Academic journal article Real Estate Economics

Value Creation in REIT Property Sell-Offs

Academic journal article Real Estate Economics

Value Creation in REIT Property Sell-Offs

Article excerpt

We examine major sales of real property by public U.S. Real Estate Investment Trusts (REITs) 1992-2002. We find that abnormal shareholder returns are significantly positive, a result that is consistent with findings for conventional firms that sell off real estate. Because REITs do not pay taxes, this finding supports the view that abnormal returns in real estate sell-offs by all types of firms are derived largely from asset allocation efficiencies and do not result exclusively from tax benefits. Shareholder returns are lower in sell-offs motivated by a desire to reduce long-term debt, as is consistent with financial theory regarding the information content of leverage decisions. Returns are inversely related to the firm's operating performance prior to the sell-off announcement, further supporting the case that improved asset efficiencies create value in real estate sell-offs.

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We study a sample of real estate property sell-offs 1992-2002, in which the seller is an Equity Real Estate Investment Trust (EREIT). We define a property sell-off as a transaction in which a Real Estate Investment Trust (REIT) sells one or more properties to the same buyer in the same transaction, when the total price is greater than $20 million. Sell-offs must be distinguished from liquidations or mergers. In a sell-off, the selling REIT continues to exist after the sale, with no clear plans to terminate operations in the foreseeable future.

The last decade has been a decade of rapid growth for REITs. As a result, a substantial body of literature has developed analyzing transactions in which REITs obtain real assets. In contrast, the literature regarding transactions in which REITs dispose off property in sell-offs is very thin.

We measure abnormal returns for these transactions, finding that announcement window returns are significantly positive. We test for wealth effects created by management's decision to apply sale proceeds to the reduction of long-term debt, and we find significant results different from results reported for conventional firms. We find that abnormal returns are inversely related to the firm's operating performance prior to the announcement. We also find that firms selling properties in Section 1031 exchanges do not experience positive returns, a result that may be related to the unique institutional structure of REITs.

Previous Studies of Asset Sell-Offs

Sell-Offs by Conventional Firms

A solid body of literature clearly documents that asset sell-offs by conventional firms are positive for shareholders (Hearth and Zaima 1984, Rosenfeld 1984, Sicherman and Pettway 1992, John and Ofek 1995, Lang, Poulsen and Stulz 1995, Datta and Iskander-Datta 1996).

To explain these positive returns, scholars focus on the value of efficient asset allocation. If both managers and real corporate asset markets were completely efficient, then assets would be sold as soon as the value to any potential buyer exceeded the value of the asset to the seller, and there would be no abnormal return to shareholders. However, markets for real corporate assets are not completely efficient, but are subject to information problems, and managers are subject to agency conflicts, such as commitment to pet projects, or a desire to maintain firm size. Therefore, the sale of real assets may not occur until the sale price significantly exceeds the value of the asset to the firm, and an abnormal return will be observed upon sale.

Sell-Offs of Real Estate

A separate stream of literature examines the special case in which it is real estate assets that are sold. The consistent finding is that selling firm shareholders experience significantly positive announcement-period abnormal returns in the 1-3% range when conventional firms sell real estate assets (Glascock, Davidson and Sirmans 1991, Ball, Rutherford and Shaw 1993, Booth, Glascock and Sarkar 1996). Different from the case for conventional firms selling other kinds of real assets, in explaining abnormal returns in real estate sales, scholars have focused on tax benefits and asset valuation errors. …

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