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The Cost of Debt for REITs: The Mortgage Puzzle

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  • Linda Allen
  • Mariya Letdin

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

  • Linda Allen & Mariya Letdin, 2020. "The Cost of Debt for REITs: The Mortgage Puzzle," Journal of Real Estate Research, Taylor & Francis Journals, vol. 42(2), pages 239-260, October.
    • Handle: RePEc:taf:rjerxx:v:42:y:2020:i:2:p:239-260
    DOI: 10.1080/08965803.2020.1822130
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