News Column

Fitch: Externally Managed REITs More Efficient, Weaker Alignment

August 1, 2014



NEW YORK--(BUSINESS WIRE)-- After analyzing financial data on 18 externally managed U.S. REITs and 106 internally managed U.S. REITs, Fitch Ratings found that internally managed REITs are not better at controlling administrative expenses versus externally managed companies, despite popular opinion to the contrary. Investors have frequently asked Fitch which management structure is preferential at managing overhead, namely general and administrative (G&A), expenses for REITs.

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.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Boris Alishayev, +1 212-612-7880

Associate Director, REITs

or

Kellie Geressy-Nilsen, +1 212-908-9123

Senior Director

Fitch Wire

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Media Relations:

Sandro Scenga, +1 212-908-0278

sandro.scenga@fitchratings.com

Source: Fitch Ratings


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