The Role of Debt in REIT Equity Issuance at a Discount to Net Asset Values

Abstract

Empirical evidence shows that REIT managers time their equity offerings based on the value of share prices relative to the value of their underlying assets in the property market. Managers’ equity issuance decisions are strongly impacted by net asset value (NAV) premiums. In this paper, we examine the impact of overall leverage and near-term debt maturities on the equity offering behavior of REITs. For a sample of 170 REITs involved in at least one seasoned equity offering from 2001 to 2017, our results indicate that higher leverage and near-term debt maturities have a significant positive impact on a REIT’s decision to issue equity at a discount-to-NAV. Furthermore, we document that REIT managers who issue equity at a discount-to-NAV become less active in property acquisitions. Taken together, our results suggest that the underlying motivation for REIT firms issuing equity below their underlying asset values is to avoid a possible default on debt repayments. Higher leverage constrains a REIT’s ability to time the market in their equity issuance decisions.

Keywords:

• Seasoned equity offerings
• net asset values
• debt
• investment activity
• REITs

Notes

1 Thank you to a reviewer for pointing this out.

2 The works of authors such as Boudry et al. (2010) and Ooi et al. (2010) look at the raising of equity by REIT firms when it is advantageous to do so. This paper is focused on REITs’ SEOs at a discount-to-NAV which has not been studied extensively in the literature. We believe providing evidence on the motive of a seemingly uneconomical capital raising behavior is interesting.

3 Formerly SNL Financial.

4 Note that the figure is based on mean values thus making it difficult to graphically show all the premium and discount periods.

5 We separate the various debt ratios in the analysis because they are highly correlated. For instance, the debt-to-equity ratio includes debt due in one year.

6 We thank a reviewer for bringing this to our attention.

7 Leary and Roberts (2005) provide evidence that non-REIT firms also frequently rebalance their leverage to an optimal level.