Performance Differences in Property Type Diversified Versus Specialised Real Estate Investment Trusts

As interest in REIT shares grows among individual and institutional investors alike, questions surrounding the comparative performance of different types of REITs have taken on added importance. The corporate finance literature has produced some evidence that diversified firms trade at a discount to otherwise comparable specialized firms. The same organizational structures exist within equity REITs, as some are diversified across property types while others are very specialized with respect to the type properties they own and operate. However, no research to date has addressed whether a similar diversification discount might exist among equity REITs. Stated differently, do diversified REITs outperform property specific types of REITs? In order to make this determination we propose to test for performance differences among equity REITs. Using a sample of 75 equity REITs tracked over an 8 year period, we test for the existence of a diversification discount using a single-factor Jensenís Alpha, Treynor Index, Sharpe Ratio, and ìDoubleî Sharpe Ratio, which was first proposed by Vinod and Morey (1999). For Jensenís Alpha and the Treynor Index, we also compute results from a multifactor market model that accounts for inflation so to investigate whether any differences in performance observed with a single-factor model disappear when an alternative return model is specified. Since Roll (1977, 1978) famously argued that the choice of market proxy matters in performance ranking studies, we utilize four standard market proxies in testing for performance differences.