The Cost of Debt for REITs: The Mortgage Puzzle

39 Pages Posted: 24 Feb 2020 Last revised: 28 Feb 2020

See all articles by Mariya Letdin

Mariya Letdin

Florida State University

Linda Allen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: December 28, 2018

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.

Suggested Citation

Letdin, Mariya and Allen, Linda, The Cost of Debt for REITs: The Mortgage Puzzle (December 28, 2018). Journal of Real Estate Research, Forthcoming , Baruch College Zicklin School of Business Research Paper No. 2020-01-03, Available at SSRN: https://ssrn.com/abstract=3526986

Mariya Letdin (Contact Author)

Florida State University ( email )

College of Business
Tallahassee, FL 32306
United States

Linda Allen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States
646-312-3463 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://stern.nyu.edu/~lallen

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