Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with regulatory financial reporting framework applicable to the Group in Spain (see Notes 2 and 25). In the event of a discrepancy, the Spanish-language version prevails.

Merlin Properties SOCIMI, S.A. and Subsidiaries

Consolidated Financial Statements

for the year  ended 31 December

2020 and Directors’ Report, together with Independent Auditor's Report

Merlin Properties SOCIMI, S.A. and Subsidiaries

Consolidated Financial Statements for the year

ended 31 December 2020

prepared in accordance with International

Financial Reporting Standards (IFRSs) as adopted by the European Union and Consolidated Directors’ Report

Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with regulatory financial reporting framework applicable to the Group in Spain (see Notes 2 and 25). In the event of a discrepancy, the Spanish-language version prevails.

Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with regulatory financial reporting framework applicable to the Group in Spain (see Notes 2 and 25). In the event of a discrepancy, the Spanish-language version prevails.

MERLIN PROPERTIES SOCIMI, S.A.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMEBER 2020
(Thousands euros)
ASSETS	Notes	31/12/2020	31/12/2019	EQUITY AND LIABILITIES	Notes	31/12/2020	31/12/2019
NON-CURRENT ASSETS				EQUITY	Note 13
Other intangible assets		961	797	Share capital		469,771	469,771
Property, plant and equipment		7,106	11,683	Share premium		3,813,409	3,813,409
Investment property	Note 7	12,139,347	12,169,157	Reserves		2,509,875	2,094,275
Investments accounted for using the equity method	Note 9	434,127	346,973	Other equity holder contributions		540	540
Non-current financial assets	Note 10	392,747	376,622	Valuation adjustments		(99,537)	(83,135)
Derivatives		107,910	124,684	Treasury shares		(54,149)	(56,860)
Other financial assets		284,837	251,938	Interim dividend		—	(92,939)
Deferred tax assets	Note 17	87,469	87,778	Profit for the period attributable to equity holders of the Parent		56,358	563,639
Total non-current assets		13,061,757	12,993,010	Equity attributable to equity holders of the Parent		6,696,267	6,708,700
				Total equity		6,696,267	6,708,700
				NON-CURRENT LIABILITIES
				Debt instruments and other marketable securities	Note 14	4,065,802	3,723,414
				Non-current bank borrowings	Note 14	1,692,097	1,817,788
				Other financial liabilities	Note 15	141,436	120,464
				Deferred tax liabilities	Notes 15 & 17	684,454	687,654
				Provisions	Note 15	18,296	33,708
				Total non-current liabilities		6,602,085	6,383,028
				CURRENT LIABILITIES
				Provisions	Note 15	—	778
CURRENT ASSETS				Debt instruments and other marketable securities	Note 14	36,291	34,631
Inventories		33,436	221	Bank borrowings	Note 14	13,261	18,326
Trade and other receivables	Notes 10 & 11	33,368	30,263	Other current financial liabilities	Note 15	7,780	6,576
Other current financial assets	Note 10	79,365	7,723	Trade and other payables	Note 16	111,112	144,732
Other current assets		17,664	20,498	Current tax liabilities	Note 17	2,474	1,113
Cash and cash equivalents	Note 12	252,022	254,016	Other current liabilities	Note 15	8,342	7,847
Total current assets		415,855	312,721	Total current liabilities		179,260	214,003
TOTAL ASSETS		13,477,612	13,305,731	TOTAL EQUITY AND LIABILITIES		13,477,612	13,305,731

The accompanying explanatory Notes 1 to 25 and Appendix I are an integral part of the consolidated statement of financial position as at 31 December 2020

1

MERLIN PROPERTIES SOCIMI, S.A.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE
PERIOD ENDED IN 2020
(Thousands euros)
	Notes	Period 2020	Period 2019
				CONTINUING OPERATIONS:
Revenue	Notes 6 & 18	446,132	514,853
Other operating income		2,640	2,799
Personnel expenses	Note 18.c	(40,888)	(76,854)
Other operating expenses	Note 18.b	(66,936)	(64,473)
Gains/(losses) on disposals of assets	Note 7	(14,300)	(19,063)
Depreciation and amortisation		(1,614)	(2,123)
Provision surpluses		(30)	86
Change in fair value of investment property	Note 7	(84,468)	354,972
Negative difference on business combinations	Note 3	—	(2,866)
PROFIT/(LOSS) FROM ORDINARY ACTIVITIES		240,536	707,331
Change in fair value of financial instruments		(35,152)	(11,068)
Change in fair value of financial instruments - Embedded derivative	Note 10	(15,010)	2,397
Change in fair value of financial instruments - Other	Notes 10 & 14	(20,142)	(13,465)
Financial income	Note 18.d	3,387	664
Gains or losses on disposals of financial instruments		(62)	(40)
Financial expenses	Note 18.d	(149,653)	(116,242)
Share in profit/(loss) of companies accounted for using the equity method	Note 9	(3,444)	10,065
PROFIT/(LOSS) BEFORE TAX		55,612	590,710
Income tax	Note 17	746	(27,071)
PROFIT/(LOSS) FOR THE PERIOD FROM CONTINUING OPERATIONS		56,358	563,639
Attributable to shareholders of the Parent		56,358	563,639
EARNINGS PER SHARE (in euros)		0.12	1.21
BASIC EARNINGS PER SHARE (in euros)		0.12	1.21
DILUTED EARNINGS PER SHARE (in euros)		0.12	1.20

The accompanying explanatory Notes 1 to 25 and Appendix I are an integral part of the consolidated statement of financial position as at 31 December 2020

2

MERLIN PROPERTIES SOCIMI, S.A.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE
PERIOD OF 2020
(Thousand euros)
	Notes	Period 2020	Period 2019
PROFIT/(LOSS) FOR THE PERIOD (I)					56,358	563,639
OTHER COMPREHENSIVE INCOME:
Income and expenses recognised directly in equity-
From cash flow hedges (*)		(28,434)	(57,470)
OTHER COMPREHENSIVE INCOME RECOGNISED DIRECTLY IN EQUITY (II)		(28,434)	(57,470)
Amounts transferred to income statement		12,032	11,241
TOTAL AMOUNTS TRANSFERRED TO INCOME STATEMENT (III)		12,032	11,241
TOTAL COMPREHENSIVE INCOME (I+II+III)		39,956	517,410
Attributable to equity holders of the Parent		39,956	517,410
(*) Amounts to be transferred to the profit and loss account in subsequent years

The accompanying explanatory Notes 1 to 25 en the Consolidated Memory and Appendix I are an integral part of the consolidated statement of financial for the period ending in 2020

3

MERLIN PROPERTIES SOCIMI, S.A.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE PERIOD
ENDED DECEMBER 31 2020
(Thousand euros)
	Share capital	Share premium	Reserves	Shareholder Contribution	Profit/(loss) for the year	Interim dividend	Valuation adjustments	Translation differences	Treasury shares	Equity attributed to the Parent Company	Non-controlling interests	Total Equity
Balances as of 31 December 2018													469,771	3,858,624	1,416,773	540	854,878	(93,522)	(36,906)	—	(68,322)	6,401,836	—	6,401,836
Consolidated comprehensive profit/(loss) 2019													—	—	—	—	563,639	—	(46,229)	—	—	517,410	—	517,410
Distribution of 2018 profit													—	—	761,356	—	(854,878)	93,522	—	—	—	—	—	—
Transactions with shareholders-
Distribution of dividends	—	(45,215)	(94,193)	—	—	(92,939)	—	—	—	(232,347)	—	(232,347)
Acquisition of treasury shares	—	—	—	—	—	—	—	—	(633)	(633)	—	(633)
Recognition of share-based payments	—	—	32,025	—	—	—	—	—	—	32,025	—	32,025
Delivery of shares -2016 stock plan and flexible retribution	—	—	(21,686)	—	—	—	—	—	12,095	(9,591)	—	(9,591)
Balances as of 31 December 2019	469,771	3,813,409	2,094,275	540	563,639	(92,939)	(83,135)	—	(56,860)	6,708,700	—	6,708,700
Consolidated comprehensive profit/(loss) 2020	—	—	—	—	56,358	—	(16,402)	—	—	39,956	—	39,956
Distribution of 2019 profit	—	—	470,700	—	(563,639)	92,939	—	—	—	—	—	—
Transactions with shareholders-
Distribution of dividends	—	—	(68,518)	—	—	—	—	—	—	(68,518)	—	(68,518)
Acquisition of treasury shares	—	—	—	—	—	—	—	—	(279)	(279)	—	(279)
Recognition of share-based payments	—	—	16,258	—	—	—	—	—	—	16,258	—	16,258
Delivery of shares -2017 stock plan and flexible retribution	—	—	(2,840)	—	—	—	—	—	2,990	150	—	150
Balances as of 31 December 2020	469,771	3,813,409	2,509,875	540	56,358	—	(99,537)	—	(54,149)	6,696,267	—	6,696,267

The accompanying explanatory Notes 1 to 25 and Appendix I are an integral part of the consolidated statement of changes in equity as of 31 December 2020

4

MERLIN PROPERTIES SOCIMI, S.A.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE
PERIOD ENDED DECEMBER 31 2020
(Thousands euros)
	Notes	Period  2020	Period  2019
CASH FLOWS FROM/(USED IN) OPERATING ACTIVITIES:					134,660	294,860
Profit/(loss) for the period before tax		55,612	590,710
Adjustments for-		302,811	(159,859)
Depreciation and amortisation		1,614	2,123
Changes in fair value of investment property	Note 7	84,468	(354,972)
Changes in provisions		19,320	60,150
Gains/(losses) on disposals of assets	Notes 7 & 3	14,300	19,062
Finance income		(3,387)	(664)
Finance expenses		149,653	116,242
Changes in fair value of financial instruments		35,152	11,068
Share in profit/(loss) of investments accounted for using the equity method	Note 9	3,444	(10,065)
Other income and expenses		(1,753)	(5,669)
Negative difference on business combinations		—	2,866
Changes in working capital-		(97,714)	(10,592)
Inventories		(33,215)	1,065
Trade and other receivables		(4,845)	2,265
Other current assets		(5,541)	(9,993)
Trade and other payables		(52,555)	4,665
Other assets and liabilities		(1,558)	(8,594)
Other cash flows from/(used in) operating activities-		(126,049)	(125,399)
Interest paid		(126,695)	(110,711)
Interest received		2,392	236
Income tax paid		(1,746)	(14,924)
CASH FLOWS FROM INVESTING ACTIVITIES:		(229,866)	(277,781)
Payments for investments-		(255,172)	(613,750)
Net cash outflow from business acquisitions	Note 3	—	(113,485)
Investment property		(251,107)	(230,758)
Property, plant and equipment		(2,000)	(8,945)
Intangible assets		(568)	(972)
Financial assets		(1,497)	(259,590)
Proceeds from sales of investments-		25,306	335,969
Financial investments		—	134,470
Investment property		25,306	201,499
CASH FLOWS FROM/(USED IN) FINANCING ACTIVITIES:		93,212	67,912
Proceeds and payments from equity instruments-		(68,548)	(232,980)
Treasury stock acquisitions	Note 13	(30)	(633)
Share premium refund		—	(45,215)
Dividends paid	Note 4	(68,518)	(187,132)
Proceeds and payments from financial liabilities-		161,760	300,892
Bank debt issuance		27,261	1,051,912
Debt instruments issuance		595,691	493,621
Bank debt repayment		(202,278)	(1,244,641)
Debt instruments repayment		(258,914)	—
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		(1,994)	84,991
Cash and cash equivalents at beginning of period		254,016	169,025
Cash and cash equivalents at end of period		252,022	254,016

The accompanying explanatory Notes 1 to 25 and Appendix I are are an integral part of the consolidated statement of cash flows for the period ended as at 31 December 2020

5

Merlin Properties SOCIMI, S.A. and Subsidiaries

Notes to the Consolidated Financial Statements for the year

ended 31 December 2020

1.    Nature and activity of the Group

Merlin Properties SOCIMI, S.A. (hereinafter, the “Parent”) was incorporated in Spain on 25 March 2014 under the Spanish Limited Liability Companies Law. On 22 May 2014, the Parent requested to be included in the tax regime for listed companies investing in the property market (REITs), effective from 1 January 2014.

On 27 February 2017, the Parent changed its registered office from Paseo de la Castellana 42 to Paseo de la Castellana 257, Madrid, Spain.

The Parent’s corporate purpose, as set out in its Articles of Association, is as follows:

•The acquisition and development of urban real estate for subsequent leasing, including the refurbishment of buildings as per the Value Added Tax Law 37/1992, of 28 December;

•The holding of equity interests in other SOCIMIs or in other non-resident entities in Spain with the same corporate purpose and that operate under a similar regime as that established for SOCIMIs with respect to the mandatory profit distribution policy enforced by law or by the Articles of Association;

•The holding of equity interests in other resident or non-resident entities in Spain whose corporate purpose is to acquire urban real estate for subsequent leasing, and that operate under the same regime as that established for SOCIMIs with respect to the mandatory profit distribution policy enforced by law or by the Articles of Association, and that fulfil the investment requirements stipulated for these companies; and

•The holding of shares or equity interests in collective real estate investment undertakings regulated under Law 35/2003, of 4 November, on collective investment undertakings, or any law that may replace this in the future.

In addition to the economic activity relating to the main corporate purpose, the Parent may also carry on any other ancillary activities, i.e., those that generate income, which in total represents less than 20% of its income in each tax period, or those that may be considered ancillary activities under the legislation applicable at any time.

The activities included in the Parent’s corporate purpose may be indirectly carried on, either wholly or in part, through the ownership of shares or equity interests in companies with a similar or identical corporate purpose.

The direct and, where applicable, indirect performance of any activities which are reserved under special legislation are excluded. If the law prescribes the need for a professional qualification, administrative authorisation, entry in a public register, or any other requirement for the purpose of exercising any of the activities within the corporate purpose, no such activity can be exercised until all the applicable professional or administrative requirements have been met.

Merlin Properties SOCIMI, S.A. and Subsidiaries (“the Group”) engage mainly in the acquisition and management (through leasing to third parties) of offices, industrial buildings, logistic centres, local premises and shopping centres, and they may also invest to a lesser extent in other assets for lease.

On 30 June 2014, the Company was floated on the Spanish stock market through the issuance of EUR 125,000 thousand shares, with a share premium of EUR 1,125,000 thousand. Merlin Properties SOCIMI, S.A.'s shares/securities have been listed on the electronic trading system of the Spanish stock exchanges since 30 June 2014.

On 15 January 2020, the Parent's shares were listed on Euronext Lisbon under a dual listing.

The Parent and the majority of its subsidiaries are governed by Law 11/2009, of 26 October, as amended by Law 16/2012, of 27 December, regulating REITs (Ley 16/2012, de 27 de diciembre, por la que se regulan las Sociedades Anónimas Cotizadas de Inversión en el Mercado Inmobiliario). Article 3 of that Law sets out the investment requirements for these types of companies, namely:

6

1.At least 80% of a REIT's assets must be invested in urban real estate for leasing purposes and/or in land to be developed for leasing purposes provided such development starts within three years of acquisition, along with investments in the capital or equity of other entities referred to in Article 2.1of the Law.

The value of the assets will be determined according to the average of the individual balance sheets for each quarter of the year, whereby the REIT may opt to calculate such value by taking into account the market value of the assets included in such balance sheets instead of their carrying amount, in which case that value would apply to all balance sheets for the year. For these purposes, the money and collection rights arising from the disposal of these properties or shareholdings, if applicable, during the same year or previous years will not be calculated, provided that, in this last case, the reinvestment period referred to in article 6 of this Law has not elapsed.

2.Furthermore, at least 80% of the income for the tax period, excluding income from transfer of equity investments and real estate that are earmarked for pursuit of the principal corporate purpose, once the holding period referred to in the following paragraph has elapsed, must arise from lease of investment property and from dividends or profit shares obtained from those holdings.

This percentage is calculated based on consolidated profit if the company is a Parent of a group, as defined in article 42 of the Commercial Code, regardless of the place of residence and the obligation to prepare consolidated financial statements. Said group will be exclusively composed by the REIT and all the other entities referred to in article 2.1 of the aforementioned Law.

3.The REIT’s real estate assets must be leased for at least three years. The time that the properties have been offered for lease, up to a maximum of one year, will be included for the purposes of this calculation.

This period will be calculated:

a)In the case of properties that are included in the REIT’s assets before it avails itself of the regime, from the date of commencement of the first tax period in which the special tax regime set forth in this Law is applied, provided that the property is leased or offered for lease at that date. Otherwise, the provisions of the following paragraph will apply.

b)In the case of properties developed or acquired subsequently by the REIT, from the date on which they were leased or offered for lease for the first time.

c)Shares or equity investments in entities referred to in article 2.1 of the Law must be kept in the REIT's asset base at least during three years after their acquisition or, if applicable, from the beginning of the first tax period during which the special tax regime established in the Law applies.

As established in First Transitional Provision of Law 11/2009, of 26 October, amended by Law 16/2012, of 27 December, regulating REITs, these companies may opt to apply the special tax regime pursuant to article 13 of this Law, even when the requirements stipulated therein are not fulfilled, under the condition that such requirements are met within two years since the application of the REIT tax regime is sought.

REITs are taxed at a rate of 0% for companies tax. However, where dividends distributed to an equity holder owning at least 5% of the REIT’s share capital are exempt from taxation or taxed below 10%, such REIT will be subject to a special charge of 19% of the dividends distributed to the said equity holder, under the denomination of corporate income tax. If deemed applicable, this special charge will be paid by the REIT within two months after the dividend distribution date.

The transitional period in which the Company had to meet all requirements of this tax regime ended in 2017. Group management, based on the opinion of its tax advisors, assessed compliance with the requirements of the regime, concluding that such requirements were met at 31 December 2020.

Consequently, the Group's consolidated financial statements and the individual financial statements of the Parent for 2020, prepared by its Directors, which are awaiting approval by the General Shareholders' Meeting, have been prepared under the REIT Regime. However, the Parent’s directors consider that the aforementioned financial statements will be approved without any material changes.

On the other hand, the financial statements for the year 2020 of the companies that make up the Group are pending preparation by their respective Directors and are expected to be approved by their respective General Shareholders' or Shareholders' Meetings within the deadlines established by applicable law.

7

The separate and consolidated financial statements of Merlin Properties, SOCIMI, S.A. for 2019 prepared by its directors were approved by the shareholders at the Annual General Meeting on 17 June 2020.

The 2019 separate annual financial statements of the Group companies, which were prepared by their respective directors, were approved by their shareholders at the respective General Meetings within the periods established in applicable tax legislation.

In view of the business activities currently carried on by the Group, it does not have any environmental liability, expenses, assets, provisions or contingencies that might be material with respect to its equity, financial position or results. Therefore, no specific disclosures relating to environmental issues are included in these notes to the consolidated financial statements.

The Company has not modified its name or denomination in years 2019 or 2020

2.    Basis of presentation of the consolidated financial statements and basis of consolidation

2.1 Regulatory framework

The regulatory financial reporting framework applicable to the Group consists of the following:

–The Commercial Code and all other Spanish corporate law;

–The International Financial Reporting Standards (IFRSs) as adopted by the European Union pursuant to Regulation (EC) No 1606/2002 of the European Parliament and Law 62/2003, of 30 December, on tax, administrative and social security measures, as well as applicable rules and circulars of the Spanish National Securities Market Commission (CNMV);

–Law 11/2009, of 26 October, amended by Law 16/2012, of 27 December, regulating Real Estate Investment Trusts (REITs) and the other commercial laws.

–All other applicable Spanish accounting legislation

2.2 Basis of presentation of the consolidated financial statements

The consolidated financial statements for 2020 were obtained from the accounting records of the Parent and consolidated companies, and have been prepared in accordance with the regulatory financial reporting framework described in Note 2.1 and, accordingly, they present fairly the Group’s consolidated equity and financial position at 31 December 2020 and the consolidated results of its operations, the changes in consolidated equity and the consolidated cash flows in the year ended on that date.

Given that the accounting policies and measurement bases applied in preparing the Group’s consolidated financial statements for 2020 may differ from those applied by some of the Group companies, the necessary adjustments and reclassifications were made on consolidation to unify these policies and bases and to make them compliant with IFRSs as adopted by the European Union.

In order to uniformly present the various items composing the consolidated financial statements, the accounting, policies and measurement bases used by the Parent were applied to all the consolidated companies.

8

2.2.1 Adoption of Financial Reporting Standards and Interpretations effective as from 1 January 2020

In 2020 the following standards, amendments and interpretations came into force, which, where applicable, were used by the Group in preparing these financial statements:

Standards, Amendments and Interpretations	Description	Mandatory application in the years beginning on or after:
Amendments to IAS 1 and IAS 8 - Definition of “materiality”	Amendments to IAS 1 and IAS 8 to align the definition of “materiality” with that contained in the conceptual framework	01/01/2020
Amendments to IFRS 9, IAS 39 and IFRS 7. Reform of Benchmark Interest Rates--Phase 1	Amendments to IFRS 9, IAS 39 and IFRS 7 related to the current changes to the benchmark indexes.	01/01/2020
Amendments to IFRS 3 – Definition of a business	Clarifying the definition of a business	01/01/2020
Amendments to IFRS 16 Leases - Improvements in rents	Amendment to facilitate the accounting of rental improvements related to COVID-19 in leases	01/06/2020

These standards and amendments have not had a significant impact.

All accounting policies and measurement bases with a significant effect on the condensed consolidated financial statements were applied.

2.2.2 Standards not yet in force in 2020

The following standards were not yet in force in 2020, either because their effective date is subsequent to the date of the consolidated financial statements or because they had not yet been adopted by the European Union.

9

Standards, Amendments and Interpretations	Description	Mandatory application in the years beginning on or after:
Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16. Reform of Benchmark Interest Rates--Phase 2	Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 related to the reform of the benchmarks	01/06/2021
Amendment to IFRS 4 Differential Application of IFRS 9	Differences in the application of IFRS 9 until 2023	01/06/2021
Amendments to IFRS 3 Reference to the Conceptual Framework	IFRS 3 was updated to align the asset and liability definitions in a business combination with those contained in the conceptual framework	01/01/2022
Amendment to IAS 16 Income before projected use	The change prohibits deducting any income obtained from the sale of the items produced while the entity is preparing the asset for its intended use from the cost of property, plant and equipment	01/01/2022
Amendment to IAS 37 Payable Contracts - Cost of performing a contract	The amendment explains that the direct cost of fulfilling a contract includes the incremental costs of complying with that contract and an allocation of other costs that relate directly to the performance of the contract	01/01/2022
Improvements to IFRS Cycle 2018-20	Minor changes to IFRS 1, IFRS 9, IFRS 16 and IAS 41.	01/01/2022
Amendment to IAS 1 Classification of liabilities as current or non-current	Clarifications about the presentation of liabilities as current or non-current	01/01/2023
IFRS 17 Insurance contracts and amendments to them	Replaces IFRS 4 and includes the principles of registration, measurement, presentation and breakdown of insurance contracts with the objective that the entity provides relevant and reliable information that allows users of financial information to determine the effect that insurance contracts have on financial statements	01/01/2023

At present, the Group is assessing the impacts that the future application of standards with a mandatory application date from 1 January 2021 could have on the consolidated financial statements once they come into force, although these impacts are not expected to be significant.

2.3 Functional currency

These consolidated financial statements are presented in euros, since the euro is the functional currency in the area in which the Group operates.

2.4 Comparative information

The information relating to 2019 contained in these notes to the consolidated financial statements is presented solely for comparison purposes with similar information relating to the year ended 31 December 2020.

2.5 Responsibility for the information and use of estimates

The information in these consolidated financial statements is the responsibility of the Parent’s directors.

In the Group’s consolidated financial statements for 2020 estimates were occasionally made by the senior executives of the Group and of the consolidated companies, later ratified by the directors, in order to quantify certain of the assets, liabilities, income, expenses and obligations reported herein. These estimates relate basically to the following:

1.The market value of the net assets acquired in business combinations (see Note 3)

10

2.The market value of the Group’s property assets (see Note 5.1). The Group obtained valuations from independent experts at 31 December 2020.

3.The fair value of certain financial assets (see Notes 5.5 and 5.6).

4.The assessment of provisions and contingencies (see Note 5.11).

5.Management of financial risk and, in particular, of liquidity risk (see Note 23).

6.The recovery of deferred tax assets and the tax rate applicable to temporary differences (see Note 5.13).

7.Definition of the transactions carried out by the Group as a business combination in accordance with IFRS 3 or as an acquisition of assets (see Note 3).

8.Compliance with the requirements that govern listed real estate investment companies (Note 1).

Changes in estimates:

Although these estimates were made based on the best information available at 31 December 2020, future events may require these estimates to be modified prospectively (upwards or downwards), in accordance with IAS 8. The effects of any change would be recognised in the corresponding consolidated income statement.

2.6 Basis of consolidation applied

All companies over which effective control is exercised by virtue of holding of a majority of the voting rights in their representation and decision-making bodies and the power to determine the company’s financial and operational policies were fully consolidated; and companies in which the Group owns more than a 20% interest and exercises significant influence without holding a majority of the voting rights were accounted for using the equity method (see Note 9). Likewise, there is considered to be a significant influence on the investments held by the Group with a participation rate of less than 20% if it has representation on the Board of Directors of these companies of the parties related to it.

A number of adjustments have been made in order to bring the accounting principles and measurement bases of Group companies into line with those of the Parent, including the application of International Financial Reporting Standards measurement bases to all Group companies and associates.

It was not necessary to unify accounting periods since the balance sheet date of all the Group companies and associates is 31 December of each year.

2.6.1 Subsidiaries

Subsidiaries are considered to be those companies over which the Parent directly or indirectly exercises control through subsidiaries. The Parent has control over a subsidiary when it is exposed or has rights to variable returns from its involvement with the subsidiary, and when it has the ability to use its power to affect its returns. The Parent has power when the voting rights are sufficient to give it the ability to direct the relevant activities of the subsidiary. The Parent is exposed or has rights to variable returns from its involvement with the subsidiary when its returns from its involvement have the potential to vary as a result of the subsidiary’s performance.

The financial statements of the subsidiaries are fully consolidated with those of the Parent. Accordingly, all material balances and effects of the transactions between consolidated companies are eliminated on consolidation.

Any third-party interests in the Group's equity and profit or loss are recognised under “Non-controlling interests” in the consolidated statement of financial position and “Result attributable to non-controlling interests” in the consolidated income statement and consolidated comprehensive income statement.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statements from the effective date of acquisition or until the effective date of disposal, as appropriate.

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2.6.2 Associates

The companies listed in Appendix I, over which Merlin Properties, SOCIMI, S.A. does not exercise control but rather has a significant influence, are included under “Investments accounted for using the equity method” in the accompanying consolidated statement of financial position and are measured using the equity method, which consists of the value of the net assets and any goodwill of the associate. The share of these companies’ net profit or loss for the year is included under “Share of results of associates accounted for using the equity method” in the accompanying consolidated income statement.

2.6.3 Transactions between Group companies

Gains or losses on transactions between consolidated companies are eliminated on consolidation and deferred until they are realised with third parties outside the Group. The capitalised expenses of Group work on non-current assets are recognised at production cost, and any intra-Group results are eliminated. Receivables and payables between consolidated Group companies and any intra-Group income and expenses were eliminated.

2.6.4 First-time consolidation differences

At the date of an acquisition, the assets and liabilities of a subsidiary are measured at their fair values at that date. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. If a deficiency of the acquisition cost below the fair values of the identifiable net assets acquired (i.e. a discount on acquisition) is disclosed, the measurements of the net assets are reviewed and, where appropriate, the deficiency is credited to profit or loss in the period in which the acquisition is made.

2.6.5 Business combinations

The Group accounts for business combinations using the purchase method. The date of acquisition is the date on which the Group takes control of the acquired business.

The consideration paid is calculated at the date of acquisition as the sum of the fair values of the assets delivered, the liabilities incurred and assumed and the equity instruments issued by the Group in exchange for control of the business acquired. Acquisition costs, such as professional fees, do not form part of the cost of the business combination, but are taken directly to the consolidated income statement.

Where applicable, the contingent consideration is recognised at the acquisition-date fair value.

Subsequent changes to the fair value of the contingent consideration are taken to the consolidated income statement unless this change arises within the one-year period established as the provisional accounting period, in which case the business combination will be modified.

Goodwill is calculated as the excess of the aggregate of the consideration transferred, any non-controlling interests, and the fair value of any previously acquired interest less the net identifiable assets acquired.

If the acquisition cost of the identifiable net assets is greater than their fair value, the related difference is recognised in the consolidated income statement for the year.

2.6.6 Perimeter of consolidation

The companies composing the Merlin Group at 31 December 2020, along with information relating to the consolidation method, are listed in Appendix I of the consolidated financial statements.

2.7 Quantitative and qualitative information on the impacts of COVID-19

The appearance of COVID-19 in China in January 2020 and its recent global expansion has resulted in the viral outbreak being classified as a pandemic by the World Health Organisation since 11 March 2020. This situation has affected global financial markets, since restrictions have been placed on mobility and business activity in many sectors.

On 14 March 2020, the Government of Spain declared a state of alarm under Royal Decree 463/2020, which remained in force until 21 June 2020. According to the declaration of the state of alarm, certain commercial and lodging activities have been classified as essential, where opening is permitted, while the others have been classified as non-essential based on their nature and therefore subject to forced administrative closure. Likewise in Portugal, an Estado da Emergência was declared by the President of the Republic in Decree 14-A/2020, of 18

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March, which established limits on the restrictions of certain fundamental rights due to COVID-19, which included restrictions on the country’s retail commerce.

In addition, in 2020, the Spanish Government and the Autonomous Communities took coordinated action to control the COVID-19 pandemic, among which are limits on mobility at night and between regions.

The Group's activity has been affected in various areas, and it has taken various measures to mitigate the effects of the COVID-19 pandemic. The Parent Company’s Directors believe that the COVID-19 crisis represents a significant event that, under accounting regulations, requires the submission of separate breakdowns on the impacts. The main impacts related to COVID-19 and the actions carried out by the Group to mitigate their impact are presented below.

The Directors continue to evaluate and implement additional measures to adapt the Group's operations and to adopt the necessary measures based on how the pandemic progresses, and they believe that it is not possible to reasonably predict the impact of COVID-19. The general operational and financial impact will greatly depend on the extent and duration of the COVID-19 pandemic, including the possible appearance of additional new outbreaks, and on the effectiveness of any vaccines that have begun to be implemented, and it may be affected by other factors that cannot yet be foreseen.

The Directors and Management of the Parent believe that the COVID-19 health emergency and its effects on the Group's activities primarily affect the following aspects:

•The Group's estimates and, the case being, the book value of the assets and liabilities on the balance sheet.

•Financial risks: credit risk and liquidity risk.

These do not include all of the impacts, although the Directors and Management believe that the others not listed above will not have a significant effect on the Group's activity.

Measurement of fair value of investment property

The Group adjusted the fair value of its real estate investments in accordance with IAS 40. This fair value is determined using the reference of the valuations made by independent third parties every six months so that, at the close of each six-month period, the fair value reflects the market conditions of the elements of the investment properties at that date.

At 31 December 2020, the valuations carried out by CBRE Valuation Advisory, S.A. and Jones Lang LaSalle, S.A. (responsible for the valuation of 79.1% of the Group), although they point out that the pandemic and the measures taken to deal with COVID-19 continue to affect the economy and the real estate market at the global level, they highlight that, at the date of their valuation, the real estate markets have already begun to function again, with a volume of transactions and other sufficient market evidence to base their valuation opinion. In the case of the valuations carried out by the independent external party, Savills Consultores Inmobiliarios, S.A. (which, at 31 December 2020, valuates 20.9% of the Group's GAV), these are issued based on ‘material valuation uncertainty’ according to VPS 3 and VPGA 10, the RICS Global Valuation Standards, and therefore recommend keeping the valuation under frequent review.

The valuation methods described in Note 7 has not been modified, although they were influenced by, among other things, the following aspects derived from the effects of COVID-19.

•Closure of activities in shopping centres.

•Loss of customers and reductions in traffic.

•The positive impact on logistics distributors.

•The risk of losing major contracts.

•Payments of rent for commercial spaces.

•Increased discount rates and exit capitalisation rates due to future uncertainty.

Meanwhile, the details of main assumptions used in the appraisals at December 2019 and December 2020 based on the nature of the assets and the sensitivities to increases and decreases of those variables are included in Note 7 of the attached notes.

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Liquidity risk

The Directors of the Parent believe that the appearance of the health crisis and the impact on the economy caused by the need for lockdown has caused a significant impact on the general financial position of companies, which can be divided into the specific liquidity risk of the companies or groups and the liquidity risk of customers (credit risk).

In this context, at 31 December 2020 the Group had a leverage ratio (defined as the loan-to-value ratio [LTV]) of 39,9% and cash and other liquid assets equal to EUR 252,022 thousand. The Group does not have any major loan maturities until 2022 because of the absence of promissory notes and other short-term financial instruments.

The S&P and Moody's rating agencies also confirmed the MERLIN Group's credit rating following the COVID-19 pandemic taking into account the commercial policy it implemented, which will be explained below. S&P rated the Group BBB with a stable perspective, while Moody's rated it Baa2 with a negative perspective.

The Group has taken the following measures to strengthen its capital structure:

•CapEx investments. The Group has revised its investment plans to prioritise the execution of investments in assets with high levels of pre-rental.

•Reduced structure costs. In its meeting of 8 April 2020, the Board of Directors decided to reduce its remuneration by 25%, and it agreed with the CEO, the General Corporate Director and the management team to renounce all of their remuneration and incentives plans for 2020.  These measures represent EUR 11 million in savings on the year.

•Drawdown of additional financing. On 20 March 2020, the Group drew down from its corporate line of credit, which was fully available, for a sum of EUR 700 million. This drawdown was made with the goal of strengthening the Group's financial position in the uncertain setting of the pandemic. After June, EUR 500 million of bond financing was issued with a 7-year maturity, which was used to partially repay two bonds maturing in 2022 and 2023 and two mortgage loans maturing in 2025 (see Note 14). The Group also repaid EUR 700 million of the credit facility mentioned at the beginning of this point

•Dividends. On 8 July 2020, the supplemental 2019 dividend was paid out after it was passed in the General Shareholders Meeting held on 17 June 2020, for a sum of EUR 68,518 thousand. Additionally, that General Meeting passed a refund of the share premium for a maximum of EUR 0.174 per share payable in cash, its payment was delegated to the Board of Directors, which will decide if it should be paid out once the impact of COVID-19 on the evolution of the business becomes clear in view of the current setting of uncertainty.Finally, the Board of Directors has decided not to refund this share premium.

The Parent's Directors and Management are constantly monitoring the evolution of the situation and the effects it may have on the credit market, and they believe that the Group's situation at 31 December 2020 and the measures mentioned above ensure that it will be solvent to fulfil the current obligations on the balance sheet at 31 December 2020, and there is no material uncertainty about the continuity of the Group's operations.

Credit risk

As indicated in the consolidated director's report for the year ended 31 December 2019, the deterioration of the Group's receivables was not significant, taking into account that the risk of default was less than 1% of turnover and that the Group has deposits from its tenants to secure the credits.

In 2020, in response to the COVID-19 pandemic, the Group launched two commercial policies:

Commercial policy

After the outbreak of the pandemic, the Group implemented a commercial policy that offered 100% rent credits to commercial tenants whose activities where shut down administratively due to the state of alarm and that were current in their contractual obligations. This policy was in force during the shutdown mandated due to the state of alarm and involved a 100% rent relief for tenants that continued to pay community expenses and waived their right to any future actions against Merlin in relation to COVID-19.

The rental income of the tenants eligible for this policy represents 89% of the income of the shopping centres and 3% of offices. On the other hand, the level of acceptance by the tenants was higher than 85% in shopping centres

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and 100% in offices, which meant a reduction in lease income at the end of 2020 of EUR 22.8 million because of these measures.

The Group recorded these credits as lower turnover, in accordance with accounting regulations and the consideration that there are have been no significant changes to the leases.

Additional commercial measures

The Group also approved a series of complementary commercial measures that will last from June to 31 December 2020.  These measures are designed for most of the tenants with commercial activities in the Group's portfolio of assets, to help them reopen and recover during the rest of 2020. The measures consist of providing a partial rent credit from that decreased from 60% in June to 10% in December 2020.

The rent from the tenants eligible for these complementary trade measures represents 94% of the income from the shopping centre segment and 4% of offices. On the other hand, the level of acceptance by the tenants was 92% in shopping centres and 93% in offices. These measures resulted in a reduction in lease income at the end of 2020 for these actions of EUR 23.9 million, equivalent to 4.8% of the company's gross income over the period.

The Directors assessed the impact of the linearity of the bonuses associated with these complementary trade measures, concluding that their impact on the financial statements for the year is not significant and, therefore, they chose to record the entire amount subsidised at 31 December 2020 under the ‘Net income heading of the accompanying consolidated income statement.

Due to the current situation and evolution of the COVID 19 pandemic, the Spanish and Portuguese Governments have continued to take various measures to contain the spread of the virus, which continue to affect the performance of economic activities such as trade, hospitality and tourism. In this context, and with the aim of continuing to assist the tenants, the Group has approved complementary trade measures, the implementation period of which ranges from January to 30 June 2021. These measures are aimed at retail tenants who are up to date in their contractual obligations, including the payment of prior rent and common expenses. The measure consists of a 100% subsidy in the event of forced closure exclusively during the period in which the tenants are not legally authorised to open and an average 25% subsidy granted to the tenants (30% for leisure and catering). The policy is applicable during the first half of 2021, with an estimated revised impact of EUR 19.6 million in the period (EUR 18.6 million for shopping centres and EUR 1.0 million for the retail component in offices) due to longer lockdowns than initially forecasted.

Accounting implications of COVID-19 on the calculation of the expected loss of receivables

One of the implications considered by the Group due to COVID-19 has been the assessment of customer credit risk in the current market setting, which may increase, depending on the activity of its businesses and the degree of severity that COVID-19 has on them.

At the date of preparation of these consolidated financial statements, the Directors assessed possible impacts arising from COVID-19, taking into account the characteristics of the Group's contracts. At the date of preparation of these consolidated financial statements, the Directors assessed possible impacts arising from COVID-19, taking into account the characteristics of the Group's contracts. It should also be taken into account that the Group has a very high-quality base of customers, which mitigates the credit risk.

In this context, the Group has tried to help its customers affected by mandatory closures and severe restrictions in their operations, by implementing the trade policies described above, which has allowed the Group to present very low defaults. Rent collection levels were 99.8% for offices, 97.6% for shopping centres and 100% for logistics and 100% for the net leases segment.

Based on these facts, the Group evaluated applying the simplified approach of impairment and credit risk, and also taking into consideration other differential factors of the Group’s portfolio of tenants and the characteristics of their leases, and the amounts collected thus far, the Group has concluded that the increased credit risk of its customers has not been significantly affected.

At 31 December 2020, the default risk was less than 1% of turnover.

In relation to its other financial assets exposed to credit risk, which mainly correspond to loans to associates and third parties, the Directors have determined that there has not been a significant increase in the risk, considering the measures agreed in some cases with tenants and the long-term expectations based above all on the historical

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experience with those entities, which make it possible to estimate that the credit risk of the financial asset will remain in line with the previous year.

Nevertheless, the Group is constantly monitoring the evolution of this credit risk.

Other effects

Investment in assets and health measures derived from COVID-19

Since the start of the COVID-19 pandemic, the Group has launched various initiatives in its assets, which have been categorised into the main lines of recommendations from the competent authorities: (i) social distancing measures; (ii) hygiene and cleaning measures; and (iii) and organisational measures. The objective of these measures is to minimise the risk of infection with COVID-19, preserving the health and safety of those who enter the buildings, taking into consideration the evolution of the spread of the virus, and the latest provisions adopted by the various administrations, in addition to the various recommendations and ministerial orders of the Ministry of Health and the Ministry of Industry, Commerce and Tourism. At any rate, since the current situation of the pandemic is highly dynamic, the adopted measures will be adapted at all times as necessary to how COVID-19 evolves and the recommendations from the competent authorities.

Based on this situation, the Group has adopted gloves, masks, sanitiser gels, protective screens and other measures for sensitive areas (stairs, lifts and restrooms).

In addition, Merlin, its employees and its management team participated in the acquisition of eight robots with an investment of EUR 668 thousand.

The Company's Directors are monitoring the evolution of the situation constantly with the goal of successfully dealing with the possible financial and non-financial impacts that may arise.

3.    Changes in the scope of consolidation

2020

1)Addition of Silicius Real Estate, S.L. to the scope of consolidation

On 27 February 2020, the Group resorted to a capital increase of Silicius Real Estate, S.L. for a sum of EUR 173 million. The capital increase was performed by contributing certain secondary commercial assets owned by the Group, namely those entitled Thader, La Fira and Nassica. The capital increase saw the Group acquire 34.37% of the shares in the company, which is a multi-product company managed externally.

The asset contribution also entailed the assumption of certain obligations associated with the contributed assets for a total of EUR 9 million, at a rate of EUR 1.8 million a year, EUR 8.1 million of which maintain outstanding obligations at 31 December 2020, recorded as “other financial liabilities”, current and non-current respectively.

The contribution indicated above includes certain criteria related to the shares received by the Group. Thus, for 50% of the shares it received, the Group has an option to by Silicius at the same contribution price. This option expires 24 months after the contribution.

The remaining 50%, in turn, has a liquidity mechanism starting the fifth year after the contribution, so Silicius itself has the option to buy them at a price associated with their NAV at the time plus a differential. If the option is not exercised, the Group can sell them by collecting on certain assets of the investee company.

The Group recorded the shares associated with 50% of the investment as “financial assets available for sale” for a sum of EUR 86.5 million, because it considers it highly likely that it will exercise its option to sell at the issuing price, and that there is therefore no exposure to the investee company's future risks and benefits, with the investment exposed to the debtor's credit risk. The remaining amount of the stake, which represents 17.19% of the company's shares, was recorded as an in companies consolidated with the equity method (see Notes 9 and 10).

The above transaction resulted in a loss to the Group amounting to EUR 14,012 thousand, after considering the expenses associated with it, as well as the obligations assumed, as indicated above.

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2019

Business combinations

1)Torre Arts, Investimentos inmobiliàrios, S.A. (formerly known as Edificio 160 Arts, S.A.)

The Parent acquired 100% of the share capital of Torre Arts, Investimentos inmobiliàrios, S.A. for EUR 85,781 thousand.

	Main line of business	Date of acquisition	Percentage of ownership acquired (voting rights)	Consideration transferred (thousands of euros)
Torre Arts, Investimentos inmobiliàrios, S.A.	Acquisition and development of urban properties for subsequent management and lease	17/01/2019	100%	85,781

The detail of the net assets acquired is as follows:

	Thousands of euros
	Book	Ajuste de	Valor
	Value	Valor	Razonable
Investment property	82,935	2,456	85,391
Current assets	1,243	—	1,243
Non-current and current liabilities	(350)	—	(350)
Deferred tax liabilities	—	(503)	(503)
Total net assets	83,828	1,953	85,781
Consideration transferred			85,781

The main line of business of the acquired company is the lease of offices. Its only asset is the Arts building in Lisbon that is 97% leased and has a surface area of 22,150 square meters. Its fair value at the time of purchase according to an independent appraiser was EUR 85,391 thousand. The purpose of this business combination is to increase the Group’s presence in the office market in Lisbon.

The Group used the valuation carried out by independent experts to determine the fair value of the property.

The method used to calculate the market value involved drawing up projections of income and expenses, adjusted at the business combination date using a market discount rate. The residual amount at the end of year 10 is calculated by applying an exit yield or cap rate to the net income projections for year 11.

The main assumptions used in the calculation were a discount rate of 7.06% and a cap rate of 5.25%.

The Group identified the various assets and liabilities acquired and then determined their fair value. The Group did not find any significant differences in the values of the assets and liabilities acquired compared to the carrying amounts at which they were registered in the financial statements of the businesses acquired. There are no contingent consideration assets or liabilities related to this business combination.

The fair value of the receivables acquired, which are mainly trade receivables, was EUR 157 thousand and did not differ from the gross contractual amounts. The Group performed an individualised analysis of these receivables to check for signs of impairment and so to calculate their fair value. The Parent’s directors did not consider there to be any indications at the date of acquisition that these receivables would not be collected in full.

The valuation adjustment to liabilities of EUR 503 thousand corresponded mainly to the deferred tax liability associated with the valuation adjustments.

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The net profit/(loss) and income obtained in 2019 included in the consolidated income statement for 2019 amounted to EUR 13,445 thousand and EUR 4,471 thousand, respectively, while the difference in the full year of the acquired company was not significant.

Net cash flow from the acquisition

	Thousands of
	euros
Cash paid	85,781
Less: cash and cash
equivalents	(1.187)
Total	84,594

2)Torre Fernão Magalhães Investimentos inmobiliàrios, S.A. (formerly known as Edificio 048 Magellexpo, S.A.)

The Parent acquired 100% of the share capital of Torre Fernão Magalhães Investimentos inmobiliàrios, S.A. for 27,555 thousand euros.

	Main line of business	Date of acquisition	Percentage of ownership acquired (voting rights)	Consideration transferred (thousands of euros)
Torre Fernão Magalhães Investimentos inmobiliàrios, S.A..	Acquisition and development of urban properties for subsequent management and lease	17/01/2019	100%	27,555

The detail of the net assets acquired is as follows:

	Thousands of euros
	Book	Adjustment of	Fair
	Value	Fair	Value
Investment property	26,662	793	27,455
Non-current and current liabilities	552	—	552
Non-current and current liabilities	(284)	—	(284)
Deferred tax liabilities	—	(168)	(168)
Total net assets	26,930	625	27,555
Consideration transferred			27,555

The main line of business of the acquired company is the lease of offices. Its only asset is the Torre Magallanes building in Lisbon that is 100% leased and has a surface area of 7,837 square meters. Its fair value at the time of purchase according to an independent appraiser was EUR 27,455 thousand. The purpose of this business combination is to increase the Group’s presence in the office market in Lisbon.

The Group used the valuation carried out by independent experts to determine the fair value of the property.

The method used to calculate the market value involved drawing up projections of income and expenses, adjusted at the business combination date using a market discount rate. The residual amount at the end of year 10 is calculated by applying an exit yield or cap rate to the net income projections for year 11.

The main assumptions used in the calculation were a discount rate of 7.06% and a cap rate of 5.25%.

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The Group identified the various assets and liabilities acquired and then determined their fair value. The Group did not find any significant differences in the values of the assets and liabilities acquired compared to the carrying amounts at which they were registered in the financial statements of the businesses acquired. There are no contingent consideration assets or liabilities related to this business combination.

The fair value of the receivables acquired, which are mainly trade receivables, was EUR 200 thousand and did not differ from the gross contractual amounts. The Group performed an individualised analysis of these receivables to check for signs of impairment and so to calculate their fair value. The Parent’s directors did not consider there to be any indications at the date of acquisition that these receivables would not be collected in full.

The valuation adjustment to liabilities of EUR 168 thousand corresponded mainly to the deferred tax liability associated with the valuation adjustments.

The net profit or loss and income obtained in 2019 included on the consolidated income statement for 2019 amounted to EUR 7,093 thousand and EUR 2,279 thousand, respectively, and did not differ significantly from the total impact of the year of the acquired company.

Net cash flow from the acquisition

	Thousands of
	euros
Cash paid	27,555
Less: cash and cash
equivalents	(314)
Total	27,241

3)Innovación Colaborativa, S.L.

On 26 March 2019, the Parent acquired 53.97% of Innovación Colaborativa, S.L. for EUR 1,667 thousand. With this acquisition, the Parent shares 100% of the share capital of this company. The core business of the acquired company is flexible office space management. The aim of this business combination is to integrate a growing business line and offer more services to the Group's customers. The contribution to profit or loss for the year was not significant. Likewise, no significant initial consolidation differences were identified.

In accordance with IFRS 3 (Business Combinations), the Group has a period of 12 months to complete the final allocation of prior acquisitions. At the end of 2019, the Parent's Directors considered the aforementioned allocations of the assets identified and the liabilities assumed as final. For its part, in relation to the 2020 combination, it was also considered definitive.

4)Corporate reorganisation of subsidiaries and acquisitions

On 5 July 2019, the Managing Bodies of the absorbing and absorbed companies approved the draft merger by reverse absorption of Merlin Parques Logística, S.A. by Parc Logistic of Zona Franca, S.A. This process ended in 2019 and has no effect on the Group's consolidated financial statements.

In 2019, the holding group Jaureguizar Group 2002, S.A.U. was wound up, with no effect on the Group's consolidated financial statements.

On 30 October 2019, the Parent acquired Desarrollos Urbanísticos Udra, S.A.U. (part of the San José Business Group) and a 14.46% stake in Distrito Castellana Norte, S.A. (DCN) for a total of EUR 168,893 million. Its current activity consists of preparing the future development of the land owned by ADIF (the Spanish Railway Infrastructure Administrator) and RENFE-Operator, in the urban areas APR 08.03 ‘La Castellana Extension’ and APE 05.27 ‘Colonia Campamento’ of the current Madrid General Plan for their subsequent real estate exploitation. After the acquisition, DCN is held 75.54% by Inverahorro, S.L. (wholly owned by Banco Bilbao Vizcaya Argentaria, S.A.), 10% by Udra, S.A.U. (belonging to the San José Business Group), and 14.46% by the Parent. That acquisition was consolidated by the equity method by considering that the Parent has a significant influence because it has a presence on the Board of Directors of that company, even if the percentage of participation is less than 20% (see Note 9).

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4.      Distribution of the profit of the Parent

The distribution of profit proposed by the Parent’s directors for approval by its shareholders at the Annual General Meeting is as follows:

	Thousands of euros
Profit/(Loss) for the year	(25,467)
Distribution:
To prior year negative results	25,467

Other dividends distributed

On 17 June 2020, the General Shareholders Meeting approved the distribution of a dividend of EUR 68,518 thousand charged to the profit for 2019.

In the last five years, the Company distributed the following dividends and Share Premium refunds (thousand euros):

	2020	2019	2018	2017	2016
Shareholder remuneration	68,518	232,347	215,364	187,411	101,202

.

5.    Accounting policies

The main accounting policies and measurement bases applied in preparing the Group’s consolidated financial statements, which comply with the IFRSs in force at the date thereof, are as follows:

5.1 Investment property

Investment property comprises buildings under construction and development for use as investment property held (by the owner or by the tenant as an asset under usage rights), which are partially or fully held to generate revenue, profits or both, rather than for use in the production or supply of goods or services, or for the Group’s administrative purposes or sale in the ordinary course of business.

All assets and usage rights (through the corresponding administrative concession or area right granted by a public body) classified as real estate investments are in operation with various tenants. These properties are earmarked for leasing to third parties. The Parent’s directors do not plan to dispose of these assets in the coming 12 months and have therefore decided to recognise them as investment property in the consolidated statement of financial position.

Investment property is carried at fair value at the reporting date and is not depreciated. Investment property includes land, buildings, usage rights of concessionaire projects and other constructions held to earn rentals or for the obtainment of gains on the sale as a result of future increases in the respective market prices.

Gains or losses arising from changes in the fair value of investment property are included in the income statement for the year in which they arise.

While construction work is in progress, the costs of construction work and finance costs are capitalised. The aforementioned assets are recognised at fair value when they become operational.

In accordance with IAS 40, the Group periodically determines the fair value of its investment property so that the fair value reflects the actual market conditions of the investment property items at that date. This fair value is determined every six months based on the appraisals undertaken by independent experts.

The market value of the Group’s investment property at 31 December 2020, calculated based on appraisals carried out by Savills, JLL and CBRE, independent appraisers not related to the Group, amounted to EUR 12,180,759 thousand (see Note 7).

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5.2 Inventories

Land held for sale or integration into property development is considered as inventories. The Group considers that its inventories do not meet the requirements of IAS 40 for consideration as investment property.

At 31 December 2020, certain land acquired in the course of 2020, which is part of a future urban development, has been registered as inventories and is currently pending final urban planning.

In relation to them, the Group maintains agreements with third parties for the future sale of those whose use is residential and for which it received, at 31 December 2020, advances amounting to EUR 1,030 thousand.

The Group valuates its inventories at acquisition cost (or at market value if the latter is lower), including both the acquisition cost of the land and plots, the urban planning costs, the construction costs and the personnel directly related to the real estate activity, as well as, where applicable, financial expenses to the extent that those expenses correspond to the period of urban planning and construction, provided that they are inventories that need a period of more than one year to be able to be sold. If the inventories are registered at a cost price higher than their market value, the appropriate valuation adjustments are made, recording the corresponding impairment.

5.3 Investments accounted for using the equity method

At 31 December 2020, this heading in the consolidated statement of financial position included the amount corresponding to the percentage of shareholders’ equity of the investee relating to the Parent and accounted for using the equity method. In addition, and after accounting for these investments using the equity method, the Group decides whether or not an additional impairment loss needs to be recognised with regard to the Group’s net investment in the associate.

5.4 Leases

At the beginning of a contract, the Group assesses whether the contract is or contains a lease. A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

The group reassesses whether a contract is, or contains, a lease only if the terms of the contract change.

5.4.1 Tenant

For a contract containing a lease component and one or more additional leases or non-leases, the Group will distribute the consideration of the contract to each component of the lease based on the relative price regardless of the lease component and the aggregate price independent of the components that are non-lease components.

The relative price, independent of the lease and non-lease components, will be determined based on the price that the landlord, or a similar supplier, would charge an entity separately for that component or for a similar component. If there is no readily available separate observable price, the Group will estimate the separate price, maximising the use of observable information.

The Group chose not to apply the recognition and measurement requirements indicated in IFRS 16 to short-term leases in which the underlying asset is of low value, recognising the lease payments associated with leases as a straight-line expense over the lease term.

Initial recognition

At the commencement date, a tenant recognises a right-of-use asset and a lease liability.

At the commencement date, a tenant will measure a right-of-use asset at cost. The cost of the right-of-use asset includes:

(a)the amount of the initial measurement of the lease liability measured at the commencement date at the present value of the lease payments that were not paid at that date. Lease payments will be discounted using the interest rate specified in the lease, if that rate could be easily determined. If that rate cannot be easily determined, the tenant will use the tenant's incremental loan rate.

(b)lease payments paid before or from the commencement date, less leases received;

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(c)the initial direct costs incurred by the tenant; and

(d)an estimate of the costs incurred by the tenant when dismantling and eliminating the underlying asset, restoring the location where it is located or restoring the underlying asset to the condition required by the terms of the lease, unless those costs are incurred to produce inventories. The tenant could incur obligations as a result of these costs either at the commencement date or as a result of using the underlying asset for a specified period.

At the start date, the lease payments included in the measurement of the lease liability comprise the following payments for the right to use the underlying asset during the lease term that are not paid at the commencement date:

(a)fixed payments, less any leases receivable;

(b)variable lease payments, which depend on an index or rate, initially measured using the index or rate at the commencement date;

(c)amounts expected to be paid by the tenant as guarantees of residual value;

(d)the exercise price of a call option if the tenant is reasonably confident of exercising that option;

(e)late lease payments if the lease term reflects that the tenant will exercise an option to terminate the lease.

Subsequent measurement of the right-of-use asset

After the commencement date, the Group will measure its right-of-use assets using the cost model, unless it applies the fair value model of IAS 40 ‘Investment properties’ to its investment properties and rights of use that meet the definition of investment property (see Note 5.1). If the right of use of the assets relates to a class of property, plant and equipment to which the tenant applies the revaluation model of IAS 16, the tenant may choose to use that revaluation model for all right-of-use assets of assets related to that class of property, plant and equipment.

Subsequent measurement of lease liabilities

After the commencement date, the Group will measure a lease liability by:

(a)increasing the carrying amount to reflect interest on the lease liability;

(b)reducing the carrying amount to reflect the lease payments paid; and

(c)re-measuring the carrying amount to reflect the new measurements or changes in the lease and also to reflect the essentially fixed lease payments that have been revised.

5.4.2 Landlord

A landlord will classify each lease as an operating lease or a finance lease.

A lease will be classified as a finance lease when it substantially transfers all the risks and rewards inherent to owning an underlying asset. A lease will be classified as an operating lease if it does not substantially transfer all the risks and rewards inherent to owning an underlying asset.

Finance leases

At the commencement of the lease term, the Group recognises finance leases in the consolidated statement of financial position at amounts equal to the fair value of the leased asset or, if lower, the present value of the minimum lease payments. To calculate the present value of the lease payments the interest rate stipulated in the finance lease is used.

The cost of assets acquired under finance leases is presented in the consolidated statement of financial position based on the nature of the leased asset. These assets relate in full to investment property and are measured in accordance with that established in Note 5.1.

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Operating leases

A landlord recognises lease payments from operating leases as income on a straight-line basis or on another systematic basis. The landlord will apply another systematic basis if it is more representative of the structure with which the profit from the use of the underlying asset is reduced.

The Group will recognise the costs as expenses, including depreciation, incurred to obtain the lease income.  It will also add the initial direct costs incurred to obtain an operating lease to the carrying amount of the underlying asset and recognise these costs as an expense over the lease term, on the same basis as the lease income.

5.5 Financial Instruments

Financial instruments are recognised when the Group becomes a party to the contractual provisions of the instrument. From 1 January 2018, the Group classified its financial assets in accordance with IFRS 9 ‘Financial Instruments'.

The classification of financial assets will depend both on how an entity manages its financial instruments (its business model) and on the existence and characteristics of the contractual cash flows of the financial assets. Based on the above, the asset is measured at amortised cost, at fair value through changes in other comprehensive income or at fair value through changes in profit or loss for the period, as follows:

•If the purpose of the business model is to hold a financial asset in order to collect contractual cash flows and, under the terms of the agreement, cash flows are received at specific dates that exclusively constitute payments of the principal plus interest on the principal, the financial asset will be measured at amortised cost.

•If the business model aims at both obtaining contractual cash flows and selling them and, under the terms of the agreement, cash flows are received at specific dates that exclusively constitute payments of the principal plus interest on the principal, the financial assets are measured at fair value through changes in other overall income (equity).

Outside these scenarios, the remaining assets will be measured at fair value through changes in losses and gains. All equity instruments (e.g. shares) are, by default, measured in this category. This is because their contractual flows do not meet the characteristic of being only payments of principal and interest. Financial derivatives are also classified as financial assets at fair value through profit or loss unless they are designated as hedging instruments.

For the purposes of measurement, financial assets should be classified into one of the following categories, with the accounting policies of each category being as follows:

1.Financial assets at amortised cost: these assets are subsequently recognised at their initial cost amortised in accordance with the effective interest method. This amortised cost will be reduced by any impairment loss. They are recognised in the consolidated income statement for the period when the financial asset is derecognised or impaired, or due to exchange differences. Interest calculated using the effective interest method is recognised in the income statement under the heading ‘Financial income’.

2.Financial assets at fair value with profit or loss: financial assets at fair value with profit or loss are recognised initially and subsequently at fair value, excluding transaction costs, which are charged to the income statement. Gains or losses from changes in fair value are presented in the income statement under the heading ‘Changes in the fair value of financial instruments’ in the period in which they originated. Any dividends and interest also leads to financial results.

3.Debt instruments at fair value with changes in total profit or loss: These instruments are subsequently recognised at fair value, recognising changes in fair value in ‘Other comprehensive income’. Interest income, impairment losses and exchange differences are recognised in the consolidated income statement. When sold or derecognised, the accumulated fair value adjustments recognised in ‘Other comprehensive income’ are included in the income statement as ‘other financial income/(expenses)'.

4.Equity instruments at fair value with changes in total profit or loss: Their subsequent measurement is at fair value. Dividends are only recorded in profits and loss, unless the dividends clearly represent a recovery in the cost of the investment. Other gains or losses are recognised as ‘Other comprehensive income’ and are never reclassified as profit or loss.

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Impairment of financial assets

The impairment model applies to financial assets measured at amortised cost that include the item ‘Customers and other receivables'.

The impairment model is based on a dual measurement approach, under which there will be an impairment provision based on expected losses over the next 12 months or based on expected losses over the entire life of the asset. The fact that determines the transition from the first approach to the second is that there is a significant decline in creditworthiness.

The deterioration of the Group's receivables was not significant, taking into account that the risk of default was less than 1% of turnover and that the Group has deposits from its tenants to secure its loans.

Financial liabilities

The main financial liabilities held by the Group companies are held-to-maturity financial liabilities, which are measured at amortised cost. The financial liabilities held by the Group companies are classified as:

1.Bank loans and other loans: loans from banks and other lenders are recognised by the proceeds received, net of transaction costs.

Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the term of the borrowings using the effective interest method.

Financial debt is eliminated from the consolidated statement of financial position when the obligation specified in the agreement is paid, cancelled or expired. The difference between the carrying amount of a financial liability that has been cancelled or transferred to another party and the consideration paid, including any transferred assets other than the cash or liabilities assumed, is recognised in profit or loss for the year as other financial income or expenses.

Exchanges of debt instruments between the Group and a counterparty and substantial changes to initially recognised liabilities are recognised as a cancellation of the original financial liability and the recognition of a new financial liability, provided that the instruments have substantially different terms. The Group considers that the conditions are substantially different if the present value of the cash flows discounted under the new conditions, including any net commission paid from any commission received, and using the original effective interest rate to make the discount, differs by at least 10 percent from the discounted present value of the cash flows that still fall outside the original financial liability.

If the exchange is recognised as a cancellation of the original financial liability, the costs or fees are recognised in the consolidated income statement as part of the consolidated income statement. Otherwise, the modified flows are discounted at the original effective interest rate, recognising any difference with the prior carrying amount, in profit or loss. Likewise, the costs or fees adjust the carrying amount of the financial liability and are amortised by the amortised cost method for the remaining life of the modified liability.

The Group recognises the difference between the carrying amount of a financial liability or the part of it cancelled or transferred to a third party and the consideration paid, including any assets transferred other than the cash or liabilities assumed in profit or loss.

The Group will account for exchanges of debt instruments with a lender, provided that the instruments have substantially different conditions, such as a cancellation of the original financial liability and subsequent recognition of a new financial liability. Similarly, a substantial change in the terms of an existing financial liability or a part of it will be recognised as a cancellation of the original financial liability and a subsequent recognition of a new financial liability. The difference between the carrying amount of the cancelled financial liability and the consideration paid, which includes any transferred assets other than cash or any liabilities assumed, will be recognised in profit or loss for the year.

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If it is determined that the new terms or changes of a financial liability are not substantially different from the existing ones and it is therefore determined that the change is not substantial, the existing financial liability will not be derecognised. The Group will recalculate the gross carrying amount of the financial liability and recognise in profit or loss for change. The gross carrying amount of the financial liability will be recalculated as the present value of the renegotiated or modified contractual cash flows discounted at the original effective interest rate of the financial liability.

2.Trade and other payables: trade payables are initially recognised at fair value and are subsequently measured at amortised cost using the effective interest method.

The Group derecognises financial liabilities when the obligations giving rise to them cease to exist.

5.6 Derivative financial instruments and hedge accounting

The Group uses derivative financial instruments to hedge the risks to which its future activities, transactions and cash flows are exposed. There risks are mainly due to changes in interest rates. Among the various transactions, the Group uses certain financial instruments as economic hedges.

Derivatives are initially recognised at fair value at the date on which the derivative contract is signed and are subsequently measured at fair value at the date of each balance sheet. The accounting for subsequent changes in fair value depends on whether the derivative has been designated as a hedging instrument and, if so, on the nature of the item it is hedging.

At the beginning of the hedging relationship, the Group documents the economic relationship between the hedging instruments and the hedged items, including whether changes in the cash flows of the hedging instruments are expected to offset changes in the cash flows of the hedged items. The Group documents its risk management objective and strategy to undertake its hedge transactions.

The effective part of the changes in the fair value of the derivatives that are designated and classified as cash flow hedges is recognised in the cash flow hedge reserve under equity. The gain or loss related to the ineffective part is recognised immediately in the consolidated profit/(loss) for the year.

Gains or losses relating to the effective part of the change in the intrinsic value of the option agreements are recognised in the cash flow reserve hedge under equity. Changes in the time value of option agreements that relate to the hedged item (‘aligned time value’) are recognised under other comprehensive income in the costs of the hedge reserve in equity.

When forward contracts are used to hedge expected transactions, the Group generally designates only the change in the fair value of the forward contract related to the cash component as the hedging instrument. Gains or losses related to the effective part of the change in the cash component of forward contracts are recognised in the cash flow hedge reserve under equity. The change in the forward element of the contract related to the hedged item is recognised in other comprehensive income on the costs of the hedge reserve under equity. In some cases, the gains or losses corresponding to the effective part of the change in fair value of the full term contract are recognised in the cash flow hedge reserve under equity.

–Cash flow hedges: In hedges of this nature, the portion of the gain or loss on the hedging instrument that has been determined to be an effective hedge is recognised temporarily in equity and is recognised in the income statement in the same period during which the hedged item affects profit or loss, unless the hedge relates to a forecast transaction that results in the recognition of a non-financial asset or a non-financial liability, in which case the amounts recognised in equity are included in the initial cost of the asset or liability when it is acquired or assumed.

–Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gains or losses on the hedging instrument recognised in equity are retained in equity until the forecast transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to net profit or loss for the year.

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and provided that the host contracts are not measured at fair value by recognising changes in fair value in the consolidated statement of comprehensive income.

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The fair value of the derivative financial instruments is calculated using the valuation techniques described in Note 5.7 below.

5.7 Valuation techniques and applicable assumptions to measure fair value

The fair value of financial assets and liabilities is calculated as followed:

–The fair value of financial assets and liabilities with standard terms and that are traded on active, liquid markets is calculated by reference to prices quoted in the market.

–The fair value of financial assets and liabilities (except derivative instruments) is calculated in accordance with the generally accepted valuation models based on discounted cash flows using the prices of observable market transactions and the contributor prices of similar instruments.

–The fair value of interest rate swaps is calculated by discounting future settlements between fixed and floating interest rates to their present value, in line with implicit market interest rates, obtained from long-term interest rate swap curves. Implicit volatility is used to calculate the fair values of caps and floors using option valuation models.

Consideration must be given when valuing financial derivative instruments that the derivative must also effectively offset the exposure inherent to the hedged item or position throughout the expected term of the hedge, and there must be adequate documentation evidencing the specific designation of the financial derivative to hedge certain balances or transactions and how this effectiveness was intended to be achieved and measured. Moreover, pursuant to IFRS 13 and due to the inherent risk, the credit risk of the parties to the contract (both their own risk and that of the counterparty) must be included in the valuation of the derivatives. The Group applied the discounted cash flow method, considering a discount rate affected by the Merlin Group’s own credit risk.

In particular for the measurement of the implicit derivative of the income, the Group based its estimate on the future total income arising from the agreement adjusted by the counterparty's credit risk. The estimate of future rental income was based on the eurozone inflation swaps (harmonised CPI in the euro area excluding tobacco) at the time of the analysis, and it considers the credit risk of the corresponding counterparty. The measurement approach used was based on the discounted cash flow model.

The following information is used in determining the value of the embedded income derivative (Note 10):

–Forward curve of the consumer price index of the Euro area without tobacco (HICP).

–Volatility of the HICP to calculate the value of the land (0%) included in leases.

–EUR discount factors for calculating the present value of future income (sum of the components of future income and value of land).

–Credit risk charges (Credit Default Swap) for the calculation of the adjustment for the value of the counterparty's credit risk (CVA).

HICP forward curve

For the construction of the curve, the 30-year zero coupon swap is used. From year to year, the annual rates are integrated and interpolated, applying seasonality adjustments, to obtain the forward rate curve.

HICP volatility

0% is taken as an initial premium for land. Subsequently, the volatility of each future settlement or forward year by year (floorlet) is calculated. Once the volatilities and forward rates are available, the amount of the land component is determined.

EUR discount factors

Since the market standard requires swap derivatives to be discounted at the Overnight indexed swap rate, both Euribor and Eonia rates are included in the yield curve data. The yield curve data used for the calculations are:

Deposit fees: 1D, 2D, 3D

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Fixing of the Euribor: 1M, 3M and 6M                 

Futures of Euribor: between 6M and 2Y

Euribor Swap Rates: from 2Y to 30Y

EONIA swap base fees: up to 30Y

Credit Default Swap (CDS) rates

We use CDS market data and interpolate for the specific deadlines or periods of the rents. We use the ‘Current Exposure Method’ to calculate the CVA.

Financial instruments measured subsequent to initial recognition at fair value are grouped into levels 1 to 3 based on the degree to which the fair value is observable:

–Level 1: those measured using quoted prices (unadjusted) in active markets for identical assets or liabilities.

–Level 2: those measured using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

–Level 3: those measured using valuation techniques, including inputs for the asset or liability that are not based on observable market data (non-observable inputs).

The Group's financial assets and liabilities measured at fair value were as follows at 31 December 2020:

2020

	Thousands of euros
	Level 1	Level 2	Level 3	Total
Derivative financial instruments (Note 14.3)	—	(128,622)	—	(128,622)
Embedded derivatives (Note 10)	—	107,910	—	107,910
Available-for-sale financial assets (Note 10)	17,254	—	86,521	103,775
	17,254	(20,712)	86,521	83,063

2019

	Thousands of euros
	Level 1	Level 2	Level 3	Total
Derivative financial instruments (Note 14.3)	—	(96,926)	—	(96,926)
Embedded derivatives (Note 10)	—	124,684	—	124,684
Available-for-sale financial assets (Note 10)	17,540	—	—	17,540
	17,540	27,758	—	45,298

In addition, Note 7 includes information regarding the determination of the fair value of investment property.

5.8 Equity instruments

An equity instrument is a contract that evidences a residual interest in the assets of the Parent after deducting all of its liabilities.

Capital instruments issued by the Parent are recognised in equity at the proceeds received, net of issue costs.

The Parent’s equity instruments acquired by the Group are recognised separately at cost and deducted from equity in the consolidated statement of financial position, regardless of why they were acquired. No gains or losses from transactions involving own equity instruments are recognised in the consolidated income statement.

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If the Parent’s own equity instruments are subsequently retired, the capital is reduced by the nominal amount of these treasury shares and the positive or negative difference between the acquisition price and nominal amount of the shares is debited from or credited to reserves.

Transaction costs related to own equity instruments are recognised as a decrease in equity, net of any related tax effect.

5.9 Distributions to shareholders

Dividends are paid in cash and recognised as a reduction in equity when the pay-outs are approved by shareholders at the Annual General Meeting.

The Parent is subject to the special regime for REITs. As established in article 6 of Law 11/2009, of 26 October 2009, amended by REITs Law opting to pay tax under the special tax regime are required to distribute the profit generated during the year to shareholders as dividends. Once the corresponding commercial obligations have been fulfilled, the distribution must be passed within six months from year end, and the dividends paid within one month from the date on which the pay-out is passed.

Moreover, as specified in Law 11/2009, of 26 October 2009, amended by Law 16/2012, of 27 December, the Parent must distribute the following as dividends:

–100% of the profit from dividends or shares in profits distributed by the entities referred to in article 2.1 of Law 11/2009.

–At least 50% of the profits arising from the transfer of the properties, shares or ownership interests referred to in article 2.1 of Law 11/2009, of 26 October, subsequent to expiry of the time limits referred to in article 3.2  of Law 11/2009, which are used for pursuit of the entities' principal corporate purpose. The remainder of these profits must be reinvested in other property or investments used for the pursuit of said activity within three years after the transfer date. Otherwise these profits should be distributed in full together with any profit arising in the year in which the reinvestment period expires. If the items to be reinvested are transferred prior to the end of the holding period, that profit must be distributed in full together with, if applicable, the profit generated during the year in which the items were transferred. The obligation to distribute profit does not apply to the portion of the profit attributable to prior years in which the Company was not included under the special tax regime established in this Law.

–At least 80% of the remaining profits obtained. When dividend distributions are charged to reserves generated from profits in a year in which the special tax regime applied, the distribution must necessarily be approved as set out above.

5.10 Cash and cash equivalents

The Group includes under this heading cash and short-term highly liquid investments maturing in less than three months that are readily convertible to cash and which are subject to an insignificant risk of changes in value. The interest income associated with these transactions is recognised as income when accrued while unmatured interest is presented in the consolidated statement of financial position as an addition to the balance of the aforementioned heading.

5.11 Provisions

When preparing the consolidated financial statements the Parent’s directors made a distinction between:

–Provisions: credit balances covering present obligations arising from past events with respect to which it is probable that an outflow of resources embodying economic benefits that is uncertain as to its amount and/or timing will be required to settle the obligations; and

–Contingent liabilities: possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more future events not wholly within the Group’s control.

The consolidated financial statements include all the provisions with respect to which it is likely that the obligation will have to be settled. Contingent liabilities are not recognised in the consolidated financial statements but rather are disclosed in the notes to the consolidated financial statements, unless the possibility of an outflow in settlement is considered to be remote.

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Provisions are measured at the present value of the best possible estimate of the amount required to settle or transfer the obligation, taking into account the information available on the event and its consequences. Where discounting is used, adjustments made to provisions are recognised as finance cost on an accrual basis.

The compensation receivable from a third party on settlement of the obligation is recognised as an asset, provided there is no doubt that the reimbursement will take place, unless there is a legal relationship whereby a portion of the risk has been externalised, as a result of which the Group is not liable, in which case, the compensation will be taken into account when estimating the amount of the related provision.

5.12 Revenue recognition

Revenue and expenses are recognised on an accrual basis, i.e. when the actual flow of the related goods and services occurs, regardless of when the resulting monetary or financial flow arises. Rental income is measured at the fair value of the consideration received, net of discounts and taxes.

Discounts (rent waivers and rebates) granted to lessees are recognised as a reduction in rental income when it is probable that conditions precedent will be fulfilled requiring them to be granted.

Discounts are recognised by expensing the total rent waiver or rebate on a straight-line basis over the term of the lease agreement in force. If a lease agreement is cancelled earlier than expected, any outstanding rent waiver or rebate is recognised in the last period prior to the end of the agreement.

Leasing of investment property to third parties

The Group companies’ principal activity comprises the acquisition and leasing of primarily shopping malls, logistics units and offices. The Group’s ordinary income is generated from the leasing of this investment property to third parties.

Ordinary income from the leasing of investment property is recognised taking into account the stage of completion of the transaction at the reporting date, provided the result of the transaction can be reliably estimated. Income from the Group’s leases is recognised by Group companies on a monthly basis pursuant to the terms and amounts agreed with the tenants in the various leases. This income is only recognised when it can be measured reliably and it is probable that the economic benefits from the lease will be received.

In the case of services whose end result cannot be reliably estimated, income is recognised up to the limit of recognised expenses that are recoverable.

Service charges rebilled to tenants are recognised net of other operating expenses.

5.13 Income tax

5.13.1 General regime

Tax expense (tax income) comprises current tax expense (current tax income) and deferred tax expense (deferred tax income).

The current income tax expense is the amount payable by the Group as a result of income tax settlements for a given year. Tax credits and other tax benefits, excluding tax withholdings and pre-payments, and tax loss carryforwards from prior years effectively offset in the current year reduce the current income tax expense.

The deferred tax expense or income relates to the recognition and derecognition of deferred tax assets and liabilities. These include temporary differences measured at the amount expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities and their tax bases, and tax loss and tax credit carryforwards. These amounts are measured at the tax rates that are expected to apply in the period when the asset is realised or the liability is settled.

Deferred tax liabilities are recognised for all taxable temporary differences, unless the temporary difference arises from the initial recognition of goodwill, goodwill for which amortisation is not deductible for tax purposes or the initial recognition of other assets and liabilities in a transaction that affects neither accounting profit (loss) nor taxable profit (tax loss).

Deferred tax assets are recognised for temporary differences to the extent that it is considered probable that the consolidated companies will have sufficient taxable profits in the future against which the deferred tax asset can

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be utilised, and the deferred tax assets do not arise from the initial recognition of other assets and liabilities in a transaction that affects neither accounting profit (loss) nor taxable profit (tax loss). The other deferred tax assets (tax loss, temporary differences and tax credit carryforwards) are only recognised if it is considered probable that the consolidated companies will have sufficient future taxable profits against which they can be utilised.

The deferred tax assets recognised are reassessed at the end of each reporting period and the appropriate adjustments are made to the extent that there are doubts as to their future recoverability. Also, unrecognised deferred tax assets are reassessed at the end of each reporting period and are recognised to the extent that it has become probable that they will be recovered through future taxable profits.

5.13.2 REIT regime

The REIT special tax regime, as amended by Law 16/2012 of 27 December, is based on a 0% corporate income tax rate, provided certain requirements are met. Particularly noteworthy amongst those terms is that at least 80% of income must come from urban real estate used for leasing purposes and acquired in full ownership or through holdings in Spanish or foreign companies, regardless of whether or not they are listed on organised markets, that meet the same investment and profit distribution requirements. Likewise, the main sources of income for these entities must come from the real estate market, either through leasing the properties, their subsequent sale after a minimum lease period, or the income generated from holdings in entities with similar characteristics. Nevertheless, tax is accrued in proportion to dividend distributions. Dividends received by the shareholders are exempt, unless the recipient is a legal person subject to corporate income tax or a permanent establishment of a foreign entity, in which case a deduction in the tax liability is established, so that these earnings are taxed at the shareholder’s rate. However, the remaining earnings will not be taxed so long as they are not distributed to shareholders.

As established in Transitional Provision Nine of Law 11/2009, of 26 October, amended by Law 16/2012, of 27 December, which regulate REITs, the entity will be subject to a special tax rate of 19% on the total dividends or profit shares distributed to shareholders with a shareholding in the entity of 5% or more, when these dividends are exempt or taxed at a rate below 10% in the shareholders. The Group has therefore established the procedure guaranteeing confirmation by shareholders of their tax rate, proceeding where applicable, to withhold 19% of the dividend distributed to shareholders that do not meet the aforementioned tax requirements.

On 17 June 2020, the Company's General Shareholders Meeting resolved to distribute an ordinary dividend from the 2019 profit/(loss) on which the exemption established in article 21 of Law 27/2014, of 27 November, on Corporate Income Tax could apply to shareholders who meet the requirements of that provision.

5.14 Share-based payments

The Parent recognises, on the one hand, the goods and services received as an asset or as an expense, depending on their nature, when they are received and, on the other, the related increase in equity, if the transaction is equity-settled, or the related liability if the transaction is settled with an amount based on the value of the equity instruments.

In the case of equity-settled transactions, both the services rendered and the increase in equity are measured at the fair value of the equity instruments granted, by reference to the grant date. In the case of cash-settled share-based payments, the goods and services received and the related liability are recognised at the fair value of the latter, by reference to the date on which the requirements for recognition are met.

Additionally, the General Shareholders Meeting held on 26 April 2017 approved a remuneration plan for the management team and other important members of the Group’s workforce (which includes, inter alia, the Executive Directors and Senior Management), the measurement period of which is from 1 January 2017 to 31 December 2019 (the “2017-19 Incentive Plan”). In accordance with that plan, the beneficiaries may be entitled to receive (i) a certain monetary amount based on the increase in the share price; and (ii) shares in the Parent, provided that certain objectives are met.

Vesting of the incentive will independently be conditional upon the total rate of return obtained by the shareholder during the three-year period due to:

•an increase in the Parent’s share price plus the dividends distributed by the Company to shareholders during the measurement period

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In order for the right to the share-based incentive and to the EPRA NAV-based incentive to be vested, the total shareholder rate of return (TSR) must be at least 24%, as detailed below:

TSR NAV rate / TSR rate Share price	Percentage assigned to beneficiaries (“PR”)	Percentage assigned to shareholders
< 24%	0%	100%
≥ 24% and < 36%	6%	94%
≥ 36%	9%	91%

To calculate the TSR, (i) the percentage assigned to the Beneficiaries in accordance with the above table will be applied to the result of multiplying the Share Price TSR multiplied by the number of Shares of the Company as of 31 December 2019; (ii) the result of that transaction will be balanced through an adjustment mechanism in favour of the Beneficiaries, as, once a minimum return is reached, the Beneficiaries will be entitled to the assigned percentage of the total return generated from the start.

The date for calculating the amount of the incentive tied to the EPRA NAV per share and the amount of the incentive tied to the quoted price of the shares was 31 December 2019. The maximum amount to be received for the incentive tied to the share price from 2017 to 2019 amounted to EUR 37.5 million, which was paid out in 2020.

Also, the maximum amount of the incentive tied to EPRA NAV per share will be EUR 75 million and a maximum of 6,000,000 shares have been allocated for its payment. At 31 December 2019, there were 5,874,111 shares that were ultimately allocated to the incentive benchmarked to the EPRA NAV. 50% of the allocated shares will be paid out on the second settlement date, i.e., on the second business day after the formulation of the 2020 annual financial statements. The remaining 50% of the allocated shares will be paid out on the third settlement date, i.e., on the second business day after the formulation of the 2021 annual financial statements. However, these amounts may be modified based on how the EPRA NAV evolves in the 2021.

5.15 Employee obligations

Under current labour legislation, the Group companies are required to pay termination benefits to employees terminated under certain conditions.

When a restructuring plan is approved by the directors, made public and communicated to employees, the Group recognises the provisions required to meet any future payments resulting from their application. These provisions are calculated in accordance with the best estimates available of the foreseeable costs.

In this sense, at 31 December 2020, the Group does not have commitments for this item, and there is no Downsizing Plan in force.

5.16 Current assets and liabilities

The Group classifies its assets and liabilities as current and non-current in the consolidated statement of financial position. To this end, current assets and current liabilities are those that meet the following criteria:

•Assets are classified as current when they are expected to be realised, or are intended for sale or consumption, during the course of the Group’s normal operating cycle, when they are held primarily for the purpose of being traded, when they are expected to be realised within twelve months after the reporting date, or when they constitute cash or a cash equivalent, unless they are restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date.

•Liabilities are classified as current when they are expected to be settled during the course of the Group’s normal operating cycle, when they are held primarily for the purpose of being traded, when they are expected to be settled within twelve months after the reporting date, or when the Group does not have an unconditional right to defer repayment of the liability for at least twelve months after the reporting date.

•Derivative financial instruments not held for trading are classified as current or non-current according to the period of maturity or periodic settlement.

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5.17 Segment information

The Group groups its segments based on the nature of the assets in the various areas in which it implements its strategy. In this sense, each operating segment is a component of the Group that performs business activities from which it can earn revenue and incur expenses. The operating results of each segment are regularly reviewed by the Group's management to decide on the resources to be allocated to each segment, assess its performance and for which differentiated financial information is available.

5.18 Earnings per share

Basic earnings per share are calculated by dividing net profit or loss attributable to the Parent’s shareholders by the weighted average number of ordinary shares outstanding during the year, excluding the average number of shares of the Parent held by the Group companies.

For the calculation of the diluted profit per share, the Group calculates the amounts of the diluted earnings per share for the profit for the year attributable to the shareholders of the Parent and, where applicable, the profit for the year of the ongoing activities attributable to those holders of equity instruments.

To calculate the diluted earnings per share, the Group takes the profit or loss for the year attributable to the holders of ordinary equity instruments and the weighted average number of shares in circulation for all the dilutive effects inherent to the potential ordinary shares.

5.19 Environment

The Group carries out activities whose primary purpose is to prevent, mitigate or repair environmental damage caused by its operations.

Expenses incurred in connection with these environmental activities are recognised as other operating expenses in the year in which they are incurred. However, because of their nature, the Group’s business activities do not have a significant environmental impact.

5.20 Consolidated statements of cash flows

The following terms are used in the consolidated statements of cash flows (prepared using the indirect method) with the meanings specified:

1.Cash flows: inflows and outflows of cash and cash equivalents, which are short-term, highly liquid investments that are subject to an insignificant risk of changes in value.

2.Operating activities: the principal revenue-producing activities of the entities composing the consolidated Group and other activities that are not investing or financing activities.

3.Investing activities: the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents.

4.Financing activities: activities that result in changes in the size and composition of the equity and liabilities that are not operating activities.

6.    Segment reporting

a)  Basis of segmentation

The Group's management has segmented its activities into the business segments detailed below according to the type of assets acquired and managed:

•Offices

•Net leases

•Shopping centres

•Logistics

•Other

32

Any revenue or expense that cannot be attributed to a specific line of business or relate to the entire Group are attributed to the Parent as a “Corporate unit/Other”, as are the reconciling items arising from the reconciliation of the result of integrating the financial statements of the various lines of business (prepared using a management approach) and the Group’s consolidated financial statements.

The profits of each segment, and each asset within each segment, are used to measure performance as the Group considers this information to be the most relevant when evaluating the segments’ results compared to other groups operating in the same businesses.

The Group carried out its business activities in Spain and Portugal in the year ended 31 December 2020.

b)  Basis and methodology for business segment reporting

The segment information below is based on monthly reports prepared by Group management and is generated using the same computer application that prepares all the Group’s accounting information. The accounting policies applied to prepare the segment information are the same as those used by the Group, as described in Note 5.

Segment revenue relates to ordinary revenue directly attributable to the segment plus the relevant proportion of the Group’s general income that can be allocated on a reasonable basis to that segment. Ordinary revenue of each segment does not include interest or dividend income, gains on the disposal of investment property, debt recoveries or cancellation.

Segment expenses are calculated as the directly attributable expenses incurred in the operating activities, plus the corresponding proportion of the expenses that can be reasonably allocated to the segment.

The segment profit or loss is presented before any adjustment for non-controlling interests.

Segment assets and liabilities are those directly related to each segment’s operations, plus the assets and liabilities that can be directly attributed thereto using the aforementioned allocation system, and include the proportional part of the assets and liabilities of joint ventures.

33

Segment reporting

Segment information about these businesses at 31 December 2020 is presented below:

	Thousands of euros
2020	Office buildings	Net Lease	Shopping centres	Logistics	Other	Corporate Unit	Group total
Rental income	221,974	86,153	68,437	56,652	7,846	—	441,062
Revenue from services rendered	3,098	—	699	—	—	1,273	5,070
Revenues	225,072	86,153	69,136	56,652	7,846	1,273	446,132
Other operating income	1,670	—	623	147	77	123	2,640
Staff costs	—	—	—	—	—	(40,888)	(40,888)
Operating expenses	(28,059)	(932)	(16,124)	(3,339)	(1,463)	(17,018)	(66,936)
Gains or losses on disposals of non-current assets	—	162	(14,350)	(1)	(111)	—	(14,300)
Depreciation and amortisation charge	(495)	—	—	—	(13)	(1,106)	(1,614)
Excess provisions	(38)	—	—	—	—	8	(30)
Changes in fair value of investment property	57,860	12,575	(206,125)	79,436	(28,214)	—	(84,468)
Negative goodwill on business combinations							—
Profit/(loss) from operations	256,010	97,958	(166,841)	132,895	(21,878)	(57,608)	240,536
Change in the fair value of financial instruments-
Changes in fair value of financial instruments - Embedded derivative	—	(15,010)	—	—	—	—	(15,010)
Changes in fair value of financial instruments - Other	—	(8,809)	—	(1,511)	—	(9,822)	(20,142)
Finance income	—	—	—	—	—	3,387	3,387
Finance expenses	(338)	(22,474)	(6,596)	(6,351)	—	(113,895)	(149,653)
Profit/(loss) on disposal of financial instruments	—	—	—	—	—	(62)	(62)
Share of results of companies accounted for using the equity method	—	—	—	—	—	(3,444)	(3,444)
Profit/(Loss) before tax	255,672	51,665	(173,437)	125,033	(21,878)	(181,444)	55,612
Income tax	(3,171)	659	10,773	—	—	(7,515)	746
Profit/(Loss) for the year	252,502	52,324	(162,664)	125,033	(21,878)	(188,959)	56,358

34

	Thousands of euros
As of 31 December 2020	Office buildings	Net Lease	Shopping centres	Logistics	Other	Corporate Unit	Group total
Investment property	6,452,502	1,737,911	2,207,456	1,317,904	423,573	—	12,139,347
Non-current financial assets-	23,639	120,762	12,569	9,192	7	226,578	392,747
Derivatives	—	107,910	—	—	—	—	107,910
Other financial assets	23,639	12,852	12,569	9,192	7	226,578	284,837
Deferred tax assets	1,077	3,707	787	3,782	—	78,116	87,469
Other non-current assets	4,820	—	45	50	893	436,387	442,194
Non-current assets	6,482,038	1,862,381	2,220,857	1,330,928	424,474	741,081	13,061,757
Trade receivables	5,312	409	14,408	5,317	585	7,336	33,368
Other current financial assets	202	1,123	306	364	2	77,368	79,365
Other current assets	42,915	25,960	68,459	15,789	24	149,975	303,122
Current assets	48,430	27,493	83,172	21,470	612	234,679	415,856
Total assets	6,530,468	1,889,873	2,304,030	1,352,398	425,085	975,760	13,477,612
Non-current bank borrowings and debenture issues	16,643	726,366	—	68,243	—	4,946,646	5,757,899
Other non-current liabilities	330,719	46,910	222,706	77,556	1,760	164,536	844,186
Non-current liabilities	347,363	773,277	222,706	145,799	1,760	5,111,182	6,602,085
Current liabilities	40,399	11,203	27,216	17,717	2,850	79,876	179,260
Total liabilities	387,762	784,480	249,922	163,516	4,610	5,191,057	6,781,345

35

Segment information about these businesses at 31 December 2019 is presented below:

	Thousands of euros
2019	Office buildings	Net Lease	Shopping centres	Logistics	Other	Corporate Unit	Group total
Rental income	237,705	86,612	121,492	51,593	14,124	—	511,526
Revenue from services rendered	1,093	—	302	—	—	1,932	3,327
Revenues	238,798	86,612	121,794	51,593	14,124	1,932	514,853
Other operating income	270	—	316	148	64	2,001	2,799
Staff costs	—	—	—	—	—	(76,854)	(76,854)
Operating expenses	(27,752)	(757)	(18,136)	(2,695)	(1,904)	(13,229)	(64,473)
Gains or losses on disposals of non-current assets	(20,058)	414	182	553	(154)	—	(19,063)
Depreciation and amortisation charge	(281)	(2)	(73)	(3)	(10)	(1,754)	(2,123)
Excess provisions	47	—	—	(115)	—	154	86
Changes in fair value of investment property	264,378	7,701	(1,867)	80,974	3,786	—	354,972
Negative goodwill on business combinations	(2,865)	—	—	—	—	(1)	(2,866)
Profit/(loss) from operations	452,537	93,968	102,216	130,455	15,906	(87,751)	707,331
Change in the fair value of financial instruments-
Changes in fair value of financial instruments - Embedded derivative	—	2,397	—	—	—	—	2,397
Changes in fair value of financial instruments - Other	—	(2,687)	—	(1,476)	—	(9,302)	(13,465)
Finance income	5	—	4	—	2	653	664
Finance expenses	(492)	(22,762)	(3,972)	(4,909)	—	(84,107)	(116,242)
Profit/(loss) on disposal of financial instruments	5	—	—	31	—	(76)	(40)
Share of results of companies accounted for using the equity method	—	—	—	—	—	10,065	10,065
Profit/(Loss) before tax	452,055	70,916	98,248	124,101	15,908	(170,518)	590,710
Income tax	(21,186)	321	(6,635)	380	151	(102)	(27,071)
Profit/(Loss) for the year	430,869	71,237	91,613	124,481	16,059	(170,620)	563,639

36

	Thousands of euros
As of 31 December 2019	Office buildings	Net Lease	Shopping centres	Logistics	Other	Corporate Unit	Group total
Investment property	6,291,960	1,748,544	2,540,437	1,136,961	451,255	—	12,169,157
Non-current financial assets-	23,210	137,623	18,276	11,378	1,216	184,919	376,622
Derivatives	—	124,684	—	—	—	—	124,684
Other financial assets	23,210	12,939	18,276	11,378	1,216	184,919	251,938
Deferred tax assets	312	3,957	788	3,818	—	78,903	87,778
Other non-current assets	3,811	1	75	5,189	929	349,448	359,453
Non-current assets	6,319,293	1,890,125	2,559,576	1,157,346	453,400	613,270	12,993,010
Trade receivables	8,671	1,498	5,282	6,825	2,966	5,021	30,263
Other current financial assets	50	1,277	151	688	—	5,557	7,723
Other current assets	36,764	31,555	64,542	13,729	737	127,408	274,735
Current assets	45,485	34,330	69,975	21,242	3,703	137,986	312,721
Total assets	6,364,778	1,924,455	2,629,551	1,178,588	457,103	751,256	13,305,731
Non-current bank borrowings and debenture issues	18,348	757,792	131,745	66,715	—	4,566,602	5,541,202
Other non-current liabilities	347,848	46,903	242,553	75,446	7,483	121,593	841,826
Non-current liabilities	366,196	804,695	374,298	142,161	7,483	4,688,195	6,383,028
Current liabilities	47,959	15,018	29,223	20,987	1,598	99,218	214,003
Total liabilities	414,155	819,713	403,521	163,148	9,081	4,787,413	6,597,031

a)Geographical segment reporting

For the purposes of geographical segment reporting, segment revenue is grouped according to the geographical location of the assets. Segment assets are also grouped according to their geographical location.

The following tables summarises ordinary income and non-current investment property for each of the assets held by the Group by geographical area:

2020

	Thousands of euros
	Rental income	%	Investment property (a)	%
Madrid	216,868	49%	6,518,339	53%
Catalonia	75,036	17%	1,837,549	15%
Andalusia	21,021	5%	441,517	4%
Valencia	16,936	4%	398,190	3%
Galicia	13,710	3%	373,993	3%
Castilla-La Mancha	17,006	4%	540,051	4%
Basque Country	15,843	4%	380,386	3%
Rest of Spain	28,548	6%	672,634	5%
Portugal	36,094	8%	1,084,598	9%
Total	441,062	100%	12,247,257	100%

(a) Also includes the amount of the embedded derivative described in Note 10

37

2019

	Thousands of euros
	Rental income	%	Investment property (a)	%
Madrid	237,038	46%	6,383,215	52%
Catalonia	93,153	18%	2,002,321	16%
Valencia	21,610	4%	410,596	3%
Galicia	20,649	4%	400,275	3%
Andalusia	22,246	5%	451,762	4%
Basque Country	18,530	4%	394,106	3%
Castilla-La Mancha	15,492	3%	448,482	4%
Rest of Spain	36,375	7%	756,671	6%
Portugal	46,433	9%	1,046,413	9%
Total	511,526	100%	12,293,841	100%

(a) Also includes the amount of the embedded derivative described in Note 10

b)Main customers

The table below lists the most significant tenants as of 31 December 2020, and the primary characteristics of each of them:

2020
Position		Name		Type		% of total		Total %		Maturity
						of rents
1		BBVA		Net lease		16,10%		16,10%		2022-2040
									2			Endesa		Offices		3,70%		19,80%		2021-2030
3		Inditex		Logistics and shopping centres		2,90%		22,70%											2022-2024
									4		Técnicas Reunidas		Offices		2,10%		24,80%			2021-2022
5		Community of Madrid		Offices		1,90%		26,70%											2021-2030
									6		PricewaterhouseCoopers, S.L.		Offices		1,60%		28,30%			2022
7		Indra Sistemas, S.A.		Offices		1,40%		29,70%											2024
									8		Hotusa		Hotels		1,40%		31,10%			2023
9		Caprabo		Net lease		1,40%		32,50%											2026
									10		FNAC		Shopping centres		1,30%		33,80%			2022

38

2019
Position		Name		Type		% of total		Total %		Maturity
						of rents
1		BBVA		Net lease		15,30%		15,30%		2029-2040
									2			Endesa		Offices		4,10%		19,40%		2020-2028
3		Inditex		Logistics and shopping centres		3,00%		22,40%											2020-2022
									4		Técnicas Reunidas		Offices		2,10%		24,50%			2022
5		PricewaterhouseCoopers, S.L.		Offices		1,50%		26,00%											2022
									6		Hotusa		Hotels		1,50%		27,50%			2024
7		Caprabo		Net lease		1,30%		28,80%											2026
									8		Indra Sistemas, S.A.		Offices		1,30%		30,10%			2024
9		FNAC		Shopping centres		1,30%		31,40%											2022
									10		Dachser		Logistics		1,30%		32,70%			2021-2024

.

7.    Investment property

The breakdown of and changes in items included under the Investment Property heading in the consolidated statement of financial position in 2020 and 2019 were as follows:

	Thousands of euros
	2020	2019
Starting balance	12,169,157	11,740,461
Additions due to business combinations (Note 3)	—	112,846
Additions for the year	251,107	230,758
Disposals	(196,449)	(269,880)
Changes in value of investment property	(84,468)	354,972
Ending balance	12,139,347	12,169,157

Investment property is recognised at fair value. The expense recognised in the 2020 consolidated income statement from measuring investment property at fair value amounted to EUR 84,468 thousand (EUR 354,972 thousand in income in 2019).

Investment property mainly includes property assets in the office, net lease, shopping centre and logistics segments.

39

Additions and assets acquired in 2020 are as follows:

	Thousands of euros
Type of asset	2020	2019
Business combination
Offices	—	112,846
	—	112,846
Purchases/Additions:
Logistics	14,095	43,111
Offices	15,411	17,737
Shopping centres	—	3,028
Other	—	459
Improvements to assets	221,601	166,423
	251,107	230,758
	251,107	343,604

The main additions during 2020 corresponded to an office building in Barcelona in the amount of EUR 15 million and to the acquisition of a logistics landplot in Azuqueca (Guadalajara).

The other additions for the year refer to the improvement and adaptation work carried out on certain properties owned by the Group, most notably the El Saler Shopping Centre in Valencia, X Madrid and Porto Pi in Palma de Mallorca, as well as the development of Monumental, Castellana 85, Torre Glóries and Diagonal 605 in the Office segment and certain logistics warehouses in Azuqueca, Lisbon, San Fernando de Henares and Seville.

The disposals in 2020 correspond to the contribution of three trading venues to the investee Silicius Real Estate Socimi (see Note 3) and to the sale of certain assets leased from subsidiary Tree, having obtained a positive result of EUR 161 thousand registered under the heading ‘Profit/(losses) on disposal of assets’ of the attached consolidated income statement.

The main additions of assets acquired in 2019 related mainly to the purchase of Nestlé’s headquarters in Lisbon amounting to EUR 14 million, the acquisition of a property for logistics use in Cabanillas amounting to EUR 17 million, as well as the purchase of a turnkey logistics industrial building located in Riba-roja, Valencia, amounting to EUR 26 million. The assets included in the scope of consolidation come from the Portuguese companies acquired in the period (see Note 3).

The other additions in 2019 were the improvement and adaptation work carried out on certain properties owned by the Group, most notably the Larios Shopping Centres in Malaga and X Madrid, as well as the development of Torre Glóries and Torre Chamartín in the Office segment and certain logistics warehouses in Seseña, Cabanillas, Pinto and Seville.

The disposals in 2019 corresponded mainly to the sale of a set of office real estate assets located in Madrid and Barcelona amounting to EUR 225 million and an associated cost of approximately EUR 217.6 million. The aforementioned agreement included certain investment commitments made by the Group on the aforementioned assets, amounting to a total of EUR 17.8 million to be performed according to a calendar in 2020 and 2021. Likewise, the agreement called for the Group to grant the buyer a loan amounting to EUR 70 million, with market interest and maturity in 2021 (see Note 10). At present, liabilities associated with the Group's investment obligations amounting to EUR 3 million remain. The net costs associated with the sale amounted to EUR 9,618 thousand.

At 31 December 2020, the Group had pledged real estate assets totalling EUR 1,980,286 thousand (EUR 2,443,433 thousand in 2019) to secure various loans and derivative financial instruments, the balances of which at 31 December 2020 amounted to EUR 764,937 thousand and EUR 112,298 thousand (EUR 965,312 thousand and EUR 86,086 thousand in 2019), respectively (see Note 14). The Group holds no rights of use, seizure or similar situations with regard to its investment property.

The Group did not hold financial leases in 2020 and 2019.

At 31 December 2020, all properties included in “Investment property” are insured.

40

The Group, at 31 December 2020, has firm commitments to buy real estate investments amounting to EUR 41,069 thousand without considering the amounts indicated above associated with sales for the year. In 2020 and 2019 no significant finance costs were capitalised in the cost of constructing the properties.

Fair value measurement and sensitivity

All investment property leased or earmarked for lease through operating leases is classified as investment property.

In accordance with IAS 40, the Group periodically determines the fair value of its investment property so that the fair value reflects the actual market conditions of the investment property items at that date. This fair value is determined each year based on the appraisals undertaken by independent experts.

The market value of the Group’s investment property as of 31 December 2020 and 2019, calculated based on appraisals carried out by Savills Consultores Inmobiliarios, S.A., CBRE Valuation Advisory, S.A. and Jones Lang LaSalle, S.A. independent appraisers not related to the Group, amounted to EUR 12,180,759 thousand (EUR 12,250,730 in 2019). This valuation includes the value of the implied derivative of the lease income with BBVA amounting to EUR 107,910 thousand and EUR 124,684 thousand in 2020 and 2019, respectively; it does not include advances paid by the Group to third parties for the purchase of assets amounting to EUR 34,450 thousand (EUR 15,283 thousand in 2019) and does not include the value of the rights of use registered by application of IFRS 16 amounting to EUR 32,048 thousand (EUR 27,828 thousand in 2019). The valuation was carried out in accordance with the Appraisal and Valuation Standards issued by the Royal Institute of Chartered Surveyors (RICS) of the United Kingdom and the International Valuation Standards (IVS) issued by the International Valuation Standards Committee (IVSC).

The method used to calculate the market value of investment property, except for the BBVA portfolio, involves drawing up ten-year projections of income and expenses for each asset, adjusted at the reporting date using a market discount rate. The residual amount at the end of year 10 is calculated by applying an exit yield or cap rate to the net income projections for year 11. The market values obtained are analysed by calculating and assessing the capitalisation of the returns implicit in these values. The projections are designed to reflect the best estimate of future income and expenses from the investment properties. Both the exit yield and discount rate are determined taking into account the national market and institutional market conditions.

The method used by CBRE to value the BBVA portfolio analyses each property individually, without making any adjustments for inclusion in a large portfolio of properties. For each property, a capitalisation rate has been assumed for the estimated market rent and subsequently adjusted based on the following parameters:

•Term of the lease, collateral terms and guarantees and creditworthiness of the tenant.

•Location of the premises within the city (downtown, metropolitan area or suburbs).

•Immediate vicinity of the property.

•Level of upkeep of the property (outside and inside).

•Above and below-ground distribution of the floor area.

•Façade on one street or more than one (corner, three-sided).

•Lease situation with respect to current market rent.

In 2020 and affected mainly by the global situation of the COVID-19 pandemic, the above valuations were calculated in an uncertain environment (see Note 2.7). Therefore, the situation of the rental property market could lead to material differences between the fair value of the Group’s investment property and their effective realisable values.

Fees paid by the Group to valuers for appraisal services rendered up to 31 December 2020 and 2019 were as follows:

41

	Thousands of euros
	2020	2019
Valuation services	656	656
Total	656	656

Breakdown of fair value of investment property

The detail of assets measured at fair value by their level in the fair value hierarchy is as follows:

2020

	Thousands of euros
	Total		Level 1		Level 2		Level 3
Fair value measurement
Investment property
Offices
-        Land	2,231,069						2,231,069
-        Buildings	4,221,433						4,221,433
Net lease
-        Land	382,218						382,218
-        Buildings	1,355,694						1,355,694
Shopping centres
-        Land	459,984						459,984
-        Buildings	1,747,472						1,747,472
Logistics
-        Land	262,322						262,322
-        Buildings	1,055,582						1,055,582
Other
-        Land	198,326						198,326
-        Buildings	225,247						225,247
Total assets measured at fair value	12,139,347						12,139,347

42

2019

	Thousands of euros
	Total		Level 1		Level 2		Level 3
Fair value measurement
Investment property
Offices
-        Land	2,159,968						2,159,968
-        Buildings	4,131,992						4,131,992
Net lease
-        Land	389,223						389,223
-        Buildings	1,359,321						1,359,321
Shopping centres
-        Land	584,853						584,853
-        Buildings	1,955,584						1,955,584
Logistics
-        Land	292,042						292,042
-        Buildings	844,919						844,919
Other
-        Land	212,622						212,622
-        Buildings	238,633						238,633
Total assets measured at fair value	12,169,157						12,169,157

No assets were reclassified from one level to another during 2020 or 2019.

At 31 December 2020, the gross surface areas and occupancy rates of the assets were as follows:

	Square metres (*)
	Gross leasable area
2020	Comm. of Madrid	Catalonia	Comm. of Valencia	Galicia	Andalusia	Basque Country	Castilla-La Mancha	Rest of Spain	Portugal	Total	Occupancy rate (%)
Offices	866,461	210,120	—	—	15,078	—	—	4,488	95,679	1,191,825	91,1%
Net lease	56,639	108,150	26,799	16,143	27,159	23,102	8,354	84,196	—	350,542	99,7%
Shopping centres	75,678	64,096	64,693	100,475	37,956	25,922	—	32,795	60,098	461,714	93,7%
Logistics	308,271	148,435	61,604	—	124,725	99,491	425,426	53,764	—	1,221,716	97.5%
Other	61,034	20,540	—	5,898	—	46	—	—	—	87,517	72,1%
Total surface area	1,368,083	551,341	153,096	122,516	204,918	148,561	433,780	175,243	155,777	3,313,314
% weight	41.3%	16.7%	4.6%	3.7%	6.2%	4.5%	13.1%	5.3%	4.7%	100.0%

              (*) Not including square metres of ongoing projects or land

	Square metres (*)
	Gross leasable area
2019	Comm. of Madrid	Catalonia	Comm. of Valencia	Galicia	Andalusia	Basque Country	Castilla-La Mancha	Rest of Spain	Portugal	Total	Occupancy rate (%)
Oficinas	850,253	227,866	—	—	15,078	—	—	4,488	95,679	1,193,364	92,8
Net lease	63,476	109,783	27,201	17,049	27,766	23,291	8,354	85,589	—	362,509	100,0
Centros comerciales	38,580	93,109	64,193	100,242	37,957	25,922	—	79,953	60,098	500,056	93,3
Logística	308,268	149,607	61,604	—	123,004	99,491	375,972	42,343	—	1,160,289	97,7
Otros	61,034	20,540	—	5,898	—	46	—	—	—	87,517	72,1
Superficie Total	1,321,611	600,905	152,998	123,189	203,805	148,750	384,326	212,373	155,777	3,303,736
% Peso	40,0%	18,2%	4,6%	3,7%	6,2%	4,5%	11,7%	6,4%	4,7%	100,0%

              (*) Not including square metres of ongoing projects or land

43

Hypotheses used in the valuation

In relation to the determination of the fair value of investment property, the significant non-observable input data used in the measurement of fair value corresponds to the rental income, the rates of return (‘exit yield’) and the rate used to discount the cash flows of the projections. The quantitative information on the significant non-observable input data used in measuring fair value is shown below.

2020

	Exit Yield	Discount rate
Offices	3,00% - 7,25%	4,75% - 10,50%
Net Lease	5,00% - 7,00%(*)	6,50% - 8,25%(*)
Shopping centres	3,50% - 8,00%	6,00% - 10,75%
Logistics	4,50% - 9,00%	6,50% - 15,00%
Other	4,00% - 7,50%	4,00% - 15,50%

(*) This does not apply to BBVA because it is measured by directly capitalising the rent.

2019

	Exit Yield	Discount rate
Offices	3,00% - 7,25%	4,00% - 8,30%
Net Lease	5,00% - 7,00%(*)	6,75% - 8,75%(*)
Shopping centres	3,50% - 7,50%	5,75% - 10,50%
Logistics	4,75% - 7,45%	6,72% - 15,00%
Other	4,00% - 7,50%	4,00% - 16,00%

(*) This does not apply to BBVA because it is measured by directly capitalising the rent.

Rents: the amounts per square metre used in the valuation have ranged from EUR 2.90 to 82.56 depending on the type of asset and location. The growth rates of the rents used in the projections are mainly based on the CPI.

Analysis of the sensitivity of the hypotheses

The effect of a one-quarter, one half and one point change in the required rates of return, calculated as income, on the market value of the assets, on investment property in consolidated assets and in the consolidated income statement, would be as follows:

	Thousands of euros
	31.12.2020
	Assets			Consolidated profit before tax
	0,25%	0,50%	1%	0,25%	0,50%	1%
Increase in rate of return	(568,443)	(1,087,623)	(2,001,762)	(568,443)	(1,087,623)	(2,001,762)
Decrease in rate of return	625,069	1,315,668	2,939,504	625,069	1,315,668	2,939,504

44

	Thousands of euros
	31.12.2019
	Assets			Consolidated profit before tax
	0,25%	0,50%	1%	0,25%	0,50%	1%
Increase in rate of return	(566,873)	(1,084,859)	(1,997,460)	(566,873)	(1,084,859)	(1,997,460)
Decrease in rate of return	623,022	1,310,972	2,926,973	623,022	1,310,972	2,926,973

The effect of a 1%, 5% and 10% change in the rents considered has the following impact investment property in consolidated assets and in the consolidated income statement:

	Thousands of euros
	31.12.2020
	Assets			Consolidated profit before tax
	1%	5%	10%	1%	5%	10%
Increase in rate of return	80,798	403,992	807,984	80,798	403,992	807,984
Decrease in rate of return	(80,798)	(403,992)	(807,984)	(80,798)	(403,992)	(807,984)

	Thousands of euros
	31.12.2019
	Assets			Consolidated profit before tax
	1%	5%	10%	1%	5%	10%
Increase in rate of return	74,288	371,439	742,878	74,288	371,439	742,878
Decrease in rate of return	(74,288)	(371,439)	(742,878)	(74,288)	(371,439)	(742,878)

The effect of the quarter-and-a-half point change in the considered exit yield, in the assumption based on return calculated as the result of dividing the net operating income of the last year of the period analysed by the estimated exit yield, on investment property in the consolidated asset and in the consolidated income statement, would be as follows:

	Thousands of euros
	31.12.2020
	Assets		Consolidated profit before tax
	0,25%	0,50%	0,25%	0,50%
Increase in rate of return	(370,941)	(708,138)	(370,941)	(708,138)
Decrease in rate of return	410,016	865,626	410,016	865,626

45

	Thousands of euros
	31.12.2019
	Assets		Consolidated profit before tax
	0,25%	0,50%	0,25%	0,50%
Increase in rate of return	(320,321)	(612,931)	(320,321)	(612,931)
Decrease in rate of return	352,165	741,170	352,165	741,170

The details of “Change in value of investment property” in the attached consolidated income statement are as follows:

Type of asset	Thousands of euros
	2020	2019
Offices	57,860	264,378
Net lease	12,575	7,701
Shopping centres	(206,125)	(1,867)
Logistics	79,050	80,974
Other	(27,828)	3,786
	(84,468)	354,972

Accordingly, the impact on the consolidated income statement of the revaluations of the Group’s real estate assets in 2020, taking into consideration all headings affected in the consolidated income statement, is as follows:

	Thousands of euros
	2020	2019
Changes in fair value of investment property	(84,468)	354,972
Changes in the fair value of derivatives	(15,010)	2,397
Effect on the income statement	(99,478)	357,369

.

8.    Operating leases

8.1 Operating leases – Tenant

The Group, in its position as a tenant, only maintains short-term and low-value leases, which, following an analysis of the application of IFRS 16, recognises them as a straight-line expense over the lease term.

8.2 Operating leases – Landlord

The occupancy rates of the leased buildings at 31 December 2020 were as follows:

	% occupancy
	2020	2019
Offices	91.1	92.8
Net lease	99.7	100.0
Shopping centres	93.7	93.3
Logistics	97.5	97.7
Other	97.1	71.5

At 31 December 2020, the ordinary income from and the fair value of each of the assets were as follows:

46

2020

	Thousands of euros
	Gross rental income	Fair
	(a)	(b)
Offices	233,215	6,452,502
Net lease	86,513	1,845,822
Shopping centres	114,375	2,207,456
Logistics	58,861	1,332,145
Other	10,484	409,332
Total	503,448	12,247,257

(a)The gross income indicated in the table above refers to the rental income (Note 6) of the properties, accrued since their incorporation into the Group, without taking into account credits (including those related to COVID-19), and rental income straight-lining.

(b)Includes investment property and the embedded derivative (Note 10).

2019

	Thousands of euros
	Gross rental income	Fair
	(a)	(b)
Offices	243,431	6,291,960
Net lease	86,962	1,873,228
Shopping centres	127,300	2,540,437
Logistics	53,796	1,136,961
Other	14,429	451,255
Total	525,918	12,293,841

(a)The gross income indicated in the table above refers to income from leases (Note 6) of the properties accrued since their incorporation into the Group, without taking into account credits and rental income straight-lining.

(b)Includes investment property and the embedded derivative (Note 10).

The leases entered into between the Group and its customers include a fixed rent and, where applicable, a variable rent linked to the tenant’s performance.

At 31 December 2020, the future minimum lease payments under non-cancellable operating leases (calculated at the nominal amount) are as follows:

	Thousands of euros
	2020	2019
Within one year	465,952	472,507
Between one and five years	1,137,511	1,217,057
After five years	1,108,520	1,165,643
	2,711,983	2,855,207

.

47

9.    Investments accounted for using the equity method

The changes in 2020 in investments in companies accounted for using the equity method are as follows:

	Thousands of euros
	2020	2019
Starting balance	346,973	169,133
Additions made during the year	92,140	168,893
Dividends	(1,542)	(1,118)
Profit/(Loss) for the year	(3,444)	10,065
Ending balance	434,127	346,973

The main changes in 2020 were as follows:

On 27 February 2020, the Parent acquired a stake in Silicius Real Estate, S.L., which represented an increase of EUR 91,021 thousand corresponding to 17.19% of the shares (see Note 3). In 2020, Silicius Real Estate, S.L., carried out capital increase by means of non-monetary contribution, in which the Parent did not participate, and the percentage of ownership was therefore diluted. At 31 December 2020, the stake amounted to 15.29% and the consolidated net value of that stake amounted to EUR 70,542 thousand as a result of incorporating the profit attributable to the Parent once the accounting criteria relating to the fair value of the assets were homogenised.

The main movements that occurred in 2019 were as follows:

On 31 October 2019, the Parent acquired a 14.46% stake in Distrito Castellana Norte, S.A. (DCN) from Desarrollos Urbanísticos Udra, S.A.U. for a total of EUR 168,893 million. In addition, as an integral part of the transaction of the sale, the Parent granted Desarrollos Udra, S.A. a loan amounting to EUR 129,109 thousand divided into two tranches: (i) EUR 86,397 thousand maturing in 20 years; and (ii) EUR 42,712 thousand maturing in December 2019, with both loans at an interest rate of 2% per annum due at maturity. At 31 December 2019, the second tranche was collected in full, with an outstanding amount of EUR 86,695 thousand (86,397 in principal and 298 in interest) under the heading ‘Other non-current financial assets - Third Party loans’ in the attached consolidated balance sheet (see Note 10). This loan guarantees the holding of the aforementioned company in DCN.

The detail of investments in companies accounted for using the equity method and the profit or loss attributable to the Group at 31 December 2020 is as follows:

48

2020

				Thousands of euros
			Percentage		Result
			of		attributable
Associate	Line of business	Registered office	Ownership interest	Investment	to the Group
Distrito Castellana Norte, S.A	‘Operación Chamartín’ construction development and property operation	Madrid	14,46%	169,387	(626)
Silicius Real Estate, S.L.	Sale and lease of property	Madrid	15,29%	70,542	(20,211)
Centro Intermodal de	Gestión de la concesión portuaria de la Zona de
Logística, S.A.	Logistics activities	Barcelona	48,50%	152,749	25,529
Paseo Comercial	Lease of
Carlos III, S.A.	Shopping centre	Madrid	50%	31,430	(6,771)
Provitae Centros				3,508	(572)
Asistenciales, S.L.	Healthcare services	Madrid	50%
				6,511	(795)
Other investments	-	-
				434,127	(3,444)

2019

				Thousands of euros
			Percentage		Result
			of		Attributable
Associate	Line of business	Registered office	Ownership interest	Investment	to the Group
Distrito Castellana Norte, S.A	‘Operación Chamartín’ construction development and property operation	Madrid	14,46%	168,893	—
Centro Intermodal de	Gestión de la concesión portuaria de la Zona de
Logística, S.A.	Logistics activities	Barcelona	48,50%	128,494	8,290
Paseo Comercial	Lease of
Carlos III, S.A.	Shopping centre	Madrid	50%	38,200	1,430
Provitae Centros
Asistenciales, S.L.	Healthcare services	Madrid	50%	4,080	(25)
Other investments	-	-		7,306	370
				346,973	10,065

All companies detailed in the table above are accounted for using the equity method.

49

The key business indicators at 100% for the Group’s associates (standardised using the regulatory framework applicable to the Group) are as follows:

2020

	Thousands of euros
	Provitae Centros Asistenciales, S.L.	Paseo Comercial Carlos III, S.A.	Centro Intermodal de Logística S.A. (CILSA)	Distrito Castellana Norte, S.A.	Silicius Real Estate S.L.	Other
Non-current assets	9,790	148,976	570,155	6,117	667,318	28,913
Current assets	11	4,765	8,106	158,284	49,505	2,533
Non-current liabilities	621	86,840	241,262	499	311,034	13,259
Current liabilities	2,164	4,041	22,047	15,394	49,649	465
Revenue	—	5,460	58,832	—	21,941	1,691
Profit/(loss) from continuing operations	(1,144)	(13,540)	50,011	(4,327)	(66,966)	(2,424)

2019

		Thousands of euros
	Distrito Castellana Norte, S.A.	Provitae Centros Asistenciales, S.L.	Paseo Comercial Carlos III, S.A.	Centro Intermodal de Logística S.A. (CILSA)	Other
Non-current assets	6,353	11,250	163,761	469,306	65,701
Current assets	154,715	10	5,726	5,277	4,642
Non-current liabilities	10,235	986	87,294	182,869	26,566
Current liabilities	6,013	2,113	5,794	26,772	3,489
Revenue	—	—	8,816	51,655	5,183
Profit/(loss) from continuing operations	—	(51)	2,861	17,093	1,073

At the end of the year, there were no indications of impairment on the recoverable value of the investments held.

50

10.    Current and non-current financial assets

The breakdown, by type, of the balance of this heading in the consolidated statement of financial position at 31 December 2020 is as follows:

Classification of financial assets by category:

	Thousands of euros
	2020	2019
Non current:
At fair value-
Derivative embedded in BBVA lease agreement	107.910	124,684
Available-for-sale financial assets	103.775	17,540
At amortised cost-
Equity instruments	2.595	1,174
Loans to third parties	108.704	163,630
Loans to associates	625	625
Deposits and guarantees	69.138	68,969
	392.747	376,622
Current:
At amortised cost-
Investments in associates	2.093	1,055
Loans to third parties	71.767	—
Other financial assets	5.505	6,668
Trade and other receivables	33.368	30,263
	112.733	37,986

The carrying amount of financial assets recognised at amortised cost does not differ significantly from their fair value.

Derivatives

“Derivatives” includes the value of the embedded derivative corresponding to the inflation multiplier included in the lease agreement with BBVA to revise rents annually (see Note 7). The decrease in the value of the derivative in 2020 amounts to EUR 16,775 thousand (EUR 1,587 thousand increase in 2019). Of the variation, EUR 1,764 thousand, corresponds to the sum the Group collected as part of the sale of the BBVA branches sold in 2020. The rest of the variation, amounting to EUR 15,010 thousand, is recognised under “Change in fair value of financial instruments” in the accompanying 2020 consolidated income statement. The measurement approach used is described in Note 5.7 and is applicable to Level 2 of the fair value measurement hierarchy established in IFRS 7, as observable inputs but not quoted prices are reflected.

Sensitivity to fluctuations of percentage points in the inflation curves is analysed below:

2020

	Thousands of euros
Scenario	Assets	Consolidated profit before tax
+50 bps	35,434	35,434
-50 bps	(24,282)	(24,282)

51

2019

	Thousands of euros
Scenario	Assets	Consolidated profit before tax
+50 bps	39,943	39,943
-50 bps	(27,807)	(27,807)

Available-for-sale financial assets

The “Available-for-sale financial assets” caption includes the Group's investments in companies excluded from the scope of consolidation because they are less than 20% and do not have significant influence.

At 31 December 2020, a holding in Aedas Homes, S.A. is included in the amount of EUR 17,254 thousand, equivalent to 1.7% of its share capital (817,727 shares). The negative change in the fair value of this investment (hierarchical level 1, see Note 5.7) in 2020, amounting to EUR 286 thousand, is recognised under “Changes in the fair value of financial instruments” (market value as of 31 December 2020 is EUR 21.10 per share). This company is listed on the Madrid Stock Exchange.

The corporate purpose of Aedas Homes, S.A. is the acquisition, development and refurbishment of any property assets for their holding, enjoyment, disposal and lease; the acquisition, holding, enjoyment, swap, sale and management of national or foreign transferable securities, as well as any type of titles or rights, such as shares in private limited liability companies.

In addition, this heading includes 15.29% (after the dilution of the holding described in Note 9) in Silicius Real Estate, S.L. amounting to EUR 86,521 thousand acquired by the Parent through an asset injection (see Note 3). This company is not yet listed. In view of the absence of observable data, the Group has used the company’s business plan as its best estimate of its fair value (hierarchical level 3, see Note 5.7). At 31 December 2020, it is very likely that the Parent Company will exercise its option to sell at the purchase price of the transaction, and Management's analysis did not indicate signs of impairment in the investment.

Loans to third parties

The “Other non-current financial assets" heading includes the loan provided to Desarrollos Urbanísticos Udra, S.A.U. for a sum of EUR 86,397 thousand (see Note 9), which accrues market rate interest. At 31 December 2020, the outstanding amount was EUR 86,397 thousand in principal and EUR 1,725 thousand in interest. In relation to the aforementioned loan, the Group has guarantees from the creditor associated with 10% of the shares in the company.

Likewise, this heading also includes tenant rent linearisation and installation expenses amounting to EUR 19,766 thousand.

The “Other current financial assets” heading includes the loan provided to Juno Holdings 1, S.a.r.l. for EUR 70,000 thousand, which has a bullet repayment on maturity in November 2021. That loan accrues an annual interest rate of 2% due at maturity. At 31 December 2020, the outstanding balance amounted to EUR 70,000 thousand in principal and EUR 1,530 thousand in interest and is recognised under the heading ‘Other current financial assets’ on the attached consolidated balance sheet.

Deposits and guarantees

“Deposits and guarantees” primarily includes the guarantees provided by tenants as security amounting to EUR 66,706 thousand (EUR 66,488 thousand at 31 December 2019), which the Group has deposited with the housing authority (Instituto de la Vivienda) in each region. At 31 December 2020, deposits paid by tenants as security amounted to EUR 73,376 thousand (EUR 75,563 thousand at 31 December 2019) and were recognised under “Non-current liabilities – Other financial liabilities” on the liability side of the accompanying consolidated statement of financial position for 2020 (see Note 15).

52

Classification of financial assets by maturity:

The classification of financial assets by maturity at 31 December 2020 and 2019 is as follows:

2020

	Thousands of euros
	Less than 1 year	From 1 to 5 years	Over 5 years	Undetermined maturity	Total
Derivative embedded in BBVA lease agreement	—	—	107,910	—	107,910
Available-for-sale financial assets	—	103,775	—	—	103,775
Equity instruments	—	—	—	2,595	2,595
Loans to third parties and associates	71,767	10,508	98,821	—	181,096
Deposits and guarantees	—	—	—	69,138	69,138
Investments in Group companies and associates	2,093	—	—	—	2,093
Other financial assets	5,505	—	—	—	5,505
Trade and other receivables	33,368	—	—	—	33,368
Total financial assets	112,733	114,283	206,731	71,733	505,481

2019

	Thousands of euros
	Less than 1 year	From 1 to 5 years	Over 5 years	Undetermined maturity	Total
Derivative embedded in BBVA lease agreement	—	—	124,684	—	124,684
Available-for-sale financial assets	—	17,540	—	—	17,540
Equity instruments	—	—	—	1,174	1,174
Loans to third parties and associates	—	70,874	86,695	6,686	164,255
Deposits and guarantees	—	—	—	68,969	68,969
Investments in Group companies and associates	1,055	—	—	—	1,055
Other financial assets	6,668	—		—	6,668
Trade and other receivables	30,263	—	—	—	30,263
Total financial assets	37,986	88,414	211,379	76,829	414.608

.

11.    Trade and other receivables

At 31 December 2020, the heading “Trade and other receivables” includes the following items:

	Thousands of euros
	2020	2019
Trade and notes receivable	19,275	27,318
Sales debentures	937	487
Associates	403	340
Sundry accounts receivable	4,380	853
Employee receivables	184	184
Other receivables from public authorities (Note 17)	20,222	11,748
Impairment of trade receivables	(12,033)	(10,667)
	33,368	30,263

53

“Trade and notes receivable” in the accompanying consolidated statement of financial position at 31 December 2020 mainly included the balances receivable from leasing investment property. In general these receivables are interest free and the terms of collection range from immediate payment on billing to payment at 30 days, while the average collection period is approximately 5 days (5 days in 2019).

At 31 December 2020, a breakdown by age of overdue receivables not considered impaired is as follows:

	Thousands of euros
	2020	2019
Less than 30 days	3.500	3.541
31 to 60 days	2.248	1.247
61 to 90 days	749	747
More than 90 days	555	657
	7.052	6.192

At 31 December 2020 and 2019, no collection rights had been transferred to financial institutions.

In accordance with IFRS 9, the Group periodically analyses the risk of insolvency of its accounts receivable by updating the related provision for impairment losses. The Group’s directors consider that the amount of trade and other receivables approximates their fair value.

The changes in the impairment losses and bad debt in 2020 and 2019 were as follows:

	Thousands of
	Euros
Balance at 31 December 2018	(11.924)
Changes in the scope of consolidation	1.276
Allocations	(1.178)
Reversals/amounts used	1.028
Other	131
Balance at 31 December 2019	(10.667)
Changes in the scope of consolidation	—
Allocations	(2.224)
Reversals/amounts used	773
Other	85
Balance at 31 December 2020	(12.033)

Losses from bad debts amounted to EUR 289 thousand in 2020.

The majority of impaired receivables are overdue by more than six months.

Details of the concentration of customers (customers that account for a significant share of business) are included in the segment information in Note 6.

12.    Cash and cash equivalents

“Cash and cash equivalents” includes the Group’s cash and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets does not differ from their fair value.

At 31 December 2020 and 2019, the balance of “Cash and cash equivalents” is freely available, except for EUR 6,748 thousand and EUR 6,749 thousand, respectively, which mainly include a reserve account to cover payment of a quarterly instalment of the syndicated mortgage loan.

54

13.    Equity

The detail of "Equity" and of the changes therein is presented in the consolidated statement of changes in equity.

13.1 Share capital

At 31 December 2020, the share capital of Merlin Properties SOCIMI, S.A., amounted to EUR 469,771 thousand, represented by 469,770,750 fully subscribed and paid shares of EUR 1 par value each, all of which are of the same class and confer the holders thereof the same rights.

All the Parent Company's shares can be publicly traded and are listed on the Madrid, Barcelona, Bilbao and Valencia and Lisbon Stock Exchanges. The market price of the Parent’s shares at 31 December 2020 and the average market price for the fourth quarter amounted to EUR 7.78 and EUR 7.22 per share, respectively.

At 31 December 2020, according to information extracted from the CNMV, in relation to the provisions of Royal Decree 1362/2007, of 19 October and Circular 2/2007, of 19 December, the shareholders with significant holdings in the share capital of Merlin Properties SOCIMI, S.A., both direct and indirect, in excess of 3% of the share capital, are the following according to public information:

	Shares			% of share capital
	Direct	Indirect	Total
Banco Santander, S.A.	89,254,715	26,072,123	115,326,838	24.549%
Manuel Lao Hernández (*)	—	29,459,324	29,459,324	6.271%
BlackRock, INC	—	18,773,897	18,773,897	3.996%

The information of Banco Santander refers to the 2020 period, as communicated to the Company by this significant shareholder.

The most significant shareholder movement in the year was the entry into the share capital of the Company of NORTIA CAPITAL INVESTMENT HOLDING, S.L. with 6.271% (whose controlling shareholder is Manuel Lao Hernández).

13.2 Share premium

The Consolidated Text of the Spanish Limited Liability Companies Law expressly permits the use of the share premium to increase capital and establishes no specific restrictions as to its use.

This reserve is unrestricted so long as its allocation does not lower equity to below the amount of share capital.

13.3 Other reserves

The detail of reserves at 31 December 2020 and 2019 is as follows:

	Thousands of euros
	2020	2019
To legal reserve	65,133	47,193
Reserves of consolidated companies	2,385,540	2,001,298
Other reserves	59,202	45,784
Total other reserves	2,509,875	2,094,275

55

To legal reserve

The legal reserve will be established in accordance with article 274 of the Consolidated Corporate Enterprise Law, which stipulates, in all cases, that 10% of net profit for each year must be transferred to the legal reserve until the balance of this reserve reaches at least 20% of the share capital.

This reserve cannot be distributed, and if it is used to offset losses, in the event no other reserves are available for this purpose, it must be restored with future profits.

At 31 December 2020, the Group had not yet reached the legally required minimum established in the Consolidated Text of the Corporate Enterprise Law.

The legal reserve of companies which have chosen to avail themselves of the special tax regime established in Law 11/2009, of 26 October, governing REITs, must not exceed 20% of share capital. The Articles of Association of these companies may not establish any other type of restricted reserves.

Reserves of consolidated companies

The detail of the reserves of consolidated companies is as follows:

	Thousands of euros
	2020	2019
Merlin Properties SOCIMI, S.A.	886,692	780,763
Tree Inversiones Inmobiliarias, SOCIMI, S.A.	471,974	449,073
Merlin Retail, S.L.U.	127,179	121,401
Merlin Oficinas, S.L.U.	257,143	223,962
Merlin Logística, S.L.U.	300,892	211,033
Varitelia Distribuciones, S.L.	48,027	43,743
Metroparque, S.A.	73,981	70,317
La Vital Centro Comercial y de Ocio, S.L.	15,568	14,281
Global Carihuela Patrimonio Comercial, S.A.	(234)	2,389
Sadorma 2003, S.L.	(5,243)	(5,386)
Parques Logísticos de la Zona Franca, S.A.	38,912	8,396
Sevisur Logística, S.A.	18,361	17,274
Innovación Colaborativa, S.A.	(4,114)	—
Desarrollo Urbano de Patraix, S.A.	232	238
Global Murex Iberia, S.L.	(30)	(12)
Exhbitions Company, S.A.U	(17)	(4)
Gescentesta, S.L.U.	629	480
Milos Asset Management, S.L.	(1)	—
MP Monumental, S.A.	42,334	37,135
MP Torre A, S.A.	13,865	9,838
MPCVI- Compra e venda Imobiliária, S.A.	13,796	9,665
MPEP-Properties Escritórios Portugal, S.A.	6,338	(31)
VFX Logística, S.A.	(2,078)	769
Promosete Investimentos Imobiliarios, S.A.	14,841	8,911
Praça do Marqués-Serviços auxiliares, S.A.	19,980	8,101
Forum Almada – Gestao Centro Comercial, Lda	15,828	(14,095)
Torre dos Oceanus Investimentos Inmobiliarios,S.A.	12,627	3,057
Torre Art, S.A.	11,492	—
Torre Fernao Magalhanes, S.A.	6,566	—
	2,385,540	2,001,298

56

Dividends

On 17 June 2020, the General Shareholders Meeting approved the distribution of a dividend of EUR 68,518 thousand charged to the profit for 2019.

13.4 Treasury shares

At 31 December 2020, the Parent held treasury shares amounting to EUR 54,149 thousand.

The changes in 2020 were as follows:

	Number of	Thousands of
	Shares	euros
Balance at 01 January 2019	6,150,000	68,322
Additions	52,776	633
Disposals	(1,125,407)	(12,095)
Balance at 31 December 2019	5,077,369	56,860
Additions	26,177	279
Disposals	(267,043)	(2,990)
Balance at 31 December 2020	4,836,503	54,149

On 27 April 2017, the shareholders authorised the Board of Directors to acquire shares of the Parent Company. The General Shareholders Meeting held on 7 May 2018 revoked the authorisation granted by the General Meeting of April 2017 in the part not used and then authorised the acquisition of shares by the Company itself or by a Group company, pursuant to article 146 and related provisions of the Corporate Enterprises Act, in accordance with the requirements and restrictions established in prevailing legislation during the five-year period. The authorisation includes the acquisition of shares that, where applicable, must be handed over directly to employees or directors of the Parent or of Group companies as a result of the purchase option they hold or for the settlement and payment of share-based incentive plans of which they are beneficiaries.

In 2020 the Parent acquired 26,177 treasury shares at an average cost of EUR 10.63 per share. At 31 December 2020, the Parent held treasury shares representing 1.03% of its share capital.

The withdrawals of own shares amounting to EUR 2,990 thousand (average price of EUR 11.20 per share) correspond mainly to EUR 2,765 thousand (average price of EUR 11.20 per share), to the delivery of shares to employees within the Flexible Remuneration Plan and the 2017-19 LTIP. There were also EUR 225 thousand in sales in 2020 (at an average cost of EUR 11.20 per share).

13.5 Capital management

The Group’s capital management objectives are to safeguard its capacity to continue operating as a going concern so that it can continue to provide returns to shareholders and to benefit interest groups, and to maintain an optimum financial structure to reduce the cost of capital.

In line with the practices of other groups present in the sector, the Group controls its capital structure through the leverage ratio, calculated as net debt divided by total capital. Net debt is determined as the sum of financial liabilities less cash and cash equivalents. Total capital is calculated as the sum of equity plus net debt.

57

	Thousands of euros
	2020	2019
Total financial debt (b)	5,735,023	5,567,217
Less - Cash and cash equivalents and
Other current financial assets (a)	(466,540)	(384,724)
Net debt	5,268,483	5,182,493
Equity	6,696,267	6,708,700
Total capital	11,964,750	11,891,193
Debt-to-equity ratio	44,03%	43,58%

(a)Included is the financial asset available for sale corresponding to 50% of the shares acquired from Silicius Real Estate, S.L. (see Note 3) amounting to EUR 86,521 thousand, as well as the loan granted by the Parent to Juno Holdings I, S.A.R.L. in 2019 amounting to EUR 70,000 thousand, as an integral part of the sale of a group of real estate assets. In 2019, the amount of the same loan granted by the Parent to Juno Holdings I, S.A.R.L. was included. (Note 7). In both years, the amount of treasury shares is included as other current financial assets.

(b)Gross debt amounts without considering debt formalisation expenses.

13.6 Earning per share

Basic

Basic earnings per share are calculated by dividing the net profit attributable to common equity holders of the Parent by the weighted average number of ordinary shares outstanding during the period, excluding treasury shares.

The detail of the calculation of basic earnings per share is as follows:

	2020	2019
Profit for the year attributable to holders of equity instruments net of the Parent Company (thousands euros)	56,358	563,639
Weighted average number of shares outstanding (thousands)	464,900	464,454
Basic earnings per share (euros)	0,12	1,21

The average number of ordinary shares outstanding is calculated as follows:

	Number of shares
	2020	2019
Ordinary shares at beginning of period	469,770,750	469,770,750
Treasury shares	(4,836,503)	(5,077,369)
Average adjustment of outstanding shares	(34,336)	(238,899)
Weighted average number of ordinary shares outstanding at 31 December 2014 (shares)	464,899,911	464,454,482

Diluted

In accordance with paragraph 41 of IAS 33, potential ordinary shares are treated as dilutive when, and only when, their conversion to ordinary shares could reduce the earnings per share of the continuing activities.

58

As indicated in Note 20, the Group has granted its executives and key personnel a variable remuneration plan payable in shares on condition that the shareholder return rate during the 3-year period ending in 2019 reaches a certain level. The amount of this variable remuneration amounts to a maximum of EUR 75 million, which will be paid with a variable number of shares, limited to a maximum of 6 million. At 31 December 2019 (the end of the measurement period) and taking into account the final share reference price (i.e., the average closing share price for the Company in the 90 trading sessions before 31 December 2019) 5,874,111 shares were allocated.

Taking into account the characteristics of the plan (detailed in Note 20) and the fulfilment of its terms, at 31 December 2020 the plan would have a dilutive effect on earnings per share.

Diluted earnings per share are calculated by adjusting the profit attributable to equity holders of the Parent by the weighted average ordinary shares outstanding after adjusting for the dilutive effects of potential ordinary shares, i.e., as if all potentially dilutive ordinary shares had been converted.

The potential ordinary shares of the variable remuneration plan, as stated in paragraph 46 of IAS 33, have been determined as if the plan consisted of a contract to issue a certain number of ordinary shares at their average market price during the period, which will not have dilutive effect, and a contract to issue the remaining ordinary shares for free.

The detail of the calculation of the diluted earnings per share is as follows:

	2020
	Thousands of euros	Thousands of shares	Earnings per share
Profit for the year attributable to holders of equity instruments net of the Parent Company (thousands euros)	56,358
Weighted average number of shares outstanding (thousands)	—	464,900	0,12
Weighted average number of potential ordinary shares to be delivered under the variable remuneration plan (Note 20).	—	5,874
Weighted average number of potential ordinary shares not provisioned at market price	—	(781)
Diluted earnings per share (euros)	56,358	469,993	0,12

13.7 Valuation adjustments

This heading of the consolidated statement of financial position includes changes in the value of financial derivatives designated as cash flow hedges. Movement in this heading in 2020 was as follows:

	Thousands of
	euros
Balance at 31 December 2018	(36,906)
Changes in the fair value of hedges in the
year	(46,229)
Balance at 31 December 2019	(83,135)
Changes in the fair value of hedges in the
year	(16,402)
Balance at 31 December 2020	(99,537)

.

59

14.    Current and non-current financial liabilitues

At 31 December 2020, current and non-current liabilities were as follows:

	Thousands of euros
	2020	2019
Non current:
Measured at amortised cost
Syndicated loan	850,000	850,000
Syndicated loan arrangement expenses	(11,054)	(14,361)
Total syndicated loan	838,946	835,639
Senior syndicated mortgage loan (Tree)	670,133	692,520
Syndicated mortgage loan arrangement costs (Tree)	(52,276)	(57,486)
Total senior syndicated mortgage loan (Tree)	617,857	635,034
Revolving credit facility	—	—
Non-mortgage loan	29,000	—
Mortgage loans	84,637	260,093
Loan arrangement expenses	(5,688)	(8,675)
Total other loans	107,949	251,418
Debentures and bonds	4,091,086	3,750,000
Debenture issue expenses	(25,284)	(26,586)
Total debentures and bonds	4,065,802	3,723,414
Total amortised cost	5,630,554	5,445,507
Measured at fair value
Derivative financial instruments	127,345	95,695
Total at fair value	127,345	95,695
Total non-current	5,757,899	5,541,202
Current:
Measured at amortised cost
Syndicated loan	644	2,501
Senior syndicated mortgage loan (Tree)	9,016	9,335
Debentures and bonds	36,291	34,631
Mortgage loans	1,795	5,100
Revolving credit facility	404	161
Non-mortgage loan	125	—
Loan arrangement expenses	—	(2)
Total amortised cost	48,275	51,726
Measured at fair value
Derivative financial instruments	1,277	1,231
Total at fair value	1,277	1,231
Total current	49,552	52,957

There is no material difference between the carrying amount and the fair value of financial liabilities at amortised cost.

On 20 April 2016, the Parent Company was given a credit rating of “BBB” with stable outlook by Standard & Poor’s Rating Credit Market Services Europe Limited. On 24 May 2018, Standard & Poor's updated this rating to “BBB” with a positive outlook, changing it to stable outlook due to the COVID-19 pandemic on 27 March 2020.

Additionally, on 17 October 2016, the Company was given a credit rating of investment grade “Baa2” by Moody’s. On 27 May 2020, Moody's updated this rating to “Baa2” with a negative outlook due to the COVID-19 pandemic.

14.1 Loams

The detail of loans at 31 December 2020 is as follows:

60

	Thousands of euros
	Bank borrowings
	Initial loan / Limit	Expenses incurred from formalising loans (Note 14.5)	31.12.2020
			Long term	Short term	Short-term interest
Syndicated loan	850,000	(11,054)	850,000	—	644
Non-mortgage loan	115,000	(47)	29,000	—	125
Revolving credit facilities	700,000	(3,026)	—	—	404
Senior syndicated mortgage loan (Tree)	716,894	(52,276)	670,133	8,443	573
Mortgage loans - other assets	88,900	(2,615)	84,637	1,724	71
Total	2,470,794	69,018	1,633,770	10,167	1,817

2019

	Thousands of euros
	Bank borrowings
	Initial loan / Limit	Expenses incurred from formalising loans (Note 14.5)	31.12.2019
			Long term	Short term	Short-term interest
Syndicated loan	881,000	(14,361)	850,000	1,905	596
Revolving credit facilities	700,000	(3,023)	—	—	161
Senior syndicated mortgage loan (Tree)	716,894	(57,486)	692,520	8,725	610
Mortgage loans - other assets	268,000	(5,652)	260,093	3,974	1,126
Non-mortgage loan	115,000	—	—	—	—
Total	2,680,894	(80,522)	1,802,613	14,604	2,493

Syndicated loan and revolving credit facilities - Parent

On 25 April 2019, the Group arranged a senior syndicated loan amounting to EUR 1,550 million, including two tranches, a corporate loan of EUR 850 million and a corporate credit facility of EUR 700 million due in 2024.

The initial maturity date for this revolving credit facility was 2024, with the possibility of two optional one-year extensions. The first one-year extension was approved on 2 July 2020, and the new maturity date is 9 May 2025.

The corporate loan accrues an interest rate of the one-month EURIBOR + 120 basis points, while the revolving credit facility yields an interest rate of the one-month EURIBOR + 90 basis points, and both incorporate a cost adjustment mechanism based on four sustainability criteria.

On 20 March 2020, the Group drew down EUR 700 million from its corporate credit facility to optimise and strengthen its financial position in view of the uncertainty generated by COVID-19. On 17 July 2020 the Group repaid the full amount drawn down from its credit facility.

In accordance with IFRS 9, the Group assessed in 2019 the nature of the refinancing undertaken previously, concluding that it does not represent a substantial change (10% test). Therefore, the difference between the value of the old debt at amortised cost and the new debt discounted at the effective interest rate of the old debt was recognised in 2019 as a lower financial expenses of EUR 7,797 thousand under “Financial expenses” in the consolidated income statement. This amount will revert to the consolidated income statement for subsequent years in accordance with the effective interest rate of the debt. In 2020, the application of the amortised cost in relation to these concepts involved a financial cost of EUR 1,795 thousand (EUR 1,162 thousand in 2019).

This financial arrangement maintains the commitments to maintain certain coverage ratios existing in the previous financial arrangement and in the Group's bonds. The Parent’s directors have confirmed that these ratios were met at 31 December 2020 and do not expect that they will not be fulfilled in the coming years.

61

Unsecured loan of the Parent

On 20 December 2018, the Parent formalised a loan without mortgage security with the European Investment Bank in an amount of EUR 51,000 thousand and with 10-year maturity. On 4 November 2019, the Parent formalised the second tranche of the mortgage-free loan with the European Investment Bank amounting to EUR 64,000 thousand, amounting to EUR 115,000 thousand. This financing has a maturity of 10 years. This credit facility will be allocated to the development of logistical assets in the Castilla–La Mancha region.

On 10 March 2020 and 26 October 2020, the Group drew down EUR 23,400 thousand and EUR 5,600 thousand corresponding to the first tranche of the financing. This loan accruals a fixed interest rate of 60 basis points.

Syndicated loans - Subsidiaries

Syndicated loan without mortgage guarantee signed by Sevisur Logística, S.A. for EUR 31,000 thousand in principal, maturing in September 2020. This financing consists of two tranches of EUR 25,000 and 6,000 thousand, with a market rate of EURIBOR + 125 and 200 basis points, respectively. In 2020, the company repaid it.

At the end of 2018, Parc Logistic de la Zona Franca, S.A. maintained a loan without mortgage collateral with a balance of EUR 23,336 thousand maturing in 2019. In 2019, the company repaid it.

Senior syndicated mortgage loan (Tree):

The senior syndicated mortgage loan of the subsidiary, Tree Investments Inmobiliarias SOCIMI, S.A., was signed on 29 July 2010 and novated for the first time on 30 December 2014.

The refinancing for 2014 and the first application of IFRS 9 ‘Financial Instruments’ resulted in an increase in reserves and a decrease in debt amounting to EUR 30,592 thousand at 1 January 2018, as well as an increase in financial expenditure amounting to EUR 10,083 thousand in 2018.

On 29 November 2018, the senior syndicated loan was novated so that the initially scheduled maturity in 2024 was postponed until 31 March 2031 with the possibility of extending the maturity annually for the next 3 years until 31 March 2034. The first of these extensions was approved in 2020. This financing accrues interest at a rate of the 3-month EURIBOR + 120 basis points.

In accordance with IFRS 9, the Group evaluated the nature of the refinancing undertaken in 2018 and concluded that it did not represent a material change (10% test). In accordance with IFRS 9, the difference between the value of the old debt at amortised cost and the new debt updated at the effective interest rate of the old debt was recognised as a financial result. This result will revert to the consolidated income statement for subsequent years in accordance with the effective interest rate of the debt. In 2020, the application of the amortised cost in relation to these concepts involved a financial cost of EUR 4,472 thousand (EUR 4,439 thousand in 2019).

The financing includes commitments to maintain certain coverage ratios, which are standard in these types of real estate companies, such as the loan-to-value ratio, the ratio of the subsidiary’s income used to service the debt (interest coverage ratio, ICR), and a minimum credit rating of BBVA from ratings agencies. The Parent’s directors have confirmed that these ratios were met at 31 December 2020 and do not expect that they will not be fulfilled in the coming years.

Secured loans - other assets

At 31 December 2020, the Group’s subsidiaries had taken out the following mortgage loans:

	Thousands of euros
	Loan	Long-term	Short-term
Financial institution	Original	Term	Term	Interest	Collateral
Caixabank	21,000	16,737	1,724	69	Hipotecaria
ING	67,900	67,900	—	2	Hipotecaria
Total	88,900	84,637	1,724	71

62

2019:

	Thousands of euros
	Loan	Long-term	Short-term
Financial institution	Original	Term	Term	Interest	Collateral
Allianz Real Estate	133,600	133,600	—	888	Hipotecaria
Caixabank	21,000	18,462	1,699	76	Hipotecaria
Caixabank	45,500	40,131	2,275	160	Hipotecaria
ING	67,900	67,900	—	2	Hipotecaria
Total	268,000	260,093	3,974	1,126

On 19 February 2015, the Group entered into a mortgage-backed loan with Allianza Real Estate for the Marineda shopping centre. The principal of the loan taken out amounted to EUR 133,600 thousand, has a term of 10 years, accrues interest at a fixed rate of 2.66% and the principal is repayable in full upon maturity. On 1 September 2020, the Group repaid this financing early.

On 26 March 2015, the Group subrogated a mortgage-backed loan taken out with Caixabank, S.A. with a mortgage guarantee on the Alcalá 38-40 office building. This loan has a principal of EUR 21,000 thousand, a term of 15 years, an interest rate of 3-month EURIBOR + 150 basis points, a 4-year grace period for the principal, and the principal is repayable in full using the French method over the following 11 years.

On 2 October 2015, the Group took out a first-ranking floating-rate mortgage-backed loan with Caixabank, S.A. on the portfolio made up of 33 property assets in Catalonia. This loan has a principal of EUR 45,500 thousand that will be allocated to finance a portion of the acquisition price of the assets portfolio. It matures in October 2025 and accrues interest at the rate of the 3-month EURIBOR + 150 basis points until the end of the loan, which is payable on a quarterly basis. On 31 July 2020, the Group repaid this financing early.

On 26 April 2019, the Group entered into a novation agreement modifying the mortgage loan subscribed on 4 December 2015 with ING Bank N.V. by the subsidiary Merlin Logística S.L.U. The due date for this financial arrangement, originally set to be in 2020, was extended until 2026.  This financial arrangement accrues an interest rate of EURIBOR at three months + 100 basis points; it includes a cost adjustment mechanism based on four sustainability criteria. This loan requires that the company maintain and comply with certain coverage ratios, such as the loan-to-value ratio and the ratio of the company’s income used to service the debt (interest coverage ratio, ICR). The Parent’s directors have confirmed that these ratios were met at 31 December 2020 and do not expect that they will not be fulfilled in the coming years.

In accordance with IFRS 9, the Group evaluated the nature of the refinancing undertaken of the previous ING loan and concluded that it did not represent a material change (10% test). Therefore, the difference between the value of the old debt at amortised cost and the new debt discounted at the effective interest rate of the old debt was recognised as a lower financial expenses of EUR 2,291 thousand under “Financial expenses” on the 2019 consolidated income statement. This amount will revert to the consolidated income statement for subsequent years in accordance with the effective interest rate of the debt.

In 2020, the application of the amortised cost in relation to these concepts involved a financial cost of EUR 363 thousand (EUR 248 thousand in 2019).

Maturity of debt

The breakdown by maturity of these loans is as follows:

63

2020

	Thousands of euros
		Secured		Revolving
	Syndicated	Senior	Syndicated	line of
	Loan	Tree	Secured	credit	Total
2021	—	8,443	1,724	—	10,167
2022	—	9,996	1,750	—	11,746
2023	—	9,847	1,777	—	11,624
2024	850,000	9,700	1,802	—	861,502
2025	—	17,435	1,824	—	19,259
Over 5 years	29,000	623,155	77,484	—	729,639
	879,000	678,576	86,361	—	1,643,937

2019

	Thousands of euros
		Mortage		Revolving
	Syndicated	Senior	Syndicated	line of
	Loan	Tree	Secured	credit	Total
2020	1,905	8,725	3,974	—	14,604
2021	—	8,616	5,401	—	14,017
2022	—	10,201	5,914	—	16,115
2023	—	10,049	6,418	—	16,467
2024	850,000	9,899	6,921	—	866,820
Over 5 years	—	653,755	235,439	—	889,194
	851,905	701,245	264,067	—	1,817,217

The Group had undrawn loans and credit facilities at 31 December 2020 with a number of financial institutions totalling EUR 786 million (EUR 815 million at 31 December 2019).

None of the Group’s debt was denominated in non-euro currencies at 31 December 2020 or 2019.

There are no significant differences between the fair values and carrying amounts of the Group’s financial liabilities.

The finance cost for interest on the loans totalled EUR 25,113 thousand in 2020 (EUR 27,810 thousand in 2019) and is recognised in the accompanying consolidated income statement for 2019.

At 31 December 2020 and 2019, the debt arrangement expenses had been deducted from the balance of “Bank borrowings”. In 2020, the Group charged an expense of EUR 13,296 thousand (in 2019 a lower expense of EUR 1,092 thousand was charged) under the heading ‘Financial costs’ of the accompanying consolidated income statement (see Note 18.d) related to the debt. This allocation in the accompanying consolidated income statement includes both the first application of IFRS 9 and the allocation of the debt to the income statement at amortised cost.

14.2 Debenture issues

On 12 May 2017, the Parent subscribed a Euro Medium Term Notes (EMTN) issue programme of up to EUR 4,000 million, which will replace the original bond issue programme and its supplement subscribed on 25 April 2016 and 14 October 2016, respectively, for an overall maximum amount of EUR 2,000 million.

On 18 May 2018, the Parent Company extended that bond-issue scheme (Euro Medium Term Notes – EMTN) up to an amount of EUR 5,000 million. This programme was renewed on 22 May 2020.

64

On 7 February 2020, the Parent issued a bond of EUR 100 million at 15 years at 102% of the nominal value and with a coupon of 1.875%, in addition to EUR 500 million of the same bond issued in the fourth quarter of 2019.

On June 17, 2020, the General Shareholders' Meeting approved the extension of this bond issuance program up to an amount of EUR 6 billion.

On 13 July 2020, the Parent issued a bond of EUR 500 million at 7 years with a coupon of 2.375%. Some of the funds were used to repurchase EUR 151.7 million of the bond maturing in 2022 and EUR 107.2 million of the bond maturing in 2023. The remainder (EUR 241.1 million) was used to early settle mortgage loans maturing in 2025.

The terms of the bonds issued by the Group abide by UK laws and are traded on the Luxembourg Stock Exchange. The bond issue scheme has the same guarantees and ratio compliance obligations as the syndicated loan and the revolving credit facility. At year-end 2020, the Group complied with the covenants set forth in this contract and the directors consider that they will be met in 2021.

The detail at 31 December 2020 of the bonds issued by Parent is as follows (in thousands of euros):

Maturity	Face value	Coupon	Listed price	Yield	Market
	(Millions of Euros)
May 2022	548	2,375%	MS + 36 p.b.	-0,16%	Ireland (a)
April 2023	743	2,225%	MS + 56 p.b.	0,04%	Luxembourg
May 2025	600	1,750%	MS + 98 p.b.	0,51%	Luxembourg
November 2026	800	1,875%	MS + 118 p.b.	0,75%	Luxembourg
July 2027	500	2,375%	MS + 146 p.b.	1,10%	Luxembourg
September 2029	300	2,375%	MS + 164 p.b.	1,32%	Luxembourg
December 2034	600	1,875%	MS + 185 p.b.	1,74%	Luxembourg
	4.091	2,085%

2019

Maturity	Face value	Coupon	Listed price	Yield	Market
	(Millions of Euros)
May 2022	700	2,375%	MS + 32 p.b.	0,31%	Irlanda (a)
April 2023	850	2,225%	MS + 51 p.b.	0,46%	Luxemburgo
May 2025	600	1,750%	MS + 72 p.b.	0,68%	Luxemburgo
November 2026	800	1,875%	MS + 84 p.b.	0,89%	Luxemburgo
September 2029	300	2,375%	MS + 119 p.b.	1,43%	Luxemburgo
December 2034	500	1,875%	MS + 146 p.b.	1,95%	Luxemburgo
	3.750	2,068%

(a) Due to the business combination with Metrovacesa carried out in 2016, the Group recognised a bond issue launched by Metrovacesa for EUR 700 million. The terms of the bonds abide by UK laws and are traded on the Irish Stock Exchange. This issue also includes a series of compliance obligations and guarantees, which is common in these types of transactions. At year-end 2020, the Group complied with the covenants set forth in this contract and the directors consider that they will be met in 2021.

The finance cost for interest on the debenture issues amounted to EUR 82,109 thousand (EUR 68,787 thousand in 2019) and is recognised in the accompanying consolidated income statement for 2020. The accrued interest payable at 31 December 2020 amounted to EUR 36,291 thousand (EUR 34,631 thousand in 2019). Debt arrangement expenses taken to the consolidated income statement in 2020 amounted to EUR 5,610 thousand (EUR 4,255 thousand in 2019).

14.3 Derivatives

The detail of the financial instruments as of 31 December 2020 is as follows:

65

	Thousands of euros
	2020	2019
Non-current
Interest rate derivatives	127.345	95.695
Total non-current	127.345	95.695
Current
Interest rate derivatives	1.277	1.231
Total current	1.277	1.231

To determine the fair value of the interest rate derivatives, the Group discounts its cash flows based on the embedded derivatives determined by the euro interest rate curve in accordance with market conditions on the measurement date.

These financial instruments are classified as Level 2 as per IFRS 7.

The detail of the derivative financial instruments included in the consolidated statement of financial position at 31 December 2020 is as follows:

2020

	Thousands of euros
	Assets	Liabilities
	Financial	Financial
Non-current
Interest rate derivatives	—	127,345
Derivative embedded in contract
BBVA lease (Note 10)	107,910	—
Current
Interest rate derivatives	—	1,277
Total derivatives recognised	107,910	128,622

2019

	Thousands of euros
	Assets	Liabilities
	Financial	Financial
Non-current
Interest rate derivatives	—	95,695
Derivative embedded in contract	—	—
BBVA lease (Note 10)	124,684	—
Current
Interest rate derivatives	—	1,231
Total derivatives recognised	124,684	96,926

At the end of 2020, the interest rate hedge financial instruments came mainly from the corporate syndicated loan of the Parent, which was refinanced in the first half of 2020, as well as from the syndicated mortgage financing of the subsidiary Tree Inversiones Inmobiliarias SOCIMI, S.A.

On the occasion of the refinancing of the syndicated loan of the Parent, a new interest rate swap (IRS) was signed to hedge the extension of the maturity of the financing from 2021 to 2024. The notional contract amounts to EUR 850,000 thousand at a cost of 0.0154%.

On 26 April 2019, the subsidiary Merlin Logistics S.L.U., in the framework of the refinancing of the mortgage loan with ING Bank N.V., signed a new interest rate swap (IRS) to hedge the extension of the maturity of the financing from 2020 to 2026. The notional contract amounts to EUR 67,900 thousand at a cost of 0.31%.

66

On the occasion of the novation of the mortgage loan of Tree Inversiones Inmobiliarias SOCIMI, S.A. on 18 December 2018, a new interest rate swap (IRS) was signed to hedge the maturity extension of the mortgage loan from 2024 to 2031. The notional contract amounted to EUR 662,514 thousand and a cost of 1.693%.

The derivatives arranged by the Group and their fair values are as follows (in thousands of euros):

2020

		Thousands of euros
			Outstanding notional amount at each date
Interest rate	Interest	Fair					Years
	Contracted	Value	2020	2021	2022	2023	years
Syndicated Parent (ending 2021)	0,0981% - (0,12%)	(2,519)	840,000	—	—	—	—
Syndicated Parent starting 2021)	0.0154%	(13,805)		850,000	850,000	850,000	—
Tree Inversiones (ending 2024)	0,959%	(38,975)	698,213	688,405	677,196	665,987	—
Tree Inversiones (starting 2024)	1,693%	(70,457)					660,029
Other subsidiaries	0,31%	(2,866)	67,900	67,900	67,900	67,900	67,900
		(128,622)	1,606,113	1,606,305	1,595,096	1,583,887	727,929

2019

		Thousands of euros
			Outstanding notional amount at each date
Interest rate	Interest	Fair					Years
	Contracted	Value	2019	2020	2021	2022	years
Syndicated Parent (ending 2021)	0,0981% - (0,12%)	(5,290)	840,000	840,000	—	—	—
Syndicated Parent starting 2021)	0.0154%	(5,279)			850,000	850,000	850,000
Tree Inversiones (ending 2024)	0,959%	(38,505)	707,553	698,213	688,405	677,196	665,987
Tree Inversiones (starting 2024)	1,693%	(44,590)	—	—	—	—	660,029
Other subsidiaries	2,085% - 0,25%	(2,031)	110,306	67,900	67,900	67,900	67,900
		(95,695)	1,657,859	1,606,113	1,606,305	1,595,096	2,243,916

The Group has opted for hedge accounting, suitably designating the hedging relationships in which these financial instruments are hedging instruments of the financing used by the Group. In this manner, the Group has neutralized flow variations stemming from interest payments and fixed the rate to be paid for said financing. The only derivatives that are highly effective prospectively and retrospectively, cumulatively, since the date of designation, are those associated with the financing of Tree, so their changes in value are recognised in equity.

The Group has recognised in equity the fair value of the derivatives that meet the effectiveness requirements, without considering any tax effect due to adhering to the REIT regime. Under the heading ‘Changes in fair value in financial instruments’ of the consolidated income statement, the Group has registered as a result of derivative financial instruments that have not met the hedge requirements due to ineffectiveness, negative EUR 19,856 thousand in 2020 (negative EUR 12,884 thousand in 2019).

On adopting IFRS 13, the Group adjusted the measurement techniques for calculating the fair value of its derivatives. The Group includes a bilateral credit risk adjustment to reflect both the own credit risk and the counterpart party risk in the measurement of the fair value of the derivatives. The Group applied the discounted cash flow method, considering a discount rate affected by its own credit risk.

In order to calculate the fair value of the financial derivatives, the Group used generally accepted measurement techniques in the market, which account for current and future expected exposure, adjusted by the probability of default and the potential loss given default affecting the contract. The CVA (Credit Value Adjustment) or counterparty credit risk and DVA (Debt Value Adjustment) or own credit risk were therefore estimated.

67

Current and expected exposure in the future is estimated using simulations of scenarios of fluctuations in market variables, such as interest rate curves, exchange rates and volatilities as per market conditions at the measurement date.

Furthermore, for the credit risk adjustment, the Group's net exposure has been taken into account with regards to each of the counterparties, if the financial derivatives arranged with them are within a financial transaction framework agreement that provides for netting positions. For counterparties for whom credit information is available, the credit spreads have been obtained from the CDS (Credit Default Swaps) quoted in the market; whereas for those with no available information, references from peers have been used. The Group hired Chatham Financial Europe Ltd. to measure the fair value of the derivatives.

The impact on liabilities and profit or loss before tax of a 50 basis point fluctuation in the estimated credit risk rate at 31 December 2020 and 2019 would be as follows:

2020

	Thousands of euros
Scenario	Liabilities	Equity	Consolidated profit before tax
5% rise in credit risk rate	(49.513)	27.331	22.182
5% reduction in credit risk rate	53.641	(11.935)	(41.706)

2019

	Thousands of euros
Scenario	Liabilities	Equity	Consolidated profit before tax
5% rise in credit risk rate	(57.253)	55.476	1.777
5% reduction in credit risk rate	60.114	(46.798)	(13.316)

14.4 Reconciliation of the carrying amount of the liabilities arising from financing activities

The breakdown of the financing activities and their impact on the Group’s cash flows in 2020 was as follows:

Thousands of euros
				No impact on cash
	31/12/2019	Cash flows from financing activities (net)	Interest paid	Reclassifications of debt	Accrued interest	Other adjustments	31/12/2020
Long-term loans	1,802,613	(159,919)	—	(8,924)	—	—	1,633,770
Short-term loans	16,936	(13,359)	(21,679)	8,924	20,758	—	11,580
Long-term revolving credit facilities	—	—	—	—	—	—	—
Short-term revolving credit facilities	161	—	(4,094)	—	4,289	48	404
Bonds	3,784,631	341,086	(80,449)	—	82,109	—	4,127,377
	5,604,341	167,808	(106,222)	—	107,156	48	5,773,131

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Thousands of euros
			No impact on cash
	31/12/2018	Cash flows from financing activities (net)	Reclassifications of debt	Accrued interest	Other adjustments	31/12/2019
							Long-term loans	1,813,946	3,271	(14,604)	—	—	1,802,613
Short-term loans	40,679	(62,315)	14,604	23,968	—	16,936
Long-term revolving credit facilities	150,000	(150,000)	—	—	—	—
Short-term revolving credit facilities	1,054	(4,735)	—	3,842	—	161
Bonds	3,284,007	431,837	—	68,787	—	3,784,631
	5,289,686	218,058	—	96,597	—	5,604,341

	31/12/2020	31/12/2019
Long-term loans	1,633,770	1,802,613
Short-term loans	11,580	16,936
Short-term revolving credit facilities	404	161
Bonds	4,127,377	3,784,631
	5,773,131	5,604,341
Non-current derivatives	127,345	95,695
Current derivatives	1,277	1,231
Loan arrangement expenses
Syndicated loan	(11,054)	(14,361)
Senior syndicated mortgage	(52,276)	(57,486)
Debenture issues	(25,284)	(26,586)
Other	(5,688)	(8,675)
Total current and non-current liabilities	5,807,451	5,594,159

In addition, under the interest rate hedging agreements signed (see Note 14.3), the net balance of the settlements amounted to EUR 14,447 thousand in 2020 (EUR 13,409 thousand in 2019).

14.5  Debt arrangement expenses

Changes in debt arrangement expenses during 2020 and 2019 are as follows:

Thousands of euros
	31/12/2019	Allocation to profit and loss account – Amortised cost	Impact income statement IFRS 9	Capitalisations	31/12/2020
				of arrangement expenses
Non-mortgage finance	17,384	(2,214)	(1,795)	752	14,127
Senior syndicated loan (Tree)	57,486	(1,777)	(4,472)	1,039	52,276
Mortgage loans - other assets	5,652	(2,674)	(363)	—	2,615
Debentures and bonds	26,586	(5,610)	—	4,309	25,284
	107,108	(12,275)	(6,630)	6,100	94,302

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Thousands of euros
	31/12/2018	Allocation to profit and loss account – Amortised cost	Impact income statement IFRS 9	Capitalisations	31/12/2019
				of arrangement expenses
Syndicated loans	3,912	(2,074)	7,797	7,750	17,384
Senior syndicated loan (Tree)	63,695	(1,771)	(4,439)	—	57,486
Mortgage loans - other assets	3,732	(712)	2,291	340	5,652
Debentures and bonds	24,460	(4,255)	—	6,380	26,586
	95,799	(8,812)	5,649	14,470	107,108

.

15.    Other current and no-current liabilities

Details of this heading at 31 December 2020 are as follows:

	Miles de euros
	2020		2019
	No Corriente	Corriente	No Corriente	Corriente
Otras provisiones	18,296	—	33,708	778
Fianzas y depósitos recibidos	89,326	714	92,257	646
Pasivos por impuesto diferidos	684,454	—	687,654	—
Otras deudas	46,260	7,065	28,207	5,930
Deudas con empresas del Grupo y asociadas	5,850	—	—	—
Otros pasivos corrientes	—	8,344	—	7,847
Total	844,186	16,123	841,826	15,201

“Provisions” includes the provision for the variable remuneration indicated in Note 20 amounting to EUR 9,305 thousand (EUR 22,825 thousand in 2019) and that will be paid in the long term.

It also includes provisions for the measurement of risk associated with a number of lawsuits and claims filed by third parties arising from the Group’s activity, which were recognised in accordance with the best existing estimates.

This heading also includes liabilities for tax debts for which there are uncertainties as to their amount or timing, whereby it is likely that the Group may have to dispose of resources to cancel these obligations as the result of a present obligation.

“Guarantees and deposits received” primarily comprise the amounts deposited by tenants to secure leases, which will be reimbursed at the end of the lease term.

The Parent and the majority of its subsidiaries adhere to the REIT regime. Under this regime, gains from the sale of assets are taxed at 0%, provided that certain requirements are met (basically, the assets must have been held by the REIT for at least three years). Any gains from the sale of assets acquired prior to joining the REIT tax regime will be distributed on a straight-line basis (unless proven to be distributed otherwise) over the period during which the REIT owned them. Any gains generated prior to joining the REIT tax regime will be taxed at the general rate, while a rate of 0% will be applied for the other years. The Parent’s directors estimated the tax rate applicable to the tax gain on the assets acquired prior to their inclusion to the REIT regime (calculated in accordance with the fair value of the assets obtained fromexpert appraisals at the date of the business combination and as of 31 December 2020), recognising the related deferred tax liability.

The Parent's directors do not envisage disposing of any of the investment property acquired after the Parent and its subsidiaries joined the REIT tax regime within three years, and have therefore not recognised the deferred tax liability corresponding to the changes in fair value since the assets were acquired as the applicable tax rate is 0%.

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16.    Trade receivables and other accounts payable

Details of this heading at 31 December 2020 are as follows:

	Thousands of euros
	2020	2019
Current
Suppliers	49,250	69,400
Suppliers, group companies and associates	544	—
Sundry accounts payable	30,207	13,598
Remuneration payable	17,476	51,922
Other accounts payable to public authorities (Note 17)	12,497	9,747
Advances from customers	1,138	65
Total	111,112	144,732

The decrease in the “Remuneration payable” heading comes from payment in 2020 of the incentive benchmarked to the value of the price of the 2017-19 Incentives Plan for a sum of EUR 37,500 thousand.

The carrying amount of the trade payables is similar to their fair value.

Information on the average period of payment to suppliers. Final provision two of Law 31/2014, of 3 December:

The information required by Additional Provision Three of Law 15/2010, of 5 July (modified by Final Provision Two of Law 31/2014, of 3 December) prepared in accordance with the Spanish Accounting and Audit Institute's Resolution of 29 January 2016 on information to be included in the notes to the annual financial statements with regard to the average period of payment to suppliers for commercial transactions is detailed below.

	2020	2019
	Days	Days
Average payment period to suppliers	31,3	33,6
Ratio of transactions paid	31,2	34,2
Ratio of transactions payable	34,9	24,7
	Thousands
	of Euros
Total payments made	411.847	154.722
Total payments pending	9.502	11.216

In accordance with the Spanish Accounting and Audit Institute's Resolution, the average period of payment to suppliers was calculated by taking into account the commercial transactions corresponding to the delivery of goods or provision of services that took place from the date of entry into force of Law 31/2014, of 3 December.

For the exclusive purpose of providing the information envisaged in this Resolution, payable to suppliers are considered trade payables for debts with suppliers of goods and services, included under “Trade receivables and other payables” under current liabilities in the attached balance sheet.

“Average period of payment to suppliers” is understood as the time elapsed between the date the supplier delivers the goods or provides the services and the date of actual payment.

The maximum legal period applicable to the Group in accordance with Law 11/2013, of 26 July was 30 days following the publication of the aforementioned law to date (unless the terms established therein are met that would enable the aforementioned maximum period to be extended up to 60 days).

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17.    Tax situation

a) Tax receivables and tax payables

The detail of the main tax receivables and payables at 31 December 2020 is as follows:

2020

	Thousands of euros
	Tax assets		Tax liabilities
	Non-		Non-
	Current	Current	Current	Current
Public finance for withholdings and other items	—	10,258	—	4,879
VAT	—	9,964	—	7,360
Tax assets	87,469	—	—	—
Corporate income tax	—	—	—	2,474
Payable to the Social Security	—	—	—	258
Deferred tax liabilities	—	—	684,454	—
	87,469	20,222	684,454	14,971

2019

	Thousands of euros
	Tax assets		Tax liabilities
	Non-		Non-
	Current	Current	Current	Current
Public finance for withholdings and other items	—	3,909	—	3,321
VAT	—	7,839	—	6,167
Tax assets	87,778	—	—	—
Corporate income tax	—	—	—	1,113
Payable to the Social Security	—	—	—	259
Deferred tax liabilities	—	—	687,654	—
	87,778	11,748	687,654	10,860

b) Reconciliation of the accounting profit/loss to the taxable profit/tax loss

At 31 December 2020, the taxable profit was calculated as the accounting profit for the year plus the effect of changes in the fair value of investment property, and temporary differences due to the existing limitations. At the reporting date of these financial statements, the Group did not recognise any deferred tax assets in this regard, as it is generally subject to a tax rate of 0% as the Parent and the majority of the subsidiaries adhere to the REIT regime.

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The reconciliation of the accounting profit to consolidated income tax expense for the year at 31 December 2020 is as follows:

	Thousands of euros
	2020	2019
Profit/(Loss) before tax	55,612	590,710
Permanent differences:
Negative goodwill on business combinations	—	2,866
- Consolidation adjustments to profit or loss	29,050	24,200
- Tax adjustments Operating profit	(32,137)	194,025
- Non-deductible finance costs	40,578	—
- Profit and loss accounted for using the equity method	3,444	(10,065)
- Tax adjustments outside the sale of assets	—	—
- Other permanent differences	88,410	(7,221)
Temporary differences:
-	84,468	(354,972)
-	(76,144)	(84,709)
Tax loss carryforwards	—	—
Adjusted taxable profit	193,282	354,834

The Parent and a significant number of its subsidiaries adhere to the REIT regime. As indicated in Note 5.13, the taxation of this scheme is constructed at a rate of 0%, provided that certain requirements are met.

In relation to the permanent differences/consolidation adjustments to profit or loss, the results of the companies integrated by the equity method are mainly included, as well as the incorporation of the amortisation expenses of the real estate investments not included under Income before taxes on the attached consolidated financial statements.

Temporary differences arose from the change in value of investment property (IAS 40 ? Fair value model). As the Parent's directors plan and state that investment property acquired by subsidiaries already subject to the REIT tax regime will not be sold within three years, the fair value adjustment in 2020 and 2019 is taxed at 0% and therefore the deferred tax liability is also zero.

c)  Reconciliation of accounting profit and tax expense

Expense / (Income)	Thousands of euros
	2020	2019
Expense for increase in value of investment property (a)	2,739	(23,016)
Expense for disposal of properties within the REIT regime (b)	(607)	(1,526)
Expense for disposal of properties outside the REIT regime	—	(184)
Expense for gain/(loss) at standard rate	(1,692)	(4,862)
Income from adjustments to prior years	—	998
Other	306	1,519
Total corporate income tax expense	746	(27,071)

(a)This corresponds to the increase in the value of the assets of the non-REIT subsidiaries (resident in Portugal, which meet the requirements of article 2.1 [c] of the REITs Law to be considered as eligible assets for the purposes of the aforementioned regime). The amount is the result of applying the tax rate that the directors consider will be applicable to the capital gains.

(b)Adjustment corresponding to the profit arising in the individual financial statements of Tree Inversiones Inmobiliarias, SOCIMI, S.A. as a result of the sale of real estate assets (BBVA branches, see Note 7).

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d) Deferred tax assets recognised

The detail of the tax loss carryforwards at 31 December 2020 is as follows:

2020

	Thousands of euros
	Recognised	Tax
	Tax base	credit
Tax loss carryforwards:
2009	138,838	34,960
2010	7,487	1,872
2011	95,395	23,849
2014	11,142	2,785
2015	1,801	450
2018	718	180
2019	462	116
2020	1,319	330
Total tax loss carryforwards	258,162	64,541
Other deferred taxes recognised	91,715	22,929
Total capitalized deferred tax assets	349,877	87,469

The “Other deferred taxes recognised” heading mainly includes the timing differences caused by the limitation of the depreciation of the assets generated by the acquisition of the Testa and Metrovacesa subgroup and the tax deductions pending application mainly due to reinvestment.

Those deferred tax assets were recognised in the consolidated statement of financial position, since the Group's directors consider that, based on the best estimates of the Group's future results, including certain tax planning measures, it is likely that these assets will be recovered.

The detail of the tax assets not recognised at 31 December 2020 is as follows:

	Thousands of euros
	Non-registered
	Tax base
Tax loss carryforwards:
2009	52,955
2010	5,673
2011	1,231
2012	1,676
2013	440
2014	20,158
2016	328
2017	1,866
2018	1,236
2019	2,845
Total tax loss carryforwards	88,408

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e)  Deferrex tax liabilities

As indicated above, the deferred tax liabilities arise mainly from the business combinations carried out in recent years and the increase in the value of the assets of Tree Inversiones Inmobiliarias, SOCIMI, S.A. (assets acquired prior to its incorporation into the REIT regime) and the non-REIT subsidiaries (resident in Portugal, which meet the requirements of article 2.1 (c) of the REIT Law to be considered as eligible assets for that regime).

The changes at 31 December 2020 are as follows:

	Thousands of
	euros
Total deferred tax liabilities at 31 December 2018	666,563
Increase in value of investment property	23,016
Additions due to business combinations (Note 3)	671
Temporary differences	(2,596)
Total deferred tax liabilities at 31 December 2019	687,654
Increase (decrease) in value of investment property	(2,739)
Temporary differences	(461)
Total deferred tax liabilities at 31 December 2020	684,454

As indicated in Note 17.b, the increase in value of investment property acquired by subsidiaries subject to the REIT tax regime generate temporary differences at a tax rate of 0%, whereby no deferred tax liability has been recognised.

f) Years open to audit and tax inspections

Under current legislation, taxes cannot be deemed to have been definitively settled until the tax returns filed have been reviewed by the tax authorities or until the four-year statute of limitations has expired. At 2020 year-end, the Parent and certain of its subsidiaries had all years since their incorporation open for review for all the taxes applicable to them. The rest of the subsidiaries had 2017 to 2019 open for review for income tax and 2017 to 2020 open for review for the other taxes applicable to them. In accordance with the provisions of Additional Provision Nine of Royal Decree Law 11/2020 of 31 March and Additional Provision One of Royal Decree Law 15/2020 of 21 April, the period between 14 March and 30 May 2020 will not count for the purposes of the limitation periods established in Law 58/2003 of 17 December, on General Taxation, so that the usual deadlines are extended by 78 additional days.

The Parent's directors consider that the tax returns for the aforementioned taxes have been filed correctly and, therefore, even in the event of discrepancies in the interpretation of current tax legislation in relation to the tax treatment afforded to certain transactions, such liabilities as might arise would not have a material effect on the accompanying financial statements. Also, Law 34/2015, of 21 September, partially amending Law 58/2003, of 17 December, on General Taxation establishes the right of the tax authorities to initiate a review and investigation procedure of the tax losses offset or carried forward or tax credits taken or carried forward, which will become statute barred after ten years from the day on which the regulatory period established for filing the tax return or self-assessment relating to the year or the tax period in which the right to offset the tax loss or to apply the tax credits arose

g) Disclosure requirements arising from REIT status, Law 11/2009, amended by Law 16/2012

The disclosure requirements arising from the Parent and certain subsidiaries being considered REITs are included in the related notes of the separate financial statements.

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18.    Revenue and expenses

a) Revenues

At 31 December 2020, the Group's revenue breakdown is as follows:

	Thousands of euros
	2020	2019
Rental income	441,062	511,526
Revenue from services rendered	5,070	3,327
Total	446,132	514,853

b) Other operating expenses

At 31 December 2020, the detail of “Other operating expenses” in the consolidated income statement is as follows:

	Thousands of euros
	2020	2019
Non-recoverable expenses of leased properties	45,454	47,780
Overheads
Independent professional services	7,898	6,869
Travel expenses	394	907
Insurance	396	246
Other	3,456	2,165
Costs associated with asset acquisitions and financing	4,174	4,492
Losses on, impairment of and change in provisions	1,740	483
Other expenses	3,424	1,531
Total	66,936	64,473

c) Staff costs and average headcount

The detail of “Staff costs” at 31 December 2020 is as follows:

	Thousands of euros
	2020	2019
Wages, salaries and similar expenses	18,308	29,498
Termination benefits	1,167	328
Social security costs	2,723	2,410
Other employee welfare expenses	458	376
Long-term incentive plan	18,232	44,242
Total	40,888	76,854

The decrease in the “Staff costs” heading come from the effect of the long-term remuneration plans for management and other relevant staff members one of which ended in 2019, and from the reduction in the bonuses paid to management following their waiver of their bonuses due to the COVID-19 assistance measures (see Note 2.7).

The average number of employees at the various Group companies in 2020 and 2019 was 222 and 203 respectively.

The detail of the headcount at 2020 and 2019 year-end, by category, is as follows:

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2020

	Women	Men	Total
Executive Directors	—	2	2
Senior management (*)	—	5	5
Management Team	1	4	5
Middle management	10	42	52
Other employees	87	69	156
Total	98	122	220

                (*) Includes the Internal Audit Director

2019

	Women	Men	Total
Executive Directors	—	2	2
Senior management (*)	—	6	6
Management Team	1	4	5
Middle management	10	43	53
Other employees	86	66	152
Total	97	121	218

                (*) Includes the Internal Audit Director

The average number of employees at the Group in 2020 with a disability equal to or greater than 33%, by category, was as follows:

Category	2020	2019
Senior management	—	—
Technical personnel and middle management	—	-
Administrative staff	5	5
Total	5	5

d) Finance income and costs

The breakdown of these items in the consolidated income statement is as follows:

	Thousands of euros
	2020	2019
Finance income:
Interest on deposits and current accounts	3,387	664
	3,387	664
Finance costs:
Interest on loans and other credits	(136,062)	(110,057)
Other finance costs	(13,591)	(6,185)
	(149,653)	(116,242)
Net finance expense	(146,266)	(115,578)

Finance costs include mainly the interest corresponding to the bank borrowings and obligations detailed in the Note 14 amounting to EUR 25,113 thousand and EUR 82,109 thousand, respectively. The amounts above also include amortisation of debt formalisation costs amounting to EUR 18,905 thousand (EUR 3,163 thousand in 2019), from application of the effective interest rate on financial debt (see Note 14.5), as well as the financial costs associated with interest rate derivatives amounting to EUR 9,934 thousand.

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e) Contribution to consolidated profit

The contribution of each company included in the scope of consolidation to profit for 2020 was as follows:

	Thousands of euros
Company	2020	2019
Full consolidation:
Merlin Properties SOCIMI, S.A.	(53,651)	194,163
Tree Inversiones Inmobiliarias, SOCIMI, S.A.	45,703	65,138
Merlin Retail, S.L.	(21,748)	17,558
Merlin Oficinas, S.L.	10,812	42,623
Merlin Logística, S.L.	87,194	101,046
Varitelia Distribuciones, S.L.U.	(18,558)	10,242
Metroparque, S.A.	(13,512)	11,276
La Vital Centro Comercial y de Ocio, S.L.	(5,093)	3,709
Global Carihuela Patrimonio Comercial, S.L.U.	(19,553)	(2,622)
Sadorma 2003, S.L.	(2)	143
Parques Logísticos de la Zona Franca, S.A.	17,363	15,954
Sevisur Logística, S.A.	9,956	3,493
Promosete Invest. Inmobiliaria, S.A.	3,517	5,929
Praça do Marques Servicios Auxiliares, S.A.	2,706	11,879
MPCVI - Compra e Venda Imobiliária, S.A.	1,770	4,267
MPEP - Properties Escritórios Portugal, S.A	1,903	6,369
MP Monumental, S.A.	10	5,198
MP Torre A, S.A.	2,202	4,027
Forum Almada – Gestao Centro Comercial, Lda	(5,137)	29,922
Torre dos Oceanus Investimentos Inmobiliarios,S.A.	2,801	9,571
Torre Arts Investimentos Inmobiliarios, S.A.	5,650	13,445
Torre Fernão Magalhães Investimentos Inmobiliarios, S.A.	5,332	7,093
VFX Logística, S.A.	1,119	(2,847)
Other companies	(982)	(4,002)
Equity method:
Paseo Comercial Carlos III, S.A.	(6,770)	1,430
Centro Intermodal de Logística, S.L.	25,529	8,290
Provitae, S.L.	(572)	(25)
Sicilius Real Estate S.L.	(20,211)	—
Distrito Castellana Norte, S.A.	(626)	—
Other investments	(794)	370
Total	56,358	563,639

.

19.    Related party transactions

In addition to subsidiaries, associates and joint ventures, the Group's “related parties” are considered to be the Company's shareholders, “key management personnel” (members of the Board of Directors and executives, along with their close relatives), and the entities over which key management personnel may exercise significant influence or control.

The following transactions are typical of the ordinary course of business and have been carried out under normal market conditions.

The detail of any significant transactions, given their amount or importance, carried out between the Parent or its Group companies, and related parties, is as follows:

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2020

		Thousands of euros
	Type
	of the
Related party	relationship	Revenue	Expense	Assets	Liabilities
Banco Santander, S.A.  (a)	Financing	—	4,788	—	200,519
Banco Santander, S.A. (a)	Cash	—	—	75,513	—
Banco Santander, S.A. (a)	Notional derivatives	—	—	—	464.471 (*)
Banco Santander, S.A. (b)	Lease of	914	—	—	98
Banco Santander, S.A.  (b)	Services	—	99	—	—
Banco Santander, S.A. (c)	Special encumbrance	—	—	—	—
G36 Developments S.L.(d)	Financing	6	—	625	—
Total		920	4,887	76,138	665,088

(*) This amount does not represent the recognition of a liability as of 31.12.2020.

Ejercicio 2019

		Thousands of euros
	Type
	of the
Related party	relationship	Revenue	Expense	Assets	Liabilities
Banco Santander, S.A.  (a)	Financiación	—	4,338	—	205,076
Banco Santander, S.A. (a)	Tesorería	—	—	76,055	—
Banco Santander, S.A. (a)	Nocional Derivados	—	—	—	466.056(*)
Banco Santander, S.A. (b)	Arrendamiento	1,880	—	—	219
Banco Santander, S.A.  (b)	Servicios	—	50	—	—
Banco Santander, S.A. (c)	Gravamen especial	1,099
G36 Developments S.L.(d)	Financiación	2	—	625	—
Total		2,981	4,388	76,780	671,351

(*) This amount does not represent the recognition of a liability as of 31.12.2019.

Transactions executed with significant shareholders

During 2020, only the shareholder Banco Santander, S.A. held the status of significant shareholder pursuant to the regulations in force.

(a)Financing transactions

•As of 31 December 2020, the Group has been granted loans from its shareholder Banco Santander, S.A. amounting to EUR 200,519 thousand. The notional amount of the derivatives in force contracted totals EUR 464,471 thousand.

•These positions correspond to Banco de Santander, S.A.’s stake in the loans included among the financing operations of the MERLIN Group, the detail of which can be found in Note 14.

•As indicated in that Note 14, on 25 April 2019, the Group arranged a senior syndicated loan amounting to EUR 1,550 million, including two tranches, a corporate loan of EUR 850 million and a corporate credit facility of EUR 700 million. Banco Santander participates in this refinancing with EUR 120 million (7.7% of the total) of which EUR 65.8 million correspond to its share of the corporate loan and EUR 54.2 million correspond to the credit line, on the terms as the other financial entities. At 31 December 2020, the credit facility was not drawn down.

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•Also indicated in Note 14, the Group maintains a syndicated loan in three tranches for the financing of Tree Inversiones Inmobiliarias, S.A., with EUR 678,576 thousand in outstanding principal, of which the portion owed to Banco Santander is EUR 134,713 thousand.

•The Group has bank balances deposited with Banco Santander, S.A. amounting to EUR 75,513 thousand (including EUR 13 thousand in the accounts in the name of the associate Paseo Comercial Carlos III, S.A.).

•In 2020, the finance costs incurred in transactions with Santander, S.A. amounted to EUR 4,788 thousand, which included EUR 33 thousand in guarantee fees and EUR 128 thousand in current account management costs.

•The Group has been granted guarantees by the shareholder Banco Santander, S.A. amounting to EUR 6,962 thousand (EUR 5,446 thousand granted to MERLIN Properties SOCIMI, S.A. and EUR 1,516 thousand granted to the associate Paseo Comercial Carlos III, S.A.).

(b)Leases and services rendered.

•The Group has 6 lease agreements with Banco Santander, S.A. in different buildings. The duration of the lease contracts covers a period of up to 4 years, and in 2020 they generated income of EUR 914 thousand, including income from leasing, as well as parking spaces and transfers of ATM space in shopping centres. The deposits paid to secure these leases amounted to EUR 98 thousand.

•In addition, the Group has contracted General Shareholders Meeting and shareholder registration organisational services amounting to EUR 65 thousand, in addition to listing agent services on the Euronext Lisboa stock exchange for EUR 32 thousand.

(c) Special encumbrance

•In 2019, the Group recorded income corresponding to the special tax provided for in section 9.2 of Law 11/2009, of 26 October, regulating Real Estate Investment Trusts.

Transactions with companies accounted for using the equity method

(d)  G36 Developments S.L.

•MERLIN Properties, SOCIMI, S.A. has a loan outstanding amounting to EUR 625 thousand, granted on 1 October 2018 to the associate G36 Developments, S.L., dedicated to management of co-working spaces. The interest accrued in 2020 amounts to EUR 6 thousand.

Dividends and other profits distributed to related parties (thousands of euros)

	2020	2019
Significant shareholders	16,999	52,822
Banco Santander, S.A.	16,999	52,822
Directors and Executives	695	2,179
Directors	439	1,344
Executives	256	835
Total	17,694	55,001

.

20.    Information on Directors

The Parent’s directors and the parties related to them did not have any conflicts of interest that had to be reported in accordance with article 229 of the revised text of the Corporate Enterprise Law.

Directors' compensation and other benefits

At 31 December 2020 and 2019, salaries, per diem attendance fees and any other type of compensation paid to members of the Parent Company’s managing bodies totalled EUR 3,149 thousand and EUR 5,812 thousand, as detailed below:

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	Thousands of euros
	2020	2019
Fixed and variable remuneration	2,909	5,802
Statutory compensation	—	—
Termination benefits	—	—
Per diem allowances	228	—
Life and health insurance	12	10
Total	3,149	5,812

In addition to the sums above, the Executive Directors were paid a total of EUR 1,815 thousand in relation to the variable objectives for 2019, and to the deferred sums for 2014 and 2017, in accordance with the terms of those plans. At 31 December 2020, the executive directors had not accrued an entitlement to variable remuneration (EUR 2,850 thousand in 2019).

There was still EUR 3,250 thousand pending payment associated with the bonus objectives for 2015-19 and that is recorded as long-term provisions. Similarly, the amount of variable remuneration paid over the short term amounts to EUR 3,027 thousand, and is recognised under “Trade and other payables” in the accompanying balance sheet

Also, as indicated below in this Note, as members of the management team, the Executive Directors are entitled to payment of a remuneration plan granted to the management team in 2017 for the 2017-19 period, which will be described below. Under that plan, the Executive Directors have been paid EUR 12,500 thousand based on compliance with the incentive linked to increasing the Company’s share price.

The Ordinary General Shareholders Meeting of 17 June 2020 approved the appointment of María Ana Forner Beltrán and Ignacio Gil Casares Satrústegui as proprietary directors. The Board of Directors thus consisted of 14 members on 31 December 2020. On 20 January 2021, Director John Gómez Hall resigned.

The breakdown, by board member, of the amounts disclosed above is as follows:

Board member		Thousands of euros
		2020	2019
Remuneration of board members
Javier García Carranza Benjumea	Chairman - Proprietary director	—	—
Ismael Clemente Orrego	CEO	1,000	2,450
Miguel Ollero Barrera	Executive director	1,000	2,400
María Luisa Jordá Castro	Independent director	144	129
Ana García Fau	Independent director	134	129
George Donald Johnston	Independent director	116	117
John Gómez Hall	Independent director	97	100
Fernando Ortiz Vaamonde	Independent director	111	115
Juan María Aguirre Gonzalo	Independent director	146	134
Pilar Cavero Mestre	Independent director	124	117
Francisca Ortega Hernández Agero	Proprietary director	—	—
Emilio Novela Berlín	Independent director	127	111
María Ana Forner Beltrán	Proprietary director	73	—
Ignacio Gil Casares Satrústegui	Proprietary director	65	—
Total		3,137	5,802

In its meeting of 8 April 2020, the Board of Directors decided to reduce its remuneration by 25%, and it resolved with the CEO, the General Corporate Director and the management team to waive all of their remuneration and incentives plans for 2020 (see Note 2.7).

The Company has granted no advances, loans or guarantees to any of its directors.

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The Parent’s directors are covered by the “Corporate Third-Party Liability Insurance Policies for Directors and Executives” taken out by the Parent in order to cover possible damages that may be claimed, and that are evidenced as a result of a management error committed by its directors or executives, as well as those of its subsidiaries, in discharging their duties. The premium amounted to an annual total of EUR 221 thousand (EUR 122 thousand in 2019).

Remuneration and other benefits of senior executives

The remuneration of the Parent's senior executives, including the Head of Internal Audit, excluding those who are simultaneously members of the Board of Directors (whose remuneration is disclosed above) in 2020 and 2019, is summarised as follows:

2020

Thousands of euros
Number of people	Fixed and variable remuneration	Other remuneration	Total
5	1,865	26	1,891

2019

Thousands of euros
Number of people	Fixed and variable remuneration	Other remuneration	Total
6	5,477	31	5,508

In addition to the above amounts and in relation to the variable remuneration for Senior Management corresponding to the prior years' bonuses, an amount of EUR 1,904 thousand was paid related to the variable objectives for 2019, as well as the deferred amounts of the variable objectives for 2014 and 2017 in accordance with the terms set out in the aforementioned plans.

EUR 850 thousand recognised as long-term provisions is maintained as unpaid accrued amounts associated with variable remuneration targets for 2015 to 2020, and the variable remuneration that will be paid in the short term amounts to EUR 4,835 thousand and is recognised under the heading ‘Trade and other payables’ in the accompanying balance sheet.

Under the 2017-19 incentives plan, Senior Management have been paid EUR 10,063 thousand based on compliance with the incentive linked to increasing the Company’s share price.

As regards “golden parachute” clauses for executive directors and other senior executives of the Company or its Group in the event of dismissal or takeover, these clauses provide for compensation that represented a total commitment of EUR 4,000 thousand as of 31 December 2020.

2017-19 incentives plan

Also, at the General Shareholders Meeting held on 26 April 2017, the shareholders approved a new remuneration plan for the management team and other important members of the Group’s workforce, the measurement period of which is from 1 January 2017 to 31 December 2019 (the “2017-19 Incentive Plan”). According to the plan, the members of the management team may be entitled to receive: (i) a certain monetary amount in accordance with the increase of the share price and (ii) Parent Company shares, if certain objectives are fulfilled.

Vesting of the incentive will independently be conditional upon the total rate of return obtained by the shareholder during the three-year period due to:

•the increase in the quoted price of the Parent’s share plus the dividends distributed to shareholders during the measurement period; and

•the increase in the EPRA NAV per share of the Parent plus the dividends distributed to shareholders during the measurement period.

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In order for the right to the share-based incentive and to the EPRA NAV-based incentive to be vested, the total shareholder rate of return (TSR) must be at least 24%.

TSR NAV rate / TSR rate Share price	Percentage assigned to beneficiaries (“PR”)	Percentage assigned to shareholders
< 24%	0%	100%
≥ 24% and < 36%	6%	94%
≥ 36%	9%	91%

To calculate the TSR, (i) the percentage assigned to the Beneficiaries in accordance with the above table will be applied to the result of multiplying the Share Price TSR multiplied by the number of Shares of the Company as of 31 December 2019; (ii) the result of that transaction will be balanced through an adjustment mechanism in favour of the Beneficiaries, as, once a minimum return is reached, the Beneficiaries will be entitled to the assigned percentage of the total return generated from the start.

The date for calculating the amount of the incentive tied to the NAV per share and the amount of the incentive tied to the quoted price of the shares was 31 December 2019. The maximum amount to be received for the incentive tied to the quoted price from 2017 to 2019 amounted to EUR 37.5 million, which was paid out in March 2020. As of 31 December 2020, the Company recognised the expense in the amount of EUR 1,974 thousand, corresponding to the vested portion of the 2017-19 Incentive Plan, with a balancing entry under liabilities.

Also, the maximum amount of the incentive tied to EPRA NAV per share will be EUR 75 million and a maximum of 6,000,000 shares have been allocated for its payment. At 31 December 2019, there were 5,874,111 shares that were ultimately allocated to the incentive benchmarked to the EPRA NAV. 50% of the allocated shares will be paid out on the second settlement date, i.e., on the second business day after the formulation of the 2020 annual financial statements. The remaining 50% of the allocated shares will be paid out on the third settlement date, i.e., on the second business day after the formulation of the 2021 annual financial statements. However, these amounts may be modified based on how the EPRA NAV evolves in 2021.

As of 31 December 2020, the Company recognised the expense in the amount of EUR 16,258 thousand, corresponding to the vested portion of the 2017-19 Incentive Plan, with an offsetting entry in reserves.

21.    Auditor's renumeration

The fees for financial audit services provided to the various companies composing the Merlin Group and subsidiaries by the principal auditor, Deloitte, S.L., and entities related to the principal auditor and other auditors is as follows:

	Miles de euros
Description	2020	2019
Audit services	592	580
Other audit-related services
Other attest services	138	155
Total audit and related services	730	735
Tax advisory services	—	—
Total other services	—	—
Total	730	735

The heading ‘Other audit-related services’ includes the verification services performed by the auditor in the bond issue process, as well as certain agreed procedures related to the performance of covenants.

For its part, the audit services include, in addition to the statutory annual audit, services from revisions of intermediate periods.

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22.    Enviromental information

Given the activity in which the Group engages, it has no environmental liabilities, expenses, assets, provisions or contingencies that could have a material impact on its equity, financial position and results of its operations.

Therefore, no specific environmental disclosures have been included in these notes to the consolidated financial statements.

23.    Risk exposure

Financial risk factors

The Group's activities expose it to a variety of financial risks: market risk, credit risk, liquidity risk and cash flow interest rate risk. The Group's overall risk management programme is based on the uncertainty of financial markets and aims to minimize the adverse effects of such risks on the financial profitability of the Group.

Risk management is undertaken by the Group's Senior Management in accordance with the policies approved by the Board of Directors. Senior Management identifies, evaluates and mitigates financial risks in close collaboration with the Group's operating units. The Board of Directors issues the written global risk management policies and the policies for specific areas, including those for covering market risk, interest rate risk and liquidity risk and investing cash surpluses.

Market risk

Given the current status of the real-estate sector and in order to mitigate the effects thereof, the Group has specific measures in place to minimize said impact on its financial position.

These measures are applied pursuant to the results of sensitivity analyses carried out by the Group on a regular basis. These analyses involve:

•The economic environment in which the Group operates: Designing different economic scenarios and modifying the key variables potentially affecting the Group. Identifying interdependent variables and the extent of their relationship; and

•The time scale in which the assessment is being carried out: The time frame of the analysis and its possible deviations will be taken into account.

MERLIN Properties is exposed to market risk from possible vacancies or renegotiations of leases when the leases expire. This risk could have a direct negative impact on the valuation of the Company's assets.

However, market risk is mitigated by the customer acquisition and selection policies and the mandatory lease terms negotiated with customers. Therefore, at 31 December 2020, the average occupancy rate of the asset portfolio was 94.2%, with a weighted average unexpired lease term of 5.4 years (weighted by GRI).

Credit risk

Credit risk is defined as the potential risk of loss in earnings to which the Group is exposed if a customer or counterparty breaches its contractual obligations.

As a general rule, the Group places cash and cash equivalents with financial institutions with high credit ratings.

Except in the case of the BBVA branch leases, the Group is not exposed to significant concentration of credit risk with one customer or counterparty. The Group regularly reviews the credit rating and thus the creditworthiness of BBVA vis-à-vis the segment of bank branches leased to this bank. The Group also pays close attention to this situation, since the finance held is dependent on credit quality being maintained. The Parent's directors do not consider that there is any material credit risk regarding receivables due from this tenant.

With respect to other customers, the Group has policies in place to limit the volume of risks posed by customers. Exposure to the risk of being unable to recover receivables is mitigated in the normal course of business through funds or guarantees deposited as collateral.

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The Group has formal procedures to identify any impairment of trade receivables. Delays in payment are detected through these procedures and individual analysis by business area and methods are established to estimate impairment loss.

Details of the estimated maturities of the Group's financial assets in the consolidated statement of financial position at 31 December 2020 are as follows. The tables present the results of the analysis of the aforesaid maturities of financial assets at 31 December 2020:

2020

	Thousands of euros
	Less than 3 months	3 to 6 months	6 months to 1 year	Over 1 year	Total
Loans to third parties	—	—	71,767	108,705	180,472
Guarantees and deposits	—	—	—	69,138	69,138
Trade and other receivables	14,884	13,147	5,337		33,368
Other current financial assets	5,505	—	2,094	—	7,599
Cash and cash equivalents	252,022	—	—	—	252,022
Total	272,411	13,147	79,198	177,843	542,599

2019

	Thousands of euros
	Less than 3 months	3 to 6 months	6 months to 1 year	Over 1 year	Total
Loans to third parties	—	—	—	163,630	163,630
Guarantees and deposits	—	—	—	68,969	68,969
Trade and other receivables	17,138	12,785	340	—	30,263
Other current financial assets	6,244	—	1,055	424	7,723
Cash and cash equivalents	254,016	—	—	—	254,016
Total	277,398	12,785	1,395	233,023	524,601

Cash and cash equivalents

The Group has cash and cash equivalents of EUR 252,022 thousand, which represents its maximum exposure to the risk posed by these assets.

Cash and cash equivalents are deposited with banks and financial institutions.

Liquidity risk

Liquidity risk is defined as the risk of the Group encountering difficulties meeting its obligations regarding financial liabilities settled in cash or with other financial assets.

To manage liquidity risk and meet its various funding requirements, the Group uses an annual cash budget and a monthly cash projection, the latter being detailed and updated daily. The factor causing the liquidity risk is the working capital deficiency, which mainly includes short-term debt. At 31 December 2020, the Group’s working capital amounted to EUR 236,595 thousand.

In addition, liquidity risk has the following mitigating factors, which should be highlighted: (i) the generation of recurrent cash from the businesses on which the Group bases its activity; and (ii) the capacity to renegotiate and obtain new financing facilities based on the Group's long-term business plans and the quality of its assets.

At the date of preparation of the consolidated financial statements, taking into account the foregoing, the Group had covered all its funding requirements to fully meet its commitments to suppliers, employees and the authorities based on the cash flow forecast for 2021. Likewise, the type of sector in which the Company operates, the

85

investments it makes, the financing it obtains to make such investments, the EBITDA they generate and the occupancy rates of the properties, enables the liquidity risk to be mitigated and excess cash to be produced.

Any cash surpluses are used to make short-term investments in highly liquid deposits with no risk. The acquisition of share options or futures, or any other high-risk deposits as a method of investing cash surpluses, is not among the possibilities considered by MERLIN Properties for investing cash surpluses.

Details of the Group's exposure to liquidity risk at 31 December 2020 are provided in the table below. The tables present the results of the analysis of financial liabilities by remaining contractual maturity date:

2020

	Thousands of euros
	Less than 3 months	3 to 6 months	6 months to 1 year	Over 1 year	Total
Bank borrowings	1,545	4,092	43,915	—	49,552
Other non-current liabilities ? Guarantees	—	—	—	89,326	89,326
Trade and other payables (excluding payables to public authorities)	28,021	68,101	2,186	—	98,308
Total	29,566	72,193	46,101	89,326	237,186

2019

	Thousands of euros
	Less than 3 months	3 to 6 months	6 months to 1 year	Over 1 year	Total
Bank borrowings	3,127	4,415	45,415	—	52,957
Other non-current liabilities ? Guarantees	—	—	—	92,257	92,257
Trade and other payables (excluding payables to public authorities)	51,922	69,400	13,663	—	134,985
Total	55,049	73,815	59,078	92,257	280,199

Cash flow interest rate risk and fair value risk

The Group manages its interest rate risk by borrowing at fixed and floating rates of interest. The Group's policy is to ensure non-current net financing from third parties is at a fixed rate. To manage this, the Group enters into interest rate swaps which are designated as hedges of the respective loans. At 31 December 2020, the percentage of debt the interest rate of which is covered by the aforementioned financial instruments was 99.8%. The impact of interest rate fluctuations is explained in Note 14.3.

Exchange rate risk

The Company's policy is to borrow in the same currency as that of the cash flows of each business. Consequently, currently there is no foreign currency risk. However, noteworthy in this connection are the exchange rate fluctuations arising in translating the financial statements of foreign companies whose functional currency is not the euro. At 31 December 2020, the functional currency of all subsidiaries and associates of the MERLIN Group was the euro.

Tax risk

As mentioned in Note 1, the Parent and part of its subsidiaries are subject to the special tax regime for Real Estate Investment Trusts (REITs). The transitional period of the Parent ended in 2017 and, therefore, compliance with all requirements established by the regime (see Notes 1 and 5.13) became mandatory. Some of the more formal obligations that the Parent must meet involve the inclusion of the term SOCIMI (REIT) in its company name, the inclusion of certain information in the notes to its separate financial statements, the share price on the stock market, etc., and other obligations that require estimates to be made and judgements to be applied by management that may become fairly complex, especially considering that the REIT regime is relatively recent and was developed by the Directorate-General of Taxes mainly in response to the queries posed by various companies. Group management, based on the opinion of its tax advisors, assessed compliance with the requirements of the regime, concluding that such requirements were met at 31 December 2020.

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Accordingly, and also for the purpose of taking into consideration the financial effect of the regime, it should be noted that, as established in article 6 of Law 11/2009, of 26 October, amended by REITs Act, and in the percentages established in it, companies that have opted for the special tax regime are required to distribute the profit generated during the year to their shareholders in the form of dividends, once the related corporate obligations have been met. This distribution must be approved within six months from each year-end, and the dividends paid in the month following the date on which the pay-out is agreed (see Note 5.13).

If the Parent does not comply with the requirements established in the regime or if the shareholders at the General Meetings of these companies do not approve the dividend distribution proposed by the Board of Directors, calculated in accordance with the requirements of this Act, it would not be complying therewith and, accordingly, tax would have to be paid under the general regime, not the regime applicable to REITs.

        24.    Events after the reporting period

In January 2021, the Group delivered a 98.757 sqm (A-2 Azuqueca II) industrial plant to Carrefour.

In February 2021, the Group sold three non-strategic logistics assets amounting to 50,904 sqm and one BBVA branch for a total amount of EUR 43.9 million, with a premium of 1% on the December 2020 valuation.

25. Explanation added for translation to English

These financial statements are presented on the basis of the regulatory financial reporting framework applicable to the Company in Spain (see Note 2.1). Certain accounting practices applied by the Group that conform with that regulatory framework may not conform with other generally accepted accounting principals and rules.

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ANEXO I - Group companies and associates 2020
			Thousands of Euros
Parent	Line of business/Location	Ownership interest	Share capital	Profit (loss)		Other	Total	Dividends	Carrying amount		Consolidation method	Auditor
				From operations	Net	Shareholder's equity	Equity	Received	Cost	Impairment losses
Tree Inversiones Inmobiliarias, SOCIMI, S.A.U.	Acquisition and development of property assets for lease / Paseo de la Castellana 257, Madrid	100%	9,323	77,951	51,559	91,189	53,159	42,237	657,984	—	Full Consolidation	Deloitte
Merlin Retail, S.L.U.	Acquisition and development of property assets for lease / Paseo de la Castellana 257, Madrid	100%	17,963	8,362	2,438	236,491	256,892	11,780	251,408	—	Full Consolidation	Deloitte
Merlin Oficinas, S.L.U.	Acquisition and development of property assets for lease / Paseo de la Castellana 257, Madrid	100%	29,674	15,787	15,517	718,239	763,430	9,442	771,345	—	Full Consolidation	Deloitte
Merlin Logística, S.L.U.	Acquisition and development of property assets for lease / Paseo de la Castellana 257, Madrid	100%	28,166	20,775	16,776	273,211	318,153	11,187	292,304	—	Full Consolidation	Deloitte
Sevisur Logística	Urban development, construction and operation of buildings for logistics purposes and shared services. Ctra. de la Esclusa, 15. 41011, Sevilla.	100%	17,220	3,706	3,553	9,173	29,946	2,406	37,629	—	Full Consolidation	Deloitte
Parques Logísticos de la Zona Franca, S.A.	Acquisition and development of property assets for lease, Avda. 3 del Parc Logístic, nº 26, Barcelona	100%	15,701	4,624	4,939	107,017	127,657	6,108	118,310	—	Full Consolidation	Deloitte
Exhibitions Company , S.A.U.	Provision of all kinds of technical, commercial or economic services/ Paseo de la Castellana 257, Madrid	100%	180	(36)	10	4,205	4,395	—	4,287	—	Full Consolidation	N/A
Gescentesta, S.L.U.	Service provision / Paseo de la Castellana 257, Madrid	100%	3	192	147	635	785	—	3	—	Full Consolidation	N/A
Metroparque, S.A.	Acquisition and development of property assets for lease / Paseo de la Castellana 257, Madrid	100%	56,194	6,030	6,354	33,086	95,633	7,612	231,557	—	Full Consolidation	Deloitte
La Vital Centro Comercial y de Ocio, S.L.	Acquisition and development of property assets for lease / Paseo de la Castellana 257, Madrid	100%	14,846	1,537	1,552	18,576	34,973	2,421	56,788	—	Full Consolidation	Deloitte
Desarrollo Urbano de Patraix, S.A.	Land management / Avda. Barón de Carcer, 50, Valencia	100%	2,790	(22)	(102)	22,453	25,141	—	25,090	—	Full Consolidation	N/A
Sadorma 2003, S.L.	Acquisition and development of property assets for lease / Paseo de la Castellana 257, Madrid	100%	73	(2)	199	18,332	18,603	—	25,485	(6,882)	Full Consolidation	N/A

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ANEXO I - Group companies and associates 2020
			Thousands of Euros
Parent	Line of business/Location	Ownership interest	Share capital	Profit (loss)		Other	Total	Dividends	Carrying amount		Consolidation method	Auditor
				From operations	Net	Shareholder's equity	Equity	Received	Cost	Impairment losses
Global Murex Iberia, S.L.	Acquisition and development of property assets for lease / Paseo de la Castellana 257, Madrid	100%	14	—	21	(15,501)	(15,466)	—	—	(15,466)	Full Consolidation	N/A
Varitelia Distribuciones, S.L.U.	Acquisition and development of property assets for lease /  Paseo de la Castellana 257, Madrid	100%	15,443	(18,531)	(20,560)	26,670	21,553	5,959	172,979	(151,427)	Full Consolidation	Deloitte
Global Carihuela, Patrimonio Comercial S.L.	Acquisition and development of property assets for lease / Paseo de la Castellana 257, Madrid	100%	3,303	(13,937)	(14,420)	24,242	13,125	—	34,102	(20,977)	Full Consolidation	N/A
MPCVI – Compra e Venda Imobiliária, S.A.	Acquisition and development of property assets for lease / Av. Fontes Pereira de Melo, Nº 51, Lisboa	100%	1,050	1,071	274	5,941	7,265	136	6,418	—	Full Consolidation	Deloitte Portugal
MPEP – Properties Escritórios Portugal, S.A.	Adquisición y promoción de bienes inmuebles para su arrendamiento / Av. Fontes Pereira de Melo, Nº 51, Lisboa	100%	50	798	78	22	150	—	85	—	Full Consolidation	Deloitte Portugal
MP Monumental, S.A.	Acquisition and development of property assets for lease / Av. Fontes Pereira de Melo, Nº 51, Lisboa	100%	50	(680)	(2,674)	8,636	6,012	—	20,348	—	Full Consolidation	Deloitte Portugal
MP Torre A, S.A.	Acquisition and development of property assets for lease / Avda. Fontes Pereira de Melo, 51, Lisboa	100%	50	1,515	(269)	325	106	—	10,186	—	Full Consolidation	Deloitte Portugal
VFX Logística, S.A.	Acquisition and development of property assets for lease. Av. Fontes Pereira de Melo, Nº 51, Lisboa	100%	5,050	1,118	875	12,445	18,370	—	20,913	(2,550)	Full Consolidation	Deloitte Portugal
Promosete, Invest. Inmobil. SA.	Acquisition and development of property assets for lease.  Av. Fontes Pereira de Melo, Nº 51, Lisboa	100%	200	1,607	863	6,924	7,987	—	10,384	—	Full Consolidation	Deloitte Portugal
Praça Do Marquês serviços Auxiliares, SA	Acquisition and development of property assets for lease.  Av. Fontes Pereira de Melo, Nº 51, Lisboa	100%	15,893	2,809	2,758	60,595	79,246	—	56,361	—	Full Consolidation	Deloitte Portugal
Torre Dos Oceanus Investimentos Inmobiliarios,S.A.	Acquisition and development of property assets for lease / Avda. Fontes Pereira de Melo, 51, Lisboa	100%	50	1,535	521	3,319	3,890	—	15,912	—	Full Consolidation	Deloitte Portugal

89

ANEXO I - Group companies and associates 2020
			Thousands of Euros
Parent	Line of business/Location	Ownership interest	Share capital	Profit (loss)		Other	Total	Dividends	Carrying amount		Consolidation method	Auditor
				From operations	Net	Shareholder's equity	Equity	Received	Cost	Impairment losses
Forum Almada – Gestão Centro Comercial Sociedade Unipessoal, Lda.	Acquisition and development of property assets for lease / Avda. Fontes Pereira de Melo, 51, Lisboa	100%	5	(5,252)	(7,221)	12,905	5,689	—	33,774	—	Full Consolidation	Deloitte Portugal
Forum Almada II, S.A.	Acquisition and development of property assets for lease / Avda. Fontes Pereira de Melo, 51, Lisboa	100%	10,000	13,255	9,369	47,767	67,136	—	298,143	—	Full Consolidation	Deloitte Portugal
Torre Arts - Investimentos Imobiliarios, S.A.	Acquisition and development of property assets for lease / Avda. Fontes Pereira de Melo, 51, Lisboa	100%	100	2,666	2,030	83,653	85,783	1,952	85,781	—	Full Consolidation	Deloitte Portugal
Torre Fernao Magalhaes - Investimentos Imobiliarios, S.A.	Acquisition and development of property assets for lease / Avda. Fontes Pereira de Melo, 51, Lisboa	100%	100	719	557	26,870	27,526	526	27,555	—	Full Consolidation	Deloitte Portugal
Innovación Colaborativa, S.L.	Selection, contracting, fitting out, organisation and management of coworking-type collaborative workspaces / Paseo de la Castellana 257, Madrid	100%	4	(4,601)	(4,699)	(751)	(5,446)	—	3,868	(9,314)	Full Consolidation	N/A
Milos Asset Development,	Acquisition, holding, administration, disposal and development of land located within the project "Distrito Castellana Norte" / Paseo de la Castellana 257, Madrid	100%	3	(36)	(123)	(1)	(121)	—	3	(124)	Full Consolidation	N/A
Paseo Comercial Carlos III, S.A.	Acquisition and development of property assets for lease / Avda. San Martín Valdeiglesias, 20 - 28922 Madrid	50%	8,698	(1,672)	(3,472)	25,409	30,635	—	25,668	—	Equity method	Deloitte
Provitae Centros Asistenciales, S.L.	Acquisition and development of property assets for lease / C. Fuencarral, 123. Madrid	50%	6,314	(42)	(47)	(1,112)	5,155	—	5,061	(1,553)	Equity method	N/A
G36 Development, S.L.	Acquisition and development of property assets for lease / Paseo de la Castellana, 93 Madrid	50%	4,053	(21)	(21)	—	4,032	—	2,027	—	Equity method	N/A
Centro Intermodal de Logística S.A. (CILSA)	Development, management and performance of logistics activities in a port system / Avenida Ports d’Europa 100, Barcelona	49%	18,920	12,299	9,063	113,906	141,889	1,274	95,688	—	Equity method	EY
Pazo de Congresos de Vigo, S.A.	Project for the execution, construction and operation of the Vigo Convention Centre / Avda. García Barbón, I, Vigo	44%	n.d	n.d	n.d.	n.d.	n.d	—	3,600	(3,600)	Equity method	n.d

90

ANEXO I - Group companies and associates 2020
			Thousands of Euros
Parent	Line of business/Location	Ownership interest	Share capital	Profit (loss)		Other	Total	Dividends	Carrying amount		Consolidation method	Auditor
				From operations	Net	Shareholder's equity	Equity	Received	Cost	Impairment losses
PK. Hoteles 22, S.L.	Acquisition and development of property assets for lease / C. Príncipe de Vergara, 15. Madrid	33%	5,801	625	369	(220)	5,920	—	2,467	—	Equity method	CROWE, S.L.P.
Parking del Palau, S.A.	Acquisition and development of property assets for lease / Paseo de la Alameda, s/n. Valencia	33%	1,698	(76)	(78)	527	2,147	—	2,137	(779)	Equity method	BDO
Araba Logística, S.A.	Acquisition and development of property assets for lease / Avda. Álava s/n Rivabellosa (Álava)	25%	1,750	1,726	1,053	1,873	4,676	—	2,257	(2,257)	Equity method	Deloitte
Distrito Castellana Norte, S.A.	Carrying out all types of real estate activities / Paseo de la Castellana 216, Madrid	14%	175,853	(5,807)	(4,327)	(23,018)	148,508	—	170,012	(626)	Equity method	KPMG
Silicius Real Estate, S.L.	Carrying out all types of real estate activities/ Calle de Velázquez, 123, Madrid	15%	361,122	(13,259)	(11,957)	6,986	356,141	267	91,021	(20,478)	Equity method	PWC

91

ANEXO I - Group companies and associates 2019
			Thousands of Euros
Parent	Line of business/Location	Ownership interest	Share capital	Profit (loss)		Other	Total	Dividends	Carrying amount		Consolidation method	Auditor
				From operations	Net	Shareholder's equity	Equity	Received	Cost	Impairment losses
Tree Inversiones Inmobiliarias, SOCIMI, S.A.U.	Acquisition and development of property assets for lease / Paseo de la Castellana 257, Madrid	100%	9,323	72,040	52,478	133,427	61,763	143,785	657,984	—	Full consolidation	Deloitte
Merlin Retail, S.L.U.	Acquisition and development of property assets for lease / Paseo de la Castellana 257, Madrid	100%	17,963	19,434	14,725	248,271	266,122	11,086	251,408	—	Full consolidation	Deloitte
Merlin Oficinas, S.L.U.	Acquisition and development of property assets for lease / Paseo de la Castellana 257, Madrid	100%	29,674	12,085	11,802	727,681	757,355	9,706	771,345	—	Full consolidation	Deloitte
Merlin Logística, S.L.U.	Acquisition and development of property assets for lease / Paseo de la Castellana 257, Madrid	100%	28,166	17,474	13,983	284,397	312,417	12,295	292,304	—	Full consolidation	Deloitte
Sevisur Logística	Urban development, construction and operation of buildings for logistics purposes and shared services. Ctra. de la Esclusa, 15. 41011, Sevilla.	100%	17,220	3,124	3,033	11,605	28,825	1,861	37,629	—	Full consolidation	Deloitte
Parques Logísticos de la Zona Franca, S.A.	Acquisition and development of property assets for lease, Avda. 3 del Parc Logístic, nº 26, Barcelona	100%	15,701	5,339	7,636	113,126	128,827	—	118,310	—	Full consolidation	Deloitte
Exhibitions Company , S.A.U.	Provision of all kinds of technical, commercial or economic services/ Paseo de la Castellana 257, Madrid	100%	180	(1)	36	4,205	4,385	—	4,287	—	Full consolidation	N/A
Gescentesta, S.L.U.	Service provision / Paseo de la Castellana 257, Madrid	100%	3	205	154	635	638	—	3	—	Full consolidation	N/A
Metroparque, S.A.	Acquisition and development of property assets for lease / Paseo de la Castellana 257, Madrid	100%	56,194	9,135	9,515	40,698	96,891	7,770	231,557	—	Full consolidation	Deloitte
La Vital Centro Comercial y de Ocio, S.L.	Acquisition and development of property assets for lease / Paseo de la Castellana 257, Madrid	100%	14,846	3,030	3,027	20,997	35,843	2,207	56,788	—	Full consolidation	Deloitte
Desarrollo Urbano de Patraix, S.A.	Land management / Avda. Barón de Carcer, 50, Valencia	100%	2,790	—	(84)	22,452	25,242	—	25,090	—	Full consolidation	N/A

92

ANEXO I - Group companies and associates 2019
			Thousands of Euros
Parent	Line of business/Location	Ownership interest	Share capital	Profit (loss)		Other	Total	Dividends	Carrying amount		Consolidation method	Auditor
				From operations	Net	Shareholder's equity	Equity	Received	Cost	Impairment losses
Sadorma 2003, S.L.	Acquisition and development of property assets for lease / Paseo de la Castellana 257, Madrid	100%	73	(10)	(2,016)	18,332	18,404	—	25,485	(7,080)	Full consolidation	N/A
Global Murex Iberia, S.L.	Acquisition and development of property assets for lease / Paseo de la Castellana 257, Madrid	100%	14	(1)	21	(15,500)	(15,487)	—	—	(15,497)	Full consolidation	N/A
Varitelia Distribuciones, S.L.U.	Acquisition and development of property assets for lease /  Paseo de la Castellana 257, Madrid	100%	15,443	9,889	7,855	33,035	48,478	18,579	172,979	(124,501)	Full consolidation	Deloitte
Global Carihuela, Patrimonio Comercial S.L.	Acquisition and development of property assets for lease / Paseo de la Castellana 257, Madrid	100%	3,303	(1,340)	(1,487)	24,242	27,545	—	34,102	(871)	Full consolidation	N/A
MPCVI – Compra e Venda Imobiliária, S.A.	Acquisition and development of property assets for lease / Av. Fontes Pereira de Melo, Nº 51, Lisboa	100%	1,050	1,058	260	5,934	7,244	354	6,418	—	Full consolidation	Deloitte Portugal
MPEP – Properties Escritórios Portugal, S.A.	Acquisition and development of property assets for lease / Av. Fontes Pereira de Melo, Nº 51, Lisboa	100%	50	249	19	3	72	—	85	—	Full consolidation	Deloitte Portugal
MP Monumental, S.A.	Acquisition and development of property assets for lease / Avda. Fontes Pereira de Melo, 51, Lisboa	100%	50	(166)	(2,381)	11,497	9,165	220	20,348	—	Full consolidation	Deloitte Portugal
MP Torre A, S.A.	Acquisition and development of property assets for lease / Avda. Fontes Pereira de Melo, 51, Lisboa	100%	50	1,507	(386)	711	375	—	10,186	—	Full consolidation	Deloitte Portugal
VFX Logística, S.A.	Acquisition and development of property assets for lease. Av. Fontes Pereira de Melo, Nº 51, Lisboa	100%	5,050	(2,813)	(2,848)	15,292	17,495	—	20,913	(3,394)	Full consolidation	Deloitte Portugal
Promosete, Invest. Inmobil. SA.	Acquisition and development of property assets for lease.  Av. Fontes Pereira de Melo, Nº 51, Lisboa	100%	200	1,480	444	6,416	7,059	—	11,245	—	Full consolidation	Deloitte Portugal
Praça Do Marquês serviços Auxiliares, SA	Acquisition and development of property assets for lease.  Av. Fontes Pereira de Melo, Nº 51, Lisboa	100%	15,893	2,307	12,098	48,628	76,618	—	56,361	—	Full consolidation	Deloitte Portugal

93

ANEXO I - Group companies and associates 2019
			Thousands of Euros
Parent	Line of business/Location	Ownership interest	Share capital	Profit (loss)		Other	Total	Dividends	Carrying amount		Consolidation method	Auditor
				From operations	Net	Shareholder's equity	Equity	Received	Cost	Impairment losses
Torre Dos Oceanus Investimentos Inmobiliarios,S.A.	Acquisition and development of property assets for lease / Avda. Fontes Pereira de Melo, 51, Lisboa	100%	50	1,350	394	2,925	3,369	—	15,912	—	Full consolidation	Deloitte Portugal
Forum Almada – Gestão Centro Comercial Sociedade Unipessoal, Lda.	Acquisition and development of property assets for lease / Avda. Fontes Pereira de Melo, 51, Lisboa	100%	5	13,791	7,052	4,979	12,036	—	31,533	—	Full consolidation	Deloitte Portugal
Forum Almada II, S.A.	Acquisition and development of property assets for lease / Avda. Fontes Pereira de Melo, 51, Lisboa	100%	10,000	13,099	9,224	38,543	57,767	—	289,302	—	Full consolidation	Deloitte Portugal
Torre Arts - Investimentos Imobiliarios, S.A.	Acquisition and development of property assets for lease / Avda. Fontes Pereira de Melo, 51, Lisboa	100%	100	2,570	1,959	83,646	85,705	—	85,781	—	Full consolidation	Deloitte Portugal
Torre Fernao Magalhaes - Investimentos Imobiliarios, S.A.	Acquisition and development of property assets for lease / Avda. Fontes Pereira de Melo, 51, Lisboa	100%	100	701	543	26,853	27,496	—	27,555	—	Full consolidation	Deloitte Portugal
Innovación Colaborativa, S.L.	Selection, contracting, fitting out, organisation and management of coworking-type collaborative workspaces / Paseo de la Castellana 257, Madrid	100%	4	(1,993)	(2,015)	1,264	(747)	—	3,868	(3,868)	Full consolidation	N/A
Milos Asset Development,	Acquisition, holding, administration, disposal and development of land located within the project "Distrito Castellana Norte" / Paseo de la Castellana 257, Madrid	100%	3	—	—	(1)	2	—	3	(1)	Full consolidation	N/A
Paseo Comercial Carlos III, S.A.	Acquisition and development of property assets for lease / Avda. San Martín Valdeiglesias, 20 - 28922 Madrid	50%	8,698	2,562	(266)	25,407	34,105	—	25,668	—	Equity method	Deloitte
Provitae Centros Asistenciales, S.L.	Acquisition and development of property assets for lease / C. Fuencarral, 123. Madrid	50%	6,314	(40)	(47)	(1,112)	5,202	—	5,061	(488)	Equity method	N/A
G36 Development, S.L.	Acquisition and development of property assets for lease / Paseo de la Castellana, 93 Madrid	50%	4,053	(21)	(21)	—	4,032	—	2,027	—	Equity method	N/A
Centro Intermodal de Logística S.A. (CILSA)	Development, management and performance of logistics activities in a port system / Avenida Ports d’Europa 100, Barcelona	49%	18,920	12,954	8,759	107,705	135,384	882	95,688	—	Equity method	EY

94

ANEXO I - Group companies and associates 2019
			Thousands of Euros
Parent	Line of business/Location	Ownership interest	Share capital	Profit (loss)		Other	Total	Dividends	Carrying amount		Consolidation method	Auditor
				From operations	Net	Shareholder's equity	Equity	Received	Cost	Impairment losses
Pazo de Congresos de Vigo, S.A.	Project for the execution, construction and operation of the Vigo Convention Centre / Avda. García Barbón, I, Vigo	44%	n.d	n.d	n.d.	n.d.	n.d	—	3,600	(3,600)	Equity method	n.d
PK. Hoteles 22, S.L.	Acquisition and development of property assets for lease / C. Príncipe de Vergara, 15. Madrid	33%	5,801	978	566	(811)	5,556	191	2,467	—	Equity method	CROWE, S.L.P.
Parking del Palau, S.A.	Acquisition and development of property assets for lease / Paseo de la Alameda, s/n. Valencia	33%	1,698	216	161	394	2,253	45	2,137	—	Equity method	BDO
Araba Logística, S.A.	Acquisition and development of property assets for lease / Avda. Álava s/n Rivabellosa (Álava)	25%	1,750	140	(416)	1,439	2,774	—	20,669	(20,669)	Equity method	Deloitte
Distrito Castellana Norte, S.A.	Carrying out all types of real estate activities / Paseo de la Castellana 216, Madrid	14%	168,111	(388)	(278)	(23,014)	144,819	—	168,893	—	Equity method	KPMG

95

Merlin Properties SOCIMI, S.A. and Subsidiaries

Consolidated Directors' Report

for the year ended

31 December 2020

1.Company Situation

Economic Situation

The markets in which the MERLIN Properties Socimi Group operates (‘MERLIN’ or ‘MERLIN Properties’ or the ‘Group’) were seriously affected in the year by the impact of the COVID-19 pandemic. In both Spain and Portugal, the government has introduced restrictions to contain the epidemiological situation that affected the economy, dragging down GDP by around 8% in Portugal and 11% in Spain. This exceptional situation has also affected consumption, especially physical consumption, as well as employment, despite the mitigating measures taken by the public authorities.

This economic situation has led to a general decline in recruitment volumes. However, the discovery of a vaccine against the new disease in record time, together with a tax and monetary expansion never before seen, including the Next Generation European Fund, should enable the economy to recover rapidly.

The investment volume for all asset types in Spain has also been reduced, hitting EUR 9,477 million in 20201 compared to EUR 12,000 million in direct investment in Spain in 2019.2 Given the Eurozone's expansive monetary policy and the overall context of low interest rates, demand for income-generating assets is expected to remain high.

1.1. Rental market situation by geographical area

Madrid

Madrid is both the largest metropolitan area and the main real estate market on the Iberian Peninsula. In general, the rental market has been less dynamic than in previous years, impacted by the economic situation. Thus, the surface absorption3 of offices was 350,414 sqm, a fall of 43% compared to 617,133 sqm in 2019.  Availability increased by 60 bp in the year to 9.0%, while income declined by 3.2% on average, although it remained in the Prime range. In relation to the logistics market, its activity has accelerated by COVID-19, reaching high levels of activity in the main axes (A-2, A-4 and A-42) for all segments (XXL warehouses, cross-docking warehouses and last mile solutions). Finally, the shopping centres sector has been significantly affected by the restrictions on opening and capacity  resulting from the pandemic.

Barcelona

The exceptional economic situation has impacted all segments of the rental market in Barcelona. In relation to the office market, rent was stable at EUR 28/sqm/month4 for prime assets, while average rent declined by 1.6% compared to 2019. The logistics market is suffering from a lack of both available land and quality product for e-commerce operators. As far as shopping centres are concerned, they have been affected both by opening restrictions and by the fall in tourism, which has particularly affected the urban assets.

Lisbon

Due to the mobility restriction measures ordered by the Portuguese Government, economic activity in general and the real estate market in particular were affected throughout 2020. The office market closed the year with ~ 138.000 sqm  transactions, 30% lower than 2019; and an unemployment rate that rose slightly to 6.4% (compared to 5% 2019). However, prime rents showed a positive evolution during the year, reaching EUR 25/sqm/month, mainly due to the lack of quality supply on the market. In relation to logistics, rents remain stable at EUR 4/ m ²/month, on the of Alverca/Azambuja axis. This market continues to be characterised by low quality supply, as well as increasing demand needs, making it possible to anticipate rent growth in the coming years. Finally, the shopping centre sector has been affected by the severe restrictions on movement and opening of premises, which have directly impacted the activity of operators and, consequently, of the entire sector.

1CBRE "2021 Real Estate Market Outlook for Spain”

2CBRE "2020 Real Estate Market Outlook for Spain”

3“Mercado de oficinas de Madrid at a glance T4 2020” BNP Paribas Real Estate

4“Mercado de oficinas de Barcelona at a glance T4 2020” BNP Paribas Real Estate

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1.2. Rental market situation by business segment

Offices

According to BNP Paribas, in 2020 the Spanish office market recorded a significant drop in activity compared to 2019, with recruitment falling by 43% in Madrid and by 55% in Barcelona. Unemployment rose slightly in both markets to 9.0% in Madrid and 7.2% in Barcelona. The performance was similar in Portugal. 

Premium rents have stood despite  the situation, although in more peripheral locations there have been slight declines.

Shopping centres

The operations of shopping centres were significantly affected in both Spain and Portugal in the course of the year, with forced closures, restrictions on opening, and occupancy restrictions. In addition, the reduction in tourist flows has also affected the sector.

This has impacted both inflows and sales. However, the unprecedented vaccination campaign that is taking place in 2021, together with the historic monetary and fiscal expansion, make it possible to foresee a significant recovery in both private consumption and retail sales.

Logistics

The upward trend in the logistics sector has been favoured by COVID-19, which has fuelled the development of e-commerce in the face of the constraints imposed on occupancy limits and physical opening. Logistics take-up was acute both in the central area and in Catalonia, with other markets reaching similarly high levels of activity (e.g. Valencia).

The volume reached by turnkey projects and pre-lets is of particular note given the lack of available logistics platforms that meet current demand requirements. This shortage of quality products has influenced rents of logistics assets.

1.3. Organisational and operational structure

As a Group, MERLIN’s main objective is to generate sustainable returns for shareholders through the acquisition, focused management and selective rotation of real estate assets in the moderate risk profile segments ("Core" and "Core Plus").

Its strategy and operations are characterised by:

1)Focusing on Core and Core Plus assets in Spain and Portugal

2)An investment grade capital structure

3)Distribution of 80% of AFFO (see Note 7.1. of the Directors' Report) in the form of dividends

4)Being one of the most efficient REITs in Europe

5)Implementing the best practices of Corporate Governance

The description of the internal organisational structure can be summarised as follows:

–A Board of Directors made up of 14 directors that receives advice from the Audit and Control Committee, the Appointments Committee and the Remuneration Committee. MERLIN’s Board, comprised a majority of independent directors, focuses its activity on defining, supervising and monitoring the policies, strategies and general guidelines to be followed by the Group. The Board is responsible for the long-term strategy and for monitoring its implementation.

–A Chief Executive Officer reports directly to the Board and sits on it.

–An Investment Committee reports to the CEO and consists of the executive team, with the Chief Investment Officer having veto power.

3

2.    Business performance and results

2.1. Business results in 2020

The Group performed well despite the impact of COVID-19, with growth in average portfolio occupancy and increases in comparable income and release spread in all asset categories with the exception of shopping centers.

MERLIN Properties ended the year with gross rental income (GRI) of EUR 503 million, EBITDA of EUR 365 million and FFO of EUR 262 million (Note 14.2. to the Directors' Report).

The net asset value (EPRA NTA Note 14.3. to the Directors' Report) amounted to EUR 7,263 million (EUR 15.46 per share), up 0.5% on the previous year. The portfolio's resilience can be seen from its solid fundamentals despite the impact of COVID-19, with growth in comparable gross rent (+ 0.4%) and an increase in occupancy up to 94.2% (-57 bps for 2019).

Offices

The offices segment has seen a rise in LfL  rents of 2.2%. Occupancy increased to 91.1% (-168 bps with regard to 2019) with a release spread of 3.0%. The main leases signed in 2020 include: BBVA with 9,135 m2 in PE Las Tablas and with the Community of Madrid with 7,785 m2 in Castellana 280 and the renewals with Endesa (54,960 m2) in Ribera del Loira 60 and with the Ministry of Interior (9,315 m2) in Alcalá 40.

Regarding the Landmark I Plan, the main developments in the year are the completion of the overhaul of Diagonal 605, while the refurbishment continues on Monumental and Castellana 85, buildings that will be delivered during the first half of 2021, and the emptying of Plaza Ruiz Picasso 2 is being finalised for the beginning of remodelling.

Shopping centres

The shopping centre portfolio has been impacted by forced closures, occupancy limits and opening restrictions, reducing both sales by 36.4% and footfall by 37.4% in the last twelve months. There was a decline in lfL  rents of 1.2%. Occupancy increased to 93.7% (+47 bps with regard to 2019) with a release spread of 4.1%. Among the main leases and renewals signed in the year are Ozone with 2,959 sqm in X-Madrid, Ongravity with 2,621 sqm in Marineda and another 2,380 sqm in X-Madrid and Mercadona with 1,916 sqmin Arenas.

With regard to the Flagship Plan, the overhauls of Saler and Porto Pi continue, assets that will be finalised in the first half of 2021.

Logistics

There was a solid release spread of 6.0% and growth in LfL rents of 1.8%. Occupancy at 97.5% is stable compared to 2019 (-14 bps).

With regard to the Best II & III Plan, the following new projects have been delivered and reclassified as part of the existing inventory: A2-cabanillas Park I F, rented to Luis Simoes (20,723 m2); A-4 Seseña, rented to Carreras and Biogran (28,731 m2); Zaragoza-Plaza II rented to DSV (11,421 m2) and Sevilla Zal (warehouse 2.6 , rented to Collbattallé (4,689 m2). In January 2021, the construction of Azuqueca II was completed.

Investment and divestment activity

The investment activity in the current year was limited to the acquisition of Plaza de Cataluña 9, an historical asset located in one of the most emblematic places in Barcelona. The asset has 3,048 sqm of GLA and will be operated by LOOM.

With regard to divestiture activity, over 2020 the Group sold assets totalling EUR 198 million, including three secondary commercial assets (Thader, La Fira and Nassica) to Silicius Socimi at GAV and 19 branches leased to BBVA.

2.2. Outlook for the Company in 2021

The evolution expected in 2021 will depend significantly on the evolution of the health situation. In 2020 MERLIN expects its occupancy rates to remain high and its cash flow to remain strong given the long lease term remaining (5.4 years from 31 December 2020, weighted by GRI). The Group also expects to continue to acquire assets that fit its investment philosophy, as well as financing its ongoing CapEx plan. To that end, it has a cash position and debt securities of EUR 256 million at the end of 2020 and a liquidity position of EUR 1,253 million, including undrawn credit facilities, EUR 54 million in treasury stock and EUR 157 million of receivables from the sale of the non-core office and secondary commercial asset portfolios sold in 2019 and 2020 respectively.

4

3.    Capital and Liquidity Resources

3.1. Debt

At the end of 2020, the Group's financial debt amounted to approximately EUR 5,735 million, made up of corporate financing without mortgage collateral (loans and bonds) and mortgages.

The Group's strategy is to actively manage both the Group's assets and the liabilities. With regard to liabilities, the goal is to extend the average maturity of the debt and to take advantage of current market conditions to reduce or maintain borrowing cost and eliminate the interest rate risk. Currently, 99.85% of the Group’s debt accrues interest at a fixed rate or is subject to interest rate hedges.

In 2020, MERLIN carried out various actions on its financial liabilities with the aim of extending the average maturity of the debt and maintaining or reducing its average cost.

The transactions carried out were:

•Issue of a EUR 100 million bond at 15 years at 102% of the nominal value and a coupon of 1.875%, in addition to the EUR 500 million bond issued in the fourth quarter of 2019.

•Draw down of EUR 29 million in EIB financing at 10 years with an interest rate of 0.60%

•In the third quarter of 2020, the issue of a EUR 500 million bond at 7 years with a coupon of 2.375%. Some of the funds were earmarked for the partial repurchase of the bonds maturing in 2022 and 2023 and the cancellation of two mortgage bonds.

•Extension of the maturity of the EUR 700 million credit facility from 2024 to 2025 and of the Tree mortgage financing from 2032 to 2033

As a result of these transactions, the debt’s average maturity at year end stood at 6.0 years and there are no significant debt maturities at short-term, the first relevant maturity being the EUR 548 million bond maturing in 2022, the amount of which would be covered by the revolving credit facility. 

The repayment schedule is as follows:

3.2. Liquidity available

The MERLIN’s liquidity position at 31 December 2020 amounts to EUR 467 million, including EUR 54 million in treasury stock and EUR 157 million corresponding to the receivables from the sale of the portfolio of non-core offices and taking a stake in Silicius. Both transactions were carried out in the last quarter of 2019 and the first quarter of 2020 respectively. 

This liquidity is increased by EUR 786 million by the revolving credit  facility, which was not drawn down in 2020, and  the undrawn financing from the European Investment Bank.

5

Additionally, the Group has the ability to access the capital markets through the euro medium-term note (EMTN) programme, which has a limit of EUR 5,000 million. At 2020 year end, EUR 909 million was available through the aforementioned programme.

3.3. Off-balance-sheet obligations and transactions

The Group's investment strategy currently focuses on two pillars, the repositioning of core assets in the office and shopping centre segments and developing new logistics warehouses.

The Group has projects in different stages of completion to which it has committed EUR 41 million over the 2021-25 period.

4.    Enviromental Matters

Since the assets were acquired, the Group has incorporated sustainability into its decision-making process, aware of its impact on improving the performance of assets and the well-being of tenants. MERLIN seeks to differentiate its properties along these lines and, to that end, in 2020 it has continued with its three key repositioning plans: Landmark I, Flagship and Best II and III, the time horizon for which is 2019-23. These plans are focused on creating value by repositioning selected properties, incorporating sustainability into the process, as well as in obtaining better financing terms linked to meeting sustainability targets.

4.1. Sustainability certification

In 2020 the Group continued to make progress on making its asset portfolio sustainable by investing in improving the environmental performance of its properties.  When certifying assets, the Group selects the most appropriate framework and modality based on the asset’s phase, as well as the characteristics of the building, its occupancy rate at the time of certification or the tenants who occupy it.

We are continuing the process of certifying our portfolio under the standards of the leaders in this market, BREEAM and LEED, with the aim of certifying 96% of our portfolio. In 2020 the Group certified 42 new assets

Asset	Category	# Assets	Certification	Rating	Date
Ulises 16-18	Offices	1	LEED	GOLD	January 2020
Barcelona-PLZF	Logistics	9	BREEAM	GOOD	February 2020
A2-Cabanillas III	Logistics	1	LEED	GOLD	February 2020
Juan Esplandiu 11-13	Offices	1	BREEAM	GOOD	March 2020
Sevilla ZAL	Logistics	2	BREEAM	GOOD	April 2020
Atica 2	Offices	1	LEED	GOLD	June 2020
A4-Pinto I	Logistics	1	BREEAM	GOOD	June 2020
PE Cerro Gamos	Offices	2	LEED	GOLD	June 2020
PE Cerro Gamos	Offices	1	LEED	SILVER	June 2020
Sevilla ZAL	Logistics	8	BREEAM	CORRECT	June 2020
Sevilla ZAL	Logistics	1	LEED	SILVER	July 2020
Arturo Soria	Shopping Centres	1	BREEAM	VERY GOOD	October 2020
Saler	Shopping Centres	1	BREEAM	VERY GOOD	October 2020
A2-Azuqueca II	Logistics	1	LEED	PLATINUM	October 2020
Adequa 1	Offices	3	BREEAM	VERY GOOD	November 2020
Atica 3	Offices	1	BREEAM	GOOD	November 2020
A2-Cabanillas Park I G	Logistics	1	LEED	GOLD	November 2020
Zaragoza-Plaza- II	Logistics	1	LEED	GOLD	November 2020
Arenas	Shopping Centres	1	BREEAM	GOOD	December 2020
Centro Oeste	Shopping Centres	1	BREEAM	GOOD	December 2020
Tres Aguas	Shopping Centres (investee)	1	BREEAM	VERY GOOD	December 2020
PE Alvia	Offices	1	BREEAM	GOOD	December 2020
Sant Cugat I	Offices	1	BREEAM	VERY GOOD	December 2020
Total		42

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Additionally, MERLIN obtained an excellent rating (78%) in the 2020 edition of GRESB, a platform that makes it possible to harmonise and compare information related to sustainability criteria (environmental, social and corporate governance - ESG) in real estate investments.

This rating is above the global average and that of our counterparts and reinforces the Group's commitment to investing in sustainability.

4.2. ISO sustainability certifications

MERLIN, as manager of its portfolios, has an Environmental Management System (EMS) certified according to ISO 14001, which is the umbrella under which it manages its portfolios and that incorporates new properties into its scope every year.

Thus, in 2015 the Company began an ambitious plan for ISO 14001 (environmental management) and ISO 50001 (energy management) certifications to maintain and expand the number of real estate assets that have at least ISO 14001 certification, and subsequently ISO 50001 certification (based on the understanding that it is a natural step to obtain ISO 14001 certification before aspiring to ISO 50001).

This plan includes office buildings, shopping centres and logistics warehouses. With regard to ISO 14001, in 2020, 85 buildings composing a surface area of 1,150,892 m2 were certified, 11 more buildings than in 2019. The Company is committed to continuing to increase the number of properties under its corporate EMS and, therefore, aims to include all its multi-tenant office assets, as well as several shopping centres.

The Group has also continued the process of implementing an Energy Management System under the ISO 50001 standard, which began in 2017. Currently, 64 buildings are certified composing a surface area of 794,577 m2, 29 more than in 2019. In the future, the Company plans to increase the number of buildings with these certifications.

4.3. ESG indicators Syndicated Loan

In 2019 the Group completed the process begun in 2018 of refinancing its debt by a corporate syndicated loan (EUR 1,550 million) and a mortgage-backed loan (EUR 68 million) under the sustainable loan format (ESG).

The corporate loan marked an important milestone, as it was the largest financing of this type granted to a real estate company in Europe and the second largest obtained in Spain.

These transactions highlight the Group's ongoing effort to integrate Corporate Social Responsibility principles by incorporating sustainability criteria in the investments of its asset portfolio, as well as in the management of the liabilities on its balance sheet.

This financing includes a cost adjustment mechanism based on management indicators calculated based on four sustainability criterion, which are measured annually and reviewed by the Group's auditor. The indicators for 2020 were:

•    Investment of at least EUR 3.4 million in energy efficiency improvements across the portfolio

•    Obtaining at least 13 LEED and BREEAM external energy certifications with a minimum rating of LEED Silver and BREEAM Good.

•    Obtaining at least 11 AIS/DIGA certifications for disability access for all tenants and consumers

•    Electricity consumption of at least 35 GW from renewable energy sources

At the end of 2020, 4 of the 4 goals were met, with the consequent adjustment to borrowing costs for both loans for 2021.

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5.    Staff management

MERLIN’s staff are the Group's most important asset. At 2020 year end, the MERLIN Group's human team was comprised a total of 220 employees, divided into 5 categories in keeping with MERLIN’s strategy of maintaining a horizontal structure.

Total number of employees at 2020 year end. Country, Sex, Professional Category and Age

Professional category	Women	Men	Overall total
Executive directors	-	2	2
Senior management	-	5	5
Management team	1	4	5
Middle management	10	42	52
Other staff	87	69	156
Total Employees	98	122	220

Country	Professional category	Age Range	Women	Men	Overall total
SPAIN	Executive directors	>50 years old	-	2	2
	Total Executive directors		-	2	2
	Senior management	>50 years old	-	4	4
		30-50 years old	-	1	1
	Total Senior management		-	5	5
	Management team	>50 years old	-	1	1
		30-50 years old	1	3	4
	Total Management team		1	4	5
	Middle management	< 30 years old	-	1	1
		>50 years old	3	17	20
		30-50 years old	7	23	30
	Total Middle management		10	41	51
	Other staff	< 30 years old	11	8	19
		>50 years old	17	17	34
		30-50 years old	57	40	97
	Total Other staff		85	65	150
Total Spain			96	117	213
PORTUGAL	Middle management	30-50 years old	-	1	1
	Total Middle management		-	1	1
	Other staff	30-50 years old	2	4	6
	Total Other staff		2	4	6
Total PORTUGAL			2	5	7
Overall total			98	122	220

Total number of employees at 2020 year end by type of employment contract

MERLIN has a team of professionals with indefinite-term contracts and an average age of 44. Throughout 2020, to promote the employability of young people, MERLIN, implemented a first job plan for young people who, having just finished their compulsory education, wanted to continue training and combine their studies with employment on some weekends.

From the moment they join the Company, MERLIN offers its employees stable contracts to ensure their loyalty and improve its ability to attract talent to the organisation. At 2020 year end, 99.1% of the Group's employees had an indefinite-term contract.

Contract Type	Time	Total
Indefinite-term	Full-time	209
	Part-time	9
Total Indefinite-term		218
Temporary	Full-time	2
Total Temporary		2
Overall total		220

Turnover Rate

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The voluntary turnover rate in 2020 was 3.64%.

Professional category	Age Range	Women	Men	Total
Middle management	30-50 years old	-	1	1
Other Staff	< 30 years old	1	1	2
	30-50 years old	1	3	4
	>50 years old	1	-	1
Overall total		3	5	8

Number of dismissals by sex, age and professional category.

Professional category	Age Range	Women	Men	Total
Senior management	>50 years old	-	1	1
Middle management	30-50 years old	-	2	2
Other Staff	30-50 years old	1	1	2
Overall total		1	4	5

Disabled Employees.

MERLIN is also very committed to including and integrating people with disabilities into its workforce.

In this context, the Company currently has a total of 5 disabled employees on its staff, all of whom have part-time indefinite-term contracts, representing 2.27% of MERLIN's human capital. These staff members are fully integrated and perform necessary and valued functions at the Company. The Company exceeds the requirements under the current law in this area (the Spanish General Disability Act [Ley General de la Discapacidad], the former Spanish Social Integration of Disabled Persons Act [Ley de Integración Social de los Minusválidos]) through direct hiring.

Professional category	2020	2019
Other Staff	5	5
Total	5	5

Attracting and retaining talent.

MERLIN is committed to guaranteeing equal opportunities and transparency in its recruitment processes, hiring new staff based on their skills, knowledge and alignment with corporate values and objectives.

Merlin hired 22 new employees in 2020 (new workforce growth rate: 59% versus 2019), of which 36% were women).

To attract new talent, MERLIN has collaboration agreements with leading educational institutions, promoting, on the one hand, the integration of students who have recently joined the labour market and, on the other, the identification of students with stellar academic performance who could join the Company.

Within the framework of these agreements, in 2020 MERLIN had 1 intern and 2 recent graduates.

In the area of talent retention, MERLIN continuously studies how to motivate and reward its staff for their involvement in and commitment to the Company. To that end, it currently has four key tools: remuneration, professional development, a horizontal structure and employment benefits.

a.Remuneration

Remuneration is a key tool for attracting and retaining the best talent. The Company's remuneration scheme has three differential aspects:

•The flattest pay slope of the IBEX-35.

•The highest average salary of the IBEX-35.

•Prioritisation of performance over any other variable when establishing remuneration and, therefore, employee growth is monitored on an ongoing basis.

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b.Employee Benefits

In addition to MERLIN's remuneration system, the Group offers all its employees employment benefits and alternative remuneration formulas.

In 2020, all MERLIN employees enjoyed the same conditions and social benefits in kind; health insurance, life and accident insurance and access to a flexible remuneration plan that contains a restaurant card, a transport card, childcare checks, training plans and access to the purchase of shares in the Parent.

5.3. Professional Development

As stated in the Company's Code of Conduct, MERLIN promotes equal opportunities and non-discrimination at all stages of its employment relationship with staff in terms of access to employment, training, promotion of employees and working conditions.

The proactivity of MERLIN staff is the key to their development. The Group’s horizontal nature and youth allows each staff member to set the pace and focus of their development based on their abilities and aspirations. Throughout their career with the Company, all staff members have the opportunity to rotate through different positions and to take on new responsibilities.

Training

Likewise, MERLIN offers its employees on-the-job training to enhance their development process. This training consists of three tools:

•Targeted training: MERLIN gives its employees the opportunity to select the courses that best suit their specific needs. If necessary, MERLIN, through the experience of its staff members, provides guidance so that employees can choose those courses that best suit their needs.

•Shared knowledge: MERLIN considers it a priority to strengthen and share the knowledge accumulated by a workforce with more than 19 years of experience, both in terms of the tools developed and the management procedures honed. To that end, the Group provides annual "in-house training" courses given by MERLIN staff to their colleagues.

•Language Training Plan: Merlin extended the scope of its Language Training Plan, extending the offer of language training through online and/or face-to-face classes to all Group employees.

In 2020, 93% of employees received training. 

Total number of training hours by professional category

Professional category	Training hours 2020	Training hours 2019
Executive Directors	3	4
Senior management	18	61
Management Team	10	36
Middle management	457	619
Other Staff	3,777	2,229
Overall total	4,265	2,949

In 2020, training hours increased by 44.6% compared to 2019.

5.4. Health and Safety

MERLIN seeks to ensure the welfare of its employees by creating healthy work environments that maximise their well-being through design, the heating, ventilation and air conditioning equipment used, light output, ergonomics, among others, meeting employees’ needs in terms of their thermal, visual and acoustic comfort, as well as indoor air quality.

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As part of their remuneration in kind, MERLIN provides its employees with high-cover health insurance that is 80% reimbursed. This health insurance is both for employees and their direct family (spouse and children). All employees, regardless of professional category, have the same health insurance with the same cover.

Number of employees and sick days broken down by sex.

	No. of employees	Total Days
Men	18	263
Women	17	412
Overall total	35	675

Occupational accident days broken down by sex.

In 2020 there were no incidents due to non-compliance with health and safety regulations. All new recruits receive Occupational Risk Prevention training.

6.    MERLIN tax contribution

In accordance with the MERLIN Group's current Tax Strategy — an update of which was approved by the Board of Directors on 10 April 2019 — compliance at all times with current tax legislation is part of the principles that guide MERLIN's corporate responsibility, with the taxes settled representing one of its contributions to the economic and social development of the society in which it operates.

6.1. Benefits and taxes by country.

In accordance with the foregoing, the Merlin Group’s total tax contribution, between Spain and Portugal in 2020 amounted to EUR 169,133 thousand. Based on the nature of the tax and the country of residence of the companies, the following is a breakdown of the total tax contribution collected and paid by the Group in 2020 following a cash approach:

Spain:

The total contribution in Spain amounted to EUR 156,498 thousand, taking into account direct and indirect taxation. This amount is differentiated into tax paid and tax collected/withheld. The former are those that entail a cost for the Group, while the latter are those that, without entailing a cost for the Group, consist of a collection on behalf of third parties. The following summary shows both concepts:

Thousands of euros
Taxes paid				Taxes collected/withheld
	31.12.2020	31.12.2019			31.12.2020	31.12.2019
Income Tax	(38)	14,837		VAT/Canary Islands General Indirect Tax	59.155	72.439
Transfer Tax and Stamp Duty	739	1,044		Suppliers Personal Income Tax/Non-resident Income Tax	713	3.762
Tax on Large Commercial Establishments	272	256		Employees Personal Income Tax/Non-resident Income Tax	29.372	15.208
Construction, installation and works tax	1,993	621		Dividend Personal Income Tax/Non-resident Income Tax	11.559	30.999
Economic Activities Tax	5,607	5,567		Employee SS	555	512
Property Tax	39,160	40,595		SUBTOTAL	101.354	122.920
Urban Property Capital Gains Tax	2,400	5,722
Electric Power Generation Tax	13	7
Fees	2,288	2,379
Company SS	2,712	2,411
SUBTOTAL	55,146	73,439

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Portugal:

The total contribution in Portugal amounted to EUR 12,631 thousand. Likewise, the following is a breakdown between the taxes paid and taxes collected/withheld for Portugal:

Thousands of euros
Taxes paid				Taxes collected/withheld
	31.12.2020	31.12.2019			31.12.2020	31.12.2019
Urban Property Capital Gains Tax	—	5,257		VAT/Canary Islands General Indirect Tax	5,678	7,043
Income Tax	1,737	3,197		Suppliers Personal Income Tax/Non-resident Income Tax	3,963	4,036
Property Tax	986	788		Employees Personal Income Tax/Non-resident Income Tax	148	—
Economic Activities Tax	—	281		Employee SS	38	—
Company SS	83	88		SUBTOTAL	9,827	11,079
SUBTOTAL	2,806	9,611

6.2. MERLIN’s Total Tax Contribution in 2020

The Total Tax Contribution ("TTC") method measures the total impact of a company's tax payments. This assessment is made from the standpoint of the total taxes settled with the various public authorities directly or indirectly as a result of the economic activity of the MERLIN Group.

To perform the analysis, the cash approach of the various taxes and fees levied on the MERLIN Group's activity was taken into account, considering the scope of consolidation of the companies under its control, as well as the impact of associates due to the Merlin Group's percentage of control over them.

The purpose of this calculation is to measure the business asset represented by the MERLIN Group's tax contribution so that it is effectively incorporated into the reputational value given the value it generates and contributes to society.

Therefore, the impact of the various taxes that entail an outflow of cash for the Group is detailed below:

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Thousands of euros
Income tax
	31.12.2020	31.12.2019
Income Tax	1,699	18,034
Suppliers Personal Income Tax/Non-resident Income Tax	4,676	7,798
Economic Activities Tax	5,607	5,848
Urban Property Capital Gains Tax	2,400	10,979
SUBTOTAL	14,382	42,659
Shareholder taxes
	31.12.2020	31.12.2019
Dividend Personal Income Tax/Non-resident Income Tax	11,559	30,999
SUBTOTAL	11,559	30,999
Property taxes
	31.12.2020	31.12.2019
Property Tax	40,146	41,383
SUBTOTAL	40,146	41,383
Employment-related taxes
	31.12.2020	31.12.2019
Employees Personal Income Tax/Non-resident Income Tax	29,520	15,208
Company SS	2,795	2,499
Employee SS	593	512
SUBTOTAL	32,908	18,219
Taxes on products and services
	31.12.2020	31.12.2019
VAT/Canary Islands General Indirect Tax	64,833	79,482
Transfer Tax and Stamp Duty	739	1,044
Construction, installation and works tax	1,993	621
SUBTOTAL	67,565	81,147
Environmental taxes
	31.12.2020	31.12.2019
Tax on Large Commercial Establishments	272	256
Fees	2,288	2,379
Electric Power Generation Tax	13	7
SUBTOTAL	2,573	2,642
	31.12.2020	31.12.2019
TOTAL	169,133	217,049

As mentioned above, in 2020 the Merlin Group’s total tax contribution amounted to EUR 169,133 thousand between Spain and Portugal, of which 34.3% corresponded to taxes paid and 65.7% to taxes collected/withheld.

•The taxes paid by the MERLIN Group in 2020 amounted to EUR 57,952 thousand including, most notably, property tax (IBI) that amounted to EUR 40,146 thousand, representing 69.3%.

•The taxes collected by the MERLIN Group in 2020 amounted to EUR 111,181 thousand including, most notably, taxes on products and services, mainly VAT, which amounted to EUR 64,833 thousand, representing 58.3%.

According to the TTC method, the distributed value of a company is comprised the sum of the following elements: net interest, wages and salaries (net of taxes withheld from employees), taxes (paid and collected) and shareholder value (i.e., dividends, reserves, etc.), among others.

Thus, the ratio of distributed tax value reveals what percentage of the total value generated by MERLIN is allocated to the taxes paid to or collected/withheld for the public authorities. In essence, the tax distributed value reflects the way in which MERLIN contributes the value it generates to society.

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	Economic data	Thousands of euros
		31.12.2020	31.12.2019
	Revenue (Note 18.a.)	446,132	514,853
	Salaries and wages (Note 18.c)	18,233	29,498
	Net financial expenses (Note 18.d.)	(146,266)	(115,578)
	Change in fair value of investment property (Note 7)	(84,468)	354,972
	Profit before tax	55,612	590,710
	Profit after tax	56,358	563,639
	Profit before tax paid	113,563	673,761
	Profit before tax (without mark to market)	175,232	246,807
	Profit before tax paid (without mark to market)	200,331	318,788
	Profit before tax paid (without mark to market)	233,183	329,857
	Profit after tax paid (without mark to market)	175,978	219,735
	Total taxes paid	57,952	83,050
	Total taxes collected/withheld	111,181	133,999
	Total tax contribution 2019	169,133	217,049
	Tax Contribution Indicators
(a)	Total Tax Contribution Ratio	25%	25%
(b)	TTC with regard to revenue	38%	42%
(c)	Taxes paid without turnover	13%	16%
(d)	Taxes Taxes collected without turnover	25%	26%
(e)	Distributed tax value in the Company	78%	62%
(a)	Total taxes paid/Profit before taxes paid
(b)	Total Tax Contribution/Revenue
(c)	Taxes paid/Revenue
(d)	Taxes collected/Revenue
(e)	Taxes paid and collected and/or withheld/Total distributed value
	Where the total distributed value = Profit after tax + wages and salaries + net interest + taxes paid and taxes collected/withheld

In 2020, 161% of the value generated by MERLIN was paid to the Treasury through taxes paid and collected/withheld. Thus, for every EUR 100 of value generated by the Group in 2020, EUR 161 were allocated to paying taxes.

For every EUR 100 of the Company's revenue, EUR 37.8 were allocated to the payment of taxes, of which EUR 12.9 are taxes paid and 24.8 euros are taxes collected/withheld.

In 2020, of total profit (without revaluation of the investment property) before tax, for the purposes of the Total Tax Contribution, taxes paid represented 28.1%

7.    Dividend policy

7.1. Dividend policy

The Company’s dividend policy takes into account sustainable levels of distribution and reflects the Company's expectation of obtaining recurring profits. The Group does not intend to create reserves that cannot be distributed to Shareholders, except as required by law.

Under the REIT regime, after fulfilling any relevant requirement of the Corporate Enterprises Act (Ley de Sociedades de Capital), the Parent Company is obliged to adopt resolutions to distribute the profit obtained in the year to shareholders in the form of dividends and this distribution must be approved within six months of the close of each year, as follows: (i) at least 50% of the profit from the transfer of real estate and shares of qualified subsidiaries, provided that the remaining profit is reinvested in other real estate assets within no more than three

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years of the date of the transfer or, otherwise, 100% of the profit must be distributed as dividends after such period has elapsed; (ii) 100% of the profit obtained from receiving the dividends paid by qualified subsidiaries; (iii) at least 80% of the remaining profit obtained.

If the dividend distribution resolution is not adopted within the legally established period, the Parent Company will lose its REIT status for the financial year to which the dividends refer. As established in the Company's IPO Prospectus, MERLIN Properties has set itself the goal of distributing an annual dividend of between 4% and 6% of the IPO value.

The Company's dividend policy establishes a minimum distribution of 80% of the AFFO ("Adjusted FFO"), understood as the cash flow from operations less interest paid and less ordinary maintenance expenses for the assets. The distributions made to MERLIN shareholders in 2020 are shown in the accompanying table.

On 8 July 2020, the supplemental 2019 dividend was paid out after it was passed in the General Shareholders Meeting held on 17 June 2020, for a sum of EUR 68,518 thousand. However, that General Meeting passed a refund of the share premium for a maximum of EUR 0.174 per share payable in cash, its payment was delegated to the Board of Directors, which will decide if it should be paid out once the impact of COVID-19 on the evolution of the business becomes clear in view of the current setting of uncertainty. Finally, the Board of Directors has decided not to execute the aforementioned share premium distribution.

7.2. Table of dividends paid by year

Type	Payment date	Item	EUR  per share
2015 interim dividend	28 Oct. 15	Dividend	0.0775
2015 final dividend	27 Apr. 16	Dividend	0.0055692
2015 final dividend	27 Apr. 16	Distribution of share premium	0.102608
2015 total dividend			0.19
2016 interim dividend	25 Oct. 16	Dividend	0.185
Extraordinary distribution	25 Oct. 16	Distribution of share premium	0.02
2016 final dividend	18-may-17	Dividend	0.10071014
2016 final dividend	18-may-17	Distribution of share premium	0.09928767
2016 total dividend			0.40
2017 interim dividend	25 Oct. 17	Dividend	0.2
2017 final dividend	25-may-18	Dividend	0.02053654
2017 final dividend	25-may-18	Distribution of share premium	0.24
2017 total dividend			0.46
2018 interim dividend	25 Oct. 18	Dividend	0.2
2018 final dividend	07-may-19	Dividend	0.20270039
2018 final dividend	07-may-19	Distribution of share premium	0.09729961
2018 total dividend			0.50
2019 interim dividend	28 Oct. 19	Dividend	0.2
2019 final dividend	26-jun-20	Dividend	0.14741659
2019 total dividend			0.34741659

8.    Main risks and uncertainties

MERLIN’s Risk Management System is based on the principles, key elements and methodology established in the COSO Framework ("Committee of Sponsoring Organizations of the Treadway Commission"), which aims to minimise the volatility of results (profitability) and, therefore, maximise the Group’s economic value, incorporating risk and uncertainty into the decision-making process to provide reasonable assurance of achieving the strategic objectives established, providing shareholders, other stakeholders and the market in general with an adequate level of guarantees to ensure that the value generated is protected.

Based on a comprehensive view of risk management, MERLIN has adopted a methodological approach based on the Enterprise Risk Management Framework - Integrating with Strategy and Performance (COSO ERM 2017), which emphasises the importance of enterprise risk management in strategic planning and incorporates it

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throughout the organisation, since risk influences strategy and performance in all areas, departments and functions.

The Risk Management and Control Policy (https://www.merlinproperties.com/en/corporate-governance/corporate-governance-normative/) was initially approved by the Board of Directors in February 2016, then in its second version in April 2018 and finally, in its current wording, in April 2019.

This policy establishes the general guiding principles, rooted in the perception that risk management is an ongoing process based on the identification and assessment of the Group's potential risks according to its strategic and business objectives, the determination of action plans and controls for critical risks, the supervision of the effectiveness of the controls designed and the evolution of residual risk to be reported to the Group's governing bodies.

MERLIN’s risk management is a process driven by the Board of Directors and Senior Management and each and every member of the organisation is responsible for it within their own purview. Risk management, supervised by the Audit and Control Committee, allows Management to effectively manage uncertainty and its associated risks, thereby improving the ability to generate value.

A central element of the Risk Management System is the Risk Map — drawn up for the first time in 2015, updated every six months by the Audit and Control Committee and approved by the Board of Directors — which reflects and assesses the risks that could potentially impact MERLIN’s ability to meet its strategic objectives.

In 2020, and as a result of the health and economic crisis caused by the COVID-19 pandemic, MERLIN’s management, Audit and Control Commission and Board updated the Company's Risk Map up to three times, reflecting at each time the risks and uncertainties that were estimated should be the focus of attention during the crisis.

8.1. Description of MERLIN’s risks

MERLIN is exposed to a variety of risks inherent to the various segments of the real estate business in which it operates and in the leasing and/or development activities it carries on in each of these segments, as well as in the geographical areas in which it is established and in the evolution of external factors, both political and economic.

To implement risk management and control, the Board of Directors is assisted by the Audit and Control Committee, which supervises and reports on the adequacy and effectiveness of the risk management and control system.

The Audit and Control Committee is responsible for supervising the Company's risk management and control system (including internal controls) and verifying its suitability and integrity. The Audit and Control Committee carries out this supervisory function through the Internal Audit Department, which verifies the suitability and integrity of the Risk Management System implemented by the Group's management on an annual basis.

Based on the analysis of MERLIN's strategic vision, values and strategy, the various components are periodically analysed according to the grouping of the different strategic objectives included in these elements (being the benchmark REIT, creation of long-term value, generation of sustainable and growing dividends, values of transparency, ethics and responsibility).

In 2020, the MERLIN Risk Map was amended to expressly include a new category of ESG risks (Environmental, Social and Governance), replacing the previous ‘Stakeholder Risks’ category, to highlight the importance of this type of risks in the direction and management of the Company in its commitment to sustainability, social responsibility and governance in accordance with the highest standards of corporate governance.

The risks MERLIN identifies and assesses are thus classified under the perspective of the different strategic components and facilitating elements identified above, as shown below:

•Business Risks: which affect the strategic objectives of long-term value creation and the generation of sustainable and growing dividends, achievement of which depends mainly on the Group's various assets, grouped together in the different business segments (offices, net leases, shopping centres, logistics and others): occupancy rate of the assets, fluctuation rent levels, rent concentration, loss of property value, inefficiency in investments, political risk, etc.

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•Resource Risks: which affect the strategic objectives of generating sustainable and growing dividends and the values of transparency, ethics and responsibility, achievement of which depends mainly on the various internal and external resources available to the Group (human, technological and financial): staff dependence and their remuneration, occupational risk prevention, business continuity plan, cybersecurity breaches, technological innovation, the Group's credit rating, volume of short-term debt, compliance with covenants, etc.

•ESG Risks: which affect the strategic objectives of leadership and reference (being the benchmark REIT) and the values of transparency, ethics and responsibility; achievement of which depends mainly on the various actions taken and policies implemented by the Group to guarantee the sustainability of its assets (physical impact, transition costs, compliance with sustainability standards) for its various stakeholders (customers, suppliers, society; investors and shareholders; and regulatory bodies) : customer and supplier credit risk, the Group's reputation, macroeconomic conditions in the country, shareholder remuneration (dividends), compliance with the REIT regime, etc.

Section E of the Annual Corporate Governance Report included in this Directors’ Report details the main risks, the action plans established and, where applicable, those that have materialised during the year and the circumstances that have led to them.

8.2. Financial and tax risks

Financial risk management policies within the rental property sector are determined mainly by analysing the investment projects, management of the occupancy of the properties and the situation of the financial markets:

• Market risk: MERLIN Properties is exposed to market risk from possible vacancies or renegotiations of leases when the leases expire. This risk could have a direct negative impact on the valuation of the Company's assets.

However, market risk is mitigated by the customer acquisition and selection policies and the mandatory lease terms negotiated with customers. Therefore, at 31 December 2020, the average occupancy rate of the asset portfolio was 94.2%, with a weighted average unexpired lease term of 5.4 years (weighted by GRI).

• Credit risk: the credit risk relating to the Company's ordinary business activity is practically non-existent or insignificant, due mainly to the fact that the agreements entered into with the tenants provide for the advance payment of the rent derived from them, in addition to requiring them to provide the legal and additional financial guarantees in the formalisation of the rental agreements and their renewal, which cover the possible non-payment of rent. This risk is also mitigated by the diversification by product type in which the Group invests and, consequently, in the type of customers.

• Liquidity risk: To manage liquidity risk and meet its various funding requirements, the Company uses an annual cash budget and a monthly cash projection, the latter being detailed and updated daily. The factor causing the liquidity risk is the working capital deficiency, which mainly includes short-term debt. In addition, liquidity risk has the following mitigating factors, which should be highlighted: (i) the generation of recurrent cash from the businesses on which the Group bases its activity; and (ii) the capacity to renegotiate and obtain new financing facilities based on the Group's long-term business plans and the quality of its assets.

At the date of preparation of the consolidated financial statements, taking into account the foregoing, the Group had covered all its funding requirements to fully meet its commitments to suppliers, employees and the authorities based on the cash flow forecast for 2021. Likewise, the type of sector in which the Company operates, the investments it makes, the financing it obtains to make such investments, the EBITDA they generate and the occupancy rates of the properties, enables the liquidity risk to be mitigated and excess cash to be produced.

Cash surpluses are used to make short-term investments in highly liquid deposits with no risk. The acquisition of share options or futures, or any other high-risk deposits as a method of investing cash surpluses, is not among the possibilities considered by MERLIN Properties.

• Interest rate risk: To minimise the Group's exposure to this risk, financial instruments have been arranged to hedge cash flows, such as interest rate swaps. At 31 December 2020, the percentage of debt the interest rate of which is covered by the aforementioned financial instruments was 99.85%.

• Foreign currency risk: the Group's policy is to borrow in the same currency as that of the cash flows of each business. Consequently, currently there is no foreign currency risk. However, noteworthy in this connection are the exchange rate fluctuations arising in translating the financial statements of foreign companies whose

17

functional currency is not the euro. At 31 December 2020, the functional currency of all subsidiaries and associates of the MERLIN Group was the euro.

• Tax risk: The Parent and a portion of its subsidiaries qualified for the special tax regime for real estate investment trusts (REITs). The transitional period of the Parent ended in 2017 and, therefore, compliance with all requirements established by the regime became mandatory.

Some of the more formal obligations that the Parent must meet involve the inclusion of the term SOCIMI (REIT) in its company name, the inclusion of certain information in the notes to its separate financial statements, the share price on the stock market, etc., and other obligations that require estimates to be made and judgements to be applied by management that may become fairly complex, especially considering that the REIT regime is relatively recent and was developed by the Directorate-General of Taxes mainly in response to the queries posed by various companies.

Group management, based on the opinion of its tax advisors, assessed compliance with the requirements of the regime, concluding that such requirements were met at 31 December 2020.

Accordingly, and also for the purpose of taking into consideration the financial effect of the regime, it should be noted that, as established in article  6 of Law 11/2009, of 26 October, amended by REITs Act, and in the percentages established in it, companies that have opted for the special tax regime are required to distribute the profit generated during the year to their shareholders in the form of dividends, once the related corporate obligations have been met. This distribution must be approved within six months from each year-end, and the dividends paid in the month following the date on which the pay-out is agreed.

If the Parent does not comply with the requirements established in the regime or if the shareholders at the General Meetings of these companies do not approve the dividend distribution proposed by the Board of Directors, calculated in accordance with the requirements of this Act, it would not be complying therewith and, accordingly, tax would have to be paid under the general regime, not the regime applicable to REITs.

9.    Fraud and corruption prevention measures

In accordance with its Articles of Association, MERLIN aspires to ensure that its conduct and that of the people related to it comply and are compliance with the current law, its system of corporate governance and also with generally accepted principles of ethical and social responsibility. MERLIN has a Criminal Compliance Management System that is based on Merlin's firm commitment to the values and principles framed within the rejection of and zero tolerance for any unlawful act.

These principles are set out in the Code of Conduct (https://www.merlinproperties.com/gobierno-corporativo/normativa-de-gobierno-corporativo/) approved by the Board of Directors in 2015, and are projected onto the organisation's employees, managers and governing bodies, with a strong message of rejection of and zero tolerance for any unlawful behaviour or behaviour that violates the Group's policies, values and principles.

The Criminal Compliance Policy (https://www.merlinproperties.com/gobierno-corporativo/normativa-de-gobierno-corporativo/) helps to reinforce the Company’s commitment to good corporate governance in accordance with its values and principles, and on the other hand, to diligently exercise in the organisation the necessary due control over the Group’s governing bodies, executives and employees to minimise as much as possible the potential risk of bad practices or non-compliance with regulations in the performance of its activity.

In addition, MERLIN has a series of policies that express the Group's intention to strictly comply with the highest standards of ethical and legal behaviour.

These policies include the Policy on Corruption and Fraud, which is based on the principle of zero tolerance for unlawful or criminal acts and, therefore, does not allow any of its employees, regardless of their hierarchical or functional level, to become involved or participate in any transaction or business within its business activity that involves a criminal or fraudulent act or goes against the principles set out in its Code of Ethics, and the Public Authority Relations Policy, which aims to establish the basic principles governing the Group, and the rules of conduct for MERLIN Group employees in their interactions with the Public Authorities to impose preventive and proactive action in the fight against corruption and bribery in all areas of its business activity.

9.1. Policies approved in 2020

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In 2020, the Board completed the reform of the MERLIN Corporate Governance system initiated in 2019, with the approval of the Interest Group Relationship Policy, the hiring, appointment and termination policy, the General corporate governance policy; the Ethics channel communication procedure and amendments to the Corporate Social Responsibility Policy.

Likewise, in 2020 the Director Remuneration Policy was approved, which was passed by vote by the General Meeting of Shareholders on 17 June 2020.

This policy, and a summary of all the policies that make up the MERLIN Corporate Governance System, are accessible on the corporate website. (https://www.merlinproperties.com/en/corporate-governance/corporate-governance-normative/  ).

Lastly, in 2020 MERLIN's Board assessed the new Code of Good Governance approved by the CNMV in June 2020. In December 2020, the Board approved amendments to its own rules of procedure and the Rules of Procedure of the Audit and Control Committeeand it approved an independent regulation for the Remuneration Commission and the Appointment Committee, all adapted to the new drafts of the corporate governance recommendations from the CNMV.

9.2. Crime Prevention Model

MERLIN has a Crime Prevention and Detection Model that was designed as a specific and effective programme to reduce the risk of crimes or other unlawful acts being committed within the Group and implemented as a set of general and specific measures aimed at preventing, detecting and reacting to possible crimes. In turn, this will allow the Group, where applicable, to be able to guarantee third parties and judicial and administrative bodies that it has exercised the proper prevention control legally required of all businesses in relation to their employees, managers and governing bodies.

Under the current law, the Group’s obligation to exercise due control requires that MERLIN implement ongoing control mechanisms and designate internal control bodies that supervise the Group’s risks and the functioning of the controls implemented.

To that end, Merlin has a Criminal Compliance Body (CCB) that is as a collective body that reports to the Parent Company's Board of Directors. The CCB has autonomous powers to take initiative and exercise control to ensure compliance with Merlin's Crime Prevention and Detection Model. The manner in which this body functions is defined in its Operating Procedures and, additionally, Merlin has a manual that defines the different responsibilities within the organisation in relation to crime prevention and detection.

In 2020, MERLIN’s Crime Prevention and Detection Model was updated and adapted to the new risks identified as a result of the COVID-19 pandemic, in particular with regard to the prevention of occupational risks and the protection of personal data, as well as updating the risks and controls related to Market Abuse.

In addition, MERLIN has a Whistle-blowing Channel (canal.etico@merlinprop.com) that provides a confidential channel through which to communicate any event that violates the laws in force and the Code of Conduct, as well as potentially material irregularities of a financial or accounting nature or of any other nature. This Channel is accessible to all MERLIN companies and is equally public and accessible to any interested third party, for which purpose there is a specific email address, which is detailed in the Code of Conduct and it is published on the Group's corporate web page.

In 2020 no reports were received through the Group's Whistle-blowing Channel.

9.3. UNE 19601 Compliance System Certification

With regard to MERLIN’s Criminal Compliance Management System, it is worth noting that in 2019 it obtained, and had renewed in 2020, quality certification in accordance with the UNE 19601 standard, the Spanish national standard for best practices in management systems to prevent crime, reduce risk and promote an ethical business culture that complies with the law, thus, contributing to generating confidence among shareholders, investors and other stakeholders.

The UNE 19601 standard establishes the requirements for criminal compliance management systems with the goal of going beyond compliance with legislation and helping companies and organisations prevent crimes from being committed and reduce criminal risk and, thus, promote a culture of ethics and compliance. Likewise, Circular 1/2016 of the Public Prosecution Service values certification as a very significant element to be

19

considered, if necessary, when assessing the effectiveness of criminal prevention models and in exonerating legal entities from criminal liability.

The certification accredits that MERLIN’s Crime Prevention and Detection Model meets all the standard's requirements and is also effective in its commitment to ongoing improvement to incorporate the highest standards of compliance.

Among other aspects, MERLIN’s Crime Prevention and Detection Model includes a Map of Risks or Criminal Offences to which the Group is exposed due to its activity and identifies, documents and executes more than 90 controls linked to such offences, demonstrating that the organisation has put in place the mechanisms and controls within its reach in the area of Criminal Compliance.

Thus, MERLIN has become one of the first real estate companies among the Ibex 35 to obtain this quality certificate, a certificate that helps to generate confidence among its stakeholders and recognises MERLIN's effort to prioritise and adopt the best national and international practices in compliance, corporate governance, social responsibility and business ethics.

10.    Adquisition and disposal of treasury shares

At 31 December 2020, the Parent held treasury shares amounting to EUR 54,149 thousand. The changes in 2020 were as follows:

	Number of	Thousands of
	Shares	euros
Balance at 01 January 2019	6,150,000	68,322
Additions	52,776	633
Disposals	(1,125,407)	(12,095)
Balance at 31 December 2019	5,077,369	58,860
Additions	26,177	279
Disposals	(267,043)	(2,990)
Balance at 31 December 2020	4,836,503	54,149

In 2020 the Parent acquired 26,177 treasury shares at an average cost of EUR 10.63 per share. At 31 December 2020, the Parent held treasury shares representing 1.03% of its share capital.

The withdrawals of own shares amounting to EUR 2,990 thousand (average price of EUR 11.20 per share) correspond mainly to EUR 2,765 thousand (average price of EUR 11.20 per share), to the delivery of shares to employees within the Flexible Remuneration Plan and the 2017-19 LTIP. There were also EUR 225 thousand in sales in 2020 (at an average cost of EUR 11.20 per share).

11.    Other relevant information

11.1. Stock market information

On 31 December 2020, MERLIN shares closed at a price of EUR 7.78, representing a 39% drop in their price compared to the closing price on 31 December 2019 (EUR 12.79).

11.2. Average payment period to suppliers

The information required by Additional Provision Three of Law 15/2010, of 5 July (modified by Final Provision Two of Law 31/2014, of 3 December) prepared in accordance with the Spanish Accounting and Audit Institute's Resolution of 29 January 2016 on information to be included in the notes to the annual financial statements with regard to the average period of payment to suppliers for commercial transactions is detailed below.

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	2020	2019
	Days	Days
Average payment period to suppliers	31.3	33.6
Ratio of transactions paid	31.2	34.2
Ratio of transactions payable	34.9	24.7
	Thousands
	of Euros
Total payments made	411,847	154,722
Total payments pending	9,502	11,216

In accordance with the Spanish Accounting and Audit Institute's Resolution, the average period of payment to suppliers was calculated by taking into account the commercial transactions corresponding to the delivery of goods or provision of services that took place from the date of entry into force of Law 31/2014, of 3 December.

For the exclusive purpose of providing the information envisaged in this Resolution, payable to suppliers are considered trade payables for debts with suppliers of goods and services, included under “Trade and other payables” under current liabilities in the attached balance sheet.

“Average period of payment to suppliers” is understood as the time elapsed between the date the supplier delivers the goods or provides the services and the date of actual payment.

The maximum legal period applicable to the Group in accordance with Law 11/2013, of 26 July was 30 days following the publication of the aforementioned law to date (unless the conditions established therein are met that would enable the aforementioned maximum period to be extended up to 60 days).

11.3. R&D+i activities

In relation to R&D+I activities and other innovative initiatives, in 2020 MERLIN continued to promote numerous projects of a technological nature to position MERLIN at the forefront in terms of solutions for its clients and internal management. Of those projects the following are of note:

–Special projects:

◦Sensorisation programme for office buildings (in collaboration with Signify) and shopping centres (in collaboration with Vodafone)

◦Last mile in logistics

◦Photovoltaic self-consumption project

◦Introduction of third-party technologies (e.g. Keepeyeonball, Mayordomo and Fillit)

◦User experience app

–Sponsorship: Agreement with Fifth Wall, the largest venture capital firm focused on the real estate industry

12.    Annual Corporate Governance Report

For the purposes of section 538 of the Corporate Enterprises Act, it is hereby stated that the 2020 Annual Corporate Governance Report forms part of this Directors' Report. (see Annex I)

13.    Events after the reporting period

In January, MERLIN delivered a 98,757 m2 (A-2 Azuqueca II) industrial building to Carrefour.

In February, MERLIN sold three non-strategic logistics assets amounting to 50,904 m2 and one BBVA branch for a total amount of EUR 44.0 million, with a premium of 1% on the December 2020 valuation.

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14.    Alternative Performance Measures

MERLIN Properties, as a member of the EPRA (European Public Real Estate Association), follows best practice standards in reporting that enables investors to more easily compare certain measures that are specific to the real estate sector. The measures are published twice a year and are detailed in the Directors' Report.

In accordance with the recommendations issued by the European Securities and Markets Authority (ESMA), the alternative performance measures are described below.

14.1. Definition of APMs

Average maturity (years)

This represents the average term of the Group's debt until its maturity. It is an important measure as it provides investors with important information on its commitments to repay its the financial obligations. It is calculated as the sum of the years remaining to maturity of each loan multiplied by the outstanding debt of the loan and divided by the total outstanding amount of all loans. Given the nature of this measure, it is not possible to reconcile it with the Group's Financial Statements; however, the main information is available in Note 14 to the Consolidated Financial Statements.

Average passing rent

This represents the rent per square meter per month at which an asset or category of assets is leased at a particular point in time. Average passing rent is a relevant performance measure as it shows the implicit rents of all the Group's current leases at a particular point in time per square meter per month, enabling it to be compared to market rents. Given the nature of this measure, it is not possible to reconcile it with the Financial Statements.

Release spread

The difference between the new rent signed and the previous rent in renewals (same space, same tenant) or relets (same space, different tenant) over the last twelve months. The release spread provides investors with an insight into rental behaviour (rental trends) when negotiating with tenants.

It is calculated on a rent-by-rent basis and, therefore, cannot be reconciled with the Financial Statements.

Like-for-like Rent

Amount of comparable GRI (Note 8.2. to the 2020 Notes to the Consolidated Financial Statements) between two periods. Assets are calculated on a per-asset basis, excluding income from investments or divestments made between the two periods and buildings undergoing complete refurbishment during the period and other atypical adjustments, such as compensation for early termination of rental agreements. We consider like-for-like rental growth a relevant measure that allows us to compare, on a homogeneous basis, the evolution of rental income for an asset or category of assets.

It is calculated on an asset-by-asset basis and, therefore, cannot be reconciled with the Financial Statements.

Annualised gross rental income

Passing rent at the balance sheet date multiplied by 12. We consider annualised GRI to be a relevant performance measure since it represents the total amount of rent from the Group's current leases at a given point in time, allowing the return on each asset (Gross Return) to be calculated. Given the nature of this measure, it is not possible to reconcile it with the Financial Statements.

GAV

The value of the portfolio based on the last available external valuation plus prepayments at cost for turnkey projects and developments, plus the market value of the investees integrated by the equity method (including all disbursements paid out) and the fair value of the financial assets available for sale.

GAV is a standard measurement for comparative purposes, recognised globally in the real estate sector, and calculated by an independent external appraiser. The reconciliation with the financial statements is provided in the Appendix to this report.

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Gross yield

Gross yield represents the gross return on an asset or category of assets. It is calculated by dividing the annualised GRI by the latest available GAV.

APM (WAULT)

Weighted average unexpired lease term, calculated as the number of years of unexpired lease terms from the balance sheet date to the first break of a lease weighted by the GRI from each lease. We consider WAULT a relevant measure as it provides investors with the period of risk and opportunity to renegotiate current leases.

Given the nature of this measure, it is not possible to reconcile it with the Financial Statements.

Total revenues

This is the sum of total GRI (EUR 503.4 million, see Note 8.2 of the Notes to the Consolidated Financial Statements for 2020) and other operating income excluding extraordinary items (EUR 5.2 million). Reconciliation with IFRS is shown in the table below.

Accounting EBITDA

Accounting EBITDA is calculated as earnings before interest, taxes, depreciation and amortisation. Accounting EBITDA is a performance measure widely used by investors to assess companies, as well as by rating agencies and creditors to evaluate the level of debt by comparing accounting EBITDA with net debt and the debt service.

Reconciliation with IFRS measures is shown in the table below.

EBITDA

EBITDA is calculated as accounting EBITDA by deducting non-overhead expenses and the provision for the LTIP. EBITDA is a very useful measure as it excludes the impact of atypical costs incurred in the period. Atypical expenses or non-overhead expenses are those associated with the acquisition or sale of assets and compensation, inter alia (as described in the IPO prospectus available on the corporate website www.merlinproperties.com).

Reconciliation with IFRS measures is shown in the table below.

Accounting FFO and FFO

Accounting FFO or Accounting Funds From Operations is calculated as EBITDA less net finance costs and recurring taxes (excluding taxes on divestments and other extraordinary events) plus the share of the results of companies accounted for using the equity method.

The FFO is calculated by deducting the Group's non-overhead expenses from the accounting FFO. It is a globally recognised measure of performance and liquidity in the real estate sector.

EPRA cost ratio

This is calculated as the ratio of the Group's total management costs divided by GRI net of incentives. This performance measure shows operating efficiency on a recurring basis. The reconciliation with the financial statements is provided in the Appendix to this report.

EPRA earnings

Earnings from strategic businesses as recommended by EPRA.

The reconciliation with the financial statements is provided in the Appendix to this report

EPRA NRV, EPRA NTA and EPRA NDV

EPRA Net Reinstatement Value (NRV): assumes that the Company never sells assets and intends to represent the value necessary to rebuild the Company

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EPRA Net Tangible Assets (NTA): assumes that the companies buy and sell assets, thus crystallizing certain levels of deferred tax liabilities

EPRA Net Disposal Value (NDV): represents the value of shareholders under a liquidation scenario, in which deferred tax liabilities, financial instruments and other adjustments are calculated taking into account all the latent liabilities, net of any tax.

EPRA Yields

Net Initial Yield: Annualised rental income based on the passing rent at the balance sheet date, less non-recoverable operating expenses, divided by the fair value of the assets (GAV) plus the acquisition costs.

EPRA "Topped-up" NIY: Adjustment to the EPRA NIY in respect of the expiration of rent-free periods (or other unexpired lease incentives such as discounted rent periods and step rents).

These are two relevant performance measures as they are a globally recognised standard of comparison in the real estate sector, providing the net return on the portfolio assets based on the leases in force at a particular date regardless of the Company's financial structure, as recommended by the EPRA. The calculation is provided in the Appendix to this report. Given the nature of this measure, it is not possible to reconcile it with the Financial Statements.

EPRA Vacancy Rate

It is calculated as the Estimated Market Rental Value ("ERV") of vacant space divided by ERV of the whole portfolio. Given the nature of this measure, it is not possible to reconcile it with the financial statements.

The reconciliation with the financial statements is provided in the Appendix to this report.

14.2. Reconciliation of the APM with the financial statements

		millions EUR
PORTFOLIO VALUATION		2020	2019
Investment properties	Note 7	12,139	12,169
Derivative embedded in BBVA lease agreement	Note 10	108	125
Shares in companies accounted for using the equity method	Note 9	434	347
Other non-current financial assets (1)	nd	104	104
Trade inventories	Nd	19	—
Property, plant and equipment used internally	Nd	0.9	0.9
Total balance sheet items		12,805	12,746
Value of rights in use (IFRS 16)	Note 7	(32)	(28)
Investee adjustment	nd	37	33
Revaluation of property, plant and equipment used internally	nd	0.3	0.4
GAV		12,811	12,751
(1) Including DCN loan and the fair value of the stake in Aedas. 2. Amount effectively delivered for land acquired in Madrid Nuevo Norte development

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						millions EUR
		Shopping				Projects in
EPRA YIELDS	Offices	centres	Logistics	Net Lease	Other	development	2020
Valuation of property assets	6,322.4	2,207.5	1,026.1	1,845.8	444.3	389.8	12,235.9
Transaction costs	147.6	76.3	34	57.2	11.1	34.7	361
Gross valuation of property assets	6,470.1	2,283.8	1,060	1,903.1	455.4	424.5	12.596, 9
Exclude:
Projects under development and Land	(700)	—	—	—	(116.8)	(424.5)	(1,241.3)
Valuation of property assets for rent:	5,770.1	2,283.8	1,060	1,903.1	338.6	—	11,355.5
Annualised GRI	229.4	110.9	57.9	86.1	9.9	—	494.1
Exclude:
Expenses not chargeable to tenants	(17.3)	(12.1)	(4.7)	(0.9)	(1.5)	—	(36.6)
Annualised ‘top-up’ income	212	98.8	53.1	85.1	8.4	—	457.5
Exclude:
Bonuses, incentives and losses	(5.6)	(3.4)	(2.1)	(0.3)	(1)	—	(12.4)
Net annualized income	206.5	95.3	51	84.8	7.5	—	445.1
EPRA "topped-up" yield	3.7%	4.3%	5.0%	4.5%	2.5%		4.0%
EPRA net initial yield	3.6%	4.2%	4.8%	4.5%	2.2%		3.9%

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Thousands EUR		2020	2019
Revenues	Notes 18.a	446,132	514,853
Other operating income	Income Statement	2,640	2,799
Staff costs	Note 18-c	(40,888)	(76,854)
Other operating expenses	Note 18-b	(66,936)	(64,473)
Accounting EBITDA		340,948	376,324
Costs associated with the acquisition and sale of assets	Note 18-b	4,174	4,492
Other expenses	Note 18-b	894	120
Termination benefits	Note 18-c	1,167	328
Non-overhead expenses	Note 18.b and 18.c	6,235	4,939
Long-term incentive plan	Note 18-c	18,232	44,242
EBITDA		365,414	425,505
Net financial expenses (1)	Income Statement	(127,360)	(112,415)
Recurring results accounted for using the equity method	nd	16,347	6,012
IFRS16 Adjustment	nd	4,273	—
Bond repurchase	nd	6,026	—
Current taxes (3)	nd	(2,300)	(6,030)
Extraordinary income	nd	—	205
FFO		262,400	313,277
General non-overhead expenses	Note 18.b and 18.c	(6,235)	(4,939)
Accounting FFO		256,165	308,338
Thousands EUR		2020	2019
Gross rental income	Note 8.2	503,448	525,918
Revenue from the rendering of services	Note 18.a	5,070	3,327
Other net operating income	nd	110	1,387
Income		508,628	530,631
1. Excluding debt arrangement costs
2. Profit/(Loss) for the period excluding revaluation adjustment, derivative impact and including income from dividends received
3. Current tax excluding impact on sales of fixed assets

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2020
(thousands of euros)
EPRA Net Asset Value metrics	Previous NAV method (1)	EPRA NRV	EPRA NTA	EPRA NDV
Consolidated equity	6,696,267	6,696,267	6,696,267	6,696,267
Includes:	—	—	—	—
I) Hybrid instruments	—	—	—	—
Diluted NAV	6,696,267	6,696,267	6,696,267	6,696,267
Includes:	—	—	—	—
ii.a) Revaluation of investment assets (if IAS 40 applies)	—	—	—	—
ii.b) Revaluation of development assets (if IAS 40 applies)	—	—	—	—
ii.c) Revaluation of other investments	37,809	37,809	37,809	37,809
Iii) Revaluation of finance leases	—	—	—	—
iv) Revaluation of assets held for sale	—	—	—	—
Diluted NAV at market value	6,734,076	6,734,076	6,734,076	6,734,076
Excludes:	—	—	—	—
v) Deferred tax in relation to fair value gains of IP	596,985	596,985	497,254	—
vi) Fair value of financial instruments	33,042	33,042	33,042	—
vii) Goodwill as a result of deferred tax	—	—	—	—
viii.a) Goodwill as per the IFRS balance sheet	—	—	—	—
viii.b) Intangibles as per the IFRS balance sheet	—	—	(961)	—
Includes:	—	—	—	—
ix) Fair value of fixed interest rate debt	—	—	—	(189,984)
x) Revaluation of intangibles to fair value	—	—	—	—
xi) Real estate transfer tax	—	374,359	—	—
NAV	7,364,103	7,738,462	7,263,411	6,544,092
Number of diluted shares	469,770,750	469,770,750	469,770,750	469,770,750
NAV - Euros per share	15.68	16.47	15.46	13.93
(1) Calculated in accordance with the old definition of EPRA NAV. Starting this year, MERLIN will report the EPRA NRV, EPRA NTA and EPRA NDV

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2019
(thousands of euros)
EPRA Net Asset Value metrics	Previous NAV method (1)	EPRA NRV	EPRA NTA	EPRA NDV
Consolidated equity	6,708,700	6,708,700	6,708,700	6,708,700
Includes:	—	—	—	—
I) Hybrid instruments	—	—	—	—
Diluted NAV	6,708,700	6,708,700	6,708,700	6,708,700
Includes:	—	—	—	—
ii.a) Revaluation of investment assets (if IAS 40 applies)	—	—	—	—
ii.b) Revaluation of development assets (if IAS 40 applies)	—	—	—	—
ii.c) Revaluation of other investments	33,510	33,510	33,510	33,510
Iii) Revaluation of finance leases	—	—	—	—
iv) Revaluation of assets held for sale	—	—	—	—
Diluted NAV at market value	6,742,210	6,742,210	6,742,210	6,742,210
Excludes:	—	—	—	—
v) Deferred tax in relation to fair value gains of IP	599,876	599,876	499,540	—
vi) Fair value of financial instruments	(11,413)	(11,413)	(11,413)	—
vii) Goodwill as a result of deferred tax	—	—	—	—
viii.a) Goodwill as per the IFRS balance sheet	—	—	—	—
viii.b) Intangibles as per the IFRS balance sheet	—	—	(797)	—
Includes:	—	—	—	—
ix) Fair value of fixed interest rate debt	—	—	—	(190,948)
x) Revaluation of intangibles to fair value	—	—	—	—
xi) Real estate transfer tax	—	369,551	—	—
NAV	7,330,673	7,700,225	7,229,540	6,551,262
Number of diluted shares	469,770,750	469,770,750	469,770,750	469,770,750
NAV - Euros per share	15.6	16.39	15.39	13.95
(1) Calculated in accordance with the old definition of EPRA NAV. Starting this year, MERLIN will report the EPRA NRV, EPRA NTA and EPRA NDV

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14.3. EPRA Metrics Reconciliation

		Thousands EUR
EPRA EARNINGS		2020	2019
Consolidated Net Profit in accordance with IFRS		56,358	563,639
Adjustments for calculating EPRA earnings, excludes:		181,575	(299,543)
(i) changes in the value of investments, investment projects and other interests (1)	Note 7	86,112	(352,936)
(ii) Gains or losses on disposals of assets	Income Statement	14,300	19,063
(iii) Absorption of the revaluation of investment property		—	—
(iv) one-off taxes (2)	n.d.	(3,046)	21,041
(v) equity interest in earnings of companies accounted for using the equity method (3)	n.d.	19,791	(4,053)
(vi) Negative goodwill on business combinations	Note 3	—	2,866
(vii) Changes in the value of financial instruments and cancellation costs	n.d.	64,356	14,436
(viii) Impacts of impairment of the tax asset		—	—
(ix) Gains or losses on disposals of financial instruments	Income Statement	62	40
Non-controlling interests with regard to the above items		—	—
EPRA net recurring earnings before specific adjustments		237,933	264,096
EPRA net earnings per share before specific adjustments (weighted)		0.51	0.56
Net EPRA per share before specific adjustments		0.51	0.56
Company specific adjustments:		24,467	49,181
(i) LTIP provision	Note 18-c	18,232	44,242
(ii) General non-overhead expenses	Note 18.b and 18.c	6,235	4,939
(iii) one-off fees		—	—
non-controlling interests with regard to the above items		—	—
EPRA net recurring earnings after specific adjustments		262,400	313,277
EPRA net earnings per share after specific adjustments (weighted)		0.56	0.67
EPRA net earnings per share after specific adjustments		0.56	0.67
1. Net revaluation of real estate investments plus Depreciation plus Surplus provisions
2. Income taxes less current taxes
3. Share in profit/(Loss) for the period excluding revaluation adjustment, derivative impact and including income from dividends received

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		Thousands EUR
EPRA COST RATIO		2020	2019
Operating costs of assets not chargeable to tenants	Note 18.b	(45,454)	(47,780)
Losses	Note 18.b	(1,740)	(483)
Staff costs	Note 18.c	(39,721)	(76,526)
Overheads	Note 18.b	(12,144)	(10,186)
General non-overhead expenses	Note 18.b and 18.c	(6,235)	(4,939)
LTIP accrued	Note 18.c	18,232	44,242
Exclude (if part of the above)
Depreciation of real estate investments		—	—
Lease costs for concessions		—	—
Service costs included in rents but not separately recovered		—	—
Third-party asset management unit expenses		—	—
EPRA costs (including direct costs of vacancy)		(87,062)	(95,672)
Gross rental income	Note 8.2	503,448	525,918
Less: incentives	n.d.	(62,386)	(14,393)
Less: service fees (if included in rents)		—	—
Plus: attributable income from joint ventures		—	—
Rental income	Note 18.a	441,062	511,525
EPRA Cost Ratio (including direct unemployment costs)		19.7%	18.7%
EPRA Cost Ratio (excluding direct unemployment costs)		17.2%	n.a.

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MERLIN Properties, SOCIMI, S.A.

DECLARATION OF RESPONSIBILITY FOR THE 2020 FINANCIAL STATEMENTS

The members of the Board of Directors of Merlin Properties, SOCIMI, S.A. declare that, to the best of their knowledge, the individual financial statements of Merlin Properties, SOCIMI, S.A. and the consolidated financial statements with its subsidiaries, for the year ended December 31, 2020, prepared (formuladas) (in English) by the Board of Directors at the meeting held on February 25, 2021, in accordance with the applicable accounting principles, offer a true and fair view of the net worth, financial situation and results of Merlin Properties, SOCIMI, S.A. and of the subsidiaries included in the consolidated group, taken as a whole, and that the directors’ reports accompanying the individual and consolidated financial statements (along with their attachments and supplementary documentation) include a true analysis of the business performance, results and position of Merlin Properties, SOCIMI, S.A. and of the subsidiaries included in the consolidated group, taken as a whole, and a description of the main risks and uncertainties they face.

________________________________________ Mr. Javier Garcia-Carranza Benjumea (Chairman)	________________________________________ Mr. Ismael Clemente Orrego (Deputy Chairman)
________________________________________ Ms. Francisca Ortega Hernández-Agero (Member)	________________________________________ Ms. Ana Forner Beltran (Member)
________________________________________ Ms. María Luisa Jorda Castro (Member)	________________________________________ Ms. Pilar Cavero Mestre (Member)
________________________________________ Mr. Juan María Aguirre Gonzalo (Member)	________________________________________ Mr. Miguel Ollero Barrera (Member)
________________________________________ Mr. Fernando Javier Ortiz Vaamonde (Member)	________________________________________ Ms. Ana María García Fau (Member)
________________________________________ Mr. Emilio Novela Berlin (Member)	________________________________________ Mr. George Donald Johnston (Member)
________________________________________ Mr. Ignacio Gil-Casares Satrústegui (Member)

rMadrid, 25 February 2021

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