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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 Feb 2020 to Feb 2025
TIDMAREO
RNS Number : 0452X
Argo Real Estate Opportunities Fd
08 February 2012
AIM code: AREO
08.02.11
Argo Real Estate Opportunities Fund Limited
(the "Company"/ "AREOF" / "Group")
Final Results for the year ended 30 September 2011
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 2011.
Key Points:
-- Audited NAV per share of EUR0.1081(2) (2010: EUR0.0802).
-- Adjusted NAV per share(1) of EUR0.1241(2) (2010: EUR0.0875).
-- Profits in the year of EUR31.2m (30 September 2010 losses EUR10.2m) including the gain arising from the appreciation of the investment property values of EUR16.8m.
-- The acquisition in September 2011 of a further two shopping parks in Romania, by way of the issue of a further 298 million ordinary shares in full consideration, made the Company the largest listed owner and operator of shopping parks in the country.
-- The Company is currently finalising a major asset management initiative on its Sibiu Shopping City retail park to attract further leading international tenants and strengthen its income deriving from this asset.
-- Banking terms have been successfully renegotiated during the year with several of the asset lending banks whereby amortization and covenant holidays have been agreed to assist the Company while income and asset values recover in the region.
-- Negotiations aimed at the restructuring of the Proton Bank loan facility have been initiated.
Notes:
1. Adjusted NAV is calculated before any deferred tax liability
2. Based on ordinary shares in issue, of which an additional 298 million were issued in the period
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 Joint Broker Shore Capital Edward Mansfield Financial Public Relations Bishopsgate Communications +44 (0) 207 220 0571 Deepali Schneider / Natalie Quinn / +44 (0) 207 408 4090 Lynne Goulding argo@bishopsgatecommunications.com +44 (0) 207 562 3350
ARGO REAL ESTATE OPPORTUITIES FUND LIMITED - 30 September 2011
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 2011 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 2011 is EUR0.1081 (2010: EUR0.0802) and EUR0.1241 (2010: EUR0.0875), reflecting a increase of EUR0.0279 and EUR0.0366 respectively in the year; this increase arises principally from an improvement in the property values notably at Rivera in Ukraine and to a lesser extent at the Company's four sites in Romania.
The financial statements for the year to 30 September 2011 show a profit for the year attributable to equity shareholders of EUR27.4m which includes gains on investment properties of EUR16.8m and negative goodwill of EUR14.8m arising on acquisitions in the year taken to the income statement.
The Group's deferred tax liability calculation of EUR12.3m 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 Group has operated over the last year in a particularly challenging and difficult environment in which regional and global property markets have remained weak despite some initial signs of recovery and the economic and financing background has been most uncertain.
Tenants have continued to seek rent concessions, albeit at a slightly reduced level from the previous year, which while provided on a time limited basis, in practice reflect the lower level of sustainable market rents in the current economic climate. The lower level of rental incomes continues to impact the Group's cash flow which, while being proactively managed, continues to put pressure on the Group's loan covenants and in the instances where covenant breaches have occurred the effects of the trading environment difficulties have been fully recognised by the relevant banks who continue to fully support the Group's activities by providing time limited amortisation and covenant holidays.
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 trade strongly.
The first of a two part asset improvement project in Sibiu Shopping Centre in Romania has been completed whereby a new gallery linking the Real and Carrefour hypermarkets together with the relocation of several tenants making way for the likes of C&A, Domo and other strong covenanted retailers to establish their presence in the fashion mall. The second part of the project to construct a new external entrance lobby for the mall is being completed in the first quarter of 2012.
The Company's Romanian investment property, being the 50,000 sqm development undertaken on the Suceava Shopping City, has been similarly impacted by the difficult trading environment along with strong competition within the city. However, tenancy occupancy levels remain at 98%, which again is a strong result in this market.
The Company's first Ukrainian investment property, the 83,000 sqm Riviera Shopping City, Odessa, completed in phases throughout 2009/10 and includes a 14,000 sqm Obi DIY store, key anchor tenants including 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 has won several property awards and has become an attractive and important regional retail destination, which is reflected in the current near 100% tenant occupancy level.
The Group's previously acquired land assets in Nikolaev, Ukraine and also in 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.
Acquisitions
In September 2011, the Group completed the purchase of Huincas Properties Limited, which controls the ERA Shopping Park, Oradea, and Omelit Limited, which controls the ERA Shopping Park Iasi. Following the purchase of these assets in Romania, the Company became the largest listed owner and operator of retail parks in the country. The Board believes the enhanced scale of the Company will make it more marketable to international investors over the long-term.
The ERA Shopping Park Oradea has a gross lettable area of 65,700 sqm and is anchored by well known tenants such as Carrefour, Bricostore and Mobexpert. In addition, to the existing retail park, a 20,000 sqm shopping mall is under construction and is expected to be completed sometime in the first quarter of 2012.
The ERA Shopping Park, Iasi has a gross lettable area of 49,800 sqm and is anchored by prominent international tenants such as Praktiker, Decathlon and Carrefour. A planned expansion of the centre will take its size to some 78,000 sqm and is scheduled for completion in phases by the end of 2012 and the spring of 2013.
Financing Facilities
The Group has successfully renegotiated and agreed terms with its existing banks on several of its loans.
Alpha Bank has agreed a time limited amortisation holiday and covenant waiver through to April 2012 in order to assist the reduced level of trading income cash flow from Suceava Shopping City to meet its loan obligations. 6
KBC has agreed a time limited amortisation holiday throughout 2011 and covenant waivers for a maximum period up to December 2012. This has provided development cash flow to allow the Group to undertake targeted asset management initiatives that would improve the future tenant cash flow at Sibiu Shopping City.
Marfin Bank has as a result of the strong cashflow being generated by the Riviera Shopping City, Odessa asset agreed to a further one year amortisation holiday when the existing amortisation holiday, agreed at the time of completion of the centre, expired during the year.
Proton Bank agreed to extend its loan facility that was originally to mature in December 2010 for a further 2 year period and provided a further bridge facility to cover the interest while the renegotiated terms were being documented.
Restructured terms with the syndicated banks of EFG, Bank of Greece, Bank of Cyprus, Banca Romaneasca have been agreed for both Era Shopping Parks in Oradea and Iasi that will provide the funding to complete the shopping malls of both centres.
In December 2011, the Board, on the advice of the Manager, took the decision to withhold the payment of interest on the Group's EUR 25m debt facility with Proton Bank. The step was taken for strategic reasons and aims to enable a restructuring of the Proton facility. The Company is currently in negotiations with Proton Bank and is confident that it can complete a consensual restructuring of its obligations to the bank.
Further information on the status of the Company's various loans can be found in note 14 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
The current turmoil in the Eurozone, which has caused ongoing uncertainty and associated volitility in the financial markets of Greece, Ireland, Portugal, Spain and Italy, has inevitably impacted the Eastern European property market in which the Group operates. The hoped for improvement in the availability of debt finance did not come to pass in 2011. As a consequence, few large property transactions took place in the region and prices remained depressed although above their 2009 lows.
Nevertheless, the economies of both Romania and Ukraine, the Company's principal markets, experienced a solid recovery in growth. This is forecast to accelerate in 2012 helping both economies to outperform their western European counterparts and could potentially lead to a modest advance in property prices.
The Group's focus in the immediate future remains the improvement of the quality of its cash flows by way of selective and carefully targeted asset management initiatives. Such measures aim to reinforce the dominance of the Company's retail parks within the regions in which they operate and leave them well positioned to benefit from improvements in asset prices.
The economic conditions of the markets in which the Company operates are constantly reviewed by Management with the aim of mitigating, as far as is possible, the effects of any negative trends on the Group and maximizing shareholder value. However, risks remain and these are fully explained in the Investment Manager's report on page 8.
Robert Provine left the Investment Manager in September 2011 to rejoin a former employer and and the important contribution he made towards the Group's development since it was formed is fully acknowledged by the Board. He has been replaced by Dennis Selinas who brings with him extensive experience of investing in Eastern Europe's property sector.
Finally, I would like to take the opportunity to express my gratitude for the
ongoing support the Company has received from its shareholders during what has been a challenging period.
David Clark
Chairman
7 February 2012
ARGO REAL ESTATE OPPORTUNITIES FUND LIMITED - 30 September 2011
INVESTMENT MANAGER'S REPORT
The Investment Manager implements a focused strategy on behalf of AREOF to create institutional quality retail property assets in leading primary and secondary cities in Central and Eastern Europe with a particular focus on Romania, Ukraine and Moldova.
Since its inception in August 2006, the Group has committed and invested all of its original EUR96m equity capital (net of listing costs) to projects, including the acquisition and subsequent extension of the 80,000 sqm Carrefour, Real and Baumaxx anchored European Retail Park Sibiu, the development of the 50,000 sqm Carrefour and Baumaxx anchored Suceava Shopping City and the construction of the 83,000 sqm Real and Obi anchored Riviera Shopping City in Odessa, Ukraine. In September 2011, the Group completed the purchase of the ERA Shopping Park Oradea and the ERA Shopping Park Iasi. Following the purchase of these assets in Romania, the Company became the largest listed owner and operator of retail parks in the country.
During the 12 month period to 30 September 2011, the economic environment in which the Group operates continued to stabilise enjoying a modest improvement on that seen in 2010. Ukraine proved to be a more promising market than Romania during the period due to the scarcer supply of modern shopping centres in Ukraine. Nevertheless, we anticipate Romania to enjoy a pick-up in trade in 2012 as the economy's return to growth feeds through to the retail sector.
Rental concessions to certain tenants were necessary once again in 2011 and these inevitably had a negative impact on the Company's cash flow. Such concessions are in the main contractually time-limited and are described in greater detail in the Transaction Overviews section. As stated in the previous report, it remains the view of the Investment Manager that the only viable way to increase income from the current levels, and in some cases to protect existing rental income, is the implementation of targeted asset management initiatives. Such initiatives are always carefully budgeted for so as to maximise the financial benefit to the Company while the extra square meterage is pre-leased where possible to minimise the risk. As described in the Group's Interim Report, the first major initiative was commenced in February 2011 in Sibiu, with the connection of two phases of the project, creation of three new large units to be occupied by strong international retailers and the redesign and reconfiguration of the shopping centre entrance. A further asset management initiative has been identified in Odessa where support from its lending bank is allowing the Investment Manager to pursue this income enhancing development.
In Eastern Europe, Poland and the Czech Republic have recently enjoyed the strongest recovery in property prices. Risk aversion and a lack of debt financing continued to weigh on prices in Romania and the Ukraine. Nevertheless, opportunistic investors were evident during the course of the year in both markets which bodes well for the coming years. As property prices in countries like Poland and the Czech Republic catch up with those in western Europe, it is the Investment Manager's belief that institutional investors will increasingly look to "next frontier" countries in South Eastern Europe like Romania and Ukraine in search of better returns. Following September's purchase of the malls in the cities of Iasi and Oradea, the Company is the largest stock exchange listed operator of shopping centres in Romania and as such is well placed to benefit from such a trend.
During 2011 the Company successfully negotiated terms with its asset-lenders in Sibiu, Suceava and Odessa which provide covenant and cash flow relief for a maximum period up to December 2012. This provides additional time for the assets to recover and enable various cash-generative asset management initiatives to be carried out and completed. In addition, banking arrangements of the newly acquired ERA Shopping Park Oradea and ERA Shopping Park Iasi were successfully renegotiated with their lending banks during the year allowing the balance of their loan facilities to be drawn in order to allow completion of the planned development of these projects.
In December 2011, the Manager advised the Company not to make payment of the interest that fell due to Proton Bank under its EUR25m debt facility as a strategic move to facilitate restructuring discussions of the facility in order to improve the immediate cash flow position of the Group. Discussions with Proton Bank are ongoing and the Manager is confident that a consensual outcome will be achieved leading to a restructuring of this debt.
The headline reported gross rental income in the year shows a small reduction year on year from EUR21.0m in 2010 to EUR19.2m in the 2011 reflecting adjustments required under IFRS whereby the effect of tenant incentives that have been granted in the year are spread evenly over the remaining term of the tenant's lease. Without this reporting adjustment actual rental income in the year grew from EUR15.8m in 2010 to EUR18.9m in 2011, the increase arising largely from the result of a full year's trading and stabilisation of rental income at the Riviera Shopping City, Odessa.
The year has seen an improvement in the value of the Group's assets, resulting in a NAV attributable to equity holders as of 30 September 2011 of EUR65.7m. The Group has obtained third party valuations from independent valuers on the portfolio of its property assets as at 30 September 2011, the results of which are reflected in the NAV, and shown in the consolidated financial statements.
The primary drivers of the NAV during the year were:
i) the general stabilisation and modest improvement of the Company's markets of operation, and
ii) the change in fair/market value of the Company's property assets as follows:
- Sibiu Shopping City: an increase in value of EUR4.2m,
- Sibiu Phase 3: the write down in value of EUR1.1m,
- Suceava Shopping City: an increase of EUR5.6m of which the Group's share amounted to EUR2.8m,
- Riviera Shopping City, Odessa: an increase in value of EUR8.4m,
- Moldova related assets: an increase in value of EUR1.2m,
- Nikolaev asset: the write down in value of EUR0.3m,
- Era Shopping Park, Iasi: a write down of EUR0.2m, and
- Era Shopping Park, Oradea: a write down of EUR0.9m.
iii) the effects of negative goodwill of EUR14.8m arising on the acquisitions during the year of the companies owning the Era Shopping Park, Oradea and Era Shopping Park, Iasi, whereby this negative goodwill was taken to the income statement in the year.
In the current commercial environment, the Investment Manager continues to focus on the proactive asset management of the existing properties, the completion of the development of the newly acquired shopping centre assets and the management of existing cash flow and implementing targeted asset management initiatives, in co-operation with our lending banks.
Under current market conditions the following risks continue to exist for the Company:
i) While a successful outcome to the discussions of the default of interest payment to Proton Bank is expected, should this not occur the Bank has the right by way of a share pledge over the Company's immediate subsidiary to acquire the asset owning subsidiary companies;
ii) Although certain of the project subsidiary companies remain cash flow positive, principally as a result of lender concessions by way of amortisation holidays, the restrictive use of any surplus funds under the terms and conditions of these banking arrangements, means that the negative situation of the Company continues. Further equity or other infusion of cash will be required in 2012;
iii) continued challenges in the local retail environments causing existing tenants to have trading difficulties which will lead once again to requests for reductions in rent which will reduce the level of the Group's income, albeit that this is expected to be at a lower level than the prior year.
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
European Retail Park Sibiu, Romania
AREOF's initial investment in European Retail Park Sibiu, subsequently renamed Sibiu Shopping City, was made in November 2006, and the Company continues to actively manage this asset.
The retail park was expanded both in 2007 and 2008, with a number of extensions and reconfigurations (known as "Phases 2 and 3").
Specifically, since opening, Sibiu Shopping City has been extended by a total of 30,000 sqm and further fortified its position as the dominant and most successful shopping centre in central Romania.
The Company is currently completing on the implementation of an extensive asset management initiative for the property, whereby the stand alone Phase 1 & 3 are now connected. As part of the redesign under this initiative tenant leases have been signed with leading international operators such as C&A, Domo/Toyplex as well as current discussions with the likes of H&M. The re-design of the mall entrance is currently under development and will be completed in the next couple of months. These initiatives are being successfully completed by way of partial funding from the KBC-led senior lending syndicate along with a EUR1.3m euro loan from the Argo Group.
Current financing arrangements include EUR66.5m of debt from KBC Bank, fully swapped until loan maturity in November 2013 along with a syndicated, five year investment loan of EUR27.8m from KBC, Investkredit and Marfin/Laiki Bank.
As with the prior year 2011 saw a constrained market environment resulting in the need to concede an extension of tenant lease discounts, which are, if annualised, some EUR1.4m in 2011 (for Phase 1, 2 & 3). Current tenant occupancy is at some 93% and would be higher but for the impact while the asset management initiative is completed. We expect that 2012 will be a challenging environment for trading activity but expect that the signs of improvement will strengthen as the year progresses.
The fair/market value of the property as at 30 September 2011 was EUR82.1m on Phase 1, against a 30 September 2010 valuation of EUR76.5m; and a valuation of EUR33.7m on Phase 3, against a comparative September 2010 valuation of EUR34.5m.
Suceava Shopping City, Suceava, Romania
The 50,000 sqm centre, a leading shopping centre in the city, remains 98% let despite the significant amount of retail competition in the City. As in prior years the depressed market conditions have required the Investment Manager to maintain the majority of temporary lease discounts for the shopping centre in order to maintain a high tenant occupancy level. 11
Rental discounts for 2011 were approximately EUR1m and it is anticipated that this will not materially increase during 2012 as the local market remains particularly competitive with five competing centres in the immediate vicinity, albeit that this centre remains a principal retail site in the city. However, the overall situation is very fluid with approximately a third of the tenant leases up for renewal over the coming 18 month period.
The current plan remains: to continue stabilising the centre with the DTZ Centre Management team and begin to explore several asset management initiatives to build upon the centre's notable successes such as the opening of a 1,000 sqm fashion unit for New Yorker.
The project has in place a EUR50m three year facility with Alpha Bank of Greece. The Company entered into an agreement with Alpha Bank in January 2011 to restructure the facility which waives its loan covenants and provides an amortization holiday up until April 2012.
The 30 September 2011 fair/market value was EUR65.2m against a 30 September 2010 valuation of EUR59.3m.
Era Shopping Park, Oradea, Romania
The recently acquired Era Shopping Park, Oradea comprises some 65,000 sqm of retail park which opened Phase 1 of its development in March 2009 with leading anchor tenants Carrefour, Altex, and Bricostore. Phase 1 of the project has now reached almost full occupancy and there is ever improving traffic and sales for the key anchor stores. Average customer traffic is 12% higher for 2011, compared to the previous year. Carrefour have successfully run a number of marketing initiatives that produced improved sales making this store one of their best for year on year sales growth.
With the opening of Phase 1 coinciding with the financial crisis the gallery opened with a low level of occupancy and the syndicated lending banks of EFG, Banca Romanesca, Bancpost and Bank of Cyprus prevented drawing of the remaining EUR10m of the EUR62.5m construction finance facility. Lengthy negotiations to reopen the project finance were carried out in 2010 and into 2011 and these were successfully concluded and documented in September 2011 since when the remaining proportion of the facility has been drawn to complete the 20,000 sqm shopping mall.
The 8,000 sqm Mobexpert unit was handed over for tenant fit out in September 2011 and is expected to open in spring 2012. Phase 2 of the Mall totalling approximately 12,000 sqm was completed in early December with Phase 3 of approximately 4,500 sqm to be delivered in accordance with specific tenant requirements.
While the leasing market in Oradea remains challenging with competition from two existing projects, tenants are requiring greater concessions from landlords, resulting in more protracted negotiation periods. Despite the increased competition, Phase 2 of the Mall has secured additional anchor tenants including such retailers as Fox (fashion), Flanco (electrical) and Elvila (furniture). Despite difficult market conditions there has been an increase of tenant interest since completion with the leasing level of Phase 2 exceeding 50% and a number of units are under active negotiations.
The fair/market value of the property was EUR80.3m as at 30 September 2011. 12
Era Shopping Park, Iasi, Romania
The recently acquired Era Shopping Park, Iasi comprises some 49,000 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 a 8,000 sqm Mobexpert furniture store and in May 2010 Decathlon purchased a 2.4 hectare site for the construction of their 3,000 sqm store.
The next phase of the project is the development of the 28,000 sqm Mall which will link into the existing Gallery. The project also comprises a further 8 hectares of land available for sale to owner occupiers or the development of big box units. In addition, there is a further 15 hectares of adjacent greenfield land acquired as part of the Group's acquisition, for longer term development.
A EUR77m development facility provided by EFG, Banca Romanesca, Bancpost and Bank of Cyprus is in place for the construction finance of which EUR60m has been drawn to date. The remaining proportion of this facility to finance the Mall construction has been subject to an ongoing restructuring, however, terms have now been agreed and the syndicate of lenders are in the process of obtaining credit committee approvals; it is expected to have all approvals in place shortly and to have the facility reopened by March 2012. The Mall has been fully designed and tenders have been received from a number of contractors with costs in line with the agreed budget. The current construction program envisages delivery of Phase 1, 15,000 sqm by the end of 2012 and Phase 2 of 13,000 sqm by March 2013.
Tenants have continued to request rental concessions throughout 2011, which has impacted project cash flows and rental discounts are likely to continue throughout 2012, although on a reducing basis and it is expected that a large part will be eliminated once further phases of the Mall are open.
Customer traffic has again increased by approximately 13% in 2011 largely due to the successful marketing campaigns run by the Manager. The three main anchors of Carrefour, Altex and Mobexpert are pleased with their 2011 turnover, however not all the gallery tenants have witnessed a corresponding increase in sales due either to their specific Mall location or their own operational matters. A number of asset management initiatives are currently being pursued to improve circulation and strengthen tenant mix by relocating a number of tenants within the Gallery. Occupancy for the Park remains at 96%.
The fair/market value of the property was EUR82.1m as at 30 September 2011.
Riviera Shopping City, Odessa, Ukraine
The Company successfully opened Phase 2 of the 83,000 sqm Riviera Shopping City in Odessa on 16 October 2009 featuring a 12,500 sqm Real Hypermarket, Inditex fashion brands Zara, Stradivarius, Bershka and Pull & Bear along with many others. Attendance and retailer sales have exceeded estimates since opening providing comfort to the Company that this location is and will continue to develop as an important and sustainable regional retail destination.
Phase 1 of the centre opened in February 2009 with the launch of the 14,000 sqm Obi DIY Store and the second and final phase completed in 2010 with the successful opening of the City Bowling and Leisure Complex along with the Imax Multiplex Cinema.
The leasing situation has materially improved and the attractiveness of the centre now that it has become fully established in the local area has led to strong demand amongst retailers for space in the centre which has resulted in the occupancy level being near 100%. 13
Following approval by the Board in September 2011 an asset management initiative is currently underway to create an attractive fashion gallery in space previous occupied by an underperforming tenant. This initiative is expected to be completed in May 2012 and when fully let is anticipated to add a further increase to net revenue of approximately EUR0.5m.
The Group has fully drawn the EUR68m Marfin construction facility, which in accordance with the original agreement, converted into a five year investment facility on 17 December 2009. Under the agreed terms of the investment facility there was an eighteen month amortisation holiday while the centre stabilised and it has subsequently been agreed with the Bank that this amortisation holiday be extended for a further twelve month period through to June 2012. Given the steadily improving performance of the centre as initial tenant incentives have expired and rental incomes stabilise and are added to through management initiatives, the Company expects be able to fully cover both interest and amortisation after June 2012.
The fair/market value of the property of EUR88.5m as at 30 September 2011 compares to the EUR79.2m as at 30 September 2010.
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.
The Company currently has no immediate development plans for this site but continually appraises development opportunities as the market begins to strengthen and it is felt that 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 with a fair/market value at 30 September 2011 of EUR0.76m against the comparative 30 September 10 valuation of EUR1.0m.
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 prominent motorway locations on the periphery of Chisinau.
Although Moldova did successfully carry out parliamentary elections in November 2010, the new government has yet to appoint all of the key city and municipal officials which are critical to the planning and permitting process relating to land and buildings. 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 the country over the next 12 months.
The Moldovan asset fair/market values as at 30 September 2011, totalled EUR4.4m against their 30 September 2010 fair/market values of EUR2.4m.
Proton Corporate Loan
The Company and Proton Bank contracted a two year extension of the EUR25m loan facility, until December 2012, at terms similar to those previously in place. The completed loan documentation for this facility extended beyond the original 20 December maturity date as a result of which Proton Bank agreed to provide a short-term extension facility of EUR0.9m. 14
As referred to earlier in this report a strategic decision was taken to refrain from paying the interest due to Proton Bank in December 2011 in order to pursue restructuring discussions. While non-payment of this interest created an event of default under the loan terms it is believed by the Manager that the conclusion of ongoing discussions will result in a consensual resolution to this matter which the Manager believes will be beneficial to Group cashflows.
Outlook
The Manager does not expect any significant improvement in property prices in the region over the next 12 months. Nevertheless, the two principal countries in which the Group operates - Romania and Ukraine - are expected to build on the solid growth they achieved in 2011 and continue to outperform their western European counterparts. This may lead to a modest increase in asset prices. As such, we believe that the current asset valuations underpinning the Group's NAV are well supported by the economic fundamentals of Romania and Ukraine.
As was the case last year, the primary challenge for the Company remains operating with reduced cash flows caused by the need for the Group to grant rental concessions to select tenants. Lower cash flows continue to put pressure on a number of the Group's debt covenants.
The Manager believes that the enhancement of the Group's size following the acquisition of the ERA Shopping Park, Oradea and ERA Shopping Park, Iasi will make it a significantly more attractive proposition to international institutional investors looking for exposure to the region. Since the acquisition the Company has held talks with a number of such investors with a view to them injecting fresh capital into the Company and strengthening its balance sheet. Furthermore, the Manager is monitoring a number of new acquisition opportunities in its target region. As in the case of the purchase of the centres in Iasi and Oradea, acquisitions are likely to be financed by the use of the Company's shares as currency.
Since the middle of 2011 the Group has received strong indicative interest for its Riviera Shopping City centre in Odessa. However, the Manager has taken the view that due to current market conditions offers received significantly undervalue the asset which is near fully let and performing above expectations.
The next 12 months will see the Manager focus on initiatives to maximize cash flow from its existing assets as well as on opportunities to increase the size of the Company's portfolio and strengthen its balance sheet.
Dennis Selinas Graeme Daniel Fund Manager Finance Director
On behalf of Argo Capital Management Property Limited
7 February 2012
ARGO REAL ESTATE OPPORTUNITIES FUND LIMITED - 30 September 2011
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 for the year ended 30 September 2011 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 27. 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 group'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 group and the group'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 all the financial and non-financial information in the Director's Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent misstatements or inconsistencies we consider the implications for our report.
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 2011 and of group's surplus 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 - going concern
In forming our opinion on the consolidated financial statements, which are not qualified, we have considered the adequacy of the disclosure 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 requires additional working capital for the foreseeable future and that this is being and 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, additional bank borrowings and a further issue of capital. Whilst the Directors are confident that sufficient working capital finance will be available no plans have yet been finalised.
As disclosed in notes 2a and 14 to the consolidated financial statements, the Group has borrowing arrangements which are subject to banking covenants, some of which are currently in breach and on which discussions are ongoing. The risk of further loan covenant breaches in the foreseeable future when previously agreed covenant holidays expire remains a possibility given the current trading environment and the effects it is having on rental income levels and could have on future property values. As such the ongoing support of the lending banks is critical to the ongoing 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.
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:
-- proper accounting records have not been kept by the company; or -- the financial statements are not in agreement with the accounting records; or
-- we have failed to obtain all the information and explanations, which, to the best of our knowledge and belief, are necessary for the purposes of our audit.
BDO Limited
Chartered Accountants
Place du Pre
Rue du Pre
St Peter Port
Guernsey
7 February 2012
ARGO REAL ESTATE OPPORTUNITIES FUND LIMITED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 September 2011
Hot Features
Premium
Note Year ended Year ended
30 September 30 September
2011 2010
--------------------------------------- ----- -------------- --------------
EUR'000 EUR'000
--------------------------------------- ----- -------------- --------------
Continuing operations
--------------------------------------- ----- -------------- --------------
Gross rental income 19,160 20,970
--------------------------------------- ----- -------------- --------------
Related services income 6,400 5,757
--------------------------------------- ----- -------------- --------------
Property operating expenses (8,066) (7,326)
--------------------------------------- ----- -------------- --------------
Net rental and related income 17,494 19,401
--------------------------------------- ----- -------------- --------------
Administrative expenses (3,415) (3,155)
--------------------------------------- ----- -------------- --------------
Changes in fair value of investment
property 16,760 (17,184)
--------------------------------------- ----- -------------- --------------
Changes in fair value of financial
assets 116 (39)
--------------------------------------- ----- -------------- --------------
Negative goodwill arising on 14,840 -
acquisition
--------------------------------------- ----- -------------- --------------
Operating profit 45,795 (977)
--------------------------------------- ----- -------------- --------------
Finance Income 619 1,243
--------------------------------------- ----- -------------- --------------
Finance Expense (16,400) (14,784)
--------------------------------------- ----- -------------- --------------
Fair value gain on swap contract 2,303 1,314
--------------------------------------- ----- -------------- --------------
Net foreign exchange gain 27 1,698
--------------------------------------- ----- -------------- --------------
Profit/(loss) before tax 32,344 (11,506)
--------------------------------------- ----- -------------- --------------
Taxation (charge)/credit 5 (1,097) 1,280
--------------------------------------- ----- -------------- --------------
Profit/(loss) for the year 31,247 (10,226)
--------------------------------------- ----- -------------- --------------
Foreign exchange gains/(losses)
on translation of foreign operations 218 (69)
--------------------------------------- ----- -------------- --------------
Total comprehensive income/(expense) 31,465 (10,295)
--------------------------------------- ----- -------------- --------------
Profit/(loss) attributable
to :
--------------------------------------- ----- -------------- --------------
Equity shareholders 27,390 (8,337)
--------------------------------------- ----- -------------- --------------
Non-controlling interest 3,857 (1,889)
--------------------------------------- ----- -------------- --------------
31,247 (10,226)
--------------------------------------- ----- -------------- --------------
Total comprehensive income/(expense)
attributable to :
--------------------------------------- ----- -------------- --------------
Equity shareholders 27,569 (8,415)
--------------------------------------- ----- -------------- --------------
Non-controlling interest 3,896 (1,880)
--------------------------------------- ----- -------------- --------------
31,465 (10,295)
--------------------------------------- ----- -------------- --------------
Basic and diluted earnings
per ordinary share 6 0.086 (0.028)
--------------------------------------- ----- -------------- --------------
ARGO REAL ESTATE OPPORTUNITIES FUND LIMITED
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 30 September 2011
Note 30 September 30 September
2011 2010
----------------------------------- ----- ------------- --------------------------
EUR'000 EUR'000
----------------------------------- ----- ------------- --------------------------
ASSETS
----------------------------------- ----- ------------- --------------------------
Non-current assets
----------------------------------- ----- ------------- --------------------------
Investment properties 9 433,264 243,870
----------------------------------- ----- ------------- --------------------------
Property, plant and equipment 10 215 152
----------------------------------- ----- ------------- --------------------------
Tax receivables 6,399 8,869
----------------------------------- ----- ------------- --------------------------
Trade and other receivables 11 6,098 3,330
----------------------------------- ----- ------------- --------------------------
Total non current assets 445,976 256,221
----------------------------------- ----- ------------- --------------------------
Current assets
----------------------------------- ----- ------------- --------------------------
Trade and other receivables 11 9,021 8,100
----------------------------------- ----- ------------- --------------------------
Tax receivables 2,570 1,631
----------------------------------- ----- ------------- --------------------------
Financial assets 12 10,039 9,610
----------------------------------- ----- ------------- --------------------------
Cash and cash equivalents 13 12,185 4,416
----------------------------------- ----- ------------- --------------------------
Total current assets 33,815 23,757
----------------------------------- ----- ------------- --------------------------
Total assets 479,791 279,978
----------------------------------- ----- ------------- --------------------------
EQUITY
----------------------------------- ----- ------------- --------------------------
Capital and reserves attributable
to equity holders of the parent
company
----------------------------------- ----- ------------- --------------------------
Share capital 18 6,080 3,100
----------------------------------- ----- ------------- --------------------------
Share premium 18 18,159 7,859
----------------------------------- ----- ------------- --------------------------
Other reserve 19 95,096 95,096
----------------------------------- ----- ------------- --------------------------
Translation Reserve (1,476) (1,655)
----------------------------------- ----- ------------- --------------------------
Retained earnings (52,149) (79,539)
----------------------------------- ----- ------------- --------------------------
Total equity attributable
to equity holders of the parent
company 65,710 24,861
----------------------------------- ----- ------------- --------------------------
Non-controlling interest 15,503 11,607
----------------------------------- ----- ------------- --------------------------
Total equity 81,213 36,468
----------------------------------- ----- ------------- --------------------------
LIABILITIES
----------------------------------- ----- ------------- --------------------------
Non-current liabilities
----------------------------------- ----- ------------- --------------------------
Loans and borrowings 14 288,021 151,290
----------------------------------- ----- ------------- --------------------------
Deferred income tax 15 12,250 4,396
----------------------------------- ----- ------------- --------------------------
Total non-current liabilities 300,271 155,686
----------------------------------- ----- ------------- --------------------------
Current liabilities
----------------------------------- ----- ------------- --------------------------
Loans and borrowings 14 72,917 75,357
----------------------------------- ----- ------------- --------------------------
Trade and other payables 16 22,872 7,488
----------------------------------- ----- ------------- --------------------------
Financial liabilities 17 2,513 4,816
----------------------------------- ----- ------------- --------------------------
Current income tax 5 163
----------------------------------- ----- ------------- --------------------------
Total current liabilities 98,307 87,824
----------------------------------- ----- ------------- --------------------------
Total equity and liabilities 479,791 279,978
----------------------------------- ----- ------------- --------------------------
The financial statements were approved and authorised for issue by the Board of Directors on
7 February 2012 and signed on its behalf by David Clark and Robert Brown.
ARGO REAL ESTATE OPPORTUNITIES FUND LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 30 September 2011
Group
----------------- --------- ---------- --------- ------------ ------------ -------- ---------------- ---------
Amount attributable to Parent Company Equity Holders
----------------- ---------------------------------------------------------------------------------------------------
Share Share Other Translation Retained Total Non-controlling Total
Capital Premium Reserve Reserve Earnings Interest
----------------- --------- ---------- --------- ------------ ------------ -------- ---------------- ---------
EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
----------------- --------- ---------- --------- ------------ ------------ -------- ---------------- ---------
At 1 October
2009 1,000 - 95,096 (1,577) (71,202) 23,317 13,487 36,804
----------------- --------- ---------- --------- ------------ ------------ -------- ---------------- ---------
Foreign exchange
gains/(losses)
on translation
of foreign
operations - - - (78) - (78) 9 (69)
----------------- --------- ---------- --------- ------------ ------------ -------- ---------------- ---------
Other
comprehensive
income - - - (78) - (78) 9 (69)
----------------- --------- ---------- --------- ------------ ------------ -------- ---------------- ---------
Result for the
year - - - - (8,337) (8,337) (1,889) (10,226)
----------------- --------- ---------- --------- ------------ ------------ -------- ---------------- ---------
Total
comprehensive
income for the
period - - - (78) (8,337) (8,415) (1,880) (10,295)
----------------- --------- ---------- --------- ------------ ------------ -------- ---------------- ---------
Shares issued
in the year 2,100 7,859 - - - 9,959 - 9,959
----------------- --------- ---------- --------- ------------ ------------ -------- ---------------- ---------
At 30 September
2010 3,100 7,859 95,096 (1,655) (79,539) 24,861 11,607 36,468
----------------- --------- ---------- --------- ------------ ------------ -------- ---------------- ---------
Foreign exchange
gains on
translation
of foreign
operations - - - 179 - 179 39 218
----------------- --------- ---------- --------- ------------ ------------ -------- ---------------- ---------
Other
comprehensive
income - - - 179 - 179 39 218
----------------- --------- ---------- --------- ------------ ------------ -------- ---------------- ---------
Result for the
year - - - - 27,390 27,390 3,857 31,247
----------------- --------- ---------- --------- ------------ ------------ -------- ---------------- ---------
Total
comprehensive
income for the
period - - - 179 27,390 27,569 3,896 31,465
----------------- --------- ---------- --------- ------------ ------------ -------- ---------------- ---------
Shares issued
in the year
(note
18) 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
----------------- --------- ---------- --------- ------------ ------------ -------- ---------------- ---------
ARGO REAL ESTATE OPPORTUNITIES FUND LIMITED
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 30 September 2011
Note Year ended Year ended
30 September 30 September
2011 2010
------------------------------------------- ----- ------------------------- -------------------------
EUR'000 EUR'000
------------------------------------------- ----- ------------------------- -------------------------
OPERATING ACTIVITIES
------------------------------------------- ----- ------------------------- -------------------------
Profit/(loss) for the year 31,247 (10,226)
------------------------------------------- ----- ------------------------- -------------------------
Adjustments for :
------------------------------------------- ----- ------------------------- -------------------------
Depreciation 37 32
------------------------------------------- ----- ------------------------- -------------------------
Changes in fair value of investment
property 9 (16,760) 17,184
------------------------------------------- ----- ------------------------- -------------------------
Impairment of financial assets (116) 39
------------------------------------------- ----- ------------------------- -------------------------
Negative goodwill arising on acquisition (14,840) -
------------------------------------------- ----- ------------------------- -------------------------
Finance income (2,922) (2,556)
------------------------------------------- ----- ------------------------- -------------------------
Finance expense 16,336 14,275
------------------------------------------- ----- ------------------------- -------------------------
Exchange translation movements 179 (78)
------------------------------------------- ----- ------------------------- -------------------------
Taxation 5 1,097 (1,280)
------------------------------------------- ----- ------------------------- -------------------------
Operating cash flows before movements
in working capital 14,258 17,390
------------------------------------------- ----- ------------------------- -------------------------
Movements in working capital :
------------------------------------------- ----- ------------------------- -------------------------
Decrease/(increase) in operating trade
and other receivables 2,180 (5,899)
------------------------------------------- ----- ------------------------- -------------------------
Decrease in operating trade and other
payables (978) (4,756)
------------------------------------------- ----- ------------------------- -------------------------
Cash generated from operations 15,460 6,735
------------------------------------------- ----- ------------------------- -------------------------
Interest received 338 403
------------------------------------------- ----- ------------------------- -------------------------
Interest paid (14,588) (15,916)
------------------------------------------- ----- ------------------------- -------------------------
Taxation paid (11) (12)
------------------------------------------- ----- ------------------------- -------------------------
Cash generated from/(used in) operating
activities 1,199 (8,790)
------------------------------------------- ----- ------------------------- -------------------------
INVESTING ACTIVITIES
------------------------------------------- ----- ------------------------- -------------------------
Acquisition of subsidiaries, net of
cash acquired 21 5,209 -
------------------------------------------- ----- ------------------------- -------------------------
Purchase of investment properties 9 (3,946) (1,028)
------------------------------------------- ----- ------------------------- -------------------------
Purchase of property, plant and equipment 10 (46) (5,618)
------------------------------------------- ----- ------------------------- -------------------------
Proceeds from sale of property, plant 10 -
and equipment
------------------------------------------- ----- ------------------------- -------------------------
Loans advanced (12) (24)
------------------------------------------- ----- ------------------------- -------------------------
Loans repaid - 393
------------------------------------------- ----- ------------------------- -------------------------
Cash flows from investing activities 1,215 (6,277)
------------------------------------------- ----- ------------------------- -------------------------
FINANCING ACTIVITIES
------------------------------------------- ----- ------------------------- -------------------------
Proceeds from ordinary shares issued - 9,959
------------------------------------------- ----- ------------------------- -------------------------
Drawdown of bank loans including costs 5,004 3,900
------------------------------------------- ----- ------------------------- -------------------------
Drawdown of other loan borrowings 1,300 -
------------------------------------------- ----- ------------------------- -------------------------
Bank loans repaid (903) (3,854)
------------------------------------------- ----- ------------------------- -------------------------
Cash flows from financing activities 5,401 10,005
------------------------------------------- ----- ------------------------- -------------------------
Increase/(decrease) in cash and cash
equivalents 7,815 (5,062)
------------------------------------------- ----- ------------------------- -------------------------
Net foreign losses on cash and cash
equivalents (46) (1,710)
------------------------------------------- ----- ------------------------- -------------------------
7,769 (6,772)
------------------------------------------- ----- ------------------------- -------------------------
Cash and cash equivalents at start
of year 4,416 11,188
------------------------------------------- ----- ------------------------- -------------------------
Cash and cash equivalents at 30 September
2011 12,185 4,416
------------------------------------------- ----- ------------------------- -------------------------
12,185
------------------------------------------- ----- ------------------------- -------------------------
0
------------------------------------------- ----- ------------------------- -------------------------
ARGO REAL ESTATE OPPORTUNITIES FUND LIMITED - 30 September 2011
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 2011 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 throughout the year, is set out below.
a. Basis of preparation
The 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.
Going concern
The 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 loan covenants, as more fully explained in note 14, 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 having discussions with the Bank with a view to reaching a consensual restructuring of this debt. Cross default clauses contained in the terms and conditions of certain other bank loans within the Group could create events of default, however, the Company has a good relationship with its long term relationship banks and is seeking to get formal waiver by the banks to such events.
While trading conditions in the local markets in which the Group operates continue to remain subdued, the 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 defer receiving its management fee as and when it becomes due; secondly, in providing a short term loan facility to assist with specific project 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 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 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.
Principal accounting policies
The principal accounting policies adopted are set out below.
Changes in Accounting Policies
None of the new standards, interpretations and amendments, effective for the first time from 1 October 2010, have had a material effect on the financial statements.
New standards and interpretations not applied Effective date (periods commencing) IAS 12 Amendment Income Taxes 1 January 2012 IAS 24 Revised Related Party Disclosures - revised definition of related parties 1 January 2011 IAS 27 Consolidated and Separate Financial Statements 1 January 2013 IAS 28 Investment in Asoociated and Joint Ventures 1 January 2013 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 Entities 1 January 2013 International Accounting Standards (IAS/IFRS)
None of the new standards and interpretations noted above, which are effective for accounting periods beginning on or after 1 October 2011 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. 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 2011. The results of the subsidiary undertakings are 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.
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.
The companies acquired during the year have been included in the consolidated financial statements as business combinations. 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. 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.
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").
e. Revenue recognition
Interest receivable is included in the consolidated financial statements on an accruals basis under the effective interest method. 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.
f. 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.
g. 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.
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.
h. 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.
i. 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 7th 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 7th 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.
j. 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.
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.
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.
Tax receivables
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.
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.
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.
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.
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.
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.
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.
k. 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.
l. Use of assumptions and estimates
The application of Group's accounting policies requires judgements, estimates and assumptions to be made concerning the future and these can have a material effect on the carrying amounts of assets and liabilities reported in the consolidated financial statements. The resulting accounting estimates will by definition seldom equal the related actual results.
The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined below.
Property and land valuations
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, 7(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 in 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.
Income and deferred taxes
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.
3. 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 five 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 Group's segmental investment property and gross property income for the year are presented below:
Carrying value Fair Value
--------- ---------------------------------------- ----------------------------------------
2011 2010 2010 2010
--------- ------------------- ------------------- ------------------- -------------------
EUR'000 EUR'000 EUR'000 EUR'000
--------- ------------------- ------------------- ------------------- -------------------
Romania 346,331 167,163 351,438 170,680
--------- ------------------- ------------------- ------------------- -------------------
Ukraine 84,424 75,256 89,268 80,190
--------- ------------------- ------------------- ------------------- -------------------
Moldova 2,509 1,451 2,509 1,451
--------- ------------------- ------------------- ------------------- -------------------
433,264 243,870 443,215 252,321
--------- ------------------- ------------------- ------------------- -------------------
Income
---------------------- ------------------- ------------------- ------------------- -------------------
Gross Rental Income Profit/(loss) before
tax
---------------------- ---------------------------------------- ----------------------------------------
2011 2010 2011 2010
---------------------- ------------------- ------------------- ------------------- -------------------
EUR'000 EUR'000 EUR'000 EUR'000
---------------------- ------------------- ------------------- ------------------- -------------------
Romania 10,513 13,994 26,598 (7,698)
---------------------- ------------------- ------------------- ------------------- -------------------
Ukraine 8,647 6,976 9,943 2,067
---------------------- ------------------- ------------------- ------------------- -------------------
Moldova - - 1,244 (1,093)
---------------------- ------------------- ------------------- ------------------- -------------------
Other group segments - - (5,441) (4,782)
---------------------- ------------------- ------------------- ------------------- -------------------
19,160 20,970 32,344 (11,506)
---------------------- ------------------- ------------------- ------------------- -------------------
4. OPERATING PROFIT
Operating profit is stated after charging:
2011 2010
-------------- ----------------- -----------------
EUR'000 EUR'000
-------------- ----------------- -----------------
Depreciation 37 32
-------------- ----------------- -----------------
5. TAXATION
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 EUR1.2m (2010: deferred tax credit of EUR1.38m) giving rise to a total current and deferred tax credit in the year as shown in the consolidated statement of comprehensive income.
2011 2010
-------------------------------------- ----------------- -----------------
EUR'000 EUR'000
-------------------------------------- ----------------- -----------------
Current tax (credit)/charge for the
year (104) 95
-------------------------------------- ----------------- -----------------
Deferred tax charge/(credit) for the
year 1,201 (1,375)
-------------------------------------- ----------------- -----------------
Tax charge/(credit) for the year 1,097 (1,280)
-------------------------------------- ----------------- -----------------
AREOF is a registered offshore company exempt from taxes. Its offshore subsidiaries did not incur any taxable profits during the period except as listed below:
The current income tax (credit)/charge represents tax charges on profit arising in : ------------------------------------------- ------ ----------------- Cyprus (at corporate income tax rates of 10%) (156) 79 ------------------------------------------- ------ ----------------- Luxembourg (at corporate income tax rates of 20%) 40 3 ------------------------------------------- ------ ----------------- Netherlands (at corporate income tax 4 - rates of 20%) ------------------------------------------- ------ ----------------- Romania (at corporate income tax rates of 16%) 8 13 ------------------------------------------- ------ ----------------- Total tax (credit)/charge for the year (104) 95 ------------------------------------------- ------ -----------------
The Group's profit/(loss) before taxation upon which the tax charge for the year arises from:
2011 2010
--------------------------- ----------------- -----------------
EUR'000 EUR'000
--------------------------- ----------------- -----------------
Taxable jurisdictions 22,529 (5,811)
--------------------------- ----------------- -----------------
Non-taxable jurisdictions 9,815 (5,695)
--------------------------- ----------------- -----------------
32,344 (11,506)
--------------------------- ----------------- -----------------
- -
--------------------------- ----------------- -----------------
The Group's taxation charge for the year is made up of:
2011 2010
----------------------------------------- ----------------- -----------------
EUR'000 EUR'000
----------------------------------------- ----------------- -----------------
Profit/(loss) before taxation 32,344 (11,506)
----------------------------------------- ----------------- -----------------
(Profit)/loss at average country rate
of 19.9% (2010: 12.5%) (6,440) 1,438
----------------------------------------- ----------------- -----------------
Profits/(losses) arising in nil tax
jurisdictions 1,954 (575)
----------------------------------------- ----------------- -----------------
Permanent differences 460 1,329
----------------------------------------- ----------------- -----------------
Profits/(losses) upon which no deferred
tax recognised in the year 2,909 (1,052)
----------------------------------------- ----------------- -----------------
Differences in local tax rates 20 140
----------------------------------------- ----------------- -----------------
(1,097) 1,280
----------------------------------------- ----------------- -----------------
- -
----------------------------------------- ----------------- -----------------
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.
6. BASIC AND DILUTED EARNINGS PER SHARE
The basic and diluted earnings per ordinary share are based on the profit for the year attributable to the equity shareholders of EUR27.4m (2010: loss EUR8.3m and 297.3 million ordinary shares) and on 319 million ordinary shares, being the weighted average number of shares in issue during the period.
There were no dilutive interests as at 30 September 2011 (2010 - nil).
7. NET ASSET VALUE PER SHARE
The Net Asset Value per share is based on shareholders' equity at the year end as follows:
2011 2010
---------------------------------------------- ------------------ ------------------
EUR'000 EUR'000
---------------------------------------------- ------------------ ------------------
Net Asset Value 65,710 24,861
---------------------------------------------- ------------------ ------------------
Add back deferred tax provision attributable
to equity shareholders 9,729 2,257
---------------------------------------------- ------------------ ------------------
Adjusted Net Assets 75,439 27,118
---------------------------------------------- ------------------ ------------------
Number of ordinary shares in issue 608 million 310 million
---------------------------------------------- ------------------ ------------------
Net Asset Value per share EUR0.1081 EUR0.0802
---------------------------------------------- ------------------ ------------------
Adjusted Net Asset Value per share EUR0.1241 EUR0.0875
---------------------------------------------- ------------------ ------------------
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.
8. DIVIDENDS
No dividends have been declared or paid to date.
9. INVESTMENT PROPERTY
2011 2010
------------------------------------------ ------------------ ------------------
EUR'000 EUR'000
------------------------------------------ ------------------ ------------------
At 1 October 2010 243,870 181,504
------------------------------------------ ------------------ ------------------
Acquisition of subsidiaries 168,688 -
------------------------------------------ ------------------ ------------------
Reclassification of development property - 77,268
------------------------------------------ ------------------ ------------------
Capital expenditure during the year 3,946 1,028
------------------------------------------ ------------------ ------------------
Reclassification of lease incentives - (2,700)
------------------------------------------ ------------------ ------------------
Land Acquisitions - 3,954
------------------------------------------ ------------------ ------------------
Fair value uplift/(write down) 16,760 (17,184)
------------------------------------------ ------------------ ------------------
At 30 September 2011 433,264 243,870
------------------------------------------ ------------------ ------------------
Adjustment from fair value to carrying
value
------------------------------------------ ------------------ ------------------
Fair value 443,215 252,321
------------------------------------------ ------------------ ------------------
Adjustment for rent recognised in
advance (9,951) (8,451)
------------------------------------------ ------------------ ------------------
Carrying value at 30 September 2010 433,264 243,870
------------------------------------------ ------------------ ------------------
Total borrowing costs capitalized in the year were EUR0.1m (2010: EUR2.5m).
The fair value of the Group's investment properties at 30 September 2011 has been arrived at on an open market value basis, carried out by independent valuers, Colliers International, Jones Lang LaSalle and DTZ, in accordance with the requirements of the Appraisal and Valuation Manual, 7(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 the recent open market sales and investments within the Central and Eastern European regions.
10. PROPERTY, PLANT AND EQUIPMENT
EUR'000 EUR'000 EUR'000
--------------------------------- --------------------- --------------------- -----------------
Buildings Machinery Total
& Construction & equipment
--------------------------------- --------------------- --------------------- -----------------
Cost or valuation
--------------------------------- --------------------- --------------------- -----------------
At 1 October 2009 67,499 158 67,657
--------------------------------- --------------------- --------------------- -----------------
Reclassification as investment
property (77,268) - (77,268)
--------------------------------- --------------------- --------------------- -----------------
Additions 9,769 81 9,850
--------------------------------- --------------------- --------------------- -----------------
At 30 September 2010 - 239 239
--------------------------------- --------------------- --------------------- -----------------
Depreciation
--------------------------------- --------------------- --------------------- -----------------
At 1 October 2009 - 55 55
--------------------------------- --------------------- --------------------- -----------------
Charge for period - 32 32
--------------------------------- --------------------- --------------------- -----------------
At 30 September 2010 - 87 87
--------------------------------- --------------------- --------------------- -----------------
Carrying amount at 30 September
2010 - 152 152
--------------------------------- --------------------- --------------------- -----------------
EUR'000 EUR'000 EUR'000
--------------------------------- --------------------- -------------------- --------------------
Buildings Machinery Total
& Construction & equipment
--------------------------------- --------------------- -------------------- --------------------
Cost or valuation
--------------------------------- --------------------- -------------------- --------------------
At 1 October 2010 - 239 239
--------------------------------- --------------------- -------------------- --------------------
Acquisition of subsidiaries - 162 162
--------------------------------- --------------------- -------------------- --------------------
Additions - 46 46
--------------------------------- --------------------- -------------------- --------------------
Disposals - (43) (43)
--------------------------------- --------------------- -------------------- --------------------
At 30 September 2011 - 404 404
--------------------------------- --------------------- -------------------- --------------------
Depreciation
--------------------------------- --------------------- -------------------- --------------------
At 1 October 2010 - 87 87
--------------------------------- --------------------- -------------------- --------------------
Acquisition of subsidiaries - 98 98
--------------------------------- --------------------- -------------------- --------------------
Charge for period - 37 37
--------------------------------- --------------------- -------------------- --------------------
Disposals - (33) (33)
--------------------------------- --------------------- -------------------- --------------------
At 30 September 2011 - 189 189
--------------------------------- --------------------- -------------------- --------------------
Carrying amount at 30 September
2011 - 215 215
--------------------------------- --------------------- -------------------- --------------------
11. TRADE AND OTHER RECEIVABLES
2011 2010
-------------------------------------- -------------------- --------------------
EUR'000 EUR'000
-------------------------------------- -------------------- --------------------
Trade receivables 4,115 2,056
-------------------------------------- -------------------- --------------------
Tenant lease incentives 9,950 8,451
-------------------------------------- -------------------- --------------------
Prepayments and other accrued income 1,054 923
-------------------------------------- -------------------- --------------------
Total trade and other receivables 15,119 11,430
-------------------------------------- -------------------- --------------------
Less: non-current portion - Tenant
lease incentives (6,098) (3,330)
-------------------------------------- -------------------- --------------------
Current portion 9,021 8,100
-------------------------------------- -------------------- --------------------
All trade receivables over 2 months old have been provided against and the movement with regard to bad debt provisions made and carried forward against trade receivables is as follows :
2011 2010
----------------------------- -------------------- --------------------
EUR'000 EUR'000
----------------------------- -------------------- --------------------
Bad debt provisions
----------------------------- -------------------- --------------------
At 1 October 2010 975 543
----------------------------- -------------------- --------------------
Acquisition of subsidiaries 2,367 -
----------------------------- -------------------- --------------------
Charge for period 415 432
----------------------------- -------------------- --------------------
At 30 September 2011 3,757 975
----------------------------- -------------------- --------------------
The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.
12. FINANCIAL ASSETS
2011 2010
------------------------------------- ------------------- -------------------
EUR'000 EUR'000
------------------------------------- ------------------- -------------------
Loans receivable 11,213 10,902
------------------------------------- ------------------- -------------------
Recoverability impairment provision (1,174) (1,292)
------------------------------------- ------------------- -------------------
Total 10,039 9,610
------------------------------------- ------------------- -------------------
Loans receivable represents advances, deposits and related accrued interest for purchases of land in Moldova of EUR2.22m (2010: EUR2.17m), secured on land assets, together with a loan in Romania of EUR8.99m (2010: EUR8.73m) unsecured. Full valuations arrived at on an open market value basis, carried out by independent valuers, Colliers International, have been carried out on the land assets in Moldova as a result of which provision has been made of EUR1.17m (2010: EUR1.29m) for the shortfall between the fair value of the secured land assets and the loans receivable.
The Moldovan loans bear interest at the rate of 6% and the Romanian loan bears interest at a variable rate linked to 3 month Euribor plus a margin of 1.75%. The Moldova loans include interest accrued of EUR0.15m of which EUR0.12m has been provided for as being non-recoverable.
13. CASH AND CASH EQUIVALENTS
2011 2010
-------------------------- ------------------- -------------------
EUR'000 EUR'000
-------------------------- ------------------- -------------------
Cash at bank and in hand 4,059 1,783
-------------------------- ------------------- -------------------
Short term bank deposits 8,126 2,633
-------------------------- ------------------- -------------------
Total 12,185 4,416
-------------------------- ------------------- -------------------
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.
14. LOANS AND BORROWINGS
2011 2010
------------------------------ ------------------- -------------------
EUR'000 EUR'000
------------------------------ ------------------- -------------------
Non-current
------------------------------ ------------------- -------------------
Bank loans 281,367 151,290
------------------------------ ------------------- -------------------
Related party loans 1,532 -
------------------------------ ------------------- -------------------
Redeemable preference shares 5,122 -
------------------------------ ------------------- -------------------
288,021 151,290
------------------------------ ------------------- -------------------
Current
------------------------------ ------------------- -------------------
Bank loans 69,061 75,357
------------------------------ ------------------- -------------------
Related party loans 3,856 -
------------------------------ ------------------- -------------------
72,917 75,357
------------------------------ ------------------- -------------------
Total loans and borrowings 360,938 226,647
------------------------------ ------------------- -------------------
2011 2010
-------------------------------------- ------------------- -------------------
EUR'000 EUR'000
-------------------------------------- ------------------- -------------------
Total gross borrowings outstanding 362,286 227,414
-------------------------------------- ------------------- -------------------
Deferred loan costs (1,348) (767)
-------------------------------------- ------------------- -------------------
Total 360,938 226,647
-------------------------------------- ------------------- -------------------
Represented by :
-------------------------------------- ------------------- -------------------
Net borrowings repayable : within
one year 72,917 75,357
-------------------------------------- ------------------- -------------------
Net borrowings repayable : within
one to two years 81,147 61,747
-------------------------------------- ------------------- -------------------
Net borrowings repayable : within
two to five years 151,830 65,547
-------------------------------------- ------------------- -------------------
Net borrowings repayable : over five
years 55,044 23,996
-------------------------------------- ------------------- -------------------
Total 360,938 226,647
-------------------------------------- ------------------- -------------------
Loans outstanding at 30 September 2011 comprise:
2011 2010
-------------------------------- ------------- ---------- ------------------- -------------------
Interest
Rate Maturity EUR'000 EUR'000
-------------------------------- ------------- ---------- ------------------- -------------------
Bank Loans
-------------------------------- ------------- ---------- ------------------- -------------------
Alpha Bank 5.2% Nov'12 46,510 47,143
-------------------------------- ------------- ---------- ------------------- -------------------
EFG, Bank of Greece, greater Apr'18 60,568 -
Bank of Cyprus, Banca Euribor
Romaneasca (Era Iasi) +2.15% or
5%
-------------------------------- ------------- ---------- ------------------- -------------------
EFG, Bank of Greece, greater Mch'17 59,662 -
Bank of Cyprus, Banca Euribor
Romaneasca (Era Oradea) +4.0% or
5%
-------------------------------- ------------- ---------- ------------------- -------------------
KBC Bank (Sibiu 1) 6.055% Nov'13 59,328 60,016
-------------------------------- ------------- ---------- ------------------- -------------------
KBC Bank (Sibiu 2) 4.755% Jun'16 27,409 27,255
-------------------------------- ------------- ---------- ------------------- -------------------
Euribor
Marfin Popular Bank +8.0% Dec'14 68,007 68,000
-------------------------------- ------------- ---------- ------------------- -------------------
Piraeus Bank Euribor Nov'11 4,392 -
+6.0%
-------------------------------- ------------- ---------- ------------------- -------------------
Euribor
Proton Bank +7.1% Dec'12 25,900 25,000
-------------------------------- ------------- ---------- ------------------- -------------------
351,776 227,414
-------------------------------- ------------- ---------- ------------------- -------------------
Related Party Loans
-------------------------------- ------------- ---------- ------------------- -------------------
Argo Capital Partners
Fund Limited 10% Sept'17 1,517 -
-------------------------------- ------------- ---------- ------------------- -------------------
Argo Capital Partners Euribor Nov'11 800 -
Fund Limited +3.75%
-------------------------------- ------------- ---------- ------------------- -------------------
Argo Distressed Credit
Fund Limited 22.50% on demand 1,300 -
-------------------------------- ------------- ---------- ------------------- -------------------
Millenary Limited 10% on demand 1,000 -
-------------------------------- ------------- ---------- ------------------- -------------------
Ankus Limited 10% on demand 500 -
-------------------------------- ------------- ---------- ------------------- -------------------
Priceton Limited 6% July'12 200 -
-------------------------------- ------------- ---------- ------------------- -------------------
Argo Global Special Situations
Fund Limited 10% on demand 56 -
-------------------------------- ------------- ---------- ------------------- -------------------
SPS Linea Cyprus Limited none Dec'12 15 -
-------------------------------- ------------- ---------- ------------------- -------------------
5,388 -
-------------------------------- ------------- ---------- ------------------- -------------------
Preference Shares Dividend
-------------------------------- ------------- ---------- ------------------- -------------------
NEF 3 (Cayman) 1 Limited 25% compound Sept'13 2,277 -
-------------------------------- ------------- ---------- ------------------- -------------------
NEF 3 (Cayman) 3 Limited 25% compound Sept'13 2,845 -
-------------------------------- ------------- ---------- ------------------- -------------------
5,122 -
-------------------------------- ------------- ---------- ------------------- -------------------
Total loans and borrowings 362,286 227,414
-------------------------------- ------------- ---------- ------------------- -------------------
All bank loans are secured on the assets of Group subsidiary companies.
The fair value of fixed and floating rate loan borrowings approximate to their carrying values at the balance sheet date as the impact of discounting is not significant. The fair values are based on cash flows discounted using rates based on equivalent fixed and floating rates as at the end of the period.
The acquired companies Huincas Properties Limited and Omelit Limited (note 21) 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.
The fair value of the preference shares is considered to be equal to their carrying values at the balance sheet date.
Interest rate Swaps
The Group is required under its financing agreements with KBC Bank 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 EUR59.3m and EUR27.4m 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.
A similar swap financing arrangement in place with Alpha Bank at the beginning of the year was replaced by fixed rate of interest terms under restructuring arrangements put in place with the Bank during the year; the fair value of the swap at the time was incorporated as part of the restructured terms of the loan.
Loan Covenants and Restructurings
(i) Alpha Bank - the ongoing requirement to provide short term tenant incentives for 2010 and into 2011 resulted in the continued temporary reduction of normalised income levels resulting in a breach of its debt service ratio and its loan to value ratio under the Group's loan with Alpha Bank. However, through negotiations with the Bank completed in January 2011 a covenant and capital repayment holiday has been concluded 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.
(ii) KBC Bank (Sibiu 1 and 2) - in order to strengthen the underlying income and attractiveness of the Sibiu shopping centre to customers and tenants alike, the first stage of a proposed asset management initiative has been undertaken during the year whereby the Bank agreed to fund a 4 quarter amortisation holiday for 2011 amounting to some EUR2.5m whereby quarterly amortisation amounts due are paid into a blocked account for use towards construction costs. In addition, the financial covenants under the terms of the loan agreement were waived for a period up to the end of 2012.
As part of the agreed financing terms the Company was obliged to provide an initial equity input amounting to some EUR1.8m to fund the initial part of the project 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.
The final part of the asset management initiative to provide a new front entrance to the shopping centre has been deferred for strategic reasons and as this was outside the original terms of the agreement made with KBC. Negotiations are taking place for an extension of the facility terms into 2012.
(iii) Marfin Popular Bank - 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. It has subsequently been agreed with the Bank that this will be extended for a further 12 month period up until June 2012 on terms consistent with the original loan agreement.
(iv) Proton Bank - 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 took the decision to refrain from paying approximately EUR1.9m of interest due to Proton Bank under its main EUR25m loan agreement. As a result of this the Group is in default on this facility along with the associated EUR0.9m debt facility and is engaged in discussions with the Bank aimed at completing a consensual restructuring of all its obligations to the Bank.
(v) EFG, Bank of Greece, Bank of Cyprus, Banca Romaneasca (Era Iasi) - a syndicated Bank facility of EUR79.5m 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 since the year end and documentation is being finalised. 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) - a syndicated Bank facility of EUR62.25m was put in place in August 2008 for the construction of the Era Shopping Park, Oradea. Agreement was reached with the Banks in mid September following certain covenant breaches following which further drawdowns under the facility have been made toward completion of construction of the centre.
(vii) Piraeus Bank - a Bank facility of some EUR79.5m 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 April 2012 has subsequently been agreed.
15. DEFERRED INCOME TAX
Deferred tax is calculated in full on temporary differences under the liability method using tax rates applicable to each individual territory.
The movement on the deferred tax account is as shown below:
DEFERRED TAX LIABILITY
------------------------------------------- ------------------- -------------------
2011 2010
------------------------------------------- ------------------- -------------------
EUR'000 EUR'000
------------------------------------------- ------------------- -------------------
At 1 October 2010 4,396 5,771
------------------------------------------- ------------------- -------------------
Acquisition of subsidiaries 6,653 -
------------------------------------------- ------------------- -------------------
Charge/(credit) to consolidated statement
of comprehensive income 1,201 (1,375)
------------------------------------------- ------------------- -------------------
At 30 September 2011 12,250 4,396
------------------------------------------- ------------------- -------------------
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
----------------------------- -------------------- ------------------- -------------------
At 1 October 2009 73 5,698 5,771
----------------------------- -------------------- ------------------- -------------------
Charged to consolidated
statement of comprehensive
income - (1,375) (1,375)
----------------------------- -------------------- ------------------- -------------------
At 30 September 2010 73 4,323 4,396
----------------------------- -------------------- ------------------- -------------------
Acquisition of subsidiaries - 6,653 6,653
----------------------------- -------------------- ------------------- -------------------
Charged to consolidated
statement of comprehensive
income - 1,201 1,201
----------------------------- -------------------- ------------------- -------------------
At 30 September 2011 73 12,177 12,250
----------------------------- -------------------- ------------------- -------------------
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 EUR5.0 million (2010: EUR4.6 million).
16. TRADE AND OTHER PAYABLES
2011 2010
------------------------------ ------------------- -------------------
EUR'000 EUR'000
------------------------------ ------------------- -------------------
Trade creditors 3,748 1,341
------------------------------ ------------------- -------------------
Bank & loan interest payable 3,710 976
------------------------------ ------------------- -------------------
Other payables 8,104 3,196
------------------------------ ------------------- -------------------
Other accruals 7,310 1,975
------------------------------ ------------------- -------------------
Total 22,872 7,488
------------------------------ ------------------- -------------------
17. FINANCIAL LIABILITIES
2011 2010
------------------------------ ------------------- -------------------
EUR'000 EUR'000
------------------------------ ------------------- -------------------
Interest rate swap (note 14) 2,513 4,816
------------------------------ ------------------- -------------------
18. SHARE CAPITAL
No. of Share Share Total
shares capital premium
---------------------- --------- ------------------- ------------------- -------------------
millions EUR'000 EUR'000 EUR'000
---------------------- --------- ------------------- ------------------- -------------------
Called up, allotted
and fully paid
---------------------- --------- ------------------- ------------------- -------------------
At 30 September 2010 310 3,100 7,859 10,959
---------------------- --------- ------------------- ------------------- -------------------
Proceeds from shares
issued 298 2,980 10,300 13,280
---------------------- --------- ------------------- ------------------- -------------------
___ ____ ____ ____
---------------------- --------- ------------------- ------------------- -------------------
At 31 September 2011 608 6,080 18,159 24,239
---------------------- --------- ------------------- ------------------- -------------------
___ ____ ____ ____
---------------------- --------- ------------------- ------------------- -------------------
The total number of authorised shares is 1 billion (2010: 450 million) with a par value of EUR0.01 each (2010: 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.
In September 2011 298,041,718 new ordinary shares of EUR0.01 per share were issued to the shareholders of Huincas Properties Limited and Omelit Limited as purchase consideration for 100% of each company's share capital. The fair value of the shares issued amounted to EUR13.4m (EUR0.045 per share). The related transaction costs amounting to EUR0.13m have been netted off with the deemed proceeds.
19. RESERVES
The movement in the reserves for the Group is shown on page 25.
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.
20. SUBSIDIARIES
The Directors consider that to give full particulars of all subsidiary undertakings would lead to excessive length of disclosures and not add to an understanding of the consolidated financial statements. The following information relates to those wholly owned subsidiaries whose results or financial position, in the opinion of the Directors, principally affected the financial affairs of the Group at 30 September 2011:
Culture Holding Sarl (Luxembourg) NREOF Finance BV (Netherlands)
NREOF Cuza Sarl (Luxembourg) NREOF Moldova BV (Netherlands)
NREOF Holding Sarl (Luxembourg) Melandra Finance BV (Netherlands)
NREOF Leopold Sarl (Luxembourg) NREOF Holding LP (Caymans)
NREOF Sibiu Sarl (Luxembourg) Park Avenue Invest Srl (Moldova)
Central Park Invest Cyprus Ltd (Cyprus) Retail Land West Srl (Moldova) Retail Land West Invest Cyprus Ltd (Cyprus) Retail Land East Srl (Moldova)
Huincas Properties Limited (Cyprus) NRE Sibiu Shopping City Srl (Romania)
Omelit Limited (Cyprus) Ermes Holding Srl (Romania)
Triton Holdings LLC (Ukraine) Omilos Oradea Srl (Romania)
Novi Biznes Poglyady LLC (Ukraine) Suceava Shopping City Srl (Romania)
Parkcity LLC (Ukraine) Belrom Trei Srl (Romania)
Biznescapital LLC (Ukraine) Tora Brand Srl (Romania)
These companies are 100% controlled within the Group, the ultimate parent being Argo Real Estate Opportunities Fund Limited, with the exceptions of Suceava Shopping City Srl which is a 50% controlling interest and Park Avenue Invest Srl which is a 90% controlling interest. Although the Group only owns 50% of Suceava Shopping City Srl, control over operational and financial decisions is exercised through a shareholder agreement.
21. 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.
Since the acquisition date, the companies acquired as described above have contributed EUR0.3m to the gross rental income and EUR3.6m of losses to the Group. If the acquisition had occurred on 1 October 2010, these companies would have contributed EUR5.9m to the gross rental income and EUR1.8m of losses to the Group.
There were no acquisitions in the year ended 30 September 2010.
22. 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.
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 16. The total charge to the income statement during the year of 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. During the year management fees of EUR2 million (2010: EUR2 million) have been incurred of which EUR1.5 million (2010: EUR0.3 million) is accrued at the year end.
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.
Acquisition of Subsidiaries
The subsidiaries acquired during the year as detailed in note 21 were purchased from 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 the subsidiaries were acquired 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.
Related Party Loans
Various loans as shown in note 14 have been made to subsidiaries in the Group by Funds managed by Argo Capital Management Cyprus Limited which as explained above is related to The Manager.
23. 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. Rental income from operating leases is recognised as rental income on a straight line basis over the term of the relevant lease.
The future anticipated lease receipts under non-cancellable operating leases which are not recognised as an asset at 30 September 2011 are as follows:
2011 2010
---------------------------------------- ------------------- -------------------
EUR'000 EUR'000
---------------------------------------- ------------------- -------------------
Within 1 year 27,557 22,348
---------------------------------------- ------------------- -------------------
After 1 year and no later than 5 years 103,312 79,238
---------------------------------------- ------------------- -------------------
After 5 years 110,720 94,163
---------------------------------------- ------------------- -------------------
241,589 195,749
---------------------------------------- ------------------- -------------------
24. 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 3.5m, 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.
25. 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 2011 but not yet incurred is as follows:
2011 2010
------------------------------- ------------------- -------------------
EUR'000 EUR'000
------------------------------- ------------------- -------------------
Investment properties 7,451 -
------------------------------- ------------------- -------------------
Property, plant and equipment - 44
------------------------------- ------------------- -------------------
7,451 44
------------------------------- ------------------- -------------------
26. EVENTS AFTER THE BALANCE SHEET DATE
Bank Financing
In December 2011 the Company decided not to pay its interest due to Proton Bank which created a default on its loan facility as more fully explained in note 14.
27. TREASURY POLICIES AND FINANCIAL RISK MANAGEMENT
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, interest rate risk, credit risk, liquidity risk and currency risk arising from the financial instruments it holds. The risk management policies employed by the Group to manage these risks are discussed below.
Market risk
(a) 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, notably floating to fixed interest rate swaps (see note 14).
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 2011 was as follows:
Total Fixed Variable Non interest Weighted
EUR'000 rate rate EUR'000 bearing avg. rate
EUR'000 EUR'000 %
----------------------- --------- --------- -------------- ----------------- -----------
Financial assets
----------------------- --------- --------- -------------- ----------------- -----------
Loans receivable 10,039 1,050 8,989 - 3.6
----------------------- --------- --------- -------------- ----------------- -----------
Trade and other
receivables 4,115 - - 4,115 -
----------------------- --------- --------- -------------- ----------------- -----------
Cash and cash
equivalents 12,185 - 8,126 4,059 3.8
----------------------- --------- --------- -------------- ----------------- -----------
Total financial
assets 26,339 1,050 17,115 8,174 3.1
----------------------- --------- --------- -------------- ----------------- -----------
Total Fixed Variable Non interest Weighted
EUR'000 rate rate EUR'000 bearing avg. rate
EUR'000 EUR'000 %
----------------------- --------- --------- -------------- ----------------- -----------
Financial liabilities
----------------------- --------- --------- -------------- ----------------- -----------
Bank loans 350,428 132,999 217,429 - 6.4
----------------------- --------- --------- -------------- ----------------- -----------
Other loans 5,388 4,573 800 15 12.1
----------------------- --------- --------- -------------- ----------------- -----------
Preference shares 5,135 5,135 - - 25.0
----------------------- --------- --------- -------------- ----------------- -----------
Interest rate
swap 2,513 2,513 - - 3.9
----------------------- --------- --------- -------------- ----------------- -----------
Trade and other
payables 19,144 - - 19,144 -
----------------------- --------- --------- -------------- ----------------- -----------
Total financial
liabilities 382,608 145,220 218,229 19,159 6.4
----------------------- --------- --------- -------------- ----------------- -----------
The interest rate profile of the Group at 30 September 2010 was as follows:
Financial assets
----------------------- --------- --------- -------------- ------------- -----------
Loans receivable 9,610 879 8,731 - 2.9
----------------------- --------- --------- -------------- ------------- -----------
Trade and other
receivables 2,056 - - 2,056 -
----------------------- --------- --------- -------------- ------------- -----------
Cash and cash
equivalents 4,416 - 2,633 1,783 9.1
----------------------- --------- --------- -------------- ------------- -----------
Total financial
assets 16,082 879 11,364 3,839 4.2
----------------------- --------- --------- -------------- ------------- -----------
Total Fixed Variable Non interest Weighted
EUR'000 rate rate EUR'000 bearing avg. rate
EUR'000 EUR'000 %
----------------------- --------- --------- -------------- ------------- -----------
Financial liabilities
----------------------- --------- --------- -------------- ------------- -----------
Bank loans 226,647 133,909 92,738 - 6.8
----------------------- --------- --------- -------------- ------------- -----------
Interest rate
swap 4,816 4,816 - - 3.9
----------------------- --------- --------- -------------- ------------- -----------
Trade and other
payables 6,258 - - 6,258 -
----------------------- --------- --------- -------------- ------------- -----------
Total financial
liabilities 237,721 138,725 92,738 6,258 6.6
----------------------- --------- --------- -------------- ------------- -----------
For the Group an increase of 100 basis points in interest rates would result in an increase of the post tax profit (2010 loss) for the year of EUR0.86m (2010: EUR0.88m). A decrease of 100 basis points in interest rates would result in a decrease of the post tax profit (2010 loss) for the year of EUR0.86m (2010: EUR0.88m).
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.
(b) 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 from future commercial transactions, recognised monetary assets and liabilities and net investments in foreign operations.
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 2011.
The Group's assets and liabilities at carrying amounts are included in the table, categorised by the currency at their carrying amount.
2011 EUR RON MDL UAH Total
----------------------------- --------------- --------------- --------------- --------------- ---------------
EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
----------------------------- --------------- --------------- --------------- --------------- ---------------
Trade and other receivables 78 9,548 10 5,483 15,119
----------------------------- --------------- --------------- --------------- --------------- ---------------
Financial assets 8,989 - 1,050 - 10,039
----------------------------- --------------- --------------- --------------- --------------- ---------------
Cash and cash equivalents 58 8,636 13 3,478 12,185
----------------------------- --------------- --------------- --------------- --------------- ---------------
Total financial assets 9,125 18,184 1,073 8,961 37,343
----------------------------- --------------- --------------- --------------- --------------- ---------------
Bank loans 350,428 - - - 350,428
----------------------------- --------------- --------------- --------------- --------------- ---------------
Other loans 15,486 - - - 15,486
----------------------------- --------------- --------------- --------------- --------------- ---------------
Preference shares 5,135 - - - 5,135
----------------------------- --------------- --------------- --------------- --------------- ---------------
Trade and other payables 7,330 14,512 65 965 22,872
----------------------------- --------------- --------------- --------------- --------------- ---------------
Financial liabilities 2,513 - - - 2,513
----------------------------- --------------- --------------- --------------- --------------- ---------------
Total financial liabilities 380,892 14,512 65 965 396,434
----------------------------- --------------- --------------- --------------- --------------- ---------------
Net balance sheet currency
position (371,767) 3,672 1,008 7,996 (359,091)
----------------------------- --------------- --------------- --------------- --------------- ---------------
2010 EUR RON MDL UAH Total
----------------------------- --------------- --------------- --------------- --------------- ---------------
EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
----------------------------- --------------- --------------- --------------- --------------- ---------------
Trade and other receivables 74 5,720 7 5,629 11,430
----------------------------- --------------- --------------- --------------- --------------- ---------------
Financial assets 8,731 - 879 - 9,610
----------------------------- --------------- --------------- --------------- --------------- ---------------
Cash and cash equivalents 1,221 984 41 2,170 4,416
----------------------------- --------------- --------------- --------------- --------------- ---------------
Total financial assets 10,026 6,704 927 7,799 25,456
----------------------------- --------------- --------------- --------------- --------------- ---------------
Bank loans 226,647 - - - 226,647
----------------------------- --------------- --------------- --------------- --------------- ---------------
Trade and other payables 889 3,781 65 2,753 7,488
----------------------------- --------------- --------------- --------------- --------------- ---------------
Financial liabilities 4,816 - - - 4,816
----------------------------- --------------- --------------- --------------- --------------- ---------------
Total financial liabilities 232,352 3,781 65 2,753 238,951
----------------------------- --------------- --------------- --------------- --------------- ---------------
Net balance sheet currency
position (222,326) 2,923 862 5,046 (213,495)
----------------------------- --------------- --------------- --------------- --------------- ---------------
If the euro weakened/strengthened by 10% against the Romanian Ron with all other variables held constant, post tax profit (2010 loss) for the year would have been EUR367k higher/lower (2010 : EUR293k higher/lower).
If the euro weakened/strengthened by 10% against the Moldovan Leu with all other variables held constant, post tax profit (2010 loss) for the year would have been EUR101k lower/higher (2010 : EUR86k lower/higher).
If the euro weakened/strengthened by 10% against the Ukrainian Hryvnia with all other variables held constant, post tax profit (2010 loss) for the year would have been EUR800k lower/higher
(2010: EUR1,554k lower/higher).
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, for example a change of interest rates and a change of foreign exchange rates.
(c) Credit risk
Credit risk arises from cash and cash equivalents as well as credit exposures with respect to rental customers, 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 that are less than three months overdue are not considered impaired. The ageing of trade receivables is as follows:
2011 2010
--------------- ------------------- -------------------
EUR'000 EUR'000
--------------- ------------------- -------------------
0 to 3 months 4,115 2,056
--------------- ------------------- -------------------
Over 3 months - -
--------------- ------------------- -------------------
Total 4,115 2,056
--------------- ------------------- -------------------
Further disclosure regarding the Group's exposure to credit risk in respect of its trade receivables is provided in note 11.
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 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 12).
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:
2011 2011
--------------------------- -------------------- --------------------
EUR'000 EUR'000
--------------------------- -------------------- --------------------
Carrying Maximum
value exposure
(unsecured)
--------------------------- -------------------- --------------------
Loans receivable 10,039 8,989
--------------------------- -------------------- --------------------
Trade receivables 4,115 -
--------------------------- -------------------- --------------------
Cash and cash equivalents 12,185 12,185
--------------------------- -------------------- --------------------
Total 26,339 21,174
--------------------------- -------------------- --------------------
2010 2010
--------------------------- -------------------- --------------------
EUR'000 EUR'000
--------------------------- -------------------- --------------------
Carrying Maximum
value exposure
(unsecured)
--------------------------- -------------------- --------------------
Loans receivable 9,610 8,733
--------------------------- -------------------- --------------------
Trade receivables 2,056 -
--------------------------- -------------------- --------------------
Cash and cash equivalents 4,416 4,416
--------------------------- -------------------- --------------------
Total 16,082 13,149
--------------------------- -------------------- --------------------
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 12. 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.
(d) 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 14).
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:
2011 2010
------------------------------------- ------------------- -------------------
EUR'000 EUR'000
------------------------------------- ------------------- -------------------
Financial assets - current
------------------------------------- ------------------- -------------------
Trade and other receivables 4,115 2,056
------------------------------------- ------------------- -------------------
Loans receivable 10,039 9,610
------------------------------------- ------------------- -------------------
Cash and cash equivalents 12,185 4,416
------------------------------------- ------------------- -------------------
Total 26,339 16,082
------------------------------------- ------------------- -------------------
Financial liabilities - non-current
borrowings
------------------------------------- ------------------- -------------------
Between 1 and 2 years:
------------------------------------- ------------------- -------------------
Bank loans 81,240 61,991
------------------------------------- ------------------- -------------------
Between 2 and 5 years:
------------------------------------- ------------------- -------------------
Bank loans 147,333 65,793
------------------------------------- ------------------- -------------------
Related party loans 15 -
------------------------------------- ------------------- -------------------
Preference shares 5,122 -
------------------------------------- ------------------- -------------------
Over 5 years:
------------------------------------- ------------------- -------------------
Bank loans 53,858 24,149
------------------------------------- ------------------- -------------------
Related party loans 1,517 -
------------------------------------- ------------------- -------------------
289,085 151,933
------------------------------------- ------------------- -------------------
Financial liabilities - current
------------------------------------- ------------------- -------------------
Bank loans 69,345 75,481
------------------------------------- ------------------- -------------------
Related party loans 3,856 -
------------------------------------- ------------------- -------------------
Interest swap 2,513 4,816
------------------------------------- ------------------- -------------------
Trade and other payables 19,144 6,258
------------------------------------- ------------------- -------------------
94,858 86,555
------------------------------------- ------------------- -------------------
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.
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 2011, the Group's strategy, which was unchanged from 2010, was to seek to achieve a gearing ratio at around 70%. The gearing ratio at 30 September 2011 and 2010 were as follows:
2011 2010
---------------------------------- ------------------- -------------------
EUR'000 EUR'000
---------------------------------- ------------------- -------------------
Total borrowings 360,938 226,647
---------------------------------- ------------------- -------------------
Less : cash and cash equivalents (12,185) (4,416)
---------------------------------- ------------------- -------------------
Net debt 348,753 222,231
---------------------------------- ------------------- -------------------
Total equity 65,710 24,861
---------------------------------- ------------------- -------------------
Total capital 414,463 247,092
---------------------------------- ------------------- -------------------
Gearing ratio 84.1% 89.9%
---------------------------------- ------------------- -------------------
The decrease in leverage in the year is predominantly due to the effect of the slightly lower
gearing of the acquired subsidiaries and their effect on the overall Group position
This information is provided by RNS
The company news service from the London Stock Exchange
END
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