KEY PERFORMANCE INDICATORS
In 2015, the group’s revenue was 10.7 million euros, exceeding by 16% the revenue of year 2014, when revenue amounted to 9.2 million euros. The increase of the group’s annual revenue comes from Development division, where revenue amounted to 7.9 million euros in 2015 (in 2014: 6.5 million euros). The revenue of Service division reached to 3.3 million euros in 2015, increased by 4% compared to 2014. The sales figures of brokerage and valuation services have shown growth in second half of the year 2015, after the falling trend in second half of year 2014 and in the beginning of year 2015.
In 2015, the group’s operating profit (=EBIT) from continuing operations was 1.3 million euros and net profit 0.5 million euros, a year ago the same figures were 2.3 million euros and 1.1 million euros respectively. The result of 2014 was impacted by two single events with total effect of 1.2 million euros on profit: gain from the sale of a subsidiary and reversal of inventory write-down. Loss from discontinued operations amounted to 15 thousand euros in 2015 and 324 thousand euros in 2014.
The group has rapidly decreased debt burden in 2015. The group’s net loans have decreased by 1.3 million euros in 2015, down to the level of 12.0 million euros as at 31 December 2015. Total loans and borrowings amounted to 12.8 million euros at 31 December 2015, decreased by 2.3 million euros through a year. As at 31 December 2015, the weighted average annual interest rate of loans was 5.0%. This is a decrease by 0.8 percentage points compared to 31 December 2015.
In 2015, 96 apartments and commercial spaces and four residential in projects developed in the group were sold. In 2014, 77 apartments and commercial spaces and 4 plots were sold.
Continuing operations
| 2015 | 2014 | ||
| In millions of euros | |||
| Revenue | |||
| Development | 7.9 | 6.5 | |
| Service | 3.3 | 3.1 | |
| Eliminations | -0.5 | -0.4 | |
| Total revenue | 10.7 | 9.2 | |
| Operating profit (EBIT) | |||
| Development | 1.8 | 1.9 | |
| Service | -0.1 | 0.3 | |
| Unallocated income and expenses | 0.1 | 0.0 | |
| Eliminations | -0.5 | 0.1 | |
| Total operating profit (EBIT) | 1.3 | 2.3 | |
| Finance income and expense | -0.7 | -1.1 | |
| Income tax | -0.1 | -0.1 | |
| Net profit | 0.5 | 1.1 | |
|
Main ratios |
|||
| 2015 | 2014 | ||
| Earnings per share, EPS (in euros) | 0.08 | 0.15 | |
| Diluted earnings per share (in euros) | 0.07 | 0.14 | |
| ROIC (rolling, four quarters) | 2.0% | 3.4% | |
| ROE (rolling, four quarters) | 4.6% | 10.7% | |
| ROA (rolling, four quarters) | 1.8% | 3.1% |
| As at 31 December | 2015 | 2014 | |||
| In millions of euros | |||||
| Total assets | 24.5 | 27.0 | |||
| Invested capital | 22.4 | 24.1 | |||
| Net loans | 12.0 | 13.3 | |||
| Equity | 9.6 | 9.1 | |||
| Current ratio | 3.22 | 2.43 | |||
| Quick ratio | 0.32 | 0.47 | |||
| Financial leverage | 2.54 | 2.98 | |||
| Average loan term (in years) | 1.7 | 2.3 | |||
| Average annual interest rate of loans | 5.0% | 5.8% | |||
| Number of staff, at period end | 178 | 189 |
Cash flows
| 2015 | 2014 | ||||
| In millions of euros | |||||
| Cash flows from operating activities | 2.4 | 0.4 | |||
| Cash flows from/used in investing activities | -0.2 | 0.2 | |||
| Cash flows from/used in financing activities | -3.2 | 0.3 | |||
| Net cash flows | -1.0 | 0.9 | |||
| Cash and cash equivalents at beginning of period | 1.7 | 0.8 | |||
| Cash and cash equivalents at end of period | 0.7 | 1.7 | |||
| Revenue and net profit/loss from continuing operations | |||||||||||||||||||
| Q1 2013 | Q2 2013 | Q3 2013 | Q4 2013 | Total 2013 | Q1 2014 | Q2 2014 | Q3 2014 | Q4 2014 | Total 2014 | Q1 2015 | Q2 2015 | Q3 2015 | Q4 2015 | Total 2015 | |||||
| In millions of euros | |||||||||||||||||||
| Revenue | 1.7 | 3.5 | 3.5 | 2.0 | 10.7 | 1.1 | 1.1 | 1.2 | 5.8 | 9.2 | 4.4 | 2.1 | 2.1 | 2.1 | 10.7 | ||||
| Net profit/loss | 0.0 | 1.4 | 0.1 | 2.0 | 3.5 | 0.4 | -0.3 | 0.4 | 0.6 | 1.1 | 0.7 | 0.0 | 0.2 | -0.4 | 0.5 | ||||
FORMULAS USED
Earnings per share (EPS) = net profit attributable to owners of the parent / (weighted average number of ordinary shares outstanding during the period – own shares)
Invested capital = current interest-bearing liabilities + non-current liabilities + equity (at end of period)
Net loans = current interest-bearing liabilities + non-current liabilities – cash and cash equivalents – short-term investments in securities (at end of period)
Return on invested capital (ROIC) = past four quarters’ net profit / average invested capital
Return on equity (ROE) = past four quarters’ net profit / average equity
Return on assets (ROA) = past four quarters’ net profit / average total assets
Current ratio = current assets / current liabilities
Quick ratio = (current assets - inventory) / current liabilities
Financial leverage = total assets / equity
Number of staff at period-end = number of people working for the group under employment or authorization (service) contracts
Group Chief Executive’s review
One should start the year’s end with a resume. The resume is as follows: we were profitable and grew. Yet the fourth quarter and full year results turned out weaker than we expected. We expected the group’s revenue to be at least 11 million euros and net profit at least 1 million euros. Actually we achieved 10.7 million euros revenue and only 0.5 million euros net profit. The management is not proud at all. We need to improve our results. The following part of comments sums up, what has been done and what exactly should be improved in order to keep the group moving forward with necessary speed.
Service division
The equity in service division companies is negative and during 2015 we did not invest additional equity into them. The division as a whole operates on the edge of profitability, although countrywise the results are different. We are pleased with profitable results and cash earned during 2015 by our Bulgarian unit. Considering the Latvian real estate market’s prolonged weakness, the Latvian unit’s results were satisfactory. The single outstanding loss-making unit of the group is in Estonia. The reasons of loss lie within the company itself and the solutions are in the hands of management. We have started rearrangements within the service division to improve the work processes and along with rearrangements, executed also replacements in the middle management.
The objective of 2016 is to achieve the profitability of services division as a whole and also increase its usability factor for Arco’s development projects – both in preparatory and in sales phase.
In the big picture the group’s results are determined by development division, where 100% of the group’s equity is allocated to. Development division’s results in turn are determined overwhelmingly by three pillars within it: (i) Madrid Blvd cash flow property in Sofia, (ii) Manastirski residential development in Sofia (and its possible successor project Izstok Parkside) and (iii) Kodulahe residential development in Tallinn.
Madrid Blvd property
By publication date of this report, the renovation works of 1st and 2nd floor office space and restructuration of it into seven autonomous lettable office units has been completed. There are ongoing negotiations with potential tenants. The post-restructuration gross lettable area (GLA) of the office space is ca 4,700 sqm, in addition to 113 underground parking places, that are rented out by piece.
Since there was no rent income from the offices during their renovation in Q4, it affected negatively annual revenue and profit. The loss of income from rents and maintenance fees amounted to more than 150 thousand euros. The impact to net profitability is approximately the same amount. It is one of the reasons, why we did not achieve our annual revenue and net profit target.
Our objective is 100% coverage of the office spaces with long-term lease contracts during Q3 of 2016 at the latest.
In other parts of the property we continue profitable operation of the lettable premises (incl. shopping area GLA ca 2,200 sqm and short-term rental apartments GLA ca 1,500 sqm) and sale of remaining apartments (GSA ca 1,700 sqm). In Q4, pre-sale agreements were concluded for two apartments, revenue for which will be recognized in 2016. The remaining balance of Piraeus bank loan on the property is below 10.5 million euros.
Manastirski Livadi
Construction of Block D was complete in November and the permission of usage was issued on 22 December, ie more than 2 weeks later than we forecasted. Due to this delay we had to suspend also execution of many apartments’ sales agreements and accounting of respective revenue in our books into Q1 2016. Q4 revenue from Manastirski Block D amounted to 628 thousand euros. The negative impact of the delay on targeted Q4 and full year results amounted to 800 thousand euros in revenue and over 300 thousand euros in net profit. The good news is that the missed revenue and profit is carried over into Q1 2016 revenue and net profit. However, the delay is also a live demonstration, how exposed the group’s results and key parameters such as ROE and ROA are to loss of time, even only for two weeks.
By end of Q4, 95% of apartments in Block D were presold. As at the publication date of this report, the whole Manastirski Livadi project is completed and the outstanding bank loan to UniCredit Bulbank repaid in full. Expected free cashflow from Block D alone is expected to exceed 2 million euros.
Since the beginning of Q1 2016 we can concentrate only to selling out the last remaining products in Manastirski. Our objective is full sale of outstanding inventory by end of 2016 at the latest. However the main focus from now on is on commencement of successor project in Sofia during Q1. At the moment the selected successor project is Izstok Parkside. By end of Q4, the preconditions of closing the purchase contract were not yet fulfilled by the Seller.
Kodulahe
Our long term efforts eventually bore fruit by end of year and we could select amongst competing offers both the best bidder of finance and construction works for the first stage of Kodulahe project in Tallinn. After the reporting date - in February 2016, financing and construction contracts were signed.
Kodulahe first phase volume is 130 apartments and shops (GSA ca 8,700 sqm), and in addition to it respective number of parking places and storages. Gross build-up area (GBA) for phase one exceeds 15,000 sqm. Expected sale revenue of first phase exceeds 15 million euros and conclusion of presale contracts was started in February 2016.
In summary, Arco Vara is back on Tallinn residential development market with Kodulahe project. Comparing with Sofia, Tallinn residential market is less stormy and has tighter competition, but it is possible to make money here, too.
Other directions of development
Besides the three development pillars described above we have undertaken two additional directions: A. to sell off all assets, that are not production-ready immediately or where the development volume is too small. Selling off the land bank that the group has historically accumulated allows us to concentrate our forces for developments that really matter; and B. launch Arco Real Estate Investment Trust (Arco REIT) in Sofia. We want to engage external capital under our management and continue in Bulgaria with targeting and implementation of new development projects, utilizing the knowhow and reputation of Arco’s team.
In terms of selling off the assets, the autumn of 2015 was successful. We sold profitably two development projects: Instituudi road properties in Harku parish and Suur-Sepa properties in Pärnu. It’s worth noting that it took only three weeks from the moment of communicating the sales team the order to commence the sale, until the moment of receiving sale price to the account. It gives credibility to our own conservative valuation of our assets in our books. We will continue selling off other properties and adding maximum value before that, for example by achieving construction rights through a detail plan or otherwise. For example, the detail plan allowing 8-floor office building onto Liimi 1b, Tallinn, entered into force in Q4.
Arco REIT project has progressed as anticipated. Shortly after the publication date of this report, Arco REIT will be listed on Sofia stock exchange where Arco Vara is the sole shareholder (by end of the year shareholding was 70%). We have placed 332 thousand euros into its share capital. The next and crucial step ahead is issue of additional shares and raising external capital into the fund during 2016, in order to commence effective business operations by end of the year.
Summary
To sum up with what I began with: 2015 profit of 0.5 million euros does not meet management’s expectations (1 million euros).
In addition to already described reasons of smaller profit (suspended Manastirski D sale: negative effect of ca 300 thousand euros; and dropping rent income from Madrid Blvd offices in Q4: negative effect of ca 150 thousand euros) there is one more accounting factor that killed part of the profit. It is the accounting effect of share option issued to the management in 2013, what entitles the option holder to subscribe 390,000 Arco Vara shares at 70 cents per share during 2016.
According to IFRS regulations, the company must account in the income statement also the effect of share option issued to the management board. According to the prescribed methodology, the effect has to be measured as difference between the nominal acquisition price (70 cents) and the measurement price determined according to the rules (1.46 cents). Respective provision into equity reserve had to be established. The cost of establishing the provision is distributed between 2.5 years since issue of the share option in July 2013 until January 1 2016 (first possible date for using the option). Respective cost for 2015 year is 119 thousand euros. The 2013 share option will not impact in any way the profit statement of 2016 or following years.
While being the stakeholder and cause of the additional 119 thousand euros accounting loss, the management board would still like to point out that there is no effective damage to the company. In order to effectuate the option, one has to pay into the company share capital 273 thousand euros and to improve the cash position of the company. The option does not give any right to cash out from the company.
The company’s target revenue for 2016 is 10.3 million euros and net profit 0.8 million euros. Year 2016 should be distinct from 2015 with one big feature: instead of one development under construction with revenue potential of ca 4-5 million euros (Manastirski D construction in Sofia), there should be two developments under construction with revenue potential of ca 20 million euros (Kodulahe 1st phase in Tallinn and Manastirski successor project in Sofia). That positive dynamics should reflect strongly in 2017 results.
SERVICE DIVISION
In 2015, revenue of service division was 3,254 thousand euros (in 2014: 3,139 thousand euros), that included intra-group revenue of 467 thousand euros (in 2014: 451 thousand euros). Revenue of service division from main services (real estate brokerage and valuation services) was 2,926 thousand euros increased by 2% compared to previous year. Revenue continues to increase in Bulgaria, seeing 39% annual increase. The revenue increased by 10% also in Estonian agency. The revenue from main services is strongly decreasing in Latvian real estate agency, having decreased by 23%.
Revenue of real estate agencies from brokerage and valuation
| 2015 | 2014 | Change, % | |||
| In thousands of euros | |||||
| Estonia | 1,282 | 1,166 | 10% | ||
| Latvia | 898 | 1,170 | -23% | ||
| Bulgaria | 746 | 536 | 39% | ||
| Total | 2,926 | 2,872 | 2% |
In 2015, the Estonian and Latvian agencies have operated on a loss: 209 thousand and 73 thousand euros, respectively. In 2014, Estonian and Latvian agencies had net profit of 48 thousand euros and 65 thousand euros, respectively. The decrease in profitability of Estonian agency is caused by significant increase of marketing and IT expenses: the goal is set to reach higher level in revenues and accordingly growth of profit. Revenues will increase with the help of wider reputation and bigger number of contacts, customer oriented data processing and smarter work environment. Bulgarian agency’s net profit was 109 thousand euros in 2015 (in 2014: 90 thousand euros).
In addition to brokerage and valuation services, the service division also provides real estate management services as well as accommodation service in Bulgaria. The revenue from real estate management was 141 thousand euros in 2015, 105 thousand euros of which was intra-group revenue (in 2014: 148 thousand and 105 thousand euros, respectively). Revenue from accommodation services amounted to 132 thousand euros in 2015 (in 2014: 74 thousand euros). In 2015, the sales of accommodation service have shown a nice 78% growth.
The number of staff in service division has been decreased down to 165 employees as at 31 December 2015, which is 11 people less compared to year end 2014. The number of staff is decreased in Estonia and Latvia and increased in Bulgaria.
DEVELOPMENT DIVISION
In 2015, revenue of development division totalled 7,947 thousand euros (in 2014: 6,503 thousand euros). The leap in revenues comes from the sale of properties in the group’s own development projects, amounting to 7,019 thousand euros in 2015 (5,414 thousand euros in 2014).
Most of the remaining revenue of development division consist of rental income from commercial and office premises in Madrid Blvd building in Sofia, amounted to 838 thousand euros in 2015 (in 2014: 953 thousand euros). In 2015, rental income has decreased due to conclusion of rental agreements in Q3, after which the rental spaces were renovated. In first half of 2016, the search of new tenants is in pipeline. The rental income is planned to recover on the previous level in Q3 2016 at latest.
In 12 months 2015, operating profit of development division was 1,790 thousand euros. In 2014, was earned 1,942 thousand euros of operating profit.
By December 2015, the apartment building of third stage in Manastirski Livadi project has been completed and permit of use has been obtained on 22 December. In 2015, 13 apartments were handed over, which corresponds to revenue of 628 thousand euros. As at 31 December 2015, 76 apartments out of 80 and one commercial space out of 8 have been sold or presold.
In 2015, 92 apartments and commercial spaces were sold in the group’s Bulgarian projects (in 2014: 63 apartments and commercial spaces). At 31 December 2015, two commercial spaces and some parking places remained in stock from first two stages of Manastirski Livadi project (blocks C and AB). 26 apartments and 113 parking places remained unsold in Madrid Blvd complex in Sofia. 16 apartments, out of all Madrid Blvd unsold apartments, are rented out on providing accommodation service. Unsold parking places are also rented out.
In 2015, four last apartments were sold in Bishumuiza-1 project in Latvia. That means the whole project could be considered as closed for the group. There remains 14 residential plots in Marsili to be sold in from the group’s stock in Latvia. A presale agreement was concluded for one of these plots in December 2015.
By Q4 2015, a goal was set to start construction of the first stage apartment building (with 125 apartments and 5 commercial spaces) in Kodulahe project in Tallinn. Design project was concluded and permit for construction of apartment building was obtained at the end of September. After the reporting date - in February 2016, the construction and financing contracts have been signed as well as the first apartment presale agreements. The construction of the apartment building started in March 2016.
In June 2015, a smaller land plot in Suur-Sepa street, in centre town of Pärnu, was acquired as an addition to the group’s land bank. The plot is suitable for apartment building. After preparing preliminary design the plot was sold profitably at the beginning of October. Also at the beginning of October, the group sold another smaller development: Instituudi road residential development project, acquired in February 2014. The latter project was also up-valued with the preliminary design. Selling smaller projects bears the goal of focusing on most important projects in Estonia and Bulgaria.
At 31 December 2015, 5 people were employed in development division, the same number as at the end of year 2014.
SUMMARY TABLE OF ARCO VARA’S ACTIVE PROJECTS AS AT 31 DECEMBER 2015
| Project name | Address | Product main type | Stage | Area of plot(s) (m2) | GSA / GLA (above grade) available or <future target> | No of units (above grade) available or <future target> |
| Manastirski A/B | Manastirski, Sofia | Apartments | S5 | - | 140 | 2 |
| Manastirski D | Manastirski, Sofia | Apartments | S5 | - | 5,832 | 75 |
| Madrid Blvd | Madrid Blvd, Sofia | Lease: Retail/Office | S5/S6 | - | 7,350 | 21 |
| Madrid Blvd | Madrid Blvd, Sofia | Apartments | S5/S6 | - | 3,216 | 28 |
| Marsili residential plots | Marsili, near Riga | Residential plots | S5 | - | 25,389 | 14 |
| Marsili residential plots | Marsili, near Riga | Residential plots | S2 | 120,220 | <120,220> | <68> |
| Kodulahe, stage 1 | Lahepea 7, Tallinn | Apartments | S3 | 6,102 | 8,732 | 130 |
| Kodulahe, stages 2-5 | Lahepea, Soodi, Pagi streets, Tallinn | Apartments | S2 | 22,396 | <13,300> | <200> |
| Lehiku carpet building | Lehiku 21,23 Tallinn | Apartments | S2 | 5,915 | <1,100> | <5> |
| Liimi | Liimi 1b, Tallinn | Lease: Office | S2/S5 | 2,463 | <6,500> | 1 |
| Viimsiranna | Haabneeme, Viimsi vald | Office/Mix | S3/S5 | 14,174 | 500 | 1 |
Note: Value presented inbetween < > means future target value as the project is in early (S1, S2) development stage and the building rights or the design have not been finished yet. The table does not reflect sellable or lettable volumes below grade including parking spaces and storages. The table does not give complete overview of the group’s land bank.
Description of stages
S1: Land plot acquired
S2: Building Rights Procedure
S3: Design and Preparation Works
S4: Construction
S5: Marketing and Sale
S6: Property Management and/or Lease
PEOPLE
As at 31 December 2015, 178 people worked for the group (189 as at 31 December 2014). Employee remuneration expenses in 2015 amounted to 2.7 million euros (in 2014: 2.5 million euros).
The remuneration of the member of the management board/chief executive and the members of the supervisory board of the group’s parent company including social security charges in 2015 amounted to 108 thousand euros (102 thousand euros in 2014).
The management board
The management board of Arco Vara AS has one member. Since 22 October 2012, the chief executive officer/member of the management board of Arco Vara AS has been Tarmo Sild. The mandate of the chief executive was prolonged by 3 years (until October 2018) on the supervisory board meeting held in September 2015.
The members of supervisory board
At 31 December 2015, supervisory board of Arco Vara AS consists of 5 members. As at 31.12.2014, the supervisory board had 7 members. At the extraordinary shareholders meeting held on 10 February 2015, previous supervisory board was recalled and new supervisory board with 5 members was elected. Hillar-Peeter Luitsalu, Allar Niinepuu and Rain Lõhmus, remained from the previous supervisory board and two new members are Steven Yaroslav Gorelik and Kert Keskpaik. The members of previous supervisory board Toomas Tool, Arvo Nõges, Aivar Pilv and Stephan David Balikn will not continue in new board.
SOCIAL RESPONSIBILITY
Main business lines of Arco Vara are real estate development, real estate brokerage and valuation services. Therefore, our social responsibility has several important dimensions.
Firstly, society uses real estate valuation service mainly on valuating loan guarantees. Both, production and consumption, and part of it also real estate market, are based largely on loan relations. The latter in turn is based on guarantees. Expertise given to the value of real estate property as loan guarantee therefore influences creditor’s evaluation of risks and decisions to boost capital onto the credit market. Too optimistic valuation policies might support initiating real estate bubble and irresponsible borrowing. Overly conservative valuation policies might slow down normal market activity and growth. Total value of properties valuated by the group only in Estonia exceeds 200 million euros a year and whereby having considerable effect on functioning balanced real estate market. Therefore, the group has a policy that expert opinions are appraised only by certified valuators, who are guided by the minimum requirements set out by professional organisations and additional intra-group rules. History of provided services to each valuated object will be stored in Arco Vara database. That includes object view i.e all previously issued appraisals can be found for the object to ensure better consistency of valuations.
Secondly, bonus value of real estate mediation services embodies sharing true and competent information between people. Bonus value of brokerage service, if compared with real estate portal mediation service, is in the amount, verifiability and truthfulness of additional information. The role of the broker in gathering information is to represent interest of both: his/her client (who initiates the deal) and possible counterparty. Both parties should have equal and verified information in all important questions on concluding the transaction. Therefore, the group’s policy concerning brokerage services is to accept for mediation only verified property eligible for transaction. Transaction eligibility, depending on the type of the property, means prior inspection of the property, prior review of legal aspects and control of the person (i.e. whether he/she is the owner?) initiating the transaction. To comply it’s standards, Arco Vara will not mediate uncontrolled real estate transactions.
Thirdly and most importantly, real estate products developed in the group will have an effect on appearance and usage functions of future cities. Therefore we always evaluate beside business aspects broader impact of our activities and expect to achieve maximum positive result in following areas:
- detail planning and design of living environment (not only design of individual building);
- architectural solution as a form that has the most long-term impact on people;
- room planning;
- technological shift, that means each new development product will be a seedbed for some new technology, we do not make the same things all the time;
- building quality and optimization of operating costs, that means our interest is to develop products with long-lasting usage value and endure generation after generation.
Arco Vara turns special attention to well-being of its employees and improvement of working conditions – in 2015, we renewed offices and organised joint events. In our everyday work we are following sustainability principles by using digital possibilities – digital signature, digital archiving and intra-office data processing without physical data carriers.
We inspire and encourage our people to participate voluntarily in charity projects and contribute to environmental initiatives. Our people are participating in support of orphanage children and activities for the benefit of community.
SHARE AND SHAREHOLDERS
Arco Vara AS has issued a total of 6,117,012 ordinary shares with nominal value of 0.7 euros per share. The shares are freely traded on NASDAQ OMX Tallinn stock exchange. As at 31 December 2015, the company had 1,600 shareholders (at 31 December 2014: 1,668) including 1,381 individuals as shareholders (at 31 December 2014: 1,441 individuals). The share price closed at 1.15 euros. The price has increased by 39% within year 2015 (closing price at the end of 2014 was 0.828 euros). During the period, the highest price per share was 1.29 euros and lowest price 0.83 euros. As at 31 December 2015, market capitalization of shares amounted to 7,035 thousand euros and P/E ratio of the share was 15.8 (at 31 December 2014: 5,065 thousand euros and 5.5, respectively).
| Major shareholders at 31 December 2015 | No of shares | Interest % |
| NORDEA BANK FINLAND PLC client | 862,820 | 14.1% |
| AS Lõhmus Holdings | 602,378 | 9.8% |
| Gamma Holding Investment OÜ | 565,356 | 9.2% |
| Alarmo Kapital OÜ | 489,188 | 8.0% |
| LHV PENSIONIFOND L | 389,765 | 6.4% |
| FIREBIRD REPUBLICS FUND LTD | 356,428 | 5.8% |
| OÜ HM Investeeringud | 325,505 | 5.3% |
| FIREBIRD AVRORA FUND, LTD. | 185,800 | 3.0% |
| LHV PENSIONIFOND XL | 173,583 | 2.8% |
| FIREBIRD FUND L.P. | 150,522 | 2.5% |
| Other shareholders | 2,015,667 | 33.0% |
| Total | 6,117,012 | 100.0% |
| Holdings of members of the management and supervisory boards at 31 December 2015 | Position | No of shares | Interest % |
| Rain Lõhmus (AS Lõhmus Holdings) | member of supervisory board | 602,378 | 9.8% |
| Tarmo Sild and Allar Niinepuu (Alarmo Kapital OÜ) |
member of management board/ member of supervisory board |
489,188 | 8.0% |
| Hillar-Peeter Luitsalu (OÜ HM Investeeringud, related persons) | chairman of supervisory board | 364,259 | 6.0% |
| Kert Keskpaik (privately and through K Vara OÜ) | member of supervisory board | 194,633 | 3.2% |
| Steven Yaroslav Gorelik ¹ | member of supervisory board | 3,150 | 0.1% |
| Total | 1,653,608 | 27.0% |
¹ - Steven Yaroslav Gorelik is active as fund manager in three investment funds holding interest in Arco Vara (Firebird Republics Fund Ltd, Firebird Avrora Fund Ltd and Firebird Fund L.P) of 692,750 shares (total of 11.3% interest).
DESCRIPTION OF THE MAIN RISKS
Strategic risk
Most of the group’s equity is placed in real estate development. The group is focused mainly on residential real estate development where development cycle lasts for years consisting of detail planning, designing, construction and sale - starts from purchase of land plot and finishes with the sale of end products to customers. The equity is invested mainly in starting phase of the cycle (purchase of land) on the assumption that there will be a demand for certain products in the future. Considering that the demand for development product is largely based on forecast and not on transaction then the main risk for the group is investing equity to the development product for which there is no demand in the future.
For mitigating the risk: (i) the group invests equity into different development projects in different markets (in 2016, in Sofia and Tallinn), (ii) monitors current demand and supply in its home markets and (iii) makes efforts to narrow the time between moment of investment and moment when the demand is rising - signing pre-agreements with clients, purchases land without using equity or postpones it using project financing alternatives where equity placement is not necessary.
Credit risk
The group’s credit risk arises mainly from two sources: real estate development activities and reliability of the banks where bank deposits are placed. As on real estate transactions a lot of counterparty financing goes through banks, co-operation with different financing banks is common to mitigate counterparty risk. And not all cash and cash equivalents are placed on the same banking group. As a consequence, the group considers credit risk as substantially mitigated.
Liquidity and interest rate risks
The base currency of all of the group’s loan agreements is euro and the base interest rate is 3 or 6 months EURIBOR. As a result, the group is exposed to developments on the international capital markets. The group does not use hedging instruments to mitigate its long-term interest rate risk. In 2015, the group’s interest-bearing liabilities have decreased by 2.3 million euros and at 31 December 2015 amounted to 12.8 million euros, of which 2.3 million euros is due within next 12 months. At the same time, the group’s cash and cash equivalents totalled 0.7 million euros as at 31 December 2015 (at 31 December 2014: 1.7 million euros). In 2015, interest payments on interest-bearing liabilities totalled 0.8 million euros (in 2014: 1.1 million euros). The group’s weighted average loan interest rate was 5.0% as at 31 December 2015. This is a decrease by 0.8 percentage points if compared to the end of year 2014. The main reason for the decrease of average interest rate is the premature redemption of bonds in February 2015. The bonds bore higher than average interest rate. Marginal effect had also the decrease of EURIBOR rates even below zero-level.
Currency risk
Purchase and sales contracts of provided services are mostly signed in local currencies: euros (EUR) or Bulgarian lev (BGN). Real estate sales are mostly nominated in euros, as a result of which the group’s assets and liabilities structure does not denote a significant currency risk. The group is not protected against currency devaluations. Most liquid funds are held in demand or short-term deposits denominated in euros.
Consolidated financial statements
Consolidated statement of comprehensive income
| Note | 2015 | 2014 | ||
| In thousands of euros | ||||
| Continuing operations | ||||
| Revenue from sale of own real estate | 7,019 | 5,414 | ||
| Revenue from rendering of services | 3,633 | 3,744 | ||
| Total revenue | 5,7 | 10,652 | 9,158 | |
| Cost of sales | 8 | -6,865 | -5,902 | |
| Gross profit | 3,787 | 3,256 | ||
| Other income | 9 | 80 | 37 | |
| Marketing and distribution expenses | 10 | -530 | -324 | |
| Administrative expenses | 11 | -2,020 | -1,811 | |
| Other expenses | 9 | -151 | -82 | |
| Gain on revaluation of investment property | 20 | 95 | 0 | |
| Gain on reversal of inventory write-down | 19 | 0 | 572 | |
| Gain on transactions involving joint ventures | 12 | 0 | -27 | |
| Gain on sale of subsidiary | 12,31 | 0 | 662 | |
| Operating profit | 1,261 | 2,283 | ||
| Finance income and costs | 13 | -666 | -1,062 | |
| Profit before tax | 595 | 1,221 | ||
| Income tax | 14 | -135 | -75 | |
| Net profit from continuing operations | 460 | 1,146 | ||
| Discontinued operations | ||||
| Loss from discontinued operations | 31 | -15 | -324 | |
| Net profit for the period | 445 | 822 | ||
| attributable to owners of the parent | 467 | 803 | ||
| attributable to non-controlling interests | -22 | 19 | ||
| Total comprehensive income for the period | 445 | 822 | ||
| attributable to owners of the parent | 467 | 803 | ||
| attributable to non-controlling interests | -22 | 19 | ||
| Earnings per share (in euros) | 15 | |||
| - basic | 0.08 | 0.15 | ||
| - diluted | 0.07 | 0.14 |
Consolidated statement of financial position
| Note | 31 December 2015 | 31 December 2014 | ||
| In thousands of euros | ||||
| Cash and cash equivalents | 17 | 745 | 1,691 | |
| Receivables and prepayments | 18 | 679 | 1,205 | |
| Inventories | 19 | 12,818 | 11,970 | |
| Total current assets | 14,242 | 14,866 | ||
| Receivables and prepayments | 18 | 0 | 5 | |
| Investment property | 20 | 9,513 | 11,585 | |
| Property, plant and equipment | 21 | 489 | 434 | |
| Intangible assets | 21 | 229 | 113 | |
| Total non-current assets | 10,231 | 12,137 | ||
| TOTAL ASSETS | 24,473 | 27,003 | ||
| Loans and borrowings | 22 | 2,345 | 3,194 | |
| Payables and deferred income | 23 | 1,935 | 2,659 | |
| Provisions | 24 | 146 | 274 | |
| Total current liabilities | 4,426 | 6,127 | ||
| Loans and borrowings | 22 | 10,417 | 11,826 | |
| Total non-current liabilities | 10,417 | 11,826 | ||
| TOTAL LIABILITIES | 14,843 | 17,953 | ||
| Share capital | 25 | 4,282 | 4,282 | |
| Share premium | 25 | 292 | 292 | |
| Statutory capital reserve | 25 | 2,011 | 2,011 | |
| Other reserves | 15 | 298 | 179 | |
| Retained earnings | 2,656 | 2,250 | ||
| Total equity attributable to owners of the parent | 9,539 | 9,014 | ||
| Equity attributable to non-controlling interests | 91 | 36 | ||
| TOTAL EQUITY | 9,630 | 9,050 | ||
| TOTAL LIABILITIES AND EQUITY | 24,473 | 27,003 |
Consolidated statement of cash flows
| Note | 2015 | 2014 | ||
| In thousands of euros | ||||
| Cash receipts from customers | 13,770 | 10,812 | ||
| Cash paid to suppliers | -7,679 | -8,945 | ||
| Income tax paid from profits | -197 | -4 | ||
| Other taxes paid and recovered (net) | -2,399 | -341 | ||
| Cash paid to employees | -1,015 | -866 | ||
| Other cash payments and receipts related to operating activities (net) | 9 | -41 | ||
| Net cash flow of discontinued operations | -15 | -250 | ||
| NET CASH FROM OPERATING ACTIVITIES | 2,474 | 365 | ||
| Purchase of tangible and intangible assets | -196 | -71 | ||
| Proceeds from sale of a subsidiary | 6 | 0 | 10 | |
| Proceeds from sale of an associated company | 0 | 1 | ||
| Loans provided | 0 | -3 | ||
| Placement of security deposits | 0 | -438 | ||
| Release of security deposits | 0 | 701 | ||
| Interest received | 4 | 5 | ||
| NET CASH FROM/USED IN INVESTING ACTIVITIES | -192 | 205 | ||
| Proceeds from loans received | 22 | 2,734 | 4,885 | |
| Settlement of loans and borrowings | 22 | -5,025 | -4,800 | |
| Interest paid | -788 | -1,091 | ||
| Dividends paid | -61 | 0 | ||
| Proceeds from share capital issue | 25 | 0 | 1,375 | |
| Other payments related to financing activities | -88 | -76 | ||
| NET CASH FROM/USED IN FINANCING ACTIVITIES | -3,228 | 293 | ||
| NET CASH FLOW | -946 | 863 | ||
| Cash and cash equivalents at beginning of period | 17 | 1,691 | 818 | |
| Increase or decrease in cash and cash equivalents | -946 | 863 | ||
| Increase in cash and cash equivalents through purchase of a subsidiary 6 | 0 | 10 | ||
| Cash and cash equivalents at end of period | 17 | 745 | 1,691 | |
Consolidated statement of changes in equity
| Equity attributable to owners of the parent | Non-controlling interests | Total equity | |||||||||
| Share capital | Share premium | Statutory capital reserve | Other reserves | Retained earnings | Total | ||||||
| In thousands of euros | |||||||||||
| Balance as at 31 December 2013 | 3,319 | 0 | 2,011 | 60 | 1,452 | 6,842 | 12 | 6,854 | |||
| Total comprehensive income for the period | 0 | 0 | 0 | 0 | 803 | 803 | 19 | 822 | |||
| Transactions with owners: | 963 | 292 | 0 | 119 | -5 | 1,369 | 5 | 1,374 | |||
| Increase of share capital | 963 | 292 | 0 | 0 | 0 | 1,255 | 0 | 1,255 | |||
| Change in non-controlling interests | 0 | 0 | 0 | 0 | -5 | -5 | 5 | 0 | |||
| Formation of equity reserve | 0 | 0 | 0 | 119 | 0 | 119 | 0 | 119 | |||
| Balance as at 31 December 2014 | 4,282 | 292 | 2,011 | 179 | 2,250 | 9,014 | 36 | 9,050 | |||
| Balance as at 31 December 2014 | 4,282 | 292 | 2,011 | 179 | 2,250 | 9,014 | 36 | 9,050 | |||
| Total comprehensive income for the period | 0 | 0 | 0 | 0 | 467 | 467 | -22 | 445 | |||
| Transactions with owners: | 0 | 0 | 0 | 119 | -61 | 58 | 77 | 135 | |||
| Dividends paid | 0 | 0 | 0 | 0 | -61 | -61 | 0 | -61 | |||
| Change in non-controlling interest | 0 | 0 | 0 | 0 | 0 | 0 | 77 | 77 | |||
| Formation of equity reserve | 0 | 0 | 0 | 119 | 0 | 119 | 0 | 119 | |||
| Balance as at 31 December 2015 | 4,282 | 292 | 2,011 | 298 | 2,656 | 9,539 | 91 | 9,630 | |||
Full text of Arco Vara's Annual Report 2015 is published on Arco Vara corporate website www.arcorealestate.com and is also attached to this announcement.
Marek Pontus
CFO
Arco Vara AS
Tel: +372 614 4662
marek.pontus@arcovara.ee
