AR 16 ANNUAL REPORT 2016

ANNUAL AR16 REPORT 2016 MERLIN PROPERTIES IS THE LEADING SOCIMI IN THE SPANISH MARKET Letter from the Chairman 6 Letter from the CEO 8

01. Organization and structure 12 02. Key aspects 20 03. Business performance 26 04. Acquisitions, refurbishments and developments 34 05. Portfolio valuation 38 06. Financial statements 42 07. EPRA metrics 52 08. Events post-closing 56 09. Stock exchange evolution 58 10. Dividend policy 62 11. Main risks and uncertainties 64 12. Treasury shares 66 13. Corporate responsibility 68 14. Staff 78

APPENDIX

EPRA metrics calculation 81 Alternative measures of performance 84 List of assets 86 Asset location maps 92 LETTER FROM THE CHAIRMAN

Dear shareholders,

2016 was the most intense year in the short life of MERLIN Properties and marks a turning point with regard to its future. Following the acquisition of Testa in 2015, MERLIN became a benchmark company in in the fledgling sector of real estate investment trusts (REITs) and became a leader in the offices and logistics markets. 2016 was no less significant and brought the integration of Metrovacesa’s commercial assets and the contribution of the rental portfolio to Testa Residencial, which makes our company a leader in all markets in which it operates. Mr. Javier García-Carranza Non-Executive Chairman The integration of Metrovacesa contributed significant value to MERLIN. First of all, we are now able to compete on the same level as the top-10 large European REITs in the sector, with all the advantages this entails for our shareholders regarding visibility, share liquidity and the ability to influence investors, tenants and authorities. Secondly, we were able to significantly consolidate our leadership position in offices in the Spanish market. MERLIN now has the most of square metres of office space in and in of any listed company, and has almost doubled its presence in the central “We are now able to business districts (CBD) of both cities. compete on the same Third, a very significant step up in scale took place with regard to shopping level as the top-10 large centres, where we now manage 18 European REITs in the centres and are the second largest company in Spain. Lastly, but no less sector” important, we created the national leader in the growing sector of rental property, following the contribution of Metrovacesa’s portfolio to Testa Residencial. Testa Residencial now operates 8,000 rental properties in a

ı 6 ı Annual Report 2016

market with a very promising outlook and MERLIN now has an asset portfolio of where being the benchmark represents a almost EUR 10 billion, which generates an significant competitive advantage given the annual gross rental income of more than tremendous fragmentation of the sector. EUR 450 million. Now we plan to look after and make the improvements to these assets 2016 was also a very intense year on two that they deserve, after two and a half years fronts: asset turnover and optimisation of of building a high-quality portfolio of assets the company’s balance sheet structure. accumulated in very favourable market Over EUR 750 million were obtained from conditions. To do this, we have the best disposals and, more importantly, these professional team and a Board of Directors disposals gave rise to a significant gain over that firmly supports their work and that the last appraisal, which shows the quality is committed to the company’s long-term and liquidity of our assets. The exclusion success. of Testa Residencial from the scope of consolidation and the sale of non-strategic Everything that MERLIN Properties assets enabled us to refine our portfolio has achieved has been thanks to its and fulfil the strategy determined since the shareholders. As the Chairman of this company’s admission to listing in 2014: to be company’s Board of Directors, I would like a benchmark in offices, retail and logistics, to express my gratitude for the support you and not to be in other non-strategic asset have shown. categories, such as hotels or residential rental properties.

No less important was the excellent work carried out to optimise the company’s balance sheet.

MERLIN now has the best rating granted to a Spanish real estate company: BBB by S&P and Baa2 by Moody’s.

In 2016, and as the company’s debut in the debt markets, we carried out three bond issues for a total of EUR 2.35 billion. Our LTV has dropped from 49.8% to 45.5%, average maturity for debt has been extended from 3.8 years to 6.2 years, non-mortgage-backed debt has rose from 16.1% to 75.6% of total debt, and debt with fixed or hedged interest rates is 89.3%, compared to 43.3% of the previous year.

ı 7 ı LETTER FROM THE CEO

Dear shareholders,

Around this time last year we explained that the company had consolidated a model for sustained return and maximum efficiency. The results for 2016 demonstrate what we told you one year ago: we have generated annual shareholder return of 17.2%, as a result of the growth in the net asset value per share plus dividends. EUR 0.40 per share will be distributed against 2016 period, amounting to a total of EUR 160 million, which is more than double that distributed against 2015 period. Return. Sustained and sustainable. Return is sustained given that we just announced to the market the company’s intent to Mr. Ismael Clemente CEO increase remuneration to EUR 0.44 per share with a charge to 2017 profit, a 10% increase. And this return is sustainable because it is based on a solid balance sheet that shows even better ratios today than those of one year ago, after having reduced the LTV to a fairly prudent level of 45.5%.

We also talked about maximum efficiency. We manage the company by attempting to incur the least overhead costs possible for the benefit of our shareholders. This has been and will continue to be, as I will mention “The results for 2016 further on, one of our management team’s primary objectives. As this has demonstrate what we been an essential objective since the told you one year ago: we company’s incorporation, we created a cost structure based on a mathematical have generated annual formula: maximum overhead costs shareholder return of 17.2%, incurred per year is the higher of 0.6% of the net asset value (NAV) or 6% of as a result of the growth rental income. In other words, this is what in the net asset value per it costs our shareholders for MERLIN to operate. Nothing more, nothing less. share plus dividends” It is that clear and simple. No other company in the world operates this way. At other companies you only find out how much their operations cost

ı 8 ı Annual Report 2016

at the end of the year, with the possibility Peninsula that no one else has: almost 1.7 of surprises. This is not how it works at million square metres at the best locations MERLIN. You know from day one. But the for our tenants. most important is not that this mechanism is new, predictable or unerring, but rather The Metrovacesa transaction also what is actually important is that when this represented the entry of Santander, BBVA ratio is calculated for other companies in the and Popular in the company’s share capital sector in Spain and in Europe, it always ends as reference shareholders. This has created up being higher. We are more efficient than enormous synergies and we are very other companies, both in Spain and abroad. grateful for their support of MERLIN, their What is our secret? At MERLIN we operate long-term vision and the support they have with a highly efficient workforce, employees always shown to our team. work hard and are extremely productive, and we have a motivated and driven team This has also been an excellent year in terms that gives their all to the company like no of asset turnover. MERLIN has continued to one else. We will take an in-depth look at grow and has entered other phases of its this later on. business plan: after years of strong growth, in 2016 we began to rotate assets that were With regard to the operating business, it no longer strategic for us. And for being is also time to take stock. This past year just the beginning, the results could not was obviously marked by the integration have been better: over EUR 760 million in of Metrovacesa, the commercial assets in divestments. What we are most pleased MERLIN and the rental portfolio in Testa with is having obtained average capital Residencial. We are very proud of what the gains greater than 7% with regard to the integration of Metrovacesa represents for last appraisal, thus creating value for our our shareholders. The transaction created shareholders and proving the liquidity of value from the very beginning and, even our portfolio with a potentially significant more importantly, it has great potential to revaluation. continue creating value in the future through dedicated and specialised management As part of this asset turnover, the integration of the asset portfolio. Metrovacesa has of Metrovacesa enabled us to exclude Testa only strengthened the unique position Residencial from the scope of consolidation, that we already had in the office market, which was one of the company’s objectives where we are now leaders, both in terms of for this year, as it is a non-strategic asset surface area and rental income in Madrid that consumed significant management and Barcelona. The leap was even more resources and time. MERLIN now has a significant with regard to shopping centres. 16% ownership interest in this specialised In an asset category where size represents subsidiary. Testa Residencial may bring us a significant advantage when negotiating significant positive results in the future: it with tenants, today MERLIN is the second operates in a market that is clearly growing, largest operator in Spain. The growth in with social dynamics that are driving rent logistics has been long-standing and was penetration and in a sector that is highly mainly organic as a result of the programme fragmented, where there is no benchmark. launched two years ago to acquire land and With almost 8,000 housing units, it is now turnkey projects. Here we are also leaders in the largest residential rental company in a fast-growing sector, favoured by growth in Spain and has an internal management team industry and the country’s export capacity of more than 50 people with considerable and by the increasingly greater penetration experience. We believe it will become the of online sales in consumer habits in benchmark in its market. Spain. Along with the existing stock, the programme of work in progress and the participation in the ZAL Port of Barcelona, we have a footprint in the Iberian

ı 9 ı All of these milestones generated, for an approximate total of EUR 4.4 billion in the cost of capital contributed have been possible thanks at various times by shareholders. Put more to the work of an excellent simply, if we compare the value upon admission to listing with the current share professional team. price, adjusted by capital increase rights (something we are still struggling to make And now I want to focus a bit on this the media understand, even theoretically aspect. MERLIN has a team of excellent specialised agencies), the share price has professionals, who are also recognised as risen by 35%. And the creation of total value such by the entire market. This is a team for shareholders through the securities that works hard, significantly above average, market, if we include dividends, exceeds above any average. It is simply a case of 42%, having significantly outperformed all mathematics: productivity per employee at benchmark indices (EPRA Europe, IBEX 35 MERLIN is 3 times greater than the sector and Eurostoxx 600). average in Spain and 3.4 times greater than the European average. If we take the I would like to conclude by talking about the gross value of the assets managed by the future. In the past we have taken advantage company divided by the workforce, at of a market that presented opportunities MERLIN that comes to EUR 73.5 million per for purchasing assets at excellent prices. In person, compared to an average of 25 in the current environment, it is difficult to find Spain and 22 in Europe. opportunities to make purchases at these prices. We therefore have employees that have extraordinary performance and thus deserve remuneration in accordance with We therefore believe that this performance. Our company does MERLIN is entering a new not have company planes or cars, private dining halls or stadium boxes and we do phase: the creation of future not fly first class. We keep unnecessary value will come from the expenses to a minimum. However, we pay our employees very well when they deserve assets we already have on it. Three figures: the average fixed salary of our workforce, not including the two the balance sheet, from executive directors, is EUR 55,300. Variable which there is still significant remuneration, which is linked to productivity and efficiency, not incurring unnecessary value to be derived. expenses or overloading the flowchart, or contracting advisors at our shareholders’ We have designed an ambitious plan of expense, amounted to EUR 58,500 renovations for our asset portfolio over the next five years, which we expect will per employee. In other words, variable improve the rental income of the properties remuneration represents more than half of involved, and we have the challenge of all compensation and, which is even more increasing occupancy of the assets obtained notable, all employees, from the first to the from Metrovacesa. In addition, the logistics last, receive a bonus tied to the company’s development programme is still in progress. performance and, therefore, the creation of In general, we will make less asset purchases value. and be more selective, but in exchange will invest more in our current assets to develop MERLIN has created significant value for their full potential. To do this we have a high-quality asset portfolio, an excellent, its shareholders since its admission to committed and motivated team, and a core listing. Measured in terms of NAV per share, group of shareholders that support and back between the growth in value of its assets us. and the dividends paid over the last two and a half years, over EUR 1.1 billion were

ı 10 ı Annual Report 2016

AT A GLANCE

In 2016 MERLIN Properties has generated a strong increase in the NAV and the net profit and has strengthened its financial structure. NAV per share The revaluation of the asset portfolio as well as the increase in the cash flow of the period are the main reasons of the strong increase in the NAV per share +14.0% 11.23 NAV per share increase 10.49

+ €465.6m 9.85 Assets revaluation 31/12/14 31/12/15 31/12/16 Earnings per share € 0.64 1.59 FFO per share 0.64 0.60 +620% 0.39 Earnings per share increase 0.25 0.22 31/12/14 31/12/15 31/12/16 FFO per share EPS Financial debt Intense year in the management of liabilities of the balance sheet, with issuances of debt for an amount of € 2,350 million, which have allowed to improve all the financial debt ratios 3.1% 49.8% 45.5% 45.5% 38.4% Loan to Value 2.2% 2.3% 2.26% Average cost of debt

31/12/14 31/12/15 31/12/16 6.2 years Loan to value Average cost of debt Average maturity period Shareholder return Total Shareholder Return, measured as dividends plus increase of the NAV during the period (less capital increases) has shown an important growth in the period 17.2% 0.40 Shareholder return rate 0.19 € 0.40 per share Dividends of the period 0.00 31/12/14 31/12/15 31/12/16

Dividends per share

ı 11 ı |01| ORGANIZATION AND ESTRUCTURE

ı 12 ı Annual Report 2016

ORGANIZATION AND ESTRUCTURE

1. 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% 20-25% 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

Attractive dividend One of the most yield cost efficient REIT’s

Logistics High Street Retail 10-15% 20-25% National footprint High triple net cash flow “One-stop shop” solution for 3PL Inflation multiplier

ı 13 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 brand • Big footprint to annual uplift tenant match the rapid • Optimization of development of 3PL retail space in office activity buildings

En stock

138 ASSETS 17 ASSETS 34 ASSETS 931 ASSETS 1.246 K SQM 455 K SQM 755 K SQM 461 K SQM €4.541 M GAV €1.613 M GAV €472 M GAV €2.205 M GAV €212M GRI €92 M GRI €33 M GRI €103 M GRIV (1)

Proyectos 12 ASSETS 477 K SQM €110 M GAV Fully Consolidation €21 M GRI(3)

(2) Tres Aguas 50% Zal Port 32% 1 ASSET 42 ASSETS 63 K SQM 381 K SQM €10 M GRI €24 M 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 gross rent (4) Gross annual rent as of 31/12/16, deductivy ground lease expenses

ı 14 ı Annual Report 2016

3. 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 fourteen 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 Mr. Ismael Clemente Mrs. Francisca Ortega CEO & Executive Vice-Chairman Propietary Director

Mr. Miguel Ollero Mr. José Ferrís Executive Director Propietary Director

Mrs. María Luisa Jordá Independent Director Mrs. Pilar Cavero Chairman A&C Committee Independent Director

Mrs. Ana García Fau Mr. Juan María Aguirre Independent Director Independent Director

Mr. Alfredo Fernández Mrs. Ana de Pro Independent Director Independent Director

Mr. Fernando Ortiz Mr. John Gómez Hall Independent Director Independent Director Mr. Donald Johnston Independent Director Chairman A&R Committee

Appointments and Remuneration Committee Audit and Control Committee Mrs. Mónica Martín de Vidales Independent Directors Secretary

Mr. Ildefonso Polo del Mármol Vice-Secretary

ı 15 ı BOARD OF DIRECTORS

1 7 8 13 5 12 10 14 9 11

4 15 2 3 6

ı 16 ı Annual Report 2016

1. Non-Executive Chairman 8. Independent Director Mr. Javier García Carranza Mr. Juan María Aguirre 2. CEO & Executive Vice-Chairman 9. Independent Director Mr. Ismael Clemente Mrs. Ana de Pro 3. Executive Director 10. Propietary Director Mr. Miguel Ollero Mrs. Francisca Ortega 4. Independent Director 11. Independent Director Chairman A&C Committee Mrs. Ana García Fau Mrs. María Luisa Jordá 1 2. Independent Director 5. Independent Director Mr. Fernando Ortiz Chairman A&R Committee 13. Vice-Secretary Mr. Donald Johnston Mr. Ildefonso Polo 6. Independent Director 14. Secretary Mr. John Gómez Hall Mrs. Mónica Martín de Vidales 7. Independent Director 15. CIO Mr. Alfredo Fernández Mr. David Brush

ı 17 ı MANAGEMENT TEAM

Ismael Clemente

Luis Lázaro

Inés Arellano

Javier Zarrabeitia

Francisco Rivas

Enrique Gracia

ı 18 ı Annual Report 2016

Miguel Ollero

Fernando Lacadena Miguel Oñate David Brush Fernando Ramírez Manuel García Casas

MERLIN Properties’ management team for many years, which works on the basis consists of 12 members, led by the of focused and defined objectives, in full Executive Director, Ismael Clemente. alignment with shareholders’ interests. The team is renowned for its operating This alignment and commitment is efficiency and proven track record in reflected in the fact that their aggregate generating value. It is a cohesive team, investment in the Company’s share whose members have worked together capital amounts to 0.5%

ı 19 ı |02| KEY ASPECTS

ı 20 ı Annual Report 2016

KEY ASPECTS

1. Capital structure Arrendamiento, S.A. (in the case of the Non- Strategic Assets and Liabilities). The public During 2016 there has been a capital deed was formalized on 20 October and increase of MERLIN Properties, executed was registered in the Madrid Commercial on 28 October, for an amount of € Registry on 26 October. The prospectus was 1,672,845 thousand through the issuance of approved by the National Securities Market 146,740,750 ordinary shares with a nominal Commission on 27 October. value of 1 euro each and a share premium of 10.40 euros, executed in the context of During 2016, apart from Metrovacesa, the total spin-off of Metrovacesa, S.A. in MERLIN Properties has acquired 27 assets, favor of MERLIN; Testa Residencial, SOCIMI, which have supposed a disbursement of S.A.U.; and Metrovacesa Promoción y € 794,351 thousand (including transaction Arrendamiento S.A. costs).

2.2. Divestments 2. Investment activity and divestments In the context of the non-core asset rotation strategy, 2016 has been an excellent year 2.1. Investments for MERLIN, having achieved the following milestones: As of 21 June, MERLIN, Testa Inmuebles en Renta, SOCIMI, S.A. (“Testa”) and Testa • Deconsolidation of the rented residential Residencial, S.L.U. (“Testa Residencial”) activity. In the context of the Integration subscribed an integration agreement with Agreement of Metrovacesa, Metrovacesa Metrovacesa, S.A. (“Metrovacesa”) and its split in favor of Testa Residencial the totality main shareholders, , S.A. of its residential business unit, including (“BS”), Banco Bilbao Vizcaya Argentaria, all the assets and liabilities of Metrovacesa S.A. (“BBVA”), and Banco Popular Español, associated to the rented residential S.A. (“BP”) with the object of creating the portfolio. The valuation attributed to largest Spanish REIT of commercial and the equity of the residential portfolio of rented residential assets (the “Integration Metrovacesa amounted to € 441 million, Agreement”). The Integration Agreement while the valuation attributed to the also contemplated the total spin-off of equity of the residential portfolio of Testa Metrovacesa in favor of MERLIN, Testa Residencial amounted to € 230 million, Residencial and Metrovacesa Promoción which represents in this case a gross asset y Arrendamiento S.A., through the value of € 341 million. Consequently, once extinguishment of Metrovacesa and the executed the spin-off, the shareholders division of all its assets and liabilities into of Metrovacesa acquired the 65.76% of three parts (referred to in the Spin-off Plan the share capital of Testa Residencial, as the Commercial Assets and Liabilities, owning MERLIN the remaining 34.24%. the Residential Assets and Liabilities and Premium versus the latest GAV before the the Non-Strategic Assets and Liabilities), announcement of the transaction is 18.4%. each of which is transferred en bloc and by way of universal succession to MERLIN • Sale of the hotel activity. On 30 December (in the case of the Commercial Assets and 2016, MERLIN reached an agreement for the Liabilities), to Testa Residencial, SOCIMI, S.A. sale of a portfolio of 19 hotels to Foncière (in the case of the Residential Assets and des Regions, through its subsidiary Foncière Liabilities) and to Metrovacesa Promoción y des Murs, for an amount of € 535 million.

ı 21 ı • Other assets. During 2016 other assets have been sold for an aggregated amount of € 226 million. Including the office building Alcalá 45, 17 branches leased to BBVA and the assets located in (Grande Armée in Paris and Centre del Mon in Perpignan).

A summary table with sales and deconsolidations executed during 2016 as well as the premium reached versus latest valuation available before the announcement of the transaction is shown below:

Premium versus the gross asset value before (€ million) Price / Value the announcement of the transaction

Testa Residencial 341 18.4% Hotels + other assets 761 7.1%

Total 1,102 10.3%

3. Commercial portfolio 4. Results

After the integration of the Commercial In 2016, the Company recorded revenues of Portfolio of Metrovacesa as well as the € 362,797 thousand, recurring EBITDA of acquisitions and divestments executed € 303,587 thousand, EBITDA of € 260,352 during the period, MERLIN Properties owns a thousand, a recurring FFO of € 232,673 commercial real estate portfolio comprising thousand and a net consolidated result of 1,157 fully owned assets with a stock gross € 582,645 thousand. These results include lettable area (“stock G.L.A.”) of 3,038,341 the integration of the results arising from sqm and 16 assets under development, assets of the Commercial Portfolio of with a development gross lettable area Metrovacesa split in favor of MERLIN from 15 (“development G.L.A.”) of 550,329 sqm. In September until 31 December. addition, MERLIN holds 8 minority stakes, comprising 53 assets and a G.L.A in stock of 372,679 sqm. The portfolio gross asset value (“GAV” or “Gross Asset Value”), in accordance with Savills and CBRE valuation as of 31 December 2016, amounts to € 9,823,619 thousand. The net asset value, following EPRA recommendations (“EPRA Net Asset Value”), amounts to € 5,274,730 thousand (€ 11.23 per share). Adjusted EPRA NAV, once deducted the goodwill arising as a result of Testa acquisition, outstanding as of 31 December 2016, (€ 9,839 thousand), amounts to € 5,264,891 thousand (€ 11.21 per share).

ı 22 ı Annual Report 2016

Principal Financial Capital structure key data (€ thousand) Standard Life 3% Group 3% Blackrock 3% Invesco 1% Invesco Number of ordinary 469,770,750 Principal Financial Group shares BBVA 6% Number of weighted 365,929,618 Standard Life shares Total equity 4,840,769 Blackrock Banco Santander 22% GAV 9,823,619 BBVA

Net Debt 4,471,125 Banco Santander Free Float 62% Net Debt / GAV 45.5% Free Float

Data as of 26 February 2017, according to the communications made to the CNMV

Key aspects of the commercial portfolio

(€ thousand) 31/12/16 31/12/15

GAV of the commercial portfolio (1) (2) 9,113,941 5,731,443 GAV of the portfolio under development (1) (2) 243,499 50,524 GAV non-core land (2) 131,957 132,635 GAV equity method stakes (2) 334,222 138,064 Total GAV 9,823,619 6,052,665

Gross annualized rents 2016 (3) 451,348 301,667 Topped-up annualized rents 2016 (3) 420,423 287,184 Net annualized rent 2016 (3) 411,253 284,329 Gross yield (4) 5,0% 5,3% EPRA topped-up yield (4) 4,6% 5,0% EPRA net initial yield (4) 4,5% 5,0%

Stock G.L.A. (sqm) 3,038,341 1,865,487 Occupancy rate 91.3% 94.6% WAULT by rents (years) (5) 7.2 9.4 Development G.L.A. (sqm) 550,329 223,024

EPRA net asset value 5,274,730 3,181,245 ("EPRA NAV") EPRA NAV per share 11.23 9.85 Adjusted EPRA NAV 5,264,891 2,981,546 (ex-goodwill)

Adjusted EPRA NAV per share 11.21 9.23

(1) Commercial portfolio: assets in profitability. Portfolio under development: includes advanced payments for turnkey projects and lands under development (2) In accordance with Savills and CBRE appraisals as of 31 December 2016 (3) Gross / topped-up / net annualized rents have been calculated as passing rent as of 31 December 2016 multiplied by 12 (4) Calculated as gross / topped-up / net annualized rents divided and GAV of the commercial portfolio (5) Weighted unexpired lease term, calculated as the number of years of unexpired lease term, as from 31 December 2016 until the first break option of the lease contracts, weighted by the gross rent of each individual lease contract

ı 23 ı GAV per asset class(1) Gross annualized rents per asset class

5.9% 2.7%

7.6% 47.6% Hoteles 7.3% 46.9% Hoteles Residencial en alquiler Residencial en alquiler

Logístico Otros 16.4% 20.3% Otros Logístico

Centros comerciales Centros comerciales High Street Retail High Street Retail 22.4% 22.9% O cinas O cinas

Offices High Street Retail Shopping centers Logistics Other

Gross yield per asset class

7.0%

5.7% 5.0% 4.7% 4.7% Average 4.3% MERLIN

Offices Shopping Logistics High Street Other centers Retail

Occupancy and wault (years) per asset class

100% 95.4% 91.3% Average 76.5% 87.9% 88.6% MERLIN 20.3

7.2 Average MERLIN 3.5 4.0 2.3 2.9

Offices Shopping Logistics High Street Other centers Retail

(1) GAV of land under development included in its respective category (offices and logistics)

ı 24 ı Annual Report 2016

Key consolidated financial and economic indicators (IFRS)

(€ thousand) 31/12/16 31/12/15 Variation

Gross rents 351,023 214,454 63.7%

Property expenses not recharged to (19,744) (10,236) tenants

Net rents before incentives 331,279 204,218 62.2%

Incentives, straight-lines and (7,811) (2,699) collection loss

Net rents after incentives 323,468 201,519 60.5%

Other income 11,774 4,690

Personnel expenses (38,774) (15,710)

Recurring general expenses (8,506) (3,808)

Non-recurring general expenses (27,610) Per share (1) (25,439) Per share (1)

EBITDA 260,352 0.71 161,252 0.73 61.5%

Net interest expense (70,914) (53,594)

FFO 189,438 0.52 107,658 0.49 76%

EPRA earnings 179,550 0.49 99,335 0.45 80.8%

Profit (loss) for the period 582,645 1.59 49,078 0.22 1,087.2% attributable

Plus non-recurring general expenses 43,235 (2) 25,439

Recurring EBITDA 303,587 0.83 186,691 0.84 62.6%

Recurring FFO 232,673 0.64 133,097 0.60 74.8%

(1) Weighted shares: 221.8 million in 2015 and 365.9 million in 2016 (2) Includes € 15,625 thousand from MSP

ı 25 ı |03| BUSINESS PERFORMANCE

ı 26 ı Annual Report 2016

RENTS

Gross rents of 2016 amounted to € 351,023 thousand with respect to € 214,454 thousand in 2015.

2016 2015 Var (%)

Offices 138,418 63,326 119%

Shopping centers 52,566 29,334 79%

Logístics 23,265 12,703 83%

High Street Retail 99,864 91,091 10%

Hotels 26,947 11,432 136%

Other 9,963 6,568 52%

Total 351,023 214,454 64%

Average passing gross rents per category are shown below:

Average passing rent (€/sqm/month)

19.3 18.6 16.1

3.9

Offices Shopping Logistics High Street centers Retail

ı 27 ı OCCUPANCY

Stock G.L.A. of MERLIN as of 31 December during the period of 1,135,689 sqm, of which 2016 amounts to 3,001,176 sqm excluding 953,391 sqm arise from the integration of Opción shopping center. Stock as of 31 the Commercial Portfolio of Metrovacesa. December 2015 amounted to 1,865,487 Occupancy rate as of 31 December 2016 of the sqm, resulting in a net increase of the stock assets fully consolidated is 91.3%.

31/12/2016 31/12/2015

Offices

Total G.L.A. (sqm) 1,246,465 554,362

G.L.A. occupied (sqm) 1,096,139 498,728

Occupancy rate (%) 87.9% 90.0%

Shopping centers (1)

Total G.L.A. (sqm) 418,011 172,032

G.L.A. occupied (sqm) 370,329 160,740

Occupancy rate (%) 88.6% 93.4%

Logistics

Total G.L.A. (sqm) 755,071 454,784

G.L.A. occupied (sqm) 720,002 425,178

Occupancy rate (%) 95.4% 93.5%

High Street Retail

Total G.L.A. (sqm) 460,524 437,409

G.L.A. occupied (sqm) 460,524 437,409

Occupancy rate (%) 100.0% 100.0%

Others

Total G.L.A. (sqm) 121,104 122,881

G.L.A. occupied (sqm) 92,646 122,881

Occupancy rate (%) 76.5% 100.0%

MERLIN

Total G.L.A. (sqm) (1) 3,001,176 1,741,468

G.L.A. occupied (sqm) 2,739,641 1,644,936

Occupancy rate (%) 91.3% 94.5%

(1) Excluding Opción SC

ı 28 ı Annual Report 2016

Occupancy evolution on a like-for-like basis, adjusted to exclude changes in the stock G.L.A., is as follows:

100%100%

96.3% 94.9% 94.0% 93.5% 92.9% 91.9%

90.0% 90.3%

Offices Shopping Logistics High Street MERLIN centers Retail

2015 2016

ı 29 ı TENANTS

MERLIN enjoys a high-quality tenant base, an additional 20% from BBVA) while top broadly diversified. Top 10 tenants represent 20 tenants represent a 26.4% of gross a 19.3% of the gross annualized rents (plus annualized rents (plus a 20% from BBVA).

To p - 2 0 % 19.3 t GRI e n

a

n

t

s

26.4% GRI

20% GRI

ı 30 ı Annual Report 2016

Tenant Years as tenant

BBVA 8

Endesa 13.5 LEASING ACTIVITY Inditex 26

Técnicas Reunidas 11 Since the beginning of 2016, or since the acquisition date for the assets acquired during Renault 11 the year (Metrovacesa is included since 15 September), until 31 December 2016, MERLIN Hotusa 15.5 has signed lease agreements in assets managed before the integration with Metrovacesa Comunidad 15 amounting to 651,445 sqm, out of which 259,315 de Madrid sqm corresponds to new leases and 392,130 sqm PWC 6.5 to renewals.

Caprabo 24.5 The total of contracts expired in 2016 amounts to 488,219 sqm, of which 392,130 have been Indra 14.5 renovated or released, therefore the retention ratio in 2016 amounts to 80.3%. L’Oréal 8.5 The breakdown per asset category is as follows: Uria Menéndez 11.5

200,000 182,819

150,000 136,922 136,922

99,821 100,000 74,253 50,667 50,000 35,237 29,606 21,190 20,931 12,794 15,008 0 (946) (551) (21,877) (16,812) (21,741) (50,000) (35,659)

Offices Shopping centers Logistics Logistics Equity method (WIP)

Renewals Out In Net

ı 31 ı Offices

Total take-up amounts to 124,920 sqm out of which 50,667 sqm correspond to new contracts and 74,253 sqm to renewals. Exits amounted to 35,659 sqm, and therefore the net take up is positive by 15,008 sqm. Main contracts signed are the following:

Asset Tenant G.L.A. (sqm)

Príncipe de Vergara Uría 10,732

Avenida de Bruselas 24 Procter&Gamble 7,267

Aquamarina SAS 4,667

Juan Esplandiú 11-13 Cellnex 3,015

PE Las Tablas Técnicas Reunidas 7,024

PE Puerta de las Naciones Ferrovial 10,619

Shopping centers

Total take-up amounts to 56,168 sqm out of which 20,931 sqm correspond to new contracts and 35,237 sqm renewals. Exits amounted to 21,877 sqm, and therefore the net take-up is negative by 946 sqm. Main new contracts signed are the following:

Asset Tenant G.L.A. (sqm)

Marineda Leroy Merlin 11,984

Larios Zara 2,026

Larios Primark 5,389

Porto Pi Sprinter 911

La Vital Casa 554

Vilamarina Bershka 560

ı 32 ı Annual Report 2016

Logistics

Total take-up amounts to 349,347 sqm out of which 166,528 sqm correspond to new contracts and 182,819 sqm to renewals. Exits amounted 16,812 sqm, therefore net take-up amounts to 149,716 sqm. Main new contracts signed are the following:

Asset Tenant G.L.A. (sqm)

Guadalajara-Cabanillas II C Luis Simoes 48,468

Guadalajara-Alovera Logiters 38,763

Madrid-Coslada Dachser 28,490

Guadalajara-Cabanillas I Logista 70,134

The chart of lease contracts maturity shows a balanced profile. In aggregated terms, in the following three years will expire a 17% (2017), 11% (2018) and 13% (2019) of the gross rent take-up.

2017 61% 30% 7% 17% 4% 1%

2018 40% 31% 13% 4% 13% 11%

2019 64% 20% 9% 5% 13% 1%

2020 54% 24% 14% 8% 9%

>2021 33% 30% 17% 17% 2% 50%

Offices Shopping Oficenterscinas Ce ntLogisticsros comercia leHighs StreetLogíst retailico High St Otherreet Retail Otros Total

ı 33 ı |04| INVESTMENTS, REFURBISHMENTS AND DEVELOPMENTS

ı 34 ı Annual Report 2016

INVESTMENTS

2016 has been a very intense year for Metrovacesa) has been € 794,351 MERLIN with respect to investments, thousand (including transaction cost) especially with the acquisition of the and the breakdown per asset category Commercial Portfolio of Metrovacesa. is as follows: Total cost of investments (excluding

(€ thousand) Price

Offices 430,015

Shopping centers 64,922

Logistics 133,544

Land for development 159,970

Other 5,900

Total 794,351

ı 35 ı REFURBISHMENTS

During 2016 the following refurbishments have been completed:

Investment Asset G.L.A. (sqm) Actions Rents (€ thousand) Ulises, 16-18 9,576 Full refurbishment 6,950 100% Avenida Europa 12,206 Full refurbishment 9,040 67% Multitenant Partenón, 12-14 16,609 9,951 - adaptation Juan Esplandiú 28,008 Facade 2,302 87%

MERLIN has a refurbishment plan for several assets. The assets currently under refurbishment are the following:

Investment Asset G.L.A. (sqm) Actions (€ thousand) Avenida Europa 12,206 Full refurbishment 6,600 Eucalipto 33 7,185 Hall and common áreas 3,500 Ribera del Loira 36-50 39,150 Full refurbishment 5,173 Marineda 100,187 Creation of sportive area 1,600 Extension (3,100 sqm), El Saler 22,967 13,100 façade and access Nickelodeon Park and Thader 48,646 8,900 common areas

ı 36 ı Annual Report 2016

DEVELOPMENTS

MERLIN is currently developing the following Logistics plan projects: MERLIN has in place an ambitious plan of Torre ChamartIn logistics development for the construction of 12 warehouses with the highest standards Construction of an office building located required by the logistics operators, all of in the intersection between A-1 and M-30 them located in the A-2 and A-4 corridors highways of Madrid in Paseo de la Castellana of Madrid. 6 assets are under development prolongation. The project includes the best through forward purchase structures specifications for the building in a project lead (“forward funding”) agreed with promotors in by the architect Miguel Oriol. The building charge of the construction and the purchase will have a LEED Platinum certification. Key only takes place when construction finishes metrics are: and the price is predetermined since the beginning according to the pre-let levels existing in the moment of the delivery of the asset. The remaining 6 assets are being G.L.A. (sqm) 16,639 developed by MERLIN. Key aggregate metrics of the plan are as follows: Land cost (€ million) 31.0

Construction cost 38.0 (€ million) G.L.A. 477,020 Amount already disbursed 34.7 (€ million) Land cost (€ million) 47.0 Outstanding amount to be 34.3 disbursed (€ million) Construction cost 192.6 (€ million) ERV (€ million) 4.3 Amount already disbursed 93.8 (€ million) Yield on total cost 6.2% Outstanding amount to be 145.8 disbursed (€ million) Works start 4Q 2016 ERV (€ million) 21.3 Estimated end of 1Q 2018 works date Yield on total cost 8.9%

Works start 2015

Estimated end of works 2018 date

ı 37 ı |05| PORTFOLIO VALUATION

ı 38 ı Annual Report 2016

PORTFOLIO VALUATION

MERLIN portfolio has been appraised by development category. The GAV of MERLIN CBRE and Savills. Advanced payments as of year-end amounts to € 9,823.6 million. related to forward purchase transactions, GAV breakdown is the following which have not been appraised, have been added at book value as part of the land for

Sqm € thousand €/sqm AG Gross yield

Offices 1,246,465 4,540,968 3,643 4.7%

Shopping centers 455,176 1,612,627 3,543 5.7%

Logistics 755,071 472,153 625 7.0%

High Street retail 460,525 2,204,610 4,787 4.7%

Others 121,104 283,583 2,342 4.3%

Logistics WIP 477,020 109,595 230 -

Land for development 73,309 133,904 1,827 -

Non-core land 364,015 131,957 363 -

TOTAL 3,952,684 9,489,397 2,401 5.0%

Equity method stakes - 334,222 - -

TOTAL - 9,823,619 - -

ı 39 ı A broader analysis of the asset portfolio by valuation in the different categories is shown below:

In offices (by GAV)

By geography By location By product

• Madrid 83% • NBA 52% • Multi tenant 63% • Barcelona 14% • Prime + CBD 37% • Single tenant 37% • Lisbon 2% • Periphery 11% • Other Spain 1%

In shopping centers (by GAV)

By geography By location By product

• Urban 63% • Large 44% • Madrid 21% • Valencia 13% •• Urban Urban 63 63%% •• Large Large 44% 44% •• Madrid Madrid 21% 21% •• Valencia Valencia 13% 13% • Dominant 18% • Medium 28% • Other 19% • Andalucía 7% •• Dominant Dominant 18% 18% •• Medium Medium 28% 28% •• Other Other 19% 19% •• Andalucía Andalucía 7% 7% • Secondary 18% • Extra-large 18% • Galicia 18% • Murcia 4% •• Secondary Secondary 18% 18% •• Extra-large Extra-large 18% 18% •• Galicia Galicia 18% 18% •• Murcia Murcia 4% 4% • Small 9% • Cataluña 17% • Lisbon 1% •• Small Small 9% 9% •• Cataluña Cataluña 17 17%% •• Lisbon Lisbon 1% 1%

ı 40 ı Annual Report 2016

In logistics (by GAV)

By geography By reach By tenant type

• Madrid 47% • Regional 34% • 3PL 40% • Barcelona 30% • National 32% • Mixed use 38% • Sevilla 9% • Ports 29% • End user 22% • Basque Country 7% • Production related 5% • Other Spain 7% • Local 1%

GAV lfl evolution

The like-for-like increase of GAV from 31 December 2015 is +6.2%.

GAV evolution Reported Growth (€ thousand) 31/12/16 31/12/15 % Lfl Offices 4,540,968 2,189,565 4.6%

Shopping centers 1,612,627 670,017 8.1%

Logistics 472,153 276,500 9.7%

High street retail 2,204,610 1,934,608 7.2%

Others (Hotels included) 283,583 409,650 5.2%

Residential (GAV) - 288,140 -

Land under development 243,499 50,524 24.6%

Non-core land 131,957 132,635 (0.5%)

TOTAL Excl Part, Min 9,489,397 5,951,639 6.1%

Equility method 334,222(1) 101,026 10.7%

TOTAL 9,823,619 6,052,665 6.2%

(1) Including Testa Residencial

ı 41 ı |06| FINANCIAL STATEMENTS

ı 42 ı Annual Report 2016

CONSOLIDATED INCOME STATEMENT

(€ thousand) 31/12/16 31/12/15 Gross rents 351,023 214,454 Offices 138,418 63,326 High Street Retail 99,864 91,091 Shopping center 52,566 29,334 Logistics 23,625 12,703 Hotels 26,947 11,432 Other 9,963 6,568 Other income 11,774 4,690 Total revenues 362,797 219,144 Incentives (7,539) (2,363) Collection loss (272) (336) Total operating expenses (94,634) (55,193) Property expenses not recharged to tenants (19,744) (10,236) Personal expenses (38,774) (15,710) Recurring general expenses (8,506) (3,808) Non-recurring general expenses (27,610) (25,439)

EBITDA 260,352 161,252 Depreciation (4,778) (107) Gain/(losses) on disposal of assets 8,484 3,986 Provision surpluses 32 476 Negative difference on business combination 37,892 (302,188) Absorption of the revaluation of investment property (154,428) - Change in fair value of investment property 453,149 314,586

EBIT 600,703 178,005 Net interest expense (70,914) (40,184) Debt amortization cost (18,987) (13,410) Gain/(losses) on disposal of financial instruments 74,646 - Change in fair value of financial instruments 5,357 (67,940) Share in earnings of equity method investees 1,817 805

PROFIT BEFORE TAX 592,622 57,276 Income taxes (9,848) (8,323) PROFIT (LOSS) FOR THE PERIOD 582,774 48,953 Minorities (129) 125 PROFIT (LOSS) FOR THE PERIOD ATTRIBUTABLE 582,645 49,078

ı 43 ı Notes to the consolidated (iii) € 15,625 thousand correspond to the income statement 25% accrued of the incentive granted in 2016 in relation with the stock plan of the Gross rents (€ 351,023 thousand) Company (6 millions of shares, for the less portfolio operating expenses not 25% accrued in 2016); rechargeable to tenants (€ 19,744 thousand) equals to net rents before incentives and (iv) € 27,610 thousand of non-recurring collection loss of € 331,279 thousand. After operating expenses. Non-recurring deducting incentives and collection loss expenses correspond mainly to € 21,523 (€ 7,811 thousand) the resulting amount is thousand of expenses for the acquisition € 323,468 thousand. of Metrovacesa and the merger with Testa, expenses for the acquisition The total amount of operating expenses of of companies and expenses for the the Company in 2016 is € 74,890 thousand, rating and the issuance of bonds of the with the following breakdown: Company, and € 4,467 thousand for the cost of the ERE. (i) € 23,149 thousand correspond to personnel expenses (excluding the cost The sum of the personnel expenses and of the employment regulation plan (ERE) the recurring operating expenses of the for an amount of€ 4,467 thousand). Company are within the threshold of overheads of the Company, prevailing this (ii) € 8,506 thousand of recurring operating 2016 period the 0.6% of the EPRA NAV of the expenses of the Company; and Company.

The reconciliation between gross rents of the period and FFO is as follows:

351.0 (19.7) 331.3 (7.8) 11.8 323.5 (23.1) (8.5) 303.6 (43.2)

260.4 (70.9) 232.7

189.4

FFO EBITDA tenants Gross rents Other income Recurring FFO collection loss collection loss collections loss Recurring EBITDA Personnel expenses Net financial expenses

Recurring general expenses Net rents after incentives and Net rents before incentives and Incentives, rent linealizations and Non-recurring general expenses Property expenses net recharget to

ı 44 ı Annual Report 2016

CONSOLIDATED BALANCE SHEET

(€ thousand)

ASSETS 31/12/16 31/12/15 EQUITY AND LIABILITIES 31/12/16 31/12/15 NON CURRENT 10,078,890 6,025,390 EQUITY 4,840,769 2,926,431 ASSETS

Intangible assets 257,969 264,937 Subscribed capital 469,771 323,030 Property plant and 3,569 1,056 Share premium 4,017,485 2,616,003 equipment Investment property 9,027,184 5,397,091 Reserves (143,537) (32,364) Investments accounted for using the equity 319,697 101,126 Treasury stock (105) - method Long term financial Other equity holder 329,427 238,040 540 540 assets contributions

Deferred tax assets 141,044 23,140 Interim dividend (59,759) (25,035)

Profit for the period 582,645 49,078

Valuation adjustments (47,582) (5,913)

Minorities 21,311 1,092

NON CURRENT LIABILITIES 5,869,954 1,760,603

Long term debt 5,278,731 1,520,942

Long term provisions 34,092 16,573

Deferred tax liabilities 556,771 223,088

CURRENT ASSETS 839,690 891,048 CURRENT LIABILITIES 208,217 2,229,404

Liabilities associated with Non-current assets for - 298,534 non-current assets for - 161,425 disposal disposal Trade and other 508,832 24,384 Short term debt 65,853 1,712,394 receivables Investments in group 76,919 2,632 Short term provisions 867 274 companies Short term financial 6,445 1,731 Trade and other payables 140,868 354,087 assets Cash and cash 247,081 560,740 Accruals and deferrals 629 1,224 equivalents Accruals and deferrals 413 3,027 TOTAL EQUITY AND TOTAL ASSETS 10,918,580 6,916,438 10,918,580 6,916,438 LIABILITIES

ı 45 ı Notes to the consolidated balance sheet Fair value of the portfolio corresponds to the appraisal value delivered by CBRE and Savills During 2016 there has been a capital as of 31 December 2016, with the addition increase of MERLIN Properties, executed on of the cost of assets whose acquisition price 28 October, for an amount of € 1,672,845 has been disbursed by advanced payments, thousand through the issuance of 146,740,750 related to forward purchase transactions, It ordinary shares with a nominal value of 1 euro is important to note that in accordance with each and a share premium of 10.40 euros, Spanish accounting regulations the increase of executed in the context of the total spin-off value in concessions, equity method and non- of Metrovacesa, S.A. in favor of MERLIN, Testa current assets for disposal are not reflected Residencial, SOCIMI, S.A.U. and Metrovacesa in the financial statements. The referred Promoción y Arrendamiento S.A. appraisal value is reflected in the following accounting Items:

(€ million)

Leaseholds (included in intangible assets) 245.7

Investment property 9,027.2

Derivatives (in non-current financial assets) 207.2

Equity method 319.7

Non-current assets 1.0 Total balance sheet items 9,800,5

Increase of value in concessions 8.3

Increase of value in equity method 14.5

Increase of value in non-current assets 0.3 Total valuation 9,823.6

ı 46 ı Annual Report 2016

FINANCIAL DEBT

MERLIN Properties has received during REIT with the best credit rating. MERLIN 2016 a “investment grade” credit rating by has executed 3 issuances for an aggregated Standard & Poor and Moody’s. Concretely, amount of € 2,350 thousand during the S&P has granted a BBB rating and Moody’s period, with the following characteristics: Baa2, which positions MERLIN as the Spanish

MRL II MVC MRL I

Issuance date 2 November 2016 23 May 2016 25 April 2016

Size (€ million) 800 700 850

Coupon 1.875% 2.375% 2.225%

Expiration date 2 November 2026 23 May 2022 25 April 2023

Spread on Euribor ms + 160 bps ms + 238 pbs ms + 200 pbs

Covenants

LTV ≤ 60% ≤ 60% ≤ 60%

ICR ≥ 2,5x ≥ 1,8x ≥ 2,5x

Unencumbered ratio ≥ 125% ≥ 110% ≥ 125%

The balance of long term debt and short guarantees and legal deposits received. term debt includes Company’s outstanding The breakdown of gross financial debt is as financial debt, mark-to-market of interest- follows: rate and inflation hedging contracts and other financial liabilities, corresponding to

Financial debt breakdown

(€ miles) Long term Short term Total

Financial debt 5,165,777 27,470 5,193,247

Loan arrangement costs (60,862) - (60,682)

Debt interest expenses - 30,150 30,150

Mark-to-market of interest-rate hedging contracts 74,201 4,235 78,436

Mark-to-market of inflation hedging contracts (4,534) - (4,534)

Other financial liabilities (i.e. legal deposits) 104,149 3,998 108,147 Total debt 5,278,731 65,853 5,344,584

ı 47 ı MERLIN’s net financial debt as of 31 December is € 4,471,125 thousand. The breakdown of MERLIN’s debt is the following:

5,193.2 (1) 180.0 135.8 (722.1) 2,350.0

4,471.1

1,258.9

1,268.6

Mortgage Unsecured Bonds Credit Leasings Total gross Cash and Total net debt facility financial equivalents financial debt debt

% Gross financial 24.4% 24.2% 45.3% 3.5% 2.6% 100.0% debt

Spot average 2.79% 1.88% 2.15% 1.92% 3.16% 2.26% cost (%)

% interest rate 98.8% 72.5% 100,0% 0.0% 68.4% 88.7% hedged

(1) Including cash (€ 250.9 million) and net proceeds from the sale of hotels (€ 471.2 million).

ı 48 ı Annual Report 2016

MERLIN’S debt has an average maturity period of 6.2 years. The chart with debt maturity is the following:

1,361

892 835 810 720

1,280 700 850 800 141 163 141 158 28 86 5 5 147 2 23 136 16 85 81 20 42 10 2017 2018 2019 2020 2021 2022 2023 2024 2025 +2026

Unsecured bank debt Bonos Secured leans and other

MERLIN’s debt as of 31 December has a spot interest rate hedged amounts to 88.7%. Key average cost of 2.26%. Nominal debt with debt ratios are shown below:

(€ thousand) 31/12/2016 31/12/2015 31/12/2014

Gross financial debt 5,193,247 3,257,336 1,009,755

Treasury 722,122(1) 243,900 151,840

Net financial debt 4,471,124 3,013,436 857,915

GAV 9,823,619 6,052,665 2,231,623

LTV 45.5% 49.8% 38.4%

Average cost 2.26% 2.22% 3.08%

Floating interest rate 11.3% 56.7% 0.7%

Average maturity period (years) 6.2 3.8 9.1

Liquidity (2) 949,043 243,900 151,840

Non-mortgage debt 75.6% 16.1% 0.0%

(1) Including cash and net proceeds from the sale of hotels (2) Including available treasury plus payment rights (net) of divestments and unused credit facilities.

ı 49 ı RETURN TO SHAREHOLDERS AND MANAGEMENTS STOCK PLAN

The Shareholder Return for a given year In accordance with these definitions, the is equivalent to the sum of (a) the change Shareholder Return in 2016 amounts to in the EPRA NAV of the Company during € 711,705 thousand and the Shareholder such year less the net proceeds of any Return Rate amounts to 20.8%. issues of ordinary shares during such year; and (b) the total dividends (or any other Following the acquisition of Testa, the form of remuneration or distribution to the Management Team of MERLIN unilaterally Shareholders) that are paid in such year decided that the Shareholder Return is to (the “Shareholder Return”). The Shareholder be calculated over the Adjusted EPRA NAV Return Rate is defined as the Shareholder in lieu of the EPRA NAV, meaning that the Return for a given year divided by the EPRA outstanding balance of goodwill associated NAV of the Company as of 31 December arising from Testa acquisition should be of the immediately preceding year (the deducted from the EPRA NAV. “Shareholder Return Rate”).

(€ thousand) Absolute Per share

EPRA NAV 31 December 2016 5,274,730 11.23

Net proceeds from October 2016 capital (1,672,845) increase

EPRA NAV 31 December 2016 (a) 3,601,886 11,23

Testa goodwill outstanding amount 31/12 (b) (9,839) (0.02)

Adjusted EPRA NAV after goodwill at (c) = (a) - (b) 3,592,047 11.21 the end of the period

EPRA NAV beginning of period (d) 2,981,546 9.23

Change in Adjusted EPRA NAV (e) = (c) - (d) 610,500 1.98

Dividends paid in year (f) 101,205 0.31

Shareholders return (g) = (e) + (f) 711,705 2.29

Shareholder Return Rate (%) (1) 20.8% 20.8%

Required shareholder return in order to 278,013 exceed the annualized yield threshold of 8%

(1) Return calculated as implied TIR of: € 2,981 million in profitability 366 days and € 1,673 million (MVC increase) in profitability 108 days

ı 50 ı Annual Report 2016

Furthermore, the Company has agreed of remuneration or distribution to the to grant an additional incentive of annual shareholders) that has been distributed in variable remuneration to the management that fiscal year, or in any preceding fiscal team as determined by the Remuneration year since the most recent fiscal year in and Nomination Committee, linked to respect of which a payment under the the Company’s shares which rewards the Management Stock Plan was made, exceeds management team depending on the returns the relevant high watermark. The relevant achieved by the Company’s shareholders (the high watermark is defined as the EPRA “Management Stock Plan”). BA at the end of the year in which there has been an incentive adjusted to exclude Management Stock Plan is granted if the the net proceeds of any issues of ordinary following two key hurdles are met: shares.

• The Shareholder Return Rate exceeds 8%. In 2016, MERLIN Properties comply with exceeding both limits determined in the • The sum of the EPRA NAV of the Company Management Stock Plan in order to be on 31 December of the fiscal year and awarded with the incentive of additional the total dividends (or any other form remuneration.

Sum EPRA NAV + dividends € thousand

Relevant High Watermark 2,981,547

Adjusted EPRA NAV end of period + dividends paid 3,693,252

Excess of return over High watermark applicable 711,705

Test of conditions to be awarded with incentives

Shareholder Return Rate >8% YES

Exceed Relevant High Watermark YES

Calculation of the incentive. The lowest of the following:

9% of the annual shareholder return for the management team 64,053

16% of the excess of return over high watermark applicable 113,873

Applicable incentive 64,053

ı 51 ı |07| EPRA METRICS

ı 52 ı Annual Report 2016

EPRA METRICS

Performance Measure Definition 31/12/2016

€ thousand € per share

EPRA Earnings Recurring earnings from core operational 179,550 0.49 (€ 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 (€ thousand) investment interests at fair value and 5,274,730 11.23 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 EPRA NNNAV the fair value of financial 4,819,459 10.26 (€ thousand) instruments, debt and deferred taxes Annualized rental income based on the cash passing rents at the balance sheet date, less non-recoverable property EPRA Net Initial Yield 4.5% 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 4.6% 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 9.8% whole portfolio Recurring running costs of the Company EPRA costs 24.2% divided by recurring rents EPRA costs (excluding 16.5% non-recurring costs)

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 53 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% 4.51% 31/12/14 31/12/15 31/12/16

EPRA topped-up yield EPRA net initial yield

EPRA NAV/share

11.23

10.49

9.85

31/12/14 31/12/15 31/12/16

EPRA vacancy/costs

16.9% 14.3% 12.0% 9.83%

5.40% 3.40%

31/12/14 31/12/15 31/12/16

EPRA vacancy EPRA costs

ı 54 ı Annual Report 2016

ı 55 ı |08| EVENTS POST-CLOSING

ı 56 ı Annual Report 2016

EVENTS POST-CLOSING

New investments Cabanillas II

Torre Glòries On 25 January, MERLIN Properties completed the acquisition of the module On 12 January, MERLIN formalized the D of the development of 202,103 sqm acquisition of the iconic building Torre that MERLIN is executing in Guadalajara- Glòries, leading to a significant expansion Cabanillas. Cabanillas del Campo is located of its footprint in the Barcelona prime in the third isochrone of Madrid (50 kms) office market. The property is located in the in the province of Guadalajara, with direct junction of Avenida Diagonal with Plaza de access to A.2 and R-2 highway, in the largest Les Glòries, at the core of the tech-oriented national logistics hub, the “Corredor de business district known as 22@. With 142 Henares”. The module acquired has a G.L.A. meters’ height, the is the third of 48,791 sqm and is fully leased to XPO tallest building in Barcelona. The building Logistics. The acquisition price amounts to € was originally designed by prestigious 22.4 million. architects Jean Nouvel and Fermín Vázquez and opened in 2005. It comprises a gross This acquisition joins the formalized in area of 37,614 sqm, in ground level plus 34 December 2016, the module A, with above ground floors, plus an auditorium 38,700 sqm of G.L.A. fully leased to Logista. 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. The acquisition price amounts to € 142 million, representing a capital value of € 3,775 per sqm. MERLIN will be investing approximately € 15 million for multi-tenancy reconversion works. MERLIN targets annual recurring revenues of € 10.3 million, representing an ERV yield of ca. 6.5% after completion of works.

ı 57 ı |09| STOCK EXCHANGE EVOLUTION

ı 58 ı Annual Report 2016

STOCK EXCHANGE EVOLUTION

MERLIN shares closed on 31 December 2016 EPRA Europe reference index (-7.8%) and at € 10.33, a decrease of 10.5% versus underperformed the IBEX-35 (-2.0%) and 31 December 2015 closing price. The Euro Stoxx 600 (-1.2%). share has moved in line with the sectorial

MERLIN share price performance vs IBEX 35 / EPRA Index / Euro Stoxx 600

(€) 12.0

11.5 -1.2% -2.0% 11.0

10.5 -7.8%

-10.5% 10.0

9.5

9.0

8.5

8.0 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16

MERLIN Volume (MM) MERLIN EPRA Index Stoxx 600 Ibex 35

ı 59 ı Average daily trading volume during (in order to take into account the new the period has been € 27.1 million, which shares issued after the transaction with represent a 0.7% of the average market Metrovacesa). capitalization of the latest quarter of 2016

Average daily trading value (€m)

33.9 31.7

27.1 23.6 Average 2016

19.5

Q1’16 Q2’16 Q3’16 Q4’16

ı 60 ı Annual Report 2016

As of the date of this report, MERLIN is covered by a wide variety of 24 equity research . Consensus target price is € 11.72.

Target prices and analyst recommendations

Date Recommendation Target price

03-02-17 Buy 11.55

31-01-17 Neutral 11.00

23-01-17 Sale 9.70

10-01-17 Neutral 11.10

09-01-17 Neutral 12.20

06-01-17 Buy 13.50

04-01-17 Buy 12.60

15-12-16 Buy 12.20

06-12-16 Neutral 11.60

28-11-16 Buy 11.45

16-11-16 Buy 12.50

10-11-16 Buy 12.51

13-10-16 Buy 12.00

23-09-16 Buy 12.5

23-09-16 Buy 10.50

19-09-16 Buy 12.10

16-09-16 Buy 12.50

21-07-16 Neutral 11.80

19-07-16 Buy 12.16

13-07-16 Buy 11.80

30-06-16 Buy 10.85

23-06-16 Buy 11.07 22-06-16 Sale 10.50

06-05-16 Buy 11.60

ı 61 ı |10| DIVIDEND POLICY

ı 62 ı Annual Report 2016

DIVIDEND POLICY

The Company maintains a dividend policy In accordance with the Prospectus, MERLIN that takes into account sustainable levels Properties targets to deliver a dividend yield of of distributions, and shows the Company’s between 4% and 6% over the initial IPO price. forecast in relation to obtaining recurring The Company’s dividend policy is established profits. The Company does not intend to create as the distribution of a minimum of the 80% reserves that cannot be distributed to the cash flow from operations less the payment shareholders, other than those required by law. of interests and less the payment of recurring expenses of maintaining assets. According to the Spanish regime for REIT’s, the Company will be obligated to adopt The distributions to MERLIN’s shareholders agreements to distribute the profits obtained during 2016 are shown in the chart. in this financial year in the form of dividends to shareholders, after complying with any relevant The Board of Directors of MERLIN Properties requirement of the Spanish Corporation Law. agreed on 19 October 2016, to distribute a The Company will be obligated to agree its dividend on account of 2016 results for a gross distribution within six months of the close of amount of € 0.185 per share, as well as to each financial period, in the following manner: establish the date of distribution of the share (i) at least 50% of the profits derived from premium for a gross amount of 0.02 euros the transfer of real properties, shares, or per share, which was already approved by the shareholdings in qualified affiliates, provided General Shareholders Meeting celebrated on that the remaining profits are reinvested in 15 September. other real estate assets within a maximum period of three years from the date of The management team of MERLIN Properties transmission or, if not, 100% of the profits will propose a complimentary dividend on must be distributed as dividends at the end account of 2016 results, being subject to of this three year period; (ii) 100% of the the 2016 General Shareholders Meeting. The profits obtained by receiving dividends paid complimentary dividend would be a gross by qualified subsidiaries; (iii) at least 80% of amount of 0.20 euros per share, expected to the rest of the obtained profits. If the dividend be distributed in April 2016, for a total of 0.40 distribution agreement is not adopted within euros per share versus 2016. the legal timeframe, the Company will lose its REIT status during the financial year to which the dividends refer.

Amount Date Concept € thousand € per share Per calendar year Final 2015 27 April 2016 Dividend 1,839 0.005692 Distribution of share Final 2015 27 April 2016 33,145 0.102608 premium Interim 2016 25 October 2016 Dividend 59,759 0.185 Distribution of Interim 2016 25 October 2016 6,461 0.02 share premium Subtotal 101,204 0.3133 Against 2016 period Interim 2016 October 2016 66,220 0.20 Complimentary 2016 May 2017 93,954 0.20 Total 2016 160,174 0.40

ı 63 ı |11| MAIN RISKS AND UNCERTAINTIES

ı 64 ı Annual Report 2016

MAIN RISKS AND UNCERTAINTIES

The policies of financial risk management The acquisition of options or futures on within the commercial real estate sector stocks, or any other high-risk activities as a deal mainly with the analysis of investment means of investing its cash surplus are not projects, the management of the building’s considered by the Company. occupation and the situation of the financial markets: • Interest rate risk: in order to minimize the Company’s exposure to this risk, financial • Credit risk: credit risk relating to the hedges, such as interest rate swaps, have Company’s ordinary business is not been executed. Total interest rate hedged significant because the contracts signed amount to 88.7% of total debt. with the tenants require payment in advance of most sums. These contracts • Exchange rate risk: the Company’s policy is also require the tenant to provide legal to contract debt only in the same currency and additional financial guarantees or as that of the cash flows of each business. deposits to cover possible nonpayment Therefore, the Company is currently not of the rent. This risk is also mitigated by exposed to exchange rate risk. Within this the diversification of the type of product type of risk, it is noted the fluctuation of in which the Company invests and the exchange rate in the conversion of consequently the typology of clients. the financial statements of the foreign companies whose functional currency is • Liquidity risk: The Company, in order to other than euro. manage liquidity risk and to meet the needs of funds, uses an annual budget and • Market risk: MERLIN Properties is exposed monthly forecast of the liquid assets. This to market risk from potential downward monthly forecast is detailed and updated movement in rental rates when current on a daily basis. The main liquidity risk is contracts terminate. This risk could due to the potential for negative working negatively affect the cash flow and capital resulting from short term debt. The valuation of the assets of the Company. factors mitigating liquidity risk include the However, the market risk is mitigated by following: (i) cash generated in the ordinary policies of attracting and selecting new high course of business is very stable; and (ii) the quality clients and negotiating compulsory company’s liabilities are largely long-dated lease terms that maximize the length of the and the high quality of the assets provides lease term. For this reason, on 31 December ample ability to obtain new sources of 2016, the occupancy rate of the Company’s funding. assets is 91.3%, with a weighted average unexpired lease term of 7.2 years (weighted When formulating consolidated annual by gross rents). 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 FY2015. 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.

ı 65 ı |12| TREASURY SHARES

ı 66 ı Annual Report 2016

TREASURY SHARES

The Company has not carried out any acquisition or divestments of own shares during FY2016.

In the context of the merger with Testa Inmuebles en Renta Socimi, S.A., the Company executed the purchase of 133,299 own shares in August, with the aim of being able to exchange the 109,082 shares of Testa in hand of third parties.

Finally, in October there were exchanged only 123,069 shares, therefore MERLIN currently has 10,230 own shares.

ı 67 ı |13| CORPORATE RESPONSIBILITY

ı 68 ı Annual Report 2016

MAIN INDICATORS 2016*

2016 Evolution 15/16

Energy consumption MWh 38.01 (13.84) +1% (+2%)

Greenhouse gas emissions (tCO2eq) 11,088 (4,087) +11% (+13%)

Water consumption (m3) 241,640 (12,132) +74% (-4%)

Environmental investment (€) 1,080,000 +208%

% of the portfolio (in GAV terms, excluding Metrovacesa and high street retail) under 38% +804% LEED or BREEAM certification

* In brackets, value expressed in like-for-like terms

ı 69 ı 13.1. Sustainable construction certification plan

Building certification under the leading In this regard, the Company has approved sustainable construction standards endorses a plan to achieve 97% (in GAV terms, the assets’ construction quality and excluding Metrovacesa and high street retail) guarantees that their design and operation certification of its buildings from 2016 to include features and systems that allow 2018. maximum environmental efficiency. Certified buildings currently account for As regards certification standards, MERLIN 38% (in GAV terms, excluding Metrovacesa has chosen LEED and BREEAM, the most and high street retail) of the total portfolio. appropriate alternative being selected based MERLIN has also registered the rest of its on the characteristics of the building or its buildings for the certification process. tenants. Under its Certification Plan 2016-2018, MERLIN Properties will invest over €6 million in the certification of 97% of its portfolio under BREEAM or LEED standards.

MERLIN’s asset certification plan 2016-2018 (% GAV)

98% 100% 96% Certified

58 In process 64 61

40 36 35

Offices Shopping Logistics centers

13.2. Consumption management

Energy and water consumption are two of At present, the Company controls energy the main environmental aspects associated and water consumption of 52% of its with the functioning of a building. MERLIN portfolio (in GAV, excluding Metrovacesa assesses both aspects in the assets managed, and high street retail) (see table). defining and implementing measures to keep them at efficient levels.

ı 70 ı Annual Report 2016

Assets in which MERLIN controls consumption

Asset type Occupancy Like for like1 Area (m2) Ática 1 Office Multi-tenant 7,080 Ática 2 Office Mono-tenant 5,644 Ática 3 Office Multi-tenant 5,746 Ática 4 Office Multi-tenant 4,936 Partenón, 16-18 Office Multi-tenant 18,343 Partenón, 12-14 Office Multi-tenant 19,289 Castellana, 83-85 Office Multi-tenant 15,171 Costa Brava, 2-4 Office Mono-tenant 16 Juan Esplandiú Office Multi-tenant 27,997 Princesa, 3 Office Mono-tenant 17,81 Princesa, 5 Office Multi-tenant 5,788 Ventura Rodríguez, 7 Office Multi-tenant 10,071 Pedro de Valdivia, 10 Office Multi-tenant 6,721 Muntadas I Office Multi-tenant 24,409 Diagonal, 605 Office Multi-tenant 14,265 Diagonal, 514 Office Multi-tenant 9,664 Sant Cugat I Office Multi-tenant 15,378 Sant Cugat II Office Multi-tenant 10,008 Muntadas II Office Multi-tenant 3,783 Arroyo de Valdebebas2 Office Multi-tenant 10,685 Padres Dominicos T4 Office Multi-tenant 5,985 Avda. de Bruselas, 243 Office Multi-tenant 9,174 WTC6 Office Multi-tenant 14,461 WTC8 Office Multi-tenant 14,542 Torre Castellana 259 Office Multi-tenant 21,39 Arturo Soria Plaza4 Shopping center Multi-tenant 9,596 Marineda City Shopping center Multi-tenant 104,589 Centro Oeste Shopping center Multi-tenant 27,893 Larios Shopping center Multi-tenant 26,036 Porto Pi Shopping center Multi-tenant 71,553 Coslada Logistic asset Multi-tenant 36,234 Sollana Logistic asset Multi-tenant 26,612 616,853

1 According to EPRA definition, like-for-like portfolio for sustainability data reporting includes all assets in operation during two consecutive years before the reporting 2 Asset in which consumption has been controlled since April 2016 3 Asset in which consumption has been controlled since July 2016 4 Asset in which consumption has been controlled since September 2015. MERLIN’s share of this property rose from 40% to 90% in October 2016, affecting total portfolio consumption

ı 71 ı 13.3. Energy consumption in MERLIN’s portfolio

As regards energy, MERLIN has begun to • Replacing conventional boilers with assess the initial status of its assets and an condensing boilers. energy classification has been obtained for 100% of the assets managed by MERLIN. • Renewing refrigerating, cooling and VRV equipment with more efficient This is the starting point for future energy alternatives. efficiency actions such as the following: • Renewing air-conditioning • Replacing conventional lighting with equipment and refrigeration towers. LED technology.

• Installing presence sensors.

Energy classification of MERLIN’s assets (% of total assets)1

ASSETS: 37 ASSETS: 5 ASSETS: 36

F; 0% F; 0% E; 0% F; 3% E; 8%

D; 22% E; 31%

D; 60%

D; 22%

C; 51%

C; 42% C; 40% B; 19% A; 0% A; 0% B; 0% A; 0% B; 3%

Offices Shopping Logistic Centers assets

1 Excluding Metrovacesa and High Street retail.

ı 72 ı Annual Report 2016

In the future, after performing energy Consumption behaved differently audits in the buildings, MERLIN will work to depending on the asset type. Office building implement an Energy Management System consumption was reduced, mainly electricity. certified under ISO 50001. This reduction amounted to 3% in absolute terms and 5% in like-for-like terms, which Following this commitment, in 2017 MERLIN appears to indicate that the measures will subject to ISO 50001 certification 3 office implemented in assets such as the Ática buildings and a , with a total complex or Diagonal 605 (both in MERLIN’s area 88.073 sqm and representing around portfolio since 2015) are beginning to bear a 10% of the office portfolio (excluding fruit. Metrovacesa), in terms of GAV. With the refurbishment of logistics assets, Energy consumption in MERLIN’s buildings portfolio energy efficiency is likely to amounted to 38,013,672 kWh in 2016. In the improve, as seems to be the case of already like-for-like portfolio, consumption totalled remodelled assets like Coslada, where 13,836,998 kWh. In both cases, there was an consumption has fallen by 23%. increase of 1% in absolute terms and 2% in the like-for-like portfolio with respect to 2015.

Absolute consumption by business line Like-for-like consumption by business (kWh) and absolute consumption intensity line (kWh) and like-for-like consumption (kWh/sqm) intensity (kWh/sqm)

37,667,623 38,013,672 13,610,720 13,836,998

63.50 61.63 81.90 83.42 136,719 161,634 94,306 128,879

12,959,456 14,097,359

8,226,764 8,706,312

24,571,448 23,754,679

5,289,650 5,001,807

2015 2016 2015 2016

Energy consumption logistic assets (kWh) Energy consumption shopping centers (kWh)

Energy consumption offices (kWh) Intensity of energy consumption (kWh/sqm)

1 In 2017 MERLIN will subject to ISO 50001 certification 3 office buildings and a business park, with a total area 88,073 sqm and representing around a 10% of the office portfolio (excluding Metrovacesa), in terms of GAV of office portfolio.

ı 73 ı Absolute consumption by energy Like-for-like consumption by energy source (kWh) source (kWh)

37,667,623 38,013,672 13,610,720 13,836,998

7,245,678 6,529,065 1,374,996 1,033,990

30,421,945 31,484,607 12,235,724 12,803,008

2015 2016 2015 2016

Electricity consumption (kWh) Fuel consumption (kWh)

Water consumption in MERLIN’s portfolio terms because shopping center consumption was not monitored in 2015, although a 9% Water consumption in 2016 totalled 241,640 reduction in total consumption and a 4% fall m3, entailing a unit consumption of 0.39 m3/ in the like-for-like portfolio may be observed sqm. Consumption has risen in absolute in unit terms.

Absolute consumption by business Like-for-like consumption by line (m3) and absolute consumption business line (m3) and like-for-like intensity (m3/sqm) consumption intensity (m3/sqm)1

139,157 241,640 12,675 12,132

0.43 0.39 0.36 0.35 3,870

106,118

4,875 12,675 12,132

134,282 131,652

2015 2016 2015 2016

Water consumption offices (m3) Water consumption offices (m3) Water consumption shopping centers (m3) Intensity of water consumption (m3/sqm)

3 Water consumption logistic assets (m ) 1 Like-for-like water consumption has been calculated only for Intensity of water consumption (m3/sqm) office buildings, since there are no consumption records for other assets.

ı 74 ı Annual Report 2016

Greenhouse gas emissions In 2016, these emissions from fuel consumption (Scope 1 emissions) and The Company’s buildings generate electricity consumption (Scope 2 emissions) greenhouse gas (GHG) emissions along the amounted 11,088 t CO2eq (+11% on 2015). different phases of their life cycle. In the like-for-like portfolio, GHG emissions

totalled 4,087 t CO2eq (+13% on 2015). MERLIN monitors emissions associated to the buildings in which energy consumption is These increases are due mainly to the change controlled. in the electricity mix emission factor in Spain (+10% on 2015) used in the calculations.

Absolute GHG emissions by business line Like-for-like GHG emissions by business

(t CO2eq) and absolute emission intensity line (t CO2eq) and like-for-like emission

(t CO2eq/sqm) intensity (t CO2eq/sqm)

10,031 11,088 3,631 4,087

0.017 0.018 0.022 0.025 37 39 25

4,229 3,499 2,612 2,221

6,495 6,810 1,384 1,436

2015 2016 2015 2016

GHG emissions logistics assets (t CO2eq) GHG emissions shopping centers (t CO2eq)

GHG emissions offices (t CO2eq) Intensity of GHG emissions (t CO2eq/sqm)

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.

ı 75 ı Absolute GHG emissions broken down Like-for-like GHG emissions broken down

by scope (t CO2eq) by scope (t CO2eq)

10,031 11,088 3,631 4,087

9,445 3,841 8,214 3,304

1,817 1,643 327 246

2015 2016 2015 2016

Scope 1 (t CO2eq)

Scope 2 (t CO2eq)

The emission factors used to calculate Scope-1 and Scope 2 GHG emissions, are those recommended by the Ministry of Agriculture and Fishing, Food and Environment of Spain

MERLIN seeks to minimise and offset these project, in 2016 the Company invested emissions during asset design, construction €9,787 in the reforestation of the Sierra de and subsequent operation. Guadarrama, Tres Cantos and La Pedriza.

Some of the Company’s buildings, mainly The Company also purchases renewable office buildings, have alternative energy energy certificates (REC) to offset emissions facilities .MERLIN also owns a photovoltaic derived from electricity consumption at plant in Coslada logistic asset, which some of its buildings. This ensures that the generated 462,635 kWh of renewable energy electricity consumed in its assets is offset in 2016. by generating the same quantity of renewable energy. In 2016, MERLIN MERLIN cooperates, through the association purchased 46.311 MWh of renewable energy. REFORESTA, in the forest recovery and the fight against desertification, while mitigating emissions from its assets. As part of this

ı 76 ı Annual Report 2016

13.4. Waste management

In its multi-tenant buildings, the Company In these assets, a total of 226,392 kg of waste manages hazardous and non-hazardous were generated in 2016, 99% of which were waste arising from maintenance works non-hazardous waste. carried out in common areas. This work is always performed by authorised Most waste (96%) were used for energy management companies. recovery. Only 4% were deposited in a landfill.

In its ISO 14001 certified assets, the Company selectively collects waste and prioritises energy recovery over disposal.

Main destinatioin of waste generated in MERLIN’s portfolio

Recovery 96%

Disposal 4%

ı 77 ı |14| STAFF

ı 78 ı Annual Report 2016

MAIN INDICATORS 2016

(€ thousand) 2016 Evolution 15/16

Number of employees 165 +37.5%

0 % Women in the workforce 44% percentage point

GAV 1/employee 58 M€ +13%

Turnover 0% 0%

1 GAV: Gross Asset Value

Workforce composition Headcount breakdown by gender In 2016, the Company finished the integration of MERLIN’s employees with those of Testa and Metrovacesa. Following Men this process, the Company has 165 Woman employees. 73 The integration of the three companies has had highly positive effects for MERLIN thanks basically to the inclusion in the 53 Company of top professionals with broad industry experience.

92 67 72% 4 of employees are 16 Hombres aged between 2014 2015 2016 30 and 50 Mujeres Executive team

100% Hombres Mujeres of employees 8% Rest of workforce have indefinite Hombres contracts 92% Mujeres 47%

44% 53% of the workforce Hombres are women Mujeres

ı 79 ı APPENDIX

ı 80 ı Annual Report 2016

EPRA METRICS CALCULATION

EPRA Earnings

(€ thousand)

Consolidated net profit in accordance with >IFRS 582,645

Adjustments to calculate EPRA earnings (403,184) (i) changes in value of investment properties (448,403) (ii) gain/(losses) on disposal of assets (8,484) (iii) absorption of revaluation in investment properties 154,428 (iv) change in fair value of deferred taxes (37,892) (v) changes in fair value of financial instruments and cancellation costs 13,630 (vi) share in earnings of equity method investees (1,817) (vii) impairment of fiscal credit - (viii) gain/(losses) on disposal of financial instruments (74,646) Minority interests in respect of previous adjustments 89 EPRA net earnings 179,550 EPRA net earnings per share 0.49

EPRA NAV

(€ thousand)

Equity in balance sheet 4,819,459

Derivatives Mark-to-market 73,902 Derivatives 69,667 Short term interest derivatives 4,235 Deferred taxes Mark-to-market 415,727 Deferred tax assets (141,044) Deferred tax liabilities 556,771.0 Cost of debt (60,862) Revaluations not recorded in the financial statements 26,504 Adjustment in concessions 8,316 Adjustment in tangible assets 277 Adjustment in equity method 17,911 EPRA NAV 5,274,730 Shares 469,770,730 NAV / share 11.23

ı 81 ı EPRA YIELDS

Shopping High Street Logístico Land Non-core (€ thousand) Offices Logistics Other TOTAL centers Retal WIP for development land

Gross asset value 4,540,968 1,612,627 472,153 2,204,610 283,583 109,595 133,904 131,957 9,489,397 Exclude: Land for development (109,595) (133,904) (243,499) Non-core land (131,957) (131,957) Valoración activos en propiedad 4,540,968 1,612,627 472,153 2,204,610 283,583 - - - 9,113,941 para alquiler: Gross rents annualized 211,514 91,562 32,883 103,152 12,237 - - - 451,348 Exclude: Property expenses not recharged to tenants (16,941) (8,865) (1,304) (1,780) (2,035) - - - (30,925) Topped-up” net rents annualized 194,573 82,697 31,579 101,372 10,202 - - - 420,423 Exclude: Incentives and collection loss (1,954) (3,430) (3,498) (86) (200) - - - (9,170) Net rents annualized 192,618 79,267 28,080 101,286 10,002 - - - 411,253 EPRA "topped-up" yield 4.3% 5.1% 6.7% 4.6% 3.6% 4.6% EPRA net initial yield 4.2% 4.9% 5.9% 4.6% 3.5% 4.5%

EPRA COST RATIO (€ thousand) 31/12/16

Property expenses not recharged to tenants (19,744) Incentives (7,539) Collection loss (272) Personal expenses (38,774) General expenses recurring (8,506) General expenses non-recurring (25,781) Expenses of Joint Ventures 15,625 Exclude Investment property depreciation - Ground rent costs - Service charge recovered through rents but not invoiced separately - Expenses related to 3rd party asset management services (Gesfontesta) - EPRA Cost ratio (including direct vacancy costs) (84,991) Gross rents 351,023 Less: service fee if part of Gress rents - Add: income of Joint Ventures - Gross rental income 351,023 EPRA Cost Ratio (including non-recurring general expenses) 24.2% EPRA Cost Ratio (excluding non-recurring general expenses) 16.9%

ı 82 ı Annual Report 2016

Shopping High Street Logístico Land Non-core (€ thousand) Offices Logistics Other TOTAL centers Retal WIP for development land

Gross asset value 4,540,968 1,612,627 472,153 2,204,610 283,583 109,595 133,904 131,957 9,489,397 Exclude: Land for development (109,595) (133,904) (243,499) Non-core land (131,957) (131,957) Valoración activos en propiedad 4,540,968 1,612,627 472,153 2,204,610 283,583 - - - 9,113,941 para alquiler: Gross rents annualized 211,514 91,562 32,883 103,152 12,237 - - - 451,348 Exclude: Property expenses not recharged to tenants (16,941) (8,865) (1,304) (1,780) (2,035) - - - (30,925) Topped-up” net rents annualized 194,573 82,697 31,579 101,372 10,202 - - - 420,423 Exclude: Incentives and collection loss (1,954) (3,430) (3,498) (86) (200) - - - (9,170) Net rents annualized 192,618 79,267 28,080 101,286 10,002 - - - 411,253 EPRA "topped-up" yield 4.3% 5.1% 6.7% 4.6% 3.6% 4.6% EPRA net initial yield 4.2% 4.9% 5.9% 4.6% 3.5% 4.5%

ı 83 ı ALTERNATIVE MEASURES OF PERFORMANCE

In accordance with the recommendations EPRA NNNAV (€ thousand) issued by the European Securities and Markets Authority (ESMA), the alternative EPRA NAV adjusted to include the fair value measures of performance are described as of financial instruments, debt and deferred follows. taxes.

Glosario EPRA Net Initial Yield

EBITDA Annualised rental income based on the cash passing rents at the balance sheet date, Earnings before net revaluations, less nonrecoverable property operating amortizations, provisions, interest and taxes. expenses, divided by the market value of the property, increased with acquisition costs. Recurring EBITDA EPRA “topped-up” NIY EBITDA less non-recurring general expenses of the Company. Adjustment to the EPRA Net Initial Yield in respect of the expiration of rentfree periods EPRA costs (or other unexpired lease incentives such as discounted rent periods and step rents). Recurring running costs of the Company divided by recurring rents. EPRA Vacancy Rate

EPRA NAV (€ thousand) Estimated Market Rental Value (ERV) of vacant space divided by ERV of the whole EPRA Net Asset Value (EPRA NAV) is portfolio. calculated based on the consolidated shareholders’ equity of the Group adjusted FFO to include properties and other investment interests at fair value and to exclude Recurring result of the Company calculated certain items not expected to crystallise in as EBITDA less debt interest expenses of the a longterm investment property business period. model, as per EPRA’s recommendations. Recurring FFO Adjusted EPRA NAV FFO less non-recurring general expenses of EPRA NAV resulting once deducted the Company. the goodwill arising as a result of Testa Inmuebles en Renta, S.A. acquisition. GAV

Value of the commercial portfolio in accordance with the latest external valuation available as of 30 June 2016 plus advanced payments for turn-key projects and developments.

ı 84 ı Annual Report 2016

Average debt maturity (years) WAULT

It represents the average debt duration of Weighted average unexpired lease term, the Company until maturity. calculated as the number of years of unexpired lease term, as from 30 June 2016, Gross annualized rents until the lease contract expiration, weighted by the gross rent of each individual lease Passing rent as of 30 June multiplied by 12. contract.

Renta Media Pasante Gross yield

It represents the rent for sqm/month to It represents the gross yield of an asset which an asset or category of assets is or category of assets. It is calculated by rented as of 31 december. dividing the annualized gross rent between the latest available GAV. EPRA Earnings (€ thousand)

Recurring earnings from core operational activities.

ı 85 ı LIST OF ASSETS

G.L.A. Location # sqm AG

Office 588,175

Ribera del Loira 60 Madrid 54,960 M 46 PE Puerta de las Naciones Madrid 39,150 M 45 PE Via Norte Madrid 37,224 M 27 PE Cerro Gamos Madrid 35,498 M 52 Avenida de Bruselas 33 Madrid 33,718 M 39 PE Alvento Madrid 32,928 M 42 PE Euronova Madrid 32,665 M 56 Sollube Madrid 31,576 M 5 Juan Esplandiu 11-13 Madrid 28,008 M 15 Adequa 1 Madrid 27,399 M 57 PE Las Tablas Madrid 27,073 M 32 Parking Princesa * Madrid 26,963 PE Alvia Madrid 23,567 M 55 Torre Castellana 259 Madrid 21,390 M 1 Josefa Valcarcel 48 Madrid 19,893 M 19 Partenon 12-14 Madrid 19,609 M 47 Trianon Madrid 18,400 M 44 Partenon 16-18 Madrid 18,343 M 48 Princesa 3 Madrid 17,810 M 12 PE Sanchinarro Madrid 17,191 M 28 PE Churruca Madrid 16,979 M 10 Castellana 280 Madrid 16,918 M 2 Costa Brava 2-4 Madrid 16,000 M 24 Adequa 3 Madrid 15,937 M 57 PE Atica XIX Madrid 15,411 M 51 Castellana 83-85 Madrid 15,254 M 6 Castellana 278 Madrid 14,468 M 3 Adequa 5 Madrid 13,790 M 57 Adequa 6 Madrid 13,789 M 57 Santiago de Compostela 94 Madrid 13,130 M 23 Avenida de Europa 1 Madrid 12,606 M 40 Avenida de Europa 2 Madrid 12,605 M 40

*Below ground surface has not been taken into account for G.L.A. purposes.

ı 86 ı Annual Report 2016

Cristalia Madrid 11,712 M 43 Castellana 93 Madrid 11,650 M 4 Aquamarina Madrid 10,856 M 26 Principe de Vergara 187 Madrid 10,732 M 7 Ventura Rodriguez 7 Madrid 10,071 M 14 Alfonso XI Madrid 9,945 M 8 Atica 5 Madrid 9,526 M 50 Alcala 40 Madrid 9,315 M 11 PE Minipark Alcobendas 1 Madrid 9,195 M 35 Avenida de Bruselas 24 Madrid 9,164 M 37 Avenida de Bruselas 26 Madrid 8,895 M 38 Elipse Madrid 7,515 M 21 Eucalipto 25 Madrid 7,368 M 17 Eucalipto 33 Madrid 7,185 M 16 Atica 1 Madrid 7,080 M 50 Pedro de Valdivia 10 Madrid 6,721 M 9 Arturo Soria 343 Madrid 6,615 M 20 Padres Dominicos T4 Madrid 6,176 M 33 Al-Andalus Madrid 5,972 M 54 Ulises 18 Madrid 5,938 M 18 Princesa 5 Madrid 5,788 M 13 Maria de Portugal T2 1 Madrid 5,749 M 29 Maria de Portugal T2 3 Madrid 5,749 M 31 Atica 3 Madrid 5,746 M 50 Atica 2 Madrid 5,644 M 50 Maria de Portugal T2 2 Madrid 5,641 M 30 Vegacinco 1 Madrid 5,496 M 41 Vegacinco 2 Madrid 5,400 M 41 Adequa 2 Madrid 5,013 M 57 Atica 4 Madrid 4,936 M 50 Fuente de la Mora Madrid 4,482 M 22 Avenida de Aragon 334 Madrid 3,890 M 49 Atica 6 Madrid 3,790 M 50 Ulises 16 Madrid 3,638 M 18 Encinar Madrid 3,623 M 34 PE Minipark Alcobendas 2 Madrid 3,347 M 36 Arturo Soria 128 Madrid 3,206 M 58 Plantio 12 D Madrid 1,816 M 53 Plantio 6 G Madrid 1,780 M 53 Plantio 10 E Madrid 1,749 M 53 Plantio 8 F Madrid 1,723 M 53

ı 87 ı PE Poble Nou 22@ Cataluña 31,337 B 7 Muntadas I Cataluña 24,380 B 13 Vilanova 12-14 Cataluña 16,494 B 8 Sant Cugat I Cataluña 15,378 B 15 Diagonal 605 Cataluña 14,795 B 1 WTC8 Cataluña 14,542 B 12 WTC6 Cataluña 14,461 B 11 Citypark Cornella Cataluña 12,901 B 10 PLZFA Cataluña 11,411 B 17 PLZFB Cataluña 10,652 B 18 Sant Cugat II Cataluña 10,008 B 16 Diagonal 514 Cataluña 9,664 B 2 Balmes 236-238 Cataluña 6,187 B 3 Diagonal 199 Cataluña 5,934 B 5 E-Forum Cataluña 5,190 B 9 Diagonal 458 Cataluña 4,033 B 4 Muntadas II Cataluña 3,783 B 14 Lerida - Mangraners Cataluña 3,228 Monumental Lisboa 16,892 Torre Lisboa Lisboa 13,715 Lisboa Expo Lisboa 6,740 Sevilla - Borbolla Andalucia 13,037 Malaga - Maestranza Andalucia 2,046 Granada - Escudo del Carmen Andalucia 2,041 Zaragoza - Aznar Molina Zaragoza 4,488 Zaragoza - Aznar Molina Zaragoza 4,488

Shopping centers 455,176 #

Opción Madrid 37,165 6 Centro Oeste Madrid 10,876 3 Nassica Madrid 10,006 5 Arturo Soria Madrid 5,974 2 Marineda Galicia 100,187 1 Vilamarina Cataluña 32,224 9 Arenas Cataluña 31,918 8 La Fira Cataluña 29,013 10 El Saler Comunidad Valenciana 22,967 12 La Vital Comunidad Valenciana 20,853 14 Bonaire Comunidad Valenciana 17,559 13 Medianas Bonaire Comunidad Valenciana 9,907 13

ı 88 ı Annual Report 2016

Larios Andalucia 21,504 16 Artea Pais Vasco 24,323 7 Thader Murcia 48,646 15 Porto Pi Mallorca 26,559 11 Monumental CC Lisboa 5,495 17

Logistics 755,071 #

Madrid-Coslada Complex Madrid 36,234 M 2 Madrid-Meco I Madrid 35,285 M 3 Madrid-Coslada Madrid 28,491 M 1 Madrid-Getafe Madrid 16,242 M 10 Madrid-Getafe (Los Olivos) Madrid 11,488 M 11 PLZF Cataluña 131,000 B 2 Nave Castellbisbal Cataluña 21,508 B 6 Barcelona-Sant Esteve Cataluña 16,812 B 4 Barcelona-Granada Penedes Cataluña 16,758 B 5 Barcelona-Lliça del Vall Cataluña 14,911 B 3 Guadalajara-Cabanillas I Castilla la Mancha 70,134 M 8 Guadalajara-Alovera Castilla la Mancha 38,763 M 7 Guadalajara-Cabanillas II A Castilla la Mancha 38,054 M 9 Guadalajara-Azuqueca I Castilla la Mancha 27,995 M 5 Valencia-Almussafes Comunidad Valenciana 26,612 Zaragoza-Pedrola Zaragoza 21,579 Zaragoza-Plaza Zaragoza 20,764 Vitoria-Jundiz Pais Vasco 72,717 Sevilla Zal Andalucia 109,724

Logistics WIP 477,020 #

Madrid-Pinto Madrid 70,115 M 13 Madrid-Meco II Madrid 59,891 M 4 Madrid-Getafe (Gavilanes) Madrid 39,576 M 12 Madrid-San Fernando II Madrid 34,224 M 14 Madrid-San Fernando I Madrid 11,165 M 15 Guadalajara-Azuqueca II Castilla la Mancha 98,000 M 6 Guadalajara-Cabanillas II E Castilla la Mancha 49,790 M 9 Guadalajara-Cabanillas II C Castilla la Mancha 48,468 M 9 Guadalajara-Cabanillas II D Castilla la Mancha 47,891 M 9 Guadalajara-Cabanillas II B Castilla la Mancha 17,900 M 9

ı 89 ı High Street Retail 460,525

Tree 366,772 Plaza de los Cubos Madrid 13,479 Callao 5 Madrid 11,629 Torre Madrid locales Madrid 4,393 Caprabo Cataluña 64,252

Hotels 53,030

Eurostars Torre Castellana 259 Madrid 31,800 Hotel Marineda Galicia 5,898 Novotel Diagonal 199 Cataluña 15,332

Other 68,074

Locales Plaza Castilla - Castellana 193 Madrid 311 (McD) Parking Palau * Comunidad Valenciana 597 General Ampudia 12 * Madrid 4,619 Yunque Madrid 1,780 San Francisco de Sales Madrid 171 Bizcargi 1 1D Pais Vasco 46 Jovellanos 91 Cataluña 4,519 Rambla Salvador Sama 45-47-49 Cataluña 1,140 Amper Madrid 22,510 Torre Madrid residencial Madrid 120 Naves Europolis Madrid 2,717 Sant Boi de Llucanes (54,6% MVC) Cataluña 15,424 CIM Valles Cataluña 19,064 Algetares Andalucia 272

Non-core land 364,015

Navalcarnero Madrid 288,389 Vadebebas - office Madrid 25,955 Arapiles 8 Madrid 1,700 Zaragoza - residencial Zaragoza 47,971

*Below ground surface has not been taken into account for G.L.A. purposes.

ı 90 ı Annual Report 2016

Land for development 73,309

Adequa 7 Madrid 26,744 Adequa 4 Madrid 14,926 Isla Chamartin Madrid 16,639 Zaragoza Plaza - logistics Zaragoza 15,000

TOTAL 3.952.684

Equity method #

ZAL Port (32%) Cataluña 121,864 B 1 Tres Aguas (50%) Madrid 33,505 4 Testa residencial (34%) Other 156,349 Arasur (44%) Pais Vasco 37,393 Villajoyosa (50%) Comunidad Valenciana - Pazo de Vigo (44%) Galicia 18,523 Parking Palau (33%) Comunidad Valenciana - Costa Ballena (32,5%) Andalucia 5,045

TOTAL 372,679

TOTAL including equity method 4,325,363

ı 91 ı Offices Madrid

ı 92 ı Annual Report 2016

Offices Barcelona

ı 93 ı Logistics Madrid

ı 94 ı Annual Report 2016

Logistics Barcelona

ı 95 ı Shopping centers

ı 96 ı

Edition MERLIN Properties Design and layout Addicta Diseño Corporativo

RSCRSC 1616 RSC 16

Paseo de la castellana, 257 28046 MADRID +34 91 769 19 00 [email protected] www.merlinproperties.com