Market announcement

Title

Arco Vara AS Interim Report (unaudited) for fourth quarter and twelve months 2014

Message

Directors’ report


CHANGES IN GROUP STRUCTURE DURING IN YEAR 2014

On 14 February 2014, Arco Vara AS divested its 100% share in Arco Ehitus OÜ to
the company Stratcorp OÜ. The sale price of the share included two parts: 

1) 10 thousand euros paid on transfer of the share;

2) 30% out of the amount, that Arco Ehitus OÜ will gain from actions brought by
Arco Ehitus OÜ through Ministry of Education and Research and OÜ Loksa
Haljastus. Income tax is deducted from proceeds. 

The group’s gain on the transaction amounted to 652 thousand euros not
considering the impact of sale price. As a result of the divestment, the
group’s liabilities decreased by 1,020 thousand euros and its assets declined
by 368 thousand euros. 

On 19 March 2014, the chairman of the management board of Arco Real Estate SIA
realised his option to gain additional ownership share in the company. As a
result, the group’s ownership interest in Arco Real Estate SIA declined from
78.5% to 70.6% and non-controlling interest in the group’s equity increased by
5 thousand euros. 

On 24 April 2014, Arco Real Estate AS divested its 100% share in Bulgarian
subsidiary Arco Imoti EOOD to the group’s parent company Arco Vara AS. 

On 25 April 2014, Arco Investeeringute AS divested its 100% share in Bulgarian
subsidiary Arco Projects EOOD to the group’s parent company Arco Vara AS. 

On 25 April 2014, Arco Invest EOOD divested its 100% share in Bulgarian
subsidiary Arco Projects EOOD to the group’s parent company Arco Vara AS. 

In May 2014, the group’s management adopted a decision to start liquidation of
the group’s subsidiary Fineprojekti OÜ. 

On 15 August 2014, the group’s Latvian subsidiary Arco Real Estate SIA divested
it’s 40% share in associate Arco Property Management SIA. The sale price was
the share’s nominal value of 1 thousand euros. The transaction has no impact on
the group’s financial position and income statement. 

On 30 September 2014, the group’s Estonian subsidiary Arco Investeeringute AS
acquired for the purchase price of 1 euro additional 50% ownership in the
group’s joint venture Tivoli Arendus OÜ. As a result of the transaction, Arco
Investeeringute AS has 100% ownership of Tivoli Arendus OÜ and Tivoli Arendus
OÜ became a subsidiary for the group. The transaction has no direct significant
impact on the group’s financial position and income statement. But there could
be long-term impact depending on the results of ongoing court disputes between
Tivoli Arendus OÜ and Nordecon AS, where Tivoli Arendus claims Nordecon for 1.2
million euros and Nordecon claims Tivoli Arendus for 0.2 million euros. 

On 3 November 2014, was registered in Estonian Business Register Arco Vara AS
100% subsidiary Kodulahe OÜ with paid in share capital of 2,500 euros. 

On 23 December 2014, was registered in Bulgarian Trade Register Arco Vara AS
100% subsidiary Arco BB EOOD with paid in share capital of 511 euros (1,000
Bulgarian lev). 

The two new companies were established in fourth quarter taking in mind
interests of the group’s new development projects. 


Key Performance Indicators

· In 12 months 2014, the group’s revenue from continuing operations was 9.2
million euros, which was 1.5 million euros less compared to 12 months 2013.
Revenue of Service division has increased by 6.3% up to 3.1 million euros.
Revenue of Development division amounted to 6.5 million euros in 2014 (in 2013:
8.1 million euros), decreased by 19.4%. The main reason for decrease of revenue
in Development division is because the group’s development projects are in such
stage, where revenue is not accrued yet. Most of Development division revenue
in 2014 accrued in fourth quarter then sale of apartments to clients amounted
to 4.9 million euros. In Q4 0214, the group’s revenue amounted to 5.8 million
euros, which is almost three times more than in Q4 2013. 

· In 12 months 2014, operating profit (=EBIT) from continuing operations was
2.3 million euros and net profit from continuing operations was 1.1 million
euros, in previous year the same figures were 4.5 million euros and 3.5 million
euros respectively. The better profit figures in 2013 were due to reversal of
provisions and revaluation of assets and liabilities in total amount of 3.3
million euros (in 2014: 1.1 million euros). In Q4 2014, the group’s operating
profit from continuing operations amounted to 1.1 million euros (in Q4 2013:
2.2 million euros). In 9 months 2014, the group’s operating profit amounted to
1.1 million euros and net profit amounted to 0.4 million euros. The group’s net
profit for 2014 was 0.8 million euros, in 2013 it was 3.4 million euros. 

· Equity to assets ratio has increased compared to the year end 2013. At 31
December 2014, it was 33.5% (at 31 December 2013: 27.2%). In addition to the
profitable operating activities the main reason is share issue conducted in Q3
2014, 1.3 million euros was raised in equity. 

· The balance of the group’s total assets is increased by 1.8 million euros in
2014. Main reason is increase of inventory through construction of Manastirski
Livadi II stage apartment building in Sofia. 

· The group’s net loans have decreased by 0.5 million euros in 12 months 2014.
As at 31 December 2014, the weighted average annual interest rate of loans is
5.8%. This is a decrease by 0.2 percentage point since the end of year 2013
mainly due to very low Euribor rates in second half of 2014. 

· In 12 months 2014, were sold 77 apartments or commercial areas and 4
residential plots in projects developed in the group (in 12 months 2013 were
sold 78 apartments or commercial areas and 4 plots), that includes 73
apartments in Q4 2014 (23 apartments or commercial areas and 1 plot in Q4
2013). 



                                        12 months      12 months      Q4      Q4
                                             2014           2013    2014    2013
--------------------------------------------------------------------------------
In millions of euros                                                            
--------------------------------------------------------------------------------
Revenue from continuing operations            9.2           10.7     5.8     2.0
--------------------------------------------------------------------------------
Operating profit from continuing              2.3            4.5     1.1     2.2
 operations                                                                     
--------------------------------------------------------------------------------
Net profit from continuing                    1.1            3.5     0.6     2.0
 operations                                                                     
--------------------------------------------------------------------------------
Net profit from discontinued                 -0.3           -0.1    -0.2    -0.6
 operations                                                                     
--------------------------------------------------------------------------------
Net profit for the period                     0.8            3.4     0.4     1.4
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
EPS (in euros)                               0.15           0.72    0.07    0.30
--------------------------------------------------------------------------------
ROIC (rolling, four quarters)                3.4%          20.7%                
-----------------------------------------------------------------               
ROE (rolling, four quarters)                10.7%          66.7%                
ROA (rolling, four quarters)                 3.1%          12.6%                
-----------------------------------------------------------------               
                                                                                
-----------------------------------------------------------------               
                                      31 December    31 December                
                                             2014           2013                
-----------------------------------------------------------------               
In millions of euros                                                            
-----------------------------------------------------------------               
Total assets at period-end                   27.0           25.2                
-----------------------------------------------------------------               
Invested capital at period-end               24.1           21.7                
-----------------------------------------------------------------               
Net loans at period-end                      13.6           14.1                
-----------------------------------------------------------------               
Equity at period-end                          9.1            6.9                
-----------------------------------------------------------------               
                                                                                
-----------------------------------------------------------------               
Average loan term (in years, at               2.3            0.3                
 period-end)                                                                    
-----------------------------------------------------------------               
Weighted average annual interest             5.8%           6.0%                
 rate of loans                                                                  
-----------------------------------------------------------------               
Number of staff at period-end                 189            178                
-----------------------------------------------------------------               

CONTINUING OPERATIONS



Statement of comprehensive                                                      
 income                                                                         
                                -------------------------------                 
                                 12 months 2014      12 months  Q4 2014  Q4 2013
                                                          2013                  
--------------------------------------------------------------------------------
In millions of euros                                                            
--------------------------------------------------------------------------------
Revenue                                                                         
--------------------------------------------------------------------------------
Development                                 6.5            8.1      5.2      1.3
--------------------------------------------------------------------------------
Service                                     3.1            2.9      0.7      0.8
--------------------------------------------------------------------------------
Eliminations                               -0.4           -0.3     -0.1     -0.1
--------------------------------------------------------------------------------
Total revenue                               9.2           10.7      5.8      2.0
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Operating profit                                                                
--------------------------------------------------------------------------------
Development                                 1.9            5.1      1.2      2.4
--------------------------------------------------------------------------------
Service                                     0.3            0.2      0.1      0.1
--------------------------------------------------------------------------------
Eliminations                                0.0           -0.5     -0.3     -0.2
--------------------------------------------------------------------------------
Unallocated items                           0.1           -0.3      0.1     -0.1
--------------------------------------------------------------------------------
Total operating profit                      2.3            4.5      1.1      2.2
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Finance income and expenses,               -1.1           -1.0     -0.4     -0.2
 net                                                                            
--------------------------------------------------------------------------------
Income tax expense                         -0,1            0.0     -0.1      0.0
--------------------------------------------------------------------------------
Net profit                                  1.1            3.5      0.6      2.0
--------------------------------------------------------------------------------


Cash flows



                                         12 months     12 months      Q4      Q4
                                              2014          2013    2014    2013
--------------------------------------------------------------------------------
In millions of euros                                                            
--------------------------------------------------------------------------------
Cash flows from/used in operating              0.2           0.3     3.7     0.4
 activities                                                                     
--------------------------------------------------------------------------------
Cash flows from/used in investing              0.4           1.6     0.0     0.3
 activities                                                                     
--------------------------------------------------------------------------------
Cash flows from/used in financing              0.3          -2.8    -3.4    -0.4
 activities                                                                     
--------------------------------------------------------------------------------
Net cash flows                                 0.9          -0.9     0.3     0.3
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cash and cash equivalents at                   0.8           1.7     1.4     0.5
 beginning of period                                                            
--------------------------------------------------------------------------------
Cash and cash equivalents at end of            1.7           0.8     1.7     0.8
 period                                                                         
--------------------------------------------------------------------------------





Revenue and net profit/loss from continuing operations 2012-2014 
          Q1      Q2      Q3      Q4     Total    Q1      Q2      Q3      Q4   
 Total    Q1      Q2      Q3      Q4     Total 
         2012    2012    2012    2012    2012    2013    2013    2013    2013  
 2013    2014    2014    2014    2014    2014 
--------------------------------------------------------------------------------
---------------------------------------------- 
In 
 milli 
ons of 
 euros 
--------------------------------------------------------------------------------
---------------------------------------------- 
Revenu     1.3     3.7     2.4     3.5    10.9     1.7     3.5     3.5     2.0 
  10.7     1.1     1.1     1.2     5.8     9.2 
e 
--------------------------------------------------------------------------------
---------------------------------------------- 
Net       -1.2    -0.3     0.3   -16.5   -17.7     0.0     1.4     0.1     2.0 
   3.5     0.4    -0.3     0.4     0.6     1.1 
 profi 
t/loss 
--------------------------------------------------------------------------------
---------------------------------------------- 

In Q4 2012, financial results were negatively affected by recognition of
provisions and revaluation of assets and liabilities in total amount of 15.6
million euros. 

Group Chief Executive’s review

When we compare the quarterly results of 2014, we can see that the
roller-coaster ride of Arco Vara continues. Quarterly operation and sales
volumes and profits vary a lot. The modest start of the year was followed by a
fourth quarter which was powerful considering the size of Arco Vara, where the
group sold apartments for nearly 5 million euros. At the same time, Arco Vara
began last year with a practically empty stock and this will hopefully be the
last such start of the year. 

Despite the rollercoaster analogy, I’d like to note that Arco Vara is riding in
the right direction and is increasingly stabilising. When I say the right
direction, I mean that the business operations of the group continue to be
profitable and also growth-oriented. The profit of 2013 was predominantly
caused by the successful removal of obligations and risks taken by the group
which it couldn’t manage and the settling of the balance sheet, whereas the
profit of 2014 also contains a large share of the main activities of the group:
selling developed products and providing real estate services. 

In a regularly functioning business process, projects release increasingly more
money which can be used to start new projects or decrease the obligations and
interest costs of the group. This process also began in the fourth quarter and
will pick up speed in the 1st quarter of 2015 due to the continued delivery of
developed products to clients. 

Stabilising means that smaller fluctuations between operating and sales volumes
of the quarters and the financial results are expected in the future and the
quarters will become more comparable. When the only stabilising factor in 2014
was the service division, i.e. the group earned a stable cash flow by providing
mediation and valuation services, then the development division has also become
more stable as at the end of the year. Our projects are divided between
different stages of development, where something is always being purchased,
planned, built or on sale as completed stock. Considering the small size of the
group and the operating on three markets simultaneously, we can’t ensure
complete stability in 2015 and the timing and funding of all processes
continues to be under tension. Efficiency losses are also incurred in the
fluctuation: for example, the balancing between expenses of foreign funding
which are incurred during the phase of development, especially construction,
and the excess cash – which does not earn revenue in temporary standstill –
incurred during the phase of realising the development. The most optimal
solution would be ongoing funding of the development phase of one project with
the realisation revenue of another development and the ongoing account balance
of the group would be minimal all year round. In 2014 as a whole, the projects
of Arco Vara were generally in the phase of development, the final quarter of
2014 and the first quarter of 2015 are predominantly in the realisation phase.
In the final quarter of 2015, we will enter a development phase again and will
probably be bearing the construction costs of the development project at
Paldiski road in Tallinn. 

The group met all the objectives set for the year: revenue exceeded 9 million
euros (planned 9 million), net profit from main activities 0.8 million euros
(planned was 0.5 million) and the rate of return of sold development projects
exceeds 20% per year. The group’s rate of return on equity as a whole did not
exceed 20% per year just yet in 2014, because our balance sheet still contains
approx. 25% of assets which are not in the active development cycle. This
primarily covers the land bank in Latvia and Estonia, obtained in recent years.
The management is continually working on bringing this land bank into active
development, realise it or exchange it for land which suits our objectives
better. 

Forecast and objectives for 2015

The management is predicting for the group at least 11 million euros as revenue
and at least 1 million euros as net profit in 2015. In addition to changes of
the general economic environment, the achievement of the forecast in 2015 and
the results of the group in 2015 – 2017 also depend on the following critical
intermediate results. 

(i) Final stabilisation of the loan for Madrid Blvd from Piraeus Bank and
extending important rent contracts. The principal amount of loan to the sum of
950 thousand euros needs to be repaid for the final extension of the loan until
December 2017, which requires a careful balancing act between all needs and
risks of the group; 

(ii) Successful sale of the apartments at Madrid Blvd to the sum of approx. 1
million euros per year; as at the date of the quarterly report, three
apartments out of 34 have been sold or pre-sold after restarting the sale; 

(iii) Final sale of the apartments of Manastirski AB block, releasing an
additional more than 2 million euros; 

(iv) Starting and finishing the construction of Manastirski D-block (final
stage of the development project), which will release about 80 apartments for
pre-sale in 2015 and the delivery and sale of which will take place in 2016; 

(v) Buying a new plot suitable for development in Sofia, with gross sellable
area (GSA) of at least 7,000 m2, on which to build in 2016 and sell to final
consumers in 2017; 

(vi) The completion of the construction project for Paldiski road 70c first
stage and beginning construction in the fourth quarter 2015. The sold volume of
first stage is predicted to exceed 120 apartments and the gross sellable area
(GSA) of apartments is 8,000 m2. 

The sale of existing completed products in Latvia also influences the results
to an extent, but the management board is not particularly optimistic about the
outlook of new developments in Latvia. The reasons for the pessimism have
remained the same, heightened requirements for self-financing for residential
loans by Latvian banks, heightened requirements for real estate investment for
obtaining a residence permit and also the decreased revenue from oil and its
consequences, which will carry along the economic food chain to all local or
CIS consumers who used to make real estate purchases in Latvia. 

The management board is most optimistic about the real estate market in Sofia,
which is indicating the strongest absolute demand, the increase of demand and
the margins of the developer. In Tallinn, the key issue is entering the market
with a product which would exceed the consumers’ expectations by its
properties, the developed and added quality for apartment supply, and bring the
cost of using apartments lower. Arco Vara does not need to bring more trees
into the forest. 


DEVELOPMENTS IN Arco Vara HOME MARKETS

Sofia

In Q4 2014, were made 6,975 sale-purchase transactions with real-estate in
Sofia, which is 37.8% more than in third quarter. The transaction activity is
practically doubled if compared to previous year. The average price of
apartments was 710, 800 and 803 euros for one-, two- and three-bedroom
apartments respectively apartment (it must be taken into consideration that in
Bulgaria, a legal share of the public premises of the building is also
considered part of the area of the apartment and that apartments sold on the
secondary market predominantly include interior finishing, whereas new
apartments have no interior finishing). An increased transaction activity has
probably been hindered also by the appointment of new Bulgarian government
which stabilized political and economical situation in the country. It should
be also mentioned the bankruptcy of the fourth largest bank in Bulgaria in
summer followed by payments to bank clients from guaranteed deposits starting
from December – part of that money found it’s way to the real estate market,
for sure. 

Riga

The transaction activity in Riga market showed clear decreasing trend in Q4
2014. In fourth quarter, were concluded 2,615 real estate sales transactions,
which is 19.5% less than 3,116 transactions in third quarter and 3.9% less than
in Q4 2013. Fourth quarter was the first after the changes have been made to
the living permit laws in September and the negative impact is clearly seen if
judged by transaction statistics. In fourth quarter, the new projects share was
15% out of all sales transactions with apartments (total of 1,957 in Riga). The
rate has been fluctuating between 15-20% during the year. The total number of
apartment sales dropped by 16.9% compared to third quarter and by 6.8% compared
to Q4 2013. The further activity of the Riga real estate market will be
influenced by a law amendment which will enter into force on 1 March 2015,
providing that in the case of bankruptcy proceedings of a private person, the
mortgage loan granted to him or her is paid also when the realizable value of
the mortgage is less than the outstanding loan (so-called non-recourse loans).
We can predict that the self-financing requirements of banks will increase up
to approx. 40% and it will hinder transaction activity, especially for newer
real estate. As an alternative to increased self-financing requirements banks
will probably offer to the borrowers somewhat higher interest rate. At the same
time, Latvia and Riga, out of three Arco Vara home markets, is most vulnerable
to the adverse developments in Russia and surrounding countries bounded
economically and politically to Russia. 

Tallinn

In Tallinn, 3,029 transactions of purchase and sale of real estate have been
completed in fourth quarter, increased by 13.3% compared to previous quarter.
The number of transactions remained practically the same (0.6% increase) if
compared to Q4 2013 (3,011 transactions made then). 2,102 transactions for
purchase and sale of apartment ownerships were carried out in Q4 in Tallinn,
which is 14% more than in previous quarter and 1.5% less than in Q4 2013. The
average sales price for apartment ownerships was 1,480 euros per m2 in Q4,
which is 12.1% higher compared to Q4 2013. Despite the slight decline of
transaction activity in the middle of the 2014, there are no dramatic changes
predicted for the Tallinn real estate market. Terms and conditions of banks for
granting loans have not changed over the year. If anything, buyers have more
choices thanks to increased supply. More research is done before finalizing a
purchase than in the past few years when there was a deficit of new
developments in particular on the market and the buyer had less time to make a
choice. 

SERVICE DIVISION

In Q4 2014, revenue of service division was 738 thousand euros, that included
intra-group revenue of 130 thousand euros (Q4 2013: 790 thousand and 90
thousand euros, respectively). In 2014, revenue of service division increased
by 6% compared to previous year and amounted to 3,139 thousand euros (includes
intra-group revenue of 451 thousand euros). Sales growth came from Latvia and
Bulgaria, where 12 months revenue from main activities of real estate agencies,
brokerage and valuation of real estate, increased by 17% and 61%, respectively.
Annual revenue of Estonian real estate agency decreased by 17% compared to
previous year. If we compare fourth quarters of 2013 and 2014, then the decline
is even 33%. Revenue drop of Estonian agency is mostly connected to the
decrease in sales of valuation services (by 25% in 2014). 

Revenue of real estate agencies from brokerage activities



                     12 months     12 months   Change  Q4 2014  Q4 2013   Change
                          2014          2013        %                          %
--------------------------------------------------------------------------------
In thousands of                                                                 
 euros                                                                          
--------------------------------------------------------------------------------
Estonia                  1,166         1,409     -17%      239      359     -33%
-----------------              -----------------------         -----------------
Latvia                   1,170         1,004      17%      291      272       7%
--------------------------------------------------------------------------------
Bulgaria                   536           332      61%      154      100      54%
--------------------------------------------------------------------------------
Total                    2,872         2,745       5%      684      731      -6%
--------------------------------------------------------------------------------

The revenue growth of Latvian and Bulgarian agencies was caused both by general
increased activity on the market and strongly seizing the market by increasing
the number of employees. But growth in Latvian remains mainly to the first half
of 2014 and is slowed down in second half of the year. There would not be a big
surprise to see further slow down in 2015 due to adverse effect of recent
changes in laws that directly influencing real estate sales. In 2014, brokerage
of the group’s own assets has 44% of Bulgarian agency’s revenue. 

All three real estate agencies ended up with a net profit in 2014: Estonian
agency’s net profit was 48 thousand euros (in 2013: 156 thousand euros),
Latvian agency’s net profit was 65 thousand euros (in 2013: 81 thousand euros)
and Bulgarian agency’s net profit was 90 thousand euros (in 2013: 25 thousand
euros). 

In addition to brokerage and valuation services, the service division also
provides real estate management services as well as accommodation service in
Bulgaria. The revenue from real estate management was 148 thousand euros in 12
months 2014, 105 thousand euros of which was intra-group revenue (12 months
2013: 135 thousand and 103 thousand euros, respectively). Revenue from
accommodation services amounted to 74 thousand euros in 12 months 2014 (12
months 2013: 24 thousand euros). The accommodation services have been provided
since July 2013. 

The number of staff in service division has been increased to 176 employees as
at 31 December 2014, growing by 15 people within a year. 

DEVELOPMENT DIVISION

In 2014, revenue of development division totalled 6,466 thousand euros, dropped
by 20% compared to previous year (in 2013: 8,049 thousand euros). Most of 2014
revenue accrued in fourth quarter amounted to 5,203 thousand euros (in Q4 2013:
1,279 thousand euros). The big leap in revenues in fourth quarter comes from
getting permit of use for two apartment buildings: for Manastirski Livadi
second stage building (with 135 apartments and smaller commercial spaces in
total) and for last stage building (with 14 apartments) in Bisumuiza-1 project
in Riga. In Q4 2014, was sold 61 apartments and commercial spaces in
Manastirski project II stage and one Madrid Blvd building apartment in Sofia,
also 11 apartments in Bisumuiza-1 project last stage in Riga. Information on
sold real estate properties in the group’s own development projects is
presented in following table. 



Number of sold real estate properties  2014  2013
-------------------------------------------------
                                                 
-------------------------------------------------
Estonia, Tallinn                          0    20
-------------------------------------------------
Tehnika 53                                0    14
-------------------------------------------------
Helme 16, Kodukolde                       0     6
-------------------------------------------------
Latvia, Riia                             18    16
-------------------------------------------------
Kometas street, Bišumuiža-1              14    11
-------------------------------------------------
Baltezers-5 plots in Marsili              4     5
-------------------------------------------------
Bulgaria, Sofia                          63    47
-------------------------------------------------
Madrid Blvd                               1     8
-------------------------------------------------
Manastirski Livadi                       62    39
-------------------------------------------------
Total                                    81    83
-------------------------------------------------

Most of other revenue of development division consisted of rental income from
commercial and office space in Madrid Blvd building in Sofia, amounted to 953
thousand euros in 12 months 2014 (in 12 months 2013: 956 thousand euros). 

In 2014, operating profit of development division was 1,942 thousand euros (in
2013: 5,100 thousand euros). In 2013, the impact of extraordinary items to the
profit amounted to 3,332 thousand euros and 521 thousand euros in 2014. 

As at 31.12.2014, the group had in stock 113 apartments and smaller commercial
spaces ready for sale, of which 109 in Bulgaria and 4 in Riga. Pre-sale
agreements were concluded to 48 apartments and commercial spaces in stock,
revenue from final sales will be accrued in first quarter of 2015. 

After a year break, was restarted in fourth quarter the sale of apartments in
Madrid Blvd building. In December, was concluded first sale transaction and as
at the interim report date two more apartments have been presold. 15 apartments
and all parking places, out of all Madrid Blvd unsold assets, are rented out.
In Q4 2014, four more apartments were prepared for letting out. 

In Bulgaria, the group will be coming to the end with preparations for the
construction of Manastirski Livadi D-block (also named as Manastirski III
stage). Construction should start in Q1 2015. The building will have at least
80 apartments and commercial areas with saleable area of nearly 6,900 m2 and
construction will be finished by the end of 2015. 

In the most important Estonian development project for the group, Paldiski road
70C, has been reached to the final stage of concluding first stage design
contract. The construction works of the apartment building (at least 120
apartments) should start in fourth quarter of 2015. 

In February 2014, the group acquired as an addition to the land bank, two land
plots with building right for 2 apartment buildings (32 apartments with GSA of
2,035 m2) near Tallinn, at Instituudi tee 7 and 9 in Harku. In Q3 2014, the
development of the project was suspended due to the need to use the group’s
finances for carrying out best yielded projects (Paldiski road 70c for
example). The sale of the development project could also be an option. 

As at 31 December 2014, 5 people were employed in development division, one
employee hired during a year. 

SUMMARY TABLE OF ARCO VARA’S PROJECTS AS AT 31 DECEMBER 2014



Project   Address   Product  Stage  Area of  GSA / GLA (above        No of units
 name                main           plot(s)  grade) available      (above grade)
                     type              (m2)     or <future       available or
                                                   target>         <future
                                                                      target>
--------------------------------------------------------------------------------
Manastir  Manastir  Apartme  S5       4,445             6,906                 74
ski A/B   ski,      nts                                                         
           Sofia                                                                
--------------------------------------------------------------------------------
Manastir  Manastir  Apartme  S5           -               160                  2
ski C     ski,      nts                                                         
           Sofia                                                                
--------------------------------------------------------------------------------
Manastir  Manastir  Apartme  S3       2,223             6,869                 87
ski D     ski,      nts                                                         
           Sofia                                                                
--------------------------------------------------------------------------------
Madrid    Madrid    Lease:   S5/S6        -             7,350                 16
 Blvd      Blvd,     Retail                                                     
           Sofia    /Office                                                     
--------------------------------------------------------------------------------
Madrid    Madrid    Apartme  S5/S6        -             3,726                 33
 Blvd      Blvd,    nts                                                         
           Sofia                                                                
--------------------------------------------------------------------------------
Bisumuiz  Kometas   Apartme  S5           -               105                  1
a-1        2, Riga  nts                                                         
--------------------------------------------------------------------------------
Bisumuiz  Kometas   Apartme  S5       2,118               278                  3
a-1        4, Riga  nts                                                         
--------------------------------------------------------------------------------
Marsili   Marsili,  Residen  S5           -            27,545                 15
 residen   near     tial                                                        
tial       Riga      plots                                                      
 plots                                                                          
--------------------------------------------------------------------------------
Marsili   Marsili,  Residen  S2     120,220   <120,220>         <68>
 residen   near     tial                                                        
tial       Riga      plots                                                      
 plots                                                                          
--------------------------------------------------------------------------------
Instituu  Instituu  Apartme  S3/S5    5,003             2,035                 32
di 7, 9   di tee    nts                                                         
           7,9                                                                  
           Harku                                                                
--------------------------------------------------------------------------------
PM 70C    Paldiski  Apartme  S3      28,498            21,420                334
           road     nts                                                         
           70C,                                                                 
           Tallinn                                                              
--------------------------------------------------------------------------------
Lehiku    Lehiku    Apartme  S2       5,915     <1,100>          <5>
 carpet    21,23    nts                                                         
 buildin   Tallinn                                                              
g                                                                               
--------------------------------------------------------------------------------
Liimi     Liimi     Lease:   S2       2,463     <6,500>          <1>
           1b,       Office                                                     
           Tallinn                                                              
--------------------------------------------------------------------------------
Viimsira  Haabneem  Office/  S3/S5   14,174               500                  1
nna       e,        Mix                                                         
           Viimsi                                                               
           vald                                                                 
--------------------------------------------------------------------------------

Note: Value presented inbetween < > means future target value as the project is
in early (S1, S2) development stage and the building rights or the design have
not been finished yet. The table does not reflect sellable or lettable volumes
below grade including parking spaces and storages. 

Description of stages
S1: Land plot acquired
S2: Building Rights Procedure
S3: Design and Preparation Works
S4: Construction
S5: Marketing and Sale
S6: Facility Management and/or Lease


PEOPLE

As at 31 December 2014, 189 people worked for the group (178 at the end of
2013). Employee remuneration expenses in 2014 amounted to 2.5 million euros (in
2013: 2.5 million euros). 

The remuneration of the member of the management board/chief executive and the
members of the supervisory board of the group’s parent company including social
security charges in 2014 amounted to 102 thousand euros compared with 174
thousand euros in 2013. 

The management board of Arco Vara AS has one member. Since 22 October 2012, the
member of the management board and chief executive of Arco Vara AS has been
Tarmo Sild. 

The supervisory board of Arco Vara AS has 7 members.

More information on members of management and supervisory board you can find on
Arco Vara corporate web page:
http://www.arcorealestate.com/en/company-investor/key-persons/supervisory-board 


DESCRIPTION OF THE MAIN RISKS

Liquidity risk

The group’s free funds are placed on current accounts or short-term deposits
with the banks operating in Estonia, Latvia and Bulgaria. Owing to high
refinancing risk, cash flow management is critical. The group’s cash and cash
equivalents balance is constantly smaller than the balance of loans that
require refinancing in the next 12 months. At 30 June 2014, the weighted
average duration of interest-bearing liabilities was 2.4 years. At the end of
Q3 2014, the group’s cash and cash equivalents totalled 1.4 million euros. Out
of the cash and cash equivalents balance 0.3 million euros was in accounts with
restricted withdrawal opportunities (mostly accounts of designated purpose
where withdrawals require the banks’ consent). Liquidity and refinancing risks
continue to be the most significant risks for the group. 

Interest rate risk

The base currency of most of the group’s loan agreements is the euro and the
base interest rate is 3 or 6 months EURIBOR. As a result, the group is exposed
to developments in international capital markets. The group does not use
hedging instruments to mitigate its long-term interest rate risk. In 9 months
2014, the group’s interest-bearing liabilities has increased by 2.9 million
euros and amounted to 17.8 million euros at 31 December 2014. In first 9 months
2014, interest payments on interest-bearing liabilities totalled 0.5 million
euros. The group’s weighted average loan interest rate is 5.8%. This is a
decrease by 0.2 percentage point in 9 months 2014 mainly due to decreased
Euribor rates. 

Currency risk

Purchase and sales contracts are mostly signed in local currencies: euros
(EUR), and Bulgarian lev (BGN). Real estate sales are mostly nominated in
euros, as a result of which the group’s assets and liabilities structure does
not denote a significant currency risk. The group is not protected against
currency devaluations. Most liquid funds are held in short-term deposits
denominated in euros. Devaluation risk decreased since the beginning of year
2014 because Republic of Latvia transferred to euro. 

Share and shareholders

Arco Vara AS has issued a total of 6,117,012 shares with nominal value of 0.7
euros per share. The shares are freely traded on NASDAQ OMX Tallinn stock
exchange. In September 2014, share capital was raised by issuing 1,375,305 new
shares. As at 31 December 2014, the company had 1,668 shareholders and the
share price closed at 0,828 euros, a decrease by 40.86% within 2014. During the
year, the highest price per share was 1.55 euros and lowest price 0.821 euros.
As at 31 December 2014, market capitalization of shares amounted to 5,065
thousand euros (as at 31 December 2013: 6,638 thousand euros) and P/E ratio of
the share was 5.3 (as at 31 December 2013: 1.9). 



Major shareholders at 31 December 2014  No of shares  Interest %
AS Baltplast                                 862 820       14,1%
AS Lõhmus Holdings                           587 378        9,6%
Gamma Holding Investment OÜ                  554 759        9,1%
Alarmo Kapital OÜ                            489 188        8,0%
HM Investeeringud OÜ                         485 000        7,9%
LHV PENSIONIFOND L                           378 765        6,2%
FIREBIRD REPUBLICS FUND LTD                  356 428        5,8%
FIREBIRD AVRORA FUND, LTD.                   185 800        3,0%
LHV PENSIONIFOND XL                          169 583        2,8%
FIREBIRD FUND L.P.                           150 522        2,5%
Other shareholders                         1 896 769       31,0%
----------------------------------------------------------------
Total                                      6 117 012      100,0%





Holdings of members of the    Position                             No of  Intere
 management                                                       shares    st %
and supervisory boards at 31                                                    
 December 2014                                                                  
Toomas Tool (AS Baltplast)    member of supervisory board        862 820   14,1%
Rain Lõhmus (AS Lõhmus        member of supervisory board        587 378    9,6%
 Holdings)                                                                      
Arvo Nõges (Gamma Holding     member of supervisory board        554 759    9,1%
 Investment OÜ)                                                                 
Hillar-Peeter Luitsalu (HM    chairman of supervisory board      513 884    8,4%
 Investeeringud OÜ,                                                             
connetced persons)                                                              
Tarmo Sild ja Allar Niinepuu  member of management board/        489 188    8,0%
 (Alarmo Kapital OÜ)           member of supervisory board                      
Stephan David Balkin          member of supervisory board              -       -
Aivar Pilv                    member of supervisory board              -       -
--------------------------------------------------------------------------------
Total                                                          3 008 029   49,2%

Condensed consolidated interim financial statements


Consolidated statement of comprehensive income



                                  Note    12 months    12 months      Q4      Q4
                                               2014         2013    2014    2013
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Continuing operations                                                           
--------------------------------------------------------------------------------
Revenue from rendering of                     3,744        3,791     883     970
 services                                                                       
--------------------------------------------------------------------------------
Revenue from sale of own real                 5,414        6,937   4,929   1,012
 estate                                                                         
--------------------------------------------------------------------------------
Total revenue                     2, 3        9,158       10,728   5,812   1,982
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cost of sales                      4         -5,902       -7,749  -4,004  -1,440
--------------------------------------------------------------------------------
Gross profit                                  3,256        2,979   1,808     542
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Other income                       7            609          703      16     505
--------------------------------------------------------------------------------
Marketing and distribution         5           -324         -278     -84     -86
 expenses                                                                       
--------------------------------------------------------------------------------
Administrative expenses            6         -1,811       -1,676    -602    -501
--------------------------------------------------------------------------------
Other expenses                     7            -82         -196     -48    -134
--------------------------------------------------------------------------------
Gain on transactions involving                  -27        2,897     -27   1,897
 joint ventures                                                                 
--------------------------------------------------------------------------------
Gain on sale of subsidiaries       16           662           98       0       0
                                 -----------------------------------------------
Operating profit                              2,283        4,527   1,063   2,223
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Finance income and costs           8         -1,062         -972    -368    -234
--------------------------------------------------------------------------------
Profit before tax                             1,221        3,555     695   1,989
                                 -----------------------------------------------
Income tax                                      -75            0     -75       0
--------------------------------------------------------------------------------
Net profit from continuing                    1,146        3,555     620   1,989
 operations                                                                     
---------------------------------                   -------------        -------
                                                                                
----------------------------------------------------             --------       
Discontinued operations                                                         
--------------------------------------------------------------------------------
Loss from discontinued             14          -324         -128    -196    -563
 operations                                                                     
                                 -----------------------------------------------
                                                                                
-----------------------------------------------------------------               
Net profit for the period                       822        3,427     424   1,426
--------------------------------------------------------------------------------
attributable to owners of the                   803        3,410     423   1,426
 parent                                                                         
--------------------------------------------------------------------------------
attributable to non-controlling                  19           17       1       0
 interests                                                                      
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Total comprehensive income for                  822        3,427     424   1,426
 the period                                                                     
--------------------------------------------------------------------------------
attributable to owners of the                   803        3,410     423   1,426
 parent                                                                         
--------------------------------------------------------------------------------
attributable to non-controlling                  19           17       1       0
 interests                                                                      
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Earnings per share (in euros)      9                                            
--------------------------------------------------------------------------------
- basic                                        0.15         0.72    0.07    0.30
--------------------------------------------------------------------------------
- diluted                                      0.14         0.66    0.07    0.28
--------------------------------------------------------------------------------

Consolidated statement of financial position



                                            Note     31 December     31 December
                                                            2014            2013
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Cash and cash equivalents                                  1,691             818
--------------------------------------------------------------------------------
Receivables and prepayments                  10            1,205             656
--------------------------------------------------------------------------------
Inventories                                  11           11,970          10,780
--------------------------------------------------------------------------------
Assets belonging to sales group              16                0             847
--------------------------------------------------------------------------------
Total current assets                                      14,866          13,101
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Investments in equity-accounted investees                      0               1
                                           -------------------------------------
Receivables and prepayments                  10                5             252
--------------------------------------------------------------------------------
Investment property                          12           11,585          11,331
                                           -------------------------------------
Property, plant and equipment                                434             459
--------------------------------------------------------------------------------
Intangible assets                                            113              13
--------------------------------------------------------------------------------
Total non-current assets                                  12,137          12,056
--------------------------------------------------------------------------------
TOTAL ASSETS                                              27,003          25,157
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Loans and borrowings                         13            3,194          12,589
--------------------------------------------------------------------------------
Payables and deferred income                 14            2,659           1,746
--------------------------------------------------------------------------------
Provisions                                                   202             172
--------------------------------------------------------------------------------
Liabilities belonging to sales group         16               72           1,488
--------------------------------------------------------------------------------
Total current liabilities                                  6,127          15,995
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Loans and borrowings                         13           11,826           2,308
--------------------------------------------------------------------------------
Total non-current liabilities                             11,826           2,308
--------------------------------------------------------------------------------
TOTAL LIABILITIES                                         17,953          18,303
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Share capital                                15            4,282           3,319
--------------------------------------------------------------------------------
Share premium                                15              292               0
--------------------------------------------------------------------------------
Statutory capital reserve                                  2,011           2,011
                                           -------------------------------------
Other reserves                               9               179              60
--------------------------------------------------------------------------------
Retained earnings                                          2,250           1,452
--------------------------------------------------------------------------------
Total equity attributable to owners of the                 9,014           6,842
 parent                                                                         
--------------------------------------------------------------------------------
Equity attributable to non-controlling                        36              12
 interests                                                                      
--------------------------------------------------------------------------------
TOTAL EQUITY                                               9,050           6,854
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY                              27,003          25,157
--------------------------------------------------------------------------------

Consolidated statement of cash flows



                                      Note  12 months  12 months      Q4      Q4
                                                 2014       2013    2014    2013
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Cash receipts from customers                   10,812     10,516   5,745   2,242
--------------------------------------------------------------------------------
Cash paid to suppliers                         -8,945     -7,058  -1,775  -1,112
--------------------------------------------------------------------------------
Taxes paid                                     -1,150     -1,976    -306    -448
--------------------------------------------------------------------------------
Taxes recovered                                   805        189     274       6
--------------------------------------------------------------------------------
Cash paid to employees                           -866       -846    -249    -209
                                     -------------------------------------------
Other cash payments and receipts                 -210       -218      -7     -77
 related to operating activities                                                
--------------------------------------------------------------------------------
Net cash flow of discontinued                    -250       -317      -2      37
 operations                                                                     
--------------------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES                196        290   3,680     439
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Purchase of property, plant and                   -71        -34     -39     -16
 equipment                                                                      
--------------------------------------------------------------------------------
Proceeds from sale of property,                     0        118       0     100
 plant and equipment                                                            
--------------------------------------------------------------------------------
Proceeds from sale of investment                    0         80       0      60
 property                                                                       
--------------------------------------------------------------------------------
Proceeds from sale of a subsidiary     16          10      1,610       0       0
--------------------------------------------------------------------------------
Proceeds from sale of an associate                  1          0       0       0
--------------------------------------------------------------------------------
Loans provided                                     -3        -48       0     -11
--------------------------------------------------------------------------------
Placement of security deposits                   -247       -263       0       0
--------------------------------------------------------------------------------
Release of security deposits                      679        258       0     258
--------------------------------------------------------------------------------
Interest received                                   5          7       2       2
--------------------------------------------------------------------------------
Net cash flow of discontinued                       0        -56       0     -56
 operations                                                                     
--------------------------------------------------------------------------------
NET CASH FROM/USED IN INVESTING                   374      1,672     -37     337
 ACTIVITIES                                                                     
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Proceeds from loans received           13       4,885      3,046     832     165
--------------------------------------------------------------------------------
Settlement of loans and finance        13      -4,800     -4,809  -3,608    -325
 lease liabilities                                                              
--------------------------------------------------------------------------------
Interest paid                                  -1,091       -964    -576    -222
--------------------------------------------------------------------------------
Proceeds from share capital issue      15       1,375          0       0     -66
--------------------------------------------------------------------------------
Other payments related to financing               -76        -75     -25       0
 activities                                                                     
--------------------------------------------------------------------------------
NET CASH FROM/USED IN FINANCING                   293     -2,802  -3,377    -448
 ACTIVITIES                                                                     
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
NET CASH FLOW                                     863       -840     266     328
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cash and cash equivalents at                      818      1,775   1,415     570
 beginning of period                                                            
--------------------------------------------------------------------------------
Decrease in cash and cash                         863       -840     266     328
 equivalents                                                                    
--------------------------------------------------------------------------------
Change in cash through purchase/sale               10        -37      10       0
 of subsidiaries                                                                
--------------------------------------------------------------------------------
Cash and cash equivalents                           0        -80       0     -80
 recalssified to sales group assets                                             
--------------------------------------------------------------------------------
Cash and cash equivalents at end of             1,691        818   1,691     818
 period                                                                         
--------------------------------------------------------------------------------

Consolidated statement of changes in equity



                 Equity attributable to owners of the parent    Non-cont   Total
                                                                 rolling  equity
                                                                interest        
                                                                       s        
--------------------------------------------------------------------------------
               Share   Share  Statutory   Other  Retain  Total                  
              capita  premiu    capital  reserv      ed                         
                   l       m    reserve      es  earnin                         
                                                     gs                         
---------------------------------------------------------------                 
In thousands                                                                    
 of euros                                                                       
--------------------------------------------------------------------------------
Balance as     3,319       0      2,011       0  -1,958  3,372        -5   3,367
 at 31                                                                          
 December                                                                       
 2012                                                                           
--------------------------------------------------------------------------------
Formation of       0       0          0      60       0     60         0      60
 equity                                                                         
 reserve                                                                        
 (note 9)                                                                       
--------------------------------------------------------------------------------
Total              0       0          0       0   3,410  3,410        17   3,427
 comprehensi                                                                    
ve income                                                                       
 for the                                                                        
 period                                                                         
             -------------------------------------------------------------------
Balance as     3,319       0      2,011      60   1,452  6,842        12   6,854
 at 31                                                                          
 December                                                                       
 2013                                                                           
--------------------------------------------------------------------------------
                                                                                
             -------------------------------------------------------------------
Balance as     3,319       0      2,011      60   1,452  6,842        12   6,854
 at 31                                                                          
 December                                                                       
 2013                                                                           
--------------------------------------------------------------------------------
Total              0       0          0       0     803    803        19     822
 comprehensi                                                                    
ve income                                                                       
 for the                                                                        
 period                                                                         
--------------------------------------------------------------------------------
Increase of      963     292          0       0       0  1,255         0   1,255
 share                                                                          
 capital                                                                        
--------------------------------------------------------------------------------
Formation of       0       0          0     119       0    119         0     119
 equity                                                                         
 reserve                                                                        
 (note 9)                                                                       
--------------------------------------------------------------------------------
Change in          0       0          0       0      -5     -5         5       0
 non-control                                                                    
ling                                                                            
 interests                                                                      
--------------------------------------------------------------------------------
Balance as     4,282     292      2,011     179   2,250  9,014        36   9,050
 at 31                                                                          
 December                                                                       
 2014                                                                           
--------------------------------------------------------------------------------




         Evelin Kanter
         Head of Legal Department
         Arco Vara AS
         Tel: +372 614 4594
         [email protected]
         http://www.arcorealestate.com