Low Beta Real Estate Sectors Offering Substantial Margin of Safety

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1 Real Estate February 16, 2016 Low Beta Real Estate Sectors Offering Substantial Margin of Safety Frederic Blondeau, CFA, FRM / (514) FBlondeau@dundeecapitalmarkets.com Stéphane Boire, CFA / (514) SBoire@dundeecapitalmarkets.com Q4/15 Preview Although We Expect Q4/15 to Be In-Line with Expectations, Quarter's Data on Fundamentals will Be Critical to 's Estimates. With our macroeconomic scenario playing out, notably in regards to the longer than anticipated period of low interest rates (and negative interest rates possibly coming to Canada), Q3 results come at a crucial moment of the economic and real estate cycles. We continue to expect Multi-Family, Senior Living and Industrial sub-sectors to outperform Office and Retail sectors, especially from REITs with top management teams like our three favourite names, all BUY rated: IIP.UN (Top Pick), RUF.UN and AAR.UN. We remain extremely cautious on commercial real estate in Alberta. Although so far in 2016 the bond and gold markets are doing relatively well, REITs correlation with the TSX continue to create bottom-up buying opportunity, notably within low qualitative beta sub-sectors. Canadian Listed REIT/REOCs Valuation Levels Relatively Compelling. At the moment, REIT/REOCs investors seem to have shifted focus from interest to Canadian real estate fundamentals. That being said, the margin of safety currently imbedded in Canadian REITs is relatively high by both historic and US standards. First, the cash yield is at an all-time high compared to the 10-y GoC yield at 547bps, 248bps above its long-term average. Second, AFFO yield spreads are extremely compelling. Although we would expect Listed Commercial AFFO yield to increase, Listed Multifamily AFFO yield spreads also increased in a rather impressive manner, which in our opinion continues to represent an excellent investment opportunity. Lastly, in terms of P/AFFO multiples, while US REITs are still trading at or near valuation peaks, Canadian REITs have largely underperformed global REIT markets and multiples have compressed. Disconnect Between Direct and Listed Valuations, While Capital Flows in Direct Real Estate Remain Solid. In 2015, direct capitalization rates slightly compressed across all major real estate asset classes, underlining still solid fundamentals for direct real estate investments despite a somewhat subdued volume for That being said, target allocation of Canadian institutional investors to real estate is moving from less than 5% to the 5-15% range, with pension funds often targeting the ~20% range. Meanwhile, listed REITs implied capitalization rates have generally increased, with a weighted average of almost 7%. We Believe International Diversification Should Remain at the Core of Investors' Strategy. Given still significant inherent risks to the Canadian economy and the Canadian dollar, we would favour international diversification through Canada-listed REITs. Our favourite internationallyexposed REITs (other than RUF and AAR) are INO.UN, DRG.UN and NWH.UN. In our opinion, these three REITs' valuations are largely disconnected with their local peers while offering a unique exposure through Canada-listed vehicles. Please see Disclosures and Disclaimers at the end of this report. A division of Dundee Securities Ltd. Dundee Capital Markets is a registered trademark of Dundee Corporation, used under license.

2 Direct Real Estate Fundamentals: Risks Concentrated in Western Canada, Office and Retail Sectors. Transaction volumes were lower in 2015 than the past five years. That said, despite capitalization rates at record lows across all sectors, direct real estate offers substantial spreads over the 10-y GoC, currently at 461 bps nationally. The Canadian Office sector remains under pressure, with total vacancy up by 3.5% YoY at 12.5%. Calgary and Edmonton are still the markets where risk is concentrated, dealing with vacancy rates of 15.0% and 12.0%, and pipelines representing 7.5% and 11.8% of total inventories, respectively. Montreal is less concerning with a pipeline of 1.7% of total inventory, although total vacancy is now at 13.0%. Generally speaking, we expect the Office market to remain weak over the next two years at the minimum. With lackluster Canadian retail sales, Retail real estate is also a sector under pressure, with the vacancy rate up by more than 7% nationally at 5.0%. We expect the Retail sector to remain relatively weak given Canadian households record debt levels and the inevitable impact on retailers' bankruptcies. We Expect Further Consolidation, Possibly Privatizations, Within the Listed Real Estate Sector, Including the Senior Living Sector. Given the still significant investment spreads, we conclude that fund flows directed towards the direct real estate sector will remain very healthy. On the other hand, we estimate publicly listed REITs' weighted average discount to NAV is 15%, with a weighted average implied capitalization rate of 6.9%. In our opinion, this situation is a reflection of the disconnect between direct and indirect real estate, which, at a certain point, has to contract. We began seeing attrition in some sub-sectors, like in the Senior Living space. With Healthlease Properties, Regal Lifestyle Communities and Amica Mature Lifestyles now privatized, we believe Sienna Senior Living (SIA; BUY) and Extendicare (EXE; Not Rated) are takeout candidates at this point. In regards to Multi-Family, now that True North Apartment merged with Northern Property REIT (NVU.UN; NEUTRAL), there are only two mid-size names remaining to go to should a prospective investor want to acquire a credible Canadian multi-family platform: IIP and Killam Apartment REIT (KMP.UN; BUY). Other largely discounted REITs, most of them commercial REITs, could be or become take-out candidates, although generally speaking we remain cautious on these due to limited visible catalysts. In this context, activism is also a possibility. Macroeconomic Environment Should Continue to Support Favourable Real Estate Financing Conditions and Solid Demand for Investments in Brick and Mortar. As we have previously discussed in our research, as expected world major economies are slowing down, no matter how much governments have been and continue to intervene through numerous QE programs. In addition, as expected rates remain low, gold is already benefiting from increased volatility in broad equity markets and the declining dollar (see appendix 5). With still decreasing inflation anticipation, it remains to be seen if the gold rally will sustain beyond the next three months. And with Canada probably being the next country to see negative rates, listed REITs are well positioned to be the most significant beneficiaries and to outperform broader equity markets (see appendix 6). The IMF continues to revise its outlook for world growth downwards: 1) China s economy (representing ~17% of the global economy, slightly bigger than the US economy) is progressively becoming a service economy and will soon grow at approximately 3-4%, if not already. Chinese PMI continues to contract. We expect further intervention from the PBOC (as well as from the BoJ, which just adopted a zero interest rates policy, see appendix 7, and as such seen its GDP contract by 1.4% during Q4/15 highlighting consumers reluctance to spend); 2) European s PMI continues to be weak despite ECB s QE program. We expect the ECB to consider additional stimulus. In addition, we continue to see growing systemic risks stemming from the Deutsche Bank situation; 3) The quality of US job creation and GDP growth is still relatively weak. As a result the probability of a US recession has recently increased and as a matter of fact, credit-rating firms have been downgrading US companies' credit ratings at the fastest pace since the Global Financial Crisis. These facts are increasingly reflected in the ISM manufacturing PMI; 4) The Canadian economy remains extremely vulnerable. Consequently the BoC is very likely to once more intervene in the course of H1/16, with the global commodity sector still under pressure and the oil sector not likely to recover before 2018, at the minimum. Moreover the lower CAD vs. USD has yet to produce tangible results on exports. DUNDEE CAPITAL MARKETS Page 2

3 We continue to believe, at this juncture, that interest rates will remain low for at least additional months, that is whether or not the US FED decides to increase rates at its next two meetings, with deflation pressures around the corner underpinned by ever growing emerging markets macroeconomic risks. That said, we believe global demand for real assets, including for real estate assets, should remain strong. CBRE recently indicated ~US$400 billion of capital is currently committed to the global real estate sector. In Canada, we think real estate demand should remain solid just as well from both local and international investors (China), despite the fact that the country s biggest real estate investors should continue to diversify away from Canada itself, at least within some specific sub-asset classes. In North America, the disconnect between private and listed valuations brings to listed REITs a significant margin of safety in what could become even more volatile equity markets. DUNDEE CAPITAL MARKETS Page 3

4 Coverage Universe Tearsheet Canadian Real Estate Sector Q Earnings Calendar Price Total FFO/unit 6-8 FFO/unit 6 AFFO/unit 6 Company Ticker 12-Feb Target Price 3 Rating 4 Yield Expected Return 7 Reporting Date 5 Q4/15 Reported Q4/15E Dundee Q4/15E Consensus Q3/15A Reported Q4/14A Reported 2015E/ Dundee 2015E/ Consensus 2016E/ Dundee 2016E/ Consensus 2015E/ Dundee 2015E/ Consensus 2016E/ Dundee Diversified Agellan Commercial REIT ACR-UN N/R 9.0% 34.3% 08-Mar N/A N/A N/A 1.23 N/A 1.29 N/A 0.93 N/A 0.96 Artis REIT AX-UN NEUTRAL 9.7% 52.3% 29-Feb N/A BTB REIT BTB-UN BUY % 21-Mar N/A Cominar REIT CUF-UN NEUTRAL 10.1% 34.2% 03-Mar N/A CREIT REF-UN N/R 4.6% 26.5% 09-Feb 0.76 N/A N/A 3.08 N/A 3.15 N/A 2.53 N/A 2.62 H&R REIT HR-UN N/R 7.3% 44.8% 17-Feb N/A N/A N/A 1.92 N/A 1.93 N/A 1.52 N/A 1.54 Melcor REIT MR-UN N/R 10.1% 38.4% 11-Mar N/A N/A N/A 0.99 N/A 1.00 N/A 0.82 N/A 0.82 Morguard Corporation MRC N/R 0.5% 42.4% 07-Mar N/A N/A 3.68 N/A N/A N/A N/A N/A N/A Morguard REIT MRT-UN N/R 7.5% 35.1% 17-Feb N/A N/A N/A 1.63 N/A 1.64 N/A 1.24 N/A 1.24 Atrium MIC AI N/R 8.0% 21.7% 09-Feb N/A N/A N/A N/A 0.94 N/A 0.94 N/A N/A N/A N/A Firm Capital MIC FC BUY 7.2% 8.1% 28-Mar N/A N/A N/A N/A N/A Industrial Dream Industrial REIT DIR-UN BUY 9.4% 50.7% 16-Feb N/A Edgefront REIT ED-UN BUY % 19-Feb N/A Granite Real Estate GRT-UN N/R 6.2% 23.4% 02-Mar N/A N/A N/A N/A 3.37 N/A 3.50 N/A 3.07 N/A 3.21 PIRET REIT AAR-UN BUY 7.2% 23.2% 10-Mar N/A Summit II REIT SMU-UN NEUTRAL 8.8% 22.2% 16-Feb N/A WPT REIT 2 WIR'U N/R 8.0% 35.1% 23-Mar N/A N/A N/A 1.03 N/A 1.10 N/A 0.84 N/A 0.88 Retail Smart REIT SRU-UN N/R 5.3% 19.4% 10-Feb 0.52 N/A N/A 2.20 N/A 2.27 N/A 2.06 N/A 2.13 Choice Properties CHP-UN N/R 5.5% 6.1% 17-Feb N/A N/A N/A 0.96 N/A 0.99 N/A 0.78 N/A 0.81 Crombie REIT CRR-UN N/R 6.9% 17.9% 24-Feb N/A N/A N/A 1.13 N/A 1.15 N/A 0.94 N/A 0.97 CT REIT CRT-UN N/R 5.0% 3.4% 16-Feb N/A N/A N/A 1.04 N/A 1.08 N/A 0.81 N/A 0.86 First Capital FCR N/R 4.5% 14.7% 17-Feb N/A N/A N/A 1.05 N/A 1.10 N/A 1.01 N/A 1.03 Partners REIT PAR-UN N/R 7.7% 7.7% 16-Mar N/A N/A N/A 0.34 N/A 0.35 N/A 0.22 N/A 0.25 Plaza Retail REIT PLZ-UN N/R 5.9% 17.1% 26-Feb N/A N/A 0.08 N/A 0.07 N/A 0.32 N/A 0.34 N/A 0.29 N/A 0.32 OneREIT ONR-UN N/R 9.8% 30.7% 24-Mar N/A N/A N/A 0.43 N/A 0.45 N/A 0.35 N/A 0.37 Slate Retail Reit SRT-UN N/R 5.6% 26.9% 02-Mar N/A N/A N/A 1.85 N/A 1.88 N/A 1.56 N/A 1.58 RioCan REIT REI-UN N/R 5.7% 16.8% 18-Feb N/A N/A N/A 1.74 N/A 1.66 N/A 1.55 N/A 1.48 Office Allied Properties REIT AP-UN NEUTRAL 4.9% 30.3% 01-Mar N/A Brookfield Can. Office Pptys REIT BOX-UN N/R 4.9% 21.3% 25-Jan 0.41 N/A N/A 1.72 N/A 1.77 N/A 1.37 N/A 1.41 Dream Global REIT DRG-UN BUY 10.4% 33.4% 17-Feb N/A Dream REIT D-UN N/R 14.7% 59.1% 18-Feb N/A N/A N/A 2.82 N/A 2.74 N/A 2.35 N/A 2.24 Inovalis REIT INO-UN BUY 8.9% 22.8% 22-Mar N/A Northwest Healthcare Pptys REIT NWH-UN BUY 9.3% 31.4% 10-Mar N/A Slate Office REIT SOT-UN N/R 10.7% 26.6% 03-Mar N/A N/A N/A 1.03 N/A 1.09 N/A 0.84 N/A 0.90 Multi-Residential Boardwalk REIT BEI-UN BUY 4.8% 61.3% 18-Feb N/A Canadian Apartment Pptys REIT CAR-UN NEUTRAL 4.3% 3.8% 16-Feb N/A InterRent REIT IIP-UN BUY 3.5% 22.0% 01-Mar N/A Killam Apartment REIT KMP-UN BUY 5.8% 16.9% 16-Feb N/A Lanesborough REIT LRT-UN 0.08 NA N/R N/A 11-Mar N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Mainstreet Equity Corp 1 MEQ N/R 46.9% 10-Feb N/A N/A N/A 2.74 N/A 2.82 N/A 2.30 N/A 2.36 Milestone Apartments REIT MST-UN BUY 4.3% 27.5% 03-Mar N/A Morguard NA Residential REIT MRG-UN NEUTRAL 5.6% 16.6% 16-Feb N/A Northview Apartment REIT NVU-UN NEUTRAL % 09-Mar N/A N/A Pure Multi-Family Apartment REIT 2 RUF'U BUY 8.1% 38.3% 07-Mar N/A Seniors Housing Chartwell Seniors Housing REIT CSH-UN N/R 4.5% 23.8% 25-Feb N/A N/A N/A 0.78 N/A 0.84 N/A 0.72 N/A 0.78 Extendicare REIT EXE N/R 5.6% 16.3% 25-Feb N/A N/A 0.16 N/A N/A N/A 0.55 N/A 0.59 N/A 0.54 N/A 0.63 Sienna Senior Living Inc. SIA BUY 5.8% 22.3% 24-Feb N/A N/A N/A Mainstreet's Q1/16 results (quarter end is Dec. 31st); 2. All figures are in US$ 3. Dundee target prices except for companies not rated (Bloomberg and/or SNL Financial Consensus); 12 months out 4. N/R= Not Rated 5. The day of the earnings release 6. All FFO and AFFO are before extraordinary items fully diluted. 7. Expected capital appreciation plus dividend yield Sources: Bloomberg, SNL Financials and Dundee Capital Markets 8. Atrium MIC & Firm Capital MIC FFO based on diluted EPS per period Source: Company Reports, Dundee Capital Markets, SNL Financial 2016E/ Consensus DUNDEE CAPITAL MARKETS Page 4

5 Appendix 1: Real Estate Sector Earnings Calendar Other Real Estate Sectors Reporting Conference Call Share Price Dundee Q4/15E FFO/unit Q3/15A FFO/unit Company Date Details 12-Feb-16 Target Price Rating Dundee Consensus Reported What to Look For Allied Properties REIT 01-Mar March 2, 10:00AM SS-NOI growth and prospects; Montreal portfolio; Non-core $30.70 $38.50 NEUTRAL $0.59 $0.57 $ dispositions; Timing of Telus Sky project vs. fundamentals Artis REIT 29-Feb March 1, 1:00PM Fundamentals in Alberta; Alberta disposition program recently $11.08 $15.80 NEUTRAL $0.37 $0.37 $ announced BTB REIT 21-Mar March 22, 10:00AM Update on the two redevelopment projects; More details on the $4.18 $5.00 BUY $0.12 $0.13 $ Montreal acquisition on February 15th Cominar REIT 03-Mar March 3, 11:00AM SS-NOI growth; Update on asset recycling/balance sheet activities; $14.51 $18.00 NEUTRAL $0.45 $0.45 $ Unit buybacks; Update on Target leases, especially in Laval, QC. Dream Global REIT 17-Feb February 18, 3:30PM $7.72 $9.50 BUY $0.21 $0.20 $0.20 SS-NOI growth; Performance of newly acquired assets Inovalis REIT 22-Mar March 22, 11:00AM Occupancy evolution; Growth plans now that available capital $9.22 $10.50 BUY $0.23 $0.24 $ deployed Northwest Healthcare March 11, 10:00AM SS-NOI in Canada; NCIB and capital allocation update; Macro risks in 10-Mar $8.60 $10.50 BUY $0.26 $0.23 $0.21 REIT Brazil; Currency hedging strategy Firm Capital MIC 28-Mar N/A $12.99 $13.10 BUY $0.25 $0.25 $0.24 Performance of portfolio vs. view on credit risk Industrials Reporting Conference Call Share Price Dundee Q4/15E FFO/unit Q3/15A FFO/unit Company Date Details 12-Feb-16 Target Price Rating Dundee Consensu Reported What to Look For Dream Industrial REIT 16-Feb February 17, 2:00PM $7.43 $10.50 BUY $0.24 $0.24 $0.24 Update on internal initiatives; NCIB Edgefront REIT 19-Feb N/A $1.60 $2.15 BUY $0.05 $0.05 $0.05 Acquisition pipeline PIRET 10-Mar March 10, 3:00PM SS-NOI growth; Non-core asset dispositions especially in Alberta; $4.31 $5.00 BUY $0.09 $0.10 $ Update on NCIB Summit II REIT 16-Feb February 17, 11:00AM $5.73 $6.50 NEUTRAL $0.16 $0.16 $0.15 Growth plans, notably with Montoni DUNDEE CAPITAL MARKETS Page 5

6 Multi-Residential Reporting Conference Call Share Price Dundee Q4/15E FFO/unit Q3/15A FFO/unit Company Date Details 12-Feb-16 Target Price Rating Dundee Consensu Reported What to Look For Boardwalk REIT 18-Feb February 19, 11:00AM $42.19 $66.00 BUY $0.85 $0.85 $0.92 Update on operating fundamentals in Alberta; Disposition plans CAP REIT 16-Feb February 17, 10:00AM $28.64 $28.50 NEUTRAL $0.40 $0.44 $0.41 SS-NOI growth vs. R&M expense; Acquisition pipeline InterRent REIT 01-Mar N/A $6.54 $7.75 BUY $0.11 $0.10 $0.10 Acquisition pipeline given the current capacity Killam Apartment REIT 16-Feb February 17, 12:00PM $10.35 $11.50 BUY $0.21 $0.20 $0.24 SS-NOI growth vs. operating expenses Milestone Apartments March 4, 11:00AM 03-Mar REIT $15.02 $18.50 BUY $0.24 $0.26 $0.26 SS-NOI growth and growth prospects in US given new supply Morguard N.A. February 18, 3:00PM SS-NOI growth and growth prospects in US given new supply; NOI 16-Feb $10.81 $12.00 NEUTRAL $0.27 $0.26 $0.28 Residential REIT margins Northview Apartment March 10, 12:00PM 09-Mar REIT $16.25 $23.50 NEUTRAL $0.60 $0.58 N/A Update on the integration of TN Pure Multi-Family REIT 07-Mar N/A $4.61 $6.00 BUY $0.10 $0.12 $0.11 SS-NOI growth and growth prospects in US given new supply Seniors Living Reporting Conference Call Share Price Dundee Q4/15E FFO/unit Q3/15A FFO/unit Company Date Details 12-Feb-16 Target Price Rating Dundee Consensu Reported What to Look For February 25, 10:00AM Sienna Senior Living 24-Feb $15.46 $18.00 BUY $0.29 $0.29 N/A Update on development activities Source: Dundee Capital Markets, SNL Financial, Thomson One DUNDEE CAPITAL MARKETS Page 6

7 Appendix 2: Movement In Cap Rates 0.6% Downtown Office "A" 8.0% Percentage Point Change 0.4% 0.2% -0.2% -0.4% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% -0.6% Toronto Vancouver Calgary Montreal Edmonton Ottawa Halifax QoQ YoY Current (RHS) National Avg. Percentage Point Change 1.0% 0.8% 0.6% 0.4% 0.2% -0.2% -0.4% -0.6% -0.8% Downtown Office "B" 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Toronto Vancouver Calgary Montreal Edmonton Ottawa Halifax QoQ YoY Current (RHS) National Avg. Percentage Point Change 0.3% 0.2% 0.1% -0.1% -0.2% -0.3% Suburban Office "A" 7.2% 7.0% 6.8% 6.6% 6.4% 6.2% 6.0% 5.8% 5.6% 5.4% 5.2% Toronto Vancouver Calgary Montreal Edmonton Ottawa QoQ YoY Current (RHS) Halifax National Avg. DUNDEE CAPITAL MARKETS Page 7

8 Retail - Regional 7.0% Percentage Point Change -0.1% -0.2% -0.3% -0.4% -0.5% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% -0.6% Toronto Vancouver Calgary Montreal Edmonton Ottawa QoQ YoY Current (RHS) Halifax National Avg. 0.6% Apartment - High Rise "A" 6.0% Percentage Point Change 0.4% 0.2% -0.2% -0.4% 5.0% 4.0% 3.0% 2.0% 1.0% -0.6% Toronto Vancouver Calgary Montreal Edmonton Ottawa QoQ YoY Current (RHS) Halifax National Avg. 0.6% Apartment - High Rise "B" 5.6% Percentage Point Change 0.4% 0.2% -0.2% -0.4% -0.6% 5.4% 5.2% 5.0% 4.8% 4.6% 4.4% 4.2% -0.8% 4.0% Toronto Vancouver Calgary Montreal Edmonton Ottawa QoQ YoY Current (RHS) Halifax National Avg. DUNDEE CAPITAL MARKETS Page 8

9 0.6% Apartment - Low Rise "A" 6.0% Percentage Point Change 0.4% 0.2% -0.2% -0.4% -0.6% 5.0% 4.0% 3.0% 2.0% 1.0% -0.8% Toronto Vancouver Calgary Montreal Edmonton Ottawa QoQ YoY Current (RHS) Halifax National Avg. 0.6% Apartment - Low Rise "B" 7.0% Percentage Point Change 0.4% 0.2% -0.2% -0.4% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% -0.6% Toronto Vancouver Calgary Montreal Edmonton Ottawa QoQ YoY Current (RHS) Halifax National Avg. Source: Dundee Capital Markets, CBRE DUNDEE CAPITAL MARKETS Page 9

10 Appendix 3: Listed vs Direct Cap Rates National Apartment Cap Rates 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Q3/09 Q1/10 Q3/10 Q1/11 Q3/11 Q1/12 Q3/12 Q1/13 Q3/13 Q1/14 Q3/14 Q1/15 Q3/15 10-year GoC Yield High Rise "A" High Rise "B" Low Rise "A" Apartment Implied Trading Cap Rate National Cap Rate Comparison 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Q3/09 Q1/10 Q3/10 Q1/11 Q3/11 Q1/12 Q3/12 Q1/13 Q3/13 Q1/14 Q3/14 Q1/15 Q3/15 10-year GoC Yield Downtown Office "A" Industrial "A" & "B" Retail - Sector / Power Implied Commercial Trading Cap Rates Source: Dundee Capital Markets, Thomson One, CBRE DUNDEE CAPITAL MARKETS Page 10

11 Appendix 4: REIT/REOCs Equity Raising Activity $Billion Equity Raised TSX Capped REIT Index Source: Dundee Capital Markets, SNL Financial, Thomson One DUNDEE CAPITAL MARKETS Page 11

12 Appendix 5: TSX, Inflation Anticipations, Commodities and REITs Source: Bloomberg, Dundee Capital Markets DUNDEE CAPITAL MARKETS Page 12

13 Appendix 6: Negative Interest Rates vs. Listed REITs Pricing, European Case DUNDEE CAPITAL MARKETS Page 13

14 Source: Bloomberg, preqin - used with permission, Dundee Capital Markets DUNDEE CAPITAL MARKETS Page 14

15 Appendix 7: Negative Interest Rates in Japan vs. Yen Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 JPY Curncy Japan Generic Govt 10Y Yield Source: Bloomberg, Dundee Capital Markets DUNDEE CAPITAL MARKETS Page 15

16 Disclosures & Disclaimers This research report (as defined in IIROC Rule 3400) is issued and approved for distribution in Canada by Dundee Securities Ltd. ( Dundee Capital Markets ), an investment dealer operating its business through its two divisions, Dundee Capital Markets and Dundee Goodman Private Wealth. Dundee Capital Markets is a member of the Canadian Investor Protection Fund, the Investment Industry Regulatory Organization of Canada and an investment fund manager registered with the securities commissions across Canada. Dundee Capital Markets is a subsidiary of Dundee Corporation. 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17 The securities discussed in this research report may not be suitable for all types of investors and such reports do not take into account particular investment needs, objectives and financial circumstances of a particular investor. An investor should not rely solely on investment recommendations contained in this research report, if any, as a substitution for the exercise of their own independent judgment in making an investment decision and, prior to acting on any of the information contained in this research report, investors are advised to contact his or her investment adviser to discuss their particular circumstances. Non-client recipients of this research report should consult with an independent financial advisor prior to making any investment decision based on this research report or for any necessary explanation of its contents. 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The compensation of each Research Analyst/Associate involved in the preparation of this research report is based competitively upon several criteria, including performance assessment criteria based on quality of research. The Research Analyst compensation pool includes revenues from several sources, including sales, trading and investment banking. Research analysts do not receive compensation based upon revenues from specific investment banking transactions. Dundee Capital Markets generally restricts any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. Certain discretionary client portfolios are managed by portfolio managers and/or dealing representatives in its private client advisory division, Dundee Goodman Private Wealth. The aforementioned portfolio managers and/or dealing representatives are segregated from Research and they may trade in securities referenced in this research report both as principal and on behalf of clients (including managed accounts and investment funds). Furthermore, Dundee Capital Markets may have had, and may in the future have, long or short positions in the securities discussed in this research report and, from time to time, may have executed or may execute transactions on behalf of the issuer of such securities or its clients. Should this research report provide web addresses of, or contain hyperlinks to, third party web sites, Dundee has not reviewed the contents of such links and takes no responsibility whatsoever for the contents of such web sites. Web addresses and/or hyperlinks are provided solely for the recipient's convenience and information, and the content of third party web sites is not in any way incorporated into this research report. Recipients who choose to access such web addresses or use such hyperlinks do so at their own risk. Unless publications are specifically marked as research publications of Dundee Capital Markets, the views expressed therein (including recommendations) are those of the author and, if applicable, any named issuer or Investment dealer alone and they have not been approved by nor are they necessarily those of Dundee Capital Markets. Dundee Capital Markets. expressly disclaims any and all liability for the content of any publication that is not expressly marked as a research publication of Dundee Capital Markets. Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by the author. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements. Dundee Securities Ltd. Any reproduction or distribution in whole or in part of this research report without permission is prohibited. Informal Comment: Informal Comments are analysts informal comments that are posted on the Dundee website. They generally pertain to news flow and do not contain any change in analysts' opinion, estimates, rating or target price. Any rating(s) and target price(s) in an Informal Comment are from prior formal published research reports. A link is provided in any Informal Comment to all company specific disclosures and analyst specific disclosures for companies under coverage, and general disclosures and disclaimers. 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18 Presentations do not include disclosures that are specific to analysts and specific to companies under coverage. Please refer to formal published research reports for company specific disclosures and analyst specific disclosures for companies under coverage. Please refer to formal published research reports for valuation methodologies used in determining target prices for companies under coverage. Idea of Interest: Dundee Capital Markets has not initiated formal continuing coverage of Idea of Interest companies. Dundee Capital Markets from time to time publishes reports on Idea of Interest securities for which it does not and may not choose to provide formal continuous research coverage. All opinions and estimates contained in an Idea of Interest report are subject to change without notice and are provided in good faith but without the legal responsibility that would accompany formal continuous research coverage. The companies may have recommendations and risk ratings as per our regular rating system and may have target prices, see Explanation of Recommendations and Risk Ratings for details. Any recommendations, ratings, target prices and/or comments expire 30 days from the published date, and once expired should no longer be relied upon as no assurance can be given as to the accuracy or relevance going forward. Dundee does not accept any obligation to update, modify or amend any Idea of Interest report or to otherwise notify a recipient of an Idea of Interest report in the event that any estimates, opinions and recommendations contained in such report change or subsequently become inaccurate. Dundee clients should consult their investment advisor as to the appropriateness of an investment in the securities mentioned. IIROC Rule 3400 Disclosures and/or FCA COBS Disclosures: A link is provided in all research reports delivered by electronic means to disclosures required under IIROC Rule Disclosures required under IIROC Rule 3400 for sector research reports covering six or more issuers can be found on the Dundee Capital Markets website at in the Research Section. Other Services means the participation of Dundee in any institutional non-brokered private placement exceeding $5 million. Where Dundee Capital Markets and its affiliates collectively beneficially own 1% or more (or for the purpose of FCA disclosure 5% or more) of any class of the issuer s equity securities, our calculations will exclude managed positions that are controlled, but not beneficially owned by Dundee Capital Markets. Explanation of Recommendations and Risk Ratings Dundee target: represents the price target as required under IIROC Rule Valuation methodologies used in determining the price target(s) for the issuer(s) mentioned in this research report are contained in current and/or prior research. Dundee target N/A: a price target and/or NAV is not available if the analyst deems there are limited financial metrics upon which to base a reasonable valuation. Recommendations: BUY: Total returns expected to be materially better than the overall market with higher return expectations needed for more risky securities. NEUTRAL: Total returns expected to be in line with the overall market. SELL: Total returns expected to be materially lower than the overall market. TENDER: The analyst recommends tendering shares to a formal tender offer. UNDER REVIEW: The analyst will place the rating and/or target price Under Review when there is a significant material event with further information pending; and/or when the analyst determines it is necessary to await adequate information that could potentially lead to a re-evaluation of the rating, target price or forecast; and/or when coverage of a particular security is transferred from one analyst to another to give the new analyst time to reconfirm the rating, target price or forecast. Risk Ratings: risk assessment is defined as Medium, High, Speculative or Venture. Medium: securities with reasonable liquidity and volatility similar to the market. High: securities with poor liquidity or high volatility. Speculative: where the company's business and/or financial risk is high and is difficult to value. Venture: an early stage company where the business and/or financial risk is high, and there are limited financial metrics upon which to base a reasonable valuation. Investors should not deem the risk ratings to be a comprehensive account of all of the risks of a security. Investors are directed to read Dundee Capital Markets Research reports that contain a discussion of risks which is not meant to be a comprehensive account of all the risks. Investors are directed to read issuer filings which contain a discussion of risk factors specific to the company s business. Medium and High Risk Ratings Methodology: Medium and High risk ratings are derived using a predetermined methodology based on liquidity and volatility. Analysts will have the discretion to raise but not lower the risk rating if it is deemed a higher risk rating is warranted. Risk in relation to forecasted price volatility is only one method of assessing the risk of a security and actual risk ratings could differ. Securities with poor liquidity or high volatility are considered to be High risk. Liquidity and volatility are measured using the following methodology: a) Price Test: All securities with a price <= $3.00 per share are considered high risk for the purpose of this test. b) Liquidity Test: This is a two-tiered calculation that looks at the market capitalization and trading volumes of a DUNDEE CAPITAL MARKETS Page 18

19 company. Smaller capitalization stocks (<$300MM) are assumed to have less liquidity, and are, therefore, more subject to price volatility. In order to avoid discriminating against smaller cap equities that have higher trading volumes, the risk rating will consider 12 month average trading volumes and if a company has traded >70% of its total shares outstanding it will be considered a liquid stock for the purpose of this test. c) Volatility Test: In this two step process, a stock s volatility and beta are compared against the diversified equity benchmark. Canadian equities are compared against the TSX while U.S. equities are compared against the S&P 500. Generally, if the volatility of a stock is 20% greater than its benchmark and the beta of the stock is higher than its sector beta, then the security will be considered a high risk security. Otherwise, the security will be deemed to be a medium risk security. Periodically, the equity risk ratings will be compared to downside risk metrics such as Value at Risk and Semi-Variance and appropriate adjustments may be made. All models used for assessing risk incorporate some element of subjectivity. SECURITY ABBREVIATIONS: NVS (non-voting shares); RVS (restricted voting shares); RS (restricted shares); SVS (subordinate voting shares). Dundee Capital Markets Equity Research Ratings 77% 71% 66% 55% 44% 33% 28% 24% 22% 11% 11% 5% 0% 0% Buy Neutral Sell % of companies covered by Dundee Capital Markets in each rating category % of companies within each rating category for which Dundee Capital Markets has provided investment banking services for a fee in the past 12 months. As at December 31, 2015 Source: Dundee Capital Markets DUNDEE CAPITAL MARKETS Page 19