GROUP CHIEF EXECUTIVE’S REVIEW
The fourth quarter of 2012 was eventful and we expect the first quarter of 2013 to be similarly intense.
Development operations in Estonia
• Ahtri 3
The bank loan of the Group’s joint venture Arco HCE OÜ fell due on 30 November 2012. Despite active negotiations with Danske bank, aimed at extending the loan agreement and continuing development of the property, no positive solution was found by the year-end. However, the process has not ended. Arco Vara AS’s subsidiary Arco Investeeringute AS has provided a surety guarantee to the joint venture’s loan commitments, which extends to 1.9 million euros. The Group has covered the obligation by recognising a provision of the same amount. Before the date of release of this report, the bank initiated enforcement proceedings against Arco HCE OÜ. To date, the proceedings have been suspended by an injunction issued in response to a petition filed by Arco HCE OÜ. However, in light of the objective change in circumstances, our goal is to exit the project with minimal loss.
Exiting the Ahtri 3 project successfully is a key to ensuring the Group’s sustainable operation.
• Tivoli
In the fourth quarter, the project was in the design phase. Our joint venture Tivoli Arendus OÜ had to seek solutions because the counterparty, general contractor Nordecon AS did not meet its obligations, which rendered the probability of completing the construction work on time remote. In the fourth quarter, we entered into negotiations with our venture partner International Invest Project OÜ (IIP) with a view to improving the financing conditions of Tivoli Arendus OÜ. The purpose was to increase the probability that the joint venture could meet its obligations to Arco Vara group and to lower the probability that that the joint venture might be unable to settle its debt to IIP and IIP would seek realisation of the surety guarantee provided by Arco Vara AS. Sale of the Tivoli property to the joint venture Tivoli Arendus OÜ in 2011 has not generated actual positive cash flow for the Group because IIP paid part of the purchase price directly to SEB bank that granted a loan for acquisition of the Tivoli property by the joint venture and the other part was transformed into the joint venture’s liability to Arco Vara AS. We are holding negotiations with IIP but the outcome is hard to predict.
Restructuring the Tivoli project or exiting from the project successfully is a key to ensuring the Group’s sustainable operation.
• Tehnika 53
Construction and sale continued. We have sold 12 out of the 14 apartments under contracts under the law of obligations (presale contracts). Construction work is on schedule.
• Kodukolde
We continued selling completed apartments. At the year-end, there were six unsold apartments and at the date of release of this report there are three.
Development operations in Latvia
• Bišumuiža 1
In the third quarter, development of the Bišumuiža apartment buildings project in Latvia was suspended. Through the fourth quarter, we continued to sell completed apartments and by the year-end all completed apartments were sold. There are 28 apartments still to be completed. Construction of the apartments resumed in February 2013.
• Mazais Baltezers
We continued to sell the existing, fully developed residential plots in the Mazais Baltezers project and sustained efforts for acquiring 68 undeveloped plots from our former Latvian partner. At the end of the quarter, 22 fully developed plots were still on sale.
Development operations in Bulgaria
• Madrid Boulevard
On 31 December 2012, loan principal of 2.4 million euros fell due but our subsidiary Arco Invest EOOD was not capable of making the payment. Partly, this was because a block transaction that had been agreed with Cleves was cancelled, resulting in unearned revenue of over 2 million euros. In line with the agreement, Cleves paid a penalty of 235 thousand euros.
Transfer of presold apartments and sale of new apartments remained suspended because the amount receivable from the customers by the date of transfer of the apartments (date of conclusion of the real right contracts and their release from the mortgage) would have been smaller than the repayment to be made by Arco Invest EOOD to the bank under the loan agreement for release of the apartments from the mortgage.
Arco Vara group started intensive negotiations with Piraeus bank for amending the loan agreement at the beginning of November, when the Group’s management had changed. The negotiations are still ongoing. Until an agreement has been reached on the restructuring of the loan, we cannot rule out the possibility of enforcement or other legal proceedings against Arco Invest EOOD.
• Manastirski
Transfer of presold apartments and sale of new apartments remained suspended because the amount receivable from the customers by the date of transfer of the apartments (date of conclusion of the real right contracts and their release from the mortgage) would have been smaller than the repayment to be made by Arco Invest EOOD to the bank under the loan agreement for release of the apartments from the mortgage.
Arco Vara group started intensive negotiations with Piraeus bank for amending the loan agreement at the beginning of November, when the Group’s management had changed. The negotiations are still ongoing. Until an agreement has been reached on the restructuring of the loan, we cannot rule out the possibility of enforcement or other legal proceedings against Arco Invest EOOD.
The Group’s Construction division
The Group’s goal is to ensure that contracts that have been signed are performed and work is delivered to customers on time. In the fourth quarter, this goal was achieved and all construction contracts in progress are on schedule. At the end of the fourth quarter, the Construction division’s order backlog amounted to 3.4 million euros.
In the reporting period, several bankruptcy petitions were filed against Arco Ehitus OÜ but the creditors withdrew the petitions because mutually satisfactory agreements were reached with the Group.
At the end of the fourth quarter, the Construction division was involved in more than ten pending lawsuits resulting from transactions that had been performed or circumstances that had emerged before the fourth quarter of 2012.
At the end of 2012, OÜ Merkton Ehitus (bankrupt) filed a statement of claim against Arco Ehitus OÜ, in which it claimed payment of 986 thousand euros based on the recovery provisions of the Bankruptcy Act and circumstances that had emerged before 2010. Arco Ehitus OÜ does not agree with the action but a detailed legal analysis of the claim and the estimation of possible outcomes is still in progress. Accordingly, we do not rule out the possibility that an additional provision will have to be made and recognised in the audited financial statements of Arco Vara group. In this interim report, the statement of claim is disclosed within contingent liabilities.
The Group’s Service division
In 2012, Service division generated revenue of 2.6 million euros, 8% up on 2011. The division ended 2012 with an operating profit of 182 thousand euros (excluding the effect of mergers and value adjustments) compared with an operating profit of 140 thousand euros for 2011.
Other activities
In the fourth quarter, we (i) continued preparations for a restructuring of the Group, which should be carried out in the first half of 2013 with a view to simplifying the Group’s structure; (ii) cut operating expenses including management and salary costs (iii) continued the work aimed at improving the Group’s capitalisation and lowering its liquidity risk and (iv) began the process of reassessing the values of the Group’s assets, which was completed by 10 January 2013.
KEY PERFORMANCE INDICATORS
- In 2012 the Group generated revenue of 20.7 million euros. Revenue for 2011 was 43.1 million euros (including 8.3 million euros earned on the sale of the Tivoli properties). Excluding the effect of the Tivoli transaction, revenue for 2012 was 41% smaller than a year ago.
- The Group ended the year 2012 with an operating loss of 16.1 million euros. In 2011, the Group incurred an operating loss of 2.4 million euros.
- Net loss for 2012 was 18 million euros compared with 3.4 million euros in 2011.
- Equity to assets ratio at the year-end was 10.8% (31 December 2011: 37.0%). Return on equity (12 months rolling) was negative.
- At the end of the fourth quarter of 2012, the Group’s order backlog stood at 3.4 million euros compared with 11.7 million euros at the end of the fourth quarter of 2011.
- In 2012, the Group sold 81 apartments and plots (2011: 111 apartments and plots) in its self-developed projects.
| 12M 2012 | 12M 2011 | Q4 2012 | Q4 2011 | ||
| In millions of euros | |||||
| Revenue | 20.7 | 43.1 | 4.7 | 11.8 | |
| Operating profit/loss | -16.1 | -2.4 | -16.1 | 0.3 | |
| Net profit/loss | -18.0 | -3.4 | -17.0 | 0.3 | |
| EPS (in euros) | -3.79 | -0.71 | -3.58 | 0.06 | |
| Total assets at period-end | 31.2 | 57.2 | |||
| Invested capital at period-end | 21.4 | 48.8 | |||
| Net loans at period-end | 16.4 | 22.9 | |||
| Equity at period-end | 3.4 | 21.2 | |||
| Average loan term (in years) | 2.0 | 2.2 | |||
| Average interest rate of loans (per year) | 6.5% | 7.4% | |||
| ROIC (rolling, four quarters) | neg | neg | |||
| ROE (rolling, four quarters) | neg | neg | |||
| Number of staff at period-end | 86 | 146 |
REVENUE AND PROFIT
| 12M 2012 | 12M 2011 | Q4 2012 | Q4 2011 | ||
| In millions of euros | |||||
| Revenue | |||||
| Development | 8.6 | 23.0 | 2.9 | 6.0 | |
| Service | 2.6 | 2.4 | 0.7 | 0.6 | |
| Construction | 9.8 | 18.1 | 1.2 | 5.3 | |
| Eliminations | -0.3 | -0.4 | -0.1 | -0.1 | |
| Total revenue | 20.7 | 43.1 | 4.7 | 11.8 | |
| Operating profit/loss | |||||
| Development | -13.9 | 1.3 | -14.0 | 1.1 | |
| Service | 0.3 | 0.1 | -0.3 | 0.0 | |
| Construction | -0.3 | -2.8 | -0.5 | -0.7 | |
| Eliminations | 0.0 | 0.3 | 0.2 | 0.1 | |
| Unallocated income and expenses | -2.2 | -1.3 | -1.5 | -0.3 | |
| Total operating profit/loss | -16.1 | -2.4 | -16.1 | 0.3 | |
| Interest income and expense | -1.4 | -1.4 | -0.4 | -0.2 | |
| Other finance income and costs | -0.3 | 0.2 | -0.2 | 0.0 | |
| Income tax expense/income | -0.2 | 0.2 | -0.3 | 0.2 | |
| Net profit/loss | -18.0 | -3.4 | -17.0 | 0.3 |
In 2011, the Development division’s revenue was significantly influenced by the sale of inventory of 8.3 million euros to the joint venture Tivoli Arendus OÜ.
CASH FLOWS
| 12M 2012 | 12M 2011 | |||
| In millions of euros | ||||
| Cash flows from operating activities | 2.3 | -0.7 | ||
| Cash flows from investing activities | 0.7 | 0.3 | ||
| Cash flows from financing activities | -3.5 | -1.6 | ||
| Net cash flow | -0.4 | -2.0 | ||
| Cash and cash equivalents at beginning of period | 2.2 | 4.2 | ||
| Cash and cash equivalents at end of period | 1.8 | 2.2 |
At 31 December 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 2.3 million euros;
- repayments of the loan taken for the Hills project in Lithuania of 0.3 million euros.
In 2012, the Group 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, the Group made scheduled repayments of the loans taken for its 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 2012, the Service division performed better than in the year before, generating an operating profit of 337 thousand euros (includes non-recurring income of 553 thousand euros from reassessment of the carrying values of liabilities performed on the merger of companies and expenses of 398 thousand euros from re-measurement of assets) compared with an operating profit of 140 thousand euros for 2011. Revenue for 2012 was 2,597 thousand euros, 8% up on 2011. The number of brokerage transactions increased by 5% and the number of valuation reports issued grew by 8% year over year. At the same time, the number of brokers decreased by 5% and the number of appraisers increased by 10%.
| 12M 2012 | 12M 2011 | Change, % | ||
| Number of completed brokerage transactions | 1,478 | 1,411 | 5% | |
| Number of projects on sale | 196 | 139 | 41% | |
| Number of valuation reports issued | 6,293 | 5,822 | 8% | |
| Number of appraisers* | 46 | 42 | 10% | |
| Number of brokers* | 69 | 73 | -5% | |
| Number of staff at end of period | 37 | 45 | -18% | |
| * Includes people working under service contracts | ||||
DEVELOPMENT DIVISION
In 2012, Arco Vara sold 75 apartments and six plots in its own projects: seven apartments in the Bišumuiža project and six plots in the Baltezers project in Latvia and 45 apartments in the Kodukolde project in Estonia. In addition, we sold 23 apartments in the Manastirski and Madrid projects in Bulgaria.
Phase VI of the Kodukolde development project at Helme 16 in Tallinn, which consists of two apartment buildings with a total of 48 apartments, was completed in June. Out of those apartments, 42 were sold (final sales under real right contracts) during the period June to December. At the end of 2012, the project’s inventory comprised six unsold apartments and at the date of release of this report the figure was three.
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. On 1 February 2013, Tivoli Arendus OÜ terminated the contract with Nordecon AS because the counterparty had seriously breached its contractual obligations. At the moment, Tivoli Arendus OÜ is being restructured and its business plan revised.
In January 2012, we 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 fourth quarter 12 of the 14 apartments were covered with pre-sale contracts.
In Bulgaria, the construction of phase I of the Manastirski project was completed. By 31 December 2012, 85% of the 74 apartments were either reserved or sold. In the commercial and residential building Boulevard Residence Madrid in Sofia we continue to lease out commercial premises, to deliver reserved apartments under real right contracts, and to sell the remaining free apartments.
In the third quarter of 2012, development and construction of apartment buildings in the Bišumuiža 1 project in Latvia was suspended. However, in February 2013 the construction permit was extended and development of the project continued. A building with 14 apartments and a sellable area of 1,149 square metres, which is currently in the stage of interior finishing works, will be completed in May 2013. After that, the last building, also with 14 apartments, will be developed. The outer shell (external structure) has already been erected. All apartments in the project’s previously completed seven buildings have been sold.
In April 2012 we divested our stake in the joint venture Bišumuižas Nami SIA to the venture partner 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. By 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 allow the non-controlling shareholder to exit from the investment in Arco Development SIA.
At the end of 2012, the Development division employed 10 people (31 December 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 2012, the largest contracts in progress were the construction of the Paide wastewater treatment plant (remaining balance 1.8 million euros) and the construction of the Kuusalu public water and wastewater network (remaining balance 1.5 million euros).
In the fourth quarter of 2012, no new construction contracts were signed. At the reporting date, the order backlog stood at 3.4 million euros compared with 11.7 million euros at the end of 2011.
At the end of 2012, the Construction division employed 26 people (31 December 2011: 58).
Consolidated statement of comprehensive income
| Note | 12M 2012 | 12M 2011 | Q4 2012 | Q4 2011 | |||
| In thousands of euros | |||||||
| Revenue from rendering of services | 13,700 | 23,214 | 2,136 | 6,934 | |||
| Revenue from sale of goods | 7,032 | 19,918 | 2,577 | 4,885 | |||
| Total revenue | 2, 3 | 20,732 | 43,132 | 4,713 | 11,819 | ||
| Cost of sales | 4 | -23,560 | -42,790 | -9,773 | -12,150 | ||
| Gross profit/loss | -2,828 | 342 | -5,060 | -331 | |||
| Other income | 7 | 1,245 | 3,049 | 361 | 3,031 | ||
| Marketing and distribution expenses | 5 | -267 | -346 | -64 | -65 | ||
| Administrative expenses | 6 | -3,409 | -3,903 | -1,399 | -933 | ||
| Other expenses | 7 | -5,598 | -634 | -4,844 | -526 | ||
| Losses from equity-accounted joint ventures | 8 | -5,272 | -914 | -5,096 | -914 | ||
| Operating profit/loss | -16,129 | -2,406 | -16,102 | 262 | |||
| Finance income | 9 | 84 | 586 | 13 | 84 | ||
| Finance costs | 9 | -1,738 | -1,811 | -618 | -342 | ||
| Profit/loss before income tax | -17,783 | -3,631 | -16,707 | 4 | |||
| Income tax expense/income | -251 | 250 | -251 | 250 | |||
| Profit/loss for the year | -18,034 | -3,381 | -16,958 | 254 | |||
| Profit/loss attributable to owners of the parent | 10 | -17,964 | -3,371 | -16,956 | 263 | ||
| Profit/loss attributable to non-controlling interests | -70 | -10 | -2 | -9 | |||
| Total comprehensive income/expense for the year | -18,034 | -3,381 | -16,958 | 254 | |||
| Earnings per share (in euros) | 10 | ||||||
| - Basic | -3.79 | -0.71 | -3.58 | 0.06 | |||
| - Diluted | -3.79 | -0.71 | -3.58 | 0.06 |
Consolidated statement of financial position
| Note | 31 December 2012 | 31 December 2011 | ||
| In thousands of euros | ||||
| Cash and cash equivalents | 1,775 | 2,209 | ||
| Trade and other receivables | 11 | 2,906 | 7,012 | |
| Prepayments | 188 | 433 | ||
| Inventories | 12 | 11,701 | 21,564 | |
| Non-current assets held for sale | 0 | 469 | ||
| Total current assets | 16,570 | 31,687 | ||
| Investments in equity-accounted investees | 1 | 4 | ||
| Other investments | 0 | 8 | ||
| Trade and other receivables | 12 | 0 | 3,058 | |
| Deferred income tax assets | 0 | 250 | ||
| Investment property | 13 | 14,097 | 21,252 | |
| Property, plant and equipment | 540 | 934 | ||
| Intangible assets | 21 | 26 | ||
| Total non-current assets | 14,659 | 25,532 | ||
| TOTAL ASSETS | 31,229 | 57,219 | ||
| Loans and borrowings | 14 | 16,838 | 9,662 | |
| Trade and other payables | 15 | 4,564 | 7,735 | |
| Deferred income | 2,081 | 2,012 | ||
| Provisions | 3,084 | 1,205 | ||
| Total current liabilities | 26,567 | 20,614 | ||
| Loans and borrowings | 14 | 1,231 | 14,675 | |
| Other payables | 15 | 64 | 741 | |
| Total non-current liabilities | 1,295 | 15,416 | ||
| TOTAL LIABILITIES | 27,862 | 36,030 | ||
| Share capital | 3,319 | 3,319 | ||
| Statutory capital reserve | 2,011 | 2,011 | ||
| Retained earnings | -1,963 | 15,859 | ||
| Total equity | 3,367 | 21,189 | ||
| Equity attributable to non-controlling interests | -5 | -447 | ||
| Equity attributable to equity holders of the parent | 3,372 | 21,636 | ||
| TOTAL LIABILITIES AND EQUITY | 31,229 | 57,219 |
Consolidated statement of cash flows
| Note | 12M 2012 | 12M 2011 | ||
| In thousands of euros | ||||
| Loss for the year | -18,034 | -3,381 | ||
| Adjustments for non-cash transactions: | ||||
| Interest income and expense | 9 | 1,356 | 1,381 | |
| Gain/loss on sale of subsidiaries and interests in joint ventures | 9 | 0 | -285 | |
| Losses from equity-accounted joint ventures | 8 | 5,272 | 914 | |
| Losses on other long-term investments | 285 | 88 | ||
| Change in fair value of investment property | 7 | 4,080 | -2,998 | |
| Gain/loss on sale of investment property | 7 | 699 | 92 | |
|
Depreciation, amortisation and impairment losses on property, plant and equipment and intangible assets |
4, 6 | 398 | 99 | |
|
Gain/loss on sale of property, plant and equipment and intangible assets |
7 | -14 | 28 | |
| Loss on write-down of inventories | 4 | 5,869 | 1,214 | |
| Gain/loss on value adjustments to other assets and liabilities | -17 | 131 | ||
| Gain on sale of other assets | 7 | -192 | 0 | |
| Foreign exchange gains and losses | 9 | 8 | 7 | |
| Income tax expense/income | 251 | -250 | ||
| Operating cash flow before working capital changes | -39 | -2,960 | ||
| Changes in working capital | 2,378 | 2,290 | ||
| NET CASH FROM/USED IN OPERATING ACTIVITIES | 2,339 | -670 | ||
| Acquisition of property, plant and equipment and intangible assets | -28 | -94 | ||
| Proceeds from sale of property, plant and equipment and intangible assets | 14 | 5 | ||
| Paid on development of investment property | 0 | -967 | ||
| Proceeds from sale of investment property | 1,160 | 774 | ||
| Acquisition of investments in subsidiaries and joint ventures | -12 | -4 | ||
| Proceeds from sale of investments in subsidiaries and joint ventures | 0 | 893 | ||
| Loans granted | -400 | -631 | ||
| Repayment of loans granted | 77 | 114 | ||
| Other payments related to investing activities | -90 | 0 | ||
| Interest received | 17 | 197 | ||
| NET CASH FROM INVESTING ACTIVITIES | 738 | 287 | ||
| Proceeds from loans received | 14 | 2,399 | 6,646 | |
| Settlement of loans and finance lease liabilities | 14 | -4,181 | -6,308 | |
| Interest paid | -1,698 | -1,955 | ||
| Other payments related to financing activities | -31 | 0 | ||
| NET CASH USED IN FINANCING ACTIVITIES | -3,511 | -1,617 | ||
| NET CASH FLOW | -434 | -2,000 | ||
| Cash and cash equivalents at beginning of year | 2,209 | 4,209 | ||
| Decrease in cash and cash equivalents | -434 | -2,000 | ||
| Cash and cash equivalents at end of year | 1,775 | 2,209 | ||
Egert Paulberg
Financial Controller
Arco Vara AS
Phone: +372 614 4503
egert.paulberg@arcovara.ee
http://www.arcorealestate.com
