Olgun Fuat Sahin, Finance, School of Business, presented the paper “Non-traded REITs” at the Academy of Finance Conference in Chicago March 25.
In this paper, I examine the differences between non-traded and traded REITs by using available financial data. I also attempt to quantify the effects of non-listing on REIT valuation. I find that many dimensions of non-traded and trades REITs are different. For example, non-traded REITs hold fewer properties, employ lower leverage, generate lower return on invested capital (ROIC) and funds from operations (FFO) and pay greater fraction of income in dividends. I do not observe significantly different dividend yields and attribute the claims of higher dividend yield on non-traded REITs to difference in dividend yield computations. I also find that non-traded REITs would have lower market-to-book multiples if they were publicly traded. Finally, I argue that non-traded REITs pose greater public policy concerns that need to be addressed. For example, a mandate on how dividends are financed would make non-traded REITs even more credible to investors. In addition, it is not clear what justifies high transaction costs associated with investing in non-traded REITs. It does not appear to be superior ROIC generated by non-traded REITs.