U.S. REIT industry profitability: a Bennet decomposition of industry dynamics
Abstract
This paper considers the aggregate profitability performance of the REIT industry. The aggregate performance depends on the underlying microeconomic dynamics within an industry – the growth of individual REITs (the within effect), the reallocation between existing REITs (the between effect), the entry of new REITs (the entry effect), and the exit of the existing REITs (the exit effect). We apply an extended Bennet (1920) dynamic decomposition on the REIT industry’s return on equity (ROE) and study the annual data on U.S. Equity REITs for the 1989 to 2015 period and various REIT industry specific sub-sample periods. Bailey et al.’s (1992) and Haltiwanger’s (1997) dynamic industry performance decompositions are special cases of the Bennet decomposition. The “within” and “between” effects dominate the annual changes in this industry’s ROE. To the extent that our Equity REIT sample proxies for the FTSE NAREIT All Equity Index, our conclusions also relate to this index’s profitability performance between 1989 and 2015.
Keyword : aggregate fluctuations, dynamic decomposition, ROE changes
How to Cite
Feng, Z., Miller, S. M., & Tirtiroglu, D. (2021). U.S. REIT industry profitability: a Bennet decomposition of industry dynamics. International Journal of Strategic Property Management, 25(4), 316–331. https://doi.org/10.3846/ijspm.2021.14958
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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https://doi.org/10.1016/S0377-2217(01)00183-7
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Bhattacharya, N., Black., E. L., Christensen T. E., & Larson, C. R. (2003). Assessing the relative informativeness and permanence of pro forma earnings and GAAP operating earnings. Journal of Accounting and Economics, 36, 285–319.
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Griliches, Z., & Regev, H. (1995). Firm productivity in Israeli industry, 1979-1988. Journal of Econometrics, 65, 175–203. https://doi.org/10.1016/0304-4076(94)01601-U
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https://doi.org/10.1007/s11146-019-09741-9
Jeon, Y., & Miller, S. M. (2005). An ‘ideal’ decomposition of industry dynamics: an application to the nationwide and state level U.S. banking industry (Working Paper No. 2005-25). Department of Economics, University of Connecticut.
http://ideas.repec.org/p/uct/uconnp/2005-25.html
Laspeyres, E. (1871). Die berechnung einer mittleren warenbpreissteigerung. Jahrbücher für Nationalökonomie und Statistik, 16, 296–314. https://doi.org/10.1515/jbnst-1871-0124
Lougee, B. A., & Marquardt, C. A. (2004). Earnings informativeness and strategic disclosure: an empirical examination of ‘pro forma’ earnings. The Accounting Review, 79(3), 769–795. https://doi.org/10.2308/accr.2004.79.3.769
McGuckin, R. H. (1995). Establishment microdata for economic research and policy analysis: looking beyond the aggregates. Journal of Business and Economic Statistics, 13, 121–126. https://doi.org/10.1080/07350015.1995.10524585
Miller, S. M., Clauretie, T. M., & Springer, T. M. (2006). Economies of scale and cost efficiencies: a panel-data stochasticfrontier analysis of real estate investment trusts. The Manchester School, 74(4), 483–489.
https://doi.org/10.1111/j.1467-9957.2006.00505.x
National Association of Real Estate Investment Trusts. (2020a, September). U.S. REIT industry equity market cap. https://www.reit.com/data-research/reit-market-data/us-reit-industry-equity-market-cap
National Association of Real Estate Investment Trusts. (2020b, September). Glossary of REIT terms.
https://www.reit.com/what-reit/glossary-reit-terms
National Association of Real Estate Investment Trusts. (2020c, September). REIT’s: real estate working for you. https://www.reit.com/
Paasche, H. (1974). Über die preisentwicklung der letzten jahre nach den Hamburger börsennotirungen. Jahrbücher für Nationalökonomie und Statistik, 24, 168–178.
Pigou, A. C. (1920). The economics of welfare. MacMillan.
Prescott, E. C., & Visscher, M. (1980). Organization capital. The Journal of Political Economy, 88(3), 446–461. https://doi.org/10.1086/260879
Ritter, J. R. (2020, September). IPO data. https://site.warrington.ufl.edu/ritter/ipo-data/
Scarpetta, S., Hemmings, P., Tressel, T., & Woo, J. (2002). The role of policy and institutions for productivity and firm dynamics: evidence from micro and industry data (Working Paper No. 329). OECD Publishing. https://doi.org/10.2139/ssrn.308680
Schumpeter, J. A. (1950). The process of creative destruction. Harper & Row.
Stiroh, K. J. (2000). Compositional dynamics and the performance of the U.S. banking industry (Staff Reports No. 98). Federal Reserve Bank of New York. https://doi.org/10.2139/ssrn.221949
https://doi.org/10.1023/A:1007881422383
Ambrose, B. W., Highfield, M. J., & Linneman, P. D. (2005). Real estate and economies of scale: the case of REITs. Journal of Real Estate Finance and Economics, 33(2), 323–350. https://doi.org/10.1111/j.1540-6229.2005.00121.x
Anderson, R. I., Fok, R., Springer, T., & Webb, J. (2002). Technical efficiency and economies of scale: a non-parametric analysis of REIT operating efficiency. European Journal of Operational Research, 139(16), 598–612.
https://doi.org/10.1016/S0377-2217(01)00183-7
Bailey, M. N., Hulten, C., & Campbell, D. (1992). The distribution of productivity. Brookings Papers on Economic Activity: Microeconomics, 1, 187–267. https://doi.org/10.2307/2534764
Balk, B. M. (2003). The residual: on monitoring and benchmarking firms, industries, and economies with respect to productivity. Journal of Productivity Analysis, 20, 5–47. https://doi.org/10.1023/A:1024817024364
Bartelsman, E., Haltiwanger, J., & Scarpetta, S. (2004). Microeconomic evidence of creative destruction in industrial and developing countries (Policy Research Working Paper Series No. 3464). World Bank. https://doi.org/10.1596/1813-9450-3464
Bennet, T. L. (1920). The theory of measurement of changes in the cost of living. Journal of the Royal Statistical Society, 83, 455–462. https://doi.org/10.2307/2340960
Ben-Shahar, B., Sulganik, E., & Tsang, D. (2011). Funds from operations versus net income: examining the dividend relevance of REIT performance measures. Journal of Real Estate Research, 33(3), 415–441. https://doi.org/10.1080/10835547.2011.12091308
Bhattacharya, N., Black., E. L., Christensen T. E., & Larson, C. R. (2003). Assessing the relative informativeness and permanence of pro forma earnings and GAAP operating earnings. Journal of Accounting and Economics, 36, 285–319.
https://doi.org/10.1016/j.jacceco.2003.06.001
Cakici, N., Erol, I., & Tirtiroglu, D. (2014). Tracking the evolution of idiosyncratic risk and cross-sectional expected returns for US REITs. Journal of Real Estate Finance and Economics, 48(3), 415–440. https://doi.org/10.1007/s11146-013-9410-7
Chen, H., Downs, D. H., & Patterson, G. A. (2012). The information content of REIT short interest: investment focus and heterogeneous beliefs. Real Estate Economics, 40(2), 249–283. https://doi.org/10.1111/j.1540-6229.2011.00312.x
Devos, E., Scofield, D., Smith, G., & Spieler, A. C. (2018). Organization capital and REIT returns [Unpublished manuscript]. Ryerson University, Real Estate Management Department.
Diewert, W. E. (2005). Index number theory using differences rather than ratios. The American Journal of Economics and Sociology, 64, 311–360.
https://doi.org/10.1111/j.1536-7150.2005.00365.x
Federal Reserve Bank of Chicago. (2020, September). Commercial bank data. https://www.chicagofed.org/banking/financialinstitution-reports/commercial-bank-data
Feng, Z., Price, S. M., & Sirmans, C. F. (2011). An overview of equity real estate investment trusts (REITs): 1993-2009. Journal of Real Estate Literature, 19, 307–343.
https://doi.org/10.1080/10835547.2011.12090304
Fisher, I. (1922). The making of index numbers. Houghton Mifflin.
Griliches, Z., & Regev, H. (1995). Firm productivity in Israeli industry, 1979-1988. Journal of Econometrics, 65, 175–203. https://doi.org/10.1016/0304-4076(94)01601-U
Haltiwanger, J. C. (1997). Measuring and analyzing aggregate fluctuations: the importance of building from microeconomic evidence. Review, 79(3), 55–77.
https://doi.org/10.20955/r.79.55-78
Highfield, M. J., Shen, L., & Springer, T. M. (2021). Economies of scale and the operating efficiency of REITs: a revisit. Journal of Real Estate Finance and Economics, 62(1), 108–138.
https://doi.org/10.1007/s11146-019-09741-9
Jeon, Y., & Miller, S. M. (2005). An ‘ideal’ decomposition of industry dynamics: an application to the nationwide and state level U.S. banking industry (Working Paper No. 2005-25). Department of Economics, University of Connecticut.
http://ideas.repec.org/p/uct/uconnp/2005-25.html
Laspeyres, E. (1871). Die berechnung einer mittleren warenbpreissteigerung. Jahrbücher für Nationalökonomie und Statistik, 16, 296–314. https://doi.org/10.1515/jbnst-1871-0124
Lougee, B. A., & Marquardt, C. A. (2004). Earnings informativeness and strategic disclosure: an empirical examination of ‘pro forma’ earnings. The Accounting Review, 79(3), 769–795. https://doi.org/10.2308/accr.2004.79.3.769
McGuckin, R. H. (1995). Establishment microdata for economic research and policy analysis: looking beyond the aggregates. Journal of Business and Economic Statistics, 13, 121–126. https://doi.org/10.1080/07350015.1995.10524585
Miller, S. M., Clauretie, T. M., & Springer, T. M. (2006). Economies of scale and cost efficiencies: a panel-data stochasticfrontier analysis of real estate investment trusts. The Manchester School, 74(4), 483–489.
https://doi.org/10.1111/j.1467-9957.2006.00505.x
National Association of Real Estate Investment Trusts. (2020a, September). U.S. REIT industry equity market cap. https://www.reit.com/data-research/reit-market-data/us-reit-industry-equity-market-cap
National Association of Real Estate Investment Trusts. (2020b, September). Glossary of REIT terms.
https://www.reit.com/what-reit/glossary-reit-terms
National Association of Real Estate Investment Trusts. (2020c, September). REIT’s: real estate working for you. https://www.reit.com/
Paasche, H. (1974). Über die preisentwicklung der letzten jahre nach den Hamburger börsennotirungen. Jahrbücher für Nationalökonomie und Statistik, 24, 168–178.
Pigou, A. C. (1920). The economics of welfare. MacMillan.
Prescott, E. C., & Visscher, M. (1980). Organization capital. The Journal of Political Economy, 88(3), 446–461. https://doi.org/10.1086/260879
Ritter, J. R. (2020, September). IPO data. https://site.warrington.ufl.edu/ritter/ipo-data/
Scarpetta, S., Hemmings, P., Tressel, T., & Woo, J. (2002). The role of policy and institutions for productivity and firm dynamics: evidence from micro and industry data (Working Paper No. 329). OECD Publishing. https://doi.org/10.2139/ssrn.308680
Schumpeter, J. A. (1950). The process of creative destruction. Harper & Row.
Stiroh, K. J. (2000). Compositional dynamics and the performance of the U.S. banking industry (Staff Reports No. 98). Federal Reserve Bank of New York. https://doi.org/10.2139/ssrn.221949