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Why Do REITs Go Private? Differences in Target Characteristics, Acquirer Motivations, and Wealth Effects in Public and Private Acquisitions

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Abstract

This paper first identifies the characteristics of publicly-traded REITs associated with an increased probability of becoming the target of an announced merger or acquisition bid. Second, conditional on being a target, we determine which target characteristics influence the probability of the bidder being a private versus a public firm. Third, we document the magnitude of the wealth effects that accrue to the shareholders of target REITs in both privatizations and public-to-public transactions and how these effects vary with the characteristics of the target firms. Finally, we investigate the extent to which privatizations differ from “staying public” acquisitions in the type of financing employed and the motivation of the two investor types. We find that REITs more likely to become acquisition targets are smaller and less liquid with higher dividend yields than non-targets. The existence of an umbrella partnership (UPREIT) structure reduces the probability of becoming a target. Private acquirers are more likely to bid on underleveraged REITs with poor operating performance. Conversely, public buyers are more focused on acquiring highly levered REITs with greater institutional ownership and superior operating results. The determinants of abnormal returns also differ in privatizations and public-to-public deals.

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Notes

  1. NAREIT classifies a REIT as a hybrid if the REIT combines the investment strategies of both equity REITs and mortgage REITs.

  2. IPO and merger and acquisition activity statistics are obtained from NAREIT.

  3. See, for example, Haughney (2005).

  4. Prior to the REIT Modernization Act of 2001, qualified REITs were required to distribute 95% of taxable income as dividends.

  5. See Einhorn et al. (2007) for more details on the complications of combining a REIT with an UPREIT.

  6. For example, the average leverage ratio of firms in the NAREIT universe, defined as total debt divided by total market capitalization, was 41.9% in the fourth quarter of 2007 (www.nareit.com).

  7. We also conduct tests using firm accounting characteristics one quarter before the announcement, rather than one year. Our results are essentially the same; however, due to variability in reported quarterly results, especially with profitability and leverage, our results using annual data were more robust.

  8. We also examine the impact of governance characteristics on the acquisition probability. We do not report our results here, since anti-takeover measures are only available for 71 of the 370 firms, while director data are available for 57 of the firms. We find that while G-Index is not significantly related to the acquisition probability, the existence of a poison pill is significantly negatively related to the probability of receiving a bid. Regarding internal governance, we find that CEO—Chairman duality is significantly and positively related to the probability of a firm becoming a takeover target. These findings are consistent with the corporate governance literature related to mergers (see, for example, Masulis et al. 2007).

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Acknowledgements

We thank Jim Shilling, Rebel Cole, Jonathan Dombrow, Jay Hartzell and Shaun Bond for their valuable comments and suggestions. We also thank the participants in the 2009 AREUEA Annual Meeting, the attendants of the 2009 ERES Conference, and the participants in the NAREIT sponsored REIT Symposium held at DePaul University.

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Authors and Affiliations

  1. Department of Finance, Insurance and Real Estate, Hough Graduate School of Business Administration, University of Florida, Gainesville, FL, 32611, USA

    David C. Ling

  2. Department of Finance, Whitman School of Management, Syracuse University, Syracuse, NY, 13244, USA

    Milena Petrova

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Correspondence to David C. Ling.

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Ling, D.C., Petrova, M. Why Do REITs Go Private? Differences in Target Characteristics, Acquirer Motivations, and Wealth Effects in Public and Private Acquisitions. J Real Estate Finan Econ 43, 99–129 (2011). https://doi.org/10.1007/s11146-010-9295-7

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