Market announcement

Title

11.01.2013: 2012 profit warning

Message

Arco Vara's management board completes revaluation of the group's assets
In November 2012, Arco Vara’s management board undertook a revaluation of the
group’s assets and liabilities, which entailed both a critical analysis of the
valuation bases applied and consideration of the impacts of developments of
2012. Items whose value was reviewed included the group’s inventories,
investment properties, significant receivables and provisions. The purpose of
the revaluation was to obtain an objective as well as a highly conservative
overview that could serve as a basis for making plans for continuing the
group’s operations and, possibly, raising capital for new investments. 

The revaluation process was undertaken in cooperation with the managers,
specialists and legal counsels of the units involved in all countries where the
group operates (Estonia, Latvia, Lithuania and Bulgaria) and the group’s
auditor. 

The revaluation was completed on 10 January 2013.


Outcome

As a result of the revaluation process, the management board will adjust the
group’s assets and liabilities as at 31 December 2012 as follows: receivables
will be written down by 3.46 million euros, inventories and investment
properties will be written down by 14.25 million euros and provisions will be
increased by 1.96 million euros. Altogether, the group’s net assets will
decrease by 19.67 million euros, which will affect both the group’s financial
performance for 2012 as well as its financial position as at 31 December 2012. 

The group’s assets and liabilities as at 31 December 2012 will be fixed on the
approval of the results for the financial year in line with the usual
procedure. It is possible that the comparative data on 2011 may have to be
restated. 


Valuation methods applied

The management board considered it appropriate to apply the following valuation
methods: 

1) the values of projects under development, which are carried as inventories,
were measured using the sales comparison method and the residual value method; 
2) the values of projects generating cash flow were measured using the
discounted cash flow method; 
3) the values of plots and buildings carried as investment properties were
measured using the sales comparison method, i.e. specialists estimated the
price for which those assets could be realised within one year by reference to
the market prices of similar assets. 

The revaluation was impacted by both developments that took place in 2012 and
changes in valuation bases. The principal differences in valuation bases are as
follows: 

(i) The main valuation basis for apartments and plots classified as inventories
is their possible sales price during a roughly one-year realisation period. 
(ii) Previously, the primary valuation bases for plots classified as investment
properties included possible future income from the development of the plots
into the end product. The current valuation is primarily based on the value of
the plot on the assumption that it has to be realised within one year. 

The group adjusts the valuation bases in light of the overall economic
uncertainty in its target markets as well as the current maintenance and
finance costs incurred in connection with passive assets (assets not used in
the production process) and assets that have been completed but not yet
realised. Estimating a very distant future value of inventories and investment
properties would be based on too many variables, which are beyond the group’s
control and could not be projected reliably. 

The change in valuation bases accounts for up to 75% of the total write-down of
inventories and investment properties. 


Commentary on major write-downs

Revaluations were conducted in (i) Bulgaria, where inventories and investment
properties will be written down by a total of 9.78 million euros; (ii) Latvia,
where inventories and investment properties will be written down by a total of
3.16 million euros; and (iii) Estonia, where receivables will be written down
by 3.47 million euros, provisions will be increased by 1.96 million euros and
inventories and investment properties will be written down by a total of 1.30
million euros. 

BULGARIA
In Bulgaria, the write-downs are based on the results of market transactions
and weaker than anticipated pace of realisation of the Madrid and Manastirski
apartments, which has partly been influenced by the will of the bank that
financed the projects. The revaluations are based on the assumption that the
group will succeed in negotiating more favourable financing terms from the
current main finance supplier, the Piraeus bank.  Relevant negotiations are
currently in progress. 

LATVIA
In Latvia, the decrease in the value of assets results largely from the
write-down of investment properties, which was triggered by the expiry of
certain rights relating to the Mazais Baltezers residential plots. 

ESTONIA
In Estonia, the group will write down a receivable from its joint venture
Tivoli Arendus OÜ. At the moment, the group’s receivable from Tivoli Arendus OÜ
is secured with a mortgage of the second ranking created on the property
belonging to Tivoli Arendus OÜ, while the co-investor’s receivables from the
joint venture, which are secured with a mortgage of the first ranking, exceed 8
million euros (together with accrued interest). In such a situation, continuing
investment in the Tivoli project is not reasonable and the probability of
realising the business plan of the Tivoli project in a profitable manner, so
that the joint venture would be able to settle its debts to Arco Vara, is
extremely remote. Arco Vara is holding negotiations with the co-investor in
order to restructure the Tivoli project. In addition, the group will increase
its provisions in connection with surety bonds issued to secure the loan
commitments of joint ventures Tivoli Arendus OÜ and Arco HCE OÜ because the
probability of the realisation of the surety bonds has increased. 


Further information

To provide investors with additional information about the extensive
revaluation of its inventories, investment properties and receivables as well
as its further action plan, Arco Vara is going to hold a webinar (a web-based
seminar) in the last week of January or in the first week of February. Further
information on the webinar will be communicated in a separate stock exchange
announcement before 18 January. 

A webinar is a virtual conference where the company’s representatives can
present the company’s operations and plans. A webinar provides opportunities
for interactive communication, including opportunities for asking questions and
obtaining answers directly from the company’s representatives. Additional
information on webinars can be found at:
http://www.nasdaqomxbaltic.com/en/exchange-information/products-and-services/web
inars/. 


Tarmo Sild
Chief Executive Officer
Arco Vara AS
Tel: +372 614 4630
[email protected]
http://www.arcorealestate.com