Merlin Properties SOCIMI, S.A. and Subsidiaries Consolidated Financial Statements for the year ended 31 December 2017, prepared in accordance with

Transcription

1 Merlin Properties SOCIMI, S.A. and Subsidiaries Consolidated Financial Statements for the year ended 31 December 2017, prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Consolidated Directors Report

2 MERLIN PROPERTIES SOCIMI, S.A. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS OF 31 DECEMBER 2016 () ASSETS Notes 31/12/ /12/2016 EQUITY AND LIABILITIES Notes 31/12/ /12/2016 NON-CURRENT ASSETS EQUITY: Note 15 Goodwill Note 7-9,839 Subscribed capital 469, ,771 Concession projects Note 8 242, ,744 Share premium 3,970,842 4,017,485 Other intangible assets 584 2,386 Reserves 330,232 (143,537) Property, plant and equipment 3,879 3,569 Other equity holder contributions Investment property Note 9 10,352,415 9,027,184 Valuation adjustments (35,806) (47,582) Investments accounted for using the equity method Note , ,697 Treasury shares (24,881) (105) Non-current financial costs Note , ,427 Interim dividend (93,457) (59,759) Derivatives 207, ,182 Profit for the period attributable to equity holders of the Parent 1,100, ,645 Other financial assets 68, ,245 Equity attributable to equity holders of the Parent 5,717,659 4,819,458 Deferred tax assets Note , ,044 Non-controlling interests 6,124 21,311 Total non-current assets 11,390,461 10,078,890 Total equity 5,723,783 4,840,769 NON-CURRENT LIABILITIES: Debt instruments and other marketable securities Note 16 3,221,317 2,327,345 Non-current bank borrowings Note 16 2,032,678 2,847,237 Other financial liabilities Note 17 88, ,149 Deferred tax liabilities Note 17 and , ,771 Provisions Note 17 72,382 34,092 Total non-current liabilities 6,006,989 5,869,594 CURRENT LIABILITIES: Provisions Note CURRENT ASSETS Debt instruments and other marketable securities Note 16 34,007 25,629 Inventories 1,997 2,938 Bank borrowings Note ,191 36,227 Trade and other receivables Notes 12 and 13 78, ,894 Other current financial liabilities Note 17 18,807 3,997 Other current financial assets Note 12 73,454 83,364 Trade and other payables Note 18 65, ,637 Other current assets 6, Current tax liabilities Notes 18 and 19 1,762 27,231 Cash and cash equivalents Note , ,081 Other current liabilities Note 17 9, Total current assets 614, ,690 Total current liabilities 274, ,217 TOTAL ASSETS 12,005,039 10,918,580 TOTAL EQUITY AND LIABILITIES 12,005,039 10,918,580 The accompanying explanatory Notes 1 to 27 and Appendix I are an integral part of the condensed consolidated statement of financial position as of 31 December

3 Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group in Spain (see Notes 2 and 27). In the event of a discrepancy, the Spanish-language version prevails. MERLIN PROPERTIES SOCIMI, S.A. AND SUBSIDIARIES CONDENSED CONSOLIDATED INCOME STATEMENT FOR THE PERIOD ENDED 31 DECEMBER 2017 () Notes Period Period CONTINUING OPERATIONS: Revenue Notes 6 and , ,646 Other operating income 4,289 3,612 Personal expenses Note 20.c (71,759) (43,241) Other operating expenses Note 20.b (51,994) (51,665) Gains/(losses) on disposals of assets Note ,484 Depreciation and amortisation (10,379) (4,779) Provision surpluses (3,791) 32 Impairment of goodwill: (9,839) (154,428) Absorption of the revaluation of investment property Notes 7 and 9 (9,839) (154,428) Change in fair value of investment property Note 9 897, ,149 Negative difference on business combinations Note 3 (1,775) 37,573 PROFIT/(LOSS) FROM ORDINARY ACTIVITIES 1,215, ,383 Change in fair value of financial instruments 2,576 5,357 Change in fair value of financial instruments - Embedded derivative Note ,415 Change in fair value of financial instruments - Other Note 16 2,484 (7,058) Finance income Note 20.d 468 1,709 Gains or losses on disposals of financial instruments Note 20.e 1,050 74,646 Finance costs Note 20.d (122,541) (91,290) Share in profit/(loss) of companies accounted for using the equity method Note 11 16,233 1,817 PROFIT/(LOSS) BEFORE TAX 1,113, ,622 Income tax Note 19 (12,941) (9,848) PROFIT/(LOSS) FOR THE PERIOD FROM CONTINUING OPERATIONS 1,100, ,774 Attributable to shareholders of the Parent 1,100, ,645 Attributable to non-controlling interests Note EARNINGS PER SHARE (in euros) BASIC EARNINGS PER SHARE (in euros) DILUTED EARNINGS PER SHARE (in euros) - - The accompanying explanatory Notes 1 to 27 and Appendix I are an integral part of the condensed consolidated income statement for the period ended 31 December 2017 MERLIN PROPERTIES SOCIMI, S.A. AND SUBSIDIARIES CONDENSED CONSOLIDATED COMPREHENSIVE INCOME STATEMENT FOR THE PERIOD ENDED 31 DECEMBER 2016 () Notes Period Period PROFIT/(LOSS) FOR THE PERIOD (I) 1,100, ,774 OTHER COMPREHENSIVE INCOME: Income and expenses recognised directly in equity- From cash flow hedges 4,184 (47,487) From translation differences (193) OTHER COMPREHENSIVE INCOME RECOGNISED DIRECTLY IN EQUITY (II) 4,184 (47,680) Amounts transferred to income statement 7,592 6,011 TOTAL AMOUNTS TRANSFERRED TO INCOME STATEMENT (III) 7,592 6,011 TOTAL COMPREHENSIVE INCOME (I+II+III) 1,112, ,105 Attributable to equity holders of the Parent 1,112, ,976 Attributable to non-controlling interests The accompanying explanatory Notes 1 to 27 and Appendix I are an integral part of the condensed consolidated comprehensive income statement for the period ended 31 December

4 Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group in Spain (see Notes 2 and 27). In the event of a discrepancy, the Spanish-language version prevails. MERLIN PROPERTIES SOCIMI, S.A. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE PERIOD ENDED 31 DECEMBER 2017 () Share capital Share premium Reserves Shareholder contributions Profit for the year Interim dividend Valuation adjustments Translation differences Treasury shares Equity attributable to the Parent Noncontrolling interests Total equity Balances as of 31 December ,030 2,616,003 (32,364) ,078 (25,035) (6,106) 193-2,925,339 1,092 2,926,431 Consolidated comprehensive profit/(loss) ,645 - (41,476) (193) - 540, ,105 Distribution of 2015 profit ,043 - (49,078) 25, Transactions with shareholders- Capital increases 146,741 1,526,104 (223,046) ,449,799-1,449,799 Distribution of dividends - (39,605) (1,838) - - (59,759) (101,202) - (101,202) Application of the share premium - (85,017) 85, Acquisition of own shares (1,369) (1,369) - (1,369) Exchange of own shares - - (172) ,264 1,092 (1,092) - Recognition of share-based payments , ,625-15,625 Other transactions - - (10,802) (10,802) 21,182 10,380 Balances as of 31 December ,771 4,017,485 (143,537) ,645 (59,759) (47,582) - (105) 4,819,458 21,311 4,840,769 Consolidated comprehensive profit/(loss) ,100,418-11, ,112, ,112,304 Distribution of 2016 profit ,886 - (582,645) 59, Transactions with shareholders- Distribution of dividends - (46,643) (47,310) - - (93,457) (187,410) - (187,410) Changes in perimeter (15,297) (14,649) Acquisition of own shares (35,393) (35,393) - (35,393) Delivery of own shares - - Recognition of share-based payments , ,738-15,738 Delivery of shares of 2016 stock plan - - (19,660) ,617 (9,043) - (9,043) Other transactions - - 1, ,467-1,467 Balances as of 31 December ,771 3,970, , ,100,418 (93,457) (35,806) - (24,881) 5,717,659 6,124 5,723,783 The accompanying explanatory Notes 1 to 27 and Appendix I are an integral part of the condensed consolidated statement of changes in equity as of 31 December

5 Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group in Spain (see Notes 2 and 27). In the event of a discrepancy, the Spanish-language version prevails. MERLIN PROPERTIES SOCIMI, S.A. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD ENDED 31 DECEMBER 2017 () Notes Period Period CASH FLOWS FROM/(USED IN) OPERATING ACTIVITIES: 695,830 (81,466) Profit/(loss) for the period before tax 1,113, ,623 Adjustments for- (712,741) (332,271) Depreciation and amortisation 10,379 4,778 Changes in fair value of investment property Note 9 (897,401) (453,149) Changes in provisions 61,685 (32) Gains/(losses) on disposals of assets Notes 9 and 3 (1,286) (83,130) Finance income (468) (1,709) Finance costs 122,541 91,290 Changes in fair value of financial instruments (2,576) (5,357) Change differences - - Share in profit/(loss) of investments accounted for using the equity method Note 11 (16,233) (1,817) Impairment of goodwill Notes 3 and 7 9, ,428 Deferred government grants - - Other income and expenses (996) - Negative difference on business combinations 1,775 (37,573) Changes in working capital- 403,473 (258,336) Inventories (941) - Trade and other receivables 461,206 36,777 Other current assets 749 (5,961) Trade and other payables (51,328) (268,793) Other assets and liabilities (6,214) (20,359) Other cash flows from/(used in) operating activities- (108,371) (83,482) Interest paid (125,164) (84,294) Interest received 468 1,710 Income tax paid 16,325 (898) CASH FLOWS FROM/(USED IN) INVESTING ACTIVITIES: (476,013) (567,391) Payments on investments- (505,256) (752,642) Net cash outflow from business acquisitions Note 3 (86,680) (566,657) Investment property (355,158) (171,817) Property, plant and equipment (1,006) (1,878) Intangible assets (5,570) (1,786) Financial assets (56,842) (10,504) Payments on disposals- 29, ,251 Investment property 29, ,251 Property, plant and equipment CASH FLOWS FROM/(USED IN) FINANCING ACTIVITIES: (12,862) 335,198 Proceeds and payments for equity instruments- (222,804) (101,202) Issue of equity instruments Note Acquisition of own shares Note 15 (35,393) - Dividends paid Note 4 (187,411) (101,202) Shareholder contributions - - Proceeds and payments for financial liabilities- 209, ,400 Bank borrowings issues - 3,502,960 Debenture issues 890,256 - Repayment of bank borrowings (680,314) (3,066,560) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 206,955 (313,659) Cash and cash equivalents at beginning of period 247, ,740 Cash and cash equivalents at end of period 454, ,081 The accompanying explanatory Notes 1 to 27 and Appendix I are an integral part of the condensed consolidated statement of cash flows for the period ended 31 December

6 Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Company in Spain (see Notes 2 and 27). In the event of a discrepancy, the Spanish-language version prevails. Merlin Properties SOCIMI, S.A. and Subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December Nature and activity of the Group Merlin Properties SOCIMI, S.A. ( the Parent ) was incorporated in Spain on 25 March 2014 under the Spanish Capital Companies Act (Ley de Sociedades de Capital). On 22 May 2014, the Parent requested to be included in the tax regime for listed real estate investment companies (SOCIMIs), effective from 1 January On 27 February 2017, the Parent change its registered office from Paseo de la Castellana 42 to Paseo de la Castellana 257, Madrid. The Parent s corporate purpose, as set out in its Articles of Association, is as follows: The acquisition and development of urban real estate for subsequent leasing, including the refurbishment of buildings as per the Spanish Law 37/1992, of 28 December, on Value-Added Tax (Ley 37/1992, de 28 de diciembre, del Impuesto sobre el Valor Añadido); The ownership of interests in the share capital of listed real estate investment companies (SOCIMIs) or other non-resident entities in Spain with the same corporate purpose, which are subject to a regime similar to that established for SOCIMIs in relation to the obligatory profit distribution policy stipulated by law or the Articles of Association. The ownership of interests in the share capital of other resident or non-resident entities in Spain, the main corporate purpose of which is the acquisition of urban properties earmarked for lease, which are subject to the regime established for SOCIMIs in relation to the obligatory profit distribution policy stipulated by law or the Articles of Association and meet the investment requirements stipulated for these companies; and The ownership of Spanish public or private limited liability company shares (acciones and participaciones respectively) in collective real estate investment undertakings governed by Spanish Law 35/2003, of 4 November, on collective investment undertakings, or any law that may replace it in the future. In addition to the economic activity relating to the main corporate purpose, the Parent may also carry on any other ancillary activities, i.e., those that generate income, which in total represents less than 20% of its income in each tax period, or those that may be considered ancillary activities under the legislation applicable at any time. The activities included in the Parent s corporate purpose may be indirectly carried on, either wholly or in part, through the ownership of Spanish public or private limited liability company shares in companies with a similar or identical corporate purpose. The direct and, where applicable, indirect performance of any activities that are reserved under special legislation are excluded. If the law prescribes the need for a professional qualification, administrative authorisation, entry in a public register, or any other requirement for the purpose of exercising any of the activities within the corporate purpose, no such activity can be exercised until all the applicable professional or administrative requirements have been met. 5

7 Merlin Properties SOCIMI, S.A. and Subsidiaries ( the Group ) engage mainly in the acquisition and management (through leasing to third parties) of offices, industrial buildings, logistic centres, local premises and shopping centres, and they may also invest to a lesser extent in other assets for lease. On 30 June 2014, the Parent was listed on the Spanish stock market through a capital increase amounting to EUR 125,000 thousand, with a share premium of EUR 1,125,000 thousand. Merlin Properties SOCIMI, S.A. s shares/securities have been listed on the electronic trading system of the Spanish stock exchanges since 30 June The tax regime of the Parent and the majority of its subsidiaries is governed by Spanish Law 11/2009, of 26 October, as amended by Spanish Law 16/2012, of 27 December, governing listed real estate investment companies (SOCIMIs). Article 3 of the Spanish Law sets out the investment requirements for these types of companies, namely: 1. SOCIMIs must have invested at least 80% of the value of their assets in urban properties earmarked for lease, in land to develop properties to be earmarked for that purpose, provided that development begins within three years following its acquisition, and in equity investments in other companies referred to in article 2.1 of the aforementioned Law. The value of the asset is calculated based on the average of the quarterly individual balance sheets of the year. To calculate this value, the SOCIMI may opt to substitute the carrying amount for the fair value of the items contained in these balance sheets, which will apply to all the balance sheets of the year. Any money or collection rights arising from the transfer of the aforementioned properties or investments made in the year or in prior years will not be included in the calculation unless, in the latter case, the reinvestment period referred to in article 6 of the aforementioned Law has expired. 2. Similarly, at least 80% of the rental income from the tax period corresponding to each year, excluding the rental income arising from the transfer of the ownership interests and the properties used by the company to achieve its main corporate purpose, once the holding period referred to below has elapsed, should be obtained from the lease of properties and dividends or shares of profits arising from the aforementioned investments. This percentage must be calculated on the basis of consolidated profit if the company is the parent of a group, in accordance with the criteria established in article 42 of the Spanish Commercial Code (Código de Comercio), regardless of its place of residence and of the obligation to formally prepare consolidated financial statements. Such a group must be composed exclusively of the SOCIMI and the other entities referred to in article 2.1 of this Law. 3. The properties included in the SOCIMI s assets should remain leased for at least three years. The time during which the properties have been made available for lease, up to a maximum of one year, will be included for the purposes of this calculation. This period will be calculated: a) For properties that are included in the SOCIMI s assets before the company avails itself of the regime, from the beginning of the first tax period in which the special tax regime set forth in this Law is applied, provided that the property is leased or offered for lease at that date. Otherwise the following shall apply. b) For properties developed or acquired subsequently by the SOCIMI, from the date on which they were leased or made available for tease for the first time. c) In the case of shares or investments in entities referred to in article 2.1 of this Law, they should be retained on the asset side of the SOCIMI s balance sheet for at least three years following their acquisition or, where applicable, from the beginning of the first tax period in which the special tax regime set forth in this Law is applied. As established in transitional provision one of Spanish Law 11/2009, of 26 October, amended by Spanish Law 16/2012, of 27 December, governing listed real estate investment companies, these companies may opt to apply the special tax regime under the terms and conditions established in article 8 of this Law, even if it does not meet the requirements established therein, provided that such requirements are met within two years after the date of the option to apply that regime. 6

8 Failure to meet this criterion will require the SOCIMI to file income tax returns under the general tax regime from the tax period in which the aforementioned condition is not met, unless this situation is rectified in the following tax period. The SOCIMI will also be obliged to pay, together with the amount relating to the aforementioned tax period, the difference between the amount of tax payable under the general tax regime and the amount paid under the special tax regime in the previous tax periods, including any applicable late-payment interest, surcharges and penalties. The income tax rate for SOCIMIs was set at 0%. However, where the dividends that the SOCIMI distributes to its shareholders holding an ownership interest exceeding 5% are exempt from tax or are subject to a tax rate lower than 10%, the SOCIMI shall be subject to a special charge of 19%, which shall be considered to be the income tax charge, on the amount of the dividend distributed to these shareholders. If applicable, this special charge must be paid by the SOCIMI within two months after the dividend distribution date. In 2017 the transitory period has ended and the Parent company must comply with all requirements of the SOCIMI regime. In the directors opinion, the Parent company complies with all of the aforementioned requirements as of December 31 st The consolidated financial statements of the Group and the separate financial statements of the Group companies for 2017, which were prepared by their respective directors, have not yet been approved by their shareholders at the respective Annual General Meetings. However, the Parent s directors consider that the aforementioned financial statements will be approved without any material changes. The separate and consolidated financial statements of Merlin Properties, SOCIMI, S.A. for 2016 prepared by its directors were approved by the shareholders at the Annual General Meeting on 26 April The 2016 separate financial statements of the Group companies, which were prepared by their respective directors, were approved by their shareholders at the respective General Meetings within the periods established in applicable tax legislation. In view of the business activities currently carried on by the Group, it does not have any environmental liability, expenses, assets, provisions or contingencies that might be material with respect to its equity, financial position or results. Therefore, no specific disclosures relating to environmental issues are included in these notes to the consolidated financial statements. 2. Basis of presentation of the consolidated financial statements and basis of 2.1 Regulatory framework The regulatory financial reporting framework applicable to the Group consists of the following: - The Spanish Commercial Code and all other Spanish corporate legislation. - International Financial Reporting Standards (IFRSs) as adopted by the European Union pursuant to Regulation (EC) No 1606/2002 of the European Parliament and Spanish Law 62/2003, of 30 December, on tax, administrative and social security measures, as well as applicable rules and circulars of the Spanish National Securities Market Commission (CNMV). - Spanish Law 11/2009, of 26 October, as amended by Spanish Law 16/2012, of 27 December, governing listed real estate investment companies (SOCIMIs) and other corporate law. - All other applicable Spanish accounting legislation. 2.2 Basis of presentation of the consolidated financial statements The consolidated financial statements for 2017 were obtained from the accounting records of the Parent and consolidated companies, and have been prepared in accordance with the regulatory financial reporting framework described in Note 2.1 and, accordingly, they present fairly the Group s consolidated equity and financial position at 31 December 2017 and the consolidated results of its operations, the changes in consolidated equity and the consolidated cash flows in the year then ended. Given that the accounting policies and measurement bases applied in preparing the Group s consolidated financial statements for 2017 may differ from those applied by some of the Group companies, the necessary 7

9 adjustments and reclassifications were made on to unify these policies and bases and to make them compliant with IFRSs as adopted by the European Union In order to uniformly present the various items composing the consolidated financial statements, the accounting policies and measurement bases used by the Parent were applied to all the consolidated companies Adoption of Financial Reporting Standards and Interpretations effective as from 1 January 2017 In 2017 the following standards, amendments and interpretations came into force, which, where applicable, were used by the Group in preparing the condensed consolidated interim financial statements: Standards, amendments and interpretations Description Mandatory application in the years beginning on or after: Amendments to IAS 7, initiative Disclosure It introduces additional disclosure requirements in relation to the reconciliation of changes in financial liabilities with cash flows from financing activities. 1 January 2017 Amendments to IAS 12, Recognition of deferred tax assets for unrealised losses Clarification of the principles established regarding the recognition of deferred tax assets for unrealised losses related to debt instruments measured at fair value. 1 January Standards not yet in force in 2017 The following standards were not yet in force in 2017, either because their effective date is subsequent to the date of the consolidated financial statements or because they had not yet been adopted by the European Union. Standards, amendments and interpretations IFRIC 16 Leases (issued in January 2016) Description Replaces IAS 17 and the related interpretations. The main development involves a single lessee accounting model, which will include all leases on the balance sheet (with specific exceptions) with an impact similar to that of current financial leases (right-of-use assets will be depreciated and a finance cost will be recognised for the depreciated cost of the liability). Mandatory application in the years beginning on or after: 1 January 2019 IFRS 9, Financial Instruments (issued in July 2014) This new standard will replace the current IAS 39. IFRS 9 consists of three large sections: classification measurement, hedging and impairment. It changes the model for classifying and measuring financial assets, the main focus of which will be the business model and the characteristics of the financial asset. The hedge accounting model is designed to better align with the economic management of the risk and require less rules. Lastly, the impairment model shifts from the current incurred losses model to an expected losses model. 1 January

10 Standards, amendments and interpretations Description Mandatory application in the years beginning on or after: IFRS 15 Revenue from Contracts with Customers (issued in May 2014) including the amendments to IFRS 15: effective date of IFRS 15 (issued September 2015) and the clarifications to IFRS 15 (issued in April 2006) Amendments to IFRS 4, Insurance Contracts IFRS 17, Insurance Contracts (issued in May 2017) Amendments to IFRS 9, Prepayment features with negative compensation (issued in October 2017) Amendments to IAS 28, Long-term interests in associates and joint ventures (issued in October 2017) IFRIC 23, Uncertainty over Income Tax Treatments (issued in June 2017) IFRIC 22, Foreign Currency Transactions and Advance Consideration (issued in December 2016) Amendments to IFRS 2, Classification and Measurement of Share-based Payment Transactions (issued in June 2016) Improvements to IFRSs Cycle (issued in December 2016) Amendments to IAS 40, Reclassification of Investment Property (issued in December 2016) (1) Yet to be adopted by the European Union It will replace all current standards and interpretations in force with regard to revenue. The new IFRS 15 model is far more restrictive and principles-based, and also has a very different conceptual approach. Application of the new requirements could therefore give rise to significant changes in the revenue profile. Provides entities with the option of applying the overlay approach (IFRS 9) or the deferral approach, within the scope of IFRS 4. Replaces IFRS 4. It includes the principles for the recognition, measurement, presentation and disclosure of insurance contracts. The amendment enables companies to measure financial assets, cancelled early with negative compensation at amortised cost or fair value, through other comprehensive income if a specific condition is met, instead of doing so at fair value through profit or loss. The amendment clarifies that companies must account for long-term interests in an associate or joint venture to which the equity method is not applied using IFRS 9. This interpretation clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over whether a certain tax treatment used by the entity will be accepted by the tax authorities. This interpretation establishes the transaction date in order to establish the exchange rate applicable to transactions with advance considerations in foreign currency. These are limited amendments that clarify specific matters such as the accounting for the effects of vesting conditions on cashsettled share-based payment transactions, the classification of share-based payment transactions with net settlement features and certain aspects of the modifications to the type of share-based payment (cash or shares). Minor amendments to a series of standards (different effective dates, one of which is 1 January 2017) The amendment clarifies that a reclassification of an investment as investment property shall only be permitted when it can be demonstrated that there has been a change in use. 1 January January January 2021 (1) 1 January 2019 (1) 1 January 2019 (1) 1 January 2019 (1) 1 January 2018 (1) 1 January January 2018 (1) 1 January 2018 (1) 9

11 The impacts of the application of IFRS 15, IFRS 9 and IFRS 16 are detailed as follows: IFRS 15 Revenue from contracts with customers IFRS 15 is the comprehensive standard for recognising revenue from customers that will replace the following standards and interpretations currently in force: IAS 18 Revenue, IAS 11 Construction Contracts, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction and Real Estate, IFRIC 18 Transfers of Customers and SIC-31 Revenue - Barter Transactions Involving Advertising Services. The revenue model is applicable to all contracts with customers except for leases, insurance contracts and financial instruments that are regulated in other IFRSs. The Group s main activity is the operation of real estate held for lease, whereby rental income represents its main source of revenue and, therefore, since contracts with customers relating to leases are excluded from IFRS 15 (IAS 17 / IFRS 16), the impact of its application will not be significant. The rest of the Group s revenue comes from property asset management services provided to third parties. This revenue represents a single performance obligation and, therefore, the point in time at which revenue is recognised is consistent with the current standard. The Group intends to apply IFRS 15 retrospectively, without restating the comparative information. However, as indicated above, in addition to providing more detailed breakdowns on the Group s revenue, management does not expect the application of IFRS 15 to have a significant impact on the Group s financial position or return. IFRS 9 Financial Instruments IFRS 9 will replace IAS 39 for periods beginning on or after 1 January The Group intends to apply IFRS 9 retrospectively, without restating the comparative information. Following an analysis of the Company s financial assets and liabilities at 31 December 2017, carried out based on the facts and circumstances at this date, Group management carried out a preliminary assessment of the impact of IFRS 9 on the financial statements, as indicated below: Classification and measurement The accounts receivable at amortised cost, the amounts of which are detailed Note 13, are held within a business model whose objective is to collect contractual cash flows that are solely payments of principal and interest on the outstanding principal. Consequently, these financial assets will continue to be measured at amortised cost in accordance with the application of IFRS 9. All other financial assets and financial liabilities will continue to be measured using the same bases currently adopted in IAS 39. Impairment The amounts receivable from customers will be subject to IFRS 9 with regard to impairment. The Group intends to apply the simplified approach to recognise the expected credit loss throughout the term of these amounts receivable from customers that arise from lease agreements. The Group is finalising its complete model for expected loss. In any case, the directors do not expect a significant impact since the insolvency risk is very low and, additionally, it is guaranteed through the deposits received from tenants. With regards to refinancing processes undertaken in previous years, no impact has been identified since the only refinancing (Tree Inversiones Inmobiliarias, S.A.) originally matured in IFRS 16 Leases In the case of IFRS 16 (Leases), this standard will replace the current IAS 17 and will be applicable as of 1 January The new development involves a single lessee accounting model, which will include all leases on the balance sheet (with specific exceptions) as if they were financed purchases, i.e., with an impact 10

12 similar to that of the current financial leases. Otherwise, lessors will continue to use a dual model, similar to that currently set forth in IAS 17 and, therefore, the Group considers that the impact of the adoption of this standard will not be significant. 2.3 Functional currency These consolidated financial statements are presented in euros, since the euro is the functional currency in the area in which the Group operates. 2.4 Comparative information The information relating to 2016 contained in these notes to the consolidated financial statements is presented solely for comparison purposes with similar information relating to the year ended 31 December Responsibility for the information and use of estimates The information in these consolidated financial statements is the responsibility of the Parent s directors. In the Group s consolidated financial statements for 2017 estimates were occasionally made by the senior executives of the Group and of the consolidated companies, later ratified by the directors, in order to quantify certain of the assets, liabilities, income, expenses and obligations reported herein. These estimates relate basically to the following: 1. The market value of the net assets acquired in business combinations (see Note 3). 2. The market value of the Group s property assets (see Note 5.3). The Group obtained valuations from independent experts at 31 December The fair value of certain financial instruments (see Note 5.7). 4. The assessment of provisions and contingencies (see Note 5.13). 5. Management of financial risk and, in particular, of liquidity risk (see Note 25). 6. The recovery of deferred tax assets and the tax rate applicable to temporary differences (see Note 5.15). 7. Definition of the transactions carried out by the Group as a business combination in accordance with IFRS 3 or as an acquisition of assets (see Note 3). 8. Compliance with the requirements that govern listed real estate investment companies (see Note 1). Changes in estimates: Although these estimates were made on the basis of the best information available at 31 December 2017, future events may require these estimates to be modified prospectively (upwards or downwards), in accordance with IAS 8. The effects of any change would be recognised in the corresponding consolidated income statement. 2.6 Basis of applied All companies over which effective control is exercised by virtue of holding of a majority of the voting rights in their representation and decision-making bodies and the power to determine the company s financial and operational policies were fully consolidated; and companies in which the Group owns more than a 20% interest and exercises significant influence without holding a majority of the voting rights were accounted for using the equity method (see Note 11). 11

13 A number of adjustments have been made in order to bring the accounting principles and measurement bases of Group companies into line with those of the Parent, including the application of International Financial Reporting Standards measurement bases to all Group companies and associates. It was not necessary to unify accounting periods since the balance sheet date of all the Group companies and associates is 31 December of each year Subsidiaries Subsidiaries are considered to be those companies over which the Parent directly or indirectly exercises control through subsidiaries. The Parent has control over a subsidiary when it is exposed or has rights to variable returns from its involvement with the subsidiary, and when it has the ability to use its power to affect its returns. The Parent has power when the voting rights are sufficient to give it the ability to direct the relevant activities of the subsidiary. The Parent is exposed or has rights to variable returns from its involvement with the subsidiary when its returns from its involvement have the potential to vary as a result of the subsidiary s performance. The financial statements of the subsidiaries are fully consolidated with those of the Parent. Accordingly, all material balances and effects of the transactions between consolidated companies are eliminated on. Third party interests in the Group s equity and profit or loss are recognised under Non-controlling interests in the consolidated statement of financial position, the consolidated income statement and consolidated statement of comprehensive income, respectively. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate Associates The companies listed in Appendix I, over which Merlin Properties, SOCIMI, S.A. does not exercise control but rather has a significant influence, are included under Investments accounted for using the equity method in the accompanying consolidated statement of financial position and are measured using the equity method, which consists of the value of the net assets and any goodwill of the associate. The share of these companies net profit or loss for the year is included under Share of results of associates accounted for using the equity method in the accompanying consolidated income statement Transactions between Group companies Gains or losses on transactions between consolidated companies are eliminated on and deferred until they are realised with third parties outside the Group. The capitalised expenses of Group work on non-current assets are recognised at production cost, and any intra-group results are eliminated. Receivables and payables between consolidated Group companies and any intra-group income and expenses were eliminated Translation of currencies other than the euro The translation to euros of foreign transactions was carried out by applying the following criteria: 1. The assets and liabilities, including goodwill and adjustments to net assets arising from the acquisition of businesses, including comparative balances, are translated at the exchange rate at each reporting date; 2. Income statement items were translated at the average exchange rates for the year; and 3. Any exchange differences that arise from applying the aforementioned criteria are recognised as translation differences in equity. In presenting the consolidated statement of cash flows, the cash flows, including comparative balances, of the subsidiaries are translated to euros at the exchange rates prevailing at the date on which such cash flows took place. 12

14 Translation differences related to foreign businesses recognised under equity are recognised in the consolidated income statement when such businesses are disposed of or when the Group no longer has control over them. Following the liquidation of Testa American Real Estate Corporation in 2016, the local currency of all Group companies is the euro First-time differences At the date of an acquisition, the assets and liabilities of a subsidiary are measured at their fair values at that date. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. If a deficiency of the acquisition cost below the fair values of the identifiable net assets acquired (i.e. a discount on acquisition) is disclosed, the valuations of the net assets are reviewed and, where appropriate, the deficiency is credited to profit or loss in the period in which the acquisition is made Business combinations The Group accounts for business combinations using the purchase method. The date of acquisition is the date on which the Group takes control of the acquired. The consideration paid is calculated at the date of acquisition as the sum of the fair values of the assets delivered, the liabilities incurred and assumed and the equity instruments issued by the Group in exchange for control of the business acquired. Acquisition costs, such as professional fees, do not form part of the cost of the business combination, but are taken directly to the consolidated income statement. Where applicable, the contingent consideration is recognised at the acquisition-date fair value. Subsequent changes to the fair value of the contingent consideration are taken to the consolidated income statement unless this change arises within the period of 12 months established as the provisional accounting period, in which case the change is recognised in goodwill. Goodwill is calculated as the excess of the aggregate of the consideration transferred, any non-controlling interests, and the fair value of any previously acquired interest less the net identifiable assets acquired. If the acquisition cost of the identifiable net assets is less than their fair value, the related difference is recognised in the consolidated income statement for the year Scope of The companies composing the Merlin Group at 31 December 2017, along with information relating to the method, are listed in Appendix I of the consolidated financial statements. 3. Changes in the scope of 2017 The changes in the scope of in 2017 were as follows: Business combinations 1) Promosete Investimentos Imobiliarios, S.A. The Parent acquired 100% of the ownership interest in Promosete Investimentos Imobiliarios, S.A., the share capital of which amounted to EUR 200,000, which was fully paid and represented by 200,000 shares of EUR 1 par value each, for a total of EUR 11,704 thousand. At the time of the acquisition, the seller had a loan with the previous owner for a total amount of EUR 17,833 thousand that was cancelled simultaneously with the acquisition price. 13

15 Main line of business Date of acquisition Percentage of ownership acquired (voting rights) Consideration transferred (thousands of euros) Promosete Investimentos Imobiliarios, S.A. Acquisition and development of urban properties for subsequent management and lease 07/04/ % 29,537 (a) (a) Consideration transferred taking into consideration the cancelled loans corresponding the previous owner. Carrying amount Valuation adjustments Fair value Investment property 26,765 4,226 30,991 Non-current assets Current assets Non-current and current liabilities (1,630) 841 (789) Deferred tax liabilities (1,881) (1,057) (2,938) Total net assets 23,752 4,010 27,762 Consideration transferred 29,537 Loss incurred on the business combination (1,775) The main line of business of the acquired company is the lease of offices, whereby its main asset is the Central Office Building in Lisbon that is 100% leased and has a surface area of 10,310 square meters. Its appraised value at the time of purchase according to an independent appraiser was EUR 30,991 thousand. The purpose of this business combination is to increase the Group s presence in the real estate market in Lisbon. The fair value of the receivables acquired, which are mainly trade receivables, is EUR 265 thousand and does not differ from the gross contractual amounts. The Parent s directors do not consider there to be any indications at the date of acquisition that these receivables would not be collected in full. The valuation adjustment to liabilities of EUR 1,057 thousand corresponds mainly to the deferred tax liability associated with the valuation adjustments. The net profit and income generated in 2017 and included in the consolidated income statement for 2017 amounted to EUR 5,370 thousand and EUR 1,701 thousand. Had the acquisition taken place on 1 January 2017, net profit would have increased by EUR 292 thousand and the revenue contributed to the Group would have been approximately EUR 525 thousand higher compared to the figures recognised in these consolidated financial statements. When calculating these amounts, the directors considered that the revenue generated and expenses incurred between 1 January 2017 and the acquisition date, along with the acquisition costs, did not vary. Net cash flow from the acquisition 14

16 Thousands of euros Cash paid 29,537 Less: cash and cash equivalents (67) Total 29,470 2) Praça do Marqués-serviços auxiliares, S.A. The Parent acquired 100% of the ownership interest in Praça do Marqués, S.A., the share capital of which amounts to EUR 15,893 thousand and is fully paid and represented by 3,185,000 shares of EUR 4.99 par value each, for a total of EUR 60,382 thousand. Main line of business Date of acquisition Percentage of ownership acquired (voting rights) Consideration transferred (thousands of euros) Praça do Marqués - Serviços Auxiliares, S.A. Acquisition and development of urban properties for subsequent management and lease 28/09/ % 60,383 Carrying amount Valuation adjustments Fair value Investment property 59,222 6,099 65,321 Current assets 3, ,449 Non-current and current liabilities (498) (178) (676) Deferred tax liabilities (6,772) (1,939) (8,711) Total net assets 55,923 4,460 60,383 Consideration transferred 60,383 The main line of business of the acquired company is the lease of urban properties, whereby its main asset is a building in Lisbon that is 63% leased and has a surface area of 12,460 square meters. Its appraised value at the time of purchase according to an independent appraiser was EUR 65,321 thousand. The purpose of this business combination is to increase the Group s presence in the real estate market in Lisbon. The fair value of the receivables acquired, which are mainly trade receivables, is EUR 664 thousand and does not differ from the gross contractual amounts. The Parent s directors do not consider that at the acquisition date there were any indications that these receivables would not be collected in full. The valuation adjustment to liabilities of EUR 1,939 thousand corresponds mainly to the deferred tax liability associated with the valuation adjustments. The net profit and income generated in 2017 and included in the consolidated income statement for 2017 amounted to EUR 121 thousand and EUR 633 thousand. Had the acquisition taken place on 1 January 2017, net profit would have increased by EUR 1,099 thousand and the revenue contributed to the Group would have been approximately EUR 1,844 thousand higher compared to the figures recognised in these consolidated financial statements. When calculating 15

17 these amounts, the directors considered that the revenue generated and expenses incurred between 1 January 2017 and the acquisition date, along with the acquisition costs, did not vary. Net cash flow from the acquisition Thousands of euros Cash paid 60,382 Less: cash and cash equivalents (3,102) Total 57,280 Corporate restructuring of subsidiaries On 27 June 2017, the Parent s Board of Directors approved the start of the merger between Explotaciones Urbanas Españolas, S.L.U. and Centros Comerciales Metropolitanos, S.A.U., both wholly owned by the Parent. The aforementioned process, which began on 29 th August 2017, does not affect the Group s consolidated financial statements. On 21 December 2017, the Group acquired 37,660 shares representing 14.39% of the share capital in the subsidiary Parc Logistic de la Zona Franca, S.A. PLZF, for EUR 11,800 thousand, thus giving the Group a 90% interest in the share capital of this company. MERLIN Parques Logísticos S.A. also acquired a 10% interest in Sevisur Logística, S.A. on 28 th July 2017 (reaching a 100% shareholding) for a total of EUR 2,828 thousand. The acquisition of the additional interest did not have any effect on the method, given that the Group has exercised control over this company since 31 December The changes in the ownership interest over these investees have given rise to a decrease in non-controlling interests and the differences with respect to the price paid were recognised under reserves. In 2017 the following subsidiary companies have been liquidated: Metrovacesa Mediterranée, S.A.S; Metrovacesa France, S.A.S and Metrovacesa Access Tower GmbH, none of which have affected the Group s consolidated financial statements Business combinations 3) Integration agreement with Metrovacesa, S.A. On 21 June 2016, the Parent signed an integration agreement with Metrovacesa, S.A. and its main shareholders (Banco Santander, S.A., Banco Bilbao Vizcaya Argentaria, S.A. and Banco Popular Español, S.A.) for the purpose of creating the largest Spanish real estate rental property group. On 26 August 2016, the merger was approved by the Spanish anti-trust authorities and on 15 September 2016 by the shareholders at the Annual General Meetings of the Parent and Metrovacesa, S.A. The resolutions passed at the respective AGMs were registered in the Mercantile Registry on 26 October The transaction was arranged through the total spin-off of Metrovacesa, S.A, thereby dissolving this company, and incorporating the property business unit of Metrovacesa into the Group, consisting of the nonresidential properties intended for lease (including the staff of the Metrovacesa group and the properties, shares or interests in subsidiaries or investees, contracts and, in general, all assets and liabilities of Metrovacesa associated with tertiary assets, except for EUR 250 million in debt). As consideration for the business received, the Parent carried out a capital increase through the issue of 146,740,750 shares of EUR 1 par value each, with an share premium of EUR per share issued. This increase was subscribed in full by the shareholders of Metrovacesa, S.A., with an exchange ratio of one share of Merlin Properties SOCIMI, S.A. for every shares of Metrovacesa, S.A. As a result of this transaction, the shareholders of Metrovacesa, S.A. acquired % of the Parent's share capital. This business combination may be summarised as follows: 16