REIT Capital Structure : An Examination of the Use of Unsecured Debt over Traditional Equity and

In the past few years, there have been several new developments in the way real estate investment trusts (REITs) access capital. There has been an increasing trend toward the use of unsecured debt, and REITs may also alter their dividend policy in order to generate capital internally to the extent they can. There has been little empirical research into the market's reaction to unsecured debt and the apparent changes in dividend policy in REITs. This thesis explores the impact of unsecured debt on REIT capital structure and changes in dividend policy. We have been able to identify what appears to be a regime shift during the study period. It appears that the market is finding unsecured debt and higher retained earnings more acceptable in REITs. The first part of this thesis explores the stock-price reaction to the addition of unsecured debt in the capital structure of REITs. Based on an event study of unsecured debt offerings, negative average abnormal returns were observed in a sample of initial public offerings during a five-day period leading up to and including the offering date. Positive abnormal average returns were observed in a sample of secondary offerings of public debt during the same five-day period. There appears to be a trend in the abnormal returns lessening in their severity over time. Through a regression analysis, we have identified the future growth impounded in the stock price as a major determinant of the negative abnormal return in 1PO issues. We have also examined the determinants in the pricing of unsecured debt and found further evidence of a regime shift as different variables explain the pricing of recent issues of unsecured debt than the pricing of earlier issues. The next section of the thesis examines the debt-equity choice in REIT capital structure. Liquidity, growth expectations, leverage, property focus, performance, ownership structure and other aspects of REIT capital structure have been introduced into a logistic regression model as explanatory variables. Aspects of leverage, growth expectations, size and age appear significant in the debt-equity choice. Finally, the thesis includes a study of the dividend policy of REITs. First, we have identified a long-term trend toward lowering payout ratios. In examining the characteristics that explain the dividend payout ratio, we have found the effects of size, leverage and liquidity to have significantly changed over the study period. This reinforces our findings of a regime shift in REITs. Thesis Supervisor: Timothy J. Riddiough Title: Assistant Professor of Real Estate Finance Table of