Real Estate Ownership, Leasing Intensity, and Value: Do Stock Returns Reflect a Firm's Real Estate Holdings?

Abstract

Little is known about the effects of real estate ownership and leasing on the stock return characteristics of public firms. In this study, we first examine the sensitivity of retail firm returns to a real estate factor over the period 1998-2008. The retail industry is chosen because of the significant use of real estate in a typical retail firm's production function. Consistent with our expectations, retail stocks exhibit positive real estate risk exposure, even after controlling for sensitivity to general market risk as well as other standard risk factors. The second part of our analysis examines whether the intensity of real estate ownership and the use of off-balance operating leases to finance real property holdings are reflected in the market and real estate betas of retail stocks. We find that greater use of off-balance sheet operating leases is associated with higher market betas. In fact, the use of operating leases appears to have a larger impact on sensitivity to market risk than does the use of on-balance sheet debt. Our findings also confirm our hypothesis that real estate intensive firms display significantly greater exposure to a real estate factor. Moreover, our results strongly suggest that investors are fully aware of the risk associated with off-balance sheet operating leases.

Keywords: Leasing, Real estate exposure, Off-balance sheet financing, Real estate risk