REIT Selection and Portfolio Construction: Using Operating Efficiency as an Indicator of Performance

Abstract

Executive Summary. A Real Estate Investment Trust (REIT) selection and portfolio construction criteria is developed based on REIT operating efficiency and pricing multiples (price-to-net asset value). Portfolios of REITs are constructed of REITs that have relatively high operating efficiency but are trading at a relatively low price. The results show that these portfolios, constructed with the use of filtering criteria, have superior first year performance in all cases, with an average excess return of 600 basis points compared to the NAREIT Equity Index. In most cases, the REITs also had superior second and third year performance, suggesting performance persistence. Further research is needed to examine if the filter works better with more frequent portfolio rebalancing and if the criteria can be used to effectively execute a short sale strategy.