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Group Chief Executive’s review

In the first quarter of 2011, we sold 13 apartments in the projects of Arco Vara - two in Estonia, five in Latvia and six in Bulgaria. The most important project of the period was the work started on the Tivoli project in Tallinn. In addition, we acquired a lease with the commitment to build a nursery school in Lille tee in Viimsi. We have also started developing an apartment building comprising up to 12 apartment units in Tehnika street in Tallinn. For financing the construction of the 160 apartments in phase I of the Tivoli project we involved a partner but the Viimsi nursery school and the apartment building at Tehnika 53 are projects we are building without partners. We did not start any other new projects but continued the construction and sale of the Kodukolde apartment buildings project in Tallinn and the sale of plots at Merivälja. After the reporting date, we completed a nursery school at Alasniidu. We will also continue the development of apartments in the Bisumuiza 1 project in Riga and realisation of the plots at Mazais Baltezers. In Bulgaria, we continued signing real right contracts on the sale of apartments and letting the last vacant rental premises in the Madrid project and the construction of the Manastirski project in Sofia.

A significant proportion of real right contracts (i.e. contracts on the transfer of title) will be signed in the second quarter when the first 50 apartments will be completed in the Kodukolde community in Tallinn. The majority of those apartments will be delivered to customers in May and June. It is important to note that the completion of development projects has a significant impact on the Group’s revenue because most sales are recognised as revenue in the period following the completion of construction work. Although the revenue of the Development division fluctuates steeply, administrative costs are incurred regardless of the stage of sale (signature of contracts on the transfer of title).

For the Service division, 2011 started better than 2010. The division ended the first quarter of 2011 with an operating loss of 32 thousand euros compared with an operating loss of 87 thousand euros for the first quarter of 2010. The improvement is all the more significant because the first quarter is low season for the division. The number of brokerage transactions increased by 22% and the number of valuation reports issued grew by 40% year-over-year. At the same time, the number of brokers decreased and the number of appraisers grew by only 8%.

In the first quarter of 2011, we secured new construction contracts of 4.3 million euros. At 31 March 2011, the Group’s order backlog was 19.0 million euros against 8.0 million euros at the end of the first quarter of 2010.

Within the past 12 months, the Group has reduced its loans and borrowings by 9.4 million euros and the equity to assets ratio has risen from 37% to 41%. Although the weighted average interest rate of loans and borrowings has risen compared with a year ago, interest payments for the first quarter of 2011 totalled 0.5 million euros, remaining at the same level as in the first quarter of 2010. Compared with the end of 2010, the weighted average duration of the Group’s loans and borrowings has increased significantly because at 31 March 2011 most of the Madrid loan, which at the year-end was classified as a current liability in conformity with IAS 1.74, was again classified by reference to its settlement schedule as a non-current liability.

KEY PERFORMANCE INDICATORS

  • The Group’s consolidated revenue for the first quarter of 2011 was 13.3 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 5.0 million euros, 17% up on the first quarter of 2010.
  • Operating loss for the period was 0.9 million euros, a 48% increase year-over-year.
  • Net loss for the first quarter was 1.3 million euros, 75% up on the first quarter of 2010.
  • Equity to assets ratio at period-end was 40.5% (31 March 2010: 37.1%). Return on equity (12 months rolling) was negative (Q1 2010: negative). Return on invested capital (12 months rolling) was 1.2% (Q1 2010: negative).
  • At the end of the first quarter, the Group’s order backlog stood at 19.0 million euros compared with 8.0 million euros at the end of the first quarter of 2010.
  • During the first quarter of 2011, the Group sold 13 apartments (Q1 2010: 30 apartments and plots).


Q1 2011

Q1 2010

In millions of euros




Revenue


13.3

4.2

Operating loss


-0.9

-0.6

Of which net loss on changes in the values of investment properties and inventories


0.0

-0.2

Loss before tax


-1.3

-0.7

Of which net loss on the disposal of financial assets


0.0

-0.2

Net loss


-1.3

-0.7





EPS (in euros)


-0.28

-0.16





Total assets at period-end


65.5

75.4

Invested capital at period-end


53.2

63.8

Net loans at period-end


24.4

32.5

Equity at period-end


26.5

27.3





Average loan term (in years)


2.1

1.6

Average interest rate of loans (per year)


7.0%

6.0%

ROIC (rolling, 4 quarters)


1.2%

neg

ROE (rolling, 4 quarters)


neg

neg





Number of staff at period-end


150

160

REVENUE AND PROFIT



Q1 2011

Q1 2010

In millions of euros




Revenue




Service


0.5

0.4

Development


9.9

2.4

Construction


2.9

1.5

Eliminations


0.0

-0.1

Total revenue


13.3

4.2





Operating loss




Service


0.0

-0.1

Development


-0.6

-0.2

Construction


-0.1

-0.1

Eliminations


0.1

0.3

Unallocated revenues and expenses


-0.3

-0.5

Total operating loss


-0.9

-0.6





Interest income and expense


-0.4

-0.1

Net loss


-1.3

-0.7

The Service and Construction divisions’ revenues have grown and operating losses have decreased year-over-year. Although the number of properties sold by the Development division was smaller than a year ago, in the first quarter of 2011 the division signed 13 preliminary apartment sales contracts (contracts under the law of obligations) in a new phase of the Kodukolde project, which are not yet included in revenue.

Finance income and expenses were influenced the most by growth in interest expense. This is related to the completion of the Madrid project and discontinuance of capitalisation of associated borrowing costs. In the first quarter 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




Q1 2011

Q1 2010

In millions of euros





Cash flows from operating activities



-0.7

-0.1

Cash flows from investing activities



-0.4

0.0

Cash flows from financing activities



-0.9

-0.8

Net cash flow



-2.0

-0.9






Cash and cash equivalents at beginning of period



4.2

4.1

Cash and cash equivalents at end of period



2.2

3.2

In March 2011, Arco Investeeringute AS repaid before maturity 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 were no other exceptional loan settlements in the first quarter of 2011.

Interest payments accounted for 0.5 million euros of the net cash outflow from financing activities. Scheduled and inventory sales-related settlements of loan principal totalled 0.7 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 nursery school that accounted for 1.2 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 factual 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 1.5 million euros;
  • repayments of the loan taken for the Bisumuiza project of 1.4 million euros;
  • repayments of the loan taken for the Laeva 2 development project of 1.1 million euros.

In the first quarter, the Group made regular repayments of the loans taken for the Kodukolde project in Tallinn, the Bishumuiza-1 project in Riga and the Madrid project in Sofia and also scheduled settlements of the loans taken for its cash flow generating projects.

SERVICE DIVISION

For the Service division, the first quarter of 2011 was better than that of 2010: operating loss for the first quarter of 2011 was 32 thousand euros compared with 87 euros a year ago. The number of the Group’s brokerage transactions increased by 22% and the number of valuation reports issued grew by 40% year-over-year. At the same time, the number of brokers decreased and the number of appraisers grew by only 8%.



Q1 2011

Q1 2010

Change, %

Number of brokerage transactions


281

230

22%

Number of projects on sale


158

171

-8%

Number of valuation reports


1,270

910

40%

Number of appraisers*


39

36

8%

Number of brokers*


69

77

-10%

Number of staff at end of period


49

63

-22%

* Includes people working under service contracts.



DEVELOPMENT DIVISION

In the first quarter of 2011, the Group sold a total of 13 apartments in Arco Vara projects. Five apartments were sold in the Bisumuiza project in Latvia, two apartments were sold in the Kodukolde project in Estonia and six apartments were sold in the Madrid project in Sofia.

The Group found a partner, International Invest Project OÜ, for the Tivoli project and raised financing for the construction of its first phase. Design work is under way and construction is scheduled to start in 2011.

The construction of the last but one phase of the Kodukolde development project (50 apartments) is on schedule and the buildings will be completed by the end of May 2011. Construction of the last phase (50 apartments) should begin in the second quarter. Construction work is performed and financed by AS Merko Ehitus.

The construction of the Alasniidu nursery school reached its final stage. We expect to obtain a use permit for the building by the end of May after which we will deliver the building to Harku local government with whom we already have a rental agreement.

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. We have started preparing the preliminary design documentation that is required for obtaining a construction permit and negotiations with financing institutions and builders. According to current plans, the building should be completed in the first half 2012.

Most of the commercial rental premises in the Boulevard Residence Madrid commercial and residential building in Sofia that were covered with preliminary contracts have been transferred to customers and tenants have moved in. We continue to deliver reserved apartments under real right contracts and to sell off free apartments.

At the end of March 2011, the Development division employed 22 people (31 December 2010: 26). 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 first quarter of 2011, the largest active construction contracts comprised the Tallinn-Muuga water and wastewater networks and facilities with the remaining balance of 6.7 million euros, the design and construction of the water and wastewater networks of the Jõgeva and Puurmani rural municipalities with the remaining balance of 2.7 million euros and the building of the Estonian Aviation Academy with the remaining balance of 1.9 million euros.

In the first quarter of 2011, the division secured new construction contracts of 4.3 million euros. As at the reporting date, the order backlog stood at 19.0 million euros compared with 8.0 million euros at the end of the first quarter of 2010.

At the end of March 2011, the Construction division employed 58 people (31 December 2010: 49).


Consolidated statement of comprehensive income

For the period ended 31 March 2011

Note


Q1 2011

Q1 2010

In thousands of euros





Revenue from rendering of services



3,737

1,835

Revenue from sale of goods



9,522

2,394

Total revenue

2


13,259

4,229






Cost of sales

3


-12,692

-3,745

Gross profit



567

484






Other income



5

117

Distribution expenses

4


-102

-63

Administrative expenses

5


-1,361

-1,100

Other expenses



-43

-68

Operating loss



-934

-630






Finance income

6


34

324

Finance expenses

6


-421

-446

Loss before tax



-1,321

-752






Income tax expense



0

-1

Loss for the period



-1,321

-753

Loss attributable to owners of the parent



-1,334

-753

Profit attributable to non-controlling interests



13

0

Other comprehensive income





Exchange differences on translating foreign operations


0

11

Total comprehensive expense for the period



-1,321

-742

Total comprehensive expense
attributable to owners of the parent



-1,334

-742

Total comprehensive income attributable to
non-controlling interests



13

0






Earnings per share (in euros)

7




- Basic



-0.28

-0.16

- Diluted



-0.28

-0.16

Consolidated statement of financial position


Note


As at 31 March 2011


As at 31 December 2010

In thousands of euros






Cash and cash equivalents



2,197


4,209

Trade and other receivables

8


7,545


5,760

Prepayments



325


192

Inventories

9


27,388


35,740

Total current assets



37,455


45,901







Investments



997


996

Trade and other receivables

8


2,951


76

Investment property

10


23,348


22,887

Property, plant and equipment



680


703

Intangible assets



21


20

Total non-current assets



27,997


24,682

TOTAL ASSETS



65,452


70,583







Loans and borrowings

11


12,110


27,126

Trade and other payables

12


6,235


4,813

Deferred income



4,819


4,859

Provisions



1,247


1,378

Total current liabilities



24,411


38,176







Loans and borrowings

11


13,824


3,855

Other payables

12


710


724

Total non-current liabilities



14,534


4,579

TOTAL LIABILITIES



38,945


42,755







Share capital



3,030


3,030

Statutory capital reserve



2,011


2,011

Retained earnings



21,466


22,787

Total equity



26,507


27,828







Equity attributable to non-controlling interests



175


-70

Equity attributable to equity holders of the parent



26,332


27,898







TOTAL LIABILITIES AND EQUITY



65,452


70,583

Consolidated statement of cash flows

For the period ended 31 March 2011

Note


Q1 2011

Q1 2010

In thousands of euros





Loss for the period



-1,321

-753

Interest income and interest expense

6


355

126

Gain/loss on sale of subsidiaries and interests in joint ventures

6


0

229

Share of profits and losses of equity-accounted investees

6


0

-80

Gain/loss on other long-term investments

6


0

4

Depreciation, amortisation and impairment losses on property, plant and equipment and intangible assets

3, 5


25

24

Gain/loss on inventory write-downs and reversals of inventory write-downs

3


0

210

Foreign exchange gains and losses

6


4

-157

Income tax expense/income



0

1

Operating cash flow before working capital changes



-937

-396

Change in receivables and prepayments



-1,866

1,863

Change in inventories



1,504

937

Change in payables and deferred income


591

-2,456

NET CASH USED IN OPERATING ACTIVITIES



-708

-52






Acquisition of property, plant and equipment and intangible assets



-2

-10

Paid on development of investment properties



-557

0

Proceeds from sale of investment properties



177

-7

Acquisition of subsidiaries and interests in joint ventures



1

0

Loans granted



-67

-12

Repayment of loans granted



29

2

Interest received



24

23

NET CASH USED IN INVESTING ACTIVITIES



-395

-4






Proceeds from loans received

11


504

1,669

Settlement of loans and finance lease liabilities

11


-876

-2,020

Interest paid



-537

-512

NET CASH USED IN FINANCING ACTIVITIES



-909

-863






NET CASH FLOW



-2,012

-919






Cash and cash equivalents at beginning of period



4,209

4,137

Decrease in cash and cash equivalents



-2,012

-919

Effect of exchange rate fluctuations on cash held



0

10

Cash and cash equivalents at end of period



2,197

3,228



The whole report you can read here.