Corporate real estate ownership, cash and credit ratings

Abstract

PurposeRecently, multiple examples of large firms acquiring real estate have polarized investors. Who are the firms investing in real estate and what are their characteristics? How does this investment in owning commercial real estate relate to cash holding policies? Is owning commercial real estate associated with better credit ratings? This study questions commonly held beliefs in finance that firms prefer to lease their real estate rather than own it and examines what are the differences in outcomes between the choices.Design/methodology/approachThe authors identify three testable hypotheses based on the research questions and prior literature. The authors use univariate and multivariate analyses to test these hypotheses along with thorough robustness and addressing of endogeneity issues to confirm that our results hold in a variety of settings. The authors employ new proxies of real estate to the literature from Bloomberg and firm level data from Compustat.FindingsThe authors show that more firms within the S&P 500 choose to own commercial real estate. The authors also find many significant differences in corporate characteristics between firms who own real estate and those who do not, such that firms with real estate ownership have significantly: higher growth opportunities, higher R&D expenses, higher working capital levels, lower capital expenditures, higher leverage and higher cash flow. Firms with corporate real estate (CRE) ownership hold less cash. Contingent on real estate ownership, firms have higher cash holdings as their real estate holdings increase. Last, firms with commercial real estate ownership have higher credit ratings.Originality/valueOne of the main contributions of this study is in the use of a new specific proxy using data on corporate land, buildings and construction in progress, which to the best of our knowledge has not been done in the past. Other studies focus on aggregate property, plant and equipment data which blurs the CRE ownership picture. Additionally, the authors provide an underexplored variable of CRE ownership to its impacts of cash holdings and credit ratings, which had yet to be uncovered.