Abstract
The impact of bank mergers on Real Estate Investment Trust (REIT) loan pricing and takeover likelihood is assessed. REITs that lose their primary banking relationship due to bank mergers pay higher interest rates on future borrowings. Bank consolidation reduces bank competition for REIT loans which affects loan pricing. Moreover, based on randomly matched samples of REITs, the results imply that firms losing their agent banks due to bank mergers and those with limited access to bank debt are more likely to be acquired while REITs associated with acquiring banks are more likely to acquire other firms. Additional analysis of the 92 merged REITs reveals that 33% of the target REITs’ banks are merged with their REIT acquirers’ banks prior to the REIT mergers while 67% of the target REITs share at least one major bank with their acquirer.
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Notes
REITs are regulated to pay out at least 90% of taxable income as dividends to shareholders (the ratio was changed from 95% to 90% due to the REIT Modernization Act in 1999). When Funds From Operations (FFO) is considered, most of the REITs pay out between 65–90% of their FFOs (see Kallberg et al. 2003) in dividends.
According to Capozza and Seguin (2003), the average annual growth rate in aggregate market capitalization of the REIT industry is 26% during the period of 1992–2003.
See Table 1 for details of the merger activities among the leading banks to REITs. Two important facts are apparent. First, most of the agent banks for REITs during the period are large banks. Second, bank mergers significantly reduce the number of loan agents and suppliers to REITs. In fact, by the end of 2004, there were only about 6 major commercial banks that remained as agent banks to REITs, compared with more than 20 of them in 1994.
While a large number of REITs merge, there are also new REITs created in this period. Thus, the total number of REITs stays about the same.
The management of the bank merger process is complicated by the within bank competition for limited resources, the need to generate cost savings that include a reduction in management, and the inherent desire of the dominant management team to protect their existing customers, client base, and relationships. The present study does not directly address these issues which are complementary to the specific question addressed in this research.
Erel (2006) focuses on which type of bank mergers create pricing benefits to borrowers while our focus is on whether mergers between large banks impact loan pricing for those REITs losing their banking relationships due to bank mergers. On the other hand, Erel (2006) documents that loan spreads widen when the market power of the consolidated banks increases. In our case, as most of the REIT lenders are large banks, bank mergers significantly reduce the number of potential agents and suppliers to REITs and increase the market power of the remaining banks, which leads to higher loan spreads for those REITs that lose their agent banks. In this regard, our results are consistent with Erel (2006).
There are transaction costs, opportunity costs, agency costs, and asymmetric information costs.
The focus here is on REIT loan pricing, instead of the loan volume. As REITs experience rapid growth and need capital to fund acquisitions and expansion, it is reasonable to believe that the primary channel through which bank mergers impact REIT borrowing conditions is loan pricing. See more discussion about this issue in the section that describes the empirical results.
Due to missing data problem, adding the regional bank competition variable and the profitability variable reduces the sample size significantly. Also, when they are included in the regression, the coefficients are not significant. So, the results are not reported here.
A revolving L/C is a loan commitment, which allows borrowers to draw whenever necessary as long as the amount drawn is under the upper credit limit. Bank L/Cs are often renewed upon expiration.
The literature often focuses on the first three types of loans for two reasons (see Berger and Udell 1995). First, these loans are often revolving credit facilities and represent long-term relationships between banks and borrowers. Also, these bank L/Cs highlight the important difference between bank loans which have been characterized as “relationship-type debt” and public debt which has been considered “arm-length debt” (Rajan 1992). Second, based on a Federal Reserve Board survey (see “Survey of Terms of Business Lending”, Federal Reserve Board Statistical Releases (June 2000)), about 80% of bank loans in recent years have been in the form of L/Cs. Hence, there is no loss of generality by focusing on bank L/Cs.
Since the REIT industry significantly increased its aggregate amount of bank commitments after 1993, the loan pricing data used here are truncated from 1994.
Since most of the REIT mergers during the period occurred among REITs with the same property focus, the property type is controlled for the matched REITs. Also, as one can argue that small firms are more likely to be acquired, we control firm size for the matched REITs.
The ability to serve as an agent bank for a major firm is prerequisite on being a large, sophisticated lender. The mergers tracked in this study are those between this top tier of institutions.
This study focuses on REITs that are forced to change their lead agent bank. Large firms use the agent bank structure to facilitate the bank lending process. Working with their lead agent, a REIT would consolidate the bank lending exercise. The lead agent typically has a large exposure to the borrower by taking the greatest share of the lines of credit for which it is the agent. Other banks compete to participate in the credit facility. The borrower does not typically negotiate directly with participating banks, although the borrower does know the individual account officers and managers at these participating banks.
A simple regression model regarding the loan volume effect of bank mergers is also estimated. The coefficients of the key variables (MergerSwitch and MergerTarget) are not statistically significant. Hence, the results are not reported here.
Admittedly, there are many factors that could potentially affect the takeover likelihood of a REIT. However, since our interest is on the impact of bank mergers, we focus on the bank merger related variables while controlling other variables as much as necessary.
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Acknowledgements
We thank Juan Esteban Carranza, Hans Degryse, Mike Milhelbergel, Stephen Malpezzi, Seow Eng Ong, Joseph Ooi, François Ortalo-Magné, Martin Ruckes, Timothy Riddiough, James Seward, James Shilling, the anonymous referee, and the seminar participants at the NUS-APRU Conference (National University of Singapore) and the University of Wisconsin-Madison for their helpful comments. We also appreciate financial support from the Jerome Bain Real Estate Institute at Florida International University and the Puelicher Center for Banking Education at University of Wisconsin-Madison. The usual disclaimer applies.
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Appendix: Target REITs and Acquiring REITs and Their Banking Relationships (1997–2004)
Appendix: Target REITs and Acquiring REITs and Their Banking Relationships (1997–2004)
Year | Target REITs | Acquiring REITs | Share agent | Share bank | Bank merger | Limit access | Bank dummy | Agent access |
|---|---|---|---|---|---|---|---|---|
1998 | Ambassador Apartments | AIMCO REIT | 0 | 0 | 0 | 0 | 0 | 0 |
1999 | American Health | Health Care Property | 1 | 1 | 0 | 0 | 1 | 1 |
2001 | American Industrial | Developers Diversified | 1 | 1 | 1 | 0 | 0 | 1 |
1998 | ASR Investments | United Dominion | 0 | 0 | 0 | 1 | 1 | 1 |
1998 | Avalon Properties | Bay Apartments | 0 | 0 | 0 | 0 | 1 | 0 |
1997 | Beacon Properties | Equity Office | 1 | 1 | 0 | 0 | 1 | 1 |
1997 | California Jockey | Club Patroit American | 0 | 0 | 0 | 1 | 1 | 1 |
1998 | Capstone Capital | HealthCare Realty | 1 | 1 | 0 | 0 | 0 | 1 |
2001 | Captec Net Lease | Commercial Net Lease | 1 | 1 | 0 | 0 | 0 | 1 |
2003 | Center Trust | Pan Pacific | 0 | 1 | 0 | 1 | 1 | 1 |
2001 | Charles E. Smith Realty | Archstone REIT | 1 | 1 | 1 | 0 | 0 | 1 |
2004 | Chelsea Property Group | Simon | 1 | 1 | 1 | 1 | 1 | 1 |
1997 | Columbus Realty Trust | Post Property | 0 | 0 | 0 | 1 | 1 | 1 |
2000 | Commercial Assets Inc. | Asset Investors Inc. | 0 | 0 | 0 | 1 | 1 | 1 |
2000 | Cornerstone Properties | Equity Office | 0 | 1 | 1 | 1 | 1 | 1 |
1997 | Corporate Realty Income | Lexington Properties | 0 | 0 | 0 | 1 | 1 | 1 |
2003 | Crown American Realty | Pennsylvania REIT | 0 | 0 | 0 | 1 | 1 | 1 |
2004 | ElderTrust | Ventas | 0 | 0 | 0 | 1 | 1 | 1 |
1997 | Evans Withycombe | Equity Residential | 1 | 1 | 0 | 0 | 0 | 1 |
2000 | Grove Property Trust | Equity Residential | 1 | 1 | 1 | 1 | 1 | 1 |
1998 | Horizon Group | Prime Retail | 0 | 1 | 1 | 1 | 1 | 1 |
2003 | IRT Property | Equity One | 1 | 1 | 0 | 0 | 1 | 1 |
2003 | JDN Realty Corporation | Developers Diversified | 1 | 1 | 1 | 0 | 1 | 1 |
2002 | JP Realty | General Growth | 1 | 1 | 0 | 1 | 1 | 1 |
2004 | Keystone Property Trust | ProLogis | 0 | 1 | 0 | 1 | 1 | 1 |
1999 | Lexford Residential Trust | Equity Residential | 0 | 1 | 0 | 1 | 1 | 1 |
1999 | Meridian Industrial Trust | ProLogis | 1 | 1 | 1 | 1 | 1 | 1 |
1998 | Merry Land & Investment | Equity Residential | 1 | 1 | 1 | 0 | 1 | 1 |
1998 | Mid-America Realty | Bradley REIT | 0 | 0 | 1 | 1 | 1 | 1 |
2003 | Mid-Atlantic Realty Trust | Kimco | 1 | 1 | 0 | 1 | 1 | 1 |
1998 | National Income Realty | Tarragon Realty Trust | 1 | 1 | 0 | 1 | 1 | 1 |
1998 | New Plan Realty Trust | Excel | 0 | 0 | 0 | 1 | 1 | 1 |
1998 | Oasis Residential | Camden | 0 | 1 | 0 | 1 | 1 | 1 |
1998 | Price REIT | Kimco | 0 | 1 | 1 | 0 | 1 | 1 |
2003 | RFS Hotel Investors | CNL Hospitality | 1 | 1 | 0 | 0 | 0 | 1 |
1997 | ROC Communities | Chateau | 1 | 1 | 1 | 1 | 1 | 1 |
2004 | Rouse Company | General Growth | 1 | 1 | 1 | 0 | 0 | 1 |
1998 | Security Capital Atlantic | Security Capital Pacific | 0 | 1 | 0 | 0 | 1 | 1 |
1997 | South West Property | United Dominion | 0 | 0 | 0 | 1 | 1 | 1 |
2001 | Spieker Properties | Equity Office | 1 | 1 | 1 | 0 | 0 | 1 |
1999 | Storage Trust Realty | Public Storage | 1 | 1 | 1 | 0 | 1 | 1 |
1999 | Tower Realty Trust | Reckson | 0 | 0 | 0 | 0 | 0 | 0 |
1999 | TriNet Realty Trust | StarWood Financial | 0 | 0 | 0 | 0 | 1 | 0 |
2001 | United Investors Realty | Equity One | 0 | 0 | 0 | 1 | 1 | 1 |
1999 | Weeks Corporation | Duke | 0 | 1 | 0 | 0 | 0 | 1 |
1997 | Wellsford Residential | Equity Residential | 0 | 1 | 0 | 0 | 0 | 1 |
% | 43.5 | 67.4 | 32.6 | 52.2 | 73.9 | 91.3 |
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Hardin, W.G., Wu, Z. Bank Mergers, REIT Loan Pricing and Takeover Likelihood. J Real Estate Finance Econ 38, 275–301 (2009). https://doi.org/10.1007/s11146-008-9150-2
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DOI: https://doi.org/10.1007/s11146-008-9150-2