Profitability of REIT Internationalization

Joshua A. Harris, Ph.D, CAIA Director, Dr. P. Phillips Institute for Research and Education in Real Estate University of Central Florida Dr. Joshua Harris serves as the Director of the Dr. P. Phillips Institute for Research and Education in Real Estate at the University of Central Florida where he is responsible for directing research initiatives, industry outreach, and program development. Additionally, Dr. Harris serves as a Managing Partner with the Lakemont Group, a boutique real estate and economic consultancy in Winter Park, FL, where he is responsible for executing complex consulting and asset management assignments for a select group of clients. Dr. Harris primary areas of expertise include multifamily real estate, structured finance, and private equity real estate vehicles.

Profitability of REIT Internationalization By Randy I. Anderson, Ph.D, CRE Joshua A. Harris, Ph. D, CAIA Nico Rottke, Ph. D, RICS

Profitability of REIT Internationalization –As REITs have grown, more and more have purchased assets overseas (7.22% in ‘95, to 19.70% in 2010). –Better acquisition opportunities, synergies with tenants, and general Int’l diversification are cited by managers as justification. –Do REITs offer better or worse risk adjusted returns by undertaking this endeavor? –Should U.S. based REITs buy overseas? –Does it matter where they buy overseas?

Prior Studies –Eichholtz et. al (2001) – Negative relative performance for Int’l Diversified REITs –Dastidar (2009) – Firm characteristics explain differences in performance and motivation for overseas investment (Business Segment data) –Gande et. Al (2009) – Increasing Tobin’s q with increasing percentage of foreign sales (Business Segment data) – Eichholtz et. al. (2011) – Confirms 2001 result, finds that countries who are more “transparent” offer better real estate opportunities

Prior Studies –Lambson et. al. (2004) – finds out of state buyers pay more than in state buyers of apartment buildings. –Ziobrowski et al. (1996 and 1997) – find that taxes and currency risks may make cross border real estate investing unprofitable. –Literature on int’l real estate investing for diversification (mainly via stock investments) largely supports the notion but does highlight risks (Worzala and Sirmans, 2003, and Wilson and Zurbruegg, 2003)

History of REIT Int’lization –Other accounts for 0.14%, and includes Middle East and Africa

History of REIT Int’lization –2009 only “net disposition” year, entirely due to Prologis’s China divestiture

History of REIT Int’lization –Multifamily accounts for 0.29%

REIT Classifications –D-REIT – Domestic REIT: holds only U.S. properties –F-REIT – Foreign REIT: At least one non-U.S. property (corresponds with F-PERC) –C-REIT – Canadian REIT: At least one Canadian property (corresponds with C-PERC) –E-REIT – European REIT: At least one European property (corresponds with E-PERC) –X-REIT – At least one foreign holding not in Canada/Europe (corresponds with X-PERC)

REIT Classifications –G-REIT: Global REIT: At least one holding in Canada, Europe, and one other region. –ExE-REIT: Exotic REIT: At least one foreign holding but none in Canada or Europe

Summary Statistics

Hypotheses Hypothesis 1: A REIT with any foreign holdings (F-REIT) shall have lower relative performance than a REIT with only domestic holdings (D-REIT). Hypothesis 2: As a REIT increases its percentage of foreign properties, its total return performance shall be decreasing. Alternative measures of foreign percentages and classifications are tested as well.

Data –SNL Real Estate Property Database –SNL Financial and CRSP –1995 to 2010, monthly and annual –338 Unique Firms –2575 Firm Year observations –31,632 Firm Month observations

Model 1 – ROAE Explained –Endogeneity Controls/Firm Specific Factors

Model 1 – ROAE Explained –Negative performance of international diversification present only when outside of Canada and Europe

Model 2 – ROAE Explained –Foreign Percentages Used – Same Finding

Model 3 – Excess Return –4 Factor Model + Ziman (US REIT Index) + EPRA (European Real Estate Index)

Model 3 – Excess Return –Ex-Canada/Europe effect remains

Model 4 – Excess Return –Foreign Percentages Used – Finding holds

Key Findings –FPERC Significant and Negative –Canada and Europe not a factor –Going “X” Abroad Causes the Pain –Likely increased costs and uncertain markets –Profit may be realized upon resale (Prologis Example)

Investor Implications –Focused strategy (prop type and geography) may be best –Going global may be factor of getting large –Lots of issues with cost and efficiency when getting large and going overseas –Access to Global RE is likely beneficial, just pick right vehicle (Eichholtz et. al, 2001)