REIT: You examined the connection between bank lines of credit and REIT profitability. What did you learn that REIT managers or investors may find interesting?
SEILER: We found REITs that use lines of credit as a greater percentage of total liquidity do, indeed, enjoy better operating performance—especially those REITs that had previously been more financially constrained. This may explain the fact that REITs announcing new or increased lines of credit generally see their stock prices increase.
These results also provide insight into, and a rational economic justification for, the previously documented positive borrower wealth effects associated with bank loan announcements. Credit facilities may enhance both a firm’s investment opportunity set and its bargaining position, thereby increasing its profitability.
REIT: In another study, you examined REIT annual reports to determine how readability—a form of transparency—is related to firm performance. Is it true that superior-performing management teams tend to be more forthright in their disclosures?
MICHAEL SEILER: Technical compliance to regulatory oversight comes in many forms. In our study of the readability of REIT annual statements, we find that if a REIT has good news to report, it will state the good news in plain, easy-to-understand language right in the front of the document. If bad news is required to be disclosed, however, this bad news will be described in a very complex manner using compound sentences and fancy language.
Moreover, the negative information tends to be relegated to footnotes. That is, the linguistic complexity and location of such disclosures is strategic in nature as it pursues all legal means of mitigating the impact of negative market reactions.
In sum, REIT transparency is rewarded by the market in terms of lower implied capital costs. I suspect good performance begets transparency, transparency begets reduced capital costs, and reduced capital costs beget good performance.
REIT: You’ve also examined the role of real estate in mixed-asset investment portfolios. What did your findings suggest?
SEILER: REITs continue to warrant inclusion in both real estate-only and mixed-asset portfolios. In a real estate-only portfolio, REITs offer an ability to make fine tuning adjustments to allocations within a specific sub-class of real estate due to their divisibility, synchronous trading environment, and low transactions cost.
In a mixed-asset portfolio, these characteristics are also partially responsible for the inclusion consideration of REITs. Moreover, real estate in general has been repeatedly found to have a low correlation with other financial assets making it appealing from an overall diversification perspective.
REIT: Are REITs part of your investment portfolio?
SEILER: As a small, individual investor, exposure to commercial real estate is most realistic through the ownership of REITs, either directly as part of a well-diversified portfolio, or indirectly as part of my retirement account through my employer. Although I am a long-term, buy-and-hold type of investor, REITs are also ideal for making fine-tuning adjustments to both real estate-only and mixed-asset portfolios.
Michael J. Seiler is the Robert M. Stanton Endowed Chair and professor of finance and real estate at Old Dominion University and editor of Real Estate Finance. He directs the Institute for Behavioral and Experimental Real Estate (www.IBERE.org), and has authored or co-authored more than 100 studies on real estate investment and the real estate industry.
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