Elective Stock Dividends and Elective Stock Dividends and REITs: Evidence from the REITs: Evidence from the Financial CrisisFinancial Crisis

Desmond Tsang, McGill UniversityDesmond Tsang, McGill University

Authors

Erik Devos, University of Texas – El Paso

Andrew Spieler, Hofstra University Desmond Tsang, McGill University

The Financial Crisis

The recent financial crisis and credit crunch which started in 2007 has created unprecedented liquidity problems for many industries

REIT industry is not immune to the crisis: Many REITs have capital shortfalls of more than

$500 millions (e.g., Apartment Investment and Management Co.; Developers Diversified Realty Corp.)

Even financially stable REITs have serious concerns about future market uncertainties (e.g., Simon Property Group, Inc.)

REIT Structure in US

US REITs are exempted from corporate level income tax

However, they have to satisfy various requirements under the rules of US Congress:

In particular, they have to distribute a minimum of 90% of taxable income as dividends to investors The requirements represent significant financial

commitment and pose huge liquidity constraint for REITs, especially at times of market downturn

Introduction of Elective Stock Dividends To provide REITs with temporary relief of the

liquidity problems, the IRS introduced RP 2008-68: The new rule allows REITs to offer investors to

pay dividends using a mixture of cash and stock dividends

REIT managers decide the proportion of stock dividends (no more than 90% of total dividends)

Investors make election to receive dividends all in cash or in stock

If too many investors electing cash dividends, every investor will get a mixture of cash and stock in the pre-determined proportion

Are Elective Stock Dividends Are Elective Stock Dividends Good or Evil?Good or Evil?

Share dilution effect Worse when REIT

prices have fallen significantly

Lower attractiveness of REITs REIT investors

typically search high dividend paying stocks

Bad signal to market

Some REITs have deficient cash flows Risk of being “de-

REIT” Preserve cash to

address funding needs Refinancing

maturing debts Investing in new

properties

Objective of the Study

Given the costs and the benefits of Elective Stock Dividends, how does the REIT industry react to its introduction? i.e., are REITs really adopting this new, unique

dividend strategy?

What are the REIT characteristics that prompt REITs to adopt (or not to adopt) ESD? i.e., are REITs adopting ESD really cash-

constrained? Or they adopt ESD for other reasons?

Adoption of ESD: We find that ESD is surprisingly unpopular There are only 17 REITs have chosen to

adopt ESD from end of 2008 through taxable year of 2009!

Determinants of ESD: Contrary to prediction, liquidity is NOT a

determinant Maturing debt position drives ESD decision REIT size, growth and performance matters

Summary of ResultsSummary of Results

Determinants of REIT Dividend Policy: Wang, Erickson and Gau 1993; Bradley, Capozza and

Seguin 1998; Ooi 2001; Ghosh and Sirmans 2006; Hardin and Hill 2008; Edelstein, Liu and Tsang 2008

We examine the effect of ESD on REIT dividend policy

Rationale of REIT Stock Split and Dividend Decision: Hardin, Liano and Huang 2005; Li, Sun and Ong

2006 We examine determinants of a special form of stock

dividends (ESD)

Related LiteratureRelated Literature

Empirical Equation:

ESD = α + β1 LIQ_FFO + β2 LIQ_CFO + β3 SDEBT +β4 LDEBT + β5 SIZE + β6 MTB + β7 GROWTH + β8 PRICEΔ + β9 ROA + β10 DIV + β11 PAYOUT + β12 PROP_TYPE + β13 TIME (1)

Research Design

ESD: Decision to declare elective stock dividends LIQ_FFO & LIQ_CFO (-): cash flows proxied by

FFO and cash flows from operations respectively SDEBT (+): Debt maturing in one year LDEBT (+): Long term liabilities SIZE (+): Log Market capitalization MTB & GROWTH (+): Market-to-book ratio and

change in total assets PRICE∆ (+/-): Percentage change in quarterly

stock price ROA (-): Return-on-assets

Key Variables of Interest Key Variables of Interest

ESD_RATIO = α + β1 LIQ_FFO + β2 LIQ_CFO + β3 SDEBT +β4 LDEBT + β5 SIZE + β6 MTB + β7 GROWTH + β8 PRICEΔ + β9 ROA + β10 DIV + β11 PAYOUT + β12 PROP_TYPE + β13 TIME (2)

ESD_AMT = α + β1 LIQ_FFO + β2 LIQ_CFO + β3 SDEBT +β4 LDEBT + β5 SIZE + β6 MTB + β7 GROWTH + β8 PRICEΔ + β9 ROA + β10 DIV + β11 PAYOUT + β12 PROP_TYPE + β13 TIME (3)

Ratio and Amount of ESD

SampleSample

Sample period: 2007-2008 (8 quarters) ESD information: SNL Financials,

NAREIT website Financial data: Compustat and SNL

Financials Total sample observations: 395

17 firms have chosen ESD 13.16% of observations report ESD

List of Firms Adopting ESDList of Firms Adopting ESDTable 1: List of REITs that choose to distribute dividends in stock and cash as of December 2009

Company Ticker Symbol Apartment Invest and Management Co.

AIV

UDR Inc. UDR Sunstone Hotel Investors Inc. SHO Avalon Bay Communities AVB Roberts Realty Investors Inc. RPI Acadia Realty Trust AKR Vornado Realty Trust VNO Simon Property Group SPG CBL & Associates Properties Inc. CBL Developers Diversified Realty Corp. DDR One Liberty Properties OLP Lexington Realty Trust LXP Cousins Property CUZ Macerich Co. MAC Host Hotels & Resorts HST DiamondRock Hospitality Co. DRH General Growth Properties Inc.

GGWPQ

Source: SNL Financial

Descriptive Statistics (Total Descriptive Statistics (Total Sample)Sample)

Panel A: Descriptive Statistics for Total Sample Variables N Mean Median Standard

Deviations 25th

Percentile 75th

Percentile ESD 395 0.1316 0 0.3385 0 0 ESD_RATIO 395 0.104 0 0.273 0 0 ESD_AMT 395 0.1527 0 0.509 0 0 LIQ_FFO 395 0.0148 0.0134 0.007 0.0107 0.0173 LIQ_CFO 395 0.0151 0.0138 0.007 0.0102 0.0192 SDEBT 395 0.0564 0.0451 0.0386 0.0303 0.0713 LDEBT 395 0.5801 0.6062 0.1648 0.5082 0.67 SIZE 395 7.2802 7.2088 1.0918 6.6357 7.9923 MTB 395 1.6619 1.8252 6.7793 1.2408 2.5775 GROWTH 395 0.0267 0.0109 0.0675 -0.002 0.0336 PRICEΔ 395 -8.3084 -6.72 15.3421 -14.7 1.16 ROA 395 3.2885 3.05 1.2982 2.48 3.84 DIV 395 0.5289 0.47 0.3541 0.33 0.64 PAYOUT 395 244.87 148.8 393.69 105.5 229.8

Descriptive Statistics (Sub-Descriptive Statistics (Sub-Sample)Sample)

Panel B: Descriptive Statistics for Sub-Samples Partitioned by ESD Variables ESD Sample Non-ESD Sample N Mean N Mean t-statistics LIQ_FFO 52 0.0145 343 0.0149 0.3319 LIQ_CFO 52 0.0133 343 0.0154 1.9319* SDEBT 52 0.0643 343 0.0552 1.5963 LDEBT 52 0.638 343 0.5713 2.7441*** SIZE 52 8.2783 343 7.1289 7.5622*** MTB 52 2.4378 343 1.5443 0.8854 GROWTH 52 0.0245 343 0.0271 0.2565 PRICEΔ 52 -10.8612 343 -7.9214 1.2887 ROA 52 2.7668 343 3.3676 3.1447*** DIV 52 0.698 343 0.5033 3.7566*** PAYOUT 52 272.72 343 240.64 0.5469

Regression Results: ESD Regression Results: ESD Dependent Variable ESD ESD

Constant -14.93*** -13.40***

(5.27) (4.72)

LIQ_FFO 36.24 51.65

(0.93) (1.37)

LIQ_CFO 1.14 12.09

(0.04) (0.30)

SDEBT 12.23** 10.90**

(2.29) (2.19)

LDEBT 4.97*** 1.84

(2.62) (0.95)

SIZE 1.25*** 1.78***

(4.70) (5.08)

MTB 0.03** 0.03**

(2.55) (2.34)

GROWTH 1.11 1.48

(0.44) (0.61)

PRICEΔ -0.03* -0.08***

(1.92) (3.11)

ROA -0.63** -1.15***

(2.27) (3.32)

DIV 0.74* -0.12

(1.82) (0.24)

PAYOUT 0.0003 0.0002

(1.24) (0.44)

Property Type Effect No Yes

Time Effect No Yes

Number of Observations 395 395

Pseudo R2 0.29 0.46

Empirical Findings

Cash positions have nothing to do with ESD, but maturing debts significantly affect ESD decision

Larger REITs and those with greater growth opportunities adopt ESD, as they may have greater funding needs

ESD more apparent in firms under price pressure

ROA significantly negative, indicating worse performing firms may issue ESD for signaling

Similar findings for ESD_RATIO and ESD_AMT

Additional Analysis

Controls for new debt or equity issue Controls for borrowing costs and for

line of credit (Riddiough and Wu 2009) Controls for extreme cash flows

Results remain robust and these factors have little influence on ESD decision

Controls for cash flow volatility (Bradley, Capozza and Seguin 1998)

Additional Analysis on Cash Additional Analysis on Cash Flows VolatilityFlows Volatility

Dependent Variables ESD ESD_RATIO ESD_AMT

Constant -11.02*** - - (3.69) LIQ_FFO 63.17 55.75 47.81 (1.52) (1.49) (1.15) LIQ_CFO 7.55 12.06 -14.08 (0.21) (0.32) (0.39) SDEBT 10.95** 7.39* 9.58** (2.15) (1.65) (2.07) LDEBT 1.61 -0.22 -0.47 (0.79) (0.11) (0.18) SIZE 1.44*** 1.23*** 1.44*** (3.89) (3.69) (4.14) MTB 0.04** 0.03** 0.03** (2.37) (2.27) (2.22) GROWTH 1.06 2.93 1.74 (0.43) (1.14) (0.88) PRICEΔ -0.07*** -0.06*** -0.06*** (2.70) (2.59) (2.79) ROA -1.28*** -1.14*** -0.94*** (4.21) (3.17) (3.42) DIV -0.13 -0.16 0.31 (0.23) (0.29) (0.72) PAYOUT 0.0001 0.0002 0.0005 (0.28) (0.51) (1.23) CF_VOLATILITY 0.03** 0.009 0.02*** (2.42) (0.96) (2.66)

Property Type Effect Yes Yes Yes

Time Effect Yes Yes Yes

Number of Observations 395 395 395

Pseudo R2 0.47 0.29 0.28

Why firms are reluctant to adopt ESD? Calculate abnormal returns around the

announcements dates for all ESDs We find positive returns, indicating

investors do not discount ESD The positive returns can be due to higher

combined dividends of these ESD firms

Analysis of ESD Analysis of ESD AnnouncementsAnnouncements

We document only a small portion of REITs adopt ESD These firms do not have immediate cash flow

problems They have maturing short term debts Larger firms with growth opportunities

ESD does not seem to lead to negative price reactions Further research: Why REITs have lukewarm

reactions to this new dividend strategy?

Concluding RemarksConcluding Remarks