2018 Financial and Legal Report 2 SFL 2018 Financial and Legal Report 2018 FINANCIAL AND LEGAL REPORT The French version of this Registration Document was filed with the Autorité des Marchés Financiers (AMF) on 15 March 2019, in accordance with Article 212-13 of the AMF’s General Regulations. It may be used for a financial transaction provided that it is accompanied by an Information Memorandum approved by the AMF. This document was prepared by the issuer and is the responsibility of the persons who signed it. SFL 2018 Financial and Legal Report 1 Management Report p. 4 Consolidated Financial Statements p.128 Company Financial Statements p. 156 Statutory Auditors’ Reports p.174 Additional Information p. 184 Cross-Reference Tables p. 192 Table of the Main Items p. 195 2 SFL 2018 Financial and Legal Report p.4 Management Report for the Year Ended 31 December 2018 1. Business Review and Significant Events of the Year 2. Results p.174 3. Outlook 4. Risk Factors Statutory Auditors’ Reports 5. Insurance for the Year Ended 31 December 2018 6. Appointment of the Statutory Auditors – Statutory Auditors’ Report 7. Internal Control and Risk Management Procedures on the Consolidated Financial Statements Implemented by the Company for the Preparation – Statutory Auditors’ Report and Processing of Accounting and Financial on the Company Financial Statements Information (Article L.225-100-1 5° of the French – Statutory Auditors’ Special Report on Related Party Commercial Code) Agreements and Commitments 8. SFL and its Shareholders 9. Partnerships 10. Shareholders’ Pacts 11. Share Performance p.184 12. 2018 Non-Financial Information Additional Information 13. Appendices – Persons Responsible for the Registration Document and the Audit of the Accounts – Additional Legal Information p.128 – Additional Information about the Company’s Capital and Share Ownership Consolidated Financial Statements – Additional Information about the Group’s Operations for the Year Ended 31 December 2018 and Organisational Structure A. Consolidated Statement of Financial Position B. Consolidated Statement of Comprehensive Income C. Consolidated Statement of Changes in Equity p.192 D. Consolidated Statement of Cash Flows E. Notes to the Consolidated Financial Statements Cross-Reference Tables p.156 p.195 Company Financial Statements Table of the Main Items for the Year Ended 31 December 2018 of the Annual Financial Report Balance Sheet Profit and Loss Account I. Accounting Policies II. Significant Events of the Year III. Notes to the Financial Statements SFL 2018 Financial and Legal Report 3 SFL 2018 Management Report 4 SFL 2018 Financial and Legal Report SFL 2018 Management Report p.7 1. Business Review and Significant Events of the Year p.29 9. Partnerships p.7 2. Results p.29 10. Shareholders’ Pacts p.11 3. Outlook p.30 11. Share Performance p.11 4. Risk Factors p.31 12. 2018 Non-Financial Information p.16 5. Insurance p.64 13. Appendices p.17 13.1 - Board of Directors’ Special Report to the Annual General Meeting of 5 April 2019 on Stock Options 6. Appointment of the Statutory (drawn up in accordance with Article L.225-184 Auditors of the French Commercial Code) ������������������p. 64 13.2 - Board of Directors’ Special Report to the Annual General Meeting of 5 April 2019 on Performance Share Plans (prepared in accordance with p.18 Article L.225-197-4 of the French Commercial Code) ...........................................................p. 64 7. Internal Control and Risk 13.3 - Five-year financial summary (Company financial Management Procedures Implemented statements) (in euros) (prepared in accordance by the Company for the Preparation with Article R.225-102 of the French Commercial and Processing of Accounting Code) ..........................................................p. 66 and Financial Information 13.4 - Board of Directors’ Corporate Governance (Article L.225-100-1.5° of Report (prepared in accordance with Article the French Commercial Code) L.225-37, paragraph 6, of the French Commercial Code) .......................................p. 67 13.5 - Agenda for the Annual General Meeting p.23 of 5 April 2019 ...........................................p. 104 13.6 - Report of the Board of Directors to the Extraordinary General Meeting ...................p. 120 8. SFL and its Shareholders 13.7 - Property portfolio at 31 December 2018 ... p. 127 The consolidated financial statements were approved for publication by the Board of Directors on 15 February 2019. SFL 2018 Financial and Legal Report 5 6 SFL 2018 Financial and Legal Report Annual General Meeting of 5 April 2019 Management Report for the Year Ended 31 December 2018 To the shareholders, We have called the Annual General Meeting in accordance with the Company’s Articles of Association and the French Commercial Code (Code de commerce) to report to shareholders on Société Foncière Lyonnaise’s operations and results for the year ended 31 December 2018 as well as its future outlook, and to submit for shareholder approval the financial statements of the parent company and the Group and the other resolutions presented in this report. The notice of meeting and all proxy documents required by law were sent or made available to shareholders within the applicable periods. 1. Business Review and Significant Events of to the new needs expressed by tenants and users on the back the Year of emerging office use practices. 1.1. Rental activity 1.3. Portfolio operations The rental market remained buoyant in 2018, although volumes There were no material real estate acquisitions or disposals declined slightly due to the shortage of available properties, during 2018. especially prime properties in Paris itself. In this environment, SFL 1.4. Property portfolio value signed leases on approximately 21,000 sq.m. on good terms. The main leases concerned units in the following properties: The consolidated market value of the portfolio at 31 December – Washington Plaza, with leases on a total of 8,700 sq.m. signed 2018 was €6,570 million excluding transfer costs, an increase with six tenants, some of whom already had offices in the of 5.5% from €6,229 million at 31 December 2017. The further building and wanted to expand or move to new floors. growth in appraisal values mainly reflected the value added to – Cézanne Saint-Honoré, with leases signed on 5,800 sq.m., properties in the process of being redeveloped as the work pro- including 3,800 sq.m. of renovated space taken up by Wells gressed and the higher rents obtained across the portfolio. Fargo and Luxottica France. – Louvre Saint-Honoré, with leases signed on around The average EPRA topped-up net initial yield (NIY) stood at 3.2% 3,600 sq.m. at 31 December 2018, stable year on year. Nominal office rents for lease agreements signed in 2018 aver- Substantially all of the portfolio consists of prime office properties aged €704/sq.m. with effective rents of €610/sq.m. (78.1% of the total), retail units and a hotel (21%). Residential units represent just 0.9% of the total and are located in a mixed- The physical occupancy rate for revenue-generating properties use building primarily made over to retail space. at 31 December 2018 was 97.3%, compared with 96.4% at the previous year end, and the EPRA vacancy rate stood at a 2. Results record low of 1.6%. 2.1. Consolidated results 1.2. Development operations 2.1.1 Consolidated profit for the year The development pipeline at 31 December 2018 represented roughly 16% of the total portfolio. The three main projects Strong operating profit and higher EPRA earnings concern: – The core of the Louvre Saint-Honoré building, where approx- Consolidated rental income in 2018 amounted to €193.5 million, imately 16,000 sq.m. of outstanding retail space are being compared with €195.8 million in 2017. The modest €2.3 million developed over three floors. decline (-1.2%) was due to a change in portfolio. Like-for-like – The office complex on avenue Emile Zola (Biome) acquired in growth offset most of the impact of selling the IN/OUT property 2017, representing some 24,000 sq.m. The building permit in September 2017. was obtained in May 2018 and the property is currently being – On a like-for-like basis (excluding all changes in the portfo- prepared for redevelopment. lio affecting year-on-year comparisons), rental income was – The 83 Marceau building (96 avenue d’Iéna), representing €8.7 million higher, representing a 5.0% increase attributable approximately 9,000 sq.m. The planning appeal process has to new leases signed in 2017 and 2018, mainly for units in the now ended and renovation work is due to begin shortly. Washington Plaza, Cézanne Saint-Honoré, 103 Grenelle and Capitalised work carried out in 2018 totalled €43.0 million and Galerie des Champs Elysées properties. concerned the above three redevelopment projects, floor-by- – Rental income from spaces being redeveloped declined floor renovations, as well as work to improve common areas by €1.4 million over the year, mainly reflecting the departure of tenants from the 83 Marceau building which is undergoing and the services offered by the Group’s properties in response renovation. SFL 2018 Financial and Legal Report 7 SFL 2018 Management Report – The sale of the In/Out building on 29 September 2017 led to offer closed on 26 September 2018. Bonds representing a total a €9.7 million decrease in rental income compared with 2017. nominal amount of €300 million were tendered to the offer, spread – Lastly, lease termination penalties received from tenants added equally between the two issues. a net €0.7 million to rental income in 2018 compared with €0.5 million in 2017. At 31 December 2018, SFL had €920 million in undrawn back-up lines of credit that are available to finance investment opportuni- Operating profit before disposal gains and losses and fair value ties and cover the Group’s liquidity risk.