1st Quarter Results

13 May 2015

MIRLAND DEVELOPMENT CORPORATION PLC

("MirLand" / the "Company")

UNAUDITED INTERIM CONSOLIDATED REPORT FOR THE

THREE MONTHS ENDED 31 MARCH 2015

MirLand, one of the leading international residential and commercial property developers in Russia, announces its results for the three months ended 31 March 2015.

Financial Highlights:

· Total revenues up 42% to US$39.1 million (31 March 2014: US$27.6 million) due to an increase in income from the sale of residential units; 

· Net operating income ("NOI") from investment properties (Company's share) down to US$6.0 million (31 March 2014: US$10.5 million), mainly due to movement in the Russian real estate market;

· Gross profit remains positive at US$6.4 million (31 March 2014: US$10.2 million);

· EBITDA remains positive at US$3.1 million (31 March 2014: US$6.2 million);

· Loss of US$12.0 million (31 March 2014: net income of US$10.9 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$17 million following a decrease in projected NOI. In addition, the Company recorded net foreign exchange losses of US$6.4 million. This was partly offset by a positive fair value adjustment of investment properties of US$16.6 million following an appreciation of the US Dollar against the Rouble of approximately 4%, resulting in the nominal appreciation of commercial assets at the same rate;

· Total assets amounted to US$719.2 million, of which 88% are property and land assets (31 December 2014: US$756.6 million); 

· Total equity of US$123.7 million (31 December 2014: US$141.4 million), equating to 17% of total assets;

· Net leverage stands at 60.0% of total assets (31 December 2014: 57%);

· 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 rates continue to remain high with prices of later phases increasing ahead of inflation:

· Phase II: Handover of final apartments to owners on track to complete in the first half of 2015;

· Phase III: Sales momentum continuing with an additional 31 sales since 1 January 2015. In total 898 apartments out of 1,346 have been pre-sold, totalling circa 67% of the scheme and representing sales of approximately US$64 million;

· Phase IV: Construction of 1,244 units began in Q3 2014, followed by the commencement of sales in Q1 2015. Approximately 175 units were pre-sold off plan during the initial three months of sales.

Western Residence, Perkhushkovo, Moscow

· Sales of a further six houses at our Western Residence development in Perkhushkovo, Moscow, have completed since 1 January 2015, taking the total number of units sold to 47 of the 77 houses in the scheme.

Retail:

· Satisfactory performance achieved despite pressures on rents and occupancy rates during the first quarter, with quarterly NOI of US$3.5 million from the Vernissage Mall and Triumph Mall compared to US$6.5 million last year;

· Occupancy rates remain high at circa 98%;

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

Offices:

· Occupancy rates slightly decreased at the MirLand Business Centre, and stand at 82% - in line with the market trend. NOI has reduced to US$2.5 million in the first quarter of 2015.

Nigel Wright, Chairman, commented:

"The Company continued to face significant challenges during the first quarter due to testing macro-economic conditions in the Russian market beyond our control. Against the extremely difficult backdrop, our core business has proved resilient. The significant increase in total revenues, mainly due to the continuing success of our St. Petersburg residential project as buyers seek refuge from a falling Rouble in bricks and mortar, is particularly pleasing to note. We did, however, suffer a significant fall in net operating income during the period, largely as a result of our strategy to seek to maintain high occupancy rates at our income producing properties through offering rental concessions to key occupiers. We believe that offering such support to tenants caught in the pincer of falling Rouble incomes and high US dollar denominated rents will pay dividends in the long term.

"In the meantime, negotiations with our existing bondholders continue in a positive vein and we are hopeful of achieving a satisfactory outcome for all parties. We will keep the market fully updated on developments in this regard.

"There have been some moderately encouraging signs in both the Russian economy and the real estate markets recently. A stronger oil price and improved exchange rate, combined with some evidence of increased levels of real estate investment by both domestic and foreign investors, can only be helpful. However, overall net capital outflows continue, albeit at a reduced rate. It is too early to predict the sustainability of these indicators.

"I do not underestimate the continuing challenges faced by the Company but feel we are taking all available steps to mitigate identified risk factors and maintain our cash resources.

"Longer term, we remain positive about both our business and Russia as a whole and I am hopeful that MirLand will be well placed to capitalise on any upturn when it arrives due to the prudent measures we have taken to date."

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FINANCING

The challenging economic environment has continued to have a substantial impact on the valuation of the Company's real estate portfolio. This saw the value marked down by approximately 36% during 2014 and an additional 4% during the first quarter of 2015, resulting in net leverage increasing further to 60.0% of total assets at 31 March 2015 from 56.9% at 31 December 2014. Total net borrowings amounted to US$432.3 million (31 December 2014: US$430.1 million).

As reported at the time of the Full Year results in March 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.

OPERATIONAL UPDATE

Good progress continues to be achieved in the pre-sale, build and delivery of Triumph Park in St. Petersburg, the Company's BREEAM certified sustainable residential project. Following the successful conclusion of Phase II with all flats sold, the Company is now handing over the final flats to the buyers, which is expected to be completed by the end of June 2015. Sales have continued to be strong in Phase III of the scheme, with 898 (67% of the scheme) apartments now pre-sold. The Company is continuing to achieve sale prices in these later phases ahead of the rate of inflation, underpinning the strong levels of profitability for the project.

The construction of Phase IV of the project, representing a further 1,244 units, commenced in Q3 2014, and 175 units were pre-sold during the first three months of sales.

The Western Residence residential development scheme at Perkhushkovo, Moscow, has also maintained momentum with six further houses sold since the beginning of the year. This now takes the number sold to 47 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. An agreement to sell the land for the construction of a 15,000 sqm extension to of the Vernissage Mall, which will house an international DIY retailer, was signed during the period. It is expected to be trading within a year and the retailer should increase the attractiveness of the Mall. The Company estimates on the basis of available information, correct as of the date of this report, that the sale of the property and said lease of the additional land (instead of developing the unit by the Company as originally planned) which is subject to, amongst other things, bank financing approval and the purchaser receiving the rights to a lien on the property. This is expected to generate a free cash flow of approximately 180 million Roubles (approximately US$3.4 million) prior to the repayment of the loan principal to the financing bank which may need to be carried out, depending on its requirements.

Occupancy at the MirLand Business Centre remains high at circa 82% 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 led to a substantial decrease in its NOI in the first quarter of 2015.

MARKET UPDATE

The Rouble has gained 15% since the beginning of the second quarter after losing about half of its value in 2014. Oil prices have been one of the drivers for the Rouble's recovery. The Central Bank expects the volatility of the Rouble to reduce by the summer, returning to levels seen in the Autumn of 2014, before the regulator switched the currency to a free float regime in November.

The price of Urals oil reduced to an average of US$54.82/bbl in March 2015, down US$2.80/bbl from February 2015.

The interest rate in Russia has averaged 6.66% from 2003 until 2015, reaching an all-time high of 17% in December 2014, and declining gradually since to 12.5% (as at 30 April 2015).

Net capital outflow during the period was US$32.5bn (US$48.6 billion 1Q2014), the Central Bank forecast for 2015 is currently US$118bn.

By the end of 2014 the most relevant economic forecast was from the Russian Central Bank which is predicting oil prices to increase to US$60/bbl, and GDP to contract by 4.5% in 2015, with recovery starting around 2017.  This compares with a recorded GDP growth in 1Q2015 of 0.4%.

Most analysts believe the current inflation spike of 16.9% y/y to be transitory due to the effects of exchange rate depreciation and an expectation that the import ban will be removed in the short term. Year-to-date inflation was 7.5% by the end of 1Q2015.

The unemployment rate increased to 5.9% in March 2015 from 5.3% in December 2014 (a record low of 4.8% was seen in August 2014).

Real Estate market

Prime yields in 1Q 2015 were 11% for offices, 11% for prime retail, and 13% for warehouses, the same as in the previous quarter.

The total volume of investments in 1Q2015 in commercial real estate was US$0.7bn. US$322 million and US$385 million were invested by domestic and foreign companies, respectively. The share of foreign companies' investments exceeded 50%. Despite the volatile global and domestic economic environment, the forecast for investments is US$2.5bn by the end of [2015]. As usual, Moscow attracted the majority of the investments at US$632 million (89%). Only US$55 million (8%) was invested in commercial real estate in St. Petersburg.

Offices

The total volume of investments in the office segment was US$470 million in 1Q 2015 (66% of total investments), including US$447 million invested in Moscow and US$22 million invested in St. Petersburg.

The average rental rates for class A premises are now US$611 and US$287 (triple net) for class B. Since 4Q2014 the average rental rates have decreased by 20% in Class A and 40% in Class B to (31 March 2015).

The average vacancy rate has increased to 17.5%: 30.9% in Class A (2015F - 35.7%), and 13.5% Class B (2015F - 14.7%). The vacancy rate is growing largely due to existing premises rather than new supply being delivered to the market.

Retail

1Q2015 saw low volumes invested in retail - with just US$96 million invested (14% of total investments).

Six new shopping centres with a total GLA of 348,700 sqm were opened in the regions, compared to 11 new shopping centres in 2014 with a total GLA of 410,383 sqm and three in Moscow.

In prime Moscow shopping malls the average vacancy rate remains below 2%. Footfall in Moscow shopping malls remains at the same level as in 1Q 2014 and is considered to be stable.

The prime rental rate indicator decreased from US$3,500 to US$3,200. 

Residential

The mortgage lending market is decreasing: circa153.5bn RUB of mortgages were granted in January and February 2015, which is 23% lower than the same period last year.

The average lending rate at the beginning of March 2015 was 14.7% (2.1% higher than in December 2014), the highest since 2010 according to the Agency for Housing Mortgage Lending. The increase has already led to a slowing of residential construction by 10% over the first two months of this year.

1Q 2015 delivery of new residential projects to the market totalled in circa890k sqm., 6% less than in 4Q 2014. Most of the delivery to the market remains in the mass-market segment (c860k sqm). 1Q 2015 demand amounted to 800k sqm, which is 51% lower than 4Q 2014 and 39% less than 1Q 2014. Against this supply and demand dynamics, housing prices slightly increased by 1.8% in economy and business classes during 1Q2015 compared with the beginning of the year.

Industrial

Total investment volume in the segment was US$120 million in 1Q 2015. New construction in Moscow accounted for 260,000 sqm of industrial space.

The vacancy rate increased from 7% to 9.5% in Class A, and from 5% to 6% in Class B. 90% of the vacant space marketed with Rouble lease rates. The average lease length is less than five years.

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

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

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

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

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

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

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