Börsiteade

Pealkiri

Arco Vara AS Interim Report (unaudited) for third quarter and nine months 2015

Teade

General information

As at 30 09 2015, the group comprised 25 companies, this is one more than at
the end of year 2014. On 31 July 2015, was registered a real estate fund in
Bulgaria named Arco Real Estate Fund REIT, with starting capital of 256
thousand euros. The group holds 70% interest in the fund. 

Significant subsidiaries

Company name       Locati  Segment       Share capital      Equity   The group's
                   on                  (nominal value)     balance      interest
                                                        at 30 Sept              
                                                              2015              
--------------------------------------------------------------------------------
In thousands of                                                                 
 euros                                                                          
Arco Manastirski   Bulgar  Develop               2,676       3,533          100%
 EOOD              ia         ment                                              
--------------------------------------------------------------------------------
Arco Invest EOOD   Bulgar  Develop              26,826         143          100%
                   ia         ment                                              
--------------------------------------------------------------------------------
Arco Real Estate   Bulgar  Develop                 256         256           70%
 Fund REIT ¹       ia         ment                                              
--------------------------------------------------------------------------------
Kolde AS           Estoni  Develop                  28         -69          100%
                   a          ment                                              
--------------------------------------------------------------------------------
Kerberon OÜ        Estoni  Develop                   5       1,177          100%
                   a          ment                                              
--------------------------------------------------------------------------------
Marsili II SIA     Latvia  Develop               1,524         937          100%
                              ment                                              
--------------------------------------------------------------------------------
Arco Development   Latvia  Develop               6,473      -1,972          100%
 SIA                          ment                                              
--------------------------------------------------------------------------------
Arco Real Estate   Estoni  Service                  42        -714          100%
 AS                a                                                            
--------------------------------------------------------------------------------
Arco Real Estate   Latvia  Service               1,905          71         70.6%
 SIA ¹                                                                          
--------------------------------------------------------------------------------
Arco Imoti EOOD    Bulgar  Service                 444         216          100%
                   ia                                                           
--------------------------------------------------------------------------------

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

Key Performance Indicators


·     In nine months 2015, the group’s revenue was 8.6 million euros, exceeding
by 156% the revenue of 9 months 2014, when revenue amounted to 3.3 million
euros. In Q3, revenue was 2.1 million euros (in Q3 2014: 1.2 million euros).
The increase of the group’s revenue comes from Development division, where
revenue amounted to 6.5 million euros in nine months 2015 (in 9 months 2014:
1.3 million euros). The revenue of Service division has remained on the same
level: 2.4 million euros in 9 months of both years: 2015 and 2014. Q3 2015
revenue of Service division increased by 8% compared to Q3 of previous year.
The sales figures of brokerage and valuation services shows growth second
quarter in a row, after the falling trend in second half of year 2014 and in
the beginning of year 2015. 

·     In nine months 2015, the group’s operating profit (=EBIT) was 1.4 million
euros and net profit 0.9 million euros, a year ago the same figures were 1.1
million euros and 0.4 million euros respectively. Moreover, the result of 2014
was impacted by two single events with total effect of 1.2 million euros on
profit: gain from the sale of a subsidiary and reversal of inventory
write-down. In Q3, operating profit was 0.3 million euros and net profit
amounted to 0.2 million euros. In Q3 2014, the group had operating profit of
0.6 million euros and net profit of 0.4 million euros. 

·     For 30 September 2015, equity to assets ratio has been risen up to 40.3%.
At 31 December 2014, the figure was 33.5%. 

·     The group’s net loans have decreased by 2.2 million euros in nine months
2015, down to 11.1 million euros as at 30 September 2015. As at 30 September
2015, the weighted average annual interest rate of loans was 5.1%. This is a
decrease by 0.7 percentage points compared to 31 December 2014. 

·     In nine months 2015, were sold 73 apartments, 6 commercial spaces and one
residental plot (of which 12 apartments, one commercial space and one plot in
Q3) in projects developed in the group. In nine months 2014, were sold only 4
apartments and 4 plots (of which one apartment and 4 plots in Q3). 

                                 9 months 2015  9 months 2014  Q3 2015  Q3 2014
-------------------------------------------------------------------------------
In millions of euros                                                           
-------------------------------------------------------------------------------
Revenue                                                                        
-------------------------------------------------------------------------------
Development                                6.5            1.3      1.4      0.5
-------------------------------------------------------------------------------
Service                                    2.4            2.4      0.9      0.8
-------------------------------------------------------------------------------
Eliminations                              -0.4           -0.3     -0.1     -0.1
-------------------------------------------------------------------------------
Total revenue                              8.6            3.3      2.2      1.2
-------------------------------------------------------------------------------
                                                                               
-------------------------------------------------------------------------------
Operating profit (EBIT)                                                        
-------------------------------------------------------------------------------
Development                                1.6            0.7      0.4      0.6
-------------------------------------------------------------------------------
Service                                    0.1            0.2      0.0      0.1
-------------------------------------------------------------------------------
Unallocated income and expenses            0.0            0.2      0.0     -0.2
-------------------------------------------------------------------------------
Eliminations                              -0.3            0.0      0.0      0.1
-------------------------------------------------------------------------------
Total operating profit (EBIT)              1.4            1.1      0.4      0.6
-------------------------------------------------------------------------------
                                                                               
-------------------------------------------------------------------------------
Finance income and expense                -0.5           -0.7     -0.2     -0.3
-------------------------------------------------------------------------------
Net profit                                 0.9            0.4      0.2      0.3
-------------------------------------------------------------------------------
                                                                               
Main ratios                                                                    
-------------------------------------------------------------------------------
EPS (in euros)                            0.15           0.08     0.03     0.07
-------------------------------------------------------------------------------
ROIC (rolling, four quarters)             5.6%           7.7%                  
-------------------------------------------------------------------------------
ROE (rolling, four quarters)             13.9%          24.7%                  
                                                              -----------------
ROA (rolling, four quarters)              5.1%           6.9%                  
-------------------------------------------------------------------------------



                                                                
----------------------------------------------------------------
                                       30 Sept 2015  31 Dec 2014
----------------------------------------------------------------
In millions of euros                                            
----------------------------------------------------------------
Total assets, at period end                    24.5         27.0
----------------------------------------------------------------
Invested capital, at period end                22.2         24.1
----------------------------------------------------------------
Net loans, at period end                       11.1         13.3
----------------------------------------------------------------
Equity, at period end                           9.9          9.1
----------------------------------------------------------------
                                                                
----------------------------------------------------------------
Average loan term (in years)                    2.0          2.3
----------------------------------------------------------------
Average annual interest rate of loans          5.1%         5.8%
----------------------------------------------------------------
Number of staff, at period end                  170          189
----------------------------------------------------------------



Cash flows

                                           9 months     9 months      Q3      Q3
                                               2015         2014    2015    2014
--------------------------------------------------------------------------------
In millions of euros                                                            
--------------------------------------------------------------------------------
Cash flows from/used in operating               3.1         -3.3    -0.1    -1.4
 activities                                                                     
--------------------------------------------------------------------------------
Cash flows from/used in investing              -0.1          0.2     0.0     0.1
 activities                                                                     
--------------------------------------------------------------------------------
Cash flows from/used in financing              -3.5          3.7     0.2     2.1
 activities                                                                     
--------------------------------------------------------------------------------
Net cash flows                                 -0.5          0.6     0.1     0.8
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cash and cash equivalents at beginning          1.7          0.8     1.1     0.6
 of period                                                                      
--------------------------------------------------------------------------------
Cash and cash equivalents at end of             1.2          1.4     1.2     1.4
 period                                                                         
--------------------------------------------------------------------------------

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) 
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
Number of staff at period-end = number of people working for the group under
employment or authorization (service) contracts 

Revenue and net profit/loss from continuing operations 
        Q1      Q2      Q3      Q4      Total   Q1      Q2      Q3      Q4     
Total   Q1      Q2      Q3      Q4      Total   Q1      Q2      Q3      Total 
         2012    2012    2012    2012    2012    2013    2013    2013    2013  
 2013    2014    2014    2014    2014    2014    2015    2015    2015    2015, 
                                                                               
                                                                         9m 
In 
 milli 
ons of 
 euros 
Revenu     1.3     3.7     2.4     3.5    10.9     1.7     3.5     3.5     2.0 
  10.7     1.1     1.1     1.2     5.8     9.2     4.4     2.1     2.1     8.6 
e 
Net       -1.2    -0.3     0.3   -16.5   -17.7     0.0     1.4     0.1     2.0 
   3.5     0.4    -0.3     0.4     0.6     1.1     0.7     0.0     0.2     0.9 
 profi 
t/loss 

   Group Chief Executive’s review



Against all expectations, the third quarter turned out to be better than the
second. We completed all activities planned for the third quarter but we did
not expect it to turn profit. Profit was generated by the sale of existing
completed development products, which was faster than planned and for a higher
price, and a disciplined approach to expenses. If we are to conclude anything
from this, then it’s been proven in practice that with a quarterly revenue of a
minimum of two million euros, Arco Vara can earn a small loss (12 thousand in
Q2) or also profit (0.2 million in Q3). However, considering absolute activity
volumes and them being fairly small, the difference is not the sort to dwell on
further. Our bigger objective is to double the current revenue and profit of
the company by the end of 2018 at the latest. 

The important questions for the management are:

(i)             what will the fourth quarter be like,

(ii)            what will 2016 as a whole be like, and

(iii)           what will 2017 be like, when the group should just begin to
reap the benefits of 2013-2016. 

The fourth quarter

The fourth quarter is important because this is when the final and third stage
(block D) of the Manastirski building is completed in Sofia with 88 apartments
and business premises on sale and rent. Depending on the speed of delivering
apartments and formalizing sales transactions, block D forms the final result
of the year of the entire group and is also the financial basis for continued
developments in Sofia. The expected revenue of the entire block D is about 5
million euros, part of which remains in 2015, the majority in the first quarter
of 2016 and a certain part is carried over in sales until the end of 2016. With
block D, the pleasing part is that as of the end of September, over 80% of
apartments were covered with preliminary sales contracts (over 65% at the end
of Q2). 

The fourth quarter will also involve renovating and dividing the office
premises (GLA over 5,400 m2) into 7 separate rental areas in the Madrid Blvd
building in Sofia and finding new tenants for them. The lease contract with the
current long-term large tenant ended in September due to the tenant needing
increased space, which could not be resolved in the Madrid building for purely
technical reasons. The revenue from office premises in the Madrid building
forms over 50% of the rental revenue of the entire building and therefore,
finding new tenants is very important for generating profit. At the same time,
the Arco rental apartments and business premises in the building generate
enough rental revenue, therefore servicing the interests of bank loans
encumbering the building does not weigh down the group. 

An important issue in the fourth quarter is also commencing the Kodulahe
apartment development project in Tallinn (formerly Paldiski mnt 70c,
www.kodulahe.ee). Arco Vara has not developed anything in Tallinn into a
completed product since 2013. The volume of the first stage of the Kodulahe
development project is over 8,700 above-ground square metres with 125
apartments and 5 business premises on sale. Funding Kodulahe and starting
construction is a great challenge for us, considering the increasing
competition on the Tallinn apartment market as well as Arco Vara being
relatively small compared to the size of the project. In regards to increasing
competition, we are empasasing the fact that our product has a unique location
and it is priced rather aggressively in regards to the current prices on the
market. The relatively small size of Arco Vara is expressed in the fact that
the total amount of assets of the group is approximately 25 million euros. 10
million of this is equity, which in turn is divided between three large
developments. Two of those three are located in Sofia (Madrid Blvd and
Manastirski Livadi or its continued project in Iztok) and one – Kodulahe – in
Tallinn. 10 million euros is probably also the minimum equity to continuously
carry three large development projects, area under construction of each of
which exceeds 10,000 m2. 

The last important event we are waiting for is completing the transaction of
obtaining the plot in the Iztok region in Sofia. This can also be postponed
until the beginning of 2016. Iztok is our continued project in Sofia regarding
Manastirski Livadi. 

Events which have already taken place in the fourth quarter include Arco Vara
exiting the development projects in (i) Tallinn, Instituudi tee 7-9 and (ii)
Pärnu, Suur-Sepa 20. The difference between purchase and sale price of these
properties was motivating for us and also confirmed that the preliminary design
projects and business plans created by our development team have added value to
the projects. 

Currently, we are predicting revenue of Arco Vara to exceed 11 million euros
and net profit to exceed 1 million euros in 2015. 

2016

In 2016, we should see the continuation of three large development projects,
where we earn rental revenue in the Madrid Blvd building and are likely to
increase the number of apartments for rent. The goal is to earn annual rent of
over one million euros per year from the building. In the Manastirski project,
we will sell the last apartments and start to develop Iztok (GSA > 7,000 m2),
where construction works should begin in the second half of the year. Thirdly,
the first stage construction of Kodulahe project should be almost completed by
the end of 2016. 

In 2016, we also want to initiate the Arco real estate fund in Bulgaria and the
first bigger development project in Sofia in its framework, where Arco Vara
would hold the role of trustee and shareholder. We must use the readiness of
the Bulgarian capital market and the current visible achievements of Arco Vara
as an apartment developer on the local market. At present, the proceedings to
obtain the corresponding licence are underway. 

The year should also fit establishing detailed plans for the projects at Liimi
1b and Lehiku tee 21-23 in Tallinn. In the service division, the year 2016 will
be important due to a transfer to new organization strategy in management,
training and software developments. Managing customer relations, marketing and
measuring the efficiency of work processes will change. Arco Vara must become
the most human-centred real estate company, in this way contrasting to an
object- or transaction-centred real estate company. Considering our nearly a
hundred thousand customer contacts and the potential of our people, this is
definitely useful for our clients and through this, also for the shareholders
of the group. 

Financially, the income statement of 2016 holds a larger proportion in cranes
and a smaller proportion in sales transactions, as we are mostly in the phase
of development. Sales revenue is largely coming from the service division, rent
of Madrid Blvd and the sale of apartments at Manastirski Livadi. The sale of
development projects which are outside the main focus of the group is also
possible, but only if we achieve value added with our work in developing the
properties and the buyers are prepared to approve of this with the transaction
price. 

2017

In 2017, the three large development projects mentioned above (Madrid Blvd,
Kodulahe, Iztok Parkside) continue, and a  fourth development project has been
added to them depending on our success in earning profit and the commencement
of ARCO REIT in Sofia. 

The total revenue of these three development project should reach 20 million
euros in 2017, which would double the active volume of the group. At least the
same should also be expected from profit. Here, I should note that this is not
a limit of our current thinking and setting of goals. 



SERVICE DIVISION

In Q3 2015, revenue of service division was 852 thousand euros (in Q3 2014: 791
thousand euros), that included intra-group revenue of 107 thousand euros (in Q3
2014: 93 thousand euros). Revenue of service division from main services (real
estate brokerage and valuation services) was 2,180 thousand euros decreased by
8 thousand euros compared to the same period of previous year. At the same
time, third quarter revenue from main services increased by 5% compared to Q3
2014. Revenue continues to increase in Bulgaria, seeing a 41% increase if
compared 9 months of both years and 34% increase if third quarters are
compared. In Q3, revenue of Estonian agency increased second quarter in a row,
exceeding by 21% in third quarter the figures of Q3 2014. The revenue from main
services is still strongly decreasing in Latvian real estate agency: by 23% if
compared 9 months periods and by 22% if third quarters are compared. 

Revenue of real estate agencies from brokerage and valuation

                     9 months     9 months   Change,  Q3 2015  Q3 2014   Change,
                         2015         2014         %                           %
--------------------------------------------------------------------------------
In thousands of                                                                 
 euros                                                                          
--------------------------------------------------------------------------------
Estonia                   963          927        4%      355      293       21%
-----------------             -----------------------         ------------------
                 -------------                       ---------                  
Latvia                    679          879      -23%      243      312      -22%
-----------------             -----------------------         ------------------
Bulgaria                  538          382       41%      158      118       34%
--------------------------------------------------------------------------------
Total                   2,180       2 ,188        0%      756      723        5%
--------------------------------------------------------------------------------

During nine months 2015, the Estonian and Latvian agencies have operated on a
loss: 68 thousand and 51 thousand euros, respectively. In nine months 2014,
Estonian and Latvian agencies had net profit of 31 thousand euros and 62
thousand euros, respectively. The decrease in profitability of Estonian agency
is caused by significant increase of marketing and IT expenses: the goal is set
to reach higher level in revenues and accordingly growth of profit. Revenues
will increase with the help of wider reputation and bigger number of contacts,
customer oriented data processing and smarter work environment. Bulgarian
agency’s net profit was 138 thousand euros in nine months 2015 (in 9 months
2014: 81 thousand euros) and 27 thousand euros in Q3 2015 (in Q3 2014: 15
thousand euros). 

In addition to brokerage and valuation services, the service division also
provides real estate management services as well as accommodation service in
Bulgaria. The revenue from real estate management was 104 thousand euros in 9
months 2015, 77 thousand euros of which was intra-group revenue (in 9 months
2014: 124 thousand and 86 thousand euros, respectively). Revenue from
accommodation services amounted to 105 thousand euros in first nine months of
2015, of which 50 thousand euros in Q3 (in 9 months 2014: 55 thousand and 20
thousand euros). The sales of accommodation service have shown nice growth in
2015, especially in Q3. 

The number of staff in service division has been decreased to 157 employees as
at 30 September 2015, which is 19 people less compared to year end 2014. 

DEVELOPMENT DIVISION

In 9 months 2015, revenue of development division totalled 6,544 thousand euros
(in 9 months 2014: 1,289 thousand euros), of which 487 thousand euros in Q3
2015 (in Q3 2014: 487 thousand euros). The big leap in revenues comes from the
sale of properties in the group’s own development projects, amounting to 5,713
thousand euros in nine months 2015 (compared to only 485 thousand euros in 9
months 2014). 

Most of the remaining revenue of development division consist of rental income
from commercial and office premises in Madrid Blvd building in Sofia, amounted
to 234 thousand euros in Q3 2015 and 708 thousand euros in 9 months (in Q3
2014: 234 thousand euros and 9 months 2014: 718 thousand euros). In Q4, some
decrease in rental income is expected due to conclusion of rental agreements
and there is ongoing renovation and preparation works of rental spaces to meet
new tenants. The rental income is planned to recover on the previous level in
Q2 2016. 

In nine months 2015, operating profit of development division was 1,598
thousand euros, of which 377 thousand euros in Q3.  In nine months 2014, was
earned 696 thousand euros of operating profit, of which 632 thousand euros in
Q3. 

In Q3 2015, has been continued the apartment sales of Manastirski Livadi
project. In Q3 2015, were sold 9 apartments and one commercial space in the
project, including two last apartments from first stage (named also as block
C). In nine months, total of 70 apartments and 6 commercial spaces have been
sold in Bulgaria. As at 30 September 2015, 3 apartments and 2 commercial spaces
from second stage of the project remained in stock, out of 135 in total. 

As at 30 September 2015, 66 apartments out of 80 and one commercial space out
of 8 have been presold in third stage of Manastirski Livadi project. Three more
apartments have been pre-sold in October. The apartment building will be ready
and permit for use is scheduled for December. 

28 apartments remained unsold in Madrid Blvd complex. 16 apartments and all
parking places, out of all Madrid Blvd unsold apartments, are rented out. 

Three apartments in Bishumuiza-1 project and one Marsili residental plot were
sold in Latvia in Q3. There remains the last apartment unsold in Bisumuisa-1
project as well as 14 residental plots in Marsili. 

In Estonia, there were concluded design works of the first stage apartment
building (with 125 apartments and 5 commercial spaces) in Kodulahe project.
Permit for construction of apartment building was obtained at the end of
September. At the publishing date of the interim report, there was ongoing
construction procurement and arranging the financing. The construction of the
apartment building should start in December 2015, after the construction
procurement and financing arrangements will succeed. The marketing of
apartments started at the end of Q3. 

In June 2015, a smaller land plot in Suur-Sepa street, in centre town of Pärnu,
was acquired as an addition to the group’s land bank. The plot is suitable for
apartment building. After preparing preliminary design the plot was sold
profitably at the beginning of October. Also at the beginning of October, the
group sold another smaller development: Instituudi road residental development
project, acquired in February 2014. The latter project was also up-valued with
the preliminary design. Selling smaller projects bears the goal of focusing on
most important projects in Estonia and Bulgaria. 

As at 30 September 2015, 5 people were employed in development division, the
same as at the end of year 2014. 

SUMMARY TABLE OF ARCO VARA’S PROJECTS AS AT 30 SEPTEMBER 2015

Project   Address   Product  Stage  Area of  GSA / GLA (above        No of units
 name                main           plot(s)  grade) available      (above grade)
                     type              (m2)        or <future       available or
                                                      target>    <future target>
--------------------------------------------------------------------------------
Manastir  Manastir  Apartme  S5           -               498                  5
ski A/B   ski,      nts                                                         
           Sofia                                                                
--------------------------------------------------------------------------------
Manastir  Manastir  Apartme  S4       2,223             6,672                 88
ski D     ski,      nts                                                         
           Sofia                                                                
--------------------------------------------------------------------------------
Madrid    Madrid    Lease:   S5/S6        -             7,350                 16
 Blvd      Blvd,     Retail                                                     
           Sofia    /Office                                                     
--------------------------------------------------------------------------------
Madrid    Madrid    Apartme  S5/S6        -             3,216                 28
 Blvd      Blvd,    nts                                                         
           Sofia                                                                
--------------------------------------------------------------------------------
Bisumuiz  Kometas   Apartme  S5           -               105                  1
a-1        2, Riga  nts                                                         
--------------------------------------------------------------------------------
Marsili   Marsili,  Residen  S5           -            25,389                 14
 residen   near     tal                                                         
tal        Riga      plots                                                      
 plots                                                                          
--------------------------------------------------------------------------------
Marsili   Marsili,  Residen  S2     120,220         <120,220>               <68>
 residen   near     tal                                                         
tal        Riga      plots                                                      
 plots                                                                          
--------------------------------------------------------------------------------
Kodulahe  Lahepea   Apartme  S3       6,102             8,739                130
, stage    7,       nts                                                         
 1         Tallinn                                                              
--------------------------------------------------------------------------------
Kodulahe  Lahepea   Apartme  S2      14,264          <13,300>              <200>
, stages   street,  nts                                                         
 2-5       Tallinn                                                              
--------------------------------------------------------------------------------
Lehiku    Lehiku    Apartme  S2       5,915           <1,100>                <5>
 carpet    21,23    nts                                                         
 buildin   Tallinn                                                              
g                                                                               
--------------------------------------------------------------------------------
Liimi     Liimi     Lease:   S2       2,463           <6,500>                <1>
           1b,       Office                                                     
           Tallinn                                                              
--------------------------------------------------------------------------------
Viimsira  Haabneem  Office/  S3/S5   14,174               500                  1
nna       e,        Mix                                                         
           Viimsi                                                               
           vald                                                                 
--------------------------------------------------------------------------------

Note: Value presented inbetween < > means future target value as the project is
in early (S1, S2) development stage and the building rights or the design have
not been finished yet. The table does not reflect sellable or lettable volumes
below grade including parking spaces and storages. 

Description of stages

S1: Land plot acquired
S2: Building Rights Procedure
S3: Design and Preparation Works
S4: Construction
S5: Marketing and Sale
S6: Facility Management and/or Lease



PEOPLE

As at 30 September 2015, 170 people worked for the group (189 as at 31 December
2014). Employee remuneration expenses in nine months 2015 amounted to 1.9
million euros (in 9 months 2014: 1.8 million euros). 

The remuneration of the member of the management board/chief executive and the
members of the supervisory board of the group’s parent company including social
security charges in first nine months 2015 amounted to 83 thousand euros (76
thousand euros in 9 months 2014). 

MANAGEMENT BOARD AND SUPERVISORY COUNCIL

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

At 30 September 2015, the supervisory board of Arco Vara AS has 5 members. As
at the end of 2014, the supervisory board had 7 members. On 10 February 2015,
extraordinary shareholders meeting recalled previous supervisory board and
elected new supervisory board with 5 members: Hillar-Peeter Luitsalu, Allar
Niinepuu and Rain Lõhmus (re-elected from the previous board), and Steven
Yaroslav Gorelik and Kert Keskpaik (newly elected to the new board). The
members of previous supervisory board Toomas Tool, Arvo Nõges, Aivar Pilv and
Stephan David Balikn will not continue in new board. 

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


DESCRIPTION OF THE MAIN RISKS

Credit risk

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

Liquidity and interest rate risks

The base currency of all of the group’s loan agreements is euro and the base
interest rate is 3 or 6 months EURIBOR. As a result, the group is exposed to
developments on the international capital markets. The group does not use
hedging instruments to mitigate its long-term interest rate risk. In nine
months 2015, the group’s interest-bearing liabilities have decreased by 2.7
million euros and at 30 September 2015 amounted to 12.3 million euros, of which
1.8 million euros is due within next 12 months. At the same time, the group’s
cash and cash equivalents totalled 1.2 million euros as at 30 September 2015.
In 9 months 2015, interest payments on interest-bearing liabilities totalled
0.6 million euros. The group’s weighted average loan interest rate was 5.1% as
at 30 September 2015. This is a decrease by 0.7 percentage points in nine
months 2015. The main reason for the decrease of average interest rate is the
premature redemption of bonds in February 2015. The bonds bore higher than
average interest rate. Marginal effect had also the decrease of EURIBOR rates
down to zero-level. 

Currency risk

Purchase and sales contracts of provided services are mostly signed in local
currencies: euros (EUR) or Bulgarian lev (BGN). Real estate sales are mostly
nominated in euros, as a result of which the group’s assets and liabilities
structure does not denote a significant currency risk. The group is not
protected against currency devaluations. Most liquid funds are held in demand
or short-term deposits denominated in euros. 



Share and shareholders

Arco Vara AS has issued a total of 6,117,012 ordinary shares with nominal value
of 0.7 euros per share. The shares are freely traded on NASDAQ OMX Tallinn
stock exchange. As at 30 September 2015, the company had 1,620 shareholders (at
31 December 2014: 1,668) including 1,395 individuals as shareholders. The share
price closed at 1.06 euros. The price has increased by 28% within nine months
2015 (closing price at the end of 2014 was 0.828 euros). During the period, the
highest price per share was 1.29 euros and lowest price 0.83 euros. As at 30
September 2015, market capitalization of shares amounted to 6,484 thousand
euros and P/E ratio of the share was 4.9 (at 31 December 2014: 5,065 thousand
euros and 5.5, respectively). 

Major shareholders at 30 September 2015  No of shares  Interest %
NORDEA BANK FINLAND PLC client                862,820       14.1%
AS Lõhmus Holdings                            602,378        9.8%
Gamma Holding Investment OÜ                   549,000        9.0%
Alarmo Kapital OÜ                             489,188        8.0%
HM Investeeringud OÜ                          430,000        7.0%
LHV PENSIONIFOND L                            389,765        6.4%
FIREBIRD REPUBLICS FUND LTD                   356,428        5.8%
FIREBIRD AVRORA FUND, LTD.                    185,800        3.0%
LHV PENSIONIFOND XL                           173,583        2.8%
FIREBIRD FUND L.P.                            150,522        2.5%
Other shareholders                          1,927,528       31.5%
-----------------------------------------------------------------
Total                                       6,117,012      100.0%

Holdings of members of the management and    Position              No of  Intere
 supervisory boards at 30 September 2015                          shares    st %
Rain Lõhmus (AS Lõhmus Holdings)             member of           602,378    9.8%
                                              supervisory                       
                                              board                             
Tarmo Sild and Allar Niinepuu (Alarmo        member of           489,188    8.0%
 Kapital OÜ)                                  management                        
                                              board/                            
                                             member of                          
                                              supervisory                       
                                              board                             
Hillar-Peeter Luitsalu (HM Investeeringud    chairman of         468,884    7.7%
 OÜ, related persons)                         supervisory                       
                                              board                             
Kert Keskpaik (privately and through K Vara  member of           193,787    3.2%
 OÜ)                                          supervisory                       
                                              board                             
Steven Yaroslav Gorelik ¹                    member of             3,150    0.1%
                                              supervisory                       
                                              board                             
--------------------------------------------------------------------------------
Total                                                          1,757,387   28.7%

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). 



Consolidated statement of comprehensive income


                                    Note    9 months    9 months      Q3      Q3
                                                2015        2014    2015    2014
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Continuing operations                                                           
--------------------------------------------------------------------------------
Revenue from sale of own real                  5,713         485   1,097     222
 estate                                                                         
--------------------------------------------------------------------------------
Revenue from rendering of services             2,842       2,861   1,001     953
--------------------------------------------------------------------------------
Total revenue                       2, 3       8,555       3,346   2,098   1,175
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cost of sales                        4        -5,433      -1,898  -1,264    -649
--------------------------------------------------------------------------------
Gross profit                                   3,122       1,448     834     526
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Other income                                      70         593      47     574
--------------------------------------------------------------------------------
Marketing and distribution           5          -359        -240    -125     -66
 expenses                                                                       
--------------------------------------------------------------------------------
Administrative expenses              6        -1,373      -1,222    -428    -307
--------------------------------------------------------------------------------
Other expenses                                   -32        -137      -6    -100
--------------------------------------------------------------------------------
Gain on sale of subsidiary                         0         662       0       0
                                   ---------------------------------------------
Operating profit/loss                          1,428       1,104     322     627
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Finance income and costs             7          -538        -694    -150    -259
--------------------------------------------------------------------------------
Net profit/loss from continuing                  890         410     172     368
 operations                                                                     
-----------------------------------                  ------------        -------
                                   ------------------            --------       
                                                                                
-----------------------------------                                             
                                   ---------------------------------------------
Discontinued operations                                                         
-----------------------------------                                             
                                   ------------------------------               
Profit/loss from discontinued                    -13         -13       0       0
 operations                                                                     
                                                                 ---------------
                                   ------------------------------               
                                                                                
-----------------------------------                                             
Net profit/loss for the period                   877         397     172     368
--------------------------------------------------------------------------------
-----------------------------------------                                       
attributable to owners of the                    892         379     173     357
 parent                                                                         
                                         ---------------------------------------
attributable to non-controlling                  -15          18      -1      11
 interests                                                                      
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Total comprehensive income/expense               877         397     172     368
 for the period                                                                 
--------------------------------------------------------------------------------
-----------------------------------------                                       
attributable to owners of the                    892         379     173     357
 parent                                                                         
                                         ---------------------------------------
attributable to non-controlling                  -15          18      -1      11
 interests                                                                      
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Earnings per share (in euros)        8                                          
--------------------------------------------------------------------------------
- basic                                         0.15        0.08    0.03    0.07
--------------------------------------------------------------------------------
- diluted                                       0.14        0.07    0.03    0.06
--------------------------------------------------------------------------------



Consolidated statement of financial position

                                           Note     30 September     31 December
                                                            2015            2014
--------------------------------------------------------------------------------
In thousands of euros                                                           
                                                -----------------               
Cash and cash equivalents                                  1,235           1,691
--------------------------------------------------------------------------------
Receivables and prepayments                 9                787           1,205
--------------------------------------------------------------------------------
Inventories                                 10            10,284          11,970
--------------------------------------------------------------------------------
Total current assets                                      12,306          14,866
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Receivables and prepayments                 9                  0               5
--------------------------------------------------------------------------------
Investment property                         11            11,547          11,585
--------------------------------------------------------------------------------
Property, plant and equipment                                481             434
--------------------------------------------------------------------------------
Intangible assets                                            176             113
--------------------------------------------------------------------------------
Total non-current assets                                  12,204          12,137
--------------------------------------------------------------------------------
TOTAL ASSETS                                              24,510          27,003
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Loans and borrowings                        12             1,773           3,194
--------------------------------------------------------------------------------
Payables and deferred income                13             2,042           2,659
--------------------------------------------------------------------------------
Provisions                                                   274             274
--------------------------------------------------------------------------------
Total current liabilities                                  4,089           6,127
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Loans and borrowings                        12            10,555          11,826
--------------------------------------------------------------------------------
Total non-current liabilities                             10,555          11,826
--------------------------------------------------------------------------------
TOTAL LIABILITIES                                         14,644          17,953
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Share capital                                              4,282           4,282
--------------------------------------------------------------------------------
Share premium                                                292             292
--------------------------------------------------------------------------------
Statutory capital reserve                                  2,011           2,011
--------------------------------------------------------------------------------
Other reserves                                               179             179
--------------------------------------------------------------------------------
Retained earnings                                          3,004           2,250
--------------------------------------------------------------------------------
Total equity attributable to owners of                     9,768           9,014
 the parent                                                                     
--------------------------------------------------------------------------------
Equity attributable to non-controlling                        98              36
 interests                                                                      
--------------------------------------------------------------------------------
TOTAL EQUITY                                               9,866           9,050
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY                              24,510          27,003
--------------------------------------------------------------------------------



Consolidated statement of cash flows



                                      Note   9 months   9 months      Q3      Q3
                                                 2015       2014    2015    2014
--------------------------------------------------------------------------------
In thousands of euros                                                           
                                           -----------           --------       
Receipts from customers                        10,945      5,068   2,250   1,809
--------------------------------------------------------------------------------
Payments to suppliers                          -4,766     -7,244  -1,808  -2,761
--------------------------------------------------------------------------------
Taxes paid                                     -2,310       -844    -270    -308
--------------------------------------------------------------------------------
Taxes recovered                                     5        531       0     182
--------------------------------------------------------------------------------
Payments to employees                            -766       -622    -227    -195
--------------------------------------------------------------------------------
Other payments and receipts related                24       -204      -9    -158
 to operating activities                                                        
--------------------------------------------------------------------------------
NET CASH FROM/USED IN OPERATING                 3,132     -3,315     -64  -1,431
 ACTIVITIES                                                                     
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Purchase of property, plant and                  -137        -32     -38     -17
 equipment                                                                      
--------------------------------------------------------------------------------
Proceeds from sale of a subsidiary                  0         10       0       0
--------------------------------------------------------------------------------
Acquisition of a subsidiary                         0          1       0       1
--------------------------------------------------------------------------------
Loans provided                                      0         -3       0       0
--------------------------------------------------------------------------------
Placement of security deposits                      0       -416       0     -89
--------------------------------------------------------------------------------
Release of security deposits                        0        679       0     227
--------------------------------------------------------------------------------
Interest received                                   4          3       1       1
--------------------------------------------------------------------------------
NET CASH FROM/USED IN INVESTING                  -133        242     -37     123
 ACTIVITIES                                                                     
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Proceeds from loans received           12       1,385      4,053     515   1,472
--------------------------------------------------------------------------------
Settlement of loans and finance        12      -4,109     -1,192    -144    -647
 lease liabilities                                                              
--------------------------------------------------------------------------------
Interest paid                                    -588       -515    -113     -89
--------------------------------------------------------------------------------
Dividends paid                                    -61          0       0       0
--------------------------------------------------------------------------------
Proceeds from share capital issue                   0      1,375       0   1,375
--------------------------------------------------------------------------------
Other payments related to financing               -82        -51       0     -28
 activities                                                                     
--------------------------------------------------------------------------------
NET CASH FROM/USED IN FINANCING                -3,455      3,670     258   2,083
 ACTIVITIES                                                                     
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
NET CASH FLOW                                    -456        597     157     775
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cash and cash equivalents at                    1,691        818   1,078     640
 beginning of period                                                            
--------------------------------------------------------------------------------
Decrease in cash and cash                        -456        597     157     775
 equivalents                                                                    
--------------------------------------------------------------------------------
Cash and cash equivalents at end of             1,235      1,415   1,235   1,415
 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     3,319       0      2,011      60   1,452  6,842        12   6,854
 at 31                                                                          
 December                                                                       
 2013                                                                           
--------------------------------------------------------------------------------
Change in          0       0          0       0      -5     -5         5       0
 non-control                                                                    
ling                                                                            
 interests                                                                      
--------------------------------------------------------------------------------
Increase of      963     292          0       0       0  1,255         0   1,255
 share                                                                          
 capital                                                                        
--------------------------------------------------------------------------------
Total              0       0          0       0     379    379        18     397
 comprehensi                                                                    
ve income                                                                       
 for the                                                                        
 period                                                                         
             -------------------------------------------------------------------
Balance as     4,282     292      2,011      60   1,826  8,471        35   8,506
 at 30                                                                          
 September                                                                      
 2014                                                                           
--------------------------------------------------------------------------------
                                                                                
             -------------------------------------------------------------------
Balance as     4,282     292      2,011     179   2,250  9,014        36   9,050
 at 31                                                                          
 December                                                                       
 2014                                                                           
--------------------------------------------------------------------------------
Profit             0       0          0       0     -61    -61         0     -61
 distributio                                                                    
n                                                                               
--------------------------------------------------------------------------------
Change in          0       0          0       0     -77    -77        77       0
 non-control                                                                    
ling                                                                            
 interest                                                                       
--------------------------------------------------------------------------------
Total              0       0          0       0     892    892       -15     877
 comprehensi                                                                    
ve income                                                                       
 for the                                                                        
 period                                                                         
--------------------------------------------------------------------------------
Balance as     4,282     292      2,011     179   3,004  9,768        98   9,866
 at 30                                                                          
 September                                                                      
 2015                                                                           
--------------------------------------------------------------------------------




         Marek Pontus
         CFO
         Arco Vara AS
         Ph: +372 614 4662
         [email protected]
         http://www.arcorealestate.com