Introducing 'Focused Firms': Implications from REIT Prime Operating Revenue

The Journal of Real Estate Finance and Economics, Forthcoming

43 Pages Posted: 13 May 2021 Last revised: 26 Aug 2021

See all articles by Zifeng Feng

Zifeng Feng

The University of Texas at El Paso

Peng Liu

Cornell University - S.C. Johnson College of Business - School of Hotel Administration

Date Written: May 26, 2021

Abstract

We examine the relationship between a firm’s main business focus and its risk and performance, using the unique settings of U.S. equity real estate investment trusts (REITs). In this paper, a REIT’s prime operating revenue ratio (POR) is measured as the ratio of rental revenue to total revenue. The empirical results show that REITs that earn more revenue from their prime business—property rentals—are less apt to take on risk but also achieve higher operational performance in the cross-section and over the medium term. The magnitudes of these results in a market crisis period are even stronger than in normal times. We also find evidence that REITs with higher POR are associated with less information asymmetry, higher operational efficiency, and higher market value. We also use three alternative REIT business focus measures based on their assets, expenses, and income. The results are qualitatively and quantitatively similar. To investigate why some REITs focus to a greater extent on non-prime businesses, the paper provides evidence that REIT executives receive, on average, higher pay when their firms engage more extensively in other businesses, and larger REITs are more likely to explore non-rental-revenue businesses. Lastly, we use the coronavirus pandemic as a quasi-experimental setting and provide evidence that REITs that have earned higher POR in recent years generally achieve better operational performance and reduce risk during the first three quarters of 2020. In sum, the results suggest that a REIT’s focus on its prime business generally leads to greater profitability and lower risk.

Keywords: Prime Operating Revenue, Business Focus, Performance, Risk, REIT

JEL Classification: G11, J24, R30

Suggested Citation

Feng, Zifeng and Liu, Peng, Introducing 'Focused Firms': Implications from REIT Prime Operating Revenue (May 26, 2021). The Journal of Real Estate Finance and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3845034

Zifeng Feng (Contact Author)

The University of Texas at El Paso ( email )

500 W. University Ave.
El Paso, TX 79968
United States

HOME PAGE: http://https://sites.google.com/view/zifeng-feng/home

Peng Liu

Cornell University - S.C. Johnson College of Business - School of Hotel Administration ( email )

448 Statler Hall
Ithaca, NY 14853
United States
6072542960 (Phone)

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