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