Final Results

RNS Number : 6992I

Mirland Development Corporation PLC

17 March 2010

 

17 March 2010

 

MirLand Development Corporation plc

("MirLand" / "Company")

 

 

FULL YEAR RESULTS FOR THE YEAR TO 31 DECEMBER 2009

 

 

MirLand Development Corporation, one of the leading international residential and commercial property developers in Russia, announces results for the 12 months ended 31 December 2009.

 

Financial Highlights:

·; Loss before tax US$23.0m (31 December 2008: loss of US$104.8m)

·; Rental income and property management fees of US$17.2m (31 December 2008: US$20.4m) reflecting a decrease in market rental rates at yielding assets and an increase in vacancy rates

·; Total assets US$616.1m (31 December 2008: US$529.9m)

·; Adjusted NAV US$472.3m (31 December 2008: US$487m) and NAV per share US$4.6 (31 December 2008: US$4.7)

·; General and administrative expenses decreased to US$16.3m (2008: US $22.3m), mainly a result of cost reductions implemented

·; The Company continues to have modest leverage at 31% of its assets (not including shareholders' loans) and 38% of its assets (including shareholders' loans).

 

Operational Highlights:

·; Revised strategic focus in 2009 to concentrate on the delivery of projects already under construction and the careful management of yielding assets

·; Significant progress made on the construction of Perkhushkovo Phase 1 and the first sub phase (c. 510 apartments) of the St Petersburg project

·; Facade of the Tamiz office building completed

·; Triumph Mall, Saratov has either pre-let agreements or letters of intent received for approx 92% of the lettable area in advance of its opening in Q2 2010

·; Good progress at Perkhushkovo with first five houses sold in Q4 2010

·; Succession plans in place with the announcement of replacement of CEO Moshe Morag with current CFO Roman Rozental.

 

Nigel Wright, Chairman, commented:

"The prudent early actions we took have helped us cope with the changing environment and better position ourselves to take advantage of the upturn, of which we have started to see encouraging signs, including increased levels of activity at both our commercial and residential projects.

 

"In light of these recent indications of economic recovery, I believe that MirLand is well positioned to capitalise on the improved market situation by resuming its pipeline projects according to demand and availability of finance."

 

 

Moshe Morag, MirLand's Chief Executive, added:

"Throughout 2009, we continued to make progress on our diversified portfolio in line with our revised business plan, focussing on projects already under construction and the effective management of our yielding assets. In 2010, with the ongoing backing of our shareholders and by seeking to further diversify our financial sources, MirLand will continue to develop and maintain its portfolio, allowing us to consolidate the Company's position as one of the leading international real estate companies in Russia."

 

For further information, please contact:

 

 

Chairman's Statement

 

Once again, I am pleased to report on MirLand's progress during the 2009 financial year. During this year, MirLand has implemented a number of measures that enabled us to endure the financial crisis and I am pleased to report that our prudent actions have helped us cope with the changing economic environment while also better positioning ourselves to take advantage of the upturn of which we have already started to see encouraging signs.

 

The Russian economy continued to experience challenges across its financial and real estate markets but, nevertheless, began to show the first steps of emergence from the recession at the end of 2009. As I reported last year, MirLand conducted a comprehensive review of its business plan in order to ensure that the Company's future strategy is aligned with both current and forecasted market conditions, particularly given the ongoing uncertainties facing the world economy, availability of funding liquidity, energy prices and pace of recovery.

 

The Company's business plan aims to:

·; maximize returns from our existing assets;

·; successfully complete those projects currently under construction; and

·; resume our pipeline projects according to the level and cost of available finance and market demand for the final product

 

By adjusting its operations to strictly focus on managing cash flow, halting the development of its pipeline projects and completing the construction of final staged projects, along with the continuous support from our main shareholders, the Fishman Group Companies, the Company has successfully endured the recent crisis and is now more strongly positioned to capitalise on opportunities as the market continues to gradually recover.

 

Business Environment

Although the Russian economy did not suffer as severely as originally anticipated, the 2009 fiscal year was nonetheless extremely difficult - resulting in a significant decline in both output and employment levels and an overall decrease in GDP over the previous year.

 

During 2009, inflation decreased as a result of a contraction in consumer spending and lower food and service prices. In turn, this caused a reduction in refinancing rates but, as the Central Bank rates largely indicated, the impact was limited and, therefore, the cost of credit still remains very high. For the first time in recent years, a budget deficit occurred as a result of the sharp decrease in oil and gas prices (despite Government support provided to stimulate the economy.) The impact of this deficit was primarily offset by the Reserve and Welfare funds which had been accumulated before the financial crisis, when Russia's economy was flourishing.

 

Over the last two quarters of 2009, the Russian economy showed signs of recovery and reported growth, largely due to an increase in oil prices. However, as the performance of the Russian economy relies heavily on oil prices, which are also highly volatile, it should be anticipated that the pace of the recovery will be slow and gradual.

 

2009 Highlights

Despite the challenging conditions of the past year, we believe that as a result of MirLand's revised business model and high quality portfolio, the Company is well positioned to weather this rapidly changing environment and capitalise on opportunities in the future.

 

·; The Company has a diversified portfolio of assets comprising both residential and commercial projects;

·; Our investment portfolio comprises four high quality, completed and income producing investment properties, Hydromashservice, MAG and Century office buildings in Moscow, and Vernissage mall in Yaroslavl. Most of the leasing agreements in these assets are linked to US dollar;

·; The Triumph Mall in Saratov, which is expected to open towards the second quarter of 2010, continues to see strong demand from potential tenants and MirLand has already received either pre-let agreements or letters of intent for approximately 92% of the lettable area;

·; During the fourth quarter of 2009, the first five houses were sold in Perkhushkovo;

·; The Company is very modestly leveraged at just 31% of its assets excluding shareholders' loans and 38% including shareholders' loans; and

·; As was evident throughout this crisis period, MirLand enjoys significant backing and support from its main shareholders.

 

Financing

Like most other real estate companies, MirLand relies on both short and long term financing sources but, over the last period, the global economic situation dramatically changed companies' abilities to arrange bank debt or raise debt on the public markets or as project financing. Despite recent improvements in the economic environment, the financing markets remain difficult.

 

To date, MirLand's activities have been financed through a combination of equity capital raised during our earlier IPO on AIM, the proceeds of our previous corporate bond issue in Israel, the line of credit backed by our main shareholders, project financing for the Vernissage and Triumph malls, shareholders' loans, and recently, a new corporate loan. Given the current and ongoing difficult credit situation, the Company is taking measures aimed at diversifying these funding sources, including efforts to build strong relationships with national and international banks.

 

As mentioned above, MirLand is managing its development pipeline according to market conditions and the availability of cash resources. Consequently, we have re-phased our residential projects in Moscow and St. Petersburg to increase our flexibility and to match the adjusted market demand. This will enable us to fund construction through a mix of pre-sales, advance payments and internally generated cash. Where we have ongoing commercial projects under construction, the Company's strategy is to enter into pre-lease agreements with high quality tenants to ensure cash flow upon completion, as demonstrated by our successes at the Triumph Mall in Saratov, even during these challenging times.

 

Results 

Total assets as at 31 December 2009 were US$616.1 million as compared to US$529.9 million as of 31 December 2008. Equity as of 31 December 2009 was US$319.2 million compared to US$342.2 million the preceding year. The main reasons for the decrease in 2009 were reductions in income due to the financial crisis and the downward revaluation of our investment properties.

 

Loss after tax in 2009 amounted to US$23.0 million as compared to loss of US$104.8 million in 2008. Again, the main reason for this loss is the decline in the value of the Company's investment properties, as a result of deteriorating market conditions. Most of these losses, however, do not impact the cash flow of the Company.

 

Over the period, rental income and property management fees decreased to US$17.2 million, from US$20.4 million in 2008. This was due to a decrease in rental rates in our yielding MAG and Hydromashservice projects and an increase in vacancies in these assets.

 

MirLand's assets are externally valued semi-annually on 30 June and 31 December. The valuation is conducted by Cushman & Wakefield Stiles & Riabokobylko ("Cushman & Wakefield"). As a result of market stabilization and further investment by the Company during this period, the value of MirLand's portfolio increased by 8.9% to US$687.8 million (Company's share) during the year (31 December 2008: US $631.7 million). Adjusted NAV based on Cushman & Wakefield's valuation is US$472.3 million compared to US$487 million in 31 December 2008.

 

We strongly believe in the quality of the assets in which the Company has invested and that this portfolio will deliver an attractive yield to our investors over the long term as the market begins to recover. 

 

 

Portfolio Development

Due to the deteriorating business environment and the lack of liquidity, MirLand's focus in 2009 was on the ongoing delivery of projects which were already under construction and on the careful management of its yielding assets.

 

During 2009, significant progress was made on the construction of Perkhushkovo Phase 1 and the Triumph Mall in Saratov and construction also continued on the St. Petersburg project's first sub-phase (approximately 510 apartments). Moreover, the facade of the Tamiz office building was completed.

 

By the end of the year, following improved conditions in the Russian economy, activity had slightly increased amongst tenants and buyers. This was evidenced in Perkushkovo, where the first five houses were sold in the final quarter of the year. We also saw some improvement in leasing activity. However, both sale prices and rental rates were below pre-crisis levels.

 

During the year, the acquisitions of the Century buildings and Saratov logistics project which began in 2008 were completed.

 

Furthermore, the Company continues to make progress on the pre-construction elements of its Skyscraper, Techagrocom, Kazan, Penza and Yaroslavl Phase 2 projects, although commencement of construction will inevitably be dependent upon market conditions and the availability of financing. However, we will continue to prepare the sites and position the assets so that when the markets stabilise, value will be added to the land.

 

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.

 

Despite modest improvements in the Russian economy, conditions are likely to remain challenging for real estate investment and development. Moreover, considering the net loss reported by the Company in this period, and as a means to provide the Company with maximum financial flexibility in the year ahead, the Board has determined that it is inappropriate to declare a dividend for the current financial year.

 

Our People

The Board of Directors and Senior Management team consists of dedicated individuals whose expertise has proved invaluable throughout this particularly challenging year. They have recommended and implemented positive and necessary changes to the business plan in light of current economic circumstances and been involved in key decisions throughout. Furthermore, as Chairman, I place considerable emphasis on rigorous Board management and, in addition to formal meetings and I meet and communicate with my colleagues on a regular basis.

 

In 2009, the Board of Directors announced management changes in two key positions.

 

The CFO, Roman Rozental, will replace the current CEO, Moshe Morag, as of 1 January 2011 and, until that time, he will continue to act as the CFO of the Company. In order to ensure that the Company will continue to benefit from Mr. Morag's experience, he will serve as a non-executive director for an additional six months. During this time, we will continue our search to replace the CFO, while also recruit new candidate for the NE.D.

 

Project manager of MirLand's flagship Triumph Park project in Saint Petersburg, Mr. Lev Margolin was appointed at the beginning of 2010 to replace Mr. Yehuda Marom as Chief Engineer. We would like to thank Mr. Marom for his considerable efforts and devotion to leading the developing of our projects during the past three years. I believe that Mr. Margolin's extensive experience, including in development projects in Russia, will allow him to lead the development of our portfolio assets.

 

Once again I would like to pay tribute to my executive colleagues and all our staff on both Board and operating levels. Together they form the backbone of our business and I thank them for their continuing dedication, energy and achievement that will ensure we are well placed to face the challenges of the future.

 

Despite market difficulties, our commitment to sound corporate governance remains firm. As in previous years, fully detailed information regarding our approach to governance issues, our internal controls and key team members will be provided in our Annual Report & Accounts.

 

Outlook

In view of modest improvements in the Russian macroeconomic environment, MirLand will continue to monitor and adjust its business plan to maximize shareholder return in the future.

 

The Board has decided to focus the Company's efforts and resources on completing projects already under construction and commencing those where funding is already in place. In conjunction with this, we continue to intensify our efforts to improve our pre-sale and pre- letting activities. As in the past, we will move forward with the planning and design stages of our strategic projects, whilst nurturing the strong income stream from our investment portfolio.

 

I have previously alluded to signs of modest recovery in the Russian economy and the slight improvement that we have witnessed recently in our current portfolio. Barring any unforeseen market aftershocks and dependent upon market demand and availability of funding, I believe that, as we move forward, MirLand is reasonably well placed to benefit from these improving market conditions.

 

Nigel Wright

Chairman

17 March 2010

 

Chief Executive's statement

 

MirLand was established in December 2006 to focus on value-enhancing acquisition, construction, lease and sale of residential and commercial real estate in Russia. The Company's projects vary in their locations (major and regional cities), sectors (residential, office, retail and logistics), and status of development (from income producing investment properties to those in the pre-planning stage). For most of MirLand's projects, a local management team is put in place which is responsible for the development and/or the ongoing management of the asset.

 

The Market

Russian Economy

 

 

2009 was a difficult year for the Russian economy. In the first half of the year, the main macroeconomic indicators decreased sharply as a result of the world economic crisis, as did the drop in oil prices, which remains the major influencing factor on the Russian economy. GDP showed negative growth for the first time since the crisis in 1998, the level of unemployment rose and industrial output decreased. However, the rate of inflation was lower than in 2008 and the Central Bank cut the refinancing interest rate 10 times during the year. The reserve funds that had been accumulated during the previous years were used to offset the budget deficit and the Government implemented additional measures to support the economy. Consequently, in the second half of the year, signs of recovery appeared and the Russian economy reported two consecutive quarters of positive GDP growth demonstrating that the country has started to emerge from the downturn.

 

The global economic crisis naturally affected Russia's real estate market along with its economy. Across the sector, we faced increasing yields which lead to decreases in our assets' values, increased vacancy rates, coupled with decreasing rental rates, and an overall lack of financial resources. However, at the end of the year, the market started to slowly turn around as a result of the improvement in the macroeconomic situation. 

 

In 2010, Russia's main macroeconomic indicators are expected to continue to improve. GDP is forecast to show modest growth along with a decrease in both unemployment and inflation rates.

 

 

 

 

The Office Sector

The total stock of office space in Moscow reached 10.6 million sqm in 2009, up from 9 million sqm in 2008. This increase in office space is largely attributed to construction that started prior to the crisis.

 

During the first half of the year, demand for office space was very depressed and resulted in a fall in rental rates and a significant increase in vacancy rates. However, in the fourth quarter of 2009, signs of stabilization in rent and vacancy rates began to appear as the macroeconomic environment slowly improved. 

 

It is expected that in 2010 both rental and vacancy rates will remain stable, while the market absorbs an additional 1 million sqm of space that is currently under construction.

 

The Retail Sector

During the crisis, consumers started to reduce their spending and increase their saving, which caused a decline in retailers' turnover and a concurrent decline in demand for quality retail premises. Nevertheless, the prime retail market in Moscow was the least affected by the crisis. In 2009, the total stock of quality retail space reached 3 million sqm, including more than 650,000 sqm of new high quality shopping space.

 

Overall, rental rates decreased by 8% to $2,200 per sqm and vacancy rates increased from 0.5% to 4.5%. Despite the crisis, new international retailers entered the Russian market to take advantage of low rental rates and expand into the region.

 

It is expected that in 2010 another 600,000 sqm will be delivered to Moscow's retail market. With consumer demand and retail turnover likely to improve, rental rates are expected to increase and vacancy rates of prime retail to decrease.

 

The Residential Sector

The market for residential property in Russia was severely affected by the crisis as evidenced by sharp declines during the first half of the year. The number of apartments sold decreased dramatically as did average asking prices. The decrease in sales across Russia was also impacted by a lack of available mortgage financing. However, in the last quarter of 2009, the market started to show signs of increased activity, likely due to increased consumer confidence and reduced interest rates. In St. Petersburg, for example, the volume of deals increased by 35% over the third quarter of 2009 which represents approximately 300,000 sqm of sales.

 

In 2010, activity in the housing market is expected to improve with modest to average price growth and a slight increase in sales expected. As very few new construction products were started during the crisis, Russia's limited housing supply and the low ratio of apartment area per capita, in relation to Europe, will create a demand for existing stock.

 

The Logistics Sector

New construction volume in Moscow totalled 600,000 sqm, down from 620,000 sqm in 2008. Several projects were put on hold and land plots, where construction had not yet started, were put on the market for sale. In the fourth quarter of 2009, the vacancy rate for prime assets stabilized at 13% in Moscow, 30% in Saint Petersburg and over 50% in regions. Rental rates for dry storage also stabilized, whereas rates for cold storage slightly increased.

 

In 2010, it is expected that just 100,000 sqm of warehouses will be delivered to the Moscow region market.

 

Strategy

MirLand's principal activities are focussed on acquisition, development, construction, reconstruction, rental and sale of residential and commercial real estate in Russia. Its particular geographic focus is in Moscow, St. Petersburg and major regional cities with populations over 500,000 people. MirLand invests primarily in projects where it identifies potential for a high return on equity and generation of strong yields and income, stemming from demand for good quality commercial and residential real estate assets that has not otherwise been met.

 

Since the second half of 2008, the business arena in Russia has changed dramatically and the Company has adjusted its operational focus accordingly.

 

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 so that they can generate income immediately upon completion.

 

§ 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 holds both yielding and development properties 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 disposals, 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, bank loans (some of which have been guaranteed by our main shareholders) and bond issuances are used to finance the Company's activities and projects.

 

§ The extension of relationships with local partners, especially in the regions: Having a local partner provides daily surveillance 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 global financial turmoil, which had a significant impact on the Russian real estate market during 2009, has led the Company to adjust its operational focus to be more focused on managing its core activities and available financial resources.

 

This has been achieved through:

·; a focus on the progression of those development projects which have the greatest potential to deliver the best returns despite current market conditions;

·; the further phasing of larger projects;

·; the development of the remaining projects according to changes in the market demand and to the availability of financial sources;

·; a strong emphasis on keeping high occupancy rates in yielding commercial projects;

·; a high prioritization on financing; and

·; a reduction of costs in OPEX, General and Administrative, professional services and "in-house" expenses.

 

MirLand believes that by adjusting its operational focus in the aforementioned ways, it can firmly establish its position as one of the leading international real estate companies in Russia.

 

During 2009, MirLand enjoyed financial support from its key shareholders through loans and guarantees. This crucial ongoing backing, together with the diversification of financial sources, will enable MirLand to continue to develop and maintain its portfolio and help fulfil its mission of creating value for its shareholders.

 

Portfolio

As at 31 December 2009, MirLand had fifteen projects, of which four are yielding assets, four are under construction, and seven projects are at various stages of the planning phase and in the process of gaining permits. During the year, the acquisitions of the Century buildings and Saratov logistics project (which began in 2008) were completed.

 

The Company's portfolio has been valued by Cushman & Wakefield at US$688 million (MirLand's share) as of 31 December 2009, based on the Company's freehold/leasehold rights. This value represents an increase of 8.7% since 30 June 2009 and is due to the advancement in development projects and decrease in yields due to market stabilization. 

 

Yielding Projects:

 

Hydromashservice (Hydro), Moscow - office and retail complex

Class B+ office complex located in the northern part of Moscow's Novoslobodsky business district. The site enjoys good transport links and excellent access.

·; Land area: 1.2 ha

·; Leasable area: 18,200 sqm

·; Completed: Q4 2008

·; Leasehold rights: 100%

 

MAG, Moscow - office and retail complex

A renovated class B+ office complex adjacent to the Hydro project.

·; Land area: 2.3 ha

·; Leasable area: 19,500 sqm

·; Completed: Q4 2007

·; Leasehold rights: 100%

 

Century Building, Moscow - offices

Recently completed class B+ office buildings at the Hydro & MAG site.

·; Leasable area: 24,000 sqm

·; Completed: Q1 2009

·; Leasehold rights: 50%

 

Vernissage Mall, Yaroslavl - shopping centre

A Western standard single floor shopping centre in Yaroslavl, completed in 2007. This project is located at the entrance road to Yaroslavl from Moscow.

·; Land area: 12 ha

·; Leasable area: 33,300 sqm

·; Completed: Q2 2007

·; Freehold rights: 49%

 

 

Projects Under Construction:

 

Triumph Park, St. Petersburg - residential complex and trade centre

Flagship phased development of a residential neighbourhood which, on completion, will comprise approximately 9,000 apartments, commercial and public areas and will provide good access to both St. Petersburg and its airport. The commercial areas will include offices and a commercial centre with underground parking. The public areas will include kindergartens, a school and parks.

·; Land area: 41 ha

·; Saleable area: 630, 900 sqm

·; Leasable area: 96,000 sqm

·; Construction commencement of sub phase 1: Q3 2008

·; Planned completion of total project: Q1 2019

·; Freehold rights: 100%

 

Western Residence Perkhushkovo, Moscow region - residential complex

Development of 163 townhouses and cottages in the prestigious western outskirts of Moscow, implemented in two phases. This project targets the growing segment of successful professionals who are seeking an improved standard of living.

·; Land area: 22.5 ha

·; Saleable area: 65,500 sqm

·; Construction commencement of phase 1: Q3 2007

·; Planned completion: Q3 2013

·; Freehold rights: 100%

·; Sales: first five houses were sold in the last quarter of 2009

 

Triumph Mall, Saratov - shopping centre

Development of 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: 27,400 sqm

·; Construction commencement: Q2 2007

·; Planned completion: Q2 2010

·; Freehold rights : 100%

·; Marketing: 92% is pre-let or with signed letters of intent

·; Financing: US$ 48.5 million financed by the European Bank for Reconstruction and Development (EBRD)

 

 

Tamiz, Moscow - offices

New class B+ office building under construction at the Hydro & MAG site.

·; Leasable area: 12,200 sqm

·; Construction commencement: Q3 2008

·; Planned completion: Q4 2010

·; Leasehold rights: 100%

 

Projects in Planning:

 

Skyscraper, Moscow - offices and retail 

A 47-storey Class A office and retail building with underground parking will be constructed on Dmitrovskoye Shosse, adjacent to Moscow's third ring. This prime location offers excellent accessibility.

·; Land area: 0.9 ha

·; Leasable area: 92,000 sqm

·; Planned construction commencement: Q3 2011

·; Planned completion: Q4 2014

·; Leasehold rights: 100%

 

Techagrocom, Moscow region - Business Park

A three phase development of a business park, which will include Class B+ office buildings and a trade centre. The complex is ideally located near the Leninskiy district near Moscow's fourth ring ("MKAD").

·; Land area: 22 ha

·; Leasable area: 163,400 sqm

·; Planned construction commencement of phase 1: Q3 2011

·; Planned completion of project: Q2 2016

·; Freehold rights: 50%

 

Big Box Complex, Yaroslavl - retail development

Development of a retail park adjacent to the Vernissage mall.

·; Land area: 18 ha

·; Leasable area: 55,200 sqm

·; Planned construction commencement: Q1 2012

·; Planned completion: Q4 2013

·; Freehold rights: 49%

 

 

 

Shopping Centre, Kazan

Development of a three-storey shopping centre in Kazan's city centre aimed at home improvement and design stores.

·; Land area: 2.2 ha

·; Leasable area: 26,300 sqm

·; Sellable area: 5,200 sqm

·; Planned construction commencement: Q1 2011

·; Planned completion: Q1 2013

·; Freehold rights: 100%

 

Penza - shopping centre

Development of a two-storey shopping centre in Penza in close proximity to a growing residential district.

·; Land area: 5.3 ha

·; Leasable area: 17,900 sqm

·; Planned construction commencement: Q2 2012

·; Planned completion: Q4 2013

·; Freehold rights: 100%

 

Saratov - logistics

Phased development of a logistics centre in Saratov, closely located to the federal highways and adjacent to the city ring road.

·; Land area: 26 ha

·; Leasable area: 104,000 sqm

·; Construction commencement: Q4 2011

·; Planned completion: Q3 2014

·; Freehold rights: 100%

 

Outlook

MirLand is adjusting to the new and fast changing environment and, as discussed, has refocused its business plan to enable it to continue to develop its portfolio. These changes include:

·; focusing on gradual and prudent development of key projects according to demand and market conditions;

·; focusing on the maintenance of occupancy and therefore rental rates at its yielding properties;

·; constantly monitoring and analysing the market to resume its pipeline projects. The Company will prioritise the progression of projects according to the availability of financial sources and specific market conditions surrounding each project. 

·; looking for additional diversified sources of financing to fill the gap left by the lack of institutional finance for real estate;

 

I would like to thank our shareholders for their continuous trust in the Company, to MirLand's management team for its dedication, and to 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 vision.

 

We strongly believe in the quality of our portfolio projects and believe that our prudent and selective approach to the management and development of our projects, especially in the challenging business environment in which we operate, together with our committed directors and managers, will lead to an increased value for our shareholders' investments.

 

Moshe Morag

Chief Executive Officer

17 March 2010

FINANCIAL REVIEW

 

Revenues for 2009 were US$17.2 million and the net loss was US$20.4 million. Total assets at December 2009 amounted to US$616.1 million and equity amounted to US$319.2 million. The Company's adjusted net asset value was US$472.3 million. The Company's real estate assets were valued on 31 December 2009 at US$783.7 million (for 100% rights from freehold/leasehold) by an external appraiser, of which MirLand's share is US$687.8 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"), the International Accounting Standards Board ("IASB") and the requirements of the Cyprus Companies Law, Cap 113.

 

Income Statement

The loss for 2009 amounted to US$23.0 million in comparison to the loss of US$104.8 million in 2008.

 

The Company's revenues consist of rental income and fees from managing investment properties. Rental income and fees from investment properties decreased to US$17.2 million from US$20.4 million, which is a decrease of 18%. This decline is attributed to the financial crisis that influenced the real estate sector in Russia causing a decrease in rental rates, discounts granted to tenants and an increase in vacancies. These conditions had particular influence on two of the Company's yielding assets, MAG and Hydromashservice.

 

In accordance with IAS 40, the Company has revalued its investment properties and investment properties under construction for the financial period ending 31 December 2009 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 loss of US$16.5 million was based on the valuations of the Company's investment properties and investment properties under constructions prepared by an independent appraiser, Cushman & Wakefield, in accordance with International Valuation Standards.

 

The cost of maintenance and management of the Company are embodied in property maintenance and management costs, which rose only marginally from US$7.3 million in 2008 to US$7.4 million in 2009.

 

The Company's general and administrative expenses for the period decreased to $16.3 million in comparison to US$22.3 million in 2008, mainly resulting from cost reductions implemented as part of the strategic review of the business plan.

 

Total financing costs for the period decreased to US$5.7 million compared to US$44.7 million in 2008, mainly a result of foreign exchange differences caused by the sharp devaluation of the Rouble in 2008. Due to US$ denominated financing sources of the Russian companies, the devaluation of the Rouble caused significant financing costs during 2008 in contrast to a lower devaluation in the currency in 2009. Financing income from deposits, loan interests and financial assets not at fair value that were recognised through the profit and loss statement amounted to US$8.7 million.

 

Tax expenditure in 2009 amounted to US$5.1 million compared to US$1.0 million in 2008 mainly due to deferred taxes. MirLand is a resident of Cyprus for tax purposes and is subject to a 10% tax rate. MirLand's subsidiaries in Russia are subject to a 20% tax rate (24% in 2008). Additional details are covered in note 19 to the financial statements.

 

The net loss for 2009 was US$23.0 million, in comparison to net loss of US$104.8 million in 2008. This improvement is largely due to the reduction in the negative fair value adjustment of investment properties and the reduction in investment properties under construction which amounted to US$16.5 million for the period compared to US$58.8 million in 2008, the reduction in financing costs as explained above, and the reduction of general and administrative costs.

 

Balance Sheet

Total assets as at 31 December 2009 amounted to US$616.1 million in comparison to US$529.9 million in 2008, an increase of 16%. The main reason for the overall increase was the addition of investment properties, investment properties under construction and inventories of buildings for sale to the portfolio, which were financed through corporate loans, loans from shareholders and new loans for the Triumph Mall in Saratov.

 

Equity and Liabilities

Equity as at 31 December 2009 decreased to US$319.2 million from US$342.2 million in 2008, a decrease of 7%. Equity decreased mainly due to foreign currency translation adjustments and net loss that occurred in 2009. MirLand's equity comprises 52% of its total assets.

 

Financial liabilities as at 31 December 2009 amounted to US$210.8 million (excluding shareholders' loans) compared to $141.9 million for 31 December 2008. The increase is mainly due to a US$15 million corporate loan received from Uniastrum bank and a US$48.5 million loan received from the EBRD to finance the construction of the Triumph Mall in Saratov. Shareholders' loans also increased during 2009 from US$9.0 million to US$45.0 million. These loans were granted to MirLand from its main shareholder, the Fishman Group, in order to finance the current operations and development of the Company's assets. In addition, the short term loans are guaranteed by the Company's main shareholders; therefore, the Company assumes that these loans will revolve if necessary.

 

The Company raised approximately US$63 million by issuing two series of debentures on the Tel Aviv stock exchange in December 2008. The debentures are to be redeemed in six equal, annual payments at the end of each year starting in 2010 up until 2015. For further details please review note 16 of the financial statements.

 

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 2009 at US$783.7 million (for 100% rights from freehold/leasehold), of which MirLand's share is US$687.8 million.

 

Overview of Portfolio Market Values as at 31 December 2009

 

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 2009, the Company's Adjusted NAV decreased to US$472.3 million (31 December 2008: US$487.0 million), a decrease of 3%. As a result, the NAV per share as at 31 December 2009 was reduced to US$4.6 in comparison to US$4.7 as at 31 December 2008.

 

Cash Flow

During 2009, the Company used US$69.7 million for investment in real estate properties in comparison with US$176.0 million in 2008. Cash flow used for operating activities amounted to US$70.3 million. Cash flow provided by financing activities amounted to US$104.8 million.

 

 

 

Financial Strategy

In 2009, MirLand's activities were primarily financed by shareholders' loans, corporate bank loans guaranteed by the Company's main shareholders, a construction loan to the triumph Mall project in Saratov and by revenues. 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. However, the Company anticipates that the debt markets in Russia will continue to be difficult, making project financing and other sources of financing limited.

 

On the other hand, residential projects are principally financed by equity as the financing market for residential projects remains relatively undeveloped in Russia. Accordingly, residential projects are constructed in phases, allowing the use of capital from pre-sales to finance upcoming development phases.

 

Wherever possible, the Company seeks to acquire finance on a non-recourse basis to minimise risk. In 2009, the Company signed one new corporate loan agreement and it is currently negotiating with several banks for financing some of its portfolio projects.

 

Market Risks

MirLand is exposed to market risks from changes in both foreign currency exchange rates and interest rates.

 

Foreign currency risk: The Company's functional currency across its operating subsidiaries is the Rouble, whereas the Company's reporting currency is the USD. The majority of the Company's revenues, costs and capital expenditures are either priced, incurred, payable or measured in USD. Although most transactions are settled in Roubles, the price for real estate property is tightly linked to the USD. 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 risk: 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 risk: 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.

 

Roman Rozental

Chief Financial Officer

17 March 2010

 

 

 

 

 

 

 

 

*) Reclassified.

 

 

 

 

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

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

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

 

 

			Attributable to equity holders of the Parent
							Capital reserve for		Retained				Capital reserve for transactions
							share-based		earnings		Currency		with				Non-controlling
			Share		Share		payment		(accumulated		Translation		controlling						Total
		Note	capital		premium		transactions		deficit)		reserve		shareholders		Total		interests		equity
			U.S. dollars in thousands
At 31 December 2006			1,000		329,028		2,348		31,749		2,402		-		366,527		25		366,552
Income for the year			-		-		-		64,880		-		-		64,880		-		64,880
Other comprehensive income			-		-		-		-		6,749				6,749		-		6,749
Total comprehensive income			-		-		-		64,880		6,749		-		71,629		-		71,629
Issue of share capital (net of issue expenses)			36		30,775		-		-		-		-		30,811		-		30,811
Share-based payment transactions			-		-		3,851		-		-		-		3,851				3,581
At 31 December 2007			1,036		359,803		6,199		96,629		9,151		-		472,818		25		472,843
Loss for the year			-		-		-		(104,831)		-		-		(104,831)		-		(104,831)
Other comprehensive loss											(28,236)				(28,236)		-		(28,236)
Total comprehensive loss			-		-		-		(104,831)		(28,236)		-		(133,067)		-		(133,067)
Share-based payment transactions		22	-		-		1,881		-		-		-		1,881		-		1,881
Shareholders' contribution (see Note 15)			-		-		-		-		-		579		579		-		579
At 31 December 2008			1,036		359,803		8,080		(8,202)		(19,085)		579		342,211		25		342,236
Loss for the year			-		-		-		(22,984)		-		-		(22,984)		-		(22,984)
Other comprehensive loss			-		-		-		-		(4,068)		-		(4,068)		-		(4,068)
Total comprehensive loss			-		-		-		(22,984)		(4,068)		-		(27,052)		-		(27,052)
Share-based payment transactions		22	-		-		1,894		-		-		-		1,894		-		1,894
Shareholders' contribution (see Note 15)			-		-		-		-		-		2,123		2,123		-		2,123
At 31 December 2009			1,036		359,803		9,974		(31,186)		(23,153)		2,702		319,176		25		319,201

 

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

 

 

 

 

*) Reclassified.

 

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

 

 

 

 

 

*) Reclassified.

 

 

 

 

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