Equity Real Estate Investment Trusts Research Articles

Navigating Real Estate Investment Trust Performance Dynamics: The Role of Style (Equity vs. Mortgage Real Estate Investment Trusts) and Diversification Amidst the COVID-19 Pandemic

In this paper, we investigate the impact of COVID-19 on different performance measures and the risk of US Real Estate Investment Trusts (REITs) with different styles. Our findings suggest a phenomenon with compelling evidence of reduced performance without any significant changes in risk profile amidst the COVID-19 pandemic. Particularly, mortgage REITs (MREITs) appear to be more adversely affected compared to equity REITs (EREITs). We further explore and analyze the performance of specialized REITs in contrast to diversified REITs in the distinctive conditions presented by COVID-19. We find that diversification creates value for the entire sample period, whereas, during the COVID-19 pandemic, property type specialization helps, although the results are weakly significant. The findings on risk suggest investors’ short-run outlook on market reaction. These results remain robust to additional tests. The implications provide insight for investors as a reference to reallocate assets in their portfolios during uncertain times.

NAV Ratios and REIT Takeovers: The Role of Public and Private Deal Premiums

We investigate how net asset values (NAVs) impact equity real estate investment trusts (REITs) in the market for corporate control. REITs trading at discounts to NAV are more likely to be acquired than those trading at premiums to NAV. For each acquisition, there is a public deal premium (the deal value relative to stock price) and a private deal premium (the deal value relative to NAV). REITs trading at discounts to NAV command larger public deal premiums and smaller private deal premiums. Shareholders of targets respond more favorably if the REIT is trading at a discount to NAV. Three-day cumulative abnormal returns (CARs) around acquisition announcements are 11% higher for targeted REITs that are trading below a price-to-NAV ratio of 0.95 than those trading at a price-to-NAV ratio above 1.05. The sale of a REIT trading at a discount to NAV appears to be a productive transaction for both acquirers and targets.

Health Care REIT Returns & Covid-19: A Note

This study tests for pricing efficiency in Healthcare Real Estate Investment Trusts (REITs) surrounding the Covid-19 pandemic. Fractal analysis is used to ascertain whether any persistence or anti-persistence in returns can be observed over the “pre-Covid” and “Covid/post-Covid” periods for the 15 healthcare equity REITs included in the FTSE NAREIT US Real Estate Index. The results point to weak form efficiency during the complete sample period with some exceptions. A relative stability in Hurst exponents exists across the sub-periods for several of the REITs. However, there is evidence that many other REITs series switch from being anti-persistent to persistent, a result consistent with possible herding behavior. Some very limited evidence is found of series switching from being persistent to anti-persistent, consistent with investor overreaction for these REITs. Overall, inefficient pricing is seen in a limited number of cases, but there is a strong suggestion of a possible change like the return dynamic in the latter part of the study period associated with the pandemic.

Intraday financial markets’ response to U.S. bank failures

The arrival of an unfavorable event in financial markets, such as the announcement of a bank failure, generally causes reactions from investors, price changes, and higher market volatility. The present paper investigates the impact of three U.S. banks (Silicon Valley Bank, Signature Bank, and First Republic Bank) collapses on financial markets: price behavior and market volatility. We use intraday data to control and lessen the impact of confounding effects, two different event study approaches to check for the robustness of the results, several U.S. indices, and a digital asset to extend the financial markets. Our results suggest that the reactions of financial markets to the failure of these banks are mixed. The returns analyses indicate that the banks’ collapses result in higher market volatilities than positive news in the case of Bitcoin and Dow Jones Equity Real Estate Investment Trust Index. At the same time, the U.S. Dollar Index shows the reverse. The mixed results could be possibly due to the inconsequential market share of these banks in the United States banking sector. The major implication of the findings is that policymakers have to take serious actions, such as examinations of portfolio holdings, to safeguard financial stability and to prevent undesirable financial markets’ volatility.

Climate Change, Technology Shocks and the US Equity Real Estate Investment Trusts (REITs)

Given the renewed interest in Real Estate Investment Trusts (REITs), we are keenly focused on exploring the possible connection between climate change and return volatility of US equity REITs, as well as the role of technology innovation for environmental sustainability in the nexus. While climate change might pose some threat to the REIT business, it is necessary to know the direction in which technological innovation can mitigate this impact. As a way to validate our evidence, we offer some additional analyses with alternative measures of technology shocks and the replacement of technology shocks with global economic expansion, as improvement in global economic activity could offer more investment options for investors to diversify their investment portfolio away from climate-prone assets. For completeness, the analyses are replicated for US mortgage REITs. Overall, we show that climate change heightens the return volatility of US equity REITs and that the former contains some predictive content for the latter. When the role of technology is examined, our results show that technology shock indeed reverses the cheering impact of temperature anomaly on the return volatility of US equity REITs. We show that these results are robust to alternative measures of economic shock and that the results equally hold for mortgage REITs. We further document some important implications of our findings for investors and policymakers alike.

REIT Long-Term Returns and Wealth Creation

This study examined the performance of 371 equity real estate investment trusts (REITs) over the period 1972–2020. Unlike stocks, we found that the majority of the 371 REITs outperformed one-month T-bills, particularly over longer holding periods and in the modern REIT era. While most REITs outperformed the T-bills, only a minority of them outperformed the overall equity REIT market. REITs that outperformed the overall equity REIT market concentrated in the health care, industrial, residential, and other specialty REIT sectors. In terms of wealth creation, REITs in aggregate created a total net wealth of $0.89 trillion to their shareholders, but the wealth creation was highly concentrated in relatively few top-performing REITs. Specifically, the top five (20) REITs together accounted for almost 30% (60%) of the total net wealth creation. Overall, our results suggest that relative to the T-bills, REITs performed better than stocks.

Transitory and permanent shock transmissions between real estate investment trusts and other assets: Evidence from time‐frequency decomposition and machine learning

AbstractWe evaluate asset returns and volatility connectedness using the time‐frequency connectedness model and machine learning approaches. Using 48 years of monthly indices of equity real estate investment trusts (EREITs), mortgage real estate investment trusts (MREITs), stocks, commodities, and bonds, we find that shocks to EREIT, and MREIT returns have a transitory impact on other assets. However, asset volatility connectedness among assets occurs at lower frequencies as markets slowly process pricing information. Therefore, shocks to EREIT and MREIT decay gradually and spill over to the other three assets for long periods. We also find that the intensity of the time‐frequency connectedness of returns and volatility varies with business cycles and significant domestic and global non‐recession events. We attribute the dominance of real estate investment trusts (REITs) in destabilising the financial system through long‐term volatility transmission to the heavy linkage of REITs to highly illiquid underlying direct real estate markets and high REITs leverage, making them more sensitive to real estate fundamentals, monetary shocks and macroeconomic risks than stocks and bonds. The result of the algorithm‐based machine learning model broadly supports the dominance of EREITs in the transmission of returns and volatility and shows that commodities have more explanatory power in the transmission of volatility than in returns. The empirical findings have implications for strategic and tactical asset allocation and policy design for market stability.

Moments and momentum in the returns of securitized real estate: A cross-country study of risk factors driving real estate investment trusts before and during COVID-19

A real estate investment trust (REIT) is a company running a funding pool that allows people to invest in real estate without physical purchase. Since REITs are stock market-traded real estate assets, there is debate as to whether their returns are driven by stock market risk factors. In this regard, this paper examines the impact of the well-established equity market risk factors of momentum, skewness, and kurtosis on the returns of different types of REITs, including mortgage REITs (MREIT), equity REITs (EREIT), and hybrid REITs (HREIT), across five countries—Australia, the UK, the US, Japan, and Canada—during the period 2000–2022, controlling for other well-established factors in the asset pricing literature. The study first adds the skewness and kurtosis to analyze cross-national REIT returns via the Fama–French five-factor model. Next, the cross-national REIT dataset is built for the different periods and then tested for the robustness of the effect of the factors during the COVID-19 period. Findings indicate that the influence of momentum on the return of the REITs is consistently positive across countries and different types of REITs. However, the significance of momentum for different REITs in different countries varies. These results were robust during the COVID-19 period, providing further confirmation that REITs behave less like stocks rather than real estate investments, with significant implications for investors.

REIT capital structure strategy in the aftermath of hurricanes

This paper studies the causal impacts of hurricanes on capital structure. The sample covers 181 US public equity Real Estate Investment Trusts (REITs) throughout 2011–2018, during which 8 catastrophic hurricanes made landfalls in the contiguous US. This study finds that a basis point (0.01%) increment in REIT sudden exposure to hurricanes leads to a negative liquidity shock of 15.3% in corporate cash. Such shock is immediately followed by a 26.4% increase in leverage, measured as total debt over total assets. The effects are temporary, lasting only one quarter during the shock. REIT reactions to hurricanes are consistent with the pecking order theory of capital structure. Overall, hurricane ramifications to REIT capital structure strategy can be as impactful as any distress event that alters corporate liquidity and ability to maintain its daily operation.

DOES LOCAL ECONOMIC UNCERTAINTY MATTER FOR RISK OF PROPERTY COMPANIES? EVIDENCE FROM US REITS

With the growing number of publicly listed property companies worldwide, investors are increasingly interested in assessing the risks of such real estate companies in the stock market. This study aims to investigate the risk of US equity real estate investment trusts (REITs) in the local market context. Using US equity REITs data from 1997 to 2020, this study examines the impact of local economic uncertainty (LEU) on risk of REITs. To measure LEU, we first exploit textual analysis to extract geographical information from REITs’ annual financial reports (10-K filings) and construct state-level regional exposure for each firm. We then obtain LEU by incorporating the regional exposure with local market uncertainty based on locally headquartered firms. In the empirical results, we find that REITs with higher LEU are strongly and positively associated with higher future risks. This positive relationship is robust to a variety of alternative risk and LEU measures. Moreover, the effects of LEU are stronger for geographically concentrated REITs and LEU is positively priced by investors.

Household Income Growth and Firm Valuation: Evidence from REITs

This article investigates the relationship between a firm’s market valuation and the household income growth in its asset locations. Using income tax data from the Internal Revenue Service and individual establishment information of U.S. equity real estate investment trusts (REITs) from 2000 to 2019, the article constructs an aggregated measure of household income growth for each firm based on its asset locations in various metropolitan areas. The paper adopts an identification strategy that links household income shocks to firm valuation. The results indicate that firm-specific household income growth positively affects firm value (measured as firm Q) and shareholder value (measured as market-to-book equity ratio). These findings suggest that local residents’ income is crucial in portfolio construction and operation.

Connectedness structure of Pan-European Equity REITs

ABSTRACT This paper examines the interconnectedness among European equity REITs (Real Estate Investment Trusts) due to increased financialization of the real estate sector and European economic integration. It uses two models, Diebold and Yilmaz's generalised variance decomposition and Barunik and Krehlik's time-frequency dynamics framework. The study covers a sample of 42 Pan-European REITs over a 15-year period from 2004 to 2018 and finds that the connectedness among REITs is influenced by the geographical location and performance of commercial real estate sub-sectors. The dynamic analysis shows that the source of shocks does not determine the persistence, but rather how the markets interpret the shocks during high-frequency intervals. The paper concludes that the connectedness structure among REITs reflects uncertainty interaction, with some effects observed mainly at high frequency levels, and few unexpected shocks found in the long-term stability of REIT returns.

Investor Inattention to Earnings Surprises: Evidence from REIT and Tenant Information Transmission

This paper investigates the equity Real Estate Investment Trust (REIT) shareholder response to tenant earnings announcements (EA). We find that while REIT investors respond to tenant EA, their response is focused on negative earnings surprises. Tenant EAs provide an ideal setting to test whether REIT investors overreact to imprecise signals (moderated confidence hypothesis) or underreact to material news (limited attention hypothesis). Contrary to the findings in the customer-supplier literature, we find that REIT investors pay limited attention to their large tenant’s negative earnings surprises. REIT shareholders do not fully incorporate the tenant earnings news at the time of the announcement, particularly when the tenant is more economically important to the REIT. These results shed further light on both the importance of the tenant-landlord relationship and the limited attention bias documented in the REIT literature.

Does Options Trading Activity Benefit REITs?

Options trading on Real Estate Investment Trusts (REITs) has grown exponentially over the past two decades. This article investigates whether, and to what extent, higher levels of active options trading activity materially influence REIT financial market performance. Using a sample of 224 equity REITs, over the period 1996 through 2019, we found REITs with higher levels of options trading activity persistently exhibit enhanced valuations and financial market liquidity. We further found the positive impact of options trading activity on REIT value is not driven by the positive association between options trading activity and market liquidity, but rather is primarily attributable to the enhanced informational efficiency induced by options trading. Taken together, these results provide compelling evidence of the potential benefits of options trading for publicly listed REITs.

Industrial tail exposure risk and asset price: Evidence from US REITs

AbstractIn this study, we investigate the impact of industry‐based tail dependence risk on the cross‐section of stock returns. To this end, we propose a novel tail risk dependence measure (industrial tail exposure risk [ITER]), which captures the tail risk exposure of individual stocks to multiple industries. Using US equity real estate investment trusts (REITs) data from 1993 to 2020, we document that stocks in the highest ITER portfolio outperform stocks in the lowest ITER portfolio by 8.40% per annum. This positive return spread is significant even after controlling for well‐known firm characteristics. The return premium of ITER is stronger for small, value, and highly levered stocks and is substantially high during recession periods. Finally, the effects of ITER are cross‐sectionally more associated with REITs that have greater degrees of the following factors: bivariate tail exposure risks of major industries, exposure to local industry tail risk, geographical concentration, and ownership of home‐biased investors. Overall, our results suggest that REIT investors are indeed averse to tail risks that are associated with various sectors.

Are REIT Dividend Changes a Firm-Specific or an Industry-Level Signal? Evidence From the Decomposition of Stock Returns

This study examines the firm-specific and industry-level effects of dividend announcements by equity real estate investment trusts (REITs). Using stock returns to measure the information impounded in stock prices from dividend announcements, we decompose stock returns into three return components: firm-specific, industry-level, and market-wide. This decomposition allows us to examine the relative importance of the firm-specific and industry-level information contained in dividend announcements. We find that the market reaction to equity REIT dividend changes is mainly driven by the firm-specific return component. We also find that equity REIT managers are more likely to cut (raise) dividend payments when the stock price reveals less (more) firm-specific information. Moreover, the managerial dividend signal can explain the announcement-period firm-specific abnormal return but not the industry-wide abnormal return, suggesting that the managerial dividend signal conveys mainly firm-specific information.

Is There Super-Normal Profit in Real Estate Development?*

This paper explores the question of whether real estate development (RED) projects systematically present positive net present value (NPV) and therefore, provide super-normal profit. Such projects are the products of a business operation that governs the exercise of the real call option on development that is represented by developable land. We present a framework for considering super-normal profit in the RED industry, and then in light of that framework we examine RED projects produced by publicly-traded equity real estate investment trusts (REITs). We find strong evidence of positive correlation between REITs’ Tobin-Q ratios, indicative of positive NPV, and the ratio of development assets to total assets in the firm, controlling for other factors. The nature of the firm’s Tobin’s-Q metric is such that the implied added firm value is net of land cost and net of overhead and search costs associated with the RED business operation. While our findings do not prove a direction of causality between REITs’ RED activity and positive NPV, the robust positive correlation controlling for other factors raises interesting implications which are discussed in the paper.

Pandemic Proof Property Companies

Using a sample of 163 U.S. based equity real estate investment trusts (REITs), this paper explores the consequences of COVID-19 on securitized commercial property markets. More specifically, we first map the geographic location of each firm’s investment property holdings to gauge the degree of exposure of each REIT’s asset base to the pandemic. We next demonstrate these firm level exposure metrics are directly related to the negative returns encountered by REITs in the early months of the pandemic and explore what firm specific characteristics and attributes (notably financial flexibility and financing constraints) may moderate this relation and enhance the resiliency of their equity returns. Finally, we examine the impact of the Federal Reserve’s late-March intervention designed to address and soften the economic fallout of the pandemic and ensure the liquidity and stability of capital markets. After this intervention, previously observed relations and patterns between firm specific COVID-exposure levels and operating characteristics fail to retain their prior signs and significance. In sum, the magnitude of the government’s response to the economic challenges brought about by the coronavirus pandemic is shown to outweigh the importance of firm specific factors in predicting the resiliency of REIT returns during this crisis period.

Economic Policy Uncertainty and Real Estate Market: Evidence from U.S. REITs

We examine how economic policy uncertainty (EPU) affects the monthly performance of U.S. real estate investment trusts (REITs) from 1985 to 2018. First, a positive shock in EPU impairs contemporaneous REIT returns but predicts higher positive future returns. Such a return reversion has not been previously documented, and we provide some explanations. Second, although EPU can explain for the current returns of both equity and mortgage REITs, EPU is unable to predict the future returns of mortgage REITs. Third, breaking down the main EPU index into its four components, we find that the impact of EPU is primarily from the broad newspaper coverage of policy-related economic uncertainties while the other components are less influential. Our results indicate that policy uncertainty can affect the value of real estate assets, and EPU is an economically important factor for understanding and pricing REITs.

Nonlinear Short-Run Adjustments between REITs and Stock Markets in the USA and Australia

Abstract This study examines whether nonlinear co-integration exists between real estate investment trusts (REITs) and corresponding stock markets in the United States and Australia. Moreover, we employ the smooth-transition, vector-error correction model (STVECM) including the generalized autoregressive conditional heteroskedasticity (GARCH) model to separately explore the adjustment efficiencies of the short-run REITs and corresponding stock returns in dynamics. The empirical results demonstrate that there is a nonlinear co-integration with structural breaks between the equity and mortgage REITs and stock markets in the US as well as between the REITs and stock markets in Australia. When large positive and negative deviations of STVECM exist, the speed of equilibrium adjustment of the S&P 500 index is greater than that of the Mortgage REITs index. Additionally, the higher the equilibrium adjustment of Australian/US REITs index, the greater the reversion of Australian/US REITs index. Meanwhile, this study is also interested in finding out whether the REIT indices in the US or Australia would serve as a leading indicator for price movements. The result findings may provide a good reference for the investors’ investment engaged in the areas of these two countries. JEL Classification: C22, D53, G14, L85. Keywords: REITs, STVECM, Nonlinear Granger causality, GARCH.