Financing Decisions of REITs and the Switching Effect

Transcription

1 Financing Decisions of REITs and the Switching Effect By Lucia Gibilaro University of Bergamo Department of Management, Economics and Quantitative Methods and Gianluca Mattarocci University of Rome Tor Vergata Department of Economics and Finance

2 Index Introduction Literature review Empirical analysis Sample Methodology Results Robustnesstests Conclusions

3 Introduction(/2) In an asymmetric information scenario, REITs have to evaluate the convenience of establishing long term relationship with few intermediaries ortopromoteaturnoveramongthem. Lenders reputation and the value or relationship lending (i.a. Harrison, Luchtenberg and Seiler, 20) Multiple financing solutions and the credit rationing (Ooi, Wong and Ong, 202)

4 Introduction(2/2) Independently with respect to the financing instrument selected (share, bond or loan) there is no evidence on the main determinants of a switching strategy in the REIT industry. The paper wants to shed light on the issue of the switching effect for the REITs industry

5 Index Introduction Literature review Empirical analysis Sample Methodology Results Robustnesstest Conclusions

6 Market timing Literaturereview(/2) The market timing theory assumes that REITs debt policy is affected by the trend of the stock market (i.a. Ghosh, Nag and Sirmans, 997), the bond market (i.a. Chen and Tzang, 200) and the market evaluation of the future REITs performance. If due to market trend or earning dynamics, the ratio between price and earnings decrease the demand of shares in the market increases rapidly because the risk assumed in the investment is lower (Ambrose and Bian, 200).

7 Literaturereview(2/2) REITs specific features Larger REITs are better able to access external financing despite frictions in public debt and equity markets and normally are characterized by a stronger and longer relationship with their lender(hardin and Wu, 2009). REITs with high book to market value are assumed to have growth opportunities that can influence the convenience of stock issuing(hardin and Hill, 20). Every firm has its own optimal level of leverage on the basis of the business characteristics and its market reputation(hovakimian, Opier and Titman, 200).

8 Index Introduction Literature review Empirical analysis Sample Methodology Results Robustnesstests Conclusions

9 Sample (/2) Standard and Poor s North America REIT Index 73 REITs Source: Thompson Reuters Year Number of REITs Overall (mln $) (00%) (00%) (00%) (00%) (00%) (00%) (00%) (00%) (00%) (00%) Value of new shares issued (mln $) (25.6%) (28.88%) (36.4%) (39.44%) (27.72%) (34.68%) (40.84%) (4.32%) (5.40%) (52.76%) Value of new bond issued (mln $) (28.87%) (23.25%) (2.67%) (2.94%) (25.09%) (8.56%) (9.98%) (7.0%) (4.83%) (0.0%) Value of new loan issued (mln $) (45.52%) (47.87%) (42.8%) (38.6%) (47.8%) (46.76%) (39.8%) (4.66%) (33.76%) (37.4%)

10 Shares Issued Bonds Issued Loans requested Overall (mln $) Avgsize (mln $) Switching Prob. Overall (mln $) Avgsize (mln $) Switching Prob. Overall (mln $) Avgsize (mln $) Switching Prob. Sample (2/2) O N O N n 2% 38% 49% 54% 60% 62% 46% 52% 49% 52% $ 20% 32% 48% 53% 72% 73% 54% 60% 43% 54% O N O N n 27% 5% 44% 5% 45% 38% 52% 48% 47% 33% $ 32% 55% 49% 62% 39% 43% 7% 57% 54% 43% O N O N n 23% 34% 33% 40% 46% 43% 27.03% 35.59% 33% 44% $ 30% 38% 30% 56% 54% 6% 29.83% 39.83% 3% 50% Old vsnew on the basis of the consortium reference entity

11 Benchmark model Methodology(/4) Multiple nested Logitmodels (Huang and Ritter (2009)

12 Methodology(2/4) Benchmark model Explaning factors Ooi, Ong and Li (200) Type Variable Details Price Earning ratio Moving-average annualized P/E ratio REIT s performance Yearly appreciation of REIT s share price Market Yearly appreciation of the Standard and Poor s North America Market performance REIT Index timing Interest rate 0-Years U.S. Government bond yield Term structure Difference in the yield of 0-Years and -Year U.S. Government bond Size The natural logarithm of total assets Growth opportunities Moving-average annualized P/BV ratio REITs features Deviation from target leverage Leverage ratio minus the target-leverage ratio of the REIT, as determined through a cross-sectional regression of leverage, firm s features and industry dummies following the approach proposed by Flannery and Rangan(2006)

13 Methodology(3/4) Multiple nested Logit model (old vs new)

14 Methodology(4/4) Leveragechangefor oldand new consortium!"!" $ % & % Speedof adjustment for only oldconsortiumand mixed solutions

15 Results(/5) Dependent variables: Explanatory variables [Hyp: Base Scenario = Passive] Pure Pure Pure Multiple Equity Issue Bond Issue Loan Issue Issue Constant -2.46*** *** *** *** Price Earning ratio *** 0.00 REIT s performance *** **.3*** Market performance *** * * -.085*** Interest rate ** *** Term structure * Size 0.002* *** *** Growth opportunities * Deviation from target leverage ** Observations

16 Results(2/5) Dependent variables: Explanatory variables [Hyp: Base Scenario = Passive] Equity Issue Bond Issue Old New Old New Constant *** *** *** *** Price Earning ratio REIT s performance ***.0437 *** Market performance *** ** * Interest rate ** Term structure ** Size 0.09 * *** Growth opportunities ** Deviation from target leverage Observations

17 Results(3/5) Dependent variables: Explanatory variables [Hyp: Base Scenario = Passive] Loan Issue Multiple issue Old New Old New Constant *** *** *** *** Price Earning ratio ** 0.008* REIT s performance ** ***.63 *** Market performance ** *** *** Interest rate *** Term structure Size *** *** Growth opportunities Deviation from target leverage * Observations

18 Results(4/5) Dependent variables: Explanatory variables [Hyp: Base Scenario = leverage neutral] Leverage increase Leverage decrease Old New Old New Constant * Price Earning ratio REIT s performance 0.97 ** **.59 *** * Market performance ** Interest rate ** ** *** *** Term structure *** *** *** *** Size * Growth opportunities Deviation from target leverage * Observations

19 Results(5/5) Explanatory variables Dependent Variable:!" $ ~ 0%,0% $ ~ 0%,0% $ ~ 0%,20% $ ~ 0%,25% $ ~ 0%,50%!" *** *** *** *** *** Overall Sample Only Existing Consortium New & Existing Consortium $ % *** *** *** *** *** N R Exclusively Existing vs New & Existing consortium!"!" *** *** *** *** ***!" $ % *** *** *** *** ** N R !" *** *** *** *** ***!" $ % *** *** *** *** *** N R

20 Robustnesstests Consortium structure IPO effect

21 Index Introduction Literature review Empirical analysis Sample Methodology Results Robustnesstests Conclusions

22 Conclusion The main reason behind the switching strategy is a market timing or an extraordinary loss or revenue obtained by REITs shares. The choice of hiring a new financing consortium is more feasible when the REIT is planning to increase the leverage and the current level of leverage is far from the target leverage.

23 Contacts Lucia Gibilaro University of Bergamo Gianluca Mattarocci University of Rome Tor Vergata