The effect of capital structure on the profitability of listed real estate invesment trusts (reits) in the united kingdom from 2007 to 2014

THE EFFECT OF CAPITAL STRUCTURE ON THE PROFITABILITY OF LISTED REAL ESTATE INVESTMENT TRUSTS (REITS) IN THE UNITED KINGDOM FROM 2007 TO 2014 By TRAN VU DANG Supervised by Pamela Anderson A dissertation submitted for the award of the degree of Master of Finance The University of Huddersfield September 2015 ABSTRACT The regulation for real estate investment trusts (REITs) in United Kingdom is introduced in January 2007 with the expectation that the REITs will be the solution for the scarcity of reasonably priced rental housing in UK and so many listed property firms in UK chose to become REITs (Leone, 2011; Park, 2009) Many property companies have chosen to convert to REITs or many new REITs have been established since 2007 The objective of this study is to analyse the effect of capital structure on the profitability of listed Real Estate Investment Trusts (REITs) in United Kingdom from 2007 to 2014 A sample of 15 REITs in United Kingdom from 2007 to 2014 has been collected from the database Osiris, which is the database provided by University of Huddersfield Short-term debt ratio, long-term debt ratio and total debt ratio will be used as the indicators of capital structure of REITs in United Kingdom Return on asset and return on equity will be used as the indicators of profitability of REITs in United Kingdom This study finds out that there is a significant and negative effect of long-term debt ratio and total debt ratio on return on asset of REITs in United Kingdom There is the negative effect of short-term debt ratio on return on asset; however, this effect is insignificant In addition, it also finds out that there is a significant and negative effect of short-term debt ratio, long-term debt ratio and total debt ratio on return on equity of REITs in United Kingdom These results may indicates that REITs in United Kingdom should use lest debt by reducing either short-term debt or long-term debt in order to increase their profitability i ACKNOWLEDGEMENT I would like to express my sincere gratitude to my supervisor Pamela Anderson for her guidance, patience, motivation, and most importantly, her immense knowledge Her support in the learning sets helped me in all the time of research and writing of this dissertation I could not have imagined having a better supervisor for my master study I would also like to thank Kay Smith for her comments in the learning sets Her comments has contributed a lot to the writing of this dissertation Finally, I would like to thank the Business School, University of Huddersfield has supplied the research resources like the Osiris database and the learning sets, which have helped me a lot in finishing this dissertation ii TABLE OF CONTENTS ABSTRACT i ACKNOWLEDGEMENT ii LIST OF TABLES vii LIST OF FIGURES viii LIST OF ABBREVIATIONS ix CHAPTER ONE: INTRODUCTION 1.1 Background of the study 1.2 Research aims and objectives 1.3 Structure of the study CHAPTER TWO: LITERATURE REVIEW 2.1 Introduction 2.2 The legislation of the Real Estate Investment Trusts (REITs) industry in United Kingdom 2.3 Profitability of Real Estate Investment Trusts (REITs) in United Kingdom 2.3.1 Previous studies about the indicators of profitability of Real Estate Investment Trusts (REITs) 2.3.2 Explanation of the choice return on asset (ROA) and Return on Equity (ROE) as indicators of profitability of Real Estate Investment Trusts (REITs) in United Kingdom 2.4 Capital structure of Real Estate Investment Trusts (REITs) in United Kingdom 2.4.1 Theories on capital structure of Real Estate Investment Trusts (REITs) 2.4.2 Explanation of the choice of short-term debt ratio (STDR) and long-term debt ratio (LTDR) and total debt ratio (TDR) as indicators of capital structure of Real Estate Investment Trusts (REITs) in United Kingdom 10 2.5 Previous studies on the relationship between short-term debt ratio (STDR) and profitability of Real Estate Investment Trusts (REITs) 12 2.5.1 Previous studies about the indicators of short-term debt ratio (STDR) 12 2.5.2 Previous studies about the relationship between short-term debt ratio (STDR) on the return on asset (ROA) 12 2.5.3 Previous studies about the relationship between short-term debt ratio (STDR) and return on equity (ROE) 13 iii 2.6 Long term debt ratio (LTDR) 14 2.6.1 Previous studies about the indicators of long-term debt ratio (LTDR) of Real Estate Investment Trusts (REITs) 14 2.6.2 Previous studies about the relationship between long-term debt ratio (LTDR) and return on asset (ROA) 14 2.6.3 Previous studies about the relationship between long-term debt ratio (LTDR) and return on equity (ROE) 15 2.7 Total debt ratio (TDR) 16 2.7.1 Previous studies about the indicators of total debt ratio (TDR) 16 2.7.2 Previous studies about the relationship between total debt ratio (TDR) and the return on asset (ROA) 17 2.7.3 Previous studies about the relationship between total debt ratio (TDR) and return on equity (ROE) 18 2.8 Size as control variable 19 2.8.1 Explanation of choosing size as control variable 19 2.8.2 Previous studies about the indicator of size of Real Estate Investment Trusts (REITs) 20 2.8.3 Previous studies about the relationship of size and return on asset (ROA) 20 2.8.4 Previous studies about the relationship between size and return on equity (ROE) 21 2.9 Conclusion 21 CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY 22 3.1 Introduction 22 3.2 Research objectives and questions 22 3.3 Research approach 22 3.4 Sample selection 23 3.5 Data collection methods 23 3.6 Data analysis 24 3.6.1 Definition and measurement of variables 24 3.6.2 Descriptive statistics 25 3.6.3 Correlation coefficients 26 3.6.4 Multicollinearity 26 3.6.5 Multivariate linear regression 27 iv 3.7 Hypothesis development 28 3.8 Conclusion 29 CHAPTER FOUR: DATA ANALYSIS AND DISCUSSION 30 4.1 Introduction 30 4.2 Descriptive statistics 30 4.2.1 Descriptive statistics of return on asset (ROA) and return on equity (ROE) 31 4.2.2 Descriptive statistics of short-term debt ratio (STDR), long-term debt ratio (LTDR) and total debt ratio (TDR) 33 4.2.3 Descriptive statistics of size 37 4.3 Results of correlation and expected relationship between capital structure and profitability of Real Estate Investment Trusts (REITs) in United Kingdom 38 4.3.1 Expected relationship between the indicators of capital structure and return on asset as the indicator of profitability of Real Estate Investment Trusts (REITs) in the United Kingdom 39 4.3.2 Expected relationship between the indicators of capital structure and return on equity (ROE) as the indicator of profitability of Real Estate Investment Trusts (REITs) in United Kingdom 39 4.4 Regression analysis and discussion of the effect of short-term debt ratio (STDR) on the profitability of Real Estate Investment Trusts (REITs) in United Kingdom 39 4.4.1 Effects of short term debt ratio (STDR) on profitability of on return on asset (ROA) 39 4.4.2 Effect of short-term debt ratio (STDR) on return on equity (ROE) 42 4.5 Effects of long-term debt ratio (LTDR) on profitability of Real Estate Investment Trusts (REITs) in United Kingdom 45 4.5.1 Effect of long- term debt ratio (LTDR) on return on asset (ROA) 45 4.5.2 Effect of long-term debt ratio (LTDR) on return on equity (ROE) 48 4.6 Effects of total debt ratio on profitability of Real Estate Investment Trusts (REITs) in United Kingdom 51 4.6.1 Effect of total debt ratio (TDR) on return on asset (ROA) 51 4.6.2 Effect of total debt ratio (TDR) on return on equity (ROE) 53 4.7 Size as control variable 56 4.7.1 Relationship between size and return on asset (ROA) 56 4.7.2 Relationship between size return on equity (ROE) 57 4.8 Hypothesis outcome 57 v 4.9 Conclusion 58 CHAPTER FIVE: RECOMMENDATIONS AND CONCLUSIONS 60 5.1 Introduction 60 5.2 Summary of the study 60 5.3 Limitations of the study 62 5.4 Recommendations for future studies 62 REFERENCE 64 APPENDICES 70 Appendix 1: Table of 40 listed REITs in UK from Osiris database 70 Appendix 2: Table of 28 listed REITs in UK chosen for the check of date of becoming REITs in UK 72 Appendix 3: Table of 15 listed REITs in UK chosen for the study 73 Appendix 4: Table of explanation of how the variable is collected and calculated 74 Appendix 5: Table of raw data collected from Osiris 75 Appendix 6: Table of the calculated data of variables used in the study 75 vi LIST OF TABLES Table 4.1: Descriptive statistics of dependent and independent variables 30 Table 4.2: Correlations between independent variables and dependent variables 38 Table 4.3: Summary of model 40 Table 4.4: ANOVA of model 40 Table 4.5: Result of the regression model 41 Table 4.6: Summary of model 42 Table 4.7: ANOVA of model 43 Table 4.8: Result of the regression model 44 Table 4.9: Summary of model 45 Table 4.10: ANOVA of model 46 Table 4.11: Result of the regression model 47 Table 4.12: Summary of model 48 Table 4.13: ANOVA of model 49 Table 4.14: Result of the regression model 50 Table 4.15: Summary of model 51 Table 4.16: ANOVA of model 51 Table 4.17: Result of the regression model 52 Table 4.18: Summary of model 54 Table 4.19: ANOVA of model 54 Table 4.20: Result of the regression model 55 Table 4.21: Hypothesis outcome 57 vii LIST OF FIGURES Figure 4.1: Normality histogram of ROA 31 Figure 4.2: Normality histogram of ROE 32 Figure 4.3: Normality histogram of STDR 33 Figure 4.4: Normality histogram of LDTR 34 Figure 4.5: Normality histogram of TDR 35 Figure 4.6: Normality histogram of SIZE 37 viii LIST OF ABBREVIATIONS REITs : Real Estate Investment Trusts ROA : Return on asset ROE : Return on equity STD : Short-term debt LTD : Long-term debt TD : Total debt STDR : Short-term debt ratio LTDR : Long-term debt ratio TDR : Total debt ratio UK : United Kingdom EBIT : Earnings before interest and taxes ix The average level of debt that REITs in United Kingdom can be indicated as low ratio as it is just about half the level that is indicated as high ratio of debt by the interest cover test of the legislation for REITs in United Kingdom (Alias & Soi, 2011; Gaut et al., 2006; Park, 2009) However, the results still find out that there is a significant and negative impact of total debt on the profitability of REITs in United Kingdom Therefore, to be more profitable, REITs in United Kingdom should try to use less debt than they are using to finance their operation Either reducing short-term debt or long-term debt could help the REITs in United Kingdom increase their profitability 5.3 Limitations of the study REITs sector is still the new sector in United Kingdom as it just appeared since 2007 Therefore, there are some REITs that have just been established or converted in recent years but have been excluded from the study because of their missing variables In addition, there are also other control variables that has effect on the profitability of REITs are excluded from the study because there are not enough data like the growth of firms that have been included in previous studies in analysing the impact of capital structure on the profitability of companies (Abor, 2005; Gatsi, 2012; Salim & Yadav, 2012) Another limitation of this research is the R square of the six regression models are quite small so the percentage of the change of the profitability of REITs in United Kingdom that can be explained by the capital structure is quite low Although the results find out that there is a negative effect of capital structure on the profitability of RETIs in UK, this negative effect may be not fully reliable The final limitation of this study is the non-normal distribution of STDR, ROA, ROE, SIZE while LTDR and TDR has relatively normal distribution The non-normal distribution of most of the variables may indicate that the results of this study may have lower generalizability, which indicates the smaller range of the applicability of the results of the study (Sekaran & Bougie, 2010) 5.4 Recommendations for future studies In a few years with more REITs and more data, the analysis of the 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Harlow: Financial Times Prentice Hall Sekaran, U., & Bougie, R (2010) Research methods for business: A skill-building approach Chichester: Wiley TALIESIN PROPERTY FUND LIMITED (2015) About us Retrieved from http://www.taliesinberlin.com/about.php Tang, C H., & Jang, S S (2008) The profitability impact of REIT requirements: A comparative analysis of hotel REITS and hotel C-corporations International Journal of Hospitality Management, 27(4), 614-622 doi:10.1016/j.ijhm.2007.07.026 Westgaard, S., Eidet, A., Frydenberg, S., & Grosas, T C (2008) Investigating the Capital Structure of UK Real Estate Companies Journal of Property Research, 25(1), 6187 doi:10.1080/09599910802397107 Zarebski, P., & Dimovski, B (2012) Determinants of capital structure of A-REITs and the global financial crisis Pacific Rim Property Research Journal, 18(1), 3-19 doi:10.1080/14445921.2012.11104347 69 APPENDIX Appendix 1: Table of 40 listed REITs in UK from Osiris database Name Still Investing in Data Companies listed UK property available chosen for the REITs or not? or not? check of date or not? becoming REITs A & J MUCKLOW GROUP P YES YES YES YES LC ASSURA (AGR) YES YES YES YES YES YES YES YES YES YES YES YES BIG YELLOW GROUP (BYG) BRITISH LAND COMPANY (BLND) CUSTODIAN REIT (CREI) YES YES YES YES DERWENT LONDON (DLN) YES YES YES YES EDISTON PROPERTY INVESTMENTS COMPANY (EPIC) EMPIRIC STUDENT PROPERTY (ESP) EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED F&C UK REAL ESTATE INVESTMENTS (FCRE) GCP STUDENT LIVING (DIGS) GLOBALWORTH REAL ESTATE INVESTMENTS LIMITED GREAT PORTLAND ESTATES (GPOR) YES YES NO NO YES YES NO NO YES YES NO NO YES YES YES YES YES YES YES YES YES NO NO NO NO NO 10 11 12 13 (ROMANIA) YES 70 YES 14 GROUND RENTS INCOME FUND (GRIO) 15 HAMMERSON (HMSO) YES YES NO NO YES YES YES YES 16 HANSTEEN HOLDINGS (HSTN) 17 HIGHCROFT INVESTMENTS (HCFT) 18 INDUSTRIAL MULTI PROPERTY TRUST PLC 19 INTU PROPERTIES (INTU) YES YES YES YES YES YES YES YES YES YES YES YES YES YES YES YES 20 INVESCO PROPERTY INCOME TRUST LIMITED 21 LAND SECURITIES GROUP PLC 22 LONDONMETRIC PROPERTY (LMP) 23 MCKAY SECURITIES (MCKS) 24 NEWRIVER RETAIL (NRR) NO YES YES NO YES YES YES YES YES YES YES YES YES YES YES YES YES YES YES YES 25 OTTOMAN FUND LTD (THE) 26 PRIMARY HEALTH PROPERTIES (PHP) 27 REDEFINE INTERNATIONAL (RDI) 28 SCHRODER GLOBAL REAL ESTATE SECURITIES LIMITED 29 SCHRODER REAL ESTATE INVESTMENT TRUST LIMITED 30 SECURE INCOME REIT PLC YES YES NO NO YES YES YES YES YES YES YES YES YES YES NO NO YES YES YES YES YES YES YES YES 31 SEGRO (SGRO) YES YES YES YES 32 SHAFTESBURY (SHB) YES YES NO NO 33 STANDARD LIFE INVESTMENTS PROPERTY INCOME TRUSTS (SLI) 34 TALIESIN PROPERTY FUND LIMITED YES YES NO NO YES NO YES NO 35 TARGET HEALTHCARE REIT (THRL) YES YES YES (GERMANY) 71 YES 36 THE LOCAL SHOPPING REIT (LSR) 37 TOWN CENTRE SECURITIES (TCSC) 38 TR PROPERTY INVESTMENT TRUST PLC 39 TRITAX BIG BOX REIT (BBOX) 40 WORKSPACE GROUP (WKP) YES YES YES YES YES YES YES YES YES YES YES YES YES YES YES YES YES YES YES YES Appendix 2: Table of 28 listed REITs in UK chosen for the check of date of becoming REITs in UK No Name of REITs in UK Date of Listed REITs becoming chosen REITs in UK A & J MUCKLOW GROUP P L C 7/2007 YES ASSURA (AGR) 4/2013 NO BIG YELLOW GROUP (BYG) 1/2007 YES BRITISH LAND COMPANY (BLND) 1/2007 YES CUSTODIAN REIT (CREI) 3/2014 NO DERWENT LONDON (DLN) 7/2007 YES F&C UK REAL ESTATE INVESTMENTS 9/2008 NO (FCRE) GCP STUDENT LIVING (DIGS) 5/2013 NO HAMMERSON (HMSO) 1/2007 YES 10 HANSTEEN HOLDINGS (HSTN) 10/2009 NO 11 HIGHCROFT INVESTMENTS (HCFT) 4/2008 NO 12 YES 13 INDUSTRIAL MULTI PROPERTY TRUST 1/2007 PLC INTU PROPERTIES (INTU) 1/2007 14 LAND SECURITIES GROUP PLC 1/2007 YES 15 LONDONMETRIC PROPERTY (LMP) 10/2010 NO 16 MCKAY SECURITIES (MCKS) 4/2007 YES 72 YES 17 NEWRIVER RETAIL (NRR) 11/2010 NO 18 PRIMARY HEALTH PROPERTIES (PHP) 1/2007 YES 19 REDEFINE INTERNATIONAL PLC (RDI) 12/2013 NO 20 SCHRODER REAL ESTATE 5/2015 NO INVESTMENT TRUST LIMITED 21 SECURE INCOME REIT PLC 6/2014 NO 22 SEGRO (SGRO) 1/2007 YES 23 TARGET HEALTHCARE REIT LIMITED 1/2013 NO 24 THE LOCAL SHOPPING REIT (LSR) 5/2007 YES 25 TOWN CENTRE SECURITIES (TCSC) 10/2007 YES 26 1/2007 YES 27 TR PROPERTY INVESTMENT TRUST PLC TRITAX BIG BOX REIT PLC 11/2013 NO 28 WORKSPACE GROUP (WKP) 1/2007 YES Appendix 3: Table of 15 listed REITs in UK chosen for the study No Name of REITs in UK chosen for the study A & J MUCKLOW GROUP P L C BIG YELLOW GROUP (BYG) BRITISH LAND COMPANY (BLND) DERWENT LONDON (DLN) HAMMERSON (HMSO) INDUSTRIAL MULTI PROPERTY TRUST PLC INTU PROPERTIES (INTU) LAND SECURITIES GROUP PLC MCKAY SECURITIES (MCKS) 10 PRIMARY HEALTH PROPERTIES (PHP) 11 SEGRO (SGRO) 12 THE LOCAL SHOPPING REIT (LSR) 13 TOWN CENTRE SECURITIES (TCSC) 73 14 TR PROPERTY INVESTMENT TRUST PLC 15 WORKSPACE GROUP (WKP) Appendix 4: Table of explanation of how the variable is collected and calculated Variables How the variable is collected or calculated EBIT Collected from Osiris ROE (%) using net income Collected from Osiris Short-term debt (STD) Collected from Osiris Long-term debt (LTD) Collected from Osiris Total debt (TD) STD+LTD Total assets Collected from Osiris STDR STD /TOTAL ASSETS LTDR LTD / TOTAL ASSETS TDR TD / TOTAL ASSETS Return on equity (ROE) ROE (%) /100 Return on asset (ROA) EBIT / TOTAL ASSETS SIZE LN (TOTAL ASSETS) 74 Appendix 5: Table of raw data collected from Osiris NAME YEAR EBIT (th GBP) ROE (%) STD (th GBP) LTD (th GBP) TD (th GBP) INTU PROPER TIES PLC 2007 2008 2009 2010 2011 2012 2013 2014 2007 2008 2009 2010 2011 2012 2013 2014 79,000 -2,435,500 -18,700 185,600 169,500 356,600 421,000 892,800 223,200 -790,400 196,300 276,300 248,800 238,700 212,100 654,400 -2.33 -125.19 -13.99 22.51 1.03 5.24 9.94 12.75 -2.51 -46.73 -8.99 7.76 -1.19 -8.83 8.98 23.61 146,200 89,100 142,700 41,900 62,100 90,800 65,800 18,200 52,100 86,300 345,200 69,900 27,700 54,800 2,600 207,600 3,704,000 4,195,500 3,740,100 2,751,500 3,546,100 3,751,600 3,944,000 4,332,700 1,997,800 2,575,700 2,188,000 2,178,000 2,296,900 2,052,100 1,690,300 1,495,400 3,850,200 4,284,600 3,882,800 2,793,400 3,608,200 3,842,400 4,009,800 4,350,900 2,049,900 2,662,000 2,533,200 2,247,900 2,324,600 2,106,900 1,692,900 1,703,000 SEGRO PLC TOTAL ASSETS (th GBP) 9,172,500 7,530,900 7,048,300 5,927,200 7,399,900 7,591,700 8,121,900 9,562,000 5,624,500 5,113,100 5,519,300 5,297,500 5,193,700 4,647,400 4,251,500 4,813,600 Appendix 6: Table of the calculated data of variables used in the study NAME INTU PROPER TIES PLC SEGRO PLC YEAR 2007 2008 2009 2010 2011 2012 2013 2014 2007 2008 2009 2010 2011 2012 2013 STDR 0.015939 0.011831 0.020246 0.007069 0.008392 0.01196 0.008102 0.001903 0.009263 0.016878 0.062544 0.013195 0.005333 0.011792 0.000612 LTDR TDR SIZE 0.403816 0.557105 0.530639 0.464216 0.479209 0.494171 0.485601 0.453117 0.355196 0.503745 0.396427 0.411137 0.442247 0.441559 0.397577 0.419755 0.568936 0.550885 0.471285 0.487601 0.506132 0.493702 0.45502 0.364459 0.520623 0.458971 0.424332 0.447581 0.45335 0.398189 16.03172 15.83453 15.7683 15.59506 15.81698 15.84257 15.91007 16.07331 15.54264 15.44732 15.52376 15.48275 15.46296 15.35182 15.26278 75 ROE -0.0233 -1.2519 -0.1399 0.2251 0.0103 0.0524 0.0994 0.1275 -0.0251 -0.4673 -0.0899 0.0776 -0.0119 -0.0883 0.0898 ROA 0.008613 -0.3234 -0.00265 0.031313 0.022906 0.046972 0.051835 0.09337 0.039684 -0.15458 0.035566 0.052157 0.047904 0.051362 0.049888 2014 0.043128 0.310661 76 0.353789 15.38696 0.2361 0.135948 ... established since 2007 The objective of this study is to analyse the effect of capital structure on the profitability of listed Real Estate Investment Trusts (REITs) in United Kingdom from 2007 to 2014. .. been done in analysing the effect of capital structure on the profitability of listed Real Estate Investment Trusts (REITs) in United Kingdom Other literatures discuss the effect of capital structure. .. objectives The objective of this study is to analyse the effect of capital structure on the profitability of listed Real Estate Investment Trusts (REITs) in United Kingdom from 2007 to 2014 1.3 Structure