the capital structure of north american reits and reocs a panel data regression

The Capital Structure of North American REITs and REOCs

A Panel Data Regression

Nicolai C. StrieweNico B. Rottke

Introduction

Motivation

Larger dataset for REITs than those of past studies.

Extension of sample by REOCs

Including Canadian REITs and REOCs

More efficient methodology, as data records have improved

2Nicolai Striewe

Real Estate Management Institute, 20.04.2023

Introduction

Contribution to literature

More determinants of leverage included

Dynamic dimension (panel approach)

Differentiation between REITs and REOCs

Detailed robustness tests

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Introduction

Overview of results

Application of pecking order theory for REITs/REOCs concerning growth opportunities

Application of trade-off theory concerning size and asset tangibility

Concerning profitability only REITs follow the pecking order relationship

Compensation style and directors` stake in company influences the choice of leverage

REOCs prefer higher leverage as they profit from tax-shield (trade -off theory)

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Data

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Database: SNL Financial

418 REITs(355) and REOCs (63)

Over 41 periods: quarterly from Q4, 1998 to Q4, 2008

Data preparation:

Hybrid REITs and mortgage REITs excluded (19 units).

Missing data: 148 units (missing data or incomplete time series)

Units for analysis: 251 units.

Results

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coefficient std. error t-ratio p-valueConstant -28.366 4.410 -6.432 0.000 ***Market to book ratio 0.161 0.022 7.450 0.000 ***ln(assets) 4.464 0.297 15.050 0.000 ***Real estate to assets ratio 0.141 0.012 12.090 0.000 ***REOC dummy 5.984 2.688 2.227 0.026 **External mgmt dummy 4.940 2.556 1.932 0.053 *Return on assets -0.107 0.013 -8.180 0.000 ***Insider ownership 0.063 0.012 5.165 0.000 ***Residential dummy 14.639 2.720 5.382 0.000 ***Shopping dummy 9.354 2.409 3.882 0.000 ***Office dummy -0.442 2.693 -0.164 0.870Hotel dummy -3.227 3.134 -1.030 0.303Diversified dummy 3.372 3.100 1.088 0.277Age 0.000 0.000 -1.909 0.056 *Canada dummy 8.666 7.579 1.143 0.253Bonus to total compensation -0.344 0.205 -1.676 0.094 *

Hausman test 0.689342

Preferred Model

Notes: The table shows the results of the panel data regression using random effects with debt to assets ratio as dependent variable. The time-series are from 1 to 41 periods long for 251 cross-sectional units. Time dummies are not displayed. They are jointly significant with a p-value of 0.0000 according to Wald test. Breusch-Pagan test identifies the variance of the unit-specific error to be significantly different from zero (p=0.0000). * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level.

Sum squared resid 1263975 S.E. of regression 15.33344No. of observations 5430 Akaike criterion 45113.6'Within' variance 41.3928 'Between' variance 152.76

Time Trend of Leverage

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Coefficients of time dummies in preferred model

1999

1999

2000

2000

2001

2001

2002

2002

2003

2003

2004

2004

2005

2005

2006

2006

2007

2007

2008

2008

0

1

2

3

4

5

6

7

Sensitivity Analysis

Impact of endogeneity Random effects model assumes endogeneity of all independent variables Endogenous variables: market to book ratio, ln(Assets), real estate to assets and return

on assets. Testing robustness of results by lagging (t-1) the endogenous variables.

Alternative dependent variable Welch (2007): The opposite of financial debt is not equity Alternative proxy for leverage: liabilities to assets ratio

Alternative independent variables Alternative proxy for growth opportunities: ln(asset growth) Alternative proxy for size: ln(rental revenue) Alternative proxy for profitability: return on sales

Special cases of residential and shopping REITs/REOCs Check changing influence of determinants for residential and shopping REITs/REOCs

respectively.

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9

Trade-off theory (TO)

Pecking order theory (PO)

REITs (previous research)

Corporate Gover-nance

This Study

Comment

Profitability + - - -(REIT)+(REOC)

REITs are tax-exempt & follow PO.REOCs benefit from tax-shield (TO).

Growth - + +/- +1 Information gap is larger for growth REITs/REOCs (PO).

Tangibility + - + +2 Asset tangibility reduces risk of financial distress (TO)

Operating risk

- - + Not covered in this study

Size + - + +2 Size reduces risk of financial distress(TO)

External Management

+ +2 Compensation by assets under management incentivizes to lever

Insider Ownership

+ + Directors’ with stake in company concentrate their ownership and reduce

risk of hostile takeover with debt.

REOC + REOCs benefit from tax shield.

Findings

1 Lower influence for residential and shopping REITs/REOCs 2 Higher influence for residential and shopping REITs/REOCs

Discussion

Nicolai C. Striewe

Real Estate Management InstituteEUROPEAN BUSINESS SCHOOLSöhnleinstraße 8D65201 Wiesbaden, GermanyE-Mail: [email protected]

Backup

Nicolai C. Striewe

Real Estate Management InstituteEUROPEAN BUSINESS SCHOOLSöhnleinstraße 8D65201 Wiesbaden, GermanyE-Mail: [email protected]

Variable definitions and basic descriptives

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Measure Description Abbreviation Mean Min MaxLeverage Total debt divided by total assets Debt to assets 50.89 0 96.33

Alternative Liabilities divided by total assets Liabilities to assets 56.923 0 99.76

Growth opportunities

Market to book ratio. Market capitalization divided by shareholders’ equity.

Market to book 1.82 0 276.86

Alternative Natural logarithm of asset growth ln(asset growth) 2.207 -4.61 6.73

Size Natural logarithm of total assets ln(assets) 14.04 5.25 17.17

Alternative Natural logarithm of Rental Revenue ln(rental revenue) 10.55 2.20 13.74

Asset Tangibility

Property Investment divided by Total Assets Real estate to assets 79.55 0 110.73

REOC Dummy variable for REOC status. (1=REOC, 0=REIT)

REOC dummy 0.13 0 1

Management structure

Dummy variable for external management. (1=externally managed, 0=internally managed)

External mgmt dummy

0.15 0 1

Profitability Net income divided by total average assets. Return on assets 3.11 -177.59 177.35

Alternative Return on Sales Return on sales 0.11 -122.50 15.58

Insider ownership

Percent ownership in shares of directors. Insider ownerships 15.59 0 100.00

Notes: Basic descriptives from 251 observations of the preferred model. Variance Inflation Factors (VIF) all below 2.4 for the variables.

Dataset

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Full Sample Reduced Sample(Data Preparation)

Property Focus Number Percentage Number Percentage

Residential 65 16% 36 14%

Shopping 59 15% 43 17%

Diversified 55 14% 27 11%

Hotel 54 14% 42 17%

Office 53 13% 36 14%

Storage 26 7% 7 3%

Industrial 24 6% 16 6%

Health Care 23 6% 15 6%

Speciality 22 6% 17 7%

Retail 17 4% 12 5%

Not Available 1 0% 0 0%

Total 399 100% 251 100%

REITs 337 84% 207 82%

REOCs 62 16% 44 18%

Sensitivity Analysis – Model specification

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Preferred Model Model 2 (alt. dep. Var) Model 3coefficient p-value coefficient p-value coefficient p-value

Constant -28.366 0.000 *** -10.662 0.015 ** -15.977 0.001 ***Market to book 0.161 0.000 *** 0.181 0.000 ***Market to book (t-1) 0.142 0.000 ***ln(Assets) 4.464 0.000 *** 3.838 0.000 ***ln(Assets) (t-1) 3.625 0.000 ***Real estate to assets 0.141 0.000 *** 0.085 0.000 ***Real estate to assets (t-1) 0.148 0.000 ***REOC dummy 5.984 0.026 ** 11.245 0.000 *** 5.413 0.046 **External mgmt dummy 4.940 0.053 * 0.720 0.782 2.980 0.252Return on assets -0.107 0.000 *** -0.135 0.000 ***Return on assets (t-1) -0.110 0.000 ***Insider Ownership 0.063 0.000 *** 0.057 0.000 *** 0.047 0.000 ***Residential dummy 14.639 0.000 *** 11.993 0.000 *** 12.915 0.000 ***Shopping dummy 9.354 0.000 *** 7.755 0.002 *** 9.239 0.000 ***Office dummy -0.442 0.870 -1.802 0.512 -0.137 0.960Hotel dummy -3.227 0.303 0.748 0.815 -2.120 0.502Diversified dummy 3.372 0.277 1.240 0.695 3.921 0.209Age 0.000 0.056 0.000 0.756 0.000 0.018 **Canada dummy 8.666 0.253 3.239 0.675 9.944 0.192Bonus to total compensation -0.344 0.094 * -0.143 0.479 -0.369 0.080 *No. of observations 5430 5430 5211Cross-sectional units 251 251 248S.E. of regression 15.333 15.159 15.121Akaike criterion 45113.60 44989.53 43151.050'Within' variance 43.393 40.005 40.922'Between' variance 152.76 159.541 153.927Wald (joint): time dummies (χ2) 139.638 0.000 *** 190.722 0.000 *** 138.122 0.000 ***Hausman test (χ2) 40.798 0.689 137.287 0.000 *** 13.911 1.000

Notes: The table shows the results of the panel data regressions using random effects with debt to assets ratio as dependent variable. In model 2 the alternative dependent variable liabilities to assets is used instead. Model 3 tests the impact of endogeneity by lagging the affected variables by lagging them (t-1). The time-series are from 1 to 41 periods. Time dummies are not displayed. They are jointly significant with a p-value of 0.000 according to Wald test. * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level.

Sensitivity Analysis – Proxy robustness

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Preferred Model Model 4 Model 5 Model 6 Model 7coefficient p-value coefficient p-value Coefficient p-value coefficient p-value coefficient p-value

Constant -28.366 0.000 *** 2.567 0.646 17.573 0.000 *** -22.716 0.000 *** -17.802 0.000 ***Market to book 0.161 0.000 *** 0.129 0.000 *** 0.155 0.000 *** 0.153 0.000 *** ln(asset growth) 0.191 0.028 **ln(assets) 4.464 0.000 *** 2.153 0.000 *** 3.913 0.000 *** 3.618 0.000 *** ln(rental revenue) 1.889 0.000 ***Real estate to assets 0.141 0.000 *** 0.151 0.000 *** 0.092 0.000 *** 0.150 0.000 *** 0.142 0.000 ***REOC dummy 5.984 0.026 ** 5.468 0.063 * 2.839 0.343 6.775 0.018 ** 6.059 0.031 **External mgmt dummy 4.940 0.053 * 2.106 0.455 1.010 0.703 4.310 0.104 3.897 0.133Return on assets -0.107 0.000 *** -0.138 0.000 *** -0.213 0.000 *** Return on sales 0.116 0.001 *** -1.636 0.000 *** *REOC dummy 1.825 0.000 ***Insider Ownership 0.063 0.000 *** 0.046 0.002 *** 0.083 0.000 *** 0.069 0.000 *** 0.067 0.000 ***Residential dummy 14.639 0.000 *** 12.819 0.000 *** 12.965 0.000 *** 14.749 0.000 *** 14.755 0.000 ***Shopping dummy 9.354 0.000 *** 10.045 0.000 *** 7.861 0.001 *** 9.523 0.000 *** 9.451 0.000 ***Office dummy -0.442 0.870 0.870 0.765 -0.226 0.932 -0.324 0.908 -0.339 0.902Hotel dummy -3.227 0.303 -1.388 0.684 1.580 0.666 -2.669 0.419 -2.622 0.417Diversified dummy 3.372 0.277 3.627 0.282 2.903 0.348 3.240 0.316 3.282 0.299Age 0.000 0.056 0.000 0.033 ** 0.000 0.312 0.000 0.033 ** 0.000 0.029 **Canada dummy 8.666 0.253 9.312 0.254 6.958 0.340 8.395 0.283 8.348 0.276Bonus to total

compensation -0.344 0.094 * -0.458 0.109 -0.180 0.405 -0.199 0.336 -0.150 0.462No. of observations 5430 3555 4733 5372 5372Cross-sectional units 251 248 221 248 248S.E. of regression 15.333 15.034 14.346 15.326 15.138Akaike criterion 45113.60 29414.390 38699.870 44627.380 44495.600'Within' variance 43.393 42.759 37.266 41.753 41.063'Between' variance 152.76 179.785 140.866 163.261 156.360Wald (joint): time dummies (χ2) 139.638 0.000 *** 145.879 0.000 *** 247.071 0.000 *** 175.046 0.000 *** 178.145 0.000 ***Hausman test (χ2) 40.798 0.689 28.233 0.982 14.778 1.000 145.98 1.000 9.977 1.000

Notes: The table shows the results of the panel data regressions using random effects with debt to assets ratio as dependent variable. The impact of an alternative proxy is tested for growth opportunities in model 4, for size in model 5, for profitability in model 6 and in model 7 with an additional interaction variable to differentiate the impact of the alternative proxy for profitability on REOCs. The time-series are from 1 to 41 periods. Time dummies are not displayed. * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level.

Sensitivity Analysis – Property type sensitivity

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Preferred Model Model 8 Model 9 Model 10 Model 11coefficient p-value coefficient p-value coefficient p-value coefficient p-value coefficient p-value

Constant -28.366 0.000 *** -26.934 0.000 *** -22.821 0.000 *** -19.826 0.000 *** -23.124 0.000 ***Market to book 0.161 0.000 *** 0.971 0.000 *** 0.160 0.000 *** 0.159 0.000 *** 0.162 0.000 *** *Residential dummy -0.909 0.000 *** *Shopping dummy -0.693 0.000 ***ln(assets) 4.464 0.000 *** 4.642 0.000 *** 4.101 0.000 *** 4.092 0.000 *** 4.485 0.000 *** *Residential dummy 1.491 0.000 *** *Shopping dummy 0.378 0.010 **Real estate to assets 0.141 0.000 *** 0.148 0.000 *** 0.137 0.000 *** 0.099 0.000 *** 0.140 0.000 *** *Residential dummy 0.251 0.000 *** *Shopping dummy 0.055 0.004 ***REOC dummy 5.984 0.026 ** 0.331 0.882 4.065 0.077 * 2.944 0.181 -1.667 0.472 *Residential dummy 31.981 0.000 *** *Shopping dummy -2.644 0.840External mgmt dummy 4.940 0.053 * 0.876 0.693 3.646 0.106 3.436 0.118 0.055 0.980Return on assets -0.107 0.000 *** -0.110 0.000 *** -0.114 0.000 *** -0.127 0.000 *** -0.106 0.000 ***Insider Ownership 0.063 0.000 *** 0.072 0.000 *** 0.066 0.000 *** 0.070 0.000 *** 0.065 0.000 ***Age 0.000 0.056 0.000 0.198 0.000 0.178 0.000 0.154 0.000 0.148Canada dummy 8.666 0.253 18.339 0.017 ** 6.338 0.412 4.604 0.542 7.220 0.364Bonus to total compensation -0.344 0.094 * -0.382 0.061 * -0.350 0.087 * -0.302 0.138 -0.371 0.072 *No. of observations 5430 5430 5430 5430 5430Cross-sectional units 251 251 251 251 251S.E. of regression 15.333 16.096 15.934 15.830 15.762Akaike criterion 45113.60 45637.430 45528.180 45457.000 45409.650'Within' variance 43.393 40.330 39.177 40.455 41.393'Between' variance 152.76 161.928 152.839 152.609 160.569Wald (joint): time dummies (χ2) 139.638 0.000 *** 137.918 0.000 *** 136.382 0.000 *** 143.867 0.000 *** 134.338 0.000 ***Hausman test (χ2) 40.798 0.689 38.977 0.820 319.225 0.000 *** 87.530 0,000 *** 42.479 0.621

Notes: The table shows the results of the panel data regressions using random effects with debt to assets ratio as dependent variable. The changing impact of growth opportunities for the special cases of residential and shopping REITs/REOCs is measured in model 8, of size in model 9, of asset tangibility in model 10 and of REOCs in model 11. The time-series are from 1 to 41 periods. Time dummies are not displayed. * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level.

Sensitivity Analysis – Property type sensitivity (cont`d)

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Preferred Model Model 12 Model 13 Model 14coefficient p-value Coefficient p-value coefficient p-value coefficient p-value

Constant -28.366 0.000 *** -22.411 0.000 *** -9.778 0.024 ** -22.686 0.000 ***Market to book 0.161 0.000 *** 0.161 0.000 *** 0.159 0.000 *** 0.166 0.000 ***ln(assets) 4.464 0.000 *** 4.411 0.000 *** 3.532 0.000 *** 4.400 0.000 ***Real estate to assets 0.141 0.000 *** 0.142 0.000 *** 0.133 0.000 *** 0.143 0.000 ***REOC dummy 5.984 0.026 ** 0.510 0.815 0.515 0.815 2.481 0.262External mgmt dummy 4.940 0.053 * -2.800 0.224 -0.066 0.976 1.102 0.614 *Residential dummy 39.472 0.000 *** *Shopping dummy 11.470 0.135Return on assets -0.107 0.000 *** -0.107 0.000 *** -0.173 0.000 *** -0.104 0.000 *** *Residential dummy 0.278 0.000 *** *Shopping dummy -0.127 0.001 ***Insider Ownership 0.063 0.000 *** 0.065 0.000 *** 0.066 0.000 *** 0.016 0.309 *Residential dummy 0.051 0.248 *Shopping dummy 0.116 0.000 ***Age 0.000 0.056 0.000 0.090 * 0.000 0.152 0.000 0.185Canada dummy 8.666 0.253 17.568 0.019 ** 16.759 0.027 ** 16.496 0.030 **Bonus to total compensation -0.344 0.094 * -0.352 0.088 * -0.324 0.111 -0.342 0.096 *No. of observations 5430 5430 5430 5430Cross-sectional units 251 251 251 251S.E. of regression 15.333 15.588 15.558 15.867Akaike criterion 45113.60 45289.320 45268.780 45481.820'Within' variance 43.393 41.393 40.600 41.195'Between' variance 152.76 154.607 158.613 156.534Wald (joint): time dummies (χ2) 139.638 0.000 *** 138.765 0.000 *** 155.335 0.000 *** 135.704 0.000 ***Hausman test (χ2) 40.798 0.689 56.032 0.147 31.459 0.969 103.426 0.000 ***

Notes: The table shows the results of the panel data regressions using random effects with debt to assets ratio as dependent variable. The changing impact of externally managed REITs/REOCs for the special cases of residential and shopping REITs/REOCs is measured in model 12, of profitability in model 13 and of insider ownership in model 14. The time-series are from 1 to 41 periods. Time dummies are not displayed. * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level.

Variance Inflation FactorsMinimum possible value = 1.0

Values > 10.0 may indicate a collinearity problem

Market to book 1.012ln(assets) 1.383Real estate to assets 1.44REOC dummy 2.34External mgmt dummy 1.657Return on assets 1.059Insider ownership 1.319Residential dummy 1.607Shopping dummy 1.831Office dummy 1.602Hotel dummy 2.398Diversified dummy 1.499Age 1.117Canada dummy 1.044Bonus to total compensation 1.286

VIF(j) = 1/(1 - R(j)^2), where R(j) is the multiple correlation coefficient

between variable j and the other independent variables

Properties of matrix X'X:

1-norm = 7.7927016e+011 Determinant = 7.8064223e+065

Reciprocal condition number = 2.2254893e-011

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the capital structure of north american reits and reocs a panel data regression

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