GLOBAL. Bears reflected in bond yields 31 August 2017 MARKET OVERVIEW

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1 UK Japan USA Index Australia Hong Kong Singapore Europe Canada SA GLOBAL MARKET OVERVIEW After ending the month of July 1.9% higher, Global REITs partially gave back the returns and closed 0.16% lower in August and 5.93% higher for the full year. Equities continued to outperform and closed 0.20% higher this month and 14.29% in the green on a year-to-date basis. Chart 1: Monthly returns per region 3% 2% 1% 0% -1% -2% -3% -2.1% -0.8% -0.4%-0.2% 2.5% 0.2% 0.8% 1.1% 1.3% 1.4% In a rather uneventful month, US GDP was revised up from 2.6% to 3%, the fastest pace this year. Importantly, US consumption was the biggest driver, growing 3.3% higher in Q2. On the other hand, the world s largest economy missed jobs estimates of jobs at for the month of August. US unemployment remained low at 4.4%. Bond yields continue to fall with US 10-year Treasuries dropping from 2.30% to 2.11% over the month, mostly driven by exogenous factors as North Korea fired missiles over Japan and announced improved nuclear weapon capability. By region the UK lagged peers by closing 2.5% in the red followed by Japan and the USA that closed -0.8% and -0.4% respectively. SA REITS, up 2.5% in $ led this month (USDZAR closed 1% higher) followed by Canada (1.4%) and Europe at 1.3%. Other Index outperformers include Singapore (1.1%), Hong Kong (0.8%) and Australia (0.2%) that all posted positive total returns for the month. Source: Bloomberg, as at 31 August 2017 Key Points in this report Bond yields fell 19bps in August from 2.3% to 2.11%. Despite this REITs posted negative total returns of -0.16% for the month, up 6% this year so far. Equites rose 0.2% to close 14% higher on a year to date basis. US GDP was revised up from 2.6% to 3% but jobs data missed estimates of 180k at 156k for the month, taking the US unemployment rate to 4.4%. exogenous factors drove bond yields this month as North Korea fired a missile over Japan and threatened improved nuclear weapon capability. This month we focus on German residential names that reported Q2 results. FFO growth was in the double digits while like-for-like (LFL) rents rose by around 3.5% with management teams guiding for acceleration next year. Global REITs have delivered around 6% in returns this year, in line with our full year estimate of 7%. They now trade at a 4.1% yield - with the 19bps fall in bond yields and 242bps discount to bonds, we see more value in the sector at current levels. 1 NIMBLE WISDOM GLOBAL 31 AUGUST 2017

2 The US economy grew faster than initially expected in Q2 and GDP was revised up to 3.0% from 2.6%, the strongest growth in 2 years. Personal consumption expenditures which makes up approximately 69% of the US economy grew at 3.3%. However, this was at the expense of a drop in the saving rate from 3.9% to 3.7%. Unexpectedly, the US economy only created jobs in August compared to the markets estimate of jobs. The labour participation rate remained flat at 62.9% and the unemployment rate increased 10bps to 4.4%. The growth in hourly earnings remained flat at 2.5% y/y, marginally lower than the market anticipated growth rate of 2.6%. In August both the US Fed Chair Janet Yellen and ECB President Mario Draghi delivered speeches to the annual central bank symposium in Jackson Hole (Wyoming, USA). The market expected strong insights on policy direction, however both speakers focused more on the importance of financial regulation, international standards and free trade. This forced the market to wait for clearer policy signals in the future and thereby allowing central bankers to maintain policy optionality. Furthermore, Draghi s failure to comment on the strong Euro, especially after the ECB minutes revealed its concerns, added to the bullish mood and resulted in the Euro strengthening to above 1.19/$. REIT news and results: On 10 August 2017, single-family-residential (SFR) focused REITs Invitation Homes (INVH US) and Starwood Waypoint (SFR US) announced an agreement to merge in a stock for stock transaction. Invitation Homes will retain its name and the merged entity will be the largest single-family-rental company with approximately homes in 17 metropolitan areas across the United States. The merger announcement was well accepted by the market as portfolio overlap among the two companies is 83% and should drive operating efficiencies and organic growth. Each SFR share will be converted into INVH shares resulting in INVH shareholders owning 59.1% of the combined company and SFR shareholders owning 40.9%. The deal is expected to close by the end of On the results front, this month we focus on German residential REITs where the fundamentals continue to improve with demand far outstripping supply. Despite our constructive view we do argue that the valuations are no longer in obvious territory and with low vacancies (2-3%), tight acquisition yields due to increased competition, and marginal decreases in already low funding costs the level of FFO per share growth will slow down next year towards low double-digit growth. Interestingly we see like on like rents accelerating by around 50bps across the board to between % with outliers being Ado properties guiding at least 5%. 2 NIMBLE WISDOM GLOBAL 31 AUGUST 2017

3 Company Ado Properties Deutche-Wohnen Grand-City Properties LEG Immobillien Vonovia Results comment Central Berlin focused ADO grew FFO by 11% driven by sector leading LFL rent growth at 5.4%. Post balance sheet date, management acquired a portfolio at 205m. NAV grew 9% to driven by 7% value uplift from the core portfolio. Balance sheet LTV remained low at 33% fixed for 5.1 years at a CoD (Cost of debt) of 1.9%. Ado has increased guidance by 3.3% and stated that LFL rents will likely rise by at least 5% over the next 12 months. Berlin biased (74% of NOI) residential company DWNI showed 11.1% FFO growth with LFL rents rising 3.2%. Guidance has been raised at 4% LFF rents for 2018 with the Berlin portfolio showing at least 5% growth. Vacancies continued to fall, down 10bps to 1.9%. DWNI announced a modest 90m capex program at a 12% yield but is planning to build 3100 units over the next 2-3 years. NAV was up 6% driven by 5.6% value increases in the portfolio. DWNI s LTV remains conservative at 36.9% with a CoD at 1.4%, 87% hedged for 8 years. Grand City s strategy is to buy poorly managed, under-let buildings and spend management time upgrading and letting them to deliver market beating RoEs. The first half results showed 10% FFO growth which was driven by a 230bps rise in occupancies to a 5% vacancy rate. LFL lagged peers significantly at 2% with management providing little visibility on this going forward. GYP acquired 1000 units over the year which was expected as acquisition yields have fallen in Germany. At 3%, EPRA NAV growth lagged peers over the period. Balance sheet LTV fell to 35% with the CoD falling 30bps to 1.5%, 98% hedged for 7.5 years. North Rhine-Westphalia focused player LEG reported 7.8% FFO growth and 9.4% NAV growth driven by 6% value upliftment. LFL rents rose 3% as vacancies rose slightly to 3.4% (from 3.1%) with management guiding around 3.5% for the following year. LEG acquired units over the period for 238m at a 4% yield. LEG s balance sheet is in better shape with an LTV of 45.3% (from 49%) with the CoD falling further from 2.09% to 1.85%, 94% fixed for 9.4 years. Management has guided 8.7% FFO growth for 2017 and 9.1% for Large cap player Vonovia reported a sector leading 15.7% FFO growth with 3.7% LFL rent growth and management guided 4% for next year. Aside from the Conwert acquisition, VNA has committed 730m on its internal capex program to upgrade apartments at a yield of 7%. NAV rose 7.6% over the period driven by a 5.2% uplift in the portfolio value. The balance sheet continued to de-gear with LTV down 80bps to 43.2% at a CoD of 2.1%, 97% fixed for 6.7 years. VNA is likely to see its CoD falling as 1.5bn in debt (10% of total) comes up for refinancing in NIMBLE WISDOM GLOBAL 31 AUGUST 2017

4 LOOKING FORWARD For many quarters, we have elaborated on the fact that at the current yields of 4.1%, global REITs trade at a 242bp discount to bonds while the long-term average is closer to bps. The chart below shows the same relationship when US REITs (64% of the Index) are compared to US 10-year bonds. Chart 2: US REIT forward yield versus US 10y bonds Source: Bloomberg, NAREIT, Raymond James The wider-than-normal discount is driven by two factors in our view, 1) a broadly expected view that current 10-year bond yields are artificially low (due to easy monetary policies globally) and 2) Global REIT earnings are likely to slow down over the next 2-3 years. We cannot argue against these points as our positioning is for a rising rate environment, but we argue that while earnings will slow down due to global REITs being later in the cycle, earnings growth will be around 5-6% per annum over the next few years, much better than what we think values are pricing in. On the bond yield front, rates should rise due to higher inflation and potential tapering in Europe. In the US, markets have lost faith in the Trump administration, but any win either on the tax or infrastructure front, could swing sentiment quickly and investors should not be complacent about this eventuality. This month bond yields fell 19bps while REIT share prices were modestly negative, implying that the REIT market is discounting higher bond yields already. In our view, this provides investors sufficient margin of safety for bond rate normalization at currently levels we expect total returns of around 8-9% per annum in USD. 4 NIMBLE WISDOM GLOBAL 31 AUGUST 2017

5 Evan Jankelowitz BCom (Hons), CFA Mohamed Kalla BCom, CFA Kundayi Munzara BSc (Hons), CFA DISCLAIMER The information contained in this report is confidential and may be subject to legal privilege. Access to this information by anyone other than the intended recipient is unauthorized. This report is in its entirety specifically intended for use by institutional clients, and is not intended for use and should accordingly not be relied upon by private individuals whether clients or otherwise. If you are not the intended recipient, you may not use, copy, disseminate, distribute and/or disclose the report or any part of its contents or take any action in reliance on it. If you have received this report in error, please notify us immediately by or telephone on (+27-11) and thereafter immediately destroy and/or delete the report. Sesfikile Capital ( Sesfikile ) makes no representations and gives no warranties of whatever nature in respect of the report and its contents including but not limited to the accuracy or completeness of any information, facts and/or opinions contained therein. The report is provided by Sesfikile solely for the recipient s information, and all rights in and to the report including copyright and other intellectual property rights therein are proprietary to Sesfikile. Accordingly, the report may not be reproduced, distributed in any form and/or disseminated without the prior written consent of Sesfikile. 5 NIMBLE WISDOM GLOBAL 31 AUGUST 2017