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The Operational Efficiency of REITs

Author

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  • Eli Beracha
  • Zifeng Feng
  • William Hardin

Abstract

This paper examines the extent to which the operational efficiency of Real Estate Investment Trusts (REITs) is related to their operational performance, risk and stock return. In this paper, the operational efficiency of a REIT is measured as the ratio of its operational expense to revenue. Higher operational efficiency ratio (OER) indicates less efficient REIT. Using a sample of U.S. equity REITs during the 1993 – 2015 time period, we find that REITs’ operational performance measured by return on assets (ROA and FFOA) as well as return on equity (ROE and FFOE) is negatively and significantly associated with their previous-year operational efficiency ratios. The results also show that more efficient REITs explore less market risk, measured by stock return volatility, and credit risk, measured by cash flow coverage ratio. Furthermore, there are evidences that the cross-sectional stock return of REITs could be partially explained by their operational efficiency ratios, and that portfolio consisting of high efficient REITs earn, on average, higher cumulative stock return than portfolio consisting of low efficient REITs.

Suggested Citation

  • Eli Beracha & Zifeng Feng & William Hardin, 2017. "The Operational Efficiency of REITs," ERES eres2017_50, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2017_50
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    References listed on IDEAS

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    More about this item

    Keywords

    Efficiency; Performance; REIT;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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