The Riskiness of REITs Surrounding the October 1997 Stock Market Decline

Real estate investment trusts (REITs) are viewed as low risk/low return stocks that exhibit defensive stock characteristics. The stock market decline of October 1997 provides an excellent opportunity to examine the riskiness of REITs during high levels of market uncertainty. We find that the decline in REIT stock values was about one-half as large as the decline of non-REIT stocks. Additionally, market uncertainty on the event day was shown with an increased bid-ask spread for all stocks. On the following day when the market decline was partially reversed, the bid-ask spreads continued to increase for non-REIT stocks, but declined for REIT stocks. This suggests that REITs, like defensive stocks in general, are less prone to significant declines during market-wide disturbances. Also, we order stocks based on the standard deviation measures of risk and show that this risk measure explains the cross-section of returns for non-REITs but is not valid for REITs.     

The Performance of REIT-owned Properties and the Impact of REIT Market Power

Using a unique, detailed panel dataset of lodging properties, this paper tests whether properties owned by real estate investment trusts (REITs) perform differently than other properties and whether the concentration of real estate ownership brought about by REITs has increased market power. Our results demonstrate that REIT-owned properties, which are primarily mid-scale and high-end hotels, did not perform significantly better, on average, than other mid-scale or high-end hotels in the same geographic area. However, because of the superior overall performance of mid-scale and high-end hotels, REIT properties as a whole did perform better, on average, than non-REIT properties. From these results we conclude that the superior performance of REIT properties was due to the fact that REITs tended to acquire properties in market segments that performed well; REIT ownership in itself does not appear to have increased performance. Our results also suggest that the superior performance of the market segments in which REITs have a significant presence is not attributable to the market power of the REITs.     

Are REITs inflation hedges?

This study investigates the relationship between returns on Real Estate Investment Trusts (REITs) and anticipated inflation. It was motivated by the contradictory findings in the literature concerning the inflation-hedging characteristics of financial and real assets. We employ the methodology developed by Fama and Schwert, which represents a generalization of the Fisher equation. Two different measures of anticipated inflation were used to estimate the regression equations. The results show that REITs generally tend to behave like equities with respect to their hedging characteristics, regardless of how inflation expectations are measured. When we used a survey measure of anticipated inflation, however, we found some evidence that REITs are partial hedges against anticipated inflation.     

Is there a real estate factor premium?

In this paper, we study the variation of expected returns on five different asset portfolios in a multi-factor model. We found the presence of a real estate factor, in addition to both a stock factor and a bond factor in asset pricing. This suggests that mutual fund managers should seriously consider including real estate assets in their portfolios, since one cannot capture the real estate factor premium without having some kind of real estate exposure. Another result is that the market segmentation found in previous studies disappears in a more general model of asset pricing in which we allow for multi-factors other than the market factor to affect asset returns. This implies that real estate assets can be treated just like other assets as far as mean-variance efficient asset allocations are concerned. We also have some preliminary evidence that equity REITs and the Russell-NCREIF index are driven by the same underlying real estate factor.     

Bank Mergers,REIT Loan Pricing and Takeover Likelihood

The impact of bank mergers on Real Estate Investment Trust (REIT) loan pricing and takeover likelihood is assessed. REITs that lose their primary banking relationship due to bank mergers pay higher interest rates on future borrowings. Bank consolidation reduces bank competition for REIT loans which affects loan pricing. Moreover, based on randomly matched samples of REITs, the results imply that firms losing their agent banks due to bank mergers and those with limited access to bank debt are more likely to be acquired while REITs associated with acquiring banks are more likely to acquire other firms. Additional analysis of the 92 merged REITs reveals that 33% of the target REITs’ banks are merged with their REIT acquirers’ banks prior to the REIT mergers while 67% of the target REITs share at least one major bank with their acquirer.     

REIT Stock Splits and Market Efficiency

An analysis of real estate investment trust (REIT) stock splits is presented. Evaluation of the initial reaction to split REITs supports efficient market pricing where REITs generate statistically significant positive announcement date returns, no statistically significant record date returns, and muted ex-date returns. In the long-term, split REITs do not consistently out perform benchmark portfolios over one-year, two-year, and three-year periods. REITs split subsequent to a substantial run up in stock price and to improve the position of their post split stock price relative to the stock price of the typical REIT.     

The Relative Importance of Stock, Bond and Real Estate Factors in Explaining REIT Returns

This paper examines the link between REIT, financial asset and real estate returns, and tests whether it changed subsequent to the “REIT boom” of the early 1990s. The main focus is on answering the question do REIT returns now better reflect the performance of underlying direct (unsecuritized) real estate? We develop and implement a variance decomposition for REIT returns that separates REIT return variability into components directly related to major stock, bond, and real estate-related return indices, as well as idiosyncratic or sector-specific effects. This is applied to aggregate REIT sector (NAREIT) returns as well as returns to size and property-type based REIT portfolios. Our results show that the REIT market went from being driven largely by the same economic factors that drive large cap stocks through the 1970s and 1980s to being more strongly related to both small cap stock and real estate-related factors in the 1990s. There is also a steady increase over time in the proportion of volatility not accounted for by stock, bond or real estate related factors. We also find that small cap REITs are “more like real estate” compared to larger cap REITs, at least over the 1993–1998 period. We argue that this could be a result of the institutionalization of the ownership of larger cap REITs that took place in the 1990s.     

Technical, Allocative and Scale Efficiencies of REITs: An Empirical Inquiry

Abstract:   This paper empirically explores various efficiency aspects of Real Estate Investment Trusts (REITs) in light of their remarkable growth in the 1990s. We find clear evidence of considerable technical inefficiency in REITs, though not much indication for allocative or scale inefficiency. The results also suggest that an increasing number of REITs has been operating under diseconomies of scale since the late 1990s primarily due to the recent wave of consolidation and merger activities. As creatures of the US tax code, REIT's have undergone several changes to their operating status, and our results suggest that the prevalent regulatory environment appears too onerous for the industry and may have contributed to the REITs' poor efficiency performance. In particular, further cuts or total elimination of the dividend restriction on REITs could provide much needed relief and stability in the US real estate market.     

The Relationship Between REITs Returns and Inflation: A Vector Error Correction Approach

Previous studies show that REITs returns and inflation arenegatively related. This paper reexamines this perverse inflation hedgephenomenon by investigating the relationship among REITs returns, realactivities, monetary policy and inflation through a Vector ErrorCorrection Model. Empirical results show that inflation does notGranger-cause REITs returns and that REITs returns signal changes in monetary policy. The observed negative relationship between REITs returnsand inflation is merely a proxy for the more fundamental relationshipbetween REITs returns and other macroeconomic variables.     

Why Do REITs Go Private? Differences in Target Characteristics, Acquirer Motivations, and Wealth Effects in Public and Private Acquisitions

This paper first identifies the characteristics of publicly-traded REITs associated with an increased probability of becoming the target of an announced merger or acquisition bid. Second, conditional on being a target, we determine which target characteristics influence the probability of the bidder being a private versus a public firm. Third, we document the magnitude of the wealth effects that accrue to the shareholders of target REITs in both privatizations and public-to-public transactions and how these effects vary with the characteristics of the target firms. Finally, we investigate the extent to which privatizations differ from ??staying public?? acquisitions in the type of financing employed and the motivation of the two investor types. We find that REITs more likely to become acquisition targets are smaller and less liquid with higher dividend yields than non-targets. The existence of an umbrella partnership (UPREIT) structure reduces the probability of becoming a target. Private acquirers are more likely to bid on underleveraged REITs with poor operating performance. Conversely, public buyers are more focused on acquiring highly levered REITs with greater institutional ownership and superior operating results. The determinants of abnormal returns also differ in privatizations and public-to-public deals.     

Real Earnings Management,Liquidity Risk and REITs SEO Dynamics

We analyze how REITs managers use real earnin gs management to address issues of liquidity risk and increased cost of capital they face during seasoned equity offerings. We show that REITs managers engage in real earnings management instead of accrual earnings management to attract more uninformed trading in order to provide the liquidity service at a lower cost during seasoned equity offerings. We find REITs with higher liquidity risk are more likely to manipulate earnings prior to equity offerings and uninformed trading is higher following real earnings management. Firms set the offer price at a smaller discount after engaging in real earnings management and stock returns decline in the long run. The findings are consistent with real option and liquidity risk explanations for equity offerings.     

Debt,Agency, and Management Contracts in REITs: The External Advisor Puzzle

This study investigates why externally advised real estate investment trusts (REITs) underperform their internally managed counterparts. Consistent with previous studies, we find that REITs managed by external advisors underperform internally managed ones by over 7 percent per year. Property-level cash-flow yields are similar between the two managerial forms, but corporate-level expenses and especially interest expenses are responsible for lower levels of cash available to shareholders in externally advised REITs. We document that the higher-interest expenses are due to both higher levels of debt and to higher debt yields for externally advised REITs. We posit that compensating managers based on either assets under management or on property-level cash flows creates incentives for managers to increase the asset base by issuing debt even if the interest costs are unfavorable.     

Good Growth,Bad Growth: How Effective are REITs’ Corporate Watchdogs?

The rapid growth of REITs over the last two decades raises an old debate on the existence of scale economies. Out of the 874 growth incidents recorded by individual REITs between 1992 and 2012, we observe that 44.5% of them are sub-optimal, that is they resulted in the acquiring REITs operating at decreasing returns to scale. Large REITs with more free cash flows have a higher propensity to engage in bad growth activities. We find evidence that institutional investors play an effective role in discouraging managerial opportunism and empire building. Independent directors and external creditors, however, do not appear to be effective in discouraging REIT managers from making bad growth decisions.     

REIT Short Sales and Return Predictability

We examine REIT short sale transactions and show REITs are shorted less frequently than non-REITs. Results also show short sellers are less able to predict negative future returns for REITs, relative to non-REITs, which is consistent with increased pricing efficiency for REITs and suggests REIT assets are more transparent. In a broader context, these results suggest differences in transparency across asset types influence the effectiveness of short selling. Results showing REIT short sellers are contrarian imply traders target REITs that are performing well instead of underperforming REITs, suggesting restrictions on REIT short sales should be re-evaluated.     

Asymmetric Correlation and Volatility Dynamics among Stock, Bond, and Securitized Real Estate Markets

We apply a multivariate asymmetric generalized dynamic conditional correlation GARCH model to daily index returns of S&P500, US corporate bonds, and their real estate counterparts (REITs and CMBS) from 1999 to 2008. We document, for the first time, evidence for asymmetric volatilities and correlations in CMBS and REITs. Due to their high levels of leverage, REIT returns exhibit stronger asymmetric volatilities. Also, both REIT and stock returns show strong evidence of asymmetries in their conditional correlation, suggesting reduced hedging potential of REITs against the stock market downturn during the sample period. There is also evidence that corporate bonds and CMBS may provide diversification benefits for stocks and REITs. Furthermore, we demonstrate that default spread and stock market volatility play a significant role in driving dynamics of these conditional correlations and that there is a significant structural break in the correlations caused by the recent financial crisis.     

Are Short Sellers Informed? Evidence from REITs

This paper uses intraday short sale data to examine whether short sellers of Real Estate Investment Trusts (REITs) are informed. We find strong evidence that short selling predicts future returns of REITs. Heavily shorted REITs significantly underperform lightly shorted REITs by approximately 1% over the following 20 trading days. This predictive relation holds for both small and large trades, but is stronger for large short trades. We also document a positive relation between shorting activity and volatility. Our results are consistent with the view that short sellers of REITs are informed and contribute to market efficiency by impounding information into prices.     

公募REITs支持新型城镇化:机理、问题与对策

基础设施公募RE I Ts是改善城镇化投融资机制、盘活基础设施存量资金、防范化解城镇化债务风险的重要创新。但是,现行制度安排对REITs的税收中性、法律框架、市场流动性等中长期发展因素的考虑存在不足,这可能带来摊薄REITs产品投资收益、加大治理与监管成本、制约市场可持续发展等问题,亦对城镇化区域均衡发展产生不确定影响。建议在结合国外经验和中国国情的基础上,加快推动REITs税收优惠政策落地,研究制定“REITs管理条例”等法律体系,完善二级市场建设和流动性培育,优化基础设施公募REITs支持新型城镇化的空间布局。     

Investor Sentiment and REIT Returns

Recent advances in the field of behavioral finance have given a fillip to the use of behavioral factors in asset pricing models. This study adds to the understanding of the REIT return generating process by exploring the behavioral impact of investor sentiment on REIT returns. The results show that when investors are optimistic (pessimistic), REIT returns become higher (lower). These findings are robust when conventional control variables are considered. Empirical analysis indicates steady erosion in the importance of the default and term structure interest rate variables previously considered as important determinants of REIT returns. Previous noise trading papers that consider the impact of institutional traders conclude that institutional investors cannot arbitrage away noise trader risk. The results of this paper find an exception in the case of small REITs. Examination of REITs based on size reveals that the return generating process of small REITs differs from that of mid-size and large REITs. Analysis of the return generating process by performance shows high performance REITs are more sensitive to the independent variables in the model as compared to the low and mid performance REITs.     

Dividends, Values and Agency Costs in REITs

This study examines the market value of REIT dividends conditional on transparency of operating structure and effectiveness of boards. Results suggest that total, mandatory and discretionary dividends are valued by the market. Consistent with agency cost theory, results provide some evidence that discretionary dividends paid by REITs with greater principal-agent conflicts have greater market value. Specific results suggest an increased value of excess dividends paid by firms with more complex organizational structures (UPREITs) and, to some degree, less independent boards. This evidence implies the equity market recognizes REITs’ substitution of discretionary dividends for stronger governance.     

Concentrated Ownership, No Dividend Payout Requirement and Capital Structure of REITs: Evidence from Turkey

This paper studies empirically the capital structure of Turkish REITs as they offer unique and so far untested angles. They do not have to pay out dividends, yet enjoy the exemption from paying corporate taxes since their legal foundation in 1998. Several financial meltdowns occurred in the last three decades, keeping investors with a doubt about Turkey??s financial and political stability. The last meltdown in 2001 is part of the sample period. Findings show that Turkish REITs employ little long-term debt in their capital structure. The legal requirement that a leader entrepreneur be present with a minimum equity position of 25% introduces the agency problem between the majority and minority owners. The leader entrepreneurs, as non-taxable institutional investors, appear to dictate Turkish REITs?? dividend and debt policies and deplete REITs?? dividends, causing them to go to the long-term debt market. The financial meltdown of 2001 exerts negative short-term and positive long-term influence on the debt ratios while inflation??s effect is negative. Firm size, REITs?? engagement in development and stock market development influence debt ratios positively; tangibility and a few firm, ownership, and country-specific determinants appear to have either mixed or no influence on Turkish REITs?? debt policies.