The Cost of Debt for REITs: The Mortgage Puzzle. Issue 2 (1st October 2020)

• Record Type: Journal Article
• Authors: Allen, Linda; Letdin, Mariya
• Is Part Of: Journal of real estate research. Volume 42:Issue 2(2020)
• Page Start: 239
• Page End: 260
• Publication Date: 2020-10-01
• Subjects: Strategic default -- recourse debt -- REIT -- financial flexibility -- interest rates -- debt overhang -- secured debt -- portfolio risk; Real estate business -- United States -- Periodicals; Real estate investment -- United States -- Periodicals; Real estate business -- Periodicals; Periodicals; 333.330973
• DOI: 10.1080/08965803.2020.1822130
• Languages: English
• ISSNs: 0896-5803

Abstract

Abstract: Established, low-leverage equity REITs with access to the public debt market rely on both non-recourse mortgages and full recourse bonds/notes as sources of long-term debt. Interest rates on secured, non-recourse debt (mortgages) include a costly strategic default option premium and do not benefit from a firm's overall financial capacity. We find that use of non-recourse, mortgage debt is more likely for longer-term, smaller borrowings, and during recessionary periods, consistent with REITs valuing financial flexibility in their capital structure. The higher rates for property-level debt suggest a benefit to REITs versus single asset investors in terms of cost of capital. Since REITs also access debt at the corporate level, the spread between long-term non-recourse debt and long-term recourse debt implies a benefit to the REIT structure.