Gazit Globe : Annual Report 2018

GAZITRESULTS2018

Our overall occupancy rate is 96.6% and over 96% in every one of our territories of operations. Net rental income in shekels from same properties grew this year by 3.1%. We are showing an increase of 15.4% in FFO per share that came to NIS 3.30 per share (net of our holding in Regency, which was sold during the year for approximately NIS 4 billion). Our private properties portfolio continues to bear fruit: in the last quarter of the year

Dear Shareholder Partners,

We are ending2018with impressive results.

the portfolio created an additional value in properties of NIS431 million and an increase in NOI of NIS 26 million, anincrease of 33.3%; this was the result of proactive management of the properties and improvements we carried out on them. These facts are the best testimony to the quality of the properties, the high demand for our properties, and the success of the strategy to focus on urban properties in areas with strong demographics. As of the end of 2018, over 75% of theGroup'sproperties are located in 14 metropolitan areas with heavy population concentrations.

MAIN ACTIVITIES IN 2018

During the year we continued to carry out the strategy we announced three years ago to increase the share of our private investments by acquiring irreplaceable properties at the same time as actively realizing our mature holdings in public companies, and reduction of the Company's leverage. Implementation of the strategy was illustrated through he following three steps:

• 1. In July we completed the sale of our holdings in Regency for an overall consideration in 2018 of NIS 4 billion. The proceeds from the disposals served to reduce theCompany'sdebt (Company expanded solo) by NIS 1.2 billion.

• 2. Up until this publication, we increased our portfolio share of private properties by NIS 2.3 billion and our holdings in our European companies by NIS 300 million (EUR 75million). The percentage of private holdings after these actions represent 37% oftheCompany'stotal assets value, while the

  Company'sleverage (expanded solo) reached

  53.9%.

3.

In February 2019 we announced that we were entering into conditional agreements for a strategic transaction in which we will realize, if completed, most of our holdings in FCR for a consideration of NIS 3.3 billion in cash. The transaction, if completed, reflects an annual IRR of 20% on our investment, which highlights the enormous value that Gazit Globe has created in the 19 years since it created and developed FCR. If the transaction is completed, theCompany'snet debt to total assets (expanded solo) is expected to dropsignificantly, reaching 43.5%, while totalprivately-held properties are expected to be at 46% of the total value of the Company's asset value.

ISRAEL

Our property portfolio in Israel showed growth in NOI of 4.6%, reaching NIS 160 million. Net rental income on same properties grew by 5.1% (together with renovations at G City) and occupancy stands at 98.6%. Investment in Israel represents 15% of theGroup'stotal assets value and we are working to expand that. Duringthe year we purchased the shopping center in Savyonthat covers 30 dunam (7.4 acre) for NIS 117 million. The shopping center gross leasable area is 3,200 sq. m., and we are currently acting to expand the leasable area by an additional 3,700 sq. m. In addition, based on our strategy to acquire urban properties in irreplaceable locations, we purchased two properties in the center of Tel-Aviv on Dizengoff Street for NIS 102 million. One, a branch of Bank Leumi, of 700 sq. m. at the very busy corner of Dizengoff and King George Streets, and the second, the iconic Chen Cinema, with 2,240 sq. m. located in the recently renovated Dizengoff Square, a historically preserved property with a wide range of possible uses that we are examining.

BRAZIL

At the beginning of the year we acquired for almost NIS 1 billion 70% of one of the most important properties in metropolitan Sao Paulo, Internacional, a mall with GLA of 77,000 sq. m., located in the town ofGuarulhos on the highway to the airport, where about30 million people visit each year. Since acquisition of the property 33 new stores have opened, including several international tenants, as well as 54 kiosks, with occupancy of 99%, and these actions will be reflected in both NOI and an increase in theproperty'svalue. There are additional rights of 200 thousand sq. m. in the property, which will be an additional growth engine for the Company in the future. In February 2019 we increased our holding in the property and acquired a further 10.1% for BRL 155 million, and currently the investment in Brazil represents 14% ofthe value of the Groups property portfolio.

CHEN THEATER

|TEL AVIV

At the same time as the acquisitions, Gazit Israel is also expanding through development and expansion of properties. During 2019 the development of the property in the Kochav Hazafon neighborhood of Tel-Aviv is expected to be completed, 2,200 sq. m. at an overall investment of NIS 105 million (applications have been filed to expand the property by a further 1,500 sq. m.), and the expansion of G City in Rishon Lezion by 13,000 sq. m. for a total investment of NIS 158 million. In parallel, we are currently working on submittingplans and obtaining approvals for two office buildings,one at the G Kfar Saba of 27,000 sq. m. and the other at the G City property in Rishon Lezion of 50,000 sq. m. These investments together with construction on lands we purchased close to the Kfar Saba property (to put up a branch and head offices of Decathlon) and in Neve Gan, Ramat Hasharon for the construction of a neighborhood shopping center, will increase investments in Israel by NIS 1 billion, and these will represent a much more significant component of theGroup'sportfolio.

Towards the end of the year we completed expansion of 9,000 sq. m. of the Mais Shopping property in Sao Paulo to 23,000 sq. m., which among other things will add to the property the offices of the government agency that issues identity cards, passports driving licenses etc., which is expected to increase footfall in the property by tens of thousands of visitors daily. Our Brazil portfolio continues to show excellent results. The NOI on the portfolio for the year came toBRL 170 million, an increase of 44.8% as comparedwith 2017, while net rental income from same properties grew by 14.3%. SaoPaulo'seconomy is booming, and we are seeing increased interest from international real estate players in investments in the city. We are certain this investment will continue to bear fruits in the future.

US

This year up until the reporting date we have increased our investments in the US through Gazit Horizon by USD 185 million, and in all we have invested in the US USD 320 million since the company was started. In the US too we are concentrating on super-urban areas and properties that we believe we can generate significantly higher yields from over time by leveraging dozens of years of experience and knowledge that we have accumulated in this market.

An example of such an improvement can already be seen in the Caesar's Bay property in Brooklyn. We purchased ourshare of the property (41%) in June 2018 for USD 50 million as part of the bankruptcy proceedings of the Toys R Us chain. The cap at acquisition was 4.1%. During February 2019 we completed various improvements, including signing an agreement with the Target chain to lease 90,000 sq. ft. and the lease of 3 further additional, smaller stores. Rental income in the property on account of these actions has doubled, yield on the cost of the property has risen to 8.6% and the asset value ofGazit'sshare has increased by USD 19 million, a rise of 38% in a period of just over half a year and with increased rental income that we collected in this period - of over 40%! In our opinion, this is just the beginning of enhancement of this property, which spreads over 57 dunam (14 acre) on which only 28,000 sq. m. are currently built up in an area of extremely high demand.

CENTRAL EUROPE - ATRIUM

In October 2018 we purchased the Wars Sawa Junior shopping center, located, in our opinion, in the most central location in Warsaw, for EUR 301.5 million. Next to this property are two metro stations through which 60 million people pass annually! In addition, during the last quarter we completed construction of about 26,000 sq. m. in Warsaw as part of the overall plan to develop 60,000 sq. m. in Warsaw for EUR 300 million. Earlier, Atrium completed its exit from Romania and Hungary with the sale of properties for EUR 176 million, a consideration that was on average 9% higher than the book values immediately prior to the disposals. These actions are part of the same strategy to concentrate on growing urban areas in central cities. Today 85% of our properties portfolio in Central Europe is concentrated in Poland and the Czech Republic, 50% of which is in the cities of Warsaw and Prague.

NORTHERN EUROPE - CITYCON

Completion of the construction of the Iso Omena shopping center and its connection to the metro inHelsinki in November 2017 ended with great success; the number of visitors to the property in 2018 increased by 74% to 20 million in the year andtenants'sales rose 17%. In September 2018, we opened a shopping center in Gothenburg, the second largest metropolitan area in Sweden. The shopping center, Molndal Galleria, with a gross leasable area of 26,000 sq. m., was opened at an overall investment of EUR 115 million. It is a modern shopping center with a mix of tenants that includes entertainment, restaurants, shopping, supermarkets and services. In January 2019 the work officially started of the new CEO, Scott Ball, a manager with dozens of years of experience in retail real estate, whom we"imported"from the US. Scott is expected to heavily focus on the management of the properties and we are sure he will march the Company forward in the process of becoming the Number One pan-Nordic player in the central cities of Scandinavia. At the same time as Scott, we appointed Henrica Ginstrom, a young, talented manager, as COO. Henrica started to work as an analyst at Citycon in 2011, and we are extremely proud of the skills that developed at us that give the Company managerial depth.

RETAIL REAL ESTATE TRANSACTIONS

This year too we suffered from a negative environment in the world of retail real estate. This atmosphere is well reflected in the share prices of income producing retail real estate companies - also here, though in my opinion unjustified. We are aware of e-commerce business, which is penetrating at variable rates into every area of our operations, as well as news of retail bankruptcies (which also happened in the past, at a more or less similar rate), which continue to grab headlines. On the other hand we are also seeing a growing phenomenon of Online retailers who are entering the Offline world. The use of Omni Channeling is not just another"tool"for retailers but a required communications channel with the customer and the competition for them. A further result of the changes in the commercial environment is the enormous importance of the physical store, especially in the Online world. If in the past the store was a sales point, today it is a showroom, it is a publicity campaign to create brand awareness, it is a logistics point - for distribution, returns, collections and exchanges. And lastly, the store is also a sales point. The importance of the physical store that is well located has only risen, and this rise emphasizes even more the high importance of location. Gazit adjusted itself to this world in good time and continues to do so every day. The locations of our properties, of which 75% are in prime locations in central metropolitan cities in every area of operations, the strong demographics around them with increasing purchasing power, the connections with different forms of transportation and mass transport, all lead to high numbers of visitors that are consistently growing, increasing sales and finally being expressed as growth in rental income. Allthat remains for me is to note the facts: sales at Iso Omena grew by 17%, sales from the propertyportfolio in Brazil increased 35%, occupancy rates are the highest ever - over 96% in every area of operations, and rental income from same properties has grown over the year by 3.1%.

LOOKING FORWARD

If and when the FCR transaction is completed, we will have completed two huge disposals in the last two years of our equity investments in two public companies to the order of NIS 8 billion in cash with a leveraged annual IRR of approximately 20% in each of these investments. We are determined to continue the execution of our strategy, to further increase the share of private real estate in strategic locations in key cities, with the focus on North America, while lowering leverage. The proceeds of the transactions will be directed first and foremost to North America where we have management with dozens of years of experience, as well as in-depth acquaintance with the players in the local real estate market. We expect to grow our investments in the US over the next three years so that our US portfolio will represent 20-25% of theGroup'sassets portfolio. We will continue to enhance and expand our real estate portfolio in Israel as described above, and will act to further enhance the value of our existing portfolio in Brazil, while limiting our exposure in this region, to 14% of our property portfolio, and in Europe we will continue to focus on improving the companies we control and to generate value through enhancing the properties, as well as through a range of other means.

Net debt to total assets (expanded solo) is expected to drop below 45% and in the medium- to long-term we are interested to retain a leverage level below 50%. Our finance costs are expected to reduce in the coming years by tens of millions of shekels while extending the weighted average duration of the debt and increasing the Company's financial flexibility.

Slowly but surely the Company is returning to its origins: acquisition of irreplaceable qualityproperties, a strong balance sheet and high cash flow, an experienced, professional managementteam that can identify and improve our properties over time and generate high yields.

THANKS

At the beginning of 2018 I took over the reins of management in order to continue theimplementation of our strategy and to lead Gazit to its rightful place as one of the leading commercial real estate companies in the world. We are carrying out, step by step, what we declared, and I intend to continue to act in this way. My thanks to all the employees of the Company, in the various countries and in Israel, for their dedicated work throughout the year and their devotion to the successful implementation of the strategic changes the Company is undergoing. My thanks to the shareholders and all other interested parties for the confidence they have placed in the Company and the team and their ability to create value for shareholders and stakeholders responsibly and over the long-term

Yours sincerely, Chaim Katzman