Skip to main content
SpringerLink
Log in

REIT Going Private Decisions

  • Published:
The Journal of Real Estate Finance and Economics Aims and scope Submit manuscript

Abstract

Over the recent decade there was a wave of REITs going private, from an average of about three per year to 40 between 2005 and 2007. Standard corporate finance theory posits that firms go private when there is no longer a positive tradeoff between the expected benefits and the costs of being public, and it provides empirical evidence that going private decisions are motivated by potential gains from leverage, tax benefits, and expected improvements in corporate governance. Given the unique institutional environment for the REIT industry, this paper sheds new light on the going-private decision. Specifically, we examine the determinants of the going-private decision and document announcement wealth changes using a sample of 160 REITs from 1985 to 2009. We find firm performance and agency-related factors significantly impact the probability that a REIT announces to go private. We find that the passage of Sarbanes-Oxley and a proxy for differential performance in the private and public markets have no significant impact on the decision. The announcement day abnormal return is almost 12% and the three-day abnormal return is 15%, magnitudes that are both statistically and economically significant. Variations in the market reaction are associated with lower levels of cash and higher stock price volatility. Overall, we document a new set of going-private factors and wealth impacts for the REIT industry that are unique from those of previous corporate finance literature.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. The decision to go public can be seen as the opposite of the decision of going private. Hence, the factors shown to influence going private decisions could impact going public decisions in the opposite direction.

  2. Marais et al. (1989) report positive reactions for debt and preferred stock securities subject to going private proposals.

  3. See Campbell et al. (2010).

  4. We use the ratio of cash to assets to proxy for the relative level of available cash.

  5. REITs were required to payout 95% of their taxable income prior to the REIT Modernization Act of 1999. The distribution requirement changed from 95% to 90%, which took effect starting in 2001.

  6. See Brau and Fawcett 2006.

  7. Leuz (2007) points out that the observed positive market reaction documented by Engel should not be interpreted as equal to the costs imposed by SOX, but that SOX could have motivated the decision to go private that generates reductions in agency costs. Companies that have fewer than 300 shareholders of record (or fewer than 500 shareholders of record and less than $10 million in assets each of the past 3 years) can avoid SEC reporting obligations by filing for deregistration (i.e., “going dark”). Companies can have thousands of beneficial shareholders with shares held in the street name by financial institutions, with each representing only one holder of record. Unlike going private transactions, decisions to go dark are not expected to improve corporate governance. Leuz et al. (2008) document that despite the cost savings available from avoiding SOX related reporting requirements, firms that announce they are going dark, experience a negative market reaction. They associate this negative market reaction with signals of poor future prospects and continued agency problems.

  8. Private real estate returns are proxied by the National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index (NPI). Public real estate returns are proxied by the National Association of Real Estate Investment Trust (NAREIT) Index.

  9. They note that investors can alter the property type mix or adjust their leverage to end up with a similar risk return tradeoff in either market.

  10. We lose 22 of the SDC observations because of duplicate companies. Thirteen firms had two observations, three firms had three observations, and one firm had four observations. We kept the first event for each firm and eliminated all other duplicates. In the end, 50 of our announcing REITs are found in the SDC data, 36 of which have an effective date.

  11. Eighty REIT going private transactions is a relatively small sample size compared to 3,397 non-REITs that went private over the same window of time (based on SDC data). The small frequency of REIT going private decisions outside of the 2005–2007 period is consistent with the notion that public benefits outweigh the benefits of going private for REITS during most time periods. The large majority of our sample is Equity REITs. Of the 80, only nine are non-equity REITs. We test to ensure our results are robust to dropping the non-equity REITs. Our results are robust to their exclusion. Indeed, excluding mortgage REITs increases the level of significance for PPE-to-Sales and Trading volume relative to the results reported in Table 3. We have kept the non-equity REITs in the sample for completeness.

  12. The 419 possible firms represent the total number of non-announcing REITs during our sample period. The number may seem high; however, there are never more than 125 REITs during any given month. The 419 REITs result from firms adding and dropping out of the sample over time.

  13. As other proxies of growth potential, we also investigate market-to-book equity (CRSP market capitalization divided by Compustat Common Equity (CEQ)) and four estimates of historical sales-growth. Tobin’s Q had the most explanatory power and was hence chosen as the proxy for expected growth.

  14. We also examine Debt-to-assets (Compustat Total Liabilities (LT) divided by Compustat Total Assets (TA)) as a measure for financial leverage. Once again, we choose Debt-to-equity for its superior explanatory power.

  15. Along with Market cap we also examine CPI-adjusted sales (Compustat Total Sales (SALE)) as a proxy for size.

  16. For robustness, we also examine the CRSP volume (VOL) in the month prior to the event instead of the average 12-month volume.

  17. In additional tests, we also define After Sox to only apply to going private REITs. Our results are robust to both definitions.

  18. In additional robustness tests not reported, but available upon request, we also examine the effects of PE ratios, the spread between t-bonds and t-bills, the spread between corporate and treasury bonds, the number of IPOs in the prior six and 12 months to the going private announcement, whether the security was an equity REIT, whether the REIT was delisted for failing to meet book equity, market equity, or price exchange requirements, the private-public spread based upon REIT sector (apartment, industrial, retail, or office), various lags of the private-public spread, CEO tenure, CEO duality, number of board members, number of board insiders, the value of options, CEO cash compensation, CEO equity compensation, and CEO unexercised options.

  19. Due to data unavailability, our fully specified logit model is estimated on a reduced sample of 101 firms.

  20. The inverse relationship we report above for Tobin’s Q is also consistent with this theory.

  21. Firm past performance is estimated using the firm’s CRSP 12-month return minus 12-month return of CRSP Market Value Weighted index. In unreported robustness tests we also use a CRSP REIT value- and equally-weighted index. Our results are robust to the REIT indices.

  22. In robustness tests using an expanded sample of 152 REITs and a reduced model (i.e., when we drop Outside board members and CEO bonus comp) all of our findings hold with the exception of Past performance which loses its significance (estimate=−0.49, p = 0.4459).

  23. In robustness tests, we interact After SOX with Market cap, and our results remain virtually unchanged.

  24. We employ a Private-public spread equal to the return of the MIT real estate return index (private) minus the return of the CRSP REIT return index (public). For robustness, we also examined spreads based on potential lagged relationships between private and public markets, as well as spreads adjusted for property types. These alternative spreads produced similar results.

  25. When the CRSP equally weighted index and REIT value weighted index are used as for the market index, the three-day CAR results are 12.5% and 11.9%, respectively.

References

  • Adams, G. A., Brau, J. C., & Holmes, A. L. (2007). REIT stock repurchases: Completion rates, long-run returns, and the straddle hypothesis. Journal of Real Estate Research, 29, 115–136.

    Google Scholar 

  • Baker, M., & Wurgler, J. (2006). Investor sentiment and the cross-section of stock returns. The Journal of Finance, 61(4), 1645–1680.

    Article  Google Scholar 

  • Block, S. B. (2004). The latest movement to going private: An empirical Study. Journal of Applied Finance, Spring/Summer: 36–44.

  • Boot, A. W. A., Gopalan, R., & Thakor, A. V. (2006). The entrepreneur’s choice between private and public ownership. The Journal of Finance, 61(2), 803–836.

    Article  Google Scholar 

  • Boot, A. W. A., Gopalan, R., & Thakor, A. V. (2008). Market liquidity, investor participation, and managerial autonomy: why do firms go private? The Journal of Finance, 63(4), 2013–2059.

    Article  Google Scholar 

  • Brau, J. C. (2010). “Why do firms go public?”In: D. Cumming (Ed.), Oxford Handbook of entrepreneurial finance, Forthcoming.

  • Brau, J. C., & Fawcett, S. E. (2006). Initial public offerings: An analysis of theory and practice. The Journal of Finance, 61, 399–436.

    Article  Google Scholar 

  • Brau, J. C., & Holmes, A. L. (2006). Why do REITs repurchase stock? Extricating the effect of managerial signaling in open market share repurchase announcements. Journal of Real Estate Research, 28, 1–23.

    Google Scholar 

  • Campbell, R. D., Ghosh, C., & Sirmans, C. F. (2001). The information content of method of payment in mergers and joint ventures. Real Estate Economics, 29(3), 361–387.

    Article  Google Scholar 

  • Campbell, R.D., Ghosh, C., Petrova, M. & Sirmans, C. F. (2010). Corporate governance and performance in the market for corporate control: The case of REITs. Journal of Real Estate Finance and Economics, Forthcoming.

  • Carlson, N., Titman, S. & Tiu, C. (2010). “The returns of private and public real estate.” Working paper.

  • DeAngelo, H., DeAngelo, L., & Rice, E. M. (1984). Going private: Minority freezeouts and stockholder wealth. The Journal of Law and Economics, 27(2), 367–401.

    Article  Google Scholar 

  • Denis, D. J. (1992). Corporate investment decisions and corporate control: Evidence from going-private transactions. Financial Management, Autumn: 80–94.

  • Downs, D. H., & Guner, Z. N. (2006). On the quality of FFO forecasts. Journal of Real Estate Research, 28(3), 257–274.

    Google Scholar 

  • Easterbrook, F. H. (1984). Two agency-cost explanations of dividends. The American Economic Review, 74(4), 650–659.

    Google Scholar 

  • Engel, E., Hayes, R. M., & Wang, X. (2007). The Sarbanes-Oxley act and firms’ going-private decisions. The Journal of Accounting and Economics, 44, 116–145.

    Article  Google Scholar 

  • Halpern, P., Kieschnick, R., & Rotenberg, W. (1999). On the heterogeneity of leveraged going private transactions. Review of Financial Studies, 12(2), 281–309.

    Article  Google Scholar 

  • Hardin, W. G., Highfield, M. J., Hill, M. D., & Kelly, G. W. (2009). The determinants of REIT cash holdings. Journal of Real Estate Finance and Economics, 39(1), 39–57.

    Article  Google Scholar 

  • Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323–329.

    Google Scholar 

  • Kaplan, S. (1989). Management buyouts: Evidence on taxes as a source of value. The Journal of Finance, 44(3), 611–632.

    Article  Google Scholar 

  • Kim, W., & Weisbach, M. S. (2008). Motivations for public equity offers: An international perspective. Journal of Financial Economics, 87, 281–307.

    Article  Google Scholar 

  • Lehn, K., & Poulsen, A. (1989). Free cash flow and stockholder gains in going private transactions. The Journal of Finance, 44(3), 771–787.

    Article  Google Scholar 

  • Leuz, C. (2007). Was the Sarbanes-Oxley act of 2002 really this costly? A discussion of evidence from event returns and going-private decisions. The Journal of Accounting and Economics, 44, 146–165.

    Article  Google Scholar 

  • Leuz, C., Triantis, A., & Wang, T. Y. (2008). Why do firms go dark? Causes and economic consequences of voluntary SEC deregistrations. The Journal of Accounting and Economics, 45, 181–208.

    Article  Google Scholar 

  • Ling, D.,& Petrova, M. (2011). Why do REITs go private? Differences in target characteristics, acquirer motivations, and wealth effects in public and private acquisitions. Journal of Real Estate Finance and Economics, Forthcoming.

  • Loughran, T., & Ritter, J. R. (1995). The new issue puzzle. The Journal of Finance, 50(1), 23–51.

    Article  Google Scholar 

  • Loughran, T., & Ritter, J. R. (1997). The operating performance of firms conducting seasoned equity offerings. The Journal of Finance, 52(5), 1823–1850.

    Article  Google Scholar 

  • Marais, L., Schipper, K., & Smith, A. (1989). Wealth effects of going private for senior securities. Journal of Financial Economics, 23, 155–191.

    Article  Google Scholar 

  • McIntosh, W., Officer, D. T., & Born, J. A. (1989). The wealth effects of merger activities: Further evidence from real estate investment trusts. Journal of Real Estate Research, 4(3), 141–155.

    Google Scholar 

  • Opler, T., & Titman, S. (1993). The determinants of leveraged buyout activity: Free cash flow vs. financial distress costs. The Journal of Finance, 48, 1985–1999.

    Article  Google Scholar 

  • Pagano, M., Panetta, F., & Zingales, L. (1998). Why do companies go public? An empirical analysis. The Journal of Finance, 53(1), 27–64.

    Article  Google Scholar 

  • Pagliari, J., Scherer, K., & Monopoli, R. (2005). Public versus private real estate equities: A more refined, long-term comparison. Real Estate Economics, 33(1), 147–187.

    Article  Google Scholar 

  • Pastor, L., & Veronesi, P. (2005). Rational IPO waves. The Journal of Finance, 60(4), 1713–1756.

    Article  Google Scholar 

  • Pristin, T. (2006). A trend for public REIT’s: Going private. The New York Times March 15.

  • Rao, S. M., Waters, M. S., & Payne, B. (1995). Going private: A financial profile. Journal of Financial And Strategic Decisions, 8(3), 53–59.

    Google Scholar 

  • Servaes, H. (1991). Tobin’s Q and the gains from takeovers. The Journal of Finance, 46(1), 409–419.

    Article  Google Scholar 

  • Shah, S., & Thakor, A. V. (1988). Private versus public ownership: Investment, ownership distribution, and optimality. The Journal of Finance, 43(1), 41–59.

    Article  Google Scholar 

  • Smith, A. (1990). Corporate ownership structure and performance: The case of management buyouts. Journal of Financial Economics, 27, 143–164.

    Article  Google Scholar 

  • Subrahmanyam, A., & Titman, S. (1999). The going-public decision and the development of financial markets. The Journal of Finance, 54(3), 1045–1082.

    Article  Google Scholar 

  • Tobin, J. (1969). A general equilibrium approach to monetary theory. Journal of Money Credit and Banking, 1, 15–29.

    Article  Google Scholar 

Download references

Acknowledgement

We also thank Elizabeth Kanell of the BYU Finance Department for proofing the paper several times.

Author information

Authors and Affiliations

  1. Brigham Young University, Provo, UT, USA

    James C. Brau & J. Troy Carpenter

  2. Texas Christian University, Forth Worth, TX, USA

    Mauricio Rodriguez

  3. The Florida State University, Tallahassee, FL, USA

    C. F. Sirmans

Authors
  1. James C. Brau
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. J. Troy Carpenter
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Mauricio Rodriguez
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. C. F. Sirmans
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Mauricio Rodriguez.

Additional information

Dr. Brau and Carpenter acknowledge funding from the BYU Silver Fund and a Goldman Sachs Fellowship. Dr. Rodriguez is grateful for research support from the Charles Tandy American Enterprise Center and the Luther King Capital Management Center for Financial Studies at Texas Christian University. We thank Dr. Javier Rodriguez of the University of Puerto Rico for early help on the paper.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Brau, J.C., Carpenter, J.T., Rodriguez, M. et al. REIT Going Private Decisions. J Real Estate Finan Econ 46, 24–43 (2013). https://doi.org/10.1007/s11146-011-9325-0

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11146-011-9325-0

Keywords

Search

Navigation