Börsiteade

Pealkiri

Arco Vara AS unaudited consolidated interim report for the third quarter and 9 months 2016

Teade

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 considers 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, and behaviour of potential
clients. Analytical data allows to make better decisions on real estate
development: purchase of land plots, planning and designing, pricing end
products, 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 also develops commercial properties until they start to
generate cash flow for two possible purposes: for the support of the group’s
cash flows or for resale. The group is currently holding completed commercial
properties that generate rental income. 

As of 30 September 2016, the group consisted of 23 companies, which is two less
than at the end of year 2015. On 19 February 2016, the group’s subsidiary
Fineprojekti OÜ was erased from 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% to 100% and the share capital of the fund was
additionally increased by 77 thousand euros. In April 2016, the group sold its
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 Sept              
                                                              2016              
--------------------------------------------------------------------------------
In thousands of                                                                 
 euros                                                                          
--------------------------------------------------------------------------------
Arco Manastirski   Bulgar  Develop               2,676       4,091          100%
 EOOD              ia         ment                                              
--------------------------------------------------------------------------------
Arco Invest EOOD   Bulgar  Develop              26,826        -501          100%
                   ia         ment                                              
--------------------------------------------------------------------------------
Iztok Parkside     Bulgar  Develop               1,433       1,234          100%
 EOOD              ia         ment                                              
--------------------------------------------------------------------------------
Arco Real Estate   Bulgar  Develop                 332         298          100%
 Fund REIT ¹       ia         ment                                              
--------------------------------------------------------------------------------
Kodulahe OÜ        Estoni  Develop                   3        -265          100%
                   a          ment                                              
--------------------------------------------------------------------------------
Kerberon OÜ        Estoni  Develop                   5       1,259          100%
                   a          ment                                              
--------------------------------------------------------------------------------
Marsili II SIA     Latvia  Develop               1,524         954          100%
                              ment                                              
--------------------------------------------------------------------------------
Arco Real Estate   Estoni  Service                  42      -1,058          100%
 AS                a                                                            
--------------------------------------------------------------------------------
Arco Real Estate   Latvia  Service               1,905          31         70.6%
 SIA ¹                                                                          
--------------------------------------------------------------------------------
Arco Imoti EOOD    Bulgar  Service                 444         174          100%
                   ia                                                           
--------------------------------------------------------------------------------

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



Key Performance Indicators

   ·                     In Q3 2016, the group’s revenue was 1.3 million euros,
which is 39% less compared to the revenue of 2.1 million euros in Q3 2015.
Revenue of Development division amounted to 0.6 million euros in Q3, decreasing
by 57% compared to Q3 2015. The revenue of Service division amounted to 0.8
million euros in Q3 2016, decreasing by 5.4% compared to Q3 2015. The group’s
revenue of 8.4 million euros for the 9 months 2016 decreased by 1.4% compared
to the same period of year 2015. The revenue of Development division decreased
by 2.2% to 6.4 million euros for 9 months 2016 and the revenue of Service
division amounted to 2.4 million euros in 9 months 2016, decreasing by 1.5%
compared to 9 months 2015. 

·                     In Q3 2016, the group’s operating loss (=EBIT) was 0.2
million euros and net loss 0.4 million euros. In Q3 2015, 0.3 million euros of
operating profit and 0.2 million euros of net profit were earned. In 9 months
2016, the group’s operating profit (=EBIT) was 1.0 million euros and net profit
was 0.5 million euros (in 9 months 2015: 1.4 million euros and 0.9 million
euros, respectively). The group’s operating profit comes from Development
division, amounting to 1.5 million euros for 9 months 2016 (in 9 months 2015:
1.6 million euros). The operating profit of Service division was practically at
zero level in the first 9 months of both 2016 and 2015. 

·                     As of 30 September 2016, the group’s debt burden has
remained practically on the same level compared to the year-end 2015. Net loans
have increased by 0.3 million euros in first 9 months 2016 up to the level of
12.3 million euros as of 30 September 2016. Total loans and borrowings amounted
to 12.7 million euros on 30 September 2016, decreasing by 0.1 million euros
during last 9 months. As of 30 September 2016, the weighted average annual
interest rate of loans was 6.1%. This is an increase of 1.1 percentage points
compared to 31 December 2015. 

·                     In Q3 2016, 2 apartments and 2 land plots were sold in
projects developed in the group (in Q3 2015, 12 apartments, one commercial
space and one land plot were sold). In 9 months 2016, 75 apartments, 5
commercial spaces and 6 land plots have been sold (in 9 months 2015: 73
apartments, 6 commercial spaces and one land plot). 

                                   9 months 2016      9 months  Q3 2016  Q3 2015
                                                          2015                  
--------------------------------------------------------------------------------
In millions of euros                                                            
--------------------------------------------------------------------------------
Revenue                                                                         
--------------------------------------------------------------------------------
Development                                  6.4           6.5      0.6      1.4
--------------------------------------------------------------------------------
Service                                      2.4           2.4      0.8      0.9
--------------------------------------------------------------------------------
Eliminations                                -0.4          -0.4     -0.1     -0.1
--------------------------------------------------------------------------------
Total revenue                                8.4           8.5      1.3      2.2
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Operating profit (EBIT)                                                         
--------------------------------------------------------------------------------
Development                                  1.5           1.6      0.0      0.4
--------------------------------------------------------------------------------
Service                                     -0.1           0.1      0.0      0.0
--------------------------------------------------------------------------------
Unallocated income and expenses             -0.5          -0.4     -0.2      0.0
--------------------------------------------------------------------------------
Eliminations                                 0.1           0.1      0.0      0.0
--------------------------------------------------------------------------------
Total operating profit/loss                  1.0           1.4     -0.2      0.4
 (EBIT)                                                                         
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Finance income and expense                  -0.5          -0.5     -0.2     -0.2
--------------------------------------------------------------------------------
Net profit/loss                              0.5           0.9     -0.4      0.2
--------------------------------------------------------------------------------
                                                                                
Key ratios                                                                      
--------------------------------------------------------------------------------
EPS (in euros)                              0.08          0.15    -0.06     0.03
--------------------------------------------------------------------------------
Diluted EPS (in euros)                      0.07          0.14    -0.05     0.03
--------------------------------------------------------------------------------
ROIC (rolling, four quarters)               0.3%          5.6%                  
--------------------------------------------------------------------------------
ROE (rolling, four quarters)                0.6%         13.9%                  
----------------------------------               -------------------------------
ROA (rolling, four quarters)                0.3%          5.1%                  
--------------------------------------------------------------------------------




                                       30 Sept 2016  31 Dec 2015
----------------------------------------------------------------
In millions of euros                                            
----------------------------------------------------------------
Total assets, at period end                    26.6         24.5
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Invested capital, at period end                22.7         22.4
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Net loans, at period end                       12.3         12.0
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Equity, at period end                          10.0          9.6
----------------------------------------------------------------
                                                                
----------------------------------------------------------------
Current ratio                                  3.22         3.22
----------------------------------------------------------------
Quick ratio                                    0.20         0.32
----------------------------------------------------------------
Financial leverage                             2.67         2.54
----------------------------------------------------------------
Average loan term (in years)                    1.2          1.7
----------------------------------------------------------------
Average annual interest rate of loans          6.1%         5.0%
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Number of staff, at period end                  185          178
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Cash flows

                                           9 months     9 months      Q3      Q3
                                               2016         2015    2016    2015
--------------------------------------------------------------------------------
In millions of euros                                                            
--------------------------------------------------------------------------------
Cash flows from/used in operating               2.6          3.1    -1.0    -0.1
 activities                                                                     
--------------------------------------------------------------------------------
Cash flows from/used in investing              -2.0         -0.1    -1.1     0.0
 activities                                                                     
--------------------------------------------------------------------------------
Cash flows from/used in financing              -0.9         -3.5     1.6     0.3
 activities                                                                     
--------------------------------------------------------------------------------
Net cash flows                                 -0.3         -0.5    -0.5    -0.2
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cash and cash equivalents at beginning          0.7          1.7     0.9     1.0
 of period                                                                      
--------------------------------------------------------------------------------
Cash and cash equivalents at end of             0.4          1.2     0.4     1.2
 period                                                                         
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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      Q3     Total 
         2013    2013    2013    2013    2013    2014    2014    2014    2014  
 2014    2015    2015    2015    2015    2015    2016    2016    2016     9M 
                                                                               
                                                                         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     1.2     8.4 
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    -0.4     0.5 
 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 the end of period) 
Net loans = current interest-bearing liabilities + non-current liabilities –
cash and cash equivalents – short-term investments in securities (at the 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 Group has been pushing simultaneously one acceleration of
restructured rental property, two constructions of residential developments,
and three internal gear-shiftings in our brokerage and valuation units in our
home markets.  The push is quite different from a walk in the park, one should
rather compare it to an expedition through the desert.  All the ongoing push
efforts consume money, before they start making money. As I have warned in
previous quarterly reports, our following quarters will be humble. 

Nevertheless, we should be clear on two things: first,  the period of push
„through the desert“ must be over in Q3 2017 when we will start delivery of
Kodulahe first stage apartments, and the Group must return to profitability
again; and second,  despite my own nice explanation of what is happening, we
underperformed in Q3. The net loss of 0.4 million euros was more than we
ourselves expected. 

We performed quite well with activities that are not yet visible in the balance
sheet and income statement. That means, Kodulahe construction proceeded
according to the schedule and current presales met our expectations. We intend
to sell out 1st stage (more than 8,700 sqm GSA, 16 million euros expected
revenue) by the end of 2017 and must start preparations for the 2nd stage soon.
Iztok Parkside land acquisition and the detail plan process has also been
completed as at the date of this report and we will proceed with a construction
tender, with a view to start construction this year. In Q4, we also started
presale of Iztok. Finally, we have made progress with several smaller
development projects in Tallinn and Tartu, where we expect to have in our
balance sheet sellable development products (attractive land with building
rights) in the first half of 2017 or finalized consumer products (apartments or
residential plots) in 2018. Our aim is still to double the revenue and net
profit of Arco Vara (from 10 and 1 million to 20 and 2 millions, respectively)
by the end of 2018. 

Areas where we did not perform well look like a bottom of a water bucket, with
small holes in it. The revenue was smaller than expected and certain expenses
bigger than expected. Normally, we need to sell for 2 million euros of goods
and services in order to break even as a group. 

First, we failed to sign in new tenants into Madrid Blvd offices in Sofia,
where we still have 4,100 sqm vacancy, and missed significant rental income as
a result. As a reaction, we have adjusted the ask prices, as we prefer a busy
house with lower rents to a not so busy house with high rents. We are also
watching the construction progress of the nearby ‘Theater’ metro station, due
in 2018, and expect it to improve the Madrid Blvd connectivity to the rest of
the metropolis. 

Second, our brokerage and valuation units in Estonia, Latvia and Bulgaria have
not been making profit so far, without having work from Arco’s own development
projects. The solution here is to change the way of thinking and redesign
certain work processes, as the group is interested in autonomously
profit-making units. Management buy-out of Latvian Arco Real Estate SIA,
announced on 1 November, is part of that solution, as we could not agree on
change. In Bulgaria and Estonia, we will continue with internal changes in work
process and thinking. 

Third, we sold less than expected from our own remaining stock of development
products. The remaining stock in Madrid Blvd and Manastirski (both in Sofia),
and Marsili (Riga) was worth approximately 1 million euros at the end of Q3. We
should have sold for more than 600 thousand euros. On the other hand, the thin
stock will be sold out in any case in the coming quarters, and there will be no
additions to the stock before Q3 2017. 

And finally, in Q3, we took some one-off marketing and administrative expenses
which the management considered unavoidable, looking at the tightening
competition both in Tallinn and in Sofia and then making forcefully space for
Arco’s 2017-2018 products. 

So all in all, we will continue on the selected course, and financial
performance of the following three quarters will not look attractive until Q3
2017 and thereafter – the results of which are being written now and these look
good. Until second half of 2017, the cash flows will be tense and some sales
from the landbank, or debt issues, are possible. Then again, there is a lot we
can pursue even before Q3 2017 and two of those things are getting in new
tenants into Madrid Blvd and increasing our brokerage and valuation revenue in
Estonia and Bulgaria. 




SERVICE DIVISION

In Q3 2016, revenue of the group’s service division was 806 thousand euros (in
Q3 2015: 852 thousand euros), which included intra-group revenue of 76 thousand
euros (in Q3 2015: 107 thousand euros). Service division revenue decreased by
1.5% in 2016 if 9 months periods were compared: 2,404 thousand euros in 9
months 2016 and 2,440 thousand euros in 9 months 2015. In 9 months 2016,
revenue of service division from main services (real estate brokerage and
valuation services) remained at the same level of the 9 months period of 2015
and dropped by 4% if third quarters are compared. 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                    
                     9 months     9 months   Change,  Q3 2016  Q3 2015   Change,
                         2016         2015         %                           %
--------------------------------------------------------------------------------
In thousands of                                                                 
 euros                                                                          
Estonia                 1,036          963        8%      381      355        7%
--------------------------------------------------------------------------------
Latvia                    694          679        2%      226      243       -7%
--------------------------------------------------------------------------------
Bulgaria                  444          538      -17%      115      158      -27%
--------------------------------------------------------------------------------
Total                   2,174        2,180        0%      722      756       -4%
--------------------------------------------------------------------------------

In 9 months 2016, Estonian and Latvian agencies have operated at a loss: 152
thousand euros and 18 thousand euros respectively (in 9 months 2015, losses of
68 thousand euros and 51 thousand euros respectively). Bulgarian agency had net
loss of 17 thousand euros in 9 months 2016, but earned net profit of 137
thousand euros in 9 months 2015. 

In addition to brokerage and valuation services, the service division also
provides real estate management services and accommodation service in Bulgaria.
The revenue from real estate management was 87 thousand euros in 9 months 2016,
75 thousand euros of which was intra-group revenue (in 9 months 2015: 104
thousand and 77 thousand euros, respectively). Revenue from accommodation
services amounted to 104 thousand euros in 9 months 2016 (in 9 months 2015: 105
thousand euros). 

The number of staff in service division increased to 172 employees in first
nine months of 2016, up by 7 people  compared to year end 2015. The number of
staff increased mainly in Bulgaria. 



DEVELOPMENT DIVISION

In Q3 2016, revenue of development division totalled 586 thousand euros (in Q3
2015: 1,374 thousand euros) including revenue of 367 thousand euros (Q3 2015:
770 thousand euros) from the sale of properties in the group’s own development
projects. In 9 months 2016, development division’s revenue amounted to 6,401
thousand euros, which is 143 thousand euros or 2.2% less compared to 9 months
2015. In 9 months 2016, the revenue from the sale of properties in the group’s
own development projects reached 6,043 thousand euros (in 9 months 2015: 5,713
thousand euros). 

Most of the other revenue of development division consists of rental income
from commercial and office premises in Madrid Blvd building in Sofia, amounting
to 89 thousand euros in Q3 2016 and 252 thousand euros in 9 months 2016 (in
2015: 234 thousand euros in Q3 and 708 thousand euros in 9 months). Rental
income has decreased compared to previous year due to ending the rental
agreement with anchor tenant in Q3 2015 and the renovation works of rental area
in Q4 2015. The rental area that was previously rented out to one anchor tenant
is now divided into 7 separate areas. Finding new tenants at the same level of
rental fee has proved to be difficult. At the end of Q3 2016, a decision was
taken to decrease rental income expectations and with the aim of renting out
all rental areas by no later than the spring of 2017. 

In 9 months 2016, operating profit of development division was 1,524 thousand
euros, out of which 33 thousand euros were earned in Q3 (In 9 months 2015:
1,598 thousand euros, out of which 377 thousand euros in Q3). 

During Q3 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. In August, the requirements of self-financing
set by the financing bank were fulfilled and credit limit in the total amount
of 8.8 million euros was opened. By the publishing date of the interim report,
presale agreements for 59 apartments and one commercial space have been
concluded. The construction of the apartment building should be finished by
summer 2017. 

As of 30 September 2016, 20 apartments remained unsold in Madrid Blvd complex
in Sofia. In Q3 2016, 2 apartments were sold. 15 apartments, out of all Madrid
Blvd unsold apartments, are being rented out as accommodation service. Unsold
105 parking places are also rented out. 

Four commercial spaces and a few parking places remained unsold in Manastirski
Livadi project. 

In May 2016, the group finalized the purchase of a company Iztok Parkside EOOD.
As a result, the group’s development portfolio has gained new development
project in Iztok district in Sofia. In September 2016, bank loan agreement was
concluded to fully finance further development costs of the project in maximum
amount of 4.9 million euros. By the date of publishing the interim report,
detail plan for the project’s property has been established, presale of
apartments has started and construction tender has been announced. Three
apartment buildings with 68 apartments (7,070 square meters of apartments’
sellable area) will be built. The construction should start in Q4 2016 and
apartment buildings should be completed by the end of 2017. 

In third quarter, two Marsili residential plots were sold. 10 plots remained
unsold in the project as of 30 September 2016. 

As of 30 September 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 OF 30 SEPTEMBER 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               20
 Blvd      Sofia         Retail                                                 
                        /Office                                                 
--------------------------------------------------------------------------------
Madrid    Madrid Blvd,  Apartme  S5/S6        -           2,060               20
 Blvd      Sofia        nts                                                     
--------------------------------------------------------------------------------
Iztok     Iztok, Sofia  Apartme  S3       2,470           7,070               68
 Parksid                nts                                                     
e                                                                               
--------------------------------------------------------------------------------
Marsili   Marsili,      Residen  S5           -          18,047               10
 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 of 30 September 2016, 185 people worked for the group (178 as of 31 December
2015). Employee remuneration expenses in the first 9 months of 2016 amounted to
2.1 million euros (in 9 months 2015: 1.9 million euros). 

The remuneration of the member of the management board / CEO, and the members
of the supervisory board of the group’s parent company including social
security charges amounted to 82 thousand euros in 9 months 2016 (83 thousand
euros in 9 months 2015). 



MANAGEMENT BOARD AND SUPERVISORY BOARD

The management board of Arco Vara AS has one member. Since 22 October 2012, the
member of the management board and chief executive officer of Arco Vara AS has
been Tarmo Sild. The mandate of the CEO was extended by 3 years (until October
2018) by the supervisory board in September 2015. 

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

Additional information on key persons of Arco Vara is presented on company’s
corporate web page www.arcorealestate.com. 



DESCRIPTION OF THE MAIN RISKS

Strategic risk

Most of the group’s equity is invested into real estate development. The group
is focused mainly on residential real estate development where development
cycle lasts for years, starting from the acquisition of a land plot, moving on
to detail planning, design and construction, and ending with the sale of end
products to customers. The equity is invested mainly in the early 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 forecasts, the main risk for the group is investing
equity into a development product for which there is no or too little demand in
the future. 

For mitigating the risk, the group: (i) invests equity into different
development projects in different markets (in 2016, in Sofia and Tallinn), (ii)
monitors current demand and supply in its home markets and (iii) makes efforts
to narrow the time between making initial investment and selling the final
product – by signing pre-agreements with clients, acquiring land without no or
little upfront equity investment etc. 

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. In real
estate transactions, much of of counterparty financing is arranged through
banks, therefore co-operation with financing banks is used to mitigate
counterparty risk. Further, not all cash and cash equivalents are held in the
same banking group. As a result, the group considers credit risk to be
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 international capital markets. The group does not use hedging
instruments to mitigate its long-term interest rate risk. On 30 September 2016,
the group’s interest-bearing liabilities amounted to 12.7 million euros
(decreased by 0.1 million euros during 9 months 2016), out of which only 1.2
million euros is due within next 12 months. At the same time, the group’s cash
and cash equivalents totalled 0.4 million euros as of 30 September 2016 (on 31
December 2015: 0.7 million euros). In 9 months 2016, interest payments on
interest-bearing liabilities totalled 0.6 million euros (in 9 months 2015: 0.6
million euros). The group’s weighted average loan interest rate was 6.1% as of
30 September 2016. This is an increase by 1.1 percentage points compared to the
end of year 2015. The reason for the increase is new borrowings raised in 2016,
which bear above-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. liquid assets are mostly held on
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 on 30 September 2016. The price
has decreased by 7% within 9 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 of 30 September 2016, market
capitalization of shares amounted to 6,545 thousand euros, P/E ratio of the
share was 104 and P/B ratio 0.66 (at 31 December 2015: 7,035 thousand euros,
15.8 and 0.73, respectively). 

Structure of shareholders

As at 30 September 2016, Arco Vara had 1,519 shareholders (at 31 December 2015:
1,600) including 1,317 individuals as shareholders (at 31 December 2015: 1,381
individuals) who jointly owned 13.2% (at 31 December 2015: 12.7%) interest out
of all Arco Vara shares. 



Major shareholders at 30 September 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                   553,975        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%
AS LHV Pank                                   158,526        2.6%
Other shareholders                          2,003,044       32.7%
-----------------------------------------------------------------
-----------------------------------------------------------------
Total                                       6,117,012      100.0%



Holdings of members of the management   Position                   No of  Intere
 and supervisory boards (and related                              shares    st %
 persons) on 30 September 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 K  member of supervisory    202,171    3.3%
 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    9 months    9 months      Q3      Q3
                                                2016        2015    2016    2015
--------------------------------------------------------------------------------
In thousands of euros                                                           
-----------------------------------------------------            --------       
Continuing operations                                                           
--------------------------------------------------------------------------------
Revenue from sale of own real                  6,043       5,713     461   1,097
 estate                                                                         
--------------------------------------------------------------------------------
Revenue from rendering of services             2,395       2,842     826   1,001
--------------------------------------------------------------------------------
Total revenue                       2, 3       8,438       8,555   1,287   2,098
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cost of sales                        4        -5,554      -5,433    -862  -1,264
--------------------------------------------------------------------------------
Gross profit                                   2,884       3,122     425     834
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Other income                                      35          70       7      47
--------------------------------------------------------------------------------
Marketing and distribution           5          -418        -359    -138    -125
 expenses                                                                       
--------------------------------------------------------------------------------
Administrative expenses              6        -1,519      -1,373    -498    -428
--------------------------------------------------------------------------------
Other expenses                                   -29         -32     -11      -6
--------------------------------------------------------------------------------
Gain on sale of subsidiary                         1           0       0       0
                                   ---------------------------------------------
Operating profit/loss                            954       1,428    -215     322
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Finance income and costs             7          -459        -538    -163    -150
--------------------------------------------------------------------------------
Net profit/loss from continuing                  495         890    -378     172
 operations                                                                     
-----------------------------------                  ------------        -------
                                   ------------------            --------       
                                                                                
-----------------------------------                  ------------        -------
                                   ------------------            --------       
Discontinued operations                                                         
-----------------------------------                  ------------        -------
                                   ------------------                           
Profit/loss from discontinued                      0         -13       0       0
 operations                                                                     
                                                     ---------------------------
                                   ------------------                           
                                                                                
-----------------------------------                  ------------        -------
Net profit/loss for the period                   495         877    -378     172
--------------------------------------------------------------------------------
-----------------------------------------            ------------        -------
attributable to owners of the                    500         892    -378     173
 parent                                                                         
                                         ------------            --------       
attributable to non-controlling                   -5         -15       0      -1
 interests                                                                      
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Total comprehensive income/expense               495         877    -378     172
 for the period                                                                 
--------------------------------------------------------------------------------
-----------------------------------------            ------------        -------
attributable to owners of the                    500         892    -378     173
 parent                                                                         
                                         ------------            --------       
attributable to non-controlling                   -5         -15       0      -1
 interests                                                                      
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
                                                     ------------        -------
Earnings per share (in euros)        8                                          
-----------------------------------------------------            --------       
- basic                                         0.08        0.15   -0.06    0.03
--------------------------------------------------------------------------------
- diluted                                       0.07        0.14   -0.05    0.03
--------------------------------------------------------------------------------



Consolidated statement of financial position

                                           Note     30 September     31 December
                                                            2016            2015
--------------------------------------------------------------------------------
In thousands of euros                                                           
                                                -----------------               
Cash and cash equivalents                                    414             745
--------------------------------------------------------------------------------
Receivables and prepayments                 9                616             679
--------------------------------------------------------------------------------
Inventories                                 10            15,525          12,818
--------------------------------------------------------------------------------
Total current assets                                      16,555          14,242
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Receivables and prepayments                 9                 11               0
--------------------------------------------------------------------------------
Investment property                         11             9,360           9,513
--------------------------------------------------------------------------------
Property, plant and equipment                                466             489
--------------------------------------------------------------------------------
Intangible assets                                            248             229
--------------------------------------------------------------------------------
Total non-current assets                                  10,085          10,231
--------------------------------------------------------------------------------
TOTAL ASSETS                                              26,640          24,473
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Loans and borrowings                        12             1,164           2,345
--------------------------------------------------------------------------------
Payables and deferred income                13             3,903           1,935
--------------------------------------------------------------------------------
Provisions                                                    81             146
--------------------------------------------------------------------------------
Total current liabilities                                  5,148           4,426
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Loans and borrowings                        12            11,505          10,417
--------------------------------------------------------------------------------
Total non-current liabilities                             11,505          10,417
--------------------------------------------------------------------------------
TOTAL LIABILITIES                                         16,653          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                                          3,095           2,656
--------------------------------------------------------------------------------
Total equity attributable to owners of                     9,978           9,539
 the parent                                                                     
--------------------------------------------------------------------------------
Equity attributable to non-controlling                         9              91
 interests                                                                      
--------------------------------------------------------------------------------
TOTAL EQUITY                                               9,987           9,630
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY                              26,640          24,473
--------------------------------------------------------------------------------



Consolidated statement of cash flows

                                      Note   9 months   9 months      Q3      Q3
                                                 2016       2015    2016    2015
--------------------------------------------------------------------------------
In thousands of euros                                                           
                                           -----------           --------       
Cash receipts from customers                   12,282     10,945   2,647   2,250
--------------------------------------------------------------------------------
Cash paid to suppliers                         -7,133     -4,766  -2,948  -1,808
--------------------------------------------------------------------------------
Other taxes paid and recovered (net)           -1,627     -2,305    -478    -270
--------------------------------------------------------------------------------
Cash paid to employees                           -894       -766    -258    -227
--------------------------------------------------------------------------------
Other cash payments and receipts related          -73         24     -11      -9
 to operating activities (net)                                                  
--------------------------------------------------------------------------------
NET CASH FROM/USED IN OPERATING                 2,555      3,132  -1,048     -64
 ACTIVITIES                                                                     
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Payments made on purchase of                      -81       -137      -7     -38
 tangible and intangible assets                                                 
--------------------------------------------------------------------------------
Proceeds from sale of a subsidiary                  1          0       0       0
--------------------------------------------------------------------------------
Payments made on purchase of a                 -1,890          0  -1,050       0
 subsidiary                                                                     
--------------------------------------------------------------------------------
Interest received                                   0          4       0       1
--------------------------------------------------------------------------------
Other payments related to investing                -3          0       0       0
 activities                                                                     
--------------------------------------------------------------------------------
NET CASH USED IN INVESTING                     -1,973       -133  -1,057     -37
 ACTIVITIES                                                                     
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Proceeds from loans received           12       3,285      1,385   2,214     515
--------------------------------------------------------------------------------
Settlement of loans and borrowings     12      -3,378     -4,109    -380    -144
--------------------------------------------------------------------------------
Interest paid                                    -621       -588    -230    -113
--------------------------------------------------------------------------------
Dividends paid                                    -61        -61       0       0
--------------------------------------------------------------------------------
Other payments related to financing              -138        -82     -10       0
 activities                                                                     
--------------------------------------------------------------------------------
NET CASH FROM/USED IN FINANCING                  -913     -3,455   1,594     258
 ACTIVITIES                                                                     
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
NET CASH FLOW                                    -331       -456    -511     157
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cash and cash equivalents at                      745      1,691     925   1,078
 beginning of period                                                            
--------------------------------------------------------------------------------
Increase in cash and cash                        -331       -456    -511     157
 equivalents                                                                    
--------------------------------------------------------------------------------
Cash and cash equivalents at end of               414      1,235     414   1,235
 period                                                                         
--------------------------------------------------------------------------------



Consolidated statement of changes in equity

------------                                                                    
                Equity attributable to owners of the parent    Non-contr   Total
                                                                  olling  equity
                                                               interests        
            --------------------------------------------------------------------
              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                                                                              
--------------------------------------------------------------------------------
Change in         0       0          0       0       0      0         77      77
 non-contro                                                                     
lling                                                                           
 interest                                                                       
--------------------------------------------------------------------------------
Total             0       0          0       0     892    892        -15     877
 comprehens                                                                     
ive income                                                                      
for the                                                                         
 period                                                                         
--------------------------------------------------------------------------------
Balance as    4,282     292      2,011     179   3,081  9,845         98   9,943
 at 30                                                                          
 September                                                                      
 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     500    500         -5     495
 comprehens                                                                     
ive income                                                                      
for the                                                                         
 period                                                                         
--------------------------------------------------------------------------------
Balance as    4,282     292      2,011     298   3,095  9,978          9   9,987
 at 30                                                                          
 September                                                                      
 2016                                                                           
--------------------------------------------------------------------------------




         Kontaktinfo:
         Kristel Tumm
         CFO
         Arco Vara AS
         Tel: +372 614 4662
         [email protected]
         www.arcorealestate.com