REIT Factor Methodology

• Standardize each component across all REITs using z-scores
• Compute composite size score:
  $$CS_{i,t} = -\frac{1}{3}(Z_{i,t}^{\text{ME}} + Z_{i,t}^{\text{TA}} + Z_{i,t}^{\text{REV}})$$
• Negative sign ensures higher scores correspond to smaller REITs
• Sort REITs into terciles based on the composite score
• Construct value-weighted portfolios within each tercile
• Calculate size factor as:
  $$SIZE_t = R_{t}^{\text{Small}} - R_{t}^{\text{Large}}$$

• Standardize each valuation ratio across all REITs using z-scores
• Compute composite value score:
  $$CV_{i,t} = \frac{1}{3}(Z_{i,t}^{\text{OCF}} + Z_{i,t}^{\text{BE}} + Z_{i,t}^{\text{REV}})$$
• Higher scores correspond to REITs with stronger fundamentals relative to price
• Sort REITs into terciles based on the composite score
• Construct value-weighted portfolios within each tercile
• Calculate value factor as:
  $$VALUE_t = R_{t}^{\text{High Value}} - R_{t}^{\text{Low Value}}$$

Value REITs exhibit significant negative correlations with:

• Momentum (-0.540 correlation): Value REITs often have poor recent performance
• Quality (-0.604 correlation): Value REITs tend to have weaker fundamentals
• Low Volatility (-0.564 correlation): Value REITs are typically more volatile

Standalone: -0.037% monthly return (insignificant)

Multifactor Alpha: 0.67% monthly when controlling for momentum, quality, and low volatility

This demonstrates the importance of multifactor approaches in REIT value investing.

• Standardize each momentum measure across all REITs using z-scores
• Compute composite momentum score:
  $$CM_{i,t} = \frac{1}{3}(Z_{i,t}^{6M} + Z_{i,t}^{CAR} + Z_{i,t}^{12M})$$
• Higher scores correspond to REITs exhibiting stronger past returns
• Sort REITs into terciles based on the composite score
• Construct value-weighted portfolios within each tercile
• Calculate momentum factor as:
  $$MOM_t = R_{t}^{\text{Winners}} - R_{t}^{\text{Losers}}$$

Monthly Return: 0.70% (t=4.51, significant at 1%)

REIT Market Alpha: 0.84% (t=4.85, significant at 1%)

Fama-French Alpha: 0.65% (t=3.62, significant at 1%)

Annualized Sharpe Ratio: 0.69

• Standardize each quality measure across all REITs using z-scores
• Compute composite quality score:
  $$CQ_{i,t} = \frac{1}{3}(Z_{i,t}^{\text{OCF/AT}} + Z_{i,t}^{\text{ROE}} - Z_{i,t}^{\text{EV}} + Z_{i,t}^{\text{SUE}})$$
• Note: Earnings variability is subtracted as higher volatility indicates lower quality
• Higher scores correspond to REITs with strong and stable profitability
• Sort REITs into terciles based on the composite score
• Construct value-weighted portfolios within each tercile
• Calculate quality factor as:
  $$QLTY_t = R_{t}^{\text{High Quality}} - R_{t}^{\text{Low Quality}}$$

Monthly Return: 0.49% (t=2.88, significant at 1%)

REIT Market Alpha: 0.70% (t=4.00, significant at 1%)

Fama-French Alpha: 0.58% (t=3.54, significant at 1%)

Annualized Sharpe Ratio: 0.44

• Standardize each risk measure across all REITs using z-scores
• Compute composite low volatility score:
  $$CLV_{i,t} = \frac{1}{3}(Z_{i,t}^{\sigma} + Z_{i,t}^{\sigma^{\text{idio}}} + Z_{i,t}^{\beta})$$
• Higher scores correspond to REITs with lower total, idiosyncratic, and systematic risk
• Sort REITs into terciles based on the composite score
• Construct value-weighted portfolios within each tercile

To ensure equivalent risk exposure across portfolios:

• Adjust portfolio weights based on historical 12-month volatility
• $$LOWVOL_t = -R_{t}^{\text{High-Risk}} \times (1-V_t) + R_{t}^{\text{Low-Risk}} \times V_t$$
• Where $V_t = \displaystyle\frac{\sigma_{12}^{\text{Low-Risk}}}{\sigma_{12}^{\text{Low-Risk}} + \sigma_{12}^{\text{High-Risk}}}$

Monthly Return: 0.29% (t=2.86, significant at 1%)

REIT Market Alpha: 0.31% (t=2.92, significant at 1%)

Fama-French Alpha: 0.23% (t=1.98, significant at 5%)

Annualized Sharpe Ratio: 0.48

• Standardize each short-term performance measure across all REITs using z-scores
• Compute composite reversal score:
  $$CRV_{i,t} = \frac{1}{3}(Z_{i,t}^{R} + Z_{i,t}^{CGR} + Z_{i,t}^{DY})$$
• Higher scores correspond to REITs with weaker short-term past performance
• Sort REITs into terciles based on the composite score
• Construct value-weighted portfolios within each tercile
• Calculate reversal factor as:
  $$REV_t = R_{t}^{\text{Low Return}} - R_{t}^{\text{High Return}}$$

Monthly Return: 0.83% (t=5.03, significant at 1%)

REIT Market Alpha: 0.65% (t=3.71, significant at 1%)

Fama-French Alpha: 0.72% (t=4.09, significant at 1%)

Annualized Sharpe Ratio: 0.83 (highest among all factors)