Börsiteade

Pealkiri

Arco Vara AS Interim report II quarter 2011

Teade

Group Chief Executive's review

Compared with the same period last year, the Group's revenue has grown
significantly across all divisions and profitability has started to improve.
After an interval of several years, the Service division posted an operating
profit while the operating loss of the Development division remained at the
same level as last year. The biggest setback was the exceptional losses of the
Construction division, which is operating in an industry ravaged by rapid
inflation that began spiralling in 2010 and counterparty bankruptcies triggered
by the economic crisis. Excluding the impact of exceptional losses, the Group
ended the second quarter with a profit. 

In the first six months of 2011, 56 apartments and plots were sold in the
projects of Arco Vara: 38 in Estonia, 9 in Latvia and 9 in Bulgaria. Major
ongoing development projects include the Tivoli apartment building in Tallinn,
which is in the design phase, and the Manastirski apartment building in Sofia,
which is in the construction phase. The Group continues to sell apartments in
the Kodukolde community being developed in Tallinn and is completing the sale
of plots at Merivälja. In the second quarter, the Development division
successfully completed and delivered to the investor the Alasniidu nursery
school and commenced the Lille tee nursery school design and build project.
Since the reporting date, the Group's Latvian associate has won an auction for
the purchase of 86 hectares of residential land in the Mazais Baltezers project
that previously could only be used under a lease. The success at the land
auction is an important step in securing the Group's position in the Latvian
market. The Group continued developing the Bišumuiža 1 apartment project and
selling plots in Riga as well as delivering apartments under real right
contracts and letting the last vacant rental premises in the Madrid project in
Sofia, Bulgaria. 

For the Service division, the first half of 2011 was better than the same
period in several previous years. Revenue grew and the division ended the
half-year with an operating profit of 44 thousand euros compared with an
operating loss of 161 thousand euros for the first half of 2010. The number of
brokerage transactions increased by 23% and the number of valuation reports
issued grew by 39% year over year. At the same time, the number of brokers
decreased and the number of appraisers grew by only 11%. 

In the first six months of 2011, the Group secured new construction contracts
of 4.3 million euros. Our order backlog as at 30 June 2011 was 13.5 million
euros against 6.0 million euros at the end of the second quarter of 2010. After
the reporting date, the Construction division has completed the Estonian
Aviation Academy building in Tartu, the largest project for which Arco Ehitus
was the sole general contractor in 2011. The operating loss of the division is
attributable to the bankruptcies of two major business partners. Owing to the
bankruptcy of construction company K&H the Construction division did not
receive payment for work done in Tartu (the receivables are secured with
mortgages), and because of the bankruptcy of construction company Kristiine
Ehitus in Tallinn the division as the remaining consortium partner had to
complete under unfavourable terms construction work started but not completed
on account of the bankruptcy. 

Within the past 12 months, the Group's loans and borrowings have decreased by
8.8 million euros and equity to assets ratio has risen from 37% to 39%. The
weighted average interest rate of loans and borrowings has increased because of
a rise in EURIBOR. The Group has responded by lengthening the weighted average
duration of loans and borrowings through current refinancing. 

KEY PERFORMANCE INDICATORS

  -- The Group ended the first six months of 2011 with revenue of 23.5 million
     euros. The figure includes 8.3 million euros earned on the sale of the
     Tivoli properties to the Group's joint venture Tivoli Arendus OÜ. Excluding
     the latter transaction, the Group's revenue was 15.2 million euros, a 43%
     improvement on the first half of 2010.
  -- Operating loss for the first half-year was 1.4 million euros, a 40%
     increase year over year.
  -- Net loss for the first half-year was 1.9 million euros, 69% up on the first
     half of 2010.
  -- Equity to assets ratio at period-end was 39.1% (30 June 2010: 37.1%).
     Return on equity (12 months rolling) was negative (Q2 2010: negative).
     Return on invested capital (12 months rolling) was 1.3% (Q2 2010:
     negative).
  -- At the end of the second quarter, the Group's order backlog stood at 13.5
     million euros compared with 6.0 million euros at the end of the second
     quarter of 2010.
  -- During the first six months of 2011, the Group sold 56 apartments and plots
     (HY1 2010: 53 apartments and plots).







                                                     HY1     HY1      Q2      Q2
                                                    2011    2010    2011    2010
--------------------------------------------------------------------------------
In millions of euros                                                            
-------------------------------------------------                               
Revenue and other income                            23.5     8.9    10.3     4.5
--------------------------------------------------------------------------------
Operating loss                                      -1.4    -1.0    -0.5    -0.4
--------------------------------------------------------------------------------
Of which net loss on changes in the values of        0.0    -0.4     0.0    -0.1
 investment properties and inventories                                          
--------------------------------------------------------------------------------
Loss before tax                                     -1.9    -1.1    -0.6    -0.4
--------------------------------------------------------------------------------
Of which net gain/ loss on the disposal of           0.3    -0.2     0.3     0.1
 financial assets                                                               
--------------------------------------------------------------------------------
Net loss                                            -1.9    -1.1    -0.6    -0.4
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
EPS (in euros)                                     -0.41   -0.24   -0.13   -0.08
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Total assets at period-end                          64.9    74.5                
--------------------------------------------------------------------------------
Invested capital at period-end                      51.1    62.3                
--------------------------------------------------------------------------------
Net loans at period-end                             23.5    32.3                
--------------------------------------------------------------------------------
Equity at period-end                                25.4    27.6                
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Average loan term (in years)                         2.0     1.5                
--------------------------------------------------------------------------------
Average interest rate of loans (per year)           7.4%    6.1%                
--------------------------------------------------------------------------------
ROIC (rolling, 4 quarters)                          1.3%     neg                
--------------------------------------------------------------------------------
ROE (rolling, 4 quarters)                            neg     neg                
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Number of staff at period-end                        142     153                
--------------------------------------------------------------------------------




REVENUE AND PROFIT



                                   HY1 2011  HY1 2010  Q2 2011  Q2 2010
-----------------------------------------------------------------------
In millions of euros                                                   
------------------------------------------------------                 
Revenue                                                                
-----------------------------------------------------------------------
Service                                 1.1       0.9      0.6      0.4
-----------------------------------------------------------------------
Development                            14.0       4.6      4.1      2.3
-----------------------------------------------------------------------
Construction                            8.5       3.4      5.6      1.8
-----------------------------------------------------------------------
Eliminations                           -0.1      -0.2     -0.1      0.0
-----------------------------------------------------------------------
Total revenue                          23.5       8.7     10.2      4.5
-----------------------------------------------------------------------
                                                                       
-----------------------------------------------------------------------
Operating profit/loss                                                  
-----------------------------------------------------------------------
Service                                 0.1      -0.2      0.1     -0.1
-----------------------------------------------------------------------
Development                            -0.2      -0.2      0.4      0.0
-----------------------------------------------------------------------
Construction                           -0.8       0.0     -0.7      0.1
-----------------------------------------------------------------------
Eliminations                            0.2       0.4      0.1      0.1
-----------------------------------------------------------------------
Unallocated expenses                   -0.7      -1.0     -0.4     -0.5
-----------------------------------------------------------------------
Total operating loss                   -1.4      -1.0     -0.5     -0.4
-----------------------------------------------------------------------
                                                                       
-----------------------------------------------------------------------
Interest income and expense            -0.7      -0.3     -0.4     -0.1
-----------------------------------------------------------------------
Other finance income and expenses       0.2       0.2      0.3      0.1
-----------------------------------------------------------------------
Income tax expense                      0.0       0.0      0.0      0.0
-----------------------------------------------------------------------
Net loss                               -1.9      -1.1     -0.6     -0.4
-----------------------------------------------------------------------


 Finance income and expenses was influenced the most by growth in interest
expense, which resulted from the completion of the Madrid project and
discontinuance of capitalisation of associated borrowing costs. In the first
half of 2011, the Group did not earn any exceptional finance income or incur
any exceptional finance expenses but the result for the first quarter of 2010
was influenced by foreign exchange gain of 0.15 million euros earned on a
receivable from AS Ühendatud Kapital that was denominated in US dollars and a
loss of 0.23 million euros incurred on the disposal of Arco Vara Saare
Kinnistute OÜ. 


 CASH FLOWS



                                                  HY1 2011  HY1 2010
--------------------------------------------------------------------
In millions of euros                                                
--------------------------------------------------------------------
Cash flows from operating activities                  -1.1       0.1
--------------------------------------------------------------------
Cash flows from investing activities                   0.1       0.8
--------------------------------------------------------------------
Cash flows from financing activities                  -1.0      -2.6
--------------------------------------------------------------------
Net cash flow                                         -2.0      -1.7
--------------------------------------------------------------------
                                                                    
--------------------------------------------------------------------
Cash and cash equivalents at beginning of period       4.2       4.1
--------------------------------------------------------------------
Effect of movements in exchange rates                  0.0      -0.2
--------------------------------------------------------------------
Cash and cash equivalents at end of period             2.2       2.3
--------------------------------------------------------------------



In March 2011, Arco Investeeringute AS repaid ahead of schedule the remaining
5.27 million euros of the loan taken from SEB Pank for acquiring the land under
the Tivoli project and 0.12 million euros of the loan taken for acquiring the
land under the Laeva project. Repayment of the Tivoli loan and partial
repayment of the Laeva 2 loan are not reflected in the Group's cash flows
because the buyer of Tivoli Arendus OÜ paid the cash directly to SEB. There
have been no other exceptional loan settlements in 2011. 

Interest payments accounted for 0.6 million euros of the net cash outflow from
financing activities. Scheduled and inventory sales-related settlements of loan
principal totalled 1.2 million euros. The largest proportion of credit limits
utilised during the period was related to the construction of the last but one
phase in the Kodukolde project and the Alasniidu and Lille tee nursery schools
that accounted for 2.5 million euros of the total. Use of the Kodukolde credit
limit is not reflected in the cash flows because invoices received from Merko
Ehitus are booked as a loan and there are no cash movements. 

The largest current liabilities to be settled in the next 12 months comprise:

  -- estimated principal repayments to be made on the sale of reserved premises
     and payments under the settlement schedule of the loan taken for the
     Boulevard Residence Madrid project in Sofia of 4.7 million euros;
  -- repayments of the loan taken for the Manastirski project of 2.2 million
     euros;
  -- repayments of an investment loan taken for a cash flow project at Kadaka
     tee 131 of 1.4 million euros;
  -- repayments of the loan taken for the Bišumuiža project of 1.3 million
     euros;
  -- repayments of the loan taken for the Laeva 2 development project of 1.1
     million euros.

In the first six months of 2011, the Group made regular repayments under the
loans taken for the Kodukolde project in Tallinn, the Bišumuiža 1 project in
Riga and the Madrid project in Sofia and scheduled settlements under the loans
taken for its cash flow generating projects. The Group is also following the
principal repayment schedules set for the loans taken for the Laeva 2 project
and Koduküla OÜ. 

SERVICE DIVISION

In 2011, the performance of the Service division has been in every respect
better than in 2010. The division ended the first half-year with an operating
profit of 44 thousand euros compared with an operating loss of 161 thousand
euros for the first half of 2010. The number of the Group's brokerage
transactions increased by 23% and the number of valuation reports issued grew
by 39% year over year. At the same time, the number of brokers decreased and
the number of appraisers grew by only 11%. 



                                                                                
                                                   HY1 2011  HY1 2010  Change, %
--------------------------------------------------------------------------------
Number of brokerage transactions                        626       507        23%
--------------------------------------------------------------------------------
Number of projects on sale                              173       177        -2%
--------------------------------------------------------------------------------
Number of valuation reports                           2,778     1,993        39%
--------------------------------------------------------------------------------
Number of appraisers*                                    39        35        11%
--------------------------------------------------------------------------------
Number of brokers*                                       71        74        -4%
--------------------------------------------------------------------------------
Number of staff at end of period                         46        59       -22%
--------------------------------------------------------------------------------
* Includes people working under service                                         
 contracts.                                                                     



DEVELOPMENT DIVISION


In the first six months of 2011, 56 apartments and plots were sold in the
projects of Arco Vara. The Development division sold seven apartments in the
Bišumuiža project and two plots in the Baltezers project in Latvia, 36
apartments in the Kodukolde project and two plots in the Merivälja project in
Estonia, and nine apartments in the Madrid project in Sofia, Bulgaria. 

The Group succeeded in finding a partner, International Invest Project OÜ, for
the Tivoli project and raised financing for the construction of phase I. Design
work is under way and construction should to start in 2011. 

The last but one phase of the Kodukolde development project (50 apartments) was
completed in June. Revenue for the first half-year includes the sale of 29
apartments of this phase. Construction of the last phase (48 apartments)
commenced in the second quarter. Construction work is performed and financed by
AS Merko Ehitus. The buildings are expected to be completed in the first half
of 2012. 

The building of the Alasniidu nursery school was granted a use permit at the
end of May and was delivered to Harku local government with whom a rental
agreement had been signed. The company that owns the nursery school was sold in
the second quarter of 2011 and with this the project was successfully
completed. 

At the end of the first quarter, a wholly-held subsidiary of Arco
Investeeringute AS bought the right of superficies to a property in Lille tee
in Viimsi with a view to building a nursery school for six groups of children.
The Group has already signed a long-term rental agreement with the local
government. According to plan, the nursery school should be completed in the
first quarter of 2012. Construction work is performed by YIT. 

In Bulgaria, the construction of phase I of the Manastirski project is under
way: 42% of the apartments have already been reserved. In the commercial and
residential building Boulevard Residence Madrid in Sofia the division continues
delivering reserved apartments under real right contracts and selling the
remaining free apartments. 

For further information on our projects, please refer to:
www.arcorealestate.com/development. 




CONSTRUCTION DIVISION


The Construction division is typically actively involved in environmental,
infrastructure and civil engineering (mostly educational
establishments-related) projects. 

As at the end of the second quarter of 2011, the largest active construction
contracts comprised the construction of the Tallinn-Muuga water and wastewater
networks and facilities with the remaining balance of 5.1 million euros, the
design and build of the water and wastewater networks of the Jõgeva and
Puurmani rural municipalities with the remaining balance of 2.3 million euros 
and the water management project for the wastewater collection area of Tamsalu
with the remaining balance of 1.4 million euros. 

In the first half of 2011, the division secured new construction contracts of
4.3 million euros. As at the reporting date, the order backlog stood at 13.5
million euros compared with 6.0 million euros at the end of the second quarter
of 2010. 

At the end of June 2011, the Construction division employed 55 people (30 June
2010: 47). 


Consolidated statement of comprehensive income



For the period ended 30 June               Note      HY1     HY1      Q2      Q2
                                                    2011    2010    2011    2010
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Revenue from rendering of services                10,340   4,200   6,603   2,365
--------------------------------------------------------------------------------
Revenue from sale of goods                        13,167   4,507   3,645   2,113
--------------------------------------------------------------------------------
Total revenue                               2     23,507   8,707  10,248   4,478
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cost of sales                               3    -22,434  -7,637  -9,742  -3,892
--------------------------------------------------------------------------------
Gross profit                                       1,073   1,070     506     586
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Other income                                          12     183       7      66
--------------------------------------------------------------------------------
Distribution expenses                       4       -214    -159    -112     -97
--------------------------------------------------------------------------------
Administrative expenses                     5     -2,240  -1,942    -879    -842
--------------------------------------------------------------------------------
Other expenses                                       -59    -172     -16    -104
--------------------------------------------------------------------------------
Operating loss                                    -1,428  -1,020    -494    -391
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Finance income                              6        417     580     383     354
--------------------------------------------------------------------------------
Finance expenses                            6       -908    -668    -487    -320
--------------------------------------------------------------------------------
Loss before tax                                   -1,919  -1,108    -598    -357
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Income tax expense                                     0     -28       0     -27
--------------------------------------------------------------------------------
Loss for the period                               -1,919  -1,136    -598    -384
--------------------------------------------------------------------------------
Loss attributable to owners of the parent         -1,932  -1,136    -598    -384
--------------------------------------------------------------------------------
Profit attributable to non-controlling                13       0       0       0
 interests                                                                      
--------------------------------------------------------------------------------
Other comprehensive income                                                      
--------------------------------------------------------------------------------
Exchange differences on translating foreign            0      12       0       1
 operations                                                                     
--------------------------------------------------------------------------------
Total comprehensive expense for the               -1,919  -1,124    -598    -383
 period                                                                         
--------------------------------------------------------------------------------
Total comprehensive expense                       -1,919  -1,124    -598    -383
attributable to owners of the parent                                            
--------------------------------------------------------------------------------
Total comprehensive income/expense                     0       0       0       0
 attributable  to non-controlling                                               
 interests                                                                      
--------------------------------------------------------------------------------
Earnings per share (in euros)               7                                   
--------------------------------------------------------------------------------
                                  - Basic          -0.41   -0.24   -0.13   -0.08
--------------------------------------------------------------------------------
                                - Diluted          -0.41   -0.24   -0.13   -0.08
--------------------------------------------------------------------------------



 Consolidated statement of financial position



                                         Note   As at 30 June  As at 31 December
                                                         2011               2010
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Cash and cash equivalents                               2,234              4,209
--------------------------------------------------------------------------------
Trade and other receivables               8             9,494              5,760
--------------------------------------------------------------------------------
Prepayments                                               392                192
--------------------------------------------------------------------------------
Inventories                               9            26,001             35,740
--------------------------------------------------------------------------------
Total current assets                                   38,121             45,901
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Investments                                               997                996
--------------------------------------------------------------------------------
Trade and other receivables               8             2,950                 76
--------------------------------------------------------------------------------
Investment property                       10           22,163             22,887
--------------------------------------------------------------------------------
Property, plant and equipment                             665                703
--------------------------------------------------------------------------------
Intangible assets                                          20                 20
--------------------------------------------------------------------------------
Total non-current assets                               26,795             24,682
--------------------------------------------------------------------------------
TOTAL ASSETS                                           64,916             70,583
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Loans and borrowings                      11           13,726             27,126
--------------------------------------------------------------------------------
Trade and other payables                  12            8,240              4,813
--------------------------------------------------------------------------------
Deferred income                                         4,379              4,859
--------------------------------------------------------------------------------
Provisions                                              1,158              1,378
--------------------------------------------------------------------------------
Total current liabilities                              27,503             38,176
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Loans and borrowings                      11           11,323              3,855
--------------------------------------------------------------------------------
Other payables                            12              710                724
--------------------------------------------------------------------------------
Total non-current liabilities                          12,033              4,579
--------------------------------------------------------------------------------
TOTAL LIABILITIES                                      39,536             42,755
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Share capital                                           3,030              3,030
--------------------------------------------------------------------------------
Statutory capital reserve                               2,011              2,011
--------------------------------------------------------------------------------
Retained earnings                                      20,339             22,787
--------------------------------------------------------------------------------
Total equity                                           25,380             27,828
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Equity attributable to non-controlling                    175                -70
 interests                                                                      
--------------------------------------------------------------------------------
Equity attributable to equity holders                  25,205             27,898
 of the parent                                                                  
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY                           64,916             70,583
--------------------------------------------------------------------------------



Consolidated statement of cash flows


For the period ended 30 June                                Note     HY1     HY1
                                                                    2011    2010
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Loss for the period                                               -1,919  -1,135
--------------------------------------------------------------------------------
Interest income and interest expense, net                    6       720     268
--------------------------------------------------------------------------------
Gain/loss on sale of subsidiaries and interests in joint     6      -284      88
 ventures                                                                       
--------------------------------------------------------------------------------
Gain/loss on other long-term investments                     6        52       0
--------------------------------------------------------------------------------
Impairment losses on financial assets                        6         0       9
--------------------------------------------------------------------------------
Depreciation, amortisation and impairment losses on         3, 5      49      58
 property, plant and equipment and intangible assets                            
--------------------------------------------------------------------------------
Change in the fair value of investment property              10        0       1
--------------------------------------------------------------------------------
Gain/loss on the sale of investment property                 10        0      21
--------------------------------------------------------------------------------
Gain/loss on inventory write-downs and reversals of          3         0     355
 inventory write-downs                                                          
--------------------------------------------------------------------------------
Foreign exchange gains and losses                            6         3    -370
--------------------------------------------------------------------------------
Income tax expense                                                     0      -1
--------------------------------------------------------------------------------
Operating cash flow before working capital changes                -1,379    -706
--------------------------------------------------------------------------------
Change in receivables and prepayments                              3,216     813
--------------------------------------------------------------------------------
Change in inventories                                              1,955     181
--------------------------------------------------------------------------------
Change in payables and deferred income                            -4,913    -178
--------------------------------------------------------------------------------
NET CASH USED IN/FROM OPERATING ACTIVITIES                        -1,121     110
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Acquisition of property, plant and equipment and                      -9     -22
 intangible assets                                                              
--------------------------------------------------------------------------------
Paid on development of investment properties                        -729     -11
--------------------------------------------------------------------------------
Proceeds from sale of investment properties                          177   1,520
--------------------------------------------------------------------------------
Acquisition of subsidiaries and interests in joint                     1       0
 ventures                                                                       
--------------------------------------------------------------------------------
Proceeds from disposal of subsidiaries and interests in              891       7
 joint ventures                                                                 
--------------------------------------------------------------------------------
Loans granted                                                       -362    -668
--------------------------------------------------------------------------------
Repayment of loans granted                                            50       0
--------------------------------------------------------------------------------
Interest received                                                    113      11
--------------------------------------------------------------------------------
NET CASH FROM INVESTING ACTIVITIES                                   132     837
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Proceeds from loans received                                       1,301   3,874
--------------------------------------------------------------------------------
Settlement of loans and finance lease liabilities                 -1,680  -5,412
--------------------------------------------------------------------------------
Interest paid                                                       -607  -1,067
--------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES                               -986  -2,605
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
NET CASH FLOW                                                     -1,975  -1,658
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period                   4,209   4,137
--------------------------------------------------------------------------------
Decrease in cash and cash equivalents                             -1,975  -1,658
--------------------------------------------------------------------------------
Effect of exchange rate fluctuations on cash held                      0    -176
--------------------------------------------------------------------------------
Cash and cash equivalents at end of period                         2,234   2,303
--------------------------------------------------------------------------------










         Lembit Tampere
         
         Arco Vara AS
         Jõe 2b, 10151 Tallinn, Estonia
         tel: +372 614 4630
         gsm: +372 510 9959
         fax: +372 614 4646