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Gazit-Globe Ltd (GZTGF)
OTHER OTC:GZTGF
Risk Overview Q4, 2017
Risk Distribution
53% Finance & Corporate
15% Macro & Political
13% Legal & Regulatory
9% Production
7% Ability to Sell
4% Tech & Innovation
Finance & Corporate - Financial and accounting risks. Risks related to the execution of corporate activity and strategy
This chart displays the stock's most recent risk distribution according to category. TipRanks has identified 6 major categories: Finance & corporate, legal & regulatory, macro & political, production, tech & innovation, and ability to sell.
Risk Change Over Time
S&P500 Average
Sector Average
Risks removed
Risks added
Risks changed
G City Risk Factors
New Risk (0)
Risk Changed (0)
Risk Removed (0)
No changes from previous report
The chart shows the number of risks a company has disclosed. You can compare this to the sector average or S&P 500 average.
The quarters shown in the chart are according to the calendar year (January to December). Businesses set their own financial calendar, known as a fiscal year. For example, Walmart ends their financial year at the end of January to accommodate the holiday season.
The quarters shown in the chart are according to the calendar year (January to December). Businesses set their own financial calendar, known as a fiscal year. For example, Walmart ends their financial year at the end of January to accommodate the holiday season.
Risk Highlights Q4, 2017
Main Risk Category
Finance & Corporate
With 29 Risks
Finance & Corporate
With 29 Risks
Number of Disclosed Risks
55
No changes from last report
S&P 500 Average: 31
55
No changes from last report
S&P 500 Average: 31
Recent Changes
0Risks added
0Risks removed
5Risks changed
Since Dec 2017
0Risks added
0Risks removed
5Risks changed
Since Dec 2017
Number of Risk Changed
5
+5
From last reportS&P 500 Average: 2
5
+5
From last reportS&P 500 Average: 2
See the risk highlights of G City in the last period.
Risk Word Cloud
The most common phrases about risk factors from the most recent report. Larger texts indicate more widely used phrases.
Risk Factors Full Breakdown - Total Risks 55
Finance & Corporate
Total Risks: 29/55 (53%)Above Sector Average
Share Price & Shareholder Rights15 | 27.3%
Share Price & Shareholder Rights - Risk 1
The control that we exert over our consolidated public subsidiaries and influence that we have on our public investees may be subject to legal and other limitations, and a decision by us to exert that control or influence may adversely impact perceptions of investors in those subsidiaries or investees, or investors in our Company.Changed
Share Price & Shareholder Rights - Risk 2
The market price of our ordinary shares may be adversely affected if the market prices of our publicly traded investees decrease.A significant portion of our assets is comprised of equity securities of publicly traded companies, including First Capital, Citycon, Atrium and Regency. The stock prices of these publicly traded companies have been volatile, and have been subject to fluctuations due to market conditions and other factors which are often unrelated to operating results and which are beyond our control. Fluctuations in the market price and valuations of our holdings in these companies may affect the market's valuation of the price of our ordinary shares and may also thereby impact our results of operations. If the value of our assets decreases significantly as a result of a decrease in the value of our interest in our publicly traded investees, our business, operating results and financial condition may be materially and adversely affected and the market price of our ordinary shares may also decline.
Share Price & Shareholder Rights - Risk 3
The price of our ordinary shares may be volatile.The market price of our ordinary shares could be highly volatile and may fluctuate substantially as a result of many factors, including:
- actual or anticipated fluctuations in our results of operations; - variance in our financial performance from the expectations of market analysts; - announcements by us or our competitors of significant business developments, changes in tenant relationships, acquisitions or expansion plans; - our involvement in litigation or regulatory proceedings; - our sale of ordinary shares or other securities in the future; - market conditions in our industry and changes in estimates of the future size and growth rate of our markets; - changes in political and economic conditions in the countries where our properties are located; - changes in key personnel; - the trading volume of our ordinary shares; - the delisting of our ordinary shares from any securities exchange; and - general economic and market conditions.
Although our ordinary shares are listed on the Tel-Aviv Stock Exchange ("TASE"), the New York Stock Exchange ("NYSE") and the Toronto Stock Exchange ("TSX"), there may not be an active trading market on the NYSE and the TSX for our ordinary shares. If an active market for our ordinary shares does not exist, it may be difficult to sell our ordinary shares in the U.S. and Canada.
In addition, stock markets have experienced price and volume fluctuations. Broad market and industry factors may materially adversely affect the market price of our ordinary shares, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against that company. If we were involved in any similar litigation, we could incur substantial costs and our management's attention and resources could be diverted.
Share Price & Shareholder Rights - Risk 4
Future sales of our ordinary shares could reduce the market price of our ordinary shares.If our shareholders sell substantial amounts of our ordinary shares, either on the TASE, the NYSE or the TSX, or if there is a public perception that these sales may occur in the future, the market price of our ordinary shares may decline.
Share Price & Shareholder Rights - Risk 5
Raising additional capital by issuing securities may cause dilution to existing shareholders.In the future, we may increase our capital resources by additional offerings of equity securities. Because our decision to issue equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our ordinary shares bear the risk of our future offerings reducing the market price of our ordinary shares and diluting their shareholdings in us.
Share Price & Shareholder Rights - Risk 6
Our controlling shareholder has the ability to take actions that may conflict with the interests of other holders of our shares.Our controlling shareholder, Norstar, owned 51.73% of our outstanding ordinary shares as of April 10, 2018. Chaim Katzman, our Vice Chairman and CEO, and certain members of his family, own or control, including through private entities owned by them and trusts under which they are the beneficiaries, directly and indirectly, approximately 24.82% of Norstar's outstanding shares as of April 10, 2018. Mr. Katzman also controls First U.S. Financial, LLC ("FUF"), which controls the voting rights of an additional 18.25% (approximately) of Norstar's outstanding shares as of April 10, 2018. Consequently, Mr. Katzman is the sole controlling shareholder of Norstar, controlling 43.07% of Norstar's outstanding shares, in the aggregate. In addition, the Katzman Family Foundation, a charity fund which is considered under the Israeli Securities Laws a "joint holder" with Mr. Katzman, holds 4.36% of Norstar's outstanding ordinary shares. In March 2018, the shareholders agreement between Mr. Katzman and Mr. Segal (our Board Member and former CEO, who holds 8.42% of Norstar's outstanding shares) and other related parties with respect to their holdings in Norstar was terminated. Accordingly, subject to his duties as a controlling shareholder under the Israeli Companies Law, Mr. Katzman will be able to exercise indirect, near-majority control over the outcome of substantially all matters required to be submitted to our shareholders for approval, including decisions relating to the election of our board of directors, except for those matters which require special majorities under Israeli law. In addition, Mr. Katzman may be able to exercise that degree of control over the outcome of any proposed merger or consolidation of the Company. The aforementioned arrangements may discourage third parties from seeking to acquire control of us, which may adversely affect the market price of our shares. See "Item 7-Major Shareholders and Related Party Transactions-Major Shareholders."
Share Price & Shareholder Rights - Risk 7
Our ordinary shares are traded on more than one market and this may result in price variations.Our ordinary shares have been traded on the TASE since January 1983, on the NYSE since December 2011, and on the TSX since October 2013. Trading in our ordinary shares on these markets takes place in different currencies (U.S. dollars on the NYSE, NIS on the TASE, and Canadian dollars on the TSX), and at different times (resulting from different time zones, different trading days and different public holidays in the United States, Israel, and Canada). The trading prices of our ordinary shares on these three markets may differ due to these and other factors. Any decrease in the price of our ordinary shares on the TASE could cause a decrease in the trading price of our ordinary shares on the NYSE and/or the TSX and vice versa.
Share Price & Shareholder Rights - Risk 8
As a foreign private issuer, we follow certain home country corporate governance practices instead of applicable SEC and NYSE requirements, which may result in less protection than is accorded to shareholders under rules applicable to domestic issuers.As a foreign private issuer, in reliance on Section 303A.11 of the NYSE Listed Company Manual, which permits a foreign private issuer to follow the corporate governance practices of its home country, we are permitted to follow certain home country corporate governance practices instead of those otherwise required under the NYSE corporate governance standards for domestic issuers. We currently follow the NYSE corporate governance standards for domestic issuers, except with respect to the shareholder approval requirements for (i) private placements to directors, officers or 5% shareholders, as well as (ii) the adoption of equity-compensation plans and material revisions thereto, with respect to each of which we follow home country practice in Israel and do not need to seek shareholder approval. Under home country practice in Israel, we may not be required to seek the approval of our shareholders for such private placements which would require shareholder approval under NYSE rules applicable to a U.S. company. We may in the future elect to follow home country practice in Israel with regard to formation of compensation, nominating and corporate governance committees, separate executive sessions of independent directors and non-management directors and shareholder approval for transactions involving below market price issuances in private placements of more than 20% of outstanding shares, or issuances that result in a change in control. If we follow our home country governance practices on these matters, we may not have a compensation, nominating or corporate governance committee, we may not have mandatory executive sessions of independent directors and non-management directors, and we may not seek approval of our shareholders for the share issuances described above. Accordingly, following our home country governance practices as opposed to the requirements that would otherwise apply to a U.S. company listed on the NYSE may provide less protection than is accorded to investors under the NYSE corporate governance standards applicable to domestic issuers. In addition, we are not currently obligated to follow additional corporate governance practices promulgated by the TSX provided that (i) no more than 25% of the trading volume in our ordinary shares over any six-month period occurs on the TSX and (ii) another stock exchange is providing review of the action in question. Should TSX regulations change or were we to exceed the aforementioned 25% threshold, we could become obligated to comply with TSX corporate governance requirements that also differ from those of the NYSE and from home country practice in Israel.
Share Price & Shareholder Rights - Risk 9
We may incur significant costs as a result of the registration of our ordinary shares under the Securities Exchange Act of 1934 and the listing of our shares on the New York Stock Exchange and the Toronto Stock Exchange and our management must devote substantial time to compliance and new compliance initiatives.As a public company in the United States and Canada, we incur significant accounting, legal and other expenses. We are also incurring costs associated with the requirements under Section 404 and other provisions of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. Similarly, while National Instrument 52-109 - Certification of Disclosure in Issuers' Annual and Interim Filings under Canadian securities law statutes permits us to satisfy the Canadian equivalent of the certification obligations under the Sarbanes-Oxley Act on an annual basis by simply re-filing as soon as practicable the same certifications in Canada as were originally filed with the SEC in the United States, we are also now obligated to file separate interim certifications in Canada with our quarterly financial results. These rules and regulations may continue to increase our legal and financial compliance costs. In addition, being a public company involves various costs, such as stock exchange listing fees and shareholder reporting fees and takes up a significant amount of management's time. Furthermore, we remain a publicly traded company on the TASE and are subject to Israeli securities laws and disclosure requirements. Accordingly, we need to comply with U.S., Canadian, and Israeli disclosure requirements and the resolution of any conflicts between those requirements may lead to additional costs and require significant management time.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure and other matters may be implemented in the future, which may increase our legal and financial compliance costs, make some activities more time consuming and divert management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. Being a publicly traded company in North America and being subject to these rules and regulations has made it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.
Share Price & Shareholder Rights - Risk 10
A substantial number of the shares held by our majority shareholder, Norstar, are pledged to secure its indebtedness and foreclosure on such pledges, or other negative developments with respect to Norstar, could adversely impact the market price of our ordinary shares.Our majority shareholder, Norstar, owned 51.73% of our outstanding ordinary shares as of April 10, 2018. Norstar is a public company listed on the TASE. A substantial number of our shares held by Norstar are pledged predominantly to a number of financial institutions who are lenders to Norstar. Based on Norstar's most recent publicly filed reports in Israel, Norstar was in compliance as of December 31, 2017, with all of the covenants governing such indebtedness, including the requirement that the value of the pledged shares exceeds a certain percentage of the amount of outstanding indebtedness ("loan to value ratios"). In addition, Norstar may otherwise breach applicable covenants or default on required payments. Under those circumstances, if the secured parties foreclose on the pledge, they may acquire and seek to sell the pledged shares. The secured parties will not be subject to any restrictions other than those that apply under applicable U.S., Canadian and Israeli securities laws, and there can be no assurance that they would do so in an orderly manner. Furthermore, the mere foreclosure on the pledge and transfer of shares to such financial institutions would likely be perceived adversely by investors. In the event that the secured parties do not transfer the shares immediately, their interests may differ from those of our public shareholders. In addition, should Norstar incur significant losses, it may choose to sell its holdings of our outstanding shares and/or may no longer be able to acquire additional shares. Any of these events could adversely impact the market price of our ordinary shares.
Share Price & Shareholder Rights - Risk 11
Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a "passive foreign investment company."Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of the average value of our gross assets are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company (a "PFIC") for U.S. federal income tax purposes. To determine whether at least 50% of the average value of our gross assets are held for the production of, or produce, passive income, we may use the market capitalization method for certain periods. Under the market capitalization method, the total asset value of a company would be considered to equal the fair market value of its outstanding shares plus outstanding indebtedness on a relevant testing date. Because the market price of our ordinary shares may fluctuate and may affect the determination of whether we will be considered a PFIC, there can be no assurance that we will not be considered a PFIC for any taxable year. If we are characterized as a PFIC, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather than capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals who are U.S. Holders (as defined below), and having interest charges apply to distributions by us and the proceeds of share sales. See "Item 10. Additional Information-Taxation-United States Federal Income Tax Considerations."
Share Price & Shareholder Rights - Risk 12
Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a "United States-owned foreign corporation" unless such U.S. shareholders are eligible for the benefits of the U.S.-Israel income tax treaty and elect to apply the provisions of such treaty for U.S. tax purposes.Subject to certain exceptions, a portion of our dividends will be treated as U.S. source income for U.S. foreign tax credit purposes, in proportion to our U.S. source earnings and profits, if we are treated as a United States-owned foreign corporation for U.S. federal income tax purposes. We will generally be treated as a United States-owned foreign corporation if U.S. persons own, directly or indirectly, 50% or more of the voting power or value of our shares. To the extent any portion of our dividends is treated as U.S. source income pursuant to this rule, the ability of our U.S. shareholders to claim a foreign tax credit for any Israeli withholding taxes payable in respect of our dividends may be limited. We do not expect to maintain calculations of our earnings and profits under U.S. federal income tax principles and, therefore, if we are subject to the resourcing rule described above, U.S. shareholders should expect that the entire amount of our dividends will be treated as U.S. source income for U.S. foreign tax credit purposes. Importantly, however, U.S. shareholders who qualify for benefits of the U.S.-Israel income tax treaty may elect to treat any dividend income otherwise subject to the sourcing rule described above as foreign source income, though such income will be treated as a separate class of income subject to its own foreign tax credit limitations. The rules relating to the determination of the foreign tax credit are complex, and investors should consult their tax advisor to determine whether and to what extent they will be entitled to this credit, including the impact of, and any exception available to, the special sourcing rule described in this paragraph, and the availability and impact of the U.S.-Israel income tax treaty election described above. See "Item 10. Additional Information-Taxation-United States Federal Income Tax Considerations".
Share Price & Shareholder Rights - Risk 13
Provisions of Israeli law may delay, prevent or otherwise impede a merger with, or an acquisition of, our company, which could prevent a change of control, even when the terms of such a transaction are favorable to us and our shareholders.Israeli corporate law regulates mergers, requires that acquisitions of shares above specified thresholds be conducted through special tender offers, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. For example, a tender offer for all of a company's issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital. Completion of the tender offer also requires approval of a majority of the offerees that do not have a personal interest in the tender offer unless, following consummation of the tender offer, the acquirer would hold at least 98% of the company's outstanding shares. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer, may, at any time within six months following the completion of the tender offer, petition an Israeli court to alter the consideration for the acquisition, unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal rights.
Israeli tax considerations may also make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax or who are not exempt under the provisions of the Israeli Income Tax Ordinance from Israeli capital gains tax on the sale of our shares. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of the shares has occurred. These provisions of Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders, and may limit the price that investors may be willing to pay in the future for our ordinary shares.
Share Price & Shareholder Rights - Risk 14
It may be difficult to enforce a U.S. judgment against us, our officers and directors and our independent registered public accounting firm in Israel or the United States, or to assert U.S. securities laws claims in Israel or serve process on our officers and directors and these experts.We are incorporated in Israel. Some of our executive officers and directors are not residents of the United States. Our independent registered public accounting firm is not a resident of the United States. The majority of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a U.S. court judgment based upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons in a U.S. or Israeli court, or to effect service of process upon these persons in the United States. Additionally, it may be difficult for an investor, or any other person or entity, to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws on the grounds that Israel is not the most appropriate forum in which to bring such a claim. Even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proven as a fact by expert witnesses, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel that addresses the matters described above. As a result of the difficulty associated with enforcing a judgment against us in Israel, holders of our ordinary shares may not be able to collect any damages awarded by either a U.S. or foreign court.
Share Price & Shareholder Rights - Risk 15
Shareholder rights and responsibilities are governed by Israeli law, which differs in some respects from the laws governing the rights and responsibilities of shareholders of U.S. companies.Since we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by our articles of association and Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in typical U.S.-based companies. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters, such as an amendment to the company's articles of association, an increase of the company's authorized share capital, a merger of the company and approval of related party transactions that require shareholder approval. In addition, a shareholder who is aware that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company. There is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions that govern shareholders' actions. These provisions may be interpreted to impose additional obligations and liabilities on our shareholders that are not typically imposed on shareholders of U.S. companies.
Accounting & Financial Operations4 | 7.3%
Accounting & Financial Operations - Risk 1
Changes in accounting standards may adversely impact our financial condition and results of operations.Accounting & Financial Operations - Risk 2
We have in the past restated our historical financial statements. Restatements of our historical financial statements may have a material adverse effect on our business, financial condition or operations.During 2014, we restated our audited consolidated financial statements as of and for the year ended December 31, 2013 (which also included corrections to the audited consolidated financial statements as of and for the year ended December 31, 2012, which were not material) and our audited consolidated financial statements as of and for the period ended March 31, 2014, to retrospectively reflect a change in the estimated revenues and costs for completion of construction projects of Dori Construction, which was sold on January 2016.
We cannot be certain that measures we have taken to prevent future restatements will ensure that no additional restatements will occur in the future. A restatement may affect investor confidence in the accuracy of our financial disclosures, may raise reputational issues for our business, and frequently triggers litigation.
In addition, we may receive inquiries from the SEC, the Israeli Securities Authority, or the Canadian Securities Administrators regarding our past restated financial statements or matters relating thereto. Any future inquiries from the SEC, the Israeli Securities Authority, or the Canadian Securities Administrators as a result of the restatement of our historical financial statements will, regardless of the outcome, likely consume a significant amount of our internal resources and result in additional legal and accounting costs. The restatement of our historical financial statements may result in litigation. If litigation were to occur, we may incur additional substantial legal defense costs regardless of the outcome of such litigation. Likewise, such events might cause a diversion of our management's time and attention. If we do not prevail in any such litigation, we could be required to pay substantial damages or settlement costs.
Accounting & Financial Operations - Risk 3
We have in the past identified a material weakness in our internal control over financial reporting.Partly as a result of the restatement of our historical financial statements described above, we reassessed our disclosure controls and procedures and determined that, as of December 31, 2013, they were not effective due to a material weakness in our internal control over financial reporting. A "material weakness" is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented, or detected on a timely basis. We subsequently remediated the material weakness. For further information, see "Item 15-Controls and Procedures."
Our management is responsible for establishing and maintaining adequate internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS.
Any failure to maintain such internal controls could adversely impact our ability to report our financial results on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Insufficient internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock. It is possible that additional material weaknesses or restatements of financial results may arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities and errors or to facilitate the fair presentation of our audited consolidated financial statements.
Accounting & Financial Operations - Risk 4
Our reported financial condition and results of operations under IFRS are impacted by changes in value of our real estate assets, which value is inherently subjective and subject to conditions outside of our control.Changed
Our audited consolidated financial statements have been prepared in accordance with IFRS. There are significant differences between IFRS and U.S. GAAP which lead to different results under the two systems of accounting. Currently, one of the most significant differences between IFRS and U.S. GAAP is an option under IFRS to record the fair market value of our real estate assets in our financial statements on a quarterly basis, which we have adopted. Accordingly, our financial statements have been significantly impacted in the past by fluctuations due to changes in fair market value of our properties even if no actual disposition of assets took place. For example, in 2017, we decreased the fair value of our properties on a consolidated basis by NIS 42 million, in 2016 we increased the fair value of our properties on a consolidated basis by NIS 245 million and in 2015 we decreased the fair value of our properties on a consolidated basis by NIS 497 million.
The valuation of property is inherently subjective due to the individual nature of each property as well as exposure to macro-economic conditions. As a result, valuations are subject to uncertainty. Fair value of investment property including development and land was determined by accredited independent appraisers with respect to 97.5% of such investment properties during the year ended December 31, 2017 (97.3% of which were performed at December 31, 2017). A significant proportion of the valuations of our properties were not performed by appraisers at the balance sheet date, based on materiality thresholds and other considerations that we have applied across our properties. As a result of these factors, there is no assurance that the valuations of our interests in the properties reflected in our financial statements would reflect actual sale prices even where any such sales occur shortly after the financial statements are prepared.
Other real estate companies that are publicly traded in the United States use U.S. GAAP to report their financial statements and are therefore not currently required to record the fair market value of their real estate assets on a quarterly basis. As a result, significant declines or fluctuations in the value of their real estate could impact us disproportionately compared to these other companies.
In addition, in recent years several amendments have been made to IFRS standards, including those that affect us, and we have had to revise our accounting policies in order to comply with such amended standards. Commonly, the transition provisions of these amendments require us to implement the amendments with respect to comparative figures as well. Figures with respect to prior periods that are not required to be included in our financial statements are therefore not adjusted retrospectively. As a result, the utility of the comparative figures for certain years may be limited.
Debt & Financing8 | 14.5%
Debt & Financing - Risk 1
We have substantial debt obligations which may negatively affect our results of operations and financial position and put us at a competitive disadvantage.Debt & Financing - Risk 2
The inability of any of our public investees to satisfy their liquidity requirements may materially and adversely impact our results of operations.Even though we present the assets and liabilities of our public subsidiaries on a consolidated basis, on the equity method and as available for sale for certain public investees, our public investees satisfy their short-term liquidity and long-term capital requirements through cash generated from their respective operations and through debt and equity financings in their respective local markets. Our liquidity and available borrowings presented on a consolidated basis may not, therefore, be reflective of the position of our public investees since the liquidity and available borrowings of each of them are not available to support the others' operations. Although we have from time to time purchased equity securities of our public investees, we have not generally made shareholder loans to them (with the exceptions of during 2014 and 2015, when we made loans to Luzon Group (see Note 9(a)3 to our audited consolidated financial statements included elsewhere in this annual report)) and may have insufficient resources to do so even if our overall financial position on a consolidated basis is positive. Each public investee is subject to its own covenant compliance obligations and the failure of any public investee to comply with its obligations could result in the acceleration of its indebtedness which could have a material adverse effect on our financial position and results of operations.
Debt & Financing - Risk 3
If we are unable to obtain adequate capital, we may have to limit our operations substantially.Our acquisition and development of properties and our acquisition of other businesses and equity interests in real estate companies are financed in part by loans received from banks, insurance companies and other financing sources, as well as from the sale of shares, notes, debentures and convertible debentures in public and private offerings.
Our public investees satisfy their capital requirements through debt and equity financings in their respective local markets. The practices in these markets vary significantly, for example, with some of the markets based partly on bank lending and others depending significantly on accessing the capital markets. Our ability to obtain economically desirable financing terms could be affected by unavailability or a shortage of external financing sources, changes in existing financing terms, changes in our financial condition and results of operations, legislative changes, changes in the public or private markets in our operating regions and deterioration of the economic situation in our operating regions. Should our ability to obtain financing be impaired, our operations could be limited significantly.
Debt & Financing - Risk 4
We may face difficulties in obtaining or using information from our public subsidiaries and other investees, and it is possible that such information, if received, may contain inaccuracies.We rely on information that we receive from our public subsidiaries and other investees both to provide guidance in connection with managing the business and to comply with our reporting obligations as a public company. We receive information from our public subsidiaries and other investees on a quarterly basis in connection with the preparation of our quarterly or annual results of operations. While we request that our subsidiaries and other investees provide us with all material information that we require to manage our business and comply with our reporting obligations as a public company, we do not have formal arrangements with all of them requiring them to do so. In addition, directors of our public subsidiaries and other investees who are affiliated with us receive information at their periodic board meetings and through their discussions with management. However, the ability of these directors to use or disclose that information to others at Gazit-Globe prior to its disclosure by the public subsidiary or other investee, as applicable, may be subject to limitations resulting from the corporate governance and securities laws governing such subsidiary or other investee, as applicable, and contractual and fiduciary obligations limiting the actions of its directors. In limited circumstances, we could face a conflict between our disclosure obligations and the disclosure obligations of our public subsidiaries and other investees. In addition, if we wish to engage in a capital markets or other transaction in which we are required to disclose certain information that our subsidiaries and other investees are not required or willing to disclose under their respective securities laws, we may need to change the timing or form of our capital raising plans. Our public subsidiaries and other investees are listed in different jurisdictions and operate in different geographic markets and do not present information regarding their operations on a uniform basis. Accordingly, we may not present certain data that is typically presented by other real estate companies in certain jurisdictions.
In addition, we consolidate the financial statements of our subsidiaries into our audited consolidated financial statements and we include the financial information of certain other investees, which are accounted for in our audited consolidated financial statements using the equity method. In doing so, we rely on their published financial statements. Accordingly, a material inaccuracy in the financial statements of one of our subsidiaries or other investees can result in a material error in our audited consolidated financial statements. In 2014, the Company was compelled to restate and refile its audited consolidated financial statements as of and for the year ended December 31, 2013 (which also included corrections to the audited consolidated financial statements as of and for the year ended December 31, 2012, which were not material) and its consolidated financial statements as of and for the period ended March 31, 2014, following the restatement and refiling of the financial statements for the same periods of Luzon Group's fully-consolidated subsidiary, Dori Construction, due to a material deviation in the estimates of anticipated revenues and costs with respect to construction projects. We do not supervise the preparation of the financial statements of our public subsidiaries and equity-accounted investees. Accordingly, we cannot guarantee that such errors will not occur again or that the Company will not be compelled to restate its consolidated financial statements in the future.
Debt & Financing - Risk 5
A significant portion of our business is conducted through our public investees and our failure to generate sufficient cash flow from these public investees, or otherwise receive cash from these public investees, could result in our inability to repay our indebtedness.We conduct the substantial majority of our operations through our public investees that operate in key regions around the world. After satisfying their cash needs, certain of these investees have traditionally declared dividends to their shareholders, including us. In 2017, we received dividend payments of NIS 912 million from our public investees.
The ability of our investees in general and our public investees in particular, to pay dividends and interest or make other distributions on equity to us, is subject to limitations that could change or become more stringent in the future. Applicable laws of the respective jurisdictions governing each investee may place limitations on payments of dividends, interest or other distributions by each of our investees or may subject them to withholding taxes. The determination to pay a dividend is made by the boards of directors of each entity and our nominees or persons otherwise affiliated with us represent less than a majority of the members of the boards of directors of each of these entities. In addition, certain of our public investees incur debt on their own behalf and the instruments governing such debt may restrict their ability to pay dividends or make other distributions to us. Creditors of such investees will be entitled to payment from the assets of those investees before those assets can be distributed to us. The inability of our operating investees to make distributions to us could have a material adverse effect on our business, financial condition and results of operations.
Debt & Financing - Risk 6
Changes in our ownership levels of our public investees and related determinations may impact the presentation of our financial statements and affect investor perception of us.The determination under IFRS as to whether we consolidate the assets, liabilities and results of operations of our investees depends on whether we have legal or effective control over these investees. As of December 31, 2017, as required by IFRS, we had legal control over Atrium and effective control over Citycon, even though that with respect to Citycon we had less than a majority ownership interest and/or potential voting rights interest. Following the Regency Merger, Regency is not consolidated into our financial statements in 2017 and we present the investment as an available-for-sale financial asset. Additionally, as we reported on March 20, 2017, we have deconsolidated First Capital from our financial statements and present the investment on an equity method basis. In the future, our public investees may undertake securities offerings or issue securities in connection with acquisitions which result in dilution of our ownership interest. Furthermore, we may determine that it is in our best interests and the best interests of our public investees that they undertake an acquisition that results in dilution to our equity position. In the future, if we do not exercise control over a particular investee, we will need to deconsolidate such investee from our financial statements. If a change in the level of control which impacts whether and how we consolidate our public subsidiaries occurs, such an event may affect investor perception of us and our business model even if there is no material economic impact on our company.
Debt & Financing - Risk 7
Real estate is generally an illiquid investment.Real estate is generally an illiquid investment as compared to investments in securities. While we do not currently anticipate a need to dispose of a significant number of real estate assets in the short-term, such illiquidity may affect our ability to dispose of or liquidate real estate assets in a timely manner and at satisfactory prices in response to changes in economic, real estate market or other conditions.
We may be obliged to dispose of our interest in a property or properties at a time, for a price or on terms not of our choosing. In addition, some of our anchor tenants have rights of first refusal or rights of first offer to purchase the properties in which they lease space in the event that we seek to dispose of such properties. The presence of these rights of first refusal and rights of first offer or certain litigation (for example – with respect to the sale of Motorama in Germany) could make it more difficult for us to sell these properties in response to market conditions. These limitations on our ability to sell our properties could have an adverse effect on our financial condition and results of operations.
Debt & Financing - Risk 8
Our ability to pay dividends is dependent on the ability of our investees to efficiently distribute cash including dividends to Gazit-Globe and our ability to obtain financing.In the past, our policy has been to distribute a quarterly dividend, the minimum amount of which we set for each fiscal year (subject to legal limitations). Any dividends will depend on our earnings, financial condition and other business and economic factors affecting us as our board of directors may consider relevant at the time. We may pay dividends in any fiscal year only out of "profits", as defined by the Israeli Companies Law, unless otherwise authorized by an Israeli court, and provided that the distribution is not reasonably expected to impair our ability to fulfill our outstanding and expected obligations.
The Company's ability to pay dividends is dependent on the ability of our investees to efficiently distribute cash, including dividends to Gazit-Globe. In the event that our investees are restricted from distributing dividends due to their earnings, financial condition or results of operations or they determine not to distribute dividends, including as a result of taxes that may be payable with respect to such distribution, and in the event that our debt or equity financing is restricted or limited, we may not be able to pay dividends in the amounts otherwise anticipated or at all. If we decrease or discontinue our dividend payments, the market price of our ordinary shares may decrease.
Corporate Activity and Growth2 | 3.6%
Corporate Activity and Growth - Risk 1
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on the financial condition of co-venturers and disputes between us and our co-venturers.Corporate Activity and Growth - Risk 2
We seek to expand through acquisitions of additional real estate assets. Such expansion may not yield the returns expected, may result in disruptions to our business, may strain management resources and may result in dilution to our shareholders or dilution of our interests in our subsidiaries and other investees.Our investing strategy and our market selection process may not ultimately be successful, may not provide positive returns on our investments and may result in losses. The acquisition of properties, groups of properties or other businesses entails risks that include the following, any of which could adversely affect our results of operations and financial condition:
- we may not be able to identify suitable properties to acquire or may be unable to complete the acquisition of the properties we identify; - there may be a lack of available suitable properties for our portfolio; - we may not be able to integrate any acquisitions into our existing operations successfully; - properties we acquire may fail to achieve the occupancy or rental rates we project at the time we make the decision to acquire; - our pre-acquisition evaluation of the physical condition of each new investment may not detect certain defects or identify necessary repairs or may fail to properly evaluate the costs involved in implementing our plans with respect to such investment; - we may experience delays or increased costs in development or redevelopment due to changes in applicable laws or regulations; - we may not be able to obtain financing on favorable terms for acquisition, development or redevelopment; and - our investigation of a property or building prior to our acquisition, and any representations we may receive from the seller of such building or property, may fail to reveal various liabilities (such as to tenants or vendors or with respect to environmental contamination), which could reduce the cash flow from the property or increase our acquisition cost.
Together with our acquisition of individual properties and groups of properties, we have been an active business acquirer, and, as part of our growth strategy, we expect to seek to acquire real estate-related businesses in the future. The acquisition and integration of each business involves a number of risks and may result in unforeseen operating difficulties and expenditures in assimilating or integrating the businesses, properties, personnel or operations of the acquired business. Our due diligence prior to our acquisition of a business may not uncover certain legal or regulatory issues that could affect such business. Furthermore, future acquisitions may involve difficulties in retaining the tenants or customers of the acquired business, and disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing operation and development of our current business. Moreover, we can provide no assurances that the anticipated benefits of any acquisition, such as operating improvements or anticipated cost savings, would be realized or that we would not be exposed to unexpected liabilities in connection with any acquisition.
To complete a future acquisition, we may determine that it is necessary to use a substantial amount of our available liquidity sources or cash or engage in equity or debt financing. If we raise additional funds through further issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we or our investees issue could have rights, preferences and privileges senior to those of holders of our ordinary shares. If our public investees raise additional funds through further issuances of equity or convertible debt securities, Gazit-Globe, as the holder of equity securities of our public investees, could suffer significant dilution, and any new equity securities that our public investees issue could have rights, preferences and privileges senior to those held by Gazit-Globe. We may not be able to obtain additional financing on terms favorable to us, if at all, which could limit our ability to engage in acquisitions.
Macro & Political
Total Risks: 8/55 (15%)Above Sector Average
Economy & Political Environment3 | 5.5%
Economy & Political Environment - Risk 1
The economic performance and value of our shopping centers depend on many factors, each of which could have an adverse impact on our cash flows and operating results.Economy & Political Environment - Risk 2
Economic conditions may make it difficult to maintain or increase occupancy rates and rents, and a deterioration in economic conditions in one or more of our key regions could adversely impact our results of operations.In 2017, our rental income (assuming full consolidation of First Capital and proportionate consolidation of Kista Galleria) was derived as follows: 39.8% from Canada, 30.5% from Northern and Western Europe, 22.0% from Central and Eastern Europe, 4.4% from Israel, and 3.3% from Brazil. We are therefore exposed to the risk of potential economic downturns in one or more of these regions. We have experienced such a downturn in the past. For example, during the economic downturn of 2008-2009, general market conditions deteriorated in many of our markets, particularly the United States and Central and Eastern Europe. Consequently, occupancy rates declined in some of the regions in which we operate and the net operating income and value of our assets in all of the regions in which we operate were adversely affected. In addition, currencies in many of our markets were devalued against the NIS during that period. Although general market conditions have improved since 2010, our ability to maintain or increase our occupancy rates and rent levels depends on continued improvements in global and local economic conditions.
While the economies in many of the cities within our markets have improved (with certain exceptions), macro-economic challenges, such as low consumer confidence, high unemployment and reduced consumer spending, have adversely affected many retailers and continue to adversely affect the retail sales of many regional and local tenants in some of our markets and our ability to re-lease vacated space at higher rents. Moreover, companies in some of our markets shifted to a more cautionary mode with respect to leasing as a result of the prevailing economic climate and demand for retail space has declined generally, reducing the market rental rates for our properties. As a result, in these markets we may not be able to re-lease vacated space and, if we are able to re-lease vacated space, there is no assurance that rental rates will be equal to or in excess of current rental rates. In addition, we may incur substantial costs in obtaining new tenants, including brokerage commissions paid by us in connection with new leases or lease renewals, and the cost of making leasehold improvements. These events and factors could adversely affect our rental income and overall results of operations.
While most of our shopping centers are anchored by supermarkets, drugstores or other necessity-oriented retailers, which are less susceptible to economic cycles, other tenants have been vulnerable to declining sales and reduced access to capital. Europe in particular remains vulnerable to volatile financial and credit markets due to economic and political uncertainties, including the United Kingdom's decision to withdraw from the European Union, the ongoing refugee crisis, financial uncertainty in Greece and a lack of confidence in the European Union's banking system. As an example, Finland's credit rating was downgraded by Fitch in the first quarter of 2016. Additionally, Russia is suffering from significant economic and political turmoil. As a result, some tenants have requested rent adjustments and abatements, while other tenants have not been able to continue in business at all. Our ability to renew or replace these tenants at comparable rents could adversely impact occupancy rates and overall results of operations.
Economy & Political Environment - Risk 3
We conduct our operations in Israel and therefore our business, financial condition and results of operations may be adversely affected by political, economic and military instability in Israel.Our headquarters are located in central Israel and many of our key employees and officers and certain of our directors are residents of Israel. Accordingly, political, economic and military conditions in Israel directly affect our business. Since the State of Israel was established in 1948, a number of armed conflicts have occurred between Israel, its neighboring countries and other organizations. Any armed conflicts, terrorist activities or political instability in the region could adversely affect business conditions and could harm our business, financial condition and results of operations.
For example, any major escalation in hostilities in the region could result in a portion of our employees, including executive officers, directors, and key personnel being called upon to perform military duty for an extended period of time or otherwise disrupt our normal operations. In response to increases in terrorist activity, there have been periods where significant numbers of military reservists have been summoned for duty. Our operations could be disrupted by the absence of a significant number of our employees or of one or more of our key employees. Such disruption could materially adversely affect our business, financial condition and results of operations. Our commercial insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East, such as damages resulting in disruption of our operations. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot guarantee that this government coverage will be maintained or will be adequate in the event we submit a claim.
International Operations2 | 3.6%
International Operations - Risk 1
Commencement of operations in new geographic markets and asset classes involves risks and may result in our investing significant resources without realizing a return, which may adversely impact our future growth.Changed
International Operations - Risk 2
Certain emerging markets in which we have properties are subject to greater risks than more developed markets, including significant legal, economic and political risks.Some of our current and planned investments are located in emerging markets, primarily within Russia (through Atrium) and Brazil, as such, are subject to greater risks than those in markets in Northern and Western Europe and North America, including greater legal, economic and political risks. Our performance could be adversely affected by events beyond our control in these markets, such as a general downturn in the economy of countries in which these markets are located, conflicts between states, changes in regulatory requirements (including Market Abuse Regulation in the European Union) and applicable laws (including in relation to taxation and planning), adverse conditions in local financial markets and interest and inflation rate fluctuations. In addition, adverse political or economic developments in these or in neighboring countries could have a significant negative impact on, among other things, individual countries' gross domestic products, foreign trade or economies in general. Recent examples of potentially detrimental developments in emerging markets include the economic downturn and political developments in Brazil (for example the impeachment of president Dilma Rousseff in 2016) and the geopolitical tension between Russia and its neighbors and recently the US. While we currently have no plans to enter new emerging markets, some emerging economies in which we currently operate have historically experienced substantial rates of inflation, an unstable currency, high government debt relative to gross domestic products, a weak banking system providing limited liquidity to domestic enterprises, high levels of loss-making enterprises that continue to operate due to the lack of effective bankruptcy proceedings, significant increases in unemployment and underemployment and the impoverishment of a large portion of the population. This may have a material adverse effect on our business, financial condition or results of operations.
Furthermore, we are subject to the U.S. Foreign Corrupt Practices Act ("FCPA") and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties for the purpose of obtaining or retaining business. We currently and may in the future conduct business in countries and regions in which we may face, directly or indirectly, corrupt demands by officials, tribal or insurgent organizations, or private entities. Thus, we face the risk of unauthorized payments or offers of payments by one of our employees or consultants, even though these parties are not always subject to our control. Our existing safeguards and any future improvements may prove to be less than effective, and our employees and consultants may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could have a material adverse effect on our business, financial condition or results of operations. In addition, governments may seek to hold us liable for successor liability anti-corruption violations committed by our investees.
Natural and Human Disruptions1 | 1.8%
Natural and Human Disruptions - Risk 1
Future terrorist acts and shooting incidents could harm the demand for, and the value of, our properties.Capital Markets2 | 3.6%
Capital Markets - Risk 1
Volatility in the credit markets may affect our ability to obtain or re-finance our indebtedness at a reasonable cost.Capital Markets - Risk 2
Our results of operations may be adversely affected by fluctuations in currency exchange rates and we may not have adequately hedged against them.Because we own and operate assets in many regions throughout the world, our results of operations are affected by fluctuations in currency exchange rates. For the year ended December 31, 2017, 52.1% of our rental income was earned in Euros, 8.9% in Swedish Krona, 17.4% in Norwegian Krone, 7.5% in NIS and 13.6% in other currencies. In addition, our reporting currency is the NIS, and the functional currency is separately determined for each of our subsidiaries and investees. When an investee's functional currency differs from our reporting currency, the financial statements of such investee are translated to NIS so that they can be included in our financial statements. As a result, fluctuations of the currencies in which we conduct business relative to the NIS impact our results of operations and the impact may be material. For example, the average annual rate in NIS of the Euro weakened by 4.4%, for 2017 compared to 2016, which resulted in our net operating income decreasing by 2.2% or a total amount of NIS 43 million. We continually monitor our exposure to currency risk and pursue a company-wide foreign exchange risk management policy, which includes seeking to hold our equity in the currencies of the various markets in which we operate in the same proportions as the assets in each such currency bear to our total assets. We have in the past and expect to continue in the future to at least partly hedge such risks with certain financial instruments. Future currency exchange rate fluctuations that we have not adequately hedged could adversely affect our profitability. We also face risks arising from the imposition of exchange controls and currency devaluations. Exchange controls may limit our ability to convert foreign currencies into NIS or to remit dividends and other payments by certain of our investees or businesses located in or conducted within a country imposing controls. Currency devaluations result in a diminished value of funds denominated in the currency of the country instituting the devaluation.
Furthermore, the Company engages in currency and interest rate swap transactions, some of which are governed by agreements entered into by the Company that provide for mechanisms for the current settling of accounts in connection with the fair value of interest rate edging transactions (including swap, forwards, and call options). Consequently, the Company could be required, from time to time, to transfer material amounts to the banking institutions based on the fair value of such transactions.
Our ability to manage risks through derivatives may be negatively affected by the Dodd-Frank Act and legislation initiatives of the European Commission, which provide for a new framework of regulation of over-the-counter derivatives markets. These new regulations may require us to clear certain types of transactions currently traded in the over-the-counter derivative markets through a central clearing organization and may limit our ability to customize derivative transactions for our needs. As a result, we may experience additional collateral requirements and costs associated with derivative transactions.
Legal & Regulatory
Total Risks: 7/55 (13%)Below Sector Average
Regulation5 | 9.1%
Regulation - Risk 1
A failure by Regency to be treated as a REIT could have an adverse effect on our investment in Regency.Regulation - Risk 2
Properties held by us are subject to multiple permits and administrative approvals and to compliance with existing and future laws and regulations.Our operations and properties, including our development and redevelopment activities, are subject to regulation by various governmental entities and agencies in connection with obtaining and renewing various licenses, permits, approvals and authorizations, as well as with ongoing compliance with existing and future laws, regulations and standards. A significant change in the regime for obtaining or renewing these licenses, permits, approvals and authorizations, or a significant change in the licenses, permits, approvals and authorizations our operations and properties are subject to, could result in us incurring substantially increased costs which could adversely affect our business, financial condition and results of operations. In addition, each maintenance, development and redevelopment project we undertake must generally receive administrative approvals from various governmental agencies, including fire, health and safety and environmental protection agencies, as well as technical approvals from various utility providers, including electricity, gas and sewage services. These requirements may hinder, delay or significantly increase the costs of these projects, and failure to comply with these requirements may result in fines and penalties as well as cancellation of such projects even, in certain cases, the demolition of the building already constructed. Such consequences could have a material adverse effect on our business, financial condition and results of operations.
Regulation - Risk 3
Changes that were enacted to enhance Israeli corporate governance laws may adversely affect our ability to expand our business and raise capital from certain Israeli financial institutions.Changed
In December 2013, the Israeli Knesset enacted a law in order to promote competition and reduce concentration (the "Concentration Law"). The Concentration Law imposes restrictions on "pyramidal structures", which are corporate structures where control in a public company is held through a chain of more than one other public company.
The Concentration Law imposes a two-layer limitation on the total number of Israeli public companies in any pyramidal structure. Under its provisions, the Company is considered a "second layer company" (as it is controlled by Norstar, which is itself a public company). Under the Concentration Law, the Company's former subsidiary, Luzon Group, would have been considered a "third layer company" and Luzon Group's subsidiary, Dori Construction, a "fourth layer company." We were therefore required to make structural adjustments to comply with the Concentration Law, which led to our sale of our entire stake (which was held via Gazit Development) in Luzon Group in January 2016, primarily in an off-market transaction (for our current stake in Luzon Group please see Note 9(a)3.
The Concentration Law also authorizes the Israeli Minister of Finance to establish limits with respect to the aggregate credit that may be provided by financial institutions to a specific company or a business group (defined to include an ultimate controlling shareholder and the companies under its control). Such limitations, if ultimately established, might limit our ability to refinance our debt from financial institutions.
Proper Banking Management Directive No. 313 of the Supervisor of Banks in Israel imposes restrictions on the volume of loans that may be extended by a bank to a "single borrower", a single "group of borrowers" and to the bank's largest "groups of borrowers", as such terms are defined in such Directive. On June 9, 2015, the Supervisor of Banks issued a Circular for the Amendment of Proper Banking Management Directive No. 313 (the "Circular"), which increased restrictions on lending activities. The Circular narrows the definition of bank equity, resulting in stricter restrictions on extensions of credit. Since the Company obtains loans and credit from Israeli banks, such restrictions could adversely affect the volumes of credit that may be attained by the Company.
Pursuant to the recommendations of the Committee to Assess the Debt Restructuring Proceedings in Israel, the Supervisor of Banks and the Commissioner of the Capital Market, Insurance and Savings in the Ministry of Finance issued updates to the Proper Banking Management Directives and to circulars (as appropriate) in May 2015 with respect to restrictions on the financing of equity transactions, restrictions on the provision and management of leveraged loans, information requirements on controlling shareholders of entities that obtain credit and additional guidelines for banks regarding credit risk management. In addition, in July 2015, the Israeli Legislation Committee approved an amendment to the Concentration Law, which sets a credit limit for business groups. Furthermore, in December 2015, the Israeli Securities Authority approved a bill imposing disclosure requirements, including: past conduct of controlling shareholders where a controlled company had encountered financial difficulties, debt obtained by a controlling shareholder in an entity to finance the acquisition of the controlling shares in the entity or the pledging of such shares, and restrictions on credit. Since the Company and its controlling shareholder raise credit on the Israeli capital markets as well as from financial institutions in Israel, such restrictions could adversely affect their ability to raise or renew credit.
In addition, the Concentration Law imposes limitations on the holdings by non-finance companies in the financial sector and similar limitations on financial institutions with holdings in non-financial sectors. Such limitations restrict the ability of financial institutions or their controlling shareholders to invest in the Company, and restricts the ability of the Company to invest in such financial institutions.
Regulation - Risk 4
We are an "SEC foreign issuer" under Canadian securities regulations and are exempt from certain requirements of Canadian securities laws.Although we are a reporting issuer in Canada, we are an "SEC foreign issuer" within the meaning of National Instrument 71-102 - Continuous Disclosure and Other Exemptions Relating to Foreign Issuers under Canadian securities law statutes and are therefore exempt from certain Canadian securities laws relating to continuous disclosure obligations and proxy solicitation as long as we comply with certain reporting requirements applicable in the United States, provided that the relevant documents filed with the SEC are also filed in Canada and sent to our shareholders in Canada to the extent and in the manner and within the time required by applicable U.S. requirements. Therefore, there may be less publicly available information in Canada about us than is regularly published by or about other reporting issuers in Canada. In the event that we cease to be an "SEC foreign issuer", we may have to comply with additional Canadian securities laws and reporting requirements.
Regulation - Risk 5
It would have an adverse effect on our results of operations and our shareholders if we become subject to regulation under the U.S. Investment Company Act of 1940.We do not expect to be subject to regulation under the U.S. Investment Company Act of 1940, or the Investment Company Act, because we are not engaged in the business of investing or trading in securities. In the event we engage in business combinations which result in our holding passive investment interests in a number of entities, we could be subject to regulation under the Investment Company Act. In this event, we would be required to register as an investment company and become obligated to comply with a variety of substantive requirements under the Investment Company Act, including limitations on capital structure, restrictions on specified investments, and compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating expenses, which may make it impractical, if not impossible, for us to continue our business as currently conducted. Furthermore, as a non-U.S. entity, we would be unable to register as an investment company under the Investment Company Act, which could result in us needing to reincorporate as a U.S. entity or cease being a public company in the United States. As a result of these restrictions, any determination that we are an investment company would have material adverse consequences for our investors.
Taxation & Government Incentives1 | 1.8%
Taxation & Government Incentives - Risk 1
We have significant investments in different countries and our worldwide after-tax income as well as our ability to repatriate it might be influenced by any change in the tax laws in such countries.Changed
Environmental / Social1 | 1.8%
Environmental / Social - Risk 1
We may be subjected to liability for environmental contamination.Production
Total Risks: 5/55 (9%)Below Sector Average
Manufacturing1 | 1.8%
Manufacturing - Risk 1
Our investments in development and redevelopment projects may not yield anticipated returns, and we are subject to general construction risks which may increase costs and delay or prevent the construction of our projects.Employment / Personnel2 | 3.6%
Employment / Personnel - Risk 1
Our competitive position and future prospects depend on our senior management and the senior management of our investees.Employment / Personnel - Risk 2
If we or third-party managers fail to efficiently manage our properties, tenants may not renew their leases or we may become subject to unforeseen liabilities.If we fail to efficiently manage a property or properties, increased costs could result with respect to maintenance and improvement of properties, loss of opportunities to improve income and yield and a decline in the value of the properties. In addition, we sometimes engage third parties to provide management services for our properties. We may not be able to locate and enter into agreements with qualified management service providers. If any third parties providing us with management services do not comply with their agreements or otherwise do not provide services at the level that we expect, our tenant relationships and rental rates for such properties and, therefore, their condition and value, could be negatively affected.
We rely on third-party management companies to manage certain of our properties which represented 0.7% of our total GLA as of December 31, 2017. While we are in regular contact with our third-party managers, we do not supervise them and their personnel on a day-to-day basis and we cannot guarantee that they will manage our properties in a manner that is consistent with their obligations under our agreements, that they will not be negligent in their performance or engage in other criminal or fraudulent activity, or that they will not otherwise default on their management obligations to us. If any of the foregoing occurs, the relationships with our tenants could be damaged, which may cause the tenants not to renew their leases, and we could incur liabilities resulting from loss or injury to the properties or to persons at the properties. If we are unable to lease the properties or we become subject to significant liabilities as a result of third-party management performance, our operating results and financial condition could be substantially harmed.
Costs2 | 3.6%
Costs - Risk 1
Insurance on real estate may not cover all losses.Costs - Risk 2
Many of our real estate costs are fixed, even if income from our properties decreases.Our financial results depend in part on leasing space to tenants on favorable financial terms. Costs associated with real estate investment, such as real estate taxes, insurance and maintenance costs generally are not reduced even when a property is not fully occupied, or when rental rates decrease, or when other circumstances cause a reduction in income from the property. As a result, cash flow from the operations of the properties may be reduced if a tenant does not pay its rent or we are unable to fully lease the properties on favorable terms. Additionally, properties that we develop or redevelop may not produce any significant revenue immediately, and the cash flow from existing operations may be insufficient to pay the operating expenses and debt service associated with such projects until they are fully occupied.
Ability to Sell
Total Risks: 4/55 (7%)Above Sector Average
Competition1 | 1.8%
Competition - Risk 1
We face significant competition for the acquisition of real estate assets, which may impede our ability to make future acquisitions or may increase the cost of these acquisitions.Demand2 | 3.6%
Demand - Risk 1
We are subject to a disproportionate impact on our properties due to concentration in certain areas.Demand - Risk 2
We are particularly dependent upon large tenants that serve as anchors in our shopping centers and decisions made by these tenants or adverse developments in their businesses could have a negative impact on our financial condition.We own shopping centers that are anchored by large tenants. Because of their reputation or other factors, these large tenants are particularly important in attracting shoppers and other tenants to our centers. Our rental income depends upon the ability of the tenants of our properties and, in particular, these anchor tenants, to generate enough income to make their lease payments to us. Certain of our anchor tenants may make up a significant percentage of our rental income in certain markets. For example, Kesko accounted for 5.3% of Citycon's rental income in 2017, AFM accounted for 3.8% of Atrium's rental income in 2017. In addition, supermarkets and other grocery stores, many of which are anchor tenants, accounted for approximately 12.9% of our total rental income in 2017. Revenue from our properties depends primarily on the ability of our tenants to pay the full amount of rent and other charges due under their leases on a timely basis. Any reduction in our tenants' abilities to pay rent or other charges on a timely basis, including tenants filing for bankruptcy protection, could adversely affect our financial condition and results of operations. In the event of default by tenants, we may experience delays and unexpected costs in enforcing our rights as landlords under the leases, which may also adversely affect our financial condition and results of operations.
We generally develop or redevelop our shopping centers based on an agreement with an anchor tenant. Changes beyond our control may adversely affect the tenants' ability to make lease payments or could result in them terminating their leases. These changes include, among others:
- downturns in national or regional economic conditions where our properties are located, which generally will negatively impact the rental rates; - changes in the buying habits of consumers in the regions surrounding those shopping centers including a shift to preference for online shopping and e-commerce; - changes in local market conditions such as an oversupply of properties, including space available by sublease or new construction, or a reduction in demand for our properties; - competition from other available properties; and - changes in federal, state or local regulations and controls affecting rents, prices of goods, interest rates, fuel and energy consumption.
As a result, tenants may determine not to renew leases, delay lease commencement or reduce their square footage needs. In addition, anchor tenants often have more favorable lease provisions and significant negotiating power. In some instances, we may need to seek their permission to lease to other, smaller tenants. Anchor tenants, particularly retail chains, may also change their operating policies for their stores (such as the size of their stores) and the regions in which they operate. As a result, anchor tenants may determine not to renew leases or delay lease commencement. An anchor tenant may decide that a particular store is unprofitable and close its operations in our center, and, while the tenant may continue to make rental payments, such a failure to occupy its premises could have an adverse effect on the property. A lease termination by an anchor tenant or a failure by that anchor tenant to occupy the premises could result in lease terminations or reductions in rent by other tenants in the same shopping center. In addition, we are subject to the risk of defaults by tenants or the failure of any lease guarantors to fulfill their obligations, tenant bankruptcies and other early termination of leases or non-renewal of leases. Any of these developments could materially and adversely affect our financial condition and results of operations.
Sales & Marketing1 | 1.8%
Sales & Marketing - Risk 1
Online sales can have an adverse impact on our tenants and our business.Tech & Innovation
Total Risks: 2/55 (4%)Below Sector Average
Cyber Security1 | 1.8%
Cyber Security - Risk 1
If we do not maintain the security of tenant-related information, we could incur substantial costs and become subject to litigation.Technology1 | 1.8%
Technology - Risk 1
We rely extensively on computer systems to process transactions and manage our business. Disruptions in both our primary and secondary (back-up) systems or breaches of our network security could harm our ability to run our business and expose us to liability.See a full breakdown of risk according to category and subcategory. The list starts with the category with the most risk. Click on subcategories to read relevant extracts from the most recent report.
FAQ
What are “Risk Factors”?
Risk factors are any situations or occurrences that could make investing in a company risky.
The Securities and Exchange Commission (SEC) requires that publicly traded companies disclose their most significant risk factors. This is so that potential investors can consider any risks before they make an investment.
They also offer companies protection, as a company can use risk factors as liability protection. This could happen if a company underperforms and investors take legal action as a result.
It is worth noting that smaller companies, that is those with a public float of under $75 million on the last business day, do not have to include risk factors in their 10-K and 10-Q forms, although some may choose to do so.
How do companies disclose their risk factors?
Publicly traded companies initially disclose their risk factors to the SEC through their S-1 filings as part of the IPO process.
Additionally, companies must provide a complete list of risk factors in their Annual Reports (Form 10-K) or (Form 20-F) for “foreign private issuers”.
Quarterly Reports also include a section on risk factors (Form 10-Q) where companies are only required to update any changes since the previous report.
According to the SEC, risk factors should be reported concisely, logically and in “plain English” so investors can understand them.
How can I use TipRanks risk factors in my stock research?
Use the Risk Factors tab to get data about the risk factors of any company in which you are considering investing.
You can easily see the most significant risks a company is facing. Additionally, you can find out which risk factors a company has added, removed or adjusted since its previous disclosure. You can also see how a company’s risk factors compare to others in its sector.
Without reading company reports or participating in conference calls, you would most likely not have access to this sort of information, which is usually not included in press releases or other public announcements.
A simplified analysis of risk factors is unique to TipRanks.
What are all the risk factor categories?
TipRanks has identified 6 major categories of risk factors and a number of subcategories for each. You can see how these categories are broken down in the list below.
1. Financial & Corporate
- Accounting & Financial Operations - risks related to accounting loss, value of intangible assets, financial statements, value of intangible assets, financial reporting, estimates, guidance, company profitability, dividends, fluctuating results.
- Share Price & Shareholder Rights – risks related to things that impact share prices and the rights of shareholders, including analyst ratings, major shareholder activity, trade volatility, liquidity of shares, anti-takeover provisions, international listing, dual listing.
- Debt & Financing – risks related to debt, funding, financing and interest rates, financial investments.
- Corporate Activity and Growth – risks related to restructuring, M&As, joint ventures, execution of corporate strategy, strategic alliances.
2. Legal & Regulatory
- Litigation and Legal Liabilities – risks related to litigation/ lawsuits against the company.
- Regulation – risks related to compliance, GDPR, and new legislation.
- Environmental / Social – risks related to environmental regulation and to data privacy.
- Taxation & Government Incentives – risks related to taxation and changes in government incentives.
3. Production
- Costs – risks related to costs of production including commodity prices, future contracts, inventory.
- Supply Chain – risks related to the company’s suppliers.
- Manufacturing – risks related to the company’s manufacturing process including product quality and product recalls.
- Human Capital – risks related to recruitment, training and retention of key employees, employee relationships & unions labor disputes, pension, and post retirement benefits, medical, health and welfare benefits, employee misconduct, employee litigation.
4. Technology & Innovation
- Innovation / R&D – risks related to innovation and new product development.
- Technology – risks related to the company’s reliance on technology.
- Cyber Security – risks related to securing the company’s digital assets and from cyber attacks.
- Trade Secrets & Patents – risks related to the company’s ability to protect its intellectual property and to infringement claims against the company as well as piracy and unlicensed copying.
5. Ability to Sell
- Demand – risks related to the demand of the company’s goods and services including seasonality, reliance on key customers.
- Competition – risks related to the company’s competition including substitutes.
- Sales & Marketing – risks related to sales, marketing, and distribution channels, pricing, and market penetration.
- Brand & Reputation – risks related to the company’s brand and reputation.
6. Macro & Political
- Economy & Political Environment – risks related to changes in economic and political conditions.
- Natural and Human Disruptions – risks related to catastrophes, floods, storms, terror, earthquakes, coronavirus pandemic/COVID-19.
- International Operations – risks related to the global nature of the company.
- Capital Markets – risks related to exchange rates and trade, cryptocurrency.