Recent evidence suggests that the variation in the expected excess returns is predictable and arises from changes in business conditions. Using a multifactor latent variable model with time-varying risk premiums, we decompose excess returns into expected and unexpected excess returns to examine what determines movements in expected excess returns for equity REITs are more predictable than all other assets examined, due in part to cap rates which contain useful information about the general risk condition in the economy. We also find that the conditional risk premiums (expected excess returns) on EREITs move very closely with those of small cap stocks and much less with those of bonds.Recent evidence suggests that the variation in the expected excess returns over time is predictable and is the result of changes in business conditions. 1 We offer further evidence on this issue by extending the previous literature to include real estate, particularly equity real estate investment trusts (EREITs). 2 What is unique about EREITs is that it is traded as a stock on a stock exchange but represents an underlying ownership in a portfolio of real estate. This feature raises the possibility that different variables may be required to capture the time variation in its risk premiums relative to those for bond and non-REIT stocks. Another issue related to the hybrid nature of EREITs is whether EREITs are a hybrid of stocks and bonds and whether the stock component is representative of large cap stocks or small cap stocks. More specifically, the questions addressed in this article include: (1) Do the same variables forecast stocks, bonds, and real estate returns so that the expected returns (conditional risk premiums) on these assets move together? In particular, do cap rates carry information about the conditional risk premium for equity REITs but no other asset class? (2) Is the variation in the expected returns on equity REITs related to business conditions? (3) To what extent do REITs resemble stocks with large capitalizations, stocks with small capitalizations, and bonds?While Mengden and Hartzell (1986), Giliberto (1990), and Corgel and Rogers (1991), among others, have studied the hybrid nature of REITs in the past, none of these studies

This article tests the ability of traditional capital structure theories to explain the issuance decisions of real estate investment trusts (REITs). For issuances made between 1997 and 2006, we find strong support for the market timing theory of capital structure. Controlling for past returns and growth, a REIT is more likely to issue equity when its price-to-net asset value ratio is high. This suggests that REITs issue equity in public markets when the cost of equity capital is lower in the public market than in the private market. Consistent with traditional market timing, REITs are more likely to issue equity after experiencing large price increases. We also find some support for REITs following the trade-off theory of capital structure. REITs are less likely to issue debt when proxies for expected bankruptcy costs are high. Copyright (c) 2009 American Real Estate and Urban Economics Association.

The current study investigates whether the commercial real estate market is segmented from the stock market using the framework of Jorion and Schwartz (1986). Evidence is found to support the hypothesis that segmentation does exist as the result of indirect barriers such as the cost, amount, and quality of information for real estate rather than legal constraints. However, this evidence is contingent on whether real estate returns are computed with appraised values or imputed sale prices and on which market proxy is chosen.

There is substantial evidence that insider trading is present around corporate announcements and that this insider trading is motivated by private information. Using real estate investment trusts that choose to reappraise themselves as our sample, we establish that the appraisals contain information, but find no market response to the public announcement of this information in these appraisals. We consider two possible explanations for this inconsistency: the first that the appraisal information is not highlighted in earnings reports and hence remains unobserved; and the second that insiders trade on the appraisal information in the time that elapses between the appraisal and its public announcement We find strong support for the second hypothesis, with insiders buying (selling) after they receive favorable (unfavorable) appraisal news, especially for negative appraisals. We also find that positive (negative) appraisals and net insider buying (selling) elicit significant positive (negative) abnormal returns during the appraisal period.

This paper empirically analyzes REIT mutual funds. We show that, contrary to most mutual fund studies, the average and median alphas (net of expenses) are positive. We also find that time-varying positive alphas are much more likely to occur when the real asset market is performing poorly, suggesting that managers add more value in down markets than in up markets. We examine the cross-sectional determinants of both standard alphas and the average of time-varying alphas and find that both increase with assets and turnover. Cross-sectionally, we find that actively managed funds have higher alphas than passively managed funds.