Chapter A The Directors Explanations of the State of the Company s Affairs

Transcription

1 AFRICA ISRAEL INVESTMENTS LTD. March 21, 2013 Report of the Board of Directors for the Period from January to December 2012 Chapter A The Directors Explanations of the State of the Company s Affairs 1. General Africa Israel Investments Ltd. (hereinafter, the Company ), through its subsidiaries and associated companies (hereinafter, the Group ), is an investment company operating in various areas of activities, primarily in real estate development and its synergetic areas, in several major geographic regions: the CIS, Eastern Europe, the USA, and Israel. The Company s business policy is based on investment planning, identification of business opportunities, entrepreneurship, and management at a high standard. The following table summarizes the Company main data as presented in its consolidated financial statements (in NIS millions): For year For year For year ending ending ending December 31, December 31, December 31, Income (Loss) from operations before financing ) 020( Financing income, net ) 231( Profit from the Arrangement with the bondholders Profit (Loss) for the period, net ) 29341( Profit (Loss) attributed to Company shareholders, net ) 29003( ) 333( )300( Total balance sheet Equity attributed to Company shareholders As at December 31, As at December 31, As at December 31,

2 The following revaluations/depreciations were recorded in 2012: In 2012, the Company recorded net depreciation of NIS 1,108 million (of which, NIS 21 million in respect of appreciation recorded in the fourth quarter of 2012). The depreciations stemmed from the following reasons: (a) Decline in fair value of investment property under construction in the amount of NIS 835 million (of which, NIS 40 million recorded in the fourth quarter of 2012), stemming mainly from a decline in the fair value of four AFI Development projects involving real estate development and rental properties in the CIS due to changes in municipal planning policies and development policies of Moscow municipality; (b) Revaluation of a provision for impairment of inventory of building and land, especially in AFI Development, in the amount of NIS 266 million (NIS 14 million in respect of recovered value recorded in the fourth quarter of 2012), stemming mainly from a depreciation of land in an AFI Development projects resulting from a liquidation suit filed against the project s primary investor; (c) Net decline in the fair value of investment property in the amount of NIS 21 million (of which, a depreciation in the amount of NIS 20 million was recorded in the fourth quarter of 2012); (d) Revaluation gains from associated companies item in the amount of NIS 143 million of which, NIS 98 was recorded as revaluation gains in the fourth quarter of 2012), stemming mainly from the revaluation of the Times Building in the USA and revaluation of investment property in AFI Development s Four Winds project (a property whose sale was concluded after the date of the statement of financial position); (e) Depreciation of associated companies, which was recorded in other expenses, in the amount of NIS 128 million (of which a decline in value in the amount of NIS 31 million was recorded in the fourth quarter of 2012), stemming mainly from a depreciation of Africa Properties in respect of an associated company in Poland in the amount of NIS 97 million in the third quarter of The following revaluations/depreciations were recorded in 2011: In 2011, the Company recorded a net appreciation of NIS 1,262 million (of which, revaluation of NIS 376 million was recorded in the fourth quarter of 2011). The appreciation stemmed mainly from the following reasons: (a) Revaluation in respect of investment property in the amount of NIS 856 million (of which, NIS 166 million was recorded in the fourth quarter of 2011); (B) Revaluation of investment property under construction of NIS 65 million (of which, NIS 74 million was recorded in the fourth quarter of 2011); (c) Revaluation gains from associated companies in the amount of NIS 290 million (of which, NIS 117 million were recorded as revaluation gains in the fourth quarter of 2012); (d) Elimination of a provision for impairment mainly in a residential project in the United States, in the amount of NIS 82 million (of which NIS 21 million was recorded in the fourth quarter of 2

3 2011) less a deduction for impairment of NIS 20 million stemming from a provision recorded for loss on an investment in a jointly controlled company presented at book value and recorded in the fourth quarter of The Group s Segments of Operation Through its subsidiaries and associated companies (above and hereinafter, the Group ), the Company is engaged in holdings and investments in a variety of areas in and outside of Israel. The Company s main operations are the development and construction of real estate projects designated for residential, industrial, office, and commercial uses, where the Company focuses on the rental and operation of nonresidential projects after construction has been completed. The Group operates mainly in the CIS (mainly in Russia), Eastern Europe, the USA, and Israel. The Company also has operations in areas that are synergetic with its real estate operations, such as operations in the sector of construction contracting and infrastructure contracting, and operations in the steel (in Israel) and ceramics sectors. The Company has four publicly traded subsidiaries, and one publicly traded subsidiary listed on the London Stock Exchange. The Group has 10 activity sectors that are reported as primary operating segments in the Company s Financial Statements, as described below: a. Real estate development in Israel; b. Rental properties in Israel; c. Development of real estate and rental properties in Europe Central and Eastern Europe; d. Development of real estate and rental properties in the USA; e. Development of real estate and rental properties in the CIS; f. Construction contracting; g. Infrastructure contracting; h. Steel in Israel; i. Steel in Russia 1 ; j. Ceramics. In addition to the segments of operation listed above, the Group operates in the hotel industry and in the communications industry (Channel 9). These operations do not constitute a segment of operations due to their limited scope. The Group performs various other activities through associated companies: 1 Until December 6, 2012, the Group was also active in the steel industry in Russia. In view of the conclusion of Africa Industries holdings (65%) in its subsidiary on December 6, 2012, as stated in Section 15.1(A) to the Description of the Company s Business, the steel sector in Russia is presented in the Company s financial statements as at December 31, 2012 as a discontinued operation. 3

4 The following table summarizes the percentage holdings of the Company in the Group s public companies on March 21, 2013: 1 Company Percentage holding (March 21, 2013) Africa Development (AFID) 68.44% Africa Properties 66...% Danya Cebus 48.46% Africa Residences % Africa Industries % 3. Analysis of the Financial Position 3.1 Following are material data from equity items (in NIS million): December 31, 2012 December 31, 2011 Total statement of financial position 24,607 25,695 Equity attributed to the Company s shareholders 3,768 4,506 Noncontrolling interests 3,744 4,306 Total equity 7,512 8,812 Property, plant, and equipment 1, Investment property 9,919 9,074 Investment property under construction 2,896 3,903 Real estate inventory 1,472 2,175 Investments in investees 859 1,370 Loans to investees Longterm loans, investments, and debt balances Other noncurrent assets Cash and cash equivalents 1,747 1,026 Assets held for sale Other current assets 4,962 6,074 Longterm liabilities 10,645 10,859 Shortterm credit from banks and others 2,461 2,579 Bonds presented in current liabilities Other liabilities 3,348 3,240 1 In 2012, the Company sold its entire holding in Alon USA Energy Inc., a foreign company whose shares are listed for trade on the New York Stock Exchange, for a total consideration of NIS 178 million (of which NIS 119 million were received in the third quarter of 2012). As a result of the sale, the Company recorded a gain of NIS 56 million (of which NIS million were recorded in the third quarter of 2012). 2 The percentage holding relates to the holdings of Danya Cebus in this company. 3 Africa Industries holds 100% of the equity and voting rights in Negev Ceramics, which was, until February 2012, a public company on the Stock Exchange whose shares were listed on the TelAviv Stock Exchange. 4

5 3.2 Liquidity The sources of the Company s liquidity are mainly dividends and debt repayments from the Group s companies, as well as from raising loans, bond issues, sales of holdings in investees, and raising share capital. The liquidity sources of the Group s companies are cash deriving from inter alia their rental properties, sales of apartments, income from operations, sale and disposal of assets and/or holdings in assets, credit lines, longterm loans, and raising share capital. These sources are used to purchase and develop properties and land, discharge liabilities, invest in associated companies, and make other longterm investments. As at December 31, 2012, the Group s liquid balances, including shortterm investments, totaled NIS 2,408 million, compared with NIS 1,653 million as at December 31, The increase in liquid balances as at December 31, 2012 compared to December 31, 2011 stems mainly from an increase in cash balances, resulting from proceeds from a right issue and sale of property in the USA, Israel, and Russia. Proceeds from the sale of property in the USA and Israel and from the rights issue in April 2012 increased the Company s cash balances in the Company s extended solo financial statement (in the matter of the extended solo financial statement, also see Section 5.3 hereinafter). As at December 31, 2012, the liquid balances in the Company s extended solo financial statements totaled NIS 747 million, compared to NIS 311 million as at December 31, The aggregate market value of the Company s holdings in shares of its public subsidiaries, as at March 19, 2013, is NIS 3 billion. In the Arrangement with the Company s bondholders, the Company created a lien on part of its holdings in Africa Properties (51%) and in AFI Development (24.17%). The value of the pledged holdings at March 19, 2013 is NIS 1.2 billion. 3.3 Current assets The balance of current assets as at December 31, 2012 is NIS 7.2 billion, unchanged from the balance as at December 31, The change in the composition of current assets as at December 31, 2012, compared to December 31, 2011 stems mainly from a decrease in inventory of buildings for sale, resulting from the sale of property, mainly the Clock Tower in the USA, and, on the other hand, an increase in the Group s liquid balances resulting from proceeds from the sale of properties stated in Section 3.2 hereinabove. 3.4 Investment property, investment property under construction A. The balance of investment property under construction as at December 31, 2012 is NIS 2.9 billion, compared with NIS 3.9 billion as at December 31, The change in the reporting period was mainly due to the following reasons: (1) A decrease resulting from impairment of investment property under construction in the amount of NIS 835 million (of which, an impairment loss of NIS 40million was recorded in the fourth quarter of 2012), stemming mainly 5

6 from a decrease in AFI Development s rights in four projects in Russia due to changes in the municipal planning policy and development policy of Moscow municipality. For additional details, also see Section hereinafter. (2) A decrease resulting from the firsttime classification in the second quarter of 2012, of the Tverskaya Plaza II and Tverskaya Plaza Ib projects, from investment property under construction to investment property, in the amount of NIS 159 million in total. For additional information see Note 7(A)(2)(C) of the Company s Financial Statements as at December 31, (3) A decrease following the firsttime classification to investment property performed by Africa Properties of an office building adjacent to the AFI Palace Cotroceni mall in Bucharest, stage B of Classic 7 project in Prague, and the Beit Psagot House project in Tel Aviv (following construction completion in the reporting period), of a total amount of NIS 251 million; (4) Increase following additional costs invested in 2012 in the amount of NIS 240 million, mainly in respect of AFI Europe s projects and AFI Development s projects. B. The balance of investment property as at December 31, 2012 totaled NIS 9.9 billion, compared to NIS 9.1 billion as at December 31, The change from December 31, 2011 to December 31, 2012 stemmed mainly from the following reasons: (1) A decrease due to impairment of investment property in the amount of NIS 21 million (of which, an impairment loss in the amount of NIS 20 million was recorded in the fourth quarter of 2012). (2) An increase due to the firsttime classification, in the second quarter of 2012, from investment property under construction to investment property of the Tverskaya Plaza II and Tverskaya Plaza Ib projects in the total amount of NIS 159 million. For additional information see Note 7(A)(2)(B) of the Company s Financial Statements as at December 31, (3) An increase following the firsttime classification from investment property under construction to investment property of an office building adjacent to the AFI Palace Cotroceni mall in Bucharest, stage B of Classic 7 project in Prague, and the Beit Psagot House project in Tel Aviv (following construction completion in the reporting period), of a total amount of NIS 251 million. (4) An increase following the firsttime consolidation of real estate properties in Germany owned by AFI Europe in the amount of NIS 480 million. (5) An increase following the strengthening of the euro and the ruble relative to the shekel in the reporting period in the amount of NIS 43 million. C. Following is a geographic breakdown of the Group s investment property and investment property under construction as at December 31, 2012: 6

7 (1) Investment property Investment property December 2012 Investment property under construction December

8 3.5 Breakdown of the Group s real estate assets, 1 presented in the Company s consolidated statements of financial position as at December 31, 2012 (in NIS thousand): CIS USA Europe Israel Total Land (Real estate) 2 666, ,.18 8,851,66. Residential projects under construction 3 (inventory of buildings for sale) Rental properties under construction 4 (Investment property under construction) 685,.85 65, ,.46 8,.66,486 8,468,.88 1,886,666 6, , ,66. 1,466,688 Rental properties 5 8,418,866 8.,181 6,646,156 8,.58,866 6,686,881 (Investment property) Total Current liabilities The balance of current liabilities as at December 31, 2012 was NIS 6.4 billion compared with NIS 6 billion as at December 31, The increase in current liabilities from December 31, 2011 to December 31, 2012 was due mainly to reclassification of longterm credit to shortterm credit in view of anticipations that the credit would be repaid pursuant to the credit terms, and from advance received on account of the sale of properties in transactions pending closing by AFI Development (the sale of AFI Development s holdings in the Four Winds project company and the sale of stores in AFI Mall). 3.7 Shareholders equity attributed to Company shareholders Shareholders equity attributed to the Company s shareholders as at December 31, 2012 was NIS 3,768 million, compared with NIS 4,506 million as at December 31, 2011 (shareholders equity as at December 31, 2011 was restated after implementing the amendment to IAS Taxes on Income. For details also see Note 2(H)(1) to the Company s Financial Statements as at December 31, 2012). Following are the main changes in shareholders equity attributed to Company shareholders as at December 31, 2012 compared to December 31, 2011: 1 Excluding real estate assets included in property, plant and equipment (mainly in the hotel sector). 2 Presented for the most part at cost (excluding cases of depreciation to below original cost). 3 Presented for the most part at cost (excluding cases of depreciation to below original cost). 4 Presented at fair value. 5 Presented at fair value. 8

9 The Company s loss in 2012 totaled NIS 1,003 million. Increase of NIS 15 million in capital reserves from translation differences (adjustments stemming from the translation of financial statements of foreign operations). Net proceeds of NIS 213 million from a rights issue the Company made in April Increase in net capital reserves from transactions with noncontrolling interests in the amount of NIS 38 million, reflecting mainly the difference between the consideration paid in respect of AFI Development shares and Danya Cebus shares (for additional details see Note 6(C)(2)(3) to the Company s Financial Statements as at December 31, 2012) and the decrease in noncontrolling interests. Shareholders equity per share (including noncontrolling interests) as at December 31, 2012 was NIS compared with NIS per share as at December 31, Shareholders equity per share (excluding noncontrolling interests) as at December 31, 2012 was NIS compared with NIS per share as at December 31, Restatement of earnings (loss) per share: The data on loss per share for the years 2011 and 2010 were restated in view of the rights issue the Company made during the reporting period (for details also see Note 1(C)(2) to the Company s Financial Statements as at December 31, 2012) and due to the retrospective implementation of an amendment to an accounting standard (for details also see Note 2(H)(1) to the Company s Financial Statements as at December 31, 2012). The effect of the restatement on the basic and diluted loss per share is as follows: In NIS For year ended December 31, 2011 As previously reported Effect of the restatement retroactively As reported in these Financial Statements Basic earnings per share Diluted earnings per share In NIS For year ended December 31, 2010 As Effect of the As reported in previously restatement these Financial reported retroactively Statements Basic earnings per share (0.15) Diluted earnings per share (0.15)

10 4. Results of Business Operations 4.1 Set forth below are significant items from the statement of income (in NIS millions): For the year ended December Income from construction and real estate transactions Sale of properties (8) Update of provision for decline in value of inventory of land and buildings (266) Increase (decrease) in fair value of investment property under construction, net (835) 65 (20) Increase in fair value of investment property, net (21) Total income (loss) from real estate initiations (798) 1, Income from rental and operation of properties Income from industry Income (loss) from other activities (12) 1 (11) Other income Income from associated companies, net Administrative and general (287) (326) (287) Amortization of other assets and other expenses (218) (113) (247) Operating income (loss) (510) 1,796 1,164 Financing income ,729 Financing expenses (1,145) (1,110) (1,124) Financing income (expenses), net (784) (838) 605 Taxes on income (73) (401) (152) Income (loss ) from continuing operations (1,387) 557 1,617 Income (loss) from discontinued operations, after taxes (29) Income (loss) for the period (1,396) 635 1,837 Attributable to: The equity holders of the Company (1,003) 319 1,703 Noncontrolling interests (393) The Company s results may experience wide fluctuations between different reporting periods, mainly as a result of the timing of realizations made by the Company and the Group companies, from time to time, the timing of revaluations and writedowns of investment property and investment property under construction, and changes in the financing expenses (net) incurred by the Company and the Group companies, the scope of which is affected by the amount of the net debt, the debt s linkage channels and the net monetary assets and rate of change in the Consumer Price Index and the exchange rates of the various foreign currencies against the shekel in the periods reported. 11

11 8.1 Income (loss) from real estate development The income (losses) from real estate development derive from the following sources: A. Income (losses) from sale of residential units. B. Sale of properties. C. Income (losses) from contracting work. D. Update of the provision for decline in value of the inventory of land and buildings. E. Income (losses) from increase (decrease) in the fair value of investment property, net. F. Income (losses) from increase (decrease) in the fair value of investment property under construction, net Set forth below is a table summarizing the earnings from each of these sources (in NIS thousands): For the Three Months Ended For the Year Ended March 31 December Income from sale of residential units 59,210 46, , , ,276 Gain on sale of properties 76, ,944 (7,790) Update of provision for decline in value of inventory of land and buildings 14,040 20,962 (266,306) 81,792 60,195 Income (losses) from change in fair value of investment property, net (19,997) 166,306 (21,432) 856, ,242 Income (loss) from change in fair value of investment property under construction, net (40,028) 74,399 (835,444) 65,265 (20,290) Income from contracting work 7,857 31,347 41,633 49,741 80,488 Total income from initiations and real estate 21, ,527 ( 800,722) 1,381, , Main updates to fair value In 2012 the Company made updates to fair value, the main ones of which are as follows: Write down of inventories of lands and inventories of buildings held for sale ) 8( A subsidiary operating in the United States recorded a restoration of value with respect to land in the United States, in the amount of about NIS 46 million, in connection with land in Las Angeles (of which about NIS 18 million was recorded in the fourth quarter of 2012), due to receipt of an updated appraisal of the land in ) 1( In the second quarter of 2012, AFI Development recorded a write down, in the amount of about NIS 257 million, in connection with land in the Botanic Gardens project. The write down of this project reflects AFI Development s decision to write off its investment in the project, as stated below. A subsidiary of AFI Development is a co investor in this project 11

12 together with a private company wholly owned by the City of Moscow, which is the main investor in the project (hereinafter the Main Investor ), and which is entitled under the investment agreement with the City of Moscow to receive the lease rights therein. On August 2, 2012, a request was filed in the Court in Moscow on behalf of a third party creditor to declare that the Main Investor is bankrupt, further to a foreclosure imposed on its assets in favor of that creditor. AFI Development estimates, based on an outside legal opinion, that the chances of recovering its investments in this project are not probable. Taking into account the circumstances of the matter, AFI Development decided to write off its investment in this project in its financial statements for the second quarter of Nonetheless, AFI Development announced its intention to continue the efforts to recover its investments in this project and/or to receive the development rights therein. On February 5, 2013, AFI Development announced that further to contacts it carried on with the City, the parties signed an addendum to the investment agreement (hereinafter the Addendum ) whereby the rights of AFI Development in the project were recognized (through a wholly controlled subsidiary, hereafter the Project Company ). Pursuant to the Addendum, the Main Investor will have no contentions with respect to the AFI Development s investments in the project and the Project Company will become the sole investor in the project pursuant to the investment agreement. Further to this, the City approved assignment of the short term lease agreement covering the project s lands from the name of the Main Investor to the name of the Project Company. After an in depth evaluation of the risks to the rights of the Project Company in the project, against the background of the insolvency of the Main Investor, the Project Company decided to make the required payments to the City pursuant to the Addendum in exchange for additional development rights. The total payments under the Addendum amount to about US$18.5 million, which were paid in a number of installments. The decision was made on the basis of the opinion of AFI Development s outside legal advisors, whereby in a case where the Addendum is declared null and void or is cancelled (due to claims of creditors of the Main Investor), the Project Company will be entitled to return of the amounts paid to the City of Moscow. In light of maintenance of the insolvency proceedings, and based on an opinion of AFI Development s outside legal advisors, there is uncertainty regarding the period of the Addendum and/or the possibility of maintaining grounds for its cancellation. Due to that stated above, at this stage the provision recorded, as stated above, with respect to write off of the investment in the project, was not cancelled. ) 6( In the third quarter of 2012, AFI Europe made a write down for decline in value of an inventory of lands relating to projects in Romania, in the aggregate amount of NIS 54 million Write down of investment property under construction ) 8( In the second quarter of 2012, AFI Development recorded a decline in fair value, in the amount of about NIS 282 million, in respect of the Putchotovo project. During 2012, the 12

13 City of Moscow acted to apply across the board changes in the urban planning and development policies in Moscow, the main ones of which being reduction of the construction density and a cutback of zoning changes of lands designated for commercial use within the boundaries of the City of Moscow. Further to that stated above, AFI Development carried on contacts with the authorities of the City of Moscow, with reference to the City s intention to also implement changes, as stated, with respect to the project and its surrounding areas. In the beginning of August 2012, an internal document from the City s planning authorities came to AFI Development s attention (which was not directed to AFI Development), that the built up area in this project is to be significantly reduced. In reliance on this decision and further to additional conversations with City parties, AFI Development s management decided to agree to reduction of the building density and, accordingly, to re plan the project. The significant reduction in the building rights in the project is the main reason for the decline in the fair value of the project compared with its estimated value as at December 31, The decline in value was made based on an external valuation received from the office of JLL, as at June 30, The valuation performed by the office of Cushman & Wakefield, as at December 31, 2012 is attached to the Company s financial statements as at December 31, ) 1( In the second quarter of 2012, AFI Development recorded a decline in fair value, in the amount of about NIS 191 million, in respect of the Kosinskaya project. On July 1, 2012, the borders of the City of Moscow were officially expanded in the southwest direction (an area known as New Moscow ). Prior to this, the President of Russia initiated a plan for gradual transfer of the State authorities to New Moscow. As a result, a trend is visible of rerouting the business activities, in a gradual manner, from the City center to the southwest direction. In the estimation of the project s appraiser, this trend is expected to make marketing of offices located on the east side of the City such as the project more difficult. Taking into account the aforesaid trends, in order to maintain a competitive advantage and a level of revenues as previously planned for the project, AFI Development was forced to update the project concept and to improve the specifications of the property designated to be built in the framework thereof. Update of the concept along with addition of elevators and allotment of larger public areas resulted in a contraction of the area planned for rental. Along with this impact, this update also triggered an increase in the budget for the balance of the project s construction costs. Most of the increase in the budget relates to additional adaptations ( fit outs ) for the public areas, external infrastructures and additional approvals for these needs. Furthermore, costs were added to the updated budget (such as permits, approvals and others) for purposes of adding direct access from the project to Moscow s circular highway (MKAD), as well as in order to prepare an additional land area for outside parking in an attempt to improve the relative number of parking spaces in the project. Update of the planning in order to make the most favorable use of the project due to identification of the 13

14 change in the market trend as a result of expansion of the City s borders, which led to a decline in the project s income producing areas, along with an increase in the construction costs, are the basis for the decline in the fair value of this project. The decline in value was made based on an external appraisal received from the office of JLL, which was attached to the Company s quarterly report for the period ended June 30, The valuation performed by the office of Cushman & Wakefield, as at December 31, 2012 is attached to the Company s financial statements as at December 31, ) 6( In the second quarter of 2012, AFI Development recorded a decline in value, in the amount of about NIS 231 million, in connection with the Tverskia Zestava project stages II and Ib. As part of implementation of across the board changes in the urban planning and development policies by the City of Moscow, the City s authorities are advancing a move toward reducing the scope of the construction in the City s center. Further to that stated above, in 2011 and 2012 AFI Development held discussions with the City of Moscow s authorities addressing the continued development of a number of projects in the Tverskia Zestava area. With respect to some of the projects in this area (the Tverskia Zestava shopping mall, Plaza 1C, Plaza 2A and Plaza 4), AFI Development reached nonbinding understandings with City of Moscow in connection with discontinuance of development of shopping mall and receipt of additional rights in the surrounding area. Concurrent with and further to these understandings, the parties continued the discussions regarding development of the Plaza 2 and Plaza 1B projects. During the period of the discussions, AFI Development s management encountered publications and information releases (sometimes contradicting), in connection with, among other things, decisions of the City with respect to the rights of AFI Development in Plaza 2, Plaza 2A and Plaza 1B, which according to its understanding needed to be clarified, and to the extent necessary, the possibility of taking steps to change or cancel these decisions needed to be examined. Against the background of that stated above, AFI Development sent a letter to the Deputy Mayor of the City of Moscow, wherein the City was request to clarify the development possibilities in connection with these projects. In response to this letter and after additional discussions were held, in August 2012, AFI Development received a letter from the City of Moscow whereby the City of Moscow s authorities will approve development of the areas/buildings in these projects only within the existing areas. In light of that stated above, AFI Development views these two projects as properties designated for improvement within the existing areas and not as projects for new development. Accordingly, in the second quarter of 2012, the classification of these projects was changed from investment property under construction to investment property. Abandonment of the development plans for these projects, including the possibility of increasing their areas, is the basis for the decline in the fair value of the projects compared with their values estimated as at December 31, The decline in value was made based 14

15 on an external appraisal received from the office of JLL, which was attached to the Company s quarterly report for the period ended June 30, ) 8( In 2012, Africa Properties recorded a decline in fair value with respect to land in the area of Ramle, Gezer and Modi in, in the amount of about NIS 11 million, deriving from the fact that the Subcommittee for Objections of the Central District Committee made a decision with respect to land in the area of Ramle, Gezer and Modi in, concerning cancellation of a prior decision of the plenary Central District Committee, regarding change of the stages in the land area in which it is planned, among other things, to construct a logistics park. As a practical result of the decision of the Subcommittee, as stated, the commencement date of development of the logistics park was postponed. In addition, Africa Properties recorded a decline in the fair value in respect of land in area of Petah Tiqwa, in the amount of about NIS 4.9 million, due to a provision recorded by Africa Properties in respect of taxes expected to apply to the land and a decline in the fair value of land of Africa Properties in Bulgaria, in the amount of about NIS 15 million. On the other hand, Africa Properties recorded an increase in fair value of investment property under construction in connection with a project of Africa Properties in the Czech Republic, in the amount of about NIS 4.5 million, and in respect of a building Africa Properties is constructing in the Science Park in Nes Ziona, in the amount of about NIS 5.5 million Income from increase in fair value of investment property, net ) 8( In 2012, AFI Development recorded a decline in fair value, in the amount of about NIS 202 million, in respect of the AFI Mall shopping center (of which about NIS 48 million was recorded in the fourth quarter of 2012). The source of the above mentioned reduction is the strengthening of the ruble against the U.S. dollar in 2012 at the rate of about 5.6%. The value of the property as at December 31, 2012, was determined based on an external valuation received from the office of Cushman & Wakefield. The valuation is attached to the Company s financial statements as at December 31, (2) In 2012, Africa Properties recorded an increase in fair value stemming mainly from a revaluation, in the amount of about NIS 63.6 million, in respect of properties of Africa Properties in the Czech Republic (mainly the Parducheva shopping mall), a revaluation, in the amount of about NIS 88.7 million, in respect of properties of Africa Properties in Romania (the Cotroceni shopping mall and the office tower adjacent thereto), and a revaluation, in the amount of about NIS 62 million, in respect of properties of Africa Properties in Israel including, among others, a revaluation, in the amount of about NIS 17 million, in respect of the Global Park project in Lod and a revaluation, in the amount of about NIS 27 million, in respect of the Weitzman Park project in Nes Ziona. The increase in the fair value was offset by a decline in fair value, in the amount of about NIS 21.3 million, in respect of a property in Bulgaria, and a decline in fair value, in the amount of about NIS 13.6 million, in respect of a property in Serbia. 15

16 In 2011, the Company made the following adjustments to fair value: Writedown of inventory of land and inventory of buildings for sale (1) A subsidiary operating in the USA recorded recovery of the value of its inventory in the USA in the amount of NIS 14 million in respect of land in Gowanus. This adjustment was recorded in the first quarter of 2011 following the receipt of a revised appraisal for a number of plots of land and an indication from a transaction that was concluded in the period of report of the financial position in respect of one specific plot. (2) A subsidiary operating in the USA recorded recovery of value of NIS 112 million in respect of building inventory in the Marquis and 20 Pine projects in the USA (of which NIS 21 million was recorded in the fourth quarter of 2011). This adjustment was recorded following the receipt of a revised appraisal of the project Income in respect of increase (decline) in the fair value of investment property under construction, net: (1) In 2011, a positive revaluation was recorded of investment property under construction of NIS 26 million (of which NIS 4 million was recorded in the fourth quarter of 2011). This amount is due to interim income generated to Danya Cebus in respect of investment property projects under construction that are being executed for the Group. (2) A subsidiary of AFI Development recorded an increase in fair value in the second quarter of 2011 of NIS 45 million in respect of Stage 2 of the Paveletskaya project. The cost of the project was depreciated in 2008 and 2009, in view of the situation in the Russian real estate market and uncertainty about the continued development of the project. Due to the recovery in the real estate market in Moscow in 2010 and 2011, AFI Development intends to develop the project and it is now in the early stages of development and therefore an increase in fair value was recorded, based on an external opinion received from JLL. (3) In November 2011 a decision was taken by Moscow municipality according to which the Tverskaya Zastava Mall (part of the Tverskaya Zastava project; hereinafter, Tverskaya ) in Moscow will be returned to the Municipality and as compensation, Moscow municipality will ratify and renew AFI Development s development and lease rights in the other stages of the project. Among other things, the Municipality will not charge AFI Development with the costs of municipal development it was due to pay in the project. The writeoff of the Tverskaya project from AFI Development s books and the recording of the remaining stages of the project in accordance with the understanding reached had no material effect on the results for the period. As at December 31, 2011, external valuations were received from JLL for Tverskaya in accordance with the understanding reached. (4) In 2011 Africa Properties recorded an increase in fair value due mainly to an increase in fair value of assets in Israel in the amount of NIS 52.7 million (mainly in respect of the land purchased in Ramleh, Gezer, Modi in, and Africa Properties rights in the Ahad Ha am Project in Tel Aviv) and due to an increase of approximately NIS 6.8 million in the fair 16

17 value of the Classic 7 Project Stage B in the Czech Republic. The increase was set off by a decline in fair value of NIS 25.3 million in respect of the Varna Business Park in Bulgaria, and a decline of NIS 6.5 million in respect of land owned by Africa Properties land in Lod Income in respect of increase (decrease) in the fair value of investment property, net: (1) A subsidiary of Africa Development recorded an increase of NIS 365 million in fair value in 2011 in respect of the AFI Mall project in Moscow (of which NIS 155 million was recorded in the fourth quarter of 2011). The increase in the fourth quarter of 2011 was made on the basis of an external appraisal received from JLL as at December 31, The adjustments in the fourth quarter of 2011 include NIS USD 21 million in respect of a value added tax refund received in February 2012 which reduced the estimated Project costs and increased revaluation income in the fourth quarter of (2) AFI Development also recorded income of NIS 417 million from the purchase of the Municipality s share (25%) of the AFI Mall project in the third quarter of (3) A subsidiary of AFI Development recorded an increase in fair value of NIS 45 million in the second quarter of 2011 in respect of Stage 2 of the Paveletskaya project. The cost of the project was depreciated in 2008 and 2009 in view of the situation in the Russian real estate market and uncertainty about the continued development of the project. Due to the recovery in the real estate market in Moscow in 2010 and 2011, AFI Development intends to develop the project and it is now in the early stages of development and therefore an appreciation was recorded in fair value based on an external opinion received from JLL. (4) In 2011, Africa Properties recorded a net impairment of NIS 1.1 million in fair value of investment property. The impairment in fair value in 2011 was due mainly to an impairment in fair value of NIS 46.2 million in respect of the Varna Business Park project in Bulgaria (due mainly to the departure of a major tenant) and impairment in fair value of NIS 16.9 million in respect of the Airport City project in Belgrade. The impairment was partly set off by an appreciation of NIS 41.5 million in respect of Africa Properties assets in the Czech Republic and an appreciation of NIS 25 million in respect of properties in Israel. 4.4 Property operations and rental In 2012, the Company s income from property operations and rentals totaled NIS 732 million, compared to NIS 672 million in The increase from 2011 to 2012 stemmed mainly from the opening of the AFI Mall in Moscow in March Since the opening date, income of USD 65 million was recorded in 2011, compared with USD 65 million in The Company s income from property operation and rental in 2011 was NIS 672 million, compared with NIS 440 million in Growth in income stemmed mainly from the opening of AFI Mall in Moscow, as stated above Following is a breakdown of the net income in respect of property operation and rentals (NOI) by geographic location (in NIS millions): 17

18 Net income from property operation and rent Q4/12 Q3/12 Q2/12 Q1/ Properties in Israel Properties in the USA 1 1 (3) (2) (3) (15) 17 Properties in Europe Properties in Russia Total Income from the steel sector in Israel and the ceramics sector Income from these activity sectors in 2012 totaled NIS 135 million, compared with NIS 184 million in The decline in profitability in 2012 compared to 2012 stemmed, in the steel sector in Israel, from a negative price trend that persisted throughout 2012 compared to a positive trend in part of the corresponding period of the previous year, and in the ceramics sector, stemmed from an increase in selling costs as a result of opening new stores and expanding existing stores, which have yet to generate income in Income from these activity sectors in 2011 totaled NIS 184 million, compared with NIS 126 million in The increase in profitability in 2011 stems from steel prices that were higher than prices in the corresponding prices in 2010; from increased sales turnover in 2010 in the steel sector in Israel; from the volume of operations of Negev Ceramics in the ceramics sector, resulting from an increase in retail operations; from the acquisition of 75% of the issued and paidin shareholders equity of Orgal A.L.P. (2007) Ltd; from a change in the product mix and acquisition of the entire issued and paidin shareholders equity of H.G.I.I. Construction Materials Marketing and of Via Arcadia Home Design Ltd. 4.6 Income (Losses) from associated companies Following are the Group s main income (loss) items generated by its holdings in associated companies (in NIS thousands): For the three months ended For the year ended December 31, 2012 December 31, 2011 December 31, 2012 December 31, 2011 December 31, 2010 Associated companies in 66,666 86,866 6.,668 58, ,..1 Russia 1 Associated companies in the USA 2 5,664 66,1.6 8,666 56,846 68, In the year 2012 the total revaluation of investment property in Moscow in respect of the Four Winds Project was NIS 71 million (of which NIS 87 million was in the fourth quarter of 2012, following an adjustment to the value of the property in the sale of AFI Development s holdings in the property company that was liquidated after the date of the statement of financial position). In 2011, the amount includes revaluation in respect of the above Four Winds project in the amount of NIS 90 million before tax (of which NIS 20 million were recorded in the fourth quarter of 2011), following receipt of a revised appraisal of the project as at December 31, In 2012, this amount includes revaluation of investment property in respect of the Times Building in New York in the amount of NIS 77 million (of which NIS 18 million were recorded in the fourth quarter of 2012), following a revised property evaluation. In 2011, this amount constitutes, primarily, AFI USA s share in the income generated by the 18

19 For the three months ended For the year ended December 31, 2012 Associated companies in 6,668( Europe 1 December 31, 2011 December 31, 2012 December 31, 2011 December 31, 2010 ) ) 4,6.6( ) 88,666( 65,1.6 15,655 Africa Hotels 6,661 ) 86,688( 5,466 ) 16,68. ( Other ) 8,.66( ) 4,565( ) 8,885( ) 6,866( 6.,618 Total General and administrative expenses General and administrative expenses in 2012 totaled NIS 287 million compared with NIS 326 million in The decrease in general and administrative expenses in 2012 compared to 2011 stemmed mainly from the decline in provisions for doubtful debts in 2012, when a provision of NIS 30 million was recorded, compared with a provision of NIS 47 million recorded in The NIS 17 million decrease stemmed mainly from the reduced need for a provision, mainly in respect of the debts of AFI Development s customers, and from a decrease in general and administrative expenses due to the Group s steps to enhance organizational efficiency. In 2011, general and administrative expenses totaled NIS 326 million, compared with NIS 287 million in The increase in general and administrative expenses in 2011 compared to 2010 stemmed mainly from an increase in steel and ceramics operations following the acquisition of new operations and their inclusion in the financial statements of Africa Industries in 2011, and from a provision for doubtful debts in the amount of NIS 47 million, stemming mainly from debts of AFI Development s customers compared with NIS 20 million in 2010, which stemmed mainly from AFI Europe s operations. 4.8 Other income In 2012, the Group recorded other income of NIS 148 million, which mainly include income from the conclusion of the sale of the Company s holdings in Gottex Group in 2009: On November 22, 2012, the buyers paid the Company USD 7.5 million (approximately NIS 29 million), which constitutes the contingent consideration in respect of the said sale. This 1 company that owns the Times Building in New York. In the second quarter of 2011, the Company revaluated the property following an agreement to sell part of the building and an external evaluation that was obtained for the remainder of the building, revised as at December 31, 2011, less losses charged to the Apthorp project, primarily in respect of financing expenses. In 2011, the amount is primarily AFI USA s share in the income generated in the company holding the Flora Mall in the Czech Republic. This income was recorded following an agreement signed to sell the mall and expresses the value of the property determined in the transaction. 19

20 amount was recorded in the Company s financial statements for the third quarter of 2012 as income under other income. In March 2012, the sale of the Company s (100%) holdings in a subsidiary, Cebus Rimon Building Industries and Development Ltd, which owns real estate in the industrial zone, was for a consideration of NIS 76.2 million (and VAT) was concluded. Total income in respect of the sale was NIS 68 million, which was recorded in the first quarter of Depreciation of other assets and other expenses Other expenses in 2012 mainly included: The main expense included in this item is the impairment of an investment in an associated company in Poland, in which Africa Properties holds 30% of the rights (hereinafter, the Associated Company ). The Associated Company owns land in Warsaw on which it had planned to construct a large residential neighborhood and shopping center (mall). The assessment of an impairment was conducted, among other reasons, in view of a certain slowdown recently recorded in the residential market in Poland; legal and planning difficulties that the Associated Company encountered in constructing the shopping center; and in view of the uncertainty of the continued development of the project due to the partner s intention to take steps to sell the land owned by the Associated Company. Although no decision to sell the land owned by the Associated Company has been made, Africa Properties decided to depreciate the investment by an amount of NIS 97 million, based on the estimated consideration that Africa Properties expects to receive in the event that the Associated Company disposes of the land A writedown on an investment in an associated property company of AFI USA, following a revision to the projected consideration that the property will generate. Total depreciation recorded was NIS 31 million. Other expenses in 2011 mainly included: An impairment recorded in the first quarter of 2011 in respect of a jointly controlled company presented at book value, in the amount of NIS 20 million Impairments of NIS 12 million in respect of hotel properties in AFI Development following receipt of revised property evaluations performed in A provision made by Africa Properties in respect of a settlement with the owner of land in Romania in the third quarter of Financing income/expenses In 2012, the Group s financing expenses totaled NIS 1,145 million compared with NIS 1,110 million in Most of the Group s financing expenses in 2012 were in respect of the Group s indexlinked liabilities, mainly those of the Company. In 2012, the known CPI rose by 1.44% compared with an increase of 2.55% in In contrast, the Group s financing income in 2012 totaled NIS 362 million, compared with NIS 272 million in the previous year. Financing income in 21