Academic journal article The Journal of Real Estate Research

Liquidity Management at REITs: Listed & Public Non-Traded

Academic journal article The Journal of Real Estate Research

Liquidity Management at REITs: Listed & Public Non-Traded

Article excerpt

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In this study, we exploit a natural experiment within the real estate investment trust (REIT) industry to further our understanding of liquidity management issues at listed and unlisted firms. For firms that are not exchange-listed, liquidity management can be affected by differences in how capital is raised, differences in firm life-cycles, and differences in relationships with investors. However, the exploration of this topic has been limited due to a lack of data available for unlisted firms, which typically do not follow the same public reporting practices required of listed firms. In addition, when drawing a comparison between listed and unlisted firms, it is challenging to control for the highly-heterogeneous nature of the unlisted firm universe. Yet, the REIT regulatory framework imposes proportional asset and income limitations with firms investing in quasisubstitutable assets-creating the natural experiment. The consistency among REITs enables a comparison based on listing status in a uniquely controlled way.

The unlisted counterpart to the listed REIT is the "public non-traded" REIT.1 "Public" refers to the fact that these firms register with and submit reports to the Securities and Exchange Commission (SEC). Public reporting is relatively common in the REIT sector, but rather uncommon for many unlisted firms. Our analysis is enabled by the public reporting of non-traded REITs, which offers a consistent set of metrics for comparison to listed REITs.

"Non-traded" indicates that shares do not trade on an organized stock exchange. As a consequence, the public non-traded REIT has a finite life structure. Unlike the initial public offering (IPO) for listed firms, public non-traded REITs raise equity through a continuous offering process that must close at some point. Once the offering is closed, public non-traded REITs no longer have the ability to access new equity. By identifying the closing date of the continuous offering period for each firm using manual data efforts, the liquidity management outcomes during the offering period can be compared to those in the post-offering.

For public non-traded REITs, there are institutional details that directly affect cash inflows and outflows, with implications for liquidity management. Cash inflows from new equity proceeds can be unpredictable during the early stage of the life cycle, increasing the precautionary motive for accumulating cash reserves. Equity subscriptions are sold through independent broker-dealers, and there is a tremendous variance in the flow of new equity across firms and over time. Another factor affecting the precautionary motive is the uncertainty surrounding cash inflows from properties not yet acquired because the public non-traded REIT originates as a "blind pool" offering without assets under management.

While cash inflows are unpredictable in the early stage, the public non-traded REIT requires cash outflows for new acquisitions, dividends, and share redemption programs, increasing the transactional and financial commitment motives for holding cash. For new acquisitions, pursuit costs are incurred in an attempt to tie up target properties, however not every target is acquired. Each acquisition requires significant time and due diligence before closing. Delays and unexpected costs are not uncommon. Our interviews with current and former managers of public non-traded REITs confirm the challenge associated with tying up potential acquisitions, while facing tremendous uncertainty in the timing and quantity of future equity flows. Managers do not wish to miss out on profitable investment opportunities due to the lack of cash, and equity shares have substantial frontloaded fees, creating added pressure to quickly deploy the capital. Throughout this process, the public non-traded REIT attempts to pay a high and constant dividend in order to continue to attract new equity (Seguin, 2016; Wiley, 2018). …

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