Equity REITs Research Articles

ESG dynamics in real estate: temporal patterns and financial implications for REITs returns

PurposeThis paper aims to explore the dynamic relationship between ESG scores and REITS returns. The overarching goal is to provide a better understanding of how ESG considerations impact financial performance across different temporal contexts.Design/methodology/approachUsing a sample of 175 European Equity REITs, this analysis combines numerical ESG scores with the Fama-French model, employing both random and fixed effects methods. It integrates individual REIT data and the HESGL (High ESG Scores Minus Low ESG Scores) factors to assess their impact on REIT returns.FindingsThe findings highlight divergent patterns between the numerical ESG score and the HESGL factor concerning REIT returns. While the numerical ESG score displays a negative impact in later periods, the HESGL factor demonstrates a positive effect during prosperous times but loses significance during crises.Originality/valueThis research contributes original insights by emphasizing the importance of temporal segmentation in understanding the nuanced and evolving nature of the relationship between ESG scores and REITs’ returns. The study provides a comprehensive analysis and highlights divergent outcomes that are essential for a better interpretation of ESG impacts on real estate investments.

REIT Growth, Valuation and Performance

The extent to which a real estate investment trust’s (REIT’s) physical growth is related to market valuation and performance is examined. Using a sample of U.S. equity REITs over the 1995–2020 period, we measure a REIT’s growth as the growth of its total area in square feet (or, alternatively, its number of properties) and find that fast-growing REITs, while able to increase cash flows, are unable to increase such cash flows with equal proportionality with the expansion of their physical footprint. In essence, the growth in cash flow while positive is lower than the growth in square feet or number of properties. Moreover, we find no evidence that growth alone is associated with stock performance. However, we show that rapidly growing REITs are associated with higher market valuation, measured by capitalization rates, Price/FFO ratio, and firm Q. These findings suggest that capital structure, managerial actions and potential for improved property level performance associated with scale rather than physical growth alone play major roles in REIT valuation. Overall, our findings are aligned with expectations for market efficiency in a highly transparent asset group such as equity REITs.

To Change or Not to Change: The Informativeness of REIT Annual Reports

Increasingly similar corporate disclosures may fail to provide potential investors with adequate information about a company to facilitate astute, informed, and/or rational decision making. In light of this repeatedly expressed SEC concern, the current investigation uses a sample of 1,910 annual report (10-k) filings by 234 separate equity REITs from 2000-2020 to examine the impact of year-over-year linguistic similarity on the perceived information content of corporate disclosures. Consistent with the aforementioned concerns, we document a significant increase in the degree of REIT annual report similarity over time. Despite this trend, we find that innovations in annual report disclosures remain directly related to observable changes in both the operational complexity and financial position of the firm. Furthermore, these innovations engender significant market reactions including changes in options trading activity, annual report readability, and the firm’s cost of equity capital. Lastly, these findings are both robust to the inclusion of alternative information channels and are significantly more pronounced within informationally opaque market settings. In sum, we find REIT annual reports remain a value-relevant source of information for market participants.

Interactions between Equity REITs and S&P 500 Returns

This paper seeks to reinvestigate the contemporaneous interactions using daily closing prices of US eREIT and S&P 500 indices to calculate their respective rates of return. Daily data are used from October 31, 2008 through October 31, 2023 with 3,856 observations. Data are obtained from (www.wsj.com and (https://finance.yahoo.com/). The time series data distributions of both variables are near-normal in term of their respective mean-to-median ratio with very low standard deviations. The Ordinary Least Squares (OLS) is applied to estimate regressions (1) and (2) for reliable and unbiased results, as it meets the statistical criteria for suitability. The regression results show evidence of weak interactions between them with bidirectional causal flows.

Commercial Real Estate in the Face of Climate Risk: Insights from REITs

While climate risk is recognized as a substantial concern in finance and residential real estate, research examining its effects on commercial real estate markets remains limited. In this study, we contribute to this body of knowledge by constructing a firm-level climate risk measure. Our data, collected from the National Oceanic and Atmospheric Administration’s county-level temperature database and a detailed property-level dataset of U.S. equity REITs from 1995 to 2020, enable us to investigate the effects of climate risk on commercial real estate at the firm level. Our findings suggest that REITs with greater exposure to climate risk - characterized by a higher percentage of properties located in counties experiencing abnormally elevated temperature changes - exhibit lower cash flows and firm values, as well as inferior stock returns. These adverse impacts from climate risk persist across various model specifications and control variables. Our study thus illuminates the economic implications of rising temperatures on commercial real estate from a portfolio perspective and provides empirical support for the temperature-based long-run risk model.

Time Varying Dependences Between Real Estate Crypto, Real Estate and Crypto Returns

In recent years, blockchain-based platforms such as Propy and Elysia have emerged that apply tokenization to commercial real estate. They issue real estate crypto coins, which represent a hybrid between real estate and cryptocurrencies. We investigate the return dependence of two real estate crypto coins on (1) the real estate market, as represented by the equity REIT market due to the availability of daily data, and (2) the cryptocurrency market to assess whether real estate crypto coins behave like real estate or cryptocurrencies. Using the time-varying optimal copula (TVOC) approach, we find that the dependence of real estate crypto coins on the real estate and cryptocurrency markets has changed over time. While real estate crypto coins primarily provided exposure to the cryptocurrency market in their early years, our results suggest that real estate crypto coins have become more similar to real estate as they matured. Our findings have portfolio implications for institutional investors, as they suggest that real estate crypto coins represent another asset class to be included in the real estate category.

Do informed REIT market participants respond to property sector mispricing?

ABSTRACT Sector mispricing represents the deviation of current and long-run sector fundamentals indicating either over- or undervaluation. We focus on the response of informed market participants to property sector mispricing in the context of equity REITs. We argue that REIT market participants such as institutional REIT investors and analysts have an informational advantage due to their access to commercial real estate market data. As a result, they are expected to respond to property sector mispricing. Using a sample of 2,637 firm-quarters of pure play equity REITs over the period of 1993 to 2020, we find that sector mispricing indeed impacts the decision-making of informed REIT market participants. The more overvalued (undervalued) a property sector is, the more institutional investors behave as net sellers (buyers) for REITs with the respective property type specialisation in the next quarter. Similarly, property sector overvaluation (undervaluation) results in lower (higher) net buy recommendations by analysts for REITs in the respective sector in the next quarter. However, our results are driven by smaller REITs and REITs with higher growth options. The sensitivity of institutional REIT investors and analysts to property sector mispricing also varies across different states of trading and recommendations respectively.

Does solar activity affect the price of crude oil? A causality and volatility analysis

This study examines how solar activity affects the oil volatility index. To test whether solar phenomena affect the oil volatility price index, the Granger and Step-by-Step causality techniques are applied. Furthermore, we employ the autoregressive distributed lag order model (ARDL), which introduces as exogenous variables the Dow Jones Equity REIT index, the 3-month U.S. Government bond, the Oil Volatility Index, and the spread. As part of the model, we also include a solar variable, namely, the solar wind velocity, which is one of the most significant characteristics of the solar wind plasma. According to the results, the solar wind velocity "Granger causes" and "step-by-step causes" the oil volatility price index. All variables analyzed provide useful information for the modeling of the oil volatility index, which shows that solar activity does indeed influence the market for oil prices.

Comparative Analysis: Influence of Interest Rates on Returns of Real Estate Private Equity Index and Real Estate Public Equity Index

Abstract In this paper, we studied the influence of interest rates on a US-based real estate private equity index as well US Wilshire public equity REIT Index. The interest rates that are chosen as independent variables include Monthly LIBOR, Yearly LIBOR and the Federal Cost of Funds Index. The dependent variables include US-based real estate private equity index that includes quarterly returns of 1,035 real estate funds, including liquidated funds formed between 1986 and 2018. The other dependent variable is the US Wilshire REIT Index. The variance of returns of interest rates considerably influences the variance of returns of the US PERE Index, whereas variance of returns of interest rates doesn’t influence the variance of returns of the US Wilshire REIT Index. Also, the real estate index is positively correlated to interest rates and so rising interest rates influence the returns of US PERE Index in a positive manner. The study shows that private equity real estate investors should expect higher return as the cost of funds increase.

Short selling and options trading: A tale of two markets

AbstractRecent research documents both short selling and option volume are predictive of future real estate investment trust (REIT) returns, suggesting informed investors exploit their informational advantage in both the traditional equity and derivative security markets. However, little work has explicitly examined the factors influencing which of these markets informed investors choose to engage when transacting. We address this gap in the literature and find clear evidence that the risk associated with short selling is a significant driver of this decision. Specifically, using a sample of 124 unique equity REITS with both active short selling and option markets over the past 10 years, we find that when short selling is riskier, option volume is more predictive of future returns. These results suggest that investors view options as an alternative to shorting, and their decision to transact in the derivatives market is materially influenced by short‐selling risk.

The Effect of Interest Rates on REITs Valuation and Future Returns

This article explores the relation between interest rates, REITs valuation, and future returns. Using a dataset on mortgage and equity REITs that spans the 1993–2019 time period, we investigate whether and to what extend nominal and real interest rates, as well as interest rate quality and term spreads, are related to the valuation of REITs, measured by different metrics, and REITs returns in the medium run. The results of our analysis show that interest rates are related to REITs absolute and relative valuation measures, but the sensitivity of REITs valuation to interest rates depends on their original valuation level. Moreover, we provide evidence that lower nominal interest rates and wide quality interest spreads are positively related to future REITs returns in the medium term.

The impact of real estate allocation on investors’ ability to generate real income

ABSTRACT Endowments, wealthy families and retired individuals are often concerned, first and foremost, about preserving their wealth or avoiding the possibility of depleted funds during their lifetime. This paper examines the extent to which a variety of real estate asset types, in addition to a traditional stocks and bonds allocation, can help preserve wealth or avoid a financial shortfall event subject to periodic withdrawals over an extended time period. Using a Monte Carlo Simulation technique, we analyse the resiliency of eight different real estate investment vehicles as a rule of thumb of a 4% annual withdrawal. Our results show that some – in most cases meaningful – portfolio allocation to each of these investment vehicles reduces the chance of a financial shortfall over long-term horizons of 30 or 50 years. Similarly, when wealth preservation is desired, allocation to each of these investment vehicles increases investors’ wealth preservation probability. Overall, it appears that equity REITs provide the greatest benefit to the portfolio compared with other real estate investment vehicles. These findings support portfolio allocation into real estate vehicles for investors that seek to preserve wealth or avoid financial ruin.

Private Equity Real Estate Fund Performance: A Comparison to REITs and Open-End Core Funds

1. Thomas R. Arnold 1. is a visiting scholar in the Warrington College of Business at the University of Florida in Gainesville, FL. (tra622{at}ufl.edu) 2. David C. Ling 1. is the McGurn Professor of Real Estate in the Warrington College of Business at the University of Florida in Gainesville, FL. (ling{at}ufl.edu) 3. Andy Naranjo 1. is the John B. Hall Professor of Finance & Chairman in the Warrington College of Business at the University of Florida in Gainesville, FL. (andy.naranjo{at}warrington.ufl.edu) <!-- --> 1. To order reprints of this article, please contact David Rowe at d.rowe{at}pageantmedia.com or 646-891-2157. We provide a comprehensive examination of the return performance of closed-end, private equity real estate (PERE) funds relative to the performance of listed real estate stocks (real estate investment trusts [REITs]) and the NCREIF ODCE fund index. We first match each PERE fund in our sample and its realized internal rate of return and equity multiple with the return that would have been earned by an LP investor on an investment in the designated benchmark over each fund’s investment horizon. Overall, we find that closed-end PERE funds have underperformed listed REITs. In contrast, we find similar overall performance between PERE and the NCREIF ODCE fund index. We also examine the determinants of the relative performance spread between the PERE funds and the equity REIT index and find that the spread widens with interest rate environment variables (Treasury yields and default spreads) and narrows with broad macroeconomic performance indicators (growth rate of GDP). Key Findings

Time-Varying Correlations of REITs and Implications for Portfolio Management

This study uses bivariate dynamic conditional correlations (DCC) to analyze REITs’ relation with stock and bond markets from 1999 to 2018. The results show that the daily DCCs of both Equity REIT and Mortgage REIT returns experienced several structural changes attributed to the state of the economy, levels of leverage, inclusion or exclusion of REITs from the major S&P indices, and REITs getting their own Global Industry Classification Standard (GICS) category. To account for the structural changes, we allow the impact of the macroeconomic driving forces of the DCCs to vary over time. First, we formulate an OLS model using dummy variables regression (DV) to indicate regime membership, using endogenous break-dates. Then, we estimate a Markov regime-switching model (MRS) that allows the impacts of macroeconomic variables to differ during high and low variance regimes. Both complementary regime-sensitive models (DV and MRG) exhibit significant improvement relative to a traditional OLS model. The findings have significant implications for portfolio and risk management. For example, we find that with the new GICS sector, Equity REIT returns decoupled from the Financial Sector and the overall market as measured by the SP 500. These types of correlation shifts can significantly alter optimal portfolio weights whether trying to maximize returns, minimize risk, or achieving the highest risk-adjusted returns.

U.S. REIT INDUSTRY PROFITABILITY: A BENNET DECOMPOSITION OF INDUSTRY DYNAMICS

This paper considers the aggregate profitability performance of the REIT industry. The aggregate performance depends on the underlying microeconomic dynamics within an industry – the growth of individual REITs (the within effect), the reallocation between existing REITs (the between effect), the entry of new REITs (the entry effect), and the exit of the existing REITs (the exit effect). We apply an extended Bennet (1920) dynamic decomposition on the REIT industry’s return on equity (ROE) and study the annual data on U.S. Equity REITs for the 1989 to 2015 period and various REIT industry specific sub-sample periods. Bailey et al.’s (1992) and Haltiwanger’s (1997) dynamic industry performance decompositions are special cases of the Bennet decomposition. The “within” and “between” effects dominate the annual changes in this industry’s ROE. To the extent that our Equity REIT sample proxies for the FTSE NAREIT All Equity Index, our conclusions also relate to this index’s profitability performance between 1989 and 2015.

Do REIT investors care? An investigation into the market response to the public release of SEC comment letter correspondences

ABSTRACT The Securities and Exchange Commission (SEC) in the US reviews REIT financial statements at least every three years. In these reviews, it adopts the perspective of an investor in evaluating the disclosure of REITs and asks questions an investor would ask. If any disclosure deficiencies are identified, the SEC sends a comment letter to the REIT requesting clarification, more discussion or corrections/improvements in future filings. We investigate the response of REIT investors to the public release of comment letter correspondences between the SEC and publicly traded equity REITs as well as the impact of different types of SEC comments on this response. Using a sample of 395 comment letter correspondences for annual reports (10-Ks) over the period of 2006 to 2019, we find a negative stock market response. Business-related SEC comments are most important in explaining the market response, but only for less transparent REITs. Our results suggest that SEC comment letters may improve the information environment for certain types of REITs by providing new information relevant to forecasting future cash flows and/or signalling information about a REIT’s reporting quality.

How Did the Asset Markets Change after the Global Financial Crisis?

The Global Financial Crisis (GFC) changes the relative economic riskiness and risk-adjusted-performance of different asset markets. While the empirical distribution for stock return shifted to the right and became more concentrated around the mean after the GFC, the real estate market counterparts moved to the left and became more spread out. The economic risk of the OFHEO and Case-Shiller housing indices was smaller than the counterpart of the equity REIT (EREITs) market before the financial crisis, it substantially increased. Also, the economic performance of the OFHEO and Case-Shiller housing indices decreased after the financial crisis. They are below the performance indices of the stock and EREITs markets. The ex-post real estate premium vanishes. If we presume the best model to be the same before and after the GFC, we could severely misestimate the risk after the GFC.

Volatility Targeting for U.S. Equity REITs: A Strategy for Minimizing Extreme Downside Risk?

The study examines the feasibility of Volatility Targeting (VT) to minimize extreme downside risk for U.S. Equity REITs. The empirical study applies a two-stage approach. First, a backtest of buy-and-hold, and VT based on various volatility estimators for each equity REIT security between 1999 and 2019, is performed. Subsequently, a mean-CVaR-optimization for different equity REIT subclasses is carried out. The present study finds CVaR reductions of VT in comparison to buy-and-hold across all subclasses, as well as the entire sample. Interestingly, these improvements differ across the REIT subclasses and volatility estimators.

Location Density, Systematic Risk, and Cap Rates: Evidence from REITs

A property's location is often considered to be the ultimate determinant of its investment performance. But how exactly does a property's location influence its risk and return? We focus on the effects of location density on the risk and return of commercial real estate investments. We do this by studying the geographical characteristics of the property portfolios of U.S. equity REITs. We show that REITs with property holdings in high-density locations experience higher rental growth and carry higher systematic risk than their otherwise comparable peers in low-density locations. Consistent with higher rental growth rates, high-density REITs also have lower implied cap rates. Our results suggest that location density is an important determinant of REIT performance outcomes, implying that geographical characteristics can drive investment risk and return across commercial real estate markets.

How did the asset markets change after the Global Financial Crisis?

The Global Financial Crisis (GFC) changes the relative economic riskiness and risk-adjusted-performance of different asset markets. While the empirical distribution for stock return shifted to the right and became more concentrated around the mean after the GFC, the real estate market counterparts moved to the left and became more spread out. The economic risk of the OFHEO and Case-Shiller housing indices was smaller than the counterpart of the equity REIT (EREITs) market before the financial crisis, it substantially increased. Also, the economic performance of the OFHEO and Case-Shiller housing indices decreased after the financial crisis. They are below the performance indices of the stock and EREITs markets. The ex-post real estate premium vanishes. If we presume the best model to be the same before and after the GFC, we could severely misestimate the risk after the GFC.