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The Journal of Real Estate Finance and Economics
Published in: The Journal of Real Estate Finance and Economics 3/2020

18-09-2018

The Wealth Effects of REIT Property Acquisitions and Dispositions: the Creditors’ Perspective

Authors: Qing Li, David C. Ling, Masaki Mori, Seow Eng Ong

Published in: The Journal of Real Estate Finance and Economics | Issue 3/2020

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Abstract

Prior studies of REIT property transaction activity focus on shareholder wealth effects. This study examines the effects of property acquisitions, dispositions, and overall trading activity on unsecured bond spreads, credit rating changes, and rating outlooks using a sample of the listed equity REITs in the U.S. We find that active property trading in general decreases creditors’ wealth, but this negative impact is significantly mitigated for REITs with positive NAV premiums and when REITs use sale proceeds to pay down debt after the transactions. We also find that property transactions followed by an increased geographic focus significantly increase bond yield spreads and decrease the probability of credit rating upgrades.
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Footnotes
1
Equity REITs take ownership positions in commercial real estate. In contrast, mortgage REITs own mortgages or mortgage-backed securities.
 
2
REITs must distribute 90% of annual taxable income to remain a qualified REIT. REITs must distribute all of their taxable income in the form of dividends to completely avoid taxation at the entity level. These dividend payments constitute approximately 70% of free cash flow for the typical REIT.
 
3
According to S&P’s, a rating outlook assesses the potential direction of a long-term credit rating over the intermediate term (typically 6 months to 2 years). In determining a rating outlook, consideration is given to any changes in economic and/or fundamental business conditions. An outlook is not necessarily a precursor of a rating change. Positive means that a rating may be raised. Negative means that a rating may be lowered.
 
4
Our weighting approach is consistent with Bessembinder et al. (2008).
 
5
A REIT is subject under Sec. 857(b)(6)(A) to a 100% tax on “net income derived from prohibited transactions,” which generally includes net income from the sale or other disposition of property described in Sec. 1221(a)(1)—i.e., property primarily held by the REIT for sale to customers in the ordinary course of a trade of business (so-called dealer property)—and not pursuant to a foreclosure. Sec. 857(b)(6)(C) provides a safe harbor under which a prohibited transaction does not include the sale of a real estate asset if certain requirements are met.
 
6
FFO, as defined under the National Association of Real Estate Investment Trusts (NAREIT) standards, consists of net earnings computed in accordance with GAAP, excluding gains (or losses) from sales of real estate assets and impairment, plus depreciation and amortization of real estate assets.
 
7
See, for example, Löffler (2005) and Cheng and Neamtiu (2009).
 
8
According to S&P’s rating criteria for U.S. REITs and real estate operating companies (REOCs), a REIT rating analysis has two major components. The first is business position assessment, which involves the assessment and benchmarking of the company along the following key dimensions: market position, asset quality, diversification and stability of operations, and operating strategy and management review. The second is financial risk profile, which refers to four elements: financial policy, profitability, cash flow protection, and capital structure and financial flexibility.
 
9
A detailed description of Green Street Advisors NAV pricing model can be found in https://​www.​greenstreetadvis​ors.​com/
 
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Metadata
Title
The Wealth Effects of REIT Property Acquisitions and Dispositions: the Creditors’ Perspective
Authors
Qing Li
David C. Ling
Masaki Mori
Seow Eng Ong
Publication date
18-09-2018
Publisher
Springer US
Published in
The Journal of Real Estate Finance and Economics / Issue 3/2020
Print ISSN: 0895-5638
Electronic ISSN: 1573-045X
DOI
https://doi.org/10.1007/s11146-018-9677-9

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