Given the current financial crisis, we explore the impact that tenant bankruptcies have on the risk and return performance of their publicly traded landlord. We focus on retail REITs since the contracting mechanism associated with retail leases has several options such as percentage rents and co-tenancy provisions that are not found in leases for other property types. Ex-ante, we argue that the performance of a landlord will depend on which option dominates given that a departure of an anchor or key tenant from a center affords the landlord with a growth option, the opportunity to adjust rents to market. Utilizing an event study approach, we find significant abnormal negative returns follow the bankruptcy of a tenant in general which is consistent with the market perceiving that tenants will take advantage of the co-tenancy option. However, we also find that there are some situations where the growth option is in the money and thus abnormal returns are positive particularly in markets that have a more diversified economic base.
Liu, C. L., & Liu, P. (2011). Is what’s bad for the goose (tenant), bad for the gander (landlord): A retail real estate perspective [Electronic article]. The Center for Real Estate and Finance Working Paper Series, 2011-003, 1-22.