US Real Estate Indicators Report

1 Lazard Global real Estate SecuritiesUS real Estate Indicators ReportRD22659 Since initial price weakness in January and February, in which real Estate investment trusts (REITs) were down by as much as 12%, REIT performance has steadily improved, gaining year to date. The performance recovery is certainly welcomed by real Estate investors as many thought the early year swoon was unwarranted from both a valuation and fundamentals perspective. However, the trifecta of potentially higher rates, an aging real Estate cycle, and the market s focus on growth over value have kept REITs perennially chasing broader equity returns (the sector has underperformed broader equities by 12% over the last year and 5% year to date). Domestic real Estate fundamentals remain decent, if not improving slightly in many sectors, as the economy strengthens (at least for now).

2 In addition, the latest second quarter earnings season seems to confirm those fundamentals: real Estate pricing remains firm, REIT balance sheets are arguably in the best shape since the start of the modern REIT era, and the REIT merger and acquisition (M&A) environment is providing a strong mark-to-market. This continues to create a solid foundation for property stocks, but not necessarily a good launch pad for outsized returns, until the sentiment shifts in favor of value and more risk-off categories. For example, due to various reasons including the trifecta mentioned earlier, REIT mutual funds have experienced more than $14 billion in fund outflows year to date (this is on top of the approximate $16 billion in outflows in 2017).1We believe the second quarter REIT earnings season was better than expected and confirmed that the general stability of US real Estate across sectors should continue.

3 Certainly there are always some areas of concern (such as self-storage and assisted living), and it is likely real Estate is in a mature phase of the cycle, but the breadth of stability and stronger-than-expected second quarter results are encouraging. According to Bank of America Merrill Lynch, 87% of companies met or beat estimates while 90% raised or maintained 2018 guidance. This makes intuitive sense as real Estate is driven by the economic environment and with both wage and job growth surprising to the upside, real Estate demand is impacted positively. As such, good leasing activity was noted in data centers, industrials, select offices, life sciences, and apartments as demand is coming from both businesses and consumers. In addition, the notion that net asset valuations are an important valuation metric for REITs continues to be proven through more M&A activity across many sectors.

4 Over time, this should help to support a valuation floor for many companies and, at least for now, highlights the extent of the theoretical valuation disconnect across the real Estate space. It appears that one intriguing component of real Estate is being overlooked (especially considering the ever-increasing trade war rhetoric and the decou-pling from synchronized global economic growth and government policy response). To use a phrase from President Franklin D. Roosevelt, real Estate cannot be lost or stolen, nor can it be carried away. That is, to rephrase much less elegantly, real Estate has a durability and a link to local economics (and not to mention a contractual aspect to its cash flows ([ , leases]) which does insulate it from shorter-term swings, thereby making real Estate cash flows less exposed to the global environment.)

5 For example, Morgan Stanley ranks real Estate and utilities as the sectors with the highest percentage of domestic In a volatile world, that durability of cash flows and, in turn, dividends should become valued. Past may not be prologue, but looking back to another time of uncertainty, the end of 2000 through 2006 was among the best relative and absolute performance periods for REITs. During this period, REITs returned 200 percentage points more than the S&P 500 Index did. JUL2018US real Estate Market Returns (%; cumulative)YTD1 Month1 Year3 Years5 YearsSNL US REIT US real Estate Market Returns by Property Type(%; cumulative)YTD1 Month1 Year3 Years5 Enclosed Shopping of 31 July 2018 For illustrative purposes only. The performance quoted represents past performance. Past performance is not a reliable indicator of future results.

6 This is not intended to represent any strategy or product managed by Lazard. The indices are unmanaged and have no fees. One cannot invest directly in an : FTSE, NAREIT, Standard and Poor s2 Listed real Estate Market PerformanceCumulative Returns8010 0120140201820172016 FTSE NAREIT All REITsBofA Merrill Lynch REIT Preferred SecuritiesS&P 500(Index, 100=3 January 2016) REITs are once again lagging broader equities by over 500 basis points (bps) year to date as the value orientation of REITs cannot compete with the stock market s growth focus. With the exception of the decline during the first two months of 2018, REITs have been trading within a fairly tight range since the end of 2016 as the market has seemingly discounted REIT earnings and growth as investors contemplate the potential combination of higher rates and the end of a decade-long real Estate up cycle.

7 The aggregate numbers still hide a wide discrepancy in sector performance with an over 15 percentage point return difference between the best (hotel) and worst (shopping centers) sectors. Meanwhile, REIT preferred securities returned in July and are now down year to date. As of 31 July 2018 For illustrative purposes only. The performance quoted represents past performance. Past performance is not a reliable indicator of future : BloombergReal Estate FundamentalsSame-Store Net Operating Income (NOI) Growth(%)024682018201720162015 OfficeRetailResidentialIndustrialsAll Equity REITsIndicative of a sector multiple years into its cycle, property-level NOI growth has been moderating (from in the first quarter of 2016 to in the first quarter of 2018), though it continues to trend above inflation. However, the combination of solid economic growth and generally moderate levels of new construction are constructive to maintaining NOI growth at or near inflation.

8 As expected, this scenario has been confirmed for most sectors based on the second quarter earnings season, with the potential for acceleration in the back half of of 31 July 2018 Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to : NAREIT 2018, S&P Global Market IntelligenceUnderlying Property ValuesUS Investment Grade Composite Index Equal Weighted04590135180225201820162014201220 10200820062004200220001998(Index, 100=2000)US commercial real Estate prices are up through the first seven months of 2018, after having been generally flat for the second half of 2017 (data lags by one month).3 This puts property pricing about 19% above prior peak levels and up over 99% since the recession lows of late 2009. Commercial real Estate continues to benefit from increased allocations across most investor categories globally, and this has translated into still-significant amounts of dry powder for real Estate investment with over 60% of institutions under-invested relative to target In our view, with more stability and better economic growth prospects than many other countries, US real Estate should be even more attractive to global of 31 July 2018 Source.

9 real Capital Analytics3 Listed real Estate ValuationsPremium/Discount to Underlying Net Asset Value-60-3003020182016201420122010200820 06(%)Average Premium/DiscountLT AverageAfter trading at substantial discounts to underlying net asset value (NAV) earlier in the year, the recovery in prices has put REITs back in the 4% 7% discount range that they have been trading in since Fall 2016. While this is well below the sector s historical 2% 3% long-term average premium, the sector has, on average, been trad-ing near NAV since 2007. However, perhaps in a foreshadowing, REITs have now been trading below NAV for the longest period since the start of the financial crisis. While private real Estate prices may fall prospectively, the evidence from property sales (based on the CoStar US Composite Index) suggests that prices remain strong across most sectors.

10 The steadily growing economy, still-low levels of new construction, and solid demand for US real Estate should support asset prices even if rates rise of 31 July 2018 The REIT market as represented is a basket of 53 large and investable REITs across all sec-tors, as identified and selected by Lazard. The basket also includes companies that over time have gone private or merged in order to avoid survivor bias in the historical : SNL FinancialREIT-Implied Capitalization Rate Spread to Baa-Rated BondsSpread-4048122018201420102006200219 98(%)Baa Bond RatesImplied Capitalization RateAfter rising by about 70 bps through the first four months of 2018, Corporate Baa bond yields have remained in a narrow range over the preceding three months. With REIT prices generally range bound, the spread between bond yields and REIT implied cap rates has remained in the 150 160 bps range.