Final Results

22nd Jun 2009 07:00

Metro Baltic Horizons plc (MET.L)

Results for the year ended 31 December 2008

Metro Baltic Horizons plc ("MBH" or the "Company"), the property investment company focused on prime office, retail and residential development opportunities in St Petersburg, Russia and the cities of Riga, Latvia and Tallinn, Estonia announces its results for the period ended 31 December 2008.

Highlights:

Net asset value per share (NAV) after deferred tax liabilities declined by 60% to €0.69 (31 December 2007:€1.72)

Loss after tax of €24.6m (2007: profit €6.5million)

Total gross property portfolio now valued at €42.5 million (31 December 2007: €63.8 million)

At year end, the Group held a total of €17.7 million of asset-level bank debt, of which €11.3 million related to the recently completed Metro Plaza development in Tallinn 

Development at Metro Plaza completed on schedule in January 2009 and currently 70% of the available space has been let with an additional 15% under negotiation 

Dramatic downturn in property, financial and economic environments in each of the Group's target markets, although operational progress made

Significant challenges face the Group, particularly while credit and investment markets in the region remain closed. Working capital pressures, economic weakness and the lack of liquidity in the property markets of the region generally, may require the Group to consider all available strategic and financing alternatives

Robin James, Chairman of MBH, commented:

"The Company has made operational progress over the past year but the collapse of the property market, deteriorating economic conditions and the continued lack of credit in the markets in which we operate, makes the outlook for the Company very challenging and prospects uncertain. The Board, together with the Investment Manager, have worked hard to preserve shareholder value and to refocus the Company's business and investment strategy to reflect the very difficult environment which we now face. Although property values have continued to fall in 2009, we remain cautiously optimistic that we can restore some element of shareholder value in 2010 and beyond when markets eventually move into recovery"

For further information, please contact:

Metro Group James Kenny [email protected] Mart Habakuk [email protected]
Fairfax IS (Nominated Adviser and Broker) James King/Andrew Cox Tel: +44 (0) 20 7598 4078

Notes to Editors 

Metro Baltic Horizons (ticker code: MET.L) is a property investment company targeting development opportunities in the cities of St Petersburg, Russia and Riga and Tallinn, the capitals of Latvia and Estonia respectively.

The Company's Investment Manager is a member of the Metro Capital Management Group, an experienced property asset manager and developer with offices in Riga, Tallinn and St Petersburg. It has a team of 18 experienced professionals managing a portfolio of 21 projects across the region where it has been active since 2001. 

Chairman's Statement

Introduction

There follows the Group's results for the year ended 31 December 2008. It has clearly been an extremely challenging year for the Group and although we have made operational progress with our portfolio, the dramatic and continued deterioration both in the regional and global property markets and the economic and financing environments in which we operate, have fundamentally changed the outlook and prospects for the Group.

Financial Performance

The Group's audited net asset value after deferred tax liabilities at 31 December 2008 was €0.69 (£0.67) and before deferred tax liabilities was €0.84 (£0.83). This represents a decrease in net asset value since 31 December 2007 of 60% and 59% in Euro terms, after and before deferred tax liabilities, respectively. 

At 31 December 2008, the gross value of the Group's property portfolio was €42.5 million. It is noted that the valuation partly utilises discounted cash flow based calculations which do not necessarily reflect the lack of credit or buyers of such assets in the current market environment.

During the year, the Group recorded a loss after tax of €24.6 million. 

At the year end the Group overall remained moderately geared, with a total of €17.8 million in bank debt, all of which was held at asset level and of which, €11.3 million related to the Group's now completed Metro Plaza development in Tallinn. Further details on the Group's financing activities are contained below and in the Investment Manager's report. 

Investment Overview

During the year, the Group was focused on advancing the development of its property portfolio although the most significant progress was in Tallinn, at the Group's Metro Plaza development, which has been successfully completed and launched. A fuller description of the Metro Plaza development can be found on the property's website (www.metroplaza.eu) and in the Investment Manager's report, which also details each of the Group's four development assets. 

Investment strategy

At the time of the Group's flotation, it had been anticipated that the Group would seek to build a portfolio of prime assets spread by location, use and stage of development. This strategy was designed to both achieve risk diversification and also to facilitate the effective 'recycling' of shareholders' equity to generate superior equity returns. As previously reported, the Group has successfully assembled a balanced and attractive initial portfolio of assets ranging from advanced development (Metro Plaza,Viru Square 2), redevelopment (Bolshaya Pushkarskaya 10) and prime sites in earlier stages of planning (Pirita tee 26 and Krasta 99a). The development of Metro Plaza, the Group's most advanced asset, at Viru Square in Tallinn, was completed on schedule and budget in January 2009 and good progress is being made to lease out the development against a very difficult economic backdrop. It had been intended that once fully leased out, the Metro Plaza building would be offered for sale as an attractive, prime cash flow yielding asset and when sold, would release equity to finance, in part, the development of the Group's other assets and also provide working capital for the Group. The severe economic and property market contraction in the region has not only significantly reduced the saleability and the open market value of Metro Plaza, but also has lengthened the likely timeline for its possible sale. The immediate implication of this delay is that working capital in the Group is now very limited and the financing flexibility that had been anticipated by the Manager for the development of the Group's assets, following the sale of Metro Plaza, has been negatively impacted and even further exacerbated by the lack of availability of construction finance in each of our target markets.

Irrespective of the timing of the eventual disposal of Metro Plaza, the Group believes that due to market conditions, it is appropriate to now tailor the speed, scale and phasing of any future developments to reflect both the Group's financing capability and the prevailing property markets and economic conditions. It is therefore intended that projects will be advanced at a deliberate pace to facilitate the maintenance of sufficient working capital within the Group and also to complete such work as would allow the possible start of construction, subject to finance and appropriate levels of pre-lease agreements being in place, as soon as property markets recover. Although this is a comparatively less dynamic approach than the investment strategy pursued since the Group's listing in 2006, it is deemed wholly appropriate given the new economic reality within which we now operate. The implication for growth in shareholder value in the short to medium term is, by consequence, relatively negative, and as such the Board may seek to explore other strategic alternatives, including a possible return of capital to shareholders in some form. If a return of capital is pursued, shareholder approval will be sought at the appropriate time.

Financing Strategy

As stated above, it had been expected that the Group could achieve a successful sale of Metro Plaza in early 2009 to release both equity and the anticipated development profit, to augment the Group's working capital position and the development of other assets in the Group's portfolio. In current market conditions, this is no longer realistic other than at levels which would most probably not generate any return to shareholders. As such, it is anticipated that the Investment Manager will continue to fully lease out the development while pursuing a passive sale strategy. Once markets recover and normalised rental levels are being achieved, the Group will pursue a more pro-active sale strategy for the property. In the interim, the Group will seek to raise funds to cover both its working capital needs and pre-development expenses for its other development assets. A number of financing alternatives may be explored including the sale of a minority interest in one or more of the Group's assets, the issue of a bond or mezzanine loan note secured on certain of the Group's assets and/or the issue of new ordinary shares in the Group. At present, the Company's articles of association do not allow the issue of new ordinary shares in the Group below net asset value per share, other than by way of a rights issue or if subject to shareholder approval in general meeting. The Board believes that in current market conditions, it is appropriate that the Group has maximum flexibility to consider all potential financing alternatives and therefore proposes to seek shareholder consent for the issue of new ordinary shares at a price which may be below the prevailing net asset value per share. 

The Group remains moderately leveraged given the scale of its portfolio and at year end had a total of €17.8 million of debt on its balance sheet representing approximately 39.7% of the Group's gross assets. All borrowings are held at asset level and based on single security. The majority of borrowings relate to the Group's Metro Plaza development in Tallinn where the Group had a total drawn facility of €11.3 million.  Significant efforts were made during the year to reduce the cost base of the Group with reductions in fees and expenses agreed with both the Directors and certain of the Group's key advisers and service providers. The Group, as advised by the Investment Manager, is confident that based on reasonable expectations, it will have the necessary finance available to it to fund its current working capital requirements and allow it to continue the development of its projects as now envisaged. However, the Group's key relationship banks remain extremely cautious in regard to further loan finance and expectations are that there will continue to be very limited credit available in each of the Group's target markets at least until economic recovery is assured. In this regard, consideration will be given as to how the Group manages those loan facilities, where and if in the foreseeable future, there is little expectation of the relevant projects being refinanced, developed or sold. The Group, through the Investment Manager is in discussions with its bankers about the restructuring of several of the loans currently held by it in order to preserve financing flexibility and more closely match the Group's financial resources with its financial commitments. Further details on the Group's financial position are contained in the Investment Manager's report. 

Investment Management Agreement

As stated, the working capital position of the Group remains tight and very significant efforts have been made by the Group and the Manager over recent months to reduce all costs and expenses. As an externally managed vehicle, a significant component of the Group's operating expenses is the annual management fee due to the Manager. However, based on the gross assets of the Group as at 31 December 2008, the management fee payable to the Manager in 2009 is expected to be reduced by more than 30% compared to 2008 and this represents a significant saving for the Group and its shareholders. Furthermore, following discussions with the Board, the Manager has agreed in principle to accrue up to 100% of its annual management fee depending on the working capital sufficiency of the Group. In return for such accrual, which will be at the sole discretion of the Board, any fees so accrued will be subject to a 12% per annum interest until paid and may be paid to the Manager, at the Manager's option, in cash or shares in the Company, and if paid in shares, will be issued at the historic 30 day average closing price for the shares prior to the end of the quarter to which such accrual relates subject to any shareholder approvals which may be necessary. These concessions are of significant financial benefit to the Group at this time and represent a major concession and vote of confidence by the Manager in the Group.

The Board has also determined that the performance fee arrangement of the Investment Management Agreement is no longer appropriate in the current economic climate, in so far that it does not provide any meaningful incentive to the Manager and as there is, and deemed likely to remain, a significant disparity between the market capitalisation of the Group, the net asset value of the Group's assets and the net realisable value of such assets on the open market. At present the performance fee is calculated on the basis of a payout to the Manager of 25% of the excess growth in net asset value per share above 12% per annum. In the coming months the Board, in consultation with the Company's Nominated Adviser, intends to consider alternative incentive arrangements for the Manager, which may include the rebasing of the hurdle rate and/or the annual performance criteria. The objective of this exercise will be to both incentivise the Manager and closely align the Manager's and shareholders' commercial interests. 

Board

I am grateful for the contribution and efforts of my fellow Board members over the past year and in particular, I would like to record my thanks to Gunnar Okk who has informed the Board of his intention to step down as a Director of the Group on 30 June 2009. Gunnar has played a valuable role in the formation and development of the Group, but due to his work with Nordic Investment Bank he has indicated that he will be unable to continue with his present role due to an impending conflict of business interests with the Group. While we will miss his sound advice and counsel, we wish him well for the future. The Group will pursue the appointment of a replacement non-executive Director to the Board in the coming months. 

 Outlook

We are living in difficult times and while the outlook for the Group is considerably less positive than last year we remain focused on maximising the value of the Group's portfolio for the benefit of shareholders. 

Robin James

Chairman

19 June 2009

  

Investment Manager's Report

Introduction

Metro Capital Management AS and Metro Frontier Limited (together 'Metro Group') act as Investment Adviser and Investment Manager respectively to the Group. Metro Group is an experienced property asset manager and developer with 18 professionals operating out of offices in St Petersburg, Tallinn and Riga. Metro Group have been involved in property development and asset management in the region since 2001 and manages a portfolio of 21 projects for some 200 institutional and private investors.

Since the Group's listing, we have implemented the Group's stated investment strategy and assembled a portfolio of greenfield and brownfield development sites balanced by geography, sector and stage of development. We have also made considerable progress in rezoning, planning and developing the Group's property portfolio.  

Economic Environment

The speed and scale of change in the global economic environment over the past 12 months has been both staggering and without precedent. In 2008, real GDP in Europe, the US and the UK contracted at rates in excess of 6% and in Japan by some 12%. The speed of contraction in Q1 2009 was similar to the final quarter of 2008 and with no obvious improvement in Q2 2009, makes this the most significant correction in global economic activity since World War II. Industrial output, trade flows and capacity utilisation rates have fallen sharply fuelled by the collapse in global credit and property booms. The fact that this is a global, systemic problem is reflected in scale and coordinated nature of the response of policymakers. Interest rates have been lowered to record low levels, liquidity has been put into money markets and banks have either been allowed to fail and/or have been recapitalised. Analysts now differ, but no meaningful global recovery is forecast to be evident until end 2010. Eastern Europe generally has been amongst the hardest hit regions globally and there is a general expectation that the recession will still deepen further before the outlook improves. Clearly 2009 will be the deepest recession in Eastern Europe since the early years of transition from communism to market economy over two decades ago. The global contraction in credit has had a massive impact in the region which over the past number of years has enjoyed a credit-fuelled consumption and property boom. These dramatic changes make the achievement of the many of the Group's original targets unrealistic and a new strategy based on the new market reality with a view to an earlier capital return to investors may be considered.

Baltic States

The Baltic economies were already moving towards recession before the marked deterioration in financial markets in September 2008 triggered by collapse of Lehman Brothers, and as such the effects of the deep global recession now makes the outlook for the Baltic States considerably worse. Once the fastest growing economies in Europe, the Baltic States are now the opposite, with the creditworthiness of the region heavily under question and a very deep recession is forecast. Latvia, which in December received a €7.5billion bail-out led by the International Monetary Fund, faces the most challenges of the three Baltic States and is now basing its budget on an 18% decline in GDP in 2009. Estonia expects a decline of 13%. The Baltic economies are being heavily impacted by a decline in both external and domestic demand, low consumer confidence, rapidly growing unemployment, wage cuts and restricted credit. A conventional monetary policy response could involve a devaluation to restore competitiveness and add some fiscal stimulus, but the abandonment of the currency pegs to the Euro seems, at this point, to be quite unlikely and in fact if pursued could create other, more serious problems for the region.

As small, open economies, the Baltics are heavily exposed to global economic conditions and so weak demand in key export markets i.e. UK, Germany, Finland and Sweden remains a critical impediment to recovery. On the mildly positive side, inflation and current-account deficits are falling, albeit slowly, and progress is being seen in fiscal, government and policy reform. Formal euro entry also seems more realistic within the next few years. Although forecasting remains very difficult, if a global recovery is evident by end 2010 and the Baltics can continue on their course, it is possible that a return to growth sometime in 2011, albeit at modest levels, may be possible. However, it appears that due to structural factors, Estonia will recover ahead of Latvia which, more realistically, may not see any meaningful recovery much before 2012.

Russia

Although less integrated in the global economy, Russia has seen a rapid and severe decline in economic output since September 2008.On course for 8% GDP growth, Russia ended 2008 with 5.6% growth and it is now forecast that Russia will experience a 3% decline in GDP in 2009, so ending 10 years of growth. Unlike the US or the UK, the tipping point for Russia was not direct exposure to the sub-prime market or high profile failures in a very integrated financial and banking system, but rather their knock-on effects coupled with the steep decline in oil, gas and commodity prices. Russia's oil dependency and vulnerability cannot be overstated and in 2008, over 40% of the Russian Federal Budget and two-thirds of export earnings came from oil & gas. The Rouble was evidently seen as a 'petro-currency' and as global economic conditions worsened, the Rouble became clearly overvalued. In contrast to many of the larger economies of the world, the Russian Government has had both the means and will to take action including the gradual devaluation of the Rouble and the pledge of some $280bln to support financial markets/banks.

Although there remain specific challenges relating to reform in Russia and the country has a long history of investor suspicion, Russia is well placed to emerge from the global economic recession faster than many major economies. Russia still has the world's third largest financial reserves, is the world's largest energy producer and the world's most important metals producer. Geographically well positioned and with Europe's largest population, there appears to be a strong political commitment to move forward with economic and legislative reform both at federal and regional levels and a return to modest growth in 2010 and fuller recovery in 2011 is expected.

St Petersburg remains amongst the most attractive investment locations in Russia. In recent years St Petersburg's Gross Regional product surpassed Russian GDP growth and the City enjoyed higher average wages and unemployment than the Russian average. It has been and remains one of the most favoured locations for foreign direct investment and is positioned to emerge from the recession ahead of a broader Russian economic recovery.

Property Market Review

Tallinn, Estonia

The office market in Tallinn was flooded in 2008 with more than 100,000 sqm of new office space coming onto the market bringing total Class A & B space in the City up to 500,000 sqm. An additional 30,000 sqm is expected to be completed and released in 2009.Total take up over the year was only 42,000 sqm increasing vacancy rate from 1% in early 2008 to 22% in Q1 2009 and this is forecast to increase up to 30% by year end. Consequently, rental levels were dramatically lower and on average fell by 18% for Class A offices to a market average citywide of circa €12.70 per sqm and Class B fell by up to 30%.

No additional retail space came to the market in 2008 although some 85,000 sqm is expected in 2009. At present a number of other major new retail developments have either been frozen or cancelled. This is due obviously to the worsening economic conditions which are evidenced by an 8% decline in retail sales in 2008 and a much steeper decline expected in 2009. Vacancy rates in shopping centres have increased from close to 0% at end 2007 to 5% at the start of 2009. Rental levels remained flat with indexed rental growth largely being waived by landlords.

In the residential sector there has also been a major market correction with average prices having peaked at €1614 per sqm in April 2007 and falling by some 39% to an average of €984 per sqm by January 2009. The recessionary environment has facilitated a destocking process which may take some time to clear the estimated 1800 apartments available in the market given that just over 600 apartments were sold in 2008. No meaningful new supply is expected in 2009 also due to the virtual disappearance of foreign buyers, construction and domestic mortgage finance.

Land prices suffered the most dramatic reversal, with sites without planning falling in value by up to 80%. Even at these heavily discounted levels, the market remains somewhat artificial, due to the absence of both buyers and sellers. It is expected that there will be a more selective recovery in land prices when markets turn with a greater premium differential for prime sites with planning for efficient development in market segments with relative depth of market demand.

Riga, Latvia

After five years of GDP growth averaging 9.7%, the economy of Latvia crashed dramatically in 2008 and the country fell into what is expected to be a deep and long recession. Official statistics confirm that GDP fell 4% in 2008 and is forecast a further 16% in 2009, amongst the most extreme of any developed economy globally. The impact on the property market was both immediate and severe, particularly in the office sector which witnessed a massive increase of 109,000 sqm or 20% of total office stock in 2008. No new projects are scheduled for 2009 but completion of current construction projects will see another 100,000 sqm of new space added and vacancy rates increasing from the current level of 20% to 25%. These conditions have also had a dramatic impact on rent levels which for Class A offices fell from €16-€21 per sqm by circa 22% to €14-€19 per sqm. Anecdotal evidence indicates that the surplus of particularly new office space in Riga has meant that certain developers are seeking rents nearer €10 per sqm or lower in order to attract tenants.

In the retail sector only 9,000 sqm of new space was added which is modest compared to the nearly 270,000 sqm of new space scheduled to come to the market over the next three years. Although vacancy rates in shopping centres have held up reasonably and is approximately 3%, it is forecast to rise to 5% by year end with high street vacancy rates nearer to 20%. The catastrophic fall off in consumer spending in Riga coupled with the rising vacancy rates, has seen a considerable weakening in tenant demand and rents consequently have fallen by some 25% from 2008 levels and further falls up to 40% are expected in 2009.

Prices in the residential sector have also been greatly impacted by a combination of the Latvian economic implosion and the virtual disappearance of the domestic mortgage finance. Prices have fallen in 2008 by up to 60% in certain locations and averaged a decrease of some 36% across the City. Supply has also greatly reduced and compared with the 6780 new units completed in 2007, only 2200 new units are forecast in 2009, the very large majority, if not all, of which developments, were initiated and financed prior to the market crash. With the market only absorbing 1500 units in 2008, there will clearly be an overhang in the residential apartment market for some years to come. The market for land, with and without planning, has also been decimated and values in Riga dropped by up to 70% in 2008. Furthermore, the unavailability of construction finance other than for certain 'equity rich' developers, generating a commercial return commensurate with the risk, makes practically all new projects uneconomic in the present climate and unlikely to proceed for some time, if at all. Prices quoted for commercial land in the city centre varies widely from €400 up to €3500 sqm of land although there is no evidence of any market activity and the only potential buyers are local end-users.

The investment market remains moribund and yields for prime commercial property have moved out rapidly from circa 6% in 2007 to at least 9-10% currently, although even at such levels, transaction activity is non-existent.

St Petersburg, Russia In 2008 some 325,000 sqm of class A&B office space came into operation representing a 61% increase, the highest rate ever recorded in St Petersburg. This still represents a relatively low level of space per capita compared to most major European cities. In 2009 some 675,000 sqm of new and redeveloped class A&B space was originally forecast but this estimate has been revised significantly down to 190,000 sqm as a result of the economic conditions. Asking rental rates for Class A offices increased by 12% in Q1 2008 but decreased by 15-20% in dollar terms in Q4 2008 and are now back at close to 2006 levels. With the wide disparity in classification standards of developments, rental rates for Class A offices vary significantly and now range from $560 to $1005 per sqm per year (including operating costs, net of VAT). Vacancy rates also vary with occupancy for offices/business centres in prime downtown areas being close to 100% and city wide averaging nearer 76%.

In the retail sector, a total area of 445,000 sqm was put into operation bringing total area in the city to 3.7m sqm. With a further 170,000 sqm planned for 2009 would equate to a circa 868 sqm/thousand people which is high compared to western European levels. Vacancy rates in shopping centres which had been close to 0% over the past five years increased to 6% at end 2008 and are forecast to double to 10-12% in 2009. Consequently rental levels are expected to decline in 2009 particularly for 'inefficient' centres and locations with low footfall and consumer traffic.

The investment market in St Petersburg has been decimated since the economic crisis accelerated in Q3 2008. However, capitalisation rates had already started to decline in Q1 2008 and by mid-year there were several benchmark transactions at 9.5-11% yields. Activity had been high particularly from German, UK and Scandinavian investors and it is estimated that at beginning of Q3 2008, more than $2billion was invested in the commercial real estate market of St Petersburg. Since then the market has been effectively frozen with investment activity other than a small number of distressed sales between private buyers and sellers. As such, it is very difficult to estimate current capitalisation rates other than to report anecdotal evidence of 13-16% yields for prime office and retail assets.

Current Investment Portfolio

The Group's Investment Portfolio comprises four assets in St Petersburg, Riga and Tallinn.

A detailed description of the Group's four schemes is provided below:

Bolshaya Pushkarskaya 10, St Petersburg, Russia

The first investment by the Group is located on Bolshaya Pushkarskaya, a prominent street in the centre of St Petersburg in the Petrogradski district. The investment involved the acquisition of a 100% interest in an office complex on a privatised, freehold site of 0.72 hectares. The site runs parallel to Bolshoi Prospekt, one of St Petersburg's main shopping and business streets, and is about 3 kms from the Winter Palace. Currently, there are six existing buildings on the site which has approximately 150 metres of direct street frontage which facilitates the development of a mixed office and 'own door' retail scheme. A major obstacle in advancing planning for the site has been the status of the buildings on the site as protected structures and as such, extensive consultation, discussion and negotiation with St Petersburg's Historic Monuments Protection Agency has been required to secure approval for the development scheme. After lengthy delays the proposed development scheme has now been accepted by the local City authorities and we are proceeding to finalise all project documentation for the site. 

Due to the deteriorating demand for both office and retail space in the City, the economic outlook and the restricted availability of construction finance, it is now deemed prudent to take a phased development approach to the site. The first phase will involve the redevelopment of a corner site on the property with a gross area of circa 8,500 sqm of principally offices. As the site acquisition was financed on a full equity basis, the Manager believes that 100% construction finance could be secured to finance this first phase of redevelopment. This first phase would involve a construction period of circa 18 months and after which, the redeveloped area could be let and refinanced as a cash flow yielding asset to allow the commencement of phase two. This second phase would comprise the development of circa 18,000 sqm of mixed office and retail space. It is expected that all project documentation for the first construction phase will be completed in 2009 and subject to some stabilisation in market conditions, construction could start in early 2010.

At 31 December 2008, Bolshaya Pushkarskaya 10 was valued by Colliers at €16.8 million on an open market basis. 

Krasta 99, Riga, Latvia

This asset is a prominently located land plot of 1.7 hectares situated approximately 5 kms from Riga Old Town at the intersection of a major inner city highway (Krasta Street) and the new Riga South Bridge which opened in 2009. The site is very well suited for a modern office development, with high visibility, extensive onsite parking and easy access to the City. Planning permission has been granted for the construction of approximately 50,000 sqm of gross office space in three towers together with approximately 1000 on-site and underground parking spaces. However, the dramatic collapse in the Riga property market and the Latvian economy as a whole has meant that the development of Krasta 99 is under review. Substantially all of the planning and project documentation has effectively been completed. Limited activity is planned for the Krasta 99 site in 2009 although it is proposed to divide the site into three separate cadastral units to enhance the saleability of the project.

The project currently has no cash flow and short-term bank loans outstanding of €2.6 million (at Euribor plus 4.5% with a 15 year amortization schedule).The Group's Latvian subsidiary which was established to hold the Krasta 99 asset is in breach of certain loan covenants contained in the non-recourse loan provided by SEB/Danske Bank. No default notice has been issued and negotiations are ongoing with the bank to restructure the loan and in particular the interest service provisions. Although lending banks continue to be supportive and we are hopeful about reaching agreement on restructuring the loan, with the very significant fall property values in Riga over the past 18 months, the project is now regarded as over-leveraged. The loan is secured solely on the Krasta 99 asset and will have no impact on the other assets or borrowings of the Group. Efforts are being made to sell all or part of the project to a strategic or financial investor(s), however, the prospects for success are deemed remote at this time. In addition, consideration is being given to possibly utilising certain legal protection provisions available under Latvian law which provide scope for companies to address short term liquidity and creditor issues through a court approved process.

The Group owns an 80% interest in Krasta 99 with the balance held on a fully contributing basis, by local financial investors. At December 31 2008, Krasta 99 was valued by Colliers at €4.97 million (100%) on an open market basis which represents a fall in value of nearly 70% over the course of 2008. It is noted that the secondary market in Riga for projects such as Krasta 99a is closed at present and that there remains downward pressure on asset values despite further falls since year end.

Metro Plaza, Viru Square, Tallinn, Estonia

The property is the Group's most advanced asset, which on acquisition comprised a run-down historic building on a 2,200 sqm land plot located on a high profile square in the centre of Tallinn on the very edge of Tallinn Old Town, an area that historically commanded some of the highest rents in the city. Construction commenced on site in October 2007 and was completed on schedule and on budget in January 2009.The building now comprises 8,900 sq m of gross retail and office floor space (7,300 sqm net area), as well as underground parking for 78 cars. The estimated total gross development cost (acquisition, construction and finance) for Metro Plaza is approximately €25 million.

Unfortunately the collapse in demand for prime office space in Tallinn property market has significantly hampered the Manager's efforts to fully let the building by the time of the building's completion. Currently, approximately 70% of the space is under lease and another 15% is under negotiation. It is encouraging that Metro Plaza has, despite the difficult market, managed to achieve the very highest rents for any commercial building in Tallinn, which positively reflects the quality of its location, specification and finish. It is expected that 95% occupancy will be reached by end 2009 and that the project will turn cash flow positive in Q1 2010. After the usual rent holidays and other lease incentives expire, net operating income for Metro Plaza is currently estimated will stabilise at circa €1.65 million per annum.

The project is principally financed by equity and a €14.3 million 10 year non-recourse loan facility of which €11.3 million was drawn at year end. The loan amortizes over 20 years and is based on an interest charge of Euribor plus 1% (currently 2.66%). The Manager intends to fully let out the building and to then actively pursue a disposal of the property on the basis of its normalised cash flow realistically in 18-24 months. At December 31 2008, Metro Plaza was valued at €16.1 million on an open market basis. Asset values have weakened since year end.

Pirita Road, Tallinn, Estonia

The Group holds an 80% interest in a 1.3 hectare prime development site on the Pirita Road in Tallinn. The site is uniquely situated approximately 1 km from the President's residence, overlooking the Bay of Tallinn, 3kms from the city centre in one of the Tallinn's premier residential locations. The Pirita site is in an area zoned for residential development. It is proposed to sub-divide the site and reconfigure the building plans to accommodate a high end 9,000 sqm prime residential apartment development and a separate development comprising a circa 3,000 sqm boutique/spa hotel in a currently protected building on the site. An architectural tender was conducted during the year and a design chosen for the site.

Due to the weak property, economic and financing environment, the process of seeking sketch approval and the attendant project documentation for the proposed site is advancing at a deliberate slower pace. This strategy serves to conserve working capital and facilitate the commencement of construction by the time markets are expected to have stabilised sufficiently to warrant development. At present, this is expected to be in 18-24 months. The project currently has a €3.8 million interest-only loan (Euribor plus 1.5%) secured on the site and maturing in November 2009. Discussions are underway with the lender to restructure the loan maturity. Consideration is also being given to introducing an equity partner into the project.

As at 31 December 2008, the Pirita site was valued by Colliers at €4.6 million on an open market basis. 

Valuation

A valuation of all of the Group's property assets held as at 31 December 2008 was undertaken to determine their fair market value and, in turn, the net asset value (NAV) of the Group. The valuation was undertaken by Colliers International through their offices in St Petersburg, Tallinn and Riga. Colliers International is one of the leading real estate consultants with a network of 256 offices worldwide. The valuation was carried out in accordance with relevant international standards. The Group's policy is to independently revalue its assets twice per year, on 30 June and 31 December. The Group's property portfolio was valued at €42.5 million at 31 December 2008, and taking into account the circa €10.0 million spent in Metro Plaza during the year, represents a decline of approximately 47% over the previous 12 months. Since year end, although property market activity has been limited, it is clear that asset values have continued to decline and peak to trough valuation declines in certain sectors in the region of up to 80% are estimated.

Metro Group

19 June 2009

  Directors' Report

The Directors present their report and audited financial statements for the year ended 31 December 2008.

Principal activities

The principal activity of the Group is investing in and developing land and buildings in the Baltic States and in the St. Petersburg area of Russia.

Business Review

A review of the business during the year is contained in the Chairman's Statement.

Results for the period

Loss for the year ended 31 December 2008 was €25m (Profit for the period ended 31 December 2007 €6m). The results for the year are set out in the consolidated income statement on page 21.

Dividend

The Directors have not declared any dividends in the year ended 31 December 2008.

Directors

The Directors who served during the year were Gunnar Okk, Kristel Meos and Robin James (Chairman).

Directors interests

None of the Directors had a beneficial interest in the shares of the company. The company has not awarded any options or warrants to any of the Directors.

Secretaries

The secretary who served during the year was Philip Scales.

The board and subcommittees

The board considers all directors including the chairman to be independent. All the Directors are non-executive. The company has an audit committee consisting of all the board members. 

Directors' Responsibility Statement

The Directors are responsible for preparing this report and the financial statements in accordance with applicable Isle of Man law and those International Financial Reporting Standards adopted by the European Union.

The Directors are required to prepare financial statements for each financial period which present fairly the financial position of the Group and Company and the financial performance and cash flows of the Group for that period. In preparing those financial statements the directors are required to:

Select suitable accounting policies and then apply them consistently;

Make judgements and estimates that are reasonable and prudent;

State whether all applicable accounting standards have been followed; and

Prepare the financial statements on the going concern basis unless it is inappropriate to assume that the Group will continue in business.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and of the Group and enable them to ensure that the financial statements comply with the Companies Acts 1931 to 2004.They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

By Order of the Board

P Scales

Secretary

19 June 2009

  Independent Auditors' Report

Independent Auditors' Report to the members of Metro Baltic Horizons plc

We have audited the consolidated financial statements for the year ended 31 December 2008 which comprise the consolidated income statement, consolidated and company statement of changes in equity, consolidated and company balance sheet, consolidated and company cash flow statement and the related notes 1 to 24. These financial statements have been prepared on the basis of the accounting policies set out therein.

This report is made solely to the company's members, as a body pursuant to Section 15 of the Companies Act 1982. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body for our audit work, for this report or for the opinions we have formed.

Respective responsibilities of directors and auditors

As described in the Directors' Responsibility Statement, the company's Directors are responsible for the preparation of the financial statements in accordance with applicable Isle of Man law and appropriate accounting standards.

Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing.

We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Acts 1931 to 2004. We also report if, in our opinion, the group has not kept proper accounting records, if we have not received all the information and explanations we require for our audit or if information specified by law regarding Directors' remuneration and transactions with the Group are not disclosed.

We read other information contained in the Financial Statements and consider whether it is consistent with the audited financial statements. This other information comprises only the Directors' Report, Chairman's Statement and Investment Manager's Review. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

Basis of audit opinion

We conducted our audit in accordance with International Standards on Auditing issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group's circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

Opinion

In our opinion the financial statements give a true and fair view, in accordance with International Financial Reporting Standards adopted by the European Union, of the state of affairs of the Group and the Company as at 31 December 2008 and of the loss of the group for the year then ended and have been properly prepared in accordance with the Companies Acts 1931 to 2004.

Ernst & Young LLC Chartered Accountants

Isle of Man

19 June 2009

 

 

	Note	31 December 2008   €'000	31 December 2007  €'000
Rental income		790	280
Rental and related expenses		(685)	(292)
		_______	_______
Net rental and related income		105	(12)
Administrative expenses	3	(1,455)	(1,638)
Excess of fair value of acquisitions over purchase price		-	6,887
Changes in value of investment property	7	(30,220)	(257)
Net foreign currency gain		26	639
		_______	_______
Net operating loss before tax and finance income and expense		(31,544)	5,619
Financial income	4	119	869
Financial expense	4	(202)	(136)
		_______	_______
Loss before tax		(31,627)	6,352
Tax credit	5	4,515	154
		_______	_______
(Loss)/ profit for the year/ period		(27,112)	6,506
Minority interest		2,556	(32)
		_______	_______
(Loss)/ profit attributable to equity shareholders of the parent		(24,556)	6,474
		======	======
Basic earnings per share (cents)	6	(93.72)	24.71
Diluted earnings per share (cents)	6	(93.72)	24.40

 

The notes on pages 29 to 52 form part of these financial statements

  Consolidated Statement of Changes in Equity

For the year ended 31 December 2008

	Share Capital €'000	Share Premium €'000	Distributable Reserve €'000	Revaluation Reserve €'000	FX Gains or Losses €'000	Retained Earnings €'000	Minority Interest €'000	Total €'000
As at 18 September 2006	-	-	-	-	-	-	-	-
Revaluation of land and buildings	-	-	-	2,388	-	-	-	2,388
FX Gains or Losses	-	-	-	-	(186)	-	-	(186)
	______	_______	_________	_________	_______	_______	_______	______
Net income and expense for the year recognised directly in equity	-	-	-	2,388	(186)	-	-	2,202
Profit for the period	-	-	-	-	-	6,474	32	6,506
	______	_______	_________	_________	_______	_______	_______	______
Total income and expenses for the year	-	-	-	2,388	(186)	6,474	32	8,708
Issue of share capital	262	38,513	-	-	-	-	-	38,775
Cost of issue of shares		(2,327)	-	-	-	-	-	(2,327)
Transfer to Distributable  Reserves	-	(36,186)	36,186	-	-	-	-	-
Acquisition of subsidiaries							161	161
	______	______	_______	_______	______	_______	_______	______
As at 31December 2007	262	-	36,186	2,388	(186)	6,474	193	45,317
	=====	======	=======	=======	======	======	======	=====
As at 1 January 2008	262	-	36,186	2,388	(186)	6,474	193	45,317
Revaluation of land and buildings	-	-	-	(2,388)	-	-	-	(2,388)
FX gains or losses	-	-	-	-	(168)	-	-	(168)
	______	_______	_________	_________	_______	_______	_______	______
Net income and expense for the year recognised directly in equity	-	-	-	(2,388)	(168)	-	-	(2,556)
Loss for the year	-	-	-	-	-	(24,556)	(2,556)	(27,112)
	______	_______	_________	_________	_______	_______	_______	______
Total income and expenses for the year	-	-	-	(2,388)	(168)	(24,556)	(2,556)	(29,668)
	______	_______	_________	_________	_______	_______	_______	______
As at 31 December 2008	262	-	36,186	-	(354)	(18,082)	(2,363)	15,649
	=====	======	=======	=======	======	======	======	======

The notes on pages 29 to 52 form part of these financial statements

  Company Statement of Changes in Equity

For the year ended 31 December 2008

The notes on pages 29 to 52 form part of these financial statements

  Consolidated Balance Sheet

As at 31 December 2008

	Note	31 December 2008 €'000	31 December 2007  €'000
ASSETS
NON-CURRENT ASSETS
Investment property	7	31,050	46,424
Development property	7	11,434	17,412
Other assets		19	5
		______	______
Total non-current assets		42,503	63,841
CURRENT ASSETS
Other current assets		92	20
Trade and other receivables	8	742	512
Cash and cash equivalents	9	967	3,412
		_______	_______
TOTAL ASSETS		44,304	67,785
		======	======

The notes on pages 29 to 52 form part of these financial statements

  Consolidated Balance Sheet

As at 31 December 2008

	Note	31 December 2008 €'000	31 December 2007  €'000
EQUITY
Issued capital	14	262	262
Distributable reserves		36,186	36,186
Revaluation reserve		-	2,388
Retained earnings		(18,082)	6,474
Foreign exchange movements		(354)	(186)
		________	________
Total equity attributable to equity holders of the parent		18,012	45,124
Minority Interest		(2,363)	193
		________	________
TOTAL EQUITY		15,649	45,317
LIABILITIES
Non-current liabilities
Interest bearing and non-interest bearing loans - Bank loans	10	11,027	6,301
- Other loans	11	3,894	3,809
Deferred tax liabilities	12	4,064	8,579
		_______	_______
Total Non Current Liabilities		18,985	18,689
CURRENT LIABILITIES
Trade and other payables	13	2,931	1,369
Interest bearing and non-interest bearing loans - Bank loans	10	6,719	2,410
Tax liability		20	-
		_______	_______
Total Current Liabilities		9,670	3,779
TOTAL LIABILITIES		28,655	22,468
		_______	_______
TOTAL EQUITY AND LIABILITIES		44,304	67,785
		======	======
Net asset value per ordinary share - basic (cents)	15	69	172
Net asset value per ordinary share - diluted (cents)	15	69	170

 

 

Approved by the Board of Directors and authorised for issue on 19 June2009 and signed on its behalf by:

Robin James Kristel Meos

Director Director

The notes on pages 29 to 52 form part of these financial statements

  Company Balance Sheet

As at 31 December 2008

 

	Note	31 December 2008 €'000	31 December 2007 €'000
ASSETS
Non-current assets
Investment in subsidiaries	7, 19	35,298	36,895
Current Assets
Trade and other receivables	8	-	18
Amounts due from other group companies	8	3,103	1,012
Cash and cash equivalents	9	29	351
		_______	_______
Total current assets		3,132	1,381
		_______	_______
TOTAL ASSETS		38,430	38,276
		======	======
EQUITY
Issued capital	14	262	262
Distributable reserves		36,186	36,186
Retained earnings		1,942	1,746
		_______	_______
Total equity		38,390	38,194
		======	======
LIABILITIES
Current Liabilities
Trade and other payables	13	40	82
		_______	_______
TOTAL LIABILITIES		40	82
		_______	_______
TOTAL EQUITY AND LIABILITIES		38,430	38,276
		======	======

Approved by the Board of Directors and authorised for issue on 19 June2009 and signed on its behalf by:

Robin James Kristel Meos

Director Director

The notes on pages 29 to 52 form part of these financial statements  Consolidated Cash Flow Statement

For the year ended 31 December 2008

 

	Note	31 December 2008   €'000	31 December 2007  €'000
Cash flows from operating activities	16	(2,026)	(3,404)
		_______	_______
Net cash flows from operating activities		(2,026)	(3,404)
Cash flows from investing activities
Acquisition and investment in subsidiaries and properties		(9,058)	(17,238)
Interest received		123	862
		_______	_______
Net cash used in investing activities		(8,935)	(16,376)
Cash flows from financing activities
Proceeds from issue of shares, net of issuance costs		-	36,448
Interest paid		(410)	(446)
Other borrowing		611	-
Repayments of other borrowing		(720)	(12,810)
Bank borrowing	10	9,035	-
		_______	_______
Net cash generated from financing activities		8,516	23,192
		_______	_______
Net (decrease)/increase in cash and cash equivalents		(2,445)	3,412
Cash and cash equivalents at the beginning of the year/ period		3,412	-
		_______	_______
Cash and cash equivalents at the end of the year/ period		967	3,412
		======	======

	Note	31 December 2008  €'000	31 December 2007 €'000
Cash flows from operating activities	16	(390)	(11)
		_______	_______
Net cash generated from operating activities		(390)	(11)
Cash flows from investing activities
Interest received		3	810
Loans repaid by/ (advanced to) subsidiaries		65	(36,896)
		_______	_______
Net cash generated from/ (used in) investing activities		68	(36,086)
Cash flows from financing activities
Proceeds from issue of shares, net of issuance costs		-	36,448
		_______	_______
Net cash generated from financing activities		-	36,448
		_______	_______
Net (decrease)/increase in cash and cash equivalents		(322)	351
Cash and cash equivalents at the beginning of the year/ period		351	-
		_______	_______
Cash and cash equivalents at the end of the year/ period		29	351
		======	======

 

The notes on pages 29 to 52 form part of these financial statements

 

1. General Information

The Company was incorporated in the Isle of Man on 18 September 2006 as Metro Baltic Hermitage plc. On 13 November 2006 the Company passed a special resolution to change its name to Metro Baltic Horizons plc. The Company invests in and develops property in the Baltic States and in the St. Petersburg area of Russia.

This report of the Company for the year ended 31 December 2008 comprises the Company and its subsidiaries (together referred to as the "Group"). 

The comparative information presented in this report for the period ended 31 December 2007 reflects activity from the date of incorporation to 31 December 2007 and so represents activity for greater than 1 year.

The Company's registered address is IOMA House, Hope Street, Douglas, Isle of Man.

The Company was admitted to the AIM of the London Stock Exchange and commenced operations on 11 December 2006. The Company raised approximately €38.7 million (£26.2 million) before costs.

2. Principal Accounting Policies

A summary of the principal accounting policies, all of which have been applied consistently throughout the year, is set out below:

2.1 Basis of Preparation and Accounting

The consolidated and Company financial statements have been prepared in accordance with International Financial Reporting Standards adopted for use in the European Union ("IFRS"), which comprise standards and interpretations approved by the International Accounting Standards Board (IASB), and International Accounting Standards and Standing Interpretations Committee interpretations approved by the International Accounting Standards Committee ("IASC") that remain in effect.

The financial statements are prepared on a going concern basis. This is deemed appropriate as management have taken steps to ensure that sufficient funding is available to the Group to meet anticipated costs for the foreseeable future. These steps include extending the expiry date on current loans, creating a rolling bond facility managed by the Investment Adviser, seeking approval from shareholders for the issue of shares below Net Asset Value, the deferral of payment of the Investment Managers fees subject to approval by the Investment Manager and delaying expenditure on selected projects in line with available resources.

2.2 Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and the subsidiaries controlled by the Company. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefit from its activities.

Where necessary, adjustments are made to the financial results of subsidiaries to bring the accounting policies used into line with those used by the Group.

The financial statements of the subsidiaries are prepared for the same reporting period as the parent company.

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

Minority interests represent the portion of profit or loss and net assets not held by the Company and are presented separately in the income statement and within equity in the consolidated balance sheet. Acquisitions of minority interest are accounted for using the parent entity extension method, whereby, the difference between the consideration and the book value of the share of the net assets acquired is recognised in goodwill.

Statement of Compliance

The consolidated financial statements of the Group and Company have been prepared in accordance with IFRS as adopted for use in the EU as it applies to the financial statements of the Group for the period ended 31 December 2008. In preparing the financial statements, the accounting policies applied reflect the amendments to IFRS and the adoption of those new IFRS which were in effect.

IFRS issued but not yet effective

The Group has not adopted the following standards, interpretations and amendments in the preparation of financial statements as they were either not effective at 31 December 2008 or not applicable to the Group's business:

IFRS 1 & IAS 27 - Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (Amendment)- Periods commencing on or after 1 January 2009

IFRS 2 - Vesting Conditions and Cancellations (Amendment) - Periods commencing on or after 1 January 2009

IFRS 3 - Business Combinations (Revised January 2008) - Periods commencing on or after 1 July 2009

IFRS 7 - Financial instruments: Disclosures (Amendment) - Periods commencing on or after 1 January 2009

IFRS 8 - Operating Segments - Periods commencing on or after 1 January 2009

IAS 1 - Presentation of Financial Statements (Revised September 2007) - Periods commencing on or after 1 January 2009

IAS 23 - Borrowing Costs (Revised March 2007) - Periods commencing on or after 1 January 2009

IAS 27 - Consolidated and Separate Financial Statements (Amendment) - Periods commencing on or after 1 July 2009

IAS 1 & IAS 32 - Puttable Financial Instruments and Obligations Arising on Liquidation (Amendment) - Periods commencing on or after 1 January 2009

IAS 39 - Eligible Hedged Items (Amendment) - Periods commencing on or after 1 July 2009

IFRIC 15 - Agreements for the Construction of Real Estate - Periods commencing on or after 1 January 2009

IFRIC 17 - Distributions of Non-Cash Assets to Owners - Periods commencing on or after 1 July 2009

IFRIC 18 - Transfers of Assets from Customers- Periods commencing on or after 1 July 2009

The Group is still evaluating the impact that the above standards will have on the Group's financial statements, if any, but expect that there will be no material impact when implemented.

2.3 Revenue recognition

Rental revenues are accounted for on an accruals basis. Rent is billed in advance and then allocated to the appropriate period. Therefore, deferred revenue generally represents advance payments from tenants. Revenue is recognised when it is probable that the economic benefits associated with the transaction will flow to the Group and the amount of revenue can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable.

2.4 Investment and development property and property under construction

Property held to earn rentals and/or for capital appreciation and that is not occupied by the companies in the Group, is classified as investment property. Investment property comprises freehold land, freehold buildings and land held under operating leases. Investment property is initially measured at cost including transaction costs. Subsequent to initial recognition investment property is carried at fair value and adjustments to fair value are reflected in the income statement.

Property under construction or for development is carried at its revalued amount. Its revalued amount is equal to the fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent impairment losses. 

The Group has appointed Colliers as property valuers to prepare valuations on a semi-annual basis for both investment property and for development property and property under construction. Valuations are undertaken in accordance with International Valuation Standards published by the International Valuations Standards Committee. The basis for valuation and the assumptions and judgements involved in determining these valuations are detailed further in Note 7 of these financial statements.

Properties held by the Group are derecognised when either they have been disposed of or when they are permanently withdrawn from use and no future economic benefit is expected from their disposal. Any gains or losses on the retirement or disposal of a property are recognised in the income statement in the year of retirement or disposal.

Transfers are made to or from investment property only when there is a change in use.

Gains or losses arising from changes in the fair value of investment property or development property and property under construction are included in the income statement in the period in which they arise.

2.5 Expenses

Expenses are accounted for on an accruals basis. Fees payable to the Property Adviser are calculated with reference to the cost or valuation of the underlying properties held by the Group. 

Transaction costs directly attributable to the purchase of the investment properties are included within the cost of the property. Development costs of investment property are also included within the cost of the property. Borrowing costs that are directly attributable to the construction of investment property are capitalised as incurred.

All other administration expenses are charged through the income statement.

 

2.6 Cash and cash equivalents

Cash and cash equivalents consist of cash in hand and short term deposits which are short term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

 

2.7 Tax and Deferred Tax

The Company is resident in the Isle of Man. Its activities in the Isle of Man are liable to tax at a 0% tax rate.

The Directors conduct the Group's affairs such that the management and control is not exercised in the United Kingdom and so that neither the Company nor any of its subsidiaries carries on any trade in the United Kingdom. Accordingly, the Company and its subsidiaries will not be liable for UK taxation.

The Group is exempt from Guernsey taxation on income derived outside of Guernsey and bank interest earned in Guernsey under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989. A fixed annual fee of £600 is payable to the States of Guernsey in respect of this exemption. No charge to Guernsey taxation will arise on capital gains.

The Group is liable to Cypriot tax arising on the activities of its Cypriot operations.

The Group is liable to Dutch tax arising on the activities of its Dutch operations.

The Group is liable to Russian tax arising on the activities of its Russian operations.

The Group is liable to Latvian tax arising on the activities of its Latvian operations.

The Group is liable to Estonian tax arising on the activities of its Estonian operations.

The tax credit represents an accrual for tax which may become payable at the end of the financial year, tax currently payable and deferred tax credit arising on losses recorded through the income statement.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net loss as reported in the income statement because it excludes items of income and expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

 

2.8 Business Combinations

The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values at the date of exchange of assets given, liabilities incurred or assumed and any equity instruments issued by the Group in exchange of control of the acquiree, plus any contingent liabilities that meet the conditions for recognition under IFRS 3 are recognised at their fair values at the acquisition date.

Goodwill arising on consolidation is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. Subsequently, goodwill carried on the balance sheet is assessed for impairment on an annual basis and any impairment charge is recognised in the income statement.

If, after reassessment, the Group's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities exceeds the cost of the combination, the excess is recognised immediately in the profit or loss.

The interest of minority shareholders in the acquiree is initially measured at the minority's proportion of the net fair value of the assets, liabilities and contingent liabilities recognised

2.9 Foreign currency translation

 

a) Functional and presentation currency

Items included in the financial statements of each of the Group entities are measured in the currency of the primary economic environment in which the entity operates (the "functional currency"). The consolidated financial statements are presented in Euro which is the Group's functional and presentation currency.

b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at the year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

 

c) Group companies

The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

(i) assets and liabilities are translated at the closing rate at the date of the balance sheet;

(ii) income and expenses are translated at the average exchange rate prevailing in the period and gains or losses are dealt with in the income statement.

The exchange differences arising on the translation are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement.

 

2.10 Segmental reporting

The Directors consider that the group is at present engaged in a single segment of business being the property development business. Minor net rental income arose in the current and prior year due to receipts from existing tenants on property purchased with the intention of development. This is a by-product of the Group's primary business and is not deemed sufficiently significant to warrant presentation of segmental information. The Directors also consider that the region in which the Group operates is sufficiently homogenous geographically so as to make a segmental analysis unnecessary. All development activities take place in the Baltic region.

 

2.11 Estimates

In the preparation of the Group's consolidated financial statements, management is required to make certain judgements and estimates that affect the reported amounts of its assets and liabilities, revenues and expenses at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities. Significant areas requiring management's judgement include assessment of the fair value of investment properties and properties under construction and also the determination of deferred tax.

The basis for valuation of investment properties and properties under construction is discussed further in Note 7 of these financial statements.

The basis for determination of deferred tax assets/ liabilities is outlined in Note 12 of these financial statements.

2.12 Impairment of non-financial assets

The Company assesses at each reporting date whether there is an indication that an asset may be impaired. If such indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset's recoverable amount. An asset's recoverable amount is the higher of the asset's fair value less the cost of selling the asset and its value in use. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the Company relies on independent valuers.

2.13 Share-based payment transactions

Equity-settled share-based payments to service providers is measured at the fair value of the equity instruments as set out in note 2.14. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant service provider becomes fully entitled to the award ("the vesting date"). The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share.

2.14 Share-based payments

Metro Frontier Limited("Manager" or "Investment Manager") are entitled to receive up to 100 per cent (but not less than 25 per cent) of the performance fee (if any) in new Ordinary Shares of Metro Baltic Horizons plc under certain circumstances (the "Performance Fee Shares"). The price of the Performance Fee Shares to be issued to the Manager, if any, are calculated by reference to the average closing price of the Ordinary Shares for the last 20 days of trading in the accounting period to which the Performance Fee is payable, provided that, if such average price when calculated is lower than the most recently published Net Asset Value per Ordinary Share, Performance Fee Shares shall not be issued but the relevant part of the Performance Fee shall be paid to the Manager in cash and the Manager shall apply such cash in acquiring (within 30 days, to the extent reasonably practicable and having used reasonable endeavours so to do) Ordinary Shares in the market having an aggregate value equal to such relevant part of the Performance Fee, provided further that, if within such 30 day period, the Manager is unable to buy such number of Ordinary Shares as equals, at the purchase price, the full amount of such relevant part of the Performance Fee, the Company shall issue to the Manager, in respect, of the balance, Performance Fee Shares at the Net Asset Value per Ordinary Share as most recently published immediately before the end of such 30 day period.

As disclosed in Note 3 there is no Performance Fee payable to the Investment Manager based on the Net Asset Value at 31 December 2008.

2.15 Borrowing Costs

Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

3. Administrative Expenses

Management fees are 1.5% per annum of gross assets under management in Russia and 1% per annum of all other gross assets. The management fees are calculated and charged quarterly based on the gross assets of the Company at the end of the quarter. 

Performance fees are calculated based on the audited net asset value at 31 December each year and are payable annually. The performance fee is calculated as 25% of the increase in the net asset value of the Company in excess of a hurdle rate of 12% over the period. As the net asset value at 31 December 2008 is below the hurdle rate no performance fee is payable in respect of the year. As detailed in Note 2, the Investment Manager is required to use a portion of any performance fee to purchase new shares in the Group if the shares are trading at a level in excess of the net asset value. As the share price was trading below net asset value when the performance fee was paid in respect of 31 December 2007 the manager was required to use that portion of the proceeds to acquire shares in the market. There is no such requirement in relation to the year ended 31 December 2008 as no performance fee arose. Based on these events, no share based payments arose in the current or prior year.

4. Finance Income and Expenses

 

As there was no taxable profit for the year no income tax charge arose. The reduction in the deferred tax liability is discussed further in Note 12 to these financial statements. Tax payable at 31 December 2008 relates to taxes payable as a result of deductions from employee salaries. This does not represent a direct tax charge to the Group.

The Group has income tax losses of €3.3m (2007: €820k). The deferred tax asset associated with these losses of €507k (2007: €132k) has not been recognised in the accounts as there is no expectation that the group will earn taxable profits sufficient to utilise them.

6. Earnings per share

Basic earnings per share

The calculation of basic earnings per share at 31 December 2008 was based on the loss attributable to shareholders of €24,556k and on the weighted average number of ordinary shares in issue during the year ended 31 December 2008 of 26,200,270.

 

7. Investments

Investment property & property held for construction and development.

	Investment Property €'000	Development Property €'000
At 18 September 2006	-	-
Properties Acquired	43,245	15,978
Revaluation of properties	(257)	2,388
Investment in properties	3,436	-
Foreign currency movements	-	(954)
	________	________
At 31 December 2007 and 1 January 2008	46,424	17,412
Revaluation of properties included in the income statement	(26,616)	(3,604)
Reversal of revaluation reserve	-	(2,388)
Investment in properties	11,242	14
	________	________
Total	31,050	11,434
	=======	=======

 

The amount of borrowing costs capitalised for the year ended 31 December 2008 was €939k (2007: €217k). The weighted average rate used to determine the amount of borrowing costs eligible for capitalisation was 6%.

Valuations are carried out every six months by Colliers, an independent and internationally recognised valuer with significant experience in the region. The valuation method inter alia considers the value of the property based on the expected sale value at completion less any expenditure required to realise this value. The valuations are market based, calculated with reference to the expected rent roll rental yields for similar properties, and comparative deals in the market at the time of the valuation.

Investments in subsidiaries

8. Trade and other receivables and amounts due from group companies

 

The group had undrawn facilities of €3.1m at the year end available from Sampo Banka in relation to the completion of Metro Plaza. 

These loans are secured on the land and property assets of Focus Kinnisvara OU, SIA El Mart and OU Pirita tee 26.

Group interest bearing and non-interest bearing bank loans at 31 December 2007 

Current

20. Employees

At 31 December 2008 the Group had 42 (2007: 48) employees. The average number of employees for the year ended 31 December 2008 was 38 (2007: 28).

21. Related party and key management transactions

Transactions between the Company and its subsidiaries which are related parties have been eliminated on consolidation and are not disclosed in this note.

Key management comprises the Investment Manager, Investment Adviser and Directors. Transactions with key management are detailed below.

As disclosed in note 3 the Investment Managers management fee of the year ended 31 December 2008 was €727k (2007: €672k). There is no performance fee payable for the year ended 31 December 2008 (2007: €475k).

Directors' fees for the year ended 31 December 2008 amounted to €77k (2007: €86k).

In the context of the very weak banking environment in November 2008, the Investment Adviser provided an unsecured loan to the Company of €400k at an interest rate of 20.25% and repayable in December 2010, to meet certain costs and obligations of the Company in relation to the construction of the Metro Plaza development. This loan was subsequently repaid from a new credit facility from BAP Holding OÜ, a special purpose vehicle established and part funded by the Investment Adviser to raise funds for the Company. See note 23 for further details.

22. Commitments

The group has entered into a number of construction related contracts through a number of its operating subsidiaries. The total commitments under existing contracts at 31 December 2008 are estimated as follows:

Subsidiary	Total	0-12 Months	13-24 Months	>24 Months
Focus Kinnisvara OU	€0.2m	€0.2m	-	-
Pirita tee 26 OU	€0.1m	€0.1m	-	-
SIA D Tilts Holding	€0.3m	€0.3m	-	-
Goldbrick Investments Ltd.	€0.2m	€0.2m	-	-
Total	€0.8m	€0.8m	-	-

At 31 December 2007 the total commitments under existing contracts were estimated as follows:

Subsidiary	Total	0-12 Months	13-24 Months	>24 Months
Focus Kinnisvara OU	€12.8m	€12.0m	€0.8m	-
SIA D Tilts Holding	€2.7m	€1.5m	€0.6m	€0.6m
Goldbrick Investments Ltd.	€2.7m	€1.7m	€1.0m	-
Total	€18.2m	€15.2m	€2.4m	€0.6m

23. Subsequent events

Since the year end the Group has successfully completed the Metro Plaza development and has successfully let 70% of the space in the building. Metro Plaza was valued by Colliers at €16.0m at the year end.

In March 2009 the board approved the conversion of certain intergroup loans in three subsidiaries (SIA D Tilts Holding, OÜ Pirita tee 26 and OÜ Focus Holding) into equity. This is not expected to have any material impact on the Group.

Due to the continuing lack of banking finance in the region, the board of the Company requested the Investment Adviser to source alternative funding. In April the Company entered into a loan agreement with BAP Holding OÜ, a special purpose vehicle managed by the Investment Adviser, to provide a credit line of up to €4.5million for 18 months. The interest payable on the loan is 10% semi-annually and the loan is secured on the assets of Goldbrick Investments Ltd. 

To date the Company has drawn €915k from this facility, part of which was used to repay a loan from the Investment Adviser extended in November 2008, (see note 21). The Investment Adviser has invested €625k in BAP Holding OÜ. The balance of the funding of BAP Holding OÜ has been sourced from third party investors.

24. Approval of financial statements

The financial statements were approved by the board of directors on 19 June 2009.

 

ENDFR SFEFMUSUSEEM

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Related Shares:

Metir Plc