Using REIT Follow-on Equity Offerings to Pay down Credit Line Balances: Bank Certification or Monitored Financial Flexibility?

Vladimir A. Gatchev, Nandkumar Nayar, S. McKay Price and Ajai Singh

Journal of Real Estate Research, 2024, vol. 46, issue 4, 444-477

Abstract: Using hand collected data from offering prospectuses and other corporate filings, we examine the market response to real estate investment trust (REIT) follow-on stock offerings’ stated uses of proceeds. We also track REIT banking relationships over time. Consistent with the idea of bank certification, we show that markets react relatively favorably to REIT equity offers where issuers have lending relationships with affiliates of the underwriters. However, we also find that reactions are most favorable where REIT issuers intend to repay their bank’s line of credit, regardless of the bank’s affiliation with the underwriters. This pattern is particularly strong among smaller firms with lower institutional ownership. We posit that credit line repayments preserve benefits of bank monitoring while enhancing financial flexibility. Further examination reveals that this monitored financial flexibility is the dominant effect.

Date: 2024
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DOI: 10.1080/08965803.2023.2263246

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