Walter I. Boudry

An Analysis of REIT Security Issuance Decisions

This article tests the ability of traditional capital structure theories to explain the issuance decisions of real estate investment trusts (REITs). For issuances made between 1997 and 2006, we find strong support for the market timing theory of capital structure. Controlling for past returns and growth, a REIT is more likely to issue equity when its price-to–net asset value ratio is high. This suggests that REITs issue equity in public markets when the cost of equity capital is lower in the public market than in the private market. Consistent with traditional market timing, REITs are more likely to issue equity after experiencing large price increases. We also find some support for REITs following the trade-off theory of capital structure. REITs are less likely to issue debt when proxies for expected bankruptcy costs are high.

An Examination of REIT Dividend Payout Policy

This paper proposes a new methodology for decomposing real estate investment trust (REIT) dividends into discretionary and nondiscretionary components. By examining the tax characteristics of dividends, I am able to accurately measure the discretionary component of a REITs dividend. This methodology provides new insights into our understanding of REIT dividend payout policy. Unlike previous studies that find limited explanations for discretionary dividend payouts, I find a systematic explanation. Discretionary dividends tend to be large on average making up between 18% and 35% of a REITs total dividend and display considerable variation through time and across firms. The main determinant of these discretionary dividends appears to be dividend smoothing. There is an inverse relationship between discretionary and nondiscretionary dividends. Even if a REIT has excess cash flow it could distribute in discretionary dividends, it will tend not to do so if it has a high dividend payout due to its nondiscretionary dividends. In this sense, REITs appear to use discretionary dividends to smooth their payout ratios.

The Dynamics of REIT Pricing Efficiency

We study the dynamics of pricing efficiency in the equity REIT market from 1993 to 2014. We measure pricing efficiency at the firm level using variance ratios calculated from quote midpoints in the TAQ database. We find four main results. First, on average the market is efficient, with variance ratios close to one. However, in any given year, there is considerable cross-sectional variation in variance ratios, suggesting at least some firms are priced inefficiently. Second, higher institutional ownership by active institutional investors is related to better pricing efficiency, while passive ownership does not reduce pricing efficiency. Third, REITs that are included in the S&P 500 and S&P 400 are priced more efficiently than other REITs. For the S&P 500 firms we find evidence that this was purely driven by sample selection, while for S&P 400 firms, we find evidence that it is inclusion in the index that drives efficiency. Finally, we find evidence that firm investment, analyst coverage, and debt capital raising activity can influence pricing efficiency. This article is protected by copyright. All rights reserved

Diversification Benefits of REIT Preferred and Common Stock: New Evidence from a Utility based Framework

We study the diversification benefits of REIT preferred and common stock using a utility based framework in which investors segment based on risk aversion. Taking the view of a long run investor, we conduct our analysis using data from 1992 to 2012. We examine optimal mean-variance portfolios of investors with different levels of risk aversion given access to different classes of assets and establish three main results. First, REIT preferred and common stock provides significant diversification benefits to investors. REIT common stock helps low risk aversion investors attain portfolios with higher returns, while REIT preferred stock helps high risk aversion investors by providing a venue for risk reduction. Both asset classes receive material allocations over plausible levels of risk aversion. Second, while REIT preferred stock appears to behave somewhat like a hybrid debt/equity asset, its risk/return profile appears to not easily be replicated by those asset classes. When given the opportunity, investors will reduce allocations to REIT common stock and investment grade bonds and invest in REIT preferred stock. Finally, realistic investor constraints matter empirically. Conclusions drawn from the empirical analysis are markedly different under these constraints compared to the classical unconstrained setting.

Using Cash Flow Dynamics to Price Thinly Traded Assets

Are cash flows informative and predictive in valuing thinly traded assets? We investigate the extent to which cash-flow and discount-factor information plays a role in pricing thinly traded assets. We focus on pricing the various traded tranches in commercial mortgage-backed securities (CMBS) by developing an adaptation of the Campbell-Shiller dynamic Gordon growth model, which we term a Self-Propagating Rolling-Window VAR. We apply this to cash flows and actual bond prices. In contrast to stocks, we find that cash flows are informative in valuing thinly traded assets. Our predicted cash flow yields closely resemble ex-post realized transaction yields, and these predicted yields even outperform yields based on matrix prices especially for subordinated tranches. We also find that discount-factor information, while important is not as informative as cash flows in this setting, except after the financial crisis where the impact of discount-factor information increases somewhat. Our results provide a good representation of CMBS yields; investors can readily apply this algorithm to infer values of other types of thinly traded assets where cash flows are observable.

Using Cash Flow Dynamics to Price Thinly Traded Assets: The Case of Commercial Real Estate

We propose a technique to infer cash flow yields for investment assets whose trades are infrequent, but for which cash flow data is available. We construct a Self-Propagating Rolling-Window Panel VAR framework, adapted from a Dynamic Gordon Growth Model setup. We use this framework to estimate yields and volatility in yields for untraded commercial properties as out-of-sample predictions from our VAR based on these properties’ cash flow data. We find that our predicted cash flow yields closely resemble ex-post realized transaction yields, and that these predicted yields even outperform appraisals in this respect. We find that this paradigm provides a good representation of commercial real estate yields, and propose that investors can readily apply this algorithm to infer values of untraded investment assets.