Liquidity Management and REIT Operational Efficiency

This paper examines how corporate liquidity management impacts REIT operational efficiency and firm value. REITs have two liquidity tools that allow them to honor contractual obligations and support operations: cash (and cash equivalents) and credit lines. Although these forms of liquidity may be viewed as substitutes, cash and credit lines differ in costs and in control rights over the use of funds (An et al., 2016). On one hand, cash, although the least expensive form of corporate liquidity, may facilitate agency problems since it allows for managerial discretion in spending and may pose a significant opportunity cost if held idle. Whereas credit lines provide financial flexibility and, besides potential line maintenance fees, will only produce a tangible cost if used; however, lines of credit expose managers to monitoring by the institutions that provide the access to liquidity. An et al. (2016) explain that banks and other financial institutions that offer REITs credit lines may restrict managerial discretion through restrictive covenants, material adverse change clauses, and performance pricing grids. Thus, lines of credit, beyond a means to cover REIT liquidity needs, can serve as a tool to reduce the agency problem and financial distress risk, and may have the potential to impact operational efficiency. Using a sample of publicly traded U.S. equity REITs that spans from 1994 to 2022, we find that corporate liquidity, measured as the combination of cash (and cash equivalents) and available credit lines, is positively and significantly related to REIT operational efficiency and firm value but that excess corporate liquidity is detrimental to efficiency. Interestingly, we find that cash and access to credit lines are not substitutes in REIT liquidity management. In fact, our results suggest that higher cash holdings have a negative impact on REIT operational efficiency whereas more credit line availability produces significant efficiency gains. Results additionally show that squared terms for cash and unused lines of credit variables are both statistically significant, suggesting optimum levels of liquidity that maximize operational efficiency. Furthermore, we find significantly higher market values for REITs with more available credit lines and no significant relationship between cash holdings and firm value after controlling for the impact of liquidity on firm value through the channel of operational efficiency (Beracha et al., 2019a,b). We posit that the efficiency gains from the availability of lines credit may result from reductions in agency costs derived from the monitoring by the institutions who extend the credit (Chang et al, 2023).