REIT Investments and Investments in REITs
Saturday, Jan. 7, 2017 7:30 PM – 9:30 PM
- Chair: Tobias Muhlhofer, University of Miami
Geographic Proximity and Managerial Alignment: Evidence From Asset Sell-Offs by Real Estate Investment Trusts (REITs)
AbstractWhile the relation between geographic dispersion and firm value has been extensively studied, there are intriguing aspects that we do not yet understand. For example, Bernile, Kumar and Sulaeman (2015) report that, “local investors may perceive an informational advantage where there is in fact none.” Additionally, when we talk of local assets versus distant assets, there is little data showing what that means. REITs offer a unique and more complete data source of evidence about the proximity issue and value. In our unique panel dataset of more than 800,000 property-year observations, we find that local must be carefully evaluated as in most cases these REITs own a wide pool of geographically diversified assets.
We apply a two-stage sequential choice model to mitigate selection bias at the firm-level and property-level. We find that REITs tend to dispose of distant properties and there is a negative relation between distance and cumulative abnormal returns. The top-ten MSAs in our disposition sample were over 860 miles (1,388 kilometers) from their REIT headquarters (HQs). The average cumulative abnormal return (CAR) was over three times as large and statistically significant for those dispositions that were below the median distance compared to those farther. How-ever, further analyses show that headquarters that were in smaller areas (below the mean by population) were the only REITs to have positive abnormal returns. Thus, the gain is to firms that are located in smaller areas and who dispose of properties closer to their HQs. The gains are monotonically declining by distance from their HQs. This evidence is supportive of managerial alignment theory in the literature.
Further, informational and social factors explain corporate decisions on asset sell-offs: this social interaction effect exists for those HQs located in less-populated areas. Consistent with the hypothesis of Landier, Nair and Wulf (2009), we find a positive and significant relation between aggregated proximity of a firm’s property holdings (Geographic HHI) and employee friendliness, indicating proximity between a particular firm’s headquarters and its underlying properties is associated with poor shareholder protection due to better employee protection. Together, these findings suggest a dominant role for the managerial alignment hypothesis. We find in particular that for HQs in less-populated MSAs, the managerial alignment effect dominates the information asymmetry effect.
Shareholder Activism in REITs
AbstractThis paper examines the prevalence and wealth effects of shareholder activism in REITs. Conventional wisdom suggests that REIT-related activist campaigns occur less frequently because REITs are thought to be protected against hostile takeovers, and the extent of undervaluation in REITs is thought to be limited. We find, however, that the conventional wisdom does not hold. For a sample of 4,119 activist campaigns from 2006 to 2014, 114 of which are launched against REITs, we find that REITs are as likely to be targeted by shareholder activists as other public firms. We also show that the short-term reaction to activism announcements is positive and similar for REITs and non-REITs. Our further results are most consistent with the view that this reaction reflects investors’ expectation that an activist target faces an increased takeover likelihood. Our study addresses an existing criticism of the literature by focusing on a relatively homogenous industry where firms face the same regulatory environment and comparable business conditions.
Examining United States REITs Pricing Bubbles: An Application of the CCAPM With Stochastic Taxation and Money Supply
AbstractThis paper examines three issues relating to US REITs pricing. First, using a modified Consumption Capital Asset Pricing Model (CCAPM) with stochastic taxation and money supply, we compute the fundamental values for United States Real Estate Investment Trusts (REITs) for our data sample, 1972-2013. Our empirical analysis for US REIT pricing is statistically consistent with the CCAPM with stochastic taxation and monetary policy. Second, for our purposes, for publicly traded equity REITs, we define a bubble at a point in time to be the difference between the actual stock market price and the fundamental value derived from our theoretical model. United States REITs have, among other corporate structural features, special rules governing divided distributions and corporate taxation treatment that make them an especially attractive and preferred vehicle for testing for the presence of pricing bubbles. Our study suggests that during the sample time horizon, United States REITs experienced many price bubbles, some of which were quite large. Third, our empirical results imply that monetary policy, in the short run, plays a role in the formation of these pricing bubbles.
- D8 - Information, Knowledge, and Uncertainty
- G3 - Corporate Finance and Governance