By Brad Case

Editorís Note: This new column features insight from a real estate academic based on his or her research

Quick Bio: C.F. Sirmans is the Board of Trustees Distinguished Professor in the Finance Department at the University of Connecticut Business School, and Director of its Center for Real Estate and Urban Economic Studies. During his 32-year academic career, he has authored or co-authored more than 30 papers on REITs, along with more than 200 papers on other real estate topics.

Portfolio: You have written and lectured extensively on REITs over the last three decades. Can you give an overview of your work?
Sirmans: I have researched the securitization of real estate, particularly equity. I have examined REIT mergers and acquisitions, executive and board compensation, joint ventures, portfolio acquisitions, capital structure, stock repurchases, risk hedging, dividend payout and a variety of corporate governance issues. I lecture to a variety of academic and industry groups throughout Asia and Europe on the lessons learned in a U.S. REIT context.

Portfolio: Many of your academic papers specifically focus on the REIT industry to answer questions with respect to real estate, corporate governance or corporate finance. Are REITs a laboratory for financial research?
Sirmans: The characteristics of REITs, such as their ownership requirements, investment restrictions, dividend payout requirements and corporate tax transparency provide a unique opportunity to examine corporate finance issues.

One of the major themes of my research is how these corporate attributes influence outcomes in the capital markets through pricing and performance of REITs and the associated risks.

Portfolio: What is your opinion of the globalization of the REIT approach to real estate investment? How do you think the worldwide REIT industry will develop in the coming decades?
Sirmans: REIT globalization has the potential to be one of the most significant capital market changes affecting real estate markets in the next few years. Currently, there are 19 countries with REIT legislation in place and 10 more with legislation under consideration.

As a result of competition for capital market flows, I believe that most major mature market economies will implement some form of publicly traded real estate equity securities within a decade.

Portfolio: What is driving this globalization?
Sirmans: At the most fundamental level, it is the demand by investors for diversification. There are significant diversification gains to be had by adding equity claims on commercial real estate to a portfolio. However, we also know that, to attract capital, the investment must be transparent and accessible to investors. Historically, and for much of the market today, a characteristic of the ownership of commercial real estate has been that it is owner-managed.

Portfolio: Please summarize some of your research on REIT corporate governance. What can managers and investors learn from this research?
Sirmans: I have written about the relationships between various characteristics for measuring governance, such as the structure of the board of directors, executive compensation, tenure of the CEO and executive ownership of the firm.

I have constructed an index of "good" governance, such as small board size, majority of outside directors and not chaired by the CEO, and looked at the relationship between governance and performance. Using a sample of REITs over a period of several years, we find that "good" governance pays and "bad" governance costs. Firms with better governance mechanisms outperform other firms.

The structuring of governance requires trade-offs between various aspects of the board, managerial ownership of stock, executive compensation and other mechanisms. In other research we find that managers are attempting to trade-off some "bad" aspects with "good."

Portfolio: How do governance mechanisms affect REITs?
Sirmans: One of the fundamental aspects of the economy is that corporations separate ownership and management of assets. Corporate governance deals with the mechanisms, both internal and external to the firm, which protect shareholders from the tendency of management to not return capital to investors.

One of the main techniques for solving "agency" conflicts between shareholders and managers is the market for corporate control, which manifests itself through the merger market. If there are restrictions on ownership that limit the ability of the marketplace to have a well-functioning merger market, agency problems are potentially magnified.