The Role of the Underlying Real Asset Market in REIT IPOs

A leading explanation for IPO cycles is time-varying supply and demand for the underlying assets of the firms that are considering going public. We test this hypothesis using REIT IPOs, taking advantage of the relative transparency of the underlying real asset markets. We document links between REIT IPO activity and both the conditions of the underlying real estate market and the price of REITs. We find no significant relation between the heat of the IPO market and post-IPO operating performance, implying homogeneous firm quality across IPO cycles. Finally, we show that lagged IPO proceeds are related to future increases in investment and in capacity utilization.     

Rationale behind IPO Underpricing: Evidence from Asian REIT IPOs

This article examines the rationale behind IPO underpricing using a sample of REIT IPOs in Asia. Although the IPOs registered an average initial return of 3.08%, the issuers were able to sell the IPO shares above their fundamental values by timing the listings in periods when existing REIT stocks are traded at a premium to their net asset values (NAV). An IPO could therefore be underpriced and yet produce a net gain for the issuer. The issuers’ net gain from IPO is, however, negatively related to long‐run performance of REIT IPOs.     

The Cross Section of Expected REIT Returns

In this study, we examine the cross-sectional determinants of expected REIT returns. We examine both the pre- and post-1990 periods, since the structure of the REIT market changed substantially around 1990. The determinants of expected returns differ between the two subperiods. In the pre-1990 subperiod, momentum, size, turnover and analyst coverage predict REIT returns. In the post-1990 period, momentum is the dominant predictor of REIT returns. Given the strength of the momentum effect in the post-1990 period, we examine it in great detail. For the whole period, and for the post-1990 period where the momentum profit is strongest, our evidence is generally consistent with the studies on common stocks other than REITs. The only striking exception is that we find that momentum is stronger for the larger REITs rather than for the smaller REITs. In our multiple regressions that include the characteristics as well as interactions between past returns and firm characteristics, the turnover–momentum interaction effect provides the most significant results. More specifically, momentum effects are stronger for more liquid REITs.     

Performance of Pairs Trading Strategy in the U.S. REIT Market

We examine the performance of pairs trading in the U.S. REIT market compared with that in the U.S. general stock market over the period 1987 to 2008. The results suggest that the REIT market provided superior profit opportunities for this strategy over common stocks after accounting for the effect of the bid‐ask bounce between 1993 and 2000. This was likely because of the unique characteristics of REITs, which permitted the selection of good pairs of close substitutes and the structural changes that occurred in 1993 in the REIT market. The superior trading profits in REITs disappear after 2000.     

Real Estate Investment Trusts, Small Stocks and Bid-ask Spreads

This study examines the liquidity of Real Estate Investment Trusts (REITs), as measured by their bid-ask spread. We find that REIT spreads have increased over the period 1986–1990, are inversely related to market capitalization, and are similar in magnitude to spreads on other stocks of comparable size. Analysis of variance tests indicate that REIT spreads are similar across equity, mortgage and hybrid asset types. Multivariate regression results indicate that market capitalization is the primary determinant of REIT bid-ask spreads, and spreads are larger for National Association of Securities Dealers Automated Quotations (NASDAQ) REITs than for New York Stock Exchange (NYSE) REITs. The regression results also indicate that spreads are lower for equity REITs than for mortgage or hybrid REITs, and are inversely related to the fraction of the REIT's shares held by institutional investors. The similarity between REIT spreads and those of other common stocks holds in both bull and bear real estate markets and suggests that, from a liquidity perspective, REITs are similar to other common stocks.     

Finance, Investment and Investment Performance: Evidence from the REIT Sector

We examine financing, investment and investment performance in the equity REIT sector over the 1981–1999 time period. Analysis reveals significant differences between the old-REIT (1981–1992) and new-REIT (1993–1999) eras. The sector experienced rapid growth in the new-REIT era, primarily from firm-level investment as opposed to new entry. Firm-level investment was largely financed by equity and long-term debt, with little reliance on retained earnings. Financing policy stabilized in the new-REIT era, and capital structures became more complex. We find that REITs provided returns over and above their cost of capital, where most of the value-added investment occurred in the new-REIT era by newer firms. Finally, we present novel evidence on IPO activity and new firm investment–investment performance relations that is consistent with Tobin's q theory of investment.     

Market Microstructure and Real Estate Returns

This paper examines the Real Estate Investment Trust (REIT) market microstruc-ture and its relationship to stock returns. When compared with the general stock market, REIT stocks tend to have a lower level of institutional investor participation and are followed by fewer security analysts. In addition, REIT stocks that have a higher percentage of institutional investors or are followed by more security analysts tend to perform better than other REIT stocks. Our results seem to confirm Jensen's ( 1993 , p. 868) proposition that ownership structure (that is, who owns the firm's securities) affects the value of the firm. Our findings also have implications about the well documented phenomenon that the financial performance of Commingled Real Estate Funds (CREFs) is better than that of REITs.     

Liquidity, Return and Order-Flow Linkages Between REITs and the Stock Market

This article represents the first exploration of liquidity and order flow spillovers across New York Stock Exchange stocks and real estate investment trusts (REITs). Impulse response functions and Granger causality tests indicate the existence of persistent liquidity spillovers running from REITs to non-REITs. Specifically, REIT liquidity indicators are forecastable from non-REIT ones, at both daily and monthly horizons. I also provide evidence of a liquidity premium inherent in REIT returns. While REIT prices appear to be set efficiently in that neither REIT nor non-REIT order flows forecast REIT returns, I find that order flows and returns in the stock market negatively forecast REIT order flows. This result is consistent with the notion that real estate markets are viewed as substitute investments for the stock market, which causes down-moves in the stock market to increase money flows to the REIT market.     

The Consequences of REIT Index Membership for Return Patterns

The impact of stock market index membership on Real Estate Investment Trust (REIT) stock returns is unclear. Returns may become more like those of other indexed stocks and less like those of their underlying properties. Taking advantage of the inclusion of REITs in major S&P indexes starting in 2001, we find that shared index membership significantly increases the correlation between REIT returns. However, index membership also enhances the link between REIT returns and the underlying real estate, consistent with improved pricing efficiency.     

Changes in REIT Structure and Stock Performance: Evidence from the Monday Stock Anomaly

It is well documented that REITs in the 1990s experienced significant changes in their structure and attracted greater institutional participation. This article finds that REIT stocks with higher institutional holdings perform better on Monday than REITs with lower institutional holdings during the 1990s, but not in the 1980s. Furthermore, REITs that went public in the 1990s are the ones associated with the shift in the Monday return pattern. Our study supports the claim that the change in REIT structure and the increase in institutional participation in the REIT market in the 1990s make REIT stocks behave more like other equities in the stock market.     

Uncertainty premia in REIT returns

We provide a systematic study of how financial and real estate uncertainty affect the aggregate return performance of the U.S. REIT market from 1994 to 2017. A temporal causality analysis reveals a negative uncertainty impact on REIT returns. The asset pricing analysis confirms the predictive relation and suggests that REITs are statistically significantly exposed to changes in market-wide uncertainty, for which investors require a return compensation. We also identify economic state variables to explain time-varying uncertainty exposures as well as periodic hedging characteristics of REITs. Finally, we find evidence that the source of uncertainty matters for compensating expected REIT returns.     

Elective Stock Dividends and REITs: Evidence from the Financial Crisis

In response to the recent financial crisis, the U.S. Government introduced new rules which allow Real Estate Investment Trusts (REITs) to issue elective stock dividends (ESDs), i.e., noncash dividends, to satisfy their distribution requirements. The purported goal of these rules was to provide temporary relief to REITs facing cash flow problems. We investigate how the introduction of these rules affects dividend policy of REITs. Surprisingly, we document that only 17 REITs chose to issue elective stock dividends. We examine the characteristics of these REITs and find that their cash flows are similar to REITs that do not select these dividends. This suggests that cash flow problems are unlikely to be the primary determinant of the ESD issuance decision. Instead, our findings indicate the decision to pay ESDs is related to the level of loans that are close to maturity, REIT size, growth prospects and poor performance during the financial crisis. Furthermore, we find that the same factors determine the ratio, amount and frequency of stock dividends issued by these REITs. We also examine the response of shareholders to ESDs announcements and find positive abnormal returns surrounding these dividend announcements.     

REIT Leverage and Return Performance: Keep Your Eye on the Target

This article examines U.S. REIT leverage decisions and their effects on risk and return. We find that the speed at which REITs close the gap between current debt levels and target leverage levels is 17% annually. REITs that are highly levered relative to the average REIT tend to underperform REITs with less debt in their capital structure. However, REITs that are highly levered relative to their target leverage tend to perform better on a risk‐adjusted basis than under‐levered REITs. Taken together, our results show that REIT leverage has significant return performance effects conditional on deviations from target leverage.     

Shareholder Activism in REITs

Conventional wisdom suggests that shareholder activism in REITs is less prevalent than in other (non‐REIT) public firms because of stronger barriers to hostile takeovers and potentially less undervaluation. Our results, however, suggest that the conventional wisdom does not hold. Specifically, we find that in 2006–2015, Equity REITs (EREITs) are as likely to be targeted by shareholder activists as non‐EREITs. We also find that shareholder campaign characteristics and determinants, as well as their value consequences, appear similar for EREITs and non‐EREITs. Given that this is the first study to examine shareholder activism in REITs, we raise several questions for future research.     

Risk and Return on Real Estate: Evidence from Equity REITs

We analyze monthly returns on an equally weighted index of eighteen to twenty-three equity (real property) real estate investment trusts (REITs) that were traded on major stock exchanges over the 1973–87 period. We employ a multifactor Arbitrage Pricing Model using prespecified macroeconomic factors. We also test whether equity REIT returns are related to changes in the discount on closed-end stock funds, which seems plausible given the closed-end nature of REITs.
Three factors, and the percentage change in the discount on closed-end stock funds, consistently drive equity REIT returns: unexpected inflation and changes in the risk and term structures of interest rates. The impacts of these variables on equity REIT returns is around 60% of the impacts on corporate stock returns generally. As expected, the impacts are greater for more heavily levered REITs than for less levered REITs. Real estate, at least as measured by the return performance of equity REITs, is less risky than stocks generally, but does not offer a superior risk-adjusted return and is not a hedge against unexpected inflation.     

Does A Firm's Entry or Exit Affect Competitors’ Value? Evidence from the REIT Industry

We analyze 483 entry and 439 exit events of publicly traded real estate investment trusts (REITs) and find that changes in the number of REITs in the market affect rival REITs’ stock performance. We also partition the sample by the modes of entries and exits as well as by REIT asset type in order to disentangle alternative explanations. Overall, our evidence indicates that the supply effect still matters for stock prices even after considering signaling and price pressure explanations.     

Alternative Benchmarks for Evaluating Mutual Fund Performance

While real estate investment trusts (REITs) have experienced very high growth rates over the past 15 years, the growth in mutual funds that invest in REITs has been even more dramatic. REIT mutual fund returns are typically presented relative to the return on a simple value-weighted REIT index. We ask whether including additional factors when benchmarking funds' returns can improve the explanatory power of the models and offer more precise estimates of alpha. We investigate three sets of REIT-based benchmarks, plus an index of returns derived from non-REIT real estate firms, namely homebuilders and real estate operating companies. The REIT-based factors are a set of characteristic factors, a set of property-type factors and a set of statistical factors. Using traditional single-index benchmarks, we find that about 6% of the REIT funds exhibit significant positive performance using traditional significance levels, which is more than twice what random chance would predict. However, with the multiple-index benchmarks that we prefer, this falls considerably to only 0.7%. In addition, we find that these sets of factors and the non-REIT indices better explain the month-to-month returns of the REIT mutual funds. This suggests that investors or researchers evaluating REIT mutual fund performance may benefit from a multiple-benchmark approach.     

Institutional Investors' Preferences for REIT Stocks

This article investigates the determinants of real estate investment trusts (REIT) portfolio investment and institutional REIT ownership using multivariate Tobit regressions. We contend that many institutional investors take larger positions in more liquid assets like REIT stocks, as compared with private real estate equities, because of liquidity considerations. Consistent with this contention, we find that liquidity constraints are significantly related to REIT portfolio investment by institutional investors. We also find that institutional investors have different preferences for REIT stocks than do other investors; they generally prefer larger, more liquid REIT stocks.     

Short Sales and Fundamental Value: Explaining the REIT Premium to NAV

This study explores the role of short sale constraints in explaining the variation in premiums to Net Asset Value (NAV) in REIT pricing. We use proprietary information on short sales between June 2006 and September 2008 to examine how short sales and short sale constraints affect the variation in monthly REIT NAV premiums using panel vector autoregression models. We find that variation in short sale activity across individual REITs can account for at least one‐third of the variation in NAV premiums. Short sale constraints tend to be binding when there is strong demand and limited supply of shares to short. Excess demand leads to overvaluation and the correction of the overvaluation explains the under‐performance of premium REITs.     

How do institutional investors react to local shocks during a crisis? A test using the COVID-19 pandemic

We examine how institutional investors reacted to geographically dispersed local shocks during the early stages of the COVID-19 pandemic. A sample of real estate investment trusts (REITs) enables us to link two layers of geography: the locations of the assets in which the REITs were invested and the headquarters locations of institutional investors who owned REIT shares. We find that the institutional ownership of firms with an economic interest in the investors’ home markets declined more if those markets were heavily affected by the pandemic. In addition, the ownership responses to the COVID-19 shock were larger in those markets in which REITs had larger portfolio allocations and in markets that were home to the investors. Importantly, we find that nonpassive and short-term investors may have overreacted to the local shocks because their REIT portfolios subsequently underperformed relative to passive and long-term investors. Our study highlights the importance of geography in the formation of investors’ expectations during market crises.