REIT Long-Term Returns and Wealth Creation

Abstract

AbstractThis study examined the performance of 371 equity real estate investment trusts (REITs) over the period 1972–2020. Unlike stocks, we found that the majority of the 371 REITs outperformed one-month T-bills, particularly over longer holding periods and in the modern REIT era. While most REITs outperformed the T-bills, only a minority of them outperformed the overall equity REIT market. REITs that outperformed the overall equity REIT market concentrated in the health care, industrial, residential, and other specialty REIT sectors. In terms of wealth creation, REITs in aggregate created a total net wealth of $0.89 trillion to their shareholders, but the wealth creation was highly concentrated in relatively few top-performing REITs. Specifically, the top five (20) REITs together accounted for almost 30% (60%) of the total net wealth creation. Overall, our results suggest that relative to the T-bills, REITs performed better than stocks.Keywords: Real estate investment trustsREIT return performanceshareholder wealth AcknowledgmentsThe authors thank three anonymous referees for helpful comments.Disclosure StatementNo potential conflict of interest was reported by the authors.Notes1 The maximum lifetime return was 37,628% for REITs, while it was 244.3 million % for stocks.2 For example, Bessembinder (Citation2018) reported that the mean and median monthly returns for stocks were 1.13% and 0.00%, respectively. Our results showed that the mean and median monthly returns for REITs were 1.06% and 0.95%, respectively.3 For the period from 1972 to 2020, the average monthly return for the CRSP value-weighted market index was 0.94%, which was slightly higher than 0.88% for the FTSE NAREIT ALL REIT index. However, the average monthly income return (i.e., dividend yield) for stocks was 0.24%, which was less than 0.63% for REITs.4 We grouped equity REITs into eight property types, including diversified, health care, hotel, industrial, office, residential, retail, and other equity REITs. Other equity REITs included casino, self-storage, and specialty REITs.5 There are two REITs with the same company identification number in CRSP. We treated these two REITs as one company and calculated their lifetime wealth creation as the sum of dollar wealth creations from these two REITs. Also, see note 19.6 Our sample began in January 1972 because return data for the FTSE NAREIT All Equity REIT index are available since then. Eight equity REITs were listed in CRSP prior to January 1972. The sample also excluded four equity REITs with an initial listing date in 2020.7 The CRSP database does not contain the offering price of an IPO and, hence, the return in the IPO month is not available. Consequently, our analysis did not capture the return from the IPO month of a REIT. Furthermore, some firms changed their status from a non-REIT to a REIT after operating for some time. For these REITs, the first monthly return used was the month when their REIT status was established. We used S&P Global Market Intelligence to identify such dates. We thank an anonymous referee for this suggestion.8 For REITs that were still trading as of December 2020, the last available monthly return was December 2020. For REITs that were merged, exchanged, liquidated, or delisted prior to December 2020, the last available nonmissing monthly return was used in the calculation. Since a stock might be merged, exchanged, liquidated, or delisted at any time in a month, it is likely the last available nonmissing monthly return was not for a full month.9 The data is available on Kenneth French’s website at https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.10 The structural changes include allowing REITs to be internally managed and internally advised, removing the preferential tax treatment provided to limited partnerships, allowing the Umbrella Partnership REIT organization structure, and relaxing the restriction in institutional ownership.11 Results were not tabulated to save space.12 Appendix Figure A1 depicts dividend yields of equity REITs by property type over the period 1990–2020. The dividend yield data were retrieved from S&P Global Market Intelligence.13 Appendix Figure A2 shows price to NAV ratios of equity REITs by property type over the period 1990–2020. The NAV premium data were retrieved from S&P Global Market Intelligence.14 The poor performance in the 1981–1990 decade was likely due to the commercial real estate crisis in the late 1980s (Renaud, Citation1997). The geometric mean of annual returns for the CRSP value-weighted market index over the period 1987–1990 was 9.62%, while it was 0.19% for the FTSE NAREIT All Equity REIT index.15 Eleven REITs had a lifetime return exceeding 4,900%. These 11 returns are not displayed on Figure 3.16 Bessembinder (Citation2018) analyzed stocks over the period 1926–2016, which is much longer than our sample period 1972–2020. Thus, stocks in Bessembinder’s sample had a longer lifetime than equity REITs in our sample and, hence, generated a larger lifetime return. For example, out of the 25,967 individual stocks that Bessembinder examined, 574 stocks had a lifetime return over the mean return of 18,747.05%. The maximum lifetime return for stocks was 244.3 million %, which was substantially higher than 37,628% in our sample.17 For REITs that were still trading, the first digit of delisting codes was 1. For REITs that were delisted due to merger, exchange, or liquidation, the first digit of delisting codes was 2, 3, or 4. For REITs that were delisted by stock exchange, the first digit of delisting codes was 5.18 An SAS program to calculate the lifetime shareholder wealth is available on Hendrik Bessembinder’s website at https://wpcarey.asu.edu/sites/default/files/2021-10/wealthcreation_2019.sas_.txt.19 Kranzco Realty Trust, which has a unique PERMNO, merged with another REIT in June 2000. The two REITs were combined into a new REIT, Kramont Realty Trust. Kramont Realty Trust also has a unique PERMNO, but has the same PERMCO as Kranzco Realty Trust. The lifetime wealth creation for these two REITs was the sum of dollar wealth creations from the two PERMNOs.20 Only three REITs had a full life span of 588 months from January 1972 to December 2020. The average life span of the 370 REITs was 151 months.21 A complete list is available from the authors on request.