REIT Growth, Valuation and Performance

Abstract

The extent to which a real estate investment trust’s (REIT’s) physical growth is related to market valuation and performance is examined. Using a sample of U.S. equity REITs over the 1995–2020 period, we measure a REIT’s growth as the growth of its total area in square feet (or, alternatively, its number of properties) and find that fast-growing REITs, while able to increase cash flows, are unable to increase such cash flows with equal proportionality with the expansion of their physical footprint. In essence, the growth in cash flow while positive is lower than the growth in square feet or number of properties. Moreover, we find no evidence that growth alone is associated with stock performance. However, we show that rapidly growing REITs are associated with higher market valuation, measured by capitalization rates, Price/FFO ratio, and firm Q. These findings suggest that capital structure, managerial actions and potential for improved property level performance associated with scale rather than physical growth alone play major roles in REIT valuation. Overall, our findings are aligned with expectations for market efficiency in a highly transparent asset group such as equity REITs.