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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Argo Real Est. | LSE:AREO | London | Ordinary Share | GB00B17PFQ50 | ORD EUR0.01 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0.02 | 0.00 | 00:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Jan 2020 to Jan 2025
TIDMAREO
RNS Number : 0781B
Argo Real Estate Opportunities Fd
28 March 2013
28 March 2013
Argo Real Estate Opportunities Fund Limited
(the "Company"/ "AREOF" / "Group")
Final Results for the year ended 30 September 2012
Argo Real Estate Opportunities Fund Limited, the closed-ended investment company formed for the purpose of investing primarily in the commercial property markets of Central and Eastern Europe, today announces its results for the year ended 30 September 2012.
Key Points:
-- Audited NAV per share at 30 September 2012 of EUR0.1039 (2011: EUR0.1081).
-- Adjusted NAV per share(1) at 30 September 2012 of EUR0.1213 (2011: EUR0.1241).
-- The result for the year amounts to a loss of EUR3.8m (30 September 2011 profit EUR31.2m).
-- Completion of the development of the 16,000 sqm shopping mall of Era Shopping Park, Oradea in early spring 2012.
-- Completion of the Sibiu Shopping City asset management initiative in September 2012 connecting phases 2 and 3 and providing a new Mall entrance.
-- Signing of key leases with C&A, Domo/Toyplex and H&M at Sibiu Shopping City.
-- Restructured terms agreed with Proton Bank on the Company's EUR25.9m facility extending it through to 31 December 2016 at a reduced rate of interest and option to roll up part of the interest falling due up to December 2014.
-- Restructured terms agreed with Suceava Shopping City's Alpha Bank facility extending it to November 2015 at a reduced rate of interest together with cash sweep loan amortization.
-- Since the year end the Group has not been able to meet full debt service and therefore breached the loan terms of its KBC Bank loan in respect of Sibiu Shopping City and its Proton Bank loan. Discussions with regard to restructuring these loans and several other Group loans are ongoing.
Notes:
(1)Adjusted NAV is calculated before any deferred tax liability
Further information:
Argo Real Estate Opportunities Fund Limited David Clark, Chairman Nominated Adviser and Broker +44 (0)1481 735 540 finnCap Limited Henrik Persson Matthew Robinson +44 (0) 207 220 0500
CHAIRMAN'S STATEMENT
The Company and its objective
Argo Real Estate Opportunities Fund Limited (the "Company"/ "AREOF" / "Group") was formed and listed on AIM on 16 August 2006 for the purpose of investing primarily in the commercial property markets of Central and Eastern Europe.
The Group's primary markets of operation are Romania, Ukraine and Moldova. Its investment objective is to provide investors with a high level of risk adjusted total returns derived principally from rental income and capital appreciation from the acquisition, development and active asset management of its retail and mixed-use property investments.
Financial performance
This report sets out the results of AREOF for the year ended 30 September 2012 along with the ongoing development and active asset management of its retail and mixed-use commercial property investments.
The audited NAV per share and adjusted NAV per share at 30 September 2012 is EUR0.1039 (2011: EUR0.1081) and EUR0.1213 (2011: EUR0.1241), reflecting a decrease of EUR0.0042 and EUR0.0028 respectively in the year.
The financial statements for the year to 30 September 2012 show a loss for the year attributable to equity shareholders of EUR2.9m.
The Group's deferred tax liability calculation of EUR12.9m has been prepared on a full provision basis. We consider it unlikely that this liability will crystallise, since if Group companies rather than properties are sold, previously provided deferred tax provisions may not result in actual liabilities.
Dividend
The Board has resolved that the Company will not declare a dividend but will instead retain the funds within the Group for further reinvestment.
Operating activities
The environment in which the Group operates remains challenging and while the general macroeconomic conditions have improved the effect of this is slow to feed through to the specific markets where our assets trade.
The effect of low disposable incomes together with the lack of availability of investment capital in the local economies mean that income levels remain depressed. In Romania in particular, the balance of landlord/tenant negotiations, both in terms of continued rental concessions and rent free holidays and/or fit-out contributions in lease negotiations continues to prevail, albeit that the extent of these concessions is at a lower level than in previous years.
These tenant concessions continue to significantly impact the Group's cash flow and, while being proactively managed, this puts pressure on the Group's loan covenants, which has resulted in several breaches since the year end as explained below. Nonetheless, the Group continues to enjoy the support of the relevant banks, albeit that where breaches have occurred, negotiations with regard to restructuring the loans is currently ongoing.
Despite this difficult trading environment the Company's first investment in the 47,000 sqm Sibiu Shopping City, Romania along with its subsequent 30,000 sqm Phase 3 extension continues to maintain its dominant trading position in the region.
The two part asset improvement project in Sibiu Shopping City completed with a new gallery linking the Real and Carrefour hypermarkets along with the arrival of several strong covenanted tenants including C&A and H&M. Also, the second phase of the project providing a new external entrance lobby for the mall was completed in September 2012.
The Company's 50,000 sqm Suceava Shopping City project, is suffering from strong competition within the region and retention of tenants when leases expire and the attraction of new tenants to the centre is being proactively managed. The maintenance of occupancy at 98% is a result of this effort.
The 65,700 sqm Era Shopping Park, Oradea, anchored by leading tenants Carrefour, Altex and Bricostore completed the development of its 16,000 sqm shopping mall in the spring 2012. This was followed by the opening in May of the 8,000 sqm Mobexpert furniture store which along with similar stores means that we are the leading provider of home decorations and furnishings in the region. Leasing conditions within the area remain challenging with strong competition from two existing competing centres and the lack of available fit-out funding while negotiations of such facilities to support this are ongoing with the primary lending banks.
The 49,800 sqm Era Shopping Park, Iasi anchored by prominent international retailers Praktiker, Decathlon, Carrefour and Mobexpert operate in a city with strong competition increased by a further centre opening in the region during the year. Nonetheless, strong lettings in the year mean that the Shopping Park is now 98% let, although the competitive pressure means that the level of tenant concessions granted in the year are unlikely to dissipate in the near future. A further 28,000 sqm to the Mall is planned, the start of which is dependent on finalising the necessary funding facility with the current lending banks.
The Company's Ukrainian 83,000 sqm Riviera Shopping City, Odessa, includes a 14,000 sqm Obi DIY store along with key anchor tenants Real Hypermarket, Inditex fashion brands (Zara, Stradivarius, Bershka, Pull & Bear) as well as offering a 12-lane City Bowling leisure complex and a nine-screen IMAX multiplex cinema. Since opening the centre in 2009 the leasing strength of this asset has continually improved resulting in it becoming an attractive and important regional retail destination, which is reflected in the current near 100% tenant occupancy level. An improvement project replacing a low paying furniture retailer with a 2,500 sqm fashion gallery was completed in June, further strengthening the future income.
The Group's previously acquired land assets in Nikolaev, Ukraine and around Chisinau, Moldova, continue to be land banked as development under current economic conditions is not financially viable. Nonetheless, opportunities continue to be sought and appraised in respect of these assets in order to maximize shareholder value.
Comprehensive details of all the projects entered into by the Company are further explained in the Investment Manager's report on page 8.
Financing Facilities
The Group is negotiating terms with its existing banks on several of its loans and expects to be successful given the support and previous successful dealings in the past:
(i) Proton Bank agreed to the restructuring of its existing EUR25.9m loan during the year with a EUR29.3m facility extending the loan maturity date to December 2016. Under the agreed terms a reduced rate of interest was agreed, payable annually at December each year with the option to roll up 50% of the interest due on the December payment dates up to December 2014. Since the year end the payment of interest due at December 2012 could not be met, thereby going into covenant breach and the dialogue with the bank is ongoing in this matter.
(ii) During the year KBC agreed a further quarter's amortisation holiday providing development cash flow to complete the final phase of the project development initiative at Sibiu Shopping City. Under the agreed terms the quarter's holiday was required to be repaid by the end of 2012 but in December the Company was unable to meet the full repayment, resulting in the loan terms being breached. Negotiations with the bank on restructuring this loan to include the extension of the facility beyond its maturity later in 2013 are currently ongoing.
(iii) The Alpha Bank loan, which supports the Suceava Shopping City asset, has been successfully restructured extending the original maturity by a further 3 years to November 2015. Under the terms of the restructured agreement a reduced rate of interest was agreed together the repayment of the loan by way of a cash sweep of available funds, thereby better matching the lending terms to the currently reduced level of trading income.
(iv) Restructured terms with the syndicated banks of EFG, Bank of Greece, Bank of Cyprus, Banca Romaneasca in respect of both Era Shopping Parks in Oradea and Iasi are ongoing, in the former case to better align the terms to current and anticipated cash flows and in the latter case to permit the release of the balance of the development facility to undertake the extension of the existing mall.
Further information on the status of the Company's various loans can be found in note 19 of the consolidated financial statements.
Accounting practices
The Group has continued to apply International Financial Reporting Standards as endorsed for use in the European Union ("IFRS") in the following consolidated financial statements. The Group's reporting currency is the euro.
Shareholder communication
The Manager aims to keep shareholders and other interested parties informed of developments through its website, www.argocapitalproperty.com, which is constantly upgraded for enhanced communication.
Outlook
Although economic growth in Romania and Ukraine failed to live up to the expectations during 2012, both countries are forecast to achieve a better result in 2013. This should have a positive impact on the performance of the Group, albeit modestly so. A more profound improvement in the results achieved by Group's assets will only occur after a sustained period of economic growth in its core markets. For this to come to pass a definite resolution to the financial crisis in the Eurozone is essential as the European Union is the key trading partner of both Romania and Ukraine.
Commercial property valuations in the region remained largely stagnant last year due to the limited availability of debt financing to the sector. The Board expects this to remain the case in 2013 as international and local banks continue to shy away from making significant commitments to property transactions.
In the year ahead, the Company will focus its efforts on (i) keeping the occupancy of our centres at high levels, even if this continues to require rental discounts; (ii) reducing costs further so as to maximize cash flows; (iii) only carrying out asset management initiatives which can generate quick returns on investment; (iv) retaining the financial support of Argo Group; (v) restructuring those loan facilities that support poorly performing centres; (vi) continuing measures to raise fresh capital for the Group and; (vii) completing the disposal of assets should attractive bids be forthcoming.
Meanwhile, the financial crisis that has recently engulfed Cyprus has the potential to negatively impact the Group. AREOF's Era Shopping Park Iasi is supported by a loan facility from a consortium of lenders including the Bank of Cyprus. Under the terms of the bail-out package the government of Cyprus has agreed with European Union authorities and the International Monetary Fund, the Bank of Cyprus will be the subject of a significant restructuring. This restructuring could negatively impact the Group's ability to drawn down on the remaining EUR17m of the loan facility needed to complete construction of the Era Shopping Park Iasi. It should also be noted that the Bank of Cyprus is also lender to the Era Shopping Park Oradea and that Marfin Popular Bank (commonly referred to as Laiki Bank), another Cypriot Bank subject to a restructuring as a result of the financial crisis in Cyprus, is a sole lender to the Company's Riviera Shopping City asset and part of a consortium of lenders to Sibiu Shopping City. Although these banking facilities are fully drawn down, the planned restructuring of both the Bank of Cyprus and Marfin Popular Bank may have an impact on their future relationship with AREOF.Over the longer term, and when market conditions have recovered sufficiently, the Manager will aim to complete the disposal of all the Group's property assets.
In closing, I would like to take this opportunity to express my gratitude for the ongoing support AREOF has received from its shareholders during what remains a difficult period for the Group.
David Clark
Chairman
27 March 2013
INVESTMENT MANAGER'S REPORT
The Investment Manager implements a focused strategy on behalf of AREOF to create an institutional quality retail property portfolio in leading primary and secondary cities in Central and Eastern Europe with a particular focus on Romania, Ukraine and Moldova. The Manager continues to reposition the portfolio to take advantage of a potential macroeconomic improvement in the region through strong asset management. The search for low-cost acquisitions which could increase the visibility of the portfolio has not been possible given that quality assets are still expensive (c. 8-9 per cent capitalisation rates) and considering the low euro interest rate environment and investors' search for yield.
Macroeconomic risks have improved, with much of the uncertainty surrounding Greece and the refinancing of Southern European nations having subsided following the ECB's statements of doing 'whatever it takes' to support the euro. Romania's GDP remains at or near zero growth, mostly as a result of agricultural output contraction and a decrease in public spending. Budget performance has been commendable as it has managed to comply with the IMF's programme. It is unlikely however that conditions will improve much during 2013 considering weak export demand from a weak Europe, restricted public spending, the lack of funding for infrastructure projects and political uncertainty. As we mentioned in our interim report, Romania continues to enjoy the competitive advantages that it had prior to the crisis. The skilled, productive yet cheap labour force will continue to be in demand by foreign companies looking to cut costs, however these advantages that Romania enjoys are unlikely to overcome the supply side impact of a continuing Eurozone uncertainty.
Similar to 2011 and 2012, we expect that the retail market in Romania will remain challenging as purchasing power and disposable incomes remain low, especially in secondary cities. In 2012 Q3 retail sales registered a 4.6% year on year increase reversing a 3.3 % decline in 2011. Dominant centres experienced stable sales for a second year. Average rents and occupancy levels were also stable as non-food retail sales stabilised and next to no supply of new modern retail space came to the market.
Rental concessions to Romanian tenants continue to be necessary and as a result the Company's cash flow still remains weak requiring the support from the project company banks. The Manager believes that these discounts while decreasing will be necessary for at least a further 12 months.
In Ukraine, some political risk has been removed as Mykola Azarov has been reappointed to the position of prime minister by the president. The overall macroeconomic situation remains flat with GDP improving by only 0.5% in 2012. In the coming year there will be a need to fill the financing gap with IMF funds which would necessitate a more austere budget to be implemented. Similar to last year, the supply of modern retail space remains low and few projects are likely to be developed over the next years. As a result the retail market remains strong especially in Kiev and this situation has also favoured Riviera which remains fully leased at high average rents.
Capital Market activity remains at historically low levels particularly in Romania as debt financing continues to be severely restricted. Development has been much more active in Ukraine as many local or Russian developers are funded mostly by equity.
As previously advised, we are in the process of renegotiating the banking facilities Sibiu, Era Shopping Park, Oradea and Era Shopping Park, Iasi. The Sucaeva Shopping City loan was successfully renegotiated on favourable terms.
The 12 month period to 30 September 2012 has seen a EUR2.6m decrease in the NAV attributable to equity holders resulting in a year end NAV of EUR63.2m. No unusual events impacted unduly in creating the loss in the year but rather the reduced level of trading income was not sufficient to fully support asset financing and Fund overheads.
Where the Group provides incentives to its customers, both in terms of fit-out contributions or rental concessions, the cost of these incentives is recognised over the lease term, on a straight line basis, as an adjustment to rental revenue. Incentive adjustments of EUR2.0m were added to rental income in the period to 30 September 2012 and accumulated incentives at the period end amounted to EUR11.7m, as detailed in note 16 to the financial statements.
Under current market conditions the following risks continue to exist for the Company:
(i) Although certain of the project subsidiary companies remain cash flow positive the restrictive use of surplus funds which are subject to lenders' approval for release means that at the present time the negative situation of the Company continues. Further equity or other infusion of cash is likely to be required later in 2013.
(ii) The weakness, competitive pressure and slowness of recovery in the local retail environments causing existing tenants to continue to request reductions in rent which in turn impacts the level of the Group's income sufficient to service its debts on full repayment basis without further bank concessions being agreed.
Despite the challenging environment the Company continues to consider and pursue discrete asset and strategic disposal discussions where there are any credible indications of interest.
Transaction Overviews
Sibiu Shopping City, Sibiu, Romania
AREOF's Sibiu Shopping City, was acquired in November 2006, and through continued asset management remains the strongest centre within the Romanian asset portfolio. Occupancy is now 91% and we anticipate reaching close to full occupancy by the end of 2013.
The retail park was expanded both in 2007 and 2008, with a number of extensions and reconfigurations (known as "Phases 2 and 3"). The connection building between the two Phases was completed in 2011 and has generated increased traffic for Carrefour, a key anchor tenant, up 8% in 2012. The new Mall entrance was finished below budget in September 2012 and provides an attractive focal point for the centre.
The Manager has targeted further occupiers that will strengthen the tenant mix in order to maintain its position as a dominant shopping centre in central Romania. H&M had a successful opening in October 2012 with the Mall recording its highest ever increase in daily traffic up 22%. They have also positively increased sales for the majority of other fashion tenants in the Mall. Decathlon has agreed terms for a 2,300 sqm unit in the new connection, with anticipated opening in May.
With full occupancy anticipated by the end of 2013, further extensions of the Mall are being considered, as tenant demand for the centre is increasing. For example Inditex group are interested in securing 2,000 sqm for 3 of their fashion brands.
Rental concessions now account for less than 3% of gross rental income and we anticipate the majority of concessions will fall away by the end of 2013, early 2014. Although still subject to anti-monopoly approvals, Auchan's takeover of the Real supermarket store and introducing a more aggressive pricing policy will have a positive impact on traffic. This together with Decathlon's opening in late spring should continue to improve traffic and sales.
The Manager has internalised most of the property management activity undertaken by DTZ and reduced their fees accordingly.
Negotiations have commenced for the refinancing of the EUR59.5m debt facility from KBC Bank which expires in November 2013 and in the light of the recent loan breach where an amortisation payment due at December 2012 could not be fully met. Proposals being discussed include the deferral and rescheduling of amortisation payments. The EUR27m investment loan from KBC, Investkredit and Marfin/Laiki Bank includes a EUR1m loan prepayment in March and discussions for a deferral have commenced.
The market value of the property as at 30 September 2012 was EUR79.6m on Phase 1, against a 30 September 2011 valuation of EUR82.1m; and a valuation of EUR35.5m on Phase 3, against a comparative September 2011 valuation of EUR33.7m.
Suceava Shopping City, Suceava, Romania
The 50,000 sqm centre faces strong challenges especially as the disposable income of the relatively small catchment area population is too low to attract major international brands and there are two shopping centres within close proximity of each other. The continued strong competition for new tenants from Iulius Mall, together with a weak local economy has resulted in a decline of occupancy to 97.5%. Existing tenants have been heavily encouraged by our competitor to relocate. Key tenants such as Deichman and New Yorker with imminent lease expiries had originally decided to vacate the centre, although subsequently the Manager was able to successfully convince them to renew their leases. In addition, several new tenants, including budget fashion tenant 'Seven', have also been attracted to the centre. Decathlon have been told that their agreement for Sibiu, is conditional on them leasing a 1,400 sqm unit in Suceava and terms are under negotiation.
Rental discounts have continued to be provided, especially to the centre's high proportion of local tenants. Securing Decathlon is the Manager's prime objective together with new fashion occupiers that will strengthen the tenant mix.
The Manager has internalised most of the property management activity undertaken by DTZ and reduced their fees accordingly.
The EUR50m three year facility with Alpha Bank of Greece, has been restructured and extended to November 2015. The Company has been granted an interest rate reduction to 3 month Euribor plus 3.35% and amortisation payments will be undertaken by way of a cash sweep of surplus revenues, thereby aligning the servicing of the loan commitments to the current level of cash flows.
The 30 Sept 2012 market value of the property was EUR62.3m against a 30 September 2011 valuation of EUR65.2m.
Era Shopping Park, Oradea, Romania
Era Shopping Park, Oradea comprises a 65,700 sqm retail park, on the outskirts of the city, which opened Phase 1 in March 2009 with leading anchor tenants Carrefour, Altex, and Bricostore. Phase 2, which comprises the 16,000 sqm Mall, was completed in early spring 2012 and a Mobexpert furniture anchor of 8,000 sqm opened in May 2012. Phase 3 of approximately 4,000 sqm will be opened following pre-leasing.
The project has in place a EUR62.3m construction facility from EFG, Banca Romanesca, Bancpost and Bank of Cyprus and the full amount of this facility has been drawn to complete the shopping mall. The Company failed to satisfy the loan conversion conditions and currently is not able to fully cover interest payments and non-recoverable costs from its existing cash flow.
The Manager is in negotiations with the lending banks and has requested a rescheduling of payments and an interest rate reduction, together with the availability period for the standby facility of EUR1.3m required for tenant fit-out works to be extended. Although the majority of terms are accepted by the lenders the form of security is the main issue currently under discussion.
Mobexpert, Naturlich and other furniture stores opened this year and are trading above expectations. This part of the scheme has been branded as ERA Home Centre, as we now offer the largest selection of home decoration and furnishings in the region. While a further 5 leases are signed the tenant fit-outs can only commence when the standby facility has been reopened. Similarly, the lack of current availability of fit-out funding has caused leasing activity to slow dramatically. This is disappointing as tenant interest increased following completion and opening of Mobexpert and the Manager has been prevented from capitalizing on this. Negotiations are ongoing with Decathlon for a 1,800 sqm unit for Phase 3 of the Mall. This is an important tenant to secure, as it would be a significant boost to leasing activity.
The market value of the property was EUR79.3m as at 30 Sept 2012, against a 30 September 2011 value of EUR80.3m.
Era Shopping Park, Iasi, Romania
Era Shopping Park, Iasi comprises some 49,800 sqm of retail park of which Phase 1 of some 33,000 sqm comprising Carrefour, Praktiker and the Gallery was completed in September 2008. The Gallery was extended in September 2009 with the addition of an 8,000 sqm Mobexpert furniture store and in May 2010 Decathlon purchased a 2.4 hectare site and constructed and opened their 3,000 sqm store.
Competition in the city has increased with the opening of the 45,000 sqm Palas scheme in the city centre. This attracted a number of new retailers to the city and reduced traffic and sales in the other centres. Although traffic at ERA has now returned to pre Palas opening levels, it is clear that sales for the fashion retailers have declined. This fact is also true for the other two main retail schemes in the city. Occupancy however remains at 97.8%, after the Manager has secured a further 21 tenant lettings in 2012.
Construction of the 28,000 sqm Mall extension has been delayed pending finalisation of the debt facility. There is a further 8 hectares of land available for sale or development of further retail units. BMW have offered attractive terms to lease 6,000 sq m of land to develop a showroom and we are awaiting approval from the lending banks. IKEA will again be presenting the project internally so the Manager hopes to receive some positive news in 2013.
A EUR77m development facility provided by EFG, Banca Romanesca, Bancpost and Bank of Cyprus is in place for the construction finance of the total project, of which EUR60m has been drawn to date. The restructuring of the existing facility has received credit committee approvals, although the lending banks have delayed finalisation until completion of the Oradea re-structuring. The Mall currently has all permits necessary to commence construction and negotiations are progressing with a number of contractors. The current financial crisis in Cyprus could negatively impact the finalisation because Bank of Cyprus will be subject to a major restructuring. Assuming finalisation of the facility the current construction program is expected to deliver Phase 1 of 15,000 sqm by spring/summer 2014 and Phase 2 of 13,000 sqm by early 2015.
The short term rental concessions previously conceded to tenants are unlikely to reduce throughout 2013 due to most retailers experiencing a 15-20% sales decline following the Palas opening.
The market value of the property was EUR76.5m as at 30 September 2012 against a 30 September 2011 value of EUR82.1m.
Riviera Shopping City, Odessa, Ukraine
The Company's 83,000 sqm Riviera Shopping City centre in Odessa initially opened in October 2009 with key anchor tenants including Obi DIY Store, Real Hypermarket, Inditex fashion brands Zara, Stradivarius, Bershka, Pull & Bear and Oysho along with many others. Subsequent phased completion of the development saw the successful opening of the City Bowling and Leisure Complex along with the Imax Multiplex Cinema.
Attendance and retailer sales continue to exceed estimates confirming the Company's development as an important and sustainable regional retail destination. The footflow of the Mall for 2012 has increased by 23% compared with the same period of 2011.
The leasing situation of the centre has continually improved since completion and its attractiveness has led to strong demand amongst retailers for space in the centre which has resulted in the occupancy level being near 100%.
The asset management initiative creating an attractive fashion gallery of 2,500 sqm opened in June 2012 in space previous occupied by an underperforming tenant is currently being completed being 90% let and when fully let will provide a further increase to net revenue of approximately EUR0.7m.
Current financing arrangements consist of a EUR68m Marfin Bank investment facility. Under the agreed loan terms there was an initial eighteen month amortisation holiday which was further extended by agreement with the Bank for a further twelve month period through to June 2012. The continued improving performance of the centre as rental incomes improve and are added to through management initiatives, means that the Company is able to fully cover both interest and amortisation and the Manager is currently in discussion with the Bank to agree to the release of surplus cash resources from the project subsidiary for wider use within the Fund.
The market value of the property was EUR106.0m as at 30 September 2012 against a 30 September 2011 value of EUR88.5m.
Nikolaev, Ukraine, Freehold Development Site
The 20 hectare freehold plot is located about 5 km's outside of the city centre on the primary motorway from Odessa and near a future intersection with the planned Nikolaev ring road.
While there are very few land transactions currently in the region the Company seeks strategic opportunities to realise value from this asset. It is felt that when market conditions improve this site could accommodate a logistic warehouse park site servicing this important port city or an out of town factory outlet retail project.
The freehold land is in ownership of the Company and carries the market value of EUR0.61m at 30 September 2012 compared to a valuation of EUR0.76m at 30 September 2011.
Moldova Retail and Mixed Use Development Sites, Chisinau, Republic of Moldova
In conjunction with a local partner, the Group is completing the assembly of a retail and mixed-use development site in the historic city centre of Chisinau, the Republic of Moldova's capital. The Group also owns two further potential out-of-town retail and mixed-use sites on a prominent motorway to the airport locations on the periphery of Chisinau.
The Investment Manager has entered into a commercial relationship with a local partner for the exploitation of the Company's land assets with the goal of realising equity proceeds from these assets.
The Moldovan assets' market values as at 30 September 2012 totalled EUR4.3m, compared to a valuation of EUR4.4m at 30 September 2011.
Proton Corporate Loan
Restructured terms were agreed with Proton Bank during the year whereby the existing loans were refinanced under a EUR29.3m facility provided through to December 2016, with the option for annual interest, at a lower agreed rate, to be part capitalised for the first three repayments falling due through to December 2014. A default on the interest payment due in December has meant that this loan is in breach and a solution to this is being sought with the bank.
Outlook
The outlook for 2013 is mostly one of stagnation in terms of rents, yields and resulting values. Economic activity is unlikely to expand sufficiently to improve valuations or liquidity in the Romanian market. In Ukraine, as long as the Company's main asset retains its commanding market position, it will continue to enjoy high market rents and investor interest.
If the European crisis has been averted by ECB action or rhetoric, then global economic activity expansion will take at least two years to be translated into any meaningful improvement in the fortunes of Romania. Further fiscal austerity would be a drag on the economy and until banks expand their lending, personal consumption and retail sales will be subdued. Similarly with Ukraine, fiscal austerity resulting from the need for an IMF funding gap package will be a drag on the economy and on retail sales especially outside of Kiev.
The Manager will continue to focus on operational and process improvements, organisational changes, clear stakeholder communication and financial restructuring. It expects that equity will be generated within the Fund over the medium term through debt principal amortisation and discount and yield contraction.
Dennis Selinas Graeme Daniel Fund Manager Finance Director
On behalf of Argo Capital Management Property Limited
27 March 2013
DIRECTORS' REPORT
The Directors present herewith their report and audited consolidated financial statements of the Group (as defined in note 1 to the consolidated financial statements) for the year ended 30 September 2012.
The principal activity of the Group is that of investing in the commercial property markets of Central and Eastern Europe. A review of the Group's activities is contained in the Investment Manager's Report on page 8.
Objective
The Group has been formed for the purpose of investing primarily in the commercial property markets of Central and Eastern Europe. The target countries include Romania, Ukraine and Moldova. Its investment objective is to provide investors with a high level of risk adjusted total returns derived principally from rental income and capital appreciation from the acquisition, development and active asset management of its property investments.
Results for the Year
The result for the year ended 30 September 2012 was a loss of EUR3.8m (2011: profit EUR31.2m) of which EUR2.9m of the loss (2011: profit EUR27.4m) was attributable to equity shareholders. The results for the year are set out in the Consolidated Statement of Comprehensive Income on page 22.
Dividend
The Board has resolved that the Company will not declare a dividend for the year.
Directors
The Directors who served during the year and to date were as follows:-
David Clark (Chairman) Louis Plowden-Wardlaw (resigned 13 June 2012) Robert Brown (resigned 21 June 2012)
Ralph Hill
David Fisher
Directors' Interests
The Directors held the following ordinary shares in the Company at 30 September 2012:
Hot Features
Premium
No. of
Shares
David Clark Nil
Ralph Hill 500,000
David Fisher Nil
There have been no additional share transactions up to 26 March 2013.
The shares held by Ralph Hill were acquired through the Company's Initial Public Offering in August 2006, prior to his appointment as a director.
Directors' Remuneration
During the period under review the Directors received the following remuneration in the form of fees:-
2012 2011
EUR EUR
David Clark 16,358 13,833
Louis Plowden-Wardlaw 10,794 13,812
Robert Brown 22,060 28,833
Ralph Hill 15,606 14,083
David Fisher 14,639 14,114
Total 79,457 84,675
================ ================
There are no service contracts between the Company and the Directors, however each of the Directors was appointed by a letter of appointment which sets out the main terms of their appointment.
Corporate Governance and the Board
The Board has considered the principles and recommendations of the AIC Code of Corporate Governance ("AIC Code") by reference to the AIC Corporate Governance Guide for Investment Companies ("AIC Guide"). The AIC Code, as explained by the AIC Guide, addresses all the principles set out in the UK Corporate Governance Code ("UK Code"), as well as setting out additional principles and recommendations on issues that are of specific relevance to the Company.
The Board considers that reporting against the principles and recommendations of the AIC Code, and by reference to the AIC Guide (which incorporates the UK Code), will provide better information to shareholders.
The Company has complied during the year with the recommendations of the AIC Code and the relevant provisions of the UK Code.
The UK Code includes provisions relating to the role of the chief executive, executive directors' remuneration and the need for an internal audit function. For the reasons set out in the AIC Guide, and as explained in the UK Code, the Board considers these provisions are not relevant to the Company, being an externally managed investment company. The Company has therefore not reported further in respect of these provisions.
All Directors of the Company are subject to election by shareholders at the first Annual General Meeting after their appointment and to annual re-election thereafter.
The Company has a Nomination Committee that consists of all members of the Board as all directors are non-executive. The process adopted by the Company for the appointment of new directors is detailed in the Terms of Reference of the Nomination Committee, which may be provided by the Company Secretary upon request.
Board Responsibilities
The Board comprises three non-executive
directors, each of whom are independent
with the exception of David Fisher
who is also a director of Argo Group
Limited, which wholly owns the Investment
Manager; accordingly, where any possible
or actual conflict of interest arises,
Mr Fisher does not participate in
the decision making of the Board.
The Group has no executive directors
and no employees. However, the Board
has engaged external companies to
undertake the property investment
advisory, accounting and administrative
activities of the Group. Clearly documented
contractual arrangements are in place
between these firms which define the
areas where the Board has delegated
authority to them. The Group holds
a minimum of four formal Board meetings
a year on a quarterly basis, at which
the Directors review the Group's investments
and all other important issues to
ensure control is maintained over
the Group's affairs. In addition,
the Board meets with the Investment
Manager on a regular basis to consider
matters pertaining to investments.
The fee that was paid to each Director
during the period is disclosed on
page 15.
All members of the Board are expected
to attend each Board meeting and to
arrange their schedules accordingly,
although non-attendance is unavoidable
in certain circumstances. During the
year ended 30 September 2012 11 Board
meetings were held. The table below
details the number of Board meetings
attended by each Director. Meetings Meetings
held while attended
a Director
in the year
David Clark 11 11
Louis Plowden-Wardlaw 7 6
Robert Brown 9 5
Ralph Hill 11 9
David Fisher 11 10
Directors' Responsibilities
The Directors are responsible for preparing the financial statements in accordance with applicable Guernsey law and generally accepted accounting principles.
The Directors are responsible for preparing financial statements for each financial period, which give a true and fair view of the state of affairs of the Group, as at the end of the financial period and of the profit or loss of the Group, for that period. In preparing those financial statements, the Directors are required to: -
-- select suitable accounting policies and then apply them consistently; -- make judgements and estimates that are reasonable and prudent;
-- state whether applicable accounting standards have been followed subject to any material departures disclosed and explained in the financial statements; and
-- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business.
The Directors confirm that the financial statements comply with the above requirements.
The Directors are also responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time the financial position of the Group, and to enable them to ensure that the financial statements comply with The Companies (Guernsey) Law, 2008. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
So far as the Directors are aware, there is no relevant audit information of which the Group's auditor is not aware, having taken all the steps the Directors ought to have taken to make themselves aware of any relevant audit information and to establish that the Group's auditor is aware of that information.
Internal Control and Financial Reporting
The Board monitors the performance of the Group's service providers and their obligations under their agreements with the Group, with particular reference to the management of the Group's assets by the Investment Manager.
The Board is responsible for establishing and maintaining the Group's system of internal control. Internal control systems are designed to meet the particular needs of the Group and the risks to which it is exposed, and, by their very nature, provide reasonable, but not absolute, assurance against material misstatement or loss. The key procedures which have been established to provide effective internal controls are as follows:
-- The Group employs the services of an independent third party licensed and regulated in the provision of administrative and company secretarial services;
-- The duties of Investment Manager, accounting and the custody of assets are segregated. The procedures are designed to complement one another;
-- The Directors of the Group clearly define the duties and responsibilities of their agents and advisers in the terms of their contracts; and
-- The Board reviews financial information produced by the Investment Manager on a regular basis.
The Group does not have an internal audit department. All of the Group's management functions are delegated to independent third parties and it is therefore felt that there is no need for the Group to have an internal audit function.
Board Committees
An Audit Committee, Nominations Committee and Remuneration Committee were established with each committee being comprised of the members of the Board.
The Audit Committee is chaired by David Fisher and meets at least twice a year to review the interim and year end financial statements prior to their submission to the Board, to review the appointment of the auditors and the scope, performance and remuneration of services provided by them, as well as to monitor and assess the management of financial matters generally and the adequacy of the internal control policies and procedures adopted.
The Nominations Committee, chaired by David Fisher, meets at least annually to assess the adequacy of the Board in terms of its size, structure, skills and experience in order to appraise its leadership and performance effectiveness and make necessary recommendations as it sees appropriate.
The Remuneration Committee, chaired by David Fisher, meets at least annually to determine the policy for the remuneration of the directors to adequately reflect the time commitment and responsibilities required of the role and the appropriateness of incentives to encourage enhanced performance.
Going Concern
The Directors have prepared cash flow forecasts which show that the Group requires additional working capital for the foreseeable future and this requirement is currently being provided by the Investment Manager or funds advised by a fellow subsidiary of the Investment Manager's parent company. While the Manager continues to support the Group going forward by the deferral of management fees due and by providing an undertaking to provide additional working capital over the next 12 months as and when this is required, there remains the need to establish a more permanent basis to meet the working capital needs of the Group. Consideration is therefore being given to a number of sources to meet these needs including asset sales, restructured bank borrowings and a further issue of capital.
In considering the going concern of the Group, there are a number of material risks and judgements that have been considered as explained more fully in note 2 to the consolidated financial statements, none the least the support of the Group's long term relationship banks where temporary breaches of loan covenants have or are likely to occur, in restructuring the loan facilities to provide short term improvements in debt servicing arrangements.
Despite these material risks and uncertainties the Directors believe that the Group continues to enjoy the support of key stakeholders and will be able to fund its commitments as they fall due in the foreseeable future and as such, consider the going concern basis to be the most appropriate basis on which the financial statements should be prepared.
Substantial Shareholdings
Shareholders with holdings of more than 5 per cent of the issued ordinary shares of the Company as at 26 March 2013 were as follows:-
Name of shareholder No. of %
ordinary held
shares
Securities Services Nominees Limited 440,486,609 72.4%
Securities Services Nominees Limited 77,471,900 12.7%
The largest shareholding is held on behalf of a related party, the details of which are disclosed in note 25 of the consolidated financial statements.
Management
The Investment Manager provides investment advisory services to the Group and property advisory and monitoring services to those members of the Group which acquire properties, in each case in accordance with the investment objective and investment policy and restrictions of the Group.
The Board of Directors has considered the activities and performance of the Investment Manager to date and have decided to continue employing its services for the foreseeable future.
Payment to Creditors
Amounts due to suppliers and service providers are settled promptly within the stated payment terms, except in cases of dispute.
Litigation
The Group is not engaged in any litigation or claim of material importance, nor, so far as the Directors are aware, is any litigation or claim of material importance pending or threatened against the Group.
Charitable and political contributions
Neither the Company nor any of its subsidiaries made any donations of a political or charitable nature during the period.
Financial Risk Profile
The Group's financial instruments comprise equity, cash, loans and related interest rate swap instruments, together with various items such as receivables and payables that arise directly from the Group's operations.
The main risks arise from market risk including price, interest rate and currency risks, credit risk, liquidity risk and capital risk. Further details are given in note 3 to the consolidated financial statements.
Annual General Meeting
The Annual General Meeting will be held in Guernsey on 27 June 2013.
Auditors
Baker Tilly CI Audit Limited replaced BDO Limited as auditors to the Group during the year and their appointment will be approved at the Annual General Meeting.
On behalf of the Board
David Clark
Director
27 March 2013
INDEPENDENT AUDITOR'S REPORT
Independent auditor's report to the members of Argo Real Estate Opportunities Fund Limited
We have audited the consolidated financial statements of Argo Real Estate Opportunities Fund Limited ("the company" and together with its subsidiaries is referred to as "the Group") for the year ended 30 September 2012 which comprise the consolidated statement of comprehensive income, consolidated statement of financial position, the consolidated statement of changes in equity, the consolidated cash flow statement and the related notes 1 to 28. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
This report is made solely to the company's members, as a body, in accordance with Section 262 of the Companies (Guernsey) Law, 2008. Our audit work is undertaken so that we might state to the company's members those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of the Directors and Auditor
As explained more fully in the Directors' Responsibilities Statement within the Directors' Report, the Directors are responsible for the preparation of the consolidated financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the consolidated financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read the other information contained in the annual report and consider whether it is consistent with the audited financial statements. If we become aware of any apparent misstatements or material inconsistencies with the financial statements, we consider the implications for our report. Our responsibilities do not extend to any other information.
Opinion on the financial statements
In our opinion the financial statements:
-- give a true and fair view of the state of the group's affairs as at 30 September 2012 and of group's loss for the year then ended;
-- have been properly prepared in accordance with IFRSs as adopted by the European Union; and
-- have been properly prepared in accordance with the requirements of the Companies (Guernsey) Law, 2008.
Emphasis of matter
In forming our opinion on the consolidated financial statements, which is not qualified, we draw your attention to the following matters:
a) Going concern
We have considered the adequacy of the disclosures made in note 2a to the consolidated financial statements concerning the Group's ability to continue as a going concern.
Note 2a to the financial statements explains that the Group will require additional working capital for the foreseeable future and that this continues to be provided by the Investment Manager, or funds advanced by a fellow subsidiary of the Investment Manager's parent company. The Directors continue to review the various options available to the Group including asset sales, restructured bank borrowings and a further issue of capital. Whilst the Directors are confident that sufficient working capital finance will be available to ensure that Group can continue to trade as a going concern, no plans have yet been finalised.
As disclosed in notes 2a and 19 to the consolidated financial statements, the Group has borrowing arrangements which are subject to banking covenants, some of which are currently being breached and are the subject of on-going discussions. The risk of further loan covenant breaches in the foreseeable future remains a possibility, given the current trading environment and the effects it is having on rental income levels and future property values. As such the on-going support of the lending banks is critical to the on-going activity of the Group and its future development.
The above matters indicate the existence of material uncertainties which may cast significant doubt about the Group's ability to continue as a going concern. The financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.
b) Valuation of investment properties
The valuation of the investment properties as disclosed in note 14 to the financial statements are based on various assumptions and limiting conditions, many of which are difficult to assess. The jurisdictions in which the Group is operating are severely affected by the global economic crisis and any future estimated cash flows from such investments are affected by judgments related to the recoveries of these jurisdictions from the economic crisis. In the event that these assumptions, judgements or limiting factors do not materialise as expected, then the valuations contained in the financial statements may not reflect the actual amounts realised. The impact of such adjustments to the Group's financial results and position cannot be readily quantified.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies (Guernsey) Law, 2008 requires us to report to you if, in our opinion:
-- the company has not kept proper accounting records; or -- the financial statements are not in agreement with the accounting records and returns; or
-- we have not received all the information and explanations which to the best of our knowledge and belief are necessary for the purposes of our audit.
Baker Tilly CI Audit Limited
Chartered Accountants, Guernsey
27 March 2013
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 September 2012
Note Year ended Year ended
30 September 30 September
2012 2011
EUR'000 EUR'000
Continuing operations
Revenue 6 37,302 25,560
Property operating expenses 7 (15,338) (8,066)
Net rental and related income 21,964 17,494
------------------------------------------ ----- -------------- --------------
General expenses 8 (4,473) (3,415)
Net gain from fair value adjustment
of investment property 14 571 16,760
Changes in fair value of financial
assets (49) 116
Negative goodwill arising on acquisition 24 - 14,840
Operating profit 18,013 45,795
------------------------------------------ ----- -------------- --------------
Finance income 9 2,180 3,178
Finance costs 9 (23,084) (16,645)
Finance costs - net (20,904) (13,467)
------------------------------------------ ----- -------------- --------------
Foreign exchange (losses)/gains on
translation of foreign operations (229) 16
(Loss)/profit before tax (3,120) 32,344
------------------------------------------ ----- -------------- --------------
Income tax charge 10 (653) (1,097)
(Loss)/profit for the year (3,773) 31,247
------------------------------------------ ----- -------------- --------------
Foreign exchange gains on translation
of foreign operations 333 218
------------------------------------------
Total comprehensive (expense)/income (3,440) 31,465
------------------------------------------ ----- -------------- --------------
(Loss)/profit attributable to :
Equity shareholders (2,878) 27,390
Non-controlling interest (895) 3,857
------------------------------------------ ----- -------------- --------------
(3,773) 31,247
-------------- --------------
Total comprehensive (expense)/income
attributable to :
Equity shareholders (2,552) 27,569
Non-controlling interest (888) 3,896
------------------------------------------ ----- -------------- --------------
(3,440) 31,465
-------------- --------------
Basic and diluted earnings per ordinary
share 11 (0.005) 0.086
------------------------------------------ ----- -------------- --------------
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 30 September 2012
Note 30 September 30 September
2012 2011
EUR'000 EUR'000
ASSETS
Non-current assets
Investment properties 14 437,833 433,264
Property, plant and equipment 15 201 215
Trade and other receivables 16 10,249 8,998
Tax receivables 4,415 6,399
Loans receivable 17 1,050 1,050
Total non current assets 453,748 449,926
---------------------------------- ----- ------------- -------------
Current assets
Trade and other receivables 16 6,954 6,121
Tax receivables 2,154 2,570
Loans receivable 17 9,230 8,989
Cash and cash equivalents 18 11,631 12,185
Total current assets 29,969 29,865
---------------------------------- ----- ------------- -------------
Total assets 483,717 479,791
---------------------------------- ----- ------------- -------------
EQUITY AND LIABILITIES
Equity attributable to owners
of the parent company
Share capital 22 6,080 6,080
Share premium 22 18,159 18,159
Other reserve 23 95,096 95,096
Translation Reserve (1,150) (1,476)
Retained earnings (55,027) (52,149)
Total equity attributable to
owners of the parent company 63,158 65,710
Non-controlling interest 14,615 15,503
---------------------------------- ----- ------------- -------------
Total equity 77,773 81,213
---------------------------------- ----- ------------- -------------
LIABILITIES
Non-current liabilities
Loans and borrowings 19 283,707 288,021
Derivative financial instruments 21 2,506 2,513
Deferred income tax 10 12,892 12,250
Total non-current liabilities 299,105 302,784
---------------------------------- ----- ------------- -------------
Current liabilities
Loans and borrowings 19 84,091 72,917
Trade and other payables 20 22,748 22,872
Current income tax - 5
Total current liabilities 106,839 95,794
---------------------------------- ----- ------------- -------------
Total liabilities 405,944 398,578
---------------------------------- ----- ------------- -------------
Total equity and liabilities 483,717 479,791
---------------------------------- ----- ------------- -------------
The financial statements were approved and authorised for issue by the Board of Directors on
27 March 2013 and signed on its behalf by David Clark.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 30 September 2012
Group
Amount attributable to Parent Company Equity Holders
Share Share Other Translation Retained Non-controlling
Capital Premium Reserve Reserve Earnings Total Interest Total
EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
(note (note (note (note (note
22) 22) 23) 23) 23)
At 1 October
2010 3,100 7,859 95,096 (1,655) (79,539) 24,861 11,607 36,468
Comprehensive
income:
Result for the
year - - - - 27,390 27,390 3,857 31,247
---------------- --------- ---------- ----------- ------------ ------------ ------------ ---------------- ------------
Other
comprehensive
income:
Foreign
exchange
gains/(losses)
on translation
of foreign
operations - - - 179 - 179 39 218
---------------- --------- ---------- ----------- ------------ ------------ ------------ ---------------- ------------
Total
comprehensive
income for the
period - - - 179 27,390 27,569 3,896 31,465
---------------- --------- ---------- ----------- ------------ ------------ ------------ ---------------- ------------
Transactions
with
owners:
Shares issued
in
the year 2,980 10,300 - - - 13,280 - 13,280
---------------- --------- ---------- ----------- ------------ ------------ ------------ ---------------- ------------
At 30 September
2011 6,080 18,159 95,096 (1,476) (52,149) 65,710 15,503 81,213
---------------- --------- ---------- ----------- ------------ ------------ ------------ ---------------- ------------
Comprehensive
income:
Result for the
year - - - - (2,878) (2,878) (895) (3,773)
---------------- --------- ---------- ----------- ------------ ------------ ------------ ---------------- ------------
Other
comprehensive
income:
Foreign
exchange
gains on
translation
of foreign
operations - - - 326 - 326 7 333
---------------- --------- ---------- ----------- ------------ ------------ ------------ ---------------- ------------
Total
comprehensive
income for the
period - - - 326 (2,878) (2,552) (888) (3,440)
---------------- --------- ---------- ----------- ------------ ------------ ------------ ---------------- ------------
Transactions
with
owners:
Shares issued
in
the year - - - - - - - -
---------------- --------- ---------- ----------- ------------ ------------ ------------ ---------------- ------------
At 30 September
2012 6,080 18,159 95,096 (1,150) (55,027) 63,158 14,615 77,773
---------------- --------- ---------- ----------- ------------ ------------ ------------ ---------------- ------------
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 30 September 2012
Note
Year ended Year ended
30 September 30 September
2012 2011
EUR'000 EUR'000
OPERATING ACTIVITIES
Profit/(loss) for the year (3,773) 31,247
Adjustments for :
Depreciation 15 62 37
Changes in fair value of investment
property 14 (571) (16,760)
Impairment of financial assets 49 (116)
Negative goodwill arising on acquisition - (14,840)
Finance income (1,029) (2,922)
Finance expense 21,896 16,336
Exchange translation movements 326 179
Taxation 10 653 1,097
------------------------ -------------------------
Operating cash flows before movements
in working capital 17,613 14,258
Movements in working capital :
Decrease in operating trade and other
receivables 317 2,180
Increase/(decrease) in operating trade
and other payables 845 (978)
------------------------ -------------------------
Cash generated from operations 18,775 15,460
Interest received 745 338
Interest paid (20,430) (14,588)
Taxation paid (16) (11)
Cash generated from/(used in) operating
activities (926) 1,199
------------------------ -------------------------
INVESTING ACTIVITIES
Acquisition of subsidiaries, net of
cash acquired - 5,209
Purchase of investment properties 14 (3,998) (3,946)
Purchase of property, plant and equipment 15 (48) (46)
Proceeds from sale of property, plant
and equipment - 10
Loans advanced - (12)
Cash flows from investing activities (4,046) 1,215
------------------------ -------------------------
FINANCING ACTIVITIES
Drawdown of bank loans including costs 5,674 5,004
Drawdown of other loan borrowings 3,243 1,300
Bank loans repaid (4,414) (903)
Cash flows from financing activities 4,503 5,401
------------------------ -------------------------
(Decrease)/increase in cash and cash
equivalents (469) 7,815
Net foreign losses on cash and cash
equivalents (85) (46)
(554) 7,769
------------------------------------------- ----- ------------------------ -------------------------
Cash and cash equivalents at start
of year 12,185 4,416
Cash and cash equivalents at 30 September
2012 18 11,631 12,185
------------------------------------------- ----- ------------------------ -------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION
The Company is a limited liability, closed-ended investment company incorporated in Guernsey. The shares of the Company have been admitted to trading on the Alternative Investment Market of the London Stock Exchange. The Company invests in commercial property in Central and Eastern Europe which is held through its subsidiary companies. The consolidated financial statements of the Group for the year ended 30 September 2012 comprise the financial statements of the Company and its subsidiaries (together referred to as the "Group").
2. SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies, all of which have been applied consistently in the preparation of these consolidated financial statements, throughout the year, is set out below.
a. Basis of preparation
The consolidated financial statements of the Group have been prepared in accordance with IFRS, which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB"), the International Financial Reporting Interpretations Committee ("IFRIC"), the International Accounting Standards and Standards Interpretations Committee Interpretations approved by the International Accounting Standards Committee ("IASC") that remain in effect, and to the extent that they have been adopted by the European Union.
The consolidated financial statements of Argo Real Estate Opportunities Fund Limited have been prepared under the historical cost convention, as modified by the revaluation of investment property at fair value and derivative financial instruments that have been measured at fair value.
The preparation of consolidated financial statements in conformity with IFRS, require the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. Changes in assumptions may have a significant impact on the consolidated financial statements in the period the assumptions changed. The areas involving a higher degree of judgement or complexity or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 4.
Going concern
The consolidated financial statements have been prepared on a going concern basis which assumes that the Group will be able to meet its liabilities as they fall due, for the foreseeable future.
The recent breach of the Proton Bank and KBC (Sibiu 1) loans from non-payments of loan amounts falling due after the year end, as more fully explained in note 19, gives the right to the lending bank to accelerate the repayment of the debt which if effected would impact the going concern of the Group. However, the Company is in discussions with the banks concerned with a view to reaching a consensual agreement or restructuring of these debts.
While trading conditions in the local markets in which the Group operates continue to remain subdued, the continued need to grant material tenant discounts has resulted in reduced project level cashflows which the Investment Manager has sought, and continues to seek, to alleviate by renegotiating where possible existing bank loan facilities to minimise short term cash commitments whilst rental income stabilises and tenant discounts can be phased out.
While these actions have helped to improve the immediate and future cash position, the cash flow forecasts prepared by the Investment Manager for the next 12 months indicate that the Group requires additional working capital for the foreseeable future; this requirement is currently being provided by the Investment Manager or funds advised by a fellow subsidiary of the Investment Manager's parent company. Firstly, by its agreement to accept extended payment terms of its management fee as and when it becomes due to align settlement to the cash flow availability within the Group; secondly, in providing a short term loan facility to assist with specific bank funding needs and thirdly, by providing an undertaking to provide additional working capital over the next 12 months, as and when this is required.
In order to meet the liabilities and those specifically falling due to the Investment Manager's and/or its related companies' provision of ongoing support to the Group, as well as to enhance working capital, the Company is looking at a number of sources including asset sales, additional or further restructuring of bank borrowings and the issue of additional equity capital.
In reviewing the forecasts the Directors have taken into account material risks and uncertainties, which in addition to those outlined above regarding the successful conclusion to the Proton Bank and KBC Bank discussions, also include the following:
-- Certain surplus cash funds are held in project subsidiary companies and the release of these funds for use of the Group's working capital needs in general would in some circumstances require the support of the specific lending banks financing these projects.
-- The continuing uncertain trading environment and its impact on tenants and their ability to pay their contractual rent obligations in a timely manner. With tenant negotiations ongoing the continued downward pressure on rental income is likely to impact on certain bank loan covenants particularly as agreed loan amortisation holidays and covenant waivers that had previously been put in place expire in 2012 and this will require further negotiation and ongoing support of the Group's lending banks.
-- The ability to attract key tenants and further lease available tenant space is dependent on being able to provide fit-out incentives which requires funding support by the existing lending banks.
The above represents a material uncertainty which may cast significant doubt on the Group's ability to continue as a going concern. In the Directors' view discussions are continuing on the above satisfactorily and they have therefore concluded that it is appropriate to prepare these financial statements on a going concern basis. The financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.
Adoption of new and revised IFRSs
During the current period the Company adopted all the new and revised International Financial Reporting Standards (IFRS) that are relevant to its operations and are effective for accounting periods beginning on 1 October 2011. This adoption did not have a material effect on the accounting policies of the Company.
New standards and interpretations not applied
International Accounting Standards (IAS/IFRS) Effective date
(periods commencing)
IAS 27 Consolidated and Separate Financial 1 January 2013
Statements
IAS 28 Investment in Associated and Joint 1 January 2013
Ventures
IFRS 9 Financial Instruments 1 January 2015
IFRS 10 Consolidated Financial Statements 1 January 2013
IFRS 11 Joint Arrangements 1 January 2013
IFRS 12 Disclosures of Interest in Other 1 January 2013
Entities
IFRS 13 Fair Value Measurement 1 January 2013
IFRIC 20 Stripping Costs in the Production 1 January 2013
Phase of a Surface Mine
None of the new standards and interpretations noted above, which are effective for accounting periods beginning on or after 1 October 2012 and which have not been early adopted, are expected to have a material impact on the Group's future financial statements.
b. Basis of consolidation
Subsidiaries are those entities controlled by the Company. Control exists where the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities, generally accompanying a shareholding of more than one half of the voting rights. All inter-company loan balances, receivables, payables, income, expenses and investments are eliminated on consolidation.
The Group financial statements consolidate the financial statements of the Company and its subsidiary undertakings drawn up to 30 September 2012. The results of the subsidiary undertakings are fully accounted for in the consolidated statement of comprehensive income from the effective date of acquisition.
The cost of investment in a subsidiary is eliminated against the Group's share in net assets at the date of acquisition. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and will continue to be consolidated until the date that such control ceases.
The subsidiaries of the Group are set out below:
Country Investment property
Name of Incorporation owned Ownership Interest
2012 2011
North REOF Holding
Sarl Luxembourg - 100% 100%
North REOF Moldova
Sarl Luxembourg - 100% 100%
North REOF Leopold
Sarl Luxembourg - 100% 100%
North REOF Sibiu Sarl Luxembourg - 100% 100%
North REOF Arges Sarl Luxembourg - 100% 100%
North REOF Saxon Sarl Luxembourg - 100% 100%
North REOF Cuza Sarl Luxembourg - 100% 100%
North REOF Kubrat Sarl Luxembourg - 100% 100%
Culture Holding Sarl Luxembourg - 100% 100%
North Real Estate Opportunities Cayman
Fund Holding LP Islands - 100% 100%
North REOF Finance
BV Netherlands - 100% 100%
North REOF Moldova
BV Netherlands - 100% 100%
Melandra Finance BV Netherlands - 100% 100%
Central Park Invest
Cyprus Ltd Cyprus - 100% 100%
Retail Land East Invest
Cyprus Ltd Cyprus - 100% 100%
Retail Land West Invest
Cyprus Ltd Cyprus - 100% 100%
Huincas Properties
Ltd Cyprus - 100% 100%
Omelit Ltd Cyprus - 100% 100%
Suceava Shopping City
Ltd Cyprus - 50% 50%
Park Avenue Invest
Srl Moldova - 90% 90%
Retail Land East Srl Moldova - 100% 100%
Retail Land West Invest
Srl Moldova - 100% 100%
Suceava Shopping City Suceava Shopping
Srl Romania City 100% 100%
Sibiu Shopiing City Sibiu Shopping City
Srl Romania (Sibiu 1) 100% 100%
Sibiu Shopping City
Bel Rom Trei Srl Romania (Sibiu 2) 100% 100%
Era Shopping Park,
Omilos Oradea Srl Romania Oradea 100% 100%
S.C. Ermes Holding Era Shopping Park,
Srl Romania Iasi 100% 100%
Tora Brand Srl Romania land asset, Iasi 100% 100%
land access rights,
S.C. Santorra Srl Romania Iasi 100% 100%
Park City LLC Ukraine - 100% 100%
Triton Holding LLC Ukraine - 100% 100%
Novi Biznes Poglyady Riviera Shopping
LLC Ukraine City, Odessa 100% 100%
Biznes Capital LLC Ukraine land asset, Nikolaev 100% 100%
c. Acquisitions and Goodwill
Acquired companies are included in the consolidated financial statements using the acquisition method of accounting when, and only when, the transaction can be identified as a business combination. When determining if an acquisition qualified as a business combination or not, management consider if the transaction includes the acquisition of supporting infrastructure, employees, service provider agreements and major input and output processes, as well as active lease agreements.
Goodwill arising on a business combination represents the excess of the cost of a business combination over, the total acquisition date fair value of the identifiable assets, liabilities and contingent liabilities acquired.
Cost comprises the fair value of assets given, liabilities assumed and equity instruments issued, plus the amount of any non-controlling interest in the acquiree, plus, if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree. Contingent consideration is included in cost at its acquisition fair value and, in the case of contingent consideration classified as a financial liability, remeasured subsequently through profit or loss. The direct costs incurred in the acquisition are recognised immediately as an expense.
Goodwill is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated statement of comprehensive income. Where the fair value of the identifiable assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess is credited in full to the consolidated statement of comprehensive income on the acquisition date.
d. Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity. The Group has determined that its chief operating decision-maker is the Board of Directors as advised by the Manager.
e. Foreign currency translation
The functional and presentational currency of the parent company is the Euro and as such the Group financial statements have similarly been presented in the same currency.
The individual statements of each Group company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each Group company are expressed in Euros.
Transactions in currencies other than the entity's functional currency are recorded at rates of exchange prevailing on the transaction date. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date.
The rates of exchange of the main currencies of the Group against the Euro at the year end and on average throughout the period were as follows:
2012 2012 2011 2011
average average
year end for period year end for period
Moldova leu 0.06367 0.06556 0.06321 0.06201
Romania lei 0.22050 0.22703 0.23200 0.23711
Ukraine hryvnia 0.09628 0.09703 0.09316 0.09111
On consolidation, the results of overseas operations are translated into Euros at rates approximating to those ruling when the transactions took place. All assets and liabilities of overseas operations are translated at the rate ruling at the balance sheet date. Exchange differences arising on translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised in other comprehensive income and accumulated in equity (the "translation reserve").
f. Revenue recognition
Revenue includes rental income and service charges and management charges from investment properties.
Rental income from investment property leased out under operating leases is recognised in the consolidated statement of comprehensive income on a straight-line basis over the term of the lease. When the Group provides incentives to its customers, the cost of incentives is recognised over the lease-term, on a straight-line basis, as a reduction of rental revenue. Revenue from rendering services is recognised on an accruals basis over the period to which the services relate.
Service and management charges are recognised in the accounting period in which the services are rendered.
Interest receivable is included in the consolidated financial statements on an accruals basis under the effective interest method.
g. Expenses
Expenses are accounted for on an accruals basis and are charged through the consolidated statement of comprehensive income in the period in which they are incurred. The costs associated with acquiring investment property are capitalised with the cost of the investment in accordance with IAS 40 Investment Property.
h. Interest income and interest expense
Interest income and expense are recognised within finance income and finance cost in the consolidated statement of comprehensive income using the effective interest rate method, except for borrowing costs that are capitalised as part of the cost of that asset.
The effective interest method is a method of calculating the amortised cost of a financial asset or liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts throughout the expected life of the financial instrument, or a shorter period where appropriate, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument, including fees and transaction costs.
i. Taxation
i) Income taxes
The Group is subject to income taxes in different jurisdictions. Significant estimates are required in determining the worldwide provision for income taxes. Local taxation which is payable in the jurisdictions in which the Group operates is charged to the consolidated statement of comprehensive income as it arises. The current tax payable is based on the taxable profit of the period for the local companies. Taxable profit differs from net profit as reported in the consolidated statement of comprehensive income because it excludes certain items of income and expense that may not be taxable or deductible in the local jurisdiction.
The Group's liability for current tax is calculated based on rates and laws that have been enacted or substantively enacted.
The income tax rates that apply in the different jurisdictions are as follows:
2012 2011
Guernsey 0% 0%
Cayman Islands 0% 0%
Cyprus 10% 10%
Luxembourg 20% 20%
Moldova 15% 15%
Netherlands 20% 20%
Romania 16% 16%
Ukraine 25% 25%
ii) Deferred taxation
Deferred income tax is provided using the balance sheet liability method. Full provision for deferred tax liabilities is recognised in the consolidated financial statements in accordance with IAS 12: Income Taxes.
Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements except:
(i) where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss;
(ii) in respect of taxable temporary differences associated with investments in subsidiaries where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and
(iii) that deferred tax assets are only recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised.
Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply to the year when the related asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.
j. Dividends
Interim dividends are recognised in the period in which they are paid. Final dividends are recognised once they are paid or approved by shareholders.
k. Investment properties
Investment properties are those which are held to earn rental income and/or capital appreciation. They are initially recognised at cost, being the fair value of consideration given, including the transaction costs associated with the property.
Subsequent to initial recognition, investment properties are stated at fair value and will be revalued at least annually by independent valuers, calculated in accordance with IAS 40: Investment Property and the practice statements of the RICS Appraisal and Valuation Manual 7(th) Edition, adapted as necessary to reflect individual market considerations and practices.
Land held for development is initially recognised at cost, being the fair value of consideration given, including the transaction costs associated with acquiring the property. Subsequent to initial recognition, land is stated at fair value and is revalued at least annually by independent valuers, calculated in accordance with the practice statements of the RICS Appraisal and Valuation Manual 7(th) Edition, adapted as necessary to reflect individual market considerations and practices.
Gains or losses arising from revaluation of investment property to fair value are included in the consolidated statement of comprehensive income for the period in which they arise.
Properties are treated as acquired when the Group assumes the significant risks and returns of ownership. Disposals are recognised at date of realisation with profits and losses arising being included in the consolidated statement of comprehensive income; the profit or loss on disposal is determined as the difference between the sales proceeds and the carrying amount of the asset disposed of.
l. Leases
A group company is a lessor in an operating lease:
Properties leased out under operating leases are included in investment property in the consolidated statement of financial position (note 14). For the recognition of rental income, refer to the "revenue recognition" accounting policy above.
m. Financial instruments
Financial assets and financial liabilities are recognised in the consolidated statement of financial position when the Group becomes party to the contractual provisions of the instrument. The Group offsets financial assets and financial liabilities if the Group has a legally enforceable right to set off the recognised amounts and interests and intends to settle on a net basis.
(i) Financial assets
The Group's financial assets fall into the categories discussed below, with the allocation depending on the purpose for which the assets were acquired. Although the Group uses derivative financial instruments in economic hedges of economic risk, it does not hedge account for these transactions. The Group has not classified any of its financial assets as held to maturity or as available for sale. Unless otherwise indicated, the carrying amounts of the Group's financial assets are a reasonable approximation of their fair values.
(a) Loans receivables
These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value and subsequently carried at amortised cost using the effective interest rate method.
Impairment provisions are recognised when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. If any indication of impairment of the value of these assets exists, the recoverable amount of the asset is assessed by comparing the net carrying amount with the present value of future expected cash flows associated with the impaired receivable.
An impairment loss is recognised in the consolidated statement of comprehensive income whenever the carrying amount of the asset exceeds its recoverable amount.
(b) Trade and other receivables
Trade and other receivables are non-interest bearing and are recognised at invoice date initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivable. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of a provision account, and the amount of the loss is recognised in the consolidated statement of comprehensive income within 'Property operating expenses'.
When a trade receivable is uncollectible it is written off against the provision account for trade receivables. Subsequent recoveries of amounts previously written off are credited against 'Property operating expenses' in the consolidated statement of comprehensive income.
(c) Tax receivables (VAT)
Tax receivables arise principally from Value Added Tax attributable to the invoiced costs of construction that are not readily recoverable from the relevant tax authorities in certain of the jurisdictions within which the Group operates, but rather the attributable Value Added Tax is carried forward and used to offset against future Value Added Tax liabilities. These assets are initially recognised at fair value and subsequently at amortized cost. Their future recoverability is appraised in the preparation of the financial statements and a provision for impairment is made where there is objective evidence that the Group will not be able to fully collect the full amount of these receivables.
2012 2011
Guernsey - -
Cayman Islands - -
Cyprus 17% 15%
Luxembourg 15% 15%
Moldova 20% 20%
Netherlands 19% 19%
Romania 24% 24%
Ukraine 20% 20%
(d) Cash and cash equivalents
Cash and cash equivalents include cash in hand, bank deposits held at call and other short term bank deposits with an original maturity of three months or less.
(e) Financial assets at fair value through profit or loss
This category comprises loans advanced and 'in the money' interest rate derivatives. They are carried in the balance sheet at fair value with changes in fair value recognised in the consolidated statement of comprehensive income. Other than these loans and derivative financial instruments, the Group does not have any assets held for trading nor has it designated any other financial instruments as being at fair value through profit or loss.
(ii) Financial liabilities
The Group classifies its financial liabilities into the categories discussed below, depending on the purpose for which the liability was issued and its characteristics. Although the Group uses derivative financial instruments in economic hedges of economic risk, it does not hedge account for these transactions. Unless otherwise indicated, the carrying amounts of the Group's financial assets are a reasonable approximation of their fair values.
(a) Trade and other payables
Trade and other payables are not interest-bearing and are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
(b) Interest bearing bank loans and borrowings
All bank loans and borrowings including preference shares are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. After initial recognition, all interest-bearing liabilities are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any discount or premium on settlement.
Borrowing costs directly attributable to the acquisition or construction of property are added to the costs of those assets until such time as the assets are substantially ready for their intended use.
All other borrowing costs are recognised in the consolidated statement of comprehensive income in the period in which they are incurred.
(c) Deriviative financial instruments
Derivative financial instruments are recognised as financial assets and liabilities in the consolidated statement of financial position and comprise interest rate swaps for hedging purposes. The Group does not apply hedge accounting in accordance with IAS 39. Recognition of the derivative financial instruments takes place when the hedging contracts are entered into. They are measured initially and subsequently at fair value; transaction costs are included directly in finance costs. Gains or losses on derivatives are recognised in the consolidated statement of comprehensive income in net change in fair value of financial instruments.
(d) Financial liabilities at fair value through profit or loss
This category comprises only 'out of the money' interest rate derivatives. They are carried in the balance sheet at fair value with changes in fair value recognised in the consolidated statement of comprehensive income. Other than these derivative financial instruments, the Group does not have any liabilities held for trading nor has it designated any other financial instruments as being at fair value through profit or loss.
n. IFRS 7 fair value measurement hierarchy
IFRS 7 requires certain disclosures which require the classification of financial assets and financial liabilities measured at fair value using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurement. The fair value hierarchy has the following levels:
(a) Quoted prices (unadjusted) in active markets for identical assets and liabilities (Level 1);
(b) Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2); and
(c) Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).
The level in the fair value hierarchy within which the financial asset or liability is categorised is determined on the basis of the lowest level input that is significant to the fair value measurement. Financial assets and financial liabilities are classified in their entirety into only one of the three levels.
o. Property, plant and equipment
Property, plant and equipment comprises machinery and equipment.
Depreciation on property, plant and equipment is calculated using the straight-line method to allocate their cost less estimated residual values over their estimated useful lives, as follows:
Machinery and equipment 4-5 years
The assets' residual values and useful lives are reviewed and adjusted, if appropriate, at each balance sheet date.
p. Comparatives
Where necessary comparative figures have been adjusted to conform to changes in presentation in the current period.
3. TREASURY POLICIES AND FINANCIAL RISK MANAGEMENT
3.1 Financial risk factors
Treasury policies
The objective of the Group's treasury policies is to manage the Group's financial risk, secure cost effective funding for the Group's operations and to minimise the adverse effects of fluctuations in the financial markets on the value of the Group's financial assets and liabilities on reported profitability and on cash flows of the Group.
The Group finances its activities with a combination of equity and bank loans. Other financial assets and liabilities, such as trade receivables and payables, arise directly from the Group's operating activities. The Group may also enter into derivative transactions, principally interest rate swaps, to manage the interest rate risk arising from the Group's operations and its sources of finance. The Group does not trade in financial instruments.
The main risks associated with the Group's financial assets and liabilities are set out below, together with the policies currently applied by the Board for their management. Derivative instruments may be used to change the economic characteristics of financial instruments in accordance with the Group's treasury policies.
The Group is exposed to market risk (including currency risk, and other price risk), interest rate risk, credit risk and liquidity risk arising from the financial instruments it holds. The risk management policies employed by the Group to manage these risks are discussed below.
(a) Market risk
(i) Interest rate risk
The Group's policy is to manage its cost of borrowing using a mix of fixed and variable rate debt. The Group does not seek to predict interest rate fluctuations and accordingly where it has material exposure to variable rate debt it seeks to minimise this risk by using hedging instruments to convert floating interest rate exposure to fixed interest rates(see note 19).
Most fixed rate interest-bearing debt is not exposed to cash flow interest rate risk so there is no opportunity for the Group to enjoy a reduction in borrowing costs in markets where rates are falling or suffer an increase when they rise. In addition, the fair value risk of fixed rate borrowing, being the risk of the Group paying rates in excess of current market rates, means that the Group is exposed to unplanned costs should debt be restructured or repaid early.
In contrast, whilst floating rate borrowings are not exposed to changes in fair value, the Group is exposed to cash flow risks as costs increase if market interest rates rise.
The interest rate profile of the Group at 30 September 2012 was as follows:
Non interest Weighted
Total Fixed Variable bearing avg. rate
EUR'000 rate EUR'000 rate EUR'000 EUR'000 %
Financial assets
Loans receivable (note
17) 10,280 1,050 9,230 - 2.0
Trade and other receivables*
(note 16) 3,532 - - 3,532 -
Cash and cash equivalents
(note 18) 11,631 6,044 3,553 2,034 5.0
--------- -------------- -------------- ----------------- -----------
Total financial assets 25,443 7,094 12,783 5,566 3.1
========= ============== ============== ================= ===========
Non interest Weighted
Total Fixed Variable bearing avg. rate
EUR'000 rate EUR'000 rate EUR'000 EUR'000 %
Financial liabilities
Bank loans (note 19) 352,216 85,156 267,060 - 5.5
Related party loans (note
19) 7,481 6,666 800 15 10.4
Preference shares (note
19) 8,101 8,101 - - 24.5
Deriviative financial
instruments (note 21) 2,506 2,506 - - 3.9
Trade and other payables*
(note 20) 10,819 - - 10,819 -
Total financial liabilities 381,123 102,429 267,860 10,834 5.8
========= ============== ============== ================= ===========
* Trade and other receivables and payables have been adjusted to exclude prepayments and accruals including accrued income, deferred income and tenant lease incentives.
The interest rate profile of the Group at 30 September 2011 was as follows:
Non interest Weighted
Total Fixed Variable bearing avg. rate
EUR'000 rate EUR'000 rate EUR'000 EUR'000 %
Financial assets
Loans receivable (note
17) 10,039 1,050 8,989 - 3.6
Trade and other receivables*
(note 16) 4,115 - - 4,115 -
Cash and cash equivalents
(note 18) 12,185 6,912 2,726 2,547 4.4
--------- -------------- -------------- ----------------- -----------
Total financial assets 26,339 7,962 11,715 6,662 3.4
========= ============== ============== ================= ===========
Non interest Weighted
Total Fixed Variable bearing avg. rate
EUR'000 rate EUR'000 rate EUR'000 EUR'000 %
Financial liabilities
Bank loans (note 19) 350,428 132,999 217,429 - 6.4
Related party loans (note
19) 5,388 4,573 800 15 12.1
Preference shares (note
19) 5,122 5,122 - - 25.0
Deriviative financial
instruments (note 21) 2,513 2,513 - - 3.9
Trade and other payables*
(note 20) 10,940 - - 10,940 -
Total financial liabilities 374,391 145,207 218,229 10,955 6.5
========= ============== ============== ================= ===========
* Trade and other receivables and payables have been adjusted to exclude prepayments and accruals including accrued income, deferred income and tenant lease incentives.
For the Group an increase of 100 basis points in interest rates would result in an increase of the post tax loss (2011 decrease of the post tax profit) for the year of EUR1.13m (2011: EUR0.91m). A decrease of 100 basis points in interest rates would result in a decrease of the post tax loss (2011 increase of the post tax profit) for the year of EUR1.13m (2010: EUR0.91m).
The sensitivity analyses above are based on a change in an assumption while holding all other assumptions constant; in practice, this is unlikely to occur and changes in some assumptions may be correlated.
(ii) Currency risk
The Group operates in Europe and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Romanian Ron, Moldovan Leu and the Ukrainian Hryvnia. Foreign exchange risk arises when future commercial transactions, recognised monetary assets and liabilities and net investments in foreign operations, are denominated in a currency that it is not the respective entity's functional currency.
In the year covered by these consolidated financial statements the Group has not entered into any currency hedging transactions.
The table below summarises the Group's exposure to foreign currency risk at 30 September 2012.
The Group's assets and liabilities at carrying amounts are included in the table, categorised by the currency at their carrying amount.
2012 EUR RON MDL UAH Total
EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
Trade and other receivables*
(note 16) 6 3,220 - 306 3,532
Loans receivable (note 17) 9,230 - 1,050 - 10,280
Cash and cash equivalents (note
18) 576 7,921 - 3,134 11,631
Total financial assets 9,812 11,141 1,050 3,440 25,443
--------------------------------- --------------- --------------- --------------- --------------- ---------------
Bank loans (note 19) 352,216 - - - 352,216
Related party loans (note 19) 7,481 - - - 7,481
Preference shares (note 19) 8,101 - - - 8,101
Trade and other payables* (note
20) 4,878 4,873 2 1,066 10,819
Deriviative financial
instruments
(note 21) 2,506 - - - 2,506
Total financial liabilities 375,182 4,873 2 1,066 381,123
--------------------------------- --------------- --------------- --------------- --------------- ---------------
Net financial
assets/(liabilities)
currency position (365,370) 6,268 1,048 2,374 (355,680)
================================= =============== =============== =============== =============== ===============
2011 EUR RON MDL UAH Total
EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
Trade and other receivables*
(note 16) 6 3,906 - 203 4,115
Loans receivable (note 17) 8,989 - 1,050 - 10,039
Cash and cash equivalents (note
18) 58 8,636 13 3,478 12,185
Total financial assets 9,053 12,542 1,063 3,681 26,339
--------------------------------- --------------- --------------- --------------- --------------- ---------------
Bank loans (note 19) 350,428 - - - 350,428
Related party loans (note 19) 5,388 - - - 5,388
Preference shares (note 19) 5,122 - - - 5,122
Trade and other payables* (note
20) 5,451 4,766 - 723 10,940
Deriviative financial
instruments
(note 21) 2,513 - - - 2,513
Total financial liabilities 368,902 4,766 0 723 374,391
--------------------------------- --------------- --------------- --------------- --------------- ---------------
Net financial
assets/(liabilities)
currency position (359,849) 7,776 1,063 2,958 (348,052)
================================= =============== =============== =============== =============== ===============
* Trade and other receivables and payables have been adjusted to exclude prepayments and accruals including accrued income, deferred income and tenant lease incentives.
Sensitivity analysis of foreign currency risk:
If the Euro weakened/strengthened by 10% against the Romanian Ron with all other variables held constant, post tax loss (2011 profit) for the year would have been EUR627k lower/higher (2011 : EUR778k higher/lower).
If the Euro weakened/strengthened by 10% against the Moldovan Leu with all other variables held constant, post tax loss (2011 profit) for the year would have been EUR105k lower/higher (2011 : EUR106k higher/lower).
If the Euro weakened/strengthened by 10% against the Ukrainian Hryvnia with all other variables held constant, post tax loss (2011 profit) for the year would have been EUR237k lower/higher (2011: EUR296k higher/lower).
The sensitivity analyses above prepared by management in respect of foreign currency risk are based on a change in an assumption while holding all other assumptions constant; in practice, this is unlikely to occur and changes in some assumptions may be correlated, for example a change of interest rates and a change of foreign exchange rates.
(ii) Price risk
The fair value of the Group's investment properties carried out by independent professional valuers has been based on an analysis of recent market transactions and the valuers' market knowledge derived from their professional experience. In view of the current state of the market and the diminished frequency of property transactions on an arm's length basis a greater degree of judgement is required in valuing the property than usual. In these circumstances the fair value has been determined taking account of estimates of future rental cash flows, supported by the terms of an existing lease and by external evidence of current market rents for similar properties in a similar location and condition and using yields that reflect the current market assessments of the uncertainty in the amount and timing of the rental cash flows projected.
Accordingly, the Group is exposed to property rental and capitalisation yield risk. As future rental cash flows have been discounted in determining the fair value of investment property the effect of an increase or decrease of 10% in rental values on the Group's main investment properties (note 14) is as shown below:
2012 2011
Fair value +10% -10% Fair value +10% -10%
EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
Suceava
Shopping
City 62,340 65,350 59,330 65,211 68,360 62,060
Sibiu
Shopping
City 115,070 122,270 107,880 115,800 123,050 108,560
Era
Shopping
Park,
Oradea 79,280 84,360 74,160 80,309 85,460 75,120
Era
Shopping
Park,
Iasi 76,510 80,250 72,780 82,081 86,090 78,080
Riviera
Shopping
Park 106,038 115,680 96,400 88,520 96,570 80,470
The yield reflects the discount rate applied to future rental cash flows in determining the fair value of investment property and as such, the effect of an increase or decrease of 1% in the yield on the Group's main investment properties is as shown below:
2012 2011
Fair value +1% -1% Fair value +1% -1%
EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
Suceava
Shopping
City 62,340 55,860 70,510 65,211 58,430 67,410
Sibiu
Shopping
City 115,070 102,944 130,860 115,800 103,600 130,040
Era
Shopping
Park,
Oradea 79,280 70,880 89,820 80,309 71,800 88,670
Era
Shopping
Park,
Iasi 76,510 69,060 85,880 82,081 74,090 80,050
Riviera
Shopping
Park 106,038 98,200 115,250 88,520 81,980 138,060
The sensitivity analyses above prepared by management in respect of price risks are based on a change in an assumption while holding each and all other assumptions constant; in practice, this is unlikely to occur and changes in some assumptions may be correlated, for example a change of interest rates and a change of yield.
(b) Credit risk
Credit risk arises from cash and cash equivalents as well as credit exposures with respect to rental receivables from lessees, including outstanding receivables and committed transactions; the failure by counterparties to discharge their obligations could reduce the amount of future cash flows from financial assets on hand at the balance sheet date. Credit risk is managed on a local and group basis with control of exposure to a single counterparty, or groups of counterparty, and to geographical locations.
In the event of a default by an occupational tenant, the Group will suffer a rental shortfall and incur additional costs, including legal expenses in maintaining, insuring and re-letting the property until it is re-let. General economic conditions may affect the financial stability of tenants and prospective tenants and/or the demand for and value of real estate assets. Where possible rental contracts are made with potential tenants with an appropriate credit history and existing tenants are monitored on an ongoing basis in order to anticipate, and minimise the impact of default by occupational tenants. Where possible, tenants risk is mitigated through rental deposits or guarantees.
Trade and other receivables (note 16) that are less than three months overdue are not considered impaired. The ageing of trade receivables is as follows:
2012 2011
EUR'000 EUR'000
0 to 3 months 3,532 4,115
Over 3 months - -
Total 3,532 4,115
==================== ====================
Further disclosure regarding the Group's exposure to credit risk in respect of its trade receivables is provided in note 16.
The Group policy is to maintain its cash and cash equivalent balances with a reasonable diversity of banks. The Group monitors the placement of cash balances on a regular basis and has policies to limit the amount of credit exposure to any financial institution. The credit quality of the cash and cash equivalents is set out below:
Cash at bank and short-term deposits
Bank Rating 2012 2011
EUR'000 EUR'000
ABN Amro A- - 6
Alpha Bank CCC 875 894
OTP Bank BB 771 650
Banca Romaneasca CCC 6,271 7,094
RBSI A- 45 45
Deutsche Bank A+ 7 3
ING A 4 4
BC Mobiasbanca- Groupe Societe
Generale SA A 20 13
Koopinvestbank not rated 3 3
Marine Transport Bank B 3,594 3,468
Marfin Popular Bank B 36 -
Other 5 5
11,631 12,185
=================== ===================
The Directors have sought where possible to minimise the credit risk on loans and advances made by securing these with bank guarantees, mortgages on specific land assets and/or a pledge over assets of guarantors (see note 17).
The Group's exposure to credit risk, where the carrying value of financial assets is unsecured, is as shown below for each class of asset:
2012 2012
EUR'000 EUR'000
Carrying Maximum
value exposure
(unsecured)
Loans receivable (note 17) 10,280 9,230
Trade receivables (note 16) 3,532 -
Cash and cash equivalents (note 18) 11,631 11,631
Total 25,443 20,861
==================== ====================
2011 2011
EUR'000 EUR'000
Carrying Maximum
value exposure
(unsecured)
Loans receivable (note 17) 10,039 8,989
Trade receivables (note 16) 4,115 -
Cash and cash equivalents (note 18) 12,185 11,631
Total 26,339 20,620
==================== ====================
Loans receivable consist of loans advanced to third parties, including both principal and accrued interest thereon, some of which are secured on land assets and have been impaired as explained in note 17. The maximum exposure of the carrying value of these secured loans has not been separately identified but may be subject to further impairment depending on the future land valuations of the underlying security.
(c) Liquidity risk
Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions.
The Group's objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans. The current and future property development and investment of the Group is reliant on bank funding continuing to be made available at commercially attractive terms in order to fulfil such property transactions. The terms of the Group's borrowings entitle the lender to require early repayment should the Group breach any of the covenants placed on it by its banks (see note 19).
Due to the dynamic nature of the underlying business, the Investment Manager aims to maintain flexibility in funding by keeping cash and committed credit lines available. The Group's liquidity position is monitored on an ongoing basis by management and is reviewed at least quarterly by the Board of Directors. A summary with maturity of the Group's financial assets and liabilities is as set out below:
2012 2011
EUR'000 EUR'000
Financial assets - non-current receivables
Between 2 and 5 years:
Loans receivable (note 17) 1,050 1,050
=================== ===================
Financial assets - current
Trade and other receivables (note
16) 3,532 4,115
Loans receivable (note 17) 9,230 8,989
Cash and cash equivalents (note 18) 11,631 12,185
Total 25,443 26,339
=================== ===================
Financial liabilities - non-current
borrowings
Between 1 and 2 years:
Bank loans (note 19) 58,648 81,147
Deriviative financial instruments 1,943 -
(1) (note 21)
Between 2 and 5 years:
Bank loans (note 19) 218,445 146,694
Related party loans (note 19) 4,910 15
Preference shares (note 19) 1,704 5,122
Deriviative financial instruments
(1) (note 21) 563 2,513
Over 5 years:
Bank loans (note 19) - 53,526
Related party loans (note 19) - 1,517
286,213 290,534
=================== ===================
Financial liabilities - current
Bank loans (note 19) 75,123 69,061
Related party loans (note 19) 2,571 3,856
Preference shares (note 19) 6,397 -
Trade and other payables (note 20) 10,819 10,940
94,910 83,857
=================== ===================
* Trade and other receivables and payables have been adjusted to exclude prepayments and accruals including accrued income, deferred income and tenant lease incentives.
(1) The interest rate swap liabilities designated at fair value through the statement of comprehensive income are defined as level 2, in accordance with IFRS 7, as they are derived from inputs other than quoted prices.
3.2 Capital risk management
The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns to shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.
Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio. The ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings as shown in the consolidated balance sheet less cash and cash equivalents. Total capital is calculated as equity, as shown in the consolidated balance sheet, plus net debt.
During 2012, the Group's strategy, which was unchanged from 2011, was to seek to achieve a gearing ratio at around 70%. The gearing ratio at 30 September 2012 and 2011 were as follows:
2012 2011
EUR'000 EUR'000
Total borrowings 367,798 360,938
Less : cash and cash equivalents (11,631) (12,185)
Net debt 356,167 348,753
Total equity 77,773 81,213
Total capital 433,940 429,966
------------------- -------------------
Gearing ratio 82.1% 81.1%
=================== ===================
The increase in leverage in the year is predominantly due to the losses arising in the period resulting in a lower equity element of total capital.
4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
Management makes estimates and assumptions concerning the future. The resulting accounting estimates will by definition seldom equal the relevant actual results. The estimates, assumptions and management judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are set out below:
(a) Investment properties
The Group engages external, professional advisors to carry out third party valuations to determine the fair value of its properties and land. These are carried out in accordance with the requirements of the Appraisal and Valuation Manual, 8(th) Edition published by the Royal Institution of Chartered Surveyors.
In completing these valuations the valuers consider the following:
(i) discounted cash flow projections based on reliable estimates of future cash flows, derived from the terms of an existing lease and other contracts and using discount rates that reflect current market assessments of the uncertainty in the amount and timing of the cash flows;
(ii) current prices if there is an active market for properties of a similar nature or of a different nature, condition or location adjusted to reflect those differences; and
(iii) recent prices of similar properties in less active markets, with adjustments to reflect any changes in economic conditions since the date of the transactions at those prices.
(b) Income and deferred tax
The Group is subject to income and capital gains taxes in different jurisdictions. Significant judgements are required in determining the total provision for income and deferred taxes. There are some transactions and calculations for which the ultimate tax determination is uncertain.
The Group recognises liabilities for anticipated tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded such differences will impact the income tax and deferred tax provisions in the period in which the determination is made.
The Group's investment properties are carried at fair value and revalued in accordance with IAS 40 Investment Property. In the Group's jurisdictions, the revaluation of the investment property does not affect taxable profit in the period of the revaluation and, consequently, the tax base of the asset is not adjusted. Nevertheless, the future recovery of the carrying amount will result in a taxable flow of economic benefits to the entity and the amount that will be deductible for tax purposes will differ from the amount of those economic benefits. The difference between the carrying amount of a revalued asset and its tax base is a temporary difference and gives rise to a deferred tax liability or asset.
(c) Value added tax
Significant judgement is required in determining the recoverable amount of value added tax receivable. For some transactions the amount of value added tax receivable may be subject to confirmation by the tax authorities and there may be some uncertainties in calculations for the exact amount of value added tax receivable. Where such uncertainty exists the Group recognises provision for value added tax receivable in order to adjust it to its recoverable amount.
5. SEGMENTAL REPORTING
IFRS 8 requires operating segments to be identified on the basis of internal financial reports about components of the Group that are regularly reviewed by the chief operating decision maker (which in the Group's case is its Board comprising the three non-executive directors) in order to allocate resources to the segments and to assess their performance.
The Group's primary format for segmental reporting is based on geographic segments. On a primary basis, the Group operates in Romania, Ukraine and Moldova. The above geographic areas represent separate geographic segments.
The operating segments derive their revenue from rental income from lessees. All of the Group's business activities and operating segments are reported within the above segments.
The Group's segmental investment property and gross property income for the year are presented below:
Carrying value Fair Value
------------------------------------------ ----------------------------------------
2012 2011 2012 2011
EUR'000 EUR'000 EUR'000 EUR'000
Romania 334,497 346,331 340,360 351,438
Ukraine 100,836 84,424 106,652 89,268
Moldova 2,500 2,509 2,500 2,509
437,833 433,264 449,512 443,215
==================== ==================== =================== ===================
Income
Revenue (Loss)/profit before
tax
------------------------------------------ ----------------------------------------
2012 2011 2012 2011
EUR'000 EUR'000 EUR'000 EUR'000
Romania 22,320 13,637 (15,985) 26,598
Ukraine 14,982 11,923 19,319 9,943
Moldova - - 7 1,244
Other group segments - - (6,461) (5,441)
37,302 25,560 (3,120) 32,344
==================== ==================== =================== ===================
6. REVENUE
2012 2011
EUR'000 EUR'000
Rental income - gross 26,771 19,160
Income from service and management charges 10,531 6,400
Total 37,302 25,560
================= =================
Operating lease commitments
The Group leases its investment properties under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights. The period of these operating leases runs between less than 1 year and 13 years.
Rental income from operating leases is recognised as rental income on a straight line basis over the term of the relevant lease.
The future aggregate minimum rentals receivable under non-cancellable operating leases which are not recognised as an asset at 30 September 2012 are as follows:
2012 2011
EUR'000 EUR'000
Within 1 year 29,582 27,557
After 1 year and no later than 5 years 111,079 103,312
After 5 years 104,513 110,720
Total 245,174 241,589
=================== ===================
7. PROPERTY OPERATING EXPENSES
2012 2011
EUR'000 EUR'000
Energy and utilities 3,678 2,189
Provision for disputed supplier costs 2,381 -
Security, maintenance and repair 2,240 1,491
Property management fees 1,527 1,313
Property land tax 1,374 949
Marketing expenses 1,169 832
Provision for development profit share 727 -
Consultance fees 630 153
Transport services 350 344
Provision for bad debts 243 415
Depreciation 62 37
Other various 957 343
Total 15,338 8,066
================= =================
8. GENERAL EXPENSES
2012 2011
EUR'000 EUR'000
Investment Manager's fee (note 24) 2,000 2,000
Legal & professional fees 975 413
Accounting and administration fees 814 649
Auditors fees 196 193
Directors fees 122 135
Sundries 125 25
Provisions for risks and charges 241 -
Total 4,473 3,415
================= =================
9. FINANCE INCOME AND COSTS
2012 2011
EUR'000 EUR'000
Interest expense on bank borrowings 23,765 16,286
Amortisation of deferred loan costs 498 384
Other finance costs 11 23
Bank charges 163 73
Net foreign exchange gain on borrowings (144) (11)
Total finance costs 24,293 16,755
Less: finance costs capitalised on investment
property (1,209) (110)
Finance costs 23,084 16,645
================= =================
Interest income on short term deposits 746 339
Interest income on loans receivable
(note 17) 262 280
Fair value gain on bank loans 1,165 256
Fair value gain on loan interest swap
contracts 7 2,303
Finance income 2,180 3,178
================= =================
Finance costs - net 20,904 13,467
================= =================
10. INCOME TAX
The Company has obtained exempt company status in Guernsey under the terms of the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 as amended and accordingly is subject to an annual fee, currently GBP600. The Company as a collective investment scheme 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 Romanian and Ukrainian subsidiaries are subject to their jurisdiction's income tax on income arising on investment properties, after the deduction of debt financing costs, allowable expenses and capital allowances.
The fair value adjustment of the investment property results in a temporary difference between the carrying value of the properties and their tax basis. The Group recognised a deferred tax charge of 0.6m (2011: EUR1.2m) giving rise to a total current and deferred tax charge in the year as shown in the consolidated statement of comprehensive income.
2012 2011
EUR'000 EUR'000
Current income tax expense/(credit)
for the year 11 (104)
Deferred income tax expense for the
year 642 1,201
Total income tax expense for the year 653 1,097
================= =================
The company and its subsidiaries did not incur any taxable profits during the period except as listed below:
2012 2011
EUR'000 EUR'000
The current income tax charge/(credit)
represents tax charges on profit arising
in :
Cyprus - (156)
Luxembourg 11 40
Netherlands - 4
Romania - 8
Total tax charge/(credit) for the year 11 (104)
================= =================
The Group's (loss)/profit before tax upon which the tax charge for the year arises from:
2012 2011
EUR'000 EUR'000
Taxable jurisdictions 2,330 22,529
Non-taxable jurisdictions (5,450) 9,815
(3,120) 32,344
================= =================
The tax on the Group's (loss)/profit before tax differs from the theoretical amount that would arise using the weighted average rate on the applicable profit of the consolidated companies as follows:
2012 2011
EUR'000 EUR'000
(Loss)/profit before taxation (3,120) 32,344
(Loss)/profit at average country rate
of 92.2% (2011: 19.9%) 2,877 (6,440)
(Losses)/profits arising in nil tax jurisdictions (5,025) 1,954
Permanent differences 334 460
Profits upon which no deferred tax recognised
in the year 1,184 2,909
Differences in local tax rates (23) 20
Total (653) (1,097)
================= =================
Losses where no deferred tax has been recognised in the year occur in jurisdictions where it is not expected that taxable profits will arise in the foreseeable future against which losses could be utilised.
Deferred Income Tax
Deferred tax is calculated in full on temporary differences under the liability method using tax rates applicable to each individual territory. Deferred tax is not provided at the level of Ukraine in respect of the revaluation of the investment property as this asset has been structured for tax purposes through a Cyprus based entity as the holding parent such that any gains on disposal of an investment property would most likely be through the disposal of the shares owed by the direct Cyprus parent rather than sale of the underlying investment property in Ukraine and therefore resulting in no capital gains tax in line with Cyprus tax legislations.
The analysis of deferred tax assets and liabilities is as follows:
2012 2011
EUR'000 EUR'000
Deferred tax assets :
Deferred tax asset to be recovered
after more than 12 months 11,484 7,208
Deferred tax asset to be recovered
within 12 months - 19
11,484 7,227
------------------- -------------------
Deferred tax assets :
Deferred liability reversing after
more than 12 months 24,376 19,341
Deferred liability reversing within
12 months - 136
24,376 19,477
------------------- -------------------
Deferred tax liabilities net 12,892 12,250
=================== ===================
The movement on the deferred tax account is as shown below:
2012 2011
EUR'000 EUR'000
At 1 October 2011 12,250 4,396
Acquisition of subsidiaries - 6,653
Charge to consolidated statement of
comprehensive income 642 1,201
At 30 September 2012 12,892 12,250
=================== =============================
The movements in deferred tax assets and liabilities during the period are shown below:
Accelerated Revaluation Total
tax depreciation and fair
value adjustments
on acquisition
EUR'000 EUR'000 EUR'000
Deferred tax liabilities
(net)
At 1 October 2011 73 4,323 4,396
Acquisition of subsidiaries - 6,653 6,653
Charged to consolidated statement
of comprehensive income - 1,201 (1,375)
At 30 September 2011 73 12,177 12,250
Charged to consolidated statement
of comprehensive income - 642 642
At 30 September 2012 73 12,819 12,892
===================== =================== ===================
Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and when the deferred tax assets and liabilities relate to taxes levied by the same taxation authority on either the same taxable Group company or different Group entities where there is the intention to settle the balances on a net basis.
A deferred tax asset has not been recognised on unused tax losses of EUR4.7 million (2011: EUR5.0 million).
11. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year.
2012 2011
EUR'000 EUR'000
Net (loss)/profit attributable to shareholders
of the parent (2,878) 27,390
----------------- -----------------
number number
Weighted average number of ordinary
shartes in issue 608,041,718 318,982,079
----------------- -----------------
EUR EUR
Basic earnings per share (0.005) 0.086
================= =================
The Company has no dilutive potential ordinary shares. The diluted earnings per share are the same as the basic earnings per share.
12. NET ASSET VALUE PER SHARE
The Net Asset Value per share is based on shareholders' equity at the year end as follows:
2012 2011
EUR'000 EUR'000
Net Asset Value 63,158 65,710
Add back deferred tax provision attributable
to equity shareholders 10,622 9,729
Adjusted Net Assets 73,780 75,439
Number of ordinary shares in issue 608 million 608 million
Net Asset Value per share EUR0.1039 EUR0.1081
================== ==================
Adjusted Net Asset Value per share EUR0.1213 EUR0.1241
================== ==================
The adjustment added back to arrive at the Adjusted Net Asset Value has been made to reflect the likely value of the Group given that the deferred tax liability provided is unlikely to crystallise in full as the Group is likely to dispose of the property holding companies rather than the properties themselves.
13. DIVIDENDS
No dividends have been declared or paid to date.
14. INVESTMENT PROPERTY
2012 2011
EUR'000 EUR'000
At 1 October 2011 433,264 243,870
Additions:
- Acquisition of subsidiaries through
business combinations - 168,688
- Capital expenditure on construction
and development 3,998 3,946
Net gain from fair value adjustments
of investment property 571 16,760
At 30 September 2012 437,833 433,264
================= =================
Adjustment from fair value to carrying
value
Fair value 449,512 443,215
Adjustment for rent recognised in advance (11,679) (9,951)
Carrying value at 30 September 2012 437,833 433,264
================= =================
Total borrowing costs capitalized in the year were EUR1.2m (2011: EUR0.1m), (note 9).
The fair value of the Group's investment properties at 30 September 2012 has been arrived at on an open market value basis, carried out by independent professionally qualified valuers, Cushman & Wakefield and DTZ, in accordance with the requirements of the Appraisal and Valuation Manual, 8(th) Edition published by the Royal Institution of Chartered Surveyors.
Open market value, deemed to be fair value, is determined by reference to market based evidence, which is the amount for which the asset could be exchanged between a knowledgeable willing buyer and seller, in an arms' length transaction. The valuation methodology involves the discounted cash flow of the future rental income streams and a reversionary value discounted to a present value estimate. It also includes an assessment of open market transactions within the specific asset region.
The carrying values of investment property at 30 September 2011 and 30 September 2012 have been adjusted from the valuations reported by the external valuers for the effects of tenant lease incentives incurred and accounted for in accordance with IAS 17. As the investment property valuations take into account all rental streams including lease incentives an adjustment is made as the related tenant lease incentive asset is separately disclosed (note 16).
The details of each investment property held by the Group and the valuation carried out thereon are set out in the following tables.
The individual investment properties in the Group comprise:
Suceava Sibiu Shopping Era Shopping Era Shopping Riviera Iasi Land Chisinau Nikolaev Total
Shopping City Park, Oradea Park, Iasi Shopping Land Land
City City
Location Romania Romania Romania Romania Ukraine Romania Moldova Ukraine
Type of Asset Commercial Commercial Commercial Commercial Commercial Development Development Development land
retail retail retail retail retail land land
EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
At 1 October
2010
Fair value 59,731 110,949 - - 79,190 - 1,451 1,000 252,321
Adjustment
for rent
recognised
in advance (1,596) (1,921) - - (4,934) - (8,451)
Carrying
value 58,135 109,028 - - 74,256 - 1,451 1,000 243,870
----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Year ended 30
September
2011
Opening
carrying
value 58,135 109,028 - - 74,256 - 1,451 1,000 243,870
Acquisition
of
subsidiaries
through
business
combinations - - 79,577 81,074 - 8,037 - - 168,688
Capital
expenditure
on
construction
and
development - 1,908 843 124 1,066 - 5 - 3,946
Net gain from
fair
value
adjustments
of
investment
property 5,604 3,076 (891) (184) 8,354 - 1,053 (252) 16,760
Closing
carrying
value 63,739 114,012 79,529 81,014 83,676 8,037 2,509 748 433,264
----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Consisting
of:
Fair value 65,211 115,800 80,309 82,081 88,520 8,037 2,509 748 443,215
Adjustment
for rent
recognised
in advance (1,472) (1,788) (780) (1,067) (4,844) - - - (9,951)
Carrying
value at 30
September
2011 63,739 114,012 79,529 81,014 83,676 8,037 2,509 748 433,264
----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Year ended 30
September
2012
Opening
carrying
value 63,739 114,012 79,529 81,014 83,676 8,037 2,509 748 433,264
Capital
expenditure
on
construction
and
development - 999 2,430 34 528 - 7 - 3,998
Net gain from
fair
value
adjustments
of
investment
property (2,691) (1,156) (4,327) (6,247) 16,019 (877) (16) (134) 571
Closing
carrying
value 61,048 113,855 77,632 74,801 100,223 7,160 2,500 614 437,833
----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Consisting
of:
Fair value 62,340 115,070 79,280 76,510 106,038 7,160 2,500 614 449,512
Adjustment
for rent
recognised
in advance (1,292) (1,215) (1,648) (1,709) (5,815) - - - (11,679)
Carrying
value at 30
September
2012 61,048 113,855 77,632 74,801 100,223 7,160 2,500 614 437,833
----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
The basis of the valuations of individual investment properties in the Group are as follows:
Suceava Sibiu Era Shopping Era Shopping Riviera Iasi Land Chisinau Land Nikolaev Land
Shopping Shopping Park, Oradea Park, Iasi Shopping
City City City
Type of Asset Commercial Commercial Commercial Commercial Commercial Development land Development land Development land
retail retail retail retail retail
Valuer Cushman & Cushman & Cushman & Cushman & Cushman & Cushman & Cushman & DTZ
Wakefield Wakefield Wakefield Wakefield Wakefield Wakefield Wakefield
Basis of valuation estimated estimated estimated estimated estimated market knowledge market knowledge market knowledge
market value market value market value market value market value & comparison & comparison & comparison
based on based on based on based on based on method of method of method of
recent recent recent recent recent valuation valuation valuation
transactions transactions transactions transactions transactions
Lettable Area (sqm) 45,000 91,750 66,000 Existing Existing: 168,500 (gross 6,780 (gross land 200,000 (gross
30,000 64,000 land area) area) land area)
Planned mall Planned
extension fashion
28,000 extension:
Development 20,000
land 97,600
Capitalisation Anchors Anchors Anchors Anchors 12.5% n/a n/a n/a
yield 8.5%, 8.5%, 8.5%, 8.5%,
Gallery 9%, Gallery 9%, Gallery 9%, Gallery 9%,
other other other other
(kiosks, (kiosks, (kiosks, (kiosks,
food court food court food court food court
etc) 9.5-10% etc) 9.5-10% etc) 9.5-10% etc) 9.5-10%
Equivalent yield
(combining initial
and redemption existing
yields) 8.74% 8.75% 9.06% scheme 8.73% 12.58% n/a n/a n/a
Key assumptions no rental no rental no rental no rental turnover few comparable few comparable few comparable
concessions concessions concessions concessions rentals transactions in transactions in transactions in
after 12 after 12 after 12 after 12 capitalised the market the market the market
months; no months; no months; no months; no at 15%; no requiring greater requiring greater requiring greater
future future future future operating valuer judgement valuer judgement; valuer judgement
capital capital capital capital shortfalls; not all land
expenditure; expenditure; expenditure; expenditure fashion parcels are
operating operating operating on existing gallery officially
shortfalls shortfalls shortfalls centre; construction registered in
phased out phased out phased out operating will start company's name
as vacant as vacant as vacant shortfalls within 12 but ownership of
units let units let units let phased out mths and existing
as vacant will be 90% buildings or
units let; pre-let agreements in
mall place will result
extension to in full land
start within title
6 months and
to
be 90%
pre-let
Fair value 62,340 115,070 79,280 existing existing 7,160 2,500 614
(EUR'000) centre centre
46,210; 97,680;
planned mall fashion
extension gallery
22,500; extension
development 8,358
land within
the scheme
7,800
15. PROPERTY, PLANT AND EQUIPMENT
Machinery
& equipment
EUR'000
At 1 October 2010
Cost 239
Accumulated depreceiation (87)
Net book amount 152
-----------------
Year ended 30 September 2011
Opening net book amount 152
Acquisition of subsidiaries 64
Additions 46
Disposals (10)
Depreciation charge (37)
Closing net book amount 215
-----------------
At 30 September 2011
Cost 404
Accumulated depreciation (189)
Net book amount 215
-----------------
Year ended 30 September 2012
Opening net book amount 215
Additions 48
Depreciation charge (62)
Closing net book amount 201
-----------------
At 30 September 2012
Cost 452
Accumulated depreciation (251)
Net book amount 201
-----------------
16. TRADE AND OTHER RECEIVABLES
2012 2011
EUR'000 EUR'000
Trade receivables:
- Rent and related charges receivable
from lessees 7,352 7,693
- Other receivables 123 179
Trade receivables - gross 7,475 7,872
Less: provision for impairment of trade
receivables (3,943) (3,749)
Trade receivables - net 3,532 4,115
Tenant lease incentives (1) 11,679 9,950
Prepayments and other accrued income 1,992 1,054
Total trade and other receivables 17,203 15,119
==================== ====================
Non-current portion - tenant lease incentives 10,249 8,998
Current portion 6,954 6,121
Total trade and other receivables 17,203 15,119
==================== ====================
(1) Tenant lease incentives arise (i) when at the outset of a lease agreement being made with a potential tenant the company agrees to make a payment towards the fit-out of the tenant premises to a condition suitable to start trading, and/or (ii) during the life of an operating lease it is agreed to vary the original terms of contracted rent obligations by way of short term rental concessions to better align tenant lease obligations to the reduced local market trading environment. In both instances the effect of the incentive or concession is spread over the life of a tenant lease to smooth the impact of the benefit arising.
All trade receivables over 2 months old have been provided against.
The movement on the Group's provision for impairment of trade receivables is as follows:
2012 2011
EUR'000 EUR'000
Bad debt provisions
At 1 October 2011 3,757 975
Acquisition of subsidiaries - 2,367
Additional impairment during the year 243 415
Amount written off as uncollectable (49) -
during the year
At 30 September 2012 3,951 3,757
==================== ====================
The increase in the provision of the impairment receivables has been included in property operating expenses in the income statement (note 7). Amounts are written off when there is no expectation of recovering additional cash.
The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.
The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivables mentioned above.
17. LOANS RECEIVABLE
2012 2011
EUR'000 EUR'000
Loans receivable 11,503 11,213
Less: provision for impairment of loans
receivable (1,223) (1,174)
Total 10,280 10,039
=================== ===================
1,050
Non-current portion 1,050 1,050
Current portion 9,230 8,989
loans receivable 10,280 10,039
=================== ===================
The loans receivable comprise:
(a) Moldova - loans receivable
The loans receivable by Retail Land East Srl and Retail Land West Invest Srl, represent advances and related accrued interest for the purpose of purchases of two plots of land in Moldova of EUR1.84m (2011: EUR2.22m). The loans are secured on these land plots in a mortgage agreement. The Moldovan loans bear interest at the rate of 6% and are repayable by November 2016. The Moldova loans include interest accrued of EUR0.17m of which EUR0.1m has been provided for as being non-recoverable.
The current plots of land are currently agricultural land and upon their conversion to development land the loans will be settled through the transfer of the plots of land to the Fund's ownership.
Full valuations arrived at on an open market value basis, carried out by independent valuers, Cushman & Wakefield, have been carried out on the land assets in Moldova as a result of which provision has been made of EUR1.22m (2011: EUR1.17m) for the shortfall between the fair value of the secured land assets and the loans receivable.
(b) Cyprus - loans receivable
The loan receivable by Suceava Shopping City Limited amounts to EUR9.2m (2011: EUR9.0m held in Suceava Shopping City Srl, Romania) and is unsecured. This loan does not bear interest (2011: interest rate of 3 month Euribor plus a margin of 1.75%) and is repayable by July 2013.
18. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include the following for the purposes of the statement of cash flows:
2012 2011
EUR'000 EUR'000
Short term bank deposits 9,597 9,638
Cash at bank and in hand 2,034 4,059
Total 11,631 12,185
The fair value of short-term deposits approximates to the carrying amount due to the short maturity of these financial instruments. The remainder of the cash and cash equivalents represent cash deposits.
19. BORROWINGS
2012 2011
EUR'000 EUR'000
Non-current
Bank loans 277,093 281,367
Related party loans 4,910 1,532
Redeemable preference shares 1,704 5,122
283,707 288,021
------------------- -------------------
Current
Bank loans 75,123 69,061
Related party loans 2,571 3,856
Redeemable preference shares 6,397 -
84,091 72,917
------------------- -------------------
Total loans and borrowings 367,798 360,938
=================== ===================
2012 2011
EUR'000 EUR'000
Total gross borrowings outstanding 368,878 362,286
Deferred loan costs (1,080) (1,348)
Total 367,798 360,938
Represented by :
Net borrowings repayable : within one
year 84,091 72,917
Net borrowings repayable : within one
to two years 58,648 81,147
Net borrowings repayable : within two
to five years 225,059 151,830
Net borrowings repayable : over five
years - 55,044
Total 367,798 360,938
The gross borrowings at 30 September 2012 comprise:
Gross borrowings
Original Renegotiated 2012 2011
Investment
property
Company Interest Rate Maturity Maturity EUR'000 EUR'000 security
Bank Loans
(a)
Suceava Suceava
Shopping City Euribor 3m Shopping
Alpha Bank Srl +3.35% Nov'12 Nov'15 45,878 46,510 City
EFG, Bank of
Greece, Bank
of Cyprus,
Banca Era Shopping
Romaneasca S.C. Ermes Euribor 3m Park,
(Era Iasi) Holding Srl +2.15% Nov'14 Apr'18 60,536 60,568 Iasi
EFG, Bank of
Greece, Bank
of Cyprus, greater
Banca Euribor Era Shopping
Romaneasca Omilos Oradea 3m +4.0% or Park,
(Era Oradea) Srl 5% Sept'17 Sept'17 63,636 59,662 Oradea
Sibiu
Shopping
KBC Bank Sibiu Shopping City (Sibiu
(Sibiu 1) City Srl 6.055% May'12 Nov'13 58,520 59,328 1)
Sibiu
Shopping
KBC Bank Belrom Trei City (Sibiu
(Sibiu 2) Srl 4.755% Jun'16 Jun'16 26,749 27,409 2)
Riviera
Marfin Novi Biznes Euribor 3m Shopping
Popular Bank Poglyady LLC +8.0% Dec'14 Dec'14 66,484 68,007 City
Euribor 3m Iasi land
Piraeus Bank Tora Brand Srl +6.0% Apr'10 Oct'13 4,392 4,392 asset
Argo Real
Estate
Opportunities Euribor 12m
Proton Bank Fund Limited +4.6% Dec'10 Dec'16 27,101 25,900
353,296 351,776
Related Party
Loans
Argo Special Huincas
Situations Properties
Fund LP Limited 10% Sept'17 Sept'17 2,767 1,517
Argo Special
Situations
Fund LP Omelit Limited Euribor +3.75% Nov'08 Nov'13 800 800
Argo Real
Argo Special Estate
Situations Opportunities
Fund LP Fund Limited 15% Jun'14 Jun'14 2,143 -
North Real
Argo Estate
Distressed Opportunities
Credit Fund Holding
Fund Limited LP 22.5% on demand on demand - 1,300
S.C. Ermes
Ankus Limited Holding Srl 10% on demand on demand 1,000 1,000
Millenary S.C. Ermes
Limited Holding Srl 10% on demand on demand 500 500
Suceava
Priceton Shopping City
Limited Srl 6% Sept'07 July'13 200 200
Argo Global
Special
Situations
Fund Limited Tora Brand Srl 10% on demand on demand 56 56
SPS Linea
Cyprus
Limited Tora Brand Srl none Jun'08 Dec'15 15 15
7,481 5,388
Preference
Shares (b) Dividend
NEF 3 Huincas
(Cayman) 1 Properties
Limited Limited 25% compound Sept'13 Sept'13 3,554 2,277
NEF 3
(Cayman) 3
Limited Omelit Limited 25% compound Sept'13 Sept'13 2,843 2,845
North Real
NEF 3 Estate
(Cayman) Opportunities
Sibiu Fund Holding
Limited LP 22.5% compound May'14 May'15 1,704 -
8,101 5,122
Total loans and borrowings 368,878 362,286
Bank loans, with the exception of Proton Bank, are secured on investment properties of the Group subsidiary companies to the value of EUR446.4m (2011 EUR440.0m). Proton Bank holds a share pledge on the immediate subsidiary of Argo Real Estate Opportunities Fund Limited.
The fair value of fixed and floating rate loan borrowings approximate to their carrying values at the date of the consolidated statement of financial position.
(a) Loan Covenants and Restructurings
(i) Alpha Bank - Suceava Shopping City Srl obtained a loan financing facility from Alpha Bank in 2007 amounting to EUR50m. The continued requirement to provide short term tenant incentives throughout 2011 and 2012 resulted in the continued temporary reduction of normalised income levels impacting bank covenant ratios, as a result of which it was agreed with Alpha Bank to effect a covenant and capital repayment holiday through to April 2012, subject to a quarterly cash sweep of any monies held and a parent company guarantee to pay the unfunded instalments from any future fundraising. The original loan matured in November 2012 and the company agreed with the Bank to a restructured loan facility through to November 2015 at a reduced interest rate of 3 month Euribor plus 3.35% and a continued cash sweep facility, thus aligning debt service to the current income levels. The original parent company guarantee continues in force under the restructured terms, which have been fully documented since the year end.
(ii) KBC Bank (Sibiu 1 and 2) - Sibiu Shopping City Srl and Bel Rom Trei Srl obtained loan financing facilities from KBC Bank Deutschland AG in 2007 for EUR66.5m and from a syndicate of IIB Bank plc, Investkredit Bank AG and Marfin Popular Bank Public Co Ltd in 2008 for EUR33.2m respectively. Under the terms of both these loans there is a requirement to fix the rate of interest throughout the period of the loans as explained in note 21.
The asset management initiative to strengthen the underlying income and attractiveness of the Sibiu shopping centre in conjunction with support from the respective Banks, was started in 2011 and the two phase project completed in October 2012. Originally the Banks agreed to a 4 quarter amortisation holiday throughout 2011 amounting to some EUR2.5m. This was subsequently extended by a further quarter's amortisation holiday on the Sibiu 1 loan in the early part of 2012 to be repaid by the end of the year, however, since the year end the company was only able to part pay this additional amortisation amount and the loan is currently in default as a result of which Sibiu Shopping City Srl is in negotiations with its lenders to restructure its facility. This loan matures in November 2013 and the Company looks to extend the facility as part of its current negotiations with the lenders.
Under the financing terms of the asset management initiative the Company was obliged to provide an initial equity input amounting to some EUR1.8m to fund the asset management initiative and this was provided partly from within the Group and partly from a loan of EUR1.3m from funds managed by an associate of the Manager, Argo Capital Management Property Limited. During the year this loan and part of the accrued interest was repaid by monies subscribed by NEF 3 (Caymans) Sibiu Limited for preference shares in North Real Estate opportunities Fund Holding LP.
(iii) Marfin Popular Bank - Novi Biznes Poglyady LLC, incorporated in Ukraine, obtained a loan financing facility from Marfin Popular Bank Public Co Ltd for EUR68m in 2008. Under the original investment loan agreement with the Bank there was a capital repayment holiday for the first 18 months of the loan term up until June 2011 which was subsequently extended for a further 12 month period up until June 2012 on terms consistent with the original loan agreement. Full debt service is currently being made and the Group is currently negotiating with the Bank for excess cash flow generated from this company to be released for wider use within the Group.
(iv) Proton Bank - AREOF obtained a loan facility from Proton Bank in 2007 for an amount of EUR25m. The original loan agreement made with the Bank matured in December 2010 and it was agreed with the Bank for this loan to be extended for a further 2 years. It was agreed under the terms of this loan that interest would be paid on an annual basis at the same rate as the original loan and by way of security the Bank took a share pledge over the shares of the Group company immediately below the parent company. As completion of documentation of the agreed loan terms extended beyond the maturity date of the original loan a bridge loan facility of EUR0.9m was made available in February 2011 to settle the interest accruing between maturity of the original loan and completion of documentation; the interest terms are the same as the main loan and the loan is repayable at the end of 12 months.
At the end of December 2011, the Company refrained from paying approximately EUR1.9m of interest due to Proton Bank under its main EUR25m loan agreement resulting in this facility and its associated EUR0.9m debt facility going into default, further to which it negotiated a restructured facility in June 2012 of upto EUR29.3m. Under the revised terms the loan was extended to December 2016 with a lower interest rate of Euribor plus 4.6% payable annually with an option to capitalise half the interest for the first 3 years. Since the year end the interest falling due in December 2012 was not met triggering an event of default which the Company is in discussions with the Bank to rectify.
(v) EFG, Bank of Greece, Bank of Cyprus, Banca Romaneasca (Era Iasi) - SC Ermes Holding Srl, incorporated in Romania, obtained a syndicated Bank facility of EUR79.5m which was put in place in October 2007 for the construction of the Era Shopping Park, Iasi but due to a breach of certain conditions and covenants further funding from the Banks have ceased, although revised terms upon which the remaining funding under the facility will be made available have been agreed subject to some minor terms which are still being finalised. However, the current financial crisis in Cyprus could negatively impact the finalisation of this loan agreement because the Bank of Cyprus will be subject to a major restructuring. Due to the breach of covenants at the year end the whole of loan borrowings have been classified under current liabilities.
(vi) EFG, Bank of Greece, Bank of Cyprus, Banca Romaneasca (Era Oradea) - Omilos Oradea Srl, incorporated in Romania, obtained a syndicated Bank facility of EUR62.25m which was put in place in August 2008 for the construction of the Era Shopping Park, Oradea. Agreement was reached with the Banks in September 2011 following certain covenant breaches and full drawdown under the facility have subsequently been made to enable completion of construction of the centre during the year. Since the year end the Company has entered into further discussions with the lending Banks to better align the terms to the reduced level of current income and while agreement has been reached on the major points there are some minor issues still to be finalised which again could be negatively impacted by the current financial crisis in Cyprus due to the Bank of Cyprus being subject to a major restructuring.
(vii)Piraeus Bank - Tora Brand Srl, incorporated in Romania, obtained a Bank facility of some EUR4.4m which was made available in April 2008 for the purchase of development land adjacent to Era Shopping Park, Iasi. This agreement expired after the year end and an extension to October 2013 has subsequently been agreed.
(b) Preference Shares
Huincas Properties Limited and Omelit Limited issued on 14 September 2010 1.8 million and 2.25 million fully paid redeemable preference shares to NEF 3 (Cayman) 1 Limited and NEF 3 (Cayman) 3 Limited respectively for a consideration of EUR1 per share. These shares carry a preferred return of 25% compound per annum payable on redemption of the preference shares.
Under an option agreement entered into on the issue date the preferred shareholders have the right to exercise the redemption of their shares at or any date after the third anniversary while the issuing company holds the right to redeem these shares at or any date after the second anniversary.
In May 2012 North Real Estate Opportunities Fund Holding LP issued 100 fully paid redeemable preference shares to NEF 3 (Cayman) Sibiu Limited for a consideration of EUR14,000 per share. These shares carry a preferred return of 22.5% compound per annum payable on redemption of the preference shares. A related option agreement entered into on issue offered the same rights of redemption as those attaching to the previously issued preference shares.
The fair value of the preference shares is considered to be equal to their carrying values at the balance sheet date.
20. TRADE AND OTHER PAYABLES
2012 2011
EUR'000 EUR'000
Trade payables 3,968 3,748
Bank and loan interest payable 2,706 3,710
Other payables (1) 8,709 8,104
Other accruals (2) 7,365 7,310
Total 22,748 22,872
(1) The other payables include deferred income EUR4.6m (2011 EUR4.6m), VAT and related property taxes EUR0.9m (2011 EUR0.6m), tenant rental and contractor guarantees EUR1.8m (2011 EUR1.6m) and other various payables EUR1.4m (2011 EUR1.3m).
(2) The other accruals include a development profit share accrual EUR2.1m (2011 EUR1.4m), provision for disputed supplier claims EUR3.0m (2011 EUR0.3m), general accruals including contracted construction costs EUR2.3m (2011 EUR5.6m).
21. DERIVIATIVE FINANCIAL INSTRUMENTS
2012 2011
EUR'000 EUR'000
Interest rate swap with KBC Bank (Sibiu
1) 1,943 2,325
Interest rate swap with KBC Bank (Sibiu
2) 563 188
Total 2,506 2,513
The Group does not apply hedge accounting in accordance with IAS 39, nevertheless, the Group is required under its financing agreements with KBC Bank (note 19) to fix the rate at which it borrows during the period of the loan. The Bank has undertaken variable to fixed rate swaps with third parties which on the EUR58.5m and EUR26.7m KBC Bank loans give effective interest rates of 6.055% and 4.755% respectively.
The Group is not party to the swap agreements but via the financing agreements the Group has all the risks and rewards of the swap as, should the loan be repaid early, the Group would be required to pay the swap break costs or alternatively accrue a swap benefit as capital reduction depending on the value of the underlying swap at that point in time. The interest rate swap is valued by reference to the Bank's redemption notices of amounts due if the Group repaid its borrowings at the balance sheet date.
The fair value gain on deriviative financial instruments amounts to EUR7,000 (2011: 2.3m) (note 9).
22. SHARE CAPITAL AND SHARE PREMIUM
No. of Share Share Total
shares capital premium
millions EUR'000 EUR'000 EUR'000
Called up, allotted
and fully paid:
At 30 September 2012 608 6,080 18,159 24,239
At 30 September 2011 608 6,080 18,159 24,239
The total number of authorised shares is 1 billion (2011: 1 billion) with a par value of EUR0.01 each (2011: EUR0.01 each). All issued shares are fully paid.
The Company has only one class of ordinary shares which carry no right to fixed income.
23. RESERVES
The movement in the reserves for the Group is shown in the consolidated statement of changes in equity on page 24.
Share Premium
The share premium represents the difference between the price at which shares have been issued over the par value of each ordinary share of EUR0.01. Related costs of issuing shares have been written off against the share premium account.
Other Reserve
On 16 August 2006 the Royal Court of Guernsey confirmed the reduction of capital by way of cancellation of the amount standing to the credit of its share premium account on that date. The amount was transferred to the other reserve. The other reserve is a distributable reserve to be used for all purposes permitted under Guernsey company law, including the buyback of shares and payment of dividends.
Translation Reserve
The translation reserve contains exchange differences arising on consolidation of the Group's overseas operations. This reserve represents unrealised gains and losses and is therefore not distributable.
Retained Earnings
Any surplus or deficit on net profit or loss after tax is taken to this reserve and any surplus balance can be utilised for the buyback of shares and payment of dividends.
24. ACQUISITIONS OF SUBSIDIARIES
On 13 September 2011 the Group acquired 100% of the share capital of Huincas Properties Limited and Omelit Limited. Huincas Properties Limited through its 100% owned subsidiary Omilos Oradea Srl owns the 65,700 sqm Era Shopping Park, Oradea. Omelit Limited through its 100% owned Ermes Holding Srl owns the 49,800 sqm Era Shopping Park, Iasi, and in addition, through its 100% owned Tora Brand Srl owns a 17 hectare undeveloped adjacent land plot.
This acquisition was made with the primary objective of becoming the dominant developer, owner and operator of international quality retail parks and shopping centres in Romania and the region, thereby making the Company a significantly more attractive proposition to institutional investors looking for exposure to the region which in turn would provide the Company with a future source of capital for future growth.
Details of the fair value of identifiable assets and liabilities acquired, purchase consideration and goodwill are as follows:
Book Value Fair Value
EUR'000 EUR'000
Investment property 128,781 168,688
Property, plant and equipment 64 64
Trade and other receivables 4,524 4,524
Cash and cash equivalents 5,209 5,209
Bank loans (120,241) (120,241)
Related party loans (3,881) (3,881)
Preference shares (5,063) (5,063)
Deferred Tax - (6,653)
Trade and other payables (13,994) (14,395)
Total net assets (4,601) 28,252
EUR'000
Consideration paid
Ordinary shares 13,412
Negative goodwill 14,840
The fair value of the consideration shares issued was determined by reference to the quoted market price of EUR0.045 per share at the date of acquisition. When the consideration shares were listed on the market the same quoted market price of EUR0.045 per share applied.
Negative goodwill is attributable to various risks associated with the shopping centres acquired including the completion of the centres in accordance with the original budget and the values of the properties on acquisition being based on expected market rental incomes which in practice could differ from those achieved when the development completes.
The book and fair values of the trade and other receivables on acquisition are equal to the gross contractual amounts receivable.
Acquisition costs of EUR0.08m have been expensed against income in the year.
There were no acquisitions in the year ended 30 September 2012.
25. RELATED PARTY TRANSACTIONS
The Group is managed by its Board of Directors. The Directors of the Company are the key management personnel of the Group. However, the Company had entered into an asset management agreement with Argo Capital Management Property Limited to provide property investment advice and property management services to the Group. Consequently, the directors of Argo Capital Management Property Limited can also be considered as key management personnel of the Group. Fees paid under the asset management agreement are disclosed below.
Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. Argo Capital Management Property Limited is the Investment Adviser to the Company under the terms of the Investment Advisory Agreement and is thus considered a related party of the Company for the year. Argo Capital Management Property Limited is a wholly owned subsidiary of Argo Group Limited which through one of its subsidiaries manages Funds that acquired a major interest in the shares of the Company arising from the issue of new ordinary shares.
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.
Directors Fees
The Directors, who were the only management of the Company, received fees for their services and further details are provided in the Directors' Report on page 15. The total charge to the income statement during the year of EUR0.12m (2011: EUR0.14m) comprises fees and related expenses due to the Directors of both the Company and the Group's subsidiaries, including those outstanding at the period end.
Management Fee
The Manager, under its contractual service contract with the Company, receives a quarterly management fee (exclusive of any applicable taxes) equal to a 1/4 of 2 per cent of the gross proceeds of the original Placing, less an amount equal to the aggregate of all amounts paid during the relevant period by the Group companies to employees procured for such Group companies by the Investment Manager. During the year management fees of EUR2 million (2011: EUR2 million) have been incurred of which EUR2.1 million (2011: EUR1.5 million) is accrued or owing at the year end. To assist the cash flow of the Group, the Manager has not sought settlement of management fees as they have fallen but rather has conceded extended credit terms.
Performance Fee
The Manager is also entitled to a performance fee in respect of each property investment made by the Company equal to 20 per cent of the realised profits, as defined in the management contract, attributable to such property investment on its realisation, provided that AREOF achieves an annualised return, as defined in the management contract, in excess of 10%. No properties have been disposed of during the period and on the basis of the return achieved to date it is unlikely that a Manager's performance fee will be payable in the foreseeable future and as such no fee accrual has been made in the accounts.
Related Party Loans
Various loans as shown in note 19 have been made to subsidiaries in the Group by Funds managed by Argo Capital Management Cyprus Limited which is a wholly owned subsidiary of Argo Group limited and as such is an associate of the Manager. The Funds from which these loans have been made have their own investors who are the beneficiaries of the assets of the Funds, however, Argo Capital Management Cyprus Limited has full discretionary control over these Funds and retains all voting rights over the investments in the portfolios of the Funds.
26. CONTINGENCIES
In Ukraine, the subsidiary Novi Biznes Poglyady LLC has several ongoing disputes with the tax authorities covering the period January 2008 to date. The disputed transactions relate firstly, to the classification of the Odessa property land asset and the applicable land tax rate and secondly, to the allowability of prior period foreign exchange losses for use as offset against taxable profits.
The Company and its local legal and tax advisers see these claims as unfounded and inconsistent actions by the Ukrainian tax authorities to maximize revenues, such activities being commonplace and expected as part of the normal course of business in Ukraine. The Company has never in the past had a material claim successfully enforced against it and is rigorously contesting and defending its position and is confident of the successful resolution of these matters through the due legal process.
The maximum potential liability of the Company for additional tax and penalties in the unexpected event of being unsuccessful in the appeal process would be some Eur 3.2m (2011: 3.5m), a part of which is recoverable from tenants through service charge. However, as it is considered highly unlikely that this liability will crystallize no provision or adjustment has been made in the consolidated financial statements in relation to these issues.
27. COMMITMENTS
The Group has entered into construction related contracts through its operating subsidiaries as a result of which capital expenditure contracted for at 30 September 2012 but not yet incurred is as follows:
2012 2011
EUR'000 EUR'000
Investment properties:
Era Shopping Park, Oradea 877 6,675
Era Shopping Park, Iasi 277 611
Sibiu Shopping City, Sibiu 235 165
1,389 7,451
=================== ===================
28. EVENTS AFTER THE BALANCE SHEET DATE
Bank Financing
Default in payment amounts due under two of the Group loans have occurred since the year end, namely in respect of the Proton Bank loan and the KBC (Sibiu 1) loan, as has been explained under note 19.
Cyprus Banking crisis effect on the Group
The financial crisis that has recently engulfed Cyprus has the potential to negatively impact AREOF. Era Shopping Park Iasi is supported by a loan facility from a consortium of lenders that includes the Bank of Cyprus. This bank will be the subject of a significant restructuring by the government of Cyprus. This restructuring could negatively impact the Group's ability to draw down on the remaining EUR17m of the loan facility needed to complete construction of the Era Shopping Park Iasi.
Furthermore, Bank of Cyprus is part of a consortium of lenders to Era Shopping Park Oradea while Marfin Popular Bank (commonly referred to as Laiki Bank), another Cypriot Bank, is sole lender to the Company's Riviera Shopping City asset and part of a consortium of lenders to Sibiu Shopping City. Although these banking facilities are fully drawn, the planned restructuring of both the Bank of Cyprus and Marfin Popular Bank may have an impact on their future relationship with AREOF.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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