Property-type diversification effects on equity REIT firm value

This paper estimates the effect of property-type diversification in equity real estate investment trusts (REITs) from 1999 to 2018, by imputing stand-alone values for individual property-types and comparing the sum of these stand-alone values to the firm’s actual value. This study is motivated by the desire to determine if REITs should undertake property-type diversification and if the diversification discount found in corporate finance literature extends to real estate. Previous literature has analyzed property-type diversification effects on REIT performance. However, as far as I am aware, this paper is the first to look at firm value and property-type diversification in REITs. I find REITs who operate in multiple property classes do not have significantly more debt than their specialized counterparts, suggesting no increase in debt capacity from diversification. Contrary to the diversification discount found by Berger and Ofek (1995), I find an implied average value gain from diversification of 12% to 20%. The estimated value gain from diversification increases as the number of property-types of a REIT increases. My results are sensitive to the inclusion of extreme excess value measures