Abstract
We dissect REIT NAV premiums and examine their relation to expected returns. More than half of the cross-sectional variation in NAV premiums can be explained by readily observable company characteristics, such as size, property type, location, leverage, and profitability. We empirically decompose NAV premiums into characteristics-driven (fitted) and sentiment-driven (orthogonalized) components. The transient, sentiment-driven component of NAV premiums is strongly negatively related to future returns, whereas the stable, characteristics-driven component is a very weak positive predictor of returns. A long-short investment strategy that purchases (sells short) REITs with the lowest (highest) sentiment- driven NAV premiums generates 9% per year, which is 3% per year more than a strategy based on the raw NAV premium. These results shed light on the role of investor sentiment in REIT pricing and have important implications for REIT active investment management.
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Notes
As opposed to, and different from, REIT balance sheet liquidity.
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We’d like to thank the editor, anonymous referees, the American Real Estate Society 2019, and American Real Estate and Urban Economics Association 2020 conference participants for their helpful feedback and comments.
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Appendix
Appendix
Step 1. Total Asset Value Calc. ($000) | SNLField |
NOI ($000) | 132708 |
132099 | |
Total RE NOI Calc. ($000) | |
Partnership Income ($000) | 132556 |
132099 | |
Partnership Income ($000) Calc. | |
Deferred Contingent Rents ($000) | 132833 |
132099 | |
Deferred Contingent Rent ($000) Calc. | |
(Total RE NOI Calc. + Partnership Income Calc. + Deferred Contingent Rent Calc.) divided by the Cap Rate Calc. ($000) | |
Property Management Revenue ($000) | 138161 |
132099 | |
Capitalization Rate for Property Management Income | |
Property Mgmt Income Calc. ($000) | |
Total Assets ($000) | 131929 |
Total Intangible Assets ($000) | 132247 |
Net Property Investment ($000) | 132112 |
Investment in Partnerships ($000) | 132123 |
Total Assets minus (Total Intangible Assets + Net Property Investment + Investment in Partnerships) Calc. ($000) | |
(Total RE NOI Calc. + Partnership Income Calc. + Deferred Contingent Rent) divided by the Cap Rate Calc. ($000) | |
Property Mgmt Income Calc. ($000) | |
Total Asset Value Calc. ($000) | |
Step 2. Net Asset Value Calc. ($000) | |
Total Liabilities ($000) | 132367 |
Redeemable Preferred ($000) | 132371 |
Trust Preferred Securities ($000) | 132370 |
Preferred OP Minority Interest ($000) | 132376 |
Other Mezzanine Items ($000) | 132378 |
Total Preferred Equity ($000) | 132383 |
(Total Liabilities + Redeemable Preferred + Trust Preferred + Preferred OP Units + Other Mezzanine Items + Total Preferred Equity) Calc. ($000) | |
Total Asset Value Calc. ($000) | |
(Total Liabilities + Redeemable Preferred + Trust Preferred + Preferred OP Units + Other Mezzanine Items + Total Preferred Equity) Calc. ($000) | |
NAV Calc. ($000) | |
NAV ($000)* | 126753 |
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Letdin, M., Sirmans, S. & Sirmans, G.S. Betting Against the Sentiment in REIT NAV Premiums. J Real Estate Finan Econ 64, 590–614 (2022). https://doi.org/10.1007/s11146-020-09803-3
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DOI: https://doi.org/10.1007/s11146-020-09803-3