Comparing the financial performance of timber REITs and other REITs

- Asset pricing and GARCH models are used to assess the mean and variance of REITs.
- REITs, in general, have excess returns and behave like small and value stocks.
- The conditional volatilities of REITs rise more after good news than bad one.
- Timber REITs trade at a discount and are insensitive to macroeconomic shocks.
- Timber REITs are more subject to idiosyncratic risks.

The return and risk characteristics of three types of Real Estate Investment Trusts (REITs) in the United States are evaluated by the intertemporal capital asset pricing model (CAPM) and the multivariate generalized autoregressive conditional heteroscedasticity (GARCH) model. The three types of REITs are timber REITs, which focus on timberland management; specialized REITs, which focus on properties that are specialized in a single use; and common REITs, which consist of all REITs except specialized REITs. Results from the intertemporal CAPM demonstrate that REITs behave like procyclical small and value stocks. Results from multivariate GARCH model show that the conditional volatilities of REITs rise more after good news and REITs as a whole respond positively to past shocks. Despite being a part of specialized REITs, timber REITs have large market capitalizations and no excess returns, and are insensitive to recessionary shocks. Timber REITs have the smallest unconditional variance and are most vulnerable to idiosyncratic shocks.