REIT Structure Research Articles

Comparing IPO and REITs Through Analysis of Invitation Homes Inc. and Sunac China Holdings Limited

Real estate companies have various channels for financing, with IPOs and the establishment of REITs being two significant options. Hence, this study aims to examine and compare the distinct effects resulting from utilizing these two financing channels on the company. This article focuses on the analysis of Invitation Homes Inc. and Sunac China Holdings Limited, investigating the changes in their asset structure, liability composition, and gearing ratio before and after financing, as well as to draw potential conclusions by examining the future implications of these changes. In 2017, Invitation Homes Inc. embarked on IPO and subsequently transitioned into a REIT. In 2010, Sunac China Holdings Limited completed IPO, but it did not adopt the structure of a REIT. The findings derived from the data analysis indicate that after Invitation Homes' transition into a REIT, its asset structure demonstrates improved optimization, its liability exhibits a greater inclination towards long-term loans, and its gearing ratio shows a reduction. Comparatively, for Sunac, following its IPO, various indicators of the company have significant improvement. However, it is noteworthy that the overall structure of the company has remained unchanged. By summarizing the data results, a conclusion can be made that after transitioning into a REIT, the company's assets undergo optimization for the specific REIT type it belongs to. Furthermore, the inherent stability and reliable return characteristics associated with REITs can significantly enhance investor confidence. This research offers reference points for companies in the process of preparing for their IPO and REIT structure.

Key investors and their strategies in the expansion of European student housing investment

ABSTRACT The aim of this paper is to understand the expansion process of investment into Purpose Built Student Accommodation (PBSA) in Europe by examining transformations in student housing investment landscapes and uncovering the profiles and strategies of key investors between 2010 and 2020. Using data from Real Capital Analytics, trends in capital structures and profiles of PBSA investors are identified. Investors driving these trends are scrutinised in terms of their investment timelines, locations, hold periods and strategies of portfolio diversification. Furthermore, in-depth interviews with property analysts, PBSA investors, and developers substantiate the quantitative analysis. The empirical results show that Private Equity entered the European PBSA market, starting with the UK, when the yield premium post-GFC justified the perceived risk. Equity funds typically hold their portfolios for around five years and trade counter-cyclically with institutions such as pension funds. PBSA specialists, mainly REITs, have accumulated substantial portfolios, and the REIT structure is well-suited to the steady income which student rents should provide, but their lack of diversification leaves them vulnerable to changes in student demographics and accommodation requirements.

Assessing the Potential of Real Estate Investment Trust in Financing Real Estate Development Projects

One of the crucial challenges facing real estate development in Nigeria is finance. The informal sources of finance are grossly inadequate, and access to formal finance instruments is difficult. This study aimed at investigating the potential of REIT structure as an option for financing real estate development in Nigeria. The specific objectives of the study were to; evaluate the external factors influencing the performance, future growth and development of N-REITs as it affects funding of real estate development projects; and appraise the future prospects of N-REITs as a viable option in financing real estate development projects. A survey research design was adopted for the study. A sample of 275 stakeholders comprising 221 real estate developers, and 54 senior staff members of Securities and Exchange Commission (SEC), all in Abuja, were conveniently selected for the study. Frequency, percentage, mean, and standard deviation were used to analyse the data. Findings show that equity capital (47.8%), commercial banks (26.2%), and mortgage banks (16.5%) are the major sources of real estate development finance in Nigeria. The key external factors influencing N-REITs performance were strategic property locations (4.43 ± 0.82), tax treatment (4.34 ± 0.78), and political risks (4.10 ± 1.12); while the most important prospects of N-REITs in financing real estate development projects include; increase in supply of real properties (4.1 ± 1.02), portfolio diversification (3.88 ± 1.10), and liquidity in real estate sector (3.69 ± 1.22). The study concludes that, in implementing high level sensitisation, transparency, infrastructure provision and review of regulations guiding REIT’s operation, N-REIT most probably becomes a viable option for financing real estate development.

The Cost of Debt for REITs: The Mortgage Puzzle

Established, low-leverage equity REITs with access to the public debt market rely on both non-recourse mortgages and full recourse bonds/notes as sources of long-term debt. Interest rates on secured, non-recourse debt (mortgages) include a costly strategic default option premium and do not benefit from a firm’s overall financial capacity. We find that use of non-recourse, mortgage debt is more likely for longer-term, smaller borrowings, and during recessionary periods, consistent with REITs valuing financial flexibility in their capital structure. The higher rates for property-level debt suggest a benefit to REITs versus single asset investors in terms of cost of capital. Since REITs also access debt at the corporate level, the spread between long-term non-recourse debt and long-term recourse debt implies a benefit to the REIT structure.

The Structure, Conduct and Performance of REITs in Emerging Markets: Empirical Evidence from Nigeria

Purpose: This study examines the correlations between the structure, conduct and performance of Real Estate Investment Trusts in Nigeria (N-REITs) with a view to providing information that will enhance and guide real estate investment decisions on N-REITs. Design/Approach: The study population consists of all three REIT companies in Nigeria, namely: Skye Shelter Fund, Union Home REIT and UACN Property Development Company (UPDC) REIT. Secondary data on dividends and share prices of N-REITs; Total Business Revenues (TBR) and Total Individual Expenditure (TIE) on conduct variables were sourced from periodicals of the respective companies covering the period from 2008 to 2016. The data series for the study were analyzed by means of the Kwiatkowski-Phillips-Schimidt-Shin (KPSS) unit root tests, Philip-Perron (PP) unit root tests, Granger Causality tests, and the Ordinary Least Square (OLS) regression. Findings: The study shows a Herfindahl Hischman Index (HHI) that ranged between 41.81% (recorded in 2010) and 100% recorded in 2008. This suggests a high concentration in the N-REITs industry. Similarly, the Granger Causality Test conducted reveals a bi-directional causal relationship between the structure, conduct and performance of N-REITs. Practical Implications: The study provides essential information (on the HHI, return performance and causal relationships) for stakeholders in the real estate sector regarding the influence of structure and conduct on the performance of N-REITs. This information will be valuable for equipping asset managers, insurance companies, pension funds and individual real estate investors in making informed investment decisions. Originality/Value: This study is unique as it is the first to draw a link between the structure, conduct and performance of REITs in an African emerging real estate market; something that has not been considered in previous studies.

Real Estate Investment Trusts in Nigeria and the Structure-Conduct-Performance Paradigm

This study examined the correlations among the structure, conduct and performance of Real Estate Investment Trusts in Nigeria (N-REITs) with a view to providing information that will enhance and guide real estate investment decisions. The study population consisted of all the three REIT companies in Nigeria namely: Skye Shelter Fund, Union Home REITs and UACN Property Development Company (UPDC) REITs. Secondary data on dividends and share prices of N-REITs; Total Business Revenues (TBR) and Total Individual Expenditure (TIE) on conduct variables were sourced from periodicals of the respective companies covering the period from 2008 to 2016. The data series for the study were analyzed by means of the Granger Causality tests, Kwiatkowski-Phillips-Schimidt-Shin (KPSS) unit root tests, Philip-Perron (PP) unit root tests and the ordinary least square regression (OLS). The study showed a Herfindahl Hischman Index (HHI) that ranged between 41.81% (recorded in 2010) and 100% recorded in 2008. This suggested a high concentration in the N-REITs industry. Similarly, the study found that the returns on investment in the industry ranged between -0.24% and 22.07%. The Granger Causality Test conducted revealed a bi-directional causal relationship among the structure, conduct and performance of N-REITs. The study provided essential information for stakeholders in the real estate sector regarding the influence of structure and conduct on the performance of N-REITs. This information will be valuable for equipping asset managers, insurance companies, pension funds as well as individual real estate investors in making informed investment decisions. This study is unique as it is the first to draw a link between the structure, conduct and performance of REITs in an African emerging real estate market which was hitherto not considered in previous studies.

On the Determinants of REIT Capital Structure: Evidence from around the World

Using a sample of REITs from twelve countries around the world, we examine the determinants of REIT capital structure. We investigate firm-specific and country-specific factors, and account for the unique legal requirements that REITs face in each country. Our results suggest that legal requirements are significant determinants of the capital structure of REITs. Specifically, we find that REITs have the highest book debt ratio in countries where they must pay out most of their operating income. This result implies that REITs prefer debt financing to equity financing. Additionally, we find that in countries with no payout requirement, but leverage restrictions, REITs have lower book leverage, which suggests that internal financing is preferred to external financing. Our findings also indicate that country-specific factors do not have significant impact on REIT leverage.

Financial Structure of Reits in Emerging Property Markets: An Assessment of N-Reits

Purpose: The study assessed the financial structure of REITs in emerging markets, using the Nigerian Real Estate Investment Trusts (N-REITs) to provide relevant information to guide both foreign and domestic investors. Design/Methodology/Approach: Secondary data obtained from the financial statement and annual reports of all the REITs companies in Nigeria namely Skye Shelter Fund, Union Homes REITs and UPDC REITs were used for the study. The study period covered from 2007 to 2016. Descriptive statistical tools such as frequencies, mean weighted scores and percentages were used in analyzing the data obtained for the study. Findings: The study revealed that UPDC REITs had the highest capital injected into the industry; hence it has the highest market capitalization. However the entire industry has a market capitalization of ₦41, 183, 684, 050 ($134.5 million) and a unit holders’ fund of ₦44,726,754,000 ($146.2 million) within the study period, this is considered quite small when put alongside REIT companies of other nations with substantial market capitalizations such as the US which had a market capitalization of about $977.9 billion and South Africa with market capitalization of about $21 billion. Similarly, the study revealed that the N-REITs has great potentials given that the direct property from which it derives its income is doing well in terms of return performance in the study area. Originality/Value: REITs in emerging property markets has not been sufficiently studied. This study provided empirical data from an emerging property market which can guide prospective investors from across the globe.

The performance of externally managed REITs in Asia

PurposeThe purpose of this paper is to examine the impact of free cash flow (FCF) on the agency costs and how these FCF and agency costs affect the performance of REITs in Asia. Unlike previous studies that focus on conventional public listed companies and non-regulated industry, the Asian REIT industry being a highly regulated industry provides a new context for further research.Design/methodology/approachThe samples for this study comprise REIT data from four major Asian REIT countries, namely, Japan, Singapore, Hong Kong and Malaysia. These countries are the leaders in Asian REITs which account for 94 percent of the total market capitalization of REITs in Asia. The study period is from 2002 to 2012 using panel data. This study employs GMM method which is more robust compared to previous studies that used pooled ordinary least squares (OLS) and other panel data methods.FindingsThe results indicate that FCF and agency costs persist over time in Asian REITs even though REITs are in a highly regulated industry. The findings also imply that REIT managers face substantial costs when they wish to adjust to the equilibrium level of agency costs, whereby the optimum level is always dynamic and not constant over time and moves with the changes in the determinants of agency costs. These agency costs persist over time and have significant impacts on the performance of REITs in Asia.Research limitations/implicationsThere are limited data in selling, general and administrative expenses in Asian REITs which render only limited use of selling, general and administrative expenses ratio in this empirical study on Asian REITs. For future research, researchers can embark on research studies on issues that might determine the speed of adjustment toward the equilibrium level of agency costs in Asian REITs.Practical implicationsFor REIT regulators in Asia, this empirical study helps to provide useful information for policy planning and formulation in REIT corporate governance; and to transform the inherent satellite structure of the externally managed REIT structure into internally managed REIT structure. For REIT managers and practitioners, this empirical study serves as a reflection for them which helps them to be more aware of the dynamism of FCF and agency costs in REITs; and alert them that these FCF and agency costs persist over time which can have significant impacts on the REIT performance, return on assets and return on equity, REIT value and REIT return, respectively in Asia. Thus, they could consider internalizing their REIT management structure for better and more efficient management in REITs in order to mitigate the agency costs that are persistent over time. As a whole, this empirical study contributes significant benefits to all level of the REIT industry in Asia.Social implicationsThis implies that the REITs in Asia should consider internally managed REIT structure since the agency costs persist over time and there are always dynamic and not constant over time and moves with the changes in the determinants of agency costs. The findings also imply that the regulators in Asian REITs should enforce absolute stringent corporate governance rules and regulations in order to govern the existing inherent satellite structure of the externally managed REITs in Asia.Originality/valueThis empirical study contributes significant benefits to all levels of the REIT industry in Asia and the current limited literature on Asian REITs by examining the impact of FCF and agency costs on the performance of REITs in Asia. This is the first research to embark on FCF and agency costs on REITs in Asia. Furthermore, this study employs GMM method which is more robust compared to previous studies that used pooled OLS and other panel data methods.

Impacts of corporate governance on Asian REITs performance

The results indicate that corporate governance not only helps to improve the return on assets (ROA) but also helps to gauge excess returns of REITs even though the Asian REIT industry is a highly regulated industry. The findings also found that REIT organization, remuneration matters and fees decrease the performance of Asian REITs. However, gearing and related party transactions are found to enhance the performance and accelerate the growth of REITs. Besides that, board matters, audit and fees have significant negative impacts on Tobin’s q. Also audit is found to reduce the returns of Asian REITs. However, interestingly, the ownership has significant positive impact on Tobin’s q. In addition, the block ownership also helps to curtail and mitigate excess returns of REITs in Asia. This also implies that unitholders are generally and minimally protected. The findings imply that the REIT managers face substantial cost in adjusting to equilibrium level whereby the optimum level is always dynamic and not constant, and it persists over time. This also implies that agency costs exist in the existing externally managed REIT structure in Asian REITs. This also implies that Asian REITs could consider redefining the REIT management structure such as the internally managed REIT structure. The findings of this study indicated the need for improvements, transformation and reform in the REIT regime in order to increase the transparency and disclosure of corporate governance of REITs that could facilitate continuous strategic development and growth of REITs in Asia.

An Overview of the Initial Performance of the South African REITs Market

South Africa implemented the REIT structure in 2013 with the intention of encouraging local and international investment. A year after implementation South African listed property was reported to have performed better than the UK, European, and Asian REITs. This study assesses the initial performance of South African REITs and their portfolio diversification benefits when paired with Shares, Bonds, T-Bills, and other Listed Property in a mixed-asset portfolio, over the period May 2013 to December 2015. The findings show that REITs are the second best performing asset, risk-adjusted. REITs are a return-enhancer when included in a mixed-asset portfolio, and tend to contribute at the higher end of the risk spectrum. This paper contributes to the few that exist on emerging markets, it is a study of the only major REIT market in Africa, and is significant as it discusses South African REITs from their implementation.

United States REIT Structure and Real Estate Assets

United States REIT Structure and Real Estate Assets

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

This paper studies how the presence of sponsor and external management affect leverage and debt maturity decisions in three major Asian-Pacific REIT markets: Australia, Japan and Singapore. Our empirical results indicate that sponsored REITs opt for higher levels of leverage and loans with longer maturity. On the contrary, externally managed REITs are associated with lower leverage and loans with shorter maturity. Our results are robust to the inclusion of other firm variables and to alternative specifications. Subsequent to the financial crisis, the impact of sponsorship on debt financing decisions has diminished, and borrowing of externally managed REITs is further constrained.

Information, uncertainty, and behavioral effects: Evidence from abnormal returns around real estate investment trust earnings announcements

In this study, we examine the influence of real estate market sentiment, market-level uncertainty, and REIT-level uncertainty on cumulative abnormal earnings announcement returns over the 1995–2009 time period. We first document the relative coverage of analysts' earnings forecasts on U.S. REITs, as well as REITs from several countries (i.e., Australia, Belgium, Canada, France, Hong Kong, Japan, the Netherlands, and UK). We show that coverage outside of the U.S. is limited, and we consequently focus our analysis on U.S. REITs. We find strong evidence that earnings announcements contain pricing relevant information, with positive (negative) earnings surprises relative to analysts' forecasts resulting in significantly positive (negative) abnormal returns around the announcement date. Consistent with the findings from the broader equity market literature, we find limited evidence of a pre-announcement drift in the cumulative abnormal returns. However, in sharp contrast to the existing equity literature, we find no evidence of a post-earnings announcement drift in our aggregate sample or when the sample is restricted to the largest negative surprises. We find evidence of a post-earnings announcement drift for only the largest positive earnings surprises. These results are consistent with REIT returns more quickly impounding information relative to the broader equity market, in part because of the parallel private real estate market and because of the U.S. REIT structure and information environment. Finally, in our conditional regression analysis of cumulative abnormal returns, we find that real estate investor sentiment, market-wide uncertainty, and firm-level uncertainty significantly affect the magnitude of abnormal announcement returns and also influence the effect of unexpected earnings on abnormal returns.

A Non-Traded REITs Primer

Despite the widespread reduction in U.S. real estate values over the past few years, the share prices of many non-traded REITs have remained at or near their initial offering levels, giving investors the illusory sense of low price volatility and preserved value. Somewhat belatedly, non-traded REITs have recently been the subject of increased regulatory scrutiny.In this paper we discuss the structure and features of non-traded REITs, highlighting the high fees and significant conflicts of interests that could lead to loss of shareholder value. We also examine the financial statements of non-traded REITs and highlight several aspects that may be cause for concern amongst investors. Finally, we discuss the potential unsuitability of non-traded REITs for retail investors, as well as the implications of our findings to the even less transparent private REIT market.

What is the Relationship Between REIT Governance and Earnings Management?

The empirical corporate finance literature claims that better corporate governance constrains earnings management, while others argue that the unique legal and reporting structure of REITs may reduce the need for such internal corporate governance. Using a sample of publicly traded REITs for the 2004–2008 time period, we examine the relationships amongst corporate governance, accruals earnings management, manipulation of Funds from Operations (FFO), and real earnings management. We find that corporate governance quality is unrelated to accruals earnings management and manipulation of FFO. At first glance, the findings suggest that managers need less internal oversight because of the more transparent reporting structure of REITs. However, we document that REITs engage in significant real activities manipulation for earnings management purposes. Our empirical findings further show that corporate governance characteristics, in particular board size, independence, number of board meetings and audit committee financial expertise, are essential for constraining such activities. Finally, by focusing on a subset of REITs that act in ways which previous research has identified as more susceptible to earnings management activities, we demonstrate that good corporate governance effectively reduces accruals earnings management and manipulation of FFO for these REITs. Overall, our findings indicate that, despite the unique legal and reporting structure, REITs engage in certain forms of earnings management, and that the ability for REITs to manipulate earnings is reduced when corporate governance is more effective.

How Do Institutional Factors Affect International Real Estate Returns?

Prior international real estate studies recognize the importance of country-specific factors for explaining real estate security returns. Using firm level observations from the FTSE NAREIT/EPRA Index for 2004–2006, we construct a set of multifactor multivariate statistical regression models to identify and pin-point country-specific institutional features that determine differences for excess real estate security returns. Our analyses indicate that the excess real estate returns (i.e., required risk premiums) are, in part, determined by the quality of a country’s legal system and the corporate governance environment, controlling for various country-specific macro-economic variables and firm-level characteristics. We further find that the impact of institutional factors on international real estate returns is more prominent in the Asia-Pacific Region, and recent development of the REIT structure across the world does not alter the importance of corporate governance and legal system quality for determining real estate returns.

Concentrated Ownership, No Dividend Payout Requirement and Capital Structure of REITs: Evidence from Turkey

This paper studies empirically the capital structure of Turkish REITs as they offer unique and so far untested angles. They do not have to pay out dividends, yet enjoy the exemption from paying corporate taxes since their legal foundation in 1998. Several financial meltdowns occurred in the last three decades, keeping investors with a doubt about Turkey’s financial and political stability. The last meltdown in 2001 is part of the sample period. Findings show that Turkish REITs employ little long-term debt in their capital structure. The legal requirement that a leader entrepreneur be present with a minimum equity position of 25% introduces the agency problem between the majority and minority owners. The leader entrepreneurs, as non-taxable institutional investors, appear to dictate Turkish REITs’ dividend and debt policies and deplete REITs’ dividends, causing them to go to the long-term debt market. The financial meltdown of 2001 exerts negative short-term and positive long-term influence on the debt ratios while inflation’s effect is negative. Firm size, REITs’ engagement in development and stock market development influence debt ratios positively; tangibility and a few firm, ownership, and country-specific determinants appear to have either mixed or no influence on Turkish REITs’ debt policies.

Effects of Regulatory and Market Constraints on the Capital Structure and Share Value of REITs: Evidence from the Italian and European Market

In contrast to the US experience, most international (European) REITs are subject to prudential regulation. This paper investigates the effects on capital structure and, consequently, on REITs’ share value of the major legal and market constraints (i.e. leverage limitations, market discount on NAV, tax controls) affecting non-US REITS. Italian market data are used for the empirical analysis. Our hypothesis is that in a constrained environment the effects on share price significantly depend on the adopted valuation perspective, i.e. if shares are valued following a NAV or a financial approach. The logic for this hypothesis is that the two valuation methodologies perceive leverage and implied financial risk differently. In particular, we argue that NAV valuation techniques incentivise REITs to maximize leverage regardless of financial theory indicating a contrasting impact of debt on shares’ market value. Differences in financial risk perception could also partially explain market prices discounts on NAV.

Institutional Monitoring and REIT CEO Compensation

Our objective in this paper is to investigate the relationship between institutional ownership and CEO compensation structure of REITs. Based on detailed analyses of data on institutional ownership, performance, CEO and board characteristics over the 10 year period 1998–2007, we find significant evidence that large institutions influence governance through CEO compensation—greater institutional ownership is associated with greater emphasis on incentive-based compensation (higher pay-performance sensitivity of CEO compensation), and higher cash and total compensation for CEOs. Further, we find that institutions are less active when managers are performing in a superior fashion. Two important conclusions emerge from the analysis. First, similar to unregulated firms, institutional owners do act as monitors in REITs. Broadly, this result suggests that governance is necessary for REITs. Second, institutional investors set a high pay-performance sensitivity for CEOs, but are willing to pay higher cash compensation to induce managers to take risk.