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Arco Vara Interim Report (unaudited) for the 3rd Quarter and 9 months ended 30 September 2013

Teade

Directors’ report



ARCO VARA GROUP


Arco Vara AS and other entities of Arco Vara group (together referred to as
‘the group’) are involved in real estate development and provision of real
estate services. The group has three business lines and its operations are
carried out by three divisions – Service, Development and Construction. 

The core business of the Service division consists of real estate brokerage and
valuation, real estate management and consulting, and short-term investment in
residential real estate. 

The core business of the Development division is development of complete living
environments and commercial real estate. Fully developed housing solutions are
sold to the end-consumer. In the development of commercial real estate, the
purpose is to create an asset generating cash flow that can either be held for
consolidating the group’s own cash flows or sold. The group is currently
holding some completed commercial properties that generate rental income. 

The core business of the Construction division was provision of general
construction and environmental engineering services as a general contractor or
a subcontractor. We are planning to discontinue provision of construction
services to external customers by the end of 2013 and do not intend to start
any new projects funded by the public sector or the EU. We may continue
construction operations as part of our development business. 

The performance of all divisions is subject to seasonal fluctuations. The
transaction volumes of the Service division usually increase in autumn and
spring and the Construction division’s turnover and the Development division’s
investment volumes decline in winter. 

At the end of the third quarter of 2013, the group comprised of 23 companies
(30 September 2012: 24). In addition, at 30 September 2013 the group had two
joint ventures (30 September 2012: 2) and one associate (30 September 2012: 1). 

The group’s active markets are Estonia, Latvia and Bulgaria.



Mission, vision and shared values

The mission of Arco Vara is to be a comprehensive and valued provider of real
estate solutions. 

The vision of Arco Vara is to become a symbol of real estate.

Our core values include:

                Partnership – our client is our partner

                Reliability – we are reliable, open and honest

                Professionalism – we deliver quality

                Consideration – we value our clients as individuals

                Responsibility – we keep our promises



CHANGES IN GROUP STRUCTURE DURING 2013



On 1 March 2013, Arco Investeeringute AS divested its 100% interest in the
subsidiary Pärnu Turg OÜ to Bellvory Turg OÜ. The group’s sales gain on the
transaction amounted to 98 thousand euros. As a result of the divestment, the
group’s assets decreased by 2,067 thousand euros and its loan liabilities
declined by 772 thousand euros. The group’s annual revenue will decrease by
around 300 thousand euros. 

On 30 May 2013, Arco Investeeringute AS divested its 100% interest in the
subsidiary T53 Maja OÜ to the group’s parent Arco Vara AS. The purpose of the
divestment was to streamline the group’s structure and loan relations and
achieve administrative cost efficiencies. The transaction had no impact on the
group’s financial position or financial performance. 

On 31 May 2013, Arco Investeeringute AS divested its 100% interest in the
subsidiary Kolde AS to the group’s parent Arco Vara AS. The purpose of the
divestment was to streamline the group’s structure and achieve administrative
cost efficiencies. The transaction had no impact on the group’s financial
position or financial performance. 

On 20 June 2013, Arco Investeeringute AS divested its 100% interest in the
subsidiary Kerberon OÜ to the group’s parent Arco Vara AS. The purpose of the
divestment was to streamline the group’s structure and loan relations and
achieve administrative cost efficiencies. The transaction had no impact on the
group’s financial position or financial performance. 

On 1 July 2013, Arco Investeeringute AS divested its 100% interest in the
subsidiary Arco Development SIA to the group’s parent Arco Vara AS. The purpose
of the divestment was to streamline the group’s structure and loan relations
and achieve administrative cost efficiencies. The transaction had no impact on
the group’s financial position or financial performance. 

On 8 July 2013, Arco Investeeringute AS divested its 100% interest in the
subsidiary Arco Invest UAB to the group’s parent Arco Vara AS. The purpose of
the divestment was to streamline the group’s structure and loan relations and
achieve administrative cost efficiencies. The transaction had no impact on the
group’s financial position or financial performance. 

On 17 July 2013, Arco Investeeringute AS divested its 100% interest in the
subsidiary Marsili II SIA to the group’s parent Arco Vara AS. The purpose of
the divestment was to streamline the group’s structure and loan relations and
achieve administrative cost efficiencies. The transaction had no impact on the
group’s financial position or financial performance. 

On 9 August 2013, the group’s Bulgarian subsidiary Arco Invest EOOD established
subsidiary Arco Manastirski EOOD with 100% ownership and share capital amounted
to 2,676 thousand euros. On 4th September company was sold to Arco Vara AS. The
aim of transaction was separate different assets into separate legal entities
(Madrid Blvd development and Manastirski Livadi development). The transaction
had no impact on the group’s financial position or financial performance. 

On 30 September 2013, the group’s subsidiary T53 Maja OÜ was renamed to Arco
Vara Haldus OÜ. 

Group continues restructuring and simplification of group structure also in the
fourth quarter of 2013. The goal is to have two-tier group structure.
Resturcturing must meet two criterias: 

i)              Direct control of all relevant business entities by parent
company; 

ii)             Separating all development projects into separate companies-
i.e. one project, one entity. 

As a result all risks, revenues and liabilities of separate projects are kept
in individual companies.  Due to changes parent company will have direct
control of all development projects (as owner and creditor) and other relevant
subsidiaries which offer products and services to clients. 







KEY PERFORMANCE INDICATORS



·Sales revenue for 9 monts of 2013 was 12.4 million euros, which was 23% lower
compared to the same period of last year. Most significant reduction in
revenues is related to construction services, which reduced by 57 per cent.
Development and services divisions posted increase of 19 per cent and 11 per
cent in 3rd Quarter. Sales revenue decreases in Q3 by 4% compared to the same
period of last year. 

·Operating proft for 9 months 2013 was 2.7 million euros, compared to loss for
the same period last year. Third Q3 operating profit was 0.7 million euros,
compared to 0.6 million for the same period of 2012. 

·Net profit for 9 month of 2013 was 2 million euros. Last year the result was
1.1 million net loss. Net profit of third quarter increased to 0.5 million
euros compared to 0.2 million for Q3 2012. 

·Earnings per share were 0.42 euros for 9 month 2013 compared to net loss of
0.21 euros per share for 9 month 2012. 

·Owners equity to assets ratio shows improvement. As at 30 September 2013, it
was 21%, compared to 11% on 31 December 2012. 

·Net loans have decreased to 14.5 million euros as of 30 September 2013 (18.4
million euros as at 30 September 2012). Average annual interest rate of loans
is 5.9% (as at 30 September 2102 it as 6.5%) 

·During nine months 2013 the group sold 59 apartments, plots and commercial
areas (9 months 2012: 57). 

                                          9 month      9 month  Q3 2013  Q3 2012
                                             2013         2012                  
In millions of euros                                                            
Revenue                                      12.4         16.0      4.7      4.9
Operating profit/loss                         2.7          0.0      0.7      0.6
Net profit/loss                               2.0         -1.1      0.5      0.2
                                                                                
EPS (in euros)                               0.42        -0.21     0.09     0.05
                                                                                
Total assets at period-end                   25.7         49.1                  
Invested capital at period-end               20.4         40.1                  
Net loans at period-end                      14.5         18.4                  
Equity at period-end                          5.4         20.3                  
Equity to assets ratio at period end          21%          41%                  
                                                                                
Average loan term (in years)                  1.7          1.9                  
Average interest rate of loans (per          5.9%         6.5%                  
 year)                                                                          
ROIC (rolling, four quarters)                 neg          neg                  
ROE (rolling, four quarters)                  neg          neg                  
                                                                                
Number of staff at periood-end                 71          103                  



FORMULAS USED

Earnings per share (EPS) = net profit attributable to owners of the parent /
(weighted average number of ordinary shares outstanding during the period – own
shares) 

Invested capital = current interest-bearing liabilities + non-current
liabilities + equity (at end of period) 

Net loans = current interest-bearing liabilities + non-current liabilities –
cash and cash equivalents – short-term investments in securities (at end of
period) 

Equity to assets ratio = equity at end of period / total assets at period end

Average equity = past four quarters’ equity at end of period / four

Return on equity (ROE) = past four quarters’ net profit / average equity

Average invested capital = past four quarters’ current interest-bearing
liabilities, non-current liabilities and equity / four 

Return on invested capital (ROIC) = past four quarters’ profit before tax and
interest expense / average invested capital 

Number of staff at period-end = number of people working under employment
contracts, excludes brokers and apprises that work for the group under service
contracts 







Group Chief Executive’s review



General Comments

Q3 was the quarter for re-launching Arco Vara’s volume development projects
that will start impacting the group’s revenues at the end of 2014. We continued
the improvement cycle in the group’s work processes, data processing and
product development. We also complemented out team with needed competence.
Restructuring of the group and cleaning of the balance sheet is reaching the
end of the process. 

The group is now completely focused on the future and profitability. By keeping
this focus, we must overcome the anticipated fall in revenues during 2014,
which is caused by decreasing stock and self-inflicted gap in the development
process of the previous years. We expect increase of revenues of the services
division and maintaining its profitability at current levels, because the
brokerage, evaluation and facility management sectors have intense competition
on the one hand and on the other we need to do investments into the main
assets, which have been postponed in the previous years. 

In conjunction with completion of significant part of group’s restructuring
process, one may note that the group’s balance sheet does not include any more
any single development project, which could endanger the group’s sustainability
even in case of complete failure of that project. 

Engagement of capital is still high on the agenda, either as project-based
approach (such as a targeted bond issue to finance particular development
project) or, depending on the readiness of shareholders and the capital
markets, as a share issue. Naturally the group must demonstrate strong return
on equity. 

a)     We proceeded according to timetable with the project in Tallinn,
Paldiski road 70c, which is currently in detail planning stage. Presumed volume
is 300 apartment units, presumed gross sellable area (GSA) above grade 24 000
sq.m. 

b)     We completed the design and finance preparations for the project in
Sofia, Manastirski Livadi Stage II with presumed volume of 132 apartment units
and gross sellable area above grade  of 12 500 sq.m. In order to commence the
project, it was necessary to separate the Manasirski and Madrid Blvd. assets
and liabilities into different legal entities and complete premature repayment
of the Piraeus Bank’s outstanding Manastirski loan, which was executed in third
quarter. The repayment was partly financed by Arco Vara bond issue (750 000 EUR
at 14% interest rate). By publication date of this report, the group has
already executed the loan agreement and the construction contract to implement
the project. See also stock exchange announcement on 13 November 2013. 



c)     We will also proceed with Manastirski Livadi Stage III where the group
is the owner of the immovable, construction rights and partly completed under
grade construction. Presumed project volume is exceeding 70 apartments and GSA
above ground is in excess of 6,000 sq.m. The project will be launched in
accordance with fulfilment of the internal sales targets of Stage II,
presumably by end of 2015; 



d)     The group continues selling Bisumuiša-1 apartments in Riga. It must be
noted however, that the new middle-class apartment market (not the so-called
investment apartment market for EU-residence permit) is and remains weak for at
least another year. due to big amount of toxic assets in banks’ balance sheets.
From the consumer’s viewpoint, the banks tend to offer finance at foremost for
purchase of their own toxic assets. However the group will not change its
pricing and is well prepared to continue with slower sales pace without
sacrificing profit margins. 



e)     In Estonia, as at the end of Q3, the group’s own production stock has
been sold out with an exception of a single apartment in Tallinn, which is due
to be sold in Q4. Next consumer residence products will be ready for delivery
in 2015 at the earliest. 

Work process, research & development and complements to the team

Different units of the group commenced the development of process-specific
software and improvement of quality management systems, as well as research of
practical implementation of various energy efficiency technologies. As an
example, during the design stage we made more than 120 slight improvements into
Manastirski Stage II apartments, considering the inputs and feedback that we
got from Manastirski Stage I and other peers. 

The parent company’s team was joined by chief finance officer Marko Err and
chief marketing officer Andre Poopuu. 



Cleaning of balance sheet

a)     We continued efforts to restructure Ahtri 3 project. Unfortunately the
parties could not find a satisfactory solution during Q3, but the good will
efforts are continuing. Until a final, in- or out-of- court solution is
reached, we deem necessary to maintain the 1.9 million provision which was
established in conjunction with the guarantee issued by Arco Investeeringute AS
in favour of Danske Bank to secure Arco HCE’s loan obligations. 

b)     Arco Ehitus (Arco construction company) continued fulfilment of its
obligations under the construction contracts and as of the report date, we have
completed the last (Kuusalu) project. Therefore all Arco’s construction
contracts have been duly performed and completed. We are not seeking new
contracts with third parties, because general works or environmental
construction does not fall under the group’s businss scope. We have long
earlier predicted the weak demand on the one side and overcapacity and
oversupply on the other side of the Estonian construction sector for the coming
years. Arco Ehitus is remaining in the group’s balance sheet as legal entity
which assets and liabiliies are all related to judicial disputes that originate
from previous years. The factual value of overwhelming majority of Arco
Ehitus’s assets and liabilities will be established as a result of court
judgements, once they become issued and enter into force. The biggest creditor
of Arco Ehitus, as at the end of Q3 is the group itself. No legal dispute
related to Arco Ehitus should significantly affect the group’s general
operations or profitability. 

c)     The biggest risk of upcoming quarters is related to attempts to
refinance of Piraeus Bank’s loan on the Madrid Blvd. project in Sofia, and in
case of failure, the probable non-fulfilment of the loan agreement by group’s
subsidiary Arco Invest EOOD.  Although the building’s lettable area is 99%
occupied and is generating positive cash flow, the predictable sales pace of
apartments in the building is not sufficient to meet the obligation to repay
1.8 million euros as principal during 2014. The whole loan becomes due in 2015. 



Comment on sale revenues

  We noted in Q2 report that the sales revenue decrease is inevitable because
(i) completion of construction activities and (ii) the gap in development
production of 2011-2012. As a minimum it takes more than 4 years to complete
one full production cycle of the group’s main product – residential or office
property, if one counts the time from the moment of acquisition of the land
without building rights, followed by design, construction and selling or
letting out. 

As there are no new end products in the production pipeline for 2013 and 2014,
the decrease of revenue from development products is inevitable. The group is
actively searching possibilities to cut through to fast development and sales
possibilities for 2014, without compromising expectations to return on equity
and also Arco Vara’s demands on the quality of the development project. 

The groups also sold its last remaining property in Lithuania and reduced its
loan liabilities. The positive cashflow from the sales was directed to finance
development activities in Bulgaria. 

We look positively at increase of sale revenues in services division,
considering also the tight competition in Estonian, Latvian and Bulgarian
markets and still rather unsure than sure situation among consumers and finance
sector. It should be noted that the importance and quality of informational
inputs from services division to development division has significantly
increased during the first 9 months of 2013. 



Comment on profit

The groups target for 2013 was to achieve operating profit. After 9 months, we
are making operating profit as well as net profit and all divisions of the
group are profitable. 

As regards the service division, it should be noted that we have increased
expenditure and investments into main assets and work processes improvement
(software, team trainings etc), which have been postponed in previous years. In
the long run the expenditure and investments should result in further increase
of service division’s revenue and also increase of profit. It should also bring
along the further improvements in the quantity and quality of the input data
for development division. 

At the end of Q3 I shall still continue pointing out, that in order to change
the group’s course and maintain profitability, we need to increase the sales
volume. While the growth is supported by the service division, the foremost
source of growth shall be the continuation and expansion of development
business. For that purpose the group must engage more capital. 



Comment on loan burden

The group’s net loan liabilities decreased in Q3 as the group continues to sell
the products of its development division and despite the 750,000 euros bond
issue. 

More than 80% of the group’s loans are related to Bulgarian development
projects, of which the biggest outstanding balance (12 million euros) lies with
Piraeus Bank’s loan to Madrid Blvd project. Neither the parent company nor
other subsidiaries which embrace other significant development projects of the
group have assumed any financial obligations in relation to that loan. 

We expect increase of the loan exposure in 2013 Q4 and during 2014, because the
group is planning to expand its development activities and the positive
cashflows from the sales of existing stock are not sufficient to finance
expansion. 


Comments on human resources

In the third quarter the number of people working for the group did not change
considerably and we are not planning to make any major changes to personnel or
personnel expenses except for those resulting from shrinkage of operations at
the Construction division and reinforcement of our marketing, financial
management and information processing teams. 







 REVENUE AND PROFIT



                                   9 month 2013  9 month 2012  Q3 2013  Q3 2012
In millions of euros                                                           
Revenue                                                                        
Service                                     2.1           1.9      0.8      0.6
Development                                 6.8           5.7      2.8      1.9
Construction                                3.7           8.6      1.2      2.5
Eliminations                               -0.1          -0.2      0.0     -0.1
Total revenue                              12.4          16.0      4.8      4.9
                                                                               
Operating profit/loss                                                          
Service                                     0.2           0.6      0.1      0.6
Development                                 2.6          -0.1      0.4      0.3
Construction                                0.4           0.2      0.4     -0.1
Unallocated income and expenses            -0.2          -0.7     -0.1      0.0
Eliminations                               -0.3           0.0     -0.1     -0.2
Total operating profit/loss                 2.7           0.0      0.7      0.6
                                                                               
Finance income and expenses (net)          -0.7          -1.1     -0.2     -0.4
Net profit/loss                             2.0          -1.1      0.5      0.2



CASH FLOWS

                                            9 month      9 month      Q3      Q3
                                               2013         2012    2013    2012
In millions of euros                                                            
Cash flows from operating activities           -0.2          0.2     0.2     0.5
Cash flows from investing activities            1.4          0.8     0.0    -0.1
Cash flows from financing activities           -2.4         -2.0    -0.4    -1.5
Net cash flows                                 -1.2         -1.0    -0.2    -1.1
                                                                                
Cash and cash equivalents at beginning          1.8          2.2     0.8     2.3
 of period                                                                      
Cash and cash equivalents at end of             0.6          1.2     0.6     1.2
 period                                                                         



During next 12 months the group must pay back 1.45 million euros of loans in
Boulevard Residence Madrid in Sofia. After the date of interim report the group
has repaid final amount of loan of Bišumuiža-1  in amount of 0,2 mln eurot. 

During 9 monts of 2013 the group has made loan repayments in Madrid and
Manastirski projects in Sofia and completely paid back loans of Pärnu Turg,
Kodukolde and Kastanimaja projects in Estonia. 

Also sale-related debt reduction has been occurred in Marsili II SIA and loan
payment schedule has been set for loan of Arco Real Estate AS. 





SERVICE DIVISION

For 9 month 2013, operating profit of Service division was 187 thousand euros
compared to 663 thousand euros for the same period of last year. The operating
profit decreased compared to the same period of 2012, but the last year’s
result contained also extraordinary income in amount of 556 thousand euros.
Sales revenue has increased from 1.9 million euros for 9 months 2012 to 2.1
million euros for 9 months 2013. Number of brokerage deals has increased by 5%
and number of valuation reports has increased by 14%. Number of brokers has
increased by 5 to 79 and number of valuators by 2- to 49. 

We must stress that number of employees includes only employees who have
working agreement with Group. Significant number of brokers and valuatiors are
employed as sub-contractors. 



                                                9 months      9 months   Change,
                                                    2013          2012         %
Number of completed brokerage transactions         1,160         1,106        5%
Number of valuation reports issued during          5,419         4,753       14%
 the period                                                                     
Number of appraisers  at end of period¹               49            47        4%
Number of brokers at end if period¹                   79            74        7%
Number of staff at end of period                      49            37       32%



DEVELOPMENT DIVISION

In Q3 2013, total of 16 apartments, 2 plots and 3 commercial areas were sold in
Arco Vara projects.  2 plots in Baltezers project and 5 apartments in
Bišumuiža-1 project in Latvia, 11 apartments in Kastanimaja project in Estonia
and 3 smaller commercial areas in Manastirski project In Bulgaria were sold.
Also, a residential property in Lihtuanian capital Vilnius was sold in Q3. 

The permit for the construction of a mixed-use residential/commercial building
of energy class B called Kastanimaja (Chestnut House) at Tehnika 53 in Tallinn
was obtained in January 2012. In Q3 2013, construction work has been completed
and the permit of use has been issued for the building. Sales have been
successful as all apartements are sold by the publication date of this report. 

In Bulgaria, we continue to sell phase I of the Manastirski project. By the
publication date of this report, 72 apartments out of the 74 have sold and we
have started planning phase II of the Manastirski project. In the
commercial/residential building Boulevard Residence Madrid in Sofia we continue
to lease out commercial and office premises and to sell and rent out the
remaining free apartments. 

In Bišumuiža 1 apartment buildings project in Latvia, in February 2013 we
extended the construction permit to continue development of the project. By the
publication date of this report, the building with 14 apartments and with
sellable area of 1,149 square metres has been completed. By the publication
date of this report were sold 9 apartments. The last building of the project,
also with 14 apartments, is awaiting its turn. The outer shell has already been
erected. All apartments in the project’s previously completed 7 buildings have
been sold. 

At the end of September  2013, the division employed 4 people (30 September
2012: 20). 

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



CONSTRUCTION DIVISION

The Construction division specialises in environmental engineering and the
construction of infrastructure assets. 

At the end of Q3 2013, the only projects in the process was construction of the
Kuusalu public water and wastewater network with remaining balance of 0.09
million euros. 

At the end Q3 2013, the Construction division’s order backlog stood at 0.09
million euros compared with 4.5 million euros at the end of the Q3 2012. 

At 30 September 2013, the division employed 9 people (30 September 2012: 40
people). 



PEOPLE

At the end of Q3 2013, the group employed 71 people compared with 103 at the
end of the third quarter of 2012. Employee remuneration expenses for the 9
months of 2013 totalled 2.2 million euros compared with 2.7 million euros for
the 9 month of 2012. 

The remuneration of the member of the management board/chief executive and the
members of the supervisory board of the group’s parent company including social
security charges for the 9 months of 2013 amounted to 148 thousand euros
compared with 176 thousand euros for the 9 month of 2012. 

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




SHARE AND SHAREHOLDERS

Arco Vara AS has issued a total of 4,741,707 shares. At 30 September 2013, the
company had 1,801 shareholders and the share price closed at 1.26 euros, a
20.25% decrease within nine months. 



Major shareholders as of 30 September 2013  Number of shares  Interest %
LHV Pensionifond XL                                  110 445          2%
Central Securities Depository of Lithuania           149 171          3%
Firebird Republics Fund LTd                          205 064          4%
Lõhmus Holdings AS                                   252 378          5%
LHV Pensionifond L                                   310 000          7%
Alarmo Kapital OÜ                                    324 188          7%
Osaühing HM Investeeringud                           450 000          9%
Gamma Holding OÜ                                     470 080         10%
AS Baltplast                                       1 282 990         27%
Other                                              1 187 391         25%
Total                                              4,741,707        100%







Holdings of members of the management     Position             Number of  Intere
 and supervisory boards at 30 September                      shares held    st %
 2013                                                                           
Tarmo Sild (Alarmo Kapital OÜ)            member of the          324,188      7%
                                           management board                     
Hillar-Peeter Luitsalu (HM                chairman of the        459,507     10%
 Investeeringud OÜ, connected persons)     supervisory                          
                                           board                                
Toomas Tool (OÜ Baltplast)                member of the        1,282,990     27%
                                           supervisory                          
                                           board                                
Rain Lõhmus (Lõhmus Holdings AS, LHV      member of the          470,080     10%
 pension funds M, L, XL)                   supervisory                          
                                           board                                
Arvo Nõges (Gamma Holding OÜ)             member of the          687,523     15%
                                           supervisory                          
                                           board                                
Stephan David Balkin                      member of the                -      0%
                                           supervisory                          
                                           board                                
Aivar Pilv                                member of the                -      0%
                                           supervisory                          
                                           board                                
Total                                                          3,224,288     68%



DESCRIPTION OF THE MAIN RISKS



Credit risk

Credit risk exposure is the greatest at the Construction and Development
division. Accordingly, counterparties’ settlement behaviour is monitored on on
going basis quarantines and collaterials are also used. 

Liquidity risk

The group’s free funds are placed in overnight or short-term fixed-interest
term deposits with the largest banks operating in Estonia. Owing to high
refinancing risk, cash flow management is critical. The group’s cash and cash
equivalents balance is constantly smaller than the balance of loans that
require refinancing in the next 12 months. At 30 September 2013, the weighted
average duration of interest-bearing liabilities was 1.7 years, which means
that on average all loans need to be refinanced within less than two years. At
the end of the third quarter of 2013 the group’s cash and cash equivalents
totalled 0.6 million euros and term deposits with maturities extending from 3
to 12 months totalled 0.3 million euros. Out of the above balance 0.5 million
euros was under the group’s own control and the rest was in accounts with
restricted withdrawal opportunities (mostly accounts of designated purpose
where withdrawals require the banks’ consent). Liquidity and refinancing risks
continue to be the most significant risks for the group. 

Interest rate risk

The base currency of most of the group’s loan agreements is the euro and the
base interest rate is 3 or 6 month EURIBOR. As a result, the group is exposed
to developments in international capital markets. At the moment, the group does
not use hedging instruments to mitigate its long-term interest rate risk. 

In 9 month 2013, the group’s interest-bearing liabilities decreased by 3.6
million euros to 15.1 million euros at 30 September 2013. In 9 month 2013,
interest payments on interest-bearing liabilities totalled 0.7 million euros.
Compared with 30 September 2012, the weighted average interest rate as at 30
September 2013 decreased from 6.5% to 5.9%, mainly thanks to a decrease in the
interest rates negotiated on refinancing the bank loans of the group’s
Bulgarian development company. 

Currency risk

Purchase and sales contracts are mostly signed in local currencies: euros
(EUR), Latvian lats (LVL) and Bulgarian levs (BGN).Real Estate sales are
nominated in euros due to that company has low currency risk asset- liability
structure. The group is not protected against currency devaluations. Most
liquid funds are held in short-term deposits denominated in euros. 




         Marko Err,CFO
         E-mail: [email protected]