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The Capital Structure of North American REITs and REOCs A Panel Data Regression

The Capital Structure of North American REITs and REOCs A Panel Data Regression. Nicolai C. Striewe Nico B. Rottke. Introduction. Motivation Larger dataset for REITs than those of past studies. Extension of sample by REOCs Including Canadian REITs and REOCs

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The Capital Structure of North American REITs and REOCs A Panel Data Regression

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  1. The Capital Structure of North American REITs and REOCsA Panel Data Regression Nicolai C. Striewe Nico B. Rottke

  2. Introduction Motivation • Larger dataset for REITs than those of past studies. • Extension of sample by REOCs • Including Canadian REITs and REOCs • More efficient methodology, as data records have improved Nicolai StrieweReal Estate Management Institute, 04.10.2014

  3. Introduction Contribution to literature • More determinants of leverage included • Dynamic dimension (panel approach) • Differentiation between REITs and REOCs • Detailed robustness tests Nicolai StrieweReal Estate Management Institute, 04.10.2014

  4. Introduction Overview of results • Application of pecking order theory for REITs/REOCs concerning growth opportunities • Application of trade-off theory concerning size and asset tangibility • Concerning profitability only REITs follow the pecking order relationship • Compensation style and directors` stake in company influences the choice of leverage • REOCs prefer higher leverage as they profit from tax-shield (trade -off theory) Nicolai StrieweReal Estate Management Institute, 04.10.2014

  5. Data • Database: SNL Financial • 418 REITs(355) and REOCs (63) • Over 41 periods: quarterlyfrom Q4, 1998 to Q4, 2008 • Data preparation: • Hybrid REITs and mortgageREITsexcluded (19 units). • Missing data: 148 units (missing data orincomplete time series) • Units for analysis: 251units. Nicolai StrieweReal Estate Management Institute, 04.10.2014

  6. Results • Preferred Model Notes: The table shows the results of the panel data regression using random effects with debt to assets ratio as dependent variable. The time-series are from 1 to 41 periods long for 251 cross-sectional units. Time dummies are not displayed. They are jointly significant with a p-value of 0.0000 according to Wald test. Breusch-Pagan test identifies the variance of the unit-specific error to be significantly different from zero (p=0.0000). * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level. Nicolai StrieweReal Estate Management Institute, 04.10.2014

  7. Time Trend of Leverage • Coefficients of time dummies in preferred model Nicolai StrieweReal Estate Management Institute, 04.10.2014

  8. Sensitivity Analysis • Impact of endogeneity • Random effects model assumes endogeneity of all independent variables • Endogenous variables: market to book ratio, ln(Assets), real estate to assets and return on assets. • Testing robustness of results by lagging (t-1) the endogenous variables. • Alternative dependent variable • Welch (2007): The opposite of financial debt is not equity • Alternative proxy for leverage: liabilities to assets ratio • Alternative independent variables • Alternative proxy for growth opportunities: ln(asset growth) • Alternative proxy for size: ln(rental revenue) • Alternative proxy for profitability: return on sales • Special cases of residential and shopping REITs/REOCs • Check changing influence of determinants for residential and shopping REITs/REOCs respectively. Nicolai StrieweReal Estate Management Institute, 04.10.2014

  9. Findings 1 Lower influence for residential and shopping REITs/REOCs2 Higher influence for residential and shopping REITs/REOCs

  10. Discussion Nicolai C. Striewe Real Estate Management Institute EUROPEAN BUSINESS SCHOOL Söhnleinstraße 8D 65201 Wiesbaden, Germany E-Mail: striewe.ebs@rem-institute.org

  11. Backup Nicolai C. Striewe Real Estate Management Institute EUROPEAN BUSINESS SCHOOL Söhnleinstraße 8D 65201 Wiesbaden, Germany E-Mail: striewe.ebs@rem-institute.org

  12. Variable definitions and basic descriptives Notes: Basic descriptives from 251 observations of the preferred model. Variance Inflation Factors (VIF) all below 2.4 for the variables. Nicolai StrieweReal Estate Management Institute, 04.10.2014

  13. Dataset Nicolai StrieweReal Estate Management Institute, 04.10.2014

  14. Sensitivity Analysis – Model specification Notes: The table shows the results of the panel data regressions using random effects with debt to assets ratio as dependent variable. In model 2 the alternative dependent variable liabilities to assets is used instead. Model 3 tests the impact of endogeneity by lagging the affected variables by lagging them (t-1). The time-series are from 1 to 41 periods. Time dummies are not displayed. They are jointly significant with a p-value of 0.000 according to Wald test. * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level. Nicolai StrieweReal Estate Management Institute, 04.10.2014

  15. Sensitivity Analysis – Proxy robustness Notes: The table shows the results of the panel data regressions using random effects with debt to assets ratio as dependent variable. The impact of an alternative proxy is tested for growth opportunities in model 4, for size in model 5, for profitability in model 6 and in model 7 with an additional interaction variable to differentiate the impact of the alternative proxy for profitability on REOCs. The time-series are from 1 to 41 periods. Time dummies are not displayed. * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level. Nicolai StrieweReal Estate Management Institute, 04.10.2014

  16. Sensitivity Analysis – Property type sensitivity Notes: The table shows the results of the panel data regressions using random effects with debt to assets ratio as dependent variable. The changing impact of growth opportunities for the special cases of residential and shopping REITs/REOCs is measured in model 8, of size in model 9, of asset tangibility in model 10 and of REOCs in model 11. The time-series are from 1 to 41 periods. Time dummies are not displayed. * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level. Nicolai StrieweReal Estate Management Institute, 04.10.2014

  17. Sensitivity Analysis – Property type sensitivity (cont`d) Notes: The table shows the results of the panel data regressions using random effects with debt to assets ratio as dependent variable. The changing impact of externally managed REITs/REOCs for the special cases of residential and shopping REITs/REOCs is measured in model 12, of profitability in model 13 and of insider ownership in model 14. The time-series are from 1 to 41 periods. Time dummies are not displayed. * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level. Nicolai StrieweReal Estate Management Institute, 04.10.2014

  18. Variance Inflation Factors Nicolai StrieweReal Estate Management Institute, 04.10.2014

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