Market announcement

Title

26.06.2014: Answers of the Management Board of Arco Vara to questions of shareholders

Message

Shareholders of public limited company Arco Vara have asked the management
board questions concerning the agenda of extraordinary meeting of shareholders
on 4 July, which the management board will answer below. 



The questions and answers:

1)     The company’s Supervisory Board also supported the involving of new
money. Was the Supervisory Board unanimous in its decision? Did the Supervisory
Board members provide any counterarguments and alternatives and if so, which
ones? Were those recorded in the minutes? If so, can they be provided? 

Answer: the company’s Supervisory Board discussed the capital needs of the
company and the issue size and price of shares to be issued on 13.05.2014. The
Supervisory Board found it important that the issue of shares be successful.
The Supervisory Board unanimously approved of making the proposition of
increasing share capital at the general meeting of shareholders, in the draft
wording as it was voted on June 5th and will be voted again on July 4th general
meeting. The Supervisory Board discussed no alternatives to increasing share
capital. 



2) For what exact purpose is the new money intended to be used? How would the
involved money be distributed between various projects? 

Answer: the Management Board and the Supervisory Board find it expedient to
involve a total of €3,500,000 in the company, distributed between two important
investments: 

A.    About €2,000,000 for self-financing the apartment development project in
Tallinn, Paldiski mnt 70c. Volume of the project, according to information
provided in earlier quarterly reports, exceeds 27,000 square metres on sale,
and includes 300 apartments. With the money, designing works and preparation
works for the infrastructure of the plot would begin in the 3rd quarter of
2014. Bank loan taken to obtain the immovable, to the sum of 1.4 million euros,
also needs to be repaid. Self-financing is a prerequisite for developing the
project further with finances from the bank, in order to obtain the required
balance between equity finance and loan finance. 

B.    About €1,200,000 for repayment of principal amount of bank loan to extend
the loan contract for multifunctional building located in Sofia, Madrid Blvd
until December 2017. The building contains approx. 7,300 square metres of
rented business and commercial premises on three floors, providing the company
with annual rent revenue of nearly 1 million euros. The group also owns 34
unsold apartments with sellable area approx. 3,800 square metres. 

Balance of bank loan for the building is 12.1 million euros. The bank has
agreed to extend the bank loan until December 2017 for only interest payments
if the owner of the building, the group’s 100% subsidiary Arco Invest EOOD
decreases the loan balance by 1.2 million euros. If the bank loan is extended
and if the building’s occupancy rate and payment discipline of tenants do not
change to a significant extent, the free cash flow of the group from the
building on Madrid Blvd will exceed €300,000 per year after the bearing of
interest expenses and expenses related to the building’s operation. 

The loan balance and interest expenses may decrease further if the group sells
the 34 apartments it owns in the building. 



3) If the proposition does not gain the required support at the general
meeting, which plans need to be changed? Is there something planned that will
not be done? In short, what would forgoing the investment result in? 

Answer: if the proposition to increase share capital does not gain the required
support of 2/3 of the votes of the general meeting, the Management Board
assesses this to result in three likely and negative consequences: 

(i)    It is rather likely that the Piraeus Bank will terminate the loan
contract of Madrid blvd and the building will be sold in enforcement proceeding
to satisfy the loan claim of the bank, secured with mortgage. This would stop
the annual rent revenue of the group for approx. 1 million euros per year and
the positive cash flow. The building would be obtained by a third person. 

In the case of sale in enforcement proceedings at the bank’s request, it is
also rather likely that the revenue gained from the sale of the building is
less than if the building was sold by the group on its own schedule and sales
conditions. The interest of the bank that finances real estate is primarily in
retrieving the loan, not in obtaining maximum revenue from selling the building
which is the ultimate interest of the developer. This means that the group may
bear additional loss in late 2014 or in 2015 if the loan is not extended and
the building is foreclosed. 

(ii)     Designing and preparation works of the development project at Paldiski
mnt 70c are postponed to 2015 at the earliest. Therefore, construction works
and sales would begin in 2016 at the earliest. The group loses one year of
sales revenue, waiting until the equity capital required to develop the project
at Paldiski mnt is released from the development project of Manastirski 2nd
stage in Bulgaria. 

(iii)    On the whole, the group’s current equity capital is approx. 7 million
euros, which, divided over three markets (Estonia, Latvia, Bulgaria) and
projects already in development is too little to start any new developments on
any market in 2014. Considering the developments already in work in Riga
(Bisumuisa 1) and Sofia (Manastirski Livadi 2nd stage), involving additional
foreign capital from credit institutions is impossible – credit institutions
require at least 30% self-financing for funding a development project – and
involving private investors would cost the group too much, because private
investors generally expect rate of return to exceed 15% when investing money in
a development project. 

The gap which occurred in Estonian development activities in 2011-2012 probably
cannot be closed without increasing equity capital. If the equity capital is
not increased, the group should focus on completing the existing developments
in Riga and Sofia in 2014-2015. This means that the annual sales turnover of
the group in 2014, 2015 and 2016 will likely remain below 10 million euros and
also affect the prospect of revenue accordingly. 



4) Expenses have been made to acquire capital. If capital increase is not
approved, how many expenses have been made for no reason (financially
speaking)? 

Answer: the total expenses made to increase share capital today is under
€85,000, which are related to international legal due diligence of the group,
independent valuation of main real estate properties of the group, compiling a
prospectus, verifying the prospectus by independent international auditors and
investment banking services. 

If the share capital increase will be approved by general meeting on July 5th,
then the company will upgrade the prospectus as it was prepared for June 6th
and release it after obtaining new approval by Financial Supervisory Authority,
but before the subscription period commences. 




         Tarmo Sil
         Management Board member
         Arco Vara AS
         [email protected]
         +372 6144594