Financing choice, pricing and capital structure issues of real estate investment trusts (REITs)

Real Estate Investment Trusts (REITs) saw unprecedented growth in the nineties. REIT Initial Public Offerings (IPOs) exploded in 1993 and 1994--more than $16 billion were raised then. While IPO growth slowed down, raising capital through seasoned equity remain unabated with over \$53 billion raised from 1992 to 1997, and over $23 billion raised through unsecured debt during the same period. REITs have come of age in the sense that they are now being more and more accepted as investment vehicles, as they are enjoying a growth in the number of analysts following REITs, and also institutional ownership. REITs have a unique organizational form. They are tax-exempt provided they distribute over 95 percent of their earnings to stockholders. As a result, they became lucrative instantly for empirical studies of capital structure issues. It is from this perspective that REITs will remain to be an integral part of both corporate and real estate finance.^ We begin with an investigation of the various financing choices available to REITs. We follow it with a comprehensive analysis of performance of various types of REITs around Seasoned Equity Offerings (SEOs). We examine the wealth effects of SEOs during announcement and offer days. Event study methodology is used. Our result of negative price effect of announcements is consistent with past findings. We investigate bid-ask paradigms to explain the negative offer day results. We next analyze the valuation effects of REIT seasoned debt issues, where we report positive wealth effects.^ The pricing of SEOs is examined in the context of pre and post nineties REITs. Contrary to earlier findings in finance literature, we observe significant underpricing. We then address various underpricing issues with respect to underwriter ranking, and various firm specific attributes including institutional holding, size, property type, REIT organizational structure, etc. Finally, we establish the link between IPO and SEO underpricing. We test several signaling based hypotheses and find that SEO underpricing is positively and significantly related to IPO underpricing.