Unaudited consolidated interim report for Q1 and 3 months of 2020

GROUP CEO’S REVIEW

The satisfactory results of the first quarter do not give an idea of ​​the duration and impacts of the forthcoming Ice Age.

In the first quarter, Arco Vara earned money from rental and management fees for the Madrid Blvd building and from license fees paid by real estate brokerage and appraisal companies, as well as the sale of some Madrid Blvd and Iztok Parkside apartments. The cost base also decreased during the quarter. First, as a result of the partial repayment of the bank loan for the Madrid Blvd building and the cut of the interest rate by the bank and secondly, salary costs for the following months were decreased, due to the occurred economic crisis.

The primary short-term challenge for the Group continues to be the realization of the already built and largely pre-sold Iztok Parkside project. The Bulgarian government's decision at Christmas to transfer small street properties to the city of Sofia is being implemented, where we are no longer surprised by the fact that bureaucracy has now taken four months instead of the initial one month to be completed. It is therefore expected that a few months will elapse before the usage license is obtained. The good news is that customers are still waiting for apartments and have not yet expressed a desire to withdraw from pre-sale transactions. As an additional risk, we have to consider the possibility that the customers' purchasing power or motivation to purchase will nonetheless decrease during the second quarter. It also means keeping more money in the treasury than necessary.

Other developments in the field of construction in Estonia proceeded according to plan, whereas pre-sales continuing at a satisfactory pace until the end of the quarter. In Kodulahe and Kodukalda, 40% of the total area is covered by pre-sale agreements and more than half a year remains until the end of construction activity.

In Sofia, we froze the development of the Botanica Lozen development project on an indefinite basis. We may need our released equity to make favorable purchases to replenish the land bank.

In anticipation of the developments ahead, we can bring out the following thoughts.

First, during the second and third quarters, the Estonian and Bulgarian economies will perform worse prior to the moment when the stability will be regained and we will do better again. It is conceivable that the economy in both countries will decrease by 10% of GDP on an annual basis, the vast majority of which will be borne by the private sector and the people who earn money from it. The amount of services provided by the public sector and investments are rather growing.

Secondly, in the residential real estate market, we expect the transaction activity to shrink by more than 25% compared to 2019 (in Estonia we expect less than 37,000 transactions in 2020), as lessens A. the psychological readiness of most people to spend money and B. the purchasing power of people making money in the private sector. The reduction in purchasing power is primarily caused by the decrease in income, not by the diminishing in the financing capacity of banks. The financing capacity of banks is increasing due to the intervention of the European Central Bank, but the price of loans offered to consumers of real estate is also rising. According to the signs seen so far, the average Estonian and Bulgarian apartment buyer will not benefit significantly from the intervention of the European Central Bank.

Third, we will reach the level of transaction activity in 2018-2019 (in Estonia: 49,000 changes of ownership entered in the land register per year and the estimated number of long-term lease transactions per year is approximately the same) in 2022 at the earliest. The remainder of 2020 can be considered a period of decline in terms of both the number of transactions and transaction prices. The decline in transaction activity is followed by decline in real estate prices, which has already begun in some segments of the real estate market. It should be noted, however, that well-capitalized companies are unlikely to lower prices.

For Arco Vara, the assumptions given mean that when selling Iztok Parkside dwellings, it must be decided whether it is more beneficial for us A. to start new developments, decreasing the cost price of the development (construction price), B. replenish the land bank, or C. to direct equity to repurchases of shares during the downtime or to distribute it as dividends. A complete Ice Age scenario cannot be ruled out, where the market is overstuffed by ready-made apartments where the company is unable to sell them to anyone, while there are no new development projects to strive for either. As a conclusion, we need to evaluate the situation on an ongoing basis with an opportunistic mindset. The good news is that Arco Vara's equity ratio to total assets is high and there is no need for coercive steps in the realization of property or start developments. Our current situations is significantly different from the previous crisis, which for Arco Vara only passed by the end of 2013.

Hence, the Management Board is optimistic about Arco Vara and pessimistic about what lies ahead in the economy.

KEY PERFORMANCE INDICATORS

In Q1 2020, the group’s revenue was 2,238 thousand euros, which is 2.1 times higher than the revenue of 1,051 thousand euros in Q1 2019.

In Q1 2020, the group’s operating profit (=EBIT) was 133 thousand euros and net profit 20 thousand euros. In Q1 2019, the group had operating profit of 5 thousand euros and net loss of 112 thousand euros.

In Q1 2020, 10 apartments were sold in projects developed by the group (in Q1 2019: 7 apartments).

In the Q1 of 2020, the group’s debt burden (net loans) increased by 397 thousand euros up to the level of 11,847 thousand euros as of 31 March 2020. As of 31 March 2020, the weighted average annual interest rate of interest-bearing liabilities was 4.6%. This is an increase of 0.4% compared to 31 December 2019.

OPERATING REPORT

The revenue of the group totaled 2,238 thousand euros in Q1 2020 (in Q1 2019: 2,238 thousand euros), including revenue from the sale of properties in the group’s own development projects in the amount of 1,995 thousand euros in Q1 2020 (in Q1 2019: 823 thousand euros).

Most of the other revenue of the group consisted of rental income from commercial and office premises in Madrid Blvd building in Sofia, amounting to 162 thousand euros in Q1 2020 (in Q1 2019: 172 thousand euros). In Q1 2020, one office space was vacant, all commercial spaces together with parking places were rented out.

One apartment and commercial space remain unsold in Stage II of Kodulahe project which was finished at the end of 2019. By the publishing date of the present report, the house already has received an occupation permit.

In Q1 2020, construction works continued for Stage III of Kodulahe project, a residential building with 50 apartments at Soodi 4 in Merimetsa district in Tallinn. The project is expected to be finalized by the Q1 of 2021. Under continuing favourable construction conditions, the construction of Stage III may be finished in Q4 2020. By the publishing date of the interim report, 21 apartments have been presold.

Stages IV-V of Kodulahe project have construction permit, design works have finished. The joint construction of the Stage IV-V is scheduled to start in year 2021. The apartment buildings will become ready for final sale in about 1,5 after the construction begins.

In Q1 2020, construction works of Oa street plots in Tartu continued, where of 4 smaller apartment buildings are constructed under Kodukalda project name. 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 9 apartments have not been concluded. Iztok project consists of three apartment buildings with a total of 67 apartments.

By the date of this report, design works of Botanica Lozen project near Sofia in Bulgaria have been essentially completed. The project foresees construction of 179 homes (apartments and houses), commercial spaces and a kindergarten. Under favourable market conditions, construction may start in the Q3 of 2020, possibly divided into smaller sub-stages. Considering the nature of terrain on a mountain slope, minimum construction period is 2 years.

As of 31 March 2020 and the date of this report, 4 Marsili residential plots remained unsold in Latvia.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Tiina Malm

CFO

Arco Vara AS

Phone: +372 614 4630

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