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Comments by the CEO

During the first quarter of 2010, 30 apartments or plots were sold under Arco Vara projects. The strategy of Arco Vara development division is to finish the unfinished apartments in the Bišumuiža-1 project in Riga, the apartments and business areas in the Boulevard Residence Madrid and Manastirski projects in Sofia.

At the same time, new developments have to be started, in order to be ready for the market demand. The sales pace during recent quarters has considerably decreased the stock-in-trade and the construction prices are still favourable. AS Kolde, a subsidiary of Arco Vara AS group, and AS Merko Ehitus agreed on the next construction and financing phase of the Kodukolde development project. The new residential complex consists of four apartment houses with 100 apartments and 40 underground garage boxes, with a gross enclosed area of 8,760 square meters. The two first houses will be completed by the spring 2011. In January, the detailed plan of Paldiski road 80 entered into force, providing for a business building with a maximum gross enclosed area of 30,300 m2.


By restructuring the service division, the administration costs were considerably reduced (by 62% on year-over-year basis), at a somewhat slower pace, the turnover has decreased (by 39% on year-over-year basis). The operating loss of the quarter from current operations amounted to 1.4 million kroons (0.1 million euros), 74% down year-over-year. Reduction of the number of employees has stopped and the staff decreased by 14% on year-over-year basis. The work organisation of some smaller offices outside the capital city was changed by giving up the classical office-based work organisation and applying the home office system by maintaining our full service selection at the same time. In other offices, more cost effective work organisation solutions are being implemented in cooperation with employees. The aim of the service division is to continue implementing the work organisation that has been applied and has justified itself in Estonia also in foreign markets. This allows increasing service provision with unlimited means in these countries, with a future focus on Estonia, Latvia and Bulgaria.

In construction division, new contracts amounting to 83.4 million kroons (5.3 million euro) in total were concluded during the three months, which is considerably more than the 34.0 million kroons (2.2 million euros) of Q4. The reserve of construction agreements has increased to 125.7 million kroons (8.0 million euros). The main contracting authority is still the government sector and municipalities. In addition to environmental and infrastructure projects, resources are directed to projects related to education sector. It is important to mention that the internal turnover related to construction has been almost non-existent during the first quarter in the group.


The gross profit without revaluation was 10.9 million kroons (0.7 million euros). The net profit without revaluation of inventory, property investment, financial assets, and goodwill, and without the loss of transfer of holdings and assets amounted to -4.9 million kroons (-0.3 million euros). The reduction in fixed costs accomplished during the last year has had a positive effect to the results of the current year, the administration costs have been reduced by 14% year-over-year.

The management is still focused on the reduction of fixed costs. In addition to reduction, cost optimisation in a manner that supports the sales increase in the best possible way has become important again. In order to cover the fixed costs, construction and sales of new production were started. In addition to the development of the last stage of the Kodukolde project, we are negotiating with banks and potential partners in order to start the first stage of the Tivoli project (approx. 150 apartments) and find a beneficial financing structure for it.

In order to improve liquidity, the group has sold on a current basis smaller property investments during the first quarter, over which no control and management can be exercised or that in any other way do not meet the group's strategic goals.

The group has extended the loan taken from the Piraeus Bank Bulgaria for the development of the Madrid project in Sofia, as well as the SEB bank loans related to the Navigator and Tivoli projects in Tallinn in a total amount of 371.6 million kroons (23.8 million euros). As a result, the loan term for the Madrid project was extended by three years from 2012 to 2015, the loan for the Navigator and Tivoli projects were extended to 30 June 2010. Thanks to the extension of loans, the financial risks of the group are considerably lower.

In December last year, Arco Vara AS shareholders decided to reduce the share capital and on 16.03.2010, the relevant entry in the business register entered into force. Reduction of share capital has reduced the volatility of the share price, enabled a more efficient pricing of the share on stock exchange (through reduction in purchase and sales price difference), and created possibilities for a further strengthening of the capital structure.

Change in accounting policies for recognising jointly controlled entities.

The Group's management has reviewed the accounting principles for reflecting the joint ventures. Previously, jointly controlled entities were recognised using proportionate consolidation. Starting from January 2010, jointly controlled entities are recognised by equity method. In management's opinion, the equity method reflects the assets, liabilities and equity of the group on a more adequate basis than before.


KEY FINANCIALS

· Revenue and other income for the 1st quarter totalled 68.0 million kroons (4.3 million euros),

25 % down year-over-year.

· Operating loss was -9.8 million kroons (-0.6 million euros), 42% down year-over-year.

· Net loss was -11.8 million kroons (-0.8 million euros), 33% down year-over-year.

· Equity ratio was 37.1 % (2009 Q1: 49 %) of the balance sheet total. ROE was negative (2009 Q1: negative).

ROIC was negative (2009 Q1: negative).

· The residual volume of building contracts is 125.7 million kroons (8.0 million euros)

· During the quarter, a total of 30 apartments and plots were sold.

EEK

EUR

2010 Q1

2009 Q1

2010 Q1

2009 Q1

In millions

Revenue and other income

68.0

90.2

4.3

5.8

Operating profit

-9.8

-17.1

-0.6

-1.1

incl. revaluation of investment property and inventory

-3.3

0.0

-0.2

0.0

Profit before tax

-11.8

-17.6

-0.8

-1.1

incl. profit or loss from transfer of financial assets

-3.7

-4.7

-0.2

-0.3

Profit for the year

-11.8

-17.6

-0.8

-1.1

EPS 1 (in kroons and euros)

-2.45

-3.52

-0.16

-0.23

Total assets at period end

1180.2

1657.0

75.4

105.9

Invested capital at period end

997.8

1435.4

63.8

91.7

Net loans at period end

509.1

519.2

32.5

33.2

Equity at period end

438.2

812.3

28.0

51.9

Average loan term (in years)

1.6

1.8

1.6

1.8

Average interest rate of loans (per year)

6.0%

6.7%

6.0%

6.7%

ROIC (rolling 4 quarters)

neg

neg

neg

neg

ROE (rolling 4 quarters)

neg

neg

neg

neg

Number of staff at period end

160

245

160

245

REVENUE AND PROFIT

EEK

EUR

2010 Q1

2009 Q1

2010 Q1

2009 Q1

In millions

Revenue and other income

Service

6.6

10.8

0.4

0.7

Development

38.9

24.7

2.5

1.6

Construction

24.1

58.9

1.5

3.8

Eliminations

-1.6

-4.2

-0.1

-0.3

Total revenue and other income

68.0

90.2

4.3

5.8

Operating profit

Service

-1.4

-5.2

-0.1

-0.3

Development

-2.7

-3.7

-0.2

-0.2

Construction

-2.0

-3.4

-0.1

-0.2

Eliminations

3.9

0.0

0.2

0.0

Unallocated expenses

-7.6

-4.8

-0.5

-0.4

Total operating profit

-9.8

-17.1

-0.7

-1.1

Interest income and expense

-2.0

0.2

-0.1

0.0

Net other financial items

0.0

-0.6

0.0

0.0

Profit for the year

-11.8

-17.6

-0,8

-1.1

During the first quarter of 2010, no considerable revaluations of assets were made. Main cost cuttings have been made, and striving towards reduced costs has become a routine practice in all of our business units. The main focus is now set on increasing the turnover, completing the Madrid project, and improving the liquidity through the sales of projects and stock-in-trade.

The financial income and expenses were mainly influenced by the exchange rate profit of 2.3 million kroons (0.15 million euros) from the claim against AS Ühendatud Kapital in US dollars, as well as by the loss from the sales of Arco Vara Saare Kinnistute OÜ – 3.6 million kroons (0.23 million euros). Despite of the reduction in sales and other operating revenue and income in the construction and service divisions, the operating loss has decreased in all divisions year-over-year.

CASH FLOWS

EEK

EUR

2010 Q1

2009 Q1

2010 Q1

2009 Q1

In millions

Cash flows from operating activities

-0.8

-37.7

-0.1

-2.4

Cash flows from investing activities

-0.2

34.7

0.0

2.2

Cash flows from financing activities

-13.5

-88.3

-0.9

-5.6

Net cash flow

-14.5

-91.3

-1.0

-5.8

Cash and cash equivalents at beginning of period

64.7

156.1

4.1

10.0

Effect of exchange rate fluctuations

0.2

0.0

0.0

0.0

Cash and cash equivalents at end of period

50.5

64.7

3.2

4.1

No extraordinary loan redemptions were made during Q1 2010. Financing activity from net cash flows comprises interest payments 8.0 million kroons (0.5 million euros), which has reduced 20% year-over-year. Scheduled repayments as well as principal repayments related to the sales of inventories have amounted to 31.6 million kroons (2.0 million euros), the biggest portion of limits used during the period is made up by the financing in the amount of 25.5 million kroons (1.6 million euros) related to the completion of the Madrid project.

Major short-term liabilities during the next 12 months:

· „Tivoli” and „Laeva2” project loans in the total amount of 102.5 million kroons (6.6 million euros)

· „Kodukolde“ project loan in the amount of 31.2 million kroons (2.0 million euros);

· The loan for the Bišumuiža-1 (BM-1) development project in Riga in the amount of 45.1 million kroons (2.9 million euros);

· calculated principal returns from the sales of booked spaces in the „Boulevard Residence Madrid“ project on Sofia as the house will be finished by the 1st half-year 2010 at the latest, in an amount of 115.0 million kroons (7.4 million euros);

· commercial papers in the amount of 18.9 million kroons (1.2 million euros).

On a current basis, loans have been redeemed in the „Kodukolde” and Merivälja 2 projects in Tallinn and the „Bišumuiža-1” in Riga as well as in projects creating cash flow. Most of the liabilities of the Group are in euros.

SERVICE DIVISION

Costs have been minimised to a large extent, but they are being kept under strict supervision. Some cooperation agreements that are not profitable for the service division anymore, are intended to be terminated. Two previous unprofitable investments were sold. In connection with signs of activation on the residential market segment, more powerful marketing campaign was started all over Estonia, which is intended to be continued until end of 2010. Negotiations for cooperation agreements with bigger residential and commercial area developers were started, managers and sales persons for offices were recruited, in order to activate brokerage, valuation and marketing activity in all Estonian regions and make our services and office locations more visible for our customers. Our aim is to help customers to make decisions in a difficult market situation and offer a broad service and property selection.

Division's total operating profit for Q1 amounted to -1.4 million kroons (-0.09 million euros), whereof doubtful receivable impairments made up 0.6 million kroons (0.04 million euros). Thus, quarter operating profit from core activities amounted to -0.8 million kroons (-0.05 million euros) which is historically one of the best results.

The number of brokerage transaction of the group has increased by 11% year-over-year, also the number of valuation reports has increased by 12%. As of 31 March 2010, the division employed 63 persons (31 March 2009: 73 persons).

2010 Q1

2009 Q1

change, %

Number of brokered objects

230

208

11%

Projects being sold, pcs.

171

186

-8%

Number of valuation reports

910

810

12%

Number of appraisers*

36

33

9%

Number of real estate brokers*

77

111

-31%

Average number of staff

63

73

-14%

* Includes authorisation agreements

DEVELOPMENT DIVISION

Within three months, 30 apartments or plots were sold under Arco Vara projects. In Latvia, 3 Bišumuiža apartments and 4 residential plots in the project near the Mazais Baltezers lake were sold. In Estonia, 16 Kodukolde apartments and 7 Merivälja plots were sold.

For the construction (100 apartments) and financing of the next stage of Kodukolde a contract for services with ASMerkoEhitus has been concluded. The two first houses will be finished by the spring 2011.

With regard to the Tivoli project, negotiations for finding possible partners and banks for starting and financing the construction are being held.

The main risk factor for the development division is still the refinancing of loans of plots in Estonia.

Thanks to stabilisation of the real estate market, the previous price deductions made for promoting sales have been suspended, for some projects, the prices have increased to some extent. 2010. As of 31 March 2010, the division employed 26 people (31 March 2009: 30 persons).

CONSTRUCTION DIVISION

In addition to routine environmental and infrastructure projects, the construction division has won tenders related to educational institutions.

The biggest construction agreements during three months were Aviation Academy with 43.9 million kroons (2.8 million euros), Tallinn Technical University 4th block, and the Paide study building of the Järvamaa Education Centre.

New construction agreements amounting to 83.4 million kroons (5.3 million euro) in total were concluded during the three months, which is considerably more than the 34.0 million kroons (2.2 million euros) of last year's Q4. At the end of 1st quarter, the construction agreements volume stood at 125.7 million kroons (8.0 million euros) against 80.0 million kroons (5.1 million euros) at the end of 2009. As of 31 March 2010, the division employed 49 people (31 March 2009: 59 persons).

Condensed consolidated interim financial statements

Condensed consolidated statement of comprehensive income

EEK

EUR

Note

2010 Q1

2009 Q1

2010 Q1

2009 Q1

In thousands EEK

Revenue from rendering of services

28 707

70 536

1 835

4 508

Sale of goods

37 463

18 406

2 394

1 176

Total revenue

66 170

88 942

4 229

5 684

Cost of sales

3

-58 597

-85 994

-3 745

-5 496

Gross profit

7 573

2 948

484

188

Other income

4

1 836

1 271

117

81

Selling and distribution expenses

5

-983

-876

-63

-56

Administrative expenses

6

-17 213

-20 063

-1 100

-1 282

Other expenses

4

-1 058

-429

-68

-27

Operating profit

-9 845

-17 149

-630

-1 096

Finance income

7

4 926

11 766

315

752

Finance expenses

7

-6 832

-12 204

-437

-780

Profit before tax

-11 751

-17 587

-752

-1 124

Income tax expense

-8

0

-1

0

Profit / loss for the period

-11 759

-17 587

-753

-1 124

Profit distribution for the period:

Parent company’s participation in loss

-11 759

-16 727

-753

-1 069

Non-controlling interest in loss

0

-860

0

-55

Other comprehensive loss:

Exchange rate differences in converting foreign company

161

13

11

1

Comprehensive profit / loss for the period

-11 598

-17 574

-742

-1 123

Parent company’s participation in loss

-11 598

-16 714

-742

-1 068

Non-controlling interest in loss

0

-860

0

-55

-11 598

-17 574

-742

-1 123

Earning per share

8

- Basic

-2.45

-3.52

-0.16

-0.23

- Diluted

-2.45

-3.52

-0.16

-0.23

Consolidated statement of financial position

Note

31.03.2010

31.12.2009

31.12.2008

in thousands EEK

In thousands Cash and cash equivalents

50 505

64 724

156 061

Financial investments

0

0

40 416

Receivables

9

129 500

150 939

276 541

Prepayments

2 383

2 999

6 077

Inventories

10

749 155

754 805

827 237

Biological assets

0

0

3 680

Total current assets

931 543

973 467

1 310 012

Financial investments

17 883

17 853

216 025

Receivables

2 640

2 635

921

Investment property

11

217 051

219 129

157 367

Property, plant and equipment

12

10 245

10 545

41 664

Intangible assets

13

800

812

12 475

Total non-current assets

248 619

250 974

428 452

TOTAL ASSETS

1 180 162

1 224 441

1 738 464

Loans and borrowings

14

392 648

371 615

223 598

Payables

15

53 805

83 621

124 190

Deferred income

83 382

81 902

64 172

Provisions

45 161

43 571

37 999

Total current liabilities

574 996

580 709

449 959

Loans and borrowings

14

160 801

186 578

454 048

Payables

6 178

6 278

1 418

Provisions

0

1 100

3 191

Total non-current liabilities

166 979

193 956

458 657

TOTAL LIABILITIES

741 975

774 665

908 616

Share capital

47 417

952 841

952 842

Share premium

0

0

712 514

Statutory capital reserve

31 463

31 463

31 463

Retained earnings

359 298

-530 536

-866 593

Treasury shares

0

-3 992

-3 992

Total equity attributable to equity holders of the parent

438 178

449 776

826 234

Non-controlling interests

9

0

3 614

Total equity

8

438 187

449 776

829 848

TOTAL LIABILITIES AND EQUITY

1 180 162

1 224 441

1 738 464

Note

31.03.2010

31.12.2009

31.12.2008

in thousands EUR

In thousands Cash and cash equivalents

3 228

4 137

9 974

Financial investments

0

0

2 583

Receivables

9

8 277

9 647

17 674

Prepayments

152

192

388

Inventories

10

47 880

48 241

52 870

Biological assets

0

0

235

Total current assets

59 537

62 217

83 724

Financial investments

1 143

1 141

13 806

Receivables

169

168

59

Investment property

11

13 872

14 005

10 058

Property, plant and equipment

12

655

674

2 663

Intangible assets

13

51

52

798

Total non-current assets

15 890

16 040

27 384

TOTAL ASSETS

75 427

78 257

111 108

Loans and borrowings

14

25 095

23 750

14 290

Payables

15

3 439

5 344

7 937

Deferred income

5 329

5 234

4 101

Provisions

2 886

2 788

2 429

Total current liabilities

36 749

37 116

28 757

Loans and borrowings

14

10 277

11 924

29 019

Payables

395

401

91

Deferred income tax liability

0

70

204

Total non-current liabilities

10 672

12 395

29 314

TOTAL LIABILITIES

47 421

49 511

58 071

Share capital

3 030

60 897

60 897

Share premium

0

0

45 538

Statutory capital reserve

2 011

2 011

2 011

Retained earnings

22 963

-33 907

-55 385

Treasury shares

0

-255

-255

Total equity attributable to equity holders of the parent

28 004

28 746

52 806

Non-controlling interests

1

0

231

Total equity

8

28 005

28 746

53 037

TOTAL LIABILITIES AND EQUITY

75 426

78 257

111 108

Consolidated cash flow statement

EEK

EUR

Note

2010 Q1

2009 Q1

2010 Q1

2009 Q1

In thousands

Profit for the year

-11 759

-17 587

-752

-1 124

Interest income and expense

7

1 979

-191

126

-12

Gains and losses on disposal of subsidiaries and interests in jointly controlled entities

3 590

4 673

229

299

Gains and losses on other long-term financial assets

7

48

21

3

1

Impairment losses on financial assets

7

0

52

0

3

Profit and loss by equity method

-1 256

4 673

-80

299

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

3,4,6

376

1 000

24

64

Gain / loss on the sale of property, plant and equipment and intangible assets

3,4,6

0

24

0

2

Gain / loss on the sale of investment property

4

0

-97

0

-6

Change in the fair value of investment property and biological assets

4

5

0

1

0

Loss on decrease of net realisable value of inventories

3

3 291

0

210

0

Exchange rate gains and losses

7

-2 455

-4 117

-157

-263

Corporate income tax expense

8

0

1

0

Operating cash flow before working capital changes

-6 173

-11 549

-395

-737

Change in receivables and prepayments

29 156

22 940

1 863

1 466

Change in inventories

14 661

-32 399

937

-2 071

Change in biological assets

0

447

0

29

Change in prepayments

-38 440

-17 144

-2 456

-1 096

NET CASH USED IN OPERATING ACTIVITIES

-796

-37 705

-51

-2 409

Acquisition of property, plant and equipment and intangible assets

-162

-7 747

-10

-495

Proceeds from sale of property, plant and equipment and intangible assets

0

341

0

22

Acquisition of investment property

-111

-15

-7

-1

Proceeds from sale of investment property

0

250

0

16

Proceeds from disposal of other financial investments

0

40 416

0

2 583

Loans granted

-182

-4 246

-12

-271

Repayment of loans granted

28

3 395

2

217

Interest received

364

2 301

23

147

NET CASH USED IN INVESTING ACTIVITIES

-63

34 695

-4

2 218

Proceeds from loans received

26 113

21 754

1 669

1 390

Repayment of loans and payment of finance lease liabilities

-31 599

-100 119

-2 020

-6 399

Interest paid

-8 015

-9 974

-512

-637

NET CASH FROM FINANCING ACTIVITIES

-13 501

-88 339

-863

-5 646

NET CASH FLOW

-14 360

-91 349

-918

-5 837

Cash and cash equivalents at beginning of period

64 724

156 061

4 137

9 974

Increase / decrease

-14 360

-91 349

-918

-5 837

Effect of exchange rate fluctuations

141

12

8

1

Cash and cash equivalents at end of period

50 505

64 724

3 228

4 137


The whole report you can read here.