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REIT Operational Efficiency: Performance, Risk, and Return

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  • Eli Beracha

    (Florida International University)

  • Zifeng Feng

    (Florida International University)

  • William G. Hardin

    (Florida International University)

Abstract

Relations between Real Estate Investment Trust (REIT) efficiency and operational performance, risk, and stock return are examined. REIT-level operational efficiency is measured as the ratio of operational expenses to revenue, where a higher operational efficiency ratio (OER) indicates a less efficient REIT. For a sample of U.S. equity REITs from the modern REIT era, operational performance, measured by return on assets (ROA) as well as return on equity (ROE), is negatively associated with previous-year operational efficiency ratios, which suggests that more efficient REITs generate better operating results. Results further show that more efficient REITs have lower levels of credit risk and total risk. Perhaps most important, empirical evidence shows that the cross-sectional stock return of REITs is partially explained by operational efficiency and that a portfolio consisting of highly efficient REITs earns, on average, a higher cumulative stock return than a portfolio consisting of low efficiency REITs.

Suggested Citation

  • Eli Beracha & Zifeng Feng & William G. Hardin, 2019. "REIT Operational Efficiency: Performance, Risk, and Return," The Journal of Real Estate Finance and Economics, Springer, vol. 58(3), pages 408-437, April.
    • Handle: RePEc:kap:jrefec:v:58:y:2019:i:3:d:10.1007_s11146-018-9655-2
    DOI: 10.1007/s11146-018-9655-2
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    2. Zhilan Feng & Maneechit Pattanapanchai & S. McKay Price & C. F. Sirmans, 2021. "Geographic diversification in real estate investment trusts," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(1), pages 267-286, March.
    3. Chinmoy Ghosh & Milena Petrova, 2021. "The Effect of Legal Environment and Regulatory Structure on Performance: Cross-Country Evidence from REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 63(1), pages 40-81, July.
    4. Zifeng Feng & William G. Hardin & Zhonghua Wu, 2022. "Employee productivity and REIT performance," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(1), pages 59-88, March.
    5. Zifeng Feng & Peng Liu, 2023. "Introducing “Focused Firms”: Implications from REIT Prime Operating Revenue," The Journal of Real Estate Finance and Economics, Springer, vol. 67(3), pages 545-578, October.
    6. Chongyu Wang & Tingyu Zhou, 2023. "Face‐to‐face interactions, tenant resilience, and commercial real estate performance," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 51(6), pages 1467-1511, November.
    7. Daniel Huerta & Thanh Ngo & Mark K. Pyles, 2024. "Market and Institutional Ownership Reactions to REIT Security Issuances," The Journal of Real Estate Finance and Economics, Springer, vol. 69(1), pages 164-199, July.
    8. Joseph R. Nicholson & James A. Stevens, 2022. "REIT Operational Efficiency: External Advisement and Management," The Journal of Real Estate Finance and Economics, Springer, vol. 65(1), pages 127-151, July.
    9. Grant Alexander Wilson & Jason Jogia, 2024. "Examining personal financial advisors’ knowledge, client recommendations, and personal investments in private real estate and real estate investment trusts (REITs)," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 29(3), pages 729-744, September.
    10. Tamala Amelia Manda, 2024. "Bankruptcy Prediction in REITs," International Real Estate Review, Global Social Science Institute, vol. 27(1), pages 139-167.
    11. Zifeng Feng & Zhonghua Wu, 2022. "Local Economy, Asset Location and REIT Firm Growth," The Journal of Real Estate Finance and Economics, Springer, vol. 65(1), pages 75-102, July.
    12. Allen, Marcus T. & Huerta, Daniel E. & Weeks, H. Shelton & Wright, Jesse T., 2024. "Triple-net leased property portfolios and operational efficiency: Evidence from the U.S. REIT market," Finance Research Letters, Elsevier, vol. 65(C).
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    14. Apostolos Ampountolas, 2022. "Postcrisis REIT performance using financial ratios: A DEA approach," Tourism Economics, , vol. 28(2), pages 371-393, March.
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    16. Paul Anglin & Jianxin Cui & Yanmin Gao & Li Zhang, 2021. "Analyst Forecasts during the COVID-19 Pandemic: Evidence from REITs," JRFM, MDPI, vol. 14(10), pages 1-21, September.

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