MANAGEMENT REPORT
Chairman’s summary
Nine months of 2020 have demonstrated the economic volatility primarily related to the spread of COVID-19. However, the spring uncertainty and an expectation for the decrease in the real estate sector in autumn has not materialized to date. I have previously emphasized that real-estate development is a long-term process, thus the changes in the economic environment do not manifest themselves immediately. Pro Kapital’s sales have remained active through 2020 and we see a growing awareness of customers and their focus on entire living environment and on quality that would last. I believe that Pro Kapital's value proposition is very attractive on the market today and this is clearly reflected in pre-sales. We have reported a 23.7 million euro decrease of total sales during the 9 months of 2020, compared to the same period of 2019. However, as our revenues from the sales of the real estate depend on the completion of the residential developments, the revenues are recorded at the moment notary deeds of sale are concluded. Currently all major development projects are either under construction or prepared to be started. Despite very active presales across our operating areas, these numbers will be recorded upon completion of houses and notarization of sales transactions.
In the first quarter we refinanced senior secured bonds 2015/2020 with the new bonds 2020/2024 - each denominated 100 000 euros, carrying a fixed rate coupon of 8.00 per cent and maturing in February 2024. As a result of the first tranche, Pro Kapital refinanced part of its non-secured convertible bonds with new non-convertible bonds - 2 925 641 bonds with the total issue value of 8 191 794.80 euros as of 3 August 2020. On 30 September, Pro Kapital announced the launch of the second tranche of subscriptions of non-convertible bonds by private placement. The subscription period of the Bonds ends on 6 November 2020. In case of subscription of all of the Bonds the aggregate nominal value of the Bonds issued shall be 10 249 178.80 euros (3 660 421 Bonds, each having the issue price and nominal value of 2.80 euro).
In Tallinn, all ongoing construction activities are carried out according to plans in Kristiine City and Kalaranna District. In Kristiine City, the construction of Ratsuri Houses continues, and this unique combination of a renovated historic stable house and the accompanying New Holland-style building will be completed in spring of 2021. To date, we have presold 29 and booked 2 apartments out of the total 39 of Ratsuri Houses and the client interest has remained very active. We have also started signing bookings for the next project in Kristiine City residential area, called Kindrali Houses, for which we got the building permit in September. Kindrali Houses development is a truly unique home for people who value urban architecture and a green living environment and by its level of quality is comparable with the real estate in the central city. We have to date, reservations for 33 apartments out of 129 in total of the Kindrali Houses development project.
Another ongoing project in Tallinn is the residential area Kalaranna District, located right by the sea and on the border of Old Town. Preserving the history, location and value of the Kalaranna area is of great importance to us, with this project we open the sea to the city. Thus, the entire development including the renewed bank and beach area, will add significant value for the city of Tallinn. Kalaranna District is very much valued by our customers, not only because of the location but for the complete value proposition. Eight buildings with 240 apartments will be completed with the first, ongoing construction phase, of which 144 have been presold and 2 booked to date. With the second construction phase 146 apartments shall be completed, of which 47 have been booked. Customers continue to show very high interest in all our developments: Kalaranna Kvartal and Kristiine City projects Ratsuri Houses and Kindrali Houses.
There are no ongoing construction works in Riga and we are currently focused on the sales of River Breeze Residence, which continues to be the market leader in the premium segment. Simultaneously we are preparing for the further development of Kliversala Residential Quarter. We have to date, received a building permit for City Oasis Residential Quarter, which will shape the historical area on the border of Riga's city centre into a modern residential area. City Oasis is a truly unique home for people who value contemporary architecture and a tranquil, green living environment. The development project foresees 326 new functional city homes in a safe, green and urban environment. We plan to proceed with construction activities as soon as we find the market situation favourable. Unfortunately, the Latvian real-estate market has not been as active as its neighbouring countries Estonia and Lithuania. That situation has remained relatively similar within recent years and is heavily influenced by inflexible conditions of the banks towards their customers.
Another exceptional development project is Šaltiniu Namai Attico in Vilnius, a prestigious living area, surrounded by the nature in the most tranquil part of the Old Town. This project has proven to be extremely valued by our clients for both - people who are buying a home and who are looking for an investment property. Regardless of the overall uncertainty this year, the sales have remained active and exceeded budget expectation. Moreover, Šaltiniu Namai Attico has reached the top of the Vilnius real estate market, being one of market leaders in the luxury segment. At the end of the 3rd quarter 86% of the Šaltiniu Namai Attico apartments have been sold. We are currently preparing for the following phase with city villas and commercial building and plan to start the construction in 2021.
This spring has had a significant impact on PK Parkhotel Kurhaus in Bad Kreuznach, Germany. Due to the COVID-19 restrictions, the hotel was closed from March until the end of June. Consequently, there were no revenues during second quarter and the costs of the hotel were reduced to the minimum during the closure. The impact of COVID-19 has been 1.5 million euros in less hotel revenues and ca 0.5 million lower net result during nine months. PK Parkhotel Kurhaus operating company received a long-term government support loan in amount of 500 000 euros on favourable conditions and a non-refundable grant of 83 581 euros. The hotel’s activity has been recovering and funds received have helped to support the period of uncertainty. Understandably, we have not yet been able to reach last year's levels. The increasing number of COVID-19 cases brings uncertainty to the following months, and as stated recently, all hotels in Germany are to be closed at least until end of November, starting from the 2 November. We are adjusting plans according to the changes in the situation and restrictions imposed by the German Government.
The difficult period has also affected our subsidiary, AS Tallinna Moekombinaat. On 3 April 2020 AS Pro Kapital Grupp announced the initiation of reorganization proceedings of its subsidiary AS Tallinna Moekombinaat. On 15 June 2020 Pro Kapital announced that the court has appointed experts to evaluate the plan, who had to submit their opinion on the reorganization plan by 22 July 2020 and that the court would decide on the approval of the plan by 10 August 2020. The appointed experts filed their opinions within the due date and their overall position about the reorganisation plan was positive. On 30 July 2020 Pro Kapital notified that the Tallinn District Court had annulled the ruling of the Harju County Court in connection with the appointment of experts and referred the matter back to the county court for a new decision. With its 14 August 2020 ruling the County Court terminated the reorganization proceedings because it has established that AS Tallinna Moekombinaat is allegedly permanently insolvent. On 31 August 2020 AS Tallinna Moekombinaat contested the ruling of the County Court with which the court decided to terminate the proceedings. Three creditors of AS Tallinna Moekombinaat also filed an appeal. AS Tallinna Moekombinaat has also challenged the ruling of the District Court on which the ruling of the County Court was based. The reorganization proceedings are ongoing and the influence of initiating the reorganization proceedings continue to apply to AS Tallinna Moekombinaat. T1 Mall of Tallinn is opened for customers and proceeds with its activities according to plans. The purpose of reorganisation proceedings is to ensure continuation of normal daily business by safeguarding the rights and interests of investors, employees, creditors and all cooperation partners. The reorganisation process involves only AS Tallinna Moekombinaat and does not influence directly any other group company of AS Pro Kapital Grupp. No group company has secured nor guaranteed liabilities of AS Tallinna Moekombinaat. In the worst-case scenario, if reorganization proceedings will fail and AS Tallinna Moekombinaat goes bankrupt, AS Pro Kapital Eesti will have to record the maximum losses of 26 million euros including loan amount of 22.2, unpaid interest balance 3.0 million euros, unpaid invoices 0.3 million euros and the portion of equity of TMK in the amount of 0.2 million euros as at 30 September 2020. The total negative effect to the group would be 39 million euros (including initial investment into the share capital of the subsidiary). However, it would not affect liquidity of the group nor the short-term cash flows. The situation would influence the long-term cash flows to the extent of loan and interest payments.
2020 has presented unexpected challenges for everyone and will most likely continue to do so. We make our long-term decisions consciously and conservatively. Certainly, every negative thing is accompanied by new prospects and expectations. Consumption and behavioural habits are changing and I see this as an opportunity to adapt and offer something new and valuable. Our primary focus is currently set on ongoing and upcoming projects, sales of available inventory and contributing to re-establishing and maintaining normal activities in rental and hotel operations.
Paolo Michelozzi
CEO
Key financials
The total revenue of the Company for nine months of 2020 was 13.6 million euros, which is a decrease of 63% compared to the reference period (2019 9M: 37.3 million euros). The total revenue of the third quarter was 4.6 million euros, a decrease of 69% compared to 14.8 million euros during the same period in 2019. The real estate sales revenues are recorded at the moment of handing over the premises to the buyer. Therefore, the revenues from sales of real estate depend on the completion of the residential developments. The real estate sales revenue was higher in the first nine months in 2019 due to completion of apartment buildings in Kristina Houses and Šaltinių Namai projects. In 2020, the Company continues with sales of completed developments - River Breeze Residence in Riga and Šaltinių Namai Attico development in Vilnius.
The gross profit for nine months of 2020 decreased by 54% amounting to 5.4 million euros compared to 11.7 million euros during the same period in 2019. In the third quarter the gross profit figures were 1.9 million euros and 3.6 million euros respectively. Gross profit margin has increased by 25%.
The operating result for nine months of 2020 was 1.1 million euros profit comparing to 6.9 million euros profit during the same period in 2019. The operating result of the third quarter was 0.9 million euros comparing to 1.8 million euros in 2019. The decrease in operating result is influenced mainly by the lower total revenues.
The net result for nine months of 2020 was 11.1 million euros loss and in the third quarter 3.2 million euros loss. In the comparable periods the net result was respectively 3.1 million euros loss and 2.8 million euros loss. The net result of the reporting period was influenced by the high interest expenses in AS Tallinna Moekombinaat.
Cash used in operating activities during nine months was 4.5 million euros comparing to 6.8 million euros cash generated during the same period in 2019. In the third quarter of 2020 cash used in operating activities was 1.9 million euros while 6.3 million euros cash was generated during the same period in 2019.
Net assets per share on 30 September 2020 totalled to 1.07 euros compared to 1.72 euros on 30 September 2019.
Key performance indicators
| 2020 9M | 2019 9M | 2020 Q3 | 2019 Q3 | 2019 12M | |
| Revenue, th EUR | 13 615 | 37 283 | 4 562 | 14 771 | 55 276 |
| Gross profit, th EUR | 5 371 | 11 740 | 1 880 | 3 561 | 15 809 |
| Gross profit, % | 39% | 31% | 41% | 24% | 29% |
| Operating result, th EUR | 1 136 | 6 885 | 885 | 1 764 | -15 178 |
| Operating result, % | 8% | 18% | 19% | 12% | -27% |
| Net result, th EUR | -11 085 | -3 075 | -3 183 | -2 799 | -29 172 |
| Net result, % | -81% | -8% | -70% | -19% | -53% |
| Earnings per share, EUR | -0.19 | -0.05 | -0.06 | -0.05 | -0.48 |
| 30.09.2020 | 30.09.2019 | 31.12.2019 | |
| Total Assets, th EUR | 218 026 | 243 213 | 210 821 |
| Total Liabilities, th EUR | 157 545 | 145 549 | 139 255 |
| Total Equity, th EUR | 60 481 | 97 664 | 71 566 |
| Debt / Equity * | 2.60 | 1.49 | 1.94 |
| Return on Assets, % ** | -5.2% | -1.4% | -12.8% |
| Return on Equity, % *** | -17.3% | -3.4% | -34.4% |
| Net asset value per share, EUR **** | 1.07 | 1.72 | 1.26 |
*debt / equity = total debt / total Equity
**return on assets = net profit/loss / total average assets
***return on equity = net profit/loss / total average equity
****net asset value per share = net equity / number of shares
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated interim statement of financial position
| in thousands of euros | 30.09.2020 | 30.09.2019 | 31.12.2019 | |
| ASSETS | ||||
| Current assets | ||||
| Cash and cash equivalents | 7 316 | 5 270 | 10 616 | |
| Current receivables | 1 422 | 1 219 | 1 475 | |
| Inventories | 53 405 | 51 717 | 41 031 | |
| Total current assets | 62 143 | 58 206 | 53 122 | |
| Non-current assets | ||||
| Non-current receivables | 4 417 | 3 708 | 2 297 | |
| Property, plant and equipment | 7 011 | 7 165 | 7 146 | |
| Right-of-use assets | 400 | 558 | 519 | |
| Investment property | 143 713 | 173 219 | 147 365 | |
| Intangible assets | 342 | 357 | 372 | |
| Total non-current assets | 155 883 | 185 007 | 157 699 | |
| TOTAL ASSETS | 218 026 | 243 213 | 210 821 | |
| LIABILITIES AND EQUITY | ||||
| Current liabilities | ||||
| Current debt | 78 032 | 43 621 | 111 759 | |
| Customer advances | 7 124 | 2 059 | 3 974 | |
| Current payables | 17 844 | 8 418 | 8 741 | |
| Tax liabilities | 225 | 218 | 1 155 | |
| Short-term provisions | 358 | 1 300 | 267 | |
| Total current liabilities | 103 583 | 55 616 | 125 896 | |
| Non-current liabilities | ||||
| Long-term debt | 50 793 | 87 359 | 10 871 | |
| Other non-current payables | 1 783 | 1 043 | 1 013 | |
| Deferred income tax liabilities | 1 230 | 1 414 | 1 348 | |
| Long-term provisions | 156 | 117 | 127 | |
| Total non-current liabilities | 53 962 | 89 933 | 13 359 | |
| TOTAL LIABILITIES | 157 545 | 145 549 | 139 255 | |
| Equity attributable to owners of the Company | ||||
| Share capital in nominal value | 11 338 | 11 338 | 11 338 | |
| Share premium | 5 661 | 5 661 | 5 661 | |
| Statutory reserve | 1 134 | 1 134 | 1 134 | |
| Revaluation reserve | 3 262 | 3 262 | 3 262 | |
| Retained earnings | 49 743 | 76 725 | 76 725 | |
| Profit/ Loss for the period | -10 672 | -2 734 | -26 981 | |
| Total equity attributable to owners of the Company | 60 466 | 95 386 | 71 139 | |
| Non-controlling interest | 15 | 2 278 | 427 | |
| TOTAL EQUITY | 60 481 | 97 664 | 71 566 | |
| TOTAL LIABILITIES AND EQUITY | 218 026 | 243 213 | 210 821 | |
Consolidated interim statements of profit and loss and other comprehensive income
| in thousands of euros | 2020 9M | 2019 9M | 2020 Q3 | 2019 Q3 | 2019 12M |
| CONTINUING OPERATIONS | |||||
| Operating income | |||||
| Revenue | 13 615 | 37 283 | 4 562 | 14 771 | 55 276 |
| Cost of goods sold | -8 244 | -25 543 | -2 682 | -11 210 | -39 467 |
| Gross profit | 5 371 | 11 740 | 1 880 | 3 561 | 15 809 |
| Marketing expenses | -428 | -487 | -141 | -193 | -728 |
| Administrative expenses | -3 839 | -4 338 | -889 | -1 563 | -6 013 |
| Other income | 110 | 56 | 39 | 6 | 95 |
| Other expenses | -78 | -86 | -4 | -47 | -24 341 |
| Operating profit | 1 136 | 6 885 | 885 | 1 764 | -15 178 |
| Financial income | 3 | 3 | 1 | 1 | 4 |
| Financial expense | -12 013 | -10 074 | -3 937 | -4 502 | -14 019 |
| Profit/ loss before income tax | -10 874 | -3 186 | -3 051 | -2 737 | -29 193 |
| Income tax | -211 | 111 | -132 | -62 | 21 |
| Profit/ loss for the period | -11 085 | -3 075 | -3 183 | -2 799 | -29 172 |
| Attributable to: | |||||
| Equity holders of the parent | -10 672 | -2 734 | -3 119 | -2 605 | -26 981 |
| Non-controlling interest | -413 | -341 | -64 | -194 | -2 191 |
| Total comprehensive income/ loss for the year | -11 085 | -3 075 | -3 183 | -2 799 | -29 172 |
| Attributable to: | |||||
| Equity holders of the parent | -10 672 | -2 734 | -3 119 | -2 605 | -26 981 |
| Non-controlling interest | -413 | -341 | -64 | -194 | -2 191 |
| Earnings per share for the period (EUR) | -0.19 | -0.05 | -0.06 | -0.05 | -0.48 |
Consolidated interim statements of cash flows
| in thousands of euros | 2020 9M | 2019 9M | 2020 Q3 | 2019 Q3 | 2019 12M |
| Cash flows from operating activities | |||||
| Profit/loss for the period | -11 085 | -3 075 | -3 183 | -2 799 | -29 172 |
| Adjustments for: | |||||
| Depreciation, amortisation of non-current assets | 311 | 294 | 102 | 100 | 399 |
| Gain from disposal of property, plant, equipment | 0 | 0 | 0 | 0 | -3 |
| Gain from disposal of investment property | 0 | 0 | 0 | 0 | 6 |
| Change in fair value of property, plant, equipment | 0 | 0 | 0 | 0 | -15 |
| Change in fair value of investment property | 0 | 0 | 0 | 0 | 24 236 |
| Finance income and costs | 12 010 | 10 071 | 3 936 | 4 501 | 14 016 |
| Changes in deferred tax assets and liabilities | -118 | -590 | -59 | -413 | -656 |
| Other non-monetary changes (net amounts) | -3 118 | 2 446 | -3 114 | 2 396 | 419 |
| Changes in working capital: | |||||
| Trade receivables and prepayments | -2 049 | -1 785 | -1 069 | -826 | -630 |
| Inventories | -12 373 | 7 591 | -8 023 | 6 180 | 18 276 |
| Liabilities and prepayments | 11 870 | -8 154 | 9 522 | -2 786 | -6 412 |
| Provisions | 29 | -15 | 10 | -39 | -51 |
| Net cash used/ generated in operating activities | -4 523 | 6 783 | -1 878 | 6 314 | 20 413 |
| Cash flows from investing activities | |||||
| Payments for property, plant and equipment | -29 | -201 | -18 | -35 | -226 |
| Payments for intangible assets | 0 | -46 | 0 | -21 | -74 |
| Payments for investment property | -657 | -5 496 | -260 | -859 | -6 019 |
| Proceeds from disposal of investment property | 0 | 0 | 0 | 0 | 2 170 |
| Interests received | 2 | 3 | 0 | 1 | 4 |
| Net cash used in investing activities | -684 | -5 740 | -278 | -914 | -4 145 |
| Cash flows from financing activities | |||||
| Net proceeds from secured bonds | 28 500 | 0 | 0 | 0 | 0 |
| Redemption of non-convertible bonds | -28 003 | -600 | -3 | -300 | -500 |
| Proceeds from borrowings | 7 689 | 15 917 | 4 832 | 2 529 | 16 461 |
| Repayment of borrowings | -684 | -12 639 | -28 | -5 063 | -21 551 |
| Repayment of lease liabilities | -130 | -129 | -46 | -44 | -192 |
| Interests paid | -5 465 | -3 362 | -2 344 | -1 354 | -6 910 |
| Deposited amount related to loan obligations | 0 | -2 000 | 0 | 0 | 0 |
| Net cash used/ generated by financing activities | 1 907 | -2 813 | 2 411 | -4 232 | -12 692 |
| Net change in cash and cash equivalents | -3 300 | -1 770 | 255 | 1 168 | 3 576 |
| Cash and cash equivalents at the beginning | 10 616 | 7 040 | 7 061 | 4 102 | 7 040 |
| Cash and cash equivalents at the end of the period | 7 316 | 5 270 | 7 316 | 5 270 | 10 616 |
The full report can be found in the file attached.
Allan Remmelkoor
Member of the Board
+372 614 4920
prokapital@prokapital.ee
Attachment
