CHAPTER ONE

1.0 Introduction

1.01 Background of Study

Real Estate Investment Trust (REITs) are companies that pool together funds from investors and

invest these funds into income producingincome-producing real estate and real estate

relatedestate-related assets and distribute the profit which is in the form of dividends to

shareholders before tax (Olanrele, et al., 2015). Over the years, REIT has gained global

acceptance as a viable and rewarding, high returnhigh-return yielding investment. Generally, for

a company to qualify and operate as a REIT whist whilst enjoying the peculiar benefits of tax

exemption at a corporate level, it must satisfy the following requirements; It must be investing

not less than 70% of its funds in real estate or real estate related assets. Secondly, it must

generate 75% of its income from real estate and related investments. Thirdly, it should distribute

90% of its pre-tax income to shareholders as dividends and finally, it should be owned by not

less than 100 persons among others.

Properties in a REIT portfolio may be varied, including apartment complexes, healthcare

facilities, office buildings, retail, and warehouses. In general, REITs tend to specialisespecialize

in a specific real estate sector. However, investors may choose to diversify their portfolios by

holding different types of properties. The three main categories of REITs include Equity REITs,

Mortgage REITs, and Hybrid REITs. Most REITs are Equity REITs, which own and manage

income-producing real estate. Equity REITs primarily generate funds through the collection of

rents. Mortgage REITs lend money to real estate operators and owners through mortgages and

loans or through mortgage-backed securities, and earnings are generated primarily through the
spread between the interest they earn on mortgage loans and the cost of funding the loans.

Finally, Hybrid REITs combine the strategies of Equity and Mortgage REITs.

Taking a look at diversification from a mean-variance stand pointstandpoint reduces the

unsystematic risk associated with the variability of a portfolio's return in excess ofover the

market return. Joao & Livdan (2004) define optimal diversification as the set of assets that

maximisemaximize the return for a given level of risk or, alternatively, minimiseminimize the

risk for a given level of return. Markowitz (1952) developed modern portfolio theory (MPT) to

formalize the concept of diversification for an investment portfolio. Markowitz adopted stocks in

other to examine his theory; however, it is equally applicable to bonds, government treasury

securities, real estate, and other financial assets. In line with Markowitz’s modern portfolio

theory, Eichholtz, et al. (1995) and Candelon, et al., (2021) argue that diversification within a

real estate portfolio requires the composition of many different properties. However, in terms of

property-type diversification strategies, there is a conflict between the investment

behaviourbehavior of large institutional real estate investors and Real Estate Investment Trusts

(Bhuyan, et al., 2015). In particular, large institutional real estate investors tend to own and

manage properties broadly diversified by property-typeproperty type. On the other hand, REITs

show a strong tendency to invest in only one particular property-typeproperty type (Al-

Abduljader, 2018). A lot of studies have shown that that that the majority of institutional real

estate estates investors such as life insurance companies and pension funds consistently tend to

diversify by property-typeproperty type for their real estate portfolios. Farragher & Savage

(2008) finds that nearly 61% of institutional investors diversify by property type. Bhuyan, et al.

(2015) also observes observe that 89% of institutional investors diversify by property-

typeproperty type. According to Hernando (2016), intra-asset diversification is employed to

identify as many different groups of sub-asset classifications as possible to maximisemaximize

heterogeneity among sub-groups. This practice reduces the correlations between the sub-groups

and increases the diversification of the portfolio. Such an increase in diversification reduces

unsystematic risk and causes a corresponding increase or upward and leftward shift in the

efficient frontier. Thus, the greater the intra-asset diversification provides a greater reduction in

overall unsystematic risk, and the a higher optimum level of portfolio efficiency. In contrast,

Real Estate Investment Trusts (REITs) have a tendencytend to concentrate their investments

oninto a single le property-type. property type. According to the National Association of Real

Estate Investment Trusts (NAREIT) Handbooks (2000–2020), more than 90% of the REITs in

the U.S. equity REIT sector focus on one property-type or occasionally two closely related

property-types. The other 10% of the equity REIT sector is diversified by property-type in terms

of either total market capitalization or number of properties.

In recent years, REIT management has shifted its strategy (Capellán, et al., 2021). According to

Ro & Ziobrowski (2011) The percentage of diversified REITs has decreased steadily as REITs

have tended to specialize in the various property sectors such as healthcare, hotels, apartments,

retail, office and industrial. Thus, the conflict with Markowitz’s modern portfolio theory in

Francis & Kim (2013), and the inconsistent investment behavior of REIT management with the

diversification strategy of institutional real estate investors both motivate the fundamental

research question of this study. What drives the property type focus of REITs?

Prior corporate finance literature finds the existence of the ―diversification discount referring to

a negative correlation between the market value of a firm’s assets and the degree of

diversification in the assets it holds. They find diversified firms tend to trade at a discount

relative to similar focused firms. Benefield, et al. (2009) find a negative association between firm
performance and diversification within the firm. The idea behind these findings is that investors

do not want to invest in firms who do their diversification for them. Investors prefer to make

their own diversification decisions. Consistent with this theory, Geltner and Miller (200I) argue

that early REITs often diversified by property-type since individual relatively small REIT

investors wanted passive investment vehicles and thus were best served by a diversified portfolio

of properties. But in the 2000s, REIT investors became dominated by institutions that prefer to

make their own diversification decisions. Thus, REITs responded to the needs of their investors

by becoming more focused. Another theory argues that once REITs became more actively

managed based on the belief that management expertise could usually be more effective when it

specialized by property-type. Not only REITs but also mutual funds have a strong tendency to

focus on investments in areas where they believe they have expertise. However, Ro and

Ziobrowski (2009) examine whether the management expertise of focused REITs drives their

lack of diversification and find no evidence of superior performance associated with REIT

property-type focus. In addition, Yao, Clifford, and Berens (2004) find that hedge fund sector

specialists on the whole, are no better than generalists in terms of their exposure to systematic

risk.

In this research, I examine the diversification discount of REITs. If investors prefer to make their

own portfolio diversification decisions by employing pure-play REITs (property sector focused

REITs), I hypothesize that investors will react positively to a REIT’s property portfolio changes

which reconfirm their narrow property-type focus. Conversely, investors should react negatively

to events which decrease a REIT’s property-type focus (i.e., the REIT diversifies).

1.1 Problem Statement

Whilst there seem to be a lot of studies on Real Estate Investment Trusts in the broad sense of it,

there seem to be scanty research and lack of insight into the behavior of REITs as an investment.

This study investigates into the reasons investors favor a particular property-type whilst also

examining the diversification portfolio of REITs. It is also guided by the following research

questions:

This study is guided by two research questions:

1. What drives the property sector focus of REITs?

2.

3. What additional explanatory variables, when appropriate controls are available,

significantly influence abnormal returns on events that change a REIT's property

type focus?

1.2 Purpose Statement/Aim of Study

Based on the problem identified, which is that there is insufficient research into the reasons why

REITs are focused on a particular property-type, this research will aim identifying to identify

diversification issues on the property type focus of REITs. To be able to examine the

diversification discount of REITs, in this research work, the following objectives are pursued:

I. Critically review the relevant literature on REITs and the diversification discount of

REITs.

II. Investigate the market reaction when REITs reconfirm or invest contrary to their focus.

III. Examine the diversification discount of REITs.

IV. Test Geltner and Millers (2001) explanation for the lack of diversification among REITs.

V. 1.3 Examine the influence of certain variables of interests on abnormal returns

associated with a change in a REIT’s property-type focus.

Research Scope

To investigate this research hypothesis, I identify a sample of 500 publicly announced property

portfolio changes by REIT investment transactions in the USs coming from property

acquisitions, disposition, joint ventures and mergers from NAREITs Handbook between the

period of 2000 to 2020. The geographical scope of this study is the REITs of the United States of

America but the content scope will be on REITs worldwide.

Limitations of Study

 Analysis is over a short-term period (1998-2009)

 Access to recent open-source data on property returns is scarcely available

 Budget

1.4 Significance of Study

This dissertation bridges the gap in literature in the following ways: (i) it tests the Geltners

(2001) explanation for the lack of diversification among REITs. Other studies and prior studies

examine the relationship between performance and diversification strategy and find evidence of

diversification discount. (ii) this dissertation fills the literature gap by investigating the market

reaction when REITs reconfirm or invest contrary to their focus. Prior studies by Campbell, et al.

(2003) conclude that wealth benefits received when companies reconfirm their geographical
focus in acquisition. However, they fail to consider the wealth effects in terms of property-type

diversification. Finally, this study provides evidence for a more comprehensive range of events

adding property dispositions and joint ventures using recent data.

1.5 Organization of dissertation

This chapter provides a generic introduction of the study to be undertaken. The preceding

chapters are organized in the following manner.

Chapter 2- this chapter reviews literature relevant to the study with reference to the literature

pieces which have contributed to the knowledge of this topic.

Chapter 3- presents the data and how the data will be analyzed and provide results of this Data

Analysis.

Chapter 4- provides the results and discussions of this results.

Chapter 5- presents the conclusion and recommendation of the topic- Drivers of Property Type

REITs, and suggests further research areas to be undertaken.

1.6 Chapter Summary

In this research, I examine the diversification discount of REITs. If investors prefer to make their

own portfolio diversification decisions by employing pure-play REITs (property sector focused

REITs), I hypothesize that investors will react positively to a REIT’s property portfolio changes

which reconfirm their narrow property-type focus. Conversely, investors should react negatively

to events which decrease a REIT’s property-type focus (i.e., the REIT diversifies).
You need to have the significance of your research - here

1. Organization of your dissertation - here

2. A chapter summary

CHAPTER TWO

2.0 LITERATURE REVIEW

2.01 Overview of the Literature Review

This chapter presents a review of literature relating to real estate investment trusts and the drivers

of property type focus of REITs. To provide an in-depth understanding of the REIT industry, this

chapter will first outline the history and evolution of real estate investment trusts as a viable

investment vehicle.. ItWe will also providesconsider the legal structure as well as termination

status and penalties. Following this, finance literature on diversification diversification issues in

finance studies will be discussed., Ddiversification issues in real estate studies, including
diversification based on property-type in real estate investment and REITs are further discussed.

Finally, we wrap up the chapter by examining the and the wealth effect of real estate portfolioo

transaction are discussedwill also be considered. . The diversification issues in finance studies

reviews several theories associated with the relationship between firm value and diversification,

mainly developed in the finance literature. The literature of the diversification issues in real

estate studies focuses on property-type diversification covering REITs and other real estate

investments. The literature of the wealth effect of real estate portfolio transaction studies

discusses the studies of the wealth effect of REITs around changes in property portfolios. These

topics are essential as they establish the background and foundation for this research.

2.1 REAL ESTATE INVESTMENT TRUSTS: HISTORY AND EVOLUTION

2.1.1 Real Estate Investment Trusts: The Early Years

The evolution and history of the REIT industry in the United States since its inception in the

1960s has been witness to continuous evolution (Coletta & Busato, 2019)can be best described

by two words, resilience and persistence. In its relatively short life, the REIT industry has

enjoyed successes as well as failures, punctuated by notable booms and busts (Chan, et al.,

2002). Accordingly, as investment vehicles, the performance of REITs has also fluctuated

dramatically between periods of pronounced booms and distinct busts. Jackson (2007) states that

theThese distinct periods are marked by the distinct declines brought on by bankruptcies in the

1970s, inflation induced decline in the 1980s, followed by rapid expansion in the latter part of

the 1980’s brought on through the direct action of government intervention, followed by decline

in the early 1990s and eventual growth in the latter part of the 1990s which continued through

the 2000s.
The concept of real estate investment trusts in the United States dates back to the early 1880s.

Although most literature document the origin of REITs to the passage of the Real Estate

Investment Trust Act of 1960, their actual genesis can be traced back to the early 1900s when the

Massachusetts Trust Company was formed by a group of New England entrepreneurs who

wanted to profit from the burgeoning real estate industry (Said, et al., 2013). At the time, under

Massachusetts law, corporations could only own real estate if the real estate was a key

component of the business (Chan et al., 2003).

Accordingly, the only way for the Massachusetts Trust Company to take advantage of the real

estate market while at the same time adhering to the law was to develop the Massachusetts Trust

Company, a REIT like structure which legally allowed the corporation to invest in real estate,

while at the same time enjoy benefits usually reserved for corporations such as the transferability

of ownership shares, centralized management and limited liability (Chan et al., 2003).

Unlike today’s REITs that are easily available to willing investors, these early trusts were not

available to the general public as investment vehicles and were effectively established as

business trusts. Instead, they were initially available only to the affluent segment of New

England society (Maloney, 1998; Chan et al., 2003). However, over time they became available

to the general investing public (Valachi, 1977). This early trust allowed investors to pool their

resources, which provided them with the ability to acquire larger and diverse holdings than

would be available to individuals. The trust was also attractive as an investment vehicle since it

was exempted from federal taxation which meant that individual investors could receive income

derived from rent that were tax free at the individual level. However, this tax exemption was on

the condition that the income derived from these trusts was distributed to beneficiaries. These
trusts were treated like partnerships and subchapter S corporations and like other pass-through

entities. Hence, these trusts were taxed only at the shareholder level.

In time, the Massachusetts Trust Company grew to include the general public and expanded from

the New England area to Chicago, Omaha and Denver. However, the Great Depression of the

1930s stagnated the growth of real estate investment and development, hence hampering further

expansion of the Massachusetts Trust Company. The early growth of real estate investment trusts

was further stunted when the United States Supreme Court ruled in 1935 that all passive

investment vehicles that were centrally organized and managed like corporations should be taxed

as corporations (Jackson, 2007). This ruling included REITs and as a result, such trusts were no

longer exempted from corporate taxation and their entity level taxation ceased to exist.

Consequently, they became less and less attractive as investment devices.

Further, during these early periods, real estate investment trusts were not organized to the point

where they could effectively lobby or petition Congress and press for a repeal of the legislation.

However, by the 1950’s, advocates of the real estate investment trust started to lobby the United

States Congress to pass legislation that would grant favorable tax treatment to real estate

investment trust companies. Over the next decade, the concept of real estate investment trusts

remained dormant until 1960 when the United States Congress passed the Real Estate Investment

Act which effectively ushered in the modern-day REIT concept (Rands, 2020). This Act which

became effective in 1961 was prompted by the fact that following World War II, there was a

need for large amounts of real estate equity and mortgage funds, which in turn spurred renewed

interest in real estate investment trusts. As a result, a campaign was launched to obtain special

tax considerations for REITs that were comparable or similar to those received by mutual funds

(Jackson, 2007). As a consequence of this lobbying, the United States tax code was amended to
allow real estate trusts to be treated like closed-end mutual funds, which meant that real estate

companies could become companies whose assets could be a portfolio of common stocks.

Hence, the REIT structure formed in 1961 represented a closed end structure (Beals & Singh,

2002). This meant that REITs could issue shares to the public, while the value of those shares

would fluctuate between the net asset value and the value of the REITs. Thus, this structure

developed in 1961 offered investors, especially small investors the opportunity to invest in real

estate at reduced costs, as well as access to investment expertise. These early REITs were

designed as passive investment vehicles, which meant that REITs could not actively participate

in the management of their REIT owned properties.

As a result, early REITs employed independent property management firms or leased their

properties to third parties. This structure however has changed in recent years as many REITs

have now become management companies as well. Prior to the passage of the Real Estate

Investment Act, small investors in entities could assemble a diversified liquid portfolio of stocks

without having to buy mutual fund shares. However, the enormous capital requirements of real

estate projects excluded most small investors from participating in the real estate sector. Hence,

the passage of the Act not only made REITs the real estate equivalent of mutual funds, but also

provided small investors with the opportunity to participate in large, professionally managed real

estate projects, while at the same time maintain liquidity. Effectively, this Act allowed investors

to share in the benefits offered by real estate investment, without being exposed to extreme risks

or being subjected to the capital investments required of large scale commercial real estate

development.

Thus, the Act created a structure that enabled investors, especially small investors to participate

in large scale commercial real estate investing and/or mortgage lending and in return receive a
continuous stream of returns in the form of dividends (Block, 1998). Further, the Act outlined the

legal structure within which REITs should operate by establishing certain rules which ensured

that REITs remained similar to mutual-fund-like devices for the ownership of real estate. Modern

day REITs are a therefore a direct creation of the Internal Revenue Code (Brueggeman & Fisher,

2005) and the United States Congress (Lee & Lee, 2003), and were designed to be pass-through

entities that distribute to its shareholders a substantial portion of its earnings in addition to capital

gains generated from the sale or disposition of its assets. It is important to note that prior to the

passage of Act in 1960, investors could only participate in the real estate market through the

purchase of real estate and not from the stock market.

However, once REITs were formally created, individuals, particularly small investors could for

the first time participate in the real estate market through REITs, since they could now purchase

stocks of real properties or real estate mortgages owned by these corporations. In terms of the

management of these early REITs most employed advisory boards or firms that received fees for

their services which were usually calculated as a percentage of total assets for services rendered.

This relationship however often created agency problems. This is because, many of these early

REIT managers did not have any significant or large investments in the REIT stocks that were

under their management, and as a result many of the management decisions were not necessarily

always in the best interest of the REITs or shareholders (McMahan, 1994).

2.1.2 The Evolution of REITs from the 1980s to dateEvolution and Change- 1980 to date

The 1980s saw the slow emergence and recovery of REITs as viable investment vehicles (Center

for Affordable Housing Finance in Africa, 2017). As can be seen in table 1, throughout the

1980s, there was a slow but steady increase in the market capitalization and number or REITs.

According to Jackson (2007)In fact, in 1980, there were 75 REITs with a total market
capitalization of $2.2 billion. However, by 1989, this grew to a total of 120 REITs with a total

market capitalization of $11.7 billion. This growth was fueled in part due to the fact that

investors once again started to regain confidence in REITs as investment vehicles, and they once

again started to grow in terms of popularity.

In addition, investors also saw REIT stocks as greatly undervalued. This was due largely in part

to the fact that once REITs lost their popularity, during the 1970s, many investors failed to

revalue their older properties in the 1980s. In addition, most of the REIT managers at the time

tended to adopt a rather conservative approach, in anticipation of a declining market (Edmunds,

1982).

Another important and significant change that occurred with REITs that helped it to once again

gain prominence as a viable investment vehicle is the fact that, during this period, REITs reduced

their debts, and mortgage REITs would only lend funds to construction and development entities

that were deemed to be sound and stable, and not risky (Chan et al., 2003).

The Economic Recovery Act of 1981 also had a significant impact on REITs as investment

vehicles as it inadvertently assisted in the development of REITs. This Act was initially enacted

to spur the United States economy. Essentially, the Act provided tax breaks for real estate

investors by allowing operating loss pass through as well as shortened depreciation periods.

These factors attracted investors and developers who wanted to take advantage of the high tax

shelter as well as the generous tax right off. The Act also provided developers with the ability to

pass off losses to investors.

In addition, during this period, most real estate limited partnerships were sold for less than their

net assets value, with the overarching assumption that there would not be any further decline in
the value of the assets, and further that the limited life of the assets ensured that investors could

obtain a capital gain once their life was terminated. This however, was not the case as it did not

happen. As a result, several real estate limited partnerships were formed and a resultant major

real estate boom ensued. At first, these real estate limited partnerships had a negative impact on

the REIT industry as it caused an increase in competition for real estate investment capital. This

once again created a situation where REITs were once more less popular, despite the fact that

their annual average returns at the time (between 1981 and 1984) were more than 20% (Chan et

al., 2003).

In addition to the real estate limited partnerships, REITs also faced competition from another real

estate development concept, the master limited partnership. This concept offered investors the

liquidity and investment concept that REITs offered. In addition, they also offered the tax

incentives that limited partnerships enjoyed. Further, these types of companies also provided

mortgages, diversified equity real estate properties as well as specialized real estate assets such

as hotels and restaurants. Thus, although compared to these real estate limited partnerships, the

traditional REITs offered the ability of greater liquidity than the real estate limited partnerships.

Yet, they were not especially attractive to investors during the early 1980s. Faced with this

increased competition, the REIT industry responded by introducing a new REIT concept, the

self-liquidating, finite-life REIT, which started to trade publicly during the 1980s.

The passage of the Tax Reform Act of 1986 also resulted in a fundamental shift not only in the

structure of REITs, but also in the types of investors who were attracted to REITs (Cuono &

Francesco, 2019). Initially, when the Real Estate Reform Act was passed in 1960, the rules were

designed specifically to attract small investors to participate in the real estate market (Chan et al.,

2005). Hence, during the early period, there were relatively few institutional investors such as
retirement funds and financial analysts actively participating in the REIT market, compared to

the stock market as a whole. The reason for this is the fact that generally, institutional investors

are usually attracted to and will invest in companies that are large, liquid and have a clearly

defined and focused business line. The early REITs clearly did not display such characteristics.

However, the passage of the Tax Reform Act in 1986 created the necessary changes that not only

continued to attract small investors, but also institutional investors who welcomed the structural

changes which were now desirable. As a result, over the past two decades, a significant number

of institutional investors have been attracted to REITs.

The evolution and growth of REITs as viable investment vehicles continued in the 1990’s with

the passage of the of the REIT modernization Act in 1999. This Act was designed to enable

REITs to compete effectively with other commercial real estate entities and other business

formations. Prior to the passage of this Act, REITs were barred from providing services that

were deemed to be beyond those classified as “usual and customary” within the industry. If a

REIT violated this stipulation and provided services that were outside the boundaries of the

classification of “usual and customary”, then the income generated by the REIT would not

qualify as income derived from a REIT, which meant that the REIT would therefore loose its

REIT status. The REIT modernization Act also allowed for the REIT subsidiary companies to

provide all services to their tenant or clients pay associated taxes and pass the earnings up to the

parent REIT as income. The Act also reduced the required payout of gross income from 95% to

90%, which meant that the extra five percent could be retained for entity growth.

2.2 TYPES OF REITS

2.2.1 Public REITs

According to Sagalyn (1996), real estate investment trusts exist in two broad categories, publicly

traded REITs, which are those that are listed on an exchange or traded over the counter and

private REITs which are those that are not listed nor traded publicly.

Publicly traded REITs are further classified by their investment sector as equity real estate

investment trust, mortgage real estate investment trusts, and hybrid real estate investment trusts.

Equity real estate investment trusts are those that acquire property interest while mortgage real

estate investment trusts are those that purchase mortgage obligations and consequently become a

creditor with mortgage liens given to priority equity holders.

Essentially, mortgage REITs owns mortgage paper secured by the underlying real property.

Hybrid REITs are those that combine the advantages of both the mortgage REITs and the equity

REITs. The majority of equity REITs usually specialize in specific property types, and in some

cases, they tend to focus their investments in specific geographic locations. This specialization is

usually geared towards gaining competitive advantages by focusing resources on specific

property types as well as within specific geographic areas. However, a small percentage of equity

REITs chooses not to specialize, and instead choose to diversify their portfolios both in terms of

property types and geographic locations. The National Association of Real Estate Investment

Trusts (NAREIT, 2006) further classifies or breaks equity REITs down by property

specialization or property sector.

According to the NAREIT classification, equity REITs are classified according to the following

property types:
Industrial/Office: Office building and industrial REITs are classified collectively as one

segment since a substantial number of REITs invests in both types of properties. This

classification usually describes buildings that are used for the production or manufacture of

products as well as properties whose functions is distribution or warehousing. Included in this

category also are buildings that are used to house offices which are rented to tenants by the

REIT.

The National Association of Real Estate Investment Trust further divides this segment into

REITs that own industrial, office, or a mix of office and industrial properties. These properties

are often further dived based on their location such as whether they are located in the Central

Business District or situated in suburban locations. Buildings may also be classified by

subjective levels of quality. Under this classification, buildings are classified as class A, B, or C.

Class A buildings are those that offer excellent location and access, the facilities are relatively

new and in excellent conditions which allow the REIT to charge rents that are highly

competitive. Class B buildings also offer good locations and are in good physical condition.

However, they tend to suffer from some functional obsolescence and physical deterioration.

Class C buildings are those that suffer from physical deterioration and functional obsolescence.

Retail: These are REITs that focus on retail outlets. These REITs are further subdivided into

those that own shoppingtrip centers, regional malls, outlet centers, and free-standing retail

properties.

Residential: These are REITs that own residential dwellings consisting of five or more units in a

single building or complex of buildings. These REITs are further subdivided into those that own

multifamily apartments and manufactured home communities.

Diversified: These are REITs that own a portfolio of diversified property types.

Lodging/Resorts: These are REITs that own a variety of hotels, motels and resorts.

Health Care: These are REITs that specialize in owning hospitals and related healthcare

facilities and are usually leaders to private healthcare providers who operate these facilities.

Self-Storage: these are REITs that specialize in self-storage facilities.

Specialty: Specialty REITs are real estate investment trust companies that specialize in various

types of properties which include correctional facilities such as prisons, theatres, golf courses,

automobile dealerships, and timberland.

2.2.1.0 Finite-Life REITs and Non-Finite Life REITs

In addition to the various categories of equity REITs discussed above, REITs can also be further

classified and categorized by variables such as the duration of the trust such as finite-life REITs

and nonfinite life REITs. Finite life or self-liquidating REITs as they are commonly called are

REITs that are formed with the goal being to dispose all the company’s assets and distribute all

proceeds to the company’s shareholders by a specific date.

Finite life REITs were developed in response to investor criticism that the prices of REIT shares

act or behave like common stock in that the price is based on the current and expected future

earnings rather than the real estate value of the REIT. By establishing a finite or terminal date,

investors it is argued can make a better estimate of the terminal value of the underlying

properties. Non-finite life REITs on the other hand operate as going concern entities. Most of

today’s REITs are non-finite life REITs.

2.2.2 Private REITs

Private REITs are real estate investment trust companies that are not listed on one of the

established security markets. Although most of these companies are public entities, they are not

listed on public exchanges or traded over the counter as most public REITs. This category of

REIT is not registered with the Securities exchange Commission. The National Association of

Real Estate Investment Trust classifies private REITs into three categories:

1) REITs targeted towards institutional investors;

2) REITs that are syndicated to investors as part of a package offered by a financial

consultant;

3) “incubator” REITs which are REIT that are funded by venture capitalists who expects

that the REIT will develop and garner an excellent track record to launch a public

offering in the future.

2.2.3 Unlisted REITs

A third and relatively new segment of REITs are those that are classified as unlisted REITs. This

segment of REITs file with the Security Exchange Commission, however, their shares do not

trade on public national stock exchanges. Unlike publicly traded REITs, which offer a high level

of liquidity, unlisted REITs usually require a minimum holding period. Exit strategies for

investors are usually linked to a required liquidation after some period of time (usually ten

years). Although opponents of unlisted REITs argue that from the perspective of investors, they

are expensive and illiquid when compared to publicly traded REITs, proponents argue that while

this may be true, they are not subjected to the market volatility that publicly traded REITs are

subjected to (Brueggeman & Fisher, 2005).(Brueggeman & Fisher, 2005).

2.3 THE APPEALS OF REITS AS INVESTMENT VEHICLES

Several reasons have been forwarded as to why REITs appeal to investors as viable investment

vehicles and have consequently led to their increased popularity and securitization in recent

years. While some researchers have attributed this increased in popularity to factors such as the

overall increase in demand for real estate securities by investors as well as the increase in the

supply of real estate available for securitizations (Crain, Cudd, & Brown, 2000), others have

argued that the appeal of REITs as investment vehicles is partly due to their ability to act as

hedge against inflation (Dabara, et al., 2021)(Chatrath & Liang, 1998).

The assertion that REITs act as a hedge against inflation has, however been met with mixed

reactions (Hartzell, Hekman, & Miles, 1987; Chan, Hendershott, & Sanders, 1990; Chatrath &

Liang, 1998). Despite However, despite these mixed findings, the perception that REITs provide

a hedge against inflation has also added to the popularity of REITs a viable investment vehicle.

However, other reasons that account for their appeal as viable investment vehicles have been met

withll less debate.

Below are the less debatable common reasons that account for the appeal of REITs as viable

investment vehicles. REITs have become attractive investment vehicles since they offer both

small and large investors the opportunity to invest directly or indirectly in real estate. Hence

REITs are often considered as substitutes or a viable alternative to directly investing in real

property (Venmore-Rowland, 1989).

Essentially, real estate investment trusts allow investors with limited capital the ability to invest

in real property stocks as a way of gaining property exposure without the introduction of

excessive illiquidity (Liow, 1997). Thus, individual investors can indirectly acquire real estate

investment through the purchase of publicly traded shares in REITs or for larger investors,

through the process of directly acquiring real property or through lending as in the case of
mortgage REITs. Further, the fact that large amounts of resources and expertise are required for

the financing and ownership of commercial real estate, effectively exclude many investors from

directly participating in the acquisition or investing in commercial real estate market. REIT

ownership however does not require large financial outlay nor the longtermlong-term

commitment required of commercial real estate investment, and hence allows small investors the

opportunity to participate in the real estate market.

Additionally, because most shares of REIT stocks are traded publicly, they are easily transferred

from one owner to another at relatively low transactional costs. The end result is that investors,

especially small investors can collectively combine or pool their resources and participate in the

real estate market, thereby obtaining both real estate ownership and the economic benefits

offered by commercial real estate investments (Han & Liang, 1995).

Real estate investment trusts are also attractive since compared to other equity investments, such

as partnerships, they offer investors the added benefit of a greater level of liquidity, while at the

same time allow them to earn a relatively high return on their investment. This is because, unlike

most investments, by law, REITs are required to disburse ninety percent of their gross income to

shareholders on annual basis. Hence, REIT investors can look forward to reliable and significant

dividends which are typically four times higher on average than those of other stocks. Investors

can therefore build greater long-term wealth by combining REIT stocks with other investments

such as home ownerships as part of a diversified investment portfolio.

Additionally, REITs are also attractive to investors since this investment vehicle allows them to

benefit from the single taxation nature of REITs earnings. REITs also offer investors the

opportunity to invest funds in a diversified portfolio of real estate, with the assurance that their

investment will be monitored and managed by a professional team. Thus, REIT investors own
equity shares on organized exchanges which provide more liquidity as compared to acquiring

real property.

Further, since investors have the opportunity to pool their resources with individuals that have

similar interests, funds are usually acquired relatively quickly to purchase real property in

whatever portions that appears to yield the best returns for investors. This is because real estate

development companies can circumvent creditors by securing financing through equity capital

by forming publicly traded REITs (Gyourko, 1994).

Another factor that has accounted for the popularity of REITs is an important structural change

of REITs that occurred with the introduction of the Umbrella Partnership REIT (UPREIT) in

1992 (Mullaney, 1998). This type of REIT was designed to allow real estate owners who are

interested in taking their real estate operations public the opportunity to do so without incurring

the exorbitant and often prohibitive capital gains taxes that were typical before this structure was

allowed. REITs have also grown in popularity because of the interest and investment of

institutional investors (largely propagated by the tax changes brought by the Revenue

Reconciliation Act of 1993), who now see REITs as viable investment vehicle. Prior to the

passage of this Act, REITs had to comply with a tax provision referred to as the “five or fewer

rule”. This tax stipulation stated that an entity would lose its status as a REIT if more than 50

percent of the REIT’s shares were held by five or less shareholders during the last half of a

taxable year (Crain et al., 2000). This restriction therefore prevented several institutional

investors, such as pension funds from actively investing in REITs. This is because, prior to the

passage of the Act, institutional investors were regarded as single investors for the purpose of the

“five or fewer rule”.

Since most REITs have a relatively small market capitalization, it was virtually impossible for

large institutional investors to obtain investment positions within REITs without violating the

“five or fewer rule”. Once this barrier was removed, investment activities by institutional

investors increased (Chan, Leung, & Wang, 1998). The growth of real estate investment trust

was also propagated by the fact that during the mid-1990’s, both external equity and as well as

debt financing were easily available to REITs (Mooradian & Yang, 2001) Since the passage of

the Real Estate Investment Trust Act of 1960, the REIT industry has undergone a tremendous

and dramatic growth, both in size and importance, especially during the last decade. This growth

has been recognized by leading financial markets and institutions. For example, in 2001,

Standard & Poor’s recognized the evolution and growth of the REIT industry as a mainstream

investment by adding REITs to its major indices, including the S&P 500 (NAREIT, 2006).

2.42 Diversification Issues in Finance Literature on Diversification Studies

While a number of finance studies attempt to examine the relationship between the market value

of the firm and the degree of its diversification, the evidence still remains debated. Early finance

literature on the diversification issues findsfind the existence of the ―diversification discount,

where diversified firms are valued at a discount relative to focused firms, and develops several

theories to support the empirical findings (Mehmood, et al., 2019). However, more recently,

several studies criticize the earlier diversification discount studies. They argue that the

diversification discount results from the systematic difference between a stand-alone firm and a

single segment of a multi-segment firm, resulting in endogeneity issues.

A corporate diversification strategy deals with business expansion and profit maximization of a

firm. The modern portfolio theory of Markowitz (1952) states that diversification in various

investment projects leads to minimize risk and maximize expected return. In agency theory, the
literature shows that managers work for their personal benefits at the expense of shareholders by

using diversification strategies (Jensen and Meckling 1976; Denis et al. 1997).

Lins and Servaes (2002) explain that the utilization of internal capital is an attraction for

diversification due to imperfection in the external capital market. The concept explains a positive

relationship between corporate diversification and firms’ value because a firm has informational

advantages in raising capital and it can avoid the costs of external financing, which is greater

than the cost of internal financing (Jang, 2017). To meet challenges and survive in the markets,

firms make diversification decisions. Management of the firms decide whether to go for related

or unrelated diversification. If firms opt for related diversification, that provides good output and

reduces total risk. However, if management goes for unrelated diversification, it may have a

negative impact on firm value. Corporate diversification strategy helps firms to expand business

activities and get maximum profit (Phung and Mishra 2016).

According to Pandya and Rao (1998), diversified firms perform better on risk and return basis.

Phung and Mishra (2016) also state that there is a negative impact of diversification on financial

performance. This negative impact is due to a weak and inefficient corporate governance system,

which motivates firms to diversify and ultimately negatively affects the firms’ financial

performance. Furthermore, inefficient diversification strategy negatively affects the firms’

financial performance (Berger and Ofek 1995). The literature also states that diversification is

important and has the potential to increase the firms’ financial performance.

Further, according to investigations carried out by Laevena & Levine (2007) on whether the

diversity of activities conducted by financial institutions influences their market valuations, the

find that there is diversification discount. They report that the market values of financial

conglomerates that engage in multiple activities, for instance, lending and non-lending financial
services, are lower than if those financial conglomerates were broken into financial

intermediaries that specialize in the individual activities. Laevena & Levine (2007) also report

that the marekt values of banks that engage in numerous activities are significantly lower than if

those banks were broken up into financial intermediaries that specialised in the individual

activities.

Campbell, et al. (2003), in their research, they examine a comprehensive sample of real estate

transactions during the periods of 1995 through 2001 and find evidence that excess returns are

attributable to the wealth benefit received by firms that reconfirm their commitment to

geographical focus. They also find evidence that excess returns are attributable to positive

information conveyed to the market when project-specific private debt financing is used and a

positive signal is sent to the market when acquisitions are financed by private placement of

equity with financial instittutions.

Hartzell (2009) also finds that REITs that diversify by investing in more locations tend to be

valued lower than REITs with a tighter geographical focus. Hartzel (2009) also concludes that

diversification discount is largely related to corporate governance and discount is significantly

higer for those REITs for those REITs with higher ownership by institutions that are likely to

scrutinize the firm.

Diversification may benefit managers because management’s power or managerial compensation

is associated with firm size. Thus, managers tend to sustain diversification strategy even if it

reduces shareholder benefit. They find managerial equity ownership is negatively related to the

level of diversification. Jensen (1986) argues that firm growth benefits managers since it

increases management’s power and prestige.

Diversification is one means of growth. Jensen and Murphy (I990) find evidence that

diversification raises the compensation of managers since managerial compensation is positively

related to the size of a firm. Consistent with agency cost theory, Amihud and Lev (1981) find

that managers engage in diversification to reduce their undiversified employment risk (e.g., risk

of losing their job). Several studies find that the resource allocation in diversified firms differs

from that in focused firms, suggesting that diversified firms tend to misallocate internal capital.

Stulz (I990) finds that firm diversification results in inefficient internal capital investments such

as overinvestment in low-performing businesses.

Lamont (I997) also finds that diversified firms allocate their internal capital inefficiently,

overinvesting in poor sectors. Shin and Stulz (I998) argue that diversified firms tend to disregard

traditional market indicators of the value such as Tobin’s q since different business segments are

associated with different market indicators. They find evidence of inefficiency in the capital

allocation of diversified firms. Rajan, Servaes and Zingales (2007) find that increases in diversity

of resources and opportunities in diversified firms result in more inefficient investment and less

valuable firms.

Lamonta & Polk (2002) states that since firms endogenously choose to diversify, then exogenous

diversification is necessary to draw inferences about the casual effect. In theirr investigation of

the changes within-firm dispersion of industry investment/ diversity, the find that exogeneous

changes in diversity, due to changes in industry investment are negatively related to firm value.

They thus argue that diversification destroys value, consistent with Stein’s (2003) ineffficient

internal capital markets hypothesis. Lamonta & Polk (2002) also find that exogenous changes in

industry cash flow diversity are negatively related to firm value.

Conversely, Marinelli (2011) argue that there exists a statistically consistent persistence of

performance below and above industry average among diversified firms. It is however important

to look for a diversification discout or premium if the the firm’s performance does not follow any

specific pattern over time. Marinelli (2011) concludes that because of the persistent

heterogeniety of abnormal returns, an average indicator of a diversification discount or premium

might not indicate clearly whether diversification has any negative result for shareholders,

therefore suggesting an additional perspective on the relationship between diversification and

shareholder value. Setianto (2020) finds that a U-Shaped diversification and value relationship

exists. The research suggests that the effect of diversification in strategy on firms value may

reverse at much higher levels of diversification. This relationship is fully mediated by the firms

growth opportunty. e antecedents and

performance of the diversication

strategies of rms have been

studied extensively in the extant

literature (Hoskisson and Hitt,

1990). Factors

such as competition (Stern and

Henderson, 2004; Meyer, 2006;

Wiersema and

Bowen, 2008), economic

environment (Khanna and Palebu,

2000; Mayer and

Whittington, 2003), resource

endowment (Kor and Leblebici,

2005; Wan, 2005;

Fang et al., 2007; Kumar, 2009;

Lim et al., 2009), technological

discontinuities

(Lu and Beamish, 2004; Miller,

2006), risk appetite (Eisenmann,

2002; Wang and

Barney, 2006), managerial motives

(Tihany et al., 2000; Palmer and

Barber, 2001;

Jensen and Zazac, 2004), and

dynamic capabilities (Galunic and

Eisenhardt, 2001;

Dhir and Mital, 2012; Døving and

Gooderham, 2008) of a rm lead

to the diver-
sication decision
In-depth research has been done on the causes of and results of corporate diversification

strategies in the literature that is currently available (Hoskisson & Hitt, 1990). Competition

(Stern & Henderson, 2004; Meyer, 2006; Wiersema & Bowen, 2008), the economic environment

(Khanna & Palepu, 2000; Mayer and Whittington, 2003), the availability of resources (Kor and

Leblebici, 2005; Wan, 2005; Fang et al., 2007; Kumar, 2009; Lim et al., 2009), technological

discontinuities (Lu and Beamish, 2004; Miller, 2006), risk appetite (Eisen

2.3 Diversification Discount

According to Guo & Cao (2012), diversification discount or premium refers to a balance of the

costs and the benefits of diversification. In the case where the cost of diversification outweighs

the benefits, then there may exist a diversification discount or vice versa (Guo & Cao, 2012). A

number of corporate finance studies find evidence of a diversification discount. Lang and

Stulz (I994), Berger & Ofek (1995)Berger and Ofek (I995), Comment and Jarrell (I995), and

DeLong (2001) all find negative correlation between firm value and the degree of

diversification. They, in their research used segment-level data to study the effects of

diversification on a firm’s value by estimating the value of a diversified firm’s segments as

though they operated as separate firms. They discovered that diversification reduces the value of

a firm by between 13% to 15% over the 1986-1991 sample study periods of firms of all sizes.
There are several alternative theories which may explain the observation that

diversification reduces the value of the firm: information asymmetry, agency cost, and the

inefficient internal allocation of capital. Ferris and Sarin (2000) argue that a more

diversified firm trades at a discount relative to a focused firm because a diversified firm

has more informational asymmetry between a firm’s managers and its investors. This

makes investors less likely to invest in the firm. They find that more diversified firms have

less analyst following, lower analysts’ consensus and greater forecast error than focused

firms, which results in an increase in information asymmetry and negatively affects the

value of diversified firms.

Bhushan (1989) also finds a negative relationship between the number of analysts and the

number of lines of businesses. He argues that because of the increased number of business

lines that the analysts must follow, the greater the difficulty and cost. Thus, diversified

firms have fewer analysts than more focused firms. In addition, diversified firms have

more heterogeneous information sets among analysts, which result in a reduced consensus

among analysts. Chung and Jo (I996) find a positive relationship between the number of

security analysts tracking a firm and the market value of the firm. They argue that

investors tend to trade securities which they recognize and the cognizance stems from

information provided by security analysts, which reduces information asymmetry.

Agency cost has also been linked to the diversification discount. Denis, Denis and Sarin

(I999) argue that the diversification discount occurs because there is the conflict of interest

between the shareholders and the managers of a publicly owned firm.

Diversification may benefit managers because management’s power or managerial compensation

is associated with firm size. Thus, managers tend to sustain diversification strategy even if it
reduces shareholder benefit. They find managerial equity ownership is negatively related to the

level of diversification. Jensen (1986) argues that firm growth benefits managers since it

increases management’s power and prestige.

Diversification is one means of growth. Jensen and Murphy (I990) find evidence that

diversification raises the compensation of managers since managerial compensation is positively

related to the size of a firm. Consistent with agency cost theory, Amihud and Lev (1981) find

that managers engage in diversification to reduce their undiversified employment risk (e.g., risk

of losing their job). Several studies find that the resource allocation in diversified firms differs

from that in focused firms, suggesting that diversified firms tend to misallocate internal capital.

Stulz (I990) finds that firm diversification results in inefficient internal capital investments such

as overinvestment in low-performing businesses.

Lamont (I997) also finds that diversified firms allocate their internal capital inefficiently,

overinvesting in poor sectors. Shin and Stulz (I998) argue that diversified firms tend to disregard

traditional market indicators of the value such as Tobin’s q since different business segments are

associated with different market indicators. They find evidence of inefficiency in the capital

allocation of diversified firms. Rajan, Servaes and Zingales (2007) find that increases in diversity

of resources and opportunities in diversified firms result in more inefficient investment and less

valuable firms.Hartzell, et al. (2012) concludes in a research that REITs that diversify by

investing in more locations tend to be valued lower than REITs with a tighter geographical focus.

They also state that diversification discout is lower for firms with more institutional ownership,

especially institutional types that tend to be more active monitors.

In another research by Villalonga, et al. (2001), they examine whether the discout of diversified

firms can actually be attributed to diversification itself, making use of recent econometric
developments about causal inference. In this research, the value effect of diversification is

unbaisedly estimated by matching firms that are either diversified or specialized on the

propensity score- the predicted values form a probit model of the propensity to diversify.

Villalonga, et al. (2001) finds that when a more comparable benchmark based on propensity

score is used, the diversification discount disappearsor even turns into a premium.

Discontents of Diversification Discount

Several studies challenge the evidence of diversification discount. These studies include Campa

and Kedia (2002), Graham, et al. (2002), Villalonga (2004). They conclude that diversification

does not destroy value rather it is the acquisition of already discounted business segments. They

continue that since stand alone firms are not comparable to segments of diversified firms,

diversification discount results on grounds of endogencity bias. Poorly performing firms look to

diversity in other to shore up their firms value and performance which invariably makes

diversified firms appear to have a diversification discount.

Erdorf, et al. (2012) also argues that there exists no diversification discout for any particular

firm. This is because in some cases, diversified firms outperform single-segment firms.

Property type diversification in real estate investement trusts (REITs)

In a research carried out by Jay, et al. (2009) on the relationship between diversification and

value on a sample of REITs from 1995-2003, they argue that there exists no relationship between

property type diversification and REIT values. The study also examined the relation between

diversification and REIT characteristics in other to ascertain how diversified REITs are different

from their more focused counterparts, yet they do not uncover strong evidence that might

explaint the diversification discount.

Jay, et al. (2009) also suggest that diversification discount may be generated by two separate

channels. Firstly, there may be greater incentive problesms associated with diversified REITs.

The very fact that diversification discout is notably less for REITs owned by institutions which

unarguably are the best monitors is consistent with the idea that those incentive issues may be

important. Additionally, there could exist the case where poorly performing REITs choose to

diversify. They may do this by adding new regions to underperforming existing regions (Jay, et

al., 2009).

Effects of property type and total property returns

According to Rodrigues (2009), private owners of property specialize in one or two property

types, but this is not so for institutional investors as the own and manage several property classes

because they recognize the the benefits of intra-asset diversification. In a research by Webb

(1984), it was discovered tha approximately 61 percent of institutional investors diversify by

property type. This was corroborated in a more recent study by Louagrand (1992) where it was

dicovered that 89 percent diversify by property type. Rodrigues (2009) concludes that the

fundamental reason behind asset diversification by type is to recognize diverse groups of sub-

asset classification while maximizing homogeniety within the group and between groups.

Therefore, the greater the intra-asset diversification, the greater the chances of reduction in

overall unsystematic risks, which invariably leads to optimization of the portfolio (Rodrigues,

2009).

Furthermore, Bartley and David (2000) conclude in a study that examines how and to what

degree asset and property type diversification affects the liquidity of the market for REITs that
property type is a significant determinant of the firm’s bid-ask spread. Healthcare and storage

properties and facilities are associated with lower bid-ask spreads while office, lodging and

industrial are held by high-spread firms. After controlling for variables, they also discover that

diversification across asset classification and property type are penalized with higher spreads and

reduced liquidity.

The Wealth Effects of REIT Property Acquisitions and Dispositions

In recent literature that analyses corporate acquisitions and sales of real estate has shown that

there is statistically significant gains accrue to both buyers and sellers when the transaction is

announced. But Willard, et al. (1995) find in their research, which focused on the real estate

transactions for tax-qualified REITs to determine if REIT shareholders experience similar

patttern of positive wealth effect, that REITs do not experience any significant wealth effects

from transation announcement. Conversely, significant positive wealth effects occurs upon the

announcement of a sale transaction whenever the sale is associated with an increase in REIT

dividends (Willard, et al., 1995).

Li, Ling, Mori and Ong (2020) in their literature found a positive relation between property

transation activity and REIT bond yeild spread, meaning that property transaction activity

negatively affects creditor’s wealth. This positive relation is mitigated when the firm’s stock is

sold at a premium to its per share Net Asset Value. Futher, Li, Ling, Mori and Ong (2020) also

find that an increase in geographic focus amplifies the effects of transaction activity on bond

yield spreads. They also find that increased property activity tends to increase the probability of a

negative credit assessment and the negative effect of property transaction is significantly

mitigated when the REIT is trading at a premium to NAV.

Hassan, et al. (2006) in a study of the wealth effects of corporate real estate disposal using the

impact of the Asian financial crisis as casestudy, examined the stock price’s reaction to the

announcement of corporate real estate disposals by listed non property companies in Malaysia

and whether price reactions is directly related to disposals under different economic conditions.

The results form the study show that the cummulative abnormal returns associated with the

property disposals differ significantly in different economic conditions. Pre-Asian financial

crisis, price reaction for property disposals were consistent with the normal investor expectations

of increasing shareholder value. During and post-crisis, cross-sectional regression show that

property disposals have negative wealth effects (Hassan, et al., 2006).

Huiming (2010) investigates the wealth effects of REITs property dispositions employing the

event study methodology. The study finds that property dispositions by REITs usually generate

positive significant abnormal shareholder returns around the date of disposition announcement.

Huiming (2010) also finds that the average abnormal returns both the event day and the day

before the disposition announcement are 0.18% and 0.14% respectively with a three day average

of 0.26% consistent with studies by Campbell, Petrova and Sirmans (2006) on REITs property

selloffs. Further, the research employs cross sectional regressions to analyze the sources of value

gains in property dispositions. The research identifies capitalization rate as an important factor

that affects the shareholder returns. Huiming (2010) also observes that the property dispositions

change the average yield of the divesting REIT’s remaining portfolio. Evidence that yield

dilutive dispositions result in higher abnormal returns also exists. The research also concludes

that the abnormal returns are positively related to the REITs debt ratio prior to the property

dispositions and the decision to use the proceeds to pay back existing debt.
Also, Campbell, et al. (2003) examined a sample of 209 REIT portfolio acquisitions during

1995-2001 and find that annoncement-period shareholder returns are significantly positive in

aggregate. The research also presents evidence that excess returns to acquirers results from

positive information conveyed by the use of project-specific private debt, positive signal sent to

the market when transactions are financed by stock privately placed with financial institutions

and wealth benefits received when companies reconfirm their geographical focus in the

acquisition.
 CHAPTER FIVE

CONCLUSION AND FUTURE RESEARCH DIRECTIONS

Conclusion

This research intend to give an answer to the question what drives property-type focus of REITs.

I examine why REITs show a strong tendency to favour investments in only one property-type

while insititional real estate investors tend to own and manage properties broadly diversified by

property-type between 1998-2009. I investigate what drives the property sector focus of REITs

while testing the findings of Geltner and Miller (2001), who argue that REITs in the early days

have been diversified by property-type because REIT investors were best served by a diversified

portfolio of propertied by employing passive investment vehicles. Now, REIT investors have

become dominated by institutions that prefer to make their own diversification decisions. In

response to this, REITs have become more focused.

This dissertation, Drivers of the Property-type focus of REITs, examines investors decision

making- if they prefer to make their own portfolio diversification decisions by employing

property-type focused REITs. The study is prompted by the lack of property-type diversification

in REITs. Campbell, Petrova, and Sirmans (2003) established a significant positive abnormal

return to the news of the property acquisition to support their geographic focus and to develop

the initial study hypothesis. An announcement which narrows the geographical focus is

associated with abnormal returns that are minimally different from zero. They do not, however,

examine at how the market reacts to announcements with an impact on diversification of

property types. As my null hypothesis, the market reacts positively to announcements of a

REIT’s portfolio changes which narrows their emphasis on a particular property type.
Conversely, the news of a REIT’s property portfolio adjustment which lessen the REIT’s

property-type focus, cause the market to respond negatively (H2).

In accordance with Campbell, Petrova, and Sirmans (2003 and 2006), I use the Dow Jones

Factiva Online Database service to retrieve information from the Dow Jones News Retrieval

concerning announcements about changes to the property portfolio of REITs in the years

1998 through 2009. An announcement must appear in the Dow Jones Newswire, the Press

Release Wires, or the Reuters Newswires in order to be included in the sample. The trade day is

provided if the announcement is made before 3:59 p.m. The announcement day is the date of the

first publication of the portfolio change in one of these publications. The event day is regarded as

the following trading day after the announcement if it is announced after 3:59 p.m.

I discover evidence of significantly negative abnormal returns for acquisition and acquisitional

joint venture events that reduce property-type focus. These acquisitional events have

significantly lower abnormal returns than neutral acquisitional events that do not change

property-type focus. In addition, I find significantly negative abnormal returns for acquisitions

that reduce geographical focus, which is consistent with Campbell, Petrova, and Sirmans'

findings (2003). To support the research hypothesis, this is strong evidence of the diversification

discount (H2). However, there is no consistent evidence that dispositional events that increase

property-type focus result in significantly positive abnormal returns (H1). On the basis of the

difference test, I only find a statistically significant positive market reaction relative to those

derived from neutral dispositional events in the limited case of other property-type dispositional

JVs.

In terms of cross-sectional OLS regression results, I find strong evidence of diversification

discount derived from acquisitional events that decrease the REIT's property-type focus
regardless of sample period or type of property portfolio change. However, I have found no

evidence of a wealth benefit from dispositional events that increase property-type focus.

Future Direction

In this dissertation, Drivers of the Property-type focus of REITs, I examine if investors if they

prefer to make their own portfolio diversification decisions by employing property-type focused

REITs. The study is prompted by the lack of property-type diversification in REITs. For this

disertation, the data obtained was from 1998 through 2009. A more recent study could be carried

out from 2010 through 2022 to corroborate or delegitimize the claims of previous studies.
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