Academic Studies
REIT Dividend Payouts Demonstrate Transparency
NAREIT’s Work on FFO Increased Value to REIT Investors
From "The Effect of Increased Transparency on Manipulation and Value Relevance of Non-GAAP Disclosures by Real Estate Investment Trusts (REITs)," an unpublished working paper by Bok Baik, Bruce K. Billings and Richard M. Morton, 2006
Three Florida State business school professors have found evidence that increased transparency in the computation of funds from operations (FFO) increased its "value relevance" to potential REIT investors.
"NAREIT solicited feedback from industry executives, the analyst community, institutional investors and other industry participants and convened a best financial practices council to better clarify the definition of FFO and encourage greater uniformity and transparency in practice with the intent of increasing credibility in the financial markets. The result of this effort was a National Policy Bulletin, effective Jan. 1, 2000, which formally approved the recommendations of the best practices council to improve FFO reporting.
These results suggest that reporting initiatives aimed at reducing the extent of discretion in FFO also reduced the extent of opportunistic reporting. We further find that the usefulness of FFO to investors increased over this period, suggesting that the reporting oversight to increase uniformity in calculating FFO enhanced the perceived reliability of FFO for valuation purposes. Furthermore, we can trace some of FFO's increased value relevance to the practice of reconciling FFO to generally accepted accounting principles/earnings per share (GAAP EPS), which makes departures from GAAP more transparent."
REIT Corporate Governance is Reflected in REIT Share Prices
From "Corporate Governance and Firm Valuation: The REIT-Effect," by Rob Bauer, Piet M.A. Eichholtz and Nils Kok, an unpublished working paper, November 2006.
Three Dutch economists studied the effects of corporate governance on both company value and stock performance of U.S. REITs. Noting that strong corporate governance is typical of the entire U.S. REIT industry, Rob Bauer, Piet Eichholtz and Nils Kok of Maastricht University found that companies with stronger corporate governance are valued more highly.
"The recent global growth of capital inflows in property markets, spurred by institutional and private investors, is allocated to indirect property vehicles such as real estate investment trusts rather than to direct property, which increases the focus on the efficiency of corporate governance mechanisms.
The relationship between corporate governance and firm value is our main significant result and is especially striking because we cannot show that well-governed firms have better equity performance than poorly governed firms over the sample period. This implies that the merits of good corporate governance were recognized by investors before the time of this study. Investors were willing to pay a premium for well-governed REITs, which has immediately been incorporated in the stock price. The governance effect appears in the firm value, but does not appear in the analysis of stock performance any more."
REIT Transparency Translates to Stronger Growth
From "The Effect of Corporate Transparency on Firm Investment: Evidence from Real Estate Investment Trusts," by Heng An, an unpublished manuscript, May 2006.
Heng An, a finance Ph.D. candidate from the University of Alabama, studied the relationship between corporate transparency and investment, finding that transparency makes it easier for REITs to obtain external financing to acquire assets. An uses "stock price synchronicity" to measure corporate transparency, and reaches conclusions consistent with other recent research suggesting that less-transparent firms may fail to grow appropriately.
"I find evidence that corporate transparency, measured by stock price non-synchronicity, has a strong positive effect on REITs' investment. The results suggest that greater transparency mitigates the asymmetric information problem in the capital markets and reduces the information cost of external financing. The magnitude of this effect is larger in the equity market, where the adverse selection problem is more severe, than in the debt market. Greater transparency enables the REIT to raise external capital more easily, thereby relying less on internal cash flow."
Insider Ownership and Institutional Investors a Plus for REITs
From “Insider Ownership and Firm Value: Evidence from Real Estate Investment Trusts,” by Bing Han, published in Journal of Real Estate Finance and Economics, 2006.
An Ohio State finance economist, Bing Han, investigated whether insider ownership in listed REITs is associated more strongly with entrenchment that reduces firm value or with alignment of interests that increases firm value. Han found that insider ownership contributed to the value of the firm even at relatively high levels, especially as institutional investment in REITs has increased.
“Agency problems arise within a firm whenever managers have incentives to engage in non-value-maximizing activities such as perquisite-taking and empire-building. Listed REIT data provide a unique laboratory to study this issue. One reason is that the incentive effect of managerial ownership is likely to have a more important effect on the value of REITs.
Other things equal, firm value (measured by Tobin’s Q, the sum of market value of stock plus debt and preferred securities divided by total assets) will increase by 0.13 when insider ownership increases from 0 percent to 5 percent. The relationship between firm value and insider ownership above 25 percent turns negative, although not significantly so.
Using listed REIT data for the 1980s and early 1990s, earlier researchers found that the relationship between market-to-book ratio and insider ownership is positive up to 5 percent and turns negative after that. In comparison, for REITs in 1994-2000, firm value is positively related to insider ownership up to 25 percent. The difference is consistent with reduction in agency costs in modern REITs brought by several recent important changes.
With reduced liquidity, institutional investors with more than a 10 percent stake have more incentive to monitor and influence the firm management. Their presence should reduce agency cost in REITs and may dampen the humped relation between insider ownership and firm value.
For those REITs whose largest institutional investors hold more than 10 percent of the firm, firm value is positively related to insider ownership even at high levels of insider ownership.”
Also see: http://www.realestateportfolio.com/portfoliomag/07sepoct/quickstudy.shtml
From "Spatial Diversification, Dividend Policy, and Credit Scoring in Real Estate," an unpublished Ph.D. dissertation by Darren K. Hayunga, 2006
A finance Ph.D. student challenges earlier research that suggested REITs may take advantage of inefficient monitoring and/or information advantages in setting their dividend payouts. Instead, Darren K. Hayunga, now assistant professor, University of Texas at Arlington, finds that REIT dividend payouts reflect current earnings, with adjustments to keep dividend streams smooth and protect against volatility.
"REITs possess a straightforward organizational structure to examine dividend policy especially when compared to industrial firms. For non-REIT firms, project confidentiality, adverse selection and moral hazard can hinder the direct transfer of information between market participants.
Conversely, REIT investors and analysts are aware of the real estate assets and mortgages held by publicly traded REITs. In addition, agency costs and asymmetric information are reduced since REITs must continuously be active in the capital markets, and these markets act as an additional monitor of firm activities.
I find that the dividend payment(s) made by equity REIT managers are not materially affected by traditional measures of agency costs or asymmetric information. Instead, the results confirm the importance of contemporaneous net income and the level of dividends paid last period."