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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
---|---|---|---|---|---|
Raven Russia | LSE:RUS | London | Ordinary Share | GB00B0D5V538 | ORD 1P |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 45.50 | 45.60 | 46.80 | 0.00 | 01:00:00 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
---|---|---|---|---|---|
0 | 0 | N/A | 0 |
TIDMRUS
RNS Number : 3390H
Raven Russia Limited
12 March 2018
12 March 2018
Raven Russia Limited ("Raven Russia" or the "Company")
Results for the year ended 31 December 2017
The Board of Raven Russia releases the results for the year ended 31 December 2017.
Highlights
-- IFRS profit after tax $57.7 million (2016: profit of $7.7 million); -- Underlying earnings after tax of $56.8 million (2016: $47.1 million); -- Basic underlying earnings per share 8.56 cents (2016: 7.17 cents); -- IFRS basic earnings per share 8.69 cents (2016: 1.17 cents); -- Year end cash balance of $266.7 million (2016: $198.6 million); -- Diluted net asset value per share 80 cents (2016: 71 cents); -- Completed $209 million of acquisitions in the year; and
-- A 50% increase in distributions to 3p (2016: 2p) by way of tender offer buy back of 1 in 17 shares at 52p.
CEO Glyn Hirsch said "We are delighted with the overall results for 2017. NOI is up 10% to $166.7 million, underlying earnings per share are up 19% to 8.56 cents and diluted net asset value per share is up 13% to 80 cents. The distribution of 4p for the year is a 60% increase over the 2.5p in 2016."
Enquiries
Raven Russia Limited Tel: + 44 (0) 1481 712955
Anton Bilton
Glyn Hirsch
Novella Communications Tel: +44 (0) 203 151 7008
Tim Robertson
Toby Andrews
N+1 Singer Tel: +44 (0) 207 496 3000
Corporate Finance - James Maxwell / Liz Yong
Sales - Alan Geeves / James Waterlow
Numis Securities Limited Tel: + 44 (0) 207 260 1000
Alex Ham / Jamie Loughborough / Alasdair Abram
Ravenscroft Tel: +44 (0) 1481 729100
Jade Cook
This announcement contains forward-looking statements that involve risk and uncertainties. The Group's actual results could differ materially from those estimated or anticipated in the forward-looking statements as a result of many factors. Information contained in this announcement relating to the Company should not be relied upon as a guide to future performance.
About Raven Russia
Raven Russia was founded in 2005 to invest in class A warehouse complexes in Russia and lease to Russian and International tenants. Its Ordinary Shares, Preference Shares and Warrants are listed on the Main Market of the London Stock Exchange and admitted to the Official List of The International Stock Exchange ("TISE"). Its Convertible Preference Shares are admitted to the Official List of TISE and trading on the SETSqx market of the London Stock Exchange. The Group operates out of offices in Guernsey, Moscow and Cyprus and has an investment portfolio of circa 1.8 million square metres of Grade "A" warehouses in Moscow, St Petersburg, Rostov-on-Don and Novosibirsk and 49,000 square metres of commercial office space in St Petersburg. For further information visit the Company's website: www.ravenrussia.com
Chairman's Message
I am delighted to report that the results for the year have exceeded our expectations and that we are achieving our objective of an acquisition driven business model. In addition, and through a doggedly tenacious approach to planning, we have won various planning consents on our legacy UK land bank and achieved large gains which have added further gloss to the year. I take this opportunity to applaud the executive team for their hard efforts in this regard.
We were successful in completing two acquisition projects in the year, an office portfolio and a warehouse in St Petersburg in April and a large logistics complex in Moscow in November. Consideration for the acquisitions totalled $209 million and should generate a minimum of $24 million of net operating income ("NOI") in the current year.
The acquisitions were part funded by a second issue of convertible preference shares in July 2017, raising $126 million.
With significant cash reserves and the potential to secure finance on the last acquisition, we are actively pursuing further income producing acquisitions in a number of different asset classes.
Underlying earnings have increased to $56.8 million (2016: $47.1 million) and basic underlying earnings per share to 8.56 cents (2016: 7.17 cents). With a revaluation gain of $38.2 million (2016: loss of $43.3 million), the first gain in our portfolio values since 2013, our IFRS earnings increased to $57.7 million (2016: $7.7 million) and diluted net asset value per share to 80 cents (2017: 71 cents).
We are proposing a final distribution of 3p, paid by way of a tender offer buy back of 1 share in every 17 at 52p. This will give a total distribution of 4p for the year.
We are again extremely grateful for the continued support of our shareholders over the last twelve months.
Richard Jewson
Chairman
11 March 2018
Strategic Report
Chief Executive's Report
Dear Shareholders,
We are delighted with the overall results for 2017. NOI is up 10% to $166.7 million, underlying earnings per share are up 19% to 8.56 cents and diluted net asset value per share is up 13% to 80 cents.
With year end cash balances of $266.7 million, we are increasing the distribution per share by 50% to 3p per share. As usual this distribution will be made by way of a tender offer buy back of shares, this time for 1 in 17 shares held at a price of 52 pence per share. We intend to allow shareholders to subscribe for more than their pro rata entitlement.
We took advantage of the strong UK housing market by selling most of our UK strategic land holdings. This generated a profit of $20.2 million and cash of $21.6 million for Raven Mount in the year. These assets were acquired with Raven Mount PLC in 2008 for $0.7 million.
In relation to our joint venture with the Russian CoOp we are at the early planning stage of a pilot project. This has potential both for property returns and for our third party logistics operator, Roslogistics, in managing the sites.
Our core business of logistics warehousing has performed well. We still fight the medium term "Roubilisation" of rents through letting space (187,100sqm in 2017) and by strategic acquisitions.
Favourable market conditions gave us the opportunity to acquire four properties in two transactions in Moscow and St Petersburg for a combined consideration of RUR11.989 billion ($209 million). Both purchases represent attractive prices per sqm relative to replacement cost.The St Petersburg acquisition of three separate properties was completed in April and added 87,000sqm of Grade A warehousing and 33,000sqm of offices for a total consideration of RUR4.9 billion ($86 million) at an initial yield of 16%. The properties were 98% leased at acquisition to 68 tenants including Otis, Oracle, YIT, Schenker and Maersk. In November we completed the acquisition of Logopark Sever, a new Grade A warehouse complex of 195,000sqm to the north of Moscow. The property was 73% leased at completion to major tenants including Obi, Okey, Major Logistics and Miratorg and is 83% let today. Total consideration based on letting of the vacant space over the next 18 months is estimated at RUR7.089 billion ($123 million) which would produce a yield of 11.38% and a reversionary yield of 12.51%.
These acquisitions contributed $10 million of NOI to the 2017 results and should contribute at least $24 million of NOI in 2018.
As previously indicated, at this stage of the Russian property cycle and in a quest for income, we have successfully broadened our focus into property sectors other than logistics warehousing. We anticipate that this will continue as our strategy of seeking high quality income producing acquisitions continues alongside active management of the existing portfolio. The Group's significant cash balance provides us with the financial resource to achieve this. We expect further news during the year.
Longstanding shareholders know that our business can, and has been, significantly affected by geo-political events. Fortunately, 2017 was a year of relative stability.
The Rouble/Dollar remained within a range of 55 to 60. The oil price has slowly improved and now stands at $64 per barrel. The Russian economy has stabilised and returned to growth despite sanctions. 2017 GDP growth was 1.5%, inflation fell from 5.4% to 2.5% and central bank rates have fallen from 10% to 7.5%. Although we will not rely on it, most commentators forecast further improvements in 2018 and beyond. With some fair economic winds and the continued implementation of our strategy of acquisitions, alongside organic growth, we believe that shareholders will be rewarded.
We would like to thank our shareholders for their continued support and encouragement, particularly those who do not delegate their voting responsibilities to voting agencies. Compliance, regulation and political correctness are time consuming issues for businesses and we continue to deal with them with our customary professionalism and sense of humour.
Glyn Hirsch
Chief Executive Officer
11 March 2018
Business Model
Our Strategy
We continue with our strategy of acquiring and maintaining our core investment portfolio of Grade A logistics warehouses in Russia with the aim of producing rental income that delivers progressive distributions to our shareholders.
But whilst we remain focussed on the logistics market we will consider alternative asset class acquisitions if the property and financial metrics are attractive.
As our lease terms convert from US Dollar pegged to Rouble income, our evolving acquisition strategy is bearing fruit in supporting our net operating income through that transition.
Business Model
The fundamentals of our business model have not changed. We have a portfolio of assets with a high yield to cost of circa 12% and bank financing costs of approximately 7%. The significant change in that model has been our exposure to foreign currency risk. Prior to 2015, we operated a US Dollar model and today we continue our transition to a Rouble model.
At the year end, 46% of our warehouse income was denominated in Roubles (2016: 24%). These leases represent 47% of the Gross Lettable Area ("GLA") of our warehouse portfolio (2016: 26%). Our banking facilities remain predominately US Dollar denominated and over the past two years we have reduced and restructured facilities to increase covenant headroom and build in a safety margin on debt service should exchange rates move against us. Each of the facilities secured on our warehouse assets sits in a special purpose vehicle ("SPV") structure to minimise recourse to the overall portfolio and holding company. At the year end, asset specific debt represented 53% loan to value (2016: 55%).
Our office portfolio has a different currency mix. 49% of income is Rouble denominated, 39% Euro and 12% US Dollar. Two of the assets have sole tenants and we have refinanced the portfolio of three assets with a Euro loan.
As Russian Central Bank rates continue to reduce, the plan for the next stage of adapting our business model is to move banking facilities to a Rouble/currency mix. This will start the process of reducing our foreign currency risk while managing the cost of debt. Ultimately, the Russian Central Bank rates do not have far to fall before we consider moving to full Rouble facilities and if market commentary is correct, we may not have long to wait for that to be the case. We are having an open dialogue with all of our banking partners on this transition process.
Our average letting size by tenant is 8,760sqm (2016: 11,240sqm). We do not have one tenant with more than 11% (2016: 11%) of our portfolio's GLA and the top ten tenants account for 41% (2016: 46%) of our portfolio in GLA terms and 54% (2016: 58%) in income terms.
Key Performance Indicators ('KPIs')
We continue to focus on occupancy KPIs together with the currency mix of income and how that is likely to change over the medium term. Cash flows after interest and debt amortisation, a measure of debt service cover, influenced our decision to restructure our existing bank facilities and issue new convertible preference shares.
The ability to distribute to ordinary shareholders from cash covered underlying earnings and operating cash-flows after interest remains our focus when determining distribution policy.
All of the above underpin financial targets set for annual bonus incentives.
Portfolio Review
Leasing and maturities
Warehouse Moscow St Petersburg Regions ----------------- ------------ -------------- ---------- Space (000 sqm) 1,274 (72%) 270 (15%) 222 (13%) NOI ($m) 101 (75%) 19 (14%) 16 (11%) ----------------- ------------ -------------- ---------- Office Moscow St Petersburg Regions ----------------- ------------ -------------- ---------- Space (000 sqm) - 49 (100%) - NOI ($m) - 9 (100%) - ----------------- ------------ -------------- ----------
During the year we made two significant acquisitions, three properties in St Petersburg and Logopark Sever, a warehouse complex north of Moscow, for a total consideration of $209 million. The acquisition of Logopark Sever did not have a material impact in 2017 as this was completed in November but we expect it to contribute $13.8 million of NOI during 2018.
Vacancy has remained stable on a like for like basis and stands at 19% including acquisitions. Although the statistics have remained broadly static there has been a considerable amount of activity in the portfolio.
'000 sqm 2017 2018 2019 2020 2021-2027 Total -------------------------- ------ ----- ----- ----- ---------- ------ Maturity profile at 1 January 2017 215 165 252 179 392 1,203 Maturities profile of the acquired assets 44 31 21 19 147 262 Subtotal 259 196 273 198 539 1,465 Lease extensions (97) (79) (22) 0 0 (198) Vacated/terminated (162) (14) (4) 0 0 (180) Remaining lease maturity profile 0 103 247 198 539 1,087 -------------------------- ------ ----- ----- ----- ---------- ------
198,100sqm of existing leases have been renegotiated and extended in the financial year. Space vacated on maturity and early terminations of weaker covenants totalled 179,600sqm which, together with existing vacant space, gives 342,900sqm of vacancy at 31 December 2017. The result is a new lease maturity profile as follows:
'000 sqm 2018 2019 2020 2021-2027 Total --------------------------------- ----- ----- ----- ---------- ------ Remaining lease maturity profile 103 247 198 539 1,087 Maturity profile of lease extensions 51 0 78 69 198 New leases 15 17 32 123 187 Maturity profile at 31 December 2017 169 264 308 731 1,472 --------------------------------- ----- ----- ----- ---------- ------
This reflects 187,100sqm of new leases signed in the year in addition to the 198,100sqm of existing lease renegotiations. There are also potential breaks in the portfolio of 78,300sqm in 2018 and 79,000sqm in 2019. Significant new lettings include 27,200sqm to Makita in Moscow, 8,000sqm to Mars in Rostov and Wildberries (one of the largest Russian internet retailers) doubling their space to 10,000sqm in Novosibirsk.
Since the year end, a further 53,000sqm of renewals, 21,000sqm of new lettings have been completed. In addition, letters of intent on vacant space of 38,000sqm and lease extensions of 8,400sqm have been signed.
The warehouse and office markets in which we operate are now almost exclusively Rouble denominated and although we still have historic long term contracts in US Dollars and Euros these are continuing to unwind. New lease terms are shorter, generally contain breaks and are Rouble denominated but they have the benefit of annual indexation linked to Russian CPI.
At the year end 31% (2016: 50%) of our warehouse GLA had US Dollar denominated leases with an average warehouse rental level of $143 per sqm (2016: $125 per sqm) and a weighted average term to maturity of 3.0 years (2016: 3.0 years). Rouble denominated or capped leases account for 47% (2016: 26%) of our total warehouse space with an average warehouse rent of Roubles 5,200 per sqm (2016: 5,120 per sqm) and weighted average term to maturity of 3.6 years (2016: 4 years). Rouble leases have an average minimum annual indexation of 6.8% (2016: 7.7%). Average rents on new lettings during the year were Roubles 3,870 per sqm and for renewals Roubles 5,250 per sqm.
Currency exposure of warehouse space USD USD/RUB cap RUB EUR Vacant Total -------------------------------------- ------ ------------ ------ ------ ------- ------ sqm sqm sqm sqm Sqm sqm '000 '000 '000 '000 '000 '000 -------------------------------------- ------ ------------ ------ ------ ------- ------ 551 37 785 50 343 1,766 -------------------------------------- ------ ------------ ------ ------ ------- ------ % of total 31% 2% 45% 3% 19% 100% -------------------------------------- ------ ------------ ------ ------ ------- ------ Currency exposure of NOI USD USD/RUB cap RUB EUR Total -------------------------- ---- ------------ ---- ---- ------ % of total 62% 5% 27% 6% 100% -------------------------- ---- ------------ ---- ---- ------
Investment Portfolio
Moscow
We have ten projects in Moscow, including Logopark Sever, totalling 1,274,000sqm, and with 78% of space let at the year end.
Year end Warehouse complex Space (000 sqm) NOI ($m) Occupancy ------------------- ---------------- --------- ----------- Pushkino 214 12 80% Istra 206 24 94% Noginsk 204 26 80% Sever 195 1 83% Klimovsk 158 15 68% Krekshino 118 15 99% Nova Riga 68 1 29% Lobnya 52 6 88% Sholokhovo 45 0 6% Southern 14 1 77% ------------------- ---------------- --------- -----------
The Moscow portfolio had a net reduction in occupied area of 23,600sqm during the year as lease expiries ran at a faster rate than new lettings. Moscow remains the most competitive market in which we operate, although the reduction in the amount of new space being built means the market has certainly stabilised.
St Petersburg and Regions
Year end Warehouse complex Space ('000 sqm) NOI ($m) Occupancy ------------------- ----------------- --------- ----------- St Petersburg Shushary 148 13 97% Gorigo 85 3 82% Pulkovo 37 3 79% ------------------- ----------------- --------- ----------- Regions Novosibirsk 121 10 94% Rostov 101 6 73% ------------------- ----------------- --------- ----------- Office ------------------- ----------------- --------- ----------- St Petersburg Kellerman 22 3 99% Constanta 16 3 100% Primium 11 3 100% ------------------- ----------------- --------- -----------
Occupancy in the regional markets of St Petersburg and Novosibirsk continues to be better than in Moscow, driven by demand from retailers and a lack of over supply because of less historic speculative development. Although Rostov was more competitive in 2016 and 2017, since the year end we have secured additional lettings of 9,600sqm and we are now 83% let. We have signed long term agreements with both Metro in Novosibirsk and Mars in Rostov where we have adapted premises to incorporate temperature controlled sections of the warehouse for the storage of specialist goods.
Since the acquisition of the St Petersburg portfolio we have worked hard to extend and enhance the income profile. At Kellerman we have signed a new six year lease without break with the largest tenant and increased the area they occupy and rental level by 33% and 35% respectively. We are in discussions with various other tenants on similar deals.
Tenant Mix
Warehouse Distribution Retail Manufacturing Third Party Logistics operators Other Tenant Type -------------------- ------------- ------------ -------------- -------------------------------- ---------- Space ('000 sqm) 291 (21%) 402 (28%) 172 (12%) 512 (36%) 46 (3%) -------------------- ------------- ------------ -------------- -------------------------------- ----------
Portfolio Yields
Warehouse Moscow (%) St Petersburg (%) Regions (%) ----------- ------------- ------------------ ------------ 2016 12 - 13 13.25 13.25 2017 11.25 - 12.5 12.5 12.5 ----------- ------------- ------------------ ------------
The investment properties and additional phases of existing projects were valued by Jones Lang LaSalle ("JLL") at the year end, in accordance with the RICS Valuation and Appraisal guidelines, and are carried at a market value of $1.63 billion (see notes 11 & 12 to the financial statements). This has resulted in a net profit on revaluation of $38.2 million in portfolio value during the year.
Overall JLL have sharpened their yield assumptions for the portfolio although in general they still quote a range for yield across all sectors to reflect the difference in quality of assets, leases and differing currencies. The yields used for the portfolio fall within this range.
Estimated rental values ("ERVs") have remained static during the year, although the consensus is that they have now found their floor and the next move will be upwards, albeit gradually.
In the property investment market it is clear that the there is a two way tension. On the one hand the Central Bank of Russia has reduced its key lending rate from 10% to 7.5% since the start of 2017. Although this does not have a direct and immediate impact on the prices investors will pay for assets it is clear the risk premium for property assets has become more attractive. The cost of borrowing in Roubles has also fallen, making local currency funding increasingly attractive. On the other hand there are a number of forced or distressed sellers who wish to leave the market. This is primarily a function of the negative view of Russia in the Western press and a number of funds set up in 2007 and 2008 reaching the end of their life. This means there is not yet a clear trend for prices, although domestic buyers remain the most active.
Land Bank
Location Property/Warehouse Land plot size Complex (ha) ------------------------ ---------- -------------------- --------------- Additional phases of completed property Moscow Noginsk 26 ------------------------ Nova Riga 25 Lobnya 6 Regions Rostov-On-Don 27 ---------- --------------------------------------------- --------------- Land bank Regions Omsk 19 Omsk 2 9 Ufa 48 Novgorod 44 -------------------------------------------------------- --------------- Total 204 ---------------------------------------------------------- ---------------
We continue to hold just over 50ha of land in Moscow for future development where we could build an additional 250,000sqm, although for the foreseeable future we do not anticipate starting development unless we secure pre-lets.
Our 6ha of development land at Lobnya, Moscow have been affected by recent changes in local highway planning. Since the year end these changes have been upheld by the court and as a consequence we have written down the carrying value of the land.
The Market
As indicated a year ago, the level of new development in the warehouse sector in the Moscow region has reduced during the year with new supply almost halving to just over 500,000sqm. Take up was almost 1.2 million sqm and as a result the vacancy rate in the market has fallen to around 9%. Demand was strongest from retail and distribution businesses who accounted for 39% and 19% of the take up respectively. The warehouse market is now almost without exception denominated in Roubles and rents are in the range of Roubles 3,600 per sqm to Roubles 4,000 per sqm for Grade A space.
Vacancy in our portfolio, especially in Moscow, remains higher than the general market as existing leases expire and new letting activity fails to keep pace. There are still a number of other developers who are leasing space at rents which we feel are below real market levels which is something we will resist doing as we believe it destroys value. As the economy stabilises we expect to see an improvement in letting activity in our portfolio during the year. This is already being reflected in the activity we have seen since the year end.
In St Petersburg and our two regional hubs of Rostov and Novosibirsk rental levels are broadly the same, although the lack of completion and tighter markets mean they are more often at the higher end of this range.
Investment volumes in the year increased to $4.6 billion, with 79% of this in Moscow. Over 80% of all deals were funded by Russian capital, and only 8% of the total capital or $370m went into the warehouse sector. JLL indicate prime yields in the range of 11-12.5% for Moscow warehouses.
There is certainly a general market view that 2018 will be a year of continued improvement on all fronts, including rents, yields and occupancy driven by a general improvement in the wider economy, lower central bank rates and market forces in the property sector.
Finance Review
We continue to assess our ability to make covered distributions with reference to underlying earnings and operating cash-flows after interest. The former also allows a comparison of operating results before mark to market valuation movements. The reconciliation between underlying and IFRS earnings is given in note 9 to the accounts.
Underlying Earnings 2017 2016 (Adjusted non IFRS measure) $'000 $'000 --------------------------------------------- --------- ------------------- Net rental and related income 166,729 151,741 Administrative expenses (25,343) (24,221) Long term incentives (1,635) (3,133) Bad debt provision - (22) Foreign exchange gains 9,229 18,079 Share of profits of joint ventures 2,074 1,780 --------- ------------------- Operating profit 151,054 144,224 Net finance charge (78,087) (81,923) --------- ------------------- Underlying profit before tax 72,967 62,301 Tax (16,157) (15,179) Underlying profit after tax 56,810 47,122 --------- ------------------- Basic underlying earnings per share (cents) 8.56 7.17 --------------------------------------------- --------- -------------------
Our investment portfolio, including the contribution from Roslogistics, shows the continuing effect of the transition from US Dollar pegged to Rouble leases. On a like for like basis, NOI has dropped from $172 million in 2015, to $150 million in 2016 and $136 million for 2017 but our acquisition strategy to counteract this fall in income is bearing fruit. We purchased two investment portfolios during the year, one in April and one in November, which contributed $10 million to NOI, giving investment income for the year of $146 million including the contribution from Roslogistics (see note 4). A full year of acquisition income should more than compensate for any additional drop in revenues from the existing portfolio in the current year.
In addition to the positive impact of acquisitions we have been successful in selling off part of the legacy land bank that we hold in the UK. This generated $21 million of income after costs and boosted our NOI for the year to $167 million.
Underlying administrative expenses increased during the year, predominantly due to general salary costs increasing on a strengthening Rouble and cash bonuses paid in the year. Bonuses in 2016 had a larger share based element.
As we hold an increasing amount of our free cash in Roubles the strengthening currency created a positive foreign exchange movement in US Dollar terms. This was countered by strengthening sterling at the end of the year increasing the US Dollar value of our preference share liabilities. This resulted in a foreign exchange gain of $9 million in the income statement (2016: profit of $18 million) and a foreign currency loss through reserves of $24.7 million (2016: gain of $10.9 million).
Underlying earnings increased to $56.8 million (2016: $47.1 million) giving Basic Underlying Earnings per Share of 8.56 cents (2016: 7.17 cents).
IFRS Earnings 2017 2016 $'000 $'000 ------------------------------------------ --------- --------- Net rental and related income 166,729 151,741 Administrative expenses (28,547) (25,344) Share based payments and other long term incentives (4,545) (9,077) Foreign exchange profits 9,229 18,079 Share of joint venture profits 2,074 1,780 --------- --------- Operating profit 144,940 137,179 Profit/(Loss) on revaluation 38,152 (43,324) Profit on disposal - 3,807 Net finance charge (92,445) (75,416) IFRS profit before tax 90,647 22,246 --------- --------- Tax (32,961) (14,527) --------- --------- IFRS profit after tax 57,686 7,719 ------------------------------------------ --------- ---------
IFRS earnings are bolstered by the revaluation gain on the portfolio offset against other mark to market movements on derivatives, amortisation and depreciation charges and an increased deferred tax liability of $16.7 million on the gains. We also impaired the remaining goodwill of $2 million carried against the Raven Mount subsidiary following the sale of the strategic land bank and this is included in administrative expenses.
Finance costs increased with the issue of new convertible preference shares during the year, the proceeds being used for the acquisition completed at the end of the year. Finance income from cash balances held increased to $7.2 million (2016: $3.4 million) reflecting the higher proportion of Rouble cash generating a better interest return. 2016 also had a one off gain of $15.4 million on the redemption of a loan at below book value which was not repeated this year.
Investment Properties
A tightening of yields and stable ERVs resulted in a revaluation gain of $38.2 million for our investment properties during the year. Together with acquisitions this increases the carrying value of investment properties to $1.57 billion. The carrying value of land held for development reduced by $2.8 million, the majority relating to one small site where changes in local highway planning has reduced the possibility of new development on this site. This gives a carrying value of investment properties under construction of $38.4 million.
Debtors and Creditors
Debtors and creditors are inflated by the most recent acquisition, creditors including a provision for deferred consideration which is dependent on the leasing of vacant space on the asset and debtors including VAT recoverable on the consideration paid to date. Tax payable is also increased by uncertain tax provisions made in the year.
Cash and Debt
Cash flow Summary 2017 2016 $'000 $'000 ---------------------------------------------- ---------- ---------- Net cash generated from operating activities 125,487 118,012 Net cash used in investing activities (199,733) (992) Net cash generated/(used) in financing activities 127,298 (120,759) Net increase/(decrease) in cash and cash equivalents 53,052 (3,739) Effect of foreign exchange rate changes 14,993 69 ---------- ---------- Increase/(decrease) in cash 68,045 (3,670) ---------- ---------- Closing cash and cash equivalents 266,666 198,621 ---------------------------------------------- ---------- ----------
Cash balances increase by $68 million with a refinancing straddling the year end, a new facility of $62.3 million being drawn on 29 December 2017 but the old facility of the same amount not repaid until 9 January 2018. This artificially increases cash and debt repayable within one year at the balance sheet date.
In essence, adjusting for above, cash balances are flat for the year, acquisition expenditure of $190 million being financed from the issue of new convertible preference shares and profits generated.
Bank Debt 2017 2016 $m $m ---------------------------------------- ------ ------ Fixed rate debt 191 131 Debt hedged with swaps - 112 Debt hedged with caps 651 469 ------ ------ 842 712 Unhedged debt 14 37 ------ ------ 856 749 Unamortised loan origination costs and accrued interest (9) (9) Total debt 847 740 ------ ------ Undrawn facilities - - ------ ------ Weighted average cost of debt 7.62% 7.48% ------ ------ Weighted average term to maturity 4.5 4.7 ---------------------------------------- ------ ------
The quantum and number of facilities maturing each year is shown below.
Year 2018 2019 2020 2021 2022 2023-2024 ------------------------------- ----- ----- ----- ----- ----- ---------- Debt maturing ($ million) 76 138 15 197 163 267 ------------------------------- ----- ----- ----- ----- ----- ---------- Percentage of total debt maturing (%) 9 16 2 23 19 31 ------------------------------- ----- ----- ----- ----- ----- ---------- Number of maturing facilities 2 3 1 3 2 5 ------------------------------- ----- ----- ----- ----- ----- ----------
We continue to extend the maturity dates of our secured facilities, 50% of debt now maturing after 2021. The effective loan to value ratio on theses facilities is 53% (2016: 55%).
Our cost of debt has increased slightly to 7.62% (2016: 7.48%) with increases in underlying US LIBOR.
Taxation
The tax charge for the year increases with a deferred tax liability charge on the property revaluations. Tax paid in cash terms rose to $14.4 million (2016: $7.7 million), the majority a result of the introduction of the new tax ruling last year, limiting the offset of deferred tax assets to 50% of profits.
Subsidiaries
Raven Mount contributed significantly to profits during the year, generating $24.3 million on the sale of legacy land plots held in the UK which had a book value of $0.7 million.
Roslogistics operated out of 112,700sqm of warehouse space at the year end and has increased its Rouble NOI by 10% to Roubles 724 million. We are keen to develop this business in the medium term and increased administration costs include investment into the on-going strategy for operations.
Outlook
Our acquisition strategy is supporting our transition to Rouble rents. Over the coming year we will start to align our foreign currency risk by introducing elements of Rouble debt into our secured facilities. Should the Central Bank of Russia continue with its reduction in the Central Bank rate then this exercise will be accelerated.
Risk Report
Risk Appetite
The Group continues to adapt its balance sheet to meet the risks of the market in which we operate. The key financial risks continue to be foreign exchange driven, our income model now predominantly Rouble based but our financing US Dollar and Sterling based. Our approach is threefold:
-- In the short term we have reduced our amortising US Dollar debt facilities and extended the period of amortisation to build in sufficient covenant headroom to manage adverse foreign exchange movements;
-- We have embarked on an acquisition strategy to build our Rouble income streams as our US Dollar pegged income continues to decline; and
-- With Russian Central Bank rates reducing, we expect all new and maturing financing facilities to have an increasing proportion of Rouble denominated debt, reducing our exposure to US Dollar financing over the medium term.
With a certain stability returning to the Russian market in 2017, our risk appetite has increased as we seek income enhancing acquisition opportunities.
Risk Management and Internal Controls
The Board is responsible for the management of risk and regularly carries out a robust assessment of the principal risks and uncertainties affecting the business, discusses how these may impact on operations, performance and solvency and what mitigating actions, if any, can be taken. The Audit Committee is responsible for ensuring that the internal control procedures are robust and that risk management processes are appropriate. A fuller explanation of the processes is given in the Audit Committee Report.
The business recruited additional senior managers in both our Cyprus and Moscow offices this year. Together with our acquisition and growth plans it became evident that the current operational review structure would become less effective with the increased senior team. Each department now holds its own weekly meeting to review risks and issues and reports to an operational oversight Group of eight members comprising two executive directors, two directors of the intermediate Cypriot holding board and four senior managers. This group also meets weekly. At least one of the oversight Group sits on each departmental committee. Departmental meetings cover the day to day operating issues and refer key issues to the oversight Group where appropriate. The oversight Group also discusses business wide issues and risks and reports into the Executive Board at the formal bi monthly Board meetings. With the addition of the Company Secretary, the oversight Board also acts as the Risk Committee, reporting to the Audit Committee.
The risk management process is designed to identify, evaluate and mitigate any significant risk the Group faces. The process aims to manage rather than eliminate risks and can only provide reasonable and not absolute assurance.
The Audit Committee has not identified any significant failings or weaknesses in the internal control and risk assessment procedures during the year.
Principal Risks and Uncertainties
We have set out in the following tables the principal risks and uncertainties that face our business, our view on how those risks have changed during the year and a description of how we mitigate or manage those risks. We have also annotated those risks that have been considered as part of the viability assessment.
Financial Risk
Risk Impact Mitigation Change in 2017 ---------------------- ---------------------- ------------------------------------ ------- Oil price (Viability -> Statement This leads to The percentage of US Dollar Risk) further falls pegged leases continues in US Dollar to decline now the market Oil price equivalent income is predominately Rouble volatility and an increase based. returns in in the credit the medium risk of those With little or no speculative term leading tenants who remain development in the market, to a weakening in US Dollar research continues to forecast Rouble. pegged leases. a drop in vacancy level. Reduced consumer demand has an impact on appetite for new lettings, the renewal of existing leases and restricts rental growth. ---------------------- ---------------------- ------------------------------------ ------- Interest rates (Viability -> Statement Cost of debt The majority of our variable Risk) increases and cost of debt is hedged Group profitability with the use of swaps and Increases and debt service caps on US LIBOR or fixed in US LIBOR cover reduce. rate facilities. With Russian Central Bank Rates now falling we are also considering moving away from US Dollar debt in the medium term. ---------------------- ---------------------- ------------------------------------ ------- Foreign Exchange (Viability Statement A weakening of The high yield that we Risk) the Rouble against generate on assets has those currencies cushioned the impact of The move to reduces our ability severe Rouble depreciation. a Rouble denominated to service US rental market Dollar debt, Our acquisition strategy increases Sterling preference is also allowing us to foreign exchange share coupon re-build our profitability risk as our and Sterling with Rouble denominated debt and capital distributions. market rental income. bases are US Dollar The intention is for all and Sterling new and maturing bank facilities denominated to have an increasing element respectively. of Rouble denominated funding to reduce our US Dollar exposure over the medium term. ---------------------- ---------------------- ------------------------------------ ------- Bank Covenants (Viability The likelihood Statement of debt facility We have completed a restructuring Risk) covenant breaches of debt facilities, extending increases. amortisation periods and The significant reducing the principal drop in US outstanding to create additional Dollar equivalent covenant headroom. rents impacts on both loan There is very little recourse to value ("LTV") to the holding company and debt service and other than the new cover ratio office portfolio acquisition, ("DSCR") covenants no cross collateralisation on US Dollar between projects on events debt facilities. of default. ---------------------- ---------------------- ------------------------------------ -------
Property Investment
Risk Impact Mitigation Change in 2017 ---------------------------- ----------------------- ----------------------------------- ------- Acquisitions (Viability Statement Risk) Legacy issues We have increased our senior Our acquisition may erode earnings management resource in activity has enhancement and the year with both international increased significantly integration into and Russian experience and we operate our existing in real estate acquisitions. in an immature systems may involve -- investment market excessive management External advisers undertake where legacy resource. full detailed due diligence issues are common on any acquisition projects. with Russian -- acquisitions. -- -------------------------- ------------------------- ----------------------------------- ------- Sector focus Lack of experience We have recruited management
Investment in the new sectors resource with the appropriate is made in may increase expertise and are familiar new real estate acquisition risks with the external advisors sectors (such and lead to higher specialising in those sectors. as office transaction costs and retail). and use of excessive management resource. -------------------------- ------------------------- ----------------------------------- ------- Leases This can lead Proactive property management (Viability to uncertainty and continued open dialogue Statement of annualised with tenants. Risk) income due to Market practice lease break clauses. Dedicated resources assigned increasingly to fit-out obligations incorporates Additional landlord under leases, project management lease break risk on delivery and management oversight. requirements of tenant fit-out and landlord requirements. fit-out obligations. -------------------------- ------------------------- ----------------------------------- ------- Joint Ventures NEW Growth plans This could lead Any joint venture will could include to reliance on be governed by a joint entering into third parties venture agreement and each joint venture to help deliver joint venture party will arrangements business outcomes. be required to sign up in certain to Raven Russia's code parts of the of conduct. Senior management business. resource has been enhanced to ensure proper oversight and experience of any joint venture arrangements entered into. -------------------------- ------------------------- ----------------------------------- -------
Russian Domestic Risk
Risk Impact Mitigation Change in 2017 ------------------ ----------------------------- ----------------------------------- --------- Legal Framework -> The legal The large volume We have an experienced framework of new legislation in house legal team including in Russia from various a litigation specialist. continues state bodies We use a variety of external to develop is open to interpretation, legal advisors when appropriate. with a number puts strain on of new and the judicial Our lease agreements have proposed laws system and can been challenged and have expected to be open to abuse. proven to be robust in come into both ICAC arbitration and force in the in Russian Courts. near future. ------------------ ----------------------------- ----------------------------------- --------- Russian Taxation Russian tax Tax treaties The key tax treaty for -> code is changing may be renegotiated the Group is between Russia in line with and new legislation and Cyprus and this was global taxation may increase renegotiated during 2013 trends in the Group's tax with no significant impact areas such expense. on the business; as transfer pricing and Changes in capital gains capital gains tax rules have led to a tax. change in our calculation of Adjusted Diluted NAV per share; and Russia remains a relatively low tax jurisdiction with 20% Corporation tax. ------------------ ----------------------------- ----------------------------------- ---------
Personnel Risks
Risk Impact Mitigation Change in 2017 -------------- ------------------------ ------------------------------------- ------- Key Personnel -> Failing to Strategy becomes The Remuneration Committee retain key more difficult and Executives review remuneration personnel. to flex or implement. packages against comparable market information; Employees have regular appraisals and documented development plans and targets; and A new incentive scheme was approved at the last AGM. -------------- ------------------------ ------------------------------------- -------
Political and Economic Risk
Risk Impact Mitigation Change in 2017 --------------------- ------------------------ --------------------------------- ------- Sanctions -> The use of Continued isolation The local market has accepted economic sanctions of Russia from the inevitability of long by the US international term economic sanctions and EU continues markets and a and this has played its for the foreseeable return to a declining part in the fundamental future. Russian economy. changes to the Russian economy. We have adapted our business model to secure our position in the market. However, the risk of increased sanctions remains. --------------------- ------------------------ --------------------------------- -------
Change key
Increased risk in the period
-> Stable risk in the period
Decreased risk in the period
Signed for and on behalf of the Board
Colin Smith
Director
11 March 2018
Directors' Responsibility Statement
The Statement of Directors' Responsibilities below has been prepared in connection with the Company's full Annual Report and Accounts for the year ended 31 December 2017.
The Board confirms to the best of its knowledge:
The financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company and the undertakings included in the consolidation taken as a whole;
The strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and
The Annual Report and Accounts, taken as a whole, are fair balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.
This responsibility statement was approved by the Board of Directors on 11 March 2018 and is signed on its behalf by:
Mark Sinclair Colin Smith
Chief Financial Officer Chief Operating Officer
GROUP INCOME STATEMENT For the year ended 31 December 2017 2017 2016 Underlying Capital Underlying Capital and and earnings other Total earnings other Total Notes $'000 $'000 $'000 $'000 $'000 $'000 Gross revenue 4/5 228,083 - 228,083 195,294 - 195,294 Property operating expenditure and cost of sales (61,354) - (61,354) (43,553) - (43,553) Net rental and related income 166,729 - 166,729 151,741 - 151,741 ----------- --------- ---------- ----------- --------- --------- Administrative expenses 4/6 (25,343) (3,204) (28,547) (24,243) (1,101) (25,344) Share-based payments and other long term incentives 32 (1,635) (2,910) (4,545) (3,133) (5,944) (9,077) Foreign currency profits 9,229 - 9,229 18,079 - 18,079 Operating expenditure (17,749) (6,114) (23,863) (9,297) (7,045) (16,342) ----------- --------- ---------- ----------- --------- --------- Share of profits of joint ventures 16 2,074 - 2,074 1,780 - 1,780 Operating profit / (loss) before profits and losses on investment property 151,054 (6,114) 144,940 144,224 (7,045) 137,179 Unrealised profit / (loss) on revaluation of investment property 11 - 42,320 42,320 - (40,192) (40,192) Profit on disposal of investment property under construction 12 - - - - 3,807 3,807 Unrealised loss on revaluation of investment property under construction 12 - (4,168) (4,168) - (3,132) (3,132) ----------- --------- ---------- ----------- --------- --------- Operating profit / (loss) 4 151,054 32,038 183,092 144,224 (46,562) 97,662 Finance income 7 7,248 914 8,162 3,436 18,086 21,522 Finance expense 7 (85,335) (15,272) (100,607) (85,359) (11,579) (96,938) ----------- --------- ---------- ----------- --------- --------- Profit / (loss) before tax 72,967 17,680 90,647 62,301 (40,055) 22,246 Tax 8 (16,157) (16,804) (32,961) (15,179) 652 (14,527) ----------- --------- ---------- ----------- --------- --------- Profit / (loss) for the year 56,810 876 57,686 47,122 (39,403) 7,719 ----------- --------- ---------- ----------- --------- --------- Earnings per share: 9 Basic (cents) 8.69 1.17 Diluted (cents) 8.30 1.16 Underlying earnings per share: 9 Basic (cents) 8.56 7.17 Diluted (cents) 7.41 6.81 The total column of this statement represents the Group's Income Statement, prepared in accordance with IFRS as adopted by the EU. The "underlying earnings" and "capital and other" columns are both supplied as supplementary information permitted by IFRS as adopted by the EU. Further details of the allocation of items between the supplementary columns are given in note 9. All items in the above statement derive from continuing operations. All income is attributable to the equity holders of the parent company. There are no non-controlling interests. The accompanying notes are an integral part of this statement. GROUP STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2017 2017 2016 $'000 $'000 Profit for the year 57,686 7,719 Other comprehensive income, net of tax Items to be reclassified to profit or loss in subsequent periods: Foreign currency translation on consolidation (24,712) 10,942 Total comprehensive income for the year, net of tax 32,974 18,661 ----------- -------- All income is attributable to the equity holders of the parent company. There are no non-controlling interests. The accompanying notes are an integral part of this statement. GROUP BALANCE SHEET As at 31 December 2017 2017 2016 Notes $'000 $'000 Non-current assets Investment property 11 1,568,126 1,300,643 Investment property under construction 12 38,411 41,253 Plant and equipment 4,248 3,044 Goodwill 14 - 1,882 Investment in joint ventures 16 9,983 9,731 Other receivables 17 5,625 3,724 Derivative financial instruments 19 7,948 5,012 Deferred tax assets 26 34,629 27,451 1,668,970 1,392,740 ----------------- ---------- Current assets Inventory 423 771 Trade and other receivables 18 78,946 52,669 Derivative financial instruments 19 445 358 Cash and short term deposits 20 266,666 198,621 346,480 252,419 ----------------- ---------- Total assets 2,015,450 1,645,159 ----------------- ---------- Current liabilities Trade and other payables 21 107,357 65,408 Derivative financial instruments 19 35 943 Interest bearing loans and borrowings 22 106,697 40,787 214,089 107,138 ----------------- ---------- Non-current liabilities Interest bearing loans and borrowings 22 740,485 699,038 Preference shares 23 146,458 131,703 Convertible preference shares 24 269,031 119,859 Other payables 25 34,566 25,259 Derivative financial instruments 19 - 67 Deferred tax liabilities 26 81,063 61,869 1,271,603 1,037,795 ----------------- ---------- Total liabilities 1,485,692 1,144,933 ----------------- ---------- Net assets 529,758 500,226 ----------------- ---------- Equity Share capital 27 12,479 12,578 Share premium 207,746 216,938 Warrants 28 441 1,161 Own shares held 29 (5,742) (7,449) Convertible preference shares 24 14,497 8,453 Capital reserve (217,782) (245,426) Translation reserve (201,911) (177,199) Retained earnings 720,030 691,170 ----------------- ---------- Total equity 30 / 31 529,758 500,226 ----------------- ---------- Net asset value per share (cents): 31 Basic 81 76 Diluted 80 71 Adjusted net asset value per share (cents): 31
Basic 78 71 Diluted 77 68 ----------------- ---------- The financial statements were approved by the Board of Directors on 11 March 2018 and signed on its behalf by: Colin Mark Sinclair Smith Chief Operating Chief Financial Officer Officer The accompanying notes are an integral part of this statement. GROUP STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2017 Own Convertible Share Share Shares Preference Capital Translation Retained Capital Premium Warrants Held Shares Reserve Reserve Earnings Total For the year ended 31 December 2016 Notes $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 At 1 January 2016 12,776 224,735 1,167 (52,101) - (210,176) (188,141) 676,782 465,042 Profit for the year - - - - - - - 7,719 7,719 Other comprehensive income - - - - - - 10,942 - 10,942 -------- --------- --------- --------- ------------ ---------- ------------ --------- --------- Total comprehensive income for the year - - - - - - 10,942 7,719 18,661 -------- --------- --------- --------- ------------ ---------- ------------ --------- --------- Warrants exercised 27/28 2 41 (6) - - - - - 37 Convertible preference shares issued 24 - - - - 8,453 - - - 8,453 Conversion of convertible preference shares 24/27 - - - - - - - - - Own shares acquired 29 - - - (133) - - - - (133) Own shares disposed 29 - - - 43,161 - - - (28,549) 14,612 Own shares allocated 29 - - - 1,543 - - - (1,441) 102 Ordinary shares cancelled 27/29 (200) (7,838) - 81 - - - - (7,957) Share-based 32 payments c - - - - - - - 1,409 1,409 Transfer in respect of capital losses - - - - - (35,250) - 35,250 - -------- --------- --------- --------- ------------ ---------- ------------ --------- --------- At 31 December 2016 12,578 216,938 1,161 (7,449) 8,453 (245,426) (177,199) 691,170 500,226 -------- --------- --------- --------- ------------ ---------- ------------ --------- --------- For the year ended 31 December 2017 Profit for the year - - - - - - - 57,686 57,686 Other comprehensive income - - - - - - (24,712) - (24,712) -------- --------- --------- --------- ------------ ---------- ------------ --------- --------- Total comprehensive income for the year - - - - - - (24,712) 57,686 32,974 -------- --------- --------- --------- ------------ ---------- ------------ --------- --------- Warrants exercised 27/28 180 5,037 (720) - - - - - 4,497 Convertible preference shares issued 24 - - - - 6,067 - - - 6,067 Conversion of convertible preference shares 24/27 6 348 - - (23) - - - 331 Own shares acquired 29 - - - (158) - - - - (158) Own shares disposed 29 - - - - - - - - - Own shares allocated 29 - - - 1,818 - - - (1,182) 636 Ordinary shares cancelled 27/29 (285) (14,577) - 47 - - - - (14,815) Share-based payments 32 - - - - - - - - - Transfer in respect of capital losses - - - - - 27,644 - (27,644) - -------- --------- --------- --------- ------------ ---------- ------------ --------- --------- At 31 December 2017 12,479 207,746 441 (5,742) 14,497 (217,782) (201,911) 720,030 529,758 -------- --------- --------- --------- ------------ ---------- ------------ --------- --------- The accompanying notes are an integral part of this statement. GROUP CASH FLOW STATEMENT For the year ended 31 December 2017 2017 2016 Notes $'000 $'000 Cash flows from operating activities Profit before tax 90,647 22,246 Adjustments for: Impairment of goodwill 6 2,061 - Depreciation 6 1,143 1,101 Provision for bad debts 6 (93) 22 Share of profits of joint ventures 16 (2,074) (1,780) Finance income 7 (8,162) (21,522) Finance expense 7 100,607 96,938 Profit on disposal of investment property under construction 12 - (3,807) (Profit) / loss on revaluation of investment property 11 (42,320) 40,192 Loss on revaluation of investment property under construction 12 4,168 3,132 Foreign exchange profits (9,229) (18,079) Non-cash element of share-based payments and other long term incentives 32 2,910 5,944 ---------- ---------- 139,658 124,387 Changes in operating working capital (Increase) / decrease in operating receivables (1,148) 4,419 Decrease in other operating current assets 429 391 Decrease in operating payables (1,449) (8,026) ---------- ---------- 137,490 121,171 Receipts from joint ventures 16 2,711 4,521 Tax paid (14,714) (7,680) ---------- ---------- Net cash generated from operating activities 125,487 118,012 ---------- ---------- Cash flows from investing activities Payments for property improvements (14,793) (9,163) Refunds of VAT on construction - 493 Acquisition of subsidiaries 39 (86,606) - Cash acquired with subsidiaries 39 4,088 - Acquisition of investment property 11 (107,481) - Proceeds from disposal of investment property under construction 12 - 4,595 Purchase of plant and equipment (2,196) (653) Loans repaid - 337 Interest received 7,255 3,399 ---------- ---------- Net cash used in investing activities (199,733) (992) ---------- ---------- Cash flows from financing activities Proceeds from long term borrowings 271,457 - Repayment of long term
borrowings (125,371) (108,150) Loan amortisation (38,322) (56,343) Bank borrowing costs paid (64,171) (66,808) Exercise of warrants 27 / 28 4,497 37 Preference shares purchased 23 (112) (713) Ordinary shares purchased 27 / 29 (14,337) (7,988) Ordinary shares sold 29 - 14,612 Dividends paid on preference shares (14,732) (15,088) Dividends paid on convertible preference shares (13,143) (4,349) Issue of convertible preference shares 24 126,402 128,327 Premium paid for derivative financial instruments (4,870) (4,296) ---------- ---------- Net cash generated from / (used in) financing activities 127,298 (120,759) ---------- ---------- Net increase / (decrease) in cash and cash equivalents 53,052 (3,739) Opening cash and cash equivalents 198,621 202,291 Effect of foreign exchange rate changes 14,993 69 ---------- ---------- Closing cash and cash equivalents 20 266,666 198,621 ---------- ---------- The accompanying notes are an integral part of this statement. NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2017 1. General information Raven Russia Limited (the "Company") and its subsidiaries (together the "Group") is a property investment group specialising in commercial real estate in Russia. The Company is incorporated and domiciled in Guernsey under the provisions of the Companies (Guernsey) Law, 2008. The Company's registered office is at La Vieille Cour, La Plaiderie, St Peter Port, Guernsey GY1 6EH. The audited financial statements of the Group for the year ended 31 December 2017 were authorised by the Board for issue on 11 March 2018. 2. Accounting policies Basis of preparation The Company has taken advantage of the exemption conferred by the Companies (Guernsey) Law, 2008, section 244, not to prepare company financial statements as group financial statements have been prepared for both current and prior periods. The group financial statements are presented in US Dollars and all values are rounded to the nearest thousand dollars ($'000) except where otherwise indicated. The principal accounting policies adopted in the preparation of the group financial statements are set out below. The policies have been consistently applied to all years presented, unless otherwise indicated. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the accounting policies. The areas involving a high degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 3. Going concern The financial position of the Group, its cash flows, liquidity position and borrowings are described in the Financial Review and the notes to these financial statements. After making appropriate enquiries and examining sensitivities that could give rise to financial exposure, the Board has a reasonable expectation that the Group has adequate resources to continue operations for the foreseeable future. Accordingly, the Group continues to adopt the going concern basis in the preparation of these financial statements. Statement of compliance The financial statements of the Group have been prepared in accordance with International Financial Reporting Standards adopted for use in the European Union ("IFRS") and the Companies (Guernsey) Law, 2008. Changes in accounting policies The accounting policies adopted are consistent with those of the previous financial year. The Group has adopted new and amended IFRS and IFRIC interpretations as of 1 January 2017, which had no impact on the financial position or performance of the Group. Certain new standards, interpretations and amendments to existing standards have been published that are mandatory for later accounting periods and which have not been adopted early. Of these the five thought to have a possible impact on the Group are: IFRS 9 Financial Instruments (effective 1 January 2018) IFRS 2 Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2 effective 1 January 2018) IAS 40 Transfer of Investment Property (Amendments to IAS 40 effective 1 January 2018) IFRS 15 Revenue from contracts with customers (effective 1 January 2018) IFRS 16 Leases (effective 1 January 2019) The Group has assessed the impact of these changes and does not expect them to significantly impact on the financial position or performance of the Group. There may, however, be changes to disclosures within the financial statements. The standards, amendments or revisions are effective for annual periods beginning on or after the dates noted above. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company, its subsidiaries and the special purpose vehicles ("SPVs") controlled by the Company, made up to 31 December each year. Control is achieved where the Company is exposed, or has rights, to variable returns from its involvement with or ownership of the investee entity and has the ability to affect those returns through its power over the investee. The Group has acquired investment properties through the purchase of SPVs. In the opinion of the Directors, these transactions did not meet the definition of a business combination as set out in IFRS 3 "Business Combinations". Accordingly the transactions have not been accounted for as an acquisition of a business and instead the financial statements reflect the substance of the transactions, which is considered to be the purchase of investment property and investment property under construction. The results of subsidiaries acquired or disposed of during the year are included in the Income Statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of entities acquired to bring the accounting policies into line with those used by the Group. All intra-group transactions, balances, income and expenditure are eliminated on consolidation. Joint ventures A joint venture is a contractual arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the activities require unanimous consent of the contracting parties for strategic financial and operating decisions. The Group's investments in joint ventures are accounted for using the equity method. Under the equity method, the investment in a joint venture is initially recognised at cost. The carrying value of the investment is adjusted to recognise changes in the Group's share of net assets of the joint venture since the acquisition date. Any premium paid for an interest in a joint venture above the fair value of the Group's share of identifiable assets, liabilities and contingent liabilities is determined as goodwill. Goodwill relating to a joint venture is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. The aggregate of the Group's share of profit or loss of joint ventures is shown on the face of the Income Statement within Operating Profit and represents the profit or loss after tax. Revenue recognition (a) Property investment Rental income from operating leases is recognised in income on a straight-line basis over the lease term. Rental increases calculated with reference to an underlying index and the resulting rental income ("contingent rents") are recognised in income as they are determined. Incentives for lessees to enter into lease agreements are spread evenly over the lease term, even if the payments are not made on such a basis. The lease term is the non-cancellable period of the lease, together with any further term for which the tenant has the option to continue the lease, where, at the inception of the lease, the directors are reasonably certain that the tenant will exercise that option. Premiums received to terminate leases are recognised in the Income Statement as they arise. (b) Roslogistics Logistics revenue, excluding value added tax, is recognised as services are provided. (c) Raven Mount. The sale of completed property and land is recognised on legal completion. Taxation The Company is a limited company registered in Guernsey, Channel Islands, and is exempt from taxation. The Group is liable to Russian, UK and Cypriot tax arising on the results of its Russian, UK and Cypriot operations. The tax expense represents the sum of the tax currently payable and deferred tax. (a) Current tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit (or loss)
as reported in the Income Statement because it excludes items of income and expenditure that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. (b) Tax provisions A current tax provision is recognised when the Group has a present obligation as a result of a past event and it is probable that the Group will be required to settle that obligation. A provision for uncertain taxes is recorded within current tax payable (see note 21). (c) Deferred tax Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised, based on tax rates that have been enacted or substantively enacted at the reporting date. Deferred tax is charged or credited in the Income Statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority. (d) Value added tax Revenue, expenditure, assets and liabilities are recognised net of the amount of value added tax except: Where the value added tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the value added tax is recognised as part of the cost of acquisition of the asset or as part of the expenditure item as applicable; and Receivables and payables that are stated with the amount of value added tax included. The net amount of value added tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables, as appropriate, in the Balance Sheet. Investment property and investment property under construction Investment property comprises completed property and property under construction held to earn rentals or for capital appreciation or both. Investment property comprises both freehold and leasehold land and buildings. Investment property is measured initially at its cost, including related transaction costs. After initial recognition, investment property is carried at fair value. The Directors assess the fair value of investment property based on independent valuations carried out by their appointed property valuers or on independent valuations prepared for banking purposes. The Group has appointed Jones Lang LaSalle as property valuers to prepare valuations on a semi-annual basis. Valuations are undertaken in accordance with appropriate sections of the current Practice Statements contained in the Royal Institution of Chartered Surveyors Appraisal and Valuation Standards, 2014 Edition (the "Red Book"). This is an internationally accepted basis of valuation. Gains or losses arising from changes in the fair value of investment property are included in the Income Statement in the period in which they arise. For the purposes of these financial statements, in order to avoid double counting, the assessed fair value is reduced by the present value of any tenant incentives and contracted rent uplifts that are spread over the lease term and increased by the carrying amount of any liability under a head lease that has been recognised in the Balance Sheet. Borrowing costs that are directly attributable to the construction of investment property are included in the cost of the property from the date of commencement of construction until construction is completed. Leasing (as lessors) Leases where the Group does not transfer substantially all the risks and benefits incidental to ownership of the asset are classified as operating leases. All of the Group's properties are leased under operating leases and are included in investment property in the Balance Sheet. Financial assets The Group classifies its financial assets into one of the categories discussed below, depending upon the purpose for which the asset was acquired. The Group has not classified any of its financial assets as held to maturity. (a) Fair value through profit or loss This category comprises only in-the-money derivatives (see financial liabilities policy for out-of-the-money derivatives), which are carried at fair value with changes in the fair value recognised in the Income Statement in finance income or finance expense. (b) Loans and receivables These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. In the case of the Group, loans and receivables comprise trade and other receivables, loans, security deposits, restricted cash and cash and short term deposits. Loans and receivables are initially recognised at fair value, plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows. The amount of the impairment loss is recognised in administrative expenses. If in a subsequent period the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment is recognised, the previously recognised impairment loss is reversed. Any such reversal of an impairment loss is recognised in the Income Statement. Cash and short term deposits include cash in hand, deposits held at call with banks and other short term highly liquid investments with original maturities of three months or less. Financial liabilities and equity instruments Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. The Group classifies its financial liabilities into one of the categories listed below. (a) Fair value through profit or loss This category comprises only out-of-the-money derivatives, which are carried at fair value with changes in the fair value recognised in the Income Statement in finance income or finance expense. (b) Other financial liabilities Other financial liabilities include interest bearing loans, trade payables (including rent deposits and retentions under construction contracts), preference shares, convertible preference shares and other short-term monetary liabilities. Trade payables and other short-term monetary liabilities are initially recorded at fair value and subsequently carried at amortised cost using the effective interest rate method. Interest bearing loans, convertible preference shares and preference shares are initially recorded at fair value net of direct issue costs and subsequently carried at amortised cost using the effective interest rate method. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are charged to the Income Statement using the effective interest rate method. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. The Group considers the convertible preference shares to be a compound financial instrument, that is they have a liability and equity component. On the issue of convertible preference shares the fair value of the liability component is determined and the balance of the proceeds of issue is deemed to be equity. The Group's other equity instruments are its ordinary shares and warrants. Own shares held Own equity instruments which are acquired are recognised at cost and deducted from equity. No gain or loss is recognised in the Income Statement on the purchase, sale, issue or cancellation of the Group's own equity instruments. Any difference between the carrying amount and the consideration is recognised in retained earnings. Share-based payments and other long term incentives The Group rewards its key management and other senior employees
by a variety of means many of which are settled by ordinary, preference shares or convertible preference shares of the Company. Awards linked to or that may be settled by ordinary shares The share component of the 2016 Retention Scheme may be settled in any of the Company's listed securities, including ordinary shares, and as a consequence falls within the scope of IFRS 2 Share-based payments. To date the instalments have been settled by preference shares and convertible preference shares and therefore are cash-settled transactions. The cost of cash-settled transactions is recognised as an expense over the vesting period, measured by reference to the fair value of the corresponding liability, which is recognised on the Balance Sheet. The liability is remeasured at fair value at each balance sheet date until settlement, with changes in the fair value recognised in the Income Statement. Awards not linked to or settled by ordinary shares These awards are accounted for in accordance with IAS 19 Employee Benefits whereby the Group estimates the cost of awards using the projected unit credit method, which involves estimating the future value of the preference shares or convertible preference shares, as appropriate, at the vesting date and the probability of the awards vesting. The resulting expense is charged to the Income Statement over the performance period and the liability is remeasured at each Balance Sheet date. The cash component of the 2016 Retention Scheme has been accounted for in this way. Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of each Group entity are measured in the currency of the primary economic environment in which the entity operates (the "functional currency"). For the Company the directors consider this to be Sterling. The presentation currency of the Group is United States Dollars, which the directors consider to be the key currency for the Group's operations as a whole. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at the year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Income Statement. Non-monetary assets and liabilities are translated using exchange rates at the date of the initial transaction or when their fair values are reassessed. (c) On consolidation The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) assets and liabilities for each Balance Sheet are translated at the closing rate at the date of the Balance Sheet; (ii) income and expenditure for each Income Statement are translated at the average exchange rate prevailing in the period unless this does not approximate the rates ruling at the dates of the transactions in which case they are translated at the transaction date rates; and (iii) all resulting exchange differences are recognised in Other Comprehensive Income. On consolidation, the exchange differences arising from the translation of the net investment in foreign entities are recognised in Other Comprehensive Income. When a foreign entity is sold, such exchange differences are recognised in the Income Statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Dividends Dividends to the Company's ordinary shareholders are recognised when they become legally payable. In the case of interim dividends, this is when declared by the directors. In the case of final dividends, this is when they are approved by the shareholders at an AGM. 3. Critical accounting estimates and judgements The Group makes certain estimates and judgements regarding the future. Estimates and judgements are continually evaluated and are based on historical experience as adjusted for current market conditions and other factors. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined below. Judgements other than estimates In the process of applying the Group's accounting policies the following are considered to have the most significant effect on the amounts recognised in the consolidated financial statements: (a) Acquisitions Properties can be acquired through the corporate acquisition of a subsidiary company. At the time of acquisition, the Group considers whether the acquisition represents the acquisition of a business. The Group accounts for the acquisition as a business combination where an integrated set of activities is acquired in addition to the property. More specifically, consideration is made of the extent to which significant processes are acquired and the extent of ancillary services provided by the subsidiary. When the acquisition of a subsidiary does not represent a business, it is accounted for as an acquisition of a group of assets and liabilities. The cost of the acquisition is allocated to the assets and liabilities acquired based on their relative fair values, and no goodwill or deferred tax liabilities are recognised. As detailed in note 39, the Group purchased Gorigo Logistics Park, Primium Business Centre and Kellerman Business Centre by acquiring all of the issued share capital of the corporate vehicles that owned the properties. (b) Recognition of deferred tax assets The recognition of deferred tax assets is based upon whether it is probable that sufficient and suitable taxable profits will be available in the future, against which the reversal of temporary differences can be deducted. Recognition, therefore, involves judgement regarding the future financial performance of the particular legal entity or tax group in which the deferred tax asset has been recognised. Estimates (a) Valuation of investment property and investment property under construction The best evidence of fair value is current prices in an active market for similar lease and other contracts. In the absence of such information, the Group determines the amount within a range of reasonable, fair value estimates. In making its estimation the Group considers information from a variety of sources and engages external, professional advisers to carry out third party valuations of its properties. The external valuations are completed in accordance with appropriate sections of the current Practice Statements contained in the Royal Institution of Chartered Surveyors Appraisal and Valuation Standards, 2014 Edition (the "Red Book"). This is an internationally accepted basis of valuation and is consistent with the requirements of IFRS 13. In our market, where transactional activity is minimal, the valuers are required to use a greater degree of estimation or judgement than in a market where comparable transactions are more readily available. For the valuation at 31 December 2016 the valuer highlighted that as a result of market conditions at the valuation date it was necessary to make more judgements than is normally required. Following the improvement in the Russian economy and commercial property market and an increase in activity in the investment market, they no longer highlight this uncertainty. The significant methods and assumptions used in estimating the fair value of investment property and investment property under construction are set out in note 13, along with detail of the sensitivities of the valuations to changes in the key inputs. (b) Income tax As part of the process of preparing its financial statements, the Group is required to estimate the provision for income tax in each of the jurisdictions in which it operates. This process involves an estimation of the actual current tax exposure, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Balance Sheet. Russian tax legislation is subject to varying interpretations and changes, which may occur frequently. New legislation and clarifications have been introduced over recent years, but it remains unclear as to how these will be applied in practice. The interpretation of the legislation that the Group adopts for its transactions and activities may be challenged by the relevant regional and federal authorities from time to time. Additionally, there may be inconsistent interpretation of tax regulations by each local authority, creating uncertainties in the correct application of the taxation regulations in Russia. Fiscal periods remain open to review by the authorities for the three calendar years preceding the years of review and in some circumstances may cover a longer period. Additionally, there have been instances where new tax regulations have been applied retrospectively. The Group is and has been subject to tax reviews which are worked through with the relevant authorities to resolve. The Group, in making its tax provision judgements, is confident that an appropriate level of management and control is exerted
in each of the jurisdictions in which it operates, all companies are tax resident in their relevant jurisdictions and are the beneficial owners of any income they receive. Local management use their in house tax knowledge and previous experience as well as independent professional experts when assessing tax risks and the resultant provisions required. For the current year, the Group has specifically reviewed the potential impact that new regulations may have on its financing arrangements and the provision reflects probabilities of between 25% and 100% of possible outcomes. 4. Segmental information The Group has three reportable segments, which are managed and report independently to the Board. These comprise: Property Investment - acquire or develop and lease commercial property in Russia; Roslogistics - provision of warehousing, transport, customs brokerage and related services in Russia; and Raven Mount - sale of residential property in the UK. Financial information relating to Property Investment is provided to the Board on a property by property basis. The information provided is gross rentals, operating costs, net operating income, revaluation gains and losses and where relevant the profit or loss on disposal of an investment property. The individual properties have similar economic characteristics and are considered to be a single reporting segment. Roslogistics is an independently managed business and the Board is presented with turnover, cost of sales and operating profits or losses after deduction of administrative expenses. Information about Raven Mount provided to the Board comprises the gross sale proceeds, inventory cost of sales and gross profit, including the share of profits or losses of its joint venture. Administrative expenses and foreign currency gains or losses are reported to the Board by segment. Finance income and finance expense are not reported to the Board on a segment basis. Sales between segments are eliminated prior to provision of financial information to the Board. For the Balance Sheet, segmental information is provided in relation to investment property, inventory, cash balances and borrowings. Whilst segment liabilities includes loans and borrowings, segment profit does not include the related finance costs. If such finance costs were included in segment profit or loss, the profit from Property Investment would have decreased by $62,918k (2016: $68,631k). (a) Segmental information for the year ended and as at 31 December 2017 Year ended 31 December 2017 Property Raven Segment Central Investment Roslogistics Mount Total Overhead Total $'000 $'000 $'000 $'000 $'000 $'000 Gross revenue 179,986 23,145 24,952 228,083 - 228,083 Operating costs / cost of sales (46,710) (10,775) (3,869) (61,354) - (61,354) ----------- ------------- ----------- ------------- --------- ---------- Net operating income 133,276 12,370 21,083 166,729 - 166,729 Administrative expenses Running general & administration expenses (16,407) (2,204) (851) (19,462) (5,881) (25,343) Impairment of goodwill - - (2,061) (2,061) - (2,061) Depreciation (697) (446) - (1,143) - (1,143) Share-based payments and other long term incentives (775) - - (775) (3,770) (4,545) Foreign currency profits 9,225 4 - 9,229 - 9,229 ----------- ------------- ----------- ------------- --------- ---------- 124,622 9,724 18,171 152,517 (9,651) 142,866 Profit on disposal of investment property under construction - - - - - - Unrealised profit on revaluation of investment property 42,320 - - 42,320 - 42,320 Unrealised loss on revaluation of investment property under construction (4,168) - - (4,168) - (4,168) Share of profits of joint ventures - - 2,074 2,074 - 2,074 ----------- ------------- ----------- ------------- --------- ---------- Segment profit / (loss) 162,774 9,724 20,245 192,743 (9,651) 183,092 ----------- ------------- ----------- ------------- --------- ---------- Finance income 8,162 Finance expense (100,607) Profit before tax 90,647 ---------- As at 31 December 2017 Property Raven Investment Roslogistics Mount Total $'000 $'000 $'000 $'000 Assets Investment property 1,568,126 - - 1,568,126 Investment property under construction 38,411 - - 38,411 Investment in joint ventures - - 9,983 9,983 Inventory - - 423 423 Cash and short term deposits 258,908 907 6,851 266,666 ----------- ------------- --------- Segment assets 1,865,445 907 17,257 1,883,609 ----------- ------------- --------- ---------- Other non-current assets 52,450 Other current assets 79,391 Total assets 2,015,450 ---------- Segment liabilities Interest bearing loans and borrowings 847,182 - - 847,182 ----------- ------------- --------- ---------- Capital expenditure Corporate acquisitions 86,173 - - 86,173 Other acquisition 122,730 - - 122,730 Property improvements 16,286 - - 16,286 225,189 - - 225,189 ----------- ------------- --------- ---------- (b) Segmental information for the year ended and as at 31 December 2016 Year ended 31 December 2016 Property Raven Segment Central Investment Roslogistics Mount Total Overhead Total $'000 $'000 $'000 $'000 $'000 $'000 Gross revenue 175,661 17,806 1,827 195,294 - 195,294 Operating costs / cost of sales (35,023) (7,991) (539) (43,553) - (43,553) ----------- ------------- ----------- ------------- --------- ---------- Net operating income 140,638 9,815 1,288 151,741 - 151,741 Administrative expenses Running general & administration expenses (13,887) (1,355) (920) (16,162) (8,081) (24,243) Impairment of goodwill - - - - - - Depreciation (823) (278) - (1,101) - (1,101) Share-based payments and other long term incentives (2,224) - - (2,224) (6,853) (9,077) Foreign currency profits/(losses) 18,136 (38) (19) 18,079 - 18,079 ----------- ------------- ----------- ------------- --------- ---------- 141,840 8,144 349 150,333 (14,934) 135,399 Profit on disposal of investment property under
construction 3,807 - - 3,807 - 3,807 Unrealised loss on revaluation of investment property (40,192) - - (40,192) - (40,192) Unrealised loss on revaluation of investment property under construction (3,132) - - (3,132) - (3,132) Share of profits of joint ventures - - 1,780 1,780 - 1,780 ----------- ------------- ----------- ------------- --------- ---------- Segment profit / (loss) 102,323 8,144 2,129 112,596 (14,934) 97,662 ----------- ------------- ----------- ------------- --------- ---------- Finance income 21,522 Finance expense (96,938) Profit before tax 22,246 ---------- As at 31 December 2016 Property Raven Investment Roslogistics Mount Total $'000 $'000 $'000 $'000 Assets Investment property 1,300,643 - - 1,300,643 Investment property under construction 41,253 - - 41,253 Investment in joint ventures - - 9,731 9,731 Inventory - - 771 771 Cash and short term deposits 192,995 1,014 4,612 198,621 ----------- ------------- --------- Segment assets 1,534,891 1,014 15,114 1,551,019 ----------- ------------- --------- ---------- Other non-current assets 41,113 Other current assets 53,027 Total assets 1,645,159 ---------- Segment liabilities Interest bearing loans and borrowings 739,825 - - 739,825 ----------- ------------- --------- ---------- Capital expenditure Property improvements 7,127 - - 7,127 ----------- ------------- --------- ---------- 5. Gross revenue 2017 2016 $'000 $'000 Rental and related income 179,986 175,661 Proceeds from the sale of inventory property 24,952 1,827 Logistics 23,145 17,806 228,083 195,294 --------- ---------- The Group's leases typically include annual rental increases ("contingent rents") based on a consumer price index in Russia, Europe or the USA, which are recognised in income as they arise. Contingent rents included in rental income for the year amounted $10k (2016: $172k). Details of the Group's contracted future minimum lease receivables are detailed in note 37. The Group recognised revenue of $25.9 million (2016: $24.6 million) from a single tenant of the property investment segment that amounted to more than 10% of Group revenue. 6. Administrative expenses 2017 2016 (a) Total administrative expenses $'000 $'000 Employment costs 13,341 11,700 Directors' remuneration 3,073 4,882 Bad debts (93) 22 Office running costs and insurance 4,057 3,218 Travel costs 1,944 1,540 Auditors' remuneration 711 617 Impairment of goodwill (note 14) 2,061 - Legal and professional 1,931 1,814 Depreciation 1,143 1,101 Registrar costs and other administrative expenses 379 450 28,547 25,344 --------- ---------- (b) Fees for audit and other services provided by the Group's auditor 2017 2016 $'000 $'000 Audit services 535 508 Audit related assurance services 62 65 597 573 --------- ---------- Other fees: Taxation services 72 44 Other services 42 - 114 44 --------- ---------- Total fees 711 617 --------- ---------- The Group engaged Ernst & Young to undertake due diligence in respect of the investment property acquisitions in the year, incurring $403k (2016: $nil) of fees, which were included in the cost of the relevant investment property. Ernst & Young also provide audit and taxation services for various SPVs that form part of the property operating costs. Charges for the audit of SPVs in the year amounted to $303k (2016: $306k) and the fees for taxation services were $75k (2016: $170k). 7. Finance income and expense 2017 2016 $'000 $'000 Finance income Total interest income on financial assets not at fair value through profit or loss Income from cash and short term deposits 7,218 3,399 Interest receivable from joint ventures 29 37 Other finance income Profit on purchase and cancellation of loans and borrowings - 15,365 Change in fair value of open interest rate derivative financial instruments 48 169 Change in fair value of foreign currency embedded derivatives 867 2,552 Finance income 8,162 21,522 --------- ---------- Finance expense Interest expense on loans and borrowings measured at amortised cost 62,918 68,631 Interest expense on
preference shares 15,825 16,518 Interest expense on convertible preference shares 20,058 7,475 --------- ---------- Total interest expense on financial liabilities not at fair value through profit or loss 98,801 92,624 Change in fair value of open forward currency derivative financial instruments 156 2,324 Change in fair value of open interest rate derivative financial instruments 1,650 1,990 Finance expense 100,607 96,938 --------- ---------- In 2016, the Group agreed to pay $16.3 million to HSH Nordbank to fully repay and discharge $31.7 million of loans secured on the Konstanta office block, generating a profit for the Group of $15.4 million. Included in the interest expense on loans and borrowings is $5.5 million (2016: $3.8 million) relating to amortisation of costs incurred in originating the loans. Included in the interest expense on preference shares is $0.5 million (2016: $0.6 million) relating to the accretion of premiums payable on redemption of preference shares and amortisation of costs incurred in issuing preference shares. Included in the interest expense on convertible preference shares is $7.1 million (2016: $2.8 million) relating to the accretion of premiums payable on redemption and amortisation of costs incurred in issuing the convertible preference shares of $0.3 million (2016: $0.1 million). 8. Tax 2017 2016 $'000 $'000 The tax expense for the year comprises: Current taxation 19,346 10,816 Deferred taxation (note 26) On the origination and reversal of temporary differences 15,228 3,694 On unrealised foreign exchange movements in loans 191 17 Over provision in prior year (1,804) - Tax charge 32,961 14,527 --------- ---------- The charge for the year can be reconciled to the profit per the Income Statement as follows: 2017 2016 $'000 $'000 Profit before tax 90,647 22,246 Tax at the Russian corporate tax rate of 20% 18,129 4,449 Tax effect of financing arrangements (4,977) 12,524 Tax effect of non deductible preference share coupon 7,177 4,841 Tax effect of foreign exchange movements 1,150 10,959 Tax effect of debt repurchase not subject to tax - (2,990) Movement in provision for uncertain tax positions 7,038 3,917 Tax effect of other income not subject to tax and non-deductible expenses 4,525 1,738 Tax effect of property depreciation on revaluations 2,878 4,397 Tax on dividends and other inter company gains 3,473 1,235 Movement on previously unprovided deferred tax assets (4,628) (26,543) Over provision in prior year (1,804) - 32,961 14,527 --------- ---------- The tax effect of financing arrangements reflects the impact of intra group funding in each jurisdiction. Foreign exchange movements on intra group financing are taxable or tax deductible in Russia but not in other jurisdictions. In accordance with its accounting policy, the Group is required to estimate its provision for uncertain tax positions. During the year the provision has increased, as shown in the reconciliation above, as a consequence of tax clarifications and interpretations. Other income and expenditure not subject to tax arises in Guernsey. 9. Earnings measures In addition to reporting IFRS earnings the Group also reports its own underlying earnings measure. The Directors consider underlying earnings to be a key performance measure, as this is the measure used by Management to assess the return on holding investment assets for the long term and the Group's ability to declare covered distributions. As a consequence the underlying earnings measure excludes investment property revaluations, gains or losses on the disposal of investment property, intangible asset movements, gains and losses on derivative financial instruments, share-based payments and other long term incentives (to the extent not settled in cash), the accretion of premiums payable on redemption of preference shares and convertible preference shares, material non-recurring items, depreciation and amortisation of loan origination costs, together with any related tax. The calculation of basic and diluted earnings per share is based on the following data: 2017 2016 $'000 $'000 Earnings Net profit for the year prepared under IFRS 57,686 7,719 Adjustments to arrive at underlying earnings: Impairment of goodwill (note 6a) 2,061 - Depreciation (note 6a) 1,143 1,101 Share-based payments and other long term incentives (note 32c) 2,910 5,944 Unrealised (profit) / loss on revaluation of investment property (42,320) 40,192 Profit on disposal of investment property under construction - (3,807) Unrealised loss on revaluation of investment property under construction 4,168 3,132 Profit on purchase and cancellation of loans and borrowings (note 7) - (15,365) Change in fair value of open forward currency derivative financial instruments (note 7) 156 2,324 Change in fair value of open interest rate derivative financial instruments (note 7) 1,602 1,821 Change in fair value of foreign currency embedded derivatives (note 7) (867) (2,552) Premium on redemption of preference shares and amortisation of issue costs (note 23) 537 562 Premium on redemption of convertible preference shares and amortisation of issue costs (note 24) 7,448 2,892 Amortisation of loan origination costs (note 7) 5,481 3,811 Movement on deferred tax thereon 16,718 212 Tax on unrealised foreign exchange movements in loans 86 (864) Underlying earnings 56,809 47,122 --------- ---------- 2017 2016 Weighted Weighted
average average Earnings shares EPS Earnings shares EPS IFRS $'000 No. '000 Cents $'000 No. '000 Cents Basic 57,686 663,493 8.69 7,719 657,468 1.17 Effect of dilutive potential ordinary shares: Warrants (note 28) - 7,669 - 7,651 LTIP (note 32) - 1,382 - 1,294 2016 Retention Scheme (note 32) - 2,513 - 1,009 CBLTIS 2015 (note 32) - - - 275 ERS (note 32) - - - 21 Convertible preference shares (note 24) 20,058 261,369 - - Diluted 77,744 936,426 8.30 7,719 667,718 1.16 ----------- ------------- ------------- --------- 2017 2016 Weighted Weighted average average Earnings shares EPS Earnings shares EPS Underlying earnings $'000 No. '000 Cents $'000 No. '000 Cents Basic 56,809 663,493 8.56 47,122 657,468 7.17 Effect of dilutive potential ordinary shares: Warrants (note 28) - 7,669 - 7,651 LTIP (note 32) - 1,382 - 1,294 2016 Retention Scheme (note 32) - 2,513 - 1,009 CBLTIS 2015 (note 32) - - - 275 ERS (note 32) - - - 21 Convertible preference shares (note 24) 12,610 261,369 4,584 91,851 Diluted 69,419 936,426 7.41 51,706 759,569 6.81 ----------- ------------- ------------- --------- The finance expense for 2016 relating to the convertible preference shares was greater than IFRS basic earnings per share and thus the convertible preference shares were not dilutive for IFRS fully diluted earnings per share. This was not the case in 2017 nor for underlying earnings per share where the convertible preference shares are dilutive and have been incorporated into the calculation of diluted earnings per share. 10. Ordinary dividends In the place of a final dividend for 2016 the Company implemented a tender offer buy back of ordinary shares on the basis of 1 in every 26 shares held at a tender price of 52 pence per share, the equivalent of a final dividend of 2 pence per share. Instead of an interim dividend for 2017 the Company implemented a tender offer buy back of ordinary shares on the basis of 1 in every 52 shares at a tender price of 52 pence per share, the equivalent of a dividend of 1 pence per share. 11. Investment property Asset class Logistics Logistics Logistics Office St St Location Moscow Petersburg Regions Petersburg 2017 Fair value Level Level Level Level hierarchy* 3 3 3 3 Total $'000 $'000 $'000 $'000 $'000 Market value at 1 January 2017 1,005,449 141,431 151,846 24,818 1,323,544 Corporate acquisitions (note 39) - 35,994 - 50,179 86,173 Other acquisition 122,730 - - - 122,730 Property improvements 11,155 1,738 3,081 312 16,286 Unrealised profit on revaluation 16,346 16,872 4,477 6,834 44,529 ---------- ----------- ---------- ----------- ---------- Market value at 31 December 2017 1,155,680 196,035 159,404 82,143 1,593,262 Tenant incentives and contracted rent uplift balances (18,552) (5,749) (1,711) (550) (26,562) Head lease obligations (note 25) 1,426 - - - 1,426 ---------- Carrying value at 31 December 2017 1,138,554 190,286 157,693 81,593 1,568,126 ---------- ----------- ---------- ----------- ---------- Revaluation movement in the year ended 31 December 2017 Gross revaluation 16,346 16,872 4,477 6,834 44,529 Effect of tenant incentives and contracted rent uplift balances (1,057) (417) (339) (396) (2,209) Revaluation reported in the Income Statement 15,289 16,455 4,138 6,438 42,320 ---------- ----------- ---------- ----------- ---------- Asset class Logistics Logistics Logistics Office St St Location Moscow Petersburg Regions Petersburg 2016 Fair value hierarchy Level Level Level Level * 3 3 3 3 Total $'000 $'000 $'000 $'000 $'000 Market value at 1 January 2016 1,043,952 139,106 148,649 25,140 1,356,847 Property improvements 4,906 2,022 378 (179) 7,127 Unrealised (loss) / profit on revaluation (43,409) 303 2,819 (143) (40,430) ---------- ----------- ---------- ----------- ---------- Market value at 31 December 2016 1,005,449 141,431 151,846 24,818 1,323,544 Tenant incentives and contracted rent uplift balances (17,495) (5,332) (1,372) (154) (24,353) Head lease obligations (note 25) 1,452 - - - 1,452 ---------- Carrying value at 31 December 2016 989,406 136,099 150,474 24,664 1,300,643 ---------- ----------- ---------- ----------- ---------- Revaluation movement in the year ended 31 December 2016 Gross revaluation (43,409) 303 2,819 (143) (40,430) Effect of tenant incentives and contracted rent uplift balances (948) - (54) 1,240 238 ---------- Revaluation reported in the Income Statement (44,357) 303 2,765 1,097 (40,192) ---------- ----------- ---------- ----------- ---------- *Classified in accordance with the fair value hierarchy, see note 36. There were no transfers between fair value hierarchy in 2016 or 2017. During the year the Group acquired four new investment properties. As corporate acquisitions it acquired Gorigo Logistics Park, Kellerman Business Centre and Primium Business Centre (see note 39) and also, as a direct purchase of real estate, Logopark Sever a newly completed logistics park in Moscow. At 31 December 2017 the Group has pledged investment property with a value of $1,435 million (2016: $1,288 million) to secure banking facilities granted to the Group (note 22). 12. Investment property under construction Assets under Asset class construction Land Bank St Location Moscow Regions Petersburg Regions 2017 Fair value Level Level Level Level hierarchy* 3 3 Sub-total 3 3 Sub-total Total $'000 $'000 $'000 $'000 $'000 $'000 $'000 Market value at 1 January
2017 29,600 7,500 37,100 - 3,662 3,662 40,762 Costs incurred 57 12 69 - - - 69 Disposal - - - - - - - Effect of foreign exchange rate changes 686 341 1,027 - 206 206 1,233 Unrealised loss on revaluation (3,643) (253) (3,896) - (272) (272) (4,168) --------- --------- ---------- ----------- ---------- ----------- ---------- Market value at 31 December 2017 26,700 7,600 34,300 - 3,596 3,596 37,896 Head lease obligations (note 25) 515 - 515 - - - 515 --------- ---------- ----------- ---------- ----------- Carrying value at 31 December 2017 27,215 7,600 34,815 - 3,596 3,596 38,411 --------- --------- ---------- ----------- ---------- ----------- ---------- Assets under Asset class construction Land Bank St Location Moscow Regions Petersburg Regions 2016 Fair value Level Level Level Level hierarchy* 3 3 Sub-total 3 3 Sub-total Total $'000 $'000 $'000 $'000 $'000 $'000 $'000 Market value at 1 January 2016 27,700 7,300 35,000 413 2,714 3,127 38,127 Costs incurred 2,353 33 2,386 49 355 404 2,790 Disposal - - - (543) - (543) (543) Effect of foreign exchange rate changes 1,774 1,072 2,846 81 593 674 3,520 Unrealised loss on revaluation (2,227) (905) (3,132) - - - (3,132) --------- --------- ---------- ----------- ---------- ----------- ---------- Market value at 31 December 2016 29,600 7,500 37,100 - 3,662 3,662 40,762 Head lease obligations (note 25) 491 - 491 - - - 491 --------- --------- ----------- ---------- ----------- ---------- Carrying value at 31 December 2016 30,091 7,500 37,591 - 3,662 3,662 41,253 --------- --------- ---------- ----------- ---------- ----------- ---------- *Classified in accordance with the fair value hierarchy, see note 36. There were no transfers between fair value hierarchy in 2016 or 2017. In 2016 the Group sold a land plot in St Petersburg for $4.6 million, generating a profit of $3.8 million after costs. No borrowing costs were capitalised in the year (2016: $nil). At 31 December 2017 the Group has pledged investment property under construction with a value of $34.3 million (2016: $37.1 million) to secure banking facilities granted to the Group (note 22). 13. Investment property and investment property under construction - Valuation It is the Group's policy to carry investment property and investment property under construction at fair value in accordance with IFRS 13 "Fair Value Measurement" and IAS 40 "Investment Property": - investment property consists of the completed, income producing, portfolio; and - investment property under construction consists of potential development projects and land bank. The latter is sub-categorised as: - assets under construction - current development projects and the value of land on additional phases of existing investment property; and - land bank - land held for potential development. For the purposes of IFRS 13 disclosure, we have analysed these categories by the geographical market they are located in being Moscow, St Petersburg and the Regions (the other Russian regional cities). These form distinct markets for valuation purposes as the fundamentals differ in each. The fair value of the Group's investment property and assets under construction at 31 December 2017 has been arrived at on the basis of market valuations carried out by Jones Lang Lasalle ("JLL"), external valuers to the Group. JLL have consented to the use of their name in these financial statements. The Group's land bank in St Petersburg and the Regions is valued by the Directors. Valuation process The executive management team members responsible for property matters determine the valuation policies and procedures for property valuations in consultation with the Chief Executive Officer and Chief Financial Officer. The Group has four qualified RICS members on the management team, one of whom was a former Chairman of RICS in Russia and the CIS. All have relevant valuation and market experience and are actively involved in the valuation process. They also regularly meet with agents and consultants to obtain additional market information. The effectiveness and independence of the external valuer is reviewed each year. The criteria considered include market knowledge, reputation, independence and professional standards. The Audit Committee also meets the external valuer at least once a year. Executive management and the Directors have determined that the external valuer is experienced in the Russian market and acts as an "External Valuer" as defined in the "RICS Valuation - Professional Standards". The external valuers perform their valuations in accordance with the "RICS Valuation - Professional Standards", the 2014 Edition (the "Red Book"). This is an internationally accepted basis of valuation and is consistent with the principles of IFRS 13. For investment properties and assets under construction, the executive team members consult with the external valuers and the valuers then determine: - whether a property's fair value can be reliably determined; - which valuation method should be applied for each asset; and - the assumptions made for unobservable inputs that are used in valuation methods. The land bank is valued by the Directors. The process followed includes regular site inspections, meetings with local real estate experts, comparison to any local land sale information and comparison to transactions in other regional cities including those where the Group has income producing assets. Updated acquisition appraisals and any indication of value for alternative use are also considered. Valuations are prepared on a biannual basis. At each valuation date the executive team members review the information prepared by the property department for valuation purposes being submitted to the external valuers. Each property valuation is then reviewed and discussed with the external valuer in detail, adjustments made as necessary and results discussed with the Chief Executive Officer and Chief Financial Officer. The executive management also present the valuation results to the Audit Committee and hold discussions with the Group's auditors. Both the Audit Committee and the auditors also have discussions with the external valuers. Valuation assumptions and key inputs Class of property Carrying amount Valuation Input Range 2017 2016 technique 2017 2016 $'000 $'000 Completed investment property Long term ERV Moscow - per sqm for existing Rub 4,500- $85 to Logistics 1,138,554 989,406 Income tenants Rub 4,896 $105 Short term ERV per sqm for vacant Rub 3,500- capitalisation space Rub 3,800 Rub4,000 2.5% to 2.0% to Initial yield 15.45% 16.0% 10.54% 10.7% Equivalent yield to 12.04% to 12.2% 1% to 9% to Vacancy rate 94% 77% Passing rent $110 to $70 to per sqm $166 $158 Passing rent Rub 3,104 Rub3,500 per sqm to to
Rub 11,847 Rub6,744 St Petersburg Long term ERV - Logistics 190,286 136,099 Income per sqm Rub 4,320- $80 for existing capitalisation tenants Rub 4,608 Short term ERV per sqm for vacant space Rub 3,800 Rub3,700 5.96% 11.3% Initial yield to 13.42% to 13.2% 12.11% 12.3% Equivalent yield to 13.4% to 12.6% 3% to 3% to Vacancy rate 19% 31% Passing rent $69 to $105 to per sqm $140 $138 Passing rent Rub 2,339 Rub3,500 per sqm to to Rub 4,916 Rub4,500 Long term ERV Regional per sqm for existing - Logistics 157,693 150,474 Income tenants Rub 4,608 $80 Short term ERV per sqm for vacant capitalisation space Rub 3,800 Rub3,700 8.99% 9.0% to Initial yield to 11.33% 12.4% 12.14% 12.4% Equivalent yield to 12.53% to 12.5% 6% to 22% to Vacancy rate 27% 33% Passing rent $104 to $102 to per sqm $133 $129 Passing rent Rub 3,720 Rub3,900 per sqm to to Rub 6,707 Rub6,547 St Petersburg $173 to - Office 81,593 24,664 Income ERV per sqm $215 $235 12.53% capitalisation Initial yield to 24.25% 20.0% 11.0% Equivalent yield to 12.25% 13.0% 0% to Vacancy rate 1% 0% Passing rent per sqm $388 Rub19,545 Passing rent per sqm EUR390 n/a Passing rent Rub 8,124 per sqm to n/a Rub 16,271 Range Other key information Description 2017 2016 Land Moscow - plot 34% - 34% - Logistics ratio 65% 65% Age of 1 to 13 2 to 12 building years years Outstanding costs (US$'000) 9,436 6,803 Land St Petersburg plot 48% - 51% - - Logistics ratio 57% 57% Age of 3 to 9 2 to 8 building years years Outstanding costs (US$'000) 826 1,102 Land Regional plot 48% - 48% - - Logistics ratio 61% 61% Age of building 8 year 7 years Outstanding costs (US$'000) 154 665 Land St Petersburg plot 148% to - Office ratio 496% 320% Age of 9 to 11 building years 10 years Outstanding costs (US$'000) 81 - Carrying amount Valuation Input Range Investment property under construction 2017 2016 technique 2017 2016 $'000 $'000 Moscow - Value per ha $0.32 $0.29 Logistics 27,215 30,091 Comparable ($m) - $0.53 - $0.61 Regional Value per ha - Logistics 7,600 7,500 Comparable ($m) $0.30 $0.29 The fair value of investment property is determined using the income capitalisation method where a property's fair value is estimated based on the normalised net operating income of the asset divided by the capitalisation (discount) rate. Each income stream from every tenant is valued based on capitalising the contracted rent for the term of the lease, including any fixed increases in rent but excluding any future indexation. Allowance at lease end is made for any potential letting void and an assessment is made of the estimated rental value on re-letting (ERV). These elements are determined based on current market conditions and values. Assets under construction (development projects) are valued on a residual value basis using the future anticipated costs to complete construction, a provision for letting costs, a letting void period and an assessment of ERV. Depending on the status of the development, and how much of development process has been completed an allowance will also be made for developer's profit.
Assets under construction (additional phases of existing sites) are valued on a comparable basis. The value of these plots is estimated based on comparable transactions in the same market. This approach is based on the principle that a buyer will not pay more for an asset than it will cost to buy a comparable substitute property. The unit of comparison applied is the price per square metre. All of the above valuations are completed by JLL. The land bank is valued by the Directors using the comparable basis. Sensitivity analysis of significant changes in unobservable inputs within Level 3 of the hierarchy The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the entity's portfolio of investment property are: - ERV; - Void period on re-letting; - Initial yield; and - Specific to property under development: construction costs, letting void, construction period and development profit. In preparing their valuations in prior periods JLL specifically referred to the uncertainty in the market caused by sanctions, economic contraction and an oil price that was low compared with recent history and the difficulties this caused in drawing conclusions as to market yields and ERVs. Following the improvement in the Russian economy and commercial property market and an increase in activity in the investment market, they no longer highlight this uncertainty. Further significant increases (or decreases) in any of the main inputs to the valuation, being yield, ERV (per sqm p.a.) and letting void, would result in a significantly lower (or higher) fair value measurement. 14. Goodwill $'000 Balance at 1 January 2016 2,245 Effect of foreign exchange rate changes (363) Balance at 31 December 2016 1,882 Effect of foreign exchange rate changes 179 Impairment of goodwill (2,061) Balance at 31 December 2017 - ------------- As a consequence of the sale of the majority of Raven Mount's land bank in the year, goodwill has been impaired. 15. Investment in subsidiary undertakings The principal subsidiary undertakings of Raven Russia Limited, all of which have been included in these consolidated financial statements, are as follows: Country Proportion of ownership Name of incorporation interest 2017 2016 Dorfin Limited Cyprus 100% 100% Raven Russia Holdings Cyprus Limited Cyprus 100% 100% Roslogistics Holdings (Russia) Limited Cyprus 100% 100% Raven Mount Group Limited England 100% 100% Raven Russia Property Advisors Limited England 100% 100% Raven Russia (Service Company) Limited Guernsey 100% 100% Avalon Logistics Company LLC Russia 100% 100% Delta LLC Russia 100% 100% EG Logistics LLC Russia 100% 100% Fenix LLC Russia 100% 100% Gorigo LLC Russia 100% - CJSC Kulon Development Russia 100% 100% CJSC Kulon Istra Russia 100% 100% Kulon Spb LLC Russia 100% 100% League LLC Russia 100% 100% Logopark Don LLC Russia 100% 100% Logopark Ob LLC Russia 100% 100% CJSC Noginsk Vostok Russia 100% 100% Pervomayskay Zarya LLC Russia 100% - Petroestate LLC Russia 100% 100% Primium LLC Russia 100% - Resource Economia LLC Russia 100% 100% Sever Estate LLC Russia 100% - Soyuz-Invest LLC Russia 100% 100% CJSC Toros Russia 100% 100% The Group's investment property and investment property under construction are held by its subsidiary undertakings. 16. Investment in joint ventures The principal joint ventures of the Group are as follows: Proportion of ownership Name Country of incorporation interest 2017 2016 Coln Park LLP England 50% 50% Coln Park Construction LLP England 50% 50% Coln Park LLP and Coln Park Construction LLP are the entities through which the Group undertakes its second home development activity in the UK. In addition, the Group has a number of other small joint ventures associated with the second home development activity. The Group's interest in each joint venture has been accounted for using the equity method. None of the Group's joint ventures are individually material. Summarised aggregated financial information of the joint ventures, prepared under IFRS, and a reconciliation with the carrying amount of the investments in the consolidated financial statements are set out below: 2017 2016 Summarised Balance Sheet $'000 $'000 Non-current assets 4,355 4,141 Inventory 8,330 10,960 Cash and short term deposits 4,780 2,558 Other current assets 2,656 1,625 Current liabilities (6,094) (4,686) Non-current liabilities (3,484) (3,746) Net assets 10,543 10,852 -------------- ------------- Investment in joint ventures Goodwill on acquisition 4,712 4,305 Share of net assets at 50% 5,271 5,426 -------------- ------------- Carrying value 9,983 9,731 -------------- ------------- Carrying value at 1 January 9,731 14,968 Share of profit for the year 2,074 1,780 Share of distributions
paid (2,711) (4,521) Effect of foreign exchange rate changes 889 (2,496) Carrying value at 31 December 9,983 9,731 -------------- ------------- 2017 2016 Summarised Income Statement $'000 $'000 Gross revenue 30,758 25,430 Cost of sales (24,060) (19,807) Administrative expenses (2,305) (1,932) Finance expense (236) (125) -------------- ------------- Profit before tax 4,157 3,566 Tax (10) (5) -------------- Profit for the year 4,147 3,561 -------------- ------------- Group's share of profit for the year 2,074 1,780 -------------- ------------- The joint ventures had no contingent liabilities or capital commitments as at 31 December 2017 and 2016. The joint ventures cannot distribute their profits until they obtain the consent from the joint venture partners. The Group charged its joint ventures $93k (2016: $97k) for services rendered to them during the year. The joint ventures recharged certain costs back to the Group that for the year amounted to $175k (2016: $146k) of which $9k (2016: $9k) was included in payables at the balance sheet date. In addition to the investment shown above the Group has provided a loan to Coln Park LLP of $406k (2016: $342k) generating interest income of $30k (2016: $37k). 17. Other receivables 2017 2016 $'000 $'000 Loans receivable 665 611 Security deposits 1,305 - VAT recoverable 3,337 2,982 Prepayments and other receivables 318 131 5,625 3,724 -------------- ------------- VAT recoverable arises from the payment of value added tax on construction or purchase of investment property, which will be recovered through the offset of VAT paid on future revenue receipts or repayment direct from the taxation authority. VAT recoverable has been split between current and non-current assets based on the Group's assessment of when recovery will occur. 18. Trade and other receivables 2017 2016 $'000 $'000 Trade receivables 44,315 37,732 Prepayments 5,397 4,257 Security deposits - 2,393 VAT recoverable 23,429 4,893 Other receivables 284 319 Tax recoverable 5,521 3,075 78,946 52,669 -------------- ------------- 19. Derivative financial instruments 2017 2016 $'000 $'000 Interest rate derivative financial instruments Non-current assets 7,729 4,694 Current assets 303 95 Non-current liabilities - - Current liabilities - (25) Forward currency derivative financial instruments Non-current assets 123 269 Current assets 17 8 Foreign currency embedded derivatives Non-current assets 96 49 Current assets 125 255 Non-current liabilities - (67) Current liabilities (35) (918) The Group has entered into a series of interest rate derivative financial instruments to manage the interest rate and resulting cash flow exposure from the Group's banking facilities. At 31 December 2017 the instruments have a notional value of $651 million (2016: $581 million) and a weighted average fixed or capped rate of 1.61% (2016: 1.51%). The Group had also entered into a series of forward currency derivative financial instruments to hedge interest payments due to preference shareholders against sterling strengthening. The instruments have a notional amount of $37.2 million (2016: $55.8 million), a weighted average capped rate of $1.55 to GBP1 (2016: $1.55 to GBP1) and quarterly maturities with the final instruments maturing on 18 December 2019 (2016: 18 December 2019). Several of the Group's leases incorporate collars and caps on US Dollar and Russian Rouble exchange rates. These have been categorised as embedded derivatives and their fair values calculated resulting in the assets or liabilities disclosed above. 20. Cash and short term deposits 2017 2016 $'000 $'000 Cash at bank and on call 173,244 74,708 Short term deposits 93,422 123,913 266,666 198,621 -------------- ------------- Cash at bank and on call attracts variable interest rates, whilst short term deposits attract fixed rates but mature and re-price over a short period of time. The weighted average interest rate on short term deposits at the balance sheet date is 5.04% (2016: 5.06%). 21. Trade and other payables 2017 2016 $'000 $'000 Trade and other payables 6,762 8,667 Construction payables 10,497 5,905 Advanced rentals 26,467 28,304 Deferred consideration on property acquisition 24,166 - Other payables 6,949 3,770 Current
tax payable 19,829 9,471 Other tax payable 12,678 9,283 Head leases (note 25) 9 8 107,357 65,408 -------------- ------------- 22. Interest bearing loans and borrowings 2017 2016 $'000 $'000 Bank loans Loans due for settlement within 12 months 106,697 40,787 Loans due for settlement after 12 months 740,485 699,038 847,182 739,825 -------------- ------------- The Group's borrowings have the following maturity profile: On demand or within one year 106,697 40,787 In the second year 148,390 53,292 In the third to fifth years 383,582 440,432 After five years 208,513 205,314 847,182 739,825 -------------- ------------- The amounts above include unamortised loan origination costs of $10.6 million (2016: $12.3 million) and interest accruals of $1.7 million (2016: $3.8 million). The principal terms of the Group's interest bearing loans and borrowings on a weighted average basis are summarised below: As at 31 December 2017 Interest Maturity Rate (years) $'000 Secured on investment property and investment property under construction 7.6% 4.5 832,405 Unsecured facility of the Company 8.9% 2.7 14,777 847,182 ------------- As at 31 December 2016 Secured on investment property and investment property under construction 7.5% 4.7 725,123 Unsecured facility of the Company 8.9% 3.7 14,702 739,825 ------------- The interest rates shown above are the weighted average cost, including US LIBOR and Euribor, as at the Balance Sheet dates. There were a number of refinancings completed during the year. On 19 January 2017 the Group refinanced a secured debt facility, drawing down $80 million under the new facility and repaying $74.8 million on the old facility. The new facility has a seven year term. A second secured debt facility was refinanced, drawing $50.6 million on 21 September 2017 and a further $14.5 million on 26 October 2017, repaying the old facility of $50.6 million on the initial draw. The new facility has a term of seven years. A third refinancing straddled the year end, $62.3 million was drawn on 29 December 2017 and the old facility of the same amount repaid on 9 January 2018. Again the term is seven years. The Group entered into two new secured debt facilities towards the end of the year. On 9 November 2017 the Group entered into one facility drawing EUR21.6 million and then EUR42.8 million in two tranches drawn on 20 December 2017 and 5 January 2018 on the second facility. Both of these facilities have a seven year term. In June 2017 the Group entered into two four year forward dated caps to extend existing hedging arrangements on expiry. In October 2017 the Group entered into a four year forward dated cap starting in March 2018 to extend existing hedging arrangements on expiry. In December 2017 the Group entered into three interest rate caps to hedge floating interest rates on three facilities drawn in the year. In February 2018 the Group sold a cap hedging the facility that was fully repaid in January 2018. As at 31 December 2017 the Group had interest rate hedges for $651 million of borrowings (2016: $469 million) capped at 1.61% (2016: 1.61%) for three years (2016: two years) and $191 million of fixed rate loans (2016: $131 million) with a weighted average rate of 6.90% (2016: 7.10%) for five years (2016: six years). At 31 December 2017 the Group had no interest rate swaps (2016: $112 million with 3 months remaining at a weighted average swap rate of 1.08%). This gave a weighted average cost of debt to the Group of 7.6% (2016: 7.5%) at the year end. 23. Preference shares 2017 2016 $'000 $'000 Issued share capital: At 1 January 131,703 156,558 Purchased in the year (112) (713) Reissued in the year 961 - Premium on redemption of preference shares and amortisation of issue costs 537 562 Scrip dividends 863 614 Effect of foreign exchange rate changes 12,506 (25,318) At 31 December 146,458 131,703 -------------- ------------- 2017 2016 Number Number Issued share capital: At 1 January 98,265,327 98,328,017 Purchased in the year (56,866) (450,000) Reissued in the year 487,047 - Scrip dividends 447,684 387,310 At 31 December 99,143,192 98,265,327 -------------- ------------- Shares in issue 99,200,060 98,752,376 Held by the Company's Employee Benefit Trusts (56,868) (487,049) At 31 December 99,143,192 98,265,327 -------------- ------------- The preference shares entitle the holders to a cumulative annual dividend of 12 pence per share. 24. Convertible preference shares 2017 2016 $'000 $'000 Issued share capital: At 1 January 119,859 - Issued in the year 130,290 138,705 Allocated to equity (6,067) (8,453) Acquired by Company's Employee Benefit Trust (3,888) (10,378) Reissued in the year 4,376 2,779 Converted to ordinary shares (note 27) (331) - Premium on redemption of preference shares
and amortisation of issue costs 7,448 2,892 Movement on accrual for preference dividends 22 24 Effect of foreign exchange rate changes 17,322 (5,710) At 31 December 269,031 119,859 -------------- ------------- 2017 2016 Number Number Issued share capital: At 1 January 102,837,876 - Issued in the year 89,766,361 108,689,501 Acquired by Company's Employee Benefit Trust (2,631,578) (8,000,000) Reissued in the year 2,683,075 2,148,375 Converted to ordinary shares (note 27) (266,848) - At 31 December 192,388,886 102,837,876 -------------- ------------- Shares in issue 198,189,014 108,689,501 Held by the Company's Employee Benefit Trust (5,800,128) (5,851,625) At 31 December 192,388,886 102,837,876 -------------- ------------- On 4 July 2017 the Company created and issued a further 89,766,361 convertible preference shares at a placing price of 114p per share. The new convertible preference shares rank pari passu with the existing convertible preference shares in issue. One of the Company's Employee Benefit Trusts participated in the placing and subscribed for a further 2,631,578 convertible preference shares. The convertible preference shares entitle the holders to a cumulative annual dividend of 6.5 pence per share and are redeemable by the Company on 6 July 2026 at GBP1.35 per share. The convertible preference shares are convertible to ordinary shares at the holder's request at any time prior to redemption at a rate that is currently 1.759 ordinary shares for each convertible preference share. In applying its accounting policies the Group has determined that the convertible preference shares are a compound financial instruments in that it has a liability component and an equity component. The Group has determined the fair value of the liability component, which is reflected above, and the residual amount of the fair value of the consideration received on issue is equity. The fair value of the liability component has been calculated using a discounted cash flow model. 25. Other payables 2017 2016 $'000 $'000 Rent deposits 22,626 23,324 Deferred consideration on property acquisition 10,008 - Head leases 1,932 1,935 34,566 25,259 -------------- ------------- The Group has leasehold properties that it classifies as investment property and investment property under construction. Minimum lease payments due over the remaining term of the leases totalled $5.9 million (2016: $5.9 million) and have a present value at 31 December 2017, as reflected above and in note 21, of $1.9 million (2016: $1.9 million). 26. Deferred tax Tax losses Other Total (a) Deferred tax assets $'000 $'000 $'000 Balance at 1 January 2016 25,479 44 25,523 Effect of foreign exchange rate changes 4,838 - 4,838 (Charge) / credit for the year (3,517) 607 (2,910) Balance at 31 December 2016 26,800 651 27,451 Effect of foreign exchange rate changes 1,682 - 1,682 Credit for the year 3,207 433 3,640 On acquisition (note 39) 1,856 - 1,856 Balance at 31 December 2017 33,545 1,084 34,629 ------------ -------------- ------------- The Group has tax losses in Russia of $353 million (2016: $346 million) and tax losses in the UK of $72 million (2016: $87 million) for which deferred tax assets have not been recognised. The losses in the UK do not have an expiry date. The losses in Russia can be carried forward indefinitely, however there is a restriction on the use of losses in that taxable profits cannot be reduced by more than 50% in any one year. Accelerated Revaluation tax of investment allowances property Total (b) Deferred tax liabilities $'000 $'000 $'000 Balance at 1 January 2016 30,145 25,474 55,619 Effect of foreign exchange rate changes 5,448 - 5,448 Charge / (credit) for the year 5,069 (4,267) 802 Balance at 31 December 2016 40,662 21,207 61,869 Effect of foreign exchange rate changes 1,937 - 1,937 Charge for the year 6,749 10,508 17,257 Balance at 31 December 2017 49,348 31,715 81,063 ------------ -------------- ------------- 27. Share capital 2017 2016 $'000 $'000 Issued share capital: At 1 January 12,578 12,776 Issued in the year for cash on warrant exercises (note 28) 180 2 On conversion of convertible preference shares (note 24) 6 - Repurchased and cancelled in the year (285) (200) At 31 December 12,479 12,578 -------------- ------------- 2017 2016 Number Number Issued share capital: At 1 January 667,968,463 682,560,376 Issued in the year for cash on warrant exercises (note 28) 13,946,387 114,084 On conversion of convertible preference shares (note 24) 474,722 - Repurchased and cancelled in the year (21,817,729) (14,705,997)
At 31 December 660,571,843 667,968,463 -------------- ------------- Of the authorised ordinary share capital of 1,500,000,000 at 31 December 2017, 10,948,352 (2016: 24,894,739) are reserved for warrants. Details of own shares held are given in note 29. 28. Warrants 2017 2016 $'000 $'000 At 1 January 1,161 1,167 Exercised in the year (note 27) (720) (6) At 31 December 441 1,161 -------------- ------------- 2017 2016 Number Number At 1 January 24,894,739 25,008,823 Exercised in the year (note 27) (13,946,387) (114,084) At 31 December 10,948,352 24,894,739 -------------- ------------- The Company has issued warrants, which entitle each holder to subscribe for ordinary shares in the Company at an exercise price of 25 pence per share. The warrants expire on 25 March 2019. 315 warrants have been exercised in the period since 31 December 2017 (2016: 66,193). 29. Own shares held 2017 2016 $'000 $'000 At 1 January (7,449) (52,101) Acquisitions (158) (133) Disposal - 43,161 Cancelled 47 81 Allocation to satisfy ERS options exercised (note 32a) - 68 Allocation to satisfy LTIP options exercised (note 32a) 1,818 598 Allocation to satisfy CBLTIS 2015 awards vesting (note 32b) - 877 At 31 December (5,742) (7,449) -------------- ------------- 2017 2016 Number Number At 1 January 6,444,080 38,456,594 Acquisitions 257,703 282,468 Disposal - (30,937,631) Cancelled (39,472) (64,987) Allocation to satisfy ERS options exercised (note 32a) - (62,756) Allocation to satisfy LTIP options exercised (note 32a) (1,512,189) (500,000) Allocation to satisfy CBLTIS 2015 awards vesting (note 32b) - (729,608) At 31 December 5,150,122 6,444,080 -------------- ------------- Allocations are transfers by the Company's Employee Benefit Trusts to settle CBLTIS awards that vest and to satisfy ERS and LTIP options exercised in the year following the vesting of the options. The amounts shown for share movements are net of the Trustees' participation in tender offers during the period from grant to exercise. Details of outstanding LTIP options, which are vested but unexercised, are given in note 32a. 30. Equity The following describes the nature and purpose of each component within equity: Description and Component purpose The amount subscribed for ordinary Share capital share capital at nominal value. The amount subscribed for ordinary share capital in excess of the nominal Share premium value. The consideration attributed to the subscription of warrants less associated Warrants costs of issuance. Own shares The cost to the Company of acquiring the own shares held held by the Company and its subsidiary undertakings or Employee Benefit Trusts. Convertible The amount subscribed for convertible preference preference shares which the Directors shares consider to be Equity. Capital The amount of any capital profits and losses, including reserve gains and losses on the disposal of investment properties (after taxation), increases and decreases in the fair value of investment properties held at each period end, foreign exchange profits and losses on capital items, profits and losses on forward currency financial instruments relating to capital items and deferred taxation on the increase in fair value of investment properties. Translation The amount of any gains or losses arising reserve on the retranslation of net assets of overseas operations. Retained The amount of any profit or loss for the year after earnings payment of dividend, together with the amount of any equity-settled share-based payments, and the transfer of capital items described above. Retained earnings also includes distributable reserves created when in 2005 and 2006 the Company applied to the Royal Court of Guernsey to cancel its share premium at that time and create a reserve which is distributable. 31. Net asset value per share As well as reporting IFRS net asset value and net asset value per share, the Group also reports its own adjusted net asset value and adjusted net asset value per share measure. The Directors consider that the adjusted measure provides more relevant information to shareholders as to the net asset value of a property investment group with a strategy of long term investment. The adjustments remove or adjust assets and liabilities, including goodwill and amounts relating to irredeemable preference shares, that are not expected to crystallise in normal circumstances. 2017 2016 $'000 $'000 Net asset value 529,758 500,226 Goodwill - (1,882) Goodwill in joint ventures (4,712) (4,305) Unrealised foreign exchange profits on preference shares (7,856) (20,362) Fair value of interest rate derivative financial instruments (note 19) (8,032) (4,764) Fair value of embedded derivatives (note 19) (186) 681 Fair value of foreign exchange derivative financial instruments (note 19) (140) (277) -------------- ------------- Adjusted net asset value 508,832 469,317 -------------- ------------- Number Number
Number of ordinary shares (note 27) 660,571,843 667,968,463 Less own shares held (note 29) (5,150,122) (6,444,080) -------------- ------------- 655,421,721 661,524,383 -------------- ------------- 2017 2016 Net Net asset asset value Net asset Ordinary value per Net asset Ordinary per value shares share value shares share No. IFRS $'000 '000 Cents $'000 No. '000 Cents Net asset value per share 529,758 655,422 81 500,226 661,524 76 Effect of dilutive potential ordinary shares: Convertible preference shares (note 24) 269,031 338,412 119,859 186,959 Warrants (note 28) 3,703 10,948 7,691 24,895 LTIP (Note 32) 633 1,873 1,196 3,873 2016 Retention Scheme (note 32) 1,714 4,616 1,498 10,898 Fully diluted net asset value per share 804,839 1,011,271 80 630,470 888,149 71 ------------------ ---------- ------------ -------------- 2017 2016 Net Net asset asset value Net asset Ordinary value per Net asset Ordinary per value shares share value shares share No. Adjusted $'000 '000 Cents $'000 No. '000 Cents Net asset value per share 508,832 655,422 78 469,317 661,524 71 Effect of dilutive potential ordinary shares: Convertible preference shares (note 24) - - 119,859 186,959 Warrants (note 28) 3,703 10,948 7,691 24,895 LTIP (Note 32) 633 1,873 1,196 3,873 2016 Retention Scheme (note 32) 1,714 4,616 1,498 10,898 Fully diluted net asset value per share 514,882 672,859 77 599,561 888,149 68 ------------------ ---------- ------------ -------------- As the preference shares are considered to be capital for capital risk management (see note 35d) unrealised foreign exchange movements on these have been adjusted when calculating adjusted NAV per share. As explained in note 24 the convertible preference shares are a compound financial instrument and their carrying value is split between non-current liabilities and equity. Further more the convertible preference shares have a finite life and thus no adjustment has been made for unrealised foreign exchange gains and losses in calculating the Group's adjusted NAV. The balance sheet carrying value of the liability portion of the convertible preference shares divided by the number of ordinary shares that would be issued on their conversion is greater than the adjusted NAV per share and thus the convertible preference shares are not dilutive for adjusted diluted NAV per share. In the case of IFRS NAV per share the convertible preference shares are dilutive and have been incorporated into the calculation of IFRS diluted NAV per share. The number of potential ordinary shares is the total number of ordinary shares assuming the exercise of all potential ordinary shares less those not expected to vest. 32. Share-based payments and other long term incentives The Group has utilised a number of different share schemes to reward and incentivise the Group's executives and senior staff. Share Option Schemes ("SOS") The Group operated two SOS, the Employee Retention Scheme ("ERS") and the Long Term Incentive Plan ("LTIP"). Both schemes involved the grant of options over the Company's ordinary shares by the Company's Employee Benefit Trusts. The ERS vested in full on the publication of the audited financial statements of the Company for the year ended 31 December 2010 and the ERS options did not have an exercise price. The LTIP options vested in three equal tranches, subject to performance criteria, on 24 March 2012, 2013 and 2014. The LTIP options have an exercise price of 25p per option and have vested in full. Both the ERS and LTIP schemes are closed and further awards cannot be made under either scheme. Awards made under the ERS and LTIP have been accounted for in accordance with the Group's accounting policy for Share-based payments. Combined Bonus and Long Term Incentive Scheme 2015 to 2017 ("CBLTIS 2015") During 2015 the Group implemented the CBLTIS 2015. Contingent awards were made in respect of 35 million ordinary shares, which covered the calendar years 2015 to 2017. The awards are subject to performance criteria; three quarters of the award had performance conditions linked to operating cash flows and the remainder had a share price target. The awards made were accounted for in accordance with the Group's accounting policy for share-based payments. During 2016 the executive directors and certain senior managers waived their entitlement to rewards under this scheme. Additionally after the initial vesting in 2016 the scheme was cancelled. In accordance with the Group's accounting policy the charge to the Income Statement in respect of the share price tranche was accelerated following cancellation of the scheme. 2016 Retention Scheme During 2016 the Group terminated the CBLTIS 2015 and the Company's shareholders approved the introduction of the 2016 Retention Scheme. Awards under the scheme were made to the executive directors of the Company and two senior managers of the Group. The awards entitled the participants to three equal payments each equivalent to 150% of their basic salary. The first instalment was paid on approval of the scheme and the second on 31 December 2017. The third instalment will be paid on 31 March 2019. The sole condition for each instalment being paid is the continuing employment of the participant at the relevant payment date. Participants will receive payment of an instalment in a combination of the Company's listed securities and cash. The numbers of listed securities to be issued to satisfy such payments will be calculated with reference to the average price of the relevant security prior to the payment date. On 13 July 2016 an employment benefit trust ("EBT") of the Company transferred 2,148,375 convertible preference shares to participants of the scheme in satisfaction of the first instalment. On 31 December 2017 the EBT transferred 487,049 preference shares and 1,957,775 convertible preference shares in respect of the second instalment. It is intended that convertible preference shares held by the EBT will also be used to satisfy the third instalment. (a) Movements in Share Option Schemes 2017 2016 Weighted Weighted average average No of exercise No of exercise options price options price Outstanding at the beginning of the year 3,872,973 25p 4,447,973 25p Exercised during the year - ERS - 0p (75,000) 0p - LTIP (2,000,000) 25p (500,000) 25p Outstanding at the end of the year 1,872,973 25p 3,872,973 25p ------------ ------------ -------------- ------------- Represented by:
- LTIP 1,872,973 3,872,973 1,872,973 3,872,973 ------------ -------------- Exercisable at the end of the year 1,872,973 25p 3,872,973 25p The weighted average remaining contractual life of options was 1 year (2016: 2 year). (b) Movements in Combined Bonus and Long Term Incentive Scheme 2015 Awards 2017 2016 No of No of award award shares shares Awards of Ordinary shares: - Outstanding at the beginning of the year - 34,800,000 - Granted during the year - - - Unvested awards waived during the year - (18,750,000) - Vested during the year (of which entitlement to 2,150,626 was waived) - (2,942,060) - Lapsed during the year - (6,207,940) - Cancelled during the year - (6,900,000) - Outstanding at the end of the year - - -------------- ------------- 2017 2016 (c) Income Statement charge for the year $'000 $'000 CBLTIS 2015 - 1,409 2016 Retention scheme 4,545 7,668 4,545 9,077 -------------- ------------- To be satisfied by allocation of: Ordinary shares (IFRS 2 expense) - 1,409 Convertible preference shares / preference shares (IFRS 2 expense) 2,910 4,535 Cash 1,635 3,133 4,545 9,077 -------------- ------------- Of the IFRS 2 expense for the year $1.5 million (2016: $1.5 million) is included in current liabilities. 33. Capital commitments The Group had no significant capital commitments at 31 December 2016 and 2017. 34. Related party transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Further disclosures concerning transactions with the Company's directors are made in the Remuneration Report and note 6. There are no loan balances with directors. Remuneration of Directors and other key management personnel 2017 2016 $'000 $'000 Short term employee benefits 3,933 6,821 Post employment benefits 282 288 Share-based payments and other long term incentives 4,545 7,668 8,760 14,777 -------------- ------------- 35. Financial instruments - risk management The Group's activities expose it to a variety of financial risks in relation to the financial instruments it uses: market risk (including currency risk, price risk and cash flow interest rate risk), credit risk and liquidity risk. The financial risks relate to the following financial instruments: trade receivables, cash and short term deposits, trade and other payables, borrowings, preference shares, convertible preference shares and derivative financial instruments. Risk management parameters are established by the Board on a project by project basis and overseen by management in conjunction with professional advisers. Reports are provided to the Board formally on a weekly basis and also when authorised changes are required. (a) Market risk Currency risk The Group operates internationally and is exposed to foreign exchange risk arising from a variety of currency exposures, primarily with respect to US Dollars, Sterling, Russian Rouble and Euro. Foreign exchange risk arises from future commercial transactions (including lease receivables), recognised monetary assets and liabilities and net investments in foreign entities. The majority of the Group's transactions are denominated in US Dollars, which is also the reporting currency for the Group. The functional currency of the Company is Sterling, however the functional currencies of the Company's subsidiaries vary. The analysis that follows considers the impact of Russian Rouble, Sterling and Euro on the Group. Russian Rouble The rapid depreciation of the Rouble since November 2014 has heightened the Group's currency risk. New leases are now predominantly Rouble denominated rather than pegged to US Dollars, which will increase the Group's foreign currency risk when servicing US Dollar denominated debt. The Group holds sufficient Rouble currency to cover Rouble denominated overheads and any future construction cost commitments. The weak Rouble also has an impact on property values and increased credit risk as explained below. Sterling The Group's exposure to Sterling is primarily driven by the Sterling denominated preference shares and convertible preference shares and the related quarterly dividends, but also head office costs and ordinary share distributions. Whilst there are no Sterling foreign exchange gains and losses arising in the parent company itself, in preparing the group financial statements these Sterling amounts are translated to the Group's US Dollar presentation currency and the resulting exchange gains and losses are included in the translation reserve. The table below summarises the currency in which the Group's financial instruments are denominated: Russian As at 31 December 2017 US Dollar Sterling Rouble Euro Total $'000 $'000 $'000 $'000 $'000 Non-current assets Loans receivable - 665 - - 665 Security deposits 1,305 - - - 1,305 Derivative financial instruments 6,345 123 96 1,384 7,948 Current assets Trade receivables 21,989 4,397 15,536 2,393 44,315 Security deposits - - - - - Derivative financial instruments 303 17 125 - 445 Other current receivables 677 118 546 168 1,509 Cash and short term deposits 112,440 11,795 99,945 42,486 266,666 143,059 17,115 116,248 46,431 322,853 ---------- ------------ ------------ -------------- ------------- Non-current liabilities Interest bearing loans and borrowings 680,555 - - 59,930 740,485 Preference shares - 146,458 - - 146,458 Convertible preference shares - 269,031 - - 269,031 Derivative financial
instruments - - - - - Rent deposits 17,718 - 4,908 - 22,626 Other payables - - 1,932 - 1,932 Current liabilities Interest bearing loans and borrowings 103,906 - - 2,791 106,697 Derivative financial instruments - - 35 - 35 Rent deposits 4,765 - 1,857 - 6,622 Other payables - 6,051 11,382 22 17,455 806,944 421,540 20,114 62,743 1,311,341 ---------- ------------ ------------ -------------- ------------- Russian As at 31 December US 2016 Dollar Sterling Rouble Euro Total $'000 $'000 $'000 $'000 $'000 Non-current assets Loans receivable - 611 - - 611 Security deposits - - - - - Restricted cash - - - - - Derivative financial instruments 4,694 269 49 - 5,012 Current assets Trade receivables 29,489 38 6,068 2,137 37,732 Security deposits 2,393 - - - 2,393 Derivative financial instruments 95 8 255 - 358 Other current receivables - 98 217 3 318 Cash and short term deposits 61,846 19,841 116,287 647 198,621 98,517 20,865 122,876 2,787 245,045 ---------- ------------ ------------ -------------- ------------- Non-current liabilities Interest bearing loans and borrowings 699,038 - - - 699,038 Preference shares - 131,703 - - 131,703 Convertible preference shares - 119,859 - - 119,859 Derivative financial instruments - - 67 - 67 Rent deposits 21,264 - 1,432 628 23,324 Other payables 23 - 1,912 - 1,935 Current liabilities Interest bearing loans and borrowings 40,787 - - - 40,787 Derivative financial instruments 25 - 918 - 943 Rent deposits 5,375 - 1,265 - 6,640 Other payables - 2,769 6,078 22 8,869 766,512 254,331 11,672 650 1,033,165 ---------- ------------ ------------ -------------- ------------- The sensitivity analyses below 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 of the assumptions may be correlated, for example a change in interest rate and a change in foreign currency exchange rates. The Group principally manages foreign currency risk on a project by project basis. The sensitivity analysis prepared by management of foreign currency risk illustrates how changes in the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The table below shows the impact on consolidation if the US Dollar weakened or strengthened by 10% against the Russian Rouble, Sterling or Euro, with all other variables in each case remaining constant, then: 2017 2016 Post tax profit or loss would change by: $'000 $'000 Russian Rouble 5,156 6,619 Sterling 896 1,455 Euro 4,488 214 Net asset value would change by: Russian Rouble 6,196 11,121 Sterling 39,960 22,967 Euro 1,631 214 The sterling sensitivity relates to the retranslation of the value of preference shares and convertible preference shares. Accounting standards also require disclosure of monetary assets and liabilities that are denominated in currencies different from the functional currency of the specific subsidiary or entity in the Group. These are set out in the tables below. Russian As at 31 December 2017 US Dollar Sterling Rouble Euro $'000 $'000 $'000 $'000 Current assets Trade receivables 2,399 - - - Cash and short term deposits 12,797 - 54,998 42,486 15,196 - 54,998 42,486 ------------ ------------ -------------- ------------- Current liabilities Interest bearing loans and borrowings 67 - - 2,791 Rent deposits 4,765 - - 4,832 - - 2,791 ------------ ------------ -------------- ------------- Non-current liabilities Interest bearing loans and borrowings 15,000 - - 59,930 Rent deposits 17,719 - - 32,719 - - 59,930 ------------ ------------ -------------- ------------- Russian As at 31 December 2016 US Dollar Sterling Rouble EUR $'000 $'000 $'000 $'000 Current assets Trade receivables 5,767 - - - Cash and short term deposits 35,501 - 79,660 - 41,268 - 79,660 - ------------ ------------ -------------- ------------- Current liabilities Interest bearing loans and borrowings 63 - - - Rent deposits 5,375 - - - 5,438 - - - ------------ ------------ -------------- ------------- Non-current liabilities Interest bearing loans and borrowings 15,000 - - - Rent deposits 21,264 - - -
36,264 - - - ------------ ------------ -------------- ------------- The Group's interest rate risk arises from long-term borrowings (note 22), which include preference shares issued (note 23) and convertible preference shares (note 24). Borrowings issued at variable rates expose the Group to cash flow interest rate risk, whilst borrowings issued at a fixed rate expose the Group to fair value risk. The Group's cash flow and fair value risk is reviewed monthly by the Board. The cash flow and fair value risk is approved monthly by the Board. The Group analyses its interest rate exposure on a dynamic basis. It takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest costs may increase as a result of such changes. They may reduce or create losses in the event that unexpected movements arise. Various scenarios are simulated taking into consideration refinancing, renewal of existing positions, alternative financing and hedging. Based on these scenarios the Group calculates the impact on profit and loss of a defined interest rate shift. The simulation is run on an on-going basis to verify that the maximum potential impact is within the parameters expected by management. Formal reporting to the Board on cash flows is made on a monthly basis. To date the Group has sought to fix its exposure to interest rate risk on borrowings through fixed rate debt facilities, the use of a variety of interest rate derivatives and the issue of preference shares and convertible preference shares at a fixed coupon. This gives certainty over future cash flow but exposure to fair value movements, which amounted to an accumulated unrealised loss of $14.0 million at 31 December 2017 (2016: loss of $12.4 million). Sensitivity analysis on the Group's interest rate borrowings, net of interest bearing deposits, indicate that a 1% increase in benchmark rates would increase the loss for the year and decrease net assets by $2.6 million (2016: $2.1 million). If benchmark rates were to drop to zero then there would be a decrease in the loss for the year and an increase in net assets of $8.6 million (2016: increase of $4.2 million) as the loss on income from cash would be greater than gains on interest expense because of the low rates prevailing at this time and the interest rate hedges in place. (b) Credit risk The Group's principal financial assets are cash and short term deposits, trade and other receivables and derivative financial instruments. Credit risk associated with the Group's trade and other receivables has increased over recent years. The Group historically transacted with tenants using US dollar pegged leases, passing foreign exchange risk on to the tenant in exchange for lower US CPI indexation. The rapid weakening of the rouble has meant that the foreign exchange risk carried by tenants has increased significantly. This may result in some tenants struggling to meet rental obligations. The Group has policies in place to ensure that rental contracts are made with tenants meeting appropriate Balance Sheet covenants, supplemented by rental deposits or bank guarantees from international banks. No significant doubtful receivables existed at the year end and the amounts presented in the Balance Sheet are net of allowances for doubtful receivables. An allowance for impairment is made where there is objective evidence that the Group will not be able to collect all amounts due according to the terms of the receivables concerned. Details of the movements in provision for impairment of trade receivables is provided in the table below. 2017 2016 $'000 $'000 At 1 January 4,586 4,311 Effect of foreign exchange rate changes 128 254 Charge for the year 105 742 Unused amounts reversed (198) (721) At 31 December 4,621 4,586 -------------- ------------- At 31 December 2017 there were no significant amounts of unimpaired trade receivables that were past due for collection (2016: $ nil). The Group has VAT recoverable of $26.8 million (2016: $7.9 million). The timing of recovery of these balances is subject to future revenue receipts and application to the Russian Courts. The Group forecasts the recovery of these balances based upon the timing of future revenue receipts and its experience of successful application to the Russian Courts. No balances are considered past due or impaired at 31 December 2017 (2016: $ nil) based upon this assessment of the timing of future cash receipts. The Group believes its only exposure is in relation to the timing of recovery. The credit risk of the Group's cash and short term deposits and derivative financial instruments is limited to the Group's policy of monitoring counterparty exposures. (c) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. The Board and its advisers seek to have appropriate credit facilities in place on a project by project basis, either from available cash resources or from bank facilities. Management monitor the Group's liquidity position on a daily basis and formal liquidity reports are issued from all jurisdictions on a weekly basis and are reviewed monthly by the Board, along with cash flow forecasts. A summary table with maturity of financial liabilities is presented below. All amounts shown are gross undiscounted cash flows. Financial liabilities Years Years As at 31 December Year 3 to 6 to 2017 Total Current 2 5 10 $'000 $'000 $'000 $'000 $'000 Interest bearing loans and borrowings 1,072,072 166,325 197,846 478,065 229,836 Preference shares 160,943 16,094 16,094 48,283 80,472 Convertible preference shares 495,150 16,917 16,917 50,751 410,565 Derivative financial instruments 35 35 - - - Head leases 1,553 155 155 466 777 Trade and other payables 46,705 24,078 7,736 13,981 910 1,776,458 223,604 238,748 591,546 722,560 ---------- ------------ ------------ -------------- ------------- As at 31 December 2016 Interest bearing loans and borrowings 964,900 96,014 106,721 542,826 219,339 Preference shares 145,711 14,571 14,571 43,713 72,856 Convertible preference shares 254,153 8,260 8,260 24,780 212,853 Derivative financial instruments 1,010 943 67 - - Head leases 1,447 145 145 434 723 Trade and other payables 38,832 15,509 5,471 15,496 2,356 1,406,053 135,442 135,235 627,249 508,127 ---------- ------------ ------------ -------------- ------------- Details of the interest rates applicable to the Group's long term borrowings, preference shares and convertible preference shares are given in notes 22, 23 and 24. The Group is subject to interest costs in perpetuity in respect of preference shares, which have no contractual maturity date. The table above does not show cash flows beyond 10 years. The Group monitors its risk to a shortage of funds by forecasting cash flow requirements for future years. The Group's objective is to maintain a balance between continuity of funding and flexibility through the use of short term borrowing facilities, bank loans and equity fund raisings. Fair values Set out below is a comparison by class of the carrying amounts and fair value of the Group's financial instruments in the financial statements.
2017 2016 Carrying Fair Carrying Fair Value Value Value Value $'000 $'000 $'000 $'000 Non-current assets Loans receivable 665 621 611 577 Security deposits 1,305 1,220 - - Derivative financial instruments 7,948 7,948 5,012 5,012 Current assets Trade receivables 44,315 44,315 37,732 37,732 Security deposits - - 2,393 2,393 Other current receivables 1,509 1,509 318 318 Derivative financial instruments 445 445 358 358 Cash and short term deposits 266,666 266,666 198,621 198,621 Non-current liabilities Interest bearing loans and borrowings 740,485 743,488 699,038 706,682 Preference shares 146,458 195,816 131,703 165,140 Convertible preference shares 269,031 317,521 119,859 143,596 Derivative financial instruments - - 67 67 Rent deposits 22,626 19,838 23,324 19,838 Other payables 1,932 1,932 1,935 1,935 Current liabilities Interest bearing loans and borrowings 106,697 106,697 40,787 45,458 Derivative financial instruments 35 35 943 943 Rent deposits 6,622 6,622 6,640 6,640 Other payables 17,455 17,455 8,869 8,869 The fair values of loans receivable and borrowings have been calculated based on a discounted cash flow model using a discount rate based on the Group's weighted average cost of capital. The valuation technique falls within level 3 of the fair value hierarchy (see note 36 for definition). The fair value of short term deposits, other assets, trade and other receivables, trade and other payables is assumed to approximate to their book values. The fair value of preference shares and convertible preference shares are assumed to be their last quoted price, which is considered to be level 1 of the fair value hierarchy. The fair value of derivatives is determined by a model with market based inputs. (d) Capital risk management The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern to provide returns to shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. For capital risk management, the Directors consider both the ordinary and preference shares to be permanent capital of the Company, with similar rights as to cancellation. To maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, under take tender offers, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistent with others in its industry, the Group monitors capital on the basis of its gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total liabilities but excluding provisions, head lease obligations and preference shares, which for capital risk management is considered to be capital rather than debt, less cash and short term deposits. Total capital is calculated as equity, as shown in the balance sheet, plus preference shares and net debt. Where the Group has a net cash position, the gearing ratio will be zero. 2017 2016 $'000 $'000 Non-current liabilities 1,123,213 904,157 Current liabilities 214,080 107,130 Total borrowings 1,337,293 1,011,287 Less: cash and short term deposits 266,666 198,621 Net debt 1,070,627 812,666 -------------- ------------- Equity 529,758 500,226 Preference shares 146,458 131,703 Total capital 1,746,843 1,444,595 -------------- ------------- Gearing ratio 61.29% 56.26% -------------- ------------- 36. Fair value measurement The following table provides the fair value measurement hierarchy* of the Group's assets and liabilities. Total Fair Level Level Level 1 2 3 Value As at 31 December 2017 $'000 $'000 $'000 $'000 Assets measured at fair value Investment property - - 1,568,126 1,568,126 Investment property under construction - - 38,411 38,411 Derivative financial instruments - 8,393 - 8,393 Liabilities measured at fair value Derivative financial instruments - 35 - 35 ------------ ------------ -------------- ------------- As at 31 December 2016 Assets measured at fair value Investment property - - 1,300,643 1,300,643 Investment property under construction - - 41,253 41,253 Derivative financial instruments - 5,370 - 5,370 Liabilities measured at fair value Derivative financial instruments - 1,010 - 1,010 ------------ ------------ -------------- ------------- * Explanation of the fair value hierarchy: Level 1 - Quoted prices in active markets for identical assets or liabilities that can be accessed at the balance sheet date. Level 2 - Use of a model with inputs that are directly or indirectly observable market data. Level 3 - Use of a model with inputs that are not based on observable market data. The Group's foreign currency derivative financial instruments are call options and are measured based on spot exchange rates, the yield curves of the respective currencies as well as the currency basis spreads between the respective currencies. The Group's interest rate derivative financial instruments comprise swap contracts and interest rate caps. These contracts are valued using a discounted cash flow model and where not cash collateralised consideration is given to the Group's own credit risk. There have been no transfers between level 1 and level 2 during the year or the prior year. 37. Operating lease arrangements The Group earns rental income by leasing its investment properties to tenants under non-cancellable operating leases, which are discussed in detail in the Strategic Report and note 13. At the Balance Sheet date the Group had contracted with tenants for the following future minimum lease payments:-
2017 2016 $'000 $'000 Within one year 153,733 124,505 In the second year 129,165 108,852 In the third to fifth year (inclusive) 191,718 196,800 After five years 43,466 53,140 518,082 483,297 -------------- ------------- 38. Reconciliation of liabilities arising from financing activities Non-cash changes Cash Foreign 2016 flows Fair value exchange Other 2017 $'000 $'000 $'000 $'000 $'000 $'000 Interest bearing loans and borrowings 739,825 103,175 - (143) 4,325 847,182 Preference shares 131,703 (112) - 12,506 2,361 146,458 Convertible preference shares 119,859 126,402 - 17,322 5,448 269,031 Derivative financial instruments (5,041) (4,870) 1,758 (19) - (8,172) 986,346 224,595 1,758 29,666 12,134 1,254,499 ------------------ ---------- ------------ ------------ -------------- ------------- 2017 Cash flows relating to interest bearing loans and borrowings comprise: $'000 Proceeds from long term borrowings 271,457 Repayment of long term borrowings (125,371) Loan amortisation (38,322) Bank borrowing costs paid (64,171) Add: Interest paid 59,583 ------------ Loan origination costs incurred (4,589) 103,175 -------------- Other non-cash changes include amortisation of origination costs, movements in interest accruals, accretion of premiums payable on redemption of preference and convertible preference shares and the allocation to equity on issue of convertible preference shares. 39. Acquisitions in the period The Group made three corporate acquisitions in the period; Gorigo Logistics Park, Primium Business Centre and Kellerman Business Centre from the same investment fund. The Group purchased the properties by acquiring all of the issued share capital of the corporate vehicles that owned the properties. In accordance with its accounting policy, the Group considered each acquisition in turn, assessing whether an integrated set of activities had been acquired in addition to the property. In each case it was concluded a business had not been purchased but rather the acquisition of a group of assets and related liabilities. Analyses of the consideration payable for the properties and the incidental assets and liabilities are provided below: Offices Primium Kellerman Total Gorigo Total $'000 $'000 $'000 $'000 $'000 Non-current assets Investment property (note 11) 29,216 20,963 50,179 35,994 86,173 Deferred tax assets (note 26a) - - - 1,856 1,856 Current assets Trade and other receivables 234 440 674 282 956 Cash and short term deposits 1,930 1,016 2,946 1,142 4,088 Current liabilities Trade and other payables (1,983) (2,523) (4,506) (1,961) (6,467) 29,397 19,896 49,293 37,313 86,606 ---------- ------------ ------------ -------------- ------------- Discharged by: Cash consideration paid 85,778 Acquisition costs 828 86,606 -------------
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