Another Hunt for the Capital Structure Puzzle: Leverage and Return Relationship in the REIT Market...
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Another Hunt for the Capital Structure Puzzle: Leverage and Return Relationship in the REIT Market 27.06.2009 Ralf Hohenstatt, dipl. econ.,Ph.D. student at the Chair of Real Estate Management
Another Hunt for the Capital Structure Puzzle: Leverage and Return Relationship in the REIT Market 27.06.2009 Ralf Hohenstatt, dipl. econ.,Ph.D. student
Another Hunt for the Capital Structure Puzzle: Leverage and
Return Relationship in the REIT Market 27.06.2009 Ralf Hohenstatt,
dipl. econ.,Ph.D. student at the Chair of Real Estate
Management
Slide 2
Seite 2 Schedule: 1.Motivation for the investigation 2.Related
literature 3.Empirical Analysis 4.Empirical Results
Slide 3
Seite 3 Motivation for the investigation 1. Mentoring of a
diploma thesis about Capital Structure of REITs 2. Search for a
proper research area for my dissertation No relationship between
Sharpe-Ratio (dependent variable) and leverage in a panel
regression No consideration of MB, Size, ROA No consideration of
joint determination or interactions of leverage and other variables
Challenging Econometric Analysis and data availability (SNL)
According to previous studies (next slide) expectation of
consistent results was promising 3. Financial Crisis raises again
questions concerning debt Why REITs? Good data availability of
US-REITs Homogeneity due to legislation and focus on one industry
REITs have better possibility to collateralize debt than any other
industry
Slide 4
Seite 4 Related Literature 1. Barclay, Marx and Smith (2003):
The Joint Determination of Leverage and Maturity Focus on
identification of endogenous variables Development of firm value as
a function of maturity, leverage, investment opportunities and
regulatory environment 3. Giambona, Harding and Sirmans (2007):
Explaining the Variation in Reit Capital Structure: The Role of
Asset Liquidation Value System of two equations: Leverage and Debt
Maturity Focus on leverage and liquidation value 2. Ooi and Liow
(2004): Risk-Adjusted Performance of Real Estate Stocks Evidence
from Developing Markets Important paper for the explanation of the
performance of real estate companies Combination of balance sheet
data and market environment as explanatory variables
Slide 5
Seite 5 Empirical Analysis: the variables 1. Sample: 306 US
REITs, 1993-2008, quarterly frequency, 2.873 observations (missing
data) 2. Dependent Variables: Total Excess Return: Leverage (market
based): 3. Independent Variables: * US-Treasury Bond with 6 months
to maturity Time Dummies for booms and busts, Property Focus
Dummies, S&P500 Composite, FTSE/NAREIT All REITs, Size, Size,
Profitability/ROA, MB/Growth Opportunities, Income Growth, portion
of senior hedged debt, Asset Maturity, Asset Tangibility Debt
Maturity: Credit Access: equals 1 if a REITs has a credit rating
von S&Ps, Moodys or Fitch, 0 otherwise for t = {12, 24, 36, 48,
60, 72}
Slide 6
Seite 6 Endogeneity or Joint Determination of regressors TER
Lev MB SIZE Profitability Debt Maturity Debt Maturity FTSE/NAREIT,
S&P500, Property Focus, Time Dummies Asset Tangibility, Asset
Maturity, Rating, Earnings Growth
Slide 7
Seite 7 Solution: system of simultaneous equations Equation 1
(of main interest): Equation 2:
Slide 8
Seite 8 Endogenous Variables in Equation 1 TER Lev MB SIZE
Profitability Debt Maturity Debt Maturity
Slide 9
Seite 9 Endogenous Variables in Equation 2 TER Lev MB SIZE
Profitability Debt Maturity Debt Maturity
Slide 10
Seite 10 Maximizing TER with respect to DM and Lev 2. Partial
effect of Leverage on Total Excess Returns: Ceteris paribus, REITs
with higher Excess Returns are less levered (Equation 2)! Given the
fact that leverage and debt maturity are substitutes and jointly
determined it follows: Leverage and Debt Maturity have to be set to
minimize their sum in order to maximize Excess Returns (Equation
1)! Positive partial impact of leverage on total excess returns up
to the maximum requires leverage ratios smaller than 48% and
average debt maturities smaller than 43,4 months! 1. Partial Effect
of Total Excess Returns on Leverage
Slide 11
Seite 11 Economic reasoning of the results and adjustment to
prior research 1.Higher leverage is associated with higher
sensitivity to macroeconomic factors namely unexpected inflation as
well as risk and term structure of interest rates. Chan, Hendershot
and Sanders (1990). This problem is even more severe if debt
maturities are relatively long because interest rate and inflation
risk increases in debt levels and debt maturity likewise. 2.Market
environment and REITs specific characteristics (e.g. property
focus) very robustly influence leverage. Capozza and Seguin (1998)
3.Other endogeneity issues with respect to (balance sheet) leverage
like credit rating and financial flexibility are still not ruled
out. Graham and Harvey (1999). Upon that target (balance sheet)
leverage ratios might mainly justified by receiving an investment
grade rating. Brown and Riddiough (2003) 4.The portion of senior
debt has no impact on excess returns although it is strongly
suggested by capital structure theory. Ambrose, Bond and Ooi
(2009)
Slide 12
Seite 12 Shortcomings 1.No consideration of any variance
measures: Sharpe Ratio, Variance of Earnings 2.No deep exploration
of the leverage return relationship for different property types
and no time series dimension of the property focus dummies. 3.No
exploration of the L-R-Relation during boom and bust periods 4.No
further equations in the system, i.e. for debt maturity. 5.Omitted
variable: Liquidation value Shleifer and Vishny (1992) and
Benmelech (2005) and Giambona, Harding and Sirmans (2007)
6.Astonishing: Balance sheet leverage was not identified to be
endogenous but market leverage was?!
Slide 13
Seite 13 Coments and Suggestions Thank you very much for your
attention!!!
