F I X E D I N C O M E R E S E A R C H C O R P O R A T E S

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S E C T O R S P E C I A L

The German Real Estate Industry (Update)

The German real estate industry is not the same anymore since we have published our first sector special in November 2014 (click here). Two major events were Deutsche Annington’s acquisition of GAGFAH and, more recently, Deutsche Wohnen’s (failed) attempt to acquire Austria-based conwert. An overview on the portfolio developments as well as key investment considerations for our covered companies is given below.

Adler Real Estate AG (Overweight):

2012 No. of units: 215  Fastest growing company in the sector 2013 No. of units: 7,797  Management has good access to portfolios 2014 No. of units: 24,086  Current valuations offer attractive upside

Deutsche Annington SE (Marketweight):

2012 No. of units: 181,954  Largest player, c350k units incl. GAGFAH 2013 No. of units: 175,258  Strong fundamentals and balance sheet 2014 No. of units: 203,028  No up- or downside catalysts visible

Deutsche Wohnen AG (No recommendation):

2012 No. of units: 82,738  Failed offer to acquire Austrian conwert 2013 No. of units: 150,219  Focus on attractive Berlin region 2014 No. of units: 147,105  Best-in-class portfolio fundamentals

DIC Asset Management AG (Marketweight):

2012 No. of units: 269  Only commercial player in this report 2013 No. of units: 251  Strategic focus on portfolio optimisation 2014 No. of units: 233  Intention to deleverage credible in our view

Grand City Properties SA (Marketweight):

2012 No. of units: 12,000  Successful turnaround manager 2013 No. of units: 26,000  Best-in-class credit metrics

2014 No. of units: 43,000  Portfolio reached 52k units in March 2015

LEG Immobilien AG (No recommendation):

2012 No. of units: 90,926  North Rhine-Westphalia pure-play 2013 No. of units: 94,311  Significant economies of scale

2014 No. of units: 106,961  Strong financial and fundamental profile

TAG Immobilien AG (Marketweight):

2012 No. of units: 69,661  Focus on northern and eastern Germany 2013 No. of units: 70,587  Strong track record of optimising properties 2014 No. of units: 72,530  Exposure to weak regions and high leverage

23 April 2015

Jannik Prochnow

Analyst +49 69 91 30 90-595 jannik.prochnow@berenberg.com

Thomas Prischenk

Research Support +49 69 91 30 90-594 thomas.prischenk@berenberg.com Click here for further Berenberg FI Research on Bloomberg (BERF<Go>)

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1. Macro environment in Germany

1.1 Overview

The German real estate market has experienced a strong increase in property rents and prices over the past few years with both residential and commercial property prices increasing significantly. This development primarily has been promoted by a recovering economy, a clearly positive business sentiment (despite geopolitical hazards), a strengthened labour market and favourable financing conditions. Germany’s positive economic growth prospects are further supported by the ECB’s current monetary policy which provides the basis for a low interest rate environment. Berenberg expects this trend to continue in the medium-term.

Above European average GDP growth backed by positive business sentiment in Germany

Decreasing unemployment rates in Germany, significantly below European average

Source: Eurostat, ifo, Berenberg Fixed Income Research Source: Eurostat, ifo, Berenberg Fixed Income Research Despite the strong upswing in recent years, the German housing market still shows a more

reasonable valuation than other European property markets. Compared to other core European real estate markets it experienced one of the most stable house price-to-income ratio developments (a country’s nominal house prices divided by its nominal disposable income per capita) since 2000. While in this period, incomes have on average even risen slightly more than house prices, in the last couple of years, the German real estate market has seen a pronounced correction of this relative “undervaluation” with house prices catching up. However, this development presents itself as all but homogenous: Whereas large parts of Eastern Germany (excluding Berlin) are subject to massive migration, mostly towards north-western and southern regions, cities like Hamburg, Munich, Dusseldorf or Frankfurt will continue to observe a strongly growing population due to their favourable economic conditions and other attractive location factors. According to vdpResearch, in large parts of Eastern Germany the population is expected to decline by more than 6% between 2012 and 2020. In contrast, regions like Munich are forecasted to see their population growing by more than 6% during the same period.

Those urban growth areas are generally characterised by a shortage of housing supply and fast growing demand, creating a supportive environment for residential real estate companies. Several megatrends such as urbanisation, an ageing society, immigration and individualisation further support the already positive business conditions. The residential real estate market in Germany is particularly attractive, because the house ownership ratio (53% in 2013) has historically been lower than the EU15 average (66% in 2013).

90 95 100 105 110 115 120 125 130 -2 -1 0 1 2 3 4 5 6

Mar-10 Mar-11 Mar-12 Mar-13 Mar-14

Inde x le ve l GDP g row th yoy ( %)

DE EU15 ifo Business Sentiment (rhs)

100 102 104 106 108 110 112 114 0 2 4 6 8 10 12 14

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Inde x le ve l Une m pl oy m ent rate ( %)

DE EU15 ifo Employment Barometer (rhs) Upswing in German property prices and rents has gained momentum backed by a positive economic environment…

…without showing signs of a housing bubble

Overall supportive megatrends such as urbanisation and immigration

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Distinct domestic migration gradient towards Western

and Southern Germany expected from 2012 to 2020 In Europe, German properties still show attractive valuations relative to nominal disposable income

Source: vdpResearch, Berenberg Fixed Income Research Source: OECD, Berenberg Fixed Income Research. *_2000Q1=100

Despite the unfavourable demographic trends (declining and ageing population) in Germany, the total number of households is expected to grow until 2025 caused by the effects of positive net immigration and a decreasing number of people per apartment. Destatis forecasts the share of households with 1-2 people to rise from 76% in 2014 to almost 80% in 2025. After this, these drivers will no longer be able to compensate the overall population decline. However, we expect this trend to be more pronounced in rural areas. The ageing population also offers opportunities for residential real estate companies as there will be an increase in demand for value-add services such as nursing and assisted living.

No. of households likely to reach its peak in 2025 while the

number of people living in urban areas increases steadily Germany’s overall population is estimated to decline and become significantly older

Source: Destatis, United Nations, Berenberg Fixed Income Research Source: Destatis (averaged lower and upper bound population development model), Berenberg Fixed Income Research

60 80 100 120 140 160 180 Hous e pric e/ Inc om e ratio * DE FR IT GB AT ES SE IE 40.5 40.7 40.9 41.1 41.3 41.5 74 76 78 80 82 84 2014 2016 2018 2020 2022 2024 2026 2028 2030 # of ho use hol ds (m ill io ns) % popul atio n liv ing in urban are as

Western Europe DE # households in DE (rhs)

0 10 20 30 40 50 60 70 80 90 2014 2019 2024 2029 2034 2039 2044 2049 2054 2059 P opul atio n (m ill io ns)

<18 years 20-67 years >67 years Strong increase in the number of households until 2025 expected Change in population Below -6% -6% to -3% -3% to +0% +0% to +3% +3% to +6% Above +6%

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Historically, the increase in German rent expenses has been lower than national inflation, adding to a higher available disposable income for households. On the other side, the increase in property prices has picked up speed significantly due to higher amounts of available funds and historically low yields on traditional investments, intensifying the competition for attractive real estate assets. This in turn causes rental yields to drop in areas where the negative effect of rising property prices on yields cannot be neutralized by increasing net rents. As a consequence, most of the German real estate companies have the lion’s share of their assets located in Berlin or North Rhine-Westphalia where rental yields still meet expectations. Steep increase in German real estate prices is in contrast to

rent price growth below inflation Increase in mortgage loan volume to domestic enterprises and individuals due to decline of interest rates

Source: bulwiengesa AG, Destatis, OECD, Berenberg Fixed Income Research.

* _{PI=Property Index}

Source: Bundesbank, OECD, Berenberg Fixed Income Research

Compared to the residential market, the commerical property market has seen less steep price increases during the last couple of years. However, the strengthening economy in the Eurozone has fuelled interest in commercial property investments which is mirrored in steadily increasing transaction volumes and prices in the market. A further stimulation of both the residential and commercial real estate market is backed by a very positive sentiment within the industry towards the current and future financing situation and a further expected increase in transaction volumes.

Prices of residential real estate have shown the strongest

increase during the last couple of years Strongly increasing transaction volumes in residential and commercial real estate

Source: bulwiengesa AG, Berenberg Fixed Income Research. * _{PI=Property Index Source: EY, ZEW, Berenberg Fixed Income Research.}

*_{2012-14: Average of quarterly index values, 2011: Q4 value, 2015: Q1 value}

90 100 110 120 130 140 2000 2002 2004 2006 2008 2010 2012 2014 Inde x le ve l

HCPI rents EU19 HCPI EU19

HCPI rents DE HCPI DE

PI Germany * 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 1,050 1,100 1,150 1,200 1,250 1,300 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 Vol ume ( €bn)

Outstanding mortgage loans 10Y+ Bund yield (rhs)

0% 2% 4% 6% 8% 10% 12% 90 100 110 120 130 140 150 2005 2006 2007 2008 2009 2010 2011 2012 2013 yoy c hang e Inde x le ve l * PI Germany (rhs) PI Residential (rhs) PI Commercial (rhs) PI Germany PI Residential PI Commercial 3.8 6.0 11.0 13.7 12.8 19.1 23.0 25.0 30.5 39.9 50.0-54.0 -20 -10 0 10 20 30 40 50 60 -20 -10 0 10 20 30 40 50 60 2010 2011 2012 2013 2014 2015e Inde x le ve l Tra nsac ti on vol um e (€ bn)

Residential (portfolios) Commercial DIFI Index (rhs) * Rental yields have already started to decrease

Increasing demand not only for residential, but also for commercial real estate

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1.2 Key investment considerations

 Germany has not just one metropolitan area, but – due to its federal structure – consists of seven key metropolitan regions (BIG 7), offering investors the potential to profit from economic development in different regions as well as to diversify their risk  Germany still has a comparatively low home-ownership ratio (as per Eurostat),

making the business of residential real estate companies stable and projectable

 Favourable macro trends like urbanisation, a decreasing number of people per household and positive net migration create growing future demand in core regions  New housing supply is growing more slowly than demand according to the Federal

Institute for Research on Building Development (BBSR). Particularly metropolitan areas offer further potential for rent growth and optimisation of vacancy rates

 The BBSR has also identified a significant additional demand for assisted living in the long run. Germany’s demographic development creates a large market for housing solutions tailored to the needs of elderly tenants

 Negative population growth and higher vacancy rates for Eastern Germany are anticipated (based on Destatis forecasts). Excluding Berlin, a negative impact for companies focusing solely on this regions is expected to arise from this

Opportunities Threats

 Rising rents across all segments of the real estate market

 Financing conditions remain favourable

 Sound economic prospects

 Mega-trends in favour of real estate investment companies

 Demand and supply dynamics, low ownership ratio

 Market overheating with rental yields dropping further

 High vulnerability to changes in local labour markets

 Negative demographic development resulting in a long-term decrease of total number of households

 Negative impacts from new letting law (see below)

1.3 New residential letting law not a game-changer

The following is an extract from “Real Estate Comment – New residential letting law not a game-changer” by our equity research analyst Kai Klose dated 10 March 2015 (click here for the report).

On 5 March, the German parliament voted, as expected, in favour of a new residential law which specifies that rents for new lettings should not be more than 10% higher than current in-place local comparable rents (in German: “Mietspiegel”). This rent cap (in German: “Mietpreisbremse”) should help dampen the perceived strong rise of rental levels mainly in larger cities, where there has been an increase in the number of households and where construction levels have just started to rise. The new law has an initial lifetime of five years. In Germany, it is the federal states’ role to introduce rent caps for new lettings when they believe that local residential lettings markets have become too tight. Federal states such as Berlin, Bavaria and North Rhine-Westphalia have indicated that they will be capping rents in certain districts or cities as soon as the law has passed through the Federal Assembly.

That the Grand Coalition was about to focus on the lettings markets became very clear during the last national elections in 2014, as both the Conservatives and Social Democrats declared that this was a high priority. The new law confirmed what had been contained in the final drafts regarding the 10% rent cap on new lettings, including the following exceptions: a) if the in-place rent is already above the Mietspiegel, the previous rent levels can be maintained; b) the cap does not apply to newly-built flats completed after 1 October 2014, or to refurbished apartments where the cost of refurbishment is estimated to be up to a third of new construction costs; c) as before, the cost of quality-enhancing modernisation work can be added to the annual rent (up to a maximum rent increase of 10%).

To assess the impact of the new Mietpreisbremse on the housing markets, a number of questions still remain to be answered: for example, what will the final definition of “tight” rental markets be in the long run? One impact could be a softening of lfl rental growth, which will then have an impact on property valuations. However, the initial impact of the Mietpreisbremse on earnings levels and property values for the listed companies should be rather limited due to the relatively low annual fluctuation in the number of tenants.

New law has an initial lifetime of five years

10% rent cap on new lettings subject to certain exceptions

Some questions still remain unanswered, but impact should be rather limited overall

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2. Peer comparison

2.1 Overview

Portfolio fundamentals & key financials

Figures as of FY 2014 Adler Annington Dt. Wohnen DIC Asset Grand City LEG TAG

Total real estate units 24,086 203,028 147,105 233 43,000 106,961 72,530

Total area (sqm k) 1,546 12,888 8,946 1,413 2,946 6,855 4,437

Average size per unit 64sqm 63sqm 61sqm 6,064sqm 57sqm 64sqm 61sqm

Portfolio market value (€m) 1,170 12,759 9,785 2,397 2,180 5,990 3,371

Portfolio value per sqm (€) 757 990 1,094 1,696 740 874 760

Monthly in-place rent (€/sqm) 5.02 5.58 5.69 9.60 5.20 5.07 5.16

Occupancy rate 87.2% 96.6% 97.8% 89.1% 87.3% 97.2% 91.0%

Maintenance/capex (€/sqm p.a.) 15.6 29.1 16.5 - 13.8 13.8 12.2

EPRA NAV (€m, as reported) 342 6,578 5,326 865 1,439 3,295 1,198

Net rental income (€m) 32 591 506 132 176 285 203

Net rent multiplier 36.5x 21.6x 19.3x 18.1x 12.4x 21.0x 16.6x

Adj EBITDA (€m, as reported) 38 500 455 128 112 259 166

FFO I (€m, as reported) -1 287 218 48 76 163 75

Source: Company data, Berenberg Fixed Income Research

Credit metrics

Figures as of FY 2014 Adler Annington Dt. Wohnen DIC Asset Grand City LEG TAG

Net debt (€m) 951 6,339 5,131 1,569 747 2,830 2,151

Net debt/sqm (€) 615 492 574 1,110 254 413 485

Net debt/adj EBITDA 25.0x 12.7x 11.3x 12.2x 6.7x 10.9x 13.0x

Net debt/FFO I n.m. 22.1x 23.6x 32.8x 9.8x 17.3x 28.9x

Net debt/equity 326% 129% 109% 204% 79% 114% 220%

Adj EBITDA net interest cover 1.0x 1.8x 1.7x 1.8x 5.1x 2.0x 1.5x

LTV as reported 69% 50% 51% 66% 34% 47% 62%

Average cost of debt 4.7% 3.2% 2.5% 3.9% 2.1% 2.8% 3.7%

Source: Company data, Berenberg Fixed Income Research

Equity valuation

Pricing: 22/04/2015 (Xetra close) Adler Annington Dt. Wohnen DIC Asset Grand City LEG TAG

Share price (€) 13.66 30.94 24.72 9.17 16.90 73.26 12.02

No. of shares (millions) 32 354 295 69 122 57 133

Market cap (€m) 436 10,956 7,288 629 2,056 4,180 1,602

Enterprise value 1,441 16,098 12,597 2,202 3,137 7,034 3,884

EV/sqm 932 1,249 1,408 1,559 1,065 1,026 875

EV/adj EBITDA 37.9x 32.2x 27.7x 17.2x 28.0x 27.1x 23.4x

NAV per share 10.72 18.58 18.06 12.61 11.83 57.74 8.99

NAV premium (P/NAV) 27.5% 66.6% 36.8% -27.3% 42.9% 26.9% 33.7%

FFO I per share -0.03 0.81 0.74 0.70 0.63 2.86 0.56

FFO I yield (FFO I/P) -0.3% 2.6% 3.0% 7.6% 3.7% 3.9% 4.7%

P/FFO I multiple -393.0x 38.2x 33.5x 13.1x 27.0x 25.6x 21.5x

Dividend per share 0.00 0.78 0.44 0.35 0.19 1.96 0.50

Dividend yield (D/P) 0.0% 2.5% 1.8% 3.8% 1.1% 2.7% 4.2%

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2.2 Berenberg forecasts

Adler Annington Dt. Wohnen DIC Asset Grand City LEG TAG

€m (except per share and ratios) 2015e 2016e 2015e 2016e 2015e 2016e 2015e 2016e 2015e 2016e 2015e 2016e 2015e 2016e Investment properties 1,627 1,768 20,680 20,920 10,075 10,342 2,187 2,143 2,293 2,834 6,724 7,392 3,343 3,542

Net rental income 50 67 851 1,179 505 517 133 135 138 170 331 350 199 206

Adj EBITDA 92 111 656 932 461 469 123 125 143 177 296 316 158 169

FFO I 15 26 503 612 253 271 50 50 96 115 201 228 83 91

Net debt 1,260 1,324 12,414 12,005 4,874 4,406 1,626 1,591 1,075 1,431 3,372 3,808 2,112 2,215 Net debt/adj EBITDA 13.7x 11.9x 18.9x 12.9x 10.6x 9.4x 13.2x 12.7x 7.5x 8.1x 11.4x 12.1x 13.4x 13.1x Net debt/equity 3.9x 3.7x 1.9x 1.6x 1.0x 0.9x 2.1x 2.0x 1.2x 1.3x 1.3x 1.3x 2.1x 2.0x

Interest expense 51 59 276 419 169 159 77 78 13 20 135 127 82 82

Adj EBITDA int. cover 1.8x 1.9x 2.4x 2.2x 2.7x 2.9x 1.6x 1.6x 11.0x 8.9x 2.2x 2.5x 1.9x 2.1x

LTV 76% 74% 58% 56% 52% 50% 68% 68% 47% 50% 50% 52% 65% 65%

Year-end shares (million) 32 32 360 360 294 294 69 69 119 119 59 59 118 118 EV/adj EBITDA 18.2x 15.6x 32.0x 22.1x 26.4x 24.9x 18.8x 18.0x 20.9x 18.9x 25.2x 25.1x 20.9x 20.2x NAV per share 10.14 11.91 20.3 22.3 18.5 21.0 12.96 13.08 9.05 10.24 47.31 51.16 9.57 10.47 NAV premium (P/NAV) 10% -5% 27% 16% 24% 10% -30% -31% 60% 43% 34% 25% 7% -2% FFO I per share 0.48 0.8 1.4 1.7 0.86 0.92 0.73 0.74 0.81 0.97 3.53 3.85 0.7 0.77 FFO I yield 3.7% 6.2% 4.7% 5.8% 3.5% 3.8% 8.0% 8.2% 5.1% 6.0% 4.9% 5.3% 7.0% 7.7% P/FFO I multiple 27.3x 16.2x 21.2x 17.4x 28.5x 26.6x 12.4x 12.3x 19.7x 16.5x 20.6x 18.9x 14.3x 13.0x Dividend per share 0.00 0.00 1.00 1.19 0.56 0.60 0.35 0.35 0.24 0.30 2.20 2.50 0.53 0.57 Dividend yield 0.0% 0.0% 3.4% 4.0% 2.3% 2.4% 3.9% 3.9% 1.5% 1.8% 3.0% 3.4% 5.3% 5.7% FFO I payout ratio 0.0 0.0 0.7 0.7 0.7 0.7 0.5 0.5 0.3 0.3 0.6 0.7 0.8 0.7 Source: Berenberg Equity Research estimates, Berenberg Fixed Income Research

2.3 Straight bond relative value overview & recommendations

Pricing: 22/04/15 (BGN close) Ranking Moody’s/S&P Volume Price YTW Z-Spread Next call Recommendation

Adler Real Estate

ADLERR 4.75 04/20 Sr Unsecured -/-* €300m 102.1 4.2 401 08/2019@100.0 Overweight

ADLERR 6 04/19 Sr Unsecured -/-* €130m 105.0 4.0 392 01/2016@103.5 Overweight

Deutsche Annington

ANNGR 1.5 03/25 Sr Unsecured -/BBB+ €500m 99.7 1.5 102 Non-callable Marketweight

DIC Asset

DICGR 4.625 09/19 Sr Unsecured -/- €125m 104.9 3.4 322 Non-callable Marketweight

DICGR 5.75 07/18 Sr Unsecured -/- €100m 106.6 3.5 343 Non-callable Marketweight

Grand City Properties

GYCGR 1.5 04/25 Sr Unsecured Baa2/BBB- €400m 95.9 2.0 146 Non-callable Marketweight

GYCGR 2 10/21 Sr Secured -/BBB- €500m 103.7 1.4 108 Non-callable Marketweight

TAG Immobilien

TEGGR 3.75 06/20 Sr Unsecured -/- €125m 104.2 2.9 264 Non-callable Marketweight

TEGGR 5.125 08/18 Sr Unsecured -/- €310m 107.5 2.7 259 Non-callable Marketweight

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Adler Real Estate: Since 2012, Adler has been by far the fastest growing company in the sector, reflecting management’s good access to portfolios, with many deals sourced off-market. Adler financed its aggressive growth strategy with a large portion of debt, making it the highest levered company among its peers. However, we believe that the rather weak portfolio fundamentals are a good starting point for strong internal growth while we view management’s intention to deleverage in the medium term as credible. In our view this is not fairly reflected in current valuations, so we raise our recommendation on the ADLERR 6 04/19 to Overweight and initiate the ADLERR 4.75 04/20 with Overweight.

Deutsche Annington: Deutsche Annington is by-far the market leader in the German residential real estate market. Its portfolio fundamentals are overall very strong with above-average occupancy levels and a strong degree of regional as well as tenant diversification. Despite its high cash requirements for modernisation measures, Deutsche Annington maintains its strong financial discipline, not putting the solid investment grade rating at risk. Based on current valuations, we do not see any further upside or downside catalyst from a credit perspective and initiate both the ANNGR 1.5 03/25 and the ANNGR 2.125 07/22 with Marketweight, while maintaining our Marketweight recommendations on the other bonds. DIC Asset: DIC Asset is a German commercial real estate pure-play with a focus on office properties. Its portfolio is regionally well diversified and covers the main regions in Germany with positive economic fundamentals. The company plans to further reduce its development activities which will increase the stake of stable and recurrent income from asset management fees. We like the company’s current focus to reduce vacancy and financial leverage via asset disposals. However, the currently high leverage can only be reduced gradually. Because we believe this is fairly reflected in current spread levels and view downside risks as limited, we raise both bonds to Marketweight from Underweight.

Grand City Properties: Grand City Properties is a German residential real estate player with a strong track record of turning around underperforming properties with solid underlying fundamentals. Despite strong growth, the company has demonstrated strong financial discipline, leading to best-in-class credit metrics with the lowest LTV and average cost of debt among peers. We believe that current upside potential is limited given the recent spread-tightening rally and current valuations and therefore downgrade the GYCGR 2 10/21 to Marketweight from Overweight and initiate the GYCGR 1.5 04/25 with a Marketweight recommendation.

TAG Immobilien: TAG Immobilien specialises in residential real estate with a focus on the northern and eastern parts of Germany. Portfolio fundamentals are rather weak with high vacancy rates. This creates significant potential for the improvement of occupancy and rental levels, where the company already has a strong track record. However, TAG is currently highly leveraged and has considerable exposure to economically weak regions such as the Salzgitter region (15% of TAG’s units, 15.5% vacancy), which outweighs the otherwise strong business profile. We also note that management’s primary focus is currently not deleveraging. Thus, we remain Marketweight on both straight bonds.

Straight bond spread comparison

Source: Bloomberg, Berenberg Fixed Income Research; Pricing: 22/04/2015 (BGN close) ADLERR 4.75 20 ADLERR 6 19 ADLERR 8.75 18 ANNGR 1.5 25 ANNGR 2.125 22 ANNGR 3.625 21 ANNGR 0.875 20 ANNGR 3.125 19 ANNGR 2.125 16 DICGR 4.625 19 DICGR 5.75 18 GYCGR 1.5 25 GYCGR 2 21 TEGGR 3.75 20 TEGGR 5.125 18 0 50 100 150 200 250 300 350 400 450 0 1 2 3 4 5 6 7 8 9 10 11 Z -s pread ( bp s) Time to worst

High leverage and weak portfolio fundamentals offer an attractive entry opportunity

Strong business and financial profile with no real upside or downside catalysts

Commercial real estate player with a stabilised business and still high leverage

Successful turnaround manager with best-in-class credit metrics

Rather weak portfolio fundamentals offer internal growth opportunities

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Adler Real Estate AG

Bloomberg Ticker: ADLERR <Corp>

Recommendation:

Overweight

Straight € bonds (Pricing: 22/04/15BGN close) Price Z-spread YTW Next call Volume Recommendation*

ADLERR 4.75 04/20 102.1 401 4.2 04/2019@100.0 €300m Overweight

ADLERR 6 04/19 105.0 392 4.0 04/2016@103.5 €130m Overweight

ADLERR 8.75 04/18 113.0 389 4.0 NC €35m No recommendation

Convertibles Price Delta YTW Next call Volume Recommendation

ADLERR 6 17 -- -- -- -- €10m No recommendation

ADLERR 6 18 -- -- -- -- €3m No recommendation

Stock (Pricing: 22/04/15 Xetra close) Price Market cap Latest recommendation of our equity research

ADL GY €13.66 €436m Buy, PT €15.50 (3 Mar 2015) - Click here for the report

Investment thesis & recommendation

Since 2012, Adler has been by far the fastest growing company in the sector, reflecting management’s good access to portfolios, with many deals sourced off-market. Adler financed its aggressive growth strategy with a large portion of debt, making it the highest levered company among its peers. However, we believe that the rather weak portfolio fundamentals are a good starting point for strong internal growth while we view management’s intention to deleverage in the medium term as credible. In our view this is not fairly reflected in current valuations, so we raise our recommendation on the ADLERR 6 04/19 to Overweight and initiate the ADLERR 4.75 04/20 with Overweight.

Company profile and strategy

In the centre of the Adler’s activities is the acquisition and management of residential properties. Since the implementation of its new corporate buy-and-hold strategy in 2012 and the disposal of its development projects, Adler has built a residential portfolio concentrated in central Germany, mainly in North Rhine-Westphalia, Saxony and Lower Saxony. Additional brokerage and sales services are offered via its subsidiary Accentro, acquired in mid 2014. As of FY 2014, the company has approx. 31,000 real estate units. In February 2015, Adler was able to secure the takeover of the majority of Westgrund AG which will increase portfolio size to ~51,300 at the date of completion. Its strategy rests on four pillars:

(i) clear country focus on Germany

(ii) sole focus on good-quality residential real estate in non-city-center locations (B locations) with optimisation potential

(iii) financial goal to reach an LTV of 55% in the medium to long-term

(iv) benefit from economies of scale in asset management, building up a critical size of at least 47,000 units by 2017 (already surpassed on successful Westgrund acq.)

Distribution of units >5,000 2,500-5,000 1,000-2,500 Others (2,150) Strengths Weaknesses

• Strong portfolio growth since 2012

• Good access to portfolios, many deals were sourced off-market

• Additional (fee) income from privatising via subsidiary accentor

• Management’s intention to deleverage

• Larger competitors operating in the same region(s)

• High dependency on management’s industry network

• Relatively high vacancy rates & some exposure to weak regions

• Highest financial leverage and average cost of debt among peers

Company data www.adler-ag.com Selected financials (€m) 2013 2014e 2015e

Headquarter: Hamburg, Germany Net rents 11 134 188

Employees: 102 (Dec 2014) Adj EBITDA 6 83 92

Major shareholder Mezz. IX Inv. (37%), Wecken & Cie (10%), Uhlandstraße Investments (10%), Free float (43%)

FFO I 5 4 15

Free operating cash flow 6 60 9

Ratings & outlooks Properties & ratios 2013 2014e 2015e

Moody’s: -- Investment properties (€m) 418 1,196 1,627

Standard & Poor’s: -- Loan-to-value (LTV) 77% 79% 76%

Fitch: -- Net debt/adj EBITDA 54.0x 11.6x 13.7x

Scope: BB- (stable) Adj EBITDA/interest paid 0.6x 2.1x 1.8x

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Recent developments & outlook

The following is an extract from the latest report by our equity research analysts Kai Klose and Tina Kladnik on 3 March (Link)

In pursuit of its strategic focus on German residential real estate, Adler has grown its portfolio significantly from the 215 units it had at end-2012 to more than 30,000 units now. Over this period, Adler has been by far the fastest growing company in the sector, increasing its portfolio size in a remarkably short period of time, reflecting management’s good access to portfolios and also to off-market transactions. Adler’s initial target – a portfolio size of up to 47,000 units by year-end 2016 – will be overtaken this year if its takeover offer for Westgrund is successful (Westgrund’s anchor shareholders have already irrevocably accepted the offer). This will give it a combined portfolio of more than 50,000 units. The largest regional focus would then be on Lower Saxony. As only a number of these new portfolios will contribute to this year’s results on a pro-rata basis, we still expect net rents of €98.5m for FY 2015 and FFO I as cash-realised net profit to reach €15.2m on a standalone basis. With acquisition activities continuing in the background, we foresee net rents of €177.1m by FY 2018 and FFO of €46.3m. We will review our estimates after the takeover of Westgrund, as this transaction might also lead to a change in the portfolio strategy, ie with more privatisation activities or lower ambitions for external growth.

In recognition of the company’s track record in deal sourcing, we expect that the markets will now follow the acceleration in portfolio performance more closely, given the current vacancy rates of ~10% (standalone). In general, we regard the portfolio’s quality as average overall, although we note that regional diversification is high. We believe the company should consider bringing the property management function in-house, at least for the regions, where critical mass has already been achieved. We welcome management’s intention to reduce gearing levels, which are still unfavourably high combined with 4.7% as an above-average cost of debt. Initiatives such as these, in our view, would help to improve the company’s profile and attract new shareholders.

Financials (€m) 2013 2014e 2015e 2016e 2017e 2018e

Revenues 19 134 188 249 276 300

Net rents 11 51 98 139 159 177

Adj EBITDA 6 83 92 111 124 135

FFO I 5 4 15 26 36 46

Free operating CF 6 60 9 15 11 54

Free cash flow -82 24 -267 -218 -181 -57 Properties (BV) 418 1,196 1,627 1,768 2,016 2,180 Net debt 324 964 1,260 1,324 1,499 1,571 Loan-to-value (LTV) 77% 79% 76% 74% 73% 71% ND/adj EBITDA 54.0x 11.6x 13.7x 11.9x 12.1x 11.6x Adj EBITDA/int. paid 0.6x 2.1x 1.8x 1.9x 2.4x 2.4x

Investment properties, net debt and LTV

Net debt vs EBITDA

Maturity profile

Straight bonds vs peers

Sources: Company data, Bloomberg, Berenberg Equity Research estimates, Berenberdg Fixed Income Research; Pricing: 22/04/2015 (BGN close)

60% 65% 70% 75% 80% 85% 0 500 1,000 1,500 2,000 2,500

2013 2014e 2015e 2016e 2017e 2018e

EUR

m

Properties Net debt LTV (rhs)

0x 4x 8x 12x 16x 0 400 800 1,200 1,600

2013 2014e 2015e 2016e 2017e 2018e

EUR

m

Net debt Adj EBITDA ND/EBITDA (rhs)

0 100 200 300 400 EUR m

Bank loans Bonds Convertible bonds

ADLERR 4.75 20 ADLERR 6 19 ADLERR 8.75 18 Dt. Annington DIC Asset Grand City TEG 0 100 200 300 400 500 0 1 2 3 4 5 6 7 8 9 10 11 Z -s pread ( bp s) Time to worst

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Deutsche Annington Immobilien SE

Bloomberg Ticker: ANNGR <Corp>

Recommendations:

Marketweight

Straight € bonds (Pricing: 22/04/15 BGN close) Price Z-spread YTW Next call Volume Recommendation*

ANNGR 1.5 03/25 99.7 102 1.5 NC €500m Marketweight ANNGR 2.125 07/22 106.5 82 1.2 NC €500m Marketweight ANNGR 3.625 10/21 115.9 76 1.1 NC €500m Marketweight ANNGR 0.875 03/20 100.1 62 0.9 NC €500m Marketweight ANNGR 3.125 07/19 109.8 59 0.8 NC €600m Marketweight ANNGR 2.125 07/16 102.2 27 0.3 NC €700m Marketweight

-- -- -- -- -- -- --

Stock (Pricing: 22/04/15 Xetra close) Price Market cap Latest recommendation of our equity research

ANN GY €30.94 €10,956m Buy, PT €32.50 (5 Mar 2015) - Click here for the report

Deutsche Annington is by-far the market leader in the German residential real estate market. Its portfolio fundamentals are overall very strong with above-average occupancy levels and a strong degree of regional as well as tenant diversification. Despite its high cash requirements for modernisation measures, Deutsche Annington maintains its strong financial discipline, not putting the solid investment grade rating at risk. Based on current valuations, we do not see any further upside or downside catalyst from a credit perspective and initiate both the ANNGR 1.5 03/25 and the ANNGR 2.125 07/22 with Marketweight, while maintaining our Marketweight recommendations on the other bonds.

Deutsche Annington is the largest pure-play in the German residential market, with a portfolio of ~203,000 units on a stand-alone basis (~350,000 incl. the integration of GAGFAH starting 2015, making it the second largest listed property company in continental Europe). The company has a regionally well diversified portfolio with North Rhine-Westphalia representing its core market, particularly focusing on Dortmund. Strategic cornerstones include:

(i) clear country focus on Germany

(ii) focus on small to mid-sized apartments and offer of value-add services to tenants (iii) increasing investments in energy efficiency of rental units as well as

senior-focused renovations

(iv) increasing value by strategic acquisitions and non-core asset disposals

(v) acquisitions are required to increase FFO/share, be at least NAV/share neutral and may not put the BBB rating at risk

Distribution of units >10,000 5,000-10,000 1,000-5,000 <1,000 Strengths Weaknesses

• Largest residential real estate player in Germany

• Good portfolio fundamentals with low vacancy rates

• Strong financial profile and strategic focus on maintaining its triple-B rating

• Some parts of the portfolio in economically weak regions and with significant capex requirements

• Increase in contractual subordination of senior unsecured notes following the GAGFAH acquisition

Company data www.deutsche-annington.com Selected financials (€m) 2013 2014e 2015e

Headquarter: Bochum, Germany Net rents 728 770 1,099

Employees: 3,850 (Dec 2014) Adj EBITDA 386 418 656

Major shareholder ADIA (10%), Blackrock (6%), Norges

Bank (6%) FFO I 224 281 503

Moody’s: -- Investment properties (€m) 10,266 12,088 20,680

Standard & Poor’s: BBB+ (stable) Loan-to-value (LTV) 48% 50% 58%

Comments: Subordinated debt rated BBB- (S&P) Adj EBITDA/interest paid 1.4x 1.9x 2.5x Sources: Bloomberg, S&P, company data, Berenberg Equity Research estimates, Berenberg Fixed Income Research *Screening coverage

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Deutsche Annington's results for FY2014 on a stand-alone basis (excluding GAGFAH) were solid and slightly better than expected with rental income of €789m (Berenberg estimates: €770m) and adj EBITDA €554m (Berenberg estimates: €518m). Notably, in the residential privatisation Deutsche Annington realised high margins of ~38% from the disposal of 2,238 units (FY2013: 2,576 units), block sales comprising 1,843 units were sold at book value (FY2013: 4,144 units). FFO I as the adjusted net profit came to €287m, above the guidance of €280-285m. Our forecasts were at the upper end of the range.

Lfl-rental growth was 2.5% and within the targeted range of 2.3-2.6%. This is solid but came as no surprise and includes €172m as additional modernisation/capex spending or €29/sqm of total capex/maintenance. Vacancy rates with -10bp are virtually unchanged, remaining at low levels. Following the cost savings programme Deutsche Annington comes out at €754 costs/unit, which is below peers', but the numbers are difficult to compare. Nevertheless, Deutsche Annington improved from €830/unit the year before. Financials are solid with 50% loan-to-value and 3.2% as average cost of debt. The NAV advanced to €24.22/share, in-line with previous comments. Deutsche Annington also stressed that the start of the year was solid regarding potential acquisitions as well as for its modernisation programme, where the targeted yield of 7% is still to be achieved and the volume should exceed €200m for ~12,000 units. Stand-alone guidance excluding GAGFAH is unchanged with lfl-rental growth of 2.6-2.8%, rental income of €880-900m with a FFO I of €340-360m, of which 70% will be distributed.

While the focus moves to the combined company, for which an update on financial targets will be given 1 June, Deutsche Annington has progressed very well with strong momentum. The operational and financial targets were reached. The increase in lfl-growth by up to 30bp is key, given the high level of additional spending on modernisation or ~€30/sqm.

Financials (€m) 2012 2013 2014e 2015e 2016e

Revenues 1,161 1,165 1,238 1,784 2,412

Net rents 729 728 770 1,099 1,503

Adj EBITDA 438 386 418 656 932

FFO I 171 224 281 503 612

Free operating CF 239 304 488 291 776

Free cash flow 767 879 -1,129 -1,408 368

Properties (BV) 9,844 10,266 12,088 20,680 20,920

Net debt 5,981 5,217 6,374 12,414 12,005

Loan-to-value (LTV) 57% 48% 50% 58% 56%

ND/adj EBITDA 13.7x 13.5x 15.2x 18.9x 12.9x Adj EBITDA/int. paid 1.0x 1.4x 1.9x 2.5x 2.4x

Sources: Company data, Bloomberg, Berenberg Equity Research estimates, Berenberg Fixed Income Research; Pricing: 22/04/2015 (BGN close)

40% 44% 48% 52% 56% 60% 0 5,000 10,000 15,000 20,000 25,000

2012 2013 2014e 2015e 2016e

EUR

m

0.0x 4.0x 8.0x 12.0x 16.0x 20.0x 0 2,500 5,000 7,500 10,000 12,500

2012 2013 2014e 2015e 2016e

EUR

m

0 500 1,000 1,500 2,000 EUR m

Adler ANNGR 1.5 25 ANNGR 2.125 22 ANNGR 3.625 21 ANNGR 0.875 20 ANNGR 3.125 19 ANNGR 2.125 16 DIC Asset Grand City TEG 0 100 200 300 400 500 0 1 2 3 4 5 6 7 8 9 10 11 Z -s pread ( bp s) Time to worst

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Deutsche Wohnen AG

Bloomberg Ticker: DWNIGY <Corp>

Recommendations:

No recommendation

Straight € bonds Price Z-spread YTW Next call Volume Recommendation

-- -- -- -- -- -- --

Convertibles (Pricing: 22/04/15 BGN close) Price Delta1 _YTW _{Next call} _Volume _{Recommendation}

DWNIGY 0.875 09/2021 131.3 70% -3.5 -- €400m No recommendation

DWNIGY 0.5 11/2020 142.8 84% -9.3 11/2018@100.0 €250m No recommendation

DWNI GY €24.72 €7,288m Buy, PT 26.50€ (17 Apr 2015) - Click here for the report

Deutsche Wohnen is the second-largest residential real estate player in Germany with a focus on the economically attractive Berlin region. Its portfolio exhibits best-in-class fundamentals with the highest occupancy rate among peers. We like the solid financial profile which is characterised by a low LTV and average cost of debt. Through the nursing and assisted living operations, the company is already well prepared for the future, where we view additional services as a key success factor. On the negative side, we believe that internal growth prospects are rather limited and note that the strong focus on Berlin also involves some risks. We estimate Deutsche Wohnen’s credit spread to be very close to Dt. Annington, with the lower bound of our range being well below Deutsche Annington (visualised on next page).

Deutsche Wohnen owns ~150,000 residential properties in Germany, making it the second-largest listed residential property company in the country. It is one of the leading letting and development players in Berlin with a further focus on Hanover and the Frankfurt region. Alongside the letting and developing business, Deutsche Wohnen is the only company among its closest peers which also offers nursing and assisted living services through its 49% stake in Berlin-based Katharinenhof. Deutsche Wohnen’s corporate startegy focuses on:

(i) residential properties within Germany

(ii) core and core+ real estate in dynamic growth regions

(iii) residential letting operations, which are supplemented by nursing and assisted living operations following demographic macrotrends

(iv) additional cash and NAV contribution by privatisation and institutional sales

Distribution of units >10,000 5,000-10,000 1,000-5,000 <1,000 Strengths Weaknesses

• Focus is exclusively on strong metropolitan regions in Germany

• Highest portfolio value per sqm, in-place rent per sqm, and occupancy rate compared to its closest peers

• Solid financial profile with low LTV and average cost of debt

• Already low vacancy rates limit upside for internal growth

• High dependency on the Berlin region, where >70% of the company’s properties are located

Company data www.deutsche-wohnen.de Selected financials (€m) 2013 2014 2015e

Headquarter: Frankfurt/Main, Germany Net rents 373 626 615

Employees: 842 (Dec 2014, excl Katharinenhof) Adj EBITDA 253 454 461

Major shareholder Sun Life Financial / MFS (10%),

Blackrock (8%), Norges Bank (7%) FFO I _{Free operating cash flow} 115 ₃₆ 218 ₁₀₁ 253 ₁₀₁

Ratings & outlooks Properties & ratios 2013 2014 2015e

Moody’s: Baa1 (stable) Investment properties (€m) 8,937 9,611 10,075

Standard & Poor’s: BBB+ (stable) Loan-to-value (LTV) 57% 52% 52%

Comments: -- Adj EBITDA/interest paid 1.8x 2.4x 2.7x

Sources: Bloomberg, Moody’s, S&P, company data, Berenberg Equity Research estimates, Berenberg Fixed Income Research

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The following is an extract from the latest report by our equity research analysts Kai Klose and Tina Kladnik on 17 April (Link)

While Deutsche Wohnen could not reach the minimum acceptance level from conwert's shareholders for its takeover offer of EUR11.50/share, this does not have a material negative impact on the investment case, in our view. Our view on the proposed transaction was positive, as Deutsche Wohnen would have sourced properties of a reasonable quality at an attractive price; however, selling conwert's non-core assets would have tied up much of management's attention and resources. We do not think that management's reputation has been substantially damaged, even though Deutsche Wohnen has a good track record so far in terms of acquisitions. We expect markets to refocus on the company's operational fundamentals, which are "best in class" in terms of a) lfl rental growth with sustainably high levels above 2.0% and a 2.6% CAGR growth, b) vacancy rates of only 2.2% and c) the highest reversionary rent among peers potential of about 20%, which Deutsche Wohnen has consistently achieved. Markets have been concerned, too, that the company might be negatively affected by the upcoming cap on rents ("Mietbremse") at rent index plus 10%. While this cap will have an effect on the industry's overall lfl rental growth, Deutsche Wohnen might compensate for this by spending less on maintenance/capex, which reached the highest level on a normalised basis among peers.

Deutsche Wohnen remains committed to strong balance sheet ratios with an explicit target of 50% for the loan/value ratio. We appreciate that it provides clarity in this regard and would encourage it to take advantage of its BBB+ rating to diversify its debt structure.

We have slightly raised our estimates and expect an uptick in profitability as the GSW integration will have a full effect in this financial year. We also expect asset values to improve while our assumptions for cap rate compression remain defensive. Given Deutsche Wohnen's solid growth with high visibility and strong balance sheet ratios we regard a valuation at an earnings yield of c4.0% as reasonable; therefore we raise our target price to EUR26.50 and maintain our Buy rating.

Financials (€m) 2012 2013 2014e 2015e 2016e 2017e

Revenues 270 409 695 686 697 705

Net rents 240 373 626 615 629 643

Adj EBITDA 196 253 454 461 469 472

FFO I 68 115 218 253 271 282

Free operating CF -1 36 101 101 115 121

Free cash flow -818 -397 80 116 75 52

Properties (BV) 4,615 8,937 9,611 10,075 10,342 10,642 Net debt 2,716 5,243 5,144 4,874 4,406 3,955 Loan-to-value (LTV) 59% 57% 52% 52% 50% 49% ND/adj EBITDA 13.9x 20.7x 11.3x 10.6x 9.4x 8.4x Adj EBITDA/int. paid 1.9x 1.8x 2.4x 2.7x 2.9x 2.9x

Investment properties vs net debt (LTV)

Estimated credit spread vs closest peers

45% 48% 51% 54% 57% 60% 0 2,000 4,000 6,000 8,000 10,000

2012 2013 2014 2015e 2016e 2017e

E

UR

m

0.0x 5.0x 10.0x 15.0x 20.0x 25.0x 0 1,250 2,500 3,750 5,000 6,250

2012 2013 2014 2015e 2016e 2017e

E

UR

m

0 200 400 600 800 1000 EUR m

Bank loans Convertible bonds

0 25 50 75 100 125 150 0 1 2 3 4 5 6 7 8 9 10 11 Z -s pread ( bp s) Time to worst Dt. Annington Grand City Dt. Wohnen est.

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DIC Asset AG

Bloomberg Ticker: DICGR <Corp>

Recommendations:

Marketweight

DICGR 4.625 09/19 104.9 322 3.4 NC €125m Marketweight

DICGR 5.75 07/18 106.6 343 3.5 NC €100m Marketweight

-- -- -- -- -- --

DIC GY €9.17 €629m Buy, PT 9.00€ (18 Mar 2015) - Click here for the report

DIC Asset is a German commercial real estate pure-play with a focus on office properties. Its portfolio is regionally well diversified and covers the main regions in Germany with positive economic fundamentals. The company plans to further reduce its development activities which will increase the stake of stable and recurrent income from asset management fees. We like the company’s current focus to reduce vacancy and financial leverage via asset disposals. However, the currently high leverage can only be reduced gradually. Because we believe this is fairly reflected in current spread levels and view downside risks as limited, we raise both bonds to Marketweight from Underweight.

DIC Asset AG specialises in commercial real estate in Germany, particularly office and distribution and storage property. The company holds a portfolio of direct investments as well as minority and joint venture co-investments. DIC’s AuM amount to ~EUR 3.4bn, including around 230 properties, mainly located in the central and western Germany. DIC has a clear investment strategy:

(i) exclusive focus on Germany

(ii) balanced portfolio in major metropolitan areas and regional economic centres with positive economic fundamentals

(iii) concentrated on office properties (approx. 70%)

(iv) investments both in DIC’s own commercial real estate portfolio and co-investments Distribution of units Central (30%) West (24%) South (22%) East (12%) North (12%) Strengths Weaknesses

• Well-diversified commercial portfolio covering the main regions in Germany with positive economic fundamentals

• Further reduction in development activities, stake of recurrent income from asset management fees will rise

• High financial leverage and average cost of debt

• Vacancy rates stagnated at a high 11%

• Strong dependence on the German office property market (approx. 70% office properties)

Company data www.dic-asset.de Selected financials (€m) 2013 2014 2015e

Headquarter: Frankfurt/Main, Germany Net rents 122 147 146

Employees: 132 (Dec 2014) Adj EBITDA 105 122 119

Major shareholder Deutsche Immobilien Chancen (33%),

solvia (5%), RAG Foundation (5%) FFO I 46 48 50

Free operating cash flow -57 68 71

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DIC's numbers for FY 2014 came in close to our estimates. Gross rental income was €147.5m (Berenberg estimates: €147.2m) and EBIT was €85.2m (Berenberg: €79.6m), somewhat higher than we expected due to better results from property disposals. FFO as the adjusted net profit was €47.9m (Berenberg: €48.0m). DIC's total letting volume in the last year was 242,000sqm, almost equally split into new lettings and renewals. We think that this is a solid result, even if vacancy rates stagnated at 11%. We would expect this to improve as the annual lease expiries are relatively low and, in general, the demand for office space in Germany has somewhat increased. The average lease term is 4.6 years, which we believe is reasonable but should improve this year. We welcome that the sale of properties in the last year picked up to €162m after €99m in 2013, and that the average disposal margin was slightly better at 6%. Financial ratios improved marginally, with an LTV of 66%, and the average cost of debt was lowered by 20bp to 3.9%. The average debt maturity is 4.5 years, a rise of six months on the previous year's. For FY 2015 DIC expects an FFO of €48m-50m (Berenberg: €49.8m), where the lower rental income due to property sales should be slightly compensated by income from the funds business and lower financing costs.

We think that, in the last year, DIC has taken the right steps to restructure the company and set the right strategic goals. In particular, management simply needs more time to reduce the loan-to-value to 60%, which it should do by year-end 2016. We welcome that the company is still striving to sell another ~€200m worth of properties by 2016 and that the underlying markets are currently supportive in this regard. Obviously, this will lead to temporary stagnation in earnings levels, where peers can show stronger momentum. Nevertheless, we do not see this as a negative. We will review our assumptions following the publication of the results and now that the stock price has reached our price target. However, we see DIC progressing relatively slowly, but reasonably well.

Financials (€m) 2012 2013 2014 2015e 2016e 2017e

Revenues 133 138 160 156 159 162

Net rents 123 122 147 146 147 149

Adj EBITDA 102 105 122 119 123 125

FFO I 45 46 48 50 50 51

Free operating CF 79 -57 68 71 70 71

Free cash flow 77 114 165 149 123 124

Properties (BV) 1,847 2,256 2,224 2,187 2,143 2,100 Net debt 1,406 1,668 1,650 1,626 1,591 1,560 Loan-to-value (LTV) 71% 69% 68% 68% 68% 68% ND/adj EBITDA 13.8x 15.9x 13.5x 13.7x 12.9x 12.5x Adj EBITDA/int. paid 1.0x 1.1x 1.0x 1.0x 1.0x 1.1x

Straight bond vs peers

60.0% 62.5% 65.0% 67.5% 70.0% 72.5% 0 500 1,000 1,500 2,000 2,500

2012 2013 2014a 2015e 2016e 2017e

EUR

m

0.0x 4.0x 8.0x 12.0x 16.0x 0 300 600 900 1,200 1,500 1,800

2012 2013 2014 2015e 2016e 2017e

EUR

m

0 100 200 300 400 500 600 2015 2016 2017 2018 2019 ≥2020 EUR m

Adler Dt. Annington DICGR 4.625 19 DICGR 5.75 18 Grand City TEG 0 100 200 300 400 500 0 1 2 3 4 5 6 7 8 9 10 11 Z -s pread ( bp s) Time to worst

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Grand City Properties SA

Bloomberg Ticker: GYCGR <Corp>

Recommendations:

Marketweight

GYCGR 1.5 04/25 95.9 146 2.0 NC €400m Marketweight

GYCGR 2 10/21 103.7 108 1.4 NC €500m Marketweight

Convertible (Pricing: 22/04/15 BGN close) Price Delta1 _YTW _{Next call} _Volume _{Recommendation}

GYCGR 1.5 02/2019 179.9 92% -12.1 NC €275m No recommendation

GYC GY €16.90 €2,056m Buy, PT €18.50 (18 Mar 2015) - Click here for the report

Grand City Properties is a German residential real estate player with a strong track record of turning around underperforming properties with solid underlying fundamentals. Despite strong growth, the company has demonstrated strong financial discipline, leading to best-in-class credit metrics with the lowest LTV and average cost of debt among peers. We believe that current upside potential is limited given the recent spread-tightening rally and current valuations and therefore downgrade the GYCGR 2 10/21 to Marketweight from Overweight and initiate the GYCGR 1.5 04/25 with a Marketweight recommendation.

Grand City is focused on German residential properties and currently owns around 52,000 apartments and manages another 22,000 units for third parties. Locations are mainly in North Rhine-Westphalia, Berlin, and Saxony (Anhalt). Since March 2015, its stock has been included in EPRA/NAREIT indices. The company follows a clear turnaround approach with a long-term investment horizon, acquiring properties with significant value-add potential for optimisation and repositioning. Target property criteria include: (i) location in densely populated areas and major cities

(ii) rent level per sqm is below market level offering upside potential (iii) significant potential to reduce cost per sqm

(iv) high cash flow generating assets (v) vacancy reduction potential

Distribution of units >20% 10-20% 5-10% <5% Strengths Weaknesses

• 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

• High required capex outlays weigh on free cash flow

• Weak overall portfolio fundamentals, high average vacancy rate

• Image/reputation among tenants of a turnaround assets manager

Company data www.grandcityproperties.com Selected financials (€m) 2013 2014 2015e

Headquarter: Luxembourg Net rents 66 137 169

Employees: 500 Adj EBITDA 84 119 143

Major shareholder Edolaxia Ltd. (34%), Valuemonth Holdings (4%), Zanelo Trading Ltd. (1%), Free float (62%)

FFO I 38 76 96

Moody’s: Baa2 (stable) Investment properties (€m) 1,368 2,081 2,293

Standard & Poor’s: BBB- (stable) Loan-to-value (LTV) 39% 47% 47%

Sources: Bloomberg, company data, Berenberg Equity Research estimates, Berenberg Fixed Income Research *Screening coverage

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The following is an extract from the latest report by our equity research analysts Kai Klose and Tina Kladnik on 18 March (Link) Grand City Properties' (GYC) results for FY 2014 were solid overall and came in slightly above our estimates at the bottom line. Rental income was €216.8m (Berenberg estimates: €219.9m) and total revenues, including disposal results, were €231.5m (Berenberg: €240.2m). Adjusted EBITDA was €112.0m (Berenberg: €107.5m) and FFO I as the adjusted net profit was €76.1m (Berenberg: €66.7m) or €0.66 as FFO I/share. FY 2014 will also be the first year of dividend payments and GYC has set the initial payout ratio at 30% of FFO I.

Operationally, GYC continued to combine external growth with an increase in the portfolio size, which rose by 17,000 units yoy to 43,000 units as of December (or up to 52,000 units as of March). It has made continuous improvements to the existing portfolio, where now 40% of the apartments units are so-called “stabilised units”, with vacancy rates at 5%. As a consequence of its acquisitions, it has also increased the number of “early turnaround units”, which now comprise 27% of the portfolio. This suggests that GYC has strong potential to create value internally by raising occupancy and rental levels. GYC spent about €13.80/sqm/year on maintenance and capex, which is close to industry levels. The portfolio is currently valued at €740/sqm, which reflects a multiple on in-place rents of 13.6x.

GYC’s operational leverage, with a vacancy rate of 13%, is higher than its peers’. However, GYC’s financial ratios have strengthened further, with a low loan-to-value of 45% and a best-in-class interest-cover ratio of 5.1x. There are no material debt maturities before the expiry of the convertible bond in 2019, followed by €100m of bank debt in 2020. As before, GYC did not provide guidance for the current fiscal year. It did, however, confirm that the run-rate for the annualised rental income is €280m and that it expects to realise an upside of 30% to €365m on the existing portfolio.

Financials (€m) 2012 2013 2014 2015e 2016e 2017e

Revenues 39 96 147 184 223 258

Net rents 24 66 137 169 205 236

Adj EBITDA 29 84 119 143 177 209

FFO I 11 38 76 96 115 115

Free operating CF -5 54 88 118 186 153 Free cash flow -26 -55 -305 -352 -206 -163 Properties (BV) 407 1,368 2,081 2,293 2,834 3,209

Net debt 193 535 986 1,075 1,430 1,643

Loan-to-value (LTV) 47% 39% 47% 47% 50% 51% ND/adj EBITDA 6.7x 6.4x 8.3x 7.5x 8.1x 7.9x Adj EBITDA/int. paid 2.7x 6.1x 3.4x 5.4x 5.2x 5.4x

35.0% 37.5% 40.0% 42.5% 45.0% 47.5% 50.0% 52.5% 0 500 1,000 1,500 2,000 2,500 3,000 3,500

2012 2013 2014 2015e 2016e 2017e

EUR

m

0.0x 2.5x 5.0x 7.5x 10.0x 0 500 1,000 1,500 2,000

2012 2013 2014 2015e 2016e 2017e

EUR

m

0 200 400 600 800 EUR m

Adler Dt. Annington DIC Asset GYCGR 1.5 25 GYCGR 2 21 TEG 0 100 200 300 400 500 0 1 2 3 4 5 6 7 8 9 10 11 Z -s pread ( bp s) Time to worst

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LEG Immobilien AG

Bloomberg Ticker: LEGGR <Corp>

Recommendations:

No recommendation

Straight € bonds Price Z-spread YTW Next call Volume Recommendation

-- -- -- -- -- -- --

Convertibles (Pricing: 22/04/15 BGN close) Price Delta1 _YTW _{Next call} _Volume _{Recommendation}

LEGGR 0.5 07/2021 139.8 74% -4.9 NC €300m No recommendation

LEG GY €73.26 €4,180m Buy, PT €82.00 (17 Mar 2015) - Click here for the report

LEG is a North Rhine-Westphalia pure-play in the German residential real estate market with strong portfolio fundamentals including the second-highest occupancy rate behind Deutsche Wohnen. We particularly like the portfolio concentration in NRW allowing for significant economies of scale and efficient property management, which more than outweighs LEG’s missing diversification within Germany. Its financial profile is very strong with the second-lowest LTV among its closest peers. We estimate the range to be slightly higher than Deutsche Wohnen’s with Deutsche Annington being the floor (visualised on next page).

LEG is focused on German residential real estate and owns a portfolio of ~110,000 apartments in 160 locations, almost exclusively in North Rhine-Westphalia. LEG focuses on the major cities and therefore has a limited geographical diversification. Its leading market position in NRW was further strengthened by the acquisition of 9,600 apartments from Deutsche Annington in October 2014. LEG’s business model and strategy are characterized by:

(i) a highly concentrated portfolio that allows for supreme profitability, extremely high occupancy and attractive dividends

(ii) an inorganic growth strategy also benefiting from deep market knowledge, down to the micro-location level

(iii) a centralized and scalable platform well suited for further inorganic growth (iv) the expansion of tenant-oriented value-add services like the multimedia

cooperation with Unitymedia

Distribution of units

~100%

Strengths Weaknesses

• Economies of scale due to LEG’s regional focus on NRW

• Strong reputation in NRW

• Solid financial profile, low leverage and average cost of debt

• Strong portfolio fundamentals, low vacancy rates

• Highly dependent on the development of the German residential real estate market in NRW

• Relatively large portion of rent-restricted units (c33%)

Company data www.leg-nrw.de Selected financials (€m) 2014 2015e 2016e

Headquarter: Düsseldorf, Germany Net rents 584 639 662

Employees: 1,040 (Dec 2014) Adj EBITDA 255 296 316

Major shareholder BlackRock (15%), Perry Capital (8%),

MFS (5%), CBRE (5%), Ruffer (4%) FFO I 164 201 228

Sources: Bloomberg, company data, Berenberg Equity Research estimates, Berenberg Fixed Income Research

F I X E D I N C O M E R E S E A R C H C O R P O R A T E S

S E C T O R S P E C I A L

The German Real Estate Industry (Update)

23 April 2015

Jannik Prochnow

Thomas Prischenk

Table of contents

1. Macro environment in Germany

2. Peer comparison

Adler Real Estate AG

Overweight

Deutsche Annington Immobilien SE

Marketweight

Deutsche Wohnen AG

No recommendation

DIC Asset AG

Marketweight

Grand City Properties SA

Marketweight

LEG Immobilien AG

No recommendation