TESTA RESIDENCIAL SOCIMI, S.A. and Subsidiaries...TOTAL ASSETS 2.707.716 2.356.079 TOTAL EQUITY AND...

TESTA RESIDENCIAL SOCIMI, S.A. and Subsidiaries Condensed consolidated interim financial statements for the six months ended 30 June 2018, prepared in accordance with International Financial Reporting Standards (IFRS) adopted by the European Union

Translation of a report originally issued in Spanish based on our work performed in accordance with the audit regulations in force in Spain and of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group in Spain (see Notes 2 and 14). In the event of a discrepancy, the Spanish-language version prevails.

TESTA RESIDENCIAL SOCIMI, S.A. AND SUBSIDIARIES

Condensed consolidated interim financial statements and directors’ report for the

six months ended 30 June 2018 2

ASSETS Notes 30/6/2018 31/12/2017 EQUITY AND LIABILITIES Notes 30/6/2018 31/12/2017

NON-CURRENT ASSETS: EQUITY: 6Concession projects 4 154.830 156.343 Share capital 132.270 125.863Other intangible assets 295 99 Issue premium 1.416.193 1.332.879Property, plant and equipment 483 70 Reserves 6,2 (52.986) (133.046)Investment property 5 2.461.703 2.106.079 Other equity holder contributions (19) -Non-current financial assets - 9.480 9.812 Prior years' losses (11.916) (1.754)

Collection rights, Service concession arrangements 3.447 4.738 Profit for the year attributable to the Parent 8.932 70.146Other financial assets 6.033 5.074 Valuation adjustments (3.704) (336)

Deferred tax assets 10.844 11.083 Equity attributable to the Parent 1.488.770 1.393.752Total non-current assets 2.637.635 2.283.486 Non-controlling interests 6,3 777 772

Total equity 1.489.547 1.394.524

NON-CURRENT LIABILITIES:Provisions 8 320 320Non-current financial liabilities - 1.093.742 841.232

Non-current bank borrowings 7 695.575 470.545Derivatives 7 5.053 120Other non-current liabilities 8 393.114 370.567

Deferred tax liabilities 105.693 105.953Total non-current liabilities 1.199.755 947.505

CURRENT LIABILITIES:Provisions 8 - 1.019Current financial liabilities - 2.482 2.539

Current bank borrowings 7 2.482 2.539Current payables to related companies 11,2 5.400 5.400Trade and other payables - 9 7.244 5.092

CURRENT ASSETS: Payables to suppliers 3.125 3.168Trade and other receivables 3.098 1.432 Current tax liabilities 793 523 Other current financial assets - 3 Other payables to public authorities 290 243Prepayments and accrued income 37 - Other payables 3.036 1.158Cash and cash equivalents 12 66.946 71.158 Current accruals 3.288 -

Total current assets 70.081 72.593 Total current liabilities 18.414 14.050TOTAL ASSETS 2.707.716 2.356.079 TOTAL EQUITY AND LIABILITIES 2.707.716 2.356.079

Notes 1 to 14 described in the accompanying explanatory notes and Appendix I are an integral part of the condensed consolidated statement of financial position at 30 June 2018.


TESTA RESIDENCIAL, SOCIMI, S.A.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 30 JUNE 2018(Thousands of euros)




Notes

CONTINUING OPERATIONS:Revenue 10,1 36.990 22.336 Other operating income 75 31Personnel expenses 10,2 (2.932) (1.462)Other operating expenses 10,3 (121.348) (10.980)Depreciation and amortisation charge 4 (1.654) (1.560)Gains/(losses) from asset disposals - 256 Changes in fair value of investment property 5 125.099 41.490 OPERATING PROFIT 36.230 50.111

Finance costs (4.754) (3.378)Change in fair value of financial instruments 7 and 8 (22.290) 108 PROFIT BEFORE TAX 9.186 46.841 Corporate income tax (249) (247)PROFIT FOR THE PERIOD FROM CONTINUING OPERATIONS 8.937 46.594 Attributable to shareholders of the Parent 8.932 46.594 Attributable to non-controlling interests 5 -

BASIC EARNINGS PER SHARE (in euros): 6,4 0,0691 0,5158DILUTED EARNINGS PER SHARE (in euros): 0,0691 0,5158

Translation of a report originally issued in Spanish based on our work performed in accordance with the audit regulations in force in Spain and of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the

regulatory financial reporting framework applicab le to the Group in Spain (see Notes 2 and 14). In the event of a discrepancy, the Spanish-language version prevails.

The accompanying explanatory notes 1 to 14 and Appendix I are an integral part of the condensed consolidated income statement for the six-month period ended 30 June 2018.

TESTA RESIDENCIAL, SOCIMI, S.A.AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENT FOR THESIX-MONTH PERIOD ENDED 30 JUNE 2018

(Thousands of euros)

30/6/201730/6/2018




30/06/2018 30/6/2017

PROFIT PER THE INCOME STATEMENT (I) 8.937 46.594OTHER COMPREHENSIVE INCOME:Income and expenses recognised directly in equity- Arising from cash flow hedges (5.706) 60 TOTAL COMPREHENSIVE INCOME RECOGNISED DIRECTLY IN EQUITY (II) (5.706) 60 Amounts transferred to income statement Arising from cash flow hedges 2.338 -TOTAL AMOUNTS TRANSFERRED TO INCOME STATEMENT (III) 2.338 -TOTAL COMPREHENSIVE INCOME (I+II+III) 5.569 46.654

Attributable to shareholders of the Parent 5.562 46.654Attributable to non-controlling interests 7 -


regulatory financial reporting framework applicable to the Group in Spain (see Notes 2 and 14). In the event of a discrepancy, the Spanish-language version prevails.

The accompanying explanatory notes 1 to 14 and Appendix I are an integral part of the condensed consolidated statement of changes in equity for the six-month period ended 30 June 2018.


CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE

(Thousands of euros)SIX-MONTH PERIOD ENDED 30 JUNE 2018




Equity Prior Profit Valuation attributable to the Total

Share Issue Shareholder years' for the adjust Parent Non-controlling equitycapital premium Reserves contributions profit/(loss) period ments Company interests

Balance at 31 December 2016 46.766 411.032 192.295 - - 24.781 (489) 674.385 - 674.385

Consolidated comprehensive income - - - - - 46.594 60 46.654 - 46.654 Capital increases 52.220 607.533 (1.147) - - - - 658.606 - 658.606 Distribution of 2016 profit - - 26.535 - (1.754) (24.781) - - - -

Balance at 30 June 2017 98.986 1.018.565 217.683 - (1.754) 46.594 (429) 1.379.645 - 1.379.645

Balance at 31 December 2017 125.863 1.332.879 (133.046) - (1.754) 70.146 (336) 1.393.752 772 1.394.524

Consolidated comprehensive income - - - - - 8.932 (3.368) 5.564 5 5.569 Capital increases (Note 6) 6.407 83.314 (248) - - - - 89.473 - 89.473 Acquisition of own shares - - - (19) - - - (19) - (19)Transfers between equity items - - 80.308 - (10.162) (70.146) - - - -

Balance at 30 June 2018 132.270 1.416.193 (52.986) (19) (11.916) 8.932 (3.704) 1.488.770 777 1.489.547


The accompanying explanatory notes 1 to 14 and Appendix I are an integral part of the condensed consolidated statement of changes in equity for the six-month period ended 30 June 2018.


CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE

SIX-MONTH PERIOD ENDED 30 JUNE 2018





Notes 30/6/2018 30/6/2017

CASH FLOWS FROM OPERATING ACTIVITIES: 2.703 8.689

Profit for the year before tax 9.186 46.841

Adjustments to profit/(loss)- 14.615 (36.548) Amortisation and depreciation 4 1.654 1.560Change in fair value of investment property 5 (125.099) (41.490) Changes in provisions for liabilities and charges - 6Finance costs 4.754 3.378Change in fair value of financial instruments 7 and 8 22.290 (108) Other income and expenses 111.016 106

Changes in working capital- 4.090 681Trade and other receivables (1.666) 643Other current assets - 431Trade and other payables 871 (1.717)

Other assets and liabilities 4.885 1.324Other cash flows from/(used in) operating activities- (25.188) (2.285) Interest paid (4.804) (2.364) Borrowing costs - 108Income tax payments (1) (29) Other receipts/(payments) (20.383) -

CASH FLOWS FROM INVESTING ACTIVITIES: (231.275) 1.698Payments for investments- (231.275) (1.927) Investment properties 5 (230.525) (1.740) Property, plant and equipment (472) (93) Intangible assets (278) (94) Proceeds from sales of investments- - 3.625Investment properties - 3.625

CASH FLOWS FROM FINANCING ACTIVITIES: 224.360 (6.183) Proceeds from and payments for equity instruments- (267) 30Issue of equity instruments - 30

Acquisition of own shares (19) -

Payment of capital increases (248) - Proceeds from and payments for financial liability instruments- 224.627 (6.213) Proceeds from issue of bank borrowings 225.246 -

Repayment of bank borrowings (619) (6.213)

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (4.212) 4.204

Cash and cash equivalents at beginning of period 71.158 28.801

Cash and cash equivalents at end of period 66.946 33.005


regulatory financial reporting framework applicable to the Group in Spain (see Notes 2 and 14). In the event of a discrepancy, the Spanish-language version prevails.

condensed consolidated statement of cash flows for the six-month period ended 30 June 2018.

TESTA RESIDENCIAL, SOCIMI, S.A.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE

SIX-MONTH PERIOD ENDED 30 JUNE 2018


The accompanying explanatory notes 1 to 14 and Appendix I are an integral part of the





TESTA RESIDENCIAL SOCIMI, S.A. and Subsidiaries

Explanatory notes to the condensed consolidated interim consolidated financial statements for the six-month period ended 30 June 2018

1. Nature and Group activity

Testa Residencial, SOCIMI, S.A. (hereinafter, the Parent), was formed as a public limited company with the company name Vallehermoso Patrimonio, S.A., in Madrid on 4 January 2001, before the Notary José Aristónico García Sánchez, for an indefinite period.

On 24 June 2005, the company changed its name from Vallehermoso Patrimonio, S.A. to Testa Residencial, S.L.U.

On 7 April 2006, the Sole Shareholder of Testa Residencial, S.L.U., Testa Inmuebles en Renta, S.A., entered into a public deed before the Madrid Notary José Aristónico García Sánchez, with number 836/2006 of his notarial record book, with respect to the contribution by the Sole Shareholder of the business line involving the rental of homes located in Spain, in accordance with the decision of the Board of Directors of Testa Inmuebles en Renta, S.A. on 20 December 2005.

On 8 June 2015, Merlin Properties, SOCIMI, S.A. and the Sole Shareholder of Testa Residencial, S.L.U. (Testa Inmuebles en Renta SOCIMI, S.A.) entered into a binding agreement for the acquisition by Merlin Properties SOCIMI, S.A. of a majority stake (99.9%) in the share capital of Testa Inmuebles en Renta SOCIMI, S.A. In 2016, Merlin Properties, SOCIMI, S.A. became the Parent of the Testa Inmuebles en Renta SOCIMI, S.A. Group and its subsidiaries, which included Testa Residencial, S.L.U.

On 15 September 2016, the residential businesses of Merlin Properties, SOCIMI, S.A. (Testa Residencial, S.L.U.) and of Metrovacesa, S.A., were included, whereby the latter acquired control over Testa Residencial, S.L.U., although this latter legal entity was the one that survived from the standpoint of company law.

On 22 September 2016, the General Shareholders' Meeting requested the inclusion of the Parent in the REIT tax system, applicable from 1 January 2016, changing its company name from Testa Residencial S.A.U. to Testa Residencial, SOCIMI, S.A. The Parent with tax ID no. A82865890 was legally registered in the Madrid Mercantile Register.

Since 23 February 2017, the Parent's registered office has been located at Paseo de la Castellana, 257, in Madrid. Previously, its registered office was found at calle Ventura Rodriguez, 7, Madrid.

The Parent's object consists of the lease of homes in Spain that have been built, promoted or acquired.

Testa Residencial, SOCIMI, S.A. and Subsidiaries (hereinafter, “the Group”), engage mainly in the acquisition and management (through leases to third parties) of homes, and may also invest to a lesser extent in other leased assets.

The tax regime of the Parent is regulated by Real Estate Investment Trust (REIT) Law 11/2009, of 26 October, amended by Law 16/2012 of 27 December. Article 3 establishes the investment requirements of this type of company, namely:




1. REITs must have invested at least 80% of the value of their assets in urban properties earmarked for lease, in land to develop properties to be used for that purpose, provided that development begins within three years following its acquisition, and in equity investments in other companies referred to in Article 2.1 of the aforementioned Law.

The value of the asset is calculated based on the average of the quarterly individual balance sheets of the year. To calculate this value, the Company may opt to substitute the carrying amount for the market value of the items contained in these balance sheets, which will apply to all the balance sheets of the year. Any money or collection rights arising from the transfer of the aforementioned properties or investments made in the year or in prior years will not be included in the calculation unless, in the latter case, the reinvestment period referred to in Article 6 of the aforementioned Law has expired.

2. Similarly, at least 80% of the rental income for the tax period corresponding to each year, excluding the rental income deriving from the transfer of ownership interests and properties used by the Company to achieve its principal object, once the retention period referred to below has elapsed, should be obtained from the lease of properties and dividends or shares of profits arising from the aforementioned investments.

This percentage must be calculated on the basis of the consolidated profit if the company is the parent of a group, in accordance with the criteria established in Article 42 of the Spanish Commercial Code, regardless of its place of residence and of the obligation to formally prepare consolidated financial statements. Such a group must be composed exclusively of the REITs and the other entities referred to in article 2.1 of the aforementioned Law.

3. The properties included in the REIT's assets should remain leased for at least three years. The time during which the properties have been made available for lease will be included in calculating this term, with a maximum of one year. The term will be calculated:

a) For properties included in the REIT's assets before the company avails itself of the regime, from the beginning of the first tax period in which the special tax regime established in Law 11/2009, of 26 October, applies, provided that at that date, the asset is leased or made available for lease. Otherwise, the following shall apply.

b) For properties developed or acquired subsequently by the Company, from the date on which they were leased or made available for lease for the first time.

c) In the case of shares or ownership interests in the companies referred to in Article 2.1 of the aforementioned Law, these should be retained as assets of the REITs for at least three years following their acquisition or, as the case may be, from the beginning of the first tax period in which the special tax regime established in that Law applies.

The shares of the REIT must be admitted to trading on a regulated market or multilateral trading system in Spain or in any EU Member State or member of the European Economic Area, or on a regulated market in any country or territory in which there is an effective exchange of tax information, without interruption through the tax period (article 4 of the REIT Law). All of the Parent's shares have been listed on the Mercado Alternativo Bursátil (alternative stock market) since 26 July 2018 (see Note 13).

As established by Transitional Provision One of Real Estate Investment Trust Law 11/2009, of 26 October, amended by Law 16/2012, of 27 December, the Company may opt to apply the special tax regime under the terms and conditions established in Article 8 of Law 11/2009, of 26 October, even if it does not meet the requirements therein, provided that such requirements are met within two years after the date of the option to apply that regime.

Failure to meet this condition will require the Parent to file corporate income tax returns under the general tax regime from the tax period in which the aforementioned condition is not met, unless the situation is rectified the following tax period. The Parent will also be obliged to pay, together with the amount relating to the aforementioned tax period, the difference between the amount of tax payable under the general tax regime and the amount paid under the special tax regime in the previous tax periods, including any applicable late payment interest, surcharges and penalties.

The corporate income tax rate for REITs was set at 0%. However, where the dividends that the REIT distributes to its shareholders holding an ownership interest exceeding 5% are exempt from tax or are subject to tax rate




lower than 10%, the REIT shall be subject to a special charge of 19%, which shall be considered to be the corporate income tax charge, on the amount of the dividend distributed to these shareholders. If applicable, this special charge must be paid by the REIT within two months after the dividend payment date.

2. Basis of presentation of the condensed consolidated interim financial statements and consolidation principles

2.1 Regulatory framework

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

- The Code of Commerce and other corporate legislation.

- The International Financial Reporting Standards (IFRSs) as adopted by the European Union in accordance with Regulation (EC) No. 1606/2002 of the European Parliament and Spanish Law 62/2003, of 30 December, on tax, administrative and social order measures.

- Law 11/2009, of 26 October, amended by Law 16/2012, of 27 December, regulating Real Estate Investment Trusts (REITs) and all other Spanish corporate law.

- All other applicable Spanish accounting regulations.

The Group’s 2017 consolidated financial statements were prepared in accordance with the regulatory financial reporting framework detailed in the preceding paragraph. Accordingly, they present fairly the Group's consolidated equity and consolidated financial position at 31 December 2017 and the consolidated results of its operations, the changes in consolidated equity and the consolidated cash flows in the year then ended.

The separate and consolidated financial statements of Testa Residencial SOCIMI, S.A. for 2017, prepared by its directors, were approved by the shareholders at the General Shareholders’ Meeting held on 26 April 2018.

The separate financial statements of the remaining Group companies for 2017, prepared by the related directors, were approved by the shareholder or the sole shareholder on 6 June 2018 and 2 July 2018.

These condensed consolidated interim financial statements are presented in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting and were authorised for issue by the Parent’s directors on 6 September 2018, all in conformity with article 12 of Royal Decree 1362/2007.

In accordance with IAS 34, the interim financial report is intended to provide an update on the latest complete set of annual consolidated financial statements prepared by the Group, focusing on new activities, events and circumstances that took place in the period and not duplicating information previously reported in the consolidated financial statements. Therefore, the condensed consolidated interim financial statements at 30 June 2018 do not include all the information and disclosures required in complete consolidated financial statements prepared in accordance with International Financial Reporting Standards, adopted by the European Union, so the accompanying condensed consolidated interim financial statements should be read in conjunction with the Group’s annual consolidated financial statements for the year ended 31 December 2017.

The consolidated results and determination of consolidated equity are a product of the accounting policies and principles, measurement bases and estimates followed by the Parent’s directors in the preparation of the condensed consolidated financial statements. The accounting policies and measurement bases used relate to those applied in the consolidated financial statements for 2017, except for the standards and interpretations that took effect in the first half of 2018.

2.2 Basis of presentation of the condensed consolidated interim financial statements

The condensed consolidated interim financial statements for the six-month period ended 30 June 2016 were obtained from the accounting records of the Parent and of the companies included in the scope of consolidation, and were prepared in accordance with the financial reporting regulatory framework detailed in Note 2.1 above; accordingly, they present fairly the Group's consolidated equity and consolidated financial position at 30 June 2018 and the consolidated results of its operations, the changes in consolidated equity and the consolidated cash flows generated at the Group in the six-month period then ended.




In order to present the various items that make up the condensed consolidated interim financial statements on a consistent basis, the accounting policies and measurement bases used by the Parent were applied to all the companies included in the scope of consolidation.

These condensed consolidated interim financial statements at 30 June 2018 were reviewed by the auditors. The figures at 30 June 2017 and 31 December 2017 are presented for comparison purposes only.

2.2.1 Adoption of International Financial Reporting Standards effective beginning on or after 1 January 2018

The following standards, amendments to standards and interpretations became effective in the first half of 2018 and have been used by the Group, where applicable, in preparing the condensed consolidated interim financial statements:

Standards, amendments and interpretations

Description

Obligatory application in annual reporting periods beginning on or after:

IFRS 15 Revenue from Contracts with Customers and clarifications

The new revenue standard will affect all industries and sectors in a cross-cutting manner to a greater or lesser extent. It replaces all current standards and interpretations in force on revenue. The new IFRS 15 model is much more prescriptive and is based on rules, and has a vastly different conceptual approach that may give rise to significant changes to the profile of revenue.

1 January 2018

IFRS 9 Financial Instruments This standard contains three main sections: Classification and measurement, hedge accounting and impairment. The central axis of the financial asset classification and measurement model is the business model and the characteristics of the financial asset. The focus of the hedge accounting model aims for closer alignment with economic risk management and demands fewer rules. Lastly, the impairment model changes from the current incurred loss to an expected loss model.

1 January 2018

Amendment to IFRS 2 Classification and Measurement of Shared-Based Payment Transactions

These are limited amendments that clarify specific matters such as the accounting for the effects of vesting conditions on cash-settled share-based payments, the classification of share-based payment transactions with net settlement clauses and certain aspects of the modifications to the type of share-based payment.

1 January 2018

Amendment to IFRS 4 Insurance Contracts Provides entities with the option of applying the overlay approach (IFRS 9) or the deferral approach, within the scope of IFRS 4.

1 January 2018

Amendments to IAS 40 Reclassification of Investment Property

The amendment clarifies that a reclassification of an investment as investment property shall only be permitted when it can be demonstrated that there has been a change in use.

1 January 2018

IFRS 1 First-time adoption of IFRS Elimination of certain short-term exemptions (improvements to IFRSs, 2014 - 2016 cycle).

1 January 2018

IAS 28 Investments in Associates and Joint Ventures.

Clarification regarding the option to measure at fair value (improvements to IFRSs, 2014 - 2016 cycle).

1 January 2018

IFRIC 22 Foreign Currency Transactions and Advance Consideration

This interpretation establishes the “transaction date” in order to establish the exchange rate applicable to transactions with advance considerations in foreign currency.

1 January 2018

IFRS 15 did not have a significant impact to the extent that such standard excludes the lease arrangements from its scope, which continue to be regulated by the accounting standard (IAS 17/IFRS 16). Given the obligations arising under the SOCIMI statutory scheme, the Group has no significant income other than lease income.




IFRS 9 did not have a significant impact, since it did not lead to refinancing, under the new standard, derivative instruments arranged by the Group come under the same recognition and measurement criteria under the new standard as under IAS 39, and the balance of accounts receivable is not significant either, taking into account that the insolvency risk is less than 1% of revenue and that the clients deliver a guarantee as guarantee of their credit.

The remaining standards and amendments did not have a material impact.

All accounting principles and measurement bases with a material effect on the condensed consolidated interim financial statements were applied in their preparation.

2.2.2 Standards not in force in 2018

The following standards had not come into force in the first half of 2018, either because their effective date is subsequent to the date of the interim consolidated financial statements or because they had not yet been adopted by the European Union:

Standards, amendments and interpretations

Description

Obligatory application in annual reporting periods beginning on or after:

IFRS 16 Leases Replaces IAS 17 and the associated interpretations. The new standard proposes a single accounting model for lessees, including all leases in the statement of financial position (with some limited specific exceptions) with a similar impact to that of current finance leases (depreciation of the asset in terms of the right of use and finance expense on the amortised cost of the liability).

1 January 2019

Amendments to IFRS 9 Prepayment Features with Negative Compensation

This amendment permits measurement at amortised cost for some financial assets that can be prepaid for a smaller amount than the principal amount outstanding and interest on that principal.

1 January 2019

IFRIC 23 Uncertainty over Income Tax Treatments

This interpretation clarifies how to apply the recognition and measurement criteria set out in IAS 12 when there is uncertainty regarding whether a tax authority will accept a given tax treatment applied by the entity.

1 January 2019 (1)

Amendments to IAS 28 - Investments in Associates and Joint Ventures

This clarifies that IFRS 9 must be applied to long-term investments in associates or joint ventures if the equity method is not applied.

1 January 2019 (1)

Improvements to IFRSs 2015-2017 cycle Amendments to certain standards. 1 January 2019 (1)

Amendment of IAS 19 Plan Amendment, Curtailment or Settlement

Clarifies how to calculate current service cost and net interest for the remainder of an annual period when there is an amendment, curtailment or settlement of a defined benefit plan.

1 January 2019 (1)

IFRS 17 Insurance Contracts Replaces IFRS 4. Sets out the recognition, measurement, presentation and disclosure requirements for insurance contracts.

1 January 2021 (1)

(1) Not yet adopted by the European Union.

The Group is currently assessing the impact of the future application of the standards – which is mandatory from 1 January 2019 onwards – on the consolidated financial statements once they enter into force. It cannot reasonably estimate the impact until this analysis is complete. IFRS 16 Leases will supersede the current IAS 17 and will be effective as of 1 January 2019. The main change is that it includes a single accounting model for lessees, including all leases in the statement of financial position (with certain limited exceptions) as if they were financed purchases, with a similar impact to that of current finance leases. In contrast, lessor accounting will continue to use a dual model, similar to IAS 17. The Group accordingly believes the impact of adoption of this standard will be immaterial.




The other main change lies in the amendment of IAS 40 as a result of the implementation of IFRS 16, which means that the right-of-use assets held by the Group under a lease will be classified and measured in the same way as the remaining investment property. The impact of this amendment will involve the classification of concession projects under investment property, with an increase in value of approximately 17.3 million euros.

2.3 Functional currency

The presentation currency of the condensed consolidated interim financial statements is the euro, which is the functional currency of the economic environment in which the Group operates.

2.4 Comparison of information

In accordance with the International Financial Reporting Standards adopted by the European Union, the information contained in the condensed consolidated interim financial statements for the six-month period ended 30 June 2017 is presented for comparison purposes with the information for the six-month period ended 30 June 2018 for the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated statement of changes in equity and the condensed consolidated statement of cash flows and with the information for the year ended 31 December 2017 for the condensed consolidated statement of financial position.

2.5 Responsibility for the information and for the estimates made

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

In the Group’s condensed consolidated interim financial statements for the six-month period ended 30 June 2018, 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.

2. The market value of the Group's investment property. The Group obtained valuations from independent experts at 30 June 2018.

3. The fair value of certain financial instruments.

4. The measurement of provisions and contingencies.

5. Management of the financial risk and, in particular, of liquidity risk.

6. The recovery of deferred tax assets and the tax rate applicable to temporary differences.

7. The definition of the transactions performed by the Group as a business combination pursuant to IFRS 3 or as an asset acquisition.

8. Compliance with requirements regulating Real Estate Investment Trusts.

Changes in estimates:

Although these estimates were made on the basis of the best information available at 30 June 2018 on the events analysed, future events may require these estimates to be modified prospectively (upwards or downwards), in accordance with IAS 8. The effects of any change in estimates would be recognised prospectively in the corresponding consolidated income statement. 2.6 Contingent assets and liabilities

In the first six months of 2018, there were no significant changes in the Group's main contingent assets and liabilities.




2.7 Correction of accounting errors

No significant errors were found when preparing the condensed consolidated interim financial statements for the six-month period ended 30 June 2018 that would require a restatement of the amounts included in the 2017 consolidated financial statements. 2.8 Seasonality of the Group’s operations

Given the activities in which Group companies engage, operations are not particularly cyclical or seasonal. Therefore, no specific disclosures were provided in this regard in these explanatory notes to the condensed consolidated interim financial statements for the six-month period ended 30 June 2018.

2.9 Condensed consolidated statement of cash flows

The condensed consolidated statement of cash flows was prepared by using the indirect method and the terms used are defined as follows:

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

2. Operating activities: regular activities engaged in by companies that belong to the consolidated group, in addition to other activities that do not fall under the categories of investing or financing activities.

3. Investing activities: the acquisition, disposal or holding by other means 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 equity and borrowings and that are not operating activities.

2.10 Materiality

In determining the disclosures of items in these explanatory notes to the condensed consolidated interim financial statements or other matters, the Group, in accordance with IAS 34, has assessed their materiality in relation to the condensed consolidated interim financial statements for the six-month period ended 30 June 2018.

2.11 Segment reporting

An operating segment is a component of the Group that engages in business activities from which it may earn ordinary revenues and incur expenses and whose operating results are regularly reviewed by the Group’s chief operating decision-maker to make decisions about resources to be allocated to the segment and to assess its performance, and for which different financial information is available.

The Parent's directors consider that the Group's sole business is the lease of homes, all located in Spain. Accordingly, all activities performed by the Group constitute a unique business operating segment.

3. Changes in the scope of consolidation and other variations

There were no significant changes to the Group’s scope of consolidation in the first six months of 2018.

The 2017 consolidated financial statements provide information on the consolidated Group companies at that date.

4. Concession projects, other intangible assets and property, plant and equipment

Changes in the first six months of 2018 under “Concession projects”, “Other intangible assets” and “Property, plant and equipment” are due mainly to period depreciation and amortisation, totalling 1,654 thousand euros, recognised under “Depreciation and amortisation charge” in the accompanying condensed consolidated income statement.




5. Investment property

The detail of and changes in this heading in the six-month period ended 30 June 2018 were as follows:

At 30 June 2018

Thousands of euros

Additions

30.06.2018

Change in value of

investment property

31.12.2017

Buildings for lease 2,106,079 230,525 125,099 2,461,703 Investment property 2,106,079 230,525 125,099 2,461,703

At 31 December 2017

Thousands of euros

Business combination Additions Retirements

31.12.2017

31.12.2016

Change in value of

investment property

Buildings for lease 912,304 413,601 719,050 (4,085) 65,209 2,106,079 Investment property 912,304 413,601 719,050 (4,085) 65,209 2,106,079

Buildings for lease

The changes in buildings for lease recognised in the six-month period ended 30 June 2018 relate to the following:

- In May and June 2018, the Group's Parent entered into a purchase agreement with a third party to acquire 1,450 homes, mainly located in Catalonia, Madrid, the Balearic Islands, the Valencia Autonomous Community and Andalusia, totalling 225,538 thousand euros, also increasing the acquisition cost by 1,607 thousand euros. The acquisition materialised through the signing of two mortgage loans, of which 99,390 thousand euros and 130,000 thousand euros, respectively, had been drawn down (see Note 7).

- Also, in the first half of 2018, the Parent and the rest of the Group subsidiaries make investments to upgrade amounting to 3,390 thousand euros.

Investment property is stated at fair value. The amount of revenues recognised in the condensed consolidated income statement for the six-month period ended 30 June 2018 arising from the measurement at fair value of investment property, came to 125,099 thousand euros (65,209 thousand euros in 2017).

The Group takes out the insurance policies it considers necessary to cover the risks that might affect its investment property. At 30 June 2018, the Parent's directors estimated that all these risks had been adequately covered.

At 30 June 2018, the Group did not have any significant firm investment property purchase commitments.

No finance costs were capitalised during the six-month period ended 30 June 2018.

At 30 June 2018, the Group had a mortgage guarantee on several properties with a fair value of 816,860 thousand euros to secure loans drawn down in the amount of 330,436 thousand euros.




At 30 June 2018, the Group operated 883,906 square metres of gross leasable housing and 47,775 square metres of gross leasable commercial premises.

As of June 30, 2018, the occupancy rate of the entire real estate portfolio of the Group was 91%.

Related income and expenses

In the six-month period ended 30 June 2018, revenues arising from investment property rentals owned by the Group stood at 34,784 thousand euros and the net operating expenses for the items related thereto came to 8,410 thousand euros.

Measurement of fair value 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, at the end of each semester, the fair value reflects the market conditions of the investment property items at that date. The fair value is determined by reference to the appraisals carried out every six months by independent valuers.

The market value of the Group’s investment property at 30 June 2018, calculated on the basis of valuations made by Savills Consultores Inmobiliarios, S.A. independent appraisers not linked to the Group, amounted to 2,461,703 thousand euros (2,106,079 thousand euros at 31 December 2017). 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), using the discounted cash flow method, and applying the following two different assumptions:

Profitability assumption (used for all buildings at which the Group owns all units): The method used to calculate the market value of investment property involves drawing up 10-year income and expense projections 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 projections of net revenues in year 11. The market values thereby obtained are analysed through the calculation and analysis of the capitalisation of return implicit in such values. The projections are designed to reflect the best estimate of future revenues and expenses from the investment properties. Both the exit yield and the discount rate are determined by taking into account Spanish and institutional market conditions. The percentage of investment property valued using such assumption at 30 June 2018 amounted to 46% of the total (51% at 31 December 2017).

Settlement assumption (used for all buildings at which the Group does not own all units): The method used to calculate the market value of investment property assumes the payment of the homes once the agreement expires. It involves drawing up income and expense projections for each asset, adjusted at the reporting date using a market discount rate. The selling prices are obtained by comparing the property under study with other similar properties recently sold or which are being offered on the market, making the corresponding adjustments based on differentiating factors. The projections are designed to reflect the best estimate of future revenues and expenses from the investment properties. The discount rate is determined by taking into account Spanish and institutional market conditions. The percentage of investment property valued using such assumption at 30 June 2018 amounted to 54% of the total (49% at 31 December 2017).

In any event, considering the situation of the rental property market, significant differences might arise between the fair value of the Group’s investment property and their effective realisable values.

Accrued fees by the Group to appraisal companies for appraisals at 30 June 2018 and 2017 were as follows:




Euros

2018 2017

Appraisal services 51.750 45.000

Total 51.750 45.000

Disclosure of the fair value of investment property

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

At 30 June 2018

Thousands of euros Total Level 1 Level 2 Level 3

Recurring fair value measurements - - Investment property Housing 2,461,703 - - 2,461,703 Total assets measured at fair value on a recurring basis 2,461,703 - - 2,461,703

In the six-month period ended 30 June 2018, there were no transfers of assets between the different levels.

At 30 June 2018, the detail of the gross surface area is as follows:

The main assumptions used by appraisal companies to calculate the fair value of investment property were as follows: At 30 June 2018

Autonomous Communities Discount rate (%)

Exit yield (%) Average market

rental (€/m2/month)

Average selling price

(Euros/m2)

Madrid 5.43% 3.96% 11.91 3,293 Catalonia 5.35% 4.26% 11.61 3,203 Galicia 5.97% 3.85% 6.21 1,987 Remaining autonomous communities 5.83% 4.48% 7.94 1,807 Total 5.63% 4.15% 9.86 2,492

31 June 2018

Square metres Gross leasable area

Madrid Autonomous Community

Catalonia Castilla y

León Galicia Andalusia

Valencia Autonomous Community

Rest of Spain

Total

Investment property

448,550 51,603 38,423 54,612 30,550 62,286 245,656 931,681

% weight 48.14% 5.54% 4.12% 5.86% 3.28% 6.69% 26.37% 100.00%




The effect of a one-quarter, one-half or one-point variation in the required rate of return, both on the assumptions of profitability and settlement, calculated as rent divided by the market value of the assets, on investment property in consolidated assets and in the condensed consolidated income statement, would be as follows:

Thousands of euros 30.06.2018

Assets Consolidated net profit

0.25% 0.50% 1% 0.25% 0.50% 1% Increase in rate of return (29,448) (58,099) (113,594) (29,448) (58,099) (113,594) Decrease in rate of return 29,694 60,239 123,331 29,694 60,239 123,331

Thousands of euros 31.12,2017


0.25% 0.50% 1% 0.25% 0.50% 1% Increase in rate of return (25,886) (51,043) (100,200) (25,886) (51,043) (100,200) Decrease in rate of return 26,456 53,516 109,475 26,456 53,516 109,475

The effect of a 1%, 5% and 10% variation in the rent considered, on the assumptions of profitability had the following impact on consolidated assets and the condensed consolidated income statement with respective to investment property:



1% 5% 10% 1% 5% 10% Increase in income 10,616 53,258 106,333 10,616 53,258 106,333 Decrease in income (12,330) (57,662) (115,406) (12,330) (57,662) (115,406)






1% 5% 10% 1% 5% 10% Increase in income 10,226 51,001 102,199 10,226 51,001 102,199 Decrease in income (10,732) (53,795) (108,407) (10,732) (53,795) (108,407)

The effect of a quarter- and half-point variation in the exit yield considered, on the assumption of profitability, on the condensed consolidated income statement with respect to investment property would be as follows:


Assets Consolidated net

profit

0.25% 0.50% 0.25% 0.50% Increase in exit yield (51,477) (96,729) (51,477) (96,729) Decrease in exit yield 59,095 127,730 59,095 127,730


Assets Consolidated net

profit

0.25% 0.50% 0.25% 0.50% Increase in exit yield (48,944) (91,959) (48,944) (91,959) Decrease in exit yield 56,221 121,553 56,221 121,553

The effect of a 1%, 5% and 10% variation in the selling price considered, on the assumption based on settlement has the following impact on consolidated assets on the condensed consolidated income statement with respect to investment property:

Thousands of euros 30.06.2018 Assets Consolidated net profit

1% 5% 10% 1% 5% 10% Increase selling price 11,594 58.150 114,954 11,594 58.150 114,954 Decrease selling price (11,997) (59,825) (94,451) (11,997) (59,825) (94,451)






1% 5% 10% 1% 5% 10% Increase selling price 9,424 47,143 94,796 9,424 47,143 94,796 Decrease selling price (9,436) (47,153) (94,451) (9,436) (47,153) (94,451)

6. Equity and shareholders' equity

6.1 Share capital and issue premium

On 19 January 2018, the services agreement entered into with Merlin Properties SOCIMI, S.A. was terminated and the Parent incurred expenses amounting to 107,244 thousand euros (which includes the portion of non-recoverable VAT). This amount was calculated based on the Group's share price at the effective termination date (in accordance with the Group's NAV at that date), multiplied by the number of shares to be delivered in accordance with clause 9.2 of the aforementioned agreement (640,693,342 new shares).

The liability arising from the termination was settled through the capitalisation of 89,721 thousand euros, as explained in the following paragraph, and the payment in cash of 18,842 thousand euros corresponding to VAT, of which 17,523 thousand euros are not tax-deductible.

On 26 March 2018, the General Shareholders' Meeting of Testa Residencial SOCIMI, S.A., approved a capital increase via a conversion of debt into equity in the amount of 89,721 thousand euros, through the issue of 640,693,342 new shares of 0.01 euros par value each (6,407 thousand euros), with a share premium of 0,130037800013383 euros per share issued (83,314 thousand euros). This capital increase was subscribed in full by Merlin Properties SOCIMI, S.A.

On 26 March 2018, the Board of Directors approved the redenomination of shares, from 13,227,020,257 shares of 0.01 euro par value each to 132,270,202 shares of 1 euro par value each. In For total number of shares grouped together to be a multiple of the number stipulated in the exchange ratio, prior to the redenomination, the voluntary redemption of 57 shares was approved.

At 30 June 2018, the share capital of Testa Residencial SOCIMI, S.A. amounted to 132,270 thousand euros, and is represented by 132,270,202 ordinary shares of 1 euro par value each, all of the same class, all fully subscribed and paid, granting its holders the same rights.

The significant shareholders of the Parent, with direct or indirect ownership interests at 30 June 2018, were as follows:

At 30 June 2018

Shares % of

share capital Direct Indirect Total

Banco Santander, S.A. 17,331,791 31,432,889 48,764,680 36.87%

Merlin Properties SOCIMI, S.A. 22,420,089 - 22,420,089 16.95%

Banco Bilbao Vizcaya Argentaria, S.A. 4,889,621 28,501,307 33,390,928 25.24%

Acciona Real Estate S.L. 26,454,040 - 26,454,040 20.00%

Other 1,240,465 - 1,240,465 0.94%




Issue premium

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

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

6.2 Reserves

Details of reserves at 30 June 2018 and 31 December 2017 are as follows:

Thousands of euros 30.06.2018 31.12.2017 Legal reserve 3,203 3,203 Other reserves (162,321) (162,073) Reserves in consolidated companies 106,132 25,824

Total reserves (52,986) (133,046)

Legal reserve

Pursuant to article 274 of the Consolidated Spanish Limited Liability Companies Law, 10% of profit in each year must be transferred to the legal reserve until the balance of this reserve reaches at least 20% of share capital.

The legal reserve may not be distributed and if it is used to offset losses -only insofar as no other sufficient reserves are available for this purpose- it must be replenished with future profits.

At 30 June 2018, the Group had not attained the minimum level of the legal reserve stipulated in the Consolidated Spanish Limited Liability Companies Law.

Pursuant to the Real Estate Investment Trust (REIT) Law 11/2009, the legal reserve of the companies that have opted to avail themselves of the special tax regime established in the aforementioned law, must not exceed 20% of the share capital.

As mentioned in Notes 3 and 13 to the 2017 consolidated financial statements, in accordance with the terms of the shareholders' agreement, Acciona Real Estate, S.L. is entitled to redeem the shares subscribed in the contribution described in these notes if the Group has not listed its securities on a continuous market prior to 21 September 2022. If such situation occurs, the Parent must deliver, in exchange for the redeemed shares, an equivalent amount to the percentage represented by such shares with respect to the Group's EPRA NAV at the date of such redemption. The payment can be made, at the Parent's discretion, in cash or through the refund of the net assets received in the capital increase subscribed by Acciona Real Estate, S.L. and, if necessary, the difference with respect to the Group's EPRA NAV at the redemption date will be paid to a greater or lesser extent in cash. In accordance with IAS 32, the Group recognised the commitment it holds with Acciona Real Estate, S.L., recognising a financial liability equivalent to the present value of the amount to be redeemed, which amounted to 375,517 thousand euros at 30 June 2018 (see Note 8).

The Parent's directors consider it highly probable that the Group will list its shares on the continuous market prior to 21 September 2022. Therefore, the option to redeem the shares of Acciona Real Estate, S.L. will expire, and the liability will immediately become equity.

Reserves in consolidated companies

The detail of reserves at consolidated companies at 30 June 2018 and 31 December 2017 was as follows:




Thousands of euros 30.06.2018 31.12.2017 Testa Alquileres Urbanos, S.L.U. (252) (66) Valdgrand 6, S.A.U. 525 - Compañía Urbanizadora del Coto, S.L. 7,974 - Testa Residencial, SOCIMI, S.A. 97,884 25,890

106,132 25,824 6.3 Other equity holder contributions As of June 30, 2018, the Parent Company holds its own shares for an amount of 19 thousand euros, representing 0.001% of the share capital. The movement during the first six months of the financial year 2018 was as follows:

Share number

Thousands of euros

Amount as of January 1, 2018 - - Adictions 1,457 19

Amount as of June 30, 2018 1,457 19 Additions for the 2018 fiscal year correspond to the acquisition of 1,457 treasury shares representing a 0.001% of its share capital. The purchase of the shares has been made at a price of 13 euros per share. The total investment made amounts to 19 thousand euros. 6.4 Non-controlling interests

The changes in “Non-controlling Interests” in the six-month period ended 30 June 2018, together with the profit/(losses) attributed to non-controlling interests, were as follows:

Thousands of euros

Balance at 31 December 2016 - Non-controlling interests arising from business combinations Acciona Real Estate, S.L.

732

2017 profit/(losses) attributable to non-controlling interests 40

Balance at 31 December 2017 772

Profit/(losses) for the six-month period ended 30 June 2018 attributable to non-controlling interests

5

Balance at 30 June 2018 777

“Non-controlling interests” in the accompanying condensed consolidated statement of financial position at 30 June 2018 relates to the minority shareholders (0,345%) of Compañía Urbanizadora del Coto, S.L.

6.5 Basic earnings per share

Basic earnings per share are calculated by dividing profit or loss for the year attributable to the Parent's ordinary shareholders by the weighted average number of ordinary shares outstanding during the year, excluding treasury shares.




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

30.06.2018 30.06.2017 Profit for the period attributable to: holders of equity instruments 8,932 46,594 of the Parent (thousands of euros) Weighted average number of shares outstanding (in thousands) 129,297 90,332

Basic earnings per share (euros) 0,0691 0,5158

The average number of ordinary shares outstanding is calculated, based on the new number of shares, once redenominated (see Note 6.1), as follows (in thousands):

Number of shares 30.06.2018 30.06.2017 Ordinary shares at beginning of the period 125,863 46,766 Capital increases 6,407 52,221 Average effect of outstanding shares (2,973) (8,655) Weighted average number of ordinary shares outstanding 129,297 90,332

Diluted

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

At 30 June 2018, the Parent does not have different classes of potentially dilutive ordinary shares.

7. Non-current and current financial liabilities

7.1 Bank borrowings

The detail of “Non-current and current financial liabilities” at 30 June 2018 and 31 December 2017 is as follows:




Thousands of euros

30.06.2018 31.12.2017

Non-current: Measured at amortised cost Syndicated loan 350,000 350,000 Syndicated loan arrangement costs (1,905) (1,819) Total syndicated loan 348,095 348,181 Mortgage loans 351,994 123,224 Arrangement expenses (4,514) (860) Total other loans 347,480 122,364

Measured at fair value

Derivative financial instruments 5,053 120

Total measured at fair value 5,053 120

Total non-current 700,628 470,665 Current: Measured at amortised cost Mortgage loans 2,238 2,238 Debt interest 244 301 Total amortised cost 2,482 2,539 Total current 2,482 2,539

For financial liabilities measured at amortised cost, the difference between the carrying amount and the fair value is not significant.




7.2 Loans

The detail of loans at 30 June 2018 and 31 December 2017 is as follows:

30 June 2018

Thousands of euros Bank borrowings

Limit Debt

arrangement expenses

30.06.2018

Non-current Current Current interest

Syndicated loan 450,000 (1,905) 350,000 - 98 Mortgage loans 354,842 (4,514) 351,994 2,238 146

Total 804,842 (6,419) 701,994 2,238 244

31 December 2017

Thousands of euros Bank borrowings

Limit Debt

arrangement expenses

31.12.2017

Non-current Current Current interest

Syndicated loan 800,000 (1,819) 350,000 - 191 Mortgage loans 125,462 (860) 123,224 2,238 110

Total 925,462 (2,679) 473,224 2,238 301

Parent Company syndicated loan

On 20 December 2017, the Parent entered into a syndicated loan without a mortgage guarantee, in the amount of 800 million euros. Such loan was earmarked to repay the Parent's former syndicated loan, amounting to 250 million euros, set to mature in May 2018, and to repay the syndicated mortgage loan taken out by the subsidiary Compañía Urbanizadora del Coto S.L. of 77 million euros, set to mature in September 2022. The main terms and conditions of this syndicated loan, not secured by a mortgage loan, are as follows:

- This loan comprises three tranches:

a) The first tranche consists of a bank loan with a corporate guarantee of 350 million euros, maturing in December 2022, with an interest rate tied to the Euribor + 120 basis points. The total amount of the first tranche is repaid on maturity and was earmarked in full to repay the syndicated loans of the Parent and of Compañía Urbanizadora del Coto S.L. At 30 June 2018, the first tranche was fully drawn down.

b) The second tranche consists of a bridge loan for 350 million euros, maturing in December 2019, with an initial cost of Euribor + 50 basis points. This tranche was repaid on 16 April 2018.

c) The third tranche is a revolving credit line, amounting to 100 million euros. This credit facility matures in December 2022 and accrues interest at the Euribor + 120 basis points, tied to the Company's rating. This financing will be used for general corporate purposes. At 30 June 2018, the Parent had not made any drawdowns on this credit facility.




This bank financing with a corporate guarantee has reporting obligation commitments with respect to the separate and consolidated financial statements and to budgets. Also, on a half-yearly basis, the Group must comply with certain hedging ratio commitments such as Loan to Value and the proportion existing between Group revenues and debt interest (“ICR”) and the existing proportion between the value of unsecured assets on debt without mortgage collateral ("unencumbered ratio"). At 30 June 2018, the Group was complying with the financial ratios established in this agreement, and the directors consider that they will also be complied with at the end of 2018 and in the coming years. Mortgage loans

At 30 June 2018, the Group had taken out the following mortgage loans:

Initial date

Maturity date

Thousands of euros

Long- Short-

Financial entity Limit term term Interest Mortgage guarantee

Banco Santander, S.A. 2/12/2013 2/12/2023 21,016 20,016 1,000 27 Property of Osuna and Benquerencia-Toledo

ING Direct, NV. 30/9/2015 20/7/2022 63,200 63,200 - 3 Property of Pavones,

Valdebernardo, Alcorcón, Plaza De Castilla

CaixaBank 22/9/2017 1/10/2022 16,830 16,490 340 32

Property of Mercedes Formica, Ronda de

Segovia and José M. Perdis

Bilbao Bizkaia Kutxa 30/12/2014 30/12/2044 23,796 22,898 898 - Property of Bentaberri

ING Direct, NV. 2 18/5/2018 18/5/2025 130,000 130,000 - 21 (1)

CaixaBank 2 24/5/2018 24/5/2025 100,000 99,390 - 15 (2)

Total 354,842 351,994 2,238 98

(1) The assets located in Madrid secured by a mortgage guarantee with ING are as follows:

Embalse Navacerrada, Las Tablas Ligonde, Las Tablas 813, Tomas Lopez, Méndez Alvaro, María Moliner, El Pinar II, Alcalá, Jose Antonio Zapata, Joaquín Ruiz Jiménez, Planetario, Córdoba and Castroviejo.

(2) The assets acquired in 2018 and secured by a mortgage guarantee with CaixaBank are as follows: Almeria Medico Francisco, Granollers Fontanella, Sabadell Puig, Barcelona Rossello, Sabadell Carretera Barcelona, Palmas De Gran Canaria Las Serventia, Gijon Prosperidad, Gijon Concejo De Salas, Gijon Alava, Villanueva De La Cañada, Madrid Josefa Fernandez, Pinto Edmundo Meric, Madrid Paseo Direccion, Majadahonda Navaluenga, Malaga Saturno, Malaga Huerta, Malaga Rosario, Malaga San Quintín, Manacor Institut, Capdepera de la Mar, Inca Perez Galdos, Muro Albufera, Pamplona Santos Ochandategui, Berrioplano Leonor, Sevilla Castillo De Cumbres, Sevilla San Jorge¸ Aldaia Cuenca, Mislata 8 De Marzo, Valencia Alemania, Burjassot Maria Ros, Valencia Salvador Giner, Paterna San Agustin, Valencia Juan De Aguilo, Valladolid Calle La Galana, Valladolid Doctor Sanchez, Valladolid Pedro De La Gasca, Zaragoza Predicadores, Zaragoza San Pablo, Palau Reguer, Son Serra and Vazquez Humesque.

As explained in Note 5, pursuant to the acquisition of homes in the first half of 2018, the Parent took out two new mortgage loans for 130,000 thousand euros and 99,390 thousand euros, respectively, maturing in 2025, both with interest at the 1-month Euribor plus a spread of 1%.

Both ING's two mortgage loans and CaixaBank's mortgage loan signed in 2018 have certain reporting obligation commitments with respect to the separate and consolidated financial statements. Also, on a half-yearly basis, the Group must comply with certain hedging ratio commitments such as Loan to Value and the proportion existing between Group revenues and debt interest (“ICR”). At 30 June 2018, the Group was complying with the financial ratios established in this agreement, and the directors consider that they will also be complied with at the end of 2018 and in the coming years.

Loan repayment dates




Details of the Group’s loan repayment dates at 30 June 2018 are as follows:

Thousands of euros

Mortgage loan Syndicated loan Total

Year

2018 1,619 - 1,619

2019 2,238 - 2,238

2020 2,238 - 2,238

2021 2,238 - 2,238

2022 80,738 350,000 430,738

More than 5 years

265,161 - 265,161

354,232 350,000 704,232

The balances of bank borrowings only reflect the amount drawn down.

In the six-month period ended 30 June 2018, the contractual conditions for the payment of the outstanding loans and all other contractual terms and conditions had been met.

7.3 Derivatives

The interest rate derivatives entered into by the Group in force at 30 June 2018 and 31 December 2017 and their fair values at that date (in thousands of euros) are as follows:

At 30 June 2018

Holder

Thousands of euros

Maturity Interest rate Notional Fair value ex-

credit risk Liabilities

Income statement (expenses/revenues)

ING 30/09/2020 0,300% 37,240 427 427 129 HSBC France 14/12/2022 0,140% 56,000 242 232 428 MedioBanca 14/12/2022 0,140% 112,000 469 450 863 Goldman Sachs 14/12/2022 0,140% 56,000 236 226 425 Citibank Europe 14/12/2022 0,140% 56,000 233 224 427 Citibank Europe 2 25/05/2025 0,607% 130,000 2,126 2,105 20 CaixaBank 1 24/05/2025 0,452% 7,115 1,362 1,348 42 CaixaBank 2 24/05/2025 0,580% 92,276 43 42 4

546,631 5,138 5,054 2,338




At 31 December 2017

Holder

Thousands of euros

Maturity Interest rate Notional Fair value ex-

credit risk Liabilities

Income statement (expenses/revenues)

ING 30/09/2020 0.30% 37,240 418 414 (18) HSBC France 14/12/2022 0.14% 56,000 (42) (52) (42) MedioBanca 14/12/2022 0.14% 112,000 (108) (128) (107) Goldman Sachs 14/12/2022 0.14% 56,000 (45) (55) (45) Citibank Europe 14/12/2022 0.14% 56,000 (49) (59) (50)

317,240 174 120 (262)

The fair values of interest rate derivatives are determined by the Group using a discounted cash flow analysis based on the rates implied on the yield curve of the euro according to market conditions at the measurement date.

These financial instruments were classified as level 2 according to the calculation hierarchy established in IFRS 7.

At 30 June 2018, the Group had entered into interest rate derivatives with a fair value of 5,138 thousand euros, with respect to which the Group elected the hedge accounting of cash flows permitted under IFRS 9, appropriately designating the hedging relationships in which these derivatives are hedging instruments of the financing used by the Group, thereby neutralising changes in cash flows for payments of interest established and establishing the variable rate payable. These hedging relationships have been prospectively and retrospectively highly effective on a cumulative basis, since the date of designation. The remaining derivatives have been designated as accounting hedges.

At 30 June 2018, the Group recognised in equity a total of 3,704 thousand euros (336 thousand euros at 31 December 2017) is respect of the change in fair value of the derivatives satisfying these requirements, while recognising under “Change in the fair value of financial instruments” in the condensed consolidated income statement 2,338 thousand euros as a result of the derivative financial instruments that have not satisfy the hedging requirements. In addition, in the first six months of 2018 finance costs were incurred amounting to 673 thousand euros.

As a result of the Parent’s application on 22 September 2016 to come within the special tax statutory scheme for SOCIMIs (Spanish real estate investment trusts) under Law 11/2009, of 26 October (REITs Act), effective from 1 January 2016, the Company has recognised in equity the fair values of the derivatives having no tax effect.

The Group has made an adjustment to its valuation techniques in order to calculate the fair value of its derivatives. The Company includes a bilateral credit risk adjustment in order to reflect both its own and counterparty risk to the fair value of the derivatives. The Company applied the discounted cash flow method considering a discount rate affected by the inherent risk of these financial instruments.

To determine the fair value of financial derivatives, the Group used valuation techniques widely accepted in the market based on the current and expected future exposure, adjusted by the probability of default and the potential loss given default in the event of breach of the contract. DVA (Debt Value Adjustment) or CVA (Credit Value Adjustment) was thus estimated.

The current and expected future exposure of the derivatives are estimated on the basis of simulating movement scenarios for a range of market variables, such as yield curves, exchange rates and volatilities under market conditions at the measurement date. In addition, to adjust credit risk account was taken of the Group's net exposure to each counterparty where the financial derivatives entered into with that counterparty come under a financial transaction master agreement that allows netting. For counterparties with available credit information, credit spreads are obtained from Credit Default Swaps (CDS) quoted in the market. Where credit information is unavailable, the Group uses comparable entities as a reference. The Group has engaged the services of Chatham Financial Europe Ltd to measure the fair value of derivatives.




At 30 June 2018, the effect on liabilities and on the condensed consolidated income statement before taxes of the variation of 50 basis points in the estimated credit risk rate was as follows:

Thousands of euros

Scenario Liabilities Equity Profit before tax

Credit risk increase of 0.5%. (6,481) - 6,481 Credit risk decrease of 0.5%. 6,662 - (6,662)

8. Other current and non-current liabilities

The detail of these headings at 30 June 2018 and 31 December 2017 is as follows:

Thousands of euros 30.06.2018 31.12.2017

Non-current Other financial liabilities 375,517 355,565 Provisions 320 320 Guarantees and deposits received

17,597 15,002

Current Provisions - 1,019

Total 393,434 371,906

Other non-current financial liabilities

As described in Notes 3 and 13 to the 2017 consolidated financial statements, the Parent is bound, at Acciona Real Estate, S.L.'s discretion, to reduce capital if the Parent's securities are not listed on the continuous market by 21 September 2022. Only shares subscribed by Acciona Real Estate, S.L. in 2017 will be redeemed and the amount of the capital reduction will be determined based on the EPRA NAV at the date of the capital reduction. The payment can be made, at the Parent's discretion, in cash or through the delivery of assets received in the contribution made in 2017 and, if necessary, the difference with respect to the Group's EPRA NAV at the redemption date will be paid in cash.

Pursuant to the accounting regulations in force, the Group recognised a non-current liability arising from the commitment mentioned in the previous paragraph. In accordance with IAS 32, this liability was initially recognised at the present value of the Group's estimated net asset value and updated at 30 June 2018 based on the change in fair value.

The expense due to the change in fair value in the six-month period ended 30 June 2018 amounted to 19,952 thousand euros, recognised under “Change in the fair value of financial instruments” in the accompanying condensed consolidated income statement for the six-month period ended 30 June 2018.

To calculate the fair value, the Group estimated the current EPRA NAV, based on the Group's equity, adjusted by the implicit gains from the concession projects and agreements, valued at market. The assumptions used to determine the fair value of the Group's investment property are disclosed in Note 5.

The Parent's directors consider it highly probable that the Group will list its shares on the continuous market by 21 September 2022. Therefore, the option to redeem the shares of Acciona Real Estate, S.L. will expire, and the liability will immediately become equity.

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




9. Trade and other payables

The breakdown of “Trade and other payables” at 30 June 2018 and 31 December 2017 is as follows:

Thousands of euros

30.06.2018 31.12.2017 Trade and other payables: Payables to suppliers 3,125 811 Trade payables to related parties - 2,357 Other payable 2,352 567 Personnel (salaries payable) 679 591 Current tax liabilities 793 523 Other payables to public authorities 290 243 Customer advances 5 -

Total 7,244 5,092

The Parent’s directors consider that the carrying amount of trade payables approximates their fair value.

At 30 June 2018, "Other payables" includes 1,392 thousand euros relating to the estimated expenses incurred and pending payment by the Group in the ongoing stock market flotation.




10. Revenue and expenses

10.1. Ordinary income

Details of "Revenue" by business line for the six-month period ended 30 June 2018 and 2017 are as follows:

Thousands of euros

2018 2017

Rental income 36,980 21,866

Income from the provision of services 10 470

Total revenue 36,990 22,336

a) Geographical segment reporting

The breakdown of rental income for the six-month period ended 30 June 2018, by geographical market, was as follows:

Autonomous Communities Thousands

of euros %

Madrid 23,685 64.0% Basque Country 2,006 5.4% Catalonia 1,928 5.2% Valencia Autonomous Community 1,416 3.8% Balearic Islands 1,395 3.8% Canary Islands 1,349 3.6% Galicia 1,083 2.9% Castilla La Mancha 1,063 2.9% Navarre 1,058 2.9% Other 1,997 5.5% Total 36,980

10.2 Personnel expenses

The breakdown of personnel expenses in the six-month periods ended 30 June 2018 and 2017are as follows:

Thousands of euros

2018 2017

Wages, salaries and similar expenses 2,444 1,205

Other employee welfare costs and taxes 488 257

Total personnel expenses 2,932 1,462

The average number of employees at the companies composing the Group in the six-month period ended 30 June 2018 was 80.

Long-term executive incentive plan and exit bonus




On 26 March 2018, the Parent's Board of Directors proposed to the General Shareholders' Meeting to grant an incentive plan payable in shares of the Parent to key executives and other employees in the event the Parent is listed on the continuous market. This plan will be settled by the majority shareholders.

- Key executives will receive the shares in the three years following the listing on the continuous market of the Parent (at a rate of 15%, 35% and 50%), with the amount to be received being a percentage of their annual remuneration. Accrual will depend on the listing price on the continuous market compared with the EPRA NAV at that date (adjusted for the repurchasing right of Acciona Real Estate, S.A.) and to their continued employment at the Group at the delivery dates.

- The remaining employees will receive a fixed amount in shares on the first anniversary of the exclusion from the computerised trading system (subject to their permanence as Group employees).

The amount receivable for this incentive, based on the best estimate by the Parent's directors, will range from a minimum of 1.6 million euros to a maximum of 5.1 million euros.

In this regard, at 30 June 2018, the Group had not recognised any expense for the aforementioned plan since it had not been approved by the General Shareholders' Meeting.

The Group will recognise this plan in accordance with the requirements of IFRS 2 Share-based Payment, recognising the expense during the vesting period (three years for key executives and one year for the remaining employees), with a charge to equity.

10.3 Other operating expenses

Details of this income statement heading in the six-month periods ended 30 June 2018 and 2017 are as follows:

Thousands of euros

2018 2017

Non-recoverable expenses on leased properties 8,509 5,602

General expenses – Overheads 1,644 1,508

Professional services 655 244

Office rental 108 155

Taxes other than income tax 693 934

Other 188 175

General expenses – Non-overheads 110,934 4

Discontinuation of services agreement (Note 6.1) 107,244 -

Other 3,690 4

Losses, impairment and changes in provisions 14 6

Other 247 3,860

Total 121,348 10,980

11. Related party balances and 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.

11.1 Related party transactions




The Group carries out transactions with related parties at arm's length. Transfer prices are adequately documented. Therefore, the Parent’s directors consider that there are no significant risks that could give rise to any material future liabilities. Details of transactions with related parties in the six-month periods ended 30 June 2018 and 2017 are as follows:

Six-month period ended 30 June 2018 Thousands of euros

Other

operating expenses

Finance costs Rental income Income from the provision of services

Merlin Properties, SOCIMI, S.A. (a) 107,244 - - - Banco Santander, S.A. - 485 99 10 TOTAL 107,244 485 99 10 (a) Includes an amount of 17,523 thousand euros relating to the portion of non-deductible VAT.

Six-month period ended 30 June 2017

Thousands of euros

Other operating

expenses Finance costs

Merlin Properties, SOCIMI, S.A. 3,923 - Banco Bilbao Vizcaya Argentaria, S.A. - 629 Banco Santander, S.A. 14 2,855 TOTAL 3,937 3,484

In 2016, the Parent entered into a services agreement with Merlin Properties, SOCIMI, S.A. to provide advisory, planning and strategic management services for the businesses, assets and liabilities, in exchange for an annual economic consideration of 7.7 million euros plus value-added tax (updated annually by 1.5%).

On 19 January 2018, the agreement was terminated, with the Parent paying an amount of 89,721 thousand euros arising from the withdrawal (see Note 6.1).

11.2 Related party balances

The detail of the balances with related parties at 30 June 2018 and 31 December 2017 is as follows:

30 June 2018

Thousands of euros

Current accounts and other payables

to Group companies and

associates Bank

borrowings Other liabilities (Notes 6 and 8)

Cash and cash equivalents

Merlin Properties, SOCIMI, S.A. - - - - Acciona Real Estate, S.L. 5,400 - 375,260 - Banco Bilbao Vizcaya Argentaria, S.A. - - - 4,592 Banco Santander, S.A. - 56,016 - 39,480 TOTAL 5,400 56,016 375,260 44,072




31 December 2017

Thousands of euros

Current accounts and other

payables to Group

companies and associates

Payables to suppliers

Bank borrowings

Other liabilities (Notes 6 and 8)


Merlin Properties, SOCIMI, S.A. - 2,357 - - - Acciona Real Estate, S.L. 5,400 - - 355,565 - Banco Bilbao Vizcaya Argentaria, S.A. - - - - 25 Banco Santander, S.A. - - 56,016 - 55,405 TOTAL 5,400 2,357 56,016 355,565 55,430

Under the shareholders' agreement entered into with Acciona Real Estate, S.L., the contributions made by the latter in 2017, once the commitment that the Parent had with one of its shareholders has been capitalised (see Note 6), should not be less than 20% of the Group's value at the date of the aforementioned contribution. As a result of this effect, mainly from the outflow of cash associated with the non-deductible input VAT arising from the termination of the services agreement with Merlin Properties SOCIMI, S.A., the contributions made by Acciona Real Estate, S.L. represented a value of less than 5,400 thousand euros at the 20% rate described previously. In this regard, the Parent considered that it must pay Acciona Real Estate, S.L. the amount of 5,400 thousand euros, which was recognised under "Current account and other payables to Group companies and associates".

11.3 Remuneration of directors and senior management

Remuneration paid in the six-month period ended 30 June 2018 to members of the Board of Directors and senior management of Testa Residencial, SOCIMI, S.A., by item, was as follows (in thousands of euros):

Salaries Attendance

fees Other items

Pension plans

Insurance premiums

(1) Termination

benefits Share-based

payments

Remuneration of individuals representing the Company

(2)

Board of Directors and senior management

694 - - - 32 - - -

(1) Includes the amount paid for the civil liability insurance premium for damages caused by acts or omissions by directors, totalling 28 thousand euros.

(2) Includes the remuneration paid to individuals representing the Company on the Board of Directors of other entities.

At 30 June 2018 and 31 December 2017, the Parent had not granted any advances or loans to Board members or senior management.

At the date of authorisation for issue of these condensed consolidated interim financial statements for the six-month period ended 30 June 2018, the Parent's directors were represented by 10 men and 1 woman (9 men and 1 woman at 31 December 2017).




11.4 Information regarding conflicts of interest involving directors

In the six-month period ended 30 June 2018, the members of the Board of Directors of Testa Residencial SOCIMI, S.A. had not informed other members of the Board of Directors of any direct or indirect conflict that they, or their affiliates as defined in the Spanish Limited Liability Companies Law, have with the Parent's interests.

12. Information on financial risk management

Financial risk factors

The Group's activities expose it to various types of financial risk: market risk, credit risk, liquidity risk and cash flow interest rate risk. The Group's overall risk management programme focuses on the uncertainty of financial markets and aims to minimise the potential 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 protects against 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, such as those for covering market risk, interest rate risk and liquidity risk, and for investing cash surpluses.

Market risk In light of current conditions in the property sector, the Group has established specific measures that it plans to adopt to minimise the impact of these factors on its financial position.

The application of these measures is dependent on the outcome of the sensitivity analyses that the Group performs periodically. These analyses take the following factors into consideration:

The economic environment in which the Group performs its activity: The design of various economic scenarios with different key variables that can affect the Group (e.g. interest rates, share prices, occupancy rates of investment property, etc.). The identification of variables that are interconnected and their degree of connection.

Time frame within which the assessment is made: The time frame for the analysis and the potential deviations shall be taken into account.

Credit risk

Credit risk is defined as the risk of financial loss to which the Group is exposed if a customer or counterparty defaults on its contractual obligations.

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

The Group has policies in place to limit customer credit risk and it manages its exposure to credit recovery risk as part of its normal activities through, among others, guarantees and securities.

The Group has formal procedures in place to detect impairment of trade receivables. By means of these procedures and individual analyses by business areas, delays in payment can be detected and methods for estimating the impairment loss can be established.

Details of the estimated maturities of the Group's financial assets on the consolidated statement of financial position at 30 June 2018 and 31 December 2017 are provided below. The accompanying tables reflect the analysis of the maturities of financial assets at 30 June 2018 and 31 December 2017:

At 30 June 2018

Thousands of euros




Less than 3 months

More than 3 and less than 6

months

More than 6 months and less

than 1 year Over 1 year Total

Guarantees and deposits - - - 6,033 6,033

Trade and other receivables 3,098 - - - 3,098

Prepayments and accrued income - 37 - - 37

Cash and cash equivalents 66,946 - - - 66,946

Total 70,044 37 - 6,033 76,114

At 31 December 2017

Thousands of euros

Less than 3 months

More than 3 and less than 6

months

More than 6 months and less

than 1 year Over 1 year Total

Guarantees and deposits - - - 5,074 5,074

Trade and other receivables 1,432 - - - 1,432

Other current financial assets - - 3 - 3

Cash and cash equivalents 71,158 - - - 71,158

Total 72,590 - 3 5,074 77,667


The Group has cash and cash equivalents totalling 66,946 thousand euros, which represents its maximum exposure to the risk of these assets.

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

Liquidity risk

Liquidity risk is defined as the risk that the Group will encounter in meeting obligations associated with financial liabilities that are settled by delivering cash or other financial assets.

The Group applies a prudent liquidity risk management policy, based on having sufficient liquidity to meet its obligations when they fall due, in both normal and stressed conditions, without incurring unacceptable losses or placing the Group's reputation at risk.

Below is a detail of the Group's exposure to liquidity risk at 30 June 2018 and 31 December 2017. The accompanying tables reflect the analysis of the financial liabilities, by their remaining contractual term to maturity.




At 30 June 2018

Thousands of euros

Less than 1 month

1 to 3 months3 months to

1 year Over 1 year Total

Bank borrowings 85 554 1,843 700,628 703,110 Other non-current liabilities - deposits and guarantees

- - - 17,917 17,917

Other non-current liabilities - - - 375,517 375,517

Payables to related parties - - 5,400 - 5,400 Trade and other payables (excluding balances with public authorities)

6,161 - - - 6,161

Prepayments and accrued income - - 3,288 - 3,288

Total 6,246 554 10,531 1,094,062 1,111,393

At 31 December 2017

Thousands of euros

Less than 1 month

1 to 3 months3 months to

1 year Over 1 year Total

Bank borrowings 301 1,000 1,238 470,665 473,204 Other non-current liabilities - deposits and guarantees

- - - 15,322 15,322

Other non-current liabilities - - - 355,565 355,565

Payables to related parties - - 5,400 - 5,400 Trade and other payables (excluding balances with public authorities)

4,326 - - - 4,326

Total 4,627 1,000 6,638 841,552 853,817

Solvency risk

At 30 June 2018, the Group's net bank borrowings amounted to 637,530 thousand euros, as shown in the following table:

Thousands of

euros Gross banking borrowings: Syndicated loan 350,000 Mortgage loans 354,232 Accrued interest 244 Cash and cash equivalents (66,946)

Net bank borrowings 637,530

Foreign currency risk

The Group is not exposed to exchange rate fluctuations as all its transactions are carried out in its functional currency.

Tax risk

As mentioned in Note 1, the Parent will adhere to the special tax regime for REITs. Pursuant to Article 6 of Law 11/2009 of 26 October 2009, amended by Law 16/2012 of 27 December, companies that have opted for the special tax regime are required to distribute profit for the year to the shareholders in the form of dividends, once all




obligations under commercial law have been met. The distribution must be approved within six months each year-end and paid in the month following the date of the distribution resolution.

As established by Transitional Provision One of Real Estate Investment Trust Law 11/2009, of 26 October, amended by Law 16/2012, of 27 December, the Company may opt to apply the special tax regime under the terms and conditions established in Article 8 of Law 11/2009, of 26 October, even if it does not meet the requirements therein, provided that such requirements are met within two years after the date of the option to apply that regime.

At 30 June 2018, the directors considered that the Company would comply with all the requirements established by the aforementioned Law once the transitional period ends. In this regard, on 26 July 2018, the Parent was included on the Mercado Alternativo Bursátil (alternative stock market).

13. Events after the reporting period

On 26 April 2018, the Boards of Directors of the Parent, Testa Residencial SOCIMI, S.A. (absorbing company) and subsidiary, Compañía Urbanizadora del Coto, S.L. (absorbed company) approved the planned merger between the companies, which was executed in a public deed and pending to place on file at the Mercantile Register. This transaction will not have any impact on the Testa Group's consolidated financial statements.

Additionally, since 26 July 2018, the Company's shares have been admitted to listing on the alternative stock market, all having the same voting and dividend rights. At that date, the initial flotation price was 13.90 euros per share.

On 16 July 2018, the Parent's General Shareholders' Meeting approved a long-term incentives plan aimed at certain Group executives, and the amount to be received was a percentage of their annual remuneration. The plan lasts for five years and includes a measurement period in the first three years, from 1 July 2018 until 30 June 2021.

The accrual of the incentive by the executives is dependent on achieving a level of compliance with the Group's business plan for 2018 - 2021 of over 90% during the measurement period.

The executive must also continue to provide his/her services to the Group on each of the settlement dates:

- At the end of the measurement period, the executives will receive 50% of the incentive in cash,

- Once a year has elapsed since the end of the measurement period, the executives will receive 25% of the incentive in cash, and

- Once two years have elapsed since the end of the measurement period, the executives will receive the remaining 25% of the incentive in cash.

If a level of compliance with the Group's business plan for 2018 - 2021 of over 90% is achieved, the amount to be received for this incentive, based on the directors' best estimate, will range from a minimum of 1.8 million euros to a maximum of 7.8 million euros. The Group will recognise the plan in accordance with the requirements of IFRS 19 Employee Benefits, recognising the expense in line as accrued (3, 4 and 5 years), with a credit to liabilities.

During the month of July, and before starting the quotation in the MAB, Testa has increased its treasury stock up to 601,991 shares, equivalent to 0.46% of the share capital.

In August 2018, Testa has agreed to purchase a portfolio of 549 homes for rent in the province of Madrid for an amount of 66.8 M €. The buildings are located in important municipalities in the south of Madrid: Pinto, Parla, Móstoles and Aranjuez. The buildings are rented by 95%, and the purchase amount is equivalent to 1,590 euros per square meter. An important part of the agreement (334 homes) has already been made effective in the month of August, and the rest is pending certain administrative procedures.

14. Explanation added for translation to English

These interim condensed consolidated financial statements are presented on the basis of the regulatory financial reporting framework applicable to the Group 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 principles and rules.




Appendix I

Subsidiaries at 30 June 2018

Thousands of euros

Profit/(loss) Other Total Dividends Carrying amount Consolidation

Company Registered offices / activity Equity interest

Share capital

Operating Net equity equity received Cost Impairment method Auditor

Compañía Urbanizadora del Coto, S.L.

The acquisition and development of property for subsequent rental / Paseo de la Castellana 257, Madrid

99.66% 15,315 1,937 2,147 210,742 228,204 - 290,040 - Full

consolidation Deloitte, S.L.

Testa Alquileres Urbanos, S.L.U. The acquisition and development of property for subsequent rental / Paseo de la Castellana 257, Madrid

100% 55,087 797 591 8,780 64,458 - 132,137 - Full

consolidation Deloitte, S.L.

Valgrand 6, S.A.U. The acquisition and development of property for subsequent rental / Paseo de la Castellana 257, Madrid

100% 10,013 169 138 529 10,680 - 12,266 (1,201) Full

consolidation N/A

INTERIM MANAGEMENT REPORT 1H 2018

TESTA RESIDENCIAL, SOCIMI, S.A. AND SUBSIDIARIES

INTERIM MANAGEMENT REPORT 1H 2018

TESTA RESIDENCIAL, SOCIMI, S.A. INTERIM MANAGEMENT REPORT: FIRST HALF OF 2018

EXECUTIVE SUMMARY

BUSINESS PERFORMANCE

FINANCIAL STATEMENTS Income Statement / Balance sheet and debt / Cash flow

VALUATION GAV Y NAV

ASSET PORTFOLIO

EPRA METRICS

TESTA SHARES

GLOSSARY

2

3

4

5

6

7

8

9

KEY HIGHLIGHTS

Translation of a report originally issued in Spanish. In the event of a discrepancy, the Spanish-language version prevails.

1

KEY HIGHLIGHTS1

PuentedeyMADRID

ı 4 ı

Interim Management Report 1H 2018

KEY HIGHLIGHTS

KEY EARNINGS HIGHLIGHTS

1H 2018 1H 2017 % Change

Rental income Eur M 36.98 21.87 69.1%

Net rental income Eur M 28.47 16.26 75.1%

Net rental income margin % 77.0% 74.4%

EBITDA Eur M -87.20 9.92 n.m.

Adjusted rental EBITDA Eur M 24.38 14.53 67.8%

Adjusted rental EBITDA margin % 65.9% 66.4%

FFO1 Eur M 19.58 12.24 59.9%

FFO1 per share Eur 0.148 0.124 19.7%

AFFO Eur M 17.53 10.50 66.9%

AFFO per share Eur 0.133 0.106 24.9%

KEY FINANCIAL HIGHLIGHTS

JUN 2018 DEC 2017 % Change

Portfolio gross asset value (GAV) Eur M 2,637.3 2,275.5 15.9%

Adjusted EPRA NAV Eur M 1,981.5 1,833.8 8.1%

Adjusted EPRA NAV per share Eur 14.98 13.86 8.1%

Net debt Eur M 636.1 402.0 58.2%

LTV ratio % 24.1% 17.7%

Cost of debt % 1.6% 1.5%

KEY OPERATING HIGHLIGHTS

JUN 2018 DEC 2017 % Change

No. of apartments Units 10,615 9,244 14.8%

Total surface area (GLA) sqm 1,002.483 881,687 13.7%

Residential surface area (GLA) sqm 953,662 837,739 13.8%

Annualized gross rental income (GRI) Eur M 85.0 72.4 17.5%

LFL growth in annualized rental income (12 months)*

% 11.9% 6.2%

Passing rent Eur/sqm/month 7.63 7.50 1.7%

Occupancy rate (surface area) % 91.4% 89.5%

* Includes impact from occupancy change and rent change.

1. Key Highlights

ı 5 ı


Madrid San Sebastián Barcelona Palma de Mallorca

C. Valenciana Las Palmas Otros

TESTA PORTFOLIO (no. of apartments)

GEOGRAPHICAL FOOTPRINT (% GAV)

1,500 1,500

9,24410,615

4,677

2014

2015

2016

2017

jun

2018

KEY SHARE PRICE DATA

SEPT 4th, 2018

Share price Eur 14.10

Total no. of shares issued Millon 132.27

Market capitalisation Eur M 1,865

6.5%

5.6%

5.0%

3.1%2.8%

17.6% 59.3%

1. Key Highlights

ı 6 ı


Las TablasMADRID

1. Key Highlights

EXECUTIVE SUMMARY2

Terrazas de Gran Vía ALICANTE

ı 8 ı


Key figures

EXECUTIVE SUMMARY

> Testa's current portfolio: 10,615 apartments, compared with 9,244 at the end of 2017.

> Gross rental income of 36.98 million euros in 1H18: +69.1% vs 1H17.

> Growth of annualized rental income (GRI): 85.0 million euros through June, +12.7% LFL vs. June 2017.

> Occupancy rate of 91.4%, marking an LFL improvement of 236 basis points in the first half of the year.

> Improvement in operating margins: net/gross rental margin of 77.0%; recurring EBITDA margin of 65.9%.

> Funds from operations (FFO1) amounted to 19.58 million euros in 1H18 (+98% vs. 1H17), equivalent to 0.148 euros per share.

> Appraisal of real estate assets (GAV) of 2,637 million euros, +4.3% LFL vs. December 2017.

> Adjusted EPRA NAV of 14.98 euros/share, +8.1% from 13.86 euros/share at year-end 2017.

> Start of listing of Testa shares on the Alternative Equity Market (Mercado Alternativo Bursátil: “MAB”) on 26/7/2018, with an initial reference price of 13.9 euros per share and an initial market capitalisation of 1,838 million euros.

ANNUALIZED GROSS RENTAL INCOME (GRI)

€ 85.0 M +11.9% LFL vs Dec 2017

NO. OF APARTMENTS

10,615 +14.8% vs Dec 2017

OCCUPANCY RATE

91.4% +236bp LFL vs. Dec 2017

NET RENTAL INCOME MARGIN (NRI/GRI)

77.0%

ADJUSTED EBITDA MARGIN

65.9%

FF01

€ 19.58 M +59,9% vs 1H17

PORTFOLIO VALUE (GAV)

€ 2,637 M +4.3% LFL vs Dec 2017

ADJUST. EPRA NAV

€ 14.98/sh +8.1% vs. Dec 2017

LTV RATIO

24.1%

2. Executive Summary

ı 9 ı


Strategy

Testa is the largest residential rental REIT (SOCIMI) in Spain. Our strategy is based on the acquisition and management of residential assets located in metropolitan areas with the greatest growth potential to provide sustainable returns for shareholders with a moderate risk profile. The company is managed internally with a staff of 80 employees.

Testa owns 10,615 residential units and 317 commercial premises, with a market value of 2,637 million euros according to the latest valuation report by Savills as of June 2018. The assets are located mostly in Madrid (59% of GAV) and, to a lesser extent, in other major metropolitan areas in Spain such as San Sebastián (7%), Barcelona (6%), Palma de Mallorca (5%), Las Palmas de Gran Canaria (3%) and Valencia (3%). All these areas feature scarce supply of residential property, sharper demographic growth, a higher household creation and higher per capita income than the Spanish average.

Moreover, 84% of the company's assets are less than 20 years old, making a good fit with customer preferences. This also implies smaller maintenance capex, allowing for a fairly high cash flow conversion rate. Meanwhile, 84% of rents are open market, and Testa owns either the entire building or the majority of the units in most cases.

The corporate strategy is geared towards improving the rental income, with a combination of higher occupancy and rent levels, while controlling operational costs, thereby boosting margins and shareholder returns. The Spanish residential market has seen a strong rental growth in the last few years, which lead us to expect higher revenues as our lease contracts are repriced up to market levels. We pursue an adequate balance between rent increases and a gradual improvement in occupancy, where our medium-term target is 95%.

Testa aims to be an active player in the consolidation and institutionalisation of the Spanish residential real estate market in a bid to bolster its leadership position and, above all, leverage economies of scale. The goal is to acquire between 1,000 and 2,000 apartments annually that are in line with the company's strategy regarding location, quality and profitability. Testa also intends to enter into turnkey built-to-let agreements with developers, for a volume of up to 10% of GAV.

Testa's dividend policy going forward entails the distribution of approximately 80% of FF01 each year, which easily complies with the mandatory dividend requirement of Spanish REITs.

BentaberriSAN SEBASTIÁN


ı 10 ı


Outlook

Testa sees scope for further organic growth in both rental income and in annualized rents in coming quarters. Key growth drivers will continue to be the occupancy rate and lease renegotiations, capturing the increases in the residential rental market and narrowing the gap between the company's current leases and market rents, which stands at 26% according to the report by the external valuer. We are confident that we can continue to improve our margins (net rental income and

adjusted EBITDA margins) through more efficient management of direct operating costs and general expenses, coupled with higher revenue.

We also have a pipeline of potential acquisitions, under study or in the negotiation phase, worth approximately 467 million euros and including 1,900 homes. The properties would meet our investment criteria, for which we currently estimate a gross initial yield of approximately 3.5%.

PamplonaNAVARRA


ı 11 ı


Developments

in the first half

In January 2018, Testa terminated its advisory, planning and strategic management services agreement with Merlin Properties earlier than scheduled. This agreement had

an annual cost of 7.7 million euros plus VAT. The cost of

early termination was 107.2 million euros, split between

89.7 million euros, that was converted into new Testa shares issued in March, and a cash

payment of 18.8 million euros related to the payment of VAT,

of which 17.5 million euros were considered as non-tax deductible.

In March 2018, Testa signed an agreement with CaixaBank

to acquire 1,458 apartments

for 228 million euros, in several stages. It completed

the acquisition of 1,329 and

121 apartments in May and

June, respectively, for 207

million euros and 19 million euros, respectively, with effect for financial purposes from June and July. That leaves eight apartments under the

agreement worth 1.5 million euros, which are expected to be acquired over the coming months.

In March 2018, Standard & Poor’s assigned Testa Residencial an investment grade rating of BBB-; outlook positive. This is a preliminary rating, subject to the admission of Testa's shares to listing on the Spanish main market (‘Mercado Continuo’).

In April 2018, Testa Residencial's Board of Directors approved the

planned merger with 99.65% -owned subsidiary Compañía Urbanizadora del Coto, S.L. The owners of the remaining

0.35% will receive Testa

Residencial shares worth 1.1 million euros. The exchange will be covered with treasury shares, so there is no need to issue new shares. The merger is expected to be completed within the third quarter of the year.

January 2018 March 2018 April 2018


ı 12 ı


Events after

the reporting period

In August 2018, Testa has agreed to acquire a portfolio of

549 rental apartments located in the province of Madrid for

a price of 66.8 million euros. The assets are situated in important municipalities in the South region of Madrid: Pinto, Parla, Móstoles and Aranjuez.

The buildings are currently 95% leased and the price implies

a value of 1,590 euros per square meter. An important

part of the agreement (334 apartments) has already been closed in August, while the rest is pending certain administrative procedures. The seller is a local private real estate company.

On 26 July 2018, shares of Testa Residencial began trading on the Spanish Alternative Equity Market (MAB), with an initial market capitalisation of

1,838 million euros, which corresponds to its approximate net asset value (adjusted EPRA NAV) based on the December 2017 appraisal. This fulfils one of the requirements of the Spanish REIT regime. The Company is open to the possibility of trading on the Spanish continuous market, in future, if conditions alllow.

In July 2018, and before the shares were listed on the MAB, Testa increased the amount of treasury shares held to

601,991, representing

0.46% of the share capital.

August 2018 May 2018 July 2018

In May 2018, Testa signed two new mortgages with banks to fund the acquisition of apartments from CaixaBank, for

130 million and 99 million euros, respectively. The two loans have similar terms and conditions, with a 7-year bullet maturity and a fixed annual cost

of approximately 1.6%.

In May 2018, Campo de Tiro

en Leganés (Madrid), with 80 apartments, was removed from the portfolio after the expiration of the surface rights. This asset generated

51,225 euros of monthly income. The concession in Torrejón de Ardoz (Madrid) will expire in September, resulting in the derecognition

of 64 apartments representing

33,671 euros of current monthly rents, with a very limited impact on GAV.


BUSINESS PERFORMANCE3

Mendez ÁlvaroMADRID

ı 14 ı


BUSINESS PERFORMANCE

RENTAL INCOME FOR THE PERIOD

€ M IH2018 IH2017 % Change

Residential 34.7 20.7 67.7%

Commercial 1.9 0.9 111.0%

Parking and other 0.3 0.2 36.8%

Total gross rental income 37.0 21.9 69.1%

Gross rental income

Annualized rental income (GRI)

Gross rental income in the first half of the year amounted to 36.98 million euros, of which 94% came from residential assets and the remaining 6% from other uses, such as commercial, car parks and other.

This marked a 69% increase from the first half of 2017. There were considerable changes in asset perimeter between the two periods, with the addition of 3,300 apartments in March 2017, around 1,100 in September 2017, and 1,450 in May and June this year. On a constant-perimeter basis, gross rental income increased by 9.2% year-on-year.

Leases in force at the end of June 2018 represented gross annualized rental income (GRI) of 85.01 million euros, up 56% year-on-year from June 2017. Excluding net changes in perimeter (24.1 million euros), like-for-like (LFL) growth in GRI was 11.9% year-on-year.

Annualized GRI increased by 17.5% in the first six months of 2018. Excluding perimeter changes, which accounted for a net annualized 8.4 million euros, GRI rose by 6.0% LFL in the period.

GRI growth was driven mostly by an increase in occupancy and the higher average in-place rent. Average passing rent ended 1H18 at 7.63 euros/sqm/month for the entire residential portfolio (+3.2% in the last six months and +7.4% year-on-year, both LFL). The average rent for open market assets (84% of the portfolio) stood at 7.99 euros/sqm/month.

Residential Commercial Parking and other

RENTS IN 1H18 BY USE

5% 1% 94%

3. Business Performance

ı 15 ı


IN-PLACE RENTS AT THE END OF THE PERIOD

JUN 2018 DEC 2017 JUN 2017

Chg. LFL %

JUN '18 vs DEC ’17

Chg. LFL %

JUN ’18 vs JUN ’17

Annualised gross rental income (Eur M) 85.01 72.36 54.50 6.0% 11.9%

Of which: residential use 80.09 67.77 51.96 5.9% 12.5%

Residential passing rent (Eur/sqm/month):

Total portfolio 7.63 7.50 6.75 3.2% 7.4%

Open market leases 7.99 7.87 6.98 3.7% 8.7%

TREND IN ANNUALIZED GRI Jun 2018 vs. Dec 2017 (Eur M)

TREND IN ANNUALIZED GRI June 2018 vs. June 2017 (Eur M)

72.454.5

24.1

2.2 4.10.1

8.40.3

2.31.7

GRI DEC '17

annualiz.

GRI JUN'17

annualiz.

Perimetereffect(net)

Perimetereffect(net)

Occupeffect

Occupeffect

Mix effect

Mix effect

LFLgrowth

in average

rents

LFLgrowth

in average

rents

GRI JUN '18 annualiz.

GRI JUN '18 annualiz.

85.0 85.0

Occupancy rate

The residential occupancy rate at end-June 2018 stood at 91.4%, up from 89.5% at end-December 2017. Stripping out the assets acquired recently from CaixaBank, with average occupancy of 88.5%, the occupancy rate for the rest of the portfolio was 91.8%. This marks a 236 basis point

LFL improvement in the six-month period. The occupancy rate is calculated as a percentage of the residential lettable area.


ı 16 ı


Lease reviews

In the first half of the year, a total of 1,027 new rental leases were signed and 875 renewed with the same tenants. Accordingly, rental prices for 20% of the portfolio were updated in the six-month period. The period also saw the departure of 884 tenants, representing 9% of the total portfolio. The first half of the year showed a net increase of 143 new tenants, leading to an improvement in the

occupancy rate. Monthly figures show a net positive balance in all months except June, which saw a larger number of departures arising from the recently added CaixaBank apartments. Excluding this impact, June also would have shown a net increase in tenants.

OCCUPANCY RATE %

VACANCY RATE BY TYPE %

84.5%

3.3% 2.5%2.7%

1.6% 1.9%2.2%

5.6%4.2%4.2%

91.0% 91.4%

Jun

2018

Jun

2018

Mar

201

8

Mar

201

8

Dec

201

7

Dec

201

7

ACTIVITY WITH TENANTS

4Q17 Jan '18 Feb' 18 Mar' 18 Apr' 18 May' 18 Jun' 18Accum. 1H18

Residential portfolio 9,244 9,244 9,244 9,244 9,244 10,494 10,615

Leases signed 1,193 379 308 338 272 317 288 1,902

Renewals 667 182 150 157 113 161 112 875

New tenants 526 197 158 181 159 156 176 1,027

Tenant departures -444 -147 -131 -156 -133 -129 -188 -884

Net increase in tenants 82 50 27 25 26 27 -12 143

% leases /total portfolio 13% 4% 3% 4% 3% 3% 3% 20%

WIP - under renewal <90 days of marketing Other


ı 17 ı


On average, prices of leases signed in the first half of this year were 17.7% higher than the previous leases, including renewals and new tenants, and all type of apartments (unrestricted and rent-protected). For open market units, average rents were 19.6% higher for new tenants and 16.3% higher for renewals. As the chart illustrates, the percentage increase for all leases remained at similar levels throughout the first half. Rent increases are mainly a reflection of the Spanish residential rental market, which

accumulates strong increases in the last three years. However, our average contractual rents remain below market prices in each location, which allows us to predict further rises in our rental income for coming quarters. Currently, Testa’s average rent per apartment is 685 euros per month for the total portfolio and 860 euros per month for the Madrid assets.

PERCENTAGE RENT REVIEW: TOTAL LEASES, NEW LEASES AND RENEWALS

4Q17 Jan '18 Feb' 18. Mar' 18 Apr' 18 May' 18 Jun' 18Average 1H2018

Renewals (unrestricted units) 18.2% 19.5% 16.7% 14.8% 15.3% 13.2% 18.2% 16.3%

New leases (unrestricted units) 19.3% 20.3% 21.3% 22.6% 17.4% 19.0% 17.0% 19.6%

Total leases * 15.2% 18.6% 17.6% 18.7% 16.5% 17.1% 17.4% 17.7%

* New rents vs. previous rent for all new leases and renewals signed in the period and for the entire portfolio (including unrestricted and rent-protected units).

% RENT REVIEW IN RENEWALS AND NEW LEASES *

* New rents vs. previous rent for all new leases and renewals signed in the period and for the entire portfolio (including open market and social housing).

15.2%

18.6%17.6% 16.5% 17.1% 17.4%

18.7%

Feb

201

8

Jan

2018

Ap

r 20

18

May

201

8

Jun

2018

Mar

201

8

4Q20

17


ı 18 ı


Difference between current and market rents (ERV)

Lease expiration profile

According to the Savills report, the average market rent in June 2018 was 9.93 euros/sqm/month for Testa's entire residential portfolio and 10.1 euros/sqm/month for open market housing. The latter is 26% above the average rents agreed of 7.99 euros/sqm/month at present, up from 25% at the end of 2017.

Of the more than 7,500 open market residential leases currently in force, 12% expire in the second half of 2018, 19% in 2019, 43% in 2020 and 26% in 2021. These figures refer to the maximum duration of each lease of three years according to current legislation. However, the tenant has the option to terminate the lease before expiry, and only has to fulfil one year of contract, with the option to extend it annually up to three years.

7.99 +26%

10.10

San MateoLAS PALMAS DE GRAN CANARIA

In- placerent

Market rent (ERV)

ESTIMATED RENTAL VALUE (ERV) VS. IN-PLACE RENT FOR OPEN MARKET HOUSING

(euros / sqm / month)


FINANCIAL STATEMENTS Income Statement / Balance sheet and debt / Cash flow4

Los Olivos de OrgazMADRID

ı 20 ı


FINANCIAL STATEMENTS

4.a. Income statement

CONSOLIDATED INCOME STATEMENT

€ M IH 2018 IH 2017 % Change

Rental income 36.98 21.87 69.1%

Direct operating expenses (net of recoveries) -8.51 -5.60 51.9%

Net rental income 28.47 16.26 75.1%

Net rental income margin, % 77.0% 74.4% 3.5%

Other revenue 0.09 0.50 -82.9%

Personnel expenses -2.93 -1.46 100.5%

General expenses -112.82 -5.38 1997.8%

EBITDA -87.20 9.92 -

Depreciation and amortisation -1.65 -1.56 6.1%

Operating provisions -0.01 0.00 -

Gain/(losses) on asset disposals 0.00 0.26 -

EBIT -88.87 8.62 -

Finance costs -4.75 -3.38 40.7%

Finance income 0.00 0.00 -

Change in value of financial instruments -22.29 0.11 -

Change in value of investment properties 125.10 41.49 201.5%

Profit before tax 9.19 46.84 -80.4%

Income tax -0.25 -0.25 0.9%

Non-controlling interests 0.00 0.00 -

Profit for the period 8.94 46.59 -80.8%

No. of shares (million), excluding treasury shares * 132.27 98.99

Net earnings per share (euros): 0.068 0.471 -85.6%

* The number of shares for 1H17 is adjusted for the reverse split.

4. Financial Statements

ı 21 ı


> Gross rental income increased by 69.1% year-on-year to 36.98 million euros. The period featured significant perimeter changes, mostly arising from the inclusion of assets in March 2017 (3,300 apartments, GAV of 665 million euros), in September 2017 (1,100 apartments, GAV of 400 million) and May-June 2018 (1,450 apartments worth 227 million euros). On a constant-perimeter basis, gross rents were up 9.2%, with an improvement in the occupancy rate and average in-place rent.

> Net rental income amounted to 28.47 million euros, with a net margin (NRI/GRI) of 77.0%, up from 74.4% in the first half of 2017.

> Personnel expenses increased due to the build up of an internal management team. This figure does not include the long-term incentive plan approved in July 2018, which will amount to around 1 million euros every six months as from 2H18. The average number of employees in the first half of 2018 was 80.

> General expenses included certain one-off expenses, totalling 111.6 million euros. The most significant are the 107.2 million for the termination of the service agreement with Merlin Properties and the 0.3 million euros for the costs incurred on the agreement up to the date of termination of 19 January 2018. It also included 4.0 million euros of non-recurring costs related to the listing preparation and other extraordinary expenses.

> Rental EBITDA adjusted for exceptional items amounted to 24.4 million euros in the first half, up 68% year-on-year, leaving a margin of 65.9% on gross rents.

> Depreciation and amortisation related to the Bentaberri asset in San Sebastián, which involve an administrative concession until 2069 and are measured at historical cost rather than fair value.

> Finance costs totalled 4.75 million euros, includes interest payments and the amortisation of loan arrangement expenses (0.40 million euros).

> The change in value of financial instruments relates mainly to Acciona's contingent liability, which is further explained in the balance sheet section.

> The change in value of investment properties was the result of the revaluation of assets in the six-month period based on the external appraisal. The first half featured a revaluation of the real estate portfolio of 125.1 million euros (+4.3% like-for-like increase vs December 2017).

> Net profit for the semester is 8.94 million euros, equivalent to 0.068 euros per share. We consider that the net profit is not the most useful metric to assess the underlying evolution of the Group, due to the impact of items like the change in the fair value of properties, with no impact on cashflow, or some non-recurring items which had a big impact this semester. Therefore, we prefer to focus on FFO1 and AFFO as metrics that better reflect the underlying evolution of the Testa business.

NET RENTAL INCOME AND EBITDA MARGINS, %

74.4% 73.9%77.0%

66.4%64.5% 65.9%

Net rental income margin Adjusted Ebitda margin %

IH 2017 2017 IH 2018


ı 22 ı


> Adjusted rental EBITDA excluding non-recurring costs and non-rental revenue amounted to 24.38 million euros in the first half, up 67.8% on the same period last year, leaving a margin of 65.9% on gross rents.

> FFO1 (funds from operations) amounted to 19.58 million euros, up 98% on the same period last year, or 0.148 euros per share (+48.4%).

> Testa spent 2.0 million euros on maintenance capex in the period, equivalent to 2.1 euros/sqm for the total portfolio.

> AFFO (FFO1 less maintenance capex) amounted to 17.53 million euros, or 0.133 euros/share.

Calculation of FFO1/AFFO

CALCULATION OF ADJUSTED EBITDA, FFO1 AND AFFO

€ M IH 2018 IH 2017 % Change

Reported EBITDA -87.20 9.92

(+) Management cost - Merlin 0.30 4.6

(+) Cost for termination of agreement - Merlin 107.24 0.0

(+) IPO/listing preparation costs 3.26 0.0

(+) Other adjustments 0.78 0.0

Adjusted rental EBITDA 24.38 14.53 67.8%

Adjusted rental EBITDA margin, % 65.9% 66.4%

(-) Interest paid -4.80 -2.26 112.9%

(+) Interest received 0.00 0.00

(-) Income taxes paid 0.00 - 0.03

FFO1 19.58 12.24 59.9%

(-) Maintenance capex -2.04 -1.74 17.4%

AFFO 17.53 10.50 66.9%

No. of shares (million), excluding treasury shares 132.27 98.99 33.6%

FFO1 per share (euros) 0.148 0.124 19.7%

AFFO per share (euros) 0.133 0.106 24.9%

€ 19.58 M Funds from operations (FF01) generated during the semester.


ı 23 ı


Testa invested 231.3 million to investment property in the first half of 2018, broken down as follows:

> 225.5 million euros in acquisitions of assets, mainly the portfolio purchased from CaixaBank (1,450 apartments). This transaction involved associated costs of 1.6 million euros, a figure which is included under Other investments. These apartments produce annual rent of 8.9 million euros according to the current leases and have an occupancy rate of 88.5%. Pending completion under the announced agreement is the acquisition of an 8-home building for 1.5 million euros.

> 2.0 million euros of maintenance capex, equivalent to 2.1 euros/sqm for the total portfolio. This figure, used to calculate FFO1, relates to expenditure on upgrades of investment properties, including the refurbishment of apartments between outgoing and incoming tenants, but excluding investments in recently acquired assets or investments that increase yield considerably, or acquisition costs. Average capex per apartment in the first half amounted to 1,670 euros, in line with our forecasts, with 747 units refurbished in the period owing to a higher-than-expected tenant rotation. Nevertheless, high rotation is resulting in higher increases in the average passing rent.

> 3.7 million euros of other investments. These entail investments in properties acquired recently for refurbishment (0.5 million euros), repositioning to achieve a significantly improved returns (0.5 million euros), investments in IT, furniture and equipment (0.8 million euros) as well as costs associated with acquisitions (1.8 million euros, coming from the CaixaBank acquisition and other transactions).

Breakdown of capex

DETAIL OF INVESTMENTS

€ M IH 2018 IH 2017 % Change

Acquisition of assets 225.5 660.0 65.8%

Euros/unit 155,537 198,981

Maintenance capex 2.0 1.7 17.4%

Euros/sqm/period 2.1 2.1 3.2%

Other investments 3.7 0.2

Total investments 231.3 661.9 65.1%

Málaga MÁLAGA


ı 24 ı


4.a. Balance sheet

ASSETS JUN 2018 DEC 2017

€ M

Non-current assets 2,637.6 2,283.5

Concession assets 154.8 156,3

Other intangible assets 0.3 0,1

Property, plant and equipment

0.5 0,1

Investment property 2,461.7 2,106.1

Non-current financial assets

9.5 9.8

Deferred tax assets 10.8 11.1

Current assets 70.1 72.6

Trade and other receivables

3.1 1.4

Other current financial assets

0.0 0.0


66.9 71.2

Total assets 2,707.7 2,356.1

EQUITY AND LIABILITIES

JUN 2018 DEC 2017

€ M

Equity 1,489.5 1,394.5

Shareholders’ equity 1,488.8 1,393.8

Non-controlling interests 0.8 0.8

Non-current liabilities 1,199.8 947.5

Non-current provisions 0.3 0.3

Non-current bank borrowings 695.6 470.5

Derivatives 5.1 0.1

Other non-current financial liabilities

393.1 370.6

Deferred tax liabilities 105.7 106.0

Current liabilities 18.4 14.1

Provisions 0.0 1.0

Current bank borrowings 2.5 2.5

Current payables to group companies

5.4 5.4

Trade and other payables

10.5 5.1

Total equity and liabilities

2,707.7 2,356.1

CONSOLIDATED BALANCE SHEET


ı 25 ı


> Investment property had a market value at 30 June 2018 of 2,461.7 million euros according to the external appraisal. The increase from December 2017 is due to the both the increase in market value and the investments in new assets made in the first half of 2018.

> Concession assets includes mainly the Bentaberri asset in San Sebastián, which includes the surface rights held to 2069, measured at historical cost and subject to annual depreciation rather than at fair value.

> Non-current financial assets includes 3.4 million euros of receivables from three leasehold or concession assets (Torrejón de Ardoz, Usera and Ventilla), which stipulate a fixed annual rent with the Madrid housing agency, IVIMA (Instituto de la Vivienda de Madrid) and entail no demand risk. The Campo de Tiro service concession arrangement expired in May, while the Torrejón de Ardoz concession expires in September this year. This balance sheet item also includes 6.0 million euros of deposits extended as guarantees.

> Shareholders’ equity stood at 1,488.8 million euros. A capital increase in favour of Merlin Properties for 89.7 million euros was carried out in the first half of the year, under which

the payable for termination of the services agreement was capitalised in exchange for shares of Testa.

> Other non-current financial liabilities includes 375.5 million euros related to the contribution of assets by Acciona in 2017. According to the agreement, if Testa is not listed on the Spanish main market (‘Mercado Continuo’) by September 2022, Acciona has the option to recover the value of its shares in the Company, taking the EPRA NAV at that date. From an accounting perspective, this liability will become equity automatically once the company begins listing on the Spanish main market (‘Mercado Continuo’). Testa considers it highly probable that this will occur before the deadline. Meanwhile, the change in the value of this liability is recognised in the income statement under “Change in value of financial instruments”.

> Deferred tax liabilities arise from the asset contributions of 2016 and 2017 due to the difference between the tax amount and the carrying amounts of the assets included in those transactions. These liabilities will only materialise if the assets are sold, which is not envisaged in Testa’s strategy since they are considered ‘core’ assets.

Financial debt

Net financial debt at 30 June 2018 stood at 636.1 million euros, up from 402.0 million euros at the end of last year. The increase is the result mainly of the financing raised for new investments in real estate assets, especially the acquisition of the residential portfolio from CaixaBank.

The loan-to-value (LTV) ratio was 24.1%, which is still considerably below our medium-term target of 35%. Until it reaches 35%, Testa has a theoretical

borrowing capacity of an additional 287 million euros to fund future acquisitions of assets. There is currently 167 million euros of available cash, including undrawn amounts of 100 million euros on existing credit facilities.

The average maturity of the debt is 6.0 years, compared to 5.5 years at the end of 2017. Average cost of debt is 1.6%, while 80% is at fixed rates or hedged with derivatives.


ı 26 ı


DEBT STRUCTURE

€ M JUN 2018 DEC 2017

Gross debt 703.1 473.2

Syndicated loan 350.0 350.0

Mortgage debt 354.2 125.5

Derivatives 5.1 0.1

Interest payable 0.2 0.3

Debt arrangement expenses -6.4 -2.7

Cash and cash equivalents -67.0 -71.2

Net debt 636.1 402.0

Islas Baleares MALLORCA


ı 27 ı


Testa arranged two new mortgage loans in the first half of the year to fund the purchase of assets from CaixaBank, for 130 million euros and 99 million euros, respectively, both with a 7-year bullet maturity and a fixed annual cost of approximately 1.6%.

At present, half of the Company's debt has mortgage guarantees, with an unencumbered ratio of 471%.

GROSS DEBT MATURITY SCHEDULE (€ M)

2 2 2 2 17

248

81

350

2018

2019

2020

2021

2022

2023

>202

4

DEBT STRUCTURE

€ M JUN 2018 DEC 2017

Net debt 636 402

GAV 2,637 2,276

LTV ratio, % 24.1% 17.7%

Average maturity (years) 6.0 5.5

Cost of debt (%) 1.6% 1.5%

At fixed rates or hedged (%) 80% 71%

Interest coverage ratio (x) * 6.0 4.8

Mortgage debt (%) 50% 26%

Unencumbered ratio (%) ** 471% 528%

* Interest coverage ratio (ICR) defined as net rental income/interest expenses

** Unencumbered ratio defined as uncollateralised assets/unsecured gross debt

Mortgage Corporate


ı 28 ı


4.c. Cash Flow

CONSOLIDATED STATEMENT OF CASH FLOWS

€ M IH 2018 IH 2017

EBITDA -87.2 9.9

Other income and expenses 88.4 0.1

Changes in working capital 4.1 3.0

Gains/(losses) on asset disposals 0.3

Change in operating provisions

Income tax payments 0.0

Net interest paid -4.8 -2.3

Other 2.2 -2.4

Net cash generated by operating activities 2.7 8.7

Investments -5.7 -1.9

Acquisitions of assets -225,5

Proceeds from sales 3.6

Net cash used in investing activities -231.3 1.7

Proceeds from and repayment of equity instruments -0.3

Proceeds from and repayment of borrowings 224.6 -6.2

Net cash from/(used in) financing activities 224.4 -6.2

Net increase/(decrease) in cash and cash equivalents -4.2 4.2

> Operating activities showed positive cash flow for the first half, but less than in the same period last year due to various extraordinary expenses described previously, especially the payment of 18.8 million euros of VAT related to the termination of the agreement with Merlin and listing preparation costs.

> Other income and expenses includes other expenses recognised in the income statement, but that did not result in cash outflows, related mostly to the agreement with Merlin, which was capitalised with newly issued Testa shares worth 89.7 million euros.

> Changes in working capital includes provisions for expenses recognised but not paid, provisions for the accrual of direct taxes (property and business tax), which are usually paid at the end of the year, and changes in guarantees and deposits from tenants.


VALUATION: GAV AND NAV5

La FloridaOVIEDO

ı 30 ı


VALUATION: GAV AND NAV

Portfolio value (GAV)

According to the June 2018 appraisal by Savills, Testa's portfolio has an estimated market value (GAV) of 2,637.3 million euros, 15.9% higher than the December 2017 appraisal. On a same-portfolio basis (like-for-like), GAV increased by 4.3% in the first six months of the year, slightly lagging the like-for-like growth of GRI in the same period.

Moreover, the assets acquired in May and June were appraised for an amount (36.6 million euros) that was 16% above the acquisition price.

Based on the latest asset appraisal, adjusted EPRA NAV rose by 8.1% to 14.98 euros per share in the first half from 13.86 euros per share at the end of 2017. The adjustments are: i) the termination of the agreement with Merlin, which took place in the first half of the year along with the capital increase; and ii) the conversion into equity of the liability with Acciona, related to shares already issued by Testa over which Acciona has the right to recover the value if the Company is not listed on an official market by 2022.

TREND IN TESTA GAV (€ M)

2,275227 37

982,637

GAV Dec 2017

ChangeLFL value

Investment in acquisition

of assets

Revaluation of acquisitions

GAV Jun 2018

Calculation of NAV

The average gross yield of the portfolio ended the period at 3.2%, broadly in line with the figure at the end of December 2017. This valuation implies an average residential price of 2,637 euros per gross square metre.

San MateoLAS PALMAS DE GRAN CANARIA

5. Valuation: GAV and NAV

ı 31 ı


CALCULATION OF NAV

€ M JUN 2018 DEC 2017 % Change

Shareholders' equity per balance sheet 1,488.8 1,393.8

Unrealised gains on assets * 17.3 8.4

Change in value of derivatives 5.1 0.1

Deferred taxes (assets/liabilities) 94.8 94.9

EPRA NAV 1,606.0 1,497.1 7.3%

Merlin services agreement ** -18.8

Conversion of Acciona liability *** 375.5 355.6

Adjusted EPRA NAV 1,981.5 1,833.8 8.1%

No. of shares (million), excluding treasury shares **** 132.3 132.3

Adjusted EPRA NAV per share (euros) 14.98 13.86 8.1%

Plaza EuropaBARCELONA

*Referred to concession assets (Bentaberri and others), that are accounted for at historical cost on the balance sheet.

**The Merlin management agreement was terminated and capitalised as equity in 1Q18.

***Acciona has a right to recover its investment if Testa is not listed on an official market by 2022.

****The number of shares for Dec 2017 includes the capital increase for the cancellation of the Merlin contract.

€ 14.98/sh is the adjusted NAV as of June 2018, up 8.1% from Dec. 2017.

5. Valuation: GAV and NAV

6 TESTA'S ASSET PORTFOLIO

Islas BalearesMALLORCA

ı 33 ı


TESTA'S ASSET PORTFOLIO

Profile of Testa's portfolio

Testa boasts an excellent real estate portfolio, specialising in the residential rental segment. We have a strong footprint in Madrid (59,3% of GAV) and other key metropolitan areas of Spain, such as San Sebastián (6.5%), Barcelona (5.6%), Palma de Mallorca (5.0%),

Valencia (3.1%) and Las Palmas de Gran Canaria (2.8%). These areas enjoy higher economic and demographic growth than the national average and we will continue to target these going forward.


C. Valenciana Las Palmas Others


C. Valenciana Las Palmas Others

GEOGRAPHICAL BREAKDOWN OF THE PORTFOLIO (% of GAV at June 2018)

GEOGRAPHICAL BREAKDOWN OF THE PORTFOLIO (% annualized GRI at June 2018)

6.5%

5.6%

5.0%

3.1%2.8%

17.6% 59.3%

4.8%

5.4%

5.3%

2.8%3.4%

21.3% 57.0%

6. Asset Portfolio

ı 34 ı


Of total assets, 95% are of residential use and the remaining 5% of other uses (commercial premises, offices, car parks), generally belonging to the same building as the homes.

The majority of our residential leases (84%) are unrestricted, so rents can be agreed freely between the parties. 15% are rent protected, whereby

the local government sets a maximum rent for a specified term. Finally, 1% are old rent (renta antigua), involving leases entered into before the current Spanish lease act (Ley de Arrendamientos Urbanos) became effective.

On the other hand, 7% of assets are leasehold. The most important leasehold is the BentaBerri asset in San Sebastián, which expires in 2069. BentaBerri is

also our main social housing asset, although the rent protection expires in 2028, after which the properties can be leased at market rents.

Residential Commercial

5% 95%

Unrestricted rents Rent protected Old rent regime

15% 1% 84%

BY USE (% of GAV)

BY LEASE TYPE (% of GRI)

6. Asset Portfolio

ı 35 ı


The portfolio is composed mostly (80%) of properties in which Testa owns the entire building or the majority of the units. This enables the Company to manage its assets more efficiently and control the homeowners' associations, thereby controlling operating costs.

84% of assets are less than 20 years old, which makes the product commercially appealing for our customers and reduces maintenance capex requirements considerably.

Freehold properties Leasehold

100% ownership >50% ownership < 50% ownership

7%

41%

20%93% 39%

BY TYPE OF OWNERSHIP (% of GAV)

BY YEAR BUILT (% of apartments)

BY MONTHLY IN-PLACE RENT (euros/month)

BY OWNERSHIP/COMPLETE BUILDING (% of no. of units)

3% 4% 9%21%

84%

12%

26%19%

9%1%

63%

33%

1952

-196

6

<500

1967

-198

1

500-

700

1982

-199

6

700-

900

1997

-200

8

900-

1100

2009

-201

8

1100

-130

0

>130

0

6. Asset Portfolio

ı 36 ı


37%26%26%

8%

33%25%

5%

19%

21%

BY NUMBER OF ROOMS (% of apartments)

BY APARTMENT SIZE IN GROSS SQM (% of apartments) – Testa average: 90 sqm

1 room or studio 2 rooms 3 rooms 4+rooms

>110 sqm 90-110 sqm

70-90 sqm 50-70 sqm <50 sqm

Torrejardín OVIEDO

6. Asset Portfolio

ı 37 ı


TESTA PORTFOLIO IN DETAIL AS OF JUNE 2018

TOTAL PORTFOLIO RESIDENTIAL PORTFOLIO

GAV (Eur M)

GAV (%)GRI

(Eur M)

Gross yield (%)

No. of apartm.

GAV (Eur/sqm)

GRI (Eur/sqm/

month)

GRI (Eur/apartm./month)

Occupan- cy (%)

Madrid * 1,565 59.3% 48.4 3.1% 4,698 3,603 9.85 860 91.2%

Madrid ciudad 1,345 51.0% 40.3 3.0% 3,608 3,955 10.42 920 90.9%

Otros municipios 220 8.3% 8.2 3.7% 1,090 2,369 7.91 665 92.5%

San Sebastián ** 172 6.5% 4.0 2.4% 510 3,639 7.26 674 98.1%

Barcelona * 147 5.6% 4.6 3.1% 501 3,627 10.12 801 93.3%

Las Palmas Gran Canaria * 75 2.8% 2.9 3.9% 506 1,456 5.47 492 93.0%

Palma de Mallorca * 132 5.0% 4.5 3.4% 533 2,099 6.49 756 93.0%

Valencia ** 82 3.1% 2.4 2.9% 352 2,033 5.30 594 93.8%

Toledo ** 56 2.1% 2.2 4.0% 449 1,249 4.48 428 93.6%

Pamplona * 63 2.4% 2.7 4.3% 507 1,370 5.09 460 97.1%

Valladolid ** 52 2.0% 2.0 3.9% 513 1,367 4.86 363 91.0%

Oviedo ** 42 1.6% 1.3 3.2% 291 1,653 5.46 483 80.4%

Top 10 markets 2,385 90.4% 75.2 3.2% 8,860 2,867 8.02 722 92.2%

Other premium & core markets 134 5.1% 4.6 3.4% 818 1,830 5.67 507 91.4%

Total premium & core markets

2,519 95.5% 79.7 3.2% 9,678 2,781 7.83 704 92.1%

Non-core assets 118 4.5% 5.3 4.5% 937 1,104 5.25 459 83.2%

Testa total portfolio 2,637 100.0% 85.0 3.2% 10,615 2,637 7.63 685 91.4%

Breakdown of Testa's assets

* Premium markets; ** Core markets

6. Asset Portfolio

ı 38 ı


14%

15%14%

44% 27%29%

20%22%25%

11%

13%7%

6%10%

6%

3%8%

6%

2% 3%

5%4%

6%

MADRID CITY CENTRE (% of GAV)

MADRID SECOND-RING (% of GAV)

LARGE MUNICIPALITIES OF MADRID (% GAV)

Hortaleza Chamartín Tetuán Arganzuela Salamanca Fuencarral - El Pardo Others

Alcorcón Las Rozas

Móstoles Getafe Torrelodones Leganés Valdemoro

Fuencarral - El Pardo Ciudad Lineal

Vallecas San Blas - Canillejas Barajas Moratalaz Vicálvaro Usera Others

DETALLE DE LOS ACTIVOS DE MADRID POR ZONAS


GAV (Eur M)

GAV Madrid

(%)

GRI (Eur M)

Gross yield (%)

No. of apartm.

GAV (Eur/sqm)

Passing rent (Eur/sqm/

month)

Passing rent (Eur/

apartm./month)

Occupan- cy (%)

City centre 843 53.9% 23.2 2.8% 1,868 4,581 11.18 1,016 89.2%

Second-ring 502 32.1% 17.0 3.4% 1,740 3,232 9.57 819 92.8%

Madrid City 1,345 85.9% 40.3 3.0% 3,608 3,995 10.42 920 90.9%

Large municipalities 220 14.1% 8.2 3.7% 1,090 2,369 7.91 665 92.5%

Total Madrid 1,565 100.0% 48.4 3.1% 4,698 3,603 9.85 860 91.2%

Area of Madrid

6. Asset Portfolio

ı 39 ı


AlcorcónMADRID

6. Asset Portfolio

ı 40 ı


SOCIAL HOUSING PROJECTS

Asset LocationGAV

(Eur M)GAV (%)

GRI (Eur M)

No. of apartm.

GAV (Eur/ sqm)

In-place residen-tial rent

(Eur/sqm/

month)

Occupan- cy (%)

End of concession

Social regime expiry date

Bentaberri San Sebastián 172.1 6.5% 4.0 510 3,639 7.26 98.1% 23/12/2069 17/11/2028

La Ventilla Madrid 1.9 0.1% 0.6 90 316 8.41 100.0% 28/07/2023 31/08/2030

Usera Madrid 1.5 0.1% 0.9 148 145 7.39 100.0% 31/05/2020 14/04/2033

Torrejón Madrid 0.0 0.0% 0.4 64 6 5.65 100.0% 09/09/2018 23/04/2031

Estocolmo Alcorcón 24.3 0.9% 1.0 159 2,181 7.78 97.0% - 08/12/2024

María Moliner Leganés 16.1 0.6% 0.6 104 1,706 5.92 88.2% - 19/07/2018

Tajo Valladolid 12.0 0.5% 0.6 210 989 4.50 86.7% - 11/12/2036

E. Norte Pamplona 11.7 0.4% 0.6 124 1,199 4.96 99.5% - 01/11/2018

González Garcés A Coruña 9.2 0.4% 0.3 111 938 3.21 88.4% - 29/06/2028

Sanducelay Pamplona 9.0 0.3% 0.5 89 1,103 4.91 100.0% - 31/05/2018

Mandeo A Coruña 8.3 0.3% 0.3 136 1,122 4.59 81.1% - 05/07/2029

Miño Valladolid 7.9 0.3% 0.3 80 1,403 4.39 98.8% - 29/03/2030

Marcelo Celayeta Pamplona 8.3 0.3% 0.4 70 1,250 4.82 100.0% - 02/06/2019

Can Mates IV San Cugat 8.0 0.3% 0.4 62 1,724 6.87 100.0% - 18/07/2042

La Rochapea Pamplona 4.7 0.2% 0.2 36 1,223 4.79 100.0% - 04/11/2019

Sandúa Pamplona 3.9 0.1% 0.2 34 1,101 4.61 96.7% - 03/07/2021

Can Mates III San Cugat 3.4 0.1% 0.2 24 1,590 6.59 100.0% - 18/07/2042

Total 302.5 11.5% 11.5 2,051 1,849 6.11 96.0%

6. Asset Portfolio

ı 41 ı


EXPIRATION OF SOCIAL HOUSING REGIME

< 5 years 5-10 years > 10 years

In-place rent (Eur/sqm/month) 4.9 7.4 5.2

ERV Savills (Eur/sqm/month) 7.7 12.1 7.7

% upside 57% 64% 47%

Upside potential for rents (Eur M) € 0.78 M € 3.27 M € 1.64 M

OLD RENT REGIME PROPERTIES

Asset LocationGRI

(Eur M)No. of

apartm.

In-place residential rent (Eur/sqm/

month)

Occupancy (%)

Manzana de Castellana Madrid 0.39 84 2.25 100%

Torrelaguna Madrid 0.10 11 6.45 100%

Condesa Venadito Madrid 0.08 7 9.18 100%

Bac de Roda Barcelona 0.03 8 3.59 100%

Montevideo A Coruña 0.01 9 1.28 100%

Trinxant Barcelona 0.02 8 2.51 100%

Campanar Valencia 0.00 7 0.37 100%

Cesáreo Alierta Zaragoza 0.02 2 8.14 100%

San Jorge Sevilla 0.00 4 0.32 100%

Parque América-Caribe Madrid 0.02 2 13.24 100%

Total old rent 0.66 142 3.21 100%

6. Asset Portfolio

ı 42 ı


Smaller, lower quality assets Car parks Offices Surface rights Lower-growth areas

NON-CORE ASSETS BY TYPE (% of GAV)

NON-CORE ASSETS BY TYPE (% of GRI)

24%

24%

9%

6%

37%

Surface rights Lower-growth areas Smaller, lower quality assets Car parks Offices

TESTA'S TOP 10 ASSETS


Asset LocationGAV

(Eur M)GAV (%)

GRI (Eur M)

Gross yield (%)

No. of apartm.

GAV (Eur/ sqm)

Passing rent (Eur/sqm/

month)

Passing rent (Eur/

apartm./month)

Occupan. (%)

Coto Madrid 406.6 15.4% 11.8 2.9% 834 5,053 12.61 1.107 89.2%

Bentaberri San Sebastián 172.1 6.5% 4.0 2.4% 510 3,639 7.26 674 98.1%

Castellana Madrid 159.7 6.1% 3.4 2.1% 245 4,393 7.88 1.115 94.0%

Plaza de Castilla Madrid 116.2 4.4% 3.5 3.0% 302 5,204 12.61 794 92.9%

Cond. de Benadito Madrid 47.4 1.8% 1.6 3.4% 149 2,816 9.14 1.016 82.3%

Salvador Dalí P. de Mallorca 47.2 1.8% 1.8 3.9% 216 1,518 5.18 736 95.3%

Tamaraceite Las Palmas G.C. 48.5 1.8% 2.0 4.1% 363 1,368 5.51 450 95.3%

Mir.Tablas B11 Madrid 44.0 1.7% 1.3 3.0% 123 3,658 9.49 927 96.5%

Benicalap Valencia 31.8 1.2% 0.9 2.8% 147 1,972 4.95 517 97.3%

Francisco Remiro Madrid 30.1 1.1% 1.1 3.6% 140 3,973 12.17 655 96.5%

Top 10 edificios 1,103.6 41.8% 31.5 2.9% 3,029 3,604 8.78 829 93.3%

Resto de activos 1,533.7 58.2% 53.6 3.5% 7,586 2,222 7.12 626 90.5%

Total portfolio 2,637.3 100.0% 85.0 3.2% 10,615 2,637 7.63 685 91.4%

13%5%3%

37% 42%

6. Asset Portfolio

ı 43 ı


Las Tablas MADRID

6. Asset Portfolio

ı 44 ı


17%

35-4

0

17%

30-3

5Profile of Testa's tenants

Testa's average tenant profile shows older tenants than the Spanish average (41 years old at Testa vs. 32 for the market) and higher purchasing power, with average household net income of 2,850 euros per month (vs the the average Spanish

household of 2,228 euros per month). The average affordability ratio (calculated as monthly rent divided by net income) is 30% for new leases signed in 2018.

51

Tole

do

43

Pam

plo

na

40

Val

lad

olid

43

Ovi

edo

42

Val

enci

a

42

Pal

ma

Mal

lorc

a

46

Las

Pal

mas

G. C

anar

ias

42

Bar

celo

na

42

Mad

rid

41

Ave

rag

e Te

sta

38

San

Seb

asti

án

AVERAGE AGE OF TESTA'S TENANTS

22%

>50

10%

45-5

0

16%

40-4

5

17%

<30

% OF TENANTS BY AGE GROUP

6. Asset Portfolio

ı 45 ı


Dec

201

7

0.6% 0.6%

TENANT BAD DEBT (NET OF GUARANTEES)

20%

Tole

do

25%

Pam

plo

na

29%

Val

lad

olid

27%

Ovi

edo

32%

Val

enci

a

31%

Pal

ma

Mal

lorc

a

33%

Las

Pal

mas

G. C

anar

ias

32%

Bar

celo

na

31%

Mad

rid

30% 28%

San

Seb

asti

án

AFFORDABILITY RATIO OF TESTA'S TENANTS *

* Monthly rent divided by total household net income, in new lease agreements signed in 1H18.

*For new lease agreements signed in 1H18

BREAKDOWN OF TENANTS BY MONTHLY HOUSEHOLD NET INCOME BRACKET (AVERAGE: 2,850 EUROS/MONTH) *

4%

15%17% 19%

11%

35%

500-

1000

1000

-150

0

1500

-200

0

2000

-250

0

2500

-300

0

3000

Jun

2018

Ave

rag

e Te

sta

6. Asset Portfolio

EPRA METRICS7

Terrazas de Gran Vía ALICANTE

ı 47 ı


EPRA METRICS

EPRA EARNINGS

Eur M IH 2018 FY 2017

Earnings per IFRS income statement 8.94 46.59

Adjustments to calculate EPRA earnings:

Change in value of investment properties -125.10 -41.49

Gains or losses on asset disposals -0.26

Tax on non-recurring income

Amortisation of goodwill

Change in the value of financial instruments and associated close-out costs

22.29 -0.11

Acquisition costs

Deferred tax in respect of EPRA adjustments

Non-controlling interests in respect of the above

EPRA earnings before company-specific adjustments -93.87 4.74

Diluted number of shares (million) 132.27 132.27

EPRA earnings per share before company-specific adjustments, in euros

-0.710 0.036

Company-specific adjustments:

Termination of Merlin services agreement 107.55 4.60

IPO/listing costs 3.26

Other adjustments 0.78

Company-specific adjusted EPRA earnings 17.71 9.34

Company-specific adjusted EPRA earnings per share, in euros

0.134 0.071

7. EPRA Metrics

ı 48 ı


EPRA NAV

Eur M JUN 2018 DEC 2017

Shareholders' equity per balance sheet 1,488.8 1,393.8

Unrealised gains on assets * 17.3 8.4

Change in value of derivatives 5.1 0.1

Deferred taxes (assets/liabilities) 94.8 94.9

EPRA NAV 1,606.0 1,497.1

No. of shares, million 132.27 132.27

EPRA NAV per share (euros) 12.14 11.32

Merlin services agreement ** 0.0 -18.8

Conversion of Acciona liability *** 375.5 355.6

Adjusted EPRA NAV 1,981.5 1,833.8

No. of shares, million **** 132.27 132.27

Adjusted EPRA NAV per share (euros) 14.98 13.86

** Referred to concession assets (Bentaberri and others), that are accounted for at historical cost on the balance sheet.** The Merlin management agreement was terminated and capitalised as equity in 1Q18.*** Acciona has a right to recover its investment if Testa is not listed on an official market by 2022.**** The number of shares for Dec 2017 includes the capital increase for the cancellation of the Merlin contract.

CalviàMALLORCA

7. EPRA Metrics

ı 49 ı


EPRA NNNAV

Eur M JUN 2018 DEC 2017

EPRA NAV 1,606.0 1,497.1

Deferred taxes (assets/liabilities) -94.8 -94.9

Change in value of derivatives -5.1 -0.1

EPRA NNNAV 1,506.1 1,402.1

No. of shares, million 132.27 132.27

EPRA NNNAV per share (euros) 11.39 10.60

Merlin services agreement * 0.0 -18.8

Conversion of Acciona liability ** 375.5 355.6

Adjusted EPRA NNNAV 1,881.6 1,738.8

No. of shares, million (diluted) *** 132.27 132.27

Adjusted EPRA NNNAV per share (euros) 14.23 13.15

* The Merlin management agreement was terminated and capitalised as equity in 1Q18.** Acciona has a right to recover its investment if Testa is not listed on an official market by 2022.*** The number of shares for Dec 2017 includes the capital increase for the cancellation of the Merlin contract.

EPRA VACANCY RATE

JUN 2018 DEC 2017

Eur M

Estimated rental value (ERV) of vacant space 9.5 9.9

Estimated rental value (ERV) of whole portfolio 118.2 102.8

EPRA vacancy rate, % 8.0% 9.6%

7. EPRA Metrics

TESTA SHARES8

CalviàMALLORCA

ı 51 ı


TESTA SHARES

Testa Residencial shares were admitted to trading on the Alternative Equity Market (MAB) from 26 July 2018. The initial reference price was set at 13.90 euros per share, approximately the same as the pro-forma EPRA NAV at year-end 2017 and giving an initial market capitalisation of 1,838 million euros.

The stock's technical listing has not resulted in any change to the Company's shareholder structure, but boosts the liquidity of outstanding shares, especially for the more than 1,500 non-controlling shareholders making up the free-float.

Share data

SECURITIES MARKET

Alternative Equity Market (MAB)

TYPE OF MARKET

Non-regulated market

TICKER

YTST

ISIN CODE

ES0105210019

FIRST DAY OF TRADING

26/07/2018

INITIAL REFERENCE PRICE

13.90 Euros/share

TOTAL NO. OF SHARES

132,270,202Bentaberri SAN SEBASTIÁN

8. Testa Shares

ı 52 ı


Estructura accionarial

At the end of the first half, the number of treasury shares stood at 1,457, representing 0,001% of share capital. After the end of period and before the shares with listed on the MAB, Testa increased the amount of treasury shares held to 601,991, representing 0.46% of share capital.

TESTA SHAREHOLDERS

17.0%0.9%

36.9%

BOARD OF DIRECTORS

Name Position Category Representing

Ignacio Moreno Martínez Chairman Independent -

Miguel Oñate Rino Vice-Chairman Proprietary Merlin

Wolfgang Beck Chief Executive Officer Executive -

Javier Alarcó Canosa Director Independent -

Antonio Hernández Mancha Director Independent -

José María Xercavins Lluch Director Independent -

Azucena Viñuela Hernández Director Independent

Finanzas y Carteras Uno, S.A. * Director Proprietary Acciona

Altamira Santander Real Estate, S.A. ** Director Proprietary Santander

Carlos Manzano Cuesta Director Proprietary Santander

Cesáreo Rey-Baltar Oramás Director Proprietary BBVA

Lucas Osorio IturmendiSecretary

(non member)Secretary

(non member)-

Santander Grupo BBAV Grupo Acciona Inmobiliaria

Merlin Properties Other

Testa's main shareholders are Santander (36.9%), BBVA (25.2%), Acciona Inmobiliaria (20.0%) and Merlin Properties (17.0%).

20.0%

25.2%

* Finanzas y Cartera Uno, S.A., represented by Isabel Antúnez Cid ** Altamira Santander Real Estate, S.A., represented by Jaime Rodriguez Andrade

8. Testa Shares

ı 53 ı


Calle Vallgornera MALLORCA

TREND IN NUMBER OF SHARES

Event Date

Volume of capital increase (Eur M)

Nominal amount (Eur/sh)

No. of issued/

redeemed shares

No. of

resulting shares

Resulting share capital

(Eur M)

Situation at Dec 2016 0.01 4,676,593,732 46.8

Capital increase (contributions by Santander and BBVA)

07/03/2017 659.7 0.01 5,221,817,098 9,898,410,830 99.0

Capital increase 24/05/2017 0.03 0.01 237,407 9,898,648,237 99.0

Capital increase (contribution by Acciona)

25/09/2017 341.2 0.01 2,687,678,678 12,586,326,915 125.9

Situation at Dec 2017 0.01 12,586,326,915 125.9

Capital increase (termination of Merlin agreement)

27/03/2018 89.7 0.01 640,693,342 13,227,020,257 132.3

Reverse split (100x1) 27/03/2018 1.00 -57 132,270,202 132.3

Situation at June 2018 1.00 132,270,202 132.3

8. Testa Shares

9 GLOSSARY

Avenida EuroMADRID

ı 55 ı


GLOSSARY AND ALTERNATIVE PERFORMANCE MEASURES

Net rental income (NRI): Rental income less non-recoverable expenses on properties. EBITDA: Earnings before net revaluations, depreciation and amortisation, provisions, interest and taxes. Adjusted rental EBITDA: EBITDA excluding extraordinary or non-recurring items.

Annualized gross rental income or "GRI": Passing monthly gross rents multiplied by 12.

ERV: Estimated rental value of properties as determined by the external appraiser.

Average passing residential rents: Passing monthly residential rent divided by the residential surface area as at the end of a period.

Like-for-like growth of rent: Performance of passing residential rent assuming the same scope of properties at the beginning and end of the period. Occupancy rate (physical): Leased residential surface area divided by total residential surface area.

Like-for-like occupancy rate: Trend in occupancy rate assuming a constant scope between the two periods.

EPRA vacancy rate : Estimated rental value (ERV) of vacant space as a % of the portfolio's total ERV calculated in accordance with EPRA recommendations.

FFO1: Funds from operations calculated as adjusted rental EBITDA less interest and income tax payments.

Inversiones de mantenimiento: Inversión realizada en el mantenimiento y modernización de los activos, excluyendo adquisiciones. Con frecuencia, se presenta en relación a la SBA de la cartera.

Maintenance capex: Amount nvested to maintain and upgrade investment properties, excluding acquisitions. Often shows as a percentage of portfolio GLA. AFFO: Adjusted funds from operations, calculated as FFO1 less maintenance capex.

GAV: Gross Asset Value of the properties as defined by the external appraiser.

GLA: Gross leasable area.

EPRA: European Public Real Estate Association. EPRA NAV: Net Asset Value as calculated in accordance with EPRA recommendation, taking shareholders' equity plus the revaluation of properties recognised at historical cost, the market value of derivatives and deferred taxes.

EPRA NNNAV: Triple net NAV, calculated as EPRA NAV less deferred taxes and the value of derivatives, in accordance with EPRA recommendations. Adjusted NAV or NNNAV: EPRA NAV or NNNAV including certain company-specific adjustments. EPRA earnings: Earnings from operations calculated in accordance with EPRA recommendations. EPRA cost ratio: Operating expenses as a percentage of gross rental income, calculated in accordance with EPRA recommendations.

Gross yield: Gross yield of the properties calculated by dividing annualized gross rent by the latest available GAV. LTV (loan to value): Net debt divided by GAV. Unencumbered ratio: Ratio of assets free of encumbrances divided by debt without mortgage guarantees

9. Glossary

Testa Residencial SOCIMI S.A.

Paseo de la Castellana 257, 2nd floor

28046 Madrid, España

+34 91 048 9400

[email protected]

www.testaresidencial.com


Condensed consolidated interim financial statements and management report for the


TESTA RESIDENCIAL SOCIMI, S.A. and Subsidiaries

Authorisation for issue of the condensed consolidated interim financial statements and consolidated directors’ report for the six-month period ended 30 June 2018

The directors of TESTA RESIDENCIAL, SOCIMI, S.A., having assembled on September 6th 2018, authorise for issue the condensed consolidated interim financial statements and consolidated directors' report for the six-month period ended 30 June 2018. The condensed consolidated interim financial statements consist of the accompanying documents preceding this certificate.

In Madrid at September 6th 2018

Mr. Ignacio Moreno Martínez (Chairman)

Mr. Miguel Oñate Rino (Vice Chairman)

Mr. Wolfgang Beck (Chief Executive Officer)

Mr. Javier Alarcó Canosa

Ms. Azucena Viñuela Hernandez

Finanzas y Cartera Uno, S.A., represented by Ms. María Isabel Antúnez Cid

Mr. Carlos Manzano Cuesta

Altamira Santander Real Estate, S.A., represented by Mr. Jaime Rodríguez Andrade

Mr. Cesáreo Rey-Baltar Oramas

Mr. José María Xercavins Lluch

Mr. Antonio Hernández Mancha

Mr. Lucas Osorio Iturmendi

Secretary to the Board of Directors

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TESTA RESIDENCIAL SOCIMI, S.A. and Subsidiaries...TOTAL ASSETS 2.707.716 2.356.079 TOTAL EQUITY AND...

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