From the Research Desk

3/13/2013 | By Calvin Schnure

Published in the March/April 2013 issue of REIT magazine.

How Public Information Impacts REIT Share Prices

SOURCE:  “Public Information, REIT Responses, Size, Leverage, and Focus”, Journal of Real Estate Research, October-December 2012.

AUTHORS:  Arjun Chatrath, Rohan Christie-David and Sanjay Ramchander (University of Portland, University of Louisville and Colorado State University).

SYNOPSIS:  This paper examines how public information affects REIT share prices. The research is noteworthy because the comparison of public vs. private real estate often hinges on the greater volatility of REIT returns. Studying intra-day trading in the period immediately following the release of public information, including news reports and data releases on the macro economy as well as REIT-specific information, the authors find that new information quickly affects both trading activity (number of trades, trade size, bid-ask spread) and prices of REIT stocks. Shares of larger REITs display greater increases in trading activity, perhaps because of the greater ease in transacting in more liquid markets. Leverage increases REITs’ sensitivity to information, especially during declining markets. The authors’ findings that high-frequency activity in REIT share prices is strongly linked to new information on the macro economy and REITs puts the high-frequency volatility of REIT prices vis-à-vis private real estate in a different light:  why do private valuations not reflect relevant information on real estate?

“We find that public information plays a large role in the contemporaneous price formation of REITs.  REIT responses tend to be timely. For example, increases in the levels of trading and quoting immediately follow the release of REIT-specific public information… REIT stories lead to increases in trading activity”


Examining Meanings Behind Mergers

SOURCE:  “Real Estate Mergers:  Corporate Control & Shareholder Wealth”, Journal of Real Estate Finance and Economics, May 2012.

AUTHORS:  Kiplin S. Womack (University of Georgia).

SYNOPSIS:  Do mergers in the real estate industry create wealth for the acquiring firms?  And, what are the motivations for these mergers? Based on data covering nearly three decades of mergers in the real estate industry, this paper finds that mergers tend to generate gains for shareholders (so the answer to the first question is, “Yes!”). Specifically, share prices achieve abnormal positive returns relative to the market return for the period following the announcement of the merger.

For the second question, the results are consistent with the hypothesis that target firms have inefficient management, with high costs and untapped earnings potential, and that acquiring firms have superior management that is able to exploit these opportunities.  The vast majority (85 percent) of the acquiring firms in this study are REITs, highlighting another advantage of publicly-listed shares: the market for corporate control in public equity markets helps improve financial performance as superior managers take over underperforming firms.

“Findings from this study are consistent with the notion that real estate mergers occur because firms with superior management acquire other firms that possess unexploited opportunities to cut costs and increase earnings… Furthermore, the results indicate that real estate mergers generally create wealth, as shareholders at best realize modest gains and at worst break even.”

Calvin Schnure is NAREIT vice president, research & industry information.


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