REIT Style and Performance

Abstract

Executive Summary. Applying a performance style model developed by Sharpe, we investigate the style and performance of real estate investment trusts from March 1984 through December 1997. Total returns of the S&P 500, S&P MidCap 400, S&P SmallCap 600, Lehman Brothers' government bond index, and Salomon Brothers' three-month Treasury bill index are used to replicate the performance of all REIT, equity REIT and mortgage REIT portfolios. We find that all REITs and equity REITs have remarkably stable style attributes over time: they behave similarly to a portfolio of 40% small capitalization stocks and 60% bonds (including Treasury bills). The behavior of mortgage REITs, however, has been more erratic. Sharpe's alpha, a performance measure similar to Jensen's alpha, indicates that equity REITs performed approximately at par to its style portfolio prior to 1994 and has dramatically outperformed its style portfolio since then. All REITs and mortgage REITs that underperformed at first, outperformed their respective style portfolios in recent years. REITs, in general, have become more “unique” as the R-squared value of the Sharpe model has declined dramatically over the last five years for all REITs as well as equity REITs.