Cornell Study Finds Anomaly In REIT Dividend Patterns

-- Hotels, 11/16/2008 11:42:00 AM

Ithaca, NY, November 14, 2008 – An analysis of so-called “nontraded REITs” finds that their structure puts long-term investors at a disadvantage, according to a new report about hotel real estate investment funds issued by Cornell's Center for Hospitality Research. The report, “Nontraded REITs: Considerations for Hotel Investors,” finds that REITs – short for real estate investment trusts – can be an attractive buy-and-hold investment for income-oriented investors because of their high dividend payouts. However, the analysis by authors John B. (Jack) Corgel and Scott Gibson reveals that those payouts are diminished for long-term holders. The report is available at no charge from http://www.hotelschool.cornell.edu/research/chr/pubs/reports/2008.html.

“These are called nontraded REITs because shares are sold through broker-dealers, and those shares do not trade on public exchanges. The REITs that we studied were formed to purchase hotel properties,” explained Corgel, the Robert C. Baker Professor of Real Estate at the Cornell School of Hotel Administration. “Our model found that REIT returns for long-term holders diminish as a result of fixed share prices, which do not change even when the value of underlying assets appreciate. Those gains are absorbed by commissions and fees when new investors enter the picture.”

Shares of Hotel Real Estate Investment Funds Should Be Revalued to Reflect Asset-Value Changes

While Corgel and Gibson agree that the relatively high dividend payouts for hotel real estate investment funds mitigate the reduced return for long-term holders, they suggest that a more equitable approach might be to revalue the shares to reflect asset-value changes. “This would allow all investors to share in the appreciation of the underlying assets,” Corgel pointed out. “Instead, what we found is that many REITs were paying out dividends in excess of their funds from operations, which is an unstable situation.”

Corgel and Gibson's hotel REIT report offers suggestions for the due diligence that investors should apply to this investment. Gibson is a professor at the Mason School of Business at the College of William and Mary.

Thanks to the support of the Center for Hospitality Research partners listed below, all publications posted on the center's website are available free of charge, at www.chr.cornell.edu.