DEMIRE Deutsche Mittelstand Real Estate AG ANNUAL REPORT 2016 Financial year January 1 – December 31, 2016 2 DEMIRE Deutsche Mittelstand Real Estate AG | Annual Report 2016 DEMIRE at a glance FIRST IN SECONDARY LOCATIONS DEMIRE Deutsche Mittelstand Real Estate AG has commercial real estate holdings in mid-sized cities and upcoming areas bordering metropolitan areas across Germany. The Company has its special strength in these secondary locations – first in secondary locations – and focuses on properties which that are particularly attractive for medium-sized companies. DEMIRE has grown rapidly in recent years as a result of aquisitions of individual properties and company shares alike. At the end of the 2016 fiscal year, DEMIRE’s portfolio contained rental space of 1.1 million sqm with a market value of more than EUR 1 billion. The portfolio’s focus on office, retail and logistic properties results in a risk structure that DEMIRE believes is reasonable for the commercial real estate segment. The Company places importance on long-term contracts with solvent tenants and, therefore, anticipates stable and sustainable rental income. DEMIRE intends to maintain its corporate organisation as lean as possible, although it believes that economies of scale and portfolio optimisation are best achieved by having its own in-house asset, property and facility management. This safeguards the Company’s business expertise and, equally important, allows the Company to maintain direct contact with the customer. The shares of DEMIRE Deutsche Mittelstand Real Estate AG are listed on the regulated market (Prime Standard Segment) of the Frankfurter Stock Exchange. » Portfolio Management / Strategy » Risk Management / DEMIRE Compliance » Finance and Controlling trategy S » Legal » Investor Relations Property & Asset Facility Management Management » Operational property- and tenant-related functions » Accounting & IT » Efficient and effective daily operations » Direct tenant relationship DEMIRE » Cost & quality control Immobilien Ma- Praedia Facility perational Business perational Management GmbH O nagement GmbH Integrated platform enables to scale the portfolio while maintaining an efficient and effective corporate structure 3 DEMIRE at a glance TOTAL REVENUE EBIT EPS (diluted) + 113 % 92.1 + 42 % 1.74 83.2 + 1.070 % 43.3 + 1 % -59 %* 58.7 - 45 %* 58.4 0.71 3.7 0.39 2014 2015 2016 2014 2015 2016 2014 2015 2016 in EUR million in EUR million * considering district increase in average number of shares EPRA NAV (diluted) EPRA NAV per share (diluted) EQUITY RATIO (%) + 15 % + 12 % 28.2 % 312.5 + 8 % 271.9 4.60 + 281 % + 50 % 4.25 + 75 % 25.6 % 71.4 2.84 14.6 % 2014 2015 2016 2014 2015 2016 2014 2015 2016 in EUR million in EUR AVG. COST OF DEBT (%) EPRA VACANCY (%) (1) LTV (%) -13% -9 % -19 % -15 % -23 % 14.7 -7 % 12.8 87.4 6.4 5.2 4,4 11.6 67.5 62.8 2014 2015 2016 2014 2015 2016 2014 2015 2016 CONSOLIDATED INCOME STATEMENT 01/01/2016– 01/01/2015– 31/12/2016 31/12/2015 Rental revenue 92,117 43,344 Net rental income 55,570 23,680 EBIT 83,159 58,740 Financial result -43,207 -25,728 EBT 39,962 33,012 Net profit/loss for the period 27,649 28,873 Net profit/loss for the period per share (undiluted / diluted, in EUR) 0.48 / 0.39 1.09 / 0.71 FFO before minority interests / FFO before minority interests considering real 8,095 / 13,019 n.a. estat sales FFO after minority interests / FO after minority interests considering real 2,679 / 7,502 n.a. estat sales CONSOLIDATED BALANCE SHEET 31/12/2016 31/12/2015 Total assets 1,094,006 1,032,945 Investment properties 981,274 915,089 Non-current assets held for sale 24,291 13,005 Total portfolio 1,005,565 928,094 Financial liabilities 662,643 655,239 Cash and cash equivalents 31,289 28,467 Net financial liabilities 631,354 626,772 % of total portfolio (LTV) 62.8 67.5 Equity according to the consolidated balance sheet 308,637 264,902 Equity ratio in % 28.2 25.6 Equity attributable to equity holders of the parent company (NAV) 271,945 230,697 EPRA NAV (undiluted / diluted) 300,459 / 312,506 256,267 / 271,585 EPRA NAV per share (undiluted / diluted, in EUR) 5.54 / 4.60 5.20 / 4.25 4 DEMIRE Deutsche Mittelstand Real Estate AG | Annual Report 2016 Competitive strengths PROPERTY PORTFOLIO FOCUS ON THREE ASSET CLASSES 1,100 1,068 181 1,006 174 928 72 74 Retail 23.9 % 5.4 5.3 Breakdown according Office 66.9 % to potential rent as at Logistics 5.5 % 31/12/2016 Others 3.7 % Number Market value Net rent, WALT Rental space properties (EUR million) excl. utilities (Years) (m² thousands) (EUR million) 31/12/2015 31/12/2016 OPERATING STRATEGIES 1 » Increase rental cash flow and reduce vacancy Aktive Portfolio » Extend WALT » Streamline portfolio by selling non-core assets 2 » Generate economies of scale through in-house asset, property and facility management Operating Efficiency » Execute targeted capex programs » Optimize operating cost structures 3 » Restructure existing debt Optimization of » Reduce average cost of debt to < 4% Financing Structure » Improve LTV towards 50 % (mid-term) 4 Further Accretive » Direct investments (via asset- and/or share deal) Acquisitions » Indirect investments (via the purchase of shares in closed-end real estate funds) Operating strategies will drive growth in both FFO and NAV INVESTMENT HIGHLIGHTS 1 Well diversified EUR 1bn commercial real estate portfolio in Germany Clear focus on secondary locations which offer more attractive economics and lower 2 volatility Efficient, fully integrated and scalable asset management platform to create 3 shareholder value 4 Experienced management team with proven track record Execution of four major operating strategies in order to create shareholder value: 5 Active portfolio management, optimization of operating efficiency and financing structure and further accretive acquisitions Short-to-medium term value upside to be unlocked by optimizing financing structure and 6 vacancy reduction 7 Strong pipeline for further growth 5 DEMIRE at a glance Eschborn „After successfully integrating the properties acquired in 2015 and early 2016 and conso- lidation in 2016, our aim continues to be the future expansion of our portfolio“. Hon-Prof Andreas Steyer, CEO of the DEMIRE Group“ Hon.-Prof. Andreas Steyer, CEO of the DEMIRE Group 6 DEMIRE Deutsche Mittelstand Real Estate AG | Annual Report 2016 Contents 2 DEMIRE AT A GLANCE 96 NOTES TO THE CONSOLIDATED 2 First in Secondary Locations FINANCIAL STATEMENTS 3 Demire at a glance 96 A. General information 6 Contents 100 B. Scope of consolidation and consolidation methods 114 C. Accounting policies 7 FOREWORD OF THE EXECUTIVE BOARD 114 D. Notes to the consolidated statement of income 10 REPORT OF THE SUPERVISORY BOARD 124 E. Notes to the consolidated balance sheet 16 CORPORATE GOVERNANCE REPORT 149 F. Group segment reporting 153 G. Other disclosures 24 FIRST IN SECONDARY LOCATIONS 170 Attachments to the Notes 24 Portfolio 28 Top 20 properties - short portrait 174 BALANCE SHEET OATH 32 DEMIRE on the capital market 175 AuDITor’s rePORT 38 COMBINED MANAGEMENT REPORT (GROUP AND AG) 177 IMPRINT & CONTACT 38 I. Group principles 40 II. Economic report 60 III. Changes in the composition of the governing bodies 61 IV. Remuneration report 66 V. Report on opportunities, risks, and outlook 76 VI. Acquisition related information 82 VII. Corporate Governance Report 83 VIII.Management Report for DEMIRE Deutsche Mittelstand Real Estate AG 90 CONSOLIDATED FINANCIAL STATEMENTS 90 Consolidated statement of income 91 Consolidated statement of comprehensive income 92 Consolidated balance sheet 94 Consolidated statement of cash flows 95 Consolidated statement of changes in equity Disclaimer: The report is published in German and as an English translation. In the event of any conflict or inconsistency between the English and the German versions, the German original shall prevail. FOREWOrd OF THE EXECUTivE BOard | REPORT OF THE SUPErvisOry BOard | CORPORATE GOVERNANCE REPORT 7 FirsT IN SECONdary LOcaTIONS | COMBINED MANAGEMENT REPORT (GROUP AND AG) CONSOLIDATED FINANCIAL STATEMENTS | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS BALANCE shEET OATH | AUdiTOR’S REPORT » Foreword of the Executive Board Foreword of the Executive Board Ladies and Gentlemen, The focus during the 2016 fiscal year was the integration and optimal management of the real estate acquired as part of the Company’s major growth step in the previous year. The refinancing and repayments made during the year were a further successful step on the way to improving DEMIRE’s financial results going forward. During the fiscal year, we redeemed a high-yield SME-bond in its entirety and reduced one of our key ratios, the LTV ratio (loan-to-value), representing the net financial debt ratio in relation to real estate assets, from its level of 67.5 % at the end of 2015 to 62.8 % as at December 31, 2016. By the year-end reporting date, we had also reduced the average interest rate for the DEMIRE Group’s financial debt from 5.2 % to 4.4 % p.a. thereby meeting our 2016 target range of 4.0 % to 4.5 % p.a. The bond was repaid using our operating cash flow and the funds raised from our 10 % cash capital increase in August 2016. The remaining net proceeds from the capital increase further strengthened DEMIRE AG’s financial position and will be used to finance future real estate acquisitions. Another milestone in improving our financing structures was achieved in February 2017 with the early renewal of a promissory note, originally due in 2019, at much more favourable terms. The interest rate was reduced from 5 % p.a. to 4 % p.a. with retroactive effect as of January 1, 2017, with the option for a further reduction to 3.5 %, without paying a prepayment penalty.