Arco Vara AS' unaudited consolidated interim report for Q2 and 6 months of 2018

KEY PERFORMANCE INDICATORS

In Q2 2018, the group’s revenue was 1.1 million euros, which is 10% more than the revenue of 1.0 million euros in Q2 2017. In 6 months 2018, the group’s revenue was 3.2 million euros, which is 23% more than the revenue of 2.6 million euros in 6 months 2017. The revenue of the Development Division amounted to 0.4 million euros in Q2 2018 and 1.8 million euros in 6 months 2018 (2017: 0.4 million euros in Q2 and 1.5 million euros in 6 months) and revenue of the Service Division amounted to 0.9 million euros in Q2 and 1.7 million euros in 6 months (in 2017: 0.7 million euros in Q2 and 1.4 million euros in 6 months).

In Q2 2018, the group’s operating loss (=EBIT) was 0.3 million euros and net loss 0.4 million euros (in 6 months 2018: operating loss of 0.2 million euros and net loss of 0.4 million euros). In Q2 2017, the group had operating loss of 0.2 million euros and net loss of 0.4 million euros. In 6 months 2017, the group made operating loss of 0.4 million euros and net loss of 0.6 million euros. The Development Division made an operating loss of 0.2 million euros in Q2 2018, 6 months ended with zero result. The Development Division made zero result also in Q2 2017 and 6 months 2017. The Service Division made zero result in Q2 2018, but had an operating loss of 0.1 million euros in 6 months 2018, as well as in 6 months 2017.

In Q2 2018, 1 apartment was sold in projects developed by the group (in 6 months 2018: 8 apartments and 1 land plot). In Q2 2017, 1 apartment and 4 land plots were sold (2 apartments and 6 land plots in 6 months).

In the first 6 months of 2018, the group’s debt burden (net loans) increased by 0.9 million euros up to the level of 10.6 million euros as of 30 June 2018. As of 30 June 2018, the weighted average annual interest rate of interest bearing liabilities was 4.9%. This is a decrease of 0.5 percentage points compared to 31 December 2017.

GROUP CEO’S REVIEW

We remain on the chosen path. In Q4 2018, Iztok Parkside development in Sofia will be ready, to be sold in full by the end of Q2 2019. In Q4 2019, Stage II of Kodulahe project in Tallinn will be finished, to be sold by the end of the same quarter. Presales of both projects have been good with 60% presold in Iztok despite multiple increases in sales prices, and 40% presold in Kodulahe, although the construction there has only started. Construction of Lozen project will commence in Q1 2019. If demand remains strong, construction of Kodulahe Stages III-V will also begin in H1 2019, before construction of Stage II will be completed.

In Q2 2018, we achieved 100% occupancy in the rental areas of Madrid Blvd building in Sofia, which has a positive effect on both cash flows and income statement and will become visible in Q3. The next goal is to refinance the existing loan obligation with less expensive one in 2019, which would further improve cash flows and profitability.

In 2018, income from brokerage and valuation services has also increased. We make over 250,000 euros of revenue per month. We help around 700 clients per month in signing a transaction or evaluating their property. Still, despite increased revenues we have not succeeded in achieving in real estate services such results, which would fully justify the time and money invested into providing these services, and which would fully cover the overhead of the group in periods where new cranes are up, but stock is empty and the sale of new apartments is quarters ahead. Arco Vara should be profitable in every quarter, including the ones where development projects are on their way. There is still work to be done to achieve this.

SERVICE DIVISION

In Q2 2018, revenue of the Service Division amounted to 884 thousand euros (Q2 2017: 682 thousand euros), which included intra-group revenue of 145 thousand euros (Q2 2017: 56 thousand euros). In 6 months 2018, the revenue of 1.660 thousand euros had increased by 21.9% compared to the revenue of 1.362 thousand euros in 6 months 2017.

The main services of the Service Division are real estate brokerage and evaluation services through real estate agencies. In 6 months 2018, revenue of the real estate agencies increased by 26% compared to 6 months 2017. In Q2 and 6 months 2018, Estonian agency had net loss of 57 thousand euros and 76 thousand euros, respectively (in 2017: net loss of 46 thousand euros in Q2 and 108 thousand euros in 6 months). Bulgarian agency earned net profit of 31 thousand euros in Q2 2018 and 21 thousand euros in 6 months 2018 (2017: net profit of 6 thousand euros in Q2 and 41 thousand euros in 6 months).

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 47 thousand euros in 6 months 2018, 40 thousand euros of which was intra-group revenue (6 months 2017: 63 thousand and 52 thousand euros, respectively). Revenue from accommodation services amounted to 86 thousand euros in 6 months 2018, of which 44 thousand euros was made in Q2 (2017: 86 thousand euros in 6 months and 47 thousand euros in Q2).

DEVELOPMENT DIVISION

The revenue of the Development Division totaled 368 thousand euros in Q2 2018 (in Q2 2017: 406 thousand euros) and 1,841 thousand euros in 6 months 2018 (in 6 months 2017: 1,469 thousand euros), including revenue from the sale of properties in the group’s own development projects in the amount of 182 thousand euros in Q2 and 1,492 thousand euros in 6 months (2017: 248 thousand euros in Q2 and 1,186 thousand euros in 6 months).

Most of the other revenue of the Development Division consisted of rental income from commercial and office premises in Madrid Blvd building in Sofia, amounting to 128 thousand euros in Q2 2018 and 252 thousand euros in 6 months 2018 (2017: 120 thousand euros in Q2 and 212 thousand euros in 6 months). In Q2 2018, we managed to rent out all office and commercial spaces together with parking places.

In Q2 and 6 months 2018, the Development Division had operating loss of 181 thousand euros and 1 thousand euros, respectively. In 2017, the Development Division bore an operating loss of 29 thousand euros in Q2 and 43 thousand euros in 6 months.

Revenue and profitability figures were higher in Q1 2018 due to the completion of several sale agreements for the apartments in Stage I 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, 3 apartments (one of which is a demo apartment and 2 have been presold) and 3 commercial spaces (two of which are rented out) remain unsold.

In Q2 2018, construction works started for Stage II of Kodulahe project, a building with 68 apartments and 1 commercial space. The project is expected to be finalised by the end of 2019. By the publishing date of the interim report, 36 apartments have been presold.

In Iztok Parkside project in Sofia, construction continued during Q2 2018. By the publishing date of the interim report, presale agreements for 42 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, and also signed an agreement for the design of Stage I. Design works continued in Q2 and are scheduled to end in Q4. Stage I will include ca 170 residential units (apartments and houses), commercial spaces and a kindergarten.

As of 30 June 2018, 5 Marsili residential plots remained unsold in Latvia, out of which one is presold. In 6 months 2018, one plot was sold in the project.

As of 30 June 2018, 6 people were employed in the Development Division, the same number as at the end of 2017.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

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