Arco Vara
Quarterly report

Arco Vara AS unaudited consolidated interim report for the first quarter of 2017

GENERAL INFORMATION

Arco Vara AS and other entities of Arco Vara group (hereafter together ‘the group’) are engaged in real estate development and services related to real estate. The group considers Estonia, Latvia and Bulgaria as its home markets. The group has two business lines: the Service Division and the Development Division.

The Service Division is engaged in real estate brokerage, valuation, management and consulting as well as in short-term investment in residential real estate. The Service Division offers to the group additional value by generating analytical data on market demand and supply, and behaviour of potential clients. Analytical data allows making better decisions on real estate development: purchase of land plots, planning and designing, pricing end products, and timing the start of construction.

The Development Division develops complete living environments and commercial real estate. Fully developed housing solutions are sold to the end-consumer. In some cases the group also develops commercial properties until they start to generate cash flow for two possible purposes: for the support of the group’s cash flows or for resale. The group is currently holding completed commercial properties that generate rental income.

As of 31 March 2017, the group consisted of 22 companies, the same as on 31 December 2016. During first three months of the year, there were no changes in the group’s structure.

Significant subsidiaries as of 31 March 2017

KEY PERFORMANCE INDICATORS

·                     In Q1 2017, the group’s revenue was 1.6 million euros, which is 68% less compared to the revenue of 5.1 million euros in Q1 2016. In Q1 2017, revenue of the Development Division amounted to 1.1 million euros (Q1 2016: 4.4 million euros) and revenue of the Service Division amounted to 0.7 million euros (Q1 2016: 0.8 million euros).

·                     In Q1 2017, the group’s operating loss (=EBIT) was 0.2 million euros and net loss 0.3 million euros. In Q1 2016, the group earned operating profit of 1.2 million euros and net profit of 1.1 million euros. In Q1 2017, the Development Division made operating loss of 14 thousand euros and the Service Division made operating loss of 12 thousand euros. In Q1 2016, the Development Division earned operating profit of 1.4 million euros and the Service Division made operating loss of 0.1 million euros.

·                     In Q1 2017, 1 apartment and 3 land plots were sold in projects developed in the group (in Q1 2016: 68 apartments and 2 commercial spaces were sold). Number of sold properties explains big differences in revenue and operating profit figures of the Development Division. In Q1 2016, active sale was ongoing in Manastirski project in Bulgaria, but no development projects were completed in Q1 2017.

·                     In the first 3 months 2017, the group’s debt burden (net loans) increased by 1.2 million euros up to the level of 14.6 million euros as of 31 March 2017. As of 31 March 2017, the weighted average annual interest rate of interest bearing liabilities was 5.1%. This is a decrease of 0.2 percentage points compared to 31 December 2016.

Main financial figures

Formulas used:

Earnings per share (EPS) = net profit attributable to owners of the parent / weighted average number of ordinary shares outstanding during the period

Diluted earnings per share (Diluted EPS) = net profit attributable to owners of the parent / (weighted average number of ordinary shares outstanding during the period + number of all potentially issued shares)

Invested capital = current interest-bearing liabilities + non-current liabilities + equity (at the end of period)

Net loans = current interest-bearing liabilities + non-current liabilities – cash and cash equivalents – short-term investments in securities (at the end of period)

Return on invested capital (ROIC) = past four quarters’ net profit / average invested capital

Return on equity (ROE) = past four quarters’ net profit / average equity

Return on assets (ROA) = past four quarters’ net profit / average total assets

Current ratio = current assets / current liabilities

Quick ratio = (current assets - inventory) / current liabilities

Financial leverage = total assets / equity

Number of staff at period-end = number of people working for the group under employment or authorization (service) contracts

GROUP CEO’S REVIEW

As promised, Q1 2017 was a boring quarter and should remain the last but one boring quarter with modest financial volumes. We continued selling the last units from already empty stock. During the first 3 months, our balance sheet grew by 10% to 30M EUR. Investors and bypassers alike could watch construction works of Kodulahe phase I and follow its presale levels, which by now exceed 70% and which will convert into effective sales numbers starting from Q3. If we outperform ourselves, Kodulahe sales may commence already at the end of Q2. Expected revenue from phase I exceeds 16M EUR.

We have run into bureacuratic delays with Iztok Parkside, another potential source of significant revenue (more than 8M EUR) and profit. The problem lies in getting the construction permit for future access street that will be constructed on the landplots belonging to the state. We depend on cooperation of Sofia municipality and the government, which hopefully will be efficient and smooth so that we can commence the construction very soon. Achieved presale levels exceed 20%, but currently we have stopped presales as we cannot guarantee to our clients the delivery time.   

We made progress in Madrid Blvd building where the offices vacancy has dropped to only two premises (unoccupied GLA has decreased to 2000 sqm) and new tenants have moved in. We also sold the Liimi 1b landplot in Tallinn for a price that exceeded our expectations.

We progressed well with Oa development in Tartu where we are in design phase, and Kodulahe phase II building design. Arco Vara’s aim is to commence construction of both projects by year-end. Taking into account our recent experience, it should be added - subject to getting the construction permit according to our schedule.  

We have been the least successful with acquiring new landplots in Sofia. There is nothing to report about it at this time.

The backbone of Q1 results are the ongoing brokerage and evaluation services in Estonia and in Bulgaria that on a stand-alone basis have crossed the breakeven point and have started to support the Group’s overhead costs.  In the first quarter, the number of served customers exceeded 2000 people and the combined revenue from those customers exceeded 660,000 EUR, which is better than in Q1 2016 (when our revenue without Latvia was 520,000 EUR).

To sum up, the Group stays well on the course of meeting its 2017 targets.

SERVICE DIVISION

Revenue of the Service Division amounted to 680 thousand euros in Q1 2017 (Q1 2016: 748 thousand euros), which included intra-group revenue of 120 thousand euros (Q1 2016: 77 thousand euros). In Q1 2017, revenue of the Service Division from main services (real estate brokerage and valuation services) decreased by 11% compared to Q1 2016. The main reason is the fact that the revenue in the amount of 235 thousand euros from Latvian agency (which was sold in Q4 2016) was included in the group revenue Q1 2016. It is pleasant to see from the table below that the revenue from main services increased significantly both in Estonian and Bulgarian agencies (increases compared to the Q1 2016 by 35% and 38%, respectively).

In Q1 2017, Estonian agency had net loss of 62 thousand euros (Q1 2016: net loss of 73 thousand euros), but Bulgarian agency earned net profit of 35 thousand euros (Q1 2016: net profit of 9 thousand euros).

In addition to brokerage and valuation services, the Service Division also provides real estate management services and accommodation service in Bulgaria. The revenue from real estate management was 29 thousand euros in Q1 2017, 24 thousand euros of which was intra-group revenue (Q1 2016: 27 thousand and 23 thousand euros, respectively). Revenue from accommodation services amounted to 39 thousand euros in Q1 2017 (Q1 2016: 30 thousand euros).

The numbers of brokerage deals and valuation reports of the Service Division, together with the number of staff are shown in the following graphs. For better comparability, only Bulgarian and Estonian figures are shown.

On 31 March 2017, the number of staff in the Service division was 107 (on 31.12.2016: 97).

DEVELOPMENT DIVISION

In Q1 2017, revenue of the Development Division totalled 1,063 thousand euros (in Q1 2016: 4,412 thousand euros) including revenue of 938 thousand euros (Q1 2016: 4,305 thousand euros) from the sale of properties in the group’s own development projects.

Most of the other revenue of the Development Division consists of rental income from commercial and office premises in Madrid Blvd building in Sofia, amounting to 92 thousand euros in Q1 2017 (Q1 2016: 76 thousand euros). Two new rental agreements were concluded in Q1 2017. By the publishing date of the interim report, last two office spaces remained vacant. The group expects to rent out all vacant spaces during Q2 2017.

In Q1 2017, operating loss of the Development Division was 14 thousand euros. In Q1 2016, operating profit in the amount of 1,386 thousand euros was earned. Revenue and profitability figures were significantly higher in Q1 2016 due to the conclusion of most of sale agreements in the last stage of Manastirski project in Sofia in that period (the construction of apartment building was finished in December 2015).

During Q1 2017, the construction and presale of apartments of the first stage apartment building (with 125 apartments and 5 commercial spaces) in the group’s largest development project Kodulahe continued in Tallinn. By the publishing date of the interim report, presale agreements for 92 apartments and two commercial spaces have been concluded. The construction of the apartment building should be finished by summer 2017.

In Q1 2017, preparatory works in the second stage of Kodulahe project started, where a building with ca 70 apartments and commercial spaces is planned. Preparatory works also started for Oa street properties in Tartu, where 4 smaller apartment buildings are planned. Both of these projects are expected to be finalised by mid-2019.

In Q1 2017, one apartment was sold in Madrid Blvd complex in Sofia. As of 31 March 2017, 4 apartments remained unsold. Additional 15 apartments are furnished and are being rented out as accommodation service. Unsold parking places are also being rented out.

In Q1 2017, delays emerged in the development of Iztok Parkside project in Sofia, Bulgaria. The problem lies in obtaining construction permit for the construction of access road, which is located on state-owned land. By the publication date of interim report, presale agreements for 18 apartments have been concluded, but presale has been stopped by now until the construction permit issue will be cleared out. Iztok project consists of three apartment buildings with 68 apartments (7,070 square meters of apartments’ sellable area).

As of 31 March 2017, 9 Marsili residential plots remained unsold in Latvia, out of which a presale agreement for one had been concluded in December 2016. In Q1 2017, one plot was sold in the project. Additionally, the sale of Baltezers-3 project (68 undeveloped land plots as a whole) was finished in Latvia in January.  

As of 31 March 2017, 5 people were employed in the Development Division, the same number as at the end of 2016.

Summary table of Arco Vara’s active projects as of 31 March 2017

Note: Values presented between < > sign represent future target values for projects where the building rights or the design have not been finished yet. The table does not reflect sellable or lettable volumes below grade including parking spaces and storages. The table does not give complete overview of the group’s land bank.  

Description of stages
S1: Land plot acquired
S2: Building Rights Procedure
S3: Design and Preparation Works
S4: Construction
S5: Marketing and Sale
S6: Facility Management and/or Lease

SHARES AND SHAREHOLDERS

Share price

Arco Vara AS has issued a total of 6,507,012 ordinary shares with nominal value of 0.7 euros per share. The shares are freely traded on NASDAQ Tallinn stock exchange. The share price closed at 1.24 euros on 31 March 2017 2016, the same price as on 31 December 2016. During the period, the highest traded price per share was 1.39 euros and the lowest price 1.15 euros. As of 31 March 2017, market capitalization of shares amounted to 8,069 thousand euros and P/B ratio was 0.93 (31 December 2016: 8,069 thousand euros and 0.90, respectively). P/E ratio of the share was negative on 31 March 2017 and also on 31 December 2016.

Shareholder structure

As of 31 March 2017, Arco Vara had 1,453 shareholders (on 31 December 2016: 1,502) including 1,256 individuals as shareholders (on 31 December 2016: 1,297 individuals) who jointly owned 12.4% (on 31 December 2016: 12.5%) out of all Arco Vara shares. 

Major shareholders on 31 March 2017

Holdings of management and supervisory board members on 31 March 2017

¹ - Steven Yaroslav Gorelik is active as fund manager in three investment funds holding interest in Arco Vara (Firebird Republics Fund Ltd, Firebird Avrora Fund Ltd and Firebird Fund L.P) of 692,750 shares (total of 10.6% interest).

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
 

 CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF CASH FLOWS

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Kristel Tumm

CFO

Arco Vara AS

Tel: +372 614 4662

kristel.tumm@arcovara.ee

www.arcorealestate.com