Report of the Supervisory Board

Dear Shareholders,

Deutsche Wohnen AG once more generated record earnings in the financial year 2016 and benefited from the persistently dynamic market environment in its Core+ and Core regions, in particular.

The consolidated group profit reached a new high of EUR 1.6 billion, also due to the appreciation in the value of the portfolio. At the same time, improvements were recorded again with regard to all key fig-ures, the Group's financing structure was optimised further and its debt ratio, at 37.7%, could be main-tained at the previous year's level as a result of its conservative financing policy.

Approximately 870 residential and commercial units and 31 nursing properties (comprising 4,600 beds) were acquired in the context of several different transactions, and approximately 4,300 residential units were sold, in the financial year. The portfolio could thus be further optimised in a targeted manner by making use of the positive market conditions.

The company's sustained success was also reflected in the positive performance of its share price and in its favourable ratings.

Trusting cooperation with the Management Board

In the financial year 2016, as in previous years, the Supervisory Board has taken great care in carrying out the duties incumbent upon it pursuant to the law, the company's Articles of Association, the German Corporate Governance Code and the Rules of Procedure. It has regularly advised the Management Board on the management of the company and monitored its activities. In addition, it was directly and promptly included in all decisions of fundamental importance to the company.

The Management Board informed the Supervisory Board regularly, promptly and fully, both orally and in writing, of all matters of relevance to the company relating to the business policy, the business plan and strategy, the company’s situation including the opportunities and risks, the course of the business, the risk management as well as the compliance. Discrepancies between actual and planned development were explained in full. The Management Board agreed upon major business transactions with the Super-visory Board.

The Chairman of the Supervisory Board and other members of the Supervisory Board were in regular contact with the Management Board and also discussed important issues outside of the meetings of the Supervisory Board and its committees. These concerned, for example, the strategic direction of the company, its performance and the risk management activities.

Meetings of the Supervisory Board

In the financial year 2016, the Supervisory Board discussed the company's current performance, indi-vidual significant events and transactions requiring its approval in 15 meetings, eight of which took the form of a telephone conference. At each of the meetings, the Supervisory Board granted the requested approvals to the necessary extent and in each case after careful consideration and extensive discussion of the matter at hand. In addition, resolutions relating to an acquisition were adopted on 20 July 2016 and 2 August 2016 by way of written resolution following extensive prior discussions held in plenary sessions. The average attendance rate for the meetings of the Supervisory Board was 96.7%. In the year under review, Mr Clement, Mr Hünlein and Mr Wisser were each unable to attend one meeting; apart from these cases, all of the members of the Supervisory Board were present at all Board meet-ings. Furthermore, members unable to attend a meeting in some cases nonetheless took part in the adoption of resolutions by way of proxy voting.

The Supervisory Board's activities in the year under review focused on the business plan and perfor-mance of Deutsche Wohnen AG, the company's corporate strategy, planned acquisitions and the inte-gration of acquisitions.

The performance of the segments Residential Property Management, Disposals, Nursing and Assisted Living segments, as well as the financial and liquidity position of the Group were the subject of regular and intense discussion. The Supervisory Board's activities additionally focused on the review and dis-cussion of the internal control and risk management system of the Deutsche Wohnen Group.

At the meeting held on 21 January 2016 (telephone conference), the Supervisory Board addressed the matter of the takeover bid by Vonovia SE and furthermore resolved upon the amendment of the Articles of Association in light of the issuance in 2015 of shares of Deutsche Wohnen AG to external shareholders of GSW Immobilien AG.

At the meetings held on 25, 27 and 29 January and on 7 and 9 February 2016 (all in the form of a telephone conference), the Supervisory Board addressed the matter of the current status of the takeover bid by Vonovia SE and related strategic considerations and, on 29 January in par-ticular, the issuance of a statement in response to the amendment of the takeover bid of Vonovia SE.

At the meeting held on 10 March 2016, the Supervisory Board dealt mainly with the reports prepared at the meetings of the Audit Committee and the Executive Committee, the 2015 annual and consolidated financial statements and matters relat-ing to the Management Board, in particular the determination of the Management Board bonuses for the financial year 2015. Representatives of the auditing company took part in the discussions relating to the 2015 annual financial statements, explaining items and approaches adopted in the annual financial statements of the company and the Group. Further core issues addressed related to the proposed can-didate for the position of auditor of the financial statements, the proposed agenda for the Annual General Meeting, the adoption of the report of the Supervisory Board, the corporate governance report and the risk management strategy.

The focal point of the meeting held on 9 May 2016 were the reports from the committees, the report on the company's performance in the first quarter of 2016 and the approval of the agenda and the proposals for the resolutions to be adopted at the Annual General Meeting.

The meeting of the Supervisory Board held on 23 May 2016 centred on a discussion of strategic issues.

At the meeting held on 22 June 2016, the Supervisory Board addressed the composition of the Supervisory Board committees, current ac-quisition projects, the status of the shareholder action (domination agreement concluded with GSW Im-mobilien AG), the Annual General Meeting of GSW Immobilien AG on 7 July 2016 and the partnership with the Füchse Berlin handball team.

The core issues addressed at the meeting held on 15 July 2016 (telephone conference) comprised a discussion of the acquisition project Pegasus (nursing properties) and the approval of the proposed acquisition and financing structure for the purchase.

The meeting held on 8 August 2016 focused on reports of the committees, the discussion of the current performance of the company on the basis of the half-year report, the adoption of resolutions on matters relating to the Management Board (employment contract for and appointment of Philip Grosse as a member of the Management Board as at 1 September 2016) and the status of the shareholder action (domination agreement concluded with GSW Immobilien AG).

The focal point of the meeting held on 30 September 2016 (telephone conference) was the handling of financing matters.

The meeting held on 8 November 2016 focused largely on reports of the committees, the performance of the company on the basis of the report for the third quarter 2016, financing matters, current projects (dissolution of the third-party bank structure resulting from the takeover of GSW) and matters relating to the Management Board (stock option pro-gramme for Mr Grosse).

At the meeting held on 19 December 2016, the Supervisory Board addressed, in particular, the adoption of the business plan for 2017, acquisitions, financing matters, considerations of structural nature and the German Corporate Governance Code, and also adopted the Ddeclaration of Compliance to be submitted jointly with the Management Board.

Efficient work in four committees of the Supervisory Board

In order to efficiently perform its duties, the Supervisory Board has formed committees, each composed of three members, and continuously evaluated their requirements and activities in the year under review.

Specifically, there existed the following four committees in the year under review:

  • The Executive Committee,
  • The Nomination Committee,
  • The Audit Committee and
  • The Acquisition Committee.

Their tasks are described in greater detail on page 39 of the corporate governance report.

In principle, the resolutions of the Supervisory Board and the topics to be discussed at the Supervisory Board plenary meetings are prepared by the committees. To the extent permitted by law, some of these committees have been granted decision-making powers in accordance with the Rules of Procedure or pursuant to resolutions of the Supervisory Board. The chairmen of the committees regularly and fully re-ported on the subject matter and outcome of committee meetings to the meetings of the Supervisory Board.

The Executive Committee was convened on one occasion in the year under review. The matters discussed at the meeting, which took the form of a telephone conference, involved, in particular, consultation, the adoption of resolutions and the issuance of recommendations with regard to matters relating to the Management Board (con-tractual matters, remuneration issues). Furthermore, a resolution was adopted on matters relating to the Management Board and corresponding recommendations issued to the Supervisory Board (employment contract for and appointment of Philip Grosse) by way of circular resolution in July 2016.

The Nomination Committee was convened six times in the year under review; of these meetings, three were held in the form of a telephone conference. At these meetings, proposals for the nomination of a candidate for election as a member of the Supervisory Board were prepared and submitted to Supervisory Board plenary by way of recommendation for its proposal to be put by to the Annual General Meeting, consulted on prospective succession planning with regard to the Supervisory Board and the related requirement profiles, and pre-pared proposals for the filling of a position on the Management Board (with the assistance of a recruit-ment agency during the selection process).

The Audit Committee met on four occasions during the year under review, at which it dealt with the relevant items of the Su-pervisory Board's work. These included, in particular, a preliminary examination of the annual financial statements, the consolidated financial statements and the interim reports of Deutsche Wohnen AG, and a discussion of the risk management system. It submitted its recommendation for the appointment of the auditing company for the financial year 2016 to the Supervisory Board, procured a declaration of in-dependence from the said auditor, monitored its activities and stipulated the main focal points of the au-dit. The members of the Audit Committee have expertise and experience in the application of accounting principles and internal control procedures. The Chairman of the Committee, Dr. Andreas Kretschmer, is in full compliance with all of the requirements of sec. 100 para. 5 of the German Stock Corporation Act (AktG).

The Acquisition Committee was convened on one occasion during the year under review; this meeting was held in the form of a tel-ephone conference and addressed, in particular, the project involving the acquisition project Pegasus (nursing property portfolio).

Corporate governance

The Supervisory Board subjected the further development of the company's own Corporate Governance Standards to continuous observation and discussion. Comprehensive information on corporate govern-ance matters within the company, including the components and amounts of the remuneration paid to the members of the Supervisory Board and the Management Board, can be found on pages 38 to 42 of this annual report.

The Management Board and the Supervisory Board have discussed the requirements of the version of the German Corporate Governance Code applicable for the year under review and the implementation thereof. In December 2016, they adopted their updated joint Declaration of Compliance pursuant to sec. 161 of the German Stock Corporation Act (AktG) and made it permanently accessible to the public on the company website. The Declaration of Compliance can be viewed at: http://ir.deutsche-wohnen.com/websites/deuwo/English/8300/declaration-of-compliance.html.

Annual and consolidated financial statements discussed in detail

The annual financial statements of Deutsche Wohnen as at 31 December 2016 and the consolidated fi-nancial statements prepared by the Management Board, together with the company's combined man-agement report, were audited by KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, the auditing com-pany appointed by the Annual General Meeting held on 22 June 2016 and commissioned by the Super-visory Board, which issued an unqualified audit opinion with regard thereto.

The annual financial statements of Deutsche Wohnen AG and the consolidated financial statements, the combined management report for Deutsche Wohnen AG and the Group as well as the audit reports were made available to all of the members of the Supervisory Board immediately upon their preparation. The auditor attended the preparatory meetings of the Audit Committee held on 23 January 2017 and 13 March 2017 ahead of the meeting of the Supervisory Board for the approval of the balance sheet. It re-ported on the substantial results of its audit and provided additional information. After extensive discus-sion, the Audit Committee approved the results of the audit of the company's annual financial state-ments, the consolidated financial statements and the combined management report of the company.

The Chairman of the Audit Committee gave a full report to the Supervisory Board on the annual financial statements and the audit at the meeting of the Supervisory Board on 13 March 2017. In addition, the auditing company explained the main findings of its audit and was available to provide information and answers to further questions for the Supervisory Board. The Supervisory Board carefully reviewed the annual financial statements, the consolidated financial statements, the combined management report, the proposal for the utilisation of the net profit and the audit reports. There have been no objections. The Supervisory Board then approved the recommendation of the Audit Committee in accordance with the annual financial statements and consolidated financial statements as at 31 December 2016 prepared by the Management Board, thereby adopting the annual financial statements.

The adopted annual financial statements indicate a net profit. The Supervisory Board endorses the Management Board's proposal regarding the utilisation of the net profit. The agenda for the Annual Gen-eral Meeting 2017 will therefore include the adoption of a resolution on the distribution of a dividend in the amount of EUR 0.74 per share entitled to dividends.

Changes to the Supervisory Board and Management Board

Dr. Florian Stetter, whose term of office ended upon the conclusion of the Annual General Meeting held on 22 June 2016, was reelected as a member of the Supervisory Board by the Annual General Meeting held on 22 June 2016.

On 8 August 2016, the Supervisory Board unanimously appointed Mr Philip Grosse as an additional member of the Management Board and as Chief Financial Officer (CFO) of the Company for a term of three years with effect from 1 September 2016. He takes responsibility for the areas of Corporate Fi-nance, Investor Relations, Legal/Compliance and Treasury.

On behalf of the Supervisory Board, I would like to thank the members of the Management Board and the employees of Deutsche Wohnen AG and all of the Group companies for their dedicated work and provided perfomance in the financial year 2016.

Frankfurt/Main, March 2017

On behalf of the Supervisory Board

Uwe E. Flach

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