Group Chief Executive’s review
In the third quarter of 2012, the most important internal developments for Arco Vara AS were changes on the supervisory board and in the Group’s structure and staffing.
In our second quarter report we informed you about the resignation of three members of the supervisory board and the election of three new members - Toomas Tool, Stephan David Balkin and Aivar Pilv. At an extraordinary general meeting, which convened on 30 July 2012, the supervisory board was further strengthened by the election of Arvo Nõges and Rain Lõhmus. The new board members’ contribution to the Group’s development has triggered reshuffling aimed at modernising the Group’s management and improving internal efficiency. We are not planning any other major staffing changes. From now on, we are going to focus on utilising our existing resources more effectively and streamlining our management structure (mostly by reducing the formal levels of management and simplifying the decision-making and accountability mechanism).
In the third quarter, we reduced the number of staff by 23 (by 13 in Estonia, 5 in Latvia and 5 in Bulgaria).
The structural change in Latvia was aimed at gaining complete control and ownership of the Bišumuiža apartments, which from the point of view of further development constitute assets with additional profit potential, and dividing the Mazais Baltezers plots, which are located in naturally beautiful surroundings near Riga, with the former Latvian development partner.
In other respects, we continued our ordinary business operations.
Development operations in Estonia
Tivoli project (joint venture Tivoli Arenduse OÜ): In May we signed a construction contract of 13 million euros and continued preparations for commencing construction.
Kodukolde project: Construction of phase VI (48 apartments) at Helme 16 in Tallinn ended in June 2012. By the end of the third quarter, 35 apartments had been sold.
Tehnika 53 project: The contract for the construction of a residential and commercial building called Kastanimaja (Chestnut House) was signed in June 2012 and construction began in July. Sales have been successful - by the end of the third quarter 11 of the 14 apartments were covered with contracts under the law of obligations (pre-sale contracts).
Ahtri 3 project (joint venture Arco HCE OÜ): We continued preparing the business plan together with a partner.
Development operations in Latvia
The Bišumuiža apartment buildings development project in Latvia was suspended in the third quarter but sales of completed apartments continued. At the reporting date, three completed apartments were still unsold. The number of uncompleted apartments is 28.
We also continued selling the Mazais Baltezers plots.
Development operations in Bulgaria
The construction of phase I in the Manastirski project in Sofia (over 7,000 square metres) has been completed. At the reporting date, 57 of the 74 apartments had either been sold or reserved (on a prepayment basis).
In addition, we continue to lease out commercial premises and to sell the remaining free apartments in the commercial and residential building Boulevard Residence Madrid in Sofia (approximately 7,000 square metres). At the reporting date, 66 units had either been sold or reserved (on a prepayment basis) and 21 units were still on sale.
Construction operations
In the third quarter, the Group signed construction contracts of 0.4 million euros. At the reporting date, the order backlog was 4.5 million euros compared with 8.6 million euros at the end of the third quarter of 2011. The Construction division ended the first nine months of 2012 with a operating profit of 0.2 million euros compared with an operating loss of 2.2 million euros for the first nine months of 2011.
Service operations
In the first nine months of 2012, the Service division generated revenue of 1.9 million euros, 9% up on the first nine months of 2011, and earned an operating profit of 663 thousand euros (includes non-recurring income of 556 thousand euros from the reassessment of the carrying values of liabilities performed on the merger of companies). Excluding non-recurring income, the operating profit of the Service division would have been 107 thousand euros, which is still 18% larger than the 91 thousand euros earned a year ago. The number of brokerage transactions increased by 6% and the number of valuation reports issued grew by 8% year over year. At the same time, the number of brokers has increased by 1% and the number of appraisers by 31%.
Action plan for the fourth quarter
In the fourth quarter we are going to continue: (i) enhancing the Group’s structure, (ii) completing the cost-cutting programme, (iii) streamlining our management operations and (iv) making preparations for improving the Group’s capitalisation and reducing its liquidity risks. At the same time, we will have to resolve significant sustainability issues surrounding the business plans of several subsidiaries and joint ventures and to renegotiate the terms of some important contracts which currently do not meet our long-term targets of earnings a profit and increasing our business volumes. It is possible that the values of some assets will be reassessed. All significant developments and transactions will first be disclosed via the stock exchange information system.
KEY PERFORMANCE INDICATORS
- The Group ended the first nine months of 2012 with revenue of 16.0 million euros. Revenue for the first nine months of 2011 was 31.3 million euros (including 8.3 million euros earned on the sale of the Tivoli properties). Excluding the effect of the Tivoli transaction, revenue for the first nine months of 2012 was 30% smaller than a year ago.
- Operating profit for the period was 0.1 million euros. In the same period in 2011, the Group incurred an operating loss of 2.7 million euros.
- Net loss for the first nine months was 1.1 million euros, a 69% decrease from the net loss of 3.6 million euros incurred in the first nine months of 2011.
- Equity to assets ratio at period-end was 44.1% (30 September 2011: 37.0%). Return on equity (12 months rolling) was negative.
- At the end of the third quarter, the Group’s order backlog stood at 4.5 million euros compared with 8.6 million euros at the end of the third quarter of 2011.
- Within the first nine months, the Group sold 57 apartments and plots (9M 2011: 81 apartments and plots) in its self-developed projects.
| 9M 2012 | 9M 2011 | Q3 2012 | Q3 2011 | ||
| In millions of euros | |||||
| Revenue | 16.0 | 31.3 | 4.9 | 7.8 | |
| Operating profit/loss | 0.1 | -2.7 | 0.7 | -1.2 | |
| Net profit/loss | -1.1 | -3.6 | 0.2 | -1.7 | |
| EPS (in euros) | -0.23 | -0.77 | 0.04 | -0.36 | |
| Total assets at period-end | 51.9 | 64.0 | |||
| Invested capital at period-end | 42.5 | 49.0 | |||
| Net loans at period-end | 18.4 | 23.4 | |||
| Equity at period-end | 22.9 | 23.7 | |||
| Average loan term (in years) | 1.9 | 2.0 | |||
| Average interest rate of loans (per year) | 6.5% | 7.6% | |||
| ROIC (rolling, four quarters) | neg | neg | |||
| ROE (rolling, four quarters) | neg | neg | |||
| Number of staff at period-end | 103 | 147 |
REVENUE AND PROFIT
| 9M 2012 | 9M 2011 | Q3 2012 | Q3 2011 | ||
| In millions of euros | |||||
| Revenue | |||||
| Development | 5.7 | 17.0 | 1.9 | 3.0 | |
| Service | 1.9 | 1.8 | 0.6 | 0.6 | |
| Construction | 8.6 | 12.8 | 2.5 | 4.3 | |
| Eliminations | -0.2 | -0.3 | -0.1 | -0.1 | |
| Total revenue | 16.0 | 31.3 | 4.9 | 7.8 | |
| Operating profit/loss | |||||
| Development | 0.0 | 0.2 | 0.4 | 0.4 | |
| Service | 0.6 | 0.1 | 0.6 | 0.0 | |
| Construction | 0.2 | -2.2 | -0.1 | -1.4 | |
| Eliminations | 0.0 | 0.2 | -0.2 | 0.0 | |
| Unallocated income and expenses | -0.7 | -1.0 | 0.0 | -0.3 | |
| Total operating profit/loss | 0.1 | -2.7 | 0.7 | -1.2 | |
| Interest income and expense | -0.9 | -1.2 | -0.3 | -0.4 | |
| Other finance income and costs | -0.3 | 0.2 | -0.2 | -0.1 | |
| Net profit/loss | -1.1 | -3.6 | 0.2 | -1.7 |
In 2011, the Development division’s revenue was significantly impacted by the sale of inventory of 8.3 million euros to the joint venture Tivoli Arendus OÜ.
CASH FLOWS
| 9M 2012 | 9M 2011 | |||
| In millions of euros | ||||
| Cash flows from operating activities | 0.2 | -1.9 | ||
| Cash flows from investing activities | 0.8 | 0.0 | ||
| Cash flows from financing activities | -2.0 | -0.4 | ||
| Net cash flow | -1.0 | -2.3 | ||
| Cash and cash equivalents at beginning of period | 2.2 | 4.2 | ||
| Cash and cash equivalents at end of period | 1.2 | 1.9 |
At 30 September 2012, the largest current liabilities to be settled in the next 12 months comprised:
- estimated principal repayments to be made on the sale of reserved premises and payments under the settlement schedule of the loan of the Boulevard Residence Madrid project in Sofia of 2.6 million euros;
- repayments of the loan taken for the Manastirski project of 3.0 million euros;
- repayments of the loan taken for the Bišumuiža 1 project of 0.5 million euros;
- repayments of the construction loan taken for the Kodukolde project of 0.4 million euros;
In the reporting period, we made repayments of the loans taken for the Bišumuiža 1 project in Riga, the Baltezers 5 project near Riga, the Kodukolde project in Tallinn, the Manastirski project in Sofia and repaid the Kerberon loan in full.
In addition, we made scheduled repayments of the loans taken for our cash flow generating projects, Madrid and Pärnu market, and followed the principal repayments schedule agreed for the bank loan taken by Arco Real Estate AS (previously the loan of Koduküla OÜ).
SERVICE DIVISION
In the first nine months of 2012, the Service division performed better than in the comparative period, generating an operating profit of 663 thousand euros (includes non-recurring income of 556 thousand euros from the reassessment of the carrying values of liabilities performed on the merger of companies) compared with an operating profit of 91 thousand euros a year ago. Revenue for the first nine months of 2012 was 1,927 thousand euros, 9% up on the first nine months of 2011. The number of brokerage transactions increased by 6% and the number of valuation reports issued grew by 8% year over year. At the same time, the number of brokers has increased by 1% and the number of appraisers by 31%.
| 9M 2012 | 9M 2011 | Change, % | ||
| Number of completed brokerage transactions | 1,106 | 1,045 | 6% | |
| Number of projects on sale | 229 | 178 | 29% | |
| Number of valuation reports issued | 4,753 | 4,390 | 8% | |
| Number of appraisers* | 47 | 36 | 31% | |
| Number of brokers* | 74 | 73 | 1% | |
| Number of staff at end of period | 37 | 46 | -20% | |
| * Includes people working under service contracts | ||||
DEVELOPMENT DIVISION
In the first nine months of 2012, Arco Vara sold 53 apartments and four plots in its own projects: five apartments in the Bišumuiža project and four plots in the Baltezers project in Latvia and 37 apartments in the Kodukolde project in Estonia. In addition, in the third quarter we sold 11 apartments in the Manastirski project in Bulgaria. It should be noted that the Bulgarian sales figures do not yet include all the apartments sold in the Manastirski project. The sales of 46 apartments are still being finalised. Respective revenue will be recognised from the fourth quarter onwards.
In June, the division completed phase VI of the Kodukolde development project at Helme 16 in Tallinn, which consists of two apartment buildings with a total of 48 apartments. Out of the latter, 35 were sold during the second and third quarter (under real right contracts). In October four more apartments were sold. At the reporting date, the inventory of the project included nine unsold apartments, four of which were reserved.
In the fourth quarter of 2011, Tivoli Arendus OÜ obtained a permit for the construction of six residential buildings. The design and build contract with Nordecon AS was signed in May 2012. Because of the time required for making changes to the design documentation and obtaining appropriate approvals, commencement of construction operations has been scheduled for winter 2012-2013.
In January 2012, the division obtained a permit for the construction of a residential and commercial building of energy class B called Kastanimaja (Chestnut House), designed to be located at Tehnika 53 in Tallinn. The work was put out to tender in the first quarter and the construction contract with AS Parmeron was signed in June. According to plan, construction work will be completed in 12 months. Pre-sale of apartments, which began in May 2012, has been successful: by the end of the third quarter 11 of the 14 apartments were covered with contracts under the law of obligations (under Estonian legislation, in a real estate transaction a contract under the law of obligations is signed when the buyer makes a prepayment and the parties agree the terms and conditions of sale, thus it is essentially a presale contract; title to the property transfers under a real right contract, which is usually signed when the real estate is complete).
In Bulgaria, the construction of phase I of the Manastirski project has been completed. At 30 September 2012, 77% of the 74 apartments were reserved or sold. In the commercial and residential building Boulevard Residence Madrid in Sofia the division continues to lease out commercial premises, to deliver reserved apartments under real right contracts, and to sell the remaining free apartments.
In the Bišumuiža 1 project in Latvia further development and construction has been suspended. There are two buildings of 14 apartments each in different stages of completion. The completed phases include three unsold apartments.
In April 2012 we divested our stake in the joint venture Bišumuižas Nami SIA to the co-venturer SIA Linstow Baltic. Arco Vara sought possibilities for exiting the project for over a year. Through the transaction, the Group disposed of the obligation to support the joint venture in the development of apartment buildings and in servicing loan liabilities. Bišumuižas Nami SIA’s loan liabilities totalled 14 million euros.
In July, we completed the merging of some small project companies. Arco Vara Ärikinnistute OÜ, OÜ Waldrop Investments and AIP Projekti OÜ were merged with Fineprojekti OÜ.
Through a transaction finalised on 5 September 2012, the Latvian development entity Arco Development SIA was divided into two companies - Arco Development SIA and Newcom SIA. By the transaction, Newcom SIA acquired some of the assets and liabilities that used to belong to Arco Development SIA. As a result of the transaction, Arco Investeeringute AS became the sole owner of Arco Development SIA and the former non-controlling shareholder Viktors Savins became the sole owner of the new entity Newcom SIA. The transaction was undertaken to enable the non-controlling shareholder to exit from the investment in Arco Development SIA.
At the end of September 2012, the Development division employed 12 people (30 September 2011: 24).
For further information on our projects, please refer to: www.arcorealestate.com/development.
CONSTRUCTION DIVISION
The Construction division specialises in environmental and civil engineering.
At the end of the third quarter of 2012, the largest contracts in progress were the construction of the Paide wastewater treatment plant (remaining balance 2.6 million euros) and the construction of the Kuusalu public water and wastewater network (remaining balance 2 million euros).
In the third quarter of 2012, the division secured new construction contracts of 0.4 million euros. At the reporting date, the order backlog stood at 4.5 million euros compared with 8.6 million euros at the end of the third quarter of 2011.
At the end of September 2012, the Construction division employed 40 people (30 September 2011: 58).
Consolidated statement of comprehensive income
| Note | 9M 2012 | 9M 2011 | Q3 2012 | Q3 2011 | |||
| In thousands of euros | |||||||
| Revenue from rendering of services | 11,564 | 16,280 | 3,448 | 5,942 | |||
| Revenue from sale of goods | 4,455 | 15,033 | 1,494 | 1,866 | |||
| Total revenue | 2, 3 | 16,019 | 31,313 | 4,942 | 7,808 | ||
| Cost of sales | 4 | -13,787 | -30,640 | -4,175 | -8,198 | ||
| Gross profit/loss | 2,232 | 673 | 767 | -390 | |||
| Other income | 7 | 884 | 18 | 675 | 6 | ||
| Marketing and distribution expenses | 5 | -203 | -281 | -60 | -67 | ||
| Administrative expenses | 6 | -2,010 | -2,970 | -626 | -744 | ||
| Other expenses | 7 | -754 | -108 | -18 | -49 | ||
| Operating profit/loss | 149 | -2,668 | 738 | -1,244 | |||
| Finance income | 8 | 71 | 502 | 26 | 85 | ||
| Finance costs | 8 | -1,296 | -1,469 | -552 | -556 | ||
| Profit/loss before income tax | -1,076 | -3,635 | 212 | -1,715 | |||
| Profit/loss for the period | -1,076 | -3,635 | 212 | -1,715 | |||
| Profit/loss attributable to owners of the parent | 9 | -1,082 | -3,634 | 212 | -1,701 | ||
| Profit/loss attributable to non-controlling interests | 6 | -1 | 0 | -14 | |||
| Total comprehensive income/expense for the period | -1,076 | -3,635 | 212 | -1,715 | |||
| Earnings per share (in euros) | 9 | ||||||
| - Basic | -0.23 | -0.77 | 0.04 | -0.36 | |||
| - Diluted | -0.23 | -0.77 | 0.04 | -0.36 |
Consolidated statement of financial position
| Note | 30 September 2012 | 31 December 2011 | ||
| In thousands of euros | ||||
| Cash and cash equivalents | 1,199 | 2,209 | ||
| Trade and other receivables | 10 | 5,419 | 7,012 | |
| Prepayments | 408 | 433 | ||
| Inventories | 11 | 20,250 | 21,564 | |
| Non-current assets held for sale | 0 | 469 | ||
| Total current assets | 27,276 | 31,687 | ||
| Investments in equity-accounted investees | 2 | 4 | ||
| Other investments | 8 | 8 | ||
| Trade and other receivables | 10 | 2,987 | 3,058 | |
| Deferred income tax assets | 283 | 250 | ||
| Investment property | 12 | 20,459 | 24,046 | |
| Property, plant and equipment | 890 | 934 | ||
| Intangible assets | 22 | 26 | ||
| Total non-current assets | 24,651 | 28,326 | ||
| TOTAL ASSETS | 51,927 | 60,013 | ||
| Loans and borrowings | 13 | 7,544 | 9,662 | |
| Trade and other payables | 14 | 4,211 | 7,735 | |
| Deferred income | 3,338 | 2,012 | ||
| Provisions | 1,127 | 1,205 | ||
| Total current liabilities | 16,220 | 20,614 | ||
| Loans and borrowings | 13 | 12,038 | 14,675 | |
| Other payables | 14 | 762 | 741 | |
| Total non-current liabilities | 12,800 | 15,416 | ||
| TOTAL LIABILITIES | 29,020 | 36,030 | ||
| Share capital | 3,319 | 3,319 | ||
| Statutory capital reserve | 2,011 | 2,011 | ||
| Retained earnings | 17,577 | 18,653 | ||
| Total equity | 22,907 | 23,983 | ||
| Equity attributable to non-controlling interests | -3 | 155 | ||
| Equity attributable to equity holders of the parent | 22,910 | 23,828 | ||
| TOTAL LIABILITIES AND EQUITY | 51,927 | 60,013 |
Consolidated statement of cash flows
| Note | 9M 2012 | 9M 2011 | ||
| In thousands of euros | ||||
| Loss for the period | -1,076 | -3,635 | ||
| Adjustments for non-cash transactions: | ||||
| Interest income and expense | 8 | 934 | 1,150 | |
| Gain/loss on sale of subsidiaries and interests in joint ventures | 8 | 0 | -285 | |
| Share of profits and losses of equity-accounted joint ventures | 8 | 176 | 0 | |
| Losses on other long-term investments | 8 | 109 | 99 | |
| Gain/loss on sale of investment property | 7 | 710 | 0 | |
|
Depreciation, amortisation and impairment losses on property, plant and equipment and intangible assets |
4, 6 | 64 | 72 | |
| Gain/loss on value adjustments to assets and liabilities | -669 | 0 | ||
| Foreign exchange gains and losses | 8 | 6 | 4 | |
| Operating cash flow before working capital changes | 254 | -2,595 | ||
| Change in receivables and prepayments | -231 | 1,003 | ||
| Change in inventories | 749 | 3,319 | ||
| Change in payables and deferred income | -584 | -3,628 | ||
| NET CASH FROM/USED IN OPERATING ACTIVITIES | 188 | -1,901 | ||
| Acquisition of property, plant and equipment and intangible assets | -27 | -37 | ||
| Proceeds from sale of property, plant and equipment and intangible assets | 7 | 4 | ||
| Paid on development of investment property | 0 | -729 | ||
| Proceeds from sale of investment property | 1,160 | 177 | ||
| Acquisition of investments in subsidiaries and joint ventures | 0 | -3 | ||
| Proceeds from sale of investments in subsidiaries and joint ventures | 0 | 893 | ||
| Loans granted | -308 | -492 | ||
| Repayment of loans granted | 2 | 75 | ||
| Other payments related to investing activities | -48 | 0 | ||
| Interest received | 14 | 157 | ||
| NET CASH FROM INVESTING ACTIVITIES | 800 | 45 | ||
| Proceeds from loans received | 13 | 2,230 | 4,591 | |
| Settlement of loans and finance lease liabilities | 13 | -2,823 | -4,185 | |
| Interest paid | -1,389 | -846 | ||
| Other payments related to financing activities | -16 | 0 | ||
| NET CASH USED IN FINANCING ACTIVITIES | -1,998 | -440 | ||
| NET CASH FLOW | -1,010 | -2,296 | ||
| Cash and cash equivalents at beginning of period | 2,209 | 4,209 | ||
| Decrease in cash and cash equivalents | -1,010 | -2,296 | ||
| Cash and cash equivalents at end of period | 1,199 | 1,913 | ||
Egert Paulberg
Financial Controller
Arco Vara AS
Phone: +372 614 4503
egert.paulberg@arcovara.ee
http://www.arcorealestate.com
