Market announcement

Title

18.05.2012: Arco Vara AS Interim report I quarter 2012

Message

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      31 December   
                                                     2012          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 non-controlling                       140             155
 interests                                                                      
--------------------------------------------------------------------------------
Equity attributable to equity holders of the              22,981          23,828
 parent                                                                         
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY                              57,658          60,013
--------------------------------------------------------------------------------



Consolidated statement of cash flows

                                                            Note  Q1      Q1    
                                                                   2012    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         4, 6      23      25
 property, plant and equipment and intangible assets                            
--------------------------------------------------------------------------------
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                     -12      -2
 intangible assets                                                              
--------------------------------------------------------------------------------
Paid on development of investment property                             0    -557
--------------------------------------------------------------------------------
Proceeds from sale of investment property                          1,140     177
--------------------------------------------------------------------------------
Acquisition of investments in subsidiaries and joint                   0       1
 ventures                                                                       
--------------------------------------------------------------------------------
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
[email protected]