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Green Properties and
           the Financial Performance of REITs


   Piet Eichholtz            Nils Kok              Erkan Yönder
Maastricht University   Maastricht University   Maastricht University




                         Tilburg University
                          December 2011
Growing interest in green properties
Financial performance of green properties
green properties generate economic premiums

 Green properties generate economic premiums (Eichholtz, Kok, and
   Quigley, 2010).
       Premiums of rents are 5% for LEED-certified and 3% for Energy-Star-certified
        buildings.
       11% and 19%, respectively, for transaction prices


 Fuerst, McAllister, 2011; Miller, Spivey, Florance, 2008; Wiley, Benefield,
   Johnson, 2010

 Premiums to certified buildings have not significantly been affected
   between 2007 and 2009. (Eichholtz, Kok, and Quigley, 2011)

 Higher occupancy, energy savings, increased economic lives, lower risk
   (reduced depreciation) (Eichholtz, Kok, and Quigley, 2011)
Corporate social responsibility (CSR) and corporate
financial performance
 Greater loyalty of employees, customers and local communities
   (Ribstein, 2005)

 Growth in charitable contributions is positively related to subsequent
   revenue growth. (Lev, Petrovis, and Radhakrishnan, 2010)

 Improved reputation (Turban and Greening, 1997)

 The slack resource theory (Waddock and Graves, 1997)
       The issue of causality


 Margolis, Elfenbein and, Walsh (2007)
       Overall positive relation between CSR and financial performance
       The literature does not provide firm conclusions regarding the direction of
        causality
Portfolio greenness and financial performance
…has not been (sufficiently) documented


 The aim of the paper is twofold:

       Identifying the green properties owned by REITs
           The first study that identifies the portfolio greenness of REITs



       Investigating the effect of portfolio greenness on the financial performance
        of REITs
           Dynamic measure of portfolio greenness

           Two channels

                Benefits at property level

                Benefits from making CSR investment

           Causality issues
Green certification
LEED and Energy Star


 LEED
      The program has been initiated by the US Green Building Council (USGBC).
      LEED covers six different components of sustainability, including energy
       performance and material selection.
      31,705 registered, 10,121 LEED-certified commercial buildings as of
       September 2011.


 Energy Star
      Founded in 1992 by the U.S. Environment Protection Agency (EPA) and the
       U.S. Department of Energy (DOE).
      Energy star evaluates the efficiency of buildings‘ energy use with respect to
       a base building of similar size and quality.
      15,146 Energy Star-labeled commercial buildings as of September 2011.
REIT property portfolios
data matching


 Using GIS software, we convert the addresses of buildings into a unique
   combination of longitude and latitude.

 Data Matching
    Step 1:        Format addresses from USGBC, EPA, SNL Financial
    Step 2:        Perfect matches
    Step 3:        Decomposing addresses of a portfolio of properties
    Step 4:        Searching for similar addresses


 Annual greenness of portfolios for each REIT
       Considering year of acquisition, sale and certification
Green buildings in the portfolios of US REITs
increasing number of green properties
                       800                                                                                                                            80
                       700                                                                                                                            70
                       600                          LEED                                                                                              60
 # of Properties




                       500                                                                                                                            50




                                                                                                                                                           # of REITs
                       400                                                                                                                            40
                       300                                                                                                                            30
                       200                                                                                                                            20
                       100                                                                                                                            10
                        0                                                                                                                             0
                                 2000       2001     2002         2003   2004     2005       2006   2007    2008      2009      2010       2011

                                 # of REITs owning Leed Certified Properties                          # of REITs owning Leed Registered Properties
                                 # of Leed Certified Properties                                       # of Leed Registered Properties
                       1000                                                                                                                           80
                        900                                                                                                                           70
                        800
                        700
                                                    Energy Star                                                                                       60
     # of Properties




                                                                                                                                                           # of REITs
                        600                                                                                                                           50
                        500                                                                                                                           40
                        400                                                                                                                           30
                        300
                                                                                                                                                      20
                        200
                        100                                                                                                                           10
                             0                                                                                                                        0
                                  2000       2001      2002       2003    2004     2005      2006   2007    2008      2009      2010      2011
                                        # of REITs owning Energy Star Certified Properties                     # of Energystar Certified Properties
Greenness measures
ratio of green properties to whole property portfolio


 We create 3 different measures of portfolio grenness:




where i stands for REIT i, t stands for year t, l stands for property l and g is
the certification, which is either LEED or Energy Star
The diffusion of green properties in REIT property
    portfolios.06
              .05
              .04
Square feet

              .03
              .02
              .01
              0




                    2000   2001   2002   2003   2004   2005   2006   2007     2008   2009   2010
                                                       Year

                                                LEED            Energy Star
Model specification
causality issues

 We apply 2 staged regression (OLS & random effects FGLS)

 Endogenous measures of greenness
      2 measures for greenness of the environment
          The weighted locational greenness (WLG)

          The weighted locational green policy (WLGPL)



   




    where i stands for REIT i, j stands for MSA j and t stands for year t
Model
greenness & financial performance

 We estimate the following equation:




where i stands for REIT i, and t stands for year t.

 Greenness stands for Number_Certified, Sqft_Certified and Score_Certified
   for both LEED and Energy Star certifications.

 Financial Performance stands for ROA, ROE, Funds from Operations
   (FFO)/Total Revenue, Alpha and Beta.

 Z covers a vector of control variables.
Operating performance – ROA
                       (1)       (2)       (3)       (4)          (5)        (6)
VARIABLES            LEED       LEED      LEED   Energy Star Energy Star Energy Star
Number_Certified 2.21*                           0.76**
(Predicted)      [1.18]                          [0.38]
Sqft_Certified               1.69*                           0.35**
(Predicted)                  [0.96]                          [0.16]
Score_Certified                        0.06*                             0.01**
(Predicted)                            [0.03]                            [0.00]
Total Assets       -0.67*    -0.68*    -0.64*    -1.05***    -0.71*      -1.04***
(in log)           [0.37]    [0.38]    [0.37]    [0.40]      [0.38]      [0.39]
Price-Book Ratio   0.01**    0.01**    0.01**    0.02***     0.01**      0.02***
                   [0.00]    [0.00]    [0.00]    [0.00]      [0.00]      [0.00]
Age                0.06**    0.05**    0.06**    0.06***     0.06**      0.07***
(years, in log)    [0.02]    [0.02]    [0.02]    [0.02]      [0.02]      [0.02]
Year-Fixed Effects      Y         Y         Y            Y           Y           Y
 Property Type          Y         Y         Y            Y           Y           Y
Constant                Y         Y         Y            Y           Y           Y
Observations       1,000     1,000     1,000     1,000       1,000       1,000
R-squared          0.17      0.16      0.17      0.17        0.17        0.17
Operating performance – ROE
                       (1)       (2)       (3)        (4)         (5)          (6)
VARIABLES           LEED        LEED      LEED   Energy Star Energy Star Energy Star
Number_Certified 5.54**                          1.85***
(Predicted)      [2.48]                          [0.69]
Sqft_Certified               4.32**                           0.75**
(Predicted)                  [2.05]                           [0.29]
Score_Certified                        0.14**                             0.02***
(Predicted)                            [0.06]                             [0.01]
Total Assets       -0.49     -0.53     -0.42     -1.41*       -0.53       -1.39*
(in log)           [0.55]    [0.55]    [0.54]    [0.78]       [0.54]      [0.77]
Price-Book Ratio   0.03***   0.03***   0.03***   0.04***      0.03***     0.04***
                   [0.01]    [0.01]    [0.01]    [0.01]       [0.01]      [0.01]
Age                0.09**    0.08*     0.09**    0.11**       0.09**      0.11**
(years, in log)    [0.04]    [0.04]    [0.04]    [0.04]       [0.04]      [0.04]
Year-Fixed Effects      Y         Y         Y             Y           Y            Y
 Property Type          Y         Y         Y             Y           Y            Y
Constant                Y         Y         Y             Y           Y            Y
Observations       1,000     1,000     1,000     1,000        1,000       1,000
R-squared          0.18      0.18      0.18      0.18         0.18        0.18
Operating performance – FFO/Total Revenue
                          (1)          (2)      (3)          (4)            (5)           (6)
VARIABLES            LEED          LEED        LEED    Energy Star   Energy Star   Energy Star
Number_Certified 16.74**                              4.81**
(Predicted)      [7.28]                               [2.36]
Sqft_Certified                  13.19**                              2.36***
(Predicted)                     [5.90]                               [0.90]
Score_Certified                              0.42**                                0.05**
(Predicted)                                  [0.18]                                [0.03]
Total Assets       2.72         2.56         2.90     0.57           2.43          0.62
(in log)           [2.62]       [2.66]       [2.59]   [3.09]         [2.60]        [3.07]
Price-Book Ratio   0.02         0.02         0.02     0.05**         0.03          0.05**
                   [0.02]       [0.02]       [0.02]   [0.02]         [0.02]        [0.02]
Age                0.08         0.05         0.08     0.14           0.08          0.14
(years, in log)    [0.18]       [0.18]       [0.18]   [0.18]         [0.18]        [0.18]
Year-Fixed Effects       Y             Y         Y             Y              Y             Y
 Property Type           Y             Y         Y             Y              Y             Y
Constant                 Y             Y         Y             Y              Y             Y
Observations       904          904          904      904            904           904
R-squared          0.45         0.45         0.45     0.45           0.45          0.45
Stock performance – Alpha
                       (1)        (2)         (3)        (4)         (5)          (6)
VARIABLES             LEED       LEED        LEED    Energy Star Energy Star Energy Star
Number_Certified   0.057                             0.024**
(Predicted)        [0.037]                           [0.012]
Sqft_Certified                0.043                              0.008*
(Predicted)                   [0.030]                            [0.004]
Score_Certified                           0.001                              0.000**
(Predicted)                               [0.001]                            [0.000]
Total Assets       -0.008     -0.008      -0.007     -0.021**    -0.008      -0.020**
(in log)           [0.006]    [0.006]     [0.006]    [0.010]     [0.006]     [0.010]
Price-Book Ratio   0.000***   0.000***    0.000***   0.001***    0.000***    0.000***
                   [0.000]    [0.000]     [0.000]    [0.000]     [0.000]     [0.000]
Age                -0.001**   -0.001**    -0.001**   -0.001      -0.001**    -0.001
(years, in log)    [0.001]    [0.001]     [0.001]    [0.001]     [0.001]     [0.001]
Year-Fixed Effects      Y             Y        Y             Y           Y           Y
 Property Type          Y             Y        Y             Y           Y           Y
Constant                Y             Y        Y             Y           Y           Y
Observations       750        750         750        750         750         750
Model Chi-squared 55.57       55.24       55.56      57.40       56.32       57.40
Stock performance – Beta
                       (1)        (2)          (3)          (4)            (5)          (6)
VARIABLES             LEED       LEED        LEED       Energy Star   Energy Star   Energy Star
Number_Certified   -0.068***                           -0.012***
(Predicted)        [0.010]                             [0.003]
Sqft_Certified                 -0.057***                              -0.007***
(Predicted)                    [0.008]                                [0.001]
Score_Certified                            -0.002***                                -0.000***
(Predicted)                                [0.000]                                  [0.000]
Total Assets       0.149***    0.150***    0.148***    0.153***       0.149***      0.153***
(in log)           [0.002]     [0.002]     [0.002]     [0.003]        [0.002]       [0.003]
Price-Book Ratio   0.000***    0.000*** 0.000***       0.000**        0.000***      0.000**
                   [0.000]     [0.000]     [0.000]     [0.000]        [0.000]       [0.000]
Age                -0.000      -0.000      -0.000      -0.000**       -0.000        -0.000**
(years, in log)    [0.000]     [0.000]     [0.000]     [0.000]        [0.000]       [0.000]
Year-Fixed Effects      Y          Y           Y            Y              Y             Y
 Property Type          Y          Y           Y            Y              Y             Y
Constant                Y          Y           Y            Y              Y             Y
Observations       750         750         750         750            750           750
Model Chi-squared 7165.64      7167.21     7165.68     7135.14        7159.13       7135.23
Main Findings
 We identify that, on average, 1% and 6% of the REIT property portfolios
   are green-certified in 2010 for LEED and Energy Star, respectively.

 We find that greenness enhances operating performance when we
   estimate ROA, ROE and FFO/Total Revenue.
       Different from analysis of financial performance of green properties, these
        measures are net of costs.


 We partially find an effect of greenness on abnormal returns.

 Greenness decreases market risk.
       Possibly, due to sustainable returns of green properties.
       Properties in the portfolios are less exposed to energy price fluctuations.

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Portfolio Greenness and the Financial Performance of REITs

  • 1. Green Properties and the Financial Performance of REITs Piet Eichholtz Nils Kok Erkan Yönder Maastricht University Maastricht University Maastricht University Tilburg University December 2011
  • 2. Growing interest in green properties
  • 3. Financial performance of green properties green properties generate economic premiums  Green properties generate economic premiums (Eichholtz, Kok, and Quigley, 2010).  Premiums of rents are 5% for LEED-certified and 3% for Energy-Star-certified buildings.  11% and 19%, respectively, for transaction prices  Fuerst, McAllister, 2011; Miller, Spivey, Florance, 2008; Wiley, Benefield, Johnson, 2010  Premiums to certified buildings have not significantly been affected between 2007 and 2009. (Eichholtz, Kok, and Quigley, 2011)  Higher occupancy, energy savings, increased economic lives, lower risk (reduced depreciation) (Eichholtz, Kok, and Quigley, 2011)
  • 4. Corporate social responsibility (CSR) and corporate financial performance  Greater loyalty of employees, customers and local communities (Ribstein, 2005)  Growth in charitable contributions is positively related to subsequent revenue growth. (Lev, Petrovis, and Radhakrishnan, 2010)  Improved reputation (Turban and Greening, 1997)  The slack resource theory (Waddock and Graves, 1997)  The issue of causality  Margolis, Elfenbein and, Walsh (2007)  Overall positive relation between CSR and financial performance  The literature does not provide firm conclusions regarding the direction of causality
  • 5. Portfolio greenness and financial performance …has not been (sufficiently) documented  The aim of the paper is twofold:  Identifying the green properties owned by REITs  The first study that identifies the portfolio greenness of REITs  Investigating the effect of portfolio greenness on the financial performance of REITs  Dynamic measure of portfolio greenness  Two channels  Benefits at property level  Benefits from making CSR investment  Causality issues
  • 6. Green certification LEED and Energy Star  LEED  The program has been initiated by the US Green Building Council (USGBC).  LEED covers six different components of sustainability, including energy performance and material selection.  31,705 registered, 10,121 LEED-certified commercial buildings as of September 2011.  Energy Star  Founded in 1992 by the U.S. Environment Protection Agency (EPA) and the U.S. Department of Energy (DOE).  Energy star evaluates the efficiency of buildings‘ energy use with respect to a base building of similar size and quality.  15,146 Energy Star-labeled commercial buildings as of September 2011.
  • 7. REIT property portfolios data matching  Using GIS software, we convert the addresses of buildings into a unique combination of longitude and latitude.  Data Matching Step 1: Format addresses from USGBC, EPA, SNL Financial Step 2: Perfect matches Step 3: Decomposing addresses of a portfolio of properties Step 4: Searching for similar addresses  Annual greenness of portfolios for each REIT  Considering year of acquisition, sale and certification
  • 8. Green buildings in the portfolios of US REITs increasing number of green properties 800 80 700 70 600 LEED 60 # of Properties 500 50 # of REITs 400 40 300 30 200 20 100 10 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 # of REITs owning Leed Certified Properties # of REITs owning Leed Registered Properties # of Leed Certified Properties # of Leed Registered Properties 1000 80 900 70 800 700 Energy Star 60 # of Properties # of REITs 600 50 500 40 400 30 300 20 200 100 10 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 # of REITs owning Energy Star Certified Properties # of Energystar Certified Properties
  • 9. Greenness measures ratio of green properties to whole property portfolio  We create 3 different measures of portfolio grenness: where i stands for REIT i, t stands for year t, l stands for property l and g is the certification, which is either LEED or Energy Star
  • 10. The diffusion of green properties in REIT property portfolios.06 .05 .04 Square feet .03 .02 .01 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year LEED Energy Star
  • 11. Model specification causality issues  We apply 2 staged regression (OLS & random effects FGLS)  Endogenous measures of greenness  2 measures for greenness of the environment  The weighted locational greenness (WLG)  The weighted locational green policy (WLGPL)  where i stands for REIT i, j stands for MSA j and t stands for year t
  • 12. Model greenness & financial performance  We estimate the following equation: where i stands for REIT i, and t stands for year t.  Greenness stands for Number_Certified, Sqft_Certified and Score_Certified for both LEED and Energy Star certifications.  Financial Performance stands for ROA, ROE, Funds from Operations (FFO)/Total Revenue, Alpha and Beta.  Z covers a vector of control variables.
  • 13. Operating performance – ROA (1) (2) (3) (4) (5) (6) VARIABLES LEED LEED LEED Energy Star Energy Star Energy Star Number_Certified 2.21* 0.76** (Predicted) [1.18] [0.38] Sqft_Certified 1.69* 0.35** (Predicted) [0.96] [0.16] Score_Certified 0.06* 0.01** (Predicted) [0.03] [0.00] Total Assets -0.67* -0.68* -0.64* -1.05*** -0.71* -1.04*** (in log) [0.37] [0.38] [0.37] [0.40] [0.38] [0.39] Price-Book Ratio 0.01** 0.01** 0.01** 0.02*** 0.01** 0.02*** [0.00] [0.00] [0.00] [0.00] [0.00] [0.00] Age 0.06** 0.05** 0.06** 0.06*** 0.06** 0.07*** (years, in log) [0.02] [0.02] [0.02] [0.02] [0.02] [0.02] Year-Fixed Effects Y Y Y Y Y Y Property Type Y Y Y Y Y Y Constant Y Y Y Y Y Y Observations 1,000 1,000 1,000 1,000 1,000 1,000 R-squared 0.17 0.16 0.17 0.17 0.17 0.17
  • 14. Operating performance – ROE (1) (2) (3) (4) (5) (6) VARIABLES LEED LEED LEED Energy Star Energy Star Energy Star Number_Certified 5.54** 1.85*** (Predicted) [2.48] [0.69] Sqft_Certified 4.32** 0.75** (Predicted) [2.05] [0.29] Score_Certified 0.14** 0.02*** (Predicted) [0.06] [0.01] Total Assets -0.49 -0.53 -0.42 -1.41* -0.53 -1.39* (in log) [0.55] [0.55] [0.54] [0.78] [0.54] [0.77] Price-Book Ratio 0.03*** 0.03*** 0.03*** 0.04*** 0.03*** 0.04*** [0.01] [0.01] [0.01] [0.01] [0.01] [0.01] Age 0.09** 0.08* 0.09** 0.11** 0.09** 0.11** (years, in log) [0.04] [0.04] [0.04] [0.04] [0.04] [0.04] Year-Fixed Effects Y Y Y Y Y Y Property Type Y Y Y Y Y Y Constant Y Y Y Y Y Y Observations 1,000 1,000 1,000 1,000 1,000 1,000 R-squared 0.18 0.18 0.18 0.18 0.18 0.18
  • 15. Operating performance – FFO/Total Revenue (1) (2) (3) (4) (5) (6) VARIABLES LEED LEED LEED Energy Star Energy Star Energy Star Number_Certified 16.74** 4.81** (Predicted) [7.28] [2.36] Sqft_Certified 13.19** 2.36*** (Predicted) [5.90] [0.90] Score_Certified 0.42** 0.05** (Predicted) [0.18] [0.03] Total Assets 2.72 2.56 2.90 0.57 2.43 0.62 (in log) [2.62] [2.66] [2.59] [3.09] [2.60] [3.07] Price-Book Ratio 0.02 0.02 0.02 0.05** 0.03 0.05** [0.02] [0.02] [0.02] [0.02] [0.02] [0.02] Age 0.08 0.05 0.08 0.14 0.08 0.14 (years, in log) [0.18] [0.18] [0.18] [0.18] [0.18] [0.18] Year-Fixed Effects Y Y Y Y Y Y Property Type Y Y Y Y Y Y Constant Y Y Y Y Y Y Observations 904 904 904 904 904 904 R-squared 0.45 0.45 0.45 0.45 0.45 0.45
  • 16. Stock performance – Alpha (1) (2) (3) (4) (5) (6) VARIABLES LEED LEED LEED Energy Star Energy Star Energy Star Number_Certified 0.057 0.024** (Predicted) [0.037] [0.012] Sqft_Certified 0.043 0.008* (Predicted) [0.030] [0.004] Score_Certified 0.001 0.000** (Predicted) [0.001] [0.000] Total Assets -0.008 -0.008 -0.007 -0.021** -0.008 -0.020** (in log) [0.006] [0.006] [0.006] [0.010] [0.006] [0.010] Price-Book Ratio 0.000*** 0.000*** 0.000*** 0.001*** 0.000*** 0.000*** [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] Age -0.001** -0.001** -0.001** -0.001 -0.001** -0.001 (years, in log) [0.001] [0.001] [0.001] [0.001] [0.001] [0.001] Year-Fixed Effects Y Y Y Y Y Y Property Type Y Y Y Y Y Y Constant Y Y Y Y Y Y Observations 750 750 750 750 750 750 Model Chi-squared 55.57 55.24 55.56 57.40 56.32 57.40
  • 17. Stock performance – Beta (1) (2) (3) (4) (5) (6) VARIABLES LEED LEED LEED Energy Star Energy Star Energy Star Number_Certified -0.068*** -0.012*** (Predicted) [0.010] [0.003] Sqft_Certified -0.057*** -0.007*** (Predicted) [0.008] [0.001] Score_Certified -0.002*** -0.000*** (Predicted) [0.000] [0.000] Total Assets 0.149*** 0.150*** 0.148*** 0.153*** 0.149*** 0.153*** (in log) [0.002] [0.002] [0.002] [0.003] [0.002] [0.003] Price-Book Ratio 0.000*** 0.000*** 0.000*** 0.000** 0.000*** 0.000** [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] Age -0.000 -0.000 -0.000 -0.000** -0.000 -0.000** (years, in log) [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] Year-Fixed Effects Y Y Y Y Y Y Property Type Y Y Y Y Y Y Constant Y Y Y Y Y Y Observations 750 750 750 750 750 750 Model Chi-squared 7165.64 7167.21 7165.68 7135.14 7159.13 7135.23
  • 18. Main Findings  We identify that, on average, 1% and 6% of the REIT property portfolios are green-certified in 2010 for LEED and Energy Star, respectively.  We find that greenness enhances operating performance when we estimate ROA, ROE and FFO/Total Revenue.  Different from analysis of financial performance of green properties, these measures are net of costs.  We partially find an effect of greenness on abnormal returns.  Greenness decreases market risk.  Possibly, due to sustainable returns of green properties.  Properties in the portfolios are less exposed to energy price fluctuations.

Editor's Notes

  1. by the increases in the supply during between 2007 and 2009by the recent downturns in the United States property markets
  2. LEED covers six different components of sustainability, including energy performance and material selection.Energy star Evaluates the efficiency of buildings‘ energy use with respect to a base building of similar size and quality.