Is COVID Revealing a Virus in CMBS 2.0? (with John M. Griffin)

Journal of Finance, Volume 78, Issue 4 (2023)

Media Coverage: Wall Street Journal, The Intercept

Commercial loan valuations crucially depend on accurate loan income, but underwritten income on CMBS loans is commonly overstated relative to actual property income. Consistent with these differences being originator specific, income overstatement in CMBS 2.0 deals varies widely and persistently across originators, is priced by originators, related across property types within an originator, predictable ex-ante, and accompanied by inflation of past financials. Risk-retention and associated regulation had no discernable effect on income overstatement. Originator income overstatement is highly predictive of pre- and COVID-period loan distress. Overall, recent market stresses reveal large systemic differences in underwriting standards across originators. 

Does Credit Supply Affect Real Estate Cap Rates? 

Does credit availability explain large cross-sectional variation in commercial real estate valuations? Financial theory and industry participants emphasize that cap rates reflect investor expectations of cash flow risk and growth. Yet, properties with observationally similar cash flows experience considerably different cap rates. I document that significant variation in property cap rates can be explained by the supply of local credit. Properties in markets with greater credit supply have significantly higher valuations; exogenous exit of a local lender predicts decreased property values of 5.5%. On the intensive margin, variation in average originator underwriting standards explains economically important differences in property cap rates and valuations across markets. Competition for lending business appears to explain originator behavior. Originators underwrite loans more aggressively when competitors have looser underwriting standards.

Not In My Back Yard! The (Non) Effects of Data Centers on Home Prices 

Data centers have become a focal point of local opposition in the United States, with communities citing environmental, noise, and aesthetic concerns. Using a novel dataset of air permit issuances in Virginia matched to ZIP code–level home price indices, this paper estimates the causal effect of data center permitting on nearby residential property values in a difference-in-differences framework. Across multiple specifications and event-study designs, the estimated effects are economically small and slightly positive, providing no evidence of large negative impacts of data centers on home prices. Confidence intervals rule out substantial price declines, and results are similar for recent permits associated with AI-related facilities. Overall,the findings suggest that data center development appears to have little measurable impact on local housing prices. 

What Constrains Medicare Fraud The Role of Firm Culture in Nursing Homes (with John M. Griffin)

Reject and Resubmit, Journal of Financial Economics

We uncover persistent variation in Medicare billing intensity that is not explained by sicker patients, patient selection, or coding completeness, but by systematic upcoding of specific comorbidities absent in the immediately preceding hospital stay. Substantial cross-sectional variation in upcoding is largely unrelated to factors emphasized in the literature such as billing regimes, enforcement, and competition. Upcoding appears driven by firm-wide practices that spread across facilities within skilled nursing facility (SNF) firms and through rapid acquisitions. For-profit and private equity firms have higher upcoding on average, but wide differences across firms of all ownership types underscore the importance of firm-level ethos.  

Overbilling and Killing? An Examination of  the Skilled Nursing Industry (with John M. Griffin)

Skilled Nursing Facility (SNF) systems that provided excess rehab therapy just above revenue thresholds quickly begin upcoding previously unidentified comorbidities under the new PDPM billing regime. Patients at these opportunistic systems develop more than 50% greater preventable conditions and have twice as many verified reviews indicating abuse. Opportunistic systems mask adverse outcomes through underreporting to CMS. Instrumental variable estimates indicate that opportunistic SNF systems are responsible for an additional 35,000 hospitalizations and 30,000 deaths since PDPM was enacted, while overbilling Medicare $4.3 billion. Opportunistic SNF systems are spreading with more than 2.5 times the acquisition rate of accurate billing systems.

Are Low Cap Rate Properties Less Risky? Evidence from Property-Level Cash Flows