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
Index Introduction Literature review Empirical analysis Sample Methodology Results Robustnesstests Conclusions
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)
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
Index Introduction Literature review Empirical analysis Sample Methodology Results Robustnesstest Conclusions
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).
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).
Index Introduction Literature review Empirical analysis Sample Methodology Results Robustnesstests Conclusions
Sample (/2) Standard and Poor s North America REIT Index 73 REITs Source: Thompson Reuters Year Number of REITs 2004 4 2005 8 2006 2 2007 24 2008 24 2009 26 200 38 20 46 202 55 203 73 Overall (mln $) 3540.32 (00%) 28258.72 (00%) 64674.67 (00%) 48478.70 (00%) 3038.86 (00%) 57080.87 (00%) 576.24 (00%) 47073.42 (00%) 5339.5 (00%) 60202.33 (00%) Value of new shares issued (mln $) 8999.53 (25.6%) 860.88 (28.88%) 23374.75 (36.4%) 92.87 (39.44%) 8355.58 (27.72%) 9796.7 (34.68%) 23527.73 (40.84%) 9452.94 (4.32%) 26389.44 (5.40%) 376.99 (52.76%) Value of new bond issued (mln $) 043.43 (28.87%) 6569.58 (23.25%) 407.58 (2.67%) 0637.04 (2.94%) 7563.24 (25.09%) 0595.09 (8.56%) 52.87 (9.98%) 8008.09 (7.0%) 765.64 (4.83%) 6082.2 (0.0%) Value of new loan issued (mln $) 5997.36 (45.52%) 3528.26 (47.87%) 27282.34 (42.8%) 879.79 (38.6%) 4220.04 (47.8%) 26689.6 (46.76%) 22570.64 (39.8%) 962.39 (4.66%) 7334.07 (33.76%) 22358.4 (37.4%)
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) 2004 2005 2006 2007 2008 2009 200 20 202 203 O 766 5538 265 8974.3 238 539 0866 7826 507 4754 N 833 2623 20 047 6038 4477 2662 627 372 7008 O 40 68 234 289 22 52 94 74 288 254 N 30 3 229 282 26 254 264 242 227 274 n 2% 38% 49% 54% 60% 62% 46% 52% 49% 52% $ 20% 32% 48% 53% 72% 73% 54% 60% 43% 54% O 6870 2957 729 4020 4604 6077 3386 3444 3493 3463 N 3272 363 6799 667 2959 459 827 4564 422 269 O 63 48 8 83 27 84 47 72 84 73 N 204 72 29 288 2 226 325 240 243 262 n 27% 5% 44% 5% 45% 38% 52% 48% 47% 33% $ 32% 55% 49% 62% 39% 43% 7% 57% 54% 43% O 94 835 9027 8338 649 0426 5837 800 962 289 N 4802 576 8255 0382 7729 6263 6734 782 5372 069 O 243 269 328 278 309 262 293.27 30.54 307 282 N 343 323 285 59 429 542 336.69 37.99 283 346 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
Benchmark model Methodology(/4) Multiple nested Logitmodels (Huang and Ritter (2009)
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)
Methodology(3/4) Multiple nested Logit model (old vs new)
Methodology(4/4) Leveragechangefor oldand new consortium!"!" $ % & % Speedof adjustment for only oldconsortiumand mixed solutions
Results(/5) Dependent variables: Explanatory variables [Hyp: Base Scenario = Passive] Pure Pure Pure Multiple Equity Issue Bond Issue Loan Issue Issue Constant -2.46*** -6.7684*** -2.486*** -5.8755*** Price Earning ratio 0.002-0.003 0.0023*** 0.00 REIT s performance 0.8536*** 0.3049 0.534**.3*** Market performance -.0967*** -0.7596* -0.6343* -.085*** Interest rate -3.8998** 9.6773-0.0033 27.5673*** Term structure -6.0262-5.0773* -7.0-0.2629 Size 0.002* 0.4469*** 0.03 0.369*** Growth opportunities -0.077* -0.074-0.033-0.0 Deviation from target leverage -0.3426-0.2379 0.3665-0.8594** Observations 477 7 249 379
Results(2/5) Dependent variables: Explanatory variables [Hyp: Base Scenario = Passive] Equity Issue Bond Issue Old New Old New Constant -2.8625 *** -3.367 *** -9.3248 *** -5.792 *** Price Earning ratio 0.00 0.004-0.008-0.0007 REIT s performance 0.6809 ***.0437 *** 0.2429 0.3955 Market performance -.2254 *** -0.929 ** -0.6988-0.8465* Interest rate -8.6667 ** -8.9885 5.6375 2.5 Term structure -.455 -.0493-26.6257 ** -4.388 Size 0.09 * 0.0874 0.7083 *** 0.952 Growth opportunities -0.0223 ** -0.0099-0.072-0.096 Deviation from target leverage -0.5878-0.028 0.4666-0.856 Observations 25 202 73 7
Results(3/5) Dependent variables: Explanatory variables [Hyp: Base Scenario = Passive] Loan Issue Multiple issue Old New Old New Constant -3.9235 *** -2.703 *** -9.4985 *** -5.5096 *** Price Earning ratio 0.0030 ** 0.008* 0.008 0.0007 REIT s performance 0.9549 ** 0.3084.287 ***.63 *** Market performance -.2536 ** -0.2789 -.3863 *** -0.9873 *** Interest rate -.6933-9.2728 9.7966 30.0342 *** Term structure -3.507-3.9437 0.6348-3.3037 Size 0.0836-0.0253 0.5938 *** 0.237 *** Growth opportunities -0.022-0.043 0.009-0.042 Deviation from target leverage 0.2242 0.448 -.059-0.7873 * Observations 82 39 79 258
Results(4/5) Dependent variables: Explanatory variables [Hyp: Base Scenario = leverage neutral] Leverage increase Leverage decrease Old New Old New Constant -0.7632.2724.6888 2.09 * Price Earning ratio -0.0006 0.000 0.0009-0.0004 REIT s performance 0.97 ** 0.906 **.59 *** 0.5822 * Market performance -.065-0.3438 -.3984 ** -0.5945 Interest rate -32.74 ** -30.807 ** -77.542 *** -44.464 *** Term structure 69.3882 *** 75.776 *** 92.595 *** 00.35 *** Size 0.0677-0.795-0.0705-0.2267 * Growth opportunities -0.057-0.0438-0.0804-0.0274 Deviation from target leverage -.5299 -.822 * -0.709 0.7 Observations 27 94 93 289
Results(5/5) Explanatory variables Dependent Variable:!" $ ~ 0%,0% $ ~ 0%,0% $ ~ 0%,20% $ ~ 0%,25% $ ~ 0%,50%!" 0.8404 *** 0.9442 *** 0.9707 *** 0.9753 *** 0.988 *** Overall Sample Only Existing Consortium New & Existing Consortium $ % 0.596 *** 0.0530 *** 0.0258 *** 0.0205 *** 0.0063 *** N 59 59 59 59 59 R 2 0.906 0.909 0.909 0.90 0.93 Exclusively Existing vs New & Existing consortium!"!" 0.8754 *** 0.9536 *** 0.9729 *** 0.9788 *** 0.9907 ***!" $ % 0.256 *** 0.0447 *** 0.0239 *** 0.072 *** 0.0045 ** N 2640 2640 2640 2640 2640 R 2 0.8703 0.8705 0.8708 0.870 0.875!" 0.870 *** 0.930 *** 0.9690 *** 0.9724 *** 0.9856 ***!" $ % 0.830 *** 0.0758 *** 0.0272 *** 0.0232 *** 0.0082 *** N 2479 2479 2479 2479 2479 R 2 0.9307 0.9300 0.8705 0.8703 0.870
Robustnesstests Consortium structure IPO effect
Index Introduction Literature review Empirical analysis Sample Methodology Results Robustnesstests Conclusions
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.
Contacts Lucia Gibilaro University of Bergamo e-mail: lucia.gibilaro@unibg.it Gianluca Mattarocci University of Rome Tor Vergata e-mail: gianluca.mattarocci@uniroma2.it