Wall Street versus Main Street: Valuing securitized assets.

Abstract

Real Estate Investment Trusts (REITs) are similar to closed-end mutual funds and concentrate their investment portfolios in real estate holdings. REITs provide an unique laboratory for the study of valuation, management contracts, capital structure and diversification in corporations since it is possible to estimate the intrinsic value of the underlying real estate assets with precision. A model for REIT property asset valuation (Main Street valuation) is developed based upon value additivity and irrelevant capital structure assumptions. The stock market valuation of REITs (Wall Street valuation) above the values of the underlying properties (the Main Street valuation) is measured by premiums, which is used to test proposed hypotheses. The market values externally advised REITs lower than self-administered REITs. Financial leverage in the absence of corporate tax advantage of debt financing impacts REIT value negatively and most of the leverage effect occurs between the first and second quartiles of leverage. The market places higher values on focused REITs and lower values on diversified REITs. REIT market liquidity, measured by firm size, volume of trade, or dollar volume of trade, has a positive impact on the market value of REIT shares.