My Fellow Shareholders
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MY FELLOW SHAREHOLDERS, completed the sale by Atrium European Real Estate of 72 smaller format non-core retail assets in the Czech Republic. These initiatives also allowed us to strengthen our financial position and increase the Group’s total liquidity to more than NIS 13.5 billion. As a result, we were also able to continue the process of reducing our leverage which now stands at 51.0% as of December 31 2014 compared to 55.1% in December 2013. While our overriding aim is to continue bringing the Group’s gearing levels down over the long term, we are also acutely aware of the need to remain flexible and opportunistic in our approach to making acquisitions in order I am very pleased to report another positive year for Gazit- to deliver on our strategy of continually improving the quality Globe, both in the progression of our strategy to improve of our portfolio. As such, we are willing to increase our levels the quality of the underlying assets in our core portfolio and of debt in the short term, if that helps us achieve our wider in terms of the strong financial results we have delivered, business goals. further demonstrating our continued ability to generate long term value. Our 2014 same property NOI grew by 1.7% while we increased our FFO by 2%. This upward trend is driven Gazit-Globe now controls and manages a $21 billion by growing rental income from our well-established and portfolio comprising some 524 properties in more than 20 increasingly high quality portfolio. countries, which at the end of 2014 generated approximately $1.8 billion of annualized income from 6.3 million sqm of However, one of the themes of the year under review, and, Gross Leasable Area (“GLA”). Our portfolio is comprised indeed, the past few years, for all companies operating predominantly of urban supermarket-anchored shopping across multiple geographies, has been the dynamic currency centers and we have a particularly dominant position in the environment. Whilst this trend has reaffirmed our hedging most desirable metropolitan centers across North America, strategy, it has caused a short term drag on the financial Europe, Brazil and Israel. results when reported at Group level. We also faced some challenges within the Dori Group which, while these were not In a changing retail and economic environment, a key material to our core operations they were, nevertheless, a element of our success over the years has been our focus distraction both financially and in terms of management time. on both expanding and upgrading our portfolio to ensure our centers are the most relevant and desirable for consumers However, our core businesses in our core geographies and retailers alike. In this respect 2014 proved to be a year across the world continue to deliver growing levels of cash during which we successfully invested a total of NIS 4.5 flow which in turn, allowed us to, once again increase our billion in upgrading the portfolio through the acquisition of dividend payment, representing average annual compound seven high quality, dominant centers for NIS 2.3 billion, with growth of 10.2% over the last 16 years. a further NIS 2.2 billion deployed towards development, These results and other activities, and principally the refurbishment and extension of existing assets. massive deleveraging undertaken by the Group and Group In addition, in 2014 we successfully divested a total of NIS companies, are also reflected in the continued positive 3.1 billion, or 59, non-core assets, such as the sale of 12 momentum of the Group’s credit rating and those of our of our medical office buildings in the U.S. and half of our subsidiaries, which have been continually upgraded and/or remaining retail assets in Germany. Also, in early 2015 we maintained over the past few years. Succeeding in a Bifurcated Retail reminder of the sales power and popularity of the shopping Environment center as a human destination which, if managed properly, will succeed and drive financial results. The two key questions we continue to be asked by investors are how the current dynamic and constantly With this in mind, our goal is to fill our portfolio with strongly evolving retail environment will affect bricks-and-mortar performing top-tier shopping centers which provide high shopping centers and, I’d argue more importantly, what quality raw materials for us to add further value over time are WE, as operators, doing about it? through the creation and execution of a successful asset management program. We can leverage the extensive To the first question, our reply is simply to confirm what relationships with retailers, which we have established most people observing or involved in the sector already across our global platform, to populate our centers with know - that we are witnessing an increasing bifurcation of the right balance of tenants to attract a growing stream of the retail market. While there may be exceptions, broadly above-average income shoppers and apply market leading speaking what this means is that those retail properties best-practices towards ongoing center operation. This is which are dominant in, and convenient to, their local the model that has driven our success to date and that will catchment, either because they are the large, top-tier continue to serve us well in the future. shopping centers, or smaller but well-kept and equally well-placed in areas of high footfall and barriers to entry, are thriving, while poorly located, underinvested Grade Progress in 2014: Urbanization, Quality, B-C centers in smaller markets, especially those where Growth there are few barriers to entry, are fighting for survival. The clearest indicator of the progress we have made Over the past 25 years we have followed a strategy, which upgrading the quality of our portfolio is the fact that we since we do not intend to deviate from, of investing in shopping 2008 we have quadrupled the number of assets valued at centers which are anchored by super market and other above $100 million in our portfolio. 39% of the value of our needs based retailers. In today’s, and more appropriately, portfolio comprises assets which are at or above this level, tomorrow’s market we believe the key watchwords for compared to just 17% five years ago, while 50% is valued success will continue to be dominance and convenience. at above $75 million. These assets by definition have larger, And that combining these scarce attributes with a high- stronger anchors, are better located and more dominant quality, needs-based product in a supply-constrained and serve a wider and often more affluent demographic. market is a recipe for value creation and cash flow, year- As a further indication of how the portfolio has changed, in and year-out. This model has proven itself in all past our 46 largest centers account for just below 9% of the economic cycles, and is even more applicable now, against portfolio by number of assets but around 25% by GLA (1.7 the relentless march of urbanization and e-commerce. million sqm out of 6.3 million sqm). In addition, the center which ‘wins’ in today’s market will be This reweighting of our asset base has been a major the one which can also supplement its traditional fashion, contributing factor to the significant improvement we retail and supermarket anchors with a strong variety of have witnessed in the demographic composition of the services such as medical centers, gyms, restaurants, local catchment of our properties. For example, over the coffee shops and other leisure offerings, all of which last five years in Canada, the average population within encourage both footfall and dwell-time. It is also imperative a 5 km radius of our properties has grown by about 40 that the center managers’ work embraces new technology % to 187,000, while the average household income has and e-commerce and identifies how it can enhance a increased by 26% to C$96,000 per year. In the same vein, center’s popularity and profitability. ‘Click and collect’ is in the United States, where our portfolio has undergone a a good example of a retail model which is working well significant capital recycling since 2008, we have witnessed and gaining increasing popularity, while some retailers increases of about 162% around 34% in population and now actually assess a store’s performance not just on the household income, respectively. Clearly, if there are more product it sells directly but also the level of online sales people with more disposable income closer to your center generated in its catchment. These two examples also play and you are selling what they want, then your asset will well to another important facet of our business, which is perform well. that one should never underestimate consumers’ desire to In addition to the above we have listed below a few of go shopping and enjoy their leisure time, or the value they our specific strategic transactions and important areas of place on “touching and feeling” the merchandise before focus during the year under review: purchase. This desire to experience the sensorial feel of the brand does not just apply to fashion items; ironically Continued Focus on Europe: As I have said before, we it is the new generation of technology-focused retailers believe that both Central Europe and the Nordics are selling high-priced goods, such as Apple, where this is geographies which present a great opportunity for the equally as acute. All of these factors serve as a constant Group. During 2014 we acquired a number of prime assets in these markets including one in Poland, the Focus House.