MARKET COMMENTARY. February 2014 Q413 PERFORMANCE REVIEW. Entrepreneurial Culture, Institutional Strength.

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1 MARKET COMMENTARY February 2014 Q413 PERFORMANCE REVIEW FTSE EPRA/NAREIT DEVELOPED INDEX Hong Kong/China Entrepreneurial Culture, Institutional Strength. E. Todd Briddell, Chief Executive Officer and Chief Investment Officer For the most part, played out as we expected. Central banks maintained easy monetary policy to help nurse national economies back to health. Investors came to accept the weak-to-modest growth, low-yield environment and adjusted their portfolios accordingly. Catastrophic economic events were kept at bay. And, meanwhile, tailwinds such as a reduction in perceived risk, a recovery in asset values, and falling corporate and household debt levels provided a modest boost to global economic growth. At present, volatility and risk aversion are at pre-credit-crisis levels with balance sheets stronger, and the markets facing fewer headwinds than in previous years. The year also brought a flood of new capital to the global equity markets. Global IPO s successfully raised $21.1 billion in, compared to $6.9 billion in Total global equity raised in reached $95.5 billion, a 55 percent year-over-year increase from We believe that the amount of capital raised during the past year is significant enough to suggest that the 5-year delevering process may largely be over. Singapore United States United Kingdom 4Q13 Australia Europe Canada Japan -20% 0% 20% 40% 60% All returns in local currency. Source: Bloomberg LLC, FTSE, January 2014 FTSE NAREIT EQUITY REITS INDEX Health Care Self Storage Residential Specialty Other Shopping Center Industrial Triple Net Office Regional Mall Hotel 4Q -15% -5% 5% 15% 25% Source: Bloomberg LLC, FTSE, January 2014 NCREIF PROPERTY INDEX Hotel Office US Bank Tower, Los Angeles, California In the United States, employment gains are driving the economy forward. In, 2.9 million jobs were created, bringing the unemployment rate to 6.7 percent, the lowest reading in more than 5 years 2. While this is good news for the economy generally, the weak labor force Apartment Total Retail Industrial 4Q 0% 4% 8% 12% 16% Source: NCREIF, January 2014 KEY EVENTS AND TRENDS ECONOMIC CONDITIONS IN THE U.S. IMPROVED DURING Unemployment dropped to 6.7%, though participation and wage growth were weak The manufacturing, housing, energy and technology sectors gained momentum Stocks rallied throughout the year, though REITs lagged 1 Source: SNL Financial, January Source: Bureau of Labor Statistics January 2014 ECONOMIC POLICY BECAME MORE PREDICTABLE Tapering of Quantitative Easing began as planned The Volcker rule and Obamacare were enacted, ending speculation GLOBAL CAPITAL MARKETS BECAME STRONGER AND FACED FEWER CHALLENGES IN Strong equity and debt formation Volatility, credit spreads, and CDS declined The statements made and the conclusions drawn in this newsletter are not guarantees and are merely the opinion of CenterSquare and its employees. Please refer to disclosures at the end of this 1 document.

2 Global Equity Raised (USD bn) participation rate is putting a strain on discretionary spending and sustainable economic growth. The economic picture is looking brighter outside of the United States as well. In Japan, a shift in monetary policy and a government-incentivized program to encourage investment are fueling growth. The Bank of Japan is likely to increase monetary expansion and has set an aggressive inflation target of 2 percent to be achieved by The yen is likely to remain weak, which will benefit exporters and corporate profits. However, we remain aware of the long-term risk to Japan s growth prospects given its aging population and lack of immigration. China continues to generate relatively strong growth, albeit at a slower rate than previous years. A 7.5 percent GDP growth target for 2014 is expected good, but not the double-digit figures of the past. The slowdown stems from structural economic change, as the economy shifts from being primarily investment and export-driven to becoming more consumer and servicedriven. The Chinese government is aiming to maintain neutral monetary and fiscal policy while increasing efforts to limit speculation and credit growth. While the market is pricing in short term pain, long-term benefits are expected. Emerging markets proved to be the biggest underperformers of. Inflation and policy risk rose during the year, as capital flight drove down currencies and limited emerging economies 3 Source: FTSE, Bloomberg LLC, January Source: Bloomberg LLC, January 2014 Total IPO SEO Total YoY (%) Asia-Pacific % Europe and UK % North America % Total % 2012 Asia-Pacific % Europe and UK % North America % Total % 2011 Asia-Pacific Europe and UK North America Total Source: SNL SNL Financial, Financial, January January The amount of capital raised during the past year is significant enough to suggest that the 5-year delevering process may largely be over. ability to support growth. Brazil, India, Turkey and Indonesia all had to refocus their efforts to fight inflation by raising rates during the second half of. U.S. REIT PERFORMANCE In mid-december, the Federal Reserve announced plans to taper QE3 via a monthly reduction in bond purchases from $85 billion to $75 billion, beginning in January Interest rates spiked causing upward pressure on cap rates and flattening commercial real estate values. U.S. REITs returned 0.7 percent in the fourth quarter of, based on the FTSE NAREIT Equity REITs Index. REITs finished the year with a 2.5 percent return, underperforming the broader equity markets by a wide margin 3. The Dow Jones Industrial Average and S&P 500 returned 29.7 percent and 32.4 percent in, respectively 4. Despite the lackluster quarter and year for REITs, some sectors performed better than others. Given expectations for an improving economy and higher interest rates, hotels with their short-term leases returned 8.3 percent for the fourth quarter, bringing the year end total to 27.2 percent 5. On the other hand, healthcare and triple net, the sectors with the longest-term leases, lagged the market. As of the end of, office is CenterSquare s largest sector overweight. The office market is showing an accelerating recovery in almost every major market in the country. The technology hubs of Seattle and San Francisco are further along in the recovery, but other coastal gateway, southeastern and southwestern markets are poised for an attractive supply/ demand environment. Washington D.C. and the surrounding suburbs are the exception to the rule, however, due to weakness driven by a combination of new supply and retrenchment in government spending. Overall, new supply remains very low or non-existent, which should allow for good rent growth in the coming years. The fundamentals look stable for net lease (freestanding retail), but in a growing economy with higher interest rates, this bond-like sector doesn t excite us, and we are significantly underweight the space. In addition, these REITs trade at premiums to net asset value (NAV), where other core sectors trade at substantial discounts. Net lease premiums are partially justified by the diversification benefits of a portfolio of these assets relative to the tenant and property risk of a single asset, but other core sectors offer better growth prospects. Healthcare, another sector with long-term leases, faces similar challenges in a growing economy with higher interest rates, and is another large underweight for CenterSquare as of the end 5 Source: FTSE, Bloomberg LLC, January

3 of. Healthcare faces the additional risk of weak fundamentals, such as oversupply in senior housing and exposure to policy risk related to Medicare and Medicaid. Like triple net, healthcare REITs are currently expensive relative to NAV. 4Q13 and Sector Returns (FTSE NAREIT Equity REIT Index) 4Q13 Overall, U.S. REITs now trade at a moderate discount to net asset value (NAV). The market appears to have priced in a 3.5 percent 10- year U.S. treasury rate and a 50 basis point rise in cap rates. The yield spread between REITs and the 10- year U.S. treasury is just above its 10-year average, and while we expect a rise in the 10-year treasury yield throughout 2014, we also expect meaningful REIT dividend growth. Most REITS trade at a discount to replacement cost. Core assets in the private market, meanwhile, are trading near or above replacement cost which could justify an increase in future development. U.S. real estate fundamentals should remain positive in 2014 but our expectations for growth are tempered, as continued deceleration is likely as the recovery cycle matures. The private market, with improved access to debt capital and higher LTVs for leveraged acquisitions, is positioned to drive real estate valuations in the months ahead. GLOBAL REIT PERFORMANCE AND VALUATION Global REIT returns were flat for the fourth quarter, bringing the total return to 4.4 percent (FTSE EPRA/NAREIT Developed Index). Performance was largely affected by improvement in the U.S. economy and small signs of improvement in Europe. Japan was the strongest regional performer by far, finishing the year with gains just over 60 percent on the back of improved sentiment and macro economic data, as well as structural 6 Source: Miki Shoji, January 2014 Hotel Regional Mall U.S. real estate fundamentals should remain positive in 2014 but our expectations for growth are tempered, as continued deceleration is likely as the recovery cycle matures. Office Triple Net Industrial Shopping Other Specialty Residential Self Storage Health Care Center Source: Bloomberg LLC, January 2014 This chart shows the total return for each sector within the FTSE NAREIT Equity REIT Index. Refer to Definition of Indices at the end of thisdocument. reforms and changes in tax policy. Tokyo office vacancy fell to 7.5 percent, the lowest level since July 2009 and a sign that the office recovery remained on track 6. The United Kingdom also outperformed for the second quarter in a row. Housing prices continue to rise and the recovery is gaining momentum, with job data and GDP growth recently revised upward. Investment volumes have reached all-time highs. As yields compress in London, money is starting to find its way into secondary and provincial assets. We expect this trend toward more fringe assets to continue into 2014, with the spread between prime and secondary yields narrowing further. During the fourth quarter, small and mid-cap real estate stocks continued to outperform, especially those with exposure to residential property and peripheral or secondary assets. Retail specialists, who primarily own large shopping centers, were significant underperformers. In Europe, though capital continues to flow into the region, the banking sector will likely remain a significant drag on the region s recovery in the near term. The euro zone should continue to face the threats of a strong euro and deflation, which are the primary risks to the recovery in We expect modest or no rental growth due to rising bond yields, which may put pressure on property capital values, as well as continued slow economic growth. Hong Kong and China underperformed for the quarter and year due largely to policy overhang. Hong Kong primary residential sales revived during the fourth quarter as developers adopted a more flexible pricing strategy. Hong Kong s Central Grade A Office market, however, remained soft, but we expect gradual 3

4 4Q13 and Regional Returns 70% 60% 50% 40% 30% 20% 10% 0% (10%) (20%) 60.51% 7.60% 6.97% 23.82% 3.42% (2.68%) 1.79% 4.11% 2.47% 4Q13 (0.71%) (1.68%) (1.96%) (7.61%) 6.63% (6.15%) (9.27%) Japan United Kingdom Canada Europe United States Singapore Australia Hong Kong/China Compared to physical real estate, the global listed real estate market continues to be fairly valued, trading at an average discount of about 10 percent to NAV 7. During the fourth quarter, Brazil, Luxembourg and China saw their discounts widen while most of the large northern European countries saw their large discounts narrow. China continues to have the largest discount to NAV at 57 percent 7. Source: FTSE, Bloomberg LLC, January 2014 All returns in local currency. Returns are based on region-specific indexes, i.e. the FTSE NAREIT Equity REITs Index for the United States. recovery in rents during the second half of In China, developer sales volumes were strong as end user demand remained robust, and we expect this to continue into Singapore, adapting to developed world growth and reacting to recent policy, saw its primary residential prices decline during the fourth quarter, the first decline since the first quarter of Developers are choosing to invest overseas as land for development and asking cap rates for existing assets in Singapore are too expensive. Given investor interest in the industrial sector, the government has now implemented measures in this segment to limit price growth. Overall, the Singapore economy will likely be driven by the speed of the global recovery and in particular, the U.S. economy. Australia continued to deal with the effects of the mining slowdown and the associated declines in CAPEX deployments. Aside from a few potential M&A transactions, the fourth quarter was fairly uneventful as the RBA chose to hold the cash interest rate at 2.5 percent. In 2014, we expect to see price growth in major city property, and REIT yields around 5.4 percent during the year, but the benefits from re-financings will likely wane. Canada underperformed again during the fourth quarter. Office fundamentals have begun to deteriorate as new supply came online in Toronto and Calgary. Retail and apartment fundamentals remain stable but show little growth. Canada s high dividend yields are being propped up by high leverage and already low in-place financing. If interest rates increase much further, earnings will decline, as payout ratios are close to 100 percent of cash flow. CENTERSQUARE INVESTMENT THEMES CenterSquare is focusing on five major investment themes that we believe will come to define the markets in the coming year. UNEVEN GROWTH: First, we expect to see a wider variation in returns in 2014 than we have in previous years. The economies of United States, United Kingdom, and Japan should continue to accelerate off of modest GDP growth from the second half of. Strong returns will likely be driven by second derivative growth metrics, as higher absolute growth forecasts may provide less return than accelerating low targets. Equity multiples recorded at the end of seem full and may compress if growth targets are not realized. LOOSE CENTRAL BANK POLICIES: We foresee central bank policies continuing to diverge, but in most developed markets, the focus will continue to support growth. Even as central governments begin to taper emergency measures, monetary policy will not become restrictive. However, the lift for all markets from quantitative easing is over. MODERATE GROWTH: We believe the low yield environment will continue at least through the end of Economic growth, as a result, will be good, but not great. Already, we re beginning to see multiple expansion on yield-centric assets waning. Going forward, we expect investors to focus not only on yield, but on growth as well. These total return strategies will likely come to dominate the market in 2014 and Source: SNL Financial, January

5 Premiums/Discounts to NAV 3Q13 vs. 4Q13 by Country Premium/(Discount) to NAV 30% 20% 10% (0%) (10%) (20%) (30%) (40%) (50%) (60%) Japan Belgium 9/30/ 12/31/ South Africa Australia United Kingdom New Zealand Source: SNL Financial, January 2014 * Premium/discounts to NAV are calculated using closing prices as of the shown date and NAVs as reported by real estate companies within SNL Financial s research universe. For the U.S. and Canada, an average of consensus NAV estimates is used. THE WIND AT OUR BACKS: With the delevering cycle largely over, we expect the economic momentum to move in a positive direction. Asset value recovery is adding to balance sheet strength, investor confidence is on the rise, political and regulatory risks are moderating, and stability seems to be growing throughout the global economy. REITS SHOULD WIN: These economic conditions should prove fruitful for REITs. Given the current attractive valuations of REITs and the current high multiples for broader equities, we believe REITs will likely outperform broader equities in Sweden France Switzerland Singapore Global Median Finland USA Canada Germany Netherlands Austria Greece Hong Kong Brazil Luxembourg China bank policies should all provide strong momentum for economic improvement. A climbing U.S. 10-year treasury yield, longterm unemployment, the decline in China s GDP growth, and a Eurozone that continues to contend with bank reforms are just a few of the headwinds that the markets will face. While emerging markets continue to face elevated uncertainty political, policy and balance sheet related the outlook should improve modestly, particularly in the second half of 2014 as growth stabilizes. Still, we believe that emerging markets are going to continue to struggle to produce growth without creating significant inflation, and that developed markets will be taking over leadership in terms of global growth over the next few years. Going forward, we expect investors to focus not only on yield, but on growth as well. These total return strategies will likely come to dominate the market in 2014 and MARKET OUTLOOK We expect 2014 to be another year of slow growth in the economy, though much like it will come in fits and starts. The bottoming of Eurozone prices, the strength of the U.S. housing, technology and energy sectors, Japan s fiscal, monetary and reform policies, and the likely continued dovish international The real estate recovery story has matured, and the second derivative of growth may become negative some time in That said, we believe that REITs have overshot on the downside over the last 9 months. With full multiples in the broader equity markets, we are expecting REITs to outperform broader equities with high single-digit returns in

6 DISCLOSURES The statements made and the conclusions drawn in this commentary are not guarantees and are merely the opinion of CenterSquare Investment Management, Inc. ( CenterSquare ) and its employees. The statements and opinions expressed in this commentary are those of the author as of the date of this commentary, and do not necessarily represent the view of The Bank of New York Mellon Corporation, or BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA, formerly named BNY Mellon Asset Management International Limited). Any statements of opinion constitute only current opinions of CenterSquare which are subject to change and which CenterSquare does not undertake to update. Material in this publication is for general information only and is not intended to provide specific investment advice or recommendations for any purchase or sale of any specific security or commodity. 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BNY Mellon Investment Management EMEA Limited, CenterSquare Investment Management and any other BNY Mellon entity mentioned are all ultimately owned by The Bank of New York Mellon Corporation. Issued as at CP (3M) Definition of Indices The following indices were included in the commentary for illustrative purposes only and have been selected as they are well known and are easily recognizable by investors. The indices have volatility and other material characteristics that may differ from actual investments, are unmanaged, are not available for direct investment, and are not subject to management fees. Because of these differences, benchmarks should not be relied upon as an accurate measure of comparison. FTSE NAREIT Equity REITs Index The FTSE NAREIT Equity REITs Index is a free float market capitalization-weighted index measuring equity tax-qualified real estate investments trusts which meet minimum size and liquidity criteria and are traded on the New York Stock Exchange, the American Stock Exchange, and the NASDAQ National Market System. The performance presented is based on total return calculations which add the income a stock s dividend provides to the performance of the index and is gross of investment management fees. The FTSE NAREIT Equity REITs Index is part of the FTSE NAREIT U.S. Real Estate Index Series. FTSE EPRA/NAREIT Developed Index The FTSE EPRA/NAREIT Developed Real Estate Index Series covers both the FTSE EPRA/NAREIT Equity Index and the FTSE EPRA/NAREIT Developed ex-u.s. Index. Designed to track the performance of listed real estate companies and REITs worldwide, the series acts as a performance measure of the overall market. The performance presented is based on total return calculations which add the income a stock s dividend provides to the performance of the index, and is gross of withholding taxes and investment management fees. The index changed names on March 23, 2009, and was formerly known as the FTSE EPRA/NAREIT Global Real Estate Index. NCREIF Property Index The National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index is a quarterly time series composite total return measure of investment performance of a very large pool of individual commercial real estate properties (apartments, hotels, industrial properties, office buildings and retail only) acquired in the private market for investment purposes. S&P 500 Index The S&P 500 is an index that is considered to be a gauge of the U.S. equities market. The index includes 500 leading companies spread across the major sectors of the U.S. economy. The index focuses on the larger cap segment of the U.S. market and represents approximately 75% of the market capitalization of U.S. securities. The index is the most notable of the many indices owned and maintained by Standard & Poor s, a division of McGraw-Hill Companies. Dow Jones Industrial Average A widely used indicator of the overall conditi on of the stock market, the Dow Jones Industrial Average is a price-weighted average of 30 acti vely traded blue chip stocks, primarily industrials. The 30 stocks are chosen by the editors of the Wall Street Journal (which is published by Dow Jones & Company). FTSE Data disclosure: Source: FTSE International Limited ( FTSE ) FTSE FTSE is a trade mark of the London Stock Exchange Group companies and is used by FTSE under licence. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE s express written consent. FTSE is a trade mark of the London Stock Exchange Group companies, NAREIT is a trade mark of the National Association of Real Estate Investment Trusts ( NAREIT ) and EPRA is a trade mark of the European Public Real Estate Association ( EPRA ) and all are used by FTSE International Limited ( FTSE ) under licence). The FTSE EPRA/NAREIT Developed Index is calculated by FTSE. Neither FTSE, Euronext N.V., NAREIT nor EPRA sponsor, endorse or promote this product and are not in any way connected to it and do not accept any liability. The FTSE NAREIT Equity REITs Index is calculated by FTSE. Neither FTSE nor NAREIT sponsor, endorse or promote this product and are not in any way connected to it and do not accept any liability. FOR MORE INFORMATION, PLEASE CONTACT: NORTH AMERICA Scott Maguire, CFA, CAIA Managing Director, Global Head of Client Service & Marketing 630 West Germantown Pike Suite 300 Plymouth Meeting, PA SMaguire@centersquare.com EUROPE Alan Supple Senior Portfolio Manager BNY Mellon Asset Management International 160 Queen Victoria Street London EC4V 4LA +44 (0) Alan.Supple@bnymellon.com ASIA PACIFIC Andrew Nicholas Global Co-Head, Real Estate Securities BNY Mellon Investment Management Singapore Pte. Limited One Temasek Avenue #02-01 Millenia Tower Singapore (65) Andrew.Nicholas@bnymellon.com 6