An Analysis of REIT Security Issuance Decisions

Abstract

This article tests the ability of traditional capital structure theories to explain the issuance decisions of real estate investment trusts (REITs). For issuances made between 1997 and 2006, we find strong support for the market timing theory of capital structure. Controlling for past returns and growth, a REIT is more likely to issue equity when its price-to-net asset value ratio is high. This suggests that REITs issue equity in public markets when the cost of equity capital is lower in the public market than in the private market. Consistent with traditional market timing, REITs are more likely to issue equity after experiencing large price increases. We also find some support for REITs following the trade-off theory of capital structure. REITs are less likely to issue debt when proxies for expected bankruptcy costs are high. Copyright (c) 2009 American Real Estate and Urban Economics Association.

The Role of Sponsor and External Management on the Capital Structure of Asian-Pacific REITs: The Case of Australia, Japan, and Singapore

“…Feng et al (2007) show that REITs with historically high market-to-book ratios tend to have persistently high leverage ratios, and they attribute the findings to the existence of the special regulatory environment of U.S. REITs, with limited tax-shield benefits on debt interest payments given their tax-exempt status. Boudry et al (2010) show that REITs are less likely to issue debt when bankruptcy costs are high and interpret this finding as support of the trade-off theory (e.g., Kraus and Litzenberger 1973), in which the benefits of debt are offset by the risk and cost of debt.…”

“…Prior research on financing and capital structure decisions of REITs focuses predominantly on the U.S. market (e.g., Howe and Shilling 1988;Capozza and Seguin 2000;Brown and Riddiough 2003;Feng et al 2007;Boudry et al 2010). For instance, Howe and Shilling (1988) examine the tax-exempt status of U.S. REITs and argue firms should use little or no debt in their capital structure.…”

The Impact of Misvaluation in the REIT Sector

“…We argue that one of the answers that appear to be reasonable is the mandatory high payout for REITs. With high payouts, REITs rely on external capital to finance their activities (Ooi et al, 2010), so they always issue securities to cover a shortage of internal sources of capital (Boudry et al, 2010). Because companies can raise debt more quickly than raise equity (Rapp et al, 2014), REITs should prioritize the choice of debt issues, and our finding appears to imply that overvalued REITs generally have easier access to debt.…”

“…What we can find so far is : Boudry et al (2010) use a multinomial logistic model with four categories, namely common equity, preferred equity, public debt and private debt, to examine the determinants of REIT security issuance decisions. They find that market timing behavior has a strong influence on security choices of REITs.…”

“…Moreover, REITs rely mainly on external financings for their investment or expansion activities because REITs have to distribute at least 90% of taxable income as dividends to shareholders (Feng et al, 2007;Ooi et al, 2010), and they always issue securities to cover a shortage of internal sources of capital (Boudry et al, 2010). Hence, misvaluation is more likely to be a significant problem for REITs.…”