Recent research has provided a summary of procedures for selecting and estimating beta that are assumed to be invariant to the type of company being analyzed. For companies such as real estate investment trusts, however, institutional details may dictate the use of different procedures. Specifically, U.S. REITs qualify for corporate tax exemption only by following rules that require high dividend payouts. Also, they are generally considered to be small-capitalization stocks.
We present here a review of how financial services firms calculate REIT betas. The findings indicate that these firms make no special provisions for REITs and that their different procedures for estimating beta generally yield statistically different results among the REIT sample. Then, we present a study of elements that may be important in estimating REIT cost of capital. Through a series of beta estimations, using the same companies over the same period, we tested how treatments of dividends, use of small-cap versus broad market indexes, and use of other specialized procedures influence cost-of-capital results for REITs.