Preliminary and Incomplete Deviations between Stock Price and Fundamental Value for Real Estate Investment Trusts

We document that real estate investment trust (REIT) stock prices deviate from net asset values (NAV), as measured by Green Street Advisors, a buy-side research firm. Using REIT data since 1990, we find large positive excess returns to a strategy of buying stocks that trade at a discount to NAV, and shorting stocks trading at a premium to NAV. Estimated alphas are between 1.2% and 1.8% per month, with little risk. Trading costs and short-sale constraints are not prohibitive. We find that some variation in P/NAV makes sense, as premiums are positively related to recent and future NAV growth. However, there appears to be too much variation in P/NAV, giving rise to potential profits from trading on mean reversion. These results are clearly related to similar findings in the closed-end fund literature. However, REITs have much higher institutional ownership. Thus, it is unlikely that these premiums and discounts reflect the investor sentiment hypothesis of Lee, Shleifer, and Thaler (1991).