Börsiteade

Pealkiri

Pro Kapital Council approved Consolidated Interim Report for IV Quarter and 12 Months of 2019 (Unaudited)

Teade

MANAGEMENT REPORT

Chairman's summary

2019 was  as a  year of  challenges, opportunities  and acknowledgment, which is
characteristic  to many  companies with  an eye  on the  future and ambition for
growth.  The key  focus of  our work  is on  large-scale development projects of
residential  and commercial quarters in all  Baltic capitals - Tallinn, Riga and
Vilnius. With more than 25 years of experience and extensive portfolio we have a
strong  understanding of  the market  we operate  in. Equally,  we hold  a great
responsibility,  developing  whole  areas  and  impacting entire communities and
natural environment.

The  results of 2019 give a good indication  of the volumes of the business. The
growth  of the total annual revenue was 97% compared to the comparable period of
2018, from  28 million euros to 55.3 million euros.  The growth of total revenue
by  159% during the 4th quarter of 2019, from  6.9 million euros during the 4th
quarter  of  2018 to  18 million  euros  in  2019. This growth was influenced by
active sales in Tallinn and Vilnius increasing real estate revenue by 20 million
euros and the T1 Mall of Tallinn (T1) rental related revenue by 8 million euros.
Our  revenues from the sales of the real  estate depend on the completion of the
residential  developments,  as  the  revenues  are  recorded at the moment final
notary  deeds of sale are concluded and properties handed over to the buyer. The
gross profit of 2019 was 15.8 million euros compared to 9.6 million euros during
the same period in 2018. This is a 65% increase y-o-y.

Our  otherwise positive  results were  challenged by  T1's financial performance
during  its first year of  operations, which has not  met our initial prognosis.
One  of  the  reasons  for  underperformance  was lower than expected demand for
retail  spaces, which  resulted in  higher vacancy  in the centre than initially
anticipated.  With the aim of supporting  T1 operations and reduce vacancies, T1
offered rebates and adjusted vacant areas to meet the needs of the tenants. This
has had a short-term impact on operating profit and as a result, led to the non-
monetary  decrease  of  the  property  value  in  amount of 23 million euros (18
million  euros increase in value of T1 was recorded in 2018). The revaluation of
the  investment property  had a  significant impact  on the  Group's results. In
addition,  the results  are influenced  by the  interest expenses  related to T1
project,  which at the end of the  year were 9.5 million euros. The interests of
T1  are  recorded  in  finance  cost  in  2019 instead  of  capitalisation  into
investment  property, which  has been  done during  active development until 31
December 2018. Consequently, the net result for 2019 was 29.1 million euros loss
compared to 18 million euros profit during the same period of 2018.

The  lower operating  profitability of  AS Tallinna  Moekombinaat triggered non-
fulfilment  of  two  financial  maintenance  covenants  under  the loan facility
agreement  with the  subsidiary's main  creditor (DSCR  or Debt Service Coverage
Ratio  and NLR or Net Leverage Ratio -  which are ratios to assess the health of
the  investment  in  conformity  with  expected operating results). However, the
operating  result  of  AS  Tallinna  Moekombinaat  in  2019 before  non-monetary
revaluation  effect and the interest costs is positive. AS Tallinna Moekombinaat
is  in active discussions with the lender  and negotiations are in progress. Pro
Kapital  will issue a separate notice about the outcome of the negotiations with
the lender.

Pro  Kapital has  recently announced,  that we  have secured  refinancing of the
existing  senior  secured  bonds  2015/2020 (the  "Existing  Bonds")  in full by
issuing  new senior secured bonds 2020/2024 (the "New Bonds"). Until redemption,
the  terms and conditions of the Existing  Bonds still apply and we are required
to  report breaches of such  terms and conditions. Therefore,  we inform that in
Q4'2019,  due  to  the  non-monetary  revaluation  loss  of assets of one of Pro
Kapital's  subsidiaries,  AS  Tallinna  Moekombinaat,  it failed the Maintenance
test,  which requires at least 40% equity to  total assets ratio. We also inform
that  due to lower than expected  operating results of AS Tallinna Moekombinaat,
the  subsidiary is  in payment  default under  the above-mentioned loan facility
agreement,  which constitutes an event of default under the Existing Bond. While
the  first regular interest  payment under the  loan facility agreement was duly
made  in September 2019, during ongoing negotiations with the lender AS Tallinna
Moekombinaat  has made no further interest  or default interest payments and has
also  suspended  its  payments  to  another  main  creditor under agreed payment
schedule.  Such non-payment and the  above described non-fulfilment of financial
covenants  entitle  the  creditor  to  accelerate  its claims under the facility
agreement,  but  until  now  it  has  chosen  not  to do so. As mentioned above,
negotiations  are ongoing.  The non-compliance  under the  terms of the Existing
Bonds  technically entitles  the agent  of the  bonds to  terminate the Existing
Bonds  and to  declare them  due for  payment immediately (acceleration). As the
Existing  Bonds are  being refinanced  in their  entirety with proceeds from the
issue  of the  New Bonds  and the  Existing Bonds  will be  redeemed on 17 March
2020, then  we do not foresee the risk of acceleration of the Existing Bonds. We
would  like to emphasise that Pro Kapital has fulfilled all monetary obligations
arising  from the  Existing Bonds  2015/2020 in a  timely manner. Going forward,
under  the terms and  conditions of the  New Bonds, AS  Tallinna Moekombinaat is
excluded from the ratio of equity to total assets calculation and from the event
of  default catalogue. Therefore, AS  Tallinna Moekombinaat's future performance
and  the outcome  of the  negotiations with  its lender  shall have  no negative
influence on the fulfilment of the terms and conditions of the New Bonds.

Aside  from the  challenges with  T1, the  Group's residential  developments are
progressing  as  planned  and  we  feel  confident  that our residential project
pipeline  and inventory is able to generate  positive cash flows over the coming
years.

Residential real-estate development with long-term mindset

In  early November 2019, Pro Kapital  was recognised as the  winner of the real-
estate  developer's TOP of  Äripäev (Estonian leading  business media provider),
which  I am very proud and humbled by. I believe this recognition to reflect the
long-term commitment of our team and the desire to create something truly great.
At  the same time, I am pleased that the 2019 real estate developers TOP was led
by  companies who understand that their work  has much broader impact on shaping
the  cities than merely building physical  spaces. The ability to understand but
even  more importantly to be ahead of  the changes in consumer behaviours and to
create  something valuable for years to come, is a challenge for any real-estate
developer.

By  developing entire areas, we always acknowledge that our work has a long-term
impact  on communities. We need to be  able to offer people something meaningful
in  a wide range of aspects. I'm  glad to emphasise several residential quarters
in  our portfolio, which  already have increased  or will increase  the value of
entire  areas and  which are  ahead of  the market  trends. In  2019, we reached
several milestones in our residential portfolio development across the Baltics.

In late October, we completed the construction of three last apartment buildings
of the Kristina Houses project. Kristina Houses is one of the major developments
within a new residential area in Tallinn, named Kristiine City - an integral and
unique  residential district close to a downtown Tallinn - as if it were a "city
within a city". A safe, green and functional living environment where along with
the  new houses, we bring new life  into the much-valued historic buildings from
the  early 20th century. We  have already completed  and sold the historic Tondi
51 Barracks  and  Marsi  6 lofts.  With  the  completion of the Kristina Houses,
designed  by  Alliance  Architects,  we  welcomed  nearly  310 new  families  to
Kristiine City. We are now about to begin the construction of the Ratsuri Houses
development  project. This  is a  unique development  in the  heart of Kristiine
City, combining reconstruction of a historic stable building with a contemporary
New  Dutch style  building in  a balanced  whole. The  building is scheduled for
completion  in spring 2021. Ratsuri Houses will  have a total of 39 apartments -
17 in  the former stables  and 22 in the  modern New Holland  style building. To
date,  77% of apartments have already been  booked. The particularly high volume
of pre bookings has been characteristic to all our projects in Kristiine City as
this living quarter has significantly benefited the value of an entire area.

Just  before  the  end  of  the  year,  we  announced  that  we are starting the
construction  of  the  much  awaited  Kalaranna  District  -  a  unique sea-side
residential quarter bordering Tallinn's central city and the Old town. Kalaranna
District  will have twelve 4-5 storey buildings on nearly six hectares. The area
will  be developed  in two  stages, the  first of  which we have now started. An
integral   part   of  the  residential  quarter  is  well-thought-out  landscape
architecture  and a beach promenade that  largely preserves the existing natural
environment.  During the  first phase  of construction,  eight buildings will be
completed  with 240 apartments, commercial premises and an underground car park.
The  area will include  the Kalaranna Park  with versatile leisure opportunities
and  a Square connecting the buildings. The first buildings will be completed by
September  2021 at the  latest. To  date we  have already  booked 51.2% and sold
47.5% of  the apartments to be completed in  the first phase. The four buildings
of the second phase are already in pre-sale, with 26.6% booked to date.

It  is very  positive to  recognise the  growing customer  awareness and growing
rationality  in the purchase decision-making process. In all markets, the client
is  willing to invest  in quality real  estate that is  reflected in a number of
interrelated  aspects  like  functionality,  the  choice of materials that would
equally be pleasing to the eye, would last in time and are easy to maintain, but
also  the interior  and exterior  architecture and  thought-out landscaping. The
central  idea is a safe,  functional and modern environment  that lasts long and
enriches  the urban space, preserving and  enhancing its value. Each development
is  special - it has its  own story, the environment in  which it is located and
the people this area is for.

In  Vilnius, an area just like this is being developed - an area called Shaltiniu
Namai  Attico,  which  is  a  second  phase  of  the  Shaltiniu Namai prestigious
residential  area located  within the  UNESCO heritage  area, surrounded  by the
nature  in  the  most  peaceful  part  of  the Old Town of Vilnius. The "Attico"
reflects the unique location slightly higher than the Old City, allowing breath-
taking  views to the  city panorama. Here,  people can choose  homes with simply
breath-taking view to the historic cityscape or spacious homes with terraces and
green  areas.  Like  with  all  our  residential developments, we have created a
peaceful, safe and green living area for the residents. Shaltiniu Namai Attico is
inspired  by the baroque spirit of Vilnius Old Town and the tradition of Italian
architecture  in Lithuania, also as  an integral part of  the landscape, has the
first  Italian  courtyard  garden  in  the  city  designed by an Italian concept
architect  Gianmarco Cavagnino. To date we have sold over 70% of 115 apartments.
We  are currently  in the  planning stage  of the  next phases of Shaltiniu Namai
Attico, city villas and a commercial building.

I  have discussed  the Baltics  real-estate markets  in my 2019 interim reports,
mainly because the real-estate market in the Baltic counties in a good indicator
of  the wider  socio-political situation.  Undoubtably, Latvian  market has been
showing  slower pace  compared to  Lithuania and  Estonia, especially in the so-
called  premium segment, which  sets a standard  of quality for  the rest of the
segments.  While  the  Lithuanian  real-estate  market showed a remarkable, 32%
market  growth last year, the Latvian  real-estate market is mainly dominated by
the  growth of the economic segment. When the market is driven by the price only
for  a  long  time,  this  will  have  a  considerable footprint on the quality.
Therefore, it is very positive that our outstanding development project in Riga,
with  a worthy name - River Breeze Residence has held its position as the market
leader in the premium segment for a second consecutive year.

At   the  end  of  October  2019, River  Breeze  Residence  received  the  2019
Architecture  Award,  which  is  one  of  the most prestigious awards in Latvia,
recognising the balance between private and public outdoor space in an exclusive
and  innovative  housing  project. In  2019, River  Breeze  Residence  was  also
recognised  by its impeccable  construction quality and  as the most sustainable
building earlier in 2018. By being one of the most outstanding buildings in Riga
in  terms  of  architecture,  location  and  quality,  River Breeze sets the new
positive  example  for  the  whole  market.  River Breeze Residence is the first
building  in the Kliversala  Quarter, which will  become an integral residential
area  that binds together the feeling of a metropolitan, modern architecture and
well  considered living environment. This area  is unique and outstanding across
Europe  - it is located right in the  heart of the city, just a walking distance
from  the Old  town, with  spectacular views  and at  the same time as green and
quiet  as if you were in a garden  city. At the end of September 2019, the local
planning  for Kliversala area  came into force.  This means that  we can proceed
developing  the Kliversala  Quarter as  an integral  residential area.  The next
phases  will  foresee  bringing  functional,  modern  apartment  buildings  with
commercial  premises to life, allowing Kliversala Quarter to become a new centre
of the urban city life, creating fine balance between the private and the public
areas.

As  a conclusion, I would say,  2019 was well-balanced by positive developments,
humbling  recognition and confronting challenges. I believe it to be an integral
part  of the business, allowing us to  grow and improve our operations. It takes
courage  to face new challenges and make decisions to do things that no one else
has  done. Above all, I am proud of the  people who work in the Group - our team
is  highly professional, competent and dedicated  and that is the most important
value  of any business with such  passion towards the long-term value-growth and
positive impact. Thank you!

Paolo Michelozzi
CEO

Key financials

The  total revenue of  the Company in  2019 was 55.3 million euros,  which is an
increase  of 97% compared to the  reference period (2018 12M: 28 million euros).
The  total revenue of  the fourth quarter  was 18 million euros,  an increase of
159% compared  to 6.9 million  euros during  the same  period in  2018. The real
estate sales revenues are recorded at the moment of handing over the premises to
the  buyer. Therefore,  the revenues  from sales  of real  estate depend  on the
completion  of the residential  developments. The improvement  of the results in
the  fourth quarter was influenced  by the completion of  three new buildings in
Kristina  Houses development in October, where  all apartments have been sold as
at  today. In addition, the sales results of the year improved due to continuous
sales of River Breeze Residence in Riga and Shaltini? Namai Attico development in
Vilnius.
The gross profit in 2019 increased by 65% amounting to 15.8 million euros and by
52% amounting  to 4.1 million  euros in  the fourth  quarter. In  the comparable
period  the gross  profit figures  were 9.6 million  euros and 2.7 million euros
respectively.
The  operating result  of 2019 was  15.2 million euros  loss comparing  to 21.5
million  euros profit  in 2018. The  operating result  of the fourth quarter was
22.1 million euros loss comparing to 16.7 million euros profit in 2018. Although
the  main operations  of the  Company have  generated extraordinary results, the
operating  result  includes  non-monetary  loss  from  revaluation of investment
properties.  The total impact from revaluation  is 24.2 million euros (Note 8),
mostly  related  to  devaluation  of  T1  Mall  of Tallinn property due to lower
results comparing to initial expectations.
The net result for the year of 2019 was 29.1 million euros loss and 26.0 million
euros loss for the fourth quarter. In the comparable period the net results were
18.1 million  euros profit and  15.8 million euros profit  respectively. The net
result  of the period was influenced negatively by 9.5 million euros of interest
expenses  in AS Tallinna  Moekombinaat (Note 15). The  interests are recorded in
finance  cost in 2019 instead of  capitalization into investment property, which
was done during active development until 31 December 2018.
Cash  generated from operating activities during  the reporting period was 20.4
million  euros  comparing  to  1.0 million  euros  of  cash  used  in  operating
activities  in 2018. In the fourth quarter of 2019 cash generated from operating
activities  was  13.7 million  euros  and  4.5 million  euros  of  cash  used in
operating activities during the same period in 2018.
Net  assets per  share on  31 December 2019 totalled  to 1.26 euros  compared to
1.80 euros on 31 December 2018.

Key performance indicators

                             2019 12M   2018 12M   2019 Q4   2018 Q4
---------------------------------------------------------------------
  Revenue, th EUR              55 276     27 991    17 993     6 948

  Gross profit, th EUR         15 809      9 576     4 069     2 684

  Gross profit, %                 29%        34%       23%       39%

  Operating result, th EUR    -15 178     21 483   -22 063    16 688

  Operating result, %            -27%        77%     -123%      240%

  Net result, th EUR          -29 106     18 056   -26 031    15 761

  Net result, %                  -53%        65%     -145%      227%



  Earnings per share, EUR       -0.47       0.30     -0.43      0.26


                                        31.12.2019   31.12.2018
----------------------------------------------------------------
  Total Assets, th EUR                     210 821      246 405

  Total Liabilities, th EUR                139 189      144 383

  Total Equity, th EUR                      71 632      102 022

  Debt / Equity *                             1.94         1.42



  Return on Assets, % **                    -12.8%         8.6%

  Return on Equity, % ***                   -33.8%        18.3%

  Net asset value per share, EUR ****         1.26         1.80

*debt / equity = total debt / total equity

**return on assets = net profit/loss / total average assets
***return on equity = net profit/loss / total average equity
****net asset value per share = net equity / number of shares



CONSOLIDATED FINANCIAL STATEMENTS

Consolidated interim statement of financial position

  in thousands of euros                                31.12.2019   31.12.2018
-------------------------------------------------------------------------------
  ASSETS

  Current assets

  Cash and cash equivalents                                10 616        7 040

  Current receivables                                       1 475        2 928

  Inventories                                              41 031       59 331
                                                     --------------------------
  Total current assets                                     53 122       69 299

  Non-current assets

      Non-current receivables                               2 297          216

      Property, plant and equipment                         7 665        7 128

      Investment property                                 147 365      168 145

      Intangible assets                                       372          324
                                                     --------------------------
  Total non-current assets                                157 699      175 813

  TOTAL ASSETS                                            210 821      245 112



  LIABILITIES AND EQUITY

  Current liabilities

      Current debt                                         36 403       10 328

      Customer advances                                     3 974        5 707

      Current payables                                      8 675       11 939

      Tax liabilities                                       1 155          357

      Short-term provisions                                   267          852
                                                     --------------------------
  Total current liabilities                                50 474       29 183

  Non-current liabilities

      Long-term debt                                       86 227      112 009

      Other non-current payables                            1 013        1 039

      Deferred income tax liabilities                       1 348        2 004

      Long-term provisions                                    127          139
                                                     --------------------------
  Total non-current liabilities                            88 715      115 191

  TOTAL LIABILITIES                                       139 189      144 374



  Equity attributable to owners of the Company

      Share capital in nominal value                       11 338       11 338

      Share premium                                         5 661        5 661

      Statutory reserve                                     1 134        1 082

      Revaluation reserve                                   3 262        3 262

      Retained earnings                                    76 725       59 944

      Profit/ Loss for the period                         -26 915       16 827
                                                     --------------------------
  Total equity attributable to owners of the Company       71 205       98 114

  Non-controlling interest                                    427        2 624

  TOTAL EQUITY                                             71 632      100 738



  TOTAL LIABILITIES AND EQUITY                            210 821      245 112



 Consolidated interim statements of comprehensive income

 in thousands of euros                        2019 12M 2018 12M 2019 Q4 2018 Q4
-------------------------------------------------------------------------------
 CONTINUING OPERATIONS

 Operating income

 Revenue                                        55 276   27 991  17 993   6 948

 Cost of goods sold                            -39 467  -18 415 -13 924  -4 264
                                             ----------------------------------
 Gross profit                                   15 809    9 576   4 069   2 684



 Marketing expenses                               -728   -1 336    -240    -630

 Administrative expenses                        -6 013   -5 427  -1 674  -1 390

 Other income                                       95   18 839      39  16 144

 Other expenses                                -24 341     -169 -24 257    -120
                                             ----------------------------------
 Operating profit                              -15 178   21 483 -22 063  16 688



 Financial income                                    4        4       1       1

 Financial expense                             -13 953   -3 473  -3 879    -925
                                             ----------------------------------
 Profit/ loss before income tax                -29 127   18 014 -25 941  15 764

 Income tax                                         21       42     -90      -3
                                             ----------------------------------
 Profit/ loss for the period                   -29 106   18 056 -26 031  15 761



 Attributable to:

 Equity holders of the parent                  -26 915   16 827 -24 181  14 491

 Non-controlling interest                       -2 191    1 229  -1 850   1 270



 Total comprehensive income/ loss for the
 year                                          -29 106   18 056 -26 031  15 761

 Attributable to:

 Equity holders of the parent                  -26 915   16 827 -24 181  14 491

 Non-controlling interest                       -2 191    1 229  -1 850   1 270



 Earnings per share for the period (EUR)         -0.47     0.30   -0.43    0.26




Consolidated interim statements of cash flows

 in thousands of euros                        2019 12M 2018 12M 2019 Q4 2018 Q4
-------------------------------------------------------------------------------
 Cash flows from operating activities

 Profit/loss for the period                    -29 106   18 056 -26 031  15 762

 Adjustments for:

   Depreciation, amortisation of non-current
 assets                                            399      214     105      56

   Gain from disposal of property, plant,
 equipment                                           0       -4       0       0

   Gain from disposal of investment property        -3     -418      -3       0

   Loss from write-off of PPE and intangible
 assets                                              6        0       6       0

   Change in fair value of property, plant,
 equipment                                         -15      -13     -15     -13

   Change in fair value of investment
 property                                       24 236  -17 995  24 236 -16 069

   Finance income and costs                     13 949    3 469   3 878     923

   Changes in deferred tax assets and
 liabilities                                      -656      -54     -66       0

   Other non-monetary changes (net amounts)        420   15 458  -2 026  -1 428

 Changes in working capital:

   Trade receivables and prepayments              -630    1 781   1 155     931

   Inventories                                  18 276  -21 307  10 685  -2 611

   Liabilities and prepayments                  -6 412     -128   1 842  -1 420

   Provisions                                      -51     -107     -36    -609
                                             ----------------------------------
 Net cash used in/ generated in operating
 activities                                     20 413   -1 048  13 730  -4 478



 Cash flows from investing activities

 Payments for property, plant and equipment       -226     -206     -24     -40

 Payments for intangible assets                    -74      -24     -28     -17

 Proceeds from disposal of property, plant,
 equipment                                           0      336       0       0

 Payments for investment property               -6 019  -47 786    -523 -16 702

 Proceeds from disposal of investment
 property                                        2 170    1 000   2 170   1 000

 Interests received                                  4        4       0       1
                                             ----------------------------------
 Net cash used in investing activities          -4 145  -46 676   1 595 -15 758



 Cash flows from financing activities

 Dividend payment                                    0     -850       0       0

 Redemption of convertible bonds                     0       -9       0       0

 Redemption of non-convertible bonds              -500     -640       0      -6

 Proceeds from borrowings                       16 461   56 923     544  23 449

 Repayment of borrowings                       -21 551   -7 496  -8 912  -1 987

 Repayment of lease liabilities                   -192        0     -63       0

 Interests paid                                 -6 910   -3 481  -3 548  -1 259

 Deposited amount related to loan obligations        0        0   2 000       0
                                             ----------------------------------
 Net cash used in/ generated by financing
 activities                                    -12 692   44 447  -9 979  20 197



 Net change in cash and cash equivalents         3 576   -3 277   5 346     -39

 Cash and cash equivalents at the beginning      7 040   10 317   5 270   7 079

 Cash and cash equivalents at the end of the
 period                                         10 616    7 040  10 616   7 040

The full report can be found in the file attached.




Allan Remmelkoor
Member of the Board
+372 614 4920
[email protected]