Determinants and Dynamics of Dividend Payouts by REITs by

1. Determinants and Dynamics of Dividend Payouts by REITs by Milena Petrova, Syracuse UniversityAndrew Spieler, Hofstra University

2. Background and Motivation • Large body of theoretical & empirical research on corporate dividend policy, most of which is focused on the relationship between firm value and level, and form of payout and dividend signaling. • However, empirical research on the determinants of dividend payouts and signaling effects for REITs is limited. • Excess dividends examined by Hardin and Hill (REE, 2008) • Handful of dividend policy studies (Wang, Erickson and Gao, 1993; Bradley, Capozza and Seguin, 1998; Ghosh and Sirmans, 2006) • Recent REIT earnings management (Edelstein, Liu and Tsang, WP; Ambrose and Bian, WP)

3. Why REITs? • US REITs are required by law to distribute at least 90% of their taxable income to maintain status • REITs attract investors for their high dividend yields and any unexpected increase/decrease in dividends may have significant effects on price • Historically, REITs have been known to pay on average significantly more than 90% of TI • On average REITs pay more than 120% of pretax income • What determines excess dividends and does the investor identity matter? • More recently during 2007-2008 REITs have lost more than 50% of their market valuation • This begs the question whether dividend payout by REITs and signaling effects change in times of crisis?

4. What Questions Do We Address? • Are there any patterns in the dividend payout policy by REITs over time and by property focus? • What characteristics are associated with higher dividend payout? • We compare REITs with publicly traded companies and examine whether the unique restrictions, REITs face, have impact on their dividend payout policy • What REIT characteristics are associated with higher excess dividend payout? • Excess dividend – dividend in excess to the 90% (95% prior to 2001) of the taxable income • Specifically we test whether institutional investors impact REIT managers’ decisions to pay dividends over and above the mandatory requirement by IRS.

5. What Questions Do We Address? 4. Do shareholder wealth effects differ for REITs and non-REIT publicly traded property firms? • Distinguish between irregular and regular dividends; dividend increases and decreases 5. What are the determinants of dividend announcement wealth effects and do they differ for REITs and non-REITs?

6. Data & Sources • Dividend announcements by REITs and publicly traded property firms acquired from SNL for the years of 1990-2008 • Final announcement sample includes: 10171 dividend announcements by REITs and 735 announcements by property firms • Obtained annual dividend payment data and additional accounting data from COMPUSTAT • Final annual data sample consists of 1877 REIT years and 138 property firm years • Institutional ownership data from Thomson Financial • REIT type and property concentration data from CRSP Ziman

7. Summary Statistics

8. Sample Distribution over Time and by Property Focus

9. Dividend Payout Statistics

10. Dividend Payout by REITs over Time

11. Regression Analysis • We estimate determinants of dividend payouts by elected REIT status and use robust clustered standard errors to account for potential heteroscedasticity and lack of independence between same firm observations • We include year fixed effects and property focus fixed effects • We use the same methodology to examine determinants of excess dividends

12. Determinants of Dividend Payout by REITs

13. Determinants of Dividend Payout by Non-REITs

14. Determinants of Excess Dividends

15. Event Study • Use standard event study methodology to examine whether stock price announcement effects differ for REITs vs. non-REITs and for dividend changes • Use standard regression analysis to determine whether factors driving REIT dividend announcement effects differ from those for non-REITs

16. Dividend Announcement Returns by REITs and non-REITs

17. Determinants of Dividend Announcement Effects - REITs

18. Determinants of Dividend Announcement Effects – non-REITs

19. In Summary • We find that although the dollar amount of dividends that REITs pay has increased over time dividend payout ratio is sensitive to market conditions and is cyclical in nature. • Total dividends by REITs are almost fully explained by the previous period dividends. • REITs do not like to change dividends – dividends are sticky • Long-term leverage is negatively associated with div. payout • Consistent with findings by Bradley, Capozza, Seguin, 1998 and Hardin and Hill 2008 • Pre-tax income is negatively related to excess dividends paid by REITs • Higher and less dispersed institutional ownership related to lower total and excess dividend payout by REITs • Capital expenditures are negatively related to excess dividends • When REITs do announce dividend changes, there is a significant positive (negative) price impact associated with dividend increases (decreases) • In contrast non-REITs do not observe such significant announcement effects • In addition, leverage adversely affects dividend announcement returns by REITs.

20. Determinants and Dynamics of Dividend Payouts by REITs by Milena Petrova, Syracuse UniversityAndrew Spieler, Hofstra University