PART A DESCRIPTION OF THE COMPANY S BUSINESS

Transcription

1 Africa Israel Investments Ltd. PART A DESCRIPTION OF THE COMPANY S BUSINESS FOR 2016

2 Table of Contents Description of the Company s Business Topic Page Part 1 Description of the General Development of the Company s Business 1. General 1.1 The Company s activities and description of the development of its 3 business 1.2 The Company s main business segments Investments in the Company s equity and transactions in its shares Dividends 21 Part 2 Other Information 1.5 Financial information regarding the Company s business segments Changes in the boundaries of the Company s business segments The general environment and impact of external factors on the Company s operations 27 Part 3 Description of the Company s Business by Segment 1.8 Real estate development in Israel Rental property in Israel Real estate development and rental property outside in Europe Other operations - Properties in the United States Real estate development and rental property in the CIS Construction contracting Infrastructure contracting Steel in Israel Home Design 251 Part 4 Other Information on the Group and the Company 1.17 Human capital Working capital Africa Israel Hotels Ltd Financing Taxation Material agreements Legal proceedings Financial information with respect to geographic sectors Goals and business strategy Outlook for the coming year Discussion of risk factors 313 1

3 DESCRIPTION OF THE COMPANY S BUSINESS Part One Description of the General Development of the Company s Business 1. General In this section of the Periodic Report on the description of the Company s business, the following abbreviations will have the meanings appearing next to them: The Company or Africa Israel Africa Israel Investments Ltd. The Group or The Company Group Africa Israel Investments Ltd., including all its subsidiaries. Subsidiary as defined in the Securities Law. AFI Development AFI Development Plc., whose shares are listed on the London Stock Exchange, and which was owned by the Company until September 7, Africa Financing Africa Israel (Financing) 1985 Ltd., a private company wholly owned by the Company. Africa Residences Africa Israel Residences Ltd., a subsidiary of Danya Cebus, whose shares are listed on the TASE. Africa Hotels Africa Israel Hotels Ltd., an affiliate of the Company. Africa Properties Africa Israel Properties Ltd., a subsidiary of the Company whose shares are listed on the TASE. AFI Europe AFI Europe NV, a wholly owned subsidiary of Africa Properties. AFI USA AI Holdings (USA) Corp., an (indirectly) wholly owned subsidiary of the Company, registered in Delaware, United States. Danya or Danya Cebus Danya Cebus Ltd., a subsidiary of the Company. Africa Industries Africa Israel Industries Ltd., a subsidiary of the Company whose shares are listed on the TASE. Negev Ceramics Negev Ceramics Ltd., a subsidiary of Africa Industries. The Companies Law - The Companies Law The Securities Law The Securities Law 1968 The TASE The Tel Aviv Stock Exchange Ltd. The Income Tax Ordinance or the Ordinance The Income Tax Ordinance [New Version]. This section of the Periodic Report on the description of the Company s business should be read in conjunction with the other parts of this Periodic Report, including the notes to the financial statements. 2

4 1.1 The Company s activities and description of the development of its business The Company was incorporated in 1934 as a private company, pursuant to the Companies Ordinance, under the name of Africa Palestine Investments Ltd, and in 1967, the Company changed its name to its present name. In 1973 the Company became a public company and its shares were listed on the Tel Aviv Stock Exchange (hereinafter, the TASE ) Since 1997, Mr. Lev Leviev has been the controlling shareholder of the Company (including through corporations which are wholly owned and controlled by him) As of the date of this Periodic Report, the Company directly and indirectly owns a large number of subsidiaries, including three public corporations whose shares are listed on the TASE, as detailed in the following table (the Company also owns other companies whose shares are listed on the TASE and/or other stock exchanges, as set forth in Section hereinafter): Company Africa Israel Residences Ltd. Africa Israel Properties Ltd. Africa Israel Industries Ltd. Equity attributed to Company shareholders as at Decemebr 31, 2016 (NIS thousands) Holdings as of December 31, 2016 (not fully diluted) Company Subsidiaries Holdings as of the date of this Periodic Report (not fully diluted) Market value of the Company s holdings as of March 23, 2017 (NIS thousands) 845, % 32.47% 6,,,1 4,1,4,1,, 55.57% 55.57% 4,676 Business Segment as of date of this Periodic Report Development and construction of residential projects in Israel, and the construction, management, and maintenance of a rental housing project in Israel. Rental properties in Israel, and development of real estate and rental properties in Europe. ) 643,16,( 34.51% 34.51% 662 Steel and home design 1 The controlling shareholder of the Company is Mr. Lev Leviev and the following corporations are controlled by him: Memorand Ltd., Memorand Management (1998) Ltd., Memorand Investments (2000) Ltd. At the date of this Periodic Report, Mr. Leviev holds (directly and indirectly) 98,926, ordinary shares of NIS 0.1 par value each, which constitute 48.13% of the Company s issued share capital and voting rights (after deducting the dormant shares held by the Company). It should be noted that, as indicated to the Company, all Mr. Leviev s holdings are pledged under fixed and/or floating liens, to secure various liabilities to banks in Israel (and/or their branches overseas) in connection with credit granted to Mr. Leviev and/or to companies fully owned and controlled by him. In this context, a part of the shares are held in trust for Mr. Leviev and companies he controls by Poalim Trust Services Ltd and some are held in trust by Wexler Bergman and Associates Trusts Ltd. Most of Mr. Leviev s holdings in the Company, in the amount of about 29.5% of the Company s issued share capital and the voting rights therein (after deducting the dormant shares held by the Company), are pledged in favor of Bank Hapoalim Ltd. 3

5 Following are data on the cash flows of the Company and several companies in the Group for the years 2015 and 2016: Company Cash flow from ordinary activities for the year ended Cash flow from investment activities for the year ended Cash flow from finance activities for the year ended Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2015 Dec. 31, 2016 Company (extended solo) 1 ) 45,,67( ) 8,,25( 385,526 6,3,312 ) 547,345( )562,816( Africa Israel Residences Ltd. (consolidated) 664, ,5,7 ) 4,2,734( ) 55,4,5( 34,,21 )51,785( Africa Israel Properties Ltd. (consolidated) 2 38,6,5 75,4,6 ) 477,746( 6,7,151 6,146 )47,467( AFI Europe NV (consolidated) 467, ,783 ) 65,,55, ( ) 444,351( 76,485 52,,14 Danya Cebus Ltd. (consolidated) 3 256,,21 662,228 ) 2,5,,43( ) 6,3,511( 44,161 3,,527 Africa Israel Industries Ltd. (consolidated) 651,276 61,,,55 ) 78,151( ) 41,161( ) 665,542( )65,,326( AI Holdings (USA) Corp. (consolidated) ) 5,858( ) 26,556( 67,,822 62,241 ) 643,555( 41, Proceedings of the Company s previous Arrangement of its liabilities to old bondholders On March 21, 2010, the District Court of Tel Aviv Yaffo certified the debt Arrangement between the Company, its shareholders, and its Controlling Shareholder, with the Company s old bondholders (hereinafter, the Previous Arrangement ), after the Arrangement had been approved by the general meeting of all Company bondholders on March 14, 2010 (hereinafter, the Old Bonds ), and by a shareholders meeting As part of the Previous Arrangement, the Company issued bonds (Series Y), which were listed for trade on the TASE, to the Old Bondholders, in the total principal amount was NIS 1,016 million (redeemed in full in an early redemption by the Company performed on January 20, 2011) and bonds (Series Z), listed for trade on the TASE, in the total principal amount of NIS 3,626 million. Bonds (Series Z) are payable in 13 equal annual installments beginning from May 2013, and are linked to the CPI and bear annual interest at the average rate of 7% (the interest rate increases gradually from 6% per annum to 10.75% per annum), which is payable bi-annually beginning from November For information on suspending the payments to the Company s financial creditors, see paragraph hereinafter On January 1, 2013, 4 the Company purchased bonds (Series Z) in a total par value of NIS 1,468,484, in exchange for an issue of NIS 1,587,901,654 par value of bonds (Series ZA), as part of a swap transaction (hereinafter, the Swap Transaction ). Bonds (Series ZA) are payable in 12 installments as follows: (a) the first payment equal to 18% of the principal amount was paid on January 22, 2013; (b) the second payment equal to 5% of the principal amount was 1 Including the following companies: Africa Israel Financing (1985) Ltd., Africa Israel Investment House Ltd., Africa Israel Trade and Agencies Ltd. 2 Excluding AFI Europe NV (and its subsidiaries), a subsidiary of Africa Properties. 3 Excluding Africa Residences (and its subsidiaries), a subsidiary of Danya Cebus. 4 After the meeting of the Company s bondholders (Series Z) resolved to approve an addendum to the Deed of Trust of the bonds (Series Z), concerning certain adjustments to the Deed of Trust related to the inclusion of bonds (Series Z) in the collateral made available to secure the Company s liabilities toward bondholders (Series Z), as set forth in detail in Section (b) hereinafter. 4

6 paid on May 16, 2015; (c) the balance of the principal of the bonds (Series ZA) is payable in 10 equal annual continuous consecutive installments, beginning from May 16, 2016 and ending on May 16, For information on suspending the payments to the Company s financial creditors, see paragraph hereinafter Under the Previous Arrangement, the Company allocated to the Old Bondholders 39,383,506 ordinary shares of NIS 0.1 par value each of the Company; and transferred a total of 3,372,948 ordinary shares of NIS 1 par value each of Africa Properties to the Old Bondholders, such that the Company s holding in Africa Properties decreased from 68% to 56%; and transferred a total of 92,720,923 Global Depository Receipts (GDR) listed for trade on the London Stock Exchange, which represent ordinary shares of AFI Development of USD each. For information on the sale of the Company s entire holdings in AFI Development, see Section hereinafter In the years from 2011 to 2014, the Controlling Shareholder completed his commitment under the Previous Arrangement to invest a total of NIS 750 million in the Company (including partial linkage differences), as part of a rights issue performed by the Company. In view of the completion of the Controlling Shareholder s commitment, Hermetik Trustees (1975) Ltd, the Bondholders Trustee, transferred to the Company 12,456,126 ordinary shares of the Company that had been allocated in favor of Hermetik Trustees (1975) Ltd, and constituted the Agreed Relief Shares that were collateral for the Bondholders Debt Arrangement proceedings with the Company s Old Boldholders On May 17, 2016, the Company published an immediate report, in which the Company announced that in view of the significant worsening of AFI Development s financial situation,in view of the possibility that immediate repayment of USD 611 millions in loans might be demanded, and AFI Development s state of insolvency in the immediate term, or alternatively the disposal of AFI Development s significant core assets developments that had a significant adverse effect on the chances that the Company s assessments of its ability to meet its long-term liabilities would be realized the Company s Board of Directors concluded that uncertainty currently surrounding the Company s ability to meet its liabilities, and taking a considered perspective, to properly address the risks described above as well as other adverse changes that might occur in the future, and as a result, an improvement in the Company s chances of servicing its debts, their responsibility obligates them to commence with negotiations with the Company s bondholders as soon as possible, to developed a reorganization plan for the Company s obligations toward all its bondholders, which would include strengthening of the Company s equity base, among other things Furthermore, to reexamine the Company s plans, the Company s Board of Directors believes that it is in the interests of the Company (and the interests of the bondholders) support a suspension of the management s plans to dispose of additional significant core assets of the Company until said negotiations have been exhausted and the situation becomes clearer. Consequently, in view of the Company s liquid balances, as long as the negotiations to develop a settlement continue, the 5

7 Company cannot continue to service the principal and interest payments of its debts to its financial creditors according to the current repayment schedules On May 29, 2016, the bondholders decided to appoint a joint representative for series Z and Agreement [bondholders], and to appoint a separate representative for series BB [bondholders] On August 28, 2016, the Company issued a clarification that in the discussions with the representatives of the boldholders and the trustees of the bondholders, several alternatives to promote a debt settlement for the Company were discussed, including publication of an agreed outline for investing in the Company s equity (either by the controlling shareholders or by another investor), in combination with refinancing of the Company s debt and/or an outline to sell additional Company assets On September 26, 2016, the Company s Board of Directors among other things adopted a resolution to appoint Mr. Amir Burger as an observer on behalf of the trustees, and approved his various powers (hereinafter, the Observer ). The Company s Board of Directors confirmed that the Observer is entitled to receive information regarding the Company, subject to a nondisclosure obligation, and to attend meetings of the board and the board committees (with the exception of meetings related to the Company s actions involving its bondholders) and the relevant management forum On September 29, 2016, the Company announced that several resolutions adopted by the Company s board regarding the promotion and examination of a comprehensive debt arrangement for the Company by introducing an investor into the Company (either by the controlling shareholder or by another investor)(hereinafter, the Comprehensive Arrangement Track ), concurrently with an examination of the option of selling the Company s main assets (hereinafter, the Sale of Holdings Track ), have come into effect. As part of the above actions, the Company s Board of Directors approved the establishment of a special, independent board committee including two external directors and an additional independent director who are unrelated to the controlling shareholders (hereinafter, the Committee ) and also defined its duties and powers, including with respect to determining the procedure for submitting proposals in both tracks, determining the schedules of the proposal submittal procedure, and approval of the relevant offerors Among its duties, the Committee will review the various proposals, decide to promote negotiations jointly with the Company management with the potential offerors regarding the Comprehensive Arrangement Track or the Sale of Holdings Track, develop recommendations to the Company s Board of Directors, and oversee the procedures with respect to both tracks The Committee is also overseen by the Company s management and by an investment banker selected by the Committee and approved by the trustees (hereinafter, the Investment Banker ), and if necessary, by officers in the subsidiaries or external consultants, and operates in transparency and collaboration with the trustees, the members of the representations, and the Observer. 6

8 It should be noted that the decision on entering into any transaction that is binding on the Company will be subject to the approval of the board of directors and all other approvals required by law. Furthermore, any decision regarding the sale of the Company s holdings in its subsidiaries and decision regarding a Comprehensive Setllement shall also be subject to the approval of the Company s bondholders As part of these moves, on December 1, 2016, the Company published an offer to submit offers in the Comprehensive Arrangement Track and in the Sale of Holdings Track, which the Committee and the Investment Banker developed, requesting the various offerors to submit a non-binding offer no later than January 16, 2017 (hereinafter, the Invitation ) According to the terms of the Invitation, it was determined that offers that submit initial nonbinding offers that are approved by the Committee will be entitled to submit binding offers, after various tests incxluding due diligence tests are performed. For additional information, see the immediate report issued by the Company on December 11, 2016 (ref. no ). The information contained in said immediate report is included herein by reference It should be noted that until January 16, 2017, several non-binding offers from various investors were received, either under the Comprehensive Arrangement Track or under the Sale of Holdings Track, including a joint offer of the current controlling shareholders and Mr. Motti Ben Moshe On February 1, 2017, the trustee of the Company s bonds (Series Z-BB) announced that the meetings of bondholders (Series Z-ZB) approved to authorize the representations, after having consulted with the Investment Banker and the legal and economic advisors, to develop and determine on behalf of the bondholders their position on the selection of the offers whose offers would pass to the next stage of the process, and with whom negotiations woult be conducted, and their position on the detailed outline of the following stage of the procedure, in order to obtain the best terms and promote the procedure, and to develop and determine on behalf of the bondholders their position on the option to include a compensation mechanism in respect of expenses and/or break-up fee and/or stalking horse offer at conventional rates (to they extent that they conclude that this would create the best terms of offer and significantly improve the changes of success of the procedure) Offerors who submitted initial non-binding offers that were approved by the board of directors subcommittee in charge of receiving and handling the receipt of offers, may submit binding offers by April 4, 2017, after various tests including due diligence tests are performed in the manner defined by the Committee; such offers to be submitted on the offer forms and sales agreements to be drafted by then Company, attached by banking or other guarantees in the amounts and rates as defined by the Committee As at the date of this report, no binding offers have been received, either in the Comprehensive Arrangement Track or the Sale of Holdings (in the Company s subsidiaries) Track. 7

9 1.1.6 Delineation of the Group s operations To the best of the Company s knowledge, Mr. Lev Leviev, the controlling shareholder of the Company, operates and invests in Israel and overseas, either directly or indirectly (including through corporations owned by him), including in areas of operation in which the Group companies operate and/or invest, and/or in areas of operation that are tangential to several areas of operation of the Company, such as real estate. As of the date of this Periodic Report, no other agreement or other arrangement that limits Mr. Leviev s aforementioned areas of operations or investments has been signed between the Company and Mr. Lev Leviev In addition, the Company has direct and indirect holdings in a large number of other companies As noted above, the Company has holdings in a large number of companies engaged in various areas of activity. For details on the areas in which the Group operates, see Section 1.2 below. The Company views its holdings in a company as a material holding if and to the extent that the sum of its investment therein (as included in the Company s financial statements as of December 31, 2016) constitutes at least 5% of the Company s shareholders equity (according to its consolidated financial statements, including minority rights). Furthermore, even if the above condition is not satisfied, the Company views its holdings in a company as a material holding if it is significant to the Group and/or to its operations due to other circumstances (including circumstances that constitute forward-looking information), such as the need for significant investments in the future, significant future returns, exposure of and significant risks to the Company s operations, etc. In this context it is further clarified that in general, the description contained in this Periodic Report includes only information that the Company considers material information. Nonetheless, in several cases, in order to present a complete picture, the Company also included descriptions in greater detail than required, which also includes information that it does not necessarily consider material information As of December 31, 2016, the Company including all its subsidiaries is engaged in holdings and investments in a diverse range of areas of activity in Israel and overseas, including CEE countries. The Group s business policy is based on planning of investments, identifying business opportunities, and a high standard of entrepreneurship and management. The Group operates in the following seven areas that are reported as business segments in the Company s financial statements as of December 31, 2016: 1 A. Real estate development in Israel, including development and construction of residential construction in Israel, and the construction, management, and maintenance of a rental housing project in Israel. B. Rental properties in Israel 1 Notably, until the Company s financial statements as of September 30, 2014, the Company also included as part of its business segments, the segment of real estate development and rental properties in the United States. Nonetheless, in view of the sale of a considerable share of the Group s assets in the United States in recent years, real estate development and rental properties operations in the United States does not meet the quantitative criteria for a reportable business segment as of the date of this report, and beginning from the Company s annual financial statements as of December 31, 2014, these operations have ceased to be an operating segment. 8

10 C. Real estate development and rental properties in Europe D. Construction contracting E. Infrastructure contracting F. Steel G. Home design Furthermore, as of the date of this Periodic Report, the Group has invested in a corporation that operates in the hotel sector, and was engaged in real estate development and rental properties in the United States. It should also be noted that until September 7, 2016, the Company was also engaged in the development of real estate and rental properties in Russia. Nonetheless, in view of the conclusion of the transaction to sell the Company s entire holdings in AFI Development, the subsidiary through which these operations were conducted, the results of this operating segment, which are included in the comparasion figures in the Company s consolidated financial statements for the year 2016, are presented as discontinued operations. For additional information on the conclusion of said transaction, see paragraph 1.12 hereinafter Aspects of the Company s operations as a holding company Throughout all its years of operation, the Company s operations mainly focused on various types of real estate development. In the late 1990s, the Company began to extend the areas of its operations outside the borders of Israel, with emphasis on Russia, East Europe, and the United States. Concurrently, the Company purchased several companies over the years, which engage in areas that are tangential to real estate development: project execution, steel and iron processing and marketing, and the manufacture and marketing of home-related products and other finishing materials for buildings. As of the date of this Periodic Report, the major share of operations in real estate development is concentrated in investees in Israel and overseas, and the major such investees are public companies: Africa Residence, which engages in residential real estate development in Israel; Africa Properties, which engages in the development of rental properties in Israel and in residential real estate development and rental property development mainly in Eastern Europe; In addition, the Company, through AFI Development, held real estate properties in Russia, zoned for various uses, and through AFI USA, a wholly owned subsidiary, the Company owned several real estate properties in the United States, zoned for various uses, mostly in New York. In recent years, the operations of this company have focused on the sale of all the Company s properties in the USA rather than the purchase or development of additional real estate properties. The operations that are tangential to real estate development are mainly concentrated in Danya Cebus, a private company wholly owned by the Company, which engages in construction projects (residential and non-residential) and infrastructure, and through Africa Industries, which owns two clusters of wholly owned private companies: the Packer Steel Group, which 9

11 concentrates steel and iron processing and marketing, and Negev Ceramics, which concentrates the manufacture and marketing of ceramics and other finishing products for residential apartments. With attention to the above, business opportunities (including joint ventures with third parties) are referred to Group companies according to the main areas of operations and region of operations of Group members, with no formal arrangements of delineation of areas of operation(arrangements of such a type were in effect in the past or have expired). One of the few exceptions to the situation described above is participation in infrastructure and public construction projects in the PPP/BOT segment (such as the Cross-Israel Highway, the Light Train, the IDF Training City, etc.), as participation in projects of this kind is generally in the form of a tender process, and is generally conditional upon prior experience and/or proof of high financial strength, which the other Group companies are occasionally unable to meet on their own. In such cases, the Company participates in these projects, utilizing the expertise, knowledge, and performance abilities of the various Group companies, under orderly subarrangements with these companies, subject to the approvals required by law. Another exception to the aforementioned description is the joint participation of Africa Properties and Africa Residences in tenders for the construction and operations of rental housing projects, since projects of this type combine aspects of development, planning, and development of residential real estate in Israel, which are within the fields of Africa Residences experience and expertise, together with aspects of long-term financing and management of rental projects as long-term income-generating properties, which are fields within the experience and expertise of Africa Properties. Another exception is the joint operations of Africa Residences and Danya Cebus in Buyer Price tenders, in view of the nature of Buyer Price tenders, in which tenders are awarded according to the lowest final sales price to housing buyers in each project, on the one hand, where the demand for Buyers Price units is guaranteed at a high probability, on the other hand, and the chances of winning these tenders are mainly influenced by the building costs. Under these circumstances, there is understandable significance to incentivize contractors to price their construction work at cost, by granting them a share in the developer s profit. Therefore, Africa Residences working jointly with Danya Cebus, and involving Danya Cebus is several Buyers Price tenders, makes it possible to obtain Danya Debus commitment to perform the construction works at cost (waiving a developer s fee), which increases the chances of winning tenders of this type. This format of operations allows both parties to benefit from Africa Residences experience and expertise on all aspects of real estate development and planning in Israel, and from Danya Cebus experience and expertise, even if Danya Cebus does not function as the building contractor in the project, and increases the chances of obtaining optimal business results in these Buyers Price tenders. 10

12 Furthermore, significant synergies exist between the real estate development companies and the Group companies that engage in building inputs (construction services, steel and iron, ceramics and other finishing products). The close inherent connection between engagement in real estate development and investment in inputs in project execution is reflected in extensive business ties among the Group companies, in the form of commitments to execute projects and to purchase raw materials and finished materials. Due to corporate governance applicable to the Group companies, these commitments are subject to the provisions of law that apply to transactions involving interested parties, which, on the one hand, require relatively lengthy approval procedures, but, on the other hand, ensure transparency and careful examination of the market terms on which they are made, in the interests of all the involved parties. The Company believes that this internal synergy generates added value from a Group perspective, as beyond the agreements that are made on market terms, the familiarity and trust that exist among the managers of the Group companies contribute to the efficiency of the engagement procedures and to their performance and to savings in transaction costs (such as waivers of demands for collateral, flexibility of terms, responding to unexpected events, etc.), and foster a higher degree of identification and involvement on part of the parties companied to relationships between clients and their suppliers or service providers. Furthermore, the focus on the real estate sector, and the Group s global business distribution contributed to the creation of international ties and knowledge bases among the Group companies executives, which is available to be used in the interests of the business development of all Group companies. For illustration, a considerable share of the Group companies operations focus on the supply of construction inputs in countries outside Israel, which commenced after the business infrastructure of the real estate development companies became established in those countries, and was initially supported by the development companies staff infrastructure and the business ties that these countries developed in those countries. The current structure of the Group, as a holding group that owns a cluster of companies, the majority of whose main business arms operate under publicly owned companies, together with its corporate governance and the regulatory regime that applies to public companies, dictates that the managerial independence of each of these main arms be maintained, and each of which maintains a business management function that is independent to some degree. Furthermore, this combination, which places outside control and oversight functions in each publicly owned company due to the obligation to appoint independent, outside directors in each publicly owned company. In light of this situation, the Company s key role is the development of a master business policy for the Group, which uses sources effectively and performs calculated allocation of resources, alongside activities to assimilate the policy and implement it in a concrete manner in 11

13 each investee, and oversee the operations of the investees through the Company s representatives on the BODs of the various investees. In addition, in recent years, it is evident that actions have been taken to enhance and extend oversight and control requirements as part of the regulatory regime that applies to publicly owned companies (the Goshen Procedures, etc.), as well as extending the liability in respect of violations of these requirements. These processes create common needs for the Company and all the publicly owned Group companies. Consequently, the Company has in recent years taken action to increase its control, finance, and economic functions, and making them available to the publicly owned investees, in the interests of all parties. In this manner, the Company is able to perform closer supervision and control of the investees activities, while these investees enjoy the support of these functions in meeting the applicable regulatory requirements. Furthermore, the Company aspires to achieve an efficient use of its secondary staff resources (such as economic analyses, management of senior personnel, secretarial resources, and spokesmanship) by the entire Group. Financial reconciliation in respect of these support services takes place under management agreements between the Company and its investees, based on their cost to the Company, and these are brought for periodic internal review, and are re-approved as required by law. Another consideration underlying the structure of the Company Group is influenced by the degree of internal synergy between the various arms of the Group. As explained above, real estate development operations are concentrated according to the type of real estate and the geographic region of operations. Supply of inputs for the execution of projects is concentrated under Africa Industries, and execution operations are concentrated under Danya Cebus. To illustrate, a significant portion of the construction work in Africa Residences projects is performed by Danya Cebus, which accounts for the main input of Africa Residences operations and a major share of Danya Cebus operations. One of the considerations that guided the Group s structure of ownership was based on the assessment that a vertical holding organization involving these companies would allow more efficient use of resources and overhead (mainly invested in the sites of Africa Residence, and mainly in the construction period), and would help soften the conflicts of interests inherent in a contractor-developer relationship, as in this structure of ownership the contractor (Danya) also benefits from the developer s profits, being the main shareholder of the project Chart of the Company s Holdings 1 The following is a chart of the Company s holdings in the primary corporations in which the Company owned a holding 2 (public companies are marked by [**]): 1 In this Periodic Report, above and below, unless stated otherwise, the interest in any company is calculated according to issued share capital, without taking into consideration any dilution due to the exercise and/or conversion of outstanding convertible securities. 2 It is hereby clarified that the Company has holdings in additional companies and partnerships that are inactive or are immaterial to the Company s overall operations and therefore are not noted in the chart below. 12

14 Africa Israel Investments Ltd. Real Estate Development in Israel Rental Property in Israel Danya Cebus Ltd. 100% Africa Israel Properties Ltd.** 55.93% Africa Israel Residences Ltd.** 74.23% Af-Shar Ltd. 100% P.A. Development and Construction in Jerusalem Ltd 50% Haifa Quarries Ltd. 45% Someil Towers Ltd. 50% One Half Jubilee Ltd. 49% Givat Shmuel Hahadasha Ltd. 50% Netzer Netsharim Ltd. 100% Ram Nah Ltd. 57.5% Flamingo Ltd. 100% Africa Urban Renewal Ltd. 100% Afriram Ltd. 40% Lev Talpiot Management and Maintenance Ltd. 60% Givat Savyon Ltd. 85% E.M.T. Neve Savyon Ltd. 33% Savyon Nurseries Ltd 21% 13

15 Africa Israel Investments Ltd. Real Estate Development and Rental Property USA Real Estate Development and Rental Property outside Israel Africa Israel International Holdings 100%(1997) Ltd Africa Israel Properties Ltd.** 55.93% Al Holdings (U.S.A.) Corp. 100% Africa Israel International Properties (2002) Ltd. 100% Al Properties and Development (U.S.A.) Corp. 100% AFI Europe NV 100% Al Florida Holdings Inc. 100% PRAHA SEN S.R.O. (Czech Republic) 50% Foreign companies: Holland Czech Republic Serbia Romania Latvia Germany Poland Hungary Bulgaria 14

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20 1.2 The Company s main business segments As stated above, the Company has seven segments of activity that are reported as business segments in its consolidated financial statements as of December 31, 2016 (also see Note 38 to the said financial statements). The following is a brief description of these areas: Real estate development in Israel As noted above, in this area of activity, the Group focuses on the development of projects designated for residential, office and commercial uses, in Israel, by locating and acquiring land, constructing the buildings (including by improvement and/or renovation) and selling the units. In Israel, the real estate development operations are mainly residential real estate development operations. These operations are executed primarily through its subsidiary, Africa Residences (including its subsidiaries). Africa Residences is also engaged in the construction, management, and maintenance of a rental housing project in Israel, and these oeprations are part of the rental property operations segment in Israel Rental properties in Israel As noted above, the Group is engaged in development, construction (including by improvement and/or appreciation), rental and operation of buildings, mainly zoned for industrial, office and commercial use in Israel. The Group s operations in the property rental segment in Israel are conducted primarily by its subsidiary, Africa Properties (including its subsidiaries) Real estate development and rental properties in Europe 1 As noted above, most of the Company s activities in the area of real estate development and rental properties in Europe are performed through AFI Europe. In this business segment, the Company has two main activity channels, as follows: (a) real estate development for residential purposes in Europe in this channel, the Group has lands zoned for residential construction in the Czech Republic, Poland, Latvia, Romania, Hungary and Bulgaria. (b) rental properties in Europe in this channel, the Group concentrates on development, construction, rental, and operation of buildings, mainly zoned for industry, offices, and commercial use (including in the Czech Republic, Serbia, Romania, Hungary, Bulgaria, Poland, and Germany 2 ) Construction contracting As noted above, in this business segment, the Group operates mainly through the Company s subsidiary, Danya Cebus Ltd. (including its subsidiaries), and is engaged in residential and non-residential construction. As at the date of this Periodic Report, the majority of the construction operations are performed in Israel, and the remainder of the construction operations are performed in Romania and in the United States. 1 The Group also has an affiliated company in Panama. 2 For information on a transaction to sell the majority of AFI Europe s assets in Germany, see paragraph 1.10 hereinafter. 19

21 1.2.5 Infrastructure contracting As noted above, in this business segment, the Group operates in Israel and overseas, primarily through the Company s subsidiary, Danya Cebus (including its subsidiaries) as a concessionaire (including as an operator) and/or contractor of transportation infrastructures such as highways, railroad lines and bridges. The operations in the infrastructure segment are mainly for the public segment, either directly or indirectly, that is, for the government, government-owned companies and auxiliary units, or for private developers who were awarded tenders issued by the public segment as PPP projects (Private Public Partnership) wherein the private segment executes, finances, and operates the project (i.e., BOT, PFI and similar project types) Steel As noted above, in this business segment, the Group is engaged, through its subsidiaries, Africa Industries and Packer Steel (including corporations and its associated companies), in the processing and marketing of tin and flat steel products, profiles and pipes, trading in aluminum and stainless steel, galvanization services, professional steel, steel rod extrusion, trading in special steel types and steel instruments, manufacture and marketing of incubators, processing of steel reinforcements for infrastructure and construction, manufacture of welded mesh and manufacture of welded steel cages and piles for structural foundations and casing, manufacture and marketing of steel communications and electronic equipment cabinets, and manufacture and marketing of steel lighting stanchions Home design In this business segment, the Group is engaged, through the Negev Ceramic subsidiary, in the import, marketing, and sale of ceramic products, porcelain, sanitary ware, taps and finishing products; and in the manufacture of porcelain floor and wall tiles, as well as other products for construction, renovation, and home design to random customers, housing projects, contractors, merchants, and overseas customers Discontinued operations: Real estate development and rental properties in the United States As noted above, up to the Company s financial statements as of September 30, 2014, this activity was classified as an operating segment. In 2016, the Company recorded a provision for impairment in respect of a loan in the Apthorp project in the United States, which Africa USA recorded in the amount of NIS 17 million, after a revision in the expected cash flow from the project Discontinued operations Real estate development and rental properties in Russia As noted above, up to the Company s financial statements as at June 30, 2016, these operations were classified as an operating segment. After the sale of the Company s holdings in AFI Development was concluded, as described in paragraph 1.12 hereinafter, these operations are presented as discontinued operations beginning from the Company s financial statements as at September 30,

22 1.3 Investments in the Company equity and transactions in its shares Following is information on the investments in the Company s equity made in the period beginning on January 1, 2015 and ending on the date of this Periodic Report: On May 1, 2014, the Company published a shelf offering report the Company published an amended shelf offering (hereinafter in this subsection, the Shelf Offering Report concerning a rights issue (hereinafter, the Rights Issue ), according to which the Company offered its shareholders up to 43,375,130 ordinary shares of NIS 0.1 par value each of the Company by way of rights and up to 18,150,052 registered option warrants (Series 9)(hereinafter, the Option Warrants ), exercisable such that each option warrant is exercisable for a single ordinary share of the Company (subject to adjustments) against payment in cash of the exercise price of NIS 12 (subject to adjustments) for each option warrant, by no later than May 31, Within the Rights Issue, rights to purchase 42,190,883.3 ordinary shares of the Company and 16,876,353.3 Option Warrants were exercised, and the total (gross) consideration received in respect thereof was NIS million. By March 31, 2015, 1,386 Option Warrants were exercised for NIS 16 thousand. In the Rights Issue, the Controlling Shareholders purchased 21,530,054.1 ordinary shares of the Company and 8,612, Option Warrants, for a total of NIS 156 million To the Company s best knowledge, in the period from January 1, 2015 to the date of this Periodic Report, no significant transactions 1 in the Company s shares were performed by interested parties in the Company. 1.4 Dividends In the years 2014, 2015, and 2016, the Company did not declare or distribute dividends to its shareholders Pursuant to the Company s consolidated financial statements, the Company s negative surplus balance as of December 31, 2016 is (NIS 4,165,165 thousand) For information on the Company s commitment to maintain financial ratios, see Section hereinafter As of the date of this Periodic Report, the Company s Board of Directors has not determined a dividend distribution policy Notably, as part of its commitments to the Company s bond holders (Series Z, ZA, and ZB), may perform a distribution, as this term is defined in the Companies Law, exclusively subject to the following cumulative conditions: (a) On the date of the resolution of a distribution, the Company maintains the financial ratios according to data of its financial statements most recently approved prior to the resolution date; (b) Performance of the distribution does not constitute or cause any breach of the financial covenants; (c) The Company furnished to the Trustee of bondholders (Series Z and ZA, and ZB) confirmation signed by the Company, through two 1 For this purpose, significant transactions means transactions involving a quantity of shares that, on the transaction date, constitute 5% or more of the Company s issued share capital and/or its voting rights. 21

23 signatories of the signatories with the broadest signatory powers in the Company, based on the calculation set forth (according to the data of the Company s financial statements most recently approved prior to the resolution date), according to which the company complies with the financial covenants on the distribution declaration date and the performance of the distribution does not constitute or cause a breach of the financial covenants; (d) Prior to the performance of the distribution, the Company will furnish to the Trustee a copy of the transcript of the resolution of the Company s Board of Directors of the distribution in which the Company s Board of Directors confirms that, in its opinion and after having examined the Company s position, it has concluded that there is no reasonable risk that performance of the distribution will impair the Company s ability to repay the New Bonds according to their terms. 22

24 Part 2 Other Information This section includes, among other things, information and data taken from various sources, as the Company deemed fit and as stated in the body of this Part, as the case may be (hereinafter, the Sources ). The Sources were available factors for the collection of the information and data included in the relevant descriptions. The management believes that while it did not perform independent tests to confirm the data, said Sources constitute reasonable sources for collecting the relevant information, as the case may be. 1.5 Financial Information on the Company s Business Segments Following is information on the Company s business segments for the years ended on December 31, 2016, December 31, 2015, and December 31, 2014 (for additional information see Note 38 to the Company s consolidated financial statements as of December 31, 2016): 23

25 For the period ending December 31, 2014 Rental Eastern Property Residential CIS Europe In Israel In Israel Infrastructure Construction Steel In Israel Home Design Other Segments Inter-segment Unattribut ed Amounts Adjustments to Consolidation Consolidation NIS thousands Audited NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands Revenues from externals Revenues from intersegment sales Variable costs in respect of revenues from externals 562,18, 258,375 52,,,, 555, ,52, 6,152,,,5 6,,,,,5,1 384, ,4,5-14, ) 837,762( 5,657,86, ,833 15,38, 48,373 7,252 ) 548,888( ) 441,,13( (159,950) (11,088) (459,012) (427,150) (1,639,011) (1,008,205) (821,181) (545,775) - 535, ,902 )2,525,337( Inter-segment costs (428,355) (57,103) (21,553) - 507, Segment operating profit Income (Loss) from ordinary activities attributed to noncontrolling interests Segment assets as of December 31, 2014 ) 4,5,575( 396,245 84,583 94,040 25,732 13,520 5,501 (31,956) (12,901) (21,877) 66,495 ) 633,426( 582,663 22,451 (16,069) ( 666( - 473, ,36, 8,716,122 5,586,726 6,5,2,358 7,,62, , ,411 6,766,443 6,7,,,,55 6,42,,513 ) 421,585( 6,2,8,84, ) 384,1,5( 42,,81,,57 24

26 For the period ending December 31, 2015 Russia * Central and East Europe Rental Property in Israel Residential in Israel Infrastructures Construction Steel In Israel Home Design Other segments Unattributed Adjustments to Intersegment Amounts Consolidation Consolidation NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands Revenues from externals Revenues from intersegment sales Variable costs in respect of revenues from externals Audited 717,373 76,,342 57,,86 335, ,751 4,,87,737 54,,215 8,,,244 2,4,6,5-5, ) 323,555( 5,765, ,342 15,321 76,651 4,214 ) 583,,88( ) 653,817( ) 28,582( ) 65,157( ) 125,278( ) 482,565( ) 4,,,4,183( ) 563,2,1( ) 544,265( ) 751,821( ) 751,821( - 545,,36 )2,377,763( Inter-segment costs ) 552,,65( ) 55,877( ) 47,713( ) 4,214( 173,465 4, Segment operating profit Income (Loss) from ordinary activities attributed to noncontrolling interests Segment assets as of December 31, ,,36 ) 2,377,763( 545,,36 ) 2,377,763( 545,,36 ) 2,377,763( 545,,36 ) 2,377,763( 545,,36 ) 2,377,763( 545,,36 ) 2,377,763( 545,,36 6,,,35 ) 63,568( , , ,277 5,858,541 5,836,516 6,825,451 7,274, , ,763 6,421,422 6,626,321 6,,58,211 ) 211,,12( 6,267,416 ) 328,71, ( 46,246,311 * discontinued operations 25

27 For the period ending December 31, 2016 Rental Russia Central and East Europe Property in Israel Residential in Israel Infrastructures Construction Steel In Israel Home Design Other segments Intersegment Unattributed Amounts Adjustments to Consolidation Consolidation NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands Revenues from externals Revenues from inter-segment sales Variable costs in respect of revenues from externals 346, ,897 67,199 1,301, ,116 2,535, , , , (746,440) 6,415, ,293 68,454 28,091 1,971 (527,809) (243,490) (55,632) (5,176) (1,123,541) (465,964) (2,530,839) (850,359) (855,237) (382,406) - 202, ,859 (5,701,906) Inter-segment costs (456,274) (55,803) (22,360) (1,971) 536, Segment operating profit Income (Loss) from ordinary activities attributed to noncontrolling interests Segment assets as of December 31, 2016 (270,414) 682, , ,837 77,036 (23,722) 38,047 (261,164) (13,467) 8,600 38, , ,398 ) 168( 75, ,,5, - 73, ,,651-6,416,034 2,050,610 3,129, , ,350 1,210, , ,913 (431,252) 1,114,188 (746,909) 15,364,490 26

28 1.6 Changes in the boundaries of the Company s business segments As stated in Sections and hereinabove, the Company continues to present real estate development and rental properties activities in the United States as other activities as of the financial statements as of December 31, As noted above, beginning from the Company s financial statements as at September 30, 2016, real estate development and rental property operations in Russia are classified as discontinued operations. 1.7 The general environment and impact of external factors on the Company s activities As a result of the Group s activities in a large number of markets and in a variety of activity areas, the Group is exposed to and impacted by changes in the global economy and the situation in the markets in which it operates including Central and Eastern Europe and Israel. For information on the state of the global economy, see Section hereinafter. Developments in the global economy affect and can affect in the future, directly or indirectly, the Group s commercial activities, including the value of its assets, its liquidity, its ability to sell properties, its ability to raise capital and to comply with financial covenants State of the Israeli economy General A. Monetary policy In 2016, the Monetary Committee decided to retain interest rates at 0.1%. In January and February 2017, the Monetary Committee also decided to retain the interest rate unchanged. According to the macroeconomic forecasts of the Bank of Israel s research division of December 2016, the interests should remain at its current level until the end of the third quarter of B. Inflation and inflationary expectations In the 12 months ended in December 2016, the CPI decreased by 0.2%. Product prices (food, fruit and vegetables, furniture, and apparel) and transportation and communications, made the most significant contribution to the decline in the CPI in 2016, due to the Open Skies reform. The remaining services (housing and housing maintenance, education, culture, and entertainment) moderated the decline as their prices increased. Energy prices remained unchanged in 2016, and the effect of the decline in administrative prices brought the inflation down by 0.2%. The prices of the components that represent the negotiable products in the CPI declined by 1.7% in 2016, and the prices of the components that represent the non-negotiable products increased by 0.6%. C. Real domestic activity In 2016, the GDP is expected to increase by 3.5% according to the data. GDP growth was expressed in all uses. Specifically, private consumption increased in the second quarter at an annual rate of 10%, after the high rate of increase in the previous quarters, a part of the increase stemmed from an exceptional surge in the consumption of vehicles, but current consumption also increased at a high rate, supported by low interest and high employment rates. The forecast for growth in 2017 is estimated at 3.2%. 1 Data were taken from the websites of the Bank of Israel, the Central Bureau of Statistics, and the Ministry of Finance. 27

29 D. Foreign exchange rates In the second half of 2016, the effective nominal exchange rate [of the shekel] increased, primarily as a result of the devaluation of the euro against the shekel after continued monitary expansion and a low growth environment in the euro block. In contrast, the dollar maintained its value against the shekel and strengthened against most currencies in the world. In summary in this period the shekel appreciated by 5.2% against the currency basket (June average compared to December average), and continued to undermine growth in the export of goods. E. Housing market The housing market The housing component of the CPI declined by 1% in December, similarly to its decline in November, and in 2016 it increased by 1.4% compared to over 2% in recent years. Housing prices increased by 0.4% in October-November, after increasing by 0.9% in September-October. The inventory of new apartments for sale continued to increase and reached 31.1 thousand (controlled for seasonality). In December, new mortgages in the amount of NIS 4.7 billion were assumed, and total new mortgages in 2016 was 10% lower than the comparable figure in Average mortgage interest continued to increase in December in most mortgage tracks, although interest remained almost without change in the linked fixed interest track. F. Financial markets Local share indices remained almost without change in the second half of 2016 (in dollar terms, December average compared to June average), similarly to the leading indices in Europe and emerging markets, and in contrast to US indices: The S&P500 index continued the upward trend that was evident in the previous half year. Nominal and real return curves showed increases in the intermediate and long terms, in line with the global situation. This is also consistent with the stability reflected in intermediate- and long-term inflationary expectations. G. Fiscal developments Total government deficit (excluding net credit) in 2016 was NIS 22.1 billion, which reflects 1.8% of the GDP. Total domestic expenditures (excluding credit) was similar to expenditures planned in the budget. Tax collection exceeded forecasts by NIS 5.8 billion, and increased from 2015 by 5.8% in real terms, controlling from the effects of legislation and one-off revenues. H. Forecasts of the research division According to the forecasts of the BOI research division, in the forthcoming quarters, inflation is expected to converge gradually to the range of the inflation target, reaching 1% by end 2017, and increasing 1.5% in For information on trends in the building contracting segment in Israel, see Section hereinafter For information on trends in the infrastructure contracting segment in Israel, see Section hereinafter For information on the effect of trends in the steel segment see Sections1.15 hereinafter For information on trends in the home design segment, see Section 1.16 hereinafter. 28

30 1.7.2 The security situation The Company considers that the security and political situation in Israel directly impacts the real estate segment and the hotels and leisure segment. Security crises are reflected in a drop in demand for housing units, in a lack of manpower in the building segment, and in an increase in building costs and a reduction in incoming tourism into Israel. The security situation in countries outside Israel in which the Company operates also affects the Company The global economy 1 According to the IMF, several main trends reflect the state of the global economy as of January 2017: A. IMF s main forecasts include a 3.4% increase in growth in 2017 and 3.6% increase in growth in 2018, reflecting an increase from the 3.1% rate of growth in A significant portion of the increase in growth is expected to come from an improvement in several emerging markets and low-income economies that experienced severe economic strife in At the same time, an improvement in the forecasts for the United States, China, Europe and Japan should also contribute to the increase in growth. In 2016, global growth was the lowest since , after a challenging first half of the year, caused by the financial markets. In the second half of the year, an overall improvement occurred, and in many countries the downward pressure on inflation lessened due to an increase in the prices of goods, among other causes. B. In view of the momentum of the US economy, and the expected change in policies that the new administration is expected to create, US growth forecasts were revised upward. At the same time it should be noted that at this stage, details of the new policy have not been clarified, including the scope of an increase in government investments and the expected impact on aggregate demand, manufacturing potential, government deficit, and the dollar. On a global level, one vulnerability that might materialize is the growing dissatisfaction with international trade and emigration; high levels of private and public debt; climate change, which mainly affects low-income countries and several developed economies that have a continued slow rate of growth and deflationary pressure. In Europe, the terms of Britain s exit from the EU have not yet been determined, and upcoming elections in other countries might lead to dangerous economic changes in the short term and the long term. 1 See IMF World Economic Outlook, January

31 Following is a summary of the data concerning the state of the markets in the Group s main operating countries: Country Romania Czech Republic Serbia Poland Bulgaria Inflation for the period (%) Unemployment (%) Change in GDP in the period (in comparison with the corresponding period in the previous year)(%) ),.5( ),.5(, ,.1,.7, , ,.8 )6.8( ),.8( ),.5(, ) 6.1( ) 6.6( ) 6.1( The foreign currency market The Group is exposed to changes in the foreign currency rates, including for the reasons stated below: The Company has loans and deposits in various currencies; the Group operates in various countries in which the currency of operations is different; the Group also has liabilities some of which are linked, directly or indirectly, to foreign currencies Terms of bank financing The Company estimates that the real estate industry is characterized by a high degree of financial risk, stemming from, among other things, the long period of time involved in obtaining planning and approval for each project. During a period of economic slowdown, banks tend to set more stringent conditions for credit, in a manner that makes it difficult to obtain bank financing for the construction industry, and leads to liquidity problems for many real estate companies. Company management regularly examines the exposure of the Group, and specifically the Company, to market risks, and accordingly decides on modifications to its risk management policy and the protective actions required Changes in accounting standards For details of the new accounting standards, see Note 3 to the Company s Financial Statements as of December 31,

32 Part Three Description of the Company s Business by Segment Set forth below is a detailed description of the Group s business. The description is presented separately for each of the Group s operating segments (real estate development in Israel, rental properties in Israel, real estate development and rental property outside of Israel, construction contracting, infrastructure contracting, steel, home design): A description of the Group s activities as a whole is presented in Part Four below: 1.8 Real Estate Development in Israel In this operating segment, the Group focuses, through Africa Residences, on developing projects in Israel designated for residential, office and commercial uses, by locating and acquiring land constructing the buildings (including through renovation and/or appreciation) and selling the units: The Group s rights in the land it purchase are ownership rights and/or leasing rights and/or contractual rights and/or other rights. Presented below are details of this operating segment. Furthermore, Africa Residences is engaged in the construction, management, and maintenance of a rental housing project and renders rental-related services; These works were awarded to Africa Residences jointly with Africa Properties in a tender issued by the State of Israel. According to the terms of the said tenders, at the end of the period determined for this purpose, the Group may sell the housing units in the project. These operations are included in the rental properties segment in Israel, as described in paragraph 1.9 below General information on the operating segment General As noted above, real estate development in Israel is primarily the development of real estate for residential uses. These operations are mainly performed Africa Residences, 1 which engages in the location, purchase, rezoning and planning of land, the construction of the buildings and the marketing and sale of the housing units. Following is a description of trends, events and developments in the residential construction segment in Israel 2,3 1 Africa Residences initially offered its shares to the public pursuant to a prospectus dated June The securities of Africa Residences were listed on the Tel-Aviv Stock Exchange in July As of the date of this Periodic Report, Danya Cebus holds 74.23% of the share capital and voting rights of Africa Residences. 2 This section includes forward-looking information that is based on the Group s assessment of the economy and the factors impacting the state of the economy, based on, among other things, economic analyses and a review of developments in the real estate sector in past years. 3 The information in this section is based, as stated in the body of the document, on publications of the Ministry of Construction and Housing in January-February 2017 (hereinafter, "MOCH Publications"), publications of the Central Bureau of Statistics (hereinafter, "the CBS") dated December 2016 and January-February 2017, publications of the Bank of Israel dated January- February December 2016 (hereinafter, "Bank of Israel Publications"), and on publications of the Ministry of Finance Chief Economist Division January-December 2016 and January-February This section includes forward-looking information that is based on the Company s assessment of the economy and the factors affecting the state of the economy, based on, among other things, economic data and a review of developments in the real estate sector in past years. 03

33 Structure of the residential construction sector and the changes therein A. General As it has done for the last few years, the real estate sector continues to be at the center of the public and political debate in Israel. The cost of living in general and the cost of housing in particular continue to be a fertile ground for ideas and plans of the government agencies with the object of "cooling down" the market. The implications of the actions taken in this ector are not yet clearly evident. Apparently we will be able to see the results and their impact on apartment prices only in several years. In 2015, the Committee for Preferential Housing Areas ( VATMAL ) was established, and in 2015 and 2016, several Buyer s Price tenders and Target Price tenders were launched. Furthermore, in 2017 the Third Apartment Law came into effect. It should be noted that in 2014 another plan was launched, the objective of which was longterm rentat housing (Africa Residences together with Africa Properties won the first tender in Glil Yam in Herzliya). Furthermore, considerable development is evident in this sector concerning urban renewal. In 2016, the Building Inputs Index declined by 0.5%, after several years of steady increases. The factors that spurred the price increases in recent years are still valid and include: the low interest rate (which was raised slightly in 2016 in view of guidance by the Bank of Israel), the lack of alternative investment veicles, and a record shortage in inventory of housing units. B. Following is a review of several major factors that the Group believes have a direct impact on the residential construction segment in Israel: (1) Housing demand Demand for housing is affected by residents socio-economic situation (unemployment, wages, etc.), the scope of investments in the housing market in Israel by foreign investors, state incentives to housing buyers (eligibility grants, development area grants, and others), the scope of immigration, the scope of natural demand (which exceeds 43,000 units per year), and interest rates. Based on CBS data concerning the demand for new apartments in 2016, an decline of 5.8% was recorded in the demand for new apartments compared to the corresponding period of the previous year, yet was 22% greater than the demand in the corresponding period of It should be recalled that 2015 was a record year in this sector, with the demand of new apartments was over 50,000 units. (2) Buyer s Price According to this government plan, land is sold nationwide at final apartment sales prices below market prices. The plan is designed to reduce apartment prices for eligible individuals, by reducing the price of the land paid by the contractors who construct and sell the apartments, and through direct subsidies on the land development costs or grants to buyers, under which the contractors undertake to sell the apartments at a price lower than the market price, which is determined in a tender 03

34 process. According to a notice by the Ministry of Construction and Housing in January 2017, [land for] 20,854 units was offered for sale in 2016, a 3% increase compared to Since the inception of the Buyer s Price program, [land for] 70,000 housing units has been marketed of which [land for] 27,000 housing units has been sold and building permits for 3,766 housing units have been issued. (3) The mortgage market The extent of credit for housing in the banking system and the high exposure of households in Israel to housing loans are subject to a major risk that housing prices may drop sharply, either as a result of the steep and rapid increase in interest rates or as a result of a recession that is liable to affect the ability of purchasers to meet their obligations. For several years the Bank of Israel has determined banking provisions that limit the market to limited leverage levels and limited exposure to variable interest rates, in order to reduce the risk profiles of new loans that stabilized at lower levels than in previous years. Nonetheless, apartment prices continued to soar at a rate of 8%, the volume of residential loans continued to be high, and reached NIS 5 billion a month on average in The banking housing credit portfolio continued to expand and its balance amounted to NIS 300 billion, and together with the construction and real estate credit portfolio accounted for 45% of the total bank credit. In recent months, an increase was recorded in the average period for repayment of loans in all categories of interest and linkage plans, and an increase was evident in the average amount of housing loans. Alongside these developments, in 2016 the Bank of Israel limited restrictions on credit to this sector, which expands the supply of credit to the real estate sector, and joins a previous expansion of housing credit that commenced in 2014, in view of the credit made available by institutional entities, mainly in conjunction with the banks, although the volume of this credit remains low. This development increases the potential to expand housing credit and the inter-connections in the financial system. As the banks assimilated these risks, under the guidance of the Supervision of Bank, interest on housing credit rose. Africa Residences estimates that the Central Bank will continue its close supervision of developments in the mortgage market, and it is not inconceivable that additional restrictions will be imposed as part of a series of macro-stabilizing steps that the Central Bank is considering in the currently low monetary interest environment. (3) Supply of land and construction starts Land supply Land resources in the State of Israel are almost exclusively controlled by the State, and in effect by the Israel Land Authority (hereinafter, ( ILA ). 03

35 According to Ministry of Finance data, land for 60,000 new housing units was offered for sale in 2016 by the ILA and the Ministry of Construction and Housing, which was higher than the target that the government had set at 55,000 new apartment units. In January 2016, the Housing Cabinet approved the Minister of Finance s proposal to extend the umbrella agreements by an additional 75,000 housing units in According to the umbrella agreements that have been signed since 2014, close to 100,000 housing units will be offered for sale in the next five years in Ashkelon, Beer Sheva, Ramleh, Modi in, Rishon Letzion, Kiryat Bialk, Rosh Ha ayin, and Kiryat Gat According to the umbrella agreement model, the government gives local governments budgets for development and construction of infrastructure, public institutions and schools, while the local governments remove planning barriers and expedite the building permit approval process for contractors who are building under the plan. This model is designed to cause a massive offering of housing units on a very large scale. Africa Residences believes that a significant series of tenders can be expected to continue with the aim of increasing supply. The Company believes that due to the long life cycle of activities in the real estate sector, the effect of the marketing action can be expected to be felt only within a few years. Furthermore, it is possible to see government s [favorable view] of the entry of companies into the long-term rental housing sector. Africa Residences believes that the government s actions will have a differential impact on geographic areas in Israel. Construction starts The pace of construction starts in the first nine months of 2016 was 38,670 housing units, a 4% decline compared with the corresponding period of the previous year, 25% of these apartments were located in the center district. As of end September 2015, there were 98,000 units under construction. The scope of construction in 2015 is the highest since 1997, indicating an upsurge in activities in the real estate sector. According to CBS digures, 31,150 new apartments inventory at end November 2016, compared with 28,440 at end According to the average number of new apartments sold in Q4 of 2016, there was a 15.2-month supply at end December Restrictions, legislation, standards, and special constraints applicable to the residential construction segment The impact of government policy on the construction sector is reflected in several areas, including the pace at which land is sold, the availability of mortgages, taxation imposed on the sale or rental of apartments, and the scope of incentives that the government offers apartment buyers. The Bank of Israel s monetary policy, in general,, and its decisions on interest rates in particular, also have a strong impact on demand in this sector. 00

36 Beyond the effects described above, following is a description of additional regulatory effects in the sector: A. Labor The cycles of construction sector products are also reflected in the growth and contraction of employment in the sector. In times of expansion, the number of workers employed in the sector increases sharply and at a more rapid rate compared with the rest of the market. But like construction products, the sector s weight in total employment also shows a downward trend. In the past decade, workers in the construction sector account for less than 7% of total employment (as noted, in recent years, the acceleration in this sector has hardly been reflected in an increase in employment rates). The sector s weight in employment is nonetheless greater than its weight in the GDP, but this difference disappears when we examine the sector s impact on employment of Israeli workers alone. The cycles of expansion and contraction in the construction sector have a dramatic impact on the employment of foreign workers and Palestinians in this sector, with a more moderate impact on the employment of Israelis. On average, a 1% increase in construction sector products is accompanied by a 1% increase in the number of foreign and Palestinian workers and an increase of merely 0.6% in the number of Israeli workers in this sector. B. Municipal by-laws pertaining to development levies and charges The enactment of municipal by-laws pertaining to paving, sewerage, water, drainage and other levies affects development levies. Changes in these fees affect project profitability and, as a practical result, affect the selling prices of housing units. C. Real estate tax 1 According to an analysis of tax revenues, the real estate sector was the main source of increase in revenues this year: Net land tax revenues in November 2016 amounted to NIS 0.9 billion, a real increase of 21% compared to the corresponding period of the previous year. In June 2015, purchase tax on second apartments was raised, and the waiting period for second-time apartment buyers [for tax deduction purposes] was reduced. Furthermore, in early 2017, the Third Apartment Law was approved, according to which owners of apartments who hold more than 49% of the rights therein are liable for tax of 1% on the third apartment and over that they own D. The Planning and Construction Law 1965 (hereinafter, the Planning and Construction Law ) This law prohibits construction without obtaining appropriate permits from the authorities. Construction without a permit or non-compliance with the conditions of a permit constitutes a criminal offense under Sections 203 to 255 of the Planning and Construction Law. Furthermore, according to the Sales Law, a seller fails 2 The description in this section does not cover all the tax rates that apply in this sector. 03

37 to fulfill his obligations to the buyer, among other things, if the apartment or anything contained therein differs from the provisions of the regulations promulgated by the force of the Planning and Construction Law. On January 1, 2016, a reform in building licensing was scheduled to come into force in a gradual manner, as part of Amendment 101 of the Planning and Construction Law. The aim of the reform is to increase the efficiency and simplify licensing procedures including building permit approval procedures. Implementation of the reform is conditional upon, among other things, enactment of regulations, the drafting of which has not yet been completed. On December 20, 2015, the Minister of Finance used the authority vested in him to issue an order that postpones the entry into force of several building licensing procedures to various dates. On October 31, 2016, the Minister of Finance postponed the directives related to the construction of new apartment buildings to June 1, 2017, and the directives that are not related to the construction of new residential buildings to January 1, On December 28, 2015, the Knesset passed the second and third reading of an amendment to the Planning and Construction Law (Emergency Order) 2015 (hereinafter, the Amendment ). According to the bill, the Amendment was designed to authorize local planning and building committees to approve additional building areas of up to 20% in order to add housing units on lots zoned for multi-unit housing in municipal authorities, subject to compliance with the remaining conditions set forth in the Amendment. E. The Sales Law (Apartments) 1973 (hereinafter, the Sales Law or the Sales Law (Apartments) ) All sales of housing units by a seller, as this term is defined in the Sales Law (Apartments) 1973 (hereinafter, the Sales Law or the Sales Law (Apartments and the Seller, respectively) are subject to the provisions of the Sales Law. Pursuant to the provisions of the Sales Law and the secondary legislation enacted thereunder, the seller must submit a specification of the housing unit to the buyer. The Sales Law also determines the degree of deviation permitted between the area and quantities appearing in the specification provided to apartment purchasers and the actual area and quantities. The Sales Law also defines the obligations that apply to the Seller pertaining to the repair of faults and non-conformities, and defines the warranty and inspection periods during which the obligation to make said repairs applies to the seller. Furthermore, according to the Sale (Apartments) (Assurance of Investments of Persons Acquiring Apartments) Law 1974 (hereinafter, Sale (Assurance of Investments) Law ), the seller must secure the buyer's funds pursuant to conditions and dates defined in this law. 03

38 In recent years, a number of amendments to the Law have been passed which extend the seller's warranty Changes in the scope of operations and profitability in the sector The fourth quarter of 2016 indicates that activity in the real estate market has cooled down. A total of 24,000 housing units were purchased, representing a decline of 17% compared to the third quarter of 2016, and the lowest number in the past two years. This moderation in activity arrives after several years that specifically began in 2008, in which the real estate sector benefited from significant growth, both in the scope of construction and in the sales prices of apartments. In 2016, there are indications of a slight decline in housing prices, which may signal a change in the trend of steadily increasing apartment prices in recent years. Low interest rates continue to support the demand in the sector for both owner-occupier apartments and apartments for investment, which is an alternative to other investment channels. In 2016, land for 27,000 housing units was sold to contractors (most of which in Buyer s Price projects) in urban locations, representing a 10% increase compared with The forecast is that in 2019 we will see the impact of these sales in the number of occupied apartments, and in 2017 we will see an increase in marketing of these units. In the first nine months of 2016, construction on 39,000 housing units commenced. This number is lower by 4% compared with the corresponding period of the previous year. In 2015, construction starts were at a record high of 52.7 thousand units. Africa Residences believes that the effects of any program that applies to the real estate sector are expected to affect the housing market in the intermediate and long terms Changes in customer profiles in the residential construction sector The sector s traditional purchasers are young couples, housing improvers and investors, and the last are directly affected by interest rates in the market and by resrictions imposed on them with the aim of reducing excess demand. Indeed, in 2016, after a decline that began in 2015, there is evidence of a sharp drop in investors demand for apartments, in view of the increase in purchase tax rate imposed on investors. Furthermore, a significant decline was recorded in the demand by first-time apartment buyers, apparently because young couples waited to make a purchase in a Buyer s Price tender. In addition to these groups, there is a population of foreign residents who in recent years have typically purchased apartments for investment in Jerusakem and along the coast, mainly by foreign residents of high socio-economic status. Following a wave of anti-semitic incidents in 2014 and 2015, there was considerable interest from foreign residents among the buyers in the middle socioeconomic bracket who are looking for apartments in wider circles of demand. 03

39 Technological changes The residential construction sector in Israel is known for its conservatism in the matter of introducing advanced construction technologies, compared to conventional practice in the western world, and therefore production in this sector is based on relatively large labor inputs. However, in recent years, advanced construction technologies have been introduced and a market has developed for rented molds and equipment used in industrialized construction methods Critical success factors in the residential construction sector, according to the Company Group s assessment A. Land reserves in high-demand areas Ownership of zoned land in high-demand areas, especially in the center, confers a distinct advantage on the companies that own them. Most of the land in the central region, both the land owned by private individuals and the land owned by the ILA, are un-planned lands and must undergo extensive long-term planning procedures before they are ready for marketing and construction. B. Goodwill A reputation and long-standing presence in the market confer an advantage, and potential apartment buyers have a high opinion of long-standing companies with proven sales ability, many years after the occupation date. C. Economies of scale A large company has an advantage of greater potential in the entire spectrum of the sector, from potential to purchase land, a broad geographic distribution, trust of buyers, and availability of bank and ex-bank credit. D. Financial strength The greater the financial strength of the Company Group, the greater its flexibility, and the ease of purchasing land and obtaining construction financing compared to small companies. E. Experience Many years of experience in the construction and management of residential construction projects constitute a highly significant success factor. F. Human resources The high professional standards of Africa Residences staff (including in finance, planning, engineering and marketing) give Africa Residences greater efficiency and ability to optimally tailor its final product to the market Changes in the raw materials organization for the residential construction industry For information on changes in the raw materials organization for the residential construction industry, see paragraph hereinafter Entry and exit barriers No formal entry or exit barriers exist in this operating segment. Given the scope and standards at which Africa Residences operates, most of the barriers to entry into this area of operations relate to the initial investment of equity capital, the availability of 03

40 bank financing, and professional know-how in planning, constructing, and marketing projects. Exiting this segment involves liquidation of Africa Residences land reserves. The Group s ability to sell land is a function of location, zoning status and the state of the market, among other factors. In addition, in Africa Residences estimation, another exit barrier to companies considering leaving this operating segment is the warranty obligation to purchasers of housing units for fixed periods pursuant to the provisions of the Sale Law, involvement the repair or correction of non-conformities (as this term is defined in the Sale Law) due to faulty construction Structure of competition in the residential construction industry For information on the structure of competition in the residential construction industry, see paragraph hereinafter Products and services General A. Africa Residences derives its earnings from the following five channels of activity: (1) sales of residential apartments; (2) construction work for landowners in combination transactions involving apartments; (3) sales of inventory of land; (4) management fees; and (5) a rental housing project. B. Africa Residences commitments to purchase rights in land are anchored in agreements with individuals or corporations using various formats, where each format has key features, and these are generally similar in all the transactions of the same time. Differences between transactions stem mainly from understandings with the owners of rights in the land and the unique features of the land and the transaction. C. In several transactions, Africa Residents purchases land by entering into contingent sales agreements. Typcally, in contingent sales agreements, the Group purchases land on which residential construction requires rezoning of applicable City Building Plans, and Africa Residences typically handles the rezoning procedure vis a vis the planning authorities. D. Agreements to purchase land typically include the following material terms (all or in part): (1) If the land is not zoned for residential construction on the agreement date, the purchase is contingent upon a change to the land s permitted uses (hereinafter, Rezoning ) according to the dates determined and pursuant to the provisions of the Planning and Construction Law. (2) The Group pays the consideration (subject to any conditions precedent) in one or more of the following methods (typically, a combination of these methods): 03

41 (a) Cash transaction a transaction in which the Group purchases the rights in the land in consideration for a sum in cash based on the stated price and/or a mechanism for calculating the price, as set forth in the agreement; (b) Combination transaction in kind A transaction in which the Group purchases part of the seller s rights in the land in exchange for construction services, defined in the agreement, on the part of the land that remained owned by the seller; (c) In some cases, the seller may or is obligated to use the Group s marketing services to sell the units he owns, in exchange for a marketing fee to the Group in an amount determined as a percentage of the sales price of each unit; (d) Consideration transaction a transaction in which the Group purchases all the owners rights in the land in exchange for a transfer of an agreed portion of the sales proceeds that the Group receives from the sale of the units in the project. (3) In cases in which the seller is entitled to several housing units and/or proceeds in respect of the sale of housing units in a transaction that is contingent on Rezoning, the following material terms (all or in part) typically apply: (a) The Group assumes an obligation to prepare a new City Building Plan (either independently or in conjunction with the rights owners in the land) and meet milestones related to the planning activities required for Rezoning. (b) Provisions are defined regarding the parties obligations to provide deeds of indemnity to the local planning and building committee related to potential charges imposed on the committee as a result of lawsuits filed under Section 197 of the Planning and Construction Law that stem from the Rezoning process. The Group is obligated to meet the timetable defined in the agreement with respect to filing applications for building permits and/or obtaining building permits, and with respect to the construction of the buildings in the project. Some agreements also determine that the owners of the rights in the land may terminate the agreement if the building permit is not obtained by the determined date. Typically, in cases where the Group has partners in the land (either because it jointly purchased the land with partners or because it purchased part of the rights in the land), the Group generally operates under a joint venture structure that is established through the purchase agreement and/or a separate agreement with the partner (hereinafter, Joint Venture ), to regulate the parties relationship. The provisions that refer to the Joint Venture regulate the the relationship between the partners in the land and in the project that will be constructed on it. In Joint Ventures, the parties to the Joint Venture grant services to the Joint Venture, according to a division of labor determined between them, including financial management, management of planning and construction, management of marketing and sales (including monitoring buyers payments), handling the issue of guarantees to secure buyers according to the Sales Law, housing company services, etc. Generally, 03

42 the Group renders most of the services to the Joint Venture, and in respect thereof it is typically entitled to 3%-4% of the proceeds from the sale of the apartments. E. In some transactions, the Group purchases rights in land according to development or lease agreements with the ILA. Purchase of rights from the ILA is typically performed as follows: A development agreement is signed by the ILA and the developer (the Group and/or the third party from which the rights are being purchased)(hereinafter in this subparagraph, the Development Agreement ). According to the Development Agreement, ILA makes the land available to the Developer for the period specific in the Development Agreement, and the developer undertakes to construct the buildings on the land according to the terms and dates defined in the Development Agreement, according to the permitted uses, the purpose, and the scope of construction defined in the Development Agreement. In the Development Agreement, the ILA undertakes that, subject to the developer s fulfillment of the terms of the Development Agreement, the ILA will lease the land to the developer according to a lease agreement (hereinafter in this sub-paragraph, the Lease Agreement ). Typically, the Lease Agreement determines that the lessee will be entitled to extend the Lease Agreement for an additional lease period at the end of the original lease period, subject to the conditions defined in the Lease Agreement. As at the date of this Report, it appears that the Group successfully obtained extensions in those cases in which the dates defined in the lease agreements elapsed. As at the date of this Report, no Development Agreement to which the Group is a party with the ILA has been cancelled under such circumstances. F. Construction of projects The Group (or the Joint Venture, as the case may be) executes the construction on the land through external contractors, including Danya Cebus, and including contractors that are the Group s partners in Joint Ventures. Building agreement are typically turnkey agreements 1 at market prices. F. Financing for purchase of lands and project construction The Group typically finances the purchase of land and/or the construction of the project, mainly through financing by banks, which is granted in one of the following forms: (1) Financing for the purchase of rights, against a lien on the land - where the land is not available for construction and in other cases, financing is granted against a lien on the rights in the land in the form of a mortgage and/or encumbrance. 1 A construction agreement between a client and a building contractor. The price of the work is determined and final. In some cases, the agreement defines a final price per sqm and the method for calculating the total sqm, and the total price is determined after the total area is calculated after planning stage has been completed. 33

43 (2) Construction loan agreements - Construction loans are typically performed as closed projects : The Group (or Joint Venture, as the case may be) opens a bank account (or several bank accounts) designated for the specific project for which the credit is granted, and to which all proceeds from the sales of housing units are deposited, and from which all payments to cover project costs are withdrawn. In most cases, where such credit is granted to the Group jointly with a partner, the relevant Group company and the partner are liable for the credit severally (and not jointly). Still, in most cases, the lien that covers the credit applies to the entire property so that the bank is able to sell the entire property even if only one of the partners defaults (cross-default). In such a case, however, the bank has recourse only to the defaulting partners share in the proceeds of the property sale. In recent years, the borrower must put up between 15% and 30% of the total expected costs of each phase of construction. Financing is granted against a lien on the rights in the land that was purchased, and a lien on all the other rights of the Group (or the Joint Venture, as the case may be) in the project. (3) Corporate loan Africa Residences has limited credit lines with commercial banks. From time to time the Group uses these credit lines, with no requirement to pledge its rights in land. (4) Open-ended construction loan In several of its projects, Africa Residences finances the project construction using funds from buyers and its own sources. In these projects, the apartment buyers receive securities pursuant to the Sales Law, through an insurance company. Against collateral, the insurance company pledges the land or alternatively receives a negative pledge. As at the date of this Report, most of the Group s rights are in projects under construction and some of its rights are in land in the planning stage or reserves that are pledged in favor of banks and other financiers to secure financing granted with respect to the purchase of the land and/or the construction of the relevant project. For additional information on the banking credit that the Group assumes, see paragraph hereinafter. (5) After the housing units and/or lots are sold, and until buyers rights are registered at the the Land Registration Bureau, the Group typically functions as a houding company and maintain records, in its books, of buyers rights and any action taken with respect to such rights. 33

44 Additional information about the projects In this paragraph : Completed project a project on which the construction work has been completed and all housing units have been delivered in the reporting year. Real estate development projects concluded in the current year, sales not completed Projects in which the construction work has been completed but the delivery of the apartments in the project has not been completed in the reporting year. Project in progress a project on which construction work has commenced but has not been completed. Project in planning a project with an approved City Building Plan, which the Company intends to begin construction in the following year or projects in which a building permit has been issued. Land reserves land that Africa Residences has designated for construction but requires rezoning and/or other actions before residential construction is possible and therefore it is not possible to assess when residential construction on these lands will begin (if at all). Contingent project lands that the transaction relating to their purchase have not yet come into effect. The Group s share the total number of units in which the Company Group has rights, not including rights of partners in Joint Transactions and/or of owners in combination transactions. Housing units according to the valid City Building Plan this means the number of housing units in projects held by the Company Group together with others. Housing units sold housing units for which binding sales contracts have been signed, including contingent contracts, 1 but not including signed applications to purchase rights. Additional planned units this means the additional number of housing units (in excess of the number of housing units based on a valid City Building Plan) that the Company Group seeks to include in the project, based on plans pending approval (whether plans have been submitted to the planning authorities and whether they are in the preparation stage), excluding the landowner s share in combination transactions. It should be noted that the financial data presented in the following tables relate to the Company Group s share only and do not include VAT. 1 Notably, generally the condition precedent in contingent contracts is the issue of a building permit. 33

45 A. Aggregate data Projects on which construction has been concluded and sales have not yet been completely conclded as the last day of the year 2016 and the Reporting Period (in NIS thousands) Book balance referring to projects whose construction has been concluded and sales have not yet completely been concluded (in terms of cost) Aging of inventory of housing units in projects whose construction has been concluded and sales have not yet been completely concluded (in terms of no. of houding No. of months elapsed since conclusion of construction Jerusalem Ono Valley and Petah Tikva Sharon and Plains Tel Aviv Total December 31, 2016 December 31, 2016 December 31, 2016 December 31, 2016 December 31, (*) )*( Over Total 931,941,8,,11-39, ,391 )*( )*( Over Total units) Anticipated gross profit No. of binding sales contracts signed from the end of the reporting period until shortly prior to the date of this Report regarding projects whose construction has been concluded and sales have not yet been completely concluded (*) There are also commercial and/or hotel areas designated for sale in these projects. Projects under construction as of the last day of the year 2016 and the Reporting Period No. of housing units in projects under construction Book balance of inventory referring to projects under construction (in terms of cost) Anticipated gross profit including projects under construction No. of binding sales contracts signed in the current period with respect to projects under construction No. of housing units in projects under construction, resoect of which no binding sales contracts were signed No. of binding sales contracts signed from the end of the reporting period until shortly prior to the date of this Report (with respect to projects under construction) Ono Valley and Petah Sharon and Jerusalem North Tel Aviv, Ramat Gan Total Tikva Plains and Givataim NIS thousands December 31, , ,868 74,570 77, , , ,787 51,599 95,713 23, , , The number of housing units and financial data are presented in terms of Africa Residences share. 30

46 B. Set forth below is a summary of details in connection with the housing units included in the Group s projects (excluding evacuation-construction projects) as of December 31, 2016: Type of project Projects in progress No. of housing units based on a valid CBP Total no. of Africa units in Residences project share No. of units according to CBP pending approval and/or in planning Total no. of units in project Africa Residences share Total units in project Total units Africa Residences share Average anticipated average gross profit margin 1, , % Year construct n is expected to start Under consruction Expected average duration of construction in years 0 Projects in planning Land reserves Contingent projects and others 1,712 1, ,906 1,785 33% , ,078 1, , Total 4,502 3,768 1,751 1,437 6,253 5, (*) Excluding landowners rights in combination transactions. Excluding owners rights in NOP 38 plans and excuding Africa Residences rights in the Herzliya housing rental project. (**) The data referring to plans pending approval and/or anticipated average construction duration constitute forward-looking information, since the approval of the said plans involves, among other things, statutory procedures that are not in the Company s control. The said data reflect only the Company s intentions and there is no certainty that the plans or applications that have been or will be submitted by the Group will be approved (if at all) in entirety or in part. 33

47 C. General information on completed projects (in NIS thousands): Name Savyonei Ramat Aviv 10 Ganei Savyon 122 Ganei Savyon 124 Mashtela 1-4 Shaar Hayam 6 Ir Yamim 2 Savyonei Netzer Savyon 0.5 dunam 1-dunam lots in Savyon Location Tel Aviv Ono Valley and Petah Tikva Ono Valley and Petah Tikva Tel Aviv Sharon and Plaints Sharon and Plaints Sharon and Plaints Ono Valley and Petah Tikva Ono Valley and Petah Tikva Date of land purchase Date constr n commenced Date constr n ended Effective share of the corporation (%) Units sold Average area per unit (sqm) Income recognized Current period Cumulative from beginning of project Total vosts recognized Current period Cumulative from beginning of project Total gross profit Current period recognized Cumulative from beginning of project Total gross profit Current period margin (%) Cumulative from beginning of project Average price per sqm (not including VAT) 3333 June 13 June 16 33% % 30% June 13 July % % 33% June 13 July % % 30% Aug 14 Feb % , ,008 90,319 90,319 9,689 9,689 33% 33% 25,006 25, March 13 Nov 15 33% % 03% July 11 May 14 33% % 33% Nov 12 Dec 15 33% % 33% % % 333% % 33% Current period Cumulative from beginning of project 33

48 D. Projects whose construction is complete and whose sales have not yet been completed as of the last day of 2016 (in NIS thousands) Name Location Date of land purchase Date constr n commenced Date constr n ended Effective share of the corporation (%) Units in inventory Cost of inventory of units attributed to inventory as of December 31, 2016 Average area (sqm) of units in inventory as of December 31, 2016 No. of binding contracts signed per project, by period From end 2016 to Reporting date Q4/2016 Q3/2016 Q2/2016 Q1/2016 Ancticipated income from apartments in inventory Anticipated gross margin Anticipated gross margin profit on apartments in inventory Savyonei TLV Harav Kook 7 Ganei Savyon 121 Ganei Savyon 123 Ganei Savyon 125 Space 3 Mashtela 5-6 Tel Aviv Jerusalem Ono Valley and Petah Tikva Ono Valley and Petah Tikva Ono Valley and Petah Tikva Ono Valley and Petah Tikva Tel Aviv 2011 Aug 12 Oct % % 2007 Apr % % June 14 Dec % % Oct 14 Aug % % Jan 14 June16 100% % 2013 Jan 14 Aug % % 2013 Aug 14 July % 29 39, % Hatzer Haniviim Arnona 19 Arnona 20 Jerusalem 2011 Oct 12 Nov % % Jerusalem 2007 June 12 June 16 33% ,285 1,652 20% Jerusalem 2007 Sep 14 Dec 16 33% ,441 20,129 20% 33

49 Projects whose construction is complete and whose sales have not yet been completed as of the last day of 2016 additional information on remaining anticipated income (NIS thousands) Name Savyonei TLV Average selling price per sqm in contracts sold in the project (by period), not including VAT March 5, 2017 December 31, 2016 September 30, 2016 June 30, 2016 March 31, 2016 Acerage price per sqm (used to calculate anticipated income from unsold inventory Arnona Arnona Harav Kook 7 Ganei Savyon 121 Ganei Savyon 123 Ganei Savyon Space Hatzer Haniviim E. Set forth below is a summary of residential projects in Israel that the Group is executing as of December 31, 2016: The following tables provide data on residential projects in Israel in which construction had not yet been completed as of December 31, It should be noted that all projects in the following table have closed construction loans, with the exception of one project. The financial data below are presented in NIS thousands. (1) General data: In this table Project start date date of land acquisition. Anticipated completion date the expected completion date of a building in projects in the relevant vicinity (Form 4 issued). 33

50 A. Projects under construction Anticipated data 1,2 (in NIS thousands) Projects under construction as of December 31, 2016 General information on the projects (in NIS thousands) Name Location Date of land purchase Date constr n commenced Estimated date of completion Effective share of the corporation (%) Total units including landowners units Total units Total area per unit (sqm) Rate of financial/ engineering completion (%) Total no. of units with signed binding sales contracts Total unsold units as of December 31, 2016 Total anticipated income Equity invested in the project (%) Total anticipated gross profit Total anticipate gross profit marging (%) Anticipated capital reserve upon completion including equity invested in project Savyonei Netzer Sireni 30 Netzer Sireni 3333 July % % % % Savyon in the Lake Netanya 3333 Fe % % % % Migdal Savyon Mofet Ramat Gan Feb % % % % Savyon Bamashtela B Tiber 48 Givataim Tel Aviv 3330 Dec % % % % Givataim 3333 Feb % % % 033 3% Herut Rokah 116 Ramat Gan Ramat Gan 3333 Dec % % % % Apr % % % % The financial data refer to Africa Residences' share in the project. 2 The information set out in the following table concerning anticipated income, total anticipated costs, anticipated gross profit and margin per project, are based on assumptions, forecasts and/or work plans of Africa Residences, in respect of which there is no certainty that they will be realized in full. In this context is should be noted that estimated anticipated income is based on selling prices in the same project, and estimated anticipated expenses (excluding land costs, which are known either in entirety or in part) are based mainly on signed contracts with contractors and consultants. Anticipated income, total anticipated costs, anticipated gross profit and margin per project, may effectively be other than as appears in the table, if Africa Residences forecasts or its work plans will not be realized, either in entirety or in part. 33

51 Uzeil 133 Uziel 128 Ramat Gan Ramat Gan 3330 Apr % % % % May % % % % Savyonei Nof Hadera A Savyonei Ramat Sharet A Hadera 3330 Apr % % % % Jerusalem 3330 Aug % % % % Savyonei Hasharon Kfar Yona 1-2 Savyonei Givat Shmuel A Savyonei Ganei Tikva 1 Savyonei Ganei Tikva 2 Savyon on Bialik Kfar Yona Givat Shmuel Ganei Tikva Ganei Tikva Ramat Gan 3333 Jul % % % % Jul % % % % Apr % % % % Sep % % % % June % % % % Savyonei Gan Arnona Jerusalem 3333 June % % % % Tzvi 11 Ramat Gan 3333 Dec % % % % Gordon 29 Givataim 3330 Oct % % % % Total %

52 Projects under construction as of December 31, 2016 General information on income, costs, and prices (in NIS thousands) Costs effectively invested in project as of December 31, 2016 Average selling prices per sqm in signed contracts in the project (entire period) excluding VAT Income from signed contracts as at December 31, 2016 Inventory with no binding signed sales contracts as of December 31, 2016 Income not yet recognized (a)+(b)+(c) Total gross profit not yet recognized Total anticipated gross profit margin Name Land development levies Construction Financing costs capitali\zed to project Other Remaining anticipated costs not yet invested as of December 31, 2016 In the year ended December 31, 2016 In the year ended December 31, 2015 In the year ended December 31, 2014 Recognized income Income not yet recognized from signed contracts Advanced received (a) Balance of receivables according to contracts (b) Book cost of unsold inventory Forecast of income from unsold inventory (c) Average price per sqm used to calcualte income from unsold inventory Total income not yet recognized (a)+(b)+(c ) Savyonei Netzer Sireni 30 Savyon in the Lake Migdal Savyon Mofet Savyon Bamashtela B Savyonei Hair - Tiber 48 Givataim Savyonei Hair -Herut Rokah 116 Ramat Gan Uzeil 133 Ramat Gan Uziel 128 Ramat Gan Savyonei Nof Hadera A Savyonei Ramat 616,6, ,, 616,6 -,41351,51, ,, ,,1, % 5,1,4,,,115,,31,6,,,146, 5,1,4,,51,43,11,,3,, ,513,6 1,1, ,4, ,,111, 1,1,,, 13% 1,885 67,274 2,280 17,101 1,885 1,16,1,11616,,1,,, - 4,1,, ,1,13 6,1,,5 1,111,,6,1,1, 3,1,3, 18% 92,756 15,017 4,185 16,815 92, ,5, 1511,6 1114,, -,,,1,,5,,,1, ,,, 3,131, 1,,11,, 3,11,, 15% 2,373 3, ,707 2, , , 111, ,1,6, 3,13,1 1,1545 3,1 2% 9,580 10, ,097 9, ,6 1,141, ,,, 3,1,5, 61,6, 5,1,,3 1315,1,,, ,61 26% 5,099 4, ,298 5, ,1, - - -, ,1,,5 11,1,,614,,,,1,,, 41164,,15,3 16% 2, ,528 2,302 1,1,15,61,13 - -,,13,4,,16,1,1151,,143,,1131, 3, , 14% 5, ,140 5,090 1,131, ,4,611,1 11,,,,11,64 1,16,1 3, ,6 14% 20,847 55, ,429 20,847 11,61 116,, ,,1,, ,31,31,,11,,,,1,,,,111,,, % 151,31,,11,6,13, ,1131 1,1,,3, ,156, 441,,3 1516,3,3,115, % 33

53 Projects under construction as of December 31, 2016 General information on income, costs, and prices (in NIS thousands) Costs effectively invested in project as of December 31, 2016 Average selling prices per sqm in signed contracts in the project (entire period) excluding VAT Income from signed contracts as at December 31, 2016 Inventory with no binding signed sales contracts as of December 31, 2016 Income not yet recognized (a)+(b)+(c) Total gross profit not yet recognized Total anticipated gross profit margin Name Land development levies Construction Financing costs capitali\zed to project Other Remaining anticipated costs not yet invested as of December 31, 2016 In the year ended December 31, 2016 In the year ended December 31, 2015 In the year ended December 31, 2014 Recognized income Income not yet recognized from signed contracts Advanced received (a) Balance of receivables according to contracts (b) Book cost of unsold inventory Forecast of income from unsold inventory (c) Average price per sqm used to calcualte income from unsold inventory Total income not yet recognized (a)+(b)+(c ) Sharet A Savyonei Hasharon Kfar Yona 1-2 Savyonei Givat Shmuel A Savyonei Ganei Tikva 1 Savyonei Ganei Tikva 2 Savyon on Bialik Savyonei Gan Arnona Savyonei Hair - Tzvi 11 Savyonei Hair - Gordon 29 20,843 7,300 1,180 4,608 20, % % 73,624 10,963 4,086 10,507 73, % 22,167 2,631 1,275 1,995 22, % 26,219 3, ,915 26, % 21, ,936 21, % 3, ,636 3, % 4, ,902 4, % Total 368, ,898 29, , ,322-8,3, , , , ,349 9,1,1, ,148 17% 33

54 The information set out in the above table concerning anticipated completion dates is forward-looking information based on data available to the Group As of the date of this Periodic Report. It is possible that due to factors not under the Group's control, the projects will not be completed on the dates indicated above. F. Following are the details of projects not yet started (excluding contingent projects and excluding land reserves as detail below) As of December 31, 2016: The information contained in the following table is, in part, forward-looking information, based on data available to the Group on the Reporting Date, and therefore may not materialize and/or may materialize in an incomplete or manner other than described in the table. Regarding the data noted in the following table, that the Company has various interests in the various projects, including interests based on development agreements, ownership rights, capitalized lease rights, and sub-lease rights. According to the statutory planning status of the majority of the projects in the following table, a valid City Building Plan applies or such plan is in advanced planning stages and the Group intends to begin construction on the entire project, or a part thereof, in In this table Group s share in the project Total units in which the Group has rights, not including the rights of partners in Joint Ventures and/or the owners in proceeds transactions. Number of housing units in the project according to a valid City Building Plan this means the housing units in which the Company and/or parties to the Joint Transaction have rights. Type of rights purchased the type of rights that the Group purchased. Said rights are not necessarily registered in the Group s name. Total estimated project cost including land this means the Group s share in the entire project transaction after completion of any planning procedures that the Group plans to perform (including housing units included in plans and/or applications that are pending entry into effect of approval, as the case may be). It is clarified that accordingly, the information in the following table is forward-looking information. The gross profit margin stated in the table below was calculated with respect to the anticipated income. The Company s Group has difficulty to forecast gross profit because the profit margin depends on factors, several of which are not under the Company s Group control. Therefore, the 33

55 information stated below is forward-looking information and there is no certainty that it will be realized. In this context it should be clarified that the estimates of anticipated income are based on the selling prices in projects adjacent to the Company s Group s projects and the estimated anticipated expenses (excluding cost of land, which is known either in entirety or in part) are based on signed agreements with contractors and/or expenses incurred in projects of a similar style. It is further clarified that the cash flows have not been capitalized over the project lifetime. 30

56 Projects in planning General information on the projects No. of units in project Current planning status Planned Name Savyonei Givat Shmuel Givat Shmuel Hahadasha Ltd. Location Givat Shmuel Date land purchased 2012 Book cost as of December 31, 2016 Presented using the equity method Planned start of construction Planned date of completion Financing or construction loan secured? Financing agreement Corporation s effective share in the project (%) No. of units including landowners units in combination projects No. of units excluding landowner s units in combinatio n projects Average area per unit (sqm) No. of units Average area per unit (sqm) 33% Savyonei Nof Hadera B Hadera , No 333% Migdalei Savyon City (Andreus) Netanya , No 333% Buyer s Price Glil Yam Herzliya No 333% Savyonei Hasharon Kfar Yona Kfar Yona , Savyonei Hasharon Kfar Yona Kfar Yona , Sderot Hasavyonim Modiin , Savyonei Bialik Kiryat Bialik Harish Harish , Savyonei Hair Ramat- Gan, Gavitaim Construction loan Financing agreement Construction loan 333% % % , No 33% Financing agreement 333% , No 333% Savyon View (Mapai House) Jerusalem , Financing agreement 333% Total 319,499 9,11, 9,194 9,19,. 33

57 G. Information on credit for projects (in NIS thousands) Name Savyon in the Lake, Netanya Savyon View, Jerusalem Savyonei Ganei Tikva, Ganei Tikva Savyonei Hasharon, Kfar Yona Sderot Hasavyonim, Modiin Financial credit limit Remaining balance of financial credit as of balance sheet date Limit for credit for guatantees Remaining balance of credit for guarantees as of balance sheet date Information on credit for projects Total credit facility Nonrecourse? No No No No No Interest range Interent type Compliance with the construction loan agreement as of the balance sheet date and the date of the Periodic Report +0.05% +0.5% Prime Yes +0.05% +0.5% +0.05% +0.5% +0.05% +0.5% +0.05% +0.5% Someil, KGM No +0.65% +1.25% Prime Yes Savyonei Arnona, Jerusalem Savyonei Givat Shmuel Hahadasha** Savyonei Nof Hadera A* Savyon on Bialik, Ramat Gan No No No No +0.65% +1.25% +0.65% +1.25% Prime Prime Prime Prime Prime Prime % +1.25% Prime Space No - - Yes Savyon Bamashtela No - - Yes Migdal Savyon Mofet No +0.05% +0.5% Prime Yes Savyonei Netzer Sireni No - - Yes Yes Yes Yes Yes Yes Yes Yes Yes 33

58 Information on credit for projects Remaining Compliance with the Remaining Name balance of construction loan balance of Financial Limit for credit credit for Total credit Nonrecourse? balance sheet date and agreement as of the financial credit as Interest range Interent type credit limit for guatantees guarantees as facility of balance sheet of balance sheet the date of the date date Periodic Report Ramat Sharet** No +0.65% +1.25% Prime Yes Sanei Savyon * No - - Yes Tiber No - - Yes Herut No - - Yes Rokah No - - Yes Uziel No - - Yes Usiel No - - Yes Tzvi No - - Yes Gordon No - - Yes * Open construction loan ** Presented accoriding to the equity method. 33

59 H. Additional information on material projects by Africa Residences that are being planned and executed by Africa Residences as at December 31, 2016 Item.1 Information Project Savyon VIEW (formerly, Mapai House) Location 60 Yaffo St or 57 Haneviim St, downton Jerusalem Brief description of the project Residential hi-rise of 27 storie including 194 units, and a 6-storey office building of 4,200 sqm, both above a closed, 3-storey shopping center of 4,500 sqm and a 2-level parking facility containing 174 parking spaces Corporation s effective share in the project 100% Structure of ownership Holding in real estate Project partners None Presentation in financial statements Land inventory Date of land acquisition 2014 Area on which the project is to be built Two parcel of a total area of 3,458 sqm Planned completion date of construction works 2019 Anticipated marketing completion date 2019/2020 Agreements with building contractors Start date of construction works (actual / planned) Legal rights in the land Special agreements (combination / evacuate-build / other) Exposure of reporting corporation to material risks in the project Special issues Excavation works NIS 7.05 million. Prime contractor tender stage. Work start order for excavations April 12, Work start order for construction not yet issued. Ownership - As described below On June 16, 2016, the estate of the late Albert Binyan and others filed an appeal against a decision rendered on November 30, 2015 to issue Africa Rresidences a building permit. In the appeal it was argued that the decision to issue a building permit to Africa Residences was made unlawfully and in considerable deviation from the plan, due to a dispute over the manner in which access to the underground parking was planned, allegedly in violation of the plan, contrary to agreements with the previous landowners, and contrary to commitments that the Jerusalem Municipality gave the appellants. After the appeal was filed, Africa Residences negotiated with the representatives of the Binyan estate. On November 28, 2016, the appeal was stricken, at the parties request and with the consent of Jerusalem Municipality, after agreements concerning the plan of the access to the underground parking were filed. On January 11, 2017, Africa Residences received a building permit for the project. 33

60 Costs invested Costs not yet invested and rate of completion Planning status December 31, 2016 Current planning status Inventory class Total area (sqm) Total no. of units Notes Housing units Commercial areas and built-up offices Unutilized building rights Planning status after planned modification [in projects that require modifications to plans] Inventory class Total area (sqm) Total no. of units Notes Housing units Unutilized building rights Primary residential 12,600 Primary commercial 2,700 Primary offices 3,233 Residential remaining primary areas (2,934 sqm) were utilized as service areas due to a lack of services areas for the maximum number of permitted floors in the CBP. Commercial fully utilized Offices remaining primary areas (566 sqm) were used as service areas due to lack of service areas in the CBP. 194 housing units. Shopping center as a single unit Office building as a single unit The Company plans to file an application to increase the number of housing units from 170 units to 194 units, on the basis of an exemption procedure. An exemption is required for the residential hi-rise, to convert a technical level to a residential level (floor 25). This exemption would be included in the permit for the said modifications and exemptions. The year 2016 The year 2015 The year 2014 Cumulative costs of land at the end of the period (a) , ,461 Cumulative costs of development, taxes, and levies (b) ,112 1,193 Cumulative construction costs (c) , Cumulative financing costs (capitalized) (d) ,704 1,087 Total cumulative costs in books (a)+(b)+(c)+(d) , ,759 Land costs not yet invested (estimate) (e) Development costs, taxes, and levies not yet invested (estimated) (f) ,620 31,378 Construction costs not yet invested (estimate) (g) , ,253 Cumulative financial costs that are expected to be capitalized in the future (h) ,504 33,513 (estimate) Total costs remaining to completion (e)+(f)+(g)+(h) , ,144 Rate of completion [engineering/financial] (not including 3% 2% 0% land)(%) Anticipated completion date

61 Contracts signed in the current period Average price per sqm in contracts signed in the current period Cumulative contracts to end of period Average price per sqm in cumulative contracts to end of period Share of project sold Areas in respect of which contracts have not yet been signed Total cumulative costs (inventory balance) attributed to areas in respect of which binding contracts have not yet been signed in the statement of financial position No. of contracts signed from the end of the period until the reporting date Average price per sqm in contracts signed from the end of the period until the reporting date Housing units January 1, 2017 March 5, 2017 Entire period 2016 (reporting year) Q4 Q3 Q2 Q Housing units (sqm) ,632 - Commercial areas (sqm) Housing units 35,596 29,945 29,466 30,722 30,980 29,132 28,636 - Commercial areas Housing units Housing units (sqm) 3,549 3,497 3,497 3,364 3,123 2,974 2,632 - Commercial areas (sqm) Housing units 29,057 28,960 28,960 28,940 28,802 28,693 28,636 - Commercial areas Total anticipated income from the entire project (in operating 583, , , , , , , ,208 currency) Total anticipated cumulative income from contracts signed 103, , ,273 97,354 89,950 85,334 75,371 (operating currency) Share of project sold as of the last day of the period (%) 18% 17% 17% 18% 17% 16% 14% 0% Housing units Housing units (sqm) 8,779 8,831 8,831 8,964 9,205 9,354 9,696 12, , , ,

62 Total income in respect of signed contracts that was/will be recognized Total advances received/expected to be received (NIS thousands) As of last day of The year The year The year Total 994,9,, 994,9,, NIS thousands The year 2016 The year 2015 The year 2014 Anticipated project income , ,208 Anticipated project expenses , ,903 Anticipated gross profit (loss) for the project Of which, gross profit already recognized in P/L Of which gross profit not yet recognized in P/L Total anticipated gross profit margin 33% 33% 33% Average price per sqm used to calculate gross profit not yet recognized (by use) Other Residential ,478 32,770 Commercial ,110 30,071 Offices ,361 9,487 Sensitivity analysis on gross profit not yet recognized for the project (in NIS thousands) Total gross Effect of Effect of Effect of profit not 10% 5% 5% yet increase increase decline recognized Effect of a change in the per-sqm selling prices of areas in respect of which binding contracts have not yet been signed on the anticipated gross profit not yet recognized Effect of a change in construction costs per sqm on the anticipated gross profit not yet recognized Effect of 10% decline Residential 40,643 39,169 37,695 36,221 34,747 Commercial 32,593 31,111 29,630 28,148 26,667 Offices 13,282 12,678 12,074 11,471 10,867 33

63 Financing assumed specifically for the project Financing agreement (in NIS thousands) December 31, 2016 Presented as short-term loans Presented as long-term loans -,,,11,, December 31, 2015 Presented as short-term loans Presented as long-term loans -,3614,, Financing institution Banking corporations Loan / credit facility approval date and date loan assumed September 2014 Total credit facility (in operating currency) 138,000 Of which, unutilized balance 28,300 Interest rate basis and interest rate [or range] Prime % - Prime + 0.5% Maturity date of principal and interest Principal due in a single installment at the end of the period, interest due in quarterly installments. Main financial covenants -- Other financial covenants [including pace of sales, etc.] -- Non-compliance with any main financial covenants or other covenants as of the end of the reporting No year? Non-recourse [yes/no]? No Conditions for releasing surplus from construction loan account, and were these conditions met Not relevant Collateral Senior mortgage, unlimited in amount 33

64 Item Project Location Brief description of the project Corporation s effective share in the project Structure of ownership Project partners Presentation in financial statements Date of land acquisition Area on which the project is to be built Details Someil Corner Ibn Gvirol-Arlozorov-Ben Sruk, Tel Aviv Construction of 2 50-floor hi-rise towers and 668 housing units, an open commercial center of 10,200 sqm primary areas, and underground parking of 40,000 sqm. App. 39% See table of structure of ownership of the project below Private owners See tables of presentation in financial statements below See table of structure of ownership in the project below App. 8 dunams (after concluding a lease agreement with Tel Aviv Municipalitu app. 10 dunams) Actual/planned completion date of Planned September 2024, subject to completion of construction works evacuation, which is not under the control of Africa Residences Anticipated marketing completion date Agreements with building contractors Geodanya (pumping and penetration tests) NIS 692,860 plus VAT Start date of construction works (actual / planned) Legal rights in the land Special agreements (combination / evacuate-build / other) Exposure of reporting corporation to material risks in the project Estimated net selling price in the reporting period? Including details of the assumptions concerning the inventory of very material land Infrastructure in the vicinity of the project Special issues Planned (excavations and shoring) February 2017, subject to completion of evaluation, which is not under the control of Africa Residences Holding in Ramnah Ltd, Afriram Ltd, Someil Towers Lt, and acquisition of direct rights in the land (in a transaction pending conclusion) from the Central Histadrut Worker Retirees Fund Ltd (under special administration) Africa Residences has a management agreement with several of the rights owners An approval for engineering coordination is at the end of the process, Approvals pending from Mei Avivim, Neta, and the Properties Division. There are no significant infrastructures within the project site. Beginning of project execution is contingent upon conclusion of the evacuations that are not under the control of Africa Residences, and in concluding cooperation arrangement agreements with the remaining landowners. Planning status December 31, 2016 Current planning status Inventory class Total areas (sqm) Total units Notes Housing units 61,834 sqm primary areas 514 Commercial areas and built-up offices 10,201 sqm primary areas Unutilized building rights 1,000 sqm primary areas Housing units Planning status after planned modification [in projects that require modifications to plans] Inventory class Inventory class Inventory class Inventory class Housing units 61,834 sqm primary areas 668 Including 30% Sheves Unutilized building rights 33

65 Costs invested Costs not yet invested and rate of completion Structure of project ownership Company Africa Residences share Date rights purchased Someil South units South Someil commercial areas North Someil units Ram-Nah Ltd 57.5% , Afriram Ltd 40% , Someil Towers 50% ,020 8 Africa Residences Others (South Someil) 100% , ,144 Total ,201 Presentation in financial statements: Company Ram-Nah Ltd Afriram Ltd Someil Towers Africa Residences Presentation in financial statements Consolidation Equity method Equity method Land inventory NIS thousands The year 2016 The year 2015 The year 2014 Cumulative costs of land at the end of the period (a) Cumulative costs of development, taxes, and (b) levies Cumulative construction costs (c) Cumulative financing costs (capitalized) (d) ,263 23,214 Total cumulative costs in books (a)+(b)+(c)+(d) , ,207 Land costs not yet invested (estimate) (e) ,941 55,208 Development costs, taxes, and levies not yet invested (f) ,680 40,677 (estimated) Construction costs not yet invested (estimate) (g) , ,925 Cumulative financial costs that are expected to be capitalized in the future (h) ,224 28,165 (estimate) Total costs remaining to completion (e)+(f)+(g)+(h) , ,975 Rate of completion [engineering/financial] 3% 3 3 (not including land)(%) Anticipated completion date

66 Africa Residences rights are held by Africa Residences, by Ram-Nah Ltd, a subsidiary of Africa Residences in which it holds 57.5%, and by Someil Towers Ltd, and Afriram Ltd, companies presented using the equity method, at the rates stated above. Cumulative cost and estimated project costs represent the weighted relative share of Africa Residences, including its holdings through its investees. Financing assumed specifically for the project Financing agreement (in NIS thousands) Balance as of Company Africa Residences December 31, 2016 Presentation in share (share of Africa financial statements Residences) Ram-Nah Ltd 3383% Short-term loan Afriram Ltd 33% Short-term loan Someil Towers 33% Short-term loan The Company 333% Long-term loan 33

67 Buyer s Price Glil Yam Project 2. Item Information Location Brief description of the project Glil Yam Buyer s Price (commercial yet to be determined) Glil Yam area, Herzliya General: Awarded a Buryer s Price tender in two adjacent residential areas, divided as follows: Area D: 8 buildings of 9 stories each above a ground floor, containing 352 units Primary areas 30,910 sqm Area E: 7 buildings of 9 stories each above a ground floor, containing 301 units. Primary areas 26,538 Total 15 residential buildings Total housing units in both areas 653 units Total primary areas in both areas 57,448 sqm Corporation s effective share in the project The project is divided into 80% buyer s price units and 20% units for sale at market prices. Total units based on Buyer s Price 523 units Total units to be sold at market prices 130 units 333% Structure of ownership Holding in real estate Project partners None Presentation in financial statements Land inventory Date of land acquisition Date land was awarded December 27, 2016 Transaction closing date June 25, 2017 Area on which the project is to be built Area D 10,658 sqm Area E sqm Total areas of the lots in both areas 19,467 sqm Planned completion date of construction works 2020 (according to the terms of the tender, within 27 months from the date the Municipality receives the lots) Anticipated marketing completion date Agreements with building contractors Contractors to be determined Start date of construction works (planned) 3333 It should be clarified that according to the development agreement, the Municipality may hand over the lots to the contractor up to 18 months from the signing date of the development agreement. In practice, the lots are expected to be handed over much earlier. Legal rights in the land Lease agreement with the ILA Special agreements (combination / evacuate-build / other) According to the terms of tender: Herzliya Municipality contract for execution of public infrastructure ILA construction contract related to the construction of the project

68 2. Item Information Exposure of reporting corporation to material As described below risks in the project Special issues According to the development agreement, within 12 months planning information and maps will be available at the local government to be used in the planning process. Africa Residences intends to take steps to advance these dates. Planning status today Current planning status (excluding additional units under the Shevess clause(*) [*This alternative, excluding Sheves, was never planned because the tender dictated an addition of units based on the Sheves clause] Inventory class Total areas (sqm) Total units Notes Housing units (net) *not planned no information 333 Planning status after planned modification (including additional units based on the Sheves clause) Inventory class Total areas (sqm) Total units Notes Housing units (net) The additional units (based on the Shevves clause) are a requirement of the tender. Additional housing units may be added. NIS thousands The year 2016 Anticipated project income Anticipated project expenses Anticipated gross profit (loss) for the project Of which, gross profit already - recognized in P/L Of which gross profit not yet recognized in P/L Total anticipated gross profit 33% margin (%) Average price per sqm used to calculate gross profit not yet recognized (by use) 33

69 I. Set forth below is information on the projects of Africa Urban Renewal Ltd (a subsidiary of Africa Residences engaged in the development of residential projects under NOP 38, hereinafter, Africa Urban Renewal ) in which marketing has not yet commenced and projects in the planning stage in respect of which agreements have been signed as at the Reporting Date: The information contained in the following table is, in part, forward-looking information, based on data available to Africa Urban Renewal on the Reporting Date, and therefore may not materialize and/or may materialize in an incomplete or manner other than described in the table. The rights related to said projects and/or lands are not necessarily registered in Africa Urban Renewal s name on the Reporting Date. In this table, total housing units in the project means housing units in which Africa Urban Renewal owns the rights, including housing units to which apartment owners are entitled. The data referring to plans pending approval constitute forward-looking information. All the projects are held by Africa Urban Renewal without partners and are sold under the Savyonei Ha Ir brand. Project Location Projects Ramatunder Gan construction Givataim Projects in planning Contingent projects Total Ramat- Gan Givataim Tel Aviv Ramat- Gan Givataim No. of projects Total housing units per project Not Including including owners owners rights in rights in proceeds proceeds transactions transactions Total units sold Contract value of sales Total estimated cost per project Total estimated cost per project including land Anticipated gross profit margin % Year construction commences Under construction Anticipated duration of construction in years % % ,1,413 1,9,111 98,,199 98% 3 Total cost of land inventory in respect of NOP 38 in the Consolidated Financial Statements of Africa Residences as of December 31, 2016 is NIS 15 million. The data in this table are included in the data on projects under construction, in planning, and contingent projects, above. 33

70 J. Set forth below is a summary of data on suspended relating to contingent residential projects and land reserves in this operating segment as of December 31, 2016 (in NIS thousands): The information in this table below is, in part, forward-looking information based on data available to the Group as of the Reporting Date and, therefore, it may not materialize and/or it may be realized in a partial manner and/or otherwise than described in this table below. The rights related to the aforementioned projects and/or lands are not necessarily recorded in the Group's name at the Report Date. Land reserves General information on the projects Name Savyonei Bialik Savyon City Towers B (Andreus) Ramat Marpeh Location Kiryat Bialik Date of acquisition Costs related to land reserves as of the last day of the reporting period Original cost Financing costs capitalized to land Planning and other costs Cumulative decline in value recorded Current book cost as of December 31, 2016 (a) (b) (c) (d) (a)+(b)+(c)+(d) Corporation s effective share (%) Area (sqm) Current planning status (by use) Housing units, other uses Building rights Planning status according to applications or plans (by use) Housing units, other uses Status of planning procedures , % CBP in effect Netanya % Ramat Gan % - 33 CBP under the authority of the local council for the addition of 55 housing units (Stages A and B) approved for validation with conditions On February 10, 2014, the district council published a notice in the Official Gazette (Reshumot) of preparations on a conservation plan including a limit on new permit issues. The building is on the list of 33

71 Land reserves General information on the projects Name Savyonei Arnona Ramat Sharet Savyonei Netzer Savyonei Hanasi Location Date of acquisition Costs related to land reserves as of the last day of the reporting period Original cost Financing costs capitalized to land Planning and other costs Cumulative decline in value recorded Current book cost as of December 31, 2016 (a) (b) (c) (d) (a)+(b)+(c)+(d) Corporation s effective share (%) Area (sqm) Current planning status (by use) Housing units, other uses Jerusalem % 3 Jerusalem 2008 Ness Ziona Presented using the equity method Building rights Planning status according to applications or plans (by use) Housing units, other uses Status of planning procedures buildings that is expected to be subject to said plan. The new plan for conservation of the existing building and an addition of 88 housing units was approved by the district council for validation subject to conditions. Rights to 5 housing units (with no subdivisions) 33% Pending committee ,022 33% Jerusalem , % ,500 sqm rights to residential uses and 3,885 sqm hotel uses 4,635 sqm rights to residential uses and 4,516 sqm hotel uses The Company intends to take steps to modify the plan CBP in effect for residential and hotel uses (for hotel uses, a detailed plan must be prepared). CBP to appreciate the land by additing rights for residential uses and hotel areas was filed with the local council, which decided to join in as an applicant. The plan is 33

72 Name Savyonei Yam Location Kiryat Yam Date of acquisition Land reserves General information on the projects Costs related to land reserves as of the last day of the reporting period Original cost Financing costs capitalized to land Planning and other costs Cumulative decline in value recorded Current book cost as of December 31, 2016 (a) (b) (c) (d) (a)+(b)+(c)+(d) Corporation s effective share (%) Area (sqm) Current planning status (by use) Housing units, other uses Building rights Planning status according to applications or plans (by use) Housing units, other uses % Status of planning procedures being discussed by the Municipal Conservation Committee. For additional information on this project, see sub-paragraph (3) below. The plan was approved by the local committee for deposit subject to conditions. Givat Shmuel C Kfar Yonah 9-11 Givat Shmuel Kfar Yonah 2012 Presented using the equity method 33% The plan, which is under the authority of the local committee, to add 95 housing units, was approved for deposit subject to conditions % CBP in effect Harish B Harish , , % CBP in effect 33

73 Land reserves General information on the projects Costs related to land reserves as of the last day of the reporting period Building rights Name Location Date of acquisition Original cost Financing costs capitalized to land Planning and other costs Cumulative decline in value recorded Current book cost as of December 31, 2016 (a) (b) (c) (d) (a)+(b)+(c)+(d) Corporation s effective share (%) Area (sqm) Current planning status (by use) Housing units, other uses Planning status according to applications or plans (by use) Housing units, other uses Status of planning procedures Harish C Harish , ,080-31, % CBP in effect Bialik on the Park - Afek Kiryat Bialik % App. 270 Outline building plan not including subdivisions is in effect land is zoned for residential uses in this plan. A subdivision plan is under preparation. Givat Savyon Hahadasha Stage B (cash transaction) Ganei Tikva 50% in 2000 and 33% in % Cannot be estimated The land is situated in a compound zoned for metropolitan leisure uses according to a district outline plan. Someil South (1) Tel Aviv 3333/ housing units and 6,400 sqm commercial areas CBP in effect Someil North Tel Aviv 3333/ CBP in effect 33

74 Additional land reserves: Land Parcel 31, Block 11073, Yokneam Parcels (in part), Block 11072, Yokneam Parcels 105, 106, and 107 (in part), 155 (in part), 363 (in part), Block 12257, Haifa Type of rights 1 Land cost in books as of December 31, 2016 (NIS thousands) Statutory planning status Ownership -- Agricultural land Ownership -- Agricultural land Ownership -- Parcel 23, Block 11203, Haifa 2 Ownership -- According to a CBP in effect, this land is zoned as a nature reserve According to a CBP in effect, this land is zoned as private unbuilt land 1 This is the type of rights that Africa Residences acquired. These rights, as noted above, are not necessarily registered in Africa Residences name as of the date of the Report. 2 A 999-year lease is registered in favor of Meidan Carmel Ltd, a subsidiary of Africa Residences, on a part of Africa residences' ownership rights. 33

75 Project Herzlia Studios Givat Hakaliyot Harav Pinto - Rozenberg complex Location Africa Residences share in the project Date rights in the land were acquired Total no. of units that Africa Residences wishes to include in the project Herzliya 33% Type of rights acquired Capitalized lease Cost of land in books as of December 31, 2016 (NIS thousands) Type of agreement Share of residents who signed the agreement No. of units designated for evacuation,,1451 Combination Not relevant Not relevant Kiryat Ata 333% 3333 App. 500 Ownership,,3 Combination Not relevant Not relevant Petah Tikva 333% 3333 App. 160 Ownership,4, Construction services Not relevant Not relevant Statutory planning status Main conditions precedent The agreement set a suspending condition and a schedule for rezoning. The main date in the timetable refers to the date on which the CBP comes into effect. As of the date of this Report, the plan is in effect and therefore the suspending condition expired. The main suspending condition is that the CBP comes into effect. As of the date of this Report, the plan was re-deposited with the district committee. The main suspending condition is that the CBP comes into effect. As of the date of this Report, the plan, subject to the authority of the district committee, was recommended by the local committee to be deposited with conditions. Savyonei Hair Ramat Gan, Givataim,3, 15% תמ"א,,15,, 3, % Total cost of land reserves in respect of contingent projects in Africa Residences books as of December 31, 2016 totals NIS 23,203 million. 30

76 Africa Residences The following table summarizes Africa Residences investments in joint ventures (in NIS thousands) concerning real estate development in Israel, as of December 31, Investee No. of units and commercial areas, according to CBP in effect No. of units and commercial areas according to the Group s plans Holding company Share of holdings as of December 31, 2016 Cost of investment in the Company s consolidated financial statements for December 31, 2016 Group s share in profit (loss) 2016 Group s share in profit (loss) 2015 Group s share in profit (loss) 2014 Group s share in cumulative profit (loss) as of December 31, 2016 Total investment in the Group s consolidate financial statements for December 31, 2016 Owners loans as of December 31, 2016 Afriram Ltd. App. 93 units and 1,500 sqm commercial areas. CBP in effect. App. 93 units and 1,500 sqm commercial areas. 33% ) 333( ) 303( 33 ) 33330( ) ( Someil Towers Ltd 62 units and 1,000 sqm commercial areas. CBP in effect. 62 units and 1,000 sqm commercial areas. 33% P.A. Development and Building in Jerusalem Ltd. Givat Shmuel Hahadasha Ltd 232 units and 1,500 sqm commercial areas in Ramat Sharet, Jerusalem (CBP in effect) 232 units and 1,500 sqm commercial areas. 33% - ) 33333( ) 33333( (386) ) 33333( ) 33333( units in Givat Shmuel 695 units 33% - ) 33333( ) 33033( ) 33333( ) ( ) ( According to the Group's policy, beginning from January 1, 2008, investees in which holding is 50% or less are no longer consolidated. 33

77 Company Investee No. of units and commercial areas, according to CBP in effect No. of units and commercial areas according to the Group s plans Holding company Share of holdings as of December 31, 2016 Cost of investment in the Company s consolidated financial statements for December 31, 2016 Group s share in profit (loss) 2016 Group s share in profit (loss) 2015 Group s share in profit (loss) 2014 Group s share in cumulative profit (loss) as of December 31, 2016 Total investment in the Group s consolidate financial statements for December 31, 2016 Owners loans as of December 31, 2016 Savyon Nurseries Ltd. 65 units in the new neighborhood in Savyon (29 one-family lots and 36 twofamily lots) 1 65 units in the new neighborhoo d in Savyon 33% - ) 333( Savyon Nurseries Ltd owns an additional area that borders on the area of the plan that refers to said lots. It should be noted that lease agreements have also not yet been signed for the second lease period (beginning from June 2000) with respect to these additional lands. 33

78 Lands sold Following is information on lands that were sold beginning from January 1, 2014 until shortly prior to the date of the Report: 1 Transaction Givat Savyon Hahadasha Stage B Northern Hod Hacarmel Description of property Rights in parcel 59, Block 6721, Ganei Tikva Rights in land known as part of parcels 50 and 54, Block 11238, Haifa Type of transaction Date of sale Africa residences share in the proceeds of the sale (NIS thousands) Profit (Loss) in NIS thousands (before tax) Notes Sale 48,5 1145, 41, Transaction was concluded in 2014 Sale 68,4 3,1,,, 331,,, Transaction was concluded in 2015 In addition to the contingent projects and the land in reserves as described in the above table, the Group has additional land reserves (in the vicinity of Haifa and Yokneam), where the cost of land in its books is not material. 2 1 In addition, in the said period, Africa Residences cancelled several transactions. The costs in respect of these transactions were not material. 2 To the best of the Company's knowledge, on March 7, 2016, Africa Residences Audit Committee appointed an external appraiser on its behalf to examine a possible acquisition of the Company s lease rights (which are capitalized in respect to the built-up rights only) in the country club compound of Savyon, of 39 dunams which include 1,860 sqm of builtup areas in the country club and a vacant area of 10 dunams zoned for commercial uses; lots at the entrance to Savyon zoned for agricultural uses of a total area of 25 dunams, and the adjacent 20-dunam area zoned for agricultural processing; 58 dunams of land zoned for agricultural uses adjacent to the Savyon Junction (of which 11.5 dunams to be appropriated for a road)(hereinafter jointly, the Properties ). It is clarified that at this stage there is no certainty regarding the execution of the transactions, either in entirety or in part, due to, among other reasons, failure to reach agreement on the terms of the transactions and/or due to findings of a due diligence process that Africa Residences is conducting and/or receipt of approvals and/or consent of third parties and/or the planning status. It should be noted that the Company eventually entered into an agreement to sell the country club complex with a third party unrelated to the Company or to anyone acting on its behalf. Furthermore, as of the date of the Report, no decusion has been made with respect to the remaining Properties. 33

79 K. Order backlog (1) The following is a breakdown of the order backlog of Africa Residences in this operating segment of real estate development in Israel, according to the period of recognition of expected revenues in the quarters of the coming year and in the years thereafter (in NIS thousands). Anticipated income recognition period Income to be recognized in respect of binding sales contracts As of December 31, 2016 Anticipated buyers advances and payments in respect of binding sales contracts Q1/ Q2/ Q3/ Q4/ and onward - - It is clarified that the information in the above table is forward-looking information based on the Company Group s assessments, estimates and plans, and there is no certainty that it will be realized, due to, inter alia, the pace of the projects construction and the Group's estimates of their completion, as well as because of the possible effect of the Company s Group s risk factors in on its operations. (2) According to IFRS, the revenues from the sale of housing units by contractordevelopers are recognized when the units are delivered to their purchasers. On this matter and regarding IFRS 15, see Note 3X(1) to the Company s Consolidated Financial Statements as of December 31, The balance of revenues from sales of units according to IFRS was NIS 1,596,825 thousand as at December 31, 2016, NIS 1,912,409 thousand as at December 31, 2015, and NIS 1,463,478 thousand at December 31, To remove all doubt, it is hereby clarified that the information in the tables in paragraph above, referring to construction of projects the construction of which has not yet commenced, additional housing units based on plans, plans that have not yet been approved, additional projected project costs, and scheduled completion dates, constitute forward-looking statements. The data in the tables are based on the following assumptions, among others: (1) the Group will decide to utilize the land reserves (this, among other things, taking into account the economic viability and the market conditions as they will be), or the contingent conditions to 33

80 complete the transaction relating to a contingent project will be satisfied, as the case may be; (2) all additional owners in the property will join the planned projects pursuant to the Group s expectations; (3) the plans and/or applications that have been and/or will be submitted by the Group will be approved and come into effect without any substantial change in the number of housing units permitted for construction on the land, the mix of housing unit [types] and/or the plan of the residential units, relative to the number, mix and plan that the Group expects; (4) no material modifications will be made to the fees, levies, and/or taxes that apply to the parties of real estate transactions: (5) construction costs and the remaining sales costs will be consistent with the Group s estimates. It is clarified that if a substantial change occurs in one or more of the above factors, a substantial change may occur in the number of units and/or costs or schedules that the Group expects Additional commitments A. Commitment with Shuval Eyal Israel Ltd. To the best of the Company s knowledge, in 1998, a company named Shuval Eyal Israel Ltd. (hereinafter in this sub-paragraph, Shuval Eyal ) was awarded a tender issued by the ILA (hereinafter in this sub-paragraph, the Tender ) for planning and an option to purchase rights according to a development agreement with the ILA on a section that constitutes 20% of the to-be determined rights in 685 dunams located in the jurisdiction of the South Sharon Regional Council, in the vicinity of Ganei Yehuda (hereinafter, the Land ). On March 16, 1998, following legal proceedings initiated by Shuval Eyal against the ILA concerning the Tender, the ILA decided to approve Shuval Eyal s bid for the Tender and sign the aforementioned agreement concerning the Land with it (hereinafter, the Unplanned Land Contract ). The price offered by Shuval Eyal is NIS 189 million (linked to the CPI; the base index is in respect of May 1997). Furthermore, Shuvay Eyal was required to sign an agreement with the ILA by April 1, 1998 and pay, by that date, the consideration of the option in the amount of NIS 19.5 million (which constitute 10% of the bid price). On March 30, 1998, a loan agreement was signed (hereinafter, in this paragraph, the First Loan Agreement ) according to which Africa Residences granted a loan to Shuval Eyal in the nominal amount of NIS 9.75 million, and in October 2002 and August 2004, granted Shuval Eyal additional loans in the total nominal amount of NIS 3.3 million, on the same terms as the First Loan Agreement. All the loans are linked to the CPI and bear annual linked interest of 5%. The loans mature within 14 days from the approval date of the City Building Plan for the Land and/or earlier if the City Building Plan preparation process is terminated. To secure the loan, a third party, which owns 33

81 99% of Shuval Eyal, pledged one half of his holdings in Shuval Eyal in favor of Africa Residences. Africa Residences also received a personal guarantee from the individual who is, to the best of its knowledge, the controlling owner of Shuval Eyal. Furthermore, a lien was registered in favor of Africa Residences in the Companies Registry on the entire registered shareholders equity of Shuval Eyal, as it increases or decreases from time to time. The lien is a senior lien and unlimited in amount and applies to any monetary amount received from upon the allocation of the registered shareholders equity. In addition to the loan agreements, Africa and Shuval Eyal signed a series of agreements on March 30, 1998, the main agreements of these being: Africa Residences offered to Shuval Eyal to execute a joint transaction involving the Land, that would come into effect up to 14 days from the approval date of the City Building Plan (hereinafter, the Joint Transaction Offer or the Offer ). In the Offer, Africa Residences offered to purchase one half of the rights in the Land from Shuval Eyal, according to the cost that Shuval Eyal paid at purchase (and all costs that Shuval Eyal incurred until the date the development contract was granted to it), by way of an issue of 50% of Shuval Eyal s shares. In the Offer, Africa Residences offered to Shuval Eyal to jointly construct the project, after the purchase, on a completely equal basis. The Offer also stated that the parties would jointly take steps to procure a development contract in the names of both parties or to transfer one half of Shuval Eyal s rights to Africa Residences. If Shuval Eyal refuses the Offer to construct the project together, Shuval Eyal will be required to immediately repay the company the entire amount of the loans (as stated above), and linkage and interest differences accrued to that date. Furthermore, Shuval Eyal fave notice that if the parties conduct a joint project, it would commission management services from Africa Residences, the fees of which would be determined by the two parties. It should be noted that on the Reporting Date, the parties relationship is one between lender and borrower, and the Company s participation in the project depends on Shuval Eyal, and the company has no ability or contractual or other legal right to ensure its participation in the project. The company similar has not vested rights, authority, or permits on behalf of Shuval Eyal by agreement or on the basis of other understandings : neither in the matter of the company s participation in the meetings of Shuval Eyal s organs, or in the matter of any role in the planning procedures involving the Land, or in the matter of obtaining financial statements or current reports on behalf of Shuval Eyal or in the matter of meetings and discussions with the ILA, and the company has no rights to appoint directors and/or observers to Shuval Eyal s board of director. Consequently, despite the company s hope that it will become a partner 33

82 in the project in the future, as at the reporting date Shuval Eyal has no obligation, including any implied obligations, to add Africa Residences as a partner in the project. 1 To Africa Residences best knowledge, the dates determined in the Temder for permits to plan and consequently to exercise the option, have elapsed. According to a resolution of the ILA council in January 2008, the planning permit and option period may be extended for an additional two-year period beginning in February 2008 (hereinafter in this sub-paragraph, New Decision Date ), subject to payment to the ILA of 4.5% of Shuval Eyal s original bid in the Tender, in respect of an extention until the New Decision Date3 and an additional 0.5% for every additional year (and two eyar at most, as stated above). These dates have also elapsed. To Africa Residences best knowledge, said payments were not made by Shuval Eyal to the ILA due to various arguments that Shuval Eyal has against the ILA, concerning, among other things, delays caused by the ILA in approving the City Building Plan that Shuval Eyal is promoting with respect to the Land. On August 29, 2010, Resolution 1204 of the ILA council was adopted, which determined provisions concerning the extention of the Unplanned Land Contract. The Unplanned Land Contract is not mentioned in the table attached to the resolution on the Unplanned Land Contracts subject to extensions (hereinafter, Resolution 1204). On January 24, 2011, Shuval Eyal received a letter from the ILA ( the ILA Letter ) in which the ILA notified Shuval Eyal that it would not have any right to exercise the option defined in the Unplanned Land Contract and/or any other right in the Unplanned Land Contract lands due to Resolution 1204, among other things, its failure to obtain an approved City Building Plan by the designated date, and failure to make payments in respect of the extensions granted in respect of the planning procedures. In response, Shuval Eyal sent a letter to the ILA on February 3, 2011, in which it argued, among other things, that the ILA s conduct over the years, through which it continued and continues to uphold the Unplanned Land Contract, and on the other hand, chooses to ignore Shuval Eyal s numerous communications and wishes on the even of the approval of the plan for deposit, to dispossess it of its rights under the Unplanned Land Contract so that it might benefit from its efforts invested over 1 The motivation for granting the loan in this format was to establish a long-term business relationship with Shuval Eyal, based on the hope that over time, against the continuing long-term business relationship between them as lender and borrower, Africa Residences would have an opportunity to prove its value in promoting the project and a natural outcome of this would that Shuval Eyal would choose to exercise its rights to add Africa Residences as its partner in the project. In other words, the loan was granted mainly to protection the potential of a future transaction involving the parties that would confer upon Africa Residences rights in the project (if Shuval Eyal exercises the option). 33

83 the years constitute lack of good faith and extreme lack of reasonableness, and constitutes a despicable attempt at unjust enrichment, in violation of the law. Accordingly, Shuval Eyal informed the ILA that if it does not retract its letter, Shuval Eyal will not hesitate to use all the legal means necessary to protect its rights and recover the heavy damage caused to it by the ILA s conduct. On June 21, 2011, a meeting was held in the offices of the ILA attended by all the owners of the rights in the Land. The meeting was held in view of the ILA s position that Shuval Eyal s planning right was not extended in view of Resolution 1204, as stated above. Each party presented its arguments about the existing barriers to the promotion of the Unplanned Land Contract. All the interested parties stressed their common interest in approving a plan for 800 residential units and that, on the Reporting Date, has already received a decision by the sub-committee on objections and is pending modifications according to that decision. In the meeting it was agreed that separate meetings would be conducted with each party, in order to determine an agenda for promoting the plan in the future, and a steering committee would be established to promote the plan through a smaller forum that includes representatives of all the interested parties. The company, based on the opinion of Shuval Eyal s legal adivors, is that if a decision is made to terminate the Unplanned Land Contract, and if Shuval Eyal files a legal action to enforce said Contract, the chance that the Unplanned Land Contract will be enforced either partially or entirely is greater than the chance that the legal action will be dismissed. In this matter, partially refers to the first stage of the plan that permits the construction of 800 housing units. If the court rules that the agreement should be partially enforced then, respectively, it is almost certain that the court will rule that the exercise price and cost of option should be adjusted to the number of units actually constructed. Alternatively, if Shuval Eyal sues the ILA in order to receover its investments and costs related to the Unplanned Land Contract, the chances that the action will prevail are greater than its chances of being dimissed. Accordingly, considering the aforesaid legal opinions and based on economic calculations performed by Africa Residences, according to which the estimated future cash flows anticipated from ths project exceed the amount of the loans (including linkage and interest differences), Africa Residence did not make any impairment provision in respect of said loans. The estimated future cash flows that Africa Residences calculated are based on the project s feasibility (based on said opinion, among other things). The assessment of feasibility was based on a conservative assumption of a housing project that Shuval Eyal s estimated share of the number of housing units that will be available and be included in the City Building Plan in 33

84 respect of which the sub-committee on objections has rendered a decision and is pending modifications according to said decision, less loans from others, effectively constitutes the source of repayment and/or collateral for the loans, and according to Africa Residences estimates, exceeds the amount of the said loans. On May 28, 2013, Africa Residences received notice from the borrower that it received notice on behalf of the ILA that, in view of the dismissal of the ILA s appeal against the sub-committee for objections decision not to promote the City Building Plan for the Land in the proposed format, the ILA intends to promote the required planning procedures directly, and that in such circumstances, there is no point in contoinuting the negotiations between the borrower and the ILA to reach a settlement concerning the borrower s entitlement to exercise the option that it was granted by the ILA and/or to receive any other right in the aforesaid Land. On June 5, 2013, the borrower s legal advisors responded to the ILA s notice, stipulating that the borrower completely rejects the entire contents of the ILA s letter and stresses that the borrower s position is that the borrower has a purchase option even if no City Building Plan was approved by the end of the permission for planning period. Nonetheless, in view of the notice on behalf of the ILA, and based on the opinion of the borrower s legal advisor that it is not possible to estimate the borrower s prospects in the actions that it may file against the ILA for enforcement and/or damage in respect of its costs, against the backdrop of recent developments concerning this issue and additional planning obstacles that emerged concerning the Land, the management of Africa Residences believes that it is no longer has a reliable foundation on which to assess its ability to collect on the loans that it granted to the borrower, as well as the amount that it may be able to collect, and therefore Africa Residences recorded a loss in respect of a provisions for impairment in its Financial Statements for the second quarter of 2013, in the amount of the book value of the loans in Africa Residences books, which is NIS 20.5 million (NIS 15.4 million after tax effects). To remove all doubt, it is clarified that the provision does not detract from Africa Residences right to repayment of the loans that it granted to the borrower. Following the understandings between Africa Residences and Shuval Eyal regarding collaboration and granting a loan in the amount of NIS 1.9 million for filing an action against the ILA to enforce the option and/or for damages in respect of its costs, Shuvay Eyal filed an action against the ILA in October 2015 in the amount of NIS 300 million. 33

85 B. Rental housing On May 14, 2014, the bid of Africa Residences together with Africa Properties, in a tender published by the State of Israel, the Accountant General in the Ministry of Finance together with the Construction and Housing Ministry and the ILA (henceforth, jointly, the Client ), for the purchase of land in Herzliya for the construction of rental apartments for a period of 20 years, was announced the winner. Subsequently, during July 2014, Africa Residences and Africa Properties purchased their share in the land in Herzliya using their own sources of financing for a total of NIS 75 million (not including purchase tax). Africa Residences and Africa Properties also entered into a construction contract with Danya Cebus which will function, as part of the tender, as the construction contractor of the residential project on the land in Herzliya for a total area of 37,000 sqm, including housing units, a 10,000 sqm underground parking area, and public areas. On January 15, 2015, a financing agreement was signed between Africa Residences and Africa Properties and an institutional body not related to the Company Group. For details on the project, see paragraph 1.9 below and Note 4C(7) to the Company s Consolidated Financial Statements as of December 31, C. Undertaking of indemnification regarding the project in Rehovot - A dispute exists between Africa Residences and Elot Investments (Remet-Vered) 1994 Ltd. (hereinafter, Elot ), which purchased from Africa Residences rights in land in a project in Rehovot (the land is divided into three complexes), mainly concerning Elot s claims that it is entitled to obligate Africa Residences to purchased its rights in one of the complexes from it (hereinafter, Complex B ) and to terminate the purchase of rights in an additional complex (hereinafter, Complex C ). There is also a dispute regarding the consideration that Elot undertook to pay to Africa Residences for construction services that it rendered to Elot and that are attributed to said complex in the project (hereinafter, Elot s Debt ). On May 2, 1995, Africa Residences entered into an agreement (hereinafter in this paragraph, the Elot Agreement ) with Elot, in which Africa Residences sold sections of land known as parcels 8 and 9 in Block 3649 in Rehovot to Elot, Such land was zoned for rental industrial buildings in three complexes (hereinafter in this paragraph, the Project ). The Elot agreement determines, among other things, that under certain conditions, Elot may, among other things, terminate the purchase of rights in Complex C (50% of the rights in Complex C) in the Project. A dispute emerged between the parties, where Elot notified Africa Residences that it claims that it is engigled to terminate the purchase of the rights in Complex C (hereinafter, Elot s alleged rights ). 30

86 Elot s argument was rejected by Africa Residences as Africa Residences believes that the conditions that permit Elot to exercise its alleged right do not obtain. It should be noted that the company is guarantor to Africa Residences obligations to Elot. On May 23, 2012, Africa Residences signed an addendum to its agreement with Elot, for the final and absolute settlement of all the parties mutual claims and/or obligations, and Elot paid NIS 23.6 million (plus VAT) to complete the purchase of the rights concerning Complex C from Africa Residences. Furthermore, according to the terms of the said agreements between Africa Residences and Elot, the company paid Africa Residences NIS 3.4 million Vacate-Build projects A. Africa Residences entered into agreements with various developers to promote vacate-build type projects. In the framework of these agreements, Africa Residences is taking steps, through the said developers, to create a contractual framework with the residents of various complexes in which Africa Residences is involved, pursuant to which the residents vacate their old apartments, receive financing to rent an apartment during the evacuation period, and subsequently receive a new apartment in the project that will be constructed. Execution of these projects is contingent on, among other things, approval of a new City Building Plan (if there is no valid building plan allowing the project to be completed); consent to vacate the land by all residents and actual evacuation; application of Section Five 4: Evacuation and Construction of the Land Tax Law (Appreciation, Sale and Purchase) 1963; exemption of betterment tax and VAT; exemption from all payments to the ILA, and other conditions relevant to each case. B. Generally, in consideration for these actions, and subject to the contingent conditions of the project, the developers are entitled to an amount equal to a share in the actual proceeds received from the sale of all or a part of the housing units in the project which are not substitute apartments for the vacating residents. As of the date of the Periodic Report, Africa Residences is active in several areas in Gush Dan and the Sharon. C. On the Reporting Date, Africca Residences entered into vacate-build agreements with all residents of the the Andreas project in Netanya (116 residents). The project has a City Building Plan in effect for 333 housing units. In addition, a City Bulding Plan for an additional 55 units is pending approval of the local planningcommittee Additional information on land sold by the Company Group During the period from January 1, 2014 to December 31, 2016, the Company Group sold various lands zoned for residential uses, the proceeds of which (the 33

87 Group's share, consolidated) totaled NIS 43 million, and the cumulative income recorded in respect of the sales (before tax, consolidated) was NIS 23 million Provisions for completion, inspection, warranty, and registration in the Land Registration Office The Group s balance of provisions for completion, inspection, warranty, and registration in the Land Registration Office was NIS 85,876, NIS 54, 373, and NIS 53,182 thousand, as of December 31, 2016, December 31, 2015, and December 31, 2014, respectively. It should be noted that after payment of the final bills to the contractor and consultants, the Company generally does not make provisions for inspection, warranty and registration, since the responsibility for inspections applies to the building contractors, and in any case, the relevant amounts are not material. As part of the sales agreements between Africa Residences and the buyers, and as part of several of the agreements pursuant to which the Africa Residences acquires rights in real estate (including agreements with private entities, the ILA and/or the Ministry of Housing and Construction), the Africa Residences undertake to register the housing units as a condominium (if and to the extent necessary for registration purposes) and to register the housing units in the buyers names. As of the date of this Report, housing units, as detailed in the following table, have not been registered in the buyers names, since registration of rights also typically involves procedures, including subdivision procedures, that are not under the control of Africa Residences. Most of the agreements with the buyers provide that Africa Residences is obligated to register a condominium and to register a housing unit in the buyer s name is contingent on completion of the subdivision procedures. For details of the Sales (Assurance of Investments) Law, which determines, among other things, the timetables for registering buyers rights in apartments, see paragraph (E) hereinabove. Following are details of the registration status 1 of housing units sold, As of December 31, 2016 (including the share of partners in joint ventures, and including the share of landowners in combination transactions in kind, but excluding housing units the registration of which is the responsibility of the counterparty in the joint venture): 1 Including housing units sold by the Company. 33

88 Status Housing units in the registration process Housing units, the registration of which is contingent on subdivision Total number of residential units being processed Units registered in the buyers names Units not yet registered in the name of buyers Housing units to which condominium orders apply Customers The Company Group s revenues in the residential construction segment in Israel stem from a large number of apartment buyers. The Group is not dependent on any single customer in the residential construction segment Marketing and distribution In the residential construction segment, the Company Group sells residential apartments nationwide, generally under the Savyonim trade name (see paragraph hereinafter), generally through its own marketing system. Furthermore, in some cases, the Company Group receives marketing and sales services rendered by outside entities. The Group s sales representatives generally operate out of sales offices located on the project sites. The projects included in this operating segment are sometimes performed through a joint venture involving the Company Group and a second developer. In some of these joint ransactions, the Company Group in the residential construction segment manages project sales in exchange for a specific percentage of the sales proceeds. The projects are generally marketed on the basis of a comprehensive marketing plan which includes, among other things, an analysis of the marketing environment based on market surveys, an analysis of the project s advantages and weaknesses, opportunities and risks, etc. On the basis of said marketing plan, the Company Group decides on a marketing strategy for each project, which is also the foundation for the advertising strategy that accompanies each project. An additional means the Company Group uses in its marketing efforts is the use of nationwide image-based advertising campaigns and large-scale sale offers Competition The real estate industry in Israel, in general, and the residential construction sector in particular, are characterized by a high level of competition. The number of companies in this sector that construct hundreds of housing units in a specific 33

89 timeframe, such as Africa Residences, is relatively small, whereas there are many medium-sized and small companies that construct a smaller number of units in a given timeframe. Africa Residences main competitors in its operating segment include, to the best of its knowledge, such companies as Azorim, Housing and Construction, Ashdar, and Y. H. Dimri. Africa Residences share in the private residential construction sector in Israel, as of the Reporting Date, is only a few percentage points, similar to the companies mentioned above The Company Group views as its potential competitor in the residential construction segment any developer-contractor who builds in the same geographical area in which it builds, as well as other developer-contractors and buying groups that build in areas which may constitute a suitable alternative to areas in which the Group builds. Africa Residences reviews its competitors activities on a regular basis through, among other things, market surveys (known as covert customer surveys) and the available media in order to remain informed of its competitors activities. Nonetheless, Africa Residences considers itself a leader in each of the sites on which it operates and its actions are guided by the decision of Company Group s management in each site One of the positive factors affecting the Company Group s status in this segment in Israel is its use of the Savyonim trademark and the positive reputation that the Africa Israel trade name enjoys among the public of residential housing buyers Intangible assets The Company and Africa Residences have a longstanding reputation for constructing residential neighborhoods in Israel. The Savyonim trade name is identified with the residential districts built by the Company and by Africa Residences (Africa Properties various projects have names identified with each individual project). In June 2006, the Company granted Africa Residences the right, unlimited as to time and for no consideration, at terms determined between the parties, to use the Company s logo and its Savyonim trade name including all the permutations and forms thereof that are registered in the areas of Africa Residences activities, so long as the Company holds more than 50% of the rights to vote at the General Meeting of Africa Residences Human capital Set forth below is the organizational chart of Africa Residences, as of the date of this Periodic Report: 33

90 To the best of the Company s knowledge, all the employees in this operating segment are employed under individual contracts. According to written and oral agreements, said employees are entitled to a salary, related amounts, and accepted social benefits. Several senior employees are further entitled to reimbursement of conventional expenses, and are entitled to have placed at their disposal a vehicle, the expenses and maintenance costs of which are born by the Group. Salespersons are furthermore entitled to bonuses in respect of sales, based on a scheduled agreed with them Group employees in the real estate development area in Israel undergo training from time to time, according to their functions Raw materials and suppliers In the normal course of Africa Residences business, it enters into agreements concerning the construction of the development, infrastructure, and construction work with contractors; with prime contractors in lump sum contracts for the construction of buildings, with (primarily prime) contractors in cost-plus contracts (based on the bill of quantities) for development work; and with suppliers of engineering services such as architects, planners, project managers, coordinators, supervisors, and consultants (on matters of electricity, water, roads, HVAC, etc.). Payments to the above entities are generally made according to pre-determined milestones that are a function of the progress of the relevant project In the course of its operations, Africa Residences does not typically enter into agreements with raw materials suppliers, and such agreements are made by the contractors whose services are used by Africa Residences, as described above To complete the picture, it should be noted that in 2016, 2015, and 2014, Africa Residences paid NIS 795,230 thousand, NIS 766,966 thousand, and NIS 505,513 33

91 thousand, to suppliers, respectively, of which NIS 431,219 thousand, NIS 438,241 thousand, and NIS 271,548 thousand, respectively, were paid to Danya Cebus Working capital Sales proceeds are collected from apartment purchasers over the life of a project, and the purchaser usually pays 15%-20% of the purchase price on execution of the purchase contract, and the balance is paid over the course of execution of the project To secure payments made by apartment buyers, Africa Residences issues bank guarantees or insurance policies, pursuant to the Sale Law Assurance of Investments. Africa Residences commits to a warranty and repair period defined in the Sale Law. Against this commitment, Africa Residences usually receives guarantees from the building contractor. In some cases, Africa Residences does not receive such guarantees from Danya Cebus The working capital ratio of Africa Residences operations as of December 31, 2016 was The average credit period from suppliers in 2016 was between 45 and 60 days, on average As of December 31, 2016, Africa Residences working capital differed from its working capital for the 12-month period (as these terms are defined in GAAP). Following is information on the difference between Africa Residences working capital and its working capital in the 12-month period ended on December 31, 2016 (in NIS thousands): Amount included in the Financial Statements Adjustments (for the 12-month period) Total (for the 12-month period) Current assets ) ( Current liabilities ) ( ) ( Excess current assets over current liabilities Working capital ratio No material change has occurred in Africa Residences average credit period from suppliers in the last three years Financing General 33

92 As of the Reporting Date, Africa Residences finances its activities in this segment through independent means, bonds, and bank credit from financial institutions. The bank credit is usually extended to the Company against a lien on its rights in the projects that it constructs, 1 including a lien on its rights in the real estate acquired, a lien on the contractual rights related to the real estate, a lien on rights in the insurance policies related to the real estate, a lien on the proceeds from sales of the residential units, and so forth. As of December 31, 2016, the balance of assets that are not pledged in Africa Residences (consolidated) is NIS 650 million (the balance of assets that are not pledged in Africa Residences (solo) is NIS 762 million as of December 31, 2016) The balance of loans secured by said liens was NIS 652,020 thousand and NIS 622,064 thousand as of December 31, 2016 and December 31, 2015, respectively Restrictions in connection with receipt of credit in this operating segment A. Borrower group limitations see paragraph hereinafter. B. Construction loan agreements To finance various projects that Africa Residences constructs, Africa Residences usually enters into loan agreements with banks (hereinafter and heretofore: Construction Loans ), whereby Africa Residences receives a credit facility for executing the relevant project. These agreements require Africa Residences to, among other things, pledge to the banks all its rights in the relevant project; furnish the banks with all its contracts with the contractors; pledge in favor of the banks the bank accounts relating to the project and obtain the banks approval for making withdrawals from these accounts; meet obligations concerning the project; refrain from selling, leasing, transferring and/or disposing of the right of use in the project other than with the bank s approval; pay all taxes, levies and municipal taxes relating to the project in a timely manner; and meet the construction schedules and sales volumes as detailed in each agreement. For additional information on the construction loans, see paragraph (g)(2) above Bonds issued by Africa Residences For details of Africa Residences bonds, see Note 18D to the Company s Consolidated Financial Statements as of December 31, The bank credit is granted to Africa Residences under construction loans and is secured by liens. In some cases, Africa Residences also pledged cash, goodwill, uncalled and/or unpaid share capital and in addition, registered a floating lien on all the equipment, materials and other assets used in construction of the project. 2 Not including guarantees. As of December 31, 2016, total guarantees granted by Africa Residences (secured by a charge) was NIS 1,948,769 thousand, of which NIS 1,603,929 thousand refers to Sale Law guarantees. 33

93 Following are details of Africa Residences' credit balances (including its consolidated corporations) as of December 31, 2016: Type of credit Total credit balance (NIS thousands) Balances in respect of bonds (public and private) Balances in respect of bank credit Balances in respect of non-bank credit Balances in respect of owners loans (including under financing agreements in the Group) Total liabilities: Exposure in respect of ex-book debt (financial guarantees) Sale Law guarantees Taking into consideration the proceedings designed to reach a debt arrangement for the Company, it is possible that the control of Africa Residences may change, either directly or indirectly. It should be noted that several agreements to receive credit to which Africa Residences is a party contain a clause that grants the lender the right to demand immediate payment of the credit granted to Africa Residences in the event of a change in control of Africa Residences. As of December 31, 2016, total credit granted to Africa Residence by financial organizations and bondholders was NIS 1,263 million (hereinafter, the Credit ), of which NIS 501 million was granted by Africa Residences bondholders, and the remainder ois credit from financial institutions. According to the terms of Africa Residences bonds, if the Company ceases to be the controlling shareholder of Africa Residences, the bondholders may demand immediate repayment of the credit they granted to Africa Residences. With respect to credit granted by financial institutions, in general any direct or indirect change of control or holding of less than 51% in Africa Residences gives the lender the right to demand immediate repayment of the credit granted. Apparently there is no credit in respect of which immediate payment will be demanded upon a change in control of Africa Residences, if any such change occurs, and such demands are subject to the discretion of the financial institutions and the bondholders. It is reasonable to assume that the decisions of the financial institutions and bondholders will be affected mainly by the identity of the new controlling shareholder. At this stage, Africa Residences is unable to assess the approach that the financial institutions and bondholders will adopt to the new 33

94 investor (if any). Therefore, as of the date of this Periodic Report, Africa Residences is unable to estimate the probability that this risk will materialize Taxes For details of the Group s taxes see paragraph 1.21 hereinafter Environmental risk factors and management thereof Environmental issues affect operations concerning land development in Israel on two main levels: A. Neutralizing the effects and external hazards that are caused by the construction project and affect the environment, such as pollution, noise, concealment of landscape, and soil contamination. These issues are generally regulated by City Building Plans, building permits, and orders of the regulatory agencies. In some cases, an environmental survey must be conducted before work on the project can commence. B. Protection of the project and its residents against external effects and disturbances such as wind regime, noise emanating from industrial facilities and busy highways, proximity to waste treatment or electricity facilities, etc Africa Residences considers environmental issues to be of significant importance and takes steps to institute environmentally friendly planning procedures in the current and future projects of the Company Group. To meet statutory requirements and the needs of the projects with respects to environmental issues, the Group is assisted by a team of professional consultants in the relevant fields Legal proceedings For information on legal proceedings in the land development segment in Israel, see Note 36 to the Company's Consolidated Financial Statements as of December 31, Targets and business strategies The Company Group focuses its operations in real estate development segment in Israel. The Company Group intends to continue to increase the scope of active operations, both as a consequence of the coming to fruition of the land backlog and by continuing to purchase and appreciate new land (including through Buyer s Price and rental housing tenders) The Company Group considers it a strategic target to continue to be the leading factor in the residential construction market in Israel The Company Group has set itself the objective of acting systematically to bring about continuous improvement in the quality of the projects and the apartments sold therein, for its customers benefit. 33

95 Africa Urban Renewal is expected to work on a number of projects and to increase the scope of operations and agreements with new landowners Rental housing activity The Company Group continues to explore the possible entry into additional rental housing projects The Company Group recognizes the importance of green construction and is taking steps to incorporate these principles in the projects to be constructed in coming years In the normal course of its business, Africa Residences studies options to develop and purchase properties according to its needs. At the same time, Africa Residences considers the sale of properties it owns, in order to maximize Africa Residences profit in the interests of its shareholders Forecast of developments in the coming year The Company Group intends to continue constructing and marketing the existing projects and, concurrently, to promote new sites for construction and marketing according to a careful analysis of its needs and the needs of the market as it identifies them The Planning Division will continue to make efforts to bring the lands to a state of planning suitability In the normal course of its business, the Company Group studies options to develop and purchase properties, either in conventional transactions or rental housing tenders and/or Buyer s Price tenders, according to its needs in Israel, and conducts negotiations and/or participates in tenders accordingly. The Company Group also continuously studies offers to liquidate properties it own thereby maximizing its profit Africa Residences intends to evaluate and participate in additional rental housing tenders, including through joint ventures with Africa Properties Africa Residences intends to continue and deliver possession of apartments in the project to the remaining tenants with whom it has entered into rental agreements The Company Group s intentions and estimates specified in paragraph constitute forward-looking information, based upon, among other things, the Company Group s assessments of its economic and business development, with attention to the special attributes of each project detailed above and taking into consideration the Company Group s past experience. These forecasts may not materialize, or may materialize other than anticipated by the Group due to, among other things, various external factors or because of the materialization of the risk factors detailed in paragraph 1.27, hereinafter. 30

96 Risk factors in the operating segment For information on the Group's risk factors affecting its operations, see paragraph 1.27 hereinafter. 33

97 1.9 Rental property in Israel segment In this operating segment, the Group focuses on the development, construction (including renovation and/or appreciation), leasing, and operation of buildings in Israel, and mainly for industrial, office and commercial use, and mainly through the Company s subsidiary, Africa Properties, 1 which operates in the rental property sector in Israel and in the rental and real-estate development sectors in Europe (for more information on Africa Properties operations in Europe see section 1.10 below). In this context the Group has real estate assets 2 in Israel indirectly owned and developed by it and holdings in companies which themselves own or own through a subsidiary real estate assets and are engaged in the development, construction, leasing and operation of real estate assets. As is known, Mr. Leviev, the controlling owner of the Company (including through a cluster of private companies he controls (hereinafter, the Leviev Group ) extensive global business activities in various sectors. However, as was reported to the Company, in general, the Leviev Group has no established commercial operations in the rental property sector in European countries or in Israel nor in the residential property sector in European countries in which the Company Group operates in the rental property sector in Israel and in the real estate development sector and rental property sector in Europe. The Leviev Group's operations in the rental property and real estate development sectors in Israel and in the land development and rental property sectors in the countries in which it operates are characterized by transactions on an occasional basis, and the properties mentioned have features that differ from the features of the properties the Company Group normally deals in (such as single office floors in an office building for rental, land in the geographical periphery zoned for residential uses, etc.). Moreover, at the date of this Report, the Leviev Group has no rental or residential property geographically close to similar real estate properties of the Company Group in the property rental sector in Israel and in the land development and rental property sector in Europe. The value of said properties owned by the Leviev Group and the extent of its revenues from them is not significant in comparison with the value of the Company Group's properties and its revenues from the property rental market in Israel and in the land development and property rental sectors in Europe. 1 Africa Properties offered its shares to the public for the first time under a prospectus dated September Africa Properties' shares were listed for trade on the TASE in October As at the date of this Periodic Report, the Company owns 56% of Africa Properties shares and voting rights. 2 The Group s rights in properties (registered or as yet unregistered) are ownership rights and/or leasehold rights and/or intellectual or contractual or other rights, as the case may be. 59

98 Following is a description of the Company s operations in the rental property sector in Israel: General information Structure of the rental property sector in Israel and changes therein The rental property sector in Israel includes the development, planning, construction, marketing, leasing, and operation of properties in Israel for lease, mainly for industrial, commercial, office, car parking, storage, and logistical uses. For changes that have occurred in the state of the Israeli economy and accordingly in the rental property market in Israel, see Section hereinafter Restrictions, legislation, standards and special constraints applicable to the rental property sector in Israel This sector is controlled mainly by the real-estate laws and the building and planning laws, rent and business licensing laws. The planning and building laws (including regulations promulgated under them) regulate the Group s operations in all matters concerning building permits, site safety during construction, options and restrictions on the use of land for building, and occupancy certificates if required. During and on completion of every project and sometimes even from time to time after its completion, certificates have to be obtained from the competent authorities, including certificates from the Standards Institute, a fire certificate, and certificates from other competent authorities. In addition, operations in this sector are also affected by variable local authority rates, legislation concerning business licensing, real estate taxes and municipal taxes, including purchase, sales and betterment taxes levied on transactions in realestate properties The state of the Israeli economy 1 A. For information on the state of the Israeli economy, see Section hereinabove. 1 The data were taken from reports published on the Internet sites of the Bank of Israel and the Central Bureau of Statistics. 59

99 B. Following are several economic indicators of the Israeli economy: Gross national product (in NIS billions) 1,224 1, Percentage growth in GDP (compared with the previous year) 3.8% 2.5% 2.3% Percentage growth in per capita product 1.8% 0.5% 8.3% Inflation rate (0.2%) (0.8%) (0.2%) Unemployment rate 4.9% 5.3% 9.5% Budget deficit (percentage of GDP) 2.2% 1.6% 3.2% Export of goods and services (at fixed prices) 3% (4.3%) 1.4% Import of goods and services (at fixed prices) 9.2% (0.5%) 2.1% Rating of long-term government debt 2 A+ A+ A+ Local currency/dollar exchange rate (at end of period) Local currency/eur exchange rate (at end of period) According to an industry survey by Maalot on the rental property sector in Israel, in the first nine months of 2016, most companies continued to show a 2.5%-3.5% increase in identical property NOI over the corresponding period of the previous year. Occupancy rates remained stable at 97%-100%, and most companies continue to show a flurry of investments, both in office areas and in commercial areas. We also see quick rental rates of areas under construction, beyond expectations, and even in the central area that has been saturated. In recent years, real estate companies have refinanced debt, receiving low interest rates and extending the average duration of their debt, which led to a significant improvement in interest coverage rates and debt structure. It appears that we will begin to see some increase in financing costs in the intermediate term, corresponding to expectations of an increase in interest in the United States. According to a review of the office market in the second half of 2016 by Inter, small changes in rentals were evident in the second half of 2016 in all business zones, and on average were NIS 66 per sqm for finished areas, a slight 1.5% decline compared to the previous six months. The cities in which the most significant change was observed were Herzliya, where compared to the previous six months in which rentals soared significantly, a 5.3% decline in rentals was observed this six-month period, from NIS 100 per sqm (finished areas) to NIS 95 1 The data were taken from reports published on the Internet sites of the Bank of Israel and the Central Bureau of Statistics. 2 The data in the table were taken from the Internet site of the S&P rating company. 3 Representative rates from the Bank of Israel Internet site. 59

100 per sqm. In contrast, in Netanya a 6% increase was recorded, from NIS 53 per sqm to NIS 56 per sqm. One of the reasons for the decline in rentals in Herzliya is the relocation of hi-tech companies to downtown Tel Aviv, a trend that is clearly observed in many financial capitals around the world. Additional areas which showed a change in rentals are Petah Tikva, with a 3% increase, Rosh Ha ayin with a 4% decline, a 4.5% decline in the vicinity of Ben Gurion Airport, a decline of 1.2% in Kfar Saba, and a decline of 4% in Raanana. Critical success factors in the rental property sector A. General The Group s management considers the critical success factors in the rental property sector to be: knowledge and experience in locating and exploiting commercial opportunities, in locating properties, in planning, constructing, marketing and operating properties; the location of properties and access to them; and financial strength. B. Following are the main factors that, in the opinion of Africa Properties' management, affect the demand and the occupancy rates of office buildings in Israel and the main factors that affect the success of commercial centers: (1) Office buildings Location of the property; transportation access (including public transportation); parking place in the building in which the property is located or parking places in the vicinity; age of the building in which the property is located; the property s exterior and interior appearance; the cost of the rent; the cost of maintenance; cost of municipal taxes; local services; business environment (including the level of competition in the area for the type of building), etc. (2) Commercial centers rent; maintenance fees; location of property; proximity to the target audience; vehicle access (including public transportation); accessibility of main highways; parking options; efficient division of space inside the commercial centers; the supply of commercial centers in the area; availability of the commercial centers (opening hours and days); the commercial center s positioning and suitability for its target audience; mix and variety of stores; venues of leisure and entertainment in the commercial center as focal points to attract customers; Entry and exit barriers In this operating segment, there are formal entry and exit barriers. However, in view of the special nature of this operating segment it requires financial strength and accessibility of sources of finance. Exit from the sector is not flexible in view of the fact that it can take a long time to sell investments, and the ability to sell the properties is inter alia a function of the location of the properties, their physical condition, and the state of the market. 51

101 Structure of the competition in the rental property sector The Group's management considers the rental property sector to be a competitive one with a large number of players. Close to most of the Group's properties in Israel, there are similar properties competing with the Group's properties The geographical areas and types of rental properties in which operations are conducted The management of Africa Properties chose to represent the areas of activities as two main areas, one "Tel Aviv and surroundings", including the Company s properties in the following cities: one office tower in Tel Aviv, an office tower in Bnei Brak, a science park in Nes Ziona, rental housing in Herzliya, an office building in Yehud, and an office park in Lod; The "Other" category includes a commercial property in Haifa Policy on sale of properties The Group studies business opportunities to sell properties on the basis of profitability and anticipated cash flows from these sales. For information on the properties sold between 2014 and 2016, see Section (12)(a) hereinafter Products and services The Group s products in this sector of operations are mainly office, industrial and commercial space for rent in Israel The Group has real-estate properties that it owns and develops directly as well as holdings in companies that own and are either directly or indirectly through subsidiaries engaged in the development and operation of real-estate properties The agreements to purchase real estate (whether built-up land or not) in entirety or in part for rent, typically contain all or several of the following material terms: A. The Group pays the price of the property (subject to conditions precedent, if any) in one or more of the following ways (including a combination of them): (1) Cash transaction The payment is at the price stated in the agreement and/or based on a mechanism for determining the price stated in the agreement. (2) Combination transaction the normal format for a combination transaction is the purchase of a non-specific part of the real estate in return for the provision of construction services in the relevant project by the Group. B. In cases in which the Group has partners in the real estate (whether through a joint purchase of real estate or through a purchase of part of the rights in the real estate), the Group normally operates through a joint transaction or a joint company to arrange the relationship between the parties, including: 55

102 (1) Management of the transaction through an administration and/or steering committee made up of representatives of the parties, the decisions in which are taken according to a preset mechanism (generally, unanimous); (2) Provisions concerning a prohibition or restriction on the assigning and/or transferring and/or granting rights by the parties and/or giving right of first refusal; (3) Provisions regarding the parties' responsibilities to finance the project and sanctions in the case of default, etc.; (4) Provisions regarding the selection of the prime contractor or any contractor and/or third party involved in project planning and construction; (5) Provisions regarding tasks imposed on or services provided by any partner for the benefit of the project, and occasionally provisions regarding the payment of management fees for these services; (6) Provisions regarding the provision of collateral by the partners in favor of a bank or financing institution. C. In order to finance projects, the Group sometimes pledges part of the relevant project to a financing body, including the right to receive rents and the other project proceeds and the Group s rights vis-à-vis the seller of said project, and the Group sometimes enters into construction loan agreements with banks. In cases in which targets are not met, the bank is entitled to involve itself in the management of the project even to the extent of actually seizing it and/or calling the credit for immediate repayment. The amount of equity required in said construction loan agreements typically ranges from 20% to 40% of the total anticipated project costs. Additional guarantees are sometimes given to ensure compliance with budgetary and other targets. When the project has been completed, the credit facility is usually replaced by a long-term loan (5 to 15 years). In construction loans outside Israel, the lender typically issues non-recourse credit (for information on rental operations in Europe, see Section below). D. Tenant mix In order to maintain the correct mix of leased areas, the Group inter alia enters into lease agreements with "anchor" tenants and "crowd pullers" in the commercial areas, such as grocery stores and major fashion chains. The rents charged to such anchor tenants are generally lower than those charged to the other tenants (i.e., those that are not anchors), and the lease periods of anchor stores are usually longer The Group also builds part of the rental property it owns using the B.O.T. system (Build Operate Transfer) and/or P.F.I. system (Private Finance Initiative). In these arrangements the project client (usually the state or public body) grants the 800

103 developer (a private entity) a franchise to operate the property and the right to charge payment for operating it for a limited period in return for the concessionaire building the property and returning it into the ownership of the client and/or someone on its behalf at the end of the construction, operation and maintenance period, with the project financed for the most part by banks with limited recourse financing. The provisions generally appearing in the above types of projects in most case concern the following matters: (a) the nature of the concession and the exclusivity given to the concessionaire to operate the project; (b) the concession period and provisions on extending the franchise period if there is such an option; (c) the way the project is to be constructed at the expense and responsibility of the concessionaire; (d) the concessionaire s rights and obligations; (e) the client s rights and obligations; (f) the way the project is to be operated; (g) provisions concerning the concessionaire s insurance cover; (h) provisions on the way the contract can be terminated for a breach by the concessionaire. The Group has operated and continues to operate a number of projects using this method as follows: A. Habarzel Parking - Africa Properties was awarded a DBOT tender to plan, construct and deliver a four-level (4) underground public car park with five hundred and forty (540) parking spaces on Habarzel Street Tel Aviv-Yafo (hereinafter, the Car Park ), on land owned by the Tel Aviv-Yafo municipality (hereinafter in this sub-paragraph, the Land ), and to carry out landscaping, development of open spaces and paths, lighting, water and irrigation, drainage, and garden furnishings in the developed areas, according to the specifications included in the tender documents. On September 5, 2016, in the midst of construction works on the Car Park, performed by Danya Cebus, parts of the Car Park collapsed, killing six people and injuring 18. As a result, the construction works on the Car Park were halted until the conclusion of investigations by the competent authorities and the enforcement authorities. Consequently, and in view of the extent of the damage to the Car Park, Africa Properties will not be able to operate the Car Park on the determined date. Notably, collapse of the parking spaces constitutes grounds for terminating the concession agreement (which has not been terminated as of the date of this Report). The client made a decision in principle to re-construct the Car Park, and views favorably its re-construction by Africa Properties and Danya Cebus. The parties are negotiating over the terms of an addendum to the concession agreement, which is designed to regulate the terms for renewing the works and the construction of the 808

104 Car Park. Furthermore, the collapse of the parking spaces also constitutes grounds for demanding immediate payment of the bank financing that was granted to Africa Properties for the construction of the Car Park, but as of the date of this Report, notice has been received of the bank s consent to refrain from using those grounds to demand immediate repayment at this stage, until June 1, It should be noted that since the incident occurred, Danya and Africa Properties have worked in cooperation vis a vis all the stakeholders, based on the joint commitment of these companies managements to return the project to its course. For additional information on said project, see Note 4C(1) to the Company s Consolidated Financial Statements as of December 31, B. Rental housing in Herzliya - As stated in Section B hereinabove, in July 2014 Africa Properties and Africa Residences purchased (in equal shares) land in Herzliya for the construction of residential apartments for rent for a period of 20 years. In November 2016, Form 4 was issued, permitting the occupancy of the 273 apartments in the project. As of December 31, 2016, the occupancy rate of the project in 76%. C. Ministry of Justice, Jerusalem On June 9, 2016, Africa Properties received notice that it was awarded a tender to financial (partial), plan, and build an office building and additional buildings and facilities in a compound of office buildings (hereinafter in this sub-paragraph, the Office Building and the Compound, respectively) for the Ministry of Justice in Jerusalem (hereinafter, the Tender and the Project, respectively), which includes a 35,000 sqm office building and 30,000 sqm in underground areas. In consideration, Africa Properties is entitled to a fixed annual payment of NIS 23 million, linked to the CPI, plus VAT as mandated by law, for a period of 21 years and 8 months, payable in quarterly installments beginning from the quarter following the completion of the Office Building and its delivery, and Africa Properties will also receive a construction bonus of NIS 110 million. A work start order was issued in July 2016 and the construction works commenced in December D. Kirya Mehozit in Jerusalem - On August 4, 2016, Africa Properties received notice that it was awarded a tender for the partial financing, planning, construction, and maintenance of a government office building and commercial areas in the Kirya Mehozit in Jerusalem (in this paragraph hereinafter, the Office Building and the Complex, respectively), and construction of an office building of 53,000 sqm above ground and an underground car park containing 416 parking spaces and an additional 4,000 sqm in underground areas. In consideration, Africa Properties is entitled to a fixed annual payment over the operating period (21 years and 6 803

105 months) of NIS 33 million, linked to the CPI, plus VAT as mandated by law (this sum does not include income from 3,000 sqm commercial areas), payable in quarterly installments beginning from the quarter following the completion of the Office Building and its delivery, and Africa Properties will also receive full reimbursement for various services that it renders at a cost-plus basis, as well as a construction bonus of NIS 25 million (linked to the Office and Commercial Construction Inputs Index, plus VAT as mandated by law). E. It should also be stated that as of the date of this Periodic Report, the Group is involved in the screening stages of various BOT tenders Following is information on the Group s rental properties in Israel It is hereby clarified that the following information and tables relating to the construction of projects on which construction work has not yet started, whose plans have yet to be approved, the extra cost estimated for the project, and the planned completion date are forward-looking information. The data in the tables are based inter alia on the following assumptions: (a) The Group will decide to use building rights that have not yet been used; (b) In accordance with the Group s expectations, all the other holders of rights in the land will participate in the planned project; (c) The plans and/or application the Group has submitted or will submit will be approved and go into force without there being any material change in the scope of the constructed areas, the mix of areas and/or the planning compared with the scope, the mix and planning anticipated by the Group; (d) There will be no material changes in the fees, duties and/or taxes imposed on the parties to the land transactions; (e) The construction costs and other sales costs will be in line with the Group s estimates. It is clarified that in the event of a material change in one or more of the above factors, there may be a material change in the areas available for construction and rent, and/or in the costs and/or dates anticipated by the Group. 802

106 A. Following is a summary of the results of the Group's investment properties in Israel (aggregate): 1,2 (1) Following is a summary of the results of operations (in NIS thousands): Parameter December 31, 2016 December 31, 2015 NIS thousands December 31, 2014 Total revenues from operations , ,791 (consolidated) Gains/losses on revaluation (consolidated) ,615 5,873 Operating profit (consolidated) , ,027 Identical property NOI (consolidated)** Identical property NOI (consolidated) (Company s share)** Total NOI (consolidated) , ,154 Total NOI (Africa Properties share) ,452 68,653 * It should be stated that the consolidated data include Africa Properties share in jointly controlled properties. ** The data are presented only for the most recent two years. For information on the economic indicators in the region of operations, see Section (a) above. Following is a breakdown of the Group's rental property in Israel by region and use, as of December 31, 2015 and December 31, 2016 (in sqm): (a) As at December 31, 2015 Region Tel-Aviv and surroundings Other Total % of total area Uses Offices and industry Commercial Total % of total property value Consolidated 140, ,555 96% The Company s share 78,711-78,711 96% Consolidated 2,619 3,047 5,666 4% The Company s 1,466 1,660 3,126 4% share Consolidated 143,174 3, , % The Company s 80,177 1,660 81, % share Consolidated 98% 2% 100% The Company s 98% 2% 100% share 1 It should be stated that not included in the aggregate tables attached relating to the rental property segment in Israel for 2016 are data on the country club property in Savyon, in which the Company had a direct holding (not through Africa Properties) in view of the great difference between the profile of the rental properties that account for the core of the operating segment (i.e., offices and commercial centers) and the country club property in Savyon, which is a rental property with different features. It should be noted that at the Report date, the country club property was not producing significant income for the Company. After signing a sales agreement, it was reclassified as property for sale. 2 In the aggregate tables, rental housing data include Africa Residences share in a rental housing property in Glil Yam. 806

107 (b) As at December 31, 2016 Region Tel-Aviv and surroundings Other Total % of total area Uses Offices and industry Commercial Total % of total property value Consolidated 118,333 21, ,221 97% Company s share 66,266 14,252-80,519 97% Consolidated 2,619-2,265 4,884 3% Company s share 1,466-1,269 2,735 3% consolidated 120,952 21,888 2, , % Company s share 67,733 14,252 1,269 83, % Consolidated 83% 15% 2% 100% Company s share 81% 17% 2% 100% (2) Following is a breakdown of the value of the Group's rental property in Israel by region and use as of December 31, 2015 and December 31, 2016: (a) As at December 31, 2015 Region Tel-Aviv and surroundings (in NIS thousands( Other (in NIS thousands) Total (in NIS thousands( % of total value of properties Uses Offices and industry Commercial Total (in NIS thousands) % of total of the property value Consolidated 1,526,692-1,526,692 97% Company s share 854, ,948 97% Consolidated 9,165 31,064 40,229 3% Company s share 5,132 16,815 21,947 3% Consolidated 1,535,857 31,064 1,566, % Company s share 860,080 16, , % Consolidated 98% 2% 100% Company s share 98% 2% 100% 809

108 (b) As at December 31, 2016 Region Tel-Aviv and surroundings (in NIS thousands) Other (in NIS thousands) Total (in NIS thousands) % of total value of properties Uses Offices and industry Rental housing Commercial Total (in NIS thousands) % of total property value Consolidated 1,337, ,200-1,710,586 98% Company s share 748, , ,945 98% Consolidated 9,666-22,554 32,220 2% Company s share 5,413-12,630 18,043 2% Consolidated 1,347, ,200 22,554 1,742, % Company s share 754, ,009 12,630 1,009, % Consolidated 77.3% 21.4% 1.3% 100% Company s share 75% 24% 1% 100% (3) Following is a breakdown of NOI from the Group's rental property in Israel by (a) 2016 region and use for the years 2014, 2015 and 2016: Region Tel-Aviv and surroundings (in NIS thousands) Other (in NIS thousands) Total (in NIS thousands) % of total NOI of properties Uses Offices and industry Rental housing Commercial Total (in NIS thousands) % of total property NOI Consolidated 99, ,789 98% Company s share 55, ,914 98% Consolidated 633-1,477 2,110 2% Company s share ,182 2% Consolidated 100, , , % Company s share 56, , % Consolidated 98% 0.3% 1.4% 100% Company s share 98% 0.4% 1.4% 100% (*) Notably, Form 5 was issued in November 2016 and occupancy of the project commenced in December

109 (b) 2015 Region Tel-Aviv and surroundings (in NIS thousands) Other (in NIS thousands) Total (in NIS thousands) % of total NOI of properties Uses Offices and industry Commercial Total (in NIS thousands) % of total property NOI Consolidated 116, ,072 98% Company s share 65,000-65,000 98% Consolidated 589 2,079 2,668 2% Company s share 330 1,122 1,452 2% Consolidated 116,661 2, , % Company s share 65,330 1,122 66, % Consolidated 98% 2% 100% Company s share 98% 2% 100% (c) 2014 Region Tel-Aviv and surroundings (in NIS thousands) Other (in NIS thousands) Total (in NIS thousands) % of total NOI of properties Uses Offices and industry Commercial Total (in NIS thousands) % of total property NOI Consolidated 117, ,329 98% Company s 67,120-67,120 98% share Consolidated 591 2,234 2,825 2% Company s 331 1,202 1,533 2% share Consolidated 117,920 2, , % Company s 67,451 1,202 68, % share Consolidated 98% 2% 800% Company s 98% 2% 800% share (4) Following is a breakdown of revaluation gains (losses) stemming from the Group's (a) 2016 rental property in Israel by region and use for 2014, 2015 and 2016: Region Tel-Aviv and surroundings (in NIS thousands) Other (in NIS thousands) Total (in NIS thousands) % of total revaluation gain Uses Offices and industry Rental housing 809 Commercial Total (in NIS thousands) % of total revaluation gain Consolidated (13,215) 60,639-47,424 97% Company s share (7,400) 39,485-32,085 97% Consolidated - - 1,555 1,555 3% Company s share % consolidated (13,215) 60,639 1,555 48, % Company s share (7,400) 39, , % Consolidated (27%) 124% 3% 100% Company s share (22%) 120% 3% 100%

110 (b) 2015 Uses Regions Tel-Aviv and surroundings (in NIS thousands) Other (in NIS thousands) Total (in NIS thousands) % of total revaluation gain Offices and Total (in NIS % of total Commercial industry thousands) revaluation gain Consolidated 21,909-21, % Company s 13,356-13, % share Consolidated - (34) (34) (0%) Company s - (50) (50) (0%) share consolidated 21,909 (34) 21, % Company s 13,356 (50) 13, % share Consolidated 100% (0%) 100% Company s 100% (0%) 100% share (c) 2014 Uses Regions Tel-Aviv and surroundings (in NIS thousands) Other (in NIS thousands) Total (in NIS thousands) % of total revaluation gain Offices and Total (in NIS % of total Commercial industry thousands) revaluation gain Consolidated 6,502-6, % Company s share 3,580-3, % Consolidated - (629) (629) (11%) Company s share - (352) (352) (11%) consolidated 6,502 (629) 5, % Company s share 3,580 (352) 3, % Consolidated 111% (11%) 100% Company s share 111% (11%) 100% 801

111 (5) Following is a breakdown of average monthly rents in NIS per sqm by region and Uses use: Offices and industry Rental housing Commercial For the year ended December December December December December December Regions 31, , , , , , 2015 Tel-Aviv and surroundings Tel-Aviv and surroundings)*( Other Other range )*( (*) Notably, the wide range of rents is due, inter alia, to differences in the location, the standards of the rental premises, and the standard of finish of the various properties included in the table. (6) Following is a breakdown of average occupancy by region and use: Region Tel-Aviv and surroundings Uses Offices and industry Rental housing Commercial As at December 31, 2015 For the year 2016 For the year 2015 As at December 31, 2016 % For the year 2016 For the year 2015 As at December 31, 2016 For the year 2016 For the year % 96% 93% 99% 99% Other 94% 96% 96% 0% 0% - 96% 86% 50% (7) Following is a breakdown of the number of the Group s rental properties in Israel Region Tel-Aviv and surroundings Uses by region and use: Offices and industry Rental housing Commercial December 31, 2016 December 31, 2015 December 31, 2016 As at December 31, 2015 December 31, 2016 December 31, Other Total (8) Following is a breakdown of the actual average rates of return on the Group's rental Regions properties in Israel (at their end of year value) by region and use: Uses Offices and industry Rental housing Commercial December 31, 2016 December 31, 2015 For the year ended December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015 Tel-Aviv and surroundings 9.6% 6.8% 0.8% Other 9.9% 6.4% % 6.6% 805

112 (9) Following are data on anticipated revenues from the Group's rental properties in Period revenue recognized Israel in respect of signed rental contracts: Assuming non-exercise of lease option periods Area of Revenues agreements from No. of ending fixed elements contracts (in sqm (NIS thousands) ending thousands) Assuming exercise of lease option periods Revenues from fixed elements (NIS thousands) No. of contracts ending Area of agreements ending (in sqm thousands) Q1/ , , Q2/ , , Q3/ , , Q4/ , , , , , , , , and thereafter 349, , Total 754, , (10) Following are details of the Group s rental properties under construction in Israel in the Tel-Aviv and the surrounding area: Tel-Aviv and surroundings Science Park, Ness Ziona Parameters Number of properties under construction at end of period Total area under construction (planned) at end of period (in sqm thousands) Total costs invested in the current period (consolidated) (in NIS thousands) The amount at which the properties are represented in the statements at end period (consolidated) (in NIS thousands) Construction budget for following period (estimate) (consolidated) (in NIS thousands) Total estimated construction budget balance to complete construction work (consolidated) (in NIS thousands) Percentage of built space for which lease contracts have been signed Anticipated annual revenues from projects completed in the following period and for which contracts have been signed in respect of 50% or more of the area (consolidated) (estimate) (in NIS thousands) December 31, 2016 Year ended December 31, 2015 December 31,

113 (11) Following are aggregate data of land designated for real estate development of rental properties in Israel, owned by or leased by the Group: Property name Land, Science Park, Ness Ziona RGM Yachin Lod land Sarona The amount at which the land is represented in the statements at end period (consolidated) (in NIS thousands) Total land area at end period (sqm thousands) Total building rights in land under approve d plans, by use (sqm thousands) Percentage holding 100% 000% 000% 000% 50% Hi-tech industry and offices Industry Light industry Warehou ses Business and offices December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015 Total

114 (12) Following is information on the purchases and sales of the Group s rental property (a) commencing January 1, 2014: Properties sold Property name Psagot Savyon commercial center Global Park Lod Savyonei Yam Date sold July 29, December May 9, July 28, , Country Israel Israel Israel Israel Percentage holding 90% 800% 800% 90% Sale proceeds (consolidated) (in NIS thousands) Percentage ownership sold % % 800% 90% Area sold (consolidated) (in NIS thousands) NOI of the property sold (consolidated) (in NIS thousands) 3,735 3, Profit/loss recorded on sale of the property/shares (consolidated) (in NIS thousands) ) 198( (79) ) 652( 0 *Regarding the sale of Yachin and Global Park, see Note 4C(3) and (4) to the Company s Consolidated Financial Statements as of December 31, (b) Properties purchased Property name Rental housing in Glil Yam Building 12 (Weizman n Park) Floors Mercantile (Hayovel Tower) Sarona (Lot 7) Date purchased July 13, July 24, July 16, September , 2015 Country Israel Israel Israel Israel Percentage holding 800%* 800% 49% 50% Property cost (consolidated) (in NIS 78,900 7,322 65, ,000 thousands) NOI of the property purchased (consolidated) ,900 - (NIS thousands) Area purchased (consolidated) (in NIS thousands) * Held in equal shares by Africa Residences and Africa Properties. 883

115 Holding structure Half-Jubilee Ltd Haifa Quarries Ltd. B. Following is a table summarizing the Company's Group investments in Property description Office tower in Tel-Aviv Commercial Center in Haifa associated companies holding rental property (in NIS thousands) at the date of this Periodic Report: Associated companies held by Africa Properties: % holding of Africa Properties on December 31, 2016 Total investment in the Company s consolidated statements as of December 31, 2016 Owners loan as of December 31, 2016 Group s share in profit 2016 Group s share in profit 2015 Group s share in profit 2014 Group s share in the aggregate profit (loss) at December 31, 2016 Total investment in the Company s consolidated statements as of December 31, % % ) ( ) 88911( ) 38919( (45,429) Customers The Company has more than 200 customers renting various amounts of areas from it in Israel The Group's customers in Israel are private customer and major business corporations with different features and a wide distribution. The State of Israel, through the Accountant General, also rents 45,600 sqm and 550 parking spaces in the Hayovel Tower in Tel Aviv from an associated company of Africa Properties (One-Half Jubilee Ltd.) for NIS 46,375 thousand per annum (Group s share 49%). A the date of this Periodic Report, the Group does not have any tenant the revenues from whose rent account for 10% or more of the Group's revenues. 882

116 1.9.4 Marketing and distribution In this operating segment the Group employs a variety of marketing methods, including as described below: Marketing through marketing personnel employed by the Group Contracts from time to time with independent marketing bodies and international real-estate agencies, which are not normally given exclusivity; Advertising information about the Group s properties in the national and local press and on the Company s internet site and the internet site of Africa Properties Competition The rental properties sector in Israel is highly competitive and the Group is exposed in its operations to competition from many companies engaged in the promotion, development, leasing and appreciation of real estate Competition in the rental properties sector is mainly regional, based on the geographic location of each rental property Following are details of the Group s main competitors relating to its main properties in this operating segment: A. The Kiryat Weizmann Science Park in Nes Ziona The Park competes with similar properties adjacent to it, such as Park Tamar and similar parks in the center of the country. B. Concorde Towers Bnei Brak Similar buildings compete with this project in the downtown area of Tel-Aviv in general and specifically properties in downtown Tel-Aviv, Ramat Gan, and Bnei Brak The Group considers that the scope of its operations in the rental properties sector in Israel is not significant relative to the total market of rental properties in Israel, and it has no way of estimating its share of the market The Group s primary means to address competition are as follows: Maintaining a high standard of maintenance and management over time of its properties and creating and protecting the Group's reputation in this sector, employing high quality personnel experienced in the rental property sector, investing in marketing the Group and its projects (inter alia to stress the advantages of its properties in comparison with its competitors' properties), maintaining a high standard of service and fulfilling the Group's undertakings over time to its tenants, and constant checking and comparing the rents charged to tenants with the rents its competitors charge in similar projects. 886

117 The Group considers that the main positive factors affecting its competitive position are: A. Reputation Its positive reputation gives the Group a competitive advantage. The Group is considered to be a reliable, experienced and quality provider in this operating segment. B. Experience Extensive experience in the development, construction, leasing and operation of buildings is a highly important factor in the Group's competitive standing. C. Human capital The high professionalism of the Group s employees in this operating segment gives the Group a relative advantage in its operations in this competitive market, including in identifying and exploiting opportunities in the relevant market, and in marketing and positioning its properties. D. Nationwide distribution of operations The Group s ability to geographically diversify its investments gives it access to large market segments while allowing it to tailor projects to relevant customers Intangible assets In September 2004, the Company granted Africa Properties the right, on terms agreed by the parties, to use the trade marks in respect of the Company s logo, registered in the Company s operating segment on the day of publication of Africa Properties prospectus (from September 2004) for an indefinite period of time and without charge, for as long as the Company holds 50% or more of the voting rights in the general meeting of Africa Properties. At the date of this Periodic Report, Africa Properties is using the Company s trade mark and logo. It should also be noted that AFI Europe also uses the Company s logo Human capital As at December 31, 2016, the Africa Properties Group employed 220 employees (including employees in Europe) compared with 187 employees as of December 31, The Company also has a number of employees who provide services to Africa Properties as part of the management agreement between the Company and Africa Properties, which has not yet been approved by the organs of Africa Properties as at the date of this Report Following is a schematic description of Africa Properties organizational structure as it relates to operations in Israel and in Europe as of the date of this Periodic Report. 1 1 For information on the activities and organizational structure of AFI Europe, a subsidiary of Africa Properties, see Section hereinafter. 889

118 Africa Properties CEO Assistant to the CEO Africa Properties and CEO AFI Europe Legal counsel and company secretary AFI Europe Director of Operations in Bulgaria Rentals Israel Chief Engineer CFO Director of Operations in Serbia Director of Operations in Poland Rentals Israel Marketing Director Director of Operations in Germany / Czech Republic Director of Operations in Romania/Latvia / Hungary Rentals Israel Chief Economist / Business Development Rentals Israel Business Managers Operations and Control Africa Properties - Comptroller AFI Europe - Comptroller Treasury 889

119 Management agreement between the Company and Africa Properties Until December 31, 2016, an agreement existed for management services, between the Company and Africa Properties, according to which the Company rendered the following management services to Africa Properties: (a) Current general management and management consulting services of Africa Properties Group's current commercial and strategic (business development) procedures for a quarterly fee of NIS 182,500 (linked to the index). (b) other services internal audit services, company secretariat, spokesmen and public relations, information systems tax consulting, treasurer's and accounting services, salary accountants services, and operation and maintenance of offices at a total scope of 8.65 monthly positions for a quarterly fee of NIS 834,250 (linked to the CPI); and (c) services of directors (excluding external directors) to Africa Properties and/or to its subsidiaries whose shares are traded on the stock exchange in Israel or overseas for an annual fee and participation fee for each meeting attended by a director on the Company s behalf (hereinafter in this section, the Management Agreement"). As of the date of this Report, a new management agreement has yet to be signed by the parties. Raw materials and suppliers In some cases the Group constructs on the properties through subcontractors (including through the subsidiary, Danya Cebus). The Group also carries out maintenance work, repairs and adjustments for tenants from time to time on its properties, beyond the ongoing operation of properties that is performed by the Group and/or management companies (from a separate management budget attributed to the relevant property). In most cases, the Group does not itself purchase raw materials, and the purchase of these raw materials is made through the contractors carrying out the maintenance, repair and construction work Working capital The Group charges its tenants rents in advance for a period of between one month and one year, and accordingly does not give credit to tenants in the normal course of business. To guarantee the amounts due to the Company under lease and/or management agreements the Company demands, as part of the agreements with tenants, a deposit of guarantees (such as bank guarantees, personal guarantees, deposits and promissory notes) As of December 31, 2016, there is a difference between Africa Properties working capital and its working capital for the last 12 months (as defined in GAPP). Following are details of the difference between Africa Properties working capital and its working capital in the last 12 months (in NIS thousands): 889

120 Amount in the financial statements Adjustments (for the 12-month period)* Total (for the last 12 months) Current assets ) ( Current liabilities ) ( ) ( Excess current assets over current liabilities ) ( Working capital ratio *Adjustment reflects the forecast of the full sale of building for sale for the 12- month period based on the Group s working plans for For additional information on the Groups working capital see Section 1.18 below Financing General In 2016, the Africa Properties Group financed its operations from its own sources, loans raised from institutional investors, bond issues, and bank credit from financial institutions. The Company usually operates through specific credit facilities, guaranteed with liens and/or mortgages on its rights in properties and the rights attached to them In this operating segment, the Company is required to meet financial covenants in connection with the credit it receives from banks or others. To the best of the Company s knowledge, unless stated otherwise on the relevant measurements dates, in the reporting periods included in the financial statements attached to this Periodic Report, the Group Companies complied with all the financial covenants they had undertaken to meet in connection with significant credit facilities from banks and others in this operating segment On August 21, 2011, Africa Properties and a wholly owned (100%) subsidiary (hereinafter: "the Companies") entered into a loan agreement to finance the Group's rental properties (the Ness Ziona Science Park, the Lod Global Park project, the Bnei Brak Concorde project, land adjacent to the Ness Ziona Science Park and Yachin land in Petah Tikva) with an Israeli bank (hereinafter in this subsection, the Bank"), according to which the Bank granted to the Companies a loan of NIS 480 million for a period of 5 years (hereinafter, the Loan Agreement") at an interest rate of 4.9% (linked to the CPI). 1 This Section relates mainly to the financing of Africa Properties operations and may include references to the financing of AFI Europe s operations. For information on AFI Europe s operations and said financing of operations, see Section 1.10 hereinafter. 881

121 With attention to the repayment date according to the loan agreement, on January 17, 2017 Africa Properties and a wholly owned subsidiary concluded their engagement in a set of refinancing agreements of the credit that is the topic of the loan agreement. In this set of agreements, the original credit period, as stated in the loan agreement (a total of NIS 493 million) was extended, and an additional loan in the amount of NIS 7 million was granted to the subsidiary by the lenders (jointly, hereinafter in this sub-paragraph, the Credit ), the main terms of which are are as follows: 1. The credit that is the subject of the refinancing (a total of NIS 500 million) is due over a period of 5 years from the closing date (hereinafter in this paragraph, the Credit Period ) and bears fixed annual interest (linked to the CPI) of 3.6% (hereinafter in this paragraph, the Interest ). According to the terms of the Credit, mechanisms were determined for increasing the interest rate in the event of a default event and/or delay in payments, as is conventional in credit of this type. 2. Every year in the Credit Period, the borrowers will repay a sum equal to 5% of the principal of the Credit that is the subject of the refinancing (in equal quarterly payments) plus accrued interest, beginning from the closing date until the end of the Credit Period. The balance of the Credit that is the subject of the refinancing is due at the end of the Credit Period. 3. The following financial covenants were also determined: (a) The ratio between the annual NOI (as defined in the credit documents) to current maturities ratio (DSCR) shall not be less than As at the reporting date, said ratio is (b) Annual NOI (as defined in the credit documents) shall not be less than NIS 57 million. As at the reporting date, the annual NOI is NIS 62 million. (c) The aggregate value of the pledged assets (as defined below) shall not decline by more than 2.5% in the first year of the Credit Period; and not decline by more than 5% in the second year of the Credit Period; and not decline by more than 10% in the third year of the Credit Period, and so on. The Credit Documents defined mechanisms to rectify defaults, referring to specific percentages of the financial covenants. 4. To secure repayment of the Credit, first-degree mortgages, senior fixed and floating charges, unlimited in amount, were registered in the lenders favor on the Concord project in Bnei Brak and on the Science Park project in Ness 885

122 Ziona (in this paragraph, above and below, the Pledged Assets ), and pledges were registered on the shares of the subsidiary Following is information on the financing for the Glil Yam rental housing project in the amount of NIS 300 million, see Note 4C(7) and 4D(4) to the Company s Consolidated Financial Statements as of December 31, For information on bonds issued by Africa Properties that were outstanding as of the date of this Periodic Report, see Note 18D to the Company s Consolidated Financial Statements as of December 31, Following is information on the total credit balances of Africa Properties (and its subsidiaries, including AFI Europe) as of December 31, 2016: Type of credit Banking credit, short-term Banking credit, long-term, variable (*) interest Banking credit, long-term, fixed interest Bonds (including current maturities) Balances in respect of owners loans (including according to financing agreements in the Group) (*) Africa Properties performs transactions to swap variable interest with fixed interest for several of its loans. The total of loans with interest swaps as of December 31, 2016 was NIS 1, thousand (as of December 31, 2015, NIS 1,248,810 thousand) Average interest rate Following are the average interest rates for the years 2014 to 2016 on Africa Properties undesignated loans, classified by short-term and long-term credit from banks and other financial institutions: Average interest rate by percentage of undesignated loans Short-term Long-term Short-term Long-term Short-term Long-term Bank sources NIS % 2.99% 2.9%-6.39% 2.2%-6.09% Index-linked - 6%-9.8% - 6%-9.8% - 6%-9.8% Non-bank sources Index-linked - 2.9%-9.5% - 2.9%-9.5% - 2.9%-9.5% In view of the proceedings to reach a debt arrangement for the Company, it should be noted that there is a possibility that the control of Africa Properties will change, 830

123 either directly or indirectly. It should be noted that several of the credit agreements entered into by the Company Group companies contain a clause that entitles the financing entity to demand immediate payment of the credit in the event of a change in the Company s control. As at December 31, 2016, the total credit granted to the Africa Properties Group (consolidated) by financing entities and the bondholders totaled NIS 4,477 million (hereinafter, the Credit ), of which NIS 1,323 million was granted by the Company s bondholders and the remainder by financing entities, which include foreign banking corporations. According to the terms of the Company s bonds, if Africa Investments ceases to be the controlling shareholder of the Company, the bondholders are entitled to demand immediate payment of the outstanding bonds. Of the total credit granted by financing entities, it was determined that a direct or indirect change in the Company s control grants the financing entity the right to demand immediate payment of the outstanding credit with respect to NIS 1,365 million in credit. Furthermore, several of the credit agreements include a cross-default clause, which might create a chain reaction of said risk and also affect credit agreements that do not include grounds for demanding immediate repayment in the event of change of control. As noted above, a change in control in the Company, if it occurs, might cause a demand to be issued for the immediate repayment of the above described credit, subject to the discretion of the financing entities and the bondholders. At this stage, the Company is unable to estimate the identity of the new controlling shareholder (if any) and the approach of the financing entities and the bondholders to the new controlling shareholder. Therefore, as at the date of this report, the Company is unable to estimate the probability that this risk will materialize Taxation For details of the Group s taxes, see Section 1.21 hereinafter. For information on payment orders in respect of tax assessments pursuant to Article 145(A)(2)(b) of the Income Tax Ordinance, issued to Africa Properties for and to a wholly owned subsidiary of Africa Properties for 2009 and 2011, for a total of NIS 280 million (including linkage differentials and interest), and Africa Properties appeal against the orders, see Note 30E(5) to the Company's Consolidated Financial Statements as of December 31, Environmental protection As the owners or lessees of real estate properties, the Group may be liable by law, including in respect of planning and building laws and the environmental laws, for breaches of the law, if the breach occurs within the confines of real estate it owns or leases and/or real estate in which it has contractual or other rights. 838

124 In view of the legislation being developed in the area of quality of the environment in various countries in which the Group operates, the Group is conducting various checks (such as an environmental review to ensure that its activities in the various projects in the operating segment comply with the relevant provisions of the law) Restrictions and regulation of the Group s operations For details of the restrictions and regulations on the Group s operations in this sector of operations, see Section hereinabove Legal proceedings For details of legal proceedings in the rental property sector in Israel, see Note 36 to the Company s Financial Statements as of December 31, Goals and business strategy The Group intends to continue to develop its development activity in the rental sector in Israel in BOT projects. This will be accomplished by improving the rental properties owned by the Company, developing land owned by the Company. The purchase of other land or properties for future development purposes as well as competing in BOT tenders, will be considered from time to time. Africa Properties will concentrate on transactions in the logistics, industrial and office sector. The date for commencing each project will be determined taking into consideration the availability of suitable financing, and according to the state of the Israeli market. At the same time the Group is working to improve land on which actual construction work has not yet started, by obtaining the various certificates necessary in order to build. The Group also examines from time to time opportunities and business offers to sell properties it owns or part of them Forecast of developments in the coming year In the forthcoming year, the Group is expected to continue the construction work on an additional building in the Science Park in Ness Ziona (approximately 12,000 sqm for rent), and on obtaining building permits for another building in the Science Park in Ness Ziona, on renewing construction of the Habarzel Parking Facility in Tel Aviv, and on performing excavation and shoring in the Sarona project in Tel Aviv (the Group s share 50%). After the date of the statement of financial position, a permit for excavation and shoring in the Sarona project was issued. The Group will also continue the construction of the Ministry of Justice compound in Jerusalem and will begin construction on the Kirya Mehozit in Jerusalem, projects that were awarded to the Group in In the forthcoming year, the Group also intends to compete in BOT tenders and rental housing tenders. 833

125 The Group's intentions described in this Section are forward-looking information base inter alia on the Group's estimates of its economic and commercial development and on its past experience. It may be that in fact said estimates may not be realized or may be realized differently from what the Group expects because of various external factors, including the state of the real-estate market in Israel and the state of the financial markets in Israel and overseas, or because of the occurrence of any of the Groups risk factors described in Section hereinafter Risk factors in the operating segment Macro risks 1. The growth rates in the areas of the Company's operations - The growth rates and the extent of the activity in Israel and in the countries in which the Company operates have a material effect on the level of demand for space to rent, on the level of demand in the housing sector, and on the level of activity in malls owned by the Company. 2. Changes in interest rates Changes in the interest rates in Israel and abroad affect the Group's financing expenses. 3. Changes in the Consumer Price Index in Israel Changes in the Consumer Price Index affect the financing costs of index-linked credit and the financing costs in respect of Africa Properties index-linked bonds series. 4. Exposure to various currency risks Africa Properties has loans and deposits in various foreign currencies (foreign currency, shekel-linked, and non-shekellinked), so that fluctuations in the exchange rates of currencies (especially against the euro) and the CPI affect the Group's financing income and expenses for better or worse. 5. Earthquake damage According to standard insurance policies, the Group s companies are obligated to co-payments in the event of damage due to an earthquake. Should extensive damage be caused to the Group s properties following an earthquake, the Group may be exposed to significant risk that cannot be estimated. 6. Changes in the financial markets in Israel and the ROW A recession or deterioration in the financial markets in Israel and abroad may make it difficult to find sources of financing when the Group and its investees require them to finance their current operations, and may lead to a slowdown in the Group s operations and damage to its revenues in Israel and abroad in the rental property and residential land development segments. 832

126 Sector risks 1. Exposure to the high-tech and biotechnology sectors in Israel A major component of the Group s revenues in this sector of operations in the last few years has come from customers in the high-tech and biotechnology sectors in industrial parks and consequently, the Group is exposed to activity in these sectors. 2. Changes in the financial markets in Israel and the ROW A recession in the financial markets inside and outside of Israel, or a deterioration in the financial markets in Israel and the rest of the world may make it difficult to find sources of financing when these are required by Africa Properties and companies held by it to finance their current operations, and may lead to a slowdown in the Company's operations and damage to its revenues in Israel and worldwide, in the operating segment. 836

127 1.10 Real estate development and rental properties in Europe General information regarding the business sector The majority of the Company s activities in the area of real estate development and rental properties in Europe is concentrated in Eastern Europe through AFI Europe N.V., a wholly-owned subsidiary of Africa Properties (hereinafter, AFI Europe ) In the real estate development and rental property sector in Europe, the Company operates in two main activity channels, as follows: A. Residential real estate development in Europe In this business segment, the Group focuses on developing residential projects in Europe, through locating and purchasing land, construction of the buildings (including renovations and/or appreciation), and sale of the units. B. Rental properties in Europe In this business segment, the Group focuses on the development, construction (including through renovation and/or appreciation), rental, and operation of buildings, especially for industrial, office, and commercial uses, in Europe. Included in the above, the Group owns real estate properties 1 in Europe that it owns and develops directly and through holdings in companies that own, directly and/or through subsidiaries, real estate properties, and that are engaged, as stated, in the development, construction, rental, and operation of real estate properties The economic condition in the countries in which the Company operates in Europe and the condition of the real estate market in the main countries in which the Company operates. A. Czech Republic 2 In 2016, the Czech economy grew by a considerable 2.5%, with a similar forecast for The economic growth is the result of an increase in private consumption and a considerable investment by the European Union in the Czech Republic. Growthsupporting economic conditions, including an increase in wages and company profits and stronger exports, are expected to support continued growth in Inflationary pressure is increasing in the Czech Republic as a result of the increase in private consumption, which stems from the nominal increase in wages. Unemployment in 2016 was the lowest of all EU countries. 1 The Group s rights in properties (registered or yet to be registered) are ownership and/or lease and/or contractual or other rights, whichever is applicable. 2 The data are taken from reports by the OECD, the International Monetary Fund and the Czech Republic Central Bank. 124

128 Czech Republic Nominal GDP (in USD billions) Product per person (PPP in USD) Percentage growth in real GDP (compared with the previous year) 239% 139% 23.% Inflation rate (average for period) 831% 83.% 831% Unemployment rate 134% 9% 134% Budgetary deficit (percentage of GDP) 439% 835% 832% Long-term government debt rating )AA( )AA( )AA( Local currency rate of exchange against the EUR (end of period) B. Romania 1 In 2016, private consumption rose in Romania in response to a cut in VAT rates, which is currently 14%, the lowest rate of all CEE countries. Wages increased by 12% and inflation remained low. All these indicators, including the low interest rates, let to an increase in disposable income. Real GDP increased by 5%, driven mainly by private consumption. Inflation remained low in 2016 and the year ended in -0.5%. Average unemployment in Romania is low compared to other European countries. In 2016, unemployment was 5.7% compared with 6.7% in the corresponding period of the previous year. Romania Nominal GDP (in USD billions) Product per person (PPP in USD) GDP growth rate (compared to previous year) 9%.31%.% Annual inflation rate ) 839% ( ) 835% ( 831% Unemployment rate 93.% 13.% 131% Budgetary deficit (percentage of GDP) ) 2% ( ) 434% ( ) 839% ( Long-term government debt rating (BBB) (BBB) (BBB) Local currency/eur exchange rate (at end of period) The data are taken from reports of Colliers. 125

129 C. Serbia 1 In 2016, the rate of inflation in Serbia reached 1.3% compared with 1.5% in the corresponding period of the previous year. In 2016, unemployment was 18.1% compared with 17.9% in the corresponding period of the previous year. Labor costs in Serbia are one of the lowest in Eastern Europe, and the net monthly salary is EUR 330. The highest salaries are in Belgrade, with an average net monthly salary of EUR 411 in Serbia s future growth depends on a revival of exports, profits from privatization, foreign investments and a reduction in the fiscal deficit. All these depend on the reforms in the private sector. Serbia Nominal GDP (in USD billions) Product per person (PPP in USD( Percentage growth in real GDP (compared with the previous year) 431% 831% ) 431% ( Inflation rate (average for period) 43.% 439% 43.% Unemployment rate 4134% 4.35% 4135% Budgetary deficit (percentage of GDP) ) 132% ( ) 131% ( ) 1% ( Long-term government debt rating (BB) (BB) (BB) Local currency rate of exchange against the EUR (end of period) D. Poland 2 Poland is the eighth largest economy in the European Union but its GNP is still well below the EU average. Poland s industrial base includes coal, textiles, chemicals, machinery, steel and iron, and industry has recently expanded into other sectors including fertilizers, fuels, electric machinery, electronics, cars, and shipbuilding. Economic growth in Poland was halted in 2016 by a decline in investments by European funds and by domestic policy. Economic indicators suggest that the economy may expand in 2017, after a low point in the fourth quarter of The OECD forecast for Poland s economy is annual growth in the GDP at the rate of 3% in 2017 and This forecast is based on social transfers, low interest rates, and an increase in investments by European funds. The increase in disposable income will create moderate inflationary pressure in Global instability as a result of the 1 The data are taken from reports of CBRE. 3 2 The data are taken from reports by the OECD and Colliers. 126

130 Brexit in the UK and political changes in leading countries in Europe and the world may have an exogenous impact on Poland s economy. In 2016, unemployment in Poland averaged 6.1%, a decline of 1.4% in relation to the average unemployment rate in the previous year. The unemployment forecast for 2017 is 5.4%. Poland Nominal GDP (in USD billions) Product per person (PPP in USD) Unemployment rate 134%.39% 5% GDP growth rate (compared to previous year).34%.3.%.3.% Inflation rate (average for period) ) 831% ( ) 835% ( 834% Budgetary deficit (percentage of GDP( ) 834% ( ) 832% ( ) 2% ( Long-term government debt rating BBB+ BBB+ (A) Local currency rate of exchange against the EUR (end of period) E. Bulgaria 1 In 2016, the Bulgarian economy grew by 3%. In 2016, unemployment was 8.2%, the lowest since 2010, which manifest in a strong labor market, growth in exports and in economic product from the industrial sector. An increase in private consumption is expected to support economic growth in Bulgaria in 2017, which will also be supported by a decline in unemployment rates and a rise in wages. Bulgarian elections are scheduled for March this year, generating uncertainty that might affect the economy. The Bulgarian currency is linked to the euro, and the linkage base is expected to remain unchanged until Bulgaria joins the euro bloc and adopts the common currency. Bulgaria Nominal GDP (in USD billions) Product per person (PPP in USD) GDP growth rate (compared to previous year).%.% 439% Inflation rate ) 431% ( ) 434% ( ) 431% ( Unemployment rate (end of period) 132% 532% 4439% Budgetary deficit (percentage of GDP) 831% 431% 835% Long-term government debt rating BB+ BB+ BB+ Rate of exchange of local currency against EUR (end of period The data are taken from reports by the OECD. 127

131 Following is a description of the Group s activities in the real estate development and rental property sector in Europe Development of land for residential use in Europe Most of the Group s real estate and residential development activities in Europe are coordinated with AFI Europe. The Group has land zoned for residential properties in the Czech Republic, Poland, Latvia, Bulgaria, Hungary, and Romania General survey of the countries in which the Group operates in the business segment For details of the economy in Romania, the Czech Republic, Poland, and Bulgaria, in which the Group develops land for residential use in Europe, see paragraph above. It should also be noted as follows: A. Czech Republic-Prague 1 - According to a review by LEXXUS, 6,100 new apartments were added in Prague in 2016, reflecting an increase of 17% over the corresponding period of the previous year. The number of building starts of apartments declined significantly in 2016 compared to 2015: In 2016, construction started in 2,800 units, compared with 5,300 units in The demand for apartments in Prague remained high, primarily as a result of the favorable mortgage market. In 2016, 6,700 apartments in Prague were sold, compared with 7,000 apartments sold in Apartment prices in Prague rose by 14% in 2016 compared with The rise in prices and the decline in the supply of apartments may lead to a decline in the demand for new apartments in 2017, despite the favorable conditions (low interest rates) in the mortgage market. Apartment prices in the Czech Republic as a whole increased by 11% in 2016 and reached record levels since 2007 and The growing Czech economy, rising wages, low mortgage interest rates in 2015 and 2016 and residents desire to live in a self-owned apartment increased the demand for apartments. B. Romania - Bucharest - In 2016, 30,000 new apartments were added to the market in Romania, of which 13,000 were added in Bucharest, reflecting a 20% increase compared with the corresponding period of the previous year. Approximately 70% of the new apartments in Bucharest that were offered for sale in 2016 were sold and the remainder are expected to be purchased in the first half of The low interest rates and economic growth in Romania support an increase in the demand for apartments, and consequently, a rise in prices. The average price of an apartment in Bucharest increased by 5% in 2016 and is EUR 1,100 per sqm. 1 The Group has an associated company in Panama. 128

132 Poland 2016 was a record year for Poland in terms of the number of apartments sold and number of apartments placed for sale. In 2016, 65,000 new apartments were placed on sale (in Poland s six major cities), 25% more than in corresponding period of the previous year. In 2016, 62,000 apartments were sold in Poland, 20% more than the corresponding period of the previous year. In Warsaw, new apartment sales rose in 2016 by 26% compared with 2015, and in Krakow by merely 5%. Due to the growing supply of apartments and the moderate decline in demand expected in 2017, market prices are not expected to rise significantly. C. Bulgaria, Sophia According to a view by Colliers International, the number of residential projects that were completed in Sophia increased by 5% compared with the corresponding period of the previous year. Total supply of apartments in Sophia totaled 7,000 in 2016 in 57 projects. In 2016, 1,650 apartments were constructed in 17 projects, of which 10 projects are expected to be completed in the course of In 2017, 13 construction starts in new projects are anticipated in The residential market in Sophia began to recover in Recovery of the local economy and an expansion of the local mortgage market contributed to the demand for housing. The growth in the housing sector also continued in 2016, with the renewed demand for housing in Sophia and an increase in housing prices. Asking prices for mid-level and luxury apartments in Sophia ranged between EUR 900-1,550 per sqm including VAT, a price that reflects a 9% increase compared with the corresponding period of the previous year. D. Serbia According to a study by CBRE, a large number of new residential projects in Belgrade are in the development stage. In 2016, 10,000 apartments in Belgrade are expected to be sold, based on preliminary data, which is more than 2014 and 2015 combined. Prices of luxury apartments in the city center are sold at EUR 2,200 per sqm and upwards, including VAT. One of the main factors behind the demand for apartments in Belgrade is the fact that it is the most economically developed city in Serbia and it functions as a key university center (65 faculties). Restrictions, legislation, standardization, and special constraints As stated above, the Group s main activities in the real estate development sector in Europe are in real estate assets, and therefore legislation on land taxation and municipal taxation impact its activities, including taxes on buying and selling and betterment levies imposed on transactions in real estate assets. Critical success factors The management of Africa Properties considers the critical factors in the real estate for housing development sector to be: knowledge and 1 According to a report published on the Jones Lang Lasalle website3 129

133 experience in identifying and exploiting business opportunities; identifying projects; planning, construction, and marketing of the projects, location of and access to the properties Products and services A. General (1) The Group s products in this activity sector are mainly residential apartments for sale3 (2) The Group has real estate properties that are held and developed by it directly as well as through holdings in companies that own and are engaged, directly and/or through subsidiaries, in the development and operation of real estate properties3 (3) Agreements for the acquisition of land (whether built-up or not) zoned, in whole or in (a) (b) (c) (d) part, for residential construction, generally include the following material conditions (either in entirety or in part) as follows: The Group pays for the property (subject to preconditions, if any) generally in cash, with payment at the price stated in the agreement and/or according to a mechanism for determining the price stated in the agreement3 In cases in which it has partners in the property (whether by virtue of joint acquisition of the real estate or due to acquisition of a share of the rights in the project), the Group generally operates in a joint company made up of the Company and its partners for the purpose of regulating the relationships between the parties3 To finance the project, the Group occasionally creates a lien on its share in the relevant project, in favor of the financing party, including on its right to receive all the proceeds from the relevant project and the Group s rights vis-à-vis the seller of the said project3 Occasionally, the agreement is contingent on the Group s obligation, alone or together with its partners, to change the zoning of the relevant areas Additional information on projects A. For the purposes of this paragraph : The data in the tables in sub-paragraph below represent the share of Africa Properties (in which the Company holds, as of the date of this periodic statement, 56% of the issued share capital and voting rights). Completed project a project on which construction work has been completed, even if all the residential units have not yet been sold. Project in process a project on which construction has been started but has not yet been completed. Project in planning a project the Group intends to begin constructing in the foreseeable future but the construction work on which has not yet started. Project in preliminary planning a project in a preliminary stage on which the Group does not intend to commence construction in the foreseeable future and for 130

134 which there are no plans as to a date for a construction start date and regarding its precise nature (among other things, due to uncertainty concerning demand and the possibility of financing). Holding in the project means the Group Company s holding compared with the other partners in the project (not including the share of the owners in combination transactions). Housing units sold the number of residential units sold by the Group Company and its partners in the project3 Planned housing units the number of residential units the Group wishes to include in the project, according to plans pending approval (either submitted to the planning authorities or in the preparation stages). 131

135 B. Following is a summary of data with respect to residential projects in Europe the Group has executed and that were completed as at December 31, 2016: (1) Following is a summary of the data on projects that have been completed and charged to the statements of income (financial data in NIS thousands): 1 Project name Location Holding Company Percentage holding in the project (by the holding Company) Cumulative amount charged as at December 31, 2016 Impairments / revaluations in respect of project until December 31, 2016 (NIS thousands) Total recognized gross profit Balance of unrecognized gross profit (loss) Cumulated revenues recognized as at December 31 Percentage gross profit for the year (average) Osiedle Europejskie phase 8B Krakow Poland Novo Maar Sp. z o.o3 488% % 24% 2.% Osiedle Europejskie phase 11 Krakow Poland Novo Maar Sp. z o.o3 488% % - - Vitosha Tulip Sofia, Bulgaria Vitosha Gardens Eood 488% (4,667) , % 15% 42% Lagera Tulip Sofia, Bulgaria AFI Lagera Tulip eood 488% (6,011) , % 11% 1% Total ) ( The percentage gross profit in the table is the percentage of profit from revenues as included in the Company s Consolidated Financial Statements as at December 31, 2016, according to the data available to the Group on the date said Financial Statements were prepared. It should be clarified that on the date of preparing the Financial Statements, in respect of each period, the Group has difficulty in anticipating precisely the percentage of gross profit throughout the life of the project due to the numerous variables that may affect that profit, including variables on which the Group has no influence. 132

136 (2) Following are details of the inventory of units as at December 31, 2016 in completed projects Project name Osiedle Europejskie phase 8B Metropolia Osiedle Europejskie Phase 11 (i.e., whose construction has been completed and which have not yet been sold in their entirety by the Group) (financial data in NIS thousands): Date of end of project construction Apartments purchased until December 31, 2016 (cumulatively) Apartments purchased until December 31, 2015 (cumulatively) Apartment inventory as at December 31, 2016 Apartments purchased and not delivered as at December 31, 2016 Cost in books of apartments as at December 31, 2016 Apartments, the construction of which was completed as at December 31, 2016 and which were sold after December 31, 2016 and until March 5, 2016 Q2/ Q4/ Vitosha Tulip Q3/ Lagera Tulip Q3/ Total )*( (*) Not including the cost of the remaining stores remaining for sale in the Osiedle Europejskie phase 9 project of NIS 71 thousand3 (3) Following is a summary of data with respect to residential projects in Europe the Group has Project name Osiedle Europejskie Phase 8B executed and that were completed as at December 31, 2016: Project construction completion date Year Number of housing units sold Housing units inventory at end of period Average price per sqm of apartments sold in quarter (1) Operating Q1 Q2 Q3 Q4 Total currency Q1 Q2 Q3 Q4 Q2/13 PLN , Osiedle Europejskie Phase 11 Vitosha Tulip Q4/16 EUR ,315 6,144 6,430 6, ,336 6,543 6,506 6, ,477 Q3/09 EUR Lagera Tulip Q3/ EUR (1) The average price per sqm in Poland, Latvia and the Czech Republic calculated on the net area of the apartment (excluding common areas), and in Bulgaria calculated as gross area. (2) Representative exchange rates at December 31, 2016: NIS to EUR 1; NIS to CZK 1; NIS to PLN

137 C. Following is a summary of data on residential projects the Group is executing as at December 31, 2016: The following table provides data on residential projects in which construction had not yet been completed as at December 31, (1) General data: Project name and location Tulip Trebesin Phase 1 (Prague Czech Republic) In this table - Project starting date the date construction started Anticipated sales completion date sales of at least 90% of the housing units or the areas in the project3 Units sold according to signed contracts only (not including non-binding buyers declarations, apart from commissions of an immaterial amount only that have been signed). It should be noted that all projects in the following table have closed construction loans. The information set out in the following table concerning anticipated completion dates is forward-looking information based on data available to the Group as at the date of this Periodic Report. It is possible that due to factors not under the Group s control, the projects will not be completed on the dates indicated below3 Gross sqm for construction Number of housing units Average sqm per unit Costs (NIS thousands) Percentage of project completed Project start date Anticipated date for completion* No. of units sold as at December 31, 2016 No. of units sold as at December 31, 2015 No. of units sold after December 31, % Q2/2015 Q1/ Tulip Trebesin Phase 2 (Prague Czech Republic) % Q3/2016 Q2/ Tulip Trebesin Phase 2 (Prague Czech Republic) % Q3/2016 Q1/ (*) The information set out below is forward-looking information based on data available to the Company on the date of this Periodic Report. Projects may not be completed on the dates stated below due to factors that are not in the Company s control. (2) Anticipated data (in NIS thousands): The information in the table in respect of the total anticipated revenues, total anticipated costs, the anticipated gross profit from the projects, and its percentage is based on assumptions, forecasts, and/or the Group s work plans, and there is no certainty that these will be fully realized. In this context it should be clarified that the estimate of anticipated revenues is based 134

138 Project name and location Tulip Trebesin Phase 1 (Prague Czech Republic) Tulip Trebesin Phase 2 (Prague Czech Republic) Tulipa City LMNO Phase 1 (Prague, Czech Republic)_ on the selling prices of the various projects and the estimate of anticipated expenses (apart from the cost of land which is entirely or partially known) based mainly on signed contracts with contractors and consultants. The anticipated revenues, the total anticipated costs, the anticipated gross profit from the projects, and its percentage may in actuality be different from the information in the table if the Company s said forecast or work plan is not realized in whole or in part3 Prepayments until December 31, 2016 Accounts receivable for apts sold Inventory at selling price as at December 31, 2015 Total anticipated revenues Actual costs paid Costs to pay until the end of the inventory Total anticipat ed costs Anticipa ted gross profit Gross profit margin ,681 4, ,275 77, ,381 37,894 33% ,057 97, ,141 25,889 81, ,47 60,669 36% ,810 23, ,637 31,700 60,030 91,730 12,908 12% D. Following are details of projects work on which has not yet started (excluding land reserves as described below) as at December 31, 2016: 1 It should be noted that in view of the economic situation and uncertainty in the various markets in which the Group operates in Europe as described in paragraph above, the Group is unable to estimate at this stage the percentage gross profit expected on average from the projects described in the following table that are in planning stages only. It should also be noted in respect of all the projects in the following table that the rights in them are held 100% by AFI Europe (without partners), by virtue of ownership. 1 The information set out below is forward-looking information based on data available to the Company on the date of this Periodic Report. Changes in projects planning and the nature of projects may occur due to factors that are not in the Company s control. 135

139 Project name and location AFI City Phase 2 Prague/ Czech Republic Zlota 38 Warsaw Poland AFI Tech (Inox) Stages 2 and 3 Bucharest/ Romania AFI Palace B.Noi Bucharest/ Romania Trebu Home (Stage 1) Riga/ Latvia Holding Company Tulipa City s.r.o. AFI Zlota 83 Sp. z o.o. SC Tulip Manageme nt SRL SC Premier Solutions & Team SRL SIA AFI Investment s % holding in project (of AFI Europe( Acquisitio n date of rights in the land 488% % % % % 2007 The Group s plans for the project as at the date of this Periodic Report Construction of offices with a total area of 107,500 sqm alongside 17,000 sqm commercial 21,000 residential Derelict building for preservation. The project will include 8,000 sqm of residential and commercial Building an office project in a total area of 60,000 sqm with a total area for rent of 50,000 sqm Construction of a mixed project including 2,000 housing units, a commercial center of 5,000 sqm for rental and an office/ residential building above the commercial center Construction of a residential project and a commercial center with a total area of 2,240 sqm 136 Statutory planning state Original cost with the addition of capitalized/ accumulated costs (NIS thousands) Write-offs/ adjustmen ts made up to December 31, 2016 (NIS thousands) Cost of land in books as at December 31, 2016 (NIS thousands) CBP exists ) 198( CBP exists. Building permits pending CBP exists. Building permit issued. There is a town building plan for Phase A of the project which will include 200 residential units, the commercial center of 5,000 sqm for rent and an office/ residential building over the commercial center. Application for building permits has been submitted Building permits have been received for the first phase of the project; building ) ( ) ( ) (

140 Project name and location Holding Company % holding in project (of AFI Europe( Acquisitio n date of rights in the land The Group s plans for the project as at the date of this Periodic Report Statutory planning state permits for the next stages of the project pending. Original cost with the addition of capitalized/ accumulated costs (NIS thousands) Write-offs/ adjustmen ts made up to December 31, 2016 (NIS thousands) Cost of land in books as at December 31, 2016 (NIS thousands) Osiedle Europejskie Phase 10 Krakow/ Poland Tulipa Trebesin (Phase 3) Prague/ Czech Republic Czech Republic Skyline Belgrade/ Serbia (residential portion only) Novo Maar Sp. z o.o. Tulipa Trebesin AFI Mixed Use Project 488% % % 2016 Construction of a residential project with 250 units Construction of a mixed commercial/ residential project with a total residential area of 78,000 sqm and commercial area of 6,400 sqm Construction of a residential project of a total area of 34,000 sqm CBP exists. Building permits pending CBP exists. Planning permit has been received and there is a building permit for the entire project CBP exists, building permit pending ).12411( Total ,670 ) 294,452( 178,129 E. Inventory of apartments that have been sold and have not yet been charged to the profit and loss statement (order backlog) (1) Following are data on apartments sold (but not charged to the profit and loss statement), broken down according to the recognition period of the anticipated revenue (in NIS thousands) as at December 31, 2016: Anticipated period revenue recognized Anticipated income (NIS thousands) Q ,072 Q ,318 H ,

141 (2) Following are data on apartments sold (but not charged to the profit and loss statement), broken down according to the recognition period of the anticipated revenue (in NIS thousands) as at February 6, 2017: Anticipated period revenue recognized Anticipated income (NIS thousands) Q ,074 Q ,400 H , ,072 It should be clarified that the information in the above table is forward-looking information based on assumptions, estimates, and the Group s plans and there is no certainty that these will be realized, in view, among other things, of the rate of building the projects and the Group s estimates of completing them, as well as due to the possible effect of the Group s relevant risk factors. (3) According to generally accepted accounting principles, income from contracts to sell apartments are recorded in the Company s books as income when the apartment is delivered to the occupier. As at December 31, 2016, the balance of income from sales of residential units that had not yet been recognized in the statement of income was NIS 279 million compared with a balance of income from sales of residential units as at December 31, 2015 of NIS 79.3 million. F. Following is a table summarizing the Company Group s investments as at December 31, Holding structure AFI Project Developers B.V in an associated company (in NIS thousands) engaged in the development of land for residential projects in Europe: 1 Property description A residential project including 400 apartments and 15,000 sqm of commercial /office area Percentage holding as at December 31, 2016 Cost of the investment in the Company s consolidated financial statement as at December 31, 2016 Owners loans as at December 31, 2016 Company s share of profit (loss) 2016 Company s share of profit (loss) 2015 Company s share of profit (loss) 2014 Company s share of cumulative profit (loss) as at December 31, 2016 Total investment in the Company s consolidated statements as at December 31, % 4,873 25,258 4, (584) 5,074 30,130 1 According to Group policy, beginning on January 1, 2008, investees in which the company holds a stake of 50% or more are no longer consolidated. 138

142 For the removal of doubt, it is hereby clarified that the information in this paragraph above relating to the construction of projects on which construction work has not yet started, the Group s plans for the projects construction of which has not yet started, plans that have not yet been approved, the extra cost estimated for the project, and the planned completion date are forward-looking information. The data in the tables is based inter alia on the following assumptions: (1) the Group will make a decision to use the above land (taking into consideration, among other things, the economic viability and market conditions that may pertain); (2) the plans and/or applications that have been and/or will be submitted by the Group will be approved and come into effect without any substantial change in the number of residential units permitted for construction on the land, the mix of residential units [types] and/or the plan of the residential units, relative to the number, mix and plan that the Group expects; (3) there will be no material changes in the fees, duties and/or taxes levied on the parties to the land transactions; (4) the construction costs and other sales costs will be in line with the Group s estimates. It is clarified that in the event that there is a material change in one or more of the above factors, there may be a material change in the areas for construction and lease and/or in the costs and/or dates anticipated by the Group. G. Additional information on land purchased by the Company Group Land and apartment inventory in Poland In February 2015, the Group won a tender for the purchase of a building in Warsaw, Poland for the sum of EUR 2.2 million. The Group intends to develop the property for residential and commercial uses covering a total area of 5,000 sqm. The purchase transaction was completed in March Tulipa Trebesin project, Czech Republic In July 2016, a Polish subsidiary of AFI Europe signed a preliminary agreement to purchase a building in Warsaw for PLN 30 million (NIS 29 million). After the building is demolished, the Company s Group intends to build a residential project with saleable area of 6,000 sqm. The transaction was concluded in February In July 2016, a Polish subsidiary of AFI Europe signed an agreement to purchase land adjacent to the building in Warsaw, Poland, that was purchased by the Company s Group in February 2015 for EUR 2.5 million (NIS 11 million). AFI Europe intends to take steps to increase the area of the planned residential projects by 3,000 sqm to create a total of 8,000 sqm. The transaction was concluded in September Land and inventory of apartments in Serbia In October 2014, a subsidiary of AFI Europe (hereinafter in this paragraph, the Subsidiary ) together with additional partners that are not associated with the Company Group (hereinafter in this paragraph, the Partners ) completed a deal to purchase all the shares of a Serbian company which owned rights in a land asset in the center of Belgrade (hereinafter, the Company Purchased for a total of EUR 1 million (it should be noted that the Company Purchased has a 139

143 financial debt to a banking corporation of EUR 11 million). The Group and the Partnership intend to construct a project of 550 residential units and 12,000 sqm of commercial space and offices. If the prices of residential units in the project exceed the ceiling determined in the agreement, the seller will be paid additional amounts according to a formula stated in the agreement. At the Report Date, the subsidiary holds 45% of the voting rights in the Company Purchased and 41.9% of the rights to receive profits. The construction of Phase A, which includes 89 residential units, has been completed. At the Report date, 88 housing units have been sold. Construction of Phase B, which includes 89 residential units, is in progress and 88 of those units have been sold, and 82 have been delivered to customers. Construction of Phase C includes 129 housing units, of which 96 have been sold. The Group is also preparing to begin construction on an office building of a total of 15,000 sqm rentable area. On June 30, 2016, a Dutch subsidiary of AFI Europe concluded an agreement (hereinafter in this paragraph, the Purchase Agreement ) with a subsidiary of Plaza Centers N.V. (hereinafter, in this paragraph, the Seller ), a foreign company that is unrelated to the Group or to its controlling shareholder. According to the Purchase Agreement, the buyer will purchase from the Seller 100% of the issued share capital of a Serbian company that owns land in central Belgrade of an area of 10,400 sqm (hereinafter in this paragraph, the Land ), on which a project is planned to include housing, offices, and commercial areas (hereinafter in this paragraph, the Planned Projects ) of an area of 70,000 sqm, for EUR 15,900,000. Furthermore, the buyer undertook to pay the seller an additional sum of EUR 600,000 if and when the City Building Plan that applies to the Land allows the construction of the Planned Project with an area of over 69,999 sqm above ground. As of the date of this Report, the Group concluded demolition of the existing building and is preparing to receive a building permit to construct the project. Notably, Africa properties classified assets in the amount of NIS 38,798 thousand of the total book cost of the project in Africa Properties financial statements as of December 31, 2016 as investment property under construction, and NIS 35,924 thousand was classified as land inventory Customers Most of the Group s customers in real estate development for residential use in this business segment are private customers with various characteristics and wide distribution Marketing and distribution The Group s activities in marketing the aforementioned residential projects are conducted in a variety of marketing ways, among others as described below: (a) Marketing through marketing personnel employed by the Company Group; (b) contracts from time to time with independent marketing bodies and local and international real estate agencies which are not normally given exclusivity; (c) advertising information about the Group s properties in the national and local press, on the relevant project s internet site; and on the internet sites of Africa Properties and Africa Europe Competition 140

144 By its nature the real estate market includes a large number of competitors in all the locations where the Group develops residential projects in this activity sector. The Group s share in markets in which it is active is extremely small Working capital A. According to custom and legislation in the Czech Republic, apartment buyers pay between 15% and 20% of the purchase price on signing the purchase contract. The balance of the consideration is paid into a trust fund (until the date the apartment is registered in the buyer s name in the land registration office) after the final purchase agreement has been signed and the apartment has been delivered 3 B. According to custom in Poland, the consideration for the purchase of the apartment is paid over the various constructions stages of the project, according to a schedule of payments determined between the seller and the buyer. When the apartment is ready for delivery, a payment schedule can be determined whereby the consideration will be paid in full on signing the sale contract3 C. According to custom in Bulgaria, the payment for the sale of the apartment can be made over the various construction stages of the project, according to milestones, unless there is a legal restriction on the matter. D. According to custom in Serbia, the consideration for the purchase of the apartment is paid over the various constructions stages of the project, according to a schedule of payments determined between the seller and the buyer. In the event that the apartment is ready for delivery, a payment schedule may be determined whereby the consideration will be paid in full on signing the sale contract. E. According to custom in Latvia, initially, a preliminary contract is signed and a deposit of 10% of the purchase price of the apartment is paid and only when construction has been completed and ownership of the apartment can be transferred to the buyer, will the buyer pay the balance of the purchase price. If there is any delay in delivery of more than the number of months determined by law, the buyer may cancel the purchase and have the deposit refunded Restrictions and supervision in the business segment To the best of the Company s knowledge, in this business segment, in addition to the laws and regulations in which the type of construction, its quality, and the supervision required over its completion are enshrined, there are specific regulations relating to the use of buildings. Moreover, in this business segment, legislation in the area of land taxation and municipal taxation has an effect on the Group s activities, including the effect of purchase and sales tax and betterment levies imposed on transactions in real estate properties. The Group s activities in this business segment are also subject to the consumer protection laws and laws regulating the sale of apartments. 141

145 Rental properties in Europe The rental property sector includes the development, planning, construction, marketing, investment, and operation of properties for lease, mainly for industrial, office, and commercial use General information on the business segment relating to rental properties in Europe General information on the real estate rental sector in Central and East European countries (CEE) A. Czech Republic - Prague According to a review by CBRE, as of Q4/2016, 330,000 sqm of office areas are under development and construction in Prague. In 2016, 33,000 sqm sqm of office spaces were completed, and 66% of these were leased. As of the end of 2016, the vacancy rate of office areas in Prague was 10.6%. This rate was supported by a high demand for office space and a rather small supply of offices areas that were completed in 2016 compared with previous years. In Prague, 110,000 sqm of offices areas, net, were leased in Despite the anticipated increase in the completion of offices areas in Prague in 2017, CBRE expected that the rate of vacant areas in 2017 will continue to decline. Despite the existing demand for new offices, developers are still compelled to offer incentives to tenants, and these affect the effect rental prices. B. Romania According to a study by Colliers International, the supply of commercial areas in Romania in 2016 increased by 240,000 sqm, and 40% of this increase is attributed to areas in Bucharest. The total ratio of commercial areas to population in Bucharest is still low compared to CEE countries and is 626 sqm/1000 population. In 2015, this ratio was 573 sqm/1,000 population. Office leasing activity in Bucharest in 2016 grew by 42% compared with 2015, and reached 412,000 sqm of office areas, of which 144,000 sqm were leased in the fourth quarter of % of the office areas leased in the fourth quarter of 2016 represent rentals excluding renewals or extensions of existing leases, and 35% additional demand. Demand for office areas is supported by an addition of 5,000 new jobs in Bucharest and growth in the hi-tech industry, which is estimated to account for 40% of the demand in the market. Offices areas in Bucharest total 2.64 million sqm, and are expected to increase by 188,000 sqm by end % of these office areas are A class office buildings. In , 592,000 sqm of office areas are expected to be completed, and 40% of these are in west Bucharest. Rentals in Bucharest remained stable in 2016, and effective rentals are 80%-85% of the rentals stated in leases. Following the completion of additional office buildings in ,, pressure on rentals is expected. The vacancy rate at end 2016 w2as 11.7%, compared with 11.9% in

146 C. Serbia Belgrade According to a review by CBRE, the office renal market in Belgrade grew in 2016 by 50,000 sqm of new office spaces, the highest annual increase since The modern office market in Belgrade totaled 812,000 sqm at end In 2016, 80,000 sqm of office areas were leased in Belgrade, of which 61,500 sqm were new leases and extensions of existing leases. The vacancy rate of office areas at end 2016 was 7.7%, which represents a slight increase compared with the corresponding period of the previous year. The year 2016 was characterized by record activity in the development and lease of office areas in Belgrade. The most active sectors in office rentals this year are IT, telecommunications, and hi-tech, which accounted for 35% of the demand for rented areas. Class A offices are leased at EUR per sqm per month, and B class offices are leased at EUR per sqm per month. D. Poland Krakow According to a review by CBRE, the office market in Krakow is the quickest growing market in Poland, and most of the new offices that are built are Class A. According to CBRE s forecast for the year 2016, a total of 200,000 sqm of office spaces were leased in Krakow, and over 289,000 sqm of office areas are under construction and completion is scheduled in The vacancy rate of office areas in Krakow is the lowest in Poland. At the end of the third quarter of 2016, the vacancy rate of office areas was 6.3% compared with 3.7% at end The increase in vacant areas is the result of the completion of a large amount of office areas in the first three quarters of CBRE s forecast points to stabilization of the vacancy rate at 5%. As of the third quarter of 2016, office rentals for Class A offices were EUR 14 per sqm per month on average. CBRE anticipates that office rentals in Krakow will not change in the near future. In recent years, Krakow has positioned itself as a European/international center of IT and outsources with significant growth, and this trend is expected to continue in the forthcoming years as well Restrictions, legislation, standards, and special constraints applicable to the rental property sector in Europe Similar to activities in the real estate sector in Israel (see paragraph 1.9 above), this business segment is mainly regulated by the real estate laws and the building and planning laws. For details see paragraph above Products and services A. General For additional information about the characteristics of the Company s products and services in the rental properties sector, see paragraph above. It should also be noted as follows: (1) The geographical areas and types of income-producing properties in which operations are conducted in the sector 143

147 The Company operates in the rental properties sector, in the rental and operating sector of buildings zoned for commerce, offices, and industry in the Czech Republic, Romania, Bulgaria, Germany, Serbia, Poland, and the Netherlands. (2) Asset sale policy In this activity sector, the Company is examining business opportunities to sell properties, taking into consideration, among other things, the percentage profitability and cash flows that will be obtained from said sale of properties3 On November 23, 2016, AFI Europe and four wholly owned property companies entered into a revised non-binding letter of intentions with a foreign company (hereinafter, the Revised Letter of Intent ) to sell five office buildings known as AFI Park 1-5 in Bucharest, Romania (hereinafter in this paragraph, the Additional Properties ). It is clarified that the Revised Letter of Intentions replaced a letter of intent in which the parties entered in June According to the Revised Letter of Intent, the foreign company will conduct due diligence on the properties, and subject to its successful conclusion, the foreign company will take steps to enter into a detailed agreement (either directly and/or through a party acting on its behalf) according to which it will purchase the Additional Properties in the first quarter of In this transaction, AFI Europe undertook to refrain from entering into an agreement to sell the holdings of said property companies and/or the Additional Properties as long as the Revised Letter of Intent remains in force. The consideration for the sale of the Additional Properties will be determined on the basis of the value of the Additional Properties set at EUR million (subject to conventional adjustments). Conclusion of the transaction is subject to several conditions precedent, as is conventional in transactions of this type, such as the consent of the financing entities, required regulatory approvals, and lack of a material adverse change in the condition of the Additional Properties. If the transaction is concluded, the Company expected to receive a total cash flow (after tax) of an estimated sum of NIS 286 million. The Company recorded income (after tax) of NIS 18 million in the fourth quarter of 2016 after signing the letter of intent. The information above concerning the Company s entering into a detailed agreement and its implications for the Company s financial results is forward-looking information and there is no certainty that it will be realized due to, among other things, the absence of an agreement on the provisions of the detailed agreement and/or a breach of the detailed agreement (if signed) by any party. B. Clarifications concerning the tables in paragraph below: It is hereby clarified that the following information and tables relating to the construction of projects on which construction work has not yet started, whose plans have yet to be approved, the extra cost estimated for the project, and the planned completion date are forward-looking information. The data in the tables is based inter alia on the following assumptions: (a) The Group will decide to exercise building rights that have not yet been exercised; (b) in accordance 144

148 with the Group s expectations, all the other holders of rights in the land will participate in the planned project; (c) the plans and/or applications the Group has submitted or will submit will be approved and go into force without there being any material change in the areas that may be built on the land, the mix of areas and/or the planning, compared with the amount, the mix and the planning anticipated by the Group; (d) there will be no material changes in the fees, duties and/or taxes levied on the parties to the land transactions; (e) the construction costs and other sales costs will be in line with the Group s estimates. It is clarified that in the event that there is a material change in one or more of the above factors, there may be a material change in the areas for construction and lease and/or in the costs and/or dates anticipated by the Group3 C. Valuation of the properties through external valuations In general, it is the Group s policy in this activity sector to use external valuations every year in the preparation of the annual Financial Statements. The value of real estate property for investment and real estate properties for investment under construction is based on these valuations. In accordance with the Group s policy on updating valuations during the quarters, every quarter Africa Properties examines the changes and the updates in the various parameters for each of the properties and the extent of the effect of these changes on the value of the properties. In accordance with this system, decisions are taken on the properties for which there is a reasonable possibility that the valuation will be substantially different from the previous valuation, and a full revaluation is conducted for these. In respect of land inventory and building inventory for sale in this activity sector, every quarter the Group examines whether any warning signs have been discovered that the values of these properties are liable to fall below their value in the Company s books or in accordance with which, a full revaluation is conducted as required3 D. Following is a summary of the results of the Group s investment properties operations in Europe (aggregate): It should be stated that the Group s consolidated data in this sub-paragraph (D) below include Africa Properties share in jointly controlled properties3 (1) Information on the geographical areas in which the Group operates in Europe: In accordance with AFI Europe s policy, the division of the properties in Europe into geographical areas is made according to the division of the various countries in which the properties are located. (2) Following is a summary of the Group s investment real estate activity results in Europe (in NIS thousands): 145

149 Parameter Summary of the results as at December Total income from activities (consolidated) 290, , ,780 Estimated revaluation gains/losses (consolidated) 439, , ,806 Operating profit (consolidated) 720, , ,026 Identical property NOI (consolidated)(**) 242, ,938 Identical property NOI (consolidated) (Company s share)(**) Total consolidated NOI 280, , ,220 Total NOI Company s share ,594 (*) Calculated at the average exchange rate for the year (**) The data are presented on a two-year basis. (3) Following is data about the segmentation of the Group s rental properties in Europe, by region and usage, as at December 31, 2015 and December 31, 2016 (in sqm): (a) As at December 31, 2015 Region Uses Offices Commercial Total (in NIS thousands) Percentage of total area Czech Republic Consolidated 41,000-41,000 11% Company s share 22,960-22,960 11% Romania Serbia Bulgaria Germany1 Poland Total % of total Consolidated 37, , ,194 39% Company s share 20,856 63,635 84,490 42% Consolidated 61,852-61,852 16% Company s share 18,600-18,600 9% Consolidated 43,997-43,997 11% Company s share 24,638-24,638 12% Consolidated - 87,324 87,324 22% Company s share - 48,901 48,901 24% Consolidated - 2,041 2,041 1% Company s share - 1,143 1,143 1% Consolidated 184, , , % Company s share 87, , , % Consolidated 47% 53% 100% Company s share 43% 57% 100% 1 Including apartments for rent in a total area of 47,000 sqm3 146

150 (b) As at December 31, 2016 %of total Region Uses Offices Commercial Total property value Czech Republic Consolidated 42,052-42,052 10% Company s share 23,549-23,549 11% Romania Consolidated 69, , ,302 43% Company s share 39,105 63, ,488 47% Serbia Consolidated 80,853-80,853 19% Company s share 24,314-24,314 11% Bulgaria Consolidated 43,093-43,093 10% Company s share 24,132-24,132 11% Consolidated - 75,409 75,409 18% Germany 1 Company s share - 42,229 42,229 19% Total Consolidated 235, , , % Company s share 111, , , % % of total value Consolidated 55% 45% 100% - of properties Company s share 51% 49% 100% - (4) Following are data on rental property values by region and usage, as at December 31, 2015 and December 31, 2016: (a) As at December 31, 2016 % of total Region Uses Offices Industry Commercial Total property value Czech Republic Consolidated 92, ,793 8% 92,931 In EUR thousands Company s share 52, ,444 9% 52,041 Romania Consolidated 155, ,439 2,799,644 62% 155,891 In EUR thousands Company s share 87, ,210 1,550,833 67% 87,299 Serbia Consolidated 160, ,353 14% 160,827 In EUR thousands Company s share 48, ,574 8% 48,364 Bulgaria Consolidated 22,815-92,259 2% 22,815 In EUR thousands Company s share 12,776-51,665 2% 12,776 Germany Consolidated - 141, ,883 13% - In EUR thousands Company s share - 79, ,695 14% - Total (in Consolidated 1,748,797 2,740,135 4,488, % 1,748,797 NIS thousands) Company s share 810,703 1,517,508 2,328, % 810,703 % of total Consolidated 39% 61% 100% - 39% value of properties Company s share 35% 65% 100% - 35% 1 Including apartments for rent in a total area of 38,000 sqm 147

151 (b) As at December 31, 2015 Region Uses Offices Industry Commercial Czech Republic In EUR thousands Romania In EUR thousands Serbia In EUR thousands Bulgaria In EUR thousands Germany In EUR thousands Poland In EUR thousands Total In NIS thousands % of total value of properties (NIS thousands) % of total property value Consolidated 79, ,332 8% Company s share 44, ,026 9% Consolidated 85, ,668 2,499,772 62% Company s share 48, ,597 1,383,322 66% Consolidated 132, ,890 14% Company s share 39, ,971 8% Consolidated 24, ,866 3% Company s share 13, ,725 3% Consolidated , ,630 13% Company s share , ,593 14% Consolidated - - 3,194 13,564 0% Company s share - - 1,789 7,596 0% Consolidated 1,371,130-2,652,925 4,024, % Company s share 622,146-1,469,087 2,091, % Consolidated 34% - 66% 100% Company s share 30% - 70% 100% (5) Following are data on NOI by region and usage, for 2016, 2015 and 2014: (a) 2016 Region Uses Offices Industry Commercial Czech Republic In EUR thousands Romania In EUR thousands Serbia In EUR thousands Bulgaria In EUR thousands Germany In EUR thousands Total In NIS thousands % of the total NOI of the properties 148 %of total Total NIS NOI of the thousands properties Consolidated 4, ,112 7% Company s share 2, ,263 8% Consolidated 8,242-38, ,704 70% Company s share 4,616-21, ,428 76% Consolidated 11, ,067 17% Company s share 3, ,154 10% Consolidated ,866 1% Company s share ,045 1% Consolidated - - 3,299 14,019 5% Company s share - - 1,847 7,851 5% Consolidated 104, , , % Company s share 46,076-97, , % Consolidated..% - 1.% 488% - Company s share.2% - 11% 488% -

152 (b) 2849 %of total Total NIS NOI of the Region Uses Offices Industry Commercial thousands properties Czech Republic Consolidated 4, ,016 7% In EUR thousands Company s share 2, ,089 7% Romania In EUR thousands Serbia In EUR thousands Bulgaria In EUR thousands Germany In EUR thousands Poland In EUR thousands Total In NIS thousands % of the total NOI of the properties Consolidated 5,340-34, ,121 65% Company s share 2,990-19,300 96,119 71% Consolidated 10, ,171 18% Company s share 3, ,884 10% Consolidated ,324 1% Company s share ,302 1% Consolidated - - 5,351 23,073 9% Company s share - - 2,996 12,921 10% Consolidated ,137 0% Company s share % Consolidated 89, , , % Company s share 38,170-96, , % Consolidated 34% 8% 66% 100% -- Company s share 28% 0% 72% 100% -- (c) 2014 Region Uses Offices Industry Commercial Czech Republic In EUR thousands Romania In EUR thousands Serbia In EUR thousands Bulgaria In EUR thousands Germany In EUR thousands Poland In EUR thousand The Netherlands In EUR thousands Total In NIS thousands % of the total NOI of the properties Total (in NIS thousands) % of total NOI of the properties Consolidated 3, ,441 39,312 13% Company s share 1, ,487 21,398 14% Consolidated 3,566-33, ,817 60% Company s share 1,997-18,474 97,191 65% Consolidated 10, ,547 17% Company s share 3, ,900 10% Consolidated ,516 1% Company s share ,409 1% Consolidated - - 5,568 26,435 9% Company s share - - 3,118 14,803 10% Consolidated ,143 0% Company s share % Consolidated % Company s share % Consolidated 86,654 1, , , % Company s share 35, , , % Consolidated 29% 0% 70% 100% 0% Company s share 23% 0% 76% 100% 0% 149

153 (6) Following are data on gains and losses on revaluation, by region and usage, for 2016, 2015 and 2014: (a) 2016 Region Uses Offices Industry Commercial Czech Republic In EUR thousands Romania In EUR thousands Serbia In EUR thousands Bulgaria In EUR thousands Germany In EUR thousands Total In NIS thousands % of the total NOI of the properties Total (in NIS thousands) %of total NOI of the properties Consolidated 3, ,983 4% Company s share 2, ,511 4% Consolidated 21,957-28, ,072 49% Company s share 12,296-15, ,309 51% Consolidated 11, ,150 11% Company s share 3, ,179 6% Consolidated (1,902) - - (8,083) (2%) Company s share (1,065) - - (4,526) (2%) Consolidated , ,777 38% Company s share ,241 94,515 41% Consolidated 149, , , % Company s share 71, , , % Consolidated.1% - 11% 488% - Company s share.4% - 15% 488% - (b) 2015 Region Uses Offices Industry Czech Republic In EUR thousands Romania In EUR thousands Serbia In EUR thousands Bulgaria In EUR thousands Germany In EUR thousands Poland In EUR thousand The Netherlands In EUR thousands Total In NIS thousands % of the total NOI of the properties Commercia l Total (in NIS thousands) % of total NOI of the properties Consolidated 1, ,476 2% Company s share ,507 2% Consolidated 6,528-33, ,143 77% Company s share 3,656-18,286 94,618 79% Consolidated 3, ,615 7% Company s share 1, ,996 4% Consolidated (1,992) - - (8,590) (4%) Company s share (1,116) - - (4,810) (4%) Consolidated - - 9,037 38,969 18% Company s share - - 5,061 21,823 18% Consolidated % Company s share % Consolidated % Company s share % Consolidated 40, , , % Company s share 18, , , % Consolidated 18% - 82% 100% Company s share 15% - 85% 100% 150

154 (c) 2014 Region Uses Offices Industry Commercial Czech Republic In EUR thousands Romania In EUR thousands Serbia In EUR thousands Bulgaria In EUR thousands Germany In EUR thousands Poland In EUR thousand The Netherlands In EUR thousands Total In NIS thousands % of the total NOI of the properties Total (in NIS thousands) % of total NOI of the properties Consolidated (1,680) 277 (2,190) (17,061) (11%) Company s share (941) 155 (1,226) (9,554) (11%) Consolidated 8,129-25, , % Company s share 4,552-14,212 89, % Consolidated ,205 2% Company s share % Consolidated (2,634) - - (12,505) (8%) Company s share (1,475) - - (7,003) (8%) Consolidated - - 4,568 21,687 14% Company s share - - 2,558 12,145 14% Consolidated - - (41) (195) 8% Company s share - - (23) (109) 8% Consolidated (275) - - (1,306) (1%) Company s share (154) - - (731) (1%) Consolidated 20,012 1, , , % Company s share 10, ,687 84, % Consolidated 13% 1% 86% 100% Company s share 12% 1% 87% 100% (7) Following are data on average rentals per sqm, by region and usage, in EUR: Uses Offices Industry Commercial For the year ended For the year ended For the year ended Regions December 31 December 31 December Czech Republic Romania Serbia Bulgaria Germany Poland Concerning the above table it should be stated that the wide range of rents is due inter alia to the difference in the quality of the rented premises, the age and level of finish of the various properties included in the table, as well as other, similar parameters that do not feature in this table3 151

155 (8) Following are data on breakdown of average occupancy rates by region and use: Offices Industry Commercial As at 31 December 1026 Year 1026 Year 1025 As at 31 December 1026 Year 1026 Year 1025 As at 31 December 1026 % Czech Republic 5.% 11% 75% Romania 5.% 11% 97% % 55% 98% Serbia 11% 11% 92% Bulgaria.8% 21% 21% Germany % 52% 88% Poland % Year 1026 Year 1025 (9) Following is a breakdown of the number of the Group s rental properties in Europe by region and use: Uses Offices Industry Commercial Regions Czech Republic For the year ended December 31 For the year ended December 31 For the year ended December Romania Serbia Bulgaria Germany* Poland Total (*) Most of the properties in Germany include residential and commercial3 (10) Following is a breakdown of the actual average returns on the Group s rental properties in Europe (at end of year value), by region and usage (%): Uses Offices Industry Commercial Regions For the year ended December 31 For the year ended December 31 For the year ended December Czech % 5.2% - - Republic Romania 5.7% 7.3% % 7% Serbia 8.2% 8.1% Bulgaria 1.9% 2.2% Germany % 4.5% Poland % 152

156 (11) Following are data on the Group s anticipated income in Europe from signed rental contracts*: Assuming non-exercise of lease option periods Assuming exercise of lease option periods Income fixed components (in NIS thousands) Income from variable components (NIS thousands) Area of contracts ending (in sqm thousands) Income fixed components (in NIS thousands) Income from variable components (NIS thousands))**( Area of contracts ending (in sqm thousands) Period revenue recognized No. of contracts ending No. of contracts ending Q ,082 3, ,126 3, Q ,027 3, ,254 3, Q ,873 3, ,092 3, Q ,044 4, ,448 4, ,492 11, ,199 11, ,958 11, ,319 11, ,812 11, ,272 11, and thereafter 214,775 11, ,818 11, Total 1,102,062 60,220 1, ,204,528 60,220 1, (*) Translated according to the foreign exchange rate at the end of the period. (**) The income from variable components varies based mainly on the income from the malls based on the actual income received during (12) Following are aggregate data on the Group s rental properties in the construction stages in Europe: Region Romania AFI Tech Park, Bucharest (Stage 1) Parameters Total area under construction (planned) at end of period (in sqm thousands) Total costs invested in the current period (consolidated) (in EUR thousands) The amount at which the properties are presented in the statements at end period (consolidated) (in EUR thousands) Construction budget for following period (estimate) (consolidated) (in EUR thousands( Total estimated construction budget balance to complete construction work (consolidated) (estimate at end period) (EUR thousands) Percentage of built space for which lease contracts have been signed )%( December 31, 2016 Year ended December 31, 2015 December 31, , , , ,

157 Region Romania Mall and office buildings in Brasov, Romania Parameters Total area under construction (planned) at end of period (in sqm thousands) Total costs invested in the current period (consolidated) (in EUR thousands) The amount at which the properties are presented in the statements at end period (consolidated) (in EUR thousands) Construction budget for following period (estimate) (consolidated) (in EUR thousands( Total estimated construction budget balance to complete construction work (consolidated) (estimate at end period) (EUR thousands) Percentage of built space for which lease contracts have been signed )%( December 31, 2016 Year ended December 31, 2015 December 31, , , , , % - - Region Czech Republic AFI Vokovice office building in Prague AFI Butterfly Karlin office building in Prague Parameters Total area under construction (planned) at end of period (in sqm thousands) Total costs invested in the current period (consolidated) (in EUR thousands) The amount at which the properties are presented in the statements at end period (consolidated) (in EUR thousands) Construction budget for following period (estimate) (consolidated) (in EUR thousands) Total estimated construction budget balance to complete construction work (consolidated) (estimate at end period) (EUR thousands) Percentage of built space for which lease contracts have been signed (%) Total area under construction (planned) at end of period (in sqm thousands) Total costs invested in the current period (consolidated) (in EUR thousands) The amount at which the properties are presented in the statements at end period (consolidated) (in EUR thousands) Construction budget for consecutive period (estimate) (consolidated) (in EUR thousands) Total estimated construction budget balance to complete construction work (consolidated) (estimate at end period) (EUR thousands) Percentage of built space for which lease contracts have been signed (%) December 31, 2016 Year ended December 31, 2015 December 31, , , , , , ,908 12,716-25,512 15,492-25,512 42,

158 Region - Serbia ACB Office building in Belgrade. Phase 4 Parameters Total area under construction (planned) at end of period (in sqm thousands Total costs invested in the current period (consolidated) (in EUR thousands) The amount at which the properties are presented in the statements at end period (consolidated) (in EUR thousands) Construction budget for following period (estimate) (consolidated) (in EUR thousands) Total estimated construction budget balance to complete construction work (consolidated) (estimate at end period) (EUR thousands) Percentage of built space for which lease contracts have been signed )%( December 31, 2016 Year ended December 31, 2015 December 31, , , , , % - - (13) Following are data on land categorized as real estate for investment or zoned for development of (a) the Group s rental properties in the various countries: The data in the tables in this paragraph (13) below are presented according to the share of Africa Properties (in which the Company holds 56% of the issued shares and voting rights at the date of this Periodic Report)3 Poland: Property AFI Park Krakow Percentage holding 200% The amount at which the land is presented in the December 31, statements at end period (consolidated) (in EUR thousands) December 31, ,078 Total area of land at end of period (in sqm thousands) December 31, December 31, Total building rights in land under December 31, approved plans, according to uses (sqm Offices thousands) December 31, (b) Serbia: Property Airport City, Belgrade Skyline (MUP) Total Percentage holding 5.37% 96% The amount at which the land is presented in the statements at end December 31, , period (consolidated) (in EUR thousands) December 31, , Total area of land at end of period (in December 31, sqm thousands) December 31, Total building rights in December 31, land under approved Offices plans, according to uses December 31, (sqm thousands) 155

159 (c) Bulgaria: Property Business Park Varna Plovdiv Logistic Center Total Percentage holding 200% 75% The amount at which the land is presented in the statements at December 31, ,330 3,525 10,855 end period (consolidated) (in EUR thousands) December 31, ,424 3,702 11,126 Total area of land at end of December 31, period (in sqm thousands) December 31, Total building rights in land according to approved plans, by use (sqm thousands) Logistics Offices December 31, December 31, December 31, 2016 Building rights exists with respect to an area of thousand sqm. A building December 31, 2015 permit has not yet been received3 (d) Hungary: Property Clubaliga Percentage holding 50% The amount at which the land is presented in the statements at end period (consolidated) (in EUR thousands) Total area of land at end of period (in sqm thousands) Total building rights in land under approved plans, by use (sqm thousands) Residential, commercial, and hotel December 31, ,656 December 31, ,656 December 31, December 31, December 31, 2016 December 31, 2015 There is a suitable CBP building permits pending (e) Romania: The amount at which the land is presented in the statements at end period (consolidated) (in EUR thousands) Total area of land at end of period (in sqm thousands) Total building rights in land under approved plans, by use (sqm thousands) Commercial (sqm thousands) Offices (sqm thousands) Property Arad Percentage holding 200% December 31, ,770 December 31, ,780 December 31, December 31, December 31, December 31, December 31, December 31,

160 (14) Following is information on the purchases and sales of the Group s rental property in Europe commencing January 1, 2014: Sales Property AFI Palace Pardubice D8 European Park Land- Teltower Damm Aachen 1 - Peterstrasse Aachen 2- Hansemannplatz Krakow commercial center Date sold November 6, 2014 April 14, 2010 May 7, 2014 March 13, 2015 January 8, 2015 November 1, 2015 Country Czech Republic Czech Republic Germany Germany Germany Poland Name of holding company Percentage holding Proceeds from Sale (Consolidated) (Euro thousands) Percentage ownership sold Area sold (consolidated) (in NIS thousands) NOI of the property sold(*) (consolidated) (in EUR thousands) Profit/loss recorded on sale of the property/ shares (consolidated) (in EUR thousands) Value of property sold according to the transaction (in EUR thousands) Value at last valuation (in EUR thousands) Date of last valuation Bohemia Sen s.r.o National Technology Park s.r.o. Margalit Teltower Damm Grundstucks GmbH Peerly Peerly Grundstücks novo maar Sp. Z.o.o 488% 98% 488% 488% 488% 100% In the transaction, the shares the Company held in the property were sold net pre-tax cash flows were EUR 23 million3 In the transaction, the shares the Company held in the property were sold net pre-tax cash flows were EUR 1.9 million ,860 5,680 3, % 100% 100% 100% 100% 100% 21 Rental property, Group s share is 10,000 sqm, land area is 77,000 sqm. 4, (7) 6 2,816 4,839 2,041 EUR 60 thousand in 2015; EUR 280 thousand in a full year EUR 860 thousand, EUR 490 thousand less transaction costs and loan breaking charges EUR 281 thousand in 2015; EUR 350 thousand in a full year EUR 473 thousand, EUR 33 thousand less transaction costs and loan breaking charges 83,050(**) - - 3,860 5,200 3,122 85, ,000 5,170 3,187 September 30, September 30, 2014 September 30, (66) September 30, **According to the sale agreement, the price of the shares was determined on the basis of a 42.5% deduction of the deferred tax reserves alone, applying to the property3 157

161 Hildesheim er Straße 46 - Kaiser- Friedrich- Str. 1/Weseler Str Hofkamp 9 / Wilbergstr Gökerstra ße Wilhelmsh Schloss 95 Dreilinden strasse, Leipzig Lavesstraß e 71 - Hannover Hannover Böhmer Straße 2 - Hannover Duisburg Wuppertal aven Date sold March 29, December 7, October 31, December December April 29, May 18, April 27, , , Country Germany many many many many many many many Name of holding company Percentage holding Proceeds from sale (consolidated) (Euro thousands) Percentage ownership sold Area sold (consolidated) (NIS thousands) NOI of the property sold (consolidated) (EUR thousands) Profit/loss recorded on sale of the property/ shares (consolidated) (EUR thousands) Value of property sold according to the transaction (EUR thousands) Value at last valuation (EUR thousands) Date of last valuation Harel Peerly Grundstücks Peerly Grundstücks Peerly Grundstücks Peerly Grundstücks Peerly Grundstücks Peerly Grundstücks Peerly Grundstücks 100% 100% 100% 100% 100% 100% 100% 100% 9, % 100% 100% 100% 100% 100% 100% 100% 2.07 Land EUR 89 thousand in 2016, EUR 335 thousand in complete year EUR 1,830 thousand. EUR 1,155 thousand less transaction costs and loan breaking fees Land EUR 27, thousand. EUR 25 thousand less transaction costs and loan breaking fees EUR 11 thousand in 2015, EUR 56 thousand in complete year EUR (10) thousand. EUR (131) thousand less transaction costs and loan breaking fees EUR 21 thousand in 2015, EUR 84 thousand in complete year EUR 259 thousand. EUR 127 thousand less transaction costs and loan breaking fees EUR 17 thousand in 2015, EUR 66 thousand in complete year EUR 234 thousand. EUR 114 thousand less transaction costs and loan breaking fees EUR 14 thousand in 2015, EUR 183 thousand in complete year EUR (995) thousand. EUR (1,160) thousand less transaction costs and loan breaking fees EUR 6 thousand in 2015, EUR 74 thousand in complete year EUR (440) thousand. EUR (548) thousand less transaction costs and loan breaking fees EUR 4 thousand in 2015, EUR 31 thousand in complete year EUR (270) thousand. EUR (308) thousand less transaction costs and loan breaking fees 7, , September 30, 2014 September 30, 2014 September 30, 2014 September 30, 2014 September 30, 2014 September 30, 2014 September 30, 2014 September 30,

162 E. Following are detailed data on the Group s material real estate property for investment in Europe Cotroceni Mall in Romania 1 (1) Description of the property Property name: Location of the premises: Area of the property (sqm) Details as at December 31, 2016 Cotrocini Mall Bucharest Romania Commercial 85,705 Offices 1,309 Structure of holdings in the property: AFI Europe 98.4%, public 1.6% The Company s effective share in the property: 5131% Names of partners in the property: Public Date of acquisition of the property: November 23, 2014 Details of the legal rights in the property: Situation with regard to registration of legal rights: Special issues: Presentation method in the Financial Statements: Material non-utilized building rights Exclusive ownership rights registered in the subsidiary s name, Cotroceni Park SA The property is pledged to the financing banks None Consolidation None 1 It should be stated that although this property does not come under the definition of an extremely material property, in view of the fact that it appears as an extremely important property in the financial statements of Africa Israel, a public company, and since the data set out in this paragraph in connection with the property is included in Africa Properties annual report, the Company3has chosen to include the following data in the context of this business segment. The data in the tables in this subparagraph (E) are presented according to the share of Africa Properties (in which the Company holds, at the date of this Periodic Report, 56% of the share capital and the voting rights). 159

163 (2) Following are main data: (Data at 100%. Group s share in property 98.4%) Fair value at end of period (in EUR thousands) 468, , ,039 Book value at end of period (in NIS thousands) 1,893,703 1,847,180 1,894,749 Estimated profit (loss) (in EUR thousands) 29,711 31,621 24,985 Average occupancy rate )%( 98.4% 98.2% 97.8% Rented Vacant Rented Vacant Rented Vacant Space Commercial 78, ,799 1,103 77,864 1,458 actually rented Offices , , (sqm( Total 79,244 1,270 80,939 1,463 79,004 1,818 Total revenues (in EUR thousands) 31,574 29,280 28,758 Average monthly rent per sqm (NIS) Average rents per sqm in contracts signed in the period (EUR) NOI (in EUR thousands) 33,793 30,713 29,779 Adjusted NOI (in EUR thousands) 34,440 31,252 30,736 Actual yield rate )%( 7.22% 7.06% 7.43% Adjusted actual yield rate )%( 7.35% 7.19% 7.66% Number of tenants as at end of reporting year Ratio of rent to total income 12% 12% 14% Euro Shekel exchange rate at end of the report year Data at 100%. Africa Properties share in the property 98.4% In EUR thousands Original construction cost Additional costs for expansions 10,702 Date land purchased November 23, 2881 (3) Following are revenue structure and cost segmentation: (Data at 100%. Africa Properties share in the property 98%) Revenues: (in EUR thousands) From rents fixed 28,602 27,525 27,311 From rents variable 2,972 1,755 1,448 From management fees 11,460 10,036 8,719 Total revenues 43,034 39,316 37,478 Costs: Management, maintenance and operation (9,241) (8,603) (7,699) Total costs: (9,241) (8,603) (7,699) Profit: 33,793 30,713 29,779 NOI: 33,793 29,779 28,719

164 (4) Following are details of the main tenants in the properties (Data at 100%. Africa Properties share in the property 98%) % of property area attributed to tenant in 2016 Tenant accounts for 20% or more of the property s revenue? Tenant s sectoral attribution Tenant A 45% no Hypermarket Tenant B 5% no Cinema Tenant C 9% no Fashion + household wares Tenant D 1% no Fashion Tenant E.% no Fashion Remaining contract period (years) 1 years remaining 3 years remaining 3 years remaining 3years remaining 4 years remaining (*) Linked to MUICP- Monetary union of consumer prices. Options for extension (years) Rental agreement Review mechanism or rent linkage Indexlinked Indexlinked Indexlinked Indexlinked Unlinked Details of guarantees Parent company guarantee Parent company guarantee Indicate special dependence Parent company guarantee Parent company guarantee - - (5) Following are data on the anticipated revenues for signed rental contracts in the property: (Data at 100%. Group s share in property 98.4%) For year ending EUR thousands 1011 and thereafter Fixed components 26,011 22,425 18,124 10,186 14,361 Variable components (estimate) 3,246 2,632 2,591 2,625 2,702 Total 29,257 25,056 20,716 12,811 17,

165 (6) Following are details of specific financing received for the property: Specific financing Loan Balance in report on financial state December 31, 2016 Presented as short-term loan 8,252 (EUR thousands) Presented as long-term loan 189,164 December 31, 2015 Presented as short-term loan 8,252 (EUR thousands) Presented as long-term loan 199,373 Fair value at December 31, 2016 (end of reporting year) (NIS thousands) 798,311 Fair value at December 31, 2015 (end of reporting year) (NIS thousands) 881,742 Date original loan taken August 2014 Extent of original loan (EUR thousands) Effective interest rate as at December 31, % Payment dates of principal and interest Quarterly Main financial covenants LTV ratio of up to 70%, debt coverage ratio (principal and interest) of 1.1 for the year State if main stipulations or financial covenants were breached or at the end of the Report year Non-recourse type No Yes (7) Following are mortgages and material legal restrictions on the property: Type Details Encumbrances Senior Mortgage on the building and the land Other Pledge on shares, bank account, and payments to receive The amount guaranteed by lien at the end of 2016 EUR thousands (8) Details of valuation conducted in respect 0f the property: (Data at 100%. Africa Properties share in the property 98%) Value determined (in EUR thousands) ,039 Appraiser s identity CBRE CBRE Is the appraiser independent? Yes Yes Is there an indemnification agreement? No No Validity date of valuation (the date to which the valuation refers) September 30, 2016 September 30, 2015 September 30, 2014 Valuation model Capitalization of revenues Capitalization of revenues Capitalization of revenues 162

166 (9) Key parameters used in making the valuation Gross leasable area taken into account in the calculation (sqm) Representative occupancy rate out of the gross leasable area for the purpose of the valuation Average representative rents {monthly/annual] per leased sqm for valuation purposes (EUR) NOI/representative cash flow for valuation purposes (in EUR thousands) 87,014 82, % 488% 488% 414/ / / Capitalization rate 7.39% 7.56% 1% Analysis of sensitivity to value: Capitalization rates Average rents per sqm Change in value in EUR thousands Increase of 0.25% 466, , ,783 Decrease of 0.25% 468, , ,005 Increase of 5% 486, , ,215 Reduction of 5% 447, , ,797 F. Following is a table summarizing, at the date of this Periodic Report, the Company s Group investments in associated companies holding rental property (in NIS thousands): 1 Holding structure Promot Hungaria Kft Property description Ground for real estate for development Percentage holding as at December 31, 2016 Cost of the investment in the Company s consolidated financial statement as at December 31, 2016 Owners loans as at December 31, 2016 Company s share of profit (loss) 2016 Company s share of profit (loss) 2015 Company s share of profit (loss) 2014 Company s share of profit (loss) accumulated at December 31, 2016 Total investment in the Company s consolidated statements as at December 31, % (1,876) 43,515 (450) (750) (5,151) (7,125) 41, Customers A. The Group has more than 1,600 customers in Europe renting different sizes of areas from it for a variety of uses. B. The Group s customers are private customers and commercial companies with various characteristics and a wide distribution. As at the date of this Periodic Report, the Group does not have a tenant the rental income from which is 10% or more than the Group s income Marketing and distribution As a rule, the Group s marketing and distribution means in the rental property sector in Europe are similar to the means previously stated in the rental property in Israel sector (see paragraph above) and its activities in the development of residential real estate in Europe (see paragraph above). 1 According to Group policy, investees held 50% of less are no longer consolidated as at January 1,

167 Competition The characteristics of the competition in the Group s activities in the rental property market in Europe are similar in nature to the characteristics of the competition in the rental property sector in Israel (for details see paragraph above) Additional information about the real estate development and rental property sector in the Europe as a whole Human capital For details of the human capital in the Group as a whole see paragraph 1.17 hereinafter Raw materials and suppliers In the real estate development and rental sector in Europe the Group sets up projects through contractors (including through Danya Cebus), on the turn-key contract system Working capital For details of the working capital with regard to the Group s rental properties activities in Europe see paragraph above Financing A. AFI Europe finances its activities from working capital invested by AFI Properties, owners loans, and specific credit against projects. B. The value of the Group s total unpledged assets in Europe as at December 31, 2016 is NIS 823 million. C. The balance of the Group s real estate in Europe, including the European company s real estate for investment and real estate for investment under construction as at December 31, 2016 of NIS 5,150 million, is pledged. D. Financial covenants In some of the Group s financing contracts in its European operations in this activity sector, a number of subsidiaries of AFI Europe have given undertakings to the financing banks to maintain certain financial ratios determined in the agreements and to keep minimum cash balances. The main financial covenants are: (a) maintaining the ratio determined between periodic net revenues from rents and periodic loan repayments and other similar ratios; (b) maintaining the ratio determined between the balance of unpaid loans and the fair value of the project that is the subject of the loan; (c) various reporting requirements. As at December 31, 2016 and the Report Date, all the Group companies met the following financial criteria: 164

168 F. Following are details of the total credit balances of AFI Europe (including its consolidated companies), as at December 31, 2016: Total credit Type of credit balance (NIS thousands) Balances in respect of bonds - Balances in respect of bank credit Balances in respect of ex-banking credit Balances in respect of owners loans (including under financing agreements in the Group) Total liabilities: G. For additional information on financing for the Group s activities in the rental property sector and in the real estate development and rental sector in Europe, see paragraph above Taxation In 2014, a subsidiary of Africa Europe in Romania, received a notification from the authorities regarding additional amounts of purchase tax it was required to pay for previous years totaling EUR 4.6 million (including interest and fines) (hereinafter: the Subsidiary ). In 2014, the Subsidiary paid these amounts although it disagreed with the Romanian authority s position and considered that it had good counterclaims, based on the position of its advisors, among other things. The Subsidiary filed an appeal with the Romanian authorities. These amounts are included as part of other expenses item in At the end of July 2015, notification was received from the Romanian prosecutor s office of a decision to initiate criminal proceedings against the Subsidiary and three of its employees on charges of tax evasion, including in connection with the another alleged debt of the Subsidiary for building fees in the amount of EUR 68,000 (not including arrears interest and fines) (hereinafter: the Prosecutor s Decision ). In October 2015, charges were brought against the Subsidiary and against three of its employees by the Romanian prosecutor s office. In the opinion of the Subsidiary s legal counsel, there were serious flaws in the Romanian authority s decision-making process, including in connection with the legality of the investigation process. The Subsidiary and its employees therefore applied to the courts with the aim of securing the cancellation of these decisions and dismissing the legal proceedings. On March 10, 2016, after the date of the report on the financial position, a court decision was handed down in a preliminary proceeding, rejecting claims of flaws in the investigation process and the further continuation of the legal proceeding. In March-April 2016, the Subsidiary and its employees filed an appeal against the decision, which was denied. The trial commenced in September In any event, without entering into the potential vacation of those decisions related to the actions taken until now, the opinion of the Subsidiary s legal counsel and its employees is that they have 165

169 sound defense arguments against a conviction, because the elements required by Romanian law for a criminal conviction do not obtain. As stated above, in 2014, the Subsidiary paid the bulk of the amount of tax that is the subject of the proceedings described above (the additional purchase tax), although it still disagrees with the Romanian authority s position on the actual tax debt. Based on the opinion of the Subsidiary s legal counsel, Company management considers that the proceedings described above are not expected to have any material effect on the Company s financial statements as at December 31, For additional details regarding taxation, including the percentages of company tax applying in the various countries in which the Group operates in Europe, see Note 30 to the Company s Consolidated Financial Statements as at December 31, Environmental protection In view of the legislation being developed in the area of quality of the environment in various countries in which the Group operates, the Group is conducting various surveys (such as an environmental survey to ensure that its activities in the various projects in this operating sector comply with the relevant provisions of the law) Goals and business strategy 1 A. The Group concentrates on constructing projects on land it owns and will consider beginning the construction of a number of projects in Europe depending on an examination of the market and the possibility of raising finance to construct these projects on suitable terms. The Company is also examining entry into a number of new projects. The Group is in contact with several local banks to finance the projects. B. As for other projects, construction of which has not yet commenced, the Group is re-examining the date for starting each project and will discuss the option of commencing construction, paying attention to, among other things, market conditions in the relevant countries as well as the possibility of raising finance for the construction of projects on suitable terms. At the same time, the Company is engaged in appreciating the land on which actual construction work has not yet started, by obtaining the various approvals necessary for construction Forecast of developments in the coming year In the coming year, the Group is expected to complete the construction of an additional office building in Airport City, Belgrade with a rentable area of 13,300 sqm (30% of the areas are leased), expansion of the Cotroceni Mall by 6,500 sqm (of this area, a lease has been signed with P&C for 5,170 sqm), and the construction of the Buttery office building in Karlin Prague, with a rentable area of 21,000 sqm. Furthermore, the Group will continue the construction of the following rental projects: a mall in Brasov Romania of a rentable area of 40,000 sqm commercial areas and 19,000 sqm office 1 It is hereby clarified that the information in this paragraph included forward-looking information based only on estimates of the state of the market in which the Group operates and therefore these estimates may not materialize or will materialize other than presented by Africa Properties for reasons that are not known to Africa Properties at the date of this periodic report. 166

170 areas; Phase 1 of AFI Tech Park in Bucharest, Romania (formerly INOX) of a rentable area of 21,000 sqm, and the AFI Vikovice project in Prague, Czech Republic, with a rentable area of 15,000 sqm. In the forthcoming year, the Group will commence construction on AFI Park Krakow, Poland, with a rentable area of 24,000 sqm and the Skyline project in Belgrade, which includes an office building with 21,300 sqm for rent, commercial area of 7,200 sqm for rent, and two stages of residential areas of 25,000 sqm for sale. The Group will also commence construction on an office building in the Central Garden project with a rentable area of 15,000 sqm. The Company is expected to commence the construction on the following residential projects: Phase 1 of Trebu Home (formerly Solville) in Latvia; the third stage in the Tulipa Trebsin project in Prague, which includes 252 housing units; the Zlota 83 project in Warsaw, Poland, with 80 units; the first stage in the B NOI project in Bucharest, Romania with 190 units; and an additional stage in the AFI City project in Prague, with 216 housing units. Furthermore, the Group will continue to focus on selling the inventory of completed apartments in Sophia, Bulgaria, and in Krakow, Poland, and on the transition to an additional stage in the Group s residential project in Krakow, Poland. The Group also intends to study additional acquisitions of projects in the countries in which the Group operates. In the next few years the Group intends to develop lands, the value of which in the Company s books totals NIS 360 million, and constitute 35% of the remainder of the Group s lands in Europe. The Company s intentions described in this paragraph above are forward-looking information based, among other things, on the Company s estimates of the Group s economic and commercial development taking its past experience into account. Said estimates may not actually be realized or may be realized differently from what the Company expects because of various external factors, including the state of the real estate market in Europe and the state of the financial markets overseas, or because of the occurrence of any of the Groups risk factors described in paragraph 1.22 below Risk factors (A) Macro risks 1. The rate of growth in the areas where the Group operates The rate of growth and the volume of activities in the countries where the Group operates have a material effect on the amount of demand for space to rent, the amount of demand in the residential sector, and the volume of activities in the malls owned by the Group. 2. Changes in interest rates Changes in the interest rates abroad affect the Group s financing expenses3 3. Exposure to various currencies The Company has loans and deposits in various currencies (foreign currency, linked shekels, and unlinked shekels) and fluctuations in the rates of exchange 167

171 (mainly against the euro) of the currencies and the consumer price index can have a positive or negative effect on the Groups financing revenues and expenses3 4. Changes in the capital markets in Israel and the rest of the world See paragraph above3 (B) Sector risks 5. The Group s overseas operations The Group s overseas operations expose the Company to the risks of the countries in which it operates. This exposure derives, among other things, from political and policy changes liable to have an effect on the economic state of these countries3 168

172 1.11 Discontinued Operations - Properties in the USA General information It should be noted that up to the Company s financial statements as of September 30, 2014, the Company presented real estate development and rental properties in the United States as one of its business segments. However, in view of the conclusion of the sales of a considerable share of the Group s properties in the United States in recent years, real estate development and rental properties operations in the United States no longer constitute a reportable business segment, and from the Company s annual financial statements as of December 31, 2014, these operations are no longer a business segment, and are presented under discontinued operations Most of the Company s activities in this segment were conducted by AI Holdings (USA) Corp., an (indirectly) wholly owned subsidiary of the Company, which is registered in Delaware in the USA (hereinafter, AFI USA ). As of the date of the statement of financial position, AFI USA no longer holds any real estate properties in the United States Real estate development in the USA As of the Reporting Date, the Company has no residential projects that have not been sold in entirety. In 2016, after the sale by the financing body of all the remaining apartments in the project, the Group wrote off the balance of the loan that was granted in the Apthorp project in the United States in the amount of USD 3.9 million (NIS 15.3 million) after the anticipated project cash flow was revised Additional information Human capital The Group s real estate business in the USA is managed under the supervision of a staff totaling 4 employees in New York. For information on AFI USA s agreement to receive general administrative services from Hagit Leviev, the daughter of the Company s controlling owner, see Regulation 22 of the Additional Information Chapter Taxation For details of the Company s taxation in this business segment, see Section 1.21 hereinafter. 961

173 1.12 Discontinued operations Real estate development and rental properties sector in Russia General information about the operating segment In 2000, a foreign subsidiary of the Company signed an agreement of principles with a foreign company for cooperation in the real estate sector in Russia and the CIS, and since 2000 the Group operated in the real estate sector in Russia. The Group operated in Russia through AFI Development, which is, since May 2007, a public subsidiary whose shares are listed on the main market of the main London stock exchange (LSE). In May 2007, AFI Development issued global deposit certificates (GDR, hereinafter, the Deposit Certificates"), which represent shares of AFI Development (at a ratio of one Deposit Certificate per share). In July 2010, 523,847,027 Class B shares of AFI Development were issued and listed on the main market in London Sale of the Company s holdings in AFI Development On March 30, 2016, AFI Development issued an immediate report concerning the receipt of a notice from a Russian Bank (hereinafter, the Bank or the Russian Bank ) addressed to two subsidiaries of AFI Development (hereinafter, the Borrowers ) in connection with loans that it had granted the Borrowers in the AFI Mall and Ozerkovskaya III projects. According to the Bank s notice, it had come to the conclusion that a material adverse change in the financial position of the Borrowers had occurred, in the Bank s opinion, and that there are additional indications that the Borrowers undertakings according to the financing agreements will not be repaid as scheduled. In view of this, the Bank suggested that action be taken to eliminate the potential negative implications of said circumstances within 30 days, otherwise, the Bank would exercise its rights under the financing agreements and demand early repayment of the loans. In the Company s immediate report dated May 17, 2016, the Company gave notice that the parties examined the option that the loans would be discharged against transfer to the Bank of several material assets of AFI Development, whose total book value as of March 31, 2016 was USD 877 million (hereinafter, the Exchange Transaction ). Subsequently, on May 26, 2016, AFI Development gave notice that the Russian Bank had given it a written notice of its intentions to take steps to exercise its rights under the financing agreements and demand immediate repayment of the loans if the Exchange Transaction is not concluded by June 10, 2016; The parties subsequently agreed on a date not later than June 15, Subsequently, on July 18, the Company (with the consent of the trustees of bondholders series Z-BB; hereinafter, the Trustees and the Bondholders, as relevant) filed a motion with the Tel Aviv District Court for remedies, and requested that the court certify and order that the sale of AFI Development shares owned by the Company (64.88% of the issued share capital of AFI Development), and which is mostly (85%) charged in favor of the Trustees) to Mr. Lev Leviev, the Company s controlling shareholder, should be performed subject to approval of the meetings of the bondholders series Z-ZB, and to approve an exemption on behalf of the 170

174 bondholders (hereinafter, the Exemption ) without the need for approval by the Company s shareholders (hereinafter, the Sale ). The parties agreed that in consideration for the purchase of the Company s holdings in AFI Development, the Company s controlling shareholder will pay NIS 550 million, no later than 36 days after the date on which all the conditions precedent defined in the Sale obtain, and that the controlling shareholder will grant the Company the right to purchase up to 10% of AFI Development s total securities from him for a specific consideration and under specific terms, that reflect a price equal to 122% of the price at which the controlling shareholder purchased these securities from the Company. This right will be assigned to the Trustees on the Sale closing date (according to the ratio between the cash payment, to be divided to each of the bond series)(hereinafter, the Options ). It was further agreed that the cash payment would be used in entirety to make a partial early repayment of principal and interest to the bondholders. On July 25, 2016, the [bondholders] pf the Company s three bond series approved the Sale and on that date, the Company and the controlling shareholders signed a sales agreement. On July 28, 2016, the court certified the sales agreement and on August 5, 2016 approval of the securities authority of Cyprus was received, stating that there was no requirement to issue a tender offer for AFI Development securities and accordingly, the conditions precedent for the Sale according to the dates defined therein obtained. On September 7, 2016, the Sale was concluded and on that date, a subsidiary wholly controlled and owned by Mr. Leviev transferred the full consideration for AFI Development s securities in the amount of NIS 550 million to the trust accounts in the names of the Trustees. Furthermore, on the closing date, Mr. Leviev granted the Options to the Company, for no consideration, with respect to 10% of the total securities of AFI Development, and accordingly the Company assigned its rights to the trustees of those bondholders of series Z-BB who own bonds (series Z-ZB) on the determining date for the early repayment, and to them alone. On September 20, 2016, the Company issued an immediate report that it had received from the Trustees regarding the division of the Options and on September 25, 2016, the Company used the amount of the consideration to make partial early repayment of bonds (series Z-BB). For additional information on the Sale and revisions to the Sale, see immediate reports dated July 18, 2016 (ref. no ), dated July 21, 2016 (ref. nos and ), dated July 24, 2016 (ref. no ), dated September 8, 2016 (ref. no ), dated September 17, 2016 (ref. no ), and dated September 20, 2016 (ref. no ). For additional information on the implications of the Sale for the Company s financial statements, see Notes 1B(1) and 4A to the Company s consolidated financial statements as of December 31,

175 It should be noted that in view of the closing of the Sale, the Company reports on the real estate development and rental properties segment in Russia as discontinued operations in its financial statements as of December 31, For additional information also see the immediate reports published by the Company on May 17, 2016, May 26, 2016, June 1, 2016, and June 12, 2016 (ref. nos , , and , respectively). The information contained in these immediate reports is included herein by reference General description of the Group s operations in the operating segment The Group planned, developed, and constructed commercial properties and office buildings for rent, and housing units for sale. The Group s revenues from its operations in Russia stemmed mainly from the development, re-development, and sale of commercial properties, office buildings, and residential properties, either independently or jointly with its partners in joint ventures, and from rentals of the rental properties and hotels that the Group owns. 172

176 1.13 Construction contracting sector The Group s activities in the construction contracting sector are performed mainly by the Company s subsidiary, Danya Cebus Acquisition of Danya Cebus shares On June 17, 2015, the Company approached all the shareholders of Danya Cebus and presented a complete tender offer to them with respect to all the shares they own, conditional upon the purchase of all the offered shares (5,192,036 shares), pursuant to Section 336 of the Companies Law, all subject to the terms of the offer submitted by the Company on June 17, 2015, as amended on July 6, 2015 (hereinafter, the Tender Offer ). Pursuant to the Tender Offer, the Company purchased 5,192,036 shares of Danya Cebus for a total consideration of NIS 140 million (NIS 27 per share)(hereinafter, the Consideration ). Upon completion of the Tender Offer, the Company (directly and indirectly) holds 100% of the issued share capital of Danya Cebus, which became a private company and whose shares were delisted from the TASE on July 16, Collapse of Habarzel Car Park As noted in paragraph (a) above, on September 5, 2016, in the midst of construction works by Danya Cebus on the car park, several sections of the car park collapsed, killing six people and injuring 18. As a result, the construction works on the car park were halted until the conclusion of investigations by the competent authorities and the enforcement authorities. Subsequently, the Israel Police opened an investigation into this matter and interrogated several entities in Danya including its officers. As of the date of this Report, Danya Cenus is performing evacuation work, and work on the reinforcement and supports of the car park, with the approval and in coordination with of the Tel Aviv Municipality and the Israel Police. In view of this, and in view of the extent of the damage to the building, Danya Cebus will not be able to complete the construction of the car park by the determined date. After the balance sheet date, Danya Cebus, Africa Properties, and the Tel Aviv Municipality (which issued the tender for the planning, construction, and operations of the car park) reached an understanding and outlined a plan to govern the future construction works of the car park. It should be noted that since the above event occurred, Danya and Africa Properties have worked in cooperation vis a vis all the stakeholders, based on the joint commitment of these companies managements to return the project to its course. 1 In this Section 1.13, Danya Cebus includes the subsidiaries of Danya Cebus. 395

177 As noted, to construct the project, Danya Cebus entered into an insurance policy for contract works. The amount of the policy is NIS 64 million. The policy was extended beyond the insurance amount to include special extensions covering first loss and not subject to under-insurance. The policy also included coverage for third party liability up to NIS 20 million, and coverage of employer s liability up to NIS 40 million. Danya also has a general professional liability insurance policy in the amount of NIS 20 million. According to the assessment of Danya Cebus management, the potential damage that might stem from the collapse of the car park (independent of the issue of the liability for the damage) includes the costs of reconstructing the car park, including evacuation, reinforcement, and demolition works, payments for mental anguish and physical injuries of employees who were on the site, and other acillary costs. According to the estimates that Danya Cebys performed at this preliminary stage, Danya recorded an appropriate provision to cover the damage and the anticipated expenses. Furthermore, Danya recognized an indemnification asset in respect of a considerable share of the damage, based on an opinion of its legal advisors, according to which Danya is certain to receive the insurance benefits in the amount of the recognized indemnification asset for the damage that it incurred. Nonetheless, it should be noted this assessment of the exposure resulting from this complex and unusual event is based on the best judgment and data known to Danya Cebus today, and therefore, if additional and/or different data emerge, the assessment may by modified. For additional information on the collapse of the car park and the further construction works on the car park, also see Note 4C(1) to the Company s consolidated financial statements as of December 31, In this operating segment, the Danya performs construction work for various clients (including Group Companies and Group partnerships as these terms are defined below), from both the private and public/government sectors, for residential and non-residential uses, in and outside of Israel. In 2016, about 63% of the Group s revenues in this business segment were from residential construction and 37% of the Group s revenues in this business segment were from non-residential construction (mainly office and commercial space). In some projects, Danya operates on behalf of the Company and companies controlled thereby (in this section hereinabove and hereinafter, the Group Companies ), or on 396

178 behalf of investees that are not controlled by the Company (in this section below, the Group Partnerships ) Following are the main data from Danya Cebus financial statements (consolidated) (in NIS thousands): 2 Revenues Costs Gross profit (loss) Gross profit (loss) rate Profit (loss) before taxes Total assets as of For year ending December 31, 2016 For year ending December 31, ,254, ;34 3,027, , % ,135 65;; ,842,802 Residential construction Nonresidential construction Infrastructure 2015 Land Development Adjustments Consolidated Revenues :80 ) 5955:45( ;0 Total costs ;84579; 4:05:40 7;;5364 ) ( Gross profit/ business segment results ) 4;5634( 9959; : ) 45835( Residential construction Nonresidential construction Infrastructure 2016 Land Development Adjustments Consolidated Revenues 35;:;5;5; ;9658: :3573: ) ( Total costs 35;;;5;57 ;745: ; :0 ) ( ;34 Gross profit/ business segment results );5;;8( 435:67 :35: : ) 356:3( General environment and the impact of external factors upon the Company s activity Danya has operations in construction work in Bangkok. Thailand, in conjunction with a local partner. The scope of these works is not material. Furthermore, in late 2014, Danya Romania commenced work on projects in a West African country. The cumulative total of projects as of December 31, 2016 is EUR 14 million. In view of the 1 Including contracts with Africa Residences, which is a Danya Cebus subsidiary. 2 It should be clarified that the data in this table include the residential, non-residential construction, infrastructure contracting, and the realty development segments. For a description of the Group s operations in the infrastructure contracting sector, see Section 1.14 below. 397

179 client s demand, Danya discontinued its works on the projects and is no longer active in this country. Below is a description of the trends, events, and developments in the macroeconomic environment in each of the countries that Danya operates in, which to the best of its knowledge and assessment, have or will have material impact upon its activity its and business results The Israeli business environment For details concerning Israel s business environment, see Section hereinabove. A. Events, trends, and additional developments (1) Israel s diplomatic and security situation Israel s diplomatic and security situation has a direct impact on the real estate sector. Security crises are reflected in a temporary drop in the demand for housing units. For additional information see Section hereinabove. (2) The foreign currency market For additional information on the effect of changes in foreign currency exchange rates on the real estate sector, see Section hereinabove. (3) The banking system For additional information on the effect of the banking system on the real estate sector, see Section hereinabove. Danya estimates that Danya s strength constitutes an advantage in obtaining financing from bank and non-bank sources. B. Structure of the residential construction sector in Israel and changes therein For details concerning the residential construction sector in Israel, including a review of the main factors that, in the Company s opinion, directly affect the residential construction sector in Israel, see Section hereinabove The Romanian business environment For details on the business environment in Romania, see Section (b) hereinabove The business environment in the USA New York 1 The housing market in the city of New York expanded significantly in the past five years. Prices of apartments for sale or rent increased significantly in this period, yet according to a report by the real estate broker firm Douglas Elliman and the appraisal firm of Miller Samuel, a 20% drop in sales occurred in the third quarter of 2016 compared to the corresponding period of the previous year. The inventory of 1 From an economic review dated November 2016, published by TheMarker on the NY real estate market, which quotes the real estate broker firm of Douglas Elliman, the appraier firm of Miller Samiel, and the real estate broker firm of Maxwell Jacobs. 398

180 apartments in the market is tens of times greater than in the corresponding period two or three years earlier. Acccording to the real estate broker firm of Maxwell Jacobs, as of end October 2016, the apartment market is still weak. According to this report, the supply of apartments for sale increased by 5.4% over the previous year. The percentage of closed deals indicates a 26% decline from the previous year. Apartment prices declined by 11.6% compared to the corresponding period of the previous year. The median price of rental apartments has stabilized, according to the real estate broker firm of Douglas Elliman and the real estate appraiser firm of Miller Samuel at USd 3,347 per month, after concessions to renters, reflecting a 2% decline from the corresponding period of the previous year. Time to rent also increased by 4 days, to a total of 44 days. These data reflect a trend that has continued for one year in this market. According to assessment, the market is not making a correction, and a crisis is not expected although a 10% drop in prices is expected. Nonetheless, prices in New York remain very high. Housing prices in New York soared impressively in the past two decades, after the real estate market crisis in the late 1980s. Even after the financial crisis of 2008, the New York real estate managed to recover. Local Americans and foreigners want to move to the hottest location in the United States; The problem was that there were not enough apartments. The result was that prices jumped and the supply of apartments contracted. One of the reasons for the rising prices in Manhattan is the lack of available land. This fact influenced developers to purchase old buildings at high prices, in order to renovate them or demolish them and construct new buildings instead. Construction activity in New York is feverish. Available land that no one used to go near has now become attractive, such as the areas near the Hudson River, which once were considered very unsavory, have suddently sprouted high-rise residential towers. The high prices in Manhattan have also fueled the growing popularity of Brooklyn and certain areas in other boroughs. Many people have discovered that Brooklyn is much less expensive, and is sometimes more pleasant, and have started moving there. Areas in Queens have also suddenly become popular and developers follow demand. As a result, prices in Brooklyn have also risen. Today, a large number of residential construction projects are evident throughout Manhattan as well as in certain brighborhoods in Brooklyn and Queens Residential construction sector General information on the residential construction sector Within its operations in this segment, Danya performs residential construction in Israel, Romania, and the USA. 399

181 The residential construction sector constituted about 28% of Danya s revenue (consolidated) for In several projects, Danya operates on behalf of the Company and corporations controlled by it (together hereinafter, the Africa Group Companies ), or on behalf of investees but are not controlled by the Company (hereinafter, Africa Partnerships ). For additional information, see Section hereinabove. Operations for companies of the Africa Group and Africa Partnerships include operations for Africa Residence, which, since the end of 2010, is a company under Danya s control. For its operations in the construction sector, Danya manufactures concrete building elements for prefabricated construction, 1 at the Cebus Rimon plant, which is owned by Danya s subsidiary (for additional details concerning the Cebus Rimon plant, see Section (a)(2) hereinafter). Danya s activity in the residential construction sector is affected by events and developments described in Section hereinabove. A. Structure of the business segment and the changes therein There are many active companies in the construction contracting sector performing various types and amounts of construction, commencing from small projects including a small number of residential units up to large companies that work on several projects concurrently with hundreds of residential units. For details of the residential construction sector in Israel, see Section hereinabove. In the construction sector, two main construction methods are in use: prefabricated (wherein use is made of prefabricated elements, molds, and advanced equipment), and conventional (traditional construction). The construction technologies used in the construction of residential units change, generally, based on the characteristics of the structure and the project size. In high-rise residential structures, prefabricated construction is generally used, which requires less labor input per construction unit, while in low-rise structures, conventional construction is more prevalent, which requires more labor input. Usually, the size of the project also impacts the choice of the building method, similar to the impact of structure height. In large projects that entail construction of many residential units, prefabricated construction is more widespread, whereas in relatively smaller projects, conventional construction is more likely to be found. 1 In prefabricated construction, the contractor uses prefabricated elements that are assembled on site, such as facades, ceilings, and so forth. 39:

182 B Limitations, legislation, regulations and special constraints upon the construction sector The Company Group is obligated to implement engineering work according to instructions of the laws, regulations, orders, and standards that are applicable to the realm of planning and construction, including therein the Planning and Building Law 1965 (hereinafter, the Planning and Building Law ) and the provisions of Supervision of Work. Danya s operations require that the necessary approvals, permits, and licenses from the competent authorities be obtained. (1) Sales laws Israel The Sales Law (Apartments) 1973 (hereinafter, Sales Law ) The Sales Law imposes various obligations on parties constructing apartments in order to sell them to others, including, obligations related to the inspection and warranty periods in respect of noncompliance of the residential units sold. As part of the agreements signed between Danya and the clients ordering the work, in general, Danya undertakes, as the executing contractor, the obligations of the clients pursuant to the Sales Law for warranty and inspection in all aspects of the execution of the contracting work, which also imposes on it continuing responsibility after completing the projects. In such cases, Danya commits to indemnify the clients in respect of expenses they incur as a result of claims by third parties. Occasionally, Danya also commits to the said inspections and warranties directly to the parties purchasing the residential units from the clients commissioning the work. For additional information, see Section (b) hereinafter. Romania In Romania, the sales law sets a warranty period for concealed defects of 10 years, and the warranty period for the building s construction is for the entire lifetime of the building. All tenants have grounds for a lawsuit following the aforesaid and may bring action against the executing contractor or developer. USA Danya s activities are currently limited to New York State and New York City. This summary relates to the local and state laws, regulations, and codes (jointly hereinafter, "New York laws") only in a general way. Sales Laws According to New York laws, the contractor is not required to provide a guarantee or other warranty in the condominium buyers favor. Usually, buyers will file a lawsuit against the apartment house sponsor and demand compensation from it. Notwithstanding, the contract between the contractor and the apartment house sponsor 39;

183 may require the contractor to provide guarantees for mechanic s liens that are filed by subcontractors against the condominium. According to New York laws, the limitation for building contract violations is six years. If the lawsuit refers to defective materials and a contract with the material supplier was made for sales of goods, a limitation of four years is applicable according to the Uniform Commercial Code. If the lawsuit in respect of defective materials is based on absolute product liability, a limitation of three years is applicable. When the lawsuit is based on liability or warranty included in the contract, the limitation typically begins from the time the defect is or should have been discovered and is usually subject to the limitation included in the contract. New York does have a Statute of Repose that refers to building activities. Therefore, there are no statute of limitation laws on hidden defects. (2) Licensing Israel According to the Construction Engineering Contract Registration Law 1969 (hereinafter, the Contractor Registration Law ), the Group requires a contractor s license as well as an appropriate classification issued by the Contractors Registrar in order to operate as a construction engineering contractor. Danya is classified by the Contractors Registrar in the unlimited class of Construction Engineering (100 classification C5). 1 Furthermore, Danya is a Recognized Contractor for construction work with an unlimited classification for the government in connection with the above classifications (hereinafter in this section, the Recognized Contractor ). Romania According to Romanian law, construction does not require a contractor s license, nevertheless, construction is required to be performed based on building permits. The contractor is required to register the construction sites with the relevant authorities. USA According to New York laws, a building contractor is not required to hold a license, except for a person or business dealing with construction, repair, renovation, or adding any type of addition to a property or structure, who must hold a Home Improvement Contractor license. Still, it is probable that licensed professionals in the construction trades, such as architect, design, mechanics, electricity, plumbing, will be required. This can usually be resolved by employing licensed subcontractors, architects, and so forth. Moreover, according to New York law, one is required to obtain the suitable 1 In addition to the aforesaid in this section, the subsidiaries, Cebus Rimon Industrialized Building Ltd and Forma Projects Ltd, have a C5 contractor s license in the construction sector (100). 3:0

184 permits from the appropriate government offices for such activities as demolition, construction, and other connected activities. Danya meets all the requirements of New York laws concerning those types of work it carries out. (3) Planning and building laws Israel Danya s operations are performed pursuant to the provisions of law, regulations, orders, and standards that apply to planning and construction and work supervision. As such, Danya is required to obtain the necessary approvals, permits, and licenses from the competent authorities. Planning and Building Law forbids construction without receiving a building permit from the authorities. Construction without a building permit and construction that does not conform to a building permit constitutes a criminal offense under articles 203 through 255 of the Planning and Building Law. Romania Construction and land development in Romania are subject mainly to the civil code, the codex of the Romanian Civil Legislation. Construction and development is a multiphase process involving compliance with detailed regulatory requirements, as well as approvals from a large number of district and municipal authorities. A construction license from the competent authority and legally approved planning documents must be obtained in order to carry out construction work by law. Construction work is sometimes started with temporary work permits that give the right to carry out preliminary construction work. Any deviation from the construction permit requires the submission of an alterations permit and receiving the appropriate approval. A building permit is subject to ratification by the planning authorities, the municipal authorities, and the environmental authorities in accordance with European Union regulations. A building permit may be cancelled before it expires, in particular in the event of a fundamental breach of the project documents and/or the planning and building laws, as well as for other reasons. USA Danya s operations are implemented in accordance with the laws, regulations, orders, and standards applicable to planning, building work and its supervision. Danya is required to obtain the required authorizations, permits, and licenses from the appropriate government authorities before beginning the said work and to renew the same until contracting works are concluded and an occupancy permit is issued. According to New York laws, deviation from permitted work or any incompatibility whatsoever may be cause for issuance of a work cessation order or cancellation of the permit. Construction and development is a multi-phased process associated with 3:3

185 fulfilling detailed regulatory requirements and work coordination between many professionals and obtaining authorizations from many bureaus. (4) Standards Israel Under the Standards Law 1953, the Israeli Standards Institute may stipulate specifications or technical rules concerning materials, products, or work processes that are called standards. Similarly, the Minister of Industry and Trade may, after consulting with representatives of manufacturers and consumers, declare a specific Israeli standard, either in whole or in part, to be an official Israeli Standard, the compliance with the said requirements then becomes mandatory by law. In this context it should be noted that according to the Sales Law, a seller fails to fulfill his obligations to the buyer if, among other things, the residential unit or anything contained therein differs from the provisions of an official Israeli Standard. Standards, some of which have also been declared as official Israeli Standards, have been defined for raw materials, products, and various work processes, which are used by Danya in its operations. Wherever an official Israeli Standard has been defined for any raw material, product or work process, Danya meets the requirements of the said standard as required by law. Furthermore to the aforesaid, Danya meets additional standards whose compliance is not required by law, including: Danya has been examined and reviewed by the Israeli Standards Institute and found to be in compliance with the Israeli and International Standard ISO-9001/2008 in the general construction contracting sector. Danya has been examined and reviewed by the Israeli Standards Institute and found to be in compliance with the Israeli and International Standard OHSAS-18001, for safety and health management, in the general construction contracting sector. Danya has been certified by the Israeli Standards Institute to carry out on-site concrete casting according to Israel Standard Danya was also awarded a Gold Standard by the Israeli Standards Institute, an award that is granted to companies that have received certification of at least three quality marks. Danya has been examined and reviewed by the Israeli Standards Institute and found to be in compliance with the Israeli and International Standard ISO in the area of environmental quality. 3:4

186 Romania Romanian law does not require Danya to undergo certification for a quality standard, although foreign entities operating in Romania on publicly funded public projects are required to comply with the requirements of international quality standards that have been adapted to Romanian requirements. Structures in Romania are divided into four different categories: buildings of high importance, of special importance, of ordinary importance, and of low importance. Construction in several building classes requires an ISO-9000 standard. 1. Danya was tested and reviewed by the Romanian Standard Institute and was found in compliance with the requirements of Romanian and international ISO-9001 standards in the field of general contracting. 2. Danya was tested and reviewed by the Romanian Standard Institute and was found in compliance with the requirements of Romanian and international IHSAS standard for safety and health management in the field of general contracting. 3. Danya was tested and reviewed by the Romanian Standard Institute and was found in compliance with the requirements of Romanian and international ISO standard in the field of environmental management. USA According to New York law, Danya does not require certification for a quality standard. However, the work must meet the applicable building codes and one must obtain architectural and/or certain governmental certificates before a temporary or permanent occupancy permit is issued for the building. New York passed a statutory program according to which one that supplies materials and workmen for improving a property and obtains rights of a mechanic s lien against the improved property. Article A-3 of New York s Lien Law creates a trust over certain monies used in connection with any construction project. Among the different types of funds covered by this trust are payments received by contractors involved in the construction project, as well as payments received by subcontractors. According to the provisions of the law, the contractor and subcontractor must hold any payments they received or they are entitled to receive according to their contracts for improving the property in favor of those whom they are employing to work on this improvement. Among other things, the assets held in trust by the contractor or subcontractor must be used to pay for claims by architects, engineers, surveyor, workers, and materialmen. Failure to pay these funds to the trust s beneficiaries may expose the building contractor to civil and criminal penalties. 3:5

187 (5) Employment agency workers, foreign workers and Palestinian Authority (PA) laborers A. Employment contractor employees Israeli employees and employees from PA territories work on Danya sites and receive wages based on the actual number of hours invested. These workers are employed through employment contractors who locate for Danya the workers in the professions that Danya requires and the employment contractors sign direct work agreements with these workers. According to the Employment Contractors Law 1996, employment contractor employees who are effectively employed by an employer for a consecutive period of nine months of more, effectively become the employer s actual employees. As of the date of this Report, Danya owns an employment company named Danya Cebus Manpower Ltd, through which Danya employs employees according to the Employment Contractors Law 1996 for the Group s activities. Danya Manpower commenced its operations in the year 2014 and as of the Reporting Date, employs a total of 165 employees. B. Foreign laborers Israel Danya employs, either directly or indirectly, thousands of foreign workers. A considerable shares of these are foreign laborers employed by Danya, according to its requirements, based on its operations and needs. In June 2014, the government resolved (Resolution no. 1693) that until June 30, 2019, the quota of foreign workers in the construction sector will be 8,000, but if this quota is filled, the quota will be increased in three stages to a maximum quota of 15,000 foreign workers. In a government resolution dated July 2015, it was resolved that if the above quotas are filled, the maximum quota will be increased to 20,000 foreign workers. Since early 2016, entry of foreign workers was permitted only for the purpose of construction work on residential projects and this fact will also be noted on each worker s employment permit and work license. In recent years, the government began to charge an application fee for permits to employ foreign employees, an annual employment levy, and an employment fee. It should be noted that the government may impose additional taxes and charges, which may further increase the cost of employing the foreign employees. Furthermore, conditions for employing foreign employees were determined, including various reporting requirements and deposits of funds in a fund on behalf of foreign employee. In addition to all these conditions and restrictions, the government decided to restrict the employment of foreign employees in projects constructed for the government, government companies, statutory corporations, local governments, and municipal corporations ( National Projects ). 3:6

188 Beginning in 2005, permits for employing foreign workers are issued to licensed corporations that have a license for employing foreign workers in the construction sector (not the construction companies themselves, as was customary in the past). Danya established a corporation called Yuvalim Manpower Ltd, which is a wholly owned subsidiary, for the purpose of obtaining permits to employ foreign workers as described above (hereinafter, Yuvalim ). Yuvalim had a permit to operate as an employment contractor for the purpose of employing foreign workers until December 31, 2016, which was limited to 440 foreign workers. The permit was extended to December 31, As at the Reporting Date, Danya employs 400 foreign workers. Foreign workers and PA employees (see Section D hereinafter) have a significant impact on Danya s operations in Israel, both in terms of their availability and in terms of the cost of their employment. A shortage in foreign workers (including a shortage caused by a prohibition to employ them or reduced quotas for them or failure to receive approvals in respect of them) on the one hand and/or increase costs of employment on the other may have a material effect on Danya s operations. Romania Romanian laws permits the employment of foreign experts only (including workers in managerial positions), subject to work permits. The Romanian government issues an annual quota for foreign workers every year. As of the date of this Report, all Danya employees have work permits. C. Palestinian Authority (PA) workers The decision of the ministerial committee for planning, construction, land, and housing ( the Housing Cabinet ) of July 13, 2015, entitled Focused assistance to increase the scope of construction for residential uses was given the effect of a government resolution on July 30, In this resolution it was decided, among other things, to increase the quotas Palestinian workers from Judea and Samaria permitted to be employed in construction to 8,000, of which 4,000 from the date the resolution came into force. In other words, the maximum quota for Palestinian workers in construction is 41,100 workers and may be increased to 45,100, and this resolution is in effect until June 30, The resolution determines that the new employment permits and work licenses for up to 8,000 workers that will be issued under the resolution will be issued for residential construction, and this fact will be noted on the workers work license and employment permit. As of the date of this Report, Danya has 250 permits to employee workers from the Palestinian Authority. 3:7

189 Violation of the conditions of the permit or the procedure for employing Palestinian workers in the construction sector may lead to imposition of an administrative fine or an charge in respect of a violation of the provisions of Section 2(a) of the Foreign Workers Law 1991 and/or revocation or restriction of the conditions of the permit issued to Danya regarding the employment of foreign workers, including PA workers, and/or refusal to grant such permits in the future. D. Critical success factors in the sector s operations In Danya management s estimation, the principal factors of success in this business segment are as follows: (1) The existence of a customer service system that is responsible for tenants in residential projects; (2) Client satisfaction including a stable enduring relationship with clients; (3) The Company s financial strength; (4) Knowhow, experience; and project management and execution skills in construction projects; (5) Adherence to timetables and a high standard of performance. E. Major barriers to entry and exit in the business segment and changes therein The main formal entrance barrier to the construction sector in Israel is licensing obtaining a contractor s license and registration in the Contractors Register. For more information see subsection (2) above. In addition to these barriers, Danya s management believes that unofficial barriers exist in non-governmental tenders, such as requirements of shareholders equity and financial capability, reputation and prior experience, all of which may affect eligibility to be listed among those invited to respond to tenders for contract implementation. The main exit barriers in this sector are as follows: (1) A formal barrier is the contractor s obligation to repair building defects or non-conformities (for additional information, see Section (b)(1) hereinafter); and (2) Long-term contractual obligations toward clients and purchasers of residential units and financing entities. F. Competitive structure of the business segment and changes therein For details, see Section hereinafter Products and services A. Danya renders construction services to residential projects using both conventional and industrialized (prefabricated) methods, especially in Israel, Romania, and the United States. 3:8

190 B. Below are data concerning projects being implemented in the construction sector Residential (housing units) for 2016: construction Work in progress at beginning of the period Work introduced during the period Work completed during the period Work in progress at the end of the period Israel 857:; ; 855:8 Romania ; 33; 4;3 USA 87: ; Total 715,8,1696, , Breakdown of revenues, products and services In the tables hereinafter are detailed Danya s revenues, expenditures, and profits stemming from residential construction projects in Israel and abroad; the percentage of Danya s said revenues for the years 2016, 2015, and 2014, as well as Danya s additional financial data for its projects in the residential construction sector. The tables were divided into tables organizing the projects being implemented during 2016, and separate one for projects completed in Projects pending completion as of December 31, 2016 The tables hereinafter include all the residential construction projects being implemented as of December 31, 2016, and pending completion. The data for 2016 and cumulative current comparison data refer only to these projects. Project scope (including comparison data) varies according to the project completion times in each reporting period. Project revenues and progress Country No. of projects Start date Duration Completion date Cumulative recognized revenues Anticipated revenues Total actual and anticipated revenues Israel ,943, , ,792 3,016,327 4,960,053 Romania ,253 8, ,860 62,113 USA , ,063 4, , ,723 Total ,364, , ,952 3,519,524 5,883,889 Country % Complete Cumulative deposits Total turnover for the period received as of December 31, Israel 39% 22% 9% 1,896,150 1,209, , ,768 Romania 49% 29% 0% 6,586 21,548 8,705 0 USA 45% 16% 2% 335, ,322 99,902 4,161 Total 40% 21% 8% 2,238,640 1,517, , ,929 3:9

191 Country Costs Cumulative recognized costs Anticipated costs Total actual and anticipated costs Israel 1,944, , ,792 2,987,310 4,931,344 Romania 25,830 8, ,526 56,357 USA 392, ,063 4, , ,541 Total 2,362, , ,952 3,467,947 5,830,241 Country Gross profit Accumulated Recognized Gross Profit Total cumulative recognized Gross Profit Margin Anticipated gross profit gross profit actual and balance anticipated Israel (308) 1, ,017 28,709 1% 1% 0% Romania 4, ,334 5,756 9% 8% 0% USA (2,043) ,226 19,182 2% 3% 0% Total 2,071 2, ,577 53,648 1% 1% 0% Projects completed as of December 31, 2016 The data in this table include projects in the construction sector that were completed during the report period, as well as their comparative data. Country Total sales for the period Recognized gross profit Income receivable as of December 31, 2016 Israel 416, ,149 1,067,401 (13,367) (39,677) (742) 69,077 Romania 11,997 14,334 24,432 3,177 4,006 4,625 9,246 Russia 44,485 56,708 11, ,161 (4,124) 10,049 Total 472, ,191 1,103,055 (9,969) (31,510) (241) 88,373 As of the date of this Report, Danya has no new material agreements in the residential construction sector Clients A. General Danya s principal clients in the construction contracting sector are private companies and entities engaged in real estate development or rental properties activities (hereinafter, developers and/or the private sector ). A large portion of these clients are returning clients in the construction sector who from time to time, approach Danya over the years, to enter into construction project agreements. Danya estimates that repeat agreements with these clients are based on Danya s reputation in the construction market, and on the clients satisfaction with Danya s past construction projects. Nonetheless, due to the nature of the agreements with clients, generally in the 3::

192 form of quasi-tenders, previous acquaintance with clients does not generally guarantee the award of additional projects, but only confers to Danya the right to compete in the future in said quasi-tenders with other construction companies. In these tenders, the proposed price of the construction work is the critical parameter for selecting the entity to which any project is awarded, is usually the proposed price. Danya s principal clients in the Private Sector are third parties ( External Clients ). The remainder of its clients is Group Companies and Africa s partnerships. B. Contracts with clients (1) Contracts with clients in Israel Contracting method: Danya enters into contracts with clients to regulate the way the contract work is to be executed (hereinafter, Construction Contracts ). In Construction Contracts, the following issues, among others, are arranged: The consideration and how it will be paid, the powers and duties of the client s supervisor, work by subcontractors, Danya s guarantee of compliance with the contract, and lien charges, work methods and timetables, Danya s liability in the event of physical injury or damage to property, insurance policies to be taken out by Danya, labor supply and working conditions, supply of equipment, apparatus and materials and their financing, liquidated damages in respect of delays, and Danya s liability for inspections and repairs. Most of Danya s contracts in the construction contracting sector for constructing projects have the following main features: (a) For the large majority of projects that Danya implements, it acts as an executing contractor and provides construction services to the client. (b) Danya employs subcontractors but is generally responsible to the customer for their work. Occasionally, employing material subcontractors requires the customer s prior consent. (c) Regarding certain construction occupations (especially systems and/or development), Danya frequently enters into a tri-partite agreement with the client and the subcontractor. In such cases, the subcontractor is defined as the Appointed Contractor. In some of these cases, Danya remains responsible for the work carried out by the Appointed Contractor and its quality, and in other cases, Danya provides the Appointed Contractor with management services but is not responsible for the work it carries out. (d) The client generally appoints a project manager or supervisor whose job is to check the manner the work is being carried out, its quality, progress, and the invoices rendered by Danya. In some cases in which there is a construction loan, the customer mortgages his 3:;

193 (e) (f) (g) (h) (i) (j) (k) or her rights vis-à-vis Danya in favor of the bank. Most of the projects in which Danya is involved, as of the Reporting Date, have a construction loan. Generally, the client may modify the project timetable and likewise order a halt to the work for a limited or unlimited period. Similarly, the client may increase or reduce the scope of the project, while making adjustments to the price accordingly; and may request additional work or work that differs from the work agreed upon in advance. In these cases, negotiations are held between Danya and the client concerning payment to Danya. In most Construction Contracts, there is a compensation mechanism for Danya to pay in the event of a delay in carrying out the work in contrast to what is set in the agreements. The payments set out in the Construction Agreements with the clients are considered interim payments on account of the consideration. When the project is delivered to the client, inspections or measurements are made of the final quantities by which the final account is accordingly rendered. Deducted from this account are all the interim payments made to Danya. In general, the consideration for projects in the construction sector is based on the turnkey method (as defined hereinafter in this section). Payments are generally linked to the Building Inputs Index. In most of the contracts, Danya is required to deposit a guarantee to ensure performance of the work and/or its compliance with the agreement at a rate of between 5% and 10% of the total contract price (hereinafter, the Performance Bond ). Sometimes the customer holds back an additional sum of about 5% of the progress payments or demands a guarantee against the release of the aforementioned lien, in whole or in part. When the work has been completed, the Performance Bond is normally exchanged for a warranty guarantee as described hereinafter. In most of the contracts, Danya has the right to receive, at the beginning of the project, a deposit of about 5%-10% of the value of the work, against which it is required to provide a bank guarantee. In projects in which Danya is a joint contractor with other companies, the liability to the client is generally several and jointly, and a reciprocal indemnification mechanism exists. The decisions in these projects are usually made by unanimous agreement of the partners. Danya sometimes agrees with the client on a deferment of payments of the invoices authorized by it for an agreed period, against an amount previously determined by Danya and the client (interest and/or a certain percentage of the customer s profit in the project). 3;0

194 (l) In agreements with various clients, Danya usually provides a warranty pursuant to the provisions of the Sales Law (Apartments) to repair discrepancies (as this term is described in the Sales Law) in respect of construction defects. This warranty applies during the inspection period as defined in the Sales Law, and which begins upon delivery of the property to the tenant or the customer pursuant to the agreement, as well as various warranty periods, as defined in the Sales Law that begin at the end of the inspection period. In some of the contracts for residential construction, Danya gives the apartment purchasers a direct undertaking as part of its liability under the agreement to the customer s clients to repair construction defects. Danya is in the practice of giving the customer collaterals in respect of the inspection and warranty periods (above and hereinafter, the Warranty Guarantee ). In most cases, a bank guarantee or collateral is given, as agreed with the customer, generally for 5% of the agreement s consideration, which is gradually reduced until it is cancelled. (m) Danya includes in its financial reports periodic charges to cover liabilities for guarantees and inspection in respect of projects in Israel and abroad. These charges are made according the engineers' estimations taking into consideration the project's characteristics and the accumulated information on it during construction. The charges are made over the construction period, considering the completed portion, and are updated as necessary when the project is finished and delivered to the customer. The charge rate usually averages about 2% of the project s scope. (n) As of December 31, 2016, the total provision for inspections and guarantees (in Israel and overseas) was NIS 103 million. (2) Contracts with clients overseas (a) Contracts with clients in the USA Contracting in the USA is similar to the contracting method used in Israel. However, in view of the demand of the US banking corporations that finance the projects, in several cases in which Danya USA functions as a contractor, Danya USA is required to provide a commitment in favor of lending bank that it will complete construction of the building even if the developer terminates its involvement in the project, subject to payment of construction costs by the lender bank. Furthermore, Danya is occasionally required to provide a commitment to the lending bank, jointly with the project developer, regarding the completion of construction pursuant to the plans, specifications, and improvements, according to the series of agreements with clients. Furthermore, Danya, is occasionally required to provide a commitment, jointly with the project developer, to the lending bank, to perform balancing payments concerning its capital requirements (in such cases, Danya and the project developer sign a letter of indemnification, according to which Danya will bear and/or complete the required 3;3

195 payments in the event that the lending bank requires a balancing payment and/or completion of construction is required in view of a violation by Danya USA. In any event in which such a demand is not due to a violation by Danya USA, the project developer will bear and/or complete the required payments). Furthermore, in several of its agreements with clients, Danya USA granted loans totaling USD 8 million. These loans bear interest for a period of up to 5 years. (b) Contracts with clients in Romania The contracting method in Romania is similar to the contracting method in Israel. (3) Danya s method for receiving the consideration The method of receiving the consideration from the client varies by the various projects. The main methods employed by the Company are: (a) Turnkey In this method, the consideration is based on a fixed price agreed upon in advance of execution, although specific parts of the work contained in the contract may be priced on the basis of measured quantities, as described hereinafter. As a rule, the payment of contracts of this type is implemented according to a set payment schedule, according to milestones in the project s implementation, and in some cases, according to project sales. In 2016, 78% of residential construction activity was executed according to this method. In the non-residential construction and infrastructure sectors, this method accounts for 34% and 12%, respectively. (b) Measured quantities In this method, the contract consideration is based on measured quantities of work actually performed, the precise extent of which is determined only upon the completion of the project. In 2016, the percentage of the revenues in residential construction activity by this method was 8%. In the non-residential construction and infrastructure sectors, this method of payments constitutes about 40% and 88%, respectively. (c) Cost Plus In this method, contracts are based on reimbursement of Danya s expenses relating to execution of the project with the addition of a certain percentage to cover overheads, financing expenses, and a profit. This method accounts for 14% in the residential construction segment, and 26% in the non-residential construction segment. In other segments, income by this method is insignificant. (d) Tenants modifications In residential projects executed by the Danya for clients, tenants may make modifications to their apartments, with Danya s advance agreement, or pursuant to an agreement with the customer. The tenants pay Danya directly based on its standard price list for changes or based on a price list for changes determined in an agreement with the client. Sometimes the tenants receive reimbursements from the Company in the event that tenants modifications reduce the value of the work executed by the Danya in the apartment. These reimbursements are in amounts that are not 3;4

196 material to Danya. The scope of Danya s revenues from this method is not material relative to its total revenue in this business segment. (4) For information on clients in the construction sector that account for 10% or more of Danya s total revenues, see subsection C(2) hereinafter. (5) Trade accounts receivable in Danya s Financial Statements as of December 31, 2015, totaled about NIS 446 million, and NIS 480 million as of December 31, Trade accounts receivable in the residential construction segment in Danya s Financial Statements as of December 31, 2015 totaled NIS 244 million, and NIS 258 million as of December 31, C. Danya s activity by client (1) Below are details concerning the breakdown of the income from clients in the residential construction segment, of Danya s total income, by clients relationship to its controlling shareholder (in NIS thousands): Country Market segment Income % of Danya s total revenues 2016 Gross profit (loss) Gross profit margin Israel External 1,178,863 25% (32,685) (3%) Africa Partnerships* 99,105 2% 7,318 7% Companies of the Africa Group* 347,619 7% 9,712 3% Total Israel 1,625,587 34% (15,655) (1%) Romania External 33,545 1% 7,483 22% Total Romania 33,545 1% 7,483 22% USA External 330,807 7% (1,824) (1%) Total USA 330,807 7% (1,824) (1%) Grand Total 1,989,939 42% (9,996) (1%) Country Market segment 2015 % of Danya s Gross profit Income total revenues (loss) Gross profit margin Israel External 864,408 24% (42,655) (5%) Africa Partnerships* 173,478 5% 1,414 1% Companies of the Africa Group* 309,186 9% 3,542 1% Total Israel 1,347,072 37% (37,699) (3%) Romania External 23,039 1% 4,123 18% Total Romania 23,039 1% 4,123 18% USA External 156,610 4% 4,161 3% Total USA 156,610 4% 4,161 3% Grand Total 1,526,721 42% (29,415) (2%) * Including income attributed by Danya to its subsidiary Africa Residences (for the real estate development sector in Israel). 3;5

197 Country Market segment 2014 Income % of Danya s total revenues Gross profit (loss) Gross profit margin Israel External :985:98 4:% );5564( )3%( Africa Partnerships* 33:5565 6% % Companies of the Africa Group* 3: % 65;57 5% Total Israel,1,8,1466,8% ) 747( )0%( Romania External % ;% Total Romania 7414,7,% 41675,9% USA External 3755:5 0% ) 65346( )49%( Total USA.,51,8, 0% ) 41,74( )77%( Overall Total,177,178, 40% ) 74, ( )0%( * Including income attributed by the Danya to Africa Residences (for real estate development segment in Israel. (2) Contracts with Danya s main clients: (a) (b) In the residential construction sector, Danya executes projects exclusively for private sector clients. Danya divides its clients into two groups: Third parties External clients Danya does not have any dependency upon any particular customer in this group, although the scope of revenues from projects ordered by it in a particular year rises above 10% of its total revenues for that year. For additional details concerning the accumulated revenues, see Section (a) hereinafter. Africa Group Companies and Africa Partnerships As stated above, a sizable portion of Danya s income stems from work implemented for companies from the Africa Group and Africa Partnerships, which is performed on terms that are similar to Danya s agreements with other clients. Nonetheless, it is to be noted that Danya does not have a dependency upon these contracts, since controlling for the contract work implemented for Africa Residences, which is one of the Group of Companies of the Africa Group, and for several Africa Partnerships, these works are not of significant scope and do not produce a material gross profit for the Danya. Moreover, by Danya s estimation, even if Africa Investments Group will reduce the scope of its contracts with Danya and cease to constitute a material customer for the Company, the scope of work executed by Danya would not be materially affected. Additionally, it is to be noted, that the profitability of most of the projects that Danya executed for the Africa Investments Group in the construction sector in Israel is similar to that in most of the projects implemented by Danya for unrelated third parties. For details concerning the breakdown of the income from Danya s clients, see the tables in subsection (1) above. 3;6

198 D. As of the date of the Report, Danya is not in any bidding process or the negotiating stage concerning tenders of a significant scope in the residential construction sector Marketing and distribution Danya receives work to be carried out by participating in tenders, in both the private and public sectors, as well as by initiating contact with potential clients, and also by contacts from various clients. The decision to award contracts is made on the basis of negotiations or tenders. In most cases, the projects require that the Company execute the construction only, in accordance with a given plan and specifications. Sometimes, the work comprises planning and execution, where Danya is also responsible for planning according to general guidelines Order backlog A. Danya s orders backlog in the residential construction sector as of December 31, 2016, totaled about NIS 3,520 million, compared to NIS 3,808.8 million as of December 31, The orders backlog detailed hereinafter includes the remainder of work for execution for Africa Residence. Following is an estimated detail of the breakdown of execution of the order backlog in the residential construction sector: Estimated timing of revenue recognition In NIS millions Q ; Q Q Q : 2018 ; ; ; Total 767 It should be emphasized that the timing of recognition of income, as detailed above, as well as the actual implementation of the orders are estimates and include forwardlooking information. Danya s assessments in this sector are based on the data set forth in this section, and their realization is subject to the risk factors as detailed below, as well as additional factors affecting the time to complete projects, including the commencement date and schedules for project execution which may also be affected by clients flexibility to modify such schedules, or various delays that are or are not dependent upon the contractor as detailed in subsection B hereinabove. 3;7

199 B. Below are data concerning the breakdown of the orders backlog as at December 31, 2016 (in NIS millions): Entered into orders backlog January- Orders backlog Country December 2016 balance Israel 3568: Romania USA Total C. Below are data concerning the breakdown of the orders backlog by client: Client % Company :% Africa Israel Partnerships 5% External * :;% Total,00% *Including order backlog for implementation in the residential construction activity by the company under Danya s control Competition A. The construction sector is very competitive. In every country in which Danya operates there are hundreds or thousands of companies operating as executing contractors, of which, in the Group s estimation, there are several companies that execute large-scale projects. B. According to BDI publications for the year 2016, Danya is ranked among Israel s five largest development, construction, and infrastructure companies. C. Danya s main competitors in the residential and non-residential construction contracting sector in Israel, according to BDI publications for 2016, are as follows: Housing and Construction, Solel Boneh, Electra Construction, the Ashtrom Group, and the Shafir Group. As stated above, other, smaller construction companies, whose names do not appear in this section, constitute competition for Danya in this business segment Raw materials, suppliers, subcontractors, and service providers In this business segment, Danya contracts with subcontractors, suppliers, and service providers. 3;8

200 A. Raw materials and suppliers (1) Contracts with suppliers in Israel The principal raw materials used by Danya in the construction contracting sector are concrete, various types of iron, stone, as well as flooring and cladding materials. Additionally, some raw materials (such as aluminum, piping for sanitation works, elevators, etc.) are purchased directly by Danya s subcontractors. For information on contracts with subcontractors, see subsection (2) hereinafter. The Danya Group is in the practice of purchasing most of its required raw materials, both for its operational needs in Israel, as well as in Romania, in local markets in Israel or Romania, as the case may be, from a range of suppliers and service providers (with the exception of cables used in manufacturing pre-stressed beams and flooring materials such as stone for special wall cladding, which are at times purchased directly from overseas suppliers). Danya has also begun purchasing locally in the USA for projects executed there. Similarly, Danya purchases industrial equipment or special molds required for its operations directly from overseas or through the manufacturer s official importers in the relevant market. Danya is dependent on the regular supply of raw materials for its operations in the construction sector. It should be noted that most of the cement used by Danya and its suppliers is purchased from the Nesher plant, which is a monopoly in this sector. Therefore, Danya is dependent upon the Nesher plant concerning its operations in Israel. For details concerning the availability of raw materials as a risk factor for Danya, see Section (h) hereinafter. Below are details on the amount of changes in the major raw material prices in comparison with the Building Inputs Index: Category Building Inputs Index 3.6% 0.8% 0.;% Cement, Ytong, and their products 5.3% 2.3% 3.9% Iron and metal products ) 9.9% ( (5.9%) ) 8.3% ( Finished products for construction (sealants, paints, glass, etc.) 3.4% 0.6% 3.5% (2) The Cebus Rimon plant Danya manufactures part of the elements required for its operations, both in the construction sector as well as in the infrastructure sector, in a plant located in Palmachim and in the Emek Sarah Industrial Zone in Beer Sheva. The Cebus Rimon plants meet the ISO-9002 standard. Cebus Rimon has a business license for operating the plant in Palmahim, and has not yet received a business license 3;9

201 for the plant in Beer Sheva, and also has a contractor s license for the construction sector (100), and is classified as C5. As aforesaid, standards, some of which have also been declared as official Israeli Standards, have been defined for some raw materials, products and various work processes that are used by Danya in its operations. Wherever an official Israeli Standard has been defined for any raw material, product, or work process, relevant to products manufactured by Cebus Rimon, Cebus Rimon meets the requirements of the said standard as required by law. B. Subcontractors Danya implements its operations through subcontractors. Danya enters into agreements with several subcontractors in various fields in each project, pursuant to the specific conditions of each project. Some of its contracts with subcontractors are exclusively for the performance of construction work, where Danya purchases the raw materials from suppliers and provides the equipment. Such contracts are typically made for the construction of building shells and similarly wet construction work such as, plastering, flooring, cladding, etc. In Danya s contracts with other subcontractors, including electricity, aluminum, carpentry, metalwork, air-conditioning, elevators, acoustic ceilings, etc., the subcontractors purchase the raw materials and deliver a finished product. Before contracting, Danya is in the practice of turning to a number of subcontractors for quotes. One proposal is usually chosen from the various quotes. In the contracting with the subcontractors, Danya is in the practice to receive pledges, including bank guarantees, promissory notes, withheld routine payments, and/or other collateral. Payments to subcontractors are generally made according to milestones in the project s progress. The subcontractor undertakes, to Danya, to bear responsibility for the work quality and defects, usually for the entire inspection and guarantee period as defined in the Sales Law. C. In Danya s estimation, with the exception of the aforesaid in Section A(1) above concerning the Nesher plant (with respect to cement), there is no dependency upon any supplier or subcontractor Non-residential construction sector General information on the non-residential construction sector As part of its operations in this business segment Danya performs non-residential construction and finishing work for public buildings. Activity within this sector is implemented in Israel and Romania. Danya provides construction services for public, industrial, office, commercial, and other buildings. 3;:

202 Its non-residential construction sector constituted about 21% of Danya s (consolidated) income in 2016, of which 78% was from non-residential construction in Israel and 22% from non-residential construction abroad. Similar to its residential construction operations, in some projects Danya provides services to Africa Group Companies or Africa Partnerships. Danya s construction services are provided to clients in the private sector as well as in the government sector. Of its non-residential construction activity in 2016, some 70% was for the private sector, with the remaining 30% for the government sector. For its operations in the non-residential construction sector, Danya manufactures concrete building elements for prefabricated construction 1 at the Cebus Rimon plants. A. Structure of the business segment and the changes therein There are numerous companies operating in the non-residential construction sector that execute construction works at various volumes. In the non-residential construction sector, two main construction methods are in use: Prefabricated (wherein use is made of prefabricated elements, molds and advanced equipment), and conventional (traditional construction). For details, see (a) hereinabove. B. Limitations, legislation, regulations and special constraints upon the nonresidential construction sector Danya is obligated to implement engineering work according to instructions of the laws, regulations, orders, and standards that are applicable to the realm of planning and construction, including therein the Planning and Building Law and the work supervisory instructions. Danya activity is required to obtain the necessary approvals, permits, and licenses from the competent authorities. Concerning licensing, Planning and Building Laws, standards, and foreign workers, the same instructions apply as for the residential construction sector. C. Critical success factors in the sector s operations Danya management estimates that the principal factors of success in this business segment are as follows: (1) Client satisfaction including a stable enduring relationship with clients; (2) Financial strength; (3) Know-how, experience; and project management and execution skills in construction projects; (4) Adherence to timetables and a high performance standard. D. Major barriers to entry and exit in the sector of operations and changes therein 1 In prefabricated construction the contractor uses prefabricated elements that are assembled on site, such as facades, ceilings, and so forth. 3;;

203 The main formal entrance barrier to the construction sector in Israel is licensing obtaining a contractor s license and registration in the Contractors Register. For more information, see B(2) above. Some of the tenders issued by various government ministries require confirmation of recognized contractor status, as a precondition for participation. Other threshold conditions are also sometimes stipulated, which differ from one tender to the next, such as providing guarantees at certain scope, equity, prior activity volume, and experience in project execution. In addition to these barriers, there exist, in Danya management s estimation, unofficial barriers even in non-government sector invitations to tender, such as, equity and financial stability, reputation and prior experience, all of which may affect eligibility to respond to invitations to tender for contract execution. The main exit barriers in this sector are as follows: (1) A formal barrier is the contractor s obligation to repair building defects or non-conformities (for additional details, see Section (b)(1) above); and (2) Long-term contractual obligations toward clients and purchasers of residential units and financing entities Products and services A. Below are data concerning projects being implemented in the construction sector for Non-residential construction (thousands sqm) 2016: Israel Work in progress at beginning of the period Work introduced during the period Completion date Work introduced during the period Work in progress at the end of the period Romania Total 58,,7, Breakdown of revenues by product and service Detailed in the tables hereinafter are Danya s revenues, expenditures, and profits stemming from non-residential construction projects in Israel and abroad; the percentage of Danya s said revenues for the years 2014, 2015, and 2016, as well as Danya s additional financial data for its projects in the non-residential construction sector. The tables were divided into tables organizing the projects under construction in 2016, and separate tables for projects completed in Projects under construction pending completion as of December 31,

204 The tables hereinafter include all the residential construction projects being implemented as of December 31, 2016, are pending completion. The data for 2016 and cumulative current comparison data refer only to these projects. Project scope (including comparison data) varies according to the project completion times in each reporting period. Country Project revenues and progress No. of projects Start date Duration Cumulative recognized income Completion date Anticipated revenues Total actual and anticipated revenues Israel ,365, , ,192 1,612,133 2,977,177 Romania , , ,985 46, ,541 Total ,876,949 1,033, ,177 1,658,768 3,535,717 Country % Complete Cumulative deposits received as of December 31, Total sales for the period Israel 46% 34% 17% 1,247, , , ,655 Romania 92% 67% 44% 499, , , ,152 Total 53% 40% 21% 1,746, , , ,807 Country Costs Cumulative Recognized Costs Anticipated costs Total actual and anticipated costs Israel 1,404, , ,844 1,594,525 2,999,307 Romania 406, , ,481 41, ,462 Total 1,810, , ,325 1,635,945 3,446,770 Country Gross profit Cumulative recognized gross profit (loss) Cumulative recognized gross Gross profit margin Anticipated gross profit balance profit actual and anticipated Israel (39,739) (1) ,608 (22,131) (1%) 0% 0% Romania 105,864 43,605 10,504 5, ,078 20% 12% 4% Total 66,125 43,604 10,852 22,823 88,948 3% 3% 1% Country Projects completed as of December 31, 2016 The data in this table include projects in the non-residential construction sector that were completed during the report period, as well as their comparative data. Sales for the period Recognized gross profit Accounts receivable as of December 31, Israel 104, , ,898 (4,266) 19,344 16,413 4,452 Romania 26, ,412 75,574 3,591 13,549 15, Russia , ,153 2,679 0 Total 131, , ,095 (675) 45,046 34,609 4,

205 As of the date of this Report, Danya does not have any new material agreements in the residential construction sector Clients A. General Danya s principal clients in the non-residential construction contracting sector are private companies, entities, and companies from the government sector or private clients engaged in entrepreneurial projects for the government sector. Due to the nature of the agreements with clients, generally in the form of quasi-tenders, previous acquaintance with clients does not generally guarantee the award of additional projects, but only confers to Danya the right to compete in the future in tenders with other construction companies. In these tenders, the proposed price of the construction work is the critical parameter for selecting the entity to which any project is awarded, is usually the proposed price. In 2016, work for the government sector in the non-residential construction sector accounted for 30% of the total volume of work. B. Operations in Romania Danya executed a large number of projects in Romania for clients in the private sector. Danya executed projects for a company from the Africa Group that operates in Romania (hereinafter, Africa Romania ): office buildings for the AFI Business Park Bucharest, Romania. Work linked with established a base for the American army, which is being erected in southwestern Romania near the city of Deveselu and office buildings in Bucharest for the Ikea Group. As of the Reporting Date, Danya s operations in Romania for Africa Romania are not material. C. Contracts with clients Commitments with clients in this sector under the contractual method have similar characteristics as those in the residential construction sector. D. Trade accounts receivable in respect of the non-residential construction sector in Danya s Financial Statements as of December 31, 2016, totaled about NIS 128 million compared to about NIS 165 million as of December 31, E. Danya s operations, by client Below are details concerning the breakdown of the revenues from clients in the nonresidential construction sector, out of Danya s total revenues, based on the relationship with the Company (in NIS thousands): 404

206 Country Market segment Income % of the Company s Total Revenues 2016 Gross profit (loss) % Gross Profit Israel External 732,442 15% (24,228) (3%) Africa Group companies 30,457 1% (19,776) (65%) Total Israel 762,899 16% (44,004) (6%) Romania External 202,971 4% 62,258 31% Africa Group companies 8,815 0% 3,591 41% Total Romania 211,786 4% 65,849 31% Total 974,685 20% 21,845 2% Country Market segment Income % of the Company s Total Revenues 2015 Profit (Loss) Gross % Gross Profit Israel External 706,940 19% 16,783 2% Africa Group companies 21,228 1% 2,211 10% Total Israel 728,168 20% 18,994 3% Romania External 247,131 7% 33,101 13% Africa Group companies 65,0775 2% 13,549 21% Total Romania 312,208 9% 46,650 15% Russia 1,040,376 29% 77,797 7% Total Russia External 706,940 19% 16,783 2% Overall Total 21,228 1% 2,211 10% Country Market segment4 Income % of the Company s Total Revenues 2014 Profit (Loss) Gross % Gross Profit Israel External 573,859 19% 14,625 3% Africa partnerships 32,397 1% 2,136 7% Africa Group companies 606,256 20% 16,761 3% Total Israel 110,152 4% 10,504 10% Romania External 75,574 2% 15,517 21% Africa Group companies 185,726 6% 26,021 14% Total Romania 67,623 2% 2,679 4% Russia External 67,623 2% 2,679 4% Africa Group companies 859,605 28% 45,461 5% Total Russia External 573,859 19% 14,625 3% Overall Total 32,397 1% 2,136 7% 405

207 F. Following are details of tenders or projects at a significant scope in the non-residential construction contracting sector, in which the Group is participating: 1. Agreement to plan and construct an office building in Jerusalem for the Ministry of Justice For information on the tender that was awarded to Africa Properties to plan and construct an office building as well as additional buildings and facilities in the compound, see paragraph (c) above. In 2015, Danya Cebus Board of Directors approved the principles of a contracting construction agreement with Africa Properties, under which Danya Cebus will function as the building contractor for construction and contracting work, including, among other things, project planning and the required licensing procedures for an office building and the additional buildings. 2. Agreement to perform planning and construction work of a government office building and commercial areas in the Jerusalem Kirya Mehozit For information on the tender awarded to Africa Properties to partially finance, plan, construct, and maintain an office building for government ministeries and commercial areas in the Kirya Mehozit in Jerusalem, see paragraph (d) above. In 2015, Danya Cebus Board of Directors approved the principles of a contracting agreement with Africa Properties, under which Danya Cebus will function as the building contractor for construction and contracting work, including, among other things, project planning and the required licensing procedures for the office building. 3. An agreement in the prequalification process for the construction and operation of IDF s telecommunication base in the Negev In 2015, Danya Cebus entered into an agreement with a third party that is not related to the Company Group (hereinafter in this sub-paragraph, jointly, the Building Contractor ), of an agreement of principles with Africa Properties, together with a partner (hereinafter in this sub-paragraph, jointly, the Bidder ), according to which the Building Contractor will function as the construction contractor proposed in the bid submitted by the Bidder to participate in prequalification proceedings as part of a tender for financing, planning, constructing, and operating the IDF telecommunication base in the Negev. It was agreed that if the Bidder prequalifies as a suitable bidder for the main tender, the parties will negotiate over the terms of the Construction Contractor s monetary offer and the details of the agreement to be signed with the Construction Contractor as part of the Tender, back-to-back with the Bidder s obligations concerning the construction of the Project. As of the Reporting Date, Africa Properties and the Partner passed the prequalification stage of the Tender and Africa Properties has not yet decided whether to submit a bid in the main Tender. 4. In November 2015, an agreement was signed between Danya Cebus and A. Luzon Properties and Investments Ltd to participate in bidding and executing Buyer s Price 406

208 tenders issued by the ILA and other agencies for the construction of residential projects and related uses in Israel. The joint business is held by A. Luzon and Danya Cebus in equal shares (50% each). For information on the tenders awarded to the joint business, see Note 4(f)(1) to the Company s consolidated financial statements as of December 31, Marketing and distribution Danya receives work to be carried out by participating in tenders, both by participating in tenders from the private and public sectors, as well as by initiating contact with potential clients, and also by contacts from various clients. Decisions to assign work may be based on negotiations or tenders. In most cases these are projects for construction only, based on given plans and specifications. Occasionally the works are for plans and construction, where Danya is also responsible for the plans, according to general guidelines Order backlog A. Danya s orders backlog in the non-residential construction sector as of December 31, 2016, totaled about NIS 1,659 million, compared to NIS 1,465.2 million as of December 31, Following is an estimated breakdown of execution of the orders backlog in the nonresidential construction sector: Estimated timing of revenue recognition In NIS millions Q Q Q :5 Q : Total,1659 It should be emphasized that the timing of recognition of income, as detailed above, as well as the actual implementation of the orders are estimates and include forwardlooking information. Danya s assessments in this sector are based on the data set forth in this section, and their realization is subject to the risk factors as detailed in Section hereinafter, as well as additional factors affecting the time to complete projects, including the commencement date and schedules for project execution which may also be affected by clients flexibility to modify such schedules, or various delays that are or are not dependent upon the contractor

209 B. Following is the breakdown of the orders backlog as of December 31, 2016 (in NIS millions): Country Entered into orders backlog January-December 2016 Orders backlog balance Israel : Romania - 69 Total 867,1659 C. Below is a breakdown of the orders backlog by client and region: Client % Geographical location % Company 68% Israel ;9% Other 76% Romania 5% Total,00% Total,00% Competition A. The non-residential construction sector is saturated with competitors. In every country where Danya operates there are hundreds or thousands of companies operating as executing contractors, of which, in the Group s estimation, there are several companies executing large-scale projects. B. According to Danya s assessment, its market share in Israel in 2016 is several percentage points of the non-residential construction branch in Israel. Danya similarly estimates that its market share in Romania and the USA in 2016 was insignificant. C. For information on Danya s main competitors, see Section (c) hereinabove. D. Danya also has competitors in markets in which it operates overseas, in the USA and in Romania, several of which are major international construction companies Raw materials, suppliers, subcontractors, and service providers In this business segment, Danya contracts with subcontractors, suppliers, and service providers. A. Raw materials and suppliers Contracts with suppliers in Israel The principal raw materials used by Danya in the non-residential construction sector are concrete, various types of iron, stone, as well as flooring and cladding materials. The raw materials used in this sector are similar to those used in the residential construction sector. Contracts with suppliers in Romania Danya s commitments with suppliers in Romania are essentially similar to Danya s commitments with suppliers in Israel, with the exception of payments, which are 408

210 mainly made in local currency or local currency linked to the euro, advance payments, and guarantees for payments issued to major suppliers (the extent of the advances and guarantees are determined by the value of the contract and/or scope of activity vis a vis each supplier), and more favorable payment terms to suppliers compared to Israel. B. Subcontractors Danya implements its operations through subcontractors. Danya enters into agreement with several subcontractors in various fields in each project, pursuant to the specific conditions of each project. Operations through subcontractors are similar in features to operations in the residential construction sector. Still, the non-residential construction sector is at times characterized by building systems differing from those for residential buildings Property, plant and equipment Following is a description of the property, plant, equipment, and installations used by the Group both in its operations in the construction contracting, as well as in the infrastructure contracting sector 1 (hereinafter, the Contracting Segments ): A. For information on the Cebus Rimon plant, see Section (a)(2) hereinabove. B. The property, plant, and equipment owned by Danya include mainly cranes, construction equipment, land and office equipment. The balance of depreciated cost of fixed assets in Danya s books as of December 31, 2016, is NIS 76 million (compared to NIS 56 million as of December 31, 2015), as follows: Category Depreciated Cost Installations and construction equipment 83 Land* 5 Office equipment : Leasehold improvements 5 Model apartments and sales offices 76 Total property, plant, and equipment 83 Other assets 5 * In addition to land leased, Danya Cebus rents additional areas for the Cebus Rimon plant. Rentals paid for these areas totaled approximately NIS 4 million in For a description of the Group's operations in the infrastructure contracting segment, see paragraph 1.14 hereinafter. 409

211 Intangible assets Pursuant to a trademark licensing agreement signed between Danya and the Company, Danya was granted the right to use Company trademarks in the contracting sectors for an unlimited period and at no cost, for as long as the Company owns 50% or more of the voting rights at the General Meetings of Danya s shareholders. As of the date of this report, Danya s intangible assets include software programs, as well as the trademark, administration costs, and reputation stemming from its holding in Africa Residences The balance of Danya Cebus depreciated cost of its intangible assets as of December 31, 2016, was NIS 81 million Human capital Organizational structure Danya operates through headquarters coordinating Danya s operations, providing administrative and logistical support for implementing various projects. The various matters handled by Danya s headquarters are finance and control, legal advice, human resources, purchasing and logistics, tenders, tenant service center, among others. Project management in the construction and infrastructure contracting sectors is done by managerial teams. Each team generally consists of a project manager and foreman/foremen construction engineers, warehouse staff, and other employees based upon the specific nature of each project. The managerial team is responsible for execution of the work, its quality, timetables, and accounts with clients, subcontractors, suppliers, and service providers. The project managers are generally subordinate to the regional manager who reports to Danya s Chief Engineer and COO, a member of Danya s management. The following is a chart of Danya Cebus organizational structure as of the date of the Report: CEO Execution Chief Construction Officer Chief Infrastructure and Building Officer Chief Officer of Finance and Control Chief HR & Legal Officer Chief Planning & Engineering Officer COO Safety Chief Engineer Chief Engineer Finance Manager Subsidiaries and affiliates Comptroller 40:

212 Staff As stated above, Danya employs, directly and indirectly, thousands of workers at various construction sites, including foreign workers, workers from Judea, Samaria, and Gaza, and employment agency workers. The number of such workers varies according to the extent of Danya s operations. In 2016, Danya s staff increased mainly in response to the increase in the scope of its operations, especially by foreign workers and workers from the Palestinian Authority. Below is the breakdown of Danya s employees as of December 31, 2016: Division Israel Romania USA Total Danya management :; ;;3 Danya HR Foreign workers employed in Israel 5; ;8 Workers from the Palestinian Authority 3; ;4 Total *,164, 60 4,, Danya s investments in training and coaching From time to time, based on the employee s position and Danya s needs, Danya conducts training, seminars, and workshops for its employees (including officers). The training is given to Danya s employees according to position and profession, in order to maintain the professional standards of its employees at all levels, in all professions, and in all positions Collective agreements Danya is a member of the Contractors and Builders Association in Israel. Therefore, only its employees actually engaged in construction and only from the level of foreman down who are not employed in desk jobs, are subject to the general collective labor agreement for employees in the construction industry, infrastructure, heavy construction equipment, public works, and renovations, as signed between the Boneh Ha aretz and the Histadrut on June 29, 2015 and came into effect on November 1, 2015 (hereinafter, the General Collective Agreement ). According to the General Collective Agreement, Danya is obligated, among other things, to grant its said employees a comprehensive pension plan (budgeted at 17.5% in the New Fund, and 20.5% in the Veteran Fund). For workers insured in a provident fund or by an insurance policy that is not a pension fund a budget of 19.33%, with an additional purchase of disability insurance at 2.5%, or a rate that will provide the worker with a disability pension to the amount of 75% of the employee s salary, the lower of the two amounts; all from the time the agreement becomes valid and onwards. 40;

213 Likewise, the agreement preserves the rights for a comprehensive veteran pension plan the workers had before the agreement came into effect. Danya s liabilities for severance pay are fully covered by amounts paid in the form of regular installments for this purpose into pension funds and/or insurance policies and/or severance pay funds administered by banks and/or severance pay funds. According to the General Collective Agreement, Danya is obligated to make contributions to a further education fund for its employees, as follows: (1) Building managers From their first day of work they are entitled to contributions to a further education fund at the following rates (based on a fixed rate salary defined in the General Collective Agreement): 7.5% employer s contribution and 2.5% employee s contribution. (2) With respect to other employees: a. Employees with three years experience in the construction sector in Israel (independent of the date on which the General Collective Agreement came into force) are entitled to contributions to a further education fund at the following rates (based on a fixed rate salary defined in the General Collective Agreement): 2.5% employer s contribution and 1% employee s contribution; b. Beginning from June 29, 2015, employees with six years experience in the construcvtion sector in Israel are entitled to contributions to a further education fund at the following rates (based on a fixed rate salary defined in the General Collective Agreement): 5% employer s contribution and 2.5% employee s contribution; All without detracting from the rights of individuals who benefited from additional rights before the General Collective Agreement came into force. With respect to employees who are not subject to the General Collective Agreement, employers are obligated to contribute to the employee s pension fund or managerial insurance according to the Extension Order for Comprehensive Pension Insurance in the Economy, Remuneration and employee benefits The majority of Danya s employees are employed on the basis of personal contracts and employment letters. For the most part, their salary is higher than the standard wage defined in the General Collective Agreement. In Danya s opinion, the wages paid them cover all the benefits due them under the General Collective Agreement and/or the extension order for the construction sector and public works. 430

214 Information about the Group s officers As stated above, Danya s officers are employed through personal employment contracts, whose general terms are similar to the employment terms of the other employees at Danya. The officers receive bonuses from time to time, including bonuses based on specific targets that have been determined for them Working capital for construction in residential, non-residential, and infrastructure sector Danya s policy concerning inventory of raw materials Due to the availability of raw materials required by Danya in its sectors of activity, Danya maintains a relatively small inventory of raw materials for construction. Generally, Danya orders the raw materials required for operations at its construction sites or the Cebus Rimon plant, according to the progress of the various projects Average duration and scope of supplier and subcontractor credit and client credit Danya s working capital as of December 31, 2016 differs from its working capital for the 12-month period (as these terms are defined in GAAP). Following are details about the difference between Danya s working capital and its working capital for the 12-month period (in NIS thousands): Amount included in the consolidated financial statements Adjustments (for the 12-month period) Total (for the 12- month period) Current assets 45; ) 95:5974( : Current liabilities :87 ) : ( Excess current assets over current liabilities );35536( :55:43 Working capital ratio ; Financing operations in the residential and non-residential construction, and the infrastructure sectors General A. As of the Reporting Date, Danya finances its operations using the following financing methods: (a) Advance payments received from clients and supplier credit; (b) Cash and credit balance available to Danya. B. On August 13, 2015, Danya Cebus entered into an agreement with a banking corporation to receive a credit line and loans (hereinafter, the Credit Agreement ), according to which Danya Cebus will receive a short-term credit line in the amount of NIS 50 million and loans totaling NIS 350 million. The Credit Agreement contains conventional provisions concerning additional interest in the event of a violation, arrears interest, grounds for demanding immediate repayment, financial covenants, etc. 433

215 Notably, Danya granted loans to the Company in the total amount of NIS 210 million for seven years, at interest terms identical to the interest terms defined in the Credit Agreement. In view of the proceedings to reach an arrangement regarding the Company s debt. it should be noted that control of Danya may change, either directly or indirectly. The Credit Agreement contains a clause that grants the financing entity the right to demand immediate repayment of the credit that it granted in the event of a change in control of Danya Cebus. As of the date of the statement of financial position, the credit granted to Danya Cebus by financing entities totaled NIS 374 million, and credit facilities of NIS 1 billion used for bank guarantees issued to third parties (hereinafter jointly, the Credit ). As noted above, a change in control of the Company, if it occurs, may cause issue of an immediate demand to repay the Credit, subject to the discretion of the financing entities. At this stage, Danya is unable to estimate the financing entities attitude toward the new controlling owner (if any). Therefore, as of the date of this Report, Danya is unable to assess the chances that this risk will materialize Restrictions on access to credit and guarantees A. Danya is subject to the following restrictions under its loan agreements: (1) As a condition for granting credit and guarantees to Danya by financing entities, Danya undertook not to create any floating lien on its assets, in whole or in part, without the advance written consent of these entities, subject to specific exceptions. A failure by Danya to meet its obligations to these entities may lead, among other things, to their demand for immediate repayment of Danya s debts to the financing entities. (2) Utilizing the credit facility granted, Danya (as detailed in subsection B(b) hereinafter) is subject to a series of borrower restrictions (including utilizing credit facilities in general by Africa Investments Group and its controlling shareholder), and/or the condition of Danya s businesses. It should be noted, that as of the Reporting Date, the restriction of the said borrowers group does constitute an effective restriction upon Danya s operations. (3) Furthermore, the loans granted to Danya contain immediate payment clauses, including clauses pertaining to the state of Danya s business. B. Financial covenants As part of operations to expand the facilities provided to it in order for it to give bank guarantees in favor of clients, Danya undertook to meet the financial covenants toward a number of banks. For details concerning the said financial covenants, including those financial covenants that apply to Danya in the real estate development sector in Israel, see Note 18(D) to the Company s Consolidated Financial Statements as of December 434

216 31, As of the date of this Report, Danya is in compliance with the aforesaid financial covenants. As of the Reporting Date, Danya complies with said financial covenants. (1) Liens As of the date of this report, several fixed charges, pledges and assignments by means of pledges, which are unlimited in amount, apply to Danya s assets in favor of banks granting credit and guarantees to the Danya Group. Against the loan to acquire Africa Residences, Danya pledged its share of Africa Residence shares in the lending bank s favor. As of December 31, 2016, the balance of Danya s unencumbered assets (consolidated) totals about NIS 4,804.8 million; the balance of Danya s (solo) unencumbered assets totals NIS 1,574 million (the balance of the said assets include cash and holdings in subsidiaries and associated companies) Guarantees in the residential, non-residential, and infrastructure sectors As part of its operations, Danya, as an executing contractor, is occasionally obligated to furnish various types of guarantees to third parties, such as contract guarantees, performance bonds, quality guarantees, guarantees issued against advances received from clients, and guarantees required to release consideration funds that are held by the client. Similarly, in some tenders, Danya is required to furnish guarantees to ensure its participation in the tenders Following are details of the amounts of guarantees furnished by Danya to third parties (in NIS millions): Guarantees from financial institutions (banks and insurance companies) Guarantees issued by the parent company Danya s self-guarantees, promissory notes and other securities Total guarantees As of As of As of December December December 31, , , ; ; ,1078,9 977, Pursuant to an agreement between the Company and Danya signed in February 2000, which expired on February 28, 2015, the Company undertook to provide guarantees in favor of third parties for work performed by Danya in the normal course of business, except for financial guarantees (guarantees for loans), at Danya s request, and on the condition that the guarantees provided by the Company, as stated, do not exceed NIS 60 million (linked to the Building Inputs Index Base Index December 1999). On 435

217 February 28, 2015 the agreement expired and the Company will not put up additional guarantees under this agreement, but the guarantees that were provided prior to the expiry date of the agreement will remain in effect. As of the date of this Report, the amount of issued guarantees is negligible Insurance in the residential and non-residential construction segment, and the infrastructure segment Danya is insured by insurance policies through insurance companies in Israel who cover, subject to the policy terms, risks of up to a total sum as set in the insurance policy in types of insurance whose main terms are detailed hereinafter. The insured party s name in the policies is expanded to include Danya, Danya s subsidiaries, and partners, clients, subcontractors, project managers, supervisors and supervisors on the clients behalf, and employment agencies, unless explicitly stated otherwise: Danya has a framework insurance policy for contracted construction works (hereinafter, the Framework Insurance Policy ), covering those works that Danya began executing in the course of the policy period and the insurer was informed of them. The maximum insurance period for each project under the open policy is 36 months with the possibility of extensions. The policy includes an extended maintenance period of 24 months. The maximum scope for insuring a project under the open policy is NIS 200 million. In the event there is need for a specific project whose scope is higher than the amounts covered by the open policy, Danya arranges specific insurance for the project according to its characteristics, scope, and project length. At times, insurance for a specific project is implemented by the client so that in such a case Danya is insured by the policy presented by the client and not by Danya Additionally, Danya has insurance policies that cover assets, third party coverage, employers liability insurance, professional, and product liability insurance, heavy equipment insurance (including mechanical failure for some of the equipment), goods in transit, cash, and fidelity insurance Danya participates in Company Group s insurance policy for company officers liability insurance. For operations in Romania and the United States, Danya arranges insurance coverage in these countries according to its needs, both for insuring its operations, as well as for projects it is executing (including coverage by insurance policy arranged by the client but it does not have a framework policy (as in Israel). These insurance policies are arranged by local insurance companies in these countries, who issue acceptable policies, which include among other things, property and liability insurance, as needed. 436

218 Legal proceedings In February 2016, Danya learned that the Anti-Trust Commission is conducting an investigation against it, and against several employees and managers of Danya Cebus. In the investigation, documents were collected from Danya Cebus and several employees and managers were interrogated. To the best of the Company s knowledge, the Anti-Trust Commission has not yet concluded its investigation. For information on other legal proceedings in the construction contracting sector, see Note 36 to the Company s Consolidated Financial Statements as at December 31, Targets and business strategies The Group examines its strategic plans from time to time and revises its targets in accordance with developments in business segments, its clients, the macroeconomic indicators, and in the market s competition structure. Danya set for itself a number of strategic targets for the next few years, which are divided into two main sectors of activities in which Danya operates today, contracting in construction and infrastructure and real estate development in Israel. Contract construction in the building and infrastructure segments In determining targets for the coming years, Danya differentiated in its operations in Israel and its overseas operations. It also split its operations in Israel between construction (residential and non-residential construction) and infrastructure. A. Construction in Israel segment Danya intends to continue to establish its position as a leading building company in Israel both in the residential and non-residential construction sectors. Danya strives to maintain a high backlog level in the construction contracting sector, with emphasis on adequate gross profitability levels, and to execute a large number of projects at the same time stressing a distribution among the various clients and various types of work and implementations. B. Infrastructure contracting in Israel segment It is Danya s intention to continue to compete for executing large infrastructure projects. The goals the Company set for itself including increasing operational turnovers in the infrastructure sector while maximizing its planning capabilities, Danya s industrial implementation and operational capabilities. With reference to large-scale infrastructure projects mainly for the government sector, Danya is considering executing such projects independently and in partnership with Israeli and foreign companies, both in the field of tunneling and road construction, and in electromechanical works and other fields. In the past year, the company was awarded several significant projects mainly related to the Light Train in Tel Aviv. Awards of these projects strengthened Danya s orders backlog in this segment, and Danya aspires to maintain and even increase its order backlog in this segment. 437

219 Danya also founded a new corporation, Geo Danya Ltd (hereinafter, Geo Danya ), jointly with a foreign company (that is not related to the Company Group), which specializes in this sector and will engage in the execution of foundations, shoring and other advanced geo-technical work (jointly, hereinafter jointly, the Foundation Works ). The Foundation Works constitute a derivative of general construction works, in which Danya is currently engaged (including residential construction, non-residential construction, and infrastructure). Within its operations in Geo Danya, Danya expects to execute varied activities in this sector and even expand the scope of its operations. C. Tangential business segments within Danya s project execution operations Danya aspires to expand its operations in execution segments that are tangential to its role as a prime contractor that executes projects. As part of these efforts, Danya is examining new activities either for independent activity or by acquiring existing operations. In the past two years, Danya initiated operations in the field of aluminum work management, concrete pumping operations, and logistic site support operations. Danya continues to consider opportunities to enter into various tangential activities, including in the field of earthworks. D. Romania Danya is positioned today as a company with a good reputation in the construction and real estate market in Romania. Danya plans to protect the good reputation that it earned in Romania, and to this end, Danya will continue to contend in contract tenders for a variety of development projects and ventures in Romania. E. USA Danya has significant operations in the USA, New York, and significantly increased its backlog of work orders. Its turnover increased in 2016, and this trend is expected to continue in the forthcoming year. Operations in the USA also include an insignificant entrepreneurial component, and loans that the company granted related to the projects that it is executing in the USA. F. African continent In 2016, Danya began execution of a project in a West African country. The total scope of the project reached EUR 145 million as of December 31, In view of the a demand by the client, Danya ceased its work on the project and is not active in this country. G. Additional markets Danya is routinely approached with offers to execute projects abroad in various countries. Danya examines the different options that face it, including entering new markets, including additional countries in Europe. 438

220 Discussion of risk factors Danya s management estimates that Danya is exposed to the following main risk factors: Macroeconomic risk factors: A. Israel s security situation A worsening of the security situation has an impact upon Danya s operations, which can be expressed for example, in a decline in demand for construction work, in a shortage of work force, and an appreciation of construction work costs. This factor may cause a slowdown and even a certain cessation of on-site work, mainly for those located close to the seam line or the separation fence. B. Earthquakes Danya is liable for co-payments in respect of earthquake damage in an amount equal to 10% of the total investment in the project, but not to exceed NIS 5 million per project. If extensive damage is caused to the projects that Danya is executing as a result of an earthquake, this may have a material impact on Danya s profitability. C. Changes in foreign currency exchange rates Danya is active in Romania and the USA, where the reporting currency is different from Israeli currency. As a result, in the case of a change in the real exchange rate of the shekel against the euro or the dollar, it creates a risk to Danya s reported business results and its capital. D. Changes in prices of marketable securities Danya holds marketable securities where a decline in their prices may cause a rise in Danya s financing costs. E. Changes in market interest rates Danya has a variable interest rate credit line. Therefore, a rise in interest rates will negatively impact on Danya s financing costs and its cash flows Sector risk factors A. Regulatory intervention in the Israeli real estate sector Danya is exposed to regulatory actions in all that is related to the real estate branch. During the last few years, there has been a rise in regulatory activity in this branch among others, in aspects of taxation, mortgages, and supply of land. B. Slowdown in the construction sector A slowdown in the markets that Danya operates in, accompanied by a decline in demand and/or supply of housing and project construction. The decline in activity may be due to the decline in demand in the nonresidential construction segment and to a decline in the supply of these properties due to increasingly strict financing requirements and costs imposed by financing institutions. C. Government policy on infrastructure development Infrastructure development, is directly influenced by government policy, including the amounts budgeted for it in the State s budget and the tenders published by it. Therefore, reduction of budgets assigned 439

221 to this topic, including budgets for road paving, laying railroad tracks, and bridges or reducing the scope of the tenders published will cause a decline in the scope of infrastructure branch s activities and may cause a reduction of Danya s operations in this sector. D. Large-scale construction and infrastructure tenders - Danya submits binds and plans to submit bids in construction and infrastructure tenders of material scope. Such projects require substantial equity, guarantees, and extensive financing. Additionally, in some of these projects, Danya assumes risks that are beyond the ordinary risks assumed by construction contractor, such as planning. Moreover, the scale of the construction works in these projects is significantly greater than Danya s other contract construction projects. If Danya is awarded all or several of these tenders, and fails to meet its business plans for these projects, with emphasis on budgets and schedules, this can have a significantly negative impact on Danya. E. Foreign workers and local workers Foreign workers (including managerial staff) have a material impact on Danya s operations in Israel and abroad, both in the aspect of their availability, as well as their employment cost. The scarcity of foreign workers (in addition to the prohibition on their employment, the reduced quotas, or failure to receive permits for them) on the one hand, and/or the increasing cost of their employment on the other hand, may have a material impact on Danya s operations. Regarding domestic labor and foreign workers, regulatory changes in labor laws, including the Employment Contractors Law, the Law to Enhance Enforcement of Labor Laws (Third Addendum concerning sections of labor laws whose violation by a service provider mandates imposition of a fine on the service provider), and the collective agreements in the construction sector, may lead to an increase in the prices of construction inputs and to the erosion of Danya s profitability in the short term. F. Increasing costs of building and paving inputs Increasing costs of building and paving inputs, mainly the principal inputs such as manpower (including foreign workers), concrete, iron, stone, paving and cladding materials, quarry materials, asphalt aggregates, bitumen, and so forth, could bring on an erosion of Danya s profitability in the short term, which could be reduced due to the parallel linkage mechanism as provided for in Danya s contractual consideration. Additionally, Danya arranges from time to time, transactions in derivatives and/or direct purchases of goods in insignificant scope. Also, the appreciation in inputs purchased directly by subcontractors (such as elevators, aluminum, sanitation piping, and so forth) may indirectly bring about an erosion of Danya s profitability in the short term. G. Discovery of antiquities on Danya s real estate properties Discovery of antiquities could cause unexpected costs to Danya, among other things, because of construction 43:

222 delays and/or because of the need for conducting additional excavations and/or the need for re-planning the project. H. Availability of raw materials Disruption of raw materials supply including those caused by strikes and/or work disputes in quarries, ports, etc., may cause a full or partial stoppage of operations for a time, at Danya s sites. It is noted that most of the cement used by Danya and Danya s suppliers in Israel is acquired from Nesher, which has a monopoly in the sector. I. Competition As aforesaid, the construction, and infrastructure sectors are saturated with competitors. In Danya s estimation, its market share in Israel is at only a few percent. In the USA, it is insignificant and in Romania, it is immaterial. Therefore, increased competition in these sectors may cause damage to Danya s income and profitability Unique risks for Danya A. Construction flaws Substantial construction flaws within Danya s total operations are liable to affect its profitability. Substantial construction faults in a specific project are liable to affect Danya s profitability in that project. For additional information on the legal proceedings involving construction flaws, also see Note 36 to the Financial Statements as at December 31, Danya s operations abroad Global or national financial crises affect the scope of operations in the real estate market, and consequently, affect the scale of Danya s operations and its profitability. 43;

223 1.14 Infrastructure Contracting Sector In this operating segment, the Group operates (as a concessionaire or building contractor) of transportation infrastructures, including bridges, tunnels, underground stations, roads, and railroad lines. The Group s operations in the infrastructure sector are performed mainly by the Company s subsidiary, Danya Cebus This operating segment accounted for 12% of Danya s revenues (consolidated) income in For its operations in the infrastructures sector, Danya manufactures industrial products in its Cebus Rimon Industrial Products plants, including girders for bridges, segments, elements for tunnels, and other pre-stressed products. For more information on the Cebus Rimon plants see Section (a)(2) hereinabove. Following are financial data concerning the Group's projects in the infrastructure contracting sector (in NIS thousands): Infrastructure projects in Israel under construction as of December 31, 2016 The following tables include all the projects under construction in the infrastructure sector as of December , not yet completed. Data for the year 2016 and cumulative current comparison data refer to these projects only. The scope of these projects (including in the comparison data) varies according to the project completion date in each reporting period. Project revenues and progress No. of projects Performance range Starting date Completion date Cumulative income recognized Anticipated revenues Total actual and anticipated revenues , ,350 82,118 1,500,076 2,056,842 Completion Cumulative advance payments Total sales for the period as of December 31, % 10% 44% 530, ,417 93,232 53,591 Costs Cumulative recognized costs Anticipated costs Total actual and anticipated costs 584, ,891 92,278 1,497,709 2,081,913 Gross profit Recognized gross profit Total actual Gross profit margin Anticipated and gross profit anticipated balance gross profit (27,438) (21,542) (10,160) 2,367 (25,071) (1%) 1% (5%) 442

224 Infrastructure projects in Israel completed as of December 31, 2016 The data in this table include the infrastructure projects that were completed in the period of the Report and the comparison data for these projects Total sales for the period Gross profit (loss) recognized Income receivable as of December 31, , , ,949 87,720 47,917 39, General information on the infrastructure contracting sector Structure of the operating segment and changes in the scope of activities therein and its profitability A. Operations in the infrastructure contracting sector are executed largely for the public sector, either directly or indirectly, in other words, for the government, government-owned companies and ancillary units, or for private developers that were awarded tenders issued by the public sector using the Private Public Partnership (PPP) method, in which the private sector entity executes, finances, and operates the project (e.g., BOT, PFI projects, etc.). Operations in the infrastructure sector are divided into two levels by project scope: (1) Mega projects such as the Tel Aviv Light Train, tunnel projects, ports projects, Cross-Israel Highway, Highway 431, and similar projects. The number of players in Israel in this sector is limited and generally groups of companies or large companies submit bids for such projects, occasionally in collaboration with foreign companies. Several of such projects are executed in the PPP method. (2) Ordinary budgetary projects a significant number of players in the industry are able to compete in projects of this type. The Group s activities in the infrastructure sector are affected mainly by the government s policy on infrastructure development, including the amounts budgeted for it in the State s budget and the scope of the tenders published by the State (with both government financing and private financing). The economy is currently experiencing a credit squeeze, in view of the restriction imposed by the Bank of Israel on the banks that allows them to allocate only 20% of their total bank credit portfolio to operations in the real estate sector. This has created the real estate sector and the infrastructures area a concentrated market with few companies able to win tenders that require private financing. B. According to data from the Central Bureau of Statistics, gross investments in infrastructure in recent years were distributed as follows (in NIS millions at current prices): 443

225 Communications Transport Total* Energy and water Total Of which - roads: ; 33473: :3; : ;14238 :4537 ; :4283 *Includes value of development of infrastructure by the State, which cannot be attributed to sectors. The total Ministry of Transportation budget for the various transportation segments is NIS 1.18 billion for net expenses, and NIS 940 million for contingent expenses, and NIS 8.39 billion for future commitments in the 2017 fiscal year; and NIS 5.18 billion for net expenses, NIS 981 for contingent expenses and NIS 31 billion for future commitments in the 2018 fiscal year. Of these sums, the total transportation development budget is NIS 11 billion net expenses in 2017 and NIS 11 billion net expenses in Total transportation supporting budget is NIS 6 billion net expenses in 2017 and NIS 6 billion net expenses in Total current budget of the Ministry of Transportation is NIS 414 million net expenses in 2017 and NIS 442 million net expenses in 2018 (from the Highlights of the State Budget Ministry of Transportation and National Infrastructure and Road Safety file). Below are the key points of infrastructure development in Israel for the forthcoming years: A. Heavy rail train development The heavy rail development budget for 2017 is NIS 8.1 billion net expenses, NIS 200 million contingent expenses and NIS 6 billion for future commitments, excluding ex-budget sources. In the forthcoming years, work will continue on several projects, including the rapid line to Jerusalem, the electrification project, replacement of the signaling system and acquisition of mobile equipment (train cars and locomotives). These projects are expected to improve the quality of passenger service by increasing the frequency of the trains and their traveling speed, and by reducing noise and air pollution, and other factors. Electrification of the system will also reduce maintenance and mobile equipment costs. In addition to the projects promoted by the Israel Train Company, Nitivei Israel will complete the Acco-Carmiel line in 2017 according to a 2010 government decision. The Cross-Israel Highway company will begin a detailed plan of the eastern rail line between Lod and Hadera. B. Promoting mass transit systems The government budget for public transportation and mass transit systems in metropolitan areas (not including heavy rail) in 2017 is NIS 6.3 billion net expenses and NIS 9 billion future commitments, and NIS 1.3 billion net expenses and NIS 8.8 billion future commitments in The budget is mainly designated for the planning of mass transit systems in metropolitan areas and for the construction of the first mass transit system lines in Jerusalem, Tel Aviv and greater Haifa; mass transit systems such as the light train; the BRT (bus rapid transit); rapid car lanes; and the construction of public transportation infrastructure, bicycle lanes, etc. In 2017 and 444

226 2017, Neta will continue to perform work on the construction of the Red Line that connects Bat Yam to Petah Tikva through Tel Aviv, Ramat-Gan, and Bnei Brak, and will accelerate the planning work on the complete network of lines in the metropolitan. In Jerusalem, work on the plans for two additional light train lines will continue the green line and the blue line. In the Haifa metropolitan, work is underway to complete the construction of Israel s first BRT system (the Metronit), which commenced operations in August Furthermore, planning of a rapid light train line between Nazareth and Haifa and a cable car line from the Mifratz station to Haifa University will also be promoted. C. Inter-city highways In 2017, the budget for inter-city highways is NIS 2.4 billion net expenses and NIS 360 million contingent expenses and NIS 5.7 billion future commitments. In 2018 the budget for inter-city highways is NIS 3.4 billion net expenses and NIS 400 million contingent expenses and NIS 2.9 billion future commitments. Development of the inter-city highways is performed by Nitivei Israel and Cross-Israel Highway. Nitivei Israel works according to a multi-annual plan. In 2016, a multi-annual plan for was agreed. Cross-Israel Highway continued to develop the Cross-Israel highway according to the government decision on the Nitivei Israel plan. D. Public traffic lanes Extension of public traffic lanes of up to 576 km Restrictions, legislation, standards, and special constraints applicable to the infrastructure contracting sector A. Licensing Through Danya, the Group is licensed by the Registrar of Contractors in various classifications which allow it to execute projects in which it is involved as specified in the following table: 1 Industry Name Classification 422 Roads, infrastructure, and development C5 unlimited 522 Bridges C5 unlimited 400 Drainage and sewage B5 (special) unlimited In all these sectors, Danya has a certificate as a recognized contractor for work with government offices. For more information, see Section (b)(2) hereinabove. B. In addition, the provisions of the standards and restrictions specified in Section (b)4 hereinabove apply to the Group s operations Critical success factors in the infrastructure contracting sector and the changes therein In the estimation of Danya s Management, the major factors contributing to success in this operating segment are as follows: 1 Furthermore, the Cebus Rimon subsidiary has a contractor's license in the infrastructure sector (200), and is classified as C1. 445

227 A. Knowledge, experience and the ability to manage and execute large-scale projects; B. Financial strength, and in projects financed by the private sector the ability to obtain credit and financing guarantees on a large scale; C. Meeting deadlines and standards of performance Main entry and exit barriers of the infrastructure contracting sector and the changes therein A. The main formal entrance barrier to the infrastructure contracting sector in Israel is licensing: obtaining a contractor s license and registration in the Contractors Register. B. Some of the tenders issued by various government ministries require confirmed "recognized contractor" status as a precondition for participation. Some tenders determine additional threshold requirements for participation and/or for advancing beyond the preliminary screening stage of the tender, which vary from tender to tender, such as provision of guarantees, proof of financial strength, scope of operations and previous experience in project execution. C. In addition to these barriers, Danya believes there are also informal barriers in non-government sector tenders, such as share capital and financial capability, prestige and previous experience that affect the ability to be included in the list of contractors invited to participate in tenders for work contracts. D. The main exit barriers in this sector are as follows: long-term contractual obligations to clients, authorities, suppliers and financing entities, including, long-term commitments for operation, maintenance, warranty for repairs, and guarantees pursuant to the agreements of undertaking The structure of competition in the infrastructure sector and the changes therein For details, see Section below Products and services In 2016, Danya operated as a general contractor providing infrastructure construction services to a number of projects. A. Following is a description of the Light Train project, which is the main infrastructure project in which Danya was engaged in On June 11, 2015, Danya was informed by Neta that its bid, submitted jointly with an international company (hereinafter in this sub-paragraph, the Foreign Company ) that is not related to the Company and/or to its controlling shareholder, as part of a specific contractual arrangement to be established (jointly hereinafter in this sub-paragraph, the Partnership ; Danya will hold 49% of the rights in the Partnership and the Foreign Company will hold 51% of the rights in the Partnership), that it was declared the winning bid in a tender to perform mining work at the Carlibach Station that is located in the western section of the Red Line Tel Aviv Light Train (hereinafter in this sub-paragraph, the Tender ), which Neta issued. According to the terms of the Tender and the bid that was submitted, the Partnership will be entitled to a consideration of NIS 568 million (plus VAT as mandated by law) for said work, to be paid according to the progress of said work. The performance period is 54 months (according 446

228 to milestones defined in the Tender) from the date of the start work order. The partners provided a performance bond as is customary. The Partnership commenced the work that is the subject of the Tender. On December 21, 2015, Danya was informed by Neta that Danya Cebus bid, on behalf of the Partnership, was declared the winning bid in a tender to plan tunnels and construct underground stations in the eastern section of the Red Line Tel Aviv Light Train (hereinafter in this subparagraph, the Red Line) that Neta had issued. In this tender, bidders were required to bid for said work to construct the eastern section of the Red Line, which includes, among other things, the construction of three underground stations, two parallel tunnels of 3.5 km each using a tunnel boring machine (TMB) from the depot portal to Ben Gurion station, and from Shenkar portal to two connective passageways west of Geha Junction, and the construction of an additional 400-meter-long connective passageway from Shenkar portal to Em Hamoshavot station using the New Austrian Method (NAM). According to the terms of the tender and the bid, the consideration for the work is estimated at NIS 1.7 billion plus VAT as mandated by law (Danya Cebus share is NIS 0.8 billion), which shall be paid according to the progress of said work. The performance period is five and a half years (according to milestones defined in the tender), beginning from December 29, 2015 (the date of signing a binding agreement). Furthermore, the partners provided performance bonds as is customary in tenders of this type. The work on the Light Train projects commenced in late 2016 and as of the date of this Report, works valued at NIS 254 million have been performed (Danya Cebus share NIS 125 million), which constitute 13% of the total value of the works. In the course of the construction work on the Red Line and the Carlibach station projects, Neta requested that the Partnership perform additional work valued at several tens of millions of shekels, which according to the partners position, were not included in the original agreement. As of the date of this Report, Neta has rejected the Partnership s arguments and has decided to discuss them in an arbitration proceeding that will be conducted according to the principles defined in the agreement. Consequently, in these financial statements, the Partnership recognized costs that were incurred in respect of said works, but did not recognize the corresponding income. Moreover, delays that were, according to the Partnership, caused by Neta, might cause the Partnership not to meet the schedules for several of the milestones defined in the agreement. As a result, the Partnership is subject to the risk of fines if it fails to meet the deadlines. It should be noted that according to the terms of the tender, the total fines shall not exceed 10% of the total value of contracts with Neta. Nonetheless, the Partnership expects to meet the final delivery date for the project. The Partnership estimates that if any fines are imposed on the Partnership, they will be discussed in the arbitration proceeding in view of the Partnership s position on Neta s liability for said delays. 447

229 The Partnership estimates that no fines in respect of the above are expected to be imposed and therefore these fines in respect of non-compliance with milestones were not included in these financial statements. B. Following is a summary of information and financial data on the Light Train project (Red Line - eastern section, and Carlibach station): Total sales in the period (NIS thousands) Gross profit margin Cumulative recognized income (NIS thousands) Actual Anticipated Total actual + anticipated Cumulative recognized costs (NIS thousands) Actual Anticipated Total actual + anticipated Recognized gross profit (NIS thousands) Actual Anticipated Total actual + anticipated ,629 4% 8,629 1,079,811 1,088,440 8,629 1,037,428 1,046, ,383 42, ,888 (2%) 124, ,856 1,074, , ,856 1,091,106 (16,733) 0 (16,733) Total advances in respect of the Light Train project as of December 31, 2016 are NIS 155,920 thousand. Project completion rate: 13% Project operating period Insurance For details of insurance in connection with the Group s operations in the residential construction sector, the non-residential construction sector, and the infrastructure sector, see Section hereinabove Breakdown of income and the profitability of goods and services In 2016, gross profit in the infrastructure segment totaled NIS 81.8 million in the infrastructures sector compared with gross profit of NIS 35.5 million in For information on financial data in connection with Danya s projects in the infrastructures sector, see Section hereinabove Clients The major part of the Group s operations in the infrastructure contracting sector is generally performed under direct or indirect agreements with the public/government sector. In some projects, the Group (through Danya) executes the infrastructure construction work, receives a fixed payment in advance, and has no project-related risks. On occasion, this method also includes responsibility for the planning. In PPP projects, the engagement method is different In this operating segment, the agreements with clients have features that are similar to those in the construction sector (for details, see Section hereinabove). However, receipt of the consideration from clients in this sector is usually on the basis of measured quantities, with the exception of PPP projects as previously stated and/or projects in which Danya is also responsible for the planning, in which case the consideration payment method is generally turn-key. Payments are generally linked to the Paving and/or Construction Inputs Index, and sometimes include a currency-based element (euro or dollars). Accounts receivable in the infrastructures sector at December 31, 2016 totaled NIS 94.4 million. 448

230 Marketing and distribution Work in this sector is usually obtained by submitting bids in tenders published by the public sector Order backlog The Group's order backlog for infrastructure construction as of December 31, 2016 was NIS 1,500.1 million, compared with NIS 1,588.4 million as of December 31, The backlog includes binding orders that were not yet recognized as income in the Financial Statements. For details of the income recognition principles in respect of work performed in the infrastructures segment, see Note 3(Y)(1) to the Company s Consolidated Financial Statements at December 31, Following is the estimated breakdown of execution of the order backlog in the infrastructure contracting segment: Estimated timing of revenue recognition NIS millions Q1/ Q2/ Q3/ Q4/ and onward 1186 Total 1.055,1 It should be emphasized that the timing of income recognition as well as the actual completion of the orders are estimates and include forward-looking information. The Group s assessments in this segment are based on the data set forth in this section, and their realization is subject to the risk factors affecting the Group s operations as detailed in Section above, and other factors affecting the time to complete projects, including the commencement date and schedules for completing the projects which may also be affected by clients flexibility to change such schedules, the availability of budgetary sources required for project execution, the date on which the land is made available for work by the State, and the resolution of issues related to archeological findings In 2016, NIS 350 million of infrastructure projects were added to Danya's order backlog. The entire balance of the order backlog is for projects in Israel Competition In the infrastructure contracting segment, Danya executes projects of a relatively large financial scope. The companies competing in tenders of this type are large-scale infrastructure companies 449

231 with the know-how, experience, and financing required to execute projects of this type, and in some cases in cooperation with giant multi-national companies To the best of Danya s knowledge, Danya s principal competitors in the infrastructure contracting segment in Israel are Shafir, Solel Boneh, Magnezi Group, Orion Group, Yaakobi Bros., Electra Infrastructures Hofrei Hasharon, and Elyakim Ben Ari and Einav Hetz (1965). As stated above, there are other, smaller infrastructure companies that also compete with Danya in the infrastructure contracting segment and whose names are not mentioned in this Section According to BDi publications for 2016, Danya is ranked among Israel s five largest development, construction, and infrastructure companies Danya s financial capabilities in the infrastructure contracting segment, as well as the extensive know-how, experience and project management abilities it has gained in this sector enable it to compete for the construction of large-scale projects Property, plant, equipment, and facilities For details of property, plant, equipment, and facilities in the infrastructure contracting sector, see Section hereinabove Intangible assets For details of property, plant, equipment, and facilities in the infrastructure contracting sector, see Section hereinabove Human capital For details of human resources in the infrastructure contracting segment, see Section hereinabove Raw materials, suppliers, and subcontractors Raw materials and suppliers A. The principal raw materials used by the Group in the infrastructure contracting segment are various types of concrete and iron. In addition, there are principal raw materials that are acquired directly by the Group's subcontractors, such as aggregates and quarried materials, asphalt mixtures, bitumen, and various concrete products. The Group purchases these raw materials on the domestic market from the suppliers from whom it also purchases inputs for its operations in the construction segment. The Group is dependent on the regular supply of raw materials for its operations in the infrastructure contracting segment. B. The Group s commitments in the infrastructure contracting segment with suppliers are similar in nature to its commitments with suppliers in the construction segment (see Section hereinabove). C. For the purposes of its operations in the infrastructure contracting sector, the Group manufactures, through the Cebus Rimon plants, industrialized products. 44:

232 Subcontractors The nature of the Group's engagements in the infrastructure contracting sector with subcontractors is essentially similar to that in the construction sector (see Section (b) hereinabove) Working capital For details of working capital in the infrastructure contracting sector, see Section hereinabove Financing For details of financing of the Group s operations in the infrastructure contracting sector, see Section hereinabove Taxation For details of the taxation on the Group s operations, see Section 1.21 hereinafter Targets and business strategy For details of the Group s targets and business strategy in the infrastructure contracting sector, see Section hereinabove Risk factors For details of the Group s main risk factors in the contracting sector, see Section hereinabove. 44;

233 1.15 The Steel Sector in Israel The Group s activities in the steel sector are conducted through the Company s subsidiary, Africa Industries Ltd., which as previously stated is a subsidiary of the Company, as well as through subsidiaries and related companies of Africa Industries (hereinafter jointly, the Africa Industries Group ), which since September 1981, has been a public company whose securities are listed on the TASE. As of the Report date, the Company held 72.96% 1 of Africa Industries' issued share capital and voting rights. In this operating segment, the Group is engaged in the processing and marketing of sheet-metal and flat steel; 2 profiles and pipes; trade in aluminum, stainless steel, and special steels; anticorrosion; production and marketing of hothouses and light construction buildings; processing and marketing rebar for reinforced concrete in infrastructure and construction; production of welded reinforcing mesh, piles, and cages; production and marketing of communication steel switchboard cabinets and electronic kits; and marketing of steel lighting poles. In the steel sector, Africa Industries operates through Packer Building Steel (Registered Partnership), Packer Steel Industries Ltd. and its subsidiaries (hereinafter, Packer Industries or Packer Steel )(jointly, the Steel Group ) General information on the steel sector General The center of Packer Industries' operations is in Kiryat Malachi where operations in flat steel, profiles and pipes, high-grade iron, painting metals, galvanizing services and running poles are concentrated. Companies in the Packer Steel Group have other factories in Ashkelon offering galvanizing services and the construction of hothouses and light structures (chicken coops, stores, etc.), and in Haifa with operations in flat steel, high-quality steel, aluminum and stainless steel, a factory in Arab for the manufacture of lighting poles, as well as in a plant in Or Akiva where communications cupboards and electronic kits are manufactured. The Group's steel building operations are mainly conducted in a plant in the Beer Tuvia industrial area and two other sites in Rishon Lezion Restrictions, legislation, standards, and special constraints applicable to the steel industry For details of environmental restrictions applying to the Group s operations in the steel products sector, see Section hereinafter Changes in the scope of operations and profitability in the steel products sector There is a connection between the steel prices in Israel and steel prices worldwide, and changes in prices worldwide are reflected in the local prices in the countries in which the Company operates. The cost of steel and raw materials accounted for 67% of the cost of sales in the steel segment in 2016, 74% of the cost of sales in the steel segment in 2015 and The percentage of the Company s holdings in Africa Industries is after deduction of treasury shares held by Africa Industries. 2 Initial processing of steel arriving at the Packer Group plants (as defined below) as huge rolls into the form of sheets/strips supplied to customers who consume them as raw materials for themselves. 032

234 The following graph shows the development in the prices of flat steel (HR black steel plate, simple steel that undergoes a basic rolling process) 1, from 2014 to 2016: $650 $600 $550 $500 $450 $400 $350 $300 $250 NIS 2,165 $586 NIS 1,096 $280 2,400 2,200 NIS 2,038 2,000 $530 1,800 1,600 1,400 1,200 1,000 *The data in the graph are based on the weighted average value of Africa Industries inventory and the Company s orders from its main suppliers. When there is a change in world prices of raw materials, it affects the steel sector in Israel and is expressed in an adjustment of selling prices in Israel. Therefore, when there are global changes in raw materials, the Steel Group may make an exceptional profit (when raw material prices increase) and alternatively, when raw material prices drop, its profitability may decline and the Group may even incur a loss. Based on the experience of the Steel Group, sharp fluctuations in the steel prices may have a substantial effect on the Steel Group s profit and loss. The following graph shows the development of steel prices in relation to the Group's revenues and profitability in the steel segment from 2014 through Rolling is a process of bending steel gradually (for example bending tin until it becomes a tube). 032

235 *It should be noted that the net product in the steel sector in 2014 and 2016, as presented in the above graph, does not include the deductions recorded in respect of goodwill impairment to Packer Steel in 2014 and in respect of a goodwill impairment to Packer Construction Iron in Developments in the markets for steel products or changes in customer profiles Following are the data on the percentage changes in gross domestic product, the percentage changes in industrial output, and percentages of exports of goods and services according to estimates from the Central Bureau of Statistics Percentage change in gross domestic product Percentage changes in industrial output Percentages of exports of goods and services 0.2% 0.2% 3.0% 2% 2.1% 2.3% 3% ) 2.3% ( 2.2% Critical success factors in the steel sector and the changes therein In the estimation of Africa Industries management, the factors that may affect the future success of the steel products sector are as follows: efficiency of production; expansion of the activities in market sectors characterized by low competition (niche markets) and high profitability based on a review of the state of the markets from time to time; maintaining low inventory levels to reduce exposure to fluctuations in global steel prices; strict care to enter into contracts with stable, reliable customers; an increase in the price of steel and flexibility in obtaining credit from banks and suppliers Changes in suppliers and raw materials in the steel sector A. The Steel Group purchases from a large variety of suppliers worldwide (China, Eastern Europe, Turkey, and Western Europe). The nature of the Chinese market requires cash payments with orders, and in a minority of cases, very short credit is extended by suppliers, and this mainly from suppliers in Eastern and Western Europe. B. Contracts with suppliers are entered into separately for each transaction. The Packer Group has no exclusivity agreements with raw material suppliers and cannot retain exclusivity over time with new suppliers that it identifies. 030

236 Main entrance and exit barriers in the steel market sector To the best of the Africa Industries' knowledge, there are no regulatory or other statutory restrictions that restrict the entry of competitors into activities in the steel sector in Israel, including restriction on the import from abroad of products of the type manufactured by the Group. The entry barriers faced by potential competitors are the extensive investment required in working capital (including inventory risks) and steel processing equipment, storage facilities and hoisting equipment. Furthermore, highly developed skills are required to integrate delivery sources as well as expertise in inventory delivery, in the informed use of materials, and in adapting it to customers' needs. A limited number of local steel traders are operating in the Israel market and they import steel on an irregular basis depending on market conditions Substitutes for steel products and changes therein Substitutes for steel products are limited due to the difficulty of competing successfully with the mechanical properties of steel and the ease of its processing. Nonetheless, the end products manufactured in steel in the steel by customers of the Steel Group compete with similar products manufactured from plastic, PVC, and other materials. However and as stated above, in the estimation of Africa Industries management the potential for steel substitutes is limited. This estimation by Africa Industries management is based on, among other things, subjective estimates and assessments that take into account past experience, which in Africa Industries view may offer a general, albeit imprecise overview of the steel market and the uses of steel products Products and services The main products and services in the steel products sector are used for industry, infrastructure, construction, agriculture, and private consumption, as described below Sheet-metal products imports from overseas at steel rolls and processing, including cutting to length, cutting strips and cutting sheets according to customers' requirements; Anti-corrosive products Hot-zinc galvanizing and electrolytic painting of various steel products for manufacturers and service providers in the steel industry. It should be noted that 80% of the galvanizing services are provided for steel products that the Group s customers bring to it to be galvanized, with the remainder provided for by the Group s own steel products Pipes and profiles The import, marketing and manufacture of pipes, profiles, road barriers, etc Construction steel Processing steel for insertion into infrastructures and building, manufacture of welded mesh and production of rods and welded steel cages for strengthening and reinforcing structures Steels and metals (a) Alloy steels and tool steel import and marketing of alloy steels and tool steel, which are high-grade steels used to manufacture molds for chip processing, etc. These steels are considerably more expensive than regular steel (b) Aluminum and stainless steel import and marketing of aluminum and stainless steel used for microchip processing, industrial 033

237 activities, etc. (c) Extrusion of steel coils Purchase of steel coils from overseas manufacturers and extrusion to dimensions according to its customers needs; In this process, the shape of the steel is modified without cutting Hothouses and light construction buildings Manufacture and marketing of hothouses, chicken coops, fattening pens, and screen houses in Israel and overseas (hothouses are supplied complete, including installation); Africa Industries operates overseas primarily by offering a fully integrated structure, including the interior systems, the supply of plants and agronomic consulting Lighting poles Manufacture and marketing of lighting poles for the Israel National Roads Company, local authorities, and public institutions Communications equipment and electronic kit cabinets Manufacture and marketing of cabinets for electronic products Breakdown of revenues and the profitability of goods and services There are three main product categories in the steel sector the percentage revenues from which are more than 10% of the Group s revenues in this sector, and they are the category of sheetmetal products, the category of pipes and profiles and the category of building iron. Following is the distribution of the Group s revenues in Israel from sheet-metal products, metal products, and the other products in the sector (in NIS thousands): Revenues % of the total revenues from the steel sector Revenues % of the total revenues from the steel sector Revenues % of the total revenues from the steel sector Sheet-metal products 222,523 21% 233,300 23% 258,522 25% Pipes and profiles 038,832 02% 032,352 02% 028,018 02% Building iron 323,322 30% 322,281 30% 322,253 33% Others (galvanization, hothouses and light construction, and stainless steel rods) Revenues from intersector sales 022,228 01% 028,321 01% 013,582 02% 1,322 2% 1,522 2% 3,252 2% Total 323, ,699 9,3,3,2,2 032

238 Following is the distribution of the Group s gross profitability from the product categories the steel sector for 2014, 2015 and 2016: 2016: Other Sheetmetal products Pipes and profiles Building iron (galvanization, hothouses and light construction, rods and stainless steel) Total revenues (in NIS thousands) Total gross profit (NIS thousands) 222, , , ,228 02,132 32,335 08,282 22,251 Total gross profit margin 21.2% 20.5% 8.1% 02% 0225: Other Sheetmetal products Pipes and profiles Building iron (galvanization, hothouses and light construction, rods and stainless steel) Total revenues (in NIS thousands) Total gross profit (NIS thousands) 233, , , ,321 8,282 22,122 22,523 28,223 Total gross profit margin 2.2% 1.0% 2% 28.2% 2014: Sheetmetal products Pipes and profiles Building iron Other (galvanization, hothouses and light construction, rods and stainless steel) Total revenues (in NIS thousands( Total gross profit (NIS thousands( 258, , , ,582 22,251 1,135 01,233 12,220 Total gross profit margin 2.2% 0.1% 3.1% 00.8% 032

239 Customers The Group's products in the steel sector cater to a wide range of customers in the construction, agriculture, industrial, trade sectors and others. The Steel Group is not dependent on any single customer the loss of which would materially affect this operating segment. Following is a breakdown of customers in the steel segment by sector in 2016: Following is a breakdown of customers in the steel segment in Israel in 2015: Marketing and distribution The Steel Group in Israel has an independent marketing setup that functions through sales representatives employed in the Steel Group. Sales representatives make regular calls on customers and take orders, collect payments, and provide customer service Competition The steel industry is characterized by intense competition. Most of the companies that compete with Africa Industries in steel products are privately owned companies and their business information is not accessible to the public. Therefore, Africa Industries is unable to estimate its market share in steel products in Israel accurately, although it estimates that the Packer Group is one of the three largest players in this industry in Israel. 031

240 The Steel Group is a leader in the steel industry in Israel and has a long-standing reputation due to the fact that the Packer Industries Group offers a broad range of products and services and is able to meet its customers special needs. The relative advantage the Packer Group has over some of its competitors is in the fact that Packer Group companies provide themselves with engineering services (for maintenance), transportation and galvanizing services, joint purchasing and internal purchasing, and thus reduce operating costs compared to its competitors that are forced to purchase such services from external sources. On this subject it should be noted that the Packer Industries Group coordinates various activity sectors under one roof in the Kiryat Malachi plant. This fact gives the Group a relative advantage over some of its competitors in its ability to supply its customers with a wide variety of products from one place and to transport them using its own resources, while putting the emphasis on efficiency and quick response Following are additional details of manufacturers and service providers in the steel sector: Iskoor Ltd. operates in the field of sheet-metals, pipes, and profiles, galvanizing and painting, and high-grade iron; Scope Metals Group Ltd. (hereinafter, Scope ) a public company whose activities in the sector are technical trade and supply to industry. Scope supplies stainless steel, aluminum, steel and steel alloys, magnesium, plastic, nickel alloys, brass, bronze, copper, lead and titanium; Polypach Bet Shemesh Plants (1991) Ltd.; Middle East Pipes Ltd. operates in galvanizing and the manufacture of large-diameter pipes; Zinometal Ltd. operates in sheetmetals, pipes and profiles; Ran Steel Ltd. is engaged in trade of sheet-metals, profiles and high-grade iron; Polyran Ltd. is engaged in the sale and manufacture of sheet-metal and profiles; S. Cohen is engaged in the high-grade metal and sheet-metal sector; Or Epoxy operates in the powder coating sector; Yehuda Pladot operates in the areas at manufacture and marketing of building steel, and; Hod Assaf Industries Ltd. operates in the areas at manufacture and marketing of building steel Production capacity The Packer Group does not fully utilize its manufacturing capacity in the steel sector (as of the date of this Periodic Report, the Packer Industries Group is utilizing 78% of its production capacity). The management of Africa Industries estimates that for a relatively small investment its output could be increased by 15%, although based on the present level of demand in the market, such expansion is unnecessary at the date of this Periodic Report. 033

241 Property, plant, equipment, and facilities Following are data on the depreciated cost of items of significant property, plant and equipment, with respect to the steel sector as of December 31, (NIS millions): Land 32,321 33,213 32,230 Machinery and equipment (including, among other things, pipe production machines, galvanization baths and vehicles) 055, , , In the steel sector, the Company Group holds lease rights for a period of between two and 42 years in a number of real estate properties in Israel (including in Kiryat Malachi, Ashkelon and Haifa) with a total of 160,906 sqm, for which the Steel Group paid a total of NIS 897 thousand in rentals in 2016, NIS 894 thousand in 2015, and NIS 888 thousand in In the steel sector the Company Group also entered into rental agreements (expected to terminate in between one and 18 years) in connection with sites in Israel (including in Beer Tuvia, Rishon Lezion, Haifa, and Or Akiva) for a total of 116,195 sqm, for which the Steel Group paid rent of NIS 8,955 thousand in rentals in 2016, NIS 8,761 thousand in 2015, and NIS 8,933 thousand in The Steel Group owns equipment, including inter alia production lines for off cut flat steel, cutting lines for flat steel slitting, machines for manufacturing pipes and profiles, rolling machines for the production of drainpipes and highway barriers, extrusion and cutting of steel rods, galvanizing baths, machines for manufacturing steel mesh, machines for manufacturing elements Human capital Organizational structure Furthermore, under the management agreement between the Company and Packer, Packer provides the Company with management services, including the services of the company s CEO, services of a chief financial officer, and other services. Following is Africa Industries organizational chart in the steel segment as of the date of this Periodic Report: 035

242 Following is a breakdown of the Company Group s employees in the steel sector: Headquarters and management Manufacturing and operations December 31, 2016 December 31, December 31, Sales Total 33,,39,43 Africa Industries management considers that it has no significant dependency on any particular worker in the steel operations in Israel. It should be noted that a change in the minimum wage of up to 10% is not expected to have any significant effect on Africa Industries gross profit or net profit in the steel sector next year The Steel Group employs 159 Israeli and foreign employees in the operating segment, in jobs whose salary is determined by actual work hours spent. These workers are employed through employment agencies. 038

243 Management services agreement between the Company and Africa Industries Commencing April 1, 2014, the Company provides current management consultancy on current and strategic management procedures to Africa Industries, as well as spokesman, public relations, and assisting the Company's secretariat, with a total of 1.5 monthly positions in return for a quarterly payment of NIS 172,500 (linked to the April 2014 CPI), and directors' services (excluding in respect of external directors) to Africa Industries and/or its subsidiary whose shares are traded on the Israeli and/or a foreign stock exchange, for an annual remuneration and remuneration for each meeting attended by a director on behalf of the Company. The management agreement has been in force since April 1, 2014 for three years, after replacing the previous management agreement between the parties. As of the date of this Report, the parties have not yet entered into a new management agreement Labor relations in the steel sector in Israel are governed by the general labor laws, extension orders applying to the steel sector, general collective labor agreements, and collective agreement signed between Steel Group companies and representatives of the employees of these companies and the New General Workers Histadrut and in personal agreements with management staff Investments in training and development of human capital The Packer Industries Group invests resources in professional training for its employees, to raise the level of safety, improve employee work satisfaction, increase group identification, and improve customer service based on the position of each employee and the area in which he works Employee bonus plan for steel workers The Steel Group rewards its sales representatives in the steel sector on the basis of profitability targets, added value, and quarterly collections. In addition, based on the Steel Industries Group s profit data and employee performance, the Steel Group typically awards year-end bonuses to employees for the previous year. The Steel Group also remunerates the directors of its subsidiaries on the basis of meeting targets, including meeting budgetary targets, implementation of investment programs, meeting efficiency targets, employee motivation within the organization, and customer satisfaction Raw materials and suppliers As part of the activities of the steel segment, the Steel Group imports tin rolls and rods from various plants worldwide, and processes them into a broad range of end products, including tins, pipes, profiles, tapes, and road barriers, rolled tin in various sizes and shapes, and to different levels of finish. Most of the sheet-metal, flat steel, profiles, and pipes are off-the-shelf products, with the rest manufactured and processed according to the specific requirements of customers of the Packer Industries Group The above-mentioned raw materials are standard components imported partly from Europe (including Russia and the Ukraine) and partly from China, India, and Turkey. 022

244 The Steel Group receives credit from its overseas suppliers. The credit is extended as open debt or against letters of credit (LCs). The balance of the credit provided to the Company Group in the steel sector is from suppliers in the steel sector for steel products was NIS 4 million, NIS 35 million as of December 31, 2015, and NIS 45 million as of December 31, Some suppliers discount bills against the Steel Group's liabilities Lead times of steel in operations vary between 2.5 months to 6 months to 4 months. The Packer Steel Group places orders on a monthly basis for the various raw materials according to estimates of its marketing division concerning the anticipated sales volume and based on past experience. Orders for specific sizes are placed according to requirements. The size of the order and the timing are determined inter alia on the basis of inventory planning models that calculate the average consumption rate of each type of raw material. The Company Group has a policy of minimizing its exposure to fluctuations in raw material prices by reducing the quantities of inventory in open orders to a minimum, taking into account the Steel Group s normal operations with respect to steel products (about three months inventory) The Steel Group is not dependent on any specific suppliers and there are a number of suppliers for every raw material. The raw materials purchased by the Steel Group are standard products, and accordingly, Africa Industries considers that the Packer Steel Group would have no difficulty replacing suppliers based on price considerations, where selection of suppliers are based on price and credit considerations Following are the Company s purchases of steel products in the steel sector from suppliers whose purchases by Steel Group accounted for more than 10% during the years 2014, 2015, and 2016: Supplier's name/relevant period % of total steel purchases in Israel for the period METINVEST 1 22% 22% 21% DUFERCO 2 02% 00% 22% ICDA % 2% 22% The Steel Group has no binding agreements with suppliers, and the terms of the order are determined when the order is placed. Payment for raw material is in cash on the supply date or against letters of credit (LCs) Operating working capital Inventory policy In the steel sector, the Packer Group strives to keep the lowest possible level of inventory. Average lead times between steel orders and their delivery to Packer Industries Group range between three and four months. In a small number of cases, where standard 1 A trading company in the Ukraine which purchased a company in the Ukraine whose products used to be purchased through Midland. 2 A Swiss trading company that markets products from all over the world globally. 3 The largest steel producing company in Turkey with worldwide distribution. 022

245 products are involved, such as pipes, the Packer Group holds an inventory of finished goods so as to be able to supply the products to its customers quickly. The Steel Group in Israel holds average inventory of four months sales. It should be noted that the Packer Group holds insignificant quantities of steel inventory for periods of more than a year purely from operational considerations. Since steel has an unlimited life span, it is unimportant how long this inventory is held and it does not lose value, and therefore it is not depreciated Credit policy Customers credit The Steel Group gives its customers in the steel sector large amounts of credit on payment terms of up to EOM+120 days, and in the hothouse and light construction sectors, Africa Industries gives its customers the option of spreading payments over a number of years on market terms standard in the sector. The balance of credit extended to customers in the steel sector was NIS 435 million as of December 31, 2016, NIS 465 million as of December 31, 2015, and NIS 528 million as of December 31, Customer credit is extended on the basis of various economic criteria, such as the customer's profitability, experience with the customer, an analysis of the customer's balance sheet, and personal guarantees or other collateral given in a few cases. The Steel Group periodically examines the provision of credit to its large customers, the provision of new credit to existing and new customers, authorizing exceptions as required, and enforcing the restrictions determined. The examination is carried out by the Group s credit committee which meets periodically for this purpose. The Steel Group has a policy of making a provision for doubtful debts of problem customers by means of a specific list that is updated once a quarter. In the first stage of the review, the managers of the companies in the Steel Group review the list of problematic debts and assess, based on their knowledge of the customers situation and after receiving a legal opinion (as necessary), the collection rate from these customers and decide which debts and at which rate should be included in the list of doubtful debts. Notably, the list of doubtful debts also includes debts regarding which no legal action has been initiated, when it is estimated that no sum will ultimately be collected on them. The Company s management reviews this list on a quarterly basis. Furthermore, once every six months a review is conducted of the balances in arrears that were not reviewed as problematic debts. If it emerges that the progress in the debt collection process is not consistent with the estimates made by the relevant officers in Africa Industries, an additional provision for doubtful debts is generally made in respect of these debts at the following rates: in respect of a debt in arrears for 3-6 months a provision of 25%; in respect of a debt in arrears for 6-12 months a provision of 50% is made; in respect of a debt in 020

246 arrears for over 12 months a provision of 75% is made. Notably, the balance of these debts is not material relative to the balance of debts in respect of which specific provisions are made. In most cases, accounts more than 12 months in arrears are the subject of legal proceedings or there are arrangements to spread the payments. During this period, the chances of a claim and collection are assessed by attorneys dealing with the matter and/or by the managers of the relevant operations, and the provision for doubtful debts is made according to these assessments in the Steel Group s books. These assessments are examined every reporting period according to the progress of the legal proceedings or new information received on the subject. For some of the debts for which no provision for doubtful debts has been made, the Steel Group has liens or other collateral (such as first liens on property, endorsement of the right to receive money from property tax, liens on the debtors private property, and assessments of the attorneys dealing with the claims), which in Africa Industries opinion cover the amount of the debts for which no provision has been made. In some cases in which the Steel Group has the opportunity to exercise rights on assets owned by the debtors, the Steel Group chooses not to do so when it anticipates that it is commercially expedient to collect the debt on a current basis, among other things so as to ensure the continuation of current operations with the customer (under contracts with high collateral or conditions of payment in advance) Financing Operations in the steel sector are financed by shareholders equity, bank credit (short- and longterm), financial institutions, and supplier credit Following are average and effective interest rates on the loans that were in force during 2014, 2015 and 2016, by bank and non-bank credit sources: Short-term loans Long-term loans Average interest rate Average Effective interest Bank sources NIS 1.4% 5% 1.4% 1.4% Average interest rate 6399 Bank sources NIS 3.3% 3.3% 3.3% 3.3% Average interest rate 2014 Bank sources NIS 0.8% 3.3% 3.2% 3.0% Credit facilities The Group's credit facilities in the steel sector in Israel in 2016 totaled an average of NIS 845 million, of which an average of NIS 815 million were drawn; NIS 1,045 million in 2015 of which NIS 909 million were drawn; and NIS 1,194 million of which an average of NIS 894 million were drawn in

247 Variable interest The range of interest rates for shekel loans in the Group Company in the steel sector in 2016, 2015, and 2014 ranged from 2.85%-8.6%, from 1.8% to 5.4%, and from 1.75% and 5.4%, respectively Restrictions on obtaining loans A. Packer Steel has an obligation to several commercial banks in Israel (hereafter in this paragraph, the Banks ) to maintain a minimum shareholders equity of NIS 120 million and tangible shareholders equity/packer Steel net assets ratio (hereinafter, Equity to Assets Ratio ) of 22%, when for most of the banks the definition of the tangible shareholders' equity ratio (hereinafter, tangible shareholders' equity ratio ). In effect, Packer Steel s shareholders equity was NIS 277 million as of December 31, 2016, NIS 255 million as of December 31, 2015, and NIS 255 million as of December 31, Equity to Assets Ratio was 28.1%, 25.5%, and 25% as of December 31, 2016, 2015, and The total debt to tangible net worth was 18.6%, 16%, and 17.3% as of December 31, 2016, 2015, and 2014, respectively. It should be noted that the above tangible shareholders' equity ratios do not include references to the equity regulations in respect of guarantees that Packer Steel signed to cover a debt of Packer Iron Construction in favor of Bank Leumi and Bank Igud (as part of a mutual guarantee). In view of the fact that as of December 31, 2015, Packer Steel did not comply with the required tangible shareholders' equity ratio set by several banks, Packer Steel obtained letters of waiver of limited terms from several of the banks with respect to said covenants, which as of December 31, 2016 expired (hereinafter, the Previous Letters of Waiver ). It should be noted that also as of December 31, 2016, Packer Steel was not in compliance with the tangible shareholders' equity ratio, and therefore it is negotiating with various banks to obtain new letters of waiver. As of the date of this Periodic Report, Africa Industries is communicating with the banks that finance the steel segment to arrange for a comprehensive financing scheme for the companies in the steel segment. B. As of December 31, 2016, a registered partnership wholly owned by Africa Industries (hereinafter, the Partnership or Building Steel ) had a credit facility in two banks in Israel (hereinafter, the Banks ) for a total of NIS 170 million. Under the agreement with the Banks, it was agreed between the parties that Africa Industries would guarantee the performance of all the partnership's debts and undertakings to the Banks. Under the Loan Agreement it was also agreed that the Partnership would not create a lien on its assets (negative lien). Furthermore, in February and March 2017, specific charges on the Partnership s plant, property and equipment were signed in favor of the banks that finance the Partnership. It should be noted that when the Previous Letters of Waiver were obtained from the banks, as described above, in January-March 2017, Packer Steel and Packer Construction Iron signed cross-guarantees in favor of the banks to secure their mutual liabilities. As of the date of this Periodic Report, Packer Steel is taking steps to delete these cross-guarantees. 022

248 The Partnership also gave both banks an undertaking that the tangible shareholders' equity ratio of the Partnership would not be less than 15%. As of December 31, 2016, the Partnership was in compliance with that ratio. Africa Industries also has an undertaking to one of the banks, that depending on the results of the financial covenants of tangible shareholders equity/net assets ratio (solo) and financial debt to EBIDTA ratio of Africa Industries, the dividend that Africa Industries may distribute to shareholders from the net profit of Africa Industries will be restricted as shown in the following table: Financial debt to EBITDA of Africa Industries* Africa Industries tangible shareholders' equity ratio (solo) Above 32.22% %- 00%-32% 40% 22% 32% Less than 3 222% 222% 32% 22% Between 3-4 Between % 32% 22% 02% 32% 22% 02% 2 *The financial debt is after a deduction of 75% of the working capital. As of the date of this Periodic Report, Africa Industries may not distribute dividends to its shareholders. C. Private loan from institutional bodies In 2013 and 2014, Africa Industries entered into a private loan agreement with two institutional entities that granted Africa Industries a total of NIS 200 million in loans, against which Africa Industries registered a fixed senior lien over all the shares of Negev Ceramics (hereinafter, the Loan Agreement ). Under the Loan Agreement, Africa Industries is required to meet the following financial covenants: (a) The shareholders equity/net assets ratio according to Negev s consolidated financial statements will not be less than 13%. (b) The ratio of Africa Industries debt to Negev s EBIDTA will not be greater than 6 (hereinafter, the EBIDTA Covenant or the Overall Debt Ratio ). (c) The minimum shareholders equity (solo) of Africa Industries will not drop below NIS 330 million. As of December 31, 2016, Africa Industries does not comply with all the financial covenants noted above. On March 21, 2016, Africa Industries received a letter of waiver from the lenders concerning non-compliance with the said covenants (hereinafter, the Previous Letter of Waiver ). According to the terms of the Previous Letter of Waiver, inclusion of a going concern disclosure in Africa Industries financial statements constitutes a violation of the Previous Letter of Waiver 022

249 and grounds to demanding immediate repayment of the outstanding balance of the loan. Nonetheless, on September 28, 2016, a second letter of waiver was signed with the lenders (hereinafter, the Second Letter of Waiver ) with respect to the inclusion of a going concern disclosure in Africa Industries financial statements and with respect to the financial covenants that Africa Industries undertook to meet in the Loan Agreement and the Previous Letter of Waiver. According to the Second Letter of Waiver, among other things, a going concern disclosure in Africa Industries financial statements as of June 30, 2016 and/or September 30, 2016, will not constitute grounds for demanding immediate repayment of the loan, until September 30, 2017, subject to Africa Industries compliance with the financial covenants that were defined. As of the date of this Report, Africa Industries is not in compliance with the financial covenants that it undertook to me in the Second Letter of Waiver, and the institutional entities have grounds for demanding the immediate repayment of the institutional loan. The key points of the Second Letter of Waiver are as follows: (a) The outstanding principal and interest payments scheduled for September 30, 2016 in the amount of NIS 11.7 million will be repaid as follows: (1) NIS 50 thousand payable within 3 business days from the signing date of the Second Letter of Waiver; (2) NIS 5.8 million (linked to the CPI plus accrued interest) payable on March 31, 2017; and (3) NIS 5.8 million (linked to the CPI plus accrued interest) payable on September 30, (b) Africa Industries failure to comply with the financial covenants defined in the Loan Agreement and in the Previous Letter of Waiver will not constitute a breach of the Loan Agreement and/or grounds for demanding immediate repayment of Africa Industries outstanding debt to the lenders, provided that Africa Industries complies with the following financial convents until the publication date of Africa Industries financial statements as of September 30, 2017 (hereinafter, the Waiver Period ). In the Waiver Period, Africa Industries will not be required to meet the equity covenant with respect to Negev, or the total debt to EBITDA ratio and the equity convent with respect to Africa Industries, provided that: 1. The cash flow from ordinary operations, as reflected in Negev s financial statements, will be positive at all times in this period. As of the date of this Report, Negev has a positive cash flow from ordinary operations according to its financial statements as of December 31, At all times beginning from the date of the reviewed financial statements of Africa Industries and Negev as of June 30, 2016, the total debt to EBITDA ratio will be better than the total debt to EBITDA ratio according to Africa Industries consolidated financial statements as of December 31, 2015, which was negative (73) as of December 31, The total debt to EBITDA ratio according to the financial statements of Africa Industries as of December 31, 2016 is (70). 021

250 3. During the Waiver Period, Africa Industries shareholders equity will not less than NIS (70) million. 1 As of the date of this Report, Africa Industries shareholders equity according to the financial statements as of December 31, 2016 is NIS 24 million. (c) Africa Industries undertook to take steps to sell several assets of Africa Industries including through external entities, and also undertook that any proceeds received from the sales of assets and/or lawsuits that were or will be filed by Africa Industries (not including reimbursements of expenses) shall be applied to repay the loan (including early repayment; with the exception of the sum agreed upon by the parties to serve for Africa Industries current operations). (d) Beginning from September 1, 2016, the annual interest rate on the Loan will be 7.7%. (e) Provisions were defined with respect to the submission of information and reports to the lenders and several conventional grounds were added for demanding immediate repayment of the Loan. (f) The provisions of paragraphs (c) through (e) above will also apply after the end of the Waiver Period, until the earlier of the following dates: (a) final, full and absolute payment of the loans; or (b) the date on which Africa Industries meets all the terms of the Loan Agreement including the financial covenants. Notably, on March 10, 2016, Africa Industries made early repayment to the Lenders of the principal and interest amounts that were scheduled to mature on March 31, On March 16, 2017, Africa Industries was informed by the institutional entities of the expiry of the Second Letter of Waiver, due to the institutional entities following claims: (a) breaches of various representations made by Africa Industries from the date the institutional loan was granted and over the period (including in view of the restatement of the financial statements of Africa Industries and Negev after the discovery of irregularities in Negev, and in view of the disputes related to the presentation of Africa Industries guarantees); and (b) an anticipated violation on the grounds of default on the upcoming payment of the institutional loan, scheduled on March 31, It should further be noted that in view of the expiry of the Second Letter of Waiver, Africa Industries is in a continuing breach of the institutional loans and therefore the institutional entities have various grounds to demand immediate repayment of the loan. Africa Industries financial statements as of December 31, 2016 contain a note and a note in the auditing accountants report concerning significant doubts about the continued existence of Africa Industries as a going concern, due to Africa Industries financial position, among other things, and in view of the uncertainty surrounding Africa Industries ability to meet its obligations toward the institutional entities. As of the date of this Periodic Report, Africa Industries lacks the means and sources to discharge the upcoming payment of NIS 26 million to the institutional entities, which is 1 For this purpose shareholders equity will be after deductions in respect of an impairment to the value of Negev s manufacturing operations (the Negev factory) and in respect of intangible assets that will be recorded (if recorded) in the Company s financial statements for the period beginning from the date of the signing of the Second Letter of Waiver until the date of its expiry, for any cause. 023

251 scheduled on March 31, In view of this, on March 28, 2017, the institutional entities notified Africa Industries of their demand to make immediate repayment of the outstanding balance of the institutional loan, which is NIS 161 million as of March 31, 2017, plus interest and linkage differences to the effective date of payment. As of the date of this Report, Africa Industries is studying the options available to it with its legal advisors. D. Undertaking to meet financial ratios To guarantee credit from a bank (hereinafter, the Bank ) and credit granted to its investees and to which Africa Industries is a guarantor, including a long-term loan taken by the Iron Construction Partnership, in respect of which the final principal payment was due on October 31, 2016, Africa Industries undertook to maintain the following financial ratios: 1. Tangible shareholders equity ratio of Africa Industries, according to Africa Industries financial statements, will not be less than 15% (the ratio as of December 31, 2016 is 0.15%). 2. Total tangible shareholders equity ratio of Africa Industries will not be less than NIS 240 million linked to the CPI (tangible shareholders equity ratio of Africa Industries is NIS 2.5 million as of December 31, 2016). 3. The ratio between the aggregate shareholders equity of Negev, Packer Steel and Packer Construction Iron, based on the equity of Negev, Packer Steel and the Partnership as they appear in their respective financial statements, and Africa Industries debts and liabilities less cash and cash equivalents, according to the separate financial statements of Africa Industries (solo statements), will be not less than 1.5 (the ratio as of December 31, 2016 is 1.5). To secure credit provided by a bank to a company controlled and wholly owned by Africa Industries, Africa Industries undertook not to distribute a dividend, unless Africa Industries complies with the following cumulative conditions on the date the resolution to distribute a dividend is adopted by the Board of Directors of Africa Industries: (a) Africa Israel is complying with the financial covenants stated in sub-paragraphs 1 to 3 above; (b) Africa Industries aggregate results (based on the consolidated financial statements) in the four calendar quarters prior to the resolution adoption date are not a net loss; (c) the Bank has not given notice of its intention to call the debts of Africa Industries for immediate repayment; (d) The resolution is adopted after December 31, Loan in favor of Africa Industries On September 21, 2015, the Company granted a loan of NIS 50 million in favor of Africa Industries (hereinafter, the Loan ). The loan bears variable interest at the annual rate of Prime plus 1.5%. The loan and interest are due in a single payment on December 31, 2017, unless the parties agree on a deferral. To secure Africa Industries obligation to discharge the loan, Africa Industries registered a first degree change in the Company s favor on all its (indirect) rights in the share capital of Koa Gas, subject to Koa Gas undertaking not to register a charge on its rights in the Koa Gas site. 025

252 Taxation The industrial plants of several of the Company s subsidiaries in the steel segment have Approved Enterprise status pursuant to the Law for Encouragement of Capital Investments 1959 (hereinafter, the Encouragement Law ) Furthermore, the industrial plants of several of Africa Industries subsidiaries in the steel sector are subject to the Preferred Enterprise provisions In addition, several of the Group s subsidiaries in the steel segment are Industrial Companies within the meaning of this term in the Law for Encouragement of Industry (Taxes) For additional information in connection with the tax environment in which the Steel Group operates, the elements of the taxes on income expenses (income), the adjustment of the theoretical tax on income before taxes to tax expenses, deferred tax assets and liabilities, and tax assessments, see Note 30 to the Company s Consolidated Financial Statements as of December 31, Environmental protection In 2016, the costs of the Company Group in the steel segment, relating to these operations designed to comply with the environmental provisions applying to it, were NIS 1.7 million. In 2015, the expenses of the Company Group in the steel sector, attributed to these operations, totaled NIS 1.8 million Restrictions and regulatory control of operations in the steel sector Africa Industries Group operations in the steel sector are subject to the provisions of the Hazardous Substances Law, 1993, hereinafter, Hazardous Substances Law ), the provisions of the Prevention of Nuisances Law, 1961, and the provisions of the Licensing of Business Law, The galvanization plants have toxin permits pursuant to Section 3 of the Hazardous Substances Law due to the use of hazardous substances and acids Business licenses Most of the Packer Group s plants currently hold valid business licenses. Packer Construction Iron s plants in Rishon Lezion and in Beer Tuvia have valid business licenses. At the date of this Periodic Report, Ymko YPDZ Ltd. (hereinafter, Ymko ) does not have a business license. However, in view of the fact that Ymko has built a new plant on a site adjacent to the existing plant, the construction of which was completed in 2015, Ymko is currently acting to obtain a valid business license Reliability and quality control Companies from the Steel Group operate a combined quality management system pursuant to the requirements of Israeli standard 2008 and international standard ISO The products developed, manufactured and marketed by the Steel Group comply with said standard and the relevant Steel Group companies accordingly have the necessary permits from the Israel Standards Institute. To ensure the reliability and maintenance of the quality management system, Africa Industries has a quality management and control department that deals with the full upkeep and maintenance of the system. 028

253 Targets and business strategy in the steel segment The Group is acting to increase the scope of its operations in products with relatively high profit margins and to increase marketing efforts in obtaining projects and take advantage of the existing synergy between a number of product groups in the operating segment Legal proceedings For details of legal proceedings in the steel sector in Israel see Note 36 to the Company s Consolidated Financial Statements as of December 31, Forecast of developments in the coming year In this operating segment, the Group intends to emphasize the development and expansion of operations in the local market and in international markets in areas in which products have relatively high profitability, and in special projects. The Group s assessments in this section are forward-looking information. It is possible that the assessments and intentions, as stated, will not be realized due to various factors, such as a decline in the demand for products, or realization of any of the risk factors specified in Section hereinafter Risk factors in the steel sector In the steel sector, the Company s activities are subject to various risks, as detailed below: Macroeconomic risk factors Economic showdown and uncertainty in the Israeli market are liable to lead to a drop in consumption of Africa Industries Group s products which may lead to a drop in Africa Industries sales and its profitability; Deterioration in the political and security situation the Group owns plants in the Ashkelon Industrial Zone and in Kiryat Malachi that are within range of Qassam rockets and, therefore, any deterioration in the political and security situation may have a negative impact on the results of Group s operations in this sector; Exposure to the domestic and international financial market; Exposure to changes in the exchange rates an increase in the values of various currencies against the shekel may lead to erosion of Africa Industries profitability and its cash flows. exposure to changes in the interest rates; and exposure to fluctuations in the cost of labor changes in the labor laws, including the amount of the minimum wage, could have an impact on the Africa Industries Group s expenses with respect to payment of wages and thus on its profitability Risk factors in the sector Exposure to fluctuations in steel and metal prices due to holding steel and metal inventory and having open orders at fixed prices that exposes it to risks of falling prices. Due to the strong competition, in a situation when prices are falling, steel and metal prices adjust themselves to the price levels extremely quickly whereas the Steel Group actually consumes inventory it purchased at higher prices; Customers credit Credit in the Steel Group is spread over a large number of customers and the Steel Group makes strenuous efforts to identify problem customers but it is possible that one of its large customers could get into difficulties. Africa Industries has a policy of making a provision for doubtful debts of problem customers by means of a specific list that is updated once a quarter. A drop in demand 022

254 could give rise to an increase in competition in the industry and, as a result, to a decline in margins. Working capital financing The significance difference between the credit granted to customers and the inventory requirements and the credit received from suppliers creates a significant dependency on banking credit. A decline in banking sources of credit and credit from suppliers might adversely affect the scope of operations in the steel sector Special risks Concentration of manufacturing at several plants most of the Group s steel operations take place at its plants in Kiryat Malachi and Ashkelon. Any natural damage or other significant damage caused to those sites is liable to have a material effect on the Steel Group s operations in the steel sector; Planning and building and business licensing As of the date of the Periodic Report, a business license has not yet been obtained for the site where Ymko Yadpaz Ltd. is operating. 022

255 1.16. The Home Design Segment General In this operating segment, the Group is engaged in the import, marketing, and sale of ceramic and granite porcelain tiles, sanitary fixtures, taps and other finishing products for home design, the manufacture of porcelain floor and wall tiles for construction, renovation and home design sold to private customers, residents in housing projects, contractors, and local and overseas dealers, all through Negev Ceramics Ltd (hereinafter, Negev Ceramics or Negev ), a subsidiary of Africa Industries, and through subsidiaries and a related company of Negev Ceramics (hereinafter, jointly, the Negev Ceramics Group ). 1 Negev commenced operating in 1970 in the manufacture and marketing of ceramic tiles designed primarily for flooring, which were manufactured in the Group s factory in Yerucham (hereinafter, the Negev Group Factory ). In 2000, Negev converted its ceramic tile manufacturing operations to the manufacture of porcelain tiles, under the NOVO brand, and as of 2001, has led a revolution among customers in shifting from the use of ceramic tiles to porcelain tiles. Beginning in 2011, upon acquisition of Via Arcadia, Negev began to operate two additional chain stores, in addition to the Negev Ceramic concept stores one store under the Via Arcadia brand name, which targets the general public that seeks unique solutions, and another under the Super Ceramic brand name, which targets the general public that seeks discount solutions. Today, the three chains comprise 15 outlets, after Negev s management commenced a reorganization program in October 2015, based, among other things, on focusing on Negev s core operations and reducing Negev s operating expenses, including by downsizing the staff employed by Negev and by matching production at the Negev factory to current levels of demand. In the said reorganization program, Negev took steps, among other things, to merge the sales management functions of the three retail chains that the Group operates and to close 8 of the Group s retail outlets that are not profitable on in the first quarter of 2017). As a result of these moves, the number of employees employed by the Group naturally was reduced by several dozen employees. The Negev Ceramics Group markets a wide range of products, including porcelain tiles for flooring and wall covering, manufactured in the Negev Group plant which is the center of the Group's manufacturing activities. The Group also markets products it purchases in the domestic and foreign markets, including porcelain tiles, ceramics, mosaic, parquet, marble, poll tiles, sanitary equipment, taps, bathroom accessories, glues, and products that supplement the basket of products marketed by the Group. Commencing November 2013, Negev Ceramics began the run of a new factory in Yerucham with a production capacity of up to 3.5 times the production capacity in its previous condition. 1 As of the Report Date, Negev Ceramics entire share capital is subject to a fixed and floating senior lien in favor of an institutional body from which Africa Industries received a long-term loan. 020

256 In the second quarter of 2014, Negev Ceramics closed down the old production plant and gradually began to operate the new plant. It should be noted that due to the proliferation of machines from various manufacturers and the complexity of the technology required to synchronize and balance the machines, together with the transition to natural gas at the beginning of February 2014 and a change in the mix of raw materials, the running-in process of the factory continued for longer than expected, which also led to an increase in expenses in connection with the new plant. In early November 2014, the running-in period of the new plant ended after most of the production and product quality processes stabilized. It should be noted that during the runningin period, (i.e., until the end of October 2014), Negev capitalized its production costs to the plant construction costs, and on the other hand, attributed all the proceeds from sales of the products manufactured during the running-in period, to reduce construction costs, and they were deducted from the sales in Negev s profit and loss statement. As noted above, since 2015, Negev s management commenced implementation of a reorganization plan. As part of this plan, Negev is focusing on its core operations, and has closed unprofitable outlets as well as several of the other ancillary operations in which it was involved. These moves led to a significant reduction in one-off expenses for Negev, including a significant savings in various expenses of Negev, and savings in store rental expenses and a reduction in manpower, and are expected to continue to affect Negev in the forthcoming years. Negev s management plans to examine the continued implementation of reorganization steps Negotiations to reorganize Negev s banking debt A. In view of the decline in the Negev Group s financial flexibility on the one hand, and the considerable extent of its bank debt and considerable current costs, on the other hand, Negev s management concluded that a reorganization of its bank debt is required, by restructuring the bank debt, extending the payment terms and/or reducing its costs. B. Subsequently, after an extended period of negotiations that Negev s management conducted separately with each of the banks that had granted it credit (hereinafter, the Banks ), Negev s management, in consultation with an external advisor and a financial overseer on behalf of the Banks, developed a program for reorganizing the bank debt and receiving new credit (hereinafter, the Outline ), after it presented to the Banks an aggressive reorganization program that Negev s management had developed and includes the execution of a long-term marketing plan designed to create an improvement in the Negev Group s business results. C. As the first stage in the Outline, an agreement to provide additional credit in the amount of up to NIS 50 million was signed on December 7, 2016 between the Negev Group companies and the Banks (hereinafter, the Additional Credit Agreement ), under which the Banks granted NIS 37 million to the Negev Group of the additional credit until the date of this Report. D. The maturity date of the additional credit was defined as the earlier of April 30, 2017 or the signing date of a detailed arrangement to reorganize the Negev Group s bank debt, which was 023

257 scheduled to be signed within 90 days from the signing date of the Additional Credit Agreement. E. Concurrently, the parties negotiated to develop the terms and format of the debt arrangement based on the Outline. Nonetheless, in view of the additional downturn in Negev s business results and the continuation of this situation, it has become clear that an immediate injection of capital is necessary for Negev to continue its operations, beyond the reorganization of the bank debt. In view of the financial position of Africa Industries and the lack of available sources to perform said injection of capital, the parties are seeking, in a coordinated manner, and with the assistance of an external advisor, an external investor who might perform an injection of capital against purchase of the holdings in the Negev Group, concurrently with the reorganization of the bank debt. F. As of the date of this Report, Negev s management and the Banks are negotiating with a potential buyer to develop the terms of an agreement to purchase Negev, alongside the development of an arrangement of the bank debt, and these are designed to come into force in an integrated and inseparable manner. G. On March 16, 2017, Africa Industries was informed by the institutional entities that in view of the charge on Negev s shares, which was created to secure the institutional loan, the institutional entities demand that the steps that Africa Industries and Negev are conducting in coordination with Negev s financing banks in the effort to reorganize the bank debt, to identify a buyer for Negev, should also be coordinated with them and subject to their approval, as the owners of the charge on Negev s shares. H. In view of the fact that the implementation of the sales agreement, which involves an amendment of Negev s articles of association, includes the cancellation of existing Negev shares and the issue of new Negev shares to the potential investor, Negev intends to apply for approval of the court. I. Africa Industries management estimates that, subject to the agreement in principle on said Outline, the reorganization of the bank debt may significant improve Negev s business results and help it realize it plans. J. It should be noted that there is no certainty that negotiations with the potential buyer and/or with the banks will ripen into binding agreements, in view of the fact, among other things, that Negev s entry into binding agreements may also depend on the approval of third parties. K. Negev s financial statements as of December 31, 2016 contain a note and reference in the report of the auditing accountant regarding significant doubts about Negev s future as a going concern due to, among other things, the uncertainty surrounding Negev s ability to comply with the Outline of the debt arrangement and the uncertainty surrounding Negev s future operations without additional injections of capital in the foreseeable future. The financial statements do not include adjustments to the values of its assets and liabilities or their classification, which may be necessary if Negev is unable to continue to operate as a going concern. 022

258 Irregularities in financial reports and their implications on the financial position of Africa Industries On March 29, 2015, Africa Industries reported for the first time that its management had received a communication from an entity in the Africa Industries Group, after the dismissal of the former CEO of Africa Industries, regarding concerns about irregularities in the recording of income in one of the (indirectly) wholly owned subsidiaries of Negev Ceramics, in response to which Africa Industries initiated an immediate investigation of the issue with the assistance of the internal auditor, among others. Prior to said report, on March 26, 2015, the BOD of Africa Industries, at a meeting convened for this purpose, resolved to appoint an external examiner on its behalf to examine the issue and all the implications of such irregularities,.including amendments to the financial statements that Africa Industries published (hereinafter, the External Examiner ). After the appointment of the External Examiner, it was resolved to increase the breadth and depth of the examination, in conjunction with professional investigative resources and with the assistance of Africa Industries accounting division. At the conclusion of the examination it emerged that false records were made over several years, and especially between 2011 and the end of 2014, which included illegal premature recording of quarterly income, illegal premature recording of income prior to the delivery of purchased products (that is, prior to the income generation date), duplicate records of income, misleading records of accounts receivable that were included in the financial statements of the Negev Group companies for those years, and recording of an artificially inflated increase in inventory of the Negev Group companies. These discoveries were made after irregularities had been discovered in the recording of income by one of the companies in the Negev Group (hereinafter, jointly, the Flaws ). It was also discovered that the aggregate effect of the Flaws over the aforesaid period on equity attributed to Africa Industries owners in Africa Industries financial statements as of December 31, 2014 amounted to a write-off of NIS 73 million, and the effect on equity attributed to the Company s owners as of December 31, 2014 amounted to a write-off of NIS 45 million (this amount is after the adjustment made to the Company s financial statements for the year 2014). In view of the findings of these examinations, Africa Industries made an adjustment in the form a restatement of Africa Industries financial statements for the years 2013 and 2014, in order to ensure retrospectively that they reflect the aforesaid effects. Within the restated financial statements of Africa Industries for those years, Africa Industries also included, in addition to the adjusted data for the reporting period, adjusted comparison data referring to previous reporting periods that included errors resulting from the Flaws. To retrospectively reflect the effects of the Flaws on the Company s financial statements, the Company performed the said adjustments in the form of a restatement of the previous reporting periods included in this Report, after making adjustments to its financial statements for 022

259 Q1/2015. The Company also included, in addition to the adjusted data for the reporting periods, adjusted comparison data referring to previous reporting periods that included errors resulting from the Flaws, in addition to adjustments made by the Company to its income items in its financial statements for the year 2014 that were published on March 30, 2015 in response to the initial communication sent to Africa Industries management, and on the basis of data that were obtained from the preliminary examinations that Africa Industries performed on this matter (the Company s share in the decrease in income is NIS 10.3 million). For information on the effects of the restatement of the Company s financial statements for past reporting periods, see Note 36(1)(A)(3) to the Company s Consolidated Financial Statements as of December 31, General information on the home design sector Structure of the home design sector and the changes therein The home design sector is directly impacted by changes and fluctuations in the economy as a whole and in the construction sector and the real estate market in particular. In 2016 there was a 7% decline in the share of sales compared to 2015 and a 4% decline in construction starts. These data are based on the number of sales reported to purchase tax authorities in this period Changes in the scope of operations in the home design sector and its profitability Based on data of flooring and cladding imports published by Malam Team on the basis of Customs administration reports, imports of tiles to Israel increased by 5% in 2016 compared with 2015, and declined by 6% in 2015 compared with In 2016, Negev s sales to contractors and projects declined by 15% from In 2015, Negev increased its total sales to contractors and construction projects by 1.5% compared with In 2014, Negev s sales to contractors and construction projects had declined by 0.2% compared with Moreover, there has been a decline in recent years in the sales of the Negev Ceramics Group s retail chains. In 2016, sales of the Group s retail chains declined by 11% from 2015, and in 2015, sales of the Group s retail chains declined by 4.1% from It should be noted that the 021

260 revenues from upgrading customers declined by 7.5% in 2016 compared with 2015, after revenues increased by 9.1% in 2015 compared with Developments in the home design sector markets and changes in customers profiles Along with the Negev Ceramics Group s activities in recent years, which focus sales to contractors and projects, it is the Group s main growth engine in was sales to households in the renovations market and to private customers who purchased apartments from contractors and upgraded builder-grade products to more high-end products Critical success factors in the home design sector and the changes therein Negev Ceramics management considers the main factors liable to affect its future success in the ceramics sector to be as follows: increased efficiency and merger of management, marketing, sales and distribution functions of the three chains on the one hand, and on the other hand, improving customer service and response, all based on the desire to reduce expenses; market dominance and increased awareness of the Negev, Via Arkadia, Super Ceramic, Grohe, and NOVO brands, and the Group's products, including the development and maintenance of products and brands that provide a shopping experience, as well as added value to the end customer; development of a broad, modern product range (own products and bought in) that appeals to the general population and is geared to various consumer opportunities; high flexibility and availability of goods; adjusting the manufacturing plan of the Negev Ceramics' factory to customers orders (as against the slow lead times for products purchased abroad); a modern retail set-up with national distribution; a quality customer service set-up; attention to product quality and investments in the manufacturing plant, and improvement and development of technological ability; A comprehensive distribution and self-production system, providing high availability of products according to customers changing and diverse needs Changes in suppliers and raw materials in the home design sector The Negev Group contracts from time to time with additional suppliers (of finished products) according to the new products it wishes to buy. Negev purchases products of a lower standard mainly from Turkish and Chinese suppliers. In 2015 and 2016, maritime shipping costs from Turkey gradually dropped in view of the global decline in fuel prices The main entry and exit barriers of the home design sector and changes therein The main entry barriers are attributable to the combination of managing a national distribution of stores, a variety of products, and availability of merchandise while operating a complex distribution and managing and operating a factory for self-production with the ability to adapt quickly to customers needs, from the point of view both of design and availability of the merchandise. In sales to private customers, there are other entry barriers, including the establishment of fashionable stores at a high investment and the development of consumer awareness (increasing brand awareness). 023

261 Products and services The Negev Ceramics Group markets finishing products for the building, renovations, and home design sectors. These products are self-manufactured by Negev in the Group's plant in Yerucham and purchased from various suppliers inside and outside of Israel The products include a wide range of finishing products, including porcelain, tiles, ceramics for flooring and cladding, ceramic tiles, mosaic, marble, parquet, sanitary equipment, shower stalls, faucets, bathroom fittings, adhesives, and auxiliary products manufactured in the Negev Group s plant in Yerucham. Following is a breakdown of Negev's revenues from self-manufactured and purchased products that it sells to its customers, in 2014, 2015 and 2016 (in NIS thousands): Selfmanufactured products Purchased products Revenues % of Negev s segment revenues Revenues % of Negev s segment revenues Revenues % of Negev s segment revenues 221,238 28% 202,250 22% 22,230 1% 123,582 52% 322,381 52% 312,822 82% Total,94, % 532, %,93,3,9 933% *The data for 2014 and 2015 do not include Negev's income during the running-in period of the new plant, which were capitalized according to GAAP. For additional information, see Section hereinabove In , Negev completed the acquisition of its entire holding in Orgal A.L.P. (2007) Ltd., which sells taps, shower accessories, toilets, and flush cisterns, and is inter alia the exclusive distributor and marketer of Grohe taps. In May 2011, a deal was completed to purchase the entire holdings in H.G.I.I. Building Materials Marketing Ltd., a company dealing mainly in the marketing of building products, including advance building materials such as adhesives and sealants and in Via Arkadia Home Design Ltd., a company deals mainly in the sale of finishing products for the building industry and home design, including ceramics, porcelain granite, stone and marble, sanitary fittings, and other claddings for construction companies, contractors, and private individuals, under the Via Arkadia and Super Ceramic brands. Negev manages the Subsidiaries' operations independently and uses the Via Arkadia and Super Ceramic brands to market, sell and distribute Negev's products in all the marketing channels to a wide variety of customers, including the retail chain Via Arkadia that (which targets a wide range of Negev's customers who are looking for unique solutions) as well as the retail chain Super Ceramic, which targets a wide audience looking for affordable solutions. 025

262 Breakdown of revenues and the profitability of goods and services 2016: Self-manufactured products* Imported products Total revenues (in NIS thousands) 221, ,582 Total gross profit (NIS thousands) 23, ,381 Total gross profit margin 8.32% 33.23% 2015: Self-manufactured products Imported products Total revenues (in NIS thousands) 121, ,396 Total gross profit (NIS thousands) 25, ,787 Total gross profit margin % 0224: Total revenues (in NIS thousands) Total gross profit (NIS thousands) Self-manufactured products Imported products 22, ,941 22, ,227 Total gross profit margin 05.22% 39.98% *The data for 2014 and 2015 do not include Negev's income during the running-in period of the new plant which was capitalized according to GAAP. For additional information see Section hereinabove Customers Dependency on customers In the home design sector, the Company is not dependent on any single customer or any small number of customers the loss of which would materially affect the Group s operations. The Group also does not have any customer that accounts for 10% or more of the Company s total revenues in this sector. It is to be noted that purchases from Negev Ceramics by the one of the Group's companies are implemented in the usual manner of transactions at market prices Breakdown of sales to customers Negev Ceramics Group s customers fall into two main categories: customers renovating their homes and customers buying a home from a contractor and upgrading its standard products. A. Customers renovating their homes Customers renovating their homes (hereinafter, Renovators ) include customers who purchase the products of the Negev Ceramics Group through the Negev Group chain of stores for renovation projects in the current or newly purchased second-hand homes. Every year, this group of Renovators comprises tens of thousands of customers, with no fixed characteristics. 028

263 B. Contractors and customers upgrading This group of customers includes building contractors inter alia of residential units, as well as customers upgrading who purchased a new apartment from a contractor and are upgrading through the Negev Group's stores, purchasing high-end ceramic products to be supplied to them by the contractor. Contracts with residential project contractors are generally executed under agreements that specify the products that the Negev Group will supply according to the contracting standard for the specific projects. These agreements also include provisions that allow the contractor s customers (who have purchased units in the constructed project) to upgrade their ceramic products in the Negev Group s chain of stores at an additional cost. Framework agreements are not binding on the contractor, which generally enters into contracts with other suppliers to supply substitutes for Negev Group products, according to each tenant s choice of supplier for upgrading these products. The nature of the relationship with these customers is generally one of receiving a binding order close to the date the Negev Group supplies the products. Accordingly, the Negev Group s order backlog from these framework agreements is not certain. C. Notably in 2016, a negligible share of sales of the Negev Ceramics Group were directed to exports. In 2015 and 2014, exports accounted for 1.73% and 3.34% of the Negev Group s sales, respectively Marketing and distribution Sales and distribution The Negev Group s sales and distribution system in the home design segment in Israel serves customers by means of direct marketing, among other things, through three retail chains: Negev, Via Arkadia and Super Ceramic, with a total of 15 stores throughout the country, in which most of the Negev Group s products are displayed. All the chain s stores operated by Negev Ceramics are wholly owned by the Group, apart from the stores in Hadera, Netanya, and Eilat, which are operated by external bodies. The Negev Group is not materially dependent on any single dealer and therefore the loss of a customer that trades in or markets its products would have no adverse effect on the Negev Group's activity sector Marketing Currently, the Negev Group is primarily trying to maintain its share of the retail market (private customers). This is reflected in the design of the Negev Group s chain of stores, and maintaining the variety of the product range sold in the stores. To cut its expenses and improve its customer service, Negev consolidated all aspects of the managerial functions of its retail operations, from sales through advertising and logistics, as well as its distribution functions. 012

264 In 2016, expenses declined by 32% compared with and in 2015, expenses decline by 47% from Advertising and marketing communications Negev Ceramics uses the following marketing communications channels (including in support of the Company Group's private label, NOVO, and the Grohe, Via Arkadia and Super Ceramic brands): advertising channels (such as TV, newspapers and the Internet), exhibitions and trade shows, trade activities, and management of an informative website Order backlog The order backlog of the Negev Group as of December 31, 2016 is NIS 120 million, compared with 150 million as of December 31, It should be noted that based on the Negev Group s past experience, about 75% of the order backlog is supplied within three months on average from the order date, while the remaining 25% is supplied on average six to twelve months after the order date. However, it is impossible to accurately predict the dates on which customers pick up the products they have ordered Negev Ceramics cannot assess the dates when product will be drawn by the customers who ordered them, mainly in residential projects, in view of the nature of the sector s operations (dependency on the progress of project construction) As stated above, regarding the Negev Group s contracts with contractors and construction companies, there is no order backlog and, and there is no certain order backlog from Negev s framework agreements with them Competition To the best of the Negev Ceramics Group s knowledge, there are numerous companies and brands in the home design sector, including small-scale retailers that compete with Negev Ceramics and its products. Products in this category are mainly sold by a large number of importers who sell and distribute products that are similar, are alternatives to, and compete aggressively in the home design sector. To the best of the knowledge of Negev Ceramics management, the Negev Ceramics Group is the leader in the volume of activities in the home design sector and it considers that, insofar as the supply and marketing of ceramic and porcelain tiles is concerned, its market share is about 20%. Negev Ceramics is unable to estimate its share with respect to the other product types it supplies and markets. To the best of the knowledge of Negev Ceramics management, its main competitors are: Alony, Zahavi Atzmon, Heresh, Hezi Bank, Mody, Topolsky, and a number of small-scale chains. In addition, there are hundreds of small stores and merchants. The aforesaid companies constitute competitors for ceramic and porcelain products and Negev Ceramics has no way of estimating their market share. 1 Data for the year 2014 related to the manufacturing costs in the new factory do not include Negev s costs in the set-up period of the new factory, which were capitalized according to GAAP. 012

265 Seasonality Sales of ceramic products are affected by inter alia the renovation market which is characterized by seasonal changes in demand. The periods that are characterized by a rise in demand are the summer and the periods preceding major holidays (Jewish New Year and Passover). During these periods there is a surge mainly in sales to households and in sales of products for apartment and home renovations. Following are details of Negev s revenues for 2016, 2015, and 2014, by quarter: 6392 * 6399 * 6394 Revenues (NIS thousands) Share of total revenues of the Negev Group Revenues (NIS thousands) Share of total revenues of the Negev Group Revenues (NIS thousands) Share of total revenues of the Negev Group Q1 022, % 258, % 023, % Q2 280, % 003, % 288,221 01% Q3 022, % 022, % 020,288 02% Q4 225, % 023, % 281, % Total 322, % 532, %,93,3,9 933% * The data for 2014 and 2015 do not include Negev s revenues in the running-in period of the new factory, which were capitalized according to GAAP Production capacity Until the beginning of 2014, the Negev Group was using its entire production capacity in its old plant in Yerucham. On February 28, 2011, Negev's Board of Directors approved an investment of NIS 140 million to refurbish the Negev Ceramics plant to be spread over three years in view of the increase in the volume of Negev's activities in connection with said plant. In view of the need to add machines, expand the existing premises and erect additional buildings, as well as the extra investment required to comply with the new standards relating to the plant's operations, including the provisions of the Clean Air Law 2008, the safety standards for transporting natural gas, civil defense and fire department requirements, on January 8, 2013 Africa Industries' Board of Directors also approved an increase of the investment in the plant to a total of NIS 206 million. Negev Ceramics entered into an agreement with Dor Alon Gas Technologies Ltd. (hereinafter, DorGas ), for the supply of natural gas two the new Negev plant in Yerucham for a period of seven years. After obtaining temporary approval from the Natural Gas Authority for the transmission of natural gas, DorGas began to supply natural gas to the plant on February 2,

266 As stated above, due to the proliferation of machines from various manufacturers and the technological complexity required to synchronize and balance the machines, together with the transition to natural gas in early February 2014, and a change in the mix of raw materials, the running-in process of the factory continued for a longer period than expected, which also led to an increase in the expenses related to the new plant. As part of the construction of the new plant, Negev entered into contracts with a number of Italian suppliers to purchase machines for the plant s expansion which, together with the existing equipment will allow Negev to increase its production capacity as stated above. Part of the purchase cost of some of the machines is being financed by credit granted to Negev by the Italian suppliers. As stated above, the running-in period of the plant ended in the fourth quarter of In 2015, Negev s management commenced the implication of a reorganization program based on, among other things, focusing on Negev s core operations and reducing Negev s operating expenses, including by downsizing the manpower employed by Negev and by adapting production at the Negev factory to current demand Property, plant, equipment, and facilities The Negev Group entered into a series of rental agreements (that are expected to end in 1-25 years), according to which Negev rented areas in Israel in 2014, Negev rented a total of 156,678 sqm in Israel, in respect of which it paid rentals in the amount of NIS 36,712 thousand. In 2015, Negev rented a total of 157,818 sqm in Israel, in respect of which it paid rentals in the amount of NIS 30,032 thousand. In 2016, Negev rented a total of 110,809 sqm in Israel, in respect of which it paid NIS 27,116 thousand. These areas include Africa Industries Company s factory in Yerucham, several stores, and logistic centers, warehouses, and storerooms that the Negev Group uses in its ordinary operations Intangible assets In view of the Negev Ceramic Group s focus on branded goods that it manufactures and in view of the trade name of Negev Ceramics, which is the oldest in the sector (operating from the beginning of the 1970s), the registration of trade marks is extremely important. The following trade names used by the Negev Group are registered or are in the process of being registered with the registrar of trademarks in Israel: (a) NOVO; (b) Novocryl; (c) Negev, Negev and Negev (color logo); (d) Via Arkadia, Via Arkadia (logo), Via Line, NEXXTEP; (e) Super Ceramic (f) Natura (logo); (g) Supertile (logo); (g) Via Collection (logo). The trademarks are important for the Negev Group's operations, in view of its focus on the brands it manufacturers. In addition to the name Negev Ceramics, two patents are registered in Israel on ceramic tiles and tile-coated pre-fabricated boards and their manufacturing methods. 013

267 Human resources Following is the organizational chart of the home design segment: Staff As of December 31, 2016, the Negev Group had 748 employees, 802 employees as of December 31, 2015, and 941 employees as of December 31, The decline in the number of employees is the result of the reorganization program that Negev initiated in the final quarter of The breakdown of Negev Ceramics Group employees by organizational function is as follows: December 31, 2016 December 31, 2015 December 31, 2014 Total Negev Plant Total,4,, It should be noted that a change in the minimum wage of up to 10% is not expected to have a material effect on the Company s gross profit or net profit in the ceramics segment. The reduction in the sales staff can be attributed, among other things, to the closure of several stores, which was part of Negev s steps to increase efficiency and downsize Dependency on employees Negev Ceramics estimates that the Negev Ceramics Group is not materially dependent on any single worker in the ceramics sector Training and qualification The Negev Ceramics Group holds regular training and education sessions for its employees, according to the employee s function and the needs of the Negev Ceramics Group in the home 012

268 design segment. Among other things, from time to time, employees are sent to professional trade shows, seminars, and conferences on a broad range of topics Employee incentive program The Negev Ceramics Group awards incentives to its employees based on targets, according to employee role and rank. The targets are derived from the Negev Ceramics Group s work plan. The incentive plans are not defined in the employment agreements, and vary according to need Work agreements for workers in the Negev plant (a) Tenured employees the number of permanent production workers (Generation A) represented by the workers committee was 100 as of December 31, 2016, 95 employees as of December 31, 2015, and 93 employees as of December 31, The employment terms of these workers are set out in a special collective labor agreement that was revised over the years; (b) Production workers (Generation B) the number of production workers (Generation B) to whom the special collective agreement does not apply was 22 as of December 31, 2016, 34 as of December 31, 2015, and 58 as of December 31, The employment terms of these workers are based mainly on individual work contracts, pursuant to the provisions of the labor laws Employment agreements with the Negev Group s other workers Officers and senior executives are employed through individual contracts based on a global salary and vehicle. It should be noted that Orgal employees are, for the most part, employed through individual contracts or according to agreements with employment agencies. The remaining employees of the Negev Group are employed under a collective agreement that was signed in July 2016 by the General Labor Union (Histadrut), which in principle governs issues such as tenure, education funds, employee well-being budgets, hours for parents of children up to the age of 4, and the agreement also defined one-off supplements to individuals whose salaries are NIS 7,000 or less. Furthermore, it should be noted that Africa Industries joined to Fund for Encouragement of Well-Being in order to establish well-being terms for its employees. It should be noted that in July 2016, Negev signed a collective labor agreement with the employees of Super Ceramic and Via Arkadia, Negev Ceramics Ltd, Negev Home Design, and Negev Marketing under the Histadrut, which establishes rights of tenure, education funds, an hour s vacation for parents of children up to the age of 4, and a well-being budget for its employees. Africa Industries also joined the Fund for Encouragement of Well-being in the Construction Sector Raw materials and suppliers Raw materials used in the production of porcelain tiles The raw materials used by the Negev Ceramics Group in the manufacture of porcelain tiles fall into two main groups: (1) Raw materials used to manufacture the body of the tile feldspar 012

269 purchased in Turkey, and clay purchased in the Ukraine; (2) Raw materials used to glaze the tile surfaces purchased mainly in Italy. As of the date of this Report, the Negev Group purchases the raw materials used in the manufacture of porcelain tiles from three main suppliers, which accounted for 70% of the Group s total raw material purchases in 2016, 68% in 2015, and 72.5% in Negev Ceramics is not dependent on any of these suppliers of raw materials. The Negev Ceramics Group does not have binding agreements with the main suppliers, and the terms of the orders placed with them are determined on the execution date. Due to the fact that the majority of purchases from suppliers in this sector are made in US dollars, and due to the lag between the payment date to the supplier and the sale date of the products to customers (generally in shekels), the Negev Ceramics Group is exposed to fluctuations in the exchange rate of the shekel against other currencies Use of energy for production Up until 1995, natural gas was the main energy source for production. Due to the lack of natural gas in Israel, the Negev Ceramic plant in Israel operates on LPG (liquefied petroleum gas), which accounted for 5.7% of the total production outlays of the Negev Group s plant in 2014, 1 and 9.4% in In October 2016, two curing facilities that were transferred from the old factory were converted to natural gas, and from this date, the use of LPG is negligent. As stated above, in October 2013, the Negev Group entered into an agreement with DorGas for the supply of natural gas to the new Negev plant for seven years. Following are the total expenses for gas used in the Negev Group s factories in the manufacturing process in the years from 2008 to 2016 (in NIS millions): Gas expenses in NIS millions 1 Data for 2014 related to the manufacturing costs in the new factory do not include Negev s costs in the running-in period of the new factory, which were capitalized according to GAAP. For additional information see Section hereinabove. 011

270 Suppliers of finished products Imports from Turkey, Spain, Italy and China Following are data on imports from the various countries as a percentage of the entire import of products in the ceramics and porcelain / flooring and cladding products in the various years: Imports from Turkey 00% 03% 02.2% Imports from China 33% 31% 33.3% Imports from Spain 00% 00% 02.2% Imports from Italy 23% 21% 22% Operating working capital Working capital To manufacture tiles in the Negev Group s plant, the Negev Group holds inventory of raw materials for defined production periods that range from three to four months Finished products inventory policy The Negev Group s finished products inventory policy (i.e., products ready for sale to customers) is affected mainly by the need to meet obligations to private customers, ensure availability of inventory for contractors customers, and ensure inventory levels required for occasional sales to dealers and retail chains. It is also affected by seasonality in the Negev Group s sales and the dates of the advertising campaigns it conducts. In 2016, the Negev Group maintained an inventory of finished products of between 5 and 6 months, and its target for 2017 is an inventory of between 4 and 5 months. Purchased products are held by Africa Industries for a period of between 3 and 4 inventory months Credit policy Credit to customers The Negev Group gives its business customers credit according to the customer and the type of contract. In 2014, the average period of credit was 43 selling days compared with 32 selling days in In 2016, the average credit period was 112 selling days. Average customer credit in 2016 was NIS 184 thousand, compared with NIS 87 thousand in In most cases, Negev gives contractors credit on payment terms of between EOM+90 days and EOM+150 days from the invoice date. The Negev Group has a credit and collection procedure on the basis of which it works with contractors and traders. When the Negev Group is interested in opening a new customer account, the following factors, among others, are examined: the customer s seniority in the relevant market, financial information on the customer, previous contracts between Negev Group companies and the customer, recommendation of the customer from others in the 013

271 relevant sector, the anticipated volume of purchases, and the actual conventional credit terms in the market. Customers debts are examined at the end of every quarter by the Negev Group management. The examination is specific for each customer, according to the customer s aging reports. The decisions on making and/or revising provisions for doubtful debt in Negev Ceramics books is taken according to management's assessment of the likelihood that the customer will pay its debts. The remainder of customers in arrears in Negev Ceramics books also include debts the collection of which has been referred to the Negev Group s legal advisors (mainly customers in bankruptcy, receivership or liquidation proceedings), and in respect of the last of these, provisions are made in Negev Ceramics books for the amount Africa Industries does not expect to recoup. It should also be noted that in this context are also debt balances of active customers with whom there is a dispute concerning the amount of the liability; Negev Ceramics makes a provision for the disputed amounts that it does not expect to recoup. Negev s management reviewed the provisions it made in recent years and the balance of accounts receivable at the end of Due to the complex legal procedures entailed in collecting such debts, and notwithstanding the provisions in Negev s books in respect of specific customers, Negev s management decided to make a general provision for doubtful debt in Negev Ceramic s books in the amount of NIS 0.5 million. Suppliers' credit The Negev Group receives credit from its suppliers for a period of between 90 and 150 days. However, suppliers in China and stone and marble suppliers from the other countries are paid a large deposit (deposits to China are 70%). In 2016, all the suppliers of the Negev Group granted an average credit period of 60 days, compared with 74 days in 2015, and 103 days in Average suppliers credit totaled NIS 114,598 in 2016, NS 153,774 thousand in 2015, and NIS 207,429 thousand in Financing Average interest rates Following are details of the average interest rates and the effective interest rates on outstanding short-term and long-term loans taken by the Negev Group in 2015 and in 2014 and 2013, with a distinction made between bank sources of credit and non-bank sources of credit, in connection with the Negev Groups operating segment: Average rate of interest in 2016 Short-term loans Long-term loans Average Bank sources 4.5% 4.5% Non-bank sources Euro linked - 6% 6% 015

272 Average rate of interest in 2015 Short-term loans Long-term loans Average Bank sources NIS P % P+2.86 Non-bank sources Euro linked % 2.81% Average rate of interest in 2014 Short-term loans Long-term loans Average Bank sources NIS P+1.55 P+1.25 P+1.4 Non-bank sources Euro linked % 5.96% The Negev Ceramics Group finances its operations with bank credit and non-bank credit, and as such it is subject to liens in favor of banks and others, including in respect of unpaid share capital, goodwill, and equipment. Among other things, Negev Ceramics Group is subject to various liens on its assets As of December 31, 2016, Negev has credit facilities of NIS 706 million, NIS 701 million as of December 31, 2015, and NIS 701 million as of December 31, The utilized balance of the said credit facilities (including credit facilities in respect of imports) is NIS 706 million as of December 31, 2016, NIS 698 million as of December 31, 2015, and NIS 700 million as of December 31, Environmental protection The Negev Group operates in the home design sector under the ongoing supervision of the Environmental Protection Authority in Israel, and at the date of this Periodic Report is in compliance with various criteria. Negev Ceramics Group conducts occupational tests on airborne chemicals semiannually, as mandated by law. Since July 1, 2012, the Negev Group plant has held an emissions permit under the Clean Air Law that took effect in March It should be noted that this permit is for a period of seven years. Negev intends to consistently reduce the emissions from the chimneys to values lower than required for a permit and to persist with improvements to reduce its energy consumption. The provisions in respect of the environment have no material repercussions on the Negev Group, including on Negev s capital investments, profits, and competitive standing. With regard to the new plant, Negev took a number of steps to act consistently to prevent and reduce environmental pollution and to minimize the effects on the environment from the plant s activities, including the following: 018

273 (a) Improving the recycling of waste from activities and from the finished products, including recycling the water used in the production processes; (b) The plant s products have a green certificate issued in 2011 and a toxin permit from the Ministry of the Environment for the use of hazardous substances valid until August 2016; (c) In 2014, Negev implemented ISO and ISO standards in the plant and implemented a quality assurance system that includes an environmental and safety policy; (d) With regard to the new plant, the optimal systems have been installed to draw out dust and filter emissions from the ovens at least to the levels required by law, and an especially economic plant lighting system has been designed and installed. The management of Negev Ceramics expects that the Negev Group will not incur significant costs or environmental investments in 2016 and in the period thereafter, considering inter alia the environmental expenses already invested by the Group Restrictions and regulatory control of activities in the home design segment Business licenses As of the date of this Periodic Report, it should be noted that the Group store in Eilat (of the three retail chains) has not business license. It should be furthermore noted that according to the settlement that was certified as a judgment, Negev undertook to obtain a business license for Negev s logistics center in Rishon Lezion by September 2012 (September 28, 2012). Following motions for an extension filed by Africa Industries from time to time, the enforcement of a closure notice served against the logistics center was deferred due, to the fact that the business license has been delayed for reasons that were not in Africa Industries control and which involve planning and building approvals. With the approval of the Rishon Lezion municipal attorney s office and according to the court s decision, the date on which the order will come into effect was deferred again, to September 2, Both the store in Rishon and the gas station have fire permits in effect (until February 13, 2018 for the store and until November 13, 2017 for the gas station), but they do not have a business license as required by law. The main factor behind the absence of a license is the refusal of the Municipality engineering department to issue a license in view of illegal construction and building additions that have not yet been legalized, and because the use of the store constitutes a case of non-conforming use without a license Through an external architectural firm, Negev submitted an application for a permit for modifications and an application to approve non-conforming use. These applications were approved conditionally by the local committee, but the conditions listed in these decisions were not met and the decisions expired. Currently, according to one decision by the local committee dated December 5, 2016, the application for approval of modifications as submitted by Negev was approved, subject to conditions, and these conditions have not yet been met. 032

274 According to the best estimates, regulating the non-conforming use and the building additions is a very complicated, protracted process that requires many years, and such permits are not obtainable in the immediate future Under these circumstances, in the absence of any significant progress in the planning process, Negev will be hard pressed to persuade the court that additional extensions for postponing the orders are justified. In any case, Negev estimates that even if it fails to obtain said business license and/or an extension from the court and a closing order is issued, it will be able to lease an alternative site for its operations, without any adverse long-term impact on its business As of the Reporting Date, Negev Group s plant in Yerucham has a business license. It should be noted that Negev and the landlord of the site on which the plant operates entered into an agreement to extend the rental period and to expand the Negev Group s plant according to Negev s requirements Toxin permit The Negev Ceramics Group's factory in Yerucham was granted a Hazardous Substances Permit, required by the Hazardous Substances Law 1993, which expires on August 19, Standards Institute The tiles manufactured in the Negev Ceramics factory, as well as the products manufactured by the Turkish company Kale and imported by Negev Ceramics, were approved by Israeli Standard 314. The Standard mark will remain valid so long as the products or the law under which the said validity was awarded do not change, and so long as the plant complies with the standards determined for it. The standard mark approval is valid until December 31, 2017 and is renewed annually. In addition, the products manufactured at the Negev Group s factory are manufactured in accordance with Israeli Standard ISO The approval is issued by the Israeli Standard Institute, is renewed annually Legal proceedings For information on the decision of the Economic Department of the Tel Aviv District Court on January 28, 2015 as part of the administrative appeal file by Africa Industries against a decision of the Administrative Enforcement Committee of August 27, 2013 to fine Africa Industries and its officers for acting negligently in three counts of administrative violations in the context of the purchase offer for Negev to dismiss the administrative appeal filed by Africa Industries and its officers, with the exception of the amount of the fine imposed on Africa Industries, which was reduced to NIS 4 million, see Note 36(1)(e)(3)to the Company s Consolidated Financial Statements as of December 31, For details of the application to motion to certify a class action and a class action against 11 companies in the ceramics sector, including indirect subsidiaries of the Company, in connection with financial damages allegedly suffered by the plaintiffs due to the defendants alleged violations of the Consumer Protection Law, see Note 36 to the Company s Consolidated Financial Statements as of December 31,

275 On March 16, 2017 Africa Industries received a decision of the Tel Aviv District Court, according to which the court decided to approve the settlement and certify it as a judicial ruling in the class action against Africa Industries, against Negev and against officers in Africa Industries and Negev in connection with financial damage allegedly caused to the plaintiff due to alleged violations of the Securities Law and the Companies Law by the defendants, based on the decision handed down by the Administrative Enforcement Committee as part of an administrative enforcement proceeding pursuant to the Securities Law against Africa Industries and officers of the Company, see Note 36 to the Company s Consolidated Financial Statements as of December 31, According to the settlement, it was agreed that subject to the full dismissal of the plaintiffs claims, the Company and Negev would pay damages in the amount of NIS 3.2 million, which includes, among other things, the element of damages for the group of plaintiffs and the damages to the represented class and legal fees. It should be noted that that major part of the damages payment falls on the insurance companies, under the Company s officers insurance policy For information on a motion to certify a class action and a class action against Africa Industries, the Company, former and current officers and directors of the Company and Africa Investments (including the CEO of the Company who formerly served as CEO of Africa Industries, and the CBOD of the Company who is the Company s controlling shareholder), and against the auditing accountant of Africa Industries (with respect of financial damage allegedly caused to the plaintiff due to the defendants alleged violations of the Securities Law, the Companies Law, the Tort Ordinance [New Version] and the Contract Law (General Part) 1973), based on the reports of the Company and of Africa Industries related to irregularities that were discovered in the conduct of the Company s subsidiaries in the home design segment, which also led to the restatement of the data in the financial statements of the Company and of Africa Industries in recent years. For additional information see Note 1(D) to the Company s Consolidated Financial Statements as of December 31, On June 9, 2015, Africa Industries announced that to the best of its knowledge, the ISA initiated an investigation related to the irregularities that had been discovered in the Company s subsidiaries in the home design segment, and that ISA investigators conducted a search of the subsidiaries offices on June 9, 2015 as part of that investigation For details of additional legal proceedings in the home design segment, see Note 36 to the Company s Consolidated Financial Statements as of December 31, Targets and business strategy To the best of the Company s knowledge, the Negev Group intends to increase its market share in the domestic market and the investment in the Negev plant will be an important component in Negev's strategy to increase its market share and to expand its operations in existing markets and growth in new, international markets Forecast for developments in the ceramics segment in the coming year 030

276 Negev s management intends to continue the reorganization steps that it initiated, and accordingly will from time to time review the options of restricting various activities and reducing costs. As part of these efforts, Negev s management may decide to close additional stores and reduce its manpower further. Negev s management intends to put emphasis on the development and expansion of operations in the local market and in the international markets, subject to and in accordance with macroeconomic developments in the relevant countries. In the coming year, Negev intends to continue in the normal course of business inter alia to perform and expand the developments described above while focusing on continual improvement of the retail chain, and promoting the Negev, NOVO, Grohe, Via Arkadia, and Super Ceramic brands. The assessments stated in this section hereinabove are forward-looking information based, inter alia, on its assessments concerning the economic and commercial development of the Negev Ceramics Group, taking into consideration its past experience. It may be that in fact said assessments and intentions will not be realized or are realized otherwise than expected by the Company, due to various factors of which the Company has no knowledge at the date of this Periodic Report, such as a drop in demand for products or the occurrence of any of the risk factors specified in Section hereinafter, or if on the relevant date Negev Ceramics discovers that said actions are not expedient Discussion of risk factors in the ceramics segment Macroeconomic risk factors Economic showdown and uncertainty in the Israeli market, exposure changes in gas prices Commencing 2014, the Negev plant will use natural gas, therefore any material change in the price of Brent crude or increase in the exchange rate of the dollar may affect Negev s profit from production in the plant, exposure to changes in the exchange rates, exposure to the local and international financial markets, a deterioration in the political and security situation, exposure to changes in interest rates, exposure to changes in labor costs Industry-wide risk factors Exposure to selling prices, fluctuations in the new building industry, imports from Turkey and China (due to the increase in imports from these countries), dependency on the plant and exposure to technological changes and changes in consumer tastes (in the modern age, technological revolutions are liable to create substantial changes in supply and demand in the home design segment), fluctuations in the prices of raw materials and the regular supply of raw materials (most of the Negev Ceramics Group's raw materials are imported) Special risks A. Production in the Yerucham factory A considerable part of the home design operations are carried out in the Yerucham plant. Any natural damage or other significant damage caused to that site is liable to have a material effect on the Negev Ceramics Group s operations. 033

277 B. Dependency on suppliers The Negev Ceramics Group imports porcelain and ceramic flooring from the Turkish company Kale. As previously stated, sales of Kale products currently account for 6.4 % of the Negev Ceramics Group s overall sales. However, as stated above, the Negev Ceramics Group would not suffer any significant damage in the intermediate or long term from a discontinuation of Kale s operations, but there may be damage in the short term. C. Safety at work A serious work accident at the site of the plants or on the Group s premises may stop its operations for a time, cause media and legal damage, and necessarily affect Africa Industries in its operating segment. Moreover, on August 18, 2014, new regulations came into effect concerning safety management, requiring administrative and legal action to comply with all their requirements. A central part of these regulations necessitates systematic action to analyze and manage the operational risks in each of the plants and on the Company s premises. Negev made preparations to implement the regulations and complies with the requirements of the aforementioned laws. D. Planning building and business licensing As of the date of this Periodic Report, it should be noted that one of the Group s stores (of its three retail chains), the store in Eilat, has no business license. It should also be noted that according to a settlement that was certified as a court ruling, Negev undertook to obtain a business license for the Negev logistics center in Rishon Letzion by September 2012 (September 28, 2012). After several requests for an extension that the Company filed from time to time, the closing order issued against the logistics center was deferred in view of the fact that the licensing process of the business was delayed under circumstances that were not in the Company s control, and entailed the regulation of planning and building approval. Negev estimates that even if it is unable to obtain said business license and/or an extension by the court and a closing order is issued, it will be able to rent an alternative site for its operations without any long-term adverse impact on its business. E. Bad debts The risk of bad (doubtful) debts may arise as a result of credit granted to problematic customers who may go bankrupt without paying their full debt. The Group s sales to its commercial customers (contractors and traders), are mostly made on standard customer credit terms. The credit to these customers is secured in part by personal guarantees (mainly from the majority of small and medium traders and contractors). Concerning the standard collateral in the sectors of operation, there is not generally any high positive coefficient between the financial situation of the business and the value of those personal guarantees. The Negev Group has, in the past, examined credit insurance and found the cost of the insurances to be no different materially from the amount of bad debts in the last five years. The Negev Group therefore decided to manage its customer credit with great care and to conduct investigations and collect information on the customers who are enjoying high amount of credit and as necessary, and acts to reduce arrears of payment. 032

278 Part Four Additional Information at the Company and the Group Level 1.17 Human capital General The Company s operations are conducted through subsidiaries and divisions, as described in Section hereinafter, whose managers are usually responsible for one sector of operations or for several sectors of operations, in one territory or in several territories. The managers of the subsidiaries and divisions management the operations under their responsibility in an ongoing manner, while regularly reporting and updating the Company's management, and in particular the Company's CEO, with the assistance of the relevant parties in the Company's headquarters, as necessary. In some cases, certain transactions require the approval of the Company's CEO, who is in charge of the division managers, and who, in some cases, is also Chairman of the Board of Directors of the subsidiaries, and CEO of Africa Properties and Africa Industries. In addition, the Company receives management services from the Company's controlling shareholder, Mr. Lev Leviev, through a company controlled by him, as the Chairman of the Company's Board of Directors. In some cases, certain transactions also require approval of the Chairman of the Company's Board of Directors and/or approval of the Company's entire Board of Directors. The approvals required for each and every transaction are determined, as relevant for case, by the transaction's size, its immediate and/or expected effect on the Group's operations or its assets and liabilities, the unique characteristics of the transactions, etc. It should also be made clear that the process of initiating transactions may be executed by a manager of the subsidiary and/or a manager of the relevant division responsible for the transaction in question, or by the Chairman of the Board of Directors and/or the CEO and/or other members of management, who refer the business opportunity to the said manager for his handling. For information on the human resources in each of the Group s various business segments, see Sections 1.8.7, 1.9.7, , , , , , and hereinabove. It should be made clear that the provisions of this Section 1.17 hereinabove and hereinafter refer to of the Company s employees. For information on the human resources in the hotel operations, see Section hereinafter. 274

279 Following is the Company s organizational chart as of the date of this Periodic Report: Board of Directors Internal Auditor Company CEO CFO Company Secretary Finance, Control, Risk Management, IT, HR and Operations Africa Hotels Africa Industries Africa Properties Danya Cebus AFI USA Negev Ceramics Packer Steel AFI Europe Africa Residences As of December 31, 2016, the staff comprised 39 1 employees, compared to 44 employees as of December 31, Company headquarters The departments included in the divisions set out in the above organizational chart are managed by highly experienced managers who run the following small, professional work teams: Divisions Finance, Control, Risk Management, Information Systems, Human Resources, and Operations No. of employees as of December 31, 2016 The Company s Secretariat 3 Internal Auditing 6 Office 3 Total The Company has internal policies and procedures that regulate its procedures in its various operations, including: attendance reports, reimbursement of personal expenses, reimbursement of traveling expenses, seminars, training courses, etc. 1 As of January 2017, the number of employees is

280 Furthermore, in 2010, the Company adopted a code of ethics in which inter alia rules were set down for the ethical behavior of the Company s employees (hereinafter, the Code of Ethics ). As of the date of this Periodic Report, the Company's employees have signed the Code of Ethics and all new employees hired by the Company also sign the Code of Ethics The Group invests in its human capital by various means, including inter alia: Training The Company invests extensive resources in employee recruitment, mentoring, training, and professional development. At the beginning of each year, the Company assesses its training needs and uses the assessment to construct training programs that meet the Company s needs Employee remuneration programs A. General The Company has several performance assessment programs and remuneration plans designed to encourage and create incentives for its employees to improve their professional performance and achievements in their jobs with the Company, such as annual bonuses awarded following a performance review procedure conducted by the Company, and on the basis of recommendations by the relevant division manager (generally payable in April of each year). Furthermore, the Company has a sales-based incentive program for the Company s marketing and sales representatives. B. Special bonuses to the Group s executives and managers (1) Remuneration policy On October 21, 2013, the general meeting of the Company, after receiving the approval of the Remuneration Committee of the Company s Board of Directors, approved the Company s officer remuneration policy according to Amendment 20 of the Law of Companies. As of the reporting date, the Company has yet to renew its remuneration policy. (2) The Three-Year Bonus Plan for On October 21, 2013, the general meeting of the Company, after receiving the approval of the Remuneration Committee of the Company s Board of Directors, approved, among other things, a Three-Year CEO Bonus Plan to the Company s CEO and Deputy COB, according to which the Company s CEO and/or the Deputy COB will be entitled to a three-year bonus equal to 4.5 monthly salaries (at the end of the three years of the plan), subject to their meeting the multiannual target defined in the Three-Year Bonus Plan. The Remuneration Committee and the Company s Board of Directors may reduce an officer s annual bonus and/or the three-year bonus at their discretion, 276

281 taking into consideration the following factors: the officer s contribution to the development of the Company s business beyond his specific area of responsibility; the officer s quality and rate of response to crisis and unexpected events, and his overall managerial functioning, employee motivation, and leadership. On March 28, 2016, the Company s Board of Directors decided to use its authority and reduced the amount of the bonuses to several officers including the Company s CEO and the Deputy COB, according to the aforesaid bonus plan, in respect of the component related to the year (3) Special bonus to the CEO of the Company On March 30, 2017, the Company s BOD approved a special bonus in a nonmaterial amount equal to 1.8 monthly salaries to Mr. Novogrotsky (NIS 200 thousand), in respect of the performance of the subsidiaries Africa Residence and Africa Properties and the record profitability in their results for the year 2016, among other things. The BOD gave its approval after the Remuneration Committee confirmed that said bonus does not constitute a material change in Mr. Novogrotsky s employment terms. C. Option Plan On September 15, 2011, the Company s Board of Directors approved an employee stock option plan (hereinafter, the Plan ) for the Company's employees and executives. Under the Plan, 568,066 non-negotiable option warrants were allocated to 5 of the Company's workers and officers. In October 2016, the final tranche of the options expired and as of the date of this Report, no option warrants are outstanding Welfare The Company invests extensively in promoting employee satisfaction through a wide range of divisional, departmental, and individual activities that take place throughout the year Management services agreement with a company owned by the COB For details of an agreement between the Company and Memorand Management (1998) Ltd. (hereinafter, Memorand Management ), a company owned and controlled by Mr. Lev Leviev, chairman of the Company's Board of Directors and the controlling shareholder in it (hereinafter, the Management Services Agreement ), see Regulation 21(A)(1) of the chapter on Additional Information Terms of service and employment of the Company's CEO, Mr. Abraham Novogrotsky For details of the terms of Mr. Abraham Novogrotsky's service and employment as CEO of the Company, see Section 21(A)(7) of the Additional Information chapter. 277

282 Terms of service and employment of Avinadav Grinshpon, Deputy Chairman of the Company's Board of Directors For details of the terms of Mr. Avinadav Grinspon s service and employment as Deputy Chair of the Company see Section 21(A)(6) of the Additional Information chapter Terms of service and employment of Ms. Hagit Leviev-Sofiev For details of the terms of service and employment of Ms. Hagit Leviev-Sofiev, the daughter of Mr. Lev Leviev, chairman of the Company's Board of Directors and the controlling shareholder in AFI USA, see Regulation 22(6) of the chapter on Additional Information Holdings of senior officers and parties at interest For details of the holdings of parties at interest and officers in shares, options, and bonds in the Company and in any of its subsidiaries or in any of its associated companies, see Appendix E to the Additional Information chapter. 278

283 1.18 Working capital For details of the working capital of each of the Group s various sectors of operations see Sections 1.8.9, 1.9.8, , , , , and hereinabove Following is additional information about the Group s working capital: The working capital ratio of the Group s operations as of December 31, 2016 was 0.7 compared with 0.9 as of December 31, As of December 31, 2016, the Group's total current assets were NIS 6,167 million, and as of December 31, 2015, the Group's total current assets were NIS 6,790 million. As of December 31, 2016, the Group's total current liabilities were NIS 8,777 million, and 7,533 million as of December 31, As of December 31, 2016, there was a difference between the Company s working capital and its working capital for the twelve-month period (as these terms are defined in GAAP). For information on the nature of the difference see Note 2(D) of the Company s Financial Statements as of December 31, Following are details of the difference between the Company's working capital and its LTM working capital (in NIS thousands): The amount included in the Financial Statements Adjustments (for the period of twelve months)* Total (for the period of twelve months) Current assets ) ( Current liabilities ) ( Excess of liabilities over assets ) ( ) ( ) ( Working capital ratio *The adjustment reflects the predicted 12-month period sale of buildings for sale on the basis of the Group s working plan for For additional information on the Company s working capital, see Chapter A of the Board of Directors Report. 279

284 Additional Investment Following are details of the Company s investment in an associated company that is not a material associate, and whose business results are not consolidated in the Company s Financial Statements Africa Israel Hotels Ltd General The Group operates in the hotel, tourism, and leisure sector in Israel, through Africa Hotels. Until December 30, 2010, the Company held 100% of the issued and paid-in share capital of Africa Hotels, and on that date the Company concluded a transaction to sell 50% of Africa Hotels issued and paid-in shareholders equity for a total consideration of NIS 182 million (hereinafter in this paragraph, the Transaction and the Consideration, respectively) Principles of the agreement to sell the holdings in Africa Hotels The parties agreed that, in addition to the payment of the Consideration, the buyer will purchased from the Company, within 36 months from the Transaction closing date, one half of the balance of the outstanding owners loan that the Company granted to Africa Hotels (as at the signing date of the agreement, the balance of the owners loan was NIS 36 million), in exchange for a payment of NIS 12.5 million (including interest and linkage differences). Nonetheless, on February 4, 2016, the parties signed an addendum to the sales agreement, according to which the buyer will purchase and pay for 50% of the balance of the outstanding owners loan (hereinafter, One Half of the Loan ) by December 31, 2020 (this deferred date, hereinafter, the Amended Payment Date ), according to the revised amount of the owners loan as at the Amended Payment Date including interest and linkage differences. As of January 30, 2017, Africa Hotels discharged part of the said owners loans, and the balance of the owners loans as at the reporting date is NIS 8 million. As an alternative to the aforesaid undertaking to purchase, the parties agreed that they would take steps to ensure that Africa Hotels discharges the balance of the outstanding owners loan in full from the proceeds of the sale of Africa Hotels assets and/or from any distribution to be made to the buyer and/or from other payment and/or right in the company to be conferred to the buyer, at their net value (that is, after withholding tax at source), to the extent that such action is not inconsistent with undertakings toward the entities that provide financing to Africa Hotels. The sales agreement further determined that from the Transaction closing date 280

285 until the date on which the buyer undertook to conclude the purchase of the balance of the sold shares, the buyer will retain 50% of the voting and control rights in Africa Hotels, and the buyer and the Company will have joint control over the management of Africa Hotels (as if the buyer holds 50% of Africa Hotels issued share capital) Agreement to sell Africa Hotels holdings in Crowne Plaza and other hotels On May 31, 2016 (hereinafter in this sub-paragraph, the Signing Date ), Africa Hotels entered into a binding agreement of understandings (hereinafter in this sub-paragraph, the Agreement of Understandings ) with third parties unrelated to the Company group (hereinafter in this sub-paragraph, the Buyer ), defining the consideration for Africa Hotels full holdings in land and other assets used by Crowne Plaza Hotel Tel Aviv, and the (direct and indirect) holdings of Africa Hotels subsidiaries (hereinafter in this sub-paragraph, the Subsidiaries ), which hold rights in the Crowne Plaza Jerusalem Hotel and the Crowne Plaza Eilat Hotel (hereinafter in this sub-paragraph, the Hotels )(hereinafter in this subparagraph, jointly, the Sold Assets ). The Agreement of Understandings determines that Africa Hotels will continue to manage the Hotels for a period of no less than 18 months from the closing date of the transaction (if the transaction is concluded), for management fees to be determined by the parties. On September 4, 2016, the parties entered into an addendum to the agreement of principles (hereinafter in this sub-paragraph, the Addendum ), in which the parties reached agreements concerning the maximum amounts of indemnification to which the Buyer will be entitled with respect to various periods that occur after the transaction closing (in specific cases in which the Buyer is entitled to indemnification). On December 14, 2016, the parties entered into another addendum concerning the agreement of principles (hereinafter in this sub-paragraph, the Third Addendum ), which determines that the Buyer will, in addition to the Sold Assets, also purchase its entire holdings in a company that holds two additional hotels in Eilat (Be City and La Playa hotels) through subsidiaries (hereinafter in this sub-paragraph, the Additional Hotels ) together with its entire holdings in additional land and assets used by Crowne Plaza Tel Aviv Hotel and its entire holdings in Africa Hotels (direct and indirect) subsidiaries that hold rights to the Crowne Plaza Jerusalem Hotel and the Crowne Plaza Eilat Hotel (hereinafter in this sub-paragraph, the Sold Assets ). The consideration for the Sold Assets and the Additional Hotels was set at a total of NIS million (plus VAT as applicable)(where part of this amount will be 281

286 provided as an owner s loan by the Buyer to the Subsidiaries to discharge loans to banking corporations)(hereinafter in this sub-paragraph, the Consideration ). The Parties agreed that the sale of Africa Hotels rights in the Crowne Plaza Jerusalem Hotel will constitute a transaction separate from the sale of the remaining Sold Assets (hereinafter in this sub-paragraph, the Jerusalem Sale ) and that closing of the Jerusalem Sale will not constitute a condition precedent for the closing of the Sale or the sale of the Additional Hotels, as the case may be. In the Third Addendum the parties agreed to extend the period for extending the lease agreement with respect to the Jerusalem property (which is a condition precedent for the closing of the Jerusalem Sale) to July 16, In the Third Addendum the parties reached agreements, among other things, concerning the maximum amount of indemnification to which Africa Hotels will be entitled to receive from the Buyer in respect of amounts that Africa Hotels will be required to bear toward certain third parties (if so required). On January 18, 2017, the transactions with respect to the sale of the Eilat property, the Tel Aviv property and the Additional Hotels were concluded (hereinafter in this sub-paragraph, the Concluded Transactions ), after the conditions precedent obtained (or alternatively, the parties waived the conditions) and after the Buyer paid Africa Hotels NIS 524 million, which constitutes the entire consideration for the Concluded Transactions and an advance payment in the amount of NIS 20 million that was deposited in trust in respect of the Jerusalem property transaction (as defined above and in lieu of the sum of NIS 30 million that was previously determined by the parties), which was not yet concluded as of the date of this Report, and will serve as liquidated damages if the Jerusalem property transaction is not concluded for any cause that is not in Africa Hotel s control and will be refunded to the Buyer in specific cases defined by the parties. Upon conclusion of the transaction, Africa Hotels discharged bank loans in the total amount of NIS 380 million. On January 11, 2017, a lawsuit was filed against, among others, Africa Hotels and its subsidiaries that hold rights in the Additional Hotels, by the lessor of the Law Playa Hotel (which is also the former lessor of the Be City Hotel)(hereinafter in this sub-paragraph, the Plaintiff ), in connection with the agreements entered by Africa Hotel and/or a company in its control to sell its entire holdings in the Crowne Plaza Tel Aviv Hotel, its entire holdings in subsidiaries of Africa Hotels (directly and indirectly) that hold rights in the Crowne Plaza Jerusalem Hotel and rights in the Crowne Plaza Eilat Hotels and in the other hotels in Eilat (hereinafter in this sub-paragraph, the Transaction ). 282

287 According to the Complaint, the Plaintiff has first right of refusal in the event of a direct sale of the Additional Hotels, and it claims that it is entitled to exercise this right also in the event of a sale of the holdings in the corporation that hold, among other things, the corporations that directly hold the Additional Hotels, the sale of which is contemplated in the Transaction. It is the opinion of Africa Hotels that the facts alleged in the lawsuit are incorrect, and based on preliminary advice of its legal advisors, among other things, the Plaintiff s alleged cause of action lacks all foundation, and they believe that the prospects of this lawsuit are very low Following are the main data from the financial statements of Africa Hotels (consolidated) (in NIS thousands): For the year ended December 31, 2014 For the year ended December 31, 2015 For the year ended December 31, 2016 Revenues 57:,856 5:5,:8: 633,594 Costs 898,645 8;4,9:9 8;;,877 Gross profit 8:4,488 8;8, ,989 Gross profit (%) 730:% 6;099% 73085% Operating income before financing expenses 86,33; 47,878 45,9:8 Net earnings (loss) ) 89,388( ) 4,3;3( ) 86,38: ( Total assets as of 9:4,837 96:, ,;3; The majority of the hotel properties managed by Africa Hotels are owned and/or leased (either in entirety or in part) by Africa Hotels, typically through subsidiaries. Nonetheless, with respect to several of the hotels, Africa Hotels entered into management agreements (based on fixed amounts or a percentage of the revenues), without any specific interest in the hotel property General information on the business segment Structure of the hotel industry and changes therein The hotel industry includes hospitality services of several types, the primary categories of which are: vacation hotels, business hotels, B&B and guest houses. In recent years, a trend has developed for hotels to specialize in a specific area and target market, such as health and spa. By its nature, the hotel industry involves frequent investments in current maintenance and hotel development Restrictions, legislation, laws, and special constraints applicable to the hotel industry Various provisions concerning safety, sanitation, business licensing, labor laws, and consumer protection apply to the hotel industry. 283

288 Changes in the scope of operations in the hotel industry and in its profitability 1 According to Israel Hotel Association data for 2016, there was a 2% increase in the number of nights of domestic and foreign tourists in hotels compared with 2015, and they totaled 22.1 million compared with 21.7 million nights in the previous year. The total number of nights by foreign tourists of total nights spent was 8.5 million in 2016, compared to 8.2 million in 2015, reflecting a 4% increase in Total nights spend by domestic tourists in 2015 remained unchanged from the previous year, 13.6 million compared with 13.5 million in Notably, not all tourists stay at hotels (they stay with family members, on ships, in short-term rental apartments, enter Israel with no overnight stay, etc.). According to Hotel Association data, hotel occupancy rate in 2016 was 62% compared with 61% in Developments in the hotel industry markets or changes in the profile of customers 2 In recent years, several developments in the hotel markets and the profile of customers in this industry are evident, and the primary developments are expressed in growing use of electronic commerce in marketing, increased direct marketing (chain-wide reservation centers, websites, etc), changes in customer expectations (awareness of the significance of service standards, hotel experiences, etc), the enhanced status of large chains through mergers and acquisitions, and in an increase in business tourism (corporate client clubs). Furthermore, in recent years, an alternative method of accommodation has emerged, in which individuals rent the properties they own for short-term stays through website such as Airbnb Critical success factors in the hotel industry and the changes therein The management of Africa Hotels believes that the critical success factors in the hotel industry are (1) changes in the security situation; (2) investment, maintenance, and proper maintenance of hotels; (3) Maintaining hotel branding and differentiation; (4) Improvements in information systems and technologies used in hotels, and marketing and advertising activities including operation of a customer retention system; (5) branding of an international chain; (6) attractive location of hotels; (7) Increased advertising in and outside Israel as well as a customer retention system; (8) high standards of maintenance and service that give the hotel the reputation required to operate it as a high-class hotel and to 1 The data in this Section are based on data published by the Israel Hotels Association. 2 Taken from the website of the Central Bureau of Statistics at It should be noted that the Company did not request the website s permission to include the said information, which is public information available to the public. 284

289 maintain its attractiveness to guests Main entry and exit obstacles of the hotel industry and the changes therein The main entry barriers in the hotel industry are: A nationwide hotel chain (in contrast to the establishment of a single hotel or resort unit) requires large investments in infrastructures and buildings, and its operation involves expenses for routine maintenance and operations of the hotels; Developing a customer base also involves extensive investments and is quite naturally a gradual process over time. However, the increased use of the Internet provides broader and easier access to relatively small hotels, which reduces the said entry barrier; hotel and chain brand names and reputation, and obtaining financing. In view of the fact that the tourist and hotel industry makes intensive use of properties, current assets and inventory, it would appear that the main exit barrier in the hotel industry is the sale of these assets and cancelling or terminating existing agreements Substitutes for hotel sector products and the changes therein Substitutes include B&Bs and guesthouses in Israel, hotels and guesthouses overseas, and culture and leisure products including extreme sports facilities, etc Structure of competition in the hotel industry and changes therein Competition in the hotel and vacation sector is characterized by the diversity and large number of competitors. The direct competitors in this sector are all the hotels in a relevant country, while the indirect competitors are B&Bs, guesthouses, vacation accommodations, culture and leisure activity operators, as well as hotels in other countries Products and services In the hotel and vacation sector, the Group s revenues stem mainly from accommodation services in hotels and health and vacation resorts that the Group manages Accommodation packages in hotels and health and vacation resorts generally include bed and board. In addition, in some hotels, additional services are offered, including food and beverage services, leisure and vacation services, general services, business services, spa and health resort services, and events and conference services Following are details of the Group s hotels, and health and vacation centers as of the December 31, 2016: In the following table: Percentage rights in the hotel either ownership rights, leasehold rights or contractual rights. For purposes of clarification it should be noted that the percentage of holdings in ownership or leasehold rights (as distinct from 285

290 contractual rights) is shown according to the holdings of Africa Hotels subsidiaries in the real estate properties, unless explicitly stated otherwise (for example, in respect to the Tel-Aviv Crowne Plaza, in which Africa Hotels has a direct stake, and with the exception of the Jerusalem Crowne Plaza, in which Africa Hotels has a holding through a partnership in which it is a partner). Number of rooms and suites in this column is the total number of rooms in the relevant property. Hotel name Location No. of rooms and suites Crowne Plaza, Tel- Tel Aviv 246 Aviv 1 Type of rights in hotel % rights in hotel Hotel features Ownership as of December 31, 100% 2016 hotel. Crowne Plaza, Jerusalem 397 Leasehold 100% Jerusalem 2 Crowne Plaza, Dead Dead Sea 304 Leasehold 50% Sea 3 This hotel s main market share is foreign business persons. Many conferences and events are held at this This hotel is used for conferences, vacation tourism from overseas and business persons. This hotel has a fitness center, offers treatments and has a modern spa with diverse options. Crowne Plaza, Haifa 4 Haifa 100 Rental only Rental only 5 This hotel is intended mainly for business persons and other vacationers. Holiday Inn, Ashkelon Crowne Plaza, Eilat Patio Hotel, Eilat La Playa Hotel, Eilat Ashkelon 217 Eilat 266 Management only Management only Management only 6 Management only Eilat 115 Leasehold 833% Eilat 212 Leasehold 833% Crowne Plaza City Center, Tel Aviv 273 Rental only Rental only 8 Azrieli 7 Haifa Bay View, Haifa 9 Haifa 109 Rental only Rental only Total in Israel 2,239 rooms Modern hotel of unique architecture. The hotel is intended for business persons and other vacationers, and includes conference halls. This hotel is intended mainly for vacationers. This hotel is leased and operated by a third party. This hotel is leased and operated by a third party. This is a modern boutique hotel intended mainly for business persons, and it offers a range of advanced services. The hotel includes conference halls, gourmet restaurants and firstclass meeting rooms. Hotel leased in 2014 and renovated. The hotel re-opened in February For information about an agreement to sell the Crowne Plaza Jerusalem Hotel, which was not yet concluded as of the date of this Report, see paragraph above. 2 For information about an agreement to sell the Crowne Plaza Jerusalem Hotel, which was not yet concluded as of the date of this Report, see paragraph above. 3 The hotel is owned by the Ashlon Africa partnership (hereinafter, the Partnership ). Africa Hotels holds 50% of the rights in the Partnership, and the remainder are held by a third party, as stated above. Furthermore, Africa Hotels entered into a management agreement regarding said hotel. 4 Adjacent to the hotel is an apartment building, which is considered luxury class, and receives maintenance services from the Haifa Crowne Plaza Hotel. 5 Africa Hotels manages the hotel. 6 The property is owned by third parties. 7 Since 2008, the Group has operated this hotel, which is owned by Kanit Hashalom Investments Ltd ( Kanit ) a member of the Azrieli Group. Africa Hotels has leased areas of the hotel from Kanit for a period of 12 years since the hotel opened. Furthermore, there are two additional option periods for different periods. According to agreements reached by the parties, Africa Hotels (through a subsidiary, Jordan Hotels M.H.I. Ltd) has paid rentals in respect of the hotel areas since January This is the right to rent the areas used for the hotel, based on a contract signed with Kanit on March 27, The hotel was leased for 10 years from August 18, The operating agreement will be automatically renewed for additional five-year periods each unless Africa Hotels notifies otherwise. 286

291 Notably, charges are registered on the Group s rights in the hotels in the above table (that is, the ownership, leasehold, or rental rights, with the exception of management rights alone) Average annual occupancy rates in all the Group s hotels (in Israel) in 2015 and Clients 2016 were 70.7% and 72.1%, respectively The following table contains details of the Group s revenues from overnight stays in the hotels sector (in Israel and overseas), based on a breakdown by Israeli customers and overseas customers: Clients from Israel Clients from overseas Revenues from overnight stays in 2016 (in NIS thousands) % Revenues from overnight stays in 2015 (in NIS thousands) % Revenues from overnight stays in 2014 (in NIS thousands) % 888,567 73% 885,75; 78% 878,9;8 78% 88:,866 73% 883,3;5 6;% 866,595 6;% Total 556,6:; 833% 545, % 4;8,88: 833% Marketing and distribution The Group operates in numerous, diverse marketing channels to appeal to a broad target audience in Israel. The Group conducts centralized marketing operations for all its hotels and sites, taking advantage of economies of scale and the fact that it operates a single marketing network The main marketing channels used by the Group in the hotel sector are: telephone and Internet reservation center; agents who contact potential customers; reservations through companies in Israel and overseas; advertising in various diverse media, and through a members club which is designed to promote sales of services to the business sector Competition The Group s management estimates that its share of the Israeli hotel and vacation market is 4%. 1 The Group responds in various ways to the fierce competition to its operations in the hotel sector. The primary methods used are: investment in tourism products (renovation of hotels, maintenance, and refurbishment of hotels, etc), investment in marketing and advertising in Israel and overseas, cooperation agreements with various corporations in Israel and overseas concerning accommodations in the 1 This estimate is based on the number of guest rooms and occupancy rates in hotels in Israel, according to data of the Israel Hotel Association. The above calculation is based on the number of occupied rooms of Africa Hotels (average annual occupancy multiplied by the total number of rooms of Africa Hotels), divided by the total number of occupied rooms in Israel (annual occupancy multiplied by the total number of rooms in Israel, based on data of the Israel Hotel Association). 287

292 chain s hotels, and defining the standard of service the Group s hotels provide as a primary target Seasonality The hotel industry is highly influenced by seasonal factors. The extent of the seasonal factors influence varies from one tourist area in Israel to the next. Usually the high seasons in resort hotels are during the summer months and the holidays; that is, the second and third quarters of the year. For the health resort in Tiberias, the high season is during the final quarter of the year. As for business tourism, which the Company sees as its target audience for the Tel-Aviv Crowne Plaza, the City Center Crowne Plaza, the Jerusalem Crowne Plaza, the Ashkelon Holiday Inn, the Haifa Crowne Plaza, and the hotels in Romania, the effect of seasonality is less significant. Following are details of the Group s revenues in the hotel sector in Israel by quarter for the years 2014, 2015, and 2016 (in percentages): Period Q1 48% 430:% 4405% Q2 49% 4:04% 4;09% Q3 49% 480;% 45% Q4 47% 4608% 47% Total 100% 100% 833% Plant, property, and equipment The majority of the Group s plant, property, and equipment in the hotel sector are hotel buildings and the attached real estate, which serve the Group in its operations in this sector. The total depreciated costs of the Group s plant, property, and equipment in this business segment as of December 31, 2014, December 31, 2015, and December 31, 2016, were NIS 565,145 thousand, NIS 553,961 thousand, and NIS 551,130 thousand, respectively Intangible assets In its operations in this sector, the Group makes use of the following brand names with which its hotels have become identified over the years< The Africa Israel brand name and logo ( Africa Israel ), due to its status as a member of the Company Group, with no consideration paid to the Company In Israel, the Group uses the two brand names of the Six Continents Inc. hotel chain known by its trade name I.H.G. along with the title Intercontinental Hotels Group (hereinafter, I.H.G. ) as follows. 288

293 The Crowne Plaza brand name (hotels in Tel-Aviv, Eilat, Jerusalem, Haifa, and the Dead Sea). The brand name is associated with five-star luxury hotels (in comparison to global standards). It is characterized as a deluxe hotel The Holiday Inn brand name (hotel in Ashkelon). It is the I.H.G. Group s most common brand and is associated with four-star hotels (in comparison to global standards) On March 16, 2016, the Company signed an agreement with I.H.G. concerning the operation of a new hotel scheduled to open in The agreement provides, among other things, that the Company may operate the hotel under the Indigo brand name, and the Company may use the trademark and Holidex system. The agreement also included commercial terms for payment of royalty and set-up fees Human resources As of December 31, 2016, the Group had 1,419 employees in the hotel sector. As of December 31, 2015, the Group had 1,460 employees. Following is an organization chart of the Africa Hotels management: Raw materials and suppliers The main raw materials required in the Group s hotel sector are food and beverages, operating equipment and general equipment required for the routine maintenance of the hotels. Purchases are made, from the administrative standpoint, separately for each hotel. However, the Group takes advantage of economies of scale to obtain preferential purchasing conditions, and signs contracts with suppliers for all the hotels in the Group s network of hotels. 289