REIT Board Composition

A 2017 FPL Report REIT Board Composition The current state of Board governance practices and demographics for publicly-traded REITs FPL ADVISORY GROUP FERGUSON PARTNERS FPL ASSOCIATES FPL CONSULTING

REIT Board Composition Introduction The real estate industry is one of the largest industries in the United States and its importance to our economy cannot be understated. Over the past few decades, real estate companies have been increasingly likely to use the publicly-traded equity real estate investment trust (REIT) structure to access capital markets. The recent addition of a Real Estate sector in the Global Industry Classification Standard (GICS) is but one indication of the growing importance of this asset class, and it will likely increase the attention paid by investors to the board governance practices of the REITs in this sector. Ferguson Partners has commissioned this in-depth research report to provide the REIT industry an overview of the current state of board governance practices in place at publicly-traded REITs. While governance is not a onesize-fits-all matter, it is important for boards to be aware of the current trends in board practices. It is also essential that REIT executives and directors know the issues on which their investors are focused so they can act proactively to meet investors demands, or prepare effectively for investor engagement efforts. This research is also the basis for a proprietary board assessment tool the Best Practices REIT Board Template developed by Ferguson Partners to assist clients in proactively improving their board composition and governance practices. For more information regarding this tool, please contact William J. Ferguson at 312 893 2332 or wjferguson@m.fergusonpartners.com. 2

Key Findings The REIT industry has strong board governance practices in several areas, including the following: Most REIT directors stand for election every year The REIT industry is far ahead of the broader market in declassifying the board and holding annual director elections. The vast majority of REITs in the study (87%) require their directors to stand for election annually. REITs are more likely to have separated the roles of CEO and board chair Nearly two-thirds (64%) of the REITs have separated the roles of CEO and board chair, compared to 58% of the Russell 3000 companies which have done so. However, the following are areas of board governance which REIT boards could improve upon: Increasing the number of women on REIT boards The Russell 3000 boards are more likely to have two or more female directors when compared to the REITs. In fact, nearly three-quarters (73%) of the REIT boards have zero or one female director. Bringing fresh ideas to REIT boardrooms by adding younger directors REITs directors are more likely to be older when compared to the companies in the Russell 3000 Index. One-quarter (25%) of the REIT directors are seventy years of age or older, while only 19% of the directors of Russell 3000 companies are in this age range. Furthermore, REIT directors are less likely to be under fifty years old. Only 8% of the REIT directors are under age fifty, compared to 10% of the Russell 3000 directors. Expanding pool of director candidates beyond the real estate industry More than half (52%) of the REIT directors who are actively employed work for a real estate company or a REIT. Best practice calls for boards to have directors with a variety of industry expertise to bring a diversity of views and experiences to boardroom deliberations and to avoid potential conflicts of interest which may arise from inter-industry directorships. Ferguson Partners 3

REIT Board Composition Study Companies This report compares the board practices and director demographics of the following two groups of companies: incorporated in Delaware, it is more common for REITs to be incorporated in Maryland, due to specific corporate laws designed for the REIT structure. The 151 non-mortgage REITs that were in the Russell 3000 Index as of December 2016 and had revenues over $100 million ( REITs ) 77% The 2,979 companies included in the Russell 3000 Index as of December 2016 ( Russell 3000 ), to represent the broader U.S. market 60% 33% The chart below presents the types of REITs included in the study, based on Global Industry Classification Standard (GICS) 1 sub-industry categories. The most common types of REIT in the study were the Retail and Specialized REITs, and the least common type was Industrial REITs. 11% 13% 7% Russell 3000 (n=2,979) REITs (n=151) Delaware Maryland Other LISTING EXCHANGE Specialized REITs 16% n=151 REITs 13% Nearly all of the REITs (91%) are listed on the NYSE, while the Russell 3000 companies are evenly split between the NYSE (50%) and the NASDAQ (48%). Very few of the companies studied are listed on Retail REITs 19% Residential REITs 13% 15% Health Care REITs 9% Hotel & Resort REITs 11% Industrial REITs 4% the NYSE MKT (formerly known as the American Stock Exchange, or AMEX) or other exchanges. 91% 50% 48% STATE OF INCORPORATION Companies are often not incorporated in the states in which they are headquartered. While a majority (60%) of the Russell 3000 companies are 7% 2% 2% 1% 0% NYSE NASDAQ NYSE MKT (formerly AMEX) Other 1 Global Industry Classification Standard (GICS) was developed by MSCI, Inc. and Standard & Poor s to categorize all major public companies and is widely used by the global financial community. Russell 3000 (n=2,976) REITs (n=151) 4

Board Practices BOARD SIZE BOARD LEADERSHIP Given the multifaceted work of the board of directors, it is important that there are enough qualified people sitting around the boardroom table. Most governance experts advise that companies have at least five directors on the board to ensure that a variety of viewpoints are brought to boardroom discussions and that each board committee can be adequately staffed with different independent directors. On the other hand, a board with too many directors may find it difficult to control boardroom debates and to ensure that each director is actively involved in key discussions. In some cases, large boards tend to break up into factions, which can be counter-productive to achieving the key responsibilities of the board. Companies in the Russell 3000 are twice as likely to have a board with ten or more directors when compared to the REITs. The average REIT board has eight directors, while the average board of the Russell 3000 companies has nine directors. As shown in the chart below, most of the companies studied have between seven and nine directors. Board leadership has been a source of debate among governance experts for decades. Some argue that the board should be led by an independent board chair, while others argue that the CEO can effectively serve as the chair of the board. There is consensus, however, that if the roles of CEO and board chair are held by the same person, an independent director should be named lead independent director to lead the board in those circumstances under which the CEO has a potential conflict of interest. Many governance experts advise companies to separate the roles of CEO and board chair upon the next CEO succession. 42% 36% Combined CEO & Chair 58% 64% Separate CEO & Chair Russell 3000 (n=2,809) REITs (n=151) 67% 53% Nearly half (42%) of Russell 3000 companies still combine the roles of CEO and board chair. 34% Generally, the larger companies in the Russell 3000 Index are more likely than the smaller companies 13% 17% 17% to have adopted this leadership structure. 4 6 directors 7 9 directors 10+ directors Russell 3000 (n=2,979) REITs (n=151) The REITs are more likely to have separated the roles of CEO and board chair than companies in the Russell 3000 Index. Nearly two-thirds (64%) of the REITs have a CEO who does not also serve as chair of the board. Ferguson Partners 5

REIT Board Composition Board Committees Board Classification Much of the work of the board of directors is done in board committees. All of the companies in the study have an Audit Committee. All of the REITs studied also have a Compensation Committee, while only a few of the Russell 3000 companies did not have a separate committee performing this function at the time of their 2016 proxy filing. Nearly all of the companies studied also have a separate committee dedicated to board governance and nominating director candidates ( Governance and/or Nominating Committee ). Executive Committees are in place at approximately one-quarter of the companies studied. These committees are often empowered to act on behalf of the entire board under certain circumstances. Not surprisingly, Finance (or Finance and Real Estate) Committees are more prevalent among the REITs. Strategy Committees are also among the most commonly found committees, with the REITs being slightly less likely to have such a committee. With a staggered or classified board voting structure, directors are divided into classes and stand for reelection on a staggered schedule; in other words, in a given year, only a fraction of directors usually onethird are standing for election. This arrangement acts as a takeover defense because a hostile bidder cannot change control of the board in a single election, but rather must wait through two or three elections, which adds delay and uncertainty to the takeover process. In general, investors are in favor of annual director elections because they prefer to have the opportunity to vote on each director every year. Companies in the Russell 3000 have been gradually shifting to annual elections, with the larger companies in the index adopting the practice first. 87% 58% 42% 100% 100% 100% 99% 95% 94% 13% Annual Director Elections Russell 3000 (n=2,979) REITs (n=151) 26% 28% 23% 18% 16% 10% Audit Gov/Nom Finance/RE Compensation Executive Strategy Russell 3000 (n=2,979) REITs (n=151) As shown in the chart above, the REIT industry is far ahead of the broader market in adopting annual elections. The vast majority of REITs in the study (87%) allow shareholders to vote on each director every year. 6

Board Meetings Boards of publicly-traded companies typically meet in person at least once per quarter; however, most boards hold meetings more often. 41% 43% 36% 34% When a company is facing significant challenges or opportunities, the board may meet more 22% 23% frequently. As shown in the chart to the right, there is very little difference in the number of meetings held by REIT boards and the boards of the Russell 3000 companies. 3 6 meetings 7 10 meetings 11+ meetings Russell (n=2,979) All REITs (n=150) Board Practices DIRECTOR TENURE The appropriate length of time that a director should serve on the board is dependent on a number of factors. While some observers question the continued contributions someone can bring to the board after having served for more than a decade, others see the value in the institutional knowledge a director who has been there for many years. In recent years, there has been much attention paid to the concept of refreshing the board, to bring in new directors with fresh ideas and diverse opinions. An increased focus has been put on the issue as many advocates for increased board diversity have begun calling for the replacement of long-tenured directors with younger, more diverse candidates. Additionally, concerns related to perceived lack of independence for directors who have served on boards for many years have been piqued by pressure from certain institutional investors which have put in place policies under which they consider a director to no longer be independent after ten or twelve years of board service. 29% 38% 33% 33% 33% 34% There is no significant difference in overall director tenure among the REIT directors as compared to the director serving on all Russell 3000 companies. The average tenure of the Russell 3000 directors is 8.5 years, while the average tenure of the REIT directors is 8.75 years. 0 3 years 3 10 years1 s10+ years Russell 3000 (n=25,651) REITs (n=1,205) The chart to the left indicates that the tenures of all REIT directors are evenly distributed between the three categories presented. The tenures of the directors serving on Russell 3000 boards are similarly distributed, with a slightly higher percentage of directors having served more than three years. Ferguson Partners 7

REIT Board Composition DIRECTOR GENDER Gender diversity in the boardroom is a topic that has garnered increasing attention across the globe over the last decade. In the US, there are several initiatives underway to increase the number of women serving on corporate boards. Despite these efforts, the prevalence of female directors serving on US company boards still remains relatively low. REIT boards are slightly less likely to have no female directors when compared to the Russell 3000. One-quarter (25%) of the companies in the Russell 3000 have no female directors, while only 21% of the REIT boards are all male. However, REITs which have female directors tend to only have one woman on the board. On the other hand, the Russell 3000 boards are more likely to have two or more female directors when compared to the REITs. In fact, nearly three-quarters (73%) of the REIT boards have zero or one female director. Number of Female Directors Overall The prevalence of female directors serving on REIT boards is similar to that of the Russell 3000 52% boards. Among all of the directors serving on the boards of Russell 3000 companies, 15% are female. Women comprise 14% of the directors serving on REIT boards. 25% 21% 36% 25% 21% 14% 6% 85% 86% No female directors 1 female director 2 female directors 3+ female directors Russell 3000 (n=2,979) All REITs (n=151) 15% Female 14% Number of Female Directors on Each Board Another way to evaluate gender diversity is to assess the number of female directors serving on each board. Studies have shown that the benefits of gender diversity on corporate boards are most significant when there is more than one woman serving on the board. Male Russell 3000 (n=26,054) REITs (1,205) DIRECTOR AGE Most directors of publicly-traded companies in the U.S. are in their fifties and sixties. In fact, nearly threequarters (71%) of the directors serving on Russell 3000 boards fall in this age range. It is very rare for someone to be a director of a publicly-traded company before age 40. At the other extreme, it is becoming more common for directors to serve well into their 70 s and some continue to serve into their 80 s and even their 90 s. As shown in the chart on the next page, REITs directors are more likely to be older when compared to the directors serving on the Russell 3000 companies. One-quarter (25%) of the REIT directors are seventy years of age or older, while only 19% of the directors of Russell 3000 companies are in this age range. 8

Furthermore, REIT directors are less likely to be under fifty years old. Only 8% of the REIT directors are under age fifty, compared to 10% of the Russell 3000 directors. Retired 30% 41% 36% 1%1% 9% 7% DIRECTOR EMPLOYMENT STATUS Service on a corporate board requires a significant amount of time and commitment. Some directors find that it is difficult to dedicate the amount of time necessary to be an effective director when they also have a full-time job. In addition, while a director is working for another company, the possibilities for conflicts of interest increase. Therefore, many people prefer to wait until they have retired from active employment to serve on corporate boards. 31% 30% 17% 21% 4% 2% 30's 40's 50's 60's 70's 80's & 90's Russell 3000 (n=26,047) REITs (n=1,205) Thirty percent of the directors of the REITs studied are retired from full-time employment. This data is not available for all of the directors serving on Russell 3000 boards, so a comparison is not possible. JOBS HELD BY ACTIVELY- EMPLOYED DIRECTORS Employers of Actively-Employed REIT Directors Among those actively-employed REIT directors, the chart below shows that most (52%) work for a real estate company or a REIT. While comparable 31% Actively Employed 70% - On the other hand, companies often seek directors who are actively involved in the business world to serve on their boards so the experience and 11% 9% 16% 21% 12% insights brought to boardroom discussions reflect current practices and business trends. In addition, some companies see directorships as excellent professional growth opportunities for their high Prof. Non- REIT Corporation REIT Real estate company Other potential executives. Ferguson Partners 9

REIT Board Composition data is not available for the directors of the Russell 3000 companies, best practice calls for directors to have a broader variety of industry expertise in order to bring a diversity of views - and experiences to boardroom deliberations and to avoid potential conflicts of interest which may arise from inter-industry directorships. Some 30% n=845 institutional investors are particularly concerned when REIT executives or directors serve on the boards of several REITs simultaneously. 8% 14% 12% 12% 13% 7% 3% Titles of Actively-Employed Directors The actively-employed REIT directors studied hold a variety of positions, and many are the leaders of their respective companies. In fact, nearly one-third (30%) of the actively-employed REIT directors hold the title of CEO. Given the board s role in advising the CEO and overseeing Founder Chair/ CEO Exec. Chair/ Vice Chair Pres./ COO/ CFO Mng. Dir./ Partner the implementation of the company s strategy, many directors feel that it is beneficial to have an active CEO serving as a director. Sr. Exec./ Partner Prof. Other Services Provider 10

Research Methodology This report compares the board practices and director demographics of the 151 REIT boards in the Russell 3000 Index with revenues over $100 million (excluding mortgage REITs) with the board practices and director demographics of the companies included in the Russell 3000 Index as of December 2016. The data was reported by the companies in regulatory filings submitted to the Securities Exchange Commission (proxy statements or Forms S-1) during 2016. Due to the timing of the regulatory filings, the data reflects board composition as of each company s annual shareholder meeting in 2016. Most of the data was collected by data firm Equilar, an executive compensation and corporate governance data firm. Board Governance Research LLC collected additional data and conducted the analysis. The employment status, employers and titles of REIT directors were determined based on a review of the biographies of the directors provided in each company s 2016 proxy statement. While every reasonable effort was made to ensure accuracy, interpretations of employment status are subjective. Ferguson Partners 11

REIT Board Composition About the Author Annalisa Barrett is the founder and CEO of Board Governance Research LLC, which provides independent research on corporate governance practices, board composition and director demographics. Ms. Barrett has nearly two decades of experience in the field of corporate governance. She is the author of numerous reports and articles on corporate governance topics and is regularly invited to speak on governance matters at national conferences. She has been quoted in numerous periodicals and her research has been featured on the front page of the Wall Street Journal. Ms. Barrett is a Clinical Professor of Finance at the University of San Diego s School of Business. She teaches graduate courses in Corporate Governance and undergraduate courses in Financial Statement Analysis and Personal Finance. In addition, she is a Senior Advisor for ValueEdge Advisors, which was founded by corporate governance leaders Richard Bennett, Robert AG Monks and Nell Minow to advise institutional investors regarding effective corporate governance engagement to preserve portfolio value and diminish risk. Previously, Ms. Barrett was Vice President and Senior Research Associate at The Corporate Library, where she led the firm s research on the effectiveness of the board of directors. Before joining The Corporate Library, Ms. Barrett was a Research Consultant at Towers Perrin (now Willis Towers Watson). Prior to that, she spent several years in the Family Wealth Planning practice of Arthur Andersen. In 2008, Ms. Barrett was named a Millstein Rising Star in Corporate Governance. She holds an MBA, with distinction, from the Ross School of Business at the University of Michigan. She and her family live in San Diego, California. For more information contact: Annalisa Barrett Founder & CEO Board Governance Research LLC annalisa@boardgovernanceresearch.com (858) 774-1212 @Annalisa_BGR 12

About FPL FPL is a global professional services firm that specializes in providing executive search and leadership, compensation, and management consulting solutions to the real estate and a select group of related industries. Our committed senior professionals bring a wealth of expertise and category-specific knowledge to leaders across the real estate, infrastructure, hospitality and leisure, and healthcare services sectors. Comprised of two businesses that work together, FPL offers solutions and services across the entire business life cycle: Ferguson Partners With an emphasis on the right executive fit, Ferguson Partners offers services in executive recruitment, as well as leadership consulting. FPL Associates Focusing on a wide array of business needs, FPL Associates assists with the assessment, design and implementation of compensation programs. We also partner with clients to develop strategies and structures to drive competitive performance. Our service offerings FERGUSON PARTNERS FPL ASSOCIATES EXECUTIVE SEARCH LEADERSHIP CONSULTING COMPENSATION CONSULTING MANAGEMENT CONSULTING Board/Trustee Recruitment Board Assessment Chairmen/CEOs/ Presidents Senior Management/ Corporate Officers Succession Planning Assessment for Selection or Development Executive Coaching Team Effectiveness Benchmarking Program Design Contractual & Policy Arrangements Surveys Strategic Planning Organziational Design Corporate Finance Specialized Research Our industry practices Real Estate Private Equity/Real Estate Investment Managers, Public (REITs) & Private Owners/ Developers, Property Services (Brokerage) Firms, Commercial Mortgage Investment/ Finance, Residential Mortgage Investment/ Finance, Homebuilders, Corporate Real Estate Hospitality & Leisure Lodging (Brands/Owners), Gaming Resorts & Casinos, Restaurants, Sports & Recreation, Amusement Parks & Attractions Healthcare Owners/Investors/ Operators/Financiers of Seniors Housing, Hospitals, Health Care Service Providers Infrastructure, Engineering & Construction Infrastructure Investing: Transport, Energy, Social Infrastructure; Construction & Engineering Our office locations CHICAGO HONG KONG LONDON NEW YORK SAN FRANCISCO SINGAPORE TOKYO TORONTO 2017 FPL Advisory Group. The Ferguson Partners recruitment practice consists of five affiliated entities serving FPL s clients around the world: Ferguson Partners Ltd. headquartered in Chicago with other locations in New York and San Francisco, Ferguson Partners Canada Co. in Toronto, Ferguson Partners Europe Ltd. headquartered in London with a Japan branch located in Tokyo, Ferguson Partners Hong Kong Ltd. in Hong Kong, and Ferguson Partners Singapore Pte. Ltd. in Singapore. Ferguson Partners Europe Ltd. is registered in England and Wales, No. 4232444, Registered Office: 100 New Bridge Street, London, EC4V 6JA. Ferguson Partners Singapore Pte. Ltd. is registered in Singapore, Business Registration No. (UEN) 201215619H, Employment Agency License No. 12S6233. FPL Associates L.P., the entity which provides consulting services to FPL s clients, is headquartered in Chicago. Ferguson Partners 13

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