ANNUAL REPORT 2017 ANNUAL REPORT 2017 MERLIN PROPERTIES, THE LEADING SOCIMI IN THE SPANISH REAL ESTATE MARKET Letter from the Chairman 6 Letter from the CEO 8 O1. Organization and structure 12 O2. Business performance 20 O3. Acquisitions, refurbishments and developments 30 O4. Portfolio valuation 42 O5. Financial statements 46 O6. EPRA metrics 54 O7. Events post-closing 58 O8. Stock Exchange evolution 60 09. Dividend policy 64 10. Main risks and uncertainties 66 11. Treasury shares 68 12. Outlook / R+D information / other 70 13. Corporate responsibility 72 14. Staff 84 APPENDIX EPRA metrics calculation 93 Alternative measures of performance 96 List of assets 97 Asset location mapss 104 LETTER FROM THE CHAIRMAN Dear shareholders, 2017 marked the first full year of consolidation and returns for the outstanding asset base that MERLIN Properties compiled throughout 2014, 2015 and 2016. Of particular importance were the Testa acquisitions in 2015 and the integration of Metrovacesa’s commercial assets in the last quarter of 2016. The results reported this year support the strategy implemented by the Company. In both the generation of cash flow and portfolio value growth, the Company has experienced notable development, increasing the overall return for our Mr. Javier García-Carranza Non-Executive Chairman shareholders to a rate of 21.6%. These results, which I would describe as outstanding, are the upshot of a series of contributing factors: the healthy momentum of the Spanish real estate sector, the leading positioning of MERLIN Properties, the active management of our asset portfolio, the quality of the team that leads this company, and lastly, the incorporation of the market’s best practices into the company’s corporate governance policy. Indeed, positive job creation data coupled with a growth in spending and “The results reported this industrial activity have propelled the year support the strategy good performance of the three sectors in which MERLIN operates. In 2017, implemented by the nearly 900,000 sqm of office space was Company.” contracted, a figure unseen since 2007. In shopping centres, a record EUR 3.9 billion in investment volume was reached. In logistics, the emergence of operators associated with online retail is leading the sector to never-before-seen figures in contract volume and income. ı 6 ı Annual Report 2017 MERLIN Properties is the primary example But, without a doubt, the of this positive trend in the market, given its leadership position in all of the sectors support of our shareholders in which it operates. When the market does has been crucial in achieving well, MERLIN does even better: in 2017, we increased both office occupancy and our goals in 2017. renewals (+3.4% on average); in shopping centres, occupancy grew to 89.4% and This company is committed to its release spread rose an average of 4.7%; and, shareholders and to delivering sustainable in logistics, almost full employment was results over time. To achieve this, the achieved and rents on renewals increased Company has adopted the market’s best 13.4% on average. practices in corporate governance as part of its DNA. And the Company continues These data are the result of an active to make progress: it has reduced the size portfolio management policy. After two of the Board, increasing the influence intense years of investment activity, 2017 of independent directors, and in 2017, it was the turning point for the Company, approved a new compensation plan that having embarked on a very ambitious includes the best recommendations on renovation plan to extract all the value the subject and substantially improves the from our assets. A total of eight renovated Company’s alignment with its shareholders. assets were delivered over the course of the year, including the renovation of Avenida We have frankly good expectations for the Europa 1A, the new Renault headquarters, coming years and we expect to achieve the the successful opening of the sports area ambitious goals we set for ourselves with at the Marineda shopping centre, and the quality of the MERLIN team, the support the inauguration of Cabanillas I logistics of the shareholders, and the commitment park, the largest logistics development and dedication of the Board of Directors. undertaken in Spain since 2007, 100% I want to thank all of them for their excellent leased upon opening. And this is only the work this year. beginning: the Company’s plan covers major renovations through 2022. These achievements would not have been possible without the people who make up the team at this Company. MERLIN has an excellent team of professionals, recognised as such by the market, who are truly committed to the project that this Company represents, which is evident in the low levels of employee turnover. It is a team that works with enthusiasm, entrepreneurial spirit, and responsibility, and it is the team with the highest productivity levels in Europe. ı 7 ı LETTER FROM THE CEO value. We are simultaneously undaunted and motivated by this challenge: holding assets is the complicated part, developing all of their potential is merely a matter of designing action plans and executing them in a timely manner. And fulfilling those plans is our specialty. In this letter, I want to convey our enthusiasm and share with you some information about our plans for offices, shopping centres, and logistics sites that will be carried out in the coming years. The majority of refurbishments will take place prior to 2020 and will be divided into three internal projects that involve investments of more than EUR 250 million to renovate office buildings, EUR 120 million for shopping centres, and nearly EUR Mr. Ismael Clemente CEO 250 million to develop more square metres of logistics capacity. Dear shareholders, The Landmark I Project is a plan designed to optimise the return of an initial selection of The intense investment activity in which offices that—situated in the prime locations MERLIN Properties engaged in from its of each submarket—offer immediate inception until the end of 2016, culminating potential for rental increases and value with the integration of Metrovacesa, was the appreciation after investing in restoring them result of a strategic vision: we were on the to peak condition. In 2017, we witnessed the brink of an uptrend in the real estate cycle success of this strategy with the delivery and a window of opportunity opened to of partial renovations, like Puerta de las purchase high quality assets and companies Naciones (100% let to Roche and Ferrovial), at very attractive prices. As you all know, we Eucalipto (66% let), Juan Esplandiu (98% let, took full advantage of it. That quality and with Cellnex as the primary tenant), Avenida those prices will not be seen again until a Europa (100% let to Renault and Vass) and new cycle begins. Balmes (100% let to Eugin) in Barcelona. This year’s deliveries will include Torre Glòries Today, thanks to that vision, many of those (which is progressing well, with 30% of the special assets that only appear on the market office space already let, plus the domed from time to time are part of our portfolio, observatory, which promises to become a and generated formidable returns: in 2017, main attraction in Barcelona, generating shareholder returns were outstanding, at income as soon as it opens, scheduled 21.6%, on the growth of net asset value per for summer 2019), and Torre Chamartín share plus the dividend. This year we will (about which we will have news soon). distribute EUR 216 million, 46 cents per share, From 2018-2021, the Company will focus on which is a 15% increase from 2016. executing this plan, with major renovations of landmark buildings, like Castellana 83-85, MERLIN Properties is now entering a new and Castellana 93, Alfonso XI, Plaza de Pablo exciting phase: investing in the optimisation Ruiz Picasso, Alcalá 38-40, and Princesa 5-7 of our excellent asset base to extract its in Madrid, Diagonal 605 in Barcelona, and ı 8 ı Annual Report 2017 Monumental and Marqués de Pombal 3 in of 2014, without the possibility of corporate Lisbon. Moreover, as soon as we lease Torre acquisitions, except for the assets acquired Chamartín as a head office or exceed two- with Saba Logística a couple of years thirds occupancy in a multi-tenant scheme, ago. In 2017, we closed the first phase of we will begin construction works on the two the previous plan with the opening of the Adequa buildings. Cabanillas I logistics park. With 202,000 sqm, it is the largest logistics development In shopping centres, the Flagship Project, a undertaken in Spain in the last decade. plan to renovate our spectacular portfolio This project, located in the pivotal Henares of urban centres, is committed to the corridor, had reached full occupancy convergence of online and physical sales. before opening, with top-tier tenants like These are ultra-prime assets, opened Luis Simões, XPO, Logista and DSV. In when the developer could still choose the the first few months of 2018, a second optimum site, with very central locations. wave of projects got underway: Gavilanes They dominate the submarkets in which (let to IDL and Coca-Cola), Meco (with they operate. We will renovate them in order Leroy Merlin), Sevilla ZAL (XPO) and San to provide clients with a more spacious Fernando I (GLS). The projects now grouped and enriching experience, incorporating in Best II will add an additional 500,000 cutting-edge technologies with the aim of sqm to the portfolio, to far exceed the supporting store concepts that consumers 2,000,000 sqm of logistics property under will want to experience and that will become management in record time.