Market announcement

Title

Arco Vara AS unaudited consolidated interim report for second quarter and 6 months 2016

Message

General information

Arco Vara AS and other entities of Arco Vara group (hereafter together ‘the
group’) are engaged in real estate development and services related to real
estate. The group regards Estonia, Latvia and Bulgaria as its home markets. The
group has two business lines: Service division and Development division. 

The Service division is engaged in real estate brokerage, valuation, management
and consulting as well as in short-term investment in residential real estate.
The Service division offers to the group additional value by generating
analytical data on market demand and supply, also behaviour of potential
clients. Analytical data allows making better decisions on real estate
development: on purchase of land plots, planning and designing, pricing end
products also on timing the start of construction. 

The Development division develops complete living environments and commercial
real estate. Fully developed housing solutions are sold to the end-consumer. In
some cases the group is developing also commercial properties until they start
generating cash flow for two possible purposes: for the support of the groups’
cash flows or for resale. The group is currently holding completed commercial
properties that generate rental income. 

As at 30 June 2016, the group comprised 23 companies, which is two less than at
the end of year 2015. On 19 February 2016, the group’s subsidiary Fineprojekti
OÜ was deregistered in Estonian Commercial Register, the liquidation process
was started in 2014. The liquidation also resulted in derecognition of Romanian
subsidiary Arco Capital Real Estate SRL from the group’s structure. In Q1 2016,
the group’s interest in Bulgarian real estate fund Arco Real Estate Fund REIT
was increased from 70% up to 100% and the share capital of the fund was
additionally increased by 77 thousand euros. In April 2016, the group sold 100%
subsidiary Arco BB EOOD in Bulgaria and in May 2016 the group purchased 100%
subsidiary Iztok Parkside EOOD in Bulgaria. None of these transactions had
significant impact on the group’s net assets. 

Significant subsidiaries

Company name       Locati  Segment       Share capital      Equity   The group's
                   on                  (nominal value)     balance      interest
                                                        at 30 June              
                                                              2016              
--------------------------------------------------------------------------------
In thousands of                                                                 
 euros                                                                          
--------------------------------------------------------------------------------
Arco Manastirski   Bulgar  Develop               2,676       4,119          100%
 EOOD              ia         ment                                              
--------------------------------------------------------------------------------
Arco Invest EOOD   Bulgar  Develop              26,826        -357          100%
                   ia         ment                                              
--------------------------------------------------------------------------------
Iztok Parkside     Bulgar  Develop               1,433       1,255          100%
 EOOD              ia         ment                                              
--------------------------------------------------------------------------------
Arco Real Estate   Bulgar  Develop                 332         306          100%
 Fund REIT ¹       ia         ment                                              
--------------------------------------------------------------------------------
Kodulahe OÜ        Estoni  Develop                   3        -196          100%
                   a          ment                                              
--------------------------------------------------------------------------------
Kerberon OÜ        Estoni  Develop                   5       1,262          100%
                   a          ment                                              
--------------------------------------------------------------------------------
Marsili II SIA     Latvia  Develop               1,524         944          100%
                              ment                                              
--------------------------------------------------------------------------------
Arco Real Estate   Estoni  Service                  42      -1,025          100%
 AS                a                                                            
--------------------------------------------------------------------------------
Arco Real Estate   Latvia  Service               1,905          31         70.6%
 SIA ¹                                                                          
--------------------------------------------------------------------------------
Arco Imoti EOOD    Bulgar  Service                 444         188          100%
                   ia                                                           
--------------------------------------------------------------------------------

¹ - Non-controlling interest in Arco Real Estate SIA equals to the group’s
total non-controlling interest 

Key Performance Indicators

·     In Q2 2016, the group’s revenue was 2.1 million euros, exceeding by 1.7%
the revenue of Q2 2015. Revenue increased by 1.1% in Development division and
by 5.1% in Service division. The group’s revenue of 7.2 million euros for the 6
months 2016 exceeded by 10.7% the revenue of comparative period of year 2015.
The growth of revenue comes from Development division, where revenue increased
by 12.5% up to 5.8 million euros for 6 months 2016 (6 months 2015: 5.2 million
euros). The revenue of Service division amounted to 1.6 million euros in 6
months 2016, increased by 0.6% compared to 6 months 2015. 

·     In 6 months 2016, the group’s operating profit (=EBIT) was 1.2 million
euros and net profit 0.9 million euros. In 6 months 2015, the same figures were
1.1 million euros and 0.7 million euros respectively. The group’s operating
profit comes from Development division, amounting to 1.5 million euros for 6
months 2016 (in 6 months 2015: 1.2 million euros). In second quarter 2016, the
group ended with operating loss (=EBIT) of 0.1 million euros and net loss of
0.2 million euros. In Q2 2015, the group earned operating profit of 0.2 million
euros and net profit figure was practically on zero level. 

·     The group has continued to decrease debt burden in 2016. Net loans have
decreased by 2.1 million euros in first 6 months 2016 down to the level of 9.9
million euros as at 30 June 2016. Total loans and borrowings amounted 10.8
million euros at 30 June 2016, decreased by 1.9 million euros in 6 months. As
at 30 June 2016, the weighted average annual interest rate of loans was 5.7%.
This is an increase by 0.7 percentage points compared to 31 December 2015. 

·    In Q2 2016, 5 apartments, 3 commercial spaces and 4 land plots were sold
in projects developed in the group (in Q2 2015, 13 apartments were sold). In 6
months 2016, 73 apartments, 5 commercial spaces and 4 land plots were sold (in
6 months 2015: 61 apartments and 5 commercial spaces). 

                                   6 months 2016      6 months  Q2 2016  Q1 2015
                                                          2015                  
--------------------------------------------------------------------------------
In millions of euros                                                            
--------------------------------------------------------------------------------
Revenue                                                                         
--------------------------------------------------------------------------------
Development                                  5.8           5.2      1.4      1.4
--------------------------------------------------------------------------------
Service                                      1.6           1.6      0.9      0.8
--------------------------------------------------------------------------------
Eliminations                                -0.2          -0.3     -0.2     -0.1
--------------------------------------------------------------------------------
Total revenue                                7.2           6.5      2.1      2.1
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Operating profit (EBIT)                                                         
--------------------------------------------------------------------------------
Development                                  1.5           1.2      0.1      0.3
--------------------------------------------------------------------------------
Service                                     -0.1           0.1      0.0      0.0
--------------------------------------------------------------------------------
Unallocated income and expenses             -0.3           0.0     -0.2     -0.2
--------------------------------------------------------------------------------
Eliminations                                 0.1          -0.2      0.0      0.1
--------------------------------------------------------------------------------
Total operating profit/loss                  1.2           1.1     -0.1      0.2
 (EBIT)                                                                         
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Finance income and expense                  -0.3          -0.4     -0.1     -0.2
--------------------------------------------------------------------------------
Net profit/loss                              0.9           0.7     -0.2      0.0
--------------------------------------------------------------------------------
                                                                                
Key ratios                                                                      
--------------------------------------------------------------------------------
EPS (in euros)                              0.14          0.12    -0.03     0.00
--------------------------------------------------------------------------------
Diluted EPS (in euros)                      0.13          0.11    -0.03     0.00
--------------------------------------------------------------------------------
ROIC (rolling, four quarters)               2.8%          6.3%                  
--------------------------------------------------------------------------------
ROE (rolling, four quarters)                6.1%         17.1%                  
----------------------------------               -------------------------------
ROA (rolling, four quarters)                2.5%          5.7%                  
--------------------------------------------------------------------------------



                                       30 June 2016  31 Dec 2015
----------------------------------------------------------------
In millions of euros                                            
----------------------------------------------------------------
Total assets, at period end                    25.6         24.5
----------------------------------------------------------------
Invested capital, at period end                21.2         22.4
----------------------------------------------------------------
Net loans, at period end                        9.9         12.0
----------------------------------------------------------------
Equity, at period end                          10.4          9.6
----------------------------------------------------------------
                                                                
----------------------------------------------------------------
Current ratio                                  3.49         3.22
----------------------------------------------------------------
Quick ratio                                    0.36         0.32
----------------------------------------------------------------
Financial leverage                             2.47         2.54
----------------------------------------------------------------
Average loan term (in years)                    1.5          1.7
----------------------------------------------------------------
Average annual interest rate of loans          5.7%         5.0%
----------------------------------------------------------------
Number of staff, at period end                  185          178
----------------------------------------------------------------



Cash flows

                                           6 months     6 months      Q2      Q2
                                               2016         2015    2016    2015
--------------------------------------------------------------------------------
In millions of euros                                                            
--------------------------------------------------------------------------------
Cash flows from operating activities            3.6          3.2     0.7     0.2
--------------------------------------------------------------------------------
Cash flows used in investing                   -0.9         -0.1    -0.9     0.0
 activities                                                                     
--------------------------------------------------------------------------------
Cash flows used in financing                   -2.5         -3.7    -0.8    -0.9
 activities                                                                     
--------------------------------------------------------------------------------
Net cash flows                                  0.2         -0.6    -1.0    -0.7
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cash and cash equivalents at beginning          0.7          1.7     1.9     1.8
 of period                                                                      
--------------------------------------------------------------------------------
Cash and cash equivalents at end of             0.9          1.1     0.9     1.1
 period                                                                         
--------------------------------------------------------------------------------



Revenue and net profit/loss from continuing operations 
          Q1      Q2      Q3      Q4     Total    Q1      Q2      Q3      Q4   
 Total    Q1      Q2      Q3      Q4     Total    Q1      Q2     Total 
         2013    2013    2013    2013    2013    2014    2014    2014    2014  
 2014    2015    2015    2015    2015    2015    2016    2016    2016 
--------------------------------------------------------------------------------
---------------------------------------------------------------------- 
In 
 milli 
ons of 
 euros 
--------------------------------------------------------------------------------
---------------------------------------------------------------------- 
Revenu     1.7     3.5     3.5     2.0    10.7     1.1     1.1     1.2     5.8 
   9.2     4.4     2.1     2.1     2.1    10.7     5.1     2.1     7.2 
e 
--------------------------------------------------------------------------------
---------------------------------------------------------------------- 
Net        0.0     1.4     0.1     2.0     3.5     0.4    -0.3     0.4     0.6 
   1.1     0.7     0.0     0.2    -0.4     0.5     1.1    -0.2     0.9 
 profi 
t/loss 
--------------------------------------------------------------------------------
---------------------------------------------------------------------- 



FORMULAS USED

Earnings per share (EPS) = net profit attributable to owners of the parent /
(weighted average number of ordinary shares outstanding during the period) 
Diluted earnings per share (Diluted EPS) = net profit attributable to owners of
the parent / (weighted average number of ordinary shares outstanding during the
period + number of all potentially issued shares) 
Invested capital = current interest-bearing liabilities + non-current
liabilities + equity (at end of period) 
Net loans = current interest-bearing liabilities + non-current liabilities –
cash and cash equivalents – short-term investments in securities (at end of
period) 
Return on invested capital (ROIC) = past four quarters’ net profit / average
invested capital 
Return on equity (ROE) = past four quarters’ net profit / average equity
Return on assets (ROA) = past four quarters’ net profit / average total assets
Current ratio = current assets / current liabilities
Quick ratio = (current assets - inventory) / current liabilities
Financial leverage = total assets / equity
Number of staff at period-end = number of people working for the group under
employment or authorization (service) contracts 



Group Chief Executive’s review

Arco Vara completed during Q2 several steps towards achieving its short-term
goal - to double its volume of operations and profit by the end of 2018.
Figuratively speaking, this progress can be seen in cranes that have been or
will be set up. The numbers in the second-quarter earnings report are modest
and overheads mean that the bottom line is negative. As I have said earlier,
the numbers are set to remain modest until the end of the third quarter 2017.
It is important to look at the internal dynamics of the group that forms a
foundation for the upcoming results of 2017, 2018 and subsequent years.  In Q2,
we moved forward with such development projects that customers want and can
afford to buy. 

Key developments: Kodulahe and Iztok Parkside

Construction of phase one of the Kodulahe residential development in Tallinn
has progressed as planned and presales are meeting our expectations. We intend
to continue at the same pace, which means that all 130 apartments and
commercial spaces of the first phase become sold out by the end of 2017 or in
Q1 2018. Along with the construction of the building and development of the
recognizable future living environment, there has been a noticeable increase in
the customers' interest. 

In the Iztok Parkside project in Sofia we completed the acquisition transaction
of the property. Design works are in schedule. Obtaining the detail plan from
Sofia municipality has taken a little longer, but was nearing completion by end
of Q2. In Q3, we expect the detail plan to enter into force. We also expect to
execute financing contract with the bank and obtaining of a building permit so
that both actual construction works and presales can start already by the end
of the year.  Sales revenue of Iztok Parkside will appear in the income
statement of Q1 2018. 

Expected profit margin of both projects remains unchanged. The target return on
equity (ROE) is 20% per year. In the development of both projects the critical
part is to find such financing solutions that will allow - when demand is
sufficient - to continue uninterrupted development of the second phase of
Kodulahe, as well as the development of Project X in Sofia, a successor project
to Iztok Parkside. 

Madrid Blvd

We were too optimistic in our forecast for new tenants for office spaces.
Although the location of our building, quality of premises on offer and the
rental price are competitive, the flexibility of tenants in moving from their
existing space and terminating the existing contracts is more limited than we
thought. The number of first time tenants entering the market in Sofia is
relatively limited. Therefore, the rental income of Q2 is not satisfactory. No
new rental agreements were concluded, and the vacancy rate of the building
remains unchanged. Rental income earned at present from the building's
commercial space, rental apartments and two office spaces is slightly lower
than the interest expense of the Piraeus bank loan. However, negotiations with
several tenants are at a stage where we expect a significant reduction in the
vacancy by end of Q3. As at the end of the year, the building's free cash flow
and impact on the income statement should be positive. 

In Q2 we sold and delivered four apartments and some parking spaces in the
Madrid Blvd building. Therefore, the balance of the outstanding bank loan on
the building decreased to below EUR 9.5 million by the date of publication of
the interim report. At the date of the interim report, the stock of vacant
apartments on sale has decreased to 6 units. The remaining apartments (15) are
rented out. 

Other developments

In Q2 we started preparations for taking several land plots in the group's land
bank into active development in order to strengthen the results in 2017 and
2018. We sold Viimsiranna properties. In addition, one property in Tartu may be
exchanged with an immovable suitable for residential development in the same
city. The property at Liimi 1b in Tallinn will be either sold off or we will
develop it ourselves into cashflow-generating estate. The detail plan for the
Lehiku tee property in Tallinn has been approved and we hope that it will enter
into force by end of the year. Our land bank has some other untapped resources
that could become active in the coming years in connection with the increase in
Tallinn's population. 

Service Division

The results of the Service Division as a whole are still not satisfactory for
the Management. Our business in Bulgaria is profitable, and we opened already a
second representative office in Sofia. However, in Latvia and Estonia we are
losing money. The company's goal is to be the most human-focused real estate
company, which requires some changes in staff thinking, especially in the
thinking of brokers who are focusing narrowly on the property sales. It’s
“bricks versus people” change in the thinking. The positive in Estonia is that
the revenues of the appraisal services have grown beyond expectations and,
taken alone, are profitable.  In Estonia as a whole we also see that the
structure of revenues is gradually benefitting brokers and appraisers who are
professionals only, and dedicated and consolidated under the Arco Vara brand.
The Management Board still expects the Estonian unit to become profitable by
the end of 2016 at the latest. In order to become profitable, we must increase
revenues (brokerage efficiency) at the present fixed costs base. 

With regard to the Latvian service unit should be noted that the group's
opportunities to influence the management of that company are limited since the
group is not its sole owner and several important decisions can be made with
consensus only. 

Forecast for the year

As at the end of the first quarter, the Management maintains its previous
annual forecast: 2016 sales revenue of 10.3 million euros and net profit of 0.8
million euros. We will be driving through the whole 2016 on the results of Q1.
The quarters that follow will add sales revenue, brokerage transactions, issued
expert opinions and building of new apartments, but also slightly erode the
profit earned during Q1, because of continuous overheads. 


Developments in Arco Vara home markets

Sofia

In Sofia, real estate market is in stable growth phase. In first half of year
2016, 7% more (compared to the same period of year 2015) real estate
transactions have been concluded. The total value of new mortgages set had
increased by 19% in the same period. There have been issued more construction
permits in Sofia, but also in Plovdiv, the second-largest city in Bulgaria. 5%
raise in real estate prices is forecasted for the whole year 2016. The real
estate market benefits also from the decrease of interest rates on mortgaged
loans staying mainly between 4.25% and 5.25% during first half of 2016. Based
on experience of the group’s brokerage agency the typical traded one-bedroom
apartment in Sofia is between 55-65 square meters in size and between 850-1,000
euros per one square meter of sellable area. The most popular two-bedroom
apartment is between 85-100 square meters in size and between 800-900 euros per
one square meter of sellable area. 

Tallinn

In second quarter 2016, 2,261 apartment sale-purchase agreements were concluded
in Tallinn. This is 9.9% more than Q1 2016 while 1.3% less than Q2 2015. In 6
months 2016, 4,318 apartment sale-purchase agreements were concluded in
Tallinn, increased by 2.3% compared to the same period of last year. In Q2
2016, median price on apartment sales in Tallinn was 1,516 euros per square
meter, increased by 3.1% compared to previous quarter and increased by 3.6%
compared to Q2 2015. Based on transaction statistics we can consider Tallinn
apartment market as stable with slightly growing trend in sale prices. In last
year, transaction activity and prices have increased more in districts
bordering city centre like North Tallinn, Kristiine, also Mustamäe. Apartment
market is strongly impacted by new developments, which motivate people to
change their living place, but on the same time increased offer makes the
clients more demanding. 

SERVICE DIVISION

In Q2 2016, revenue of the group’s service division was 850 thousand euros (in
Q2 2015: 809 thousand euros), that included intra-group revenue of 129 thousand
euros (in Q2 2015: 117 thousand euros). Service division revenue was
practically the same if 6 months periods were compared: 1,598 thousand euros in
6 months 2016 and 1,588 thousand euros in 6 months 2015. Revenue of service
division from main services (real estate brokerage and valuation services) has
increased in 2016 if compared with the same period of 2015: growing by 9% if
comparing second quarters and 3% if comparing 6 months periods. Revenue from
main services has increased in Estonian and Latvian brokerage agency and
decreased in Bulgarian agency. The drop in the revenue of Bulgarian agency can
be attributed to the decreased income from mediating the sales of the group’s
own properties. 

Revenue of real estate agencies from brokerage and valuation                    
                     6 months     6 months   Change,  Q2 2016  Q2 2015   Change,
                         2016         2015         %                           %
--------------------------------------------------------------------------------
In thousands of                                                                 
 euros                                                                          
Estonia                   655          595       10%      355      317       12%
--------------------------------------------------------------------------------
Latvia                    468          436        7%      233      193       21%
--------------------------------------------------------------------------------
Bulgaria                  329          378      -13%      186      198       -6%
--------------------------------------------------------------------------------
Total                   1,452        1,409        3%      774      708        9%
--------------------------------------------------------------------------------

In 6 months 2016, Estonian and Latvian agencies have operated on a loss: 119
thousand euros and 18 thousand euros respectively (in 6 months 2015, had a loss
of 40 thousand euros and 48 thousand euros respectively). Bulgarian agency had
net loss of 2 thousand euros in 6 months 2016, but earned net profit of 111
thousand euros in 6 months 2015. 

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 56 thousand euros in 6
months 2016, 48 thousand euros of which was intra-group revenue (in 6 months
2015: 82 thousand and 57 thousand euros, respectively). Revenue from
accommodation services amounted to 64 thousand euros in 6 months 2016 (in 6
months 2015: 55 thousand euros). 

The number of staff in service division has been increased to 172 employees in
first six months of 2016, this is 7 people more compared to year end 2015. The
number of staff is increased mainly in Bulgaria. 

DEVELOPMENT DIVISION

In Q2 2016, revenue of development division totalled 1,403 thousand euros (in
Q2 2015: 1,382 thousand euros) including revenue of 969 thousand euros (Q2
2015: 791 thousand euros) from the sale of properties in the group’s own
development projects. In 6 months 2016, development division revenue amounted
to 5,815 thousand euros, which is 12.5% more compared to 6 months 2015 then
revenue was 5,170 thousand euros. 

Most of the remaining revenue of development division consist of rental income
from commercial and office premises in Madrid Blvd building in Sofia, amounted
to 88 thousand euros in Q2 2016 and 163 thousand euros in 6 months 2016 (in
2015: 237 thousand euros in Q2 and 474 thousand euros in 6 months). Rental
income has decreased compared to previous year due to conclusion of rental
agreement with anchor tenant in Q3 2015 and the renovation works of rental
spaces in Q4 2015. The rental space that was previously rented out for one
anchor tenant is now divided into 7 separate spaces. The search of new tenants
is ongoing, the first rental agreement was concluded in Q2 2016. The rental
income is planned to recover close to the previous level by the end of year
2016. 

In 6 months 2016, operating profit of development division was 1,491 thousand
euros, of which 105 thousand euros was earned in Q2. In 6 months 2015, the
operating profit was 1,221 thousand euros, of which 255 thousand euros in Q2. 

During Q2 2016, the construction of first stage apartment building (with 125
apartments and 5 commercial spaces) in the group’s biggest development project
Kodulahe continued in Tallinn.  By the publishing date of the interim report,
presale agreements for 41 apartments and one commercial space have been
concluded. The construction of the apartment building should finalize at the
beginning of summer 2017. 

In Q2 2016, sale of last apartments and commercial spaces in Manastirski Livadi
project in Sofia have been continued. During the quarter, one apartment (the
last one for the whole project) and 4 commercial premises were sold. As at 30
June 2016, 4 commercial spaces and some parking places remained unsold in the
project. 

As at 30 June 2016, 22 apartments remained unsold in Madrid Blvd complex in
Sofia. In Q2 2016, 4 apartments were sold and after the reporting period
another one. 15 apartments, out of all Madrid Blvd unsold apartments, are
rented out as accommodation service. Unsold 105 parking places are also rented
out. 

In May 2016, the group finalized the purchase of a company Iztok Parkside EOOD.
As a result, the group’s development portfolio has new development project in
Iztok district in Sofia. By the date of publishing the interim report, detail
plan for the project’s property has been established. It is expected, that City
Government of Sofia should adopt the plan in Q3 2016. In q2 2016, design
contest was carried out, which foresees construction of three apartment
buildings with 68 apartments and 7,070 square meters of apartments’ sellable
area. The construction should start in Q4 2016 and apartment buildings should
be completed by the end of year 2017. 

In second quarter, two Marsili residential plots were sold. 12 plots remained
unsold, on one of which has been concluded presale agreement - the final sale
should be concluded in Q3 2016. 

As at 30 June 2016, 5 people were employed in development division, the same
number as at the end of year 2015. 


SUMMARY TABLE OF ARCO VARA’S ACTIVE PROJECTS AS AT 30 JUNE 2016

Project   Address       Product  Stage  Area of       GSA / GLA      No of units
 name                    main           plot(s)   (above grade)    (above grade)
                         type              (m2)    available or     available or
                                                        <future  <future target>
                                                        target>                 
--------------------------------------------------------------------------------
Manastir  Manastirski,  Apartme  S5           -             372                4
ski D      Sofia        nts                                                     
--------------------------------------------------------------------------------
Madrid    Madrid Blvd,  Lease:   S5/S6        -           7,350               21
 Blvd      Sofia         Retail                                                 
                        /Office                                                 
--------------------------------------------------------------------------------
Madrid    Madrid Blvd,  Apartme  S5/S6        -           2,408               22
 Blvd      Sofia        nts                                                     
--------------------------------------------------------------------------------
Iztok     Iztok, Sofia  Apartme  S3       2,470           7,070               68
 Parksid                nts                                                     
e                                                                               
--------------------------------------------------------------------------------
Marsili   Marsili,      Residen  S5           -          21,048               12
 residen   near Riga    tial                                                    
tial                     plots                                                  
 plots                                                                          
--------------------------------------------------------------------------------
Marsili   Marsili,      Residen  S2/S5  120,220       <120,220>             <68>
 residen   near Riga    tial                                                    
tial                     plots                                                  
 plots                                                                          
--------------------------------------------------------------------------------
Kodulahe  Lahepea 7,    Apartme  S4/S5    6,102           8,732              130
, stage    Tallinn      nts                                                     
 1                                                                              
--------------------------------------------------------------------------------
Kodulahe  Lahepea,      Apartme  S2      22,396        <13,300>            <200>
, stages   Soodi, Pagi  nts                                                     
 2-5       streets,                                                             
           Tallinn                                                              
--------------------------------------------------------------------------------
Lehiku    Lehiku 21,23  Apartme  S2       5,915         <1,100>              <5>
 carpet    Tallinn      nts                                                     
 buildin                                                                        
g                                                                               
--------------------------------------------------------------------------------
Liimi     Liimi 1b,     Lease:   S2/S5    2,463         <6,500>                1
           Tallinn       Office                                                 
--------------------------------------------------------------------------------

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. The table does not provide
complete overview of the group’s land bank. 

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 30 June 2016, 185 people worked for the group (178 as at 31 December
2015). Employee remuneration expenses in first 6 months 2016 amounted to 1.4
million euros (in 6 months 2015: 1.3 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 6 months 2016 amounted to 57 thousand euros (54 thousand
euros in 6 months 2015). 

MANAGEMENT BOARD AND SUPERVISORY COUNCIL

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 mandate of the chief executive was prolonged by 3 years (until
October 2018) on the supervisory board meeting held in September 2015. 

The supervisory board of Arco Vara AS has 5 members. Since 10 February 2015,
supervisory board comprise: Hillar-Peeter Luitsalu (the chairman), Allar
Niinepuu, Rain Lõhmus, Steven Yaroslav Gorelik and Kert Keskpaik. 

More information on key persons of Arco Vara you can find on company’s
corporate web page www.arcorealestate.com. 



DESCRIPTION OF THE MAIN RISKS

Strategic risk

Most of the group’s equity is placed in real estate development. The group is
focused mainly on residential real estate development where development cycle
lasts for years consisting of detail planning, designing, construction and sale
- starts from purchase of land plot and finishes with the sale of end products
to customers. The equity is invested mainly in starting phase of the cycle
(purchase of land) on the assumption that there will be a demand for certain
products in the future. Considering that the demand for development product is
largely based on forecast and not on transaction then the main risk for the
group is investing equity to the development product for which there is no
demand in the future. 

For mitigating the risk: (i) the group invests equity into different
development project in different markets (in 2016, in Sofia and Tallinn), (ii)
monitoring current demand and supply in its home markets and (iii) makes
efforts to narrow the time between moment of investment and moment of the
demand is rising - signing pre-agreements with clients, purchases land without
using equity or postpones it using project financing alternatives there equity
placement is not necessary. 

Credit risk

The group’s credit risk arises mainly from two sources: real estate development
activities and reliability of the banks where bank deposits are placed. As on
real estate transactions a lot of counterparty financing goes through banks,
co-operation with financing banks is common to mitigate counterparty risk. And
not all cash and cash equivalents are placed on the same banking group. As a
consequence, the group considers credit risk as substantially mitigated. 

Liquidity and interest rate risks

The base currency of all of the group’s loan agreements is euro and the base
interest rate is 3 or 6 months EURIBOR. As a result, the group is exposed to
developments on the international capital markets. The group does not use
hedging instruments to mitigate its long-term interest rate risk. In first 6
months 2016, the group’s interest-bearing liabilities have decreased by 1.9
million euros and at 30 June 2016 amounted to 10.8 million euros, of which only
0.1 million euros is due within next 12 months. At the same time, the group’s
cash and cash equivalents totalled 0.9 million euros as at 30 June 2016 (at 31
December 2015: 0.7 million euros). In 6 months 2016, interest payments on
interest-bearing liabilities totalled 0.4 million euros (in 6 months 2015: 0.5
million euros). The group’s weighted average loan interest rate was 5.7% as at
30 June 2016. This is an increase by 0.7 percentage points compared to the end
of year 2015. The reason for the increase is bonds issued in January 2016, the
bonds bear significantly higher than average interest rate. 

Currency risk

Purchase and sales contracts of provided services are mostly signed in local
currencies: euros (EUR) or 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 demand
or short-term deposits denominated in euros. 



Share and shareholders

Arco Vara AS has issued a total of 6,117,012 ordinary shares with nominal value
of 0.7 euros per share. The shares are freely traded on NASDAQ Tallinn stock
exchange. The share price closed at 1.07 euros as at 30 June 2016. The price
has decreased by 7% within 6 months 2016 (closing price at the end of 2015 was
1.15 euros). During the period, the highest traded price per share was 1.15
euros and lowest price 1.01 euros. As at 30 June 2016, market capitalization of
shares amounted to 6,545 thousand euros, P/E ratio of the share was 10.7 and
P/B ratio 0.63 (at 31 December 2015: 7,035 thousand euros, 15.8 and 0.73,
respectively). 

Structure of shareholders

As at 30 June 2016, Arco Vara had 1,536 shareholders (at 31 December 2015:
1,600) including 1,327 individuals as shareholders (at 31 December 2015: 1,381
individuals) who jointly owned 13.5% (at 31 December 2015: 12.7%) interest out
of all Arco Vara shares. 



Major shareholders at 30 June 2016  No of shares  Interest %
NORDEA BANK FINLAND PLC client           862,820       14.1%
AS Lõhmus Holdings                       602,378        9.8%
Gamma Holding Investment OÜ              558,975        9.1%
Alarmo Kapital OÜ                        500,188        8.2%
LHV PENSIONIFOND L                       389,765        6.4%
FIREBIRD REPUBLICS FUND LTD              356,428        5.8%
HM Investeeringud OÜ                     330,505        5.4%
FIREBIRD AVRORA FUND, LTD.               185,800        3.0%
LHV PENSIONIFOND XL                      173,583        2.8%
FIREBIRD FUND L.P.                       150,522        2.5%
Other shareholders                     2,006,048       32.8%
------------------------------------------------------------
------------------------------------------------------------
Total                                  6,117,012      100.0%



Holdings of members of the management  Position                    No of  Intere
 and supervisory boards (and related                              shares    st %
 persons) at 30 June 2016                                                       
Rain Lõhmus (AS Lõhmus Holdings)       member of supervisory     602,378    9.8%
                                        board                                   
Tarmo Sild ja Allar Niinepuu (Alarmo   member of management      500,188    8.2%
 Kapital OÜ)                            board/ member of                        
                                        supervisory board                       
Hillar-Peeter Luitsalu (HM             chairman of               369,259    6.0%
 Investeeringud OÜ, related persons)    supervisory board                       
Kert Keskpaik (privately and through   member of supervisory     202,171    3.3%
 K Vara OÜ)                             board                                   
Steven Yaroslav Gorelik ¹              member of supervisory           0    0.0%
                                        board                                   
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Total                                                          1,673,996   27.4%

¹ - Steven Yaroslav Gorelik is active as fund manager in three investment funds
holding interest in Arco Vara (Firebird Republics Fund Ltd, Firebird Avrora
Fund Ltd and Firebird Fund L.P) of 692,750 shares (total of 11.3% interest). 



Condensed consolidated interim financial statements

Consolidated statement of comprehensive income


                                    Note    6 months    6 months      Q2      Q2
                                                2016        2015    2016    2015
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Continuing operations                                                           
--------------------------------------------------------------------------------
Revenue from sale of own real                  5,582       4,616   1,277   1,111
 estate                                                                         
--------------------------------------------------------------------------------
Revenue from rendering of services             1,569       1,841     817     949
--------------------------------------------------------------------------------
Total revenue                       2, 3       7,151       6,457   2,094   2,060
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cost of sales                        4        -4,692      -4,169  -1,513  -1,269
--------------------------------------------------------------------------------
Gross profit                                   2,459       2,288     581     791
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Other income                                      28          23      27       6
--------------------------------------------------------------------------------
Marketing and distribution           5          -280        -234    -138    -125
 expenses                                                                       
--------------------------------------------------------------------------------
Administrative expenses              6        -1,021        -945    -522    -470
--------------------------------------------------------------------------------
Other expenses                                   -18         -26     -12     -14
--------------------------------------------------------------------------------
Gain on sale of subsidiary                         1           0       1       0
--------------------------------------------------------------------------------
Operating profit/loss                          1,169       1,106     -63     188
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Finance income and costs             7          -296        -388    -124    -198
--------------------------------------------------------------------------------
Net profit/loss from continuing                  873         718    -187     -10
 operations                                                                     
-----------------------------------------            ------------        -------
                                         ------------            --------       
                                                                                
-----------------------------------------            ------------        -------
                                         ------------            --------       
Discontinued operations                                                         
-----------------------------------------            ------------        -------
Loss from discontinued operations                  0         -13       0      -2
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Net profit/loss for the period                   873         705    -187     -12
--------------------------------------------------------------------------------
attributable to owners of the                    878         719    -182      -3
 parent                                                                         
--------------------------------------------------------------------------------
attributable to non-controlling                   -5         -14      -5      -9
 interests                                                                      
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Total comprehensive income/expense               873         705    -187     -12
 for the period                                                                 
--------------------------------------------------------------------------------
attributable to owners of the                    878         719    -182      -3
 parent                                                                         
--------------------------------------------------------------------------------
attributable to non-controlling                   -5         -14      -5      -9
 interests                                                                      
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Earnings per share (in euros)        8                                          
--------------------------------------------------------------------------------
- basic                                         0.14        0.12   -0.03    0.00
--------------------------------------------------------------------------------
- diluted                                       0.13        0.11   -0.03    0.00
--------------------------------------------------------------------------------



Consolidated statement of financial position

                                              Note      30 June      31 December
                                                           2016             2015
--------------------------------------------------------------------------------
In thousands of euros                                                           
                                                   -------------                
Cash and cash equivalents                                   925              745
--------------------------------------------------------------------------------
Receivables and prepayments                    9            716              679
--------------------------------------------------------------------------------
Inventories                                    10        14,092           12,818
--------------------------------------------------------------------------------
Total current assets                                     15,733           14,242
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Receivables and prepayments                    9             11                0
--------------------------------------------------------------------------------
Investment property                            11         9,111            9,513
--------------------------------------------------------------------------------
Property, plant and equipment                               483              489
--------------------------------------------------------------------------------
Intangible assets                                           255              229
--------------------------------------------------------------------------------
Total non-current assets                                  9,860           10,231
--------------------------------------------------------------------------------
TOTAL ASSETS                                             25,593           24,473
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Loans and borrowings                           12           118            2,345
--------------------------------------------------------------------------------
Payables and deferred income                   13         4,312            1,935
--------------------------------------------------------------------------------
Provisions                                                   81              146
--------------------------------------------------------------------------------
Total current liabilities                                 4,511            4,426
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Loans and borrowings                           12        10,717           10,417
--------------------------------------------------------------------------------
Total non-current liabilities                            10,717           10,417
--------------------------------------------------------------------------------
TOTAL LIABILITIES                                        15,228           14,843
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Share capital                                             4,282            4,282
--------------------------------------------------------------------------------
Share premium                                               292              292
--------------------------------------------------------------------------------
Statutory capital reserve                                 2,011            2,011
--------------------------------------------------------------------------------
Other reserves                                 8            298              298
--------------------------------------------------------------------------------
Retained earnings                                         3,473            2,656
--------------------------------------------------------------------------------
Total equity attributable to owners of the               10,356            9,539
 parent                                                                         
--------------------------------------------------------------------------------
Equity attributable to non-controlling                        9               91
 interests                                                                      
--------------------------------------------------------------------------------
TOTAL EQUITY                                             10,365            9,630
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY                             25,593           24,473
--------------------------------------------------------------------------------



Consolidated statement of cash flows

                                      Note   6 months   6 months      Q2      Q2
                                                 2016       2015    2016    2015
--------------------------------------------------------------------------------
In thousands of euros                                                           
                                           -----------           --------       
Cash receipts from customers                    9,635      8,695   3,809   2,802
--------------------------------------------------------------------------------
Cash paid to suppliers                         -4,185     -2,958  -2,403  -1,673
--------------------------------------------------------------------------------
Taxes paid and recovered (net)                 -1,149     -2,035    -378    -532
--------------------------------------------------------------------------------
Cash paid to employees                           -636       -539    -312    -304
--------------------------------------------------------------------------------
Other cash payments and receipts related          -62         33     -15     -94
 to operating activities (net)                                                  
--------------------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES              3,603      3,196     701     199
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Payments made on purchase of                      -74        -99     -35     -43
 tangible and intangible assets                                                 
--------------------------------------------------------------------------------
Proceeds from sale of a subsidiary                  1          0       1       0
--------------------------------------------------------------------------------
Payments made on purchase of a                   -840          0    -840       0
 subsidiary                                                                     
--------------------------------------------------------------------------------
Interest received                                   0          3       0       2
--------------------------------------------------------------------------------
Other payments related to investing                -3          0       0       0
 activities                                                                     
--------------------------------------------------------------------------------
NET CASH USED IN INVESTING                       -916        -96    -874     -41
 ACTIVITIES                                                                     
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Proceeds from loans received           12       1,071        870      51     870
--------------------------------------------------------------------------------
Settlement of loans and borrowings     12      -2,998     -3,965    -580  -1,432
--------------------------------------------------------------------------------
Interest paid                                    -391       -475    -189    -172
--------------------------------------------------------------------------------
Dividends paid                                    -61        -61     -61     -61
--------------------------------------------------------------------------------
Other payments related to financing              -128        -82       0     -82
 activities                                                                     
--------------------------------------------------------------------------------
NET CASH USED IN FINANCING                     -2,507     -3,713    -779    -877
 ACTIVITIES                                                                     
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
NET CASH FLOW                                     180       -613    -952    -719
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cash and cash equivalents at                      745      1,691   1,877   1,797
 beginning of period                                                            
--------------------------------------------------------------------------------
Increase in cash and cash                         180       -613    -952    -719
 equivalents                                                                    
--------------------------------------------------------------------------------
Cash and cash equivalents at end of               925      1,078     925   1,078
 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    4,282     292      2,011     179   2,250   9,014        36   9,050
 at 31                                                                          
 December                                                                       
 2014                                                                           
--------------------------------------------------------------------------------
Profit            0       0          0       0     -61     -61         0     -61
 distributi                                                                     
on                                                                              
--------------------------------------------------------------------------------
Total             0       0          0       0     719     719       -14     705
 comprehens                                                                     
ive income                                                                      
for the                                                                         
 period                                                                         
--------------------------------------------------------------------------------
Balance as    4,282     292      2,011     179   2,908   9,672        22   9,694
 at 30 June                                                                     
 2015                                                                           
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Balance as    4,282     292      2,011     298   2,656   9,539        91   9,630
 at 31                                                                          
 December                                                                       
 2015                                                                           
--------------------------------------------------------------------------------
Profit            0       0          0       0     -61     -61         0     -61
 distributi                                                                     
on                                                                              
--------------------------------------------------------------------------------
Change in         0       0          0       0       0       0       -77     -77
 non-contro                                                                     
lling                                                                           
 interest                                                                       
--------------------------------------------------------------------------------
Total             0       0          0       0     878     878        -5     873
 comprehens                                                                     
ive income                                                                      
for the                                                                         
 period                                                                         
--------------------------------------------------------------------------------
Balance as    4,282     292      2,011     298   3,473  10,356         9  10,365
 at 30 June                                                                     
 2016                                                                           
--------------------------------------------------------------------------------




         Contact information:
         Marek Pontus
         CFO
         Arco Vara AS
         Tel: +372 614 4662
         [email protected]
         www.arcorealestate.com