M E R C E R W E B C A S T

H E A L T H W E A L T H C A R E E R M E R C E R W E B C A S T T H I R D Q U A R T E R 2 0 1 7 M A R K E T O U T L O O K July 25, 2017 Anthony Brown US Director of Strategic Research Paul Kolevsohn Head of North American Real Estate

E Q U I T I E S M A R C H E D H I G H E R I N Q 2 Intl Sm-Cap Stks Emerg Mkt Stks Intl Large-Cap Stks Emerg Mkt Debt (Local) US Large-Cap Stks Global REITs Global Fixed (unhedged) US Mid-Cap Stks US I/G Corp Bonds US Small-Cap Stks US High Yield Bonds US Treasuries US MBS Funds of Hedge Funds T-Bills US TIPS Commodity Futures Natural Res Stks Source: Datastream -7.1 Second Quarter Performance (%) -3.0-0.4 1.2 0.9 0.8 0.2 3.1 3.0 2.9 2.7 2.5 2.5 2.2-8 -6-4 -2 0 2 4 6 8 10 3.6 6.3 6.1 8.1 Past performance is no guarantee of future results. Please see Important Notices for further information. MERCER 2017 1

S M A L L - C A P S A N D I N T E R N A T I O N A L S H A V E L E D O V E R T H E P A S T 1 2 - M O N T H S US Small-Cap Stks Emerg Mkt Stks Intl Sm-Cap Stks Intl Large-Cap Stks US Large-Cap Stks US Mid-Cap Stks US High Yield Bonds Funds of Hedge Funds Emerg Mkt Debt (Local) US I/G Corp Bonds Global REITs T-Bills US MBS US TIPS US Treasuries Natural Res Stks Global Fixed (unhedged) Commodity Futures Source: Datastream -4.1-6.5 12-Month Performance (%) -0.1-0.6-2.3-2.6 2.3 1.1 0.4 6.5 6.4 12.7 17.9 16.5 20.3 24.6 23.7-10 -5 0 5 10 15 20 25 30 23.2 MERCER 2017 2

Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 T R U M P T R A D E S C O N T I N U E D T O R E V E R S E 9% Currencies -18% 1.04 GS High Tax Rate Basket vs. S&P 500 High Tax Rate Outperforms 6% -12% 1.02 1.00 3% -6% 0.98 0% 0% 0.96-3% -6% US Trade Weighted Dollar- Major Currencies (LHS) Mexican peso (RHS, Inverted) 6% 12% 0.94 0.92 0.90 S&P 500 Outperforms Source: Bloomberg Source: Goldman Sachs, Bloomberg MERCER 2017 3

3/31/2015 6/30/2015 9/30/2015 12/31/2015 3/31/2016 6/30/2016 9/30/2016 12/31/2016 3/31/2017 6/30/2017 3/31/2016 6/30/2016 9/30/2016 12/31/2016 3/31/2017 6/30/2017 Percentage change T H E G L O B A L E C O N O M Y G A I N E D M O M E N T U M Consensus GDP Growth Forecasts 4.0 2017 Forecast 2018 Forecast 3.5 3.0 2.5 United States 2.0 1.5 1.0 United Kingdom Eurozone 0.5 0.0 Japan Source: Bloomberg Month of Forecast MERCER 2017 4

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Dec-07 = 1 E A R N I N G S O U T L O O K H A S I M P R O V E D, B U T V A L U A T I O N S A R E R I C H 1.4 Forward Earnings Estimates (Local Currencies) 45 Shiller P/E (10y Average Real Earnings) 1.2 40 35 1.0 30 0.8 25 20 0.6 15 0.4 US Eurozone UK Japan 0.2 Emerging World 10 MSCI US 5 MSCI EASEA (EAFE ex-japan) 0 Source: Datastream Source: Datastream, MSCI, Mercer MERCER 2017 5

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 (%) (%) F R O T H I N E S S A L S O E V I D E N T I N C R E D I T 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Investment-Grade Corporate Bond Credit Spread OAS Median OAS Quality Adjusted Median OAS 20 15 10 5 0 High Yield Bond Option Adjusted Credit Spread OAS Median OAS 0.0-5 Source: Bloomberg, Mercer Source: Bloomberg MERCER 2017 6

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 H A V E I N V E S T O R S B E C O M E C O M P L A C E N T? 40 35 30 25 20 15 VIX 40 35 30 25 20 15 Implied Volatility on S&P 500 Options 10 5 0 10 5 0 SPX 80% 1Y SPX 90% 1Y SPX 110% 1Y Source: Bloomberg Source: Datastream MERCER 2017 7

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 (%) T H E C O S T O F T A I L R I S K I N S U R A N C E H A S D E C L I N E D 8 Cost of 1Y Puts on the S&P 500 Protection Beyond 20% Loss 7 6 5 4 3 2 1 0 Source: Parametric, Bloomberg MERCER 2017 8

1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 (%) (%) F E D P O L I C Y : M A R K E T S T I G H T E N I N G E X P E C T A T I O N S S T I L L B E L O W T H E F E D S 3.5 Expectations for Fed Funds Target Rate 10 Fed Funds Rate 3.0 8 2.5 6 2.0 1.5 1.0 4 2 0-2 0.5 FOMC Median Market 0.0 Current 12/31/2017 12/31/2018 12/31/2019 Long-Run Source: Bloomberg -4-6 Estimated Neutral Real Rate Effective Real Fed Funds Rate Source: Bloomberg, Federal Reserve Bank San Francisco MERCER 2017 9

1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 1993 1996 1999 2002 2005 2008 2011 2014 2017 (%) (%) F E D P O L I C Y : L A B O R M A R K E T T I G H T, B U T I N F L A T I O N M O V E D L O W E R 12 Unemployment Rate 4 Inflation Rolling 12-months 10 8 3 6 2 4 1 2 0 0 Source: Bloomberg Source: Bloomberg Core CPI Core PCE Deflator MERCER 2017 10

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 Relative to Geometric Mean (%) I S T H E D O L L A R B U L L M A R K E T O V E R? 3.5 3.0 Global 10y Bond Yields Germany UK US Japan US Dollar - Real Effective Exchange Rate (Major Currencies) 50 40 2.5 30 2.0 1.5 20 1.0 10 0.5 0 0.0-10 -0.5-20 Source: Bloomberg Source: Bloomberg MERCER 2017 11

C O N C L U S I O N S Macro environment remains supportive Global growth solid Earnings growth accelerating Monetary policy remains easy Global equities are expensive Valuations especially rich in the US More upside potential from non-us and emerging market equities Risks to the outlook Fed policy China tightening US policy Use strong performance as opportunity to rebalance Continue to diversify, seek alpha MERCER 2017 12

R E A L E S T A T E M A R K E T S U M M A R Y ( 3 1 M A R C H 2 0 1 7 ) Moderate economic growth with low interest rates, punctuated with bouts of pessimism and volatility the factors that have characterized the world economy for the past few years are likely to continue in 2017, supporting moderate growth in commercial rents and investment sales volume globally Core Non-Core A T T R A C T I V E N E S S US UK Value-Add Opportunistic High-Yield Debt Maturing legacy GFC loans and tighter regulations on traditional lenders in the US continue to provide opportunities in high-yield private debt and stressed equity investments. Over a 2-3 year investment period we expect value-add and opportunistic transactions to become more widespread as the market descends from its cyclical peak. Strong current income in non-core remains vital.! Value-Add Opportunistic High-Yield Debt A lack of development in some regions, coupled with low borrowing costs provide a bedrock to Opportunistic strategies. Brexit has tempered the market somewhat and values have fallen which may result in some opportunities for good buying. However, this needs to be balanced against the risk of a weaker occupier market. Value-Add Opportunistic High-Yield Debt Europe Low development pipelines and improving fundamentals provide opportunities in many mature markets. Supply of undermanaged stock is sufficient and from various sources. Value-Add Opportunistic High-Yield Debt 1Q16 cap rate Current cap rate 10 yr cap rate range Source: NCREIF, RCA Asia Opportunistic and niche real estate strategies are the region s best idea because the talent pool and experience are deeper in these areas. Value-add is appealing but most managers lack scale. Securing quality core assets remains a challenge for the expanding universe of core managers. MERCER 2017 13

US Strategies Mercer s current DAA position/view (3/31/17) Position/view last time (if changed) (12/31/16) Extremely Unattractive Neutral Attractive Extremely Unattractive Attractive Core Value-Add Opportunistic HY-Debt Low global interest rates and US safe haven status continues to attract capital to Core Real Estate. Although transaction volumes have slowed. Improvement in property fundamentals present opportunities to fix broken capital structures and under managed property. However, exit options becoming less robust. Speculative new developments are becoming increasingly risky at this point in the cycle. Position in capital stack and high income providing protection at this point in cycle Low lending rates continue to be favorable for real estate investment. Tighter lending regulations reduce excessive risk. Deal flow in primary markets are scarce, but some opportunities exist. While secondary markets present opportunities, caution should prevail late in the cycle. Distressed opportunities are becoming more widespread with cap rates at historical lows and the broader economy becoming more uncertain. Tighter regulations for traditional lenders creating opportunity for private lenders to fill the gap in the capital stack. Property fundamentals driving NOI growth. Cap rates are at historical lows and core has passed its cyclical peak. Returns reverted back to the mean 7%-9% net. Record asset prices will lead to distressed opportunities as market comes off cyclical peaks. Record asset prices will lead to distressed opportunities as market comes off cyclical peaks. Wave of pre-gfc loan maturities creating re-financing opportunities through 2018. MERCER 2017 14

Billions M A C R O - E C O N O M I C V I E W GDP growth, expected to remain stable in the 2% range. While this is mediocre growth, it continues to support solid property fundamentals. Given the potential for rising long-term interest rates, moderation in total return is expected to continue. We expect core real estate total returns to average 6%-8% over the next one to three years, on par with historical levels. Total annual US capital flow decreased 9.6% from 2015 to 2016. 1Q2017 capital flow decreased 18.3% from 1Q2016. Lingering capital market tailwinds continue to keep real estate valuations at all-time highs, but this trend has moderated indicating that private real estate valuations may become constrained. NOI growth will become the primary driver of total real estate returns as appreciation normalizes. Given the current spread and steady property fundamentals, we continue to believe that a sharp increase in cap rates is unlikely. Interest rates will likely rise slowly, which will prolong the low cap rate environment through 2017. While the recovery has shown depth in gateway markets, it has now reached a wider breadth. There is increasing evidence that investors are venturing into non-major markets at an increased rate to meet their return objectives. After several years of double digit returns we have entered a mature part of the cycle. However, real estate fundamentals remain sound which causes us to remain positive towards the US real estate market. 9% 8% 7% 6% 5% 4% 3% 2% 1% Spread Mar-11 Mar-10 Mar-09 Mar-08 Mar-07 Mar-06 Mar-05 Mar-04 Mar-03 Mar-02 NCREIF Market Value Wtd Cap Rates Mar-12 Mar-17 Mar-16 Mar-15 Mar-14 Mar-13 10-Yr Treasury $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 Mar-08 Mar-09 Total Capital Flow Mar-14 Mar-13 Mar-12 Mar-11 Mar-10 Total Capital Flow ($) Mar-15 Mar-16 Mar-17 4% 3% 2% 1% 0% Mar-15 Jun-15 Core Property Returns Sep-16 Jun-16 Mar-16 Dec-15 Sep-15 Income Appreciation Dec-16 Mar-17 Source: Bureau of Economic Analysis, NCREIF, US Treasury MERCER 2017 July 25, 2017 15

% of Inventory Year-over-year rent increase% P R O P E R T Y M A R K E T Commercial real estate fundamentals continue to exhibit strength so far during 2017. According to NCREIF, 2016 occupancy levels and NOI growth were at highest levels since 2001. Pockets of increased supply will continue across the US during 2017, but forecasts project construction activity to level off or decline during 2018. With supply at reasonable levels, even slight increases in tenant demand continue to drive rents and occupancy upward in 2017. As a result, year-on-year rental growth for the commercial sector is forecasted to stabilize in the 3% range across most property types. Leverage at the property level remains at relatively modest levels. Real estate fundamentals continue to be balanced which we believe should continue. Solid real estate fundamentals will offset a moderating capital market picture for the real estate asset class. 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Inventory Change 2014 2015 Multifamily Retail ST Average (2014) 2016 2017F 2018F Office Industrial 7% 6% 5% 4% 3% 2% 1% 0% Year-over-Year Yearly Rent Change % 2014 2015 Source: Reis, Real Capital Analytics, NCREIF MERCER 2017 16 July 25, 2017 2016 2017F 2018F Multifamily Office Retail Industrial 94% 93% 92% 91% 90% 89% 88% 87% 86% 85% Mar-05 NPI Occupancy and NOI Growth Mar-07 occupancy Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 25% 20% 15% 10% 5% 0% -5% -10% NOI YoY Growth (4Q Ave) RT Axis2

S U M M A R Y A N D B E S T I D E A S US property is still an attractive asset class across the risk spectrum, but risk management is becoming more vital as the macro-economy is well into the mature phase of the cycle. Low supply and inventory will continue to boost real estate fundamentals. Interest rates will slowly rise but should be offset by moderate economic growth which will drive property fundamentals such as rents and occupancy. Discipline should be employed as investors increasingly look for opportunities outside primary markets; market and manager selection is essential. We currently recommend defensive strategies such as real estate debt and equity investing with strong in-place income. Additionally, to hedge against increasing macro headwinds, real estate portfolios should be diversified between GDP-driven strategies and those that that are de-linked from the broader economy (i.e., medical office, senior living, apartments, etc). Debt: Traditional lending sources continue to be constrained, causing first mortgages to have lower loan-tovalue ratios. To fill the gap in the capital stack, property owners must find other sources of capital. Select real estate funds dedicated to the high-yield debt space are producing strong returns with limited downside risk. Value-Add/Opportunistic: Maturing loans, especially CMBS, are causing assets to have both capital and property distress. Opportunistic funds are acquiring these assets at an attractive basis and fixing the deficiencies. MERCER 2017 17 July 25, 2017

Q U E S T I O N S? Anthony Brown Paul Kolevsohn St. Louis Atlanta +1 314 982 5741 +1 404 442 3462 anthony.brown@mercer.com paul.kolevsohn@mercer.com QUESTIONS Please type your questions in the Q&A section of the toolbar and we will do our best to answer as many questions as we have time for. To submit a question while in full screen mode, use the Q&A button, on the floating panel, on the top of your screen. FEEDBACK Please take the time to fill out the feedback form at the end of this webcast so we can continue to improve. The feedback form will pop-up in a new window when the session ends. CLICK HERE TO ASK A QUESTION TO ALL PANELISTS MERCER 2017 18

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