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This paper examines how a concentrated tenant base affects the operating performance and market valuations of US REITs. We observe that REITs adopting a concentrated tenant base present higher corporate cash flows and lower expenses. However, we identify a concentration discount effect that REITs with a more concentrated tenant base experience lower market valuations. We argue that this concentration discount is a result of the trade-offs between the impacts of the tenant base on the operating performance, risk levels and growth potentials. We find that a concentrated tenant base is associated with higher liquidity risk and lower dividend growth, resulting in an inflated discount factor. Our findings are not subject to sub-samples of focused or diversified REITs and stay robust after correcting for the selection bias as well as controlling for the lease structure, tenant quality and anchor tenant effect.r

Concentrate or diversify? The relationship between tenant concentration and REIT performance