TIDMMLD
RNS Number : 7217H
Mirland Development Corporation PLC
18 March 2015
18 March 2015
MIRLAND DEVELOPMENT CORPORATION PLC
("MirLand" / the "Company")
CONSOLIDATED REPORT FOR THE
YEAR ENDED 31 DECEMBER 2014
MirLand, one of the leading international residential and
commercial property developers in Russia, announces results for the
12 months ended 31 December 2014.
Financial Highlights:
-- Total revenues from investment properties up 18% to US$56.5
million (31 December 2013: US$47.8 million) due to an increase in
income from yielding assets and full consolidation of the
Vernissage Mall in Yaroslavl;
-- Net operating income ("NOI") from investment properties
(Company's share) up 12% to US$37.3 million (31 December 2013:
US$33.4 million), mainly due to full consolidation of the
Vernissage Mall in Yaroslavl and increase in income;
-- Gross profit remains flat at US$39.1 million (31 December 2013: US$39.8 million);
-- EBITDA down 8% to US$22.9 million (31 December 2013: US$24.9
million) due to a decrease in net income from residential
projects;
-- Loss of US$62.9 million (31 December 2013: net income of
US$6.2 million) due to the ongoing impact of adverse conditions in
the Russian economy, which resulted in the negative fair value
adjustment of investment properties of approximately US$185.8
million following a decrease in projected NOI, a 1.5% increase to
discount rates and 1% increase to CAP rates in the real estate
market. In addition, the Company recorded net foreign exchange
losses of US$175.9 million. This was partly offset by a positive
fair value adjustment of investment properties of US$270.6 million
following an appreciation of the US Dollar against the Rouble of
approximately 72%, resulting in the nominal appreciation of
commercial assets at the same rate;
-- Total assets amounted to US$756.6 million, of which 89% are
property and land assets (31 December 2013: US$893.2 million);
-- Total equity of US$141.4 million (31 December 2013: US$331.7
million), equating to 19% of total assets;
-- Net leverage stands at 56.9% of total assets (31 December 2013: 40.1%);
-- The Company is continuing its discussions with the trustees
of the Series A-F bondholders to agree a restructuring of its debt
and will update the market in due course.
Operational Highlights
Residential:
Triumph Park, St. Petersburg
Sales rate remains high with prices of later phases increasing
ahead of inflation:
-- Phase I: All 510 apartments have been sold, representing
income of approximately US$69 million, all of which was recognised
during the period, in accordance with IFRS standards. An occupancy
permit was received from the relevant authorities and delivery of
apartments to owners has been completed;
-- Phase II: Launched in Q3 2012. To date, 620 out of a total of
630 apartments (circa 98% of the scheme) have been sold,
representing sales of approximately US$51.1 million. An occupancy
permit was received from the relevant authorities and the handover
of apartments to owners commenced during 2014 and is expected to
complete in the first half of 2015;
-- Phase III: Strong sales launch in Q4 2013, with an additional
867 apartments out of 1,346 pre-sold, totalling circa 64% of the
scheme, representing sales of approximately US$63.5 million;
-- Phase IV: Construction of 1,244 units commenced in Q3 2014,
followed by the commencement of sales in Q1 2015. Approximately 82
units were pre-sold off plan during the initial two weeks of
sales.
Western Residence, Perkhushkovo, Moscow
-- Sales of a further 14 houses at our Western Residence
development in Perkhushkovo, Moscow, have completed since 1 January
2014, taking the total number of units sold to 44 of the 77 houses
in the scheme.
Retail:
-- Satisfactory performance achieved despite pressures on rents
and valuations during the fourth quarter with annual NOI from the
Vernissage Mall and Triumph Mall up 14% (4% decrease in December
2013 like-for-like NOI) to US$22.4 million (2013: US$ 19.7
million);
-- The construction of a circa. 15,000 sqm extension to the
Vernissage Mall commenced during the period, with advanced
negotiations currently underway with an international DIY retailer
regarding the pre-sale of a built-to-suit unit.
Offices:
-- Occupancy rates remain high at the MirLand Business Center,
which stands at 86% leased. Like-for-like NOI up 10% to US$15.0
million.
Nigel Wright, Chairman, commented:
"Since last reporting to shareholders the Russian business
environment has been adversely affected by a well-publicised series
of events that were both unforeseeable and beyond our control. The
combined effects of a major devaluation in the Rouble, economic
sanctions, further reductions to oil prices, low growth and high
inflation have damaged both the real estate sector and the business
environment as a whole. Given this exceptional combination of
factors our core business has proved remarkably resilient and our
results at the operating level remain encouraging. Unfortunately,
however, the economic events I refer to have had a major adverse
impact on our portfolio valuations and bottom line
profitability.
"The Russian economy remains challenging and is experiencing
continued turbulence as a result of prevailing and continuing
economic and geopolitical uncertainties. Despite stabilization
measures taken by the Russian Government and the Central Bank, a
combination of falling currency, rising inflation, low oil prices
and the recent downgrades of the Russian Federation's sovereign
credit rating suggests that the business environment generally and
the economy as a whole will continue to suffer in 2015. The full
impact of economic sanctions is unknown and their duration is
uncertain. Furthermore we have no way of predicting either how far
or for how long these adverse conditions will remain.
"We believe we have taken prudent steps to protect our business
to the greatest extent possible but we cannot control the impact of
outside factors, either political or economic, on our core
activities. We continue to monitor the situation closely while
evaluating the potential impact on the Group's cash flow and
portfolio valuation. We believe we are capable of withstanding any
foreseeable difficulties. Despite rising mortgage rates, our
residential sales are holding up well as buyers continue to seek
refuge from a falling Rouble in bricks and mortar. With regard to
rental income, we anticipate some reductions in cash flow as
tenants seek concessions but again we have factored this into our
Business Plan. Long term, we remain positive about both our
business and Russia as a whole but as outlined below we face a
number of considerable challenges. Inevitably there will be
continuing uncertainty at least in the short to medium term."
For further information, please contact:
MirLand Development Corporation plc
Roman Rozental, CEO
roman@mirland-development.com +7 495 787 4962
Yevgeny Steklov, CFO +7 499 130 31 09
yevgeny@mirland-development.com +7 903 628 24 50
FTI Consulting
Dido Laurimore /Ellie Sweeney
dido.laurimore@fticonsulting.com
ellie.sweeney@fticonsulting.com +44 20 3727 1000
Investec Bank plc
Jeremy Ellis / David Anderson +44 20 7597 4000
Chairman's Statement
MirLand has delivered a positive operating performance during
the 2014 financial year with further operational and financial
milestones achieved across the business, despite having to navigate
an increasingly challenging economic environment in Russia.
FINANCING
The challenging economic environment has had a substantial
impact on the independent valuation of the Company's real estate
portfolio, which has been marked down in value by approximately 36%
resulting in net leverage increasing substantially to 56.9% of
total assets (31 December 2013: 40.1%). Total net borrowings
amounted to US$430.1 million (31 December 2013: US$357.7
million).
Against this context and, further to the announcement on 25
January 2015, the Company is 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.
Discussions are continuing and, during this period, 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.
The Company will update the market further on this in due
course.
During the 2014 financial year, and prior to the significant
deterioration of the economic situation in Russia, MirLand had made
good progress in successfully securing new bank financing or
refinancing agreements. These new facilities were all secured on
highly attractive terms, and were in line with our strategy of
diversifying our funding sources whilst keeping long term leverage
at a relatively low level. Further details are set out below:
1. In September 2014, the Company issued new debentures (Series
F) in the total amount of NIS142.6 million (approximately US$39.2
million). The Series F debentures bear an annual fixed interest
rate of 6.5% following increase of 1% due to the fact that they
have been rated by Midroog at "B1 Negative". The debentures are
repayable in five unequal annual payments; the first four payments
are 5% of the principal amount and the fifth payment is 80% of the
principal amount, payable on 31 December of each year from 2015 to
2019 (inclusive).
2. In September 2014, the Company successfully financed the
fourth phase of 1,244 apartments at Triumph Park. Petra 8 LLC
("Petra"), a wholly owned subsidiary, entered into a loan agreement
with SberBank, which also financed the previous three phases of
this project. The loan agreement comprises a non-revolving credit
line of up to US$87 million which will provide approximately 75% of
the expected phase four construction costs, with the balance
financed from sale proceeds. The loan fulfills the outstanding
funding requirements for this latest phase of the project, and will
be provided to Petra in tranches over the next three years, secured
by way of mortgage, charge, pledge and other appropriate security
interests for the benefit of the Bank. The Loan, which matures in
four years, is in addition to three facilities previously granted
by the Bank to Petra, the outstanding balance of which, to date, is
approximately US$2.6 million.
3. In May 2014, a 51% owned subsidiary of the Company entered
into a new non-revolving US$26 million refinancing loan agreement
with Nordea Bank against Century, its 11,000 sqm office investment
asset in Moscow. The loan, which bears an interest rate of LIBOR +
6.85%, is for a period of five years. The loan principal is to be
paid in quarterly installments, with the last repayment
representing 73% of the loan balance.
4. In April 2014, a 61% owned subsidiary of the Company replaced
its existing US$11 million loan facility from Sberbank of Russia
with a new US$18 million facility with a fixed interest rate of
7.7%, compared to LIBOR + 7.7% for the previous loan, with all
other terms remaining unchanged.
5. On 20 March 2014, a subsidiary of the Company entered into a
US$49 million loan agreement with the Bank of Moscow to refinance
the Vernissage Mall project. The loan, which bears a fixed interest
rate of 7.75%, is for a period of seven years, after which it will
be possible to extend the period by three additional years. The
loan principal is to be paid in quarterly installments, with the
last repayment representing 49% of the loan balance. The
refinancing follows the Company's decision in December 2013 to
acquire the remaining 49.5% of shares in the asset, consolidating
its control of the project.
We are very pleased to have negotiated these new facilities, as
detailed above, particularly in the context of high interest rates,
and considering the levels to which rates have since moved.
The net proceeds of the Series F Bonds issuance, as well as
loans obtained by subsidiaries, were applied for general working
capital purposes and the repayment of certain financial liabilities
including, inter alia, Bonds and loans provided to subsidiaries in
Russia.
Following a sharp annual devaluation of 72% of the Russian
Rouble against the US Dollar, the Company recorded an exceptional
nominal revaluation gain of US$270.6 million and nominal foreign
exchange loss of US$175.9 million in its 2014 annual profit and
loss statement. This nominal revaluation gain and nominal foreign
exchange loss had no impact on the Company's US Dollar denominated
investment properties or loans provided to the Company's
subsidiaries.
OPERATIONAL UPDATE
Despite the challenges in the market, operational progress
continues to be in line with expectations. 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. Construction of Phase II has now completed,
ahead of schedule, with approximately 98% of the flats pre-sold and
the handover of circa 290 flats now concluded. Sales have continued
to complete at a strong pace on Phase III of the scheme, with 867
(65% of the scheme) apartments pre-sold in the first 15 months of
the sales process. The Company continues to market and achieve
sales prices on these later phases ahead of the rate of inflation,
underpinning the strong levels of profitability for the project in
Rouble terms.
The construction of Phase IV of the project, representing a
further 1,244 units, commenced in Q3 2014 and the sales programme
launched in the first quarter of 2015 with 82 flats pre-sold in the
first 2 weeks of sales.
The Western Residence residential development scheme at
Perkhushkovo, Moscow has also maintained momentum with 12 further
houses sold since the beginning of 2014. This takes the number now
sold to 44 of a total of 77 houses in the scheme.
Our Vernissage Mall and Triumph Mall assets remain over 97% let,
with footfall high at both. The retail portfolio enjoyed a strong
operating performance, with net operating income up 14% to US$22.4
million compared to 2013. We have commenced the construction of a
circa 15,000 sqm extension to the Vernissage Mall, with advanced
negotiations currently underway with an international DIY retailer
regarding the pre-sale of a built-to-suit unit.
Occupancy at the MirLand Business Centre remains high at circa
86% of the total lettable area, which is in line with the market
average.
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 will lead
to a substantial decrease in its NOI in the coming year.
Results
Total assets as at 31 December 2014 decreased by 15.3% to
US$756.6 million, as compared to US$893.2 million as of 31 December
2013. Equity as at 31 December 2014 was US$141.4 million compared
to US$331.7 million the preceding year.
Losses for the year amounted to US$62.9 million (31 December
2013: net income of US$6.2 million), due to the turmoil in the
Russian market, which resulted in negative fair value adjustment of
investment properties of approximately US$185.8 million following a
decrease in projected NOI, a 1.5% increase to discount rates and 1%
increase to CAP rates in the real estate market. In addition, the
Company recorded net foreign exchange losses of US$149.4 million.
This was partly offset by positive fair value adjustment of
investment properties of US$270.6 million following an appreciation
of the US Dollar against the Rouble of approximately 72%, resulting
in the nominal appreciation of commercial assets at the same
rate.
Over the period, net operating income ("NOI") from investment
properties increased by 12% to US$37.3 million (31 December 2013:
US$33.4 million) due to decrease in operational expenses and full
consolidation of Vernissage mall project.
MirLand's assets are externally valued semi-annually on 30 June
and 31 December of each year. The valuation is conducted by Cushman
& Wakefield. As a result of the above mentioned financial
crisis, the value of MirLand's portfolio (Company's share)
decreased by approximately 33.1% to US$589.5 million as at 31
December 2014 (31 December 2013: US $880.7 million). Adjusted NAV,
based on Cushman & Wakefield's valuation, was US$164.6 million
(31 December 2013: US$556.7 million), a decrease of 70.4%.
Portfolio Development
Despite the challenges of the Russian economy, MirLand's focus
for 2014 was to continue to deliver its flagship residential
project already under construction, manage carefully its
income-producing investment properties in order to decrease
operational expenses, and execute its high quality pipeline of
development projects. MirLand will continue to keep this strategy
under review in light of macro-economic developments in Russia.
Residential
MirLand has continued to make significant progress at its
flagship residential led development, Triumph Park in St.
Petersburg. All 510 apartments have been sold in Phase I and Phase
II launched in Q3 2012 with 620 out of a total of 630 apartments
(circa 98% of the scheme) sold, representing sales of approximately
US$51.1 million. An occupancy permit for Phase II was received from
the relevant authorities and the handover of apartments to owners
commenced during 2014 and is expected to complete in the first half
of 2015. We saw strong sales in Phase III in Q4 2013, with an
additional 867 apartments out of 1,346 pre-sold, totalling circa
64% of the scheme, representing sales of approximately US$63.5
million.
In Q3 2014 we commenced construction of 1,244 units at Phase IV
followed by the commencement of sales in Q1 2015. Approximately 82
units were pre-sold off plan during the initial two weeks of
sales.
The project offers high quality and competitively priced housing
in St. Petersburg's strengthening residential market. Situated on a
40 hectare site, the project represents one of the few large scale
developments in the city in close proximity to major transport
links. Furthermore, the development is the first eco-residential
complex in St. Petersburg certified by BREEAM, the world's leading
assessment organization of green and sustainable construction. It
will provide attractive features including ecologically friendly
construction materials, energy efficient design, reduced CO2
emissions, water purification filters and high speed eco lifts
certified according to ISO 14001. The flexibility of the apartment
mix in terms of both range of sizes and fit-out options is designed
to appeal to a wide range of purchasers.
In Q4 2011 the construction of Phase I of the Western Residence
project in Perkhushkovo (77 houses out of 163) was completed and
the houses are now being marketed to prospective to the buyers. To
date, a total of 44 houses have been sold.
Retail
The Company owns two retail projects located in large prosperous
regional cities. Both are over 97% occupied and enjoy high footfall
throughout the year.
As part of our strategy to grow the retail segment of the
portfolio, we have now started the construction of Phase IIa of the
Vernissage Mall (approximately 15,000 sqm) in Yaroslavl, which is
being built-to-suit and under advanced negotiations to be sold in
its entirety to an international DIY retailer. In addition, we are
currently in negotiations with a single tenant for a tailor-made
theme store development which will be let on a long term lease
agreement at Triumph House, a retail project in Kazan.
Offices
The office segment of the portfolio comprises four
income-producing investment properties - Hydromashservice, MAG,
Century Bld and Tamiz - all located at the MirLand Business Center,
which provides good quality office space in Moscow.
Dividend Policy
MirLand has adopted a dividend policy that is intended to
reflect long term earnings and cash flow potential while, at the
same time, maintaining both prudent dividend cover and adequate
capital resources within the business.
In light of the challenges currently facing the Company, the
Board has determined it inappropriate to declare a dividend for the
financial year ended 31 December 2014.
Our People
The Board of Directors and Senior Management team consist of
dedicated individuals whose expertise has proved invaluable
throughout this year. They have recommended and implemented
positive and necessary changes to the Business Plan in light of
rapidly changing economic circumstances and been involved in key
decisions throughout.
As Chairman, I place considerable emphasis on rigorous Board
management and, in addition to formal meetings, I meet and
communicate with my colleagues on a regular basis.
Once again I would like to pay tribute to both my executive and
non-executive Board colleagues and all our staff. Together they
form the backbone of our business and I thank them for their
continuing dedication, energy and achievement. Their efforts have
ensured that the Company is well positioned to face the challenges
of the future.
The Board of Directors and the management are fully committed to
sound corporate governance. As in previous years, detailed
information regarding our approach to governance issues, our
internal controls and key team members will be provided in our
Annual Report & Accounts.
Outlook
Since last reporting to shareholders the Russian business
environment has been adversely affected by a well-publicised series
of events that were both unforeseeable and beyond our control. The
combined effects of a major devaluation in the Rouble, economic
sanctions, further reductions to oil prices, low growth and high
inflation have damaged both the real estate sector and the business
environment as a whole. Given this exceptional combination of
factors our core business has proved remarkably resilient and our
results at the operating level remain encouraging. Unfortunately,
however, the economic events I refer to have had a major adverse
impact on our portfolio valuations and bottom line
profitability.
The Russian economy remains challenging and is experiencing
continued turbulence as a result of prevailing and continuing
economic and geopolitical uncertainties. Despite stabilization
measures taken by the Russian Government and the Central Bank, a
combination of falling currency, rising inflation, low oil prices
and the recent downgrades of the Russian Federation's sovereign
credit rating suggests that the business environment generally and
the economy as a whole will continue to suffer in 2015. The full
impact of economic sanctions is unknown and their duration is
uncertain. Furthermore we have no way of predicting either how far
or for how long these adverse conditions will remain.
We believe we have taken prudent steps to protect our business
to the greatest extent possible but we cannot control the impact of
outside factors, either political or economic, on our core
activities. We continue to monitor the situation closely while
evaluating the potential impact on the Group's cash flow and
portfolio valuation. We believe we are capable of withstanding any
foreseeable difficulties. Despite rising mortgage rates, our
residential sales are holding up well as buyers continue to seek
refuge from a falling Rouble in bricks and mortar. With regard to
rental income, we anticipate some reductions in cash flow as
tenants seek concessions but again we have factored this into our
business plan. Long term, we remain positive about both our
business and Russia as a whole but as outlined below we face a
number of considerable challenges. Inevitably there will be
continuing uncertainty at least in the short to medium term.
Nigel Wright
Chairman
18 March 2015
Chief Executive's statement
Russian Business Environment
Key economic indicators 2012 2013 2014
------------------------- ------- ------- -------
Population (millions) 143.0 143.3 143.7
------------------------- ------- ------- -------
GDP per capita (PPP,
$) 23,700 24,298 24,764
------------------------- ------- ------- -------
GDP growth rate
(%) 3.5 1.5 0.6
------------------------- ------- ------- -------
Inflation (%) 6.5 6.5 11.4
------------------------- ------- ------- -------
Unemployment rate 5.5 5.5 5.3
------------------------- ------- ------- -------
RUR/USD exchange
rating 30.4 32.9 56.3
------------------------- ------- ------- -------
Sovereign Credit BBB BBB BB+
rating
------------------------- ------- ------- -------
In 2014 Russia faced two major events that negatively impacted
its economy. The first was the military unrest in East Ukraine and
annexation of Crimea by Russia that started in March and led to
economic sanctions from the US and the EU against Russia. The
second was the sharp decrease in oil prices that initiated in the
middle of the year and led to an approximately 50% drop in the
second half of 2014, while the oil sector represents 65% of
Russia's total export revenues.
On the back of falling oil prices, increasing geopolitical
tension and a surprise cut in the key policy rate by the Central
Bank of Russia ("CBR") the value of the Rouble collapsed and has
continued to slide since the middle of 2014. Measures taken by the
Russian Government and the CBR's December key policy rate hike of
750 bps have helped to stabilize the Rouble. In January 2015,
S&P downgraded Russia's sovereign credit rating to BB+ with
negative outlook. Subsequently, the market reaction to the CBR's
decision on 30 January 2015 to cut its policy rate by 200 bps was
sharply negative and required the CBR to intervene with US$700
million to stabilize the Rouble. Therefore, at the beginning of
2015 the Rouble continued its devaluation against the US$ and
against the dual currency basket. On 30 January, the government
revealed an anti-crisis package of RUB2.3 trillion (approximately
US$37 billion) which it plans to commit to support the economy.
Rosstat's preliminary estimate for Russia's 2014 real GDP growth
stands at 0.6% while inflation increased to 11.4 % during the year,
driven by high food inflation and the devaluation of the Rouble.
This decline in growth from 1.3% in 2013 was due to weaker domestic
and external demand. Consumption remained the main growth driver,
yet its pace of expansion slowed to 1.5%, compared to 3.9% in 2013.
Depressed investment demand was reflected in the contraction of
fixed capital investment by 2.5%, while companies continued
destocking. Growth was supported by stronger net exports due to the
weaker Rouble. Manufacturing and financial services were the main
growth contributors on the production side. On the upside,
unemployment remained low during the year. A continued decline in
imports due to political sanctions on Russia from the US and the
EU, together with weak currency, are expected to support the
consumption of indigenous goods whilst simultaneously boosting
export performance as trade activity will become more attractive
with a weak local currency.
Rosstat's January survey points to a worsening of business
conditions across all major manufacturing industries, with the
aggregate seasonally adjusted index falling to the lowest level
since the 2009 crisis. The survey suggests that weak domestic
demand and growing political uncertainty have become the two most
important factors affecting investor confidence. This reflects
Russia's balance of payments which deteriorated significantly in
the fourth quarter of 2014, affected by a terms of trade shock and
again accelerating capital outflows. Net capital outflows grew in
in the fourth quarter to US$59.5 billion. For 2014, capital
outflows in the amount of US$130.5 billion (7% of GDP) triggered
the deterioration in the balance of payments and required the CBR
to spend US$86.5 billion of its reserves, decreasing its reserve
stock by 25.6% since the beginning of the year. The World Bank
revised its Russia growth forecast for 2015 to -3.8%, based on a
new oil price projection of US$53/bbl.
The 2014 federal budget deficit was the result of the measures
to support the economy. The Ministry of Finance issued on 30
December 2014, RUB1 trillion (approximately US$16 billion) in
treasury bonds to recapitalize the banking system. The overall
budget deficit remained at the same level compared with 2013. This
was largely the result of the Rouble depreciation, which boosted
oil revenues and led to an increase in total government revenues to
20.4% of GDP from 19.7% of GDP a year before.
In spite of the economic challenges, Russia still has large
foreign exchange reserves that amounted to US$ 385 billion at the
end of 2014. These reserves will continue to support the balance of
payments gap and help to stabilize the Rouble's devaluation. In
addition, the reserves might also be used to support the Russian
banking system as capital ratios are starting to deteriorate and
liquidity support by some banks may be needed. However, the level
of government debt, as a percentage of GDP remains low, at 32.5% at
the end of 2014 (14% in 2013), which is still much lower than many
OECD and other European countries.
Positive news came during February 2015 as a cease-fire in East
Ukraine was declared. It is not yet clear what impact this
cease-fire will have on the western sanctions regime and on the
wider Russian economy should this agreement prove stable.
Russian Real Estate Market
In 2014 total volume invested in commercial real estate in
Russia was back to 2010 levels and decreased sharply to US$4.1
billion, compared to 2011-2013 yearly investments which stood at
US$7.5-8.1 billion. This decrease in investment volume is
attributed to both the global and domestic macroeconomic
environment and the forecast for 2015 is even lower. Foreign
investment in real estate reduced to only 20% of total investment
(34% in 2013) or US$0.8 billion (US$2.4 billion in 2013).
The macroeconomic environment also led to a sharp increase in
capitalization rates during the year by 2.5% to 11% in the office
sector, by 2.0% to 11% in the shopping centres sector and by 2% to
13% in the warehouse sector. This increase occurred mainly during
the fourth quarter of the year as the CBR increased the interest
rate to 17%, while trying to support the devaluation of the Rouble.
However, these new capitalization rates do not fully reflect new
financing terms, and therefore this outward movement may
continue.
As with previous years, the office sector led the investments in
Russian real estate with US$2.2 billion (54% of total investment),
out of which US$2.0 billion was invested in Moscow and US$0.2
billion was invested in St. Petersburg. However, investments in
this sector reduced by 37% relative to 2013. Other sectors
demonstrated weaker performance with investment in the retail
sector amounting to US$0.6 billion (down 77% from 2013) and
investments in the warehouse sector of US$0.4 billion (down 74%
from 2013).
The Office Sector
During 2014 most market indicators presented negative trends
mainly due to a decrease in demand for office premises and a cycle
peak of new construction. New construction added 1.4 million sqm to
the market, representing a record high for the last five years of
new development. However, the net absorption was only 300,000 sqm
which is 4.5 times less than the new construction volume which
entered the market. The volume of premises under construction
remains high, however developers are tending to halt work on new
projects.
Tenant requirements to reduce costs has led to rent reductions,
space use efficiency and cancelation of expansion plans. The sharp
Rouble depreciation initiated a trend of "dedollarization" of lease
contracts, mainly in class B buildings. In class A buildings this
trend is not so apparent, however landlords of these assets are
prepared to become more flexible. Take-up during the year amounted
to only 1.3 million sqm, on par with 2010 volumes, culminating a
three year decrease in demand for the leasing and purchasing of
space. Rental asking prices reduced principally towards the end of
the year and were 30% lower in 4Q 2014 than in 4Q 2013.
The reduction in demand together with the significant supply of
new buildings on the market has caused an increase in vacant space
to 2.6 million sqm, while an additional 0.7 million sqm which will
be delivered during 2015 is already being offered for lease. By the
end of 2014, 17.2% of all existing office premises in Moscow (12%
at the end of 2013) was vacant. Demand for class A office space
fell more significantly resulting in a 31% vacancy level at year
end, whereas class B offices present a lower 13% vacancy level.
The Retail Sector
Russia is the largest market in Europe and has the biggest
retail turnover in EMEA with US$611.8 billion in 2013. While modern
retail space only started being developed about 10 years ago,
shopping has become a conventional cultural pastime for many. The
majority of good quality projects are located in large cities,
although in recent years developers have also increased their
activity in cities with less than 500,000 people.
The economic downturn, devaluation and inflation influenced
consumer spending during 2014 and the negative trend is expected to
continue in 2015. Retail sales in Russia grew by only 1.9% during
2014 (3.9% in 2013) and real disposable income grew by just 1% (2%
in 2013). This growth has been attributed to the strong consumption
trend in November and December as the Rouble continued its
devaluation and inflation expectations were on the rise. In
addition to the decrease in real wages in December 2014, the
increase in financing costs will reduce the consumer credit that
fuelled spending in previous years.
Since the middle of 2014, demand for retail premises has
decreased significantly. The main reasons for the decline are: the
reduction in sales volumes due to import restrictions and high
purchase prices, in addition to the high cost of imports and
consequently retail prices which conflict against a decrease in
purchasing power, and general future uncertainty. Tenants have
consequently started to renegotiate their lease agreements due to a
decline in sales expectations and growing economic uncertainty.
2014 was a record year for the construction of quality retail
premises as 60 new shopping centres with a GLA of 2.1 million sqm
were delivered in 49 cities across Russia. In Moscow, 14 new
shopping centres were opened with 0.67 million sqm of GLA,
including Avia Park which is the biggest mall in Europe. Outside
Moscow, 46 shopping centres were delivered with 1.54 million sqm of
GLA. The majority of these new centres had soft openings with low
occupancy rates due to the slowing demand.
In light of the economic situation and the huge influx of new
shopping centres, vacancy rates in existing shopping centres
started to increase towards the end of the year, as the higher
vacancy rates at new premises increased the competition.
The market situation has put downward pressure on leasing
contracts. Many lease agreements have been transferred from US$ to
Rouble. In addition, fixed rental prices are becoming less common
as payments as a percentage of turnover is becoming an increasingly
popular trend.
In Saratov, the market is young and not yet stabilized. The area
of quality retail space is only 140 sqm per 1,000 inhabitants. In
Yaroslavl, the retail sector has developed rapidly since 2004 and
reached 300 sqm per 1,000 inhabitants. Almost all large retailers
active in Russia, both local and international, are also active in
Yaroslavl.
The Residential Sector
The residential sector in Russia presents one of the best
opportunities for growth due to the low level of living space per
capita and what has been a slowly developing mortgage market. The
average area per capita is circa 24 sqm and the mortgage market
amounts to only small proportion of GDP, significantly lower than
in western countries. In 2014, approximately 1.1 million apartments
comprising a total area of 81 million sqm were delivered in Russia,
representing 15% growth over the year. Among the newly constructed
apartments, 10.2% were built in the Moscow region, 4.1% were built
in Moscow, and 4% were built is St. Petersburg.
2014 saw a record volume of residential schemes under
development in St. Petersburg, with 3.3 million sqm under
construction. Due to both economic instability and currency
volatility there are concerns regarding the demand for new
apartments, however it's expected that high quality and
well-designed projects will be less affected by the downturn, as
evidenced by the 2008 financial crisis.
In December 2014, the residential market in St. Petersburg
experienced a boom in demand. However, expectations for 2015 are
that demand will be lower as a result of increased mortgage rates
and decreasing purchasing power in light of the falling Rouble.
During the year average selling prices of apartments in St.
Petersburg increased by 9.4%. 60% of apartments were priced between
70-110 thousand Rouble per sqm, and 15% of apartments ranged
between 110-130 thousand Rouble per sqm. Market expectations are
that the prices will continue to increase by 5%-10%, which is lower
than the expected rate of inflation.
As at the year-end, there are slightly more than 700 cottage
settlements of all categories in the development stage in the
Moscow region, as 120 of them can be referred to as concept
development of business or prime class in comparison to our
project. However, the development activity slowed down in 3Q 2014
due to the economic situation in Russia. Traditionally, the
majority of demand has accounted for empty plots of land, however
an increase in demand for town houses has recently been witnessed.
Turnkey ready houses and town houses are on average 10%-30% more
expensive than contracted land-plots. In 2014 demand shifted
towards smaller properties which could accommodate a reduced
budget..
Average price increases for apartments in Russia during 2014
were lower than the rate of inflation. In Moscow, prices increased
by 8% and in St. Petersburg an average apartment price increased by
just 5%. The mortgage market in Russia increased by 30% (2013 -
31%), however due to the sharp increase in the interest rate by the
CBR at the end of 2014 it is not expected that mortgages will see
any growth during 2015.
The Logistics Sector
Since early 2014, the market for warehouses in the Moscow region
has become more favourable for tenants. In the first half of the
year the supply of good quality space increased significantly which
resulted in the growth of vacancy rates. Therefore, for the first
time since 2011 tenants can now close deals on existing space, not
only on warehouses under construction.
2014 presented record volumes of new construction that resulted
in a 4% increase in vacancy rates in the Moscow region to 5% in
class B and 7% in class A warehouses. Some near complete projects
are expected to come to market in 2015.
In the regions, economic and political factors did not have such
an affect on the market as in the Moscow region. As a result,
regional demand during the year remained strong. During 2014, circa
1 million sqm of quality warehouse space was delivered across
Russia (excluding Moscow). New construction activity is expected to
continue, as there is a lack in supply of quality warehouses in
many regions. In comparison to 2014, take-up increased by 29%, with
77% of transactions relating to new lease agreements, and 23% were
purchase transactions.
The demand, especially from food retailers, is not satisfied in
all Russian regions. In 2014 the most active companies in the
regions were retailers (mainly food retail) with a 65% market
share, industrial companies (primarily car components and
industrial equipment production) with a 22% market share, and
logistic players with a 13% market share.
In the regions, local developers make mainly Rouble denominated
agreements, therefore, the Rouble devaluation did not have a
significant affect on the market and average rents have remained
relatively stable. Contrastingly, in the Moscow region, rents
decreased by 25% due to the devaluation of the Rouble.
Strategy
MirLand's principal activities are focused on the acquisition,
development, construction, reconstruction, lease and sale of
residential and commercial real estate in Russia. Its particular
geographic focus is Moscow, St. Petersburg and major regional
cities with a population of over 500,000 people. MirLand invests
primarily in projects where it identifies potential for a high
return on equity and the generation of strong yields and income,
stemming from demand for high quality commercial and residential
real estate assets.
The key elements of MirLand's strategy are as follows:
-- Focus on the completion of existing projects: The Company
aims for the timely delivery of projects while ensuring they are
completed to a high standard. Marketing of all of the Company's
commercial projects is commenced during their development
phase.
-- Portfolio Diversification: To mitigate risk, the Company's
portfolio is balanced between various sectors, locations and
development stages.
- Geographic location: investments are spread across Moscow, St.
Petersburg, and other major regional cities. Investment decisions
are made following a detailed feasibility study and the close
examination of local and national economic and demographic data, as
well as the balance between supply and anticipated demand for
international standard properties.
- Sector: the Company invests in a balanced mix of residential,
retail, office and logistics, as well as mixed-use projects.
- The Company's portfolio includes projects which are of varying
duration, phasing and anticipated completion. The Company owns both
yielding and development properties in order to obtain a relatively
balanced spread in the use of working capital and demand for
management's attention, that can, at the same time, generate an
income flow from sales and yielding properties.
-- Realisation of assets: The Company will continuously assess
whether to retain yielding properties or realise their market value
through disposal, depending on the opportunity and on prevailing
market conditions. The Company uses revenues from yielding assets
to diversify its income sources.
-- Use of diverse financing sources to accelerate business
activity and growth: Equity, shareholders' loans, corporate loans
(some of which have been guaranteed by our main shareholders),
project financing and bond issuances are used to finance the
Company's activities and projects.
-- Enhancing business cooperation with local partners,
especially in the regions: Having a local partner provides daily
monitoring of the projects and thus a greater level of control over
quality, costs and delivery for the Company. In addition, these
relationships are expected to lead to future investment
opportunities.
The recent financial turmoil has led the Company to adjust its
operational focus to be more directed on managing its core
activities and available financial resources.
This has been achieved through:
-- focus on the progression of the development projects which
have the greatest potential to deliver the best returns despite
changing market conditions;
-- further phasing of larger projects;
-- development of the remaining projects according to changes in
the market demand and to the availability of financial sources;
-- strong emphasis on keeping high occupancy rates in yielding commercial projects;
-- high prioritization of financing.
This strategy supports the Company's position as one of the
leading international real estate companies in Russia. The backing
of the Company's main shareholders, together with the
diversification of financial sources, enables MirLand to continue
to develop and maintain its portfolio and help support it in its
mission of creating value for its shareholders.
In addition, in the event that market conditions begin to
improve and the availability of financing sources in Russia
increases, the Company might consider increasing its portfolio when
good opportunities arise, through acquisitions of new real estate
assets, either yielding or development projects, that can be
delivered in a short time to the market.
Portfolio
MirLand currently has 13 projects, six of which are yielding
assets (offices in Moscow and regional retail), two project are
under construction (Phase 2a of Vernissage Mall and Phase III and
Phase IV of the Triumph Park project in St. Petersburg), two are
completed residential projects (Phase I in Western Residence in
Perkhushkovo and Triumph Park) ) and three projects are at various
stages of planning and in the process of obtaining permits (in
addition to the Phase II of the Western Residence project in
Perkhushkovo and phases V-VIII of the Triumph Park project in St.
Petersburg).
The Company's portfolio has been valued by Cushman &
Wakefield at US$589.5 million (MirLand's share) as at 31 December
2014, based on the Company's freehold/leasehold rights. This value
represents a decrease of approximately 33% since 31 December
2013.
Yielding Projects:
Mirland Business Center comprises Class B+ office buildings of
Hydro, MAG, Century Buildings and Tamiz projects. The complex is
located in the northern part of Moscow's Novoslobodsky business
district. The site enjoys good transport links and excellent
access.
Hydromashservice (Hydro), Moscow - offices
Class B+ office complex. Part of the MirLand Business Center
-- Land area: 1.2 ha
-- Leasable area: 16,700 sqm
-- Completed: Q4 2008
-- Leasehold rights of land: 100%
-- Occupancy rate: 80%
-- Financing: US$20 million financed by Sberbank in September
2012 (principal balance as of 31 December 2014: US$19.2
million)
MAG, Moscow - offices
Class B+ office complex. Part of the MirLand Business
Center.
-- Land area: 2.2 ha
-- Leasable area: 18,500 sqm
-- Completed: Q4 2007
-- Leasehold rights of land: 100%
-- Occupancy rate: 78%
-- Financing: US$49 million financed by Sberbank in 2012-2014
(principal balance as of 31 December 2014: US$45.3 million)
Century Buildings, Moscow - offices
Two Class B+ office buildings Part of the MirLand Business
Center.
-- Leasable area: 20,900 sqm
-- Completed: Q1 2009
-- Leasehold rights of land: 61%/51%
-- Occupancy rate: 95%
-- Financing: US$39 million financed by Sberbank and Nordea bank
in 2014 (principal balance as of 31 December 2014: US$37
million)
Tamiz, Moscow - offices
New class B+ office building Part of the MirLand Business
Center.
-- Leasable area: 11,700 sqm
-- Completed: Q3, 2011
-- Leasehold rights of land: 100%
-- Occupancy rate: 95%
Vernissage Mall, Yaroslavl - retail
A Western standard single floor shopping centre in Yaroslavl,
located at the entrance road to Yaroslavl from Moscow.
-- Land area: 12 ha
-- Leasable area: 34,100 sqm
-- Completed: Q2 2007
-- Freehold rights: 100%
-- Occupancy rate: 97%
-- Financing: US$49 million financed by Bank of Moscow in April
2014 (principal balance as of 31 December 2014: US$44.2
million).
Triumph Mall, Saratov - retail
The first multi-storey retail and entertainment centre in
Saratov. The complex is strategically located near the historical
city centre on an important retail avenue in the city.
-- Land area: 2.2 ha
-- Leasable area: 27,300 sqm
-- Completed: Q4 2010
-- Freehold rights: 100%
-- Occupancy rate: 100%
-- Financing: US$95 million financed by Sberbank in June 2013
(principal balance as of 31 December 2014: US$87.3 million)
Completed Residential Projects:
Western Residence - Phase I, Perkhushkovo, Moscow region -
residential complex
Development of 77 townhouses and cottages (out of 163) in the
prestigious western outskirts of Moscow, targeting the high end of
middle class segment
-- Land area (Phase I): 11 ha
-- Saleable area (Phase I): 13,390 sqm (excluding sold houses)
-- Freehold rights: 100%
-- Sales: 44 houses have been sold;
-- Completion: Phase I (77 townhouses and cottages) was completed in Q4, 2011.
Project under construction:
Triumph Park, St. Petersburg - residential complex
Phased development of a residential neighbourhood which, upon
completion, will comprise approximately 9,000 apartments,
commercial and public areas with good accessibility to the city and
its airport. The commercial areas will include offices and a
commercial centre with underground parking. The public facilities
will include kindergartens, a school and parks.
-- Land area: 41 ha
-- Saleable area: 560, 000 sqm
-- Leasable area: 117,775 sqm
-- Planned completion of total project: Q4 2021
-- Freehold rights: 100%
-- Marketing:
- Sales and construction of Phase II, which consists of
approximately 32,600 sqm representing 630 apartments, was launched
in September 2012.
- Sales and construction of Phase III, which consists of
approximately 61,800 sqm representing1,346 apartments, was launched
in September 2013.
- Launch of sales of Phase IV, which will consist approximately
60,694 sqm representing1,244 apartments, was in Q1 2015
-- Sales:
- Phase I: sold out;
- Phase II: to date, 620 sale contracts have been executed;
- Phase III: to date, 867 sale contracts have been executed;
- Phase IV: to date, 82 reservation contracts have been executed in the first two weeks of sales
-- Financing:
- credit line of US$41 million for Phase I construction was
obtained from Sberbank in November 2011 and fully repaid;
- credit line of US$47.5 million for Phase II construction was
obtained from Sberbank in September 2012 and fully repaid;
- credit line of US$96 million for Phase III construction was
obtained from Sberbank in September 2013 (principal balance as of
31 December 2013: US$2.6 million)
- credit line of US$87 million (conversion rate as of the
signing date) for Phase IV construction was obtained from Sberbank
in September 2014 (principal balance as of 31 December 2014: US$0.7
million)
Projects in Planning:
Big Box Complex, Yaroslavl - retail
Development of a retail complex adjacent to the Vernissage mall
in Yaroslavl.
-- Land area: 18 ha
-- Leasable area: 55,000 sqm
-- Planned construction commencement: Q1 2015 (Phase IIa)/ Q1 2016 (Phase IIb)
-- Planned completion: Q4 2015 (Phase IIa)/ Q4 2017 (Phase IIb)
-- Freehold rights: 100%
Triumph House, Kazan - retail
Development of home design and improvement centre at favourable
location in the city
-- Land area: 2.2 ha
-- Leasable area: 16,783 sqm
-- Planned construction commencement: Q2 2015
-- Planned completion: Q4 2016
-- Freehold rights: 100%
Saratov - logistics
Phased development of a logistics centre in Saratov, located
close to the federal highways and adjacent to the city ring
road.
-- Land area: 26 ha
-- Leasable area: 104,000 sqm
-- Planned construction commencement: NA
-- Planned completion: NA
-- Freehold rights: 100%
Novosibirsk - logistics
Phased development of a logistics centre in Novosibirsk, closely
located to the federal highways and railways.
-- Land area: 40.6 ha
-- Leasable area: 180,000 sqm
-- Leasehold rights: 100%
-- Planned construction commencement: NA
-- Planned completion: NA
Western Residence - Phase II, Perkhushkovo, Moscow region -
residential
Development of 86 townhouses and cottages (out of 163) in the
prestigious western outskirts of Moscow.
-- Land area: 11.5 ha (Phase II)
-- Saleable area: 34,607 sqm
-- Freehold rights: 100%
-- Planned construction commencement: NA
-- Planned completion: NA
Outlook
We strongly believe in the quality of our portfolio and that our
prudent and selective approach to its management and development
will lead to an increase in long term value for our
shareholders.
I would like to thank our shareholders for their on-going
support of the Company, MirLand's management team for its
dedication, and the Company's employees, who are responsible for
the day-to-day activities. I am confident that this strong team
will continue working through the challenging, fast-paced market to
realize MirLand's long term vision.
Roman Rozental
Chief Executive Officer
18 March 2015
FINANCIAL REVIEW
Revenues for 2014 were US$56.5 million and losses were US$62.9
million. Total Assets at 31 December 2014 amounted to US$756.6
million and Equity amounted to US$141.4 million. The Company's
adjusted net asset value was US$164.9 million. The Company's real
estate assets were valued on 31 December 2014 at US$621.6 million
(for 100% rights from freehold/leasehold) by Cushman &
Wakefield, the external appraiser, of which MirLand's share is
US$589.5 million.
Accounting Policy
The Company's financial statements are prepared in accordance
with International Financial Reporting Standards ("IFRS") as
adopted by the European Union ("EU") and the requirements of the
Cyprus Companies Law, Cap 113.
Income Statement
The Company's revenues consist of rental income from investment
properties, income from sales of residential units and fees from
managing investment properties. Rental income and fees from
investment properties increased to US$56.5 million from US$47.8
million, representing an 18% increase. This growth is mainly
attributed to full consolidation of Vernissage mall following
purchase of the partner's share and to management constant effort
to decrease operational expenses of the Company. The Company's
recognised income of US$29.8 million from sale of inventory was due
to the start of handover of residential units in Triumph Park Phase
II and houses in the Western Residence project, to buyers.
The cost of maintenance and management of the Company increased
from US$17.4 million in 2013 to US$18.2 million in 2014, which was
largely attributed to the full consolidation of the Vernissage mall
project (presented on equity basis in 2013). Like for like assets
recorded a decrease of approximately 14% due to efficiency measures
performed by the management.
In accordance with IAS 40, the Company has revalued its
investment properties and investment properties under construction
for the financial period ending 31 December 2014 and has recognized
the resulting movement in valuation through its income statement as
fair value adjustments of investment properties and investment
properties under construction.
The Company's general administrative expenses for the period
were US$13.0 million in comparison to US$13.3 million in 2012. The
decrease of 2% is mainly attributed to a reduction in salaries and
to decrease in professional services purchased by the Company.
Marketing expenses for the period were US$4.1 million in
comparison to US$5.4 million in 2013, largely attributed to the
recognition of the brokerage fees relating to Phase II of the
Triumph Park project.
Net financing costs for the period amounted to US$35.4 million
compared to US$31.4 million in 2013. The increase is explained by
additional financing raised by the Company to expand its
development activities and deliver further growth through its
activities.
The tax gain recorded in 2014 was mainly attributed to the
increase of a deferred tax asset in the Company's balance sheet,
due to recognition of foreign exchange losses attributed mainly to
the Triumph park project in St. Petersburg.
MirLand is a resident of Cyprus for tax purposes and is subject
to a 12.5% corporate tax rate. MirLand's subsidiaries in Russia are
subject to a 20% tax rate. Additional details are covered in note
16 to the financial statements.
The loss for 2014 amounted to US$62.9 million in comparison to
net profit of US$6.2 million in 2013. The loss is mainly attributed
to the sharp decrease in value of the Company's investment
assets.
Balance Sheet
Total assets as at 31 December 2014 amounted to US$756.6 million
in comparison to US$893.2 million in 2013, a decrease of 15.3%. The
main reasons for the overall decrease were the decrease in cash and
cash equivalents balance, decrease in a fair value of investment
properties, compensated by continuing development of the Company's
residential projects which were financed through bank financing on
the project level and apartment sales.
The Company's real estate portfolio amounted to US$673 million
at the year end, and comprised 89% of the total assets, in
comparison to US$807.4 million as at 31 December 2013 which
comprised 90% of the total balance sheet.
Equity and Liabilities
Equity as at 31 December 2013 decreased to US$141.4 million from
US$331.7 million as at 31 December 2013. The decrease in equity
from 2013 ascribed mainly to the decrease in the value of company's
real estate portfolio as described above. MirLand's equity
comprises 19% of its total assets.
Net financial liabilities as at 31 December 2014 amounted to
approximately 430.1 million compared to US$357.7 million as at 31
December 2013.
During 2014, further emphasis was made on diversifying the
company's funding sources by obtaining bank financing on the
project level. In 2014, the following new bank loans were
obtained:
Project Bank Loan type Original Amount Balance
amount obtained as of 31.12.14
(US$m) as of 31.12.14 (US$m)
(US$m)
--------------------- ---------------- -------------- --------- ---------------- ----------------
Century buildings, Sberbank,
Moscow Nordea Refinance 39.0 39.0 37.0
Vernissage mall,
Yaroslavl Bank of Moscow Refinance 49.0 49.0 44.2
Triumph Park, phase
4 SberBank Construction *87.5 7.8 2.6
175.5 95.8 83.8
----------------------------------------------------- --------- ---------------- ----------------
* Maximal availability, based on the exchange rate at the date
of signing.
Net Asset Value ("NAV")
The Company's real estate assets were valued by an external
independent appraiser, Cushman & Wakefield, in accordance with
International Valuation Standards on 31 December 2014 at US$621.6
million (for 100% rights from freehold/leasehold), of which
MirLand's share is US$589.5 million.
Overview of Portfolio Market Values as at 31 December 2014
City Property Name and Portfolio Percentage MirLand Market
Address Market Value Owned by Value as at 31st
as at 31st MirLand of December 2013
of December (Rounded)
2013 (Rounded)
---------------- ---------------------------- ---------------- ----------- ------------------
Hydromashservice,
2-Khutorskaya str.,
Moscow 38A $45,900,000 100% $45,900,000
---------------- ---------------------------- ---------------- ----------- ------------------
MAG, 2-Khutorskaya
Moscow str., 38A $55,700,000 100% $55,700,000
---------------- ---------------------------- ---------------- ----------- ------------------
Western Residence,
Moscow Perkhushkovo, Odintsovsky
Region district $31,000,000 100% $31,000,000
---------------- ---------------------------- ---------------- ----------- ------------------
Triumph Mall, 167
Saratov Zarubina street $96,500,000 100% $96,500,000
---------------- ---------------------------- ---------------- ----------- ------------------
St. Petersburg Triumph Park, Residential $176,000,000 100% $176,000,000
---------------- ---------------------------- ---------------- ----------- ------------------
Triumph Park, Trade
St. Petersburg Centre $15,500,000 100% $15,500,000
---------------- ---------------------------- ---------------- ----------- ------------------
Vernissage Mall, Kalinina
Yaroslavl str. $70,000,000 100% $70,000,000
---------------- ---------------------------- ---------------- ----------- ------------------
Yaroslavl Phase II $9,900,000 100% $9,900,000
---------------- ---------------------------- ---------------- ----------- ------------------
Moscow Tamiz Building $33,500,000 100% $33,500,000
---------------- ---------------------------- ---------------- ----------- ------------------
Moscow Century Buildings $72,300,000 51%/61% $40,163,000
---------------- ---------------------------- ---------------- ----------- ------------------
Kazan Triumph House $7,400,000 100% $7,400,000
---------------- ---------------------------- ---------------- ----------- ------------------
Saratov Logistics Complex $5,500,000 100% $5,500,000
---------------- ---------------------------- ---------------- ----------- ------------------
Novosibirsk Logistics Complex $2,400,000 100% $2,400,000
---------------- ---------------------------- ---------------- ----------- ------------------
Total $621,600,000 $589,463,000
---------------------------------------------- ---------------- ----------- ------------------
The full Cushman & Wakefield valuation is available on the
Company's website, www.mirland-development.com.
Based on the Cushman & Wakefield valuation as at December
2014, the Company's Adjusted NAV decreased to US$164.6 million (31
December 2013: US$556.7 million), a decrease of 70.4%. As a result,
the NAV per share as at 31 December 2014 was US$1.6 in comparison
to US$5.4 as at 31 December 2013.
Cash Flow
During 2014, the Company used US$85.7 million for investment in
real estate properties (including change in buildings for sale) in
comparison to US$50 million in 2013. Cash flow used in operating
activities amounted to US$30.2 million. Cash flow provided by
financing activities amounted to US$52.9 million.
Financial Strategy
In 2014, MirLand's activities were primarily financed by project
bank loans, bonds issuances and by revenues from yielding and
residential projects. The Company's policy is to limit its leverage
to 66% of the gross value of its assets, including all development,
trading and investment properties As described above, the Company
is 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.
Typically, residential projects are constructed in phases,
allowing the use of capital from pre-sales to finance on-going
development phases. However, the Company obtained construction loan
facilities from Sberbank for the 1-4 phases of its flagship
project, the Triumph Park in St. Petersburg, respectively
Wherever possible, the Company seeks to acquire finance on a
non-recourse basis to minimise risk. The Company is negotiating
with several banks for financing some of its other pipeline
projects.
Market Risks
MirLand is exposed to market risks from changes in both foreign
currency exchange rates and interest rates.
Foreign Currency Risks: The Company's functional currency across
its operating subsidiaries is the Rouble, whereas the Company's
reporting currency is the US Dollar. The majority of the Company's
revenues, costs and capital expenditures are either priced,
incurred, payable or measured in US Dollar. Although most
transactions are settled in Roubles, the price for real estate
property is tightly linked to the US Dollar. However, the current
trend in Russia is to move toward Rouble linked transactions and
therefore, the Company will consider in the future hedging its
transactions for currency risks.
Interest Rate Risks: Whilst the Company does not currently have
any significant interest bearing assets, changes in interest rates
could affect the cost of current and future financing.
Credit Risks: The Company performs ongoing credit evaluations of
its tenants, purchasers and contractors and its financial
statements include specific allowances for doubtful accounts. The
Company also seeks to mitigate the risk of non-payment in
structuring its contractual arrangements with such parties.
Regulatory Risks: On 11 December 2013, the Law on Promotion of
Competition and Reduction of Concentration (2013) (the
"Concentration Law" or the "Law") was published in Israel where the
Company's bonds are listed. The Law deals with a number of issues,
including restrictions on control of reporting companies within
pyramid holding structures and a ban on control by a second layer
company of a company in a different layer, all as more thoroughly
described in Section C of the Concentration Law. A company which,
upon the date of publication of the Concentration Law, was a second
layer company, and so long as it remains as such, is entitled to
continue to control a company of a different layer (the: "Different
Layer Company") for up to six years from the date of publication of
the Concentration Law, if such a company controlled the "different
layer" company prior to the publication (the "Intermediate
Period"). During the Intermediate Period, special corporate
governance rules shall apply, as set out in the Concentration
Law.
On July 16th 2014 the Regulation on Promotion of Competition and
Reduction of Concentration (Type of Companies that will not be
regarded as Layer Companies and attribution of control directives')
(2014) (the: "Regulation"). The Regulation define certain companies
that will not be regarded as Layer Companies, since there is no
public interest in determining such over such entities, for the
purpose of the Intermediate Period provisions. The Intermediate
Period provisions require that in Different Layer Companies, during
the Intermediate Period, the majority of its directors will be
independent according to the definition of the Law.
According to the Regulation definition, the Company is not
regarded as Different Layer Company for the purpose of the
Intermediate Period requirement purposes subject to certain
conditions. The company took the necessary measures in order to
adhere to the conditions set by the Regulations and hence is in
line with the requirement of the Intermediate Period
provisions.
The Company intends, in conjunction with its group of
controlling companies, to take the necessary action in order to
comply with the Concentration Law.
Yevgeny Steklov
Chief Financial Officer
18 March 2014
Certain information contained in this Announcement constitutes
"forward-looking statements" which can be identified by the use of
forward-looking terminology such as "may", "will", "should",
"expect", "anticipate", "target", "project", "estimate", "intend",
"continue" or "believe", or the negatives therefore or other
variations thereof or comparable terminology. Due to various risks
and uncertainties, actual events or results or the actual
performance of the Company may differ materially from those
reflected or contemplated in such forward-looking statements.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
31 December
---------------------------
2014 *) 2013
----------- --------------
Note U.S. dollars in thousands
---- ---------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 40,646 66,154
Trade receivables 1,502 1,472
Accounts receivables 5a 6,530 7,277
VAT receivable 2i 4,438 4,147
Inventories of buildings for sale 6 169,297 180,157
Loans granted to companies accounted
for at equity method - 3,274
----------- --------------
222,413 262,481
----------- --------------
NON-CURRENT ASSETS:
Investment properties 7 383,800 *) 431,500
Investment properties under construction 8 30,800 *) 59,100
Inventories of buildings for sale 6 88,917 99,564
VAT receivable 314 415
Fixed assets, net 1,231 966
Other long term receivables 5b 18,558 2,496
Prepaid expenses 517 615
Deferred taxes 16 10,056 2,244
Investment in companies accounted for
at equity method 4c - 33,789
----------- --------------
534,193 630,689
----------- --------------
TOTAL ASSETS 756,606 893,170
=========== ==============
*) Restated. See Note 2z.
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
31 December
---------------------------
2014 *) 2013
------------- ------------
Note U.S. dollars in thousands
----- ---------------------------
EQUITY AND LIABILITIES
CURRENT LIABILITIES:
Long-term loans from banks which classified
for short-term 1b,11 181,588 -
Credit from banks and others 10 - 19,635
Current maturities of long-term credit
from banks 11 15,445 10,783
Current maturities of debentures 13 57,298 48,014
Credit from banks for financing of inventory
of buildings for sale 11 3,300 9,730
Long-term Debentures which classified
for short-term 13,1b 178,316 -
Trade payables 8,262 7,629
Deposits from tenants 14 2,762 4,090
Advances from buyers 6c,d 88,471 75,684
Other accounts payable 2,847 4,244
------------- ------------
538,289 179,809
------------- ------------
NON-CURRENT LIABILITIES:
Loans from banks and others 11 34,847 129,123
Debentures 13 - 206,606
Other non-current liabilities 14 12,562 5,113
Deferred taxes 16 29,461 *) 40,802
76,870 381,644
------------- ------------
TOTAL LIABILITIES 615,159 561,453
------------- ------------
EQUITY ATTRIBUTABLE TO EQUITY HOLDERS
OF THE PARENT:
Issued capital 17 1,036 1,036
Share premium 359,803 359,803
Capital reserve for share-based payment
transactions 19 12,530 12,396
Capital reserve for transactions with
controlling shareholders 12 8,556 8,556
Foreign currency translation reserve (174,197) (61,523)
Accumulated deficit (89,757) (18,444)
------------- ------------
TOTAL EQUITY ATTRIBUTABLE TO EQUITY HOLDERS
OF THE PARENT 117,971 301,824
------------- ------------
Non-controlling interest 23,476 29,893
------------- ------------
Total equity 141,447 331,717
------------- ------------
TOTAL EQUITY AND LIABILITIES 756,606 893,170
============= ============
*) Restated. See Note 2z.
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED INCOME STATEMENT
Year ended
31 December
------------------------------------
2014 2013 2012
---------- ---------- ------------
U.S. dollars in thousands
(except for share and per share
Note data)
---- ------------------------------------
Rental income from investment
properties 52,525 46,255 32,231
Revenues from sale of residential
units 6 29,796 56,050 8,079
Revenues from management fees 3,938 1,505 1,641
---------- ---------- ------------
Total revenues 86,259 103,810 41,951
Cost of sales and maintenance
of residential units 28,974 46,680 12,833
Cost of maintenance and management 20a 18,228 17,370 14,874
---------- ---------- ------------
Gross profit before provision
for impairment 39,057 39,760 14,244
Impairment of inventory - - 8,041
---------- ---------- ------------
Gross profit 39,057 39,760 6,203
---------- ---------- ------------
General and administrative expenses 20b 13,043 13,282 14,607
Marketing expenses 4,053 5,389 2,102
Fair value adjustments of investment
properties and investment properties
under construction 7,8 84,802 *) 55,212 *) (32,468)
Other expense, net 20d 1,992 1,086 1,832
Group's share in earnings of
companies accounted for using
the equity method and gain from
obtaining control in company
previously accounted for using
the equity method 4c 4,009 7,591 6,340
---------- ---------- ------------
Operating income (loss) 108,780 82,806 (38,466)
Finance income 20c 1,521 1,080 1,382
Finance expenses 20c (36,942) (32,445) (24,941)
Net foreign exchange differences (149,361) (33,967) 19,892
Profit (loss) before taxes on
income (76,002) 17,474 (42,133)
Taxes on income (tax benefit) 16 (13,125) *) 11,268 *) (169)
---------- ---------- ------------
Net income (loss) (62,877) 6,206 (42,302)
========== ========== ============
Attributable to:
Equity holders of the parent (71,313) 3,339 (42,302)
Non-controlling interests 8,436 2,867 -
---------- ---------- ------------
(62,877) 6,206 (42,302)
========== ========== ============
Basic and diluted net earnings
(loss) per share (US Dollars)
attributable to equity holders
of the parent 18 (0.69) 0.03 (0.41)
========== ========== ============
*) Restated. See Note 2z.
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 December
-----------------------------
2014 *) 2013 2012
--------- -------- --------
U.S. dollars in thousands
-----------------------------
Net income (loss) (62,877) 6,206 (42,302)
Other comprehensive income (loss) (net
of tax effect):
Other comprehensive income to be reclassified
to profit or loss in subsequent periods:
Transfer of currency translation reserve
to income statement for obtaining control
in companies previously accounted for
using the equity method 6,624 244 -
Exchange differences on translation
of foreign operations (130,853) (19,451) 8,178
Group's share of net other comprehensive
income (loss) of companies accounted
for using the equity method (3,298) (2,562) 1,662
--------- -------- --------
Total other comprehensive income (loss) (127,527) (21,769) 9,840
========= ======== ========
Total comprehensive income (loss) (190,404) (15,563) (32,462)
========= ======== ========
Attributable to:
Equity holders of the parent (183,987) (15,898) (32,462)
Non-controlling interests (6,417) 335 -
--------- -------- --------
(190,404) (15,563) (32,462)
========= ======== ========
*) Restated. See Note 2z.
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Capital Total
reserve equity
for
Capital transactions Foreign attributable
reserve to equity Non-
for with currency
Issued Share share-based controlling translation Accumulated holders of controlling Total
capital premium payments shareholders reserve deficit the parent interest equity
------- ------- ----------- ------------ ----------- ----------- ------------ ----------- ---------
U.S. dollars in thousands
At 1 January
2014 1,036 359,803 12,396 8,556 (61,523) (18,444) 301,824 29,893 331,717
Net profit
(loss) for the
year - - - - - (71,313) (71,313) 8,436 (62,877)
Other
comprehensive
loss - - - - (112,674) - (112,674) (14,853) (127,527)
------- ------- ----------- ------------ ----------- ----------- ------------ ----------- ---------
Total
comprehensive
income
(loss) - - - - (112,674) (71,313) (183,987) (6,417) (190,404)
Share-based
payments (Note
19) - - 134 - - - 134 - 134
------------ ----------- ---------
At 31 December
2014 1,036 359,803 12,530 8,556 (174,197) (89,757) 117,971 23,476 141,447
======= ======= =========== ============ =========== =========== ============ =========== =========
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Capital Total
reserve equity
for
Capital transactions Foreign attributable
reserve to equity Non-
for with currency
Issued Share share-based controlling translation Accumulated holders of controlling Total
capital premium payments shareholders reserve deficit the parent interest equity
------- ------- ----------- ------------ ----------- ----------- ------------ ----------- --------
U.S. dollars in thousands
1,036 359,803 12,186 8,391 (42,286) (21,783) 317,347 - 317,347
At 1 January
2013
Net profit for
the year - - - - - 3,339 3,339 2,867 6,206
Other
comprehensive
loss - - - - (19,237) - (19,237) (2,532) (21,769)
------- ------- ----------- ------------ ----------- ----------- ------------ ----------- --------
Total
comprehensive
income
(loss) - - - - (19,237) 3,339 (15,898) 335 (15,563)
Obtaining
control in
companies
previously
accounted for
using
the equity
method (Note
3) - - - - - - - 29,558 29,558
Equity
component of
transaction
with
controlling
shareholders
( Note 12) - - - 165 - - 165 - 165
Share-based
payments (Note
19) - - 210 - - - 210 - 210
------------ ----------- --------
At 31 December
2013 1,036 359,803 12,396 8,556 (61,523) (18,444) 301,824 29,893 331,717
======= ======= =========== ============ =========== =========== ============ =========== ========
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Capital
reserve for
Capital transactions Foreign Retained
reserve for with currency earnings
Issued Share share-based controlling translation (accumulated Total
capital premium payments shareholders reserve deficit) equity
------- ------- ----------- ------------ ----------- ------------ --------
U.S. dollars in thousands
1,036 359,803 11,341 6,565 (52,126) 20,519 347,138
At 1 January 2012
Loss - - - - - (42,302) (42,302)
Other comprehensive income - - - - 9,840 - 9,840
------- ------- ----------- ------------ ----------- ------------ --------
Total comprehensive income (loss) - - - - 9,840 (42,302) (32,462)
Equity component of transaction
with controlling shareholders - - - 1,826 - - 1,826
Share-based payments - - 845 - - - 845
--------
At 31 December 2012 1,036 359,803 12,186 8,391 (42,286) (21,783) 317,347
======= ======= =========== ============ =========== ============ ========
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended 31 December
---------------------------------
2014 *) 2013 2012
-------- ----------- ----------
U.S. dollars in thousands
---------------------------------
Cash flows from operating activities:
Net profit (loss) (62,877) 6,206 (42,302)
-------- ----------- ----------
Adjustments to reconcile net profit
(loss) to net cash provided by (used
in) operating activities:
Adjustments to the profit or loss items:
Deferred taxes, net (14,824) *) 10,779 (209) (*
Depreciation and amortization 200 230 491
Finance expenses, net 184,783 65,332 3,667
Share-based payment 134 210 845
Fair value adjustment of investment
properties and investment properties
under construction, net (84,802) *) (55,212) *) 32,468
Group's share in earnings of associates
net from loss (gain) from obtaining
control in company accounted for equity
method (4,009) (7,347) (6,340)
Gain from sale of investment property - (548) -
-------- ----------- ----------
81,482 13,444 30,922
-------- ----------- ----------
Working Capital adjustments:
Decrease (increase) in trade receivables 1,879 2,491 (4,095)
Decrease (increase) in VAT receivable
and others (3,022) (36) 2,991
Increase in inventories of buildings
for sale (78,763) (16,767) (32,544)
Increase (decrease) in trade payables 6,957 450 (59)
Increase in other accounts payable 62,724 5,558 70,319
-------- ----------- ----------
(10,225) (8,304) 36,612
-------- ----------- ----------
Interest paid (36,730) (28,247) (23,851)
Interest received 231 430 4,291
Taxes paid (2,046) (344) (629)
(38,545) (28,161) (20,189)
-------- ----------- ----------
Net cash flows generated from (used
in) operating activities (30,165) (16,815) 5,043
-------- ----------- ----------
*) Restated. See Note 2z.
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended 31 December
------------------------------
2014 *) 2013 2012
--------- --------- --------
U.S. dollars in thousands
------------------------------
Cash flows from investing activities:
Acquisition of additional interest in
jointly controlled entity - - (1,500)
Additions to investment properties (3,529) (6,466) (7,881)
Additions to investment properties under
construction (3,418) (1,125) (2,277)
Purchase of fixed assets (625) (389) (279)
Settlement of restricted deposit, net - 1,119 620
Repayment of loans granted to related
parties - - 250
Loans granted to related parties (10,684) (890) (1,630)
Proceeds from repayment of loans granted
to companies accounted for using the
equity method - - 12,088
Cash from obtaining control in companies
previously accounted for using the equity
method (a) (21,140) (2,914) -
Proceeds from sale of investment property
under construction - 3,973 -
Net cash flows used in investing activities (39,396) (6,692) (609)
--------- --------- --------
Cash flows from financing activities:
Issuance of debenture, net 39,152 125,267 -
Repayment of debentures (32,211) (28,685) (26,456)
Receipt of loans from banks and others,
net from origination costs 155,630 124,456 91,118
Repayment of loans from banks and others (109,667) (156,768) (69,268)
Receipt of loans from shareholders - - 12,422
Repayment of loans from shareholders - - (18,306)
--------- --------- --------
Net cash flows generated from (used in)
financing activities 52,904 64,270 (10,490)
--------- --------- --------
Exchange differences on balances of cash
and cash equivalents (8,851) (278) 249
--------- --------- --------
Increase (decrease) in cash and cash
equivalents (25,508) 40,485 (5,807)
Cash and cash equivalents at the beginning
of the year 66,154 25,669 32,333
Adjustment due to IFRS 11 implementation - - (857)
Cash and cash equivalents at the end
of the year 40,646 66,154 25,669
========= ========= ========
*) Restated. See Note 2z.
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended
31 December
-----------------------------
2014 *) 2013 2012
----------- --------- -----
Unaudited Audited
----------- ----------------
U.S. dollars in thousands
-----------------------------
(a) Cash generated from obtaining control
in companies accounted for using
the equity method:
The subsidiaries' assets and liabilities
at date of sale:
Working capital (excluding cash
and cash equivalents) 136 2,793 -
Investment properties (109,800) (94,972) -
Fixed assets, net (313) - -
Other receivables (49) (71) -
Deferred taxes 16,107 9,093 -
Loans from banks 21,419 10,849 -
Other non-current liabilities 12,700 866 -
Loans from related party - 5,973 -
Indemnification assets (5,737) - -
Foreign currency translation reserve 6,624 244 -
Non-controlling interests - 29,558 -
Gain (Loss) from obtaining control
in companies accounted for using
the equity method 702 (244) -
Investment in associate 33,727 35,997 -
Loans granted to associates 3,344 - -
(21,140) 86 -
=========== ========= =====
(b) Significant non-cash transactions:
Obtaining control in companies
accounted for using the equity
method against offset of previously
granted loans - 600 -
=========== ========= =====
Additions to investment property
and investment property under construction - 83 5,121
=========== ========= =====
*) Restated. See Note 2z.
The accompanying notes are an integral part of the consolidated
financial statements.
NOTE 1:- GENERAL
a. Mirland Development Corporation Plc ("the Company") was
incorporated in Cyprus on 10 November 2004 under the Cyprus
Companies Law, Cap. 113 as a private company limited by shares. Its
registered office is located at Thessalonikis Street, Nicolaou
Pentadromos Centre, 6(th) floor, Limassol 3025, Cyprus.
The Company's shares are traded on AIM and its bonds are traded
on Tel-Aviv Stock Exchange.
The principal activities of the Company and its subsidiaries
("The Group") are investment and development of residential and
commercial real estate assets in Russia.
b. 1. During 2014, mainly in the second half of the year, the
Russian economy was subject to sanctions imposed on it by the west
and in the last quarter of 2014, the Russian economy experienced a
serious deterioration which resulted, Inter Alia, in the weakening
of Russian Rubal in relation to the U.S. dollar by about 72%. In
the second half of 2014 and principally in December of that year,
due to the decline in oil prices, the aggravation of the sanctions
imposed by the West due to Geopolitical instability in the East
Ukraine and the devaluation of the Russian Ruble, the Central Bank
of Russia raised the interbank interest rate from 5.5% in January
2014 to 17%. International rating agencies (S&P Moody's and
Fitch Ratings) gradually lowered Russia's credit rating to BB+/Baa3
with a negative outlook. After the balance sheet date through the
date of signing the financial statements, the Ruble dropped another
9% in its value in relation to the U.S dollar. During February and
March 2015 the Central Bank of Russia lowered the interbank
interest to 14%.
2. On December 18, 2014, the trustees of the holders of the
Company's debentures (series A-F) called for a meeting for
obtaining reports from the Company's representatives regarding the
developments in the Company's business affairs and for discussing
and deciding on actions to be taken to protect the rights of the
creditors.
On the same date and following the announcement of the trustees
of the holders of the Company's debentures, the Company announced
that in view of the fluctuations in the Russian markets, the
scheduled meeting of the holders of debentures and their appeals to
the Company, the Company's Board decided to defer the principal and
interest payments to the holders of debentures (series A-B) which
were due on December 31, 2014.
In addition on the same date, the rating agencies (S&P
Maalot and Midroog) announced the lowering of the Company's rating
to ilCC and B1 with negative outlooks, respectively, this among
others, following the Company's announcement of deferring the
debenture payments of December 2014.
In the meeting of holders of debentures held on December 22,
2014, the Company announced that it requires time until the general
situation in Russia and the Company's specific business affairs
become clear. In early January 2015, the Company announced the
results of the voting of the holders of debentures (series A-F)
which resolved to temporarily defer the maturity dates of the
principal and interest payments to the holders of debentures
(series A-B) to February 1, 2015 (as well as authorizing the
trustee to extend this date by an overall 60-day period) subject to
depositing $ 11 million in an escrow account in favor of the
Company (reflecting the payment that was due in December 2014) and
provided that the Company initiate an immediate, consecutive and
intensive dialog with the trustees of the debentures (who have been
authorized to negotiate with the Company for reaching an
arrangement) and the Company will sign a Stand Still letter and
subject to the signing of the stand still letter by controlling
shareholders of the Company, Jerusalem Economic Corporation Ltd.,
and Industrial Buildings Ltd., as long as the amount of the deposit
is held in trust account, they will not sell the bonds (series A
and B) held Biden to a third party.
On January 22, 2015, the Company signed a "standstill
commitment" towards the trustees and the holders of the debentures
in which it undertook, among others, to the following principals
according to the specified in the "standstill commitment": not to
make any material payments to its financial creditors in respect of
any debt, whether in or outside of Israel beyond the amortization
schedule settled with them, but due notice trustees, not to make
any payments to the controlling shareholders in the Company, not to
dispose of any material assets, not to distribute any dividends
only with a prior notice to the trustees and also other commitments
as detailed in the "standstill commitment"
On January 26, 2015, February 9, 2015 and February 25, 2015, the
trustee of the s (series A-B) decided to defer the maturity dates
of the principal and interest payments to March 31, 2015.
On February 2, 2015, S&P announced another lowering of the
Company's rating to D- with a negative outlook since the Company
failed to meet its liabilities to the holders of debentures (series
A and B) in the 30-day period following the original maturity date
and given its intention to refinance the debt on the all the
debenture series.
On February 10, 2015, the Company's Board decided to announce
the deferral of payments to holders of all the series of debentures
until negotiations with them are concluded.
On February 15, 2015 and February 25, 2015, the trustee of the
debentures (series C) decided to defer the maturity dates of the
interest payments to March 31, 2015.
The Company is negotiating with the trustees of the holders of
the debentures in order to achieve a comprehensive arrangement.
As a result, the Company classified the outstanding debentures
in an amount of $ 178.3 million as current liabilities in its
financial statements as of December 31, 2014.
3. In the context of financing agreements with lending banks in
Russia, certain financial covenants were determined with which the
Company is not in compliance as of December 31, 2014 which include,
among others, a certain LTV ratio, minimum occupancy rates and debt
coverage and interest ratios. As a result, the Company classified
in its financial statements as of December 31, 2014 loans from
banks, in which the Company breaches its covenants, in an amount of
$ 181.6 million as current liabilities.
4. The Group has a working capital deficiency of approximately $
315.9 million as of December 31, 2014, a loss of approximately $
62.9 million, total comprehensive loss of approximate $ 190.4
million for the year then ended and negative cash flows from
operating activities of approximately $ 30.2 million for the year
then ended. Moreover, during 2014 the equity attributable to parent
company reduced by $ 183.9 million.
The Company continues to monitor the economic developments in
Russia which are external to the Group and beyond its control and
is continuing taking steps to minimize its exposure to the
situation. In view of all of the aforementioned, there is a
material uncertainty which may cast significant doubt as to the
Group's ability to continue to operate as a going concern. The
financial statements do not include any adjustments to the carrying
amounts of assets and liabilities and their classification which
might be required if the Company is unable to continue to operate
as a going concern.
c. Definitions:
In these financial statements:
The Company - Mirland Development Corporation Plc.
Parent Company - Jerusalem Economic Company Ltd.
The Group - Mirland Development Corporation Plc and
its investees as listed below.
Subsidiaries - Companies over which the Company exercises
control (as defined in IFRS 10) and whose
financial statements are consolidated with
those of the Company.
Jointly controlled - Companies held by a number of entities,
entities among which contractual agreement exists
for joint control and whose financial statements
are presented in equity method, according
to IFRS 11.
Investees - Subsidiaries and joint controlled entities
Related parties - As defined in IAS 24 (revised)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies have been applied consistently
in the financial statements for all periods presented, unless
otherwise stated.
a. Basis of presentation of the financial statements:
1. Measurement basis:
The Group's financial statements have been prepared on a cost
basis, except for: investment property and investment property
under construction which are presented at fair value through profit
or loss.
The Group has elected to present the statement of income using
the function of expense method.
2. Basis of preparation of the financial statements:
These consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards
("IFRS") as adopted by the EU.
Furthermore, the consolidated financial statements are prepared
in accordance with the requirements of the Cyprus Companies Law
Cap.113.
The financial statements have been prepared under the assumption
that the Company continues as a going concern.
b. The operating cycle:
The Group has two operating cycles. The operating cycle of
construction projects may generally last four years. The operating
cycle of the remaining activities is one year. Accordingly, in
respect of construction projects, when the operating cycle exceeds
one year, the assets and liabilities directly attributable to this
activity are classified in the statement of financial position as
current assets and liabilities based on the operating cycle.
c. Consolidated financial statements:
The consolidated financial statements comprise the financial
statements of companies that are controlled by the Company
(subsidiaries). Control is achieved when the Company is exposed, or
has rights, to variable returns from its involvement with the
investee and has the ability to affect those returns through its
power over the investee. Potential voting rights are considered
when assessing whether an entity has control. The consolidation of
the financial statements commences on the date on which control is
obtained and ends when such control ceases.
The financial statements of the Company and of the subsidiaries
are prepared as of the same dates and periods. The consolidated
financial statements are prepared using uniform accounting policies
by all companies in the Group. Significant intragroup balances and
transactions and gains or losses resulting from intragroup
transactions are eliminated in full in the consolidated financial
statements.
Non-controlling interests in subsidiaries represent the equity
in subsidiaries not attributable, directly or indirectly, to a
parent. Non-controlling interests are presented in equity
separately from the equity attributable to the equity holders of
the Company. Profit or loss and components of other comprehensive
income are attributed to the Company and to non-controlling
interests. Losses are attributed to non-controlling interests even
if they result in a negative balance of non-controlling interests
in the consolidated statement of financial position.
d. Business combinations and goodwill:
Business combinations are accounted for by applying the
acquisition method. The cost of the acquisition is measured at the
fair value of the consideration transferred on the acquisition date
with the addition of non-controlling interests in the acquiree. In
each business combination, the Company chooses whether to measure
the non-controlling interests in the acquiree based on their fair
value on the acquisition date or at their proportionate share in
the fair value of the acquiree's net identifiable assets.
Direct acquisition costs are carried to the statement of profit
or loss as incurred.
In a business combination achieved in stages, equity interests
in the acquiree that had been held by the acquirer prior to
obtaining control are measured at the acquisition date fair value
while recognizing a gain or loss resulting from the revaluation of
the prior investment on the date of achieving control.
Contingent consideration is recognized at fair value on the
acquisition date and classified as a financial asset or liability
in accordance with IAS 39. Subsequent changes in the fair value of
the contingent consideration are recognized in profit or loss or in
the statement of comprehensive income. If the contingent
consideration is classified as an equity instrument, it is measured
at fair value on the acquisition date without subsequent
remeasurement.
Goodwill is initially measured at cost which represents the
excess of the acquisition consideration and the amount of
non-controlling interests over the net identifiable assets acquired
and liabilities assumed. If the resulting amount is negative, the
acquirer recognizes the resulting gain on the acquisition date.
e. Investments in associates:
Associates are companies in which the Group has significant
influence over the financial and operating policies without having
control. The investment in an associate is accounted for using the
equity method.
f. Investments accounted for using the equity method:
The Group's investments in associates are accounted for using
the equity method.
Under the equity method, the investment in the associate or in
the joint venture is presented at cost with the addition of
post-acquisition changes in the Group's share of net assets,
including other comprehensive income of the associate or the joint
venture. Gains and losses resulting from transactions between the
Group and the associate or the joint venture are eliminated to the
extent of the interest in the associate or in the joint
venture.
The financial statements of the Company and of the associate or
joint venture are prepared as of the same dates and periods. The
accounting policies applied in the financial statements of the
associate or the joint venture are uniform and consistent with the
policies applied in the financial statements of the Group.
The equity method is applied until the loss of significant
influence in the associate or classification as investment held for
sale.
On the date of loss of significant influence, the Group measures
any remaining investment in the associate at fair value and
recognizes in profit or loss the difference between the fair value
of any remaining investment plus any proceeds from the sale of the
investment in the associate and the carrying amount of the
investment on that date.
g. Functional and foreign currencies:
1. Functional currency and presentation currency:
The financial statements are presented in thousands of U.S.
dollars.
The Group determines the functional currency of each Group
entity, and this currency is used to separately measure each Group
entity's financial position and operating results. The Company's
functional currency is the US Dollar.
When an investee's functional currency differs from the
Company's functional currency, that investee represents a foreign
operation whose financial statements are translated into the
Company's functional currency so that they can be included in the
consolidated financial statements.
Assets and liabilities are translated at the closing rate at the
end of each reporting period. Goodwill arising from the acquisition
of a foreign operation and any fair value adjustments to the
carrying amounts of assets and liabilities on the date of
acquisition of the foreign operation are treated as assets and
liabilities of the foreign operation and are translated at the
closing rate at the end of each reporting period. Profit and loss
items are translated at average exchange rates for all the relevant
periods. All resulting translation differences are recognized as a
separate component of other comprehensive income.
Intragroup loans for which settlement is neither planned nor
likely to occur in the foreseeable future are, in substance, a part
of the investment in the foreign operation.
Upon the full or partial disposal of a foreign operation
resulting in loss of control in the foreign operation, the
cumulative gain (loss) from the foreign operation which had been
recognized in other comprehensive income is transferred to profit
or loss. Upon the partial disposal of a foreign operation which
results in the retention of control in the subsidiary, the relative
portion of the cumulative amount recognized in other comprehensive
income is reattributed to non-controlling interests.
2. Foreign currency transactions, assets and liabilities:
Transactions in foreign currencies are initially recorded at the
exchange rate on the date of transaction. Monetary assets and
liabilities denominated in foreign currencies are translated into
the functional currency of the operation at the exchange rates
prevailing at the reporting date. Exchange rate differences are
carried to the income statement. Non-monetary assets and
liabilities are translated into the functional currency of the
operation at the exchange rates prevailing on the date of the
transaction (or date of later revaluation). Non-monetary assets and
liabilities denominated in foreign currencies are translated at the
exchange rates prevailing on the date of the initial
transaction.
3. Index-linked monetary items:
Monetary assets and liabilities linked to the changes in the
Israeli Consumer Price Index ("Israeli CPI") are adjusted at the
relevant index at each reporting date according to the terms of the
agreement.
g. Cash and cash equivalents:
Cash equivalents are considered as highly liquid investments,
including unrestricted short-term bank deposits with an original
maturity of three months or less from the date of investment or
with a maturity of more than three months, but which are redeemable
on demand without penalty and which form part of the Group's cash
management.
h. Short-term deposits:
Short-term deposits comprise cash at banks whose maturity
exceeds three months from the day of the investment.
i. Long-term VAT receivable:
Long-term VAT receivable represents VAT which was paid upon the
purchase of land and during the construction of the projects and is
stated at its estimated present value using a discount rate of
8.25%.
j. Allowance for doubtful accounts:
The allowance for doubtful accounts is determined in respect of
specific debts whose collection, in the opinion of the Group's
management, is doubtful.
k. Inventories of buildings for sale:
Cost of inventories of buildings and apartments for sale
comprises identifiable direct costs of land such as taxes, fees and
duties and construction costs. The Company also capitalizes
borrowing costs as part of the cost of inventories of buildings and
apartments for sale from the period in which the Company commenced
development of the land.
Real estate under construction is measured at cost. Cost of real
estate includes borrowing costs relating to the financing of the
construction of the assets until their completion, planning and
design costs, indirect costs attributable to construction and other
related costs.
Inventories of buildings and apartments for sale are measured at
the lower of cost and net realizable value. Net realizable value is
the estimated selling price in the ordinary course of business less
estimated costs of completion and the estimated selling costs.
l. Revenue recognition:
Revenues are recognized in profit or loss when the revenues can
be measured reliably, it is probable that the economic benefits
associated with the transaction will flow to the Company and the
costs incurred or to be incurred in respect of the transaction can
be measured reliably. When the Company acts as a principal and is
exposed to the risks associated with the transaction, revenues are
presented on a gross basis. When the Company acts as an agent and
is not exposed to the risks and rewards associated with the
transaction, revenues are presented on a net basis. Revenues are
measured at the fair value of the consideration less any trade
discounts, volume rebates and returns.
Following are the specific revenue recognition criteria which
must be met before revenue is recognized:
Rendering of services, including management fees:
Revenue from the rendering of services is recognized by
reference to the stage of completion as of the reporting date.
Where the contract outcome cannot be measured reliably, revenue is
recognized only to the extent of the expenses recognized that are
recoverable.
Revenues from sale of residential apartments:
Revenues from the sale of residential apartments are recognized
when the principal risks and rewards of ownership have passed to
the buyer. These criteria are usually met when construction has
effectively been completed, the residential apartment has been
delivered to the buyer and the buyer has paid the entire
consideration for the apartment.
Rental income from operating lease:
Rental income is recognized on a straight-line basis over the
lease term. Fixed increases in rent over the term of the contract
are recognized as income on a straight-line basis over the lease
period. The aggregate cost of lease incentives granted is
recognized as a reduction of rental income on a straight-line basis
over the lease term.
m. Financial instruments:
1. Financial assets:
Financial assets within the scope of IAS 39 are initially
recognized at fair value plus directly attributable transaction
costs, except for financial assets measured at fair value through
profit or loss in respect of which transaction costs are recorded
in profit or loss.
After initial recognition, the accounting treatment of financial
assets is based on their classification as follows:
Loans and receivables:
Loans and receivables are investments with fixed or determinable
payments that are not quoted in an active market. After initial
recognition, loans are measured based on their terms at amortized
cost less directly attributable transaction costs using the
effective interest method and less any impairment losses.
Short-term borrowings are measured based on their terms, normally
at face value.
2. Financial liabilities:
Financial liabilities within the scope of IAS 39 are classified
as either financial liabilities at fair value through profit or
loss, loans at amortized cost or derivatives designated as
effective hedging instruments. The Group determines the
classification of the liability on the date of initial recognition.
All liabilities are initially recognized at fair value. Loans are
presented net of directly attributable transaction costs.
After initial recognition, the accounting treatment of financial
liabilities is based on their classification as follows:
Financial liabilities measured at amortized cost:
After initial recognition, loans, including debentures, are
measured based on their terms at amortized cost using the effective
interest method taking into account directly attributable
transaction costs.
3. Offsetting financial instruments:
Financial assets and liabilities are offset and the net amount
is presented in the statement of financial position if there is a
legally enforceable right to set off the recognized amount and
there is an intention either to settle on a net basis or to realize
the asset and settle the liability simultaneously.
The right of set-off must be legally enforceable not only during
the ordinary course of business of the parties to the contract but
also in the event of bankruptcy or insolvency of one of the
parties. In order for the right of set-off to be currently
available, it must not be contingent on a future event, there may
not be periods during which the right is not available, or there
may not be any events that will cause the right to expire.
4. Derecognition of financial instruments:
a) Financial assets:
A financial asset is derecognized when the contractual rights to
the cash flows from the financial asset expire or the Group has
transferred its contractual rights to receive cash flows from the
financial asset or assumes an obligation to pay the cash flows in
full without material delay to a third party and has transferred
substantially all the risks and rewards of the asset, or has
neither transferred nor retained substantially all the risks and
rewards of the asset, but has transferred control of the asset.
b) Financial liabilities:
A financial liability is derecognized when it is extinguished,
that is when the obligation is discharged or cancelled or expires.
A financial liability is extinguished when the debtor (the
Group):
-- discharges the liability by paying in cash, other financial assets, goods or services; or
-- is legally released from the liability.
When an existing financial liability is exchanged with another
liability from the same lender on substantially different terms, or
the terms of an existing liability are substantially modified, such
an exchange or modification is accounted for as an extinguishment
of the original liability and the recognition of a new
liability.
5. Impairment of financial assets:
The Group assesses at each reporting date whether a financial
asset or Group of financial assets is impaired.
Financial assets carried at amortized cost:
There is objective evidence of impairment of debt instruments,
loans and receivables and held-to-maturity investments carried at
amortized cost as a result of one or more events that has occurred
after the initial recognition of the asset and that loss event has
an impact on the estimated future cash flows. The amount of the
loss recorded in profit or loss is measured as the difference
between the asset's carrying amount and the present value of
estimated future cash flows (excluding future credit losses that
have not yet been incurred) discounted at the financial asset's
original effective interest rate. In a subsequent period, the
amount of the impairment loss is reversed if the recovery of the
asset can be related objectively to an event occurring after the
impairment was recognized. The amount of the reversal, up to the
amount of any previous impairment, is recorded in profit or
loss.
n. Leases:
The tests for classifying leases as finance or operating leases
depend on the substance of the agreements and are made at the
inception of the lease in accordance with the principles below as
set out in IAS 17.
The Group as lessee:
Operating leases:
Lease agreements are classified as an operating lease if they do
not transfer substantially all the risks and benefits incidental to
ownership of the leased asset. Lease payments are recognized as an
expense in the income statement on a straight-line basis over the
lease term.
The Group as lessor:
Operating leases:
Lease agreements where the Group does not actually transfer
substantially all the risks and benefits incidental to ownership of
the leased asset are classified as operating leases.
Initial direct costs incurred in respect of the lease agreement,
except those relating to investment property which are carried to
the Income Statement, are added to the carrying amount of the
leased asset and recognized as an expense in parallel with the
lease income. Lease income is recognized as revenue in the Income
Statement on a straight-line basis over the lease term.
o. Fixed assets:
Office furniture and equipment are stated at cost, including
direct acquisition costs, less accumulated depreciation and
accumulated impairment losses, and excluding day-to-day servicing
expenses.
Depreciation is calculated on a straight-line basis over the
useful life of the asset.
Depreciation of an asset ceases at the earlier of the date that
the asset is classified as held for sale and the date that the
asset is derecognized.
p. Borrowing costs in respect of qualifying assets:
The Group capitalizes borrowing costs that are attributable to
the acquisition, construction or production of qualifying
assets.
The capitalization of borrowing costs commences when
expenditures for the asset are being incurred, borrowing costs are
being incurred and the activities to prepare the asset are in
progress and ceases when substantially all the activities to
prepare the qualifying asset for its intended use or sale are
complete.
q. Investment property and investment properties under construction:
Investment property is measured initially at cost, including
costs directly attributable to the acquisition. After initial
recognition, investment property is measured at fair value which
reflects market conditions at the end of the reporting period.
Gains or losses arising from changes in the fair values of
investment property are included in profit or loss when they
arise.
The fair value model is also applied to property under
construction for future use as investment property when fair value
can be reliably measured. However, when the fair value of the
investment property is not reliably determinable due to the nature
and scope of the project risks, the property is measured at cost
less, if appropriate, any impairment losses, until the earlier of
the date when fair value becomes reliably determinable or
construction is completed.
Investment property is derecognized on disposal or when the
investment property ceases to be used and no future economic
benefits are expected from its disposal.
The Group determines the fair value of investment property on
the basis of valuations by independent valuers who hold recognized
and relevant professional qualifications and have the necessary
knowledge and experience.
r. Impairment of non-financial assets:
The Group evaluates the need to record an impairment of the
carrying amount of non-financial assets whenever events or changes
in circumstances indicate that the carrying amount is not
recoverable. If the carrying amount of non-financial assets exceeds
their recoverable amount, the assets are reduced to their
recoverable amount. The recoverable amount is the higher of fair
value less costs of sale and value in use. Impairment losses are
recognized in profit or loss.
An impairment loss of an asset, is reversed only if there have
been changes in the estimates used to determine the asset's
recoverable amount since the last impairment loss was
recognized.
s. Taxes on income:
The tax charges/credit in respect of current or deferred taxes
are carried to the Income Statement other than if they relate to
items that are directly carried to equity or to other comprehensive
income.
1. Current income taxes:
The current tax liability is measured using the tax rates and
tax laws that have been enacted or substantively enacted by the end
of reporting period as well as adjustments required in connection
with the tax liability in respect of previous years.
2. Deferred income taxes:
Deferred taxes are measured at the tax rates that are expected
to apply to the period when the taxes are reversed based on tax
laws that have been enacted or substantively enacted by the end of
the reporting period.
Deferred tax assets are reviewed at the end of each reporting
period and reduced to the extent that it is not probable that they
will be utilized. Also, temporary differences for which deferred
tax assets have not been recognized are reassessed and deferred tax
assets are recognized to the extent that their recoverability has
become probable.
Taxes that would apply in the event of the disposal of
investments in investees have not been taken into account in
computing deferred taxes, as long as the disposal of the
investments in investees is not probable in the foreseeable future.
Also, deferred taxes that would apply in the event of distribution
of earnings by investees as dividends have not been taken into
account in computing deferred taxes, since the distribution of
dividends does not involve an additional tax liability or since it
is the Company's policy not to initiate distribution of dividends
that triggers an additional tax liability.
All deferred tax assets and deferred tax liabilities are
presented in the statement of financial position as non-current
assets and non-current liabilities, respectively.
Deferred taxes are offset in the statement of financial position
if there is a legally enforceable right to offset a current tax
asset against a current tax liability and the deferred taxes relate
to the same taxpayer and the same taxation authority.
t. Provisions:
A provision in accordance with IAS 37 is recognized when the
Group has a present obligation as a result of a past event and it
is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation and a reliable
estimate can be made of the amount of the obligation.
u. Share-based payment transactions:
The Company's employees are entitled to receive remuneration in
the form of equity-settled, share-based payment transactions.
Equity-settled transactions:
The cost of equity-settled transactions with employees is
measured at the fair value of the equity instruments granted at
grant date. The fair value is determined using a standard option
pricing model.
The cost of equity-settled transactions is recognized in profit
or loss, together with a corresponding increase in equity, during
the period which the performance and/or service conditions are to
be satisfied, ending on the date on which the relevant employees
become fully entitled to the award ("the vesting period").
No expense is recognized for awards that do not ultimately vest,
except for awards where vesting is conditional upon a market
condition, which are treated as vesting irrespective of whether the
market condition is satisfied, provided that all other vesting
conditions (service and/or performance) are satisfied.
If the Company modifies the conditions on which
equity-instruments were granted, an additional expense is
recognized for any modification that increases the total fair value
of the share-based payment arrangement or is otherwise beneficial
to the employee/other service provider at the modification
date.
v. Earnings (loss) per share:
Earnings per share are calculated by dividing the net income
attributable to equity holders of the Company by the weighted
number of Ordinary shares outstanding during the period. Basic
earnings per share only include shares that were actually
outstanding during the period. Potential Ordinary shares are only
included in the computation of diluted earnings per share from
continuing operations. Further, potential Ordinary shares that are
converted during the period are included in diluted earnings per
share only until the conversion date and from that date in basic
earnings per share.
w. Fair value measurement:
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value
measurement is based on the presumption that the transaction to
sell the asset or transfer the liability takes place either:
1. In the principal market for the asset or liability, or
2. In the absence of a principal market, in the most
advantageous market for the asset or liability
A fair value measurement of a non-financial asset takes into
account a market participant's ability to generate economic
benefits by using the asset in its highest and best use or by
selling it to another market participant that would use the asset
in its highest and best use.
All assets and liabilities for which fair value is measured or
disclosed in the financial statements are categorized within the
fair value hierarchy, described as follows, based on the lowest
level input that is significant to the fair value measurement as a
whole:
Level 1 - Quoted (unadjusted) market prices in active markets
for identical assets or liabilities,
Level 2 - Valuation techniques for which the lowest level input
that is significant to the fair value measurement is directly or
indirectly observable,
Level 3 - Valuation techniques for which the lowest level input
that is significant to the fair value measurement is
unobservable.
x. Significant accounting judgments, estimates and assumptions
used in the preparation of the financial statements:
In the process of applying the significant accounting policies,
the Group has made the following judgments which have the most
significant effect on the amounts recognized in the financial
statements:
1. Judgments:
Classification of leases:
In order to determine whether to classify a lease as a finance
lease or an operating lease, the Group evaluates whether the lease
transfers substantially all the risks and benefits incidental to
ownership of the leased asset. In this respect, the Group evaluates
such criteria as the existence of a "bargain" purchase option, the
lease term in relation to the economic life of the asset and the
present value of the minimum lease payments in relation to the fair
value of the asset.
2. Estimates and assumptions:
The key assumptions made in the financial statements concerning
uncertainties at the end of the reporting period and the critical
estimates computed by the Group that may result in a material
adjustment to the carrying amounts of assets and liabilities within
the next financial year are discussed below.
Investment property and investment property under
development:
Investment property and investment property under development
that can be reliably measured are presented at fair value at the
end of the reporting period. Changes in their fair value are
recognized in profit or loss. Fair value is determined generally by
independent valuation experts using economic valuations that
involve valuation techniques and assumptions as to estimates of
projected future cash flows from the property and estimate of the
suitable discount rate for these cash flows. Investment property
under development also requires an estimate of construction costs.
If applicable, fair value is determined based on recent real estate
transactions with similar characteristics and location of the
valued asset.
The fair value measurement of investment property requires
valuation experts and the Company's management to use certain
assumptions regarding rates of return on the Group's assets, future
rent, occupancy rates, contract renewal terms, the probability of
leasing vacant areas, asset operating expenses, the tenants'
financial stability and the implications of any investments made
for future development purposes in order to assess the future
expected cash flows from the assets.
- Reliable measurement of fair value of investment property under construction:
In evaluating whether the fair value of investment property
under construction can be reliably measured, the Group considers,
among others, the following relevant indicators:
1. Is the property being constructed in a developed, liquid market;
2. Are there any price quotations from recent transactions or
prior valuations from acquisitions or sales of properties with
similar characteristics and location;
3. Has a construction contract been signed with the prime contractor;
4. Have the required building permits been obtained;
5. What percentage of rentable area has been pre-leased to tenants;
6. Are construction costs reliably determinable;
7. Is the value of the completed property reliably determinable.
If after evaluating the above indicators it is determined that
the fair value of investment property under construction can be
reliably measured, the property is measured at fair value in
accordance with the Group's policy for investment property. If fair
value cannot be reliably measured, then investment property under
construction is measured at cost less, if appropriate, any
impairment loss.
Inventories of building for sale:
The net realizable value is assessed based on management's
evaluation including forecasts and estimates as to the amounts
expected to be realized from the sale of the project inventory and
the construction costs necessary to bring the inventory to a
saleable condition.
Deferred tax assets:
Deferred tax assets are recognized for carry forward tax losses
and temporary differences to the extent that it is probable that
taxable profit will be available against which the losses can be
recognized. Significant management judgment is required to
determine the amount of deferred tax assets that can be recognized,
based upon the likely timing and level of future taxable profits
together with future tax planning strategies.
y. Disclosure of new IFRSs in the period prior to their adoption:
1. IFRS 15, "Revenue from Contracts with Customers":
In May 2014, the IASB issued IFRS 15 ("IFRS 15").
IFRS 15 replaces IAS 18, "Revenue", IAS 11, "Construction
Contracts", IFRIC 13, "Customer Loyalty Programs", IFRIC 15,
"Agreements for the Construction of Real Estate", IFRIC 18,
"Transfers of Assets from Customers" and SIC-31, "Revenue - Barter
Transactions Involving Advertising Services".
IFRS 15 is to be applied retrospectively for annual periods
beginning on or after January 1, 2017. Early adoption is
permitted.
The Company is evaluating the possible impact of IFRS 15 but is
presently unable to assess its effect, if any, on the financial
statements.
2. IFRS 9, "Financial Instruments":
In July 2014, the IASB issued the final and complete version of
IFRS 9, "Financial Instruments" ("IFRS 9"), which replaces IAS 39,
" Financial Instruments: Recognition and Measurement".
According to IFRS 9, all financial assets are measured at fair
value upon initial recognition. In subsequent periods, debt
instruments are measured at amortized cost only if both of the
following conditions are met:
- the asset is held within a business model whose objective is
to hold assets in order to collect the contractual cash flows.
- the contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal
and interest on the principal amount outstanding.
Subsequent measurement of all other debt instruments and
financial assets should be at fair value. IFRS 9 establishes a
distinction between debt instruments to be measured at fair value
through profit or loss and debt instruments to be measured at fair
value through other comprehensive income.
Financial assets that are equity instruments should be measured
in subsequent periods at fair value and the changes recognized in
profit or loss or in other comprehensive income (loss), in
accordance with the election by the Company on an
instrument-by-instrument basis. If equity instruments are held for
trading, they should be measured at fair value through profit or
loss.
According to IFRS 9, the provisions of IAS 39 will continue to
apply to derecognition and to financial liabilities for which the
fair value option has not been elected.
IFRS 9 is to be applied for annual periods beginning on January
1, 2018. Early adoption is permitted.
The Company is evaluating the possible impact of IFRS 9 but is
presently unable to assess its effect, if any, on the financial
statements.
z. Changes in accounting policies in view of adoption of new standards:
In July 2014, the IFRIC issued a resolution regarding the
recognition of deferred taxes in respect of temporary differences
relating to asset companies when an entity expects the reversal of
the temporary difference to be in the form of sale of shares in the
asset company rather than the sale of the asset itself. Based on
said IFRIC resolution and given the provisions of IAS 12, the
Company is required to recognize deferred taxes both with respect
to inside differences arising from the gap between the asset tax
base and its carrying amount and with respect to outside
differences arising from the gap between the shares' tax base and
the investor's share of the net assets of the investee in the
consolidated financial statements.
Prior to the date of issuance of said resolution, according to
the Company's accounting policy, it recorded deferred taxes in
respect of temporary differences based on the tax implications and
tax rate applicable to the sale of the shares in the asset company
and not to the sale of the asset itself.
The effect of the change in accounting policy in view of the
above IFRIC resolution on the Company's financial statements is as
follows:
In the consolidated statements of financial position as of 31
December, 2013:
As previously As currently
reported Restatement presented
------------- ----------- ------------
U.S. dollars in thousands
----------------------------------------
Non-current assets:
Investment properties 397,683 33,817 431,500
Investment properties under
construction 52,814 6,286 59,100
Non-current liabilities:
Deferred taxes 699 40,103 40,802
Total Equity 331,717 - 331,717
In the consolidated statements of income for the year ended 31
December, 2013:
As previously As currently
reported Restatement presented
------------- ----------- ------------
U.S. dollars in thousands
----------------------------------------
Fair value adjustments of
investment properties and
investment properties under
construction, net 45,085 10,127 55,212
Taxes on income (1,141) (10,127) (11,268)
In the consolidated statements of income for the nine months
ended 31 December, 2012:
As previously As currently
reported Restatement presented
------------- ----------- ------------
U.S. dollars in thousands
----------------------------------------
Fair value adjustments of
investment properties and
investment properties under
construction, net (31,554) (914) (32,468)
Taxes on income (1,083) 914 (169)
NOTE 3:- BUSINESS COMBINATIONS
a. Business combination in 2014:
On December 23, 2013, the Company (via its subsidiary) signed an
agreement ("the agreement") for the purchase of 49.5% of the shares
of Inverton Enterprises Limited ("Inverton" and "the purchased
shares", respectively) in which the Company holds 50.5% and which
owns Global LLC from the partner in Inverton ("the seller").
According to the agreement, the Company paid the seller an
advance of 3 million US dollars on December 24, 2013. The
outstanding consideration of $ 25.6 million was paid on March 4,
2014 and an additional amount of $ 2.5 million was paid in April
2014.
As part of the transaction for obtaining control, the seller
undertook to pay its share of the liability to the municipality of
Yaroslavl if this payment is demanded in the next four years. As a
result, an indemnification asset in a total of $ 5,737 thousand was
recognized.
The fair value of the identifiable assets and liabilities of
Inverton on the acquisition date:
Fair value
-------------
US dollars
in thousands
-------------
Cash and cash equivalents 7,009
Other assets 2,119
Investment properties 109,800
118,928
-------------
Loan from bank 21,419
Other liabilities 1,926
Deferred taxes 16,127
Other non-current liabilities 12,700
Loans from related parties 5,948
-------------
58,120
-------------
Net identifiable assets 60,808
Assignment of loans from related parties
to the Company 2,614
Profit from obtaining control (7,326)
-------------
Total acquisition cost 56,096
=============
The fair value of investment property was determined by external
appraiser. A loan from bank in amount of $ 21.4 million was
received close to the balance sheet date; therefore the carrying
amount is equal to its fair value.
Cost of acquisition:
Fair value
-------------
US dollars
in thousands
-------------
Cash paid 31,149
Fair value of existing investment at acquisition
date 30,684
Indemnification asset (5,737)
-------------
Total 56,096
=============
Cash flow on the acquisition:
Cash and cash equivalents in Inverton at
the acquisition date 7,009
Cash paid during the period (28,149)
Cash from obtaining control paid during the
period (21,140)
-------------
Cash paid during 2013, as advance (3,000)
-------------
Net cash (24,140)
=============
From the date of obtaining control, Inverton has contributed to
the consolidated net income and the consolidated revenues an amount
of $ 14,108 and $ 9,864 thousands, respectively. If the business
combination had taken place at the beginning of the year, the
consolidated loss would have amounted to $ 59,903 thousand and the
consolidated revenues turnover would have amounted to $ 90,148
thousand. The gain from obtaining control in Inverton amounted to $
702 thousand and included a gain from a bargain purchase of $ 7,326
thousand and a loss of $ 6,624 thousand from the release of a
foreign currency translation reserve accumulated on the investment
on the date of obtaining control.
b. Business combination in 2013:
On 4 January 2013, the Company entered into an agreement with
its partners in the Century Companies according to which the
partners will waive the option previously granted to them for the
acquisition of 1% of the Century Companies in consideration of 600
thousand US dollars. The parties agreed that such amount will be
set off against the balance of the loan previously granted to one
of the partners.
Simultaneously, the Company amended its joint control agreements
with the partners in the Century Companies in such a way that from
the date of the amendment the Company obtained control over the
Century Companies.
Before the date of obtaining control, the Century Companies were
accounted for using the equity method.
The Group has elected to measure the non-controlling interests
in the Century Companies at the proportionate share of the
non-controlling interests in the acquired identifiable net
assets.
Fair value
-------------
U.S. dollars
in thousands
-------------
Cash and cash equivalents 86
Trade receivables 38
Other receivables 38
VAT receivables 254
Investment properties 85,760
Deferred taxes 119
Other long-term receivables 71
-------------
86,366
-------------
Trade payables (228)
Loans from bank and others (12,854)
Government authorities (111)
Deposits from tenants (779)
Other non-current liabilities (866)
Loans from related parties (5,973)
-------------
(20,811)
-------------
Net identifiable assets 65,555
Non-controlling interests (29,558)
-------------
Total acquisition cost 35,997
=============
Cost of acquisition
Fair value
-------------
U.S. dollars
in thousands
-------------
Cash paid -
Waiver of option (1%) previously granted to the
sellers, at fair value 600
Fair value of existing investment on acquisition
date 35,997
-------------
Total 36,597
=============
Cash flow on the acquisition
Cash and cash equivalents in the Century Companies
on acquisition date 86
Cash paid -
-------------
Net cash 86
=============
NOTE 4:- INTEREST IN INVESTEES
a. Investment in companies accounted at equity method:
2014 2013
------------- ------------
U.S. dollars in thousands
---------------------------
Balance as of January 1 33,789 61,650
Changes during the year:
Obtaining control in companies previously
accounted for using the equity method
(1) (33,727) (35,997)
Groups share in earnings of companies
accounted for using the equity method 3,290 7,591
Group's share of net other comprehensive
income (loss) of companies accounted
for using the equity method (3,352) (2,455)
------------- ------------
Balance for December 31 - 30,789
============= ============
Advance paid for acquisition of subsidiary - 3,000
============= ============
(1) See Note 3.
b. Summarized financial data of Century's companies subsidiaries
with material non-controlling interests:
As of December 31, 2014 the Company holds 61% of the share on
Inomotor and 51% of Avtoprioriet.
December 31,
------------------
2014 2013
-------- --------
NIS in thousands
------------------
Statement of financial position at
reporting date (as presented in the
subsidiary's financial statements):
Current assets 4,288 1,494
Non-current assets 96,231 83,875
Current liabilities (2,940) (2,597)
Non-current liabilities (46,062) (16,026)
-------- --------
Total equity 51,517 66,746
======== ========
Non-controlling interests 23,476 29,893
Total equity attributable to equity
holders of the parent 28,041 36,853
====== ======
Year ended
December 31,
------------------
2014 2013
--------- -------
NIS in thousands
------------------
The subsidiary's operating results
(as presented in the subsidiary's
financial statements):
Revenues 9,509 9,545
Net income 18,062 6,342
Other comprehensive loss (33,292) (5,028)
--------- -------
Total comprehensive income (loss) (15,230) 1,314
========= =======
Net income attributable to :
non-controlling interests 8,436 2,867
======= =====
Equity holders of the parent 9,626 3,475
======= =====
Total comprehensive income (loss)
Attributable to :
non-controlling interests (6,417) 335
======= =====
Equity holders of the parent (8,813) 979
======= =====
Year ended
December 31,
------------------
2014 2013
--------- -------
NIS in thousands
------------------
The subsidiary's cash flows (as presented
in the subsidiary's financial statements):
From operating activities 116 2,455
From investing activities (23,930) -
From financing activities 27,115 (1,278)
Exchange differences on balances
of cash (372) (63)
--------- -------
Net increase in cash and cash equivalents 2,929 1,114
========= =======
NOTE 5:- TRADE AND OTHER RECEIVABLES
a. Trade and other receivables:
31 December
---------------------------
2014 2013
------------- ------------
U.S. dollars in thousands
---------------------------
Deferred sales commission 4,205 3,138
Advances to suppliers 572 2,905
Tax authorities 1,211 468
Other trade receivables 542 766
------------- ------------
6,530 7,277
============= ============
b. Other long-term receivables:
31 December
---------------------------
2014 2013
-------------- -----------
U.S. dollars in thousands
---------------------------
Loans granted to related parties
(1) 14,190 2,496
Indemnification assets (2) 4,274 -
Others 94 -
-------------- -----------
18,558 2,496
============== ===========
(1) See note 23a, 23b, 23g
(2) See note 3a, 23g
NOTE 6:- INVENTORIES OF BUILDINGS FOR SALE
a. The Group has two residential projects, one in Saint
Petersburg, which is the largest project of the Group, and the
other one is in Moskva Western Residence Project. The Group intends
to build approximately 9,000 apartments in several phases. The
first phase includes 510 apartments and was completed and delivered
during 2013 and 2014. The construction of the second Phase, which
includes 630 apartments, has completed during the last quarters of
2014, and the Group has started to deliver the apartment. The third
phase includes 1,346 apartments and the fourth phase includes 1,244
apartments, those phases are under construction, and the sales of
the apartments have been started.
b. Composition:
31 December
---------------------------
2014 2013
------------- ------------
U.S. dollars in thousands
---------------------------
St. Petersburg Project 218,557 212,306
Western Residence Project 39,657 67,415
258,214 279,721
============= ============
Current assets:
31 December
---------------------------
2014 2013
------------- ------------
U.S. dollars in thousands
---------------------------
Land 22,065 29,273
Construction costs 147,232 150,884
169,297 180,157
============= ============
Non-current assets:
31 December
---------------------------
2014 2013
------------- ------------
U.S. dollars in thousands
---------------------------
Land 21,396 21,773
Construction costs 67,521 77,791
------------- ------------
88,917 99,564
============= ============
b. This includes capitalized borrowing costs of approximately
2,782 thousand US dollars for the year ended 31 December, 2014 (in
2013 - 1,415 thousand US dollars).
NOTE 7:- INVESTMENT PROPERTIES
a. Composition and adjustment:
31 December
---------------------------
2014 2013
-------------- -----------
U.S. dollars in thousands
---------------------------
Balance at 1 January 431,500 320,200
Obtaining control (1) 109,800 95,000
Additions during the period 2,932 1,267
Fair value adjustments, net 91,112 46,868
Exchange rate differences (251,544) (31,835)
-------------- -----------
Balance at 31 December 383,800 431,500
============== ===========
(1) See also Note 3.
Below is detail the influence on the fair value adjustments:
Increase due to devaluation of the Rubble
with compare to US dollar 251,544
Real decrease in fair value (160,432)
---------
Total increase in fair value of investment
property 91,112
=========
b. Fair value measurement of investment property:
Investment property is measured at fair value which has been
determined based on a valuation performed by an external
independent valuation expert who holds recognized and relevant
professional qualifications and who has experience in the location
and category of the property being valued. The fair value was
measured with reference to recent real estate transactions for
similar properties in similar locations as the property owned by
the Company and based on the expected future cash flows from the
property. In assessing cash flows, their risk is taken into account
by using a discounted yield that reflects their underlying risk
supported by the standard yield in the real estate market and by
including adjustments for the specific characteristics of the
property and the level of future income therefrom.
The valuation of investment property under construction is
either determined on the basis of the residual or the discounted
cash flow (DCF) methods, as deemed appropriate by the valuation
expert. The estimated fair value is based on the expected future
income from the completed project using yields adjusted for the
significant risks which are relevant to the construction process,
including construction costs and rent that are higher than the
current yields of similar completed property. The remaining
expected costs of completion plus development profit are deducted
from the estimated future income, as above.
c. Significant assumptions (on the basis of weighted averages)
used in the valuations are presented below:
Investment Valuation Significant unobservable Range (weighed
property technique Inputs average)
------------------ ----------- ------------------------- --------------
Rental value per sqm
Office properties DCF method per year 317
Vacancy rate 14%
Average discount rate 14%
Cap rate 10%
Rental value per sqm
Retail property DCF method per year 334
Vacancy rate 2%
Average discount rate 14%
Cap rate 11.5%
d. Fair value adjustment of investment property (level 3 in the fair value hierarchy):
Office Retail
properties property
----------- ---------
U.S. dollars in
thousands
----------------------
Balance at January 1, 2014 296,200 135,300
Fair value adjustments, net 51,605 39,507
Obtaining control in companies previously
accounted for using the equity method
(1) - 109,800
Additions - 2,932
Exchange rate differences (140,405) (111,139)
----------- ---------
Balance at December 31, 2014 207,400 176,400
=========== =========
(1) See note 3.
Following the crisis in Russia, described in Note 1b., during
the last quarter of 2014, multiple tenants asked to reduce the
dollar rental fees. As part of coping with the situation, the
subsidiaries held negotiations with the tenants for reduces in the
rental fees. In those negotiations usually the Group sets ceiling
to the rate of exchange. Reductions were given in specific manner
and for limited periods (commonly for three months).
e. Land:
December 31,
---------------------------
2014 2013
------------- ------------
U.S. dollars in thousands
---------------------------
Freehold 176,400 135,300
------------- ------------
Leasehold 207,400 296,200
383,800 431,500
============= ============
The Group leases lands for period of 15 to 42 years.
NOTE 8:- INVESTMENT PROPERTIES UNDER CONSTRUCTION
a. Composition and adjustments:
2014 2013
-------------- -----------
U.S. dollars in thousands
---------------------------
At 1 January 59,100 57,900
Additions for the year 3,417 1,127
Disposal - (3,529)
Fair value adjustments, net (6,310) 8,344
Exchange rate differences (25,408) (4,742)
-------------- -----------
At 31 December 30,800 59,100
============== ===========
Below is detailed the influence on the fair value
adjustments:
Increase due to devaluation of the Rubble
with compare to US dollar 25,408
Real decrease in fair value (31,718)
--------
Total decrease in fair value of investment
property under construction (6,310)
========
b. Fair value of investment property under construction:
Fair value is determined generally by independent valuation
experts using economic valuations that involve valuation techniques
and assumptions as to estimates of projected future cash flows from
the property and estimate of the suitable discount rate for these
cash flows. Investment property under development also requires an
estimate of construction costs. If applicable, fair value is
determined based on recent real estate transactions with similar
characteristics and location of the valued asset.
c. Description of valuation techniques used and key inputs to
valuation on investment properties:
Investment
Property under Valuation Significant unobservable Range (weighed
construction technique inputs average)
------------------ ----------- ------------------------- --------------
Estimated rental value
Retail properties DCF method per sqm (USD) 211
Estimated costs per sqm
(USD) 1,089
Discount rate 17.5%-21.5%
Average rate per sqm 248-441
d. Reconciliation of fair value:
Retail Logistic
properties centers
------------- ---------
US dollars In thousand
------------------------
Balance at January 1, 2014 42,800 16,300
Fair value adjustments, net (3,510) (2,800)
Disposal - -
Additions 3,375 42
Exchange rate differences (19,766) (5,642)
------------- ---------
Balance at December 31, 2014 22,900 7,900
============= =========
e. Land:
December 31,
--------------------
2014 2013
-------- ---------
NIS in thousands
------------------
Freehold 28,400 50,200
-------- ---------
Leasehold (1) 2,400 8,900
30,800 59,100
======== =========
(1) The lease hold rights are according to lease agreement for 5
years, with option extend for additional 2 years.
The lease period is about to terminate on December 16, 2015. The
Group intends to extend the lease agreement and to exercise its
extended option.
f. On January 23, 2013, the Company received a letter, dated
January 9, 2013, from the Department of Land Resources of the
Moscow government notifying RealService of the termination of its
lease agreement in connection with the Skyscraper project.
In February 2013, the Company filed an objection with the Moscow
government, in which it stated that such termination of the lease
agreement is unlawful due to the fact that there was no material
breach of the agreement, and the inability to complete construction
was due to delayed actions by the government itself. The objection
of the Subsidiary was denied by the Moscow Government, based mainly
on procedural arguments. Following the Subsidiary's rejection, the
Subsidiary of the Company filed a law suit against the Moscow
Government to cancel the above mentioned decision. On December 3,
2013, Moscow Arbitration Court passed an award that the
Subsidiary's claims were rejected. On January 21, 2014 the
Subsidiary has launched an appellate claim to a second level Court.
On March 04, 2014, the second level Court left the resolution
unchanged. After the Subsidiary has taken all reasonable actions in
order to protect its position regarding the termination of the
lease agreement, all of its claims were denied by all courts. On 16
December 2014 the Subsidiary signed documentation transferring the
rights in the land to the government.
The Group has fully deducted the asset from its financial
statements as of 2012.
NOTE 9:- MEASUREMENT FAIR VALUE
The following table provides the fair value measurement
hierarchy of the Group's assets and liabilities.
Quantitative disclosures fair value measurement hierarchy for
assets as at 31 December, 2014:
Fair value measurement using
-----------------------------------------------
Quoted
prices Significant
in active observable Significant
Date of markets inputs unobservable
valuation (Level (Level inputs
31/12/2014 Total 1) 2) (Level 3)
------------ ------- ---------- ----------- -------------
US dollars In thousand
-----------------------------------------------
Assets measured at fair
value:
Investment property - -
(Note 7)
Office properties 176,400 - - 176,400
Retail properties 207,400 - - 207,400
Investment properties
under construction (Note
8):
Logistics Complex 15,300 - - 15,300
Retail properties 15,300 - - 15,300
Liabilities for which
fair values are disclosed
(Note 15):
Long and short-term
credit from banks 187,611 - - 187,611
Debentures 67,645 67,645 - -
There have been no transfers between Level 1 and Level 2 during
the period.
NOTE 10:- SHORT-TERM CREDIT FROM BANKS
On May 12, 2014, the Company fully repaid credit from banks,
secured through irrevocable guarantees of the controlling
shareholders in an amount of approximately $ 20 million.
NOTE 11:- LONG-TERM CREDITS FROM BANKS
a. Composition:
Weighted
interest
rate December 31
-------------
% 2014 2013
------------ ----------
US dollars In thousand
------------------------
Loans from banks in US dollars
with fixed interest rate
(1)(2)(b) 8.4% 212,254 128,330
Loans from banks in Ruble
with fixed interest rate
(4) 11% 3,300 3,969
Loans from banks in US dollars
with variable interest rate
(3)(b) Libor + 6.85% 19,626 17,337
235,180 149,636
Current maturities (15,445) (10,783)
Credit from banks for financing
inventory of buildings for
sale (3,300) (9,730)
Loans from banks which classified
for short term (*) (181,588) -
34,847 129,123
============ ==========
(*) As a result of incompliance with financial convents as
determined by financial institutions, see also note b below.
(1) On March 30, 2014 the Group's sub-subsidiary Global 1 LLC
entered into loan agreement with the Bank of Moscow ("the Bank"),
pursuant to which the bank will provide credit to the
sub-subsidiary up to the amount of $ 49 million for the purpose of
refinancing of Vernissage Mall project. The loan is for the period
of seven years, after which it will be possible to extend the loan
period by three years. The loan principal is to be paid in
quarterly installments, with the last payment representing 49% of
the loan balance. The loan bears fixed annual interest rate of
7.75%, which is to be payable on quarterly basis.
The loan is secured by various mortgages, charges, pledge of
lease area in Vernissage Mall, pledges and other customary security
interests for the benefit of the bank.
In addition the company granted securities and a guarantee for
the loan.
The Company undertook to maintain an LTV for the project of no
more than 70% and an occupancy rate of more than 90%, in order to
comply with the debt service coverage ratio, which shall be no less
than 1.35.
As of December 31, 2014 the Company is not in compliance with
the above financial covenants and accordingly classified the above
loan to current liabilities.
(2) On March 14, 2014 the limited liability company Inomotor, a
61% owned subsidiary of the Company, has entered into the $ 18
million loan refinancing agreement with SberBank of Russia (the
"Bank"). The loan bears a fixed annual interest rate of 7.7%,
payable quarterly. The Loan will be repaid within seven years
through regular quarterly payments and a final balloon payment of
50% at the end of the term. The Company undertook to maintain an
LTV of no more than 60%.
The Loan is secured by various mortgages, charges, pledge of the
lease area in the project, pledges and other customary security
interests for the benefit of the Bank and entered into by both
Inomotor and the Company.
As of December 31, 2014 the Company is in compliance with the
above financial covenant.
(3) On May 7, 2014 the limited liability company Avtoprioritet,
a 51% owned subsidiary of the Company, has entered into the $ 26
million loan refinancing agreement with Nordea Bank (the "Bank").
The loan bears a variable annual interest rate of Libor + 6.85%,
payable quarterly. The Loan will be repaid within five years
through regular quarterly payments and a final balloon payment of
73% at the end of the term. The Company undertook to maintain an
LTV of no more than 65% and DSCR of not less than 1.2.
The Loan is secured by various mortgages, charges, pledge of the
lease area in the project, pledges and other customary security
interests for the benefit of the Bank and entered into by both
Avtoprioritet and the Company.
As of December 31, 2014 the Company is in compliance with the
above financial covenants.
(4) On September 21, 2014, a wholly owned subsidiary Petra 8 LLC
("Petra") has entered into a new loan agreement with Sberbank of
Russia (the "Bank"). The Bank will provide a non-revolving credit
line of up to US$87 million (the "Loan") to finance the fourth
phase of 1,244 apartments at MirLand's "Triumph Park" major
residential development in St. Petersburg.
The Loan will provide approximately 75% of the expected fourth
phase construction cost, with the balance financed from sale
proceeds, and fulfils the outstanding funding requirement for this
latest phase of the project. It will be provided to Petra in
tranches over the next three years, and will be secured by way of
mortgage, charge, pledge and other appropriate security interests
for the benefit of the Bank and entered into by Petra and the
Company.
The Loan principal will be available for 35 months and the Loan
will mature in four years.
The Loan bears a fixed Ruble annual interest rate of 11.9% and
is to be paid quarterly, in addition to other fees set out in the
loan agreement, and is in addition to three facilities previously
granted by the Bank to Petra, the outstanding balance of which, to
date, is approximately $ 5 million.
b. Financial covenants:
According to the agreements for the credit lines from banks in
Russia, the Company's subsidiaries were required to meet several
financial covenants, including a Loan to Value Ratio (LTV) of 70%
and a Debt Service Coverage Ratio (DSCR) that varies from between
120% and 130%.
As of December 31, 2014, part of the Group's subsidiaries is not
complied with all of the financial covenants that were determined
as part of the credit agreements. Therefore, the Company classified
its loans from the bank in the amount of 181.6 million US dollars
and presented them as of the reporting date under current
liabilities.
c. Pledges and securities:
The Company's subsidiaries pledged their rights in the projects
and the income stemming from the aforesaid financed projects. The
balance of the secured properties as of 31 December 2014 is
amounted to approximately 602 million US dollars. Furthermore, in
some cases the Group pledged its shares in the subsidiaries which
own the projects in favor of the banks, as aforesaid.
d. The maturity dates of long-term loans:
31 December
---------------------------
2014 2013
-------------- -----------
U.S. dollars in thousands
---------------------------
First year - current liabilities 24,630 23,465
Second year 17,560 10,517
Third year 19,917 12,223
Fourth year and after 184,961 110,693
-------------- -----------
247,068 156,898
Origination costs (11,888) (7,262)
-------------- -----------
235,180 149,636
============== ===========
NOTE 12:- LOANS AND GUARANTEES FROM SHAREHOLDERS
During September 2008, the main shareholders of the Company
(companies that are part of Fishman Group) granted guarantees in
favor of certain banks that secured lines of credit to the Company
that were granted to the Company from banks. During 2014 the
Company repaid its obligation to the banks (see also Note 10).
NOTE 13:- DEBENTURES
a. Composition
Nominal Effective December 31, 2014 December 31, 2013
---------------------- ----------------------
value on Linkage annual Amount Amount
terms
Date of Nominal date of (principal interest of of
and
Series issuance interest Maturity date issuance interest) rate debentures Balance debentures Balance
------- ------------------ ---------- ----------------------- --------- ---------- ------------ ---------- --------- ---------- ---------
U.S. U.S. U.S.
dollars dollars dollars
in In in In in
thousands thousands thousands thousands thousands
--------- ---------- --------- ---------- ---------
6 equal annual payments
beginning December
A December 2007 6.5% 31,2010 10,085 Israel CPI 6.19% 13,087 4,108 13,087 4,483
U.S.
6 equal annual payments dollar
LIBOR beginning December exchange
B December 2007 +2.75% 31,2010 52,626 rate 5.15% 68,225 18,036 68,292 17,611
5 equal annual payments
beginning August
C August 2010 8.5% 31,2012 79,803 Israel CPI
February 2011 (*) 9% 5.59%-8.88% 119,224 34,269 178,835 57,860
August 2010 4 equal annual payments
February 2011/May beginning November
D 2013 6% 30, 2014 56,586 Israel CPI 42,125
(*) 6.5% 6.16%-7.86% 155,288 207,051 62,921
5 annual payments
beginning May 31,
E July 2013 7.21% 2016 107,429 Not linked
December 2013 (*) 8.21% 6.29% -7.59% 382,400 99,693 382,400 111,745
5 annual payments
F b) September 2014 5.5% beginning 39,656 Not linked
(*) 6.5% September 30, 2015 6.94% 144,389 37,383 - -
--------- ---------
235,614 254,620
========= =========
(*) Following the lowering of the rating mention in note 1b, the
annual interest rate on the debentures (series C-D) increased by
0.5% per annum and on the debentures (series E-F) increased by 1%
per annum from December 18, 2014 and until the date that the
Company's rating is raised back to BBB or above.
b. On September 16, 2014, the Company issued new debentures
(Series F) in the total amount of NIS 144.4 million (approximately
39.7 million US dollars). The debentures (Series F) bear fixed
annual interest of 5.5%.
Bonds are due September 2019, with 5% repaid every September
from 2015 to 2018, with the remaining 80% due in September
2019.
The effective interest rate of the new debentures is 5.97%.
The Company is required to meet several covenants until the full
repayment of debentures Series F:
a) The Company's equity shall be higher than 140 million US
dollars during the period of two consecutive quarters,
b) The ratio of Company's net debt in consolidated financial
statements to net CAP shall not exceed 75% during the period of two
consecutive quarters.
In case the ratio of debt in consolidated financial statements
to net CAP will be higher than 65%, the annual interest rate will
be adjusted.
As of December 31, 2014 the Company is not in compliance with
the above financial covenants and accordingly classified the above
debentures to current liabilities. (See also note 1b).
c. Regarding the negotiations between the Company and the
trustees of the debentures, see Note 1b.
d. The expected maturities as of December 31, 2014:
2 to
Less than 1 to 3 3 to 4 to
one year 2 years years 4 years 5 years > 5 years Total
--------- -------- ------ -------- -------- --------- -------
U.S. dollars in thousands
-------------------------------------------------------------------
Series A 3,971 - - - - - 3,971
Series B 17,543 - - - - - 17,543
Series C 16,495 16,495 - - - - 32,990
Series D 14,149 14,149 14,149 - - - 42,447
Series E - 9,833 22,124 22,124 22,124 22,124 98,329
Series F - 1,856 1,856 1,856 1,856 29,702 37,126
--------- -------- ------ -------- -------- --------- -------
52,158 42,333 38,129 23,980 23,980 51,826 232,406
========= ======== ====== ======== ======== =========
Premium 287
-------
Total 232,693
=======
*) Not including interest accrued, in the amount of 2,291
thousands US dollars as of 31 December, 2014 which is part of
current maturities of long-term loans from banks and
debentures.
e. Debentures held by related parties are disclosed in Note 21b.
NOTE 14:- OTHER NON-CURRENT LIABILITIES
31 December
---------------------------
2014 2013
------------- ------------
U.S. dollars in thousands
---------------------------
Deposits from tenants (1) 6,707 9,203
Less short-term deposits from tenants (2,780) (4,090)
Liability to Yaroslavl municipality (2) 8,635 -
------------- ------------
12,562 5,113
============= ============
(1) The deposits do not bear interest and usually represent up
to three months of rent to be repaid at the end of the rent
period.
(2) See Note 23g.
NOTE 15:- FINANCIAL INSTRUMENTS
a. Financial risk factors:
The Group's activities in the Russian market expose it to
various financial risks such as market risk (foreign currency risk,
interest rate risk and CPI risk), credit risk and liquidity risk.
The Group's comprehensive risk management plan focuses on
activities that reduce to a minimum any possible adverse effects on
the Group's financial performance.
The Group performed sensitivity tests for principal market risk
factors which can affect the results of operations or the reported
financial position. Both risk factors and financial assets and
liabilities were examined based on the materiality of each risk's
exposure versus the functional currency and under the assumption
that all of the other variables are fixed.
1. Foreign currency risk:
Foreign currency risk is the risk that the fair value or future
cash flows of a financial instrument will fluctuate because of
changes in foreign exchange rates.
The Group has financial instruments held in Ruble, New Israeli
Shekels ("NIS") and Hungarian Forint ("HUF") and main revenues in
Ruble. The Group is exposed to changes in the value of those
financial instruments due to changes in foreign currencies exchange
rates. The Group's policy is not to enter into any exchange rate
hedging transactions Group.
For the accelerated devaluation of the Rubble in compare to US
dollars, see also Note 1b. The Group has financial instruments
stated in Rubble at the amount of 9 million US dollar, and
financial instrument stated in ILS at the amount of 206 million US
dollar.
The following table represents the sensitivity to a reasonably
possible change in the U.S. dollar/Ruble exchange rates:
2014 2013
------------- ------------
Effect on profit (loss)
before tax
---------------------------
U.S. dollars in thousands
---------------------------
Increase of 5% in U.S. dollar/Ruble (11,647) (7,161)
Increase of 10% in U.S. dollar/Ruble (23,294) (14,322)
Increase of 20% in U.S. dollar/Ruble (46,588) (28,644)
Decrease of 5% in U.S. dollar/Ruble 11,647 7,161
Decrease of 10% in U.S. dollar/Ruble 23,294 14,322
Decrease of 20% in U.S. dollar/Ruble 46,588 28,644
The following table represents the sensitivity to a reasonable
possible change in U.S. dollars/NIS exchange rates:
2014 2013
------------- ------------
Effect on profit (loss)
before tax
---------------------------
U.S. dollars in thousands
---------------------------
Increase 5% in U.S. dollar/NIS (10,296) (14,038)
============= ============
Decrease 5% in U.S. dollar/NIS 10,296 14,038
============= ============
2. Credit risk:
Credit risk is the risk that counterparty will not meet its
obligations under a financial instrument or customer contract,
leading to a financial loss. The Group is exposed to credit risk
from its operating activities (primarily trade receivables) and
from its financing activities, including deposits with banks and
financial institutions, foreign exchange transactions and other
financial instruments.
Following the crisis in Russia, and devaluation of the Russian
Rubble in compare to the US dollar, as described in Note 1b, the
Company is negotiate with its customer and allow specific reduces
for limited periods, in order to allow its customer to be able pay
their rental fees.
3. Interest rate risk:
Interest rate risk is the risk that the fair value or future
cash flows of a financial instrument will fluctuate because of
changes in market interest rate.
The Group has loans from banks and issued debentures.
These balances bear variable interest and therefore expose the
Group to cash flow risk in respect of increase in interest
rates.
22% of the Company's loans bear floating interest rates.
The following table represents the sensitivity to a reasonable
possible change in interest:
2014 2013
------------- ------------
Effect on profit (loss)
before tax
---------------------------
U.S. dollars in thousands
---------------------------
Increase 1% in interest (377) (533)
============= ============
Decrease 1% in interest 377 533
============= ============
4. Liquidity risk exposure:
The Group monitors the risk to a shortage of funds using a
liquidity planning tool.
The Group's objective is to maintain a balance between
continuity of funding and flexibility through the use of bank
overdrafts, bank loans, debentures, preference shares, finance
leases and hire purchase contracts. As a result of the crisis in
the Russian economy, the Company announced the postponement of
payments due to the holders of debentures of the Company, for
details see Note 1b.
The table below summarizes the maturity profile of the Group's
financial liabilities based on contractual undiscounted payments
(Including payments for interest) And does not include the effects
of negotiations with the debentures holders:
31 December 2014
-----------------------------------------------------
Less than 1 to 2 2 to 3 3 to 4
one year Years Years years > 5 years Total
--------- ------ ------ ------ --------- -------
U.S. dollars in thousands
-----------------------------------------------------
Loans from
banks and
others 43,327 34,455 35,349 35,763 179,236 328,130
Debentures 71,044 55,711 47,587 30,578 79,518 284,438
Accounts payable 9,240 - 8,635 - - 17,875
--------- ------ ------ ------ --------- -------
123,611 90,166 91,571 66,341 258,754 630,443
========= ====== ====== ====== ========= =======
31 December 2013
-----------------------------------------------------
Less than 1 to 2 2 to 3 3 to 4
one year Years Years years > 5 years Total
--------- ------ ------ ------ --------- -------
U.S. dollars in thousands
-----------------------------------------------------
Loans from
banks and
others 35,476 21,004 21,805 22,121 111,516 211,922
Debentures 62,713 59,769 56,446 47,881 82,407 309,216
Credits from
banks 20,056 - - - - 20,056
Accounts payable 8,912 - - - - 8,912
--------- ------ ------ ------ --------- -------
127,157 80,773 78,251 70,002 193,923 550,106
========= ====== ====== ====== ========= =======
5. Financial instruments and cash deposits:
Credit risk from balances with banks and financial institutions
is managed by the Group's treasury department in accordance with
the Group's policy. Investments of surplus funds are made only with
approved counterparties and within credit limits assigned to each
counterparty. Counterparty credit limits are reviewed by the
Group's Board of Directors on an annual basis, and may be updated
throughout the year subject to approval of the Group's Finance
Committee. The limits are set to minimise the concentration of
risks and therefore mitigate financial loss through potential
counterparty's failure to make payments.
The Group's maximum exposure to credit risk for the components
of the statement of financial position at 31 December 2014 and 2013
is the amount of cash balance.
6. Israeli Consumer Price Index risk:
a) The Series A, C and D Bonds issued by the Company are linked
to the Israeli Consumer Price Index ("CPI"). The total amount of
financial instruments which are linked to CPI is 80,502 thousand US
dollars and 125,264 thousand US dollars as of 31 December 2014 and
31 December 2013, respectively.
b) The table below represents sensitivity to a reasonable possible change in CPI:
2014 2013
------------- ------------
Effect on profit (loss)
before tax
---------------------------
U.S. dollars in thousands
---------------------------
Increase 0.2% in CPI (1,610) (1,253)
============= ============
Decrease 0. 2% in CPI 1,610 1,253
============= ============
b. Fair value of financial instruments:
Set out below is a comparison by category of carrying amounts
and fair values of all the financial instruments of the Group as of
31 December, 2013 and 31 December, 2012:
31 December 2014 31 December 2013
--------------------- --------------------
Carrying Carrying
amount Fair value amount Fair value
--------- ---------- -------- ----------
U.S. dollars in thousands
-------------------------------------------
Financial liabilities
Long and short-term
loans (1) 226,461 187,611 139,318 145,264
Debentures (series
A) (2) 4,108 1,181 4,483 4,666
Debentures (series
B) (2) 18,036 6,663 17,611 18,180
Debentures (series
C) (2) 34,269 9,764 57,860 62,296
Debentures (series
D) (2) 42,124 11,891 62,921 62,114
Debentures (series
E) (2) 99,693 27,483 111,745 114,808
Debentures (series
F) (2) 37,384 10,663 - -
(1) Level 3 according to fair value hierarchy.
(2) Level 1 according to fair value hierarchy.
The management assessed that cash and short-term deposits, trade
receivables, trade payables, bank overdrafts and other current
liabilities approximate their carrying amounts largely due to the
short-term maturities of these instruments.
The following methods and assumptions were used to estimate the
fair values:
-- Fair value of the quoted notes and bonds is based on price quotations at the reporting date.
-- Fair values of the Group's interest-bearing borrowings and
loans are determined by using DCF method using discount rate that
reflects the issuer's borrowing rate as at the end of the reporting
period.
Significant
Valuation unobservable Range (weighted
technique inputs average)
----------- -------------- ---------------
Discount
Bank loans DCF rate 14.2%
NOTE 16:- INCOME TAX
a. Tax rates applicable to the Company and its investees:
Cyprus - corporate tax rate - 12.5%.
Russia - corporate tax rate - 20%.
Israel - corporate tax rate - 26.5%.
Hungary - corporate tax rate - 19%.
b. Deferred taxes:
Consolidated statement
of financial position Consolidated income statement
------------------------ ---------------------------------
31 December 31 December
------------------------ ---------------------------------
2014 2013 2014 2013 2012
----------- ----------- ----------- ---------- --------
U.S. dollars in thousands
-----------------------------------------------------------
Deferred tax liabilities:
Investment property
and Investment
property under
construction (59,822) (62,198) (19,429) (14,355) 4,327
Inventory of buildings (4,454) (15,452) 6,021 220 221
=========== =========== =========== ========== ========
Deferred tax assets:
Carry forward
tax losses 44,871 39,092 28,317 3,354 (4,170)
=========== =========== =========== ========== ========
Deferred tax expenses
(income) 14,909 (10,781) 378
=========== ========== ========
Deferred tax,
net (19,405) (38,558)
=========== ===========
1. The deferred taxes are calculated at the average tax rate of
20% (2013 - 20%) based on the tax rates that are expected to apply
at the time they are realized.
2. The Cyprus-Russian tax treaty was amended in 2012. Following
this amendment a Cypriot holding company which will record a
capital gain on the sale of a Russian real estate company will be
subject to a 20% tax rate in Russia as of January 1, 2017 (such
sale is not subject to tax up to December 31, 2016).
The Group is evaluating the possible impact of the change, but
is presently unable to assess the effects, if any, on its financial
statements. The Group's management believes that the change will
not have any material effect on the Company's results of
operations, because the Group has accounted for a tax provision
which was deducted from the fair value of the properties.
3. The new legislation of the transfer prices became valid
starts from January 1, 2012, which allow the authority perform
adjustments to the income for tax, in relation to related party
transactions which their prices different from the fair value.
Under this legislation, the tax burden had been transferred to
the companies.
The Group believes it will be able to prove that the related
party transactions were made on market terms.
c. Tax expense (tax benefit):
Year ended
31 December
-----------------------------
2014 2013 2012
----------- -------- ------
U.S. dollars in thousands
-----------------------------
Current income tax 1,784 487 547
Deferred taxes (14,909) 10,781 (378)
----------- -------- ------
Tax expense (tax benefit)
in income statement (13,125) 11,268 169
=========== ======== ======
d. A reconciliation between the tax expense in the Income
Statement and the product of profit (loss) before tax multiplied by
the current tax rate can be explained as follows:
Year ended
31 December
-----------------------------
2014 2013 2012
--------- -------- --------
U.S. dollars in thousands
-----------------------------
Income (loss) before tax
expense (76,002) 17,474 (42,133)
========= ======== ========
Tax at the statutory tax
rate in Russia (20%) (15,200) 3,495 (8,427)
Increase (decrease) in respect
of:
Effect of different tax
rate in Cyprus (12.5%) and
Hungary (19%) 1,653 3,010 2,924
Earnings of companies accounted
for at equity method for
which deferred tax were
not recorded (658) (1,518) (1,268)
Inter-company expenses for
which deferred tax liabilities
were recorded (11,768) (1,526) 246
Losses for which deferred
tax assets were not recorded 11,374 6,363 6,769
Expenses not recognized
for tax purposes 1,313 1,325 -
Others 161 119 (75)
Income tax expense (tax
benefit) (13,125) 11,268 169
========= ======== ========
(*) See also Note 16 b2
e. Losses carried forward:
The tax losses carried forward by the Group companies' amount to
approximately 224.5 million US dollars. Deferred tax assets
amounting to 44.9 million US dollars have been recognized.
Deferred tax assets in the total amount of 11.4 million US
dollars, on tax losses carried forward in the amount approximately
57 million US dollars, were not recorded.
NOTE 17:- EQUITY
a. Composition of issued capital:
31 December
--------------------
2014 2013
--------- ---------
U.S. dollars
--------------------
Authorized shares of $ 0.01 par
value each 1,350,000 1,350,000
========= =========
Issued and fully paid shares of
$ 0.01 par value each 1,035,580 1,035,580
========= =========
b. Accompanying rights to shares
The shares are traded in the AIM London stock exchange.
Voting rights - each shareholder own one voice to each share, in
general assembly.
Dividend rights - dividend will be calculated pro rata to the
quantity shares.
c. Dividend distribution policy:
Since its establishment, the Company has not distributed a
dividend to its shareholders.
The distribution of dividends by the Company is dependent on the
financial performance and position of the Company, its equity and
its working capital requirements. On November 27, 2006, the
Company's board of directors adopted a dividend policy which
reflects the long-term earnings and cash flow potential of the
Group, taking into account the Group's capital requirements, while
at the same time maintaining an appropriate level of dividend
cover.
Following is data about the ratio of net debt to adjusted
capital in 2014 which the Company required to comply under the
issuance of debenture F during 2014, see also Note 13b.:
Ratio of net debt to adjusted capital:
December 31,
2014
---------------
US in thousands
---------------
Total debt reported in the financial statements 615,159
Less - cash and cash equivalents (40,646)
---------------
Net debt 574,513
===============
Total equity reported in the financial statements 117,971
Add - owners' loans -
Less - foreign currency translation reserve 174,197
---------------
Adjusted capital 292,168
===============
Ratio of net debt to adjusted capital 1.97
===============
As mentioned in Note 1b and following the crisis in Russia and
the devaluation of the Russian Rubble in compare to the US dollar,
the total equity attributable to equity holders of the parent
reduced during 2014, and mostly in fourth quarter of the year, at
the amount of 183.8 million US dollar.
As a result, the Company is incompliance in the above financial
covenant.
d. Reserve from transaction with controlling shareholder:
Assets and liabilities involved in a transaction between the
Company and the controlling shareholder or between companies under
common control are recognized at fair value at the date of the
transaction. The difference between the fair value and the
consideration determined in the transaction is taken to equity. A
positive difference arises relating to deposits and guarantees from
a controlling shareholder that were given to the Company to secure
short and long-term credit from banks and relating to a beneficiary
loan from a controlling shareholder with off-market conditions. A
negative difference represents, in substance, a dividend and,
therefore, reduces the retained earnings. A positive difference
represents, in substance, owners' investment and is therefore
presented in a separate item in equity "reserve from transaction
with a controlling shareholder".
e. Group's capital management:
The Group's capital management objectives are:
1. To maintain healthy capital ratios in order to support its
business activity and maximize shareholder's value.
2. To achieve return on capital to shareholders by pricing
correctly rents level and sale prices according to the business
risk levels.
3. To monitor loans and capital levels to support the business
activity and to produce, maximum value to its shareholders.
The Group acts to achieve a return on capital at a level that is
customary in the industry and markets in which the Group operates.
This return is subject to changes depending on market conditions in
the Group's industry and business environment.
The Group monitors its capital level using the ratio of net debt
to adjusted capital. Net debt is calculated as the total debt less
cash and cash equivalents. Adjusted capital includes the equity
components: share capital, share premium, retained earnings,
capital reserves and shareholders' loans and excludes currency
translation adjustment reserves.
NOTE 18:- EARNINGS (LOSS) PER SHARE
Year ended
31 December
---------------------------
2014 2013 2012
-------- ------- --------
Weighted average number of Ordinary
shares used for computing basic
earnings per share (in thousands) 103,558 103,558 103,558
======== ======= ========
Income (loss) used for computing
basic and diluted earnings per
share (in thousands of U.S.
dollars) (attributable to parent
company) (71,313) 3,339 (42,302)
======== ======= ========
NOTE 19:- SHARE-BASED PAYMENTS
a. The Company adopted a share option plan on 19 November 2006.
The options can be exercised by way of a cashless exercise
according to a mechanism determined by the Company's Board. The
options were ment to be exercised within five years from the grant
date, otherwise they expire.
b. On November 2009 the Company's board has approved the update
of the exercise price of 1,946,524 Share Option granted to certain
officers of the Company and its subsidiary to 2.5 GBP per option,
pursuant to an ESOP adopted by the Board on November 2006.
c. On 2 December 2010, the Company granted Mr. Rozental, who was
appointed, at that time, as the Company's CEO, additional Share
Options for 673,797 Ordinary shares of the Company. The exercise
price is 2.30 GBP per share and the options are exercisable until 1
December 2015.
d. On March 12, 2012, the Company's RemCo approved the extension
of the exercise period of 1,122,995 options, previously granted by
the Company, to 19 March 2014, and updated the exercise price of
those options from 4.8 GBP per share to exercise price of 3.5 GBP
per share. As of the reporting date, the options expired.
e. On 11 November, 2013 the Board of Directors of the Company
resolved numerous resolutions in connection with un-registered
options ("options") which are exercisable into Company's shares
that are traded on the AIM in London, as follows:
1. To re-issue 449,198 options exercisable into 449,198 shares
at an exercise price of 2.50 GBP per option, to Mr. Roman Rozental,
CEO of the Company, in lieu of 449,198 options which were
previously issued to Mr. Rozental.
The abovementioned 449,198 options will be granted on a
fully-vested basis from the date of issuance, where the last date
on which the options may be exercised is 30 May, 2017.
2. To issue 258,750 new options to Mr. Yevgeny Steklov, CFO of
the Company, exercisable into 258,750 shares at an exercise price
of 2.60 GBP for each option.
The abovementioned 258,750 options will be exercisable in three
equal parts: the first will be exercisable at the end of the first
year from the date of issuance of such options; the second will be
exercisable at the end of the second year from the date of issuance
of such options; the third will be exercisable at the end of the
third year from the date of issuance of such options. The options
will expire at the end of the fifth year after the date of
issuance.
f. On November 10, 2014 the Company's Board of Directors
resolved, by way of a new issuance, the extension of the expiration
date of 374,332 options by additional two years until December 19,
2016 which the Company issued in the past to its service provider,
and as such, the exercise price of such options from 3.5 Pounds per
share to an exercise price of 2.85 Pounds per share.
According to IFRS 2, the value of granted options was measured
by independent appraiser and amounted to 11 thousands US
dollars.
g. The total expense that was recognized in the income
statements for the share based payment is presented in the
following table:
Year ended
31 December,
-----------------------------
2014 2013 2012
--------- -------- --------
U.S. dollars in thousands
-----------------------------
134 210 845
========= ======== ========
h. Movement during the year:
The following table illustrates the number and weighted average
exercise prices (WAEP) of, and movements in, share options during
the year:
2014 2013
--------------- ---------------
Number Waep Number Waep
--------- ---- --------- ----
Outstanding at 1 January 2,879,071 4.7 3,743,316 4.4
Granted during the year - 258,750 4.2
Expired during the year 1,122,995 5.5 1,122,995 4.1
--------- ---- --------- ----
Outstanding 31 December 1,756,077 3.8 2,879,071 4.7
========= ==== ========= ====
Exercisable at 31 December 1,583,577 3.8 2,620,321 4.8
i. The weighted average remaining contractual life for the share
options outstanding as at 31 December 2014 is one and a half
years.
j. Measurement of the fair value of equity-settled share options:
The Company uses the binomial model when estimating the grant
date fair value of equity-settled share options. The measurement
was made at the grant date of equity-settled share options since
the options were granted to employees.
NOTE 20:- ADDITIONAL DETAILS REGARDING PROFIT AND LOSS
a. Cost of maintenance and management:
Year ended
31 December,
-----------------------------
2014 2013 2012
--------- -------- --------
U.S. dollars in thousands
-----------------------------
Maintenance of property 10,642 10,858 9,762
Land lease payments 809 909 673
Management fees 1,422 1,243 815
Property tax on investment
property 5,355 4,360 3,624
--------- -------- --------
18,228 17,370 14,874
========= ======== ========
b. General and administrative expenses:
Year ended
31 December,
-----------------------------
2014 2013 2012
--------- -------- --------
U.S. dollars in thousands
-----------------------------
Salaries (1) 6,860 7,591 7,376
Office maintenance 2,099 1,494 1,677
Professional fees 2,545 2,772 3,413
Traveling expenses 544 554 589
Depreciation 200 230 491
Other costs (2) 795 641 1,061
--------- -------- --------
13,043 13,282 14,607
========= ======== ========
(1) Includes cost of share-based
payment 134 210 290
========= ======== ========
(2) Includes cost of share-based
payment - - 555
========= ======== ========
c. Finance costs and income:
Finance income:
Year ended
31 December,
-----------------------------
2014 2013 2012
--------- -------- --------
U.S. dollars in thousands
-----------------------------
Interest income from cash
and cash equivalents and
restricted deposits 323 51 9
Interest income from loans
provided 1,198 1,029 1,115
Effect of discounting of
long-term receivables - - 258
--------- -------- --------
1,521 1,080 1,382
========= ======== ========
Finance expenses:
Year ended 31 December,
-----------------------------
2014 2013 2012
--------- -------- --------
U.S. dollars in thousands
-----------------------------
Interest expenses - loans
from banks (20,864) (15,677) (13,156)
Interest expenses- loans
from shareholders - - (117)
Interest expenses - debentures (16,716) (14,486) (11,876)
Net capitalized interest
expenses 2,782 1,415 2,201
Bank charges and others (1,900) (3,301) (1,993)
Effect of discounting of
long-term receivables (244) (396) -
(36,942) (32,445) (24,941)
========= ======== ========
d. Other income (expenses):
Year ended
31 December,
-----------------------------
2014 2013 2012
--------- -------- --------
U.S. dollars in thousands
-----------------------------
Change in provision regarding
service providers (see Note
23a and b) (3,485) (1,390) (1,881)
Update of liability to Yaroslavl
municipality 1,493 - -
Gain from sale of investment
property under construction - 548 -
Other - (244) 49
(1,992) (1,086) (1,832)
========= ======== ========
NOTE 21:- RELATED PARTIES
a. Transactions with related parties:
Year ended
31 December,
-----------------------------
2014 2013 2012
--------- -------- --------
U.S. dollars in thousands
-----------------------------
Interest income from related
parties 1,198 701 1,115
Interest paid to shareholders
(1) (2) 518 756 2,714
========= ======== ========
Private jet expenses - 42 17
========= ======== ========
(1) Regarding loans from shareholders, see Note 12.
(2) Includes interest expenses of debenture which are held by the shareholders of the Company.
b. Balances with related parties:
31 December
---------------------------
2014 2013
------------- ------------
U.S. dollars in thousands
---------------------------
Debentures held by shareholders 12,297 14,707
============= ============
Guarantees provided and benefits received
regarding loans from majority shareholders
(Note12) - 165
============= ============
c. For more details regarding agreements with related parties, see also Note 22.
d. Compensation of key management personnel of the Group and employees of the Company:
Year ended
31 December,
-----------------------------
2014 2013 2012
--------- -------- --------
U.S. dollars in thousands
-----------------------------
Salaries 1,090 1,003 904
Share-based payments 134 210 290
--------- -------- --------
1,224 1,213 1,194
========= ======== ========
e. The Company provided guarantees in favor of its subsidiaries'
financing banks at the amount of 235.2 million UD dollars.
NOTE 22:- AGREEMENTS WITH RELATED PARTIES
a. Global 1, a company accounted for at equity method, which
owns a commercial center in Yaroslavl, has entered into a lease
agreement with Home Centers LLC ("Home Center"), a company
controlled by the Fishman family, the controlling shareholders of
the Company. The area leased to Home Center covers 6,703 sq.m. the
minimal lease fees are 138 US dollars per sq.m. and the lease
period, assuming the exercise of all of the option periods
contained therein, is 25 years. The terms of the agreements are in
accordance with market conditions. In May 2014, the subsidiary of
the Company entered into an agreement with Home Center under which
the subsidiary has the right for early termination lease agreement
without compensation, except for the facilities which are
inseparable of the property that were purchased from Home Center,
and Home Center may stay in the store until the entry of a new
tenant.
As of September 2014 the lease agreement states maximum
dollar-ruble rate similar to the agreed agreements with other
tenants.
As of 01.01.2015 a new short-term lease agreement were signed
whereby Home Center will pay the subsidiary of the Company 4% of
its business cycle, plus holding costs until the entry of a new
tenant.
According to this agreement the subsidiary of the Company has
the right for termination with 2 week notice without
compensation.
b. Hydro leases offices to Home Centre with an overall area of
approximately 652 sq.m. used for office purposes. The monthly lease
fee is approximately 20 thousand US dollars. The lease period
terminated on June 30, 2014. The engagement is in accordance with
market conditions.
NOTE 23:- COMMITMENTS AND CONTINGENCIES
a. On January 4, 2013 subsidiaries that holds the offices
project of the Company, entered into a new management service
agreement which replaces the previous agreement between two
parties, with TMJK HOLDINGS LTD, a Cypriot company owned by Mr.
Michael Krichevsky and FADIDA HOLDINGS LTD., a Cypriot company
owned by Mr. Ofer Fadida ("Service Providers") according to which
they will provide management services to Hydro such as management
of rental agreements, marketing of the empty spaces, office
maintenance and etc.
b. In return for the management services pursuant to the above
agreement, Service Providers will be entitled to receive: a) 10% of
the current income net of any expenses including investments and
financial expenses ("Projects Commission"); b) 2% of the lease fees
actually received by the subsidiaries from its tenants.
In accordance with description in section a and b above, the
balance of the provision for service provider as of December 31,
2014, is at the amount of 5 million US dollar (as of December 31,
2015 is at the amount of 4.9 million US dollar). The Company paid
until December 31, 2014 on advances for those liabilities at the
amount of 8.6 million US dollar (in 2013 - 7.4 million US
dollar).
c. A subsidiary of the Company, Petra 8 LLC ("Petra"), entered
into an agreement with a third party, which is not related to the
Company, pursuant to which it will provide various professional
services to Petra in connection with the receipt of the approvals
and permits that are required for the project. Pursuant to the
provisions of the agreement, as revised from time-to-time in the
supplementary agreements, in consideration of the aforesaid
services, Petra 8 will pay an amount that is equal to 2.5% of Petra
8's profit (net) stemming from project's realization. The
consideration will be paid on dates and at rates detailed in the
agreement, pursuant to which advances were paid on account of the
aforesaid consideration in the amount of approximately 4 million US
dollars (according to a mechanism for the settling of accounts that
was determined in the agreements), until the financial statements
date.
d. In addition Petra entered into an agreement with another
third party according to which such third party provides services
which include supervision and preparation for tenders, assistance
in projects planning, assistance in selection of providers,
technical supervision, budget control etc. As of the reporting date
Petra pays such third party monthly management fees in an amount of
approximately 70 thousands US dollars.
Petra has entered on September 2012 into an agreement with
another management company for the purpose of developing the third
phase of the Project for a monthly consideration of 41 thousands US
dollars.
e. The Group entered into commercial lease agreements for
certain land plots. These leases are irrevocable and have a term of
14-41 years with a renewal option.
Future minimum lease payments as of 31 December 2014 are as
follows:
U.S. dollars
in thousands
-------------
First year 600
After one year but no more than five
years 2,395
More than five years 7,523
-------------
Total 10,518
=============
f. Expected rental income:
The lease agreements of the Company's investees are for periods
of up to 10 years.
The minimum rental income is as follows:
31 December
2014
-------------
U.S. dollars
in thousands
-------------
First year 33,840
Second year until five years 64,417
More than five years 5,912
-------------
104,179
=============
g. A subsidiary of the company, which owns a plot of land in
Yaroslavl, has entered into an agreement with the municipality of
Yaroslavl whereby the municipality of Yaroslavl will be entitled to
8% of the built area on said land. The Group has recorded a
provision regarding this agreement (See Note 3).
i. Petra - 8 is engaged with local marketing company for the
marketing of the project for commissions at the amount of 4-5%, in
respect of specific goals achievement and in accordance with the
terms specify in the agreement.
j. Petra - 8 has engaged with local contractor for the
construction of the third phase in Petra project, for 800 dollar
per mater.
k. Charges:
1. In order to secure the Group's liabilities, real estate
properties were mortgaged and fixed charges were recorded on
property, plant and equipment, insurance rights, goodwill, bank and
other deposits and receipts from customers. Floating charges have
been recorded on the Group's assets, including a charge on certain
shares in subsidiaries.
NOTE 24:- SEGMENT INFORMATION
The operating segments are identified on the basis of
information that is reviewed by the chief operating decision maker
("CODM"). That information is used in order to assess performance
and allocation of resources. For management purposes, the Group is
organized according to operating segments based on products and
services.
Commercial segment - real estate for commercial purposes.
Residential segment - residential real estate for sale.
Segment performance (segment income (loss)) is evaluated based
on operating income (loss) in the financial statements.
The segment results reported to the CODM include items that are
allocated directly to the segments and items that can be allocated
on a reasonable basis.
Items that were not allocated, mainly the Group's headquarter
assets, general and administrative costs, finance (consisting of
finance expense and finance income) and taxes on income are managed
on a group basis.
The CODM reviews segment assets apart from deferred taxes and
loans to companies accounted for equity method, as these assets are
managed on a group basis.
The CODM reviews segment liabilities apart from deferred taxes,
current tax liability and loans as these liabilities are managed on
a group basis.
The following tables present revenue and profit and certain
assets and liability information regarding the Group's operating
segments.
Commercial Residential Total
---------- ----------- ---------
U.S. dollars in thousands
----------------------------------
Year ended 31 December 2014:
Segment revenues 56,463 29,796 86,259
========== =========== =========
Segment results 121,905 (4,944) 116,961
========== =========== ---------
Unallocated expenses (8,181)
Finance expenses, net (184,782)
Income before taxes on income (76,002)
=========
Commercial Residential Total
---------- ----------- --------
U.S. dollars in thousands
---------------------------------
Year ended 31 December 2013:
Segment revenues 47,760 56,050 103,810
========== =========== ========
Segment results 88,689 2,925 91,614
========== =========== --------
Unallocated expenses (8,808)
Finance expenses, net (65,332)
--------
Income before taxes on income 17,474
========
Commercial Residential Total
---------- ----------- --------
U.S. dollars in thousands
---------------------------------
Year ended 31 December 2012:
Segment revenues 33,872 8,079 41,951
========== =========== ========
Segment results (11,493) (16,789) (28,282)
========== =========== --------
Unallocated expenses (10,353)
Finance expenses, net (3,667)
--------
Loss before taxes on income (42,302)
========
Year ended
31 December 2014
----------------------------------
Commercial Residential Total
---------- ----------- ---------
U.S. dollars in thousands
----------------------------------
Assets:
Segments assets 440,526 269,861 710,387
Unallocated assets 46,219
---------
Total assets 756,606
=========
Liabilities:
Segments liabilities (250,272) (98,994) (349,266)
Unallocated liabilities (265,893)
---------
Total liabilities (615,159)
=========
Year ended
31 December 2013
--------------------------------
Commercial Residential Total
---------- ----------- -------
U.S. dollars in thousands
--------------------------------
Assets:
Segments assets 548,488 299,775 848,263
Unallocated assets 44,907
-------
Total assets 893,170
=======
Liabilities:
Segments liabilities 192,238 92,867 285,105
Unallocated liabilities 276,348
-------
Total liabilities 561,453
=======
NOTE 25:- SUBSEQUENT EVENTS
1. On January 1, 2015, the results of a meeting between the
holders of bonds A and B regarding the deferral of payments were
published. For details, see Company's reports dated 1.1.2015.
2. On January 7, 2015, the results of meetings between the
holders of bonds C- F regarding the trustee certification for
negotiations with the Company were published. For details, see the
Company's reports dated 07.01.2015.
3. On January 8, 2015, the Company reported that the amount of
the deposit ($ 11 million) was deposited in trust. For details see
immediate report dated 8.1.2015
4. On January 22, 2015, the Company signed a letter of
commitment for an interim period (stand-still) as a result of the
bondholders meetings. For details, see the Company's immediate
report dated 26.1.2015
5. On February 2, 2015, S & P lowered the rating of the
Company and Bonds A- D of the Company to rate D due to non-payment
of its obligations in a timely manner. For details, see immediate
report dated .2.2.2015
6. On February 10, 2015 the Company announced the suspension of
all payments to any Bond Series of the Company before talking with
the bondholders. For details see immediate report dated
.10.2.2015
7. On February 11, 2015 the Trustees of bonds C to F reported
that a meetings were held on December 22, 2014 as required by the
provisions of Section 8.2 of the Deed of Trust Bonds (Series C) and
(Series D) and as required by the provisions of Article 7.2 of the
Deed of Trust Bonds (Series E) and (Series F) of the Company. For
details see immediate report dated .1.2.2015
8. On February 15, 2015, the results of a meeting of the
bondholders of Series C regarding the decline of payment on
February 11, 2015 were published. For details see immediate report
dated .15.2.2015
9. On the 9th and 10th of March, 2015 the bondholders of Series
A were summoned to meetings March 12, 2015 regarding the deferment
of payment. For details, see reports of 9 and 10 March 2015.
10. On March 10, 2015 the bondholders of Series A were invited
to a meeting on Friday March 19, 2015 regarding, among other
things, to discuss the progress and the reduction in the settlement
although no meeting will be convened for the purpose of immediate
repayment. For details see immediate report dated .10.3.2015
11. On March 12, 2015 a meeting of the bondholder of Series F
was set for March 17, 2015 in order to discuss the situation. For
details see immediate report dated 12.3.2015.
NOTE 26:- DATE OF APPROVAL OF THE FINANCIAL STATEMENTS
The Board of Directors approved these consolidated financial
statements for issue on 16 March 2015.
- - - - - - - - - - - - - - - - - - - - - - -
This information is provided by RNS
The company news service from the London Stock Exchange
END
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