Academic journal article Journal of Real Estate Literature

A Review and Extension of Merger and Acquisition Research between Reits and General Corporations

Academic journal article Journal of Real Estate Literature

A Review and Extension of Merger and Acquisition Research between Reits and General Corporations

Article excerpt

The finance literature on mergers and acquisitions (M&As) covers a wide range of topics including bidding strategies, takeover defenses, short- and long-run abnormal stock returns to targets and bidders, merger arbitrage, efficiency, market power, antitrust policies, and the impact of regulation changes. The literature on real estate investment trust (REIT) M&As began in the late 1980s. Traditionally, finance studies exclude REITs from their samples because of the legal restrictions placed on REITs. However, REIT M&As do provide valuable implications for finance theories.1

Compared with conventional corporations, REITs have several unique features. To maintain a REIT status, a company must distribute 90% of its taxable income to shareholders as dividends. The dividends can be exempted from its corporate taxable income, but must be reported as taxable income to the individuals who receive dividends. For ownership structure, a REIT has to meet several requirements: (1) there are at least 100 different shareholders; (2) five or fewer shareholders cannot own more than 50% of its stock (the 5-50 rule); and (3) at least 75% of the REIT's gross income must be from real estate-related operations.

The form of an umbrella partnership REIT (UPREIT) plays an important role in REITs. UPREIT is a type of corporate structure in which all the properties are owned by a limited liability operating partnership (OP). The OP units are jointly owned by the REIT and by the entities that sold properties to the REIT and can be converted into REIT shares subject to a minimum holding period. The advantage of an UPREIT is that when the property is transferred from the seller to the buyer in terms of OP units, capital gains taxes can be delayed until the conversion occurs. If investors do not use the UPREIT structure, capital gains will be realized immediately when the REIT purchases a property from a private seller as long as the price is higher than the book value in exchange for equity shares.

To date, research about REIT M&A activities mainly focuses on bidding strategies (payment methods), takeover gains (wealth effect), and the interaction between the market for corporate control, ownership structure, and corporate governance. As the REIT literature is a small subset of the finance literature, to make our comparisons more concise, we restrict topics to be either REITs or general finance in the United States.2

There are several reasons why it is worth investigating the observable differences between REIT and non-REIT M&As. Allen and Sirmans (1987) were among the first to propose that, due to the unique characteristics of REITs, the wealth effect of REIT M&As might be different from those of non-REIT industrial and retail firms. For example, as it is generally difficult for REITs to finance M&As using internal funds because they must pay out at least 90% of taxable income, there might be a lower incidence of cash finance among REIT M&As. Compared with conventional firms, REITs have different tax incentives. For REITs, net operating loss carry-forwards can be used to offset or to reduce capital gains tax liabilities. It therefore reduces cash dividends and income taxes to shareholders. In addition, bidders with UPREIT structure are able to offer private target tax advantages and capitalize this tax deferral into higher returns. Prior studies find a lack of hostile takeover among REITs because the 5-50 rule impedes the formation of block holders and weakens the takeover threat. Together, these detailed explanations support that REITs' unique regulatory nature makes them an interesting category for research and provide valuable implications for finance theories. In this survey, we summarize empirical research on finance and REIT M&As, compare their findings, and use that information to guide future research ideas.3

The paper is structured as follows: We give a review of REIT and traditional firm M&A activities. …

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