We found the cost associated with managing an internal managed REIT versus an external managed REIT is 20 bps higher from a total market value perspective. However, Fitch believes that stock ownership, corporate governance, potential conflicts of interest, allocation of investment opportunities and management time are still the greatest risks of externally managed REITs. Ensuring alignment of interests between investors and management is the key aspect at enhancing investor trust and support for externally managed REITs. Most externally advised REITs fall short on at least one of these items.
Since 2010, G&A expenses were higher for internally managed REITs versus externally managed companies. For example, externally managed REITs' efficiency ratios, G&A expenses as a percentage of total revenues, were mostly between 4%-6% with a median ratio of 5.22%. By comparison, this ratio for internally managed REITs was between 5%-7% with a median ratio of 6.60%. Further, we did not find any significant differences in G&A expenses as a percentage of gross assets for internally and externally managed REITs.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Associate Director, REITs
Source: Fitch Ratings
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