Board of Directors' Report on the Corporation's State of Affairs

Transcription

1 Board of Directors' Report on the Corporation's State of Affairs Brack Capital Properties NV (hereinafter: "the Company") hereby submits the Board of Directors' report for a period of six months ending on June 30, 2016 (hereinafter: "the Reported Period" or "the Report Period. The review is limited in scope and refers to events and changes occurring in the corporation's state of affairs during the Reported Period the influence of which is material. The report was prepared assuming that the report of the Company's Board of Directors for 2015 (which is included in the Company's periodical report for 2015) (hereinafter, respectively: "2015 Board of Directors Report" and "2015 Periodic Report") 1 is available to the reader. The financial statements attached in Chapter B of this quarterly report are presented according to International Standards the IFRS. All the data in this report refer to the interim consolidated financial statements unless otherwise stated. In this report: "The report date or "the date of the report" June 30, "Report signing date" or "the date of signing the report" August 22, "The reported quarter" the second quarter of Preamble Below are the Company's principal results for the six months ended June 30, Profitability in the second quarter of 2016, the Company's net income attributed to the Company's shareholders amounted to approximately EUR 9.4 million compared to income of EUR 12.3 million in the corresponding quarter last year. The following is the contribution of income producing real estate and residential development activities to the Company's results: - Income producing real estate in the second quarter of 2016, the FFO I amounted to EUR 7 million compared to EUR 6.75 million in the first quarter of In the reported quarter, the FFO I grosses up an annual rate of EUR 28.0 million. In addition, the FFO II 2 grosses up an annual rate EUR 37.2 million as of the report date. - Residential development activity- in the reported quarter, no apartments were delivered to purchasers Operating segments key operational data 3. a. Residential development Grafental project 4 Stage Number of flats Expected revenues (EUR in millions) Expected income (EUR in millions) Entrepreneurial profit (in percentage) Sales (in percentage) Revenue recognition until now B % 99.8% 88% B % 96% 0% C % 44% 0% Total % 80% 29% 1 Published on March 20, 2016 (Ref No ]. 2 FFO II: (the FFO from income producing activity) plus the Company's share in the annual profit from development activity in the last two years. 3 As of the signing date of the report 4 Data according to 100%, the effective corporation's share in the project is 83%; sales include reservations. 1

2 b. Income producing real estate 5 Zoning Area (square meters) Actual Return of rental income 6 ERV Return 7 Actual NOI return 6 NOI return according to ERV 8 Occupancy rate Residential % 8.7 % 5.9 % 7.8 % 96% Commercial % 7. 5% 6. 5% 7.0 % 96% Total % 8. 1% 6. 2% 7. 4% 96% - Residential: in the second quarter of 2016, rental income increased by 5.0 % from identical assets and11.3% in rental income per square meter in new rentals compared to the corresponding quarter of The rental income in new rentals in the residential market grosses up an increase potential of 27 % compared to the actual rental income. - Commercial: in the second quarter of 2016, NOI has increased by 2.6 % compared to the quarter in the corresponding period last year mainly from the betterment of assets. In addition, the Company commenced the process of betterment of several commercial centers by using existing construction rights gradually while securing in advance long term commitments with new tenants. Balance sheet structure and financial solvency a. Equity and NAV: The equity attributed to the Company's shareholders amounted to approximately EUR million and the NAV 9 amounted to EUR million. As of the report date, equity and NAV per share amounted to EUR and EUR 65.84, respectively. b. Debt ratios: the LTV ratio 10 is 53.7% and the debt ratio to net CAP 11 is 59.4 % as of the date of the report. The EBITDA ratio to interest expenses (only from the income producing portfolio, excluding operating income from entrepreneurship activity) is 2.9 in the second quarter of c. Liquidity: cash balances and liquid balances amounted to approximately EUR 67 million as of the report date. 5 Assets consolidated in the Company's financial statements 6 Data of August 2016 in annual terms divided by the carrying values. 7 ERV estimated rental value the expected annual return provided that all of the assets are leased in full occupancy in return for the rental income prevailing in the market. 8 Actual NOI plus the difference between actual rental income and the ERV divided by the carrying values. 9 EPRA NAV for information regarding the index and the calculation manner see section 5 of part A. 10 Net debt to total balance sheet, net 11 For details regarding the calculation manner, see part E designated disclosure to the bondholders, section 4c, the CAP ratio calculation in this report. 2

3 Concise description of the Corporation and its business environment Areas of activity The Company, its subsidiaries and associates companies (hereinafter, collectively: "the Group") have been operating in the field of real-estate in Germany, in four primary activity sectors: residential income producing real estate, commercial income producing real estate, entrepreneurship residential real estate in Düsseldorf and betterment of land in Dusseldorf. Below are the details on the major developments in said sectors (as occurred) in the reported period and until the signing date of the report: Residential income-producing real-estate as of the report date, the Group owns 10,242 apartments, with a total leasing area of approximately 598,000 m 2. Commercial income-producing real-estate as of the report date, the Group owns 32 commercial income-producing properties 12 in the commercial segment (commerce and offices ) with an overall leasing area of approximately 387,000 m2. Entrepreneurship Residential Real estate - for details regarding the marketing, sales and performance of stages B1 and B3 (225 units) and Stage C (109 units) of the project, see "Material events during the reported period". Betterment of land in Dusseldorf - the Company owns 2 land complexes in Dusseldorf, Germany, undergoing advanced procedures for changing the zoning from offices to residential. For details regarding the Company's progress in the zoning changes of the lands in Dusseldorf, see the section Material events during the reported period". 12 In addition, there is property of an associate spanning over an area of 7,000 m 2 in the city of Chemnitz. 3

4 Property financing The Company consistently works for maximizing the return-risk profile for its shareholders by means, inter alia, of optimization of the capital/debt structure, both on property level and on corporation level. To that end the Company uses the following sources: bank loans and bonds raising in Israel etc. Below are the details on updates in the aforesaid financing methods (as occurred) in the reported period and until the signing date of the report: Bank loans as of the report signing date, the Company has bank loans amounting to EUR 601,518 thousand. As of the report date, the average rate of interest of these loans is approximately 2.0%. The average duration of the loans is about 3.5 years. Bonds the Company has three series of bonds (non convertible to shares) rated by S&P Maalot Ltd. (Maalot) with AA- rating as of the signing date of the report: Series A at a scope of approximately NIS 228,640 thousand par value with an interest (linked) of approximately 4.8% per year with an average duration of approximately 2.3 years, Series B at a scope of approximately NIS 220,000 thousand par value with an interest (linked) of approximately 3.29% per year with an average duration of approximately 5.1 years and Series C at a scope of NIS 156,910 thousand par value with an interest (linked) of approximately 3.3% per year with an average duration of approximately 7.4 years. Activity environment The German economy is the fourth in the world in terms of Gross National Product (GDP). It is characterized by low unemployment rate and low and steady inflation. The German government enjoys a perfect credit rating (AAA) with a stable outlook and low financing cost of government bonds. 13 The real estate market in Germany is characterized with high stability and positive directions as occupancy rates improve and rental prices are increasing. In 2015, the German GDP recorded an increase of 1.7% while the other large European economies recorded lower growth rate, when the GDP of the entire Eurozone increased by 1.5%. In 2015, the German GDP has grown mainly from an increase in private consumption and increase in volumes of investments in equipment and construction. The Organization for Economic Co-operation and Development (OECD) expects an increase in the economic activity in Germany in 2016, which is expected to show a growth of 1.8% mainly due to an additional improvement in the private consumption, which is supported among others, by low interest and low petrol prices as well as due to low unemployment rate. In the first quarter of 2016, the German GDP increased by 0.7% whereas in the second quarter an additional increase of 0.4% was recorded. 13 As of the date of signing the report, the German government bonds for 10 years yields a nominal annual return of 0.0%. 4

5 Material and other Events in the Report Period Purchase of an additional residential portfolio in Kiel, northern Germany - on December 18, 2015, the Company (through a sub subsidiary) entered into a notarized sale agreement with a third party who is not related to the Company and/or to its controlling shareholders (only in this sub section: the seller) under which the seller shall sell the Company 296 residential units in northern Germany (only in this sub section: the acquired assets) for a total consideration of EUR 20.4 million (including related transaction costs). For the purpose of financing the purchase, the Company (through a sub subsidiary) entered into an agreement with a German bank to obtain a loan of EUR 14 million under non- recourse terms bearing an annual fixed interest rate of 1.24% which its final repayment date is 5 years from the date of extending the loan. On March 1, 2016, said transaction was completed 14. Capital distribution to shareholders on January 11, 2016, the Company' general meeting of shareholders approved to carry out a capital distribution to its shareholders in the total amount of EUR 6,041 thousand (out of the premium reserve on the Company's shares, of which NIS 38 thousand for treasury shares which are held by the Company).Said capital distribution was carried out on April 13, Purchase of land in Aachen, Germany - on February 26, 2016, the Company (through a sub subsidiary) entered with a third party who is not related to the Company and/or its controlling shareholders (the "Partner") into a notarized sale agreement with a third party who is not related to the Company and/or its controlling shareholders (the seller) to acquire ownership rights to the land in the city of Aachen in Germany, on which an old plant which is not in use is erected, for a total consideration of 6 million (the Company's share is EUR 3 million) that was completed in April 2016 after the required conditions were met. The Company and the partner intend to work collaboratively to change the zoning of the land into residential zoning such it would be feasible to construct residential units (combination of townhouses and garden/roof apartments) after demolishing the existing building. For the avoidance of doubt, it is clarified that the Company has not yet made its final decision regarding the development of the project and its dates For additional information see the immediate reports of the Company from December 20, 2015 and February 21, 2016 (references numbers: and , respectively) which are brought in this report by way of reference. 15 For additional information see the Company's immediate reports dated November 25, 2015 (2 reports) and January 11, 2016, March 23, 2016, April 5, 2016 and April 7, 2016 (references , , , , and , respectively) which are brought in this report by way of reference. 16 For additional information see the Company's immediate report dated February 28, 2016 (reference which is brought in this report by way of reference 5

6 Change in the ESOP3 conditions on January 27, 2016 and February 4, 2016, the Company's remuneration committee and the Board of Directors (respectively) approved a modification to the plans from 2013 for the allocation of options to employees (ESOP 3) (the existing plans) with respect to the acceleration of the vesting dates as follows: the Company's competent organs may approve a mechanism for accelerating the entitlement of all or any of the offerees with respect to all or any of the warrants that were not yet vested in case the employee is dismissed (other than in circumstances where he is not entitled to severance pay as specified in the Severance Pay Law 1963) and/or upon transferring the control of the Company. The modification of the plans and the approval of accelerating the entitlement dates for exercising non marketable ESOP 3 options issued to joint CEOs and the VP of entrepreneurship and development of the Company received the approval of the Company's general meeting of shareholders which was called for March 21, Purchase of rights from non-controlling interests in January 2016, the Company addressed investors holding the Leipzig joint venture 18 and the Leipzig Am Zoo joint venture 19 offering to sell the Company the entire rights in these joint ventures, in return for EUR 24.7 million (for 49% of the rights in the joint ventures). Investors holding a total 17% of the joint ventures accepted the Company's proposal and in the second quarter of 2016, shortly after the completion of refinancing the Leipzig portfolio (as described below) the transaction was completed and said rights were acquired for EUR 8.65 million. It should be noted that after the completion of the above transactions the Company holds 68% of the rights in these joint ventures and the remaining 32% of the rights are held by investors. It should be noted that the transaction price derives from the fair value of the assets held by the joint ventures, according to valuations of independent outside appraisers and the Promote calculation to which the Company is entitled. Refinance of Leipzig on February 1, 2016, the Company entered into a refinance agreement for a major portion of the Leipzig portfolio (about 2,790 residential units) for 7 years. The new loan of EUR 57.5 million (similar to the unsettled principal balance of the loan from 2011) which repayment date is April 30, 2023 bears a fixed interest for the first 5 years of 1.12% per annum. The loan will be paid in equal quarterly installments, principal and interest (Spitzer) effective from June 30, 2016 in the amount of NIS 449 thousand per quarter and the balance will be paid at the end of the loan term 20. Under the refinance, a credit facility of EUR 17.4 million was approved for the Company until 2023 where if and when used it will bear, if and when used, a variable Libor interest for 3 months plus a margin of 1% per annum. Sale of an asset in Dusseldorf - on March 4, 2016, the Company (through a sub subsidiary) entered into a notarized sale agreement with a third party who is not related to the Company and/or to its controlling shareholders for the sale of rights in an office building which is not occupied from 2013 which undergoes betterment procedures in a total area of 3,985 m 2 located in Dusseldorf. The consideration was set at EUR 5,050 thousand slightly above the value in the Company's books. It is noted that the asset is not pledged and the consideration is expected to be received in full by the Company upon the transaction completion date at the end of July For additional information see the Company's immediate reports dated February 29, 2016 and March 27, 2016 (reference and ) which are brought in this report by way of reference. 18 a joint venture that includes 2,790 flats in Leipzig (Germany) 19 a joint venture that includes 436 flats in Leipzig (Germany) 20 The interest rate for the sixth and seventh year was not yet determined. According to the agreement with the bank the interest rate will be determined based on the Eurobor rate plus 1% or fixed interest according to market conditions on that date. 6

7 Increasing the credit rating for the Company by Maalot on March 15, 2016, Standard & Poor's Maalot (Maalot) determined for the Company a rating of ilaa- (stable outlook) and for the Company's series A, B and C bonds determined the rating of ilaa- 21. Purchase of additional assets in Kiel, northern Germany on March 16, 2016, the Company (through a sub subsidiary) entered into a notarized sale agreement with a third party who is not related to the Company and/or to its controlling shareholders (only in this sub section: the seller) under which the seller shall sell the Company 287 residential units in Kiel, northern Germany (only in this sub section: the acquired assets) for a total consideration of EUR 36 million (including related transaction costs). For the purpose of financing the purchase, the Company (through a sub subsidiary) entered into an agreement with a German bank to obtain a loan of EUR 25 million under non-recourse terms which its final repayment date is 5 years from the date of extending the loan bearing a fixed annual interest rate of 1.65%. The transaction was completed on June 1, Purchase of an asset in Hanover, Germany on March 18, 2016, the Company (through a sub subsidiary) entered into a notarized sale agreement with a third party that is not related to the Company and/or to its controlling shareholder (in this sub section only: the seller) under which the seller will sell the Company residential, commercial and office building in Hanover, Germany (in this sub section only: the acquired asset) for a total of EUR 7.8 million (including related transaction costs). For the purpose of financing the purchase, the Company (through a sub subsidiary) entered into an agreement with a German bank to obtain a loan in the amount of EUR 5.6 million under non-recourse terms which its final repayment date is December 31, 2019 bearing a fixed annual interest rate of 1.49%. The transaction was completed on July 1, Purchase of an asset in Dortmund, Germany - on March 23, 2016, the Company (through a sub subsidiary) entered into a notarized sale agreement with a third party that is not related to the Company and/or to its controlling shareholder (in this sub section only: the seller) under which the seller will sell the Company 32 residential units in Dortmund, Germany (in this sub section only: the acquired asset) for a total of EUR million (excluding related transaction costs). For the purpose of financing the purchase, the Company entered into an agreement with a German bank to obtain a loan in the amount of EUR 1.75 million under non-recourse terms which its final repayment date is 5 years from the date of extending the loan bearing a variable interest based on the Euribor rate for 3 months plus a margin of 1.3% per annum. The transaction was completed on June 1, Expansion of Series C bonds - on April 4, 2016, the Company successfully completed the issuance to the public of 60,058,000 bonds (Series C) of NIS 1 par value each listed for trade by way of expanding the existing series of bonds (Series C) according to the shelf offering report published on April 3, 2016 which is based on a shelf prospectus dated May 28, The total gross consideration is NIS 61,319 thousand For additional information see the rating activity report of Maalot which was attached to the Company's immediate report dated March 15, 2016 (reference number ) which is brought in this report by way of reference. 22 For additional information, see the Company's immediate reports dated March 17, 2016 and June 1, 2016 (reference and ) which are brought in this report by way of reference. 23 For additional information, see the Company's immediate reports dated March 22, 2016 and July 3, 2016 (reference and ) which are brought in this report by way of reference. 24 For additional information see the Company's immediate reports dated April 3, 2016 and April 5, 2016 (reference number and ) which are brought in this report by way of reference. 7

8 Purchase of an asset in the Dortmund area, Germany - on May 13, 2016, the Company (through a sub subsidiary) entered into a notarized sale agreement with a third party that is not related to the Company and/or to its controlling shareholder (the seller) under which the seller will sell the Company a commercial asset in the Dortmund area, Germany for a total of EUR 9.1 million (including related transaction costs). For the purpose of financing the purchase, the Company entered into an agreement (through a sub subsidiary) with a German bank to obtain a loan in the amount of EUR 6.35 million under non-recourse terms which its final repayment date is April 30, 2021 bearing a fixed annual interest rate of 1.55%. The transaction was completed on July 1, Sale of an asset in the Bad Kreuznach, Germany - on May 13, 2016, the Company (through a sub subsidiary) entered into a notarized sale agreement with a third party that is not related to the Company and/or to its controlling shareholder for the sale of rights in a fully occupied building at a total area of 3,602 sq.m located in the city of Bad Kreuznach producing annual rental income of EUR 360 thousand. The consideration was set at EUR 5.1 million slightly above the value of the asset in the Company's books. The consideration was fully received by the Company on the transaction completion date on August 1, 2016 to be used for a partial repayment of the portfolio loan from the bank. Progress with the development of the residential project in Düsseldorf Below are the major developments regarding the development of the residential project in Grafental in the reported period and until the date of signing the report: a. Performance and marketing of stage B1 the construction of Stage B1 commenced in April 2014 and ended in the fourth quarter of The Company commenced the marketing of Stage B1 of the project in September 2013, which includes 108 flats in multi-family construction and 10 townhouses (about 18,000 m 2 gross) and until February 2016, all 118 apartments in this stage were marketed (signed agreements and reservations) were marketed (about 99.8% of this stage, 4 parking spaces remained unsold) for a total consideration of EUR 56.3 million. As of the report date and the signing date of the report, advances of EUR 56 million and EUR 56.2 million were received from apartment purchasers, respectively. b. Delivery of apartments and profit recognition of Stage B1 in the fourth quarter of 2015, the Company delivered 63 apartments out of 108 apartments of the stage and the delivery of the remaining 45 apartments was carried out in the first quarter of Consequently, the Company recognized a profit of EUR 5.9 million in the fourth quarter of 2015 and EUR 4.4 million in the first quarter of The remaining profit for this stage of EUR 1.4 million will be recognized in the Company's financial statements upon delivering the 10 townhouses to be carried out in the third quarter of For additional information see the Company's immediate reports dated May 15, 2016 and July 5, 2016 (reference number and ) which are brought in this report by way of reference. 8

9 c. Performance and marketing of Stage B3 the construction of Stage B3 commenced in April 2015 and is expected to end in December 2016 upon the delivery of the apartments to the purchasers. Marketing of stage B3 commenced in January 2015 and until the date of signing the report 105 apartments were marketed (signed agreements and reservations) (about96 % of this stage) for a total monetary consideration of EUR 53.1 million. As of the report date and the date of signing the report, advances of EUR 36.8 million and EUR 40.7million, respectively, were received from apartment purchasers. d. Stage C in April 2016, upon receiving the building permit, the Company commenced the construction of Stage C which includes 109 flats and 125 parking spaces at a total scope of 16,000 m 2 gross. The Company commenced the marketing of Stage C in May 2016 at selling prices higher by 7% compared to Stage B3. As of the report signing date,49 apartments (signed agreements and reservations) (about 44% of this stage) were marketed at a total monetary consideration of EUR 24.7 million. In view of the high demand, at the end of June 2016, the Company updated upwards the selling prices relative to the apartments that were not yet sold by an additional 3% and consequently the expected monetary consideration in Stage C will increase by EUR 1 million and entrepreneurial profit will increase from 26% to 28%. e. Planning Stages D and E the Company commenced the planning of Stages D and E that will include 110 flats each and 15 townhouses (10 in Stage D and 5 in Stage E) at a total scope of 32,000 m2, gross, intending to file applications for building permits for these stages in the third quarter of For additional information on the performance and marketing status of the stages under construction of the project, see the tables below. 9

10 Project marketing Stage B1 Data according to 100% The effective corporation's share in the project 83%) As of the date of signing the report Quarter 2 Quarter 1 Cumulative agreements signed in the current period: Flats )#( Flats total monetary consideration (including for parking, EUR in thousands) 56,338 56,338 56,338 54,891 Flats (square meters) 14,332 14,332 14,332 13,961 Average price per sq.m (EUR) (including consideration for parking) 3,931 3,931 3,931 3,932 Apartment Reservations* as of the date of signing the reports: Flats )#( 0 Flats total monetary consideration (including for parking, EUR in thousands) 0 Flats (square meters) 0 Average price per sq.m (EUR) (including consideration for parking) 0 Cumulative signed agreements and reservations until the date of signing the reports Flats )#( 118 Flats total monetary consideration (including for parking, EUR in thousands) 56,338 Flats (square meters) 14,332 Average price per sq.m (EUR) (including consideration for parking) 3,931 Marketing rate of the project: (%) Marketing rate on the last date of the period -signed agreements As of the date of signing the report As of June 30, 2016 As of March 31, 2016 As of December 31, % 99.8% 99.8% 97.3% Marketing rate on the last date of the period -signed agreements 99.8% and reservations Advances from tenants Advances from tenants (EUR in thousands) 56, ,007 54,143 51,870 Rate of Advances from tenants (%) 99. 6% 99.3% 96.0% 91.9% Spaces in respect of which agreements and reservations were not yet signed as of the date of signing the reports: Flats )#( 0 Flats total expected monetary consideration (including for parking, EUR in thousands) 89 Flats (square meters) NA Average price per sq.m (EUR) NA For 4 unsold parking spaces Total cumulative cost attributed to spaces in respect of which binding agreements were not yet signed in the statement of 70 financial position (consolidated) (EUR in thousands) (*) Reservation is a process where a potential purchaser signs a document that includes a description of the apartment and its registered number, number of purchased parking spaces and their registered numbers, amendments to specifications, if any, including the total price (apartment, parking spaces, amendments to specifications) and payment terms. The purchaser deposits EUR 2,000 for the reservation. The reservation is not legally binding and the purchaser may cancel such reservation without a penalty. 10

11 Project marketing Stage B3 Data according to 100% The effective corporation's share in the project 83%) As of the date of signing the report Quarter 2 Quarter 1 Cumulative agreements signed in the current period: Flats )#( Flats total monetary consideration (including for parking, EUR in thousands) 53,125 51,809 45,015 31,889 Flats (square meters) 12,875 12,583 10,964 7,711 Average price per sq.m (EUR) (including consideration for parking) 4,126 4,117 4,106 4,135 Apartment Reservations* as of the date of signing the reports: Flats )#( 0 Flats total monetary consideration (including for parking, EUR in thousands) 0 Flats (square meters) 0 Average price per sq.m (EUR) (including consideration for parking) NA Cumulative signed agreements and reservations until the date of signing the reports Flats )#( 105 Flats total monetary consideration (including for parking, EUR in thousands) 53,125 Flats (square meters) 12,875 Average price per sq.m (EUR) (including consideration for 4,126 parking) Marketing rate of the project: (%) As of the date of signing the report As of June 30, 2016 As of March 31, 2016 As of December 31, 2015 Marketing rate on the last date of the period -signed agreements 96.3% 93.9% 81.6% 57.8% Marketing rate on the last date of the period -signed agreements and reservations 96.3 % Advances from tenants Advances from tenants (EUR in thousands) 40,670 36,829 20,744 12,106 Rate of Advances from tenants (%) 73.7% 66.8% 37.6% 21.9% Spaces in respect of which agreements and reservations were not yet signed as of the date of signing the reports: Flats )#( 2 Flats total expected monetary consideration (including for 2,044 parking, EUR in thousands) Flats (square meters) 388 For 2 penthouses and 15 parking spaces Average price per sq.m (EUR) 5,265 Total cumulative cost attributed to spaces in respect of which binding agreements were not yet signed in the statement of 913 financial position (consolidated) (EUR in thousands) 11

12 Project marketing Stage C Data according to 100% The effective corporation's share in the project 83%) As of the date of signing the report Quarter 2 Quarter 1 Cumulative agreements signed in the current period: Flats )#( Flats total monetary consideration (including for 23,758 10,945 parking, EUR in thousands) Flats (square meters) 5,254 2,429 Average price per sq.m (EUR) (including consideration for parking) 4,522 4,507 Apartment Reservations* as of the date of signing the reports: Flats )#( 2 Flats total monetary consideration (including for parking, EUR in thousands) 988 Flats (square meters) 205 Average price per sq.m (EUR) (including consideration for parking) 4,820 Cumulative signed agreements and reservations until the date of signing the reports Flats )#( 49 Flats total monetary consideration (including for parking, EUR in thousands) 24,746 Flats (square meters) 5,459 Irrelevant; marketing commenced on May 1, 2016 Average price per sq.m (EUR) (including consideration for parking) 4,533 Marketing rate of the project: (%) As of the date of signing the report As of June 30, 2016 As of March 31, 2016 As of December 31, 2015 Marketing rate on the last date of the period - signed agreements 42.3% 19.5% Irrelevant Marketing rate on the last date of the period - signed agreements and reservations 44.1 % Advances from tenants Advances from tenants (EUR in thousands) 2,180 0 Rate of Advances from tenants (%) 4% 0.0% Irrelevant Spaces in respect of which agreements and reservations were not yet signed as of the date of signing the reports: Flats )#( 60 Flats total expected monetary consideration 31,404 (including for parking, EUR in thousands) Flats (square meters) 6,826 Average price per sq.m (EUR) 4,601 Total cumulative cost attributed to spaces in respect of which binding agreements were not yet signed in the statement of financial position (consolidated) (EUR in thousands) 6,784 12

13 Forecast of revenues, costs and entrepreneurial profits of the stages in progress (EUR in thousands) Stage B1 Stage B3 Stage C 26 Total expected revenues 56,426 55,169 56,150 Advances from apartment purchasers as of the report date Advances from apartment purchasers as of the date of signing the report 56,007 36, ,188 40,670 2,180 Total cumulative costs invested 44,550 31,192 12,209 Total costs remaining for investment ,482 31,594 Total expected cost (including land (EUR in thousands) 44,795 43,674 43,803 Completion rate (engineering/monetary)(excluding land)(%) % 63.8% 8.1% Total expected entrepreneurial profit 11,631 11,495 12,347 Total entrepreneurial profit recognized in the Company's financial statements (consolidated) cumulatively as of the report date 10, Rate of expected entrepreneurial profit (%) 26.0% 26.3% 28.2% Expected completion date and profit recognition Fourth quarter of 2015 and first and third quarters of Fourth quarter of 2015 Expected completion date fourth quarter of In accordance with accounting principles, the Company recognizes revenues, costs and gross profit deriving from the stages in progress, upon completion of performance and delivering the apartments to the tenants. The following is a tabular summary of expected revenue, cash flow and entrepreneurial profit, not yet recognized in the financial statements of the company, from stages in progress and from stages under the approved urban scheme which its execution has not yet begun, in Grafental project: 26 The performance of Stage C commenced in April 2016 upon receiving the building permit. 27 It is stressed that engineering completion rate is not identical to apartment delivery rate and profit recognition rate from delivering the apartments that was carried out when the apartments were delivered. See Note 2ff to the consolidated financial statements which is attached in Chapter C of the 2015 periodic report. 28 It is indicated that in the framework of Stage B1, in addition to the 108 apartments (all of which were delivered until early March 2016) 10 townhouses are in stages of construction which will be completed only in the third quarter of 2016 and the Company will recognize the profit accordingly. 13

14 From sold apartments (EUR in thousands) Data according to 100%. The corporation's effective portion in the project 83% Revenue not yet recognized Cash flow not yet recognized Entrepreneurial profit not yet recognized Stages in progress (stages b1 b3 and c) 84,729 32,105 17,883 From apartments not yet sold (EUR in thousands) Data according to 100%. The corporation's effective portion in the project 83% Stages in progress (stages b1 b3 and c) Stages C E (under approved urban scheme) not yet in progress Revenue not yet recognized Cash flow not yet recognized Entrepreneurial profit not yet recognized 33,536 12,567 7, ,436 38,103 25,264 Total 141,972 50,670 32,614 Betterment of the land in Dusseldorf and changing the zoning to residence the following are the main developments in the betterment of lands in Dusseldorf in the reported period and until the date of signing the report: a. with respect to the remaining land that includes construction rights of thousand m 2 for offices (the parcel of land): in the reported period, the Company with Dusseldorf municipality, continued to advance a new urban scheme such that it will be feasible to build, with the formal approval of the new urban scheme which is in progress, if approved, on the entire parcel of land an additional 650 flats in addition to 850 flats that are included today in the valid urban scheme and (in total 1,500 flats). The Company estimates that if the urban scheme is approved, the 300 flats out of the 650 flats deriving from changing the zoning will be available for construction to commence in the second half of 2017 and the balance will be available for construction to commence at the end of b. Purchase of several office and residential buildings in Grafenberg neighborhood for betterment in August 2014, the Company consummated the purchase of land spanning over 20,000 m 2 erected thereon residential and office buildings (generating annual income of EUR 220 thousand) in Grafenberg one of the luxurious neighborhoods of Dusseldorf and adjacent to the Grafental project which is constructed by the Company 31 The Company has not yet decided how to use the land under the change of zoning from offices to residence in Grafental and/or the land in Grafenberg including the development of which of the parcels of land. The decision to develop the above lands or any of them is subject to consummating the relevant approval procedures of urban scheme, the market conditions that shall prevail upon completing the urban scheme, the ability to obtain financing for developing the project in the said lands, the availability of equity resources required to realize said development plans, meeting financial ratios and more. The data shown in the table below were calculated under the assumption that the Company shall elect to develop the land complexes and the rates of entrepreneurial profit and cash flow in future stages shall be similar to the rates of the Grafental project that are in progress as of the report date (entrepreneurial profit of 26% - 28% and cash flows of 35% - 40% of the scope of sales). 29 For additional details see section in the 2015 periodic report. 14

15 in Dusseldorf 30. In the reported period, the Company continued to advance with the Dusseldorf municipality a new urban scheme for the complex such that it will be feasible to construct a residential project on the land that will include 80 up to 100 flats (a constructed area of 20,000 m 2, gross) (instead of the existing buildings). The Company estimates that said plans will be approved, if at all, by the municipality until the end of 2016 and the land will be available for construction (with the necessary approvals) in the second half of The following is a tabular summary of expected revenue, cash flow and entrepreneurial profit expected from the betterment of the land in Dusseldorf 30 Data according to 100% (EUR in thousands) Revenue not yet recognized Parcel of land under the change of zoning from offices to residence in Grafental 32 and the land in 4,900 Grafenberg Cash flow not yet recognized Entrepreneurial profit not yet recognized , , 356 The information described above in connection with stages C E of the Grafental project (which are included in the approved urban scheme) which their performance was not yet commenced and in connection with the betterment of the lands for residence in Dusseldorf and the change of their zoning (including the expected dates of completion) regarding the total expected sales,the expected entrepreneurial profit and expected cash flows before taxes,is a forward looking information which is not under the full control of the Company and the actual materialization of such change of zoning,in whole or in part,is uncertain. The information is based on information possessed by the Company as of the report date, regarding: 1) demand for residential spaces in Dusseldorf; 2) market prices of residential spaces in Dusseldorf generally and in the area of the projects (including competing projects comparable with the Company's projects); 3) accumulated know how and experience of the Company's management and project managers in the segment; 4) the Company's forecasts and estimates regarding the costs of construction, development, marketing of projects based on the costs of the stages that as of the report date are in progress; and other estimates of the Company. It is uncertain whether the change of zoning will take place and/or consummated, if any, since its consummation is subject to the planning and construction procedures required under German law, the consummation of which is not controlled by the Company. In addition,even if the approvals are received and the Company will resolve to establish the projects independently and the performance of the projects will be executed, change in circumstances (including without derogating from the generality of the foregoing decrease in demand for flats in Dusseldorf and/or decrease in market prices of flats in Dusseldorf) or increase in construction costs (and other costs) and/or the formation of special conditions that may significantly change the Company's estimates detailed above and have a material impact on the expected revenues from the projects,including their overall profitability. 30 for additional information regarding the above transaction see immediate report dated August 31, 2014 (reference ) which is brought in this report by way of reference. 32 The corporation's effective portion in said parcel of land is 83%. 15

16 Part A Board of Directors Explanations in regard to the State of the Corporations' Businesses, the Results of its Activities, its Equity and Cash Flows; (1) Financial Position Assets Current assets June 30 December 31, EUR in thousands Cash and cash equivalents 66,142 66,029 55,820 Balances receivable from banks Restricted deposits and other receivables 1,237 24,583 24,969 9,482 14,932 12,031 Tenants and trade receivables 5,258 4,094 5,677 Explanation for the change See details in the statement of cash flows Profit from hedging transactions for immediate withdrawal. The decrease in the reported period derived from the realization of the transaction and receipt of the consideration in cash by the Company Movement mainly derives from release of construction projects accounts and payment of advance for the purchase of assets Other financial assets Inventory of buildings under construction 51,643 76,585 59,589 Total current assets 133, , ,585 Asset held for sale Non-current assets: 10, On one hand, increase in inventory in respect of progress in constructing the new stages and on the other hand, decrease in inventory for delivering apartments in Stage B1. In respect of the agreement for the sale of the assets, see material and other events in the reported period Investments measured at equity 8,135 5,005 5,005 Inventory of real estate 26,125 37,924 25,591 Investment property real estate rights 96,894 78, ,038 Investment property income producing assets 1,071, , ,243 Restricted deposits for investments in assets Other accounts receivable and other 1, ,481 The increase in the reported period derives the purchase of an asset in Aachen. Reclassification of assets for realization and investments The increase in the reported period derived from purchasing a residential portfolio in northern Germany, capex investments in existing assets and revaluation profits 16

17 financial assets Fixed assets Deferred taxes 4,090 8,732 8,585 Total non-current assets: 1,208,953 1,097,494 1,122,483 Total assets 1,353,349 1,283,717 1,281,068 Liabilities Current liabilities: June 30 December 31, EUR in thousands Current maturities of loans from banks 28, ,693 68,491 Current maturities of debentures 16,747 16,756 16,623 Loans for financing inventory of buildings under construction - 7,500 3,500 Current maturities of other financial liabilities Accounts payable 14,901 16,128 20,073 Advances from apartment purchasers 43,365 63,105 35,687 Explanation for the change The decrease derives from classification of loans to long term from refinancing. See material and other events in the reported period. The decrease in the reported period derives from loan repayment. It is noted that the balance of the construction loan in respect of stages B and C is zero. Total current liabilities 103, , ,767 Non-current liabilities: Loans from banks and others 573, , ,887 The main increase in the report period derives from refinancing of a loan that was classified in the previous quarter as short term and from taking a loan to finance the purchase of an asset portfolio in northern Germany. See material and other events in the reported period. Debentures 139, , ,076 Other liabilities 3,148 3,154 3,148 Other financial liabilities 969 1, Deferred taxes 60,398 44,413 51, , , ,201 Total liabilities 881, , ,968 Equity Equity attributable to equity holders of the company 368, , ,523 The increase in the reported period derives on one hand from expanding the Series C and on the other hand from current payments of debentures The increase in the reported period mainly derives from a profit in this 17

18 period offset by a capital distribution Non controlling interests 103, , ,577 Total equity 471, , ,100 Total liabilities and equity 1,353, 349 1,283,717 1,281,068 (2) Activity Results Revenues from rental of Six months ended June 30 Three months ended June 30 Year ended December 31, EUR in thousands properties 35,103 32,595 17,764 16,300 66,415 Revenues from property management and others 12,987 12,281 6,937 6,394 26,277 Property management expenses ) 12,427( ) 11,776( ) 6,739( ) 6,087( )24,072( Cost of maintenance of rental properties ) 3,951( ) 3,432( ) 1,932( ) 1,652( )8,105( Rental and management revenues, net 31,712 29,668 16,030 14,955 60,515 Revenues from sale of apartments 21,095 7,263-2,413 68,372 Cost of sale of apartments ) 16,729( ) 5,979( - ) 2,046( )54,637( Income from the sale of apartments 4,366 1, ,735 General and administrative expenses ) 6,266( ) 5,610( ) 2,911( ) 2,680( )11,090( General and administrative expenses attributed to inventory of apartments under construction and inventory of real estate ) 1,271( ) 957( ) 447( ) 426( )1,799( selling and marketing expenses ) 267( ) 88( ) 163( ) 25( )242( Cost of share based payment ) 792( ) 867( ) 409( ) 460( ) 1,525( Increase (decrease) in the value of investment property, net 30,616 18,808 15,233 12,577 44,256 Operating profit 58,098 42,238 27,333 24, ,850 Financing income Financing expenses excluding the effect of exchange rate differences, CPI and hedging transactions, net ) 10,270( ) 10,691( ) 5,147( ) 5,294( )21,162( Effect of exchange rate differences, CPI and currency hedging transactions, net 1,800 ) 1,098( 1,778 ) 4,572( 3,424 Explanation for the change Purchase of new assets and increase in rental income in identical assets Delivery of apartments in Stages A and B of the residential project Increase in the Company's activity Increase in bank loans for financing the purchase of new assets offset by current repayments of loans and bonds 18

19 Change in the value of loans and interest rate swap transactions, net ) 866( 8,337 ) 426( 8,273 6,023 Income before taxes on 48,776 38,853 23,546 22,723 92,217 income Taxes on income ) 14,557( ) 6,597( ) 8,994( ) 4,332( ) 14,725( Reported net income Net income attributed to: 34,219 32,256 14,552 18,391 77,492 Company shareholders 27,791 23,496 9,390 12,301 63,439 Non-controlling interests 6,428 8,760 5,162 6,090 14,053 Decrease of the interest curve in Europe and hedging transactions 3) Cash flows Six months ended June 30 Three months ended June 30 Year ended December 31, EUR in thousands Cash flows provided by operating activities (Cash flows used in operating activities) 38,965 38,462 24,229 14,315 80,048 Cash flows provided by investing activities (Cash flows used in investing activities) ) 44,149( ) 35,787( ) 41,637( ) 32,589( )45,246( Cash flows provided by financing activities (Cash flows used in financing activities) 15,506 3,149 13,153 15,942 )39,187( Explanation for the change Expansion of the Company's activity and the timing of receipts from the residential development project Purchase of new assets 19

20 Access to financing sources the Company evaluates its accessibility to financing sources as very high in light of its financial strength, the stability of core activity, and the good relationships it has created with the banks financing real-estate projects in Germany. It is indicated that for the period of twelve months ended December 31, 2015, the Company has in its solo reports positive cash flows from operating activity resulting from the effect of exchange rates on cash balances and therefore is not representative. In addition, for the period of six months ended June 30, 2016, the Company has in its solo reports negative cash flows from operating activity amounting to EUR 0.7 million. The Board has determined, based on its examination, that this does not indicate on liquidity difficulty since cash flows and liquid balances in the Company (solo) with the unlimited liquid balances which can be distributed immediately to subsidiaries as of the signing date of the report amount to EUR 37.8 million compared to its current liabilities amounting EUR 19.1 million so the Company (solo) has a working capital surplus of EUR 18.7 million consisting of cash balances and liquid balances. The Board believes that the issue at hand is merely technical whereas in view of the high liquid balances maintained by the Company (solo), the Company elected not to receive management fees or distribute dividends from a wholly owned subsidiary (Brack German Properties B.V) and therefore no current revenues were recorded under the separate activity of the Company (solo) in a manner resulting in negative cash flows from operating activity of the solo company in said periods. Furthermore, the Company (through a sub subsidiary) has unused credit lines which can be withdrawn immediately in the amount of EUR 11.6 million (the Company's share). (4) FFO (Funds from Operations) Calculating FFO the FFO index is calculated as the net profit (loss) attributed to Company's shareholders from the income generating activity only excluding the income from sale apartments in Grafental project (FFO I) with some adjustments for non-operating items, which are affected from the revaluation of the fair value of assets and liabilities. It deals mainly with adjustments of the fair value of investment property, miscellaneous capital profits and losses, miscellaneous amortizations, adjustment of expenses for management and marketing of the Düsseldorf project (since the revenues in respect of this project are not taken into account in the FFO), changes in fair value recognized for financial instruments, deferred taxes and non controlling interests for the above items. The Company believes that this index reflects more correctly the Company's operating results, without the entrepreneurial project and its publication will provide a more correct basis for comparing the Company's operating results in a certain period with prior periods, and will enable the comparison of the operating results with other real-estate companies in Israel and in Europe. The Company clarifies that the FFO index does not represent cash flows from operating activity according to generally accepted accounting principles, does not reflect cash held by the Company and its ability to distribute it, and does not replace the reported net profit (loss). In addition, it is clarified that these indices do not constitute data audited by the Company's auditors. 20