Real Estate Investment Trusts Managers Research Articles

The compensation structure of REIT managers: impact on stock valuation and performance

This paper examines the impact of managers' compensation structure on initial public offering (IPO) pricing and the subsequent corporate performance of 20 externally‐managed real estate investment trusts (REITs) listed on the Singapore Exchange. The results indicate that the IPO market is somewhat efficient in pricing potential moral hazard problems arising from the way REIT managers are paid. In particular, we find that the market generally rewards REITs that pay their managers a low base fee coupled with a high incentive fee that is benchmarked against a pre‐determined performance level. When tracking the post‐IPO performance of the individual REITs, we find that it is related negatively to the size of the base fee, but positively to the performance‐based fee. We also find weak evidence that the incentive‐based fee that is benchmarked against a pre‐determined hurdle leads to superior performance by the managers.

Is There a Disposition Effect in Corporate Investment Decisions? Evidence from Real Estate Investment Trusts

While several studies have documented behavioral biases in the behavior of individual investors, very little is known about the existence of such biases in corporations. We utilize the unique nature of Real Estate Investment Trusts (REITs) to test for the presence of one of the most widely discussed biases, the disposition effect. Using property level REIT data, we find strong statistical evidence that REIT managers tend to sell winners and hold losers, where winners and losers are defined using changes in properties' prices since they were acquired. In addition, we find evidence that this behavior is consistent with the disposition effect. REIT managers are significantly less likely to sell properties that have a loss relative to a reference point based on inflation or historical average returns, controlling for the properties' recent returns. Management of corporations with greater tendencies toward disposition effect behavior tend to sell winner properties at lower prices, all else equal. We find no support for three alternative explanations, optimal tax timing, mean reverting property-level returns, and asymmetric information.

Positive Performance and Private Equity Placements: Outside Monitoring or Inside Expertise?

Executive Summary. This paper examines the performance of real estate investment trusts (REITs) making equity private placements. Since REITs are frequent issuers of equity, we can control for the market’s reaction to underinvestment versus monitoring. Like previous studies of REIT public offerings, we find a significant negative abnormal return associated with the announcement of an equity private placement, positive long-run abnormal returns, and improved operating performance. The long-run abnormal returns are not associated with the presence of an external monitor. It does appear, however, that REIT managers are able to time equity issues to correspond with stock market performance and investment opportunities in the real estate market.

International Real Estate Review

We examine short interests in equity real estate investment trusts (REITs) between 1994 and 2001. Our results show that only high levels (the 90th percentile) of short interest are associated with significant negative REIT returns as the bearish content of short interest may have been mitigated by the favorable risk characteristics of real estate securities. In addition, the significant negative relationship between short interest and REIT returns applies only to REITs with poor performance. The result implies that the bearish sentiment of short interest could also be mitigated by good REIT managers in a real estate market that is informationally inefficient. The results of a logistic regression model further show that the short selling of REIT shares can be explained by firm-specific factors such as operating efficiency, fundamental value, and liquidity. Given that short interest is not indiscriminately associated with negative REIT returns and that the short positions are firm-specific, the results are consistent with implications that short interests in REITs represent attempts to make short-term profits rather than general bearishness regarding real estate investments.

Shareholder wealth effects of private placements of debt made by REITs

AbstractThis study examined both the short‐run and long‐run shareholder wealth effects of private placements of debt made by Real Estate Investment Trusts (REITs). The authors found that there is no significant market reaction to the placement. One‐year and three‐year adjusted abnormal returns were found to be negative and significant for placing REITs. This suggests that REITs do not benefit from added monitoring associated with the private placement. The results also suggest that REIT managers issue in order to grow the asset size of the firm to the detriment of shareholder wealth. Copyright © 2004 Henry Stewart Publications

What Can We Learn about Investment and Capital Structure with a Better Measure of q?

This paper takes an integrated approach to examining the link between stock prices, investment, and capital structure decisions using data on a unique type of firm: Real Estate Investment Trusts (REITs). By using REITs, we are able to obtain high quality estimates of the net asset value of the firm, that can be used to create relatively accurate measures of Tobin's q. In addition, REITs have institutional features that allow us to abstract from other factors that have complicated previous studies. We have three main findings. First, while REIT investment is weakly related to the traditional measure of q, it is quite responsive to an alternative measure of q based on NAV. A REIT whose NAV-based q ratio rises from 1.0 to 1.1 will increase its assets by ten percent in the next year. Second, the debt-to-value ratio responds to deviations in price-to-NAV ratio as well, but more sluggishly. A 0.1 increase in price-to-NAV ratio leads to a relatively modest 0.52 percentage point decrease in the following year's debt-to-market-value ratio. Overall, REITs appear to finance marginal projects with a mix of debt and equity that is similar to their average debt-equity mix. Third, we find evidence that these relationships are nonlinear. Firms invest aggressively when q exceeds one, but do not dis-invest when q is below one. The investment results support traditional theories of firm investment with adjustment costs and imply that past difficulties in validating q theory are likely due to problems in adequately measuring q. The nonlinear relationship between investment and q is consistent with relatively high costs of disinvestment, but also agency models in which managers are reluctant to shrink the size of the firm. Finally, the evidence is weakly consistent with REIT managers attempting a limited amount of financial market timing based on quasi-public information on NAV.

Management Styles of REIT Funds

Executive Summary. This study examines the ability of implied property type allocations to aid in the explanation for the performance of real estate investment trust (REIT) funds. Implied allocations are estimated for ten institutional REIT managers and for nine mutual funds specializing in real estate from January, 1994 through September, 1996. The study finds evidence for the ability of the implied allocations to explain performance, but the tests for a statistically significant relationship are mixed.

Anomalous Evidence on Operating Performance Following Seasoned Equity Offerings: The Case of REITs

We examine the operating performance of 200 equity real estate investment trusts (REITs) following seasoned equity offerings (SEO) made between 1990 and 1996. Our sample shows flat to increasing levels of operating performance changes prior to the SEO; and increasing raw performance changes and flat industry-adjusted performance changes following the SEO. Cross-sectional test results on the operating performance changes are consistent with existing theory. Our results contrast with industrial firm results, where performance changes are negative following an SEO. We attribute this difference to structural differences in REITs that limit the levels of internal capital available to REIT managers.

An Empirical Examination of Compensation of REIT Managers

Principal-agent literature finds that manager and owner incentives can be aligned with performance contingent contracts. We investigate the compensation of Real Estate Investment Trust (REIT) industry executives. The competitive nature of mortgage and equity markets, in conjunction with the corporate tax exemption available when REITs distribute most of their earnings as dividends, is likely to influence the compensation of REIT managers. Executive compensation is modelled as a function of revenues and unexpected profit. After transforming the model to reduce collinearity and hetero-skedasticity, we find compensation to be generally positively related to revenue. We also find unexpected profit to be generally insignificantly related to compensation, but positively related in those cases where it is significant.