REIT Operational Efficiency: Performance, Risk and Return

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.