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U.S. REIT banking relationships and syndicated loan pricing

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Abstract

Given bank debt is a critical financing source for real estate investment trusts (REITs), understanding how REIT banking relationships facilitate their borrowing costs becomes crucial. This research focuses on REIT syndicated loan facilities and investigates how banking relationships affect REIT loan pricing over the 1987–2015 period. We find that banking relationships on average lower syndicated loan spreads by at least 13.53 basis points. This reduction in spread for relationship loans versus non-relationship loans holds for the periods before the subprime crisis, during the crisis, and after the crisis. The result indicates that the financial crisis increases the borrowing cost for REITs with banking relationships by 59.36 basis points, while it increases by 95.92 basis points for REITs without banking relationships. We further examine the cost for public debt and the underpricing for season equity offerings (SEOs). During the non-crisis periods, banking relationships help reduce the borrowing cost of public debt by around 34 basis points. In addition, during the crisis period, the degree of SEO underpricing for REITs with prior banking relationships is significantly lowered (13.2%) compared to REITs without banking relationships.

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Notes

  1. Ivashina and Scharfstein (2010) show that loans to large borrowers during the peak period of the financial crisis (fourth quarter of 2008) was 47% lower than it was the quarter prior to that and 79% lower than at the peak of the credit boom (second quarter of 2007).

  2. DealScan-Compustat Link Data is available at Michael R. Roberts website (http://finance.wharton.upenn.edu/~mrrobert/styled-9/styled-12/index.html). We use the latest file in 2018.

  3. For mergers and acquisitions between REITs, we expect that the relationship between acquirers and the bank of the target firm are established through their interactions after the mergers rather than carried forward from the target company. Therefore, we do not consider banking relationships to be carried forward from the mergers.

  4. We do not use the market capitalization proxy for the Size variable to avoid collinearity.

  5. For loan spread, from 2010 to 2012, REITs without banking relationships have lower loan spreads, however the difference is not statistically significant. On the other hand, from 2013 to 2015, REITs with banking relationships have statistically significant lower loan spreads compared to those REITs without banking relationships.

  6. We obtain data on the syndicated loans of industrial firms over the same period, which includes 5,462 borrowing companies, 20,624 loan packages, and 36,059 lead bank facility-level observations. The means of REL(Dummy), REL(Number), and REL(Amount) for industrial firms are 0.391, 0.246, and 0.157, respectively.

  7. The results of the univariate tests show that strong banking relationship loans have lower spreads compared to non-banking relationship loans during a financial crisis. Having a strong banking relationship not only reduces information asymmetry between lenders and borrowers but also reduces future monitoring costs for lenders. Thus, REITs benefit from strong banking relationships and pay lower loan spreads even during financial crises.

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Funding

Lu acknowledges financial support from the National Science and Technology Council of Taiwan (MOST 105-2410-H-002-049).

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Authors and Affiliations

  1. College of Management, Yuan Ze University, Taoyuan, Taiwan

    Yang-pin Shen

  2. Department of Accounting, Feng Chia University, Taichung, Taiwan

    Chou-Yen Wu

  3. Department of International Business, National Taiwan University, No. 1, Sec. 4, Roosevelt Rd., Taipei, 10617, Taiwan

    Chiuling Lu

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  1. Yang-pin Shen
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  2. Chou-Yen Wu
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Correspondence to Chiuling Lu.

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Shen, Yp., Wu, CY. & Lu, C. U.S. REIT banking relationships and syndicated loan pricing. Rev Quant Finan Acc 61, 447–479 (2023). https://doi.org/10.1007/s11156-023-01157-0

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