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Betting Against the Sentiment in REIT NAV Premiums

Author

Listed:
  • Mariya Letdin

    (Florida State University)

  • Stace Sirmans

    (Auburn University)

  • G. Stacy Sirmans

    (Florida State University)

Abstract

We dissect REIT NAV premiums and examine their relation to expected returns. More than half of the cross-sectional variation in NAV premiums can be explained by readily observable company characteristics, such as size, property type, location, leverage, and profitability. We empirically decompose NAV premiums into characteristics-driven (fitted) and sentiment-driven (orthogonalized) components. The transient, sentiment-driven component of NAV premiums is strongly negatively related to future returns, whereas the stable, characteristics-driven component is a very weak positive predictor of returns. A long-short investment strategy that purchases (sells short) REITs with the lowest (highest) sentiment- driven NAV premiums generates 9% per year, which is 3% per year more than a strategy based on the raw NAV premium. These results shed light on the role of investor sentiment in REIT pricing and have important implications for REIT active investment management.

Suggested Citation

  • Mariya Letdin & Stace Sirmans & G. Stacy Sirmans, 2022. "Betting Against the Sentiment in REIT NAV Premiums," The Journal of Real Estate Finance and Economics, Springer, vol. 64(4), pages 590-614, May.
    • Handle: RePEc:kap:jrefec:v:64:y:2022:i:4:d:10.1007_s11146-020-09803-3
    DOI: 10.1007/s11146-020-09803-3
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