Finance, Investment and Investment Performance: Evidence from the REIT Sector

Abstract

We examine financing, investment and investment performance in the equity REIT sector over the 1981-1999 time period. Analysis reveals significant differences between the old- REIT (1981REIT ( -1992 and new- REIT (1993REIT ( -1999 eras. The sector experienced rapid growth in the new-REIT era, primarily from firmlevel investment as opposed to new entry. Firm-level investment was largely financed by equity and long-term debt, with little reliance on retained earnings. Financing policy stabilized in the new-REIT era, and capital structures became more complex. We find that REITs provided returns over and above their cost of capital, where most of the value-added investment occurred in the new-REIT era by newer firms. Finally, we present novel evidence on IPO activity and new firm investment-investment performance relations that is consistent with Tobin's q theory of investment.Do real estate investment trusts (REITs) destroy or generate value for the shareholders? What is the relation between investment and investment performance? How do REITs finance their investments? Do financial policies of REITs mimic or depart substantially from those adopted by most firms in the U.S. stock market? How do performance relations change depending on the time period? The answers to these questions are still largely unknown, more than four decades after Congress first introduced REITs to American investors.To address these questions, we measure investment, investment performance and the financing of investment in the equity REIT sector over a sample period from 1981 through 1999. We are particularly interested in identifying differences between the relatively sleepy, slow-growth "old-REIT" era of the 1980s and early 1990s and the dynamic, high-growth "new-REIT" era that began around 1992-1993.

Do Investors Infer Vocal Cues from CEOs During Quarterly REIT Conference Calls?

“…However, in the long-run they are subject to an exogenous capital constraint and must turn to the capital markets for continued growth. For example, Ott et al (2005) find that 84 % of REIT investment is financed by equity and long-term debt. See Hardin and Hill (2008), Hardin et al (2009), and An et al (2012) for discussions of REIT cash holdings and revolving debt utilization.…”

“…Current regulations dictate that REITs must payout a minimum of 90 % of taxable income to shareholders as dividends, although they often payout in excess of 100 % (Wang et al 1993;Bradley et al 1998;Chan et al 2003;Riddiough and Wu 2009;and others). This distributional requirement forces REITs to make frequent trips to the capital markets in order to take advantage of growth opportunities (Ott et al 2005;Hartzell et al 2008; and others). 7 As real estate is a capital intensive business, REITs have a compelling incentive to ensure their disclosures are not misleading or distorted.…”

Understanding the determinants of firm growth in young REITs

“…7 But REITs still hold 1.57% of its total assets in cash and its cash holdings are directly related to cost of finance and growth opportunities (Hardin et al 2009). However, Ott et al (2005) argue that internally generated capital would be insufficient to fund an aggressive growth strategy and REITs have to necessarily go to external sources for finance. Hence REITs are better off by disbursing cash and reducing the agency cost associated with free cash flow.…”

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

“…Given that the Asian-Pacific equity markets are relatively young and these REITs are known to pursue aggressive acquisition strategies (Ooi et al 2011), one vital puzzle is how these REITs can sustain their growth through financing. This is especially important for entities such as REITs because they are characterized by high dividend distribution which limits their abilities to use internal fund to satisfy their capital needs, and are consequently heavily reliant on long-term debt financing for property acquisition (Ott et al 2005). …”