The following summary is from our academic alpha database at http://alpha.turnkeyanalyst.com/ideas/55.
Title: Corporate Real Estate Holdings and the Cross Section of Stock Returns
Authors: Selale Tuzel
Category: Equity alpha
Alpha remarks: Table 6 suggest an annual alpha of 8.22%, ~68bp monthly, for VW long/short portfolios
Blog link: N/A
This article explores the link between the composition of firms’ capital and stock returns. I develop a general equilibrium production economy where firms use two factors: real estate and other capital. Investment is subject to asymmetric adjustment costs. Because real estate depreciates slowly, firms with high real estate holdings are more vulnerable to bad productivity shocks and hence are riskier and have higher expected returns. This prediction is supported empirically. I find that the returns of firms with a high share of real estate capital exceed that of low real estate firms by 3–6% annually, adjusted for exposures to the market return, size, value, and momentum factors. Moreover, conditional beta estimates reveal that these firms indeed have higher market betas, and the spread between the betas of high and low real estate firms is countercyclical.
- Compute Rental Expense/Gross PPE and eliminate firms with greater than 5%
- Compute the RER for every firm: RER= (building & cap leases/PPE(firm) – building & cap leases/PPE(industry))
- Go long Higher RER firms and go short low RER firms
- Capture a 8.22% annualized alpha (see table 9)
- Make money
- Equal-weight results show alphas in the 4-6% range for all quintiles, suggesting that the effect might be driven by large firms.
- Alphas are small, especially when they are industry-adjusted (see table 7)
- Alphas can be enhanced if the investor excludes firms that have rental expense/Gross PPE that is greater than 5%.
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