Börsiteade

Pealkiri

Arco Vara AS unaudited consolidated interim report for the fourth quarter and 12 months of 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, and 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 31 December 2016, the group consisted of 22 companies, which is three
less than at the end of 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 acquired a
100% subsidiary Iztok Parkside EOOD in Bulgaria. On 31 October 2016, the group
sold its 70.6% ownership in Arco Real Estate SIA (including its subsidiary
Adepto SIA). On 22 December 2016, the group established a new subsidiary
Kodulahe II OÜ. 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 31 Dec              
                                                              2016              
--------------------------------------------------------------------------------
In thousands of                                                                 
 euros                                                                          
--------------------------------------------------------------------------------
Arco Invest EOOD  Bulgar  Developm              26,826      -1,170          100%
                  ia           ent                                              
--------------------------------------------------------------------------------
Iztok Parkside    Bulgar  Developm               1,433       1,177          100%
 EOOD             ia           ent                                              
--------------------------------------------------------------------------------
Arco Real Estate  Bulgar  Developm                 332         306          100%
 Fund REIT        ia           ent                                              
--------------------------------------------------------------------------------
Kodulahe OÜ       Estoni  Developm                   3        -330          100%
                  a            ent                                              
--------------------------------------------------------------------------------
Kerberon OÜ       Estoni  Developm                   5       1,332          100%
                  a            ent                                              
--------------------------------------------------------------------------------
Marsili II SIA    Latvia  Developm               1,524         743          100%
                               ent                                              
--------------------------------------------------------------------------------
Arco Real Estate  Estoni   Service                  42      -1,095          100%
 AS               a                                                             
--------------------------------------------------------------------------------
Arco Imoti EOOD   Bulgar   Service                 444         171          100%
                  ia                                                            
--------------------------------------------------------------------------------



KEY PERFORMANCE INDICATORS



·                     In Q4 2016, the group’s revenue was 1.3 million euros,
which is 37.6% less compared to the revenue of 2.1 million euros in Q4 2015.
Revenue of the Development division amounted to 0.6 million euros in Q4,
decreasing by 54% compared to Q4 2015. Revenue of the Service division amounted
to 0.8 million euros in Q4 2016, increasing by 1.6% compared to Q4 2015. The
group’s revenue of 9.7 million euros for the 12 months of 2016 decreased by
8.5% compared to the 12 months of year 2015. Revenue of the Development
division decreased by 11.3% to 7.0 million euros for 12 months 2016. Revenue of
the Service division amounted to 3.2 million euros in 12 months 2016,
decreasing by 0.7% compared to 12 months 2015. 

·                     In Q4 2016, the group’s operating loss (=EBIT) was 1.1
million euros (In Q4 2015: 0.2 million euros) and net loss 1.3 million euros
(In Q4 2015: 0.4 million euros). In 12 months 2016, the group’s operating loss
(=EBIT) was 0.1 million euros and net loss was 0.8 million euros. In 12 months
2015, the group earned operating profit of 1.3 million euros and net profit of
0.5 million euros. The group’s financial performance for 2016 was affected by
the loss from devaluation of assets in amount of 0.6 million euros. The
development division earned operating profit of 0.6 million euros in 12 months
2016 and 1.8 million euros in 12 months 2015. Operating loss of the Service
division was 0.2 million euros in 12 months 2016 and 0.1 million euros in 12
months 2015. 

·                     As of 31 December 2016, the group’s debt burden had
increased by 1.5 million euros compared to the year-end of 2015. Net loans had
increased by 1.4 million euros over 2016 up to the level of 13.4 million euros
as of 31 December 2016. As of 31 December 2016, the weighted average annual
interest rate of interest bearing liabilities was 5.3%. This is an increase of
0.3 percentage points compared to 31 December 2015. 

·                     In Q4 2016, 2 apartments, 4 commercial spaces and 2 land
plots were sold in projects developed in the group (in Q4 2015, 17 apartments
and 3 land plots were sold). In 12 months 2016, 77 apartments, 9 commercial
spaces and 8 land plots were sold (in 12 months 2015: 90 apartments, 6
commercial spaces and 4 land plots). 

                                 12 months 2016      12 months  Q4 2016  Q4 2015
                                                          2015                  
--------------------------------------------------------------------------------
In millions of euros                                                            
                                ----------------               ---------        
Revenue                                                                         
--------------------------------------------------------------------------------
Development                                 7.0            7.9      0.6      1.4
--------------------------------------------------------------------------------
Service                                     3.2            3.3      0.8      0.8
--------------------------------------------------------------------------------
Eliminations                               -0.5           -0.5     -0.2     -0.1
--------------------------------------------------------------------------------
Total revenue                               9.7           10.7      1.2      2.1
--------------------------------------------------------------------------------
                                                                                
                                ----------------               ---------        
Operating profit (EBIT)                                                         
--------------------------------------------------------------------------------
Development                                 0.6            1.8     -0.9      0.2
--------------------------------------------------------------------------------
Service                                    -0.1           -0.1      0.0     -0.2
--------------------------------------------------------------------------------
Unallocated income and expenses            -0.6            0.1     -0.1      0.1
--------------------------------------------------------------------------------
Eliminations                                0.0           -0.5     -0.1     -0.3
--------------------------------------------------------------------------------
Total operating profit/loss                -0.1            1.3     -1.1     -0.2
 (EBIT)                                                                         
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Financial income and expense               -0.6           -0.7     -0.1     -0.1
--------------------------------------------------------------------------------
Income tax                                 -0.1           -0.1     -0.1     -0.1
--------------------------------------------------------------------------------
Net profit/loss                            -0.8            0.5     -1.3     -0.4
--------------------------------------------------------------------------------
                                                                                
Key ratios                                                                      
--------------------------------------------------------------------------------
--------------------------------                ---------------         --------
EPS (in euros)                            -0.13           0.08    -0.21    -0.07
                                ----------------               ---------        
                                                                        --------
Diluted EPS (in euros)                    -0.13           0.07    -0.20    -0.07
------------------------------------------------------------------------        
ROIC (rolling, four quarters)             -3.7%           2.0%                  
--------------------------------------------------------------------------------
ROE (rolling, four quarters)              -8.4%           4.6%                  
--------------------------------                --------------------------------
ROA (rolling, four quarters)              -3.2%           1.8%                  
--------------------------------------------------------------------------------



                                               31 Dec 2016  31 Dec 2015
-----------------------------------------------------------------------
In millions of euros, as of the end of period                          
                                              -------------            
----------------------------------------------             ------------
Total assets                                          27.7         24.5
                                              -------------            
Invested capital                                      23.2         22.4
-----------------------------------------------------------------------
Net loans                                             13.4         12.0
-----------------------------------------------------------------------
Equity                                                 9.0          9.6
-----------------------------------------------------------------------
                                                                       
-----------------------------------------------------------------------
Current ratio                                         1.15         3.22
-----------------------------------------------------------------------
Quick ratio                                           0.09         0.32
-----------------------------------------------------------------------
Financial leverage                                    3.09         2.54
-----------------------------------------------------------------------
Average loan term (in years)                           1.2          1.7
-----------------------------------------------------------------------
Average annual interest rate of loans                 5.3%         5.0%
-----------------------------------------------------------------------
Number of staff, end-of-period                         110          178
-----------------------------------------------------------------------



Cash flows

                                         12 months     12 months      Q4      Q4
                                              2016          2015    2016    2015
--------------------------------------------------------------------------------
In millions of euros                                                            
                                     --------------              --------       
Cash flows from/used in operating              1.3           2.4    -1.3    -0.6
 activities                                                                     
--------------------------------------------------------------------------------
Cash flows from/used in investing             -2.0          -0.2     0.0    -0.1
 activities                                                                     
--------------------------------------------------------------------------------
Cash flows from/used in financing              0.8          -3.2     1.7     0.2
 activities                                                                     
--------------------------------------------------------------------------------
Net cash flows                                 0.1          -1.0     0.4    -0.5
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cash and cash equivalents at                   0.7           1.7     0.4     1.2
 beginning of period                                                            
--------------------------------------------------------------------------------
Cash and cash equivalents at the end           0.8           0.7     0.8     0.7
 of period                                                                      
--------------------------------------------------------------------------------





Revenue and net profit/loss from continuing operations 
          Q1      Q2      Q3      Q4     Total    Q1      Q2      Q3      Q4   
 Total    Q1      Q2      Q3      Q4     Total 
         2014    2014    2014    2014    2014    2015    2015    2015    2015  
 2015    2016    2016    2016    2016    2016 
--------------------------------------------------------------------------------
---------------------------------------------- 
In 
 milli 
ons of 
 euros 
--------------------------------------------------------------------------------
---------------------------------------------- 
Revenu     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     1.3     9.7 
e 
--------------------------------------------------------------------------------
---------------------------------------------- 
Net        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    -1.3    -0.8 
 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 CEO’S REVIEW

From the targets set for 2016, we achieved necessary internal growth, but did
not achieve profit.  It is hard to reach profit without selling anything and
without revaluating your assets. There are no reasons to revaluate our assets
upwards, and in order to sell anything, we must first complete the ongoing
development projects while launching new developments like a cascade. As a
general philosophical remark, I think that earning real money must be preferred
anytime to simple rewriting the asset valuations. In real estate you earn real
money when you sell something against payment. 

Arco Vara will celebrate its 25th birthday very shortly. A few years ago, we
went through reanimation from a situation which we had put ourselves into by
growing our assets and liabilities much faster that our capacity to sell to our
customers completed real estate products. Today, we are gathering speed again,
which is a painfully slow process. I am not proud of the results of Q4 and the
full year, but I also do not think they are bad results. I see how the results
of 2016 will lead us to sales in 2017 and the years thereafter. Presales of
development products have been good and this will be recorded as revenue in
2017. 

At the moment, let’s concentrate on 2016 figures. I start with the worse, with
the net loss. The full year’s results were damaged by Q4 when we did not sell
anything out of our almost empty stock. We did not achieve our annual target to
sell our services and products for 10.3 million euros and earn a net profit of
at least 0.8 million euros. The actual 2016 results (unaudited) are a revenue
of 9.7 million euros and net loss of 0.8 million euros, where Q4 was the
biggest contributor to annual loss. 

There are five reasons for the annual loss. First, we were not successful in
letting out the offices of Madrid Blvd building, Sofia. Although one additional
tenant was signed in Q4, the vacant premises at the end of the year amounted to
3,500 square meters. The lost rental income for 2016 was at least 0.4 million
euros, in cash. 

Second, since we were not successful in letting out the offices of Madrid Blvd
and the effective rents of signed agreements have been lower than expected, the
management had to write down the value of the building as of the end of the
year. We decreased the valuation by 0.4 million euros. That part of net loss is
accounted on paper, not in cash. 

Third, around year- end we sold as one-off deal “Baltezers-3” - the block of
undeveloped residential land plots in Latvia, at an accounting loss of 0.2
million euros. With this transaction we chose guaranteed cash over possible
revenue in the future. We calculated that at times when the Group issues debt
to finance its developments at a cost of over 10% per annum, it would not be
right to sit for years on undeveloped land that offers zero current yield and
negative cash flow after land taxes and other expenses. The management
devaluated the whole Baltezers project (both completed unsold individual
residential plots and the value of undeveloped chunk of land) as of the end of
2012. Apparently, the devaluation at that time was not sufficient. Since then,
we have sold the finished products with a small profit, but very slowly, 4-8
units per year. 

Fourth, we lost 0.2 million euros by rendering evaluation and brokerage
services. Looking into the mirror provides an answer for this loss. As of
today, we have sold out of the Group the Latvian service unit. It is possible
that we will license the trademark and software in Latvia. In Bulgarian and
especially in Estonian units, we have undertaken thorough changes in personnel,
marketing, service standards, processing of data and sharing the revenues. I
expect these changes to deliver current operational profit both in Bulgaria and
in Estonia in 2017. 

Fifth, the loss was increased by marketing and other preparatory expenses of
Iztok Parkside that were borne but not capitalized during Q4. Those costs were
foreseen in the business plan and we expect the net profit to be respectively
larger, when we will sell out the Iztok products. 

If one wants to sum up the reasons of loss in 2016 and be smart
retrospectively, then we made substantial mistakes with the offices in Madrid
Blvd. The effect of those mistakes on the P/L statement amounts to more than
0.8 million euros. The only good news here is that the occupancy of the
building has improved over the year and the net result of Madrid Blvd building
should be significantly better in 2017. 

Next I will describe the internal growth factors of Arco Vara during the past
year, which should become visible in numbers by end of 2017 and in 2018. 

Kodulahe construction progress and presale met its targets. The first building
with 130 units will be sold out by the beginning of 2018, if we continue with
average sales pace of 6 apartments per month. The first and the largest
building will be completed in Q3 2017. Expected sale revenue exceeds 16 million
euros. In addition, we have commenced the design of the second phase –
altogether there are five phases on Paldiski road 70c (former name) land plot –
and we have concluded a pre-agreement to acquire additional land plot in 2018
in the neighbourhood of Kodulahe project with a view to make a detail plan and
continue development of Kodulahe project after Paldiski road 70c plot (2.7
hectars, 330 units) will become exhausted. We will be Kodulahe district
developers and sellers at least until 2022. 

Iztok Parkside presale has exceeded expectations. We launched a marketing
campaign in December and have sold „on paper“ more than 26% of the total
project volume by today.  Expected sales revenue exceeds 8 million euros. The
offers presented in construction tender also met our expectations. The sole
problem we face today is the delay caused by the bureaucracy of Sofia
municipality in obtaining the construction permit. Delay with construction
permit causes in turn the delay with concluding and performing the construction
contract. As of the date of this report, we have lost at least 45 days against
our initial schedule. Completion of the construction works will therefore be
postponed into Q1 2018. Although this is a small condolence, we have learned
from our competitors that many developers get stuck into municipal bureaucracy
in Sofia. 

In Madrid Blvd building we signed in one new tenant and reduced the vacancy.
There are ongoing negotiations with several interested parties. The shortest
way to eliminate Group’s loss and start making profit is to resolve the
problems of Madrid Blvd vacancy. 

In Tartu, Estonia, we succeeded in bringing to an end the land exchange with
Tartu municipality. We waived our co-ownership in Turu 34a commercial purpose
land plot, made a compensation payment to the municipality and acquired from
the municipality the sole ownership of Oa Str 37, 39 and 41 land plots that
have detail plan allowing construction of 2300 square meters (ca 40
apartments). We have commenced the design works with a view to complete the
project by the end of 2018. Considering that the plots are located at the bank
of Emajõgi river in a good neighbourhood, and that we shifted ourselves from
commercial segment into residential segment, the progress so far could be
called a success. 

Last but not least the revenues of Estonian and Bulgarian service companies
grew. The younger team of professional appraisers and brokers has started to
show first results, although there are still big differences between the
regions. The biggest challenge of 2017 lies ahead in Tallinn. 

We sold Latvian subsidiary in Q4 to Latvian management, preferring one-off
money from selling the shares to unclear prospect of earning dividends in the
future. 

Targets for 2017 and 2018

Arco Vara’s objective of year 2017 is to earn revenue of at least 18 million
euros and net profit of at least 1.8 million euros. For this, we need to sell
at least 120 apartments and serve at least 6,000 appraisal and brokerage
customers. By the end of 2018, we wish to earn at least 20 million euros and
make a net profit of at least 2 million euros, which is a new level in the
Group’s history and a new threshold for the Group’s future years. Our objective
is to be the most people-oriented real estate company. In Estonian and
Bulgarian real estate sectors, there remains a lot to be done to achieve this
mission. If we succeed, the future Arco Vara will be several times larger than
today’s. 

In short term, we need to:

1)     Sell out Kodulahe phase I in Tallinn and commence construction and
presale of phase II in 2017; 

2)     Commence the construction of Iztok Parkside in Q1 and sell it out by the
end of Q1 2018; 

3)     Let out all Madrid Blvd vacancies by the end of Q2 2017 and refinance
the existing loan contract with outstanding balance of less than 9 million
euros by the end of 2017; 

4)     Commence the construction and presale of Oa project in Tartu in Q4 2017
and sell it out by the end of 2018; 

5)     Acquire in Sofia at least one development plot with GBA/GSA exceeding
10,000 sqm in 2017; 

6)     Acquire in Tallinn at least one development plot with GSA/GBA exceeding
10,000 sqm in 2018; 

7)     Serve in Bulgaria and in Estonia combined at least 7,500 customers per
year and earn at least 3 million euros of annual revenue by end of 2018, at
which level we will start to make satisfactory profits. 

In order to deliver the above, we need to resolve a bunch of tactical issues
related to financing, design, marketing, sales and IT, as well as in our
relations with municipal and state bureaucracy. This is what the management and
the team are paid for and eagerly working on. 



Service division

The most significant event of the group’s services division in Q4 2016 was the
sale of the Latvian brokerage agency on 31 October 2016. In 10 months 2016,
revenue of Latvian agency was 771 thousand euros (including 7 thousand euros of
intra-group revenue) and net loss amounted to 11 thousand euros. With the sale
of Latvian agency, the number of employees working for the group decreased by
70 people. 

Revenue of the service division amounted to 3,231 thousand euros in 12 months
2016 (2015: 3,254 thousand euros), which included intra-group revenue of 418
thousand euros (2015: 467 thousand euros). In Q4 2016, revenue of the group’s
service division was 827 thousand euros (Q4 2015: 814 thousand euros), which
included intra-group revenue of 136 thousand euros (Q4 2015: 100 thousand
euros). In 12 months 2016, revenue of the Service division from main services
(real estate brokerage and valuation services) decreased by 3% compared to 12
months 2015. The main reason is the fact that the revenue from Latvian agency
was included in the group revenue only for the first 10 months of 2017. The
revenue from main services increased in Estonian 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 - 97
thousand euros less in year 2016 compared to year 2015. 

Revenue of real estate agencies from brokerage and valuation      
                                                                 
                       12 months     12 months   Change,      Q4      Q4  Change
                            2016          2015         %    2016    2015     , %
--------------------------------------------------------------------------------
In thousands of                                                                 
 euros                                                                          
Estonia                    1,422         1,282       11%     386     319     21%
--------------------------------------------------------------------------------
Latvia                       771           898      -14%      77     219    -65%
--------------------------------------------------------------------------------
Bulgaria                     639           746      -14%     195     208     -6%
--------------------------------------------------------------------------------
Total                      2,832         2,926       -3%     658     746    -12%
--------------------------------------------------------------------------------
                                                                                

In 2016, all 3 brokerage agencies operated at a loss: Estonian agency had net
loss of 188 thousand euros, Bulgarian agency 19 thousand euros and Latvian
agency 11 thousand euros (Latvian agency in 10 months). In 2015, Estonian and
Latvian agencies had net loss of 209 thousand euros and 73 thousand euros,
respectively. Bulgarian agency had net profit of 109 thousand euros in 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 118 thousand euros in 12 months
2016, 100 thousand euros of which was intra-group revenue (2015: 141 thousand
and 105 thousand euros, respectively). Revenue from accommodation services
amounted to 144 thousand euros in 12 months 2016 (2015: 132 thousand euros). 

At of 31 December 2016, the number of staff in service division was 97 (at
31.12.2015: 165). The number decreased in 2016 due to the sale of the Latvian
agency in October. 



Development division

In Q4 2016, revenue of development division totalled 647 thousand euros (in Q4
2015: 1,403 thousand euros) including revenue of 519 thousand euros (Q4 2015:
1,306 thousand euros) from the sale of properties in the group’s own
development projects. In 12 months of 2016, revenue of the Development division
amounted to 7,048 thousand euros, which is 899 thousand euros or 11.3% less
compared to 12 months 2015. In 12 months 2016, the revenue from the sale of
properties in the group’s own development projects reached 6,562 thousand euros
(2015: 7,019 thousand euros). 

Most of the other revenue of the Development division consists of rental income
from commercial and office premises in Madrid Blvd building in Sofia, amounting
to 98 thousand euros in Q4 2016 and 369 thousand euros in 12 months 2016 (77
thousand euros in Q4 2015 and 838 thousand euros in 12 months 2015). Rental
income has decreased compared to the 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 smaller 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 with the aim of renting out all
rental areas by no later than in Q2 2017. In Q4 2016, one new rental agreement
was concluded. 

In 12 months 2016, operating profit of the Development division was 611
thousand euros. In Q4 2016, an operating loss in the amount of 912 thousand
euros was suffered in the Development division. This included a loss in the
amount of 708 thousand euros from the decrease in value of inventories and
investment property. In 12 months 2015, development division had an operating
profit of 1,790 thousand euros, out of which 192 thousand euros in Q4. 

During Q4 2016, the construction and presale of apartments of the first stage
apartment building (with 125 apartments and 5 commercial spaces) in the group’s
biggest development project Kodulahe continued in Tallinn. By the publishing
date of the interim report, presale agreements for 75 apartments and one
commercial space have been concluded. The construction of the apartment
building should be finished by summer 2017. 

In Q4 2016, the group completed a land exchange agreement in Tartu, where a
joint ownership in a commercial property at Turu street 34a was exchanged for
land plots on Oa street 37, 39, 41 with building right for smaller apartment
buildings with GSA above grade of up to 2,300 m2 (ca 40 apartments). Design
works have started and the project is scheduled for completion by the end of
2018. 

As of 31 December 2016, 5 apartments remained unsold in Madrid Blvd complex in
Sofia, one of which was presold. In Q4 2016, 2 apartments were sold. 15
apartments are furnished and are being rented out as accommodation service.
Unsold 103 parking places are also rented out. 

The last four commercial spaces in Manastirski Livadi project were sold in Q4
2016 and thus the whole residential project (developed in 3 stages with 300
apartments and commercial spaces in total) is sold out by now. 

In May 2016, the group finalized the purchase of a company Iztok Parkside EOOD.
As a result, the group’s development portfolio has gained a new development
project in Iztok district in Sofia. In September 2016, a bank loan agreement
was concluded to fully finance further development costs of the project in the
maximum amount of 4.9 million euros. In Q4 2016, detail plan for the project’s
property was established and construction tender was carried out, but obtaining
the construction permit has been somewhat delayed. By the publishing date of
this report, presale agreements for 18 apartments have been concluded already.
Three apartment buildings with 68 apartments (7,070 square meters of
apartments’ sellable area) will be built by Q1 2018. 

By the end of 2016, an agreement for sale of the whole Baltezers-3 project in
Latvia (68 plots) was reached. The transaction was completed in January 2017.
Accounting loss from the transaction in amount of 200 thousand euros was
recognized already in 2016. 

At 31 December 2016, 10 Marsili residential plots remained unsold. In Q4 2016,
one presale agreement was concluded for one of those plots. 

As of 31 December 2016, 5 people were employed in the Development division, the
same number as of the end of  2015. 

Summary table of Arco Vara’s active projects as of 31 December 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 target>  <future target>
--------------------------------------------------------------------------------
Madrid    Madrid       Lease:   S5/S6        -            7,350               20
 Blvd      Blvd,        Retail                                                  
           Sofia       /Office                                                  
--------------------------------------------------------------------------------
Madrid    Madrid       Apartme  S5/S6        -            2,408               20
 Blvd      Blvd,       nts                                                      
           Sofia                                                                
--------------------------------------------------------------------------------
Iztok     Iztok,       Apartme  S3       2,470            7,070               68
 Parksid   Sofia       nts                                                      
e                                                                               
--------------------------------------------------------------------------------
Marsili   Marsili,     Residen  S5           -           18,047               10
 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  S3      22,396         <13,300>            <200>
, stages   Soodi,      nts                                                      
 2-5       Pagi                                                                 
           streets,                                                             
           Tallinn                                                              
--------------------------------------------------------------------------------
Oa        Oa street,   Apartme  S3       4,146          <2,300>             <40>
 street    Tartu       nts                                                      
 apartme                                                                        
nts                                                                             
--------------------------------------------------------------------------------
Lehiku    Lehiku       Apartme  S2       5,915          <1,100>              <5>
 carpet    21,23       nts                                                      
 buildin   Tallinn                                                              
g                                                                               
--------------------------------------------------------------------------------
Liimi     Liimi 1b,    Lease:   S2/S5    2,463          <6,500>                1
           Tallinn      Office                                                  
--------------------------------------------------------------------------------

Note: Value presented between < > 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 31 December 2016, 110 people worked for the group (178 as of 31 December
2015). The number of employees has decreased significantly due to the sale of
the Latvian brokerage agency Arco Real Estate SIA in October 2016. Employee
remuneration expenses in the 12 months of 2016 amounted to 2.8 million euros
(in 12 months 2015: 2.7 million euros), out of which 0.7 million euros in Q4
(0.8 million euros in Q4 2015). 

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 111 thousand euros in 12 months 2016 (108 thousand
euros in 12 months 2015), out of which 28 thousand euros in Q4 (26 thousand
euros in Q4 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 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 considers credit risks to be substantially mitigated. The final sales
of real estate development products takes place simultaneously with customer
payment, therefore customer debts do not arise. Also, cash and cash equivalents
are not held in the same banking group. 

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 31 December 2016,
the group’s interest-bearing liabilities amounted to 15.5 million euros
(increased by 2.7 million euros during 12 months 2016), out of which 9.4
million euros is due within next 12 months, including bank loan in the amount
of 9 million euros in Madrid project in Bulgaria. At the same time, the group’s
cash and cash equivalents totalled 0.8 million euros as of 31 December 2016 (on
31 December 2015: 0.7 million euros). In 12 months 2016, interest payments on
interest-bearing liabilities totalled 0.8 million euros (in 12 months 2015: 0.8
million euros). The group’s weighted average loan interest rate was 5.3% as of
31 December 2016. This is an increase by 0.3 percentage points compared to the
end of year 2015. The reason for the increase is new borrowings raised in 2016,
which bear an 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. 





SHARES AND SHAREHOLDERS

Share price

Arco Vara AS has issued a total of 6,507,012 ordinary shares with nominal value
of 0.7 euros per share. In November 2016, the share capital increased by 390
thousand shares, when a convertible bond issued to CEO was executed. The shares
are freely traded on NASDAQ Tallinn stock exchange. The share price closed at
1.24 euros on 31 December 2016. The price has increased by 7.8% within 12
months 2016 (closing price at the end of 2015 was 1.15 euros). During the
period, the highest traded price per share was 1.35 euros and lowest price 1.01
euros. As of 31 December 2016, market capitalization of shares amounted to
8,049 thousand euros, P/E ratio of the share was negative (-9.2) and P/B ratio
was 0.90 (at 31 December 2015: 7,035 thousand euros, 15.8 and 0.73,
respectively). 



Structure of shareholders

As of 31 December 2016, Arco Vara had 1,502 shareholders (on 31 December 2015:
1,600) including 1,297 individuals as shareholders (on 31 December 2015: 1,381
individuals) who jointly owned 12.5% (on 31 December 2015: 12.7%) out of all
Arco Vara shares. 





Major shareholders of 31 December 2016  No of shares  Share, %
Alarmo Kapital OÜ                            890,188     13.7%
NORDEA BANK FINLAND PLC client               862,820     13.3%
AS Lõhmus Holdings                           602,378      9.3%
Gamma Holding Investment OÜ                  553,975      8.5%
LHV PENSIONIFOND L                           389,765      6.0%
FIREBIRD REPUBLICS FUND LTD                  356,428      5.5%
HM Investeeringud OÜ                         330,505      5.1%
FIREBIRD AVRORA FUND, LTD.                   185,800      2.9%
LHV PENSIONIFOND XL                          173,583      2.7%
FIREBIRD FUND L.P.                           150,522      2.3%
Other shareholders                         2,011,048     30.9%
--------------------------------------------------------------
Total                                      6,507,012    100.0%



Holdings of members of the management   Position                   No of  Share,
 and supervisory boards (and related                              shares       %
 persons) on 31 December 2016                                                   
Tarmo Sild ja Allar Niinepuu (Alarmo    member of management     890,188   13.7%
 Kapital OÜ)                             board/ member of                       
                                         supervisory board                      
Rain Lõhmus (AS Lõhmus Holdings)        member of supervisory    602,378    9.3%
                                         board                                  
Hillar-Peeter Luitsalu (HM              chairman of              369,259    5.7%
 Investeeringud OÜ, related persons)     supervisory board                      
Kert Keskpaik (privately and through K  member of supervisory    202,171    3.1%
 Vara OÜ)                                board                                  
Steven Yaroslav Gorelik ¹               member of supervisory          0    0.0%
                                         board                                  
--------------------------------------------------------------------------------
Total                                                          2,063,996   31.7%

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    12 months    12 months      Q4      Q4
                                               2016         2015    2016    2015
--------------------------------------------------------------------------------
In thousands of euros                                                           
                                       -------------             --------       
Continuing operations                                                           
--------------------------------------------------------------------------------
Revenue from sale of own real                 6,620        7,019     577   1,306
 estate                                                                         
--------------------------------------------------------------------------------
Revenue from rendering of                     3,127        3,633     732     791
 services                                                                       
--------------------------------------------------------------------------------
Total revenue                     2, 3        9,747       10,652   1,309   2,097
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cost of sales                      4         -6,621       -6,865  -1,067  -1,432
--------------------------------------------------------------------------------
Gross profit                                  3,126        3,787     242     665
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Other income                                    182           80     147      10
--------------------------------------------------------------------------------
Marketing and distribution         5           -556         -530    -138    -170
 expenses                                                                       
--------------------------------------------------------------------------------
Administrative expenses            6         -2,064       -2,020    -545    -648
--------------------------------------------------------------------------------
Other expenses                                  -99         -151     -70    -119
--------------------------------------------------------------------------------
Gain/loss on revaluation of        11          -584           95    -584      95
 investment property                                                            
--------------------------------------------------------------------------------
Loss on inventory write-down       10          -124            0    -124       0
--------------------------------------------------------------------------------
Gain on sale of subsidiaries                      4            0       3       0
--------------------------------------------------------------------------------
Operating profit/loss                          -115        1,261  -1,069    -167
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Finance income and costs           7           -590         -666    -131    -128
--------------------------------------------------------------------------------
Profit/loss before tax                         -705          595  -1,200    -295
--------------------------------------------------------------------------------
Income tax                                     -127         -135    -127    -135
--------------------------------------------------------------------------------
Net profit/loss from continuing                -832          460  -1,327    -430
 operations                                                                     
---------------------------------------             -------------        -------
                                       -------------             --------       
                                                                                
---------------------------------------             -------------        -------
                                       -------------             --------       
Discontinued operations                                                         
---------------------------------------             -------------        -------
                                       -------------             --------       
Profit/loss from discontinued                     0          -15       0      -2
 operations                                                                     
---------------------------------------             -------------        -------
                                       -------------             --------       
                                                                                
---------------------------------------             -------------        -------
Net profit/loss for the period                 -832          445  -1,327    -432
--------------------------------------------------------------------------------
attributable to owners of the                  -832          467  -1,327    -425
 parent                                                                         
                                       -------------             --------       
attributable to non-controlling                   0          -22       0      -7
 interests                                                                      
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Total comprehensive                            -832          445  -1,327    -432
 income/expense for the period                                                  
--------------------------------------------------------------------------------
attributable to owners of the                  -832          467  -1,327    -425
 parent                                                                         
                                       -------------             --------       
attributable to non-controlling                   0          -22       0      -7
 interests                                                                      
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Earnings per share (in euros)      8                                            
                                       -------------             --------       
- basic                                       -0.13         0.08   -0.21   -0.07
--------------------------------------------------------------------------------
- diluted                                     -0.13         0.07   -0.20   -0.07
--------------------------------------------------------------------------------





CONSOLIDATED STATEMENT OF FINANCIAL POSITION



                                            Note     31 December     31 December
                                                            2016            2015
--------------------------------------------------------------------------------
In thousands of euros                                                           
                                                 ----------------               
Cash and cash equivalents                                    845             745
--------------------------------------------------------------------------------
Receivables and prepayments                  9               470             679
--------------------------------------------------------------------------------
Inventories                                  10           14,593          12,818
--------------------------------------------------------------------------------
Total current assets                                      15,908          14,242
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Receivables and prepayments                  9                11               0
--------------------------------------------------------------------------------
Investment property                          11           10,835           9,513
--------------------------------------------------------------------------------
Property, plant and equipment                                718             489
--------------------------------------------------------------------------------
Intangible assets                                            248             229
--------------------------------------------------------------------------------
Total non-current assets                                  11,812          10,231
--------------------------------------------------------------------------------
TOTAL ASSETS                                              27,720          24,473
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Loans and borrowings                         12            9,372           2,345
--------------------------------------------------------------------------------
Payables and deferred income                 13            4,369           1,935
--------------------------------------------------------------------------------
Provisions                                                   108             146
--------------------------------------------------------------------------------
Total current liabilities                                 13,849           4,426
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Loans and borrowings                         12            4,886          10,417
--------------------------------------------------------------------------------
Total non-current liabilities                              4,886          10,417
--------------------------------------------------------------------------------
TOTAL LIABILITIES                                         18,735          14,843
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Share capital                                8             4,555           4,282
--------------------------------------------------------------------------------
Share premium                                                292             292
--------------------------------------------------------------------------------
Statutory capital reserve                                  2,011           2,011
--------------------------------------------------------------------------------
Other reserves                               8                52             298
--------------------------------------------------------------------------------
Retained earnings                                          2,075           2,656
--------------------------------------------------------------------------------
Total equity attributable to owners of the                 8,985           9,539
 parent                                                                         
--------------------------------------------------------------------------------
Equity attributable to non-controlling                         0              91
 interests                                                                      
--------------------------------------------------------------------------------
TOTAL EQUITY                                               8,985           9,630
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY                              27,720          24,473
--------------------------------------------------------------------------------



CONSOLIDATED STATEMENT OF CASH FLOWS



                                      Note  12 months  12 months      Q4      Q4
                                                 2016       2015    2016    2015
--------------------------------------------------------------------------------
In thousands of euros                                                           
                                           -----------           --------       
Cash receipts from customers                   14,290     13,770   2,008   2,825
--------------------------------------------------------------------------------
Cash paid to suppliers                         -9,991     -7,679  -2,858  -2,926
--------------------------------------------------------------------------------
Income tax paid from profits                     -106       -197     -23     -24
--------------------------------------------------------------------------------
Other taxes paid and recovered (net)           -1,631     -2,399     -87    -267
--------------------------------------------------------------------------------
Cash paid to employees                         -1,151     -1,015    -257    -249
--------------------------------------------------------------------------------
Other cash payments and receipts                  -96          9     -23     -15
 related to operating activities                                                
 (net)                                                                          
--------------------------------------------------------------------------------
Net cash flow of discontinued                       0        -15       0      -2
 operations                                                                     
--------------------------------------------------------------------------------
NET CASH FROM/USED IN OPERATING                 1,315      2,474  -1,240    -658
 ACTIVITIES                                                                     
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Payments made on purchase of tangible and         -99       -196     -18     -59
 intangible assets                                                              
--------------------------------------------------------------------------------
Proceeds from sale of property,                     1          0       1       0
 plant and equipment                                                            
--------------------------------------------------------------------------------
Proceeds from sale of a subsidiary                 41          0      40       0
--------------------------------------------------------------------------------
Payments made on purchase of a                 -1,890          0       0       0
 subsidiary                                                                     
--------------------------------------------------------------------------------
Interest received                                   0          4       0       0
--------------------------------------------------------------------------------
Other payments related to investing                -3          0       0       0
 activities                                                                     
--------------------------------------------------------------------------------
NET CASH FROM/USED IN INVESTING                -1,950       -192      23     -59
 ACTIVITIES                                                                     
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Proceeds from loans received           12       6,135      2,734   2,850   1,349
--------------------------------------------------------------------------------
Settlement of loans and borrowings     12      -4,637     -5,025  -1,259    -916
--------------------------------------------------------------------------------
Interest paid                                    -797       -788    -176    -200
--------------------------------------------------------------------------------
Dividends paid                                    -61        -61       0       0
--------------------------------------------------------------------------------
Proceeds from share capital increase   8          273          0     273       0
--------------------------------------------------------------------------------
Other payments related to financing              -138        -88       0      -6
 activities                                                                     
--------------------------------------------------------------------------------
NET CASH FROM/USED IN FINANCING                   775     -3,228   1,688     227
 ACTIVITIES                                                                     
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
NET CASH FLOW                                     140       -946     471    -490
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cash and cash equivalents at                      745      1,691     414   1,235
 beginning of period                                                            
--------------------------------------------------------------------------------
Increase in cash and cash                         140       -946     471    -490
 equivalents                                                                    
--------------------------------------------------------------------------------
Decrease in cash and cash                         -40          0     -40       0
 equivalents through sale of                                                    
 subsidiaries                                                                   
--------------------------------------------------------------------------------
Cash and cash equivalents at end of               845        745     845     745
 period                                                                         
--------------------------------------------------------------------------------



CONSOLIDATED STATEMENT OF CHANGES IN EQUITY



-------------                                                                   
                 Equity attributable to owners of the parent    Non-cont   Total
                                                                 rolling  equity
                                                                interest        
                                                                       s        
             -------------------------------------------------------------------
               Share   Share  Statutory   Other  Retain  Total            
              capita  premiu    capital  reserv      ed                   
                   l       m    reserve      es  earnin                   
                                                     gs                   
---------------------------------------------------------------          
In thousands                                                                    
 of euros                                                                       
                                                        -------                 
Balance as     4,282     292      2,011     179   2,250  9,014        36   9,050
 at 31                                                                          
 December                                                                       
 2014                                                                           
--------------------------------------------------------------------------------
Dividends          0       0          0       0     -61    -61         0     -61
 paid                                                                           
--------------------------------------------------------------------------------
Change in          0       0          0       0       0      0        77      77
 non-control                                                                    
ling                                                                            
 interest                                                                       
--------------------------------------------------------------------------------
Formation of       0       0          0     119       0    119         0     119
 equity                                                                         
 reserve                                                                        
--------------------------------------------------------------------------------
Total              0       0          0       0     467    467       -22     445
 comprehensi                                                                    
ve income                                                                       
 for the                                                                        
 period                                                                         
--------------------------------------------------------------------------------
Balance as     4,282     292      2,011     298   2,656  9,539        91   9,630
 at 31                                                                          
 December                                                                       
 2015                                                                           
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Balance as     4,282     292      2,011     298   2,656  9,539        91   9,630
 at 31                                                                          
 December                                                                       
 2015                                                                           
--------------------------------------------------------------------------------
Dividends          0       0          0       0     -61    -61         0     -61
 paid                                                                           
--------------------------------------------------------------------------------
Change in          0       0          0       0      14     14       -91     -77
 non-control                                                                    
ling                                                                            
 interest                                                                       
--------------------------------------------------------------------------------
Increase of      273       0          0    -298     298    273         0     273
 share                                                                          
 capital                                                                        
--------------------------------------------------------------------------------
Formation of       0       0          0      52       0     52         0      52
 equity                                                                         
 reserve                                                                        
--------------------------------------------------------------------------------
Total              0       0          0       0    -832   -832         0    -832
 comprehensi                                                                    
ve income                                                                       
 for the                                                                        
 period                                                                         
--------------------------------------------------------------------------------
Balance as     4,555     292      2,011      52   2,075  8,985         0   8,985
 at 31                                                                          
 December                                                                       
 2016                                                                           
--------------------------------------------------------------------------------






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