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Abstract
The SEC requires publicly traded REITs to discuss commercial real estate market conditions in their financial statements in order to provide REIT investors with decision-relevant information. We investigate whether the textual tone in REIT financial statements (10-K/10-Q) can be used to predict future commercial real estate returns. In our empirical investigation, we focus on forward-looking tone, i.e., tone that cannot be explained by a REIT’s past performance. We extract textual tone from quarterly REIT financial statements over the period from 2002 to 2017 by using both a generic finance dictionary and a new, REIT-specific dictionary. We then employ a regime-switching methodology to assess the informative value of forward-looking tone for commercial real estate returns in the next quarter. We find that in periods of poorly performing real estate markets the forward-looking tone in REIT financial statements predicts total returns in the next quarter. This effect is driven by capital returns and is most pronounced for apartment and retail. Our findings suggest that the tone in REIT financial statements can help improve the information environment for commercial real estate investors.
Notes
1 For more information on SEC comment letters and REITs, please see Schrand et al. (2021).
2 For an overview of the framing literature, see Levin et al. (1998).
3 RapidMiner has been used for textual analysis in a variety of disciplines. For a list of studies using this software, please visit: https://scholar.google.de/scholar?cites=8123454278324720182&as_sdt=5,46&sciodt=0,46&hl=en
4 The dictionary is available upon request.
5 For the positive and negative word lists, please visit: https://sraf.nd.edu/textual-analysis/resources/#LM%20Sentiment%20Word%20Lists