US Real Estate Investment Trusts Research Articles

ESG components and equity returns: Evidence from real estate investment trusts

This study examines the relationships between the individual components of environmental, social, and governance (ESG) performance and future stock returns of US Real Estate Investment Trusts (REITs). The findings demonstrate a negative association between environmental performance and expected returns, while social performance shows a positive relationship with future returns. Moreover, the study investigates whether the observed negative (positive) relationship between environmental (social) performance and equity returns can be attributed to the predictability of ESG components on future firm fundamentals or investor preferences towards different ESG components. The results indicate that environmental performance has a detrimental impact on firm fundamentals in REITs, including future profits, external financing, and stock risk. Conversely, social performance exhibits a positive association with future firm fundamentals. Institutional investors do not significantly reduce ownership to REITs with strong environmental performance but increase their ownership of REITs with strong social performance. In summary, this study highlights that the relationship between ESG and equity varies depending on the specific ESG components under consideration.

Risk transmission and diversification strategies between US real estate investment trusts (REITs) and green finance indices

Risk transmission and diversification strategies between US real estate investment trusts (REITs) and green finance indices

Boardroom dynamics: the impact of board gender diversity on discretionary dividend policy in US REITs

Purpose This study aims to address a notable gap in the existing literature by exploring the relationship between gender diversity and dividend policy within the context of US Real Estate Investment Trusts (REITs). Design/methodology/approach The authors use a substantial data set comprising 1,398 firm-year observations across 209 US REIT companies from 2011 to 2021 to address the research aims. Fixed effects models and generalized least squares regression methods are used in the analysis. Findings The results demonstrate a significant positive association between board gender diversity and higher dividend payouts among US REITs. This relationship holds after controlling for corporate governance and other firm-level factors. The findings have strong implications that the presence of women on REIT boards contributes to a greater propensity for discretionary dividend increases in the USA. Originality/value This research contributes to the literature by empirically examining female directors’ role in influencing US REITs’ dividend policies, an area lacking adequate prior scholarship. The paper also considers the unique regulatory environment of REITs, highlighting the importance of the study for externally financed firms.

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.

Prediction and Allocation of Stocks, Bonds, and REITs in the US Market

AbstractThis study employs dynamic model averaging and selection of Vector Autoregressive and Time-Varying Parameters Vector Autoregressive models to forecast out-of-sample monthly returns of US stocks, bonds, and Real Estate Investment Trusts (REITs) indexes from October 2006 to December 2021. The models were recursively estimated using 17 additional predictors chosen by a genetic algorithm applied to an initial list of 155 predictors. These forecasts were then used to dynamically choose portfolios formed by these assets and the riskless asset proxied by the 3-month US treasury bills. Although we did not find any predictability in the stock market, positive results were obtained for REITs and especially for bonds. The Bayesian-based approaches applied to just the returns of the three risky assets resulted in portfolios that remarkably outperform the portfolios based on the historical means and covariances and the equally weighted portfolio in terms of certainty equivalent return, Sharpe ratio, Sortino ratio and even Conditional Value-at-Risk at 5%. This study points out that Constant Relative Risk Averse investors should use Bayesian-based approaches to forecast and choose the investment portfolios, focusing their attention on different types of assets.

Investment and finance committees composition and firm performance: evidence from US Real Estate Investment Trusts (REITs)

Investment and finance committees composition and firm performance: evidence from US Real Estate Investment Trusts (REITs)

What is the Effect of VIX and (un)Expected Illiquidity on Sectoral Herding in US REITs during (Non)Crises? Evidence from a Markov Switching Model (2014 – 2022)

The study investigates the impact of sector and market-wide illiquidity shocks on herding within US Real Estate Investment Trusts (REITs), on a sub-sector level, including health, hotel, mortgage, residential, retail and Warehouse REITs. Using daily data from January 2014 to February 2022, and consistent with noise trader risk theory, the research confirms the existence of herding behavior within US REITs on a sub-sector level, along with identifying that herding effects are intense on days with negative market returns as compared to days with positive market returns. Assessing the impact of investor sentiments via the VIX index, we find that herding behavior rises with a hike in investor uncertainty and fear. Motivated by the presence of a structural break within our data set corresponding to the Covid-19 outbreak, we use a Markov Switching approach and find significant evidence of sub-sector herding being more intense during the crash regime/covid-19 phase, relative to the expansionary phase. When assessing illiquidity, our results confirm that i) during the expansionary phase only expected illiquidity (market and sector-wide) enhances sub-sector herding within US REITs while ii) during the crash phase only unexpected illiquidity (market and sector-wide) enhances sub-sector herding within US REITs.

Housing in the greater Paris area as an inflation hedge?

PurposeOver a long period, even low inflation has an impact on portfolio value and households’ purchasing power. In such a context, inflation hedging should remain an important issue for investors. In particular, long-term investors, who are concerned with the protection of their wealth, seek to hold effective hedging assets. This study aims to demonstrate that residential assets in “Grand Paris” are a hedge against inflation and particularly against its unexpected component.Design/methodology/approachIn this study, the physical residential markets in 127 communes in Paris and the Parisian first-ring suburbs are considered as potential asset classes. We simplified the analysis by clustering the 127 communes into five homogenous groups using ascending hierarchical classification (AHC). Then, we test the hedging ability of these groups within a mixed asset portfolios using both correlation and regression analysis.FindingsThis paper presents an analysis of the “Grand Paris” housing market and its inflation hedging ability with comparison to other financial asset classes. Results show that the five housing groups act as a highly positive hedge against unexpected inflation. Furthermore, cash and bonds seem to provide, respectively, a partial and an over hedge against unexpected inflation. Stocks act as a perverse hedge against unexpected inflation and provide no significant hedge against expected inflation. Also, indirect listed real estate demonstrates little correlation with inflation, which makes us reject its hedging ability contrary to physical residential real estate.Research limitations/implicationsThe inflation topic: although several researches exist that question the hedging property of real estate, very few concentrate on physical residential assets and to the best of the authors’ knowledge, this study is the only one that targets the “Grand Paris” area. Residential assets of the “Grand Paris” communes are confirmed to be a hedge against inflation and particularly against its unexpected component thanks to its capital appreciation rather than income one. Also, we show that the listed real estate in France (Sociétés d’Investissement Immobilier Cotée) does not provide the same hedging properties contrary to the US real estate investment trusts (REITs) who demonstrate this ability. Listed real estate could thus not be used interchangeably with housing to protect from inflation in the French market.Practical implicationsProtection of investors against inflation and in particular in the face of its return to France in 2022. Reassuring promoters and investors of the interest of residential investment projects in “Greater Paris” and of the potential that this holds.Social implicationsInflation takes a chunk out of the purchasing power of money and thereby erodes the real value of people’s finance. Investors and households who seek protection from inflation erosion should invest in direct housing, and in particular within areas that are experiencing an effective metropolization process.Originality/valueThe originality of the study is precisely relative to the geographical area studied. The latter has experienced favorable economic conditions for several years and offers interesting fundamentals to explore and exploit in investment strategies that prove capable of protecting against imminent inflation. The database is specific to this project and has been built through the compilation of several sources and with the support of BNP Paribas Real Estate.

In Real Estate Investment We Trust: State De-risking and the Ownership of Listed US and German Residential Real Estate Investment Trusts

Real estate investment trusts (REITs) have been around since 1960 but have only become major players in housing markets in the last twenty years. The current and ongoing wave of residential REIT (R-REIT) expansion has attracted significant scholarly and broader public interest. This article examines how real estate, finance, and the state are configured in relation to each other through R-REITs. While much of the housing financialization literature has focused on the real estate/state axis of this relationship, we explore the underexamined connections between the real estate/finance axis and the finance/state axis of the real estate–finance–state triangle. We analyze the financial accounts of the world’s fifteen largest publicly traded R-REITs and R-REIT–like funds in the two largest markets: the United States and Germany. Our findings demonstrate how the ownership of R-REIT stock is remarkably homogeneous: the largest shareholders in each of the studied R-REITs are the three largest index exchange-traded funds, which are heavily backed by pension fund capital. For these investors, it is important that R-REITs provide a healthy return on investment at the lowest possible risk. The investors require the state, in its various guises, to guarantee attractive risk-adjusted returns on R-REITs investments. We identify six dimensions of state de-risking in this context, deepening our understanding of the role of the state in housing financialization. It is the state that creates the trust in real estate investment trusts, and it thus is what generates the investment in real estate investment trusts.

Fama–French–Carhart Factor-Based Premiums in the US REIT Market: A Risk Based Explanation, and the Impact of Financial Distress and Liquidity Crisis from 2001 to 2020

The study investigates the impact of financial distress (credit spread) and liquidity crises (TED spread) on size, value, profitability, investment and momentum premiums within the US Real Estate Investment Trust market. Using daily data from 2001 to 2020, we examine the presence, magnitude and significance of these premiums, along with assessing if these premiums are associated with higher risk. The study then employs Auto-regressive distributed lag and Error Correction Modeling to establish the long/short-run impact of financial distress and liquidity crisis on these premiums during recessionary and non-recessionary phases, including COVID-19. Premiums associated with all five factors are positive and significant. Secondly, in contradiction to the Efficient Market Hypothesis, we find that value and momentum portfolios provide superior returns without exposing investors to higher risk while portfolios based on size, profitability and investment, do tend to expose investors to a higher risk. Thirdly, in contradiction to the risk based explanation of Fama–French/Carhart (2015/1997), we find significant evidence of a fall in profitability and momentum premiums with an uptick in financial distress and liquidity crisis. On the other hand, size, value and investment premiums rise with financial distress/liquidity crisis, only during the recessionary phases. This impact is insignificant during non-recessionary phases.

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.

Can textual analysis solve the underpricing puzzle? A US REIT study

PurposeAlthough many theories aim to explain initial public offering (IPO) underpricing, initial-day returns of US Real Estate Investment Trust (REIT) IPOs remain a “puzzle”. The literature on REIT IPOs has focused on indirect quantitative proxies for information asymmetries between REITs and investors to determine IPO underpricing. This study, however, proposes textual analysis to exploit the qualitative information, revealed through one of the most important documents during the IPO process – Form S-11 – as a direct measure of information asymmetries.Design/methodology/approachThis study determines the level of uncertain language in the prospectus, as well as its similarity to recently filed registration statements, to assess whether textual features can solve the underpricing puzzle. It assumes that uncertain language makes it more difficult for potential investors to price the issue and thus increases underpricing. Furthermore, it is hypothesized that a higher similarity to previous filings indicates that the prospectus provides little useful information and thus does not resolve existing information asymmetries, leading to increased underpricing.FindingsContrary to expectations, this research does not find a statistically significant association between uncertain language in Form S-11 and initial-day returns. This result is interpreted as suggesting that uncertain language in the prospectus does not reflect the issuer's expectations about the company's future prospects, but rather is necessary because of forecasting difficulties and litigation risk. Analyzing disclosure similarity instead, this study finds a statistically and economically significant impact of qualitative information on initial-day returns. Thus, REIT managers may reduce underpricing by voluntarily providing more information to potential investors in Form S-11.Practical implicationsThe results demonstrate that textual analysis can in fact help to explain underpricing of US REIT IPOs, as qualitative information in Forms S-11 decreases information asymmetries between US REIT managers and investors, thus reducing underpricing. Consequently, REIT managers are incentivized to provide as much information as possible to reduce underpricing, while investors could use textual analysis to identify offerings that promise the highest returns.Originality/valueThis is the first study which applies textual analysis to corporate disclosures of US REITs in order to explain IPO underpricing.

Market Efficiency of US REITs: A Revisit

The findings on the efficient market hypothesis in the US real estate investment trust (REIT) sector are mixed, and applied methodologies may not be adequate. This paper investigates the weak-form efficient market hypothesis for US REIT stocks. The variance ratio test indicates that the REIT and general stock markets are not efficient in the weak-form: the log price series for REIT stocks violates the random walk theory as a model specification. As an alternative, we applied the quantum harmonic oscillator to provide robust evidence. The quantum harmonic oscillator, including the solution for a random walk as a ground state solution, proved to be a better method for testing the efficient market hypothesis. Contrary to variance ratio test, quantum harmonic oscillator provides results that REIT stocks are more efficient than general stocks, and their market efficiency is close to that of bonds. We argue that large market size and substantial institutional ownership of REIT shares have enhanced market efficiency. The findings suggest that arbitrage in the REIT market cannot be achieved simply by analyzing the historical price trend.

On the Dynamics of International Real-Estate-Investment Trust-Propagation Mechanisms: Evidence from Time-Varying Return and Volatility Connectedness Measures.

In this paper, we investigate the time-varying interconnectedness of international Real Estate Investment Trusts (REITs) markets using daily REIT prices in twelve major REIT countries since the Global Financial Crisis. We construct dynamic total, net total and net pairwise return and volatility connectedness measures to better understand systemic risk and the transmission of shocks across REIT markets. Our findings show that that REIT market interdependence is dynamic and increases significantly during times of heightened uncertainty, including the COVID-19 pandemic. We also find that the US REIT market along with major European REITs are generally sources of shocks to Asian-Pacific REIT markets. Furthermore, US REITs appear to dominate European REITs. These findings highlight that portfolio diversification opportunities decline during times of market uncertainty.

Greenness and financial performance of European REITs

PurposeThe purpose of this paper is to investigate the link between greenness and the operating performance in 50 listed European real estate investment trusts (REITs).Design/methodology/approachUsing a sample of 50 listed European REITs, the analysis leverages on Ordinary least squares models to investigate the relationship between greenness and operating performance indicators. In particular, it examines three types of greenness indicators: the overall Green Real Estate Sustainability Benchmark (GRESB) rating, its two components (management and policy [MP] and implementation and measurement) and the seven aspect scores; return on equity (ROE) and return on assets (ROA) are the fundamental measures of REITs operating performance.FindingsThe results demonstrate a positive relationship between greenness indicators and operating performance in European REITs, but the impact on ROE and ROA differs depending on the GRESB variable analyzed. If the GRESB rating proved to be significant on ROE and ROA, none of its two components has an impact on ROA, and only the MP score has a positive relationship with ROE. Finally, of the seven aspect scores, only the stakeholder engagement is significant on the two dependent variables.Originality/valueThe commercial real estate sector has a significant role in tackling climate change issues. To incentivize the market to increase the investments in green buildings, it is essential to find a link between their sustainability characteristics and the improvements they deliver in terms of operating performance. Despite there being a substantial body of literature investigating this connection in the US REITs market, there is still limited knowledge on the relationship between green and operating indicators in the European REITs market.

Women directors’ effect on firm value and performance: the case of REITs

PurposeThe purpose of this paper is to assess the effect of women directors on US Real Estate Investment Trusts (REITs) value and performance.Design/methodology/approachArchival financial and board of director data for the 1999–2019 period are collected and analyzed using panel data regression analysis.FindingsThe main findings indicate that women directors’ presence renders a modest positive effect on REIT performance but only when they reach critical mass on REIT boards; and that women directors have no effect at all on REIT value. Additional findings indicate that women directors are more common on REIT boards after the enactment of the Sarbanes–Oxley Act but less common on boards in which the REIT founder is the chief executive officer.Originality/valueTo the best of the author’s knowledge, this is the first research on the effect of a gender diverse board on REIT value. It is also the first paper documenting a positive relationship between board gender diversity and REIT performance. This paper fills a research gap, as it is one of the few papers focused on gender diversity within the REITs board composition literature.

Https://www.risk.net/journal-of-risk/7674176/the-impact-of-corporate-social-and-environmental-performance-on-credit-rating-prediction-north-america-versus-europe

Using a quantile regression model, this study examines economic policy uncertainty and investors’ attention for policy risk on US real estate investment trusts' (REITs') herding behaviors. We consider information demand and supply as indicators for investors’ consequent reactions to economic policy uncertainty. Our empirical findings indicate that the REITs market is able to avoid the impact of uncertainties in economic policies, and that information demand and supply show the rational level of the REITs market's investment behaviors and reveal spurious market herding. When facing uncertainties in global economic policies, analysts’ professional reports can provide valuable information for making rational investment decisions.

Law of Two Prices? Revisiting the Noise Trader Model of NAV Premiums

This dissertation studies the US real estate investment trust (REIT) market to empirically examine several conditions of the noise trader model (NTM) — a behavioral theory that purports to explain departures of listed property share prices from their net asset values (NAV spreads). First, we demonstrate that after controlling for divergent rates of price discovery between listed and direct property markets, REIT prices correct toward an equilibrium relationship with NAVs — a persistent premium; these price corrections are consistent with NTM but contradict prior studies which find only unidirectional corrections of NAVs toward prices. Next, we find disaggregated measures of investor sentiment can help explain NAV spreads. Furthermore, individual investor sentiment appears more correlated with NAV spreads than institutional investor sentiment. While the relationships are weak and somewhat inconsistent, these findings are in line with NTM’s predictions. However, after controlling for fundamental information and standard asset pricing factors, the residual (considered irrational) component of sentiment offers insignificant supplementary explanation; this result severely challenges NTM’s relevance. Our findings elicit greater inquiries on the operationalization of sentiment, the risk profile of listed real estate, and the rationality of market risk pricing.

Green Building, Cost of Equity Capital and Corporate Governance: Evidence from US Real Estate Investment Trusts

Distinct from the existing literature, which mainly focuses on the impacts of green building practices on the owners’ benefits, this paper examines capital market participants’ perceptions of green building, specifically, the cost of equity capital. The study uses data regarding the United States Real Estate Investment Trusts (US REITs) from 2000 to 2016, employing a panel regression analysis and adopting a Price Earnings Growth (PEG) ratio model for the cost of equity capital estimation. We find a negative relationship between green building certification and the cost of equity capital. Our results encourage REITs to participate in green building certification and aim for higher green building rankings. In addition, we examine whether corporate governance could affect the intensity of green building practices in REITs. It is found that corporate governance practices implemented to align shareholders’ and managers’ interests, such as higher institutional holdings and a less dispersed ownership structure, positively impact firms’ resource allocation for green initiatives. The results suggest there could be mutual benefits for both economic profits and sustainable buildings.

Is the MD&A of US REITs informative? A textual sentiment study

PurposeThis study examines whether language disclosed in the Management Discussion and Analysis (MD&A) of US Real Estate Investment Trusts (REITs) provides signals regarding future firm performance and thus generates a market response.Design/methodology/approachThis research conducts textual analysis on a sample of approximately 6,500 MD&As of US REITs filed by the SEC between 2003 and 2018. Specifically, the Loughran and Mcdonald (2011) financial dictionary, and a custom dictionary for the real estate industry created by Ruscheinsky et al. (2018), are employed to determine the inherent sentiment, that is, the level of pessimistic or optimistic language for each filing. Thereafter, a panel fixed-effects regression enables investigating the relationship between sentiment and future firm performance, as well as the markets’ reaction.FindingsThe empirical results suggest that higher levels of pessimistic (optimistic) language in the MD&A predict lower (higher) future firm performance. Hereby, the use of a domain-specific real estate dictionary, namely that developed by Ruscheinsky et al. (2018) leads to superior results. Corresponding to the notion that the human psyche is affected more strongly by negative than positive news (Rozin and Royzman, 2001), the market responds solely to pessimistic language in the MD&A.Practical implicationsThe results suggest that the market can benefit from textual analysis, as investigating the language in the MD&A reduces information asymmetries between US REIT managers and investors.Originality/valueThis is the first study to analyze exclusively US REITs, whether language in the MD&A is predictive of future firm performance and whether the market responds to textual sentiment.