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The Journal of Real Estate Finance and Economics

Erschienen in:

23.03.2021

Local Economy, Asset Location and REIT Firm Growth

verfasst von: Zifeng Feng, Zhonghua Wu

Erschienen in: The Journal of Real Estate Finance and Economics | Ausgabe 1/2022

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Abstract

This paper empirically examines the extent to which and how local economic growth and asset location affect firm growth based on a sample of US equity real estate investment trusts (REITs) from 2001 to 2016. Using the GDP growth rate by MSA and individual property data of REITs, we construct an aggregated measure of local economic growth for each REIT based on its asset locations in different metropolitan areas. We find that REIT firm growth (measured using both book value and market value of assets) is positively correlated with the lagged firm-level economic growth measure, indicating that REITs allocating assets in areas with higher economic growth tend to experience higher firm growth. Moreover, local economic growth enhances REIT growth mainly through the growth of equity (not through the growth of debt), as REITs with more assets in higher economic growth areas provide higher stock returns to shareholders. These findings suggest that local economic conditions have a significant impact on REIT firm growth and a REIT’s asset allocation strategy can play an important role in its long-term prospects.

Vorheriger Artikel Accuracy of Households’ Dwelling Valuations, Housing Demand and Mortgage Decisions: Israeli Case

Nächster Artikel The Globalization of Local Housing Markets: Immigrants, the Motherland and Housing Prices in Australia

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Several studies in the literature examine the relationship between US residential investment and GDP growth at the aggregate level (e.g., Green 1997; Coulson and Kim 2000). Other papers, largely based on information asymmetry and agency cost theory, examine the impact of external financing on REIT firm growth (e.g., An et al. 2011; Ghosh and Sun 2014) or the role of corporate monitors in discouraging managerial opportunism and empire building (Xu and Ooi 2018).

See REITs’ assets across America at http://www.reitsacrossamerica.com/.

Many agree that 2001 is the beginning of the Modern REIT era. In 2016, the equity market capitalization of REITs reached $1 trillion, and a new Real Estate sector under the GICS standard was created by S&P Dow Jones Indices and MSCI Inc. Also, US REITs provided about 2.4 million full-time equivalent (FTE) jobs and generated $148.2 billion of labor income to the economy in 2018 (see www.reit.com).

In addition, see an article on the NAREIT website: https://www.reit.com/news/videos/reit-industry-likely-see-more-consolidation-real-estate-advisor-says. Some industry experts believe that there will be only three to four firms in each property type subsector of REITs in the future.

For instance, due to high transaction costs and illiquidity of assets, it is costly for real estate portfolio managers to adjust their portfolio quickly.

In 2019, the total number of REIT-owned properties was 54,606, with a total gross asset value of $1.7 trillion. See http://www.reitsacrossamerica.com/.

For example, suppose a REIT holds only two properties that are located in MSA #1 and MSA #2. The values of the two properties are $50 million each, and the GDP growth rates of the two MSAs are 2% and 4%, respectively. Then, the firm-level aggregated measure of local economic growth for this REIT based on its asset locations is calculated as: 0.5*2% + 0.5*4 = 3%. To control for geographic concentration of a REIT’s assets, we add a geographic diversification variable in the regression analysis based on the Herfindahl index of the REIT’s assets.

The sample period starts in 2001 because the GDP data by metropolitan area from BEA are available since 2001.

The real estate property types are casino, health care, hotel, industrial, manufactured home, multifamily, office, other retail, regional mall, self-storage, shopping center, specialty, and diversified, based on the classification provided by the S&P Global Market Intelligence database.

When accounting information is not available at year t but available at year t-1 and t + 1, the value for the variable at year t is replaced by the average of the values at year t-1 and year t + 1.

Kenneth R. French’s Data Library: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

See more details from https://www.bea.gov/data/gdp/gdp-metropolitan-area.

Net book value is used to construct the firm GDP growth measure since the database (SNL) does not provide market or economic value of REIT properties. In addition, following Ling et al. (2021), we use the adjusted cost of REIT properties to construct the FirmGDPGrowth variable. The results are similar to those based on net book value.

A very small number of REIT properties are located in rural areas, which are not part of an MSA. To make the total weight equal to 100%, we drop these properties in the sample. For robustness, we conduct the analysis without dropping those properties. The results are qualitatively similar, which are not reported in the paper for brevity.

The average value of total assets of REITs, consisting of properties in different areas, is about $3.5 billion.

Since our research focus is on the impact of local economic growth and asset location on overall firm growth of REITs, we use both book value and market value of REIT total assets. This is different from Ling, Ooi, and Xu (2019), which examines the impact of asset growth rate on the future stock performance. In their paper, the asset growth rate (ASSETG) is based on the book value of total assets.

In case the IPO date is not available, we calculate the firm age based on the year in which the REIT status is established.

We use a widely used approach for panel regressions in corporate finance, in which the robust t-statistics are corrected for clustering of residuals at the firm level, while controlling the time-series variation by adding year fixed effects (e.g., see Petersen 2009; Coles et al. 2014). An anonymous referee suggests us to use Fama-Macbeth two-stage model to control for the time-series variation in GDP growth and highlight the effect of asset allocation on REIT firm growth. We follow the suggestion and estimate Equation (4) using the Fama-MacBeth model. The results are largely consistent, suggesting that spatial allocation of assets is an important factor influencing firm growth. We appreciate an anonymous the referee for this valuable suggestion.

We appreciate an anonymous referee for this suggestion.

The recent literature documents that property portfolios of US equity REITs are concentrated in major MSAs (see Ling, Naranjo, Scheick, 2019).

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Titel: Local Economy, Asset Location and REIT Firm Growth
verfasst von: Zifeng Feng
Zhonghua Wu
Publikationsdatum: 23.03.2021
Verlag: Springer US
Erschienen in: The Journal of Real Estate Finance and Economics / Ausgabe 1/2022
Print ISSN: 0895-5638
Elektronische ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-021-09822-8

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