Dispositional joint ventures as REIT financing strategy

Abstract

A dispositional joint venture (DJV) represents an alternative disposal strategy used by USA real estate investment trusts (REITs), which has received limited attention in the real estate investment and finance literature. REITs form DJVs by selling a partial interest in a property to a financier, for example, a pension fund. We hypothesise that REITs pursue this financing strategy when in need of funds and faced with restricted capital market access. We investigate the motivation to form a DJV at the REIT and property level. Using multinomial logistic regression, we find that, compared to REITs with full or no disposals, DJV REITs are characterised by higher leverage, lower market-to-book values and a lower dividend payout ratio. These findings support our hypothesis that DJV forming REITs face restricted capital market access and use DJVs to obtain financing in the private equity market. Also DJV properties appear to be of a higher quality than completely sold properties, which may explain why REITs are interested in maintaining a partial interest and thus opt for a DJV instead of an outright sale.

Keywords:

• real estate finance
• real estate investment trust (REIT)
• asset disposal
• joint venture
• capital markets

Acknowledgements

We thank Crocker H. Liu, Eli Beracha, Shawn Howton, Seunghan Ro, four anonymous reviewers and the participants at the 2010 AREUEA mid-year conference as well as the 2011 and 2010 ARES annual conference for valuable comments on the final and earlier versions of this paper.