Understanding the determinants of firm growth in young REITs

Radheshyam Gopinath

ERES from European Real Estate Society (ERES)

Abstract: The main objective of this paper is to investigate the determinants of firm growth in young REITs with the view that REITs with its unique operating environment may have different implications for new venture growth. This study aims to (a) document growth characteristics of REITs, (b) empirically examine different growth determinants of REITs, (c) explore different growth strategies adopted by REITs, and (d) investigate the dual relationship between growth and profitability in REITs. To start with, we explore the heterogeneity of the growth trajectories adopted by young REITs by examining the distribution of firm growth rates. REITs experience spurts of high growth when they are young i.e. they are less than five years old. Also, new REITs that grow at higher rates in early years survive longer, but this rapid growth is not sustainable in the longer run. We provide evidence that REITs usually achieve growth in three different ways: organic, acquisition and property development. Acquisitions have been the preferred route for REITsí external growth as development is considered to be risky. Also, development activities are undertaken primarily by large and established REITs. The pattern of growth differs across REITs based on demographic characteristics, financing choices and property types. We use GMM-system‚ estimator to test a dynamic panel data model of firm growth that overcomes the problems of endogeneity, unobserved firm-specific effects and persistence. Using data on 148 US public equity REITs that had its IPO during the period 1993-2005, we find that REIT growth is inversely proportional to REIT size, age and leverage and directly related to cash flow and insider ownership. These factors explain the differential growth observed in REITs. We also find positive persistency in growth rates in young REITs. Finally, we find a small positive influence of profit rates on subsequent growth and a positive and significant reciprocal influence of growth on profits.

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2012-01-01
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Citations: View citations in EconPapers (1)

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