MLD Mirland Dev.

18 November 2015

 

MIRLAND DEVELOPMENT CORPORATION PLC

("MirLand" or the "Company")

 

 

UNAUDITED INTERIM CONSOLIDATED REPORT FOR THE

NINE MONTHS ENDED 30 SEPTEMBER 2015

 

 

INCREASED REVENUES AND RESILIENT PERFORMANCE,

DEPSITE TOUGH MARKET CONDITIONS

 

MirLand, one of the leading international residential and commercial property developers in Russia, announces its results for the nine months ended 30 September 2015.

 

Financial Highlights:

·     Total revenues up 24% to US$76.8 million (30 September 2014: US$61.8 million) due to an increase in income from the sale of residential units; 

·     Net operating income ("NOI") from the Company's share of the investment portfolio of US$17.6 million (30 September 2014: US$ 31.3 million), mainly due to depreciation in the Russian Rouble against the US Dollar and the negative movement in the Russian real estate market;

·     Gross profit of US$18.6 million (30 September 2014: US$ 31.4 million);

·     EBITDA of US$10.5 million (30 September 2014: US$17.7 million);

·     Loss of US$83.7 million (30 September 2014: net income of US$25.9 million) due to the on-going impact of adverse conditions in the Russian economy, which resulted in the negative fair value adjustment of the Company's share of the investment portfolio of approximately US$70.2 million following a decrease in projected NOI. In addition, the Company recorded a net foreign exchange loss of US$49 million. There was also a positive fair value adjustment of the Company's share of the investment portfolio of US$48.7 million following depreciation of the Russian Rouble against the US Dollar of approximately 18%, resulting in nominal appreciation of commercial assets at the same rate;

·     Total assets amounted to US$649.6 million, of which 89% are property and land assets (31 December 2014: US$756.6 million); 

·     Total equity of US$51.2 million (31 December 2014: US$141.4 million);

·     Net leverage stands at 74.2% of total assets (31 December 2014: 57%);

 

On 17 November 2015, Mirland confirmed that a proposed Settlement Plan and amended trust deeds to the Bonds (Series A-F) were approved by the Company's Bondholders (Series A-F) subject to various conditions.

 

 

Operational Highlights

 

Residential:

Triumph Park, St. Petersburg

Sales rates continue to remain high with prices in Russian Rouble of later phases increasing ahead of inflation:

·     Phase II: Handover of final apartments during the third quarter of 2015.

·     Phase III: Sales momentum continuing with an additional 40 sales in the last quarter taking sales for the current financial year to 105.  In total, 947 apartments out of 1,346 have been pre-sold, totalling circa 72.5% of the scheme and representing sales of approximately US$63 million;

·     Phase IV: Construction of 1,244 units began in Q3 2014, followed by the commencement of sales in Q1 2015. 349 apartments were pre-sold off plan within the initial nine months with sales totalling approximately 30% of the scheme or US$24 million, up from 22% at the half year with 112 further apartments sold.

Western Residence, Perkhushkovo, Moscow

·     Continued progress, with the sale of a further three houses at our Western Residence development in Perkhushkovo, Moscow, taking sales completed since 1 January 2015 to 12 and the total number of units sold to 52 of the 77 houses within the scheme.

Retail:

·     Satisfactory performance achieved despite ongoing pressure on rents and occupancy rates during the period, with nine months NOI of US$10.4 million from the Vernissage Mall and Triumph Mall, compared to US$17.5 million for the same period last year;

·     Occupancy levels remain high as an average of 95%;

·     An agreement to sell land for the construction of a 15,000 sqm extension of the Vernissage Mall, which will house an international DIY retailer, was completed during the third quarter. The store is expected to be open and begin trading within the next six months and the Board expects the introduction of the retailer to increase the attractiveness of the Mall as a retail destination.

Offices:

·     Occupancy rates decreased by 1% at the MirLand Business Centre, and stand at 82% - in line with the market average. NOI reduced to US$7.1 million (Company share) over the first nine months of 2015, from US$12 million at September 2014.  

 

 

Nigel Wright, Chairman of Mirland, commented:

 

"Mirland continues to face significant challenges in the months ahead. Despite an encouraging increase in revenues, solid performance at our Triumph Park residential project and stable occupancy rates in our key retail investments our results and cash flows continue to be adversely affected by the weak Rouble and the uncertain outlook for the Russian economy.

 

"Net leverage has increased significantly over the past year due principally to a downward valuation of our property portfolio and adverse currency movements. It is especially unfortunate that our financial results have disappointed largely as a result of external factors over which we have little or no control. We continue, however, to work diligently on those areas we can control through prudent cost and asset management. I am especially grateful to our management team for their unrelenting efforts in the face of considerable head winds.

 

"I am also encouraged that we have reached agreement, subject to conditions, with our Bond Holders on the restructuring of our Bond Debt and I am grateful for the efforts made on both sides to reach a compromise of mutual benefit. However, the bank financing market continues to be challenging and we remain highly cautious about the availability of new finance in the short to medium term which is highly dependent on the progress of the economy as a whole.

 

"In summary, therefore, we do not underestimate the challenges we face but are determined to remain focused on maximising portfolio performance, doing our utmost to maintain and improve cash flow and strengthening our core business for the benefit of both creditors and shareholders."

 

 

For further information, please contact:

 

 

 

 

FINANCING

The challenging economic environment has continued to have a substantial impact on the valuation of the Company's real estate portfolio. This saw the value of MirLand's assets revalued down by approximately 36% during 2014 and an additional 18% so far in 2015. This resulted in net leverage increasing further to 74.5% of total assets as at 30 September 2015 from 56.9% as at 31 December 2014. Total net borrowings amounted to US$459.6 million at 30 September 2015 (31 December 2014: US$430.1 million).

 

As reported at the time of the full year results in March 2015, the Company has been in negotiation with the trustees of the Series A-F bondholders to agree a restructuring of its debt which addresses the challenges posed by the current instability in the Russian economy for the benefit of all the Company's creditors and shareholders. On 17 November 2015, Mirland announced that, following preliminary meetings held in Israel on 11 November 2015, a proposed Settlement Plan and amended trust deeds to the Bonds (Series A-F) were approved by the Company's Bondholders (Series A-F). The Company will now act to convene a meeting of creditors pursuant to a ruling of the Cypriot Court on 14 July 2015.

 

The completion of the Settlement is subject to various conditions precedent by deadlines set in the Settlement documents, including, among other things, receiving approval of the Settlement by the Cypriot court, receipt of approval of the Tel Aviv Stock Exchange, and approval of the Company and its shareholders.

 

There is no certainty that the conditions precedent set out in the Settlement documents will be completed by the set deadlines, nor that that the Settlement will be completed.

 

Until the Settlement is completed, the Company has agreed not to undertake certain transactions which would involve incurring any material obligations without giving the Trustees the agreed prior notice (the "Interim Period").

 

Furthermore, the Company's controlling shareholders, Jerusalem Economy Ltd., Industrial Buildings Corporation Ltd. and Darban Investments Ltd., as well as Dunchoille Holdings Ltd. (a subsidiary wholly owned by the Company), have undertaken that, during the Interim Period, no disposal will be made of any of the Company's debentures held by them, unless they give the Trustees prior written notice specifying the particulars of the transaction.

 

 

OPERATIONAL UPDATE

Good progress continues to be achieved in the pre-sale, build and delivery of Triumph Park in St. Petersburg, the Company's BREEAM certified sustainable residential project. This follows the successful conclusion of Phase II with all flats sold and handed over to buyers during the third quarter of 2015. Sales have continued to be strong in Phase III of the scheme, resulting in 975 (72% of the scheme) apartments now having been pre-sold. The Company is continuing to achieve sale prices in Russian Rouble in these latter phases ahead of the rate of inflation, underpinning the strong levels of profitability for the project.

 

The construction of Phase IV of the project, representing a further 1,244 units, commenced in Q3 2014, and 377 units were pre-sold during the first nine months of sales.

 

We have also seen continued sales momentum at The Western Residence residential development in Perkhushkovo, Moscow, with a further three houses sold in the quarter taking total sales in the year to 12 houses. This takes the number of houses sold to 52 out of a 77 houses in total at the scheme.

 

Occupancy at our Vernissage Mall and Triumph Mall assets remained high at approximately 95%, and footfall was also resilient.

 

The Company announced in May 2015 the agreement to sell land for the construction of a 15,000 sqm extension to the Vernissage Mall to an international DIY retailer for a consideration of approximately 400 million Roubles (approximately US Dollar 6.1 million). During August 2015 the sale was completed and part of the consideration was received. According to the Company's obligation, 60% of the consideration was paid to the financing bank as early repayment of the loan principal.

 

Occupancy at the MirLand Business Centre remains in line with market averages at approximately 82% of the total rentable area.

 

On account of the challenging economic environment, the Company has been providing certain discounts and limitation agreements on the exchange rate to its retail and office tenants, which led to a substantial decrease in its NOI in the first nine months of 2015.

 

 

 

MARKET UPDATE

 

Russia's GDP contracted by 4.3% in the third quarter of 2015 compared with the same quarter in 2014. GDP is projected to fall by around 3.5% in 2015, and expected to grow by 0.3% in 2016, according to the Ministry of Economic Development of the Russian Federation. Meanwhile, the World Bank forecasts that Russia's GDP will contract by 3.8% during 2015.

 

The Russian Consumer Price Index ("CPI") in October 2015 reached 15.5% on a year-on-year basis, a decrease of 0.2% since September 2015. Since August 2015, the inflation outlook has fallen to 10% for 2015 from 12%.

 

Exchange rates have fluctuated between 50-70 RUB/USD so far in 2015 and were at 66.3 on 30 September 2015. As of the date of publication of this announcement the rate did not change materially.  

 

Russia's Urals oil brand sold for an average of 56.99 USD/BBL between January and September 2015, down 47% from an average of 107.28 USD/BBL during the same period last year (according to the Ministry of Finance of Russia). Brent crude oil decreased to 45 USD/BBL as of the date of this announcement. 

 

The Central Bank of Russia (CBR) interest rate averaged 6.7% from 2003 to 2015, reaching a record high of 17% in December 2014, and has declined gradually since to 11% on 31 July 2015 and currently remains at this rate.

 

Net capital outflow fell in the third quarter of 2015 to US$52.2bn, according to estimated balance of payments data published by the CBR. In the second quarter of 2015 it was US$20bn. The estimated figure for 2015 is currently US$85bn according to the CBR and the Ministry of Finance of Russia, whilst the World Bank expects the figure to reach US$113bn.

 

Foreign Direct Investments into Russia data by CBR only covers the first quarter of 2015 with US$4bn. The third quarter of 2015 is estimated to be US$2.6bn and the projection for the fourth quarter of 2015 is US$4bn.

 

Russia's unemployment rate decreased to 5.2% in September 2015 from 5.3% in August 2015. It is the lowest rate since December 2014 and below market expectations.

 

Real Estate market

Prime yields in the third quarter of 2015 remained as the same as the previous two quarters, with 11% for offices, 11% for prime retail, and 13% for warehouses.

 

There are two key factors affecting commercial real estate today: devaluation of the Rouble and the excessive supply of real estate. While construction rates are still high, shrinking demand creates a downward pressure on rents.

 

Investment volumes are still declining: in the first nine months of 2015 they were 23% lower than the same period in 2014, totalling US$2bn (offices: US$913m; retail: US$482m; warehouses: US$464m; hotels and residential: US$220). The overall forecast for 2015 is US$2.5-3bn, and lower in 2016 at US$2bn.

 

During the first nine months of 2015 US$1.5bn and US$848m were invested in Russian commercial real estate by domestic and foreign companies respectively. The share of foreign companies' investments increased slightly from 40% in the second quarter of 2015 to 42% in the third quarter of 2015. As has previously been the case, Moscow attracted the majority of the investment with 84%. Only 7% was invested in commercial real estate in St. Petersburg, and 9% in the regions.

 

Offices

In the first nine months of 2015 the total volume of investments in the office segment was US$859m, representing approximately 57% of total investments. During the first nine months of 2015 new construction volume was 464,000 sqm. Net absorption is negative and signifies the lack of demand for new offices.

 

The average vacancy rate increased to 19.1% during the third quarter of 2015: 31.2% in Class A (2015F - 33%), and 14.4% in Class B (2015F - 16%). In the third quarter of 2015 the average rental rates for Class A premises were US$690/sqm and US$330/sqm for Class B (triple net). The forecast for the end of 2015 is US$600/sqm for Class A and US$280/sqm for Class B.

 

Retail

US$482m was invested in retail (23% of total real estate investments) during the third quarter of 2015. 25 shopping centres with a total GLA of circa 750,000 sqm (including five in Moscow) opened in Russia during the first nine months of 2015. A number of notable investment deals took place, including the Mercedes-Benz Plaza BC and the Modny Sezon Retail Gallery. The 2015 forecast is for a total GLA of circa 1,300,000 sqm.

 

In the third quarter of 2015 the average vacancy rate in prime Moscow shopping malls was 2.4% while the overall vacancy rate in Moscow was 7.5%. During the first nine months of 2015 footfall at Moscow's shopping malls was at the lowest level since 2011. The average prime rental rate indicator for the third quarter of 2015 was US$2,800/sqm.

 

Residential

The mortgage lending market in Russia is decreasing; circa 662bn RUB of mortgages were granted from January to August 2015, which is 38% lower than the same period in 2014. The average lending rate at the beginning of September 2015 was 13% (down from 13.5% in August 2015).

 

During the third quarter of 2015 delivery of new residential projects to St. Petersburg's housing market totalled circa 452,000 sqm, 45% less than the same period last year. 89% of the delivery to the market was attributed to the mass-market segment. As at the end of September 2015, there were 555 projects offered in St. Petersburg (4.3% higher than the second quarter of 2015).

 

In the third quarter of 2015, for the first time, mass market prices in Rouble decreased by 1.8% compared to the second quarter of 2015 (while the economy class decreased by 2.8%).

 

Industrial

During the first nine months of 2015, total investment volume in the industrial segment was US$464m. Take-up in the third quarter of 2015 was 75% higher than the average for the period in 2008-2014. In the third quarter of 2015 75,000 sqm of quality warehouse space was delivered in Moscow and 122,000 sqm in the regions. Demand is supported by food retail activity. New construction so far in 2015 is half of the volume of that delivered in 2014.

 

The third quarter 2015 vacancy rate was 9.5% in Class A and 7% in Class B industrial real estate. All vacant space in Moscow is offered for rent in Rouble. Rental rates in the third quarter of 2015 reached 3,800-4,500 RUB/sqm in Moscow and 3,500-4,000 RUB/sqm in the regions (prices per year, excluding OPEX and VAT).

 

 

 

 

 

Nigel Wright                                                                 Roman Rozental

Chairman                                                                      Chief Executive

18 November 2015                                                      18 November 2015

 

 

 

 

 

                                                    

 

 

 

 

 

 

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

 

 

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

 

 

 

 

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

 

 

 

 

 

 

 

The accompanying notes are an integral part of the interim condensed consolidated financial statements.