more properties to the same buyer in the same transaction, when the total price is greater than $20 million. Sell-offs must be distinguished from liquidations or mergers. In a sell-off, the selling REIT continues to exist after the sale, with no clear plans to terminate operations in the foreseeable future.The last decade has been a decade of rapid growth for REITs. As a result, a substantial body of literature has developed analyzing transactions in which REITs obtain real assets. In contrast, the literature regarding transactions in which REITs dispose off property in sell-offs is very thin.We measure abnormal returns for these transactions, finding that announcement window returns are significantly positive. We test for wealth effects created by management's decision to apply sale proceeds to the reduction of longterm debt, and we find significant results different from results reported for conventional firms. We find that abnormal returns are inversely related to the firm's operating performance prior to the announcement. We also find that firms

Section: Sell-offs Of Real Estatementioning

confidence: 99%

Value Creation in REIT Property Sell‐Offs

Campbell

Petrova

Sirmans

2006

“…Owers and Rogers (1986) find positive abnormal returns for corporate sellers of real estate, but they find ambiguous and inconclusive results for a small sample of 16 buyers. Glascock, Davidson and Sirmans (1991) study a sample of 51 real estate portfolio purchases during 1971-1986, and Booth, Glascock and Sarkar (1996 study a sample of 94 such transactions during 1980-1989. Both studies find that returns to acquirers are insignificantly different from zero. McIntosh, Ott and Liang (1995) study a sample of 54 major property acquisitions during in which all of the acquirers are REITs.…”

Section: The Literature On Real Estate Portfolio Transactionsmentioning

confidence: 99%

Wealth Effects of Diversification and Financial Deal Structuring: Evidence from REIT Property Portfolio Acquisitions

Campbell

Petrova

Sirmans

2003

This study examines the strategic characteristics and shareholder wealth effects of a popular vehicle for Real Estate Investment Trust growth in the 1990s: the acquisition of a portfolio of properties from a single seller. We examine a sample of 209 REIT portfolio acquisitions during 1995-2001. We observe a wide variety of financing strategies and find an array of different categories of sellers. Contrary to results reported in real estate transactions of this sort in the past, we find that announcement-period shareholder returns are significantly positive in the aggregate. We present evidence that excess returns to acquirers result from (1) wealth benefits received when companies reconfirm their geographical focus in the acquisition, (2) positive information conveyed by the use of project-specific private debt and (3) a positive signal sent to the market when transactions are financed by stock privately placed with financial institutions. Copyright 2003 by the American Real Estate and Urban Economics Association

“…The empirical evidence, however, remains inconclusive. In the real estate literature, while some studies have reported positive abnormal gains (Allen and Sirmans 1987, Campbell, Ghosh and Sirmans 2001, Li, Elayan and Meyer 2001, Campbell, Petrova and Sirmans 2003), others have reported returns to REIT acquirers that are insignificantly different from zero (Glascock, Davidson and Sirmans 1991, Pierzak 2001, Booth, Glascock and Sarkar 1996). In a competitive market where there are numerous buyers in the market and the product is unique, the economic gain is captured mostly by the vendor.…”

mentioning

confidence: 99%

The Wealth Effects of Property Acquisitions: Evidence from Japanese and Singaporean REITs

Ooi

Ong

Neo

2011

This article examines the wealth effects of 228 property acquisition announcements made by REITs publicly traded in Singapore and Japan, which are the two largest REIT markets in Asia. Adopting an aggressive growth-byacquisition strategy, the newly listed REITs acquired a number of properties within a short time period. Despite their regular activities, we observe the acquisition announcements are associated with a significantly positive abnormal increase in shareholder wealth averaging 0.38% in a 5-day window around the event date. Controlling for the method of payment, buyer's acquisition strategy and seller's relationship with the acquiring REIT, the regression results show that the likely sources of economic gains associated with acquisitions are economies of scale and better management by acquiring firms. We also find strong evidence that the market reacts less favorably to acquisitions involving a portfolio of properties as opposed to a single property and weaker evidence that it reacts less favorably to mixed-use acquisitions. These findings suggest the presence of premiums on transparency and corporate focus.Although merger and acquisition (M&A) decisions consume massive corporate resources and expose shareholders to high uncertainty, they are one of the quickest ways for a firm to grow. Within the corporate finance literature, a number of theories have been advanced to explain why M&As take place. From the shareholders' perspective, the main concern is whether the acquisitions create or destroy value. To the extent that managers adopt shareholder wealth maximization as the goal of corporate investment decisions, new acquisitions should be expected to produce a rate of return that at least equals their cost of capital. In this context, the net present value (NPV) is the best criteria for evaluating new ventures. If an acquisition is a positive NPV venture and to the extent that the positive NPV represents economic gains to the shareholders, one should expect to see an increase in the stock price of the acquiring firm.