Arco Vara
Quarterly report

Unaudited consolidated interim report for Q3 and 9 months of 2018

KEY PERFORMANCE INDICATORS

In Q3 2018, the group’s revenue was 2.1 million euros, which is 3.7 times less than the revenue of 7.7 million euros in Q3 2017. In 9 months 2018, the group’s revenue was 5.3 million euros, which is 49% less than the revenue of 10.3 million euros in 9 months 2017. The revenue of the Development Division amounted to 1.3 million euros in Q3 2018 and 3.1 million euros in 9 months 2018 (2017: 7.0 million euros in Q3 and 8.5 million euros in 9 months); revenue of the Service Division increased to 0.9 million euros in Q3 and 2.6 million euros in 9 months (in 2017: 0.8 million euros in Q3 and 2.2 million euros in 9 months).

In Q3 2018, the group’s operating loss (=EBIT) was 0.2 million euros and net profit 0.1 million euros (in 9 months 2018: no operating profit and net loss of 0.4 million euros). In Q3 2017, the group had operating profit of 0.8 million euros and net profit of 0.7 million euros. In 9 months 2017, the group made operating loss of 0.4 million euros and net profit of 0.1 million euros. The Development Division made an operating profit of 0.2 million euros in Q3 2018, 9 months ended with the same result. The Development Division made 0.9 million operating profit in Q3 2017 as well as in 9 months 2017. The Service Division made zero result in Q3 2018 but had an operating loss of 0.1 million euros in 9 months 2018, as well as in 9 months 2017.

In Q3 2018, 4 apartments and 2 commercial spaces were sold in projects developed by the group (in 9 months 2018: 12 apartments, 2 commercial spaces and 1 land plot). In Q3 2017, 59 apartments and 2 commercial spaces were sold (60 apartments, 2 commercial spaces and 6 land plots in 9 months).

In the first 9 months of 2018, the group’s debt burden (net loans) decreased by 1.9 million euros down to the level of 11.8 million euros as of 30 September 2018. As of 30 September 2018, the weighted average annual interest rate of interest-bearing liabilities was 4.8%. This is a decrease of 0.6 percentage points compared to 31 December 2017.

GROUP CEO’S REVIEW

Quarterly net result of below 100 thousand euros is a very small amount even for a very small sales revenue of 2 million euros.

It will take two more quarters for sales revenues and profits to increase, as the sale of Iztok Parkside apartments is scheduled to start in Q1 2019 and the sale of Kodulahe stage 2 apartments in Q4 2019. At the moment, construction and presales are in process. Year 2018 will thus end with a modest result, being supported only by the results of the Service Division, rental income from the Madrid Blvd building and sale of the little remaining stock. It must be noted that weak results should not be blamed on poor market conditions or design and construction related bureaucracy – although the latter has in some cases turned out to be unpleasantly complicated. We ourselves failed in two things – starting earlier and executing faster –, so that nothing important gets finalized in 2018. One can make it on time even on a road roller, when starting earlier. But we could not foresee it and lost valuable time.

On a positive side, we have good land plots, we are strongly capitalized and have developed reliable processes and team. The management – whose mandate was extended in October – began its 3-year plan with selling off the real estate services companies and signing license agreements. We also started the sale of rental apartments in Madrid Blvd building and optimizing overhead costs. As a result of these initiatives, the overhead of the group should decrease, and profitability increase substantially from Q1 2019. Quarterly base revenue from license fees and Madrid Blvd rental income should exceed 220 thousand euros in 2019.

The group will continue to pursue its main goals with development business, as has been the case so far. In 2019, we should sell more than 130 apartments in Sofia and Tallinn; the land plots of the group allow to have at least 260 units under construction at the end of 2019. We will continue construction only if market conditions support it. The support is sufficient when enough presale agreements have been signed with clients, and when net sales margin of a development exceeds 10%.

SERVICE DIVISION

In Q3 2018, revenue of the Service Division amounted to 942 thousand euros (Q3 2017: 780 thousand euros), which included intra-group revenue of 74 thousand euros (Q3 2017: 115 thousand euros). In 9 months 2018, the revenue of 2,602 thousand euros had increased by 21.5% compared to the revenue of 2,142 thousand euros in 9 months 2017.

The main services of the Service Division are real estate brokerage and evaluation services through real estate agencies. In 9 months 2018, revenue of the real estate agencies increased by 27% compared to 9 months 2017. Sales figures for real estate agencies in the table below show an increase of 46% in revenue from the Bulgarian office compared to the first 9 months of 2017 and increase of 33% if one compares Q3 2018 to Q3 2017.

In Q3 2018, Estonian agency had net profit of 13 thousand euros and net loss of 63 thousand euros, respectively (in 2017: net loss of 4 thousand euros in Q3 and 112 thousand euros in 9 months). Bulgarian agency bore net loss of 2 thousand euros in Q3 2018 and 19 thousand euros in 9 months 2018 (2017: net profit of 12 thousand euros in Q3 and 53 thousand euros in 9 months).

In addition to brokerage and valuation services, the Service Division also provides real estate management and accommodation services in Bulgaria. The revenue from real estate management was 47 thousand euros in 9 months 2018, 40 thousand euros of which was intra-group revenue (9 months 2017: 92 thousand and 78 thousand euros, respectively). Revenue from accommodation services amounted to 135 thousand euros in 9 months 2018, of which 49 thousand euros was made in Q3 (2017: 135 thousand euros in 9 months and 49 thousand euros in Q3).

DEVELOPMENT DIVISION

The revenue of the Development Division totaled 1,273 thousand euros in Q3 2018 (in Q3 2017: 7,042 thousand euros) and 3,114 thousand euros in 9 months 2018 (in 9 months 2017: 8,511 thousand euros), including revenue from the sale of properties in the group’s own development projects in the amount of 1,045 thousand euros in Q3 and 2,537 thousand euros in 9 months (2017: 6,627 thousand euros in Q3 and 6,875 thousand euros in 9 months).

Most of the other revenue of the Development Division consisted of rental income from commercial and office premises in Madrid Blvd building in Sofia, amounting to 167 thousand euros in Q3 2018 and 419 thousand euros in 9 months 2018 (2017: 148 thousand euros in Q3 and 360 thousand euros in 9 months). In Q3 2018, all office and commercial spaces together with parking places were rented out.

In Q3 and 9 months 2018, the Development Division had an operating profit of 204 thousand euros and 203 thousand euros, respectively. In 2017, the Development Division had an operating profit of 894 thousand euros in Q3 and 851 thousand euros in 9 months.

Revenue and profitability figures were higher in 2017 due to the completion of most sale agreements for the apartments in Stage I of Kodulahe project. The construction of the apartment building with 125 apartments and 5 commercial areas was finished in Q3 2017. By the publishing date of the interim report, 1 commercial space (which is rented out) remains unsold.

In Q3 2018, construction works continued for Stage II of Kodulahe project, a building with 68 apartments and 1 commercial space. The project is expected to be finalized by the end of 2019. By the publishing date of the interim report, 41 apartments have been presold.

In Iztok Parkside project in Sofia, construction continued during Q3 2018. By the publishing date of the interim report, presale agreements for 44 apartments have been concluded. Iztok project consists of three apartment buildings with 67 apartments (7,070 square meters of apartments’ sellable area).

In Q1 2018, Arco Vara acquired land plots in the Lozen project in Bulgaria with total area of 5.3 ha, and also signed an agreement for the design of Stage I. The design works continued in Q3 and are scheduled to end in early 2019. Stage I will include ca 170 residential units (apartments and houses), commercial spaces and a kindergarten.

As of 30 September 2018, 5 Marsili residential plots remained unsold in Latvia, one of which is presold. In 9 months 2018, one plot was sold in the project.

As of 30 September 2018, 6 people were employed in the Development Division, which is one more than at the end of 2017.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Attachment

• AVG 2018 Q3 ENG