Arco Vara
Quarterly report

Interim report I quarter ended 31. March 2011 (unaudited)

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).

REVENUE AND PROFIT

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

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%.

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

 

Consolidated statement of financial position

Consolidated statement of cash flows