Debt, Agency, and Management Contracts in REITs: The External Advisor Puzzle

Debt, Agency, and Management Contracts in REITs: The External Advisor Puzzle This study investigates why externally advised real estate investment trusts (REITs) underperform their internally managed counterparts. Consistent with previous studies, we find that REITs managed by external advisors underperform internally managed ones by over 7 percent per year. Property-level cash-flow yields are similar between the two managerial forms, but corporate-level expenses and especially interest expenses are responsible for lower levels of cash available to shareholders in externally advised REITs. We document that the higher-interest expenses are due to both higher levels of debt and to higher debt yields for externally advised REITs. We posit that compensating managers based on either assets under management or on property-level cash flows creates incentives for managers to increase the asset base by issuing debt even if the interest costs are unfavorable. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

Debt, Agency, and Management Contracts in REITs: The External Advisor Puzzle

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2000 by Kluwer Academic Publishers
Subject
Economics; Regional/Spatial Science; Financial Services
ISSN
0895-5638
eISSN
1573-045X
D.O.I.
10.1023/A:1007869019657
Publisher site
See Article on Publisher Site

Abstract

This study investigates why externally advised real estate investment trusts (REITs) underperform their internally managed counterparts. Consistent with previous studies, we find that REITs managed by external advisors underperform internally managed ones by over 7 percent per year. Property-level cash-flow yields are similar between the two managerial forms, but corporate-level expenses and especially interest expenses are responsible for lower levels of cash available to shareholders in externally advised REITs. We document that the higher-interest expenses are due to both higher levels of debt and to higher debt yields for externally advised REITs. We posit that compensating managers based on either assets under management or on property-level cash flows creates incentives for managers to increase the asset base by issuing debt even if the interest costs are unfavorable.

Journal

The Journal of Real Estate Finance and EconomicsSpringer Journals

Published: Oct 16, 2004

References

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