1. School of Real Estate & Planning School of Real Estate and Planning Sponsor Ownership, Board Independence and Asian REITs Performance © Henley Business School 2013 www.henley.reading.ac.uk Annisa Dian Prima*, Simon Stevenson and Peter Wyatt ERES 20 th Annual Conference - 5 July 2013

2. School of Real Estate & Planning Most Asian REITs are typically formed as captive entities by their sponsors Asian REITs benefit from their business group relationship with the sponsors Types of support provided by the REITs sponsors: - Development pipeline: ‘right of first refusal’ - Management expertise Asian REITs pursue aggressive acquisition strategies: support from sponsors is essential for future growth opportunities (Ooi et al., 2011) 2 Introduction & Motivation

3. School of Real Estate & Planning3 Introduction & Motivation Agency conflict is exacerbated by the captive relationship between the manager and the sponsor Sponsors have substantial control over REITs management, financing and investment policies (Wei et al., 1995) Related party transactions with the sponsors are inevitable (Ooi et al., 2012) REITs serve as an ‘exit strategy’ for the developer sponsor (Rosenberg, 1986; Wong et al. 2012)

4. School of Real Estate & Planning Introduction & Motivation “…Potential conflicts of interest among the REIT, the Manager, the Sponsor and the major Unitholders could result in corporate actions and business decisions that are not in the Unitholder’s best interests…” -One of the REITs prospectus- “…The Manager may experience conflicts of interest as a result of the activities and interests of its affiliates in acquiring and disposing of potential investments. As a wholly-owned subsidiary of the Sponsor, the Manager may experience conflicts of interests in connection with any potential acquisitions from sponsor or its affiliates, and in agreeing the terms of such potential acquisitions... Any potential conflicts of interest between the REIT and the Sponsor and its affiliates may not necessarily be resolved in favour of the REIT…” -One of the REITs prospectus- 4

5. School of Real Estate & Planning Research Objective Aim : to investigate the influence of sponsor ownership and other governance variables on board independence and Asian REITs performance Kudus and Sing (2011) attempt to investigate the relationship between insider (sponsor) ownership on board independence and Asian REITs performance - Insider ownership as a proxy of sponsor ownership  good proxy? - Pyramid structure of sponsor ownership - Sample period between 2002 and 2007  exclude the financial crisis period Higher likelihood of sponsors expropriation during the crisis due to a negative shock on investment opportunities and financial constraint (Johnson et al., 2000; Lemmon and Lins, 2003) Firm value is adversely affected when Asian REITs are involved in the related party transactions with their sponsors during the crisis (Ooi et al., 2012) 5

6. School of Real Estate & Planning Literature Review Board Independence and Managerial Ownership – integral governance mechanisms (Jensen and Meckling, 1976; Fama and Jensen, 1983 ; Weisbach, 1988; Capozza and Seguin, 2003) Entrenchment hypothesis: managerial ownership is negatively related to board independence and firm performance (Fama and Jensen, 1983; Ghosh and Sirmans, 2003; Kim et al., 2007) Incentive alignment hypothesis: managerial ownership is positively related to board independence and firm performance (Capozza and Seguin, 2003 ; Yeh and Woidtke, 2005) The countervailing forces between the incentive effect and the entrenchment effect raise the possibility that managerial ownership is nonlinearly related to board independence and firm performance (Friday et al.,1999; Morck et al.,1988; Han, 2006; Dolde and Knopf, 2009; Kudus and Sing, 2011) 6

7. School of Real Estate & Planning Empirical Models Board independence model: BInd i,t = β 0 + β 1 SPON i,t + β 2 BOARD i,t + β 3 OWN i,t + β 4 CEO i,t + β 5 CONTROL i,t + λ t + η i + ε i,t Stock return and performance model: ARR i,t = δ 0 + δ 1 SPON i,t + δ 2 BOARD i,t + δ 3 OWN i,t + δ 4 CEO i,t + δ 5 CONTROL i,t + λ t + η i + ε i,t ARR i,t is a vector of three performance measure variables, namely of: - Jensen’s Alpha:Abnormal returns - ROE and ROA:Operating efficiency 7

8. School of Real Estate & Planning Model Specification Each model include 3 specifications: 1) Linear 2) Quadratic - squared term of sponsor ownership 3) Spline - sponsor ownership is divided into three range segments - 0% - 5% of ownership, 5%-25 % of ownership, and > 25% of ownership 8

9. School of Real Estate & Planning Estimation of sponsor ownership 9 Partly-owned Subsidiary Sponsor Subsidiary REIT 10% 50% 5% Sponsor Subsidiary REIT 10% 100% 10% Wholly-owned Subsidiary 1. Wholly-owned:Sponsors retain a 10 percent stake in the REIT 2. Partly-owned: Sponsors retain a 5 percent stake in the REIT

10. School of Real Estate & Planning Sample Characteristics 10 Sample CharacteristicsJapanSingaporeMalaysiaHong KongTotal No. of existing & delisted REITs 452414891 No. of REITs in the sample422414787 Proportion of sample to existing REITs 93.33100 87.5096.67 No. of Pooled Observations2751327037514 Annual data from 2002 – 2012 (unbalanced panel data) Corporate governance data: Annual Reports, prospectus & other disclosed documents at corporate website Financial data: SNL Financial and Thomson Reuter’s Datastream

11. School of Real Estate & Planning Descriptive Statistics 11 JapanSingaporeMalaysiaHong KongTotal VariableSymbolMean Panel A: CEO Profile CEO TenureCEOTen2.6072.6742.6852.6492.638 CEO DualityDual0.5160.0000.1710.0000.300 Panel B: Board Composition Board SizeBsize3.5027.6676.6007.3245.268 Board IndependenceBind66.43945.90540.04642.41455.842 Panel C: Ownership Structure CEO OwnershipCEOOwn0.0000.0740.7300.0010.118 Insider OwnershipInsOwn0.0000.75714.67111.3533.010 Independent OwnershipIndOwn0.0000.0450.0400.0020.017 Total BlockholdingTotBlk25.06842.6237.71912.48526.308 Panel D: Sponsor Characteristic and Ownership Sponsor OwnershipSponOwn8.60129.14337.32726.00419.040 Sponsor DeveloperStype57.884.191.486.571.2 Panel E: Control Variables Firm Size (log term)Fsize4.7256.0125.6806.5785.320 Market to BookMTB1.0610.8720.9391.2691.011 Leverage (log term)LEV1.5881.4431.3821.3661.507 Asset StrategiesType0.5930.2500.3570.7300.482 Panel F: Performance Measures Abnormal ReturnAlpha0.096-0.428-1.256-0.679-0.274 Return of EquityROE5.2368.50710.9999.7957.189 Return on AssetROA2.5875.6477.4745.9504.281

12. School of Real Estate & Planning OLS: Board Independence and Abnormal Returns 12 Model 1: GLSModel 2: OLS BINDAlpha LinearQuadraticSplineLinearQuadraticSpline Constant66.846 *** (5.736) 66.990*** (5.710) 65.472*** (5.830) 136.362 (106.275) 128.44 (104.767) 135.246 (108.575) SponOwn-0.091* (0.050) -0.094* (0.051) 1.303** (0.533) 1.501*** (0.543) SponOwn_sqr-0.131 (0.200) 9.010* (5.438) SponOwn50.316 (0.254) 8.049 (5.015) SponOwn5_25-0.045 (0.100) -0.052 (1.234) SponOwn25-0.163** (0.081) 1.726** (0.785) BInd-1.332* (0.717) -1.333* (0.720) -1.415* (0.723) BSize-3.286*** (0.525) -3.290*** (0.527) -3.312*** (0.527) -6.935 (6.016) -6.890 (6.007) -7.394 (6.093) Dual-1.530* (0.884) -1.536* (0.887) -1.695* (0.881) -7.633 (15.609) -9.463 (15.709) -10.911 (15.775) CEOOwn-0.269*** (0.059) -0.271*** (0.059) -0.231*** (0.060) 4.022*** (1.212) 4.262*** (1.215) 4.341*** (1.313) InsOwn-0.094 (0.058) -0.096* (0.058) -0.081 (0.053) 1.768** (0.786) 1.901** (0.783) 2.014** (0.802) TotBlk0.026 (0.031) 0.025 (0.030) 0.028 (0.030) 1.097* (0.578) 1.191** (0.577) 1.287** (0.594) MTB0.005 (0.003) 0.005 (0.004) 0.140** (0.060) 0.155*** (0.060) 0.142** (0.060) FSize-0.017** (0.007) -0.017** (0.008) -0.028 (0.120) -0.046 (0.120) -0.045 (0.122) Type-0.339 (1.572) -0.331 (1.576) -0.300 (1.559) -24.358* (13.234) -23.088* (13.158) -23.603* (13.134) Country F.EYes Year F.EYes No. Observations514 508 R-squared0.1410.1420.1480.2280.232

13. School of Real Estate & Planning OLS: Operating Performance 13 Model 3: OLSModel 4: OLS ROEROA Explanatory VariableLinearQuadraticSplineLinearQuadraticSpline Constant5.561 (3.933) 5.530 (3.972) 5.637 (3.970) 7.955*** (2.774) 7.961*** (2.785) 7.912*** (2.791) SponOwn0.076** (0.031) 0.077** (0.032) 0.040* (0.021) 0.040* (0.022) SponOwn_sqr0.034 (0.222) -0.008 (0.126) SponOwn5-0.001 (0.194) 0.064 (0.117) SponOwn5_250.125** (0.057) 0.059 (0.039) SponOwn250.046 (0.062) 0.023 (0.038) CEOTen0.552*** (0.171) 0.552*** (0.172) 0.551*** (0.168) 0.286** (0.114) 0.285** (0.115) 0.289** (0.114) CEOOwn0.259*** (0.045) 0.260*** (0.045) 0.259*** (0.050) 0.096** (0.040) 0.100** (0.042) Country F. E.No Yes Year F. E.Yes No. Observations514 R-squared0.187 0.1890.253 0.254

14. School of Real Estate & Planning OLS: Financial Crisis 14 Model 5: OLSModel 6: OLSModel 7: OLS AlphaROEROA Explanatory VariableLinearQuadraticSplineLinearQuadraticSplineLinearQuadraticSpline Constant-6.744 (4.577) -6.062 (4.574) -5.382 (4.528) 12.239 (10.747) 11.154 (11.122) 11.29 (11.184) 14.813** (6.795) 14.067** (6.818) 14.091** (6.824) SponOwn-0.012 (0.024) 0.036 (0.062) 0.163*** (0.061) 0.077 (0.140) 0.102*** (0.036) 0.043 (0.091) SponOwn_sqr-0.001 (0.001) 0.002 (0.003) 0.001 (0.002) Sponown50.507 (0.373) 0.117 (0.343) 0.067 (0.213) Sponown5_25-0.05 (0.074) 0.117 (0.110) 0.067 (0.073) Sponown25-0.028 (0.029) 0.198* (0.113) 0.128** (0.064) BInd-0.061 (0.040) -0.079** (0.039) -0.039 (0.092) -0.037 (0.095) -0.067 (0.054) -0.065 (0.055) BSize-0.871*** (0.326) -0.875*** (0.329) -0.904*** (0.319) -0.516 (0.521) -0.496 (0.525) -0.513 (0.529) -0.477 (0.329) -0.463 (0.328) -0.475 (0.333) CEOTen0.047 (0.230) 0.071 (0.231) 0.114 (0.237) 0.891** (0.352) 0.852** (0.343) 0.858** (0.343) 0.542** (0.213) 0.515** (0.209) 0.517** (0.210) CEOOwn-0.021 (0.042) -0.010 (0.045) 0.026 (0.060) 0.291*** (0.068) 0.272*** (0.070) 0.278*** (0.075) 0.168*** (0.043) 0.155*** (0.048) 0.159*** (0.052) LEV2.061 (1.283) 1.859 (1.321) 1.810 (1.310) -0.781 (2.716) -0.429 (2.767) -0.554 (2.727) -3.294* (1.863) -3.052* (1.825) -3.121* (1.820) MTB3.989*** (0.876) 3.997*** (0.881) 3.769*** (0.829) -0.703 (1.759) -0.730 (1.751) -0.766 (1.812) -0.702 (1.04) -0.721 (1.032) -0.751 (1.062) Country F. E.No Year F. E.Yes No. Observations224 227 R-squared0.3290.3310.3410.2090.2120.2100.2630.2670.265

15. School of Real Estate & Planning Concluding Remarks Sponsor ownership and board independence : nonlinear - Monitoring abilities Sponsor ownership and abnormal returns : nonlinear - Monitoring costs - Use of private information (information asymmetry) Sponsor ownership and ROE : nonlinear - Tacit knowledge - Efforts and involvement Sponsor ownership and ROA : linear - Quality of real estate assets - Capital raising assistance Sponsor ownership and operating performance (ROE, ROA) during crisis: linear - Sponsors commitment to support REITs during good time and bad time 15 E-mail: a.d.prima@pgr.reading.ac.uka.d.prima@pgr.reading.ac.uk