Nicolai C. Striewe Nico B. Rottke 21.09.2018 The Capital Structure of North American REITs and REOCs A Panel Data Regression Nicolai C. Striewe Nico B. Rottke

Introduction Motivation 21.09.2018 Introduction Motivation Larger dataset for REITs than those of past studies. Extension of sample by REOCs Including Canadian REITs and REOCs More efficient methodology, as data records have improved Nicolai Striewe Real Estate Management Institute, 21.09.2018

Introduction Contribution to literature 21.09.2018 Introduction Contribution to literature More determinants of leverage included Dynamic dimension (panel approach) Differentiation between REITs and REOCs Detailed robustness tests Nicolai Striewe Real Estate Management Institute, 21.09.2018

Introduction Overview of results 21.09.2018 Introduction Overview of results Application of pecking order theory for REITs/REOCs concerning growth opportunities Application of trade-off theory concerning size and asset tangibility Concerning profitability only REITs follow the pecking order relationship Compensation style and directors` stake in company influences the choice of leverage REOCs prefer higher leverage as they profit from tax-shield (trade -off theory) Nicolai Striewe Real Estate Management Institute, 21.09.2018

Data Database: SNL Financial 418 REITs(355) and REOCs (63) 21.09.2018 Data Database: SNL Financial 418 REITs(355) and REOCs (63) Over 41 periods: quarterly from Q4, 1998 to Q4, 2008 Data preparation: Hybrid REITs and mortgage REITs excluded (19 units). Missing data: 148 units (missing data or incomplete time series) Units for analysis: 251 units. Nicolai Striewe Real Estate Management Institute, 21.09.2018

Results Preferred Model 21.09.2018 Sum squared resid 1263975 S.E. of regression 15.33344 No. of observations 5430 Akaike criterion 45113.6 'Within' variance 41.3928 'Between' variance 152.76 coefficient std. error t-ratio p-value Constant -28.366 4.410 -6.432 0.000 *** Market to book ratio 0.161 0.022 7.450 ln(assets) 4.464 0.297 15.050 Real estate to assets ratio 0.141 0.012 12.090 REOC dummy 5.984 2.688 2.227 0.026 ** External mgmt dummy 4.940 2.556 1.932 0.053 * Return on assets -0.107 0.013 -8.180 Insider ownership 0.063 5.165 Residential dummy 14.639 2.720 5.382 Shopping dummy 9.354 2.409 3.882 Office dummy -0.442 2.693 -0.164 0.870 Hotel dummy -3.227 3.134 -1.030 0.303 Diversified dummy 3.372 3.100 1.088 0.277 Age -1.909 0.056 Canada dummy 8.666 7.579 1.143 0.253 Bonus to total compensation -0.344 0.205 -1.676 0.094 Hausman test 0.689342 Explain HAUSMAN TEST. Why RANDOM EFFECTs. Can also TIME-INVARIANT EFFECTs. MORE EFFICIENT. Notes: The table shows the results of the panel data regression using random effects with debt to assets ratio as dependent variable. The time-series are from 1 to 41 periods long for 251 cross-sectional units. Time dummies are not displayed. They are jointly significant with a p-value of 0.0000 according to Wald test. Breusch-Pagan test identifies the variance of the unit-specific error to be significantly different from zero (p=0.0000). * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level. Nicolai Striewe Real Estate Management Institute, 21.09.2018

Time Trend of Leverage Coefficients of time dummies in preferred model 21.09.2018 Time Trend of Leverage Coefficients of time dummies in preferred model Nicolai Striewe Real Estate Management Institute, 21.09.2018

Sensitivity Analysis Impact of endogeneity 21.09.2018 Sensitivity Analysis Impact of endogeneity Random effects model assumes endogeneity of all independent variables Endogenous variables: market to book ratio, ln(Assets), real estate to assets and return on assets. Testing robustness of results by lagging (t-1) the endogenous variables. Alternative dependent variable Welch (2007): The opposite of financial debt is not equity Alternative proxy for leverage: liabilities to assets ratio Alternative independent variables Alternative proxy for growth opportunities: ln(asset growth) Alternative proxy for size: ln(rental revenue) Alternative proxy for profitability: return on sales Special cases of residential and shopping REITs/REOCs Check changing influence of determinants for residential and shopping REITs/REOCs respectively. Nicolai Striewe Real Estate Management Institute, 21.09.2018

Findings Trade-off theory (TO) Pecking order theory (PO) 21.09.2018 Findings Trade-off theory (TO) Pecking order theory (PO) REITs (previous research) Corporate Gover-nance This Study Comment Profitability + - -(REIT) +(REOC) REITs are tax-exempt & follow PO. REOCs benefit from tax-shield (TO). Growth +/- +1 Information gap is larger for growth REITs/REOCs (PO). Tangibility +2 Asset tangibility reduces risk of financial distress (TO) Operating risk Not covered in this study Size Size reduces risk of financial distress(TO) External Management Compensation by assets under management incentivizes to lever Insider Ownership Directors’ with stake in company concentrate their ownership and reduce risk of hostile takeover with debt. REOC REOCs benefit from tax shield. 1 Lower influence for residential and shopping REITs/REOCs 2 Higher influence for residential and shopping REITs/REOCs

Discussion Nicolai C. Striewe Real Estate Management Institute 21.09.2018 Discussion Nicolai C. Striewe Real Estate Management Institute EUROPEAN BUSINESS SCHOOL Söhnleinstraße 8D 65201 Wiesbaden, Germany E-Mail: striewe.ebs@rem-institute.org

Backup Nicolai C. Striewe Real Estate Management Institute 21.09.2018 Backup Nicolai C. Striewe Real Estate Management Institute EUROPEAN BUSINESS SCHOOL Söhnleinstraße 8D 65201 Wiesbaden, Germany E-Mail: striewe.ebs@rem-institute.org

Variable definitions and basic descriptives 21.09.2018 Variable definitions and basic descriptives Measure Description Abbreviation Mean Min Max Leverage Total debt divided by total assets Debt to assets 50.89 96.33 Alternative Liabilities divided by total assets Liabilities to assets 56.923 99.76 Growth opportunities Market to book ratio. Market capitalization divided by shareholders’ equity. Market to book 1.82 276.86 Natural logarithm of asset growth ln(asset growth) 2.207 -4.61 6.73 Size Natural logarithm of total assets ln(assets) 14.04 5.25 17.17 Natural logarithm of Rental Revenue ln(rental revenue) 10.55 2.20 13.74 Asset Tangibility Property Investment divided by Total Assets Real estate to assets 79.55 110.73 REOC Dummy variable for REOC status. (1=REOC, 0=REIT) REOC dummy 0.13 1 Management structure Dummy variable for external management. (1=externally managed, 0=internally managed) External mgmt dummy 0.15 Profitability Net income divided by total average assets. Return on assets 3.11 -177.59 177.35 Return on Sales Return on sales 0.11 -122.50 15.58 Insider ownership Percent ownership in shares of directors. Insider ownerships 15.59 100.00 Notes: Basic descriptives from 251 observations of the preferred model. Variance Inflation Factors (VIF) all below 2.4 for the variables. Nicolai Striewe Real Estate Management Institute, 21.09.2018

Dataset 21.09.2018 Full Sample Reduced Sample (Data Preparation) Property Focus Number Percentage Residential 65 16% 36 14% Shopping 59 15% 43 17% Diversified 55 27 11% Hotel 54 42 Office 53 13% Storage 26 7% 7 3% Industrial 24 6% 16 Health Care 23 15 Speciality 22 17 Retail 4% 12 5% Not Available 1 0% Total 399 100% 251 REITs 337 84% 207 82% REOCs 62 44 18% Nicolai Striewe Real Estate Management Institute, 21.09.2018

Sensitivity Analysis – Model specification 21.09.2018 Preferred Model Model 2 (alt. dep. Var) Model 3 coefficient p-value Constant -28.366 0.000 *** -10.662 0.015 ** -15.977 0.001 Market to book 0.161 0.181 Market to book (t-1) 0.142 ln(Assets) 4.464 3.838 ln(Assets) (t-1) 3.625 Real estate to assets 0.141 0.085 Real estate to assets (t-1) 0.148 REOC dummy 5.984 0.026 11.245 5.413 0.046 External mgmt dummy 4.940 0.053 * 0.720 0.782 2.980 0.252 Return on assets -0.107 -0.135 Return on assets (t-1) -0.110 Insider Ownership 0.063 0.057 0.047 Residential dummy 14.639 11.993 12.915 Shopping dummy 9.354 7.755 0.002 9.239 Office dummy -0.442 0.870 -1.802 0.512 -0.137 0.960 Hotel dummy -3.227 0.303 0.748 0.815 -2.120 0.502 Diversified dummy 3.372 0.277 1.240 0.695 3.921 0.209 Age 0.056 0.756 0.018 Canada dummy 8.666 0.253 3.239 0.675 9.944 0.192 Bonus to total compensation -0.344 0.094 -0.143 0.479 -0.369 0.080 No. of observations 5430 5211 Cross-sectional units 251 248 S.E. of regression 15.333 15.159 15.121 Akaike criterion 45113.60 44989.53 43151.050 'Within' variance 43.393 40.005 40.922 'Between' variance 152.76 159.541 153.927 Wald (joint): time dummies (χ2) 139.638 190.722 138.122 Hausman test (χ2) 40.798 0.689 137.287 13.911 1.000 Notes: The table shows the results of the panel data regressions using random effects with debt to assets ratio as dependent variable. In model 2 the alternative dependent variable liabilities to assets is used instead. Model 3 tests the impact of endogeneity by lagging the affected variables by lagging them (t-1). The time-series are from 1 to 41 periods. Time dummies are not displayed. They are jointly significant with a p-value of 0.000 according to Wald test. * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level. Nicolai Striewe Real Estate Management Institute, 21.09.2018

Sensitivity Analysis – Proxy robustness 21.09.2018 Sensitivity Analysis – Proxy robustness Preferred Model Model 4 Model 5 Model 6 Model 7 coefficient p-value Coefficient Constant -28.366 0.000 *** 2.567 0.646 17.573 -22.716 -17.802 Market to book 0.161 0.129 0.155 0.153 ln(asset growth) 0.191 0.028 ** ln(assets) 4.464 2.153 3.913 3.618 ln(rental revenue) 1.889 Real estate to assets 0.141 0.151 0.092 0.150 0.142 REOC dummy 5.984 0.026 5.468 0.063 * 2.839 0.343 6.775 0.018 6.059 0.031 External mgmt dummy 4.940 0.053 2.106 0.455 1.010 0.703 4.310 0.104 3.897 0.133 Return on assets -0.107 -0.138 -0.213 Return on sales 0.116 0.001 -1.636 *REOC dummy 1.825 Insider Ownership 0.046 0.002 0.083 0.069 0.067 Residential dummy 14.639 12.819 12.965 14.749 14.755 Shopping dummy 9.354 10.045 7.861 9.523 9.451 Office dummy -0.442 0.870 0.765 -0.226 0.932 -0.324 0.908 -0.339 0.902 Hotel dummy -3.227 0.303 -1.388 0.684 1.580 0.666 -2.669 0.419 -2.622 0.417 Diversified dummy 3.372 0.277 3.627 0.282 2.903 0.348 3.240 0.316 3.282 0.299 Age 0.056 0.033 0.312 0.029 Canada dummy 8.666 0.253 9.312 0.254 6.958 0.340 8.395 0.283 8.348 0.276 Bonus to total compensation -0.344 0.094 -0.458 0.109 -0.180 0.405 -0.199 0.336 -0.150 0.462 No. of observations 5430 3555 4733 5372 Cross-sectional units 251 248 221 S.E. of regression 15.333 15.034 14.346 15.326 15.138 Akaike criterion 45113.60 29414.390 38699.870 44627.380 44495.600 'Within' variance 43.393 42.759 37.266 41.753 41.063 'Between' variance 152.76 179.785 140.866 163.261 156.360 Wald (joint): time dummies (χ2) 139.638 145.879 247.071 175.046 178.145 Hausman test (χ2) 40.798 0.689 28.233 0.982 14.778 1.000 145.98 9.977 Notes: The table shows the results of the panel data regressions using random effects with debt to assets ratio as dependent variable. The impact of an alternative proxy is tested for growth opportunities in model 4, for size in model 5, for profitability in model 6 and in model 7 with an additional interaction variable to differentiate the impact of the alternative proxy for profitability on REOCs. The time-series are from 1 to 41 periods. Time dummies are not displayed. * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level. Nicolai Striewe Real Estate Management Institute, 21.09.2018

Sensitivity Analysis – Property type sensitivity 21.09.2018 Preferred Model Model 8 Model 9 Model 10 Model 11 coefficient p-value Constant -28.366 0.000 *** -26.934 -22.821 -19.826 -23.124 Market to book 0.161 0.971 0.160 0.159 0.162 *Residential dummy -0.909 *Shopping dummy -0.693 ln(assets) 4.464 4.642 4.101 4.092 4.485 1.491 0.378 0.010 ** Real estate to assets 0.141 0.148 0.137 0.099 0.140 0.251 0.055 0.004 REOC dummy 5.984 0.026 0.331 0.882 4.065 0.077 * 2.944 0.181 -1.667 0.472 31.981 -2.644 0.840 External mgmt dummy 4.940 0.053 0.876 0.693 3.646 0.106 3.436 0.118 0.980 Return on assets -0.107 -0.110 -0.114 -0.127 -0.106 Insider Ownership 0.063 0.072 0.066 0.070 0.065 Age 0.056 0.198 0.178 0.154 Canada dummy 8.666 0.253 18.339 0.017 6.338 0.412 4.604 0.542 7.220 0.364 Bonus to total compensation -0.344 0.094 -0.382 0.061 -0.350 0.087 -0.302 0.138 -0.371 No. of observations 5430 Cross-sectional units 251 S.E. of regression 15.333 16.096 15.934 15.830 15.762 Akaike criterion 45113.60 45637.430 45528.180 45457.000 45409.650 'Within' variance 43.393 40.330 39.177 40.455 41.393 'Between' variance 152.76 161.928 152.839 152.609 160.569 Wald (joint): time dummies (χ2) 139.638 137.918 136.382 143.867 134.338 Hausman test (χ2) 40.798 0.689 38.977 0.820 319.225 87.530 0,000 42.479 0.621 Notes: The table shows the results of the panel data regressions using random effects with debt to assets ratio as dependent variable. The changing impact of growth opportunities for the special cases of residential and shopping REITs/REOCs is measured in model 8, of size in model 9, of asset tangibility in model 10 and of REOCs in model 11. The time-series are from 1 to 41 periods. Time dummies are not displayed. * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level. Nicolai Striewe Real Estate Management Institute, 21.09.2018

Sensitivity Analysis – Property type sensitivity (cont`d) 21.09.2018 Preferred Model Model 12 Model 13 Model 14 coefficient p-value Coefficient Constant -28.366 0.000 *** -22.411 -9.778 0.024 ** -22.686 Market to book 0.161 0.159 0.166 ln(assets) 4.464 4.411 3.532 4.400 Real estate to assets 0.141 0.142 0.133 0.143 REOC dummy 5.984 0.026 0.510 0.815 0.515 2.481 0.262 External mgmt dummy 4.940 0.053 * -2.800 0.224 -0.066 0.976 1.102 0.614 *Residential dummy 39.472 *Shopping dummy 11.470 0.135 Return on assets -0.107 -0.173 -0.104 0.278 -0.127 0.001 Insider Ownership 0.063 0.065 0.066 0.016 0.309 0.051 0.248 0.116 Age 0.056 0.090 0.152 0.185 Canada dummy 8.666 0.253 17.568 0.019 16.759 0.027 16.496 0.030 Bonus to total compensation -0.344 0.094 -0.352 0.088 -0.324 0.111 -0.342 0.096 No. of observations 5430 Cross-sectional units 251 S.E. of regression 15.333 15.588 15.558 15.867 Akaike criterion 45113.60 45289.320 45268.780 45481.820 'Within' variance 43.393 41.393 40.600 41.195 'Between' variance 152.76 154.607 158.613 156.534 Wald (joint): time dummies (χ2) 139.638 138.765 155.335 135.704 Hausman test (χ2) 40.798 0.689 56.032 0.147 31.459 0.969 103.426 Notes: The table shows the results of the panel data regressions using random effects with debt to assets ratio as dependent variable. The changing impact of externally managed REITs/REOCs for the special cases of residential and shopping REITs/REOCs is measured in model 12, of profitability in model 13 and of insider ownership in model 14. The time-series are from 1 to 41 periods. Time dummies are not displayed. * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1% level. Nicolai Striewe Real Estate Management Institute, 21.09.2018

Variance Inflation Factors 21.09.2018 Variance Inflation Factors Minimum possible value = 1.0 Values > 10.0 may indicate a collinearity problem Market to book 1.012 ln(assets) 1.383 Real estate to assets 1.44 REOC dummy 2.34 External mgmt dummy 1.657 Return on assets 1.059 Insider ownership 1.319 Residential dummy 1.607 Shopping dummy 1.831 Office dummy 1.602 Hotel dummy 2.398 Diversified dummy 1.499 Age 1.117 Canada dummy 1.044 Bonus to total compensation 1.286 VIF(j) = 1/(1 - R(j)^2), where R(j) is the multiple correlation coefficient between variable j and the other independent variables Properties of matrix X'X: 1-norm = 7.7927016e+011 Determinant = 7.8064223e+065 Reciprocal condition number = 2.2254893e-011 Nicolai Striewe Real Estate Management Institute, 21.09.2018