Academic journal article Journal of Real Estate Portfolio Management

REIT Ownership and Property Performance: Evidence from the Lodging Industry

Academic journal article Journal of Real Estate Portfolio Management

REIT Ownership and Property Performance: Evidence from the Lodging Industry

Article excerpt

Executive Summary. Prior research on the impact of real estate investment trust (REIT) ownership on property performance is very limited and provides inconclusive empirical evidence. Whether REITs add value at the micro-level remains a puzzle. Utilizing a dataset of detailed accounting information for individual hotels across five states in the United States, we re-examine the performance of REIT-owned properties. Unlike prior research that focuses on revenue-based performance measures, we examine both the top-line and bottom-line performance of hotel operations. We find that REIT ownership favorably impacts property performance in that REIT-owned hotels have higher profit margins than other lodging properties. The greater cost efficiency is likely attributable to savings in non-distributed operating expenses and fixed charges. We document no outperformance by REITs in revenue growth at the individual property level.

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Real estate has gained broad acceptance as an asset class in mixed-asset portfolios. Hudson- Wilson, Gordon, Fabozzi, Anson, and Gilberto (2005) find that real estate improves the risk/return profile of large institutional investors through both diversification and absolute return benefits. Oikarinen, Hoesli, and Serrano (2011) find that private and securitized real estate should provide similar diversification benefits in a mixed-use portfolio. As institutional real estate investment matures and becomes more sophisticated, it is important to understand the drivers of performance across different types of investment vehicles. Institutional investors have many choices of how to invest the funds they allocate to real estate. The spectrum ranges from direct investment in real estate to publicly traded shares of real estate investment trusts (REITs). Pagliari, Scherer, and Monopoli (2003) provide evidence that institutional investors use private investment vehicles for over 90% of their real estate investments even though REITs outperform private real estate in their study. The authors reject the hypothesis that the return series are statistically different, but this still does not explain the choice of private investment over REITs for most institutional investors as REITs are shown to perform at least as well as private investments. A 2010 study by the National Association of Real Estate Investment Trusts (NAREIT) entitled "REITs: Real Estate with a Return Premium" finds that REITs outperform private equity over the last full real estate market cycle.1 The NAREIT study concludes that REITs outperformed in both bull and bear markets and argues that institutional investors should rethink their bias towards private real estate investment.

Pagliari, Scherer, and Monopoli (2003) and the more recent NAREIT study examine macro level performance for private and public real estate equity indices. Both papers discuss potential drivers of performance differences but do not explicitly test them. Geltner (2003) and Feng and Geltner (2011) provide a framework for understanding real estate performance attributes at the property level. Performance can come from initial yields on properties, changes in operating cash flows, and changes in yields upon the sale of properties. Good performance in the first and third attributes is driven by buying properties at attractive prices and selling them when prices are higher and yields are lower. The changes in the cash flow attribute is driven by property level operating cash flows and closely associated with superior property management skills. If REITs do provide superior returns over time, they must be better than private equity in at least one of these areas. Brounen, Eichholtz, and Ling (2007) find that trading intensity in REITs is not related to performance and conclude that REITs are not creating value through their investment timing and tactical asset allocation. Feng and Geltner (2011) find that the change in the cash flow attribute is the most important determinant of strong performance in a sample of properties owned by private equity investors. …

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