Skip to main content
Log in

REIT Open-Market Stock Repurchases and Profitability

  • Published:
The Journal of Real Estate Finance and Economics Aims and scope Submit manuscript

Abstract

This study examines whether the announcement of real estate investment trust (REIT) open-market stock repurchase programs contain information content about future operating performance over the period 1990–2001. We find no evidence that REIT stock buybacks are positively related to the operating performance. In fact, the operating performance of our sample REIT firms peak at the repurchase announcement year and deteriorate in the years following the announcement of share repurchases. Nevertheless, the sample REITs show higher levels of post-repurchase operating performance when compared to those of the pre-repurchase period. Additionally, our regression analysis shows that changes in future operating performance can explain the positive announcement effect.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. The REIT Modernization Act of 1999 reduces the payout ratio from 95% to 90%.

  2. Giambona et al. (2005) find both short-term and long-run abnormal stock returns following the announcement of REIT open-market stock repurchases. Their results suggest that the long-horizon abnormal returns are mainly due to market undervaluation. Giambona et al. (2006) show that repurchase size is positively related to subsequent stock price appreciation as well as to future (three to nine months) operating performance. However, neither Giambona, Giaccotto, and Sirmans nor Giambona, Golec, and Giaccotto investigate whether or not operating performance improves after stock repurchase announcement. Thus, it is not clear whether REIT managers use a repurchase program to signal private information about their firm’s better future prospects.

  3. We do not calculate abnormal returns using the market model. Since share repurchases are usually conditioning on large price decreases, the calculation of abnormal returns using the model based on price data before repurchases likely will bias the abnormal returns upward. Instead, we use an equally-weighted REIT portfolio as a benchmark to calculate abnormal returns. All REITs (the SIC code is 6798 or share codes are 18 (ordinary common shares, REITs) or 48 (shares of beneficial interest, REITs)) with return data available in the CRSP dataset are included in the equally-weighted REIT portfolio. The abnormal return is the difference between the daily return of a sample REIT firm and that of an equally-weighted REIT portfolio.

  4. The dividend payout ratio is calculated as total dividends paid (item #21) divided by income available to shareholders (item #18–item #17). The target leverage ratio, LEVERAGE, is total debt divided by total assets in the year prior to the repurchase minus the average of LEVERAGE from year −4 to year −2.

  5. The variable OPTIONS is the ratio of treasury shares (item #87) to shares outstanding.

  6. FFO is calculated as net income (item #172) plus depreciation and amortization (item #14) and extraordinary items (item #124) minus gains and losses from sales of properties (item #107). We treat depreciation and amortization, extraordinary items, or gains and losses from sales of properties as zero if they are not available or missing in COMPUSTAT. Vincent (1999) finds that FFO calculated in this way using financial statement information is very close to the reported FFO by REITs.

  7. In addition to FFOE, we also examine return on equity (ROE) and return on assets (ROA) to check for the robustness of the results. The ROE is equal to net income (item #172) scaled by the book value of equity (item #60) while the ROA is equal to operating income after depreciation (item #178) scaled by the book value of total assets (item #6). The results from ROE and ROA are consistent with the results from FFOE and hence are not reported.

References

  • Adams, G. L., Brau, J. C., & Holmes A. (2007). REIT stock repurchases: completion rates, long-run returns, and the straddle hypothesis. Journal of Real Estate Research, 29, 115–135.

    Google Scholar 

  • Bagwell, L. S. (1991). Share repurchase and takeover deterrence. RAND Journal of Economics, 22, 72–88.

    Article  Google Scholar 

  • Bagwell, L. S., & Shoven, J. B. (1988). Share repurchases and acquisitions: an analysis of which firms participate. In A. J. Auerbach (Ed.), Corporate takeovers: causes and consequences (pp 191–213). Chicago: University of Chicago Press.

    Google Scholar 

  • Brau, J. C., & Holmes A. (2006). Why do REITs repurchase stock? Extricating the effect of managerial signaling in open market share repurchase announcements. Journal of Real Estate Research, 28, 1–23.

    Google Scholar 

  • Brav, A., Graham, J. R., Harvey C. R., & Michaely R. (2005). Payout policy in the 21st century. Journal of Financial Economics, 77, 483–527

    Article  Google Scholar 

  • Comment, R., & Jarrell, G. A. (1991). The relative signaling power of Dutch-auction and fixed-price self-tender offers and open-market share repurchases. Journal of Finance, 46, 1243–1271.

    Article  Google Scholar 

  • Dann, L. Y. (1981). Common stock repurchases: An analysis of returns to bondholders and stockholders. Journal of Financial Economics, 9, 113–138.

    Article  Google Scholar 

  • Dittmar, A. K. (2000). Why do firms repurchase stock? Journal of Business, 73, 331–355.

    Article  Google Scholar 

  • Ghosh, C., Harding, J. P., Sezer, O., & Sirmans, C. F. (2008). The role of executive stock options in REIT repurchases. Journal of Real Estate Research, 30, 27–44.

    Google Scholar 

  • Giambona, E., Giaccotto, C., Sirmans, C. F. (2005). The long-run performance of REIT stock repurchases. Real Estate Economics, 33, 351–380.

    Article  Google Scholar 

  • Giambona, E., Golec J., & Giaccotto, C. (2006). The conditional performance of REIT stock repurchase. Journal of Real Estate Finance and Economics, 32, 129–149.

    Article  Google Scholar 

  • Grullon, G., & Michaely, R. (2004). The information content of share repurchase programs. Journal of Finance, 59, 651–680.

    Article  Google Scholar 

  • Guay, W., & Harford, J. (2000). The cash-flow permanence and information content of dividend increases versus repurchases. Journal of Financial Economics, 57, 385–415.

    Article  Google Scholar 

  • Ikenberry, D., Lakonishok, J., Vermaelen, T. (1995). Market underreaction to open-market share repurchases. Journal of Financial Economics, 39, 181–208.

    Article  Google Scholar 

  • Ikenberry, D., & Vermaelen, T. (1996). The option to repurchase stock. Financial Management, 25, 9–24.

    Article  Google Scholar 

  • Jagannathan, M., Stephens, C. P., & Weisbach, M. S. (2000). Financial flexibility and the choice between dividends and stock repurchases. Journal of Financial Economics, 57, 355–384.

    Article  Google Scholar 

  • Jensen, M. C. (1986). Agency costs of free cash flow. American Economic Review, 76, 323–329.

    Google Scholar 

  • Kahle, K. M. (2002). When a buyback isn’t a buyback: Open market repurchases and employee options. Journal of Financial Economics, 63, 235–261.

    Article  Google Scholar 

  • Loughran, T., & Ritter, J. R. (1997). The operating performance of firms conducting seasoned equity offerings. Journal of Finance, 52, 1823–1850.

    Article  Google Scholar 

  • Oded, J. (2005). Why do firms announce open-market repurchase programs? Review of Financial Studies, 18, 271–300.

    Article  Google Scholar 

  • Vermaelen, T. (1981). Common stock repurchases and market signaling: an empirical study. Journal of Financial Economics, 9, 139–183.

    Article  Google Scholar 

  • Vincent, L. (1999). The information content of funds from operations (FFO) for real estate investment trusts (REITs). Journal of Accounting and Economics, 26, 69–104.

    Article  Google Scholar 

  • White, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica, 48, 817–838.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Kartono Liano.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Huang, GC., Liano, K. & Pan, MS. REIT Open-Market Stock Repurchases and Profitability. J Real Estate Finan Econ 39, 439–449 (2009). https://doi.org/10.1007/s11146-008-9121-7

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11146-008-9121-7

Keywords

JEL Classification

Navigation