Conclusion
In this research, I examine the effects of tenant quality on REIT firm liquidity management. I find significant evidence that the quality and creditworthiness of the tenants have an impact on REIT liquidity management. Specifically, tenant size plays an important role in liquidity management. I show that REITs with larger tenants have lower total liquidity and unused line of credit compared to those with smaller tenants. REIT firms could treat tenant size as a signal to their tenant quality if they consider size as a proxy for information transparency, financial flexibility or industry reputation. I find that REIT firms with higher tenant Z-scores and larger tenants hold lower total liquidity and lower unused credit in the subsequent year. I also show that REIT firms with more mature tenant firms (i.e. higher book-to-market ratios) and higher profitability (i.e. ROA) tend to have less cash in the subsequent year. All these relations remain statistically significant after I control for the REIT cash holding determinants suggested by Hardin et al. (2009).
Additionally, I find that tenant quality matters to REIT liquidity management within different property types. I show that tenant size has negative effects on total liquidity and unused credits for office REITs, retail REITs, and other REITs. Tenant credit ratings have positive effects on office REITs’ total credit available and unused credit lines. Tenant credit ratings have negative effects on other REITs’ total liquidity and unused credits. Office REITs, Industrial REITs and Other REITs with larger tenants hold lower total liquidity and lower unused credits in the subsequent year. Tenant credit ratings are negatively related to cash holdings in industrial REITs in the subsequent year. Moreover, I find that tenant quality factors, especially tenant size, have robust effects on REIT liquidity management after I control for REIT debt and lease schedules.
