Capital Structure, Managers' Compensation and REITs' Share Value.

The paper investigates how (public) REITs managers’ compensation schemes influence capital structure and consequently REITs’ share value. The analysis focuses on “gross asset value” versus “net asset value”-based compensation structures and investigates the issue if NAV-based REITs outperform GAV-based REITs. This by considering Italian REIT market data and the Italian and European regulatory context. Due to regulatory and market constraints, Italian GAV and NAV-based REITs have a strong incentive to leverage in order to maximize management fees. However, NAV-based REITs are expected to be more selective in investment decisions compared to GAV-based REITs because of the different compensation base. Moreover, leverage produces different effects on share value if measured upon market price or net asset value due to the different implicit valuation methodologies. The empirical results seem to support the theoretical expectations. GAV-based REITs experience higher debt trends in respect to NAV-based REITs. At the same time, GAV-REITs register lower real estate asset returns net of management fees both for current as well as for growth returns. Differences in net real estate returns seem to lead to permanent higher performances of NAV-based REITs in respect to GAV-based REITs measured upon total return benchmarks.