1. Nicolai C. Striewe Nico B. Rottke
The Capital Structure of North American REITs and REOCs A Panel Data Regression
Nicolai C. Striewe
Nico B. Rottke

2. Introduction Motivation
Introduction
Motivation
Larger dataset for REITs than those of past studies.
Extension of sample by REOCs
Including Canadian REITs and REOCs
More efficient methodology, as data records have improved
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3. Introduction Contribution to literature
Introduction
Contribution to literature
More determinants of leverage included
Dynamic dimension (panel approach)
Differentiation between REITs and REOCs
Detailed robustness tests
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4. Introduction Overview of results
Introduction
Overview of results
Application of pecking order theory for REITs/REOCs concerning growth opportunities
Application of trade-off theory concerning size and asset tangibility
Concerning profitability only REITs follow the pecking order relationship
Compensation style and directors` stake in company influences the choice of leverage
REOCs prefer higher leverage as they profit from tax-shield (trade -off theory)
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5. Data Database: SNL Financial 418 REITs(355) and REOCs (63)
Data
Database: SNL Financial
418 REITs(355) and REOCs (63)
Over 41 periods: quarterly from Q4, 1998 to Q4, 2008
Data preparation:
Hybrid REITs and mortgage REITs excluded (19 units).
Missing data: 148 units (missing data or incomplete time series)
Units for analysis: 251 units.
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6. Results Preferred Model 21.09.2018 Sum squared resid 1263975
S.E. of regression
No. of observations
5430
Akaike criterion
'Within' variance
'Between' variance
152.76
coefficient
std. error
t-ratio
p-value
Constant
4.410
-6.432
0.000
***
Market to book ratio
0.161
0.022
7.450
ln(assets)
4.464
0.297
15.050
Real estate to assets ratio
0.141
0.012
12.090
REOC dummy
5.984
2.688
2.227
0.026 **
External mgmt dummy
4.940
2.556
1.932
0.053 *
Return on assets
-0.107
0.013
-8.180
Insider ownership
0.063
5.165
Residential dummy
14.639
2.720
5.382
Shopping dummy
9.354
2.409
3.882
Office dummy
-0.442
2.693
-0.164
0.870
Hotel dummy
-3.227
3.134
-1.030
0.303
Diversified dummy
3.372
3.100
1.088
0.277
Age
-1.909
0.056
Canada dummy
8.666
7.579
1.143
0.253
Bonus to total compensation
-0.344
0.205
-1.676
0.094
Hausman test
Explain HAUSMAN TEST. Why RANDOM EFFECTs. Can also TIME-INVARIANT EFFECTs. MORE EFFICIENT.
Notes: The table shows the results of the panel data regression using random effects with debt to assets ratio as dependent variable. The time-series are from 1 to 41 periods long for 251 cross-sectional units. Time dummies are not displayed. They are jointly significant with a p-value of according to Wald test. Breusch-Pagan test identifies the variance of the unit-specific error to be significantly different from zero (p=0.0000). * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level.
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7. Time Trend of Leverage Coefficients of time dummies in preferred model
Time Trend of Leverage
Coefficients of time dummies in preferred model
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8. Sensitivity Analysis Impact of endogeneity
Sensitivity Analysis
Impact of endogeneity
Random effects model assumes endogeneity of all independent variables
Endogenous variables: market to book ratio, ln(Assets), real estate to assets and return on assets.
Testing robustness of results by lagging (t-1) the endogenous variables.
Alternative dependent variable
Welch (2007): The opposite of financial debt is not equity
Alternative proxy for leverage: liabilities to assets ratio
Alternative independent variables
Alternative proxy for growth opportunities: ln(asset growth)
Alternative proxy for size: ln(rental revenue)
Alternative proxy for profitability: return on sales
Special cases of residential and shopping REITs/REOCs
Check changing influence of determinants for residential and shopping REITs/REOCs respectively.
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9. Findings Trade-off theory (TO) Pecking order theory (PO)
Findings
Trade-off theory (TO)
Pecking order theory (PO)
REITs (previous research)
Corporate Gover-nance
This Study
Comment
Profitability + -
-(REIT)
+(REOC)
REITs are tax-exempt & follow PO.
REOCs benefit from tax-shield (TO).
Growth
+/- +1
Information gap is larger for growth REITs/REOCs (PO).
Tangibility +2
Asset tangibility reduces risk of financial distress (TO)
Operating risk
Not covered in this study
Size
Size reduces risk of financial distress(TO)
External
Management
Compensation by assets under management incentivizes to lever
Insider Ownership
Directors’ with stake in company concentrate their ownership and reduce risk of hostile takeover with debt.
REOC
REOCs benefit from tax shield.
1 Lower influence for residential and shopping REITs/REOCs 2 Higher influence for residential and shopping REITs/REOCs

10. Discussion Nicolai C. Striewe Real Estate Management Institute
Discussion
Nicolai C. Striewe
Real Estate Management Institute
EUROPEAN BUSINESS SCHOOL
Söhnleinstraße 8D
65201 Wiesbaden, Germany

11. Backup Nicolai C. Striewe Real Estate Management Institute
Backup
Nicolai C. Striewe
Real Estate Management Institute
EUROPEAN BUSINESS SCHOOL
Söhnleinstraße 8D
65201 Wiesbaden, Germany

12. Variable definitions and basic descriptives
Variable definitions and basic descriptives
Measure
Description
Abbreviation
Mean
Min
Max
Leverage
Total debt divided by total assets
Debt to assets
50.89
96.33
Alternative
Liabilities divided by total assets
Liabilities to assets
56.923
99.76
Growth opportunities
Market to book ratio. Market capitalization divided by shareholders’ equity.
Market to book
1.82
276.86
Natural logarithm of asset growth
ln(asset growth)
2.207
-4.61
6.73
Size
Natural logarithm of total assets
ln(assets)
14.04
5.25
17.17
Natural logarithm of Rental Revenue
ln(rental revenue)
10.55
2.20
13.74
Asset Tangibility
Property Investment divided by Total Assets
Real estate to assets
79.55
110.73
REOC
Dummy variable for REOC status. (1=REOC, 0=REIT)
REOC dummy
0.13 1
Management structure
Dummy variable for external management. (1=externally managed, 0=internally managed)
External mgmt dummy
0.15
Profitability
Net income divided by total average assets.
Return on assets
3.11
177.35
Return on Sales
Return on sales
0.11
15.58
Insider ownership
Percent ownership in shares of directors.
Insider ownerships
15.59
100.00
Notes: Basic descriptives from 251 observations of the preferred model. Variance Inflation Factors (VIF) all below 2.4 for the variables.
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13. Dataset 21.09.2018 Full Sample Reduced Sample (Data Preparation)
Property Focus
Number
Percentage
Residential 65
16% 36
14%
Shopping 59
15% 43
17%
Diversified 55 27
11%
Hotel 54 42
Office 53
13%
Storage 26 7% 7 3%
Industrial 24 6% 16
Health Care 23 15
Speciality 22 17
Retail 4% 12 5%
Not Available 1 0%
Total
399
100%
251
REITs
337
84%
207
82%
REOCs 62 44
18%
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14. Sensitivity Analysis – Model specification
Preferred Model
Model 2 (alt. dep. Var)
Model 3
coefficient
p-value
Constant
0.000
***
0.015 **
0.001
Market to book
0.161
0.181
Market to book (t-1)
0.142
ln(Assets)
4.464
3.838
ln(Assets) (t-1)
3.625
Real estate to assets
0.141
0.085
Real estate to assets (t-1)
0.148
REOC dummy
5.984
0.026
11.245
5.413
0.046
External mgmt dummy
4.940
0.053 *
0.720
0.782
2.980
0.252
Return on assets
-0.107
-0.135
Return on assets (t-1)
-0.110
Insider Ownership
0.063
0.057
0.047
Residential dummy
14.639
11.993
12.915
Shopping dummy
9.354
7.755
0.002
9.239
Office dummy
-0.442
0.870
-1.802
0.512
-0.137
0.960
Hotel dummy
-3.227
0.303
0.748
0.815
-2.120
0.502
Diversified dummy
3.372
0.277
1.240
0.695
3.921
0.209
Age
0.056
0.756
0.018
Canada dummy
8.666
0.253
3.239
0.675
9.944
0.192
Bonus to total compensation
-0.344
0.094
-0.143
0.479
-0.369
0.080
No. of observations
5430
5211
Cross-sectional units
251
248
S.E. of regression
15.333
15.159
15.121
Akaike criterion
'Within' variance
43.393
40.005
40.922
'Between' variance
152.76
Wald (joint): time dummies (χ2)
Hausman test (χ2)
40.798
0.689
13.911
1.000
Notes: The table shows the results of the panel data regressions using random effects with debt to assets ratio as dependent variable. In model 2 the alternative dependent variable liabilities to assets is used instead. Model 3 tests the impact of endogeneity by lagging the affected variables by lagging them (t-1). The time-series are from 1 to 41 periods. Time dummies are not displayed. They are jointly significant with a p-value of according to Wald test. * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level.
Nicolai Striewe Real Estate Management Institute,

15. Sensitivity Analysis – Proxy robustness
Sensitivity Analysis – Proxy robustness
Preferred Model
Model 4
Model 5
Model 6
Model 7
coefficient
p-value
Coefficient
Constant
0.000
***
2.567
0.646
17.573
Market to book
0.161
0.129
0.155
0.153
ln(asset growth)
0.191
0.028 **
ln(assets)
4.464
2.153
3.913
3.618
ln(rental revenue)
1.889
Real estate to assets
0.141
0.151
0.092
0.150
0.142
REOC dummy
5.984
0.026
5.468
0.063 *
2.839
0.343
6.775
0.018
6.059
0.031
External mgmt dummy
4.940
0.053
2.106
0.455
1.010
0.703
4.310
0.104
3.897
0.133
Return on assets
-0.107
-0.138
-0.213
Return on sales
0.116
0.001
-1.636
*REOC dummy
1.825
Insider Ownership
0.046
0.002
0.083
0.069
0.067
Residential dummy
14.639
12.819
12.965
14.749
14.755
Shopping dummy
9.354
10.045
7.861
9.523
9.451
Office dummy
-0.442
0.870
0.765
-0.226
0.932
-0.324
0.908
-0.339
0.902
Hotel dummy
-3.227
0.303
-1.388
0.684
1.580
0.666
-2.669
0.419
-2.622
0.417
Diversified dummy
3.372
0.277
3.627
0.282
2.903
0.348
3.240
0.316
3.282
0.299
Age
0.056
0.033
0.312
0.029
Canada dummy
8.666
0.253
9.312
0.254
6.958
0.340
8.395
0.283
8.348
0.276
Bonus to total compensation
-0.344
0.094
-0.458
0.109
-0.180
0.405
-0.199
0.336
-0.150
0.462
No. of observations
5430
3555
4733
5372
Cross-sectional units
251
248
221
S.E. of regression
15.333
15.034
14.346
15.326
15.138
Akaike criterion
'Within' variance
43.393
42.759
37.266
41.753
41.063
'Between' variance
152.76
Wald (joint): time dummies (χ2)
Hausman test (χ2)
40.798
0.689
28.233
0.982
14.778
1.000
145.98
9.977
Notes: The table shows the results of the panel data regressions using random effects with debt to assets ratio as dependent variable. The impact of an alternative proxy is tested for growth opportunities in model 4, for size in model 5, for profitability in model 6 and in model 7 with an additional interaction variable to differentiate the impact of the alternative proxy for profitability on REOCs. The time-series are from 1 to 41 periods. Time dummies are not displayed. * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level.
Nicolai Striewe Real Estate Management Institute,

16. Sensitivity Analysis – Property type sensitivity
Preferred Model
Model 8
Model 9
Model 10
Model 11
coefficient
p-value
Constant
0.000
***
Market to book
0.161
0.971
0.160
0.159
0.162
*Residential dummy
-0.909
*Shopping dummy
-0.693
ln(assets)
4.464
4.642
4.101
4.092
4.485
1.491
0.378
0.010 **
Real estate to assets
0.141
0.148
0.137
0.099
0.140
0.251
0.055
0.004
REOC dummy
5.984
0.026
0.331
0.882
4.065
0.077 *
2.944
0.181
-1.667
0.472
31.981
-2.644
0.840
External mgmt dummy
4.940
0.053
0.876
0.693
3.646
0.106
3.436
0.118
0.980
Return on assets
-0.107
-0.110
-0.114
-0.127
-0.106
Insider Ownership
0.063
0.072
0.066
0.070
0.065
Age
0.056
0.198
0.178
0.154
Canada dummy
8.666
0.253
18.339
0.017
6.338
0.412
4.604
0.542
7.220
0.364
Bonus to total
compensation
-0.344
0.094
-0.382
0.061
-0.350
0.087
-0.302
0.138
-0.371
No. of observations
5430
Cross-sectional units
251
S.E. of regression
15.333
16.096
15.934
15.830
15.762
Akaike criterion
'Within' variance
43.393
40.330
39.177
40.455
41.393
'Between' variance
152.76
Wald (joint): time dummies (χ2)
Hausman test (χ2)
40.798
0.689
38.977
0.820
87.530
0,000
42.479
0.621
Notes: The table shows the results of the panel data regressions using random effects with debt to assets ratio as dependent variable. The changing impact of growth opportunities for the special cases of residential and shopping REITs/REOCs is measured in model 8, of size in model 9, of asset tangibility in model 10 and of REOCs in model 11. The time-series are from 1 to 41 periods. Time dummies are not displayed. * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level.
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17. Sensitivity Analysis – Property type sensitivity (cont`d)
Preferred Model
Model 12
Model 13
Model 14
coefficient
p-value
Coefficient
Constant
0.000
***
-9.778
0.024 **
Market to book
0.161
0.159
0.166
ln(assets)
4.464
4.411
3.532
4.400
Real estate to assets
0.141
0.142
0.133
0.143
REOC dummy
5.984
0.026
0.510
0.815
0.515
2.481
0.262
External mgmt dummy
4.940
0.053 *
-2.800
0.224
-0.066
0.976
1.102
0.614
*Residential dummy
39.472
*Shopping dummy
11.470
0.135
Return on assets
-0.107
-0.173
-0.104
0.278
-0.127
0.001
Insider Ownership
0.063
0.065
0.066
0.016
0.309
0.051
0.248
0.116
Age
0.056
0.090
0.152
0.185
Canada dummy
8.666
0.253
17.568
0.019
16.759
0.027
16.496
0.030
Bonus to total
compensation
-0.344
0.094
-0.352
0.088
-0.324
0.111
-0.342
0.096
No. of observations
5430
Cross-sectional units
251
S.E. of regression
15.333
15.588
15.558
15.867
Akaike criterion
'Within' variance
43.393
41.393
40.600
41.195
'Between' variance
152.76
Wald (joint): time dummies (χ2)
Hausman test (χ2)
40.798
0.689
56.032
0.147
31.459
0.969
Notes: The table shows the results of the panel data regressions using random effects with debt to assets ratio as dependent variable. The changing impact of externally managed REITs/REOCs for the special cases of residential and shopping REITs/REOCs is measured in model 12, of profitability in model 13 and of insider ownership in model 14. The time-series are from 1 to 41 periods. Time dummies are not displayed. * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level.
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18. Variance Inflation Factors
Variance Inflation Factors
Minimum possible value = 1.0
Values > 10.0 may indicate a collinearity problem
Market to book
1.012
ln(assets)
1.383
Real estate to assets
1.44
REOC dummy
2.34
External mgmt dummy
1.657
Return on assets
1.059
Insider ownership
1.319
Residential dummy
1.607
Shopping dummy
1.831
Office dummy
1.602
Hotel dummy
2.398
Diversified dummy
1.499
Age
1.117
Canada dummy
1.044
Bonus to total compensation
1.286
VIF(j) = 1/(1 - R(j)^2), where R(j) is the multiple correlation coefficient
between variable j and the other independent variables
Properties of matrix X'X:
1-norm = e+011
Determinant = e+065
Reciprocal condition number = e-011
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