Resetting the REIT Cycle
This report focuses on the potential buying opportunity shaping up in U.S. REITs, as valuations have improved and Donald Trump’s election has primed the pump on growth and infation expectations. While much is still unknown, Cohen & Steers sees potential for the kind of policy upheaval that could change the shape of real estate fundamentals and values for the better through stronger demand and slower new supply.
High Priced ≠ Overpriced
REITs have been trading at a premium to the broader stock market, and some investors have questioned whether higher multiples on REITs are justified. Green Street Advisors makes the case that the REIT premium is justified by REITs’ superior operating results and higher profit growth over the past twenty years. Green Street reports that, going forward, REIT profits may look even better compared to the broad equity market and “As a result, anyone holding out for a sharp reduction in the earnings multiple premium the market now ascribes to REITs may be in for a long and painful wait.”
REIT Stocks: An Underutilized Portfolio Diversifier
In a new “Leadership Series” white paper Fidelity Investments Research explores the fact that many investors remain underexposed to REIT stocks despite the diversification benefits they can provide to investment portfolios. Co-authored by Andy Rubin, Steve Buller, and Sam Wald, the paper provides arguments for why investors should consider higher exposures to commercial real estate through listed REITs. The authors find that “making a sizable allocation to REITs in a multi-asset-class portfolio would have helped improve the portfolio’s risk-adjusted return over time.”
A Primer on US Equity REITs and Their Role in an Institutional Investment Portfolio
This report highlights the similarities between stock exchange-listed Equity REITs and private real estate as investments. “REIT values are dictated by property values and, therefore, REITs are real estate over the long-term,” offering similar risk and return attributes, the report states. Boston-based NEPC serves more than 300 clients with total assets under advisement in excess of $850 billion. It is one of the largest full-service investment consulting firms in the country.
The Truth About Real Estate Allocations
This analysis from investment management firm Cohen & Steers reviews the performance of publicly traded REITs and core, value-added and opportunistic private equity real estate funds over various periods on a net-of-expenses basis. The paper explores the possible reasons for REITs' outperformance, based on the comparative business models of REITs and private equity real estate funds.
Research Presented at the 2015 NAREIT/AREUEA Real Estate Research Conference
REIT Financing Choices: Preparation Matters
by Andrey Pavlov (Simon Fraser University), Eva Steiner (University of Cambridge), and Susan Wachter (University of Pennsylvania)
Responding to previous research showing that REITs that were using relatively little debt just prior to the 2008 liquidity crisis outperformed others during and immediately after it, the authors note that REIT leadership can prepare for such events either by maintaining perpetually conservative balance sheets or by making greater use of leverage during ordinary times but then paying down debt and improving maturity schedules in anticipation of such crises. Their empirical results indicate that the best-performing REITs during and after the crisis tended to be those that took action to reduce their leverage risks, rather than those that maintained consistently low leverage, and that this was especially true for REITs with stronger, more investor-oriented governance. The authors interpret their findings as suggesting that governance and risk-reducing actions taken prior to the crisis provided signals to investors regarding market-awareness and initiative on the part of REIT executive leadership.
Diversification Benefits of REIT Preferred and Common Stock: New Evidence from a Utility based Framework
by Walter I. Boudry, Jan A. deRoos, and Andrey D. Ukhov (Cornell University)
The authors provide the first analysis of the diversification benefits of REIT preferred stock, as well as REIT common stock, in mixed-asset portfolios. Noting that market imperfections make it necessary to construct optimal portfolios separately for risk-averse investors and for those with low risk aversion, they find that REIT common stock has generally provided the greatest benefits to risk-tolerant investors by increasing their portfolio gains without increasing portfolio volatility. In contrast, REIT preferred stock has primarily benefited risk-averse investors by reducing portfolio volatility without reducing portfolio returns; moreover, the authors find that the diversification benefits of REIT preferred stock cannot be replicated by combinations of other assets.
The Misuse of Alpha in Private Equity Real Estate Investments
by Kiat Ying Seah (National University of Singapore), James D. Shilling (DePaul University), and Charles Wurtzebach (DePaul University)
The authors question whether performance compensation for managers of private equity real estate funds--especially those following value-added or opportunistic strategies targeting higher net total returns--should be based on fund-level performance, which may be affected by the use of leverage, or on asset-level performance independent of leverage risk. Using data collected by the National Council of Real Estate Investment Fiduciaries (NCREIF), the authors show that Jensen's alpha--a commonly used measure of performance that is leverage-sensitive and therefore at least potentially subject to manipulation through the choice of leverage risk--has generally exceeded asset-level alpha by a wide margin during real estate booms and, conversely, fallen fall short of deal-level alphas when poor market conditions are exacerbated by the return-destroying effects of leverage.
Cross-Sectional Dynamics of REIT Market Efficiency
by Mike Aguilar (University of North Carolina), Walter I. Boudry (Cornell University), and Robert A. Connolly (University of North Carolina)
The authors study "price discovery"--that is, the process by which information about future earnings growth, discount rates, and other conditions is aggregated through stock trades to reveal the market value of each exchange-traded REIT. Using data on REIT stock trades throughout the day, the authors show that the price discovery process is efficient for most REITs most of the time, but that there is a sizable number of instances of inefficient price discovery--such as instances of systematic mean-reversion or momentum (mean-aversion). Moreover, REIT pricing appears to become more efficient over time, with newer REITs more likely to be inefficiently priced. They also find that greater investment by institutions--especially those that engage in relatively infrequent trading activity--help to improve REIT pricing efficiency.
J-REIT Market Quality: Impact of High Frequency Trading and the Financial Crisis
by Pawan Jain (Central Michigan University)
The author investigates the effect of the 2008-09 liquidity crisis and the introduction of high-frequency trading (HFT) on several measures of market quality including liquidity, volatility, and market depth (number of bid or ask quotes) in the Japanese REIT market. As expected, the liquidity crisis put a significant strain on market quality; contrary to some expectations, however, the introduction of high-frequency trading generally improved market quality by improving liquidity, which in turn reduced volatility. The author also finds that both the deterioration of market quality during the liquidity crisis and the improvement of market quality as a result of HFT were less pronounced for Japanese REITs than for similar non-REIT stocks, a result that he attributes to more transparency and less asymmetric information for REITs relative to non-REITs.