Financing Choice and Liability Structure of Real Estate Investment Trusts

Abstract

We conduct an analysis of public financial offerings of equity Real Estate Investment Trusts (REITs), with a focus on liability structure effects and whether or not firms target longer-run debt ratios. Our major findings are that (1) proceeds from equity offers are more likely to fund investment, whereas public debt offer proceeds are typically used to reconfigure the liability structure of the firm; (2) public debt issuers are often capital constrained and target total leverage ratios to retain an investment grade credit rating; and (3) the preoffer liability structure affects the issuance choice decision, in that firms with higher preoffer levels of secured (unsecured) debt tend to issue equity (public debt). Other notable findings are that the market for public REIT debt is integrated with the broader debt markets and that higher credit quality firms issue longer-maturing bonds. Copyright 2003 by the American Real Estate and Urban Economics Association

Real Estate Securitization and the Debt Maturity Structure: Evidence from J-REITs

“…As well, studies increasingly exploit data from the REIT market to substantiate the theoretical frameworks submitted by Williamson (1988) and Shleifer and Vishny (1992). For example, Brown and Riddiough (2003) and Giambona et al (2008) employ REIT data to explore the relationships among asset liquidation value, the debt-to-equity ratio, and liability structure.…”

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

“…Capozza and Seguin (2000) find that cost of debt and equity are higher for more diversified REITs. Brown and Riddiough (2003) find that REITs' financing choice depends on their pre-existing corporate structures, in which firms with higher existing debt (equity) issuing equity (debt) in subsequent offering. They also show that REITs target a long-run leverage ratio with the objective of maintaining an investment grade rating.…”

“…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.…”

Concentrated Ownership, No Dividend Payout Requirement and Capital Structure of REITs: Evidence from Turkey

“…Empirical evidence, however, clearly demonstrates the relevancy of the capital structure for REITs. For example, Brown and Riddiough (2003) report that, despite no obvious tax advantages, as long as REITs can attain a minimum investment-grade credit rating, they prefer to issue debt and choose equity only as a last resort and that higher credit quality firms issue longer maturing bonds. Also, Feng et al (2007) find REITs issue more debt than equity in nine out of 10 years after IPO 1 .…”