18th Mar 2009 07:00
18 March 2009
MirLand Development Corporation plc ("MirLand" / "Company")
FULL YEAR RESULTS FOR THE YEAR TO 31 DECEMBER 2008
MirLand Development Corporation, one of the leading international residential and commercial property developers in Russia, today announces its results for the 12 months ended 31 December 2008.
Financial Highlights:
Loss before tax US$103.8 million (31 December 2007: profit US$70.3 million) mainly due to the negative fair value adjustment of the Company's property portfolio and devaluation of the Russian Rouble against the US Dollar. Losses made due to the implication of certain accounting policies and do not impact the cash flow of the Company
Rental income and property management fees up 65% to US$20.4 million (31 December 2007: US$12.4 million)
Total assets US$529.9 million (31 December 2007: US$658 million) largely due to the downward revaluation of the Company's investment properties
Adjusted NAV US$487 million (31 December 2007: US$1,245 million) a decrease of 60% and NAV per share US$4.7 (31 December 2007: US$12.0).
Real estate assets (MirLand's share) valued by Cushman & Wakefield at US$631.7 million for freehold/leasehold rights
The Company continues to have modest leverage at 28% of its assets
Operational highlights:
Completion of the Century office buildings in Moscow
Triumph Mall, Saratov has received pre lets or letters of intent for circa 90% of the lettable area 8 months prior to completion and opening
Start of first sub phase construction of the Company's flagship project in St. Petersburg which on completion will comprise 9,000 apartments
Nigel Wright, Chairman, commented:
"In view of the uncertain and challenging market conditions, MirLand will continue to monitor and adjust its strategy according to market and economic conditions.
"In the absence of further unforeseen adverse events I am confident that we have taken prudent actions to enable us to endure the current crisis and position us to take full advantage as markets normalise and improve."
Moshe Morag, MirLand's Chief Executive, added:
"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, even in the unstable environment which we are active in, and together with our committed directors and managers, will lead to an enhancement of our shareholders' value."
For further information, please contact:
|
MirLand Development Corporation plc Roman Rozental |
+972 52 2776640 +7 499 130 31 09 |
|
Financial Dynamics Dido Laurimore/ Rachel Drysdale |
+44 20 7831 3113 |
Chairman's Statement
Once again I have pleasure in reporting to shareholders on your Company's efforts and progress during the 2008 financial year. In light of the extraordinary turn of events in world financial and real estate markets over the reporting period, the continuing global recession and the challenges faced by the Russian economy (upon which I comment further below) MirLand has conducted a thorough review of its business plan in order to ensure that the Company's future strategy is appropriate in light of current and anticipated market conditions. Given the uncertainties surrounding the world economy as a whole, availability of funding liquidity, energy prices and the timing of any upturn, our focus has been on positioning MirLand to cope with any presently foreseeable eventuality and we have therefore taken strong actions to ensure the business is appropriately positioned to ride out the storm.
We have adjusted our overall programme to ensure that we can:
maximise returns from our existing completed developments;
successfully bring to fruition those projects currently under construction; and
delay commencement of certain pipeline projects until such a time that the outlook in the funding markets becomes clearer.
However, despite an anticipated slowdown of certain future projects we are still committing capital to "working up" those schemes which we feel will yield significant returns to shareholders as markets normalise and growth returns in due course.
Having taken these appropriate steps, the Board of Directors and senior management believe that MirLand is positioned to weather the global financial and economic crises, barring further unforeseen market shocks.
Business environment
The 2008 financial year started positively, with increasing oil prices leading to continuing growth in the Russian economy as a whole including the real estate sector. Initially foreign capital inflows continued and the Russian economy seemed, to an extent, insulated from the global credit crunch.
However, the business environment changed significantly in the second half of the year. Russia in particular suffered a significant outflow of foreign capital as international banks and investors sought to resolve problems in their domestic markets. Furthermore, a combination of falling commodity prices, in particular oil and gas from which Russia derives significant income streams, a collapsing stock market and a weakening Rouble presented huge challenges both for the Government and individual businesses in Russia.
In order to stimulate the economy and to rebuild investor confidence, the Russian Government has announced a series of significant measures aimed at promoting business activity, increasing liquidity and redeeming foreign debt payments. Russia still has significant foreign currency reserves, and together with its decision to allow the Rouble devaluation it should have more than sufficient resources to pass through the global economic crisis, barring further unforeseen adverse events.
Success factors
MirLand is a real estate developer and its sector has been significantly affected by the above factors. Changes in the business climate has forced management to adopt a prudent and cautious approach since we are in a period which offers both threats, challenges and opportunities alike. Despite these challenging conditions, we believe that as a result of its revised business model, MirLand is well positioned to weather this rapidly changing environment:
The Company has a diversified portfolio of assets comprising both residential and commercial projects;
Our investment portfolio has three high quality completed income producing investment properties, Hydromashservice and MAG office buildings in Moscow, and Vernissage mall in Yaroslavl. Most of the leasing agreements in these assets are linked to US dollar;
The Century office building in Moscow was completed during Q1 2009;
The Triumph Mall in Saratov, which is expected to open towards the end of 2009, has seen strong ongoing demand from potential tenants and we have already either pre-let or received letters of intent for approximately 90% of the lettable area;
We have a high quality tenant base and, when agreeing new leases the financial quality of the tenant is a key priority in our due diligence process;
The Company is very modestly leveraged at just 28% of its assets and has no significant loan facilities due for repayment within the next 12 months; and
MirLand enjoys significant backing and support from its main shareholders.
Financing
As a real estate company we rely on both short and long term financing sources but, over the last few months, the global economic situation has dramatically changed and the ability for companies to arrange bank debt or raise debt on the public markets has become increasingly difficult.
To date, MirLand has relied upon 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 its main shareholders, and recently shareholder loans, but given the current and ongoing difficult credit situation, the Company has taken measures aimed at diversifying these funding sources.
The Company has made efforts to build strong relationships with national and international banks, in particular the European Bank for Reconstruction and Development (EBRD) which is currently providing financing for our Triumph Mall project in Saratov, and Gazprom bank, which financed the construction of our Vernissage Mall in Yaroslavl. We continue to invest significant time and effort into building upon existing banking relationships and building new ones going forward.
As mentioned above, MirLand is managing its development pipeline according to market conditions and the availability of cash resources. As such, we have re-phased our residential projects in Moscow and Saint 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.
Results
Total assets as at 31 December 2008 were US$530 million in comparison to US$658 million as at 31 December 2007. Equity as at 31 December 2008 was US$342 million compared to US$473 million as at 31 December 2007. The main reasons for the decrease in 2008 were foreign exchange losses caused by the sharp devaluation of the Russian Rouble against US Dollar and the downward revaluation of the three investment properties.
Loss after tax in 2008 amounted to US$104.8 million in comparison with profit of US$64.9 million for 2007. Again, the main reason for the loss is foreign exchange losses and the decline in the revaluation of the Company's three investment properties, as a result of deteriorating market conditions. However, I would like to draw your attention to the fact that those losses were made due to the implication of certain accounting policies and do not impact the cash flow of the Company.
Rental income and property management fees increased to US$20.4 million in 2008 in comparison with US$12.4 million for 2007. This was due to the first full year of operation of the Vernissage mall in Yaroslavl and of the expanded and renovated MAG and Hydromashservice projects, as well as rising rental rates in MAG and Hydromashservice projects.
In line with the Company's policy, MirLand's assets are externally valued semi annually - at 30 June and 31 December. The valuation is conducted by Cushman & Wakefield Stiles & Riabokobylko ("Cushman & Wakefield"). Due to the market changes, the value of MirLand's portfolio has decreased by 50% to US$632 million (Company's share). However, we strongly believe in the strength of the assets the Company has invested in and, that this portfolio will present an attractive yield to our investors over the longer term as the market begins to recover.
Portfolio development
Due to the deteriorating business environment and the lack of liquidity, MirLand's focus is on the ongoing implementation of projects which are already under construction and on the careful management of its yielding assets.
During 2008, significant progress on the construction of Perkhushkovo Phase 1, Century buildings (which were completed during the first quarter of 2009) and the Saratov projects was achieved and construction works began on two additional projects:
Phase one of Triumph Park, Saint Petersburg involving the development of circa 250 apartments (as the first element of phase one) began in August 2008. On completion, the entire development is expected to comprise 9,000 apartments;
Construction of the new Tamiz office building which is located adjacent to Hydromashservice, MAG and Century projects, began in July 2008.
On 31 March 2008, Tamiz (a wholly-owned subsidiary) won a tender for the purchase of 5.3 hectares of land in the city of Penza. The Company's long term intention is to build a shopping centre on this land plot.
In addition the Company is continuing to progress pre-construction elements at the Skyscraper, Techagrocom, Kazan and Yaroslavl Phase 2 projects. In line with the Company's strategy, commencement of construction will be dependent upon market conditions and the availability of finance. However as the Company continues to prepare the sites prior to construction, additional value may be added to the land and the projects are positioned to progress as markets stabilise.
As previously announced in July 2008, the Company ended its joint venture relating to two residential projects in Moscow due to its former partner's failure to comply with the development agreement terms and conditions regarding obtaining development permits. In accordance with the terms of that joint venture, the Company had advanced a secured loan of approximately US$14 million aimed at supporting the initial set up and design stages of the projects. Following termination of the agreement, the Company was repaid the full amount of the loan as well as an additional sum of US$1.5 million in interest. The Company has no outstanding obligations in connection with the joint venture.
Dividend policy
As set out in the Company's admission document, 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.
Shareholders will be aware that it was the Company's stated intention in 2009 to declare a dividend equating to 2% of its adjusted net asset value as at the date of the IPO for the financial year 2008. The Board has decided it would now be inappropriate to declare this dividend for 2008 for three reasons: firstly, because of the significant deterioration of the real estate investment and development market conditions since the declaration of this policy, secondly as a result of the net loss during the year, and thirdly to allow the Company maximum financial flexibility in the challenging year ahead.
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. As Chairman, I place considerable emphasis on rigorous Board management and, in addition to formal meetings, I meet and communicate with my colleagues on a regular basis.
Once again I pay further tribute to my executive colleagues and all our staff at both Board and operating level. 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 undiluted. As in previous years, full detailed information on our approach to governance issues, our internal controls and key team members will be provided in our Annual Report & Accounts.
Outlook
In view of the uncertain and challenging market conditions, MirLand will continue to monitor and adjust its strategy according to market and economic conditions.
The Board has decided to focus the Company's efforts and resources on completing projects already under construction. In parallel to this, we will continue to intensify our efforts to grow our pre-sale and pre-letting activities. As before, we will continue with the planning and design stages of our strategic projects. We also expect to maintain a strong income stream from our leased investment properties.
In the absence of further unforeseen adverse events I am confident that we have taken prudent actions to enable us to endure the current crisis and position us to take full advantage as markets normalise and improve.
Nigel Wright
Chairman
18 March 2009
Chief Executive's statement
MirLand was established in December 2006 to focus on the 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 every one 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.
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 population's over 500,000 people. MirLand invests primarily in projects where it identifies potential for a high return on equity and the generation of high yields, stemming from relatively low construction costs coupled with high demand driven by a lack of supply of high quality commercial real estate assets.
Since the second half of 2008, the business arena has changed dramatically, and the Company has adjusted its operational focus accordingly in order to cope with these new, more challenging market conditions.
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 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 the close examination of local and national economic and demographic data, and 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 intends to hold both yielding and development properties to obtain a relatively balanced spread in the use of working capital and management attention, while at the same time generating 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 the yielding assets to diversify its income sources.
Use of diverse financing sources to accelerate business activity and growth: equity, shareholders' loans, bank loans part of which have been guaranteed by our main shareholders and bond issuance are used to finance the Company's activities.
The extension of relationships with local partners, especially in the regions: Having a local partner provides daily proximity to 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 the second half of 2008, has led the Company to adjust its strategic focus to be more focused on managing its balance sheet and available financial resources.
This has been achieved through:
the further phasing of larger projects;
a focus on the progression of those development projects which have the greatest potential to deliver the best returns despite current market conditions; and
the development of the remaining projects according to the availability of financial sources.
Furthermore, the Company does not expect to make any additional investments in new projects during 2009. MirLand believes that by adjusting its strategy in this way it will emerge out of this crisis stronger, firmly establishing its position as one of the leading international real estate companies in Russia.
During 2008, MirLand enjoyed financial support from its key shareholders through loans and guarantees.. This crucial ongoing backing will enable MirLand to continue developing and maintaining its portfolio and to fulfil its mission of creating value for its shareholders according to its adjusted strategic focus.
The Market
Russian Economy
2008 started well showing the same positive growth trend of the past ten years supported by increasing oil prices and foreign investment into the country. In the second half of the year the picture altered dramatically, as it did across the globe, and the Russian economy entered a severe slowdown. The main reasons for this change were the world financial and economic crises and the lack of a substantial debt market, which led to a steep reduction in commodity prices. Several controversial actions taken by the Russian Government such as the war in Georgia also acted to deter existing and potential foreign investors into Russia.
In 2009, the Russian economy is forecast to contract further and the Russian Government has deployed emergency measures in order to support the economy. The central bank injected money into the banking system to support the Rouble and the government published a list of companies, regarded as being crucial to the economy, which will be eligible for financial support. However, the Government believes that the country's foreign currency reserves, which amounted to almost US$400 billion as at the end of 2008, will be sufficient to support the economy.
|
Key economic indicators |
2004 |
2005 |
2006 |
2007 |
2008 |
|
Population (millions) |
143.8 |
143.4 |
142.8 |
142.4 |
140.0 |
|
GDP per capita (PPP, $) |
9,800 |
11,000 |
12,200 |
14,600 |
15,800 |
|
GDP growth rate (%) |
7.2 |
6.4 |
6.7 |
7.6 |
5.6 |
|
Inflation (%) |
10.9 |
12.7 |
9.7 |
11.9 |
13.3 |
|
Unemployment rate |
8.6 |
8.2 |
7.6 |
6.1 |
7.7 |
|
average RUR/USD exchange rate |
28.8 |
28.3 |
27.4 |
25.7 |
24.9 |
|
Credit rating |
BB+ |
BBB |
BBB+ |
BBB+ |
BBB |
The economic slowdown in Russia naturally affected the real estate market and as can be seen also across the world, yields are on the rise as asset values are decreasing, developments have been frozen and the investment volume in yielding assets decreased due to scarcity of financing. At the same time, the decline in new construction starts has lead to a decrease in raw materials and construction costs.
The Office Market
The total stock of office space in Moscow reached 9 million sqm in 2008, up from just 7.5 million sq m in 2007. During Q1-Q3 2008 a record level of 1.5 million sqm was leased or sold (30% increase on 2007 space taken up). However, in Q4 2008 it was clear that the rapid growth in occupational demand for the office sector that had taken place since 2005, was coming to an end.
Across Russia it is expected that in 2009 the considerable reduction in demand for office space will lead to a fall in the average rental rates and a significant increase in vacancy rates. Pre-letting rates will also decline as demand will be focused on completed and fitted out space.
The Retail Sector
The consumer market only really began to show the serious effects of the global economic downturn towards the end of 2008 and the beginning of 2009. The demand for quality retail premises began to decline in Q4 2008, as a result of consumer caution, coupled with a decline in real disposable income growth and therefore retailers' turnover.
The country has numerous regional cities with populations of over 500,000 people, with no or little modern real estate stock. Retail growth was stimulated by the increasing purchasing power in Russia's regions and a shortage of good quality retail assets - even in some of the country's largest regional cities. However, the change in market conditions is expected to delay plans of both Russian and international retailers who were looking to continue their expansion into the regions.
Residential Sector
The market for residential property in Russia is characterised by very low supply per capita and ageing stock.
Since 1990, the volume of housing stock in Moscow city and the Moscow region has almost doubled. The main reasons for the increase in demand were the growth in salaries and disposable income, the expansion of western enterprises and the subsequent increase in employees needing housing.
In Saint Petersburg, for example, the residential real estate market has experienced the fastest rate of development over the last few years while prices have shown relatively stable growth.
Since Q3 2008 there has been a decrease in demand across Russia, due to the worsening economic situation and lack of mortgage finance. As a result, prices decreased (in US$ terms) across Russia, and in Moscow and Saint Petersburg in particular.
In 2009, activity in the housing market is expected to be low, with most potential buyers waiting for property prices to decrease further. Buyers seem to prefer smaller ready to market apartments, mortgages may not be attractive due to high costs, and both business and elite segments will suffer from the lack of Government support.
Portfolio
As at 31 December 2008, MirLand had fourteen projects. During the year MirLand had three yielding assets, three projects under construction, two assets that entered into the construction phase, five projects at various stages of the planning phase and in the process of issuance of permits and made one acquisition.
The Company's portfolio has been valued by Cushman & Wakefield at US$632 million (MirLand's share) as at 31 December 2008 based on the Company's freehold/leasehold rights. This value represents a decrease of 50% in the portfolio's value since 30 June 2008 and is due to the changing real estate market arena and lack of financing sources in Russia as well as the other factors discussed in this statement, which led to increasing yields.
The Company's main projects are as follows:
Investment Portfolio
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: 17,200 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%
Vernissage Mall, Yaroslavl - shopping centre
Development of 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%
Century Building, Moscow - offices
Recently completed class B+ office buildings on the Hydro & MAG site. Acquisition is subject to completion of some conditions precedent.
Leasable area: 22,800 sqm
Completed: Q1 2009
Leasehold rights: 50%
Development Portfolio:
Tamiz, Moscow - offices
New class B+ office building under construction at the Hydro & MAG site.
Leasable area: 12,200 sqm
Construction commencement: 3Q 2008
Planned completion: Q3 2010
Leasehold rights: 100%
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: Q2 2010
Planned completion: Q3 2013
Leasehold rights: 100%
Techagrocom, Moscow region - Business Park
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: Q2 2010
Planned completion of project: Q1 2015
f Freehold rights: 50%
Western Residence Perkhushkovo, Moscow region - residential complex
Development of 163 town houses and cottages in the prestigious western outskirts of Moscow. This project targets the growing segment of successful professionals who seek an improved standard of living.
Land area: 22.5 ha
Saleable area: 69,900 sqm
Construction commencement: Q3 2007
Planned completion: Q2 2012
Freehold rights: 100%
Triumph Park, St. Petersburg - residential complex and trade centre
Flagship development of a residential neighbourhood, which will comprise approximately 9,000 apartments, commercial and public areas, providing good access to both St. Petersburg and its airport. The commercial areas will include offices and a commercial centre with underground parking, and the public areas will include kindergartens, school and parks.
Land area: 41 ha
Saleable area: 630, 900 sqm
Leasable area: 90,000 sqm
Construction commencement of sub phase 1: Q3 2008
Planned completion of project: Q4 2017
Freehold rights: 100%
Big Box Complex, Yaroslavl - retail development
Development of a 50,000 sqm retail park adjacent to the Vernissage mall.
Land area: 18 ha
Leasable area: 50,000 sqm
Planned construction commencement: Q4 2010
Planned completion: Q4 2011
Freehold rights: 49%
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: 27,600 sqm
Construction commencement: Q2 2007
Planned completion: Q4 2009
Freehold rights : 95%
Marketing: 90% is pre-let or with signed letters of intent
Financing: US$ 48.5 million financed by the European Bank for Reconstruction and Development
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
Saleable area: 5,200 sqm
Planned construction commencement: Q2 2010
Planned completion: Q2 2012
Freehold rights: 100%
Penza - shopping centre
Land area: 5.3 ha
Leasable area: 17,900 sqm
Planned construction commencement: Q4 2010
Planned completion: Q4 2012
Freehold rights: 100%
Prospects
MirLand is adjusting to the new and fast changing environment, and as discussed, has refocused its strategy 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;
focus on the maintenance of occupancy and therefore rental rates at yielding properties;
reducing costs and looking for additional sources of financing to substitute the gap left by the lack of available institutional financing support for real estate;
constantly monitoring and analysing the market for signs of recovery that will enable the Company to re engage with its original strategy; and
the Company will prioritise the progression of projects according to the availability of financial sources and specific market conditions surrounding each project.
I would like to thank the MirLand management team for its dedication to the Company, its shareholders and the Company's employees, who are responsible for the day-to-day success of all our activities. I am confident that this strong team will continue working through the current market turbulence to realise 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, even in the unstable environment which we are active in, and together with our committed directors and managers, will lead to an enhancement of our shareholders' value.
Moshe Morag
Chief Executive Officer
18 March 2009
FINANCIAL REVIEW
Revenues for 2008 were US$20.4 million and the net loss was US$104.8 million. Total assets at December 2008 were $529.9 million and equity amounted to $342.2 million. The Company's adjusted net asset value was $487.2 million. The Company's real estate assets were valued on 31 December 2007 at $731.6 million (for 100% rights from freehold/leasehold) by an external appraiser of which MirLand's share is $631.7 million.
Accounting Policy
The Company's financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and the International Accounting Standards Board ("IASB") and the requirements of the Cyprus Companies Law, Cap 113.
Income Statement
The loss for 2008 amounted to US$104.8 million in comparison to income of US$94.6 million in 2007.
The Company's revenue consists of two main items: rental income and fees from managing investment properties, and fair value adjustments of investment properties. Rental income and fees from investment properties grew to US$20.4 million from US$12.4 million, a rise of 65%, as 2008 was the first full year of operation since the completion of the Vernissage mall in Yaroslavl in April 2007, and of the expanded and renovated MAG and Hydromashservice projects, as well as increased rental rates in MAG and Hydromashservice projects. In accordance with IAS 40 the Company has revalued its investment properties for the financial period ending 31 December 2008 and has recognized the resulting movement in valuation through its income statement as fair value adjustments of investment properties. The loss of US$58.8 million has been determined based on the valuations of the Company's Yaroslavl, MAG & Hydromashservice projects prepared by an independent appraiser (Cushman & Wakefield Stiles& Riabokobylko), in accordance with International Valuation Standards.
The principal operating expenses of the Company are embodied in property maintenance costs, which rose from US$6.4 million in 2007 to US$7.3 million in 2008, due to first full year of operation in Vernissage mall and MAG properties.
The Company's general and administrative expenses for the period decreased to $17.1 million compared with US$26.7 million in 2007, mainly due to adjustment of provision of management services for MAG and Hydromashservice.
Total financing costs for the period increased to US$44.7 million compared with US$8.7 million in 2007 mainly due to foreign exchange differences caused by the sharp devaluation of the Rouble. Financing income, achieved mainly through interest from deposits and from loans provided, and from financial assets not at fair value that were recognised through profit and loss statement, amounted to US$9.9 million.
Tax expenditure in 2008 was US$1.0 million. MirLand is resident in Cyprus for tax purposes and is subject to a 10% tax rate. MirLand's subsidiaries in Russia are subject to a 24% tax rate (20% from 2009). Additional details are covered in note 8 of the financial statements.
Net loss for 2008 was US$104.8 million, in comparison with net profit of US$64.9 million in 2007. This decrease is largely due to the negative fair value adjustment of investment properties of US$58.8 million for the period as opposed to US$94.6 million positive adjustment in 2007.
Balance Sheet
Total assets as at December 31, 2008 amounted to US$529.9m in comparison with US$658.0m in 2007, a decrease of 19%. The main reasons for the decrease were the reduction of value of three assets which amounted to US$58.8 million, from reduction of cash and cash equivalents, and from devaluation of the Rouble against the US Dollar.
Equity and Liabilities
Equity as at 31 December 2008 decreased to US$342.2 million from $472.8 million in 2007, a decrease of 26%. Equity decreased mainly due to the net loss in 2008 and foreign currency translation adjustments. Prior to this the Company has financed its activities mainly by equity, which comprises 65% of total assets.
Financial liabilities as at 31 December 2008 amounted to US$150.9 million compared with $154.7m for 31 December 2007. The decrease is mainly due to the repayment of short term loans. There are no significant loans due for repayment in the next 12 months. 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 in the Tel-Aviv stock exchange on December 2007. The debentures are redeemed in six annual and equal payments at the end of years 2010-2015. For further details please review note 22 of the financial statements.
NAV
The Company's real estate assets were valued by an external independent appraiser (Cushman & Wakefield Stiles& Riabokobylko) in accordance with International Valuation Standards on December 31 2007 at US$731.6 million (for 100% rights from freehold/leasehold), of this MirLand's share is US$631.7 million.
Overview of Market Values as at 31 December 2008
|
City |
Property Name and Address |
Portfolio Market Value as at 31st of December 2008 (Rounded) |
Percentage Owned by MirLand |
MirLand Market Value as at 31st of December 2008 (Rounded) |
|
Moscow |
Hydromashservice, 2-Khutorskaya str., 38A |
$75,210,000 |
100% |
$75,210,000 |
|
Moscow |
MAG, 2-Khutorskaya str., 38A |
$79,910,000 |
100% |
$79,910,000 |
|
Moscow Region |
Perkhushkovo, Odintsovsky district |
$86,220,000 |
100% |
$86,220,000 |
|
Saratov |
Retail mall, 167 Zarubina street |
$33,160,000 |
95% |
$31,502,000 |
|
Moscow |
Skyscraper, Dmitrovskoe schosse, 1 |
$41,292,000 |
100% |
$41,292,000 |
|
Saint Petersburg |
Residential |
$173,068,300 |
100% |
$173,068,000 |
|
Saint Petersburg |
Trade Center |
$12,376,754 |
100% |
$12,377,000 |
|
Moscow Region |
Techagrocom, Kaluzhskoe Highway |
$44,697,000 |
50% |
$22,349,000 |
|
Yaroslavl |
Phase I: Operating Shopping Centre, Kalinina str. |
$62,290,000 |
49% |
$30,522,000 |
|
Yaroslavl |
Phase II (Remaining unimproved Land Plot of 18 ha) |
$4,628,000 |
49% |
$2,268,000 |
|
Moscow |
Tamiz Building |
$26,290,000 |
100% |
$26,290,000 |
|
Moscow |
Century Building |
$83,360,000 |
50% |
$41,680,000 |
|
Kazan |
Kazan Commercial |
$7,180,000 |
100% |
$7,180,000 |
|
Penza |
Retail Center |
$1,879,000 |
100% |
$1,879,000 |
|
Total |
$731,561,054 |
$631,747,000 |
||
The full Cushman & Wakefield Stiles & Riabokobylko valuation will be available on the Company's website www.mirland-development.com.
The Company's Adjusted Net Asset Value ("NAV") based on the Cushman & Wakefield valuation as at December 2008 decreased to US$487 million in comparison with US$1,245 million in December 2007, a decrease of 60%. The decrease came mainly from the decrease of portfolio projects (US$483 million), from projects that went out of the portfolio (US$98 million), and from the decrease of cash and deposits (US$179 million). The decrease of the portfolio projects' value is attributed to the increase of yields and discount rates in the real estate property market in Russia due to the changing market conditions. As a result, the NAV per share as at 31 December 2008 reduced to US4.7$ in comparison to US$12.0 as at 31 December 2007.
Cash Flow
During 2008, the Company used US$176 million for investment in real estate properties in comparison with US$110 million. Cash flow used for operating activities amounted to US$14.9 million. Cash flow provided by financing activity amounted to US$6 million.
Financial Strategy
In 2008 the Company's activities have been primarily financed with proceeds from the 2007 bond issuance, corporate bank loans guaranteed by MirLand main shareholders, revenues and shareholders' loans. The Company's policy is to limit its leverage to 66% of the gross value of the Company's 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.
Residential projects, on the other hand, are principally financed with equity as the financing market for residential projects remains relatively undeveloped in Russia. Accordingly, residential projects are constructed in phases, thus 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 2008 the Company did not sign any new loan agreements. The Company is currently negotiating with several banks financing for some of the portfolio projects.
Market Risks
The Company 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 functional currency is the USD. The majority of the Company's revenues, costs and capital expenditures are either priced, incurred, payable or otherwise 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 Roubles linked transaction and therefore the Company will assess its future transactions. The Company is exposed to fluctuations in the Rouble pending receipt of refunds or offsets of excess VAT under Russian VAT legislation. The Company's policy is generally not to enter into currency hedging transactions.
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
18 March 2009
CONSOLIDATED INCOME STATEMENT
|
Year ended 31 December |
||||||
|
Note |
2008 |
2007 |
||||
|
U.S. dollars in thousands (except per share data) |
||||||
|
Revenues: |
||||||
|
Rental income from investment properties |
17,949 |
10,446 |
||||
|
Revenues from managing fees |
2,411 |
1,977 |
||||
|
Total revenues |
20,360 |
12,423 |
||||
|
Fair value adjustments of investment properties |
9 |
(58,768) |
82,138 |
|||
|
(38,408) |
94,561 |
|||||
|
Operating expenses |
4 |
(7,291) |
(6,384) |
|||
|
General and administrative expenses |
5 |
(17,099) |
(26,706) |
|||
|
Finance costs |
6a |
(44,725) |
(8,703) |
|||
|
Finance income |
6b |
9,883 |
23,004 |
|||
|
Other expenses |
7 |
(6,186) |
(5,469) |
|||
|
Profit (loss) before tax expense |
(103,826) |
70,303 |
||||
|
Tax expense |
8 |
(1,005) |
(5,423) |
|||
|
Profit (loss) for the year |
(104,831) |
64,880 |
||||
|
Earnings per share (in U.S. dollars per share): |
21 |
|||||
|
Basic |
(1.012) |
0.627 |
||||
|
Diluted |
(1.012) |
0.627 |
||||
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED BALANCE SHEET
|
31 December |
||||||
|
Note |
2008 |
2007 |
||||
|
U.S. dollars in thousands |
||||||
|
ASSETS |
||||||
|
NON-CURRENT ASSETS: |
||||||
|
Investment properties |
9 |
163,987 |
227,030 |
|||
|
Investment properties under construction |
10 |
120,035 |
87,963 |
|||
|
Long-term loans |
12 |
58,525 |
22,521 |
|||
|
Advance on acquisition of subsidiary |
13 |
584 |
1,080 |
|||
|
Fixed assets, net |
14 |
2,154 |
4,866 |
|||
|
Deferred expenses |
26j |
1,936 |
796 |
|||
|
Long-term receivables and prepayments |
15 |
16,172 |
12,891 |
|||
|
Deferred taxes |
8c |
4,246 |
214 |
|||
|
Financial derivative |
27c |
719 |
- |
|||
|
368,358 |
357,361 |
|||||
|
CURRENT ASSETS: |
||||||
|
Inventories of buildings under construction |
11 |
144,202 |
103,980 |
|||
|
Trade and other receivables |
17 |
7,566 |
7,537 |
|||
|
Restricted deposits |
18 |
- |
71,406 |
|||
|
Cash and cash equivalents |
16 |
9,822 |
117,758 |
|||
|
161,590 |
300,681 |
|||||
|
Total assets |
529,948 |
658,042 |
||||
CONSOLIDATED BALANCE SHEET
|
31 December |
||||||
|
Note |
2008 |
2007 |
||||
|
U.S. dollars in thousands |
||||||
|
EQUITY AND LIABILITIES |
||||||
|
EQUITY: |
||||||
|
Equity attributable to equity holders of the Company: |
||||||
|
Share capital |
19 |
1,036 |
1,036 |
|||
|
Share premium |
359,803 |
359,803 |
||||
|
Employee equity benefits reserve |
8,080 |
6,199 |
||||
|
Retained earnings (accumulated deficit) |
(8,202) |
96,629 |
||||
|
Currency translation reserve |
(19,085) |
9,151 |
||||
|
Shareholders' contributions |
579 |
- |
||||
|
342,211 |
472,818 |
|||||
|
Minority interests |
25 |
25 |
||||
|
Total equity |
342,236 |
472,843 |
||||
|
NON-CURRENT LIABILITIES: |
||||||
|
Debentures, net |
22 |
62,267 |
62,088 |
|||
|
Financial derivative |
27 |
- |
50 |
|||
|
Long-term loans from banks |
24b |
17,443 |
*) 19,357 |
|||
|
Long-term loans from shareholders |
20h |
9,032 |
- |
|||
|
Other long-term liabilities |
25 |
8,112 |
12,739 |
|||
|
Deferred taxes |
8c |
9,154 |
5,118 |
|||
|
106,008 |
*) 99,352 |
|||||
|
CURRENT LIABILITIES: |
||||||
|
Accounts payable and accruals |
23 |
17,032 |
11,145 |
|||
|
Short-term loans from banks |
24 |
62,196 |
*) 73,212 |
|||
|
Income tax payable |
2,476 |
1,490 |
||||
|
81,704 |
*) 85,847 |
|||||
|
Total liabilities |
187,712 |
185,199 |
||||
|
Total equity and liabilities |
529,948 |
658,042 |
||||
*) Reclassified.
The accompanying notes are an integral part of the consolidated financial statements.
|
Moshe Morag |
Roman Rozental |
|||
|
Chief Executive Officer |
Chief Financial Officer |
|||
CONSOLIDATED CASH FLOW STATEMENT
|
Year ended 31 December |
||||||
|
2008 |
2007 |
|||||
|
Note |
U.S. dollars in thousands |
|||||
|
Cash flows from operating activities: |
||||||
|
Profit (loss) before the tax expense |
(103,826) |
70,303 |
||||
|
Adjustments for: |
||||||
|
Finance costs |
44,725 |
8,703 |
||||
|
Interest paid |
(8,135) |
(6,881) |
||||
|
Finance income |
(9,883) |
(23,004) |
||||
|
Interest received |
3,156 |
10,343 |
||||
|
Fair value adjustments of investment properties |
58,768 |
(82,138) |
||||
|
Options granted |
1,881 |
3,851 |
||||
|
Additions to residential projects for sale under construction |
(64,466) |
(22,003) |
||||
|
Depreciation of equipment |
343 |
287 |
||||
|
Increase in trade and other receivables |
(2,674) |
(3,067) |
||||
|
Impairment of investment property under construction and residential projects for sale under construction |
4,289 |
- |
||||
|
Increase in accounts payable and accruals and in provision to service provider |
1,380 |
5,941 |
||||
|
Write-down of advance on account of acquisition of subsidiary |
1,256 |
406 |
||||
|
Income taxes paid |
(1,909) |
(1,169) |
||||
|
Net cash flows used in operating activities |
(75,095) |
(38,428) |
||||
|
Cash flows from investing activities: |
||||||
|
Additions to fixed assets |
(679) |
(3,373) |
||||
|
Additions to investment properties |
(29,206) |
(36,056) |
||||
|
Additions to investment properties under construction |
(48,296) |
(62,658) |
||||
|
Interest capitalised in investment properties under construction |
- |
(2,016) |
||||
|
Loans granted |
(47,408) |
(22,238) |
||||
|
Advance on acquisition of subsidiary |
(600) |
(1,080) |
||||
|
Loans repaid |
14,829 |
- |
||||
|
Release of restricted deposits |
71,406 |
- |
||||
|
Net cash flows used in investing activities |
(39,954) |
(127,421) |
||||
|
Cash flows from financing activities: |
||||||
|
Proceeds from issuance of shares by the Company |
- |
30,811 |
||||
|
Advances received on account of IPO |
- |
1,053 |
||||
|
Accrued expenses on account of loan |
(1,500) |
(767) |
||||
|
Proceeds from issuance of bonds |
- |
61,756 |
||||
|
Repayments from short-term borrowings |
(12,433) |
- |
||||
|
Proceeds from long-term borrowings from related parties |
7,991 |
- |
||||
|
Net cash flows provided by (used in) financing activities |
(5,942) |
92,853 |
||||
|
Decrease in cash and cash equivalents |
(120,991) |
(72,996) |
||||
|
Net foreign exchange differences on cash and cash equivalents |
13,055 |
(5,832) |
||||
|
Cash and cash equivalents at beginning of year |
117,758 |
196,586 |
||||
|
Cash and cash equivalents at end of year |
16 |
9,822 |
117,758 |
|||
The accompanying notes are an integral part of the consolidated financial statements.
NOTE 1:- General
a. Mirland Development Corporation Plc ("the Company") was incorporated in Cyprus on 10 November 2004 under the Cyprus Companies Law, Cap. 113 as a private company limited by shares. Its registered office is located at Thessalonikis Street, Nicolaou Pentadromos Centre, 6th floor, Limassol 3025, Cyprus.
b. The principal activities of the Company and its subsidiaries ("the Group"), which did not change from last year, are investment and development of real estate assets in Russia.
c. On 18 December 2006, the Company issued approximately 30 million shares in an initial public offering and all of its shares were admitted for trading on AIM. The shares represent 30% of the Company's share capital. On 3 January 2007, the underwriters of the offering exercised options to purchase an additional approximately 3.6 million shares representing approximately 3.5% of the Company's share capital.
d. On 7 December 2007, the Company issued two series of debentures. The par value of both of the series that were issued is NIS 244,134,000 (approximately $63 million). Issuance expenses of approximately $1 million were deducted from the consideration. All of the debentures were admitted for trading on the Tel-Aviv Stock Exchange (see also Note 19).
e. The following are the principal shareholders of the Company as of 31 December 2008:
|
Shareholder |
Rate of holding |
|
|
(%) |
||
|
Jerusalem Economy Ltd. ("JEC") (a company traded on the Tel-Aviv Stock Exchange) |
~ |
28.8 |
|
Industrial Buildings Corporation Ltd. ("IBC") (71.43%-owned subsidiary of JEC and traded on the Tel-Aviv Stock Exchange) |
~ |
34.0 |
|
Darban Investments Ltd. (a company traded on the Tel-Aviv Stock Exchange) |
~ |
13.5 |
All of the above shareholders are companies that are controlled, directly and indirectly, by the Fishman family.
NOTE 2:- Summary of significant accounting policies
Basis of presentation of the financial statements:
These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU"). The accounting policies adopted are consistent with those of the previous financial years. International Financial Reporting Standards comprise standards and interpretations adopted by the International Accounting Standards Board, and include:
a) International Financial Reporting Standards (IFRS).
b) International Accounting Standards (IAS).
c) Interpretations to IFRS and IAS: IFRIC and SIC.
Furthermore, the financial statements are prepared in accordance with the requirements of the Cyprus Companies Law Cap.113 and under historical cost convention except for investment properties, financial derivatives and options to employees which are measured at fair value.
The Company has been preparing financial statements in accordance with IFRS since its establishment.
IFRS 8 - Operating Segments - Early Adoption:
IFRS 8 ("the Standard") deals with operating segments and replaces IAS 14. The Standard applies to companies whose securities are traded or are in the process of filing with any securities stock exchange. The Standard is effective for annual financial statements for periods beginning after 1 January 2009. Early application of the standard was not applied retrospectively, due to immateriality.
In accordance to the Standard the entity adopted a management approaches in reporting on the financial performance of the operating segments. The segment information contains the information that is internally used by management in order to assess its performance and allocate resources to the operating segments.
For additional information see note 3.
Basis of consolidation:
The consolidated financial statements include the accounts of companies over which the Company exercises control (subsidiaries). Control is normally evidenced when the Company is able, directly or indirectly, to govern the financial and operating policies of an enterprise so as to benefit from its activities. In the examination of the existence of control, the effect of potential voting rights exercisable as of the balance sheet date is taken into consideration. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases.
All intercompany balances and transactions among the Group companies have been eliminated in the consolidated financial statements.
Minority interests represent the portion of profit or loss and net assets not held by the Group and are presented within equity in the consolidated balance sheet, separately from the Company's shareholders' equity.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The accounts of a jointly controlled entity in which the shareholders share joint control under contractual consent are consolidated with those of the Company using the proportionate consolidation method. The Group consolidates its share in the jointly controlled entity's assets, liabilities, revenues and expenses with the proper financial statement items. All intercompany balances and transactions and gains and losses between the Group companies and the jointly controlled entity are eliminated based on the Company's share in the jointly controlled entity.
The financial statements of the subsidiaries and jointly controlled entities are prepared for the same reporting periods as the company, using consistent accounting policies.
Note 3:- SEGMENT INFORMATION
The segment reporting format is determined in business segments as the Group's risks and rates of return are predominantly affected by differences in the use of real estate assets of the Company.
Since most of the operating activity and capital expenditure of the Company is in Russia, geographical segments were not presented.
The commercial segment leases real estate for commercial purposes, the residential segment develops real estate assets for sale for residential purposes.
The following tables present revenue and profit and certain assets and liability information regarding the Group's business segments.
NOTE 3:- SEGMENT INFORMATION (Cont.)
|
Year ended 31 December 2008 |
Year ended 31 December 2007 |
|||||||||||
|
Commercial |
Residential |
Total |
Commercial |
Residential |
Total |
|||||||
|
U.S. dollars in thousands |
||||||||||||
|
Revenues |
||||||||||||
|
Rental income from investment properties |
17,949 |
- |
17,949 |
10,446 |
- |
10,446 |
||||||
|
Revenue from management fees |
2,411 |
- |
2,411 |
1,977 |
- |
1,977 |
||||||
|
Total revenues |
20,360 |
- |
20,360 |
12,423 |
- |
12,423 |
||||||
|
Fair value adjustments of investment properties |
(58,768) |
- |
(58,768) |
82,138 |
- |
82,138 |
||||||
|
Total income (loss) |
(38,408) |
- |
(38,408) |
94,561 |
- |
94,561 |
||||||
|
Inter-segment income |
- |
- |
- |
- |
- |
- |
||||||
|
(38,408) |
- |
(38,408) |
94,561 |
- |
94,561 |
|||||||
|
Segment results |
(59,150) |
(2,246) |
(61,396) |
(1) 69,872 |
(1,314) |
68,558 |
||||||
|
Unallocated expenses (1) |
(7,588) |
(12,556) |
||||||||||
|
Net finance income (costs) |
(34,842) |
14,301 |
||||||||||
|
Profit (loss) before income tax |
(103,826) |
70,303 |
||||||||||
|
Tax expense |
(1,005) |
(5,423) |
||||||||||
|
Profit (loss) for the year |
(104,831) |
64,880 |
||||||||||
|
Assets and liabilities |
||||||||||||
|
Segment assets |
316,544 |
154,172 |
470,716 |
346,825 |
103,980 |
450,805 |
||||||
|
Unallocated assets |
59,232 |
207,237 |
||||||||||
|
Total assets |
529,948 |
658,042 |
||||||||||
|
Segment liabilities |
34,333 |
9,485 |
43,818 |
23,370 |
1,202 |
24,572 |
||||||
|
Unallocated liabilities (2) |
143,894 |
160,627 |
||||||||||
|
Total liabilities |
187,712 |
185,199 |
||||||||||
(1) Includes an expense for registration of land lease of $ 5,469 thousand.
(2) Includes mainly tax, financing assets and genuine central assets.
Note 4:- OPERATING EXPENSES
|
Year ended 31 December |
||||
|
2008 |
2007 |
|||
|
U.S. dollars in thousands |
||||
|
Maintenance of property |
4,783 |
*) 3,831 |
||
|
Land lease payments |
241 |
195 |
||
|
Fee to management company |
813 |
*) 773 |
||
|
Property tax on investment property |
1,454 |
812 |
||
|
Land tax on investment property under construction and inventories of buildings under construction |
- |
773 |
||
|
7,291 |
6,384 |
|||
*) Reclassified.
NOTE 5:- GENERAL AND ADMINISTRATIVE EXPENSES
|
Year ended 31 December |
||||
|
2008 |
2007 |
|||
|
U.S. dollars in thousands |
||||
|
Office maintenance |
1,652 |
1,330 |
||
|
Professional fees |
6,236 |
4,968 |
||
|
Marketing fees |
2,386 |
674 |
||
|
Salaries (1) |
7,530 |
8,506 |
||
|
Depreciation of equipment |
343 |
287 |
||
|
Write-down of advances on account of investments |
1,256 |
406 |
||
|
Adjustment of provision to service providers |
(5,160) |
7,643 |
||
|
Traveling expenses |
1,090 |
1,440 |
||
|
Other costs |
1,766 |
1,452 |
||
|
17,099 |
26,706 |
|||
|
(1) Includes cost of share-based payment (see Note 19) |
1,881 |
3,851 |
||
The fee in consideration of the audit is in the amount of approximately $ 2,080 thousand (2007 - $1,398 thousand).
The fee to directors is approximately $617 thousand (2007 - $521 thousand).
NOTE 6:- FINANCE COSTS AND INCOME
|
Year ended 31 December |
||||
|
2008 |
2007 |
|||
|
U.S. dollars in thousands |
||||
a. Finance costs:
|
Interest costs - financial liabilities not at fair value through profit and loss |
(10,838) |
(10,669) |
||
|
Net capitalised interest costs |
- |
2,016 |
||
|
Effect of discounting of long-term receivables |
(3,933) |
(1,400) |
||
|
Fair value adjustment of financial derivative |
- |
(50) |
||
|
Effect of discounting of long-term receivables to investment properties under construction and residential projects for sale under construction |
3,933 |
1,400 |
||
|
Other (mainly foreign exchange differences) (1) |
(33,887) |
- |
||
|
(44,725) |
(8,703) |
b. Finance income:
|
Interest income from cash and cash equivalents and restricted deposits |
3,420 |
10,744 |
||
|
Interest income from loans provided |
4,420 |
843 |
||
|
Interest income from financial assets not at fair value through profit and loss |
528 |
- |
||
|
Effect of discounting of long-term receivables |
405 |
- |
||
|
Fair value adjustment of financial derivative |
769 |
- |
||
|
Other (mainly foreign exchange differences) |
341 |
11,417 |
||
|
9,883 |
23,004 |
(1) Starting from the last quarter of 2008, the Company has no intention in the foreseeable future to require repayment of intercompany loans provided by the Company to its subsidiaries developing real estate projects under construction in Russia. Therefore, foreign exchange differences for the said loans beginning in the last quarter of 2008 are recognized as a separate item in equity (currency translation reserve).
Note 7:- other expenses
|
Year ended 31 December |
||||
|
2008 |
2007 |
|||
|
U.S. dollars in thousands |
||||
|
Update of provision regarding an agreement with government authorities (see Note 26o) |
1,897 |
- |
||
|
Registration of land lease |
- |
5,469 |
||
|
Impairment of investment properties under construction and inventories of buildings under construction |
4,289 |
- |
||
|
6,186 |
5,469 |
|||
Note 8:- Taxation
a. Tax expense:
|
Year ended 31 December |
||||
|
2008 |
2007 |
|||
|
U.S. dollars in thousands |
||||
|
Current taxes |
1,844 |
2,659 |
||
|
Prior year taxes |
(849) |
- |
||
|
Deferred taxes |
10 |
2,764 |
||
|
Tax expense in income statement |
1,005 |
5,423 |
||
b. A reconciliation between the tax expense in the income statement and the product of profit before tax multiplied by the current tax rate can be explained as follows:
|
Year ended 31 December |
||||
|
2008 |
2007 |
|||
|
U.S. dollars in thousands |
||||
|
Profit (loss) before tax expense |
(103,826) |
70,303 |
||
|
Tax at the statutory tax rate in Cyprus (10%) |
(10,383) |
7,030 |
||
|
Increase (decrease) in respect of: |
||||
|
Temporary differences in respect of which no deferred tax was recorded *) |
6,846 |
(17,918) |
||
|
Effect of different tax rate in Russia (24%) and Hungary (16%) |
6,375 |
13,224 |
||
|
Effect of change in tax law in Russia |
196 |
- |
||
|
Prior year taxes |
(849) |
- |
||
|
Losses for which deferred tax assets were not recorded |
416 |
2,852 |
||
|
Income not subject to tax |
(716) |
(641) |
||
|
Other |
(880) |
876 |
||
|
Income tax expense |
1,005 |
5,423 |
||
*) The fair value adjustments of the investment properties result in a temporary difference between the carrying value of the properties and their tax basis. Since it is the management's intention to sell the shares in companies holding those properties rather than the selling the properties themselves, deferred taxes on the above differences have not been recorded (see Note 9).
Note 8:- Taxation (Cont.)
Taxation in Cyprus:
- The taxation of the companies is based on their country of residence and accordingly, all the Cypriot companies are taxable at a corporate tax rate of 10%.
- Dividend income in the hands of the Company and of Cypriot holding companies is tax corporate tax exempt in Cyprus.
Dividend income in Cyprus is subject to Defense tax at a rate of 15% on dividends received by Cypriot resident companies from non-resident subsidiaries ("foreign companies"). However, dividend income received from Russian companies is Defense tax exempt in Cyprus in accordance with Cyprus tax laws as long as the Russian companies are 100% held by the Cypriot companies and their earnings are corporate taxable in Russia at a rate of 24%. Commencing January 1, 2009, the income tax was decreased to 20%.
- The distribution of dividends by Cypriot holding companies to the Company is not taxable in Cyprus yet the non distribution of dividends by Cypriot holding companies to the Company during a period of two years from the end of the tax year in which dividends were last distributed may lead to attributing a notional dividend to the Company's income.
- A capital gain from the sale of shares of Russian companies or Cypriot holding companies by the Company will be tax exempt in Cyprus.
- Interest income derived for the Company will be taxed at the regular corporate tax rate unless it is not generated in the ordinary course of business, in which case it will be subject to effective tax at a rate of 15%.
Taxation in Russia:
- Income from the sale or lease of real estate in Russia, net of legally deductible expenses, should be subject to corporate tax of 24% in Russia. Commencing January 1, 2009, the income tax was decreased to 20%.
- Rental income from properties is VAT taxable in Russia at a rate of 18%. Subject to certain conditions, the sale of residential properties is not VAT taxable in Russia whereas the sale of commercial properties is VAT taxable in Russia.
- The Russian companies must pay property tax at a maximum rate of 2.2% of the value of the properties in the financial statements of those Russian companies, prepared in accordance with Russian GAAP. In view of the Company's policy to acquire companies rater than properties, this tax liability is immaterial.
- Russian companies that own real estate are liable to pay real estate tax at a maximum rate of 1.5% of the value of the real estate in the Land Registrar's Office.
- The distribution of dividends by the Russian companies to the Company or to the Cypriot holding companies will be subject to withholding tax in Russia at a rate of 5% according to the treaty between Russia and Cyprus.
Note 8:- Taxation (Cont.)
- A capital gain from the sale of shares of the Russian companies by the Company or the Cypriot holding companies is tax exempt in Russia subject to certain conditions, in accordance with the treaty for the prevention of double taxation signed between Russia and Cyprus.
Taxation in Hungary:
- Net interest income is subject to corporate tax in Hungary at a rate of 16%. It is also subject to solidarity tax of 4%.
- According to the thin financing laws, if the daily debt average exceeds three times the Company's daily capital average, the remaining interest expenses will not be deducted in the calculation of the corporate tax liability.
Taxation in Israel:
- According to the amendment to the Income Tax Ordinance (No. 147) 2005, the corporate tax rate is to be progressively reduced to the following tax rates: 2007 - 29%, 2008 - 27%, 2009 - 26%, 2010 and thereafter - 25%.
- The Company is subject to the Income Tax (Inflationary Adjustments) Law, 1985 according to which, until 2007, the results for tax purposes were adjusted for the changes in the Israeli CPI.
In February 2008, the "Knesset" (Israeli parliament) passed an amendment to the Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law starting 2008 and thereafter. Starting 2008, the results for tax purposes are measured in nominal values, excluding certain adjustments for changes in the Israeli CPI carried out in the period up to December 31, 2007. The amendment to the law includes, inter alia, the elimination of the inflationary additions and deductions and the additional deduction for depreciation starting 2008.
c. Deferred taxes:
|
31 December |
||||
|
2008 |
2007 |
|||
|
U.S. dollars in thousands |
||||
|
Opening balance - net credit balance |
4,904 |
1,755 |
||
|
Charged to the income statement |
10 |
2,764 |
||
|
Exchange rate differences |
(6) |
385 |
||
|
Closing balance - net credit balance |
4,908 |
4,904 |
||
d. The tax losses carried forward of the Group companies amount to approximately $ 87,823 thousand and a deferred tax asset amounting to $ 4,310 thousand has been recognised.
Note 9:- Investment propertIES
a. Composition:
|
U.S. dollars in thousands |
||
|
At 1 January 2007 |
65,709 |
|
|
Reclassification from investment properties under construction |
32,081 |
|
|
Additions for the year |
36,056 |
|
|
Fair value adjustments |
82,138 |
|
|
Exchange rate differences |
11,046 |
|
|
At 31 December 2007 |
227,030 |
|
|
Additions for the year |
29,206 |
|
|
Fair value adjustments |
(58,768) |
|
|
Exchange rate differences |
(33,481) |
|
|
At 31 December 2008 |
163,987 |
b. The investment properties are stated at fair value, which has been determined based on valuations performed by independent appraisers (Cushman & Wakefield Stiles & Riabokobylko). The fair value represents the amount at which the assets could be exchanged between a willing buyer and willing seller in an arm's length transaction at the date of valuation, after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion, in accordance with International Valuation Standards. The valuations are based on the income approach. In the case of completed and operating buildings, this approach involves a direct capitalization of the net income and, in respect of buildings under renovation, a discounted cash flow analysis.
c. The fair value adjustments of the investment properties result in a temporary difference between the carrying value of the properties and their tax basis. Since it is the intention of management to sell the shares in companies holding these properties rather than the properties themselves, deferred taxes on the above differences have not been recorded. However, the fair values of the properties have been reduced in 2008 and 2007 by $15,896 thousand and $28,644 thousand, respectively, to reflect the fair values of the deferred tax liabilities that the Company would transfer to a buyer upon the sale of the companies owning the properties. The reduction was calculated based on the 20% income tax rate in Russia. The Company's management believes that the actual amount of the reduction might be substantially lower due to economic benefits that the buyer will be entitled to, based upon the differences arising from the method of disposal, (i.e. direct asset sale or share sale).
NOTE 10:- INVESTMENT PROPERTIES UNDER CONSTRUCTION
|
U.S. dollars in thousands |
||
|
At 1 January 2007 |
46,930 |
|
|
Reclassification to investment properties |
(32,081) |
|
|
Additions for the year |
61,020 |
|
|
Capitalised interest |
3,416 |
|
|
Exchange rate differences |
8,678 |
|
|
At 31 December 2007 |
87,963 |
|
|
Additions for the year |
48,296 |
|
|
Capitalization of equipment |
2,981 |
|
|
Impairment |
(4,289) |
|
|
Effect of discounting of long-term receivables |
2,200 |
|
|
Exchange rate differences |
(17,116) |
|
|
At 31 December 2008 |
120,035 |
Investment properties under construction are presented at cost, and impairment is reviewed in accordance to IAS 36.
NOTE 11:- INVENTORIES OF BUILDINGS UNDER CONSTRUCTION
|
U.S. dollars in thousands |
||
|
At 1 January 2008 |
103,980 |
|
|
Additions for the year |
64,466 |
|
|
Impairment |
(649) |
|
|
Exchange rate differences |
(23,595) |
|
|
At 31 December 2008 |
144,202 |
Inventories of buildings under construction are intended for construction of residential apartments and vacation homes.
NOTE 12:- LONG-TERM LOANS
a. In December 2007, a wholly-owned subsidiary of the Company provided a loan to a third party of approximately $1.6 million for the purpose of purchasing land in Saratov, Russia and constructing a logistic centre. The acquired land that is secured by a mortgage in favor of the subsidiary. The subsidiary intends to acquire the rights to the land during 2009, upon fulfillment of certain conditions. The loan bears annual interest of 11% and is repayable on demand of the subsidiary.
b. On 31 December 2007, a wholly-owned subsidiary of the Company entered into a memorandum of understanding with two private companies which are affiliated with the owners of a management company that provides the Company with certain services ("the Sellers") for the purchase of 51% of the Sellers' shares in the companies Inomotor LLC and Avtoprioritet LLC, both incorporated under the laws of the Russian Federation.
The Project is adjacent to the Hydro and MAG Projects and is comprised of two buildings. One building is owned by Inomotor and the other by Avtoprioritet, which after their renovation and expansion will be part of the Project complex and buildings.
The subsidiary provided loans of approximately $55 million to Avtoprioritet and Inomotor for the purpose of investing in the project buildings and the repayment of former debts to third parties. The loans bears 11% annual interest.
NOTE 13:- ADVANCE ON ACCOUNT OF INVESTMENT
In March 2008, the Company paid an amount of $584 thousand as an advance on account of investment in Saratov Project.
NOTE 14:- FIXED ASSETS, NET
|
U.S. dollars in thousands |
|||
|
At 1 January 2007, net of accumulated depreciation |
1,082 |
||
|
Additions for the year |
3,373 |
||
|
Depreciation for the year |
(287) |
||
|
Exchange rate differences |
698 |
||
|
At 31 December 2007, net of accumulated depreciation |
4,866 |
||
|
Additions for the year |
679 |
||
|
Capitalization to investment properties under construction |
(2,981) |
||
|
Depreciation for the year |
(343) |
||
|
Exchange rate differences |
(67) |
||
|
At 31 December 2008, net of accumulated depreciation |
2,154 |
||
|
At 31 December 2007 |
|||
|
Cost |
5,165 |
||
|
Accumulated depreciation |
(299) |
||
|
Net carrying value |
4,866 |
||
|
At 31 December 2008 |
|||
|
Cost |
2,796 |
||
|
Accumulated depreciation |
(642) |
||
|
Net carrying value |
2,154 |
||
NOTE 15:- LONG-TERM RECEIVABLES AND PREPAYMENTS
Comprises VAT which was paid upon the purchase of land and construction, and which the Group expects to recover in a period exceeding 12 months from the balance sheet date.
Note 16:- CASH AND CASH EQUIVALENTS
|
31 December |
||||
|
2008 |
2007 |
|||
|
U.S. dollars in thousands |
||||
|
Cash in banks (1) |
9,822 |
65,476 |
||
|
Short-term deposits |
- |
52,282 |
||
|
9,822 |
117,758 |
|||
(1) Cash in bank earns interest at floating rates based on daily bank deposit rates.
Note 17:- TRADE AND OTHER RECEIVABLES
|
31 December |
||||
|
2008 |
2007 |
|||
|
U.S. dollars in thousands |
||||
|
Trade receivables (1) |
328 |
268 |
||
|
Prepayments to suppliers |
716 |
1,195 |
||
|
Government authorities (mainly VAT) |
6,318 |
4,696 |
||
|
Other |
204 |
1,378 |
||
|
7,566 |
7,537 |
|||
(1) The balances represent amounts that are neither past due nor impaired.
Note 18:- RESTRICTED DEPOSITS
Deposits held to secure the Company's compliance with liabilities to banks.
During September 2008, the Company received guarantees from its majority shareholders, and the deposits were classified as cash and cash equivalents (see Note 24).
Note 19:- equity
|
31 December |
||||
|
2008 |
2007 |
|||
|
U.S. dollars |
||||
|
Authorised shares of $ 0.01 par value each |
1,200,000 |
1,200,000 |
||
|
Issued and fully paid shares of $ 0.01 par value each |
1,035,580 |
1,035,580 |
||
On 4 January 2007, the Company issued an additional 3,558 thousand shares to Merrill Lynch and Credit Suisse as a result of the exercise of options granted to them as underwriters in the initial public offering. As consideration for the exercise of the options, the Company received $30,811 thousand net of expenses that were deducted in the amount of $2,389 thousand. The share price at the date of the exercise of the option was GBP 4.78 per share.
Dividend policy
The Company adopted a dividend policy which reflects the long-term earnings and cash flow potential of the Company, taking into account the Company's capital requirements, while at the same time maintaining an appropriate level of dividend cover. Subject to these factors, and where it is otherwise appropriate to do so, the Company intends to declare a dividend of 2% of the Adjusted NAV on Admission (taking into account the net proceeds of the Placing) for each financial year, and 7% of the Adjusted NAV on Admission (market value of company's property assets, as determined by a third party valuation, adjusted to reflect the percentage interests held by the Group, plus its non-property assets minus its total liabilities minus assumed amounts payable under certain management services agreements with Senior Managers) for each financial year, with a view to increasing the dividend in line with the Company's cash flow growth in the future.
Due to the global financial crisis and the downturn of the Russian real estate market, the Company decided not to declare a dividend for the year 2008. The Company intends to continue to evaluate its ability to declare a dividend during 2009, taking into account inter alia the cash flow levels of the Company and the economical conditions of the Russian real estate market.
Share option schemes
The Company adopted a share option plan on 19 November 2006 ("the Adoption Date"), according to which a certain portion of the options was granted immediately with the remaining options to be granted in the future.
The Company granted on 18 December 2006 options to purchase 1,871,658 Ordinary shares under the share option plan to employees ("the Employee Options"). The exercise price of the Employee Options is equivalent to the price of the offering of the Ordinary shares (GBP 4.78 per share). The Employee Options will vest over a period of three years from the grant date, in equal tranches from the anniversary of the grant date. Termination of employment renders the options that are not yet vested, expired. The options will expire within five years from the date of grant or within three months from the date of termination of employment, whichever is sooner.
The Company also granted at the same date, options to purchase 1,497,326 Ordinary shares were granted under the share, which option plan to officers of subsidiaries of the Company ("Options to Officers").
Note 19:- EQUITY (Cont.)
The terms of half of the Options to Officers are identical to the terms of options to the employees. The Options to Officers will vest over three years from the grant date, in equal tranches from the anniversary of the grant date. Termination of the engagement renders the options that are not yet vested expired. The options to officer are to be exercised within five years from the grant date, otherwise they expire.
The other half of the Options to Officers vest on the grant date. The exercise of the Employee Options and the Options to Officers will be a cashless exercise according to a mechanism determined by the Company's Board (so that in practice, the number of shares allocated to the option holder will only be in respect of the bonus component upon the exercise, where the exercise price is not paid by the option holder).
As part of the December 18, 2006 offering terms, the IPO underwriters accompanying the issuance received an option to purchase 3,558,000 shares of the Company for an exercise price of GBP 4.78 per share. The option was exercisable until 6 January 2007. On 4 January 2007, some of the option were exercised. The weighted average share price at that date was GBP 4.78. The above grant had no effect on the financial statements since it was accounted as part of the issuance of the shares carried to equity.
Details on equity-settled share-based payment transaction:
|
2008 |
2007 |
|||
|
U.S. dollars in thousands |
||||
|
Fair value of the options |
8,823 |
8,823 |
||
|
Less - recognised as expense in the income statement |
(8,080) |
(6,199) |
||
|
Expense to be recognised in the future |
743 |
2,624 |
||
In the years 2008 and 2007, there were no exercised of termination of any of the options granted to Employees or Officers.
The following table lists the binomial model used for the plans for the year ended 31 December 2008:
|
Vested on grant date |
||
|
Expected volatility (%) |
31.89 |
|
|
Risk-free interest rate (%) |
5 |
|
|
Expected life of option (months) |
0 |
|
|
Weighted average share price (GBP) |
4.78 |
|
Vested over three years |
||
|
Expected volatility (%) |
3.89 |
|
|
Risk-free interest rate (%) |
5 |
|
|
Expected life of option (months) |
12 |
|
|
Weighted average share price (GBP) |
4.78 |
Note 19:- EQUITY (Cont.)
The expected life of the options is based on historical data and Company's expectations and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome. The volatility was calculated according to comparative data of companies with similar activity.
The weighted average remaining contractual life for the share option outstanding as at 31 December 2008 is 3.97 years (2007 - 4.97).
No options were exercised as of the balance sheet date.
The options were appraised by an independent appraisal company.
Shareholders' contributions:
The shareholders' contributions are comprised of the following:
(1) The fair value surplus from the provision of shareholders' loans at below market interest rate.
(2) The fair value surplus from the financial guarantees provided by the shareholders with respect of the bank loans.
Note 20:- Related parties
a. Transactions with related parties:
|
Year ended 31 December |
||||
|
2008 |
2007 |
|||
|
U.S. dollars in thousands |
||||
|
Interest expense to shareholders |
1,494 |
97 |
||
|
Private jet expenses |
279 |
515 |
||
b. Balances with related parties:
|
31 December |
||||
|
2008 |
2007 |
|||
|
U.S. dollars in thousands |
||||
|
Debentures held by shareholders (see Note 22) |
22,016 |
24,687 |
||
|
Guarantees and benefit regarding loans received from majority shareholders |
529 |
- |
||
|
Loans received from majority shareholders |
9,032 |
- |
||
Note 20:- Related parties (Cont.)
c. The transactions with related parties are according to the market terms.
d. Compensation of key management personnel of the Group:
|
Year ended 31 December |
||||
|
2008 |
2007 |
|||
|
U.S. dollars in thousands |
||||
|
Salaries (1) |
1,227 |
856 |
||
|
Share-based payments |
1,881 |
3,851 |
||
|
3,108 |
4,707 |
|||
(1) Key personnel were appointed at the end of 2006.
e. During 2007, renovation work was carried out at the Ackerstein Towers by Industrial Buildings. The Group's relative share in the renovation work amounted to approximately $ 198 thousand.
f. Global, which owns a commercial centre in Yaroslavl has entered into a lease agreement with Home Centres LLC ("Home Centre"), a company controlled by the Fishman family, the controlling shareholders in the Company. The area leased to the Group spans 6,712 sq. m., the minimal lease fees are $120 per sq. m. and the lease period, assuming the exercise of all the option periods, is 300 months. The engagement is under market conditions.
g. Hydro leases to Home Centre offices with an overall area of some 730 sq. m. used for office purposes. The monthly lease fees are approximate $ 22 thousand. The lease period terminates on 30 September 2011. The engagement is under market conditions.
h. On 11 December 2008, the Company signed a loan facility agreement with its main shareholders. According to which, the Company received in December 2008 loans in the amount of $8 million, and will receive additional loans of $23 million. The loans bear interest of 12% and are repayable on 31 March 2010.
i. During September 2008, its main shareholders (companies that are part of Fishman Group) have reinstated certain guarantees in favor of certain banking institutions that secured lines of credit in the aggregate amount of approximately $70 million that were previously granted to the Company.
NOTE 21:- EARNINGS PER SHARE
|
Year ended 31 December |
||||
|
2008 |
2007 |
|||
|
Weighted average number of Ordinary shares used for computing basic earnings per share (in thousands) |
103,558 |
103,558 |
||
|
Weighted average number of Ordinary shares used for computing diluted earnings per share (in thousands) (see Note 19) (1) |
103,558 |
103,558 |
||
|
Income (loss) used for computing basic and diluted earnings per share (in thousands of U.S. dollars) |
(104,831) |
64,880 |
||
(1) The options have no dilutive impact in 2008 and 2007 since, as of 31 December 2008 and 2007; the exercise price was higher than the market value.
Note 22:- debentures
On 7 December 2007, the Company raised approximately $ 63 million of debt by the issuance of 2 series (A and B) of debentures on the Tel-Aviv Stock Exchange. Both series are repaid in 6 annual equal and consecutive payments on 31 December for each of the years 2010-2015 (inclusive). Issuance expenses of approximately $ 1 million were discounted from amount of the debentures and will be recognised according to the effective interest method.
Series A - is in NIS linked to the Israeli Consumer Price Index. The debenture pays an annual interest rate of 6.5%. The Company has entered into a swap agreement regarding this series (see Note 27c).
Series B - is in NIS linked to the NIS/U.S. dollar exchange rate. The debenture pays an interest of Libor (for dollar deposits for a period of six months) plus a margin of 2.75%.
|
31 December 2008 |
||||||
|
Par value in U.S. dollars in thousands |
Effective semi-annual interest rate |
U.S. dollars in thousands |
||||
|
Series A |
39,260 |
4.16% (1) |
10,583 |
|||
|
Series B |
204,874 |
3.84% |
51,684 |
|||
|
62,267 |
(1) In respect of a swap agreement (see Note 27c).
Regarding acquisitions by related parties, see Note 20.
NOTE 23:- Accounts payable and accruals
|
31 December |
||||
|
2008 |
2007 |
|||
|
U.S. dollars in thousands |
||||
|
Trade payables |
11,615 |
6,640 |
||
|
Property tax payable |
- |
570 |
||
|
Government institutions |
635 |
526 |
||
|
Rent received in advance |
2,047 |
2,424 |
||
|
Deposits from tenants |
2,065 |
337 |
||
|
Accrued expenses and other payables |
670 |
648 |
||
|
17,032 |
11,145 |
|||
NOTE 24:- CREDIT FROM BANKS
a. The bank loans bear annual interest at rates of LIBOR plus 1.75% to 2%. Bank deposits have been put in place to secure the Company's liabilities in respect of these loans (see also Note 18). During September 2008, the Company main shareholders (companies that are part of the Fishman Group) have reinstated guarantees in favor of certain banking institutions that have granted the Company lines of credit in the aggregate amount of $70 million. These guarantees have replaced the deposits of the Company in the bank as collateral which allowed the free used of these funds.
|
31 December |
||||
|
2008 |
2007 |
|||
|
U.S. dollars in thousands |
||||
|
Short-term credit from banks |
60,282 |
71,406 |
||
|
Current maturities of long-term loans |
1,914 |
1,806 |
||
|
62,196 |
73,212 |
|||
These loans were classified as short-term loans due to the fact that according to certain previous in the bank agreement, the bank may have very wide right can demand repayment of the loans at any time.
b. In February 2006, a jointly controlled entity received a loan of approximately $42 million from a bank, bearing annual interest of 12%. As collateral for this loan, the jointly controlled entity pledged 100% of the parent company shares to the bank. The jointly controlled entity's relative share in the loan is approximately $19.4 million as of 31 December 2008.
The maturity dates of long-term loans subsequent to balance sheet date are as follows:
|
31 December |
||||
|
2008 |
2007 |
|||
|
U.S. dollars in thousands |
||||
|
First year - current maturities |
1,914 |
1,806 |
||
|
Second year |
2,059 |
1,914 |
||
|
Third year |
15,384 |
2,059 |
||
|
Fourth year |
- |
15,384 |
||
|
19,357 |
21,163 |
|||
NOTE 25:- OTHER LONG-TERM LIABILITIES
|
31 December |
||||
|
2008 |
2007 |
|||
|
U.S. dollars in thousands |
||||
|
Provision to service provider (1) |
3,374 |
10,943 |
||
|
Deposits from tenants |
1,141 |
- |
||
|
Provision regarding an agreement with government authorities (see Note 26o) |
3,328 |
1,431 |
||
|
Other |
269 |
365 |
||
|
8,112 |
12,739 |
|||
(1) According to the management services agreements signed between MAG and Hydro ("the Companies") and FIN ("the Service Provider"), in return for the service provider's assistance in sourcing the project, the Service Provider shall be entitled to a payment equal to 10% of the net profit (as defined below) of the Companies from its ongoing operation as well as in case of the sale of properties, if they are sold to a third party. See also Notes 26b and 26h.
The net profit in relation to these properties is calculated as: the price of the property paid by a third party, less any expenses that the Companies have incurred as a result of such sale, less repayments of any external debt of the Companies, and only after the balance of any outstanding shareholder loans plus an annual interest of 10% have been repaid in full to the relevant shareholder and/or repayment of any other third party financing relating to said property. The amounts paid for the acquisition of the Companies at the date of acquisition and thereafter will be treated as shareholders loans to the Group for the purposes therein.
The Group has accounted for this payment as an interest in the profits of MAG and Hydro. Accordingly, a liability measured at fair value has been recorded based on the fair value of the properties as recorded in the financial statements at each balance sheet date.
Note 26:- COMMITMENTS AND CONTINGENCIES
a. Group as lessee:
The Group entered into commercial lease agreements for certain land plot. These leases are irrevocable and have a life of 4-45 years with a renewal option.
Future minimum lease payments at 31 December 2008 are as follows:
|
U.S. dollars in thousands |
||
|
First year |
176 |
|
|
After one year but no more than five years |
936 |
|
|
More than five years |
6,018 |
|
|
Total |
7,130 |
Note 26:- COMMITMENTS AND CONTINGENCIES (Cont.)
b. On 1 July 2005, Hydro and FIN entered into a management service agreement for an indefinite period. FIN is a Russian company whose controlling shareholder also serves as the CEO of Hydro. Either party may terminate the agreement without cause at any time upon providing the other party with advance written notice of a minimum of three months.
In return for the management services provided by FIN, FIN will be entitled to 2% of the lease fees actually received by Hydro from its tenants. It was further agreed that the direct expenses of FIN's hiring additional employees for providing the said management services will be paid by Hydro. Hydro's books include the proper expenses.
c. On 22 May 2005, the subsidiary and the other shareholders in Inverton (Gazprombank Invest and NAM) signed a shareholders' agreement whereby it was agreed that NAM would be entitled to receive fees from Inverton based on a fixed formula set forth in the shareholders' agreement in a total of approximately $1,763 thousand for rendering certain management services stipulated in the agreement (mainly coordination with local authorities).
d. On 27 November 2006 Global 1 entered into an agreement with a third party for the current management of the commercial centre in Yaroslavl, which began its operations in April 2007. The agreement is in effect until 31 March 2009 and will be automatically renewed for three more additional years unless either of the parties informs the other party of its wish to terminate the agreement as was amended. In exchange for said management services Global 1 will pay monthly fees based on a mechanism established in the agreement. An adequate expense was recorded in Global 1's books in respect of the agreement. An expense of approximately $1.4 million was recorded in the financial statements.
e. The Company's subsidiary ("Heckbert22") extended a loan to Mall Project, the balance of which as of 31 December 2007 and 2008 is $3,826 thousand and $4,045 thousand, respectively, for the financing of the acquisition of the property under development in Saratov. According to the shareholders' agreement, as was amended, the minority shareholders in Mall Project will be entitled to receive rights to shares subsequent to the repayment of the loan and the accrued interest. The intercompany balances regarding this loan were eliminated in the consolidated financial statements.
f. On 16 March 2006, IIK entered into a consulting agreement with Norman Project according to which the latter undertook to provide consulting services to IIK in connection with the development and construction of a commercial project in Saratov, in consideration of the equivalent of approximately $ 1 million excluding VAT. The agreement expires on the performance in full by the parties of their obligations under the agreement.
g. In December 2006, RealService entered into an oral agreement with FIN for providing certain services that include sourcing the investment and project management services. According to the agreement and in consideration for these services FIN will be entitled to 10% of the net profits from the project, including any sale of the project after completion.
h. In February 2006, MAG and FIN entered into a management service agreement. The terms of the agreement are identical to Hydro's engagement with FIN. MAG's books include the adequate expenses.
Note 26:- COMMITMENTS AND CONTINGENCIES (Cont.)
i. On 24 May 2007, IIK entered into a contracting agreement with a Russian company controlled by Denya Cebus Ltd. ("Denya") for the construction of the commercial centre in Saratov as a main contractor in consideration for an overall amount of $50.8 million principally paid at the rate of the project's progress.
On 25 February 2009, IIK signed an additional agreement with Denya in which the overall amount of the agreement was enlarged by $3 million and it was agreed that Denya would receive an additional $1.5 million, if the construction of the trade centre is finished by 15 October 2009.
j. On 29 May 2007, IIK entered into an agreement with a bank whereby the bank will extend a loan of approximately $48.5 million to IIK for a period of 15 years to be repaid in quarterly installments, while during the first two years, IIK will pay interest alone.
The loan will bear interest of Libor + 2.5-5%. The Company guaranteed IIK's liabilities towards the bank until the conditions undertaken by IIK toward the bank are met as detailed below:
|
1.
|
The project will be completed by 31 December 2011.
|
|
2.
|
IIK's debt coverage ratio will not be below 1:3.
|
|
3.
|
The ratio of equity to total liabilities will not fall below 0:5 before the project is completed and 0:4 after the
project is completed.
|
|
4.
|
No dividends will be distributed until the project is completed.
|
|
5.
|
No investments will be performed of an aggregate amount exceeding $ 250 thousand that are not in compliance with the bank approved project budget.
|
To secure the loan, IIK will pledge its rights to the project area and rights to the project as well as the shares of IIK held by the Company in favor of the bank.
Expenses regarding this loan are recorded as other assets in the balance sheet. Once the loan is received, these deferred expenses will be discounted from the loan and recognised in profit and loss according to the effective interest method.
k. On 27 November 2006, Petra entered into an agreement with a third party for receiving management services for which it shall pay approximately $9.3 million in 95 monthly installments. Petra will also pay success commissions of approximately $ 1.7 million for complying with established targets. The financial statements include adequate expenses.
Starting March 2009, the amount was reduced to 41 thousand a month.
l. On 1 August 2006, Creative entered into an oral agreement for receiving management and supervision services from a third party whereby the third party will be entitled to approximately $2 million to be paid in 33 equal monthly installments.
Commencing February 2009, the amount was reduced to $10 thousand a month.
NOTE 26:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
m. In February 2008, IIK entered into an additional management agreement with NAM, according to which IIK will pay to NAM an amount of $ 450 thousand during the year 2008.
n. Expected rental income:
The lease agreements of the Company's subsidiaries are for periods of up to 10 years.
The minimum rental income is as follows:
|
31 December |
||||||
|
2008 |
2007 |
|||||
|
U.S. dollars in thousands |
||||||
|
First year |
17,398 |
16,498 |
||||
|
Second year until five years |
50,286 |
55,577 |
||||
|
More than five years |
18,032 |
24,712 |
||||
|
85,716 |
96,787 |
|||||
o. The previous owners of a plot of land in Yaroslavl, which is currently owned by the Group and on which the Group has constructed a shopping centre, have entered into an agreement with the municipality of Yaroslavl whereby the municipality of Yaroslavl will be entitled to 8% of the built area on said land. The Company has recorded a provision regarding this agreement.
Note 27:- Financial instruments
a. Financial risk factors:
The Group's activities in the Russian market expose it to various financial risks such as market risk (foreign currency risk, interest rate risk and CPI risk), credit risk and liquidity risk. The Group's comprehensive risk management plan focuses on activities that reduce to a minimum any possible adverse effects on the Group's financial performances.
1. Exchange rate risk:
The Group has balances of financial instruments held in Ruble, New Israeli Shekels ("NIS") and Hungarian Forint ("HUF"). The Group is exposed to changes in the value of these foreign currencies due to changes in exchange rates against the U.S. dollar. The Group's policy is not to enter into any hedging transactions in order to hedge against exchange rate risks, except for raising funding from the public.
a) The following table represents the sensitivity to a reasonably possible change in the U.S. dollar/Ruble exchange rates in the year 2008:
|
Effect on equity |
||||||||
|
Increase |
Decrease |
|||||||
|
10% |
5% |
10% |
5% |
|||||
|
U.S. dollars in thousands |
||||||||
|
Cash and cash equivalents |
496 |
248 |
(496) |
(248) |
||||
|
Trade and other receivables |
2 |
1 |
(2) |
(1) |
||||
|
Trade and other payables |
(1,284) |
(642) |
1,284 |
642 |
||||
Note 27:- Financial instruments (cont.)
b) The following table represents the sensitivity to a reasonable possible change in U.S. dollars/NIS exchange rates in the year 2008:
|
Effect on profit before tax |
||||||||
|
Increase |
Decrease |
|||||||
|
10% |
5% |
10% |
5% |
|||||
|
U.S. dollars in thousands |
||||||||
|
Debentures (series A) and swap agreement |
(992) |
(496) |
992 |
496 |
||||
2. Credit risk:
The Group performs ongoing evaluations of the prospects of collecting debts of customers and buyers and, if necessary, it records a provision in the books reflecting the losses anticipated by management. The financial statements do not include an allowance for doubtful accounts since management believes, from past experience, that the chances of collecting all the debts of customers and buyers are good. The maximum credit risk is the carrying amount of the financial assets in the balance sheet.
Credit risk may arise to the Company from concentration of revenues to a major client. The rental income of the Company from this client amounted in the year 2008 to approximately 16% of total rental income from investment properties.
All of the financial assets are neither past due nor impaired.
3. Interest rate risk:
The Group has placed deposits in banks, which are held for short periods, and has also taken out loans from banks. In December 2007, the Group issued debentures (see Note 22). These balances bear variable interest and therefore expose the Group to cash flow risk in respect of increase in interest rates.
Note 27:- Financial instruments (Cont.)
a) The following table represents the sensitivity to a reasonable possible change in interest on balances in NIS in the year 2008:
|
Effect on profit before tax |
||||||||
|
Increase |
Decrease |
|||||||
|
10% |
5% |
10% |
5% |
|||||
|
U.S. dollars in thousands |
||||||||
|
Debentures (series A) and swap agreement |
(992) |
(496) |
992 |
496 |
||||
b) The following table represents the sensitivity to a reasonable possible change in interest on balances in U.S. dollars in the year 2008:
|
Effect on profit before tax |
||||||||
|
Increase |
Decrease |
|||||||
|
10% |
5% |
10% |
5% |
|||||
|
U.S. dollars in thousands |
||||||||
|
Financial derivative |
72 |
36 |
(72) |
(36) |
||||
|
Loan provided |
(2,508) |
(1,254) |
2,508 |
1,254 |
||||
|
Long-term loans from banks |
5,852 |
2,926 |
(5,852) |
(2,926) |
||||
4. Linkage to Israeli CPI risk:
In December 2007, the Company issued debentures that were admitted to be traded on in the Israeli Stock Exchange (series A) (see Note 22). These debentures are linked to the Israeli CPI. In order to hedge this risk, the Company entered into a swap agreement (see c below).
The following table represents the sensitivity to a reasonably possible change in Israeli CPI in 2007:
|
Effect on profit before tax |
||||
|
Increase |
Decrease |
|||
|
1.5% |
1.5% |
|||
|
U.S. dollars in thousands |
||||
|
Debentures (series A) and swap agreement |
(149) |
149 |
||
5. Significant risk exposure:
The only item in the balance sheet that is affected significantly by various risks is debentures nominated in shekels. Since there is a hedge on this item, the risk is not material.
Note 27:- Financial instruments (Cont.)
b. Fair value of financial instruments:
Set out below is a comparison by category of carrying amounts and fair values of all the financial instruments of the Group in 2008 and:
|
31 December 2008 |
||||||
|
Carrying amount |
Fair value |
|||||
|
U.S. dollars in thousands |
||||||
|
Long-term loans |
58,525 |
58,525 |
||||
|
Long-term receivables and prepayments |
16,172 |
16,172 |
||||
|
Trade and other receivables |
7,566 |
7,566 |
||||
|
Cash and cash equivalents |
9,822 |
9,822 |
||||
|
Loans from shareholders |
9,032 |
7,841 |
||||
|
Debentures (series A) and swap agreement (1) |
(10,583) |
8,652 |
||||
|
Debentures (series B) |
(51,684) |
(51,684) |
||||
|
Long-term loans from banks (including current maturities) |
(19,357) |
(21,352) |
||||
|
Accounts payable and accruals, including income tax |
(19,508) |
(19,508) |
||||
|
31 December 2007 |
||||||
|
Carrying amount |
Fair value |
|||||
|
U.S. dollars in thousands |
||||||
|
Long-term loan |
14,829 |
15,016 |
||||
|
Long-term receivables and prepayments |
12,891 |
12,891 |
||||
|
Trade and other receivables |
7,537 |
8,176 |
||||
|
Short-term loans |
7,692 |
7,692 |
||||
|
Restricted deposits |
71,312 |
71,312 |
||||
|
Cash and cash equivalents |
117,758 |
117,758 |
||||
|
Debentures (series A) and swap agreement (1) |
(10,098) |
(10,257) |
||||
|
Debentures (series B) |
(52,040) |
(52,040) |
||||
|
Long-term loans from banks (including current maturities) |
(21,163) |
(21,128) |
||||
|
Accounts payable and accruals, including income tax |
(12,635) |
(11,403) |
||||
(1) The fair value represents the market value of the debentures on the Tel Aviv Stock Exchange.
c. On 31 December 2007, the Company entered into a transaction agreement with Bank Leumi (UK) plc. According to the agreement, payments of the Company on account of Series A debentures (see Note 22) will be linked to the NIS/U.S. dollar as of 31 December 2007, and the interest payments will be according to LIBOR (for dollar deposits for a six-month period), plus a margin of 3.72%. The transaction hedging is not recognised for accounting purposes, therefore it is recorded in each period according to the fair value. The fair value of the swap agreement at 31 December 2007 amounted to $(50) thousand and the fair value of the swap agreement at 31 December 2008 amounted to $719 thousand.
Note 27:- Financial instruments (Cont.)
d. The Company's capital management objectives are to maintain healthy capital ratios in order to support its business activity and maximise shareholders value.
The Company acts to achieve a capital return at a level that is customary in the industry and markets in which the Company operates. This return is subject to changes depending on market conditions in the Company's industry and business environment.
The Group monitors its capital level using the ratio of net debt to adjusted capital. Net debt is calculated as the total debt less cash and cash equivalents. Adjusted capital includes the equity components: share capital, premium, minority interests, retained earnings, capital reserves and shareholders' loans and excludes currency translation adjustment reserves and treasury shares.
e. During September 2008, the Company's main shareholders (companies that are part of the Fishman Group) have reinstate guarantees in favor of certain banking institution that have granted the Company lines of credit in the aggregate amount of $70 million. The fair value of this transaction is recorded in the equity of the Company ("shareholders' contributions") and is amortised in the subsequent periods through profit and loss.
f. On 11 December 2008, the Company signed a loan facility agreement with its main shareholders (see Note 20h). The fair value of this transaction is recorded in the equity of the Company ("shareholders' contributions") and is amortised in the subsequent periods through profit and loss.
f. The table below summarises the maturity profile of the Group's financial assets at 31 December 2008 and 2007 based on contractual undiscounted payments.
|
31 December 2008 |
||||||||||||
|
On demand |
Less than 3 months |
3 to 12 months |
1 to 5 years |
> 5 years |
Total |
|||||||
|
U.S. dollars in thousands |
||||||||||||
|
Long-term loans |
- |
- |
- |
58,525 |
- |
58,525 |
||||||
|
Long-term receivables and prepayments |
- |
- |
- |
16,172 |
- |
16,172 |
||||||
|
Trade and other receivables |
- |
1,126 |
5,598 |
- |
- |
6,724 |
||||||
|
Financial derivative |
- |
- |
- |
- |
719 |
719 |
||||||
|
Cash and cash equivalents |
9,822 |
- |
- |
- |
- |
9,822 |
||||||
|
9,822 |
1,126 |
5,598 |
74,697 |
719 |
91,962 |
|||||||
|
31 December 2007 |
||||||||||||
|
On demand |
Less than 3 months |
3 to 12 months |
1 to 5 years |
> 5 years |
Total |
|||||||
|
U.S. dollars in thousands |
||||||||||||
|
Long-term loans |
- |
- |
7,692 |
- |
14,829 |
22,521 |
||||||
|
Long-term receivables and prepayments |
- |
- |
7,400 |
5,491 |
- |
12,891 |
||||||
|
Trade and other receivables |
- |
6,342 |
- |
- |
- |
6,342 |
||||||
|
Restricted deposits |
71,406 |
- |
- |
- |
- |
71,406 |
||||||
|
Cash and cash equivalents |
117,758 |
- |
- |
- |
- |
117,758 |
||||||
|
189,164 |
6,342 |
15,092 |
5,491 |
14,829 |
230,918 |
|||||||
Note 27:- Financial instruments (Cont.)
g. The table below summarises the maturity profile of the Group's financial liabilities at 31 December 2008 and 2007 based on contractual undiscounted payments.
|
31 December 2008 |
||||||||||||
|
On demand |
Less than 3 months |
3 to 12 months |
1 to 5 years |
> 5 years |
Total |
|||||||
|
U.S. dollars in thousands |
||||||||||||
|
Long-term loans from banks |
- |
479 |
1,436 |
17,443 |
- |
19,357 |
||||||
|
Long-term loans from shareholders |
- |
- |
- |
9,032 |
- |
9,032 |
||||||
|
Debentures, net |
- |
- |
- |
41,511 |
20,756 |
62,267 |
||||||
|
Other long-term liability |
- |
- |
- |
1,141 |
6,971 |
8,112 |
||||||
|
Short-term loan from bank |
62,196 |
- |
- |
- |
- |
62,196 |
||||||
|
Accounts payable and accruals |
- |
6,587 |
10,445 |
- |
- |
17,032 |
||||||
|
Income tax payable |
- |
2,476 |
- |
- |
- |
2,476 |
||||||
|
62,196 |
9,542 |
11,881 |
69,127 |
27,727 |
180,472 |
|||||||
|
31 December 2007 |
||||||||||||
|
On demand |
Less than 3 months |
3 to 12 months |
1 to 5 years |
> 5 years |
Total |
|||||||
|
U.S. dollars in thousands |
||||||||||||
|
Long-term loans from banks |
- |
- |
- |
19,357 |
- |
19,357 |
||||||
|
Debentures, net |
- |
- |
4,683 |
34,940 |
22,465 |
62,088 |
||||||
|
Other long-term liability |
- |
- |
- |
- |
12,739 |
12,739 |
||||||
|
Short-term loan from bank |
73,212 |
- |
- |
- |
- |
73,212 |
||||||
|
Accounts payable and accruals |
11,145 |
- |
- |
- |
- |
11,145 |
||||||
|
Income tax payable |
- |
1,490 |
- |
- |
- |
1,490 |
||||||
|
87,841 |
1,490 |
4,683 |
50,813 |
35,204 |
180,031 |
|||||||
Note 28:- POST BALANCE SHEET EVENTS
There were no significant post-balance sheet events that require disclosure in the financial statements.
Note 29:- DATE OF APPROVAL OF THE FINANCIAL STATEMENTS
The Board of Directors approved these consolidated financial statements for issue on 18 March 2009.
- - - - - - - - - -
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