Mortgage 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.

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.

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.

Liquidity in the Mortgage Market: How does the COVID-19 Crisis Compare with the Global Financial Crisis?

The liquidity strains that contributed to the meltdown of the mortgage market in the Global Financial Crisis (GFC) re-emerged in the Coronavirus 2019 (COVID-19) Crisis. Some of these strains were acute. For example, the dependence of mortgage real estate investment trusts (REITs) on short-term funding amplified market disruption in March 2020. However, other liquidity pressures had only minor repercussions for the overall mortgage market because of reforms since the GFC, a heavy government presence, and strong house prices. The lackluster performance of the private-label mortgage-backed securities market provides a glimpse of how the market might have performed in the absence of the heavy government presence.

Liquidity in the mortgage market: How does the COVID‐19 crisis compare with the global financial crisis?

The liquidity strains that contributed to the meltdown of the mortgage market in the Global Financial Crisis (GFC) re‐emerged in the Coronavirus 2019 (COVID‐19) Crisis. Some of these strains were acute. For example, the dependence of mortgage real estate investment trusts (REITs) on short‐term funding amplified market disruption in March 2020. However, other liquidity pressures had only minor repercussions for the overall mortgage market because of reforms since the GFC, a heavy government presence, and strong house prices. The lackluster performance of the private‐label mortgage‐backed securities market provides a glimpse of how the market might have performed in the absence of the heavy government presence.

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.

Quantitative easing and agency MBS investment and financing choices by mortgage REITs

AbstractWe study Agency Mortgage Real Estate Investment Trusts (Agency MREITs)—shadow banks that invest in guaranteed U.S. Agency mortgage‐backed securities (MBS) and that are principally funded with repo debt—to test how quantitative easing (QE) affects financial risk taking. Agency MREIT asset growth is inversely related to the Federal Reserve's Agency mortgage‐backed securities (MBS) purchases, reflecting investor portfolio rebalancing. Agency MREITs increased leverage during QE, consistent with “reaching for yield.” They countered the heightened solvency risk by extending repo maturity and increased hedging of funding costs to reduce liquidity and interest rate risk. Research linking QE to increased credit risk taking should account for contemporaneous changes in financing choices and risk management.

An Analysis of Central Drivers of REIT Returns

Many researchers have questioned whether real estate investment trusts (REITs) can act as a hedge for inflation or whether REITs can act as a safe haven for investors in the event of economic downturn. However, many studies lack basic data analysis or timely data to determine the dependence of REIT returns on various economic factors. The goal of this study is to act as a meta-analysis to synthesize the relationship between REITs and several potential risk factors. This study will extend beyond the timeline of previous studies, and will examine the relationship of several hypothesized risk factors. The results of this study can help brokers in their future decisions to hedge REIT risk in a portfolio. This study will use the historical returns from the National Association of Real Estate Investment Trusts (NAREIT) as well as six indices. This study will also use both univariate regressions and multivariate regressions to analyze the relationship between REITs and mortgage REITs and each representative index

Diversification and Property Control Impact on the Performance of Brazilian REITs

The Brazilian Real Estate Investment Trusts (REITs) had a market capitalization of 20.2 billion dollars on July 31, 2018, and is a constantly growing market, according to the Brazilian Association of Financial and Capital Market Entities (ANBIMA). This paper seeks to analyse property-type diversification and property control management strategies in the performance of Brazilian REITs, measured by Jensen’s Alpha indicator, using a dynamic regression panel data from 110 REITs in the period between 2002 and early 2016. The results suggest that a property control strategy positively affects the performance of Brazilian REITs, indicating that trusts could improve performance by avoiding conflicts of interest with third parties, and perhaps agency problems inside the REIT’s corporate structure by having full control over its properties. When excluding mortgage REITs from the sample, the property-type diversification also presents a positive and statistical relevant impact on performance, surpassing the impacts of a focused strategy. Finally, it is noted that the performance of Brazilian REITs have high persistence, which indicates that managers seek to achieve a target performance and maintain this performance over time.

Should REIT Investors be Concerned about Changing Economic Conditions?

Current economic development in global markets promises gradually rising interest rates, which seems to concern many investors of the Real Estate Investment Trusts (REITs). The aim of this article is, based on the data from 1972 through 2017, to describe the sensitivity of REITs' total returns to those of the stock market and to the dynamics of interest rates, and to compare the findings with previous research published during the 1990s in order to identify any shifts in the market behaviour. Our OLS regression models will study the effects of the stock market performance and changes in interest rates on both the equity and mortgage REITs. As we will demonstrate, REITs remain sensitive to the stock market performance, but changes of interest rates have little temporary effect on their performance. Contrarily to popular beliefs, there is little evidence that long-term oriented and diversified REIT investors should be overly concerned about rising interest rates.

On the transmission of spillover risks between the housing market, the mortgage and equity REITs markets, and the stock market

Using monthly returns for the January 1975–December 2016 time period in U.S. markets, we report large variations in total, net and pairwise return spillovers across the housing market, the mortgage and equity real estate investment trusts (REITs) markets, and the stock market. Each of the four markets acts as both receiver and transmitter of spillovers during specific subperiods. While in economic downturns the housing market is generally a transmitter of spillovers, we find that during the recent mortgage crisis the housing market was a receiver of spillovers predominantly from the mortgage REITs market but also, to a lesser degree, from the equity REITs market. In periods of high political uncertainty and in periods of easy credit, the equity REITs and the stock market transmit spillovers to the housing and the mortgage REITs market.

Unconventional Monetary Policy and Risk-Taking: Evidence from Agency Mortgage REITs

We study how the Federal Reserve's quantitative easing (QE) influenced the behavior of Agency mortgage real estate investment trusts (REITs)—a set of institutions identified by the Financial Stability Oversight Council as posing systemic risk. We document that Agency mortgage REITs: [i] equity prices reacted to QE announcements and in a manner consistent with their business prospects; [ii] grew markedly during QE2 and receded during QE3 in relation to the Federal Reserve's Agency MBS purchase activity; and [iii] increased their leverage during QE3. Our findings are consistent with unconventional monetary policy actions crowding out private investment and reaching for yield behavior by financial institutions.

The adjustment speeds of short-run real estate investment trust (REIT) and corresponding stock returns in the USA and Australia

This study first uses the non-linear co-integration with structural breaks by Gregory and Hansen (1996) to examine whether non-linear co-integration exists between real estate investment trusts (REITs) and corresponding stock markets in the United States and Australia. Second, 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 non-linear short-run REIT and corresponding stock return dynamics, as well as respective REIT return dynamics when the long-run disequilibrium occurs. The results show that a structural break co-integration exists between the equity and mortgage REITs and stock markets in the US, between the REITs and stock markets in the Australia and between the REIT markets in both the US and Australia. When there are large positive and negative deviations of STVECM, the adjustment speed of reverting to equilibrium of the S&P 500 index is greater than that of the Mortgage REIT index. However, when there are large positive (negative) deviations of STVECM, the adjustment speed of reverting to equilibrium of the Australian REIT (stock) index is greater, and that of the Australian REIT (US REIT) index is greater. In addition, by using a non-linear Granger causality test by Hiemstra and Jones (1994), we find that credit price effects exist between the US for each type of REIT and stock markets regardless of large positive or negative deviations (or returns) in STVECM (or STVAR). However, there is a feedback effect exists between the REITs and the stock markets in Australia.

International Real Estate Review

We investigate the long- and short-term interrelationships between equity and mortgage real estate investment trusts (REITs) by focusing on decomposed income and appreciation components. We find that the previously documented long-term cointegration relation between equity and mortgage REIT prices stems exclusively from their income components and subsequently, the appreciation components contribute nothing to such a long-term relationship. We also find that the previously documented short-term causal relation between equity and mortgage REIT returns is due to the causality that runs from the appreciation returns of equity REITs to those of mortgage REITs while their income returns do not lead to causality. Lastly, we show that the income returns of both equity and mortgage REITs are influenced by the same equity market factor while their appreciation returns are responsive to different macroeconomic factors, which explain the heterogeneous performance between them.

On the Transmission of Spillover Risks between the Housing Market, the Mortgage and Equity Reits Markets, and the Stock Market

In this study we examine the dynamics of return spillovers across four markets: the housing market, the mortgage and equity real estate investment trusts (REITs) markets, and the stock market in the United States. Applying the spillover index methodology by Diebold and Yilmaz (2012) on monthly data from the January 1975-December 2016 time period, we find large variations in the total, net and pairwise return spillovers across these markets. Each of the four markets acts as both receiver and transmitter of spillovers during specific subperiods. While in economic downturns the housing market is generally a transmitter of spillovers, we find that during the recent mortgage crisis the housing market was a receiver of spillovers predominantly from the mortgage REITs market but also, to a lesser degree, from the equity REITs market. We also find that investor sentiment, political uncertainty and availability of consumer credit are key determinants of the direction and intensity of spillovers across markets. In periods of high political uncertainty and in periods of easy credit, the equity REITs and the stock markets transmit spillovers to the housing and the mortgage REITs markets.

Oil prices and real estate investment trusts (REITs): Gradual-shift causality and volatility transmission analysis

According to literature, oil price shocks and volatility can have sector-specific impacts in the market. While these studies include most asset groups, the dynamic relationship between the oil market and Real Estate Investment Trusts (REITs) has not been tested. This study examines the role of oil price shocks and volatility on six REIT categories: Residential, Hotel, Healthcare, Retail, Mortgage and Warehouse/Industrial REITs for the January 2005–December 2013 period. In addition, a new causality approach is proposed by augmenting the Toda–Yamamoto method with a Fourier approximation. This approach is capable of capturing gradual or smooth shifts and does not require a prior knowledge regarding the number, dates, and form of structural breaks. The so-called Fourier Toda–Yamamoto causality (mean spillover) test finds uni-directional causality running from oil prices to all REITs, except for the mortgage REITs. In the latter case, the causality is reversed. In addition, the relatively new and simple causality-in-variance test shows that there is bi-directional volatility transmission between the oil market and all REITs. Our results have important implications for REIT managers and investors.

Exchange rate exposure of REITs

Abstract In this paper, I examine how foreign exchange rate movements affect U.S. real estate investment trusts (REITs) returns. I document that REITs returns are adversely affected by U.S. dollar appreciation, regardless of the measurement of the exchange rate changes, of the REIT size and of macro-economic factors. The exchange rate exposures, however, vary significantly among the REIT types and REITs’ property. U.S. dollar appreciation adversely affects equity REITs returns while leaving no significant impact on mortgage REITs and hybrid REITs returns. The exchange rate exposure is especially prominent among health care, industrials-office, residential, retail and self-storage REITs. The findings unveil an important source of risk that REITs are exposed to, demanding more attention from REIT portfolio managers and investors alike.

A Fixed-Income Market View of Mortgage REIT Valuations

This article discusses the use of mortgage-backed securities and fixed-income derivatives analytics in order to model agency mortgage real estate investment trust (REIT) holdings in more detail than standard equity market practice. The author shows that book value projections derived from a full bottom-up modeling approach are quite accurate. He also computes such metrics as duration, convexity, and basis risk of mortgage REITs, and suggests hedging strategies. Finally the author explores performance attribution and how to fundamentally explain the large yields observed on these stocks. <b>TOPICS:</b>MBS and residential mortgage loans, derivatives applications, real estate