External vs. Internal REIT Management

Nugget of the week

Focus: External management typically oversee multiple portfolios. Internal management can focus on one portfolio.

Compensation: External management is usually compensated mainly based on AUM (conflict of interest). Internal management is rewarded for dividend growth and share price gains (alignment with shareholder interests).

Economies of scale: REITs do not benefit from external management companies’ increasing operational economies of scale. Internally managed REITs profit from cost efficiencies caused by portfolio growth.

Infrastructure: External management companies command a comprehensive set of resources (experienced personnel, analytical tools, professional network). Internally managed companies can only afford to accumulate comparable resources after reaching critical mass.