Concentrate or diversify? The relationship between tenant concentration and REIT performance

Chen Zheng () and Bing Zhu ()
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Chen Zheng: University of Reading
Bing Zhu: Technical University of Munich

Review of Quantitative Finance and Accounting, 2021, vol. 57, issue 3, No 4, 899-927

Abstract: Abstract This paper examines how a concentrated tenant base affects the operating performance and market valuations of US REITs. We observe that REITs adopting a concentrated tenant base present higher corporate cash flows and lower expenses. However, we identify a concentration discount effect that REITs with a more concentrated tenant base experience lower market valuations. We argue that this concentration discount is a result of the trade-offs between the impacts of the tenant base on the operating performance, risk levels and growth potentials. We find that a concentrated tenant base is associated with higher liquidity risk and lower dividend growth, resulting in an inflated discount factor. Our findings are not subject to sub-samples of focused or diversified REITs and stay robust after correcting for the selection bias as well as controlling for the lease structure, tenant quality and anchor tenant effect.r

Keywords: Tenant concentration; REIT performance; REIT valuations; Herfindahl index (search for similar items in EconPapers)
JEL-codes: G30 G32 L25 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s11156-021-00965-6

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