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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Squarestone | LSE:SQB | London | Ordinary Share | GG00B61JP354 | ORD NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 110.00 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From May 2019 to May 2024
TIDMSQB
RNS Number : 7901O
Squarestone Brasil Limited
23 September 2011
SQUARESTONE BRASIL LIMITED
("Squarestone Brasil", "the Company" or "the Group")
INTERIM RESULTS
FOR THE SIX MONTHS ENDED 30 JUNE 2011 (UNAUDITED)
Squarestone Brasil Limited (AIM: SQB.L; SQBW.L), the Anglo-Brazilian real estate and investment Group, today announces unaudited results for the six months ended 30 June 2011.
Financial highlights
-- NAV per share 124.5p (31 December 2010: 107.1p)
-- Adjusted NAV (calculated before any deferred tax liability) of 135.85p (31 December 2010: 109.5p)
-- Profit per share 14.5p (31 December 2010: 7.28p)
-- Independent valuation of the Golden Square shopping mall increased 35% to R$256.0m (GBP101.96m) (value at 31 December 2010: R$189.2m (GBP73.4m). This is based on a valuation of the property by Cushman & Wakefield (see note 4 for further details)
-- As the Group is still in the development phase of Golden Square, the Directors anticipate profits will continue to be driven by the increasing value of Golden Square as it nears completion
Operational highlights
-- Acquisition of remaining 50% of Golden Square shopping mall development from the original joint venture partner
-- Successful completion of convertible bond agreement with Delta II Fundo de Investimento em Participacoes ("Delta II") an entity jointly owned by BTG Pactual, a leading Brazil investment bank, and Walton Street Capital, US real estate investor, which will provide funds of up to R$192.5m to develop Golden Square to completion
-- Commencement of construction of 31,000 sq m Golden Square shopping mall in May 2011, expected to be completed by Q3 2012
-- Delta II to fund three further 50/50 equity investments in separate malls with the Group in return for an option to purchase 49% of the Group's wholly owned Brazilian management company
-- Leasing activities for Golden Square are on schedule with contracts/proposals for circa 31% of the lettable space already signed/agreed (as at 23 September 2011) including "key strategic brands" which will reinforce the mall positioning as a high end centre
-- Appointment of Neil Varnham as the new Non-Executive Chairman
James Morse, Chief Executive of Squarestone Brasil, commented:
"We are pleased to report that Squarestone Brasil's performance continued to be strong in the first half of 2011, with excellent profit growth and significant progress being made on leasing activities. The economic and financial indicators remain positive for the Brazilian shopping mall sector and we believe that it remains an attractive growth investment opportunity. Squarestone Brasil is now significantly stronger since forming its joint venture with BTG Pactual and Walton Street Capital and the Board believes the Group is in an excellent position to capitalise on the significant shopping mall opportunities in Brazil."
For further information contact:
Squarestone Brasil Tel: +44 (0)20 7074 1800 James Morse, Chief Executive Email: Robert Sloss, Executive Director squarestone@kreabgavinanderson.com Tim Barlow, Executive Director Liberum Capital (Nominated Adviser Tel: +44 (0)20 3100 2000 and Broker) Chris Bowman Christopher Britton Kreab Gavin Anderson (PR Adviser) Tel: +44 (0)20 7074 1800 James Benjamin Email: Natalie Biasin squarestone@kreabgavinanderson.com
Notes to Editors
Squarestone Brasil Limited (AIM: SQB.L, SQBW.L) is an Anglo-Brazilian real estate investment and development company specialising in the Brazilian shopping mall sector. The Company combines local real estate market knowledge with international expertise in retailing, construction and development and is focused on introducing to the Brazil shopping mall sector international standards in terms of design, construction, operation and asset management.
Squarestone Brasil Limited is a Guernsey registered and domiciled company with an operational subsidiary in Sao Paulo. Its Ordinary Shares and Warrants are traded on AIM where it was admitted to trading in April 2010. The business carried on by Squarestone Brasil was co-founded in 2007 by James Morse, Tim Barlow and Robert Sloss.
Further information on Squarestone Brasil is available from the Company's website:
www.squarestone.com.br
CHAIRMAN'S STATEMENT
As per the Company announcement made in June this year, I am delighted to have been appointed Non-Executive Chairman, taking over from Tim Walker, who continues as a Non-Executive Director on the Board and as Chairman of the Company's Audit Committee. I look forward to working with the rest of the team to ensure the continued success of Squarestone Brasil during what is anticipated to be a significant period of growth.
At the beginning of the period, the main focus of the Group was the successful negotiation and completion of a joint venture with BTG Pactual and Walton Street Capital, one of the leading Brazilian investment banks and an experienced international real estate investment fund manager respectively. This resulted in an agreement by them to invest R$192.5m into our Golden Square project company, SB Brast Participacoes S.A. ("SB Brast"). This investment has come through a joint venture partner, Delta II, in the form of a convertible bond, which will provide all of the funds required to acquire 50% of the project the Group did not already own and to settle the remaining amounts still payable under the original sale and purchase agreement. It also provides all the funds necessary to complete the development of the mall. The key terms
of the convertible bond and its treatment for accounting purposes are set out in note 3.
The signing of this agreement has provided two excellent financial partners with complementary skills to the Group and is a strong endorsement of the Group's strategy to deliver international quality shopping malls to Brazil effectively and successfully.
The agreement led to the commencement of development works on our flagship shopping mall, Golden Square. The budget for construction and all associated costs is R$138.5m (pure construction is R$118.2m). A contract has been signed with a contractor, Construtora e Incorporadora Guarany Ltda ("Guarany") and construction started in May 2011. The shopping mall is now scheduled to be completed by the end of the third quarter of 2012. Golden Square will be a mall of 31,000 sq m of net lettable area (NLA) on three levels, designed and built to international shopping mall standards combined with the local culture, tastes and fashions of Brazil. Golden Square's goal is to redefine the local retail experience based on international standards, hosting both domestic and international retailers under one roof and presenting a distinctive retail offer that currently does not exist in this part of Greater Sao Paulo.
As part of this series of transactions with BTG Pactual and Walton Street Capital, the Group has also entered into an option agreement with Delta II under which Delta II has the right to acquire 49% of the ordinary share capital of SB Administeracao e Participacoes S.A ("SB SA"), an operational subsidiary of Squarestone Brasil, for a price based on an attractive multiple of the adjusted EBITDA of SB SA. The option is exercisable only if Delta II provides 50% of the required equity funding for a total of four shopping centres. This number will include Golden Square if the bond issued to Delta II by SB Brast were to be converted to equity.
The Group has continued to invest in its team in order to deliver a vertically integrated mall company, capable of managing large scale projects from inception to asset management. We will continue with our policy of employing Brazilian nationals in the Brazilian management company and combine them with a team of international professional advisors to deliver optimal performance.
Results and Operations
Squarestone Brasil reports a profit of GBP5,857,744 for the six months to 30 June 2011, representing a profit per ordinary share of 14.50p, a significant improvement on the 7.28p at 31 December 2010. The primary reason for this improvement was the increase in the fair value of the underlying property in the Group's investment in SB Brast. As the Group is still in the development phase of Golden Square, the Directors anticipate profits will continue to be driven by the increasing value of Golden Square as it proceeds to completion.
The consolidated net asset value ("NAV") of the Group at 30 June 2011 was GBP50,295,780 representing 124.54p per ordinary share, an increase from 107.11p at the 31 December 2010. In the previous period, the Directors disclosed the adjusted NAV per share of 109.5p as at 31 December under the Best Practices Recommendations issued by the European Public Real Estate Association. Given the change of the accounting treatment of SB Brast and its underlying asset (see note 3), this measure is no longer appropriate. However the Directors still consider an adjusted NAV (excluding deferred tax) to be a more appropriate measure of the Group's NAV as the liability for tax is likely to be mitigated by the careful management of disposals in line with the tax efficient structure of the Group. The adjusted NAV of the Group for the period to 30 June 2011 was 135.85p (see note 8 for details).
Overview
The Brazilian shopping mall sector has continued to benefit from favourable economic conditions in the first six months of 2011, with both same-store-sales and same-store-rent up year on year by approximately 10% and 13% respectively (source: J.P. Morgan Latin America Equity Research Issued 10 June 2011). This growth is maintained by a sustained increase in real wages and household income, coupled with the continued popularity of shopping malls as a place of convenience in which shopping can be done in a secure and temperate environment. The growth in mall sales also compares favourably with the rate of growth in national retail sales which were up by 7.3% year on year in June 2011.
According to ABRASCE, the Brazilian Shopping Centre Association, shopping mall sales still only account for 18.3% of total retail sales, highlighting the continued under penetration of the mall sector within the retail industry. In addition, it is estimated that total mall gross leasable area ("GLA") will increase by 5.7% in 2011, approximately 560,000 sq m, with a total of 21 new malls due to be opened. This is still below the pace of growth in national retail sales.
With retail rents linked to inflation, the shopping mall sector continues to offer a good hedge against potential inflationary pressures, which are seen as one of the main threats to the Latin American region. At the COPOM (Comite de Politica Monetaria) Monetary Policy Committee meeting in June, expectation for the 2011 IPCA (Indice Nacional de Precos ao Consumidor Amplorate) rate of inflation was anticipated to be 6.16%. Also, the expected rate of inflation in 2012 increased from 5.1% to 5.15%. Having increased the benchmark SELIC (Sistema Especial de Liquidacao e Custodiainterest) rate at five of the previous COPOM meetings, the decision was taken to reduce the SELIC rate by 50 basis points to 12.0% in August 2011, largely due to the ongoing financial turmoil in many of the developed economies. The BMI Latin American monitor forecasts year on year GDP growth of 4.5% for 2011, with per capita income estimated to more than double to US$16,457 by 2015.
Generally, positive trends in underlying economic growth, a large and growing population, all-time low unemployment rates, rising disposable incomes and continued strong consumer confidence levels, are key factors behind the forecast growth in Brazil's retail sector.
Aside from the expansion of domestic Brazilian brands, we are seeing increasing levels of interest in the Brazilian retail market from high quality international retailers. Squarestone Brasil is continuing active negotiations with these well known international retailers and domestic operators, to sign them as potential occupiers. We believe that the international retailers' presence in Golden Square would further enhance its shopper appeal.
Outlook
The economic and financial indicators remain positive for the Brazilian shopping mall sector and we believe that it remains an attractive growth investment opportunity. Whilst there remains a significant shortage of retail accommodation available to the large and growing 'B' and 'C' classes (c. 130m people), Squarestone Brasil recognises that, as consumer tastes become more sophisticated, there is a greater need to deliver a high quality retail and leisure experience in Brazil. The Squarestone management team's international experience, partners and advisors will help the Group deliver this type of cutting edge product.
Neil Varnham
Non-Executive Chairman
23 September 2011
Consolidated Income Statement (unaudited)
for the 6 months ended 30 June 2011
Hot Features
Premium
Period Period Period
01.01.11 29.01.10 29.01.10
to 30.06.11 to 30.06.10 to 31.12.10
Note unaudited unaudited audited
GBP GBP GBP
Gross rental Income - - -
Service charge income - - -
Property operating
expenses (42,025) (72,976) (160,905)
Net rental cost (42,025) (72,976) (160,905)
============= ============= =============
Other operating
income 372,656 - 401,719
Administrative and
other expenses (1,530,306) (478,217) (2,376,747)
Changes in fair value
of investment
properties - (523,630) 5,087,105
(Loss)/profit from
operations (1,199,675) (1,074,823) 2,951,172
------------- ------------- -------------
Finance income 392,982 19,324 899,514
Finance expense (581) (984) (4,401)
Net finance income 392,401 18,340 895,113
------------- ------------- -------------
Share of profits from
joint venture 3 6,665,018 - -
Profit/(loss) before
taxation 5,857,744 (1,056,483) 3,846,285
------------- ------------- -------------
Tax charge on profit
for the year 5 - - (957,616)
Profit/(loss) for the
period 5,857,744 (1,056,483) 2,888,669
============= ============= =============
Profit/(loss) for the
period attributable
to:
Owners of the parent 5,857,744 (1,040,646) 2,888,669
Non-controlling
interest - (15,837) -
------------- ------------- -------------
Earnings/(loss) per
share (pence)
Basic 6 14.50 (2.63) 7.28
Diluted 6 12.67 (2.63) 7.27
============= ============= =============
Consolidated Statement of Comprehensive Income (unaudited)
for the 6 months ended 30 June 2011
Period Period Period
01.01.11 29.01.10 29.01.10
to 30.06.11 to 30.06.10 to 31.12.10
unaudited unaudited audited
GBP GBP GBP
Group
Profit/(loss) for the period 5,857,744 (1,056,483) 2,888,669
Other comprehensive income
Foreign currency translation 1,180,098 39,761 1,798,136
Total comprehensive
income/(expense) relating to
the period 7,037,842 (1,016,722) 4,686,805
============= ============= =============
Attributable to:
Owners of the parent 7,037,842 (1,002,092) 4,686,805
Non-controlling interest - (14,630) -
------------- ------------- -------------
Consolidated Statement of Financial Position (unaudited)
as at 30 June 2011
30.06.11 30.06.10 31.12.10
Note unaudited unaudited audited
GBP GBP GBP
Assets
Non-current assets
Investment property - 18,175,501 25,039,896
Investment in joint venture 3 44,786,284 - -
Property, plant and equipment 99,770 - 58,061
Goodwill 448,426 - 436,903
Intangible assets 947,408 - 923,062
Total non-current assets 46,281,888 18,175,501 26,457,922
Current assets
Trade and other receivables 3,340,165 461,937 788,170
Cash and cash equivalents 2,139,730 20,429,608 19,037,986
Total current assets 5,479,895 20,891,545 19,826,156
Total assets 51,761,783 39,067,046 46,284,078
----------- ------------ -----------
Liabilities
Non-current liabilities
Other non-current liabilities - 936,139 224,074
Deferred tax liability - - 955,995
-----------
Total non-current liabilities - 936,139 1,180,069
Current liabilities
Trade and other payables 1,466,003 1,284,567 1,846,071
Total current liabilities 1,466,003 1,284,567 1,846,071
Total liabilities 1,466,003 2,220,706 3,026,140
----------- ------------ -----------
TOTAL NET ASSETS 50,295,780 36,846,339 43,257,938
=========== ============ ===========
Equity
Share capital 7 - - -
Share premium reserve 33,266,112 32,500,802 33,266,112
Warrant reserve 5,158,507 5,045,727 5,158,507
Foreign exchange reserve 2,978,234 38,554 1,798,136
Share option reserve 146,514 41,362 146,514
Retained earnings 8,746,413 (1,040,646) 2,888,669
----------- ------------ -----------
50,295,780 36,585,799 43,257,938
Non-controlling interest - 260,540 -
----------- ------------ -----------
TOTAL EQUITY 50,295,780 36,846,339 43,257,938
=========== ============ ===========
Consolidated Statement of Changes in Equity (unaudited)
for the 6 months ended 30 June 2011
Foreign Share Non-
Share Warrants exchange option Retained controlling Total
premium reserve reserve reserve earnings Total interest equity
At 1 January
2011 33,266,112 5,158,507 1,798,136 146,514 2,888,669 43,257,938 - 43,257,938
Total
comprehensive
income for the
period - - 1,180,098 - 5,857,744 7,037,842 - 7,037,842
At 30 June 2011 33,266,112 5,158,507 2,978,234 146,514 8,746,413 50,295,780 - 50,295,780
============ ========== ========== ======== ============ ============ ============ ============
At 29 January
2010 - - - - - - - -
Amount arising
on
acquisition - - - - - - 275,170 275,170
Total comprehensive expense
for the period - - 38,554 - (1,040,646) (1,002,092) (14,630) (1,016,722)
Ordinary
shares/warrants
issued 34,455,233 5,045,727 - - - 39,500,960 - 39,500,960
Issue cost (1,954,431) - - - - (1,954,431) - (1,954,431)
Share based
payment - - - 41,362 - 41,362 - 41,362
At 30 June 2010 32,500,802 5,045,727 38,554 41,362 (1,040,646) 36,585,799 260,540 36,846,339
============ ========== ========== ======== ============ ============ ============ ============
At 29 January
2010 - - - - - - - -
Amount arising
on
acquisition - - - - - - 378,350 378,350
Total comprehensive income
for the period - - 1,798,136 - 2,888,669 4,686,805 - 4,686,805
Ordinary
shares/warrants
issued 35,347,266 5,158,507 - - - 40,505,773 - 40,505,773
Issue cost (2,081,154) - - - - (2,081,154) - (2,081,154)
Acquired in the
period - - - - - - (378,350) (378,350)
Share based
payment - - - 146,514 - 146,514 - 146,514
At 31 December
2010 33,266,112 5,158,507 1,798,136 146,514 2,888,669 43,257,938 - 43,257,938
============ ========== ========== ======== ============ ============ ============ ============
Consolidated Statement of Cash Flows (unaudited)
for the 6 months ended 30 June 2011
Period Period Period
01.01.11 29.01.10 29.01.10
to 30.06.11 to 30.06.10 to 31.12.10
Note unaudited unaudited audited
GBP GBP GBP
Cash flows from
operating activities
Profit/(loss) after tax for the
period 5,857,744 (1,056,483) 2,888,669
Adjusted for:
Depreciation of property, plant
and equipment 6,321 - 4,211
Change in value of investment
properties - 523,630 (5,087,105)
Finance income (392,982) (19,324) (899,514)
Finance expense 581 984 4,401
Share of profit from
joint venture (6,665,018) - -
Income tax expense - - 957,616
(1,193,354) (551,193) (2,131,722)
Increase in trade and other
receivables (2,680,053) (420,575) (175,446)
Increase in trade and other
payables 565,248 122,998 (337,775)
Income taxes paid - - (1,621)
Net cash flows from operating
activities (3,308,159) (848,770) (2,646,564)
Cash flows from
investing activities
Purchase of subsidiary - - (360,151)
Cash acquired on purchase of
subsidiary - 848,812 849,238
Disposal of investment property - (5,708,638) (5,952,363)
Investment in joint
venture (16,860,203) - -
Expenditure on investment
properties (43,714) (185,503) (376,889)
Purchase of property, plant and
equipment (46,499) - (2,758)
Acquisition of minority interest - - (378,350)
Interest received 392,982 19,324 899,514
Dividend received from
joint venture 1,685,204 - -
Net cash flows from investing
activities (14,872,230) (5,026,005) (5,321,759)
Cash flows from
financing activities
Proceeds from the issue of
shares - 27,168,000 27,168,000
Issue cost paid on issue of
ordinary shares and warrants - (861,471) (883,041)
Interest paid (581) (984) (4,401)
Net cash flows from financing
activities (581) 26,305,545 26,280,558
Net decrease)/increase in cash
and cash equivalents (18,180,970) 20,430,770 18,312,235
Cash and cash
equivalents at the
beginning of the period 19,037,986 - -
Effect of exchange rates on cash
and cash equivalents 1,282,714 (1,162) 725,751
Cash and cash equivalents at the
end of the period 2,139,730 20,429,608 19,037,986
============= ============= =============
Notes to the Consolidated Financial Statements
1. Basis of preparation
The consolidated financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS") and International Financial Reporting Interpretations Committee ("IFRIC") interpretations as endorsed by the European Union ("EU") and with those parts of The Companies (Guernsey) Law, 2008, applicable to companies reporting under IFRS. The Financial Statements are prepared in sterling, which is the presentational currency of the Company and all its subsidiaries ("the Group"). The Group's functional currency is the Brazilian Real as Brazil is the primary economic environment in which the Group operates.
These financial statements are unaudited and are not the Company's statutory financial statements.
The financial information in these interim financial statements is that of the holding company and all of its subsidiaries (the "Group") together with the Group's share of its joint venture. It should be read in conjunction with the annual report and the accounts for the period ended 31 December 2010. The accounting policies adopted by the Group in these interim statements are the same as those applied by the Group in its financial statements for the period ended 31 December 2010 with the exception of the new standards and policies adopted and outlined below which will form the basis of the 2011 financial statements.
At the date of authorisation of these financial statements, the following standards and interpretations applicable to the Group's financial statements, which have not been applied in these financial statements were in issue but not effective at the period end date:
IAS 12 Income Taxes (amendment); IAS 1 Presentation of Financial Statements (amendment); IFRS 10 Consolidated Financial Statements; IFRS 11 Joint Arrangements; IAS 27 Separate Financial Statements; IFRS 13 Fair Value Measurement; and IAS 28 Investments in Associates and Joint Ventures.
The Directors have not commented on amendments to existing standards or the issue of new standards where changes are not considered to be relevant to the Group or will have no material impact on the financial statements of the Group once effected.
The amendment to IAS 12 introduces a presumption that recovery of the carrying amount of an asset upon which deferred tax has been recognised will normally be through sale. The Directors do not believe that this will have a significant impact on the measurement of the current deferred tax liability. It may impact the calculation of deferred tax on future investments.
IFRS 10 introduces additional qualitative elements to the definition of "control" when determining whether it is appropriate to consolidate investees. The Directors do not consider that application of the standard will materially affect the presentation of the Group Financial Statements.
As a result of the issue of the R$192.5m convertible bond in March 2011 and the change in the circumstance resulting in a different accounting treatment of the joint venture operation, the following new policies have been adopted by the Group:
Convertible bond
The fair value of the liability component of a convertible bond is determined using the market interest rate for an equivalent non convertible bond. This amount is recorded as a liability on an amortised cost basis until extinguished on conversion or maturity of the bond. The remainder of the proceeds is allocated to the conversion option. This is recognised and included in shareholder's equity, and is not subsequently re-measured. Issue costs are apportioned between the liability and the equity components of the convertible loan notes based on their carrying amounts at the date of the issue. The portion relating to the equity component is charged directly against equity. Issue costs appointed to the liability are amortised over the life of the bond.
Joint ventures
Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement. Where a joint venture involves a jointly controlled entity the Group accounts for such investments on a net equity basis. Such investments are included in the Group's balance sheet at cost together with the Group's share of post acquisition reserves on a net equity basis. Where a joint venture involves a jointly controlled asset the Group accounts for such investments using the proportional consolidation basis. Accounting practices of subsidiaries, joint ventures or associates which differ from Group accounting policies are adjusted on consolidation.
2. Critical Accounting Estimates and Judgments
(a) Valuation of investment property
The Group obtains valuations performed by external valuers in order to determine the fair value of the investment property held by SB Brast, a joint venture company in which the Group has an interest. This is completed in accordance with appropriate sections of the current Practice Statement contained in the Royal Institution of Chartered Surveyors Appraisal and Valuation Standards, 6(th) Edition (the "Red Book"). This is an internationally accepted basis of valuation.
In completing these valuations the valuers consider the following:
(i) current prices in an active market for properties of a different nature, condition or location (or subject to different leases or other contracts), adjusted to reflect those differences; (ii) recent prices of similar property in less active markets, with adjustments to reflect any changes in economic conditions since the date of the transactions that occurred at those prices; and (iii) discounted cash flow projections based on reliable estimates of future cash flows, derived from the terms of existing leases or other contracts and (where possible) from external evidence such as current market rents for similar properties in the same location and condition, and using discount rates that reflect current market assessments of the uncertainty in the amount and timing of cash flows.
The Directors review such independent valuations, and where it is considered appropriate, will adjust the valuation to reflect any future financial commitments relating to the investment property that in the opinion of the Directors is necessary to reflect the open market value of their interest in the property.
(b) Impairment of goodwill
Goodwill only arises in business combinations. The amount of goodwill recognised is dependent on the allocation of the purchase price to the fair value of the identifiable assets acquired and liabilities assumed. The determination of the fair value of the net assets and liabilities is based, to a considerable extent on the Director's judgment.
Goodwill is capitalised as an intangible asset with any impairment in the carrying value being charged to the consolidated income statement. The Group is required to test, on an annual basis, whether goodwill has suffered any impairment. The carrying value is the higher of fair value of the asset less costs to sell and value in use.
(c) Income taxes
The Group is subject to income tax in different jurisdictions and significant judgment is required in determining the provision for income taxes. During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. As a result, the Group recognises tax liabilities based on estimates of whether additional taxes and interest will be due. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will impact income tax expense in the period in which such determination is made.
(d) Investment in joint venture
The complexity and uncertainty of various aspects of the compound financial instrument that SB Brast entered into (convertible bond) require estimates and judgments regarding the future financial performance of the investment and the decisions made by the bondholder. The Directors performed a detailed calculation in order to establish the likelihood of conversion that will be linked to the profitability of the project which cannot be accurately measured. Various factors were taken into consideration, including the estimated value of the property on completion (based on consultation with the valuers and after taking into account the future construction cost). It is in the Directors' view that the bond will be converted, leaving the Group with approximately 33% share of the net assets of SB Brast (assuming full conversion) and so this scenario has been taken into account when calculating the value of the Group's investment in SB Brast.
3. Investment in joint venture
On 31 March 2011, SB Brast entered into a sale and purchase agreement with Sao Bernardo Shopping Center S.A. to acquire the remaining 50% ownership of the Golden Square Shopping Mall, and to settle the remaining amounts still payable under the original sale and purchase agreement entered into in July 2008. The total amount payable under this agreement was R$95.20m, including a deferred payment of R$35.20m which would fall due on completion of the construction of the shopping mall. The value of the deferred payment is subject to an adjustment equal to the movement in the Brazilian IGP-M inflation index (currently 5-6%) between the date of the signing of the sale and purchase agreement to the date on which the deferred payment is subsequently made.
At the same date SB Brast entered into a convertible bond with Delta II Fundo de Investimento em Participacoes ("Delta II"), which will provide funds of up to R$192.50m in order to fund the acquisition mentioned above and to complete the construction of the project.
The bond has the following main characteristics:
Issue date: 31-Mar-11
Amount: R$ 192.5m
Draw downs: R$ 46.7m drawn to 30 June 2011, the balance to
be released upon approved architect's certificates.
Interest: Accrued at 15% from the issue date, until six
months after project stabilisation, adjusted for
the IGP-M inflation measure. Thereafter payable
at 12.5% per annum, adjusted for IGP-M. The accrued
interest will be waived if the bondholder decides
to convert.
Amortisation: Interest on the Bond will cease to roll up upon the
earlier of; (i) 6 months after Project Stabilisation,
or; (ii) 24 months after the initial Bond issuance.
Thereafter interest will become payable on a monthly
basis at the lower rate. 12 months after Project
Stabilisation, or 30 months from the Issue Date of
the Bond, the outstanding balance and accrued
interest shall be subject to amortisation. This will
be based on a straight-line calculation for the
remaining term of the Bond (approximately 5 years).
Conversion: This can be exercised at any time up to 180 days
after the project stabilisation date, thereafter the
conversion option ceases to be available. On
conversion the debt will be settled by a fixed number
of shares depending on the level of debt to be
converted. The calculation of the number of shares on
conversion is such that post conversion both the
bondholder and Squarestone Brasil will have
contributed funds to the joint venture in proportion
to their shareholding. Based upon investment already
made by Squarestone Brasil and the value of the bond
the split will be approximately 33% to 67% but the
final shareholdings will be calculated according to
the actual amounts invested by both parties.
Project stabilisation Is achieved when: (i) the construction of the
Project shall have achieved substantial completion
and (ii) retail stores representing 80% of the
gross leasable area of the Project have commenced
the payment of monthly rent under binding Approved
Leases.
Bond terminates 8 years from the issue date.
The Company currently owns 99.99% share of SB Brast; however the bond holders have a "golden share" that means that SB Brast is subject to joint controls with the bond holders. No one party has control either prior to or post conversion. The "Shareholders Agreement" sets out a number of key strategic decisions that require the agreement of both parties prior to and after conversion.
Previously the Group had accounted for its 50% interest in the Golden Shopping Mall (held by SB Brast, a 100% owned subsidiary) as a jointly controlled asset using the proportionate consolidation method. On the 31 March 2011 this arrangement ceased to apply, the subsidiary was disposed of and a new joint venture was formed with Delta II. The Group's interest in the joint venture can be accounted for either under the equity accounting or the proportionate consolidation method. However the latter may cease to be an option from 2013 due to IFRS 11 becoming effective. Due to these changes the Directors believe it is appropriate to account for its investment in SB Brast as a joint venture using the equity accounting method.
The results of the joint venture for the period to 30 June 2011 were as follows:
Jun-11
GBP
Non-current assets 101,962,528
Current assets 8,162,335
Non-current liabilities (41,350,792)
Current liabilities (1,916,890)
TOTAL NET ASSETS 66,857,181
=============
Income 282
Increase in value of investment
property 34,749,988
Expenses (538,289)
Deferred tax on FV adjustment (11,814,996)
Profit after tax * 22,396,985
=============
*Profit for period from April to June 2011
Following the significant uplift in the fair value of the investment property (see note 4 for details), the value of the 99.99% interest in the joint venture at 30 June 2011 was GBP66.8m.
The terms of the convertible bond issued by SB Brast mean that, on conversion, the bond holders (who can convert any time up to 180 days post project stabilisation) will acquire approximately 67% of the share capital of SB Brast, leaving the Group with 33% (assuming full conversion). The financing has been set up in such a way that the project will have to considerably underperform in order for the bondholder not to convert. The Director's view is that it is more likely than not that the bondholder will convert the debentures into the shares in SB Brast.
The Directors are of the opinion that until the decision about the conversion is made by the bondholder, recognising the full value of the investment in the Group's accounts would not reflect the economic reality of the situation and would therefore be misleading to the readers of the Group's financial statements. The full recognition is likely to lead to the initial uplift in the Group's NAV which may be followed by a significant dilution on conversion.
The Directors consider it necessary to recognise a provision against the Group's value of the investment based on the comparison of the fair value of the investment with its "recoverable amount". The fair value of the 99.99% share in the joint venture's net assets at the 30 June 2011 was compared with the situation when, assuming full conversion, the Group will ultimately own approximately 33% of the investment.
GBP
Interest in joint venture at 1
January 2011 -
Additions 38,121,266
Share of profits from SB Brast 22,211,407
Provision (15,546,389)
Interest in joint venture at 30
June 2011 44,786,284
=============
The Company, through its investment in SB Brast owns 99.99% of the freehold interest in the Golden Square Shopping Centre development in Sao Paulo, Brazil. The property was valued on 30 June 2011 on an open market basis by qualified valuers from Cushman & Wakefield, an independent firm of chartered surveyors. The valuations were carried out in accordance with guidance issued by the Royal Institution of Chartered Surveyors. The property was valued at R$256.0m (GBP101.96m).
The deferred tax liability of GBP11.8m, being 34% (tax rate applicable in Brazil) of the fair value adjustment of GBP34.7m was recognised in the accounts of SB Brast.
4. Investment property
GBP
At 1 January 2011 25,039,896
Capital expenditure 43,714
Foreign exchange rate movements (544,660)
Reclassification on change of accounting treatment (24,538,950)
At 30 June 2011 -
=============
At 29 January 2010 -
Acquisition 18,472,704
Capital expenditure during the period 185,503
Foreign exchange rate movements 40,923
Change in fair value (523,630)
At 30 June 2010 18,175,500
=============
At 29 January 2010 -
Acquisition 18,567,177
Capital expenditure during the period 381,811
Foreign exchange rate movements 1,003,803
Change in fair value 5,087,105
At 31 December 2010 25,039,896
=============
At 1 January 2011 the Company owned 50% of the freehold interest in the Golden Square Shopping Centre development in Sao Paulo, Brazil. The property was valued on 31 December 2010 at R$189.16m (GBP75.3m). The value of the Company's 50% share was R$94.58m (GBP36.70m). The terms of the joint venture agreement with the previous joint venture partner required the Group to contribute more than 50% of the total construction cost of the development in order to settle part of the site acquisition cost. The Directors considered it necessary to adjust the Group's share of value of the property to reflect these anticipated additional future contributions in order to reflect the open market value of the Group's interest in the property. The amount of this adjustment included at 31 December 2010 was R$30.5m (GBP11.66m). On the 31 March when the former joint venture operation was terminated, this contribution was effectively crystallised.
Following the change of the joint venture structure, the Group now equity accounts for its joint venture rather than use the proportionate consolidation method, as explained in note 3 above. The Group's share of the carrying value of the property and any subsequent uplift in the fair value have been included in the investment figure in the Group's statement of the financial position and as a share of profits in the joint venture in the income statement respectively. At the 30 June 2011 the property was valued by Cushman and Wakefield at R$256.0m (GBP101.96m).
The property is in the course of construction with completion anticipated by the end of the third quarter of 2012. In the period ended 30 June 2011 there was no rental income received.
5. Tax
The Company is a Limited company registered in Guernsey, Channel Islands, and has obtained exempt company status in Guernsey under the terms of the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989. The Company will be able to continue to apply for exempt tax status under the revised company income tax regime that came into effect on 1 January 2008.
The Group's Brazilian subsidiaries are subject to Brazilian corporate income tax on income and capital gains arising from their operations, after the deduction of allowable expenses.
The Group has taken advantage of Brazilian tax legislation, through the use of a Fundos de Investimento em Participacoes ("FIP"), a closed-ended investment vehicle, regulated by CVM Ruling No. 391 of July 16, 2003, as amended ("CVM Ruling No 391/03"). A FIP is a closed-ended investment vehicle that may acquire shares, certificates of shares, debentures, subscriptions warrants, or other bonds and securities convertible, or exchangeable for shares, issued by Brazilian closely and/or publicly-held companies.
Under Brazilian tax law, subject to the FIP adhering to certain investment and ownership criteria, distributions from the FIP to its foreign investors can benefit from 0% rate of tax. In addition, current legislation exempts a FIP from income taxes with respect to income and capital gains resulting from the acquisition and disposal of investments in Brazil (such as the shares of its portfolio).
The fair value adjustment of the investment property results in a temporary difference between the carrying value of the property and its tax basis. A deferred tax liability has been recognised on the uplift in the fair value of investment property in the accounts of the joint venture for which the Group accounts for under the equity method.
The Directors, although having recognised the deferred tax liability in accordance with IAS 12 Income Tax in the accounts of SB Brast, consider that such deferred tax liabilities will not become payable due to the structure of the Group, which may permit such taxes to be avoided through the sale of the relevant subsidiary rather than the investment property. However, as there is the possibility of tax arising were the investment property to be sold, deferred tax is provided on any increase in the fair value of the investment property.
GBP
Deferred tax liability at
1 January 2011 955,995
Foreign exchange movement (39,459)
Reclassification on change
of accounting treatment (916,536)
Deferred tax at 30 June -
2011
==========
6. Earnings per share
Basic earnings per share are calculated by dividing the profit for the year of GBP5,857,707 by the weighted average number of shares in issue during the period.
Basic Diluted
-------------------------------------- --------------------------------------
30.06.11 30.06.10 31.12.10 30.06.11 30.06.10 31.12.10
Profit/(loss)
for the period 5,857,707 (1,040,646) 2,888,669 5,857,707 (1,040,646) 2,888,669
Weighted average
number of
ordinary shares
in issue 40,384,960 39,500,960 39,700,203 46,227,371 39,500,960 39,724,268
Earnings/(loss)
per share 14.50 (2.63) 7.28 12.67 (2.63) 7.27
=========== ============ =========== =========== ============ ===========
At 30 June 2011, there were 708,450 share options and 26,923,307 warrants which could potentially dilute earnings in future. The average share price during the period was above the subscription price of the options and the warrants. Both have been included in the diluted earnings per share calculation in accordance with IAS 33. The options cannot be exercised until after the third anniversary of admission to AIM (April 2013). The warrants can be exercised before the third anniversary of admission to AIM at a price of 120p.
7. Share capital
Number GBP
------------------------------------- -------------------------------
30.06.11 30.06.10 31.12.10 30.06.11 30.06.10 31.12.10
Ordinary
shares
of no
par
value 40,384,960 39,500,960 40,384,960 - - -
The Company was incorporated with an unlimited number of shares at no par value.
8. Adjusted NAV
The adjusted NAV was calculated before taking into consideration any deferred tax accrued on the fair value adjustment relating to the investment property owned by SB Brast.
GBP
Group's NAV at 30.06.11 50,295,780
Group's estimated share of deferred tax on uplift
in fair value of investment property 4,568,989
Group's Adjusted NAV at 30.06.11 54,864,769
===========
Number of shares in issue at 30.06.11 40,384,960
Adjusted NAV per share 135.85p
-----------
9. Subsidiaries
The principal subsidiary of Squarestone Brasil Limited, which has been included in these consolidated financial statements, is as follows:
Proportion
of ownership
interest
Country at 30 June
Name of incorporation Activity 2011
Squarestone Brasil
Administeracao e
Participacoes
S.A. Brazil Property management 100%
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR UUVBRAOAKUAR
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