Merlin Properties, Socimi, S.A

MERLIN PROPERTIES, SOCIMI, S.A.

Consolidated Financial Statements for the period ended 31 December 2017, prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, and Directors' Report, together with Independent Auditor's Report

Translation ofa report originally issued in Spanish based on our work peiformed in accordance with the audit regulations in force in Spain and offinancial statements originally issued in Spanish and prepared in accordance with the regulatory framework applicable to the Group (see Notes 2 and 27). In the event of a discrepancy, the Spanish-language version prevails. Deloitte, S.L. Plaza Pablo Ruiz Picasso, 1 Torre Picasso 28020 Madrid España

Tel: +34 915 14 50 00 Fax: +34 915 14 51 80 www.deloitte.es

Translation of a report originally issued in Spanish based on our work performed in accordance with the audit regulations in force in Spain. In the event of a discrepancy, the Spanish-language version prevails.

INDEPENDENT AUDITOR'S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS

To the Shareholders of Merlin Properties SOCIMI, S.A.,

Report on the Consolidated Financial Statements

Opinion

We have audited the consolidated financial statements of Merlin Properties SOCIMI, S.A. (the Parent) and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at 31 December 2017, and the consolidated statement of profit or loss, consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated statement of cash flows and notes to the consolidated financial statements for the year then ended.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated equity and consolidated financial position of the Group as at 31 December 2017, and its consolidated results and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union (EU-IFRSs) and the other provisions of the regulatory financial reporting framework applicable to the Group in Spain.

Basis for Opinion

We conducted our audit in accordance with the audit regulations in force in Spain. Our responsibilities under those regulations are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report.

We are independent of the Group in accordance with the ethical requirements, including those pertaining to independence, that are relevant to our audit of the consolidated financial statements in Spain pursuant to the audit regulations in force. In this regard, we have not provided any services other than those relating to the audit of financial statements and there have not been any situations or circumstances that, in accordance with the aforementioned audit regulations, might have affected the requisite independence in such a way as to compromise our independence.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Deloitte, S.L. Inscrita en el Registro Mercantil de Madrid, tomo 13.650, sección 8ª, folio 188, hoja M-54414, inscripción 96ª. C.I.F.: B-79104469. Domicilio social: Plaza Pablo Ruiz Picasso, 1, Torre Picasso, 28020, Madrid. Key Audit Matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Compliance with the REIT tax regime

Description Procedures applied in the audit

On 22 May 2014, the Parent applied to be Our audit procedures included, among included in the REIT (Spanish “SOCIMI”) others, the review of the design and tax regime, which was applicable from 1 implementation of the relevant controls January 2014. Therefore, in 2017 the that mitigate the risks associated with Merlin Properties SOCIMI, S.A. and compliance with the REIT tax regime, as Subsidiaries Group was regulated by well as tests to verify that the Spanish Real Estate Investment Trusts aforementioned controls operate (SOCIMI) Law 11/2009, of 26 October, effectively. amended by Law 16/2012, of 27 December. One of the main characteristics Group management furnished us with the of companies of this nature is that they calculations performed in relation to are subject to an income tax rate of 0%. compliance with the obligations associated with this tax regime, together with the The REIT tax regime is conditional upon related supporting documentation, and we compliance with certain relatively complex involved internal experts from the tax rules that require the use of significant area to assist in the analysis of the judgements and estimates by reasonableness of the information management of the Parent, since the obtained, as well as the completeness obligations under this regime include, inter thereof in relation to all the aspects alia, certain investment requirements and provided for in the legislation in force at requirements in relation to the nature of the analysis date. the revenue obtained, to the length of time for which property assets must be We also verified that Notes 1, 19 and 25 held and to the distribution of dividends. to the consolidated financial statements for 2017 contain the disclosures relating to Compliance with the REIT regime is a key compliance with the conditions required by matter in our audit because the the REIT tax regime and other matters applicability of this regime is the basis of associated with the taxation of the Parent its business model given the material and of its subsidiaries. impact of the tax exemption on the consolidated financial statements and on the returns of the shareholders.

- 2 - Valuation of investment property

Description Procedures applied in the audit

The Group manages a portfolio of urban Our audit procedures included, among property assets earmarked for lease others, the review of the design and (offices, shopping centres, logistics implementation of the relevant controls facilities, etc.) located in Spain and that mitigate the risks associated with the Portugal. Investment property is stated at valuation of investment property, as well its fair value at the reporting date and is as tests to verify that the aforementioned not depreciated. At 31 December 2017, controls operate effectively. In particular, the portfolio of property assets was valued those used by the directors to supervise at EUR 10,352 million. and approve the hiring of and work performed by the experts engaged for this The Group periodically uses third parties purpose, and to ensure no influence is independent of the Group as experts to exercised over the result of the work determine the fair value of its property performed by those experts. assets. The aforementioned experts have substantial experience in the markets in We obtained the valuation reports of the which the Group operates and employ experts hired by the Group to value the valuation methodologies and standards entire real estate portfolio and assessed widely used in the market. the competence, capability and objectivity of the experts and the adequacy of their The valuation of the real estate portfolio is work for use as audit evidence. In this a key audit matter, since it requires the connection, with the cooperation of our use of estimates with a significant degree internal valuation experts, we: of uncertainty. Specifically, the discounted cash flow method is generally applied to • analysed and concluded on the the valuation of the rental property assets, reasonableness of the valuation which requires estimates of: procedures and methodology used by the experts hired by Group • the future net revenue from each management; property based on available historical information and market surveys; • performed, on a sample of assets chosen on a selective basis, an • the internal rate of return or independent valuation taking into opportunity cost used when consideration the information available discounting; on the industry and transactions with • the residual value of the assets at the property assets similar to those in the end of the projection period (the exit real estate portfolio owned by the yield). Company. Furthermore, we performed substantive analytical procedures and In addition, small percentage changes in analysed those assets whose variation the key assumptions used for the might imply an atypical characteristic valuation of the property assets could give with respect to the available market rise to significant changes in the information and the other real estate consolidated financial statements. assets,

- 3 - Valuation of investment property

Description Procedures applied in the audit

• assessed, in conjunction with our internal experts, the most significant risks, including the occupancy rates and expected returns on the real estate assets.

We also analysed and concluded on the suitability of the disclosures made by the Group in relation to these matters, which are included in Note 9 to the consolidated financial statements for 2017.

Other Information: Consolidated Directors' Report

The other information comprises only the consolidated directors' report for 2017, the preparation of which is the responsibility of the Parent's directors and which does not form part of the consolidated financial statements.

Our audit opinion on the consolidated financial statements does not cover the consolidated directors' report. Our responsibility relating to the information contained in the consolidated directors' report is defined in the audit regulations in force, which establish two distinct levels: a) A specific level that applies to certain information included in the Annual Corporate Governance Report, as defined in Article 35.2.b) of Spanish Audit Law 22/2015, which consists solely of checking that the aforementioned information has been provided in the consolidated directors' report and, if this is not the case, reporting this fact. b) A general level applicable to the other information included in the consolidated directors' report, which consists of evaluating and reporting on whether the aforementioned information is consistent with the consolidated financial statements, based on the knowledge of the Group obtained in the audit of those consolidated financial statements and excluding any information other than that obtained as evidence during the audit, as well as evaluating and reporting on whether the content and presentation of this part of the consolidated directors' report are in conformity with the applicable regulations. If, based on the work we have performed, we conclude that there are material misstatements, we are required to report that fact.

Based on the work performed, as described above, we have checked that the information described in section a) above is provided in the consolidated directors’ report and that the other information in the consolidated directors' report is consistent with that contained in the consolidated financial statements for 2017 and its content and presentation are in conformity with the applicable regulations.

- 4 - Responsibilities of the Directors and of the Audit Committee of the Parent for the Consolidated Financial Statements

The Parent's directors are responsible for preparing the accompanying consolidated financial statements so that they present fairly the Group's consolidated equity, consolidated financial position and consolidated results in accordance with EU-IFRSs and the other provisions of the regulatory financial reporting framework applicable to the Group in Spain, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the Parent's directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

The Parent's audit committee is responsible for overseeing the process involved in the preparation and presentation of the consolidated financial statements.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the audit regulations in force in Spain will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

A further description of our responsibilities for the audit of the consolidated financial statements is included in Appendix I to this auditor's report. This description, which is on the following pages 7 and 8, forms part of our auditor's report.

Report on Other Legal and Regulatory Requirements

Additional Report to the Parent's Audit Committee

The opinion expressed in this report is consistent with the content of our additional report to the Parent's audit committee issued on this same date.

Engagement Period

The Annual General Meeting held on 26 April 2017 appointed us as auditors for a period of one year from the year ended 31 December 2016.

- 5 - Previously, we were designated pursuant to a resolution of the General Meeting for the period of three years and have been auditing the consolidated financial statements uninterruptedly since the year ended 31 December 2014.

er no. 50692

Anto 10 Sa e - Martfn-Gonzalez Registered in ROAC under no. 21251

27 February 2018 Appendix I to our auditor's report

Further to the information contained in our auditor's report, in this Appendix we include our responsibilities in relation to the audit of the consolidated financial statements

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

As part of an audit in accordance with the audit regulations in force in Spain, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Parent's directors.

• Conclude on the appropriateness of the use by the Parent's directors of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.

- 7 - We communicate with the Parent's audit committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the Parent's audit committee with a statement that we have complied with relevant ethical requirements, including those regarding independence, and we have communicated with it to report on all matters that may reasonably be thought to jeopardise our independence, and where applicable, on the related safeguards.

From the matters communicated with the Parent's audit committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters.

We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter.

- 8 - MERLIN PROPERTIES SOCIMI, S.A. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS OF 31 DECEMBER 2016 (Thousands of euros)

ASSETS Notes 31/12/2017 31/12/2016 EQUITY AND LIABILITIES Notes 31/12/2017 31/12/2016

NON-CURRENT ASSETS EQUITY: Note 15 Goodwill Note 7 - 9,839 Subscribed capital 469,771 469,771 Concession projects Note 8 242,166 245,744 Share premium 3,970,842 4,017,485 Other intangible assets 584 2,386 Reserves 330,232 (143,537) Property, plant and equipment 3,879 3,569 Other equity holder contributions 540 540 Investment property Note 9 10,352,415 9,027,184 Valuation adjustments (35,806) (47,582) Investments accounted for using the equity method Note 11 371,408 319,697 Treasury shares (24,881) (105) Non-current financial costs Note 12 275,882 329,427 Interim dividend (93,457) (59,759) Derivatives 207,274 207,182 Profit for the period attributable to equity holders of the Parent 1,100,418 582,645 Other financial assets 68,608 122,245 Equity attributable to equity holders of the Parent 5,717,659 4,819,458 Deferred tax assets Note 19 144,127 141,044 Non-controlling interests 6,124 21,311 Total non-current assets 11,390,461 10,078,890 Total equity 5,723,783 4,840,769

NON-CURRENT LIABILITIES: Debt instruments and other marketable securities Note 16 3,221,317 2,327,345 Non-current bank borrowings Note 16 2,032,678 2,847,237 Other financial liabilities Note 17 88,194 104,149 Deferred tax liabilities Note 17 and 19 592,418 556,771 Provisions Note 17 72,382 34,092 Total non-current liabilities 6,006,989 5,869,594

CURRENT LIABILITIES: Provisions Note 17 867 867 CURRENT ASSETS Debt instruments and other marketable securities Note 16 34,007 25,629 Inventories 1,997 2,938 Bank borrowings Note 16 144,191 36,227 Trade and other receivables Notes 12 and 13 78,533 505,894 Other current financial liabilities Note 17 18,807 3,997 Other current financial assets Note 12 73,454 83,364 Trade and other payables Note 18 65,484 113,637 Other current assets 6,558 413 Current tax liabilities Notes 18 and 19 1,762 27,231 Cash and cash equivalents Note 14 454,036 247,081 Other current liabilities Note 17 9,149 629 Total current assets 614,578 839,690 Total current liabilities 274,267 208,217 TOTAL ASSETS 12,005,039 10,918,580 TOTAL EQUITY AND LIABILITIES 12,005,039 10,918,580

The accompanying explanatory Notes 1 to 27 and Appendix I are an integral part of the condensed consolidated statement of financial position as of 31 December 2017.

1 Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group in Spain (see Notes 2 and 27). In the event of a discrepancy, the Spanish-language version prevails.

MERLIN PROPERTIES SOCIMI, S.A. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENT FOR THE PERIOD ENDED 31 DECEMBER 2017 (Thousands of euros)

2017 2016 Notes Period Period

CONTINUING OPERATIONS: Revenue Notes 6 and 20 463,294 351,646 Other operating income 4,289 3,612 Personal expenses Note 20.c (71,759) (43,241) Other operating expenses Note 20.b (51,994) (51,665) Gains/(losses) on disposals of assets Note 9 236 8,484 Depreciation and amortisation (10,379) (4,779) Provision surpluses (3,791) 32 Impairment of goodwill: (9,839) (154,428) Absorption of the revaluation of investment property Notes 7 and 9 (9,839) (154,428) Change in fair value of investment property Note 9 897,401 453,149 Negative difference on business combinations Note 3 (1,775) 37,573 PROFIT/(LOSS) FROM ORDINARY ACTIVITIES 1,215,683 600,383

Change in fair value of financial instruments 2,576 5,357 Change in fair value of financial instruments - Embedded derivative Note 12 92 12,415 Change in fair value of financial instruments - Other Note 16 2,484 (7,058) Finance income Note 20.d 468 1,709 Gains or losses on disposals of financial instruments Note 20.e 1,050 74,646 Finance costs Note 20.d (122,541) (91,290) Share in profit/(loss) of companies accounted for using the equity method Note 11 16,233 1,817 PROFIT/(LOSS) BEFORE TAX 1,113,469 592,622 Income tax Note 19 (12,941) (9,848) PROFIT/(LOSS) FOR THE PERIOD FROM CONTINUING OPERATIONS 1,100,528 582,774 Attributable to shareholders of the Parent 1,100,418 582,645 Attributable to non-controlling interests Note 15 110 129

EARNINGS PER SHARE (in euros) 2.35 1.62 BASIC EARNINGS PER SHARE (in euros) 2.35 1.62 DILUTED EARNINGS PER SHARE (in euros) - -

The accompanying explanatory Notes 1 to 27 and Appendix I are an integral part of the condensed consolidated income statement for the period ended 31 December 2017

MERLIN PROPERTIES SOCIMI, S.A. AND SUBSIDIARIES

CONDENSED CONSOLIDATED COMPREHENSIVE INCOME STATEMENT FOR THE PERIOD ENDED 31 DECEMBER 2016 (Thousands of euros)

2017 2016 Notes Period Period

PROFIT/(LOSS) FOR THE PERIOD (I) 1,100,528 582,774 OTHER COMPREHENSIVE INCOME: Income and expenses recognised directly in equity- From cash flow hedges 4,184 (47,487) From translation differences (193) OTHER COMPREHENSIVE INCOME RECOGNISED DIRECTLY IN EQUITY (II) 4,184 (47,680) Amounts transferred to income statement 7,592 6,011 TOTAL AMOUNTS TRANSFERRED TO INCOME STATEMENT (III) 7,592 6,011 TOTAL COMPREHENSIVE INCOME (I+II+III) 1,112,304 541,105

Attributable to equity holders of the Parent 1,112,194 540,976 Attributable to non-controlling interests 110 129

The accompanying explanatory Notes 1 to 27 and Appendix I are an integral part of the condensed consolidated comprehensive income statement for the period ended 31 December 2017

4 Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group in Spain (see Notes 2 and 27). In the event of a discrepancy, the Spanish-language version prevails.

MERLIN PROPERTIES SOCIMI, S.A. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE PERIOD ENDED 31 DECEMBER 2017 (Thousands of euros)

Equity Non- Share Share Shareholder Profit for the Interim Valuation Translation Treasury attributable to controlling capital premium Reserves contributions year dividend adjustments differences shares the Parent interests Total equity

Balances as of 31 December 2015 323,030 2,616,003 (32,364) 540 49,078 (25,035) (6,106) 193 - 2,925,339 1,092 2,926,431

Consolidated comprehensive profit/(loss) 2016 - - - - 582,645 - (41,476) (193) - 540,976 129 541,105 Distribution of 2015 profit - - 24,043 - (49,078) 25,035 - - - - Transactions with shareholders- Capital increases 146,741 1,526,104 (223,046) ------1,449,799 - 1,449,799 Distribution of dividends - (39,605) (1,838) - - (59,759) - - - (101,202) - (101,202) Application of the share premium - (85,017) 85,017 ------Acquisition of own shares ------(1,369) (1,369) - (1,369) Exchange of own shares - - (172) - - - - - 1,264 1,092 (1,092) - Recognition of share-based payments - - 15,625 ------15,625 - 15,625 Other transactions - - (10,802) ------(10,802) 21,182 10,380 Balances as of 31 December 2016 469,771 4,017,485 (143,537) 540 582,645 (59,759) (47,582) - (105) 4,819,458 21,311 4,840,769

Consolidated comprehensive profit/(loss) 2017 - - - - 1,100,418 - 11,776 - - 1,112,194 110 1,112,304 Distribution of 2016 profit - - 522,886 - (582,645) 59,759 ------Transactions with shareholders- Distribution of dividends - (46,643) (47,310) - - (93,457) - - - (187,410) - (187,410) Changes in perimeter - - 648 ------648 (15,297) (14,649) Acquisition of own shares ------(35,393) (35,393) - (35,393) Delivery of own shares - - Recognition of share-based payments - - 15,738 ------15,738 - 15,738 Delivery of shares of 2016 stock plan - - (19,660) - - - - - 10,617 (9,043) - (9,043) Other transactions - - 1,467 ------1,467 - 1,467 Balances as of 31 December 2017 469,771 3,970,842 330,232 540 1,100,418 (93,457) (35,806) - (24,881) 5,717,659 6,124 5,723,783

The accompanying explanatory Notes 1 to 27 and Appendix I are an integral part of the condensed consolidated statement of changes in equity as of 31 December 2017

MERLIN PROPERTIES SOCIMI, S.A. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD ENDED 31 DECEMBER 2017 (Thousands of euros)

2017 2016 Notes Period Period

CASH FLOWS FROM/(USED IN) OPERATING ACTIVITIES: 695,830 (81,466) Profit/(loss) for the period before tax 1,113,469 592,623 Adjustments for- (712,741) (332,271) Depreciation and amortisation 10,379 4,778 Changes in fair value of investment property Note 9 (897,401) (453,149) Changes in provisions 61,685 (32) Gains/(losses) on disposals of assets Notes 9 and 3 (1,286) (83,130) Finance income (468) (1,709) Finance costs 122,541 91,290 Changes in fair value of financial instruments (2,576) (5,357) Change differences - - Share in profit/(loss) of investments accounted for using the equity method Note 11 (16,233) (1,817) Impairment of goodwill Notes 3 and 7 9,839 154,428 Deferred government grants - - Other income and expenses (996) - Negative difference on business combinations 1,775 (37,573) Changes in working capital- 403,473 (258,336) Inventories (941) - Trade and other receivables 461,206 36,777 Other current assets 749 (5,961) Trade and other payables (51,328) (268,793) Other assets and liabilities (6,214) (20,359) Other cash flows from/(used in) operating activities- (108,371) (83,482) Interest paid (125,164) (84,294) Interest received 468 1,710 Income tax paid 16,325 (898)

CASH FLOWS FROM/(USED IN) INVESTING ACTIVITIES: (476,013) (567,391) Payments on investments- (505,256) (752,642) Net cash outflow from business acquisitions Note 3 (86,680) (566,657) Investment property (355,158) (171,817) Property, plant and equipment (1,006) (1,878) Intangible assets (5,570) (1,786) Financial assets (56,842) (10,504) Payments on disposals- 29,243 185,251 Investment property 29,096 185,251 Property, plant and equipment 147 -

CASH FLOWS FROM/(USED IN) FINANCING ACTIVITIES: (12,862) 335,198 Proceeds and payments for equity instruments- (222,804) (101,202) Issue of equity instruments Note 16 - - Acquisition of own shares Note 15 (35,393) - Dividends paid Note 4 (187,411) (101,202) Shareholder contributions - - Proceeds and payments for financial liabilities- 209,942 436,400 Bank borrowings issues - 3,502,960 Debenture issues 890,256 - Repayment of bank borrowings (680,314) (3,066,560)

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 206,955 (313,659)

Cash and cash equivalents at beginning of period 247,081 560,740 Cash and cash equivalents at end of period 454,036 247,081

The accompanying explanatory Notes 1 to 27 and Appendix I are an integral part of the condensed consolidated statement of cash flows for the period ended 31 December 2017.

Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Company in Spain (see Notes 2 and 27). In the event of a discrepancy, the Spanish-language version prevails.

Merlin Properties SOCIMI, S.A. and Subsidiaries

Notes to the Consolidated Financial Statements for the year ended 31 December 2017

1. Nature and activity of the Group

Merlin Properties SOCIMI, S.A. (“the Parent”) was incorporated in Spain on 25 March 2014 under the Spanish Capital Companies Act (Ley de Sociedades de Capital). On 22 May 2014, the Parent requested to be included in the tax regime for listed real estate investment companies (SOCIMIs), effective from 1 January 2014.

On 27 February 2017, the Parent change its registered office from Paseo de la Castellana 42 to Paseo de la Castellana 257, Madrid.

The Parent’s corporate purpose, as set out in its Articles of Association, is as follows:

 The acquisition and development of urban real estate for subsequent leasing, including the refurbishment of buildings as per the Spanish Law 37/1992, of 28 December, on Value-Added Tax (Ley 37/1992, de 28 de diciembre, del Impuesto sobre el Valor Añadido);  The ownership of interests in the share capital of listed real estate investment companies (SOCIMIs) or other non-resident entities in Spain with the same corporate purpose, which are subject to a regime similar to that established for SOCIMIs in relation to the obligatory profit distribution policy stipulated by law or the Articles of Association.  The ownership of interests in the share capital of other resident or non-resident entities in Spain, the main corporate purpose of which is the acquisition of urban properties earmarked for lease, which are subject to the regime established for SOCIMIs in relation to the obligatory profit distribution policy stipulated by law or the Articles of Association and meet the investment requirements stipulated for these companies; and  The ownership of Spanish public or private limited liability company shares (acciones and participaciones respectively) in collective real estate investment undertakings governed by Spanish Law 35/2003, of 4 November, on collective investment undertakings, or any law that may replace it in the future.

In addition to the economic activity relating to the main corporate purpose, the Parent may also carry on any other ancillary activities, i.e., those that generate income, which in total represents less than 20% of its income in each tax period, or those that may be considered ancillary activities under the legislation applicable at any time.

The activities included in the Parent’s corporate purpose may be indirectly carried on, either wholly or in part, through the ownership of Spanish public or private limited liability company shares in companies with a similar or identical corporate purpose.

The direct and, where applicable, indirect performance of any activities that are reserved under special legislation are excluded. If the law prescribes the need for a professional qualification, administrative authorisation, entry in a public register, or any other requirement for the purpose of exercising any of the activities within the corporate purpose, no such activity can be exercised until all the applicable professional or administrative requirements have been met.

Merlin Properties SOCIMI, S.A. and Subsidiaries (“the Group”) engage mainly in the acquisition and management (through leasing to third parties) of offices, industrial buildings, logistic centres, local premises and shopping centres, and they may also invest to a lesser extent in other assets for lease.

On 30 June 2014, the Parent was listed on the Spanish stock market through a capital increase amounting to EUR 125,000 thousand, with a share premium of EUR 1,125,000 thousand. Merlin Properties SOCIMI, S.A.’s shares/securities have been listed on the electronic trading system of the Spanish stock exchanges since 30 June 2014.

The tax regime of the Parent and the majority of its subsidiaries is governed by Spanish Law 11/2009, of 26 October, as amended by Spanish Law 16/2012, of 27 December, governing listed real estate investment companies (SOCIMIs). Article 3 of the Spanish Law sets out the investment requirements for these types of companies, namely:

1. SOCIMIs must have invested at least 80% of the value of their assets in urban properties earmarked for lease, in land to develop properties to be earmarked for that purpose, provided that development begins within three years following its acquisition, and in equity investments in other companies referred to in article 2.1 of the aforementioned Law.

The value of the asset is calculated based on the average of the quarterly individual balance sheets of the year. To calculate this value, the SOCIMI may opt to substitute the carrying amount for the fair value of the items contained in these balance sheets, which will apply to all the balance sheets of the year. Any money or collection rights arising from the transfer of the aforementioned properties or investments made in the year or in prior years will not be included in the calculation unless, in the latter case, the reinvestment period referred to in article 6 of the aforementioned Law has expired.

2. Similarly, at least 80% of the rental income from the tax period corresponding to each year, excluding the rental income arising from the transfer of the ownership interests and the properties used by the company to achieve its main corporate purpose, once the holding period referred to below has elapsed, should be obtained from the lease of properties and dividends or shares of profits arising from the aforementioned investments.

This percentage must be calculated on the basis of consolidated profit if the company is the parent of a group, in accordance with the criteria established in article 42 of the Spanish Commercial Code (Código de Comercio), regardless of its place of residence and of the obligation to formally prepare consolidated financial statements. Such a group must be composed exclusively of the SOCIMI and the other entities referred to in article 2.1 of this Law.

3. The properties included in the SOCIMI’s assets should remain leased for at least three years. The time during which the properties have been made available for lease, up to a maximum of one year, will be included for the purposes of this calculation.

This period will be calculated:

a) For properties that are included in the SOCIMI’s assets before the company avails itself of the regime, from the beginning of the first tax period in which the special tax regime set forth in this Law is applied, provided that the property is leased or offered for lease at that date. Otherwise the following shall apply.

b) For properties developed or acquired subsequently by the SOCIMI, from the date on which they were leased or made available for tease for the first time.

c) In the case of shares or investments in entities referred to in article 2.1 of this Law, they should be retained on the asset side of the SOCIMI’s balance sheet for at least three years following their acquisition or, where applicable, from the beginning of the first tax period in which the special tax regime set forth in this Law is applied.

As established in transitional provision one of Spanish Law 11/2009, of 26 October, amended by Spanish Law 16/2012, of 27 December, governing listed real estate investment companies, these companies may opt to apply the special tax regime under the terms and conditions established in article 8 of this Law, even if it does not meet the requirements established therein, provided that such requirements are met within two years after the date of the option to apply that regime.

Failure to meet this criterion will require the SOCIMI to file income tax returns under the general tax regime from the tax period in which the aforementioned condition is not met, unless this situation is rectified in the following tax period. The SOCIMI will also be obliged to pay, together with the amount relating to the aforementioned tax period, the difference between the amount of tax payable under the general tax regime and the amount paid under the special tax regime in the previous tax periods, including any applicable late-payment interest, surcharges and penalties.

The income tax rate for SOCIMIs was set at 0%. However, where the dividends that the SOCIMI distributes to its shareholders holding an ownership interest exceeding 5% are exempt from tax or are subject to a tax rate lower than 10%, the SOCIMI shall be subject to a special charge of 19%, which shall be considered to be the income tax charge, on the amount of the dividend distributed to these shareholders. If applicable, this special charge must be paid by the SOCIMI within two months after the dividend distribution date.

In 2017 the transitory period has ended and the Parent company must comply with all requirements of the SOCIMI regime. In the directors opinion, the Parent company complies with all of the aforementioned requirements as of December 31st 2017.

The consolidated financial statements of the Group and the separate financial statements of the Group companies for 2017, which were prepared by their respective directors, have not yet been approved by their shareholders at the respective Annual General Meetings. However, the Parent’s directors consider that the aforementioned financial statements will be approved without any material changes. The separate and consolidated financial statements of Merlin Properties, SOCIMI, S.A. for 2016 prepared by its directors were approved by the shareholders at the Annual General Meeting on 26 April 2017.

The 2016 separate financial statements of the Group companies, which were prepared by their respective directors, were approved by their shareholders at the respective General Meetings within the periods established in applicable tax legislation.

In view of the business activities currently carried on by the Group, it does not have any environmental liability, expenses, assets, provisions or contingencies that might be material with respect to its equity, financial position or results. Therefore, no specific disclosures relating to environmental issues are included in these notes to the consolidated financial statements.

2. Basis of presentation of the consolidated financial statements and basis of consolidation

2.1 Regulatory framework

The regulatory financial reporting framework applicable to the Group consists of the following:

- The Spanish Commercial Code and all other Spanish corporate legislation.

- International Financial Reporting Standards (IFRSs) as adopted by the European Union pursuant to Regulation (EC) No 1606/2002 of the European Parliament and Spanish Law 62/2003, of 30 December, on tax, administrative and social security measures, as well as applicable rules and circulars of the Spanish National Securities Market Commission (CNMV).

- Spanish Law 11/2009, of 26 October, as amended by Spanish Law 16/2012, of 27 December, governing listed real estate investment companies (SOCIMIs) and other corporate law.

- All other applicable Spanish accounting legislation.

2.2 Basis of presentation of the consolidated financial statements

The consolidated financial statements for 2017 were obtained from the accounting records of the Parent and consolidated companies, and have been prepared in accordance with the regulatory financial reporting framework described in Note 2.1 and, accordingly, they present fairly the Group’s consolidated equity and financial position at 31 December 2017 and the consolidated results of its operations, the changes in consolidated equity and the consolidated cash flows in the year then ended.

Given that the accounting policies and measurement bases applied in preparing the Group’s consolidated financial statements for 2017 may differ from those applied by some of the Group companies, the necessary

adjustments and reclassifications were made on consolidation to unify these policies and bases and to make them compliant with IFRSs as adopted by the European Union

In order to uniformly present the various items composing the consolidated financial statements, the accounting policies and measurement bases used by the Parent were applied to all the consolidated companies.

2.2.1 Adoption of Financial Reporting Standards and Interpretations effective as from 1 January 2017

In 2017 the following standards, amendments and interpretations came into force, which, where applicable, were used by the Group in preparing the condensed consolidated interim financial statements:

Standards, amendments and Mandatory application in the Description interpretations years beginning on or after:

It introduces additional disclosure Amendments to IAS 7, Disclosure requirements in relation to the reconciliation 1 January 2017 initiative of changes in financial liabilities with cash flows from financing activities. Clarification of the principles established Amendments to IAS 12, Recognition of regarding the recognition of deferred tax 1 January 2017 deferred tax assets for unrealised losses assets for unrealised losses related to debt instruments measured at fair value.

2.2.2 Standards not yet in force in 2017

The following standards were not yet in force in 2017, either because their effective date is subsequent to the date of the consolidated financial statements or because they had not yet been adopted by the European Union.

Standards, amendments and Mandatory application in the Description interpretations years beginning on or after:

Replaces IAS 17 and the related interpretations. The main development involves a single lessee accounting model, which will include all leases on the balance IFRIC 16 Leases (issued in January 2016) sheet (with specific exceptions) with an 1 January 2019 impact similar to that of current financial leases (right-of-use assets will be depreciated and a finance cost will be recognised for the depreciated cost of the liability). This new standard will replace the current IAS 39. IFRS 9 consists of three large sections: classification measurement, hedging and impairment. It changes the model for classifying and measuring financial assets, the main focus of which will IFRS 9, Financial Instruments (issued in be the business model and the characteristics 1 January 2018 July 2014) of the financial asset. The hedge accounting model is designed to better align with the economic management of the risk and require less rules. Lastly, the impairment model shifts from the current incurred losses model to an expected losses model.

Standards, amendments and Mandatory application in the Description interpretations years beginning on or after:

It will replace all current standards and IFRS 15 Revenue from Contracts with interpretations in force with regard to Customers (issued in May 2014) revenue. The new IFRS 15 model is far more including the amendments to IFRS 15: restrictive and principles-based, and also has 1 January 2018 effective date of IFRS 15 (issued a very different conceptual approach. September 2015) and the clarifications to Application of the new requirements could IFRS 15 (issued in April 2006) therefore give rise to significant changes in the revenue profile. Provides entities with the option of applying Amendments to IFRS 4, Insurance the overlay approach (IFRS 9) or the deferral 1 January 2018 Contracts approach, within the scope of IFRS 4. Replaces IFRS 4. It includes the principles IFRS 17, Insurance Contracts (issued in for the recognition, measurement, 1 January 2021 (1) May 2017) presentation and disclosure of insurance contracts. The amendment enables companies to measure financial assets, cancelled early with Amendments to IFRS 9, Prepayment negative compensation at amortised cost or features with negative compensation 1 January 2019 (1) fair value, through other comprehensive (issued in October 2017) income if a specific condition is met, instead of doing so at fair value through profit or loss. The amendment clarifies that companies Amendments to IAS 28, Long-term must account for long-term interests in an interests in associates and joint ventures 1 January 2019 (1) associate or joint venture to which the equity (issued in October 2017) method is not applied using IFRS 9. This interpretation clarifies how to apply the recognition and measurement requirements IFRIC 23, Uncertainty over Income Tax in IAS 12 when there is uncertainty over 1 January 2019 (1) Treatments (issued in June 2017) whether a certain tax treatment used by the entity will be accepted by the tax authorities. This interpretation establishes the IFRIC 22, Foreign Currency Transactions “transaction date” in order to establish the and Advance Consideration (issued in 1 January 2018 (1) exchange rate applicable to transactions with December 2016) advance considerations in foreign currency. These are limited amendments that clarify specific matters such as the accounting for Amendments to IFRS 2, Classification the effects of vesting conditions on cash- and Measurement of Share-based settled share-based payment transactions, the 1 January 2018 Payment Transactions (issued in June classification of share-based payment 2016) transactions with net settlement features and certain aspects of the modifications to the type of share-based payment (cash or shares). Minor amendments to a series of standards Improvements to IFRSs 2014 – 2016 (different effective dates, one of which is 1 1 January 2018 (1) Cycle (issued in December 2016) January 2017) The amendment clarifies that a Amendments to IAS 40, Reclassification reclassification of an investment as of Investment Property (issued in investment property shall only be permitted 1 January 2018 (1) December 2016) when it can be demonstrated that there has been a change in use. (1) Yet to be adopted by the European Union

The impacts of the application of IFRS 15, IFRS 9 and IFRS 16 are detailed as follows:

IFRS 15 Revenue from contracts with customers

IFRS 15 is the comprehensive standard for recognising revenue from customers that will replace the following standards and interpretations currently in force: IAS 18 Revenue, IAS 11 Construction Contracts, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction and Real Estate, IFRIC 18 Transfers of Customers and SIC-31 Revenue - Barter Transactions Involving Advertising Services. The revenue model is applicable to all contracts with customers except for leases, insurance contracts and financial instruments that are regulated in other IFRSs.

The Group’s main activity is the operation of real estate held for lease, whereby rental income represents its main source of revenue and, therefore, since contracts with customers relating to leases are excluded from IFRS 15 (IAS 17 / IFRS 16), the impact of its application will not be significant.

The rest of the Group’s revenue comes from property asset management services provided to third parties. This revenue represents a single performance obligation and, therefore, the point in time at which revenue is recognised is consistent with the current standard.

The Group intends to apply IFRS 15 retrospectively, without restating the comparative information. However, as indicated above, in addition to providing more detailed breakdowns on the Group’s revenue, management does not expect the application of IFRS 15 to have a significant impact on the Group’s financial position or return.

IFRS 9 Financial Instruments

IFRS 9 will replace IAS 39 for periods beginning on or after 1 January 2008.

The Group intends to apply IFRS 9 retrospectively, without restating the comparative information. Following an analysis of the Company’s financial assets and liabilities at 31 December 2017, carried out based on the facts and circumstances at this date, Group management carried out a preliminary assessment of the impact of IFRS 9 on the financial statements, as indicated below:

Classification and measurement

The accounts receivable at amortised cost, the amounts of which are detailed Note 13, are held within a business model whose objective is to collect contractual cash flows that are solely payments of principal and interest on the outstanding principal. Consequently, these financial assets will continue to be measured at amortised cost in accordance with the application of IFRS 9.

All other financial assets and financial liabilities will continue to be measured using the same bases currently adopted in IAS 39.

Impairment

The amounts receivable from customers will be subject to IFRS 9 with regard to impairment.

The Group intends to apply the simplified approach to recognise the expected credit loss throughout the term of these amounts receivable from customers that arise from lease agreements.

The Group is finalising its complete model for expected loss. In any case, the directors do not expect a significant impact since the insolvency risk is very low and, additionally, it is guaranteed through the deposits received from tenants.

With regards to refinancing processes undertaken in previous years, no impact has been identified since the only refinancing (Tree Inversiones Inmobiliarias, S.A.) originally matured in 2017.

IFRS 16 Leases

In the case of IFRS 16 (Leases), this standard will replace the current IAS 17 and will be applicable as of 1 January 2019. The new development involves a single lessee accounting model, which will include all leases on the balance sheet (with specific exceptions) as if they were financed purchases, i.e., with an impact

similar to that of the current financial leases. Otherwise, lessors will continue to use a dual model, similar to that currently set forth in IAS 17 and, therefore, the Group considers that the impact of the adoption of this standard will not be significant.

2.3 Functional currency

These consolidated financial statements are presented in euros, since the euro is the functional currency in the area in which the Group operates.

2.4 Comparative information

The information relating to 2016 contained in these notes to the consolidated financial statements is presented solely for comparison purposes with similar information relating to the year ended 31 December 2017.

2.5 Responsibility for the information and use of estimates

The information in these consolidated financial statements is the responsibility of the Parent’s directors.

In the Group’s consolidated financial statements for 2017 estimates were occasionally made by the senior executives of the Group and of the consolidated companies, later ratified by the directors, in order to quantify certain of the assets, liabilities, income, expenses and obligations reported herein. These estimates relate basically to the following:

1. The market value of the net assets acquired in business combinations (see Note 3).

2. The market value of the Group’s property assets (see Note 5.3). The Group obtained valuations from independent experts at 31 December 2017.

3. The fair value of certain financial instruments (see Note 5.7).

4. The assessment of provisions and contingencies (see Note 5.13).

5. Management of financial risk and, in particular, of liquidity risk (see Note 25).

6. The recovery of deferred tax assets and the tax rate applicable to temporary differences (see Note 5.15).

7. Definition of the transactions carried out by the Group as a business combination in accordance with IFRS 3 or as an acquisition of assets (see Note 3).

8. Compliance with the requirements that govern listed real estate investment companies (see Note 1).

Changes in estimates:

Although these estimates were made on the basis of the best information available at 31 December 2017, future events may require these estimates to be modified prospectively (upwards or downwards), in accordance with IAS 8. The effects of any change would be recognised in the corresponding consolidated income statement.

2.6 Basis of consolidation applied

All companies over which effective control is exercised by virtue of holding of a majority of the voting rights in their representation and decision-making bodies and the power to determine the company’s financial and operational policies were fully consolidated; and companies in which the Group owns more than a 20% interest and exercises significant influence without holding a majority of the voting rights were accounted for using the equity method (see Note 11).

A number of adjustments have been made in order to bring the accounting principles and measurement bases of Group companies into line with those of the Parent, including the application of International Financial Reporting Standards measurement bases to all Group companies and associates.

It was not necessary to unify accounting periods since the balance sheet date of all the Group companies and associates is 31 December of each year.

2.6.1 Subsidiaries

Subsidiaries are considered to be those companies over which the Parent directly or indirectly exercises control through subsidiaries. The Parent has control over a subsidiary when it is exposed or has rights to variable returns from its involvement with the subsidiary, and when it has the ability to use its power to affect its returns. The Parent has power when the voting rights are sufficient to give it the ability to direct the relevant activities of the subsidiary. The Parent is exposed or has rights to variable returns from its involvement with the subsidiary when its returns from its involvement have the potential to vary as a result of the subsidiary’s performance.

The financial statements of the subsidiaries are fully consolidated with those of the Parent. Accordingly, all material balances and effects of the transactions between consolidated companies are eliminated on consolidation.

Third party interests in the Group’s equity and profit or loss are recognised under “Non-controlling interests” in the consolidated statement of financial position, the consolidated income statement and consolidated statement of comprehensive income, respectively.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

2.6.2 Associates

The companies listed in Appendix I, over which Merlin Properties, SOCIMI, S.A. does not exercise control but rather has a significant influence, are included under “Investments accounted for using the equity method” in the accompanying consolidated statement of financial position and are measured using the equity method, which consists of the value of the net assets and any goodwill of the associate. The share of these companies’ net profit or loss for the year is included under “Share of results of associates accounted for using the equity method” in the accompanying consolidated income statement.

2.6.3 Transactions between Group companies

Gains or losses on transactions between consolidated companies are eliminated on consolidation and deferred until they are realised with third parties outside the Group. The capitalised expenses of Group work on non-current assets are recognised at production cost, and any intra-Group results are eliminated. Receivables and payables between consolidated Group companies and any intra-Group income and expenses were eliminated.

2.6.4 Translation of currencies other than the euro

The translation to euros of foreign transactions was carried out by applying the following criteria:

1. The assets and liabilities, including goodwill and adjustments to net assets arising from the acquisition of businesses, including comparative balances, are translated at the exchange rate at each reporting date;

2. Income statement items were translated at the average exchange rates for the year; and

3. Any exchange differences that arise from applying the aforementioned criteria are recognised as translation differences in equity.

In presenting the consolidated statement of cash flows, the cash flows, including comparative balances, of the subsidiaries are translated to euros at the exchange rates prevailing at the date on which such cash flows took place.

Translation differences related to foreign businesses recognised under equity are recognised in the consolidated income statement when such businesses are disposed of or when the Group no longer has control over them.

Following the liquidation of Testa American Real Estate Corporation in 2016, the local currency of all Group companies is the euro.

2.6.5 First-time consolidation differences

At the date of an acquisition, the assets and liabilities of a subsidiary are measured at their fair values at that date. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. If a deficiency of the acquisition cost below the fair values of the identifiable net assets acquired (i.e. a discount on acquisition) is disclosed, the valuations of the net assets are reviewed and, where appropriate, the deficiency is credited to profit or loss in the period in which the acquisition is made.

2.6.6 Business combinations

The Group accounts for business combinations using the purchase method. The date of acquisition is the date on which the Group takes control of the acquired.

The consideration paid is calculated at the date of acquisition as the sum of the fair values of the assets delivered, the liabilities incurred and assumed and the equity instruments issued by the Group in exchange for control of the business acquired. Acquisition costs, such as professional fees, do not form part of the cost of the business combination, but are taken directly to the consolidated income statement.

Where applicable, the contingent consideration is recognised at the acquisition-date fair value. Subsequent changes to the fair value of the contingent consideration are taken to the consolidated income statement unless this change arises within the period of 12 months established as the provisional accounting period, in which case the change is recognised in goodwill.

Goodwill is calculated as the excess of the aggregate of the consideration transferred, any non-controlling interests, and the fair value of any previously acquired interest less the net identifiable assets acquired.

If the acquisition cost of the identifiable net assets is less than their fair value, the related difference is recognised in the consolidated income statement for the year.

2.6.7 Scope of consolidation

The companies composing the Merlin Group at 31 December 2017, along with information relating to the consolidation method, are listed in Appendix I of the consolidated financial statements.

3. Changes in the scope of consolidation

2017

The changes in the scope of consolidation in 2017 were as follows:

Business combinations

1) Promosete Investimentos Imobiliarios, S.A. The Parent acquired 100% of the ownership interest in Promosete Investimentos Imobiliarios, S.A., the share capital of which amounted to EUR 200,000, which was fully paid and represented by 200,000 shares of EUR 1 par value each, for a total of EUR 11,704 thousand. At the time of the acquisition, the seller had a loan with the previous owner for a total amount of EUR 17,833 thousand that was cancelled simultaneously with the acquisition price.

Percentage of Consideration Date of ownership transferred Main line of business acquisition acquired (voting (thousands of rights) euros)

Acquisition and development of urban Promosete Investimentos Imobiliarios, S.A. properties for 07/04/2017 100% 29,537 (a) subsequent management and lease

(a) Consideration transferred taking into consideration the cancelled loans corresponding the previous owner.

Thousands of euros Carrying Valuation Fair value amount adjustments

Investment property 26,765 4,226 30,991 Non-current assets 181 - 181 Current assets 317 317 Non-current and current (1,630) 841 (789) liabilities Deferred tax liabilities (1,881) (1,057) (2,938) Total net assets 23,752 4,010 27,762 Consideration transferred 29,537 Loss incurred on the (1,775) business combination

The main line of business of the acquired company is the lease of offices, whereby its main asset is the Central Office Building in Lisbon that is 100% leased and has a surface area of 10,310 square meters. Its appraised value at the time of purchase according to an independent appraiser was EUR 30,991 thousand. The purpose of this business combination is to increase the Group’s presence in the real estate market in Lisbon.

The fair value of the receivables acquired, which are mainly trade receivables, is EUR 265 thousand and does not differ from the gross contractual amounts. The Parent’s directors do not consider there to be any indications at the date of acquisition that these receivables would not be collected in full. The valuation adjustment to liabilities of EUR 1,057 thousand corresponds mainly to the deferred tax liability associated with the valuation adjustments. The net profit and income generated in 2017 and included in the consolidated income statement for 2017 amounted to EUR 5,370 thousand and EUR 1,701 thousand.

Had the acquisition taken place on 1 January 2017, net profit would have increased by EUR 292 thousand and the revenue contributed to the Group would have been approximately EUR 525 thousand higher compared to the figures recognised in these consolidated financial statements. When calculating these amounts, the directors considered that the revenue generated and expenses incurred between 1 January 2017 and the acquisition date, along with the acquisition costs, did not vary.

Net cash flow from the acquisition

Thousands of euros

Cash paid 29,537 Less: cash and cash equivalents (67) Total 29,470

2) Praça do Marqués-serviços auxiliares, S.A.

The Parent acquired 100% of the ownership interest in Praça do Marqués, S.A., the share capital of which amounts to EUR 15,893 thousand and is fully paid and represented by 3,185,000 shares of EUR 4.99 par value each, for a total of EUR 60,382 thousand.

Percentage of Consideration Date of ownership transferred Main line of business acquisition acquired (voting (thousands of rights) euros)

Acquisition and development of urban Praça do Marqués - Serviços Auxiliares, properties for 28/09/2017 100% 60,383 S.A. subsequent management and lease

Thousands of euros Carrying Valuation Fair value amount adjustments

Investment property 59,222 6,099 65,321 Current assets 3,971 478 4,449 Non-current and current (498) (178) (676) liabilities Deferred tax liabilities (6,772) (1,939) (8,711) Total net assets 55,923 4,460 60,383 Consideration transferred 60,383

The main line of business of the acquired company is the lease of urban properties, whereby its main asset is a building in Lisbon that is 63% leased and has a surface area of 12,460 square meters. Its appraised value at the time of purchase according to an independent appraiser was EUR 65,321 thousand. The purpose of this business combination is to increase the Group’s presence in the real estate market in Lisbon. The fair value of the receivables acquired, which are mainly trade receivables, is EUR 664 thousand and does not differ from the gross contractual amounts. The Parent’s directors do not consider that at the acquisition date there were any indications that these receivables would not be collected in full. The valuation adjustment to liabilities of EUR 1,939 thousand corresponds mainly to the deferred tax liability associated with the valuation adjustments. The net profit and income generated in 2017 and included in the consolidated income statement for 2017 amounted to EUR 121 thousand and EUR 633 thousand.

Had the acquisition taken place on 1 January 2017, net profit would have increased by EUR 1,099 thousand and the revenue contributed to the Group would have been approximately EUR 1,844 thousand higher compared to the figures recognised in these consolidated financial statements. When calculating

these amounts, the directors considered that the revenue generated and expenses incurred between 1 January 2017 and the acquisition date, along with the acquisition costs, did not vary.

Net cash flow from the acquisition Thousands of euros

Cash paid 60,382 Less: cash and cash equivalents (3,102) Total 57,280

Corporate restructuring of subsidiaries

On 27 June 2017, the Parent’s Board of Directors approved the start of the merger between Explotaciones Urbanas Españolas, S.L.U. and Centros Comerciales Metropolitanos, S.A.U., both wholly owned by the Parent. The aforementioned process, which began on 29th August 2017, does not affect the Group’s consolidated financial statements.

On 21 December 2017, the Group acquired 37,660 shares representing 14.39% of the share capital in the subsidiary Parc Logistic de la Zona Franca, S.A. “PLZF”, for EUR 11,800 thousand, thus giving the Group a 90% interest in the share capital of this company. MERLIN Parques Logísticos S.A. also acquired a 10% interest in Sevisur Logística, S.A. on 28th July 2017 (reaching a 100% shareholding) for a total of EUR 2,828 thousand.

The acquisition of the additional interest did not have any effect on the consolidation method, given that the Group has exercised control over this company since 31 December 2016. The changes in the ownership interest over these investees have given rise to a decrease in non-controlling interests and the differences with respect to the price paid were recognised under reserves.

In 2017 the following subsidiary companies have been liquidated: Metrovacesa Mediterranée, S.A.S; Metrovacesa France, S.A.S and Metrovacesa Access Tower GmbH, none of which have affected the Group’s consolidated financial statements.

2016-

Business combinations

3) Integration agreement with Metrovacesa, S.A. On 21 June 2016, the Parent signed an integration agreement with Metrovacesa, S.A. and its main shareholders (Banco Santander, S.A., Banco Bilbao Vizcaya Argentaria, S.A. and Banco Popular Español, S.A.) for the purpose of creating the largest Spanish real estate rental property group. On 26 August 2016, the merger was approved by the Spanish anti-trust authorities and on 15 September 2016 by the shareholders at the Annual General Meetings of the Parent and Metrovacesa, S.A. The resolutions passed at the respective AGMs were registered in the Mercantile Registry on 26 October 2016. The transaction was arranged through the total spin-off of Metrovacesa, S.A, thereby dissolving this company, and incorporating the property business unit of Metrovacesa into the Group, consisting of the non- residential properties intended for lease (including the staff of the Metrovacesa group and the properties, shares or interests in subsidiaries or investees, contracts and, in general, all assets and liabilities of Metrovacesa associated with tertiary assets, except for EUR 250 million in debt). As consideration for the business received, the Parent carried out a capital increase through the issue of 146,740,750 shares of EUR 1 par value each, with an share premium of EUR 10.40 per share issued. This increase was subscribed in full by the shareholders of Metrovacesa, S.A., with an exchange ratio of one share of Merlin Properties SOCIMI, S.A. for every 20.95722 shares of Metrovacesa, S.A. As a result of this transaction, the shareholders of Metrovacesa, S.A. acquired 31.237% of the Parent's share capital. This business combination may be summarised as follows:

Thousands of euros Carrying Valuation amount adjustments Fair value

Concession projects 86,742 81 86,823 Intangible assets 200 - 200 Property, plant and equipment 13,325 22 13,347 Investment property 1,966,333 1,093,203 3,059,536 Investments accounted for using the equity method 22,485 - 22,485 Loans to associates 72,860 - 72,860 Other non-current assets 19,700 - 19,700 Deferred tax assets 430,248 (296,442) 133,806 Current assets 89,767 - 89,767 Deferred tax liabilities (19,621) (291,258) (310,879) Non-current liabilities (1,612,522) (909) (1,613,431) Current liabilities (51,299) - (51,299) Total net assets 1,018,218 504,697 1,522,915 Consideration transferred (a) 1,449,799 Negative goodwill on business combinations 73,116

(a) The fair value of the consideration transferred was calculated by applying the share price (EUR 9.88) at 15 September 2016, the date of the takeover, to the shares issued (146,740,750). The integration agreement for the property business of Metrovacesa, S.A. does not include any type of contingent consideration.

In 2016 the Parent’s directors initially allocated the cost of the business combination, which was confirmed as final, by estimating that the difference between the cost of the business combination and the fair value of the net assets acquired represented a gain amounting to EUR 73,116 thousand, which was included under “Negative goodwill on business combinations” in the consolidated income statement for 2016. To estimate the fair value of the net assets of the property business of Metrovacesa, S.A., the Parent used the appraisals of the acquired assets (mainly property assets) carried out by independent experts. The Group recognised an adjustment amounting to EUR 296,442 thousand in relation to the fair value of the deferred tax assets as it considers that it is not likely to be recovered as a result of the SOCIMI regime to which the Parent is subject. The costs associated with the transaction amounted to EUR 9,658 thousand and were recognised under “Other operating expenses” in the accompanying consolidated income statement for 2016.

The fair value of the receivables acquired, which are mainly trade receivables, was EUR 23,723 thousand and does not differ from the gross contractual amounts. The Parent’s directors did not consider there to be any indications at the date of acquisition that these receivables would not be collected in full. The net profit and income generated by the commercial property business of Metrovacesa, S.A. incorporated in 2016 and included in the consolidated income statement for 2016 amounted to EUR 80,891 thousand and EUR 40,843 thousand, respectively.

Had the two businesses been acquired on 1 January 2016, net profit would have increased by EUR 45,688 thousand and the revenue contributed to the Group would have been approximately EUR 116,972 thousand higher compared to the figures in these consolidated financial statements. When calculating these amounts, the directors considered that the revenue generated and expenses incurred between 1 January 2016 and the acquisition date, along with the acquisition costs, did not vary.

Net cash flow from the acquisition

Thousands of euros

Cash paid - Less: cash and cash equivalents (28,035) Total (28,035)

4) Other business combinations

a) MP Torre A, S.A. and MP Monumental, S.A.

On 10 March 2016, the Parent, Merlin Properties SOCIMI, S.A., acquired all ownership interest in LSREF3 Reo Torre A, S.A., the share capital of which amounted to EUR 50,000, which was fully paid and represented by 50,000 shares of EUR 1 par value each, for a total of EUR 10,150 thousand. The main line of business of the acquired company is the lease of offices, warehouses and commercial establishments in Lisbon. At the time of the purchase, the seller had a loan with LSREF3 Reo Torre A, S.A. amounting to EUR 32,873 thousand, which was paid simultaneously with the purchase price. On 16 March 2016, the company name was changed to MP Torre A, S.A.

On this same date, the Parent also acquired 100% of the ownership interest in LSREF3 Reo Monumental, S.A., the share capital of which amounted to EUR 50,000, which was fully paid and represented by 50,000 shares of EUR 1 par value each, for a total of EUR 20,291 thousand. The main line of business of the acquired company is the lease of offices and commercial establishments in Lisbon. At the time of the purchase, the seller had a loan with LSREF3 Reo Monumental, S.A. amounting to EUR 40,180 thousand, which was paid simultaneously with the purchase price. On 23 March 2016, the company name was changed to MP Monumental, S.A.

Percentage of Consideration Date of ownership transferred Main line of business acquisition acquired (voting (thousands of rights) euros)

Acquisition and development of MP Torre A, S.A. 10/03/2016 100% 43,023 (a) property assets for lease

Acquisition and development of MP Monumental, S.A. 10/03/2016 100% 60,471 (a) property assets for lease

(b) Consideration transferred taking into account settled loans of the former owner.

Thousands of euros Carrying Valuation Fair value amount adjustments

Investment property 80,335 22,683 103,018 Non-current assets 27 - 27 Current assets 7,729 (4,898) 2,831 Non-current and current (2,333) (4,435) (6,768) liabilities Total net assets 85,758 13,350 99,108 Consideration transferred 103,494 Loss incurred on the (4,386) business combination

The adjustment in value relates mainly to the contribution of the fair value of investment properties. The acquired assets are two office buildings and the “Dolce Vita Monumental” shopping centre in Lisbon, which at the time of the purchase was appraised by an independent appraisal company at EUR 103,018 thousand. The Torre A building is leased in its entirety to Galp, S.A. The Monumental building and the shipping centre have an occupancy ratio of 91%. These leases constitute the business activity of the acquired companies and their source of revenue. The purpose of these business combinations is to increase the Group’s presence in the Lisbon real estate market. The fair value of the receivables acquired in the business combinations, which are mainly trade receivables, was EUR 52 thousand and does not differ from the gross contractual amounts. The Parent’s directors did not consider there to be any indications at the date of acquisition that these receivables would not be collected in full. The valuation adjustment to liabilities of EUR 4,435 thousand corresponds mainly to the deferred tax liability associated with the valuation adjustments. The net profit and income generated by the acquired businesses in 2016 and recognised in the 2016 consolidated income statement totalled EUR 34 thousand and EUR 2,335 thousand in the case of MP Torre A, S.A. and EUR 564 thousand and EUR 3,503 thousand in the case of MP Monumental, S.A.

Had the two businesses been acquired on 1 January 2016, net profit would have increased by EUR 972 thousand and the revenue contributed to the Group would have been approximately EUR 1,211 thousand higher compared to the figures recognised in the 2016 consolidated financial statements. When calculating these amounts, the directors considered that the revenue generated and expenses incurred between 1 January 2016 and the acquisition date, along with the acquisition costs, did not vary.

Net cash flow from the acquisition Thousands of euros MP MP Torre A, S.A. Monumental, S.A.

Cash paid 43,023 60,471 Less: cash and cash equivalents (472) (1,590) Total 42,551 58,881 b) Saba Parques Logísticos, S.A.

On 17 October 2016, the sale and purchase agreement entered into by the Parent and by Saba Infraestructuras, S.A. to acquire the logistics business owned by the latter, was executed in a public deed. The Group acquired 100% of the share capital of Saba Parques Logísticos, S.L.U. (hereinafter, “SPL”), which was made up of 1,745,041 shares of EUR 40 par value each. SPL is also the Parent of a group of companies whose main business activity is leasing logistical property assets to third parties. The purchase price was EUR 123,776 thousand.

Percentage of Consideration Date of ownership transferred Main line of business acquisition acquired (voting (thousands of rights) euros)

Acquisition and development of Saba Parques Logísticos, S.A. and logistics properties for 17/10/2016 100% 123,776 (a) subsidiaries subsequent management and lease

a) Consideration transferred taking into account the variable price, which is expected to be paid in full.

Thousands of euros Carrying Valuation amount adjustments Fair value

Concession projects 90,533 70,886 161,419 Intangible assets 2 - 2 Investment property 40,065 (12,239) 27,826 Other non-current assets 2,379 - 2,379 Deferred tax assets 10,202 - 10,202 Current assets 9,231 - 9,231 Non-current liabilities (43,065) (17,722) (60,787) Current liabilities (9,270) - (9,270) Total net assets 100,077 40,925 141,002 Consideration transferred 123,776 Value assigned to non-controlling interests 21,182 Loss incurred on the business combination (3,956)

The adjustment in the value of the assets relate mainly to the allocation of fair value of the property assets, which also includes surface rights and administrative concessions as well as the ownership interest in an associate. The acquired assets relate mainly to logistical complexes located in Barcelona, Seville and Portugal, and the 43.99% financial interest in Araba Logística, S.L. The logistical complexes are leased to third parties and have an occupancy rate of 85%. These leases constitute the main business activity and main source of revenue. The purpose of this business combination is to increase the Group’s logistics business. The valuation adjustment to liabilities of EUR 17,722 thousand corresponds mainly to the deferred tax liability associated with the valuation adjustments. The fair value of the receivables acquired, which are mainly trade receivables, was EUR 405 thousand and does not differ from the gross contractual amounts. The Parent’s directors did not consider there to be any indications at the date of acquisition that these receivables would not be collected in full. The losses and income generated by the logistics business acquired and recognised in the consolidated income statement for 2016 amounted to EUR 2,078 thousand and EUR 4,034 thousand, respectively.

Had the two businesses been acquired on 1 January 2016, net profit would have amounted to EUR 1,244 thousand and the revenue contributed to the Group would have been approximately EUR 14,655 thousand higher compared to the figures in the 2016 consolidated financial statements. When calculating these amounts, the directors considered that the revenue generated and expenses incurred between 1 January 2016 and the acquisition date, along with the acquisition costs, did not vary.

Net cash flow from the acquisition

Thousands of euros

Cash paid 123,776 Less: cash and cash equivalents (4,702) Total 119,074

c) LSREF3 Octopus Holding Adequa, S.L.U.

On 1 December 2016, the Parent, Merlin Properties SOCIMI, S.A., acquired all ownership interest in LSREF3 Octopus Holding Adequa, S.L.U., the share capital of which amounted to EUR 5,075 thousands which was fully paid and represented by 5,075,300 shares of EUR 1 par value each, for a total of EUR 378,755 thousand. The main line of business of the acquired company is the lease of offices in Madrid. On 1 December 2016, the company name was changed to Merlin Properties Adequa, S.L.U.

Percentage of Consideration Date of ownership transferred Main line of business acquisition acquired (thousands of (voting rights) euros)

Acquisition and development of LSREF Octopus Holding Adequa, S.L.U. 01/12/2016 100% 378,755 property assets for lease

Thousands of euros Carrying Valuation Fair value amount adjustments

Investment property 272,374 107,626 380,000 Non-current assets 6,881 (4,313) 2,568 Current assets 12,495 (5,579) 6,916 Non-current and current (11,023) (26,907) (37,930) liabilities Total net assets 280,727 70,827 351,554 Consideration transferred 378,755 Loss incurred on the (27,201) business combination

The adjustment in value relates mainly to the contribution of the fair value of investment properties. The acquired assets relate to one office complex in Madrid, which at the time of the purchase was appraised by an independent appraisal company at EUR 380,000 thousand. The complex is leased out with an occupancy rate of 98%. This lease constitutes the acquired company’s business activity and its source of revenue. The purpose of these business combinations is to increase the Group’s presence in the Madrid real estate market.

The fair value of the receivables acquired, which are mainly trade receivables, was EUR 2,308 thousand and does not differ from the gross contractual amounts. The Parent’s directors did not consider there to be any indications at the date of acquisition that these receivables would not be collected in full. The valuation adjustment to liabilities of EUR 26,907 thousand corresponds mainly to the deferred tax liability associated with the valuation adjustments. The net loss and income generated in 2016 and included in the consolidated income statement for 2016 amounted to EUR 14,826 thousand and EUR 1,526 thousand.

Had the acquisition taken place on 1 January 2016, net loss would have been reduced by EUR 3,339 thousand and the revenue contributed to the Group would have been approximately EUR 15,989 thousand higher compared to the figures recognised in these consolidated financial statements. When calculating these amounts, the directors considered that the revenue generated and expenses incurred between 1 January 2016 and the acquisition date, along with the acquisition costs, did not vary.

Net cash flow from the acquisition

Thousands of euros

Cash paid 378,755 Less: cash and cash equivalents (4,569) Total 374,186

Other changes

1) Acquisition of 22.61% of Testa Inmuebles en Renta SOCIMI, S.A. and subsequent merger with the Parent

On 20 June 2016, the Parent acquired 34,810,520 shares of Testa Inmuebles en Renta SOCIMI, S.A., owned by Sacyr, and that represented 22.61% of the share capital and Testa’s voting rights. These shares, together with those acquired by the Parent in 2015, represented 99.93% of the share capital and voting rights of Testa Inmuebles en Renta SOCIMI, S.A. The acquisition went through in accordance with the investment agreement entered into between by the Parent and Sacyr, S.A. on 8 June 2015, with a payment of EUR 316,840 thousand for the acquired shares.

Subsequently, on 21 June 2016, the Boards of Directors of the Parent and Testa Inmuebles en Renta SOCIMI, S.A. approved the merger by absorption involving the integration of Testa Inmuebles en Renta SOCIMI, S.A. in the Parent, through the transfer en bloc of the former’s assets and liabilities to the latter. On 6 September 2016, the shareholders at the General Shareholders' Meeting of Testa Inmuebles en Renta, SOCIMI, S.A. approved the merger, which was then registered at the Mercantile Registry on 14 October 2016.

At the time of the merger, Merlin Properties SOCIMI, S.A. owned 153,858,636 shares in Testa, which represented 99.93% of its share capital. This meant that the share capital owned by third parties consisted of 109,082 shares, representing 0.07% of Testa’ share capital.

Pursuant to article 50.1 of the LME, Law 3/2009, of April 3rd, on structural amendments of private companies, the absorbing company, i.e., Merlin Properties, offered the shareholders of the absorbed companies the opportunity to acquire their shares. The shares owned by non-controlling interests were estimated to be worth EUR 11.90 shares, whereby the exchange ratio was 1,222 shares of the Parent for every share of the absorbed company.

As provided in the merger agreement, for accounting and economic purposes, the transactions carried out by the absorbed company are considered to have been performed by Merlin Properties SOCIMI, S.A. as of 1 January 2016.

Under the terms of the merger, all employees were transferred to the absorbing company, in accordance with the company succession regime regulated in article 44 of the Spanish Workers’ Statute.

The transaction qualified for the special tax regime envisaged in Chapter VII of Title VII of article 89 of the Spanish Law 27/2014, of 27 November, on Corporation Tax.

2) Loss of control of Testa Residencial SOCIMI, S.A.

In accordance with the integration agreement entered into with Metrovacesa, S.A., which was ratified at their respective General Shareholders’ Meetings on 15 September 2016, the entire residential business unit, consisting of the residential property assets allocated for lease (including Metrovacesa employees and, in general, the assets and liabilities associated with residential property, in addition to the EUR 250

million of debt not transferred to Merlin Properties SOCIMI, S.A. in the spin-off), was spun off in favour of Testa Residencial SOCIMI, S.A., a company that, at that time, was fully owned by the Parent. As consideration for the residential business, Testa Residencial SOCIMI, S.A. carried out a capital increase through the issue of 3,075,278,154 shares of EUR 0.01 par value each, with an share premium of EUR 0.13366 per share issued. This increase was subscribed in full by the shareholders of Metrovacesa, S.A., with an exchange ratio of one share of Testa Residencial SOCIMI, S.A. for every share of Metrovacesa, S.A. As a result of this transaction, the shareholders of Metrovacesa, S.A. acquired 65.76% of the share capital of Testa Residencial SOCIMI, S.A. and the Parent lost control of the company.

Consequently, the investment in Testa Residencial SOCIMI, S.A. is no longer fully consolidated, but rather accounted for using the equity method in the consolidated financial statements of the Merlin Group. The net assets of the residential business were classified under “Non-current assets held for sale” and “Liabilities associated with non-current assets held for sale” in the consolidated financial statements for 2015.

In accordance with IFRS 10, the Merlin Group initially recognised the ownership interest in Testa Residencial SOCIMI, S.A. at its fair value, which amounted to EUR 223,141 thousand. Appraisals of the assets of Testa Residencial SOCIMI, S.A. (mainly property assets, intangible assets and investments in associates) carried out by independent experts at the date control over the company was lost were used to determine the fair value of the investment in Testa Residencial SOCIMI, S.A.

Thousands of euros

Value of the investment in Testa Residencial SOCIMI, S.A. at 31 December 2015 137,109 Additions and profit prior to loss of control 10,183 Value of the investment at 15 September 2016 147,292

Fair value of Testa Residencial SOCIMI, S.A. at 15 September 2016 651,697 Ownership interest held by the Group 34.24% Initial value of the investment 223,141

Due to the loss of control and recognition of the investment at fair value, a positive gain of EUR 75,849 thousand was recognised under “Gains or losses on disposals of financial instruments” in the consolidated income statement for 2016.

3) Sale of hotel assets On 30 December 2016, the Group and a third party entered into a sale and purchase agreement for the Group’s hotel leasing business, the only exceptions being the properties shared with other businesses (Eurostars Torre Castellana in Madrid and Novotel Diagonal in Barcelona).

Specifically, the agreement entails the sale of 17 hotel assets and in the financial investments in Bardiomar, S.L. and Trade Center Hotel, S.L.

The parties agreed to a price of EUR 535 million, which EUR 458,291 thousand were collected in 2017 and EUR 50,794 thousand are to mature in 2018. As a result of this transaction, and arising from the recent acquisition of the hotels (included in the Group after the business combinations with Testa Inmuebles en Renta SOCIMI, S.A. and the property business of Metrovacesa, S.A.) and their measurement at fair value in accordance with IAS 40, no significant profit was recognised after the costs to sell.

Accordingly, as the minimum period stipulated by the SOCIMI regime has not elapsed, the Group included the taxable profit from this transaction in the tax base for 2016, recognising the related current income tax liability.

4) Liquidation of Testa American Real Estate Corporation In 2016 the shareholders at the General Meeting of Testa American Real Estate Corporation S.A. unanimously resolved to liquidate the company, which is wholly owned by the Group. The company

was declared to have ceased to exist by court order in October 2016. This transaction did not give rise to any profit or loss in the consolidated income statement for 2016.

4. Distribution of the profit of the Parent

The distribution of profit proposed by the Parent’s directors for approval by its shareholders at the Annual General Meeting is as follows: Thousands of euros

Profit for the year 114,535 Distribution: Legal reserve 11,454 Interim dividend 93,457 Dividends 9,624

Interim dividend

On 9 October 2017, the Parent’s Board of Directors resolved to distribute EUR 93,457 thousand as an interim dividend with a charge to profit for 2017. This interim dividend was paid to shareholders on 25 October 2017.

The provisional accounting statement prepared in accordance with legal requirements evidencing the existence of sufficient liquidity for the distribution of the dividends was as follows:

Thousands of euros

Profit before tax at 30 September 2017 109,078 Less: required transfer to the legal reserve (10,908) Profit that may be distributed with a charge to income for 2017 98,170

Interim dividend to be distributed 93,457

Forecast of cash for the period from 30 September 2017 to 30 September 2018: - Cash balance at 30 September 2017 472,273 - Projected proceeds 334,899 - Projected payments, including the interim dividend. (763,650) Projected cash balance 43,522

Other dividends distributed

On 26 April 2016, the shareholders at the Annual General Meeting approved the distribution of a dividend out of 2016 profit in the amount of EUR 47,310 thousand, and the distribution of an additional dividend with a charge to the share premium for EUR 46,643 thousand.

5. Accounting policies

The main accounting policies and measurement bases applied in preparing the Group’s consolidated financial statements, which comply with the IFRSs in force at the date thereof, are as follows:

5.1 Goodwill on consolidation

In determining the aforementioned fair value the Group:

1. Allocates cost to specific assets and liabilities of the companies acquired, increasing the carrying amount at which they were recognised in the statements of financial position of the companies acquired up to the limit of their market values.

2. If a cost is attributable to specific intangible assets, it is recognised explicitly in the consolidated statements of financial position provided that the market value at the date of acquisition can be measured reliably.

3. If the costs assigned differ from their values for tax purposes, the related deferred tax is recognised.

Goodwill is only recognised when it has been acquired for consideration.

If a cash-generating unit is sold, the amount attributed to goodwill is included in determining the profit or loss from the sale.

Goodwill is not amortised. However, at the end of each reporting period or whenever there is any indication of a decline in value, the Group tests the goodwill for impairment to determine whether there is any indication that the goodwill has suffered a permanent loss of value that has reduced the recoverable amount thereof to below its carrying amount. If there is any impairment, the goodwill is written down and the impairment loss is recognised. An impairment loss recognised for goodwill must not be reversed in a subsequent period.

All goodwill is allocated to one or more cash-generating units. The recoverable amount of each cash- generating unit is the higher of value in use and the net selling price of the assets associated with the cash- generating unit. The value in use is calculated according to the methodology described Notes 5.4 and 7.

5.2 Intangible assets

This heading includes computer software and intangible assets relating to concession projects. They are recognised at acquisition or production cost less any accumulated amortisation and any accumulated impairment losses. An intangible asset is recognised if, and only if, it is probable that the expected future economic benefits attributable to the asset will flow to the Group, and its cost can be measured reliably.

The gains or losses arising from the derecognition of an intangible asset are calculated as the difference between the net profit obtained on the sale and the carrying amount of the asset, and are recognised in the consolidated income statement when the asset is derecognised.

Computer software

“Computer software” includes the amount of computer programs acquired from third parties, and exclusively in those cases in which they are expected to be used over several years. Computer software is amortised over its useful life, which is normally four years.

Concession projects

This heading includes administrative concessions that are recognised at acquisition or production cost less any accumulated amortisation and any accumulated impairment losses.

Administrative concessions are recognised at the amount paid by the Group in operating fees and are amortised on a straight-line basis over the years of the concession.

The gains or losses arising from the derecognition of a concession project are calculated as the difference between the net profit obtained on the sale and the carrying amount of the asset, and are recognised in the consolidated income statement when the asset is derecognised.

5.3 Investment property

Investment property comprises buildings under construction and development for use as investment property, which are partially or fully held to generate revenue, profits or both, rather than for use in the

production or supply of goods or services, or for the Group’s administrative purposes or sale in the ordinary course of business.

All assets classified as investment property are occupied by various tenants. These properties are earmarked for leasing to third parties. The Parent’s directors do not plan to dispose of these assets in 12 months and have therefore decided to recognise them as investment property in the consolidated statement of financial position.

Investment property is carried at fair value at the reporting date and is not depreciated. Investment property includes land, buildings or other constructions held to earn rentals or for the obtainment of gains on the sale as a result of future increases in the respective market prices.

Gains or losses arising from changes in the fair value of investment property are included in the income statement for the year in which they arise.

While construction work is in progress, the costs of construction work and finance costs are capitalised. When the asset becomes operational, it is recognised at its fair value.

In accordance with IAS 40, the Group periodically determines the fair value of its investment property so that the fair value reflects the actual market conditions of the investment property items at that date. This fair value is determined each year based on the appraisals carried out by independent experts.

The market value of the Group’s investment property at 31 December 2017, calculated on the basis of appraisals carried out by Savills and CBRE, independent appraisers not related to the Group, amounted to EUR 10,352,415 thousand (see Note 9).

5.4 Impairment of property, plant and equipment and intangible assets

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets might have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years.

5.5 Investments accounted for using the equity method

At 31 December 2017, this heading in the consolidated statement of financial position included the amount corresponding to the percentage of shareholders’ equity of the investee relating to the Parent and accounted for using the equity method. In addition, and after accounting for these investments using the equity method, the Group decides whether or not an additional impairment loss needs to be recognised with regard to the Group’s net investment in the associate.

5.6 Leases

5.6.1 Classification of leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the Group, which usually has the option to purchase the assets at the end of the lease under the terms agreed upon when the lease was arranged. All other leases are classified as operating leases.

5.6.2 Accounting treatment as lessor

Operating leases

Assets leased to third parties under operating leases are recognised according to their nature.

Rental income from operating leases is recognised in the consolidated income statement on a straight-line basis over the term of the lease, net of any incentives granted.

Contingent payments from operating leases are recognised in the consolidated income statement when it is probable that they will be collected, which generally occurs when the conditions stipulated in the lease agreement are fulfilled.

5.6.3 Accounting treatment as lessee

Finance leases

At the commencement of the lease term, the Group recognises finance leases in the consolidated statement of financial position at amounts equal to the fair value of the leased asset or, if lower, the present value of the minimum lease payments. To calculate the present value of the lease payments the interest rate stipulated in the finance lease is used.

The cost of assets acquired under finance leases is presented in the consolidated statement of financial position on the basis of the nature of the leased asset. These assets relate in full to investment property and are measured in accordance with that established in Note 5.3.

Finance charges are recognised over the lease term on a time proportion basis.

Operating leases

Lease payments under an operating lease, net of any incentives received, are recognised as an expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern of the benefits of the lease.

The Group expenses the initial costs directly incurred under the operating leases as they are incurred. Contingent rent is recognised as an expense when it is most likely to be incurred. 5.7 Financial instruments

Financial instruments are classified upon initial recognition as financial assets, financial liabilities or equity instruments, in accordance with the economic reality of the contractual arrangement and the definitions of a financial asset, financial liability and equity instrument given in IAS 32 Financial Instruments: Presentation.

Financial instruments are recognised when the Group becomes a party to the contractual provisions of the instrument.

For measurement purposes, financial instruments are classified as financial assets or liabilities at fair value through profit or loss, separating those initially classified as held for trading, loans and receivables, held-to- maturity investments, available-for-sale financial assets and financial liabilities at amortised cost. Financial instruments are classified in these categories depending on their nature and the Group’s intentions at the time of initial recognition.

Financial assets

Financial assets are recognised in the consolidated statement of financial position on acquisition and are initially recognised at fair value. The financial assets held by the Group companies are classified as:

1. Loans and receivables are initially recognised at the fair value of the consideration given, plus any directly attributable transaction costs and are subsequently measured at amortised cost. The Group has recognised provisions to cover uncollectibility risks. These provisions are calculated based on the probability of recovering the debt depending on its age and the debtor’s solvency. At 31 December 2017, the fair value of these assets was not materially different from their value in the consolidated statement of financial position.

2. Financial assets held for trading are measured at fair value and the gains or losses arising from changes in fair value are recognised in the consolidated income statement. The fair value of a financial instrument on a given date is taken to be the amount for which it could be bought or sold on that date by two knowledgeable, willing parties in an arm’s length transaction acting prudently.

3. Held-to-maturity investments: assets with fixed or determinable payments and fixed maturity. The Group has the positive intention and ability to hold them from the date of purchase to the date of maturity.

4. Available-for-sale financial assets: these relate to equity investments that do not meet the requirements included in IFRSs for treatment as an investment in a subsidiary, associate or joint venture. They are recognised in the consolidated statement of financial position at fair value. Gains and losses from changes in fair value are recognised directly in equity until the asset is disposed of or it is determined that it has become impaired, at which time such gains or losses are taken directly to the consolidated income statement.

At least at each reporting date the Group tests its financial assets not measured at fair value through profit or loss for impairment. Objective evidence of impairment is considered to exist when the recoverable amount of the financial asset is lower than its carrying amount. When this occurs, the impairment loss is recognised in the consolidated income statement.

Financial assets are derecognised when they expire or when the rights to the cash flows from the related financial asset and substantially all the risks and rewards of ownership have been transferred. However, the Group does not derecognise financial assets, and recognises a financial liability for an amount equal to the consideration received, in transfers of financial assets in which substantially all the risks and rewards of ownership are retained.

Financial liabilities

The main financial liabilities held by the Group companies are held-to-maturity financial liabilities that are measured at amortised cost. The financial liabilities held by the Group companies are classified as:

1. Bank and other loans: loans from banks and other lenders are recognised at the proceeds received, net of transaction costs. They are subsequently measured at amortised cost. Borrowing costs are recognised in the consolidated income statement on an accrual basis using the effective interest method and are added to the carrying amount of the liability to the extent that they are not settled in the period in which they arise.

2. Trade and other payables: trade payables are initially recognised at fair value and are subsequently measured at amortised cost using the effective interest method.

The Group derecognises financial liabilities when the obligations they generate are extinguished.

5.8 Derivative financial instruments and hedge accounting

The Group uses derivative financial instruments to hedge the risks to which its future activities, transactions and cash flows are exposed. There risks are mainly due to changes in interest rates and inflation. Among the various transactions, the Group uses certain financial instruments as economic hedges.

In order for these financial instruments to qualify for hedge accounting, they are initially designated as such and the hedging relationship is documented. Also, the Group verifies, both at inception and periodically over the term of the hedge (at least at the end of each reporting period), that the hedging relationship is effective, i.e. that it is prospectively foreseeable that the changes in the fair value or cash flows of the hedged item (attributable to the hedged risk) will be almost fully offset by those of the hedging instrument and that, retrospectively, the gain or loss on the hedge was within a range of 80-125% of the gain or loss on the hedged item.

Financial derivatives are initially recognised at cost in the consolidated statement of financial position, and the required valuation adjustments are subsequently made to reflect their fair value at all times. Increases in value are recognised under “Non-current financial assets - Derivatives” and “Other current financial assets - Derivatives” and reductions in value under “Non-current and current bank borrowings - Derivatives” in the consolidated statement of financial position. Gains and losses from fair value changes are recognised in the consolidated income statement, unless the derivative has been designated and is highly effective as a hedge, in which case it is recognised as follows:

- Cash flow hedges: in hedges of this nature, the portion of the gain or loss on the hedging instrument that has been determined to be an effective hedge is recognised temporarily in equity and is recognised in the income statement in the same period during which the hedged item affects profit

or loss, unless the hedge relates to a forecast transaction that results in the recognition of a non- financial asset or a non-financial liability, in which case the amounts recognised in equity are included in the initial cost of the asset or liability when it is acquired or assumed.

- Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gains or losses on the hedging instrument recognised in equity are retained in equity until the forecast transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to net profit or loss for the year.

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and provided that the host contracts are not measured at fair value by recognising changes in fair value in the consolidated statement of comprehensive income.

The fair value of the derivative financial instruments is calculated using the valuation techniques described in Note 5.9 below.

5.9 Valuation techniques and applicable assumptions to measure fair value

The fair value of financial assets and liabilities is calculated as followed:

- The fair value of financial assets and liabilities with standard terms and conditions and that are traded on active, liquid markets is calculated by reference to prices quoted in the market.

- The fair value of financial assets and liabilities (except derivative instruments) is calculated in accordance with the generally accepted valuation models on the basis of discounted cash flows using the prices of observable market transactions and the contributor prices of similar instruments.

- The fair value of interest rate swaps is calculated by discounting future settlements between fixed and floating interest rates to their present value, in line with implicit market interest rates, obtained from long-term interest rate swap curves. Implicit volatility is used to calculate the fair values of caps and floors using option valuation models.

Consideration must be given when valuing financial derivative instruments that the derivative must also effectively offset the exposure inherent to the hedged item or position throughout the expected term of the hedge, and there must be adequate documentation evidencing the specific designation of the financial derivative to hedge certain balances or transactions and how this effectiveness was intended to be achieved and measured. Moreover, pursuant to IFRS 13 and due to the inherent risk, the credit risk of the parties to the contract (both their own risk and that of the counterparty) must be included in the valuation of the derivatives. The Group applied the discounted cash flow method, considering a discount rate affected by the Merlin Group’s own credit risk.

Financial instruments measured subsequent to initial recognition at fair value are grouped into levels 1 to 3 based on the degree to which the fair value is observable:

- Level 1: those measured using quoted prices (unadjusted) in active markets for identical assets or liabilities.

- Level 2: those measured using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

- Level 3: those measured using valuation techniques, including inputs for the asset or liability that are not based on observable market data (non-observable inputs).

The Group’s financial assets and liabilities measured at fair value were as follows at 31 December 2017:

2017

Thousands of euros Level 1 Level 2 Level 3 Total

Derivative financial instruments (Note 16.3) - (36,912) - (36,912) Embedded derivatives (Note 12) - 207,274 - 207,274 - 170,362 - 170,362

2016

Thousands of euros Level 1 Level 2 Level 3 Total

Derivative financial instruments - (73,902) - (73,902) Embedded derivatives - 207,182 - 207,182 - 133,280 - 133,280

Note 9 also provides information on calculating the fair value of investment property in accordance with the valuation techniques described in the note.

5.10 Equity instruments

An equity instrument is a contract that evidences a residual interest in the assets of the Parent after deducting all of its liabilities.

Capital instruments issued by the Parent are recognised in equity at the proceeds received, net of issue costs.

The Parent’s equity instruments acquired by the Group are recognised separately at acquisition cost and deducted from equity in the consolidated statement of financial position, regardless of why they were acquired. No gains or losses from transactions involving own equity instruments are recognised in the consolidated income statement.

If the Parent’s own equity instruments are subsequently retired, capital is reduced by the nominal amount of these treasury shares and the positive or negative difference between the acquisition price and nominal amount of the shares is debited from or credited to reserves.

The transaction costs related to own equity instruments are recognised as a decrease in equity, net of any related tax effect.

5.11 Shareholder remuneration

Dividends are paid in cash and recognised as a reduction in equity when the pay-outs are approved by shareholders at the Annual General Meeting.

The Parent is subject to the special regime for SOCIMIs. As established in article 6 of Spanish Law 11/2009, of 26 October, amended by Spanish Law 16/2012, of 27 December, the SOCIMIs opting to pay tax under the special tax regime are required to distribute the profit generated during the year to shareholders as dividends. Once the corresponding commercial obligations have been fulfilled, the distribution must be agreed within six months from year end, and the dividends paid within 30 days from the date on which the pay-out is agreed.

Moreover, as specified in Spanish Law 11/2009, of 26 October, amended by Spanish Law 16/2012, of 27 December, the Parent must distribute the following as dividends:

- 100% of the profit from dividends or shares in profits distributed by the entities referred to in article 2.1 of Spanish Law 11/2009.

- At least 50% of the profit generated from the transfer of the properties, shares or investments referred to in article 2.1 of Spanish Law 11/2009, once the periods referred to in article 3.2 of Spanish Law 11/2009 have elapsed, subject to compliance with its main corporate purpose. The rest of the profit must be reinvested in other properties or shares subject to compliance with this purpose, within a period of three years following the date of transfer. Failing this, the profit must be distributed in full together with, if applicable, the profit generated during the year in which the reinvestment period ends. If the items to be reinvested are transferred prior to the end of the holding period, that profit must be distributed in full together with, if applicable, the profit generated during the year in which the items were transferred. The obligation to distribute profit does not apply to the portion of the profit attributable to prior years in which the Company was not included under the special tax regime established in this Law.

- At least 80% of the rest of the profit obtained. When dividend distributions are charged to reserves generated from profits in a year in which the special tax regime applied, the distribution must necessarily be approved as set out above.

5.12 Cash and cash equivalents

The Group includes under this heading cash and short-term highly liquid investments maturing in less than three months that are readily convertible to cash and that are subject to an insignificant risk of changes in value. The interest income associated with these transactions is recognised as income when accrued while unmatured interest is presented in the consolidated statement of financial position as an addition to the balance of the aforementioned heading. 5.13 Provisions

When preparing the consolidated financial statements, the Parent’s directors made a distinction between:

- Provisions: credit balances covering present obligations arising from past events, the settlement of which is likely to cause an outflow of resources, but that are uncertain as to their amount and/or timing.

- Contingent liabilities: possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more future events not wholly within the Group’s control.

The consolidated financial statements include all the provisions with respect to which it is likely that the obligation will have to be settled. Contingent liabilities are not recognised in the consolidated financial statements, but rather are disclosed, unless the possibility of an outflow in settlement is considered to be remote.

Provisions are measured at the present value of the best possible estimate of the amount required to settle or transfer the obligation, taking into account the information available on the event and its consequences. Where discounting is used, adjustments made to provisions are recognised as finance cost on an accrual basis.

The compensation receivable from a third party on settlement of the obligation is recognised as an asset, provided there is no doubt that the reimbursement will take place, unless there is a legal relationship whereby a portion of the risk has been externalised, as a result of which the Group is not liable, in which case, the compensation will be taken into account when estimating, if appropriate, the amount of the related provision.

5.14 Revenue recognition

Revenue and expenses are recognised on an accrual basis, i.e. when the actual flow of the related goods and services occurs, regardless of when the resulting monetary or financial flow arises. Rental income is measured at the fair value of the consideration received, net of discounts and taxes.

Discounts (rent waivers and rebates) granted to lessees are recognised as a reduction in rental income when it is probable that conditions precedent will be fulfilled requiring them to be granted.

Discounts are recognised by expensing the total rent waiver or rebate on a straight-line basis over the term of the lease agreement in force. If a lease agreement is cancelled earlier than expected, any outstanding rent waiver or rebate is recognised in the last period prior to the end of the agreement.

Leasing of investment property to third parties

The Group companies’ principal activity comprises the acquisition and leasing of primarily shopping malls, logistics units and offices. The Group’s revenue is generated by leasing this investment property to third parties.

Revenue from the leasing of investment property is recognised taking into account the stage of completion of the transaction at the reporting date, provided the result of the transaction can be reliably estimated. Income from the Group’s leases is recognised by Group companies on a monthly basis pursuant to the conditions and amounts agreed with the lessees in the various agreements. This income is only recognised when it can be measured reliably and it is probable that the economic benefits from the lease will be received.

Where the outcome of services rendered cannot be measured reliably, revenue is recognised to the extent that the expenses incurred are deemed recoverable.

Service charges rebilled to lessees are recognised net of other operating expenses.

5.15 Income tax

5.15.1 General regime

Tax expense (tax income) comprises current tax expense (current tax income) and deferred tax expense (deferred tax income).

The current income tax expense is the amount payable by the Group as a result of income tax settlements for a given year. Tax credits and other tax benefits, excluding tax withholdings and prepayments, and tax loss carryforwards from prior years effectively offset in the current year reduce the current income tax expense.

The deferred tax expense or income relates to the recognition and derecognition of deferred tax assets and liabilities. These include temporary differences measured at the amount expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities and their tax bases, and tax loss and tax credit carryforwards. These amounts are measured at the tax rates that are expected to apply in the period when the asset is realised or the liability is settled.

Deferred tax liabilities are recognised for all taxable temporary differences, unless the temporary difference arises from the initial recognition of goodwill, goodwill for which amortisation is not deductible for tax purposes or the initial recognition of other assets and liabilities in a transaction that affects neither accounting profit (loss) nor taxable profit (tax loss).

Deferred tax assets are recognised for temporary differences to the extent that it is considered probable that the consolidated companies will have sufficient taxable profits in the future against which the deferred tax asset can be utilised, and the deferred tax assets do not arise from the initial recognition of other assets and liabilities in a transaction that affects neither accounting profit (loss) nor taxable profit (tax loss). The other deferred tax assets (tax loss, temporary differences and tax credit carryforwards) are only recognised if it is considered probable that the consolidated companies will have sufficient future taxable profits against which they can be utilised.

The deferred tax assets recognised are reassessed at the end of each reporting period and the appropriate adjustments are made to the extent that there are doubts as to their future recoverability. Also, unrecognised deferred tax assets are reassessed at the end of each reporting period and are recognised to the extent that it has become probable that they will be recovered through future taxable profits.

5.15.2 SOCIMI regime

The special tax regime for SOCIMIs, as amended by Law 16/2012, of 27 December, is based on the application of a 0% income tax rate, provided certain requirements are met. Particularly noteworthy is the requirement that at least 80% of its assets must be made up of urban properties intended for lease and acquired through full ownership or through shareholdings in Spanish or foreign companies, regardless of whether or not they are listed on organised markets, that meet the same investment and profit distribution requirements. Likewise, the main sources of income for these entities must come from the real estate market, either through leasing the properties, their subsequent sale after a minimum lease period, or the income

generated from shareholdings in entities with similar characteristics. However, tax is accrued in proportion to the dividend distributed. The dividends received by the shareholders will be exempt, unless the shareholder receiving such dividends is a legal entity subject to income tax or a permanent establishment of a foreign company, in which case a tax credit is received, and this income is taxed at the tax rate of the shareholder. However, the other income will not be taxed as long as it is not distributed to the shareholders.

As established in Transitional Provision Nine of Spanish Law 11/2009, of 26 October, amended by Spanish Law 16/2012, of 27 December, governing listed real estate investment companies (SOCIMIs), the company will be subject to a special tax rate of 19% on the total dividends or shares in profit distributed to shareholders that have an ownership interest in the company’s share capital equal to or greater than 5%, when these dividends, in reference to the shareholders, are exempt or are taxed at a rate less than 10%. Accordingly, the Group has established a procedure that guarantees confirmation by shareholders of their tax status, and withholds, where appropriate, 19% of the dividend distributed to shareholders that do not meet the aforementioned tax requirements.

5.16 Share-based payments

The Parent recognises, on the one hand, the goods and services received as an asset or as an expense, depending on their nature, when they are received and, on the other, the related increase in equity, if the transaction is equity-settled, or the related liability if the transaction is settled with an amount based on the value of the equity instruments.

In the case of equity-settled transactions, both the services rendered and the increase in equity are measured at the fair value of the equity instruments granted, by reference to the grant date. In the case of cash-settled share-based payments, the goods and services received and the related liability are recognised at the fair value of the latter, by reference to the date on which the requirements for recognition are met.

In 2016, the Parent had a commitment to award an annual variable remuneration incentive to the management team, as determined by the Appointments and Remuneration Committee which compensates senior management and executive directors based on the returns obtained by the Group’s shareholders (the “2016 Share Plan”). In accordance with the terms and conditions of this plan, members of senior management must remain at the Group and provide their services for a period of three years.

Lastly, at the Annual General Meeting held on 26 April 2017, the shareholders approved a new remuneration plan for the management team and other relevant employees of the Group (which includes among others the executive directors and senior management), the measurement period of which is from 1 January 2017 to 31 December 2019 (“2017-2019 Incentive Plan”). In accordance with that established in this plan, members of the management team may be entitled to receive (i) a certain monetary amount based on the increase in the share price and (ii) shares of the Parent, provided that certain objectives are met.

Vesting of the incentive will independently be conditional upon the total rate of return obtained by the shareholder during the three-year period due to:

 the increase in the quoted price of the Parent’s share plus the dividends distributed during the measurement period; and

 the increase in the EPRA NAV per share of the Parent plus the dividends distributed by the Company during the measurement period.

In order for the right to the share-based incentive and to the EPRA NAV-based incentive to be vested, the total shareholder rate of return (TSR) must be at least 24%, as detailed below:

Percentage assigned to Percentage assigned to TSR NAV / TSR share price beneficiaries (“PR”) shareholders < 24% 0% 100%

≥ 24% and < 36% 6% 94% ≥ 36% 9% 91%

The date for calculating the amount of the incentive tied to the NAV per share and the amount of the incentive tied to the quoted price of the shares will be 31 December 2019. The maximum amount to be received for the incentive tied to the quoted price from 2017 to 2019 will amount to EUR 37.5 million. If the amount of the incentive were to exceed the aforementioned limit, it would be used to supplement the incentive referenced to the NAV per share, if this falls below the maximum limit established in this connection. Also, the maximum amount of the incentive tied to NAV per share will be EUR 75 million and a maximum of 6,000,000 shares have been allocated for the payment thereof. Lastly, if the value of the maximum number of shares allocated to the plan were below the aforementioned incentive tied to the EPRA NAV, the difference would be paid in cash.

5.17 Employee obligations

Under current labour legislation, the Group companies are required to pay termination benefits to employees terminated under certain conditions.

When a restructuring plan is approved by the directors, made public and communicated to employees, the Group recognises the provisions required to meet any future payments resulting from their application. These provisions are calculated in accordance with the best estimates available of the foreseeable costs.

At 31 December 2016, the Group had a commitment in this regard arising from the collective redundancy procedure announced on 20 December 2016 and that affected 52 employees. These termination benefits were paid in 2017 and there is no other plan of this nature in force.

5.18 Current assets and liabilities

The Group classifies its assets and liabilities as current and non-current in the consolidated statement of financial position. To this end, current assets and current liabilities are those that meet the following criteria:

 Assets are classified as current when they are expected to be realised, sold or consumed over the course of the Group’s normal operating cycle, when they are held primarily for the purpose of being traded, when they are expected to be realised within twelve months after the reporting date, or when they constitute cash and cash equivalents, except in cases where they cannot be exchanged or used to settle a liability for at least twelve months after the reporting date.

 Liabilities are classified as current when they are expected to be settled over the course of the Group’s normal operating cycle, when they are held primarily for the purpose of being traded, when they must be settled within twelve months after the reporting date or when the Group does not have an unconditional right to defer settlement of the liabilities for twelve months after the reporting date.

 Derivative financial instruments not held for trading are classified as current or non-current according to the period of maturity or periodic settlement.

5.19 Segment reporting

An operating segment is a component of the Group that engages in business activities from which it may earn revenue and incur expenses, whose results from operations are reviewed regularly by the Group’s highest operating decision-making body to determine how resources should be allocated to the segment and assess its performance, for which separate financial information is available.

5.20 Earnings per share

Basic earnings per share are calculated by dividing net profit or loss attributable to the Parent by the weighted average number of ordinary shares outstanding during the year, excluding the average number of shares of the Parent held by the Group companies.

5.21 Environmental information

The Group carries out activities whose main purpose is to prevent, mitigate or repair damage that its activities may have on the environment.

Expenses incurred in connection with these environmental activities are recognised as other operating expenses in the year in which they are incurred. However, because of their nature, the Group’s business activities do not have a significant environmental impact.

5.22 Consolidated statements of cash flows

The following terms are used in the consolidated statements of cash flows (prepared using the indirect method) with the meanings specified:

1. Cash flows: inflows and outflows of cash and cash equivalents, which are short-term, highly liquid investments that are subject to an insignificant risk of changes in value.

2. Operating activities: the principal revenue-producing activities of the consolidated Group companies and other activities that are not investing or financing activities.

3. Investing activities: the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents.

4. Financing activities: activities that result in changes in the size and composition of equity and borrowings that are not operating activities.

6. Segment reporting

a) Basis of segmentation

Group management has segmented its activities into the business segments detailed below according to the type of assets acquired and managed:

 Office buildings

 High Street retail assets

 Shopping centres

 Logistics assets

 Other

Any revenue or expense that cannot be attributed to a specific line of business or relate to the entire Group are attributed to the Parent as a “Corporate unit/Other”, as are the reconciling items arising from the reconciliation of the result of integrating the financial statements of the various lines of business (prepared using a management approach) and the Group’s consolidated financial statements.

The profits of each segment, and each asset within each segment, are used to measure performance as the Group considers this information to be the most relevant when evaluating the segments’ results compared to other groups operating in the same businesses.

The Group carried out its business activities mainly in Spain and Portugal in the year ended 31 December 2017.

b) Basis and methodology for segment reporting

The segment information below is based on monthly reports prepared by Group management and is generated using the same computer application that prepares all the Group’s accounting information. The accounting policies applied to prepare the segment information are the same as those used by the Group, as described in Note 5.

Segment revenue relates to ordinary revenue directly attributable to the segment plus the relevant proportion of the Group’s general income that can be allocated on a reasonable basis to that segment. The revenue of

each segment does not include interest or dividend income, gains on the disposal of investment property, debt recoveries or cancellation.

Segment expenses are calculated as the directly attributable expenses incurred in the operating activities, plus the corresponding proportion of the expenses that can be reasonably allocated to the segment.

The segment’s profit or loss is presented before any adjustment for non-controlling interests.

The assets and liabilities of the segments are those that are directly related to their operations plus those that can be directly attributed to them on the basis of the aforementioned allocation system, and include the proportional part of joint ventures.

Segment reporting

Segment information about these businesses at 31 December 2017 is presented below:

Thousands of euros High Office Street Shopping Logistic Corporat 2017 buildings retail centres s Other e Unit Group total

Revenue from non-Group customers Rental income 206,486 106,096 88,738 40,478 12,918 8,578 463,294 Revenue 206,486 106,096 88,738 40,478 12,918 8,578 463,294 Other operating income 131 33 393 228 - 3,504 4,289 Personal expenses - - (392) (410) (141) (70,816) (71,759) Other operating expenses (16,167) (1,934) (13,257) (4,422) (2,218) (13,996) (51,994) Gains or losses on disposal of non- 45 488 417 - (714) - 236 current assets Depreciation and amortisation - (5) (1,821) (7,349) (19) (1,185) (10,379) Provision surpluses 310 - 1,883 - - (5,984) (3,791) Absorption of the revaluation of - - - - (9,839) - (9,839) investment property Changes in fair value of investment 553,672 141,534 91,910 82,456 27,829 - 897,401 property Negative goodwill on business (1,775) - - - - - (1,775) combinations Profit/(loss) from operations 742,702 246,212 167,871 110,981 27,816 (79,899) 1,215,683

Net financial profit/(loss) (3,535) (23,652) (3,960) (2,807) (14) (88,105) (122,073) Profit/(loss) on disposal of financial 116 (10) 1,075 17 (6) (142) 1,050 instruments Changes in the value of derivative (1,695) (888) - 60 - 5,099 2,576 financial instruments Share of results of companies - - - - - 16,233 16,233 accounted for using the equity method Profit/(Loss) before tax 737,588 221,662 164,986 108,251 27,796 (146,814) 1,113,469 Income tax (10,077) (2,132) (10,141) (1,017) (1,322) 11,748 (12,941) Profit for the year 727,511 219,530 154,845 107,234 26,474 (135,066) 1,100,528

Thousands of euros High Street Shopping Corporate 2017 Office buildings retail centres Logistics Other Unit Group total

Investment property 5,187,207 2,140,262 1,661,845 624,097 739,000 4 10,352,415 Non-current financial assets- 19,363 222,083 8,963 5,680 1,626 18,167 275,882 Derivatives - 207,274 - - - - 207,274 Other financial assets 19,363 14,809 8,963 5,680 1,626 18,167 68,608 Deferred tax assets 23 7,079 808 553 9,572 126,092 144,127 Other non-current assets - 6 85,518 156,110 915 375,488 618,037 Non-current assets 5,206,593 2,369,430 1,757,134 786,440 751,113 519,751 11,390,461

Trade receivables 8,649 1,589 2,368 5,334 7,258 53,335 78,533 Other current financial assets 47 405 17 1,408 17 71,560 73,454 Other current assets 26,257 59,583 45,593 17,196 1,822 312,140 462,591 Current assets 34,953 61,577 47,978 23,938 9,097 437,035 614,578 Total assets 5,241,546 2,431,007 1,805,112 810,378 760,210 956,786 12,005,039

Non-current bank borrowings and debenture 20,844 948,049 131,152 96,264 - 4,057,686 5,253,995 issues Other non-current liabilities 323,312 91,797 112,331 42,127 3,502 179,925 752,994 Non-current liabilities 344,156 1,039,846 243,483 138,391 3,502 4,237,611 6,006,989 Current liabilities 41,774 12,783 9,338 10,597 8,415 191,360 274,267 Total liabilities 385,930 1,052,629 252,821 148,988 11,917 4,429,096 6,281,381

Segment information about these businesses at 31 December 2016 is presented below:

Thousands of euros Office High Street Shopping Logistic Corporat Group 2016 buildings retail centres s Other e Unit total

Revenue from non-Group customers Rental income 134,081 101,264 53,201 22,402 35,911 4,787 351,646 Total revenue 134,081 101,264 53,201 22,402 35,911 4,787 351,646 Other operating income 86 - 459 132 738 2,197 3,612 Personal expenses (23) - (284) (124) (385) (42,425) (43,241) Other operating expenses (8,651) (1,756) (4,150) (2,450) (4,396) (30,262) (51,665) Gains or losses on disposal of non- current assets (24) 2,639 (5,345) (1,011) 12,225 - 8,484 Depreciation and amortisation - (27) (439) (1,422) (2,230) (661) (4,777) Provision surpluses 15 - - - - 17 32 Absorption of the revaluation of investment property (101,935) - (38,380) (8,792) (5,321) - (154,428) Changes in fair value of investment property 166,052 123,593 109,617 39,506 14,381 - 453,149 Negative difference on business combinations (30,683) - (905) (3,956) - 73,117 37,573 Profit (Loss) from ordinary activities 94,801 102,120 42,537 13,571 41,863 6,770 301,662 Net financial profit/(loss) (2,676) (21,561) 159 (1,815) (775) (62,913) (89,581) Profit/(loss) on disposal of financial instruments - - 48 - 48,706 25,892 74,646 Changes in the value of derivative financial instruments (53) 11,744 - (393) (477) (5,464) 5,357 Share of results of companies accounted for using the equity method - - 557 - (2,924) 4,184 1,817 Profit/(Loss) before tax 156,189 215,896 114,538 42,077 95,453 (31,531) 592,622 Income tax (1,666) (4,231) (838) (231) (1,408) (1,474) (9,848) Profit for the year 154,523 211,665 113,700 41,846 94,045 (33,005) 582,774

Thousands of euros High Street Shopping Corporate Group 2016 Office buildings retail centres Logistics Other Unit total

Investment property 4,645,053 1,997,428 1,525,247 455,142 404,310 4 9,027,184 Non-current financial assets- 17,855 222,100 10,616 4,869 3,585 16,407 275,432 Derivatives - 207,182 - - - - 207,182 Other financial assets 17,855 14,918 10,616 4,869 3,585 16,407 68,250 Deferred tax assets 55 7,337 932 9,494 1,479 121,747 141,044 Other non-current assets 231 11 110,056 160,156 4,321 360,455 635,230 Non-current assets 4,663,194 2,226,876 1,646,851 629,661 413,695 498,613 10,078,890

Trade receivables 14,842 6,228 4,429 4,721 318,067 157,607 505,894 Other current financial assets 17 459 - 1,421 - 4,547 6,444 Other current assets 17,607 34,511 13,616 7,501 753 253,364 327,352 Current assets 32,466 41,198 18,045 13,643 318,820 415,518 839,690 Total assets 4,695,660 2,268,074 1,664,896 643,304 732,515 914,131 10,918,580

Non-current bank borrowings and debenture issues 233,988 925,246 130,301 100,380 - 3,784,667 5,174,582 Other non-current liabilities 234,132 135,295 50,175 29,018 454 245,938 695,012 Non-current liabilities 468,120 1,060,541 180,476 129,398 454 4,030,605 5,869,594 Current liabilities 40,442 16,530 15,269 12,261 25,233 98,482 208,217 Total liabilities 508,562 1,077,071 195,745 141,659 25,687 4,129,087 6,077,811

a) Geographical segment reporting

For the purposes of geographical segment reporting, segment revenue is grouped according to the geographical location of the assets. Segment assets are also grouped according to their geographical location.

The following tables summarises, by geographical area, the revenue and non-current investment property for each of the assets held by the Group:

2017

Thousands of euros Investment Revenue % property / % Intangible assets

Madrid 231,743 50% 5,921,608 55% Catalonia 82,916 18% 1,793,210 17% Galicia 21,303 5% 434,525 4% Basque Country 20,735 4% 409,118 4% Andalusia 20,585 4% 402,565 4% Valencia 22,920 5% 421,745 4% Castilla y León 6,401 1% 132,446 1% Rest of Spain 45,882 10% 1,014,149 8% Portugal 10,809 3% 272,489 3% Total 463,294 100% 10,801,855 100% Includes the amount of concession projects and the amount of the implied derivative described note 12

2016

Thousands of euros Investment Revenue % property / % Intangible assets

Madrid 170,997 49% 5,276,648 56% Catalonia 55,576 16% 1,503,073 16% Galicia 22,559 6% 424,923 4% Basque Country 14,800 4% 393,184 4% Andalusia 19,234 5% 379,111 4% Valencia 15,077 4% 400,441 4% Castilla y León 6,293 2% 121,770 1% Rest of Spain 39,024 11% 834,813 9% Portugal 7,229 2% 146,147 2% France 857 0% - 0% Total 351,646 100% 9,480,110 100% Includes the amount of concession projects and the amount of the implied derivative described note 12

b) Main customers

The table below lists the lessees from which the most rental income was received at 31 December 2017, and the primary characteristics of each of them:

2017

% of total % Position Name Type Maturity rental accumulated income High Street 1 BBVA 19.6% 19.6% 2029-2040 Retail

2 Endesa Offices 4.6% 24.3% 2020-2028

Shopping 3 Inditex 2.8% 27.1% 2018 centres 4 Técnicas Reunidas Offices 2.3% 29.4% 2019

5 PricewaterhouseCoopers, S.L. Offices 1.7% 31.1% 2022

High Street 6 Caprabo 1.5% 32.6% 2023 Retail 7 Indra Sistemas, S.A. Offices 1.5% 34.1% 2024

8 Hotusa + WTC Hotel 1.4% 35.5% 2021

9 Comunidad de Madrid Offices 1.4% 36.9% 2019

10 XPO Logistics 1.1% 38.1% 2020

2016

% of total % Position Name Type Maturity rental accumulated income High Street 1 BBVA 19.54% 19.5% 2029-2040 retail

2 Endesa Offices 4.67% 24.2% 2020-2028

3 Técnicas Reunidas Offices 2.54% 26.7% 2019

Shopping 4 Inditex 2.52% 29.3% 2017 centres 5 Renault Offices 1.99% 31.3% 2017

6 Madrid Offices 1.61% 32.9% 2019

7 PricewaterhouseCoopers, S.L. Offices 1.59% 34.4% 2022

8 Hotusa + WTC Hotel 1.44% 35.9% 2021

High Street 9 Caprabo 1.54% 37.4% 2023 retail 10 Amper Sistemas, S.A. Offices 1.43% 38.9% 2022

7. Goodwill on consolidation

The goodwill recognised at 31 December 2016 arose from the business combination with Testa Inmuebles en Renta, SOCIMI, S.A. and subsidiaries (see Note 3). The changes in this heading in 2017 were as follows:

Thousands of euros Transfers due Balance at to absorption Balance at 31/12/2016 of value 31/12/2017

Goodwill 9,839 (9,839) -

The changes in 2017 relate to the revaluation of the property assets from Testa. Accordingly, the valuations of the assets included in the cashflow generation units linked to the goodwill carried out by independent appraisers at 31 December 2017 increased by EUR 25,752 thousand compared to 31 December 2016 (see Note 9). The Group considers that this increase shows that the expectations existing at the date of the business combination were met and, therefore, the goodwill was reduced by EUR 9,839 thousand, which corresponds to the absorption of goodwill as a result of the increase in value of the property assets in 2017.

2016

Thousands of euros Transfer to Transfers non-current due to

Balance at assets held for absorption of Balance at 31/12/2015 sale Reductions value 31/12/2016

Goodwill 193,039 (503) (28,269) (154,428) 9,839

The main changes in 2016 in “Goodwill” relate to the disposal in the amount of EUR 28,269 thousand arising mainly from the sale of the hotel rental business, which had been assigned a portion of the goodwill.

As indicated above in this Note, the change also includes the effect of the increase in value in 2016 due to property assets from Testa. Accordingly, the valuations of the assets acquired in the Testa business combination carried out by independent appraisers at 31 December 2016 increased by EUR 202,731 thousand compared to 31 December 2015. The Group consider that this increase shows that the expectations existing at the date of the business combination were partially met and, therefore, the goodwill was reduced by EUR 154,428 thousand, which corresponds to the absorption of goodwill as a result of the increase in value of the property assets in 2016.

8. Intangible concession projects

The changes in concession projects at year-end 2017 are as follows:

Thousands of euros Balance at 31 December 2015 71,500

Disposals (71,500) Changes in the scope of consolidation 248,242 Depreciation and amortisation charge (2,498) Balances at 31 December 2016 245,744

Additions 5,570 Depreciation and amortisation charge (9,148) Balances at 31 December 2017 242,166

In 2016, after the integration of the commercial assets of Metrovacesa, S.A., the Group added the La Fira shopping centre located in Reus (Tarragona). This shopping centre is operated under an administrative concession granted by the Reus Municipal Council for a maximum term of 50 years, maturing in 2060.

Also, as a result of the business combination with Saba Parques Logísticos, S.A. (currently Merlin Parques Logísticos, S.A.) in October 2016, the Group has recognised the following intangible assets:

 Operating rights of the logistics centre in the free trade zone of Barcelona under the terms of the contract entered into with the Free Trade Zone Consortium, lasting until 31 December 2049.

 Administrative concessions granted by the Seville Port Authority to operate various plots of land in the Seville port area. These concessions last until 2033-2043.

These assets were included in the consolidated statement of financial position at the fair value determined by independent experts at the date of purchase.

Accordingly, in 2016 the Group disposed of the concession to operate a hotel establishment in the World Trade Centre of Barcelona, as part of the sale of the hotel asset business in 2016.

No finance costs were capitalised in 2017.

The Group takes out insurance policies to cover the possible risks to which its concession projects are subject. At the end of 2017 the concession projects were fully insured against these risks.

These assets did not have any type of related mortgage guarantee at 31 December 2017.

The Group did not have any significant investment commitments in concession projects at 31 December 2017.

The fair value of the concession projects as of December 31st 2017, as per the appraisals carried out by the Group, amounts to 272,220 thousand euros (253,700 thousand euros in 2016).

9. Investment property

The breakdown of and changes in items included under this heading in the consolidated statement of financial position in 2017 and 2016 are as follows:

Thousands of euros 2017 2016

Beginning balance 9,027,184 5,397,091 Additions due to business combinations (Note 3) 96,312 3,570,380 Additions for the year 356,854 171,817 Disposals (25,336) (565,253) Changes in value of investment property 897,401 453,149 Ending balance 10,352,415 9,027,184

Investment property is recognised at fair value. Income recognised in the consolidated income statement for 2017 from measuring investment property at fair value amounted to EUR 897,401 thousand (EUR 453,149 thousand in 2016). EUR 9,839 thousand of this amount (EUR 154,428 thousand in 2016) relate to the absorption of goodwill arising from the business combination with Testa Inmuebles en Renta, SOCIMI, S.A. (see Note 7).

Investment property mainly includes property assets in the office, high street retail, shopping centre and logistics segments.

Additions and assets acquired in 2017 are as follows:

Thousands of euros Type of asset 2017 2016

Business combination Offices 96,312 2,329,823 Shopping centres - 878,524 Hotels - 286,306 Residential assets - 9,565 Logistics - 18,460 Other assets - 47,702 96,312 3,570,380

Acquisitions: Logistics 87,303 61,704 Offices 146,111 30,700 Shopping centres 42,148 High street retail - 35,200 Improvements to assets 81,291 44,213 356,854 171,817 453,166 3,742,197

The main acquisition of assets in 2017 corresponds to the Torre Glóries building located in Barcelona, the acquisition price of which amounted to EUR 142 million and the total built surface area of which is 51,485 square metres. The Parent will invest an additional EUR 15 million to convert it into a multi-tenant building, in order for the building to be used mainly for offices. Likewise, in 2017 the Group acquired four logistics buildings in Cabanillas (Guadalajara) for EUR 62 million and several retail units in shopping centers owned by the Group for a total amount of EUR 42 million.

The other additions in the year relate to the improvement and adaptation work carried out on certain buildings owned by the Group, as well as the development of sites such as Torre Chamartín and certain logistics buildings.

Property assets were incorporated into all of the Group’s main operating segments in 2016 as a result of the business combinations and acquisitions carried out during the year. Accordingly, the most significant assets acquired relate to office buildings located in Lisbon, Madrid and Barcelona, logistics units in Madrid and Catalonia, shopping centres in Madrid, Barcelona, Valencia and Murcia, high street retail units in Madrid, etc.

The disposals in 2017 relate mainly to the sale of certain office properties, commercial premises and others, whereby the profit obtained from the sale thereof did not have a significant impact on 2017 consolidated income statement.

At 31 December 2017, the Group had pledged property assets totalling EUR 2,602,235 thousand (EUR 2,704,824 thousand in 2016) to secure various loans and derivative financial instruments, the balances of which at 31 December 2017 amounted to EUR 1,165,623 thousand and EUR 32,285 thousand (EUR 1,268,557 thousand and EUR 53,605 thousand in 2016), respectively (see Note 16). The Group holds no rights of use, attachments or similar situations with regard to its investment property.

“Investment property” includes finance lease transactions as detailed below:

Thousands of euros Number of Purchase Type of asset Fair value Final maturity properties option price

Offices 3 331,732 104,645 14/02/2018 3 331,732 104,645

All properties included under “Investment property” were insured at 31 December 2017.

At 31 December 2017, the Group has purchase agreements for investment property amounting to 42,363 thousand euros. In 2017 and 2016 no significant finance costs were capitalised in the cost of constructing the properties.

Fair value measurement and sensitivity

All investment property leased or earmarked for lease through operating leases (rental property business segment) is classified as investment property.

The market value of the Group’s investment property at 31 December 2017 and 2016, calculated on the basis of appraisals carried out by Savills Consultores Inmobiliarios, S.A. and CBRE Valuation Advisory, S.A., independent appraisers not related to the Group, amounted to EUR 10,537,395 thousand (EUR 9,214,589 thousand in 2016). This valuation includes the value of the embedded derivative of the rent in the lease agreement with BBVA amounting to EUR 207,274 thousand and EUR 207,182 thousand in 2017 and 2016, respectively, and does not include any prepayments made by the Group to third parties for the purchase of assets in the amount of EUR 22,294 thousand (EUR 19,777 thousand in 2016). The valuation was carried out in accordance with the Appraisal and Valuation Standards issued by the Royal Institute of Chartered Surveyors (RICS) of the United Kingdom and the International Valuation Standards (IVS) issued by the International Valuation Standards Council (IVSC).

The method used to calculate the market value of investment property, except the BBVA portfolio, involves drawing up ten-year projections of income and expenses for each asset, adjusted at the reporting date using a market discount rate. The residual amount at the end of year 10 is calculated by applying an exit yield or cap rate to the net income projections for year 11. The market values obtained are analysed by calculating and assessing the capitalisation of the returns implicit in these values. The projections are intended to reflect

the best estimate of future income and expenses from the property assets. Both the exit yield and discount rate are determined taking into account the national market and institutional market conditions.

The method used by CBRE to value the BBVA portfolio analyses each property individually, without making any adjustments for inclusion in a large portfolio of properties. For each property, a capitalisation rate has been assumed for the estimated market rent and subsequently adjusted on the basis of the following parameters:

 Term of the lease agreement and creditworthiness of the lessee.  Location of the premises within the city (downtown, metropolitan area or suburbs).  Immediate vicinity of the property.  Level of upkeep of the property (outside and inside).  Above and below-ground distribution of the floor area.  Façade on one street or more than one (corner, three-sided).  Lease situation with respect to current market rent.

In any event, the situation of the rental property market could lead to material differences between the fair value of the Group’s investment property and their effective realisable values.

Fees paid by the Group to valuers for appraisals conducted up to 31 December 2017 and 2016 were as follows:

Thousands of euros 2017 2016

Valuation services 635 633 Total 635 633

Breakdown of fair value of investment property

The detail of assets measured at fair value by their level in the fair value hierarchy is as follows:

2017

Thousands of euros Total Level 1 Level 2 Level 3 Recurring fair value measurement 10,352,415

Investment property Offices - Land 1,989,164 1,989,164 - Buildings 3,198,043 3,198,043 High Street retail - Land 799,221 799,221 - Buildings 1,341,041 1,341,041 Shopping centres - Land 418,282 418,282 - Buildings 1,243,563 1,243,563 Logistics - Land 183,117 181,286 - Buildings 440,980 440,980 Other - Land 268,665 270,496 - Buildings 470,339 470,339

Total assets measured at fair value on a recurrent basis 10,352,415 10,352,415

2016

Thousands of euros Level Total Level 1 2 Level 3 Recurring fair value measurement 9,027,184 9,027,184

Investment property Offices - Land 1,994,420 1,994,420 - Buildings 2,518,560 2,518,560 High Street retail - Land 776,620 776,620 - Buildings 1,224,508 1,224,508 Shopping centres - Land 421,573 421,573 - Buildings 1,103,674 1,103,674 Logistics - Land 153,993 153,993 - Buildings 291,254 291,254 Other - Land 263,139 263,139 - Buildings 279,443 279,443

Total assets measured at 9,027,184 9,027,184 fair value on a recurrent basis

No assets were reclassified from one level to another during 2017 or 2016.

At 31 December 2017, the gross surface areas and occupancy rates of the assets by line of business were as follows:

Square metres (*) Gross leasable area Castilla Basque Rest of Occupanc 2017 Andalusia Madrid Catalonia y León Galicia Country Valencia Spain Portugal Total y rate (%)

Offices 973,128 214,534 - - - 15,078 - 4,488 60,117 1,267,345 88.2 High Street retail 95,006 112,985 24,673 26,910 31,789 31,839 40,456 96,322 - 459,980 99.4 Shopping centres 74,281 93,155 - 100,207 24,323 40,805 69,272 80,766 5,495 488,304 89.4 Logistics 168,383 202,543 - - 72,717 108,728 26,613 381,842 - 960,826 98.5 Other 372,424 55,137 - 5,898 46 - - 47,971 - 481,476 76.7 Total surface area 1,683,222 678,354 24,673 133,015 128,875 196,450 136,341 611,389 65,612 3,657,931 % weight 46.0% 18.5% 0.7% 3.6% 3.5% 5.4% 3.7% 16.8% 1.8% 100.0% (*) Does not include sqm related to development projects

Square metres (*) Gross leasable area Castilla Basque Rest of Occupanc 2016 Andalusia Madrid Catalonia y León Galicia Country Valencia Spain Portugal Total y rate (%)

Offices 973,130 214,377 - - - 17,124 - 4,488 37,347 1,246,466 87.9 High Street retail 94,866 112,985 24,673 26,910 31,789 31,839 41,050 96,413 - 460,525 100.0 Shopping centres 64,021 93,154 - 100,187 24,323 21,504 71,286 75,206 5,495 455,177 88.6 Logistics 127,740 200,989 - - 72,717 109,724 26,612 217,289 - 755,071 95.4 Other 375,452 55,479 - 5,898 46 272 - 47,971 - 485,119 76.5 Total surface area 1,635,209 676,984 24,673 132,995 128,875 180,463 138,948 441,367 42,842 3,402,358 % weight 48,1% 19,9% 0,7% 3,9% 3,8% 5,3% 4,1% 13,0% 1,3% 100% (*) Does not include sqm related to development projects

The main assumptions used to calculate the fair value of investment property were as follows:

2017

Net initial yield Exit Yield Discount rate

Offices 7.94% - (1.17%) 3.75% - 8.00% 4.00% - 8.00% High Street retail 6.78% - 3.15% 4.00% - 7.00%(*) 5.00% - 9.00%(*) Shopping centres 6.41% - (0.22%) 4.75% - 7.50% 6.25% - 10.00% Logistics 9.31% - 3.14% 5.75% - 7.50% 7.25% - 16.00% Other 15.49% - (0.05%) 4.75% - 10.0% 5,00% - 16.00%

(*) This does not apply to BBVA because they are measured by directly capitalising the rent.

2016

Net initial yield Exit Yield Discount rate

Offices (1.02%) - 6.65% 4,00% - 7,50% 5.00% - 9.50% High Street retail 2.49% - 7.40% 4.50% - 5,25% (*) 6.00% - 7.00% (*) Shopping centres 1.78% - 6.75% 4,75% - 7,75% 6.50% - 11.00% Logistics (0.28%) - 10.00% 5.75% - 7,50% 8.00% - 13.86% Other 0.00% - 7.34% 4.25% - 8,00% 5.00% - 10.00%

(*) This does not apply to BBVA and Caprabo because they are measured by directly capitalising the rent.

The effect of one-quarter of a point change in the required rates of return, calculated as income, on the market value of the assets, on investment property in consolidated assets and in the consolidated income statement, would be as follows:

Thousands of euros 2017 2016 Consolidated Consolidated net Assets net profit/(loss) Assets profit/(loss)

One-quarter of one percent increase in the rate of return (511,059) (511,059) (527,221) (527,221) One-quarter of one percent decrease in the rate of return 561,532 561,532 589,304 589,304

The effect of a 10% change in the rent increases considered on the investment property in consolidated assets and in the consolidated income statement would be as follows:

Thousands of euros 2017 2016 Consolidated Consolidated net net Assets profit/(loss) Assets profit/(loss)

10% increase in market rent 658,692 658,692 342,153 342,153 10% decrease in market rent (658,692) (658,692) (342,153) (342,153)

Details of “Changes in value of investment property” in the consolidated income statement are as follows:

Thousands of euros Type of asset 2017 2016

Offices 553,672 155,168 High Street retail 141,534 125,729 Shopping centres 91,910 105,330 Logistics 82,456 31,968 Other assets 27,829 34,954 897,401 453,149

Accordingly, the impact on the consolidated income statement of the increases in value of the Group’s property assets in 2017, taking into consideration all headings affected in the consolidated income statement, is as follows:

Thousands of euros 2017 2016

Changes in fair value of investment property 897,401 453,149 Changes in the fair value of derivatives 92 12,415 Absorption of the increases in value of the investment property of Testa Inmuebles en Renta (Note 7) (9,839) (154,428) Effect on the income statement 887,654 311,136

10. Operating leases

10.1 Operating leases – Lessee

At the end of 2017 the Group had contracted with lessors for the following minimum lease payments, based on the leases currently in force, without taking into account the charging of common expenses, future increases in the CPI or future contractual lease payment revisions (in thousands of euros):

Minimum operating lease Nominal amount payments 2017 2016

Within one year 463 491 Between one and five years 494 982 Total 957 1,473

The main expense relating to operating leases corresponds to the lease agreement that the Parent entered into to rent out its offices. On 27 February 2017, the Parent change its registered office from Paseo de la Castellana 42 to Paseo de la Castellana 257, Madrid. The length of this lease agreement is up to 2020, extendable for two additional years.

10.2 Operating leases – Lessor

The occupancy rates of the leased buildings at 31 December 2017 were as follows:

% occupancy 2017 2016

Offices 88.2 87.9 High street retail 99.4 100.0 Shopping centres 89.4 88.6 Logistics 98.5 95.4 Other 76.7 76.5

At 31 December 2017, the revenue from and the fair value of each of the assets were as follows:

2017

Thousands of euros Revenue (a) Fair value (b)

Offices 206,486 5,303,437 High street retail 106,096 2,347,536 Shopping centres 88,738 1,747,189 Logistics 40,478 664,689 Other 12,918 739,004 Total 454,716 10,801,855

(a) The income shown in the table above refers to the rental income of the properties accrued since they were included in the Group’s scope of consolidation. The increase with regard to the previous year is a result of the inclusion of all profit for the year from the business combinations and purchases made in 2016.

(b) It includes investment property, concession projects and the implicit derivative.

2016

Thousands of euros Revenue (a) Fair value (b)

Offices 134,081 4,645,053 High street retail 101,264 2,204,610 Shopping centres 53,201 1,610,493 Logistics 22,402 615,280 Other 35,911 404,674 Total 346,859 9,480,110

(a) The income shown in the table above refers to the rental income of the properties accrued since they were included in the Group’s scope of consolidation. (b) It includes investment property and concession projects.

The lease agreements entered into between the Group and its customers include a fixed rent and, where applicable, a variable rent linked to the lessee’s performance.

At 31 December 2017, future minimum lease payments under non-cancellable operating leases (calculated at the nominal amount) are as follows:

Thousands of euros 2017 (a) 2016 (a)

Within one year 462,214 435,804 Between one and five 1,185,556 1,195,797 years After five years 1,466,002 1,523,866 3,113,682 3,155,467

(a) Includes the future minimum lease payments under non-cancellable operating leases indicated in Note 10.3

10.3 Finance leases

At 31 December 2017, the Group had arranged the following lease payments with the lessors:

Thousands of euros 2017 2016

Within one year 123,555 10,849 Between one and five years - 124,911 After five years - - Total (Note 16) 123,555 135,760

There are no rent review or escalation clauses and the restrictions imposed are those found in standard financing agreements. There are no restrictions with regard to the payment of dividends, additional debt or new finance lease agreements.

At the end of 2017 the Group had contracted the aforementioned leases with the lessees for the following minimum lease payments, based on the leases currently in force, without taking into account the charging of common expenses, future increases in line with the CPI or future contractual lease payment revisions until the end of the agreements:

Thousands of euros 2017 2016

Within one year 16,135 16,261 Between one and five years 67,318 79,332 After five years 3,367 6,604 86,820 102,197

11. Investments accounted for using the equity method

The changes in 2017 in investments in companies accounted for using the equity method are as follows:

Thousands of euros 2017 2016

Beginning balance 319,697 101,126 Changes due to loss of control - 223,141 Investments acquired in business combinations - 22,484 Additions made during the year 39,050 3,641 Disposals/impairment losses (3,433) (32,512) Dividends (139) - Profit for the year 16,233 1,817 Ending balance 371,408 319,697

The main changes in 2017 were as follows:

The additions in 2017 relate to the increase in ownership interest in Centro Intermodal de Logística, S.A. (Cilsa). On 20 December 2017, the Parent acquired 1,287 class B shares of this company’s share capital for a total of EUR 8,350 thousand, corresponding to a 5% interest.

In addition, on 21 December 2017 the shareholders at General Meeting of Centro Intermodal de Logística, S.A. (Cilsa) approved a capital increase by offsetting the participating loans with other loans existing at that date. This increase enabled the Parent to subscribe a total of 15,268 shares, representing 11.5% of the company’s share capital, which represents an increase in the cost of the investee of EUR 30,700 thousand. At 31 December 2017, the Parent had a 48.50% ownership interest in Centro Intermodal de Logística, S.A.

The disposals/impairment losses for 2017 relate mainly to the impairment of the entire financial investment that the Group has in Pazo de Congresos de Vigo, S.L., company in liquidation.

The detail of investments in companies accounted for using the equity method and the profit or loss attributable to the Group at 31 December 2017 is as follows:

2017

Thousands of euros Percentage of Profit/(loss) Registered ownership attributed to Associate Line of business office interest Investment the Group

Testa Residencial, Socimi, S.A. Residential lease Madrid 12.72% 242,109 10,200

Management of the port Centro Intermodal de concession of the Logística, S.A. logistics activity area Barcelona 48.50% 96,272 2,951

Paseo Comercial Lease of Carlos III, S.A. Shopping centre Madrid 50% 24,408 1,367

Provitae Centros Asistenciales, S.L. Healthcare services Madrid 50% 4,477 (26)

Other investments - - 4,142 1,741 371,408 16,233 (a) All companies detailed in the table above are accounted for using the equity method. (b) The percentage of ownership interest was reduced as a result of the capital increases carried out in 2017 to which the Parent did not subscribe.

2016

Thousands of euros Percentage of Profit/(loss) Registered ownership attributed to the Associate Line of business office interest Investment Group (a)

Testa Residencial, Socimi, S.A. Residential lease Madrid 34.24% 231,910 8,769

Management of the Centro Intermodal de port concession of the Logística, S.A. logistics activity area Barcelona 32% 54,271 (4,192)

Paseo Comercial Lease of Carlos III, S.A. Shopping centre Madrid 50% 23,041 557

Provitae Centros Asistenciales, S.L. Healthcare services Madrid 50% 4,503 (534)

Other investments - - 5,972 (2,783) 319,697 1,817

(a) Profit or loss obtained by the associate since the loss of control or since its date of inclusion in the scope of consolidation. (b) All companies detailed in the table above are accounted for using the equity method.

The key business indicators for the Group’s associates (standardised using the regulatory framework applicable to the Group) are as follows:

2017

Thousands of euros Testa Paseo Centro Residencial Comercial Intermodal SOCIMI, Provitae, Carlos III, de Logística, S.A. S.L. S.A. S.A. Other

Non-current assets 2,279,785 7,300 102,649 241,935 18,977 Current assets 72,554 6 2,828 10,444 2,677 Non-current liabilities 696,826 - 63,514 142,060 12,234 Current liabilities 9,790 2,006 8,693 25,901 1,865 Revenue 52,943 - 8,776 44,472 2,672 Profit/(loss) from continuing operations 80,167 (53) 3,809 6,085 465

2016

Thousands of euros Testa Paseo Centro Residencial Comercial Intermodal SOCIMI, Provitae, Carlos III, de Logística, S.A. S.L. S.A. S.A. Other

Non-current assets 1,039,624 7,300 105,437 220,855 75,696 Current assets 32,257 6 4,376 26,982 3,075 Non-current liabilities 418,155 - 69,978 133,762 22,629 Current liabilities 19,548 1,953 9,297 35,045 40,847 Revenue 9,850 - 8,254 40,694 3,647 Profit/(loss) from continuing operations 8,769 (534) 557 (4,192) (2,783)

12. Current and non-current financial assets

The breakdown, by type of transaction, of the balance of this heading in the consolidated statement of financial position at 31 December 2017 is as follows:

Classification of financial assets by category:

Thousands of euros 2017 2016

Non-current: At fair value- Derivative embedded in BBVA lease agreement 207,274 207,182 At amortised cost- Equity instruments 873 206 Loans to third parties 1,488 55,608 Deposits and guarantees 66,247 66,431 275,882 329,427

Current: At amortised cost- Investments in associates 66,340 72,860 Other financial assets 7,114 10,504 Trade and other receivables 78,533 505,894 151,987 589,258

The carrying amount of financial assets recognised at amortised cost does not differ from their fair value.

Derivatives

“Derivatives” includes the value of the embedded derivative corresponding to the inflation multiplier included in the lease agreement with BBVA to revise rents annually (see Note 9). The increase in the value of this derivative in 2017 amounted to EUR 92 thousand (increase of EUR 12,415 thousand in 2016) and was recognised under “Change in fair value of financial instruments” in the accompanying 2017 consolidated income statement. The measurement approach used is described in Note 5.9 and is applicable to Level two of the fair value measurement hierarchy established in IFRS 7, as observable inputs but not quoted prices are reflected.

Sensitivity to fluctuations of percentage points in the inflation curves is analysed below:

2017

Thousands of euros Consolidated profit/(loss) before Scenario Assets tax

+50 bps 60,655 60,655 -50 bps (45,631) (45,631)

2016

Thousands of euros Consolidated profit/(loss) before Scenario Assets tax

+50 bps 60,023 60,023 -50 bps (43,275) (43,275)

Deposits and guarantees

“Deposits and guarantees” primarily includes the guarantees provided by lessees as security amounting to EUR 64,069 thousand (EUR 63,539 thousand at 31 December 2016), which the Group has deposited with the housing authority (Instituto de la Vivienda) in each region. At 31 December 2017, guarantees provided by lessees as security amounted to EUR 71,782 thousand (EUR 73,565 thousand at 31 December 2016) and were recognised under “Non-current liabilities – Other financial liabilities” on the liability side of the accompanying consolidated statement of financial position for 2017 (see Note 17).

Investments in associates

The balance of “Investments in associates” includes the loan granted by the Parent to Paseo Comercial III, S.A. In 2000 Eurohypo AG (now Hypothekebank Frankfurt AG) entered into a financing agreement with this associate, which was assigned to LSREF3 Octopus Investments, S.a.r.l. on 2 August 2014. Subsequently, on 30 July 2015 LSREF3 Octopus Investments, S.a.r.l. assigned and transferred the rights, obligations and full contractual position of the loan, transferring all rights and obligations to Metrovacesa, S.A., which currently forms part of the Parent. The loan bears interest at 3-month Euribor + 0.55%.

This loan requires that the company maintain and comply with certain coverage ratios, which are standard in these types of real estate companies, such as the loan-to-value ratio and the ratio of the company’s income used to service the debt (interest coverage ratio, ICR). At year-end 2017 Paseo Comercial Carlos III, S.A. did not comply with the ICR while complying with the loan-to-value ratio.

Classification of financial assets by maturity:

The classification of financial assets by maturity at 31 December 2017 and 2016 is as follows:

2017

Thousands of euros From 1 Less than More than to 5 Undetermined Total 1 year 5 years years

Derivative embedded in BBVA lease agreement - - 207,274 - 207,274 Equity instruments - - - 873 873 Loans to third parties - - 1,488 - 1,488 Deposits and guarantees - - - 66,247 66,247 Investments in Group companies and associates 66,340 - - - 66,340 Other financial assets 7,114 - - - 7,114 Trade and other receivables 78,533 - - - 78,533 Total financial assets 151,987 - 208,762 67,120 427,869

2016

Thousands of euros From 1 Less than More than to 5 Undetermined Total 1 year 5 years years

Derivative embedded in BBVA lease agreement - - 207,182 - 207,182 Equity instruments - 206 - - 206 Loans to third parties - 55,608 - - 55,608 Deposits and guarantees - - - 66,431 66,431 Investments in Group companies and associates 72,860 - - - 72,860 Other financial assets 10,504 - - - 10,504 Trade and other receivables 505,894 - - - 505,894 Total financial assets 589,258 55,814 207,182 66,431 918,685

13. Trade and other receivables

“Trade and other receivables” included the following items at 31 December 2017:

Thousands of euros 2017 2016

Trade and notes receivable 23,659 27,392 Trade receivables for sales 51,578 453,150 Group companies and associates 2,376 64 Sundry accounts receivable 1,106 12,246 Employee receivables 184 178 Current tax assets 555 1 Other accounts receivable from public authorities 10,404 29,689 (Note 19) Impairment of trade receivables (11,329) (16,826) 78,533 505,894

“Trade and notes receivable” in the accompanying consolidated statement of financial position at 31 December 2017 mainly included the balances receivable from leasing investment property. In general these receivables are interest free and the terms of collection range from immediate payment on billing to payment at 30 days, while the average collection period is approximately 5 days (5 days in 2016).

In 2017, the Group received EUR 458 million corresponding to the sale price of the hotel assets sold in 2016. The remaining amount, which totals approximately EUR 50.8 million, is included under “Trade receivables for sales” since they mature in the second half of 2018.

The analysis of the age of the past-due balances that were not considered to have become impaired at 31 December 2017 is as follows:

Thousands of euros 2017 2016

Less than 30 days 2,706 12,672 31 to 60 days 2,209 2,689 61 to 90 days 879 291 More than 90 days 1,809 1,005 7,603 16,657

At 31 December 2017 and 2016, no collection rights had been transferred to financial institutions.

The Group periodically analyses the risk of insolvency of its accounts receivable by updating the related provision for impairment losses. The Group’s directors consider that the amount of trade and other receivables approximates their fair value.

The changes in the impairment losses and bad debt in 2017 and 2016 were as follows:

Thousands of euros Balance at 31 December 2015 (1,876)

Changes in the scope of consolidation (14,678) Charge for the year (781) Reversals/amounts used 509 Balance at 31 December 2016 (16,826) Changes in the scope of consolidation (99) Charge for the year (2,174) Reversals/amounts used 3,236 Others 4,534 Balance at 31 December 2017 (11,329)

The majority of impaired receivables are overdue by more than 6 months.

Details of the concentration of customers (customers that account for a significant share of business) are included in the segment information in Note 6.

14. Cash and cash equivalents

“Cash and cash equivalents” includes the Group’s cash and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets does not differ from their fair value.

At 31 December 2017 and 2016, the balance of “Cash and cash equivalents” is freely available, except for EUR 9,235 thousand and EUR 12,879 thousand, respectively, which are included in reserves to cover payment of a quarterly instalment of the senior syndicated mortgage loan.

15. Equity

The detail of “Equity” and of the changes therein is presented in the consolidated statement of changes in equity.

15.1 Share capital

At 31 December 2017, the share capital of Merlin Properties SOCIMI, S.A., amounted to EUR 469,771 thousand, represented by 469,770,750 fully subscribed and paid shares of EUR 1 par value each, all of which are of the same class and confer the holders thereof the same rights.

All the Parent’s shares are admitted to official listing on the Madrid, Barcelona, Bilbao and Valencia stock exchanges. The market price of the Parent’s shares at 31 December 2017 and the average market price for the fourth quarter amounted to EUR 11.30 and EUR 11.12 per share, respectively.

The changes in the Parent’s shares in 2017 were as follows:

Number of shares 2017 2016

Beginning balance 469,770,750 323,030,000 Capital increase of 15 September 2016 - 146,740,750 Ending balance 469,770,750 469,770,750

On 15 September 2016, the Parent increased its share capital by EUR 146,740,750 through the issuance of 146,740,750 ordinary shares, of the same class and series as those currently outstanding, with a par value of EUR 1 each and a share premium of EUR 1,526,104 thousand (EUR 10.40 per share). The shares were subscribed and paid in full by the shareholders of Metrovacesa, S.A. through the contribution of its property business.

At 31 December 2017, the significant shareholders of Merlin Properties SOCIMI, S.A. with direct or indirect ownership interests exceeding 3% of share capital, are as follows:

Shares % of share capital Direct Indirect Total

Banco Santander, S.A. 78,437,100 26,172,125 104.609.225 22.27% BlackRock, INC - 18,773,897 18,773,897 3.996%

15.2 Share premium

The revised text of the Spanish Capital Companies Act expressly permits the use of the share premium to increase capital and establishes no specific restrictions as to its use.

This reserve is unrestricted so long as its allocation does not lower equity to below the amount of share capital. In this connection, in 2017 the shareholders at the General Meeting approved the distribution of dividends totalling EUR 46,643 thousand with a charge to the share premium.

15.3 Other reserves

The detail of reserves at 31 December 2017 and 2016 is as follows:

Thousands of euros 2017 2016

Legal reserve 14,883 2,986 Reserves of consolidated companies 303,819 (158,493) Other reserves 11,530 11,970 Total other reserves 330,232 (143,537)

Legal reserve

The legal reserve will be established in accordance with article 274 of the revised text of the Spanish Capital Companies Act, which stipulates, in all cases, that 10% of net profit for each year must be transferred to the legal reserve until the balance of this reserve reaches at least 20% of the share capital.

This reserve cannot be distributed, and if it is used to offset losses, in the event no other reserves are available for this purpose, it must be restored with future profits.

At 31 December 2017, the Group had not yet reached the legally required minimum established in the revised text of the Spanish Capital Companies Act.

The legal reserve of companies which have chosen to avail themselves of the special tax regime established in Spanish Law 11/2009, governing listed real estate investment companies (SOCIMIs), must not exceed 20% of share capital. The Articles of Association of these companies may not establish any other type of restricted reserves.

Reserves of consolidated companies

The detail of the reserves of consolidated companies is as follows:

Thousands of euros 2017 2016

Merlin Properties SOCIMI, S.A. (191,602) (337,858) Tree Inversiones Inmobiliarias, SOCIMI, S.A. 314,709 136,058 Merlin Retail, S.L.U. 79,902 52,449 Merlin Oficinas, S.L.U. 48,353 14,969 Merlin Logística, S.L.U. 41,903 9,871 Merlin Logística II, S.L.U. 4,725 2,590 Obraser (1,332) (7,004) Merlin Properties Adequa, S.L. (14,826) - Merlin Parques Logísticos, S.L.U. 8,913 - Varitelia Distribuciones 12,076 (4,757) Metroparque 10,098 (3,282) Metropolitana Castellana 754 29,718 La Vital Centro Comercial 298 28,599 Global Carihuela Patrimonio Comercial, S.A. 451 332 Sadorma 2003 (4,458) (189) Parques Logísticos de la Zona Franca, S.A. (11,096) - Sevisur Logística, S.A. (418) - Belkyn West Company, S.L. (9) - Centros Comerciales Metropolitanos - (32,740) Exp. Urbanos españolas - (30,134) Acoghe (4) (16,912) Global Murex Iberia (10) (10) Testa Hoteles (4) (4) Gescentesta 223 1 Gesfintesta (224) 139 Merlin Properties Monumental, S.A. 564 - Merlin Properties Torre A, S.A. 55 - MPCVI 3,876 1,548 MPEP (9) (2) VFX Logística, S.A. 939 - Inmobiliaria Metrogolf (28) 11 Metrovacesa Francia - (2,640) Metrovacesa Mediterranée - 369 Project Maple IBV - 385 303,819 (158,493)

Interim dividend

Dividends

On 26 April 2017, the shareholders at the Annual General Meeting approved the distribution of a dividend out of 2016 profit in the amount of EUR 47,310 thousand, and the distribution of an additional dividend with a charge to the share premium for EUR 46,643 thousand.

15.4 Non-controlling interests

The changes in “Non-Controlling Interests” in 2017 and in the profit or loss attributable to non-controlling interests were as follows:

Thousands of euros 2017 2016

Beginning balance 21,311 1,092 Changes in the scope of consolidation (15,297) - Non-controlling interests arising in business combinations - 21,182 Absorption of Testa Inmuebles en Renta SOCIMI, S.A. - (1,092) Profit/(loss) attributable to non-controlling interests 110 129 Ending balance 6,124 21,311

At 31 December 2017, MERLIN Parques Logísticos increased its ownership interest in Parc Logistic de la Zona Franca, S.A. and Sevisur Logistica, S.A., companies over which it already had control in 2016, thus reducing non-controlling interests by EUR 15,297 thousand (see Note 3). At 31 December 2017, the entire balance under “Non-controlling interests” corresponded to the ownership interest held by minority shareholders in Parc Logistic de la Zona Franca, S.A.

The additions due to business combinations in 2016 correspond to the minority shareholders with investments in the subsidiaries of Merlin Parques Logísticos, S.A.

15.5 Treasury shares

At 31 December 2017, the Parent held treasury shares amounting to EUR 24,881 thousand.

The changes in 2017 were as follows:

Number of Thousands of shares euros

Balance at 1 January 2016 - - Additions 133,299 1,369 Disposals (123,069) (1,264) Balance at 31 December 2016 10,230 105 Additions 3,300,000 35,393 Disposals (990,000) (10,617) Balance at 31 December 2017 2,320,230 24,881

On 6 April 2016, the Parent’s shareholders authorised the Board of Directors to acquire treasury shares up to a maximum of 10% of the Company’s share capital. The shareholders at the Annual General Meeting held on 26 April 2017 revoked the aforementioned authorisation and authorised the acquisition of treasury shares by the company itself or by a Group company pursuant to article 146 et seq. of the Spanish Capital Companies Act, in accordance with the requirements and restrictions established in prevailing legislation during the five-year period. The authorisation includes the acquisition of shares which, where applicable, must be handed over directly to employees or directors of the Parent or of Group companies as a result of the purchase option they hold or for the settlement and payment of share-based incentive plans of which they are beneficiaries.

The additions in 2017 correspond to the acquisition of 3,300,000 treasury shares representing 0.70% of its share capital within the framework of the divestment process carried out by the former shareholder Banco Popular Español, S.A. The shares were purchased at a price of EUR 10.725 per share. The total investment amounted to EUR 35,393 thousand.

The disposals of treasury shares, amounting to EUR 10,617 thousand (average cost of EUR 10.72 per share), relate to the early delivery of shares made to executive directors and senior management corresponding to the variable remuneration incentive in the 2016 Share Plan agreed upon therewith (see Note 22).

15.6 Capital management

The Group’s capital management objectives are to safeguard its capacity to continue operating as a going concern so that it can continue to provide returns to shareholders and to benefit interest groups, and to maintain an optimum financial structure to reduce the cost of capital.

In line with other groups in the sector, the Group’s capital structure is controlled based on the leverage ratio, which is calculated as the result of dividing net debt by total capital. Net debt is determined as the sum of financial liabilities less cash and cash equivalents. Total capital is calculated as the sum of equity plus net debt.

Thousands of euros 2017 2016

Total financial debt 5,412,933 5,193,248 Less - Cash and cash equivalents and Other current (508,679) (722,123) financial assets (a) Net debt 4,904,254 4,471,125 Equity 5,723,783 4,840,769 Total capital 10,628,037 9,311,894

Debt-to-equity ratio 46.14% 48.02%

(a) It included the account receivable for the sale of the hotel portfolio for an amount of EUR 50,794 and 471,193 thousand, respectively

15.7 Earnings per share

Basic

Basic earnings per share are calculated by dividing profit or loss for the year attributable to the Parent’s ordinary shareholders by the weighted average number of ordinary shares outstanding during the year, excluding treasury shares.

The detail of the calculation of basic earnings per share is as follows:

2017 2016

Profit for the year attributable to holders of equity instruments of the Parent (thousands of euros) 1,100,418 582,645

Weighted average number of shares outstanding (thousands) 467,899 359,870 Basic earnings per share (euros) 2.35 1.62

The average number of ordinary shares outstanding is calculated as follows:

Number of shares 2017 2016

Ordinary shares at beginning of period 469,770,750 323,030,000 Treasury shares (2,320,230) - Capital increases - 146,740,750 Average effect of outstanding shares 448.606 (109,900,396) Weighted average number of ordinary shares outstanding at 31 December 2014 (thousands of shares) 467.899.126 359,870,354

Diluted

Diluted earnings per share are calculated by adjusting the profit or loss for the year attributable to holders of equity instruments of the Parent and the weighted average number of outstanding ordinary shares by all the dilutive effects inherent to the potential ordinary shares, i.e., as if all the potential dilutive ordinary shares had been converted.

The Parent does not have different classes of potentially dilutive ordinary shares.

15.8 Valuation adjustments

This heading of the consolidated statement of financial position includes changes in the value of financial derivatives designated as cash flow hedges. The changes in the balance of this heading in 2017 are as follows:

Thousands of euros Balance at 31 December 2015 (6,106) Changes in the fair value of hedges in the year (41,476) Balance at 31 December 2016 (47,582) Changes in the fair value of hedges in the year 11,776 Balance at 31 December 2017 (35,806)

16. Current and non-current financial liabilities

The detail of current and non-current liabilities at 31 December 2017 is as follows:

Thousands of euros 2017 2016

Non-current: Measured at amortised cost Syndicated loan 868,653 1,253,885 Syndicated loan arrangement expenses (5,643) (12,421) Total syndicated loan 863,010 1,241,464

Senior syndicated mortgage loan (Tree) 889,149 899,924 Syndicated mortgage loan arrangement expenses (Tree) (16,281) (18,871) Total senior syndicated mortgage loan (Tree) 872,868 881,053

Revolving credit facility - 180,000 Mortgage loans 267,181 357,058 Leases, credit facilities and loans - 124,911 Loan arrangement expenses (4,559) (6,914) Total other loans 262,622 655,055

Debentures and bonds 3,250,000 2,350,000 Debenture issue expenses (28,683) (22,655) Total debentures and bonds 3,221,317 2,327,345 Total amortised cost 5,219,817 5,104,917

Measured at fair value Derivative financial instruments 34,178 69,667 Total at fair value 34,178 69,667 Total non-current 5,253,995 5,174,584

Current: Measured at amortised cost Syndicated loan 6,113 6,530 Senior syndicated mortgage loan (Tree) 10,182 11,476 Debentures and bonds 34,007 25,629 Mortgage loans 1,494 2,912 Leases, credit facilities and loans 123,555 10,849 Revolving credit facility 113 225 Total amortised cost 175,464 57,621 Measured at fair value Derivative financial instruments 2,734 4,235 Total at fair value 2,734 4,235 Total current 178,198 61,856

There is no material difference between the carrying amount and the fair value of financial liabilities at amortised cost.

On 20 April 2016, the Parent was given a credit rating of “BBB” by Standard & Poor’s Rating Credit Market Services Europe Limited. Additionally, on 17 October 2016, the Company was given a credit rating of investment grade “Baa2” by Moody’s.

16.1 Loans

The detail of loans at 31 December 2017 is as follows:

2017

Thousands of euros

Bank borrowings 31/12/2017 Debt Limit arrangement Short-term Non-current Current expenses interest

Syndicated loans 1,290,000 (5,643) 868,653 5,101 1,012 Revolving credit facilities 420,000 - - - 113 Senior syndicated mortgage loan (Tree) 939,756 (16,281) 889,149 8,947 1,235 Mortgage loans - other assets 268,000 (4,559) 267,181 346 1,148 Leases (Note 10) 149,125 - - 123,555 - Total 3,066,881 (26,483) 2,024,983 137,949 3,508

2016

Thousands of euros Bank borrowings 31/12/2016 Debt Limit arrangement Short-term Non-current Current expenses interest

Syndicated loans 1,790,000 (12,421) 1,253,885 5,045 1,485 Revolving credit facilities 420,000 - 180,000 - 225 Senior syndicated mortgage loan (Tree) 939,756 (18,871) 899,924 10,225 1,251 Mortgage loans - other assets 360,845 (6,651) 357,058 1,351 1,561 Leases 149,125 (263) 124,911 10,849 - Total 3,659,726 (38,206) 2,815,777 27,470 4,522

Syndicated loans and revolving credit facilities – Parent

On 24 October 2016, a novation and amendment to the syndicated financing without mortgage guarantee was signed, whereby the syndicated financing from Metrovacesa was consolidated with the Parent (without changing the maturity dates or interest rate). At year-end 2016, this financing had three tranches:

a) The first tranche consists of a loan with a corporate guarantee of EUR 850,000 thousand, which matures in June 2021 and has an interest rate of EURIBOR +160 basis points. The first tranche was repaid in full upon maturity.

b) The second tranche consists of a loan of EUR 370,000 thousand, which is expected to mature in April 2021 and has an initial cost of EURIBOR +170 basis points tied to the company’s rating (the spread currently amounts to 155 basis points).

c) The third tranche consists of a revolving credit facility in the amount of EUR 100,000 thousand. The credit facility matures in April 2021 and accrues interest at a rate of EURIBOR +130 basis points tied to the company’s rating (the spread currently amounts to 115 basis points). This financing will

be allocated to the acquisition of new property assets. At 31 December 2016, EUR 60,000 thousand had been drawn down on this credit facility.

In addition, on 21 June 2016 the Parent arranged a revolving credit facility with a group of 12 financial institutions in the amount of EUR 320,000 thousand. The current maturity date of the credit facility is June 2020, but it has the possibility of being extended for an additional year (final maturity in June 2021). The credit facility accrues interest at a rate of EURIBOR +140 basis point. This financing will be allocated to the acquisition of new property assets. At 31 December 2016, EUR 120,000 thousand had been drawn down on this credit facility.

In 2017 the Parent voluntarily repaid the loans of the syndicated financing in the amount of EUR 320,000 thousand and EUR 60,000 thousand (first and second tranche, respectively), as well as EUR 60,000 thousand and EUR 120,000 thousand corresponding to revolving credit facilities.

This secured corporate bank financing has certain disclosure obligations regarding the separate and consolidated financial statements and the budgets. The Group must also comply with certain obligations regarding coverage ratios on a quarterly basis. At year-end 2017, the Group complied with the covenants established and the directors consider that they will be met in 2018.

Syndicated loans - Subsidiaries

- Syndicated loan without mortgage guarantee subscribed by Sevisur Logística, S.A. with a principal of EUR 31,000 thousand and maturing in 2020. This financing consists of two tranches of EUR 25,000 thousand and EUR 6,000 thousand, with a market interest rate of EURIBOR +125 and 200 basis points, respectively, and an annual repayment of 6.7% of the principal until maturity of both tranches. At year-end 2017, the Group complied with the covenants set forth in this contract and the directors consider that they will be met in 2018.

-Syndicated loan without mortgage guarantee subscribed by Parc Logistic de la Zona Franca, S.A. with a first tranche consisting of a loan with principal amount of a EUR 36 million and a second tranche consisting of a revolving credit facility with a limit of EUR 3 million (undrawn as of December 31st 2017). Both tranches mature in 2019 and have a spread of EURIBOR +277.5 bps. The first tranche has a 7% annual repayment scheme and 68.6% at maturity (bullet). At year-end 2017, the Group complied with the covenants established and the directors consider that they will be met in 2018.

Senior syndicated mortgage loan (Tree):

On 30 December 2014, the Group entered into a novation agreement to amend the senior syndicated loan taken out on 29 July 2010 by Tree Inversiones Inmobiliarias SOCIMI, S.A., the agent bank of which is Deutsche Bank.

Pursuant to this agreement, the senior syndicated loan, which at the novation date totalled EUR 776,547 thousand, was increased to EUR 939,756 thousand. Similarly, the 2017 maturity date was extended to 24 September 2024. This financing accrues interest at a rate of 3-month EURIBOR + 175 basis point.

The financing includes commitments to maintain certain coverage ratios, which are standard in these types of real estate companies, such as the loan-to-value ratio, the ratio of the subsidiary’s income used to service the debt (interest coverage ratio, ICR), and a minimum credit rating of BBVA from ratings agencies. The Parent’s directors have confirmed that these ratios were met at 31 December 2017 and do not forecast that they will not be fulfilled in the coming years.

Mortgage loans - other assets

At 31 December 2017, the Group’s subsidiaries had taken out the following mortgage loans:

Thousands of euros Original Financial institution loan Non-current Current Interest Collateral

Allianz Real Estate 133,600 133,600 - 888 Mortgage Caixabank 21,000 21,000 - 81 Mortgage Caixabank 45,500 44,681 346 171 Mortgage ING 56,670 56,670 - 7 Mortgage ING 11,230 11,230 - 1 Mortgage

Total 268,000 267,181 346 1,148

2016:

Thousands of euros Original Financial institution loan Non-current Current Interest Collateral

Santander 70,000 67,000 1,000 385 Mortgage Allianz Real Estate 133,600 133,600 - 888 Mortgage Deutsche Pfandbriefbank 22,845 22,527 114 29 Mortgage Caixabank 21,000 21,000 - 81 Mortgage Caixabank 45,500 45,027 237 172 Mortgage ING 56,670 56,670 - 5 Mortgage ING 11,230 11,230 - 1 Mortgage Total 360,845 357,054 1,351 1,561

On 19 February 2015, the Group entered into a mortgage-backed loan with Allianza Real Estate for the Marineda shopping centre. The principal of the loan taken out amounts to EUR 133,600 thousand, has a term of 10 years, accrues interest at a fixed rate of 2.66% and the principal is repayable in full upon maturity. At year-end 2017, the Group complied with the covenants set forth in this contract and the directors consider that they will be met in 2018.

On 26 March 2015, the Group subrogated a mortgage-backed loan taken out with Caixabank, S.A. with a mortgage guarantee on the Alcalá 38-40 office building. This loan has a principal of EUR 21,000 thousand, a term of 15 years, an interest rate of 3-month EURIBOR + 150 basis points, a 4-year grace period for the principal, and the principal is repayable in full using the French method over the following 11 years.

On 2 October 2015, the Group took out a first-ranking floating-rate mortgage-backed loan with Caixabank, S.A. on the portfolio made up of 33 property assets in Catalonia. This loan has a principal of EUR 45,500 thousand that will be allocated to finance a portion of the acquisition price of the assets portfolio. It matures in October 2025 and accrues interest at a daily rate tied to 3-month EURIBOR + 150 basis points until the end of the loan, which is payable on a quarterly basis. While the contract is in force, certain ratios relating to debt service coverage and the levels of net debt in relation to GAV of the property assets must be met at the end of the year. At year-end 2017, the Group complied with the covenants set forth in this contract and the directors consider that they will be met in 2018.

On 4 December 2015, the Group took out two first-ranking mortgage-backed loans with ING Bank N.V. through its subsidiaries Merlin Logística and Merlin Logística II for the portfolio of 7 logistics assets. It also arranged a senior pledge on the collection rights arising from the loan accounts, the lease agreements and the insurance policies. At the same time as it signed this contract, it also entered into an interest rate swap agreement and took out a second-ranking mortgage on the properties and a second-ranking pledge on the collection rights arising from the lease agreements and insurance policies, as collateral for the obligations of the hedging agreement.

This loans have a principal of EUR 56,670 thousand and EUR 11,230 thousand, respectively, mature on 4 December 2020, and accrued interest at a rate tied to 3-month EURIBOR + 150 basis points until the end of the loan, which is payable on a quarterly basis. While the contract is in force, certain ratios relating to debt

service coverage and the levels of net debt in relation to GAV of the property assets must be met every six months and on an annual basis. At year-end 2017, the Group complied with the covenants set forth in this contract and the directors consider that they will be met in 2018.

In 2017 the Group, through its subsidiary Merlin Oficinas, carried out the voluntary early repayment of the mortgage-backed loans entered into with Deutsche Pfandbriefbank and Banco Santander for EUR 22,559 thousand and EUR 67,250 thousand, respectively, thus lifting the charges on the World Trade Center Alameda Park 6 office building, located in Barcelona, and the set of offices located in Madrid, Edificios Sanchinarro T2, T4 and T7.

Maturity of debt

The detail, by maturity, of these loans is as follows:

2017

Thousands of euros Senior syndicated Revolving Syndicated mortgage loan Mortgage credit loans (Tree) loans Leases facility Total

2018 5,101 8,947 346 123,555 - 137,949 2019 26,748 11,062 3,115 - - 40,925 2020 1,905 10,925 71,869 - - 84,699 2021 840,000 10,789 5,375 - - 856,164 2022 - 12,773 5,876 - - 18,649 More than 5 years - 843,600 180,946 - - 1,024,546 873,754 898,096 267,527 123,555 - 2,162,932

2016

Thousands of euros Senior syndicated Revolving Syndicated mortgage loan Mortgage credit loans (Tree) loans Leases facility Total

2017 5,045 10,225 1,351 10,849 - 27,470 2018 5,101 8,966 1,460 124,911 - 140,347 2019 26,878 11,085 4,229 - 120,000 162,192 2020 1,905 10,947 72,988 - - 85,840 2021 1,220,000 10,811 69,515 - 60,000 1,360,326 More than 5 years - 858,116 208,866 - - 1,066,982 1,258,929 910,148 358,409 135,760 180,000 2,843,247

The Group had undrawn loans and credit facilities at 31 December 2017 with a number of financial institutions totalling EUR 423 million (EUR 243 million at 31 December 2016).

None of the Group’s debt was denominated in non-euro currencies at 31 December 2017 or 2016.

There are no significant differences between the fair values and carrying amounts of the Group’s financial liabilities.

The finance cost for interest on the loans totalled EUR 40,025 thousand in 2017 (EUR 44,762 thousand in 2016) and is recognised in the accompanying consolidated income statement for 2017.

At 31 December 2017 and 2016, the debt arrangement expenses had been deducted from the balance of “Bank borrowings”. In 2017 and 2016, the Group recognised EUR 9,998 thousand and EUR 18,440 thousand, respectively, associated with the debt under “Finance costs” in the accompanying consolidated income statement (see Note 20.d).

16.2 Debenture issues

On 12 May 2017, the Parent subscribed a Euro Medium Term Notes (EMTN) issue programme of up to EUR 4,000 million, which will replace the original bond issue programme and its supplement subscribed on 25 April 2016 and 14 October 2016, respectively, for an overall maximum amount of EUR 2,000 million.

On 26 May 2017, a non-subordinated ordinary bond issue was carried out on the Euromarket for a total of EUR 600 million. The bonds were issued at 99,417% of their face value, maturing after 8 years with an annual coupon of 1.750%, payable annually in arrears. At 29 December 2017, the bond was trading at around MS +108 basis points, equal to a yield of approximately 1.65%.

On 18 September 2017, a non-subordinated ordinary bond issue was carried out on the Euromarket for a total of EUR 300 million. The bonds were issued at 98.718% of their face value, maturing after 12 years with an annual coupon of 2.375%, payable annually in arrears. At 29 December 2017, the bond was trading at around MS +134 basis points, equal to a yield of 2.35%.

The terms and conditions of the bonds issued abide by UK laws and are traded on the Luxembourg Stock Exchange. The bond issue has the same guarantees and ratio compliance obligations as the syndicated loan and the revolving credit facility.

The funds obtained in both issues were allocated to the early repayment of the syndicated and mortgage debt described in this Note and to the Group’s general uses.

The detail at 31 December 2017 of the bonds issued by Parent is as follows (in thousands of euros):

Maturity Face value Coupon Listed price Return Market

May 2022 700 2.375% MS + 66 bp 0.93% Ireland (a) April 2023 850 2.225% MS + 83 bp 1.18% Luxembourg May 2025 600 1.750% MS + 108 bp 1.65% Luxembourg November 2026 800 1.875% MS + 115 bp 1.90% Luxembourg September 2029 300 2.375% MS + 134 bp 2.35% Luxembourg 3,250 2.097%

(a) Due to the business combination with Metrovacesa carried out in 2016, the Group recognised a bond issue launched by Metrovacesa for EUR 700 million. The terms and conditions of the bonds abide by UK laws and are traded on the Irish Stock Exchange. This issue also includes a series of compliance obligations and guarantees, which is common in these types of transactions. At 31 December 2017, the Group complies with the covenants established in such terms and conditions and the directors consider that they will be met in 2018.

The finance cost for interest on the debenture issues amounted to EUR 58,916 thousand (EUR 20,468 thousand in 2016) and is recognised in the accompanying consolidated income statement for 2017. The accrued interest payable at 31 December 2017 amounted to EUR 34,007 thousand (EUR 25,629 thousand in 2016). The debt arrangement expenses In 2017 and 2016, amounted to EUR 3,702 thousand and EUR 547 thousand, respectively.

16.3 Derivatives

The detail of the financial instruments at 31 December 2017 is as follows:

Thousands of euros 2017 2016

Non-current Interest rate derivatives 34,178 74,201 Inflation derivatives - (4,534) Total non-current 34,178 69,667 Current Interest rate derivatives 2,734 4,235 Total current 2,734 4,235

To determine the fair value of the interest rate and inflation derivatives, the Group discounts the cash flows based on the embedded derivatives determined by the euro interest rate curve in accordance with market conditions on the measurement date.

These financial instruments were categorised as Level 2 based on the fair value hierarchy established in IFRS 7.

The detail of the derivative financial instruments included in the consolidated statement of financial position at 31 December 2017 is as follows:

2017

Thousands of euros Financial Financial assets liabilities

Non-current Interest rate derivatives - 36,912 Inflation derivatives - - Derivative embedded in - - BBVA lease agreement (Note 12) 207,274 - Total derivatives recognised 207,274 36,912

2016

Thousands of euros Financial Financial assets liabilities

Non-current Interest rate derivatives - 78,436 Inflation derivatives - (4,534) Derivative embedded in - BBVA lease agreement (Note 12) 207,182 - Total derivatives recognised 207,182 73,902

At year-end 2017, the interest rate hedges mainly arose from the corporate syndicated loan that the Parent disbursed in 2016 and the mortgage syndicated loan of Tree Inversiones Inmobiliarias SOCIMI, S.A. The inflation derivatives as well as the interest rate swaps of Tree Ivnersiones Inmobiliarias S.A. which were incorporated in the business combination carried out in 2014 matured during the year.

In 2016, within the framework of the syndicated financing without mortgage guarantee signed in this year, the Parent subscribed an interest rate hedge (IRS), which matures in 2021, for 70% of the notional amount, i.e., EUR 595,000 thousand and a cost of 0.0981%. Following the early repayment of EUR 320,000 thousand relating to Tranche A of the Parent’s syndicated financing, the notional amount of this hedge was reduced to EUR 530,000 thousand, thus obtaining a coverage ratio of 100%.

In addition, tied to the syndicated financing without mortgage guarantee from Metrovacesa, it includes an interest rate hedge (IRS), which matures in 2021, for a notional amount of EUR 310,000 thousand and a cost of -0.12%.

At 31 December 2017 and 2016, the change in fair value of the financial instruments recognised in equity as valuation adjustments amounted to EUR 11,776 thousand and EUR 41,476 thousand, respectively. These amounts are reached having eliminated the fluctuations in value that are not attributable to the Group, as they are value adjustments included in the equity acquired in the business combinations.

A total of EUR 6,110 thousand were allocated to the consolidated income statement at 31 December 2017, of which EUR 8,594 thousand are included as finance costs, and EUR 2,484 thousand relate to finance income as a result of inefficiencies included under “Change in fair value of financial instruments - Other”.

The derivatives arranged by the Group and their fair values are as follows (in thousands of euros):

2017

Thousands of euros Outstanding notional amount at each date Interest rate Fair value Subsequent contracted years 2018 2019 2020 2021

Syndicate Parent Company 0.0981% - (0.12%) (1,371) 840,000 840,000 840,000 - - Leasing 3.974% (444) - - - - - Tree Inversiones 0.959% (31,148) 901,578 889,831 878,084 865,750 851,654 Other subsidiary companies 2.085% - 0.25% (1,215) 115,081 110,306 - - - (34,178) 1,856,659 1,840,137 1,718,084 865,750 851,654

2016

Thousands of euros Outstanding notional amount at each date Interest rate Fair value Subsequent contracted years 2017 2018 2019 2020

Syndicate Parent Company 0.0981% - (0.12%) (9,351) 905,000 905,000 905,000 905,000 905,000 Leasing 3.974% (4,109) 83,500 - - - - Tree Inversiones 0.959% (56,441) 911,563 901,578 889,831 878,084 865,750 Other subsidiary companies 2.085%-0.25% (4,300) 175,932 175,584 173,306 63,000 - Inflation derivative 3.14% 4,534 - - - - - (69,667) 1,992,578 1,982,162 1,968,137 1,846,084 1,770,750

Having opted to use hedge accounting, the Group adequately designated the hedging relationships in which these derivative instruments hedge the borrowings used by the Group, neutralising changes in interest payment flows by setting a fixed rate to be paid thereon. These hedging relationships have been highly effective, prospectively and retrospectively, on a cumulative basis, since their date of designation for certain derivatives.

As a result of the request submitted by the Group to be included under the special tax regime for listed real estate investment companies (SOCIMI regime) set forth in Spanish Law 11/2009, of 26 October, governing listed real estate investment companies (SOCIMI Act). The Group therefore recognised a total of EUR 35,806 thousand and EUR 47,582 thousand under equity at 31 December 2017 and 2016, respectively, relating to the fair value of the derivatives that meet these requirements, without considering any tax effect, and recognised EUR 2,577 thousand and EUR 7,058 thousand under “Change in fair value of financial instruments” in the consolidated income statement as a result of the derivative financial instruments not meeting the hedge requirements due to inefficiency.

On adopting IFRS 13, the Group adjusted the valuation techniques for calculating the fair value of its derivatives. The Group includes a bilateral credit risk adjustment to reflect both the own credit risk and the counterpart party risk in the measurement of the fair value of the derivatives. The Group applied the discounted cash flow method, considering a discount rate affected by its own credit risk.

In order to calculate the fair value of the financial derivatives, the Group used valuation techniques generally accepted in the market, which account for current and future expected exposure, adjusted by the probability of default and the potential loss given default affecting the contract. The credit value adjustment (CVA) or counterparty credit risk and debt value adjustment (DVA) or own credit risk were therefore estimated.

Current and expected exposure in the future is estimated using simulations of scenarios of fluctuations in market variables, such as interest rate curves, exchange rates and volatilities as per market conditions at the measurement date.

Furthermore, the Group’s net exposure has been taken into account with regards to each of the counterparties for the credit risk adjustment, if the financial derivatives arranged are included in a framework agreement for financial transactions that provide for netting-off positions. For counterparties for whom credit information is available, credit spreads have been obtained from the credit default swaps (CDS) quoted in the market; whereas for those with no available information, references from peers have been used. The Group hired Chatham Financial Europe Ltd. to measure the fair value of the derivatives.

The impact on liabilities and profit or loss before tax of a 50 basis point fluctuation in the estimated credit risk rate at 31 December 2017 and 2016 would be as follows:

2017

Thousands of euros Consolidated Scenario Liabilities Equity profit/(loss) before tax

5% rise in credit risk rate (43,948) 27,758 16,190 5% reduction in credit risk rate 45,434 (21,790) (23,644)

2016

Thousands of euros Consolidated Scenario Liabilities Equity profit/(loss) before tax

5% rise in credit risk rate (51,542) 35,161 16,381 5% reduction in credit risk rate 53,553 (25,043) (28,510)

16.4 Reconciliation of the carrying amount of the liabilities arising from financing activities

The breakdown of the financing activities and their impact on the Group’s cash flows in 2017 was as follows:

Thousand of Euros No impact on cash

Cash flows from Change in Finance cost for Reclassifications 31/12/2016 31/12/2017 financing activities fair value interest

Long-term loans 2,510,865 (471,488) (14,394) - - 2,024,984 Short-term loans 20,918 (54,647) 14,394 37,231 (106) 17,789 Long-term revolving credit facilities 180,000 (180,000) - 2,403 116 - Short-term revolving credit facilities 225 (2,631) - - - 113 Long-term leases 124,911 (965) (123,555) - - - Short-term leases 10,849 (11,240) 123,555 391 - 123,555 Bonds 2,375,629 839,718 - 58,916 9,744 3,284,007 5,223,397 118,748 - 98,941 9,754 5,450,448

17. Other current and non-current liabilities

The detail of these headings at 31 December 2017 is as follows:

Thousands of euros 2017 2016 Non-current Current Non-current Current

Other provisions 72,382 867 34,092 867 Guarantees and deposits received 85,194 340 85,123 75 Deferred tax liabilities 592,418 - 556,771 - Other payables 3,000 18,467 19,026 3,119 Payable to associates - - - 803 Other current liabilities - 9,149 - 629 Total 752,994 28,823 695,012 5,493

“Other provisions” includes the provision corresponding to the variable remuneration indicated in Note 22 of 44,490 thousand euros (10,158 thousand euros in 2016), that will be disbursed in the long term.

In addition, Other provisions include the provision for the assessment of the risk associated with a series of litigations and claims from third parties arising from the ordinary activities of the Group, which have been registered in accordance to the best existing estimates.

This heading also includes liabilities for tax debts for which there are uncertainties as to their amount or timing, whereby it is likely that the Group may have to dispose of resources to cancel these obligations as the result of a present obligation.

“Guarantees and deposits received” includes mainly the guarantee deposits paid by lessees, which will be reimbursed at the end of the lease term.

The Parent and the majority of its subsidiaries adhere to the SOCIMI regime. Under this regime, gains from the sale of assets are taxed at a rate 0%, provided that certain requirements are met (basically, the assets must have been held by the SOCIMI for at least three years). The gains obtained on the disposal of assets obtained prior to inclusion in the SOCIMI regime shall be distributed on a straight-line basis (in the absence of proof otherwise) over those years in which the asset was owned by the SOCIMI. The gains relating to the years prior to inclusion in the SOCIMI regime shall be subject to tax at the standard rate, while for other years the rate will be 0%. In this regard, the Parent’s directors estimated the tax rate applicable to the tax gain on the assets acquired prior to their inclusion to the SOCIMI regime (calculated in accordance with the fair value of the assets obtained from expert appraisals at the date of the business combination and at 31 December 2017), recognising the related deferred tax liability.

The Parent’s directors do not envisage disposing of any of the investment property acquired after the Parent and its subsidiaries adhered to the SOCIMI regime within three years, and have therefore not recognised

the deferred tax liability corresponding to the changes in fair value since the assets were acquired as the applicable tax rate is 0%.

18. Trade and other payables

The detail of “Trade and other payables” at 31 December 2017 is as follows:

Thousands of euros 2017 2016

Current Payable to suppliers 37,244 60,959 Sundry accounts payable 6,915 25,434 Remuneration payable 8,052 11,944 Current tax liabilities (Note 19) 1,762 27,231 Other accounts payable to public authorities (Note 19) 13,081 12,625 Customer advances 192 2,675 Total 67,246 140,868

The carrying amount of the trade payables is similar to their fair value.

Information on the average period of payment to suppliers. Final provision two of Spanish Law 31/2014, of 3 December:

Set forth below are the disclosures required by additional provision three of Spanish Law 15/2010, of 5 July (amended by final provision two of Spanish Law 31/2014, of 3 December), prepared in accordance with the Spanish Accounting and Audit Institute (ICAC) Resolution of 29 January 2016 on the disclosures to be included in the notes to financial statements in relation to the average period of payment to suppliers in commercial transactions.

2017 2016 Days Days

Average period of payment to suppliers 38.7 38.9 Ratio of transactions paid 38.7 28.7 Ratio of transactions payable 39.1 69.7 Thousands of euros

Total payments made 245,441 193,835 Total payments pending 19,776 8,654

Pursuant to the ICAC’s decision regarding the calculation of the “average period of payment to suppliers”, all transactions corresponding to the supply of goods and services accruing since the entry into force of Law 31/2014 have been taken into account.

To the extent of providing the information required by the aforementioned decision, suppliers will be understood as all those trade payables corresponding to debts with suppliers of goods and services included under the item “Trade payables and other receivables” in the current liabilities side of the balance sheet.

“Average period of payment to suppliers” is the period between the delivery of a good or service by the supplier and the payment of the transaction.

The maximum payment period applicable to the Group as per Spanish Law 11/2013, of July 26th, since the publication of the aforementioned law and up to present, is 30 days (unless the conditions mentioned in this law are met, in which case the maximum payment period may be increased to 60 days).

19. Tax matters

a) Tax receivables and tax payables

The detail of the main tax receivables and payables at 31 December 2017 is as follows:

2017

Thousands of euros Tax assets Tax liabilities Non- Non-current Current current Current

Tax withholdings - 3,179 - 4,650 VAT refundable/payable - 7,225 - 8,252 Tax assets 144,127 - - - Current tax refundable/payable - 555 - 1,762 Accrued social security taxes payable - - - 179 Deferred tax liabilities - - 592,418 - 144,127 10,959 592,418 14,843

2016

Thousands of euros Tax assets Tax liabilities Non-

Non-current Current current Current

Tax withholdings - 23,612 - 3,352 VAT refundable/payable - 6,076 - 9,035 Tax assets 141,044 - - - Current tax refundable/payable - 1 - 27,231 Accrued social security taxes payable - - - 238 Deferred tax liabilities - - 556,771 - 141,044 29.689 556,771 39.856

b) Reconciliation of the accounting profit to the taxable profit

At 31 December 2017, the taxable profit was calculated as the accounting profit for the year plus the effect of changes in the fair value of investment property, and temporary differences due to the existing limitations. At the reporting date of these financial statements, the Group did not recognise any deferred tax assets in this regard, as it is generally subject to a tax rate of 0% as the Parent and the majority of the subsidiaries adhere to the SOCIMI regime.

The reconciliation of the accounting profit to consolidated income tax expense for the year at 31 December 2017 is as follows:

Thousands of euros 2017 2016

Profit before tax 1,113,469 592,622 Permanent differences: - Capital increase expenses - (17) - Negative goodwill on business combinations 1,775 (37,572) - Absorption of goodwill 9,839 154,428 - Consolidation adjustments to profit or loss 89,730 (47,665) - Taxable adjustments to profit or loss 22,797 - - Non deductibles financial costs 30,725 - - Other permanent differences - 6,958

Temporary differences: - Changes in value of investment property (897,401) (453,149) - Adjustments to depreciation and amortisation 13,818 (2,765) Offset of tax losses (5,159) (42,532) Adjusted taxable profit 379,593 170,308

The Parent company and a significant amount of its subsidiary companies are integrated in the SOCIMI regime. As set forth in Note 5.15, taxation under this regime is subject to a 0% tax rate, as long as certain requirements are met.

With regards to “Permanent differences - Consolidation adjustments to profit and loss”, the item mainly includes the net profits of subsidiaries consolidated by the equity method, as well as the amortization costs of property investments not registered under “Earnings before tax” in the Consolidated Financial Statements attached.

The temporary differences arose from the change in value of investment property (IAS 40 - Fair value model). In this regard, it should be noted that since the Parent’s directors consider and state that investment property acquired by subsidiaries that already adhere to the SOCIMI regime will not be sold within three years, the fair value adjustment carried out in 2017 and 2016 should be taxed at 0% and, therefore, the deferred tax liability is also zero.

c) Reconciliation of accounting profit to the tax expense

Thousands of euros 2017 2016

Expense for increase in value of investment property (a) (12,046) (3,602) Expense for disposal of properties within the SOCIMI regime - (630) Expense for disposal of properties outside the SOCIMI regime - (28,076) Expense for adjustment of bases excluded from the SOCIMI regime - (4,435) Income from reinvestment of gains on sales - 4,592 Income from amortisation adjustment 2016 (609) 359 Income from income tax adjustments - 8,210 Income from increases on assets sold - 20,246 Expense for gain/(loss) at standard rate (438) (6,342) Income from adjustment of previous years results 1,578 - Expense for tax benefit (1,222) - Other (204) (170) Total tax expense (12,941) (9,848)

(a) Corresponds to the increase in value of Tree Inversiones Inmobiliaria, SOCIMI, S.A. assets (acquired before filing for the SOCIMI regime) and non-SOCIMI subsidiaries (resident in Portugal, which comply with the requirements set forth under article 2.1.c) of the SOCIMI law in order to be considered as qualifying assets under said regime). The amount results by applying the tax rate that the Directors consider will be applicable to the increase in value (capital gain). d) Deferred tax assets recognised

The detail of the tax loss carryforwards at 31 December 2017 is as follows:

2017

Thousands of euros Recognised Tax in tax base assets

Tax Losees Prior to 2009 1,596 - 2009 232,902 58,225 2010 28,982 7,246 2011 81,880 20,470 2012 268 67 2013 440 110 2014 31,935 7,984 2015 524 131 2016 343 86 Total tax losses 378,870 94,318 Other deferred taxes recognised 88,342 49,809 Total deferred tax assets capitalised 467,212 144,127

“Other deferred taxes recognised” mainly includes the temporary differences arising from the limit on the deductibility of the depreciation of the assets from the acquisition of the Testa subgroup and Metrovacesa, and pending tax deductions, mainly from reinvestments.

The deferred tax assets indicated above were recognised in the consolidated statement of financial position because the Group’s directors considered that, based on their best estimate of the Group’s future earnings, including certain tax planning measures, it is probable that these assets will be recovered.

The detail of the tax assets not recognised at 31 December 2017 is as follows:

Thousands of euros Not recognised in tax base

Tax losses: Prior to 2008 - 2009 - 2010 - 2011 - 2012 - 2013 69,301 2014 5,149 2014 - Total tax losses 74,450 e) Deferred tax liabilities

As indicated above, the deferred tax liabilities mainly arose from business combinations carried out in recent years and the increase in value of the assets of Tree Inversiones Inmobiliarias, SOCIMI, S.A. (assets acquired before adhering to the SOCIMI regime) and from the non-socimi subsidiaries (residents in Portugal which comply with the requirements established in article 2.1c) of the SOCIMI law for being considered as compliant assets under the SOCIMI regime).

The changes at 31 December 2017 are as follows:

Thousands of euros Total deferred tax liabilities at 31 December 2015 223,088 Additions due to business combinations (Note 3) 359,943 Increase in value of investment property 4,424 Temporary differences (30,684) Total deferred tax liabilities at 31 December 2016 556,771 Increase in value of investment property 12,447 Additions due to business combinations 8,653 Temporary differences 1,222 Others 13,325 Total deferred tax liabilities at 31 December 2017 592,418

As stipulated in Note 19.b, the increase in value of investment property acquired by subsidiaries that adhere to the SOCIMI regime generate temporary differences at a tax rate of 0% and, therefore, no deferred tax liability has been recognised.

f) Years open for review and tax audits

Under current legislation, taxes cannot be deemed to have been definitively settled until the tax returns filed have been reviewed by the tax authorities or until the four-year statute-of-limitations period has expired. At 2017 year-end, the Parent and certain of its subsidiaries had all years since their incorporation open for review for all the taxes applicable to them. The rest of the subsidiaries had 2013 to 2016 open for review for income tax and 2014 to 2017 open for review for the other taxes applicable to them. The Parent’s directors consider that the tax returns for the aforementioned taxes have been filed correctly and, therefore, even in the event of discrepancies in the interpretation of current tax legislation in relation to the tax treatment afforded to certain transactions, such liabilities as might arise would not have a material effect on the accompanying consolidated financial statements. Also, Spanish Law 34/2015, of 21 September, partially amending Spanish Law 58/2003, of 17 December, on General Taxation establishes the right of the tax authorities to initiate a review and investigation procedure of the tax losses offset or carried forward or tax credits taken or carried forward, which will become statute barred after ten years from the day on which the regulatory period established for filing the tax return or self-assessment relating to the year or the tax period in which the right to offset the tax loss or to apply the tax credits arose.

The Parent company, as legal successor to the commercial property branch of Metrovacesa,S.A. has been subject to a general inspection and verification procedure for all applicable taxes to the aforementioned branch in the period between 2012 and 2014. Such procedure has concluded through a conformity agreement signed in February 2018 with no material impact in 2017 financial statements.

In 2017 the subsidiary Desarrollos Urbanos de Patraix, S.A. has been subject to a general inspection and verification procedure for all applicable taxes to the aforementioned subsidiary in the period between 2012 and 2014. The Group has provisioned the potential contingency arising from the procedure (Nota 17).

g) Disclosure requirements arising from SOCIMI status, Spanish Law 11/2009, amended by Spanish Law 16/2012

The disclosure requirements arising from the Parent and certain subsidiaries being considered SOCIMIs are included in the related notes of the separate financial statements.

20. Revenue and expenses

a) Revenue

The detail of revenue, together with the segment information, is provided in Note 6.

b) Other operating expenses

The detail of “Other operating expenses” in the consolidated income statement is as follows:

Thousands of euros 2017 2016

Non-recoverable expenses of leased properties 35,564 19,744 General expenses Professional services 6,690 5,825 Travel expenses 843 395 Office rental charges 733 642 Insurance 167 1,325 Other 1,334 319 Costs associated with the acquisition and sale of assets 4,110 22,588 Losses on, impairment of and change in provisions 1,851 272 Other expenses 702 555 Total 51,994 51,665 c) Staff costs and average headcount

The detail of “Staff costs” at 31 December 2017 is as follows:

Thousands of euros 2017 2016 Wages, salaries and similar expenses 25,791 21,817 Termination benefits 140 4,467 Employer social security costs 1,981 1,332 Other employee benefit costs 79 155 Long-term incentive plan 43,838 15,625 Total 71,759 43,241

As indicated in Note 5.17, on 20 December 2016 the Group approved a collective redundancy procedure that affects 52 employees and was paid in January 2017.

The average number of employees at the various Group companies in 2017 was 155 (132 in 2016).

The detail of the headcount at 2017 and 2016 year-end, by category, is as follows:

2017

Women Men Total

General managers - 2 2 Directors - 6 6 Other managers 1 4 5 Line personnel and support staff 7 25 32 Accountants, clerical staff and office employees 61 56 117 Total 69 93 162

2016

Women Men Total

General managers - 2 2 Directors - 4 4 Other managers 1 5 6 Line personnel and support staff 7 27 34 Accountants, clerical staff and office employees 88 64 152 Total 96 102 198

The average number of employees at the Group in 2017 with a disability equal to or greater than 33%, by category, was as follows:

Category 2017 2016

Senior executives - - Line personnel and middle management - - Clerical staff 5 1 Total 5 1 d) Finance income and finance costs

The detail of the balances of these headings in the consolidated income statement is as follows:

Thousands of euros 2017 2016

Finance income: Interest on deposits and current accounts 468 1,709 468 1,709 Finance costs: Interest on loans and other credits (121,235) (90,229) Other finance costs (1,306) (1,061) (122,541) (91,290) Financial loss (122,073) (89,581)

Finance costs include mainly the interest corresponding to the bank borrowings and obligations detailed in the Note 16 amounting to EUR 40,025 thousand and EUR 58,916 thousand, respectively. They also include the repayment of the debt arrangement expenses amounting to EUR 13,700 thousand (EUR 18,987 thousand in 2016), applying the effective interest rate to the financial debt, as well as other finance costs amounting to EUR 8,594 thousand. e) Profit/(loss) on disposal of financial instruments

The balance in this heading of the consolidated income statement for 2016 includes mainly the profit obtained in the loss of control of Testa Residencial SOCIMI, S.A. amounting to approximately EUR 75,849 thousand. f) Contribution to consolidated profit or loss

The contribution of each company included in the scope of consolidation to profit for 2017 was as follows:

Thousands of euros Company 2017 2016

Full Consolidation Merlin Properties SOCIMI, S.A. 597,798 273,858 Tree Inversiones Inmobiliarias, SOCIMI, S.A. 134,647 190,529 Merlin Retail, S.L. 20,834 29,954 Merlin Oficinas, S.L. 48,493 34,109 Merlin Logística, S.L. 80,747 33,210 Merlin Logística II, S.L. 3,187 2,368 Obraser, S.A. 9,544 8,848 Merlin Properties Adequa, S.L. 55,983 (14,826) Merlin Parques Logísticos, S.A. (1,296) (2,206) Varitelia Distribuciones, S.L.U. 24,045 16,781 Metroparque, S.A. 37,207 13,380 Metropolitana Castellana, S.L. 31,181 1,682 La Vital Centro Comercial y de Ocio, S.L. 11,127 1,317 Global Carihuela Patrimonio Comercial, S.L.U. (125) 119 Sadorma 2003, S.L. (989) (4,244) Promosete Invest. Inmobiliaria, S.A. 5,370 - MPCVI - Compra e Venda Imobiliária, S.A. 4,332 2,328 MPEP - Properties Escritórios Portugal, S.A (10) (7) MP Monumental, S.A. 17,408 564 MP Torre A, S.A. 8,514 34 Other subsidiaries (3,812) (6,971)

Equity Method Testa Residencial SOCIMI, S.A. 10,200 8,769 Paseo Comercial Carlos III, S.A. 1,367 557 Centro Intermodal de Logística, S.L. 2,951 (4,192) Provitae, S.L. (26) (535) Otras participated entities 1,741 (2,781) Total 1,100,418 582,645

21. Related party transactions

In addition to subsidiaries, associates and joint ventures, the Group’s related parties are considered to be the shareholders, the Company’s key management personnel (members of its Board of Directors and executives, together with their close relatives) and the entities over which key management personnel may exercise significant influence or control.

In June 2017, Banco Santander, S.A, related party to the Group, acquired Banco Popular and as such, all balances and transactions with Grupo Popular have been reclassified as balances and transactions with related entities in the details attached.

In 2017, BBVA reported the sale of its ownership interest in the Group. In this regard, on 22 December 2017 BBVA reported the removal of the members of the Board directors that it had appointed and, therefore, on 31 December 2017 BBVA lost its status as a related party with the MERLIN Group. In order to provide a fair view of BBVA’s relationship with the Group in 2017, the tables below include the most significant balances and transactions during the year between BBVA and the MERLIN Group up until the date on which the relationship between BBVA and the MERLIN Group ended.

The detail of any significant transactions, given their amount or importance, carried out between the Parent or its Group companies and related parties is as follows:

2017

Thousands of euros

Type of Related party relationship Revenue Expense Assets Liabilities

Banco Santander, S.A. (a) Financing 103 7,475 - 290,869 Banco Santander, S.A. (a) Cash - - 287,866 - Notional Banco Santander, S.A. (a) derivatives - - 354,951 Banco Santander, S.A. (b) Lease 1,410 239 - 271 Banco Santander, S.A. (b) Services 173 1,177 - - Banco Bilbao Vizcaya Argentaria, S.A. (a) (*) Financing - 42 - - Banco Bilbao Vizcaya Argentaria, S.A. (a) (*) Cash - 5,349 - Banco Bilbao Vizcaya Argentaria, S.A. (b) (*) Lease 93,729 159 - 14,756 Magic Real Estate, S.L. (d) Sublease 39 - - Testa Residencial, SOCIMI, S.A. (c) Services 7,725 - - Testa Residencial, SOCIMI, S.A. (c) Lease 57 - 2 Total 103,236 9,092 293,215 660,849 (*) Related party in 2017 as it was a shareholder of the Parent until December 2017

2016

Thousands of euros

Related party Type of relationship Revenue Expense Liabilities

Banco Santander, S.A. Financing 4 4,366 300,683 Banco Santander, S.A. Notional derivatives - - 227,981 Banco Santander, S.A. Lease 1,639 - - Banco Bilbao Vizcaya Argentaria, S.A. Financing - 192 - Banco Bilbao Vizcaya Argentaria, S.A. Lease 93,242 - - Magic Real Estate, S.L. Sublease 48 - - Testa Residencial, SOCIMI, S.A. Real estate services 2,249 - - Testa Residencial, SOCIMI, S.A. Lease 31 - - Total 97,213 4,558 528,664

a) The Group has been granted loans from its shareholder Banco Santander, S.A. amounting to EUR 290,869 thousand. In 2017, the finance costs incurred in transactions with shareholder banks amounted to EUR 7,517 thousand, which included EUR 98 thousand in bank guarantee costs and bank accounts costs (87 thousand euros and 11 thousand euros, respectively).

EUR 7,475 thousand relate to financing transactions carried out with Banco Santander, S.A., which include the expenses generated by bank guarantees and current accounts amounting to EUR 48 thousand and EUR 8 thousand respectively.

EUR 42 thousand relate to financing transactions carried out with Banco Bilbao Vizcaya, S.A. which include the expenses generated by bank guarantees and current accounts amounting to EUR 39 thousand and EUR 3 thousand respectively. The finance income obtained in 2017 amounted to EUR 103 thousand.

At 31 December 2017, the Group’s balances deposited with Banco Santander, S.A. and Banco Bilbao Vizcaya, S.A. amounted to EUR 287,866 thousand and EUR 5,349 thousand, respectively.

The notional amount of the current derivatives arranged with Banco Santander, S.A. totals EUR 354,951 thousand.

The Group has been granted guarantee lines by its shareholder Banco Santander, S.A. in the amount of EUR 4,846 and by Banco Bilbao Vizcaya, S.A. in the amount of EUR 5,496 thousand.

The Group made contributions in the amount of EUR 24 thousand to employee pension funds managed by its shareholder Banco Santander, S.A.

(b) As indicated in Note 9, the Group leased 867 offices (862 branches and 5 flagship buildings) to Banco Bilbao Vizcaya Argentaria, S.A. The term of the lease agreements covers a period of between 2 and 24 years, and in 2017 these agreements generated income of EUR 93,210 thousand. The guarantees deposited to secure these agreements amounted to EUR 14,673 thousand. The Group also leased two properties to Banco Bilbao Vizcaya Argentaria, S.A. for a period of up to two years (and a space for an ATM in a shopping centre), which generated revenue of EUR 519 thousand and for which a guarantee of EUR 83 thousand was provided at 31 December 2017.

Additionally, in 2017 the company has settled the pending expenses related to assets contributed by Banco Bilbao Vizcaya, S.A. to the extinct Metrovacesa, S.A. amounting to EUR 159 thousand.

The Group also leased eight properties to Banco Santander, S.A. The term of the lease agreements covers a period of between 1 and 20 years, and in 2017 these agreements generated income of EUR 1,410 thousand. The guarantees deposited to secure these agreements amounted to EUR 271. In addition, in 2017 the company has settled the pending expenses related to assets contributed by Banco Santander S.A. to the extinct Metrovacesa S.A. amounting to EUR 239 thousand.

MERLIN Properties Socimi, S.A. provides technological support services to Metrovacesa Suelo y Promoción, S.A., owned by its shareholder Banco Santander, S.A. for which it received a consideration of EUR 173 thousand in 2017. Similarly, Metrovacesa Promoción y Suelo , S.A. provides the Group with services related to the management of real estate projects, for which it received 1,120 thousand euros in 2017. Additionally, the Group has incurred in expenses related to the organization of its General Shareholders Meeting amounting to EUR 57 thousand.

(c) The Group provides real estate management services for its subsidiary Testa Residencial, SOCIMI, for which it received EUR 7,725 thousand in 2017. It also received EUR 57 thousand in rental income and common expenses charged for an office, which has a guarantee of EUR 2 thousand associated therewith.

(d) Merlin Properties, Socimi, S.A. subleases 20 square meters of office space to Magic Real Estate, S.L. This sublease was formally executed in December 2015 (until April 2017) with regard to a floor of office space, subleasing 125 square meters to Magic Real Estate, S.L. Since May 2017, the company replaced this sublease for another 20 square meters in a different building.

22. Directors information

The Parent’s directors and the parties related thereto did not have any conflicts of interest that had to be reported in accordance with article 229 of the revised text of the Spanish Capital Companies Act.

Remuneration and other benefits of directors

At 31 December 2017 and 2016, salaries, per diem attendance fees and any other type of compensation paid to members of the Parent’s managing bodies totalled EUR 6,067 thousand and EUR 4,748 thousand, as detailed below:

Thousands of euros 2017 2016

Fixed and variable remuneration 6,067 4,748 Articles of Association-stipulated - - emoluments Termination benefits - - Attendance fees - - Life and health insurance 11 11 Total 6,078 4,759

At 31 December 2017, the variable remuneration received by executive directors amounted to EUR 3,050 thousand (EUR 3,650 thousand in 2016). The first 50% of this amount is paid ten days after the Group’s financial statements are authorised for issued by the Board Directors. The other 50% will be paid two years after the Company’s financial statements were authorised for issue. In this regard, EUR 1,825 thousand corresponding to the bonuses accrued in previous years were paid in 2017.

At 31 December 2017, the amount of variable remuneration paid over the long term amounts to EUR 5,305 thousand, and is recognised under “Long-term provisions” in the accompanying balance sheet.

As indicated below in this Note, as members of the management team, executive directors have been awarded a share remuneration plan if they meet certain conditions linked to shareholder return (“2016 Share Plan”). In this regard, at 31 December 2017 the conditions envisaged in the plan were met in order for executive directors to receive 750,000 shares equivalent to 8,006 thousand euros (750,000 shares in 2016). The remuneration policy approved at the Annual General Meeting held on 26 April 2017 stipulates that shares may be delivered early on the dates of the vesting period.

In addition, as members of the management team, executive directors are entitled to receive compensation under the new remuneration plan granted to the management team in 2017 for the period 2017-2019, which is described below.

The breakdown, by board member, of the amounts disclosed above is as follows:

Thousands of euros Director 2017 2016 Directors’ remuneration Chairman - Proprietary - - Javier García Carranza Benjumea director Ismael Clemente Orrego CEO 2,550 2,150 Miguel Ollero Barrera Executive director 2,550 2,100 Maria Luisa Jordá Castro Independent director 120 71 Ana García Fau Independent director 115 71 Alfredo Fernández Agras Independent director 100 77 George Donald Johnston Independent director 115 68 John Gómez Hall Independent director 100 60 Fernando Ortiz Vaamonde Independent director 110 68 Ana de Pro Independent director 32 60 Juan María Aguirre Gonzalo Independent director 115 12 Pilar Cavero Mestre Independent director 110 11 Francisca Ortega Hernández Agero Proprietary director - - José Ferris Monera Proprietary director 100 - Total 6,067 4,748

The Parent did not grant any advances, loans or guarantees to any members of the Board of Directors.

The Parent’s directors are covered by the “Corporate Third-Party Liability Insurance Policies for Directors and Executives” taken out by the Parent in order to cover possible damages that may be claimed, and that are evidenced as a result of a management error committed by its directors or executives, as well as those of its subsidiaries, in discharging their duties. The total annual amount of premium was EUR 152 thousand (EUR 162 thousand in 2016).

Remuneration and other benefits of senior executives

The remuneration of the Parent’s senior executives, excluding those who are simultaneously members of the Board of Directors (whose remuneration is disclosed above), in 2017 and 2016 is summarised as follows:

2017

Thousands of euros Fixed and Number of Other variable Total persons remuneration remuneration 6* 5,376 36 5,412 * Includes the Internal Audit Director

2016

Thousands of euros Fixed and Number of Other variable Total persons remuneration remuneration 4 4,405 14 4,419

At 31 December 2017, the variable remuneration received by senior executives amounted to EUR 3,360 thousand (EUR 3,400 thousand in 2016). The first 50% of this amount is paid ten days after the Group’s financial statements are authorised for issued by the Board Directors. The other 50% will be paid two years after the Company’s financial statements were authorised for issue. In this regard, EUR 1,825 thousand corresponding to the bonuses accrued in previous years were paid in 2017. At 31 December 2017, the amount of variable remuneration paid over the long term amounts to EUR 5,049 thousand, and is recognised under “Long-term provisions” in the accompanying consolidated statement of financial position.

The Parent also had a commitment to award an additional annual variable remuneration incentive to the management team as determined by the Appointments and Remuneration Committee, linked to the Parent’s shares, which compensates the Parent’s management team based on the returns obtained by the Company’s shareholders (the “2016 Share Plan”). In accordance with the terms and conditions of this plan, members of senior management must remain at the Group and provide their services for a period of three years, whereby the shares will be delivered on the fifth year.

In this regard, at 31 December 2017 the conditions envisaged in the plan were met in order for senior management to receive 623,334 shares equivalent to EUR 6,654 thousand (623,334 shares in 2016).

The management team will be entitled to receive a maximum of 6,000,000 shares, provided that they continue to provide services to the Group over the next three years. Furthermore, the right to receive two thirds of these shares is conditional on the Parent’s financial solvency over the next two years. At 31 December 2017, the Group recognised the expense incurred with a charge to equity in the amount of EUR 15,738 thousand, corresponding to the portion accrued in the 2016 Share Plan, as this obligation must be met with the delivery of the Parent’s shares.

The Annual General Meeting held on 26 April 2017 authorized the delivery of the shares corresponding to the Management Stock Plan 2016 on the vesting dates.

Lastly, a new remuneration plan for the management team and other relevant members of the Group was approved at the Annual General Meeting held on 26 April 2017. The measurement period for this plan is from 1 January 2017 to 31 December 2019 (“2017-2019 Incentive Plan”). In accordance with that established in this plan, members of the management team may be entitled to receive (i) a certain monetary amount

based on the increase in the share price and (ii) shares of the Parent, provided that certain objectives are met.

Vesting of the incentive will independently be conditional upon the total rate of return obtained by the shareholder during the three-year period due to:

 the increase in the quoted price of the Parent’s share plus the shareholders distributions during the measurement period; and

 the increase in the EPRA NAV per share of the Parent plus the shareholders distributions by the Company during the measurement period.

In order for the right to the share-based incentive and to the EPRA NAV-based incentive to be vested, the total shareholder rate of return (TSR) must be at least 24%.

Percentage assigned Percentage assigned TSR NAV / TSR share price to beneficiaries to shareholders (“PR”)

< 24% 0% 100%

≥ 24% and < 36% 6% 94%

≥ 36% 9% 91%

The date for calculating the amount of the incentive tied to the NAV per share and the amount of the incentive tied to the quoted price of the shares will be 31 December 2019. The maximum amount to be received for the incentive tied to the quoted price from 2017 to 2019 will amount to EUR 37.5 million. If the amount of the incentive were to exceed the aforementioned limit, it would be used to supplement the incentive referenced to the NAV per share, if this falls below the maximum limit established in this connection. Also, the maximum amount of the incentive tied to EPRA NAV per share will be EUR 75 million and a maximum of 6,000,000 shares have been allocated for the payment thereof. Lastly, if the value of the maximum number of shares allocated to the plan were below the aforementioned incentive tied to the EPRA NAV, the difference would be paid in cash.

In this regard, at 31 December 2017 the Group recognised the expense incurred with a charge to “Long-term provisions”, amounting to EUR 28,100 thousand, corresponding to the vested portion of the 2017-2019 Incentive Plan.

Lastly, as regards “golden parachute” clauses for executive directors and other senior executives of the Parent or its Group in the event of dismissal or takeover, these clauses provide for compensation that represented a total commitment of EUR 15,300 thousand at 31 December 2017.

23. Auditors’ fees

The fees for financial audit services provided to the various companies composing the Merlin Group and subsidiaries by the principal auditor, Deloitte, S.L., and entities related to the principal auditor and other auditors is as follows:

Thousands of euros Description 2017 2016

Audit services 402 379 Other audit-related services: Other attest services 225 291 Total audit and related services 627 670

Other services - 552 Tax advisory services 12 - Total other services 12 552 Total 639 1,222

“Other audit-related services” includes the attest services carried out by the auditor in the process of issuing bonds, agreed-upon procedures related to compliance with covenants and the limited review of the half- yearly financial information.

24. Environmental information

In view of the Group’s business activity, it does not have any environmental liability, expenses, assets, provisions or contingencies that might be material with respect to its equity, financial position or results.

Therefore, no specific disclosures relating to environmental issues are included in these notes to the consolidated financial statements.

25. Risk exposure

Financial risk factors

The Group’s activities are exposed to various financial risks: market risk, credit risk, liquidity risk and cash flow interest rate risk. The Group’s global risk management programme focuses on the uncertainty of the financial markets and aims to minimise the potential adverse effects on the Group’s financial returns.

Risk management is controlled by the Group’s senior management in accordance with the policies established by the Board of Directors. Senior management identifies, assesses and hedges financial risks in close cooperation with the Group’s operating units. The Board provides written policies for global risk management, and specific subjects such as market risk, interest rate risk, liquidity risk and investment of surplus liquidity.

Market risk

Given the current situation of the real estate sector and in order to mitigate the effects thereof, the Group has specific measures in place to minimise the impact on its financial position.

These measures are applied pursuant to the results of sensitivity analyses carried out by the Group on a regular basis. These analyses take into account:

 The economic environment in which the Group operates: designing different economic scenarios and modifying the key variables potentially affecting the Group (interest rates, share price, occupancy rate of investment property, etc.). Identification of interdependent variables and the extent of their relationship.

 Time frame over which the assessment is carried out: the time horizon of the analysis and potential deviations will be taken into account.

Credit risk

Credit risk is defined as the risk of financial loss to which the Group is exposed if a customer or counterparty does not comply with its contractual obligations.

In general, the Group holds its cash and cash equivalents at banks with high credit ratings.

Except in the case of the lease of offices to BBVA, the Group does not have significant concentrations of credit risk. The Group regularly reviews the credit rating and the creditworthiness of BBVA in relation to the segment of bank branches leased to this bank. The Group also pays close attention to this situation, given that its financing is dependent on this credit rating being maintained. The Parent’s directors do not consider that there is any material credit risk with regard to its accounts receivable due from this lessee.

With respect to other customers, the Group has policies in place to limit the volume of risks posed by customers. Exposure to the risk of being unable to recover receivables is mitigated in the normal course of business through funds or guarantees deposited as collateral.

The Group has formal procedures to identify any impairment of trade receivables. Delays in payment are detected through these procedures and individual analysis by business area and methods are established to estimate impairment loss.

The estimated maturities of the Group’s financial assets in the consolidated statement of financial position at 31 December 2017 are detailed below. The tables present the results of the analysis of the maturities of its financial assets at 31 December 2017:

2017

Thousands of euros Less than 3 More than 3 months and less More than 6 months and More than 1 Total months than 6 months less than 1 year year

Loans to third parties - - - 1,488 1,488 Guarantees and deposits - - - 66,247 66,247 Trade and other receivables 27,739 - 50,794 - 78,533 Other current financial assets 7,114 - - - 7,114 Cash and cash equivalents 454,036 - - - 454,036 Total 488,889 - 50,794 68,608 607,418

2016

Thousands of euros Less than 3 More than 3 months and less More than 6 months and More than 1 Total months than 6 months less than 1 year year

Loans to third parties - - - 1,796 1,796 Guarantees and deposits - - - 66,431 66,431 Trade and other receivables 501,017 - 4,877 54,018 559,912 Other current financial assets 6,444 - - - 6,444 Cash and cash equivalents 247,081 - - - 247,081 Total 754,542 - 4,877 122,245 881,664

Cash and cash equivalents

The Group has cash and cash equivalents of EUR 454,036 thousand, which represents its maximum exposure to the risk posed by these assets.

Cash and cash equivalents are deposited with banks and financial institutions.

Liquidity risk

Liquidity risk is defined as the risk of the Group encountering difficulties meeting its obligations regarding financial liabilities settled in cash or with other financial assets.

At 31 December 2017, the Group’s working capital amounted to EUR 340,311 thousand.

The Group conducts prudent management of liquidity risk by maintaining sufficient cash to meet its payment obligations when they fall due, both in normal and stressed conditions, without incurring unacceptable losses or risking the Group’s reputation.

The Group’s exposure to liquidity risk at 31 December 2017 is detailed below. The tables below reflect the analysis, by maturity, of the financial liabilities in accordance with the existing agreements.

2017

Thousands of euros Less than 1 3 months to More than 1 to 3 months Total month 1 year 1 year Bank borrowings 2,847 129,917 45,434 - 178,198 Other non-current liabilities - - - - 85,194 85,194 Guarantees Trade and other payables (excluding balances with public 12,307 11,188 28,908 - 52,403 authorities) Total 15,154 141,105 74,342 85,194 315,795

2016

Thousands of euros Less than 1 3 months to More than 1 to 3 months Total month 1 year 1 year Bank borrowings 13,022 6,036 45,991 - 65,049 Other non-current liabilities - - - - 85,123 85,123 Guarantees Trade and other payables (excluding balances with public 51,182 27,350 22,479 - 101,011 authorities) Total 64,204 33,386 68,470 85,123 251,183

Cash flow and fair value interest rate risk

The Group manages its interest rate risk by borrowing at fixed and floating rates of interest. The Group’s policy is to ensure non-current net financing from third parties is at a fixed rate. To achieve this objective, the Group enters into interest rate swaps that are designated as hedges of the respective loans. The impact of interest rate fluctuations is explained in Note 16.3.

Foreign currency risk

The Group is not exposed to exchange rate fluctuations as all its operations are in its functional currency.

Tax risk

As stated in Note 1, the Parent and subsidiaries qualified for the special tax regime for listed real estate investment companies (SOCIMIs). In 2017, the transitory period has ended and the compliance of all requirements set forth in the SOCIMI regime has become obligatory (see Notes 1 and 5.15). Among the

requirements that the Parent company must comply with, some are of a formal nature, such as the obligation to include the term SOCIMI after the company’s name, including certain information in the notes to the individual annual accounts, being listed in an official stock exchange, etc; and other require management to produce estimates and apply judgement (determination of the fiscal rent, rent test, asset test, etc.) that may imply certain complexity, furthermore given the short life of the SOCIMI regime and that its development has taken place through the responses from the Tax Authority to the different formal issues posed by private companies. In this vein, the Group’s management, in coordination with its tax advisors, has concluded that the company complies with all requirements set forth in the regime as of December 31st 2017.

On the other side, and in order to consider the financial effect of the SOCIMI regime, it is important to note that as established in article 6 of Spanish Law 11/2009, of 26 October, amended by Spanish Law 16/2012, of 27 December, SOCIMIs that have opted for the special tax regime are required to distribute the profit generated during the year to their shareholders in the form of dividends, once the related corporate obligations have been met. This distribution must be approved within six months from each year-end, and the dividends paid in the month following the date on which the pay-out is agreed (see Note 11).

If the Parent company does not comply with the regime requirements or if the shareholders at the General Meetings of these companies do not approve the dividend distribution proposed by the Board of Directors, calculated in accordance with the requirements of this Law, it would not be complying therewith and, accordingly, tax would have to be paid under the general regime, not the regime applicable to SOCIMIs.

26 Events after the reporting date

On 3 January 2018, in accordance with clause 9.3 of the management service agreement entered into with Merlin Properties SOCIMI, S.A., Testa Residencial SOCIMI, S.A. notified Merlin Properties SOCIMI, S.A. of the cancellation of the aforementioned agreement effective as of 19 January 2018. In exchange, Testa Residencial SOCIMI, S.A. will undertake a capital increase through credit compensation, and MERLIN Properties Socimi, S.A. will receive 640,693,342 shares (equivalent to EUR 90 million) which will increase its stake in Testa Residencial SOCIMI, S.A. to 16.95%.

As of February 13th 2018, the Parent company has fully repaid and cancelled the outstanding leasing balances for a total amount of EUR 122.6 million.

27. Explanation added for translation to English

These consolidated financial statements are presented on the basis of the regulatory financial reporting framework applicable to the Group in Spain (see Note 2.1). Certain accounting practices applied by the Group that conform with that regulatory framework may not conform with other generally accepted accounting principles and rules.

ANEXO I - Subsidiaries and associates 2017

Thousands of euros

Profit/(Loss) Remaining Carrying amount Total Dividends Consolidation Ownership Share shareholders’ Company Line of business / Location Operations Net equity received Cost Impairment method Auditor interest capital equity

Tree Inversiones Acquisition and development of property assets for Full Inmobiliarias, SOCIMI, 100% 9,323 79,191 42,460 35,605 56,857 50,669 657,984 - Deloitte lease / Paseo de la Castellana 257, Madrid consolidation S.A.U.

Acquisition and development of property assets for Full Merlin Logística, S.L.U. 100% 24,418 9,425 8,236 216,201 248,394 6,685 244,153 - Deloitte lease / Paseo de la Castellana 257, Madrid consolidation

Acquisition and development of property assets for Full Merlin Retail, S.L.U. 100% 17,963 15,771 10,859 157,372 185,782 10,939 179,608 - Deloitte lease / Paseo de la Castellana 257, Madrid consolidation

Acquisition and development of property assets for Full Merlin Oficinas, S.L.U. 100% 19,699 11,735 6,541 172,029 198,269 5,605 196,959 - Deloitte lease / Paseo de la Castellana 257, Madrid consolidation

MPEP – Properties Acquisition and development of property assets for Full Deloitte 100% 50 (10) (10) (9) 31 - 50 (19) Escritórios Portugal, S.A. lease / Av. Fontes Pereira de Melo, Nº 51, Lisboa consolidation Portugal

MPCVI – Compra e Venda Acquisition and development of property assets for Full Deloitte 100% 1,050 1,360 500 5890 7,440 - 6,418 - Imobiliária, S.A. lease / Av. Fontes Pereira de Melo, Nº 51, Lisboa consolidation Portugal

Acquisition and development of property assets for Full Merlin Logística II, S.L.U. 100% 300 765 531 3,748 4,487 624 10,671 - Deloitte lease / Paseo de la Castellana 257, Madrid consolidation

Acquisition and development of property assets for Full Obraser, S.A. 100% 4,121 3,405 3,376 32,805 40,303 6,156 71,800 - N/A lease / Paseo de la Castellana 257, Madrid consolidation

Thousands of euros Profit/(Loss) Remaining Carrying amount Total Dividends Consolidation Ownership Share shareholders’ Company Line of business / Location Operations Net equity received Cost Impairment method Auditor interest capital equity Acquisition and development of property assets for lease Full MP Torre A, S.A. 100% 50 1,977 111 1,558 1,719 - 10,186 - EY / Avda Fontes Pereira de Melo, 51, Lisbon consolidation

Acquisition and development of property assets for lease Full MP Monumental, S.A. 100% 50 3,772 1,045 11,497 12,592 - 20,348 - EY / Avda Fontes Pereira de Melo, 51, Lisbon consolidation

Merlin Properties Acquisition and development of property assets for lease Full 100% 5,075 8,285 8,404 269,761 283,240 7,860 379,560 - Deloitte Adequa, S.L. / Paseo de la Castellana 257, Madrid consolidation

Belkyn West Acquisition and development of property assets for lease Full 100% 337 (6) (129) 2998 3206 - 3,343 (137) N/A Company, S.L. / Paseo de la Castellana 257, Madrid consolidation

Merlin Parques Acquisition and development of property assets for lease Full 100% 69,802 2,159 7,965 2,554 80,326 - 118,310 - Deloitte Logisticos, S.A.U. / Paseo de la Castellana 257, Madrid consolidation

Full Gescentesta, S.L.U. Provision of services / Paseo de la Castellana 257, Madrid 100% 3 185 165 224 392 - 3 - N/A consolidation Gesfitesta, S.L. Full (formerly Itaceco, No activity / Paseo de la Castellana 257, Madrid 100% 6 (46) (71) (270) (335) - 6 (341) N/A consolidation S.L.U.) Full Testa Hoteles, S.A. No activity / Paseo de la Castellana 257, Madrid 100% 180 0 18 4,102 4,300 - 4,287 - N/A consolidation La Vital Centro Acquisition and development of property assets for lease Full Comercial y de Ocio, 100% 14,846 2,901 2,941 14,500 32,287 2,330 56,788 - Deloitte / Paseo de la Castellana 257, Madrid consolidation S.L. (1) PKF & Inmobiliaria Metrogolf, No activity / Alameda das Linhas de Torres, 152, Lisbon Full 100% 1000 (53) (53) 2,681 3,628 - 3,709 (85) Asociados S.A. consolidation SROC Metropolitana Acquisition and development of property assets for lease Full 100% 2,343 2,565 2,562 34,887 39,792 2,390 90,859 - Deloitte Castellana, S.L. / Paseo de la Castellana 257, Madrid consolidation

Thousands of euros

Profit/(Loss) Remaining Carrying amount Total Dividends Consolidation Ownership Share shareholde Company Line of business / Location Operations Net equity received Cost Impairment method Auditor interest capital rs’ equity Acquisition and development of property assets for lease / Paseo Full Acoghe, S.L. 100% 400 (13) (6) (104) 290 - 300 (10) N/A de la Castellana 257, Madrid consolidation Holding Jaureguizahar Full No activity / Paseo de la Castellana 257, Madrid 100% 1,481 (3) (3) (6,722) (5,244) - - (5,244) N/A 2002, S.A. consolidation Acquisition and development of property assets for lease / Paseo Full Sadorma 2003, S.L. 100% 73 624 218 19,696 19,987 - 25,485 (5,498) Deloitte de la Castellana 257, Madrid consolidation

Acquisition and development of property assets for lease / Paseo Full Global Murex Iberia, S.L. 100% 14 (1) (1) (15,547) (15,535) - - (15,535) N/A de la Castellana 257, Madrid consolidation

Global Carihuela, Acquisition and development of property assets for lease / Paseo Full 100% 1,603 (1,468) (1,482) 13,285 13,405 - 17,102 - N/A Patrimonio Comercial, S.A. de la Castellana 257, Madrid consolidation

Promosete, Invest. Inmobil, Acquisition and development of property assets for lease Av. Full 100% 200 621 40 6,008 6,248 - 11,704 - S.A. Fontes Pereira de Melo, Nº 51, Lisboa consolidation Praça Do Marquês Acquisition and development of property assets for lease Av. Full Victor 100% 15,893 1,452 3,037 41,922 60,852 - 60,382 - Serviços Auxiliares, S.A. Fontes Pereira de Melo, Nº 51, Lisboa consolidation Olivera Urban development, construction and operation of buildings for Full Sevisur Logística logistics activities and common services. Ctra. de la Esclusa, 15. 100% 17,220 1,766 1,550 6,651 25,420 1,120 37,628 - consolidation 41011, Seville Acquisition and development of property assets for lease Av. Full Deloitte VFX Logística, S.A. (1) 100% 5,050 852 812 17,783 23,644 - 50,188 -26,565 Fontes Pereira de Melo, Nº 51, Lisboa consolidation Portugal Parques Logísticos de la Acquisition and development of property assets for lease Avda. 3 Full 90% 15.701 4.948 2.889 9.718 28.248 - 23.671 - Deloitte Zona Franca, S.A. (1) del Parc Logístic, nº 26, Barcelona consolidation Varitelia Distribuciones, Acquisition and development of property assets for lease / C. Full 100% 15,443 33,388 34,245 (32,289) 17,399 29,680 154,400 (137,001) Deloitte S.L. Quintanavides, 13, Madrid consolidation

Thousands of euros

Acquisition and development of property assets for lease / C. Full Metroparque, S.A. 100% 56,194 11,458 11,670 18,856 86,719 8,050 231,557 - Deloitte Quintanavides, 13, Madrid consolidation

Desarrollo Urbano de Full Land management / Avda. Barón de Carcer, 50, Valencia 100% 2,790 (6,527) (6,809) 22,300 18,281 - 25,090 (6,809) N/A Patraix, S.A. consolidation

Paseo Comercial Carlos Acquisition and development of property assets for lease / Morison 50% 8,698 3,809 2,734 21,839 33,271 - 25,668 - Equity method III, S.A. (1) Avda. San Martín Valdeiglesias, 20 - 28922 Madrid ACPM

Testa Residencial, Acquisition and development of property assets for lease / Full 12.72% 125,863 4,573 (3,212) 1,413,469 1,535,785 - 144,369 - Deloitte Socimi, S.A. Paseo de la Castellana 83-85, Madrid consolidation

Development, management and performance of logistics Centro Intermodal de activities in a port system / Avenida Ports d’Europa 100, 48.50% 18,920 10,759 6,085 90,880 121,290 - 95,688 - Equity method KPMG Logística S.A. (CILSA) Barcelona Provitae Centros Acquisition and development of property assets for lease / C. 50% 6,314 (43) (53) (961) 5,300 - 5,061 (511) Equity method N/A Asistenciales, S.L. Fuencarral, 123. Madrid

PK. Inversiones 22, Provision of services / C. Príncipe de Vergara, 15. Madrid 50% 60 - - (24) 36 - 30 (13) Equity method N/A S.L.

Pazo de Congresos de Project for the execution, construction and operation of the 44% 11,100 (966) (1,015) (1,153) 8,932 - - (3,600) Equity method EY Vigo, S.A. Vigo Convention Centre / Avda. García Barbón, I. Vigo

Araba Logística SA(1) Acquisition and development of property assets for lease 25.14% 1,750 (569) (3,761) 2,186 175 - 20,669 (20,669) Equity method Deloitte

Acquisition and development of property assets for lease / C. PK. Hoteles 22, S.L. 32.50% 5,801 503 298 (680) 5,423 - 2,467 (633) Equity method N/A Príncipe de Vergara, 15. Madrid

Acquisition and development of property assets for lease / Parking del Palau, S.A. 33% 1,998 223 167 322 2487 40 2,137 - Equity method N/A Paseo de la Alameda, s/n. Valencia

(1) Indirect ownership interest

Appendix I

Subsidiaries and associates 2016

Thousands of euros

Tree Inversiones Inmobiliarias, Acquisition and development of property assets for lease / Full 100% 9,323 85,296 42,773 43,885 95,981 23,000 657,984 - Deloitte SOCIMI, S.A.U. Paseo de la Castellana 42, Madrid consolidation

Acquisition and development of property assets for lease / Full Merlin Logística, S.L.U. 100% 12,418 5,781 4,218 110,052 126,688 2,713 124,153 - Deloitte Paseo de la Castellana 42, Madrid consolidation

Acquisition and development of property assets for lease / Full Merlin Retail, S.L.U. 100% 17,963 15,197 9,932 157,501 185,396 7,200 179,608 - Deloitte Paseo de la Castellana 42, Madrid consolidation

Acquisition and development of property assets for lease / Full Merlin Oficinas, S.L.U. 100% 16,779 10,806 7,840 142,118 166,737 7,826 167,759 - Deloitte Paseo de la Castellana 42, Madrid consolidation

MPEP – Properties Escritórios Acquisition and development of property assets for lease / Full Deloitte 100% 50 (7) (7) (2) 41 - 50 - Portugal, S.A. Rua Eça de Queirós 20, Lisbon consolidation Portugal

MPCVI – Compra e Venda Acquisition and development of property assets for lease / Full Deloitte 100% 1,050 1,313 457 5,433 6,940 - 6,418 - Imobiliária, S.A. Rua Eça de Queirós 20, Lisbon consolidation Portugal

Acquisition and development of property assets for lease / Full Merlin Logística II, S.L.U. 100% 300 622 293 4,079 4,672 - 10,671 - Deloitte Paseo de la Castellana 42, Madrid consolidation

Acquisition and development of property assets for lease / Full Obraser, S.A. 100% 601 3,827 3,969 3,312 7,882 1,144 36,600 - N/A Paseo de la Castellana 42, Madrid consolidation

Thousands of euros Profit/(Loss) Carrying amount Other Total Dividends Consolidation Ownership Share Company Line of business / Location Operations Net equity equity received Cost Impairment method Auditor interest capital Acquisition and development of property assets for lease Full MP Torre A, S.A. 100% 50 1,710 (196) 1,754 1,608 - 10,186 - EY / Avda Fontes Pereira de Melo, 51, Lisbon consolidation

Acquisition and development of property assets for lease Full MP Monumental, S.A. 100% 50 3,576 855 10,642 11,547 - 20,348 - EY / Avda Fontes Pereira de Melo, 51, Lisbon consolidation

Merlin Properties Adequa, Acquisition and development of property assets for lease Full 100% 5,075 4,527 (3,920) 281,541 282,696 - 378,755 - Deloitte S.L. / Paseo de la Castellana 42, Madrid consolidation

Belkyn West Company, Acquisition and development of property assets for lease Full 100% 3 (27) (27) - (24) - 3 - N/A S.L. / Paseo de la Castellana 42, Madrid consolidation

Merlin Parques Acquisition and development of property assets for lease Full 100% 69,802 228 2,226 2,717 74,745 - 115,292 - Deloitte Logisticos, S.A.U. / Avda 3 del Parc Logistic, 26, Barcelona consolidation

Provision of services / Paseo de la Castellana 83-85. Full Gescentesta, S.L.U. 100% 3 290 224 - 227 187 3 - N/A Madrid consolidation

Gesfitesta, S.L. (formerly Full No activity / Paseo de la Castellana 83-85. Madrid 100% 6 (320) (409) 139 (264) - 6 - N/A Itaceco, S.L.U.) consolidation

Full Testa Hoteles, S.A. No activity / Paseo de la Castellana 83-85. Madrid 100% 180 (1) (1) 4,103 4,282 - 4,287 - N/A consolidation

La Vital Centro Comercial Acquisition and development of property assets for lease Full 100% 14,010 2,699 2,024 7,471 23,505 - - - Deloitte y de Ocio, S.L. (1) / C. Quintanavides, 13, Madrid consolidation PKF & Inmobiliaria Metrogolf, No activity / Alameda das Linhas de Torres, 152, Lisbon Full 100% 1 (19) (19) 3,720 3,702 - 3,709 - Asociados S.A. consolidation SROC Metropolitana Castellana, Acquisition and development of property assets for lease Full 100% 743 2,250 1,686 21,235 23,664 - 7,559 - Deloitte S.L. / C. Quintanavides, 13, Madrid consolidation

105

Thousands of euros Profit/(Loss) Carrying amount Other Total Dividends Consolidation Ownership Share Company Line of business / Location Operations Net equity equity received Cost Impairment method Auditor interest capital Acquisition and development of property assets for lease / Full MP Torre A, S.A. 100% 50 1,710 (196) 1,754 1,608 - 10,186 - EY Avda Fontes Pereira de Melo, 51, Lisbon consolidation

Acquisition and development of property assets for lease / Full MP Monumental, S.A. 100% 50 3,576 855 10,642 11,547 - 20,348 - EY Avda Fontes Pereira de Melo, 51, Lisbon consolidation

Merlin Properties Acquisition and development of property assets for lease / Full 100% 5,075 4,527 (3,920) 281,541 282,696 - 378,755 - Deloitte Adequa, S.L. Paseo de la Castellana 42, Madrid consolidation

Belkyn West Company, Acquisition and development of property assets for lease / Full 100% 3 (27) (27) - (24) - 3 - N/A S.L. Paseo de la Castellana 42, Madrid consolidation

Merlin Parques Acquisition and development of property assets for lease / Full 100% 69,802 228 2,226 2,717 74,745 - 115,292 - Deloitte Logisticos, S.A.U. Avda 3 del Parc Logistic, 26, Barcelona consolidation

Full Gescentesta, S.L.U. Provision of services / Paseo de la Castellana 83-85. Madrid 100% 3 290 224 - 227 187 3 - N/A consolidation Gesfitesta, S.L. Full (formerly Itaceco, No activity / Paseo de la Castellana 83-85. Madrid 100% 6 (320) (409) 139 (264) - 6 - N/A consolidation S.L.U.) Full Testa Hoteles, S.A. No activity / Paseo de la Castellana 83-85. Madrid 100% 180 (1) (1) 4,103 4,282 - 4,287 - N/A consolidation La Vital Centro Acquisition and development of property assets for lease / C. Full Comercial y de Ocio, 100% 14,010 2,699 2,024 7,471 23,505 - - - Deloitte Quintanavides, 13, Madrid consolidation S.L. (1) PKF & Inmobiliaria Metrogolf, No activity / Alameda das Linhas de Torres, 152, Lisbon Full 100% 1 (19) (19) 3,720 3,702 - 3,709 - Asociados S.A. consolidation SROC Metropolitana Acquisition and development of property assets for lease / C. Full 100% 743 2,250 1,686 21,235 23,664 - 7,559 - Deloitte Castellana, S.L. Quintanavides, 13, Madrid consolidation

106

Thousands of euros

Profit/(Loss) Carrying amount Other Total Dividends Consolidation Ownership Share Impairme Company Line of business / Location Operations Net equity equity received Cost method Auditor interest capital nt Metrovacesa Access Tower Full No activity / Lyoner Straße 36, 60528 Frankfurt 100% 25 - - 1,176 1,201 - 1,202 - N/A GmbH consolidation Expl. Urbanas Españolas, Acquisition and development of property assets for lease / C. Full 100% 364 (2) (2) 592 954 - 31,088 - N/A S.L.U. Quintanavides, 13, Madrid consolidation Acquisition and development of property assets for lease / C. Full Acoghe, S.L. 100% 400 (3) (2) (102) 296 - 299 - N/A Quintanavides, 13, Madrid consolidation Holding Jaureguizahar Full No activity / Pza de Carlos Trias Bertrán, 7, Madrid 100% 1,481 - - (6,722) (5,241) - - - N/A 2002, S.A. consolidation Acquisition and development of property assets for lease / C. Full Sadorma 2003, S.L. 100% 73 (196) (532) 21,477 21,018 - 25,449 (4,460) Deloitte Quintanavides, 13, Madrid consolidation

Acquisition and development of property assets for lease / C. Full Global Murex Iberia, S.L. 100% 13 (1) (1) (15,545) (15,533) - - - N/A Quintanavides, 13, Madrid consolidation

No activity / Prins Bernhardplein 200, 1097 JB Amsterdam, the Full Project Maple I BV 100% 474,641 - (2) (474,845) (206) - - - N/A Netherlands consolidation

Global Carihuela, Acquisition and development of property assets for lease / C. Full 100% 3 (1,652) (2,465) 1,350 (1,112) - 1,102 - N/A Patrimonio Comercial, S.A. Quintanavides, 13, Madrid consolidation

Varitelia Distribuciones, Acquisition and development of property assets for lease / C. Full 100% 3 25,782 22,154 (154,339) (132,182) - - - Deloitte S.L. Quintanavides, 13, Madrid consolidation

Acquisition and development of property assets for lease / 34 Full Deloitte Metrovacesa France, S.A.S. 100% 1,895 2,377 1,970 6,149 10,014 - 10,135 (122) avenue des Champs-Elysées, Paris consolidation France

107

Thousands of euros

Profit/(Loss) Carrying amount Other Total Dividends Consolidation Ownership Share Company Line of business / Location Operations Net equity equity received Cost Impairment method Auditor interest capital Centros Comerc. Acquisition and development of property assets for lease / C. Full 100% 61 958 9,936 (8,059) 1,938 - 36,262 - Deloitte Metropolitanos., S.A. Quintanavides, 13, Madrid consolidation

Acquisition and development of property assets for lease / C. Full Metroparque, S.A. 100% 56,194 9,243 6,835 21,070 84,099 - 231,557 - Deloitte Quintanavides, 13, Madrid consolidation

Desarrollo Urbano de Full Land management / Avda. Barón de Carcer, 50, Valencia 100% 2,790 (1) (1) 22,301 25,090 - 25,090 - N/A Patraix, S.A. consolidation

Paseo Comercial Acquisition and development of property assets for lease / Morison 50% 8,698 4,160 2,894 18,945 30,537 - - - Equity method Carlos III, S.A. (1) Avda. San Martín Valdeiglesias, 20 - 28922 Madrid ACPM

Testa Residencial, Acquisition and development of property assets for lease / Full 34% 46,766 179 (1,215) 588,627 634,178 - 144,369 - EY Socimi, S.A. Paseo de la Castellana 83-85, Madrid consolidation

Centro Intermodal de Development, management and performance of logistics Logística S.A. activities in a port system / Avenida Ports d’Europa 100, 32% 15,467 10,080 5,196 58,367 79,030 - 50,038 - Equity method KPMG (CILSA) Barcelona Provitae Centros Acquisition and development of property assets for lease / C. 50% 6,314 (47) (55) (906) 5,353 - 5,541 (1,070) Equity method N/A Asistenciales, S.L. Fuencarral, 123. Madrid

PK. Inversiones 22, Provision of services / C. Príncipe de Vergara, 15. Madrid 50% 60 - - (24) 36 - 30 - Equity method N/A S.L.

Pazo de Congresos Project for the execution, construction and operation of the 44% 11,100 (309) (1,005) (2,367) 7,728 - 3,652 (217) Equity method EY de Vigo, S.A. Vigo Convention Centre / Avda. García Barbón, I. Vigo

Acquisition and development of property assets for lease / C. PK. Hoteles 22, S.L. 33% 5,800 431 363 (1,036) 5,127 - 1,985 (1,888) Equity method N/A Príncipe de Vergara, 15. Madrid

Parking del Palau, Acquisition and development of property assets for lease / 33% 1,998 157 116 326 2,440 - 2,236 - Equity method N/A S.A. Paseo de la Alameda, s/n. Valencia

(1) Indirect ownership interest

108

MANAGEMENT REPORT ON CONSOLIDATED FINANCIAL STATEMENTS MERLIN FOR THE PERIOD ENDED ON DECEMBER 31, 2017 PROPERTIES

2017 MERLIN PROPERTIES, THE LEADING SOCIMI IN THE SPANISH REAL ESTATE MARKET

STOXX11 Europe 600 EPRA MSC I O1. Executive Summary 4

O2. Organization and structure 16

O3. Business performance 20

O4. Acquisitions, refurbishments and developments 30

O5. Portfolio valuation 42

O6. Financial statements 46

O7. EPRA metrics 54

O8. Events post-closing 58

O9. Stock Exchange evolution 60

10. Dividend policy 64

11. Main risks and uncertainties 66

12. Treasury shares 68

13. Outlook / R+D information / other 70

14. Corporate responsibility 72

15. Staff 84

APPENDIX

EPRA metrics calculation 93

Alternative measures of performance 94

List of assets 97

Asset location maps 104

2017 consolidated financial statements

Corporate Governance Annual Report FY17 RESULTS Trading Update

AT A GLANCE In 2017 MERLIN Properties achieved excellent results in cash flow generation and portfolio value pushing shareholder return to a very high level TOTAL SHAREHOLDER RETURN (TSR)

Highest TSR achieved in the company’s history 0. 46 0.40 € 0.46 per share (+14% YoY)

Dividends of the period 21.6% 0.19 17.2%

21.6% 4.9% TSR rate (5.9%) 0.00

2014 2015 2016 2017 NAV PER SHARE TSR DPS Strong growth in assets revaluation € 13.25 (+18.0% YoY) 13.25

EPRA NAV per share increase 11.23 € 959.0m 10.49 Assets revaluation(1) 9.85 2014 2015 2016 2017

FFO PER SHARE / EPS NAV per share

Excellent year in cash flow generation 01 2.34 meeting upgraded guidance and offsetting loss of € 0.06 of 2016 sales 1.59 0.62 (2) 0.60 € 0.62 (+2.0% YoY) 0.60

FFO ps 0.25 EXECUTIVE SUMMARY € 2.34 (+47.1%) 0.39 0.22 2014 2015 2016 2017 EPS FFO ps EPS FINANCIAL DEBT Proactive management of the debt side resulting

in lower leverage, extended maturities 3.1% 49.8% and lower exposure to interest rate fluctuations 45.5% 43.6% 38.4% 43.6% 2.2% 2.3% 2.2% Loan to Value 2.23% Average cost of debt 2014 2015 2016 2017 Loan to Value Average cost of debt

(1) € 897.4m asset revaluation of investment property in P&L + off-balance sheet revaluations (2) 2016 FFO rebased to deduct recurring taxes ı 1 ı

ı 4 ı FY17 RESULTS Management Report on ConsolidatedTrading Financial StatementsUpdate

AT A GLANCE In 2017 MERLIN Properties achieved excellent results in cash flow generation and portfolio value pushing shareholder return to a very high level TOTAL SHAREHOLDER RETURN (TSR)

Highest TSR achieved in the company’s history 0. 46 0.40 € 0.46 per share (+14% YoY)

Dividends of the period 21.6% 0.19 17.2%

21.6% 4.9% TSR rate (5.9%) 0.00 . I I 2014 2015 2016 2017 NAV PER SHARE • TSR DPS Strong growth in assets revaluation € 13.25 (+18.0% YoY) 13.25

EPRA NAV per share increase 11.23 € 959.0m 10.49 Assets revaluation(1) 9.85 2014 2015 2016 2017

FFO PER SHARE / EPS NAV per share Excellent year in cash flow generation meeting upgraded guidance and offsetting 2.34 loss of € 0.06 of 2016 sales 1.59 0.62 (2) 0.60 € 0.62 (+2.0% YoY) 0.60

FFO ps 0.25

€ 2.34 (+47.1%) 0.39 0.22 2014 2015 2016 2017 EPS FFO ps EPS FINANCIAL DEBT Proactive management of the debt side resulting in lower leverage, extended maturities 3.1% 49.8% and lower exposure to interest rate fluctuations 45.5% 43.6% 38.4% 43.6% 2.2% 2.3% 2.2% Loan to Value 2.23% Average cost of debt 2014 2015 2016 2017 • Loan to Value Average cost of debt (1) € 897.4m asset revaluation of investment property in P&L + off-balance sheet revaluations (2) 2016 FFO rebased to deduct recurring taxes ı 1 ı

ı 5 ı MERLIN Properties FY17 RESULTS Trading Update

PROPERTIES

CONSOLIDATED PERFORMANCE +2.0% +10.6% (€ million) FY17 FY16 YoY FFO per share YoY YoY PF(1) Total revenues 484.3 362.8 +33.5% Gross rents 469.4 351.0 +33.7% +47.0% Net rents 415.2 323.5 +28.4% EPS YoY Gross-to-net margin 88.5% 92.1% EBITDA (2) 392.6 303.6 +29.3%

+18.0% Margin 83.6% 86.5% EPRA NAV YoY FFO (3) 289.2 221.0 +30.9%

• Excellent results in both cash flow generation AFFO 270.9 n.a. n.a. and net assets revaluation Net earnings 1,100.4 582.6 +88.9% • FFO per share of € 0.61 (+1.3% YoY) and EPRA NAV per share at € 13.25 (+18.0% YoY) (€ per share) FY17 FY16 YoY • AFFO meets full year upgraded 2017 guidance FFO 0.62 0.60 +2.0% (€ 0.57 per share) AFFO 0.58 n.a. n.a.

EPS 2.34 1.59 +47.1%

NAV 13.25 11.23 +18.0%

Leasing Occ. vs Contracted Rent FY17 BUSINESS PERFORMANCE activity 31/12/16 LfL Release sqm €m bps Same perimeter change spread +2.7% as FY16 Office 456,921 217.5 +2.9% +3.4% +28 Rents like-for-like(4) YoY (Excludes MVC) Shopping 108,411 92.8 +3.6% +4.7% +78 centers All High street n.a. 104.1 +0.9% n.m. (59) +3.4% +4.7% +13.4% portfolio retail ' Office S. Centers Logistics i in FY17 Logistics 284,667 41.3 +8.4% +13.4% +315 Release spread L---·-·-·-·-·-·---~ Other n.a. 13.7 +7.2% n.m. +20 +132 bps 92.6% Total 849,999 469.4 +2.7% +132 Occupancy vs 31/12/16 Gross rents bridge • Office:456,921 sqm contracted. LfL(4) of +2.9% (€m) and release spread of +3.4% LfL +2.7% +112.7 469.4 • Shopping centers: 108,411 sqm contracted. LfL(4) of +3.6% and release spread of +4.7% 351.0 +7.0 (1.3) • Logistics: 284,667 sqm contracted. LfL(4) of +8.4% and release spread of +13.4%

(1) After deducting € 0.06 related to 2016 disposals from € 0.60 of 2016 FFO FY 2016 Like-for-Like 4 old Balance FY 2017 per share growth leases FY16 acquisitions (2) Excludes non-recurring ítems (€ 5.0m) plus LTIP accrual (€ 43.8m) and disposals (3) FFO equals EBITDA less net interest payments, less minorities, less recurring income taxes plus share in earnings of equity method. FFO reported in FY16 has been rebased in accordance with this methodology (4) Portfolio in operation for FY16 (€ 257.7m GRI) and for FY17 (€ 264.7m GRI) ı 6 ı ı 2 ı MERLIN Properties Management Report on ConsolidatedFY17 RESULTS Financial Trading Statements Update

OFFICES

Gross rents bridge Rents breakdown (€m) LfL(1) +129.6 217.5 +2.9% Gross rents Passing rent WAULT FY17 (€ m) (€/sqm/m) (yr)

85.9 +2.8 (0.9) Madrid 174.7 16.6 2.9

Barcelona 29.8 13.5 3.7

FY 2016 Like-for-Like 2 old Balance FY 2017 Lisbon 10.0 17.9 2.9 growth leases(2) FY16 acquisitions and disposals Other 3.0 10.7 8.3

Total 217.5 16.0 3.1

Leasing activity

• Good performance in our 3 core markets, delivering +3.4% release spread on average • 4Q leasing activity highlights: • 9,502 sqm new lease with Publicis in Partenon 12-14, Madrid • 5,644 sqm new lease with Paradigma in Atica 2, Madrid • 5,559 sqm renewed with Atento in Santiago de Compostela 94, Madrid • 2,637 sqm renewed with Bodas.net in Sant Cugat I, Barcelona

Contracted Release Out In Renewals Net # Contracts Sqm spread

Madrid 390,438 (90,981) 90,033 300,404 (948) +3.3% 169

Barcelona 63,121 (12,040) 19,104 44,017 7,064 +4.5% 64

Lisbon 3,362 (991) 1,445 1,917 454 +5.1% 4

Total 456,921 (104,012) 110,583 346,338(3) 6,571 +3.4%(4) 237(4)

...... Occupancy ~ Stock 1,267,344 sqm ~ ~ ~ : WIP 95,923 sqm : • Good occupancy trend in Madrid : : : : The year has been impacted by the : Stock incl. WIP 1,363,267 sqm : !.uooooouooooouuooouuuooouuuooouuooooouooooouuooouuooooouooooouoo! programmed exit of Renault from Adequa (-14,793 sqm net impact) Occupancy rate Change 31/12/17 31/12/16 • Excellent performance in Barcelona (+328 bps), bps driven by the new leases in Sant Cugat I, Diagonal 458 and Citypark Cornella Madrid 87.8% 87.9% (9) Barcelona 89.0% 85.7% +328 • Lisbon perimeter changed after the acquisition of Marques de Pombal, 3, with 64% occupancy Lisbon 88.2% 94.2% (595) • Barcelona CBD has been the best performer Other 100.0% 100.0% - in the year, reaching full occupancy Total 88.2% 87.9% +28

(1) Office portfolio in operation for the FY16 (€ 97.0m of GRI) and for the FY17 (€ 99.8m of GRI) (2) Vestas and Endesa-Sevilla (3) Including 65,115 sqm of roll-overs not considered for the release spread analysis (4) Excluding other ı 7 ı ı 3 ı MERLIN Properties FY17 RESULTS Trading Update

OFFICES (CONT.) INVESTMENTS, REFURBISHMENTS AND DEVELOPMENTS

GLA Investments (sqm) GRI YoC Acquisition

Marqués 12,460 € 3.9m(1) 6.5% € 60.5m de Pombal 3

Central 10,310 € 2.0m 6.8% € 29.0m Office

GLA WIP (sqm) Scope Acquisition Capex % executed Delivery

Torre 37,614 Development € 142m € 15m 60% Jul-18 Glòries

Torre 16,639 Development € 31m € 31m 91% Mar-18 Chamartín

GLA Refurbishments (sqm) Scope Budget Pre-let

Puerta de 10,619 Full refurb € 6.4m 100% las Naciones

Eucalipto 33 7,185 Full refurb € 3.6m -

Delivered in 2017 Delivered Façade + Juan lobby + 28,008 € 1.8m 85% Esplandiu individual floors Avenida 12,605 Full refurb € 6.5m 100% Europa 1A

GLA (sqm) Scope Budget % executed Pre-let

Balmes 6,187 Full refurb € 1.8m 9% 100% On-going Full refurb Initial Monumental 7,185 (incl. SC) € 19.1m 4% phase

ı 8 ı (1) ERV ı 4 ı MERLIN Properties Management Report on ConsolidatedFY17 RESULTS Financial Trading Statements Update

SHOPPING CENTERS

Gross rents bridge Rents breakdown (€m) +63.5 92.8 Gross rents Passing rent WAULT FY17 (€ m) (€/sqm/m) (yr) LfL(1) +3.6% MERLIN 92.8 18.9 2.7

27.9 +1.4

Footfall and tenant sales(2)

FY 2016 Like-for-Like Balance FY 2017 growth acquisitions and disposals FY17 YoY Footfall 86.4m -

Tenant sales € 759.4m +1.5%

OCR(3) 13.1%

Leasing activity

• Excellent performance of the portfolio: positive footfall, tenant sales, release spread and like for like growth despite a negative 4Q in Catalonia • 4Q leasing activity highlights: • 1,878 sqm renewal with H&M in Artea • 1,624 sqm renewal with C&A in La Fira • 426 sqm new lease with Zara in Marineda

Release Contracted Out In Renewals Net # Contracts spread

Total 108,411 (22,405) 26,108 82,303(4) 3,703 +4.7% 166

:·········· .. ························ .. ········································································: : Stock 440,880 sqm : : ...... : : : Occupancy : X-Madrid 47,424 : ~-·············································································································~ ~ Tres Aguas(5) 67,009 sqm ~ • Positive move in occupancy (+78 bps) ~oooooouoouooooooooooouooooooooooouoouooooooooooouoouooooooooooouooooooooooooooooooouoouooooooooooooo~ ~ Stock with X-Madrid+Tres Aguas 555,313 sqm ~ • Best performers in the year have been Marineda, : ...... : Thader and Arturo Soria

Occupancy rate 31/12/17 31/12/16 Change bps

Total 89.4% 88.6% +78

(1) Shopping centers portfolio in operation for FY16 (€ 39.1m GRI) and for FY17 (€ 40.5m GRI) (2) Excluding Monumental, Factory & medianas Bonaire as well as assets impacted by the “opening effect” of a new shopping center in the previous 24 months (Porto Pi) (3) Excluding assets impacted by the “opening effect” of new shopping center in the previous 24 months (Porto Pi) (4) Including 43,375 sqm of roll-overs not considered for the release spread analysis (5) Tres Aguas at 100% allocation ı 9 ı ı 5 ı MERLIN Properties FY17 RESULTS Trading Update MERLIN Properties FY17 RESULTS Trading Update

PROPERTIES

SHOPPING CENTERS (CONT.) SHOPPING CENTERS (CONT.) INVESTMENTS, REFURBISHMENTS AND DEVELOPMENTS INVESTMENTS, REFURBISHMENTS AND DEVELOPMENTS Investments Investments Several retail units have been acquired Shopping center GLA (sqm) Price (€ m) Several retail units have been acquired Shopping center GLA (sqm) Price (€ m) throughout the year: El Saler 3,175 12.2 throughout the year: El Saler 3,175 12.2 Larios 16,928 16.1 Larios 16,928 16.1 Porto Pi 5,095 13.8 Porto Pi 5,095 13.8 Refurbishments(1) Total 25,198 42.1 Refurbishments(1) Total 25,198 42.1 Scope Budget % executed GLA (sqm) Pre-let Scope Budget % executed GLA (sqm) Pre-let ----- ,___ - Marineda Marineda t:V I\11 Sports area € 2.5m 100% 3,402 91% Delivered in 2017 Delivered Sports area € 2.5m 100% 3,402 91% Delivered in 2017 Delivered itlll ! ~ .

I - o ·~·· - ~ ...... Thader . - .- _._ I Thader i.- •. ·' .. _ ,.,. ,.. . ~ . l" ! . . .. - . - . Nickelodeon park and € 8.9m 100% 5,096 100% Nickelodeoncommon areaspark and € 8.9m 100% 5,096 100% common areas Scope Budget % executed GLA (sqm) Delivery % Occupancy Scope Budget % executed GLA (sqm) Delivery % Occupancy Arturo Soria

On-going Arturo Soria

On-going Façade, accesses, € 4.7m 81% 6,959 Apr-19 98.3% installations,Façade, accesses, lighting € 4.7m 81% 6,959 PhaseApr-19 I 98.3% installations,and floors lighting Phase I and floors Larios Larios Full refurb € 21.2m 4% 45,076 Dec-18 97.3% Full refurb € 21.2m 4% 45,076 Dec-18 97.3%

X-Madrid X-Madrid Full revamp € 31.8m 8% 47,424 May-19 70%(2) Full revamp € 31.8m 8% 47,424 May-19 70%(2)

El Saler El Saler Extension € 15.2m 8% 47,013 Jun-19 89.3% (+2,700Extension sqm), façade € 15.2m 8% 47,013 Jun-19 89.3% (+2,700and sqm),accesses façade and accesses Porto Pi Porto Pi Full refurb € 16.0m 4% 58,779 Mar-20 96.7% Full refurb € 16.0m 4% 58,779 Mar-20 96.7% (1) GLA and Capex budget for shopping centers refurbishments include 100% of the asset, regardless of the stake owned by MERLIN in the owners’ community (1)(2) GLAPre-let and Capex budget for shopping centers refurbishments include 100% of the asset, regardless of the stake owned by MERLIN in the owners’ community ı 6 ı (2) Pre-let ı 10 ı ı 6 ı MERLIN Properties FY17 RESULTS Trading Update Management Report on Consolidated Financial Statements

LOGISTICS

Gross rents bridge Rents breakdown (€m) +25,8 41.3 Gross rents Passing rent WAULT LfL(1) FY17 (€/sqm/m) (yr) +8.4% (€ m) Madrid 19.5 3.6 4.0 14.6 +1.3 (0.4) Barcelona 11.1 5.0 2.8

Other 10.7 3.6 6.4

FY 2016 Like-for-Like 2 old Balance FY 2017 Total 41.3 3.9 3.7 growth leases(2) acquisitions and disposals

Leasing activity

• Outstanding release spread in Madrid (+13.1%) and Barcelona (+22.0%) • 4Q leasing activity highlights: • 4,065 sqm new lease with XPO in Sevilla-ZAL • 3,081 sqm new lease with Sending in PLZF, Barcelona • 2,275 sqm renewed with Bergé in PLZF, Barcelona

Contracted Out In Renewals Net Release spread # Contracts

Madrid 208,974 - 90,435 118,539 90,435 +13.1% 8

Barcelona 43,571 (2,492) 29,811 13,761 27,318 +22.0% 4

Other 32,121 (13,583) 9,849 22,272 (3,734) - 1

Total 284,667 (16,075) 130,095 154,571(3) 114,020 +13.4% 13

Occupancy

• Madrid and Barcelona portfolios are fully occupied • Sevilla ZAL lost occupancy due to the exit of two local operators

:••••••n ••n ••n ••••••••••••••••• •••• •••••••••••••••n .,•••••••••••••••n oon oon oon " ' '''''''''''''''' " n ••: : : : Stock 960,825 sqm : Occupancy rate : : : WIP 565,669 sqm : 31/12/2017 31/12/16 Change bps : : : Stock incl. WIP 1,526,494 sqm : Madrid 100.0% 100.0% - :······: ...... : : ZAL Port 467,930 sqm : Barcelona 99.4% 86.6% +1.282 : : : : : ZAL Port WIP 60,024 sqm : Other 94.7% 96.8% (204) : : : Stock managed 2,054,448 sqm : Total 98.5% 95.4% +315 : ...... u ...... u ...... :

(1) Logistics portfolio in operation for FY16 (€ 15.8m GRI) and for FY17 (€ 17.1m GRI) (2) UPS and Logista (3) Including 22,309 sqm of roll-overs not considered for the release spread analysis

ı 11 ı ı 7 ı 11, MERLIN Properties FY17 RESULTS Trading Update MERLIN PROPERTIES

LOGISTICS (CONT.)

INVESTMENTS, REFURBISHMENTS AND DEVELOPMENTS

Investments

GLA (sqm) GRI p.a YoC Investment

Cabanillas Park I 202,607 € 7.8m 8.2% € 96.1m

Madrid-Pinto 70,115 € 2.6m 9.8% € 26.0m In addition, MERLIN has increased its stake in its three participated companies ZAL Port, Parc Logistic de la Zona Franca (PLZF) and Sevilla-ZAL

Stake increase Resulting stake Investment

Zal Port

16.5% 48.5% € 39.1m

PLZF

14.4% 90% € 11.8m

Sevilla ZAL

10% 100% € 2.8m

WIP (as from 31/12/17) GLA (sqm) ERV (€m) Investment (€m) ERV YoC Madrid-Meco II 59,891 2.6 29.5 8.9% Madrid-Pinto II B 29,473 1.1 10.9 9.7% Madrid-San Fernando I 11,165 0.7 9.9 7.5% Madrid-San Fernando II 34,224 1.8 20.3 8.7% Madrid-Getafe (Gavilanes) 39,576 2.3 32.1 7.0% Madrid-Azuqueca II 98,000 4.3 47.6 9.0% Madrid-Azuqueca III 51,000 2.2 29.6 7.5% Guadalajara-Cabanillas Park I F 15,000 0.6 7.7 7% Guadalajara-Cabanillas Park II 210,678 8.3 109.6 7.6% Sevilla Zal WIP I 5,400 0.2 2.7 7.9% Zaragoza-Plaza Logistics 11,262 0.5 7.1 7.2% Total 565,669 24.6 306.9 8.0%

ı 12 ı ı 8 ı MERLIN Properties Management Report on ConsolidatedFY17 RESULTS Financial Trading Statements Update

BALANCE SHEET

• The Company continues deleveraging Ratios 31/12/2017 31/12/2016 having achieved a reduction of 194 bps in the period, ending 2017 with a LTV LTV 43.6% 45.5% of 43.6% Av. interest rate 2.23% 2.26% • The Company has actively managed Av. Maturity (years) 6.1 6.2 its balance sheet resulting in the Unsecured debt to total debt 78.5% 75.6% improvement of all financial ratios Interest rate fixed 98.6% 88.7% Liquidity position(2) (€m) 929 949

€ million

GAV 11,254 Gross financial debt 5,413 Corporate rating Outlook

(1) Cash (509) S&PGlobal BBB Stable Net financial debt 4,904 Mooo¥'s Baa2 Stable

VALUATION

• € 11,254m GAV. +10.5% LfL growth, showing a strong revaluation in the year • By asset category, +13.2% Lfl growth in office, +7.3% in shopping centers, +6.4% in high street retail and +17.5% in logistics

GAV LfL Growth(3) Gross yield Yield compression

Office 5,219 +13.2% 4.1% 59 bps

Shopping centers 1,753 +7.3% 5.3% 34 bps

Logistics 648 +17.5% 6.6% 34 bps

High street retail 2,348 +6.4% 4.4% 29 bps

Land under 455 n.a. development

Other(4) 411 +0.8% 4.2% 27 bps

Equity method 421 +12.2%

Total 11,254 +10.5% 4.6% 46 bps

(1) Includes cash and receivable of hotels disposal (€ 50.8m) (2) Includes available cash plus receivable of hotels disposal and unused credit facilities (€ 420m) (3) GAV of WIP projects included under offices and logistics for LfL growth purposes (4) Including Non-core land ı 13 ı ı 9 ı MERLIN Properties FY17 RESULTS Trading Update

PROPERTIES

INVESTMENTS, DIVESTMENTS AND CAPEX

• € 325.4m acquisitions and € 29.2m assets divested in the period (+15% premium vs latest reported appraisal) • Swift execution of the development & WIP program and the refurbishment plan launched at the beginning of the year

Office Retail Logistics € million

Torre Glories Porto Pi retail units Stake in Zal Port(2) Acquisitions Central Office El Saler retail unit Stake in PLZF 325.4 Marqués de Pombal 3 Larios retail unit Stake in Sevilla-ZAL

Madrid-Meco II Madrid-Pinto Guadalajara-Azuqueca Torre Chamartin Guadalajara-Cabanillas Park I(3) Development & WIP 107.4 Torre Glòries Guadalajara-Cabanillas Park II Madrid-Getafe Gavilanes Sevilla-ZAL Madrid-San Fernando I Marineda Juan Esplandiu El Saler Avda. Europa 1A Arturo Soria Eucalipto 33 Refurbishment Larios 42.8 Puerta de las Naciones Porto Pi Monumental X-Madrid Adequa 1 Thader Like-for-like portfolio 21.2 (Defensive Capex)(1)

Total 496.7

SUSTAINABILITY

• Excellent progression of the portfolio certification program, having obtained 22 new LEED/ BREEAM certificates in the year (4 since last reported) • Remarkable achievements such as Madrid-Meco, first logistics platform awarded LEED platinum in Spain

% GAV certified Pedro de Arenas WTC 8 La Fira Artea Valdivia 10 63%

43% 38%

Gold Good Gold Very Good Very Good

Office Shopping centers Logistics

(1) € 18.3m are capitalized in balance sheet and €2.9m are expensed in P&L (2) Equity method (3) Modules B, C, D, E and F

ı 14 ı ı 10 ı MERLIN Properties Management Report on ConsolidatedFY17 RESULTS Financial StatementsTrading Update

POST CLOSING EVENTS

• On January 19 2018, the service level agreement with Testa Residencial was cancelled. In exchange for that early cancellation, MERLIN Properties will increase its stake in Testa Residencial to 16.95% • On 13 February 2018, MERLIN fully repaid € 122.6m of property leasings

ı 15 ı ı 11 ı 02

ORGANIZATION AND STRUCTURE

ı 16 ı Management Report on Consolidated Financial Statements

ORGANIZATION AND STRUCTURE

Strategy

MERLIN Properties Socimi, S.A. (“MERLIN”, selective rotation of high quality commercial “MERLIN Properties” or the “Company”) is a real estate assets in the “Core” and “Core company devoted to delivering sustainable plus” segments. return to shareholders through the acquisition, active management and

Office Shopping Centers 40% 20% Breadth of prime space Urban or Dominant Madrid, Barcelona and Lisbon National scale

Core & Core Plus Spain & Portugal

Best Investment governance grade practices capital structure

One of the Dividend world’s most policy: cost efficient 80% of AFFO REIT’s

Logistics High Street Retail 20% 20% National footprint High triple net cash flow “One-stop shop” solution for 3PL Inflation multiplier

ı 17 ı 2. Positioning

#1 #2 #1 #1 Office Shopping Logistics High Street Centers retail • Flexibility to offer • Mainly urban footprint • “One-stop-shop” • Excellent conditions multitenant or in high GDP/ capita solution for logistics of BBVA lease headquarter buildings areas in Spain operators wishing to agreement triple net • Capacity to adapt • Critical mass with operate across Spain lease with 1.5x HICP to the needs of the retail brands • Big footprint to annual uplift tenant match the rapid • Optimization of development of 3PL retail space in office activity buildings

Existing Existing

139 ASSETS 17 ASSETS 40 ASSETS 928 ASSETS 1,267K SQM 488K SQM 961K SQM 460K SQM € 5,219M GAV € 1,753M GAV € 648M GAV € 2,348M GAV € 217M GRI € 93M GRI € 41M GRI € 104M GRI (1)

WIP 12 ASSETS 566K SQM € 307M GAV (3) Full Consolidation € 25M GRI(3)

(2) Tres Aguas 50% Zal Port 32% 1 ASSET 44 ASSETS 67K SQM 468K SQM € 9M GRI € 29M GRI(4) Equity method

(1) Not including other, land under development and non-core land (2) Data for Minority Stakes is reported for 100% of the subsidiary (3) Total expected investment and gross rent (4) Gross annual rent as of 31/12/17, deducting ground lease expenses

ı 18 ı Management Report on Consolidated Financial Statements

Composition

The internal management organization • Chief Executive Officer: reporting directly structure can be summarized as follows: to the Board of Directors and forming part of it. • Board of Directors: consisting of twelve directors, advised by both the Audit and • Investment Committee: reporting to the Control Committee and the Appointments CEO and consisting of the executive team, and Remuneration Committee. with a right of veto by the Chief Investment Officer.

Mr. Javier García-Carranza Non-Executive Chairman

Mrs. Francisca Ortega Mr. Ismael Clemente Propietary Director CEO & Executive Vice-Chairman

Mrs. Pilar Cavero Mr. Miguel Ollero Independent Director Executive Director

Mr. Juan María Aguirre 12 Mrs. María Luisa Jordá Independent Director Independent Director members Chairman A&C Committee

Mr. John Gómez Hall Mrs. Ana García Fau Independent Director Independent Director

Mr. Donald Johnston Mr. Alfredo Fernández Independent Director Independent Director Chairman A&R Committee Mr. Fernando Ortiz Independent Director

Appointments and Remuneration Committee Mónica Martín de Vidales Ildefonso Polo del Mármol Audit and Control Committee Secretary Vice-Secretary Independent Directors

Capital structure key data (€ thousand) Blackrock 4.0% Invesco Number of ordinary shares 469,770,750 Principal Financial Group Number of weighted shares 469,770,750 Standard Life Total equity 5,723,783 Banco Santander 22.3% Blackrock GAV 11,253,954 BBVA Net Debt 4,904,254 Net Debt / GAV 43.6% Banco Santander Free Float 73.7% Data as of 27 February 2018, according to the Free Float communications made to the CNMV

ı 19 ı 03

BUSINESS PERFORMANCE

ı 20 ı Management Report on Consolidated Financial Statements

GAV per asset class(1) Gross rents per asset class

6.9% 2.9%

7.4% 49.3% Hoteles 8.8% 46.3% Hoteles Residencial en alquiler Residencial en alquiler

Logístico Otros 15.6% 19.8% Otros Logístico

Centros comerciales Centros comerciales

High Street Retail High Street Retail 20.9% 22.2% Ocinas O cinas

Offices High Street Retail Shopping centers Logistics Other

Gross yield per asset class

6.6%

5.3% 4.6% Average 4.1% 4.4% 4.2% MERLIN

Offices Shopping Logistics High Street Other centers Retail

Occupancy and wault (years) per asset class

99.4% 98.5% 92.6% Average 76.7% 88.2% 89.4% MERLIN 19.3

6.7 Average MERLIN 3.1 3.7 2.7 1.4

Offices Shopping Logistics High Street Other centers Retail

(1) GAV of land under development included in its respective category (offices and logistics)

ı 21 ı RENTS

Gross rents in the period amount to € 469,405 thousand with respect to € 351,023 thousand in 2016.

Gross rents breakdown

FY17 FY16 YoY (%)

Office 217,473 138,418 57%

Shopping centers 92,820 52,566 77%

Logistics 41,283 23,265 77%

High street retail 104,119 99,864 4%

Other 13,709 36,910(1) (63%) Total 469,405 351,023 34%

(1) Includes hotels, rented residential (already sold or deconsolidated) and other miscellaneous assets

Average passing rent (€/sqm/month)

18.9 18.8 16.0

3.9

Oﬃces Shopping High Street retail Logistics centers

ı 22 ı CORREGIDA

Management Report on Consolidated Financial Statements

Gross rents have increased by 2.7% on a like-for-like basis. Per asset category the like-for-like evolution is shown below:

Like-for-like increase

Oﬃce Shopping Logistics High street Other centers retail

Bridge of FY17 gross rents from FY16 gross rents, for MERLIN and by asset category

MERLIN Offices (€m) (€m) LfL +2.7% +112.7 469.4

351.0 +7.0 (1.3) LfL(1) +129.6 217.5 +2.9%

85.9 +2.8 (0.9)

FY 2016 Like-for-Like 4 old Balance FY 2017 FY 2016 Like-for-Like 2 old Balance FY 2017 growth leases acquisitions growth leases(1) acquisitions FY16 and disposals FY16 and disposals

Shopping centers Logistics (€m) (€m) +63.5 92.8 +25,8 41.3

LfL(1) LfL(1) +3.6% +8.4%

27.9 +1.4 14.6 +1.3 (0.4)

FY 2016 Like-for-Like Balance FY 2017 FY 2016 Like-for-Like 2 old Balance FY 2017 growth acquisitions growth leases(2) acquisitions and disposals FY 2016 and disposals

(1) Vestas and Endesa-Sevilla (2) UPS and Logista

ı 23 ı OCCUPANCY

Stock G.L.A. of MERLIN as of 31 December resulting in a net increase of the stock during 2017 amounts to 3,293,916 sqm. Stock as of 31 the period of 255,575 sqm. Occupancy rate as December 2016 amounted to 3,038,341 sqm, of 31 December 2017 is 92.6%.

Change YoY 31/12/17 31/12/16 Bps Offices Total G.L.A. (sqm) 1,267,344 1,246,465 G.L.A. occupied (sqm) 1,118,106 1,096,139 Occupancy rate (%)(1) 88.2% 87.9% +28 Shopping centers Total G.L.A. (sqm) 488,304 455,176 G.L.A. occupied (sqm) 379,398 370.329 Occupancy rate (%)(2) 89.4% 88.6% +78 Logistics Total G.L.A. (sqm) 960,825 755,071 G.L.A. occupied (sqm) 946,448 720,002 Occupancy rate (%) 98.5% 95.4% +315 High Street retail Total G.L.A. (sqm) 459,981 460,524 G.L.A. occupied (sqm) 457,264 460,524 Occupancy rate (%) 99.4% 100.0% (59) Other Total G.L.A. (sqm) 117,462 121,104 G.L.A. occupied (sqm) 90,099 92,646 Occupancy rate (%) 76.7% 76.5% +20 MERLIN Total G.L.A. (sqm) 3,293,916 3,038,341 G.L.A. occupied (sqm) 2,991,316 2,739,641 Occupancy rate (%)(1) 92.6% 91.3% +132

(1) Excluding assets being or to be developed (Torre Chamartin, Torre Glòries, Adequa 4 and 7) (2) Excluding X-Madrid and vacant units recently acquired to be refurbished

ı 24 ı Management Report on Consolidated Financial Statements

TENANTS

MERLIN enjoys a high-quality tenant base, an additional 19.6% from BBVA) while top broadly diversified. Top 10 tenants represent 20 tenants represent a 26.2% of gross a 19.4% of the gross annualized rents (plus annualized rents (excluding BBVA).

To p - 2 0 % 19.4 t GRI e n

26.2% GRI

19.6% GRI

ı 25 ı Tenant Years as tenant

BBVA 9 LEASING ACTIVITY Endesa 14.5

Inditex 27 Since the beginning of 2017, or since the acquisition date for the assets acquired during the Técnicas Reunidas 12 year, until 31 December 2017, MERLIN has signed lease agreements amounting to 849,999 sqm, out PWC 7.5 of which 266,786 sqm corresponds to new leases and 583,212 sqm to renewals. Caprabo 25.5 The total of contracts expired in the period Indra 15.5 amounts to 725,704 sqm, of which 583,212 have been renovated or released, therefore the Hotusa 16.5 retention ratio in the period amounts to 80.4%.

Comunidad 16 The breakdown per asset category is as follows: de Madrid

XPO Logistics 8

Offices Shopping centers Logistics

Reneals n t et

ı 26 ı Management Report on Consolidated Financial Statements

Offices

Total take-up amounts to 456,921 sqm out therefore the net take up is positive by 6,571 of which 110,583 sqm correspond to new sqm. Main contracts signed in 2017 are the contracts and 346,338 sqm to renewals. following: Exits amounted to 104,012 sqm, and

Asset Tenant G.L.A. (sqm)

Josefa Valcarcel 45 L’Oreal 19,893

Avenida Europa 1A Renault 12,606

PE Puerta de las Naciones Roche 11,444

Partenon 12-14 Publicis 9,502

Avda de Bruselas 26 Codere 8,895

Avenida Europa 1B Vass 8,439

Eucalipto 25 Mondelez 7,368

Balmes 236-238 Eugin 6,187

Adequa 1 Audi 5,978

Atica 2 Paradigma 5,644

Santiago de Compostela 94 Atento 5,559

Citypark Cornellá Fujitsu 5,447

Partenon 12-14 Amex 4,749

Cristalia Aktua 4,315

The release spread achieved in the contracts renewed or relet in the period amount to 3.4%, mainly driven by the excellent performance of our core markets, Madrid, Barcelona and Lisbon.

Release # contracts spread

Madrid 3.3% 169

Barcelona 4.5% 64

Lisbon 5.1% 4

Total (1) 3.4% 237

(1) Excluding other

ı 27 ı Shopping centers

Total take-up amounts to 108,411 sqm out of which 26,108 sqm correspond to new contracts and 82,303 sqm renewals. Exits amounted to 22,405 sqm, and therefore the net take-up is positive by 3,703 sqm. Main new contracts signed are the following:

Asset Tenant G.L.A. (sqm)

Thader Nickelodeon 5,096

Marineda Conforama 4,143

La Fira H&M 3,110

Artea H&M 1,878

Porto Pi I-fitness 1,877

La Fira C&A 1,624

Artea Sfera 1,256

Marineda Zara 906

The release spread achieved in the contracts renewed or relet in the period (166 contracts) amounts to 4.7%. Top performers in the year have been Marineda, Thader and Arturo Soria.

ı 28 ı Management Report on Consolidated Financial Statements

Logistics

Total take-up amounts to 284,667 sqm out amounted 16,075 sqm, therefore net take-up of which 130,095 sqm correspond to new amounts to 114,020 sqm. Main new contracts contracts and 154,571 sqm to renewals. Exits signed are the following:

Asset Tenant G.L.A. (sqm)

Guadalajara - Cabanillas Park I DSV 49,793

Madrid-Pinto IIA IDL 29,544

Guadalajara-Azuqueca I Dachser 27,995

Barcelona-Sant Esteve Zamorano 16,812

Madrid-Pinto I Saint Gobain 11,099

Madrid-Coslada Complex Ayuntamiento de Madrid 4,959

Sevilla Zal XPO 4,065

PLZF Molenbergnatie 3,721

Release # contracts spread The release spread achieved in the contracts Madrid 13.1% 8 renewed or relet in the period amount to 13.4%, driven by the excellent performance Barcelona 22.0% 4 of Madrid and Barcelona. Other - 1

Total 13.4% 13

Lease maturity profile

The chart of lease contracts maturity years. The gross rents that have a break (next break) shows a balanced profile. option amount to 15% in 2018, 19% in 2019 and In aggregated terms, in the following three 13% in 2020.

% 28% 2% 15% %%

2% 2% 2% % 19%

% 8% 2% 2% 13% %

8% % 7%

% %

% % % % % 46%

Offices Shopping centers Logistics High Street retail Other

ı 29 ı Oﬁcinas Centros comerciales Logístico High Street Retail Otros Total 04

ACQUISITIONS, REFURBISHMENTS AND DEVELOPMENTS

ı 30 ı Management Report on Consolidated Financial Statements

ACQUISITIONS, REFURBISHMENTS AND DEVELOPMENTS

2017 has been an intense year in extracting value from the portfolio of assets. The activity has been focused in the growth of the logistics footprint propelled by the WIP program in place and the implementation of the ambitious refurbishment program launched at the beginning of the year.

Office Retail Logistics € million

Torre Glories Porto Pi retail units Stake in Zal Port(1) Acquisitions Central Office El Saler retail unit Stake in PLZF 325.4 Marqués de Pombal 3 Larios retail unit Stake in Sevilla-ZAL

Madrid-Meco II Madrid-Pinto Guadalajara-Azuqueca Development Torre Chamartin Guadalajara-Cabanillas Park I(3) 107.4 & WIP Torre Glòries Guadalajara-Cabanillas Park II Madrid Getafe Gavilanes Sevilla-ZAL Madrid-San Fernando I

Marineda Juan Esplandiu El Saler Avda. Europa 1A Arturo Soria Eucalipto 33 Refurbishment Larios 42.8 Puerta de las Naciones Porto Pi Monumental X-Madrid Adequa 1 Thader

Like-for-like portfolio 21.2 (Defensive Capex)(2)

Total 496.7

(1) Reported as equity method (2) € 18.1m are capitalized in balance sheet and € 2.9m are expensed in P&L (3) Modules B, C, D, E and F

ı 31 ı ACQUISITIONS

OFFICE

Acquisition of Torre Glòries

On 12 January, MERLIN completed the acquisition of Torre Glòries. Torre Glòries is one of the most iconic buildings in Barcelona, located in the prime area of Avenida Diagonal junction with Plaza de Les Glòries, in the heart of the Barcelona techoriented business district known as 22@.

The building was originally designed by prestigious arquitects Jean Nouvel and Fermín Vázquez and opened in 2005. It comprises a gross area of 37,614 sqm, in ground level plus 34 above ground floors, plus an auditorium with over 350 pax seating capacity. It also benefits from 300 parking spaces located in four below ground levels. The total constructed area amounts to 51,485 sqm.

22@ business district is the most dynamic area in the Barcelona office market and is now consolidated as the reference business costs), representing a capital value of € 3,775 area hosting tech oriented and innovative per sqm. MERLIN will invest approximately companies such as Cisco, Ebay, Yahoo, € 15 million for multi-tenancy reconversion Deutsche Telekom, Sage, Sap, Capgemini works to own one of the most attractive and Indra. office buildings in Barcelona. MERLIN targets annual recurring revenues of € 10.3 million, The acquisition price amounts to € 142 representing an ERV yield of ca. 6.5% after million (plus € 4.1 million of transaction completion of works.

Torre Glòries

Acquisition Price of the asset(1) (€ thousand) 142,000

Asset debt outstanding as of the date of purchase (€ thousand) -

Equity disbursement (€ thousand) 142,000

% Debt to acquisition Price of the asset -

Estimated Capex (€ thousand) 15,000

ERV (€ thousand) 10,346

ERV Yield(2) 6.5% Total G.L.A. (sqm) 37,614

(1) Excluding transaction costs (2) Calculated as ERV divided by acquisition price plus estimated Capex

ı 32 ı Management Report on Consolidated Financial Statements

Acquisition of Central Office

On 17 April, MERLIN Properties completed the acquisition of Central Office Building leading to an expansion of its footprint in the Lisbon office market and, more specifically, in the Expo area.

The asset, located in Dom Joao II 45, the main avenue in Parque das Nações in Lisbon, was originally designed by prestigious architect Federico Valsassina and opened in 2005. The 13 storey building comprises 10,310 sqm of lettable area and is 100% let to best-in-class companies.

The acquisition price amounts to € 29 million representing € 2,850 per sqm and a 6.8% gross yield.

Central Office Acquisition price of the asset(1) (€ thousand) 29,385 Asset debt outstanding as of the date of purchase (€ thousand) - Equity disbursement (€ thousand) 29,385 % Debt to acquisition Price of the asset -

Annualized gross rent 2017 (€ thousand) 1,996 Annualized net rent 2017 (€ thousand) 1,883 Gross yield 6.8% EPRA Topped-up Yield(2) 6.4% Total G.L.A. (sqm) 10,310

(1) Excluding transaction costs (2) Calculated as the gross annualized rent minus annualized property expenses not rechargeable to tenants, divided by the acquisition price of the asset

ı 33 ı Acquisition of Marqués de Pombal 3

On 25 September, MERLIN Properties completed the acquisition of Marqués de Pombal 3. The asset is located in the best spot within Lisbon Prime CBD area, in Praça Marques de Pombal, the junction between Avenida da Liberdade and Fontes Pereira de Melo. The 10-storey building comprises 12,460 sqm of lettable area, 9,435 sqm for office and 3,025 sqm of retail.

The building, currently running at 63% occupancy, includes tenants such as McKinsey, NOVO BANCO, Banco Best or MDS Portugal. The asset offers significant growth potential through an active asset management to be focused on enhancing the retail area into upper scale, and continue bringing to the office component the best specifications in the market as contracts expire. The acquisition price amounts to € 60.5 million representing a gross yield on current occupancy of 4.0% and an ERV yield of 6.5%.

Marqués de Pombal, 3 Acquisition price of the asset(1) (€ thousand) 60,491 Asset debt outstanding as of the date of purchase (€ thousand) - Equity disbursement (€ thousand) 60,491 % Debt to acquisition Price of the asset -

ERV (€ thousand) 3,900 ERV Yield(2) 6.5% Total G.L.A. (sqm) 12,460

(1) Excluding transaction costs (2) Calculated as ERV divided by acquisition price plus estimated Capex

ı 34 ı Management Report on Consolidated Financial Statements

SHOPPING CENTERS

Acquisition of retail units in shopping centers

MERLIN Properties has been active in pursuing opportunities to acquire retail units in its portfolio of shopping centers in order to consolidate the ownership position within the asset as well as gaining flexibility and broadening the scope of the respective refurbishment plans for those assets. Main units acquired have been the Eroski supermarket in Larios (Málaga) and Porto Pi (Mallorca) cinemas. The breakdown is as follows:

Shopping center G.L.A. (sqm) Price (€ m)

Larios 16,928 16.1 Porto Pi 5,095 13.8 El Saler 3,175 12.2 Total 25,198 42.1

LOGISTICS

Acquisition of additional stakes in logistics

MERLIN has increased its stake in its three participated companies ZAL Port, Parc Logistc de la Zona Franca (PLZF) and Sevilla-ZAL.

Stake increase Resulting stake Price (€ m)

ZAL Port 16.5% 48.5% 39.1 PLZF 14.4% 90% 11.8 Sevilla ZAL 10% 100% 2.8

ı 35 ı REFURBISHMENTS

2017 has been a very active year in refurbishments activity. The projects delivered in the period are described below.

OFFICE

Avenida Europa 1A

Former headquarters of Vodafone, who left the building in 2014, a full Capex program was conceived to reconvert the asset into multitenancy, once a 50% pre-let level was surpassed. Building 1B was developed on the back of a pre-let to VASS (IT supplier of El G.L.A. 12,605 Corte Ingles) and Doberman. Bulding 1A was 100% pre-let to Renault in November 2016 Capex 2017 (€ thousand) 6,500 and construction was subsequently initiated. ERV (€ thousand) 1,898 Renault lease started in September 2017. Occupancy 100%

Tenants Renault

Puerta de las Naciones Eucalipto 33

Full refurbishment of all common areas, Former headquarters of Roche, who left interiors and installations to upgrade the building in January 2017, a full Capex Ferrovial headquarters, already tenant in program was conceived to reconvert the the building. The upgrade was negotiated asset into multitenancy. The scope of with the tenant together with the renewal works encompasses lobby “merlinization”, of the lease agreement in place. Works were new ceilings and lighting and new VRV executed with the tenant in the building installations. and therefore implemented on a floor-by- floor basis.

G.L.A. 10,619 G.L.A. 7,185

Capex 2017 (€ thousand) 6,437 Capex 2017 (€ thousand) 2,347

ERV (€ thousand) 1,674 ERV (€ thousand) 1,465

Occupancy 100% Occupancy - Under Tenants Ferrovial Tenants negotiation

ı 36 ı Management Report on Consolidated Financial Statements

Juan Esplandiu 11-13

After the departure of Madrid Salud, MERLIN G.L.A. 28,008 implemented a phased Capex program for upgrading the asset. During the first phase, Capex 2017 (€ thousand) 2,522 MERLIN upgraded all technical installations ERV (€ thousand) 4,284 and accomplished a built to suit project for the Cellnex HQ In Madrid (4,417 sqm). Occupancy 85% Second phase has included the lobbies and Tenants Cellnex common areas refurbishment and façade improvement. Total investment in 2017 has been €2.5m.

The assets currently under refurbishment are the following:

GLA % (sqm) Scope Budget executed Pre-let

Balmes 6,187 Full refurb € 1.8m 9% 100% On-going

Full refurb Initial Monumental 7,185 (incl.. SC) € 19.1m 4% phase

ı 37 ı SHOPPING CENTERS

Marineda Thader

Prior to the acquisition by MERLIN, Marineda First Nickleodeon themed park in Europe, had an area addressed to ”luxury brands” operated by Parques Reunidos, boasting that failed due to the lack of demand within occupancy. Works started in January 2017 customers as well as for misconception of the and the inauguration of the space was held traffic, which resulted in virtually total vacancy on December 1st. The complex features in the area. After the acquisition MERLIN amusement park-like attractions and designed a plan to bring this area back to life: educational areas targeting family oriented (i) retenanting plan to convert the space into a clientele on weekends and school visits on sports related area, and (ii) re-designing plan working days. to improve visibility, vertical connections and interior design. Total investment amounts to € 2.5m, out of which € 1.8m of Capex and € 0.7m of FOC. The area is now running at 91% occupancy, with an ERV of € 0.5m.

G.L.A. (sqm) 3,402 GLA 5,096

Capex (€ thousand) 2,467 Capex (€ thousand) 8,900

ERV (€ thousand) 453 ERV (€ thousand) 600

Occupancy 91% Occupancy 100%

Rock & Gym, Tenants Urban Jungle, Tenants Nickleodeon Coolligan, Oteros

ı 38 ı Management Report on Consolidated Financial Statements

The assets currently under refurbishment are as follows:

Budget % % Asset G.L.A. Scope (€ m) executed Delivery Occupancy

Improvement of entrances and façade, Phase I Arturo Soria 6,959 interiors refurb 4.7 81% 98.3% 2Q18 (lighting, floors, signage)

Larios 45,076 Full refurb 21.2 4% 4Q18 97.3%

X-Madrid 47,424 Full revamp 31.8 8% 2Q19 70%(1)

Extension El Saler 47,013 (2,700 sqm), 15.2 8% 2Q19 89.3% façade and access

Porto Pi 58,779 Full refurb 16.0 4% 1Q20 96.7%

(1) Pre-let

ı 39 ı DEVELOPMENTS / WORK IN PROGRESS (WIP)

OFFICE

Torre Chamartin

Construction of an office building located Works are progressing at a very good pace, in the intersection between A-1 and M-30 complying with the calendar to finish the highways of Madrid. The project includes the asset by end of 1Q 2018. best specifications for the building in a design of the architect Miguel Oriol. The building will have a LEED Platinum certification.

Torre Chamartín G.L.A. (sqm) 16,639 Acquisition price of land(1) (€ thousand) 30,986 Estimated Capex 31,261 Total cost (€ thousand) 62,247

Capex incurred in 2017 19,684 % executed 91.0% Delivery date 1Q 2018

ERV (€ thousand) 4,079 ERV Yield(2) 6.6%

(1) Excluding transaction costs (2) Calculated as ERV divided by acquisition price plus estimated Capex

ı 40 ı Management Report on Consolidated Financial Statements

LOGISTICS

MERLIN continues expanding its logistics footprint trough the developments / WIP program in logistics. As of 31 December 2017, main assets under development / WIP are the following:

GLA (sqm) ERV (€m) Investment (€m) ERV YoC

Madrid-Meco II 59,891 2.6 29.5 8.9%

Madrid-Pinto II B 29,473 1.1 10.9 9.7%

Madrid-San Fernando I 11,165 0.7 9.9 7.5%

Madrid-San Fernando II 34,224 1.8 20.3 8.7%

Madrid-Getafe (Gavilanes) 39,576 2.3 32.1 7.0%

Madrid-Azuqueca II 98,000 4.3 47.6 9.0%

Madrid-Azuqueca III 51,000 2.2 29.6 7.5%

Guadalajara-Cabanillas Park I F 15,000 0.6 7.7 7.7%

Guadalajara-Cabanillas Park II 210,678 8.3 109.6 7.6%

Sevilla Zal WIP I 5,400 0.2 2.7 7.9%

Zaragoza-Plaza Logistics 11,262 0.5 7.1 7.2%

TotaL WIP 565,669 24.6 306.9 8.0%

ı 41 ı 05

PORTFOLIO VALUATION

ı 42 ı Management Report on Consolidated Financial Statements

PORTFOLIO VALUATION

MERLIN portfolio has been appraised by CBRE and Savills, for a total GAV of € 11,254m. GAV breakdown is the following:

Sqm € million €/sqm AG Gross yield

Offices 1,267,344 5,219 4,118 4.1%

Shopping centers 488,304 1,753 3,589 5.3%

Logistics 960,825 648 674 6.6%

High Street retail 459,981 2,348 5,104 4.4%

Land under development 661,592 455 688

Other 481,476 411 853 4.2%

Total 4,319,522 10,883 2,508 4.6%

Equity method stakes 421

Total 11,254

ı 43 ı A broader analysis of the asset portfolio by valuation in the different categories is shown below:

Offices (by GAV)

By geography By location By product Otros Lisbon Barcelona Madrid

• Madrid • Prime + CBD • Multi tenant • Barcelona • NBA • Single tenant • Lisbon • Periphery • Other Spain

Shopping centers (by GAV)

By geography By type By size Other Spain Lisbon Murcia Andalusia Valencia Madrid Galicia • Madrid • Andalusia • Urban • Large Catalonia • Catalonia • Murcia • Dominant • Medium Lisbon • Extra-large • Galicia • Secondary • Small • Valencia • Other •

Logistics (by GAV)

By geography By reach By tenant type Other Spain Basque country Seville Barcelona Madrid

• Madrid • National • 3PL multi-client • Catalonia • Regional • 3PL mono-client • Sevilla • Ports • End user • Basque Country • Production related • Other

ı 44 ı Management Report on Consolidated Financial Statements

GAV Evolution

GAV has increased by € 1,430m, raising from The like-for-like(1) increase of GAV from a GAV of € 9,824m as of 31 December 2016 31 December 2016 is +10.5%. to € 11,254m.

Oﬃce Shopping Logistics High street Other(2) centers retail

Yield Compression

Yields have compressed by 46 bps since December 2016

Oﬃce Shopping Logistics High street Others centers retail

GAV Bridge

cisitions isposals Cape Realation ec ec

(1) GAV of WIP projects included under offices and logistics fot LfL purposes (2) Including non-core land

ı 45 ı 06

FINANCIAL STATEMENTS

ı 46 ı Management Report on Consolidated Financial Statements

CONSOLIDATED INCOME STATEMENT

(€ thousand) 31/12/17 31/12/16 Gross rents 469,405 351,023 Office 217,473 138,418 Shopping centres 92,820 52,566 Logistics 41,283 23,265 High street retail 104,119 99,864 Other 13,709 36,910 Other income 14,932 11,774 Total revenues 484,337 362,797 Incentives (16,754) (7,539) Collection loss (1,851) (272) Total operating expenses (121,901) (94,634) Property expenses not recharged to tenants (35,564) (19,744) Personnel expenses (27,780) (23,149) Recurring general expenses (9,767) (8,506) Non-recurring general expenses (4,951) (27,610) LT Incentive Plan non-cash provision (43,839) (15,625)

EBITDA 343,831 260,352 Depreciation (10,379) (4,778) Gain/ (losses) on disposal of assets 236 8,484 Provision surpluses (3,791) 32 Absorption of the revaluation of investment property (9,839) (154,428) Change in fair value of investment property 897,401 453,149 Negative difference on business combination (1,775) 37,892

EBIT 1,215,684 600,703 Net interest expense (108,374) (70,914) Debt amotization costs (13,700) (18,987) Gain / (losses) on disposal of financial instruments 1,050 74,646 Change in fair value of financial instruments 2,577 5,357 Share in earnings of equity method investees 16,233 1,817

PROFIT BEFORE TAX 1,113,470 592,622 Income taxes (12,941) (9,848) PROFIT (LOSS) FOR THE PERIOD 1,100,529 582,774 Minorities (110) (129) PROFIT (LOSS) FOR THE PERIOD ATTRIBUTABLE 1,100,419 582,645

ı 47 ı Notes to the consolidated income statement

Gross rents (€ 469,405 thousand) in 2016 (€15,739 thousand), and (ii) a total less portfolio operating expenses not provision of € 28,100 thousand for the 2017- rechargeable to tenants (€ 35,564 thousand) 2019 incentive plan. This amount as per the equals to net rents before incentives and Spanish GAAP is booked under personnel collection loss of € 433,841 thousand. After expenses too. deducting incentives and collection loss (€ 18,605 thousand) the resulting amount is iv. € 4,951 thousand of non-recurring € 415,236 thousand of net rents. operating expenses. Non-recurring expenses correspond mainly to expenses Other operating income includes mainly for the bond issuance executed in May and asset management services performed for October. third parties for € 8,196 thousand (Testa Residencial and Aedas Homes) and Tree The sum of the personnel expenses inflation derivative (€ 2,049 thousand). (excluding the amount accrued for the LTIP) and the recurring operating expenses of The total amount of operating expenses the Company are within the threshold of of the Company in the period is € 86,337 overheads of the Company, prevailing this thousand, with the following breakdown: period the 0.6% of the EPRA NAV of the Company. i. € 27,780 thousand correspond to personnel expenses. The reconciliation between gross rents of the period and FFO is as follows: ii. € 9,767 of recurring general expenses.

iii. € 43,839 thousand corresponding to the long-term incentive plan (LTIP) accrued: (i) 25% of the 2016 incentive awarded

469.4 433.8 14.9 415.2 (35.6) 392.6 (18.6) (27.8) (9.8) 289.2 (103.5)

Gross rents Opex recurring Recurring FFO collection loss collection loss Recurring EBITDA Personnel expenses Other operating income Propex non rechargeable Incentives and collection loss Net rents after incentives and Net rents before incentives and

Net financial results & recurring taxes

ı 48 ı Management Report on Consolidated Financial Statements

CONSOLIDATED BALANCE SHEET

(€ thousand)

ASSETS 31/12/17 EQUITY AND LIABILITIES 31/12/17 NON CURRENT 11,390,461 EQUITY 5,723,783 ASSETS

Intangible assets 242,750 Subscribed capital 469,771

Property plant and equipment 3,879 Share premium 3,970,842

Investment property 10,352,415 Reserves 330,232 Investments accounted for using the 371,408 Treasury stock (24,881) equity method Non-current financial assets 275,882 Other equity holder contributions 540

Deferred tax assets 144,127 Interim dividend (93,457)

Profit for the period 1,100,419

Valuation adjustments (35,806)

Minorities 6,124

NON CURRENT LIABILITIES 6,006,991

Long term debt 5,342,190

Long term provisions 72,383

Deferred tax liabilities 592,418

CURRENT ASSETS 614,579 CURRENT LIABILITIES 274,267

Trade and other receivables 80,530 Short term debt 197,005 Short term investments in group 66,340 Short term provisions 867 companies and associates Short term financial assets 7,114 Trade and other payables 67,246

Cash and cash equivalents 454,036 Accruals and deferreals 9,149

Accruals and deferrals 6,559 TOTAL EQUITY TOTAL ASSETS 12,005,040 12,005,040 AND LIABILITIES

ı 49 ı Notes to the consolidated balance sheet

Fair value of the portfolio corresponds to the appraisal value delivered by CBRE and Savills as of 31 December 2017. It is important to note that in accordance with accounting regulations the increase of value in concessions, equity method and non- current assets for disposal are not reflected in the financial statements. The referred appraisal value is reflected in the following accounting Items:

€ million Leaseholds (included in intangible assets) 242.2 Investment property 10,352.4 Derivatives (in non-current financial assets) 207.3 Equity method 371.4 Non-current assets 0.9 Total balance sheet items 11,174.2 Increase of value in concessions 30.1 Increase of value in equity method 49.4 Increase of value in non-current assets 0.3 Total valuation 11,254.0

FINANCIAL DEBT

During the period, MERLIN has executed the issuance of two unsecured bonds for an aggregate amount of € 900,000 thousand, with the following characteristics:

MRL III MRL IV Issuance date 26 May 2017 18 September 2017 Size (€ thousand) 600,000 300,000 Coupon 1.750% 2.375% Expiration date 26 May 2025 18 September 2029 Spread on Euribor ms + 125 bps ms + 150.8 bps Covenants LTV ≤ 60% ≤ 60% ICR ≥ 2.5x ≥ 2.5x Unencumbered ratio ≥ 125% ≥ 125%

ı 50 ı Management Report on Consolidated Financial Statements

The balance of long term debt and short other financial liabilities, corresponding term debt includes Company’s outstanding to guarantees and legal deposits received. financial debt, mark-to-market of interest- The breakdown of gross financial debt is as rate and inflation hedging contracts and follows:

Financial debt breakdown

€ Thousand Long term Short term Total

Financial debt 5,274,984 137,949 5,412,933

Loan arrangement costs (55,166) - (55,166)

Debt interest expenses - 37,515 37,515

Mark-to-market of interest-rate hedging contracts 34,178 2,734 36,912

Other financial liabilities (i.e. legal deposits) 88,194 18,807 107,001 Total debt 5,342,190 197,005 5,539,195

MERLIN’s net financial debt as of 31 December is € 4,904,254 thousand. This represents a Loan To Value of 43.6%, which is an important reduction of 194 bps since 31/12/2016 (45.5%). The breakdown of MERLIN’s debt is the following:

(€ million) 3,250 124 5,413 509 4,904

874

1,166

Secured Unsecured Unsecured Leasings Total Gross Cash Total net bank loans loans bonds Debt debt

% Gross 21.5% 16.1% 60.0% 2.3% 100.0% financial debt

Spot average 2.7% 2.0% 2.1% 3.1% 2.2% cost (%)

% interest rate 99.4% 96.7% 100.0% 67.6% 98.6% hedged

ı 51 ı MERLIN’S debt has an average maturity period of 6.1 years. The chart with debt maturity is the following:

1,110

856 869 838 719 758

138 41 85

nsecred loans nsecred onds Secred an loans easing

MERLIN’s debt as of 31 December has a spot average cost of 2.23%. Nominal debt with interest rate hedged amounts to 98.6%. Key debt ratios are shown below:

(€ thousand) 31/12/2017 31/12/2016 Gross financial debt 5,412,933 5,193,247 Cash 508,679 (1) 722,122 (1) Net financial debt 4,904,254 4,471,124 GAV 11,253,954 9,823,619 LTV 43.6% 45.5% Average cost 2.23% 2.26% Floating interest rate 1.4% 11.3% Average maturity (years) 6.1 6.2 Liquidity (2) 928,679 949,043 Non-mortgage debt 78.5% 75.6%

(1) Including cash and net proceeds from the sale of hotels (€ 50.8m) (2) Including available treasury plus proceeds from the sale of hotels and unused credit facilities.

ı 52 ı Management Report on Consolidated Financial Statements

SHAREHOLDERS RETURN

The Shareholder Return for a given year is divided by the EPRA NAV of the Company equivalent to the sum of (a) the change in as of 31 December of the immediately the EPRA NAV per share of the Company preceding year (the “Shareholder Return during such year; and (b) the total dividends Rate”). In accordance with these definitions, per share (or any other form of remuneration the Shareholder Return in 2017 amounts or distribution to the Shareholders) that are to € 2.42 per share (or € 1,137,918 thousand paid in such year (the “Shareholder Return”). of value created in absolute terms) and the The Shareholder Return Rate is defined as Shareholder Return Rate amounts to 21.6%. the Shareholder Return for a given year

Per share (€) € thousand EPRA NAV 31/12/2016 11.23 5,274,730 NAV growth in 2017 2.02 950,011 EPRA NAV 31/12/2017 13.25 6,224,741 DPS 0.40 187,907 NAV growth + DPS (Shareholder Return) 2.42 1,137,918 Shareholder Return Rate 21.6%

ı 53 ı 07

EPRA METRICS

ı 54 ı Management Report on Consolidated Financial Statements

EPRA METRICS

Performance Measure Definition 31/12/2017

€ thousand € per share

EPRA Earnings Recurring earnings from core operational 289,085 0.62 (€ thousand) activities EPRA Net Asset Value (EPRA NAV) is calculated based on the consolidated shareholders’ equity of the Group adjusted to include properties and other EPRA NAV investment interests at fair value and 6,224,741 13.25 (€ thousand) to exclude certain items not expected to crystallise in a long-term investment property business model, as per EPRA’s recommendations EPRA NAV adjusted to include the fair EPRA NNNAV value of financial instruments, debt and 5,797,438 12.34 (€ thousand) deferred taxes Annualized rental income based on the cash passing rents at the balance sheet date, less non-recoverable property EPRA Net Initial Yield 4.1% operating expenses, divided by the market value of the property, increased with acquisition costs Adjustment to the EPRA Net Initial Yield in respect of the expiration of rent- EPRA “topped-up” NIY free periods (or other unexpired lease 4.2% incentives such as discounted rent periods and step rents) Estimated Market Rental Value (ERV) EPRA vacancy rate of vacant space divided by ERV of the 7.4% whole portfolio Running costs of the Company divided EPRA costs 20.6% by recurring rents EPRA costs (excluding Recurring running costs of the Company 19.5% non-recurring costs) divided by recurring rents

MERLIN Properties has been awarded by EPRA with the gold award of best practices in financial reporting. It is the highest recognition for an outstanding compliance with the best practices

ı 55 ı The evolution of EPRA metrics from 31 December 2014 has been the following:

EPRA Yields

5.93%

5.86% 5.01% 4.61% 4.96% 4.22% 4.51% 4.09%

31/12/14 31/12/15 31/12/16 31/12/17

EPRA topped-up yield EPRA net initial yield

EPRA NAV/share 13.25

11.23 10.49

9.85

31/12/14 31/12/15 31/12/16 31/12/17

EPRA vacancy/costs 19.5% 16.9%

14.3% 12.0% 9.8% 7.4% 5.4% 3.4%

31/12/14 31/12/15 31/12/16 31/12/17

EPRA vacancy EPRA costs

ı 56 ı Management Report on Consolidated Financial Statements

ı 57 ı 08

EVENTS POST-CLOSING

ı 58 ı Management Report on Consolidated Financial Statements

EVENTS POST-CLOSING

• On January 19 2018, the service level agreement with Testa Residencial was cancelled ahead of the IPO of Testa. In exchange, MERLIN Properties will increase its stake in Testa Residencial to 16.95%

• On 13 February 2018, MERLIN fully repaid € 122.6m of property leasings

ı 59 ı 09

STOCK EXCHANGE EVOLUTION

ı 60 ı Management Report on Consolidated Financial Statements

STOCK EXCHANGE EVOLUTION

MERLIN shares closed on 31 December 2017 The share has outperformed the sectorial at € 11.30, an increase of 9.4% versus EPRA Europe reference index (+9.3%), 31 December 2016 closing price (€ 10.33). IBEX-35 (+7.4%) and Euro Stoxx 600 (+7.7%).

MERLIN share price performance vs IBEX 35 / EPRA Index / Euro Stoxx 600

Reased to

an Fe Mar pr Ma n l g Sep ct o ec

MR R nde loal roSto e

28.1 26.9 Average daily trading value (€ m)

Average daily trading volume during 24.0 the period has been € 28.1 million, which represent a 0.6% of the average market capitalization of 2017.

2015 2016 2017

ı 61 ı As of the date of this report, MERLIN is covered by a wide variety of 24 equity research houses. Consensus target price is € 12.75.

Target prices and analyst recommendations

Broker Report date Recommendation Target price

22-02-18 Buy 13.10

19-02-18 Buy 13.70

01-02-18 Buy 13.50

31-01-18 Buy 13.51

25-01-18 Buy 13.50

11-01-18 Buy 12.70

14-12-17 Buy 12.30

01-11-17 Neutral 11.70

30-10-17 Buy 12.50

25-10-17 Buy 12.45

25-10-17 Buy 12.85

24-10-17 Buy 12.40

25-09-17 Neutral 11.80

11-09-17 Sell 11.50

07-09-17 Buy 14.00

06-09-17 Buy 13.00

29-08-17 Buy 14.50

25-08-17 Neutral 12.25

16-08-17 Neutral 12.55

13-07-17 Neutral 12.00

11-07-17 Buy 13.30

26-06-17 Buy 12.79

09-04-17 Buy 12.00

19-09-16 Buy 12.10

Market consensus 12.75

ı 62 ı Management Report on Consolidated Financial Statements

ı 63 ı 10

DIVIDEND POLICY

ı 64 ı Management Report on Consolidated Financial Statements

DIVIDEND POLICY

The Company maintains a dividend policy the rest of the obtained profits. If the dividend that takes into account sustainable levels distribution agreement is not adopted within of distributions, and shows the Company’s the legal timeframe, the Company will lose its forecast in relation to obtaining recurring REIT status during the financial year to which profits. The Company does not intend to create the dividends refer. reserves that cannot be distributed to the shareholders, other than those required by law. In accordance with the Prospectus, MERLIN Properties targets to deliver a dividend yield of According to the Spanish regime for REIT’s, between 4% and 6% over the initial IPO price. the Company will be obligated to adopt The Company’s dividend policy is established agreements to distribute the profits obtained as the distribution of a minimum of the 80% in this financial year in the form of dividends to cash flow from operations less the payment shareholders, after complying with any relevant of recurring expenses of maintaining assets. requirement of the Spanish Corporation Law. The distributions to MERLIN’s shareholders The Company will be obliged to agree its during 2017 are shown in the chart. The Board distribution within six months of the close of of Directors of MERLIN Properties agreed on each financial period, in the following manner: 9 October 2017, to distribute a dividend on (i) at least 50% of the profits derived from account of 2017 results for a gross amount the transfer of real properties, shares, or of € 0.20 per share paid on October 25 2017. shareholdings in qualified affiliates, provided The management team of MERLIN Properties that the remaining profits are reinvested in will propose a complimentary dividend on other real estate assets within a maximum account of 2017 results, being subject to period of three years from the date of the 2018 General Shareholders Meeting. The transmission or, if not, 100% of the profits complimentary dividend would be a gross must be distributed as dividends at the end amount of 0.26 euros per share, expected to of this three year period; (ii) 100% of the be distributed in May 2018, for a total of 0.46 profits obtained by receiving dividends paid euros per share versus 0.40 euros in 2016. by qualified subsidiaries; (iii) at least 80% of

Type Date Concept € per share

Interim 2015 28-oct-15 Dividend 0.0775 Final 2015 27-abr-16 Dividend 0.005692 Share premium Final 2015 27-abr-16 0.102608 distribution Total 2015 0.19

Interim 2016 25-oct-16 Dividend 0.185 Share premium Interim 2016 25-oct-16 0.02 distribution Final 2016 18-may-17 Dividend 0.10071014 Share premium Final 2016 18-may-17 0.09928767 distribution Total 2016 0.40

Interim 2017 25-oct-17 Dividend 0.20 Pending AGM Final 2017 0.26 Approval Total 2017 0.4 0.46

ı 65 ı 11

MAIN RISKS AND UNCERTAINTIES

ı 66 ı Management Report on Consolidated Financial Statements

MAIN RISKS AND UNCERTAINTIES

The policies of financial risk management • Interest rate risk: in order to minimize the within the commercial real estate sector deal Company’s exposure to this risk, financial mainly with the analysis of investment projects, hedges, such as interest rate swaps, have the management of the building’s occupancy been executed. Total interest rate hedged and the situation of the financial markets: amount to 98.6% of total debt.

• Credit risk: credit risk relating to the • Exchange rate risk: the Company’s policy is Company’s ordinary business is not to contract debt only in the same currency significant because the contracts signed as that of the cash flows of each business. with the tenants require payment in advance Therefore, the Company is currently not of most sums. These contracts also require exposed to exchange rate risk. Within this the tenant to provide legal and additional type of risk, it is noted the fluctuation of financial guarantees or deposits to cover the exchange rate in the conversion of possible nonpayment of the rent. This risk the financial statements of the foreign is also mitigated by the diversification of companies whose functional currency is the type of product in which the Company other than euro. invests and consequently the typology of clients. • Market risk: MERLIN Properties is exposed to market risk from potential downward • Liquidity risk: The Company, in order to movement in rental rates when current manage liquidity risk and to meet the contracts terminate. This risk could needs of funds, uses an annual budget and negatively affect the cash flow and monthly forecast of the liquid assets. This valuation of the assets of the Company. monthly forecast is detailed and updated on However, the market risk is mitigated by a daily basis. The main liquidity risk is due policies of attracting and selecting new high to the potential negative working capital quality clients and negotiating compulsory resulting from short term debt. The factors lease terms that maximize the length of the mitigating liquidity risk include the following: lease term. For this reason, on 31 December (i) cash generated in the ordinary course of 2017, the occupancy rate of the Company’s business is very stable; and (ii) the company’s assets is 92.6%, with a weighted average liabilities are largely long-dated and the high unexpired lease term of 6.7 years (weighted quality of the assets provides ample ability by gross rents). to obtain new sources of funding. When formulating consolidated annual accounts, the Company had already covered all of its funding requirements, enabling it to meet its commitments with providers, employees and the Public Sector, according to the cash flow for FY2017. Furthermore, given the type of industry in which the Company operates, the investments, the financing for such investments, the stable EBITDA generated and the high occupancy rate of properties is more likely to produce surplus cash. The company’s policy is to invest this cash in short-term investments and liquid deposits with highly rated institutions. The acquisition of options or futures on stocks, or any other high-risk activities as a means of investing its cash surplus are not considered by the Company.

ı 67 ı 12

TREASURY SHARES

ı 68 ı Management Report on Consolidated Financial Statements

TREASURY SHARES

As of 31/12/2016 the Company owned 10,230 treasury shares. During 2017, with the intention of covering the shares that need to be distributed in the future to the beneficiaries of the 2016 long term incentive plan, the Company bought on 18 May 2017 an amount of 3.3 million shares, from Banco Popular. In accordance with the delivery conditions of the shares awarded in 2016 long term incentive plan, 990,000 shares have been delivered to the beneficiaries on October and December. The breakdown of the treasury shares changes during the year is as follows:

(Shares) Acquisitions Disposals Total

31/12/2016 Balance 10,230

May 2017 3,300,000 - 3,300,000

October 2017 - (825,000) (825,000)

December 2017 - (165,000) (165,000)

31/12/2017 Balance 2,320,230

ı 69 ı 13

OUTLOOK / R+D INFORMATION / OTHER

ı 70 ı Management Report on Consolidated Financial Statements

OUTLOOK / R+D INFORMATION / OTHER

In 2018, MERLIN expects to continue with high occupancy rates and the maintenance of strong cash flow due to the long remaining lease period (6.7 years from 31 December 2017, weighted by each tenant rents).

The Company also expects to continue with the acquisition of assets that fit within its investment strategy. To this end, it holds a cash position of 454 million euros. In this regard, in 2017, in accordance to our best estimates, average payment period to suppliers was 38.7 days.

The Company has not developed any research and development activities during 2017.

ı 71 ı 14

CORPORATE RESPONSIBILITY Management Report on Consolidated Financial Statements

MAIN INDICATORS OF THE YEAR

EVOLUTION 2017(1) 2016-2017(1)

Energy consumption in GJ 347,561 (113,279) +144% (+4%)

GHG emissions(tCO2eq) 26,131 (8,625) +175% (+19.5%)

Water consumption (m3) 607,344 (139,698) +148% (-5%)

Environmental investment (€) 2,275,559 +124%

% of the portfolio (in GAV terms, +18.8 excluding High Street Retail) under LEED 44.9% Percentage points(2) or BREEAM certification

Sustainable building certification plan

Building certification under the leading sustainable construction standards endorses the assets’ building quality and guarantees that their design and operation include features and systems that allow maximum environmental efficiency. As regards certification standards, MERLIN has chosen LEED and BREEAM, the most appropriate alternative being selected based on the characteristics of the building or its tenants.

In this regard, the Company has approved a plan to achieve 98.5% (in GAV terms, excluding high street retail) certification of its buildings from 2016 to 2019. Certified buildings currently account for 45% (in GAV terms, excluding high street retail) of the total portfolio. MERLIN has also registered the rest of its buildings for the certification process. Under its Certification Plan 2016- 2019, MERLIN Properties will invest over €6 million in the certification of 98.5% of its portfolio under BREEAM or LEED standards.

(1) In brackets, value expressed in like-for-like terms (2) 2016 figure excluding Metrovacesa was 38%. With Metrovacesa, it is 26.1%.

ı 73 ı MERLIN’s asset Certification Plan 2016-2019 (% GAV)

99% 100% 97%

51 35 57

62 42 49

Offices Shopping Logistics centers

Certified In process

Consumption management

Energy (electricity and fuel) and water The Company also controls energy and consumption are two of the main water consumption in other assets without environmental aspects linked to building management control. These assets are operation. MERLIN continuously monitors not considered part of the company’s and assesses energy and water consumed own environmental performance and in managed assets under operation, defining therefore not included in this chapter, since and implementing measures to assure MERLIN does not have any control on their keeping both at efficient levels. performance or margin to introduce any improvement measures.

ı 74 ı Management Report on Consolidated Financial Statements

Assets in which MERLIN has information on the environmental performance

OFFICES

Area(1) (sqm) Area(1) (sqm) Adequa 1 27,399 PE Atica XIX 15,411 Adequa 2 5,013 PE Churruca 16,979 Adequa 3 15,937 PE Cerro Gamos 35,498 Adequa 5 13,790 PE Euronova 32,665 Adequa 6 13,789 PE Las Tablas 27,073 Al-Andalus 5,972 PE Minipark Alcobendas 1 9,195 Alfonso XI 9,945 PE Minipark Alcobendas 2 3,347 Aquamarina 10,856 PE Puerta de las Naciones 39,150 Arturo Soria 128 3,206 PE Sanchinarro 17,191 Atica 1(2) 7,080 PE Vía Norte 37,224 Atica 2(2) 5,644 Pedro de Valdivia, 10(4) 6,721 Atica 3(2) 5,746 Plantio 6 G 1,780 Atica 4(2) 4,936 Plantio 8 F 1,723 Atica 5 9,526 Plantio 10 E 1,749 Atica 6 3,790 Plantio 12 D 1,816 Avda de Aragon 334 3,890 Princesa 3(3) 17,810 Avenida de Bruselas, 24 9,164 Princesa 5(3) 5,788 Avenida de Burgos 210(4) 6,176 Santiago de Compostela 94 13,130 Avda de Europa 1B 12,605 Sollube 31,576 Callao 5(5) 1,987 Torre Castellana 259(4) 21,390 Castellana, 83-85(4) 15,254 Trianon 18,400 Castellana 93 11,650 Ventura Rodríguez 7(3) 10,071 Castellana 280 16,918 Citypark Cornella 12,916 Cristalia 11,712 Diagonal 458 4,174 Costa Brava, 2-4(4) 16,000 Diagonal 514(4) 9,664 Elipse 7,515 Diagonal 605(4) 14,795 Eucalipto 25 7,368 E-Forum 5,190 Eucalipto 33 7,185 Muntadas I(4) 24,380 Fuente de la Mora 4,482 Muntadas II 3,783 Juan Esplandiú, 11-13(4) 28,008 WTC6(4) 14,461 Partenón, 12-14(4) 19,609 WTC8(4) 14,542 Partenón, 16-18(4) 18,343 PE Poble Nou 22@ 31,337 PE Alvento 32,928 Sant Cugat I(4) 15,378 PE Alvia 23,567 Sant Cugat II(4) 10,008

Area (sqm) No. assets Portfolio included in environmental performance 923,305 68 Total office portfolio 1,267,344 139

(1) Gross leasable area (2) Atica 1, 2, 3 and 4 have been removed from the like-for-like portfolio because the tenant of one of the blocks left in 2017. (3) Princesa 3, 5 and Ventura Rodríguez 7 have been removed from the like-for-like portfolio due to a change in the reporting scope between 2016, 2017 and 2015 (4) Like-for-Like assets (5) Office sqm in the predominantly High Street Retail asset

ı 75 ı SHOPPING CENTERS

Area (sqm) Area (sqm)

Marineda(1) 100,207 El Saler 26,262 Arturo Soria 5,974 Artea 24,323 Centro Oeste(1) 10,876 Thader 48,646 Larios(1) 40,805 Vilamarina 32,224 Porto Pi(1) 32,119 La Vital 20,868 Arenas 31,918 La Fira 29,013 Bonaire 17,559

Area (sqm) No. assets Portfolio included in environmental 420,794 13 performance

Total shopping center portfolio 555,313 18

LOGISTIC ASSETS

Area (m2)

Madrid-Coslada Complex(1) 36,234 Valencia-Almussafes(1) 26,612

Area (m2) No. assets Portfolio included in environmental 62,846 2 performance

Total logistic assets portfolio 960,825 17

Energy consumption in MERLIN’s portfolio

Energy consumption in the portfolio depends MERLIN, as the owner of the buildings, has an mainly on the asset’s characteristics and energy classification for 71% of its portfolio occupancy rate. (by number of assets excluding High Street Retail). This provides an indication of the energy characteristics of buildings and serves as a basis for developing an improvement strategy.

(1) Like-for-Like assets

ı 76 ı Management Report on Consolidated Financial Statements

Energy classification of MERLIN’s assets (% of total assets)(1)

ASSETS: ASSETS: ASSETS: 104/135 4/17 17/23

F 0% F 0% E 0% F 3% E 13% F 6%

D 26% D 50% E 47%

C 36% D 12%

C 50% C 29% B 22%

A 4% A 0% B 0% A 0% B 6%

Offices Shopping Logistic Centers assets

After conducting several energy audits in new buildings following the integration of its buildings, MERLIN is working on the Metrovacesa portfolio. implementation of an Energy Management System and its ISO 50001 certification. The growth in energy consumption of the This process was launched in 2017 with the like-for-like office portfolio has been more certification of four assets: Aquamarina, moderate, at around 4%, mainly linked to the Avenida de Partenón 16-18, Torre Castellana rise in fuel consumption. 259 and Vía Norte business park, accounting an area of 88,073 m2 (10% GAV). In the case of the shopping centers, energy consumption is mainly related to electricity The Company plans to continue this consumption (92%), with a small proportion certification process in the coming years, of natural gas in some of the assets included including Avenida de Partenón 12-14 offices, in the portfolio in 2017. Alvento business park and Arturo Soria shopping center, what will increase the area Energy performance in shopping centers, under certification to 163,707 2m . in absolute terms, is similar to offices, also due to the integration of new assets in Regarding energy consumption in the the portfolio, pushing consumption up to portfolio, it currently amounts to 347,561 GJ 133,540 GJ (+160% on 2016). In like-for-like together with offices (61% of the portfolio), terms, there was also a rise (3%) in energy shopping centers (38%) and logistic assets consumption in this portfolio with respect (1%). to 2016.

Energy consumption in the office portfolio Regarding logistic assets, energy consists of electricity (76%), natural gas consumption is only linked to electricity (23%) and a small proportion of gas-oil consumption. It has raised to 647 GJ in (1%). In 2017, energy consumption in offices 2017. This consumption represents both totalled 213,374 GJ in absolute terms, in absolute and like-for-like terms, an 11% 134% up on 2016, due to the inclusion of increase respecting 2016.

(1) Tree and Caprabo (high street retail) assets have been excluded from the calculation

ı 77 ı Energy consumption in MERLIN’s assets(1)

Absolute energy consumption (GJ) and Like-for-like energy consumption (GJ) and absolute energy intensity(2) (GJ/m2) like-for-like energy intensity (GJ/m2)

0,300 0.328 0.310 0.320 0,309 0,286

0.267 0,258 0,265 0.245 0.244 0,249

0,008 0,009 0,010 0,008 0,009 0,010

347,561 111,913 108,760 113,279 647 492 583 647

133,540 45,786 47,554 48,867

135,600 142,358 492 583 46,654 50,750 213,374 65,635 60,623 63,765

88,454 91,025

2015 2016 2017 2015 2016 2017

Energy consumption in offices Energy intensity in offices Energy consumption in shopping centers Energy intensity in shopping centers Energy consumption in logistic assets Energy intensity in logistic assets

Absolute electricity consumption Like-for-like electricity consumption by asset category (GJ) by asset category (GJ)

280,079 97,252 95,940 96,963

647 492 583 647

122,525 45,786 47,554 48,867

109,518 118,856 492 583 46,654 50,750 156,907 50,974 47,803 47,449

62,372 67,523

2015 2016 2017 2015 2016 2017

Energy consumption in offices Energy consumption in logistic assets

Energy consumption in shopping centers

(1) Energy consumption includes those assets under MERLIN management (listed in the tables at the beginning of the chapter). The scope of this consumption can include common areas and/or shared services with tenants (like, for example, the cooling system) depending on the asset. (2) Energy intensity has been calculated using the total area of the assets considered.

ı 78 ı Management Report on Consolidated Financial Statements

Absolute fuel consumption Like-for-like fuel consumption by asset by asset category (GJ) category (GJ) 67,482 16,316

11,015 14,662 12,820

16,316 56,487 14,662 26,081 23,502 12,820

26,081 23,502

2015 2016 2017 2015 2016 2017

Fuel consumption in offices Fuel consumption in shopping centers

Generation of photovoltaic electricity Electricity consumption at MERLIN in MERLIN’s assets Properties’ headquarters

MERLIN has two photovoltaic plants in two Since March 2017, all employees in Madrid are of its assets: Vía Norte business park and reunited in a single headquarters, occupying Coslada logistic asset. Both plants together two floors of an office building, as a tenant. generated 1,910 GJ of renewable electricity in These floors together have an area of 1,855 2017. This electricity was not self-consumed m2. Electricity consumption on these floors but is fed back to the grid. as from March 2017 amounts to 575 GJ, what means a power intensity of 0.31 GJ/m2.

ı 79 ı Water consumption in MERLIN’s portfolio

In 2017, water consumption in MERLIN’s In like-for-like terms, water consumption fell portfolio was 607,344 m3. This consumption by 17% in the shopping center portfolio and is divided into the office portfolio (68%) around 9% in the logistic portfolio. On the shopping centers (31%) and logistic assets contrary, water consumption rose by 5% in (1%). Both in the office and shopping center the office portfolio. portfolio, absolute water consumption has increased with respect to 2016, mainly due to the addition of new assets.

Water consumption in MERLIN’s assets(1)

Absolute consumption by asset category (m3) Like-for-like consumption by asset category (m3) and absolute water intensity(2) (m3/m2) and like-for-like water intensity (m3/m2)

0.387 0.558 0.366 0.477 0.404 0,289 0.498 0.456 0,347 0.452

0,135 0,132 0,120 0,135 0,132 0,120 607.344 4.330

146,477 139,698 188.965 4,784 4,330

53.279 90.612 63,893 244,731 4.875 4.784 139.157 106.118 414.049 4.875 82.089 85.737 77,800

134.282 133.829

2015 2016 2017 2015 2016 2017

Water consumption in offices Water intensity in offices Water consumption in shopping centers Water intensity in shopping centers Water consumption in logistic assets Water intensity in logistic assets

(1) Water consumption includes those assets under MERLIN management (listed in the tables at the beginning of the chapter). The scope of this consumption can include common areas and/or tenant areas depending on the asset. (2) Water intensity has been calculated using the total area of the assets considered.

ı 80 ı Management Report on Consolidated Financial Statements

Greenhouse gas emissions

Greenhouse gas (GHG) emissions associated In the like-for-like portfolio, GHG emissions

with MERLIN’s buildings derive from the totalled 8,625 t CO2eq, which is 19.5% up energy (power and fuel) consumed. on 2016. Emissions rose above energy consumption due to the rise in the electricity In 2017, these emissions were the result of mix emission factor in Spain in 2017(1) . gas-oil and natural gas consumption (Scope 1 emissions) and electricity consumption (Scope 2 emissions), amounting to 26,131

t CO2eq. This represents an increase of 175% on the previous year. As with energy consumption, it is attributable to the growth in the number of portfolio assets.

Greenhouse gas (GHG) emissions from MERLIN’s assets(2)

Absolute GHG emissions by asset category Like-for-like GHG emissions by asset category

(t CO2eq) and absolute emission intensity (t CO2eq) and like-for-like emission intensity 2 2 (t CO2eq/m ) (t CO2eq/m )

0.025 0.21 0,023 0.025 0,019 0,022

0.020 0,020 0,021 0.018 0,017 0.018

0,001 0,001 0,001 0,001 0,001 0,001 26.131 8.698 8.625 51 40 51 7.217 39 10.318 3.688 3.869

3.197 10,480 9,495 40 39

3,758 3,412 15.762 4.970 4.705 3.981 6,682 6,044

2015 2016 2017 2015 2016 2017 GHG emissions in offices GHG emissions intensity in offices GHG emissions in shopping centers GHG emissions intensity in shopping centers GHG emissions in logistic assets GHG emissions intensity in logistic assets

(1) The electricity mix emission factor is the value that expresses CO2 emissions associated to the generation of electricity and is thus an indicator of the energy sources used to produce electricity. The lower the factor, the higher the contribution from low-carbon energy sources. (2) The emission factor recommended by the Ministry of Agriculture and Fisheries, Food and Environment for gas-oil and natural gas were used to calculate Scope 1 GHG emissions. The emission factor recommended by Red Eléctrica de España for the electricity mix has been used for the calculations of Scope 2 GHG emissions

ı 81 ı Absolute GHG Scope 1 emissions Like-for-like GHG Scope 1 emissions

by asset category (t CO2eq) by asset category (t CO2eq) 3,958

618

949 1,657 1,505 864 767 3,340

1,657 1,505 864 767 949

2015 2016 2017 2015 2016 2017 GHG Scope 1 emissions in offices GHG Scope 1 emissions in shopping centers

Absolute GHG Scope 2 emissions Like-for-like GHG Scope 2 emissions

by asset category (t CO2eq) by asset category (t CO2eq)

22,173 51 7,834 7,676 40 51 6,449 39 9,700 3,688 3,869

3,197 8,822 40 7,990 39 3,758 3,412 12,422 4,106 3,756 3,213 5,024 4,539

2015 2016 2017 2015 2016 2017

GHG Scope 2 emissions in offices GHG Scope 2 emissions in logistic assets GHG Scope 2 emissions in shopping centers

ı 82 ı Management Report on Consolidated Financial Statements

In addition to its efforts made to reduce its Waste management own energy consumption and greenhouse gas emissions directly linked to its activity, MERLIN currently controls hazardous MERLIN has launched other initiatives to and non-hazardous waste generation and partially offset those emissions that cannot management in 17 of its assets. They are be reduced. all included in the ISO 14001 corporate Environmental Management System. For LEED and BREEAM certification purposes, MERLIN cooperates in In these assets, 266,743 kg of waste was forest recovery and in the fight against generated in 2017, 99% of which was non- desertification through the association hazardous. REFORESTA, while mitigating emissions from its assets. In 2017, the Company invested All the waste generated was valorized in 2017. €9,021 in reforesting the National Park in Sierra de Guadarrama, Tres Cantos and La Pedriza.

MERLIN also purchases renewable energy Waste generation and management certificates (REC) to offset emissions in MERLIN’s buildings derived from power consumption in its buildings. This ensures that the electricity consumed in its assets is offset by 4% disposal generating the same quantity of renewable energy. In 2017, 120,935 GJ of renewable power was purchased.

GHG emissions associated with electricity consumption at MERLIN Properties’ headquarters 96% 100% Valorization Valorization As a result of power consumption in its office building, MERLIN has generated Scope 2 266,743 226,392 GHG emissions of 45.53 t CO2eq, what means 2 an intensity of 0.025 t CO2eq/m .

224,259 264,607

2,133 2,136

2016 2017

Generation of non-hazardous waste Generation of hazardous waste (kg)

ı 83 ı 15

STAFF

ı 84 ı Management Report on Consolidated Financial Statements

MAIN INDICATORS OF THE YEAR

2017 EVOLUTION 2016-2017

Number of employees 162 -18%

-5.9 % women in the workforce 43% Percentage points

Employees with indefinite contracts 100% =

• Relocation of the workforce into the new corporate headquarters in Madrid and Barcelona. • Creation of the leasing office, leasing shopping centers and CAPEX investment departments.

2017 MILESTONES • Launch of the employee satisfaction survey. • Resumption of the unified rainingT Plan. • Off-site meeting of the entire Asset Management team following integration. • Launch of the CSR Plan.

• Improvement of the employees’ life insurance policy. • Development of the employee intranet, which will encompass all the tools, procedures and corporate documentation, and will allow access to discounts and FUTURE CHALLENGES social benefits. • Continuation of in-house training to transfer knowledge among employees. • Revision of the Welcome Guide for all new joiners.

ı 85 ı Distinctive aspects of MERLIN’s human capital

Human capital is a key, distinctive factor at Despite their varied backgrounds, all the MERLIN. All the group’s employees have workers share the Company’s philosophy considerable experience, skills, qualifications and are perfectly aligned to achieve its and training to carry out their functions and objectives. have a recognised high capacity for work and commitment, as well as honesty in the performance of their duties.

Excellence 20 MERLIN’s good reputation allows it to average years select the market’s best academic pro files, of experience who join a top-class team of professionals with broad industry experience employing a meritocracy.

69.5M€ Efficiency MERLIN remains faithful to its philosophy of GAV/employee growth without losing efficiency, i.e. keeping up the productivity that characterises its human capital.

4.3% Commitment to the organisation MERLIN’s professionals are firmly voluntary turnover rate committed to the Company’s corporate objectives and aligned with its values. MERLIN has a non-hierarchical matrix organisation to encourage a culture of individual responsibility and favour efficient communication within the team.

74% Independence The Company has a team of proactive, of employees have responsible professionals who are received training(1) provided with the necessary training and independence to make decisions.

(1) Only parent company

ı 86 ı Management Report on Consolidated Financial Statements

MERLIN’s human capital is currently comprising 7% of employees, and other composed of 162 professionals divided into employees, the remaining 93%), in line with only two categories (management team, the Company’s horizontal structure strategy.

Workforce composition

2017 2016 2015

Men Women Men Women Men Women

Management team 11 1 11 1 11 1

Other professionals 82 68 91 95 54 53

TOTAL 162 198 119

<30 years 4 5 4 4 2 2

30-50 years 66 52 68 77 50 42

>50 years 23 12 30 15 13 10

TOTAL 162 198 119

Current profile of MERLIN Properties employees(1)

• I represent 43% of the workforce • I represent 57% of the workforce • I represent 53% of recruits in 2017 • I represent 47% of recruits in 2017 • I am between 30 and 50 years old • I am between 30 and 50 years old (75% of women) (71% of men) • I have an indefinite contract • I have an indefinite contract • I received 9 hours of training in 2017(2) • I received 8 hours of training in 2017(2)

(1) At 31 December 2017 (2) Only parent company

ı 87 ı Diversity and equal opportunities Universidad Carlos III, Universidad Pontificia de Comillas and Universidad As reflected in the Company’s Code de Navarra. of Conduct, MERLIN promotes equal opportunity and non-discrimination in In the framework of these agreements, all phases of the working relationship MERLIN has been supported by two interns with employees, regarding access to in 2017, one of whom has become part of employment, training, promotion and the workforce. working conditions. For talent retention purposes, MERLIN’s The Company also promotes the integration human resources analyses ways to motivate of people with functional diversity. In and reward its professionals for their 2017, MERLIN hired three people with involvement and commitment. Four key an intellectual disability as part of its mechanisms are now used for this purpose: collaboration with the Prodis Foundation. remuneration, professional development, These professionals are guided by an communication and flexible remuneration internal tutor who, together with all their and social benefits. colleagues, provides them with support during their daily work.

Following these hirings, there are currently five employees with a disability, all under Profile of MERLIN’s hirings in 2017 indefinite part-time contracts. They are fully integrated and carry out functions that are necessary and valued in the Company. 8% aos 10% Talent attraction and retention aos

When hiring employees, MERLIN guarantees equal opportunity and transparency, selecting new professionals based on their skills, knowledge and alignment with 82% corporate values and objectives. aos

In 2017, the Company hired 40 professionals, 14 of whom are the result of the integration of MERLIN and Centros Comerciales Metropolitanos, the management company of the shopping malls from Metrovacesa’s 47% 53% merge. Additionally, 5 external employees omres Meres from Marineda’s management team have joined the workforce together with 5 external employees in charge of the management of Las Arenas mall, after MERLIN became the sole owner.

In order to attract new talent, the Company signs collaboration agreements with top educational institutions to both favour the integration of new job seekers and identify the highest academic achievers. MERLIN currently has agreements with the following institutions: Universidad Autónoma de Madrid,

ı 88 ı Management Report on Consolidated Financial Statements

Talent retention. Main mechanisms

Remuneration Remuneration is a key tool to attract and retain the best talent. The Company’s remuneration system includes three distinctive 41 Employees may features: currently opt to • Low (base) salary slope between categories. • Better salary than the market average. join the Company’s • Prioritisation of performance over any other variable when Long-Term determining remuneration. Continuous monitoring of the Incentive Plan employees’ evolution. The following developments in employee remuneration took place in 2017: • Extension of the variable remuneration policy to the entire company for 2017 and the coming years. • Extension of the Long-Term Incentive Plan from 12 to 41 employees under the new 2017-2019 Plan.

Professional The proactiveness of MERLIN’s professionals is the key to their development advancement. The Company’s horizontal structure and youth allows its 1,170 hours training professionals to define the pace and direction of development based on their capabilities and aspirations. During their time at to employees the Company, all professionals have the opportunity to move between different positions and take on new responsibilities. MERLIN also offers employees post-specific training to boost their development process. This consists of three tools: • Language training plan: available for all employees based at headquarters and aligned with the Company’s current needs. Employees may currently study English and Portuguese. • Guided training: arises from specific needs detected in work teams and tailored to specific professionals. • Shared knowledge: SAP internal training courses are regularly held, the Company’s own personnel teaching their colleagues. Training hours totalled 1,170 in 2017. All new joiners receive training in Occupational Risk Prevention as soon as they join the Company.

ı 89 ı Communication One of the main reasons for MERLIN’s desire to keep its current structure is related to the effectiveness of its communication 89% participation with the employees. in the satisfaction survey In 2017, MERLIN took steps to enhance and systematize this communication: 6.61 average score • All the employees were moved to a single building in Madrid and another in Barcelona, all on the same floor to received in the favour communication. satisfaction survey In each department, positions are distributed so that personnel from different organisational cultures (Testa, 68 employees attended Merlin, Metrovacesa) are intermingled, thus stimulating the first meeting held integration. following integration • The Company launched its first satisfaction survey (only at parent company), which was completed by 89% of the workforce, in order to identify the Company’s alignment with its professionals and gather insight into the labour climate following integration. • In March, an off-site was held to define the strategy, basic principles, ways of working and overall vision of the company, as well as to share knowledge of MERLIN’s asset portfolio. Sixty-eight employees took part, including executives, portfolio asset managers and department heads. This is to be an annual event. MERLIN also continues to work on improving its existing communication tools, such as the Welcome Guide for all new joiners and additional communication tools such as the employee intranet.

Flexible MERLIN provides employees with social benefits and alternative remuneration and compensation arrangements. In 2017, the contract terms of all employees were brought social benefits into line following the integration of Testa and Metrovacesa workforces. Currently all employees have access to all the 100% employees flexible remuneration arrangements available (meal vouchers, with access to social travel passes, nursery vouchers and training). benefits and full medical Medical insurance has also been improved and extended to all employees and their families, entirely at the Company’s expense. insurance

ı 90 ı Management Report on Consolidated Financial Statements

Employee involvement with the community

MERLIN knows that its professionals value In 2017, different programmes were being part of an organisation aware of the implemented to strengthen the involvement problems and needs of the communities with society by the Company and its where its activities are developed and employees. uses available tools and resources to help improve it.

Approval of The 2017 Annual General Meeting approved MERLIN’s Corporate Social Responsibility Plan as a framework through which the MERLIN’s Company undertakes to earmark a percentage of revenue Corporate Social (0.1% of GRI) for social projects and programmes. Responsibility plan In 2017, the Company donated over €185,000 to 12 foundations. In addition to corporate contributions, under the CSR Plan, 38 foundations MERLIN will match twice the contributions to social projects or benefited programmes made by employees, executives or directors. These contributions may be either financial or volunteer time; 10% employees involved MERLIN calculates the value of the hours devoted to social work and makes a donation of twice that amount. >€ 220k in donations The programme was welcomed by the employees in the first year. 10% of the employees were involved, raising over €17,000 in donations which the Company matched twice. Donations by employees under the CSR matching plan were made to 26 foundations.

Voluntary training Twenty MERLIN professionals, including the CEO, have voluntarily delievered training as part of the university degree from MERLIN “Intensificación en Planificación y Gestión Inmobiliaria” of the professionals Quantity Surveyor’s School in Universidad Politécnica de Madrid, donating the associated course fees to academic grants 135 training hours for the course’s best students.

ı 91 ı APPENDIX

ı 92 ı Management Report on Consolidated Financial Statements

EPRA METRICS

EPRA Earnings

(€ thousand) Consolidated net profit in accordance with IFRS 1,100,419 Adjustments to calculate EPRA earnings (860,043) (i) changes in value of investment properties (883,231) (ii) gain/(losses) on disposal of assets (236) (iii) absorption of revaluation on investment properties 9,839 (iv) non recurring taxes 10,572 (v) share in equity method investees (8,835) (vi) negative difference in business combination 1,775 (vii) changes in fair value of financial instruments and cancellation costs 11,123 (viii) impairment of fiscal credit - (ix) gain/(losses) on disposal of financial instruments (1,050) Minority interests in respect of previous adjustments (86) EPRA net earnings pre-specific adjustments 240,290 EPRA net earnings per share pre-specific adjustments (weighted) 0.51 EPRA net earnings per share pre-specific adjustments 0.51

Company specific adjustments: 48,790 (i) LTIP provision 43,839 (ii) non recurring general expenses 4,951 Minority interests in respect of previous adjustments 5 EPRA net earnings post-specific adjustments 289,085 EPRA net earnngs per share post-specific adjustments (weighted) 0.62 EPRA net earnngs per share post-specific adjustments 0.62

EPRA NAV

(€ thousand) Equity in balance sheet 5,717,658 Derivatives Mark-to-Market 34,178 Deferred Taxes Mark-to-market 448,291 Deferred tax assets (144,127) Deferred tax liabilities 592,418 Cost of debt (55,166) Revaluations not recorded in the financial statements 79,780 Adjustment in concessions 30,054 Adjustments in tangible assets 320 Adjustments in equity method 49,406 EPRA NAV 6,224,741 Shares 469,770,750 EPRA NAV / share 13.25

ı 93 ı EPRA Yields

Shopping High Street Land under (€ thousand) Offices Logistics Other TOTAL centers Retail development

Gross asset value 5,219,490 1,752,715 647,562 2,347,536 410,776 455,061 10,833,141 Exclude: Land for development - (455,061) (455,061) Non-core land (105,784) (105,784)

Commercial property portfolio GAV 5,219,490 1,752,715 647,562 2,347,536 304,992 - 10,272,295

Gross rents annualized 214,967 91,798 42,984 103,929 12,891 - 466,569 Exclude:

Propex not recharged to tenants (17,204) (13,464) (1,381) (1,807) (968) - (34,824)

"Topped-up" net rents annualized 197,762 78,333 41,603 102,039 11,923 - 431,744 Exclude: Incentives (8,271) (2,179) (1,999) (71.2) (200) - (13,032) Net rents annaulized 189,492 76,154 39,604 101,746 11,715 - 418,712 EPRA "topped-up" yield 3.79% 4.56% 6.42% 4.35% 3.91% 4.22% EPRA net initial yield 3.63% 4.43% 6.12% 4.33% 3.84% 4.09%

ı 94 ı Management Report on Consolidated Financial Statements

Shopping High Street Land under (€ thousand) Offices Logistics Other TOTAL centers Retail development

Gross asset value 5,219,490 1,752,715 647,562 2,347,536 410,776 455,061 10,833,141 Exclude: Land for development - (455,061) (455,061) Non-core land (105,784) (105,784)

Commercial property portfolio GAV 5,219,490 1,752,715 647,562 2,347,536 304,992 - 10,272,295

Gross rents annualized 214,967 91,798 42,984 103,929 12,891 - 466,569 Exclude:

Propex not recharged to tenants (17,204) (13,464) (1,381) (1,807) (968) - (34,824)

EPRA cost ratio

(€ thousand) 31/12/17

Propex not recharged to tenants (35,564) Incentives (16,754) Collection loss (1,851) Personnel expenses (71,619) General expenses recurring (9,767) General expenses non-recurring (4,951) LTIP provision 43,839 Exclude Investment property depreciation - Ground rent costs - Service charge recovered through rents but not invoiced separetely - Expenses related to 3rd party asset management services - EPRA Cost Ratio (inclding direct vacancy cost) (96,667) Gross rents 469,405 Less: service fee if part of gross rents - Add: income of joint ventures - Gross rental income 469,405 EPRA Cost Ratio (including non-recurring general expenses) 20.6% EPRA Cost Ratio (excluding non-recurring general expenses) 19.5%

ı 95 ı ALTERNATIVE MEASURES OF PERFORMANCE

In accordance with the recommendations EPRA Vacancy Rate issued by the European Securities and Estimated Market Rental Value (ERV) of Markets Authority (ESMA), the alternative vacant space divided by ERV of the whole measures of performance are described as portfolio. follows. FFO Glossary Recurring result of the Company calculated Average debt maturity (years) as EBITDA less debt interest expenses of the It represents the average debt duration of period. the Company until maturity. GAV Average Passing Rent Value of the commercial portfolio in It represents the rent for sqm/month to accordance with the latest external valuation which an asset or category of assets is available as of 31 December 2017 plus rented as of 31 December. advanced payments for turn-key projects and developments. EBITDA Earnings before net revaluations, Gross annualized rents amortizations, provisions, interest and taxes. Passing rent as of 31 December multiplied by 12. EPRA costs Recurring running costs of the Company Gross yield divided by recurring rents. It represents the gross yield of an asset or category of assets. It is calculated by EPRA Earnings (€ thousand) dividing the annualized gross rent between Recurring earnings from core operational the latest available GAV. activities. Recurring EBITDA EPRA NAV (€ thousand) EBITDA less non-recurring general expenses EPRA Net Asset Value (EPRA NAV) is of the Company. calculated based on the consolidated shareholders’ equity of the Group adjusted Recurring FFO to include properties and other investment FFO less non-recurring general expenses of interests at fair value and to exclude the Company. certain items not expected to crystallise in Release Spread a longterm investment property business Difference between the new rent signed model, as per EPRA’s recommendations. and the old prevailing rent on renewals EPRA NNNAV (€ thousand) (same space, same tenant) or relets (same EPRA NAV adjusted to include the fair value space, different tenant) during the period of of financial instruments, debt and deferred analysis taxes. Rents Like-for-Like EPRA Net Initial Yield Difference between the rents received in the Annualised rental income based on the cash period of analysis and the rents received on passing rents at the balance sheet date, the similar period one year before for the less nonrecoverable property operating same perimeter of assets expenses, divided by the market value of the WAULT property, increased with acquisition costs. Weighted average unexpired lease term, EPRA “topped-up” NIY calculated as the number of years of Adjustment to the EPRA Net Initial Yield in unexpired lease term, as from 31 December respect of the expiration of rentfree periods 2017, until the lease contract expiration, (or other unexpired lease incentives such as weighted by the gross rent of each discounted rent periods and step rents). individual lease contract.

ı 96 ı Management Report on Consolidated Financial Statements

LIST OF ASSETS

G.L.A Asset Location # sqm AG Torre Castellana 259 Madrid 21,390 1 Castellana 280 Madrid 16,918 2 Castellana 278 Madrid 14,468 3 Castellana 93 Madrid 11,650 4 Castellana 83 Madrid 15,254 5 Plaza Pablo Ruíz Picasso Madrid 31,576 6 Alcala 40 Madrid 9,315 7 Principe de Vergara 187 Madrid 10,732 8 Alfonso XI Madrid 9,945 9 Pedro de Valdivia 10 Madrid 6,721 10 Beatriz de Bobadilla 14 Madrid 16,979 11 Princesa 3 Madrid 17,810 12 Princesa 5 Madrid 5,788 13 Ventura Rodriguez 7 Madrid 10,071 14 Juan Esplandiu 11-13 Madrid 28,008 15 Eucalipto 33 Madrid 7,185 16 Eucalipto 25 Madrid 7,368 17 Santiago de Compostela 94 Madrid 13,130 18 Parking Princesa* Madrid - 19

Total Madrid Prime + CBD 254,308

Ulises 16-18 Madrid 9,576 20 Josefa Valcarcel 48 Madrid 19,893 21 Alvento Madrid 32,928 22 Cristalia Madrid 11,712 23 Trianon Madrid 18,400 24 Ribera del Loira 36-50 Madrid 39,150 25 Ribera del Loira 60 Madrid 54,960 26 Partenon 12-14 Madrid 19,609 27 Partenon 16-18 Madrid 18,343 28 Arturo Soria 128 Madrid 3,206 29

Total Madrid NBA A2 227,778

*Below ground surface has not been taken into account for G.L.A. purposes.

ı 97 ı G.L.A Asset Location # sqm AG

Torre Chamartin* Madrid 16,639 30 Arturo Soria 343 Madrid 6,615 31 Manoteras 18 Madrid 7,515 32 Fuente de la Mora Madrid 4,482 33 Aquamarina Madrid 10,856 34 Via Norte Madrid 37,224 35 María de Portugal 9-13 Madrid 17,191 36 Las Tablas Madrid 27,073 37 Avenida de Burgos 210 Madrid 6,176 38 Manuel Pombo Angulo 20 Madrid 3,623 39 Miniparc Alcobendas I Madrid 9,195 40 Miniparc Alcobendas II Madrid 3,347 40 Avenida de Bruselas 24 Madrid 9,164 41 Avenida de Bruselas 26 Madrid 8,895 42 Avenida de Bruselas 33 Madrid 33,718 43 Avenida de Europa 1A Madrid 12,605 44 Avenida de Europa 1B Madrid 12,606 44 Maria de Portugal T2 Madrid 17,139 45 Adequa 1 Madrid 27,399 46 Adequa 2 Madrid 5,013 46 Adequa 3 Madrid 15,937 46 Adequa 5 Madrid 13,790 46 Adequa 6 Madrid 13,789 46 Adequa 4* Madrid 14,926 46 Adequa 7* Madrid 26,744 46

Total Madrid NBA A1 361,661

Francisco Delgado 9A Madrid 5,496 47 Francisco Delgado 9B Madrid 5,400 47 Costa Brava 2-4 Madrid 16,000 48 Avenida de Aragon 334 Madrid 3,890 49 Atica 1 Madrid 7,080 50 Atica 2 Madrid 5,644 50 Atica 3 Madrid 5,746 50 Atica 4 Madrid 4,936 50 Atica 5 Madrid 9,526 50 Atica 6 Madrid 3,790 50 Atica XIX Madrid 15,411 51 Cerro Gamos 1 Madrid 35,498 52 El Plantío 6 G Madrid 1,780 53 El Plantío 8 F Madrid 1,723 53

*Project under development

ı 98 ı Management Report on Consolidated Financial Statements

G.L.A Asset Location # sqm AG

El Plantío 10 E Madrid 1,749 53 El Plantío 12 D Madrid 1,816 53 Copenhague 4-8 Madrid 5,972 54 Alvia Madrid 23,567 55 Euronova Madrid 32,665 56

Total Madrid Periphery 187,689

Diagonal 605 Catalonia 14,795 1 Diagonal 514 Catalonia 9,664 2 Diagonal 458 Catalonia 4,174 3 Balmes 236-238 Catalonia 6,187 4 Vilanova 12-14 Catalonia 16,494 5 Gran Vía Cortes Catalanas 385 Catalonia 5,190 6

Total Barcelona Prime + CBD 56,504

Citypark Cornella Catalonia 12,916 7 WTC6 Catalonia 14,461 8 WTC8 Catalonia 14,542 9 Av. Parc Logistic 10-12 (PLZFA) Catalonia 11,411 10 Av. Parc Logistic 10-12 (PLZFB) Catalonia 10,652 11

Total NBA WTC 63,982

Diagonal 211 (Torre Glòries)* Catalonia 37,614 12 Diagonal 199 Catalonia 5,934 13 Llull 283 (Poble Nou 22@) Catalonia 31,337 14

Total NBA 22@ 74,884

Muntadas I Catalonia 24,380 15 Muntadas II Catalonia 3,783 16 Sant Cugat I Catalonia 15,379 17 Sant Cugat II Catalonia 10,008 18

Total Periphery 56,778

Monumental Lisbon 16,892 1 Marques de Pombal 3 Lisbon 12,460 2

Total Lisbon Prime + CBD 29,352

*Project under development

ı 99 ı G.L.A Asset Location # sqm AG

Lisboa Expo Lisbon 6,740 3 Torre Lisboa Lisbon 13,715 4 Central Office Lisbon 10,310 5

Total Lisbon NBA 30,765

Lerida - Mangraners Catalonia 3,228 Zaragoza - Aznar Molina Zaragoza 4,488 Sevilla - Borbolla Andalusia 13,037 Granada - Escudo del Carmen Andalusia 2,041

TOTAL OFFICES 1,363,267

Marineda Galicia 100,207 1 Arturo Soria Madrid 5,974 2 Centro Oeste Madrid 10,876 3 Tres Aguas Madrid 67,009 4 Leroy Merlin Getafe Madrid 10,007 5 X-Madrid Madrid 47,424 6 Larios Andalusia 40,805 7 Porto Pi Mallorca 32,119 8 Artea Basque Country 24,323 9 Arenas Catalonia 31,918 10 Vilamarina Catalonia 32,224 11 La Fira Catalonia 29,013 12 El Saler Valencian C. 26,262 13 La Vital Valencian C. 20,868 14 Bonaire Valencian C. 17,559 15 Medianas Bonaire Valencian C. 4,584 16 Thader Murcia 48,646 17 Monumental SC Lisbon 5,495 18

TOTAL SHOPPING CENTERS 555,313

Madrid-Coslada Madrid 28,491 1 Madrid-Coslada Complex Madrid 36,234 2 Madrid-Getafe Madrid 16,242 3 Madrid-Getafe (Los Olivos) Madrid 11,488 4 Madrid-Meco I Madrid 35,285 5 Madrid-Pinto I Madrid 11,099 6 Madrid-Pinto II A Madrid 29,544 6 Madrid-Pinto II B Madrid 29,473 6

ı 100 ı Management Report on Consolidated Financial Statements

G.L.A Asset Location # sqm AG

Madrid-Getafe (Gavilanes) Madrid 39,576 7 Madrid-Meco II Madrid 59,891 8 Madrid-San Fernando I Madrid 11,165 9 Madrid-San Fernando II Madrid 34,224 10 Guadalajara-Alovera Castilla la Mancha 38,763 11 Guadalajara-Azuqueca I Castilla la Mancha 27,995 12 Guadalajara-Azuqueca II Castilla la Mancha 98,000 13 Guadalajara-Azuqueca III Castilla la Mancha 51,000 14 Guadalajara-Cabanillas I Castilla la Mancha 70,134 15 Guadalajara-Cabanillas Park I A Castilla la Mancha 38,054 16 Guadalajara-Cabanillas Park I B Castilla la Mancha 17,917 16 Guadalajara-Cabanillas Park I C Castilla la Mancha 48,952 16 Guadalajara-Cabanillas Park I D Castilla la Mancha 47,892 16 Guadalajara-Cabanillas Park I E Castilla la Mancha 49,793 16 Guadalajara-Cabanillas Park I F Castilla la Mancha 15,000 16 Guadalajara-Cabanillas Park II Castilla la Mancha 210,678 17 Barcelona-ZAL Port Catalonia 527,954 18 Barcelona-Granada Penedes Catalonia 16,758 19 Barcelona-Lliça del Vall Catalonia 14,911 20 Barcelona-Sant Esteve Catalonia 16,811 21 Barcelona- Castellbisbal Catalonia 21,508 22 Barcelona-PLZF Catalonia 132,554 23 Zaragoza-Pedrola Zaragoza 21,579 24 Zaragoza-Plaza Zaragoza 20,764 25 Zaragoza Plaza - logistics Zaragoza 11,262 26 Valencia-Almussafes Valencian C. 26,613 27 Vitoria-Jundiz Basque Country 72,717 28 Sevilla Zal Andalusia 108,728 29 Sevilla ZAL WIP Andalusia 5,400 30 SPL Lisbon - 31

TOTAL LOGISTICS 2,054,448

Tree 365,916 Caprabo Catalonia 64,252 Plaza de los Cubos Madrid 13,479 Callao 5 Madrid 11,629 Torre Madrid locales Madrid 4,393 Locales Plaza Castilla Madrid 311

TOTAL HIGH STREET RETAIL 459,980

ı 101 ı G.L.A Asset Location sqm AG

Eurostars Torre Castellana 259 Madrid 31,800 General Ampudia 12* Madrid - Yunque Madrid 1,780 San Francisco de Sales Madrid 171 Amper Madrid 22,510 Torre Madrid residencial Madrid 120 Novotel Diagonal 199 Catalonia 15,332 Jovellanos 91 Catalonia 4,519 Rambla Salvador Sama 45-47-49 Catalonia 1,140 Sant Boi de Llucanes Catalonia 8,422 CIM Valles Catalonia 25,724 Hotel Marineda Galicia 5,898 Parking Palau* Valencian C. - Bizcargi 1 1D Basque Country 46 Arapiles 8 Madrid 1,700 Valdebebas - office land Madrid 25,955 Zaragoza - residencial land Zaragoza 47,971 Navalcarnero Madrid 288,389

TOTAL OTHER 481,476

*Belons ground surface has not been taken into account for G.L.A. purposes

ı 102 ı Management Report on Consolidated Financial Statements

ı 103 ı ASSET LOCATION MAPS

Offices Madrid

ı 104 ı Management Report on Consolidated Financial Statements

Offices Barcelona

ı 105 ı PROPERTIES

Offices Lisbon

Roma

Arcciro

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LISBON

ı 106 ı Management Report on Consolidated Financial Statements

Logistics Madrid

ı 107 ı PROPERTIES

Logistics Barcelona

Solsona 90kms Vie

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Blanes

Calella ' ' !30 kms ' Monrcada L. Bndalonu ii\Oi•SIIij•Jtij

V11dnova 1 la Gell rU

ı 108 ı Management Report on Consolidated Financial Statements

Shopping centers

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ı 109 ı 2017

PROPERTIES

Paseo de la Castellana, 257 28046 Madrid +34 91 769 19 00 [email protected] www.merlinproperties.com