Institutional ownership and REIT acquisitions

ABSTRACT

We examine the relationship between institutional ownership and Real Estate Investment Trust (REIT) acquisitions. We find that REITs with relatively higher levels of pre-event institutional ownership are more likely to partake in acquisitions. We additionally find that levels of institutional ownership significantly increase post-acquisitions even after controlling for other relevant factors. This increase is driven by longer-term and passive institutional investors. Further, we find positive influences from the increase in institutional ownership on both market and accounting performance, however, this is driven by increases in short-term and active institutional investor levels. Collectively, our results suggest a significant influence by institutional investment on REIT acquisition decisions that has a significant effect on shareholder wealth.

KEYWORDS:

• REIT Acquisitions
• institutional ownership
• REIT operating performance
• REIT market performance

JEL Classification:

• G30
• G32
• G34

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Information retrieved from the U.S. National Association of Real Estate Investment Trusts (NAREIT). https://www.reit.com/what-reit, last accessed on 18 February 2021.

² Beracha, Feng and Hardin (2019a) and Beracha, Feng and Hardin (2019b) show that more efficient REITs generate better operating results, lower levels of risk, higher returns and improved firm value, measured by firm Q, market-to-equity values and capitalization rates.

³ Campbell, Petrova, and Sirmans (2003) employ a specific sample of acquisitions that focus on the purchase of a portfolio of properties from a single seller.

⁴ Almazan, Hartzell, and Starks (2005) and Hartzell, Sun, and Titman (2014) argue that banks and insurance companies are less likely to be active monitors due to potential conflicts of interest over the prospects of receiving future business from the firm.

⁵ Although SDC Mergers and Acquisitions database covers all mergers and acquisitions from 1985, the number of takeover deals by REITs is very spotty in the first few years of coverage. In addition, we begin our sample in 1993 to only cover the new REIT era. Our calculation of institutional investor horizon requires at least three years of institutional ownership; thus, we must end our sample in 2015.

⁶ Asset acquisitions refer to the acquisition of a real estate property or a portfolio of properties.

⁷ For example, while the evidence of market influence from acquisitions in REITs is decidedly mixed, Campbell, Ghosh, and Sirmans (2001) find positive returns associated with private targets, Campbell, Petrova, and Sirmans (2003) find abnormal returns when portfolios are purchased from a single seller, and Eichholtz and Kok (2008) and Ooi, Ong, and Neo (2011) find positive influences outside the United States.

⁸ We examine an alternate model specification where we replace the dummy variable AFTER with $\sum _{\omega =1}^8{\beta }_{1\omega }\mathrm{Q}\mathrm{T}{\mathrm{R}}_{\mathrm{i},\mathrm{t}}$, a set of dummy variables that capture the relative quarters −4, −3, −2, −1, 0, +1, +2, +3, +4, around the acquisition announcements. The results are largely consistent with those found with this simpler approach, and are available upon request.

⁹ Overall, our results align with Huerta, Ngo and Pyles (2020) who suggest that REIT acquisitions result in positive operating performance post-acquisitions especially in REITs that acquire portfolios of properties rather than equity in other REITs.

¹⁰ Data from the National Association of Real Estate Investment Trusts (NAREIT), last accessed on 21 February 2020. https://www.reit.com/data-research/reit-market-data/us-reit-industry-equity-market-cap