Analyzing the Impacts of Property Age on REITs and the Reasons Why REITs Own Older Properties

Abstract

This paper first documents the impacts of property age on the operational efficiency, portfolio risk and market valuation of REITs. Based on the findings, we examine three possible explanations why REITs own older properties. Using a comprehensive property-level data set of U.S. equity REITs from 1995 to 2020, we construct a firm-level property age measure based on the age of individual properties held by REITs. Controlling for important firm characteristics, we find that REITs holding more older properties exhibit lower operational efficiency, lower firm value and higher firm risk than their counterparts. Moreover, while the stockholders do not enjoy higher stock returns, we find evidence that managers of REITs that carry more aged properties in their portfolios earn significantly higher compensation. This is consistent with agency cost associated with managerial opportunism. Furthermore, REITs that own more properties in the same locations as their headquareters and those with higher geographic concentration of properties tend to hold older properties. This finding is consistent with the hypothesis based on geographic locations of older properties. We, however, do not find evidence supporting the growth hypothesis associated with core-plus or value-add investment strategies.

Keywords: property age, firm risk, stock return, executive compensation, REIT