Working Paper: NBER ID: w10850
Authors: William M. Gentry; Charles M. Jones; Christopher J. Mayer
Abstract: Real estate investment trust (REIT) stock prices deviate substantially from net asset values (NAV). Using REIT data since 1990, we find large positive excess returns to a strategy of buying stocks that trade at a discount to NAV, and shorting stocks trading at a premium to NAV. Estimated alphas from this strategy are between 0.9% and 1.8% per month, with little risk. Trading costs and short-sale constraints are not prohibitive and the results strengthen when we control for differences in liquidity or the extent of institutional ownership. We find that some variation in P/NAV makes sense, as premiums are positively related to recent and future NAV growth. However, there appears to be too much volatility in P/NAV, giving rise to potential profits from short-term mean reversion. The closed-end fund literature has some similar findings on stock price deviations from fundamental value, but compared to closed-end funds REITs are much larger and have much higher insider and institutional ownership. These differences suggest that REIT premiums and discounts reflect more than just small investor sentiment, which is a common explanation of why closed-end fund prices deviate from their fundamental value.
Keywords: REITs; stock prices; fundamental value; NAV; mean reversion
JEL Codes: G0; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price-to-NAV (pNAV) (G19) | future stock returns (G17) |
| price-to-NAV (pNAV) (G19) | NAV growth (E01) |
| buying REITs trading at a discount to NAV (R33) | positive excess returns (G11) |
| shorting REITs trading at a premium to NAV (G14) | positive excess returns (G11) |
| high pNAV stocks (G12) | lower subsequent returns (G12) |
| low pNAV stocks (G12) | higher subsequent returns (G11) |
| premiums (G22) | future NAV growth (O49) |