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Betting Against the Sentiment in REIT NAV Premiums

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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Fig. 1
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Notes

  1. 1.

    Including Barkham and Ward (1999), Clayton and MacKinnon (2003), Anderson et al. (2005), Ling and Naranjo (2006), Chiang (2009), Brounen et al. (2013), Yavas and Yildirim (2011), and Pattitoni et al. (2013) among others.

  2. 2.

    As opposed to, and different from, REIT balance sheet liquidity.

  3. 3.

    www2.census.gov/geo/pdfs/maps-data/maps/reference/us-regdiv.pdf

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Acknowledgment

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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Correspondence to Mariya Letdin.

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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 (2021). https://doi.org/10.1007/s11146-020-09803-3

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Keywords

  • Investor sentiment
  • REITs
  • NAV premium
  • Returns
  • Alpha