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Group Chief Executive’s review

At the date of release of this report, the most important event of 2012 has been a change in the composition of the supervisory board of Arco Vara AS.  Since the reporting date, three independent supervisory board members, Ragnar Meitern, Kalev Tanner and Aare Tark, have resigned and Toomas Tool, Stephan David Balkin and Aivar Pilv have been elected in their place. Now, three of the company’s largest shareholders who together hold over 62% of the votes represented by shares are represented on the supervisory board.

The first quarter net loss of 0.9 million euros results mainly from the sale of an investment property, i.e. a right of superficies at Kadaka tee 131 in Tallinn. Corresponding information has already been disclosed earlier. In other respects, the Group’s performance met expectations and was more profitable than in the second half of 2011.

In the first quarter of 2012, we sold four apartments in Arco Vara’s projects: one in Estonia and three in Latvia. The figure does not include the apartments sold in the recently completed Manastirski apartment block and the two Kodukolde apartment buildings that will be completed in June, because currently we have concluded only contracts under the law of obligations there (presale contracts). The sales of those apartments will be included in revenue from the second quarter.

As regards major ongoing work, the large-scale Tivoli apartment project is in the design phase and we have invited tenders from potential builders. The construction of phase VI in the Kodukolde project (48 apartments) at Helme 16 in Tallinn, which was started in the second quarter of 2011, will be completed in June 2012. By the end of the first quarter, 52% of the new Kodukolde apartments had been reserved. We have also started development of a residential building with 14 apartments in Tehnika street in Tallinn. Construction term is14 months, pre-sale began in May 2012.

We have completed the construction of 7,000 square metres in phase I of the Manastirski project in Bulgaria. By the reporting date, 65% of the apartments in phase I had been reserved. 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 (final contracts by which title is transferred), and to sell the remaining free apartments.

In the Bišumuiža 1 apartment project in Latvia, we will complete the fourth building of stage II (14 apartments) in June 2012. In addition to selling the apartments of Bišumuiža 1, we continue realising plots in the Mazais Baltezers project. Completion of development projects has a strong impact on the Group’s revenue, because sales are recognised as revenue when construction has been completed, not when it is in progress.

To improve the Group’s liquidity and reduce its liabilities, the Group’s subsidiary OÜ Kerberon sold the right of superficies at Kadaka tee 131 in Tallinn. By divesting a business and warehouse complex on the property, the Group reduced its liabilities by 2.2 million euros and improved its liquidity although the transaction resulted in a loss of 0.7 million euros. 

In the first quarter of 2012, the Service division performed better than a year ago, generating revenue of 573 thousand euros, 13% up on a year ago. The number of brokerage transactions increased by 11% and the number of valuation reports issued grew by 9% year over year. At the same time, the number of brokers increased by only 1% and the number of appraisers remained stable. During the period, the Service division began offering valuation services in Bulgaria.

In the first quarter of 2012, the Construction division secured new construction contracts of 2.9 million euros. At the reporting date, the order backlog stood at 12.9 million euros against 19.0 million euros at the end of the first quarter of 2011. The Construction division ended the first quarter with an operating profit of 0.4 million euros compared with an operating loss of 0.1 million euros incurred in the first quarter of 2011.

After the reporting date, in April 2012, the Group sold its stake in the joint venture Bišumuižas Nami SIA to the co-venturer SIA Linstow Baltic. The Group 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. In 2011 we financed the joint venture to the extent of 0.3 million euros and Bišumuižas Nami SIA’s loan liabilities alone totalled 14 million euros.

In the first quarter, the Group’s loans and borrowings decreased by 1 million euros while equity to assets ratio remained more or less stable at around 40%. The weighted average interest rate of interest-bearing loans and borrowings has decreased by 0.1 percentage points compared with a year ago, mainly in connection with a decline in EURIBOR. The weighted average duration of loans and borrowings has extended slightly, from 2.1 years to 2.3 years.
 

KEY PERFORMANCE INDICATORS

  • The Group ended the first quarter of 2012 with revenue of 3.6 million euros. Revenue for the first quarter of 2011 was 13.3 million euros (including 8.3 million euros earned on the sale of the Tivoli properties). Excluding the effect of the Tivoli transaction, revenue for the first quarter of 2012 was 27% smaller than a year ago.
  • Operating loss for the period was 0.5 million euros. Compared with the first quarter of 2011 when the figure was 0.9 million euros, operating loss has decreased by 48%.
  • Net loss for the first quarter was 0.9 million euros, a 35% decrease from the net loss of 1.3 million euros incurred in the first quarter of 2011.
  • Equity to assets ratio at period-end was 40.1% (31 December 2011: 39.7%). Return on equity (12 months rolling) was negative.
  • At the end of the first quarter, the Group’s order backlog stood at 12.9 million euros compared with 19.0 million euros at the end of the first quarter of 2011.
  • During the first quarter, the Group sold 4 apartments and plots (Q1 2011: 13 apartments and plots) in its self-developed projects.
    Q1 2012 Q1 2011
In millions of euros      
Revenue   3.6 13.3
Operating loss   -0.5 -0.9
Net loss   -0.9 -1.3
       
EPS (in euros)   -0.18 -0.28
       
Total assets at period-end   57.7 65.5
Invested capital at period-end   47.1 53.2
Net loans at period-end   22.3 24.4
Equity at period-end   23.1 26.5
       
Average loan term (in years)   2.3 2.1
Average interest rate of loans (per year)   6.9% 7.0%
ROIC (rolling, 4 quarters)   neg 1.2%
ROE (rolling, 4 quarters)    neg neg
       
Number of staff at period-end   140 150

 

REVENUE AND PROFIT

    Q1 2012 Q1 2011
In millions of euros      
Revenue      
Service   0.6 0.5
Development   0.7 9.9
Construction   2.4 2.9
Eliminations   -0.1 0.0
Total revenue   3.6 13.3
       
Operating profit/loss      
Service   0.0 0.0
Development   -0.6 -0.6
Construction   0.4 -0.1
Eliminations   0.0 0.1
Unallocated income and expenses, net   -0.3 -0.3
Total operating loss   -0.5 -0.9
       
Interest income and expense, net   -0.4 -0.4
Net loss   -0.9 -1.3

The Development division’s revenue for the first quarter of 2011 was significantly impacted by the sale of inventory of 8.3 million euros to joint venture Tivoli Arendus OÜ.

 

CASH FLOWS

      Q1 2012 Q1 2011
In millions of euros        
Cash flows from operating activities     -1.2 -0.7
Cash flows from investing activities     1.0 -0.4
Cash flows from financing activities     -0.3 -0.9
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 March 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 taken for the Boulevard Residence Madrid project in Sofia of 2.5 million euros;
  • repayments of the loan taken for the Manastirski project of 1.9 million euros;
  • repayments of the construction loan taken by AS Kolde of 2.4 million euros;
  • repayments of the loan taken for the Bišumuiža 1 project of 0.5 million euros.

In the first quarter of 2012, the Group made repayments of the loan taken for the Bišumuiža-1 project in Riga and repaid the Kerberon loan in full. The Group also made scheduled repayments of loans taken for its cash flow generating projects and followed the principal repayments schedule agreed for the bank loan taken by Koduküla OÜ.
 

SERVICE DIVISION

In the first quarter of 2012, the Service division performed better than a year ago, ending the period with an operating loss of 5 thousand euros compared with an operating loss of 32 thousand euros for the first quarter of 2011. Revenue for the first quarter of 2012 was 573 thousand euros, 13% up on the first quarter of 2011. The number of brokerage transactions increased by 11% and the number of valuation reports issued grew by 9% year over year. At the same time, the number of brokers increased by only 1% and the number of appraisers remained stable.

         
    Q1 2012 Q1 2011 Change, %
Number of completed brokerage transactions   313 281 11%
Number of projects on sale at end of period   162 158 3%
Number of valuation reports issued   1,382 1,270 9%
Number of appraisers at end of period¹   39 39 0%
Number of brokers at end of period¹   75 69 1%
Number of staff at end of period   45 49 -8%
¹ Includes people working under service contracts        

 

DEVELOPMENT DIVISION

In the first quarter of 2012, four apartments were sold in Arco Vara’s projects: three apartments in the Bišumuiža project in Latvia and one apartment in the Kodukolde project in Estonia. It should be noted that the figure does not yet include the apartments sold in the recently completed apartment block in the Manastirski project and the two apartment buildings, which will be completed in the Kodukolde project in June. In those projects currently only contracts under the law of obligations have been signed (under Estonian legislation, in a real estate transaction a contract under the law of obligations is signed when the buyer makes a prepayment and the parties agree the terms and conditions of sale, thus it is essentially a presale contract; title to the property transfers under a real right contract, which is usually signed when the real estate is complete). The sales of those apartments will be included in the division’s revenue from the second quarter.

In 2011 the Development division found a partner, International Invest Project OÜ, for the Tivoli project and raised financing for the construction of phase I. Last year contaminated land was remediated and design work began. In the fourth quarter, Tivoli Arendus OÜ obtained a permit for the construction of six residential buildings. According to plan, construction work will begin in the summer of 2012.

Phase V of the Kodukolde development project (50 apartments) was completed in June 2011. By the end of the first quarter of 2012, all apartments in that phase had been sold. The construction of phase VI at Helme 16 in Tallinn (48 apartments) began in the second quarter of 2011. The work is performed and substantially financed by AS Merko Ehitus Eesti. The buildings are scheduled for completion in June 2012. By the end of the first quarter, half of the apartments in phase VI had been reserved on the basis of contracts under the law of obligations.

In January 2012, the division 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. Construction of the building was put out to tender in the first quarter of 2012. To date, the best two bidders have been selected and negotiations on signing a construction contract are under way. According to plan, construction work should be completed within 14 months. Preliminary sale of apartments began in May 2012.

During the period, the division completed the construction of phase I in the Manastirski project in Bulgaria. As at 31 March 2012, 65% of the apartments were reserved. In the commercial and residential building Boulevard Residence Madrid in Sofia the division continues to lease out commercial premises, to deliver reserved apartments under real right contracts, and to sell the remaining free apartments.

In June 2012, the fourth building (14 apartments) will be completed in phase II of the Bišumuiža 1 apartment buildings development project in Latvia.  Altogether, phase II consists of five buildings.

At the end of March 2012, the Development division employed 25 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 the first quarter of 2012, the largest contracts in progress included the design and build of the reconstruction and extension of the public water and wastewater systems of the Suure-Jaani rural municipality (two phases with a total remaining balance of 3.9 million euros), the construction of the Paide wastewater treatment plant (remaining balance 2.7 million euros), the design and build of water and wastewater pipelines for the city of Loksa (remaining balance 2.5 million euros) and the construction of the Kuusalu public water and wastewater network (remaining balance 2 million euros).

In the first quarter of 2012, the division secured new construction contracts of 2.9 million euros. At the reporting date, the order backlog stood at 12.9 million euros compared with 19.0 million euros at the end of the first quarter of 2011.

At the end of March 2012, the Construction division employed 53 people (31 December 2011: 58).
 

Consolidated statement of comprehensive income

  Note   Q1 2012 Q1 2011
In thousands of euros        
Revenue from rendering of services     3,368 3,737
Revenue from sale of goods     260 9,522
Total revenue 2, 3   3,628 13,259
         
Cost of sales 4   -2,815 -12,692
Gross profit     813 567
         
Other income  7    192 5
Marketing and distribution expenses 5   -82 -102
Administrative expenses 6   -697 -1,361
Other expenses 7   -716 -43
Operating loss     -490 -934
         
Finance income 8   22 34
Finance expenses 8   -394 -421
Loss before tax     -862 -1,321
         
Loss for the period     -862 -1,321
   Loss attributable to owners of the parent     -847 -1,334
   Profit/loss attributable to non-controlling interests     -15 13
         
Total comprehensive expense for the period     -862 -1,321
         
Earnings per share (in euros) 9      
- Basic     -0.18 -0.28
- Diluted     -0.18 -0.28

 

Consolidated statement of financial position

  Note   31 March 2012 31 December 2011
In thousands of euros        
Cash and cash equivalents     1,787 2,209
Trade and other receivables 10   7,648 7,012
Prepayments     397 433
Inventories 11   23,178 21,564
Non-current assets held for sale     0 469
Total current assets     33,010 31,687
         
Investments in equity-accounted investees     4 4
Other investments     8 8
Trade and other receivables 10   3,135 3,058
Deferred income tax asset     250 250
Investment property 12   20,306 24,046
Property, plant and equipment     920 934
Intangible assets     25 26
Total non-current assets     24,648 28,326
TOTAL ASSETS     57,658 60,013
         
Loans and borrowings 13   9,425 9,662
Trade and other payables 14   6,930 7,735
Deferred income     2,304 2,012
Provisions     1,201 1,205
Total current liabilities     19,860 20,614
         
Loans and borrowings 13   13 929 14 675
Other payables 14   748 741
Total non-current liabilities     14,677 15,416
TOTAL LIABILITIES     34,537 36,030
         
Share capital     3,319 3,319
Statutory capital reserve     2,011 2,011
Retained earnings     17,791 18,653
Total equity     23,121 23,983
         
Equity attributable to n on-controlling interests     140 155
Equity attributable to equity holders of the parent     22,981 23,828
         
TOTAL LIABILITIES AND EQUITY     57,658 60,013



Consolidated statement of cash flows

  Note   Q1 2012 Q1 2011
In thousands of euros        
Loss for the period     -862 -1,321
Interest income and interest expense, net 8   321 355
Loss on sale of investment property  7   712 0
Depreciation, amortisation and impairment losses on property, plant and equipment and intangible assets 4, 6   23 25
Foreign exchange gains and losses, net 8   3 4
Operating cash flow before working capital changes     197 -937
Change in receivables and prepayments     169 -1,866
Change in inventories     -953 1,504
Change in payables and deferred income     -575 591
NET CASH USED IN OPERATING ACTIVITIES     -1,162 -708
         
Acquisition of property, plant and equipment and intangible assets     -12 -2
Paid on development of investment property     0 -557
Proceeds from sale of investment property     1,140 177
Acquisition of investments in subsidiaries and joint ventures     0 1
Loans granted  15   -63 -67
Repayment of loans granted     0 29
Other payments related to investing activities     -29 0
Interest received     3 24
NET CASH FROM/USED IN INVESTING ACTIVITIES     1,039 -395
         
Proceeds from loans received  13   261 504
Settlement of loans and finance lease liabilities  13   -165 -876
Interest paid     -393 -537
Other payments related to financing activities     -2 0
NET CASH USED IN FINANCING ACTIVITIES     -299 -909
         
NET CASH FLOW     -422 -2,012
         
Cash and cash equivalents at beginning of period     2,209 4,209
Decrease in cash and cash equivalents     -422 -2,012
Cash and cash equivalents at end of period     1,787 2,197

 

Egert Paulberg
Financial Controller
Arco Vara AS
Phone: +372 614 4503
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Attachments:
Arco 2012 Q1 interim report.pdf