Wealth Effects of Accretive Acquisitions:
Evidence from Asian REITs
Date: December 1, 2007
Joseph T.L. Ooi#, Seow-Eng Ong and Poh-Har Neo
Department of Real Estate
School of Design and Environment
National University of Singapore
4 Architecture Drive Singapore 117566
# contact author: rstooitl@nus.edu.sg
Wealth Effects of Accretive Acquisitions:
Evidence from Asian REITs
Abstract
Mergers and acquisitions are important avenues for a firm to grow. Whilst many
theories have been advanced to justify why REIT should acquire properties, this
paper focuses on the yield-accretive acquisition strategy adopted by many REITs in
Asia to boost earnings and dividends for their shareholders. We offer some initial
evidence on the effect of accretive acquisitions on shareholders wealth by
analyzing 284 property acquisitions made by REITs listed in Japan and Singapore
between 2002 and 2007. The event-study shows that acquisition announcements
convey information useful for the valuation of acquiring REITs. We observe that
acquisition announcement enhances the acquiring REIT stock price by 0.29% over
a three-day period. Our regression analysis shows that the magnitude of the
abnormal return is dependent on whether the acquisition is yield-accretive or
dilutive. The evidence supports the view that the markets in Asia like and reward
acquisitions that lead to higher earnings and dividends for the shareholders.
Key words : Asia REITs, accretive acquisitions, event-study
JEL Classification: G11, G14, G34,
Wealth Effects of Accretive Acquisitions:
Evidence from Asian REITs
Introduction
Acquisitions and mergers are important events in the calendar of a corporation. Although
they provide a fast lane for the firm to grow, acquisition and mergers decisions consume
massive corporate resources and expose shareholders to high uncertainty. Many theories
have been advanced in the corporate finance literature to explain why acquisitions and
mergers take place. These include the differential efficiency theory, which prescribes that
more efficient firms will acquire less efficient firms and realize gains by improving their
efficiency; the operating synergy theory which postulates that there are economies of
scale or of scope that can be achieved through mergers and acquisitions; and the market
power theory which holds that merger gains are the result of increased concentration
leading to collusion and monopoly effects (Weston, Siu and Johnson, 2001). From the
shareholders’ perspective, the main concern is whether corporate acquisitions and
mergers create or destroy value. To the extent that firms adopt shareholder wealth
maximization as the penultimate goal of corporate investment decisions, acquisitions and
mergers are expected to produce a rate of return that at least equals the cost of capital. In
theory, the net present value (NPV) is the best criteria for evaluating new ventures
because it is consistent with shareholder wealth maximization.
However, in practice, firms focus a lot on the impact of acquisitions on current earnings,
particularly earnings per share (EPS), which they perceive to have a positive impact on
equity valuation. Corporate managers pursue accretive acquisitions because they get to
report higher earnings and distribute more dividends to their shareholders. Much
anecdotal evidence suggests that managers try to maintain a pattern of increasing
earnings. Burgstahler and Dichev (1997), for example, cite several incidents of managers
who emphasized the importance of earnings in the opening lines of the management
1
discussion section of the annual reports.1 Andrade (1999, p.1) went further as to suggest
that many practitioners are obsessed with EPS because they believe that “analysts and
investors will often focus excessively on EPS and EPS growth in valuing securities,
almost ‘blindly’ applying a multiple, such as a P/E or market-to-book ratio, to the
reported figures. Therefore, the story goes, firms that engage in transactions which
depress their EPS growth will be penalized with lower valuations in the market”.
Financial theorists will, however, counter that the higher earnings associated with
accretive acquisition are not free since shareholders are exposed to higher business and
financial risks. Furthermore, the efficient market hypothesis prescribes that the market
will not be fooled by accounting measures to boost corporate earnings.
Despite what corporate finance theory has to say, earnings accretion remains a major
factor in acquisition decisions. During a roundtable discussion hosted by the Financial
Management Association, Wessels (2006, p. 63) highlighted, “when considering an
acquisition of another company, one of the very first questions a company will ask is
whether the transaction is ‘EPS accretive’ or ‘EPS dilutive’. There is no way around it; a
senior executive wants the answer to this question”. In order for a proposed acquisition
or merger to be acceptable to existing shareholders, Reiss and Pizak (2000, p. 214)
maintained that the transaction must be “accretive” to the existing shareholders; that is,
“there must be a belief that the acquisition or merger will result in increased growth,
flow from operations, cash flow, dividends and share price”. A number of studies in the
accounting literature have shown that managers placed great importance on earnings
management and that market may be influenced by accounting numbers. Burgstahler and
Dichev (1997) provide empirical evidence that firms do manage reported earnings to
avoid earnings decreases and losses.
Whilst the wealth effects of mergers and acquisitions have been extensively studied, the
economic gains associated with accretive acquisitions have not been examined. This is
1
For example, in its 1994 annual report, Tenneco’s CEO stated: “I must emphasize that all our
strategic actions are guided by and measured against the goal of delivering consistently high increase in
earnings over the long term.” Similarly, in the release of 1994 earnings, Bank of America’s CEO
commented that “Increasing EPS was our most important objective of the year”.
2
due primarily to the difficulties researchers faced in determining the direct impact of
acquisitions on earnings.2 As noted by Andrade (1999), it is not easy to isolate the effects
of an acquisition on corporate earnings because of accounting and valuation uncertainties.
Particularly, mergers and acquisitions are often accompanied by simultaneous spin-offs,
corporate reorganizations, capital restructuring or distribution of extraordinary dividends
to the shareholders, which make it difficult to isolate the wealth effects due to earnings
accretion. The possibility of over-payment would further complicate any attempts to
measure the earning accretion associated with an acquisition. For example, if the acquirer
grossly overpay for a company, there is a high likelihood that the reported EPS will be
diluted. Moreover, valuation of a business as a going-concern is not easy due to the
subjectivity involved in estimating the value of the target’s intangible assets such as
goodwill and future growth opportunities. The valuation problem is compounded further
when the acquiring company’s stocks are used to finance the takeover or merger.. The
literature typically indicates that bidder abnormal returns are expected to be larger for
cash transactions than for securities transactions. 3 Finally, there is the contentious issue
of purchase versus pooling methods of accounting related to mergers.4
Property acquisitions by REITs, however, provide a unique opportunity for us to
overcome these difficulties. First, property deals are comparatively simple as they do not
involve massive reorganizations at the corporate level. Thus, the accounting of a property
acquisition is relatively straightforward. Second, the intrinsic value of the targets can be
2
One exception is a working paper by Andrade (1999) who found that EPS accretion has a positive
and statistically significant effect on the acquirers’ abnormal performance.
3
This follows Myers and Majluf’s (1984) pecking order theory which postulates that an acquisition
with stocks signals the bidder’s belief that the stock as overvalued. Similarly, Hansen (1987) and Eckbo
and Thorburn (2000) develop models that postulate that when there is high uncertainty on the target’s real
value, the bidder should make a stock offer to force the target to share part of the risk of overpaying for the
target.
4
US GAAP prescribes two different methods of accounting for mergers, namely pooling-ofinterests (pooling) and purchase. In the pooling transaction, the two companies merely combine their
existing financial statement together. There are no write-ups of assets to account for the re-valuation of the
target implicit in the price paid for the acquisition. In a purchase deal, on the other hand, target assets are
re-valued and recorded on the combined company’s balance sheets at their new, fair market value. In
addition, any difference between the price paid for the target and the fair market value of its assets is
incorporated as goodwill (Andrade, 1999; pp. 7-8)
3
determined more accurately due to the tangible nature of the assets involved. REITs also
do not pay corporate taxes and hence, any observed wealth effects will not be confounded
by tax considerations. In this study, we specifically focus on the REIT sector in Asia
because of their heavy emphasis on “yield-accretive” acquisitions, which essentially
involve buying buildings that generate higher rental yield than that of the REIT portfolio;
thus, increasing the yield of the combined portfolio. 5 Conversely, acquisition deals
which are “dilutive” would not be well received. For illustration, Whiting (2007) suggests
that shareholders of a REIT yielding 6.2% would raise their eyebrows if their trust
manager opted to buy a property with a yield of 6% because the deal would result in a
reduction in their dividend payouts. Moreover, the UPREIT or umbrella partnership
REIT scheme, which is commonly used in the U.S. to transfer the ownership of private
properties to a public REIT on a tax-deferred basis, is not permitted in Asia. Under the
UPREIT structure, the REIT does not own the underlying assets directly, but rather it acts
as the general partner of the umbrella partnership that owns interests in the properties.
The UPREIT structure also allows U.S. REITs to finance their acquisitions through the
issuance of “operating partnership units”.6 Since cash payment is the primary mode of
payment for property transactions in Asia, our study avoids the necessity to consider the
stock value of the bidding REITs as well as the reverse effect of stock financing when the
target is privately held (Chung, 1998). Furthermore, we have information on both the
purchase price and valuation of the target properties. This enables us to identify instances
of REITs over-paying for an asset and thereby, control for any spurious correlation
between over-payment and earnings dilution. In sum, our sample provides a cleaner
testing ground for examining the wealth effects of accretive acquisitions.
5
As an illustration, the mission statement of a major REIT in Asia openly states, “We constantly
seek investment grade and yield-accretive acquisitions to grow and diversify our portfolio…With our yieldaccretive acquisitions, proactive asset management and optimal capital structure strategies, returns for our
shareholders are maximized.”
6
For a discussion on the UPREIT structure, see Campbell (2002). Due to their special tax treatment,
REITs in the U.S. would typically pay a premium for cash transactions in order to offset the seller’s tax
burden. Hardin and Wolverton (1999) observe that REITs tend to overpay when they acquire apartments.
4
Our empirical study relies on a sample of 228 acquisition deals announced by REITs
listed in Japan (JREIT) and Singapore (SREIT). Underlining the importance of the
“accretive” motive in their acquisition decisions, the data reveals that four out of every
five acquisitions announced by Asian REITs are accretive. The event-study results show
a positive market reaction to acquisition news. Furthermore, when the acquisitions are
divided according to their impact on the portfolio yield, we find that the sub-sample
comprising accretive acquisitions registered significantly positive abnormal returns. In
contrast, the returns for the sub-sample of dilutive acquisitions recorded significantly
negative returns around their announcement dates. The positive impact of accretive
acquisitions on stock valuation continues to persist even after we control for other factors
that have been found in prior studies to influence abnormal gains associated with
acquisition announcements.
The paper is organized as follows. To give some background information, the next
section briefly reviews the development and rapid growth of the REIT markets in Asia.
The third section, which presents the research methodology, covers the data collection
process as well as our measurements of the abnormal returns and yield accretion
associated with each sampled acquisition. The fourth section discusses the empirical
results and presents the robustness tests. The fifth section contains the conclusions.
REIT Markets in Asia
Since their emergence in 2001, REITs have spread widely across the continent of Asia.
Japan, South Korea and Singapore were amongst the first Asian countries to adopt REIT.
Other jurisdictions which have since joined the REIT bandwagon include Thailand,
Taiwan, Malaysia and Hong Kong. The REIT concept is now openly embraced as a
strategic initiative for restructuring real estate markets and tapping international capital in
Asia. Within five years, 93 REITs have been listed in various stock markets across Asia
with a combined capitalization of close to US$ 83 billion (Table 1). Several countries,
such as Philippines, China and India, are reported to be deliberating on the appropriate
5
REIT framework to adopt. As the number of REITs continues to increase rapidly, the
market capitalization for Asia REITs is estimated to reach US$ 200 billion within the
next decade.
[ Table 1 ]
The phenomenal growth of REIT markets in Asia can be attributed to a boom in the
number of new IPOs as well as to the aggressive growth-by-acquisition strategy adopted
by most of the newly listed REITs. The growth and market performance of the REIT
sector in Japan and Singapore, which are by far the two largest REIT markets in Asia,
have been robust. Since their initiation, REIT stocks have registered annual capital
growth of 10.2% and 38.2% in Japan and Singapore, respectively. On top of the
impressive capital growth, investors also earn an annualized dividend of 3.84% for JREIT
stocks and 4.79% for SREIT stocks. Unlike REITs in the U.S. where dividend income
comprises 71% of the total returns (Gyourko and Siegel, 1994), property returns in Asia
have traditionally been dominated by capital growth with prime real estate commanding
low capitalization rate. The low rental yield imposes an obstacle for REIT sponsors and
managers in the region to cater to the demand of international and institutional investors
who are accustomed to high dividend paying REIT stocks. Thus, one popular strategy
adopted by Asian REITs to increase their earnings and dividends is engaging in accretive
acquisitions. 7 Between September 2002 and April 2007, JREITs and SREITs spent a
combined sum of US$24.58 billion in property acquisitions. This amount represented
more than one-third of their market capitalization as at April 2007.
Our data collection begins by shifting through the local press for news of acquisitions
made by REITs in Japan and Singapore. The event date is taken as the first day the
7
Merrill Lynch research reported that the aggregate investment portfolio of SREITs increased by
83% in 2006 and half of the growth are attributed to new acquisitions. In addition, the dividend per share
(DPS) of the average SREIT grew by 13.8% in 2005. Only four percentage points of the dividend growth
were attributed to rent escalation at building owned by REITs, while nearly 10 percentage points of the
growth came from yield accretive acquisitions (Whiting, 2007).
6
announcement first appeared in the publication. If the announcement is made on a nontrading day, the next trading day after the announcement is used as the event day. We
exclude from our analysis closely clustered acquisitions, where a REIT acquires two or
more properties within 21 days, because the returns surrounding the event window cannot
be isolated. In the case of acquisition announcements involving more than one property,
we aggregate the value of the acquired properties and treated them as a single event.
Some observations had to be omitted due to overlapping event periods and incomplete
information. Our final sample covers 228 acquisitions made by JREITs and SREITs
between September 2002 and April 2007. The average size of the acquisitions was US$
75.3 million, ranging from US$ 1.9 million to US$ 814.9 million. The average
transaction size made by JREITs (US$ 75.4 million) was not significantly different from
that registered by SREITs (US$ 75.0 million).8
REITs traded on the other stock exchanges in Asia are not included in the study either
because they have a short trading history (Hong Kong and Malaysia) or because they do
not engage in acquisitions due to their close-end structure (South Korea, Taiwan and
Thailand). Also, REITs in Japan and Singapore are usually formed by acquiring
properties from property holding/development entities. After their formation and listing,
most REITs continue to transact with these “related parties”, which include either a
director, CEO or controlling shareholder of the REIT manager or a controlling
shareholder of the REIT itself (Koh, 2006). Our sample shows that one-third of the deals
involved REITs acquiring properties from a related party. Such deals are exposed to
potential conflict of interests between the shareholders and the REIT managers and
sponsors.9
8
In terms of aggregate transaction value, the most active buyer was Japan Retail Fund Investment,
which acquired US$ 3.50 billion worth of properties over the sample period. This is followed by Nippon
Building Fund (US$ 2.64 billion) and Japan Real Estate Investment (US$ 2.01 billion). The largest buyers
in Singapore are CapitaMall Trust Limited and Ascendas REIT, which acquired US$ 1.59 billion and US$
1.45 billion worth of real estate, respectively.
9
In one instance, the Japan Securities and Exchange Surveillance Commission called for
disciplinary action against a JREIT manager and its parent company because the REIT had not conducted
proper due diligence before acquiring some properties from its parent (Whiting, 2007). The regulations in
Singapore are stricter with respect to “interested person transactions”. In addition to requiring two
independent valuations for each property to be acquired, an independent financial expert, usually an
7
Research Methodology
The main aim of this study is to examine the wealth effects of accretive acquisitions from
the perspective of the acquiring firm shareholders. We carry out empirical tests to
determine whether the sector’s apparent obsession with earnings accretion is beneficial to
the shareholders. Based on the traditional valuation framework, the null hypothesis of our
empirical research is, “the abnormal gains surrounding acquisition announcements are
not related to the degree of accretion resulting from the acquisition.” In other words, the
null hypothesis is that the accretion story does not affect stock price and hence, we do not
expect to see a significant regression coefficient for yield accretion. However, if the
market believes in the accretive story, the abnormal returns surrounding announcements
of accretive acquisitions will be significantly higher. Conversely, if the stock market
thinks the accretive story is detrimental to stockholders wealth, then an inverse
relationship could be expected.
The empirical research is carried out as follows: First, we measure the yield accretion and
abnormal returns associated with each acquisition announcements. Next, both univariate
and multivariate analyses are carried out to examine the relationship between yield
accretion and the abnormal returns observed around the announcement day.
Yield Accretion
For the purpose of this paper, accretion (and dilution) is defined as the change in the
portfolio yield as a direct consequence of an acquisition. To illustrate the mechanics of an
accretive acquisition, consider REIT A which has an existing asset portfolio worth
US$500 million. It announces an acquisition of a US$ 50 million property with a 7% net
investment bank, has to be appointed to render an opinion stating whether the transaction is on normal
commercial terms and whether it is prejudicial to the shareholders (Koh, 2006).
8
yield.10 The financial positions pre- and post-acquisition are set out in Table 2. Assuming
the property is purchased at a fair market value, the REIT’s post-acquisition portfolio
value would simply be the sum of its pre-acquisition portfolio value and the market value
of the acquired property. The new acquisition will increase the REIT portfolio value to
US$ 550 and its net property income to US$ 28.50 million. The proposed acquisition is
yield accretive with REIT A’s stockholders enjoying a higher post-acquisition yield,
rising from 5.00% to 5.18%.11
[ Table 2]
The yield accretion ( δ k REIT ) can be represented mathematically by the following
expression:
⎡ k REIT ( MVREIT ) + k ppty ( MV ppty ) ⎤
⎥ − k REIT
MVREIT + MV ppty
⎣⎢
⎦⎥
δ k REIT = ⎢
(1)
where k REIT and k ppty are the yield of the pre-acquisition yield of the REIT portfolio and
target property respectively, whilst MV REIT and MV ppty are their respective market values.
The mathematical expression (1) can be simplified by denoting MV ppty / ( MV REIT +
MV ppty ) as λ . Then MV REIT / ( MV REIT + MV ppty ) will be equal to (1- λ ) and the yield
accretion definition will be:
δ k REIT = (k ppty − k REIT ) λ
(2)
Equation (2) shows that the combined yield will increase so long as the yield of the
acquired property is higher than the existing portfolio’s. Conversely, when the yield of
10
The net property yield is often referred to as the building’s capitalization rate, or cap rate in short.
It is represented by the ratio of the building’s annual rental income after expenses over its purchase price.
11
After the acquisition, the weighted average property yield of the REIT would increase to 5.18%
(5.0%xUS$500m/US$550m + 7%xUS$50.0m/US$ 550.0m).
9
the target property is lower than the yield of the REIT portfolio, the resulting effect is
dilutive on earnings. Besides the differential yield between the acquired property and the
existing portfolio, (k ppty − k REIT ) , Equation (2) indicates that the accretive effect is also
dictated by λ , the relative size of the target property (over the combined portfolio size).
Going back to our earlier illustration in Table 2, the property yield is two percentage
points higher than the portfolio yield. Although the target may cost $50 million, it is still
small relative to the size of the REIT portfolio. Consequently, despite the significantly
higher yield of the target property, the acquisition only resulted in a marginal yield
accretion of 18 basis points.
To compute the accretion effect of each acquisition, we had to collect information on the
market value and net operating income (NOI) of the asset portfolio as well as the
purchase price and net income of the acquired property. The market value and the NOI of
the existing portfolio, which is represented by the annualized net property income
generated by the REIT portfolio prior to the acquisition, are extracted from the last
published financial statement of the individual REITs. Since REITs revalue their
properties at least once every year, we do not anticipate the book- and market-value of
their assets to be significantly different. In cases where an individual REIT announced
more than one acquisition event during the financial period, we adjust the value and NOI
of the asset portfolio incrementally to take into account the earlier acquisitions announced.
For price and income information on the target property, we consulted websites and
public statements released by the acquiring REITs. The net yield of the target property is
measured by the ratio of its NOI over the purchase price, excluding fees and acquisition
expenses paid by the acquiring REIT. 12 The NOI includes non-rental property income,
such as revenue from promotion and advertising, income from car park, and additional
12
Where specific information on an acquired property is not available, one could impute its market
value and income by taking the differences in the portfolio value and income pre- and post-acquisition,
particularly in cases where only one acquisition took place in between the financial period. However, we
decided against adopting this measure because it would incorporate any synergy between the target
property and existing portfolio of the REITs in between the accounting periods. Furthermore, where asset
revaluation exercises have been carried out within the same financial period, it is difficult to attribute how
much of the change in portfolio value is due to capital appreciation of the incumbent assets and how much
of it is due to new additions to the portfolio.
10
charges on tenants for items such as air conditioning, cleaning and other services. It takes
into account costs such as building management costs and utilities, but not debt leverage.
Note that the yield accretion as defined in Equation (2) reflects simply the “accounting”
accretion effect when the acquired property is merged with the REIT’s portfolio. This
definition is advantageous because it isolates the “accounting” effect from the “real”
effects due to synergy or opportunistic buying at a low price, which we can accommodate
separately in the multivariate regressions. In addition, our definition of the REIT’s
portfolio yield is equivalent to dividing the earnings before interest, tax, depreciation and
amortization (EBITDA) of the REIT by its enterprise value (equity plus debt minus cash).
It has the advantage of not being affected by debt, interest costs, taxation or any
extraordinary gains or losses, or the REIT’s dividend payout policy.13
Table 3 reports the yield accretion for the 228 acquisitions. On average, the acquisitions
are accretive because the yield of the average target (6.28%) is higher than the average
portfolio’s (4.64%). However, despite the 164 basis points differential, the mean
accretion of the acquisitions was only 4.3 basis points. This is because λ , the relative size
of the target over the post-acquisition portfolio, is only 5.45%. Comparing the
acquisitions made by JREITs and SREITs, the accretive effect seems to be stronger for
JREITs, due to the wider yield gap between the target property and the REIT portfolio.
This is, however, mitigated by a smaller size leverage ( λ ) effect for JREITs, 4.10% as
compared to 8.37% for SREITs. Table 3 implies that as REITs grow larger, the accretive
effect of subsequent acquisitions will diminish if there is no corresponding increase in the
acquisition size.14
13
Andrade (1999) also justifies that EBITDA captures the profitability of the acquirer, while
avoiding any of the spurious merger accounting effects, such as the extra depreciation and amortization due
to purchase, as well as the financing choices made by the acquirer (cash, debt or stock).
14
This corresponds to the “bootstrap effect” cautioned by Brealey and Myers (2000, p.949), that “in
order to keep fooling the investors, you must continue to expand by merger (acquisition) at the same
compound rate. Obviously you cannot do this forever; one day expansion must slow down or stop. Then
earnings growth will cease, and your house of cards will fall”.
11
[ Table 3 ]
Event-study Methodology
A number of studies have examined market reactions to acquisition and merger
announcements, but the evidence remains inconclusive. If an acquisition is a positive
NPV venture and to the extent that the positive NPV represents gains to the shareholders
of the firm, one should expect to see an increase in the stock price of the acquiring firm.
Furthermore, corporate acquisitions and mergers have often been justified on the basis of
synergy or the acquirer’s ability to extract value from the target.15 However, a number of
studies have reported returns to acquirers that are insignificantly different from zero.16 In
line with the present value hypothesis, the authors of these studies contend that in a
competitive market where there are numerous buyers in the market and the product is
unique, the economic gain is captured mostly by the vendor. Consequently, shareholders
of the target firm would enjoy positive wealth effects, but shareholders of the acquiring
firm should not expect any abnormal gains associated with acquisition announcements. In
a hotly contested market the winning bidder could instead end up paying a premium,
which could lead to a reduction in its stock price (Campbell, Ghosh and Sirmans, 2001;
Sahin, 2005). Most of the prior studies on the wealth effects of real estate acquisitions are
based on U.S. data, where the REIT sector is considerably more mature. In addition, a
number of the acquisitions involved REITs either acquiring or merging with other REITs.
Thus, a side contribution of our research is extending the literature on wealth effects of
acquisitions to direct property acquisition in a nascent REIT market.
15
Empirical studies which have reported positive abnormal gains associated with real estate
acquisitions include Allen and Sirmans (1987), Campbell, Ghosh and Sirmans (2001), Li, Elayan and
Mayer (2001) and Campbell, Petrova and Sirmans (2003).
16
Prior studies which have observed insignificant abnormal returns for acquiring REITs include
Owers and Rogers (1986), Glascock, Davidson and Sirmans (1991), Booth, Glascock and Sarkar (1996)
and Pierzak (2001). In the mainstream finance literature, Mulherin and Boone (2000) also find a slightly
negative but insignificant return for the bidder.
12
Abnormal returns surrounding the acquisition announcements are estimated using the
standard market model event-study methodology. A 21-day event window surrounding
the announcement (Day-10 to Day+10; abbreviated hereinafter as -10,+10) is employed
with the date of announcement designated as day 0 in the event study. Following the
recommendation of Campbell, Lo and MacKinlay (1996), we employ a multivariate
regression model with dummy variables for the event date to handle cases were there is
partial clustering, that is, where the event date is not the same across firms but there is an
overlap in the event windows. Consequently, an estimation window of –100 days to +10
days was employed and where a REIT acquires on dates less than 100 days apart, the
estimation windows for the REIT were combined so that one market model would apply
to these consecutive periods. The excess return or the prediction error ( γ ek ) for the
corresponding day is estimated using the following equation:
Kj
R jt = α j + β j Rmt + ∑
k =1
10
∑γ
e = −10
ek
Dek + ε jt
(3)
where Rjt and Rmt are the period-t returns for acquirer j and the market portfolio,
respectively. Daily returns for the market index and the individual securities were
obtained from the DATASTREAM. For the market index, we employ the All Singapore
Equities Index for Singapore and the Nikkei All Stocks Price Index for Japan. They are
the most comprehensive price index comprising all stocks listed on the respective stock
exchange. The coefficients α j and β j are the least squares estimates of the intercept and
slope respectively, and ε jt is the residual error of i.i.d. normal distribution with a zero
mean and a constant variance. K is the number of events included in the estimation, while
Dek is a dummy variable equal to zero for all the dates except that it equals one on the e-
th day of the k-th event window. Our final sample consists of 38 estimation equations (W
= 38) and 228 events (N =
∑
W
i =1
K i = 228). To test the significance of the measured
abnormal returns, we constructed the J2 statistics for the e-th day of all the event windows:
J 2 ,e = N
−
1 W
2
Ki
γ eki
∑∑ σ
i =1 k =1
(4)
eki
13
where σ eki is the standard error of the abnormal return estimate γ eki . Under the null
hypothesis that the abnormal returns follow a zero-mean normal distribution, the J2
statistics have an approximate standard normal distribution. A significantly positive
abnormal return would be inconsistent with the “present value” hypothesis (NPV = 0),
which prescribes that REIT acquirers pay a fair price for the asset.
Empirical Results
Abnormal Returns
Table 4 reports the announcement effects of the total sample of 228 acquisitions. The
table reports the average abnormal return over the 21-day window period as well as the
cumulative abnormal returns (CARs) for four different intervals. Exhibit 1 tracks the
mean CARs for the sample over the corresponding 21-day window period.
[Table 4 & Exhibit 1]
We find that acquisition announcements result in a positive stock price adjustment for the
acquiring firm. The CAR-10,+10 for the 21-day window period is 0.39% with nearly all the
abnormal gains recorded in the post-announcement period (CAR0,+10, 0.31%). Whilst the
abnormal return on the day prior to announcement is negligible (D-1), the average
abnormal gain is +0.04% on the event day (D0), +0.17% one day after (D+1), and +0.09%
two days after (D+2). Since the pattern of the abnormal returns indicates that most of the
announcement effects are significantly captured on the first three days after the
announcement, we focus our subsequent analysis on the 3-day CAR
(0, +2)
which has a
17
mean value of 0.29%. Judging by the spread of the value (-8.62% to +10.24%), the
observed abnormal returns do vary tremendously across the sample.
17
Although the magnitude of the CAR appears to be small compared to prior studies on mergers and
acquisition activities of U.S. REITs, such as Campbell, Petrova and Sirmans (2003) who observed a 0.53%
CAR, it should be clarified that our sample primarily involves firms that make multiple acquisitions within
a short period of time. Fuller, Netter and Stegemoller (2002) argue that when firms make multiple bids as
14
Overall, the event-study results show that acquisition announcements made by Asian
REITs contained good news. As shown in Table 5, the mean CAR
(0, +2)
for all the
observations is positive +0.29% and statistically significant. However, the observed
CARs for the segregated samples indicate that the economic gains are driven primarily by
JREITs’ acquisitions, which registered +0.36% average return over the three-day analysis
period. The mean return for SREITs’ acquisitions, whilst positive, is much lower
(+0.14%) and insignificant. One possible explanation for the observed abnormal gains is
that the targets in our sample involved privately held assets, which according to Hansen
and Lott (1996) and Fuller, Netter and Stegemoller (2002) tend to be priced at a discount
to publicly-listed targets.18 However, the “private value” explanation is unable to clarify
the differences in the abnormal returns observed across the two markets even though the
targets in both markets involved privately held properties.
[Table 5]
Following Ching and Fu’s (2003) proposition that wealth effects associated with
acquisitions is dependent on market contestability,19 all else being equal, any variations
in the magnitude of the abnormal returns between SREITs and JREITs could be
attributed to their comparative market structure, particularly the degree of competition
and freedom of entry and exit as well as the existence of other barriers such as restrictions
on credit. Judging by the comparative magnitude of the economic gains, Table 5 indicates
that the commercial real estate market in Japan is less contestable than in Singapore.
part of an announced acquisition program, any finding of significant bidder abnormal returns at an
acquisition announcement is noteworthy since the impact of the acquisitions is already impounded in the
stock price.
18
Fuller, Netter and Stegemoller (2002) attribute this to a liquidity effect, namely private firms
cannot be bought and sold as easily as publicly traded firms. This lack of liquidity makes the investment
less attractive and thus less valuable than similar, more liquid investments. They further postulate that the
acquirer captures this discount in purchasing the privately held firms.
19
Ching and Fu (2003) argue that a contestable market offers firms no more than a normal rate of
profit because competition compels bidders to bid up rent equal to the economic profit from the use.
Conversely, in an imperfectly contestable market, positive abnormal returns would be accrued to incumbent
firms.
15
Apart from the handicap on local knowledge, foreign investors in the Japanese markets
also face other entry barriers in the form of language and cultural disadvantages. In
contrast, Singapore has successfully attracted a number of foreign-based REITs listed on
its stock exchange due to its reputation for having the most open and progressive REIT
legislation in Asia. 20 This may explain why the abnormal returns associated with
acquisition announcements by JREITs are stronger and more significant than SREITs’. A
simpler explanation is that there are more dilutive acquisitions, as we shall see below are
inversely related to the market reaction, in the SREIT sample (37.5%) as compared to the
JREIT sample (10.3%).
Yield Accretion and Abnormal Returns
To examine the relationship between abnormal returns surrounding acquisition
announcements and yield accretion, we first segregate the acquisitions in our sample into
those that are accretive and those that are dilutive. Underlining the emphasis of Asian
REITs on earnings and yield growth, 81.3% of the acquisitions are accretive, whilst only
18.7% are dilutive. Panel A in Table 6, which compare the cumulative abnormal returns
for the two groups over different window periods, show that the wealth effects for the
two groups are significantly different. Whilst their cumulative abnormal returns prior to
the acquisition announcements, CAR
(-10,-1),
are comparable, the difference in their
abnormal returns after the announcement is striking. Judging by the statistically
significant and positive CAR (0, +2) of 0.51%, accretive acquisitions are viewed positively
by the market. Dilutive acquisitions, in contrast, convey bad news as inferred by the
significantly negative stock price reaction, CAR
(0, +2) of
-0.67%. A similar conclusion is
reached when the sample observations are divided into five quintiles ranked according to
their accretive effect (Table 6 Panel B). The univariate test results, thus, reject the null
hypothesis in favor of the alternate hypothesis that the economic gain from an acquisition
is positively related to its yield accretion effect on the acquirer’s existing asset portfolio.
20
Ooi, Newell and Sing (2006) and Whiting (2007) provide comparative reviews of the REIT
regimes in Asia.
16
[ Table 6 ]
We also employ cross-sectional regressions to assess the market reaction to acquisition
announcements. The basic regression model is set up as follows: y is defined as an (N x 1)
vector of observations and X as an (N x K) matrix of characteristics. The regression
equation is as follows: y = Xθ +η , where θ is the ( K x 1) coefficient vector and η is the
( N x 1) disturbance vector. Assuming E[ X 'η ] = 0, we can consistently estimate θ using
ordinary least squares (OLS). The dependent variable in all the regressions is the 3-day
CAR (0, +2) earned by the acquirer’s stock. The explanatory variable of key interest to us is
the yield accretion variable. If the capital market views the accretive motive to be
beneficial to the shareholders of the acquiring REIT, the abnormal returns surrounding
announcement of accretive acquisitions are expected to be positive. Conversely, if yieldaccretive story is detrimental to shareholders wealth, we would see an insignificant or
negative regression coefficient for this variable.
Table 7 reports the estimation results of our cross-sectional regression of the abnormal
returns against a set of explanatory variables. The F-statistic for the OLS regressions
indicate that the null hypothesis (that is all the partial regression coefficients in the model
are zero) can be rejected at the 5% level of significance in favor of the alternative
hypothesis that there is a linear relationship between the dependent variable and the
regressors. The reported t-statistics for the explanatory variables are the White’s tstatistics corrected for heteroscedasticity.
[ Table 7 ]
Model 1 is the base OLS model, which comprises a constant, a dummy variable to
distinguish the wealth effects of JREITs from SREITs, and another binary variable to
distinguish the wealth effects of accretive acquisitions from dilutive acquisitions. In
17
Model 2, we partitioned the yield accretion effect into two separate components as
presented previously in Equation (2), namely the differential yield between the acquired
property and the existing portfolio (k ppty − k REIT ) and the relative size of the target
property over the combined asset size, λ . The regression results confirm that yield
accretion is an important determinant of the abnormal gains surrounding acquisition
announcements. Consistent with the univariate results, the evidence shows that accretive
acquisitions yield higher economic gains for the acquiring firm’s shareholders. The
positive relationship between the yield accretion and abnormal returns persists when we
substitute the binary variable with actual values of the yield differential between the
target and portfolio’s in Model 2. However, the insignificant regression coefficient for λ
indicates that there is no premium to be achieved beyond the fact the acquisition is
accretive or dilutive. In other words, the size of the target relative to the size of the
existing portfolios does not seem to matter.
In Model 3, we incorporate a set of dummy variables to account for the fixed effects of
omitted variables specific to each firm. This specification is commonly known as the
least squares dummy variable (LSDV) or fixed-effects model. The Breush-Pagan
Lagrange test statistic, however, indicates that the classical OLS regression without any
firm effects is preferred over the fixed-effects model. More important, the positive and
statistically significant relationship between yield accretion and abnormal returns
continue to persist in the LSDV regression model.
The first three regressions are estimated using the ordinary least squares (OLS) method.
Model 4 uses the generalized least square (GLS) method where each observation is
scaled (multiplied) by the inverse of the standard error of the abnormal return estimate so
that the observations with a more precise γ(0,+2) estimate receive a greater weight in the
regression. This is consistent with the approach employed by Ching and Fu (2003). The
results reported in the last column of Table 7 show that the positive correlation between
accretive acquisition and economic gains are significant. Further tests, results not
reported for brevity reason, also confirm that the relationship is robust to alternative
18
window period used to compute the cumulative returns as well as to the omission of
acquisitions less than US$20 million from our sample.21
Other Sources of Economic Gains
The preceding evidence does not rule out other possible explanations for the market
reaction to acquisition announcements. In this section, we expand the base regression to
incorporate a fuller set of variables to take into account other possible explanations for
the abnormal returns. Specifically, we control for the extent individual REITs may
exploit other value enhancing opportunities in their acquisition activities, namely bargain
buys, scale economy, synergy, and risk diversification.
First, we incorporate a variable to differentiate “arms length” deals from “related party”
acquisitions. Unlike REITs in the US which are internally-managed, REITs in the
Singapore and Japan markets are required to delegate the REIT management and
functions to an external party, which is usually controlled by the sponsoring party.
Consequently, potential conflict of exists between the REIT shareholders and the external
management party who may elect to inject poor-quality assets owned by the sponsors into
the REIT. In this scenario, “related party” transaction should be correlated negatively
with abnormal returns. Alternatively, the market may already have anticipated that the
property would be injected into the REIT; hence, no new information is actually
conveyed when the firm announced a “related party” transaction.
Allen and Sirmans (1987) attribute the economic gains they observed for their sample to
better asset management for related acquisitions. Campbell, Petrova and Sirmans (2003)
also find that focusing acquisitions yield significantly higher abnormal returns than
diversifying acquisitions. Following these two studies, a convenient way to control for
21
The accretion variable remains significant when we substitute the dependent variable, CAR(0,+2) ,
in our regression models with CAR (-1,+1). The positive relationship between accretive acquisition and
abnormal returns is also robust when deals that involved less than US$ 20 million are filtered out of the
sample.
19
expected synergy from the acquisitions would be to introduce a binary variable to reflect
diversification across property type and geographical location. However, there were not
enough variations in our sample to do this. 22 We, instead, employ the change in the
operating efficiency ratio (operating expenses before financing over market value of the
REIT portfolio) to gauge the potential synergy and economies of scale generated by the
acquisition. A tenet of the synergy and scale economy story is that acquisitions are
undertaken to increase efficiency and consequently, the relative operating expenses
should decrease following a merger (Li, Elayan and Meyer, 2001). We expect this
variable to have a positive and significant coefficient.
We also control for firm risk to ensure that the accretive variable is not merely picking up
any omitted effects arising from a shift in the business and financial risk of the individual
firms following the acquisitions. Financial risk is represented by changes in the debt
ratios of the acquiring REIT following the acquisition, whilst firm risk is proxied by
changes in the stock price volatility of the acquiring REIT three months before and after
the acquisition. Two separate binary variables with the value of unity are used to
represent a positive expected change in these two variables. Based on the conventional
risk-return tradeoffs, both variables are expected to have a positive relationship with
returns.23
Previous studies have also suggested that the method of payment and fund raising for an
acquisition may provide valuable information to the market. To account for this, we
include a binary variable to distinguish REITs which disclosed their intention to place
equity shares to fund the announced acquisition. On the basis that equity issues tend to
signal that the stock is overpriced (Myers and Majluf, 1984), we expect this variable to be
negatively related to market reaction. To examine how overpayment influence the
economic gains associated with acquisition news, we benchmark the property’s purchase
22
Another proxy which could be employed to reflect potential synergy is a binary variable to reflect
new acquisitions that are located in a development which the REIT already partially owned. Again, there
was no variation in the sample to examine this.
23
Although both the firm risk and synergy measures are not observable at the event date, they are the
best proxies we have on the market’s expectations.
20
price against the valuation determined independently by professional appraisers. The
abnormal return should decrease with the degree of overpayment.
Table 8 defines the independent variables in the extended regression models and reports
their sample statistics. Due to incomplete data on some of the new variables, 40
observations had to be omitted. This leaves us with a final sample of 188 observations for
the expanded regressions. As is shown in Table 8, 80.3% of the acquisitions are accretive,
increasing the acquiring REITs’ portfolio yield by 4.2 basis points. The relative size of
target property over the combined portfolio is 5.6%. On average, the targets are acquired
at close to their market valuation. 33.5% of the targets are purchased from related parties
and 58.0% of the sample resulted in positive synergy and scale economies, reflected by a
reduction in the operating efficiency ratio of the acquiring REITs. However, 52.7% of the
acquisitions lead to higher volatility in the REITs stocks. 16% of the acquisition
announcements were accompanied by secondary equity offerings (SEOs). 41.5% of
acquisitions resulted in an increase in the financial risk of the acquiring REITs, as
reflected by their pre- and post-acquisition debt ratio.
[ Table 8 ]
The estimation results, which are reported under Model 5 in Table 9, are similar to what
we have observed earlier for the base regressions. In particular, the market reaction is
positive and significant for accretive acquisitions. The adjusted R-squared is modestly
higher than that for Model 1 and Model 2. Most of the variables carry the expected signs.
The market reacts negatively to announcements where the targets are acquired at a
premium price and from related parties. Similarly, acquisition announcements that are
accompanied by SEOs to fund the purchase have lower economic gains. Conversely,
acquisitions that lead to higher business and financial risks for the acquiring REIT have
higher returns. Nevertheless, only the coefficients for accretive acquisition and change in
total risk are statistically significant.
[ Table 9 ]
21
Model 6 examines the possibility that the observed abnormal returns are due to
differences in the characteristics of the bidder as well as the attributes of the target
property. 24 Due to their frequent participation, the capital market may have already
factored into their stock price future acquisitions. Alternatively, aggressive bidders are
more likely to overbid for a property, and expose themselves to the winner’s curse. An
aggressive bidding strategy is, thus, expected to be correlated negatively or
insignificantly with the abnormal return. To measure the firm’s aggressiveness and
frequency of participation in the property investment market, the time interval between
the current and previous acquisitions is used. A second variable is introduced to account
for the wealth effects of maiden acquisitions. Fuller, Netter and Stegemoller (2002) posit
that the first bid contain relatively more information about the acquiring firm than
subsequent bids made within a short time interval. A third variable is included to control
for firm size. On the basis that smaller-sized REITs have more scope to benefit from
scale economies, it is expected to be inversely related to the observed wealth effects. The
estimation results in Table 9 show the expected negative but insignificant coefficient for
aggressive REITs. Consistent with Campbell, Petrova and Sirmans (2002), we did not
find significant difference between returns in the first transaction than in later transaction
of the same firms. Interestingly, once firm attributes are controlled for, the coefficient for
JREITs turns positive but it still remains insignificant. Overall, the insignificant
coefficients confirm our earlier finding of the LSDV regression model that adding firmspecific dummy variables does not really enhance the model’s explanatory power.
In Model 6, we also take into account the attributes of the target property, particularly
whether it is a single asset or a portfolio of assets, and whether it is a retail property or a
mixed-use property. If any of these classes of properties offer buyers scope to extract
value and improve their efficiency, we should to see a positive market reaction. Whilst
the coefficient for retail property is positive, the benefit is not large enough to be
24
It should be noted that since the size of the REIT and purchase price of the target property is
included in the regression, the relative size of the acquisition is not included to avoid possible
multicollinearity problems.
22
statistically significant. Conversely, targets which involve mixed-use properties or a
portfolio of properties are associated with significantly lower abnormal returns. This is
consistent with the notion that firms are rewarded for corporate focus, and penalized for
diversification. Following Ching and Fu (2003) and Ooi and Sirmans’ (2004) argument
that the market for larger and more expensive properties tend to be thinner and less
contestable, we incorporate the purchase price as an additional variable in Model 6. The
regression results show the market reaction does depend on the property size, but not in a
significant way. Overall, the empirical results presented in Model 6 are supportive of
Fuller, Netter and Stegemoller (2002) contention that it is the characteristics of the target
and its potential relationship with the bidding firm rather than the bidding firm itself that
determine the wealth effects.
Model 7 incorporates a dummy variable to account for deals that are announced in 2006.
We choose 2006 because it coincides with a hot market and accounts for 41.5% of the
acquisitions in our sample. As the investment market becomes more contestable, we
expect to see a corresponding reduction in the abnormal returns. The coefficient for the
dummy variable in our regression is negative, as predicted, but not statistically significant.
We also tried to control for the sentiment in the real estate market by measuring the dollar
value of all property transacted in the particular market over the past six months. Again,
the relationship is insignificant.
In Model 8, we observe that the REIT stock price performance prior to the acquisition
adds to the explanatory power of the regressions. As shown in the last column of Table 9,
the estimation results indicate that the market reaction to acquisition news is associated
positively and significantly with the REIT stock returns prior to the announcement.
Going on the logic that pre-acquisition stock price performance may reflect the market’s
view on the ability of the REIT manager, property acquisitions announced by wellmanaged REITs are, not surprisingly, better received than those made by poorly-managed
REITs.
23
On the whole, models 6, 7 and 8 explained around 15% to 18% of the variation observed
in the economic gains. 25 While this may be indicative of the presence of other
determinants, we are unable to find any significant relationship between the ex ante
economic profit and other firm attributes. For example, we employed the number of times
an individual firm have acquired properties prior to the current acquisition as a measure
of the REIT’s experience in the property market. An incremental number was used to
denote the learning curve with successive property purchased by the REIT over the
sample period.26 On the other hand, Fuller, Netter and Stegemoller (2002) suggest that
after making many quick acquisitions, bidders may negotiate less efficiently and create
less synergy in later deals. Hence, we have no a priori expectation on the relationship of
this variable on abnormal returns associated with acquisition announcements. A set of
time dummies for each year of the study period was also added on the intuition that
bidding of prime properties will intensify over time (given the limited supply of
institutional properties available for purchase and the increasing number of potential
acquirers as more REITs are listed). Consequently, REIT may find it harder to earn
economic profit from property acquisitions over time. Thirdly, we examined the possible
influence of book-to-market equity ratio of the acquiring firms on the rationale that the
market reaction to acquisitions by “value” and “glamour” firms may well be different.27
We do not report the results since none of these variables are significant and do not add
to the interpretation of the results. The coefficient for the accretive variable remains
positive and statistically significant in all the regressions.28
25
Judging by the adjusted R2 values of between 7.8% and 10.7%, the explanatory power of our
regression models fare relatively well. In comparison, the regression model in prior studies, such as
Campbell, Petrova and Sirmans (2003) had adjusted R2 values in the range of 3.2% - 3.5%.
26
For illustration, assume a REIT acquired four properties over the sample period. For that
individual company, the first property purchase will be given a value of 1, the second purchase 2, the third
purchase 3, and the last purchase 4. This would capture the firm’s gradual accumulation of experience with
each successive acquisition.
27
Rau and Vermaelen (1998) observe that acquirers with low book-to-market equity (growth or
glamour firms) earn negative abnormal returns for up to 36 months.
28
We also run separate regressions for the acquisitions by SREITs and JREITs. Results for the
SREIT sample are consistent with the conclusion that accretive acquisitions are good news. The JREIT
sample, however, did not show a significant relationship, primarily because of the lack of heterogeneity
with 90% of the acquisitions yield-accretive.
24
Conclusions
This paper examines the wealth effects of accretive acquisitions based on a sample of 228
acquisitions made by REITs listed in Asia. Despite what corporate finance has to say,
yield accretion remains an important consideration in the acquisition decisions of Asian
REITs. The research provides some initial evidence that the market reacts favorably to
announcements of accretive acquisitions and negatively to dilutive acquisitions. The
positive relationship between yield accretion and abnormal returns surrounding the
acquisition announcement continue to persist even after we control for other determinants
of the market reaction. The results have important implications for shareholders and
managers of REITs which adopts active acquisition as a strategy for corporate growth
and value enhancement. At the least, the empirical evidence indicates that the managers’
obsession with earnings growth is not detrimental to the shareholders welfare in the
short-run. On the contrary, our empirical evidence shows that shareholders benefit when
REITs engage in property acquisitions that lead to higher earnings.
On the basis that REITs are required to disburse at least 90% of their earnings as
dividends, accretive acquisitions would lead to higher current earnings and hence, result
in more dividend income for the shareholders. 29 This study, thus, provides indirect
evidence supporting the stream of literature which argues that market reacts positively to
news of dividend hikes and negatively to news of dividend cuts. To the extent that REIT
management is able to exercise discretion and effectively employ yield-accretive
acquisitions to enhance operating cash flows and dividends to shareholders, our study
also contributes to the accounting literature on earnings management. In particular, the
findings are consistent with price earnings management studies which show that firms
with a long string of earnings growth are priced at a premium.
29
Given that REITs distribute most of their earnings, an alternative measure of portfolio yield is
distribution yield to REIT equity holders (the equivalent of dividend yield for common stocks). Dividend
yield is, however, affected by the firm’s capital structure and susceptible to financial engineering such as
deferred payment scheme or dividend waivers by the REIT sponsor and or manager.
25
The evidence also lends support to the catering theory of dividends. On the basis that
earnings and dividends are highly relevant to share prices, Barker and Wurgler (2004)
suggest that managers do cater to the time-varying investor demand in an effort to
maximize current share price. Given the infancy stage of the REIT market in Asia,
accretive acquisitions seems to be a credible story for newly listed REITs to signal to the
market their devotion to increase earnings. Best and Best (2001) hypothesis that if the
market participants are relatively uncertain about future earnings, that is they are not sure
of the reliability of the earnings projections, then a dividend change may convey more
information about the firm’s cash flow. Since dividend stocks are more valuable in
periods of high uncertainty, accretive acquisitions may be the only viable option for the
REITs to establish their track record during the initial years. Hence, the positive stock
price reaction to accretive acquisitions may well reflect Grinblatt and Titman’s (2002,
p.708) contention that “the stock returns of the bidder at the time of the announcement of
the bid may tell us more about how the market is reassessing the bidder’s business than it
does about the value of the acquisition.”
Moving forward, it is debatable whether such yield-accretive game can continue for
several reasons. Over time, the market participants will have more information and,
hence, be able to assess directly the management track record and performance. As the
REIT markets in Asia continue to develop, the investors will become more
knowledgeable and sophisticated and hence, better able to discern accretive earnings that
are purely cosmetic in nature. Furthermore, as the REIT markets in Asia become more
competitive and mature, it will be harder play the yield-accretive game. Although it has
been suggested that the current level of securitized real estate in Asia is still low as
compared to that in the US and Australia, increased competition from new REITs and
private real estate funds entering the market will bid up the prices of prime real estate. To
sustain their growth momentum, some REITs have considered buying overseas properties
or assuming property development risks. In their continual pursuit of accretive
acquisitions, REIT managers and shareholders would do well to be cautious of the
“bootstrap effect” (Brealey and Myers, 2000).
26
One limitation of our current study is the potential problem of sample selectivity bias. As
pointed out by Andrade (1997), if dilution is truly detrimental to stock prices, then the
most dilutive transactions would not actually get done. As a result, the data we observe
are the least ex-ante dilutive acquisitions. This implies that our estimates of the effect of
accretion on returns are actually downward biased. Unfortunately, there is little scope for
us to address this problem since we cannot observe the deals that are not done. However,
this potential bias may be mitigated by the fact that Asian REITs are managed externally.
The external REIT managers have incentives to execute and close every possible deal
because their management fees are tied to the size of the asset under management; plus
they get to earn a percentage commission of the purchase price for every acquisition deal.
Finally, although we established that accretive acquisitions increases shareholders
welfare in the short-run, it would be interesting to examine how long the observed benefit
will last. In particular, do accretive acquisitions lead to improved stock performance by
the acquirers in the long-run? We reserve this question for a future study when there are
enough data to calculate the long-term performance of the REITs.
27
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Governance (3rd ed.). Prentice-Hall: New Jersey.
Wessels, David. 2006. FMA Roundtable on Stock Market Pricing and Value-Based Management.
Journal of Applied Corporate Finance 18(2), 56-81.
Whiting, Dominic. 2007. Playing the REIT Game: Asia’s New Real Estate Investment Trusts.
John Wiley & Sons (Asia) Pte. Ltd: Singapore.
30
Table 1: Market capitalization of Asian REITs
Market capitalization of REITs listed in various markets in Asia as at April 2007. Figures in parentheses
refer to the size of market capitalization in each country relative to the total market capitalization in Asia.
Country
Japan
South Korea
Singapore
Thailand
Taiwan
Malaysia
Hong Kong
Total:
Source: Datastream
Listing Date of
Maiden REIT
Number of REITs
Market Capitalization#
Sep 2001
Jan 2002
Jul 2002
Oct 2003
Mar 2005
Aug 2005
Nov 2005
40
8
15
8
7
9
6
93
US$ ‘ billion
52.288 (63%)
0.711 (1%)
17.453 (21%)
0.628 (1%)
1.814 (2%)
0.803 (1%)
8.967 (11%)
US 82.662 billion
31
Table 2: The mechanics of an accretive acquisition
This table illustrates the mechanics of an accretive acquisition using an the example of a REIT, which has
an existing asset portfolio worth US$500 m, acquiring US$ 50 m property with a 7% net yield.
REIT property
Target
Combined portfolio
portfolio
property
(post-acquisition)
500
50
550
Net Income (US$ m)
25.00
3.50
28.50
Property Yield
5.00%
7.00%
5.18%
Market value (US$ m)
32
Table 3: Yield accretion of property acquisitions
The reported figures are mean values for 228 property acquisitions by REITs in Singapore (SREIT) and
Japan (JREIT). Yield accretion refers to the difference in the portfolio yield before and after the acquisition.
Property
Yield
Portfolio
Yield
Yield
Differential
Purchase price
(US$ million)
Purchase price
(% of portfolio
value postacquisition)
Yield
accretion
SREIT
7.86%
7.14%
0.72%
US$ 75.53 m
8.37%
0.000%
JREIT
5.55%
3.49%
2.06%
US$ 75.78 m
4.10%
0.063%
All
6.28%
4.64%
1.64%
US$ 75.70 m
5.45%
0.043%
33
Table 4: 21-day abnormal returns surrounding acquisition announcements
This table reports the announcement effects of the sample, which consists of 228 acquisition
announcements for REITs listed in Singapore and Japan between Sep 2002 and Apr 2007. Event time is
measured in days relative to the announcement date (0).
Event Day/
Window
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
-10,+10
-10, -1
0,+10
0,+2
Mean
J statistic
-0.03%
-0.11%
-0.13%
-0.04%
-0.02%
0.10%
0.18%
-0.02%
0.09%
0.00%
0.04%
0.17%
0.09%
-0.02%
-0.03%
-0.11%
-0.06%
0.15%
0.02%
0.13%
-0.01%
0.39%
0.08%
0.31%
0.29%
-0.20
-0.49
-0.86
-0.13
-0.53
0.95
2.24*
0.13
0.99
0.16
1.01
2.61*
1.35
-0.22
-0.87
-0.94
-0.46
1.58
0.13
1.36
-0.08
1.14
0.38
1.31
2.01*
Std.
Deviation
1.38%
1.49%
1.40%
1.21%
1.38%
1.52%
1.29%
1.27%
1.33%
1.39%
1.38%
1.64%
1.62%
1.43%
1.41%
1.21%
1.55%
1.22%
1.26%
1.31%
1.30%
5.00%
3.50%
3.92%
2.57%
Median
Min.
Max.
-0.07%
-0.09%
-0.07%
-0.06%
-0.01%
-0.01%
-0.01%
-0.05%
-0.05%
-0.10%
0.03%
0.07%
-0.08%
-0.01%
-0.10%
-0.05%
-0.09%
0.00%
-0.01%
0.01%
-0.08%
0.02%
0.00%
0.04%
0.18%
-4.59%
-5.62%
-5.48%
-4.31%
-6.00%
-3.42%
-4.09%
-3.32%
-5.91%
-5.33%
-7.32%
-4.92%
-5.22%
-5.94%
-5.09%
-4.54%
-5.11%
-3.92%
-3.58%
-4.07%
-5.70%
-11.74%
-12.94%
-13.80%
-8.62%
5.60%
6.07%
7.16%
4.17%
5.81%
6.85%
5.20%
5.30%
5.47%
5.63%
4.39%
7.64%
7.31%
5.72%
6.84%
5.52%
6.92%
3.50%
3.50%
5.29%
4.56%
16.80%
15.24%
12.16%
10.24%
* denotes statistical significance at 10% level or higher.
34
Exhibit 1: Cumulative abnormal returns for acquiring REITs
The sample consists of a total of 228 acquisition announcements for REITs listed in Singapore and Japan
between Sep 2002 and Apr 2007. Event time is measured in days relative to the announcement date (0).
The reported cumulative abnormal return for each event day is the mean value for all the sampled
transactions.
0.50%
0.40%
Abnormal Return
0.30%
0.20%
0.10%
0.00%
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
-0.10%
-0.20%
-0.30%
Event Day
35
10
Table 5: Abnormal returns surrounding acquisition news
The reported figures are mean values for 228 property acquisitions by REITs in Singapore (SREIT) and
Japan (JREIT) between Sep 2002 and Apr 2007. CAR(-10,+10) refers to the cumulative abnormal gains for a
21-day window period covering ten days before and after the event date. CAR(-10,-1), CAR(0,+10) CAR(0,+2) are
the cumulative abnormal returns for 10-day, 11-day, and 3-day event window, respectively.
No of Obs
CAR (-10,+10)
CAR (-10,-1)
CAR (0,+10)
CAR (0,+2)
JREIT
156
0.65%
0.20%
0.45%
0.36%*
SREIT
72
-0.17%
-0.19%
0.02%
0.14%
228
0.39%
0.08%
0.31%
0.29%*
All REIT
* denotes statistical significance at 10% level or higher.
36
Table 6: Relationship between yield accretion and abnormal returns
The reported figures in the last four columns are mean values of the cumulative abnormal returns for subsamples of for 230 property acquisitions announced by REITs in Asia between Sep 2002 and Apr 2007.
CAR(-10,+10) refers to the cumulative abnormal gains for a 21-day window period covering ten days before
and after the event date. CAR(-10,-1), CAR(0,+10) CAR(0,+2) are the cumulative abnormal returns for 10-day,
11-day, and 3-day event window, respectively. In Panel A, “Accretive” refers to the sub-sample of
acquisitions which resulted in an increase in the portfolio yield, whilst “Dilutive” refers to the sub-sample
of acquisitions which resulted in a decrease in the portfolio yield. In Panel B, the 228 sampled observations
are divided into five quintiles according to their yield accretion following each acquisition announcement.
Q1 contains events ranked in the bottom one fifth (i.e. acquisitions which are mostly dilutive), whilst Q5
comprises acquisitions ranked in the top twenty per cent (i.e. acquisitions which have the largest yield
accretive effect). The figures in parenthesis besides the Q1 to Q5 sub-samples are the mean values of the
yield accretion for each quintile sample. CAR(-10,+10) refers to the cumulative abnormal gains for a 21-day
window period covering ten days before and after the event date. CAR(-10,-1), CAR(0,+10) CAR(0,+2) are the
cumulative abnormal returns for 10-day, 11-day, and 3-day event window, respectively.
No. of Obs
CAR (-10,+10)
CAR (-10,-1)
CAR (0,+10)
CAR (0,+2)
Accretive
185
0.51%
0.05%
0.45%*
0.51%*
Dilutive
43
-0.11%
0.18%
-0.28%
-0.67%*
Q1 (-0.16%)
46
-0.26%
0.02%
-0.28%
-0.71%*
Q2 (0.02%)
46
1.05%
0.47%
0.59%
0.07%
Q3 (0.04%)
46
-0.49%
-1.35%*
0.85%
0.69%*
Q4 (0.08%)
46
0.91%
0.47%
0.44%
0.95%*
Q5 (0.32%)
44
0.76%
0.81%*
-0.05%
0.45%*
All REIT
228
0.39%
0.08%
0.31%
0.29%*
Panel A
Panel B
* denotes statistical significance at 10% level or higher.
37
Table 7: Base regression models
Estimation results of regression models with CAR (0,+3) as the dependent variable. The independent
variables are defined as follows: Accretive Acq is a binary variable equals one if the acquisition results in
an increased yield for the combined portfolio; JREIT is a binary variable equals one if the acquiring REIT
is listed in Japan; yield accretion is the difference between the differential yield between the acquired
property and the existing portfolio, and Relative Size is the ratio of the target property over the combined
portfolio asset size. The models are estimated using the ordinary least squares (OLS) for Regression 1 and
2, the LSDV estimator for Regression 3, and the generalized least squares (GLS) estimator for Regression 4.
Total number of observation for each regression is 228. Reported t-statistics are based on White
heteroskedasticity-consistent standard errors. The statistical significance is indicated by ** and *, which
represents significance at 0.05 and 0.10, respectively.
Model
Constant
Accretive
JREIT
Yield accretion
Relative Size
R-square
Adj R-square
F-ratio
1
coeff.
-0.0062
0.0122
-0.0012
2
t-stat
-1.22
2.31**
-0.31
0.033
0.024
3.790**
coeff.
0.0029
3
t-stat
0.74
-0.0018
-0.47
0.1880 2.28**
-0.0342
-1.07
0.038
0.025
2.960**
coeff.
4
t-stat
0.1672
1.84*
-0.0266
-0.74
0.165
0.070
1.750**
coeff.
-0.0051
0.0104
0.0005
t-stat
-1.01
2.07**
0.13
0.027
0.019
3.140**
38
Table 8: Definition and summary statistics of the explanatory variables
Definitions and summary statistics for the filtered sample of 188 property acquisitions announced by Asian
REITs between September 2002 and April 2007.
Variable
Accretive
Definition
A binary variable equals one if the post-acquisition yield
of the REIT portfolio increase.
Yield Chg
Annual net yield of the target property less the annual net
yield of the REIT’s existing portfolio.
Relative Size
Ratio of target property’s purchase price over the postacquisition portfolio size of the REIT.
JREIT
A binary variable equals one if the REIT is listed in Japan
Premium
Ratio of purchase price over valuation of the target
property minus one.
Related Party
Binary variable equals one if target property is acquired
from parties related to the REIT manager or sponsors.
Synergy
Binary variable equals one if the REIT’s post-acquisition
operating expenses (relative to asset value) decreases.
Add Risk
Binary variable equals one if the REIT’s post-acquisition
total risk (measured by the standard deviation of its daily
stock price over a three month period) increases.
New Equity
Binary variables equals one if REIT also announce a SEO
to finance the purchase.
Add Debt
Binary variable equals one if the REIT’s post acquisition
debt ratio increases.
Interval
The time interval between the firm’s current acquisition
and the previous acquisition.*
1st Bid
Binary variable equals one if it is the first acquisition by
the REIT since listing.
REIT Size
Value of the REIT’s prior-acquisition asset portfolio (in
USD million).*
Shop
Binary variable equals one if the target involves retail
properties.
Mixed-use
Binary variable equals one if the target involves a mixedused property.
No. Properties
Number of properties that are acquired on the same day.
Property Size
Purchase price of the target property (in USD million).*
Yr2006
Binary variable equals one if the acquisition new occurs in
2006.
Past Returns
Change in REIT stock price one month prior to the
acquisition
* Natural logarithm of these variables was employed in the regressions.
Mean
0.80319
Std Dev.
0.39865
0.01684
0.02291
0.05618
0.07191
0.65957
-0.00308
0.47512
0.04082
0.33511
0.47329
0.57979
0.49491
0.52660
0.50063
0.15957
0.36719
0.41489
0.49402
89.1489
157.406
0.06383
0.24510
1,535.84
1075.31
0.32447
0.46943
0.37766
0.48610
0.27128
76.94
0.41489
0.44581
118.84
0.49402
0.00080
0.00170
39
Table 9: Multivariate regression models
Estimation results of regression models with CAR (0,+3) as the dependent variable. The independent
variables are defined in Table 8. All the models are estimated using the OLS. Total number of observation
for each regression is 188. Reported t-statistics are based on White heteroskedasticity-consistent standard
errors. The statistical significance is indicated by ***, ** and *, which represents significance at 0.01, 0.05
and 0.10, respectively.
Model
Constant
Accretive
Relative Size
JREIT
Premium
Related Party
Synergy
Add Risk
SEO
Add Debt
Interval
1st Bid
REIT Size
Shop
Mixed use
No. Property
Property Size
YR2006
Past Returns
R-square
Adj R-square
F-ratio
5
coeff.
-0.0092
0.0118
-0.0285
-0.0021
-0.0277
-0.0019
-0.0018
0.0089
-0.0030
0.0039
6
t-stat
-1.45
2.09**
-0.88
-0.49
-0.68
-0.50
-0.56
2.58**
-0.42
1.06
0.0955
0.0498
2.09**
7
8
coeff.
0.0169
0.0145
t-stat
0.71
2.46**
coeff.
0.0209
0.0145
t-stat
0.83
2.46**
0.0068
-0.0192
-0.0027
-0.0019
0.0081
-0.0025
0.0026
-0.0020
0.0142
-0.0041
0.0044
-0.0090
-0.0023
0.0018
1.24
-0.41
-0.68
-0.62
2.29**
-0.38
0.72
-1.23
1.22
-1.22
1.04
-1.96*
-4.41**
1.11
0.0076
-0.0201
-0.0025
-0.0025
0.0089
-0.0019
0.0028
-0.0020
0.0133
-0.0044
0.0045
-0.0093
-0.0023
0.0015
-0.0032
1.32
-0.42
-0.63
-0.78
2.47**
-0.30
0.79
-1.21
1.19
-1.28
1.05
-2.02**
-4.20***
0.87
-0.82
0.1570
0.0835
2.14**
0.1604
0.0819
2.09**
coeff.
0.0156
0.0152
t-stat
0.63
2.57**
0.0058
1.00
-0.0144
-0.30
-0.0015
-0.38
-0.0021
-0.68
0.0074
2.07**
-0.0034
-0.53
0.0023
0.66
-0.0017
-1.05
0.0145
1.28
-0.0039
-1.16
0.0050
1.18
-0.0093
-2.02**
-0.0024 -4.34***
0.0011
0.67
-0.0013
-0.32
2.6139
2.70***
0.1889
0.1078
2.33***
40