Property Dispositions and REIT Credit Ratings

This paper investigates whether and how property dispositions affect credit ratings of real estate investment trusts (REITs). We use an instrument variable to control the potential endogeneity problem associated with firm’s decision to divest assets and find that property dispositions have a positive effect on REIT corporate credit ratings. We further investigate the underlying channels for this positive effect on credit ratings and test hypotheses related to three potential mechanisms: (i) utilization of proceeds, (ii) efficient asset allocation, and (iii) property focus. These mechanisms link the outcome of real estate asset divestitures to the component of REIT credit rating criteria, namely, business position assessment and financial risk profile. Our results show that the positive disposition effect on credit ratings is mainly due to the increase in geographic focus level of REIT property portfolio after the dispositions. Overall, our study provides new evidence on the wealth effects of asset transactions from creditors’ perspective.