determinants of risk-adjusted reit performance - evidence from us equity reits
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Determinants of Risk-Adjusted REIT Performance - Evidence from US Equity REITs. Kai-Magnus Schulte ERES Stockholm, Session 4-C, 26. June 2009. Agenda. Motivation & Purpose of the Study Sample Dependent & Independent Variables Data & Methodology Empirical Results Summary & Conclusion. - PowerPoint PPT PresentationTRANSCRIPT
Determinants of Risk-Adjusted REIT Performance - Evidence from US Equity REITs
Kai-Magnus Schulte ERES Stockholm, Session 4-C, 26. June 2009
Agenda
1. Motivation & Purpose of the Study
2. Sample
3. Dependent & Independent Variables
4. Data & Methodology
5. Empirical Results
6. Summary & Conclusion
2
Motivation of the StudyMotivation of the Study
REITs evolved as a distinct asset class
US Equity REITs offered both superior total and risk-adjusted returns over at least 15 years
Ongoing adoption of REIT legislations around the world
Motivation & Purpose of the Study
Four Sources of Motivation
The CAPM has dominated asset pricing theories for decades (Fama & MacBeth, 1973)
Growing consent that the single index CAPM is mis-specified (Fama & French, 1992)
The sole “beta” is incapable of explaining REIT returns
REIT market experienced two boom (1992:1997 & 2001:2007) and two bust phases (1998:2000, 2008:now)
Countering results concerning the influence of pricing factors depending on the study period
PerformancePerformance
CyclicalityCyclicality
Asset PricingAsset Pricing
REIT market is segmented into distinct property type sectors
Each sector shows distinct risk/return characteristics (Chen & Peiser, 1999)
Although increasing over time, REIT property type sectors are not perfectly correlated & integrated (Young, 2000)
SegmentationSegmentation
3
Purpose of the StudyPurpose of the Study
1. Which are the fundamental, continuing drivers of the risk-adjusted performance of REITs?
Motivation & Purpose of the Study
2. Does the impact and/or significance vary over time, esp. over boom and bust phases?
3. Does the impact and/or significance vary over property type, esp. between focused / diversified REITs and the distinct sub-sectors?
Three QuestionsThree Questions
4
SampleSample
Sample
Based on the NAREIT & FTSE/NAREIT All REIT Index
All REITs traded on NYSE, ASE & NASDAQ
Property focus reported
Sample corrected for
Mortgage & Hybrid REITs
REITs with no available / insufficient data
Sample Size
275 REITs in total
On average 135 REITs/year
Maximum of 2,034 observations
Study Period: 1993-2008
5
Dependent VariablesDependent Variables
Dependent & Independent Variables
Sharpe Ratio
Sharpei ,t TRi ,t RFRt
StDevi ,t
StDevi ,t 1
TTRi ,t i
t1
T
2
Sortino Ratio
SemiStDevi ,t 1
Tmin TRi ,t RFRt ,0
t1
T
2
Sortinoi ,t TRi ,t RFRt
SemiStDevi ,t
6
Independent VariablesIndependent Variables
Dependent & Independent Variables
Variable Proxy Literature
Size (-)(LN_MARCAP)
Ln(Market Capitalisation) Colwell/Park (1990), McIntosh/Liang/Tompkins (1991), Chen et al. (1998), Hamelink/Hoesli (2004), ...
Leverage (-)(LEVERAGE)
Total debt / market capitalisation
Chan/Hendershott/Sanders (1990), Redman/Manakyan (1995), Ooi/Liow (2004), ...
Book-to-Market Value (+)(BTMV)
Book value of equity / market value of equity
Chen et al. (1998), Chui/Titman/Wei (2003), Ooi/Liow (2004), Ooi/Webb/Zhou (2007), ...
Dividend Yield (+)(DY)
Dividend per share / share price (in %)
Sanders (1996), Ling/Naranjo (1998), Ooi/Liow (2004), ...
FFO Payout Ratio (?)(FFOPR)
Dividend per share / FFO per share (in %)
Fama/French (2002), McManus/Gwilym/Thomas (2004), Zhou/Ruland (2007), ...
Sector Specialisation (+)(FOCUSED, ...)
Binary variable; FTSE/NAREIT (2006, 2008)
Chen/Peiser (1999), Eichholtz/Op‘t Veld/Schweitzer (2000), Boer/Brounen/Op‘t Veld (2005), ...
Market Environment (+)(MARKET RETURN)
Continuous return of the MSCI US Broad Market
Ling/Naranjo (1998), Ooi/Liow (2004), Glascock/Lu/So (2006), ...
Interest Rate Changes (-)(INTEREST RATE)
First difference in FED effective interest rates
Allen/Madura/Springer (2000), Devaney (2001), Ooi/Liow (2004), ...
Boom/Bust Phases (+/-)(D1993_1997, ...)
Binary variable Ooi/Liow (2004), Glascock/Lu/So (2006), ...
7
Data & Methodology
MethodologyMethodology
Unbalanced Panel
Least-Squares Dummy Variable Regression (fixed cross-section effects)
Question 1:
Question 2:
Question 3:
Yi ,t ai Fi ,t Si ,t M t Dt ui ,t
Yi ,t ai Fi ,t Dt Si ,t Dt
M t Dt ui ,t
Yi ,t ai Fi ,t Si ,t M t Si ,t
Si ,t Dt ui ,t
DataData
Accounting data collected at end of year t
Contemporaneously available data collected at end of June year t
Sharpe / Sortino Ratio calculated from July year t to June year t+1
Data extracted from SNL Financial & Datastream
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Question 1: Which are the fundamental, continuing drivers of the risk-adjusted performance of REITs? Question 1: Which are the fundamental, continuing drivers of the risk-adjusted performance of REITs?
Empirical Results (1)
Yi ,t ai Fi ,t Si ,t M t Dt ui ,t
9
Empirical Results (2)
Five firm-specific factors, namely size (-), BTMV (+), leverage (-), dividend yield (+) & FFO payout ratio (-), drive the risk-adjusted performance of equity REITs
Question 1: Which are the fundamental, continuing drivers of the risk-adjusted performance of REITs? Question 1: Which are the fundamental, continuing drivers of the risk-adjusted performance of REITs?
Leverage
Negatively related to the Sharpe Ratio (higher risk)
Insignificant when only downside risk is penalised
FFO Payout
Negatively related to the Sharpe and Sortino Ratio
Earnings growth / Free cash flow / Overinvesting / Agency cost
Differential information (Signalling / Information asymmetry)
Sector Specialisation
Focused REITs do not outperform
Inclusion of market phase variables
Three macroeconomic factors, namely interest rate changes (-), market environment (+) & market phases (+), drive the risk-adjusted performance of equity REITs
10
Question 2: Does the impact and/or significance vary over time, esp. over boom and bust phases? Question 2: Does the impact and/or significance vary over time, esp. over boom and bust phases?
Empirical Results (3)
Yi ,t ai Fi ,t Dt Si ,t Dt
M t Dt ui ,t
11
Empirical Results (4)
Yes, it does !
Size effect only consistent driver of the risk-adjusted performance of equity REITs
Question 2: Does the impact and/or significance vary over time, esp. over boom and bust phases? Question 2: Does the impact and/or significance vary over time, esp. over boom and bust phases?
BTMV
Insignificant 1993:1997 & 2008; significant 1998:2000 & 2001:2007
Little valuation uncertainty
Immature market
Irrational market
Leverage
Insignificant 1993:1997 & 1998:2000; significant 2001:2008
Increased utilisation of debt
Dividend Yield
Insignificant 1998:2000 & 2008; significant 1993:1997 & 2001:2007
Higher scope for contrarian investment strategy following bust phases
12
Empirical Results (5)
FFO Payout
Only significant in 2001:2007
Increased risk of overinvesting ?
Question 2: Does the impact and/or significance vary over time, esp. over boom and bust phases? Question 2: Does the impact and/or significance vary over time, esp. over boom and bust phases?
Sector Specialisation
Focused REITs never outperformed their counterparts
Interest Rate Changes
Now insignificant when only downside risk is penalised
13
Question 3: Does the impact and/or significance vary over property type, esp. between focused / diversified REITs and the distinct sub-sectors?
Question 3: Does the impact and/or significance vary over property type, esp. between focused / diversified REITs and the distinct sub-sectors?
Empirical Results (6)
Yi ,t ai Fi ,t Si ,t M t Si ,t
Si ,t Dt ui ,t
14
Question 3: Does the impact and/or significance vary over property type, esp. between focused / diversified REITs and the distinct sub-sectors?
Question 3: Does the impact and/or significance vary over property type, esp. between focused / diversified REITs and the distinct sub-sectors?
Empirical Results (7)
Yi ,t ai Fi ,t Si ,t M t Si ,t
Si ,t Dt ui ,t
15
Empirical Results (8)
Yes, it does !
Size effect only consistent driver of the risk-adjusted performance of equity REITs
Question 3: Does the impact and/or significance vary over property type, esp. between focused / diversified REITs and the distinct sub-sectors?
Question 3: Does the impact and/or significance vary over property type, esp. between focused / diversified REITs and the distinct sub-sectors?
BTMV
Insignificant for retail and diversified REITs
Valuation ?
Leverage
Insignificant for retail & residential REITs
Positive for diversified REITs
More stable cash flows / higher leverage ?
Dividend Yield
Insignificant for residential & niche REITs, also diversified REITs (Sortino)
Reason ?
16
Empirical Results (9)
FFO Payout
Insignificant for residential, niche & diversified REITs
Less prone to overinvesting ?
Question 3: Does the impact and/or significance vary over property type, esp. between focused / diversified REITs and the distinct sub-sectors?
Question 3: Does the impact and/or significance vary over property type, esp. between focused / diversified REITs and the distinct sub-sectors?
Interest Rate Changes
Insignificant for industrial/office, residential & diversified REITs
Negative for retail REITs, positive for niche REITs
Linkage interest rates – consumer spending ?
Market Environment
Insignificant for niche REITs when only downside risk is penalised
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Summary & Conclusion
Question 1: Five firm-specific (size, BTMV, leverage, dividend yield & FFO payout ratio) and three macroeconomic (interest rate changes, market environment & market phases) factors drive the risk-adjusted performance of equity REITs
Question 2: For most, the significance varies over market phase
Question 3: For most, the significance varies over property sectors
Some explanations were yielded, other remain unexplored as an area of further research
SummarySummary
ConclusionConclusion
While the initial analysis revealed that several factors - on average - drive the risk-adjusted performance of equity REITs, this effect largely stems from distinct time periods and distinct property sectors
Investors need to be aware of both the current market phase and property sector before deciding which attribute they want to take into consideration in their investment decision
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Kai-Magnus Schulte
Research Assistant
Chair of Real Estate Management
IRE│BS International Real Estate Business School
University of Regensburg
Building PT, Room 50-007
Phone: +49 (0) 941 – 943 5075
Fax: +49 (0) 941 – 943 5072
Email: [email protected]
www.irebs.de
Thank you for your attention19
Dependent VariablesDependent Variables
Systematic risk may not capture all the risk inherent in REITs (Redman & Manakyan, 1995)
In segmented markets (Westerheide, 2006), volatility is a more appropriate measure of risk (Bekaert et al., 1997)
Importance of normalizing returns (Capozza & Seguin, 2000)
Especially appropriate for investors who do not hold a perfectly diversified portfolio (Glascock & Davidson, 1995)
Downside-risk framework more adequately captures the risk perception of investors
BACKUP (1)
Sharpe Ratio
Sharpei ,t TRi ,t RFRt
StDevi ,t
StDevi ,t 1
TTRi ,t i
t1
T
2
Sortino Ratio
SemiStDevi ,t 1
Tmin TRi ,t RFRt ,0
t1
T
2
Sortinoi ,t TRi ,t RFRt
SemiStDevi ,t
20