Bankruptcy Prediction in REITs

Abstract

Bankruptcy in many industries is a well-documented norm; however, in the real estate investment trust (REIT) industry, the related literature is very thin. This study uses the vector autoregressive (VAR), logistic, and multilinear models to detect bankruptcy in the REIT industry. The macroeconomic variables used as part of showing bankruptcy are adopted from Altman (1968), with an addition of funds from operations (FFOs). The results confirm interconnectedness among the Altman (1968) variables, including their causal nature on bankruptcy. The commonly used ratios (i.e. profitability, solvency and liquidity) confirm the declining financial health and financial positions of REIT firms during tough market conditions.

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