An Analysis of the Financing Decisions of REITs: The Role of Market Timing and Target Leverage

Ooi, Joseph T. L.; Ong, Seow Eng; Li, Lin

doi:10.1007/s11146-008-9127-1

Cited by 89 publications

(47 citation statements)

References 47 publications

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“…These results are consistent with Brown and Riddiough (2003) that proceeds from public debt are often used to reconfigure liability structure whereas bank loans and equity offerings are more often used to fund acquisitions and investment. The findings are also consistent with Ooi, Ong and Li's (2010) assessment of the market timing of REIT capital market activities. Bank debt can be conceptualized as a form of “bridge financing.”…”

Section: Resultssupporting

confidence: 86%

“…They show that REITs that issue public debt are likely to target a longer‐run leverage ratio to keep an investment‐grade credit rating. Ooi, Ong and Li (2010) further investigate targeted debt ratios and the timing of public offerings in REITs and find that REITs time market activities within a general targeted debt ratio environment. Although researchers have probed different areas in REIT capital structure, there exists little research on the details of debt structure and how the use of bank debt and the development of banking relationships affect the dynamics of REIT capital structure 12 .…”

Section: Literature and Theoretical Backgroundmentioning

confidence: 99%

“…Seasoned equity issuance tends to fluctuate from year to year, but access to public debt and equity markets is available throughout the period. It is likely that bank debt provides financial liquidity for property acquisitions and allows for a firm's capital structure to be adjusted when capital market conditions are more beneficial to the firm as shown by Ooi, Ong and Li (2010). Another notable fact from Table 2 is that mortgage financing has become less important to REITs.…”

Section: Data and Preliminary Analysismentioning

confidence: 99%

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Banking Relationships and REIT Capital Structure

Hardin

2010

Real Estate Economics

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This article examines the evolution of real estate investment trust (REIT) capital structure in the new REIT era with a focus on the effects of banking relationships on REIT capital structure. Using a unique sample of REITs from 1992 to 2003, we find that, after controlling for firm characteristics, REITs with banking relationships are more likely to obtain long-term debt ratings and subsequently issue public debt. Moreover, REITs with banking relationships tend to use less secured debt and have lower leverage. These findings support the notion that banking relationships facilitate REITs' access to the public debt markets and help explain why REITs shift from traditional mortgage financing to bank debt and public capital market financing. The results also support the proposition that firm leverage should be positively related to the amount of a firm's secured debt. Copyright (c) 2010 American Real Estate and Urban Economics Association.

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Section: Resultssupporting

confidence: 86%

Section: Literature and Theoretical Backgroundmentioning

confidence: 99%

Section: Data and Preliminary Analysismentioning

confidence: 99%

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Banking Relationships and REIT Capital Structure

Hardin

2010

Real Estate Economics

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“…Similarly, see Ghosh et al (1999) and Buttimer et al (2005) for the role of the pecking order theory in explaining capital structure decisions for REITs. 4 Relatedly, Ooi et al (2009) find that REIT financing decisions are mainly influenced by an attempt to time favorable market conditions. 5 Mainly for modeling reasons, these theoretical papers model the behavior of single product line firms.…”

Section: Theoretical Background and Empirical Predictionsmentioning

confidence: 99%

Property Segment and REIT Capital Structure

Ertugrul

Giambona

2010

J Real Estate Finan Econ

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“…Empirically, Feng, Ghosh, and Sirmans (2007) find little support for market timing in REIT leverage choices. However, Harrison, Panasian, andSeiler (2011), Ooi, Ong, andLi (2010) and Boudry, Kallberg, and Liu (2010) find evidence consistent with some broader implications of this theory. Their results suggest a significant influence of the relative cost of debt, market-wide default risk premia and firm-level default risk on REIT leverage levels.…”

Section: Related Literaturementioning

confidence: 84%

REIT Financing Choices: Preparation Matters

2016

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Sun, Titman, and Twite (2014) find that risky capital structure characteristics, such as high leverage, a high share of debt due in the near future and a high share of variable-rate debt, significantly reduce the cumulative total returns of US REITs over the 2007-2009 financial crisis. In this paper we show that preparing ahead of the crisis significantly improved the cumulative return over the crisis period even after controlling for the levels of the relevant capital structure characteristics at the start of the crisis. Specifically, we document that REITs which reduced leverage and increased maturity prior to the crisis fared better during the crisis. For instance, a one standard deviation reduction in leverage generated a five percent higher cumulative return during the crisis. We further find that US REITs with the highest capital structure risk (high leverage and short maturities) were more likely to prepare for the crisis ahead by reducing leverage and extending maturity. This effect is especially large for REITs with strong governance. We also document that none of our findings hold for European REITs. This suggests that since European firms did not experience or observe the levels of market excess that occurred in the US before the crisis, whether or not they prepared for the crisis had no impact on their returns during the crisis. (2014) find that risky capital structure characteristics, such as high leverage, a high share of debt due in the near future and a high share of variable-rate debt, significantly reduce the cumulative total returns of US REITs over the 2007-2009 financial crisis. In this paper we show that preparing ahead of the crisis significantly improved the cumulative return over the crisis period even after controlling for the levels of the relevant capital structure characteristics at the start of the crisis. Specifically, we document that REITs which reduced leverage and increased maturity prior to the crisis fared better during the crisis. For instance, a one standard deviation reduction in leverage generated a five percent higher cumulative return during the crisis. We further find that US REITs with the highest capital structure risk (high leverage and short maturities) were more likely to prepare for the crisis ahead by reducing leverage and extending maturity. This effect is especially large for REITs with strong governance. We also document that none of our findings hold for European REITs. This suggests that since European firms did not experience or observe the levels of market excess that occurred in the US before the crisis, whether or not they prepared for the crisis had no impact on their returns during the crisis. WORK IN PROGRESS -DO NOT CITE OR QUOTE WITHOUT PERMISSION

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An Analysis of the Financing Decisions of REITs: The Role of Market Timing and Target Leverage

Abstract: Capital structure, Market timing, Target leverage, REITs,

Cited by 89 publications

References 47 publications

Banking Relationships and REIT Capital Structure

Banking Relationships and REIT Capital Structure

Property Segment and REIT Capital Structure

REIT Financing Choices: Preparation Matters

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