DJ Arricano Real Estate Plc: Interim Results for the 6 months ended 30 June 2017
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Arricano Real Estate Plc (ARO)
Arricano Real Estate Plc: Interim Results for the 6 months ended 30 June
2017
22-Sep-2017 / 07:00 GMT/BST
Dissemination of a Regulatory Announcement, transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
22 September 2017
Arricano Real Estate plc
("Arricano" or the "Company" or, together with its subsidiaries, the
"Group")
Interim Results for the 6 months ended 30 June 2017
Arricano is one of the leading real estate developers and operators of
shopping centres in Ukraine. Today, Arricano owns and operates five
completed shopping centres comprising 147,800 sqm of gross leasable area, a
49.9% shareholding in Assofit and land for a further three sites under
development.
Highlights:
· Total revenues are up 18.7% at USD12.9 million (30 June 2016: USD10.9
million), reflecting management efforts to boost income with innovations
and service initiatives across the portfolio.
· Operating profit (including revaluation gains) was USD24.0 million (30
June 2016: USD16.8 million)
· Profit before tax was USD18.4 million (30 June 2016: USD8.3 million)
· Total fair valuation of the Company's portfolio was USD197.9 million as
at 30 June 2017 (as at 31 December 2016: USD175.7 million)
· Occupancy increased to 98.8% as at 30 June 2017, compared to 98.3% as at
31 December 2016
· Borrowings remain conservative at the property level with a loan to
investment property ratio of 23.8% as at 30 June 2017 compared to 28.5% as
at 31 December 2016
· Signed 52 new lease agreements during H1 2017 compared to 82 in H1 2016
Mykhailo Merkulov, CEO of Arricano, commented: "It is very pleasing to
report that Arricano has delivered a significant increase in revenues and
profits despite operating in a challenging environment albeit there are
increasing signs of economic improvement. We are steadily growing the
business by being very focused on our core principles of creating shopping
centres that are a pleasure to visit and retail spaces that retailers want
to rent. The fact that we are now nearly operating at full capacity shows we
are going in the right direction."
For further information please contact:
Arricano Real Estate plc Tel: +380 44 569 6708
Mykhailo Merkulov, CEO
Nominated Adviser and Broker Tel: +44 (0)20 7131
4000
Smith & Williamson Corporate Finance
Limited
Azhic Basirov
Financial PR Tel: +44 (0)20 3151
7008
Novella Communications
Tim Robertson/Toby Andrews
Chief Executive's Statement
Introduction
I am pleased to be able to report that the Company has performed extremely
well in the first six months of 2017 and increased operating profit by 42%.
Given the wider market environment we believe this is a very creditable
performance.
Our focus remains on developing and improving the social spaces in all five
of our shopping malls so that visitors are not only coming to shop but also
to relax and enjoy the other facilities on offer. The success of this focus
is reflected by the Group reaching 98.8% occupancy across the portfolio.
Politically Ukraine continues to make progress, the government is publicly
committed to weeding out corruption and this is beginning to have a positive
impact. The Hryvna improved against the US Dollar in the period which has
helped support consumer confidence and has improved commercial borrowing
costs.
Results
Revenues for the six months to 30 June 2017 increased by 19% to USD12.9
million, compared with the same period last year, but due to significant
increase in legal and consultancy costs, Net operating income (excluding
revaluation gains) from the operating properties was USD8.3 million compared
to USD7.7 million in H1 2016.
The Company reported a significant increase in pre-tax profit of USD18.4
million (30 June 2016: USD8.3 million) following a gain on the revaluation
of investment properties of USD15.6 million (30 June 2016: gain of USD9.1
million).
Net profit after tax for the six months to 30 June 2017 was USD15.9 million
(30 June 2016: USD7.7 million) giving earnings per share of USD0.15 (30 June
2016: USD0.07).
The portfolio of property assets was independently valued as at 30 June 2017
by Expandia LLC, (part of the CBRE Affiliate Network) at USD197.9 million
(31 December 2016: USD175.7 million). The valuation uplift came from an
increase in rental rates, positive currency movement, increased occupancy
and improvement in tenant mix further helped by an improving general
economy.
Bank debt at the half-year end was USD47.2 million, with the majority of
borrowings at the project level at an average rate of 11.1%. Loans mature
between 2017 and 2020 and the Company's loan to investment property value
ratio is comparatively low at 23.8% as at 30 June 2017. In addition, the
Company had USD4.2 million of cash and cash equivalents, and non-bank loans
of USD53.3 million as at 30 June 2017.
Operational Review
2017 has seen the Company focus on the 'Customer Experience' as part of the
Group's continuous drive to improve the appeal and style of its shopping
centres. The convenience of creating a central area for retailers and
customers to meet has been around for centuries in the shape of a local
market and now in the form of the modern shopping mall. The principles
remain true of creating a convivial space for people to shop, socialise and
enjoy themselves under one roof. Arricano has focused on developing its
concepts for future generations of customers.
As part of this focus, in March 2017 Arricano ran a mystery shopping
programme in the Prospekt Mall and used the results to work with 'partner
tenants' to develop positive opportunities further and provide solutions to
negative issues. Collaboration with tenants is a key point of
differentiation for Arricano. Generally, tenants are not used to working in
close partnership with a landlord, however, the experience and feedback from
tenants has been very positive. Especially as they realise that Arricano
views the success of the tenants and the shopping malls as inextricably
linked.
Reflecting the Company's partnership approach to working alongside tenants,
the Company decided to continue its free educational program for tenants
called B2B Upgrade, aimed at training shop personnel. The program is
extremely popular amongst tenants across the portfolio, and relatively
inexpensive to Arricano; in 2017 the Company provided sales training more
than 700 retailers' employees. The program as a result has generated a lot
of goodwill between Arricano and its tenants and has helped to re-enforce
our partnership approach.
The success of the Company's activities has been reflected in the increase
in occupancy across the portfolio to 98.8%. The Hryvnia in 2017 has been
relatively stable improving slightly against the USD which has helped
underpin consumer confidence. Alongside this, the World Bank is forecasting
GDP growth for Ukraine in 2017 of 2.0% rising to 3.5% in 2018. Business
confidence generally has been stable.
Arricano signed a total of 52 new leases in first six months of 2017
covering approximately 2,773 sq.m. This was a good performance increasing
occupancy and achieving an average rental rate of USD15.9 per sq.m. Of the
52 retailers, 21 were new to the Group and all the incoming tenants are good
quality which will further help to increase the appeal of the shopping
centres.
The three development sites covering 14 ha. in Lukianivka (Kyiv), Petrivka
(Kyiv), and Rozumovska (Odesa) continue to be progressed. Negotiations with
international lenders are taking place currently and it is expected that
progress on these projects will increase as additional funds are secured.
Regarding the 49.9% shareholding in Assofit Holdings Limited ("Assofit"), a
holding company, which held the Sky Mall shopping centre, the Company
continues to pursue Stockman Interhold S.A. concerning the ownership of
Assofit.
Outlook
Arricano remains well placed to continue its steady progression. Our
shopping malls are full and we continue to refine and enhance their appeal
to visitors and tenants. We see their development as a collaboration between
ourselves and our tenants as we work very closely with them to maximise our
and their businesses. This approach has proven both unusual and successful.
There is no doubt the business's growth remains restricted while Ukraine's
economic and political uncertainty continues, however, when the environment
does improve Arricano will be in an exceptionally strong position to further
develop its business.
The Company has delivered a strong performance in the first 6 months of 2017
and is well placed to build upon this in the second half of the year.
People
On behalf of the Board I would like to thank everyone involved with the
Company for their commitment and hard work during the year so far. The
business is performing well and this is all down to the Arricano team.
Mykhailo Merkulov
Chief Executive Officer
21 September 2017
INDEPENDENT AUDITORS' REPORT ON REVIEW OF CONSOLIDATED INTERIM CONDENSED
FINANCIAL STATEMENTS TO ARRICANO REAL ESTATE PLC
Introduction
We have reviewed the accompanying consolidated interim condensed statement
of financial position of Arricano Real Estate PLC and its subsidiaries ("the
Group") as at 30 June 2017, the consolidated interim condensed statements of
comprehensive income, changes in equity and cash flows for the six- month
period then ended, and notes to the interim financial statements ("the
consolidated interim condensed financial statements"). Management is
responsible for the preparation and presentation of these consolidated
interim condensed financial statements in accordance with IAS34 "Interim
Financial Reporting". Our responsibility is to express a conclusion on these
consolidated interim condensed financial statements based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review
Engagements 2410, "Review of Interim Financial Information Performed by the
Independent Auditor of the Entity." A review of interim financial statements
consists of making inquiries, primarily of persons responsible for financial
and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing and consequently does
not enable us to obtain assurance that we would become aware of all
significant matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to
believe that the accompanying consolidated interim condensed financial
statements do not present fairly, in all material respects, the financial
position of the Group as at 30 June 2017, and of its financial performance
and its cash flows for the six-month period then ended in accordance with
IAS 34 "Interim Financial Reporting".
Emphasis of matter
Without qualifying our conclusion we draw your attention to the following:
1. Note 1(b) to the consolidated interim condensed financial statements,
which describes the political and social unrest and regional tensions in
Ukraine that started in November 2013 and escalated in 2014 and afterwards.
The events referred to in Note 1(b) have adversely affected the Group and
could continue to adversely affect the Group's results and financial
position in a manner not currently determinable.
2. Note 2(d) to the consolidated interim condensed financial statements,
which describes that as at 30 June 2017 the Group's current liabilities
exceed current assets by USD 55,775 thousand. This condition, along with the
other matters described in Note 2(d), indicate the existence of a material
uncertainty that may cast significant doubt about the Group's ability to
continue as a going concern.
3. Note 13 (d) (ii) to the consolidated interim condensed financial
statements, which describe that, as at 30 June 2017, the Group was involved
as a defendant in a lawsuit concerning the request of the claimant for
demolishing of the part of the shopping center held by one of the
subsidiaries with an area of 0.73 ha, equaling to 37% of leasable area of
this shopping center. The potential financial effect as well as the ultimate
outcome of the legal case cannot be currently determined.
John C. Nicolaou, CPA
Certified Public Accountant and Registered Auditor
for and on behalf of
KPMG Limited Certified Public Accountants and Registered Auditors
11, June 16th 1943 Street
3022 Limassol
Cyprus
Limassol, 21 September 2017
Consolidated interim condensed statement of financial position as at 30 June
2017
Note 30 June 2017 31 December
(unaudited) 2016
(in thousands of USD)
Assets
Non-current assets
Investment property 4 197,870 175,663
Long-term VAT recoverable 899 1,215
Property and equipment 249 214
Intangible assets 35 38
Total non-current assets 199,053 177,130
Current assets
Trade and other receivables 934 1,162
Loans receivable 413 305
Prepayments made and other assets 1,068 901
VAT recoverable 1,089 1,067
Assets classified as held for sale 1,657 1,590
Cash and cash equivalents 4,191 4,953
Total current assets 9,352 9,978
Total assets 208,405 187,108
Note 30 June 2017 31 December
(unaudited) 2016
(in thousands of USD)
Equity and Liabilities
Equity 5
Share capital 67 67
Share premium 183,727 183,727
Non-reciprocal shareholders 59,713 59,713
contribution
Accumulated deficit (9,064) (24,973)
Other reserves (61,983) (61,983)
Foreign currency translation (127,120) (132,371)
differences
Total equity 45,340 24,180
Non-current liabilities
Long-term loans and borrowings 6 63,324 36,845
Advances received 229 325
Finance lease liability 7,233 6,855
Trade and other payables 7 3,468 4,628
Other long-term liabilities 8 20,102 98
Deferred tax liability 3,582 3,530
Total non-current liabilities 97,938 52,281
Current liabilities
Short-term loans and borrowings 6 37,123 64,239
Trade and other payables 7 16,937 15,759
Tax payables 1,073 1,106
Advances received 4,708 4,425
Current portion of finance lease 2 2
liability
Other liabilities 8 5,284 25,116
Total current liabilities 65,127 110,647
Total liabilities 163,065 162,928
Total equity and liabilities 208,405 187,108
Consolidated interim condensed statement of profit or loss and other
comprehensive income for the six months ended 30 June 2017
Note Six months ended Six months ended 30
June 2016
30 June 2017
(unaudited) (unaudited)
(in thousands of USD,
except for earnings
per share)
Revenue 9 12,933 10,897
Other income 325 6
Gain on revaluation 4 15,631 9,141
of investment
property
Goods, raw materials (399) (346)
and services used
Operating expenses (3,380) (1,973)
Employee costs (1,062) (818)
Depreciation and (74) (60)
amortisation
Profit from operating 23,974 16,847
activities
Finance income 10 1,748 128
Finance costs 10 (7,281) (8,666)
Profit before income 18,441 8,309
tax
Income tax expense 11 (2,532) (626)
Profit for the period 15,909 7,683
Items that may be
reclassified to
profit or loss:
Foreign exchange 13,352 (8,238)
gains (losses) on
monetary items that
form part of net
investment in the
foreign operation,
net of tax effect
Foreign currency (8,101) 8,066
translation
differences
Total items that may 5,251 (172)
be reclassified to
profit or loss
Other comprehensive 5,251 (172)
profit (loss)
Total comprehensive 21,160 7,511
income for the period
Weighted average 5 103,270,637 103,270,637
number of shares (in
shares)
Basic and diluted 0.15 0.07
earnings per share,
USD
Consolidated interim condensed statement of cash flows for the six months
ended 30 June 2017
Note Six months ended Six months ended
30 June 2017 30 June 2016
(unaudited) (unaudited)
(in thousands of USD)
Cash flows from operating
activities
Profit before income tax 18,441 8,309
Adjustments for:
Interest income 10 (134) (128)
Finance costs, excluding 10 7,281 7,165
foreign exchange loss
Gain on revaluation of 4 (15,631) (9,141)
investment property
Depreciation and 74 60
amortisation
Unrealised foreign (1,609) 1,477
exchange (gain) loss
Write-off of liabilities (325) -
Operating cash flows 8,097 7,742
before changes in working
capital
Change in inventories, 142 (212)
trade and other
receivables and
prepayments made and
other assets
Change in VAT recoverable 378 988
Change in trade and other 201 563
payables
Change in advances 60 29
received
Change in other (485) 1
liabilities
Change in tax payables (102) 678
Income tax paid (655) (454)
Interest paid (2,623) (2,926)
Cash flows from operating 5,013 6,409
activities
Cash flows from investing
activities
Acquisition of investment (2,369) (347)
property and settlements
of payables due to
constructors
Acquisition of property (101) (43)
and equipment and
intangible assets
Disposal of property and 5 -
equipment
Change in VAT recoverable - (49)
Repayment of the - 800
restricted deposit
Interest received 134 128
Cash flows (used in) from (2,331) 489
investing activities
Note Six months Six months ended 30
ended June 2016
30 June 2017
(unaudited) (unaudited)
(in thousands of
USD)
Cash flows from
financing activities
Proceeds from - 68
borrowings, net of
transaction costs
Financial aid (92) -
granted
Repayment of (3,272) (4,273)
borrowings
Finance lease (255) (463)
payments
Cash flows used in (3,619) (4,668)
financing activities
Net (decrease) (937) 2,230
increase in cash and
cash equivalents
Cash and cash 4,953 3,349
equivalents at 1
January
Effect of movements 175 (137)
in exchange rates on
cash and cash
equivalents
Cash and cash 4,191 5,442
equivalents at 30
June
Consolidated interim condensed statement of changes in
equity for the six months ended 30 June 2017
Attributable to equity holders of the parent
Share Share Non-reciprocal Accumulated Other Foreign Total
capit premi shareholders deficit reser currenc
al um contribution ves y
transla
tion
differe
nces
(in
thousand
s of
USD)
Balances 67 183,7 59,713 (48,466) (61,9 (130,00 3,050
at 1 27 83) 8)
January
2016
Total
comprehe
nsive
income
for the
period
Profit - - - 7,683 - - 7,683
for the
period
(unaudit
ed)
Foreign - - - - - (8,238) (8,23
exchange 8)
losses
on
monetary
items
that
form
part of
net
investme
nt in
the
foreign
operatio
n, net
of tax
effect
(unaudit
ed)
Foreign - - - - - 8,066 8,066
currency
translat
ion
differen
ces
(unaudit
ed)
Total - - - - - (172) (172)
other
comprehe
nsive
loss
(unaudit
ed)
Total - - - 7,683 - (172) 7,511
comprehe
nsive
income
for the
period
(unaudit
ed)
Balances 67 183,7 59,713 (40,783) (61,9 (130,18 10,56
at 30 27 83) 0) 1
June
2016
(unaudit
ed)
Attributable to equity holders of the parent
Share Share Non-reciprocal Accumulated Other Foreign Total
capit premi shareholders deficit reser currenc
al um contribution ves y
transla
tion
differe
nces
(in
thousand
s of
USD)
Balances 67 183,7 59,713 (24,973) (61,9 (132,37 24,18
at 1 27 83) 1) 0
January
2017
Total
comprehe
nsive
income
for the
period
Profit - - - 15,909 - - 15,90
for the 9
period
(unaudit
ed)
Foreign - - - - - 13,352 13,35
exchange 2
gains on
monetary
items
that
form
part of
net
investme
nt in
the
foreign
operatio
n, net
of tax
effect
(unaudit
ed)
Foreign - - - - - (8,101) (8,10
currency 1)
translat
ion
differen
ces
(unaudit
ed)
Total - - - - - 5,251 5,251
other
comprehe
nsive
income
(unaudit
ed)
Total - - - 15,909 - 5,251 21,16
comprehe 0
nsive
income
for the
period
(unaudit
ed)
Balances 67 183,7 59,713 (9,064) (61,9 (127,12 45,34
at 30 27 83) 0) 0
June
2017
(unaudit
ed)
Notes to the Consolidated condensed financial statements
1 Background
************
(a) Organization and operations
Arricano Real Estate PLC (Arricano, the Company or the Parent Company) is a
public company that was incorporated in Cyprus and is listed on the AIM
Market of the London Stock Exchange. The Parent Company's registered address
is office 1002, 10th floor, Nicolaou Pentadromos Centre, Thessalonikis
Street, 3025 Limassol, Cyprus. Arricano and its subsidiaries are referred to
as the Group, and their principal place of business is in Ukraine.
The main activities of the Group are investing in the development of new
properties in Ukraine and leasing them out. As at 30 June 2017, the Group
operates five shopping centres in Kyiv, Simferopol, Zaporizhzhya and Kryvyi
Rig with a total leasable area of over 147,800 square meters and is in the
process of development of two new investment projects in Kyiv and Odesa,
with one more project to be consequently developed.
(b) Ukrainian business environment
Ukraine's political and economic situation has deteriorated significantly
since 2014. Following political and social unrest, which started in November
2013, in March 2014 various events in Crimea led to the annexation of the
Republic of Crimea by the Russian Federation, which was not recognised by
Ukraine and many other countries. This event resulted in a significant
deterioration of the relationship between Ukraine and the Russian
Federation. Following the instability in Crimea, regional tensions have
spread to the Eastern regions of Ukraine, primarily Donetsk and Lugansk
regions. In May 2014, protests in those regions escalated into military
clashes and armed conflict between supporters of the self-declared republics
of the Donetsk and Lugansk regions and the Ukrainian forces, which continued
through the date of these consolidated interim condensed financial
statements. As a result of this conflict, part of the Donetsk and Lugansk
regions remains under control of the self-proclaimed republics, and
Ukrainian authorities are not currently able to fully enforce Ukrainian laws
on this territory.
Unrest in Donetsk and Lugansk does not affect the flow of current business
of the Group.
Political and social unrest combined with the military conflict in the
Donetsk and Lugansk regions has deepened the ongoing economic crisis, caused
a fall in the country's gross domestic product and foreign trade,
deterioration in state finances, depletion of the National Bank of Ukraine's
foreign currency reserves, significant devaluation of the national currency
and a further downgrading of the Ukrainian sovereign debt credit ratings.
Following the devaluation of the national currency, the National Bank of
Ukraine introduced certain administrative restrictions on currency
conversion transactions, which among others included restrictions on
purchases of foreign currency by individuals and companies, the requirement
to convert large part of foreign currency proceeds to local currency,
restrictions on payment of dividends abroad, a ban on early repayment of
foreign loans and restrictions on cash withdrawals from banks. These events
had a negative effect on Ukrainian companies and banks, significantly
limiting their ability to obtain financing on domestic and international
markets.
The final resolution and the effects of the political and economic crisis
are difficult to predict but may have further severe effects on the
Ukrainian economy.
As at 30 June 2017, the carrying value of the Group's investment property
located in Simferopol, the administrative centre of the Republic of Crimea,
amounted to USD 40,900 thousand (unaudited) (31 December 2016: USD 35,400
thousand). The ultimate effect of these developments in the Republic of
Crimea on the Group's ability to continue operations in this region, to
realise its related assets and to maintain and secure its ownership rights
cannot yet be determined.
Whilst management believes it is taking appropriate measures to support the
sustainability of the Group's business in the current circumstances, a
continuation of the current unstable business environment could further
negatively affect the Group's results and financial position in a manner not
currently determinable. These consolidated interim condensed financial
statements reflect management's current assessment of the impact of the
Ukrainian business environment on the operations and the financial position
of the Group. The future business environment may differ from management's
assessment.
(c) Cyprus business environment
According to the Cyprus Statistical Service, economic growth for 2016 was
estimated at the level of 2.8% compared to 2015. Even though the financial
services sector showed negative growth, there has been an increase in the
Gross Domestic Product which is mainly attributed to the hotels,
construction, manufacturing and the wholesale and retail trade sectors. The
economic growth was mainly driven by the increase in private consumption,
which benefited from the reduction in unemployment and the consequent
increase in disposable income. The growth was also supported by the slower
pace of reductions in public spending and the increase in investments. On 17
March 2017 the credit rating of the country rose from BB to BB +.
Despite the significant steps towards economic recovery, a degree of
uncertainty still exists, as certain issues remain to be resolved, such as
the high index of non-performing loans, the high unemployment and the
implementation of privatization and reforms of the public services sector.
The current economic environment of Cyprus is not expected to have a
significant impact on the operations of the Group as the Group does not hold
significant funds in Cypriot financial institutions.
On the basis of the evaluation performed, the Group's management has
concluded that no additional provisions or impairment charges are necessary.
The Group's management believes that it is taking all the necessary measures
to maintain the viability of the Group and the development of its business
in the current business and economic environment.
2 Basis of preparation
**********************
(a) Statement of compliance
These consolidated interim condensed financial statements have been prepared
in accordance with IAS 34 Interim Financial Reporting as adopted by the
European Union (EU). Selected explanatory notes are included to explain
events and transactions that are significant to an understanding of the
changes in financial position and performance of the Group since the last
annual financial statements as at and for the year ended 31 December 2016.
These consolidated interim condensed financial statements do not include all
the information required for full annual financial statements prepared in
accordance with International Financial Reporting Standards (IFRSs) as
adopted by the European Union (EU).
The results for the six-month period ended 30 June 2017 are not necessarily
indicative of the results expected for the full year.
(b) Judgments and estimates
Preparing the consolidated interim condensed financial statements requires
management to make judgments, estimates and assumptions that affect the
application of accounting policies and the reported amounts of assets and
liabilities, income and expense and the disclosure of contingent assets and
liabilities. Actual results may differ from these estimates.
In preparing these consolidated interim condensed financial statements,
significant judgments made by management in applying the Group's accounting
policies and the key sources of estimation uncertainty were the same as
those that applied to the consolidated financial statements as at and for
the year ended 31 December 2016.
(c) Functional and presentation currency
The functional currency of Arricano Real Estate PLC is the US dollar (USD).
The majority of Group entities are located in Ukraine and have the Ukrainian
Hryvnia (UAH) as their functional currency, except for Voyazh-Krym LLC,
which has the Russian Rouble (RUB) as its functional currency starting from
1 May 2014, following the changes in the Ukrainian business environment
described in note 1(b). The Group entities located in Cyprus, Estonia and
Isle of Man have the US dollar as their functional currency, since
substantially all transactions and balances of these entities are
denominated in US dollar. The Group entity located in the Russian
Federation, Green City LLC, has the Russian Rouble (RUB) as its functional
currency, since substantially all transactions and balances of this entity
are denominated in the Russian Rouble.
For the benefits of principal users, the management chose to present the
consolidated interim condensed financial statements in USD, rounded to the
nearest thousand.
In translating the consolidated interim condensed financial statements into
USD the Group follows a translation policy in accordance with International
Financial Reporting Standard IAS 21 The Effects of Changes in Foreign
Exchange Rates and the following rates are used:
· Historical rates: for the equity accounts except for net profit or loss
and other comprehensive income (loss) for the year.
· Year-end rate: for all assets and liabilities.
· Rates at the dates of transactions: for the statement of profit or loss
and other comprehensive income and for capital transactions.
UAH and RUB are not freely convertible currencies outside Ukraine and the
Russian Federation, and, accordingly, any conversion of UAH and RUB amounts
into USD should not be construed as a representation that UAH and RUB
amounts have been, could be, or will be in the future, convertible into USD
at the exchange rate shown, or any other exchange rate.
The principal USD exchange rates used in the preparation of these
consolidated interim condensed financial statements are as follows:
Currency 30 June 2017 31 December 2016
UAH 26.10 27.19
RUB 59.09 60.66
Average USD exchange rates for the six months period ended 30 June are as
follows:
Currency 2017 2016
UAH 26.77 25.54
RUB 57.84 70.23
As at the date that these consolidated interim condensed financial
statements are authorised for issue, 21 September 2017, the exchange rate is
UAH 26.19 to USD 1.00 and RUB 58.13 to USD 1.00.
(d) Going concern
As at 30 June 2017, the Group's current liabilities exceed current assets by
USD 55,775 thousand (unaudited). This condition indicates the existence of a
material uncertainty that may cast significant doubt about the Group's
ability to continue as a going concern.
At the same time, the Group has positive equity of USD 45,340 thousand
(unaudited) as at 30 June 2017, generated net profit of USD 15,909 thousand
(unaudited) and positive cash flows from operating activities of USD 5,013
thousand (unaudited) for the six months then ended.
Management is undertaking the following measures in order to ensure the
Group's continued operation on a going concern basis:
· The Group has financial support from the ultimate controlling party.
Based on representations received in writing from the entities under
common control, management believes that the Group will not be required to
settle the outstanding loans, accrued interest, other liabilities and
other payables to related parties in the amount of USD 7,966 thousand
(unaudited) plus any accruing interest thereon at least until 30 June
2018.
· The Group will be able to draw on existing facilities granted from
entities under common control, should this be required for operational and
other needs of the Group.
· In September 2017, the Group has received a waiver from Barleypark
Limited, waiving repayment of the loan during twelve months ending 30 June
2018, amounting to USD 19,591 thousand, which is payable on demand and
presented as short- term liability as at 30 June 2017.
· During the six months ended 30 June 2017, management was able to
conclude a number of new tenancy agreements and increase occupancy rate of
its shopping centres. Besides, the Group managed to gradually increase its
rental rates during the year for existing tenants.
Management believes that the measures that it undertakes, as described
above, will allow the Group to maintain positive working capital and operate
on a going concern basis in the foreseeable future.
These consolidated interim condensed financial statements are prepared on a
going concern basis, which contemplates the realisation of assets and the
settlement of liabilities in the normal course of business.
(e) Measurement of fair values
A number of the Group's accounting policies and disclosures require the
measurement of fair values, for both financial and non-financial assets and
liabilities.
When measuring the fair value of an asset or a liability, the Group uses
market observable data as far as possible. Fair values are categorised into
different levels in a fair value hierarchy based on the inputs used in the
valuation techniques as follows:
· Level 1: quoted prices (unadjusted) in active markets for identical
assets or liabilities.
· Level 2: inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices).
· Level 3: inputs for the asset or liability that are not based on
observable market data (unobservable inputs).
If the inputs used to measure the fair value of an asset or a liability
might be categorised in different levels of the fair value hierarchy, then
the fair value measurement is categorised in its entirety in the same level
of the fair value hierarchy as the lowest level input that is significant to
the entire measurement.
The Group recognises transfers between levels of the fair value hierarchy at
the end of the reporting period during which the change has occurred.
Further information about the assumptions made in measuring fair values is
included in the following notes:
· Note 4(b) - investment property; and
· Note 12(a) - fair values.
(f) Segment reporting
An operating segment is a component of the Group that engages in business
activities from which it may earn revenues and incur expenses, including
revenues and expenses that relate to transactions with any of the Group's
other components. Management believes that during the six months ended 30
June 2017 and the year ended 31 December 2016, the Group operated in and was
managed as one operating segment, being property investment, with all
investment properties located in Ukraine and the Republic of Crimea.
The Board of Directors, which is considered to be the chief operating
decision maker of the Group for IFRS 8 Operating Segments purposes, receives
semi-annually management accounts that are prepared in accordance with IFRS
as adopted by the EU and which present aggregated performance of all the
Group's investment properties.
3 Significant accounting policies
*********************************
The accounting policies applied by the Group in these consolidated interim
condensed financial statements are the same as those applied by the Group in
its consolidated financial statements as at and for the year ended 31
December 2016.
(a) New standards and interpretations not yet adopted
A number of new standards, amendments to standards and interpretations are
not yet effective for the six-month period ended 30 June 2017, and have not
been applied in preparing these consolidated interim condensed financial
statements. Of these pronouncements, potentially the following will have an
impact on the Group's operations. The Group plans to adopt these standards
and interpretations when they become effective.
IFRS 9 Financial Instruments
IFRS 9 Financial instruments, published in July 2014, replaces the existing
guidance in IAS 39 Financial Instruments: Recognition and Measurement, and
includes revised guidance on the classification and measurement of financial
instruments, impairment of financial assets and hedge accounting.
Classification - Financial assets and liabilities
IFRS 9 contains three principal classification categories for financial
assets: measured at amortised cost, fair value through other comprehensive
income (FVOCI) and fair value through profit or loss (FVTPL). The
classification of financial assets under IFRS 9 is generally based on the
business model in which a financial asset is managed and its contractual
cash flow characteristics. The standard eliminates the existing IAS 39
categories of held-to-maturity, loans and receivables and available for-
sale. Under IFRS 9, derivatives embedded in contracts where the host is a
financial asset in the scope of the standard are not separated. Instead, the
whole hybrid instrument is assessed for classification. Equity investments
are measured at fair value.
IFRS 9 largely retains the existing requirements in IAS 39 for the
classification of financial liabilities.
Impairment - Financial assets and contract assets
IFRS 9 replaces the 'incurred loss' model in IAS 39 with an 'expected credit
loss' model. The new impairment model applies to financial assets measured
at amortised cost and FVOCI and the contract assets. The new impairment
model generally requires to recognise expected credit losses in profit or
loss for all financial assets, even those that are newly originated or
acquired. Under IFRS 9, impairment is measured as either expected credit
losses resulting from default events on the financial instrument that are
possible within the next 12 months ('12-month ECL') or expected credit
losses resulting from all possible default events over the expected life of
the financial instrument ('lifetime ECL'). Initial amount of expected credit
losses recognised for a financial asset is equal to 12-month ECL (except for
certain trade and lease receivables, and contract assets, or purchased or
originated credit-impaired financial assets). If the credit risk on the
financial instrument has increased significantly since initial recognition,
the loss allowance is measured at an amount equal to lifetime ECL.
Financial assets for which 12-month ECL is recognised are considered to be
in stage 1; financial assets that have experienced a significant increase in
credit risk since initial recognition, but are not defaulted are considered
to be in stage 2; and financial assets that are in default or otherwise
credit-impaired are considered to be in stage 3.
Measurement of expected credit losses is required to be unbiased and
probability-weighted, should reflect the time value of money and incorporate
reasonable and supportable information that is available without undue cost
or effort about past events, current conditions and forecasts of future
economic conditions. Under IFRS 9, credit losses are recognised earlier than
under IAS 39, resulting in increased volatility in profit or loss. It will
also tend to result in an increased impairment allowance, since all
financial assets will be assessed for at least 12-month ECL and the
population of financial assets to which lifetime ECL applies is likely to be
larger than the population with objective evidence of impairment identified
under IAS 39.
Disclosures
IFRS 9 will require extensive new disclosures, in particular about credit
risk and expected credit losses.
Transition
IFRS 9 is effective for annual reporting periods beginning on or after 1
January 2018. Early adoption of the standard is permitted. The Group does
not intend to adopt the standard earlier.
The classification and measurement and impairment requirements are generally
applied retrospectively (with some exemptions) by adjusting the opening
retained earnings and reserves at the date of initial application, with no
requirement to restate comparative periods.
Since as at 30 June 2017, the total amount of unrecoverable and overdue
loans receivable and trade and other receivables was provided for and the
remaining amount is not material, the expected impact of implementation is
considered to be not significant.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 Revenue from Contracts with Customers establishes a comprehensive
framework for determining whether, how much and when revenue is recognised.
It replaces existing revenue recognition guidance, including IAS 18 Revenue,
IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes.
Rendering of services
Under IFRS 15, the total consideration in the service contracts will be
allocated to all services based on their stand-alone selling prices. The
stand-alone selling prices will be determined based on the list prices at
which the Group sells the services in separate transactions.
Transition
IFRS 15 is effective for annual reporting periods beginning on or after 1
January 2018, with early adoption permitted.
Since the revenue of the Group is mainly represented by the rental income in
accordance with IAS 17 Leases and the amount of revenue from other services
rendered is not significant, the expected impact of implementation is
considered to be not significant.
Various Improvements to IFRSs
Various Improvements to IFRSs have been dealt with on a standard-by-standard
basis. A number of amendments to standards and interpretations are not yet
effective for the six-month period ended 30 June 2017, and have not been
applied in preparing these consolidated interim condensed financial
statements. Management plans to adopt these pronouncements when they become
effective, and has not yet analysed the likely impact of them on its
consolidated financial statements.
4 Investment property
*********************
(a) Movements in investment property
Movements in investment properties for the six months ended 30 June 2017 are
as follows:
Land Land Buildings Prepayment Property
held held for under
on on investment construct
freeho lease property ion
ld hold
Total
(in
thousands
of USD)
At 1 5,800 43,05 116,700 20 10,089 175,663
January 4
2017
Additions - 92 - - 202 294
(unaudited
)
Disposals - - - (3) (634) (637)
(unaudited
)
Fair value (169) (1,31 17,114 - - 15,631
gain on 4)
revaluatio
n
(unaudited
)
Currency 169 1,801 4,586 1 362 6,919
translatio
n
adjustment
(unaudited
)
At 30 June 5,800 43,63 138,400 18 10,019 197,870
2017 3
(unaudited
)
Movements in investment properties for the six months ended 30 June 2016 are
as follows:
Land Land Buildings Prepayment Property
held held for under
on on investment construct
freeho leaseh property ion
ld old
Total
(in
thousands
of USD)
At 1 6,000 44,722 99,260 23 10,305 160,310
January
2016
Additions - - - - 246 246
(unaudited)
Fair value (603) 1,261 8,483 - - 9,141
gain on
revaluation
(unaudited)
Currency 603 (1,537 (943) - (360) (2,237)
translation )
adjustment
(unaudited)
At 30 June 6,000 44,446 106,800 23 10,191 167,460
2016
(unaudited)
As at 30 June 2017, in connection with loans and borrowings, the Group
pledged as security investment property with a carrying value of USD 104,300
thousand (unaudited) (31 December 2016: USD 103,337 thousand) (refer to note
13(a)).
During the six months ended 30 June 2017, disposal of property under
construction is represented by reversal of capitalised charges in respect of
an agreement on customer share participation in the creation and development
of engineering, transport and social infrastructure of Odesa due to win of
the related court case (refer to note 13(d)(iii)).
(b) Determination of fair value
The fair value measurement, developed for determination of fair value of the
Group's investment property, is categorised within Level 3 category due to
significance of unobservable inputs to the entire measurement, except for
certain land held on the leasehold which is not associated with completed
property and is therefore categorised within Level 2 category. As at 30 June
2017, the fair value of investment property categorised within Level 2
category is USD 27,000 thousand (unaudited) (31 December 2016: USD 26,800
thousand). To assist with the estimation of the fair value of the Group's
investment property as at 30 June 2017, which is represented by the shopping
centres, management engaged registered independent appraiser Expandia LLC,
part of the CBRE Affiliate network, having a recognised professional
qualification and recent experience in the location and categories of the
projects being valued.
The fair values are based on the estimated rental value of property. A
market yield is applied to the estimated rental value to arrive at the gross
property valuation. When actual rents differ materially from the estimated
rental value, adjustments are made to reflect actual rents. The valuation is
prepared in accordance with the practice standards contained in the
Appraisal and Valuation Standards published by the Royal Institution of
Chartered Surveyors ("RICS") or in accordance with International Valuation
Standards published by the International Valuation Standards Council.
Valuations reflect, when appropriate, the type of tenants actually in
occupation or responsible for meeting lease commitments or likely to be in
occupation after letting vacant accommodation, the allocation of maintenance
and insurance responsibilities between the Company and the lessee, and the
remaining economic life of the property. When rent reviews or lease renewals
are pending with anticipated reversionary increases, it is assumed that all
notices, and when appropriate counter-notices, have been served validly and
within the appropriate time.
Land parcels are valued based on market prices for similar properties.
As at 30 June 2017, the estimation of fair value is made using a net present
value calculation based on certain assumptions, the most important of which
are as follows (unaudited):
· monthly rental rates, ranging from USD 2.00 to USD 124.00 per sq.m.,
which are based on contractual and market rental rates, adjusted for
discounts or fixation of rental rates in Ukrainian hryvnia at a pre-agreed
exchange rate, occupancy rates ranging from 96.4% to 100%, and discount
rates ranging from 16.80% to 22.00% p.a., which represent key unobservable
inputs for determination of fair value.
· all relevant licenses and permits, to the extent not yet received, will
be obtained, in accordance with the timetables as set out in the
investment project plans.
As at 31 December 2016, the estimation of fair value is made using a net
present value calculation based on certain assumptions, the most important
of which are as follows:
· monthly rental rates, ranging from USD 1.00 to USD 131.40 per sq.m.,
which are based on contractual and market rental rates, adjusted for
discounts or fixation of rental rates in Ukrainian hryvnia at a pre-agreed
exchange rate, occupancy rates ranging from 97.6% to 100%, and discount
rates ranging from 18.40% to 24.40% p.a., which represent key unobservable
inputs for determination of fair value.
· all relevant licenses and permits, to the extent not yet received, will
be obtained, in accordance with the timetables as set out in the
investment project plans.
The reconciliation from the opening balances to the closing balances for
Level 3 fair value measurements is presented in note 4(a).
As at 30 June 2017, fair value of investment property, denominated in
functional currency amounted to UAH 4,050,564 thousand (unaudited) and RUB
1,500,772 thousand (unaudited) (31 December 2016: UAH 3,706,114 thousand and
RUB 1,358,715 thousand). The increase in fair value of investment property
results from increased rental payments invoiced in Ukrainian hryvnia and
Russian Rouble due to the increase in the average rental rates applied to
the USD equivalent of rental rates fixed in the rental contracts.
Sensitivity at the date of valuation
....................................
The valuation model used to assess the fair value of investment property as
at 30 June 2017 is particularly sensitive to unobservable inputs in the
following areas:
· If rental rates are 1% less than those used in valuation models, the
fair value of investment properties would be USD 1,524 thousand
(unaudited) (31 December 2016: USD 1,309 thousand) lower. If rental rates
are 1% higher, then the fair value of investment properties would be USD
1,524 thousand (unaudited) (31 December 2016: USD 1,309 thousand) higher.
· If the discount rate applied is 1% higher than that used in the
valuation models, the fair value of investment properties would be USD
10,173 thousand (unaudited) (31 December 2016: USD 8,505 thousand) lower.
If the discount rate is 1% less, then the fair value of investment
properties would be USD 11,753 thousand (unaudited) (31 December 2016: USD
9,783 thousand) higher.
· If the occupancy rate is 1% higher than that used in the valuation model
for shopping center "Prospekt" and are assumed to be 100% for other
shopping centers, the fair value of investment properties would be USD
1,015 thousand (unaudited) higher (31 December 2016: if the occupancy
rates are 1% higher than those used in the valuation and are assumed to be
100% for shopping center in Kyiv, the fair value of investment properties
would be USD 956 thousand higher). If the occupancy rates are 1% less,
then the fair value of investment properties would be USD 1,367 thousand
(unaudited) (31 December 2016: USD 1,154 thousand) lower.
5 Equity
********
Share capital is as follows:
2017 2017 2017 2016 2016 2016
Number of US EUR Number of US EUR
shares dollars shares dollars
Issued and
fully paid
At 1 January 103,270,63 66,750 51,635 103,270,6 66,750 51,635
and 30 June 7 37
(unaudited)
Authorised
At 1 January 106,000,00 68,564 53,000 106,000,0 68,564 53,000
and 30 June 0 00
(unaudited)
Par value, - - 0.0005 - - 0.0005
EUR
All shares rank equally with regard to the Parent Company's residual assets.
The holders of ordinary shares are entitled to receive dividends as declared
from time to time, and are entitled to one vote per share at meetings of the
Parent Company.
During the six months ended 30 June 2017 and 30 June 2016, the Parent
Company did not declare any dividends.
Earnings per share
The calculation of basic earnings per share for the six-month period ended
30 June 2017 was based on the profit for the six-month period ended 30 June
2017 attributable to ordinary shareholders of USD 15,909 thousand
(unaudited) and a weighted average number of ordinary shares outstanding as
at 30 June 2017 of 103,270,637 (unaudited) (2016 (unaudited): USD 7,683
thousand and 103,270,637 shares).
The Group has no potential dilutive ordinary shares.
6 Loans and borrowings
**********************
This note provides information about the contractual terms of loans.
(in thousands of USD) 30 June 2017 31 December 2016
(unaudited)
Non-current
Secured bank loans 38,066 27,745
Unsecured loans from 25,258 9,100
related parties
63,324 36,845
Current
Secured bank loans (current 9,118 22,319
portion of secured
long-term bank loans)
Unsecured loans from 8,414 41,920
related parties (including
current portion of
long-term loans from
related parties)
Unsecured loans from third 19,591 -
parties
37,123 64,239
100,447 101,084
Terms and debt repayment schedule
As at 30 June 2017, the terms and debt repayment schedule of bank loans are
as follows (unaudited):
(in Currency Nominal Contractual year Carrying value
thousands interest of maturity
of USD) rate
Secured
bank loans
PJSC "Bank USD 10.50% 2017-2020 16,948
"St.Peters
burg"
EBRD USD 1M LIBOR 2017-2020 14,066
+ 7.5%
EBRD USD 3M LIBOR 2017-2020 7,786
+ 8.0%
Raiffeisen UAH 18.00% 2017-2020 8,384
Bank Aval
47,184
Unsecured
loans from
related
parties
Retail USD 12.00% 2017-2020 22,785
Real
Estate OU
Retail USD 10.50% 2017-2019 10,415
Real
Estate OU
Retail USD 10.00% 2017-2018 192
Real
Estate OU
Loans from UAH/USD 0.00% 2017 280
other
related
parties
33,672
Unsecured
loans from
third
parties
Barleypark USD 10.55% 2017 19,591
Limited
19,591
100,447
As at 31 December 2016, the terms and debt repayment schedule of bank loans
are as follows:
Currency Nominal Contractual Carrying
interest rate year of value
maturity
(in thousands
of USD)
Secured bank
loans
PJSC "Bank USD 10.50% 2017-2020 17,650
"St.Petersburg
"
EBRD USD 1M LIBOR + 2017-2020 15,485
7.5%
EBRD USD 3M LIBOR + 2017-2020 8,454
8.0%
Raiffeisen UAH 18.00% 2017-2020 8,475
Bank Aval
50,064
Unsecured
loans from
related
parties
Retail Real USD 12.00% 2017 21,351
Estate OU
Barleypark USD 10.55% 2017 18,795
Limited
Retail Real USD 10.50% 2019 10,425
Estate OU
Loans from UAH/ USD 0.00%-10.00% 2017 449
other related
parties
51,020
101,084
LIBOR for USD is as follows:
30 June 2017 31 December 2016
LIBOR USD 3M 1.30% 1.00%
LIBOR USD 1M 1.23% 0.77%
EBRD
On 28 March 2017, the Group signed agreement with the EBRD pledging rights
on future income under the agreement with the anchor tenant (refer to note
13(a)).
On 31 March 2017, the Group terminated agreements with the EBRD on pledge of
investment property of PrJSC Grandinvest and Voyazh-Krym LLC in the amount
of USD 17,770 thousand as at 30 June 2017 (unaudited) (31 December 2016: USD
15,237 thousand) and pledge of investment in PrJSC Grandinvest (refer to
note 13(a)).
On 6 April 2017, the Group terminated agreements with the EBRD on pledge of
property rights under the investment agreement between PrJSC Grandinvest,
PrJSC Livoberezhzhiainvest and Voyazh-Krym LLC (refer to note 13(a)).
PJSC "Bank "St.Petersburg"
On 6 June 2017, the Group signed amendments to the loan agreements with PJSC
"Bank "St.Petersburg" stipulating a decrease in the amount of loan principal
payable for the period from June till August 2017 by USD 606 thousand.
As at 30 June 2017 (unaudited) and 31 December 2016, the Group has not
fulfilled an obligation to replace the existing pledge of investment
property by other investment properties acceptable by PJSC "Bank
"St.Petersburg", which was considered as the event of default under the loan
agreements concluded with the bank. In addition, the Group has not
replenished the deposit pledged as a collateral for the amount of USD 1,200
thousand within the time period required by the loan agreement. As a result,
such loans were presented as short-term as at 31 December 2016. During the
six months ended 30 June 2017, management obtained the letter from PJSC
"Bank "St.Petersburg" waving the above breaches of loan covenants.
Accordingly, management believes that the bank will not demand early
repayment of the loans. Consequently, as at 30 June 2017, loans with the
principal amounting to USD 16,910 thousand (unaudited) were presented
according to their contractual maturities.
Retail Real Estate OU
On 27 September 2016, the loan payable to Bytenem Co Limited was assigned to
Retail Real Estate OU. On 30 June 2017, the Group signed amendment to the
loan agreement with Retail Real Estate OU stipulating prolongation of the
maturity date till 30 June 2020.
On 16 February 2017, the loan payable to Gingerfin Holdings was assigned to
Retail Real Estate OU and prolonged till 1 July 2018.
As at 30 June 2017, the undrawn credit facilities from this related party
amount to USD 9,607 thousand (unaudited) (31 December 2016: USD 9,607
thousand).
Barleypark Limited
Based on the terms of the loan agreement the loan is repayable on demand but
not later than the final repayment date. On 30 June 2017, the Group signed
amendment to the loan agreement with Barleypark stipulating prolongation of
the maturity date till 31 July 2020. Subsequent to the reporting period end,
the Group obtained the letter from the lender waiving the right to demand
repayment of the loan during twelve months ending 30 June 2018. During the
six months ended 30 June 2017, following the changes in shareholding of
Barleypark Limited, the counterparty ceased to be a related party of the
Group and the loan was re-classified to Unsecured loans from third parties
category.
7 Trade and other payables
**************************
Trade and other payables are as follows:
30 June 2017 31 December 2016
(unaudited)
(in thousands of USD)
Non-current liabilities
Payables for construction 3,468 4,616
works
Trade and other payables to - 12
third parties
3,468 4,628
Current liabilities
Payables for construction 13,121 11,623
works
Trade and other payables to 919 1,371
related parties
Trade and other payables to 2,897 2,765
third parties
16,937 15,759
20,405 20,387
As at 30 June 2017, included in payables for construction works is UAH
denominated payable with the nominal value of USD 3,956 thousand (unaudited)
with maturity on 20 December 2020 (31 December 2016: USD 3,797 thousand).
This payable is measured at amortised cost under the effective interest rate
of 18.02% per annum.
Also, included in payables for construction works as at 30 June 2017 are EUR
denominated payables under a commission agreement concluded with a third
party with the nominal value of USD 2,333 thousand (unaudited) (31 December
2016: USD 2,838 thousand) with maturity on 15 September 2019. As at 30 June
2017 and 31 December 2016, these payables relate to construction works
performed at shopping centre "Prospekt", are presented in accordance with
their contractual maturity and measured at amortised cost under the
effective interest rate of 6.85% (unaudited) (31 December 2016: 6.38%) per
annum.
8 Other liabilities
*******************
As at 30 June 2017, other long-term liabilities comprise mainly of the
amount of principal and other current liabilities comprise of the amount of
interest of the deferred consideration that is payable in respect of the
acquisition of Wayfield Limited and its subsidiary Budkhol LLC, amounting to
USD 20,000 thousand (unaudited) and USD 5,284 thousand (unaudited),
respectively (31 December 2016: other current liabilities mainly comprise of
the deferred consideration, amounting to USD 24,317 thousand, including
accrued interest of USD 4,317 thousand).
On 30 June 2017, the Group signed an amendment to the share exchange
agreement with Vunderbuilt in order to postpone the payment of deferred
consideration to Bytenem Co Limited from 30 June 2017 to 30 June 2020.
9 Revenue
*********
Revenue for the six months ended 30 June is as follows:
2017 2016
(unaudited) (unaudited)
(in thousands of USD)
Rental income from investment properties 12,824 10,796
Other sales revenue 109 101
12,933 10,897
For the six months ended 30 June 2017, 17% of the Group's rental income was
earned from two tenants (13% and 4%, respectively) (unaudited) (six months
ended 30 June 2016: 21% of the Group's rental income was earned from two
tenants: 15% and 6%, respectively (unaudited)).
The Group rents out premises in the shopping centres to tenants in
accordance with lease agreements predominantly concluded for a period of
12-30 months, save for the hypermarkets and large network retails chains,
which enter into long term lease agreements. In accordance with lease
agreements, rental rates are usually established in USD and are settled in
Ukrainian hryvnias and Russian Roubles using the exchange rates established
by the National Bank of Ukraine and Central Bank of the Russian Federation,
as applicable. However, taking into account the current market conditions,
the Group provides temporary discounts to its tenants by applying lower
exchange rates than those established by the National Bank of Ukraine, in
arriving to the rent payment for the particular month.
Management believes that these measures will allow the Group to maintain
occupancy rates in the shopping centres at a relatively high level during
the current deteriorated period in Ukrainian business environment.
Management believes that these measures are temporary until the Ukrainian
business environment stabilises.
The Group's lease agreements with tenants usually include 3-15 months
cancellation clause. The Group believes that execution of the option to
prolong the lease period upon expiration of non-cancellable period on the
terms different to those agreed during the non-cancellable period, is not
substantiated. Accordingly, upon calculation of rental income for the period
the Group does not take into account rent payments, which are prescribed by
the agreements upon expiration of the period during which the agreement
cannot be cancelled.
10 Finance income and finance costs
***********************************
Finance income and finance costs for the six months ended 30 June are as
follows:
2017 2016
(unaudited) (unaudited)
(in thousands of USD)
Interest income 134 128
Foreign exchange gain 1,614 -
Finance income 1,748 128
Foreign exchange loss - (1,501)
Interest expense (4,943) (5,133)
Interest expense on deferred (967) (972)
consideration
Other finance costs (1,371) (1,060)
Finance costs (7,281) (8,666)
Net finance costs (5,533) (8,538)
11 Income tax expense
*********************
(a) Income tax expense
Income taxes for the six months ended 30 June are as follows:
2017 2016
(unaudited) (unaudited)
(in thousands of USD)
Current tax expense 680 143
Deferred tax expense 1,852 483
Total income tax expense 2,532 626
Corporate profit tax rate for Ukrainian entities is fixed at 18%.
While computing the deferred tax liability that arises on the temporary
differences between carrying amounts and tax values of assets and
liabilities of Voyazh-Krym LLC, registered in the Republic of Crimea, as at
30 June 2017 and 31 December 2016, management of the Group reflected the tax
consequences that are applicable under the legislation of the Russian
Federation that is being applied for all companies operating in the Republic
of Crimea. In absence of clear regulations that will be applicable to the
Republic of Crimea, management expects that reversal of temporary
differences will be done under the laws of the Russian Federation. The
applicable tax rate for the entities operating under the laws of the Russian
Federation is 20%.
The applicable tax rates are 12.5% for Cyprus companies and 20% for Estonian
companies, and nil tax for companies incorporated in the Isle of Man.
(b) Reconciliation of effective tax rate
The difference between the total expected income tax expense for the six
months ended 30 June computed by applying the Ukrainian statutory income tax
rate to profit before tax and the reported tax expense is as follows:
2017 % 2016 %
(unaudited) (unaudited)
(in thousands of USD)
Profit before income tax 18,441 100% 8,309 100%
1,537
Income tax expense at 3,319 18% 1,496 18%
statutory rate
Effect of lower tax rates on (1,242) (7%) (942) (11%)
taxable profit in foreign
jurisdictions
Non-deductible expenses 1,615 9% 1,748 21%
Change in unrecognised (1,725) (9%) (888) (11%)
deferred tax assets
Foreign currency translation 565 3% (788) (9%)
difference
Effective income tax expense 2,532 14% 626 8%
In accordance with existing Ukrainian legislation tax losses can be carried
forward and utilised indefinitely. As at 30 June 2017, management has not
recognised deferred tax assets amounting to USD 24,579 thousand (unaudited)
(31 December 2016: USD 29,261 thousand) mainly in respect of tax losses
carried forward because of significant uncertainties regarding their
realisation.
During the six months ended 30 June 2017, deferred tax benefit for the
amount of USD 1,899 thousand was recognised in other comprehensive income
(six months ended 30 June 2016: USD 414 thousand) (unaudited).
12 Financial risk management
****************************
During the six months ended 30 June 2017, the Group had no significant
changes in financial risk management policies as compared to 31 December
2016.
(a) Fair values
Estimated fair values of the financial assets and liabilities have been
determined using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting
market data to produce the estimated fair values. Accordingly, the estimates
are not necessarily indicative of the amounts that could be realised in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
values.
The estimated fair values of financial assets and liabilities are determined
using discounted cash flow and other appropriate valuation methodologies, at
year-end, and are not indicative of the fair value of those instruments at
the date these consolidated interim condensed financial statements are
prepared or distributed. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the Group's
entire holdings of a particular financial instrument. Fair value estimates
are based on judgments regarding future expected cash flows, current
economic conditions, risk characteristics of various financial instruments
and other factors.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the
value of assets and liabilities not considered financial instruments. In
addition, tax ramifications related to the realisation of the unrealised
gains and losses can have an effect on fair value estimates and have not
been considered.
Management believes that for all the financial assets and liabilities, the
carrying value is estimated to approximate the fair value as at 30 June 2017
(unaudited) and 31 December 2016. Such fair value was estimated by
discounting the expected future cash flows under the market interest rate
for similar financial instruments that prevails as at the reporting date.
The estimated fair value is categorised within Level 2 of the fair value
hierarchy.
13 Commitments and contingencies
********************************
(a) Pledged assets
In connection with loans and borrowings, the Group pledged the following
assets:
30 June 2017 31 December
(unaudited) 2016
(in thousands of USD)
Investment property (note 104,300 103,337
4(a))
Call deposits 1,056 1,013
Bank balances 7 44
105,363 104,394
As at 30 June 2017 (unaudited), the Group has also pledged the following:
· Rights on future income of Prizma Alfa LLC and Comfort Market Luks LLC
under all lease agreements;
· Investments in the following subsidiaries: PrJSC UkrPanGroup, PrJSC
Livoberezhzhiainvest, Comfort Market Luks LLC;
· Rights on future income of PrJSC UkrPanGroup under agreement with anchor
tenant.
As at 31 December 2016, the Group has also pledged the following:
· Rights on future income of Prizma Alfa LLC and Comfort Market Luks LLC
under all lease agreements;
· Investments in the following subsidiaries: PrJSC Grandinvest, PrJSC
UkrPanGroup, Comfort Market Luks LLC and PrJSC Livoberezhzhiainvest;
· Property rights under the Investment Agreement between PrJSC
Grandinvest, PrJSC Livoberezhzhiainvest and Voyazh-Krym LLC.
(b) Construction commitments
The Group entered into contracts with third parties to construct a shopping
centre in Kyiv and a shopping centre in Odesa for the total amount of USD
21,327 thousand as at 30 June 2017 (unaudited) (31 December 2016: USD 20,584
thousand).
(c) Operating lease commitments
The Group as lessor
...................
The Group entered into lease agreements on its investment property portfolio
that consists of five operating shopping centres. These non-cancellable
lease agreements have remaining terms from twelve to thirty months. All
agreements include a clause to enable upward revision of the rent rate on an
annual basis according to prevailing market conditions.
The future minimum lease payments under non-cancellable leases are as
follows:
30 June 2017 31 December
(unaudited) 2016
(in thousands of USD)
Less than one year 4,785 3,358
Between one and five 2,712 3,384
years
7,497 6,742
(d) Litigations
In the ordinary course of business, the Group is subject to legal actions
and complaints.
(i) Legal case in respect of Assofit Holdings Limited
Starting from November 2010 the Group has been involved in an arbitration
dispute with Stockman Interhold S.A. (Stockman), which was the majority
shareholder of Assofit Holdings Limited (Assofit), regarding invalidation of
the Call Option Agreement dated 25 February 2010. In accordance with this
Call Option Agreement, Arricano was granted the option to acquire the
shareholding of Stockman being equal to 50.03 per cent in the share capital
of Assofit during the period starting from 15 November 2010 up to 15 March
2011. In November 2010, the Company sought to exercise the option granted by
the Call Option Agreement, however the buy-out was suspended by legal and
arbitration proceedings that were initiated by Stockman in relation to the
validity of the termination of the agreement relating to the call option
under the Call Option Agreement.
In the seventh award delivered on 5 May 2016, the tribunal of the London
Court of International Arbitration has found that Stockman is in breach of
the Call Option Agreement and has taken "steps deliberately to dissipate and
misappropriate Assofit's assets". As a result, the tribunal has ordered
Stockman to transfer, or procure the transfer of, the Option Shares to
Arricano within 30 days of the award. Upon registration of the transfer,
Arricano shall pay to Stockman the Option Price minus damages, which when
netted out brings the balance to nil. In the event that Stockman does not
transfer, or procure the transfer of the Option Shares, Arricano may elect
instead to claim damages in lieu of the share transfer.
In its latest award, being the eighth award, made on 17 August 2016, the
tribunal of the London Court of International Arbitration has awarded the
costs of approximately USD 0.9 million to be paid by Stockman to Arricano.
No receivable was recognised in these consolidated interim condensed
financial statements, as recoverability of the related asset was not
certain.
In July 2017, the hearing regarding challenges of the fifth, the sixth and
the seventh award by Stockman has taken place. As at the date that these
consolidated interim condensed financial statements are authorised for
issuance, the results of respective hearing are not yet available.
As at the date that these consolidated interim condensed financial
statements are authorised for issuance, a number of related legal cases are
under the consideration of the District Court of Nicosia.
In September 2014, Assofit Holdings Limited transferred the shares of Prizma
Beta LLC to Financial and Investment Solutions BV, a company registered in
the Netherlands, despite the fact that an Interim Receiver was appointed in
Assofit at that period of time with the responsibility of collecting and
safeguarding Assofit's assets. Further in September 2014, Joint-Stock Bank
Pivdeniy PJSC, Ukraine, which had an outstanding mortgage loan due from
Prizma Beta LLC of USD 32,000 thousand, exercised its right to recover the
abovementioned loan by means of reposession of ownership rights to the Sky
Mall shopping centre which was pledged to secure this loan in September
2014. As at the date that these consolidated interim condensed financial
statements are authorised for issuance, shares of Prizma Beta LLC and
ownership rights for the Sky Mall shopping centre remain to be alienated.
As at 30 June 2017 (unaudited) and 31 December 2016, the Group holds 49.97%
of nominal voting rights in Assofit without retaining significant influence.
In prior years' consolidated financial statements of the Group until 31
December 2013, investment in Assofit was recognised in the statement of
financial position as available for-sale financial asset at its carrying
amount of USD 20,727 thousand. Due to loss of the legal control over the
major operating asset being the Sky Mall shopping centre in September 2014,
management believes that investment in Assofit is fully impaired as at 30
June 2017 (unaudited) and 31 December 2016.
(ii) Legal case in respect of Voyazh-Krym LLC
Starting from October 2013, the Group has been involved in the legal
proceedings regarding demolishing of the part of the shopping centre "South
Gallery" located in Simferopol with an area of 0.73 ha. On 22 January 2016,
Arbitration court of the Russian Federation ruled against Voyazh-Krym LLC
and the latter filed an appeal. On 27 December 2016, the Court of Central
District has cancelled the previous decision of 20 September 2016 and
decided to reconsider the case under the rules of the arbitration court.
As at the date that these consolidated interim condensed financial
statements are authorised for issuance, the hearing has not taken place yet.
Management believes that the Group will be successful in defending its
rights further in court, if this is required. Otherwise, Voyazh-Krym LLC may
be required to perform reconstruction of the part of the shopping center
stated at USD 20,600 thousand (unaudited) as at 30 June 2017.
(iii) Other developments during the period
On 17 April 2014, a claim was filed against Mezokred Holding LLC by a third
party individual seeking to nullify the resolution issued by the Kyiv City
Council, according to which the latter has approved the allocation to
Mezokred Holding LLC of a land plot in Obolon District of Kyiv for the
construction of a hypermarket and entitled Mezokred Holding LLC to lease
this land plot for a period of 25 years. During 2016 and 2017, the court of
first, appeal and cassation instances ruled in favour of Mezokred Holding
LLC.
On 3 October 2016, the claim was filed against Vektor Capital LLC by Odesa
City Council to recover indebtedness in respect of the agreement on customer
share participation in the creation and development of engineering,
transport and social infrastructure of Odesa. During the six months ended 30
June 2017, Vektor Capital LLC has won the related case, according to which
the due date of repayment of all fees was postponed until finalization of
construction of the shopping center.
Management is unaware of any other significant actual, pending or threatened
claims against the Group.
(e) Taxation contingencies
(i) Ukraine
The Group performs most of its operations in Ukraine and therefore within
the jurisdiction of the Ukrainian tax authorities. The Ukrainian tax system
can be characterised by numerous taxes and frequently changing legislation
which may be applied retroactively, open to wide interpretation and in some
cases are conflicting. Instances of inconsistent opinions between local,
regional, and national tax authorities and between the Ministry of Finance
and other state authorities are not unusual. Tax declarations are subject to
review and investigation by a number of authorities that are enacted by law
to impose severe fines, penalties and interest charges. A tax year remains
open for review by the tax authorities during the three subsequent calendar
years, however under certain circumstances a tax year may remain open
longer. These facts create tax risks substantially more significant than
typically found in countries with more developed systems.
Management believes that it has adequately provided for tax liabilities
based on its interpretation of tax legislation and official pronouncements.
However, the interpretations of the relevant authorities could differ and
the effect on these consolidated interim condensed financial statements, if
the authorities were successful in enforcing their interpretations, could be
significant. No provisions for potential tax assessments have been made in
these consolidated interim condensed financial statements.
(ii) Republic of Crimea
As a result of the events described in note 1(b), Ukrainian authorities are
not currently able to enforce Ukrainian laws on the territory of the
Republic of Crimea. Starting from April 2014, this territory is subject to
the transitional provisions of tax rules established by the Russian
government to ensure gradual introduction of federal laws into the
territory. Although these transitional provisions were thought to put
certain relief on the entities registered in the Republic of Crimea,
interpretations of these provisions by the tax authorities may be different
from the tax payers' view.
Effective from 1 January 2015, the territory of the Republic of Crimea is
subject to general legislation of the Russian Federation. The taxation
system in the Russian Federation continues to evolve and is characterised by
frequent changes in legislation, official pronouncements and court
decisions, which are sometimes contradictory and subject to varying
interpretation by different tax authorities.
Taxes are subject to review and investigation by a number of authorities,
which have the authority to impose severe fines, penalties and interest
charges. A tax year generally remains open for review by the tax authorities
during the three subsequent calendar years; however, under certain
circumstances a tax year may remain open longer. Recent events within the
Russian Federation suggest that the tax authorities are taking a more
assertive and substance-based position in their interpretation and
enforcement of tax legislation.
These circumstances may create tax risks in the Russian Federation that are
substantially more significant than in other countries. Management believes
that it has provided adequately for tax liabilities based on its
interpretations of applicable Russian tax legislation, official
pronouncements and court decisions. However, the interpretations of the tax
authorities and courts, especially due to reform of the supreme courts that
are resolving tax disputes, could differ and the effect on these
consolidated interim condensed financial statements, if the authorities were
successful in enforcing their interpretations, could be significant.
In addition, a number of new laws introducing changes to the Russian tax
legislation have been recently adopted. In particular, starting from 1
January 2015 changes aimed at regulating tax consequences of transactions
with foreign companies and their activities were introduced, such as concept
of beneficial ownership of income, etc. These changes may potentially impact
the Group's tax position and create additional tax risks going forward. This
legislation is still evolving and the impact of legislative changes should
be considered based on the actual circumstances.
(iii) Republic of Cyprus
During the prior years, the Group incurred certain foreign legal expenses,
where the VAT accounted for on these expenses was fully claimed. Management
believes that the Group properly claimed the VAT accounted for on these
expenses, on the basis of the plans to further collect reimbursement of the
said expenses, being purely of legal nature, from respective parties in
full. Since as at the date of issue of these consolidated interim condensed
financial statements the management has just started to implement its plans,
the transactions will not be complete in the view of VAT authorities, and
the Group may be liable to pay VAT of approximately USD 1,853 thousand plus
related interest and penalties.
No provision for the VAT liability or related penalties is made in these
consolidated interim condensed financial statements as management believes
that it is not probable that such VAT liability will materialise, as the
Group will proceed with the implementation of the plan on the reimbursement
of expenses.
14 Related party transactions
*****************************
(a) Control relationships
The Group's largest shareholders are Retail Real Estate OU, OU Ekspert
Kapital, Dragon - Ukrainian Properties and Development plc, Deltamax Group
OU, Rauno Teder and Jüri Põld. The Group's ultimate controlling party is
Estonian individual Hillar Teder. Hillar Teder indirectly controls 55.45% of
the voting shares of the Parent Company. Apart from this, the adult son of
Hillar Teder controls 7.48% of the voting shares of the Parent Company.
(b) Transactions with management and close family members
Key management remuneration
Key management compensation included in the consolidated condensed statement
of profit or loss and other comprehensive income for the six months ended 30
June 2017 is represented by salary and bonuses of USD 384 thousand
(unaudited) (six months ended 30 June 2016: USD 308 thousand (unaudited)).
(c) Transactions and balances with entities under common control
Outstanding balances with entities under common control are as follows:
(in thousands of USD) 30 June 2017 31 December
(unaudited) 2016
Long-term loans receivable 1,672 1,647
Short-term loans receivable 9,020 8,900
Trade receivables 1,446 1,384
Other receivables 8,997 8,963
Provision for impairment of (21,119) (20,885)
loans receivable and trade
and other receivables from
related parties
16 9
Long-term loans and 25,258 9,100
borrowings
Short-term loans and 8,414 41,920
borrowings
Trade and other payables 919 1,371
Advances received 26 26
Other long-term liabilities 20,000 -
Other liabilities 5,284 24,317
59,901 76,734
None of the balances are secured. The terms and conditions of significant
transactions and balances with entities under common control are described
in notes 6, 7 and 8.
Expenses incurred and income earned from transactions with entities under
common control for the six months ended 30 June are as follows:
2017 2016
(unaudited) (unaudited)
(in thousands of USD)
Other income 34 -
Interest expense (3,208) (3,128)
Operating expenses (9) (52)
Prices for related party transactions are determined on an ongoing basis.
(d) Guarantees received
The Group's related parties issued guarantees securing loans payable by
Ukrainian subsidiaries of Arricano Real Estate PLC to the EBRD (loans
payable by Comfort Market Luks LLC and UkrPanGroup PrJSC) and PJSC "Bank
"St.Petersburg" (loans payable by Livoberezhzhiainvest PrJSC). The
guarantees cover the total amount of outstanding liabilities in relation to
the EBRD as at 30 June 2017 of USD 21,852 thousand (unaudited) (31 December
2016: USD 23,939 thousand) and in relation to PJSC "Bank "St.Petersburg" as
at 30 June 2017 of USD 16,948 thousand (unaudited) (31 December 2016: USD
17,650 thousand).
15 Subsequent events
********************
(a) Changes in loan agreements
On 15 August 2017, the Group signed amendments to the loan agreements with
PJSC "Bank "St.Petersburg" stipulating a decrease in the amount of loan
principal payable for the period from September 2017 till February 2018 by
USD 1,215 thousand.
ISIN: CY0102941610
Category Code: IR
TIDM: ARO
LEI Code: 213800F8AMPULEKXFX22
Sequence No.: 4648
End of Announcement EQS News Service
611869 22-Sep-2017
(END) Dow Jones Newswires
September 22, 2017 02:04 ET (06:04 GMT)
