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Creating homes in a
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...directly tapping the market’s pulse

2011


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:

  • Construction of the Aviation Academy building in Tartu, performed in a consortium with OÜ Kristiine Ehitus (bankrupt), that resulted in a loss of 500 thousand euros.
  • Reconstruction of the academic building of the University of Life Sciences in Tartu, performed in a consortium with OÜ Wolmreks Ehitus (bankrupt), that resulted in a loss of 600 thousand euros.
  • Construction of the water and wastewater networks of Tamsalu as a subcontractor for AS K&H (bankrupt), that resulted in a loss of 240 thousand euros due to unsettled invoices.
  • Construction of drinking water facilities for AS Emajõe Veevärk as a subcontractor for AS K&H (bankrupt), that resulted in a loss of 340 thousand euros due to uncollected revenue.

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

  • The Group ended the first nine months of 2011 with revenue of 31.3 million euros, a 2.2-fold improvement on the first nine months of 2010.
  • Operating loss for nine months was 2.7 million euros, a roughly 4-fold increase year over year.
  • Net loss for nine months was 3.6 million euros, roughly 2.9 times up on the first nine months of 2010.
  • Equity to assets ratio at period-end was 37.0% (30 September 2010: 36.6%). Return on equity (12 months rolling) was negative (9M 2010: negative). Return on invested capital (12 months rolling) was negative (9M 2010: negative).
  • At the end of the third quarter, the Group’s order backlog stood at 8.6 million euros compared with 6.3 million euros at the end of the third quarter of 2010.
  • During the first nine months of 2011, the Group sold 81 apartments and plots (9M 2010: 80 apartments and plots).

 

 

    9M 2011 9M 2010 Q3 2011 Q3 2010
In millions of euros          
Revenue and other income   31.3 14.7 7.8 5.8
Operating loss   -2.7 -0.7 -1.2 0.3
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
Net loss   -3.6 -1.3 -1.7 -0.1
           
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          
Revenue          
Service   1.8 1.4 0.6 0.5
Development   17.0 7.0 3.0 2.3
Construction   12.8 6.4 4.3 3.0
Eliminations   -0.3 -0.4 -0.1 -0.2
Total revenue   31.3 14.4 7.8 5.6
           
Operating profit/loss          
Service   0.1 -0.1 0.0 0.1
Development   0.2 0.3 0.4 0.5
Construction   -2.2 0.1 -1.4 0.1
Eliminations   0.2 0.0 0.0 0.0
Unallocated expenses   -1.0 -1.0 -0.3 -0.4
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
Net loss   -3.6 -1.3 -1.7 -0.2

 

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. 

CASH FLOWS

 

      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:

  • 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 4.9 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 2.2 million euros;
  • repayments of the loan taken for the Bišumuiža  project of 1.1 million euros;
  • repayments of the loan taken for the Laeva 2 development project of 1.1 million euros.

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.

 

SERVICE DIVISION

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.        

 

DEVELOPMENT DIVISION

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 .


CONSTRUCTION DIVISION

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
Total revenue 2   31,313 14,339   7,808 5,631
               
Cost of sales 3   -30,640 -12,212   -8,198 -4,574
Gross profit/loss     673 2,127   -390 1,057
               
Other income     18 313   6 130
Distribution expenses 4   -281 -217   -67 -58
Administrative expenses 5   -2,970 -2,711   -744 -769
Other expenses     -108 -183   -49 -12
Operating profit/loss     -2,668 -671   -1,244 348
               
Finance income 6   502 633   85 53
Finance expenses 6   -1,469 -1,199   -556 -532
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
    -3,634 -1,256   -1,701 -133
Total comprehensive income attributable  to non-controlling interests     -1 0   -14 0
               
Earnings per share (in euros) 7            
- Basic     -0.77 -0.27   -0.36 -0.03
- Diluted     -0.77 -0.27   -0.36 -0.03

 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
Prepayments     353 192
Inventories 9   24,713 35,740
Total current assets     36,085 45,901
         
Investments     997 996
Trade and other receivables 8   2,948 76
Investment property 10   23,304 22,887
Property, plant and equipment     664 703
Intangible assets     21 20
Total non-current assets     27,934 24,682
TOTAL ASSETS     64,019 70,583
         
Loans and borrowings 11   13,353 27,126
Trade and other payables 12   9,641 4,813
Deferred income     4,223 4,859
Provisions     1,172 1,378
Total current liabilities     28,389 38,176
         
Loans and borrowings 11   11,255 3,855
Other payables 12   710 724
Total non-current liabilities     11,965 4,579
TOTAL LIABILITIES     40,354 42,755
         
Share capital  13   3,319 3,030
Statutory capital reserve     2,011 2,011
Retained earnings     18,335 22,787
Total equity     23,665 27,828
         
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
Loans granted     -492 -56
Repayment of loans granted     75 3
Interest received     157 131
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
Interest paid     -846 -1,614
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

Lembit Tampere
         
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.

Lembit Tampere
Member of the Management Board
Arco Vara AS
Tel: +372 614 4630
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http://www.arcorealestate.com