Group Chief Executive’s review
Compared with the same period last year, the Group’s revenue has grown significantly across all divisions. After an interval of several years, the Service division posted an operating profit while the operating profit of the Development division remained stable year over year. The biggest setback was the loss incurred by the Construction division that is operating in an industry overshadowed by unfavourable contracts secured in prior periods and continuing bankruptcies.
In the first nine months of 2011, 81 apartments and plots were sold in the projects of Arco Vara: 57 in Estonia, 15 in Latvia and 9 in Bulgaria. Major ongoing development projects include the Tivoli apartment building in Tallinn, which is in the design stage, and the Manastirski apartment building in Sofia that has reached the stage of external finishing and interior works. With more than 7000 square metres, phase I of the Manastirski apartment building that is scheduled for completion in the first quarter of 2012 is currently our largest active development project. The progress of construction work can be viewed live at http://www.arcoinvest.bg/livd/video/camera-one-bg . We also continue to build and sell apartments in the Kodukolde community in Tallinn where the progress of site operations can be viewed in real time at http://www.kodukolde.ee/#webcam and are completing the sale of plots at Merivälja. Significant third quarter transactions include successful participation in the privatisation of land near Riga where the Group, acting through its associate Prime Capital SIA, and its Latvian partner acquired a parcel of 86 hectares. In addition, we have sold to an investor the Lille tee nursery school that is under construction in Viimsi although Arco Vara will continue to manage the project until completion and we continue to develop the Bišumuiža 1 apartment project and to sell plots in Riga. Since the reporting date, the Group has signed a deed of conveyance with the company Cleves EOOD on the transfer of 21 apartments and 13 parking spaces in the Madrid project in Bulgaria with a total value of 4.3 million euros, of which 2.5 million was paid in advance in March 2008 and 1.8 million will be paid in November 2011. In addition to the above transaction, Cleves EOOD is obliged to buy another 16 apartments and 18 parking spaces by the end of 2012 for a total price of 2.8 million euros. The final transaction price will be 7.1 million euros.
For the Service division, the first nine months of 2011 were better than the same period in several previous years. Revenue grew and the division ended the period with an operating profit of 0.09 million euros compared with an operating loss of 0.08 million euros for the same period in 2010. The number of brokerage transactions increased by 31% and the number of valuation reports issued grew by 46% year over year. At the same time, the number of brokers has decreased and the number of appraisers has grown by only 6%.
In the first nine months of 2011, the Group secured new construction contracts of 7.9 million euros. Our order backlog as at 30 September 2011 was 8.6 million euros against 6.3 million euros at the end of the third quarter of 2010. In the third quarter, the Construction division completed the Estonian Aviation Academy building in Tartu, the largest project where Arco Ehitus was the sole general contractor in 2011. The Construction division’s third quarter operating loss is attributable to the unfavourable terms of the construction contracts signed in 2010 and by bankruptcy cases among our construction tender partners. Due to joint responsibility in consortium in two cases it was found necessary to continue construction by Arco Ehitus
The largest single construction projects that have generated a negative contribution in 2011 include:
Within the past 12 months, the Group’s loans and borrowings have decreased by 8.5 million euros and equity to assets ratio has remained virtually the same at 37%. The weighted average interest rate of loans and borrowings has risen year over year due to the upward trend in EURIBOR. However, the weighted average duration of loans and borrowings has not changed.
KEY PERFORMANCE INDICATORS
|9M 2011||9M 2010||Q3 2011||Q3 2010|
|In millions of euros|
|Revenue and other income||31.3||14.7||7.8||5.8|
|Of which net loss on changes in the values of investment properties and inventories||0.0||-0.3||0.0||0.0|
|Loss before tax||-3.6||-1.2||-1.7||-0.1|
|Of which net gain/ loss on the disposal of financial assets||0.3||-0.2||0.0||0.0|
|EPS (in euros)||-0.77||-0.27||-0.36||-0.03|
|Total assets at period-end||64.0||75.0|
|Invested capital at period-end||49.0||61.3|
|Net loans at period-end||23.4||31.4|
|Equity at period-end||23.7||27.5|
|Average loan term (in years)||2.0||2.0|
|Average interest rate of loans (per year)||7.6%||6.1%|
|ROIC (rolling, 4 quarters)||neg||neg|
|ROE (rolling, 4 quarters)||neg||neg|
|Number of staff at period-end||147||142|
REVENUE AND PROFIT
|9M 2011||9M 2010||Q3 2011||Q3 2010|
|In millions of euros|
|Total operating profit/loss||-2.7||-0.7||-1.2||0.3|
|Interest income and expense||-1.2||-0.5||-0.4||-0.2|
|Other finance income and expenses||0.2||-0.1||0.0||-0.3|
|Income tax expense||0.0||0.0||0.0||0.0|
The nine-month revenue of the Development division was boosted by sale of inventory of 8.3 million euros to joint venture Tivoli Arenduse OÜ. The revenue of the Construction division has grown year over year mainly on account of increasing construction activity while its nine-month operating loss is attributable to a rapid upsurge in construction prices that emerged in 2010 and counterparty bankruptcies. Finance income and expenses have been strongly influenced by interest expense, which has grown since the Madrid project was completed and capitalisation of associated borrowing costs was discontinued.
|9M 2011||9M 2010|
|In millions of euros|
|Cash flows from operating activities||-1.9||0.9|
|Cash flows from investing activities||0.0||1.4|
|Cash flows from financing activities||-0.4||-3.9|
|Net cash flow||-2.3||-1.7|
|Cash and cash equivalents at beginning of period||4.2||4.1|
|Cash and cash equivalents at end of period||1.9||2.4|
In March 2011, Arco Investeeringute AS repaid ahead of schedule 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 the 50% stake in Tivoli Arendus OÜ paid the cash directly to SEB.
Interest payments accounted for 0.8 million euros of the net cash outflow from financing activities. Scheduled settlements of loan principal and those related to inventory sales totalled 1.6 million euros. In connection with refinancing carried out in the third quarter, loans and borrowings grew by 0.8 million euros. During the reporting period, the credit limit was used for financing the construction of the two last phases in the Kodukolde project and the Alasniidu and Lille tee nursery schools of 3.5 million euros in aggregate. Use of the limit for the Kodukolde project is not reflected in cash flows because invoices received from Merko Ehitus are booked as a loan and there are no actual cash movements.
The largest current liabilities to be settled in the next 12 months comprise:
In the first nine months of 2011, the Group made regular repayments under the loans taken for the Kodukolde project in Tallinn, the Bišumuiža 1 project in Riga and the Madrid project in Sofia and scheduled settlements under the loans taken for its cash flow generating projects. The Group is also following the principal repayment schedules set for the bank loans taken for the Laeva 2 project and Koduküla OÜ.
In 2011, the performance of the Service division has been in every respect better than in 2010. The division ended the first nine months with an operating profit of 0.09 million euros compared with an operating loss of 0.08 million euros for the first nine months of 2010. The number of the Group’s brokerage transactions increased by 31% and the number of valuation reports issued grew by 46% year over year. At the same time, the number of brokers has decreased and the number of appraisers has grown by only 6%.
|9M 2011||9M 2010||Change, %|
|Number of brokerage transactions||1,045||798||31%|
|Number of projects on sale||178||176||1%|
|Number of valuation reports||4,390||3,007||46%|
|Number of appraisers*||38||36||6%|
|Number of brokers*||73||79||-8%|
|Number of staff at end of period||46||51||-10%|
|* Includes people working under service contracts.|
In the first nine months of 2011, 81 apartments and plots were sold in the projects of Arco Vara: 12 apartments in the Bišumuiža project and three plots in the Baltezers project in Latvia, 55 apartments in the Kodukolde project and two plots in the Merivälja project in Estonia, and nine apartments in the Madrid project in Sofia, Bulgaria.
The Group succeeded in finding a partner, International Invest Project OÜ, for the Tivoli project and raising financing for the construction of phase I. Design work is under way and construction should to start in 2011.
The last but one phase of the Kodukolde development project (50 apartments) was completed in June. By the end of the third quarter, only one apartment there was still unsold. Construction of the last phase (48 apartments) began in the second quarter. The work is performed and financed by AS Merko Ehitus. The buildings are expected to be completed in the first half of 2012.
The Alasniidu nursery school building was granted a use permit at the end of May and was delivered to Harku local government with whom a rental agreement had been signed. The entity that owns the nursery school was sold in the second quarter and with this the project was successfully completed.
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 and signed a long-term rental agreement with the local government. The nursery school should be completed in the first quarter of 2012. Construction work is performed by YIT. In September 2011, Arco Investeeringute AS sold its 100% interest in Lilletee LA OÜ but will continue acting as construction manager until the nursery school is completed.
In Bulgaria, the construction of phase I of the Manastirski project is under way: 51% of the apartments have already been reserved. In the commercial and residential building Boulevard Residence Madrid in Sofia the division continues delivering reserved apartments under real right contracts and selling the remaining free apartments.
At the end of September 2011, the Development division employed 24 people (30 September 2010: 26).
For further information on our projects, please refer to: www.arcorealestate.com/development .
The Construction division is typically actively involved in environmental, infrastructure and civil engineering (mostly educational establishments-related) projects.
At the end of the third quarter of 2011, the largest active construction contracts comprised the design and build of water and wastewater pipelines for the city of Loksa (remaining balance 3.3 million euros), the construction of the Tallinn-Muuga water and wastewater networks and facilities (remaining balance 1.8 million euros) and the design and build of water and wastewater networks for the Jõgeva and Puurmani rural municipalities (remaining balance 1.9 million euros).
In the first nine months of 2011, the division secured new construction contracts of 7.9 million euros. At the reporting date, the order backlog stood at 8.6 million euros compared with 6.3 million euros at the end of the third quarter of 2010.
At the end of September 2011, the Construction division employed 58 people (30 September 2010: 44).
Consolidated statement of comprehensive income
|For the period ended 30 September||Note||9M 2011||9M 2010||Q3 2011||Q3 2010|
|In thousands of euros|
|Revenue from rendering of services||16,280||8,533||5,942||3,834|
|Revenue from sale of goods||15,033||5,806||1,866||1,797|
|Cost of sales||3||-30,640||-12,212||-8,198||-4,574|
|Loss before tax||-3,635||-1,237||-1,715||-131|
|Income tax expense||0||-30||0||-2|
|Loss for the period||-3,635||-1,267||-1,715||-133|
|Loss attributable to owners of the parent||-3,634||-1,267||-1,701||-133|
|Loss attributable to non-controlling interests||-1||0||-14||0|
|Other comprehensive income|
|Exchange differences on translating foreign operations||0||11||0||0|
|Total comprehensive income for the period||-3,635||-1,256||-1,715||-133|
| Total comprehensive income |
attributable to owners of the parent
|Total comprehensive income attributable to non-controlling interests||-1||0||-14||0|
|Earnings per share (in euros)||7|
Consolidated statement of financial position
|Note||As at 30 September 2011||As at 31 December 2010|
|In thousands of euros|
|Cash and cash equivalents||1,913||4,209|
|Trade and other receivables||8||9,106||5,760|
|Total current assets||36,085||45,901|
|Trade and other receivables||8||2,948||76|
|Property, plant and equipment||664||703|
|Total non-current assets||27,934||24,682|
|Loans and borrowings||11||13,353||27,126|
|Trade and other payables||12||9,641||4,813|
|Total current liabilities||28,389||38,176|
|Loans and borrowings||11||11,255||3,855|
|Total non-current liabilities||11,965||4,579|
|Statutory capital reserve||2,011||2,011|
|Equity attributable to n on-controlling interests||161||-70|
|Equity attributable to equity holders of the parent||23,504||27,898|
|TOTAL LIABILITIES AND EQUITY||64,019||70,583|
Consolidated statement of cash flows
|For the period ended 30 September||Note||9M 2011||9M 2010|
|In thousands of euros|
|Loss for the period||-3,635||-1,268|
|Interest income and interest expense, net||6||1,150||485|
|Gain/loss on sale of subsidiaries and interests in joint ventures||6||-285||88|
|Share of profit/loss of joint ventures under the equity method||6||0||94|
|Gain/loss on other long-term investments||6||99||0|
|Impairment losses on financial assets||6||0||13|
|Depreciation, amortisation and impairment losses on property, plant and equipment and intangible assets||3, 5||72||92|
|Change in the fair value of investment property||10||0||-7|
|Gain/loss on the sale of investment property||0||21|
|Gain/loss on inventory write-downs and reversals of inventory write-downs||3||0||355|
|Foreign exchange gains and losses||6||4||-114|
|Income tax expense||0||30|
|Operating cash flow before working capital changes||-2,595||-211|
|Change in receivables and prepayments||1,003||-456|
|Change in inventories||3,319||-129|
|Change in payables and deferred income||-3,628||1,684|
|NET CASH USED IN/FROM OPERATING ACTIVITIES||-1,901||888|
|Acquisition of property, plant and equipment and intangible assets||-37||-32|
|Proceeds from sale of property, plant and equipment and intangible assets||4||0|
|Paid on development of investment properties||-729||-238|
|Proceeds from sale of investment properties||177||1,568|
|Acquisition of subsidiaries and interests in joint ventures||-3||-32|
|Proceeds from disposal of subsidiaries and interests in joint ventures||893||7|
|Repayment of loans granted||75||3|
|NET CASH FROM INVESTING ACTIVITIES||45||1,351|
|Proceeds from loans received||11||4,591||3,883|
|Settlement of loans and finance lease liabilities||11||-4,185||-6,197|
|NET CASH USED IN FINANCING ACTIVITIES||-440||-3,928|
|NET CASH FLOW||-2,296||-1,689|
|Cash and cash equivalents at beginning of period||4,209||4,137|
|Decrease in cash and cash equivalents||-2,296||-1,689|
|Effect of exchange rate fluctuations on cash held||0||1|
|Cash and cash equivalents at end of period||1,913||2,449|
Arco Vara AS
Jõe 2b, 10151 Tallinn, Estonia
tel: +372 614 4630
gsm: +372 510 9959
fax: +372 614 4646
The litigation between Arco Vara and Indrek Porila has ended with a compromise agreement that fully complies with the proposal made by Arco Vara prior to the lawsuit.
In a stock exchange announcement of 26 May 2010 Arco Vara stated that Indrek Porila had brought an action against Arco Vara AS. On 1 December 2011 the parties signed an agreement under which the claim of Indrek Porila will be settled by Arco Vara AS transferring a share with a par value of EUR 319.6 in Floriston Grupp OÜ to EPRI Invest OÜ. The share is registered in the Estonian Central Register of Securities and accounts for 12.5% of the entity’s share capital. EPRI Invest OÜ’s sole shareholder and management board member is Indrek Porila.
The transaction does not have any significant impact on the group’s balance sheet or income statement.
Floriston Grupp OÜ is involved in letting and operating own and leased real estate. The remaining 87.5% stake in the entity is held by Ärimaja AS and Majaarendus OÜ, companies related to Marcel Vichmann and Olav Miil.
For further information on the settled litigation, see Arco Vara’s interim report for the third quarter of 2011: note 15 Contingent assets and liabilities, subsection Action brought by Indrek Porila against Arco Vara AS.
Established in 1992, Arco Vara is one of the leading real estate development companies in the Baltic countries. The company’s main activity is real estate development, which is supported by brokerage, valuation, construction and property management.
Arco Vara has offices in 17 cities in Estonia, Latvia, Ukraine and Bulgaria.
Member of the Management Board
Arco Vara AS
Tel: +372 614 4630