Shuffling through the Bargain Bin: Real-Estate Holdings of Public Firms
2019, Review of Finance, with Irem Demirci and Umit G. Gurun
Constructing a novel database on the real-estate holdings of public firms, we show that distressed firms sell their real-estate assets at a discount relative to healthy firms. We find that distress discount in real-estate assets is less pronounced for sellers with less liquidity-constrained industry peers and in machinery-heavy industries. We also document that asset redeployability and the availability of potential buyers are two important property-specific determinants of the distress discount. Additionally, firms’ property portfolios that are less redeployable with less potential buyers exacerbate the negative impact of financial distress on the cost of borrowing.
Environmental Performance and the Cost of Debt: Evidence from Commercial Mortgages and REIT Bonds
2019, Journal of Banking and Finance, with Piet Eichholtz, Rogier Holtermans, and Nils Kok.
The increasing societal focus on environmental issues leads to important questions about the relationship between corporate environmental (ESG) performance and firms’ cost of capital, but research on this topic remains scant. The real estate sector offers an ideal testing ground to investigate the relationship in two distinct manners, while specifically addressing concerns about endogeneity. We first investigate the spreads on commercial mortgages collateralized by real assets, some of which are environmentally certified. We then study spreads on corporate debt of property companies (REITs), both at issuance and while trading in the secondary market. The results show that loans on environmentally certified buildings command lower spreads than conventional, but otherwise comparable buildings, varying between 24 and 29 basis points, depending on the specification. At the corporate level, REITs with a higher fraction of environmentally certified buildings have lower bond spreads in the secondary market. These results are robust to different estimation strategies, and signal that environmental risk is efficiently priced in the real estate debt market.
The Economics of Residential Solar Water Heaters in Emerging Economies: The Case of Turkey
2018, Energy Economics, with Erdal Aydin and Piet Eichholtz.
In many emerging economies, household consumption of polluting solid fuels is still very high. We study the economics of one specific clean energy appliance that has been an important alternative for solid fuels in many developing countries: solar water heaters. Using a dataset including detailed information for around 23,000 Turkish households, 61% of which still use solid-fuel stoves, we first examine the determinants of the adoption of solar water heaters. We document that income, education, geographical location and the type of space heating system are important factors driving the adoption of solar water heaters. Analyzing the energy consumption of households, we find that total household energy consumption is reduced by around 13% when a solar water heater is present. Relating their presence to housing market outcomes, we document that the perceived value of owner-occupied homes increases by 6%, and find a three percent rent premium in the rental housing market.
Corporate Diversification and the Cost of Debt: Evidence from REIT Bank Loans and Mortgages
2018, Journal of Real Estate Finance and Economics, with Irem Demirci and Piet Eichholtz.
This paper investigates whether corporate diversification by property type and by geography reduces the costs of debt capital. It employs asset-level information on the portfolios of U.S. REITs to measure diversification and looks at two of their main sources of debt capital: 1,173 commercial mortgages and 952 bank loans. The paper finds that diversification across different property types does indeed dependably reduce the cost of these different types of debt. The effect is about 7 basis points for bank loans if a firm’s property Herfindahl Index is lowered by one standard deviation and this effect gets stronger for REITs with worse financial health – as measured by the interest coverage ratio. The corresponding effect for commercial mortgages is around 22 basis points for collateral diversification by property type. After the crisis, the salience of the collateral asset increases. For diversification across regions, we do not find a consistent relationship between real asset diversification and loan pricing.
The Economic Effects of Owner Distance and Local Property Management in US Office Markets
2016, Journal of Economic Geography, with Piet Eichholtz and Rogier Holtermans.
Using a large dataset of US offices we analyse the relationship between investors’ distance to their assets and the effective rent of these assets, and study the extent to which property managers can influence this relationship. We construct hedonic rent models to control for other known rent determinants. It turns out that proximity matters: holding everything else constant, investors located closely to their office buildings are able to extract significantly higher effective rents from these assets, especially if these buildings are of low quality. This effect is due to significant differences in occupancy levels. Interestingly, property managers can affect this relationship, mitigating the adverse effects of investor distance on effective office rents. Especially if the owner does not reside in the same state as the building, external property management is of importance, most prominently so for class-B office buildings.
CEO Overconfidence, REIT Investment Activity, and Performance
2015, Real Estate Economics, with Piet Eichholtz.
This is the first paper to study the effects of overconfidence on trading activity and performance in real estate. We find that REITs with overconfident CEOs tend to invest more: these REITs acquire more assets and are less likely to sell assets than their counterparts if they have enough discretionary cash. Valuable private information is not the main driver for CEOs to be net buyers of company shares: the shares of their companies perform relatively weakly. Additionally, we find that overconfident managers have lower property investment performance measured by NOI and gain on sale of real estate.
Portfolio Greenness and the Financial Performance of REITs
2012, Journal of International Money and Finance, with Piet Eichholtz and Nils Kok.
This paper investigates the effects of the energy efficiency and sustainability of commercial properties on the operating and stock performance of a sample of US REITs, providing insight into the net benefits of green buildings. We match data on LEED- and Energy Star-certified buildings with detailed information on REIT portfolios and calculate the share of green properties for each REIT over the 2000–2011 period. We document that the greenness of REITs is positively related to operating performance but no significant relationship between the greenness of property portfolios and abnormal stock returns, suggesting that stock prices already reflect the higher cash flows deriving from investments in more efficient properties. However, REITs with a higher fraction of green properties display significantly lower market betas.
REIT Environmental Performance and the Cost of Equity
2018, The Routledge REITs Research Handbook Edited by David Parker, Routledge Taylor and Francis, with Peter Barron and Piet Eichholtz.
This study investigates the relationship between sustainability and the cost of equity capital for listed US equity REITs. For 211 U.S. REITs, we measure sustainability using the two leading energy labelling programs, LEED and Energy Star, and find that the sustainability of REITs’ portfolios is strongly property driven, with office REITs being most sustainable. We assess cost of equity using four individual implied cost of equity models based on earnings per share forecasts, from which we then take the average. We regress cost of equity estimates on the sustainability measures and relevant control variables, and find a statistically significant relationship between the cost of equity capital and REIT greenness. Overall, we document a 38-bps average reduction in the cost of equity when a REIT would have a 100% certified portfolio, as compared to a completely uncertified one. These results are robust to different specifications and approaches.
Real Estate, Governance, and the Global Economic Crisis
2011, Corporate Governance Failures: The Role of Institutional Investors in the Global Financial Crisis Edited by James P. Hawley, Shyam J. Kamath, and Andrew T. Williams, University of Pennsylvania Press, with Piet Eichholtz and Nils Kok.
We study the influence of the recent crisis on the relation between corporate governance and the performance of listed property companies in the US. We find that firm-level corporate governance did not influence performance of real estate equity investments before the crisis, but the structure of corporate governance has become an important performance driver of real estate equity investments during and after the market downturn. One of the interpretations is that institutional investors have just started to recognize the importance of transparency in real estate equity investments during the recent crisis, which is fully consistent with the herd investments in securitized debt products, where opacity of the investments was so blissfully ignored.