The Role of Debt in REIT Equity Issuance at a Discount to Net Asset Values

Abstract

Empirical evidence shows that REIT managers time their equity offerings based on the value of share prices relative to the value of their underlying assets in the property market. Managers’ equity issuance decisions are strongly impacted by net asset value (NAV) premiums. In this paper, we examine the impact of overall leverage and near-term debt maturities on the equity offering behavior of REITs. For a sample of 170 REITs involved in at least one seasoned equity offering from 2001 to 2017, our results indicate that higher leverage and near-term debt maturities have a significant positive impact on a REIT’s decision to issue equity at a discount-to-NAV. Furthermore, we document that REIT managers who issue equity at a discount-to-NAV become less active in property acquisitions. Taken together, our results suggest that the underlying motivation for REIT firms issuing equity below their underlying asset values is to avoid a possible default on debt repayments. Higher leverage constrains a REIT’s ability to time the market in their equity issuance decisions.