30 July 2015 Investment Companies Property European Industrial Equity Research UK (LSE: HSTN LN) All about that base, no treble

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1 30 July 2015 Investment Companies Property European Industrial Equity Research UK (LSE: HSTN LN) Hansteen Holdings Price / NAV cum inc est (p) / Premium % (12m range) 16.9 (4.2 to 27.8) Dividend yield (%) 4.2 Market cap ( m) 816 Objective: to generate consistent, high returns from investing in and improving undervalued UK and European industrial property Benchmark n/a Listing / Domicile Main Market / UK Trust inception 29 November 2005 Fund managers Ian Watson, Morgan Jones Management costs see pages 6 & 7 Loan tovalue (YE 31 Dec) 41.1% Dividend xd April / October Dividend paid May / November Continuation vote indefinite life GBP TR % 1yr 3yr 5yr Since HSTN NAV HSTN Price IPD UK Property FTSE All-Share HSTN TR vs. benchmark indices, since inception HSTN Price TR FTSE All-Share TR IPD UK All Property Source: Morningstar, Bloomberg. Data as at 27 July All about that base, no treble Since inception, Hansteen Holdings ( HSTN ) has delivered strong NAV returns alongside an attractive and growing dividend. This is underpinned by the trust s highly differentiated approach, which targets special situations -type investments in pan-european multi-let industrial property. The business typically follows a buy low, improve, sell high model, where the managers acquire non-prime (but fundamentally sound) assets and seek to increase occupancy and rental yields via basic, active management initiatives. In our view, HSTN offers investors a good way of gaining exposure to European property whilst diversifying away from the prime commercial stock that traditionally dominates the sector. Adding value through tried and tested buy-and-build strategy The managers of Hansteen describe their strategy as being distinctly low-tech and instead based on common sense and hard work. They observe that assets in the multilet industrial sector are generally badly managed, with occupancy rates of c.80% (i.e. a high void rate), but commensurately low prices and, thus, high initial yields (c.10%). Hansteen s approach is to acquire such mismanaged, undervalued assets and to turn them around by making slight improvements (e.g. renovations, better marketing) in order to increase occupancy which, in this segment of the market, is the key driver of rental growth. To illustrate the point, a property that sees its vacancy rate fall from 20% to 10% experiences c.12% rental growth even without upward rent reviews. Modest gearing boosts income returns, risk managed by tenant diversification The managers employ a modest amount of gearing (c.40% LTV) to help boost income returns, which comfortably funds a c.5p/share dividend. Furthermore, the portfolio s exposure is highly diversified, generating a c.8% yield from around 6,000 different tenants, with the largest one accounting for just 1.2% of the total rent roll. Active asset management and uplifts on disposal drive long-term capital growth Capital returns to HSTN investors are thus two-fold; initially, from the higher yields created by the active management process and, latterly, from the uplifts (yield compression) achieved upon disposal of what will have become a well-let, higher-quality asset (see below for illustrative example). Hansteen Holdings illustration of potential long-term total returns (% of NAV, p.a.) Charles Tan, CFA Investment Companies Analyst charlestan@cantor.com 0 Gross yield Yield gained Operating (ungeared) on gearing expenses Cost of gearing Mgmt fees Admin expenses Net income Rent roll growth Yield Perf. related Total return compression payments Source: Cantor Fitzgerald Europe This is a marketing communication. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition of dealing ahead of the dissemination of investment research. However, CFE has put in place procedures and controls designed to prevent dealing ahead of marketing communication. Please see important regulatory disclaimers and disclosures on page 9.

2 Hansteen Holdings 30 July 2015 Return profile income + capital growth model Return profile income + capital growth model While the company does not have an explicit total return target, we note that the Long Term Incentive Plan refers to its 10% p.a. compound growth rate hurdle as a target NAV. As our estimates illustrate, we believe this target is achievable over the medium to long term, with modelled total returns of c.13% p.a. split broadly between income and capital growth. The figures suggest that Hansteen s portfolio of property assets should be able to generate enough income to support a significantly higher dividend than that currently paid (c.5% of NAV), with an estimated dividend cover of c.1.3x. Capital gains should also come from growth in the rent roll and yield compression over the course of the investment cycle, which we estimate could add another c.6.5% p.a. to returns. Due to the nature of Hansteen s business model, rental growth is driven more by increased occupancy (the result of active asset management) rather than upward rent reviews, and we have factored this into our calculations (see table below). Hansteen Holdings income model Item Description % of NAV Hansteen s industrial multi-let model generates a high gross initial yield in excess of 8%, which is further enhanced through the moderate use of leverage. Hansteen s administrative expenses, net of fees received from third-party mandates, are higher than average, but are a reflection of the truly active management approach undertaken by HSTN to generate outperformance for investors. Gross yield (ungeared) Average c.8.5% gross rental yield as of 31 Dec Yield gained on gearing Assuming average gearing of c.40% LTV 5.7 Direct operating expenses Running costs of the investment property portfolio -2.5 Cost of gearing Refer to page 5 for details of borrowing arrangements -2.6 Net rental income 9.1 Management Fees Fees received for managing third-party portfolios 0.8 Administrative expenses Costs relating to the operation of Hansteen Holdings -3.2 Net income return Distributable as dividends 6.7 Source: Cantor Fitzgerald Europe, Hansteen Holdings Hansteen Holdings capital growth model Rental growth in the HSTN portfolio is driven more by increased occupancy than increasing rents. Active management initiatives typically boosts occupancy from c.80% to c.95%, providing a c.20% boost to gross rental income and justifying further uplifts from yield compression upon disposal/exit. Item Description % of NAV Rent roll growth Yield compression Assume below-average rental uplift of c.0% p.a. but void rate reduction from c.20% to c.5% over a five-year investment cycle. Gearing of c.40% LTV. Lower yield (discount rate) justified due to improved risk profile. Assume adjustment from 8.5% down to 7.5% upon exit at the end of an average five-year cycle. Capital growth Founder Long-Term Incentive Plan Other performancerelated payments The Joint Chief Executives are each entitled to receive shares equal to 12.5% of the EPRA NAV outperformance over 10% p.a. compound, calculated over 3-year periods. Hansteen awards share options to executive directors and senior employees if performance targets are met Net capital return 6.4 Source: Cantor Fitzgerald Europe, Hansteen Holdings 2 Cantor Fitzgerald Europe Research

3 The investment case Hansteen Holdings 30 July 2015 The investment case Private Equity approach to industrial real estate In our view, Hansteen s investment approach could be described as being private equity-like, to the extent that they typically take over an underperforming business cheaply, implement management change and/or operational improvements, then sell the asset(s) at an opportune point in the cycle for significant gain. Attractive, diversified income HSTN gives investors exposure to a portfolio of high yielding Pan-European industrial multi-let property assets which, in our view, should provide valuable diversification benefits given the bias toward lower yielding high-end commercial/retail assets that many London-listed UK property trusts and REITs have. With the rent roll spread across c.6000 tenants (the largest one accounting for just 1.2% of total rental income) and various geographies and sub-sectors, HSTN can boast of a truly diversified tenant portfolio. The German Mittelstand Source: Berlin School of Economics and Law, 2011 High yield does not mean low quality The managers argue that just because Hansteen s portfolio generates a high yield, it does not mean that the assets and the underlying tenants are necessarily of a low quality. They point out that HSTN s German properties, for example, are focused around the Mittelstand small and medium-sized, owner-managed businesses that are internationally recognised for their prudent management and quality exports. The Mittelstand is widely regarded as the backbone of Germany s industrial economy and these smaller companies proved among the most resilient through the recent financial crisis, helping the country survive and thrive in a weak demand environment. Significant capital growth potential buy low, improve, sell high The typical HSTN asset begins life as a poorly managed, out-of-town industrial property, bought at a large discount and, consequently, on an attractive initial yield, sometimes in excess of 10% p.a. As an example, in May 2015, the company bought a 22m portfolio of assets across Germany with an 18% void rate and c.13% yield. The team at Hansteen then work to improve returns by managing the asset actively and intensively. Locally-based, in-house management teams, comprised of 100+ dedicated staff across 15 regional offices in the UK and Europe, undertake initiatives such as local advertising and refurbishment in order to increase occupancy. Hansteen seeks to crystallise the value it creates as soon as the right buyer is found rather than engage in empire-building. Case in point, in May 2015, Hansteen sold its HPUT II portfolio for 192m, having launched it only two years earlier with 107m of equity commitments from HSTN and clients of Aviva Investors. UK investment yields: retail vs. industrial Source: CBRE UK, Tritax Big Box Annual Report 2014 Industrial real estate catching up with strong gains in commercial The managers believe that industrial real estate prices and rental growth should catch up with the recent gains in commercial real estate over the coming years. In their experience, industrial assets typically lag the broader market for commercial property by months. Furthermore, there is a longer term trend of yield convergence between the industrial and commercial/retail sectors (see chart opposite), which should translate into higher valuations for the types of assets held in the HSTN portfolio. One explanation for this recent trend is that the exponential pace of technological progress is changing the nature of and need for office/retail space (e.g. on line shopping, hot-desking, work from home), and instead driving value back to the industrial sector, where the goods are being manufactured, stored and shipped to tech-savvy consumers all around the country/the world. Cantor Fitzgerald Europe Research 3

4 Hansteen Holdings 30 July 2015 The investment portfolio The investment portfolio Portfolio statistics as at 31 Dec 2014 Number of distinct tenants: c.6,000 Average rent per tenant: 24,200 p.a. No tenant accounts for more than 1.2% of total rent roll Average rent: 42 per square metre p.a. ( 3.9 per sq ft) Like-for-like occupancy increased by 4.6 percentage points, or almost 30% of the void rate at the start of the year Hansteen Property Portfolio as at 31 Dec 2014, adjusted for announced disposals/acquisitions % owned # of props Built area (sqm) Void rate Passing Rent Value Current Yield Reversion Yield Direct Investments Germany 100% 96 1,607, % % 10.3% Germany (acquired in May 2015) 100% 13 99, % % 16.0% Benelux & France 100% , % % 13.3% United Kingdom 100% , % % 9.5% Collective Investments Ashtenne Industrial Fund 41% 252 1,146, % % 10.7% Saltley 50% 1 94, % % 8.5% Sub-total Exchange Rate (GBP/EUR) Total attributable to Hansteen 3,257, % 94.7m 1,089m 8.6% 10.8% Source: Hansteen Holdings German Portfolio c.50% of HSTN portfolio all properties directly and wholly owned Valuation increased by 44m or 6.0% over the 2014 calendar year Like-for-like occupancy increased by 1.7 percentage points; like-for-like rental income increased by 2.3% Source: Hansteen Holdings Annual Report 2014 Source: Hansteen Holdings Annual Results 2014 Benelux & France Portfolio c.20% of HSTN portfolio all properties directly and wholly owned Valuation increased by 18.8m or 8.4% over the 2014 calendar year Like-for-like occupancy increased by 5.5 percentage points; like-for-like rental income increased by 3.3% Source: Hansteen Holdings Annual Report 2014 Source: Hansteen Holdings Annual Results Cantor Fitzgerald Europe Research

5 Financing and hedging arrangements Hansteen Holdings 30 July 2015 UK Portfolio Source: Hansteen Holdings Annual Results 2014 c.30% of HSTN portfolio Valuation increased by 33.7m or 10.4% over the 2014 calendar year Made up of directly and wholly owned properties (c. 120m), and large stakes in associated funds (41% in Ashtenne Industrial Fund, 50% in Saltley) In October 2014, HSTN announced the sale of Hansteen UK Industrial Property Unit Trust ( HPUT ) for 146.1m, which resulted in a c. 10m profit over the last valuation, at 31 December 2013 In May 2015, HSTN announced the sale of Hansteen UK Industrial Property Unit Trust II ( HPUT II ) for 192.1m, which compares to a valuation of 182.5m at the year end, 31 December 2014 Source: Hansteen Holdings Annual Report 2014 (note: Associates includes HPUT II, which has been sold as of May 2015) Financing and hedging arrangements Portfolio statistics as at 31 Dec 2014 Loan-to-Value: 41.1% Average cost of debt: 3.8% p.a. Interest rate hedging: 46% of debt swapped at an average rate of 0.95%; 19% of debt capped at an average rate of 2.14%; 15% of debt fixed (convertible) at a rate of 4.0% 20% of debt floating Currency hedging: 48% of net assets in Sterling 33% of net assets hedged against the Euro 19% of net asset unhedged Weighted average option 1.32/ 1 (vs. 1.42/ 1 currently) Convertible bonds: 100m convertible bond Issued during 2013, expiring 2018 Coupon rate of 4.0% Bonds can be converted at the option of the bondholder from 15 Jul 2016 Bonds may be converted before this date if HSTN s share price is more than 130% of the conversion price (currently 93.34p/share) Convert price adjusted for dividends to ordinary shareholders in excess of 3.0p/share p.a. Cantor Fitzgerald Europe Research 5

6 Hansteen Holdings 30 July 2015 About Hansteen Holdings About Hansteen Holdings The company Hansteen Holdings Plc a FTSE 250 real estate investment trust ( REIT ) with more than 1.6bn of real estate under management across the UK, Germany, Benelux and France. The company was launched on AIM on 29 November 2005, and moved to the LSE s Main Market in 2009, converting to a REIT shortly thereafter. Investment objective Hansteen s aim is to provide investors with consistent, high and realised returns from undervalued UK and European industrial property. Hansteen seeks to produce sustainable growth in its portfolio s rental income and occupancy through intense asset management initiatives which should lead to increased values. Hansteen then aims to realise and distribute these profits to shareholders. Investment policy / strategy Hansteen has a buy, work and sell business model. HSTN aims to buy assets when they are at a relatively low point both in relation to the property cycle and at the asset level. In particular, Hansteen likes to buy properties with a significant vacant element. The managers can then apply their particular brand of intensive management to increase the occupancy, increase the rent and reduce the irrecoverable costs. Ideally, Hansteen then crystallise the value added at a relatively strong point in the cycle. For example, in the years from 2008 to 2013 the markets were both depressed and distressed. During that period Hansteen acquired 1.6bn of property and sold 649.0m from the owned or co-owned portfolio. The acquisition prices paid were low and in virtually all cases the acquisitions were directly or indirectly from banks that had taken control following a borrower defaulting on a loan. A number of those assets have since been turned around and sold for significant profit. Senior management team Ian Watson has been Joint Chief Executive of Hansteen since incorporation in Ian qualified as a solicitor with Gouldens and was a Founder Director and Joint Chief Executive of Ashtenne Holdings Plc from 1989 to Morgan Jones has been Joint Chief Executive of Hansteen since incorporation in Morgan qualified as a chartered accountant with Touche Ross and was a Founder Director and Joint Chief Executive of Ashtenne Holdings Plc from 1989 to Richard Lowes joined Hansteen on 1 January 2006 as Chief Financial Officer and Company Secretary. Prior to this he worked in a similar role for Ashtenne Holdings Plc between 1997 and 2005 and as Finance Director of Trafalgar House Property Limited and a director of Ideal Homes Holdings Plc from 1988 to Management costs In line with the company s remuneration policy, the key elements of the 2015 remuneration package for the Executive Directors are: a) fixed pay/benefits, b) variable annual pay, and, c) variable long term pay share based incentives under the Performance Share Plan ( PSP ) and the Founder LTIP (see page 7). Fixed pay/benefits: Ian Watson salary = 420,000 Morgan Jones salary = 420,000 Richard Lowes salary = 270,000 6 Cantor Fitzgerald Europe Research

7 About Hansteen Holdings Hansteen Holdings 30 July 2015 Variable annual pay: The maximum potential bonus is limited to 75% of base salary The bonus criteria for 2015 include four elements: Target Performance Measure % of Award Financial Targets (up to 35% of award) Occupancy/Cost Efficiency Targets (up to 25% of award) Corporate Target (up to 20% of award) Normalised Income Profit before tax per share from 6.9p to 7.5p (pro-rata) to achieve full award. NormalisedTotal Profit before tax per share from 6.9p to 9.2p (pro-rata) to achieve full award. The occupancy target range is a net improvement of 60,000 square metres to 120,000 square metres (prorata). The cost efficiency target range is an administrative expenses/rent ratio of 15.0% to 16.0% (pro-rata). Submit detailed business plans to the Board for all the main regions (UK, Germany and Benelux) and implement approved strategy Optimise liability strategy in support of the agreed approach to the regional business plans Review of foreign exchange hedging policy Up to 15% Up to 20% Up to 12.5% Up to 12.5% Up to 20% Discretionary Element (up to 20% of award) Based on overall performance. Up to 20% Source: Hansteen Holdings Annual Report 2014 Source: Hansteen Holdings Annual Results 2014 Variable long term pay: For 2015, each Executive Director is awarded nil-cost share options under the PSP with a value at grant of 75% of his base salary. The award will vest based on two separate performance conditions: 50% will vest by reference to the Group s TSR ranking and 50% by reference to the Group s EPRA Net Asset Value ranking, in each case relative to a comparator group over a three-year performance period. Awards that meet the performance conditions are exercisable in three equal annual instalments following the end of the performance period. The comparator group is determined by the Remuneration Committee and comprises a peer group of companies in the property sector. The percentage of the award that vests is subject to a schedule (see table on the left). Founder long-term incentive plan ( LTIP ) The LTIP is based on the growth of EPRA NAV plus dividends, which was put in place for the Joint Chief Executives at the time of the initial flotation in 2005 and which has not paid out to date. However, if the current performance continues until the end of 2015, the joint Chief Executives will receive a significant reward. The potential award is dependent on the performance over three year periods; the current award period runs from 1st January 2013 to 31st December 2015 Hurdle/minimum return to shareholders of NAV growth + dividend = 110.7p/share To the extent that growth in EPRA NAV plus dividends exceeds 10% per annum compound over three years, the Joint Chief Executives will each receive shares equating to 12.5% of the out-performance. Cantor Fitzgerald Europe Research 7

8 Hansteen Holdings 30 July 2015 About Hansteen Holdings Dividend policy The Board is committed to a prudently progressive dividend policy reflecting the strong and growing cash flow generated by the business. HSTN have paid a covered dividend every year since the first dividend distribution in 2006 and during that period, the dividend has increased by 66.7%. In 2014, Hansteen took advantage of a strong investment market to sell 315.3m of property from the owned or co-owned portfolio, crystallising profits of 26.1m over the 31 December 2013 valuation and 47.7m over gross acquisition cost. This prompted the Board to pay a special dividend of 3.0p per share in May Hansteen Holdings profit and dividend track record, since inception Source: Hansteen Holdings Annual Report 2014 Gearing policy Net debt was 416.3m at 31 December 2014 (2013: 432.2m). Debt includes a mark-to-market adjustment of 18.4m (2013: 16.2m) for the convertible bond. Excluding the mark-to-market adjustment of the convertible bond, net debt to property value at 31 December 2014 was 41.1% (2013: 49.3%) and net debt to shareholders equity at 31 December 2014 was 58.8% (2013: 75.0%) reflecting Hansteen s continued policy of maintaining gearing at a prudent level. 8 Cantor Fitzgerald Europe Research

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