2019 Annual Report of Arco Vara

KEY PERFORMANCE INDICATORS

In 2019, the Group’s revenue was 13.1 million euros, increasing 3.6 times from 2018’s revenue from continuing operations of 3.6 million euros.

In 2019, the Group’s operating profit (=EBIT) was 950 thousand euros and net profit 388 thousand euros. In 2018, the Group made operating profit from continuing operations of 101 thousand and net loss of 382 thousand euros. Discontinued operations brought an additional operating loss of 161 thousand euros in 2018.

In 2019, 82 apartments were sold in the development projects of the Group (in 2018: 12 apartments, 3 commercial spaces and 2 land plots). Lahepea 9 apartments constituted the largest part of the sales.

In 2019, the Group’s debt burden (net loans) decreased by 2.8 million euros down to the level of 11.5 million euros as of 31 December 2019. As of 31 December 2019, the weighted average annual interest rate of interest-bearing liabilities was 4.2%, which is 0.8% lower than on 31 December 2018.

GROUP CEO’S REVIEW

In 2019, Arco Vara Group made 13 million euros in revenue and 400 thousand euros in net profit on its equity of 13 million euros. This reflects the Group’s sensitivity to the development and selling pace of its real estate development projects. Had we achieved the planned result in the Iztok Parkside development project in Bulgaria, the revenue would have exceeded 22 million euros and net profit 2,2 million euros. The Group certainly has plenty of room for increasing return on equity and this was also reflected in the share price.

The Group’s equity is invested into assets that have been stabilized and are manageable. Manageability means that Arco Vara has a freedom of choice for commencing, timing and pricing development projects in Estonia and Bulgaria, and that the rental property on Madrid Blvd in Sofia is backed with a new long-term bank loan, which requires partial occupancy by tenants in order to serve the loan. In reality, the occupancy rate was close to 100% at the end of the year.

In terms of internal processes, organizational structure, as well as the balance sheet and expected cash flows, the Group has achieved a level of quality that allows to firmly continue with its growth plans. The main assets of the Group are its seasoned and motivated development teams in Estonia and Bulgaria, together with its well-known trademark and trust earned in the real estate sector. This trust and reputation can be transformed into measurable success in financing, constructing, marketing and selling real estate projects. On top of that, the Group is earning additional income through license agreements in Estonia, Latvia and Bulgaria.

The Company’s equity to debt ratio of 46/54 as of 31.12.2019 is too high, considering existing cash position, expected increase in equity upon realization of Iztok Parkside project and the weighted average term of loan liabilities. Therefore, the Company must either increase investments, or start share buybacks or cash distributions to shareholders. Of course, the Company’s capitalization and cash usage may be revised in the middle of April, as the global economic environment is very dynamic and may offer new opportunities.

In 2020, the Group continues with two Estonian developments projects, Kodulahe in Tallinn and Kodukalda in Tartu, with a total of 80 apartments under the cranes. Bank financing for finalising the construction has been secured and does not depend on new presales. Depending on the market situation, primarily the yet unclear consequences of the Covid-19 crisis, new constructions are theoretically possible in Botanica Lozen project in Sofia with a potential of over 600 units, as well as in Kodulahe project in Tallinn, where the detail plan allows to construct further 200+ apartments. In the first half of 2020, Iztok Parkside project with 68 apartments (GSA of 6,553 m²) should be realised – a project where two thirds of the time to date has been spent on bureaucracy and one third on construction and sale. By the end of the year, Kodukalda project in Tartu with 30 apartments (GSA of 1,967 m²) should be realised and a decision should be made about acquiring second stage land plots in Botanica Lozen project in Sofia. Further, we will continue close cooperation with real estate agencies using Arco Vara brand name and offering valuation and brokerage services – businesses that received mostly positive feedback from clients in 2019. Thus, on one hand, Arco Vara will continue with targeted residential real estate developments in Estonia and Bulgaria, but on other hand, will keep seeking information-based synergies with brokers and evaluators working under Arco Vara brand name.

OPERATING REPORT

The revenue of the Group totalled 13,109 thousand euros in 2019 (in 2018: 6,632 thousand euros, out of which 3,635 thousand euros from continuing operations), including revenue from the sale of properties in the Group’s own development projects in the amount of 12,152 thousand euros (in 2018: 2,778 thousand euros).

Most of the other revenue consists of rental income from commercial and office premises in Madrid Blvd building in Sofia, amounting to 696 thousand euros in 2019 (in 2018: 586 thousand euros). As of the publishing date of the annual report, all office and commercial spaces together with parking places were being rented out.

In 2019, the Group had operating profit of 388 thousand euros. In 2018, operating profit from continuing operations was 101 thousand euros.

In 2019, construction works finished in Stage II of Kodulahe project and keys were handed over to 65 apartment owners out of the total of 68 apartments during 2019. By the publishing date of the annual report, 1 apartment and a commercial space remained unsold.

In 2019, construction of Kodulahe Stage III began. In Stage III, a residential building with 50 apartments is being constructed at Soodi 4 in Merimetsa district in Tallinn. Under favourable market conditions, the joint construction of Stages IV-V will be started in 2020. The apartment buildings will become ready for final sale in about 1,5 years after the start of construction. By the publishing date of the interim report, presale agreements for 19 apartments in the Stage III building have been concluded.

In 2019, construction of 4 smaller apartment buildings with a total of 30 apartments began on Oa street plots in Tartu under the project name of Kodukalda. The construction is scheduled to end in Q4 2020. By the publishing time of the interim report, 12 apartments have been presold.

In Iztok Parkside project in Sofia, the final sale of apartments started at the end of Q4 2019, but the main sales are planned to take place during 2020 after receiving an occupancy permit. By the publishing date of the interim report, presale agreements for 10 apartments have not been concluded. Iztok project consists of three apartment buildings with a total of 67 apartments.

In Madrid Blvd building, the apartments previously used for offering accommodation service are all sold as of the date of this report.

In Lozen Botanica project near Sofia in Bulgaria, design works have been completed and main contractor has been chosen for Stage 1. Construction permit is expected in Q3 2020. The project foresees construction of 179 homes (apartments and houses), commercial spaces and a kindergarten. Under favourable market conditions, construction may start in Q3 2020, divided into smaller stages. Considering the nature of terrain on a mountain slope, minimum construction period is 2 years.

As of 31 December 2019, 4 Marsili residential plots remained unsold in Latvia.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Tiina Malm

CFO

Arco Vara AS

E-mail:

Attachment