Arco Vara AS Interim report II quarter 2011

Group Chief Executive’s review

Compared with the same period last year, the Group’s revenue has grown significantly across all divisions and profitability has started to improve. After an interval of several years, the Service division posted an operating profit while the operating loss of the Development division remained at the same level as last year. The biggest setback was the exceptional losses of the Construction division, which is operating in an industry ravaged by rapid inflation that began spiralling in 2010 and counterparty bankruptcies triggered by the economic crisis. Excluding the impact of exceptional losses, the Group ended the second quarter with a profit.

In the first six months of 2011, 56 apartments and plots were sold in the projects of Arco Vara: 38 in Estonia, 9 in Latvia and 9 in Bulgaria. Major ongoing development projects include the Tivoli apartment building in Tallinn, which is in the design phase, and the Manastirski apartment building in Sofia, which is in the construction phase. The Group continues to sell apartments in the Kodukolde community being developed in Tallinn and is completing the sale of plots at Merivälja. In the second quarter, the Development division successfully completed and delivered to the investor the Alasniidu nursery school and commenced the Lille tee nursery school design and build project. Since the reporting date, the Group’s Latvian associate has won an auction for the purchase of 86 hectares of residential land in the Mazais Baltezers project that previously could only be used under a lease. The success at the land auction is an important step in securing the Group’s position in the Latvian market. The Group continued developing the Bišumuiža 1 apartment project and selling plots in Riga as well as delivering apartments under real right contracts and letting the last vacant rental premises in the Madrid project in Sofia, Bulgaria.

For the Service division, the first half of 2011 was better than the same period in several previous years. Revenue grew and the division ended the half-year with an operating profit of 44 thousand euros compared with an operating loss of 161 thousand euros for the first half of 2010. The number of brokerage transactions increased by 23% and the number of valuation reports issued grew by 39% year over year. At the same time, the number of brokers decreased and the number of appraisers grew by only 11%.

In the first six months of 2011, the Group secured new construction contracts of 4.3 million euros. Our order backlog as at 30 June 2011 was 13.5 million euros against 6.0 million euros at the end of the second quarter of 2010. After the reporting date, the Construction division has completed the Estonian Aviation Academy building in Tartu, the largest project for which Arco Ehitus was the sole general contractor in 2011. The operating loss of the division is attributable to the bankruptcies of two major business partners. Owing to the bankruptcy of construction company K&H the Construction division did not receive payment for work done in Tartu (the receivables are secured with mortgages), and because of the bankruptcy of construction company Kristiine Ehitus in Tallinn the division as the remaining consortium partner had to complete under unfavourable terms construction work started but not completed on account of the bankruptcy.

Within the past 12 months, the Group’s loans and borrowings have decreased by 8.8 million euros and equity to assets ratio has risen from 37% to 39%. The weighted average interest rate of loans and borrowings has increased because of a rise in EURIBOR. The Group has responded by lengthening the weighted average duration of loans and borrowings through current refinancing.

KEY PERFORMANCE INDICATORS

• The Group ended the first six months of 2011 with revenue of 23.5 million euros. The figure includes 8.3 million euros earned on the sale of the Tivoli properties to the Group’s joint venture Tivoli Arendus OÜ. Excluding the latter transaction, the Group’s revenue was 15.2 million euros, a 43% improvement on the first half of 2010.
• Operating loss for the first half-year was 1.4 million euros, a 40% increase year over year.
• Net loss for the first half-year was 1.9 million euros, 69% up on the first half of 2010.
• Equity to assets ratio at period-end was 39.1% (30 June 2010: 37.1%). Return on equity (12 months rolling) was negative (Q2 2010: negative). Return on invested capital (12 months rolling) was 1.3% (Q2 2010: negative).
• At the end of the second quarter, the Group’s order backlog stood at 13.5 million euros compared with 6.0 million euros at the end of the second quarter of 2010.
• During the first six months of 2011, the Group sold 56 apartments and plots (HY1 2010: 53 apartments and plots).

REVENUE AND PROFIT

 
 Finance income and expenses was influenced the most by growth in interest expense, which resulted from the completion of the Madrid project and discontinuance of capitalisation of associated borrowing costs. In the first half of 2011, the Group did not earn any exceptional finance income or incur any exceptional finance expenses but the result for the first quarter of 2010 was influenced by foreign exchange gain of 0.15 million euros earned on a receivable from AS Ühendatud Kapital that was denominated in US dollars and a loss of 0.23 million euros incurred on the disposal of Arco Vara Saare Kinnistute OÜ. 


 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 Tivoli Arendus OÜ paid the cash directly to SEB. There have been no other exceptional loan settlements in 2011.

Interest payments accounted for 0.6 million euros of the net cash outflow from financing activities. Scheduled and inventory sales-related settlements of loan principal totalled 1.2 million euros. The largest proportion of credit limits utilised during the period was related to the construction of the last but one phase in the Kodukolde project and the Alasniidu and Lille tee nursery schools that accounted for 2.5 million euros of the total. Use of the Kodukolde credit limit is not reflected in the cash flows because invoices received from Merko Ehitus are booked as a loan and there are no 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 4.7 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 1.4 million euros;
• repayments of the loan taken for the Bišumuiža project of 1.3 million euros;
• repayments of the loan taken for the Laeva 2 development project of 1.1 million euros.

In the first six 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 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 half-year with an operating profit of 44 thousand euros compared with an operating loss of 161 thousand euros for the first half of 2010. The number of the Group’s brokerage transactions increased by 23% and the number of valuation reports issued grew by 39% year over year. At the same time, the number of brokers decreased and the number of appraisers grew by only 11%.  

DEVELOPMENT DIVISION

In the first six months of 2011, 56 apartments and plots were sold in the projects of Arco Vara. The Development division sold seven apartments in the Bišumuiža project and two plots in the Baltezers project in Latvia, 36 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 raised 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. Revenue for the first half-year includes the sale of 29 apartments of this phase. Construction of the last phase (48 apartments) commenced in the second quarter. Construction work is performed and financed by AS Merko Ehitus. The buildings are expected to be completed in the first half of 2012.

The building of the Alasniidu nursery school 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 company that owns the nursery school was sold in the second quarter of 2011 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. The Group has already signed a long-term rental agreement with the local government. According to plan, the nursery school should be completed in the first quarter of 2012. Construction work is performed by YIT.

In Bulgaria, the construction of phase I of the Manastirski project is under way: 42% 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.

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.

As at the end of the second quarter of 2011, the largest active construction contracts comprised the construction of the Tallinn-Muuga water and wastewater networks and facilities with the remaining balance of 5.1 million euros, the design and build of the water and wastewater networks of the Jõgeva and Puurmani rural municipalities with the remaining balance of 2.3 million euros  and the water management project for the wastewater collection area of Tamsalu with the remaining balance of 1.4 million euros.  

In the first half of 2011, the division secured new construction contracts of 4.3 million euros. As at the reporting date, the order backlog stood at 13.5 million euros compared with 6.0 million euros at the end of the second quarter of 2010.

At the end of June 2011, the Construction division employed 55 people (30 June 2010: 47).

Consolidated statement of comprehensive income

 

 Consolidated statement of financial position

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