Company Quick10K Filing
Gazit-Globe
20-F 2017-12-31 Filed 2018-04-30
20-F 2016-12-31 Filed 2017-04-28
20-F 2015-12-31 Filed 2016-04-22
20-F 2013-12-31 Filed 2014-04-16
20-F 2012-12-31 Filed 2013-04-22
20-F 2011-12-31 Filed 2012-04-27

GZT 20F Annual Report

Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
Item 5 Operating and Financial Review and Prospects
Item 6 Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing.
Item 10. Additional Information.
Item 11. Quantitative and Qualitative Disclosures About Market Risk.
Item 12. Description of Securities Other Than Equity Securities
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert.
Item 16B. Code of Ethics.
Item 16C. Principal Accountant Fees and Services.
Item 16D. Exemptions From The Listing Standards for Audit Committees.
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers.
Item 16F. Change in Registrant's Certifying Accountant.
Item 16G. Corporate Governance.
Item 16H. Mine Safety Disclosure
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
Note 1:- General
Note 2: - Significant Accounting Policies
Note 2:- Significant Accounting Policies (Cont)
Note 2A: - Legislation Impact on The Financial Statements
Note 3: - Cash and Cash Equivalents
Note 4A: - Short-Term Investments and Loans
Note 4B:- Marketable Securities
Note 5: - Trade Receivables
Note 6:- Other Accounts Receivable
Note 7: - Inventory of Buildings and Apartments for Sale
Note 8: - Assets and Liabilities Classified As Held for Sale
Note 9: - Investments in Investees
Note 10:- Other Investments, Loans and Receivables
Note 11:- Available-For-Sale Financial Assets
Note 12:- Investment Property
Note 13:- Investment Property Under Development
Note 14:- Fixed Assets, Net
Note 15:- Intangible Assets, Net
Note 16:- Credit From Banks and Others
Note 17:- Current Maturities of Non-Current Liabilities
Note 18:- Trade Payables
Note 19:- Other Accounts Payable
Note 20:- Debentures
Note 21:- Convertible Debentures
Note 22:- Interest-Bearing Loans From Banks and Others
Note 23:- Other Liabilities
Note 24:- Employee Benefit Liabilities and Assets
Note 25:- Taxes on Income
Note 26:- Contingent Liabilities and Commitments
Note 27:- Equity
Note 28:- Share-Based Compensation
Note 29:- Charges (Assets Pledged)
Note 30:- Rental Income
Note 31:- Property Operating Expenses
Note 32:- Revenues and Costs From Sale of Buildings, Land and Construction Works Performed
Note 33:- General and Administrative Expenses
Note 34:- Other Income and Expenses
Note 35:- Finance Expenses and Income
Note 36:- Net Earnings per Share
Note 37:- Financial Instruments
Note 38:- Transactions and Balances with Related Parties
Note 39:- Segment Information
Note 40:- Events After The Reporting Date
Note 41:- Condensed Financial Information of The Parent Company
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Gazit-Globe Earnings 2015-12-31

Balance SheetIncome StatementCash Flow

20-F 1 f20f2015_gazitglobal.htm ANNUAL AND TRANSITION REPORT OF FOREIGN PRIVATE ISSURES

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 20-F

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

or

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2015

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

or

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 001-35378

 

GAZIT-GLOBE LTD.

(Exact name of registrant as specified in its charter)

 

Israel

(Jurisdiction of incorporation or organization)

 

1 Hashalom Rd.

Tel-Aviv 67892, Israel

(972)(3) 694-8000

(Address of principal executive offices)

 

Adi Jemini,

Chief Financial Officer

Tel: (972)(3) 694-8000

Email: ajemini@gazitgroup.com

1 Hashalom Rd. Tel-Aviv 67892, Israel

(Name, telephone, email and/or facsimile number and address of company contact person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class  Name of each exchange on which registered
Ordinary Shares, par value NIS 1.00 per share  New York Stock Exchange

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 195,485,322 Ordinary Shares, par value NIS 1.00 per share (excluding Treasury Shares).

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes     ☐ No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ☐ Yes     ☒ No

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes     ☐ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☐ Yes     ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (check one).

 

Large Accelerated Filer ☒     Accelerated Filer ☐     Non-Accelerated Filer ☐

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP International Financial Reporting Standards as issued by the International Accounting Other
  Standards Board  

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow: Item 17 ☐    Item 18 ☐

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): ☐ Yes    ☒ No

 

 

 

  

 

 

GAZIT-GLOBE LTD.

 

 

 

FORM 20-F

ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015

 

 

 

TABLE OF CONTENTS

 

Introduction and Use of Certain Terms 1
Forward-Looking Statements 3
  Item 1. Identity of Directors, Senior Management and Advisers 4
  Item 2. Offer Statistics and Expected Timetable 4
  Item 3. Key Information 4
  Item 4. Information on the Company 26
  Item 4A. Unresolved Staff Comments 37
  Item 5. Operating and Financial Review and Prospects 38
  Item 6. Directors, Senior Management and Employees 98
  Item 7. Major Shareholders and Related Party Transactions 115
  Item 8. Financial Information 117
  Item 9. The Offer and Listing. 119
  Item 10. Additional Information. 121
  Item 11. Quantitative and Qualitative Disclosures about Market Risk. 136
  Item 12. Description of Securities other than Equity Securities 139
PART II    
  Item 13. Defaults, Dividend Arrearages and Delinquencies 139
  Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 139
  Item 15. Controls and Procedures. 139
  Item 16. [Reserved] 140
  Item 16A. Audit Committee Financial Expert. 140
  Item 16B. Code of Ethics. 140
  Item 16C. Principal Accountant Fees and Services. 140
  Item 16D. Exemptions from the Listing Standards for Audit Committees. 141
  Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers. 141
  Item 16F. Change In Registrant’s Certifying Accountant. 141
  Item 16G. Corporate Governance. 141
  Item 16H. Mine Safety Disclosure 142
PART III    
  Item 17. Financial Statements 142
  Item 18. Financial Statements 142
  Item 19. Exhibits 143
Signatures   144

 

  

 

 

Introduction and Use of Certain Terms

 

Unless otherwise indicated, all references to (i) “we,” “us,” or “our,” are to Gazit-Globe Ltd. and those companies that are consolidated in its financial statements or that are jointly controlled entities, and (ii) “Gazit-Globe” or the “Company” are to Gazit-Globe Ltd., not including any of its subsidiaries or affiliates.

 

Except where the context otherwise requires, references in this annual report to:

 

“Adjusted EPRA Earnings” (or “FFO according to the management approach”) means EPRA Earnings (or FFO), as adjusted for: CPI and exchange rate linkage differences; depreciation and amortization; and other adjustments, including adjustments to add back bonus expenses (through 2011) derived as a percentage of net income in respect of the adjustments above and adjustments to net income (loss) attributable to equity holders of the Company for the purposes of computing ” EPRA Earnings”; expenses arising from the termination of engagements with senior Group officers; income from the waiver by our chairman of bonuses and of compensation with respect to the expiration of his employment agreement (through 2011); expenses and income from extraordinary legal proceeding not related to the reporting periods (including the provision for legal proceedings); income and expenses from operations not related to income producing property (including the results of Dori Group) and the cost of debt with respect thereto; non-recurring expenses in respect of reorganization; and internal leasing costs (mainly salary) incurred in the leasing of properties.

 

“Average annualized base rent” refers to the average minimum rent due under the terms of the applicable leases on an annualized basis.

 

“Community” shopping center means a center that offers general merchandise or convenience-oriented offerings with gross leasable area, or GLA between 100,000 and 350,000 square feet, between 15 and 40 stores and two or more anchors, typically discount stores, supermarkets, drugstores, and large-specialty discount stores, based on the definition published by the International Council of Shopping Centers.

 

“Consolidated” refers to the Company and entities that are consolidated in the Company’s financial statements.

 

”EPRA Earnings” (or “FFO”) means the net income (loss) attributable to the equity holders of a company with certain adjustments for non-operating items, which are affected by the fair value revaluation of assets and liabilities, primarily adjustments to the fair value of investment property, investment property under development, land and other investments, and various capital gains and losses, gain (loss) from early redemption of liabilities and financial derivatives, gains from bargain purchase, the impairment of goodwill, changes in the fair value recognized with respect to financial instruments including derivatives, deferred taxes and current taxes with respect to disposal of properties, our share in equity-accounted investees and acquisition costs recognized in profit and loss, as well as non-controlling interests’ share with respect to the above items.

 

“GLA” means gross leasable area.

 

“Group” – the Company, its subsidiaries and its equity-accounted associates and jointly controlled entities.

 

"Investees" – Subsidiaries, Jointly controlled entities and associates.

 

“IFRS” means International Financial Reporting Standards, as issued by the International Accounting Standards Board.

 

“LEED®” means Leadership in Energy and Environmental Design and refers to an internationally recognized green building certification system designed by the U.S. Green Building Council.

 

“Neighborhood” shopping center means a center that is designed to provide convenience shopping for the day-to-day needs of consumers in the immediate neighborhood with GLA between 30,000 and 150,000 square feet and between five and 20 stores and is typically anchored by one or more supermarkets, based on the definition published by the International Council of Shopping Centers.

 

“NOI” means net operating income.

 

“Reporting date” or “balance sheet date” means December 31, 2015.

 

“Same property NOI” means the change in net operating income for properties that were owned for the entirety of both the current and prior reporting periods (excluding expanded and redeveloped properties and the impact of currency exchange rates).

 

 1 

 

Our principal subsidiaries are:

 

“Atrium” means Atrium European Real Estate Limited, consolidated as of January, 2015 (VSE/EURONEXT:ATRS) which owns and operates shopping centers in Central and Eastern Europe.

 

“Citycon” means Citycon Oyj. (NASDAQ OMX HELSINKI:CTY1S) which owns and operates shopping centers in Northern Europe.

 

“Dori Construction” means U. Dori Construction Ltd (TASE:DRCN) and its subsidiaries.

 

“Dori Group” means U. Dori Group Ltd. (TASE: DORI) and its subsidiaries, which as of December 31, 2015, held 83.46% of Dori Construction, which is also traded on the Tel Aviv Stock Exchange, and Dori Construction’s subsidiaries and related companies. Gazit-Globe Israel (Development) Ltd. held approximately 84.9% of Dori Group until January 2016 when it sold its entire stake. For additional details refer to Note 9g of our audited consolidated financial statements included elsewhere in this annual report.

 

“Equity One” means Equity One, Inc. (NYSE:EQY) which owns and operates shopping centers in the United States.

 

“First Capital” means First Capital Realty Inc. (TSX:FCR) which owns and operates shopping centers in Canada.

 

“Gazit America” means Gazit America Inc., a wholly-owned subsidiary, which as of December 31, 2015, held 11.1% of Equity One’s share capital and which prior to August 8, 2012 was the owner of ProMed Canada.

 

“Gazit Brazil” means Gazit Brazil Ltda. and Fundo De Investimento Multimercado Norstar Credito Privado which owns and operates shopping centers in Brazil.

 

“Gazit Development” means Gazit-Globe Israel (Development) Ltd. which wholly-owns Gazit Development (Bulgaria) and held 84.9% of Dori Group until January 2016.

 

“Gazit Germany” means Gazit Germany Beteiligungs GmbH & Co. KG which owns and operates shopping centers in Germany.

 

“Norstar” means Norstar Holdings Inc. (TASE: NSTR), formerly known as Gazit Inc., which had voting power of 50.54% of our issued ordinary shares as of April 10, 2016.

 

“ProMed” means ProMed Properties Inc. which owned and operated medical office buildings in the United States until August 2015.

 

“Royal Senior Care” or “RSC” means Royal Senior Care, LLC which owned and operated senior housing facilities in the United States, which were sold during 2012 and 2013.

 

Unless otherwise noted, all monetary amounts are in NIS, and for the convenience of the reader certain NIS amounts have been translated into U.S. dollars at the rate of NIS 3.902 = U.S.$ 1.00, based on the daily representative rate of exchange between the NIS and the U.S. dollar reported by the Bank of Israel on December 31, 2015. References herein to (i) “New Israeli Shekel” or “NIS” mean the legal currency of Israel, (ii) “U.S.$,” “$,” “U.S. dollar” or “dollar” mean the legal currency of the United States, (iii) “Euro,” “EUR” or “€” mean the currency of the participating member states in the third stage of the Economic and Monetary Union of the Treaty establishing the European community, (iv) “Canadian dollar” or “C$” mean the legal currency of Canada, and (v) “BRL” mean the legal currency of Brazil.

 

 2 

 

Forward-Looking Statements

 

We make forward-looking statements in this annual report that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, results of operations, liquidity, plans and objectives. In some cases, you can identify forward-looking statements by terminology such as “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “potential,” or the negative of these terms or other similar expressions. The statements we make regarding the following subject matters are forward-looking by their nature:

 

our ability to respond to new market developments;

 

our intent to penetrate further our existing markets and penetrate new markets;

 

our belief that we will have sufficient access to capital;

 

our belief that we will have viable financing and refinancing alternatives that will not materially adversely impact our expected financial results;

 

our belief that continuing to develop high-profile properties will drive growth, increase cash flows and profitability;

 

our belief that repositioning of our properties and our active management will improve our occupancy rates and rental income, lower our costs and increase our cash flows;

 

our plans to invest in developing and redeveloping real estate, in investing in the acquisition of additional properties, portfolios or other real estate companies;

 

our ability to use our successful business model, together with our global presence and corporate structure, to leverage our flexibility to invest in multiple regions in the same asset type to maximize shareholder value;

 

our ability to acquire additional properties or portfolios;

 

our plans to continue to expand our international presence;

 

our expectations that our business approach, combined with the geographic diversity of our current properties and our conservative approach to risk, characterized by the types of properties and markets in which we invest, will provide accretive and/or sustainable long-term returns; and

 

Our expectations regarding our future tenant mix.

 

The forward-looking statements contained in this annual report reflect our views as of the date of this annual report about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guaranty future events, results, actions, levels of activity, performance or achievements. You are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described in “Item 3—Key Information—Risk Factors.”

 

All of the forward-looking statements we have included in this annual report are based on information available to us on the date of this annual report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

  

 3 

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3. KEY INFORMATION

 

A.Selected Financial Data

 

The following tables set forth our selected consolidated financial data. You should read the following selected consolidated financial data in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements and related notes included in this annual report. Historical results are not necessarily indicative of the results that may be expected in the future. Our financial statements have been prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB. 

The selected consolidated statement of income data set forth below for each of the years ended December 31, 2013, 2014 and 2015 and the selected consolidated balance sheet data set forth below as of December 31, 2014 and 2015 are derived from our audited consolidated financial statements appearing in this annual report. The selected consolidated statement of income data for each of the years ended December 31, 2011 and 2012, and the selected consolidated balance sheet data as of December 31, 2011, 2012 and 2013, are derived from our audited consolidated financial statements that are not included in this annual report. 

The following tables also contain translations of NIS amounts into U.S. dollars for amounts presented as of and for the year ended December 31, 2015. These translations are solely for the convenience of the reader and were calculated at the rate of NIS 3.902 = U.S.$ 1.00, the daily representative rate of exchange between the NIS and the U.S. dollar reported by the Bank of Israel on December 31, 2015. You should not assume that, on that or on any other date, one could have converted these amounts of NIS into dollars at that or any other exchange rate. 

   Year Ended December 31, 
   2011   2012   2013   2014   2015   2015 
(In millions except for per share data)  NIS   U.S.$ 
Statement of Income Data:                        
Rental income   4,718    5,249    5,146    4,913    6,150    1,576 
Property operating expenses   1,522    1,705    1,689    1,584    1,966    504 
Net operating rental income   3,196    3,544    3,457    3,329    4,184    1,072 
Revenues from sale of buildings, land and construction work performed (1)   1,001    1,760    1,672    1,357    1,153    296 
Cost of buildings sold, land and construction work performed (1)   967    1,720    1,688    1,660    1,249    320 
Gross profit (loss) from sale of buildings, land and construction work performed   34    40    (16)   (303)   (96)   (24)
Total gross profit   3,230    3,584    3,441    3,026    4,088    1,048 
Fair value gain on investment property and investment property under development, net (2)   1,692    1,938    962    1,053    711    182 
General and administrative expenses   (755)   (673)   (610)   (619)   (794)   (203)
Other income   115    164    218    55    31    8 
Other expenses   (110)   (47)   (74)   (81)   (798)   (205)
Company’s share in earnings of equity-accounted investees, net   334    299    149    12    242    62 
Operating income   4,506    5,265    4,086    3,446    3,480    892 
Finance expenses   (2,197)   (2,214)   (2,185)   (2,115)   (1,852)   (475)
Finance income   72    120    549    157    861    221 
Income before taxes on income   2,381    3,171    2,450    1,488    2,489    638 
Taxes on income   352    758    265    405    183    47 
Net income   2,029    2,413    2,185    1,083    2,306    591 
Net income attributable to:                              
Equity holders of the Company   708    901    927    73    620    159 
Non-controlling interests   1,321    1,512    1,258    1,010    1,686    432 
    2,029    2,413    2,185    1,083    2,306    591 
Basic net earnings per share   4.57    5.46    5.41    0.41    3.47    0.89 
Diluted net earnings per share   4.23    5.25    5.35    0.39    3.45    0.88 

 

 

(1)Revenues from sale of buildings, land and construction work performed primarily comprises revenue from construction work performed by Dori Group starting in 2014, and also First Capital starting in 2013. Through April 17, 2011, Dori Group was included in our financial statements as an equity-accounted investee. Since April 17, 2011, Dori Group has been fully consolidated due to our acquisition of an additional 50% interest in Dori Group. In January 2016, we sold our entire stake in Dori Group, primarily in an off-market transaction. For further information see Note 9g of our audited consolidated financial statements included elsewhere in this annual report.

 4 

 

(2)Pursuant to IAS 40 "Investment Property", gains or losses arising from change in fair value of our investment property and our investment property under development where fair value can be reliably measured are recognized in our income statement at the end of each period.

 

   Year Ended December 31, 
   2011   2012   2013   2014   2015 
(In thousands)                    
Weighted average number of shares used to calculate:                    
Basic earnings per share   154,456    164,912    171,103    176,459    178,426 
Diluted earnings per share   154,783    165,016    171,413    176,546    178,601 

 

   As of December 31,     
   2011   2012   2013   2014   2015   2015 
(In millions)  NIS   U.S.$ 
Selected Balance Sheet Data:                        
Equity-accounted investees   4,390    4,713    5,907    6,213    2,996    768 
Investment property   51,014    55,465    53,309    56,646    70,606    18,095 
Investment property under development   2,198    2,806    2,479    1,642    2,587    663 
Total assets   64,599    71,034    67,927    69,984    84,236    21,588 
Long term interest-bearing liabilities from financial institutions and others (1)   18,973    19,433    12,692    8,552    11,457    2,936 
Long term debentures (2)   15,379    18,500    22,231    24,433    29,480    7,555 
Total liabilities   45,203    48,737    45,574    44,114    53,241    13,645 
Equity attributable to equity holders of the Company   7,199    7,681    7,802    8,023    7,512    1,925 
Non-controlling interests   12,197    14,616    14,551    17,847    23,483    6,018 
Total equity   19,396    22,297    22,353    25,870    30,995    7,943 

 

 

(1)As of December 31, 2015, NIS 4.2 billion (U.S.$ 1.1 billion) of our interest-bearing liabilities from financial institutions and others (including current maturities) were unsecured and the remainder were secured.
(2)As of December 31, 2015, NIS 834 million (U.S.$ 214 million) aggregate principal amount of our debentures was secured and the remainder was unsecured.

 

   As of December 31, 
   2011   2012   2013   2014   2015 
   NIS 
Other Operating Data (1):                    
Number of Group operating properties   642    622    577    524    451 
Total Group GLA (in thousands of sq. ft.)   72,903    73,292    71,431    68,336    70,796 
Group occupancy (%)   94.3    95.0    95.0    95.9    95.8 

 

 

(1)Includes equity-accounted jointly controlled companies.

 

   Year Ended December 31, 
   2011   2012   2013   2014   2015   2015 
(In millions except for per share data)  NIS   U.S.$ 
Other Financial Data:                        
NOI (1)   3,196    3,544    3,457    3,329    4,184    1,072 
Adjusted EBITDA (1)   2,864    3,257    3,192    2,817    3,403    872 
Dividends   241    264    298    318    328    84 
Dividends per share   1.56    1.60    1.72    1.80    1.84    0.47 
EPRA Earnings (1)(2)   80    327    269    345    431    110 
Adjusted EPRA Earnings (1)(2)   405    533    585    598    627    160 

 

 5 

 

   As of December 31, 
   2011   2012   2013   2014   2015   2015 
(In millions)  NIS   U.S.$ 
EPRA NAV (1)   8,762    10,037    10,200    10,740    10,341    2,650 
EPRA NNNAV (1)   6,781    7,157    7,361    7,209    7,583    1,943 

 

 

(1)For definitions and reconciliations of NOI, Adjusted EBITDA, EPRA Earnings, Adjusted EPRA Earnings, EPRA NAV and EPRA NNNAV and statements disclosing the reasons why our management believes that their presentation provides useful information to investors and, to the extent material, any additional purposes for which our management uses them see "Item 5—Operating and Financial Review and Prospects".
(2)In European countries using IFRS, it is customary for companies with income-producing property to publish their "EPRA Earnings". EPRA Earnings is a measure for presenting the operating results of a company that are attributable to its equity holders. We believe that these measures are consistent with the position paper of EPRA, which states, "EPRA Earnings is similar to NAREIT FFO. The measures are not exactly the same, as EPRA Earnings has its basis in IFRS and FFO is based on US GAAP." We believe that EPRA Earnings is similar in substance to funds from operations, or FFO, with adjustments primarily for the attribution of results under IFRS.

 

   Year Ended December 31, 
   2011   2012   2013   2014   2015   2015 
(In millions)  NIS   U.S.$ 
Cash flows provided by (used in):                        
Operating activities   1,104    1,368    1,189    1,026    1,514    388 
Investing activities   (4,195)   (4,621)   (2,208)   (768)   (4,437)   (1,137)
Financing activities   4,017    3,490    428    (701)   4,665    1,196 

 

Exchange Rate Information

 

The following table sets forth, for each period indicated, the low and high exchange rates for NIS expressed as NIS per U.S. dollar, the exchange rate at the end of such period and the average of such exchange rates during such period, based on the daily representative rate of exchange as published by the Bank of Israel. The exchange rates set forth below demonstrate trends in exchange rates, but the actual exchange rates used throughout this annual report may vary.

 

   Year Ended December 31, 
   2011   2012   2013   2014   2015 
High   3.82    4.08    3.79    3.99    4.05 
Low   3.36    3.70    3.47    3.40    3.76 
Period end   3.82    3.73    3.47    3.89    3.90 
Average Rate   3.58    3.86    3.61    3.58    3.89 

 

 6 

 

The following table shows, for each of the months indicated, the high and low exchange rates between the NIS and the U.S. dollar, expressed as NIS per U.S. dollar and based upon the daily representative rate of exchange as published by the Bank of Israel:

 

   High   Low 
Month  (NIS)   (NIS) 
October 2015   3.92    3.82 
November 2015   3.92    3.87 
December 2015   3.91    3.86 
January 2016   3.98    3.91 
February 2016   3.96    3.87 
March 2016   3.91    3.77 

 

On April 10, 2016 the daily representative rate of exchange between the NIS and U.S. dollar as published by the Bank of Israel was NIS 3.786 to $1.00.

 

B.Capitalization and Indebtedness

 

Not applicable.

 

C.Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D.Risk Factors

 

Our business involves a high degree of risk. Please carefully consider the risks we describe below in addition to the other information set forth elsewhere in this annual report and in our other filings with the SEC. These material risks could adversely affect our business, financial condition and results of operations.

 

Risks Related to Our Business and Operations

 

Economic conditions may make it difficult to maintain or increase occupancy rates and rents and a deterioration in economic conditions in one or more of our key regions could adversely impact our results of operations.

In 2015, our rental income (assuming full consolidation of jointly-controlled entities) was derived as follows: 31.5% from Canada, 22.5% from the United States, 22.9% from Northern and Western Europe, 18.8% from Central and Eastern Europe, 3.2% from Israel, and 1.1% from Brazil. During the economic downturn of 2008-2009, general market conditions deteriorated in many of our markets, particularly the United States and Central and Eastern Europe. Lack of financing and a decrease in consumer spending prevented retailers from expanding their activities. As a consequence, occupancy rates declined in some of the regions in which we operate, most significantly in the United States where the occupancy rates for our shopping centers decreased from 93.2% as of December 31, 2007 to 90.7% as of December 31, 2010. As a result, we granted rent concessions to some tenants during this period. The economic downturn adversely affected our net operating income and the value of our assets in all of the regions in which we operate. In addition, currencies in many of our markets were devalued against the NIS during that period. Although general market conditions have improved and currencies have strengthened in those markets since 2010, our ability to maintain or increase our occupancy rates and rent levels depends on continued improvements in global and local economic conditions.

 

While the economy in many of the cities within our markets has continued to gradually improve (with notable exception of Russia and Brazil), macro-economic challenges, such as low consumer confidence, high unemployment and reduced consumer spending, have adversely affected many retailers and continue to adversely affect the retail sales of many regional and local tenants in some of our markets and our ability to re-lease vacated space at higher rents. Moreover, companies in some of our markets shifted to a more cautionary mode with respect to leasing as a result of the prevailing economic climate and demand for retail space has declined generally, reducing the market rental rates for our properties. As a result, in these markets we may not be able to re-lease vacated space and, if we are able to re-lease vacated space, there is no assurance that rental rates will be equal to or in excess of current rental rates. In addition, we may incur substantial costs in obtaining new tenants, including brokerage commissions paid by us in connection with new leases or lease renewals, and the cost of making leasehold improvements. These events and factors could adversely affect our rental income and overall results of operations.

 

 7 

 

While most of our shopping centers are anchored by supermarkets, drugstores or other necessity-oriented retailers, which are less susceptible to economic cycles, other tenants of our public subsidiaries, have been vulnerable to declining sales and reduced access to capital. Europe in particular remains vulnerable to volatile financial and credit markets while Russia is suffering from significant economic and political turmoil. As a result, some tenants have requested rent adjustments and abatements, while other tenants have not been able to continue in business at all. Our ability to renew or replace these tenants at comparable rents could adversely impact occupancy rates and overall results of operations.

 

Revenue from our properties depends on the success of our tenants.

Revenue from our properties depends primarily on the ability of our tenants to pay the full amount of rent and other charges due under their leases on a timely basis. Any reduction in the tenants' abilities to pay rent or other charges on a timely basis, including the filing by the tenants for bankruptcy protection, could adversely affect our financial condition and results of operations. In the event of default by tenants, our subsidiaries and affiliates may experience delays and unexpected costs in enforcing their rights as landlords under the leases, which may also adversely affect our financial condition and results of operations.

 

The economic performance and value of our shopping centers depend on many factors, each of which could have an adverse impact on our cash flows and operating results.

The economic performance and value of our properties can be affected by many factors, including the following:

 

Economic uncertainty or downturns in general, or in the areas where our properties are located;
   
Local conditions, such as an oversupply of space, a reduction in demand for retail space or a change in local demographics;
   
The attractiveness of our properties to tenants and competition from other available space;
   
The adverse financial condition of some large retail companies and ongoing consolidation within the retail sector;
   
The growth of super-centers and warehouse club retailers and their adverse effect on traditional grocery chains;
   
Changes in the perception of retailers or shoppers regarding the safety, convenience and attractiveness of our shopping centers and changes in the overall climate of the retail industry;
   
The ability of our subsidiaries and affiliates to provide adequate management services and to maintain our properties;
   
Increased operating costs, if these costs cannot be passed through to tenants;
   
The expense of periodically renovating, repairing and re-letting spaces;
   
The impact of increased energy costs and/or extreme weather conditions on consumers and its consequential effect on the number of shopping visits to our properties; and
   
The consequences of any armed conflicts or terrorist attacks.

 

To the extent that any of these conditions occur or accelerate, they are likely to impact market rents for retail space, portfolio occupancy, our ability to sell, acquire or develop properties, and cash available for distribution to stockholders.

 

We seek to expand through acquisitions of additional real estate assets, including other businesses; such expansion may not yield the returns expected, may result in disruptions to our business, may strain management resources and may result in dilution to our shareholders or dilution of our interests in our subsidiaries and affiliates.

Our investing strategy and our market selection process may not ultimately be successful, may not provide positive returns on our investments and may result in losses. The acquisition of properties, groups of properties or other businesses entails risks that include the following, any of which could adversely affect our results of operations and financial condition:

 

we may not be able to identify suitable properties to acquire or may be unable to complete the acquisition of the properties we identify;
   
we may not be able to integrate any acquisitions into our existing operations successfully;
   
properties we acquire may fail to achieve the occupancy or rental rates we project at the time we make the decision to acquire; and
   
our pre-acquisition evaluation of the physical condition of each new investment may not detect certain defects or identify necessary repairs or may fail to properly evaluate the costs involved in implementing our plans with respect to such investment.

 

 8 

 

Together with our acquisition of individual properties and groups of properties, we have been an active business acquirer and, as part of our growth strategy, we expect to seek to acquire real estate-related businesses in the future. The acquisition and integration of each business involves a number of risks and may result in unforeseen operating difficulties and expenditures in assimilating or integrating the businesses, properties, personnel or operations of the acquired business. Our due diligence prior to our acquisition of a business may not uncover certain legal or regulatory issues that could affect such business. Furthermore, future acquisitions may involve difficulties in retaining the tenants or customers of the acquired business, and disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing operation and development of our current business. Moreover, we can make no assurances that the anticipated benefits of any acquisition, such as operating improvements or anticipated cost savings, would be realized or that we would not be exposed to unexpected liabilities in connection with any acquisition.

 

To complete a future acquisition, we may determine that it is necessary to use a substantial amount of our available liquidity sources or cash or engage in equity or debt financing. If we raise additional funds through further issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we or our subsidiaries or affiliates issue could have rights, preferences and privileges senior to those of holders of our ordinary shares. If our subsidiaries or affiliates raise additional funds through further issuances of equity or convertible debt securities, Gazit-Globe, as the holder of equity securities of our subsidiaries and affiliates, could suffer significant dilution, and any new equity securities our subsidiaries or affiliates issue could have rights, preferences and privileges senior to those held by Gazit-Globe. We may not be able to obtain additional financing on terms favorable to us, if at all, which could limit our ability to engage in acquisitions.

 

We are particularly dependent upon large tenants that serve as anchors in our shopping centers and decisions made by these tenants or adverse developments in their businesses could have a negative impact on our financial condition.

We own shopping centers that are anchored by large tenants. Because of their reputation or other factors, these large tenants are particularly important in attracting shoppers and other tenants to our centers. Our rental income depends upon the ability of the tenants of our properties and, in particular, these anchor tenants, to generate enough income to make their lease payments to us. Certain of our anchor tenants may make up a significant percentage of our rental income in certain markets. For example, Kesko accounted for 7.8% of Citycon's rental income in 2015, Ahold accounted for 4.6% of Atrium's rental income in 2015, Albertsons (and other affiliated brands) accounted for 3.5% of Equity One's total annual minimum rent as of December 31, 2015 and Loblaws and Sobey's accounted for 10.4% and 6.6% respectively of First Capital's total annual minimum rent as of December 31, 2015. In addition, supermarkets and other grocery stores, many of which are anchor tenants, accounted for approximately 16.6% of our total rental income in 2015, assuming full consolidation of equity-accounted jointly-controlled entities. We generally develop or redevelop our shopping centers based on an agreement with an anchor tenant. Changes beyond our control may adversely affect the tenants' ability to make lease payments or could result in them terminating their leases. These changes include, among others:

 

downturns in national or regional economic conditions where our properties are located, which generally will negatively impact the rental rates;
   
changes in the buying habits of consumers in the regions surrounding those shopping centers including a shift to preference for online shopping and e-commerce;
   
changes in local market conditions such as an oversupply of properties, including space available by sublease or new construction, or a reduction in demand for our properties;
   
competition from other available properties; and
   
changes in federal, state or local regulations and controls affecting rents, prices of goods, interest rates, fuel and energy consumption.

 

As a result, tenants may determine not to renew leases, delay lease commencement or adjust their square footage needs downward. In addition, anchor tenants often have more favorable lease provisions and significant negotiating power. In some instances, we may need to seek their permission to lease to other, smaller tenants. Anchor tenants, particularly retail chains, may also change their operating policies for their stores (such as the size of their stores) and the regions in which they operate. As a result, anchor tenants may determine not to renew leases or delay lease commencement. An anchor tenant may decide that a particular store is unprofitable and close its operations in our center, and, while the tenant may continue to make rental payments, such a failure to occupy its premises could have an adverse effect on the property. A lease termination by an anchor tenant or a failure by that anchor tenant to occupy the premises could result in lease terminations or reductions in rent by other tenants in the same shopping center. In addition, we are subject to the risk of defaults by tenants or the failure of any lease guarantors to fulfill their obligations, tenant bankruptcies and other early termination of leases or non-renewal of leases. Any of these developments could materially and adversely affect our financial condition and results of operations.

 

 9 

 

Commencement of operations in new geographic markets and asset classes involves risks and may result in us investing significant resources without realizing a return and may adversely impact our future growth.

The commencement of operations in new geographic markets or asset classes in which we have little or no prior experience involves costs and risks. In the past, we expanded into new regions, including Central and Eastern Europe and Brazil, and into other asset classes, such as medical office buildings and senior care facilities. While we currently have no specific plans to commence operations in new geographic markets or asset classes, we may decide to enter into new markets or asset classes in the future when an opportunity presents itself. When commencing such operations, we need to learn and become familiar with the various aspects of operating in these new geographic markets or asset classes, including regulatory aspects, the business and macro-economic environment, new currency exposure, as well as the necessity of establishing new systems and administrative headquarters at substantial costs. Additionally, it may take many years for an acquisition to achieve desired results as factors such as obtaining regulatory permits, construction, signing the right mix of tenants and assembling the right management team take time to implement. In some cases, we may commence such operations by means of a joint venture which often offers the advantage of a partner with superior experience, but also has the risks associated with any activity conducted jointly with a non-controlled third party. In addition, entry into new geographic markets may also lead to difficulty managing geographically separated organizations and assets, difficulty integrating personnel with diverse business backgrounds and organizational cultures and compliance with foreign regulatory requirements applicable to acquisitions. Our failure to successfully expand into new geographies and asset classes may result in us investing significant resources without realizing a return and may adversely impact our future growth.

 

If we or our public subsidiaries are unable to obtain adequate capital, we may have to limit our operations substantially.

Our acquisition and development of properties and our acquisition of other businesses and equity interests in real estate companies are financed in part by loans received from banks, insurance companies and other financing sources, as well as from the sale of shares, notes, debentures and convertible debentures in public and private offerings. Our public subsidiaries satisfy their capital requirements through debt and equity financings in their respective local markets. The practices in these markets vary significantly, for example, with some of the markets based partly on bank lending and others depending significantly on accessing the capital markets. Our ability to obtain, economically desirable financing terms could be affected by unavailability or a shortage of external financing sources, changes in existing financing terms, changes in our financial condition and results of operations, legislative changes, changes in the public or private markets in our operating regions and deterioration of the economic situation in our operating regions. Should our ability to obtain financing be impaired, our operations could be limited significantly. Our business results are dependent on our ability to obtain loans or capital in the future in order to repay our loans, notes, debentures and convertible debentures.

 

Internet sales can have an impact on our tenants and our business.

The use of the internet by consumers continues to gain in popularity and growth in internet sales is likely to continue in the future. The increase in internet sales could result in a downturn in the business of some of our current tenants and could affect the way other current and future tenants lease space. For example, the migration towards internet sales has led many retailers to reduce the number and size of their traditional "bricks and mortar" locations in order to increasingly rely on e-commerce and alternative distribution channels. Many tenants also permit merchandise purchased on their websites to be picked up at, or returned to, their physical store locations, which may have the effect of decreasing the reported amount of their in-store sales and the amount of rent we are able to collect from them (particularly with respect to those tenants who pay rent based on a percentage of their in-store sales). We cannot predict with certainty how growth in internet sales will impact the demand for space at our properties or how much revenue will be generated at traditional store locations in the future. If we are unable to anticipate and respond promptly to trends in retailer and consumer behavior, our occupancy levels and financial results could be negatively impacted.

 

Future terrorist acts and shooting incidents could harm the demand for, and the value of, our properties.

Over the past few years, a number of terrorist acts and shootings have occurred at retail properties throughout the world, including highly publicized incidents in Arizona, New Jersey, Maryland, Oregon, Kenya and Tel-Aviv. In the event concerns regarding safety were to alter shopping habits or deter customers from visiting shopping centers, our tenants would be adversely affected as would the general demand for retail space. Additionally, if such incidents were to continue, insurance for such acts may become limited or subject to substantial cost increases.

 

 10 

 

Many of our real estate costs are fixed, even if income from our properties decreases.

Our financial results depend in part on leasing space in the properties to tenants on favorable financial terms. Costs associated with real estate investment, such as real estate taxes, insurance and maintenance costs, generally are not reduced even when a property is not fully occupied, rental rates decrease, or other circumstances cause a reduction in income from the property. As a result, cash flow from the operations of the properties may be reduced if a tenant does not pay its rent or we are unable to fully lease the properties on favorable terms. Additionally, properties that we develop or redevelop may not produce any significant revenue immediately, and the cash flow from existing operations may be insufficient to pay the operating expenses and debt service associated with such projects until they are fully occupied.

 

We have substantial debt obligations which may negatively affect our results of operations and financial position and put us at a competitive disadvantage.

Our organizational documents do not limit the amount of debt that we may incur and we do not have a policy that limits our debt to any particular level. As of December 31, 2015, we and our private subsidiaries had outstanding interest-bearing debt in the aggregate amount of NIS 15,473 million (U.S.$ 3,965 million) and other liabilities outstanding in the aggregate amount of NIS 659 million (U.S.$ 169 million), of which approximately 9% matures during 2016. On a consolidated basis, we had debt and other liabilities outstanding as of December 31, 2015 in the aggregate amount of NIS 53,241 million (U.S.$ 13,645 million), of which 11.7% matures during 2016. We are subject to covenant compliance obligations and each of our public subsidiaries is subject to its own covenant compliance obligations. Furthermore, the indebtedness of each of our public subsidiaries is independent of each other public subsidiary and is not subject to any guaranty by Gazit-Globe or its wholly-owned subsidiaries.

 

The amount of debt outstanding from time to time could have important consequences to us and our public subsidiaries. For example, it could

 

require that we dedicate a substantial portion of cash flow from operations to payments on debt, thereby reducing funds available for operations, property acquisitions, redevelopments and other business opportunities that may arise in the future;
   
limit the ability to make distributions on equity securities, including the payment of dividends;
   
make it difficult to satisfy debt service requirements;
   
limit flexibility in planning for, or reacting to, changes in business and the factors that affect profitability, which may place us at a disadvantage compared to competitors with less debt or debt with less restrictive terms;
   
adversely affect financial ratios and debt and operational coverage levels monitored by rating agencies and adversely affect the ratings assigned to our or our public subsidiaries' debt, which could increase the cost of capital; and
   
limit our or our public subsidiaries' ability to obtain any additional debt or equity financing that may be needed in the future for working capital, debt refinancing, capital expenditures, acquisitions, redevelopment or other general corporate purposes or to obtain such financing on favorable terms.

 

If our or our public subsidiaries' internally generated cash is inadequate to repay indebtedness upon an event of default or upon maturity, then we or our public subsidiaries will be required to repay or refinance the debt. If we or our public subsidiaries are unable to refinance our indebtedness on acceptable terms or if the amount of refinancing proceeds is insufficient to fully repay the existing debt, we or our public subsidiaries might be forced to dispose of properties, potentially upon disadvantageous terms, which might result in losses and might adversely affect our cash available for distribution. If prevailing interest rates or other factors at the time of refinancing result in higher interest rates on refinancing, our interest expense would increase without a corresponding increase in our rental rates, which would adversely affect our results of operations.

 

In addition, our debt financing agreements and the debt financing agreements of our public subsidiaries contain representations, warranties and covenants, including financial covenants that, among other things, require the maintenance of certain financial ratios. Certain of the covenants that apply to Gazit-Globe depend upon the performance of our public subsidiaries and we therefore have less control over our compliance with those covenants. For example, covenants that apply to Gazit-Globe require Citycon to maintain a minimum ratio of equity to total assets less advances received and a minimum ratio of EBITDA to net finance expenses. Another covenant requires First Capital to maintain a minimum ratio of EBITDA to finance expenses.

 

 11 

 

Should we or our public subsidiaries breach any such representations, warranties or covenants contained in any such loan or other financing agreement, or otherwise be unable to service interest payments or principal repayments, we or our public subsidiaries may be required immediately to repay such borrowings in whole or in part, together with any related costs and a default under the terms of certain of our other indebtedness may result from such breach. For example, a decline in the property market or a wide scale tenant default may result in a failure to meet any loan to value or debt service coverage ratios, thereby causing an event of default and we or our public subsidiaries, as the case may be, may be required to prepay the relevant loan. A significant portion of Gazit-Globe's equity interests in its subsidiaries are pledged as collateral for Gazit-Globe's revolving credit facilities and other indebtedness incurred by Gazit-Globe directly and by its private subsidiaries. As of December 31, 2015, the principal amount of such indebtedness was NIS 2,202 million (U.S.$ 564 million), which constituted 4.9% of our consolidated indebtedness as of such date. In the event that Gazit-Globe is required to prepay its loans, the lenders under such loans may determine to pursue remedies against and cause the sale of those equity interests. In addition, since certain of our properties were mortgaged to secure payment of indebtedness with a principal amount of NIS 6,777 million (U.S.$ 1,737 million) as of December 31, 2015, which constituted 15.0% of our consolidated indebtedness as of such date, in the event we are unable to refinance or repay our borrowing, we may be unable to meet mortgage payments, or we may default under the related mortgage, deed of trust or other pledge and such property could be transferred to the mortgagee or pledgee, or the mortgagee or pledgee could foreclose upon the property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies, all with a consequent loss of income and asset value. Moreover, any restrictions on cash distributions as a result of breaching financial ratios, failure to repay such borrowings or, in certain circumstances, other breaches of covenants, representations and warranties under our debt financing agreements could result in us being prevented from paying dividends to our investors and have an adverse effect on our liquidity.

 

Volatility in the credit markets may affect our ability to obtain or re-finance our indebtedness at a reasonable cost.

At times during the last decade, global credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which at times caused the spreads on prospective debt financings to widen considerably. If a downturn or dislocation in credit markets were to occur or if interest rates were to dramatically increase from their current low levels, we may experience difficulty refinancing our upcoming debt maturities at a reasonable cost or with desired financing alternatives. For example, it may be hard to raise new unsecured financing in the form of additional bank debt or corporate bonds at interest rates that are appropriate for our long term objectives. Any change in our credit ratings could further impact our access to capital and our cost of capital, including the cost of borrowings under our revolving lines of credit. To the extent we are unable to efficiently access the credit markets, we may need to repay maturing debt with proceeds from the issuance of equity or the sale of assets. In addition, lenders may impose more restrictive covenants, events of default and other conditions.

 

The inability of any of our public subsidiaries to satisfy their liquidity requirements may materially and adversely impact our results of operations.

Even though we present the assets and liabilities of our public subsidiaries on a consolidated basis and equity method for an affiliate, they satisfy their short-term liquidity and long-term capital requirements through cash generated from their respective operations and through debt and equity financings in their respective local markets. Our liquidity and available borrowings presented on a consolidated basis may not therefore be reflective of the position of any one of our public subsidiaries since the liquidity and available borrowings of each of our public subsidiaries are not available to support the others' operations. Although we have from time to time purchased equity or convertible debt securities of our public subsidiaries, we have not generally made shareholder loans to them (with a notable exception during 2014 and 2015 being our loans to Gazit Development, please see Note 9g to our audited consolidated financial statements included elsewhere in this annual report) and may have insufficient resources to do so even if our overall financial position on a consolidated basis is positive. Each public subsidiary is subject to its own covenant compliance obligations and the failure of any public subsidiary to comply with its obligations could result in the acceleration of its indebtedness which could have a material adverse effect on our financial position and results of operations.

 

Our results of operations may be adversely affected by fluctuations in currency exchange rates and we may not have adequately hedged against them.

Because we own and operate assets in many regions throughout the world, our results of operations are affected by fluctuations in currency exchange rates. For the year ended December 31, 2015, 31.5% of our rental income (assuming full consolidation of jointly-controlled entities) was earned in Canadian dollars, 27.9% in Euros, 22.9% in U.S. dollars, 6.9% in Swedish Krona, 4.1% in Norwegian Krone, 3.2% in NIS and 3.5% in other currencies. Our income from development and construction of residential projects activity is primarily generated in NIS (NIS 96 million of gross loss during 2015). In addition, our reporting currency is the New Israeli Shekel, or NIS, and the functional currency is separately determined for each of our subsidiaries. When a subsidiary's functional currency differs from our reporting currency, the financial statements of such subsidiary are translated to NIS so that they can be included in our financial statements. As a result, fluctuations of the currencies in which we conduct business relative to the NIS impact our results of operations and the impact may be material. For example, the average annual rate in NIS of the Canadian dollar and the Euro weakened 5.9% and 9.1%, respectively, and the U.S. Dollar strengthened 8.6%, for 2015 compared to 2014, which resulted in our net operating income decreasing by a total amount of NIS 190 million, or 4.5%. We continually monitor our exposure to currency risk and pursue a company-wide foreign exchange risk management policy, which includes seeking to hold our equity in the currencies of the various markets in which we operate in the same proportions as the assets in each such currency bear to our total assets. We have in the past and expect to continue in the future to at least partly hedge such risks with certain financial instruments. Future currency exchange rate fluctuations that we have not adequately hedged could adversely affect our profitability. We also face risks arising from the imposition of exchange controls and currency devaluations. Exchange controls may limit our ability to convert foreign currencies into NIS or to remit dividends and other payments by our foreign subsidiaries or businesses located in or conducted within a country imposing controls. Currency devaluations result in a diminished value of funds denominated in the currency of the country instituting the devaluation.

 

 12 

 

Furthermore, the Company has currency and interest swap transactions, with respect to some of which the Company has entered into agreements that provide for mechanisms for the current settling of accounts in connection with the fair value of the swap transactions. Consequently, the Company could be required, from time to time, to transfer material amounts to the banking institution based on the fair value of the aforesaid transactions.

 

We are subject to a disproportionate impact on our properties due to concentration in certain areas.

As of December 31, 2015, approximately 10.5%, 9.3%, 6.9%, 4.2% and 3.8% of our total GLA was located in Florida (U.S.), the greater Toronto area (Canada), the greater Montreal area (Canada), Northeastern United States and metropolitan Helsinki (Finland), respectively. A regional recession or other major, localized economic disruption or a natural disaster, such as an earthquake or hurricane, in any of these areas could adversely affect our ability to generate or increase operating revenues from our properties, attract new tenants to our properties or dispose of unproductive properties. Any reduction in the revenues from our properties would effectively reduce the income we generate from them, which would adversely affect our results of operations and financial condition. Conversely, strong economic conditions in a region could lead to increased building activity and increased competition for tenants.

 

Certain emerging markets in which we have properties are subject to greater risks than more developed markets, including significant legal, economic and political risks.

Some of our current and planned investments are located in emerging markets, primarily within Central and Eastern Europe and Brazil, which as of December 31, 2015 comprised 18.6% and 1.2% of our total GLA, respectively, and in India, where we have an investment commitment in Hiref International LLC, a real estate fund, for U.S.$ 110 million (of which we had invested U.S.$ 95.2 million through December 31, 2015) and, as such, are subject to greater risks than those in markets in Northern and Western Europe and North America, including greater legal, economic and political risks. Our performance could be adversely affected by events beyond our control in these markets, such as a general downturn in the economy of countries in which these markets are located, conflicts between states, changes in regulatory requirements and applicable laws (including in relation to taxation and planning), adverse conditions in local financial markets and significant currency volatility or devaluation interest and inflation rate fluctuations. In addition, adverse political or economic developments in these or in neighboring countries could have a significant negative impact on, among other things, individual countries' gross domestic products, foreign trade or economies in general. Recent examples of potentially detrimental developments in emerging markets include the economic downturn in Brazil and the geopolitical tension between Russia and its neighbors. While we currently have no plans to enter new emerging markets, some emerging economies in which we currently operate have historically experienced substantial rates of inflation, an unstable currency, high government debt relative to gross domestic products, a weak banking system providing limited liquidity to domestic enterprises, high levels of loss-making enterprises that continue to operate due to the lack of effective bankruptcy proceedings, significant increases in unemployment and underemployment and the impoverishment of a large portion of the population. This may have a material adverse effect on our business, financial condition or results of operations.

 

Our reported financial condition and results of operations under IFRS are impacted by changes in value of our real estate assets, which is inherently subjective and subject to conditions outside of our control.

Our consolidated financial statements have been prepared in accordance with IFRS. There are significant differences between IFRS and U.S. GAAP which lead to different results under the two systems of accounting. Currently, one of the most significant differences between IFRS and U.S. GAAP is an option under IFRS to record our real estate assets at fair market value in our financial statements on a quarterly basis, which we have adopted. Accordingly, our financial statements have been significantly impacted in the past by fluctuations due to changes in fair market value of our properties even if no actual disposition of assets took place. For example, in 2015 and 2014, we increased the fair value of our properties on a consolidated basis by NIS 711 million and NIS 1,053 million, respectively.

 

The valuation of property is inherently subjective due to the individual nature of each property as well as to macro- economic conditions. As a result, valuations are subject to uncertainty. Fair value of investment property including development and land was determined by accredited independent appraisers with respect to 71.0% of such investment properties during the year ended December 31, 2015 (55.2% of which were performed at December 31, 2015). A significant proportion of the valuations of our properties were not performed by appraisers at the balance sheet date, based on materiality thresholds and other considerations that we have applied across our properties. As a result of these factors, there is no assurance that the valuations of our interests in the properties reflected in our financial statements would reflect actual sale prices even where any such sales occur shortly after the financial statements are prepared.

 

Other real estate companies that are publicly traded in the United States use U.S. GAAP to report their financial statements, and are therefore, not currently required to record the fair market value of their real estate assets on a quarterly basis. As a result, significant declines or fluctuations in the value of their real estate could impact us disproportionately compared to these other companies.

 

 13 

 

In addition, in recent years several amendments have been made to IFRS standards, including those that affect us, and we have had to revise our accounting policies in order to comply with such amended standards. Commonly, the transition provisions of these amendments require us to implement the amendments on comparative figures as well. Figures with respect to prior periods that are not required to be included in our financial statements are therefore not adjusted retrospectively. As a result, the utility of the comparative figures for certain years may be limited.

 

Real estate is generally an illiquid investment.

Real estate is generally an illiquid investment as compared to investments in securities. While we do not currently anticipate a need to dispose of a significant number of real estate assets in the short-term, such illiquidity may affect our ability to dispose of or liquidate real estate assets in a timely manner and at satisfactory prices in response to changes in economic, real estate market or other conditions.

 

We may be obliged to dispose of our interest in a property or properties at a time, for a price or on terms not of our choosing. In addition, some of our anchor tenants have rights of first refusal or rights of first offer to purchase the properties in which they lease space in the event that we seek to dispose of such properties. The presence of these rights of first refusal and rights of first offer could make it more difficult for us to sell these properties in response to market conditions. These limitations on our ability to sell our properties could have an adverse effect on our financial condition and results of operations.

 

Our competitive position and future prospects depend on our senior management and the senior management of our subsidiaries and affiliates.

The success of our property development and investment activities depend, among other things, on the expertise of our board of directors, our executive team and other key personnel in identifying appropriate opportunities and managing such activities, as well as the executive teams of our subsidiaries and affiliates. The employment agreements pursuant to which Messrs. Katzman and Segal provide such services to Gazit-Globe have expired. Even though their employment agreements have expired, Messrs. Katzman and Segal are continuing to serve as our executive chairman and executive vice chairman, respectively (as of January 2016, Mr. Segal receives directors fees for his services). Mr. Katzman currently also serves as the chairman of the board of Equity One, Citycon, Atrium, and Norstar, and as a director of First Capital while Mr. Segal currently also serves as the vice chairman of the board of Gazit-Globe, chairman of the board of First Capital, the vice chairman of the board of Equity One and the vice chairman of the board and CEO of Norstar. With respect to some of these positions, Messrs. Katzman and Segal have written engagement and remuneration agreements with such public subsidiaries which remain in effect. In addition, recent legislation in Israel, specifically Amendment 20 to the Israeli Companies Law, requires in certain circumstances that the Company's compensation plan for officers as well as the employment agreement of its CEO be approved by a special majority shareholder vote. The loss of some or all of these individuals or an inability to attract, retain and maintain additional personnel, including due to the possible failure to attain special majority shareholder approval mentioned above, could prevent us from implementing our business strategy and could adversely affect our business and our future financial condition or results of operations. We do not carry key man insurance with respect to any of these individuals. We cannot guaranty that we will be able to retain all of our existing senior management personnel or to attract additional qualified personnel when needed.

 

We face significant competition for the acquisition of real estate assets, which may impede our ability to make future acquisitions or may increase the cost of these acquisitions.

We compete with many other entities for acquisitions of necessity-driven real estate, including institutional pension funds, real estate investment trusts and other owner-operators of shopping centers. This competition may affect us in various ways, including:

 

reducing properties available for acquisition;
   
increasing the cost of properties available for acquisition;
   
reducing the rate of return on these properties;
   
reducing rents payable to us;
   
interfering with our ability to attract and retain tenants;
   
increasing vacancy rates at our properties; and
   
adversely affecting our ability to minimize expenses of operation.

 

The number of entities and the amount of funds competing for suitable properties and companies may increase. Such competition may reduce the number of suitable properties and companies available for purchase and increase the bargaining position of their owners. We may lose acquisition opportunities in the future if we do not match prices, structures and terms offered by competitors and if we match our competitors, we may experience decreased rates of return and increased risks of loss. If we must pay higher prices, our profitability may be reduced.

 

 14 

 

Our competitors may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. Some of these competitors may also have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of acquisitions. Furthermore, companies that are potential acquisition targets may find competitors to be more attractive because they may have greater resources, may be willing to pay more or may have a more compatible operating philosophy. These factors may create competitive disadvantages for us with respect to acquisition opportunities.

 

Our investments in development and redevelopment projects may not yield anticipated returns, and we are subject to general construction risks which may increase costs and delay or prevent the construction of our projects.

An important component of our growth strategy is the redevelopment of properties we own and the development of new projects. Some of our assets, representing 1.7% and 4.0% of the value of our properties (including of our equity-accounted joint ventures) as of December 31, 2015, are at various stages of development and redevelopment (including expansions), respectively. These developments and redevelopments may not be as successful as currently expected. Expansion, renovation and development projects and the related construction entail the following considerable risks:

 

significant time lag between commencement and completion subjects us to risks of fluctuations in the general economy;
   
failure or inability to obtain construction or permanent financing on favorable terms;
   
inability to achieve projected rental rates or anticipated pace of lease-up;
   
delay of completion of projects, which may require payment of penalties under lease agreements and subject us to claims for breach of contract;
   
incurrence of construction costs for a development project in excess of original estimates;
   
expenditure of time and resources on projects that may never be completed;
   
acts of nature, such as harsh climate conditions in the winter, earthquakes and floods, that may damage or delay construction of properties; and
   
delays and costs relating to required zoning or other regulatory approvals.

 

The inability to complete the construction of a property on schedule or at all for any of the above reasons could have a material adverse effect on our business, financial condition and results of operations.

 

Insurance on real estate may not cover all losses.

We currently carry insurance on our properties. Certain of our policies contain coverage limitations, including exclusions for certain catastrophic perils and certain aggregate loss limits. For example, we have a portfolio of properties, representing 3.9% of our total GLA, located in California, including several properties in the San Francisco Bay and Los Angeles areas. These properties may be subject to the risk that an earthquake or other similar peril would affect the operation of these properties. We currently do not have comprehensive insurance covering losses from these perils due to the properties being uninsurable, not justifiable and/or commercially reasonable to insure, or for which any insurance that may be available would be insufficient to repair or replace a damaged or destroyed property. In addition, we have a number of properties in Florida and the northeastern U.S. states representing 14.7% of our total GLA, that are susceptible to hurricanes, floods and tropical storms. While we generally carry windstorm coverage with respect to these properties, the policies contain per occurrence deductibles and aggregate loss limits that limit the amount of proceeds that we may be able to recover. In addition, our properties in Central and Eastern Europe are generally not subject to flood insurance. Further, due to inflation, changes in codes and ordinances, environmental considerations and other factors, it may not be feasible to use insurance proceeds to replace a building after it has been damaged or destroyed.

 

The availability of insurance coverage may decrease and the prices for insurance may increase as a consequence of significant losses incurred by the insurance industry. In the event of future industry losses, we may be unable to renew or duplicate our current insurance coverage in adequate amounts or at reasonable prices. In addition, insurance companies may no longer offer coverage against certain types of losses, or, if offered, the expense of obtaining these types of insurance may not be justified. We therefore may cease to have insurance coverage against certain types of losses and/or there may be decreases in the limits of insurance available.

 

Should an uninsured loss, a loss over insured limits or a loss with respect to which insurance proceeds would be insufficient to repair or replace the property occur, we may lose capital invested in the affected property as well as anticipated income and capital appreciation from that property, while we may remain liable for any debt or other financial obligation related to that property.

 

 15 

 

A failure by Equity One to be treated as a REIT could have an adverse effect on our investment in Equity One.

As of December 31, 2015, Equity One has been treated as a REIT for U.S. federal income tax purposes. Subject to certain exceptions, a REIT generally is able to avoid entity-level tax on income it distributes to its shareholders, provided certain requirements are met, including certain income, asset, and distribution requirements. If Equity One ceases to be treated as a REIT and cannot qualify for any relief provisions under the Internal Revenue Code of 1986, as amended, or the Code, Equity One would generally be subject to an entity-level tax on its income at the graduated rates applicable to corporations. Such tax would reduce Equity One's profitability and would have an adverse effect on our investment in Equity One.

 

If we or third-party managers fail to efficiently manage our properties, tenants may not renew their leases or we may become subject to unforeseen liabilities.

If we fail to efficiently manage a property or properties, increased costs could result with respect to maintenance and improvement of properties, loss of opportunities to improve income and yield and a decline in the value of the properties. In addition, we sometimes engage third parties to provide management services for our properties. We may not be able to locate and enter into agreements with qualified management service providers. If any third parties providing us with management services do not comply with their agreements or otherwise do not provide services at the level that we expect, our tenant relationships and rental rates for such properties, and therefore, their condition and value, could be negatively affected.

 

We rely on third-party management companies to manage certain of our properties which represented 0.7% of our total GLA as of December 31, 2015. While we are in regular contact with our third-party managers, we do not supervise them and their personnel on a day-to-day basis and we cannot guaranty that they will manage our properties in a manner that is consistent with their obligations under our agreements, that they will not be negligent in their performance or engage in other criminal or fraudulent activity, or that they will not otherwise default on their management obligations to us. If any of the foregoing occurs, the relationships with our tenants could be damaged, which may cause the tenants not to renew their leases, and we could incur liabilities resulting from loss or injury to the properties or to persons at the properties. If we are unable to lease the properties or we become subject to significant liabilities as a result of third-party management performance, our operating results and financial condition could be substantially harmed.

 

Properties held by us are subject to multiple permits and administrative approvals and to compliance with existing and future laws and regulations.

Our operations and properties, including our construction, development and redevelopment activities, are subject to regulation by various governmental entities and agencies in connection with obtaining and renewing various licenses, permits, approvals and authorizations, as well as with ongoing compliance with existing and future laws, regulations and standards. A significant change in the regime for obtaining or renewing these licenses, permits, approvals and authorizations, or a significant change in the licenses, permits, approvals and authorizations our operations and properties are subject to, could result in us incurring substantially increased costs which could adversely affect our business, financial condition and results of operations. In addition, each maintenance, construction, development and redevelopment project we undertake must generally receive administrative approvals from various governmental agencies, including fire, health and safety and environmental protection agencies, as well as technical approvals from various utility providers, including electricity, gas and sewage services. These requirements may hinder, delay or significantly increase the costs of these projects, and failure to comply with these requirements may result in fines and penalties as well as cancellation of such projects even, in certain cases, the demolition of the building already constructed. Such consequences could have a material adverse effect on our business, financial condition and results of operations.

 

We may be subjected to liability for environmental contamination.

As an owner and operator of real estate, we may be liable for the costs of removal or remediation of hazardous or toxic substances present at, on, under, in or released from our properties, as well as for governmental fines and damages for injuries to persons and property. We may be liable without regard to whether we knew of, or were responsible for, the environmental contamination and with respect to properties we have acquired, whether the contamination occurred before or after the acquisition. The presence of such hazardous or toxic substances, or the failure to remediate such substances properly, may also adversely affect our ability to sell or lease the real estate or to borrow using the real estate as security. Laws and regulations, as these may be amended over time, may also impose liability for the release of certain materials into the air or water from a property, including asbestos, and such release can form the basis for liability to third persons for personal injury or other damages. Other laws and regulations can limit the development of, and impose liability for, the disturbance of wetlands or the habitats of threatened or endangered species.

 

We own several properties that will require or are currently undergoing varying levels of environmental remediation. The presence of contamination or the failure to properly remediate contamination at any of our properties may adversely affect our ability to sell or lease those properties or to borrow funds by using those properties as collateral. The costs or liabilities could exceed the value of the affected real estate. Although we have environmental insurance policies covering most of our properties, there is no assurance that these policies will cover any or all of the potential losses or damages from environmental contamination; therefore, any liability, fine or damage could directly impact our financial results.

 

 16 

 

We rely extensively on computer systems to process transactions and manage our business. Disruptions in both our primary and secondary (back-up) systems or breaches of our network security could harm our ability to run our business and expose us to liability.

In order to successfully operate our business, it is essential that we maintain uninterrupted operation of our business-critical computer systems. Our computer systems, including our back-up systems, are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, cyber-attacks, catastrophic events such as fires, hurricanes, earthquakes and tornadoes, and usage errors by our employees. If our computer systems cease to function properly or are damaged, we may have to make a significant investment to repair or replace them, and we may suffer interruptions in our operations in the interim. Any material interruption in our computer systems may have a material adverse effect on our business or results of operations.

 

Additionally, increased global IT security threats and more sophisticated and targeted computer crime pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. In the event a security breach or failure results in the disclosure of sensitive third party data or the transmission of harmful/malicious code to third parties, we could be subject to liability claims. Depending on their nature and scope, such threats also could potentially lead to improper use of our systems and networks, manipulation and destruction of data, loss of trade secrets, system downtimes and operational disruptions, which in turn could adversely affect our reputation, competitiveness and results of operations.

 

We have significant investments in different countries and our worldwide after-tax income as well as our ability to repatriate it might be influenced by any change in the tax law in such countries.

Our effective tax rate reflected in our financial statements might increase or decrease over time as a result of changes in corporate income tax rates, or by other changes in the tax laws of the various countries in which we operate which could reduce our after-tax income or impose or increase taxes upon the repatriation of earnings from countries in which we operate.

 

We have in the past restated our historical financial statements. Restatements of our historical financial statements may have a material adverse effect on our business, financial condition or operations.

During 2014 we restated our audited consolidated financial statements as of December 31, 2013 and for the year then ended (which also included corrections to the audited consolidated financial statements for December 31, 2012 and for the year then ended which were not material) and our consolidated financial statements as of March 31, 2014 and for the period then ended, to retrospectively reflect the amendment in the estimated revenues and costs for completion of construction projects of our fully-consolidated subsidiary, Dori Construction.

 

We cannot be certain that measures we have taken to prevent future restatements will ensure that no additional restatements will occur in the future. A restatement may affect investor confidence in the accuracy of our financial disclosures, may raise reputational issues for our business, and frequently triggers litigation.

 

In addition, we may receive inquiries from the SEC, the Israeli Securities Authority, or the Canadian Securities Administrators regarding our past restated financial statements or matters relating thereto. Any future inquiries from the SEC, the Israeli Securities Authority, or the Canadian Securities Administrators as a result of the restatement of our historical financial statements will, regardless of the outcome, likely consume a significant amount of our internal resources and result in additional legal and accounting costs. The restatement of our historical financial statements may result in litigation. If litigation were to occur, we may incur additional substantial defense costs regardless of the outcome of such litigation. Likewise, such events might cause a diversion of our management’s time and attention. If we do not prevail in any such litigation, we could be required to pay substantial damages or settlement costs.

 

We have in the past identified a material weakness in our internal control over financial reporting.

Partially as a result of the restatement of our historical financial statements described above, we reassessed our disclosure controls and procedures and determined that, as of December 31, 2013, they were not effective due to a material weakness in our internal control over financial reporting. A “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented, or detected on a timely basis. We subsequently remediated the material weakness. For further information, please see “Item 15. Controls and Procedures.”

 

 17 

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS.

 

Any failure to maintain such internal controls could adversely impact our ability to report our financial results on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Insufficient internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock. It is possible that additional material weaknesses or restatements of financial results may arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities and errors or to facilitate the fair presentation of our consolidated financial statements.

 

Risks Related to Our Structure

 

We may face difficulties in obtaining or using information from our public subsidiaries. and it is possible that such information, if received, may contain inaccuracies.

We rely on information that we receive from our public subsidiaries both to provide guidance in connection with the business and to comply with our reporting obligations as a public company. We receive information from our public subsidiaries on a quarterly basis in connection with the preparation of our quarterly or annual results of operations. While we request that our subsidiaries provide us with all material information that we require to manage our business and comply with our reporting obligations as a public company, we do not have formal arrangements with all of them requiring them to do so. In addition, directors of our public subsidiaries who are affiliated with us receive information at their periodic board meetings and through their discussions with management. However, the ability of these directors to use or disclose that information to others at Gazit-Globe prior to its disclosure by the public subsidiary may be subject to limitations resulting from the corporate governance and securities laws governing such subsidiaries and contractual and fiduciary obligations limiting the actions of their directors. In limited circumstances, we could face a conflict between our disclosure obligations and the disclosure obligations of our public subsidiaries. In addition, if we wish to engage in a capital markets or other transaction in which we are required to disclose certain information that our subsidiaries are not required or willing to disclose under their respective securities laws, we may need to change the timing or form of our capital raising plans. Our public subsidiaries are listed in different jurisdictions and operate in different geographic markets and do not present information regarding their operations on a uniform basis. Accordingly, we may not present certain data that is typically presented by other real estate companies in certain jurisdictions.

 

In addition, we consolidate the financial statements of our subsidiaries into our consolidated financial statements and we include the financial information of unconsolidated investees, which are accounted for in our consolidated financial statements using the equity method. In doing so, we rely on their published financial statements. Accordingly, a material inaccuracy in the financial statements of one of our subsidiaries or unconsolidated investees can result in a material error in our consolidated financial statements. In 2014, the Company was compelled to restate and refile its audited consolidated financial statements for December 31, 2013 and for the year then ended (which also included corrections to the audited consolidated financial statements for December 31, 2012 and for the year then ended which were not material) and its consolidated financial statements as of March 31, 2014 and for the period then ended, following the restatement and refiling of the financial statements for the same period of its fully-consolidated subsidiary, Dori Construction, due to a material deviation in the estimates of anticipated revenues and costs with respect to construction projects. We do not supervise the preparation of the financial statements of our public subsidiaries. Accordingly, we cannot guarantee that such errors will not occur again or that the Company will not be compelled to restate its consolidated financial statements in the future.

 

A significant portion of our business is conducted through public subsidiaries and our failure to generate sufficient cash flow from these subsidiaries, or otherwise receive cash from these subsidiaries, could result in our inability to repay our indebtedness.

We conduct the substantial majority of our operations through public subsidiaries that operate in our key regions around the world. After satisfying their cash needs, these subsidiaries have traditionally declared dividends to their stockholders, including us. In 2015, we received dividend payments of NIS 832 million from public subsidiaries.

 

The ability of our subsidiaries in general, and our public subsidiaries in particular, to pay dividends and interest or make other distributions on equity to us, is subject to limitations that could change or become more stringent in the future. Applicable laws of the respective jurisdictions governing each subsidiary may place limitations on payments of dividends, interest or other distributions by each of our subsidiaries or may subject them to withholding taxes. The determination to pay a dividend is made by the boards of directors of each entity and our nominees or persons otherwise affiliated with us represent less than a majority of the members of the boards of directors of each of these entities. In addition, our subsidiaries incur debt on their own behalf and the instruments governing such debt may restrict their ability to pay dividends or make other distributions to us. Creditors of our subsidiaries will be entitled to payment from the assets of those subsidiaries before those assets can be distributed to us. The inability of our operating subsidiaries to make distributions to us could have a material adverse effect on our business, financial condition and results of operations.

 

 18 

 

The control that we exert over our public subsidiaries may be subject to legal and other limitations, and a decision by us to exert that control may adversely impact perceptions of investors in those subsidiaries.

Although we have a controlling interest in each of our public subsidiaries, Equity One, First Capital, Citycon, and, as of January 22, 2015, Atrium, they are publicly traded companies in which significant portions of the shares are held by public shareholders. These entities are subject to legal or regulatory requirements that are typical for public companies and we may be unable to take certain courses of action without the prior approval of a particular shareholder or a specified percentage of shareholders (either under shareholders' agreements or by operation of law or the rules of a stock exchange). The existence of minority interests in certain of our subsidiaries may limit our ability to influence the operations of these subsidiaries, to increase our equity interests in these subsidiaries, to combine similar operations, to utilize synergies that may exist between the operations of different subsidiaries or to reorganize our structure in ways that may be beneficial to us. Under certain circumstances, the boards of directors of those entities may decide to undertake actions that they believe are beneficial to the shareholders of the subsidiary, but that are not necessarily in the best interests of Gazit-Globe. In addition, in the event that one of our subsidiaries or affiliates issues additional shares either for purposes of capital raising or in an acquisition, our holdings in such subsidiary or affiliate may be diluted or we may be forced to invest capital in such subsidiary to avoid dilution at a time that is not of our choosing and that adversely impacts our capital requirements.

 

The market price of our ordinary shares may be adversely affected if the market prices of our publicly traded subsidiaries decrease.

A significant portion of our assets is comprised of equity securities of publicly traded companies, including Equity One, First Capital, Citycon and Atrium. The stock prices of these publicly traded companies have been volatile, and have been subject to fluctuations due to market conditions and other factors which are often unrelated to operating results and which are beyond our control. Fluctuations in the market price and valuations of our holdings in these companies may affect the market's valuation of the price of our ordinary shares and may also thereby impact our results of operations. If the value of our assets decreases significantly as a result of a decrease in the value of our interest in our publicly traded subsidiaries, our business, operating results and financial condition may be materially and adversely affected and the market price of our ordinary shares may also decline.

 

Changes in our ownership levels of our public subsidiaries and related determinations may impact the presentation of our financial statements and affect investor perception of us.

The determination under IFRS as to whether we consolidate the assets, liabilities and results of operations of our public subsidiaries depends on whether we have legal or effective control over these subsidiaries. As of December 31, 2015, as required by IFRS, we determined that we had effective control over Citycon, Equity One, Atrium and First Capital even though we had (other than with respect to Atrium) less than a majority ownership interest and/or potential voting rights interest in each entity. In the future, our public subsidiaries may undertake securities offerings or issue securities in connection with acquisitions which result in dilution of our ownership interest. To date, we have frequently participated in securities offerings by our subsidiaries with the result that our ownership interest has generally not been diluted or the dilution has not been significant; however, there can be no assurance that we will do so in the future. Furthermore, we may determine that it is in our best interests and the best interests of our public subsidiaries that they undertake an acquisition that results in dilution to our equity position. In the future, if we do not exercise effective control over a particular subsidiary, we will need to account for our investment in that subsidiary on an equity basis rather than on a consolidated basis. If a change in the level of control which impacts whether and how we consolidate our public subsidiaries occurs, such an event may affect investor perception of us and our business model even if there is no material economic impact on our company.

 

Changes in accounting standards may adversely impact our financial condition and results of operations.

New accounting standards or pronouncements that may become applicable to us from time to time, or changes in the interpretation of existing standards and pronouncements, could have a significant adverse effect on our reported results for the affected periods.

 

 19 

 

It would have an adverse effect on our results of operations and our shareholders if we become subject to regulation under the U.S. Investment Company Act of 1940.

We do not expect to be subject to regulation under the U.S. Investment Company Act of 1940, or the Investment Company Act, because we are not engaged in the business of investing or trading in securities. In the event we engage in business combinations which result in our holding passive investment interests in a number of entities, we could be subject to regulation under the Investment Company Act. In this event, we would be required to register as an investment company and become obligated to comply with a variety of substantive requirements under the Investment Company Act, including limitations on capital structure, restrictions on specified investments, and compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating expenses, which may make it impractical, if not impossible, for us to continue our business as currently conducted. Furthermore, as a non-U.S. entity, we would be unable to register as an investment company under the Investment Company Act, which could result in us needing to reincorporate as a U.S. entity or cease being a public company in the United States. As a result of these restrictions, any determination that we are an investment company would have material adverse consequences for our investors.

 

Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on the financial condition of co-venturers and disputes between us and our co-venturers.

We enter into joint ventures, partnerships and other co-ownership arrangements for the purpose of making investments, which currently include Equity One's joint ventures with, DRA Advisors, LLC, the New York Common Retirement Fund and Rider Limited Partnership, First Capital’s joint venture with Main and Main Developments LP, Citycon's joint venture with the Canada Pension Plan Investment Board (“CPPIB”) in the Kista Galleria Shopping Center located in Stockholm, Sweden, and the subsequent governance agreement between Gazit-Globe itself and CPPIB with respect to their respective stakes in Citycon in 2014. For more information on the latter, please see “Item 4—Information on the Company—History and Development of the Company.” Under the agreements with respect to certain of our joint ventures, we may not be in a position to exercise sole decision-making authority regarding the joint venture. Co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the co-venturer would have full control over the joint venture. Investments in joint ventures may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their required capital contributions. While we have not experienced any material disputes in the past, disputes between us and co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by or disputes with co-venturers might result in subjecting properties owned by the joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our co-venturers.

 

Proposed changes to enhance Israeli corporate governance laws may adversely affect our ability to expand our business and raise capital from certain Israeli Financial Institutions.

In December 2013, the law for the promoting competition and the reducing concentration was enacted by the Israeli Knesset (the "Concentration Law"). The Concentration Law imposes limitations, in addition to other restrictions, on what it deems "pyramidal structures," namely a corporate structure where control in a public company is held through a chain of more than one other public company.

 

The Concentration Law imposes a two-layer limitation on the total number of public companies in pyramidal structure. Under its provisions, the Company is considered a "second layer company" (as it is controlled by Norstar, which is itself a public Company), the Company's subsidiary, Dori Group, would have been considered a "third layer company" and the latter's subsidiary, Dori Construction, a "fourth layer company." Therefore, by the end of a transition period (four years for a fourth layer company and six years for a third layer company), we were required to make structural adjustments to comply with the Concentration Law since Gazit Globe, as a second layer company, will no longer be permitted to control another public company in Israel. The sale of the entire stake in Dori Group by Gazit Development in January 2016, primarily in an off-market transaction, has brought the Company into compliance with the aforementioned provisions of the Concentration Law.

 

The Concentration Law also authorizes the Israeli Minister of Finance establish limits with respect to the aggregate credit that may be provided by financial institutions to a specific corporation or a business group (defined to include an ultimate controlling shareholder and the companies under its control). Such limitations, if ultimately established, might limit our ability to refinance our debt from financial institutions.

 

In addition, the Concentration Law imposes limitations on the holdings by non-finance companies in the financial sector and similar limitations on financial institutions with holdings in non-financial sectors. Such limitations restrict the ability of financial institutions or their controlling shareholders to invest in the Company, or, in turn, restricts the ability of the Company to invest in such financial institutions.

 

 20 

 

Risks Related to Investment in our Ordinary Shares

 

The price of our ordinary shares may be volatile.

The market price of our ordinary shares could be highly volatile and may fluctuate substantially as a result of many factors, including:

 

actual or anticipated fluctuations in our results of operations;
   
variance in our financial performance from the expectations of market analysts;
   
announcements by us or our competitors of significant business developments, changes in tenant relationships, acquisitions or expansion plans;
   
our involvement in litigation or regulatory proceedings;
   
our sale of ordinary shares or other securities in the future;
   
market conditions in our industry and changes in estimates of the future size and growth rate of our markets;
   
changes in key personnel;
   
the trading volume of our ordinary shares; and
   
general economic and market conditions.

 

Although our ordinary shares are listed on the Tel-Aviv Stock Exchange (“TASE”), the New York Stock Exchange ("NYSE") and the Toronto Stock Exchange ("TSX"), an active trading market on the NYSE and the TSX for our ordinary shares may not be sustained. If an active market for our ordinary shares is not sustained, it may be difficult to sell ordinary shares in the U.S. and Canada.

 

In addition, the stock markets have experienced extreme price and volume fluctuations. Broad market and industry factors may materially harm the market price of our ordinary shares, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against that company. If we were involved in any similar litigation we could incur substantial costs and our management's attention and resources could be diverted.

 

Future sales of our ordinary shares could reduce the market price of our ordinary shares.

If our shareholders sell substantial amounts of our ordinary shares, either on the TASE or on the NYSE or the TSX, or if there is a public perception that these sales may occur in the future, the market price of our ordinary shares may decline.

 

Raising additional capital by issuing securities may cause dilution to existing shareholders.

In the future, we may increase our capital resources by additional offerings of equity securities. Because our decision to issue equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our ordinary shares bear the risk of our future offerings reducing the market price of our ordinary shares and diluting their shareholdings in us.

 

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Our ability to pay dividends is dependent by the ability of our subsidiaries and affiliates to efficiently distribute cash to Gazit-Globe and, and our ability to obtain financing.

In the past, our policy has been, subject to legal requirements, to distribute a quarterly dividend, the minimum amount of which we set for each fiscal year. We intend to continue our policy of distributing a quarterly dividend. Any dividend will depend on our earnings, financial condition and other business and economic factors affecting us at the time as our board of directors may consider relevant. We may pay dividends in any fiscal year only out of "profits," as defined by the Israeli Companies Law, unless otherwise authorized by an Israeli court, and provided that the distribution is not reasonably expected to impair our ability to fulfill our outstanding and expected obligations.

 

Our ability to pay dividends is also dependent on the stream of dividend paid by our subsidiaries, although the Company is not restricted by any means to be aligned by the stream of dividend distributed by its subsidiaries and can decide on higher amount, subject to our ability to obtain financing. In the event that our subsidiaries or affiliates are restricted from distributing dividends due to their earnings, financial condition or results of operations or they determine not to distribute dividends, including as a result of taxes that may be payable with respect to such distribution, and in the event that our debt or equity financing is restricted or limited, we may not be able to pay any dividends or in the amounts otherwise anticipated. If we do not pay dividends or pay a smaller dividend, our ordinary shares may be less valuable because a return on an investment will only occur if our stock price appreciates.

 

Our controlling shareholder has the ability to take actions that may conflict with the interests of other holders of our shares.

Chaim Katzman, our chairman, and certain members of his family own or control, including through private entities owned by them and trusts under which they are the beneficiaries, directly and indirectly, approximately 24.71% of Norstar's, our controlling shareholder, outstanding shares as of April 10, 2016. In addition, Dor J. Segal, our executive vice-chairman, holds 8.82% of the outstanding shares of Norstar and Erica Ottosson (Mr. Segal's spouse) holds 5.8% of the outstanding shares of Norstar. Norstar owned 50.54% of our outstanding ordinary shares as of April 10, 2016. First U.S. Financial, LLC, or FUF, holds 18.56% of the outstanding shares of Norstar. Mr. Katzman was granted an irrevocable proxy by FUF to vote, at his discretion, the shares of Norstar held by FUF. FUF is owned by Mr. Katzman, including through private entities owned by Mr. Katzman and members of his family, both directly and indirectly (51.4%); Erica Ottosson (22.6%); and Martin Klein (26%). In addition, Mr. Katzman was granted an irrevocable proxy by Erica Ottosson to vote her shares of FUF stock with respect to all matters at FUF shareholder meetings. On January 30, 2013, Mr. Katzman, together with related parties, including FUF (collectively, the "Katzman Group") and Mr. Segal, Ms. Ottosson, together with related parties (collectively, the "Segal Group"), entered into a shareholders agreement with respect to their holdings in Norstar, which among other things and subject to certain conditions, required the Katzman Group to vote its voting securities in favor of two nominees to the Norstar board of directors designated by the Segal Group, and for the Segal Group to vote its voting securities in favor of nominees designated by the Katzman Group. Accordingly, Mr. Katzman will be able to exercise control over the outcome of substantially all matters required to be submitted to our shareholders for approval, including decisions relating to the election of our board of directors, except for those matters which require special majorities under Israeli law, and all subject to his duties as a controlling shareholder under the Israeli Companies Law. In addition, Mr. Katzman may be able to exercise control over the outcome of any proposed merger or consolidation of the Company. The aforementioned may discourage third parties from seeking to acquire control of us which may adversely affect the market price of our shares. Please see also "Item 7—Major Shareholders and Related Party Transactions—Major Shareholders."

 

Risks Associated with our Ordinary Shares

 

Our ordinary shares are traded on more than one market and this may result in price variations.

Our ordinary shares have been traded on the TASE since January 1983, on the NYSE since December 2011, and on the TSX since October 2013. Trading in our ordinary shares on these markets takes place in different currencies (U.S. dollars on the NYSE, NIS on the TASE, and Canadian dollars on the TSX), and at different times (resulting from different time zones, different trading days and different public holidays in the United States, Israel, and Canada). The trading prices of our ordinary shares on these three markets may differ due to these and other factors. Any decrease in the price of our ordinary shares on the TASE could cause a decrease in the trading price of our ordinary shares on the NYSE and/or the TSX and vice versa.

 

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As a foreign private issuer, we follow certain home country corporate governance practices instead of applicable SEC and NYSE requirements, which may result in less protection than is accorded to shareholders under rules applicable to domestic issuers.

As a foreign private issuer, in reliance on Section 303A.11 of the NYSE Listed Company Manual, which permits a foreign private issuer to follow the corporate governance practices of its home country, we are permitted to follow certain home country corporate governance practices instead of those otherwise required under the NYSE corporate governance standards for domestic issuers. We currently follow the NYSE corporate governance standards for domestic issuers, except with respect to private placements to directors, officers or 5% shareholders, with respect to which we follow home country practice in Israel, under which we may not be required to seek the approval of our shareholders for such private placements which would require shareholder approval under NYSE rules applicable to a U.S. company. We may in the future elect to follow home country practice in Israel with regard to formation of compensation, nominating and corporate governance committees, separate executive sessions of independent directors and non-management directors and shareholder approval for establishment and material amendments of equity compensation plans, transactions involving below market price issuances in private placements of more than 20% of outstanding shares, or issuances that result in a change in control. If we follow our home country governance practices on these matters, we may not have a compensation, nominating or corporate governance committee, we may not have mandatory executive sessions of independent directors and non-management directors, and we may not seek approval of our shareholders for material amendments of equity compensation plans and the share issuances described above. Accordingly, following our home country governance practices as opposed to the requirements that would otherwise apply to a U.S. company listed on the NYSE may provide less protection than is accorded to investors under the NYSE corporate governance standards applicable to domestic issuers. In addition, we are not currently obligated to follow additional corporate governance practices promulgated by the TSX provided that (i) no more than 25% of the trading volume in our common stock over any six-month period occurs on the TSX and (ii) another stock exchange is providing review of the action in question. Should TSX regulations change or were we to exceed the aforementioned 25% threshold, we could become obligated to comply with TSX corporate governance requirements that also differ from those of the NYSE and from home country practice in Israel.

 

We are a "SEC foreign issuer" under Canadian securities regulations and are exempt from certain requirements of Canadian securities laws.

Although we are a reporting issuer in Canada, we are a "SEC foreign issuer" within the meaning of National Instrument 71-102 - Continuous Disclosure and Other Exemptions Relating to Foreign Issuers under Canadian securities law statutes and are therefore exempt from certain Canadian securities laws relating to continuous disclosure obligations and proxy solicitation as long as we comply with certain reporting requirements applicable in the United States, provided that the relevant documents filed with the SEC are filed in Canada and sent to our shareholders in Canada to the extent and in the manner and within the time required by applicable U.S. requirements. Therefore, there may be less publicly available information in Canada about us than is regularly published by or about other reporting issuers in Canada. In the event that we cease to be a "SEC foreign issuer", we may have to comply with additional Canadian securities laws and reporting requirements.

 

We are incurring and may incur significant additional increased costs as a result of the registration of our ordinary shares under the Securities Exchange Act of 1934 and the listing of our shares on the Toronto Stock Exchange and our management has been devoting and will be required to devote substantial time to compliance and new compliance initiatives.

As a public company in the United States and Canada, we are incurring and will continue to incur additional significant accounting, legal and other expenses that we did not incur before our U.S. offering and TSX listing. We are also incurring costs associated with the requirements under Section 404 and other provisions of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. Similarly, while National Instrument 52-109 - Certification of Disclosure in Issuers' Annual and Interim Filings under Canadian securities laws statutes permits us to satisfy the Canadian equivalent of the certification obligations under the Sarbanes-Oxley Act on annual basis by simply re-filing as soon as practicable the same certifications in Canada as were originally filed with the SEC in the United States, we are also now obligated to file separate interim certifications in Canada with our quarterly financial results. These rules and regulations may continue to increase our legal and financial compliance costs. In addition, becoming a public company in the United States and Canada has introduced new costs, such as additional stock exchange listing fees and shareholder reporting and has, and will continue to take, a significant amount of management's time. In addition, we remain a publicly traded company on the TASE and are subject to Israeli securities laws and disclosure requirements. Accordingly, we need to comply with U.S., Canadian, and Israeli disclosure requirements and the resolution of any conflicts between those requirements may lead to additional costs and require significant management time.

 

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure and other matters, may be implemented in the future, which may increase our legal and financial compliance costs, make some activities more time consuming and divert management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. Being a publicly traded company in North America and being subject to these rules and regulations has made it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.

 

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A substantial number of the shares held by our majority shareholder, Norstar Holdings Inc., are pledged to secure its indebtedness and foreclosure on such pledges, or other negative developments with respect to Norstar Holdings Inc., could adversely impact the market price of our ordinary shares.

Our majority shareholder, Norstar, had voting power over 50.54% of our outstanding shares as of April 10, 2016. Norstar is a public company listed on the TASE. As substantial number of our shares held by Norstar are pledged predominantly to a number of financial institutions who are lenders to Norstar and are otherwise pledged to secure a small portion of Norstar's debentures. Based on Norstar's most recent publicly filed reports in Israel, Norstar was in compliance as of December 31, 2015 with all of the covenants governing such indebtedness, including the requirement that the value of the pledged shares exceeds a certain percentage of the amount of outstanding indebtedness ("loan to value ratios"). In addition, Norstar may otherwise breach applicable covenants or default on required payments. Under those circumstances, if the secured parties foreclose on the pledge, they may acquire and seek to sell the pledged shares. The secured parties will not be subject to any restrictions other than those that apply under applicable U.S. and Israeli securities laws, and there can be no assurance that they would do so in an orderly manner. Furthermore, the mere foreclosure on the pledge and transfer of shares to such financial institutions would likely be perceived adversely by investors. In the event that the secured parties do not transfer the shares immediately, their interests may differ from those of our public stockholders. In addition, should Norstar incur significant losses, it may choose to sell outstanding shares of ours and/or no longer be able to acquire additional shares. Any of these events could adversely impact the market price of our ordinary shares.

 

Our United States shareholders may suffer adverse tax consequences if we are characterized as a "passive foreign investment company."

Generally, if for any taxable year 75% or more of our gross income is passive profit, or at least 50% of our assets are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company for United States federal income tax purposes. To determine whether at least 50% of our assets are held for the production of, or produce, passive income, we may use the market capitalization method for certain periods. Under the market capitalization method, the total asset value of a company would be considered to equal the fair market value of its outstanding shares plus outstanding indebtedness on a relevant testing date. Because the market price of our ordinary shares may fluctuate and may affect the determination of whether we will be considered a passive foreign investment company, there can be no assurance that we will not be considered a passive foreign investment company for any taxable year. If we are characterized as a passive foreign investment company, our United States shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather than capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals who are United States holders, and having interest charges apply to distributions by us and the proceeds of share sales.

 

Our United States shareholders may suffer adverse tax consequences if we are characterized as a "United States-owned foreign "corporation" unless such United States shareholders are eligible for the benefits of the U.S.-Israel income tax treaty and elect to apply the provisions of such treaty for U.S. tax purposes.

Subject to certain exceptions, a portion of our dividends will be treated as U.S. source income for United States foreign tax credit purposes, in proportion to our U.S. source earnings and profits, if we are treated as a United States-owned foreign corporation for United States federal income tax purposes. Generally, we will be treated as a United States-owned foreign corporation if United States persons own, directly or indirectly, 50% or more of the voting power or value of our shares. To the extent any portion of our dividends is treated as U.S. source income pursuant to this rule, the ability of our United States shareholders to claim a foreign tax credit for any Israeli withholding taxes payable in respect of our dividends may be limited. We do not expect to maintain calculations of our earnings and profits under United States federal income tax principles and, therefore, if we are subject to the resourcing rule described above, United States shareholders should expect that the entire amount of our dividends will be treated as U.S. source income for United States foreign tax credit purposes. Importantly, however, United States shareholders who qualify for benefits of the U.S.-Israel income tax treaty may elect to treat any dividend income otherwise subject to the sourcing rule described above as foreign source income, though such income will be treated as a separate class of income subject to its own foreign tax credit limitations. The rules relating to the determination of the foreign tax credit are complex, and investors should consult their tax advisor to determine whether and to what extent they will be entitled to this credit, including the impact of, and any exception available to, the special sourcing rule described in this paragraph, and the availability and impact of the U.S.-Israel income tax treaty election described above.

 

Risks Related to Our Operations in Israel

 

We conduct our operations in Israel and therefore our business, financial condition and results of operations may be adversely affected by political, economic and military instability in Israel.

Our headquarters are located in central Israel and many of our key employees and officers and most of our directors are residents of Israel. Accordingly, political, economic and military conditions in Israel directly affect our business. Since the State of Israel was established in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority, there have been continuous periods of unrest, strategic threats, and terrorist activity in the Middle East directly impacting Israel. Any armed conflicts, terrorist activities or political instability in the region could adversely affect business conditions and could harm our business, financial condition and results of operations.

 

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For example, any major escalation in hostilities in the region could result in a portion of our employees, including executive officers, directors, and key personnel, being called up to perform military duty for an extended period of time or otherwise disrupt our normal operations. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists. Our operations could be disrupted by the absence of a significant number of our employees or of one or more of our key employees. Such disruption could materially adversely affect our business, financial condition and results of operations. Our commercial insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East, such as damages to our facilities resulting in disruption of our operations. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot guaranty that this government coverage will be maintained or will be adequate in the event we submit a claim.

 

Provisions of Israeli law may delay, prevent or otherwise impede a merger with, or an acquisition of, our company, which could prevent a change of control, even when the terms of such a transaction are favorable to us and our shareholders.

Israeli corporate law regulates mergers, requires that acquisitions of shares above specified thresholds be conducted through special tender offers, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. Israeli tax considerations may also make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax or who are not exempt under the provisions of the Israeli Income Tax Ordinance from Israeli capital gains tax on the sale of our shares. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. These provisions of Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders, and may limit the price that investors may be willing to pay in the future for our ordinary shares.

 

It may be difficult to enforce a U.S. judgment against us, our officers and directors and the Israeli experts named in this annual report in Israel or the United States, or to assert U.S. securities laws claims in Israel or serve process on our officers and directors and these experts.

We are incorporated in Israel. At least 50% of our executive officers and directors are not residents of the United States. Our independent registered public accounting firm is not a resident of the United States. The majority of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a U.S. court judgment based upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons in a U.S. or Israeli court, or to effect service of process upon these persons in the United States. Additionally, it may be difficult for an investor, or any other person or entity, to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws on the grounds that Israel is not the most appropriate forum in which to bring such a claim. Even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing the matters described above.

 

Shareholder responsibilities and rights will be governed by Israeli law which differs in some respects from the rights and responsibilities of shareholders of U.S. companies.

Since we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by our articles of association and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders and to refrain from abusing its power in the company, including, in voting at the general meeting of shareholders on certain matters, such as an amendment to the company's articles of association, an increase of the company's authorized share capital, a merger of the company and approval of related party transactions that require shareholder approval. In addition, a controlling shareholder or a shareholder who knows that it possesses the power to determine the outcome of a shareholders' vote or to appoint or prevent the appointment of an office holder in the company or has another power with respect to the company, has a duty to act in fairness towards the company. However, Israeli law does not define the substance of this duty of fairness. Because Israeli corporate law underwent extensive revisions approximately fifteen years ago, the parameters and implications of the provisions that govern shareholder conduct have not been clearly determined and there is limited case law available to assist us in understanding the implications of these provisions that govern shareholders' actions. These provisions may be interpreted to impose additional obligations and liabilities on our shareholders that are not typically imposed on shareholders of U.S. corporations.

 

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ITEM 4. INFORMATION ON THE COMPANY

 

A.History and Development of the Company

 

Gazit-Globe Ltd. was incorporated in Israel in May 1982. The Company is a limited liability corporation, and it operates under the Israeli Companies Law 5759-1999. We believe we are one of the largest owners and operators of supermarket-anchored shopping centers in the world. Our 451 properties have a gross leasable area, or GLA, of approximately 71 million square feet and are geographically diversified across over 20 countries, including the United States, Canada, Finland, Norway, Sweden, Poland, the Czech Republic, Russia, Israel, Germany and Brazil. We, through our public and private investees, acquire, manage, develop and redevelop well-located, supermarket-anchored neighborhood and community shopping centers in urban growth markets with high barriers to entry and attractive demographic trends. Our properties are typically located in countries characterized by stable GDP growth, political and economic stability and strong credit ratings. In addition, we work to identify and realize business opportunities by way of acquisition of shopping centers and/or companies operating in its sector (including with partners), in the regions in which it operates and in other regions.

 

We issued our first prospectus on the Tel-Aviv Stock Exchange in January 1983. Our ordinary shares are currently listed on the Tel-Aviv Stock Exchange under the symbol "GZT." In December 2011, we completed our initial offering on the New York Stock Exchange where our ordinary shares are also currently listed under the symbol "GZT". In October 2013, we listed our ordinary shares on the Toronto Stock Exchange also under the symbol "GZT". Our principal executive offices are located at 1 Hashalom Rd., Tel-Aviv 67892, Israel, and our telephone number is +972 3 694-8000. Our agent of service in the United States is Gazit Group USA, Inc., 1696 NE Miami Gardens Drive, North Miami Beach, FL 33179, USA whose telephone number is (305) 947-8800.

 

On January 22, 2015, Gazit-Globe entered into an agreement to purchase 52,069,622 ordinary shares of Atrium from an entity forming part of a consortium managed by CPI CEE Management LLC (“CPI”), at a price of EUR 4.40 per share, for a total consideration of approximately EUR 229 million (NIS 1.05 billion) in an off-market transaction. Upon closing of the acquisition, Gazit-Globe (through wholly-owned subsidiaries) holds 206,681,551 ordinary shares of Atrium, representing approximately 54.9% of Atrium’s issued share capital and voting rights. In addition, pursuant to the transaction, the Amended and Restated Cooperation and Voting Agreement between Gazit-Globe (through a wholly-owned subsidiary) and CPI was cancelled and the CPI's rights under the Amended and Restated Relationship agreement between the Gazit-Globe (through a wholly-owned subsidiary), CPI and Atrium were terminated and the Company alone is entitled to exercise all of the rights thereunder. As a result of the acquisition and in accordance with IFRS, Gazit-Globe became the sole controlling shareholder of Atrium and, commencing from its financial statements for the first quarter of 2015, Gazit-Globe consolidates Atrium’s financial statements into its own financial statements.

 

In March 2015, we participated in an additional private placement by Equity One concurrent with a public equity offering in which the latter raised approximately U.S.$ 105 million in which we separately purchased an additional 600,000 Equity One shares for a total consideration of approximately $16.2 million.

 

In July 2015, Citycon completed the acquisition of Sektor Gruppen AS (“Sektor”) for a total consideration of EUR 1.5 billion (NIS 6.5 billion), of which EUR 571 million (NIS 2.4 billion) was in cash and the balance was through obtaining and refinancing debt. Sektor is a private company that focuses on the ownership, management and development of supermarket-anchored shopping centers in Norway and is the second largest player in this sector in Norway, the property portfolio of which as of the date of acquisition comprised 20 properties, fully or primarily held by Sektor, with a GLA of 4.3 million square feet, four properties in which Sektor holds the smaller portion, two rented properties and eight properties under its management. During 2015, the Company purchased shares of Citycon amounting to approximately EUR 271 million (NIS 1.15 billion), of which EUR 261 million (NIS 1.1 billion) was invested pursuant to a rights issuance by Citycon in July 2015, in which the latter raised an aggregate amount of approximately EUR 604 million (NIS 2.5 billion) in order to finance the acquisition of Sektor. As of December 31, 2015, the Company directly holds 43.4% of Citycon's issued share capital and voting rights (42.8% on a fully-diluted basis).

 

In August, 2015, Mr. Aharon Soffer resigned his office as President of the Company and Ms. Rachel Lavine was appointed as the CEO of the Company. Additionally, in January 2016, Mr. Gil Kotler, who had served as Senior Executive Vice President and Chief Financial Officer, left the Company and Mr. Adi Jemini was appointed as Chief Financial Officer of the Company.

 

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On December 31, 2015, the Company issued to the public17,018,270 ordinary shares at a price per share of NIS 35.5, for a total gross consideration of NIS 604 million, according to a shelf offer report published by the Company under its Israeli shelf prospectus. As part of the issuance, a subsidiary of Norstar acquired 8,500,000 shares for a total consideration of NIS 294 million.

 

In December 2015, the Company undertook the sale, by means of a registered, secondary offering off of Equity One’s shelf prospectus, of an aggregate 4.83 million Equity One shares it held. The Company received aggregate gross proceeds of approximately U.S. $124.7 million, and its holdings in Equity One reduced by 3% to approximately 38.4% of its issued and outstanding share capital and voting rights.

 

In December 2015, Gazit Development published a full purchase offer for the acquisition, in cash, of the remaining shares in Dori Group that were not in its possession. On January 11, 2016, Gazit Development announced that the purchase offer was rejected as the minimum threshold of response required by law for its completion was not achieved. Subsequently, on January 13, 2016, the Company reported the announcement by Gazit Development's Board of Directors of its decision to pursue the sale of up to the full interest (direct and indirect) of Gazit Development in Dori Group. On January 14, 2016 the entire holdings of Gazit Development (direct and indirect) in the shares of Dori Group, primarily as part of an off-the-market transaction, for a total consideration of NIS 10.7 million (U.S.$ 2.7 million). For details on this as well as the financial commitments provided by the Company to Gazit Development with respect to its holdings in Dori Group during the reporting period, please see Notes 9g to our audited consolidated financial statements included elsewhere in this Annual Report.

 

In January 2016, the Company sold 6.5 million shares of First Capital on the TSX and for approximately C$ 117 million (NIS 329 million) in consideration. Following the sale, the Company now holds 39.3% of the share capital of First Capital (36% on a fully diluted basis). For details refer to Note 40b to our audited consolidated financial statements included elsewhere in this Annual Report.

 

In March 2016, Mr. Shaiy Pilpel resigned as a director of the Company and Ms. Zehavit Cohen was appointed in his place.

 

As part of our continued recycling of capital, during the course of 2015, we disposed of 4 assets owned by ProMed for approximately U.S.$ 193 million (NIS 750 billion), and Gazit Brazil acquired an additional property for approximately BRL 339 million (NIS 487 million). Additionally, during 2015, Gazit Brazil acquired 6.2% of the issued share capital and the voting rights in BR Malls Participações S.A. ("BR Malls"), a public company that is listed on the Brazilian Stock Exchange ("Bovespa") and is engaged in the acquisition, development and management of shopping centers in Brazil. Gazit Brazil also holds 4.3% interest in a corporation that holds a shopping center in Brazil.

 

Our capital expenditures consist of the acquisition, construction and development of investment property including land for future development and goodwill amounted to NIS 10,802 million (U.S.$ 2,768 million) during 2015. For the breakdown of these amounts by operating segments, please see Note 39b to our audited consolidated financial statements included elsewhere in this Annual Report.

 

We financed these expenditures primarily by equity and debt offerings, and by borrowing from financial institutions. For further information regarding our methods of financing, please see "Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Cash Flows." For further information on our equity and debt offerings, please also see Note 9, Note 20, Note 22 and Note 27c to our audited consolidated financial statements included elsewhere in this Annual Report.

 

For a discussion of our principal capital expenditures and divestitures over the last three financial years, please see "Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Cash Flows," Note 9 (for interests in other companies), and Note 39 to our audited consolidated financial statements included elsewhere in this Annual Report.

 

As of the date of this annual report, there have been no public takeover offers by third parties in respect of our ordinary shares or by the Company in respect of other companies' shares during the last and current financial year.

 

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B.Business Overview

 

We believe we are one of the largest owners and operators of supermarket-anchored shopping centers in the world, as noted above. We operate properties with a total value of approximately U.S.$ 20.6 billion or NIS 80.2 billion (including the full value of properties that are consolidated and of equity-accounted jointly controlled entities, and the full inclusion of the value of properties managed by us, approximately U.S.$ 1.6 billion (NIS 6.2 billion) of which is not recorded in our financial statements) as of December 31, 2015. We acquire, manage, develop and redevelop well-located, supermarket-anchored neighborhood and community shopping centers in urban growth markets with high barriers to entry and attractive demographic trends. Our properties are typically located in countries characterized by stable GDP growth, political and economic stability and strong credit ratings with notable exception of our emerging market operation in Brazil and Russia. As of December 31, 2015, over 95% of our occupied GLA was leased to retailers and the majority of our occupied GLA was leased to tenants that provide consumers with daily necessities and other non-discretionary products and services, such as supermarkets, drugstores, discount retailers, moderately-priced restaurants, hair salons, liquor stores, banks, dental and medical clinics and other retail spaces. Our shopping centers draw high levels of consumer traffic and have provided us with growing rental income and strong and sustainable cash flows through different economic cycles.

 

Additionally, in 2015 we have completed the disposal of our medical office buildings in the Unites States. We owned and operated our shopping centers in Brazil, Germany and Israel through private subsidiaries. Throughout 2015, we continued to acquire properties in Brazil. Our broad geographical footprint supports our growth strategy by giving us access to opportunities around the world, allowing us to raise capital in different markets, and reducing the risks typically inherent in operating within a narrower geographic area.

 

We operate by establishing a local presence in a country through the direct acquisition of either individual assets or operating businesses. We either have built or seek to build a leading position in each market through a disciplined, proactive strategy using our significant experience and local market expertise. We execute this strategy by identifying and purchasing shopping centers that are not always broadly marketed or are in need of redevelopment or repositioning, acquiring high quality, cash generating shopping centers, selectively developing supermarket-anchored shopping centers in growing areas and executing strategic and opportunistic mergers and acquisitions. As a result, our real estate businesses range from new operations with a small number of properties to large, well-established public companies, representing a range of return and risk profiles. We continue to leverage our expertise to grow and improve operations, maximize profitability, and create substantial value for all shareholders. By implementing this business model, we have grown our GLA from 3.6 million square feet as of January 1, 2000 to approximately 71 million square feet as of December 31, 2015.

 

Our Competitive Strengths

 

Necessity-driven asset class

The substantial majority of our rental income is generated from shopping centers with supermarkets as their anchor tenants that drive consistent traffic flow throughout various economic cycles. A critical element of our business strategy is to have market-leading supermarkets as our anchor tenants. During the global economic downturn in 2008 and 2009, our average occupancy rate was 94.5% and 93.6%, respectively, and our average same property NOI, excluding foreign exchange fluctuations, increased by 3.1% from 2008 to 2009. From 2009 to 2010 it increased by 3.6%, 4.0% from 2010 to 2011, 3.9% from 2011 to 2012, 3.4% from 2012 to 2013 and 1.7% from 2013 to 2014. In the year ended December 31, 2015, average same property NOI decreased by 0.5% from the year ended December 31, 2014. For further information, please see “Item 5 – Operating and Financial Review and Prospects – Operating Results – Results of operations – Same Property NOI.” Our supermarket-anchored shopping centers are generally well-located in densely populated urban growth markets with high barriers to entry and attractive demographic trends in countries that have stable GDP growth, political and economic stability and strong credit ratings. The high barriers to entry generally result from a scarcity of commercial land, the high cost of new development or limits on the availability of shopping center properties imposed by local planning and zoning requirements. These prime locations attract high-quality tenants seeking long-term leases, which provide us with high occupancy rates, favorable rental rates and stable cash flows.

 

Diversified global real estate platform across over 20 countries

We focus our investments primarily on developed economies, including the United States, Canada, Finland, Sweden, Norway, Poland, the Czech Republic, and Israel. As of December 31, 2015, our asset base included 451 properties totaling approximately 71 million square feet of GLA. Approximately 91% of our net operating income, or NOI, on a proportionate consolidation basis, for the year ended December 31, 2015 was derived from properties in countries with investment grade credit ratings as assigned either by Moody's or Standard & Poor's, and 65% of our NOI on a proportionate consolidation basis for the year ended December 31, 2015, was derived from properties in countries with at least AA+ ratings as assigned by Standard & Poor's. We believe that our geographic diversity provides Gazit-Globe with flexibility to allocate its capital and improves our resilience to changes in economic conditions and the cyclicality of markets, enabling us to apply successful ideas and proven market strategies in multiple countries. Our global reach, together with our local management, enables us to make accretive acquisitions to expand our asset base both in countries where we already own properties and in countries where we do not. For example, during the global economic downturn in 2008 and 2009, we used the opportunity to invest an aggregate of approximately U.S.$ 3.8 billion to acquire, develop, and redevelop new shopping centers and other properties, to initially purchase interest in Atrium, to increase our holdings in our public subsidiaries and to repurchase our debt securities at a significant discount to par value.

 

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Proven business model implemented in multiple markets driving growth

The business model that we have developed and implemented over the last 20 years, whereby we own and operate our properties through our public and private subsidiaries and affiliates, has driven substantial and consistent growth. We leverage our expertise to grow and improve the operations of our subsidiaries, maximize profitability, mitigate risk and create value for all shareholders. We enter urban growth markets that are densely populated, with high barriers to entry, by acquiring and developing well-located, supermarket-anchored shopping centers. We continue to expand our business and drive growth while optimizing our capital structure with respect to our assets. For example, in the United States, Equity One acquired its first property in 1992 and became a publicly-traded REIT listed on the New York Stock Exchange in 1998. We continued to expand Equity One's platform through internal growth and acquisitions. As of December 31, 2015, Equity One owned 127 properties with a GLA of 16.7 million square feet. Similarly, our business in Canada began in 1997 with the purchase of eight properties, followed by the acquisition of a controlling stake in First Capital, a Toronto Stock Exchange-listed company in 2000. We have since expanded to 158 properties (including properties under development) in Canada with a GLA of 23.8 million square feet as of December 31, 2015. Following our successes in both the United States and Canada, we identified new and attractive regions and expanded by replicating this business model. For example, we successfully applied our model in Northern Europe through Citycon and in Central and Eastern Europe through Atrium, resulting in improved performance of the shopping centers acquired in those regions.

 

Leading presence and local market knowledge

We have a leading presence in most of our markets, which helps us generate economies of scale and marketing and operational synergies that drive profitability. Leveraging our leading market positions and our local management teams' extensive knowledge of these markets gives us access to attractive acquisition, development and redevelopment opportunities while mitigating the risks involved in these opportunities. In addition, our senior management provides our local management teams with strategic guidance to proactively manage our business, calibrated to the needs and requirements of each local management team. This approach also allows us to address the needs of our regional and national tenants and to anticipate trends on a timely basis.

 

Business and Growth Strategies

 

Our objective is to create value through long-term maximization of cash flow and capital appreciation, through continuous improvement of our properties. The strategies we intend to execute to achieve this objective include:

 

Continue to focus on supermarket-anchored shopping centers.

We will continue to concentrate on owning and operating high quality supermarket-anchored neighborhood and community shopping centers and other necessity-driven real estate assets predominantly in densely-populated areas with high barriers to entry and attractive demographic trends in countries with stable GDP growth, political and economic stability and strong credit ratings. By maintaining this focus, we will seek to keep the occupancy and NOI performance of our properties consistent through different economic cycles. We believe that this approach, combined with the geographic diversity of our current properties and our conservative approach to risk, will provide growing long-term returns. We intend to continue to actively manage and grow our presence in each region in which we operate by increasing the size and quality of our asset base. We will continue to operate through publicly and privately-held subsidiaries and affiliates in order to maximize our ability to access capital directly or through our subsidiaries and affiliates with respect to our properties in particular countries and to diversify the markets in which we operate globally with lower capital investment levels.

 

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Pursue high growth opportunities to complement our stable asset base.

We intend to continue to expand into new high growth urban markets and other high growth necessity-driven asset types that generate strong and sustainable cash flow using our experience developed over the past 20 years in entering new markets, to continue to assess opportunities, including the establishment of new real estate businesses, the acquisition of real estate companies and properties, primarily supermarket-anchored shopping centers and also other necessity-driven assets. In particular, while we currently have no specific plans to expand into new geographic markets, we will seek to prudently expand into politically and economically stable countries with compelling demographics through a thorough knowledge of local markets. For example, In July 2015, Citycon completed the acquisition of Sektor Gruppen AS (“Sektor”) for a total consideration of EUR 1.5 billion (NIS 6.5 billion). Sektor is a private company that focuses on the ownership, management and development of supermarket-anchored shopping centers in Norway and is the second largest player in this sector in Norway. We will also seek opportunities in other necessity-driven asset classes in order to drive shareholder value across a range of necessity-driven assets.

 

We also may selectively recycle capital from time to time, including from our private subsidiaries. During 2015 ProMed in the United States sold 4 medical office buildings for an aggregate U.S.$ 193 million (in comparison the Company sold 12 medical office buildings in 2014 in consideration of U.S.$ 405 million). Similarly, Gazit Germany disposed of three properties during 2014 for an aggregate amount of EUR 92 million.

 

Enhance the performance of existing assets.

We continually seek to enhance the performance of our existing assets by repositioning, expanding and redeveloping our existing properties. We believe that improving our properties makes them more desirable for both our supermarket anchor tenants and our other tenants, and drives more consumers to our properties, increasing occupancy and our rental income. We continue to actively manage our tenant mix and placement, re-leasing of space, rental rates and lease durations. We will focus on attracting more consumers to our properties by using advertising and promotions, building the branding of our shopping centers and providing a more consumer-friendly experience, for example, by improving our tenants' locations. We believe that the repositioning of our properties and our active management will improve our occupancy rates and rental income, lower our costs and increase our cash flows.

 

Selectively develop new properties in strategic locations.

We intend to leverage our experience in all stages of the development and ownership of real estate to continue to selectively develop new properties in our current markets and in new markets. We intend to continue our disciplined approach to development which is characterized by developing supermarket-anchored properties for specific anchor tenants in locations that we believe have high barriers to entry, thereby significantly decreasing the risk associated with development of real estate. We analyze development prospects utilizing our local market expertise and familiarity with tenants. From January 1, 2013 through December 31, 2015, we invested approximately NIS 5.2 billion (U.S.$ 1.3 billion) in development, redevelopment, and expansion projects as well as in other expenditures (including leasing expenditures, tenant inducements, tenant improvements, and other capital expenditures), including approximately NIS 3.1 billion (U.S.$ 0.8 billion) in development and redevelopment projects (excluding attributed lease expenditures) representing yearly average investment of approximately U.S.$ 118 per square foot.

 

Proactively optimize our property base and our allocation of capital.

Using the expertise of our local management, we carefully monitor and optimize our property base by taking advantage of opportunities to purchase and sell properties. Proactive management of our property base allows us to use our resources prudently and recycle our capital when we determine that more accretive opportunities are available. We may determine to sell a property or group of properties for a number of reasons, including a determination that we are unable to build critical mass in a particular market, our view that additional investment in a property would not be accretive or because we acquired non-core assets as part of a larger purchase. We plan to continue to seek creative structures through which to enhance our property base or divest non-core properties and allocate our capital. We recycled this capital to make new core acquisitions in high-density urban markets and deleverage our balance sheet. In 2014, we began a similar process of capital recycling through the sale of assets of ProMed, which was completed in 2015, and Gazit Germany. During 2015 our public subsidiaries also disposed non-core assets, for example, commencing in January 2015 through to the date of approval of this report, Atrium has completed the sale of 87 small retail properties across the Czech Republic, with an aggregate area of 280 thousand square meters for a total consideration of EUR 185.6 million. We may also use joint ventures to enter into new markets where we are not established to access attractive opportunities with lower capital risk.

 

For a breakdown of the location and type of our properties, see "Property, Plants and Equipment—Our Properties" below.

 

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Properties under Development

 

We had 27 properties under development or redevelopment as of December 31, 2015. The following table summarizes our properties under development, redevelopment and expansion as of December 31, 2015:

 

Region  Number of Properties (1)   Estimated Total GLA (sq. ft. in thousands)   Total investments as of December 31, 2015 (U.S.$ in thousands)   Cost to Complete (U.S.$ in thousands) 
Development                
Canada   3    1,335    238,083    82,266 
Northern Europe   1    43    16,914    26,653 
Israel   1    65    19,477    2,307 
Brazil   1    334    67,401    14,352 
Total Development   6    1,777    341,875    125,578 
Redevelopment (2)                     
United States   9    851    103,537    147,617 
Canada   8    2,165    544,593    80,728 
Northern Europe   3    700    118,913    164,018 
Central and Eastern Europe   1    86    24,346    33,829 
Total Redevelopment   21    3,802    791,389    426,192 
Total Development and Redevelopment   27    5,579    1,133,264    551,770 

 

 

(1)Excludes land for future development.
(2)Including properties under expansion.

 

The following table summarizes the rental income and NOI of our shopping center and healthcare properties for the years ended December 31, 2013, December 31, 2014, and December 31, 2015. For revenues from the sale of buildings, land, and construction work performed, and for gross profit from the sale of buildings, land and construction work performed, see "Item 5—Operating and Financial Review and Prospects—Operating Results—Other Business."

 

      Year Ended December 31,  
      2013   2014   2015   2013   2014   2015 
      Rental Income    NOI  
Property type  Region  (NIS in thousands) (5)    (NIS in thousands) (5)  
Shopping Centers                                 
   United States   1,210    1,188    1,341    874    874    988 
   Canada   2,216    2,100    2,001    1,396    1,318    1,254 
   Northern Europe(1)   1,406    1,366    1,453    964    948    989 
   Central and Eastern Europe (2)   1,345    1,373    1,213    915    968    854 
   Germany   81    75    38    53    47    20 
   Israel (3)   211    216    206    159    162    152 
   Brazil   34    40    70    18    30    56 
Healthcare                                 
   Medical office buildings (4)   200    128    30    147    94    21 
Other Properties                                 
   Other properties   6    -    -    1    -    - 
Total      6,709    6,486    6,352    4,527    4,441    4,334 
Adjustment to Exclude Non-Consolidated Properties (6)   (1,563)   (1,573)   (202)   (1,070)   (1,112)   (150)
Total Consolidated Properties   5,146    4,913    6,150    3,457    3,329    4,184 

 

 

(1)Starting from 2013, includes rental income and NOI of Kista Galleria which was purchased with a 50% partner and accounted according to the equity method.
(2)We operate in Central and Eastern Europe through Atrium which was presented in the financial statements according to the equity method until the beginning of 2015, following the acquisition of 52 million Atrium’s shares, in January 2015, by the company, the company become the sole controlling shareholder and start to consolidate Atrium’s financial statements. For further information, please also refer to Note 9c to our audited consolidated financial statements included elsewhere in this Annual Report.
(3)Includes a shopping center in Bulgaria, which is owned by and operated through Gazit Development, a private subsidiary.

 

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(4)Our medical office buildings was located in the United States through ProMed. During 2015, ProMed sold 4 medical office buildings to third parties in consideration of U.S.$ 193 million. Upon the completion of the sale of said buildings, the Company is no longer active in the medical office buildings sector in the United States.
(5)Convenience translation of December 31, 2015 figures into U.S. dollars is provided in chart under "Properties, Plants, and Equipment—Our Properties" below.
(6)Through 2014 primarily with respect to properties in Central and Eastern Europe which was presented in the financial statement according to equity method and presented above at 100% under the assumption of full consolidation. Starting from 2013, the above also includes Kista Galleria which was purchased with a 50% partner and is also accounted for with the equity method.

 

Our Tenants and Leases

 

We have strong relationships with a diverse group of market-leading tenants in the regions in which we operate. For the year ended December 31, 2015, our top three tenants (by base rent) represented 7.1% of our consolidated rental income. Our properties are subject to over 15,000 leases.

 

The following table sets forth as of December 31, 2015 the anticipated expirations of tenant leases for our properties for each year from 2016 through 2024 and thereafter(1):

 

   Number of Expiring Leases   GLA of Expiring Leases (thousands of sq. ft.)   Percent of Leased GLA   Percent of Total GLA   Expiring Rental Income (U.S.$ in thousands)   Percent of Total Rental Income 
Month-to-Month   442    636    1.0%   1.0%   14,429    0.8%
2016   3,742    7,622    11.4%   11.0%   181,743    11.6%
2017   2,292    7,900    11.9%   11.4%   195,247    12.5%
2018   2,269    7,777    11.7%   11.2%   206,566    13.2%
2019   1,832    7,778    11.7%   11.2%   202,207    12.9%
2020   1,677    6,888    10.4%   9.9%   171,765    11.0%
2021   598    4,354    6.6%   6.3%   108,817    6.9%
2022   438    3,669    5.5%   5.3%   95,464    6.1%
2023   364    3,221    4.8%   4.6%   84,064    5.4%
2024   333    2,249    3.4%   3.2%   61,432    3.9%
Thereafter   1,196    14,368    21.6%   20.7%   244,180    15.7%
Vacant   NA    2,976    NA    4.2%   NA    NA 
Total   15,183    69,438    100.0%   100.0%   1,565,914    100.0%

 

 

(1)Excluding joint venture of Citycon and Atrium that is accounted for according to the equity method with 1.4 million square feet.

 

We have 7.6 million, 7.9 million, and 7.8 million square feet of GLA in our consolidated portfolio with leases expiring in 2016, 2017, and 2018, respectively. We expect to achieve moderate increases in average rent spreads in North America as we renew or re-lease these spaces while in East and Central Europe we expect a slight decrease and in North Europe it remains relatively flat. In addition, we believe that the information provided in “Item 5—Operating and Financial Review and Prospects—Operating Results—Shopping Centers.” regarding the rental rates of renewed leases compared with the prior lease rental rates, provides certain indications of the market rents across our markets.

 

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The following table provides a breakdown of the largest tenants of our principal investees by geographical segment:

 

Subsidiary   Geographical Region   Anchor/Major Tenants
Equity One  

United States

Florida, Georgia, Louisiana, North Carolina, California, Connecticut, Massachusetts, New York and Maryland

  Albertsons, Bed Bath & Beyond, Barneys New York, CVS Pharmacy, LA Fitness, Publix, Sports Authority, Stop & Shop, The Gap Inc. and TJ Maxx.
         
First Capital  

Canada

Greater Toronto Area (including the Golden Horseshoe Area and London); Greater Calgary Area; Greater Edmonton Area; Greater Vancouver Area (including Vancouver Island); Greater Montreal Area; Greater Ottawa Area (including Gatineau region); and Quebec City.

  Canadian Tire, CIBC, Dollarama, GoodLife Fitness, Loblaw Companies, Metro, RBC Royal Bank, Sobey's, TD Canada Trust and Walmart
         
Citycon  

Northern Europe

Finland, Norway, Sweden, Denmark, and the Baltics

  ICA Gruppen AB, NorgesGruppen, Kesko Corp., S-Group, Varner Group
         
Atrium  

Central and Eastern Europe

Poland, the Czech Republic, Slovakia, Russia, Hungary, Romania and Latvia

  AFM, Ahold, ASPIAG, EMF, Hennes & Mauritz, Inditex, Kingfisher, LPP, Metro Group, Tengelmann Group
         
Gazit Germany   Germany   Aldi, Edeka Group, Inter Continental Hotels Group, and HIT
         
Gazit Development   Israel   Cinema City, Homecenter, Super Sal, Super-pharm, and VIM Clubs
         
Gazit Brazil  

Brazil

Sao Paulo and Rio Grande do Sul

  Cinepolis, Cinesystem, Extra Itaim Hipermercados, Forever 21, Lojas Americanas, Renner, Runner (gym), Tok Stok, UNG, and Zaffari

 

Most of our shopping centers in the United States and Canada have large supermarkets or retailers as the anchor, with outdoor parking areas and many smaller shops that depend on the traffic generated by the anchor. They attract and cater to residents of an expanded or expanding population area. On the other hand, our shopping centers in Europe, more typically in the Nordic region, and in Brazil are anchored by hypermarkets which combine the function of both grocery stores and retailers. They tend to be located in urban cities and are comprised of one or more buildings forming a complex of retail-oriented shops with indoor parking garages. Consequently, our properties in the Nordics tend to have higher asset values and rental rates per square foot compared to our North American properties.

 

Medical Office Buildings

 

ProMed

From 2006 through 2015, we owned and operated medical office buildings in the United States through our wholly-owned subsidiary, ProMed. During the reporting period, ProMed sold to third parties its remaining four medical office buildings in consideration for U.S.$ 193 million (NIS 750 billion) and upon the completion of the sale of said buildings, the Company is no longer active in the medical office buildings sector in the United States.

 

For the year ended December 31, 2015 and the year ended December 31, 2014, ProMed's properties generated rental income in the amount of U.S.$ 8 million and U.S.$ 36 million, respectively.

 

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Development and Construction of residential projects in Israel and Eastern Europe

 

Through January 2016, when we sold our entire stake in Dori Group, we were engaged in the development and construction of primarily residential projects in Israel and in Eastern Europe through Gazit Development's investment in Dori Group, a public company listed on the TASE. Gazit Development holds, as of December 31, 2015, 84.9% of the share capital and voting rights in Dori Group. We refer to Dori Group and its subsidiaries, including Dori Construction (83.46% of which is owned by Dori Group as of December 31, 2015) which is also traded on the TASE, and its wholly-owned subsidiaries and related companies, as Dori Group. Dori Group's primary businesses are the development and construction primarily of residential projects in Israel and Eastern Europe.

 

Seasonality of the Company’s main business

 

Our main business operations are not materially impacted by seasonality. Citycon, however, has in the past disclosed that its operations benefited from milder weather.

 

Investments in India

 

In August 2007, we entered into an agreement to invest in Hiref International LLC, or Hiref, a real estate fund in India. Hiref was sponsored by HDFC Group, one of the largest financial services companies in India. Hiref invests directly and indirectly in real estate companies that operate in the development and construction field and in similar fields, including in special economic and trade zones, technological parks, combined municipal complexes, industrial parks, and buildings in the accommodation and leisure sector, such as hotels, residential buildings and commercial and recreation centers. Our investment commitment in Hiref is U.S.$ 110 million and through December 31, 2015 we invested U.S.$ 95.2 million. As of December 31, 2015, Hiref is engaged in investment agreements for eleven projects with a total investment commitment of U.S.$ 486 million which has been fully invested. For more details, please refer to Note 11 of our audited consolidated financial statements included elsewhere in this Annual report.

 

Marketing

 

From time to time we use various marketing channels for the purpose of leasing our properties, principally advertising at the relevant property location; ongoing contacts with realty brokers; advertising concentrated on local and industry media; participation in sector-orientated exhibitions and conventions; posting lists of available properties on our websites and the employment of staff whose principal roles are the marketing and leasing of our properties. The cost of such marketing activities has not been and is not expected to be material to us.

 

Intellectual Property

 

Gazit-Globe owns a number of trademarks in Israel, including our "G" and "LOCATION, LOCATION, LOCATION" designs and has applied for a number of trademarks in Israel, including "AAA," "LOCATION, LOCATION, LOCATION," "GAZIT-GLOBE" (in Hebrew and English) and for trademarks in the U.S., Canada, Brazil and Russia for our "LOCATION, LOCATION, LOCATION" design.

 

Government Regulations

 

Our operations and properties, including our construction and redevelopment activities, are subject to regulation by various governmental entities and agencies of the country or state where that project is located in connection with obtaining and renewing various licenses, permits, approvals and authorizations, as well as with ongoing compliance with existing and future laws, regulations and standards. Each project must generally receive administrative approvals from various governmental agencies of the country or state where that project is located. No individual regulatory body, permit, approval or authorization is material to our business as a whole.

 

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C.Organizational Structure

 

We were incorporated in May 1982. As discussed above, we operate our business through public and private subsidiaries in our five principal geographic regions: the U.S., Canada, Europe, Israel and Brazil. The following chart summarizes our corporate structure as of December 31, 2015:

 

 

 

For the country of incorporation of each subsidiary, see "Appendix A to Consolidated Financial Statements–List of Major Group Investees as of December 31, 2015."

 

Our public subsidiaries are listed on stock exchanges in their local regions and are subject to oversight by their respective boards of directors. We seek to balance our role as each company's most significant shareholder with the recognition that they are public companies in their respective countries with obligations to all of their shareholders. Chaim Katzman, the Chairman of our Board serves as the Chairman of the Board of our major public subsidiaries—Equity One, Citycon and Atrium—and our Executive Vice Chairman of the Board, Dor J. Segal, serves on the boards of two of our public subsidiaries—Equity One and First Capital (as Chairman). Other individuals affiliated with us also serve on the boards of our public subsidiaries. As public companies, our public subsidiaries are generally required to have a number of directors who meet independence requirements under local law and stock exchange rules. As a result of this requirement and other factors, individuals affiliated with us represent less than a majority of the members of the boards of directors of each of these entities. We are also active in seeking, and assisting our public subsidiaries in engaging, experienced executive management. Beyond providing oversight and guidance through our board representation, the level of our involvement with each public subsidiary varies based on each subsidiary's general business needs, with greater guidance provided to those with less well-established operations or in connection with significant transactions, such as an acquisition.

 

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D.Property, Plants and Equipment

 

Our Properties

 

We own interests in 451 properties in over 20 countries. The following tables summarize our properties as of December 31, 2015:

 

   As of December 31, 2015   Year Ended December 31, 2015   As of December 31, 2015 
Region  Total No. of Properties (1)   Gazit-Globe’s Ownership Interest   GLA (1)   Occupancy   Rental Income (2)   Percent of Rental Income   Net Operating Income (2)   Same Property NOI Growth (3)   Properties Fair
Value (4)(5)
 
           (thousands of sq. ft.)       (U.S.$ in thousands)       (U.S.$ in thousands)       (U.S.$ in thousands) 
Shopping Centers                                    
United States (6)(7)   127    38.4%   16,668    96.0%   343,622    21%   253,198    3.8%   4,607,489 
Canada   155    42.2%   23,830    94.8%   512,859    32%   321,430    4.1%   5,577,006 
Northern Europe (1)   62    43.4%   14,386    96.8%   372,256    23%   253,479    1.1%   5,111,852 
Central and Eastern Europe (1)   77    54.9%   13,154    96.9%   310,917    19%   218,813    (10.6%)(8)   2,945,065 
Germany   4    100.0%   530    84.5%   9,704    1%   5,122    (4.9%)   105,505 
Israel (9)   11    84.7%   1,386    96.9%   52,910    3%   38,946    0.1%   626,235 
Brazil   6    100.0%   837    87.2%   17,852    1%   14,235    -    195,129 
Healthcare                                             
Medical office (10)   -    -    -    -    7,715    -    5,378    -    - 
Other Properties                                             
Land for future development   -    -    -    -    -    -    -    -    465,266 
Properties under development (11)   6    -    -    -    -    -    -    -    204,102 
Other   3    -    5    -    -    -    -    -    9,583 
Total   451    -    70,796    95.8%   1,627,835(14)   100%   1,110,601(15)   (0.5%)(13)   19,847,232(12)

 

 

(1)Amounts in this table with respect to shopping centers in Central and Eastern Europe includes the 75%-held joint property, Pankrac shopping Centre which is accounted for using the equity method, is presented above at 100%. Likewise, in Northern Europe, the 50%-held joint venture property, Kista Galleria which is accounted for using the equity method, is presented above at 100%.
(2)Represents amounts translated into U.S.$ using the exchange rate in effect on December 31, 2015 (U.S.$ 1.00 = NIS 3.902).
(3)Same property amounts are calculated as the amounts attributable to properties which have been owned and operated by us, and reported in our consolidated results, for the entirety of the relevant periods excluding the impact of currency exchange rate fluctuation. Therefore, any properties either acquired after the first day of the earlier comparison period or sold, contributed or otherwise removed from our consolidated financial statements before the last day of the later comparison period are excluded from same properties. Same property NOI growth excludes 37 properties that are considered under redevelopment and expansion.
(4)Investment properties and investment properties under development are measured at fair value with changes in their fair value recognized as a gain (loss) in the income statement. For a detailed description of the accounting treatment of investment properties and investment properties under development, the valuation methods used by the Group and the extent external appraisals are performed, see "Item 5—Operating and Financial Review and Prospects—Critical Accounting Policies—Investment Property and Investment Property Under Development".
(5)Includes 100% of the fair value of the properties of entities whose accounts are consolidated in Gazit-Globe's financial statements. Includes 100% of the fair value of the properties Pankrac shopping Centre and Kista Galleria, each of which are presented according to the equity method in Gazit-Globe's financial statements with respect to the year ended December 31, 2015.
(6)As of December 31, 2015, includes six office, industrial and residential properties.
(7)Occupancy data excludes the occupancy of six office, industrial and residential properties. The properties are excluded because they are non-retail properties that are not considered part of Equity One's core portfolio. If these properties were included in the occupancy data and include development and redevelopment properties, the occupancy rate as of December 31, 2015 would be 94.1%.

 

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(8)Excluding Russia, the change in same property NOI rose by 0.5%.
(9)Israel includes one income-producing property in Bulgaria
(10)Our medical office buildings was held through ProMed, our wholly-owned subsidiary. During 2015, ProMed sold four medical office buildings to third parties in consideration of U.S.$ 193 million. Upon the completion of the sale of said buildings, the Company is no longer active in the medical office buildings sector in the United States.
(11)As of December 31, 2015, total GLA under development was 1.8 million square feet.
(12)This amount would be approximately NIS 80.2 billion (U.S.$ 20.6 billion) if it included 100% of the fair value of properties operated by us through joint ventures or other management arrangements which are accounted for using the equity method of accounting, approximately U.S.$ 1.6 billion of this amount is not recorded in our financial statements and includes mainly Pankrac shopping Centre and Kista, which however, are included in the table (see note 5 above). This amount represents the following amounts recorded in our consolidated statements of financial position as of December 31, 2015: NIS 70,606 million (U.S.$ 18,095 million) of investment property, NIS 2,587 million (U.S.$ 663 million) of investment property under development and NIS 826 million (U.S.$ 212 million) of assets classified as held for sale.
(13)Excluding Russia, the change in same property NOI rose by 2.4%.
(14)This amount includes rental income from equity-accounted joint ventures in the amount of U.S.$ 52 million.
(15)This amount includes net operating income from equity-accounted joint ventures in the amount of U.S.$ 39 million.

 

Environmental

 

Due to our ownership of real estate, we are subject to national, state and local environmental legislation in every jurisdiction in which we operate. Under this legislation, we could be held responsible for, and have to bear, the clearance and reclamation costs in respect of various environmental hazards, pollution, and toxic materials that are found at, or are emitted from, our properties and could also have to pay fines and compensation in respect of such hazards. These costs could be material. Certain environmental regulations lay strict liability for environmental hazards on the holders or owners of the properties. Failure to remove these hazards could have a material adverse effect on our ability to sell, rent or pledge the properties at which such hazards are found, and could even result in a lawsuit. As of December 31, 2015, we were aware of a number of properties that require study or repair relating to environmental issues. We do not believe, however, that such environmental issues will have a material adverse effect on our financial position. Nevertheless, we are unable to guarantee that the information in our possession reveals all potential liabilities in respect of environmental hazards, or that former owners of properties we have acquired had not acted in a manner that contravenes relevant provisions of environmental laws, or that due to some other reason a material breach of such provisions has not been, or will not be, committed. Furthermore, future amendments to environmental laws could have a material adverse effect on our position, from both an operational and a financial perspective.

 

We seek to conduct our business in an environmentally-friendly manner. We are investing resources in environmental conservation and in the construction of environmentally-friendly shopping centers. We believe that, in the long-term, the consumers, the retailers and we will benefit from these investments. For example, we expect that the use of green energy and the recycling of various materials will benefit the community, preserve the environment, and in the long-term decrease our costs. In addition, we believe that the growing awareness of the need to preserve the environment will lead the population to prefer visiting "green" shopping centers over regular shopping centers, thus increasing the value of such properties.

 

Leasing expenditures

 

Leasing expenditures, such as tenant improvement costs and leasing commissions, are not material to our business as a whole and therefore additional disclosure would not be meaningful to prospective investors. See also ""Item 4—Information on the Company—Business Overview—Government Regulations".

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

None.

 

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ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

A.Operating Results

 

We believe we are one of the largest owners and operators of supermarket-anchored shopping centers in the world. Our 451 properties have a GLA of approximately 71 million square feet and are geographically diversified across over 20 countries. We operate properties with a total value of approximately U.S.$ 20.6 billion or NIS 80.2 billion (including the full value of properties that are consolidated and of equity-accounted jointly controlled entities, approximately U.S.$ 1.6 billion, or NIS 6.2 billion, of which is not recorded in our financial statements) as of December 31, 2015. We acquire, develop and redevelop well-located, supermarket-anchored neighborhood and community shopping centers in urban growth markets with high barriers to entry and attractive demographic trends. Our properties are typically located in countries characterized by stable GDP growth, political and economic stability and strong credit ratings. As of December 31, 2015, over 95% of our occupied GLA was leased to retailers and the majority of our occupied GLA was leased to tenants that provide consumers with daily necessities and other non-discretionary products and services.

 

Our properties are owned and operated through a variety of public and private subsidiaries and affiliates. Our primary public subsidiaries are Equity One in the United States, First Capital in Canada, Citycon in Northern Europe, and Atrium in Central and Eastern Europe. Additionally, we own and operate our shopping centers in Brazil, Germany and Israel through private subsidiaries.

 

Our strategy, as undertaken over the years, is to focus on growing its cash flow through the proactive management of our properties. Moreover, we actively focus on urban growth markets, in which it acquires dominant properties that the we assess will provide long-term growth opportunities. At the same time, we are working on selling non-core properties that it considers as having limited growth potential.

 

In addition, as part of our strategy, we examine alternatives to increase the private real estate component of our activity (operations that are not owned through public companies), which, in the opinion of our management, is expected to grow the cash flows received directly by the Company and is also likely to improve the Company’s costs structure by creating cost efficiencies and economies of scale. Moreover, it is the Company’s belief that increasing the number of properties that it directly owns is likely to strengthen its financial ratios, which, in turn, should improve the Company’s financial strength, leading to an upgrade in its debt rating and, consequently, to a reduction in its financial costs. Company management believes that the implementation of this policy will increase the return for shareholders.

 

We intend to continue our focus on owning and operating high quality supermarket-anchored neighborhood and community shopping centers and other necessity-driven real estate assets predominantly in densely-populated, urban growth markets with high barriers to entry and attractive demographic trends in countries with stable GDP growth, political and economic stability and strong credit ratings. By maintaining this focus, we will seek to keep the occupancy and NOI performance of our properties consistent through different economic cycles.

 

We intend to continue to prudently expand into new high growth markets in politically and economically stable countries with compelling demographics and other high growth necessity-driven asset types that generate strong and sustainable cash flow, using our experience developed over the past 20 years in entering new markets and through our thorough knowledge of local markets. We will use this experience and knowledge to continue to assess opportunities, including the establishment of new necessity-driven real estate businesses, the acquisition of real estate companies and properties, primarily supermarket-anchored shopping centers and also other necessity-driven assets.

 

We also intend to divest non-core properties and allocate our capital. During 2014 and 2015, our subsidiaries Gazit Germany and ProMed disposed of assets (the latter selling off its final remaining assets in the third quarter of 2015) in addition to our sale of other lower-tier secondary-market assets. In addition, during 2015 our public subsidiaries also disposed non-core assets, for example, commencing in January 2015 through to the date of approval of this report, Atrium has completed the sale of 87 small retail properties across the Czech Republic, with an aggregate area of 280 thousand square meters for a total consideration of EUR 185.6 million. We recycled this capital to make new core acquisitions in high-density urban markets and to deleverage our balance sheet.

 

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Factors Impacting our Results of Operations

 

Rental income. We derive revenues primarily from rental income. For the years ended December 31, 2015, 2014 and 2013, rental income represented 84%, 78% and 75% of our total revenues, respectively (85%, 83%, 80%, respectively, assuming full consolidation of equity-accounted jointly-controlled entities). Our rental income is a product of the number of income producing properties we own, the occupancy rates at our properties and the rental rates we charge our tenants.

 

Our rental income is impacted by a number of factors:

 

Global, regional and local economic conditions. The economic downturn of 2008 and 2009 resulted in many companies shifting to a more cautionary mode with respect to leasing. Potential tenants may be looking to consolidate, reduce overhead and preserve operating capital. The downturn also impacted the financial condition of some our tenants and their ability to fulfill their lease commitments which, in turn, impacted our ability in some of our regions to maintain or increase the occupancy level and/or rental rates of our properties. While the economy in most of our markets has improved since the downturn of 2008 and 2009, we are still facing macro-economic challenges in some of our markets, particularly in Europe which remains particularly vulnerable to volatility, and Russia which is suffering from significant economic and politic turmoil.

 

Scheduled lease expirations. As of December 31, 2015, leases representing 11.0% and 11.4% of the GLA of our properties will expire during 2016 and 2017, respectively. Our results of operations will depend on whether expiring leases are renewed and, with respect to renewed leases (including of equity-accounted joint ventures), whether the properties are re-leased at base rental rates equal to or above our current average base rental rates. We proactively manage our properties to reduce the risk that expiring leases are not renewed or that properties are not re-leased and to reduce the risk that renewals and re-leases are at base rental rates lower than our current average base rental rates. However, our ability to renew leases at base rental rates equal to or above our current average base rental rates is dependent on a number of factors, including micro- and macro-economic factors in the markets in which we operate.

 

Availability of properties for acquisition. We grow our property base through targeted acquisitions of properties. Our results of operations depend on whether we are able to identify suitable properties to acquire and whether we can complete the acquisition of the properties we identify on commercially attractive terms. Our results of operations also depend on whether we successfully integrate acquisitions into our existing operations and achieve the occupancy or rental rates we project at the time we make the decision to acquire a property. Our results of operations for the year ended December 31, 2015 were impacted by the acquisition of 28 income-producing properties and the disposition of 103 income-producing properties across our markets which resulted in a net increase in GLA of 0.96 million square feet. The results of operations for the year ended December 31, 2014 were impacted by the acquisition of 7 income-producing properties and the disposition of 59 income-producing properties across our markets which resulted in a net decrease in GLA of 3.1 million square feet.

 

Development and Redevelopment. Our results of operations also depend on our ability to develop new shopping centers and redevelop existing shopping centers in a timely and cost-efficient manner, since developed and redeveloped properties tend to generate higher rental rates, and to locate anchor tenants for these properties prior to development or redevelopment. For the year ended December 31, 2015, we completed the development and redevelopment of properties representing 0.9 million square feet of GLA. For the year ended December 31, 2014, we completed the development and redevelopment of properties representing 1.0 million square feet of GLA. For the year ended December 31, 2013, we completed the development and redevelopment of properties representing 0.8 million square feet of GLA.

 

Estimates for Expected Revenues and Costs in Dori Construction’s Projects. The preparation of our consolidated financial statements requires Dori Construction's and Dori Group's management to utilize estimates related to expected revenues and costs from their projects. However, these estimates require the use of Dori Construction and Dori Group management’s judgment and therefor may vary substantially from the actual revenues and costs ultimately attributed to such projects. Consequently, our results of operations may fluctuate as a result of such variance.

 

Other factors. Factors including changes in consumer preferences and fluctuations in inflation rates can affect the ability of tenants to meet their commitments to us. In addition, those factors and changes in interest rates, oversupply of properties, competition from other properties and prices of goods, fuel and energy consumption can affect our ability to continue renting our properties at the same rent levels.

 

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Change in fair value of our properties. Our results of operations, which are reflected in our financial statements based on IFRS, are impacted by changes in the fair market value of our properties. After initial recognition at cost, investment property is measured at fair value, which reflects market conditions at the balance sheet date. Gains or losses arising from changes in fair value of investment property are recognized in profit or loss when they arise. Accordingly, our results of operations will be impacted by such changes even though no actual disposition of assets took place and no cash or other value was received. Property valuation typically requires the use of certain judgments and assumptions with respect to a variety of factors, including supply and demand of comparable properties, the rate of economic growth in the location of the property, interest rates, inflation and political and economic developments in the region in which the property is located. For the year ended December 31, 2013, valuation gains from investment property and investment property under development were NIS 1.0 billion. For the year ended December 31, 2014, valuation gains from investment property and investment property under development were NIS 1.1 billion. For the year ended December 31, 2015, valuation gains from investment property and investment property under development were NIS 0.7 billion (U.S. $ 182 million).

 

Interest expense. Our results of operations depend on expenses relating to our debt service and our liquidity. In addition, our ability to acquire new assets is highly dependent on our ability to access capital in a cost efficient manner. The securities of Gazit-Globe and the securities of its major subsidiaries are traded on six international stock exchanges, and we have benefited from the flexibility offered by raising debt or equity on many of these public markets. We believe that this global access to liquidity provides us with the ability to pursue opportunities and execute transactions quickly and efficiently. A significant portion of our debt is fixed rate and fluctuations in our interest expense in a particular period typically result from changes in outstanding debt balances.

 

Functional currency and currency fluctuations. We operate globally in multiple regions and countries within each region. Our functional currency and our reporting currency is the New Israel Shekel. Our principal subsidiaries have the following functional currencies: Equity One—U.S. dollar, First Capital—Canadian dollar, Citycon—Euro and Atrium—Euro. The financial statements of these and our other subsidiaries and affiliates whose functional currencies are not the NIS are translated into NIS for inclusion in our financial statements. The resulting translation differences are recognized as other comprehensive income (loss) in a separate component of shareholders' equity under the capital reserve "foreign currency translation reserve". The translation resulted in the inclusion in our statement of comprehensive income (loss) of a loss of NIS 2.4 billion for the year ended December 31, 2013, a gain of NIS 1.1 billion for the year ended December 31, 2014 and a loss of NIS 3.8 billion (U.S.$ 983 million) for the year ended December 31, 2015. In addition to translation differences, we are exposed to risks associated with fluctuations in currency exchange rates between the NIS, the U.S. dollar, the Canadian dollar, the Euro and certain other currencies in which we conduct business. Our policy is to maintain a high correlation between the currency in which our assets are purchased and the currency in which the liabilities relating to the purchase of these assets are assumed in order to reduce currency risk. As part of this policy, we enter into cross currency swap transactions and forward contracts as part of this policy. However, these transactions are measured in the financial statements at their fair value and in some cases, these fair value changes are recognized in profit or loss which could materially impact our net income. Accordingly, during the year ended December 31, 2015 we recognized a NIS 699 million (U.S.$ 179 million) revaluation gain and during the year ended December 31, 2014 we recognized a NIS 190 million devaluation loss in profit or loss with respect to such derivatives. See also "Item 11–Quantitative and Qualitative Disclosures About Market Risk" for a discussion of our hedging activities.

 

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Shopping Centers

 

United States. In the United States, we acquire, develop, redevelop and manage shopping centers through our subsidiary Equity One, which is a REIT listed on the New York Stock Exchange. Equity One's properties are located primarily in the southeastern United States, mainly in Florida, Louisiana and Georgia, in the northeastern United States mainly in New York, Massachusetts, Maryland and Connecticut and on the west coast of the United States, mainly in California. The following data is presented on a fully consolidated basis without reflecting non-controlling interests:

 

     As of December 31, 
     2013   2014   2015 
  Our economic interest in Equity One   45.2%   43.3%   38.4%
  Shopping centers (1)   135    116    121 
  Other properties (2)   7    6    6 
  Properties under development   1    1    - 
  GLA (millions of square feet) (1)   18.4    16.2    16.7 
  Occupancy rate (3)   92.4%   95.0%   96.0%
  Average annualized base rent (U.S.$ per sq. ft.)   16.16    17.34    19.48 

 

 

(1)Includes properties of equity-accounted joint ventures.
(2)Comprised of office, industrial and residential properties.
(3)Excludes six office, industrial and residential properties. The properties are excluded because they are non-retail properties that are not considered part of Equity One's core portfolio. If these properties were included in the occupancy data and include development and redevelopment properties, the occupancy rate would be 92.5% as of December 31, 2013, 95.0% as of December 31, 2014 and 94.1% as of December 31, 2015.

 

     Year Ended December 31, 
     2013   2014   2015   2015 
     (NIS in millions except same
property NOI growth)
   (U.S.$ in millions) 
  Rental income   1,210    1,188    1,341    344 
  Net operating income   874    874    988    253 
  Increase in value of investment property and investment property under development, net   686    654    1,083    278 
  Same property NOI growth (%)   3.1    3.0    3.8    N/A 

 

The increase in Equity One's rental income to NIS 1,341 million (U.S.$ 344 million) for the year ended December 31, 2015 was driven primarily due to higher rents from new rent commencements and renewals and contractual rent increases as well as higher rents from development and redevelopment projects, and from properties acquired in 2015 and 2014 partially offset, by the disposition of properties during the years 2015 and 2014. The decrease in Equity One's rental income to NIS 1,188 million for the year ended December 31, 2014 from NIS 1,210 million for the year ended December 31, 2013 was driven primarily by the net disposition of properties during the years 2014 and 2013.

 

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The following table summarizes Equity One's leasing activities for the years ended December 31 2013, 2014, and 2015:

 

     Year Ended December 31, 
     2013   2014   2015 
  Renewals            
  Number of leases   256    261    249 
  GLA leased (square feet at end of period, in thousands)   1,320    1,386    1,936 
  New contracted annualized rent per leased square foot (U.S.$)   16.33    16.97    15.89 
  Prior contracted annualized rent per leased square foot (U.S.$)   14.76    15.66    14.51 
  New Leases               
  Number of leases   158    187    179 
  GLA leased (square feet at end of period, in thousands)   735    790    872 
  Contracted annualized rent per leased square foot (U.S.$)   26.55    18.67    19.94 
  Total New Leases and Renewals               
  Number of leases   414    448    428 
  GLA leased (square feet at end of period, in thousands)   2,055    2,176    2,808 
  Contracted annualized rent per leased square foot (U.S.$)   18.75    17.32    17.15 
  Expired Leases               
  Number of leases (1)   181    145    147 
  GLA of expiring leases (square feet at end of period, in thousands)   832    644    678 

 

 

(1) Excludes developments and non-retail properties.

 

Most of Equity One's leases provide for the monthly payment in advance of fixed minimum rent, the tenants' pro rata share of property taxes, insurance (including fire and extended coverage, rent insurance and liability insurance) and common area maintenance for the property. Utilities are generally paid directly by tenants except where common metering exists with respect to a property. In those cases, Equity One makes the payments for the utilities and is reimbursed by the tenants on a monthly basis. Generally, Equity One's leases prohibit its tenants from assigning or subletting their spaces. Generally, Equity One's leases contain escalations that occur at specified times during the term of the lease. These escalations are either fixed amounts, fixed percentage increases or increases based on changes to the Consumer Price Index. A small number of Equity One's leases also include clauses enabling it to receive percentage rents based on a tenant's gross sales above predetermined levels, which sales generally increase as prices rise, or escalation clauses which are typically related to increases in the Consumer Price Index or similar inflation indices. The leases also require tenants to use their spaces for the purposes designated in their lease agreements and to operate their businesses on a continuous basis. Some of the lease agreements with major or national or regional tenants contain modifications of these basic provisions in view of the financial condition, stability or desirability of those tenants. Where a tenant is granted the right to assign its space, the lease agreement generally provides that the original tenant will remain liable for the payment of the lease obligations under that lease agreement.

 

Throughout 2015 Equity One witnessed a gradual, continuous improvement in the economic conditions, the pace of the economic improvement varied among its different operating regions. Equity One assesses that the continued growth and the diversity of its property portfolio in quality urban markets, together with the lack of newly developed shopping centers, will continue to help it counter the effects of existing challenges to its business. It further anticipates that its same-property NOI excluding redevelopments for 2016 will reflect an increase of 3.25% to 4.25% as compared to 2015.

 

Equity One has 1.1 million square feet of GLA in its consolidated shopping center portfolio with leases expiring in 2016 with an average rent per square foot of U.S.$ 16.98 and another approximately 274.4 thousand square feet of GLA under month-to-month leases. Equity One expects to achieve moderate increases in average rent spreads as it renews or re-leases these spaces, although there is no assurance of such increases.

 

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Canada. In Canada, we acquire, develop and manage income-producing properties, comprised mostly of shopping centers, through our subsidiary First Capital, which is listed on the Toronto Stock Exchange. First Capital's properties are located primarily in growing metropolitan areas in the provinces of Ontario, Quebec, Alberta and British Columbia. The following data is presented on a fully consolidated basis without reflecting non-controlling interests.

 

     As of December 31, 
     2013   2014   2015 
  Our economic interest in First Capital   45.2%   44.0%   42.2%
  Income-Producing Properties   160    153    155 
  Properties under development   4    5    3 
  GLA (millions of square feet)   23.8    23.5    23.8 
  Occupancy rate   95.5%   96.0%   94.8%
  Average annualized base rent (C$ per sq. ft.)   17.96    18.42    18.84 

 

     Year Ended December 31, 
     2013   2014   2015   2015 
     (NIS in millions except same property NOI growth)   (U.S.$ in millions) 
  Rental income   2,216    2,100    2,001    513 
  Net operating income   1,396    1,318    1,254    321 
  Increase in value of investment property and investment property under development, net   217    137    125    32 
  Same property NOI growth (%) (1)   2.7    2.8    4.1    N/A 

 

 

(1)In 2013, 2014 and 2015 including expansion and development, same property NOI growth was 3.7%, 3.2%, and 3.7% respectively.

 

The decrease in First Capital's rental income to NIS 2,001 million (U.S.$ 513 million) for the year ended December 31, 2015 from NIS 2,100 million for the year ended December 31, 2014 was driven primarily by a lower average C$/NIS exchange rate in the year 2015 compared to the year 2014 offset by an increase in rental rates due to step-ups and lease renewals and lease surrender fees. The decrease in First Capital's rental income to NIS 2,100 million for the year ended December 31, 2014 from NIS 2,216 million for the year ended December 31, 2013 was driven primarily by a lower average C$/NIS exchange rate in the year 2014 compared to the year 2013 offset by acquisitions and completion of developments and redevelopments.

 

The following table summarizes First Capital's leasing activities for the years ended December 31, 2013, 2014, and 2015:

 

     Year Ended December 31, 
     2013   2014