Arco Vara AS Interim report III quarter 2011

Group Chief Executive’s review

Compared with the same period last year, the Group’s revenue has grown significantly across all divisions. After an interval of several years, the Service division posted an operating profit while the operating profit of the Development division remained stable year over year. The biggest setback was the loss incurred by the Construction division that is operating in an industry overshadowed by unfavourable contracts secured in prior periods and continuing bankruptcies.

In the first nine months of 2011, 81 apartments and plots were sold in the projects of Arco Vara: 57 in Estonia, 15 in Latvia and 9 in Bulgaria. Major ongoing development projects include the Tivoli apartment building in Tallinn, which is in the design stage, and the Manastirski apartment building in Sofia that has reached the stage of external finishing and interior works. With more than 7000 square metres, phase I of the Manastirski apartment building that is scheduled for completion in the first quarter of 2012 is currently our largest active development project. The progress of construction work can be viewed live at http://www.arcoinvest.bg/livd/video/camera-one-bg. We also continue to build and sell apartments in the Kodukolde community in Tallinn where the progress of site operations can be viewed in real time at http://www.kodukolde.ee/#webcam and are completing the sale of plots at Merivälja. Significant third quarter transactions include successful participation in the privatisation of land near Riga where the Group, acting through its associate Prime Capital SIA, and its Latvian partner acquired a parcel of 86 hectares. In addition, we have sold to an investor the Lille tee nursery school that is under construction in Viimsi although Arco Vara will continue to manage the project until completion and we continue to develop the Bišumuiža 1 apartment project and to sell plots in Riga. Since the reporting date, the Group has signed a deed of conveyance with the company Cleves EOOD on the transfer of 21 apartments and 13 parking spaces in the Madrid project in Bulgaria with a total value of 4.3 million euros, of which 2.5 million was paid in advance in March 2008 and 1.8 million will be paid in November 2011. In addition to the above transaction, Cleves EOOD is obliged to buy another 16 apartments and 18 parking spaces by the end of 2012 for a total price of 2.8 million euros. The final transaction price will be 7.1 million euros.

For the Service division, the first nine months of 2011 were better than the same period in several previous years. Revenue grew and the division ended the period with an operating profit of 0.09 million euros compared with an operating loss of 0.08 million euros for the same period in 2010. The number of brokerage transactions increased by 31% and the number of valuation reports issued grew by 46% year over year. At the same time, the number of brokers has decreased and the number of appraisers has grown by only 6%.

In the first nine months of 2011, the Group secured new construction contracts of 7.9 million euros. Our order backlog as at 30 September 2011 was 8.6 million euros against 6.3 million euros at the end of the third quarter of 2010.  In the third quarter, the Construction division completed the Estonian Aviation Academy building in Tartu, the largest project where Arco Ehitus was the sole general contractor in 2011. The Construction division’s third quarter operating loss is attributable to the unfavourable terms of the construction contracts signed in 2010 and by bankruptcy cases among our construction tender partners. Due to joint responsibility in consortium in two cases it was found necessary to continue construction by Arco Ehitus

The largest single construction projects that have generated a negative contribution in 2011 include:

• Construction of the Aviation Academy building in Tartu, performed in a consortium with OÜ Kristiine Ehitus (bankrupt), that resulted in a loss of 500 thousand euros.
• Reconstruction of the academic building of the University of Life Sciences in Tartu, performed in a consortium with OÜ Wolmreks Ehitus (bankrupt), that resulted in a loss of 600 thousand euros.
• Construction of the water and wastewater networks of Tamsalu as a subcontractor for AS K&H (bankrupt), that resulted in a loss of 240 thousand euros due to unsettled invoices.
• Construction of drinking water facilities for AS Emajõe Veevärk as a subcontractor for AS K&H (bankrupt), that resulted in a loss of 340 thousand euros due to uncollected revenue.

Within the past 12 months, the Group’s loans and borrowings have decreased by 8.5 million euros and equity to assets ratio has remained virtually the same at 37%. The weighted average interest rate of loans and borrowings has risen year over year due to the upward trend in EURIBOR. However, the weighted average duration of loans and borrowings has not changed.

KEY PERFORMANCE INDICATORS

• The Group ended the first nine months of 2011 with revenue of 31.3 million euros, a 2.2-fold improvement on the first nine months of 2010.
• Operating loss for nine months was 2.7 million euros, a roughly 4-fold increase year over year.
• Net loss for nine months was 3.6 million euros, roughly 2.9 times up on the first nine months of 2010.
• Equity to assets ratio at period-end was 37.0% (30 September 2010: 36.6%). Return on equity (12 months rolling) was negative (9M 2010: negative). Return on invested capital (12 months rolling) was negative (9M 2010: negative).
• At the end of the third quarter, the Group’s order backlog stood at 8.6 million euros compared with 6.3 million euros at the end of the third quarter of 2010.
• During the first nine months of 2011, the Group sold 81 apartments and plots (9M 2010: 80 apartments and plots).

REVENUE AND PROFIT

The nine-month revenue of the Development division was boosted by sale of inventory of 8.3 million euros to joint venture Tivoli Arenduse OÜ. The revenue of the Construction division has grown year over year mainly on account of increasing construction activity while its nine-month operating loss is attributable to a rapid upsurge in construction prices that emerged in 2010 and counterparty bankruptcies. Finance income and expenses have been strongly influenced by interest expense, which has grown since the Madrid project was completed and capitalisation of associated borrowing costs was discontinued. 

CASH FLOWS

In March 2011, Arco Investeeringute AS repaid ahead of schedule the remaining 5.27 million euros of the loan taken from SEB Pank for acquiring the land under the Tivoli project and 0.12 million euros of the loan taken for acquiring the land under the Laeva project. Repayment of the Tivoli loan and partial repayment of the Laeva 2 loan are not reflected in the Group’s cash flows because the buyer of the 50% stake in Tivoli Arendus OÜ paid the cash directly to SEB.   

Interest payments accounted for 0.8 million euros of the net cash outflow from financing activities. Scheduled settlements of loan principal and those related to inventory sales totalled 1.6 million euros. In connection with refinancing carried out in the third quarter, loans and borrowings grew by 0.8 million euros. During the reporting period, the credit limit was used for financing the construction of the two last phases in the Kodukolde project and the Alasniidu and Lille tee nursery schools of 3.5 million euros in aggregate. Use of the limit for the Kodukolde project is not reflected in cash flows because invoices received from Merko Ehitus are booked as a loan and there are no actual cash movements.

The largest current liabilities to be settled in the next 12 months comprise:

• estimated principal repayments to be made on the sale of reserved premises and payments under the settlement schedule of the loan taken for the Boulevard Residence Madrid project in Sofia of 4.9 million euros;
• repayments of the loan taken for the Manastirski project of 2.2 million euros;
• repayments of an investment loan taken for a cash flow project at Kadaka tee 131 of 2.2 million euros;
• repayments of the loan taken for the Bišumuiža  project of 1.1 million euros;
• repayments of the loan taken for the Laeva 2 development project of 1.1 million euros.

In the first nine months of 2011, the Group made regular repayments under the loans taken for the Kodukolde project in Tallinn, the Bišumuiža 1 project in Riga and the Madrid project in Sofia and scheduled settlements under the loans taken for its cash flow generating projects. The Group is also following the principal repayment schedules set for the bank loans taken for the Laeva 2 project and Koduküla OÜ.

SERVICE DIVISION

In 2011, the performance of the Service division has been in every respect better than in 2010. The division ended the first nine months with an operating profit of 0.09 million euros compared with an operating loss of 0.08 million euros for the first nine months of 2010. The number of the Group’s brokerage transactions increased by 31% and the number of valuation reports issued grew by 46% year over year. At the same time, the number of brokers has decreased and the number of appraisers has grown by only 6%.

DEVELOPMENT DIVISION

In the first nine months of 2011, 81 apartments and plots were sold in the projects of Arco Vara: 12 apartments in the Bišumuiža project and three plots in the Baltezers project in Latvia, 55 apartments in the Kodukolde project and two plots in the Merivälja project in Estonia, and nine apartments in the Madrid project in Sofia, Bulgaria.

The Group succeeded in finding a partner, International Invest Project OÜ, for the Tivoli project and raising financing for the construction of phase I. Design work is under way and construction should to start in 2011.

The last but one phase of the Kodukolde development project (50 apartments) was completed in June. By the end of the third quarter, only one apartment there was still unsold. Construction of the last phase (48 apartments) began in the second quarter. The work is performed and financed by AS Merko Ehitus. The buildings are expected to be completed in the first half of 2012.

The Alasniidu nursery school building was granted a use permit at the end of May and was delivered to Harku local government with whom a rental agreement had been signed. The entity that owns the nursery school was sold in the second quarter and with this the project was successfully completed.

At the end of the first quarter, a wholly-held subsidiary of Arco Investeeringute AS bought the right of superficies to a property in Lille tee in Viimsi with a view to building a nursery school for six groups of children and signed a long-term rental agreement with the local government. The nursery school should be completed in the first quarter of 2012. Construction work is performed by YIT. In September 2011, Arco Investeeringute AS sold its 100% interest in Lilletee LA OÜ but will continue acting as construction manager until the nursery school is completed.

In Bulgaria, the construction of phase I of the Manastirski project is under way: 51% of the apartments have already been reserved. In the commercial and residential building Boulevard Residence Madrid in Sofia the division continues delivering reserved apartments under real right contracts and selling the remaining free apartments.

At the end of September 2011, the Development division employed 24 people (30 September 2010: 26).

For further information on our projects, please refer to: www.arcorealestate.com/development.

CONSTRUCTION DIVISION

The Construction division is typically actively involved in environmental, infrastructure and civil engineering (mostly educational establishments-related) projects.

At the end of the third quarter of 2011, the largest active construction contracts comprised the design and build of water and wastewater pipelines for the city of Loksa (remaining balance 3.3 million euros), the construction of the Tallinn-Muuga water and wastewater networks and facilities (remaining balance 1.8 million euros) and the design and build of water and wastewater networks for the Jõgeva and Puurmani rural municipalities (remaining balance 1.9 million euros).

In the first nine months of 2011, the division secured new construction contracts of 7.9 million euros. At the reporting date, the order backlog stood at 8.6 million euros compared with 6.3 million euros at the end of the third quarter of 2010.

At the end of September 2011, the Construction division employed 58 people (30 September 2010: 44).

Consolidated statement of comprehensive income

 Consolidated statement of financial position

 Consolidated statement of cash flows

Lembit Tampere
         
Arco Vara AS
Jõe 2b, 10151 Tallinn, Estonia
tel: +372 614 4630
gsm: +372 510 9959
fax: +372 614 4646