Arco Vara AS unaudited consolidated interim report for the first quarter of 2018

KEY PERFORMANCE INDICATORS

• In Q1 2018, the group’s revenue was 2.1 million euros, which is 34.2% higher than the revenue of 1.6 million euros in Q1 2017. In Q1 2018, revenue of the Development Division amounted to 1.5 million euros (Q1 2017: 1.1 million euros) and revenue of the Service Division amounted to 0.8 million euros (Q1 2017: 0.7 million euros).
• In Q1 2018, the group’s operating profit (=EBIT) was 0.1 million euros and the quarter ended with a small net loss. In Q1 2018, the Development Division made operating profit of 0.2 million euros and the Service Division made a small operating loss.
• In Q1 2018, 7 apartments and 1 land plot were sold in projects developed by the group. In Q1 2017, 1 apartment and 3 plots were sold.
• In the first 3 months of 2018, the group’s debt burden (net loans) did not change, remaining at the level of 9.7 million euros, while a year ago, the debt burden was 50,5% or 4.9 million euros higher on 31 March 2017. As of 31 March 2018, the weighted average annual interest rate of interest bearing liabilities was 5.1%. This is a decrease of 0.3 percentage points compared to 31 December 2017.

GROUP CEO’S REVIEW

In Q1 2018, the two most important events for Arco Vara group were the completion of 3.74 mln share issue in January and the acquisition of Lozen project in Bulgaria, which consumed most of the proceeds from the share issue.

Speaking about the current year in broader terms, we can say that the first, the second and the third quarter prepare for the fourth quarter, when Iztok Parkside project will be completed and the sale of apartments and profit-making will begin. From the financial viewpoint, the beginning of the year is like setting up a stage for a rock-concert. The task of the management is to ensure that the stage will be up on time, but the most important thing is the concert itself.

During this preparatory period, we earn about 2 mln euros per quarter, out of which roughly half comes from services or rental agreements and another half from the sale of the small remaining stock. These are modest numbers.

That being said, even "quiet” quarters demonstrate a noticeable progress. We have had quite quarters earlier, when cranes have been up, but clients have been served only with brokerage, evaluations and rental agreements. Compared to Q1 of 2017 for instance, revenue from services has increased by 27% in Estonia and Bulgaria combined. Rental income from office and commercial premises in the Madrid building has increased by 35%. The Group makes an operating profit even with these small volumes, and the small net loss of Q1 was a result of interest expenses. We have borrowed money and are paying interests in order to develop real estate in both Iztok, Kodulahe and Lozen, and from May on, two developments are in process simultaneously with 140 new apartments and commercial areas on the way. The results of these developments will begin to show in Q4. Thus, Arco Vara group is quite well balanced this year. We are not burning cash even while preparing for larger results, and we are preparing for several concerts at a time.

The next financial goal is to increase the size and frequency of developments in order to decrease the number of "quiet” quarters, and increase the number of periods with some new real estate developments becoming ready for sale. While Q4 2018 and Q1 2019 will be covered by the sales revenue and profit from Iztok Parkside, the next substantial results are expected from stage 2 of Kodulahe, which should materialize in Q4 2019 and Q1 2020. An addition to our timeline is the Lozen project in Sofia, where we plan to start construction by the end of this year and commence sales in early 2020. Additionally, Oa street development project in Tartu will be undertaken if we can reach an acceptable construction price – with sale of 30 apartments most likely to start in the first half of 2020. The expected sales revenue from stage 1 of Lozen is over 25 mln euros and the sales revenue from Oa street should definitely exceed 3 mln euros. As for profit margins, expectations are higher in Bulgaria. Bulgaria seems to be far away, but the cash generated there brings it closer to Estonia and the parent company. Above all, the question is about managing people, and Arco Vara is increasingly working as one team.

SERVICE DIVISION

Revenue of the Service Division amounted to 776 thousand euros in Q1 2018 (Q1 2017: 680 thousand euros), which included intra-group revenue of 85 thousand euros (Q1 2017: 120 thousand euros).

The main services of the Service Division are real estate brokerage and evaluation services through real estate agencies. In Q1 2018, revenue from real estate agencies increased by 15% compared to Q1 2017. The revenue from main services increased both in Estonian and Bulgarian agencies (16% and 11%, respectively).

In Q1 2018, Estonian agency had net loss of 20 thousand euros (Q1 2017: net loss of 62 thousand euros), Bulgarian agency had net loss of 10 thousand euros (Q1 2017: net profit of 35 thousand euros).

In addition to brokerage and valuation services, the Service Division also provides real estate management and accommodation services in Bulgaria. The revenue from real estate management was 26 thousand euros in Q1 2018, 25 thousand euros of which was intra-group revenue (Q1 2017: 29 thousand and 24 thousand euros, respectively). Revenue from accommodation services amounted to 42 thousand euros in Q1 2018 (Q1 2017: 39 thousand euros).

On 31 March 2018, the number of staff in the Service Division was 120 (on 31.12.2017: 126).

DEVELOPMENT DIVISION

In Q1 2018, revenue of the Development Division totalled 1,473 thousand euros (in Q1 2017: 1,063 thousand euros) including revenue of 1,310 thousand euros (Q1 2017: 938 thousand euros) from the sale of properties in the group’s own development projects.

Most of the other revenue of the Development Division consists of rental income from commercial and office premises in Madrid Blvd building in Sofia, amounting to 124 thousand euros in Q1 2018 (Q1 2017: 92 thousand euros). By the publishing date of the interim report, two office spaces and two commercial areas remain vacant, and one apartment unsold in Madrid Blvd building. 15 more apartments are furnished and are being rented out as accommodation service. Unsold parking places are also being rented out.

In Q1 2018, operating profit of the Development Division was 180 thousand euros. In Q1 2017, operating loss was 14 thousand euros. Revenue and profitability figures were higher in Q1 2018 due to the completion of several sale agreements for the apartments in the first stage of Kodulahe project. The construction of the apartment building with 125 apartments and 5 commercial areas was finished in Q3 2017. By the publishing date of the interim report, 4 apartments (one of which will be kept as a demo apartment) and 3 commercial spaces (one of which is rented out since Q1 2018) remain unsold.

In Q1 2018, preparatory works started for the second stage of Kodulahe project, where a building with 68 apartments and 1 commercial space is planned. The project is expected to be finalised in the second half of 2019. By the publishing date of the interim report, both construction and financing agreements have been signed, and 22 apartments have been presold.

In Iztok Parkside project in Sofia, construction continued during Q1 2018. By the publication date of interim report, presale agreements for 33 apartments have been concluded. Iztok project consists of three apartment buildings with 67 apartments (7,070 square meters of apartments’ sellable area).

During Q1 2018, Arco Vara acquired land plots in the Lozen project in Bulgaria with total area of 5.3 ha. The land is located on the outskirts of Sofia, outside Sofia ring road but with quick access to all main transport arteries of the city. In 2021, the ring road extension will be completed which will make the access even better. Lozen project has 2 stages. The project will include apartment buildings, row houses, private houses, supermarket, several small shops, restaurant, kindergarten, sports and spa facilities, playgrounds, apartment-hotel and possibly office spaces. Parking will be underground, while visitors’ parking places will be organized on the ground.

As of 31 March 2018, 5 Marsili residential plots remained unsold in Latvia, out of which one was presold in 2017. In Q1 2018, one plot was sold in the project.

As of 31 March 2018, 6 people were employed in the Development Division, which is one more than at the end of 2017.

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

Attachment

• AVG 2018 Q1 ENG