Authors Companies covered in this stud y include: Patrick Weber Dwight Bolden

Transcription

1 Sector Special The German Real Estate Industry Berenberg Fixed Income Research 27 th November 2014 Authors Patrick Weber Analyst Dwight Bolden Research support Companies covered in this study include: Adler Real Estate AG Deutsche Annington AG Deutsche Wohnen AG DIC Asset AG GAGFAH AG Grand City Properties SA LEG Immobilien AG TAG Immobilien AG

2 All recommendations in a snapshot Adler Real Estate AG Business profile: Aggressive Financial profile: Aggressive Spread levels: fairly valued, remain on hold Summary: Adler has the potential to become the next GCP. The key question is whether it can reach the targeted portfolio size of 47k units (at a fair value) and reduce its leverage to more sustainable levels after 2017 DIC Asset Management AG Business profile: Aggressive to Balanced Financial profile: Aggressive Spread levels: too tight given the leverage profile Summary: DIC is highly leveraged and in the near term, the company may suffer from lower economic growth, leading to potentially higher vacancy rates. Leverage is too high. LEG Immobilien AG Business profile: Excellent Financial profile: Excellent Spread levels: Convertible is undervalued Summary: LEG is the largest residential real estate company operating in the state of NRW. It has delivered strong internal like-for-like rental growth and there is potential for further growth. Deutsche Annington AG Business profile: Excellent Financial profile: Balanced Spread levels: fairly priced Summary: ANNGR offers investors the most diversified investment in the German real estate sector. Just the scale and the excellent performance of the company clearly indicate an investment grade score. GAGFAH S.A. Business profile: Excellent Financial profile: Aggressive Spread levels: Convertible fairly valued Summary: GAGFAH will deliver a steady and above market average growth, just by means of internal improvements and rent increases. However, despite low interest costs, the credit profile is aggressive. TAG Immobilien AG Business profile: Balanced Financial profile: Balanced Spread levels: fairly valued, remain on hold Summary: TAG has a critical size and benefits from a low cost base. However, our positive perception is tempered by a very high vacancy rate in the Salzgitter region (key region for TAG). Deutsche Wohnen AG Business profile: Excellent Financial profile: Balanced Spread levels: Convertibles are undervalued Summary: DeuWo s occupancy rate is best in class and the company has a very solid business profile with excellent internal FFO growth prospects. We particularly like the strong Berlin exposure (72%). Grand City Properties S.A. Business profile: Excellent Financial profile: Excellent Spread levels: Convertibles are undervalued Summary: GCP is the only residential real estate company with an excellent scoring with regard to both the financial and the business profile. Clearly, LTV and the debt profile are best in class. Switch: TAG vs. DIC Recommendation: Sell DIC and buy TAG Business profile: Balanced vs. Aggressive/Balanced Financial profile: Balanced vs. Aggressive Summary: The bonds of both companies trade at a similar level, although DIC has a weaker credit profile and a more risky business model. Berenberg recommends to sell DIC and invest in TAG bonds. Overweight Marketweight Underweight Switch idea 2

3 The good and the bad you need to know about German real estate Rising rents across all segments of the real estate market Commercial and residential real estate prices increased by around 11% last year Favorable financing conditions Low financing costs due to expansive monetary policy and comeback of CMBS Sound medium-term economic profile Solid economic growth and moderate unemployment in the medium-term Mega-trends in favor of real estate investment companies Population growth (migration), urbanization, and trend to 1/2 person households Strong structural factors and sound cash flow prospects Favorable demand and supply dynamics, high structural degree of renting in Germany Market is starting to overheat, leading already to lower rental yields Investment volumes hit record high, transactions seem to start to look overvalued Temporary economic downturn in 2014/15 Likely to impact commercial real estate companies in the short-run Regulation: Introduction of a rental cap (starts in 2015) Berenberg expects a low impact for most residential real estate companies 28/11/2014 Source: Berenberg Fixed Income Research. 3

4 Real Estate one of the best performing sectors year-to-date Berenberg expects the strong momentum for the real estate industry to continue BofA ML Technology BofA ML Utilities BofA ML Real Estate BofA ML Non-Financials BofA ML Media BofA ML Basic Industry BofA ML Energy BofA ML Automotive BofA ML Capital Goods BofA ML Healthcare 0% 2% 4% 6% 8% 10% 12% 14% ytd 6M 3M 28/11/2014 Source: Bloomberg, Berenberg Fixed Income Research. 4

5 5 Structure 1. Macro environment in Germany 6 2. Credit drivers and peer valuation analysis Company profiles 17 Adler Real Estate AG 19 Deutsche Annington AG 23 Deutsche Wohnen AG 27 DIC Asset Management AG 31 GAGFAH S.A. 35 Grand City Properties S.A. 39 LEG Immobilien AG 43 TAG Immobilien AG Disclaimer Contacts 61

6 Section 1 The macro environment in Germany 6

7 Stylized facts about the structure of the German real estate market Structural factors are favorable for both residential as well as commercial real estate investment companies Supply: Residential Supply: 41m residential housing units in total (Zensus 2011) New construction of residential units remain at a historic all-time low (around 200k new residential units were built this year) Demand: Demand: increasing number of single households (number of 1 to 2 person households expected to increase by 12% to 33m until 2025); in total, growth of households expected at 1.8% until 2020 However, positive demand effects mainly for metropolitan areas and cities with universities (e.g. Jena, Munster, ) Higher demand for appropriate housing units for elderly people (market size est. at 10% of population); Deutsche Wohnen is so far the only company which explicitly tackled this market Further information: Germans spend around 23% of their disposable income on rents Ownership split: Only c.10% of residential units belong to institutional investors and c.33% are let by private persons. 40% are privately owned flats, used for own purposes Rental cap may restrict in-place rent growth Supply: Commercial Due to lower supply, vacancy rates declined across the board and even for second and third tier cities Demand: Demand for Offices: accounts for c.50% of total commercial investments (Source: CBRE, 2014); Metropolitan areas currently suffer from excess demand; Even demand for second tier locations is starting to increase; Overall rental yields expected to fall as demand from foreign investors is expected to increase further (currently rental yield across the top 8 regions is c.4.5%) Demand for retail properties: demand for prime spots and main street properties increased recently, compared to demand for shopping centers (+37% in H according to CBRE); Due to an increased focus on second and third tier cities, there is also an increased demand for prime retail location across Germany; Key demand in H comes from fashion retailers (c.25%) and food retailers (c.20%) (Source: CBRE) Further information: The city with the highest EUR/sqm prices are Frankfurt/Main (>35 EUR/sqm), followed by Munich and Dusseldorf 28/11/2014 Source: Destatis 2014 (new construction numbers), Berenberg Fixed Income Research. 7

8 Macro Environment in Germany I Long-term dynamics vary significantly on a regional level Population development until 2020* Vacancy rates (May 2014)* Change in population Below -6% -6% to -3% -3% to +0% +0% to +3% +3% to +6% Above +6% Vacancy rates in % of the housing stock Below 3% 3 to 5% 5 to 7% Above 7% Metropolitan areas benefit from urbanization trends Eastern Germany likely to be negatively impacted by demographic developments Average vacancy rates at around 3% 5% High structural vacancy in East Germany with the exception of the metropolitan areas of Dresden & Berlin Pricing and rental yield pressures very likely in some Eastern German cities with bad demand and supply dynamics Metropolitan areas will benefit most because of (i) rising income, (ii) low unemployment, and (iii) favorable demand/supply 28/11/2014 Source: * Bulwiengesa Research (House price index, March 2014) Berenberg Fixed Income Research. 8

9 Macro Environment in Germany II Short-term price dynamics positive for residential, stable for commercial Residential property prices in Germany move with interest rates and the unemployment rate Commercial property prices in Germany mainly follow the economic growth pattern % % 110 8% 110 8% 100 4% 95 2% 90 0% 80-4% Residential Unemployment Rate Long Term Interest Rates Commercial GDP Growth Rate Residential and commercial property prices increased by around 11% between 2010 and 2013 This development has been promoted by a recovering economy and favorable financing conditions Berenberg expects this trend to continue in the medium-term Residential Real Estate prices are expected to increase further due to the low interest rate environment, the demand from foreign investors, and the low level of unemployment Commercial Real Estate prices are expected to remain broadly flat and may even decline in some economically weaker regions of Germany in the short run 28/11/2014 Source: Bloomberg, Real estate price indices from vdp Research (09/2014), Berenberg Fixed Income Research. 9

10 Key takeaways for investors Germany on a macro level is an attractive market for real estate investors Country considerations Germany has not just one metropolitan area but - due to its federal structure - consists of at least eight key metropolitan regions, offering investors the potential to profit from economic developments in different regions as well as to diversify their risk Structural considerations Germany is still a country where most people are renting out real estate (c.50% vs. Europe 30%), making the business model of real estate companies relatively safe and stable Trend to urbanization (c. 2/3 of Germans in villages wish to move to metropolitan areas), increase in single households (c.44% until 2013) and net migration are further positives Supply of new housing, particularly in metropolitan areas, is still growing less than demand, leaving further room for rent growth and thus offering stable cash flows to those companies which focus on metropolitan regions For Eastern Germany, Berenberg expects a lower population growth and higher vacancy rates, which is likely to negatively impact companies focusing solely on this part of Germany Dusseldorf Cologne Eight key metropolitan areas across Germany Hamburg Frankfurt/Main Stuttgart Nuernberg Munich Berlin 28/11/2014 Source: Berenberg Fixed Income Research. 10

11 Section 2 Credit drivers and peer valuation analysis 11

12 Financial risk Berenberg s approach to real estate credit scoring Business model Macro landscape Overview Berenberg s approach to real estate credit scoring Credit driver Factors Takeaways Country considerations GDP growth, unemployment rate, long-term interest rate Low unemployment rate, solid medium-term economic growth Structural considerations New housing starts, Growth of households, Lifestyle changes Demand and supply dynamics in favor of most real estate investment companies Done in the prev. section Mega trends Exposure and business model Demographic trends, Urbanization, Elderly Living Commercial (Office, Retail), Residential, Development, Services Demographic trends in favor of most real estate investment companies Residential less dependent on the business cycle when compared to commercial Size of operations Portfolio size, company size, economies of scale, A larger portfolio size (# units) are usually credit positive Portfolio diversification & quality Leverage Regional and customer diversification, Quality of assets, Loan-to-Value, Net debt/adj. EBITDA Quality of region in terms of economic prospects is the main driver LTV below 50-55% are considered in line with an IG score Goal of the analysis in this section Profitability Adj. EBITDA (margin), interest coverage, FFO I yield Adj. EBITDA profitability of above 65% is considered in line with an IG score Cash flows and liquidity FFO I/II We mainly look at FFO I, in particular its recurring (growth) component 28/11/2014 Source: Berenberg Fixed Income Research. 12

13 Credit drivers and peer valuation analysis Business risk profile how Berenberg assesses the credit drivers Credit driver: Business risk End market exposure Business model set-up Residential Commercial Mixed Size Portfolio strucutre / diversification Quality of assets In general, Berenberg scores companies with a lower dependence on business cycles, and thus more stable cash flow streams, higher. In this context, we generally prefer residential over commercial real estate. For residential real estate companies, (structural) growth due to rent increases is rather independent of economic cycle, whereas commercial real estate companies are affected to a larger extend by business cycle fluctuations (via vacancy rates). We generally regard a larger size as credit positive if the company can demonstrate to benefit from economies of scale with regards to its asset management line and if there is proof that it benefits from cost advantages related to size. Berenberg considers that economies of scale should exist for residential portfolios with more than 40,000 real estate units. Berenberg regards this factor as the most important scoring driver. In particular, we consider factors related to: Regional diversification (a clustering in a certain region may still not hurt our scoring if the respective region has solid economic prospects) Tenant diversification (a larger number of independent tenants is usually credit positive, particularly for commercial real estate) (Structural) vacancy rates (usually considered good if below 4%) Location and the quality of the infrastructure plays a significant role for our assessment of properties in the portfolio. Ideally, the housing units should only require maintenance CAPEX. 28/11/2014 Source: Berenberg Fixed Income Research. 13

14 Credit drivers and peer valuation analysis Financial risk profile how Berenberg assesses the credit drivers Credit driver: Financial risk Leverage Profitability Cash flows and liquidity Berenberg uses the Loan-to-Value (LTV) ratio as the key leverage metric. We consider LTV of below 50-55% as indicative of a conservative financial profile and in accordance with an investment grade score. Broadly speaking, the LTV is derived by taking all financial debt, deducting cash & cash equivalents and dividing it by the size of the investment properties on the balance sheet. Berenberg uses EBITDA, adjusted for gains due to the disposal of assets, as the key figure in assessing profitability. We exclude fair value adjustments in our analysis of sustainable income generation. In principle, a larger portfolio size leads to higher profitability ratios. Generally, an adjusted EBITDA margin of above 65% is indicative of an investment grade score. Berenberg uses FFO I to assess the quality of cash flows. We only consider the portion of cash flows which we think is sustainable in the long-run. Note however, that typically, cash flows are not sufficient to repay debt and hence, Berenberg analyzes the liquidity position and refinancing prospects of the company in conjunction with cash flows metrics. Rent Income Acquisitions Cost base Interest cost FFO I Measures the income which has been directly generated from renting; This measure excludes one-time effects and gains on asset disposals Dividend payments (usually between 50-70%) Debt repayment CAPEX Acquisitions 28/11/2014 Source: Berenberg Fixed Income Research. 14

15 Small Asset value growth rate Size Large Credit drivers and peer valuation analysis Peer analysis and comparison fundamental data FY 2013 ADLER DAIG DW DIC GAGFAH GCP LEG TAG Portfolio value in m ,375 8,469 2,256 7,712 1,011 4,949 3,563 Total real estate units 7, , , ,919 22,000 90,894 68,123 Total sqm ( 000) ,396 8,972 1,900 9,142 1,800 5,844 4,443 Occupancy rate 90.7% 96.1% 97.0% 89.3% 95.2% 87.3% 97.0% 91.0% Average size per unit 63sqm 64sqm 61sqm n.a. 61sqm n.a. 64sqm 61sqm Rent restrictions 13% 16% 21% n.a. 15% n.a. 40% 0% NRI multiple 13.7x 14.1x 14.2x n.a. 14.0x n.a. 13.9x 14.0x NRI yield 7.3% 7.1% 7.1% n.a. 7.1% n.a. 7.2% 7.1% WACD 4.7% 3.3% 3.5% n.a. 3.1% n.a. 3.3% 4.1% Avg. debt maturity in yrs n.a Corporate LTV 70.2% 50.9% 56.3% % 45.8% 48.8% 64.0% Business model growth prospects (as of H1 2014) Size and Diversification (as of H1 2014) Rental income growth rate High Portfolio diversification Low GCP DAIG LEG GAGFAH DW DIC TAG ADL DAIG GAGFAH DIC TAG GCP DW LEG ADL 28/11/2014 Source: Company data (FY 2013 numbers), Berenberg Fixed Income Research. 15

16 Credit drivers and peer valuation analysis Peer analysis and comparison market data Cash bonds: Maturity Volume Price YTW OAS Callable Rating Equity TP* Comment ADLERR 6 04/ ,000, Y -- N/A Credit spread fairly valued ANNGR / ,000, N BBB N/A Credit spread fairly valued ANNGR / ,000, N BBB N/A Credit spread fairly valued ANNGR / ,000, N BBB N/A Credit spread fairly valued ANNGR / ,000, N BBB N/A Credit spread fairly valued DICGR / ,000, N -- N/A Spread too tight given leverage metrics DICGR / ,000, N -- N/A Spread too tight given leverage metrics TEGGR / ,000, N -- N/A Credit spread fairly valued TEGGR / ,000, N -- N/A Credit spread fairly valued Convertible bonds: DWNIGY / ,000, Y, Softcall Baa1 21 Further upside potential given share price target DWNIGY / ,000, Y, Softcall Baa1 21 Further upside potential given share price target GYCGR / ,000, N BBB Further upside potential given share price target LEGGR / ,000, Y, Softcall Further upside potential given share price target GFJGY / ,000, Y, Softcall Fairly valued 28/11/2014 Source: Bloomberg, * based on our Equity Research, Berenberg Fixed Income Research. 16

17 Section 3 Company profiles 17

18 18 Corporate profiles 3.1 Adler Real Estate AG Deutsche Annington AG Deutsche Wohnen AG DIC Asset Management AG GAGFAH SA Grand City Properties SA LEG Immobilien AG TAG Immobilien AG 47

19 Credit profile Adler Real Estate AG 19

20 20 Credit profiles Adler Real Estate AG Credit metrics strongly improved in H1 14, but company remains HY Adler Real Estate AG Bloomberg Ticker ADLERR <Corp> Company profile and strategy In 2012, the Adler Real Estate AG has changed its strategic alignment and repositioned itself from being a real estate developer to a residential investment company (targeted share of residential real estate in the portfolio: c.97%). Adler is currently in the process of selling commercial real estate units and legacy assets. As of H1 2014, the company has 25,000 real estate units. Its strategy rests on four pillars: (i) (ii) (iii) (iv) Clear country focus on Germany Sole focus on good-quality residential real estate and non-city-center locations (B locations) Financial goal is to reach an LTV of 55% in the medium term (currently: c.64%) Benefit from economies of scale in asset management, building up a critical size of at least 47,000 units by 2017 Berenberg believes that Adler has the potential to significantly grow in terms of net asset value and rental income within the management s scheduled timeframe (until 2017). Moreover, based on our macro outlook, the company s regional exposure in Germany looks promising (expectations about population growth and vacancy rates in its core markets) in many of its regions but we also note some company s exposure to weak regions in Eastern Germany. Source: Company presentation Rental units Company data Headquarter: Hamburg, Germany Market cap/employees: 240.9m / 83 (Sep. 2014) Major shareholders: Mezzanine IX Investors % Wecken & Cie % Uhlandstraße Investments 9.49 % Free Float: % Management: Axel Harloff (CEO) Webpage: Strengths Strategy shift ensures stable cash flows going forward Lean company structure supports a low cost structure Network of the management in the real estate industry Weaknesses Larger competitors operating in the same region(s) High vacancy rates & some exposure to weak regions High financial leverage

21 21 Credit profiles Adler Real Estate AG Portfolio size to double in the next 24 months Credit profile Business profile: Aggressive (at least until 2017) Solid diversification, but critical firm size not yet reached Adler repositioned itself in 2012; Berenberg expects that Adler will make significant acquisitions in the next two years. The company targets a portfolio size of around 47,000 units. After reaching its target size by 2017, Adler is likely to begin with its debt deleveraging process. Targeted portfolio diversification to economically good regions with a clear investment philosophy from the management is positive: Currently the portfolio is mainly split amongst North Rhine-Westphalia (40%), Saxony (20%), and Lower Saxony (15%). Current portfolio size of c.25,000 units is too small to profit from economies of scale. Key question for us: can Adler grow its portfolio size fast enough in target regions before the market dries out. Portfolio quality is medium, with rather small required CAPEX spending. Potential for rental income growth by vacancy rate reduction (Berenberg regards a 5 percentage point reduction as possible). We note that the exposure in Eastern Germany is rather in the economically weak areas. Financial profile: Aggressive for the foreseeable future Higher leverage than most of its peers Increase in profits currently mainly driven by fair value adjustments. Current LTV at around 64% (H1 2014). Excellent maturity profile with no major debt maturities before We do not expect any dividends payments in the near future. Investment thesis Adler has the potential to become the next rising star in the German residential market. Management commitment is high and we believe the targeted portfolio size of 47k units is realistic given the network of the company. However, although the maturity profile is balanced, the company is nevertheless highly leveraged and we expect that this will not chnage for the next two years until a critical portfolio size is reached. Due to size considerations, we only give a recommendation on the ADLERR 6 04/2019 bond. We would get a more positive view if Sustainable reduction of LTV to below 60% Sustainable increase in the occupancy rates of the residential share of the portfolio to 95% Successful monetization strategy, selling approx. 75m in non-core assets over the next 24 months We would get a more negative view if Failure to build up a critical size for the portfolio of at least 40,000 in the next two years Failure to increase occupancy rates to c.95% (currently slightly below 90%) Transaction prices for portfolio acquisitions become overly expansive Failure to monetize the 75m of non-core assets Recommendations ADLERR 6 06/2017 (no recommendation) Price: -- Vol: 10m YTW: -- OAS: -- Covenants: -- ADLERR /2018 (no recommendation) Price: -- Vol: 35m YTW: -- OAS: -- Covenants: -- ADLERR 6 12/2018 (no recommendation) Price: -- Vol: 3m YTW: -- OAS: -- Covenants: -- ADLERR 6 04/2019 (Marketweight) Price: Vol: 100m YTW: 5.53 OAS: 534 Structure: Callable Major covenants: Neg. pledge, CoC, Cross Default, Restriction on Activities (Pricing: BGN Close) Screening Coverage

22 in EUR mio. in EUR mio. in EUR mio. 22 Credit profiles Adler Real Estate AG Selected financials and market development over the last year Selected financials (Source: Berenberg Equity Research) 2,400 80% % 360 Maturity profile 1,600 77% % % 50 7% % e 2015e 2016e 2017e Properties Net debt LTV in % (rhs.) e 2015e 2016e 2017e Net rents FFO FFO yield (rhs.) 0% 0 Selected profit & loss and cash flow items (EURm; Source: Berenberg Equity Research) Option adjusted spread development in bps since March 2014 (Source: Bloomberg) e 2015e 2016e 2017e Total revenues Net rents EBIT (excl revaluation) Fund from operations (FFO) FFO yield 0.4% 4.5% 12.1% 13.6% 20.2% 600 Selected balance sheet items & ratios (EURm; Source: Berenberg Equity Research) e 2015e 2016e 2017e Total assets 461 1,410 1,672 2,007 2, Investment properties 418 1,176 1,486 1,831 2,014 Net debt 324 1,002 1,260 1,518 1,591 Interest cover Dividend payout ratio Loan-to-Value (LTV) 73% 77% 79% 79% 76% ADLERR 6 04/19

23 Credit profile Deutsche Annington AG 23

24 24 Credit profiles Deutsche Annington AG The largest residential real estate company in Germany Deutsche Annington AG Bloomberg Ticker ANNGR <Corp> Company profile and strategy Deutsche Annington AG (ANNGR), founded in 2001, is the largest German residential property company with more than 185,000 real estate units (+3% H1 yoy growth) in over 550 locations across all 16 federal states of Germany. Around 97% of the company s portfolio is located in Berlin and Western Germany. By market capitalization, Deutsche Annington AG scores clearly in the top 10 of all listed real estate companies in Europe and allows investors to participate in the general real estate market development in Germany. The company is rated BBB by S&P with a stable outlook. The main part of Deutsche Annington s portfolio is located in states with sound economic fundamentals, e.g. North Rhine- Westphalia, Hesse, and Bavaria (see table to the right provided by Deutsche Annington). The company s vacancy rate in H was 3.8% (vs. 3.9% in H1 2013) and the portfolio was valued at around 11.4bn (+10% H1 yoy growth) which makes Deutsche Annington the largest private real estate company in Germany by portfolio size. Company data Headquarter: Bochum, Germany Market cap/employees: 7,009m / 3,283 (June 2014) Major shareholders: ADIA: 13% Norges Bank: 9% Wellcome Trust: 8% Management: Rolf Buch (CEO) Stefan Kirsten (CFO) Klaus Freiberg (COO) Webpage: Source: Company presentation Strengths Largest residential real estate player in Germany Good financial profile (further strengthened by a 450m capital increase in November this year) No reliance on external growth necessary Weaknesses Maturity profile is less balanced than that of key peers Some parts of the portfolio in economically weak regions and with significant CAPEX requirements High dividend payout policy (>70% of FFO) Click here for the latest report from our equity research

25 25 Credit profiles Deutsche Annington AG Excellent business profile and moderate financial risk profile Credit profile Business profile: Excellent Best in class competitive position and high diversification Competitive position of ANNGR is very strong. The competitive position is even further enhanced by very lengthily rental periods of tenants and occupancy rates which belong to the best in the German industry. Highly efficient in terms of costs per unit due to significant economies of scale (in-house repair, integration, state-ofthe-art IT technology) which is unique in its industry. Very strong diversification with respect to regions and tenants, with no clustering. Asset quality is medium. However, the company plans to invest 150m annually in modernization measures which would push the average quality above that of its peers. ANNGR has one of the lowest rent restrictions across all German residential real estate companies (c.16%). Annually, on average 3-4% of the rent restrictions expire. Financial profile: Balanced Best in class capital structure Best in class refinancing costs and capital structure LTV at c.50% (strategic target: 50%). Excellent profitability due to scale, with an adj. EBITDA margin above 65% (expected to be c.68% by 2016). In H1, Deutsche Annington generated an FFO I of 130.3m (+26% yoy) which was mainly driven by lower interest expenses and new acquisitions. For 2015, the company predicts an FFO I between 275 to 285m. We regard a dividend payout ratio of 70% as too high. Capital structure strengthened with the issuance of a 700m hybrid bond with a duration of 60 years. Management committed to maintain an IG rating when considering new portfolio acquisitions. Investment thesis An investment in ANNGR allows investors to take the most diversified investment in the German real estate sector. Just the scale and the excellent performance of the company clearly indicate an investment grade score. Both the business and the credit profile are sound. However, market spreads are already trading quite tight and compared to key peers do not justify an overweight recommendation. Therefore, on valuation grounds, we recommend to marketweight ANNGR s bonds. We would get a more positive view if ANNGR generates a higher rental income without increases in the cost base - as the company did in the first half of on a sustainable basis Repayment of a larger portion of debt from internally generated cash flows We would get a more negative view if Sustained decrease of occupancy rates A decrease in like-for-like rental growth Large and highly leveraged transactions in the secondary market Departure from the strong investment philosophy Recommendations ANNGR /2016 (Marketweight) Price: Vol: 700m YTW: 0.40 OAS: 34.9 Major covenants: Neg. pledge, CoC, Cross Default, Restriction on Activities, Limitation on subsidiary debt ANNGR /2019 (Marketweight) Price: Vol: 600m YTW: 0.90 OAS: 82.7 Covenant: CoC ANNGR /2021 (Marketweight) Price: Vol: 500m YTW: 1.31 OAS: 90.8 Major covenants: Neg. pledge, CoC, Cross Default, Restriction on Activities, Lim. on subsidiary debt, Limitation on indebtedness, Coll. action clause ANNGR /2022 (Marketweight) Price: Vol: 500m YTW: 1.41 OAS: 91.2 Major covenants: same as ANNGR /2021 (Pricing: BGN Close) Screening Coverage

26 in EUR mio. in EUR mio. in EUR mio. 26 Credit profiles Deutsche Annington AG Selected financials and market development over the last year Selected financials (Source: Berenberg Equity Research) 15,000 70% 300 9% 1,500 10,000 45% % 5% 1,000 Maturity profile 5,000 20% 75 2% % e 2015e 2016e Properties Net debt LTV in % (rhs.) e 2015e 2016e Net rents FFO FFO yield (rhs.) 0% 0 Selected profit & loss and cash flow items (EURm; Source: Berenberg Equity Research) Option adjusted spread development in bps since January 2014 (Source: Bloomberg) e 2015e 2016e Total revenues 1,161 1,165 1,202 1,375 1,398 Net rents Adj. EBITDA Fund from operations (FFO) FFO yield % 4.1% 5.2% 5.4% 110 Selected balance sheet items & ratios (EURm; Source: Berenberg Equity Research) e 2015e 2016e Total assets 10,607 11,093 13,362 13,981 14, Investment properties 9,844 10,266 12,449 12,461 12,692 Net debt 5,981 5,217 6,830 6,281 6,004 Interest cover Dividend payout ratio Loan-to-Value (LTV) 59% 51% 52% 49% 47% ANNGR /16 ANNGR /19 ANNGR /21 ANNGR /22

27 Credit profile Deutsche Wohnen AG 27

28 28 Credit profiles Deutsche Wohnen AG The largest private landlord in Berlin Deutsche Wohnen AG Bloomberg Ticker DWNIGY <Corp> Company profile and strategy Deutsche Wohnen AG (DeuWo) is one of the largest residential property companies, holding around 150,000 residential units in key metropolitan areas across Germany. With regards to the portfolio of Deutsche Wohnen AG, around 92% of the company s residential units stem from strategic core+ and growth regions, such as Berlin. In fact, c.72% of DeuWo s property units are located in Berlin. In 2013, the company generated revenues of 409m and employed approximately 2,400 people. Deutsche Wohnen is rated Baa1 with a stable outlook by Moody s. Equity story (convertible bond) Focus on metropolitan areas with strong macro fundamentals: Berenberg s equity research expects that this will translate into above-industry rental growth. Operational efficiency and earnings quality: The rent potential on newly let apartments in the strategically important core+ portfolio is estimated at c.25%. Exposure to Berlin (72%) ensures significant earnings growth: DeuWo is likely to profit from rising rents in the coming years. Company data Headquarter: Frankfurt/Main, Germany Market cap/employees: 5,345m / 2,422 (FY 2013) Major shareholders: MFS 8% BlackRock 5% Norges 5% Management: Michael Zahn (CEO) Andreas Segal (CFO) Webpage: Source: Company presentation Strengths Focus is exclusively on metropolitan regions in Germany Strong potential for increases in cash flows due to DeuWo s Berlin exposure Strong maturity profile Weaknesses Low vacancy rate restricts upside for internal growth Effective leverage points towards upper high yield LTV not yet in line with an IG score (56.2% H1 14) Click here for the latest report from our equity research

29 29 Credit profiles Deutsche Wohnen AG Excellent business profile but only balanced financial risk profile Credit profile Business profile: Excellent Excellent brand name and best in class occupancy rate Strong market position due to the company s size, its diversification in terms of tenants, and the brand name. Largest private landlord in Berlin which has excellent economic growth prospects and excellent rental developments. Excellent profitability (adj. EBITDA margin of c.68% for FY 2013) due to a strong commitment of the company for keeping the cost ratio low. Around 80% of its portfolio are unrestricted in terms of rent adjustments. One of the highest l-f-l rental growth (H1 2014: 3.4%; longterm goal set at 3%) and low tenant turnover (approx. 7%). DeuWo has a good track record of integrating portfolios and realizing economies of scale. The current average in-place rent is 5.73 EUR/sqm which provides a rent potential (i.e. newly renting) of c.24% => capability for increasing FFO from pure internal growth. Very low vacancy rates: As of H1 2014: 2.5%. Financial profile: Balanced Good profitability but LTV too high for an IG score LTV as of Q3 2014: 55.8% (target: c.50% by end of 2015). Average weighted debt maturity of 7.9 years. The company pays an average rate of interest of 3.36%. Berenberg regards the maturity profile as excellent with 55% of the company s long-term debt maturing after Strong interest coverage ratio, leaving plenty of headroom if interest rates would rise. Rental cap may lead to a 3.5m loss of in-place rents p.a. Good profitability based on the realization of scale economics (adj. EBITDA margin of 69.4% in Q3 2014). Targeted dividend payout ratio of 60% in line with IG score. Investment thesis DeuWo s occupancy rate is best in class and the company has a very solid business profile. We particularly like the Berlin exposure, where we expect the company to generate a significant proportion of rental income growth going forward, without having to rely on external growth. The convertibles look cheap and the equity share has further upside potential. Berenberg thus recommends investors to overweight both bonds. We would get a more positive view if A sustainable decrease of LTV to 50% An adjusted EBITDA margin of above 70% We would get a more negative view if An increase in vacancy rates above 3% A worsening of the LTV to above 60% Lower cost efficiency, leading to a deterioration of the adjusted EBITDA margin A significantly higher dividend payout ratio A sustained decrease of l-f-l rental growth to below 3% Significant adverse economic developments in the Berlin region Recommendations DWNIGY /2020 (Overweight) Price: Vol: 250m Delta*: 68% YTW: Modeling assumptions: Berenberg equity PT/Upside: 21/8.6% Credit spread: 85bps Implied CB Volatility/ Hist. 90D Volatility*: Borrowing costs: 0.75% 16 / 17 Structure: Softcall/Put/Call 100 Major covenants: Neg. pledge, CoC DWNIGY /2021 (Overweight) Price: Vol: 400m Delta*: 55 YTW: Modeling assumptions: Berenberg equity price target: 21/8.6% Credit spread: 85 Implied CB Volatility/ Hist. 90D Volatility*: Borrowing costs: 0.75% Structure: Softcall/Put 100 Major covenants: Neg. pledge, CoC (Pricing: BGN Close) Screening Coverage * Based on modeling assumptions 14 / 17

30 in EUR mio. in EUR mio. in EUR mio. 30 Credit profiles Deutsche Wohnen AG Selected financials and market development over the last year Selected financials (Source: Berenberg Equity Research) 12,000 70% 540 9% 1,500 Maturity profile 8,000 45% 360 6% 1,000 4,000 20% 180 3% % e 2015e 2016e Properties Net debt LTV in % (rhs.) e 2015e 2016e Net rents FFO FFO yield (rhs.) 0% 0 Selected profit & loss and cash flow items (EURm; Source: Berenberg Equity Research) Bond price development since February 2014 (Source: Bloomberg) e 2015e 2016e Total revenues Net rents Adj. EBITDA Fund from operations (FFO) FFO yield 3.9% 4.7% 4.3% 5.6% 5.8% 109 Selected balance sheet items & ratios (EURm; Source: Berenberg Equity Research) e 2015e 2016e 103 Total assets 4,908 10,173 10,442 10,934 11,508 Investment properties 4,615 8,937 8,862 9,407 9,681 Net debt 2,717 5,243 4,802 4,770 4,460 Interest cover Dividend payout ratio Loan-to-Value (LTV) 59% 57% 56% 53% 51% DWNIGY /21 DWNIGY /20

31 Credit profile DIC Asset Management AG 31

32 32 Credit profiles DIC Asset Management AG The commercial real estate specialist DIC Asset Management AG Bloomberg Ticker DICGR <Corp> Company profile Founded in 2002, DIC Asset Management AG is headquartered in Frankfurt, Germany, and focuses exclusively on commercial real estate. In total, DIC has around 250 properties in its portfolio with a estimated value of 3.4bn (71% of this value is accounted for by office space). The figure to the right gives an overview of DIC Asset Management AG s portfolio distribution across Germany. The strategy of DIC Asset Management rests on two business pillars: (i) Commercial portfolio with profits coming from asset management (via long-term leases), accounting for 92% of the total portfolio value (197 units). This represents the core business of DIC and the key strategic focus of the management team. (ii) Co-investments (funds developments; minority investments usually ranging between 10-40% in size): This business line had been significantly downsized and Berenberg expects that it will be even further downsized (currently 8% of total portfolio value). Source: Company presentation Company data Headquarter: Frankfurt/Main, Germany Market cap/employees (FY 13): 478m / 132 (Sep. 2014) Major shareholders: Deutsche Immobilien Chancen 33.2% Solvia Vermögensverwaltung 5.1% RAG Foundation 4.8% APG Asset Management 3.2% Management: Ulrich Höller (CEO) Sonja Warntges (CFO) Rainer Pillmayer (COO) Webpage: Strengths Portfolio focus is on regions with solid economic fundamentals The development business will be further downsized The rental agreements are generally long-term Weaknesses High leverage ratios, in particular LTV (c.67%) Refinancing risks in the medium term if leverage profile does not improve Structural vacancy rates above 10% Click here for the latest report from our equity research

33 33 Credit profiles DIC Asset Management AG Company expect to de-lever significantly until the end of 2016 Credit profile Business profile: Aggressive to Balanced Diversified tenant structure but high vacancy rates Diversified, good quality tenant structure in different end markets: Small/Medium-sized businesses (30%), Public sector (27%), Retail (22%), Telco/IT/Multimedia (9%), Industry (8%); The 10 largest tenants account for 35% of revenues, adding further to our positive view. Office locations are in sound economic hubs across Germany: Frankfurt/Main, Hamburg, Berlin, Dusseldorf, Cologne, and Munich. In total, 1,400 commercial tenants (typical asset has 4 to 5 tenants and an average value of 50m). Vacancy rates have been persistently above 10% over the past five years (as of H1 2014: 11.5%). Financial profile: Aggressive Planned deleveraging is credit positive - in the medium-term For FY 2013, LTV was c.66.9%, however for the first 9M of 2014, this number worsened to 67.6% (+ 0.7pp). The equity ratio was 32.4% (down by 0.2pp yoy). With planned disposals of investment properties of around 450m, the strategic target of the company is to reduce its LTV to below 60%. The timeline for this goal is scheduled for the end of 2016 and depends mainly on the successful disposal of assets and the realization of the project development Main Tor in Frankfurt (40% stake of 750m). In our view, the current market conditions would provide DIC with the possibility for opportunistic selling. Average debt maturity is c.4 years (as of H1 2014), which is below that of most peers. Refinancing and interest rate rises can pose a major risk to the company s FFO in the medium run. FFO growth is low when compared to peers. For 9M 2014, FFO I increased to 35.4m (+3% yoy). Investment thesis Over the past years, DIC benefited from solid economic conditions in Germany. At least in the near term, DIC may suffer from lower economic growth, leading to potentially higher vacancy rates. The current market pricing of the bonds of DIC does not reflect the higher macro risks and hence, Berenberg recommends to underweight the bonds. We are also a bit skeptical about DIC s target to bring its LTV sustainably down to below 60% until YE We would get a more positive view if A sustainable LTV of below 60% A more balanced debt structure A longer average debt duration An increase in rental income while holding the cost base stable We would get a more negative view if LTV rises above 70% A strong decline in economic activity in Germany which would likely lead to an increase in vacancy rates and loss of rental income Tenant losses across the board due to larger competition or a large supply of office spaces (which is outside the control of DIC) Recommendations DICGR /2018 (Underweight) Price: Vol: 100m YTW: 3.25 OAS: 312 Major covenants: Neg. pledge, CoC, Cross Default, Restrictions on activities DICGR /2019 (Underweight) Price: Vol: 125m YTW: 3.21 OAS: 301 Major covenants: Neg. pledge, CoC, Cross Default, Restrictions on activities, Collective action clause (Pricing: BGN Close) Screening Coverage

34 in EUR mio. in EUR mio. in EUR mio. 34 Credit profiles DIC Asset Management AG Selected financials and market development over the last year Selected financials (Source: Berenberg Equity Research) 2,400 71% % 39 Maturity profile 1,600 69% % % 50 6% % e 2015e 2016e Properties Net debt LTV in % (rhs.) e 2015e 2016e Net rents FFO FFO yield (rhs.) 0% 0 <1y 1-2y 2-3y 3-4y 4-5y >5y Selected profit & loss and cash flow items (EURm; Source: Berenberg Equity Research) Option adjusted spread development in bps since January 2014 (Source: Bloomberg) e 2015e 2016e Total revenues Net rents Adj. EBITDA Fund from operations (FFO) FFO yield 14.3% 10.0% 10.1% 10.3% 10.6% 400 Selected balance sheet items & ratios (EURm; Source: Berenberg Equity Research) e 2015e 2016e 300 Total assets 2,210 2,596 2,535 2,500 2,469 Investment properties 1,847 2,256 2,224 2,187 2,143 Net debt 1,406 1,667 1,653 1,630 1,594 Interest cover Dividend payout ratio Loan-to-Value (LTV) 71% 69% 68% 68% 68% DICGR /18 DICGR /19

35 Credit profile GAGFAH S.A. 35

36 36 Credit profiles GAGFAH S.A. Good times for the convertible strong growth ahead GAGFAH S.A. Bloomberg Ticker GFJGY <Corp> Company profile GAGFAH S.A. is one of the largest residential real estate companies in Germany. Its portfolio consists of around 141,000 real estate units with an estimated gross asset value of 7.6bn. The most important locations in GAGFAH s portfolio are: Hamburg, Hannover, Berlin, Dresden, and Heidenheim (see underlined segments in the chart to the right). Equity story (convertible bond) Strong outlook for 2015: Further reduction of its vacancy rate to 3% (vs. 3.5% in 2014e) and an expected FFO I of 205m to 215m (vs. 185m to 189m in 2014) Outlook beyond 2015: target vacancy rate of 2.5% (end of 2017), rental income growth of 2% to 3% p.a., increase in FFO I by 10% to 15% p.a., and like-for-like rental growth of c.2.5% p.a. Overall GAGFAH established a strong track record of operational improvements, thereby raising the earnings guidance several times over the recent past. The management expects that further improvements are possible, aiming to reduce R&M (due to CAPEX increases) from 10.5 EUR/sqm to 8.5 EUR/sqm and G&A savings of 4-6m by Source: Company presentation Company data Headquarter: Luxembourg Market cap/employees: 3,329m/ 1,813 (FY 2013) Major shareholders: Lansdowne Partners 8.5% Sun Life Financial Inc. 7.2% DWS Investments 5.6% Management: Thomas Zinnöcker (CEO) Gerald Klinck (CFO) Nicolai Kuss (COO) Webpage: Strengths Excellent interest cost base Significant size and economies of scale Excellent geographical diversification across Germany, with a focus on economically strong areas Weaknesses LTV too high for an IG score A weaker balanced debt maturity profile when compared to key peers Click here for the latest report from our equity research

37 37 Credit profiles GAGFAH S.A. Excellent operational momentum tempered by a high LTV level Credit profile Business profile: Excellent Excellent operational momentum, strong growth prospects Strong track record of operational improvements (3.7% vacancy rate in H versus 5.3% in Q1 2013; Target for FY 2015: 3%) Strong 2.1% like-for-like rental growth in H (Target for 2015 is above 2%) Focus on core regions: Hamburg, Hannover, Berlin, Dresden and Heidenheim account for 50% of the asset base. Around 91% of GAGFAH s properties are located in Germany s top 30 locations and around 9% of the asset base is located in non-core regions which are likely to be disposed in the medium term. Financial profile: Balanced Low interest cost base, LTV above IG score level LTV as of H1 2014: 60.5% (vs. 61.9% in H1 2013). The management states an LTV target between 50-55%. Low interest rate cost base: 2.7% (H1 2014). Clear financial policy: Around 30% of the recurring FFO will be used for acquisitions, 35% for dividend payments, and 10% for amortization. Strong pipeline for non-core sales (4,812 units). In 2015, the management expects to generate free cash of 30m- 40m from asset disposals. Average debt maturity is 5.6 years which is adequate but not best in class. In total, the maturity profile is less balanced compared to key peers with a significant portion of debt falling due in Berenberg expects that GAGFAH will use refinancing in the capital market for its maturing debt. Decline in total portfolio value (- 87m yoy as of H1 2014) was overcompensated through rent growth and vacancy reduction (around + 3m in rental income growth yoy). Investment thesis Berenberg expects that GAGFAH will deliver a steady and above market average growth, just by means of internal improvements and due to rent increases. This should provide convertible investors with a good underlying momentum. However, in our view, the credit profile is only balanced since leverage metrics are rather pointing to a high yield score. Despite the equity share upside potential, we only recommend to marketweight the bond until improvements in the leverage metrics become evident. We would get a more positive view if Vacancy rate falling sustainably to below 3% A strengthening of the maturity profile, in particular a longer average maturity of debt A decrease of the LTV to below 55% An interest coverage ratio rising sustainably above 2.5x We would get a more negative view if An increase of the LTV to above 65% An interest coverage ratio falling sustainably to below 1.5x Decrease of like-for-like rental growth to below 2% Recommendations GFJGY /2019 (Marketweight) Price: Vol: 375m Delta*: 74% YTW: Modeling assumptions: Berenberg equity PT/Upside: 17/8.9% Credit spread: 100bps Implied 90D Volatility: Borrowing costs: 0.75% Structure: Softcall Major covenants: CoC (Pricing: BGN Close) Screening Coverage * Based on modeling assumptions

38 in EUR mio. in EUR mio. in EUR mio. 38 Credit profiles GAGFAH S.A. Selected financials and market development over the last year Selected financials (Source: Berenberg Equity Research) 9,000 75% 600 9% 2,100 Maturity profile 6,000 50% 400 6% 1,400 3,000 25% 200 3% % e 2015e 2016e Properties Net debt LTV in % (rhs.) e 2015e 2016e Net rents FFO FFO yield (rhs.) 0% 0 Selected profit & loss and cash flow items (EURm; Source: Berenberg Equity Research) Bond price development since May 2014 (Source: Bloomberg) e 2015e 2016e Total revenues Net rents Adj. EBITDA Fund from operations (FFO) FFO yield 6.3% 5.6% 5.8% 6.6% 7.1% 111 Selected balance sheet items & ratios (EURm; Source: Berenberg Equity Research) e 2015e 2016e Total assets 8,111 7,960 7,922 8,278 8, Investment properties 7,742 7,634 7,600 8,093 8,302 Net debt 5,153 4,863 4,587 4,717 4,568 Interest cover Dividend payout ratio Loan-to-Value (LTV) 65% 62% 59% 57% 54% GFJGY /19

39 Credit profile Grand City Properties S.A. 39

40 40 Credit profiles Grand City Properties S.A. The turn around specialist for residential properties Grand City Properties S.A. Bloomberg Ticker GYCGR <Corp> Company profile Grand City Properties (GCP) is a turnaround manager for distressed and underperforming residential real estate portfolios ranging in size from 5m to 50m. GCP is active in Germany with a focus on the states of North Rhine-Westphalia (c.45% of GCP s assets) and Berlin (c.23% of GCP s assets). Once GCP acquired a property and refurnished it, it aims to relet flats at a higher rent and/or tries to increase occupancy rates. As of November 2014, the company had c.42,000 units in its portfolio. Around 90% of those units are buy and hold properties around 10% of GCP s assets are for sale each year. Due to the business model of the company, vacancy rates are above industry average (November 2014: c.13%) The company is rated BBB- by S&P with a stable outlook. Equity story (convertible bond) Strong external growth via further acquisitions (just in 2014, GCP acquired 17,000 real estate units) Good internal growth story: like-for-like rental growth has been 2.5% p.a., with like-for-like occupancy being 2.8%. Further significant internal growth is expected from a reduction of the vacancy rate over time. Source: Company presentation Company data Headquarter: Luxembourg Market cap/employees: 1,300m/ 350 (June 2014) Major shareholders: Edolaxia Limited 33.7% Merrill Lynch International 3.4% Odey Asset Management 3.02% Zanelo Trading Limited 1.3% Management: Christian Windfuhr (CEO) Refael Zamir (CFO) Webpage: Strengths Strong track record of turnaround management (10 years) Clear investment philosophy and strong management commitment to hold an investment grade rating Strong prospects for internal FFO growth Weaknesses High CAPEX outlays required Image/Reputation among tenants of a turnaround assets manager Click here for the latest report from our equity research

41 41 Credit profiles Grand City Properties S.A. The only company with an excellent score in business and financial profile Credit profile Business profile: Excellent Strong track record of turnaround management, strong growth GCP s key strength is the identification of undervalued real estate assets and the turnaround of these assets. The portion of the portfolio which has been turned around ( stabilized portfolio ) increased to 40% in Q (versus 33% in FY 2014). Berenberg assesses the mix between real estate units in the turnaround and the stabilization phase as good. Portfolio exposure to regions with the significant rent growth potential: particularly Bremen (4%), Berlin (21%), North Rhine-Westphalia (36%) and Hessen (3%). Vacancy rate for the total portfolio at 13.3% (Q3 2014) Excellent external growth story, with GCP reaching a critical portfolio size in 2014: 43,000 real estate units in Q versus 26,000 real estate units as of FY Good internal growth story: like-for-like rental growth has been 2.5% and like-for-like occupancy of 2.8% p.a. Financial profile: Excellent Best in class LTV, cost of debt and debt profile As of Q3 2014, GCP s LTV was 40%, and would be 26% assuming conversion of the convertible bond (management target: 50%). Large 50% unencumbered assets base ( 950m). Excellent interest rate cost base: cost of debt decreased to 2% after refinancing operations in Good liquidity position ( 313m in Q versus 166m in FY 2014). One of the highest interest coverage ratios across the industry (4.5x in Q3 2014). No material debt maturities before 2017, allowing GCP to finish the current turnaround cycle. Investment thesis GCP is the only residential real estate company with an excellent scoring in both the financial and the business profile. Clearly, its LTV and debt profile are best in class. In addition, Berenberg believes that there is strong potential for internal FFO growth, which is most likely to come from the reduction of vacancy rates as real estate units move from the turnaround phase to the stabilization phase. The convertible is attractively priced, has still upside potential for the stock price (see our Equity Research), but is not balanced anymore. We would get a more positive view if Reduction of the vacancy rate of the total portfolio to below 10% (would also indicate a more mature stage of the company) We would get a more negative view if Decrease in like-for-like rental growth to below 2% p.a. Decrease of like-for-like occupancy rates to below 95% Recommendations GYCGR /2019 (Overweight) Price: Vol: 275m Delta*: 87% YTW: Modeling assumptions: Berenberg equity price target: 12.5 Credit spread: 200bps Implied 90D Volatility: 16 Borrowing costs: 2% Structure: Major covenants: CoC, Limit on indebtedness (Pricing: BGN Close) Screening Coverage * Based on modeling assumptions

42 in EUR mio. in EUR mio. 42 Credit profiles Grand City Properties S.A. Selected financials and market development over the last year Selected financials (Source: Berenberg Equity Research) 2,400 60% 150 9% 1,600 40% % 0 0% e 2015e 2016e Properties Net debt LTV in % (rhs.) % 3% 0% e 2015e 2016e Net rents FFO FFO yield (rhs.) Not provided (GYCGR /19, volume 275m) (GYCGR /20, volume 18.17m) (GYCGR /21, volume 500m) Selected profit & loss and cash flow items (EURm; Source: Berenberg Equity Research) Bond price development since February 2014 (Source: Bloomberg) e 2015e 2016e Total revenues Net rents Adj. EBITDA Fund from operations (FFO) FFO yield 8.1% 7.5% 5.3% 5.9% 7.5% 120 Selected balance sheet items & ratios (EURm; Source: Berenberg Equity Research) e 2015e 2016e 110 Total assets 555 1,651 2,349 2,592 2,816 Investment properties 407 1,368 1,906 2,051 2,344 Net debt ,163 Interest cover Dividend payout ratio Loan-to-Value (LTV) 23% 39% 50% 48% 49% GYCGR /19

43 Credit profile LEG Immobilien AG 43

44 44 Credit profiles LEG Immobilien AG The key player in the North Rhine-Westphalian residential market LEG Immobilien AG Bloomberg Ticker LEGGR <Corp> Company profile LEG Immobilien was founded as a public housing company in 1970 and was privatised in The real estate company operates exclusively in the state of North Rhine-Westphalia (NRW). LEG has c.110,000 apartments and caters more than 260,000 tenants. The company profits from the growing demand for single tenant flats in the NRW region. The fair value of the portfolio is estimated at 4.9bn (as of September 2012). Around 35% of LEG s portfolio is located in the cities of Mettmann, Dortmund and Münster which belong to NRW s hot spots. Equity story (convertible bond) High profitability driven by economies of scale effects in LEG s core markets. Exposure to attractive growth markets in NRW with rent growth above inflation. Possibility for external growth at low incremental costs (currently LEG is in talks to acquire an additional 10,000 real estate units towards the end of 2014). State of North Rhine-Westphalia Company data Headquarter: Dusseldorf, Germany Market cap/employees: 3,411m/ 915 (FY 2013) Major shareholders: Blackrock 15% Perry Capital 8% MFS 5% CBRE 5% Ruffer 4% Management: Thomas Hegel (CEO) Eckhard Schultz (CFO) Holger Hentschel (COO) Webpage: Source: Company presentation Strengths Economies of scale due to regional focus on NRW Low dividend payout from FFO (65% payout) Strong maturity profile and low gearing levels Strong reputation in NRW Weaknesses Economic decline in North Rhine-Westphalia (NRW) Rent restrictions Cluster risk within NRW (3 key cities) Click here for the latest report from our equity research

45 45 Credit profiles LEG Immobilien AG An excellent score in the business and credit profile Credit profile Business profile: Excellent Strong organic rent growth Organic rent growth above inflation (+3.4% like-for-like) across the entire portfolio of LEG. Very high occupancy at 96.8%, with further improvements expected towards the end of FY Exposure to NRW overall positive: The state accounts for more than one-fifth of Germany s GDP, experiences net migration to NRW, and exhibits improved levels of unemployment (12% in 2005 vs. 8.1% in 2012). Critical size and economies of scale which belong to one of the best across all residential peers. Management predicts further acquisitions of at least 5,000 units (mid term target). LEG has significant rent restrictions for its portfolio (for around 1/3 of its real estate units). In the next ten years, rent restrictions on around 10,100 units will expire. The company expects to realize an additional 4.5m rent income p.a. for rent restrictions running out within the next 5 years, and an additional 3.4m for restrictions expiring within a 5 to 10 year horizon. Financial profile: Excellent Low degree of leverage, strong profitability and long debt MAT Strong Balance Sheet (LTV 48.7% in Q vs. 47.7% in FY 2013). Average maturity approximately ten years and low cost of debt (2.93%, incl. convertible bond) Strong liquidity base ( 304 in cash assets as of Q3 2014, versus 111m for FY 2013). Good operational performance: Adj. EBITDA margin is at 66.2% as of Q (+300bps yoy) Guidance for 2015: FFO between 188m to 193m (excluding any further acquisitions) Investment thesis LEG is the largest residential real estate company operating in the state of NRW. It has delivered strong internal like-for-like rental growth. Berenberg assesses the potential for further growth, via smaller-sized portfolio transactions, as good. The CB is fairly valued. The equity share has further upside potential and given the good financial profile and the attractive upside potential, we recommend to overweight the convertible bond of LEG. We would get a more positive view if Vacancy rate reduction to below 2% A sustainable increase of the adjusted EBITDA margin to 67% We would get a more negative view if LTV above 55% A significant economic decline in the state of North Rhine-Westphalia A sustainable decline in the adjusted EBITDA margin to below 60% Recommendations LEGGR /2021 (Overweight, prev. Marketweight) Price: Vol: 300m Delta*: 66% YTW: Modeling assumptions: Berenberg equity price target: 64 Equity upside: 7.8% Credit spread: 100 Implied CB Volatility*: 17 Implied Volatility (90D): 17 Borrowing costs: 0.75% Structure: Softcall/Put 100 Covenant: CoC (Pricing: BGN Close) Screening Coverage * Based on modeling assumptions

46 in EUR mio. in EUR mio. in EUR mio. 46 Credit profiles LEG Immobilien AG Selected financials and market development over the last year Selected financials (Source: Berenberg Equity Research) 9,000 52% 660 9% 1,200 Maturity profile 6,000 50% 440 6% 800 3,000 48% 220 3% % e 2015e 2016e Properties Net debt LTV in % (rhs.) e 2015e 2016e Net rents FFO FFO yield (rhs.) 0% 0 Selected profit & loss and cash flow items (EURm; Source: Berenberg Equity Research) Bond price development since April 2014 (Source: Bloomberg) e 2015e 2016e Total revenues Net rents Adj. EBITDA Fund from operations (FFO) FFO yield 0.0% 6.2% 5.0% 6.0% 6.6% 111 Selected balance sheet items & ratios (EURm; Source: Berenberg Equity Research) e 2015e 2016e 103 Total assets 5,238 5,423 6,603 7,102 7,673 Investment properties 4,937 5,163 6,072 6,593 7,193 Net debt 2,366 2,473 2,913 3,254 3,642 Interest cover Dividend payout ratio Loan-to-Value (LTV) 48% 48% 48% 49% 51% LEGGR /21

47 Credit profile TAG Immobilien AG 47

48 48 Credit profiles TAG Immobilien AG The residential real estate specialist for the North of Germany TAG Immobilien AG Bloomberg Ticker TEGGR <Corp> Company profile TAG Immobilien AG is a residential real estate company with 74,318 real estate units (as of Q3 2014), focusing on five key regions in Germany. The company significantly grew its portfolio by +23,247 (2011), +38,703 (2012), and +926 (2013) real estate units. TAG s portfolio is valued at 3.53bn (as of Q3 2014). The company completely sold its commercial portfolio in The company operates exclusively in the North of Germany, where most of TAG Immobilien s real estate units are located in Salzgitter (8,741 units) which also accounts for the largest value ( 315m). The strategy of the company rests on two business pillars: (i) (ii) Market leader in niche regions First residential real estate company which focuses on implementation of the ABBA concept: A locations in B cities, B locations in A cities Company data Headquarter: Hamburg, Germany Market cap/employees: 1,183m/ 534 (Sep. 2014) Major shareholders: Ruffer 15% Flossbach von Storch Invest 12% Sun Life 10% Management: Martin Thiel (CFO) Claudia Hoyer (CLO) Webpage: Source: Company presentation Strengths One of the lowest administrative costs per unit across the industry ( 295 in 2013 vs. 3,686 in 2009 per unit) Disposals of assets significantly above book value (e.g. in November 2014: 35m gain from asset sales) Weaknesses High dividend payout ratio (target payout is 75% of FFO) Large exposure to the Salzgitter region with a vacancy rate in TAG s portfolio of 17% (H1 2014); Salzgitter is highly dependent on developments of Volkswagen AG Click here for the latest report from our equity research

49 49 Credit profiles TAG Immobilien AG A niche player and market leader in its core regions Credit profile Business profile: Balanced Critical size, low cost base, and market leader in niche regions Overall vacancy rate 9.3% in Q3 2014, whereby the Salzgitter region has a vacancy rate of 16.6% (was 21.5% in 01/2013). TAG has reached a critical size in 2012 and can now profit from a lower cost base per unit ( 295 per unit in administrative spending vs. 3,686 in 2010), a higher EBITDA margin (66% in 2014e vs. 44.7% in 2010), and a higher FFO margin (32.5% in 2014e vs % in 2010). Moreover, TAG is a key player in its regions, operating as a niche player with a strong, local, competitive advantage. Overall, good exposure to regions with solid economic prospects: Berlin (20% of total assets). Solid, internally generated, FFO growth ( 90m); For 2014, Berenberg expects FFO increases of around 10m and refinancing savings of 10m. Financial profile: Balanced Leverage metrics high, liquidity adequate LTV is 61.6% (Q3 2014). Debt profile strengthened in 2014: 10 year average maturity (2013: 9.4 years) and relatively cheap interest costs of 3.61% (2013: 3.7%). Recently, TAG financed 80m at 1.78% with a 7 year maturity. 77% of the debt consist of bank loans with an average interest rate of 3.58%. Within the next 3 years, 483m of debt will mature. Berenberg expects that the main portion will be refinanced. Moderate CAPEX spending (est. at around 20m p.a.). Debt/Equity (221%in FY 2013 and 201% FY 2015e) and Net gearing (213% in FY 2013 and 168% FY 2015e) still very high. Adequate liquidity ( 250m in Q3 2014, thereof 146 in undrawn credit lines). Investment thesis TAG has the critical size and profits from a low cost base (reflected by a strong adj. EBITDA margin). However, our positive perception is tempered by a very high vacancy rate in the Salzgitter region, TAG s largest portfolio position, which in addition is highly dependent on the business prospects of Volkswagen AG. We would get a more positive view if Decrease of the overall vacancy rate to 5% (structural vacancy rate estimated at around 4%) Sustainable reduction in the vacancy rate in the Salzgitter region, or the sale of assets in the Salzgitter region Debt retirement from FFO We would get a more negative view if Failure to reduce vacancy rates, in particular in the Salzgitter region Higher dividend payout rate (relative to FFO) Recommendations TEGGR /2018 (Marketweight) Price: Vol: 310m YTW: 2.61 OAS: 250 Covenant: CoC TEGGR /2020 (Marketweight) Price: Vol: 125m YTW: 3.16 OAS: 288 Covenant: CoC (Pricing: BGN Close) Screening Coverage