CORPORATES

CREDIT OPINION S.A. 24 June 2021 Update following rating affirmation

Update Summary Grand City Properties S.A.'s (Grand City) Baa1 issuer rating primarily reflects its focus on stable residential activities within the German regulated housing framework; Grand City's very good liquidity, long-dated debt maturity profile, and good access to a variety of funding sources, accompanied with a high level of unencumbered assets; the geographical RATINGS diversification of its property portfolio across multiple German metropolitan areas, with Grand City Properties S.A. continued, but moderating, rent increases; and the company’s reduced acquisition speed of Domicile Luxembourg, turnaround portfolios, resulting in continuing improvements in vacancies. Luxembourg Long Term Rating Baa1 These positives are partly offset by the company's still-elevated but improving vacancy rate; Type LT Issuer Rating - Dom Curr its diversification into London as a non-regulated residential market; and the general concern Outlook Stable for the German market of further tightening rent regulations in combination with increased environmental-related spending requirements. Please see the ratings section at the end of this report for more information. The ratings and outlook shown Grand City is solidly positioned in the Baa1 rating category, despite an elevated debt/assets reflect information as of the publication date. ratio of 46% as of March 2021, given the unusually high cash position of the company. We expect the company to slowly reduce its cash balance by acquiring own shares and further assets. We expect gross debt/assets to moderately decline, the fixed-charge cover to remain Contacts stable, and net debt/EBITDA to increase with the use of cash for the acquisition of assets and Federico Zugaro +49.69.7073.8654 share buy backs. Associate Analyst [email protected] Exhibit 1 Anke Rindermann +49.69.70730.788 Debt/gross assets elevated due to the substantial cash and cash equivalents amount Associate Managing Director Moody's-adjusted debt/gross assets and EBITDA/fixed charges

[email protected] Moody's-adjusted Debt/Gross assets (LHS) Debt/Gross assets downgrade trigger Debt/Gross assets upgrade trigger Moody's-adjusted EBITDA/Fixed charges (RHS) CLIENT SERVICES 50% 6.0x 42% - 45% Americas 1-212-553-1653 45% 5.5x Asia Pacific 852-3551-3077 40% 5.0x Japan 81-3-5408-4100 35% 4.3x - 4.7x 4.5x EMEA 44-20-7772-5454

30% 4.0x 2016 2017 2018 2019 2020 LTM Mar-2021 Moody's 12-18 Month Forward View [1]

[1] This represents Moody's forward view, not the view of the issuer. Source: Moody's Financial Metrics™

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Credit strengths » Focus on the stable and regulated rental residential property market in

» Moderate leverage

» Very good liquidity, a long-dated and extending debt maturity profile, and good access to a variety of funding sources, accompanied with a high level of unencumbered assets

» Good geographical and income diversification in its residential property portfolio across multiple German metropolitan areas, with continued while moderating rent increases

Credit challenges » Potential tightening of regulations as a result of social and political pressure on the housing market

» Still-elevated vacancy rate compared with that of peers

» Diversification into London as a non-regulated residential market

» Investment requirements for improved energy efficiency conflicting with increased sensitivity around rental increases

Rating outlook The stable outlook on Grand City's rating mainly reflects our expectation of continued robust operating performance and stable financial metrics over the next two years. The stable outlook also reflects our expectation of an unchanged favourable outlook for the German residential property sector as a whole. Factors that could lead to an upgrade » Strong operating performance, with a further reduction in vacancies and high rental growth

» Debt/gross assets sustained below 40%, accompanied by a corresponding trend in net debt/EBITDA, and a corresponding tightened financial policy

» Fixed-charge cover sustained above 4.5x

» Maintenance of solid liquidity, including a high unencumbered asset pool

» Unchanged favourable outlook for the German residential property sector as a whole

Factors that could lead to a downgrade » Debt/gross assets sustained above 45%

» Fixed-charge cover sustained below 3.5x

» Further transitioning of the portfolio towards unregulated markets, with more immediate supply-and-demand responses to rental income and higher market value volatility

» Unfavourable changes in the outlook for the German residential property sector as a whole, potentially driven by unfavourable regulatory changes

» Weakening operating performance (rental growth or vacancy rates)

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

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Key indicators

Exhibit 2 Grand City Properties S.A.

[1] This represents Moody's forward view, not the view of the issuer, and unless noted in the text, does not incorporate significant acquisitions and divestitures. All figures and ratios are calculated using Moody’s estimates and standard adjustments based on audited accounts. Source: Moody's Financial Metrics™

Profile Grand City Properties S.A. (Grand City) is a publicly listed real estate company that owns, manages and acquires residential properties, mainly in Germany. As of March 2021, the company owned more than 60,000 residential units, mainly located in the metropolitan areas of , North Rhine-Westphalia, Dresden, Leipzig, Halle, Nuremberg, Munich, Mannheim, Frankfurt, Bremen, Hamburg and London. The portfolio generated net rents of €91 million in the first three months of 2021, or €343 million on an annualised basis.

Exhibit 3 Nearly half of Grand City's portfolio is located in Berlin and London Portfolio split by market value as of 31 March 2021

Others 11% Nuremberg/Fürth/Munich North Rhine-Westphalia 3% Hamburg/Bremen 17% 5%

Mannheim/Kaiserslautern/Frankfurt/Mai nz 5%

Berlin 25% London 21%

Dresden/Leipzig/Halle 13%

Source: Company reports

Grand City is registered in Luxembourg and is listed on the , with a market capitalisation of €4 billion as of 15 June 2021, trading at a small discount to net asset value. Detailed credit considerations Stable operating environment because of its focus on regulated rental housing activities in Germany, diluted through investments in London Roughly 79% of Grand City's portfolio is invested in German residential assets. The German residential sector is one of the most stable asset classes in the European real estate industry, with high demand and limited supply supporting rents and values. While the potential for tighter regulation is a threat to property values and cash flow growth, it will also probably intensify the supply and demand imbalance.

The German rental market is highly regulated: reletting rents and rent increases for existing tenants are capped with reference to a local index (Mietspiegel) calculated by local authorities, reflecting the location and quality of the units. Rent increases are mostly capped to

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20% over a period of three years, or 15% in tense markets (5% a year; allowance made for modernisation, the cap on which is 8% per year). From a longer-term perspective, prices and rents for residential properties have been more stable in Germany than in any other large developed economy, even after taking into account recent increases. Since 1970, German house prices have increased broadly in line with inflation, but have never declined more than 3% in any given year.1

Average rents remain affordable despite recent rent and value increases. Nevertheless, affordability fluctuates in tandem with the absolute amount of household income, which exposes lower-income households in particular to higher rental cost-to-income ratios.

Grand City has accumulated a portfolio of €1.7 billion of residential assets in London. They are largely new, and do not represent high-end type of stock. Nevertheless the London investments dilute the strength of its traditional German operating environment. We favour markets with structural supply constraints that often come with regulation, which limits income downsides and reduces property value volatility, and the strength of the German residential debt funding market. On the positive side, London has also been a notoriously undersupplied market, which should support achievable rents and limit downside potential, despite recent volatility in rents and values. The total portfolio's location and property quality improves with the largely newly built London portfolio.

Good geographical and income diversification, with stable, although moderating, like-for-like rental growth The granularity of the portfolios owned by residential landlords enhances the stability of their revenue and cash flow, particularly in regulated markets, such as Germany. Grand City's portfolio is centred around North Rhine-Westphalia (17% by value), Berlin (25%), London in the UK (21%) and other areas in Germany.

Grand City's operating performance has been solid, as evidenced through slightly increasing occupancy (largely driven by lettings in London) and 1.8% rental growth as of Q1 2021. Nevertheless growth has moderated from historically 3% or above, alongside many other peers in the sector.

During the coronavirus crisis, the German residential rental sector has so far proven to be resilient as a consequence of both governmental intervention into the economy as well as the strong social security system. Grand City has elected not to pursue rental increases during the pandemic, and only a small number of tenants have elected to defer rental payments. Nevertheless, a medium- term increase in unemployment will translate into lower growth potential. The London portfolio experienced moderate rental income declines given more structural shifts in the market. Reported property values did not decline according to the company. We do expect the operational performance of the London portfolio to stabilise during 2021.

Exhibit 4 Grand City's like-for-like rental growth decreased in the last couple of years Like-for-like rental growth of German residential peers

Grand City (Baa1 stable) TAG Immobilien AG (Baa3 positive) SE (A3 negative) LEG Immobilien AG (Baa1 stable) (A3 stable) 6%

5%

4%

3%

2%

1%

0% 2015 2016 2017 2018 2019 2020 Q1 2021 Source: Companies' reports

High, although reducing, vacancies compared with those of peers Grand City's relatively higher vacancies partially stem from its strategy of buying undermanaged assets with higher vacancy rates. Given the reduced acquisition speed (in Germany) and the almost full letting of the London portfolio, vacancies will likely stabilise, although at a level higher than that of peers. The positive effect of Grand City's historical expansion is an increase in regional sub- portfolios to a sufficient scale, without exposing itself too much to any single new local market.

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Exhibit 5 Grand City's vacancy rate has improved significantly from 2015 but remains high within the peer group Vacancy rates, 2015-Q1 2021

Grand City (Baa1 stable) TAG Immobilien AG (Baa3 positive) Deutsche Wohnen SE (A3 negative) LEG Immobilien AG (Baa1 stable) Vonovia (A3 stable) 14%

12%

10%

8%

6%

4%

2%

0% 2015 2016 2017 2018 2019 2020 Q1 2020

EPRA vacancy rate for all companies, except for Vonovia (residential vacancy rate only). Source: Companies' reports

Despite the improvement in average vacancies achieved by the company over the past two years, vacancies remain higher than those of most peers. The trend in vacancies is clearly positive, and apart from a recent hike as a result of London acquisitions, vacancies continue to trend down.

Exhibit 6 Vacancy overall trends down, vacancy in London expected to further decline Area (000' Annualised net In-place rent Number of Value per Value (€m) EPRA vacancy Rental yield sqm) rent (€m) per sqm (€) units sqm (€) North Rhine-Westphalia 1,347 948 6.2% 69 6.3 13,342 1,420 5.2% Berlin 1,914 576 4.9% 55 8.1 7,821 3,321 2.9% Dresden/Leipzig/Halle 1,024 857 6.7% 51 5.4 14,687 1,195 5.0% Mannheim/Kaiserslautern/Frankfurt/Mainz 410 194 3.3% 20 8.4 3,292 2,112 4.8% Nuremberg/Fürth/Munich 234 98 4.8% 10 8.4 1,358 2,372 4.2% Hamburg/Bremen 367 274 5.6% 20 6.6 4,092 1,339 5.5% London 1,479 173 8.4% 61 32.3 3,088 8,540 4.1% Others 923 747 5.6% 57 7.0 12,617 1,238 6.1% Development rights and new buildings 447 Total 8,145 3,867 6.1% 343 7.8 60,297 1,990 4.5%

Source: Grand City's properties

Magnitude of potential medium-term value decline increases with rent multiples at record highs Declining values are a key credit concern for the European property sector. While there is currently no interest increase in sight, a normalisation of interest rates would lead to the end of a long risk-on sentiment. Hence, the investment cycle is more vulnerable and will react more quickly than the occupational markets that we expect to be performing better, especially in the residential sector in Germany. For Grand City and its peers, rent multiples have increased substantially for over a decade now and are at levels from where they may increase further in the next year or two, but are unlikely to sustain at those levels in the long run.

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Exhibit 7 In-place rent multiples remain high across the peer group, unaffected by COVID-19

2015 2016 2017 2018 2019 2020 Q1 2021

35.0x 32.7x

30.0x

24.2x 25.0x 22.2x 21.5x

20.0x 18.1x 17.4x 15.4x 13.9x 14.5x 15.0x 13.2x

10.0x Grand City (Baa1 stable) TAG Immobilien AG (Baa3 positive) Deutsche Wohnen SE (A3 negative) LEG Immobilien AG (Baa1 stable) Vonovia (A3 stable) Source: Companies' reports

At the same time, in a scenario of broad-based real estate yield increases, we expect the German residential sector to be less affected than other sectors, given its income stability and good debt funding through the German banking sector. Also, compared with the house prices in other European cities, the German residential sector is less risky. Despite recent price increases, house prices in Germany have historically been much more stable than those in any Organisation for Economic Co-operation and Development (OECD) country, including the UK.

Capacity against financial policies and leverage in line with the current ratings Grand City's Moody’s-adjusted debt/gross assets was 46% as of 31 March 2021, roughly stable compared to a year ago. The very high cash balance of €1.4 billion distorts the gross debt ratio. We expect the cash amount to reduce over time with either asset purchases, share buybacks or debt repurchases, while remaining high compared to peers. Combined with some moderate value growth, gross debt/total assets will reduce below 45% in the next 12-18 months.

Grand City has a publicly stated net loan-to-value (LTV) ratio target below 45%, compared with the reported 33% as of March 2021, highlighting the capacity under its policy for acquisitions. We expect the company to continue its prudent funding of acquisitions and maintain a high level of capacity against its financial policy. Grand City opportunistically disposed assets in the last 12 months and started to use part of the proceeds to buy back shares. The company will still remain well within its financial policy.

Given the continued yield compression in the sector, we closely monitor earnings-related measures. Grand City's fixed-charge cover has been solid at 4.4x for the 12 months ended March 2021, which will remain roughly constant. We will also monitor the development of net debt/EBITDA that stood at 12x for the 12 months ending March 2021. While we continue to focus on debt/assets for guiding potential rating changes, we are increasingly concerned when value- and earnings-related credit metrics diverge. As we expect GCP to deploy some of cash balance for acquisitions and share buy backs, we expect a moderate increase in net debt/EBITDA.

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Exhibit 8 We expect a moderately declining fixed-charge coverage ratio, but slightly increasing net debt/EBITDA following the recent portfolio recycling Moody's-adjusted net debt/EBITDA and EBITDA/fixed charges

Net Debt/ EBITDA EBITDA/Fixed Charges (RHS) 12.5x - 14x 14x 5.5x

12x 5.3x 4.9x 11.8x 11.9x 5.0x 11.5x 11.5x 11.6x 11.6x 10x 10.3x 4.8x 4.7x 4.5x 8x 4.5x 4.4x 4.4x 6x 4.3x - 4.7x 4.0x

4x 3.5x 2x

0x 3.0x 2015 2016 2017 2018 2019 2020 LTM Mar-2021 Moody's 12-18 Month Forward View [1]

[1] This represents Moody's forward view, not the view of the issuer, and unless noted in the text, does not incorporate significant acquisitions and divestitures. All figures and ratios are calculated using Moody’s estimates and standard adjustments based on audited accounts. Source: Moody's Financial Metrics™

Good liquidity, a long-dated debt maturity profile, and good access to a variety of funding sources, accompanied with a high level of unencumbered assets We score Grand City A for Liquidity and Access to Capital, which is the result of its good liquidity, proven access to debt and equity capital, and a diversified debt funding base. The company will only start experiencing refinancing needs in 2024 or later, assuming that some of the existing cash will be used for further acquisitions and share buybacks. The company continues to operate with a high cash balance, even though we expect the amount to reduce from the €1,410 million as of March 2021.

The company has repeatedly tapped the capital markets for equity and debt instruments in the last few years, which illustrates its solid access to capital. We particularly note its prudent approach of using the low interest environment and the flat interest rate curve to further extend its debt maturity profile, which reached 7 years as of March 2021.

Exhibit 9 Grand City’s debt maturities are long dated and well spread, with an average maturity of 7 years

Bank Debt Convertible Bond Straight Bonds 1200

1000

800

600 € million

400

200

0 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 ≥2034 Source: Company report

Similar to most German residential companies, Grand City has access to a strong German bank market for secured debt, which we view as a strength that substantially improves its access to capital. Even after stressing LTVs for potential value declines, a functioning banking market backed by Pfandbrief funding will likely be available to fund residential property portfolios in Germany.

Grand City’s debt arrangements include covenants set at different levels, with currently ample capacity. The covenants of the straight and convertible notes are as follows: leverage below 60%, an interest cover above 2x, secured debt/total assets below 45% and

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unencumbered assets/net unsecured debt above 125%. As of March 2021, the LTV ratio was 33%, implying a 45% capacity for value declines. The company reported interest cover of 6.2x, implying an interest cover buffer of 210%. ESG considerations We take into account the impact of environmental, social and governance (ESG) factors when assessing companies' credit quality. The risk factors impacting Grand City most are rental regulation that considers the social needs of the tenants, and the conflict with potential increases of environmental regulation and investment requirements driven by the goal to decarbonise the economy.

Rent affordability has declined in the past five years in Germany as a whole, with rental growth exceeding income growth, while still being affordable compared to other countries. We see a risk of increased regulatory interference after the September 2021 elections in Germany. Many parties have commented on intentions to further protect tenants from rental increases, with various suggestions being more or less formalised in election manifestos.

We still consider regulation as a credit positive for residential real estate companies as it limits incentives for excessive construction and speculation, as long as moderate rental growth remains possible. However, the political goal to moderate rental growth contrasts with the increased requirements to improve the energy efficiency of the housing stock. So far, Grand City has mostly focused on changing its energy mix towards renewable energy, and has put out a target to reduce carbon emissions by 40% until 2030 compared to the company's 2018 baseline.

We expect environmental regulation to also focus on the energy usage of the housing stock both on a national and on the EU level. One example that has been widely expected are CO2 taxes to be shared between landlords and tenants, but other obligations based on energy performance may follow. We expect this to result in increasing investment requirements that may not translate into rental growth. Some of Grand City's peers have already started larger investment programmes that partially aim to address the energy efficiency of the portfolio. We expect Grand City needs to increase its spending over the next years to avoid its assets falling behind market standards for larger operators.

Exhibit 10 Grand City has historically run a lower CAPEX programme than peers Maintenance expense and modernisation capital investment excl new construction (€/sqm)

70 Maintenance expenses CAPEX/Modernisation excl new construction 60

50

40

30

20 € per € per sqm

10

0 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2014 FY 2015 FY 2016 FY 2017 FY 2019 FY 2020 FY 2014 FY 2016 FY 2017 FY 2018 FY 2019 FY 2014 FY 2015 FY 2017 FY 2018 FY 2019 2021 Q1 2021 Q1 2021 Q1 2021 Q1 2021 Q1 Vonovia A3 STA Deutsche Wohnen A3 NEG Grand City Baa1 STA LEG Baa1 STA TAG Baa3 POS Source: Company reports

As a listed company, Grand City's financial policy is to keep its reported net LTV below 45%. The company has historically managed its credit metrics with substantial buffers. No other governance-related incidents have affected its rating historically.

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Methodology and scorecard The principal methodology used in this rating was our REITs and Other Commercial Property Firms rating methodology, published in September 2018. Grand City's assigned rating of Baa1 is in line with the scorecard indicated outcome of Baa1.

Exhibit 11 Rating factors Grand City Properties S.A.

REITs and Other Commercial Real Estate Firms [1] Current Moody's 12-18 Month Forward View September 2018 LTM 3/31/2021 As of 06/16/2021 [2] Factor 1 : Scale (5%) Measure Score Measure Score a) Gross Assets (USD Billion) $12.9 A $13.5 - $14 A Factor 2 : Business Profile (25%) a) Market Positioning and Asset Quality Baa Baa Baa Baa b) Operating Environment Aa Aa Aa Aa Factor 3 : Liquidity and Access To Capital (25%) a) Liquidity and Access to Capital A A A A b) Unencumbered Assets / Gross Assets 94.0% A 83% - 88% A Factor 4 : Leverage and Coverage (45%) a) Total Debt + Preferred Stock / Gross Assets 45.5% Baa 42% - 45% Baa b) Net Debt / EBITDA 11.9x Caa 12.5x - 14x Ca c) Secured Debt / Gross Assets 1.5% Aa 3% - 6% A d) Fixed-Charge Coverage 4.4x Baa 4.3x - 4.7x A Rating: a) Scorecard Indicated Outcome Baa1 Baa1 b) Actual Rating Assigned Baa1

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. [2] This represents Moody's forward view, not the view of the issuer, and unless noted in the text, does not incorporate significant acquisitions and divestitures. Source: Moody's Financial Metrics™

Appendix

Exhibit 12 Peer comparison Grand City Properties S.A. Grand City Properties S.A. Vonovia SE Deutsche Wohnen SE LEG Immobilien SE TAG Immobilien AG Baa1 Stable A3 Stable A3 Negative Baa1 Stable Baa3 Positive

FYE FYE LTM FYE FYE LTM FYE FYE LTM FYE FYE LTM FYE FYE LTM (in USD billion) Dec-19 Dec-20 Mar-21 Dec-19 Dec-20 Mar-21 Dec-19 Dec-20 Mar-21 Dec-19 Dec-20 Mar-21 Dec-19 Dec-20 Mar-21 Real Estate Gross Assets $11.1 $13.3 $12.9 $61.8 $74.5 $73.6 $31.3 $37.7 $36.1 $14.5 $18.7 $18.6 $6.3 $7.9 $7.8 Amount of Unencumbered Assets 82.7% 86.2% 94.0% 51.3% 54.2% 54.5% 29.8% 31.1% 31.1% 25.3% 28.6% 12.3% 15.4% Debt / Real Estate Gross Assets 44.0% 45.3% 45.5% 45.3% 42.1% 43.2% 37.2% 38.2% 37.2% 40.4% 39.5% 41.1% 45.8% 47.3% 47.5% Net Debt / EBITDA 11.6x 11.6x 11.9x 14.8x 13.9x 13.7x 13.8x 16.7x 16.6x 12.1x 12.7x 12.5x 11.3x 12.4x 15.3x Secured Debt / Real Estate Gross Assets 5.4% 4.0% 1.5% 14.7% 12.0% 12.3% 22.7% 21.2% 21.0% 22.0% 21.0% 20.0% 33.7% 30.5% 30.9% EBITDA / Fixed Charges 4.8x 4.4x 4.4x 3.8x 3.7x 3.8x 5.1x 4.5x 4.4x 4.3x 4.9x 4.9x 4.4x 4.3x 3.6x

All figures and ratios are calculated using Moody’s estimates and standard adjustments. FYE = Financial year-end. LTM = Last 12 months. Source: Moody’s Financial Metrics™

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Ratings

Exhibit 13 Category Moody's Rating GRAND CITY PROPERTIES S.A. Outlook Stable Issuer Rating -Dom Curr Baa1 Senior Unsecured Baa1 Jr Subordinate -Dom Curr Baa3 Source: Moody's Investors Service

Endnotes 1 Source: OECD.

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11 24 June 2021 Grand City Properties S.A.: Update following rating affirmation This document has been prepared for the use of michael Bar-Yosef and is protected by law. It may not be copied, transferred or disseminated unless authorized under a contract with Moody's or otherwise authorized in writing by Moody's. MOODY'S INVESTORS SERVICE CORPORATES

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12 24 June 2021 Grand City Properties S.A.: Update following rating affirmation This document has been prepared for the use of michael Bar-Yosef and is protected by law. It may not be copied, transferred or disseminated unless authorized under a contract with Moody's or otherwise authorized in writing by Moody's.