Can Bank Lines of Credit Protect REITs against a Credit Crisis?

Abstract

In a tight credit market, the primary concern of most real estate investment trusts (REITs) is the ability to access capital and maintain adequate liquidity. Bank lines of credit or loan commitments, which are legally binding contracts arranged to provide debt at the call of the borrowers under prespecified terms, have been theorized to provide insurance protection against a credit crisis. This article examines whether bank lines of credit can indeed provide some insurance for REITs and allow them to access credit during bad times. Covering three credit crunch events, both the origination and utilization patterns of commitment loans by 275 REITs publicly traded between 1992 and 2007 are analyzed. We find that bank lines of credit insulated REITs from credit rationing at both the broad market level as well as at the firm level. However, the insurance value is qualified in the case of smaller and risky firms which may not get to extend their credit limit or draw down on their existing credit lines in a credit crisis.

Financial Flexibility and At‐the‐Market (ATM) Equity Offerings: Evidence from Real Estate Investment Trusts

“…Several prior studies have documented how access to lines of credit have become an important financing source for REITs, particularly when facing both internal and external financing constraints ( e.g ., Hardin et al . , Hardin and Hill , Ooi, Wong and Ong ). In a similar way, the availability of an ATM program may also reduce the need for firms to hold cash as they have an alternate way to obtain funds.…”

“…A growing literature has identified access to bank lines of credit as an important source of flexible financing that may serve to reduce or replace the need for firms to hold cash on hand (e.g., Avery and Berger 1991, Martin and Santomero1997, Flannery and Lockhart 2009, Sufi 2009). Several prior studies have documented how access to lines of credit have become an important financing source for REITs, particularly when facing both internal and external financing constraints (e.g., Hardin et al 2009, Hardin and Hill 2011, Ooi, Wong and Ong 2012. In a similar way, the availability of an ATM program may also reduce the need for firms to hold cash as they have an alternate way to obtain funds.…”

“…We extend this literature by examining ATM programs as a new source of financial flexibility. A number of recent empirical studies also suggest that financial flexibility is most valuable for firms that face higher external financing constraints (Faulkender and Wang 2006), are cash poor and/or hold relatively illiquid assets (Ang and Smedema 2011), and have valuable investment opportunities (Campello et al 2011, Ooi, Wong andOng 2012). Therefore, to better isolate the importance of ATM offerings as a source of financial flexibility, we focus our analysis on the public commercial real estate market (i.e., Real Estate Investment Trusts (REITs)).…”

REIT Dividend Policies and Dividend Announcement Effects During the 2008–2009 Liquidity Crisis

“…16 16 Ooi, Wong and Ong (2012) and Hardin and Hill (2011) provide a more detailed evaluation of line of credit usage with implications from the liquidity crisis. …”

Financial Flexibility and Investment: Evidence from REIT At‐the‐Market (ATM) Equity Offerings

“…In fact, ATM fundraising by U.S. equity REITs increased by 318% annually in 2014 with firms raising over $1.73 billion in the fourth quarter alone. 3 A number of recent empirical studies suggest that financial flexibility is most valuable for firms that face higher external financing constraints (Faulkender and Wang 2006), are cash poor and/or hold relatively illiquid assets (Ang and Smedema 2011) and have valuable investment opportunities (Campello et al 2010, Ooi, Wong andOng 2012). Furthermore, Duchin, Ozbas and Sensoy (2010) and Harrison, Luchtenberg and Seiler (2011) find that firms with significant financial constraints or ones operating in industries in which external financing is costly benefit the most from maintaining financial flexibility.…”