 |
Benchmarks New Kid on the Block Does the REIT market really need another index? by Barry Vinocur |
Methodology
In a white paper introducing the index, Cohen & Steers explained how it was put together:
The construction process began by screening out smaller REITs—those with a market capitalization below $500 million. The second step was to screen out the less liquid REITs—those that did not have an average trading volume of at least 600,000 shares per month for the previous six months. The third step was subjective. Cohen & Steers reviewed the securities that met the first two tests and selected 30 REITs that best represented the firm's investment thesis.
| ||||||||||||||||||||||||||||||||||||||||||
Using the weightings determined in the initial index construction, the index divisor was calculated to yield an initial index value of 250 at the close of trading on December 31, 1998. Quarterly thereafter, the index is rebalanced to compensate for changes in shares outstanding and to enforce the maximum 8 percent weighting limit. The shares outstanding for each component stock in the RMP Index remain fixed between quarterly rebalancings except in the event of certain corporate actions. These include payment of dividends other than ordinary cash, stock distributions, stock splits, reverse stock splits, rights offerings, distributions, reorganizations, recapitalizations, or similar events with respect to the component stocks. Weightings are not adjusted for share issuance or repurchases unless they change the total shares outstanding by more than 5 percent.
In the case of a merger or spinoff, Cohen & Steers adjusts the stock's weighting if the change in shares outstanding is more than 5 percent. In the case of a spinoff, the new company is not automatically included in the index. Whenever the shares outstanding are adjusted for any security, its new weighting is subject to the maximum 8 percent limit. Whenever practicable, new shares outstanding figures will be made available three to five days before the effective date of the change.
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The RMP Index is calculated and maintained by the AMEX in consultation with Cohen & Steers Capital Management. Cohen & Steers may suggest changes in the industry categories represented in the index or changes in the number of component stocks in an industry category to properly reflect the changing conditions of the real estate securities market. In addition, Cohen & Steers may advise the AMEX on treatment of unusual corporate actions. Routine corporate actions, such as stock splits or stock dividends that require mechanical index divisor adjustments, are expected to be handled by the AMEX staff without consultation.
When possible, all stock replacements and unusual divisor adjustments caused by the occurrence of extraordinary events, such as dissolution, merger, bankruptcy, nonroutine spinoffs, or extraordinary dividends, are made by the AMEX in consultation with Cohen & Steers. In cases where a replacement is needed, stocks are selected from a replacement list provided to the AMEX each quarter by Cohen & Steers. Actual selections from this list are made by the AMEX. As soon as the AMEX receives the replacement list, and before a selection is made, the list will be made available to the AMEX's list of interested parties. In selecting replacement stocks, the minimum market capitalization and trading volume requirements must be met. The weighting of the new security will then be set according to its market capitalization subject to the maximum 8 percent limit.
Constituent weightings are rebalanced quarterly to compensate for changes in shares outstanding and to adhere to the maximum 8 percent weighting limit. This is performed as of the close of trading on the third Friday of February, May, August, and November. The same modified capitalization weighting method described earlier is used to calculate the weightings of each component stock. The market capitalizations are calculated using current shares outstanding figures and the primary market prices from the first Friday of the same month. A two-week lag is provided so that any interested parties have sufficient time to receive the new weightings before they take effect.
Initially, each constituent in the RMP Index must have a market capitalization of at least $500 million and average trading volume of at least 600,000 shares per month for the previous six months to qualify. On a quarterly basis, any security that has fallen below a market capitalization of $400 million or has average trading volume less than 500,000 shares per month for the previous six months will be removed from the index. The quarterly review criteria are less stringent than the initial criteria in order to provide a buffer, thereby avoiding unnecessary turnover resulting from a security that may have temporarily moved below the minimum requirements.
In a recent issue, Realty Stock Review (Property's sister publication) observed that it remains to be seen whether the investment thesis underlying the Cohen & Steers UIT and the index will be borne out over time.
"We doubt that others will embrace the index for a variety of reasons, including competitive reasons, and perhaps most importantly because its underpinnings are an investment thesis."
In a final observation, Realty Stock Review noted that if Cohen & Steers (or a third party) takes the next step and creates a derivative linked to the index, this story could become a lot more interesting.