Value relevance of performance measures of A-REITs

: net income, funds from operations, and fair values

Abstract

Australian Real estate Investment Trusts (A-REITs) a firm which provide investors exposure to large commercial property assets such as shopping centres, offices towers, and industrial buildings. Shares in A-REITs are a form of portfolio item alongside cash (T-bills), stocks and bonds. As A- REITs become popular, information on performance metrics that guide investors in their decision making becomes equally important.

Net income, funds from operations (FFO), and fair value of investment properties are accounting numbers often reported in the financial statement of A-REITs. Although there is international evidence on the value relevance of these metrics, there is a lack of empirical research on the importance of these metrics in A-REITs.

The main goal of this study is to provide an empirical assessment of the value relevance of these three commonly reported accounting figures: Net Income, FFO, and Fair Value of investment property in A-REITs.

A panel dataset comprising a sample of 61 A-REITsis used to test the value relevance of these metrics. The sample consists of A-REITs that traded on the Australian Stock Market between January 2012 to December 2021. It included both currently listed and delisted A-REITs to avoid survivorship bias. Following previous studies, the data is collected from the financial reports of the sample A-REITs for the study period. The variables are share price as a dependent variable while net income, FFO and fair values are the explanatory variables. The control variables are market capitalisation (proxy for size) and financial leverage.

The results suggest that net income is the only value relevant among the three metrics and is a better performance metric than FFO. The finding also supports the view that the statutory net income accounting number is still regarded as the most important performance metric in A-REITs. The study also finds leverage is a key factor that investors consider in addition to net income.
Overall, the research contributes to the understanding of the performance metrics and the risk and return profile of A-REITs. In particular, it contributes to the net income versus FFO debate in the international literature. The outcome of the study could provide some informed basis for investors for better decision making in investing in A-REITs.

Date of Award	2024
Original language	English
Awarding Institution	Western Sydney University
Supervisor	Hassan Gholipour Fereidouni (Supervisor)